(USTs mixed on LIGHT VOLUMES...)while WE slept; SKOR export data fell again in the first 20 days of November (-16.7% y/y)
Good morning … long bonds have the very same shorter-term (ie DAILY) bearish setup as 10yy
That HOLIDAY SHORTENED, bearish look, in mind, we’ve got 2 auctions today … 2yy and 5yy (1p) — note 5yy converging on support line AND 50dMA at 4.073
Think CONCESSION and as you do, 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 7s10s modestly flatter this morning. DXY is notably higher (+0.8%) while front WTI futures are lower (-0.5%). Asian stocks were mostly lower away from slight gains in Japan's exchanges, EU and UK share markets are mixed and ES futures are showing -0.5% here at a very early 6:10am. Indeed, our early start made it too early to capture and report our overnight desk flows but overnight Treasury volume may tell that tale with volumes running about 75% of average overall except in 20yrs (200% of a low base).
… We have other pictures to discuss this morning with Treasury yields opening the week aggressively mixed versus Friday's closes. Next up we show the overlay of South Korea's 20-day exports (YoY%) and ISM manufacturing. The weak print in 20-day South Korean exports for November does highlight a risk that the ISM manufacturing PMI falls below 50 (was 50.2 last) and into contraction when released on December 1st...
As for curves, the recent plunge in the Treasury 2s10s curve to new lows for this century was 2s5s driven where the Treasury 5s10s curve has remained largely rangebound since early August. What seems clear from this picture is that the -10bp area in 5s10s remains a key barrier to further steepening, as illustrated. Take that out and it looks like 0.0bp is a next stop for 5s10s.
… and for some MORE of the news you can use and to help weed thru the noise (some of which can be found over here at Finviz).
UBSs Paul Donovan on COOLING CONSUMPTION
Asian markets were upset by evidence of zero-COVID policy restrictions in China. There are reports of more lockdowns and further deaths. The path to ending zero-COVID (probably in the third quarter of next year) is unlikely to be smooth. The economic damage falls on domestic consumption if consumers save more as a precaution against COVID-related detention.
South Korean export data fell again in the first 20 days of November (-16.7% y/y). Exports to China and exports of chips were both weak. Exports to China represent both domestic demand and global demand. More hints on global consumption come later this week as US households celebrate Black Friday by indulging in the national pastime of shopping …
HERE is an updated view from DB of …
Last Friday, the latest October Conference Board leading indicators recorded its largest m/m decline since this series downswing began in earnest in Q2. In the last 6 months, the indicator has dipped sharply enough to easily given an assured signal of growth well below trend in H1 2023, but as the chart pack that follows suggests, it has not quite reached the point where a recession is assured. Most the leading indicator components (that lead GDP by one to three quarters), are similarly suggesting a sharp growth slowdown, but they are not quite at the point of being consistent with a recession, based on where they were during past recessions. The biggest exception, and strongest leading indicator recession signals, have come from the one variable that has historically been a reliable leading indicator for longer than a year - the yield curve, and most especially when including the back-end of the curve. In contrast, a multitude of shorter leading indicators are on course for eventually being consistent with a recession, without a recession already 'being completely baked in the cake". The charts speak for themselves.
And HERE is DBs latest effort to help with those MAPPING THE MARKETS
The growing sense that things can’t get much worse has led to a raft of expectations that 2023 could be a 'relief' year. There is speculation of a wind-down in Russia’s invasion of Ukraine, a more relaxed approach to Covid-19 from China, as well as the long-awaited decline of inflation. Investors themselves are primed for good news too, as we saw in the massive cross-asset rally after this month’s US inflation print.
But with markets so primed for good news, the risk is that they’re more exposed than usual if the downside scenarios end up materialising. We saw this last week, when markets sank after reports initially suggested a Russian missile had crossed into Poland. Similarly in late-September, the market turmoil after the UK mini-budget formed the backdrop to a global slump in risk assets. In light of this, we run through some of the potential downside risks next year that markets look exposed to.
Last week we got a brief glimpse of how markets could react to a potential escalation in the Ukraine conflict, after reports came through from Poland that a Russian missile had crossed the border and killed two people. In response, the S&P 500 fell by more than -1% intraday (Figure 1), and oil prices moved up by around $2 per barrel. These moves unwound as it became clear that it was not intentional, and NATO said that it was probably caused by a Ukrainian air-defence missile.
For somewhat MORE from DB on 2023,
2023 Credit Outlook
Our view on the terminal rate for 2023 credit spreads hasn’t changed much since we last updated our spread targets in April, when we became the first bank to warn of a tough 2023 US recession. In this outlook, we slightly increase our targets and see YE ‘23 spreads for EUR and USD IG hitting 245bps and 235bps, and EUR and USD HY hitting 930bps and 860bps respectively. This is a widening from current levels of +53bps, +100bps, +400bps and +410bps respectively.
However, even with a bearish 2023 outlook, we have to acknowledge that yields and spreads have made a huge adjustment in 2022. With government bonds now likely to be more range trading for 2023, and possibly with a slight downward yield bias, total returns will be a lot better in 2023 than in 2022, even if only EUR IG will be in positive territory by year-end (+1.6%). Our full year total return forecasts for USD IG are -0.2%, USD HY at -3.3% and EUR HY at -4.4%.
