while we slept (o/n volumes ~70% avg); soft landings; "Bear Flip" vs the ECB
Good morning…this past weekend I was looking at the longer-term (monthly) trendline (broken) on 30yy. This morning I’ll begin the new day and week with an updated WEEKLY look at 10yy (all the cool kids like 10s for whatever reason),
Momentum (slow stochastics, bottom) appear to be at / nearer overSOLD levels and the market has taken a little stp back from October 2018 levels (ie near 3.25%). Watching those closely into and more importantly AFTER CPI Friday and weeks end.
Meanwhile, the FT reporting this morning that,
ECB to firm up plans to ward off bond market stress
Council members likely to commit to counter any turmoil triggered by higher rates
Interesting, for sure. ECB meeting already important and now a touch more?
Seems that the evil speculators are about to test the thesis (IF one believes that USTs are following EZ govies following USTs — see latest CFTC visual below).
Meanwhile, eased restrictions in Beijing lifting all lifting equity futures here as well as bond yields a bit. NFP is but a distant memory already?
… here is a snapshot OF USTs as of 713a:
… HERE is what this shop says be behind the price action, you know,
WHILE YOU SLEPT
Treasuries are modestly lower and the curve modestly flatter as the UK returns to work and re-joins the legions waiting for Friday's CPI release. DXY is modestly lower (-0.12%) while front WTI futures are modestly higher (+0.45%). Asian stocks were mostly higher, paced by China's tech names (Hang Seng China Enterprises index +3.2%), Eu and UK share markets are mostly higher (SX5E +1.3%, SX7E +1.65%) while ES futures are showing a strong opening (+1.1%) here at 7am. Our overnight US rates flows saw a 'tepid' start to trading in Asian where a few block trades in FV's were the apparent excitement. Indeed, overnight Treasury volume was below average across all benchmarks and ~70% of average overall.… China: Beijing opens up restaurants and cinemas as curbs ease BBG China's May services PMI (Caixin) contracted for the third straight month (41.4 in May versus 36.2 in April) RTRS …
… Tsy 2's have gone sideways within a 2.44% to 2.78% (using closes) range since April 14th's close and 10's look happy between 2.71% and 3.00%- where they've spent the lion's share of the time since April 14th too. All this leaves us focused on the more recent range boundaries as potentially key support and resistance levels- trying to stay above the range noise in between. Moreover, this FT piece resonated this weekend as it describes how dispersion in stock performance has created opportunities for hedge funds and other active accounts FT We'd guess that 'reversion-to-mean' trades in rates will also be a hot choice for such investors this summer as we lily pad leap from one inflation and JOLTS print to the next... At least we have Tsy and Corp supply to wade through and to pass the time until Friday's CPI reveal.
… and for some MORE of the news you can use » IGMs Press Picks for today (6 June) to help weed thru the noise (some of which can be found over here at Finviz).
On top of a few observations from the sellside offered this weekend, a couple more things which have hit the inbox since, which may be of some interest.
First from Barclays,
Macro House View Weekly: In search of a soft landing
Solid data are helping to allay fears of recession in the US, but the outlook is murkier elsewhere… Look out, too, for May US CPI (Fri). We expect a headline rise of 0.7% m/m (8.3% y/y) and 0.4% m/m (5.8% y/y) at the core, which would be about two-tenths softer than April. An upside surprise could support the USD. But downside surprises tend to bring larger FX responses. The market is also pricing more than 40bp for the September FOMC already, likely limiting USD gains. For now, the strong dollar could weigh on lower-quality US credits with significant non-USD revenue…
… Oil: We increased our Brent price forecast by $11/b for 2022 (to $111) and $23/b for 2023 (to $111), and turned constructive with respect to the curve and consensus. A larger and sustained disruption in Russian supplies is now our base case. The Blue Drum: Collateral damage, 6 Jun 2022
For another perspective on SOFT LANDINGS — Goldilocks,
Prospects for a Soft Landing: What Could Make the Fed’s Job Easier or Harder?
That was all from page 1 and from p2,
… We also consider alternative scenarios. If wage growth and job openings do not normalize at all on their own, the required reduction in labor demand would more likely entail a recession. If instead the fading of one-off factors reduces wage growth more substantially or participation recovers more strongly, the Fed’s job would be easier and recession risk would be lower.
So to reiterate, Goldilocks’ latest global views as per Hatzius & Co, the US is,
Still on the Same Narrow Path (to a soft landing)
We continue to see the US economy on a narrow path to a soft landing. The 390k increase in nonfarm payrolls in May beat expectations, but the unemployment rate has now been flat at 3.6% for three months, the underemployment rate U6 edged up again, and average hourly earnings registered another benign 0.3% gain. Moreover, job openings have started to decline. The official JOLTS series dropped sharply in April and timelier private-sector measures suggest that this drop continued in May. More anecdotally, many technology firms seem to be cutting back on new hiring and job openings, although we note that the job openings index in the NFIB small business survey showed a surprising rise in May.
