while WE slept: USTs down, moving w/UK, Ger data flow; bonds 'agitated by Fed'; "...Treasury Yields at 6% on Fiscal Risks" -TROW; GROWTH > value; #2025DartBoard
Good morning … Having little to add as INDU leaning into it’s longest losing streak since 2018 AND value underperforming now relative to growthy stocks at a rate not seen since 2000 / 01 (think dot BOMB levels and see visual below), I think I’ll stop thinking too much here ahead of ReSale TALES and lead with a story from BBG … this story details a ‘yield call’ i’ve not yet seen so far as professionals throw 2025 darts at the board …
Bloomberg: T. Rowe Raises Prospect of Treasury Yields at 6% on Fiscal Risks
Benchmark yields likely to rise on tax cuts, fiscal expansion
Foreign demand for Treasuries is also falling, Husain writes
Treasury 10-year yields may climb to 6% for the first time in more than two decades as US fiscal woes worsen and Donald Trump’s policies help keep inflation elevated, according to T. Rowe Price.
The benchmark yield may first reach 5% in the first quarter of 2025 before potentially climbing further, Arif Husain, chief investment officer of fixed-income, wrote in a report. Husain is doubling down on calls for higher yields, citing persistent US budget deficits as Trump cuts taxes during his second presidency, as well as potential tariffs and immigration policies that would sustain price pressures.
“Is a 6% 10‑year Treasury yield possible? Why not? But we can consider that when we move through 5%,” wrote Husain, who helps the money manager oversee $187 billion. “The transition period in US politics is an opportunity to position for increasing longer‑term Treasury yields and a steeper yield curve.”
The outlook for Treasuries has grown increasingly bleak as traders brace for Trump’s proposed policies to stoke inflation and increase the fiscal strain on Washington. Investors will scour the Federal Reserve’s policy statement on Wednesday to gauge how much further interest rates may fall after the US central bank delivers an expected quarter-point cut this week…
… AND I should have quit while I was behind … I’ve got no better / worse ideas than anyone else and so, the dart-throwing exercise shall continue …
… I’ll take a quick look back at the day that was …
ZH: US Manufacturing PMI Plunges As Services Soar To 38-Month-High, But...
… Analysts were half right... as US Manufacturing PMI plunged to 48.3 (from 49.7 and below all expectations) but US Services soared higher (to 58.5 from 56.1, far above all expectations)
… The Services survey hits a 38-month high as US Manufacturing Output plummets to a 55-month low...
Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:
“Business is booming in the US services economy, where output is growing at the sharpest rate since the reopening of the economy from COVID lockdowns in 2021. The service sector expansion is helping drive overall growth in the economy to its fastest for nearly three years, consistent with GDP rising at an annualized rate of just over 3% in December.
“It’s a different picture in manufacturing, however, where output is falling sharply and at an increased rate, in part due to weak export demand.
… AND by days END, turns out STOCKS not the only thing with a losing streak going on at the moment …
ZH: Bitcoin Roars To New Record High As Stocks Suffer Worst Breadth Since 9/11
… Treasury yields rose for the seventh day in a row with the long-end continuing to lag...
…Finally, while a rate-cut this week is now fully priced in by the markets, the trajectory for 2025 continues to flatten (with less than two 25bps cuts now priced in for the whole of 2025)...
We're still surprised that The Fed has not jawboned back the December odds - there is simply no data (that they are so vehemently dependent on) to justify a rate-cut now, but the market must be obeyed (unless of course there is a third mandate to maintain US govt solvency)...
AND … here is a snapshot OF USTs as of 654a:
… and for some MORE of the news you might be able to use…here are some resources and curated links for your dining and dancing pleasure …
NEWSQUAWK: US Market Open: GBP benefits from hot UK wages data, DXY bid amid a tepid risk tone ahead of US Retail Sales … USTs are in the red but only modestly so, moving in tandem with the morning’s data release out of the UK and Germany but in relatively thin 109-21 to 109-29+ parameters. US Retail Sales precedes a 20yr auction later today.
The expected surplus next year is abundantly in the price, in our view. We lower our 2025 fair value estimate for Brent to $83/b but remain constructive relative to the curve and consensus.
… AND survey SAYS (with a couple slides caught MY eyes) …
Only 2% believe US growth will be below 1% in 2025. That’s the average expected in Europe.
No-one saw European growth in 2025 above the average expected in the US.
The base case is that investors think Trump will be a bit less aggressive than his campaign promises on trade.
