while we slept; TINA no more; Recession Monitor (vs Coincident Index); a Major Bond Letter
Good morning … 2 auctions down (stellar DEMAND for 5y -ZH) and one to go but first a break for the FOMC and a sigh of relief being offered by MSFT and GOOG.
More than a few are watching 2yy at / near 2018 highs and I’m sorry, while I get ‘it’, I just do NOT think we’re in Kansas (2018 PIVOT) any more…
Yea, worth watching and knowing but the battle lines have been drawn and The Fed seems intent on working towards containing / reigning in the ‘flation and it would seem to be doing so at all costs (ie recession — however you’d like to be told it is defined…). For this afternoon, we think we know 75bps is priced and I’m not alone suggesting one cannot and must not rule out an upside surprise.
Tiffany Wilding of PIMCO is back and offered this yest,
… Turning to the near-term implications for this week’s FOMC meeting, despite elevated recession risks, Fed officials signaled another 75 bp rate is likely, and we wouldn’t rule out a larger adjustment. While there is good deal of uncertainty around the exact level of the fed funds rate that is consistent with neutral policy (i.e., policy that is neither restrictive nor accommodative), what is clear is the current level of 1.6% is still accommodative, and that is increasingly out of sync with elevated inflation, which calls for restrictive policy. Indeed, the most prudent policy may require quickly adjusting financial conditions (i.e., a 100 bp hike to bring the policy rate to just above 2.5%, the Fed’s estimate of the long-run neutral rate) to a level that addresses the risk that even higher rates may be necessary to address the current inflation problem. Still, regardless of what is ultimately decided this week, we expect the Fed will revise up their 2022 fed funds rate projections when the new SEP is released in September, by pulling forward the two hikes that were previously forecasted for 2023, thus holding policy restrictive sooner and for longer than previously forecasted.
Not a forecast (of hers or mine) BUT worth considering ahead of the Fed as ZH notes all of Global Wall St is HOPELESSELY SPLIT on whatever happens next … here is a snapshot OF USTs as of 707a:
… HERE is what another shop says be behind the price action, you know,
WHILE YOU SLEPT
Treasuries are modestly higher this morning despite firmer stocks and amid a surge in block futures trades overnight (six! FV blocks posted, all looked buys and they were in the 4.5k to 6k size range). DXY is lower again (-0.2%) while front WTI futures are higher (+0.9%). Asian stocks were mixed, EU and UK share markets are modestly higher while ES futures are showing +0.85% here at 6:45am. Our overnight Treasury flows saw 'tepid' activity during Asian hours with real$ buying in 2's and 10's and fast$ selling in 7yrs noted. The 6x FV block buys(?) and a TY block sale were all reported during London's AM hours (taking place 3:45am to 4:40am NY time). Overnight Treasury volume was ~90% of average overall.… UST 5yrs: A key bear trendline sits at ~2.78% today with markets having a brief look at the trendline yesterday- rejecting it again. Yours truly is no fan of Head & Shoulders pattern analysis but this trendline appears to be a neckline of one of those. Right or wrong, it's a key trend resistance in our view.
… UST 30yrs: The 2.93% (rallied close to it again yesterday) appears to be your key resistance with 2.82% a resistance level behind that.
… and for some MORE of the news you can use » IGMs Press Picks for today (27 July) to help weed thru the noise (some of which can be found over here at Finviz).
And a couple items from Global Wall Streets inbox ahead of the Fed
Barclays on stocks: Capitulation only partial, yields help long-duration trade
Under-exposed HF/CTAs may turn buyers of equities if positive momentum holds. But MF/retail asset allocation is far more risk-on than depressed sentiment implies – consensus positioning is hopeful of a mild recession/dovish Fed turn. Cyclicals and long-duration plays are UW but the latter are catching a bid on lower yield.
… TINA no more, bonds getting bid again. Last month we flagged that bonds were becoming more attractive given their sharp repricing ytd and the narrative shift away from inflation to recession. Since then, nominal yields have rolled over, driven by inflation breakevens, treasury shorts have been reduced and the yield gap vs. equities is more favourable towards bonds once again. Although lower yields ease the pressure on P/Es, which is why stocks have bounced lately, risks appear skewed to the downside for equities vs. bonds compared to fundamentals. The latter seem more attractive in the case of a downturn, although we don't expect an imminent Fed dovish pivot. X-asset flows show a transition from inflation to recession positioning is ongoing, with TIPS, REITs and commodities all seeing big outflows.
… Already, we note that short positions on treasuries have been reduced, while macro HF/CTA beta to bonds has rebounded, although it is still negative. As we discussed in our x-asset piece last month (see Credit vs equity and the spectre of stagflation, 15 Jun), credit funds have seen much more outflows than equity funds in recent months.
…It is fair to say the ytd fall in equities has largely been a function of rising yields pressuring P/E's. This is why the recent rollover in yields has helped equities to bounce most, with a sense that bad news is becoming good news again. But this is a fragile concept, in our view.
