(USTs modestly LOWER on below avg volume) while WE slept; "Federal Reserve Officials Talk Too Much" (El-Erian)

Good morning. With little in the way of news over the weekend to report and in addition TO a few added 2024 outlooks mentioned HERE and just ahead of this afternoons liquidity event (aka 20yr auction) …

… (daily)momentum appears to be suggesting some sort of concession and that would be a good thing … It is going to be a holiday shortened week where many on the B and C teams will be left to manage and not break anything. This COULD increase vol and decrease any signal and so with that I’ll offer a snapshot OF USTs as of 702a:

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

… WHILE YOU SLEPT
Treasuries are modestly lower with the curve generally steeper ahead of this afternoon's $16bn 20-year Treasury auction. DXY is lower (-0.3%) while front WTI futures are higher (+1.5%). Asian stocks were mixed (Japan lower, China higher), EU and UK share markets are little changed on balance while ES futures are showing ~UNCHD here at 6:30am. Our overnight US rates flows saw another slow Asian session with futures gap-opening lower and the curve bear-steepening-- holding near the opening levels through much of the Tokyo session. Overnight Treasury volume was ~90% of average with 7yrs (146%) and 20yrs (222%) seeing some relatively elevated average turnover this morning.

… Our first attachment looks at 10yr Tsy yields to zero in on that bear trendline we've cited for months. The shadow box shows how 10yr yields have been pretty welded to the trendline over recent sessions, including this morning. Of interest too is that short-term momentum (lower panel) now shows that 10yrs are 'overbought' and perhaps at increasing risk of a corrective sell-off. That said, our next attachment shows the still-bullish, medium-term set-up for Treasury 10yrs. This tells us that 10's appear to remain in a bull phase and that any corrective move to higher rates may be a short-lived affair (1-3 days), as a guess. When we're in Asia next week you can be sure that we'll be eyeing the November closes.

… and for some MORE of the news you can use » The Morning Hark - 20 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’ …

Apollo: The US Fiscal Situation and Markets (think foreign PRIVATE buyin USTs slowing)

There is a lot of discussion in markets about the implications of the US fiscal situation.

Three areas to watch for investors are 1) debt ceiling and shutdown risk, 2) Treasury auctions, and 3) US downgrade risk. The complication for markets is that the debt ceiling and shutdown come and go with months between, but Treasury auctions happen every week, and a notice from a rating agency about the US fiscal situation can come with no warning.

In other words, for investors, the fiscal situation is not like watching quarterly earnings but instead a topic constantly lingering in the background that can impact markets with little or no warning—if, for example, a Treasury auction tails or rating agencies issue a statement.

The fundamental question remains: Who is going to buy the growing supply of Treasuries, and at what price?

Looking at net foreign purchases of Treasuries shows that foreign official institutions, i.e., central banks and sovereign wealth funds, have been net sellers of Treasuries since 2015, see chart below.

Foreign private buyers, on the other hand, stepped up purchases when the Fed raised interest rates in 2022. But in 2023 with rates peaking, they have been slowing their purchases, see again the chart below.

The bottom line is that investors across all asset classes need to spend some time not only on who is buying Treasuries—including whether it is yield-sensitive or yield-insensitive buyers—but also on Treasury auction metrics and what the rating agencies are saying and doing.

BNP: Sunday Tea with BNPP: The FOMO rally

KEY MESSAGES

• Recent data has reoriented the opportunity set for rates investors. We add a 5y10y swaps steepener to the portfolio.

• In FX, we continue to like carry. The UK Autumn Statement on Wednesday poses idiosyncratic risks for GBP.

• Last week’s low-quality rally in the US equity market was notable. Looking ahead, stronger ISM numbers will likely be required to keep the momentum going. 

Goldilocks: When Will Balance Sheet Runoff End and How Will the Fed Know When to Stop?

