Good morning … Or is it a BAD morning? Yep, one of those days where we wake up to news from China and ask if things are so BAD (credit loan growth) they are GOOD (as data will usher in PBoC easing)?
Reuters: China July new bank loans tumble, credit growth weakens further
AND
Barclays - China: Record-low credit growth to prompt monetary easing
Total social financing growth slowed to a record low of 8.9% y/y in July, suggesting very weak credit demand. The second-lowest reading for long-term household loans underscored the deep decline in home sales. Weaker corporate long-term loans point to softer FAI. We look for RRR and rate cuts.
So … happy Friday and a BAD mornin’ to ya!?
Yesterday’s economic inkblot test(s) gave the people whatever they desired to see … inflation sticky and / or moderating and, well, claims sent some sorta message. It simply depends on how you view it and whether you are long or short your bench.
Here’s but ONE example of reaction FROM intertubes ,
AT aRishisays A decent report for the Fed, considering core inflation has softened even with elevated Shelter readings and their strong belief that Rents will moderate by mid-2024. 3m Annualized Core CPI almost back in the 1%-3% "normal" range, though, might not move the market much, given the pricing going in.
Based on today's CPI report, core inflation excluding shelter is now pretty firmly back within the pre-pandemic range, and of course there's plenty of shelter disinflation in the pipeline over the coming months based on all of the leading indicators.
It is all a matter of perspective … Based on these couple of tweets, one would definitely think FED IS WINNING and should take some comfort. Furthermore, one might take not too large a leap and suggest impact of hike cycle still being felt ‘round the world, something still quite possibly to break AND, well, HIMCO view (noted here) — long the long end — may actually be correct.
Be that as it may, this helped set the table then for the LONG bond auction which took the FUN outta reFUNding today …
ZH: Subpar, Tailing 30Y Auction Prices At Highest Yield In 12 Years
… The internals were also subpar, with Indirects awarded just 67.8%, the lowest since February. And with Directs awarded 19.6%, let Dealers holding 12.5%, the most since February.
Overall, a subpar, ugly auction, if hardly catastrophic and certainly not only to send any shockwaves int he market where the 10Y has barely budged.
…. 2 outta 3 ain’t bad, or so said Meatloaf, right?
… 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 sleepwalking into the US open, volumes ~55-60% with cash USTs closed overnight for the Japan Mountain Day Holiday. Interbank FX volumes clocked in ~45% below 30d averages too, USD-crosses close to UNCH’d after DXY’s impressive reversal yday. USDJPY has retreated just slightly after flirtation with the 145 handle overnight. Risk-on px-action elsewhere in APAC, SHCOMP -2%, HSI -0.9%, KOSPI -0.4% on catch-up to US and tech investment curb concerns. European bourses are in the red as well this morning (DAX -0.5%, Eurostoxx fut’s -0.9%). UST curves are modestly steeper with 5s30s leading +2.2bps, 2s5s10s recouping a bp of richness after yesterday’s >4bp cheapening. Our desk had little flow of note to report, conviction and activity levels quite diminished.
… and for some MORE of the news you can use » The Morning Hark - 11 Aug 2023 — to help weed thru the noise, this daily compilation is organized and then dumped into your inbox ‘bout 345a and is well worth its weight in gold … IF, on the other hand, yer looking for complete list OF the noise to weed through, head over here TO Finviz.
From some of the news to some of THE VIEWS you might be able to use… here’s SOME what Global Wall St is sayin’ … including any / all ‘CPI post-op’
… On a core basis (excluding food and energy), the sticky-price index increased 3.2 percent (annualized) in July, and its 12-month percent change was 5.5 percent.
Core price pressures remained soft in July, as stronger deflation in core goods helped offset the slight acceleration in core services prices. Similar to June, disinflation was narrowly spread across a few categories, and looking beyond those, the progress in reining-in price pressures appears less impressive.
The unsmoothed July Atlanta Fed wage tracker print was unchanged from June, while the weighted 3mma measure showed deceleration. Our state-space model, which draws signals about the underlying pace of wage growth from available measures, infers deceleration after incorporating July's data.
A turnaround in industrial activity could signal an improving macro backdrop for oil prices. Meanwhile, equity-oil correlations have rebounded from historically depressed levels. We think this leaves Energy sector valuations looking too low after the group was largely left behind by the pro-cyclical rally in 1H23.
