while we slept; inflation surprise; cyclical spending; fallin' rates - bullish or bearish? bullwhip effect
Good morning … festivities over, back to work.
Summertime and we’re talking / pricing in rate CUTS? Not if you look at that wicked bad 2y and equally not good 5y auctions! Surprised? 7yrs up next — today @ 1pm — and UP ~25bps in the past 3 sessions, one might make the case that a concession is being built in,
Tell you what — 7yr auction today (a much better litmus test of demand) and if IT goes well, I’ll be surprised.
Speaking OF surprises, Bloomberg
… Equities have come roaring back along with bonds, though the drivers for stocks seem rather bizarre to say the least. It’s understandable that bond holders would cheer up at increased speculation the US is heading for recession, but the sudden and strong carry through for shares seems puzzling in that context. Especially with Goldman Sachs seeing signs that consumer belt-tightening will start passing through to corporate earnings.
The key hope for investors is that maybe inflation is set to peak, a narrative that bloomed briefly earlier this month before it was dashed when the May US CPI data hit. So far, the data picture continues to show inflation readings as about the only economic releases that are soundly topping estimates — the rest are coming in below projections as interest-rate hikes start to bite. Equities are unlikely to hold their recent rally for long unless that data pulse picture starts to flip.
For more on rate CUTS and things of this nature, check out John Authers’ latest
Boy, I missed a bunch!
… here is a snapshot OF USTs as of 726a:
… HERE is what another shop says be behind the o/n price action, in a morning commentary titled, “Testing Tokyo”
…Overnight Flows
Treasuries drifted lower during the overnight session in a classic, uninspired summer trading environment, Overnight volumes were predictably light with cash trading at 52% of the 10-day moving-average. 10s were the most active issue, taking a 30% marketshare while 5s were a close second at 29%. 2s and 3s combined to take 28% at 18% and 10%, respectively. 7s managed 8%, 20s 1%, and 30s 4%. We’ve seen buying in 3s and 5s, as well as two-way flows in 10s.
… and for some MORE of the news you can use » IGMs Press Picks for today (28 June) to help weed thru the noise (some of which can be found over here at Finviz).
Jumping right in TO Global Wall Street inbox — a few items which caught my eyes:
BBGs very own Dr. Evil (sorry, Vince … love ya!): "Catastrophic Risk To Stocks And Bonds": Fed's Balance Sheet Caused Inflation, Not Low Rates”
… The chart below shows it was not the level of interest rates that contributed to higher inflation, but the Fed maintaining the size of the balance sheet at too-high levels for too long.
If economic growth slows as many expect, the influence the balance sheet has on GDP will be even greater and may pose potential catastrophic risk to stocks and bonds.
As growth slows, so must the balance sheet to maintain the equilibrium between supply and demand. The market will decide the level of rates; the Fed can just follow along.
1stBOS notes we’re on: The edge of recession
We are sharply reducing our growth expectations from now through the end of next year. Real GDP growth should slow to 0.8% in 2022 and 0.8% in 2023 (Q4/Q4). Rapid Fed tightening, rising risk premia, and slower global growth all make a prolonged US slump likely.
A recession is now a clear possibility, but in our view there are still buffers that should prevent a worsening growth outlook from spiraling into a broader downturn, at least through next year.
Most importantly, household and business finances remain healthy – making a modest slump in cyclical spending more likely than an abrupt contraction accompanied by forced deleveraging.
Uneven growth throughout the pandemic also increases the odds that a recession can be avoided. Services spending is still well below trend, and supply chain stress should lead to backloaded investment and restocking.
These buffers against recession are a finite resource – a downturn is much nearer than we expected at the start of the year, and it would only take some modest incremental shocks to make it a likely outcome. A worsening global growth slowdown and another leg lower in risky assets are key risks in the near term. Stubbornly high goods inflation or accelerating wages later in the year would likely push the Fed to be even more aggressive about slowing growth – raising the likelihood of a contraction next year.
MSs stock-jockey: Falling Rates-Bullish or Bearish?
Falling yields and lower oil prices have lowered the terminal rate for the Fed. Whether this is bullish or bearish depends on one's interpretation. Last week, the market took the bullish view which may last a few more weeks before the reality of lower earnings arrives and the bear market resumes.
UBSs Paul Donovan: Stockpiling problems?
… The US releases May wholesale and retail inventory data. Global supply of goods is at an all-time high, but demand for goods has slowed. This has allowed companies to build inventory as insurance against supply chain problems. However, some firms now have “involuntary” inventory builds, which are a potential source of goods price disinflation or deflation.
A little bit of price disinflation or deflation sounds pretty good about now.
Finally, one last link via ZH specifically as he’s target’d TARGET (where Thing 2 currently works for…)
Michael Burry Agrees: "Bullwhip Effect" Will Force Powell To Pivot On Rate Hikes And QT
…Today, none other than the "Big Short" Michael Burry, founder of Scion Asset Management, picked up on this and tweeted that the “Bullwhip Effect” happening in the retail sector will lead to the Federal Reserve reversing rate increases and its Quantitative Tightening policy.
We only wish that instead of linking to some CNN story about retailers considering letting customers keep items they return rather than having to take the items back and add them to already bulging inventories, Burry had linked to us but we'll still take it.
It's not the first time in recent months that Burry has raised concerns about the economy. In May, he tweeted that the current market conditions are "like watching a plane crash."
And remember,
… THAT is all for now. Off to the day job…