weekly observations (02.18.25): ReSale Tales recaps; 10s repeat history, 5% by Memorial Day? Long 2s -everyone; Vigilantes vs VigiLANT; UPdated yld f'casts and more...
Good morning / afternoon / evening - please choose whichever one which best describes when ever it may be that YOU are stumbling across this weekends note…
2yy WEEKLY: SUPPORT (red) ~4.33% and RESISTANCE (green) ~4.20%
…momentum remains BULLISH input and 4.20% seems attainable (and is BMOs tgt for recent — CPI dipORtunity — long). Triangulation marches on …
…Now, all is NOT well if you look at BREAKEVENS, specifically 5y ‘breaks’, via FRED
I’ll let you draw conclusions and choose your own narrative / ending as pictures, they say, are worth a thousand words.
Seems to me the emergency cuts back in September might have been a touch premature and ‘breaks’ are, well, breaking the wrong way?
Whatever the call is / may be … 5yr ‘breaks’ heading higher and SOME (BMO) are looking to fade them and whether that is good / bad right / wrong remains to be seen.
Many below are LONG front end (fine) and at same time, i’ve noted some UPdated yield f’casts … Further down you’ll note some suggesting that as history rhymes / repeats, 10s COULD be up nearer 5% by Memorial Day.
And there were some trades placed on 5% yields placed (Bloomberg below).
NOTED … the putting of ones money where ones mouth is, always more important than anything from keyboard warrior stratEgerist community.
For now I’m going to move on to some of the points of light which shape shifted the prices for money just above … namely ReSale TALES …
ZH: January US Retail Sales Tumble Most In Almost 2 Years…
WOLFST: About that Retail Sales Plunge in the Headlines: A Romp through the Massive Seasonal Adjustments this Time of the Year
Retail sales in January were actually up by 4.8% year-over-year.
For somewhat more and a VISUAL context of the BAD hot take, a tweet, or an X or whatever …
at Econ_Parker
How bad was the miss?
Well, it was nearly a 5 sigma event for control group retail sales based on the economists surveyed by Bloomberg.
The high estimate was 1.0% from Capital Economics, while Richard Moody at Regions bank was closest with a -0.2% estimate.
So the print was undeniably no bueno but when contextualized for seasonal adjustments, they were good … um, ok then. Sounds bad (or was fine — see WolfST above and / or Apollo below). Moving on TO Industrial Production, though … not so bad? Dare I say, MAGA impact spotted …
ZH: Trump Effect? US Industrial Production Surges Most In 4 Years Since Election
… bonds went BID and bad was good, once again …
I’m so glad I’m NOT in that line of work any longer. NEVER got paid by the word but to those who are, well, they have the privilege of (re)updating process of thought.
Again … Alrighty, then.
I’ll move on TO some of Global Walls WEEKLY narratives — SOME of THE VIEWS you might be able to use. A few things which stood out to ME this weekend from the inbox
…Overall, it was a round of data that has brought into question the overall health of the US consumer, while Import Prices leaves open the possibility of a 'high' 0.2% core-PCE gain or a 'low' 0.3% monthly increase…
Brean Economics Commentary: Weak retail sales, slower import price gains, manufactured production fell in January
Key Takeaways: The January retail sales report was much weaker than expected, but this report can be plagued by volatility around the turn of the year due to the difficulty of adjusting for large seasonal swings related to holiday spending. Also, sales may have been disrupted in January by bad weather and wildfires. Nonetheless, combined with the drop in auto sales, the retail sales report points to a sharp decline in real PCE in January that would put real spending about flat versus its fourth-quarter average. Nonfuel import prices are rising at a slower pace, but these prices continue to add to domestic inflation despite the strength of the dollar. Industrial production rose in January on stronger utilities output, but manufactured output declined as a drop in auto production more than offset a rise in the production of business equipment. Business equipment production has soared in the last three months, but this largely reflects a rebound in aircraft production after the end of a strike. Total business equipment production is still a half point below year-ago levels (though information processing business equipment has risen strongly over the last year).