BMO: Core-CPI +0.160% July vs. +0.158% June; Sept FOMC likely a skip
Headline CPI in July came in at +0.2% vs. +0.2% expected and +0.2% June. This brought the YoY pace to +3.2% vs. +3.0% prior and +3.3% consensus. Core-CPI printed at +0.2% vs. +0.2% prior and +0.2% forecast. On an unrounded basis, core increased +0.160% in July vs. +0.158% June -- so another "low" +0.2%. YoY core slipped to 4.7% from 4.8% prior; in keeping with expectations. Within the details, we see real AHE at +1.1% vs. +1.3% YoY June and real weekly earnings slowed to 0.2% vs. 0.7% prior. Shelter costs were +0.4% in July for the second monthly move at that level. OER +0.5% vs. +0.4% prior. Apparel was 0.0% vs. +0.3% prior. Used autos slipped -1.3% vs. +0.5% June. New autos were -0.1% vs. 0.0% prior. Airfares dropped -8.1% in July on top of the -8.1% decline in June. Core-CPI services ex-shelter came in at 0.221% from 0.091% in June while core-CPI services ex-rent/OER was 0.195% versus -0.004% prior. Overall, there is nothing within this release that would support a Fed hike next month -- September will be a skip. Initial jobless claims in the week ended Aug 5 rose to 248k from 227k compared to the 230k forecast while continuing claims in the week ended Jul 29 dropped to 1684k vs. 1707k expected from a downwardly revised 1692k prior.
Immediately ahead of the data, the Treasury market was benefiting from a modest bid in anticipation of a consensus print. Since the data, the US rates market has rallied a bit before fading. From here, investors will continue to digest the details as we await this afternoon's 30-year refunding auction…
The US July CPI brought another welcome moderation in headline and core inflation that masked more-resilient ex-shelter services categories.
We continue to expect a slower pace of price rises in H2 2023 than in H1 that should see core CPI inflation falling to 3.5% y/y by the end of the year (from 4.7% currently).
We expect the report to keep the Fed on track for a pause at its September FOMC meeting, but it will need to see more progress in non-housing services inflation in order to begin considering interest rate cuts.
Preliminary August forecast: 0.5% m/m headline and 0.2% core. Higher gas prices should lift the headline, but we think a similar trend in the core will prevail.
BNP US rates: Sigh of funding relief, but still a ways to go
US funding markets experienced another month of relief in July, with reserves actually rising due to a decline in the RRP facility balances, a deceleration in the TGA rebuild, and waning bank liquidity concerns.
Money funds appear to be remaining somewhat defensive as the Fed’s path to terminal is still up in the air. We expect MMFs to continue taking down a meaningful chunk of bill supply, but think the extent of absorption may moderate.
We expect duration supply to the market to reach all-time highs amid rising coupon supply. Dealer inventories and demand for financing will be increasingly relevant factors to funding costs and swap spreads as the issuance is digested over the coming quarters.
… From a broader yield/term premium perspective, net of Fed purchases, duration supply to the market is likely to reach all-time highs in the coming quarters. In terms of magnitude, we estimate UST issuance will bring about $35-40bn more in 10y equivalent supply per month in 2024 compared with the 2023 average. Though not exceedingly above the prior 2021 peak, we note that the Fed was an active backstop buyer in the market, while demand from commercial banks and foreign sector demand was considerably more robust than it is today (Figure 8). The combination of more duration and a likely more price-motivated investor should, in our view, support stickier longerterm yields thanks to upward pressure on duration risk premium
The July CPI data came in largely as anticipated with both headline and core rising by 0.2% from June. While the composition of the data was broadly in line with our expectations, airfares again surprised significantly to the downside, posting a second consecutive 8.1% decline. Taken together, the year-over-year rate for headline ticked up two-tenths to 3.2%, while core fell by 16bps to 4.7% (just shy of rounding down to 4.6%).
As the data largely came in close to our expectations, there is little change to our forecast. Our initial expectations for the August CPI data are that surging gas prices will push headline meaningfully above core, namely an 0.61% increase in the former versus an 0.23% increase in the latter. Our longer term forecasts have no change to the core CPI Q4/Q4 rates: 3.6%, 2.5% and 2.5% for 2023-2025. Our core PCE forecasts also remain at 3.6%, 2.2%, and 2.2%. The analogous forecasts for headline are 3.2%, 2.1% and 2.2% for CPI and 3.4%, 1.8%, and 1.9% for PCE.
These data are consistent with our expectations that the Fed will not raise rates any further. While today's data in isolation are encouraging from the Fed's perspective and lean toward holding rates steady at the September 20 FOMC meeting, there are several more data points ahead of that meeting – including another employment and CPI report.
FirstTrust: The Consumer Price Index (CPI) Rose 0.2% in July
… The M2 measure of money is down 3.6% versus a year ago. If this persists — and it remains to be seen whether it will — it would eventually bring inflation back down to the Fed’s 2.0% target. For now, the Fed has gained some traction in its fight against inflation, but the battle is not over. In other news this morning, initial claims for jobless benefits rose 21,000 to 248,000, while continuing claims fell 8,000 to 1.684 million. These figures suggest continued job growth in August, although not as fast as earlier this year.
