while we slept; US/China (Taiwan) and PBoC; housing affordability; inflation peak? maybe, maybe not (watch 'outliers'); positions
Good morning … How about that Chinese data, eh? ZH (sorry. not sorry)
China Unexpectedly Cuts Rates As Terrible Econ Data Confirms "Alarming" Slowdown, Yields Plunge
About 4a e.s.t. this morning, headlines crossed about more Chinese military drills in response TO yet another diplomatic congressional visit TO Taiwan, CNN:
China conducts fresh military drills around Taiwan as US congressional delegation visits
With this in mind and following PBoC rate cuts in response TO weak funDUHmental data, the bond market has caught (maintained from Friday) a bid as equities have rotated lower … here is a snapshot OF USTs as of 725a:
… HERE is what this SAME shop says be behind the price action, you know,
WHILE YOU SLEPT
Treasuries are mixed on ~75-80% volumes, curves mildly flatter and risk-assets weaker after overnight data revealed worsening drought conditions in EU (Rhine falls to 30cm) and poor China data (and a -10bp cut in MLF and RRR). Japan also saw a softer 2Q GDP. Overnight flows were mainly light and 2-way, EGBs outperforming with CL -5% in early-trade, most commodity markets under pressure (BCOM -2.2%, HG -3%, XB -4%). ES futures -20pts here at 7:30am.
… and for some MORE of the news you can use » IGMs Press Picks for today (15 Aug) to help weed thru the noise (some of which can be found over here at Finviz).
Given I was outta pocket past couple days I’m going to rip through a few things in my inbox and highlight / link a few items which I’ll HOPE to circle back and read as they seem funTERtaining
Barclays on recent (o/n) CHINESE DATA
China: Slowing recovery prompts rate cut
July activity data highlighted weakness in consumption and housing, though IP held up on strong exports. We think soft domestic demand means risks to our 3.5-4% y/y growth forecasts are tilted to the downside . Disappointing credit and demand data saw a surprise PBoC rate cut, and we look for a RRR cut in H2.
For more on this rather large macro event overnight, DB, “PBOC cuts MLF rate unexpectedly amid July activity data misses” … GS, “July activity data broadly missed expectations” …
Barclays latest Macro House View Weekly:
Mission not accomplished
Price pressures surprised to the downside in the US but central bankers will be wary of declaring victory too early
Here’s an interesting one, at least in my mind, showing the impact OF low rates, a pandemic and subsequent shift in housing DEMAND (and prices),
Affordability & sentiment drop steeply
In the United States, already-low affordability and buyer sentiment have dropped still further since last quarter, and the combination of these two indicators shows the most challenging conditions (Figure 1) in data from 1990. Mortgage payments rose 51% yoy in May, while the FHFA's ARM index is up to 5.29% in July from 2.93% a year ago. The Mortgage Bankers Association's index of refinancing activity is down -81% yoy, and purchase activity is down -18% yoy. Although June completions and value of construction are still up over last year, June housing starts showed the first material yoy decline at -6%.
The top two reasons cited in the Univ of Michigan survey for poor buying conditions are high prices (71%) and high interest rates (40%). Given the view from numerous Fed officials and our own economists that easing policy rates are still a distant prospect, it stands to reason that a decline in home prices is the only path back to better sentiment and a recovery in US home sales (-13% yoy in June).
We calculate that in order for home affordability to return to its average since 2000, existing home prices would need to decline by 31% from USD 423k in June to USD 290k, assuming a 30-yr fixed rate of 5.2%. Alternatively, the 30-yr fixed rate would have to decline from 5.2% to 2.1%, well below the record low of 2.8% in 2021.
Nothing without consequence…low rates, housing demand shift, prices adjust and the next step in this affordability crisis, then is ??
Here’s an economic update yesterday morning before the PBoC cut rates,
Sunday Start | What's Next in Global Macro
The clouds of recession are gathering globally. The Chinese economy contracted in 2Q. The US notched a “technical recession.” The flow of natural gas to Western Europe is restricted. In the past three months, we have revised down our forecast for global growth to 2.5%Y in 2022, which is about 50bp below consensus and 40bp lower than in May. We are edging closer to the bear scenario from our May Mid-year Outlook. Is a global recession upon us?… The world has been simultaneously hit by supply, commodity, and dollar shocks. Central banks are pulling back on demand to contain inflation. But even as we start to glimpse the other side of the inflation peak, the full effects of rate hikes are not yet manifest in the economy. Even if we avoid a global recession, it is hard to see economic activity getting back to its pre-Covid trend. I hope it is sunny where you are…you can worry about this storm tomorrow.
