while we slept; "headlines dominate details"; sentiment GAP signals further inversion; curve "Flashing orange"; 'bonds pain is equities gain' (aka TINA)
Good morning. It seems to ME that markets desire HOPE and belief and had forgotten (at least yesterday) that quote,
Trust, but verify
Trust, but verify (Russian: Доверяй, но проверяй, tr. Doveryay, no proveryay, IPA: [dəvʲɪˈrʲæj no prəvʲɪˈrʲæj]) is a rhyming Russian proverb. The phrase became internationally known in English after Suzanne Massie, an American scholar, taught it to Ronald Reagan, then president of the United States, the latter of whom used it on several occasions in the context of nuclear disarmament discussions with the Soviet Union.
Interesting that this crops up on the anniversary of the day Reagan was shot (1981).
Meanwhile, just another day in paradise where another day and another BOJ purchase in defense of the current (soon to be moved?) line in the sand
RTRS: BOJ stands its ground on benchmark yield as global rates pressure builds
FY end in a couple days…
Here is a snapshot of UST rates, prices and moves as of 729a
And HERE is what another shop says be behind the price action, you know,
WHILE YOU SLEPT
The Treasury curve has pivoted steeper (2s30s +6.4bp) around a little-changed belly overnight as the BOJ announced a series of unscheduled bond purchases (see link above) ahead of FY-end there and quarter-end here. DXY is lower (-0.4%) while front WTI futures have rebounded by ~2.5%. Asian stocks were lower in Japan and higher elsewhere, EU and UK share markets are UNCHD (FTSE 100) to lower (DAX -1.25%) while ES futures are showing -0.2% here at 7:05am. Our overnight US rates flows saw early real$ selling out of Asia as prices climbed while our desk flows later flipped to better real$ buying all across the curve. As my desk colleague noted, "bottom line is that the market positioning is heavily skewed to shorts, and the completion of the week's supply as well as upcoming month-end buying has been a good a reason as any for unwinds to occur." Overnight Treasury volume was ~135% of average overall with some relatively high turnover see in 3yrs (196%) and in 7's (172%).… After the Tsy 2s10s curve went briefly inverted yesterday, thoughts shifted back to the late summer and fall of 1981 and the massive , over -200bp (1y-30y) inversions seen at least intraday back then. The data for that period is surprisingly poor (maybe my memory is too); we didn't quite yet have spreadsheets at that time. But here is one source LTT that, while hardly granular, offers some sense of the huge curve turbulence witnessed in that period as back-back recessions (1980 and 1981-1982, FRB ) hit as a consequence of the Fed's inflation fighting policies…
… Staying with curves, this morning's lone attachment is an update of our favorite curve-related chart. It's the post-Conference Board look at Treasury 2s10s curve and (Expectations-Present Situation). Current conditions rose 10 points to 153 while expectations fell over 4 points to 76.6, as you know. Well, that mix of outcomes is catnip for the 2s10s flattener, as you can see in the attachment. A related thought is that most of the troughs in the curve over recent decades have seen a distribution period/range near the lows-- save for the sharp reversal seen in the late 1980's. The point being that the downtrends in the two time series ('freefalls' might be a better word) appear on rails still, a pretty strong hint that probes deeper in curves may be likely in the weeks/months ahead.
… and for some MORE of the news you can use » IGMs Press Picks for today (30 March) to help weed thru the noise (some of which can be found over here at Finviz).
Now as HOPE springing eternally — at least as far as a WAR strategy goes — well, it usually leaves much to be desired.
Paul Donovan of UBS described yesterday quite well with three words,
News of a possible Russian de-escalation in Ukraine supported risk markets. Oil moved somewhat lower. This is not a ceasefire, and may be a tactical move. Expertise in trading financial markets does not necessarily correlate to expertise in military matters; at this stage, market moves should be taken as volatility from trading headlines.
… US fourth quarter GDP is revised (it will be revised further in the future). As pre-war data it will get less attention, though should show that local consumption was normalizing. What is missing is detail about how different income groups are faring—an issue that is increasingly important in the US.
