while WE slept: equity futures and bond yields down; growth defying FOMC projections; issuance; UK vigilantes and '...ratio of gold to USTs show“Trump Effect” crushin' bonds...'
Good morning … Equity futures are lower (MSFT) ahead of some key data this morning and this equity pressure is weighing on yields a touch … overnight …
Bloomberg: China Economy Picks Up on Stimulus Push Ahead of US Election
CNBC: China’s factory activity expands for the first time since April, official survey shows
newsquawk: Europe Market Open: APAC stocks subdued post-US losses and BoJ rate hold; EU & US futures fall on Meta and Microsoft downside
… AND with event risk, the MOVE, and the VIX increasing into NFP and elections, yesterday offered some insight and data (which is, as always, susceptible TO yuuuuge revisions…). And so, some math ADP+GPD = X so please solve for “X”. ..
ZH: October Surprise: ADP Employment Report Signals Six-Sigma Beat (A Week Before Elections) CalculatedRISK: ADP: Private Employment Increased 233,000 in October
ZH: US Q3 GDP Growth Disappoints, Despite Surging Personal, Government Spending CalculatedRISK: BEA: Real GDP increased at 2.8% Annualized Rate in Q3 Bonddad: Real GDP for Q3 nicely positive, but long leading components mediocre to negative for the second quarter in a row
… AND this (along with some other housing)data was then followed by a supply update …
ZH: Quarterly Refunding: Treasury To Hold Debt Sales Steady For "At Least Several Quarters"
… but wait, there was even something to be said from across the pond …
ZH: UK Gilt Yields Soar After Reeves Reveals Budget: Market Braces For Inflationary Debt Surge
… and there will be plenty more on UKs bond market vigilantes below as Global Wall illuminates, but for now, a quick look in at 10s ahead of month-end index extension close at 4pm …
10yy DAILY: resistance down at 200dMA (4.187%) but that is IF we get below psychologically important 4.25% …
… momentum IS rolling over from overSOLD levels indicating it is at least NOT a headwind and possibly even a tailwind (short-term RENTAL? keep your friends close and your stops closer…?)
… AND… here is a snapshot OF USTs as of 658a:
… and for some MORE of the news you might be able to use…
Opening Bell Daily: Selling AI bets. Meta and Microsoft have no plans to stop betting big on AI. Both stocks tumbled overnight as Wall Street took in their plans for more huge investments into artificial intelligence.
Finviz (for everything else I might have overlooked …)
Moving from some of the news to some of THE VIEWS you might be able to use… here’s SOME of what Global Wall St is sayin’ … presented without commentary …
BARCAP: Advance Q3 GDP: Another strong quarter, defying FOMC projections
The BEA's advance report placed Q3 GDP growth at 2.8% q/q saar, driven by strength in consumer and government spending. PDFP remain on a sustained upward trajectory, boding well for growth in Q4. Meanwhile, quarterly core PCE prices surprised to the upside, directing attention to tomorrow's monthly detail.
… Although the FOMC seems quite likely to deliver a 25bp cut next week, risks are skewing against our baseline that the FOMC will deliver another incremental cut in December. Although today's strong GDP estimates were little surprise in light of earlier monthly source data, these add to the body of evidence that aggregate demand remains more resilient than the FOMC expected in September.Tomorrow's personal income estimates are likely to imply a very solid carryover effect for consumer spending into the current quarter, positioning GDP for a stronger increase in 2024 than the median projection of 2.3% Q4/Q4 in the September SEPs. Core PCE price inflation looks to be running a tenth or two firmer in 2024 than the median forecast (2.6% Q4/Q4) as well. Although upcoming employment estimates may well disrupt the picture, recent declines in the measured unemployment rate also make the median participant's projected increase to 4.4% in Q4 seem unlikely. In light of these data developments, updated forecasts will likely imply one fewer 25bp cut in 2024 than the four shown by the median participant in September's SEP projection.
