while we slept; jobs are a lagging indicator; 'the employment report is wrong' -UBS; 'Dash for Cash' (biggest 1d INFLOW TO SHV since 2015); gdp vs GDI -FRED
Good morning … Over the years when I was IN the ‘game’, I never understood the pre NFP guesses, the CONsensus, if you will, and the ensuing mea culpas if/when a NFP print was far off the ‘mark’.
IF I could read only one thing ahead of the days data — and likely AFTER it would still be appropriate — it would be THIS (unedited?) TWITTER THREAD by @EPBResearch
Moving along then with very little else to add BEFORE the NFP, here is a snapshot OF USTs as of 715a:
… HERE is what another shop says be behind the OVERNIGHT FLOWS with a morning comment, “Jobs not Done”
Treasuries are unquestionably heading into the August payrolls report in a bearish state of mind. If nothing else, today’s session will provide a meaningful challenge to the peak rates thesis (in 10s and 30s). Assuming a solid round of jobs gains the operative question becomes whether 3.25% is a buying opportunity or a compelling reason to position more aggressively for higher yields as the final month of Q3 unfolds. As our client survey shows, investors are eagerly awaiting an inflection point in Treasuries with a strong willingness to chase a rally and below-average interest in selling strength. We’re certainly sympathetic to this bias and will offer the observation that the Fed’s recent hawkish rhetoric reinforced the fact there is still significant work (read hikes) to be accomplished and has further compressed TIPS breakevens as investors’ gain increasing confidence in the Fed’s commitment to bringing inflation back in line with the 2% target. Given the current outright level of PCE, a swift return to target isn’t in the offing, but one isn’t necessary from the Fed’s perspective as long as the trajectory confirms monetary policy is having its intended impact…As the setup for today’s numbers has left 10-year yields >3.25% and the 2s/10s curve comparatively ‘steep’ at -25 bp, our bias is in keeping with this month’s survey response; join any post-payrolls rally, but remain sidelined in the event a stronger-than-expect print triggers another bout of bearishness. We’ll also be watching risk assets as a limiting factor for the extent to which yields can back up; after all, stocks are decidedly in the ‘good news is bad’ mode that we expect will persist until at least the FOMC meeting.
… OVERNIGHT FLOWS
Treasuries remained weak overnight as 10-year yields moved above 3.25% and buying interest remained scarce. Overnight volumes were modest with cash trading at 81% of the 10-day moving-average. 5s were the most active issue, taking a 30% marketshare while 10s were second at 29%. 2s and 3s combined to take 27% at 20% and 7%, respectively. 7s managed 10%, 20s 1%, and 30s 3%. We’ve seen modest buying in 7s and 10s.
… and for some MORE of the news you can use head over TO Finviz and to help weed thru the noise, kindly check out Harkster.com
A couple items from the ‘Global Wall St. inbox’ (and the web) to help keep you occupied before the big data point, well, THIS from UBSs Paul Donovan
The employment report is wrong
The health of the US labor market is very important to the US economy. US consumers are supporting growth only because they are using savings and credit to offset catastrophically negative real incomes. They are prepared to use savings and credit because they have job security. If that job security is lost, then the US would move abruptly from slowdown to slump as spending suddenly stops.
This should make today’s US August employment report extra important. Unfortunately, we can say with complete confidence that the data will be wrong. Firms are reporting a boom in hiring. Workers are reporting no hiring at all. Markets will react in a Pavlovian fashion to the headlines, but this is a blurred image of the US labor market today.
US July durable goods and factory goods orders are due. The ISM sentiment survey signaled falling manufacturing orders, but it signaled falling orders in June too (and orders boomed then). Production is feeding the rapid global growth in inventories as consumers slow demand for goods.
Euro area producer price inflation for July will be energy price inflated. Most sectors seem to be able to raise prices far faster than they are increasing wages (producer prices are the prices most firms receive, not consumer prices).
And from BBG,
The weekly fix: traders poised in case jobs data revive bonds
Even If You Knew, What Would You Do?
Friday brings the all-important US August employment data, among the last top-tier economic prints before the Federal Reserve’s September gathering. After Jerome Powell’s hawkish performance at Jackson Hole last week, the tired cliche of “good news is bad news” has worked its way back into the lexicon — the idea that a stronger-than-expected number would hit risk assets, given that Fed’s quest to quell inflation.
Economists are expecting that US employers added 298,000 jobs last month and that the unemployment rate remained at a five-decade low of 3.5%. But even if you had a crystal ball and knew what 8:30 am Eastern would bring, would you know how to trade it? Bloomberg’s Vildana Hajric and I asked six pros that question ahead of the big day.