… The FOMC will likely aim to stop balance sheet normalization when bank reserves go from “abundant” to “ample”—that is, when changes in the supply of reserves have a real but modest effect on short-term rates. We expect the FOMC to begin considering changes to the speed of runoff around 2024Q3, to slow the pace in 2024Q4, and to finish runoff in 2025Q1. At that point, we expect bank reserves to be around 12-13% of bank assets and the Fed’s balance sheet to be around 22% of GDP (vs. around 30% currently and 18% in 2019). The key risk to our forecast is that the increased supply of debt that we expect in 2024 causes intermediation bottlenecks in the Treasury market that lead the Fed to stop runoff earlier.

We continue to expect the Fed’s remaining balance sheet runoff to have modest effects on interest rates, broader financial conditions, growth, and inflation—much less than the impact of interest rate hikes this cycle.

There is substantial uncertainty over how conditions in money markets will evolve as runoff continues. We therefore introduce a number of indicators to monitor how conditions are evolving in short-term funding markets. These indicators suggest that liquidity currently remains abundant, though we expect them to signal pockets of scarcity in mid-2024.

MS: Sunday Start | What's Next in Global Macro: Our 2024 Outlook – What We Debated

… Slowdown but no recession? In their baseline scenario, our economists expect a significant slowdown in DM economies, while inflation is tamed but an outright recession is avoided. Unsurprisingly, the prospect of a substantial slowdown that doesn’t devolve into a recession was debated at length. Our economists maintain that while recessions remain a risk everywhere, they expect any recession (e.g., in the UK) to be shallow. Since inflation is falling with full employment, real incomes should hold up, leaving consumption resilient despite more volatile investment spending…

… NIRP/YCC exit: Our economists expect the BoJ to formally end the framework by removing the negative interest rate policy (NIRP) and long-term rate target in January 2024, with the risk of an early move in December 2023. They also expect a 25bp rate hike in July 2024 and expect the BoJ to abolish the monetary base commitment in 2Q25, starting gradual QT with a reduction in JGB purchases. The combination of rate differentials – both falling US rates as well as an end of yield curve control (YCC) and negative rates in January – and an eventual rate hike from the BoJ sparks the emergence of broad-based JPY outperformance. We debated the implications of JPY strengthening. We expect that as JPY grows stronger over the course of the year, FX-hedging costs for non-yen assets fall, which favors high-quality spread products such as agency MBS, IG credit, and CLO AAAs …

… NIRP/YCC exit: Our economists expect the BoJ to formally end the framework by removing the negative interest rate policy (NIRP) and long-term rate target in January 2024, with the risk of an early move in December 2023. They also expect a 25bp rate hike in July 2024 and expect the BoJ to abolish the monetary base commitment in 2Q25, starting gradual QT with a reduction in JGB purchases. The combination of rate differentials – both falling US rates as well as an end of yield curve control (YCC) and negative rates in January – and an eventual rate hike from the BoJ sparks the emergence of broad-based JPY outperformance. We debated the implications of JPY strengthening. We expect that as JPY grows stronger over the course of the year, FX-hedging costs for non-yen assets fall, which favors high-quality spread products such as agency MBS, IG credit, and CLO AAAs.

MSs Global Economic Briefing: The Weekly Worldview: Market swings and our soft landing call

Slowing growth and moderating inflation are in line with our year-ahead outlook. Markets, however, may swing either way on incoming data.

With 2023Q3 particularly strong, market narrative had started to flirt with a reacceleration in the US economy that we did not believe was there. Recent data prints give us greater confidence in our views of the slowing toward a soft landing, and yet the downside surprises in US CPI and nonfarm payrolls both elicited strong market reactions. A key question to ask is whether we are in for another flip of the script in coming weeks. The market often takes incoming data and extrapolates. If our forecast is right, the same way the market saw stronger growth coming out of 23Q3 than we did, the near-term slowing that we continue to expect can easily lead to renewed expectations for a recession.

