(USTs sold off with Bunds on 'flation and all on continued above avg volumes)while WE slept; EZ 'flation hits 8.5%, 10yy hit ~4.05% (next stop 4.22%?)
Good morning … EU ‘flation hot,
@EU_Eurostat
Euro area #inflation at 8.5% in February 2023, down from 8.6% in January. Components: food, alcohol & tobacco +15.0%, energy +13.7%, other goods +6.8%, services +4.8% - flash estimate
https://ec.europa.eu/eurostat/en/web/products-euro-indicators/w/2-02032023-AP
And with THAT I present to you a “4” handle on 10yy
Next stop 4.22? So says Citi (more below) Good news is we’re off overnight HIGHS (nearly 4.05%) and so, here is a snapshot OF USTs as of 705a:
… HERE is what another shop says be behind the price action overnight…
… WHILE YOU SLEPT
Treasuries bear steepened overnight but yields are off their earlier highs as German bunds hold steady despite an upside surprise in euro area February inflation this morning (link above). DXY is higher (+0.27%) while front WTI futures are too (+0.6%). Asian stocks were mostly lower, EU and UK share markets are little changed while ES futures are showing -0.35% here at 6:55am. Our overnight US rates flows saw a heavy skew to selling during Asian hours (real$ in 10's and 30's) with fast$ names quiet. The Asian weakness bled into London's morning session with some dip-buying noted there as 10y yields pressed above 4%. Overnight US Treasury volume was decent again (~140% of average) with 20yrs (285% of a low base) and 3's (176%) seeing some relatively high average turnover this morning.…our next attachment updates Treasury 30yrs to show that bonds had their first look >3.985% this morning since mid-November- a level that capped a sell-off at the turn of the year. Close a session above 3.985% and we see little in the way of support until ~4.33%, as illustrated. Real rates have shown more stickiness, however.
… and for some MORE of the news you can use » IGMs Press Picks for today (2 MAR— and STILL SPORTING THAT NEW LOOK!!) to help weed thru the noise (some of which can be found over here at Finviz).
YESTERDAY was fun (ZH: Stocks & Bonds Dive After Hotter-Than-Expected German CPI) and cannot wait for EZ CPI … Hopefully you had a good / better start to YOUR March!
ZH: Nomura Is First Bank To Call For 50bps Rate Hike In March
Before jumping in to Global Wall St inbox, I saw this on ZH (yea, I believe everything I read on the web — but seriously, the BBG visual is what had me at HELL) … and thought, well, this can’t be good
ZH: US Bankruptcy Filings Surge At Fastest Pace Since 2009
From some of the news to some VIEWS you might be able to use. Global Wall St SAYS:
Steve Major / HSBC, via LinkedIN
Addressing questions on February's rise in yields, the increase in bond volatility, and the longer-run view …
In what was setting up to be a winning year for bonds, there has in fact been a 1:1 score draw over the last two months because yields went up in February, reversing the declines of January. For those who don’t follow football (we prefer not to call it soccer), this is when both teams score at least one goal and, when the match ends, they have an equal number of goals.
We have admittedly been selective. Viewed over the last year, the bond market has been delivering for the bears on average in two out of three months. Taking the yield on the US 10-year Treasury, through the previous six months, the bears won 4:2 because there were more months when yields rose. Over the last 12 months, yields rose in eight months, so the score was 8:4 to the bears.
Three questions need answering. What has been driving the latest rise in yields? Is increased volatility symptomatic of a bumpy turning point? Or does the recent rise in yields mean yields will be higher-for-longer?
In answer to the first question, the bullish run for bonds that started last October was anticipating softer data that did not materialise. February data releases confirmed an economy running hot with full employment and stubbornly high inflation. This trumped the view that signs of disinflation would continue, buoyed by easier energy prices and evidence of weakness in the housing market.
Initial conditions made the February sell-off appear quite fierce. At the beginning of the month, when two-year Treasury Note yields were at 4.10%, they were maybe over-interpreting the reduced pace of rate hikes and, flying in the face of Fed guidance, even looking for cuts.
It is likely true that we are nearer to the end of the tightening cycle than the beginning, but central banks don’t want the markets to get ahead of themselves. Today it is 4.8%, so the two-year Treasury Note is more consistently priced to the Fed’s guidance for the policy rate, as per the December dot plot.
