what happened o/n; another f'cast UPDATE (for higher yields, of course); housing party starting to wind down (Shilling), some longer-term charts/CONTEXT
Good morning. Today’s THE day and thankfully, we’ll get the ‘flation report we’ve all been waiting for (supporting ALL the calls / pricing for higher rates and QT) BEFORE having to bid on 30yr USTs later on. While I highly DOUBT it can go as well as yesterday’s (BLOWOUT, HUGE BUYSIDE INTEREST and RECORD FOREIGN DEMAND) 10yr auction, one certainly can breath a touch easier given the results. After all this CPI and auction drama is past AND as trading day comes to a close, don’t forget — Lacy Hunt. With THAT said, lets jump right in and here are some,
… Overnight Flows
Treasuries were little changed overnight as the market awaits this morning’s inflation data. Overnight volumes were near the norms with cash trading at 106% of the 10-day moving-average. 5s were the most active issue, taking a 33% marketshares, while 10s were a distant second at 27%. 2s and 3s combined to take 27% at 15% and 12%, respectively. 7s managed 7%, 20s 1%, and 30s 5%. We’ve seen selling in 10s and buying in 7s.
These flows from morning comment of a large Canadian operation (and best in the biz), who writes of Inflation, not inflection … and offers a look at fan fav 2s5s and 30yy
Ahead of CPI and desperate for more sellside observation?
UBS: Inflation goes vroom vroom
This from everyone’s fav German bank analyst covering macro in his early morning READ (who ALSO has a few words on upcoming CPI)
… The wildcards might be lodging away and airfares due to Omicron. These fell - 2.7% and -8.6% last August around the Delta variant. So the risks feel a touch skewed toward the downside this month even if that will likely be a temporary thing given the Omicron wave is well past the peak. Structurally we still see primary rents and OER as seeing enough upward pressure to keep the glidepath lower (when it comes) more shallow than the market thinks regardless of what happens today. As an aside, food prices continue to increase which won't help, with Bloomberg’s Agriculture Spot index up +1.68% yesterday to its highest levels since 2011 … Overnight in Asia, equity markets are struggling to find direction with the major indexes fluctuating in the morning trade. The Nikkei (+0.33%) and Kospi (+0.25%) have reversed early morning losses while the Shanghai Composite (-0.10%), CSI (-0.52%) and the Hang Seng (-0.48%) are all moving lower. Meanwhile, shares of China Evergrande Group in Hong Kong are up +2.99% after reports came in that the embattled developer plans to deliver 600,000 apartments this year and will refrain from selling off its assets to repay its debt. Elsewhere, the Reserve Bank of India (RBI) decided to keep its repo rate unchanged at +4.0% and will continue with its accommodative stance to foster economic growth. Additionally, the central bank has projected real GDP growth at +7.8% for FY 2022-23. Looking forward, equity futures are pointing to a weak opening in the US with contracts on the S&P 500 (-0.21%) and the NASDAQ (-0.30%) both lower ahead of the crucial US inflation data later today.
… for some more of the news you can use » IGMs Press Picks for today (10 FEB) to help weed thru the noise (some of which can be found over here at Finviz).
And in the case you HADN’T heard JPM’s whisperings or seen ZH on BLSs CPI weighting adjustments, well HERE you go.
Now with that in mind, the very latest f’cast UPDATE comes from head of us muppets,
Higher US Rates, Led by Real Yields
■Persistently elevated inflation and rapidly improving labor markets have led to policy pivots among many G10 central banks, including the Fed. Our economists expect the Fed to hike five times this year, three times in 2023, and twice in 2024. We have revised up our US Treasury yield forecasts to account for the economic backdrop and the Fed's hawkish turn. We now see 10y UST yields ending this year at 2.25% (up from 2% previously), and next year at 2.45% (up from 2.3%).
■The largest changes to our yield forecasts are at the front end; we now project 2y USTs to end 2022 at 1.9%, and next year at 2.45%. With intermediate and longer-dated forwards still somewhat sticky, we expect to see continued curve flattening, with greater flattening than implied by the forward yield curve. Having started the year at around 80bp, we expect the 2s10s UST curve to end the year at 25bp. While we believe the terminal rate is higher than current market pricing, we think this will be realized only gradually alongside Fed rate hikes.
■Most of the bond selloff should, in our view, come from an increase in real yields. We expect 2y real yields to rise by another 100bp by the end of the year, and 10y real yields to rise by another 30-35bp, both in addition to already substantial increases seen this year. The increases, particularly at the front end, reflect both the pull forward of liftoff and front loading of rate hikes, as well as an expectation that inflation will soften from current elevated levels over time.
This particular firms update returns us once again to higher rates calls which many / MOST all agree. Most but NOT ALL and again, this afternoons Lacy Hunt call should be of interest and hopefully YESTERDAYS UPDATE … and Strategizer from Rosie continues to be some countering food for thought.
