(USTs touch higher, following UK, Germany and doing so on light volumes)while WE slept; floodgate of 2024 dart throwing exercise continues...Happy Felix Unger Day!

Nov 13, 2023

Good morning. Very little in way of ‘news’ overnight (IGM and Harkster have that covered) and so, just one item to ADD TO what it was Moody’s said FRIDAY afternoon (which I noted over the weekend HERE, along with some of what Global Wall Street was sayin) consider along with a cup of coffee this morning as you get things fired up …

Bloomberg: China’s Consumption Recovery Is Losing Momentum, Data Show
Alternative indicator shows recreation, transport demand drop
China to release official October retail sales data this week

And with that in mind … 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 higher, trading somewhat in sympathy with peer markets in the UK and Germany this morning. DXY is a hair lower (-0.06%) while front WTI futures are modestly higher (+0.35%). Asian stocks were mixed, EU and UK share markets are all higher (SX5E +0.5%) while ES futures are showing -0.2% here at 6:45am. Our overnight US rates flows saw a sleepy start to the week in Asia with USDJPY pressing back up to October 31st's move high near 151.72. Desk flows saw real$ buying in the front-end through the session with little activity out the curve. In London's AM hours, real$ demand for 2's and 3's continued with some scattered buying in the belly seen too. Overnight Treasury volume was ~75% of average with 2yrs (92%) seeing the highest relative average turnover among benchmarks, matching our flows.
… Treasury 30yr yields, monthly: 30yr yields remain below support (4.80%) derived from the move highs seen in 2008, 2009, 20101 and 2011. Above that, the 5.29% level may be your major support that's derived from the cluster of move highs banged out in 2006 and 2007. We've learned recently that buyers have trumped the sellers near 5.00% too. 30yrs remain deeply 'oversold' on a long-term basis (lower panel, circled) and this is true for all duration benchmarks. That said, the long-term momentum studies, while oversold, have yet to flip bullishly- leaving the door(s) to higher rates still open.

