while we slept; inflation seen as biggest problem since 1979 -NFIB; consumers trading down and missing payments; commodity (dis)inflation;
Good morning … HERE are a couple / few 10yy levels I’m watching ahead of tomorrows CPI
TLINE @ 2.856% and then, above there, the 50dMA @ 2.979% should provide support. Momentum — slow stochastics, bottom panel — are offering ZERO signal …
The NFIB printed @ 6am. Let this headline settle in
HERE is the report from the NFIB and without ‘narrative’ …
A picture is worth a million words (inflation, right?)
… here is a snapshot OF USTs as of 713a:
… HERE is what another shop says be behind the price action, you know,
WHILE YOU SLEPT
Treasuries are modestly lower with the belly of the curve (and German bunds which just saw a technically un-covered 2y Schatz auction) leading the way lower overnight. DXY is lower (-0.35%) while front WTI futures are higher (+0.75%). Asian stocks were mixed, EU and UK share markets are modestly lower on balance (SX5E -0.75%) while ES futures are showing -0.15% here at 6:30am. Our overnight US rates flows were unavailable at press time but overnight volumes drop a hint at why the dearth of flow color this morning: overnight Treasury volume was ~48% of average all across the curve.… Of interest too is our next attachment showing an update of the Treasury 10s20s30s 'fly. It, too, has been in a [ up ] channel since early April and after Treasury announced another round of 20's-centric issuance cuts a few days ago, this 'fly has been probing the bottom of its channel . For now, 10s20s30s has good channel support near 63.4bp and topside resistance (support for 20yrs on curve) above 80bp, let's say. We'd guess that a further improvement of 20's versus the curve, and a break below the multi-month uptrend, would lead to a next-leg richer (for 20's), or lower for the 'fly, to the 50bp area. We're watching...
… and for some MORE of the news you can use » IGMs Press Picks for today (9 August) to help weed thru the noise (some of which can be found over here at Finviz).
Now as far as Global Wall Street is concerned and as Friday data dust continues to settle, a few words from ‘our sponsors’
First up is something from the ‘Disinflation Ahead’ group but this one hits home and attempts to speak TO rates (il)liquidity and vol.
US rates liquidity and vol risk premia
Market liquidity has been a prominent theme in US rates year-to-date. Combined with the high level of macro uncertainty, impaired market function has supported the elevated level of rates vol.
In this note, we examine both implied and delivered volatility as a function of liquidity and recent trend. In general, in environments with impaired liquidity, we find that delivered vol often exceeds what's implied when the recent vol-adjusted trend has been modest.
However, yields tend on average to realize within straddle breakeven ranges in periods of poor liquidity. This is likely because poor liquidity, while associated with higher day-to-day vol, doesn't carry strong implications on large point-to-point yield moves over longer (one month) horizons.
… Though the current backdrop falls into this bucket where actively hedging vol shorts tends to fare somewhat worse, the relative lack of momentum in yields over the last month is consistent with a somewhat thinner margin for error for vol shorts in general.
UBSs Paul Donovan YESTERDAY on the,
Last Friday’s US economic data needs to be considered as a whole. Unemployment was the lowest in over fifty years, real earnings growth is horrifically bad, and consumer credit grew dramatically. The positive spin is job security should be high – prime age workers who want to work can find jobs. Job security is a critical factor supporting consumption.
The negative spin is that an increase in payrolls is driven by an increase in labour supply – people need money given the higher cost of living. The combination of the terrible real wage growth (weak pay bargaining) and surge in consumer credit suggests weak household finances are forcing people to borrow more quickly than had been expected…
Good and bad — make of which ever one you’d like, whatever it is you think most important … to your P&L.
THIS NEXT item is interesting as it comes just on heels of the idea that ‘DISINFLATION is AHEAD’ … here’s a global economic comment suggesting,
Too Soon to Price the Fed Pivot
The simple lesson from history is that asset corrections that are primarily driven by tight monetary policy usually end around the point that the Fed shifts towards easing. The big market question has been whether the recent relaxation in risk assets marks a sustained turning point in asset markets.
Our central view has been that it is too early for the market to be trading a full Fed pivot and that the “FCI loop” has not yet been broken, so we have seen the recent relaxation in risk assets as vulnerable to reversal. That process has clearly begun, but likely has further room to run.
