(USTs mixed on light volumes ahead of the FED); while WE slept; To Pivot Or Not; a couple curve views; 10yy vs 4% (and/or 3.84%)
Good morning … since I believe everything I read on the intertubes, here’s a series of visuals from prior FOMC hike days which - legit or not - made me pause to consider,
Will today be different? IS, as ZH suggests in its FOMC preview, it Time To Step Off The Brake? Staying tuned to find out and in the meanwhile, here is a snapshot OF USTs as of 705a:
… HERE is what another shop says be behind the price action overnight…
… WHILE YOU SLEPT
Treasuries are mixed with the yield curve pivoting flatter around a little changed 10y point this morning ahead of this afternoon's FOMC reveal. DXY is lower (-0.2%) while front WTI futures are slightly lower too (-0.25%). Asian stocks were mostly higher, EU and UK share markets are mixed while ES futures are little changed here at 6:50am. Our overnight US rates flows saw very quiet sessions in both Asian and London's AM hours with ongoing demand for front-end paper (out to 5yrs) noted. Overnight Treasury volume was roughly 75% to 80% of average overall with 2's (135%) seeing the highest relative average turnover among benchmarks overnight.… 4.00% and 1.64% are two key numbers/levels that we've been eyeing in 10's and 30yr real rates, respectively. 4.00% was a double-top in 10's in 2009 and 2010 as we show in our first attachment and note in the lower panel how long-term (monthly) momentum has been chronically 'oversold' all of this year, much like it was for all of 2018. The whole set-up appears well-poised for a new, long-term bull signal but a spark is what's needed. Absent that spark, we know from past experience that oversold markets can stay that way over many weeks/months/basis points. Our next attachment zooms in on the daily chart of 10's where 10's might be breaking a bear trend in place since early August (like other, shorter duration benchmarks have recently). Daily momentum looks ambiguous (lower panel), as one might expect ahead of a Fed meeting like this one (75bp assumed; forward guidance the focus)
… and for some MORE of the news you can use » IGMs Press Picks for today (2 NOV) to help weed thru the noise (some of which can be found over here at Finviz).
A few items from Global Wall Street’s narrative creation machine
With today’s FOMC meeting and the idea of an eventual PIVOT left to the Q&A, a few words and a chart of the curve from a large German bank. First
...that is the question.
We define three pivot levels: (1) slowing the pace of hikes, (2) a pause and (3) signalling rate cuts.
Central banks could slow the pace of tightening once policy rates have reached a plausible range for the terminal rate. This could presumably be the case for the Fed after one or (at most) two more 75bp hikes.
Signalling rate cuts would require a reasonable expectation that core inflation will drop back to target in the foreseeable future. This would necessitate a significant weakening in the labour market.
… Overall, the Fed should go through the three stages of pivot ahead of the ECB, given that: (1) it is ahead in its tightening cycle and (2) fiscal policies are likely to diverge. From a market perspective, we are currently short the front-end of the EUR curve (July-23 ECB) and neutral the front-end of the USD curve…
… The hurdle for a pause would be somewhere in between. It would require a clear downward trend in core inflation and loosening in the labour market, along with tight financial conditions. On the inflation front, y/y rent inflation should be declining soon (although it is still unclear to what extent). This is more difficult to define, but one would expect to see (at least) more signs of tightness in credit markets. So far, the widening of credit spreads has been quite modest and orderly.
The firm continues with a different note …
Over the hills and far away...
…that’s where the rate cuts are typically priced during a hiking cycle.
… Finally, figure 3 shows the difference between the current and earlier episodes is not simply that recession is forecast today but wasn’t previously. While the yield curve has inverted earlier and more sharply this year, it did invert during prior cycles.
The general lack of priced cuts during hiking cycles likely reflects a mix of expectations and risk preferences that keep investors from meaningfully pricing cuts until they're imminent. For this cycle, the modest degree of cuts could also reflect expectations of a soft landing in line with the Fed SEP projections, or expectations that even with recession the Fed will need to stay restrictive to achieve its 2 percent goal …
AND since we’re looking at charts, here’s one or two from 1stBOSs weekly macro and technical charts package which may be of interest
… The S&P 500 has extended its recovery back above its 200-week average and we look for strength to our corrective target zone 3900/4000. Our bias remains to view this still as a bear market rally and we look for the rally to fail here. Please note the Credit Suisse House View remains negative US Equities.
… 10yr US Bond Yields reversed lower last week after failing to close above next support at 4.25/275%, with short and medium-term momentum indicators holding bullish divergences, which points to a tiring trend. Nevertheless, a break below 3.84% is needed to confirm a small top.
Finally, a longer term curve related — from Bloomberg may be of interest
… The Federal Reserve is expected to deliver its fourth consecutive 75 basis-point hike on Wednesday, at a time when pivot speculation is gaining traction once again. Money markets price in almost equal chances to another jumbo hike or a half point move in December while rate cuts are seen coming around the end of 2023. Some expect the central bank to be done with its tightening cycle early next year, which would follow the less-hawkish paths adopted from other central banks, like the Reserve Bank of Australia, the Bank of Canada and the European Central Bank. It’s only natural therefore that the main focus for investors is whether Powell presents a 50 basis-point move as the base case scenario for the Fed’s last hike of the year and whether that creates a fresh stimulus for bonds and equities to rally. Still, whether the Fed decides to go less aggressively than previously — as more or less flagged by some officials recently —matters less than where the terminal fed funds rate lies. And that could be higher than what investors are positioning for lately, which could in turn mean that the move seen in the US 2s30s curve lately will give way to normalization.
Finally, ahead of today’s FOMC meeting, I’d imagine the pep talk given TO JPOW as he walks out on to that stage go something like this (not an original)one from Glasbergen
… THAT is all for now. Off to the day job…