while we slept; bonds (and stocks)breaking badly;
Good morning. Ahead of NFP this SHOULD be a short update and I hope you have a great start to the end of the week. Due to circumstances beyond my control (travel schedules and family — all great things), weekend updates will continue to be somewhat limited…
Hopefully you are having / had a better week than the 10yy seems to be having. BBGs Weekly FIX,
To borrow from most of my high-school report cards, bond markets this week told global central bankers they are still falling short on effort. Sure, policy makers from Sydney to Mumbai, London, Washington and elsewhere got on at last with the task of raising interest rates to tame inflation. But the spikes higher in yields into and out of those shifts signaled that investors are fearful this is a case of too little, too late, despite the array of headlines about biggest moves or highest rate levels for a decade or more.
Treasuries endured a wild ride after Federal Reserve Chairman Jerome Powell refused to go full hawk by opening the door to a 3/4 point hike moments after announcing the first half-point move since 2000. The initial rally in response to his calm dissolved into an epic rout to take yields to fresh multi-year highs a day later. Bond investors look to be deciding that inflation can only be curbed by recessions at this stage, so any talk of soft landings provokes fresh roars from the bears that are dominating the bond landscape.
Too little too late? Seems to ME then my read YESTERDAY — BEARISH not DOVISH hike — perhaps a good guess?
Be that as it may, it is fitting, if you ask ME (which I know, you didn’t) to think about markets breaking on this day, the anniversary of 2010s flash crash ... where in just about 30mins (about 230p), $1tril in market value disappeared.
@MarketCrumbs
On this day in 2010, the flash crash temporarily caused $1 trillion in market value to disappear in about 30 minutes
For somewhat more,
LPL - Remembering the Flash Crash
Wiki: The May 6, 2010, flash crash,[1][2] also known as the crash of 2:45 or simply the flash crash, was a United States trillion-dollar[3] stock market crash, which started at 2:32 p.m. EDT and lasted for approximately 36 minutes.[4]:1
Interesting parallels? Prolly not. Likely just more coincidence and loosely connecting dots that really don’t exist on the same page … STILL,
The Bond Market Is Breaking … badly. ZH (via JPM):
The Last Three Times 30Y Treasury Yields Jumped More, The Fed Intervened
We argued yesterday that the sharp decline in front-end yields was exaggerated by the unwind of speculative short positions, but we did not expect for that move to nearly fully reverse today as Treasury yields rose 11-16bp. Given this reversal, it’s tempting to say the market is coalescing on our view; however, we do not think this represents a more hawkish reassessment of yesterday’s FOMC meeting, as the long-end led the way to higher yields.Notably, there have only been 6 instances over the last decade in which 30-year bond yields rose more than today: the top 3 were all amid the worst of market dysfunction in March 2020 which forced the Fed to intervene in unprecedented fashion, the fourth was the day after the presidential election in 2016, the fifth was a stronger-than-expected payroll release on a low-liquidity Friday around the July 4th holiday in 2013, and the sixth was in December 2015 when the ECB disappointed market’s expectations for additional stimulus (Exhibit 1)..
… Amid this liquidity backdrop and recent monetary policy developments, tomorrow’s events could certainly have a material impact in our market. We forecast nonfarm employment increased by an above consensus 475k and the unemployment rate declined 0.1%-pt to 3.5% in April (Exhibit 5). Further, we expect average hourly earnings to rise by 0.4% on the month and for average weekly hours to tick up to 34.7, both in line with consensus. Lastly, a series of Fedspeakers are on the calendar tomorrow and given yesterday’s reaction to the Fed’s decision as well as today’s partial reversal of the moves, the market should remain highly sensitive to any clues on the direction of monetary policy.
