weekly observations (6/26); "Powell Wins Over Bond Traders Dialing Back Bets on Deep Downturn" (BBG); "Three Overriding Macro Themes" (Crescat); "Outlook-at-Risk" (FRBNY) and more ... much, 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…
After the day and week which was,
ZH: Crypto Soars As VIX Collapses; Recession Worries Spark Stocks' Worst Week Since March
… Treasuries were mixed on the week with the short-end underperforming and long-end lower in yields on the week. It was a choppy week though overall...
Which then means THE greatest macro trade of the year (at least on paper, going in) — the secular (and bullish)RE STEEPENING — will have to wait?
Thanks, Jay.
… in as far as Global Wall Street inbox and link-A-palooza, a couple items stood out to ME
BAML: Remain underweight front end, trade duration tactically long, expect flatter 2s10s … July seasonals favor long 5y and 10y UST
… July is historically a good time to be long the 10Y UST. In the past twenty years, treasuries rallied (10y yield declined) 14 times or 70% of the time. The 10Y saw a golden cross on May 12 ending the session at 3.38%. History tends to suggest yield is lower than this about 35-50 days later, which is in July…
BMO — still buyer of 10yy on dips (3.85) and enter 2s10s steepening after 2y auction
BNP on quarter end FLOWS… Quarter-end presents downside risk to equities …We estimate there could be USD70-95bn of US equities to be sold in pension rebalancing flows into the quarter end …
GS, “2s10s UST curve nearing peak inversion…”
MS: Student Loan Restart Will Reduce Buying Power… The more than three year long moratorium on federal student loans will come to an end soon, with interest payments expected to resume October 1. This would impact the 26.6 million borrowers who have federal student loans in forbearance totalling $1.1tn or $41k/borrower. This assumes the Biden Administration does not leverage a grace period that could enable students to restart student loan payments 3-6 months after the moratorium expires.
We estimate the hit to disposable income from the end of the student loan moratorium lowers real PCE this year by 8-12bp and real GDP by 6-9bp, a drag already built into our Mid-Year Outlook. The largest impact will occur in October, when spending level shift lower to incorporate higher debt service costs…
… In 2019, the average interest payment made on student loans by adults who had to make payments (70% of borrowers) was between $200 and $300 each month. If all borrowers in forbearance were to restart interest payments of $200 to $300/month, this will total $5.3bn to $8bn in interest payments monthly, or $64-$96bn/annually - equivalent to 0.3%-0.5% of disposable income.
SocGEN (Edwards): “Might the neglect of monetary aggregates have gone too far?”
… US M2 is now contracting at a 5% yoy pace – and a breathtaking 10% on a 3-month annualised basis. Deflating by core CPI, the yoy contraction is also close to double digits in real terms!
And so with THESE NARRATIVES in mind, we’ll move from a few of the best in the business TO a couple / few things from the intertubes for your dining and dancing pleasure …
First up are a couple things from Bloomberg as I always enjoy a bit of a look back and cannot get enough of a FI fix ..
Bloombergs The Weekly Fix: A long hot summer for bonds as inflation sizzles
Surprises Keep Coming
June has turned into a tough month for bonds. Investors are caught between their rock-hard consensus that rates will soon peak and the hard place of central banks that keep hiking to try and tame inflation. The Bank of England’s shock half-point increase on Thursday was the latest, and perhaps greatest, demonstration of the dynamics at play.
What’s more, the US and Europe are signalling that the bias is to do more, sooner. Policymakers just don’t share investors’ confidence that the inflation genie is headed back into the bottle. Federal Reserve Chair Jerome Powell used his two days of testimony to ram home to Congress the US central bank’s expectations that further rate hikes are needed to get annual inflation back down to 2%. That leaves plenty of work to do with core inflation rates currently more than double the Fed’s target…
… Playing the Long Game
Bond investors remain at least as concerned about the economic outlook, driving them into the longer end of the market. The US yield curve inverted by a full percentage point once more to approach the lows reached in March before the collapse of Silicon Valley Bank.
Janus Henderson Group Plc. meantime sees a rising threat of a credit crunch as the Fed hikes. There are also concerns that some of biggest private equity players are getting caught out by the swift rise in interest rates — threatening to cost the companies they own billions in extra interest.
