Good morning. It would seem to be lost on nobody when a ratings agency comes out with a downgraded outlook for the USA and so, what then of this …
Moody’s affirms China's A1 rating, changes outlook to negative from stable
… The change to a negative outlook reflects rising evidence that financial support will be provided by the government and wider public sector to financially-stressed regional and local governments (RLGs) and State-Owned Enterprises (SOEs), posing broad downside risks to China's fiscal, economic and institutional strength.
Hey … all the cool kids OUTLOOKS are getting downgraded! No worries, right?
But wait there’s more behind todays aggressively UNCH prices of USTs … not JUST major country outlook downgrades but we’ve ALSO got (ECB) hawks turn DOVISH …
Reuters: Exclusive: ECB hawk Schnabel scraps more rate hikes after 'remarkable' inflation drop
… "When the facts change, I change my mind. What do you do, sir?" Schnabel said in an interview, repeating a quip often attributed to John Maynard Keynes. "The most recent inflation number has made a further rate increase rather unlikely.” …
RECAP …
ZH: US Factory Orders Plunged Most Since COVID Lockdowns In October ZH: Bitcoin Overtakes Berkshire, Gold Dumped Off Record Pump, Bonds & Big-Tech Slump
SO data was as bad as rate cut ‘istas thought and yet … yields ticked UP on the day. Go figure. WATCHING as long bonds have dropped down into what looks to be an important zone …
AND … here is a snapshot OF USTs as of 705a:
… HEREis what this shop says be behind the price action overnight…
… WHILE YOU SLEPT Treasuries are modestly higher as locally 'overbought' conditions were offset by dovish ECB-speak (Schnabel) and a less hawkish-than-expected RBA Statement. A ratings agency also downgraded China's credit outlook to Negative (see above), hitting stocks in the region. DXY is little changed while front WTI futures are also little changed. As mentioned, Asian stocks were notably lower in China and Japan, EU and UK share markets are mixed while ES futures are showing -0.4% here at 6:45am. Our overnight US rates flows saw real$ buying in the long-end during Asian hours during an otherwise quiet session. Swap flows were light this morning after a few busy sessions with better receiving in the belly noted from real$. Overnight Treasury volume was ~80% of average overall.
… and for some MORE of the news you can use » The Morning Hark - 5 Dec 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’ …
ABNAmro: Global manufacturing PMI picks up, but still in contraction mode | Insights newsletter
Global manufacturing PMI picks up in November, but remains below neutral mark. Bigger improvement in the supply side.
The consensus expects nonfarm payrolls on Friday to come in at 180,000 jobs added in November. This bullish consensus estimate is likely based on one single indicator, namely jobless claims.
But other indicators are showing ongoing signs of weakness in labor demand, which would point to a weaker employment report for November:
1) The quits rate, i.e., the share of workers voluntarily quitting their jobs every month, continues to trend lower, see the first chart below.
2) More consumers are starting to say that it is harder to find a job, see the second chart below.
3) The work week for private sector workers has been declining, suggesting labor demand is weaker, see the third chart.
4) There is now very little difference between wage growth of job switchers and job stayers, suggesting that job switchers are no longer able to get big pay increases, see the fourth chart.
5) The number of job openings has decreased since the Fed started raising interest rates, see the fifth chart.
6) The pace of job growth has declined as the Fed has raised interest rates, and with the Fed on hold well into 2024, this trend will likely continue, see the sixth chart.
Barclays 2024 Outlook: High-altitude landing (bearish at least relative to their peers)
We expect 10y yields to end 2024 at 4.5%, well above consensus, as the economy should remain resilient. We believe the long run neutral rate has shifted higher, arguing for a shallow easing cycle, and investors are also likely to demand a healthy term premium for taking duration risks.
Key Takeaways
Treasury yields rose sharply during the year, driven primarily by a resilient economy that not only defied widely held recession forecasts but in fact accelerated. The upward pressure on yields was exacerbated by worries about supply-demand imbalance. Eventually, duration supply relief at the November QRA and expectations of an imminent easing cycle amid slowing inflation dominated.
Investors remain skeptical about the sustainability of yield levels with consensus expecting them to continue to fall over coming years. This likely reflects the view that 2023 was an aberration and that in 2024, the economy will slow sharply, barely avoiding a recession, inflation will return to almost mandate-consistent levels and the Fed will be initiating a substantial easing cycle starting in 1H24.
