Good morning … today the bond market continues helping fund the government with MORE front-end supply (5s today and 7s tomorrow) … and one inside the government hoping for cheap financing can only HOPE (not a strategy) today’s liquidity event goes as well as yesterday’s 2yy …
ZH: Record Large 2Y Auction Sees Stellar Demand, First Stop Through Of 2024 (something about supply creating
… The bid to cover was also surprisingly strong, rising to 2.659 from 2.619, which was the highest since December and far above the recent average of 2.59.
The internals were also very strong, with Indirects awarded 66.2%, the highest since June 2023, and well above the six-auction average of 62.9%. And with Directs taking down 15.1% (the most since December), Dealers were left holding just 18.7%, the lowest since June.
… which leads me then to an updated look at 5yy
5yy DAILY: momentum shifting, TLINE (4.70%) holding, upTREND in place …
5yy WEEKLY: TLINE SUPPORTING making impending shift in momentum even MORE funTERtaining — and 5yy buyable
… #Got5s? So much for the ‘concession’ which WAS there for the taking? Wait, no, it’s leaking back IN to the markets as we speak … ok ok great …
ZH: US PMIs Scream Stagflation As Manufacturing 'Contracts', Prices Rise, Heaviest Job Cuts Since GFC (emphasis MINE cuz, you know, thats what I believe bond markets keyed in on … robbing mkts of whatever little concession might have existed for 2yy …)
… no sooner were we digesting the ‘bad news as good’ we were right back to … good news then is … good …
ZH: After Big Downward Revision, New Home Sales Jumped In March Along With Prices
… and as all this data set in and was then translated by markets, well, here’s what we were left with …
ZH: 'Buy All The Things' - Dismal Data Lifts Rate-Hike Odds As Markets Ignore Price-Pressures (see whatever you wanna see … STONKS …)
… Whatever … a big FAT whatever as by days end, here’s where we wound up …
ZH: Bonds & Stocks Bid As 'Bad News'-Buyers Trump CTA-Sellers
… #Got5s?? Bad news is good? Good news is good? I’m so confused. Forget it … here is a snapshot OF USTs as of 705a:
… HEREis what this shop says be behind the price action overnight…
… WHILE YOU SLEPT Treasuries are lower with the belly under-performing after Aussie bonds were gutted by another strong CPI print. DXY is higher (+0.15%) while front WTI futures are lower (-0.7%). Asian stocks were higher across the board, EU and UK share markets are mostly higher (SX5E +0.4%) while ES futures are little changed (+0.1%). Our overnight US rates flows saw better buying in the front-end despite large screen selling in 5's to 10's during Asian hours. During London's AM hours, our flows were limited with prices slipping lower ahead of supply. Fast$ showed small interest to add flatteners (5s10s and 5s30s) but that was about it. Overnight Treasury volume was weak at ~65% of average across the curve.
…Our last attachment simply checks in with Aussie 3yrs to show how they also got April 10th'd this morning... Crikey!
… and for some MORE of the news you might be able to use…
NEWSQUAWK: US Market Open: NQ outperforms, benefiting from gains in TSLA, USD firmer & AUD bid post-CPI, Bonds at lows … USTs are pressured, giving back some of the PMI-induced gains; Bunds follow suit and eye YTD lows … USTs pulling back after yesterday's PMI-induced gains which sent the 10yr benchmark to a 108.08 peak. Today's calendar sees US durables, however, greater focus may fall on the USD 70bln 5yr note auction given the well-received 2yr offering yesterday.
Finviz (for everything else I might have overlooked …)
Moving from some of the news to some of THE VIEWS you might be able to use… here’s SOME of what Global Wall St is sayin’ …
ABNAmro: US - Fed to tread more carefully with rate cuts | Insights newsletter
The economy has slowed in 2024 so far, but remains more resilient than expected. We continue to think the recent hot inflation readings are more noise than signal, but the Fed will need to be more convinced before it starts lowering interest rates.
