while we slept; China data BEATS; JGB futures collapse; ECB calls unsked meeting; TLINES, updated (reduced bearish)calls and a L/T look at PEs; Trolls and surprises
Good morning…ahead of ReSale TALES and the FOMC meeting (Newsquawk preview via ZH HERE) and in light of the past couple / few days of volatility, I’ve little to add from this ‘seat’.
That is not to say Global Wall Street’s finest is lacking words and narratives. There are even some visuals below to consider. But first …
It would appear that the day will begin and once again end thinking of central planners and whatever they think they think. Trying to outguess or bet what is on their minds will be the order of the day. Again. To whit:
Read the full story here
Here is @TheStalwart / BBG reason WHY they are meeting
Hello it's Fed Day, and everyone expects a 75 basis point and asset markets have been tumbling and layoff announcements have been picking up steam and inflation as of the last CPI reading is at its highest level of this cycle. So let's talk about something else for a moment.
It turns out that, unexpectedly, it's also ECB Day, with an unexpected emergency meeting having been called.
The primary topic of concern right now is the widening of peripheral spreads, with significant underperformance of Italian debt relative to Germany's.
Just yesterday I published an interview with Eric Lonergan, a fund manager at M&G Investments, who argues that this is the dawn of Euro Crisis 2.0. The basic argument is that it's politically a lot harder for the ECB to close spreads (which might entail having to buy Italian sovereign debt) during a time of high inflation (when ordinarily a central bank might be inclined to sell off assets). Italian debt-to-GDP is significantly higher than it was during Euro Crisis 1.0 while nationalism is a more potent political force than 10 years ago. That could spell trouble.
Anyway, we'll see how traders digest today's ECB news, and whether it can soothe nerves.
I know, there's a lot on your plate to be concerned about. I apologize for adding one more thing.
Here's the full interview.
All this news broke AFTER data from China o/n BEAT … ZH notes,
China Economic Data Beats Across The Board In Apparent ZeroCOVID Policy 'Victory Lap'
China Industrial Production YTD YoY BEAT: +3.3% vs +3.1% exp but WORSE from +4.0% prior
China Retail Sales YTD YoY BEAT: -1.5% vs -1.7% exp but WORSE from -0.2% prior
China Fixed Asset Investment YTD YoY BEAT: +6.2% YoY vs +6.0% exp but WORSE from +6.8% prior
China Property Investment YTD YoY BEAT: -4.0% vs -4.4% exp but WORSE from -2.7% prior …
And we’re back … to our regularly scheduled programing … here is a snapshot OF USTs as of 715a:
… HERE is what another shop says be behind the price action in their morning commentary (Tightening Consequences)
… Overnight Flows
Volumes were strong overnight as the market digested the emergency ECB meeting and awaits the Fed with cash trading at 142% of the 10-day moving average. 5s were the most active issue with a 38% marketshare and 10s took second most with 25%. The front-end combined for 24% with 2s and 3s taking 16% and 8%, respectively. 7s garnered 7%, 20s took a very elevated 2%, and the long-bond was allocated 4%. We saw better front-end buying and two way flows in the 10-year sector.
… and for some MORE of the news you can use » IGMs Press Picks for today (15 June) to help weed thru the noise (some of which can be found over here at Finviz).
Meanwhile, O/N CitiFX writes of JGB futures collapse sets alarm bells ringing noting a development which seems REALLY important — as important as whatever it may take from the ECBs unsked meeting,
JGB futures have plunged, triggering a volatility interruption on exchange which appears to have restored some order for now. The trickle lower quickly in JGBs since the reopen quickly turned into a flood with futures sliding as much as 179 ticks to 145.80, close to the down limit imposed by the exchange at 145.59. They are currently on track for largest one-day drop since 2013…
Here are a few other links and thinks I’m going to read, occupying my time between now, the FOMC and then on into days end.
CHARTS by Hedgopia: On Fed Decision Day, Bleeding S&P 500 And Russell 2000 Sit At Crucial Support
CHART by Kimble: Nasdaq Composite Declines Into Must-Hold Price Support!
CHART(s) by 1stBOS: Global Rates Spotlight: Staying medium-term bearish
The strong and broad-based beat in US CPI Inflation last Friday and hawkish ECB meeting on Thursday has triggered another sharp leg higher in global government bond yields, in line with our negative medium-term view on government bonds, which we have consistently maintained this year. We stay biased towards higher yields for now, particularly at the front-end, and outline the next key medium-term support levels across US and European Fixed Income markets.
Inside, we update our view on the US 10yr, 5yr and 2yr US Bond Yields, as well as US 5y5y Fwd Rates.
We also reiterate our bias for further curve flattening in the US, with the US 2s10s Bond Curve expected to move more heavily into inversion.
10yr US Real Yields have achieved our core objective at .655% and we now revise our objective to 1.00%, with US Inflation Expectations still expected to stay rangebound.
