while we slept; sings of USTs cracking; BREAK'in up the MOVE; summer's a gRIND; curve on recession watch
Good morning … Markets are quietly and aggressively UNCH. Mixed. From a friend,
Asian equities were lower while European equities bounced higher. The Nikkei, Hang Seng, and Shanghai Composite were all about 1.5% lower overnight. European bourses were 1.5% to 2% higher across the board while U.S. equity futures are largely unchanged. Credit spreads seem mixed this morning with IG hinting tighter and European crossover leaning wider, a modest decoupling with European equity markets this morning. European sovereign markets are also mixed with gilts lagging to the downside, 2.7 bps cheaper and German bunds slightly weaker. Italy, Sweden, Swiss, and Greece have rallied a touch and Ausi govt. bonds rallied 14 basis points. Eurodollar futures are also mixed with the front end of the curve out to late 2023 a couple basis points cheaper but longer term dates richer. U.S. Treasury curve also bifurcated as both the front and long ends lag the belly. 5s/30s is 1.3 bps steeper but 2s/5s is 2.4 bps flatter and we've had the sense that the front end is running out of steam with 2s/3s and 3s vs. the curve with modest flattening biases since last week. Directionless across markets.
And now for the GOOD news of yesterday,
Oil Crashes Below $100 As Recession Risk Roars, Dollar Soars
Said another, somewhat more intelligent (yet depressing) way, Goldilocks
Oil succumbs to recession fears
Oil prices collapsed today, with Brent down more than 10% from the morning highs. We view this move as driven by growing recession fears in the face of low trading liquidity, with technicals exacerbating the sell-off. The declines in prices and refining margins since mid-June are now equivalent to the oil market pricing in an 1.1% downward revision to 2H22-2023 global GDP growth expectations. We believe this move has overshot - while risks of a future recession are growing, key to our bullish view is that the current oil deficit remains unresolved, with demand destruction through high prices the only solver left as still declining inventories approach critically low levels.
Thank goodness!! The recession’s here and gas prices should start to go down!! Hopefully, politicians will be recognized for all their hard work and rewarded for it come November?
Nevermind … here is a snapshot OF USTs as of 711a:
… HERE is what another shop says be behind the price action, you know,
WHILE YOU SLEPT
Treasuries are modestly lower with the belly sustaining its recent outperformance ahead of today's ISM services and FOMC Minutes releases. DXY is higher again (+0.35%) while front WTI futures have rebounded only modestly (+0.35%) after yesterday's heave-ho. Asian stocks were mostly lower, EU and UK share markets are higher (SX5E +1.6%, FTSE 100 +1.8%) while ES futures are little changes here at 7am. Our overnight US rates flows saw another 'muted' Asian session with a few opposing TU and FV blocks posted a few hours ago. In London's morning the theme was the same as yesterday with better buying in the front end and intermediates on balance. Flows in the long-end were 2-way this morning. Overnight Treasury volume was ~90% of average overall.… Five-Year Note: Support at ~3.58% while resistance is at 2.71% now. Daily momentum: bullish, 'overbought'
… and for some MORE of the news you can use to help weed thru the noise - Finviz.
From the ‘Global Wall St’ inbox, how could I not lead with this one,
LPL: Is the U.S. Treasury Market Showing Signs of Cracking?
I mean, with stocks down and YIELDS down — bonds being bonds — how ELSE could one ‘splain it … something MUST be wrong with … BONDS? It has been and remains MY (unprofessional) view that markets are still NOT healthy and perhaps we’ve still never really recovered from the 08 ‘great financial crisis’.
Some context, via LPL note,
… As seen in the LPL Chart of the Day, liquidity in the Treasury market, as measured by the Bloomberg U.S. Government securities index, has been deteriorating with liquidity conditions as poor as they’ve been since the COVID-induced market volatility in 2020. Other metrics such as the spread between new and older issued Treasury securities (called on-the-run versus off-the-run securities) as well as the price action in the short-term funding markets further confirm the lack of depth in the Treasury market. Back in 2020, due to poor liquidity conditions in markets, the Fed had to step in to help stabilize markets. Now, the Fed is actively reducing liquidity to help tighten financial conditions in an effort to reduce consumer price pressures. Additionally, the Fed has just started paring back the amount it reinvests in Treasury securities. As such, the relative lack of liquidity in markets has been a big reason we continue to see elevated levels of volatility in fixed income markets broadly.