T. Rowe Price Group Inc. and Allspring Global Investments are among the big buyers calling the Federal Reserve’s bluff by seeking opportunities in longer-dated high-grade corporate bonds. Others are buying bonds from developed nations where they believe interest rates will be cut sooner and faster than many economists expect, such as in Australia and Sweden where households are highly leveraged.
Foreign investors are snapping up Indian debt in the best buying streak in almost four years as the nation sees better growth prospects and economic stability. And the world’s riskiest sovereign bonds are having a moment in the sun as Wall Street investors seek out high yields from countries showing early signs of market-friendly pivots…
Also from Bloomberg (via Yahoo)
Powell Wins Over Bond Traders Dialing Back Bets on Deep Downturn
Liz Capo McCormick and Michael Mackenzie
Sat, June 24, 2023 at 4:00 PM EDTThe bond market is finally getting in sync with Jerome Powell’s outlook for the economy.
Traders have scrapped once-aggressive wagers that the Federal Reserve chief would pivot to easing policy before the end of this year, reflecting deeply diminished expectations that the central bank’s rate hikes are poised to set off a sharp recession. Bond yields have risen back toward levels seen before the panic sown by Silicon Valley Bank’s collapse.
And even with policymakers seeing a chance for two more rate increases in the months ahead, the US economy is expeted to hold up fairly well, unlike Europe’s, which is showing signs of stalling.
“A realization is setting in that the Fed isn’t going to be cutting interest rates this year,” said Greg Peters, co-chief investment officer PGIM Fixed Income. “It’s a kind of an ‘ah-ha’ moment being priced in by the market that central bankers mean what they say.”
US Economy Seen Skirting Recession But With Sticky Inflation
The divergent outlooks in the US and Europe were underscored Friday, when S&P Global purchasing managers indexes indicated that growth nearly stalled in the euro area this month but continued in the US, albeit at a slower pace. The reports fueled a large rally in the European government bond market as investors shifted into havens, with US Treasuries posting smaller gains.
Nevertheless, the figures highlighted the risk of a slowdown in global growth that would weigh on the US. And markets have been anticipating that the economy will slow, even if the US only narrowly avoids a recession this year.
After Powell told US lawmakers this week that more rate hikes are likely, 10-year yields slipped to a full percentage point below 2-year rates, deepening a yield curve inversion that’s usually seen as a harbinger of a recession. But that was largely because of an upward jump in short-term rates as longer-term ones held little changed.
While swaps traders have pushed out the expected cuts until next year, they expect that the Fed’s key rate will still remain high enough to curb growth. That means policymakers are still expected to be focused on inflation, not trying to jump-start growth.
Powell told the Senate Banking Committee on Thursday that “we will do what it takes to get inflation down to 2% over time.” He said that two more rate hikes were possible this year and he didn’t see a reduction in rates “happening anytime soon.”
Powell will be speaking this coming week at several global events, potentially giving more insights on the policy outlook.
The release Friday of the Fed’s preferred inflation gauges are expected to show some improvement in May after surprisingly hot readings from April, a result that would lend additional momentum to bond traders seeing more calm ahead. Already, both short- and long-run consumer-price inflation expectations have held steady at just over 2% since early May on anticipation that the Fed will succeed in its mission.
The personal consumption expenditures price index is forecast to slow to an annual pace of 3.8% in May from 4.4% in April, according to economists surveyed by Bloomberg. The core measure, which excludes food and energy, is predicted to hold steady again at a 4.7% level.
“If you look at some of the indicators of inflation in the US, they are clearly coming down,” Thierry Wizman, global interest rates and currency strategist at Macquarie, said on Bloomberg television. “In the back half of the year you are going to finally see that so-called stickiness we are seeing in” several inflation indices “start to recede and come down. I think the market understands that.”
With the outlook growing less uncertain, the swings in the bond market have been less severe. That’s also a positive sign for traders, many of whom had come into 2023 predicting a better year for bonds, which have gained about 1.6%, rebounding slightly from the deep losses of 2022.
The ICE BofA MOVE Index, a closely watched proxy of expected Treasury swings, has tumbled by nearly half since March, when it reached the highest since 2008.