Yardeni: The Economic Week Ahead: November 20-24

Happy Thanksgiving Week. Thankfully, it is a relatively slow week for economic indicators. October's Index of Leading Economic Indicators (LEI) and the Index of Coincident Economic Indicators (CEI) (Mon) are likely to please the diehard hard-landers. The LEI is expected to be down 0.7% m/m. It has been falling since December 2021. However, over that same period, the CEI has been rising to new record highs (chart).

This time, there's a chance that the CEI will be down slightly m/m. If so, some of that weakness can be attributed to the auto strike, which depressed payroll employment, real personal income, industrial production, and real business sales. Nevertheless, there are mounting signs that economic growth is slowing during Q4, following the 4.9% jump in real GDP during Q3. The Atlanta Fed's GDPNow model is tracking Q4's real GDP at 2.0% currently. The Citibank Economic Surprise Index has been falling in recent days, which has been a bullish development for bonds (chart).

The November 18 initial unemployment claims (Thu) series is expected to edge down to 225,000 (chart). That would confirm that the jobs market remains strong. We know that there are still plenty of job openings.

… And from Global Wall Street inbox TO the WWW,

Bloomberg: Bonds’ Best Month Since March Faces ‘Sanity Check’ in Auction

• Monday’s 20-year bond auction falls into a potential vacuum

• Signs of slowing economic growth have boosted demand for bonds

… But this month’s advance has driven yields to the lowest levels since September, turning the demand at Monday’s 20-year auction into an indicator of whether investors see a risk the recent trend will reverse. Such concerns were evident in the 30-year auction earlier this month, when the market briefly tumbled after the Treasury had to offer an unusually large yield premium to sell the securities.

The Treasury’s 20-year bond has been an albatross for much of its three-year existence, during which it has never been sold during the holiday-shortened US Thanksgiving week. So a strong reception would be a particularly powerful endorsement of the rally.

The sale “will be a good sanity check for the notion that the evolution of data has in a meaningful way shifted to more stable/constructive for how duration supply gets absorbed,” said William Marshall, head of US interest-rate strategy at BNP Paribas…

… The 30-year bond auction on Nov. 9 nonetheless drew a much higher-than-expected yield, a sign of weak demand that fueled a major selloff in the market that day. That downturn, however, proved brief, rewarding investors as the new bonds went on to rally, sending the yield from a starting level of about 4.77% to as low as 4.56% this past Friday.

… What Bloomberg’s Strategists Say

Treasuries are poised for double-digit returns in 2024, given the Bloomberg Economics view of the year starting in a recession, followed by a tepid recovery. Treasury demand could overwhelm supply with expectations of easier monetary policy and declining inflation, while federal deficits will continue to be a concern.

—Ira Jersey and Will Hoffman, rates strategists

Bloomberg: 5 things to start your day (Asia edition, talkin’ TERM PREMIUM)

… Investors are a very forgiving bunch when it comes to Treasuries it seems. This month’s rally has sent the so-called term premium sliding back toward zero, undermining the calls of bond bears from last month that the expected flood of supply would mean higher yields for longer. Instead, there’s a good chance that the term premium will slide back into the negative, the way it did in early 2021 after its last, brief flirtation with the positive. That means investors are, at least in theory, satisfied to buy 10-year Treasuries at yields that are lower than the income they could get by simply buying short-term bills on a rolling basis.

Those who are buying in to the latest rally will be hoping for a better outcome than the last time the term premium vanished, back in June 2021. The Bloomberg Treasury index delivered a 12% loss since then, while T-bills returned 5.8%. The key difference this time round is 10-year yields at 4.44% offer far more of a cushion than the 1.5% or so back then, along with the growing anticipation that a severe economic slowdown is imminent. 

Bloomberg: Fed Officials Rely on Real-Time Anecdotes Over Data to Bolster Case for Patience

• Policymakers see field visits as key to understanding economy

• Even as growth data has been strong, anecdotes show slowing

Bloomberg: Federal Reserve Officials Talk Too Much

Excessive communication by the central bank can aggravate the risk of both market and economic accidents.

AND I know it’s early but …

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