So what’s next? Unfortunately, until inflationary pressures show definitive signs of cooling so the Fed can slow rate hikes, we’re unlikely to see liquidity conditions improve. Also complicating matters is the continued withdrawal of liquidity by the Fed, which owns nearly 25% of Treasury securities outstanding. As it starts to play a smaller role in the Treasury market, other investors will need to step in to help support the market. However, if volatility and illiquidity pressures remain high, we may need to see higher yields in order to entice other investors to take on these additional risks in the normally staid Treasury market. In the meantime, investors should brace themselves for elevated levels of volatility in fixed income markets.
Bonds matter. Higher rates likely got in the way of stocks. Markets and volatility are signals to ME that all is NOT well, despite the vol coming with LOWER rates. This does feel different. Bloomberg,
… Treasuries have had an extraordinary start to July, gyrating perhaps even more frenetically than they did last month. The MOVE index of implied bond volatility jumped to the highest since the pandemic panic of March 2020, so investors don’t expect calm anytime soon. And why would they? Markets are starting to realize recession is necessary to ease inflation from 40-year highs, even if an economic contraction might prove insufficient to the task. Yields continue to tumble down from the 3.5% peak seen for 10-year notes in mid-June despite the potential that this week’s payrolls data and next week’s CPI could put fresh pressure on the Federal Reserve to stick with aggressive interest-rate hikes. With even crude joining the rout among commodities, every rate hike is going to be seen bringing the US central bank closer to a fresh round of cuts. It’s possible yields are going to keep going down even as bond volatility remains high.
Rates are somewhat less high now than they were just 3mo ago. Fed is going to CONTINUE tightening. What COULD be going on? John Authers of BBG,
… Financial markets that offer some of the clearest projections of inflation have also executed a reverse, although for them the ferret turned earlier in the spring. Inflation breakevens in the US, derived from the bond market, are now no higher than they were a year ago, despite all the horrible news on inflationary pressure that has hit since then. The big turn came about three months ago, and remains intact despite some inflation data since that has been genuinely shocking. Meanwhile, the Commodity Research Bureau Raw Industrials index, known as the RIND, which follows traded commodities that aren’t available on the futures market and is regarded as a good pure measure of inflationary pressure in industry, has shown almost exactly the same picture. After surging consistently to hit an all-time high in the two years after the March 2020 shutdown, the RIND turned sharply southward:
Wonderful. Commodities turning lower, Breaks’ breakin’ and I’ve made it this far without talking about the yield curve. Don’t look now but … you know, inversion. To whit, this from the inbox just ahead of the stock market close yest,
US Rates Strategy: Yield Curve: Recession Watch
The 2s10s Treasury yield curve has again inverted amid worries about a recession. We find that signals from the yield curve are becoming more concerning over time. Despite elevated recession probabilities, markets are pricing only modest rate cuts, reflecting expectations of either a very mild recession or an inertial Fed.… The recession probability implied by the 3m10y Treasury curve is priced to rise within a few months to levels seen only ahead of a recession
The note goes on to DISMISS the idea that QE distorted the signal, suggesting
… Adjusting the curve for the decline in term premium actually worsens the signal, suggesting term premium also contains information about a potential recession
Ultimately, the firm concludes,
… Recent Fed commentary suggests that the inversion by itself is unlikely to alter the Fed's course for now. Even in 2019, when the Fed was not "unconditionally" committed to the price stability mandate, it grew concerned only when the inversion of the 3m10y curve persisted for months.
The time to panic is coming but it’s just not now? Right. Got it…Growth IS slowing and as a large German bank puts it
… Recession more than just a technicality?
… Our DB momentum index confirms that near-term growth momentum has slowed materially. Recent readings of our index are consistent with a near stalling in domestic growth momentum, with final sales predicted to rise only a bit more than 1% annualized during the middle two quarters of the year. Although this does not signal that an imminent recession is looming, there are not many historical episodes where final sales growth slows that meaningfully without falling into a recession. Reflecting these signals and the latest downgrades to consumer and business spending, we now see Q2 real GDP contracting -0.6% annualized, leaving the economy in the midst of a technical recession, and slicing full year growth to only +0.6% Q4/Q4
Finally, another reason ultimately capping of rates (either officially or unofficially) may be necessary, well, consider this from ZH and The Mises Inst,
Or for those that may prefer a Caddy Shack analogy,
Said another way, HOPE IS NOT A STRATEGY yet, HERE we are
… THAT is all for now. Off to the day job…