while WE slept: USTs modestly higher in 'illiquid conditions' (holiday); "The coast is clearer..." they say ... get long (5y)duration' ... they say

Good morning … I’m tired. YOU are tired. We’re ALL tired and likely due to TSWIFTs boyfriend winning some big game and … well, whatever. Curious if they’ll still be dating during the off-season and … really NOT that curious.

Only couple days ‘til pitchers and catchers report SO lets just move right along.

In addition TO a couple / few WEEKLY visuals sent and noted over the weekend, I thought it might be a good idea to have a look at 5yy WEEKLY given some Global Wall St thoughts stumbled upon before the BIG game …

5s: momentum BEARISH and we appear to be in an UPtrend … watchin’ 4.20%

NOW, aving spent so much time, energy and ‘ink’ on a more bearish read of the charts, a shorter-term view of 7yy which looks to be at an interesting juncture …

7yy: momentum on verge of BULLISH cross, support up nearer 4.20% and resistance down closer TO 4.05% …

… where ‘support’ might be reached if / when say momentum were to correct a bit? Clearly HOPES (not a strategy) of buying dips / remaining LONG (see below) rest on shoulders of this weeks DATA (CPI and ReSale TALES) and Fedspeak.

All told, maybe there is something TO some out there calling one / all to arms and to be buying dips, getting LONG ‘duration’ (via 5yy) and … for more (and a counter view), continue to scroll / read AND have at what was compiled and sent over the weekend …

Meanwhile, here is a snapshot OF USTs as of 705a:

… HERE is what this shop says be behind the price action overnight…

… WHILE YOU SLEPT
Treasuries are modestly higher in illiquid conditions as much of Asia is out on holiday. DXY is little changed while front WTI futures are lower (-1%). Most of Asia's stock exchanges were closed, EU and UK share markets are modestly higher (FTSE 100 -0.15% though) while ES futures are showing UNCHD here at 6:45am. Our overnight US rates flows saw light overall volumes during London hours with some interest to add steepeners noted. Overnight Treasury volume was just ~45% of average...

… Meanwhile, 5-year real yields (TIPS) are still respecting their range support near 1.885 and they're also beginning to appear tactically 'oversold' now too (see daily momentum, lower panel). The ~1.60 to 1.885 range in 5yr reals looks pretty solid still, given this set-up.

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

• The Morning Hark - 12 Feb 2024

• NEWSQUAWK: US Market Open: Equities firmer and US equities little changed, NZD lags & Crude lower; NY Fed Survey of Consumer Expectations due … Bonds are little changed amid catalyst thin trade and will likely take impetus from upcoming central bank speak …

• Reuters Morning Bid: US inflation looms large with Asia on holiday

• 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’ … this in addition TO what was compiled and sent over the weekend … where we had dip buyers (SocGEN) and those somewhat more cautious / bearish (BAML) and those who REMAIN LONG keeping their friends close and their STOPS closer (MS) …. Note then today I’ll add TO the BULLS (JPM)

BNP: Sunday Tea with BNPP: CPI – The Anti-Hero?

KEY MESSAGES

• Focus this week will be on Tuesday’s US CPI print. We see asymmetric market risks, where yields are likely to rise more on a high print than fall on a low one.

• In US rates, we have shifted our long exposure in the front-end to real rates over nominals.

• In FX, recent USD strength means that we have moved into a pocket of light gamma in both USDJPY and GBPUSD. This suggests the potential for outsized moves should we see a data surprise.

DB: Why R-star is no Lodestar (Ruskin…)

R-star has been gaining notoriety of late, not least as the US economy still appears to be growing near trend, despite a real funds well above most exante views of neutral. Below we give multiple reasons not to get star struck: i) R-star suffers from “broken clock syndrome”. ii) What r? iii) What inflation rate for a relevant measure of real rates? iv) It's not just price its quantity. v) What time frame does r* cover?

What does all of this say about the coming rate cycle?

A logical starting point is to think that there will be some symmetry between rate hikes and rate cuts and their economic impact i.e. the real growth beta to rates is symmetrical whether rates are going up or going down . By that thought process, if rates going up had less real economic effects in this cycle, there is a good chance that rates coming down will also have less stimulatory effects. This would point to a wider amplitude in rates over the cycle, with higher highs and lower lows.