First Trust: Data Watch - Retail Sales Declined 0.9% in January
… Within core sales, nonstore retailers (internet and mail-order) were responsible for most of the decline, falling 1.9%. The good news is that sales at restaurant and bars rose a solid 0.9% in January. We watch this category closely since it is the only glimpse we get at services in the retail sales report, which suffered heavily during the COVID years but have since returned to the forefront for the US consumer. As a whole, retail sales are up 4.2% on a year-to-year basis. “Real” inflation-adjusted retail sales are up 1.2% in the past year but still down from the peak in early 2021. This highlights the ugly ramifications of inflation: consumers are paying higher prices today but taking home fewer goods than they were more than three years ago. And while the Fed has cut interest rates a total of 100bps since September, it is not at all clear that inflation problems are behind us. We hope they have the resolve to stomp out the embers of inflation even if economic troubles come …
Cold weather and the Los Angeles fires certainly played a role in the poor start to the year for consumer spending and manufacturing, but it may be that confusion over tariff timing is also having an impact
This morning’s (nominal) retail sales report for January was much weaker than expected. Overall retail sales fell by 0.9% in January versus our forecast of -0.3% (consensus -0.2%), and core retail sales excluding autos and gas fell by 0.5% versus our expectation of an gain of 0.5% (consensus +0.3%). Revisions to earlier months were mostly offsetting, with upward revisions to December sales but downward revisions to November. Based on this morning’s numbers, we expect the annualized growth rate of real PCE for the fourth quarter to be close to unrevised at around a 4.2% annualized rate. However, given the weakness in January, we have reduced our estimate for real PCE for January (due February 28) from +0.2% to -0.1%….It wasn’t very clear if weather effects played a major role in the softness in this morning’s advance report…
WELLS FARGO: Rocky Start to the Year for Retail Sales
Summary Retail sales pulled back more than expected in January, yet the data may say more about the end of last year than the start of this one. The drop in sales came with upward revisions to December and was after solid gains across retailers at year-end. The January data position for weak sales growth in Q1, but consumer fundamentals are still solid.
… AND on to some of the bigger picture and updated narrations which, as we know, follow the price action (and NOT the other way ‘round) …
10s look like 2017, you say? Well maybe you didn’t but some out there are … Specifically, “…If history repeats, 10Y yield may double top at 4.80-5.00% by Memorial Day…”
…Rates: Super core = super strong, a SLR-ippery slope US: We hold core views: duration = retain soft long bias; curve = belly outperformance vs wings. We stay neutral back-end spreads but see near-term further widening risks
…Bottom line: we hold core views even with hot CPI. Duration = retain soft long bias in belly nominal & real rates; curve = belly outperformance vs wings via M5Z6 flattener & 5s30s steepener; inflation = bullish bias in 5y TIPS breakevens; spreads = wider front end; vol = sticky high upper left vol with macro uncertainty
…Technicals: US 10Y yield’s look and feel of 2017
In January we flagged a head and shoulders top pattern and called for a flush lower in yield in February to about 4.30%. While a flush to 4.38% followed, it fell short of expectations after NFP and CPI caused yield to turn higher again.
Below we compare 2015-2017 with that of 2023-2025. If history continues to repeat/rhyme, the comparison suggests yield double tops by Memorial Day.
US10Y yield: 2023-2025 is rhyming with 2015-2017 In 2015-2016, US 10Y yield was trending lower. From July 2016 to the US election on Nov 8th 2016, higher lows began and yield broke above two downtrend lines. After the election, yield pushed to another higher high and through another trend line. From election day, the US 10Y yield rose 85bps. The rise in US 10Y yield stalled at the late 2014 peak of 2.62%. In 1Q17 a double top formed and it declined into late August.
In 2023-2024, the US 10y yield was trending lower. From September 2023 to the US election on Nov 5th 2024, higher lows began as yield broke above two downtrend lines. After the election, yield went up slightly, dipped and then went to another higher high and through another trend line. From the low shortly after the election, US 10Y yield has risen 64bps. If it were to rise the same amount as in 2017, or about 85bps, it may test 5%. If history continues to rhyme, a retest of 4.80-5.00% is next as a double top forms.
This next note from the UK is another recommendation of LONG front-end …
In the US, recent data argue against extrapolating from the upside surprise in realized inflation. We recommend being long 2y USTs and 7y swap spread wideners. In Europe, the market's focus at the German election is on fiscal policy outlook. In Japan, 5y/10y yields rose, likely on RV selling.
