Good morning … The euro hit parity vs USD short while ago (1st time since 2002 -ZH) ahead of this afternoons liquidity event (10yr auction) waking up to a firm / bid bond market with 10yy now back BELOW the Maginot line better known as 3.00%
In as far as WHY, one only needs to look to … stocks and the Euro for a reason.
Investing.com: European Stocks Lower; Ongoing Energy Crisis Hits Sentiment
And then there is the latest from the small biz survey just released where sentiment plunges to 48yr low as inflation worries mount (FoxBIZ). But don’t take anything FOX (biz) has to say, read how bad it was directly from the source. NFIB HERE,
A “severe decline”. Ok then … back TO bonds and 60/40 (still not dead) and how they say bull markets LOVE supply (and secondarily, they and they will be putting that to the test today and tomorrow (thankfully done before THE Open Thursday morning. To whit, ZH on the ‘field of dreams’ moment …
Whether or not we can have similar DEMAND at today’s 10yr and/or tomorrows long bond auction likely more dependent on your view of terminal rates and inflation expectations … and don’t forget,
… This is a low volume, high volatility regime with in both Europe and US with activity in cash, swaps and futures all below historical averages.
… Liquidity declines in the summer (as measure by order book depth) but this year it was close to historical lows going into the summer in both USTs and EGBs => no short term relief expected.
One last item from yesterday which speaks to SUPPLY vs demand (but of a different variety), REDFIN
Think about it and as you we all do (ie nothing without consequence) … here is a snapshot OF USTs as of 725a:
… HEREis what another shop says be behind the price action overnight,
Overnight Flows: Treasuries rallied further overnight with 10-year yields reaching as low as 2.898%. Overnight volumes were near the norm with cash trading at 95% of the 10-day moving-average. 5s were the most active issue, taking a 33% marketshare while 10s were a close second at 29%. 2s and 3s combined to take 26% at 11% and 15%, respectively. 7s managed 8%, 20s 1%, and 30s 3%. In London, we’ve seen buying in 2s and 5s, as well as two-way flows in 10s. During the Tokyo session we saw real money buying into the rally and then some selling from both real and fast money.
… and for some MORE of the news you can use » IGMs Press Picks for today (12 July) to help weed thru the noise (some of which can be found over here at Finviz).
Now as far as what Global Wall St is sayin’ and the narratives they are sellin’, a few items from the inbox which may provide some funTERtainment as the UST supply process continues today as does the wait for the latest from HIMCO.
Barclays on CC spending,
Barclays card data suggest June retail sales declined As the US consumer may start to pull back on spending, retail sales serves as an important indicator of the consumer's health. A novel model based entirely on Barclays' credit card data suggests that June headline retail sales likely fell 0.4% m/m.
Don't ignore Europe's energy crisis The recent bounce in risk ignores the extent to which Europe’s energy crisis has worsened. We remain long the USD, overweight longer US bonds, and underweight risk assets.
Moving along to some thoughts and eye candy from rather large German bank reminding us that global mfg has more downside (so, too, did Lindberg),
We noted a year ago that leading indicators suggested that the peak in global manufacturing had been reached. One year on, the Global Manufacturing PMI has declined by close to 4pts. The same leading indicators imply that the manufacturing slowdown is not over as yet as they are consistent with another 1pt decline to ~51. The potential silver lining could come from the current stimulus in China. China's manufacturing PMI has recovered by close to 6pts in the last couple of months and should have further upside given the latest credit data.
Meanwhile, back at German Bank HQ, they suggest the jobs data ‘solidify case for 75 in July’. GS asks and attempts to answer,
We recently lowered our already below-consensus growth forecast and now expect just +0.4% real GDP growth on a Q4/Q4 basis this year. With incoming data slowing further and Q2 growth forecasts falling, the market narrative has quickly shifted from “Is a recession inevitable?” to “Are we already in a recession?”
Our estimates of the key growth impulses that drive our GDP forecast suggest that the economy is on track for solidly below potential growth over the next year. The main drag on growth in 2022H1 was the decline in real disposable income due to fading fiscal support and rising commodity prices, and that should now turn around as income begins to slowly grow again. But we expect a roughly equal drag on growth in 2022H2 from the tightening in financial conditions.