DB on what to expect from the 2yy given today’s FOMC announcement
Trading the FOMC Meeting
Extraordinarily, in the last year, the short-end of the bond market has sold-off at every FOMC meeting (on a close to close basis). The Fed has managed to leapfrog market expectations, including some notably bearish expectations since late last year.
Ahead of this afternoon’s FOMC meeting, I’d like to introduce you to something I just met … WFCs Recession Monitor,
Not Yet a Recession Way Down Inside. Recap of Key Recession Indicators & Introducing the Recession Monitor
Even if GDP posts back-to-back declines, the economy is not yet in recession, though we suspect it will be within the next six months. Because defining something as important as a recession is more than mere semantics; this report unpacks the right variables to watch and introduces a new at-a-glance tool to get the next recession call right.… Good Times, Bad Times, You Know I've Had My Share
Beyond the quarterly GDP growth figures, many of the indicators upon which the NBER relies have continued to signal expansion through May. The monthly variables can still be grouped into four primary categories: production, income, employment and spending. As seen in our Recession Monitor below, these key NBER variables are not yet consistent with recession through May. Specifically we find the monthly change of all four indicators is negative when the economy is in recession. Over the past 28 years, all four variables have been negative only once outside recession, in July 2002. Put differently, the economy has never been in recession when at least three indicators rose during the month, and only very rarely has there been two indicators positive during a recessionary period (just three months in the 2008 cycle). While we do not yet have real sales through May, nonfarm employment, real personal income less transfers and industrial production all rose during the month, suggesting the economy is not yet in recession. How should we think about these indicators in coming months?
That seems far too busy to MY eye and I believe they agree and that is why they continue digging for another signal and come up with suggesting we pay attention to a lesser known / watched indicator
… So when does the real recession begin and what can we watch to dial in our expectations? The Conference Board's Leading Economic Index tends to get the most attention for anticipating changes in the economic cycle. Rightly so. But a slightly less-followed measure from the Conference Board is the Coincident index. Perhaps it comes as no surprise that the four variables tracked for the Coincident Index align with the NBER's original four variables: employees on nonagricultural payrolls, personal income less transfer payments, industrial production and manufacturing and trade sales. Consistent with our view that the economy is not in recession at present, the Coincident Index rose in June marking the fifth increase in the first six months of the year. Contrast that with the Leading Index, which has declined in five of the first six months of the year. In Figure 3, we plot the 3-month annualized growth rates for the Leading Index and the Coincident Index. Observe how the Leading Index is sharply lower at -7.2% even though the Coincident Index is still signaling expansion at +2.6%. Also note that since 1985, whenever the Leading Index has contracted as much as it is now, recession has been inevitable.
While the economy is slowing and does not yet appear consistent with recession, it is starting to feel like it is just a matter of time. Each recession has a different catalyst, and we'll be watching these four sectors for signs of the downturn as we try to narrow in on the start of a contraction. Our forecast has the recession starting early next year. Between now and then, we will keep our Recession Monitor updated. If GDP does post a second-consecutive quarterly decline, just remember it is not so much a head-fake as it is a faint Robert Plant pre-echo. We expect the loud wailing of an actual recession to begin early next year.
Think a bit about yield curves, THIS ONE (25 July) from HSBCs Steve Major caught my attention
Steve continues, specifically on the RED LINE above,
… The red line on the chart has two parts to it: the 18-month forward, which is where the rate paid on three-month bills is expected to be in 18 months, and the current three-month bill rate. These are subtracted from each other to measure the spread. So let’s look at the two parts of the spread more closely…
And ahead of the Fed this afternoon, a POLITICO report out yesterday morning worth mention …
China targets the Fed to gain influence, senator charges, drawing Powell rebuke
Fed economists were recruited to share sensitive information around economic policymaking and research.
Food for thought (and for those with tinfoil hats!!) and finally, back to reality of here and now, BBG (perhaps fresh of HSBCs thoughts just above, on a yield curve which the Fed presumably watches so, we’re ALL watching,
Federal Reserve Chair Jerome Powell will face plenty of questions this week about the likelihood of recession with his favourite economic indicator in rapid retreat. Powell's preferred yield curve measure — where three-month rates are now versus where they are expected to be in 18 months’ time — has flattened close to 100 basis points so far this month with inversion easily on the cards if this pace continues. As Powell said earlier this year about this curve: “if it’s inverted, that means the Fed’s going to cut, which means the economy is weak.” In fact the US economy could already be in retreat. While Thursday's US GDP figure is expected to show slight growth, some analysts are predicting a second straight quarterly contraction, which would fit one unofficial definition of a recession. No doubt officials would seek to downplay the significance of such a technical label, but it would heap pressure on the Fed to consider their next moves carefully. Eurodollar traders are still betting on an about turn in Fed hawkishness, pricing in around three rate cuts next year.
Perhaps it’s all much easier and we should have known …
… THAT is all for now. Off to the day job…