weekly observations: stay short 10s, higher yield f'casts, be patient before buying DIP and more ... conflicting calls; Bostic SAYS (#FOMC101); Bill Gross in steepener; wazoo
Good morning / afternoon / evening - please choose whichever one which best describes when ever it may be that YOU are stumbling across this weekends note…
First up, some voting FOMC comments …
Reuters: Fed's Bostic scales back to single rate cut on inflation concerns
ATLANTA, March 22 (Reuters) - Atlanta Federal Reserve Bank President Raphael Bostic said on Friday he now expects just a single quarter-point interest rate cut this year instead of the two he had projected, citing persistent inflation and stronger-than-anticipated economic data…
… #FOMC101 for WHY his comments matter …
In any case, here are some UPDATED WEEKLY NARRATIVES … a compilation of some of the best / brightest on Global Wall as they provide and idea of just how event risk in the rear view mirror has shape shifted their views on the week ahead. Somewhat more just below …
In fact, I’ve got very little insight and will only slow down for a moment or two as the week ahead contains some liquidity events (aka Treasury auctions) with 2s Monday, 5s Tuesday and 7s on Wednesday — all moved forward a day to accommodate an early close Thursday and full closer of the US bond markets on Good Friday.
MY views are then to be dictated by the price action and so a couple charts to keep in mind …
2yy: yes they are dropping in the week just passed BUT to NOT recall where we’ve been might very well work against you so … watching 4.50% as resistance …
7yy: triangulating with a potential weekly break of momentum pushing yields down towards / below resistance … watching 7yy nearer to 4.10% in the week ahead
… Ok I’ll move on AND right TO the reason many / most are here … some UPDATED WEEKLY NARRATIVES … some of THE VIEWS you might be able to use.
THIS WEEKEND, a couple / few things which stood out to ME …
BARCLAYS Rates Weekly, “Itch fingers” (stay SHORT 10s and commentary on QT and issuance being ‘signifcantly higher in 2024/2025 caught MY attn)
Goldilocks rates weekly, “Front-ends find a foothold” (kinda wanna read all ‘bout the once again newly revised and HIGHER RATES GUESS…)
… Raising UST yield forecasts on slower Fed easing. Following recent changes to our economics team’s forecast for the Fed funds rate, we revise our benchmark yield forecasts for the US. We now expect 10y Treasury yields to end this year at 4.25% (previously 4%), and decline to 4.1% by end-2025 (previously 4%). We also revise up our projections for 2y, 5y and 30y yields … Our forecast upgrades reflect the slower/later Fed easing than previously expected, as well as our view that a gradual reappraisal of the neutral rate by the Fed is also likely to consolidate these higher rate expectations in market pricing, as well as increasing the uncertainty around future equilibrium rates. This should manifest either as a higher expected future short-rate (in the case of the former), or as greater risk premia in longer-dated forwards (in the case of the latter). As a result we have nudged up our longer-dated yield levels, also implying a slightly steeper yield curve in our revised forecasts versus previously that outpaces the steepening in the forwards for this year …
JPM US FI Weekly (patience before adding durational longs but …)
… Arguably, the current cycle looks somewhat more akin to 1995 than to 2019. Thus, we think there is still room for the curve to steepen from current levels, especially as the Fed’s reaction function leans more dovishly, and there are implicit signs that the neutral rate has drifted higher, which should prevent a larger decline in long-term yields …
NatWEST on 5yy,
… Weekly US 5yr Yield Chart: There is a similar chart for US 10s, but the 5yr one I am more interested in as I prefer 5s and in when it comes to dip buying opportunities. Again, I never claim that charts are everything, but are helpful for timing, entry, exit, when paired with a fundamental view.
A couple months ago we flagged the hammer reversal (the arrow) when, combined with an excessively optimistic market in Fed pricing and in our view extended positioning, we turned tactically bearish. At the time momentum (lower panel) was also extended. You can see the 50% retrace of 4.365% has held a few times, and overly-extended momentum to the bullish side has mostly reversed, though not turned back lower (lower yields). Ideally, you get that a bit more extended to the upside in the next couple weeks, and a backup to the more appealing 4.516% retracement level.
Ideally rarely happens, but this overall idea lines up with the more fundamental view to be patient because you will need at least another CPI print if not two to get the market back to more aggressively pricing cuts. Take it or leave it, but that's how I'm seeing it.
SocGEN: Global Strategy Weekly (Albert speaks we should all pause and read…this note incorporates couple bigger picture thematics — ICE AGE thesis as well as WHY Japan matters so much … )
Ice Age end-game - Yield Curve Control will be exported from Japan to the west
I don’t pay for many subscriptions but do splash out on The Wall Street Journal, mostly to keep up with insightful articles by James Mackintosh (ex-FT). This week in The American Dream Accelerates Away From Those in the Slow Lane, he points out that, all of a sudden, low income households are facing extremely hard times, in contrast to the rest of the household sector. Such pressures are evident in a surge in consumer credit delinquencies and arrears, as well as profit warnings from companies that service those households…
… Market sentiment is now especially vulnerable to weak economic data because, as we pointed out last week, it seems everyone (and their dog) has left their recessionary worries far behind. But as my favourite bear, David Rosenberg, pointed out this week, recent weak retail sales, housing starts, and industrial production data might be setting us up for a negative US Q1 GDP print. Let’s see how the Fed reacts to that. And if you want one reliable predictor of a global recession, @PeterBerezinBCA notes that “In the history of modern finance, no single indicator has done a better job of predicting when the next global recession will start than when the Bank of Japan starts raising rates. Foolproof!”
