while we slept; #got5s? Marko SAID; early morning Reid'cap, QE chart; GS QT/hikes timeline; 'Jeff' trackin' v-conomy and Bernanke circa 2012
Good morning and welcome TO turnaround Tuesday … Here’s a longer-term and somewhat shorter-term look at this afternoons liquidity event (aka 5yr auction) @ 1pm
For somewhat more of the news you can use, here are IGMs Press Picks for today (25th Jan) to help weed thru the noise — most of which can be found over here at Finviz, for example.
Now TO some news and what happened o/n (while we slept) from the sellside,
US News: The Fed steps up deliberations on shrinking its $9 trillion asset portfolio WSJ CFA study casts doubt on whether a CFA qualification is key to fund manager success BBG US oil CEO's offer differing views on crude output growth RTRS …
Treasuries are a hair lower and the curve little changed ahead of today's 5y auction and tomorrow's FOMC. Singapore tightened policy in an off-cycle move while a much firmer-than-expected Aussie inflation print has Citi and others looking for RBA hikes later this year (Aussie 3yrs +4.8bp). DXY is higher (+0.35%) while front WTI futures are UNCHD. Asian stocks were deeply red (Shenzen -3.31%), EU and UK share markets are all modestly higher though (SX5E +0.35%0 while ES futures are showing -1.4% here at 7:05am. Our overnight US rates flows saw a much more subdued session in Asian hours with a theme of better buying beyond the front end after an Aussie CPI-inspired dip there. During London hours my colleagues reported low client turnover this morning with some long-end bank selling seen after this morning's earlier flattening. Overnight Treasury volume was ~120% of average.
… Speaking of Tsy 5yrs, our first attachment this morning shows the 5yr note possibly setting up shop near the middle of its 1.31% to 1.765% pre-pandemic rate range. Indeed, last week's candle is what one might expect to see when new move highs in yields spark a food-fight to cover shorts. In candlestick parlance, last week's candle is a Doji Shooting Star- funny as that sounds. Alternatively, new move highs in yields were roundly rejected (the Shooting Star part) while 5's closed last week basically where they opened the week (the Doji part). This is a classic sign of trend exhaustion but is NOT considered a trend reversal signal- absent other inputs (like a bullish turn in weekly momentum that we don't have yet- as you can see in the lower panel). Given all this, we'd not be surprised in 5's mark [a lot of] time near spot levels as investors wait for more data and Fed guidance.
Confirming these overnight flows — BMO writes of the Perils of a Soft Landing,
… Overnight Flows
Treasuries cheapened overnight in a relatively parallel shift across the curve. Overnight volumes were elevated with cash trading at 110% of the 10-day moving-average. 5s were the most active issue, taking a 40% marketshare while 10s were a distant second at 25%. 2s and 3s combined to take 22%, each managing an 11% share. 7s took 10%, 20s <1%, and 30s 4%. We’ve seen selling in 5s and buying in 10s.
In as far as YESTERDAY goes, a couple of words from some fan favs.
John Authers: Boomerang Rally Hints at Deeper Market Troubles. History suggests that such dramatic reversals happen only when something is amiss.
First up is from Marko K @ JPM who was out with his typical BTFD type of support. Turns out he wasn’t wrong (despite the ZH snark). His note,
24 January 2022
Market worries around rates and corporate margins are overdone
… Market worries around rates and corporate margins are overdone: The recent pullback in risk assets appears overdone, and a combination of technical indicators approaching oversold territory and sentiment turning bearish suggest we could be in the final stages of this correction. While the market struggles to digest the rotation forced on it by rising rates, we expect the earnings season to reassure, and in a worst case scenario could see a return of the “Fed put”.
On Bonds,
Bonds were mixed over the week as an initial sell-off was unwound amid weakness in risky assets and rising geopolitical tensions. In the US, in next week's FOMC meeting we expect the Fed to signal a high likelihood of a rate hike in March as well as a continuation of the taper pace announced in December. While positioning is more bearish and the expensiveness of bonds relative to fair value has been reduced, medium-term we see room for real rates to rise from still depressed levels given tightness in labor markets and we stay short 10y USTs.
And finally, from DBs early morning Reid, a link and a picture
Yesterday I published my monthly chartbook called “The road to the next recession” (link here). With inflation rampant, the US employment and output gaps as good as closed, the Fed playing catch-up, and the yield curve flattening, it’s fair to say that the classic ingredients for the next recession are falling into place. However the chartbook suggests those waiting for the cycle to roll over imminently will likely have to be patient …
… This morning Asian markets are trying to come to terms with the sharp down, sharp up and then down move and are trading lower. The Kospi (-2.86%), Nikkei (-2.14%), Hang Seng (-1.59%), Shanghai Composite (-1.12%) and CSI (-0.80%) are all around the lows for the session as we type. It could be all change by the time you read this though.
Reviewing the US session in more detail now and cyclical sectors staged an impressive rebound, led by discretionary (+1.21%), energy (+0.55%), and industrials (+0.53%) stocks while defensives lagged, with the three worst performing sectors being utilities (-1.03%), health care (-0.37%), and consumer staples (-0.35%). Itwas interesting that the reversal was so broad-based. With a market this concentrated among mega-cap stocks, it’s usually safe to assume a few big names drove the changes in the headline index, but the FANG+ index was actually lower by -0.91%. Amazon was emblematic of the broader move, however, declining more than -5% intraday before finishing +1.33% in the green, but it looks like its fortunes were tied with the broader recovery in discretionary stocks than its status as a mega-cap. At the end of the day, 320 stock prices advanced. Much like the turns-for-the-worse last week, the reversal in fortunes came absent a clear catalyst, which is much more common when volatility is this high. Speaking of this the Vix index of volatility also took an intraday round trip, increasing +10.08pts before ending the day just +1.27pts higher at a still-elevated 30.12pts, right around levels seen during the initial Omicron outbreak.
