Good morning.
With holiday long-weekend nearly here (at least for those fixed income markets which used to be near and dear) and trading conditions to be extremely thin, so too might daily updates next few sessions.
I’ll begin with a look at 2yy …
… where I’d frame current situation as ‘support’ up nearer 5.08% and resistance down near, well here. Momentum appears to be steady (overBOUGHT but NOT extremely so) and for somewhat more (ie 10s, 30s) see just below but for now … here is a snapshot OF USTs as of 716a:
… HERE is what this shop says be behind the price action overnight…
… WHILE YOU SLEPT
Treasuries are modestly higher and the curve a touch flatter this morning following similar impulses from the UK and German bond markets. DXY is modestly higher (+0.15%) while front WTI futures are lower (-1.25%). Asian stocks were mixed, EU and UK share markets are mostly higher (SX5E +0.4%) while ES futures are showing +0.12% here at 6:45am. Our overnight US rates flows saw another quiet Asian session where there was little theme to our limited turnover. Similar story in London's AM hours where on-balance paying flow that the desk reported was at odds with the early bid for Treasuries. Overnight Treasury volume was ~80% of average across the curve with some relative stand-out volume seen in 20yrs (199%)…… We scrounged up a few pictures for your viewing pleasure this morning. Our first is a familiar one showing Treasury 10yr yields sitting in a technical no-man's land or between major trendlines. The old bear trendline above and the former range highs near 4.34% just below... 10's locally 'overbought' so we're assuming that resistance near 4.34% in 10's is going to be a formidable one absent an important shift in the fundamental outlook.
Next-up we take a look at the weekly chart of Treasury 30-year yields and how yields are closing in on 30yrs' equivalent (to 10yrs at 4.34%) range high. There appears to be a significant band of resistance for 30yr bonds from 4.50% down to 4.42%, the October '22 high. Our next two charts are somewhat linked to some recent news links posted in our top section.
… and for some MORE of the news you can use » The Morning Hark - 22 Nov 2023 and IGMs Press Picks (who CONTINUES to be sportin’ that new, fresh look) in effort to to help weed thru the noise (some of which can be found over here at Finviz).
Moving from some of the news to some of THE VIEWS you might be able to use… here’s SOME of what Global Wall St is sayin’ …
BAML: Global Rates Year Ahead. 2024: Cloudy with a chance of landing
… Rates: Steeper US curves outright and cross market
We see 10y at 4.50%, 4.25%, 2.10%, and 1.30% in the UK, US, EA and Japan. We are looking for steeper real and nominal curves in the US. In EUR we have more conviction in outright longs than in the curve. In Japan, we expect a bear flattening in 10s30s…… Losing steam: lower rates, steeper curve
… We expect USTs to regain more of their risk-off and hedge value as confidence grows in a macro slowdown and lower inflation. We expect modestly improved UST demand from asset managers and overseas investors as the economy slows and USD peaks. However, the UST supply / demand backdrop is challenging and could still see USTs cheapen vs SOFR swaps, especially at the front end.Our year-ahead trades: duration = long belly; curve = steeper nominal 5s30s; front end = SOFR/FF to remain wide until ON RRP near zero but sharp tightening after; TIPS = real 5s10s steepener; vol = 1y fwd 2s10s cap spread; 3y1y receiver spread, short 1y1y vs 1y10y vol; spreads = 2y-30y spread curve steepener…
… Technicals: Yield tops galore
Our Elliott wave trend following process suggests the four-year secular rise in yields likely ended in 4Q23 and a three-wave cyclical move lower occurs in 2024-25.…US: 10Y to see cyclical bull rally in 2024 to 4%
10Y yield topped in Q4, is headed to 4%, steeper curves, bonds over commod’s. Our secular call for US 10y yield to see 5.00-5.50% was briefly reached in 4Q23 with an intraday high of 5.02%. Our Elliott wave trend following process told us yield could find a peak in this area, then develop a top pattern and start a cyclical bull trend (lower yield) to the rising 200-day average near 4.00%. A head and shoulders top in the 10Y yield daily chart supports our view (Technical Advantage 15 Nov 2023). So does a bottom pattern in the bonds / commodities ratio. A risk to our view is if 10y yield forms a base in the daily chart to signal a retest of the 5% in 1H24. A retest is common enough in history to mention and may lead to a bigger top. We reiterate curves bottomed and steeper bias. US 2-10 to 20bps, maybe 50bps. US 5-30 to 55-80bps. (Chart 1, 2, 3)BAML: Global Proprietary Signals - Slow is good
Participate, but don’t gorge
Global equity markets heaved a sigh of relief with the ease of pressure in the rates market, as benchmark yields retreated from the 5%-mark and bond volatility dissipated. However, the backdrop continues to have conflicting forces: an impending (but well-flagged) growth slowdown, evolving re-pricing of policy rates, ongoing quantitative tightening, and last but not least, recovering market technicals. A holistic analysis suggests that it may be prudent to participate, but not gorge at this stage.Barclays: October existing home sales descend even lower
Existing home sales declined 4.1% m/m in October, continuing the downward trend since February's peak. Single-family and multifamily sales declined, leading to an increase in the monthly supply of homes. Mortgage lock continues to be a driving factor of weakness in sales.