…US Treasuries sold off modestly over the week amid slightly stronger-than-expected inflation and Chair Powell signaling that the Fed is in no hurry to cut rates. Swap spreads continued the widening trend amid increasing likelihood of bank deregulation following comments from Treasury Secretary Bessent, Governor Bowman and Chair Powell (see here). Figure 1 shows that 2y and 10y Treasury yields have risen 3bp and 6bp from Friday's close. Inflation breakevens were wider given trade uncertainty. Elsewhere, yields rose a touch as well led by real yields (Figure 2). The broad trade-weighted dollar sold off and oil prices did as well amid optimism about an end to the war in Ukraine. Not surprisingly, European equities outperformed US equities.
Recent inflation data have raised concerns about progress stalling, but we believe January's upside CPI surprise was largely due to volatile categories and beginning-of-the-year resets, which argues against extrapolation. January core PCE inflation is likely to move lower y/y, suggesting inflation progress has resumed. In addition, recent developments on the fiscal front suggest that concerns about fiscal policy becoming more expansionary compared to the status quo are misplaced. There are either likely to be spending cuts put in place or a lack of agreement, punting the tax plan to later in the year. Both scenarios point to a negative growth impulse from fiscal policy.
In this context, we find being long 2y Treasuries (with yields trading on top of overnight SOFR) an attractive way to position for the Fed potentially easing in response to deterioration in the economic outlook, even if one were to have a baseline of no further cuts. The modal outlook should entail cuts over the coming year or so that the markets are not pricing in. In addition, in our view the market is putting too much weight on rate hikes and too little weight on an economic slowdown-induced cutting cycle…
Here, you’ll note best in biz now LONG 2s (in wake of CPI beat down) at 4.36 with tgt near 4.20% … also looking to get short 5y ‘breaks (at 268bps) …
… It wasn’t lost on us that the February Refunding auctions (10s and 30s) both tailed, and still the broader market managed to rally into the weekend. The temptation to attribute this entirely to the Treasury Department’s assurances that auction sizes will remain stable for the next several quarters certainly resonates, although we suspect there is another influence at play …
… For the time being, we’re content to go with the current rally but will concede that there is only so far the move can extend given the global trade backdrop. That being said, the present momentum is more than sufficient to get 10- year yields back below the 4.38% mark seen earlier in February. It’s less obvious whether 10s will be revisiting the 4.25% level anytime soon in the absence of another bond bullish impulse. Curve shape is also a wildcard given that much of the recent move has been a bull flattener. Our view remains that at 4.25%, the 2-year sector continues to look cheap, with a rally back toward 4.15% a distinct possibility as growth concerns come back on the radar and the limelight shifts away from tariffs and levies …
This NEXT NOTE from France has not YET been fully endorsed by Mr Bond Vigilante himself … yet … but an excellent note about vigilant admin vs vigilantes …
BNP: Bond vigilant vs. bond vigilantes | US Rates Insights
KEY MESSAGES
Treasuries/TIPS: Suprises in coupon issuance and a possible SLR exemption for Treasuries suggest the administration is being responsive to market concerns on deficits and high term premiums.
In other words, a bond-vigilant administration could keep bond vigilantes at bay. We see support for long-term Treasuries, and still like 2s10s flatteners, long 10y TIPS, 5y breakevens, and short 6m2s10s curve vol.
Swap spreads: We examine the role of liquidity gaps in banks in driving swap spreads, and how easing SLR requirements for Treasuries could boost spreads. Given current tailwinds, plus our macro flattener view, 30y spreads at -60bp remain plausible.
Money markets: We analyze the pricing of the debt-ceiling kinks in the bill market, with late July–August emerging as the ‘X date’.
Volatility: Flat curve and bond vigilance should cheapen longer tenor payer skew. Sell 2y10y +/-100bp risk reversal (delta-hedged) at 28c; target -15c; stop 42c; allocation USD250,000,000.
… Bond vigilantes – investors who sell bonds out of concerns around high deficits/debt sustainability – have driven the curve to bear steepen ever since elections became a focal point (see Figure 1). But now we think bond vigilantes could see some resistance from a bond-vigilant administration.
This one hit just before the long weekend and it would have been great to send along before hand — sorry — I thought, well, better late than never??
