while we slept; SNAPped; 2yr non-comp bids SOAR (#got2s?); hiking during IP slumps rare; 'demand strong but less certain'; (SanFran)Fed on transitory
Good morning … once again, mkts SNAPped …
So I take a couple days off (one planned one not so much) and Lagarde tips her cards, I hear the (official)bear market in stocks was achieved, quickly put behind us (perhaps I should take off more often), AND JPMs Dimon offered a view!
… here is a snapshot OF USTs as of 725a:
… HERE is what another shop says be behind the price action in a morning commentary titled, “Oh, Snap!”
Overnight Flows
Treasuries were better overnight as risk assets once again came under pressure. Overnight volumes were modest with cash trading at 82% of the 10-day moving-average. 10s were the most active issue, taking a 34% marketshare while 5s were a distant second at 25%. 2s and 3s combined to take 25% at 17% and 8%, respectively. 7s managed 11%, 20s 2%, and 30s 4%… We’ll classify Tuesday’s highlight in the Treasury market as the $47 bn 2-year auction; supply holds this designation not only given the relatively sparse day in terms of economic updates but even had more data been on offer, the takedown of 2s will provide especially relevant context for the appropriateness of current market pricing. After the unquestionably bearish outset to the year in 2s and the largest open to close quarterly move in 2-year yields on record (157 bp, with Q2 2004 a distant second at 111 bp), we have seen the sector find something of a period of equilibrium in its new range from 2.50% to 2.80%. More specifically, resistance and the range bottom is 2.50% to 2.475% and the top of the latest zone is the yield peak that was briefly challenged at 2.85% in early May. Nonetheless, Tuesday still holds the potential to be the highest yielding 2-year auction since November 2018, and despite Powell’s hawkishness this should ensure at least a decent outcome.
Indeed, at roughly current levels last month’s 2-year supply stopped through by an impressive 1.2 bp – matching the largest since April 2020. Along with the bullish headline outcome the details were additionally encouraging as non-dealers took their largest share on record and the investor class data showed that the strength of the bid was principally a function of domestic investment funds that also took their highest-ever allocation. This reinforces the notion that a great deal of the hiking campaign is already reflected in current valuations. If in fact terminal fed funds is going to be achieved in the middle part of next year, and skepticism on the Committee’s ability to follow through is already on the rise, then there is the case to be made that the bulk of the upside in front-end Treasury rates has already been achieved. This does not preclude a retest of 2.75% 2s, but we expect dip buying interest will make a selloff significantly beyond 2.85% challenging. As such, we’ll look for a larger concession to bring in dip buying interest and expect a solid result to begin this week’s auction slate.
… and for some MORE of the news you can use » IGMs Press Picks for today (24 May) to help weed thru the noise (some of which can be found over here at Finviz).
Now in as far as a few things from Global Wall Streets inbox I’m still digging through at the moment, a couple/few items DO stand out.
First, ahead of today’s 2yr auction, a visual of 2yy DAILY
And a few words from DB:
Non-comp bids are soaring at 2-year Treasury auctions
Later today, the Treasury will be auctioning $47bn in 2-year notes. A recent phenomenon at 2-year auctions is the surge in noncompetitive bids. In April, non-comp bidders were awarded $860mm of the notes, a record since 2007. Primary dealers, on the other hand, won just 12.5% of the auction, their lowest share in 2-year auction's history.
Non-comp bids – typically submitted by "individual" investors which also include personal trusts, estates, nonprofits and foundations – tend to accompany each hiking cycle. As the Fed raises rates, market yields usually rise faster than deposit betas as banks seek to preserve their net interest margins. Consequently, short-dated Treasuries and T-bills broaden their appeal to a new subset of investors.
From a market perspective, the rise in non-comp bidding adds to a number of factors already making the 2-year trade very special in repo. Non-comp bids reduce the size of competitive offering for institutional investors and dealers, many of whom lend out their securities in the repo market. The 2-year auction is also getting smaller: the Treasury announced this month incremental cuts of $1bn per month through July. With QT, the Fed will also shrink its "add-ons" rapidly starting next month and have less to lend from its portfolio. All of these contribute to an even bigger imbalance of collateral demand and supply for 2-year notes.