To answer the second question, we can see from the chart that higher yields are also associated with increased risk premium. More surprises mean higher bond volatility. This is what happens when economic data beats or misses expectations. But when markets adjust sufficiently, the risk premium may start to dissolve, consistent with yields falling back down.
We take the forward yields as a proxy for consensus expectations, and can measure the extent to which bond markets have been “surprised” by central banks, and their response to the data, with a measure we call the realised term premium. This is what the forwards expected a year ago subtracted from what actually transpired.
Our chart shows a move towards 200bp for the 10-year segment, reflecting how policy has been tightened far more than expected by the market. Recall that at the end of 2021, the Fed’s dot plot was guiding policy rates close to 1.0% in a year’s time. Just over a year later, they are guiding the Fed funds to at least 5.0%. So bond yields rose by about half as much as the policy rate…
… Ultimately, bond investors have to be comfortable that the majority of the tightening is in the past, and that market expectations of higher equilibrium policy rates are due to a higher risk premium that will dissolve over time. Chastened after the beating of last year, the bond bulls will anyway take a score draw.
They say a picture is worth a thousand words … BBG (via ZH) above and perhaps THESE next visuals should allow me to take the rest of the week off! Germany breaking HIGHER,
… Going forwards, we expect any further move higher in the German curve to be a relatively parallel upward shift, and therefore maintain a neutral stance on the curve. For the German 2yr Bond Yield itself, the break above the important 3.00% psychological barrier has been accompanied by a reacceleration in upward momentum (in contrast to the German 10yr) and we note that the next supports are seen at 3.27/275%, then 3.53%, which is the 78.6% retracement of the fall from 2008. We would have even greater confidence in a ceiling here if reached, and our broad expectation is that the market will now move into a ~3.00-3.50% range.
As noted on the front page, we reiterate our bias for German Bonds to underperform for now, but would concentrate on the long-end, with US/Germany front-end rate differentials losing significant momentum. In contrast, the US/Germany 10yr Bond Yield spread is falling sharply after rejecting its 55-day average and is back testing retracement support at 124.5bps. Below here and then the 114bps low would open up our core longheld objective at the 103/100ps low, where we would neutralise this call and look for a floor. The 30yr has already broken to new lows, reinforcing our view that it is long-end rate differentials which have more scope to tighten.
And since I’m reposting visuals which help ME tell today’s tale, Calafia Beach Pundit:
M2: the smoking gun of inflation
Yesterday the Fed released the all-important (but almost completely ignored) M2 money supply statistics for January '23, and they were good. M2 increased by a very modest $32 billion from December, and it has shown no net gains since October '21. Year over year M2 growth is -1.7%, and 6-mo annualized growth is -3.4%.
M2's huge growth from 2020 through 2021 provided the fuel for the inflation that has rocked the economy for the past year, and it's great news that it's fading away. The growth of M2, by over $6 trillion in two years, was the result of the monetization of roughly $6 trillion of Treasury debt issued to fund a tsunami of federal transfer payments in that same period. Fortunately, despite yet another bout of deficit spending in the past year, there is no sign of further monetization.
It is still mind-boggling to me that the unprecedented growth of M2 has almost completely escaped the public's notice. Most surprising of all: how in the world could the Fed not see it? Why was there only a handful of economists who commented on it, as I noted a year ago? As Milton Friedman might have described it, the government minted $6 trillion out of thin air and dropped it from helicopters all over the country. How could that not have resulted in higher prices?In any event, here we are; the flood of funny money is receding. That's why there is now plenty of light at the end of the inflation tunnel.
Chart #1Chart #1 is the main attraction. The M2 money supply exploded from $15.5 trillion in February '20 to $21.5 trillion in January '22. Since then, M2 growth has turned negative, and today M2 is only $3.4 trillion above where it might have been in the absence of the Fed's "helicopter drop." The gap is closing, and the money printing presses have been shut down. Inflation pressures peaked almost a year ago, and headline inflation will almost certainly continue to subside.
Chart #2
Check out the rest of the note FROM Calafia Beach Pundit and note very last visual of 5yuy (nominal v REALZ) and rest assured, Scott Grannis, former bigwig economist notes wheels of disinflation have been set in motion …
… THAT is all for now. Off to the day job…