(USTs 'modestly lower' on below avg volumes) while WE slept; demand, supply and, "Five Week Positive Streak for the S&P 500 Ends -Now What?"; Curve-o-meter SAYS...

Good morning … one (UST auction) down, two to go.

ZH: Stellar 2Y Auction Sees Near-Record Indirects And Near-Record High Yield

Here’s hoping it wasn’t TOO good and positions aren’t TOO short heading in to this afternoons 5yr liquidity event so as NOT to rob concession from participants,

Momentum has moved from somewhat oversold to what looks to ME to be aggressively NEUTRAL and this, as we’ve moved right TO a (redrawn) UPTRENDING LINE … What NEXT? Thankfully I’m no longer IN that ‘game’ and I’ll refrain from a bet. I WILL, however, note 5yy are the belly of the beast and taking a stance here and now — one way OR the other — likely means YOU have a view of the Fed, growth and the ‘flation …

… here is a snapshot OF USTs as of 705a:

… HERE is what this shop says be behind the price action overnight…

… WHILE YOU SLEPT
Treasuries are modestly lower after some persistently hawkish comments from ECB officials (see bullet #2 above) with expectations for further policy stimulus out of China weighing too. DXY is lower (-0.12%) while front WTI futures are too (-1.3%). Asian stocks were mixed (SHCOMP +1.23%), EU and UK share markets are little changed on balance while ES futures are showing +0.25% here at 6:50am. Our overnight US rates flows saw another muted Asian session with real$ a better buyer of intermediates and seller of the long-end. Overnight Treasury volume was ~90% of average overall with some active trade in 30yrs (160% of ave).

… Our first attachment looks at Treasury 30yrs and their roughly-defined 3.50% to 4.00% range this year. 30yrs UST's are actually beginning to look a little 'overbought' (lower panel) after their grinding rally since late May's re-test of the 4.00% support area.

… and for some MORE of the news you can use » IGMs Press Picks for today (27 JUNE) 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 some of what Global Wall St is sayin’ …

First up a few words on some of the data … a large French bank (or a former Bloomberg group), connects dots between Dallas Mfg, SLOOS, and credit

BNP: Dallas Fed bank survey hints at broader deterioration in Q2 SLOOS
KEY MESSAGES

The latest Dallas Fed Banking Conditions Survey showed little change in lending conditions in mid-June, pointing to further deterioration in the Fed’s Q2 2023 nationwide Senior Loan Officer Opinion Survey (SLOOS).

• The Dallas Fed regional survey could be viewed as a mini-SLOOS due to the tight correlation with the official SLOOS. It contradicts the signal from many financial conditions indices (BPFCIUS), which suggests easier conditions in Q2.

• Further tightening in the nationwide SLOOS would play a significant role in shaping expectations for the terminal fed funds rate, in our view. We continue to expect the Fed will deliver the last rate hike of the cycle at the July meeting.

… Credit impulse turns negative, augurs negative GDP growth: The change in the flow of credit -- the “credit impulse” -- has recently fallen back to levels hit during the Covid crisis, although it remains above readings seen during the GFC. A decline in the measure has historically been associated with falling consumer and business spending (see chart below). The measure is calculated as a y/y change in the net increase in household and business liabilities as a percentage of GDP.

From credit impulse TO DEMAND and inflation

UBSs Paul Donovan: Demand, and inflation

US May durable goods orders data has a very wide forecast range, so the consensus number is not a reliable measure. The surge in demand for consumer durable goods has faded, pushing that sector of the US economy into deflation. However, the balance between goods and services demand may be stabilizing….

And since we’ve got a tidbit on DEMAND it would seem only fitting to point out a note from the intertubes on SUPPLY and so,

Wolf Street: Longer-Term Treasury Yields to Rise amid Flood of Issuance while Fed, Foreign Buyers, US Banks Unload. Short-Term Yields already Surged

… Markets are going to have to absorb a flood of Treasury bills (Treasury securities with maturities of one year or less) in the coming months, estimated at something close to $1 trillion, as the Treasury is trying to refill its depleted checking account, the Treasury General Account, while also covering higher outflows and lower tax receipts (we discussed this most recently here). This has been teased in a series of Treasury department announcements that keep getting worse.

