(WALLer Street Journal = lower / STEEPER USTs on decent volumes)while WE slept; 2023 'flation outlook
Good morning … In case you missed quick hit last night, HERE are a few (weekly and year AHEAD) observations from Global Wall Street … AND in case you missed Waller, who, as Danielle DiMartino Booth notes is a, “…permanent FOMC voter, Powell’s No. 1 lieutenant & closest confidante, chides investors in Sydney, Australia for getting ahead of themselves over CPI report. He’s concerned that inflation expectations could become UNANCHORED…”
Fed Official Warns Inflation Fight Has ‘Ways to Go’ - WSJ
By Nick Timiraos… “The market seems to have gotten way out in front on this,” Mr. Waller said. “Everybody should just take a deep breath—calm down. We have a ways to go yet.”
… Mr. Waller said he was nervous that consumers’ expectations of future inflation might adjust rapidly, leading paychecks and prices to move higher in lockstep and leaving central bankers little time to react.
“You don’t pop a balloon slowly. Once it goes, it goes,” he said.
And of that popping of the balloon, perhaps too late at least as far as the IMF goes? IMF says global economic “outlook is gloomier”. That in mind, #got20s?
… 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 have corrected lower and the curve steeper as markets further digest Thursday's downside miss in CPI, Waller's warning that more hikes may be needed and China's announced plan to support their property market (links above). DXY is higher (+0.9%) while front WTI futures are lower (-1.6%). Asian stocks mostly lower this morning, EU and UK share markets are mostly higher (SX5E +0.35%) while ES futures are showing -0.4% here at 7am. Our overnight US rates flows saw a Waller-led correction flatter during Asian hours with 2yr Treasuries giving up almost 1/3rd of their huge gains on Thursday. We had real$ buying in the long-end along with active fast$ flows in curve expressions amid high curve vol. Our London AM flows were quite active with front-end buyers emerging with buyers in the belly too. We also had sellers in the long-end as the curve bear-flattened during London time. Overnight Treasury volume was ~120% of average overall with elevated turnover seen in 30yrs (192%) and in 7yrs (158%).we show the daily chart of Treasury 30yr bond yields and how yields are currently probing their local range lows (4.05%) where that range low is also the intercept for the bear trend in place since early August. Needless to say, 4.05% is a key resistance for 30yr bonds today. Additionally, this really long-term (monthly) chart of TLT's (20+-year Treasury ETF) shows that long-term momentum is at least as 'oversold' as it was level-wise at the end of the Taper Tantrum in late 2013; looking really ripe for a flip to a new long-term Buy signal right now.
… and for some MORE of the news you can use » IGMs Press Picks for today (14 NOV) to help weed thru the noise (some of which can be found over here at Finviz).
Finally, a few more items from the Global Wall Street Inbox which may be of some funTERtainment value …
DB: Mapping Markets: Did markets overreact to the US CPI print?
… The downside inflation surprise led investors to price in a much more dovish path of rate hikes from the Fed based on just a single reading. For instance, the federal funds rate priced in by December 2023 fell -32bps on the day (Figure 1), going from 4.70% to 4.38%, and has only rebounded to 4.47% since.
But the Fed’s most recent dot plot in September placed the median dot at 4.6% by end-2023, which is above what markets are pricing in. Furthermore, Chair Powell subsequently said at his November FOMC press conference that “incoming data since our last meeting suggest that the ultimate level of interest rates will be higher than previously expected.” So clearly a signal that the dots may need to rise even further.
Investors are now back in a position where they’re pricing a more dovish outcome than the Fed themselves have suggested, even though the Fed have been persistently surprising in a hawkish direction over the last year…
Barclays: Disinflation nation — The weaker-than-expected US CPI print for October supports expectations of major central banks slowing the pace of tightening from here …
MSs weekly WORLD (econ) VIEW: On Labor Markets and Inflation — Labor markets across DM have seen major structural changes and are extremely tight. Inflation is clearly a problem for central banks, but how big a deal is wage inflation? … But is the signal from the labor market a harbinger of a wage-price spiral like in the 1970s? Probably not. There are a number of key structural differences that are important. First, unionization rates, especially in the US, are notably lower than what they were in the past, which reduces the collective bargaining power of employees. Indeed, we see clear evidence that wage gains in the US are much higher for job changers than for those who stay in place (Exhibit 2). Second, economies are much more open to international trade now, which means that price setting is coming increasingly from outside of the economy. Foreign competition became more prevalent after China joined the WTO in 2001. And third, in the US, the labor share of income fell sharply from 2000 to at least 2015, shifting the connection of wages to the rest of the economy.