BMO: FOMC Minutes: Uncertainty of Tightening Financial Conditions
The overall tone of the FOMC minutes was cautiously hawkish -- the commitment to remaining in restrictive territory for 'some time' was the clearest takeaway. The observation that 'Many officials said it was uncertain whether tightening in Financial Conditions would persist' was particularly apropos -- especially in light of how the market has performed in the interim. Of course, the Fed made a clear effort to keep another potential rate hike on the table; precisely what one would anticipate. Even if the Fed doesn't truly believe there is a compelling reason to hike further, adding symmetry at terminal is very typical (and understandable). Overall, there was nothing in the release that has offered any divergence from the recent Fed messaging…
BloombergBNP US November FOMC minutes: Strong unanimity to remain restrictiveKEY MESSAGES
The November FOMC minutes indicated broad agreement among policymakers to rely on risk management considerations in conducting monetary policy at this point – “all” agreed to “proceed carefully” on policy rates, suggesting the committee sees risks surrounding the economic outlook becoming increasingly more balanced.
Even as doves and hawks ordinarily see varying degrees of readiness to raise rates further if needed – a nominal tightening bias, in our view – “all” on the FOMC agree to keep rates restrictive for some time.
Our view remains that the Fed will hold rates steady through the balance of this year, initiating the first cut of the cycle in June 2024.
Goldilocks: Existing Home Sales Fall to New Low Since 2010
BOTTOM LINE: Existing home sales declined by 4.1% to a seasonally adjusted annualized rate of 3.79 million units in the October report, below expectations. The imbalance between housing supply and demand improved but the median sales price nonetheless increased 0.6% month over month (sa by GS). We left our Q4 GDP tracking estimate unchanged at +1.9% (qoq ar)
Goldilocks: FOMC Minutes Continue to Stress Data Dependence in Coming Policy Decisions
BOTTOM LINE: The minutes to the November FOMC meeting noted that “all” participants judged that keeping the target range for the federal funds rate unchanged at that meeting was appropriate. Participants continued to emphasize that “the data arriving in coming months” would help clarify the extent of additional tightening needed to return inflation to the Fed’s 2% target. We see further hikes as unlikely, however, partially because we forecast core PCE inflation of 3.36% on a Q4/Q4 basis in 2023, well below both the FOMC’s median projection of 3.7% in the September Summary of Economic Projections and the Fed staff’s projection of “around” 3.5% presented at this meeting. Participants also noted that GDP “had expanded at an unexpectedly strong pace” in 2023Q3 but that this had not precluded aggregate supply and aggregate demand from coming into better balance. Participants continued to judge that the economy needed “a period of below-trend growth … and some softening in labor market conditions” for aggregate supply and aggregate demand to be brought into better balance.
JEFF: Oct Existing Home Sales Hit 13-Year Low, Down 40% From Recent Peak in January 2022
… Despite declining momentum in sales and high borrowing costs, prices are holding up pretty well. Demand has not fallen as steeply as supply, with low-rate mortgage holders unwilling to put their houses on the market. The median price decreased just 0.3% m/m. On y/y basis, home price appreciation came in at +3.4%, the fourth month in a row where the y/y measure increased. For context, this measure peaked at 25.2% in May 2021. It is rare for the y/y change in the median price to be negative, but it took such a massive increase in 2020 and 2021 to produce 7 straight months of y/ y declines between July 2022 and January 2023.
UBS: FOMC minutes: holding pattern
Proceeding carefully, data dependent…
More hikes had not been ruled outChair Powell said "Evidence of growth persistently above potential, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy" in the post-meeting press conference. The minutes said "Participants noted that further tightening of monetary policy would be appropriate if incoming information indicated that progress toward the Committee’s inflation objective was insufficient." Inflation risks were also viewed by most participants as tilted upward, so the FOMC did not view itself as out of the woods yet, as concerns of progress stalling or another energy price shock remained. The FOMC continued to signal determination to get inflation back to 2 percent, and we expect that should the progress on inflation stall, or inflation resume rising, the FOMC would consider the need for tighter monetary policy. At the moment, the data is going the other way, however.
News was generally favorable, including supply…
UBS: How far can credit markets overshoot into yearend?