The biggest global risks are seen as a global trade war, a US tech sector plunge and concerns over inflation and bond yields.
Only 2% of German responses think the debt brake will remain completely unchanged.
The Mag-7 are seen increasing by 6.8% in 2025, the S&P 500 by 5.2%.
US long-term inflation expectations are the highest in a year but in Europe they’re the lowest since Q2 2021.
Your favourite Xmas movies are quite violent!
…YE 2025 Treasury yield expectations (average 4.2%) are a bit lower than current levels with only 4% believing we’ll end 2025 >5% Where do you see 10-year US treasury yields by year end 2025? We will bucket the answers, so slide as near as possible to your desired answer
…The S&P is expected to be +5.2% higher in 2025, with 23% believing it will be lower and 23% believing up >10%. The overwhelming consensus (35%) think between 5% to 10% and much more concentrated than in prior years... What do you think the return of the S&P 500 will be in 2025? Please pick the nearest 5% increment that you think it will be
… same outfit talking of American Exceptionalism in its morning thoughts …
… Over in the US, the theme of American exceptionalism continued as the flash PMIs were notably stronger than expected. Indeed, the composite PMI was up to 56.6, which is its highest since March 2022 when the Fed started to hike rates again. In turn, that contributed to a selloff among US Treasuries, which pared back their initial gains to leave the 10yr yield little changed (+0.1bps) at 4.40%. At the same time, there was a notable outperformance from US equities, with the S&P 500 (+0.38%) ending the session just -0.27% beneath its all-time high. As mentioned at the top the breadth was again a negative as more stocks fell than rose for an eleventh day with the equal weight index down -0.36%. So the advance was driven by the Magnificent 7 (+2.07%), which hit another all-time high. Health care stocks (-1.24%) were among the underperformers as Trump commented that he plans to “knock out the middleman” in the sector during a wide-ranging press Q&A …
US Treasury yields finally get bullied further higher by mutual fund flows selling duration. A January pause from the Fed is also on minds, even as a 25bp cut is coming on Wednesday. Still, in the eurozone, we see a reasonable chance that euro rate markets will undershoot the priced-in landing point of the ECB in the near term, below our own forecast of 1.75%
…US retail sales are expected to improve again—US household consumption is breaking records in real terms (US consumers have never had it so good, but refuse to believe that). Retail sales contain only limited “fun” spending elements—restaurants and clothing—and so probably understate overall spending growth.
… here’s a question that has RATES MARKETS implications and worth review and one which TROWE seems to have a view of …
Wells Fargo: Will Federal Government Spending Be Slashed in 2025? Where Does $6.8 Trillion in Government Spending Go?
Summary The next administration and Congress will take office in January, and one of the numerous policy changes under discussion is reducing federal spending. In this report, we take a deep dive into the composition of federal government spending and employment. We also discuss how the political process works to affect changes in these areas.
The federal government spent $6.8 trillion in fiscal year 2024, of which "mandatory" spending accounted for roughly $4.1 trillion. Because mandatory spending is determined by various eligibility requirements, such as age or income, it is more or less on "auto-pilot" from year to year. Social Security spending totaled $1.4 trillion in FY 2024 with Medicare tacking on another $900 billion. Other key mandatory spending programs include Medicaid ($600 billion), certain veteran benefits and retirement benefits for civilian employees and members of the military ($200 billion).
Reductions in mandatory spending are possible, but we are skeptical they will occur at a major scale given the enduring popularity of many of these programs, most notably the two largest, Social Security and Medicare.
Zeroing out the $950 billion in interest payments on the national debt is not a realistic option unless the government defaults on its debt.
The remaining $1.8 trillion of spending is deemed "discretionary" since it is funded via the annual appropriations process. Defense spending represented nearly one-half of total discretionary spending in FY 2024 and amounted to 3.0% of GDP—more or less a post-Cold War low. In our view, a major reduction in what Congress allocates to the Pentagon does not seem likely in today's geopolitical environment.
Nondefense discretionary spending includes a variety of government operations and services that often jump to mind when thinking about the federal government. Examples include border security, the Transportation Security Agency (TSA), the National Aeronautics and Space Agency (NASA), the Internal Revenue Service (IRS) and some veteran benefits. The ratio of nondefense discretionary spending to GDP is currently about as low as it has been in recent decades.
