China to channel 2 trillion CNY from offshore accounts of state owned enterprises into onshore stocks through Hong Kong to stabilise the market according to Bloomberg.
… AND we now return to our regularly scheduled programming where today, I’ll begin with an updated look at 2s ahead of this afternoons ‘liquidity event’ (aka AUCTION) …
… and on a shorter-term, more tactical timeframe and straight out of the ‘morning meeting’ (see RenMAC tweet below) …
… where 2yy appear to have cheapened and momentum - stochastics in this case - moved from overBOUGHT (lower yields) to now more overSOLD (higher yields) BUT there is not a condition where this momentum indicator has rolled over and CROSSED (favoring lower yields straight ahead).
Perhaps that makes some sense ahead of this afternoons ‘liquidity event’ (aka AUCTION) and any more of a ‘concession’ will likely be greeted by applause (and BUYERS) from the rate CUT / recession crowd!! In the meanwhile … here is a snapshot OF USTs as of 656a:
… HEREis what this shop says be behind the price action overnight…
… WHILE YOU SLEPT Treasuries are modestly lower with the curve a little steeper- generally mirroring the price action in Gilts and Bunds (where there was some supply today) this morning. DXY is little changed while front WTI futures (see attachments) are lower (-0.9%). Asian stocks were mixed (Chinese shares stable/higher today), EU and UK share markets are modestly lower (SX5E -0.25%) while ES futures are showing UNCHD here at an early 6:15am. Our overnight US rates flows were limited during Asian hours with some fast$ names selling intermediates as 10's outperformed on curve. During London's AM hours, we saw selling in 5's from our accounts along with some back-end selling. Overnight Treasury volume was ~80% of average with only 3yrs (110%) seeing above-average turnover overnight ahead of today's 2yr auction...
… Our second attachment is the zoomed out, monthly chart of Treasury 10's. We show this to illustrate what happened after the last major bull turn in bonds back in late 2018. As the arrows we've drawn in intimate, we had strong, trend-reversing rallies in November and December back then and then again at the end of last year. But during Q1 2019, Treasury 10yr yields spent much of their time chopping sideways or consolidating their gains before beginning a new bull leg late in the quarter. To date, Treasury 10's have taken back ~1/2 of December's gains and in early 2019 10's were hard-pressed to even get back into December 2018's rate range. But 2023's late year rally was much bigger (BPS terms) than it was in late 2018 so this year's retrace into December's range doesn't surprise us. Simply, we're still viewing the recent price action as not just a positioning rationalization but also along the lines of what was seen in early 2019: a longer-term breath-catching period before another leg to lower yields.
… and for some MORE of the news you can use » The Morning Hark - 23 Jan 2024 and IGMs Press Picks (who CONTINUES to be sportin’ that new, fresh look) in effort to to help weed thru the noise (some of which can be found over here at Finviz).
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’ …
BARCAP Long & Short of It: It's a Marathon, and a Sprint (positions matter)
2024 has a long way to go but risk assets already came in at full speed. US equity MFs' long position is back to 2021 levels; global macro HFs likely got squeezed out of 3Q equity shorts; CTAs are very long equities and asymmetry is moving to the downside; options skew signals little investor concern.
… Asset managers add to their long bond futures position Asset managers built up extremely long Treasury futures positions throughout 2023 and continued adding further in Q4. Yields dropping from October peak levels was a likely catalyst. A vastly increased supply of Treasuries stemming from Fed QT and deficit financing has also continued to favor a highly levered basis trade by macro hedge funds, extending the buildup in short speculative bond futures. While the trade did see some deleveraging take place in Q3, the massive size and leverage of the trade has the potential to exacerbate moves in the short-term repo funding market.
BNP US refunding preview: One More Time (knowing - or thinking you know - this is last hike in supply is one and same as last increase, at least as far as trading desks and market participants are concerned…)
We expect one more round of auction size increases at the February refunding, but look for a downshift in the pace of increases for nominal 2s and 5s, paired with an increase in 20s (held unchanged in November) and the same pace of adjustment for the rest of the curve.
T-bill supply is likely to remain elevated by historical standards, but should decline materially from last year. We anticipate further gradual TIPS increases.
We expect buybacks to be announced at the February refunding meeting, with separate liquidity support and cash management components.