… and for some MORE of the news you can use » The Morning Hark - 13 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 Slowdown Continues (Fed #Winning and we’re all losing demand??)
Since the Fed started raising rates in March 2022, S&P500 companies have on earnings calls talked more and more about weak demand, see chart below.
This is what the textbook would have predicted. Higher interest rates increase borrowing costs for consumers and corporates—which slows down demand.
Apollo: US Consumers Want to Travel (I want a lot of things and this just one …)
The Conference Board’s consumer confidence survey asks households if they plan to travel to a foreign country, and the chart below shows that a record-high share of US consumers are planning to go on vacation to a foreign country within the next six months.
The continued strong demand for consumer services is the reason why it is difficult for the Fed to get supercore inflation under control. US households want to travel on airplanes, stay at hotels, eat at restaurants, go to sporting events, amusement parks, and concerts, and that is why inflation in the non-housing service sector continues to be so high.
The bottom line is that rates will stay higher for longer because the Fed is still trying to get non-housing service sector inflation under control.
Barclays: Used Cars CPI: Alternative model suggests potential downside risk to October forecast (so there’s continued and REASONABLE HOPE Fed to be #Winning!?)
We have developed an additional model for used cars CPI, augmented with used car inventory data, which predicts a decline of 1.7% m/m sa for the October used cars CPI. This indicates risks of somewhat stronger deflation than models based on Manheim and JD Power indicators suggest, and our official forecast of -0.8% m/m.
BNP: Sunday Tea with BNPP: The path of least resistance (I think this is good…)
KEY MESSAGES
Despite a weak 30y auction and a hawkish tone from Powell in the past week, financial conditions continued to ease. And with a high bar for economic events to shift the FOMC from its wait-and-see stance, risk premium could continue to decline.
Risk premium is elevated in different parts of the market for different reasons. We have added a number of trades to fade it in FX (USDJPY), rates (US vs EU rates vol) and commodities (gold).
Current market pricing suggests Tuesday’s US CPI is unlikely to be a market mover, but with the US election now less than one year away, we consider medium-term risks on investors’ radars.
DB: Early Morning Reid (on Moodys)
… Late in Friday’s US session (after the equity bell) Moody’s shifted its Aaa credit rating of the US from stable to negative outlook, citing increased downside fiscal risks. S&P and Fitch ratings are already a notch lower at AA+, so the Moody's move may be seen as a step towards catching up to the other rating agencies but if it did lose its last AAA rating that would be highly symbolic. It did weigh modestly on Treasuries. 10yr yields were virtually flat on the day prior to the news, but then moved higher in the final half an hour to close up +2.7bp. In week-on-week terms, they were up +8.0bps. The 30yr yield (-0.3bps) stabilised after Thursday’s losses and was flat on the week (-0.4bps) after a volatile few days that included the disappointing 30yr auction. The short-end sold off on Friday, as 2yr yields rose +4.2bps, and gained +22.2bps week-on-week, the largest weekly rise since May and back to pre-"dovish"-FOMC level. So also a big flattening last week…
Goldilocks: 2024 Global Rates Outlook: Lower, But Not Low
… Yields moving beyond cycle peaks: Most G10 ex-Japan yields should end 2024 close to or slightly below current levels; 10y USTs / Bunds YE24 at ~4.55% / 2.25%. Compared to prior end-of-cycle bond rallies, higher inflation and low unemployment set a higher bar for deep ‘normalization’ rate cuts, while term premia could remain sticky given bond supply and fiscal concerns…
Lower rates volatility…
… Global QT and liquidity drain to pick up pace: Despite significant declines in liquidity, ample reserve levels should limit funding stresses. ECB balance sheet normalization to proceed provided it does not interfere with broader policy stance. Upward pressure on money market rates to emerge as liquidity drain extends…
… Contrary to our expectations for mildly positive returns this year, a long-end led selloff has meant that returns on holding 10y USTs are on track to be negative (-2%) for a third consecutive year. Such an outcome is unprecedented: over the past five decades, nominal bonds returns have never been negative for more than a year, let alone three (Exhibit 1).
Goldilocks asks: How Much Should We Worry About the Rise in the Unemployment Rate? (do NOT worry)
The unemployment rate increased to 3.9% in October and is now 0.33pp above its April trough on a three-month average basis. How concerned should we be that this increase is the start of a meaningful deterioration in the labor market?
We don’t expect the recent uptick to presage an upward trend in the unemployment rate, for several reasons…
… Looking ahead, we expect job creation to slow to a still-healthy 130k jobs per month in 2024H1 and to 100k jobs per month in 2024H2, as labor demand and labor supply come into better balance and state and local government hiring—which has driven roughly 40k of monthly job gains since April—slows over the next year. In all, the deceleration in job growth that we expect would be a healthy development as the Fed tries to bring wage growth down to a rate compatible with its 2% inflation target.
Goldilocks: 2024 US Economic Outlook: Final Descent
The US economy defied recession fears in 2023 and made substantial progress toward a soft landing. The key surprise has been much stronger than expected GDP growth, though this has not prevented the labor market from continuing to rebalance or inflation from continuing to fall.
The hard part of the inflation fight now looks over. It was fair to wonder last year whether labor market overheating and an at times unsettling high inflation mindset could be reversed painlessly. But these problems now look largely solved, the conditions for inflation to return to target are in place, and the heaviest blows from monetary and fiscal tightening are well behind us. As a result, we now see only a historically average 15% probability of recession over the next 12 months…
… We expect GDP to grow 1.8% in 2024 on a Q4/Q4 basis (or 2.1% on a full-year basis), again easily beating low consensus expectations. We forecast just under 2% consumption growth, with real disposable income growth of nearly 3% partly offset by a 1pp rise in the saving rate. We also forecast slower business investment growth of roughly 2% as the surge in manufacturing facility investment driven by CHIPS Act and Inflation Reduction Act subsidies slows, and flat residential investment as the housing shortage continues to temper the impact of reduced affordability.
