while we slept (sociable sized selling, lack of bids, volumes ~220%!; oil/flation/hikes OH MY; 2yr breaks; technicals...
hikes occur alongside investment BOOMS; days without an accident; spud webb
Good morning. As Global Wall Street becoming Nord Stream 2 experts, I’m sticking with local recon where Costco REG jumped from $3.15 to $3.27/gal over the past week or so. At least it’s still ‘full serve’?
So much has been dumped into the inbox since this time yesterday, I’m going to jump right in. Here’s what happened,
Treasuries are lower and the curve modestly flatter ahead of this morning's long-end Treasury buyback and this afternoon's 3y auction. Bunds have notably outperformed US/UK 2's and 5's this morning amid earlier block buys there. During the Asian session, Aussie bonds (10's +12.5bp- see link above) sharply underperformed and helped drag US 10's to their 1.95% support. DXY is higher (+0.15%) while front WTI futures are lower (-1.65%). Asian stocks were mixed, EU and UK share markets are all close to home (save for Spain's IBEX +1%) and ES futures are little changed here at 6:45am. Our overnight US rates flows saw widespread selling in Treasuries during the Asian session with the desk noting that while the sizes were sociable, the lack of opposing bids certainly stood out. Overnight Treasury volume was solid at ~220% of average with 3yrs (291%) seeing the highest relative average turnover ahead of today's 3y auction.
And some news and a long term CREDIT RELATED chart …
US News: Used car prices aren't soaring anymore. What it means for inflation Barrons Green startups stumble as inflows turn to scrutiny WSJ Investors are gobbling up dividend stocks WSJ Some banks now calling for 7 Fed hikes this year ZH
… Our final attachment this morning is a long-term look at the Bloomberg/Barclays US corporate HY average OAS. As you can see in the lower panel, long-term/monthly momentum aims solidly (and probably sustainably) higher; a picture that's almost a mirror image of the set-up in the long-term chart of 30yr real yields. So some trend conditions are quite clear today and its these latter two (or those associated with them) that have captured our attention this year.
… for some more of the news you can use » IGMs Press Picks for today (08 FEB) to help weed thru the noise (some of which can be found over here at Finviz).
Now in as far as thought leaders go, everyone’s favorite muppet’eer offered a global eco comment on,
7 February 2022
Oil, Inflation, and Rate Hikes
■Global inflation is elevated, central banks are pivoting, yet we expect oil prices to rise further to $105/barrel. We estimate the impact of oil prices on inflation for large economies.
■We estimate that a 50% increase in oil prices significantly raises global core and especially headline inflation by 30bp and 60bp on average, respectively. The effects are larger in EMs than in DMs, reflecting higher EM energy shares in consumer budgets, greater reliance on fossil fuels, and less anchored inflation expectations.
■We expect the oil boost to global year-on-year headline inflation to moderate from 120bp this quarter to 50bp in 2023Q1, and from 80bp to 40bp for global core inflation. Although oil prices will likely rise further, a slower rate of increase implies a less dramatic inflation boost.
■In practice, the total commodity contribution to inflation is significantly larger than our oil-only impulse. With inflation already above target in most economies, and given the risk that further rises in salient energy prices could fuel inflation expectations and wage pressures, we think the commodity price boom will contribute to substantial monetary tightening this year despite the moderating oil-only impulse. This supports our call for policy rate hikes this year of 250bp in Brazil, 125bp in the US, 100bp in the UK and Canada, 75bp in India, and 50bp in the Euro Area.…
For somewhat MORE on ‘Earl and it’s impulses, MS wrote the manual on it. Literally, the latest,
Oil Manual: The Force is Strong with this One
Inventories continue to draw, OPEC production appears to have lagged the quota once again in Jan, and product markets signal strength. We raise our production forecast for Iran following recent newsflow but that doesn't change our balances fundamentally. We reiterate our $100 Brent call.
In this manual, there are reasons to PRAY it’s not 07/08
Can’t imagine the price of REG gallon going down at my local Costco SHOULD this be the roadmap.
Welp, Valentine’s Day is cancelled, what’s next? Please don’t answer that. What I’d LIKE is an idea … some way to HEDGE this push higher of the ‘flation. Enter this next item inboxed from a large French bank who often is THE featured sponsor of the French Open (tennis),
2y BE offers inflation protection and positive carry
TIPS breakevens have corrected lower in January, while real rates have risen sharply. Highlighted risks of a fast Fed policy exit (end of Fed QE, and policy tightening from rate hikes and QT) have delivered.
