while we slept; IF 10s > 2.66% then 2.81 and 3.00%? the longest (duration supply) short week
Good morning. Short weeks are often the longest ones of all and with Good Friday market closure (and bond markets shutting down 2pm Thursday), this weeks certainly got ‘that’ feel.
Duration supply (10s and Bonds tomorrow/Wednesday with CPI / PPI, too) kicks off today with 3yr auction and here is a snapshot of UST rates, prices and moves as of 715a…
… And HERE is what other shops saying behind the overnight price action …
WHILE YOU SLEPT
Treasuries have been dragged lower, with the 2s10s curve slightly flatter, overnight by the under-performing UK Gilt and German bond markets after the French election (April 24th run-off) raised uncertainties. DXY is little changed while front WTI futures are lower (-3.3%). Asian stocks were paced lower by Chinese exchanges (SHCOMP -2.6%, CSI 300 -3.1%), EU and UK share markets are mixed while ES futures are showing -0.4% here at 6:50am. Our overnight US rates flows saw selling intensify (real$ in intermediates and the long-end) when Friday's low was taken out during Asian hours. There had been some modest net buying near the open... Overnight Treasury volume was ~85% of average overall with futures looking like they saw a lion's share of activity last night versus the cash markets...…US News: Bank deposits could drop for the first time since World War II WSJ What the T-Bill collateral crunch tells us about trust FT Self-fulfilling expectations of inflation are rising, and a bunch of longer-term inflationary pressures are on the way WSJ The Fed's Mester sees the US inflation rate at above 2% into 2023 BBG US airline flight search trends back to 3-year ago levels Kayak Are we in a Covid surge right now and don't know it? MSN Rising rates threaten an end to the Muni bond boom WSJ
… Our penultimate attachment this morning is a look at our TIPs flows from the hedge fund community. What stands out here is that hedge funds appear to be piling into TIPs as, for example, 5y real rates rates inch ever-closer to levels traded just before the pandemic hit and back toward 2016's low (-52bp) too. David Bieber of RPM fame shared this picture with us this morning and the demand stands out for sure ... Our last picture is a look at how 10y real yields have recaptured their pre-pandemic range low (-0.115) this month. Long-term momentum (lower panel) strongly suggests that even higher real rates lay ahead...
That large German banks early morning read noted
… Overnight in Asia, Chinese stocks are leading losses across the region, with the Shanghai Composite (-2.06%) and the CSI (-2.85%) both losing significant ground as the nation’s inflation figures surprised on the high side. PPI for March came in at +8.3% y/y (vs. +8.1% expected), whilst CPI was up +1.5% y/y (vs. +1.4% expected). Those inflation numbers come amidst continued Covid outbreaks in China, with state media CCTV reporting yesterday that the southern city of Guangzhou would suspend in-person classes for schools from today due to the virus. And in turn that’s contributed to a further fall in oil prices this morning, with Brent crude down -2.28% to $100.44/bbl, which itself comes on the back of two consecutive weekly declines. Other indices including the Hang Seng (-2.49%), Nikkei (-0.70%) and Kospi (-0.48%) are similarly lower this morning, as are futures including those on the S&P 500 (-0.58%) and the DAX (-0.74%). That comes against the backdrop of a continued bond selloff given concerns about monetary policy tightening, with 10yr Treasury yields gaining +6.9bps this morning to reach 2.769%, its highest levels since early 2019.
… and for some MORE of the news you can use to help weed thru the noise (some of which can be found over here at Finviz).
Now, allow me to apologize for my ‘radio silence’ over the weekend.
Thing 1 turning 21 Friday which led to a roadtrip to/from Boston early Saturday followed by first ‘date night’ with the Missus in, well, too long. We stayed out far too long at a local tavern watching a friend who is the drummer for BackTrack … here’s video from Stone Pony (NOT the venue from this past weekend).
In any case, with some family arriving in town yesterday afternoon, it has been somewhat hectic in a good way and successfully kept me away from global Wall Streets inbox (as well as The Masters).
A few things which caught my eye and which you may have seen (ZH?) by now but which bare some repeating,
DB: Updating our US forecast and QT outlook - 10Y to 3.3%. This week, we revised our US rates outlook, lifting the 10Y yield forecast from 2.45% to 3.3% for year-end. We now see yields peaking at that level for this cycle, which is slightly above their 2016-2019 cycle peak.