Moving along to a few other things from global Wall Streets inbox this morning which caught MY eyes,
Barclays CURVE update: Flashing Orange
The yield curve has flattened sharply and quickly to levels seen only toward the ends of previous hiking cycles. We discuss what the yield curve is telling us, the historical experience with inversions, whether this time is indeed different, and if curves have flattened enough to warrant the Fed's attention.
Our key takeaways:
The accelerated timeline of flattening reflects expectations that the Fed will hike aggressively over the coming year and finish the cycle much sooner. This is being exacerbated by expectations that rate cuts will start immediately after the terminal rate is reached, as well as the low neutral rate relative to previous hiking cycles.
On the surface, a downward-sloping yield curve simply points to expectations of rate cuts by investors and does not indicate why. Investors might be worried about a recession and expect the Fed to cut rates. Alternatively, they could be expecting the Fed to cut rates in response to falling inflation. Both are plausible explanations, though history suggests the former is more likely.
Historical experience suggests that an inversion of the 2y10y curve does not signal an imminent recession; the lag from inversion has been about 20 months, and in several instances, it has been longer than two years. 3m10y inversion has historically been a better signal, likely because the 3m10y curve better captures the monetary policy stance.
Ahead of past recessions, the inversion of the 3m10y curve persisted for months and was deep. Even for false positives, a 3m10y inversion has predicted an easing cycle. The current steepness of the 3m10y curve implies a one-year-ahead recession probability of less than 5%. However, should the 3m10y curve follow the forwards, that would increase to about 40% in a year's time. To put that in perspective, it has typically not risen far above 40%.
Is this time different? We find the usual explanation of low term premium, due to factors such as the Fed's balance sheet, unsatisfactory. If anything, adjusting the nominal curve for term premium dampens the signal. We believe this is because investors are willing to accept a low term premium when they are worried about downside risks to growth, suggesting that the term premium also contains information about the outlook.
The steepness of the real curve relative to the nominal curve is unusual and cautions against interpreting the inversion of the latter as a recession signal. However, our proxy for the real curve was quite steep in the 1960s and 1970s and performed much worse in signaling recessions. We suspect that the downward-sloping inflation curve also contains information about the economic outlook, and the nominal curve is therefore a better proxy.
Finally, we do not expect Fed rhetoric to change in light of the flattening of the yield curve so far. The Fed has generally been dismissive of the signal from curves such as 2y10y. In the previous hiking cycle, FOMC participants grew concerned only after the 3m10y curve inversion persisted at deeply negative levels.
Barclays latest: Equity Strategy – Who Owns What
Bonds' pain is equities' gain
Beyond short covering, it is the exodus from bonds that is fuelling equity buying. With 'TINA' unaltered, more upside pain is possible given low HF positions and bearish sentiment, particularly on Europe and Banks/Autos/Leisure if Ukraine risk recedes. But post the big leg up in rates, the focus will soon shift to earnings.… Bond selling is the key source of equity buying, but earnings will also matter soon again. Amid the high uncertainty, equity inflows continue unabated. In fact, the lack of central put is more challenging for fixed income, which is being sold aggressively. Equities are in contrast favoured as an inflation hedge (TINA), and we note that previous rate-hike cycles saw similar flow rotation away from bonds to equities. However, post the sharp repricing higher in rates, and with bond positioning very bearish now, yields could stabilise, so fundamentals may prevail more going forward. Although lower P/Es offer some cushion, the Q1 reporting season may turn out to be a ‘make it or break it’ moment for equities, given growing recession fears. While not our base case, if a recession became reality, neither LO nor retail investors are positioned for it, given near-record equity allocation.
… Pension fund rebalancing has likely helped too
As we had expected (see Equity Market Review - Oil and rates in the driving seat, 18 March), pension funds were likely reallocating from bonds to equities recently, given the latter’s big underperformance until a couple of weeks back. Since then, we have seen a logical bounce in flows that validates this view. But given the very strong outperformance of equities vs. bonds lately, the catalyst is likely largely exhausted now.… So despite all the concerns about rising rates on valuations, the fact is so far equities are performing well as an inflation hedge. Although the equity-bond yield gap is off from the highs, it is still positive and/or above long-term average in most regions, which means equities can still absorb a further increase in rates, before looking outright expensive in relative terms.