The fall in US breakevens may have gone too far near-term, particularly at the very front-end where the Fed policy has less impact over realized inflation.
Rising energy prices and broad-based price pressure is taking the peak in US CPI higher and later (again). The 20% rise in gasoline prices in 2022 YTD itself can add up to 0.8% of inflation in Q1!
The very positive implied carry on TIPS over the next 3 months is unlikely to be fully priced in. Using the CPI fixing market, 2y TIPS breakevens offer more than 50bp of carry over the next 3m, leaving forward breakevens at lower and increasingly attractive levels.
Long 2y TIPS breakevens offer inflation protection with positive carry. Risks include near-term CPI releases and energy price developments, although 2y TIPS should be less exposed to the end of Fed purchases.
Trade idea for consideration: Long 2y TIPS breakeven. Entry: 3.15%. Target: 3.50%. Stop: 2.80%. Carry: +4bp, +51bp at 1m and 3m, respectively. Allocation = $40,000/bp.
IF ‘BREAKS’ are too much or too academic and you prefer a simpler expression, the French bank then also offers what is standard fair — SELL 10s,
Six new trades: Higher US 10y yields, long USD & equity RV
… Scope for US 10y yield to rise: The fair value for US 10y yields has risen to 2.04%, suggesting there is further scope for yields to rise following the hawkish shift in central bank rhetoric … Initiating short US 10y bond: Our fair-value model MarFA™ Macro is signalling that US 10y yields are too low (by about 2.6 z-scores). The MarFA fair value has been moving ahead of the rise of US 10y yields in recent weeks and signals that initiating a short position is attractive. We target a rise of yield to 2.04%.
Marfa, Earl and the ‘flation — and what to DO about it — aside, getting back TO Goldilocks for just a sec,
Global Views: The Slowdown That We Need
The most important number in the US employment report for January was not the surprising 467k increase in nonfarm payrolls, but the 0.7% increase in average hourly earnings. It reinforces the message from our composition-adjusted wage tracker, which has accelerated to a 6% annualized rate over the past 2-3 quarters. With core PCE inflation running at about a 5% rate over the past 3, 6 and 12 months, this raises the question whether we are already in the middle of a wage-price spiral that will need to be broken by aggressive Fed rate hikes and a large tightening in financial conditions.… The broadening of wage and price pressures across the advanced economies implies that growth needs to slow and financial conditions need to tighten at an earlier stage of the recovery than previously expected. Consistent with this, our core market views are an increase in riskless yields, a widening of IG and HY credit spreads, and a combination of lower expected returns and bigger potential drawdowns in the major DM equity markets relative to the post-covid recovery so far. At this point, our baseline remains that this will be sufficient to slow growth and bring inflation back toward central bank targets over the next 1-2 years. But the risk of a harder landing will rise if US growth stays significantly above our below-consensus forecast.
PLEASE, let this settle in. And for some further context which I believe was NOT touched upon in the note — MIDTERMS ARE COMING and this much needed slowdown as global financial conditions INCREASE will be even MORE difficult for Team Biden in the months just ahead, IMO. The GOOD news? Well the GOOD news is / may be how The Street is excusing ahead of time just how hikes will NOT impact US Econ too badly. 1stBOS,
Hikes won't hinder investment …
… In a series of notes, we will be exploring how Fed tightening may have traction on the real economy. In this piece, we focus on business investment and corporate balance sheets…
Oh, ok, well THATS a relief — as long as I don’t think too hard about all the pre-caps and excuses ahead of this past NFP report …
Moving along, I wanted to take a look at some recently updated TECHNICALS as they say — in price, there’s tuth.
HERE is a good place to start if stocks are your game,
Tech Stocks Repeating The Same Pattern As 2000 Top?