For today's auction, we expect it to go well, noting higher non-comp participations have coincided with the recent strong end-user demand, above-average bid/cover ratios and negative auction tails.
#got2s?
And from 1stBOSTONs latest Global Cycle Notes:
Growth rebound to temporarily ease market pressure
Global industrial production momentum is set to bounce after June. The worst disruption from Chinese lockdowns appears to have passed, and we expect activity to recover in the near term. Global IP momentum is currently in its third deepest slump of the past 40 years.
The bounce in growth may temporarily support risk assets. Falling growth momentum alongside accelerating global central bank tightening – a historically rare combination – has created a toxic environment for asset returns lately. At least one of these factors should improve in Q3.
However, the IP momentum recovery is likely to be short-lived. Because supply shocks are driving global industrial production momentum, a ‘dead cat’ bounce in a trend of otherwise weakening demand has grown more likely.
Weak global industrial production growth is likely to resume into 2023. Squeezed real incomes, tighter financial conditions, and falling business confidence all point to softer global demand in the quarters ahead. Previous instances of global central bank hiking into industrial production slumps were followed by prolonged periods of weak growth (Figure 1).
From Boston TO Germany where DB stock jockeys write about
What Companies Are Saying: Demand Still Strong, But Less Certain
Last quarter we noted that companies were very confident of raising prices to offset costs as demand far exceeded supply (Strong Demand Sustaining Pricing Power, Feb 18 2022). This earnings season, most companies continued to stick to that message but with a wider band of uncertainty, while some reported clear downshifts in underlying trends. Demand is still strong for most but not for all; supply chain issues persist but are moving in the right direction; companies are still raising prices to offset cost inflation, but unlike previous quarters when they were very confident because “everyone’s hair was on fire,” they are now getting more wary of hurting demand; labor availability is still the primary concern for most, but several high-profile companies have announced that they are applying the brakes on hiring.
Demand still strong but softening at the edges. A majority of companies said they continued to see very strong demand that exceeded their capacity to meet it, and that they are not seeing recessionary signs yet. Caterpillar said “demand is strong everywhere” and Starbucks noted they “have been unable to meet the relentless demand” while Estee Lauder pointed out that consumer demand remained “robust even in this inflationary environment.” Companies in the travel and entertainment segment are benefiting from pent-up demand, which Expedia noted is “outweighing anything the market can throw at it.” However, unlike last quarter several companies voiced a note of caution and some saw signs of slowing demand. Amazon said that while there are “no indicators that we're seeing of weakness in consumer demand” they are “wary of it, as probably all companies are.” McDonald’s said the US consumer “is in good shape, and consumer balance sheets in the US broadly speaking, again, at the average, are strong” but there “probably is an increased value sensitivity with that lower income consumer.“ Verizon said the “Consumer also had a good quarter, but a little bit slowness,” while Deutsche Post “saw the normalization on the B2C volumes” and PepsiCo was conservative in its outlook as it thinks “the consumer will be feeling the overall inflation in their disposable income.”
Given the lightspeed in which we’ve entered/EXITED bear market territory, guess we no longer need to read this one from LPL
What Happens After A Bear Market Starts? Four Things To Know
Thankfully, said bear market was TRANSITORY (hey, at least something was?) And with that taboo word in mind, a letter from the (SanFran)FED
The letter concludes,
… A simple time series model for U.S. inflation along the lines of Stock and Watson (2007) suggests that persistent shocks to inflation have become more important in recent data. Historical patterns show that persistent shocks can push inflation away from the Fed’s longer-run goal for sustained periods, warranting a stronger and longerlasting policy response versus the case when elevated inflation is driven mainly by transitory shocks.
And speaking of concluding … THAT is all for now. Off to the day job …