Following up on yesterday’s mortgage applications data (mentioned yesterday, HERE) and in the context of nothing without consequence … thinking about QT and hikes, well, it was only a matter of time until this sort of thinking became / becomes more prevalent. Gary Shilling — a thought leader — OpEd in Bloomberg,
The Housing Party Is Starting to Wind Down
Builders are ramping up supply just as a record low percentage of Americans say it’s a good time to buy a home.…But the Federal Reserve is tightening monetary policy, and rates on 30-year fixed-rate mortgages have already risen from 2.82% in February 2021 to a recent 3.84%. Also, the spread between those mortgage rates and yields on 10-year U.S. Treasuries to which they are linked has risen from 1.4 percentage points in May to 1.9 percentage points, suggesting that mortgage rates will continue to rise faster than Treasury yields. Furthermore, the central bank was a massive buyer of mortgage-backed securities, purchasing some $2.7 trillion during the last cycle, or 23% of the amount outstanding. As it concludes those purchases in March and then, very likely, begins to sell what it holds, the negative effects on the mortgage market will be much greater than past Fed tightenings.
No wonder that a survey released by Fannie Mae this week showed that the share of Americans who think it’s a good time to buy a house fell to an all-time low of 25% in January. The high probability of a Fed-precipitated recession is also a major negative for single-family housing…
Again, remember, this all is a design FEATURE not a flaw. Fed takes punchbowl away and flip on the lights, and, well, the ‘party is over’. Inflation (and economy, generally speaking) will respond…Sorry. NOT sorry. Comments or concerns, kindly advance them directly TO The FED, HERE
After you’ve emailed The Fed with any / all concerns and considered just how it IS there is nothing without consequence, you may turn once again TO some technicals because … in price there is some truth.
Hedgopia: S&P 500 approaches golden ratio of Jan decline - again - shorts likely to get active
And for those of us more interested in rates (yes, they continue to exude influence on stonks), 1stBOS weekly CHART PACK which has, as its CRITICAL FOCUS CHARTS, compares and contrasts US RATES Analogs - 2016/18 vs 2020/22
A further strong move higher for global yields post the Central Bank meetings last week and then US Payrolls on Friday has seen a resumption of the core bear trend for government bonds, as expected in our “Key Themes for 2022” and “Q1 2022 outlook”. Whilst in some cases key yield targets have been achieved, we maintain our core view yield will rise further yet and in the US especially, we have raised some of our key yield objectives for this year.
We highlight again the growing similarities we see between the current period and 2017/2018, especially in the US rates market. This is seen to add further weight to our view that not only yields will rise further yet, but the S&P 500 may also behave in a similar fashion to 2018, where we saw significant price swings through the year. This would be consistent with our view that 2022 will not prove a “buy and hold year” but a mean-reverting phase with potentially aggressive swings, both up and down.
For now our bias is to continue to look for the S&P 500 to remain in a broad 4200/4600 range…
AND since we’re talking about technicals in attempt to find some truth in price, from Bloomberg because,
… here's what Cormac is interested in this morning
Calling the current weakness in bonds a bear market still looks premature when taking a longer-term approach. Looking at Treasuries using a logarithmic scale, yields remain well within their long-term downtrend. It would take a rise in the 10-year yield to about 2.7% for that four-decade plus trend to be threatened, so we're still a bit away. That makes the suggestion of Kathy Jones -- the chief fixed-income strategist at Charles Schwab -- that we're in a ``mini bond bear-market'' look more appropriate. And though the 2% level is looming for the global bond benchmark, there are signs of investors returning to Treasuries en masse. An auction of new 10-year notes Wednesday attracted record demand from non-dealers, despite the risk of a hotter-than-expected U.S. inflation print on Thursday. Investor demand was so intense that primary dealers were allocated a record-low 7.4% share of the sale (until the past year, awards of less than 20% were rare). The bond vigilantes may be gathering but the long-term bull run is not finished just yet.
And as rates are on the rise, the bond market is finally able to do its job (warn about inflation, watch CREDIT SPREADS, pick individual bonds as opposed to the ‘collective’) … Bloomberg’s Marcus Ashworth,
The Bond Market Can Finally Do Its Job Again
Its behavior is supposed to warn about inflation but the function was smothered by a decade of QE bond buyingCalm has broken out in the bond market, but the respite is likely to be brief.
It’s a question of when — not if — the 2% bound will be breached on the 10-year U.S. Treasury yield. That’s directly correlated to last week’s revisions to the non-farm payroll series; it shows the pandemic recovery has been both smooth and strong. If growth is more robust, inflation will be, too. This rise in yields is a global trend, forcing central bank thinking to shapeshift…
…Bonds are now somewhat akin to equities, becoming more of a stock picker’s market. There are bargains for those committed to the asset class. But it will be heavy lifting until inflation disappears or growth falters.
With THAT all in mind, did you sign up for Lacy Hunt (430p e.s.t) yet? I did. Perhaps those who were ready / willing / and eager to BUY 10yr at (BLOWOUT, HUGE BUYSIDE INTEREST and RECORD FOREIGN DEMAND) auction yesterday ALSO did (after reading Rosie’s Strategizer).
#GotBONDS? Here’s an HOURLY of 30yy at/near 2.25% TLINE with a CPI break providing something more of a CONCESSION and only in the fullness of time (1pm) will we know if there was any interest …
… that’s all for now. Off to the day job…