ING: US inflation boosts case for no further rate hikes
A second consecutive benign set of inflation prints adds to optimism that the Fed rate hike cycle is at an end and a soft landing is achievable for the US economy. We continue to have our concerns about the economic outlook, centred on the abrupt hard stop in credit growth, but the Fed will soon be in a position to be able to cut rates if a recession materialises
One of the factors that potentially played a role in last week’s sell-off in bond markets was market participants’ focus on next year’s UST coupon issuance.
In trying to gauge next year’s bond demand-supply balance we see an overall deterioration of $0.9tr in 2024 vs. 2023 mostly due to an increase in US government bond supply.
If we combine this year’s net improvement of $0.4tr with a $0.9tr deterioration next year, that would suggest upward pressure of around 25bp (for 2023/2024 combined).
YTD, Global Agg Bond Index yields have increased by around 12bp, which could be consistent with markets factoring in some of next year’s projected deterioration in the supply-demand balance.
… Overall, this means we see a modest deterioration in bond demand of around $150bn as a further deterioration in demand is partially offset by an improvement in commercial bank demand. Combined with the increase in net supply of around $0.8tr, this leaves us with a deterioration in bond demand in 2024 vs. 2023 of around $0.9tr. As we had noted previously, the relative improvement in the supply-demand balance in 2023 vs. 2022 would, based on the historical relationship between annual changes in excess supply and the Global Agg bond index yield, imply downward pressure on Global Agg yields of around 20bp. If we combine this year’s net improvement of $0.4tr with a $0.9tr deterioration next year, that would suggest upward pressure of around 25bp (for 2023/2024 combined). YTD, Global Agg yields have increased by around 12bp, which could be consistent with markets factoring in some of next year’s projected deterioration in the supply-demand balance.
… Which previous Fed tightening cycles saw bear steepening?
… Of all these previous Fed tightening cycles only the 1969 saw sustained bear steepening for 2-3 months after the last Fed hike. The most significant steepening after a final hike without a recession was in 1984, but that was a bullsteepening.
In the current conjuncture, a sustained bear-steepening seems challenging.
One scenario that could see a sustained steepening without a recession would be if markets price in materially higher long-run neutral rates, though 1m forward rates in 10 years’ time are already at 3.6% suggesting a fairly high bar. That would probably affect the 5-10y part most given that’s where the trough of the benchmark spot curve is currently.
Another could be some combination of ongoing Fed QT and either even larger fiscal stimulus or perhaps BoJ QT that sees Japanese yields rise and sees repatriation by Japanese investors as well as perhaps attracting foreign investors given the yield pickup after hedging costs. But if it has an additional fiscal component, it seems likely that the Fed would eventually need to push policy rates even higher given the tightness in labor markets.
The consumer price index rose a temperate 0.2% in July, matching consensus expectations. Excluding food and energy, the core CPI also increased 0.2%. Continued deflation for pandemic-disrupted categories such as used autos, household furnishings and travel services such as airfares contributed to the modest reading for core inflation. The recent trend is encouraging and confirms that inflation is headed in the direction the FOMC wants. That said, we are cautious about getting overly excited about a sustained return to the Fed's 2% inflation target.
WolfST: A Word about the Odious Ridiculous Massive Adjustments to Health Insurance CPI, which Now Collapsed to Jan 2019 Levels
… his chart shows the month-to-month percentage changes of the health insurance CPI, including the last 10 months after the odious ridiculous massive adjustments:
Year-over-year, the CPI for health insurance has now collapsed by 29.5%!
… Gasoline accounts for about half of the total energy CPI. It has been rising for seven months, and over the next few months will turn positive on a year-over-year basis, measured against the plunging prices in the second half of 2022. This will further push up overall CPI. You can see this dynamic in the CPI for gasoline as index value; the low-point was December:
The FOMC can take the rest of the year off. The federal funds rate is now restrictive enough to bring inflation down without causing a recession, in our opinion. The banking crisis in March, Moody's recent downgrade of several regional banks, and the Fed's latest Senior Loan Officer Opinion Survey all confirm that credit conditions are tightening. The economic data confirm that the economy remains resilient with the Atlanta Fed's GDPNow currently forecasting a 4.1% increase in Q3's real GDP. Today's CPI report for July confirms that inflation remains on a moderating trend. Tomorrow's July PPI report will most likely do the same…
… However, The Fed will be watching its new favorite signal - Core Services CPI Ex-Shelter - which reaccelerated in July (+0.2% MoM, and from +3.9% to +4.0% YoY)...
Finally for those of us visual learners and inner techAmentalists, a couple / few final links and things for your consideration,
AllStarCHARTS- Yields: Listen to the Charts, Not the Gossip
… Warning: Picking bottoms is never a good look.
It’s unbecoming, especially when there are zero signs of a reversal. (The same applies to tops.)