We expect 10y yields to end next year at 4.5%, well above consensus and not far above steady state levels. The economy is likely to remain resilient, and inflation progress is likely to be somewhat slower. While the front end should remain caught up in disinflationary and recessionary cuts, investors should demand a healthy term premium for taking duration risk and the 2s10s Treasury yield curve should dis-invert next year.
Risks to the the view are two sided. Another year of solid nominal GDP growth and the possibility of further fiscal expansion after the 2024 US presidential election are likely to challenge the peak yield narrative. On the other hand, any circumstances that lead to a recession are likely to result in an easier monetary policy stance and lower yield levels than we envisage.
We believe the long run neutral rate has meaningfully risen from pre-COVID levels, reflecting structurally wide budget deficits, the increase in the dependency ratio and the greater investment needs related to green energy. These should shift the saving/investment balance away from excess savings, which plagued the pre-COVID era of low and potentially negative real neutral rate, despite only a modest drop in trend growth expectations.
We believe investors are also likely to demand a meaningful term premium to take duration risk in an environment of historically elevated macro uncertainty, inflation risks still being skewed to the upside and a reduced diversification benefit of Treasuries. This should be exacerbated by duration supply-demand mismatches.
Net issuance of notes/bonds should rise sharply next year amid wide budget deficits and ongoing QT, with no offset from spread product supply. Private domestic investors, particularly retail, would need to do the heavy lifting as foreign central banks should remain on the sidelines. They would need more compensation to term out of the safety and attractiveness of the front end.
… Markets have lost a little of their recent poise over the last 24 hours, with the S&P 500 (-0.54%) coming off its YTD high from Friday, just as yields on 2yr Treasury yields (+9.6bps) moved back up to 4.64%. There hasn't been a specific catalyst for the softness, but the astonishing rally in November and long positioning has led to some scepticism about how much further it’s able to run, at least until we get some more data that’s soft-landing friendly. After all, even though markets are fully pricing in a Fed rate cut by the May meeting in just 5 months’ time, this isn’t the first time this year that rate cut speculation has built up. In fact, at the height of the SVB turmoil in March, futures were fully pricing in a rate cut by the July meeting, which was just 4 months away. So it’ll be fascinating to see the extent to which the FOMC’s dot plot next week validates or pushes back on current market pricing, which is now looking for 124bps of cuts in 2024…
DB: US Economic Chartbook - 2024 US outlook in charts (picture worth a 1000 words)
… The second half of disinflation typically takes longer than the first half
DB: A potential "Global Put" is asserting dominance (besides Ruskin being one of the sellsides ‘popular kids’, it makes the point why WE here in USofA care when an ECB hawk (Schnabel — above) turns dove)
… IF inflation provides enough flexibility to allow policymakers to respond to weaker growth, then in many countries there is soon likely to be more scope to ease interest rates, support financial conditions, and offset risk negative events, than any time since nominal rates were last at these levels before the Great Financial Crisis …
… That there is believed to be considerable scope for monetary easing in the event of a shock, represents a potential policy 'put', and the more the market knows Central Banks have plenty of ammunition, and scope to support asset prices, the less this support is likely to be needed. This potential 'put' is global in nature to the extent that rate cycles within the G10 mostly look highly synchronized. The 'potential put' is already the dominant force restraining risk volatility and supporting risk appetite.
FirstTRUST: Monday Morning Outlook - Disinflation, Not Deflation (important distinction NOT being translated by rate cut ‘istas IMO)
… In fact, deflation doesn’t even have a grip on the housing market. New home prices only include the prices for the new homes sold each month, which in the past year has averaged about 55,000 per month. That’s out of a total housing stock of about 145 million homes. In other words, new home prices reflect what’s going on each month with only about 0.04% of all homes…
… It’s important to remember that although the M2 measure of the money supply is down 4.5% from the peak in July 2022, that follows the surge of 40% that preceded it. That huge increase is still wending its way into the economy, and it would be crazy to try to take all that money back out. That would cause a massive deflationary problem. As a result, the general price level is permanently higher than the path it was on pre-COVID.
