while we slept; German inflation falls; the best early recession indicator; (BULLards)lessons from '74 & '83
Good morning … and NOW you know …
Fed’s Mester backs 75 basis point hike in July if conditions remain the same
… “So we’re in this transition right now, and I think that’s going to be a painful one in some respects and it’s going to be a bumpy ride in some respects, but it’s very necessary that we do it to get those inflation numbers down.”
And now you know … whether or not you want to hear / believe it, there are some at the Fed who are willing to risk ALL, to prove a point.
We’re NOT in Kansas (2018) any more and the Fed may NOT be about to pivot TO rate CUTS.
Perhaps bonds have figured this out?
Ugly, Tailing 7Y Auction, But It Could Have Been Worse (ZH)
… Overall, an ugly auction, but not catastrophic and certainly stronger than yesterday's 5Y. That said, a few weeks of QT, a few more rate hikes and we won't be surprised if we have an actual failed belly-buster auction.
SUPPLY > demand (but hey, at least it coulda been worse … for now or until …)
Long bonds then shall remain in this range-bound purgatory until such a time we get some other sort of news or surprise which proves so shocking that markets are forced to (re)price it … in or out. Hikes or cuts. Whatever it will be, does NOT show up on this chart. Yet.
Currently there is NO signal — bonds are not overbought nor are they oversold. They are nominally at / near cheaps but without any technical signal, and ahead of long holiday weekend ahead, it is a reasonable assertion to make that the bond market will continue to tread water and wait for another market to attempt to push a narrative.l
That said, here is a snapshot OF USTs as of 722a:
… HERE is what another shop says be behind the price action, you know,
WHILE YOU SLEPT
Treasuries are modestly higher and the curve modestly steeper with Treasuries generally following similar moves in Bunds and Gilts this morning. DXY is little changed and front WTI futures are +0.75%. Asian stocks were all in the red, EU and UK share markets are lower too (SX5E -1.3%, Germany's DAX -1.9%) while ES futures are showing -0.25% here at 7:10am. Our overnight US rates flows saw early buying in 10's (real$ and fast$) at the Asian open with real$ names later selling bonds into the uptick. The rally continued into London hours before Spain's historic CPI print took prices off the boil (Tsys were UNCHD an hour ago). Overnight Treasury volume was ~75% of average overall with 30yrs (107%) seeing the highest relative average turnover this morning.… ECB sources: Weighing whether to put a number on bond fighting scheme RTRS Spain's inflation soars to 10% (8.7% BBG est) BBG Bunds rallied after Germany's largest state by population (NRW) said consumer prices fell -0.1% MoM in June after temporary government measures to cut fuel prices and rail tickets took effect Yahoo Euro area June economic confidence fells to 104.0 from 105.0 prior (BBG est 103.0) - BBG
… and for some MORE of the news you can use » IGMs Press Picks for today (29June) to help weed thru the noise (some of which can be found over here at Finviz).
Now in as far as Global Wall Street’s inbox goes … a few items which caught my eyes
THIS one from Barclays arrives as ‘Equity Strategy’
Capitulation seen in bonds, not equities
X-asset flows and equity internals have turned notably more defensive as recession fear grows. But the divide b/w bearish sentiment and still-high MF/retail exposure remains. So equities have not reached capitulation point yet, while bonds now offer an alternative. Long-duration stocks are bid again, not the China plays.… TINA is over, bonds now offer an alternative to equities. Capitulation is much more advanced in fixed income (~$200bn outflows ytd) than in equities ($195bn inflows). But as growth now overtakes inflation as the key worry, bond shorts are being covered. Credit flows typically lead equity flows, and credit valuations now look more competitive vs. equities on a risk-adjusted basis. As bond prices have also fallen ytd despite weaker growth, the relative performance of equities looks too high vs. PMI/ISM. This means that if activity continues to slow and inflation peaks, investors may rotate away from equities and into bonds. Near term, PF rebalancing supports equities, but they will lack the bid from buybacks over the next few weeks.
… Inflation hedges are being unwound
After looking very strong for most of the ytd, equity flows have become more mixed recently. The last week saw sharp redemptions of $17bn from global equity funds, the biggest since April 2022. Meanwhile, US treasuries are seeing higher inflows as investor concerns shift from inflation/stagflation to growth downside. Popular inflation hedges over the recent months such as TIPS and real estate ETFs are also seeing flows rolling over most recently.… Systematic funds have also been continuously selling equity positions given the still-high realized volumes. However, further selling pressure from here is likely to be quite small given the already-low exposure levels. Meanwhile risk parity funds have also been underweight equities since the start of the year but seem to have closed some of those short positions lately, while continuing to increase bonds shorts.
