(USTs moderately higher / steeper on light volumes)while WE slept; 2s5s, 2s and CARRY; China; stocks (and earnings) & liquidity; golden crosses forming
Good morning … China Producer Prices fell further, down 5.4% against expectations of -5.0% and -4.6% prior, while annual CPI was flat. Said another way,
Reuters: China's deflation pressure builds as consumer prices falter
The Fed should / could only be so lucky that de / dis inflation are the next greatest import from China. Perhaps Yellen inked a TRADE deal guaranteeing such? Time will tell. As far as here and now goes, YESTERDAY I offered up a weekly look at 5yy and ahead of this weeks onslaught of duration, I thought a DAILY look of a security which isn’t going to be up for auction, might be in order,
Bullish momentum (stochastics, bottom panel) as we’ve just attempted to hold October cheaps and are hovering just in / around March (ie SVB) cheaps … seems like an interesting place generally speaking, for so many belly lovers to engage (noted yest)
… here is a snapshot OF USTs as of 718a:
… HERE is what this shop says be behind the price action overnight…
… WHILE YOU SLEPT
Treasuries are modestly higher with the yield curve pivoting steeper around an unchanged 20y benchmark after China's inflation data disappointed again (see link above). DXY is modestly higher (+0.14%) while front WTI futures are lower (-0.75%). Asian stocks were mixed and little changed on balance, EU and UK share markets are modestly higher while ES futures are -0.1% here at 7am. Our overnight US rates flows saw limited action during the Asian session while our London desk reported better selling in the belly alongside some block FV-TY flatteners. Overnight Treasury volume was about 90% of average overall with decent turnover seen in 7yrs amid the block flow (150%).… Last week Citi's Jim McCormick shared a chart that showed the correlation breakdown between the Tsy 2s5s curve and Tsy 2y rates. We illustrate and update what he shared in today's first attachment with 2y yields on an inverted scale. Since then, we've chatted about the increasingly buoyant back-end curves and how their charts are super well set-up for rebounds in those curves-- hinting at a possible renaissance in term premium, among other things. And we've also recently illustrated and discussed the increasingly favorable conditions for the bellies of 'fly's (like 2s5s10s and 5s10s30s) to cheapen after they got to historically rich levels (again) in recent months. When chatting about these evolving trend signals with the desk (hat tip: Victor and Andrew), they reminded of a simpler catalyst for the correlation breakdown between curves and nominals and for the prospects of cheaper 'fly bellies: Carry. We knew that during Q2 this year that investors were piling into positive carry/roll flatteners (like 2s5s- as flagged by Citi's RPM positioning reports) or at least exiting steepeners as negative carry pressures weighed.
An interesting chart, IMO … and for some MORE of the news you can use » IGMs Press Picks for today (10 July) to help weed thru the noise (some of which can be found over here at Finviz).
From some of the news to some of THE VIEWS you might be able to use… here’s what Global Wall St is sayin’ …
First on CHINA developments overnight,
Barclays - China: Mounting deflation pressure bodes ill for growth
Worsened PPI deflation and drop in CPI inflation point to weak domestic demand. We think the more challenging deflation environment and sharp slowdown in growth momentum support our view that the PBoC has entered a rate-cutting cycle. We expect a 10bp policy rate cut per quarter through Q1 24 to reduce financing costs.
Goldilocks - China: Both CPI and PPI inflation were below expectations in June
Bottom line: Both CPI and PPI inflation missed expectations. The CPI-PPI gap widened further as June CPI rose in sequential terms while PPI declined (CPI: +1.4% mom sa annualized, PPI: -8.8%). In year-over-year terms, China's headline CPI was flat in June (vs. 0.1% yoy in May), and PPI inflation fell to -5.4% yoy in June from -4.6% yoy in May. Goods prices continued to soften on falling commodity prices and continued price cuts due to the "618" online shopping festival. Looking ahead, in year-over-year terms, we expect PPI deflation to persist in the coming months. Incorporating the soft Q2 inflation prints lowers our full-year 2023 forecasts of headline CPI and PPI inflation to 0.5% yoy and -2.7% yoy, respectively (vs. 0.7% and -2.2% previously).
Moving along / away FROM China overnight TO a weekly note from a large German bank as they attempt
DBs Mapping Markets: Why a hard landing still lies ahead
Several factors are still putting upward pressure on inflation. That raises the prospect of further rate hikes ahead…
I’ll summarize — tight labor markets, financial conditions NOT particularly tight (highlight — 30yr mortgage held around same levels for ~9mo — feel better?), big downward forces on inflation 'stopped or are about to’ — gas prices -19.7% in year TO May BUT bulk of decline already happened in 2022 as prices FLAT YTD — and finally, risks ‘of exogenous shocks that could hit’ … all told, i’m not yet feeling too warm and fuzzy having read this …
Real yields are rising rapidly. This is increasing the chances that something breaks in financial markets.