Importantly, the recent selloff in global rates markets has been broad-based, with German 10yr Bond Yields surging above our 1.50% tactical objective to test the long-term downtrend from 1994 at 1.64%. Inside, we update our views on this market, as well as the 2yr and 5yr German Bond Yields.
As European interest rates rise, Italian debt sustainability concerns are coming back to the forefront, especially as the ECB fails to deploy an anti-fragmentation tool. From a technical perspective, both the Italian 10yr Bond Yield and the BTP/Bund spread have broken major support, suggesting a deeper rise/widening, which is a new and crucial risk for global financial markets to monitor.
We also stay biased higher for the UK 10yr Bond Yield despite our next objective at 2.445/50% being reached.
For more, see weekly macro chart pack and updated key market themes HERE.
Here’s one which looks quite interesting, from DBs Ruskin: Trading a boxed-in Fed
It would be among the biggest surprises for a rate hiking cycle in decades, were the Fed not to deliver a 75bp rate hike tomorrow.
On balance the danger is that the extreme volatility and strong trends going into the FOMC meeting, that have left some metrics flashing 'oversold', make for an attempt at a fixed income and risk 'relief rally' on the day. But participants should not expect the Fed to breathe any sustained life into counter-trend trades.
The multi-week stagflation trades and trends on risk, fixed income and the USD are still your friend.
This is not least because even as growth slows, inflation is likely to prove sticky, with DB now expecting the core PCE deflator at a stubborn 3.4% by the end of 2023. In the Q&A, Chair Powell is unlikely to understate the growth risks, and will reiterate that driving inflation down to target will take precedence over a pending growth slowdown.
… So where does this now leave the likely market reaction to the FOMC, assuming the Fed does deliver the expected 75bp hike?
At the same time (actually hours before) the same firm, diff analyst out with updated firm call on valuations: Reducing bearish risk
We update our valuation metrics following the sharp recent repricing. We reduce bearish risk in front-end trades and maintain our term premia trades (beta-hedged steepeners). Moreover, having exited our short 10Y Spain ASW last week, our expectation is to look for an entry point to be long BTPs.
A couple highlights,
Cross asset proxy and the data: UST10Y has overshot the cross asset proxy and the data but less so than at the peak in 2018. Also, unlike in 2018, the cross asset proxy has actually been stable for the past year. Moreover, as these models were calibrated over the 2010-2014 period, they may not hold today given the very different inflation environment.
Financial conditions: Financial conditions have tightened to levels that have led to a Fed dovish pivot in the previous decade. However, in the current environment, credit spreads are arguably more relevant than broader financial condition indices that overweight equities. Credit spreads are still below the level that led to a Fed pivot in the past decade. Moreover, given that the Fed is approaching its dual mandate "from above", it should be more tolerant of (if not seeking) tighter financial conditions.
GSs latest come to Jesus moment? Equity bear market: a paradigm shift?
Against a backdrop of sky-high inflation, rising rates, and growing recession concerns, the S&P 500 has had its worst start to the year since 1962, with the tech-heavy Nasdaq and unprofitable Growth companies performing even more dismally. Whether equity markets are in the midst of a paradigm shift and what’s in store for them ahead is Top of Mind. For answers, we speak with ARK’s Cathie Wood, AQR’s Cliff Asness, GSAM’s Darren Cohen, GS GIR’s David Kostin, and GS analysts. The one commonality in their disparate views: good buying opportunities can be found in equity markets today. While Wood still favors innovative Growth companies, Asness beats the drum for Value. But with investors reluctant to re-engage without greater clarity on if equities have troughed, GS strategists find that a likely coming peak in inflation is probably not sufficient to see the bottom, and that similar past drawdowns have only ended when the Fed has shifted towards easier policy. So, for now, they recommend investors reduce portfolio duration and increase exposure to real assets.
The report contains visual of longer-term look at / history of US P/Es
LPL: Historic Bond Market Selloff Persists as Fed Meeting Approaches
UBSs Paul Donovan: Don’t feed the trolls
The Federal Reserve meets today. Whether the Fed decides to raise rates by 0.5ppt or 0.75ppt makes little difference to the second half decline in inflation. A 0.75ppt increase may still be a policy error because it breaches the first rule of social media: “don’t feed the trolls”
The Fed clearly communicated an intention to raise by 0.5ppt at this meeting. Last Friday, headline consumer price inflation rose unexpectedly. Other inflation measures have fallen, and the Fed does not focus on CPI. Nonetheless, without direct Fed guidance, markets decided that a 0.75ppt hike is now needed. Satisfying that expectation will increase future volatility by making CPI the main inflation focus for markets. A 0.75ppt move today means future Fed attempts to signal policy direction will be countered with “they don’t mean it, remember June 2022”…
Clearly Paul’s never traded and missed the fact that the Fed is being ‘given’ 75bps on a platter — to not ‘take’ the opportunity without ‘surprising the market’ is advice only an ivory tower resident might offer…Then again that’s why they call them,
AND … THAT is all for now. Off to the day job…