The net new issuance will pull liquidity out of other markets and put upward pressure on short-term Treasury yields and on other interest rates, including for CDs, as more and more buyers need to be found to buy these bills, and higher yields will do that.

We knew that. And it’s happening. Investors in bills and CDs are finally getting some yield, after 15 years of getting screwed.

For example, today, the Treasury sold $162 billion in securities, of which $120 billion were Treasury bills with juicy yields:

• $58 billion in six-month bills at an investment yield of 5.45%

• $62 billion in three-month bills at an investment yield of 5.34%.

• $42 billion in two-year notes at a high yield of 4.67%, amid very strong demand. Longer-term yields are still far below short-term yields.

The Treasury department wants to refill the TGA account to where it reaches $600 billion by the end of September. Borrowing to refill it will have to cover a lot of spending, lower tax receipts, plus the extra portion needed to increase the cash balance…

And from supply we head back to … demand FOR LABOR … as a shop asks,

WELLS Hold on Tight: Can Labor Hoarding Insulate the Economy from Recession?
Labor hoarding has been bandied about as a key way in which the FOMC may tame inflation without extensive damage to the broad economy. However, we remain skeptical that job losses can be completely avoided if output declines under the weight of Fed's efforts to tame inflation…

… We suspect that given the hiring challenges of the past few years, employers are likely to set a higher bar for job cuts in a recession and bear more short-term financial pain from holding excess workers. However, we remain skeptical that job losses can be completely avoided if output declines under the weight of the Fed's efforts to tame inflation. Employers may be heading into a soft patch with the welcome intention of holding on to workers come what may, but when the rubber meets the road, financial realities may end up forcing their hand….

Here’s an interesting note which seems to be about stocks BUT…

LPL: Five Week Positive Streak for the S&P 500 Ends -Now What?

… Looking at S&P 500 performance data going back to 1950 there have been 57 occurrences of streaks of positive returns ending after five weeks. The average returns looking out over the next 12 months, after a five-week positive streak, show a return profile that is slightly below the average seen over all weeks during the study period. In the three months after the positive streak ended stocks have shown very tepid returns of 0.4% compared to all week average of 2.1%. Six- and 12-month returns following the end of a 5-week streak have also been below the study period average. Based on the historic data, had the streak extended into a sixth week, performance may have still been muted within a three-to-six-month period compared to the all-week average numbers…

… What does LPL Research believe this data can tell us about the current environment for stocks? From a tactical asset allocation perspective, LPL Research’s Strategic and Tactical Asset Allocation Committee (STAAC) recently reduced our equity positioning to neutral on the basis that equities may have gotten over their skis a bit. The STAAC recognizes the possibility of more potential upside in equities in a “melt-up” type scenario. However, as shown in the data above, these types of runs often are followed by at least shorter periods of weaker equity returns so further gains for the S&P 500 may be more modest, and could come with more volatility than we’ve experienced during the first half of the year. Based on the historic performance data, stocks that exhibit more growth-style characteristics may continue to ride the positive momentum trend.

The STAAC is overweight fixed income relative to cash, with bond yields at levels that we have not seen in decades outside recent peaks. The equity risk premium has been greatly reduced, and as such the risk reward trade-off between stocks and bonds is much more balanced now. Attractive fixed income yields can help mitigate potential equity market volatility, boost income, and, given the STAAC’s outlook for interest rates, have the potential for capital appreciation over the intermediate term.

#gotBONDS? On THAT sort of note, I’ll offer another VIEW even as we know, all views are created equally — but we ALSO know that some views are more equal than others … to whit,

JPMs View: Backdrop to become more challenging in H2

… We expect growth to moderate in 2H as the recent tailwinds boosting service sector activity fade and the drags from restrictive monetary policy and tightening credit build. Persistent inflation should keep pressure on central banks to maintain restrictive stances—and likely tighten further. As they restrain demand, private sector health is set to be undermined. The most likely result of these developments is an early end to the current expansion before inflation is brought under control. We expect a more challenging backdrop for stocks in H2 and believe risk-reward remains unattractive, given the decelerating economy and a likely recession starting in 4Q23/1Q24, softening consumer trends (excess COVID savings are expected to be exhausted by October, and restarting student loan repayment becomes a $10Bn/month headwind), investor complacency, and the significant re-rating of stocks so far this year (P/E has expanded by 14%).