Goldilocks: Boosting Our GDP Growth Forecast on Higher State and Local Spending (when the facts change we’re supposed to change, right, what do YOU do, sirs…? question then IS if growth estimates raised up will there be any material impact on rate CUT guesstimation?)
Real state and local (S&L) government spending has recently been stronger than expected, growing 4.8% annualized in the first three quarters of 2023 and contributing ½pp to overall GDP growth, much more than its average contribution of 0.1pp over the prior 5 years …
…When can we expect sagging S&L tax revenues to moderate spending growth? We find that the peak impact comes four quarters after a slowdown, with spending falling by 0.25% for every 1% decline in revenues, all else equal. However, federal infrastructure funding and state fiscal reserves have recently attenuated this relationship.
We estimate S&L spending continued growing around 4.5% last quarter and have therefore revised up our 2023Q4 GDP growth forecast by 0.3pp to 2.1% (qoq, ar), which boosts our 2023 GDP forecast by 0.1pp to 2.8% (Q4/Q4 basis).We are also raising our 2024 S&L forecast, which boosts our GDP growth forecast by 0.3pp in each of the next two quarters to 2.5% in 2024Q1 and 2.2% in 2024Q2 (qoq, ar) and increases our 2024 GDP forecast by 0.1pp to 2.1% (Q4/Q4).
TD: I Also Like to Live Dangerously (weekly a bit late for ME but … better late than never? generally speaking they read more bullish buyers of dips … joining the club)
…US Election: Groundhog Day Our baseline is that Trump wins the presidency and Congress remains split. We lean long 10s on dips and in 5s30s steepeners.
… Elections ultimately bring lots of moving parts for markets, but from a fundamental standpoint, we believe markets would be impacted in the following ways:
Duration and curve: From a longer-term perspective, we view the fair value of 10y Treasuries at around 3.5%. This breaks down as 1% r*, 2% Fed long-term inflation target, and about 0.5% for term premium. While term premium remains relatively low historically due to elevated central bank balance sheets, there is a risk of term premium rising higher if US deficits continue to swell (Figure 18). We expect 10y term premium to average around 50bp for the coming years, but a sharp upswing in deficits and softer economic landing could bias term premium another 50-100bp higher, keeping rates notably elevated. This is partly why we remain positioned for 5s30s steepeners to hedge against both bull and bear steepening trends. However, we continue to expect rates to move lower in 2024 amid Fed rate cuts starting in May, with 10s ending the year at 3%….
Summary While the Leading Economic Index continues to signal recession, a milder pace of contraction and broad-based improvements in the index's components suggest activity, especially in interest-rate sensitive sectors, has found a floor.
Wells Fargo: Do Elections Affect Economic Activity?
Summary
We wrote reports in 2016 and again in 2019 to determine if election periods had a significant impact on U.S. economic activity. With the 2024 presidential election right around the corner, we revisit that analysis.
Initial theories suggested that elections positively impact the economy through the actions of politicians, who may try to stimulate it as a part of their re-election campaigns. More recent theory, however, implies the opposite, suggesting that elections weigh on near-term economic growth, as individuals and businesses may delay large purchases or investments in the face of political uncertainty.
Our analysis in 2016 and again in 2019 did not find evidence of weaker economic growth in the 18 presidential election years that occurred between 1948 and 2016. In fact, we found that growth rates of real GDP, real consumer spending and real business investment spending were stronger during presidential election years than non-election years.
Did elected officials "juice" the economy via stimulative fiscal policy to improve their electoral prospects? Apparently not. Our 2016 analysis did not find a statistically significant difference between growth in real government spending in election years compared to non-election years.
We forecast the U.S. economy will continue to expand in 2024, albeit at a sluggish pace due to the current restrictive stance of monetary policy. Given the findings of our previous analyses, we suspect that this year's election will not have a material effect on the U.S. economy in 2024.
… And from Global Wall Street inbox TO the WWW,
Almanac Trader: February 2024 Almanac: Second Worst S&P 500 Month since 1950
February is in the middle of the Best Six Months, but its long-term track record, since 1950, is not that impressive…
Bloomberg: Treasuries & Stocks Delivering Policy-Loosening Obviate Fed-Cuts (wait, I thought I was Capt Obvious)
… As demanding as Nasdaq’s valuations seemed toward the end of the week, technology stocks screamed higher to a new record on Friday. Meanwhile, 10-year inflation-adjusted Treasury yields are about 75 basis points lower than they were just three months ago. Little wonder that financial conditions are now near the loosest they have been since the Fed started to tighten policy in this cycle.