The bottom line is that the stance of monetary policy is tight enough to keep bringing inflation down in 2024. But don’t expect it to stay there so long that general prices start consistently falling. At present, the futures market is pricing in a drop in short-term interest rates of about 1.25 percentage points. We think the rate cuts will be steeper, the front edge of a shift in policy that will eventually cause an echo of the 2021-23 inflation problem in the years ahead. Unfortunately, like the 1970s.
Goldilocks: Holiday Sales Update: Clicks over Bricks
Hard data on Black Friday and Cyber Week spending tell a familiar Christmas story: solid growth in ecommerce but weakness in brick and mortar. Nominal spending across Adobe’s panel of online retailers rose 7.3% year-over-year in November (1st through 27th), the fastest pace in three years. Given the 7% year-on-year pace of ecommerce growth in October, the Adobe data imply modest or moderate sequential gains in the nonstore category in November (we assume +0.4%, mom sa). However, gains of this magnitude would not be large enough to offset the brick-and-mortar declines indicated by Fiserv credit card data and the Redbook department store panel.
Additionally, the autumn boost to pharmacy spending from Covid boosters—a tenth of the population was vaccinated in September and October—and the broader step-up in Q3 retail demand together create a high hurdle for incremental growth. Taken together, we are assuming a 0.1% decline in Census retail control in both November and December (ex-auto, gas, building materials, mom sa).
In terms of consumer prices, Adobe data showed a sharp increase in online discounting, with apparel prices falling 25% over the course of November, compared to -15.5% during November 2022 (not seasonally adjusted). Coupled with the earlier start to promotions this holiday season, this argues for a sequential decline in CPI and PCE apparel prices in November, other things equal.
… Exhibit 1: Online Spending Growth Solid but Well Below the Pre-Pandemic Pace
Invesco: Investment outlook 2024: A balancing act for growth and inflation
Key takeaways
A bumpy landing
As we move into 2024, we expect the global economy to slow marginally, with a bumpy landing for major developed economies in the first half.
Favored asset classes
We believe an increasing global risk appetite should favor equities, while the likelihood of falling rates could help boost fixed income.
Stabilizing growth in China
Chinese policymakers are seeking to stabilize growth after optimism around its post-COVID opening was tempered in 2023.
… Fixed income and currencies
We favor high quality credit given short-term concerns about decelerating economies, along with the prospect of falling rates.
We favor long duration and believe this is an attractive time to lock in rates on the long end of the curve.
We anticipate nominal bonds will perform well as disinflation continues.
We favor emerging market local currency debt in this scenario, as it should benefit from a weakening US dollar.
We believe the US dollar will ease as markets anticipate rate cuts by the Fed.
The pros and cons of taking refuge in cash now that yields are hovering above 5%…
… The odds of T-bills outperforming intermediate-term Treasuries following a positive yield-curve spread were relatively low, especially over longer periods. And investors holding cash gave up at least 3.5 percentage points in annualized returns, on average, over each of the four periods.
… Conclusion
In the end, the fact that T-bills don’t typically produce strong long-term returns—even at times when they offer relatively attractive yields—probably seems like an obvious point. As safe assets, they’re not expected to generate strong returns. (My colleague Adam Fleck came to a similar conclusion in a recent article.) The “T-bill and chill” strategy might pay off over some shorter-term periods (as it has over the past 12 months), but it’s not a reliable way to build long-term wealth.
There is a day of rather dubious data ahead. The US job vacancy numbers are based on a survey with a response rate so low it should not really be published. The data also only records a subset of job vacancies, and the collective mid-life crisis experienced by US workers in recent years has distorted the reporting of the numbers.
There are assorted service sector sentiment figures coming out—unlike official surveys, there is little information on response rates, or questions asked. Investors are asked to just accept that the surveys do what they say they do. Some evidence suggests that the surveys might not do what they say they do…
UBS: Interest rates strategy: Rates down sharply, where to from here?
With evidence mounting that the US economy is slowing into year-end and that inflation globally is continuing to cool, expectations have risen that major central banks have finished with rate hikes and next year we will begin to see rate cuts.
This has translated into a sharp drop in rates across the curve in recent weeks and strong total returns for bonds.
