while we slept (extremely quiet); BoE largest hike in 27yrs; WalMart + CSFB = layoffs; “I don’t feel the pain of inflation anymore ..." -Daly
Good morning …
One thing we can say for sure is that August hasn’t been dull so far and we’ve only had three days. This is all before the biggest BoE hike for 27 years (50bps) likely today, and then US payrolls tomorrow.
Indeed, there have been some remarkable ranges in treasuries so far in the three days of August. In just over 24 hours from mid-afternoon London time on Tuesday, 2yr US yields moved from 2.83% to 3.18%, 5yrs from 2.58% to 2.96% and 10yrs from 2.52% to 2.83%. These all marked the high points as the three closed at 3.07% (+1.4bps on the day), 2.83% (-2.4bps) and 2.71% (-4.5bps) respectively, 11bps to 13bps off their intra-day highs immediately after a strong US services ISM yesterday. This led to a big curve flattening as 2s10s closed c.6bps lower at -36bps. This morning in Asia, treasury yields are pretty much unchanged.
-Jim Reid, DB
50bps hike CONFIRMED
AND we move on … here is a snapshot OF USTs as of 705a:
… HERE is what another shop says be behind the price action, you know,
WHILE YOU SLEPT
Treasuries are modestly (for these days) lower and the curve is a touch flatter ahead of potentially the biggest BOE hike (+50bp) since 1995 and this morning's update on jobless claims. DXY is lower (-0.25%) while front WTI futures are higher (+1%). Asian stocks were mostly higher, EU and UK share markets are all in the green (SX5E +1.1%, DAX +1.4%) while ES futures are showing +0.3% here at 6:45am. Our overnight US rates flows saw a lackluster Asian session today with some real$ selling of 10's and buying of the long-end noted amid below average turnover there. Indeed, overnight US Treasury volume through 6:45am NY time was around 65% of average overall with Tsy 3yrs once again seeing the highest relative average turnover (95%) among benchmarks.… The recent bear flattening in curve drove Treasury 2yr yields up to its equivalent bull trend yesterday where 2's touched, and then swiftly rejected, that trend support in yesterday's session. Two thoughts here: 1) investors appear so far unwilling to completely give- up on the more hikes = sooner/deeper downturn narrative and 2) we may not be the only ones watching these trend supports (5's at just above 3.00%, 10's' near 2.90% today, etc)...
… US news: America's biggest warehouse is running out of room as slowing sales at major US retailers leave a trailing wake of inventories RTRS A big global shipper warns of weakening demand and warehouses filling up CNBC Americans are driving less than they did in the summer of 2020 Yahoo Hopes for low pressure, Thorium-based nuclear power generation appear high right now TSR
… for some MORE of the news you can use » Finviz.
Before jumping in to Global Wall St inbox, here’s a live look (ok, listen) from the ivory tower (Daly of the FRBSF and SPACES yesterday) via ZH,
"I Don't Feel The Pain Of Inflation Anymore" Says Wealthy SF Fed Chair From Ivory Tower
SHE and, you know, many Americans, have enough.
Listen closely to what those currently in power up in the ivory tower are saying and truly believe … Now on to just a couple things …
got20s?
Treasury Slashes Auction Sizes Through October Despite QT, Plans Biggest Cuts To 20Y Bond
Truth be known, the 20yr UNDERPERFORMED wings following the announcement. How do I know or why do I suggest this? Because I believe everything I read. Like THIS from NatWEST
… Since its introduction in 2020, the 20y bond has consistently underperformed on the curve. Naturally, Treasury has taken notice and trying to remedy the issue by lowering the supply in the sector relative to the rest of its issues. Going into the refunding, we had penciled in a $3bn cut, which ended up being slightly higher than what we got at $2bn. The modest reduction underwhelmed markets and the immediate reaction was for the 20y to sell-off vs. neighboring bonds – see Chart 1 for the immediate reaction of the 10s20s30s fly following the announcement - we should point out that the sector recovered by the end of the trading session …
Chart 1: 20s underperformed following the refunding announcement
Now in as far as other things, specfically how GOOD things have become thanks in part to lower longer-term RATES, GOLDILOCKS
Global FCI Eases on Lower Long-Term Rates and Higher Equities
Chart of the Week
Exhibit 1: Global FCI Eases on Lower Long-Term Rates and Higher Equities
Turning TO part 3 of a 3 part series from WFC,
The Fed's Balance Sheet: Your Questions Answered
Part III: Does a Bloated Balance Sheet Lead to High Inflation?… Historically, an increase in the reserves that commercial banks held at the Federal Reserve could lead to a significant increase in M2 through the so-called “money multiplier.”
However, the relationship between the monetary base, the M2 money supply and bank credit broke down starting in late 2008 due to a combination of demand and supply factors that constrained growth in new bank loans and, hence, money supply growth. The monetary base ballooned by more than 300% between September 2008 and mid-2015, while the M2 money supply went up only 40% or so during that period. Bank credit grew even less.
The fiscal stimulus programs that were associated with the pandemic led to significant acceleration in M2 via a surge in bank deposits. But M2 growth has slowed considerably in recent months alongside the fading fiscal stimulus. This in turn should help to bring down the CPI inflation rate in coming quarters.
In our view, most policymakers at the Federal Reserve do not view QE as a way to boost inflation through the money creation process. Rather, QE influences the real economy primarily by easing financial conditions to promote stronger aggregate demand and higher inflation.
We acknowledge that balance sheet expansion could potentially contribute to asset price bubbles. But asset price bubbles predate the QE era, and they can form because of accommodative financial conditions in general and not just because of elevated central bank balance sheets specifically.
… There is a common perception that a large central bank balance sheet can lead to high inflation. This perception is based on the observation that growth in the size of the Fed's balance sheet historically has had some degree of correlation with growth in the money supply (Figure 2).
Finally, while many / most up in that there ivory tower lean on easing financial conditions and push back a touch on rate CUTS being priced, its worth noting that at this very moment, cuts have NOT yet ‘left the building’. BBG,
For a group supposedly keen on dialing back forward guidance, Fed officials sure have been doing plenty of guiding this week. A drop in the benchmark Treasury yield toward 2.5% seems to have been the trigger, sparking a rush to the microphones from an array of policy makers amping up the hawkish rhetoric lest we had forgotten their commitment to fight inflation. Fed Bank St. Louis President James Bullard said he favors a strategy of “front-loading” big interest-rate hikes, while his Richmond and Minneapolis counterparts — Barkin and Kashkari — noted the importance of tackling inflation. San Francisco Fed President Mary Daly endorsed a half-point September hike, but didn't rule out a 75-basis-point move. The jaw-jaw has pushed yields back up again and odds on a three-quarter point rate increase next month have gone up. But investors continue to bet the Fed will be back easing policy next year with between two and three rate cuts still priced in.
Perhaps THINGS — both equity AND rates related — need to get a whole lot worse before the ivory tower can / will be … reassured?
At THAT point — stocks down, rates UP and TIGHTENING financial conditions where an INCREASING URATE a signal Americans beginning to lose their jobs …
WalMart (corp layoffs) YESTERDAY and then just this morning,
Initial Jobless Claims this morning, NFP tomorrow will eventually suggest Amercians — same who currently ‘have enough’ per DALY — will be in a worse position.
At this point the obvious question will have to be … How’s Ms. Daly doing?
… THAT is all for now. Off to the day job…