And since on the topic of SOFT LANDINGS, John Authers’ morning missive on soft landings a good read and has an excellent visual which is worth its weight in … gold? bitc? whatever you’d like,
The Path to a Soft Landing Is Getting a Little Easier
It isn’t inevitable that policy makers will crash the economy in their efforts to bring down inflation, even though the task remains fiendishly difficult.… What About the Banks? (Or Non-Banks?)
What are the problems with this? If interest rates can rise without directly crashing demand, there remains a risk that they can trigger a financial accident bad enough to create a recession. This would fit the model of the two worst US recessions of the last hundred years, the implosions of 1929 and 2008. As shown in the following chart produced by Ian Harnett of Absolute Strategy Research Ltd. in London, a Fed hiking cycle more or less invariably ends with a financial failure of some magnitude:Lightning almost never hits in the same place twice, or at least not twice in a row. At different points in history, crises have afflicted the UK secondary banking system, Wall Street investment banks, emerging market debt, large industrial groups, or the sovereign debt of euro-zone countries. In the typical pattern, the sector that causes the crash is rescued at great expense, and then regulated in a way that makes sure it won’t crash again. Then, financial engineers get to work, and risk and leverage move elsewhere. When the Fed next starts to hike rates, we discover that leverage has gone just where regulators should instead have been focusing their attention…
No Monday FUNday would be complete without MSs stock jockey in chief,
Revisions Headed Lower but It Takes Time as US Dollar Enters Picture
Negative Earnings Revision Cycles are Slow to Play out….. As expected, earnings revision breadth has moved into negative territory but is not negative enough yet to take NTM EPS down. In the absence of an obvious shock like a recession, companies are slow to guide down. This time should be no different which means stocks can hang around current levels until 2Q earnings season when the next leg lower is likely to begin and end. With MSFT guiding lower on FX headwinds, we screen for companies most/least vulnerable to a stronger dollar and discover the market is already onto this theme.With EPS revisions for the overall market dipping into negative territory, we look at revisions at the industry level...Real Estate has seen the strongest revisions over the past 4 weeks. Food Beverage & Tobacco, Commercial and Professional Services and Materials have also seen a positive change in revisions. The weakest revisions have come from consumer and tech industry groups. Food & Staples Retailing revisions have collapsed over the past 4 weeks as concerns over cost pressures hit the space. Consumer Discretionary has also seen continued weakness in revisions over the past 4 weeks. This weakness has been driven by Consumer Durables & Apparel and Retailing. Tech Hardware has also seen weakness in revisions breadth as of late.
The largest S&P 500 weights have outperformed the most during the Covid era...The largest 5% of S&P 500 stocks are trading at a 40% median premium to pre-covid levels compared to 17% for the broader index. One could say that the market has worked efficiently with the largest and most stable companies acting the most defensively within the index. However, this potentially presents a downside scenario as well where these stocks could be the final shoe to drop before we exit the current bear market.
… However, if earnings revisions don't reaccelerate (our view), we think the price remains wrong with the equity risk premium at 290bps as compared to our fair market value of 345bps. This is why we still think it will be difficult for the equity market to make much upward progress this summer/fall from current levels. Either the price needs to come down to reflect the earnings risk or the estimates need to fall. We think both will happen over the course of 2Q/3Q earnings season as companies come to the confessional one by one. With MSFT highlighting the risk from currency, we think investors hoping for a quick reversal of earnings revisions breadth may be disappointed (Exhibit 4).
Finally, back TO Bloomberg for the latest read on (spec / levered) UST positions and the, “Bear Flip”
… Hedge funds are once more betting against benchmark Treasuries, at least one gauge of positioning shows. Net leveraged-fund 10-year Treasury futures positions turned negative for the first time since January 2021, according to the latest Commodity Futures Trading Commission data. The move comes as benchmark yields climb back toward 3%, as traders renew their focus on the path of Federal Reserve rate hikes. Of course, the data is not necessarily a clean view of fast-money bets, with some of the positioning likely part of broader strategies and a hedge for wagers on cash Treasuries. The next major catalyst for US yields will be Friday's inflation figures for May, with investors looking for indications that US price pressure has peaked. CPI is projected to post an 8.3% annual gain from an 8.3% rate a month earlier. That's not much of a slowdown, or a margin for error, and both bulls and bears will fancy their chances of a surprise. That suggests a choppy week ahead with 3% the key focal point for the global bond benchmark.
… THAT is all for now. Off to the day job…