The compensation of federal employees represents less than 6% of spending, and federal government employment is just 1.5% of nonfarm payrolls. A bit more than half of federal employment is concentrated in just three departments (the Departments of Defense, Veterans Affairs and Homeland Security) in which significant headcount reductions may be difficult to achieve.
Generally speaking, it takes an act of Congress to materially increase or decrease federal spending, and in many cases these changes need to clear a de facto 60 vote threshold in the Senate due to the filibuster. The president can take some unilateral actions on spending, but not nearly enough to close the projected $26 trillion cumulative budget deficit that the Congressional Budget Office projects over the next 10 years, assuming a Tax Cuts and Jobs Act extension.
We think some reductions in federal spending and employment on the margin are plausible over the next couple of years, but probably not on the scale that they will have large implications for a U.S. economy that has almost 160 million nonfarm employees and nearly $30 trillion of annual GDP.
… In short, some federal government spending cuts and employment reductions strike us as plausible on the margin, but we are assuming relative status quo for these areas in 2025, not major changes. Other policy changes, such as those on taxes and tariffs, strike us as much more likely to be changed next year, as we outlined in our 2025 Annual Economic Outlook.
… same shop has an economic calendar for the year ahead which I’ve already printed and keep on my desk (yes, with notes) …
… and ‘bout that there ‘hawkish CUT’ — not a fan but, you didn’t ask MY view …
WisdomTree: Prof. Siegel: Surging Tech Stocks, a Hawkish Fed Cut, and Regulatory Shifts
… The Federal Open Market Committee (FOMC) meeting this week looms large. I expect the Fed to deliver a rate cut— but a hawkish one. I believe the dot plot may show a large number of members preferring only two cuts next year, and this might jar risk assets. I believe the Summary of Economic Projections (SEP) will reveal long-term expectations of the funds rate will move up to 3.0% or 3.1% or potentially higher. Since the market is expecting a rate cut Wednesday, and there has been no push back by Powell, I think a 25-basis point (bp) cut at this meeting is in the bag, although there might be dissents. Remember, I estimate that the neutral Fed Funds Rate to be 3.5% to 4.0%, far higher than the consensus of FOMC members, but still 50 bps to 100 bps lower than current rate.
Money supply growth has stabilized around a 5.5% annualized increase, while commodity prices have plateaued and GDP growth appears robust, likely landing around 3% for Q4. However, a slight uptick in unemployment last month cemented market expectations for a December rate cut. Nevertheless, the economy is not showing any weakening signs …
… finally, a terrific question or statement of the obvious …
Yardeni: Is the Fed Inflating? Is China Deflating?
Last Thursday, we wrote, "After today's PPI, we won't be surprised if Fed officials plant a story in The Wall Street Journal over the weekend titled something like "Fed Officials Might Vote To Pause Rate Cutting Following Hot Inflation Data." We were close. Nick Timiraos, the WSJ's ace Fed watcher, posted after midnight today an article titled "The Fed’s Game Plan on Interest-Rate Cuts Keeps Shifting." It was subtitled, "Investors widely expect a third-in-a-row rate cut this week. Officials are ready to slow—or even stop—lowering rates after that."
That doesn't rule out no rate cut in the federal funds rate (FFR) on Wednesday. Or else, if the FOMC votes for a rate cut, there might be more than one dissenter. The FOMC's dissenters will undoubtedly argue that the FFR isn't restrictive given the strength of the economy, stickiness of inflation, and record high prices for stocks, homes, bitcoin, and gold.
We agree with the dissenters. We devised a simple way to judge whether the Fed is restrictive or not. Recessions tend to coincide with periods when the FFR exceeds nominal GDP growth (chart). The spread is currently close to zero, suggesting that the FFR isn't too restrictive.
We can do a similar calculation to gauge whether the Bond Vigilantes are restrictive using the 10-year Treasury bond yield instead of the FFR (chart). They are not so far. They were too relaxed during the inflationary 1960s and 1970s. They turned vigilant during the 1980s and 1990s. The spread between the bond yield and the growth of nominal GDP has been negative since the pandemic. So neither the FFR nor the bond yield is restrictive currently. Message to the Fed: Chill…
… And from Global Wall Street inbox TO the WWW …
AND ‘bout that value vs growth story, a tweet …
at JasonGoepfert
With today's dip in value stocks and jump in growth, the ratio between them just fell to the lowest in 24 years.
Another couple of days like this, and value will hit a 40-year low relative to growth.
10Y 6% doesnt look so bold anymore tbh