[ZH: The lagged effect of that massive loosening of financial conditions is about to send macro-economic data soaring...]
… San Francisco Fed President Mary Daly cautioned Friday that it is premature to think that rate cuts are around the corner and that policymakers “don’t want to loosen policy too quickly, only to find that inflation gets stuck at way above target.”
We get a pulse check of the latter this week, with data on the Fed’s preferred core PCE forecast to show an uptick in December from a month earlier.
We also get a snapshot of how the US economy is faring: while gross domestic product is expected to have risen at a more moderate clip of 2% in the three months through December, it may still be above what the Fed sees as long-term trend growth of 1.8% - suggesting that the central bank’s cumulative policy tightening in this cycle isn’t strangling the economy.
[ZH: Simply put, the reflexive cycle of stronger stocks (on expectations of easier policy) driving financial conditions dramatically looser (doing The Fed's job for it), remove the need for actual rate-cuts from The Fed... and remove the pillar that is supporting the buying-panic in stocks... and around we go.
Be careful what you wish for...]
The more the markets rejoice on the idea of an impending rate cut by engendering looser and looser financial conditions, the less is the chance that we get a reduction even in May - let alone in March. For, if the markets are already doing the job on behalf of the Fed, there is little incentive for the Fed to add fuel to fire and stoke inflation all over again.
FirstTrustMonday Morning Outlook: Slower Growth in Q4, But No Recession
… Why do we still think a recession is coming? Because monetary policy is tight whether you like to use the yield curve, the “real” (inflation-adjusted) federal funds rate, or the M2 measure of money to assess the stance of policy from the Federal Reserve.
Why hasn’t a recession happened yet? Because monetary policy works with long and variable lags and a surge in the budget deficit in 2023 temporarily postponed the economic day of reckoning. We are right now living through a reckless Keynesian experiment with massive deficit spending relative to low unemployment, with the government having devised programs to temporarily boost GDP in the short run. But this government spending isn’t lifting longterm growth; it’s stealing from future growth.
In the meantime, higher short-term interest rates mean businesses have the ability to lock in healthy nominal returns on cash with minimal risk. In turn, this should lead to a reduction in risk-taking and business investment…
RENMAC (via TWITTER, HERE AT RenMACLLC — if only they used oversold / bought correctly in as far as bonds and rates … oh well, at least they suggest the directional impulse correctly — ie downside?)
From today's Monday Morning Macro Meeting: Yields were oversold in mid-December at 4.00% and now are overbought at 4.33% while $SPX has managed to punch to an all-time high. Global yields look more vulnerable to downside.
Last week the S&P 500 reached a new high and jobless claims hit a 60-year low. Stay up to date with the latest commentary from Professor Siegel.
… Just to reiterate my position on the Fed. I do not think we need five to six cuts from the Fed to have continued equity market gains this year. The Dot Plot penciled in three rate cuts—but the key insight I took from Powell’s December discussion was the willingness by the Fed to cut rates if the economy weakens. I previously was concerned the Fed might be stubborn in its inflation fight even in a softer economic scenario. Now we see the Fed weighing the employment side of its mandate as much as the inflationary side. And that’s the key flexibility we need to lower downside risks. If the economy is strong and the Fed does not cut rates as much as some expect—earnings growth may end up being supportive for the market.
Higher duration growth stocks (those with higher valuation multiples based on future cash flows)—have held up very well in the face of these higher interest rates relative to the value stocks. This is not usually the case, but I am attributing this strength to the continued strong performance in the semiconductor companies, which are spreading excitement over the impact from artificial intelligence (AI) technology. For the full year, I still expect greater participation in the rally from a broader cross section of the market, but sentiment still favors the high quality, big tech stocks.
It's interesting being able to trace one's Career Arc along a 30+ yr chart of the 2 yr note :)
Skip Bayless measures his life by 30 yrs of Deem' Boys Domination, and now 28+ yrs of Hype, Hysteria, and HEARTBREAK :)))