MSs US stock view for 2023: The Road Not Taken — This year, we take our cues again from Poet Robert Frost with "The Road Not Taken." While our year ahead targets are unexciting with a narrower range than normal, the path will not be as smooth. Investors will need to be more tactical and make choices with no regrets … A Volatile Path to 3,900...While our year end 2023 base case price target of 3,900 is roughly in line with where we're currently trading, it won't be a smooth ride. We remain highly convicted that 2023 bottom up consensus earnings are materially too high. On that score, we revise our '23 EPS forecast another 8% lower to $195 in the base case, a reflection of worsening output from our leading earnings models. This leaves us 16% below consensus on '23 EPS in our base case and down 11% from a year-over-year growth standpoint. After what's left of this current tactical rally, we see the S&P 500 discounting the '23 earnings risk sometime in Q123 via a ~3,000-3,300 price trough. We think this occurs in advance of the eventual trough in EPS, which is typical for earnings recessions. While we see 2023 as a very challenging year for earnings growth, 2024 should be a strong rebound where positive operating leverage returns—i.e., the next boom. Equities should begin to process that growth reacceleration well in advance, and rebound sharply to finish the year at 3,900 in our base case. Bear/Base/Bull price skew: 3,500/3,900/4,200 … In contrast, the set-up was so poor a year ago that the trends in all of the variables mentioned above were headed lower, in our view. Therefore, the right choice/strategy was about managing and/or profiting from the new downtrend. After all, Fire and Ice, the poem, is not a debate about the destination – it's the end of the world. Instead, it's about what causes it and the path to that destination. In the case of our bear market call, it was a combination of both Fire AND Ice – inflation AND slowing growth, a generally toxic cocktail for stocks. As it turned out, that cocktail has been just as bad for bonds, at least so far. However, as the Ice overtakes the Fire and inflation cools off, we're becoming more confident that bonds should handily beat stocks in this final verse that has yet to fully play out (Exhibit 1). That divergence can create new opportunities and confusion about the road we are on, and why we have recently pivoted to a more bullish tactical view. For a recent discussion of our tactical views, check out the latest episode of our Equities Unplugged podcast.
And for somewhat MORE on 2023 - MS not the ONLY shop thinkin ahead … Goldilocks, 2023 Inflation Outlook: Finally Falling … All in, we forecast core PCE inflation to fall significantly, from 5.1% currently to around 3.5% mid-year and 2.9% in December. That being said, consensus forecasts still look too optimistic, embedding an even larger decline to 2.7% in Q4. In particular, we think core services inflation will fall only moderately next year, to a still-high 4.4% year-on-year next December. This reflects a lower but still elevated pace of shelter inflation later in the year, as well as an outright increase in healthcare inflation in part reflecting the largest Medicare fee update in at least 15 years … High sensitivity to wage growth—particularly for lesser-skilled workers—is a shared feature of many consumer service categories. Accordingly, the elevated pace of wage growth currently—our wage tracker indicates 5.4% year-on-year in Q3 including 7.2% for the bottom half of the income distribution—argues for additional strength in core services inflation this winter and likely beyond (see Exhibit 9).
Finally, in the wake of last weeks epic cooling of CPI (?), BBG
… The risk rally at the end of last week looks to be built on the perception that one softer-than-expected CPI report means that the Federal Reserve has won the war on inflation and we can all look forward to some peace dividends. Still, it remains far from clear that the central bank will be resting on its laurels all that soon.
Bond-market measures have been signaling since July that inflation will cool rapidly to average less than 3% a year, even as headline annual CPI kept jumping. Of more concern to the Fed would be the way consumers think inflation is going to stay elevated in the coming year — the gap between traders and households is yawning in a way usually seen around the time of severe deflationary downturns. Little wonder that big money managers are betting the world will have to contend with elevated prices for years to come, focusing on cash and on trend-following strategies. The risk remains both that inflation will be sticky, and that any sustained cooldown will require a very hard landing for the economy.
On THAT note … and ahead of TOMORROWS ANNOUNCEMENT,
… THAT is all for now. Off to the day job…