Traders see another quarter-point hike in July now as likely and give some chance to another. The Fed’s policy rate is seen peaking this year at around 5.35% before the US central bank pushes rates to around 3.8% by December 2024, a level that’s still what’s considered high enough to slow economic growth.
“Given how far we’ve come, it may make sense to move rates higher but do so at a more moderate pace,” said Jared Gross, head of institutional portfolio strategy at J.P. Morgan Asset Management
NEXT UP is a a couple visuals from Chart of the Day,
Chart of the Day: Sharp -- T-Bonds Total Return
Long-term (i.e., 20+ year) Treasury bonds are down significantly in the 2020s.
The magnitude of the decline is clearly a break from the past.
For example, T-bonds trended higher and with relatively low volatility from 1990 to 2005.
From 2005 to 2020, the gains continued albeit at a slower pace and with increased volatility.
Over the past three and a half years, however, it’s been quite a different story.
The trend has been down — sharply down.
However, ongoing concerns over a slowing economy which could lead to lower inflation and interest rates have helped T-bonds rally to a point where they are currently testing resistance (red line) of its current downtrend channel.
AND from same source, for our inner stock-jockeys,
Chart of the Day: July's different -- Dow Jones Average Monthly Gain
From facts and figures / visuals to a few MACRO THEMES
Crescat Capital: Three Overriding Macro Themes
At Crescat, we have three overriding, high-conviction macro themes supported by our independent research and proprietary models that we believe are poised to unfold in rapid succession over the short and medium term:
We see highly overvalued long-duration financial assets as ripe for a second major leg down due to the rising cost of capital and the imminent trigger of a deluge of new US Treasury issuances now hitting the market after the recent debt ceiling deal that the Fed will ultimately need to accommodate.
We believe a powerful new demand wave for gold is coming in the short term from both institutional and retail investors. In aggregate, global central banks are already ahead of the curve as they have been accumulating the monetary metal recently as a reserve asset in preference over USTs. Gold is a haven asset that can provide an inflation hedge while also offering strong absolute and relative real return potential in the stagflationary hard-landing environment that our models are now forecasting.
Over the medium term, we envision a coming fiscal-stimulus-driven secular demand boom for commodities in G7 economies to rival China’s commodity demand boom of the 2000s. In the US, three new open-ended Congressional spending Acts are ready to lead the world out of the likely upcoming recession and drive the next global economic expansion cycle.
… Recessions normally follow euphoric market tops, and we think one is coming soon.
This yield curve signal developed here at Crescat by Tavi Costa foretold seven of the last seven near-term recessions over the last six decades including its first out-of-sample hit with the recent Covid one. With zero false positives yet, this macro model, which is totally independent of our tech bubble analysis, is forecasting a near-term economic contraction.
The countertrend rally year to date in the megacap techs has been based on the hope of a soft landing as well as hype over advances in artificial intelligence. In our view, this is a massive head fake. The above yield curve analysis is in strong opposition to such dreams.
In the 2000 market top, the stock prices of the top-ten mega-cap tech leaders had a similar bear market rally and attempted to retest their highs. These were the companies that built the infrastructure for the Internet, but they were way ahead of themselves on similar hype and hope. Their stock prices were decimated in the naturally ensuing recession in 2001 which was also forecasted independently by this yield curve model.
AI is indeed exciting today, just like the Internet was then, but as our chart also shows, the top-ten megacap tech stock prices are even more inflated in size today relative to the economy than their 2000-era analogs. Like their counterparts that built the Internet, today’s tech mega caps are the ones that have built the infrastructure for AI, including the cloud, neural network training software, and GPUs. EVs and smartphones by extension could also be considered part of the AI infrastructure today. Currently, we think investors in these companies have more to lose through potential stock price collapse than to gain through future earnings growth. This risk is particularly pronounced during the likely impending recession and should only be continued as truly new disruptive competition emerges.