From the perspective of risk assets, there’s the case to be made that good news will be bad news, according to Chris Zaccarelli of Independent Advisor Alliance, as the market is taking to heart the “stern talking to” it got from Powell on Aug. 26:
For that reason, we think a strong jobs report will be a reason for a market selloff on Friday.
Which means that the flipside is also true, and that bad news is good news, says Prosper Trading Academy’s Scott Bauer:
That is a sign then for the Fed that OK, it’s starting to happen and maybe they don’t have to be as aggressive. And if the Fed’s not as aggressive, the market’s going to rip higher.
The August numbers land in a beaten-up bond market, with 10-year Treasury yields climbing more than 20 basis points this week to about 3.25%, while 2-year rates touched the highest level since 2007.
But even with the selling pressure, BMO Capital Markets’ informal pre-jobs survey found that 12% would buy into a rally should Friday’s numbers lead to a drop in yields — the largest read since November 2019.
“Willingness to join a bid coming out of payrolls was the most topical takeaway from this month’s pre-NFP survey,” BMO’s Ian Lyngen wrote. “The takeaway being that a move toward lower yields after this week’s backup is seen as having room to run.”
Not How High, But For How Long
In case Powell wasn’t clear enough last Friday, the drip-feed of hawkish Fedspeak continued this week. Minneapolis Fed President Neel Kashkari was extremely straight-forward — he was “happy to see” how stocks puked after Powell’s speech — and Cleveland Fed President Loretta Mester laid out her vision of how the next 16 months will go.
“My current view is that it will be necessary to move the fed funds rate up to somewhat above 4% by early next year and hold it there,” Mester said Wednesday. “I do not anticipate the Fed cutting the fed funds rate target next year.”
The “hold it there” comment is interesting in the context of recent Fed history. The central bank lifted rates to an upper bound of 2.5% at the end of 2018, only to cut rates six months later. The 2006-2007 hiking cycle ended with the Fed holding at the the terminal rate for over a year, while the 2000 campaign had a seven month pause.
“To me, the signal is that they’re saying, look, we do not plan on cutting again as soon as possible,” Bespoke Investment Group global macro strategist George Pearkes said. “The market is pricing that they’re going to spend one meeting, maybe two at terminal and then start cutting, and they’ve explicitly said, no, we’re not going to do that.”
There’s also the wrinkle of the Fed’s balance sheet runoff, which is scheduled to kick into its highest gear this month. It’d be counterintuitive to cut rates while whittling down its holdings — which could imply a longer plateau for the fed funds rate…
… Dash for Cash
In any case, exchange-traded fund flows seem to show that the bears have the upper hand. This week’s leaderboard is particularly telling: the top four fixed-income funds with the biggest outflows are investment-grade and junk bond ETFs as of Thursday. The $41 billion Vanguard Intermediate-Term Corporate Bond ETF (ticker VCIT) is leading the way with roughly $1 billion in withdrawals.
Broadening the aperture from just ETFs tells a similar story. Investors yanked $5 billion from US high-yield funds for the week ending Aug. 31, the second biggest outflow this year, according to Refinitiv Lipper data. US high-grade funds posted roughly $4.6 billion in outflows.
An even more impressive sum of money is being funneled into cash-like ETFs. After snapping an eight-week streak of outflows last week, the $19.2 billion SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) is on track to take in about $1.9 billion this week through Wednesday.
Meanwhile, the $21 billion iShares Short Treasury Bond ETF (SHV) -- which Bloomberg Intelligence’s Ira Jersey points out is often used as a money-market alternative -- saw its biggest one-day inflow since 2015 this week.
“People are looking at cash rates of nearly 3% and are coming to the conclusion that they can just park money there, reinvest in what will likely even be higher rates in 3 months and wait for credit spreads to widen,” said Michael Contopoulos, director of fixed income at Richard Bernstein Advisors. “It’s pretty clear to us that the credit cycle is over and that the rally this summer was really built on fairy tale dreams of a soft landing and easier Fed.”…
From the CHARTS department, THIS from Chris Kimble
S&P 500 Posting Big Bearish Reversal In August
AllStar Charts asks / answers
Heading into Q3, we wanted to play a mean-reversion bounce in US treasury bonds. A long list of reasons supported this position:
US Treasuries experienced their worst H1 in history (or close to it).
Bonds were finding support at their previous-cycle lows from 2018.
Commodities and inflation expectations peaked earlier in the spring.
Assets that benefit from rising rates (financials) were making fresh lows.
Global yields were pulling back.
And, quite frankly, our risk was well-defined. We can’t ask for much more. For us, the greater risk was not taking a swing at this trade in the event bonds ripped higher…
Two months later, bonds across the curve are taking out their 2018 lows. The market has proven our mean-reversion thesis wrong. But we can live that because we manage risk responsibly.
