while WE slept; QQQs tied TO bond yields; "The consumer is king, and unhappy"; UST liquidity WORSE than pandemic AND post-Lehman (so says JPM...)
Good morning … With CPI to garner all the attention, things like GS apocolyptic warnings and layoffs to come will thankfully be ‘buried by the lead’ SO …
"Production Has Fallen Off A Cliff" - Goldman Reportedly Prepping For Layoffs
And as these layoffs are buried, lets hope yesterday’s poor UST auctions are as well. This afternoons 30yr will at least have the benefit of knowing whatever is the CPI and may provide a way to position for This Thursday’s ReSale TALES …
Momentum remains overSOLD but the (regressed)TREND higher remains in place. Standing by, ready to find a thicker crayon in order to redraw everything …
Ahead of this mornings CPI (more in a sec), exactly how’d you THINK 3yr auction would go, esp as there was also to be a 10yr auction couple hours later?
Ugly, Tailing 3Y Auction Leaves Bitter Taste Ahead Of Today's 10Year Sale
But as far as that 10yr auction hours later, you know, with curve flatteners all the rage,
Ugly, Tailing 10Y Auction Prices At Highest Yield In More Than A Decade
Oh. Ok. Nevermind.
ahead of CPI, this one from ZH (sorry) and, well, the FRBNY caught my eyes
... moments ago the latest NY Fed consumer expectations survey confirmed what we already know, namely that both one- and three-year-ahead inflation expectations posted steep declines in August, from 6.2% and 3.2% in July to 5.7% and 2.8% respectively.
Remarkably, the more relevant, 3Y-inflation expectation, is back to August 2020 levels when the Fed was viewed as keeping rates at zero for years and years, and when growth assets were exploding higher having priced in QE pretty much in perpetuity. All of which means that consumers are now bracing for the coming recession…
But, hey, don’t take ZHs snarky words on it, perhaps you need someone with a British accent writing about it cuz, you KNOW he’s smart. BBGs John Authers
Markets need a less rosy view of inflation news
… Stronger evidence that a wage-price spiral can indeed be avoided came from Monday’s publication of the New York Fed’s latest Survey of Consumer Expectations. This found expectations for inflation three years hence had dropped below levels that were typical before the pandemic, while expectations for the next year have dipped sharply from a very high level. This data should unambiguously encourage the Fed that it is succeeding in reining in angst over inflation:
So some degree of optimism over inflation is justified. But the question the equity market may be ignoring is what it would take to convince the Fed to stop hiking and even start cutting rates again. It’s hard to see how it can cut unless inflation is plainly on its way back to 2% (and nothing can prove that as yet), or economic growth starts to decline noticeably (the reverse has happened in the US as the oil shock has eased during the summer), or there is a clear-cut financial accident. There may be arguments that hiking much further would be dangerous, but the current buoyancy of the stock market ironically argues against them.
What is troubling is the way that the stock market is ignoring one of the key indicators from the bond market — the real yield…
… here is a snapshot OF USTs as of 704a:
… HERE is what another shop says be behind the “Low Conviction Conditions”
… WHILE YOU SLEPT
Treasuries are higher with the belly outperforming this morning ahead of today's CPI and Tsy supply events. DXY is lower again (-0.4%, see attachments) while front WTI futures are higher (+1.2%). Asian stocks were modestly higher with Korea (+2.75%) playing catch-up, EU and UK share markets are modestly higher while ES futures are showing here at 6:50am. Our overnight US rates flows saw a predictably dull Asian session with Treasury prices rebounding on a block TY futures buy and apparent buying in the 20y sector too. Our flows were mixed (RM buying in the long-end, balanced with RM front-end selling). Overnight Treasury volume through 7am looked so low (~25% of ave) that I hit my screen to see if it re-set higher. Not sure I'd trust it but it does fit with the anecdotes from Tokyo...
… and for some MORE of the news you can use » IGMs Press Picks for today (13 Sep) to help weed thru the noise (some of which can be found over here at Finviz).
Couple other things which may / may NOT be of interest ahead of this mornings CPI. First one is something I missed but which was pointed out to ME by the folks growing the tree of wisdom … aka, WISDOMTREE … where bonds = NAZ = bonds
Stock Market Implications of Bonds’ Margin Call
… The NASDAQ is taking its cue from the long bond yield. It’s down 23%, and the S&P 500 Growth index is tracking it with a 21% loss. This puts the relative haven status of the S&P 500 Value Index, which is down “only” 7%, into perspective.
Figure 1: The NASDAQ Is Tied to Bond Yields
Stock market earnings look suspect. I think that is a problem for the very high beta stocks that tend to populate growth baskets…
OK, great so now that we’re all (still / continuing to be) watching QQQ, we turn TO a large German bank suggesting economically, and from a CONSUMER CONFIDENCE point of view, well, the worst is yet to come.
The consumer is king, and unhappy
Consumer and business surveys have been painting diverging pictures of the economic outlook for the last couple of years. While businesses across advanced economies came out of the pandemic with plenty of confidence, consumer confidence recovered only briefly before dropping back to record lows. By the early summer, this confidence gap had reached four standard deviations--a once-in-a-century dislocation. Something had to give, and we noted that statistical analysis of the historical relationship suggested that business confidence was more likely to catch down to consumer confidence. This is now happening. The survey data since June shows business confidence slipping, pulled down by abysmal sentiment on the consumer side. And although consumer confidence is getting close to hitting bedrock, it is far from bottoming out yet. Hence, as far as overall confidence goes, the worst is likely yet to come.Business confidence has begun catching down to consumer confidence over the summer
Feel better heading into holiday season now that back to school buying done? If you do, well, you shouldn’t … And since we’re NOT feeling too good AND this mornings update is going over a few things which are not necessarily NEW ‘news’, THIS ONE FROM PIMCO likely worth another look. The ‘BeachBoys’ ask,
How Can Policymakers Improve the Functioning of the U.S. Treasury Market?