…Liquidity on days before public holidays Ahead of the Presidents’ Day public holiday next week, today’s chart examines Treasury market liquidity on the trading days before a public holiday and days with an early market close. The chart shows the ratio of order book depth for on-the-run 10y Treasury notes on days immediately before SIFMA holidays, relative to the average order book depth of the five preceding trading days. The sample period goes back to 2020 and extends to include Fridays after Thanksgiving (early close) and the National Day of Mourning for President Carter earlier this year.
Over three-fifths of observations have order book depth ratios below 1, suggesting that the days before market holidays tend to have lower market liquidity. However, there are a number of notable exceptions, including three occurrences in the past year (Good Friday, Labor Day, and New Year’s Eve) where order book depth on the day before the holiday was elevated. Additionally, the percentage of order book depth ratios above 1 versus those below 1 is comparable for days with an early close versus full working days, suggesting that there is no notable difference in liquidity conditions regardless of whether a holiday is preceded by an early close.
Same German shop with an economic chartbook on ‘flation with a couple MY favs …
DB: US Economic Chartbook - US Inflation Outlook: CPI lays an egg
…Median and trimmed mean CPI show the strength was broad-based
…Categories like airfares that come from the PPI imply a much softer core PCE print
…Details within the CPI and PPI point to 0.27% core PCE print for January
Progress on core PCE stalled over H2 2024, but should resume in early 2025
Same shop on equity flows and specifically those headed to EZ (MAGA related?) …
DB: Investor Positioning and Flows European Equity Inflows Jump To A Two Year High
From a group with excellent output, a note reiterating staying LONG of duration (5s) and at same time, UPdating YIELD FORECASTS … and one which needs further attention (on SLR) …
MS: Staying Long Duration While Raising UST Yield Forecasts | US Rates Strategy
Fewer and later rate cuts from the Fed in our US economics baseline raise our US Treasury yield forecasts – which we keep well below consensus and the market forwards. We see the 10y Treasury yield ending the year at 4.00%, with risks skewed to lower, not higher, yields. Stay long 5y Treasury notes.
Key takeaways
We raise our year-end 2025 10-year Treasury yield forecast from 3.55% to 4.00% on a major change in our US economists' projected outcome for Fed policies.
We continue to suggest investors adopt overweight or long duration positions concentrated in the 5-year maturity or key rate duration point.
We suggest avoiding duration-neutral yield-curve trades, as neither steepeners nor flatteners look appealing to us given recent growth data and FOMC rhetoric.
The GAO estimates the US federal government made $236bn in improper payments in FY23 – spotlighting an opportunity for DOGE to reduce spending.
US political focus should turn toward the government shutdown looming on March 14 and the automatic 1% discretionary spending cut on April 30.
…United States | US Treasury yield forecast update
We must dispel a common misunderstanding between our Treasury yield forecasts and our tactical trade ideas.
Our baseline yield forecasts attempt to align with the (1) baseline two-year-ahead Fed policy projection, (2) baseline economic projections, (3) and baseline macro narrative – all determined by our economists.
Our baseline yield forecasts also attempt to incorporate primary risks to the baseline views of our economists.
The past many years saw frequent changes in Fed policy projections, economic projections, macro narratives, and primary risks around them – changes that necessitate changes in our Treasury yield forecasts.
Separately, we attempt to identify attractive investment opportunities and present them as tactical trade ideas. Indeed, these opportunities may involve positioning for eventual changes in our Treasury yield forecasts.
…Today, our economists see only one 25bp rate cut (in June) and a balance sheet that continues to shrink into the summer. As a result, we adjusted higher our Treasury yield forecasts and tweaked our forecasts for where US Treasury yields sit relative to FOMC overnight index swap (OIS) rates (see Exhibit 9 and Exhibit 10 ).
In our year-ahead outlook, we saw the 10-year Treasury declining to 3.55% by the end of 2025. With 50bp fewer rate cuts in 2025 and a later end to balance sheet normalization, we raised our forecast to 4.00%.
