while we slept (got20s?); GALLUP says (we're all suffering); PwC says (jobs data completely COOKED); MSI turns NEGATIVE
Good morning … ahead of today’s 5yr auction, ZH
Ugly, Tailing 2Y Auction Spooks Bonds Ahead Of Jackson Hawkano
Got5s? Concession for supply OR preparation for Hawk-NADO at JHOLE?
Momentum REMAINS overSOLD as yields > 50dMA (3.024%) and so it’s hard NOT to see recent peak (3.25%) as significant even just beyond the laws of round numbers.
… here is a snapshot OF USTs as of 655a:
… HERE is what another shop says be behind the price action, you know,
WHILE YOU SLEPT
Treasuries are little changed amid a light news slate and weak-er overnight volumes as the Jackson Hole footsteps grow louder. The 20yr Treasury is notably outperforming on curve this morning (see pictures and discussion below) with relatively high turnover seen in the benchmark too. DXY is higher (+0.12%) while front WTI futures are too (+0.7%). Asian stocks were mixed, EU and UK share markets are little changed while ES futures are showing UNCHD here at 6:45am. Our overnight US rates flows saw Asian real$ buying in intermediates while in London's early going we had decent 2-way activity in the long-end with fast$ selling outright and on curve. In the intermediate sector, rangebound conditions have ruled this morning with general interest to fade upticks. The desk did note Asian real$ demand in 20yrs. Overnight Treasury volume was ~80% of average overall with 20yrs (127%) seeing the highest relative average turnover this morning.… We do have one other attachment to share this morning as we tap pencils for Friday: a refreshed look at the Treasury 10s20s30's 'fly which is -3.3bp this morning and a standout amid little-changed yields. As you can pretty clearly see, 10s20s30s has been in a reasonably well-defined up - channel (cheapening 20's on curve) since early April this year and this morning 10s20s30s is attempting to break down out of it. As such, it will be interesting to see where today's close is and, following the rulebooks on breakouts, a close below 66.6bp (oh no!) would confirm the breakdown today. Note too that daily momentum is swinging down and in favor of 20's again- a potentially new signal that needs closing confirmation too. Early last month we said that we thought the so-called Shooting Star rejection above 80bp on this 'fly on July 7th... might have been a blow-off high (or low, for 20's). Well, closing confirmations today on what we've cited here would pretty much put a chop on that idea. Perhaps the Treasury's relatively heavy issuance cutbacks in 20's are finally imposing a better supply-demand balance for this [former] curve orphan...
… and for some MORE of the news you can use » IGMs Press Picks for today (24 Aug) to help weed thru the noise (some of which can be found over here at Finviz).
Here are a few topical bullets and links to things which caused me to pause and think for a moment about the state of global macro …
Yesterdays set of data — for the un initiated (ie, without a terminal) like myself, these days, ZH:
Stocks & Bonds Soar, Dollar Pukes As Dismal Data Dump Reignites 'Fed Pivot' Narrative
Goldilocks on the Fed,
Powell’s Challenge at Jackson Hole: Slowing the Pace Without Easing Financial Conditions
The Fed’s annual Jackson Hole Economic Policy Symposium takes place on Friday and will open with a speech by Chair Powell at 10am EST. We expect Powell to reiterate the case for slowing the pace of tightening laid out in his July press conference and the July minutes released last week. He is likely to balance that message by stressing that the FOMC remains committed to bringing inflation down and that upcoming policy decisions will depend on incoming data.
We suspect that the Fed leadership saw the easing in financial conditions after the July FOMC meeting—much of which has now reversed—as unhelpful to its task of keeping the economy on a below-potential growth trajectory, but not problematic enough to scrap its plan to slow the pace of tightening. Softer-than-expected CPI and PPI reports since the July meeting should also make the leadership more comfortable proceeding with its plan to slow down
We continue to expect the FOMC to slow the pace of rate hikes to 50bp in September and 25bp in November and December, though we see the risks to both the near-term pace and our terminal rate forecast of 3.25-3.5% as tilted to the upside. If the FOMC decides it needs to tighten more aggressively this year, we suspect that the Fed leadership would prefer to deliver multiple 50bp rate hikes rather than another 75bp rate hike in September.