BARCAP: March new home sales show growth after downwardly revised February data
March new home sales increased 8.8% m/m, to 693k, alongside a 25k downward revision to the prior month. The print highlights continued demand amid the current mortgage rate market. Meanwhile, the median new home price increased, and months' supply declined to 8.3.
DB: Early Morning Reid (on DATA shape shifting Fed narrative)
… Earnings season will continue apace today, as we’ll hear from Meta after the US close later. Before the Tesla results, the weakness in the US PMIs helped to set the tone, with Treasury yields seeing a sharp intraday decline after they came out. In terms of the details, the composite PMI was down to 50.9 in April (vs. 52.0 expected), which is the lowest in 4 months. And there wasn’t much relief from the subcomponents, as new orders were down to a 7-month low of 48.4, whilst the employment index fell to 48.0, which is its lowest since May 2020 at the height of the pandemic. In sectoral terms, services fell to a 5-month low of 50.9 (vs. 52.0 expected), and manufacturing was at a 4-month low of 49.9 (vs. 52.0 expected).
The release led investors to dial up their expectations for Fed rate cuts this year, and the chance of a cut by the July meeting moved up from 46% to 52% by the close. In turn, that sparked a rally for US Treasuries, with the 2yr yield down by -3.9bps on the day to 4.93%, having been as high as 4.998% at its intraday peak. 2yr yields had troughed shortly after a solid 2yr auction that saw $69bn of notes issued at 4.898%, -0.6bps below the pre-sale yield. Further out the curve, the 10yr yield (-0.9bps) fell back marginally to 4.60%, having been just shy of 4.65% before the US PMIs. With rates moving lower, the broad dollar index (-0.38%) saw its weakest day in nearly three weeks. This morning in Asia, yields on the 10yr USTs (+1.7bps) have edged back higher to 4.617% as we go to print.
The rates rally helped to spur a fresh advance for equities…
Goldilocks Global Markets Daily: US Long-end Rates: Dots and Divergence
Since the US CPI beat, the sell-off in rates has shifted from a growth upgrade to hawkish policy. Last year’s Q3 sell-off in long-dated forwards was preceded by a similar upgrade of growth views following the regional bank stresses in March.
Against a backdrop of elevated bond supply and strong performance of the economy, increasing comfort with the current ‘higher-for-longer’ policy path risks another sell-off in 5y5y forwards (and beyond). Also pointing in this direction is the potential eventual upward revisions of the Fed’s long-run dot, and the potential for this to induce further upward revisions in long-end rates.
However, with US real rate forwards at historically elevated levels, and forward real rate differentials to Europe near historical wides, it looks like the market is already anticipating a substantial increase in equilibrium real rates.
This suggests that while a move higher in real rate forwards remains a risk, a sustainable move higher in long-end rates would likely need to be driven by a rise in US traded inflation, either in absolute terms or relative to Europe.
… With the market pricing forward rates well above the Fed’s long-run neutral rate estimate—even after controlling for the term premium—it is worth asking whether changes in the Fed long run dots will impact market rates (Exhibit 4). In the 2014-2019 period, even as the Fed’s long-run dot fell, market rates were already priced well below the Fed’s projections, and yet still showed signs of response to the Fed’s signals. Taking changes on meeting days, we estimate that the impact of a 100bp increase in the long-run Fed dot is worth around 15bp for 5y5y nominal yields since 2012. However, once we control for changes in other dots (either the one-year ahead, or a measure of total change in rate path dots) we find that the beta on the long-run dot falls and becomes less significant.
Goldilocks Global Economics Comment: Higher Commodity Prices Pose Limited Upside Risk to Global Inflation and Policy
Commodity prices and oil prices in particular have risen since the start of the year, raising questions about whether these increases could prompt a pickup in inflation and a more hawkish policy shift. In this comment we update our estimates of the inflation, growth, and policy impacts of oil price increases across major economies and argue that higher commodity prices are unlikely to derail the global economic outlook.