Widening participation in the Fed’s standing repo facility and bond buying programs could mitigate another liquidity crisis in the Treasury market.SUMMARY
• The U.S. Treasury market has proved vulnerable to serious disruptions in recent years, when intense selling pressure overwhelmed securities dealers’ balance sheets, causing liquidity to evaporate.
• We believe policymakers should enact changes that lessen reliance on primary dealers to make markets in Treasuries, including by broadening access to the Fedsponsored standing repo facility and bond-buying programs.
• Policymakers should also, in our view, tweak existing bank capital regulations to allow dealers to make markets in Treasury bonds more readily.
• We would like the entire Treasury market to move to a platform where asset managers, dealers, and non-bank liquidity providers are able to trade with each other.… CONCLUSION
A well-functioning U.S. Treasury market is critical for global capital markets. Given the Treasury market’s growth, the current structure leaves it vulnerable in times of stress to further bouts of the extreme price volatility seen in March 2020. In our view, changes are urgently needed to lessen reliance on primary dealers to make markets, while increasing banks’ capacity to hold Treasuries. Without these changes, we believe Treasury market liquidity will again disappear during bouts of turbulence, ultimately leaving investors and the U.S. government exposed.
#Blockchain ?
GotBITCOIN ?
Nevermind … You are prolly still not that worried ‘bout the UST market and thats OK. Whatever you do, DONT read THIS ONE FROM BBG (via ZH)
Liquidity Fated To Scupper Smooth-Running Of Fed's QT
By Simon White, Bloomberg Markets Live commentator and reporterLiquidity constraints and uncertainty around investor preferences mean that QT is unlikely to operate as smoothly as optimists predict. Bill Dudley in a Bloomberg Opinion article today suggests that QT is unlikely to “cause any major disruptions”. This implicitly makes assumptions we cannot be certain of.
In simple terms, the heavy lifting of the Fed’s balance-sheet decline can be done by the ~$2.5 trillion held in the reverse repo facility (RRP), or the $3.2 trillion held in bank reserves. If the decline is predominantly met by a fall in the RRP, this is the best, least disruptive outcome. Reserves held by users of the RRP -- at least 80% money market funds (MMFs) -- are mainly “low velocity” and therefore their loss should have a more limited impact on the broader economy.
But the Fed has no control over how its balance sheet declines. When the Fed allows a Treasury to mature, it has no agency over how the Treasury pays back the Fed, or who buys the re-issued debt.
If the reserves ultimately come from a MMF, then they can draw down on their RRP at the Fed and the net impact is limited; but if ultimately a tax payer meets the obligation, then this involves a decline in bank reserves, negatively impacting economic activity.
So far, reserves are down almost 25% from their 1-year peak while the RRP is down only 3%.
Yet Dudley posits that the RRP is likely to do much of the heavy lifting as QT continues, since tightening liquidity leads to higher bank-deposit rates, and therefore money will flow seamlessly from MMFs to banks -- meaning bank reserves rise as the RRP declines. However, this presupposes banks will be happy to take on the extra reserves and clients will be happy to deposit them.
That’s a big if. Reserves have a balance-sheet charge associated with them, and since the massive expansion in the Fed’s balance sheet, and the re-imposition of the charge last year, banks have been turning deposits away, with MMFs picking up a lot of the flow.
Banks may still not be eager for reserves if they don’t see lending opportunities (they are currently tightening lending conditions). Moreover, there’s no guarantee depositors will happily flip their money back to banks who originally turned it away.
But it’s liquidity that’s the existential risk to the Fed’s tightening program. Liquidity in the Treasury market is extremely low at the moment. Liquidity conditions for rates markets this year resemble the conditions seen in the pandemic and the period after the Lehman crisis, JP Morgan shows.
As the Fed steps back as the major buyer of Treasuries, liquidity conditions will be further stressed, especially as the Treasury increases its borrowing requirements.
Thus even with Dudley’s optimism - and even with the standing repo facility, there to backstop rates when reserves get scarce - things may break, forcing a premature to end to QT.
ZH ends with REMINDER OF ITS HIGHLIGHT via BAML that,
"Powell Will Be Forced To End QT Much Sooner Than Expected." Slowly but surely everyone is finally figuring it out...
Meanwhile, before we get THERE, the markets are going to have to come to grips — IMO — with this sort of analysis,
Teeing up another super-sized hike
… In response to this Fedspeak and incoming data, last week we adjusted our call for the September FOMC meeting, and now expect the Fed to deliver a third 75bp increase (see “75 but not so sunny for the September FOMC”). Further out, we maintained the contours of our existing monetary policy view. In particular, we continue to expect the Fed to downshift to 50bps in November and further to 25bps in December. We also continue to expect a terminal rate of 4.1% in early 2023, though with a 75bp hike in September this peak would be pulled forward to the February meeting. Inflation failing to ease along the timeline we anticipate could well require a higher peak rate during this cycle. Either way, we continue to expect that the achievement of the Fed’s 2% inflation objective is likely to only come from a recession around mid-2023 triggered by the Fed’s aggressive tightening.
… THAT is all for now. Off to the day job…