Our forecast for the very front end of the yield curve changed more dramatically. Our previous forecast saw the 2-year Treasury yield ending 2025 at 3.05%. Now, we see it ending the year at 4.20% – given a Fed on hold until 2H26…
MS: SLR Implications for the US Treasury Market | US Rates Strategy
Fed Chair Powell and Governor Bowman discuss changes to SLR, we think USTs and market liquidity could benefit on the margin. January MMF holdings data show strong demand for bills, alongside a drop in repo holdings. Stay in SFRM5Z6 curve flatteners and short SERFFJ5.
Key takeaways
Fed Chair Powell and Governor Bowman have discussed amending the SLR as a way to stem the erosion of liquidity in the US Treasury market.
Swap spreads reacted favorably to this as AFS portfolios could increase demand for USTs on asset swap where return hurdles may be more easily met.
From a fundamental view, the extent of these moves may not be justified based upon how banks ultimately choose to allocate this excess capital.
But amending the SLR will improve Treasury market liquidity on the margin and especially during time of stress should the SLR become a binding constraint.
We review changes in portfolio allocation across the MMF universe in January and find a rise in the UST allocation, led by bills, and a drop in repo holdings.
A weekly note from the covered wagons folks offered couple sections worth a look, IMO …
United States: FOMC in No Hurry A hot reading on the CPI to start 2025 amplified worries that progress in getting inflation back to target has stalled out as new risks arrive from changing trade policy. Meanwhile, retail sales unexpectedly plunged in January, suggesting consumers tightened their belts to start the year…
…Interest Rate Watch: Mortgage Rates Likely Will Remain Elevated We did not make any meaningful changes to the interest rate forecasts we published this week. We believe the 30-year fixed rate mortgage will remain elevated for as far as the eye can see, which will continue to exert headwinds on the housing market.
… Moving along TO a few other curated links from the intertubes, which I HOPE you’ll find useful …
First up, hard to argue … ReSale TALES tumbled most in 2yrs OR … remains strong …
The data this week shows that the economy remains strong.
Consumers are in good shape, and year-over-year retail sales show steady growth, see the first chart below. Capex spending plans are improving, see the second chart, and the Atlanta Fed GDP estimate for first quarter GDP and the Dallas Fed weekly estimate for GDP are at 2.3% and 2.5%, respectively, see the third and fourth chart.
We are carefully monitoring trade war uncertainty, but so far, there are no signs that it is having a negative impact on the incoming data, see the fifth chart.
… Choose your very own narrative? AND we move on …
BLOOMBERG: Corporate America’s Souring Profit Outlook Clouds Equity Rally
And then THIS…
BLOOMBERG: Traders Look for $10 Million Payout in Bet on 5% US Yield
Wager was placed on options tied to US 10-year futures
A similar bet was placed last week ahead of hot US inflation
…Friday’s trade entails the purchase of options tied to the 10-year Treasury future in lots of 10,000, buying 107 puts and selling an equal number of 106 puts. While the size of this week’s trades pales in comparison with a bet placed last week for more than 100,000 contracts, the yield target is significantly higher.
A similar wager, but expiring in a week, was placed before Wednesday’s data showed US inflation ran hot in January. While the size of the trade pales in comparison with a bet placed last week for more than 100,000 contracts, the yield target is significantly higher…
This next operation / site offers a very good visual recap of the week that just was, in 10yr yields …
…Interest Rates As mentioned, yields have been all over the place as the market is trying to cling to a view that Bessent will successfully push 10-year yields lower somehow. While CPI was hot, it wasn’t hot enough to sustain higher yields, even as the Fed is firmly and indefinitely on hold.
This drop in yields was painful for all concerned. It’s going to be super interesting to see the data going forward as the seasonal quirks all steer towards stronger data in January and February and then fade quickly after that. The fade in seasonality is likely to coincide with DOGE job cuts, and falling business confidence as it’s impossible to invest in an environment where you don’t know the rules. The promise of tax cuts and deregulation are candy on the horizon for investment in the long run but in the short term you are losing government as the dominant positive driver of GDP and investors hate uncertainty. The good news from deregulation is also somewhat to very priced in. See XLF (the US bank ETF) for example.
… AND for any / all (still)interested in trying to plan your trades and trade your plans in / around FUNduhMENTALs, here are a couple economic calendars and LINKS I used when I was closer to and IN ‘the game’.
First, this from the best in the strategy biz is a LINKthru TO this calendar,
That was EXCELLENT !