We note that rotation from bonds to equities has also been observed among the retail community. As discussed above, retail keeps buying stocks. However, it is selling bonds now.
Moving from a large British operation TO large French bank where BNP is offering up how / why you’ll know it MAY be DIFFERENT THIS TIME (FF above 2.50%)
The large French bank has ALSO jacked it’s rates forecasts,
… We raise our rates forecasts for end-22 to 2.80% for 2y UST and 2.70% for 10y, with 275bp of hikes expected to invert the 2s10s UST curve, despite QT.
… We still expect higher rates, curve flattening and higher breakevens but much of the asymmetry has diminished, positioning remains very short (PRISM) and demand can re-emerge at higher rates particularly LDI from pensions in surplus…
Moving right along, the following couple charts INCLUDING one from a large German operation (DB) comes from John Authers’ latest, “Markets Need to Lose the ‘Peace in Our Time’ Reflex”
… Now, an inverted curve should, in anything like normal circumstances, be taken as a signal of a coming recession. In current circumstances, as I argued yesterday, it isn’t so clear. The amount of intervention in bond markets over the last decade dulls the signal. But recession risks are plainly increasing. To return to consumer confidence, mentioned above, there is an interesting recession indicator to be derived from the gap between the two best-known surveys, published by the Conference Board and the University of Michigan. Both are well respected, but they track slightly different indicators. The Conference Board’s is more weighted toward measures that tend to keep flourishing in late cycle, while Michigan’s tend to fall earlier in the cycle. The fact that the Michigan number has just dropped to an all-time high deficit compared to the Conference Board suggests very strongly that we are right at the end of the cycle (and therefore due for a recession):
As Matthew Luzzetti, chief U.S. economist for Deutsche Bank AG, points out, the spread between the confidence measures tends to mimic the spread between two- and 10-year bond yields. The sentiment emanating from bond traders looks identical to the sentiment revealed in the consumer surveys:
This is decent evidence that the inverted yield curve isn’t a deceiving indicator, and also suggests that inversion has further to go. We have a bond market that responded to encouraging geopolitical news by positioning for a recession.
A quick update from the technical chart department as this from 1stBOS, hit yest and is worth consideration into month/quarter (and Japanese FY)end tomorrow,
10yr US Bond Yields look increasingly close to a peak in our view after another neutral session…
Now, SHOULD 10s rally (nobody’s forecast), the firm suggests they’ll be ready, willing and able to turn tactically bearish (2.285, stop 2.10). And they’ve got more…
In as far as WHO might be (has has been)BUYIN, a chart from Hedgopia:
US Bond Market Amidst Interesting Dynamics
…As the Fed gets ready to move away from this market, creating less demand for these securities, foreigners are buying more. In the 12 months to January, they bought $205.6 billion in treasury notes and bonds – the highest total since September 2014 (Chart 3).
… Caught in these dynamics, the 10-year yield has scored some important breakouts. If they are real, rates could still head higher. Immediately ahead, a giveback is due.
In closing, a bit of good news / counter (not really, as everyone remains largely positive on the economy — ie, it’s different this time — despite the curve. Here’s an argument where one pundit (who’s now fully and presumably comfortably retired for YEARS)says
Bond market says no recession in the cards
… Chart #4 compares the level of the Vix index (the "fear" index) with the level of the S&P 500 index. Rising fears almost always accompany market declines, and vice versa. Currently the level of fear is declining and the stock market is recovering, presumably because tensions in the Russia/Ukraine war are subsiding.
Technically, the Vix index measures the effective cost of buying options (buying options is an effective way to reduce your exposure to risk). Very high Vix levels make buying options very expensive, which is another way of saying that it becomes very expensive to hedge one's exposure to risk. So high levels of the Vix are a clear sign of just how nervous the market is. Today the market is breathing easier than it was just a few weeks ago, and investors are more willing to take on exposure to risk.
I don't see anything in these charts that makes me worry about a near-term recession.
Leaning on VIX and VIX only seems to me to be a bit like driving the car thru the rear-view mirror. Reflexive with QUITE a lag but still, a good chart that makes quite a good point.
WATCHING, as always and … THAT is all for now. Off to the day job…