Have we already gone beyond a deceleration and into outright recession? Some GDP tracking estimates now project negative Q2 GDP growth (vs. GS +0.7%), which would trip the rule of thumb that two quarters of negative growth constitute a recession. However, we are doubtful that the economy is already in a recession. The official definition of recession is a judgmental mix of levels and rates-of-change across several variables, and we suspect that a period of strong labor market recovery would not qualify. In addition, the GDP weakness in H1 has been largely driven by the less persistent and often mean-reverting components, net trade and inventory accumulation…
… We continue to see a 30% probability of entering a recession over the next year and nearly even odds at a two-year horizon. But the softening of leading indicators in June highlights the importance of monitoring more immediate downside risks.
With all this banter back and forth regarding what IS / isn’t a recession, I thought these words from BBG yesterday morningwere worth mentioning,
Later this month, we're going to get the first reading of second quarter US GDP. And it's possible that it will show two straight months of contraction. Right now, the Atlanta Fed's GDPNow model has it at -1.239% for the quarter.
If we do get a negative print, the response is going to be extremely predictable.
Some people are going to scream: "Recession! The definition of recession is two quarters of negative GDP."
And then some financial journalists are going to econsplain that "ACTUALLY two straight quarters of negative GDP is not the definition of recession" and that the NBER uses a range of indicators to call a recession, and that many of them are not indicative of a downturn.
And then there will be accusations of how the media and NBER are protecting The White House, shifting the goalposts, and how it's really out of touch to say we're not in a recession when consumer confidence is down in the dumps like it is right now.
And then others will point out that the NBER doesn't instantly call a recession anyway regardless, and on it goes. Maybe the discourse will last 48 hours before people get distracted and move onto something else.
All that being said on Friday, we got a report of 372,000 jobs added in June, easily topping estimates. The unemployment rate held steady at 3.6%. In fact the pace of job growth has been robust all year, which is not consistent with how most people think of a recession. As Tim Duy of SGH Macro Advisors put it in a note to clients this weekend. "A negative headline GDP number just isn’t a recession during a quarter in which the economy added over a million jobs."
Now again, this doesn't mean the economy is necessarily "good" and for people experiencing diminished savings, shrinking net worth, negative real wage growth, and persistent shortages or delays there are plenty of reasons to be frustrated. But if investment, consumption, and employment are all still growing, it's not necessarily useful to call that a recession, when that's so distinct from past recessionary periods.
HERE is one from the CHARTS department (and 1stBOS) who’s focus this morning is on REALZ
Chart of the Day: 10yr US Real Yields are getting closer to confirming a short-term bearish “flag” continuation pattern following the payrolls beat on Friday, which alleviated some of the recession fears, at least in the near-term. This bearish pattern would be confirmed above .73%, to open up a quick move to our core objective at 1.00% and potentially the 2018 high at 1.17%.
The firm also remains tactically bearish 10yy (notes yields, still above the 55-day average and although a major top is still threatening, this is not our base case) and remains ready to BUY BONDS @ support (3.395%).
Finally, on stocks, so you’ve heard now about what BlackRock is out with and saying (2022 midyear outlook - Back to a volatile future) essentially NOW validating what MSs Mike Wilson’s been sayin’ all along?
The Great Moderation, a period of steady growth and inflation, is over, in our view. Instead, we are braving a new world of heightened macro volatility – and higher risk premia for both bonds and equities. This regime has echoes of the early 1980s, so we’re calling our Midyear Outlook Back to a volatile future. We ultimately expect central banks to live with inflation, but only after stalling growth. The result? Persistent inflation amid sharp and short swings in economic activity. We stay proequities on a strategic horizon but are now underweight in the short run
Interesting chart from the slide deck / presentation and as they say, pictures are worth a thousand words so about that
…Unprecedented leverage In this new world shaped by supply, trade-offs for policymakers become starker – at a time when their maneuvering room has shrunk. Global debt has surged to new highs as governments sought to limit the fallout from the pandemic. This means that small rises in interest rates can have an outsized and painful impact, as the chart shows. The private sector debt is also susceptible to higher rates, especially via housing. All this makes it tougher for central banks to hike rates - and ultimately more tempting to live with inflation.
Oh, ok then. Putting it all together in cartoon form, then as Investing.com does well,
