while WE slept; "Peak in LONG rates in sight"; w/2yy now ABOVE 3.75% (highest since '07), think either 4.45% OR, "Opportunity"; Fed rate cuts remain priced;
Good morning … With the rail strike apparently averted (CNBC) it would appear that the stock market simply yawns,
Good news is now (again) bad? Perhaps it’s that move in rates (higher, again this morning) which ultimately matters most (says a former rates guy)? Never mind … here is a snapshot OF USTs as of 715a:
… HERE is what another shop says be behind the price action overnight…
… WHILE YOU SLEPT
Treasuries are lower and the curve is a hair steeper on a day with little news save for word that the Biden administration has a deal to end the threatened rail strike. DXY is little changed while front WTI futures are modestly lower (-0.5%). Asian stocks were mixed, EU and UK share markets are mixed and ES futures are little changed here at 7:15am. Our overnight US rates flows saw very little client flow during Asian hours as Treasury prices bled further. Interestingly, today's 20-year JGB auction saw the weakest Bid/Cover in a decade ahead of next week's BOJ meeting. In London hours we saw mixed real$ flow (Asian banks in 2's to 5's and EU asset managers looking at asset swaps in off the run intermediates). Overnight Treasury volume was about 75% of average overall with 3's and 5's (~135% of average each) seeing the highest relative average turnover this morning…… this morning's first attachment of Treasury 2yrs illustrates why this observer struggles mightily to find a nearby support for 2yrs. Now above their 2018 cycle and mid-June move highs, 2's are now into their GFC airpocket where I don't see any support of consequence until 4.45% (1H 2007 range low that they haven't re-visited since). I'm sure the Fibonacci guys might have something in between here and there; I'll leave that to them as a non-believer myself.
… and for some MORE of the news you can use » IGMs Press Picks for today (15 Sep) to help weed thru the noise (some of which can be found over here at Finviz).
Now, on the heels of CPI it’s likely LESS of a shock that PPI was hot …
Core Producer Prices Hotter-Than-Expected In August As Services Cost Rise
Fine and dandy … Let us see how or IF any of this ‘flation (that may or may not exist), depending upon who you are gonna believe — your politicians or their press secretaries OR your own lyin’ eyes at <gas station, grocery store, pizza joint> … Here are a few items from the Global Wall St inbox to help funTERtain you ahead of ReSale Tales … First from ABNAmro,
Peak in long rates in sight
Given our recent change in our ECB and Fed calls, we have revised both our US and EU rates forecast.… US rates: Treasury bonds set to rally in 2023
After the recent development in the US economy and inflation, we now expect the FOMC to front-load rate hikes and to reach its peak earlier. We expect the fed funds (upper) rate to peak at 4% in December instead of February. Thus, we expect the 10y Treasury yield to peak a few months prior to the final rate hike as long-term rates already more than reflect those rate hikes and the 4% final rate.Thereafter, we expect Treasury yields to slide from the year-end onwards. Multiple factors are in play here. First, we expect US inflation to cool off with the economy to start showing signs of weakness approaching the end of the year and throughout H1 2023. Thus, we expect rising risk-off sentiment to increase safe-haven demand pushing Treasury yields lower. Second, we expect the Fed to cut interest rates next year as well as in 2024 to come back to the neutral level at 2.5%. Overall, this will lead to lower rates in 2023 and particularly in Q1 2023 where we expect the market to price in additional rate cuts as it currently set the Feds fund rate to reach 3.5% end of 2023 versus 3% in our forecast.
From ABNAmro of Amsterdam TO Switzerland comes an updated ‘house view’
Global Economy Notes: Rates higher for longer with no pivot in sight
Upside inflation surprises have led us to forecast more aggressive central bank hikes. Our conviction is growing that central banks are unlikely to ease next year, even as growth softens. Inflation is now a beast that the central banks need to kill, not tame, even at the cost of recession.
We now expect the Fed to hike rates to 4-4.25% by year-end, and to a terminal rate of 4.25-4.5%, both 50bps higher than our previous forecasts. FX pressure means the ECB and the BoE will err on the side of larger hikes, faster. We now expect the ECB to hike to a terminal rate of 2.5% by Q1 next year, and the Bank of England to a terminal rate of 4%.
Global monetary policy is tightening at its fastest pace since 1989. This is likely to produce a global interest rate structure that will be higher for longer than markets expected just a few weeks ago.
Recession probabilities: US still no, Europe yes. Our updated recession probability models imply a 30% chance of recession 6 and 12 months ahead in the US, and suggest a recession in the euro area is more likely than not.
Higher for LONGER — if today was an auction day I might suggest this move was a concession. From Amsterdam to Switzerland and back to the BANK of the USofA with a comment and a visual helping make (or suggest) a point,
… Highest 2y UST yield since 2007 = opportunity in high quality, short to intermediate duration bonds
Given concerns over one more risk off episode, we have up in quality preference in fixed income. At 3.75%, the 2y UST yield is now the highest since 2007 (Exhibit 9). We see this as indicative of the current attractiveness of fixed income in general and short to intermediate high quality duration in particular. For even more yield with modest give on quality, 3-5y investment grade corporates look attractive at 4.75%. Meanwhile, continued relatively strong performance of leveraged loans in August (Exhibit 1, Exhibit 10) reflects ongoing propensity to manage duration risk with floating rate assets while reaching for yield/taking credit risk in what remains a fundamentally strong economic environment. Some credit deterioration is expected in both loans and high yield bonds as modest recession unfolds, arguing for up in quality exposure here, with preference for BB and B rated bonds. We advocate similar credit and duration exposure in municipals. In all fixed income sectors, we would look to increase duration and credit risk exposure if the modestly higher yield, risk off episode discussed above emerges as expected.