BNP: US Q3 GDP: Resilience reinforces go-slow approach on Fed cuts
KEY MESSAGES
Consumer resilience points to staying power for the US economy following the 2.8% q/q saar headline GDP print for Q3.
Business spending on equipment was strong, and reduced uncertainty after the election could bolster that tailwind.
Strong growth is not on its own an impediment to Fed rate cuts, particularly as robust productivity gains keep a lid on inflation. However, it does reinforce our view that downside risks to the economy are less pronounced.
BNP: US rates: Treasury issuance uncertainty into November election
Treasury announced another (widely anticipated) pause to coupon and FRN auction sizes with a gradual rise for TIPS. We do not rule out further increases in coupons over the medium-term.
The $850bn TGA target for Q1 2025 means we expect over $400bn in net T-bill issuance during the period, but a contentious debt ceiling impasse may skew issuance lower and distort funding markets.
Liquidity and cash management buyback operations will continue into the new year while TBAC recommends new policy initiatives to improve demand and resilience in US Treasury markets.
BNP: Macroeconomic impact of oil prices: A simple framework
Oil price shocks from supply-side factors tend to have a larger impact on GDP than demand-led ones, our new framework finds.
This is because under a supply shock the direct impact from oil prices and that of central banks’ reaction work in the same direction, which is not the case in a demand shock.
The inflation impact tends to be similar regardless of whether oil prices are moved by supply or demand. For EM in general, oil shocks have a larger impact on inflation than in DM.
BNP: UK Budget: Big borrowing but no big growth boost
KEY MESSAGES:
The Budget delivered a fiscal loosening compared to previous forecasts that reinforces our cautiously optimistic view on UK economic growth and supports our view of a gradual approach from the BoE.
However, the overall fiscal stance is still tightening and will continue to do so for the foreseeable future. Difficult decisions still lie ahead.
Headroom against the fiscal rules remains limited and the OBR’s assessment regarding the boost to the UK’s growth potential from the policy announcements was relatively sombre.
Rates: While the headline remit figure initially offered some support to gilts, thanks to the credible plan from the new government, and in line with our expectation, the details unveiled a somehow less supportive picture.
FX: With downside risk scenarios for the GBP from today’s event not materialising we think the currency can find some near-term support.
DB: Shaky markets, shaky auctions? Exploring connections between volatility and auction performance
In the week following the weaker-than-expected August nonfarm payrolls report, the 10y and 30y Treasury auctions performed exceptionally poorly, with each auction producing some of the largest tails for this year. Given the significant market turbulence stemming from the weak data surprise, market conditions were viewed as the primary reason for the weak auction performances. In this report, we evaluate this explanation by examining the volatility of rates markets in the leadup to Treasury auctions and searching for connections between auction performance and market volatility. We find a positive relationship between market volatility and auction tails for the 2y and 10y auctions, an association that does not appear for other maturities.
…Stronger data also helped to put upward pressure on US yields, albeit after an initial false start. 2yr and 10yr Treasury yields ended the day +8.6bps and +4.6bps higher, respectively, with the 10yr reaching 4.30% for the first time since early July. It's dipped back to 4.276% this morning in Asia. The highlight of the data was a strong rise in the ADP employment survey (+233k vs +111k expected) ahead of Friday’s payrolls release. We also had Q3 GDP, which came in a touch beneath expectations (+2.9% vs +2.8%) but with strong growth in personal consumption (+3.7% vs +3.3% expected), and the September pending home sales print, which saw the strongest monthly jump since the first post-Covid lockdown rebound in summer 2020 (+7.4% vs. +1.9% expected).