My how the narrative has shape shifted over time!!
Finally, a couple from the EQUITIES department.
The latest from MSs Mike Wilson,
The Challenge with Front-Running a Fed Put
The equity market has front-run a durable Fed pause, the odds of which are low to begin with. This leaves valuation significantly disconnected from economic/earnings reality. Risk/reward remains unattractive.… Equity valuation is now significantly disconnected from fundamentals... which continues to suggest we're in a late cycle, slowing growth environment. Specifically, our fair value framework suggests the market's ERP is ~150 basis points too low based on current data. The message from us for the next several months remains: risk/reward is unattractive, and this bear market remains incomplete.
What's likely to drive the next leg lower in stocks?… We think it will be earnings disappointment. Seasonals for earnings revisions worsen materially over the next 8 weeks, and revisions have been following the seasonal pattern quite closely YTD. While many focused on the impact of the recent jobs and CPI prints from a Fed policy standpoint, we came away with some fundamental takeaways as well. The combination of sustained, higher wage costs and slowing end market/consumer pricing loudly signals margin pressure, which is at odds with optimistic consensus estimates…
And THIS from The Terminal is a quick look at equity short base growing,
The US equity rally may be confounding bears, but they ain't for turning. Net-short non-commercial positions in S&P 500 futures -- a gauge of bearish bets on the US stock benchmark -- grew again last week and remain at the highest since June 2020. The data is to Tuesday, so just before the S&P 500 hit a closely-watched milestone on Friday, retracing half the losses from its steep decline this year, a move which some see as a bullish signal for the recovery. A slew of positive economic data helped US shares to a fourth straight weekly gain, even as hawkish Federal Reserve commentary filled the air about the potential for even higher interest rates. That will give bulls confidence. But question marks remain about the risks of a US recession and until they are answered, there's every chance the bears will hold their ground.
For somewhat more on POSITIONS, McGeever / RTRS column
Hedge funds strike it right on dollar, yield curve
… INFLATION PEAK?
In bonds, the trend remains funds' friend as the 10-year Treasury yield fell as much as 50 basis points below the two-year yield, resulting in the most inverted curve since 2000.
CFTC data shows that speculators increased their net short two-year Treasuries position for a third week, by more than 70,000 contracts to 172,221. That is now their biggest bet against two-year Treasuries since July last year.
In the same week, they trimmed their net short 10-year bond position by just over 9,000 contracts to 286,478 contracts.
A short position is essentially a bet that an asset's price will fall, and a long position is a bet it will rise. In bonds, yields fall when prices rise, and move up when prices fall.
Hedge funds' hawkish view on the Fed was also clearly reflected in their rates futures trades.
In the week to Aug. 9 they increased their net short position in three-month 'SOFR' rates futures to a record 797,342 contracts. The net short has doubled in less than three months.
This suggests speculators are betting heavily on the Fed keeping its foot on the rate-hiking pedal, perhaps pushing the fed funds policy rate well into 'restrictive' territory to make sure it gets inflation back down.
But consumer and producer price inflation figures for July released after the cutoff for the latest CFTC report showed a notable easing in price pressures. It's only one month, but some investors' outlook is changing. read more
"In the near term, risk assets should trade well, as we're getting past peak inflation worry," Citi strategists wrote on Friday.
As far as that INFLATION PEAK question, here’s ONE answer from DBs latest Mapping of the markets:
… Indeed some of the stickier components like shelter inflation were still very strong. If you look at that monthly trimmed mean on an annualised basis too, then it was running at a +5.5% pace for the month of July, which again is still well above rates we were seeing until about a year ago.
So whilst it’s not impossible this marks the start of a more favourable trend on inflation, keep in mind that this is just one month’s reading AND that it was driven by a few specific price movements like energy. Both markets and the Fed are going to need a lot more evidence than this before we can call the all clear for good…
AND for any / all (still)interested in trying to plan your trades and trade your plans in / around FUNduhMENTALs, here are a couple economic calendars and LINKS I used when I was closer to and IN ‘the game’.
First, this from the best in the strategy biz is a LINK thru TO this calendar,
Wells FARGOs version, if you prefer …
… and lets NOT forget EconOday links (among the best available and most useful IMO), GLOBALLY HERE and as far as US domestically (only) HERE …
Happy Monday (said nobody, ever),
… THAT is all for now. Off to the day job…