However, we are seeing in this cycle that there is some asymmetry between easing and tightening. US households have had relative flexible rate borrowing when rates decline, and predominant fixed rate borrowings when rates have increased! In addition, rates fell so low for so long, they made this "optionality" even easier to capture. In these circumstances, the average rates over the subsequent cycle is apt to be higher.

In addition, the seeming higher r* falls out of the public sector leverage and relatively restrained private sector leverage in this cycle, rather than longer-term 'structural' issues like productivity that could speak to a higher r* over the coming decade.

DB Early Morning Reid: Macro Strategy (on S&P500 “5000!” hats…)

…But the rally was still relatively concentrated. The equal-weighted S&P 500 increased a more modest +0.47% (+0.15% on Friday) and it was the IT sector (+1.50% in the S&P), including the Magnificent Seven (+2.98%), that drove last week’s rally again. Semiconductors were the most prominent outperformer, as the Philadelphia Semiconductor Index jumped +5.32% (and +1.99% on Friday) following strong results from chipmaker ARM and an announcement by Nvidia that it was in talks with top AI firm OpenAI on designing specialised chips. US regional banks recovered on Friday, with the regional banking KBW index up +1.85% (but still -1.31% lower on the week) as New York Community Bank rose by +16.9% on news that its management had bought additional shares. That said, NYCB was -18.9% lower on the week, drawing further attention to turmoil in the CRE market. The STOXX 600 rose a more modest +0.19% last week (and -0.09% on Friday)…

Goldilocks US Economics Analyst: Making Sense of the GDP-GDI Gap

Real GDP grew by 3.3% year-over-year in 2023Q4, well above expectations and our estimate of potential growth. However, real gross domestic income (GDI), an alternative measure of economic activity derived from income rather than expenditure data, declined by 0.1% year-over-year in 2023Q3, and the gap between the levels of GDP and GDI is now at its highest level since the early 1990s.

Both GDP and GDI are valuable indicators of economic activity in general. Historically, we find that a simple average of the initial estimates of GDP and GDI growth does best at predicting the revised estimates of both indicators. In addition, GDI growth has sometimes been weaker just before the economy goes into recession, leading some commentators to place more weight on it as a signal of inflection points in economic growth.

At present, however, we see some tangible reasons why GDI probably understates growth…

…To gauge “true” growth in the four quarters to 2023Q3, we would use the average of GDP (2.9%) and GDI adjusted for our four distortions (1.3%). The resulting 2.1% estimate implies that the US economy grew at a pace close to or very slightly above potential. This is also consistent with the performance of the labor market over the past 12-18 months.

…Real GDP grew by 3.3% year-over-year in 2023Q4, well above expectations and our estimate of potential growth. However, real gross domestic income (GDI), an alternative measure of economic activity derived from income rather than expenditure data, declined by 0.1% year-over-year in 2023Q3, and the gap between the levels of GDP and GDI is at its highest level since the early 1990s (Exhibit 1).

JPM: US FI Markets Weekly (get. long. (5yr)duration…)

…Treasuries
The coast is clearer: add longs in 5-year Treasuries

• Yields rose to their highest levels since the December FOMC meeting, as hawkish Fedspeak and stronger-than-expected data more than fully offset the strong results from this week’s refunding auction

• With yields near the top of their 2-month ranges, less Fed easing priced in, our expectations for softer-than-expected data in the week ahead, and positioning more neutral, we turn more constructive and recommend adding duration in 5-year Treasuries

• The long-end should continue to steepen ahead of the first Fed ease. We continue to hold 2s/5s flatteners and 5s/30s steepeners: these curves are too steep and too flat, respectively, relative to their drivers

• Stripping activity totaled $4.2bn in January, below the very strong levels seen in recent months. Demand remained concentrated in the long end. Overall, given the high pension funding status, we would expect stripping activity to remain firm

…As we look ahead, we think the current backdrop is supportive of lower yields and recommend longs in 5-year Treasuries, for a few reasons. First, after the recent moves, intermediate yields are now back to their highest levels since the December FOMC meeting and the OIS forward market has also pared back Fed easing expectations for 2024 to only 112bp of easing. Second, as we look ahead to next week, the data flow should be supportive of lower yields: we expect the January retail sales report to show some weakening relative to recent months, with a 0.9% decline in the headline (consensus: -0.1%) along with a flat reading for the important control group, 0.2%-pts below consensus (Focus: Expect noisy and weak retail sales data for January, Daniel Silver, 2/9/24).We also expect a benign CPI report, with core CPI held down by an expected decline in used vehicle prices, coming in at 0.2% (consensus: 0.3%), and 3.7% oya, down from 3.9% in December and reinforcing the recent disinflationary trend (see United States, Michael Feroli, 2/9/24).