Here in the UK, gilts actually outperformed the euro area and the US with yields ‘only’ 3-5bps higher across the curve. That was mostly thanks to a decline early in the day before the budget announcement. However, 2yr yields then rose as much as 24bps off the lows at one point, with long-end yields rising only slightly less. This came as the market digested a post budget announcement from the UK Debt Management Office that gross financing needs for 2024/25 would be GBP 23bn higher than projected back in April, with a further GBP 145bn cumulative increase over the following 4 years. Yields settled back down 5 to 10bps from the highs before the close but it was certainly a volatile session. In terms of implications for the BoE, the market takeaway was that it would likely keep rates higher for longer with the June 2025 pricing rising by +15.9bps on the day…
Better-than-expected data from the eurozone and the US, and looser fiscal policies leading to a repricing of Bank of England easing expectations, have pushed rates higher. Long-end levels still don't imply much of a term premium, limiting the downside in rates. Today sees eurozone flash CPI, but a more pivotal data point is tomorrow's US jobs data
GDP growth came in at a robust 2.8% annualised rate, led by another big increase in consumer spending, strong business investment and firm government defence spending. A soft landing remains our view with growth set to slow to around 1.5% for full year 2025 as a cooling jobs market takes some of the steam out of the economy
ING: UK bond yields spike as budget boosts borrowing
Financial markets have been on a wild ride since the announcement of the UK's latest budget. Big tax rises are coming, but not as quickly as big spending increases. And the prospect of higher growth has led investors to curtail expectations for Bank of England rate cuts
MS: US Treasury Refunding Takeaways: November 2024
US Treasury announced planned auction sizes, in line with our expectations for nominal coupons, FRNs, and TIPS. Guidance still indicates no changes to coupon sizes for "at least the next several quarters." Clarity on deficit paths will come post-election, with the debt limit in focus into year-end.
Key takeaways
November Treasury refunding delivered no changes to nominal coupon and FRN auction sizes, with incremental increases to TIPS, in line with our expectations.
Incorporating feedback from dealers, Treasury increased the size of cash management buybacks to $22.5bn per quarter, or $7.5bn per operation.
We continue to believe further clarity on deficit trends, and thus issuance needs, will come after the outcome of the November US presidential election.
Expiration of the federal debt limit extension introduces more uncertainty; once binding, this likely means less T-bill issuance and a lower TGA cash balance.
The cumulative cash requirement uplift was in line with our expectations, but the borrowing was higher, more front-loaded, and likely beyond what the market was braced for. This was a big fiscal event – and the headroom for more is narrow. In net terms, the event was a bit more BoE-hawkish than we expected, but the scale of the market reaction post the release of the OBR's EFO seems a bit excessive to us.
U.S. GDP growth remains strong despite high interest rates, with an annualized quarter-over-quarter rate of 2.8% in Q3, mainly driven by a resilient consumer and a jump in government spending.
Labor markets have shown more signs of (gradual) easing than the GDP numbers – the unemployment rate has edged lower since July but remains higher than levels seen earlier this year and job openings continue to decline. But the softening is consistent with a normalization rather than faltering in the economy.
Meanwhile, PCE inflation continued to trend lower, reflecting reduced price pressures in line with the broader slowdown in inflation observed in recent months.
With inflation moderating and labor market conditions normalizing, the resilience of U.S. GDP should not deter the Fed from proceeding with a rate cut at its November meeting.
Impact to Our Forecasts:
We continue to expect that a much larger-than-usual (for this point in the economic cycle) government budget deficit will keep a floor under the economy, inflation, and ultimately interest rates in the year ahead.
Near-term interest rate cuts from current high levels are still justified, but we expect just three additional 25 bps reductions over the next three Fed meetings before pausing at 4% - 4.25% for the remainder of 2025.
We expect U.S. GDP growth to decelerate in the coming quarters as households exhaust their savings and manufacturing activity continues to struggle.
The labor market is likely to cool further, with the unemployment rate projected to increase to around 4.2% by the end of this year and 4.4% next year, consistent with reduced job openings and lower quit rates.
A softer labor market is expected to lead to slower wage growth, easing upward pressure on prices. This aligns with our base case, where headline inflation continues to trend down toward the Fed’s 2% target over the next year.
