while WE slept; a 'textbook' bear market rally (stocks); USTs yield MORE THAN junk bonds
Good morning … equity futures DOWN (CNBC), bonds DOWN (yields UP -CNBC) all attempting to brace for impact of FOMC meeting this week. As Reuters put it (and I noted) yesterday, RATES, rates, rates … 2yy, leading the charge higher this morning SO
Momentum (slow stochastics, bottom panel) remain overSOLD but that can / will happen until something changes it (FOMC?) …
… 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 are lower and the curve flatter this morning ahead of Wednesday's Fed meeting (Citi +75bp with their projections for the SEP here: Citi ) DXY is higher (+0.2%) while front WTI futures are lower (-2%). Asian stocks were mostly lower (Japan out for holiday along with the UK for the Queen's funeral), EU share markets are all lower (SX5E -1.1%) while ES futures are showing -0.85% here at 7am. Our overnight US rates flows and Treasury volumes were unavailable due to the Japan and UK holidays.… Treasury 10yr yields probing potentially important range support near 3.50%; a support derived from their mid-June move high. Above that and we find next-support near 3.76%- the ultimately rejected February 2011 high that hasn't been re-visited since.
… and for some MORE of the news you can use » IGMs Press Picks for today (19 Sep) to help weed thru the noise (some of which can be found over here at Finviz).
From the news you can use TO whatever it is on Global Wall Street’s minds, we go.
There are only a couple things to share today as THIS updated PDF has quite a bit more. It wasnoted in yesterday’s brief note (where you’ll catch a video of Lacy Hunt) to a few updated thoughts inboxed over the past 24hrs.
UBSs Paul Donovan asks / answers
Financial markets are focused on the US Federal Reserve policy decision this week. The focus is “how big is the hike?” not “will hiking rates cut inflation?”. The Fed’s June policy errors included a focus on consumer price inflation. More and more of CPI is made up of prices that monetary policy has less and less influence over. The Fed is forced to create more disinflation and deflation in the areas where policy does have an influence.
US housing has been affected by policy tightening, with mortgage rates for new borrowers rising over 6% last week. Today’s National Association of Home Builders’ index is likely to reflect this. By lowering demand for home ownership, the Fed’s policy may encourage more people to rent: higher rents artificially raise inflation…
From a Swiss operation to a rather large British one comes,
One hike to rule them all
An expected aggressive Fed hike and fresh projections likely to overshadow the myriad of other rate decisions this weekIt's a big week for central banks. The Fed, BoE and BoJ lead a plethora of policy decisions in coming days, with hawkish hikes expected across most of G10. We expect the Fed to lift rates by 75bp, and for the dots and then Chair Powell to maintain a hawkish line. Keep an eye on the updated Summary of Economic Projections for insight into policy makers' views of the road ahead. We expect them to show 1pp in hikes in November and December, bringing the funds rate target range to 4.00-4.25% by year-end, as well as a much weaker growth trajectory, rising unemployment, and gradual declines in inflation from elevated levels …
… The end of the easy-money era means instability for equities. Investors have been hopeful of a decisive fall in inflation, but the reality is that it may take time and some economic pain to materialise. Depressed technicals can help short term, but the big picture is that more tightening in financial conditions seems inevitable and markets still have to learn to live without the Fed put. This means more instability ahead, said Emmanuel Cau and team. European Equity Strategy: Equity Market Review - Hope vs. (new) reality, 16 Sep 2022
AND for ones inner stock-jockey, the latest (weekly warmup) from MSs Mike Wilson,
Prices Starting to Reflect the Building Evidence for Deeper EPS Cuts
As the evidence builds around our more bearish earnings outlook, the stock market has traded lower again. While we think there is still a long way to go before reality is fairly priced, investors may face a volatile path in the absence of an "event" to clear the decks…… From a technical perspective, the bear market rally off the June lows was textbook with the S&P 500 and many leading stocks stopping exactly at the declining 200-day moving average. Since the high in mid-August, the index has fallen back below its 50-day moving average and the new uptrend it was trying to establish (Exhibit 2). This is not a good sign, in our view, and supports our more bearish outlook. Of course, we are also oversold again and that means bear market rallies can continue to occur in the absence of a market clearing event that forces capitulatory behavior. Bottom line, we remain bearish both fundamentally and technically on a 3-month basis, more neutral on a 9-12 month basis and open minded on a day-to-day basis. With that backdrop, we continue to recommend owning more defensively oriented companies with earnings stability and high operational efficiency.
From stocks TO JUNK BONDS and a post from ZH (from BBG) last night on how they — JUNK — yields LESS THAN USTs
Surprise! Chinese Junk Bonds Yield Less Than US Treasuries
Three things we learned last week:
1. The policy divergence between the world’s two largest economies has been so extreme that it has yielded another market milestone.
As China keeps borrowing costs exceptionally low, yields on onshore junk bonds dropped below those of US Treasuries for the first time since 2007.
Five-year, AA-rated corporate bonds, the Chinese equivalent of non-investment grade debt, yielded 3.61% on Thursday, compared with 3.67% for five-year US Treasuries. In other words, Chinese investors can earn higher yields in the world’s financial safe-haven without taking credit risk or worrying about yuan depreciation. Granted, given the tight capital controls, this is easier said than done. Still, the policy divergence explains why the yuan would be under pressure.
2. Speaking of which, the yuan broke 7 per dollar for the first time in more than two years, but without much fanfare. It helps that the PBOC has been setting the fixing strong to slow the slide…
… 3. Friday’s economic data showed some signs of stabilization. But without improvements in the housing market and a change in the Covid policy, it’s difficult to see any meaningful rebound.
Economists at UBS are among the latest to cut their GDP forecasts below 3%, predicting a growth rate of 2.7%.
As the research firm China Bull puts it: “Unless the coming economic recovery can broaden out and restore household and business confidence, the rebound will soon run out of steam.”
… THAT is all for now. Off to the day job…