The path to rate cuts is not likely to be smooth, given the strength of the US economy coming out of the summer. Nonetheless, and taking into consideration recent price gains, we continue to recommend highquality bonds, as outright yields remain appealing and the risk-return in a sharper economic slowdown scenario is favorable.
One key source of market volatility over the next few months could emanate from the material amount of sovereign bonds due for refinancing and deficit financing. Politically there is little appetite for austerity and central banks in most developed markets are no longer marginal buyers of sovereign debt. Therefore, private investors are being asked to step up and buy.
Ultimately, growth, inflation, and monetary policy will drive bond returns going forward. However, given the risk of supply indigestion, we favor taking rate risk in the 5-year part of the curve and see the ultra-long end of the curve as vulnerable to these technical dynamics. We outline specifically what we are watching to gauge how supply is being absorbed.
… Fed funds futures do not reflect any hikes this December and are starting to price in significant cuts for next year. Last Friday, the 2024 December futures were showing a rate of five cuts, but I always point out that is a biased estimate of pricing—as traders use these futures contracts to hedge bad scenarios which bid up their prices (and lower their yields). The rates pricing is more consistent with three to four cuts and some hedging/insurance premium.
If Powell shows he's flexible and will move on the downside, the equity markets can look past slow or zero growth in first and second quarter and we will have a good year in 2024. Outside of the tech sector, I think the market is still very defensively priced. We had a rally in small- and mid-caps but it has been muted so far.
When could we see the first cut? That depends on how weak the data come in and whether inflation continues to come down.One note of caution as you go into the new year and hear more talk of hikes or drops in the Fed funds rate will be after the release of the Dot Plot in December. Less than three months ago, at the September meeting, a majority of FOMC members believed there would be one more increase in rates by December. Now it's off the table. I suspect social media will be ablaze with comments at how hawkish the Dot Plot reads out. Just remember how good their own forecasting record has been.
… And from Global Wall Street inbox TO the WWW,
Bloomberg: El-Erian Says Fed Risks Losing Control of Messaging on US Rates (OpED worth a click)
The US Federal Reserve is losing control of its messaging on interest rates, but financial markets are wrong to expect imminent cuts, Allianz Chief Economic Adviser Mohamed El-Erian said…
… “I do believe the Fed is done raising rates, but I don’t think that validates what is in the markets about rate cuts next year,” he said. “They still have a significant communication problem and they still have a credibility problem.”
… “Ultimately the choice facing the Fed is the following: Either they stick to 2% and risk dipping the economy into recession; or tolerate slightly higher inflation, don’t push the economy into recession and find out that that is stable, that it doesn’t de-anchor inflationary expectations,” he said. “My hope is that they will opt for the second option.”
Hedgopia: Hard To Come Up With Scenario In Which Russell 2000 Decisively Breaks Out Of Nearly 2-Year Range (picture worth a 1000 words? here you go)
… 2/ A Bullish Indicator A few years ago I wrote and Investopedia article mentioning how low volatility in the markets could be a bullish indicator. That indication lasted for about a month before the rising volatility coinciding with rising prices signaled a huge warning flag in front of the COVID panic. But that brief blip aside, the following year turned out to be quite bullish after all.
The following chart gives three indications that 2024 could be a strongly bullish year in its own right. First, SPY rose more than 10% during the month of November. This is, historically speaking, a very bullish prognosticator. Second, the average true range indicator is approaching its lowest level since before 2022, and this corresponds with what could be a continuation of the upward trend. Third, the Cboe Volatility Index (VIX) has hit its lowest since before the pandemic, displaying that option sellers expect less volatility than any time in the last three years. All three signals are strongly bullish indicators.
3/ Keeping a Cautious Mind About the only thing that could generate worry in the minds of investors would be the sign of an imminent recession. The inverted yield curve returning back to its zero line would be just such an indication. While this could happen in 2024, that could be several months away and a bullish market behavior could result all along the way up until that time comes. Meanwhile there is no guarantee that the inverted yield curve means a bear market is inevitable, even if the country does face a recession.
AT KRooneyVera (an excellent spot on 10yy and TIME at a certain price)
As far as the Bloomberg data goes back (and basically within living memory), the 10yr yield has spent the most time between 4.1%-4.2%, relative to any other 10bp increment …
am enjoying / LEARNING from you all too by the way, much appreciated
This daily read is gold. GOLD!!!!