Combining our inflation and GDP estimates with a simple Taylor rule implies that historically a 10% increase in oil prices would lead to roughly 10bp in policy tightening, with larger effects in Canada and Latin America but smaller effects in Japan and the UK. While risks around policy responses are likely more hawkish than these rules-of-thumb would imply, inflationary pressures from current commodity prices pose limited risk to the policy outlook in most economies.
We also see fairly limited growth risks from higher oil prices. We estimate that each 10% increase in oil prices raises GDP by 0.1-0.2pp in oil producing economies like Canada and Latin America but lowers GDP by 0.1-0.3pp elsewhere, resulting in a modest net 0.1pp drag on global growth in 2024.
The 14% increase in oil prices since the start of the year should put around 40bp upward pressure on year-over-year headline global inflation in 2024 but only boost core inflation by 7bp, a small effect relative to the decline in inflation that we forecast. In addition, we see upside inflation risks as somewhat limited given ample spare capacity in global oil production, and because the pass-through of commodity shocks to core inflation, inflation expectations, and wage growth should be smaller now that price inflation has returned to closer-to-normal levels.
The 2024 year-to-date US Treasury market sell-off may seem similar to the 2023 summertime sell-off. But movements in yields this year exhibit major differences from the rise last year – differences with important implications for the performance of the US Treasury market.
Key takeaways
Investors can't blame supply for the YTD sell-off as Treasury refundings did not book-end the rise in yields, and rate expectations, not term premiums, rose.
More synchronous energy markets and upside surprises to core inflation drove inflation expectations higher YTD, pushing up breakeven inflation rates.
The sustainability and extendability of the rise in US Treasury yields links strongly to upcoming inflation data and the performance of energy commodities.
Our economists see faster rent disinflation ahead – raising risks of a reversal in recently higher inflation expectations and TIPS real yields.
At the same time, our commodity analysts forecast more upside for Brent crude ($94/bbp) oil into the summer, complicating the outlook for inflation breakevens.
The US Senate has passed legislation defunding parts of Gen Z, with a ban on TikTok being allowed in US app stores unless the Chinese owner sells within 270 days. This potentially removes the economic activity generated by US content creators (influencers reportedly have an average income of over USD120,000—albeit with a very uneven income distribution). This economic activity may be underreported in official data, but it still takes place.
The ban may be spun as economic nationalism. US Senator Warner focused on security concerns, but the evidence has not been published. Meanwhile, the EU is accusing China of economic nationalism, with investigations into China’s medical device market and suggestions of China favoring domestic suppliers.
US March durable goods orders data is due. This is a volatile series, with a very wide forecast range for the headline; so, presenting the outcome as being above or below consensus is not especially helpful. Artificial intelligence-related investment is less visible in these numbers (as being more dependent on imported capital equipment)…
Summary New home sales jumped 8.8% to a 693K-unit pace in March, the strongest pace since September 2023. Although the report was accompanied by downward revisions to sales in February, on balance, the pace has strengthened on trend so far to start the year. New home sales should continue to gradually improve with a sturdy macroeconomic backdrop and structural affordability and availability constraints in the resale market remaining as tailwinds. That noted, higher interest rates and rising existing supply could weigh on the new home market moving forward.
… Takeaway We publish today’s table on an annual basis as a reminder to investors that not all market maxims should be taken at face value. In this case, the data presented does not support the notion that investors should “sell in May and go away”. Over the last 20 years, an investor who remained fully invested in the S&P 500 Index from May to October enjoyed an average annual total return of 3.37%, which is a significant figure when compounded. We continue to advocate that investors consider their time horizons and take risk as appropriate. For many, missing out on six months of equity market returns is a risk not worth taking, in our view.
… In as far as the TESLA news, is thiswhat I’m likely to be able to afford?
American History:
The Incomparable Mr. Buckley
First few minutes are slow...FF past them, if you want....
https://www.pbs.org/wnet/americanmasters/william-f-buckley-jr-about-the-documentary/28220/