Remember, Google and Facebook were two disruptive Internet growth businesses that took advantage of the incumbents’ infrastructure to build massive entirely new technology growth businesses and take share from them. These companies did not even emerge until well after the dot-com bust. Similarly, Amazon became one of the biggest growth disruptors of the Internet era, but not before its stock price went down about 95% from its 1999 peak into 2001…
Always interesting food for thought (and I never quite understood WHY I was blocked on fintwit … :) )
From being blocked to being largely uninterested by LPL stuff something did make ME pause and reflect,
LPL: Pause and Reflect
Key Takeaways:
As expected, the Federal Reserve (Fed) paused its rate-hiking cycle last week after 15 consecutive months of tightening. Over the last 35 years, there have been five other monetary policy periods when the Fed paused after a major rate-hiking cycle. During these periods, it took anywhere from four to 15 months before the Fed started cutting rates, with the average pause lasting 6.8 months.
Stocks have historically done relatively well after a Fed pause. The S&P 500 has climbed higher over the following 12 months during four of the last five pauses, generating an average gain of 16.4%.
Value has edged out growth following a Fed pause. The Russell 1000 Value Index has posted an average 12-month gain of 17.4% after a Fed pause, outpacing the average gain of the Russell 1000 Growth Index by 2.7%.
Interest rates have historically declined after a Fed pause. The 10-year Treasury yield has declined after all five pauses, falling by an average of 13.7% over the following 12 months.
And on banks and flowing funds and the magic of seasonal adjustments,
ZH: Fed's Seasonal Shenanigans Continue As 'Adjusted' Domestic Bank Deposit Outflows Grow
… As a reminder, amid this deposit flight, banks are borrowing a record $102.7 billion at The Fed's emergency Bank Term Funding Program facility.
Make if it — remain calm, ALL IS WELL — what ever you might like. In as far as being apologetic for passing along SO many ZH links, well, I will not.
I USED to have my fingers closer TO the pulse and a variety of sources including Bloomberg but now, having been relegated to reading ‘bout things well AFTER the fact, I find most ‘regular folk’ out there still have no idea about many / most of the inner workings and so … these ‘beatings’ shall continue for better or worse …
ZH: FDIC Mistakenly Releases List Of Top Firms Bailed Out By Biden Admin's Backstop Of SVB Deposits
… While the incompetent buffoons at the FDIC - which has been selling off pieces of the bank since its failure and which absurdly ended up giving JPMorgan a $50 billion loan in Jamie Dimon's taxpayer-funded rescue of First Republic Bank...
... asked that Bloomberg destroy and not share the depositor list, saying the agency intended to “partially” withhold some details from the document “because it included confidential commercial or financial information,” according to a letter from an attorney for the regulator. The agency subsequently declined to comment on the substance of the information in the document.
Bloomberg, however, refused to comply. The list - whose contents were largely known already except for a handful of names - mistakenly sent by the FDIC is below:
… In fact, once the small bank reserve constraint is hit again, expect round 2 of the 2023 banking crisis to hit with a vengeance.
It's why Peter Crane, president of money-fund tracking firm Crane Data LLC, said Friday at the Crane’s Money Fund Symposium in Atlanta that cash will "relentlessly" keep pouring out of banks and into money funds.
"Until they guarantee all deposits, which they will have to do at some point, institutional investors are looking at a big block of uninsured deposits” Crane said. “With cash, it’s the possibility of losing money you’re trying to avoid.”
On the retail side, Crane said that investors are shifting out of deposits because of the 4.5%-5% yield available in money funds relative to the sub-1% yield on bank deposits: “That’s the greed of a 4% spread,” he said. “You can drive a truck through that spread.”
Cranes … the legend continues … And speaking of LEGENDS, when the Federal Reserve Bank of NY speaks, well, we should all lean in
FRBNY: Research Update: Outlook-at-Risk
Real GDP Growth, Unemployment, and InflationOutlook-at-risk offers a unified approach to measuring downside risk to real GDP growth, upside risk to the unemployment rate, and two-sided risks to CPI inflation.
On a somewhat more POSITIVE note,
FRB Dallas: Rent inflation remains on track to slow over the coming year
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 LINK thru TO this calendar,
Wells FARGOs version, if you prefer …
… and lets NOT forget EconOday links (among the best available and most useful IMO), GLOBALLY HERE and as far as US domestically (only) HERE …
Enjoy what is left of your (soggy here in the NE) weekend ahead of futures markets reopening … THAT is all for now…