'while we slept', armchair virologists, higher rate calls (re)AFFIRMED and Jefferson
Good morning. Here is a few days view of HOURLY 30yy,
It appears to be a couple basis points lower than where we left them at 5p.
This because / despite the fact that we’re waking up TO news of 1mm+ cases reported in the US. Bloomberg,
U.S. Sets Global Daily Record of Over 1 Million Virus Cases
Cases nearly doubled versus four days ago as omicron surges
Officials hopeful that deaths won’t rise as much as infections
A post holiday surge — predicted — so one could say unsurprising,
The Terminal ALSO adds something to the discussion in as far as WHY we care ‘bout the OMI … haters gonna hate and traders gonna trade,
Treasury Traders Are Betting Omicron Will Add to Inflation Spike
U.S. 10-year break-even rate climbs to highest since November
U.K. rate hovers close to a three-month low at just below 4%
… Overnight-index swaps are now suggesting the Federal Reserve will start to raise its policy rate as soon as May, earlier than the July liftoff projected a month ago. In the U.K., the Bank of England’s move to kick off a hiking cycle last month has already damped break-even rates.
In as far as what happened overnight or, as one bank puts it
WHILE YOU SLEPT
Treasuries have been led modestly lower by the front end of the curve after the overnight data showed global manufacturing and employment (see above) holding up pretty well despite new Omicron-related restrictions. DXY is higher (+0.15%) while front WTI futures are little changed. Asian stocks were generally higher (Chinese shares modestly lower though), EU and UK share markets are all higher (SX5E +1%, FTSE 100 +1.35%) while ES futures are showing +0.35% here at 7am. Our overnight US rates flows saw an active session during Asian hours with good 2-way flows in the back-end of the curve with fast$ adding steepeners as real$ went the other way curve-wise. My London colleagues also reported a 'decently active' session with outright buying in 30yrs (credit hedging?) a feature along with better selling elsewhere on the curve. As for overnight Treasury volume, yesterday's trading halt into NY may have messed up our volume sheet but we'd guess, given anecdotes, that overnight volumes were ~1.3x-1.5x averages...
This overnight descriptor came with a visual of 30yy DAILY (Showing how bonds are currently bumping up near a support that we'd expect to be somewhat solid near 2.03% (August high, cluster of November highs))
…It also offered a FedFunds proxy via Z2Z4,
… The multi-month flattening trend was broken yesterday with momentum (lower panel) solidly in favor of further steepening now. That cluster of November move highs near 90bp could be a next upside target.
Moving right along, UBSs Paul Donovan comments on 1mm+ daily case count,
Amateur virologists come out to play
Amateur virologists are likely to be prominent today, as the US reported over a million new COVID cases on Monday (the actual number will be higher). As the infected isolate, there will be fewer active workers in the economy—although inventories and changing working patterns will mitigate that. Demand is likely to be hit—quarantine limits consumers to online shopping, and in the absence of government help some incomes may suffer.
…German retail sales were stronger than expected in November and, of course, the previous month’s data was revised stronger. French consumer price inflation for December is expected to rise a little…
Speaking of amateurs, it’s come to light late yesterday afternoon that the White House is likely to nominate economist Philip Jefferson for a seat on the Fed board of governors, according to people familiar with the matter . Bloomberg story excerpt notes,
… Jefferson has authored and edited books and articles on poverty, and has focused his teaching on inequality. He has taught at Columbia University, the University of Virginia, Swarthmore College in Pennsylvania, and was a visiting assistant research economist at the University of California, Berkeley.
Kidding aside, I’m not familiar with the name or his body of work so I am NOT saying he’s amateur — I’m sure he’s just what the doctor ordered for the Federal Reserve board seat.
How he’ll deal with a high and rising term structure and inflation remans unknown to ME but as the debt load grows along with yields, well, it would seem at some point, there will be a day of reckoning. How Jefferson will vote may tip scales so I look forward to analysis paralysis on his CV.
Speaking of said analysis and the idea of high / RISING yields, latest from a large German bank overnight,
Omicron is proving to be more transitory than inflation. The policy setting and financial conditions are supportive of above potential growth, which is confirmed by GDP trackers. Rates are back to pre-Omicron levels and the sell-off is healthy so far: breakevens and the term premium are rising while policy rates are expected to remain below (a rising) r* for several years. In fact, current market and macro conditions should encourage the Fed to press ahead with its tightening cycle. This should create further upside to yields in H1. The outlook for US fiscal policy post midterm elections could become more relevant in H2 and then pose downside risks to the bearish rate view. In the meantime, we maintain a bearish bias in our macro portfolio.
… Portfolio update – staying the course. We kept it simple in the macro portfolio with a short UST10y and a short EUR30Y swap. The latter has reached its target. We will reassess the macro trades in the coming days to reflect the repricing that has occurred in the last few weeks. As argued above, the priority for now is to stay the course.
For even MORE in as far as news overnight, IGMs Press Picks HERE (note link thru to SCMP detailing, Supply, demand rally sees China factory activity hit 6-month high).
Thats all for now, folks. Off to the day job! More (or less) later when possible.