With THAT in mind and the idea of global LONG rates are to be higher for longer and with the front-end ALSO getting clubbed (and perhaps now an “Opportunity”), this is likely a good time for Bernstein Advisors latest note — a reminder of,
The 4 stages of an Interest Rate Cycle
We more than doubled our portfolios’ duration in a single day this summer. Since then, many have asked: If RBA thinks inflation can be persistent and on a secular basis continue to surprise to the upside, why would we overweight long-term Treasuries? The answer lies in the nuances of how interest rates have historically behaved during different economic, profit, and tightening cycles. We believe sentiment has exited Stage 2 and is now in the early part of Stage 3: a period when the market begins to price in lower long-term growth as a profit recession looms.… Stage 3 and 4: Overweight Duration
Stage 3: Catch Up and Inversion
The third stage of the interest rate cycle is marked by profit and economic growth that has begun to moderate and by a Fed that starts to aggressively tighten financial conditions. In the current cycle, the markets have now entered Stage 3, which is often a tricky time for investors. Inflation is high, and growth is still positive, the Fed raises rates often leaving one to assume higher yields across the interest rate curve. However, earnings and economic growth have usually peaked during this period, while the Fed has committed to slowing demand. Consequently, this phase is characterized by curve inversion; higher 2-year yields than 10-year yields, otherwise known as “bear flattening.”Importantly, the front-end of the yield curve represents policy, while longer-dated yields represent growth. At this point in the interest rate cycle, growth should start to matter more to longer dated yields than elevated inflation. Data is often choppy during this transition and market volatility increases as investors adjust to a new paradigm. The 1970s and 1980s have several such examples when interest rates fell despite inflation at 11% and 8% respectively. The common theme during those times were earnings recessions and growth slowdowns.
Stage 4: The End and Steepening
The fourth stage is when the market (and ultimately Fed) price and engage in interest rate cuts. By the time this happens, economic and earnings growth is negative and yields across the entire interest rate curve collapse. During this stage, the Fed cuts interest rates and 2-year yields collapse, causing a resteepening (known as “bull steepening”) of the yield curve. We view Stage 4 occurring sometime in 2023, as we expect the earnings recession to deepen and the effects of a year’s worth of tightening to take hold in the real economy.
On THAT note and with 10yy and high inflation regimes in mind, what then about NAZ? We KNOW they are related SO … to the Chris Kimble CHARTS
Equal Weight Nasdaq 100 Testing Important Bull Market Support!
Here are a couple things from BBG which crossed MY inbox and you may enjoy, too. First from John Authers, a visual (from TS Lombard) of rates 800 year lows
… The net impact of the loose monetary/tight fiscal policy of the last decade was, as Dario Perkins of TS Lombard points out, to drive bond yields to historic levels. And when I say historic, I mean he has a chart to show that long-term bond yields dropped to their lowest since 1314:
Perkins also suggests that central banks will need to go to greater lengths, and spend much time contemplating the morals of what they do, before pressing on with much higher rates. The key is that “independent” central banks are now committing themselves to a course of action that elected politicians will hate, and this will raise constitutional issues:
Weirdly (not weirdly, obviously), politicians – who will want to be reelected at some point – do not share their central bankers’ tolerance for a recession. They see inflation very differently, as a “cost-of-living crisis.” And their natural reflex is to ease fiscal policy to try to cushion the blow. European governments are set to launch another massive support program through a combination of direct income transfers and “price caps” on energy bills: In effect, they will be boosting demand and simultaneously curbing production.
This sets up what Perkins calls a “tug-of-war” between fiscal and monetary policy…
Indeed … as the tug of war continues, here’s an update as to where the sides stand, at least as far as FED PRICING goes, check out THIS from BBG
This week's US inflation shock may have cemented bets of a supersized September Fed hike, but it’s done nothing to dissuade traders that the central bank will be busy cutting rates again next year. In what for me is one of the most important charts today in markets, expectations for a rate cut in 2023 refuse to budge and are edging back toward pricing in a move of 50 basis points. The cuts are mostly expected to happen in the second half of the year. The hotter-than-expected CPI print has also pushed the US yield curve deeper into inversion, with the 2-year/30-year Treasury spread hitting levels last seen in 2000. The moves suggest the bond market continues to expect a US recession as the base-case scenario despite a flurry of recent commentary on the likelihood of a soft landing for the economy.
With THAT markets pricing of The Fed — mechanism — in mind, one last thing from the inbox to help guide you through this blackout period up until the FOMC meeting.
September Flashlight for the FOMC Blackout Period
We look for the FOMC to hike rates by 75 bps at its September 21 policy meeting and for the dot plot to signal no rate cuts in 2023. Furthermore, we expect that Chair Powell will stress in his post-meeting press conference that the Fed's fight against inflation remains far from finished…… At some point, Chair Powell and his FOMC colleagues will feel confident enough that they can slow the pace of monetary policy tightening. With the federal funds rate soon to be above 3% for the first time in 15 years and with QT running at full speed, monetary policy is rapidly moving towards restrictive territory. That said, we do not think the FOMC is ready to slow the pace of tightening yet, let alone reverse course. Chair Powell's speech at Jackson Hole made clear that the Federal Reserve views its fight against inflation as far from finished. We expect a similar message to come through in the post-meeting press conference next week.
In closing and ahead of this mornings ReSale TALES, it is ALWAYS and forever about The Usual Suspects … no, not those but instead, these
… THAT is all for now. Off to the day job…