Recent credit market squeeze has us wondering where the floor is (Figures 1+2)
Our outlook heading into year-end 2023 has been for range bound spreads with a bias for widening, and gradual weakness in the first half of 2024 followed by a more aggressive sell-off in H2 2024 as a moderate recession in the US impacts credit risks (see our 2024 outlook for more detail). That said, a confluence of softer-than-expected inflation prints, a more dovish Fed outlook and weaker Treasury issuance has inspired a rally in credit spreads as well as broader fixed income markets. Despite the fundamental arguments against more tightening, we have seen year-end credit rallies in the past as issuance dries up and cash gets redeployed before the new year. After the most recent rally, IG/HY cash spreads are just 2/23bp off YTD tights, but remain 34/127bp from postCovid tights reached in mid-2021. This begs the question: if the rally continues into yearend, how much tighter can credit spreads get?UBS (Donovan): Bond vigilantes are not being controlled
Central bankers keep stressing rates will stay high—the Federal Reserve minutes signalled much the same message. Markets are not paying attention. There is a sense that central bankers are trying to manipulate the bond market vigilantes—but bond traders are like three-year olds at a party who are high on sugar and will not be controlled. Investors are increasingly looking at the disinflationary details of advanced economy consumer prices and speculating on rate cuts having to come sooner.
US October durable goods orders have conflicting drivers. Consumers are not increasing spending on durable goods (European spending is slowing). Companies pursuing capital for labor substitution plans are investing in durable goods, but other companies are cutting back. Flexible working reduces demand for office furniture, for instance…
Yardeni: Fed Not Even Thinking About Thinking About Cutting Rates
That's the basic message of the FOMC's minutes released today. The word "restrictive" was mentioned seven times mostly in the following context: "In discussing the policy outlook, participants continued to judge that it was critical that the stance of monetary policy be kept sufficiently restrictive to return inflation to the Committee’s 2 percent objective over time."
The core PCED was up 3.7% y/y through September (chart). So the Fed won't cut the federal funds rate until inflation is closer to 2.0%. We optimistically think that could happen by mid-2024.
The first time Fed Chair Jerome Powell publicly stated that the central bank was "not even thinking about thinking about raising rates" was on June 10, 2020 during a press conference following the FOMC meeting, where the Fed decided to keep its benchmark interest rate unchanged at a range of 0% to 0.25%.
The rebound in inflation during the second half of 2021 forced Powell and his colleagues to start thinking about raising interest rates, which is what they began to do aggressively in March 2022 (chart).
… And from Global Wall Street inbox TO the WWW,
Bloomberg: Higher Interest Rates Are Shattering Housing Dreams Around the World
The end of the property boom is diminishing homeownership as a path to wealth and deepening economic divides.
TNX continues to roll over.
SPY bullish MA cross + MAs turned up.Investopedia: Impending Nasdaq Trend Change
… 3/ Rates Poised to Bottom?
The 10-year Treasury yield posted its recent high at 4.99% on October 23rd. It has since pulled back sharply to test its Fibonacci 89-day EMA. Nevertheless, we sense that rates have some unfinished business on the upside. The breakout above the October 2022 high of 4.33% just two month ago projects a measured move to approximately 5.41%, but the yield thus far has failed to achieve that target. Meanwhile, the ascending trend line connecting the 2021, 2022, and 2023 lows remains intact. Indeed, yields have yet to even retrace a Fibonacci 38.2% of the 2023 advance. Moreover, our multi-timeframe momentum study remains positive. As such, we suspect that the lows for this correction may be near at hand – with perhaps 20 bps of additional risk. If our hypothesis is correct, then 10-year Treasury yields may be setting-up for a major move higher that could potentially approach 100 bps in total magnitude before peaking.Kimble: Equities / Commodities 12-Year Cycle Performance Outlook and Update
LPL: Five Things We’re Thankful For: Fixed Income Edition
The (potential) end of the Federal Reserve (Fed) rate hiking campaign.
The asymmetric risk/return profile for core bonds.
The potential for equity-like returns (without equity-like risks).
The ability for income-oriented investors to generate income again
The (historical) after-tax returns for muni investors following Fed rate hikes.WolfST: Home Sales Collapse, Prices Drop Further, Supply Jumps. People Are Finally on Buyers’ Strike
ZH: National Activity Index Unexpectedly Tumbled In October, Chicago Fed Warns
… The overall trend of CFNAI is clear...
and an oldy but a goody
ANDF … THAT is all for now. Off to the day job…not sure but there is likely to be an update of some sort as Friday, markets ARE open …
"Bond vigilantes are like 3 yr olds on a sugar high". Such disparaging disrespect! Having recently been corrected in my theory that the 'vigilantes" had perished, or gone extinct; I find their reemergence from hibernation to be rather....MATURE!
Well I haven't seen that "oldie" yet, thanks for the laughs, Dats a Good one! And thanks for all that you do Steve, wishing a Happy Thanksgiving to all us Bond Nerds here!