Last week saw real yields hit multi-year highs. In the US, the 10yr real yield closed at a post-2009 high of 1.80%, and the 5yr real yield hit a post-2008 high of 2.15%. The 2yr real yield has even surpassed 3% for the first time since 2008.
This trend has not been confined to the US. In Germany, the 10yr real yield is now at 0.26%, almost at levels last seen in 2014. In the UK, the 10yr real yield is at its highest in a decade, with the exception of the mini-budget turmoil last year.
This will have an impact across several channels. For markets, higher real yields undermine the support for various risky assets. After all, if you can get a higher inflation-adjusted return in a relatively safe asset, then other things equal, the attractiveness of those risky assets will fall. Indeed, the daily peak for gold in 2022 came the same day that 10yr US real yields were at their lowest of that year.
More broadly, periods of rising rates often coincide with accidents in financial markets. We’ve already seen that in this cycle with the collapse of SVB in March, and the issues around UK LDI pension funds last year. Clearly those events had several causes, but an environment of rising interest rates made them more likely to occur.
3. Historically, the last yards of tightening are the hardest when getting inflation back to target.
Here’s one for our inner-stock jockey,
Barclays U.S. Equity Strategy Mid-Year Outlook: Range bound into the second half
We raise our 2023 S&P 500 price target to 4150, and increase our FY23 EPS estimate to $218. We think equities would remain range bound through year end, and do not see the Tech-centric rally broadening to the rest of S&P. We would tactically add to secular growth exposure.
…Resilience amidst Macro Uncertainty
Risks of a severe economic contraction have receded since our 2023 outlook (30 Nov 2022). While the Conference Board’s Leading Economic Indicators (LEI) Index has fallen quite sharply to recessionary levels, incoming hard data throughout 1H23 shows that actual deterioration in the US economy has largely failed to materialize, despite historic Fed policy tightening.… Resilient price pressures help to explain why certain leading indicators have been off the mark in terms of signaling a recession in 2023. For example, the yield curve has been deeply inverted since late last year. While this is typically considered a classic recession indicator, steep inversion also reflects market expectations that inflation will drop sharply over the next two years, which has not occurred despite the record pace of Fed tightening …
All in all, a good note despite couple excerpts I’ve brought forward which MIGHT suggest an ‘its different this time’ feel. Agree or not — lover of stocks or not — worth a few moments of your click-bait time…
Continuing along on STOCKS,
MS: Do Earnings Matter?
With nearly all of the price performance this year attributable to multiple expansion, do earnings matter? While earnings revisions breadth has improved this year, calendar EPS forecasts continue to fall. Higher rates and lower liquidity suggest P/Es are vulnerable unless EPS forecasts rise.
… On the liquidity front, we think that support is starting to fade. One way of measuring liquidity is global M2 in US dollars. One of the reasons we turned tactically bullish last October was due to our view that the dollar was topping. This, along with the China reopening and the BOJ's monetary policy actions added close to $7 Trillion to global M2 ( Exhibit 3 ). We have pointed out previously that the rate of change in global M2 is correlated to the rate of change on global equities, as well as the S&P 500 ( Exhibit 4 ). Recently, the S&P 500 has traded better than it should have based on this simple relationship—i.e., it appears to be well ahead of itself unless one assumes global M2 in USD growth is about to re-accelerate meaningfully
Another liquidity measure that our QDS team has been focused on is the combination of the Fed's balance sheet, the Treasury's general account and the reverse repo facility. This gauge has also been closely aligned with the price of the S&P 500, until recently ( Exhibit 5 ). For most of the past year, this relationship has held fairly well, but over the past month it has started to diverge quite meaningfully. In the past when these divergences have arisen, they have signaled good times to either buy or sell. At this time, the magnitude of the divergence (liquidity lower, index higher—i.e., the sell signal based on this relationship) is as wide as we've witnessed in recent history.
… Real Rates On the Move...If real rates push higher, could we return to a backdrop where equity returns are adversely impacted as a result? We think it's feasible should this occur, particularly given the fact that the real rate/equity return correlation has now fallen more definitively into negative territory. This means focus is likely to be on CPI once again this week after a couple of months where the pricing gauge was less of a focal point for equity investors.
… the most significant macro development last week, in our view, was the move in the rates market. The nominal 10-year yield broke above 4% and real rates broke out to new cycle highs ( Exhibit 6 ). This initially sent equities lower and equity vol higher. While this reaction function proved fleeting, it was significant in that it was the first time in several months that equities appeared to be adversely impacted by a move higher in real yields. In simplistic terms, it was the first time the S&P 500 was down more than 0.7% on a day when real yields were up more than 7 bps since early March, just before the regional bank stress. We recall Powell's comments from that period on the ultimate level of rates likely being higher than expected. If real rates push higher, could we return to a backdrop where equity returns are adversely impacted as a result? We think it's feasible, particularly given the fact that the real rate/equity return correlation has now fallen more definitively into negative territory ( Exhibit 8 ). This means focus is likely to be on CPI once again this week after a couple of months where the pricing gauge was less of a focal point for equity investors.