I understand the Nasdaq 100 had its best first half – like, ever.
But what does that have to do with yield charts?
Rates continue to rise worldwide.
Here’s a look at Germany, France, Portugal, and US benchmark rates:
All are steadily grinding higher following explosive advances last year. Yet none have decisively resolved to the upside from their respective multi-month ranges.
The European yields posted year-to-date highs in early March, while the 10-year US Treasury yield reached its year-to-date peak last week.
That doesn’t change the undeniable uptrend for yields.
My five-year-old can identify the trend on this chart – and he should! We learn to identify the underlying trend in technical analysis kindergarten.
We also learn the cornerstone of our discipline: the Dow Theory tenet that markets trend and that trends persist.
That’s why we always err in the direction of the underlying trend. Charles Dow figured that out over 100 years ago. Luckily for us, he shared it with the world.
Any talk of falling rates and bond-buying, while the US 10-year yield holds above 3.25, is glorified gossip. The uptrend for rates remains intact without any signs of a reversal.
But it’s a completely different story if the US benchmark rate undercuts its April pivot low.
I have to see it first.
If and when rates begin to roll over, then we can have that discussion. It’s a moot point until then.
Betting on lower rates conflicts with everything I’ve been taught and have experienced trading.
Of course, when the data changes, I’ll change with it…
…US inflation came in softer than expected, but that was pretty cold comfort for investors. The surprising trend for a so-called bear steepening of the yield curve came back in force with longer-dated bonds slumping after July CPI data ended up reinforcing the potential that the Federal Reserve has a lot more work to do before it can declare victory over inflation. That makes the current shift higher in the gap between two- and 10-year Treasury yields markedly different from the bullish outburst set off by March’s banking crisis. That move higher for the still deeply inverted curve was a more classic end-of-cycle shift back up toward zero, led as it was by a tumble in two-year yields as traders bet the central bank would soon pivot toward rate cuts.
Stocks meantime fell in both instances, underscoring the theme that a re-steepening curve is the real danger moment for risk assets, rather than the inversion itself and its signal that a recession is likely within 18 months or so.
…Only above the 254bps YTD high in 10yr US Inflation Breakevens though would suggest a base has been completed to open the door to a more sustained rise…
…and 10yr US Bond Yields posted a bullish “reversal day” last week ahead of long-term support at 4.27/4.405%, although still need to break 3.925% to mark a near-term yield top.
The sharp rise in US 10yr Bond Yields came to an abrupt halt post payrolls last Friday, just ahead of long-term support in the broad 4.27%/4.405% zone – the 2022 yield high, the 78.6% retracement of the 2007/2020 yield fall and the “neckline” to the 2006/2007 yield top
Whilst the subsequent rally has seen a bullish “reversal day” established, below resistance at 3.925% stays seen needed to establish a minor top to reassert a bullish tone in the broader sideways range for resistance next at the 55-day average, now at 3.84%. Medium-term resistance stays seen at the July low and 200-day average at 3.73/70% and ultimately, we need to see below here to suggest the market has established a more important yield top.
Whilst support at 3.925% holds there can remain the risk recent strength has been temporary and above 4.04% can reassert a bearish bias for a move back to 4.12%, with this latter level seen as the trigger for a move back to the 4.205% high of last week, then long-term support at 4.27/4.405%
Importantly, 10yr US Real Yields have also yet again defended key support from the top of their medium-term range at 1.82%. As we have previously flagged though, a sustained break above here would instead be seen to mark a worrying development for risk markets in general.
…The question now is whether this latest sentiment extreme in 2022 is going to mark another one of those great moments in history. That extreme came about because of high inflation, and the gold coin TV commercials all tell us that gold is supposed to be a great hedge against inflation. So if inflation lies ahead, and gold is going to outperform stocks, then that would make this DJIA/Gold Ratio move downward.
The problem with this thinking is that while gold prices might be helped by inflation, they are harmed by the Fed's remedies to inflation. If you have your money invested in gold right now, you are missing out on earning a 5.4% yield on 3-month T-Bills. That makes owning gold pretty expensive in terms of "opportunity cost", i.e. missing out on the opportunity to earn interest.
But high short term rates also hurt the stock market, especially when the Fed pushes up rates to above the 2-year T-Note yield as they have done now. And the multiple officials of the FOMC who have made comments about their intentions seem to be saying that the Fed plans to keep this up for a while.
So that 2022 all-time record low reading for the UMich survey data may not turn out to be the great historical bottoming indication this time like it has been in the past, at least not for the stock market by itself. But it is reasonable to expect the DJIA/Gold Ratio to rise as it has before, thanks to gold underperforming more than from stocks outperforming.
Gold in my hand can't become "unbanked". That's easily worth a 5.5% opportunity cost imo!