After the excitement of yesterday’s GDP data, today investors are granted another peek into the hedonistic lifestyle of the US consumer. Personal income and consumption data are due, and both should be relatively buoyant. Job security and rising real incomes are powerful forces for supporting economic activity through consumer spending.
The US personal consumer expenditure deflator is also due. This is less dependent on fantasy than the US consumer price measure, although there is still a fantasy element. Market determined prices (very definitely a subset of the overall index) showed a less than 2% y/y increase last month, which does not suggest a meaningly imbalance in economic supply and demand…
Taxes up, borrowing up, spending up: the first Labour budget in 14 years marks a sharp change in fiscal policy direction.
Tax increases of GBP 36bn (1.1% of GDP) will take the tax burden to the highest level on record. However, more borrowing will allow spending to increase by around GBP 70bn (~2% of GDP), a large proportion of which will boost growth in the short term.
The market reaction to the budget was initially positive for sterling and the FTSE 250, likely due to expectations of stronger near-term growth. Gilt markets initially welcomed the announcement, despite higher borrowing, but this goodwill soon evaporated as expectations for BoE rate cuts faded.
Wells Fargo: Q3 GDP: The U.S. Economy Continues to Clip Along at a Solid Pace
Summary
Real GDP grew a solid annualized rate of 2.8% in Q3-2024 relative to the previous quarter. On a year-ago basis, output was up 2.7% in the third quarter, stronger than the 2.4% per annum growth rate that was registered during the last economic expansion in 2010-2019.
Consumer spending once again stole the show. Overall spending remained solid in the third quarter, with real personal consumption expenditures (PCE) advancing at a 3.7% annualized rate.
Investment spending was also strong in the third quarter, with real business spending on equipment up more than 11%. That said, spending on intellectual property products was essentially flat, while structures (i.e., non-residential construction) posted a modest contraction.
We look for the U.S. economy to continue to expand in coming quarters, although not quite as strongly as it has recently. Policy changes in the wake of next week's election could potentially lead to modifications of our forecast. We may make some changes to our forecast once we know the results of the election. Our Annual Economic Outlook webinar is scheduled for Thursday November 21.
The S&P 500 equal-weighted index has been going nowhere fast since the Fed cut the federal funds rate (FFR) by 50bps on September 18 (chart). The same can be said for the Russell 2000. The stock market rally has stopped broadening since the Fed's rate cut! Why is that given that the current earnings season has been mostly upbeat?
The problem is that the bond yield has been rising and tightening credit conditions ever since the Fed eased credit conditions! That's a rather unusual response to the first rate cut in a monetary easing cycle (chart). The bond market agrees with our opinion that the Fed cut the FFR too much, too soon. Indeed, the latest economic indicators have been strong, as we expected. In addition, the US Treasury Department plans to raise a whopping $1.3 trillion over the next six months.
The S&P 500 is up 3.8% since September 18. We expect that it might go nowhere fast over the rest of this year too, hovering around 5800. The outlook for fiscal policy will probably remain unsettling after the election and the Fed might not lower the FFR over the rest of this year after all.
Let's dive into today's relevant developments:
… And from Global Wall Street inbox TO the WWW …
Apollo: US Fiscal Outlook Starting to Play a Role for Long-Term Interest Rates
The two charts below show that US long rates are disconnecting from Fed expectations and oil prices. Despite the market still expecting five Fed cuts over the coming 12 months, long rates are moving higher. And despite oil prices falling, long rates are moving higher. This suggests that long rates are rising because of emerging worries about fiscal sustainability.
Note: New York Fed economists Tobias Adrian, Richard Crump, and Emanuel Moench (or “ACM”) present Treasury term premia estimates for maturities from one to 10 years from 1961 to the present. ACM further estimate fitted yields and the expected average short-term rates for the same set of maturities. The analysis is based on a five-factor, no-arbitrage term structure model. Source: Bloomberg, Apollo Chief Economist
Source: Bloomberg, Apollo Chief Economi
Bloomberg: Nobody Expects the Gilt-Edged Bond Vigilantes
But Rachel Reeves was as ready as she could be, and got a pass — still somewhat stern — on her first UK budget.
