while WE slept: USTs modestly firmer ahead of JPOW, supply ; policy rules = SEPT cut; "...it is starting to look like rate cuts are too late" -UBS; 2s to 2% ?

Good morning … ahead of this afternoons $39bb 10yr auction …

10yy: near triangulated RESISTANCE as yields overBOUGHT

… a concession would be NICE but does NOT look like it’s in the works…

… Can only HOPE today’s liquidity event goes as well as yesterday’s 3yr did, with the benefit of JPOW testimony / hindsight (appeared NOT to rock the boat … much) … and so, a quick look back at some of what made up yesterday’s price action …

ZH: Crypto Bid, Crude Skids, Stocks & Bonds Sluggish As CPI Looms

… Powell was his ubiquitously neutral self with maybe a slight dovish tilt lifted rate-cut expectations rising modestly on the day...

… Treasury yields basically trod water again today with the long-end very modestly underperforming (30Y +3bps, 2Y unch). This pulled the entire curve higher on the week - though very marginally...

ZH: Stellar 3Y Auction Stops Through With Highest BId-To-Cover Since January

… onwards and upwards to this mornings clown show (House) and as we look forward, I’ll offer a quick look back and ask IF there’s any coincidence left in the world … EVER …

… and from one snapshot (July 2019…) to another … here is a snapshot OF USTs as of 650a:

… and for some MORE of the news you might be able to use…

• IGMs Press Picks: July 10 2024

• NEWSQUAWK: US Market Open: Equities on a firmer footing alongside strength in Bonds, USD flat & NZD sinks post-RBNZ … Bonds are firmer ahead of US 10yr supply and another appearance from Chair Powell … USTs are very modestly firmer, up to a 110-17 peak with Tuesday's 110-18 and Monday's 110-20+ highs in close proximity. Fed Chair Powell will appear before the House, though is unlikely to deviate much from commentary provided yesterday.

• Reuters Morning Bid: Calm markets as China skirts deflation, NZ doves coo

• 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’ …

BARCAP: U.S. Equity Insights: Is 2024 Half Full, or Half Empty?

Having passed the midpoint of the year, we check in on performance through the first half and what's still to come in 2024. Big Tech carried 1H24 (both EPS and returns); upcoming earnings season implies more of the same. 2H is seasonally stronger but choppier; estimates imply broader EPS growth pickup starting in 3Q.

BNP: US equities: Q2 earnings season – Delta replacement

Delta replacement: The US equity market is at highs, vol is at lows and there has been significant rotation as we approach earnings season. If the market continues to hit new highs, we expect to see a spot up/vol up dynamic. Even if realized volatility remains low, we suggest investors consider replacing delta exposure with call options. Our preferred SPY maturity to own is Sep24, which spans earnings season (including NVDA) and the next two FOMC meetings.

Should we see a market correction, we have less confidence in vol performing. For downside, SPY 1x2 Put Ratios or PDOs offer potentially attractive payoffs for mean reversion trades. Given low recent realized and our expectation of more dispersion in earnings season, we think it could be a challenging environment for downside vol to realize, despite the low starting levels.

DB: Policy rules point to a September cut (okie dokie … so it has been written and so it shall come to be…once and for all?? OR are rules meant to be broken…?)

…Prescriptions from common policy rules also support the case for a September cut, as shown in today’s chart. The grey area plots the range of prescriptions from three rules – Taylor 1993, balanced-approach, and balanced-approach shortfalls – based on two distinct sets of inputs, reflecting realized macro data and forecasts. The blue line is the midpoint of the fed funds target range.

Most notable with respect to the current setting is that, for the first time in 30 years, Fed policy is meaningfully restrictive relative to the range of rules. Previously, the only instances in which the funds rate was above the rule prescriptions were episodes in which policy was constrained by the effective lower bound.

Of course, the rules offer just one lens and there are good arguments in favor of more caution: broad financial conditions aren’t tight; budget deficits are projected to remain historically large and could grow post-election; shifts in trade and immigration policy could boost near-term inflation and put inflation expectations at risk; the neutral rate may be much higher than commonly assumed; and although risks to inflation and employment have moved toward balance, policymakers’ loss function is still asymmetrically tilted towards easing too late rather than too early.

DB: Early Morning Reid - Macro Strategy (on JPOW)

… Overall, Powell’s tone was a fairly balanced one, and he reiterated the Fed’s message that they needed “greater confidence” that inflation was moving back towards target. Nevertheless, he also explicitly said in his statement that “elevated inflation is not the only risk we face”, pointing out that keeping policy too restrictive “could unduly weaken economic activity and employment” and that “labor-market conditions have now cooled considerably”. So there was an acknowledgement of the risk of staying on hold too long.

But despite Powell’s comments, Treasury yields initially moved higher across the curve. In large part, that was because of hopes that Powell would be even more dovish, and it’s worth noting that markets were already pricing more easing than the Fed had signalled in their June dot plot. For instance, the median dot had pointed to just one rate cut this year, but futures were fully pricing in two rate cuts before Powell’s testimony and this was little changed on the day (-0.4bps at 50bps). Treasury yields were a few bps higher intraday as Powell spoke, but began to turn lower around the end of his testimony. The 2yr yield ended the session -0.3bps lower at 4.63%, with the reversal also helped by a solid 3yr Treasury auction that saw $58bn of bonds issued 0.8bps below the pre-sale yield. Still, the 10yr yield closed +1.7bps higher on the day at 4.30%.