This late rally left European bourses behind, with the STOXX 600’s decline (-3.81%) marking it the worst daily performance since June 2020, with indices slumping across the continent including the DAX (-3.80%), the CAC 40 (-3.97%) and the FTSE MIB (-4.02%). After the US rebound but the Asian falls Stoxx futures are only +0.7%.
The current high volatility in markets comes as the FOMC are set to begin their two-day policy deliberations today.
The year-to-date selloff in risk assets was sparked by the release of the December FOMC minutes in the first week of January, when investors took fright at the possibility of a more hawkish Fed over the coming months. So will Powell change the mood tomorrow night? With inflation at 7% that's tough but we might get an idea of how much financial conditions tightening will frighten the Fed and how much they are actually comfortable with.
While markets are certainly concerned about the Fed and other central banks right now, the market also has to contend with the backdrop of an increasingly hostile geopolitical environment, with tensions ratcheting up continuously between Russia and the West. Reports note both sides are increasing their troop presence and putting current troops on higher alert within the region, while western leaders including Presidents Biden and Macron, Chancellor Scholz, and Prime Minister Johnson reportedly had a productive call on western cooperation on Ukraine issues. Separately, there was a meeting of EU foreign ministers that was joined by US Secretary of State Blinken, and the EU reiterated its warning that “any further military aggression by Russia against Ukraine will have massive consequences and severe costs”. The latest developments saw Russian assets lose further ground yesterday, with the Ruble down -1.68% against the US Dollar, whilst Russian equities underperformed globally, with the MOEX Russia index down -5.93% by the close but before the US bounce. Meanwhile European natural gas futures surged again given the higher perceived risk of conflict, with the benchmark future up by +17.75%.
… Amidst the woes for markets more broadly, sovereign bonds were fairly subdued, with the long-end of the Treasury curve selling off from intraday lows in line with the turn in risk. Yields on 10yr Treasuries increased +1.3bps to 1.77% (1.755% in Asian), with real yields declining -3.8bps but breakevens cancelled out the decline by rebounding alongside equities late in the afternoon, ending the day +4.9bps higher. Breakevens moved with risk assets on the day, so the price action seemed to reflect the broader growth outlook rather than incremental updates to the Fed’s inflation-fighting bona fides, having already declined -22.9bps from the start of the year’s hawkish pivot.
In line with the turn in risk, the 2s10s US yield curve bounced from intraday lows of 70.3 bps to increase +4.5bps to 79.5bps at the close. However it's back down to 74.5bps in Asia but 2-3bps of this is a 2yr benchmark change. The rally in the front end of the curve left the market pricing 3.83 Fed hikes this year, the lowest level in more than a week. Faith in the Fed put is alive and well. The probability of March liftoff dipped as well, with the market pricing 98.5% chance of a rate hike. As I wrote in my latest chartbook, the 2s10s is one of the best recessionary indicators and a classic late-cycle signal, and it’s lost around half its steepness in less than a year, having peaked at 157.6bps at the end of Q1 2021. However don’t let’s get too ahead of ourselves. It hasn’t inverted yet so recession is likely someway off yet even if we're moving in that direction. Over in Europe, sovereign bond yields wound up the day a little lower, having missed the late selloff, with those on 10yr bunds (-4.2bps to -0.11%), OATs (-2.8bps) and gilts (-4.5bps) seeing declines, thus coming off their recent highs last week that saw 10yr bund yields back in positive territory at one point in trading.
AND from the chartbook mentioned / linked above, this visual stood out to me,
QT interrupted one of the biggest bull markets in history…. Will it have a similar impact this time? Note though it took 9 hikes and a year of QT for turmoil in markets…
Dunno why, but I quite like these visual reminders of prior CB interference and various markets … There are, of course, OTHER visuals going ‘round out there on the intertubes and this calendar of events comes from head of the muppets,
and can be found HERE. This timeline then would imply rapid V-shape economic v-bound persists and, well, puts paid to JEFF’s trackin’ in realtime,
■ The JEF US Economic Activity Index was stable last week after declining by more than 10 points over the prior 3 weeks.
■ The downside momentum bodes poorly for January data and points to an outright contraction in activity at the start of the new year. The first official data release will be January payrolls due a week from Friday, and we see high probability of a negative print.
■ As for Q1 GDP, we have penciled in a 1.5% growth rate for Q1 GDP, and our index suggests downside risk to that forecast. That said, we believe the recent weakness is driven by Omicron and distorted seasonals, and not by fundamentals. We remain constructive on growth prospects beyond Q1.
Anxiously awaiting ‘reopening #4’ so that CBs don’t feel need to lob MOAR at markets and consumers … Speaking of CB interference, on this day, Bernanke set a 2% inflation target (2012).
...In a historic shift on 25 January 2012, U.S. Federal Reserve Chairman Ben Bernanke set a 2% target inflation rate, bringing the Fed in line with many of the world's other major central banks.[24] Until then, the Fed's policy committee, the Federal Open Market Committee (FOMC), did not have an explicit inflation target but regularly announced a desired target range for inflation (usually between 1.7% and 2%) measured by the personal consumption expenditures price index.
Anyways, that’s all for now. Off to the day job…