…Vigilante Justice in the USA Meanwhile in the US, Janet Yellen — likely nearing the end of her term whoever wins the election — plays her own very bad hand like a master. Wednesday brought the quarterly refunding announcement, in which the govenrment lays out its borrowing plans. This was a flashpoint with the markets several times last year, but Yellen announced that auctions of longer-term bonds will be unchanged compared to the previous quarter, and also predicted that there wouldn’t be a need to increase the amount of debt it auctions “for the next several quarters.”
That runs counter to the belief animating the “Trump Trade” that the Treasury will soon have to borrow a lot more. It might even suggest that the Treasury believes in a Harris victory. It also shows that the Treasury is, responsibly, minimizing the risk of a market disruption when political uncertainty is high. Tom Tzitzouris of Strategas Research Partners said:
The Treasury has punted on stabilizing the nation’s financing, and in the near-term, likely helped to slow some of the recent losses in Treasuries and MBS. Much like most of the market, we anticipated the Treasury not rocking the boat a week before the election.
But even if Yellen kept Treasuries broadly stable in a time of extreme political sensitivity, the pattern of ebbing confidence is clear and concerning. Michael Howell of CrossBorder Capital in London points to the ratio of gold to Treasury bonds to show a “Trump Effect” crushing bonds:
This run on confidence, the worst since the 2011 debt ceiling crisis that culminated in a downgrade for Treasury’s credit rating, has happened despite the jumbo cut of 50 basis points to the fed funds rate last month, which should have been directly supportive. If we compare the ETFs with the tickers GLD and TLT, the most widely held trackers of the two asset classes, we see that the trend has been uninterrupted since the Fed started to hike rates in 2022, and now seems to be in overdrive:
Note also that this particular version of the Trump Trade doesn’t correlate very strongly with his chances in the election. As Bloomberg’s Cameron Crise points out, the economic data is more than enough to explain what’s happening to bonds…
EPB RESEARCH: Q3 GDP & The Impact From Aircraft Equipment Aircraft equipment investment increased at a 429% annual rate in Q3, following a 647% annualized increase in Q2, a significant driver of overall GDP growth.
Hedgeye: CHART OF THE DAY: US Debt Set to Ramp Post Election
As you can see in today’s Chart Of The Day:
From the 1960s to 2008 US Debt-to-GDP had some discipline, ranging between 23-48%
Goldman’s Paulson and The Bernank hit CTRL Print and Debt-to-GDP grew from 39% to 97% (today)
So what’s next post the election? A: more all-time highs in reckless US Deficit Spending and the US Debt. Over the next 30 years (with zero recessions in their models, wars, pandemics, etc.) US Debt-to-GDP is projected by CBO to ramp from 97% to 172%!
WolfST: Our Drunken Sailors Splurge in Q3, Phenomenally so on Durable Goods, Drive GDP Growth. But Debt-to-GDP Ratio Worsens
Jump in government spending also boosted GDP growth. But surging Imports, falling residential fixed investments, and inventories dragged.
Finally, with it being Halloween, a chart from M&G Bond Vigilantes for Team Rate CUT …
Bond Vigilantes: Five frightening financial charts to fear this Halloween!
The howl of restrictive rates reverberating through the economy
Source: M&G, Bloomberg, as at October 2024
Monetary policy was restrictive for a long time, and since it works with a lag, its effects are only now becoming evident. Although central banks have begun easing, policy remains more restrictive than what might be deemed neutral, and this is impacting both businesses and consumers. In the US, Chapter 11 filings are rising steadily, while credit card delinquencies over 90 days are climbing to levels last seen following the Global Financial Crisis. Until monetary policy significantly loosens, these trends may continue to persist.
While economic and financial pressures mount, are all risks being priced into credit markets?
Big one today. Thanks