This outfit goes on to detail how not just RATES but rates VOL is a headwind for equity multiples … hmmm.
Fear NOT as PRICE informs and some technicals — a look towards a GOLDEN CROSS developing despite all reasons for pause (noted…)
Hedgopia: Russell 2000 On Verge Of Golden Cross, Even As Ratio Of Nasdaq 100 To Russell 2000 At Potential Reversal
… The Russell 2000 has been stuck in a 200-point range between 1700 and 1900 since January last year, with a loss of 1900 this March. It was not until mid-June the bulls mustered enough strength to try to reclaim the top of the range but met with failure. This again occurred last week and, once again, they were rejected.
On Monday and Wednesday last week, the small cap index ticked 1899 and 1892 intraday before retreating. Thursday’s intraday drop to 1824, however, was bought. In the end, the small cap index finished the week at 1865, down 1.3 percent for the week.
Incidentally, at 1954 also lies the 38.2-percent retracement of the decline between November 2021 (2459) and June 2022 (1641).
Amidst all this, it is just a matter of time a golden cross completes on the Russell 2000. The 50-day moving average lies at 1809 and the 200-day is at 1812, with the former sharply rising. There is no guarantee, but technicians view the formation as a signal of more gains to come.
A similar cross completed in late January (this year), and within just a few sessions the Russell 2000 shot up from 1885 to 2007, but momentum soon petered out (arrow in Chart 4).
The Russell 2000 right at this moment has something else going for it.
On an absolute basis, small-cap bulls are running against probable deceleration in the domestic economy and its adverse effect on earnings. On a relative basis, it can benefit from a phenomenon in which even if it is down it may be down less than tech.
A ratio of the Nasdaq 100 to the Russell 2000 last week edged past the March 2000 high, but was unable to hang on to the gains, resulting in a monthly shooting star, although July has just begun (Chart 5).
AND for a few other things — I’d imagine Global Wall Street may be reading … from The Terminal,
ZH: Jobs Data Highlights More Recessionary Behavior
Authored by Simon White, Bloomberg macro strategist,Employers continue to cut back on temporary employment, something typically seen in the run-up to recessions.
Temporary help services is one of the most leading components of the payrolls report. Employers typically let temporary staff go first in a slowdown before full-time employees.
Temp help fell again in June and has been contracting on an annual basis for several months, anticipating the slowing trend in payrolls we are currently seeing.
As the chart above shows, there is more to come, with total payrolls potentially contracting on an annual basis by the end of the year.
Firms are not only cutting temporary employees, they are reducing hours worked, also typical of what happens before firms start to fire people. The average weekly hours worked of all employees has been steadily falling.
Stocks and yields are currently roughly back to where they were prior to the jobs date release, suggesting the market continues to believe the Fed will prioritize inflation over growth.
AH … the Fed can only HOPE things turn out so ‘well’ … AND then there’s this snippet from The Terminal where BONDS > stocks?
5 things to start your day (Europe)
The Stoxx 600 eked out a small gain on Friday, but still ended up posting the worst week since March. Continued tightening by central banks has fed into fears of an economic slowdown in the region and elsewhere, with cyclical sectors such as consumer products and travel underperforming. Eurozone and China economic surprise indexes are firmly in negative territory, while German industrial production unexpectedly fell in May. The ECB’s Nagel said the central bank will have have to keep interest rates at restrictive levels for an extended period to get inflation under control.
Much of the drama played out far away from Europe, but gave investors a reason to take profits after a robust June. Perhaps there was a sense European stocks had become disconnected from macroeconomic data. Recently Michael Msika noted that stocks face increased competition from fixed income.
This latest selloff cemented European stocks’ unloved status. They’ve posted 17 weeks of outflows and the ratio of the Stoxx 600 to the S&P 500 has fallen to the lowest since about April 2022. While the rates backdrop should continue to drive the story, the earnings backdrop doesn’t look amazing either: revisions have turned negative.
Meanwhile, in the Treasury market (where just yesterday I noted a couple 60/40 links and visuals)
WolfStreet: Treasury Market Comes Out of Denial, Grapples with “Higher-for-Longer,” QT, Flood of New Issuance. Long-Term Yields Jump
… The one-year yield, which eyes events that would happen over the next 12 months, closed on Friday at 5.41%. It has been above 5.4% for six days in a row. It is now fully pricing in one rate hike and getting closer to pricing in another rate hike. And it’s not pricing in a rate cut over the next 12 months, which makes sense, and there is no denial of higher for longer within its 12-month window.
Tale of two FOMCs? HOPE springing eternal that things are just SO good we’ll be blinded and therefore NOT recognize / see the bad?? OR, better (or worse?) yet, things are so bad, USTs become good and 60/40’istas will wax poetic about how bonds never die?
… THAT is all for now. Off to the day job…