ZeroHedge offers up THIS from DB
The Best Early Recession Indicator
As we approach the end of the first half, it’s safe to say that how the second progresses will likely be determined by whether the US moves into recession or not (and how soon). In regards to this key question, Deutsche Bank's Jim Reid writes that those readers looking for lead indicators, the bank's economists have long believed that continuing claims are the best signal for an imminent slide into recession. In a recent piece, they show how an +11.5% rise above the minimum level over the previous year provides the most accurate and timely signal of recession risks since the data becomes available in the 1960s. It works for each recession and normally leads by around 2 months.
In this cycle, the current low was 1306k hit on May 20th 2022. So far it’s up less than 1% to 1315k and would need to hit 1456k for the 2-month recessionary countdown clock to start ticking.
However, as one can can see from the chart below, this isn’t a big pick-up in historical terms so although we’re not trending there at the moment, it wouldn’t take too much to change the picture.
Indeed one concern is that initial jobless claims are up from a trough of 166k in March to 229k last week. Over time, Reid writes, these two series are very well correlated so this is a big enough move to confirm an imminent recession if continuing claims catch up. However this series is seasonally adjusted and non-seasonally adjusted claims are still bumping along the bottom and DB economist Matt Luzzetti thinks there may be some issues with seasonally adjusting so he wouldn’t yet read anything too significant into the pick-up in SA claims.
And then there’s THIS — one for all the Transitorian’s — from UBSs Paul Donovan
German consumer price inflation is due; the state of North Rhine Westphalia showed a noticeable decline in its inflation number. Markets had been expecting inflation to increase nationally, so evidence of disinflation (even from just one state) is a surprise. Spanish consumer price inflation is also due.
UK price data showed the dilemma faced by central banks. The BRC shop price index showed non-food disinflation (slowing to 1.9% y/y inflation) but accelerating food inflation. Central banks need to create more deflation where they can, to offset the inflation pressures they cannot control. There is a pontification of central bankers speaking today—ECB President Lagarde speaks twice. It is unlikely, though not impossible, that Lagarde’s views have changed since yesterday.
US first quarter GDP is revised (it will be revised further in the future). Consumer spending is robust, supported by increased credit and a reduced savings rate. The core PCE deflator is part of this data, but the US Federal Reserve seems to have cast this aside as an inflation measure.
China has reduced quarantine times for inbound visitors, and offered some other signals of easing Covid restrictions. The impact is likely to be felt in the domestic economy, as the export sector was more resilient during the restrictions.
Finally, as the saying goes — those who don’t learn from history are doomed to repeat it. It would then appear that BULLard has learned from 1974 and 1983
Getting Ahead of U.S. Inflation: A Lesson from 1974 and 1983
The Federal Reserve has a mandate to promote stable prices for the U.S. economy as well as maximum employment. Consistent with the price stability part of that mandate, the Federal Open Market Committee (FOMC) has set an inflation target of 2%, as measured by the year-over-year percentage change in the price index for personal consumption expenditures (PCE).
Inflation in the U.S. is currently running far above the Fed’s 2% target and is at levels last seen in the 1970s and early 1980s. The FOMC faced inflation levels in 1974 and 1983 that were similar to today’s inflation rate, but its policy responses were very different in the two episodes. Consequently, the results were also quite different. The contrast between the 1974 and 1983 experiences has convinced many that it is important to “get ahead” of inflation—a lesson that is valuable today.
There are multiple demand and supply factors contributing to today’s high inflation, but this article focuses on reviewing the Fed’s actions during previous high inflationary periods as a guide to informing the Fed’s actions in the current situation…
… The lesson from these two different approaches to monetary policy is the importance of staying ahead of—rather than getting behind—inflation. In particular, the takeaway is that getting ahead of inflation will keep inflation low and stable and promote a strong real economy.
In the 1990s, the FOMC stayed ahead of inflation as it tightened monetary policy following the 1990-91 recession. From early 1994 to early 1995, the FOMC raised the policy rate by 300 basis points (going from 3% to 6%) in an environment where inflation was generally moderate. Similar to the 1983 experience, the associated ex-post real interest rate at that time was high. Again, the result was not a recession but instead an expansion, which lasted until 2001. In fact, one of the best periods for economic growth and labor market performance in the entire post-World War II era occurred in the second half of the 1990s…
You’ve either read and learned from history OR feel like this, about the Fed
… THAT is all for now. Off to the day job…