while we slept (TY 127 PUTs); rent'flation'nation; debt mountain
"As the Fed grapples with rate hikes, higher housing costs will be feeding inflation for months to come."
Before we slept we learned what JPOW will say at his trial (I mean reconfirmation hearing — watch live: here) and that we’ll no longer get Clarida-fication as he’s resigning sooner than we thought.
Here is an HOURLY (YTD) chart of 30yy as of 710a so you can see with your own lyin’ eyes, what happened over the past few days,
(HOURLY momentum suggests somewhat HIGHER yields are path of least resistance — Look, kids, 2.10%, Parliament … ok, never mind)
… so that you can play along at home (as I do now with my limited capacity) with what happened overnight. This from Bloomberg (Macro Squawk team as of 612a)
Tech Bounce Supports Risk Assets; Curves Flatten
(Bloomberg) -- European equities mostly reverse Monday’s sell off; Euro Stoxx 50 rises ~1.25%. Tech, retail and travel are the best performers among sector gains in Stoxx 600. S&P futures add 0.4%, Nasdaq futures are up 0.6%. Fixed income issubdued. Curves have a small bull flattening bias but ranges are narrow. Bund futures trade either side of 170, 10-year Treasury yield either side of 1.75%. Peripheral spreads widen slightly, books on Spain’s 10y syndication top EU58b. In FX, Bloomberg Dollar Spot returns to flat on the session after a choppy morning. Commodity currencies lead in G-10, JPY lags, fading roughly half of Monday’s strength. Crude futures rise over 1%. WTI regains a $79-handle, pushing through Monday’s highs. Brent rises through $82. Spot gold adds ~$4 but struggles to make headway through $1,810/oz. Base metals are in the green after a prolonged exchange outage, with LME nickel up over 3%. KEY HEADLINES:
ECB’s Lane says 2022 rate hikes are ‘highly unlikely’: Sole
Lagarde says ECB’s commitment to price stability is unwavering
Nagel takes charge of Bundesbank with warning on inflation risks
Fed’s Bostic ‘ready to act’ to cap inflation with March liftoff
Spain eyes ‘endemic’ virus; Chinese lockdowns: Virus Update
Kremlin sees few grounds for optimism about U.S security talks
Bostic — mind you — is NOT A VOTER THIS YEAR… See WFCs FOMC 101 infographic HERE.
For more from BBG ECON Dept, as THEY comment on how,
Fed Runoff - Nothing Like Watching Paint Dry
And from BBG.com ahead of SUPPLY of duration this week
Wary Global Bond Markets Brace for the Supply Floodgates to Open
… The likely increase in effective global supply will offer a keen test for the savings glut that helped bring yields down at least twice last year. Fed Chairman Jerome Powell highlighted the role of deep-pocketed foreign investors in repressing longer-dated yields just after December’s policy meeting.
Sounds like a new ride at Epcot. Now in as far as what happened overnight, you knkow,
WHILE YOU SLEPT
… The Treasury curve continued its flattening ways overnight; this time pivoting flatter around an unchanged 7-year benchmark ahead of Powell's 10am appearance. DXY is modestly lower (-0.13%) while front WTI futures are higher (+1.55%). Asian stocks were mixed, EU and UK share markets are all higher (SX5E +1.23%) and ES futures are showing +0.3% here at 7am. Our overnight US rates flows saw another block flattener printed during Asian hours (FV->WN) alongside more TY put buying. On the latter, my futures colleagues said there was another block buy of March 10y 127 puts with the strike targeting 10's at ~1.92%. The 127 strike is the largest outstanding TYH2 put strike by a large margin according to my colleague. Asian volumes were elevated (2.5x average) with an afternoon dump in JGB futures too. Overnight Treasury volume, including London's AM session, was ~125% of average with 3's (210%) seeing elevated activity ahead of this afternoon's auction …
This heavy volume overnight is confirmed by the other shop — you know, the one that constantly wins best in show year after year (Inst. Investor poll), who describes
… Overnight Flows
Treasuries were mixed overnight with the most discernable trend being a flatter curve. 5s/30s flattened to 54.2 bp. Overnight volumes were elevated with cash trading at 167% of the 10-day moving-average. 10s were the most active issue, taking a 32% marketshare while 5s took second at 29%. 2s and 3s combined to take 23% at 6% and 17%, respectively. 7s managed 9%, 20s 1%, and 30s an above-average 7%. We’ve seen two-way flows in 5s and 10s…
For MORE news you can use, HERE are IGMs Press Picks (11 Jan).
… And as far as CPI goes tomorrow, this mornings OpED by John Authers of BBG attempts to show how RENTS are such a big part of the narrative and point to continued UPWARDS pressure though the year (further supporting the building of short positions noted HERE and HERE).
… Rents make up the single biggest portion of the consumer price index. By November, they were contributing more than any other single category to the overall number, except gasoline. This chart was produced by the ECAN service, which is available on the Bloomberg terminal:
So it’s not disputed, then, rents make up largest portion OF CPI so what happens to rents NOW matters more than ever.
… The growing contribution of rents, in green, to inflation was due to dynamics following the pandemic, which saw rents fall, and then rebound to their highest rate of increase since 2007:
While it has risen sharply, rental inflation remains within its long-term range. However, there is very good reason to expect rents to rise further. The housing sector has boomed since the worst of the pandemic shutdown early in 2020. As one good indicator of this, the Hoya Capital Housing 100 index, which covers a range of stocks that benefit most from a shortage of accommodation and an active housing market, has slightly outpaced even the mighty NYSE Fang+ index since the nadir of March 2020. There is intense activity in the sector:
The story continues along showing how far behind OFFICIAL data is and how / why it will catch up to things like ZILLOWS INDEX (rents up more than 10% last year?).
All in, a very good read and something which will help those TO one side of the boat as haters gonna hate and sellers gonna sell.
Once everyone is on board — more on board than they were earlier in 2021 when the boat tipped end Q1 and rates rallied back down hard — it will tip. It always does. Perhaps it will take a little bit of a nudge from officials, hiking until something breaks.
It is then and ONLY then, we’ll see the light in notes like THIS about PEAK FLATION.
Thats it for NOW. 10am JPOW, 1pm 3yr notes. Enjoy…I’m off to the day job …