while we slept; (at)risk parity; Goldilocks; 'the end of an era' (again)
Good morning…here we go again. Que all the 2018 yield comparisons. Stocks, they said, would offer the ‘cover’ one would desire. A port in a storm. Global Wall Street heading back TO the drawing board,
The good news is that Biden said to give some remarks on the ‘flation tomorrow, before the CPI report on Wednesday. For whatever little it is worth, if all the kings horses and all the kings men, couldn’t put humpty dumpty markets back together again LAST week, then perhaps THIS WEEKS docket of Fed-lines will help?
I’m NOT holding my breath. Supply of duration this week WILL be a challenge (or an opportunity IF you view the glass as half … full? empty) …
While we await data and open - mouth policy activities, here is a snapshot OF USTs as of 720a:
… HERE is what they say is be behind the price action, you know,
WHILE YOU SLEPT
Treasuries are mixed with the yield curve pivoting sharply steeper around a little-changed belly this morning ahead of CPI and the Treasury refunding. DXY is modestly higher (+0.1%) while front WTI futures are lower (-2.5%). Asian stocks were all in the red (save for Chinese exchanges that were little changed after holiday), EU and UK share markets are all lower (SX5E -2.15%, SX7E -0.9%) while ES futures are showing -1.9% here at 7:10am. Our overnight US rates flows saw a flurry of block TY sales 3-4 hours ago alongside some real$ dip-buying during Asian hours (intermediates mostly). Overnight Treasury volume was very solid at ~250% of average with 7yrs (421%) seeing out-sized turnover based on the block and our desk flows...
… and for some MORE of the news you can use » IGMs Press Picks for today (9 May) to help weed thru the noise (some of which can be found over here at Finviz).
In addition TO the narratives on the sellside (noted HERE yesterday), a few other items of interest which hit inboxes,
Barclays latest thinking on global MACRO,
We have consistently been underweight risk assets for most of 2022. This week, we turn neutral on risk. A good Q1 earnings season, more reasonable valuations, moderating US wage data, and a positive reaction if May 9th passes without an escalation in Ukraine – all of these seem catalysts for a near-term risk rally.
Barclays’ Macro House View (Weekly): Slamming on the brakes. Tackling inflation risks is now front and centre for central banks, even at the risk of hurting growth
GSs latest ‘FLATION VIEWS, The Risks to the Inflation Path and the Implications for the Fed
… There are three pillars of our 2022 inflation forecast. First, we expect inflation in supply-constrained durable goods categories to fall sharply to roughly zero on net. This accounts for the entirety of the decline in our 2022 forecast, even though we are not assuming payback for recent price spikes in these categories on net until after this year. Second, we think shelter inflation has peaked on a sequential basis but will rise above 5% on a year-on-year basis. Third, we expect inflation in the rest of the service sector to remain steady at just over 4% because labor market overheating is likely to keep wage pressures firm for a while.
We think this inflation path coupled with the convincing growth deceleration we expect this year would probably make the FOMC comfortable reverting to a 25bp/meeting hiking pace starting at the September meeting. But the inflation outlook is highly uncertain, and we therefore also consider a range of other scenarios based on alternative assumptions about supply-side problems, commodity prices, and wage growth.
Our scenario analysis suggests that a wide range of inflation outcomes is plausible. In particular, differing assumptions on supply constraints have a large impact. If prices in supply-constrained categories begin to revert partially to trend and wage growth slows more materially than we expect, the sequential pace of inflation could be 1pp lower over the rest of this year. Under that scenario, annualized sequential inflation would read 3.0% at the September FOMC meeting and increase our conviction that the FOMC will revert to a 25bp hike.
Alternatively, if prices in supply-constrained categories rebound to pandemic highs and wage growth is stronger than expected, the pace of core PCE inflation could be ¾pp higher. Under that scenario, inflation would read 4.6% at the September meeting, increasing the likelihood that the FOMC continues hiking in 50bp increments beyond July…
GSs latest Global Views: In the Ballpark
… How far does the funds rate need to rise in order to push growth ½-1pp below potential? To obtain an approximate answer, we start with the growth impulses from nonfinancial forces, including post-covid reopening and pent-up household savings on the positive side as well as fiscal policy tightening on the negative side. On net, we think these are neutral or at most mildly positive, which implies that Fed officials need to engineer a growth impulse of about -1pp from tighter financial conditions. After the sharp FCI tightening of the past several weeks, however, this is roughly what the current level of our financial conditions index implies. Thus, we think the substantial further amount of Fed tightening that is currently priced into financial conditions is in the ballpark of what is ultimately needed and have maintained our view that the funds rate will rise to a terminal rate of 3-3¼%, a touch below current market pricing.
… The tightening in US financial conditions has somewhat rebalanced the risks to the Fed’s mandate and potentially set the stage for a stabilization in the financial market environment. But while we forecast a recovery in the major equity indices as well as modestly positive excess returns in the credit markets from current levels, the upside potential for risk assets looks fundamentally limited. After all, if the recent tightening of financial conditions was necessary to put the labor market on a more sustainable path, then undoing this tightening via a big rebound in risk asset valuations would be inherently unsustainable. At a minimum, such a rebound would create pressure for a further increase in US interest rates and/or the value of the US dollar. This is one reason why we would stay close to shore in both the rates and G10 FX markets even after the sizable moves of the past two months.
… HERE are a few words and a visual from BBG as trading gets underway and risk is off while bonds again refuse to offer any shelter from the storm,
…And finally, here’s what Cormac’s interested in today
The last holdout in the bond bull market camp must be packing up their tent and heading home. Benchmark Treasury yields definitively broke above 3%, moving further above their four-decade downtrend which intimates a new era has begun. A cold look at the long-term chart shows the next obvious stop should be around 4% but that might be a little too neat for a complicated world. The higher yields go, the more appealing they become for many investors and increased fears of a global recession suggests that some may soon consider returning to bonds. This year's surge in yields has come from traders betting on an ever more aggressive plan to raise rates by the Federal Reserve. But comments from Chair Jerome Powell downplaying the possibility of even bigger hikes have led to a pullback in the most hawkish of those wagers. That also hints that we may be close to a near-term top in the global bond benchmark.
Finally, couldn’t resist — Global Wall Street explaining latest quarterly statements,
… THAT is all for now. Off to the day job…