A lack of near-term maturities will limit 2023 defaults, but our models highlight leverage is 2x more important than maturity walls at explaining historical default rates. We forecast YE'23 defaults in USD HY of 4.5%, USD Loans of 5.6%, EUR HY of 2.2%, and EUR Loans of 3.7%. But by 2H’24, we forecast peak defaults in USD HY of 9%, USD Loans of 11.3%, EUR HY of 4.3% and EUR loans of 7.1%. Indeed loans worry us more than high-yield bonds. We see USD loans returning -10.8% over FY'23 as defaults rise and CLO demand is impaired from future downgrades…
AND HERE’s updated Weekly Worldview from MSs Seth Carpenter
A Challenging Year Ahead
The global economy is slowing, and risks are to the downside next year. We are on the cusp of a loose definition of recession, and 2023 will be even slower.
Last week, we published our Year-Ahead outlook. We expect the global economy to decelerate through the first half of next year before troughing in Q2. We see Europe and the UK entering recession now, the Fed hiking until 23Q1, and China’s reopening pushed off until April. And despite this gloomy outlook, we still see risks as skewed to the downside. While upside surprises to inflation have become the norm, and more of the same would lead to more monetary policy tightening restricting growth further. While China is on a path to reopening, nothing is guaranteed.
In numbers, we forecast 2022 global growth at 3.0%Y, stepping down to around 2.2%Y in 2023. The IMF calls that type of performance a “global recession.” But the world is heterogeneous; we see the UK and Europe in outright recession, the US only barely positive, and so it is EM that provides the little bit of growth we see in the forecasts.
One key component to the forecast is our view that inflation is peaking now and will step down notably around the world over the course of next year. Just as inflation persistently surprised to the upside this year, we expect some downside surprise for investors next year. Food and energy drove a lot of the global inflation this year, and we do not see that push continuing. For oil, we do think prices will rise modestly on net from here, but nothing like the 40% increase we saw from the end of last year to the peak in March. Food commodity prices have also come down, and the lagged effects of that decline should further pull down headline inflation.
Consumer goods prices should also fall on an outright basis. We know that supply chains have healed a lot over the past 12 months and are on track to normalize further. A broad inventory cycle is underway, and with demand softening, it is hard to see continued price pressure from goods outside new automobiles. The question mark comes from services inflation, given tight labor markets. In the US, shelter inflation from rents is critical, but rents on new leases have already peaked, so given the lags in the computation of CPI data, we should see a decline by the second half of next year.
Major DM central banks will head further into restrictive territory and stay there for the bulk of 2023. In particular, we see the Fed hiking in December and January, and then holding policy flat until 2023 year end. Asian central banks are quite different. The PBOC and BoJ are not worried about inflation and will maintain an accommodative stance; although after Governor Kuroda’s term expires, we expect BoJ yield curve control to shift from the 10-year point to the 5-year point. EM Asia central banks have been normalizing policy, rather than hiking to bring down inflation, and they should ease off when the dollar peaks, given subdued inflationary pressures. In contrast, Latin American central banks are at or near the peak in policy rates and looking to eventually normalize if politics allow…
And from MSs stock jockey in chief, Mike Wilson,
Feedback on Our Tactical Views and 2023 Outlook
Feedback to our year ahead outlook has been mixed, with many agreeing on the main points but trying to understand the path, where conviction remains low. We still expect higher highs for this tactical rally before the deteriorating fundamentals take us to lower bear market lows next year.
Technicals over Fundamentals for now… our tactically bullish call was always more about the technicals than the fundamentals. Today, we provide an update to those factors, some of which no longer justify higher prices although they provide support at current levels. The deciding factor is market breadth, which has improved greatly over the past month and argues for us to remain bullish into year end before the fundamentals take us to lower lows next year.
Feedback on our call for the S&P 500 to reach a price trough of 3,000-3,300 in Q1 '23… we've gotten a fair amount of pushback on that our forecast on this front is too aggressive both from a magnitude and timing standpoint. While directionally bearish, many investors struggle to see even a retest of 3,500. In our view, what was priced at the October lows was peak Fed hawkishness, not material earnings downside. If we were forecasting a modest 5% forward EPS decline and a reacceleration off of those levels, we'd concede that the earnings risk is probably priced, but we're modeling a much more significant 15-20% forward earnings downdraft, which should demand a more recessionary type 13.5-15x multiple on materially lower EPS.
We are hearing more of a desire to explore the "soft landing" scenario... We find the most common interpretation of a "soft landing" is the US economy avoids an economic recession – i.e. the labor market remains resilient, inflation slows, and the Fed does not hike beyond Q1 '23. We view that scenario as an economic muddle through, and one that is still negative for margins/earnings and therefore equity markets. Why? First off, a tight labor market keeps labor costs sticky and elevated and pressures margins. Second, inflation may be slowing but the downtrend is likely more significant for goods inflation, which the S&P 500 is relatively exposed to from a nominal revenue perspective. Third, in that scenario, the Fed may not be hiking, but they're likely not cutting either because the labor market is resilient and they're still handicapped by inflation that's slowly decelerating but not plunging. So, the equity market may get the benefit of the late cycle "pause trade" typically worth ~+15%. However, it won't get the "cuts before a recession" trade worth another ~+10%.
AND as we enter a very much interrupted holiday shortened week ahead,
… THAT is all for now. Off to the day job…