We see modest room for yields to decline in 2H23, and have a medium-term bullish duration outlook. We expect the intermediate sector to outperform on signs of macro weakness, with yield curve bull steepening taking place as one gets closer to the end of the tightening cycle. Supportive fundamentals and technicals are likely to keep a lid on credit spreads near-term, before they begin widening out later in the year. We see a regime-shift towards a more defensive backdrop, which is supportive of USD strength, particularly vs. low-yielding, growth-sensitive currencies. Idiosyncratic risks leave the entire commodity complex exposed to the upside should recessionary risks not materialize. We expect Brent oil to increase to $85 by year-end, with both demand and non-OPEC supply growth strong.

With BONDS in mind, then, I’ll turn to a look at POSITIONS and the Curve-O-meter

BAMLs US Rates Watch: Limited long covering, foreign buying returns while fund flows cool

Directionally long, but limited covering
Our positioning indicators continue to suggest a net out of the money long position biasing the curve higher and flatter (Exhibit 1). However, this long position may be in strong, convicted hands as we see limited covering in recent weeks from the broader speculative community. CTAs have likely reduced their long position but perhaps not to the extent that momentum would suggest. Foreign investors are returning to the market, but inflows to UST funds moderated. July seasonals and summer de-risking may be more supportive of future inflows.

Longs remain out of the money while shorts build
The futures positioning proxy (for construction details see: Gauging positioning in Treasury Futures) shows a bias for rates to sell off, most notably at the front-end (Exhibit 12). While shorts have become a more prominent portion of new positions, longs outstanding remain OTM (Exhibit 11). Changes in open interest on the week reflect relatively limited long covering except for SFR which saw a large number of longs closed.

AND a note on banking and LIQUIDITY (if only indirectly),

MS: Banking Sector Challenges and How is TGA Rebuild Playing Out?
With impending CCAR stress results for US banks and the potential for regulatory changes looming, what to expect for US banks and how do European banks compare? The expected flood off T-Bill issuance has begun. How is the TGA rebuild playing out this far? What are the expectations and implications for markets going forward?

…The TGA Build-up Has Started, Likely to Reach $500 Billion+ in July

With QT and the TGA Rebuild Still Ongoing, Reserves Are Still Likely Headed Lower in the Coming Months

The Fed’s Path, Pace of Inflows into MMFs, and Repo Intermediation Capacity Will Also Shape RRP Usage

Finally, as much as it pains me to end on a somewhat LESS optimistic note, student loans …

Wells Summer Schooled: A Supreme Challenge & Payments Set to Resume
Households with student loans face two major developments this summer. The first is the possibility that the debt forgiveness plan will be struck down by the Supreme Court. The second is the coming expiration of a payment moratorium that has allowed debts to go unpaid for more than three years. This report considers what these student loan developments mean for consumer spending.

…Correlation Is Not Causation: Spending Was Already Poised to Slow

Essentially, we view student loan debt as an increasing burden for U.S. households, but the data demonstrate that large balances (and thus payments) are concentrated among a relatively small number of households. Of the total U.S. population of 330 million people, 43 million hold student loans (~13% of the population). For those households, the struggle will be real and unfamiliar after more than three years of not having to make payments. We will likely see some slowing in spending growth toward the end of this year as a result of the resumed payments denting certain households’ ability to consume, but we do not think the end to the payment pause will be widespread enough to have a significant effect on overall U.S. household spending.

Still, we would be remiss not to acknowledge the timing happens to coincide with a slowing in consumer spending already reflected in our forecast for the final quarter of this year, and we expect consumer spending to contract in the first quarter of 2024 as a mild recession takes hold. The timing of this slowing happening concurrent with the impact of the expiration of the payment moratorium is more coincidence than a cause. It is rather an expected slowing in the labor market and the concomitant decline in personal income that we see as the more consequential driver of that weakness.

AND … THAT is all for now. Off to the day job…