IF this one from Chris Kimble WERE to actually be the roadmap, well, refer to above — this ain’t good. What of RATES, though? 1stBos UPDATE leads with visual of 10yr REALZ, …finally clear their key -.54% high of last year to reinforce their large “wedge” base, and we look for a move to our core 2022 objective at -.335/305%.... In as far as NOMINALS goes,
10yy WEEKLY: A small bear “pennant” pattern has been confirmed, and we maintain our core bearish bias for our first objective at 1.965/2.00% and higher to 2.16/18% in due course…We turned tactically bearish again at 1.77%, with key resistance now higher at 1.74% and with support at 1.96% where we would turn neutral.
And 30yy DAILY: The clear break above 2.19/215% is expected to see a resumption of the bear trend to support at 2.32/33%…We stay tactically bearish, looking for a move to 2.32/33%. We would turn tactically neutral below 2.03%.
As you know, I’m a big fan of keeping my friends close and my stops closer. I’ll spare you a Clubber Lang / pain trade link but will note these,
MS US Economics: The Great Inventory Rebuilding Has Begun.
Barclays updated equity risk pulse: No Qualms About Looming Fed Tightening
Surprisingly, option markets have become less worried about the aggressive Fed's tightening cycle this year. Volatility skew and convexity measures have declined as hedgers appear to have monetized their hedges. Retail investors, however, remain bearish and demand for single stock put options remains elevated…BBG: Bond Market Tantrum Should Give ECB Moment of Pause. Rising yields threaten to tighten monetary conditions before the euro-zone economy is able to cope with higher borrowing costs
BBG (OpED) on CREDIT rough patch, following USTs in today’s early edition of, Five Things You Need to Know to Start Your Day … And finally, here's what Cormac is interested in this morning - The credit market is now showing signs of stress, raising the chances of a disorderly rise in yields piling further pressure on global risk assets. A key measure of U.S. corporate credit risk reached the highest since September 2020 on Friday -- and its European equivalent soared -- after strong U.S. payrolls data and a hawkish ECB stoked expectations for aggressive rate hikes around the globe. Unlike during last year’s Treasuries slump, when high-yield debt continued to push higher, this time junk bonds are selling off alongside their government equivalents -- witness the two popular iShares ETFs tracking the asset classes. This credit weakness removes a key argument from bulls that risk assets can tolerate higher bond yields -- corporate debt is often used as a canary in the coal mine to detect broader market stress. As always it is the pace of yield rises that poses the biggest threat to investors. The spreading uncertainty over the speed of global rate hikes will have to be priced in to the upcoming slate of corporate bond issuance, coming in the midst of the ongoing earnings season. And if wage inflation continues to beat expectations, investors will have to adjust their expectations for corporate margins on top of accounting for rising borrowing costs in future refinancings. Of course the hopeful demise of the omicron wave could brighten the economic picture and an alleviation in the supply-chain crisis could blunt inflation’s rise. But the fact that corporate bonds look to have joined the risk-asset slide is an ominous sign for global markets.MacroMarketsDaily - US credit impulse picking up
The US credit impulse, which measures the rate of change in the flow of credit, is picking up again on both a six- and 12-month basis. That is normally thought to be a good thing for economic growth, as increased borrowing normally coincides with increased consumer and business spending - though the surge in early 2020 and later decline mainly reflected precautionary borrowing by businesses and the rise in government deficits, as the chart below shows. More recently, household and commercial loans have shown tentative signs that they are picking up after a period of deleveraging…
WolfStreet.com on consumer credit: Americans Borrowed More to Buy Much Less: What Happened with Auto Loans Is Truly Amazing
Jeff’s: Tracking the US Economy with Real-Time Data
Reopening #4 waiting in the wings and at the moment, global markets and sellside along with The Fed have GOT to be thoroughly impressed nothing has broken … YET. Said another way,
Nothing without consequence, am I right? It is when this streak comes to an end which is of greater concern. Portfolios, PM jobs / career risk / and consumer’s pocketbooks will ALL be impacted and I get the sense, a cheaper / steeper US rates environment will be mostly a rear-view mirror thing …
In terms of REAR VIEW MIRRORS, this look back is for those of us out there who are … how to say … vertically challenged … on this day, in 1986, Spud Webb wins the NBA Slam Dunk Contest,
And in essence of saving the best for last, on this day in the year of the flood … My father in law (aka Coach Steve Goldman) was born! A happiest of happy birthdays TO Coach (also known as Grumpy by all of his grandkids). Hopefully this ‘mention’ counts as a card / gift!
… that’s all for now. Off to the day job…