On its own, a reversal of Fed relief driven by renewed concerns about inflation persistence would push yields higher; keep curves and the Fed rate strip firmly inverted and perhaps invert them further; provide renewed USD support; and put fresh downward pressure on equities and credit. However, the optimal expressions of that kind of shift—and of any shift to tighten financial conditions—will depend also on how the market is revising its growth views. We think the market has worried too much about imminent recession. But the more the growth outlook improves, the more the Fed will need to make sure financial conditions stay tight.
Even after the recent shifts, this backdrop argues for a mixture of positions that capture renewed concern about near-term inflation risks and a reversal of recent Fed relief, but that—at least together—are fairly neutral to the growth picture. We think that some mix of rate shorts; long positions in inflation and/or longer-dated oil contracts; long USD positions against EUR, JPY and CNH; and short positions in US credit makes sense on that basis. Signs of renewed disappointments in the early activity data for August would argue for cutting oil and inflation longs out of this mix and leaning more firmly into shorts in risk assets after this latest rally and perhaps into broader long USD positions.
In the case that ‘disinflation ahead’ was too clear or bold and to make sure that they’ve got ALL the bases covered, you know, as a 2-handed economist, the firm can and likely will into the future, be sure to tell us they told us so … no matter WHAT the outcome.
Seriously, though, there IS another side of the very same coin … not EVERYONE residing on Global Wall Street says / thinks the same. Here’s a somewhat different point of view,
Persistent inflation to prevent cuts
Inflation should fall gradually in coming months, encouraging a shift towards a more gradual pace of tightening by Q4. We expect the goods sector to lead inflation lower.
However, actually getting inflation to target will be difficult. Inflation stays above 3% through 2023 in our forecasts. Tight labor and housing markets should keep services inflation elevated for the next few years. Risks to inflation expectations are one-sided.
Rate cuts are unlikely in 2023. We expect another 125bps of hikes by YE22, with one additional 25bp hike in Q1 2023. The possibility that we have shifted to a structurally higher and more volatile inflation regime also points to further upside for policy rates in 2023. Should inflation settle around 3-4%, the policy path would likely move up and out: more hikes in 2023 towards a higher terminal rate.
HERE are some ‘charts that caught my eye’ from Katy Huberty of MS … specifically the one which caught my eyes was the 2nd one,
Don’t get me wrong — they are ALL worth a quick click and as far as a close runner up, taking 2nd spot …
4. Global Supply Chains: Improving… and Weaker Demand Is Accelerating the Healing
Finally, heading into Wednesday’s ‘all important’ CPI print, John Authers’ of BBG touches on lots of important topics today including the ‘Monster Beveridge’ curve debate and yesterday’s Fed survey of consumer expectations. THE COLUMN certainly worth a read but to the CPI point, while there seems to be lots of HOPE an inflation PEAK IS IN, its not really shown up in front-end futures pricing as of yet. One reason for this peak ‘flation HOPE — commods
… The fall in commodity prices has now reached the point where some of the main materials are actually down year-on-year (such as industrial metals and raw industrials), or nearly back to zero as in the case of agricultural commodities. Even energy price inflation, year-on-year, has fallen a long way:
So there are a lot of good reasons to expect a lower inflation number on Wednesday. And all of this evidence does suggest that another upside surprise (and we’ve had three months during this inflation scare when CPI came in above the highest estimate) would be a nasty shock.
With all of these aforementioned NARRATIVES in mind, it would appear that state and local employees / retirees are none the wiser based on investments with Global Wall Street and all their expert views. WSJ EXCLUSIVE
Market Rout Sends State and City Pension Funds to Worst Year Since 2009
Simultaneous declines in stocks and bonds hammered the funds in the year ended in June, adding to pressure on government finances
… “It was a really, really bad quarter for investing, there’s no way around it,” said Michael Rush, a senior vice president at Wilshire.
The results underscore the pain felt by many investors in a year characterized by a rare combination: simultaneous sharp declines in both stocks, which are understood to be risky, and bonds, which aren’t and accordingly are often purchased by investment managers as hedges.
But. But … hedges … bonds as hedges…
… That one-two punch has pummeled household and institutional investors alike as the Federal Reserve has pushed short-term interest rates higher to rein in inflation. For state and local governments around the country, the losses will mean higher annual retirement contributions in the coming years, forcing many public officials to raise taxes or other revenues or to cut services …
But never fear, the LONG TERM is not here / now and one must keep eyes on the prize
… “One year is like the pace of a mile in a marathon,” Christopher Ailman, investment chief of the California teachers fund, said at a board meeting last month. “Last year was so positive, it gave us such a nice lead, we could be flat another year and still have a 7% three-year return.”
… THAT is all for now. Off to the day job…