Yet same shop — econ dept — out with slide deck which title struck me. This time is not different for Fed tightening fallout … The mild recession we anticipate should nonetheless lead to a meaningful rise in unemployment, which peaks above 5% in 2024. This contraction in aggregate demand and loosening of the labor market in turn allows inflation to fall much closer to target by 2024, with core PCE ending the year around 2.2% in Q4/Q4 terms. With the unemployment rate receding only slowly following the peak, inflation should continue to moderate, falling to the Fed's 2% objective in 2025, which is beyond our forecast horizon at this point.
DB on stocks, you know … During Fed Hiking Cycles where this slide obviously caught me eyes …
MSs econ team acknowledging, Slower Growth Ahead. We have revised our forecasts for real GDP growth this year and next, largely reflecting the effects of higher oil prices and tighter monetary policy. On balance, we have marked down our forecast for real GDP growth this year by 1pp to 3.0% 4Q/4Q and next year by 0.9pp to 2.1%.
MSs stock jockey chief (Wilson) weekly, Listening Carefully-to Stocks; 1Q Worse Than It Felt; Charts to Chew on. When stocks and bonds send mixed signals, we listen to stocks more attentively. The underlying message is clear: Stay Defensively oriented because growth is going to disappoint. 1Q was tough but even worse under the hood. We chew on some charts to consider as we enter a pivotal earnings season.
… Exhibit 3 shows the 10 year Treasury yield is simply a function of where the market thinks Fed funds rate will be at it's peak for this cycle--the Morgan Stanley Terminal Rate. As already noted, this has been one of the sharpest resets we have ever seen. In prior episodes when the Terminal rate, and consequently 10 year yields, has adjusted so abruptly, it marked a top for both. In short, the bond market does the tightening for the Fed long before it actually raises rates. In that sense, it acts as it's own governor because higher rates will ultimately slow inflation, and the economy, which is the Fed's desired goal. Of course, this means eventually lower expectations on how high the Fed will be able to raise rates before it has to pause/stop. This is the way it always works and as our rates strategists have recently noted, the bond market is almost probing for what the level of rates is that will ultimately slow growth and subsequently reverse as it always does. In their latest note, they argue bond yields have likely entered the "overshoot" zone with back end rates most likely to consolidate recent gains as growth slows (Welcome to the Overshoot).
A large Swiss operation with roots in Beantown offered it’s quarterly economics presentation which exudes HOPE we’ll be, Avoiding stagflation … We have reduced our 2022 global GDP growth forecast, from 4.0% to 3.5%, compared to the start of the year. Revisions are strongest in countries most exposed to Russia and Ukraine, or which are highly dependent on oil and gas imports. The 2022 growth impact is greater for the eurozone (from 3.8% to 2.8%) than for the US (from 3.3% to 3.2%). China faces downside risks from Covid lockdowns, but we maintain an above-consensus forecast (5.9%) since regulatory reforms and additional stimulus are helping to counteract the impact of the pandemic. The 2022 global inflation forecast has been revised up from 4.4% to 6.4%, with broad upward revisions across economies. The further rise in inflation, much of which predates the outbreak of the war in Ukraine, substantially affects the outlook for monetary policy. The Federal Reserve has recently shifted in a far more hawkish direction. Our own forecast has also shifted, and we now foresee the Fed raising the funds rate by 50 basis points in early May, followed by a further 125 basis points in 2022 and 100 bps in 2023; the latter is obviously contingent on the absence of additional significant negative shocks to the economy. Fed tightening will add to pressure on other central banks, especially in Latin America, and even the ECB is likely to ‘lift off’ in December unless the conflict in Eastern Europe escalates substantially.
Finally from THE namesake bank of this fine country (Global Rates Weekly - Bill back better), comes this bit of chartOlogy noting 2.66% 10yy is THE ‘last “bull market” line’ — which by the looks of things this morning, we’re WELL ABOVE:
• Residual bearish momentum has stretched even further as 10Y yield reached the 200m SMA at 2.66%. Outlier momentum at key level favors top watch, no top yet.
• The 200m SMA (2.66%) is the last line guarding the forty year bull market. Mean reversion strategies trade against this and trend following strategies push through.
• Above 2.66% would emphasize the big and bearish head and shoulders pattern (and trend) with bigger picture upside of 2.81% and 3%
Here’s an economic calendar the best in the strategy biz is a LINK thru TO this calendar,
… and lets NOT forget EconOday links (among the best available and most useful IMO), GLOBALLY HERE and as far as US domestically (only) HERE …
THAT is all for now. Off TO the day job!!