Those at JHOLE will certainly have opportunity to discuss the idea of QT. A large German bank has ALSO just printed THIS NOTE
Catch-2.2 trillion: technical adjustments and slowing down QT
The latest FOMC minutes revealed a Fed more focused on bank deposit betas lagging MMF net yields along with the path of RRP balances, suggesting they may be uncomfortable with how quickly terminal reserve levels are approaching
Should reserve drainage comprise enough of liability runoff over the near-term, the Fed will aim to widen the administered rate range by raising IORB while lowering ON RRP at the same time later this year
If reserve and ON RRP drainage are roughly equal, the Fed will leave IORB unchanged while moving ON RRP to the bottom of the range late this year or early next year
Any technical adjustment will only marginally alter the pace of liability runoff given reduced rate sensitivities, meaning the Fed will have to slow and eventually stop QT earlier than markets appreciate
With QT and the upcoming CB confab (and pursuant FOMC reactions) in mind, another item for central planners to consider, via WFC
Unpacking the Inflation Reduction Act
Summary
Last week, President Biden signed the Inflation Reduction Act (IRA) into law. The road to passage was a long and winding one.
In the spring of 2021, President Biden proposed a “Build Back Better” framework for his domestic policy agenda. This agenda included two separate proposals, the American Jobs Plan and American Families Plan. These two sweeping proposals included more than $4 trillion of new spending, tax credits and tax cuts over 10 years, with a roughly offsetting amount of new tax increases and spending cuts over the same period.
As time passed, some “physical” infrastructure spending was broken off from the Build Back Better framework. This effort culminated in the Infrastructure Investment and Jobs Act (IIJA), a bipartisan bill passed by Congress and signed into law by President Biden in November 2021.
The IIJA contained $1 trillion in gross spending over five years, of which $550 billion was new spending, and the money was authorized to be spent primarily on infrastructure needs tied to roads, bridges, ports, public transit, water and broadband.
The remainder of the original BBB framework was unable to garner much support from Republicans in Congress. As a result, Democrats turned to budget reconciliation as a way to circumvent the Senate filibuster and pass the remainder of the BBB agenda. After more than a year of intraparty negotiations, this effort eventually yielded the Inflation Reduction Act (IRA).
The IRA is significantly smaller than the original BBB framework. The bill contains roughly $500 billion of new spending and tax credits over the next 10 years. These costs are more than offset by roughly $800 billion of new tax increases, spending cuts and increased tax enforcement. On a net basis, the bill is projected to reduce the budget deficit by roughly $300 billion over the next 10 years.
In our view, the IRA will not have a major impact on the outlook for the U.S. macroeconomy over the next year or two. A tightening of fiscal policy can be disinflationary by slowing aggregate demand growth. The IRA does impose some fiscal tightening, such as the 15% minimum tax on corporations' financial statement income and the 1% excise tax on stock buybacks. However, these new taxes are relatively small, amounting to just 0.1% of GDP per year.
Other disinflationary portions of the bill do not take effect right away. For example, the drug price negotiation program for Medicare does not take effect until 2026. In addition, the extension of the expanded Affordable Care Act subsidies act as a small boost to inflationary pressures by extending a consumer subsidy that was set to expire.
On net, and when viewed against the $24 trillion annual size of the U.S. economy, we doubt these fiscal policy changes will move the needle much on the inflation front, leaving the Federal Reserve as the main driver of inflation-fighting policy change.
Of course, this is not to say that the legislation will have no impact at all. The microeconomic impact on specific industries/companies, such as energy and pharmaceutical firms, could be substantial. And the broader, societal benefits over the longer-run from potentially expanding the technological frontier for clean energy is another angle from which this legislation could be analyzed.
