while we slept; only the shadow (fed funds) knows
Good morning … How ‘bout that bond auction?
Not ALL was lost - there was SOME sort of demand given tail (ie concession) as JEFF points out
… Near-Record Low Dealer Takedown
… Tails in 30-year bond auctions are pretty common, especially for new issues. Prior to today, 4 of the last 5 auctions stopped short, due in part to the cuts to the auction sizes since last year. Today's tail brings things back in line with historical norms, where new issues generate solid stats aside from the tail …
… Dealers took down 10.8%, 0.3 ppts above last month's record low. Usually, there is some kind of tradeoff in strength between Indirects and Directs, but today both classes of bidders were stronger than average …
PICKED THE WRONG WEEK to begin that ‘quest for duration’, eh? Note DAILY momentum quickly into overSOLD territory and on verge of bullish cross
TLINEs and support redrawn ahead of UoMICH data @ 10a. Weekly visuals of 30yy aren’t too ‘duration quest’ friendly … here is a snapshot OF USTs as of 720a:
… HERE is what this shop says be behind the price action, you know,
WHILE YOU SLEPT
Treasuries are higher and the curve flatter with a lion's share of the overnight gains occurring in the past 30mins (since 6:10am NY time). DXY has rebounded (+0.35%) while front WTI futures are lower (-1%). Asian stocks saw solid gains in Japan after their return from holiday (mixed elsewhere), EU and UK share markets are modestly higher while ES futures are showing +0.4% here at 6:40am. Our overnight US rates flows saw Japan return to much higher rates than they left on Wednesday, sparking dip-buying from real$ across the curve (concentrated in the long-end with particularly high volume in 20yrs seen ahead of Wednesday's auction). Overnight Treasury volume was decent at ~150% of average overall with relatively elevated turnover seen in 30's (249%) and 20's (226%) using a 6:45am snapshot.… we show in today's first attachment that while Treasury 2yrs broke their bull trend a week ago on NFP day... 2's still don't seem to know what to do as they respect local range support near 3.29%... But what we can say with some confidence is that the bull phase in bonds seen this summer (one that has perhaps helped to lift risk asset valuations) appeared to end yesterday. Will rates retrace higher and maybe back toward their mid-June move highs or will rates de-trend into a sideways chop ? We have no idea except to point out that an important tailwind for bond prices has likely disappeared after these multi-month bull trends zippered into the ether despite optically price-supportive, back-back inflation prints...
… the Treasury 2s5s curve is now also attempting to break its well-defined flattening trend in place since... you guessed it, mid-June. This flattening trend guided/paced an over 60bp flattening of this curve over just two months. Now this downtrend is threatening an upside breakout this morning after momentum flipped up in favor of steepening at yesterday's close. This development, and those discussed above, all lend credence to notion that trends in oil prices matter a lot/most for our rates market now- at least,or especially, between tier#1 data points and FOMC gatherings? Meanwhile, yesterday afternoon one of our senior vol traders noted that the 2-day collapse in upper left vol was the biggest he's seen in roughly a decade.
… and for some MORE of the news you can use » IGMs Press Picks for today (12 Aug) to help weed thru the noise (some of which can be found over here at Finviz).
Here are a few additional items/links/things to consider into the day and weekend ahead.
Barclays latest weekly rates writeup
Small beginnings
In the US, we maintain our recommendation to position for the outperformance of the belly on the curve as with the Fed committed to 2% inflation, the risk of a hard landing remains elevated…
Moody’s weekly Market Outlook:
Fed Isn’t Popping Champagne
…All told, it was a better CPI report but inflation is still high and costly. With the CPI up 8.5% on a year-ago basis in July, the typical American household now needs to spend $460 more per month to buy the same goods and services as it did last year.
BBGs weekly fix: Fed hawks prey on bond buyers lulled by CPI dip
HERE is DBs latest effort / ESTIMATE of ‘shadow’ FF, which takes into account ability to ease (and hike later) policy with rates pinned at zero … steepest jump since 1981,
… . Over the past year, our shadow rate has risen by 4.3 percentage points (Figure 2). This jump is the sharpest rise in this metric since the Volcker Fed in 1981.
Guggenheims latest Macro Alert
The Inflation Moderation We Expected Should Continue
… An even more important sign for the medium-term outlook was the moderation in core services inflation. Rent inflation remains red hot but cooled down a bit with rent declining from 9.7 percent annualized to 8.8 percent and owners’ equivalent rent down from 8.7 percent to 7.9 percent. These two categories alone are still contributing 2.5 percentage points to headline CPI so need to slow much more, but more timely measures of market rents (such as Zillow and Apartment List data) point to more moderation in the months ahead. Recent business surveys such as the ISM Services index also point to more slowing in services inflation.
Paul Donovan of UBS with a words on UoMICH,
… US Michigan consumer sentiment data is subject to political polarisation distortions. The inflation expectations component has been falling and could well fall further. This is not because consumers believe in the Federal Reserve (many do not know what the Fed is or does). It is because gasoline prices have fallen, and US consumers believe five cents off the pump price today guarantees lower inflation in five years.
A couple / few stock AND bond charts from CitiFX HERE with this one of 2yy jumping out at me,
The price action on the 2 year yield is very interesting as we have pretty much ranged between 2.70% and 3.30% since mid- June including just ahead of the recent Employment and CPI prints. We now look in danger of once again retreating towards the lower end of that range again in the weeks ahead having failed to break out after payrolls and solidifying that after CPI.
The 2-year yield remains an important signaling indicator for us re Fed expectations.
And a 4-pack of equity charts from the CHARTS DEPARTMENT of Chris Kimble,
U.S. Stock Market Set To Receive Key Message From Fibonacci Level!
… Today’s chart 4-pack includes stock indices facing respective 38.2% retracement levels of the downturn this year: Nasdaq 100 (QQQ), NYSE Composite, Russell 2000, and Wilshire 4500.
Well, that is all for INFLATION PEAKED? WEEK …
Actually, THAT is all until next week.
There will be NO update this weekend and all regularly scheduled spamming of the inbox should return Monday morning, when we learn what ever happened while we slept … For now, though its off to the day job…