We expect the FOMC to deliver its first rate cut in 2024Q4 once core PCE inflation falls below 2.5%. We then expect one 25bp cut per quarter until 2026Q2, when the fed funds rate would reach 3.5-3.75%, a higher equilibrium rate than last cycle. While we do not have any major macroeconomic shocks in our 2024 forecast, we think the bar to cut in response to a growth scare will be low in coming years and would not be surprised by insurance cuts at some point…
Goldilocks: Commodity Views: 2024 Outlook: Three Reasons to Go Long Commodities (so this is disinflation, Fed #Winning trade?)
We recommend going long commodities in 2024, as we expect somewhat higher spot commodity prices, strong carry, and see hedging value against geopolitical supply disruptions. We forecast a 21% GSCI 12M total return.
We believe that a fading monetary policy drag, receding recession fears, and reduced industrial destocking will support demand and spot prices in 2024. We now forecast Brent to rise to a 2024 average of $92/bbl (vs. $98 prior) given supply beats, with prices back up to the higher end of the $80-100 range…
MS: Sunday Start | What's Next in Global Macro: The 2024 Outlook: A Good Year for Income Investing
… Our economists led by Seth Carpenter, Morgan Stanley’s chief global economist, expect below-trend growth in developed markets (DM) and a mixed growth picture evolving in emerging markets (EM). They see restrictive monetary policy of the last two years continuing to exert pressure on the global economic cycle over 2024. Positing that while global inflation has peaked, returning to target levels will take a period of below-par growth, they expect to see global growth slowing with most DM economies avoiding recession while taming inflation. They acknowledge that while recessions remain a risk everywhere, any recession in our baseline scenario (such as in the UK) should be shallow as inflation is falling with full employment, so real incomes hold up, leaving consumption resilient, despite more volatile investment spending…
… For markets, 2024 presents a challenging set-up. Many markets have already priced a smooth macro transition, a soft landing characterized by moderating growth and inflation and eventually easier policy. Thus, justifying current valuations across many asset classes requires the macro outlook to stick the landing perfectly. In that sense, there is little room for error. Unlike the last two years when we had a strong preference for RoW over US, we expect that US assets will find 2024 easier, and EM markets less so. In currencies, we expect that USD strength endures through 1Q, as growth and rate divergence continue and USD's defensive characteristics remain alluring. JPY outperforms on the back of the BoJ exiting YCC and NIRP.
A slowing economy and policy easing set the stage for yields to be lower in the US, Europe, the UK and the dollar bloc, and yield curves to steepen. We think that this is a good set-up for 'income investing'. For yield-focused investors seeking 6%+ yields, we see a wide range of opportunities across high-quality fixed income – DM government bonds, IG credit, agency MBS and senior tranches of securitized credit…
… 2023 has been a challenging year for markets and 2024 won’t be easy either, but we expect the nature of the challenge to be different.
MS: 2024 Global Strategy Outlook: Threading the Needle
The end of hikes and start of cuts mean high grade bonds outperform, USD stays strong, and EM assets lag. US stocks see positive returns but risks are front-loaded. With markets pricing in a smooth macro transition, there's little room for error.
… Global equities – Japan leads, look for US earnings recovery: Japan reflation and ROE improvement are secular positives while Europe and EM growth likely disappoint. We expect US earnings growth to trough in early 2024 and rebound thereafter. We recommend a barbell of defensive growth and late-cycle cyclicals. We see the S&P 500 at 4,500 at end-2024.
G10 rates – overweight duration: Easing drives yields lower in the US, Europe, the UK, and the dollar bloc. Curves steepen globally, except in Japan. With the BoJ eventually delivering a rate hike, we expect JGB long-end yields to remain near current levels even as other global benchmark yields decline. We forecast UST 10Y at 3.95%, DBR 10Y at 1.80%, and JGB 10Y at 0.90% by the end of 2024…
… Top trades: In the US, we suggest buying UST 30-year bonds outright…
MS: US Equity Strategy: 2024 US Equities Outlook: The Narrowing Road
Near-term uncertainty should give way to an earnings recovery... For December 2024, we forecast a 17.0x P/E multiple on 12-month forward EPS (2025) of US$266, which equates to a 4,500 price target ~12 months from today. Our 2024 earnings forecast of US$229 (+7%Y) assumes 4-5%Y top-line growth in addition to modest margin expansion as labor cost pressures ease. Our 2024 EPS estimate is consistent with output from our leading earnings models, which show a recovery in growth next year as well as our economists' expectations for growth next year. In line with our comments in Standing Fast, September 10, 2023, our updated 2023 earnings forecast moves closer to our prior bull case, which brings our 2024 EPS growth rate down even though our 2024 estimate is little changed at US$229. 2025 represents a strong earnings growth environment (+16%Y) as positive operating leverage and tech-driven productivity growth (AI) lead to margin expansion. On the valuation front, we forecast a 17.0x forward P/E multiple at the end of next year (20-year average P/E is 15.6x; currently 18.1x).
While the medium-term outlook for earnings looks positive, the near-term backdrop remains challenged...
… We recommend a barbell of defensive growth + late cycle cyclicals...
MS: 2024 Global Economics Outlook: The Last Mile
Global inflation has peaked, but the last mile to target will take a period of subpar growth. Growth stepped down in 2023, and should be slower at just under 3% for 2024 and 2025. DM growth is broadly soft, while the picture in EM is mixed…
… US: Slowing Growth, Easing Policy – Monetary policy remains on hold until June 2024 to offset continued resilience in the real economy. We forecast that GDP slows from an estimated 2.5% 4Q/4Q (2.4%Y) in 2023 to 1.6% (1.9%Y) in 2024, and 1.4% (1.4%Y) in 2025. In our forecasts, core PCE inflation is an estimated 3.5% 4Q/4Q in 2023, and slows to a still-elevated 2.4% in 2024 with sticky services inflation, before falling further to 2.1% in 2025. The Fed holds the policy rate steady at 5.375% from July 2023 until June 2024 when it delivers the first 25bp cut, followed by 25bp cuts in September, November, and December, and by 25bp cuts at every meeting in 2025. The policy rate falls from 5.375% in 4Q23 to 4.375% in 4Q24 and 2.375% in 4Q25.

AND there’s more … I will continue to sift through the Global Wall Street inbox and bring forward whatever I can but for now, a most happy Felix Unger Day to one and all