Ok, then. NO reduction of the ‘flation act, it is … Moving along back TO markets and PRICE ACTION in and of itself, HERE is one from the (1stBOS)CHARTS Department,
Multi Asset Macro Pack: Key Market Themes
… US Equities have come under pressure over the past week as we approach Jackson hole, with the S&P 500 capped exactly at our technical recovery objective of the 200-day average, 2022 downtrend and 61.8% retracement of the entire 2022 fall. Fears of a hawkish pushback from Powell seems to be the primary driver, with the USD and US Yields also pushing higher. We maintain our base case of looking from a technical perspective for an important peak and further weakness over the next 1-month.
Now on a somewhat less positive note, here is what Gallup SAYS (via ZH),
Record Number Of Americans Are "Suffering", Surpassing 2008 Crisis Levels; Gallup Poll Finds
About that good news NFP, PwC SAYS (via ZH)
… We bring up all these rhetorical questions because a new survey released by consultancy PwC confirms our previous observations about rampant mass layoffs in the US labor market, and suggests that the true state of the job market is far, far uglier than the alleged 528K job gain reported by the BLS in July would suggest.
In the PwC survey released last Thursday, which last month polled more than 700 US executives and board members across a range of industries, half of respondents said they’re reducing headcount or plan to, and 52% have implemented hiring freezes. At the same time, more than four in ten are rescinding job offers, and a similar amount are reducing or eliminating the sign-on bonuses that had become common to attract talent in a tight job market.
At the same time, though, about two-thirds of firms are boosting pay - for those who keep their jobs - or expanding "mental-health benefits", because we now live in a liberal dystopia where a growing number of workers are batshit insane.
The findings, as even Bloomberg concludes, illustrate the contradictory nature of today’s labor market, where skilled workers can still largely name their terms amid talent shortages (in high demand sectors like line cooks and bartenders), even as companies look to let people go elsewhere, particularly in hard-hit industries like technology and real estate…
Our sentiment indicator (MSI) has turned negative. We highlight the drivers of the signal change, and revisit a brief set of FAQs on the indicator's construction.
… What could change this signal? While the 'level' condition should remain satisfied for some time, the 'change' condition is more fragile. The summer rally has seen sentiment improve, and a return to this trend would cause the signal to return back to neutral…
How any / all of this impacts UST yields ultimately matters … at least TO HFs … How do I know? Because the OFR says so
OFR Working Paper Finds Hedge Fund Exposures are Related to Treasury Yield Changes
The increasing importance of non-bank financial intermediaries has raised new questions about the risks that hedge funds' activities pose to the stability of the financial system.
A working paper published today by the Office of Financial Research looks at the role that changes in hedge fund exposures play in driving U.S. Treasury prices and the yield curve. Using confidential hedge fund data from the Securities and Exchange Commission, the authors calculated hedge funds' aggregate, net Treasury exposures, and their fluctuations over time.
The authors found significant and robust evidence that changes in hedge fund exposures are related to Treasury yield changes. Furthermore, the working paper shows that particular strategy groups and lower-levered hedge funds display a larger estimated price impact on Treasuries. Finally, asset pricing tests show that U.S. Treasury investors demand additional return compensation due to risks associated with hedge fund demand.
… Overall, these findings indicate that the trading activities of hedge funds can be linked to market price movements. At the same time, it is important to recognize that these findings do not show that hedge funds are the sole or decisive driver of price fluctuations in the Treasury market. Neither are they necessarily the source or originator of fundamental shocks that cascade through the financial system. Clearly, there are other forces that drive price movements in those markets. Extrapolating from this last point, it might be difficult to demonstrate that hedge fund trading during the March 2020 episode was the principal force behind the large fluctuations in Treasury yields and the decrease in liquidity. However, they might have served the role of an amplification mechanism.
… THAT is all for now. Off to the day job…