UBS econ weekly, “So, three cuts it is”
… In our new outlook, we removed the economic contraction, but still expect a slowdown in 2024 … …We expect the FOMC to begin “dialing back” the restrictive stance of monetary policy at the June FOMC meeting, with a 25 bp reduction in the target range for the federal funds rate. We expect that to be followed by two additional 25 bp rate cuts at the September and December FOMC meetings, leaving the target range for the federal funds rate at 4.50% to 4.75% at the end of 2024, higher than our prior projections. Chair Powell appeared comfortable with that base case this week…Plus, without the acute weakness, aggressive FOMC easing is less needed…
… AND more. MUCH, much more…
… Moving along and away FROM highly sought after and often paywalled and Global Wall Street narratives TO a few other things widely available and maybe as useful from the WWW
Bill Gross: Time Traveler
… And lastly about 10-year Treasury rates. Too much supply. And real rates at 2% imply a 2.3% breakeven rate against inflation with 10-year nominals at 4.3%. If inflation gets to 2.3% by the end of the year (not likely in my book) what can the 4.3% yield do? I don’t understand any of the new bond gurus on CNBC when they tout bonds over the last 12 months. Bet on a flattening of the negative yield curve. Sooner or later it must go positive if the economy is to stay positive. I am long 2’s and short 5’s and 10’s…
Bloomberg: Goldman Says Megacap Bull Case Might Take S&P 500 to 6,000 (reminiscent of the Byrini Ruler)
Strategists still expect gauge to end year near current levels
Trajectory of US stock valuations is uncertain: strategists
Bloomberg (via ZH): Treasuries Still Winners In Historic Week Filled With Surprises (winner, winner, chicken dinner!!)
… The Fed’s dot plot left observers tearing their hair out: policymakers thought the economy this year will be way stronger than they had estimated in December by revising up their growth projection all the way to 2.1% from 1.4%.
They also expect core PCE to be higher and unemployment to be lower. And yet they expect to be able to cut rates no fewer than three times, revealing an unmistakable preference to cut no matter what. While two-year Treasury yields are have declined some 12 basis points so far this week, there is room for them to trend lower.
Hedgopia CoT: Peek Into Future Through Futures, How Hedge Funds Are Positioned
McClellan Financial: More Food Inflation Is Coming - Chart In Focus
March 22, 2024
…Gold prices bottomed on a monthly basis in October 2022, and have been rising strongly since then. And wheat prices bottomed almost a year later, in September 2023, starting to rise on gold schedule. But just recently wheat prices have fallen just a little bit, taking them off of gold's script. I expect wheat prices generally to get back on track again and start rising for at least the next 12 months, following in gold's footsteps.
… This relationship occasionally goes off track in a much bigger way, when a weird exogenous event puts a thumb on the scale. Covid is a great example. The 2008 commodities bubble is another, when all of Wall Street suddenly went mad for commodities indexing (because stocks no longer worked in 2008). Outside of conditions like that, this is a pretty durable relationship.
And the 12 month leading indication for food prices generally also works with gold, as seen in this next chart.
… Falling food prices (through Feb. 2024, the most recent available) reflect the drop in gold prices just over a year earlier. We are not yet seeing an upsurge in this measure of food inflation quite yet, in part because wheat and corn prices have fallen in the past 8 months. But another rise should be coming, assuming that this relationship continues to work as it has been working for the almost 50 years that gold has been freely traded in the U.S.
The latest FOMC meeting announcement, and Chairman Powell's comments afterward, indicate that the Fed officials think that they are getting inflation under control, and so their interest rate targets can presumably start falling sometime in 2024. They are soon going to find out that gold's message means more inflation generally is coming.
Yahoo Finance Chart of the Week (via LinkedIN): The Fed’s massive economic upgrade (seems like a perfect time for rate CUTS … ?)
WolfST: The Fed’s Liabilities: How Far Can QT Go? What’s the Lowest Possible Level of the Balance Sheet without Blowing Stuff Up?
… 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 …
Finally this comic from Randy Glasbergen makes ME think back to 2000 …
… which of course reminds one and all of sock puppets DOT BOMB and specifically of this superbowl ad …
from 2000 …
… move this man to a private room … and while you do, I’ll regret NOT having quit while I was already behind … THAT is all for now. Enjoy whatever is left of YOUR weekend …
Bostic said the quiet part, out loud....
Bill Gross probably is correct....
Feds new forecasts and 3 rate cuts.....don't square
Great weekend update !!!!
Saw Ken Griffen, Hedge Fund Mgr. lamenting that the US Gov't Debt went up about
168 Billion, in 20 days.......
That used to be the Annual Deficit.
We used to have control of our Borders....
We used to support Israel....
We used to be against Terrorists and Terrorism(Iran)
We used to be Energy Independent.
We used to be at Peace, not involved in 3 different Military actions simultaneously(Red Sea, Israel
and Ukraine)
Pretty soon.....we used to be a Great Country....
Seems like the Inmates are running the Federal Gov't Asylum.....
How the hell did I ever miss that commercial? LOL a sure Bubble indicator!