Ok, then. Another interesting and completely unrelated coincidence when all this stock market / bond breaking remembrance is taking place is that we’ve got NFP to contend with. You KNOW what the CONsensus is and what it is JPM is thinking. Just 1yr ago (RTRS: May 6, 2021), here’s what I was thinking then
... The yield curve, meanwhile, flattened for a fifth straight day, as yields on the long end stalled amid increased investor demand with the Federal Reserve repeatedly affirming its dovish stance. The spread between U.S. 2-year and 10-year yields slid to 140 basis points.
"I'd say positions are being squared or shorts covered, which is counter to the bearish narrative," said Steve Feiss, managing director, fixed income, at broker-dealer Etico Partners.
"Inflation remains a near-term risk but so far, the word 'transitory' remains a key hope and a single 1 million jobs non-farm payrolls print is only just beginning," he added...
Turns out hope was NOT a strategy and I’ll say it again, I was dead wrong on this front.
From a still quite DOVISH stance THEN to letting the markets down with ‘only’ 50bps hike! I said it YESTERDAY — a BEARISH, not dovish, hike it was! What a difference a day or a year makes.
Moving on then TO the day ahead, here is a snapshot OF USTs as of 724a:
… HERE is what another shop says in their morning commentary (Jobs Roadmap) be behind the price action, you know,
Overnight Flows
Treasury yields continued to push higher overnight with the belly of the curve underperforming ahead of this morning’s jobs data. Overnight volumes were elevated with cash trading at 129% of the 10-day moving-average. 5s were the most active issue, taking a 35% marketshare while 10s were a distant second at 27%. 2s and 3s combined to take 24% at 13% and 11%, respectively. 7s managed 9%, 20s 2%, and 30s just 3%. We’ve seen buying in 10s and selling in the long end of the curve.
… and for some MORE of the news you can use » IGMs Press Picks for today (6May) to help weed thru the noise (some of which can be found over here at Finviz).
From the Global Wall St inbox, a few WEEKLY / MACRO CHARTS from 1stBOS caught my eyes,
Guessing these two — buried IN the report — go hand in hand and as I continue to say (and am certainly not alone), nothing happens without a consequence.
And what would any given day be without a couple things rom BBG. First on stocks, John Authers (leaning on GMO)
A Brontosaurus Moment Is Finally Waking Up Markets
… GMO’s models show that over history, inflation has a greater impact on stocks’ earnings multiples than anything else, and generally, it’s almost instant. This chart, showing the price/earnings ratio of the S&P 500 compared with the inverted inflation rate shows this crudely — when inflation rises, investors require a lower earnings multiple before they buy stocks. This time, p/es began to correct as inflation took off, although much of this was an attempt to unwind the excess caused by the pandemic. If inflation cannot be reeled in quickly, history suggests that multiples will have to fall much further:
Where does this end? Grantham is convinced that this is the fifth great bubble of the modern era, following the U.S. in 1929, Japan in 1989, the dot.coms in 2000, and the Global Financial Crisis in 2008. With the exception of 2000, when the economy muddled through initially with only a relatively minor slowdown, all saw an immediate recession. The difference between 2000 and the others was that it was far more concentrated. U.S. tech stocks were absurdly overpriced but much of the economy was still reasonably valued. In the other bubbles, real estate prices were high, as they are now. Proportionate increases in mortgage rates on the scale we are currently witnessing therefore look very dangerous. “2000 showed you can just about skate through a stock market event,” said Grantham, “but Japan and 2008 showed you can’t skate through a housing crisis.”
The U.S. isn’t the only place with over-inflated housing prices. Cities like Vancouver, Toronto, Sydney and London all look similarly vulnerable to an increase in rates. On the face of it, the doubling of mortgage rates, and therefore mortgage interest payments for countries like the U.K., where variable-rate mortgages are still popular, makes a very dangerous combination with house prices that are inflating almost as fast as they did before the great U.S. housing bust that started in 2006….
AND then there’s this on BONDS … 10yr bonds,
... And finally, here's what Cormac is interested in this morning
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 Fed. 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.
And, ahead of NFP,
… THAT is all for now. Off to the day job…have a great weekend!