NatWEST: June CPI Preview: Another soft CPI print (so, July CUT or … perhaps NOTSOFAST … read)

… In that context, readings matching our expectations for the June print would put the three-month annualized rate of growth for the core CPI closer to the Fed’s 2% target at 2.4%, down from 3.3% in May. However, the six-month annualized rate of growth will show more modest improvement at an expected 3.5% for June versus 3.7% in May, suggesting the Fed may want to watch further progress on these measures before they start signaling any easing in monetary policy.

UBS: Bad policy waits for “good data”

Perhaps Federal Reserve Chair Powell has opened an economics book (possibly “How the world really works—the economy”). Powell told the Senate banking committee that cutting rates too early would be bad, but cutting rates too late would also be bad. Unfortunately, the Fed Chair insisted that more “good data” was required to induce a rate cut. With inflation down over eight percentage points in less than two years, real rates soaring, and deflation peppering sectors of the US, it is starting to look like rate cuts are too late…

Wells Fargo: Another Modest Improvement in Small Business Optimism
Optimism Turned up in June, but Outlook Is Still Dim

Summary
Inflation Remains a Top Concern
Small business sentiment remains sour amid a downshift in economic momentum. The NFIB Small Business Optimism Index improved in June to 90.5. Although the index has risen for three consecutive months now, high uncertainty and poor economic outlooks have cemented the index below its 50-year average of 98. Retreating labor demand, weak sales growth and high interest rates all weighed on optimism in June. Receding price pressures was one silver lining of the report. However, inflation remained the top problem facing small businesses as the path back to 2% is slow-going.

Wells Fargo: Slow Boat from China
Implications of Soaring Shipping Costs

Summary
Red Sea attacks are increasing the time and cost of shipping, and the impact is felt far beyond the Asia–Europe trade route. That said, this is not a replay of the global supply chain crisis of 2021–2023. The absence of extreme shocks in both supply and demand relative to that period means that, although importers will continue to feel the pinch, higher shipping rates are unlikely to be fully passed on or to spur a rebound in inflation.

… And from Global Wall Street inbox TO the WWW,

Apollo: 10s and Fed Expectations

In rates markets, there is a tug-of-war between a slowing economy arguing for lower rates versus the structural forces putting upside pressures on inflation and rates (i.e., deglobalization, energy transition, more restrictions on immigration, more defense spending, and significant fiscal challenges).

So far, 10s have been moving around one-to-one with Fed expectations, see chart below. But in recent weeks, a gap has opened up, suggesting that other factors, perhaps including the fiscal outlook, are beginning to play a role for long rates.

Bloomberg: 5 Things You Need to Know to Start Your Day: Asia

… Market reaction to Fed Chair Jerome Powell’s testimony in the Senate Tuesday wasn’t as dovish as expected, yet economic data suggests rate-cut bets will only rise in the months ahead.

While the chair intended to strike a balanced tone to keep his options open, he also acknowledged that inflation isn’t the only risk the Fed faces — emphasizing the labor market, the other leg of its dual mandate. Last week’s data showed the unemployment rate ticking up to 4.1%, ahead of the Fed’s median projection of 4% by year-end.

Other indicators, such as ISM Services — which rarely dips into contraction — are also flagging risk of a deterioration in business activity. Alongside faltering consumption, it all suggests economic risks are rising.

Absent a jump in inflation readings Thursday, traders will likely start assigning higher odds of a cut in September. Those bets are little changed today, hovering around 17 basis points of cuts, or odds of ~70%.

Calafia Beach Pundit: With a little luck we'll survive Biden's departure

… Chart #4 is one of my long-time favorites, since it shows two variables that have, until recently, foreshadowed the onset of every recession in my lifetime (with the solitary exception being the Covid black hole). When the Fed raises short-term rates to levels significantly higher than inflation—otherwise known as monetary tightening—and the Treasury yield curve inverts (red line), recessions typically follow. We are now very close to seeing both of these variables manifesting: real rates (blue line) are 3% and rising (still a bit shy of past peaks however), and the yield curve has been inverted for several years. If the economy avoids a recession it will likely be due to the Fed's policy of abundant reserves, an argument I've been making for the past 15 years. Abundant reserves all but guarantee that liquidity remains abundant, and that has the effect of inoculating the economy against credit busts and related recession. I've been making this argument frequently in the past 18 months.

CRESCAT on 2yy down to 2%

I wouldn’t be surprised if the 2-year yield retests its breakout level, forming major support around 2%.

The risk of a recession has significantly increased in recent months, particularly with the steepening of the yield curve from deeply inverted levels, cracks in the labor market, and growing signs of decelerating growth, while earnings expectations remain unrealistically high.

Interestingly, today’s suppression of volatility is characteristic of what we often see before a recession, commonly referred to as the calm before the storm.

Large interest rate cuts have yet to become a central narrative, and in my view, now is the time to “T-Bill and chill”.

ING: Fed's Powell signals a willingness to cut rates, but more progress is required

Progress appears to being made on the Fed's aspiration of moving the economy into better balance and thus bringing inflation down towards the 2% target. Two-way risks are also increasingly being acknowledged and if the data moves in the direction we expect the potential of a September interest rate cut in the US will build further

… and with THAT in mind, rarely do I offer investment / trading ADVICE but … here you go, here’s a look at recent meeting between myself and my advisor …

AND … THAT is all for now. Off to the day job…get those bids in for 10s EARLY AND OFTEN as good luck as you plan your trades and TRADE your plans…