It’s the most important part of playing this game.
Easily, the second-most important is to remain flexible.
As investors and traders, we have to be able to change our opinion on any given market, especially when the data no longer supports our thesis!
We’re going to check that box today as our outlook pivots lower for bonds heading into Q4. Basically, if US treasuries are below their 2018 lows, you’ve got to be short!
These charts all look very similar, as it all comes down to the prior-cycle trough marked by the 2018 lows.
It doesn’t matter what duration bond we’re outlining. Those former lows are our line in the sand.
First up is the 30-year Treasury bond futures:
After an impressive bounce off the June lows, T-bond futures have slipped back below their 2018 lows at 136’16. As long as it’s below that level, we want to be short with a target of 127’23.
Next, we have the long-duration bond ETF $TLT:
TLT also rebounded higher after undercutting its prior-cycle lows. These were the bounces we wanted to ride higher back in July. But, now, it’s back below those critical former lows near 112.
It’s simple: We can’t be long below that level.
Instead, we like TLT short if and only if it’s below 112 with a downside objective of 101.50.
Again, these charts are all very similar, so I zoomed in on the 10-year T-note for a different perspective:
Like many US Treasuries, the 10-year T-note bounced higher after taking out its prior cycle lows. In the process that followed, it formed a multi-month inverted head-and-shoulders pattern.
That reversal pattern failed yesterday, as bears pushed price below the low of the right shoulder. We want to get short below the pivot low of 117’14, targeting 111’16.
Here’s the corresponding ETF $IEF:
Interestingly, IEF has not undercut its former 2018 lows of 99.50. It’s actually the only chart in today’s post that hasn’t.
If and when it does, we want to sell weakness on a breakdown with a fresh target near the 2011 lows around 91.
As we move down toward the shorter end of the curve, the further the bonds get from their 2018 lows. The five-year T-note is a great example:
It broke back below our risk level of 112 last week, leading the way lower. Our outlook is bearish as long as it’s below that key level, targeting near 103.
In the event the five-year breaks back above those crucial former lows, we can’t be short.
Also, a failed breakdown in the 5-year would call into question the downside resolutions further out on the curve. So we want to keep an eye on the five-year as it often leads in either direction.
Last but not least, we have the three- to seven-year US Treasuries ETF $IEI:
IEI is breaking down below its prior cycle highs at 118.15. We want to get short below that critical level, targeting 113.
It’s simple: If bonds are below their prior-cycle highs, we’re short. The fact that the vast majority of these markets trade below their 2018 highs tells us one thing.
Interest rates are still on the rise.
This is critical information regarding the broader intermarket landscape. If risk assets experience another bout of selling pressure while rates continue to rise, the only place to hide will be the dollar.
Whether another leg lower for stocks will come to fruition is unseen. But the currency market has been rewarding dollar bulls for months now.
And the bond market is instructing us to sell Treasuries.
It’s something to keep in mind as we head into what is seasonally the worst month of the year, September.
Finally some updated thought process from the algos running the St. Louis FRED ‘research / blog’ asking / answering THE question on all OUR minds as well as those at the F(r)ed
Is the economy growing? Depends on how you measure it : GDP vs. GDI
One of the most watched U.S. economic indicators is the growth of real gross domestic product (GDP). A similar but lesser-known economic indicator has also been in the news lately—real gross domestic income (GDI). According to the Bureau of Economic Analysis, both real GDP and real GDI measure the real output of the U.S. economy. Real GDP measures the value of goods, while real GDI measures the income of employees and corporations. In theory, the growth rates of real GDP and real GDI should be equal.
Lately, this hasn’t been the case. The FRED graph above displays the compounded annual rate of change of real GDP and real GDI over the past 10 years. As the graph shows, growth in GDP and GDI have both slowed recently and have also diverged, with real GDP growth turning negative and real GDI growth remaining positive.
What’s going on here? Although there’s no consensus, a few possible explanations include
measurement error
missing data
sampling errors
non-sampling errors such as survey nonresponse
business cycles
Although the statistical discrepancy tends to change quarter to quarter, some scholars have found predictability in this change. When GDP and GDI data are revised, the revisions tend to be smaller for GDI, which may make it a more-accurate indicator than GDP. See Owyang (2016) for more details. For example, GDI growth is currently higher than GDP growth; in the past when this has occurred, GDP has typically been revised up.
There’s room for debate on whether GDP or GDI should be the primary economic indicator for determining the health of the economy. GDP is released in a more timely manner, which may explain why it garners more attention. However, it’s clear that both measures of economic output offer valuable information on the health of the economy.
I HOPE to have somewhat more over the weekend but, THAT is all for now. Off to the day job…Good luck as you plan your NFP trades and TRADE your NFP plans!