Finally, while positioning is not totally clean, the technical backdrop has turned significantly more supportive over the last week: out of our five preferred positioning indicators, only the macro hedge fund beta remains meaningfully long relative to its 1-year average, while all others are now within 1 standard deviation of their respective 1-year averages (Figure 13). Further, the share of neutrals in our Treasury Client Survey rose to 74% this week, the highest share since April 2023 and in the 98th percentile over the last 10 years, suggesting that the vast majority of our client franchise is on the sidelines (Figure 14). Given these factors, we turn bullish and recommend adding duration in 5-year Treasuries…

MS: Sunday Start | What's Next in Global Macro: CRE: Persistent Pressures

Commercial real estate (CRE) is back in the spotlight in the aftermath of the loan losses, reserve build, and dividend cuts announced by New York Community Bancorp (NYCB), a regional bank that primarily focuses on rent-stabilized multifamily and CRE lending in the New York metro area. Lenders and investors in Japan, Germany, and Canada have also reported sizable credit losses or write-downs related to US CRE. Government officials ranging from Treasury Secretary Yellen and Fed Chair Powell to other central bank officials on both sides of the Atlantic have expressed concerns about the financial stability risks emanating from CRE losses. The challenges in CRE have been on a slow burn for several quarters. In our view, the CRE issues should be scrutinized through the lenses of lenders and property types. We see meaningful challenges in both…

…Where do we go from here? Property valuations will take time to adjust to shifts in demand, and repurposing office properties for other uses is far from straightforward. Upgrading older buildings tends to be expensive, especially in the context of energy efficiency improvements sought by both tenants and authorities. While easier monetary policy could alleviate some valuation pressures, market prices already reflect much of the expected easing, in our view. The bottom line is that CRE challenges should persist, and a quick resolution is unlikely, in part because a majority of loan loss reserves at banks reflect visible transactions, not forward-looking peak-to-trough estimates.

Is it systemic? Treasury Secretary Yellen noted in her remarks to the US House of Representatives that “Commercial real estate is an area that we’ve long been aware could create financial stability risks or losses in the banking system, and this is something that requires careful supervisory attention….I believe it’s manageable, although there may be some institutions that are quite stressed by this problem.” Whether or not this escalates to broader system-wide stress depends on one’s definition of systemic risk. In our view, the risk is unlikely to be systemic along the lines of the global financial crisis (GFC) of 2008. That said, the GFC is a very high bar.

In our view, the strong linkages between the regional banks and CRE may impair these banks’ ability to lend to households and small businesses. This could lead to lower credit formation, with the potential to weigh on economic growth over the longer term.

MS US Equity Strategy: Weekly Warm-up: A Premium on Quality

Balance sheet quality and operational efficiency come back into focus. We reiterate our constructive stance on high quality growth, which is showing relative strength from a fundamental and performance standpoint.

… And from Global Wall Street inbox TO the WWW,

Apollo: The Fragile Soft Landing

Markets fluctuate between the “lagged effects of Fed hikes are slowing down consumers, firms, and bank lending,” and “the easing of financial conditions since the December Fed pivot has boosted growth, including January hiring,” see chart below.

The bottom line is that what currently looks like a soft landing is a fragile equilibrium, and there is still more than 50% chance we will end up in either a hard landing scenario where the Fed cuts faster than the market expects or a no landing scenario where the Fed has to raise rates again. It makes sense that rates volatility and swaption volatility are high relative to VIX.

Bloomberg: Bond Traders Cave to the Fed by Dialing Back Their Rate-Cut Bets

Hedgopia: CoT: Peek Into Future Through Futures, How Hedge Funds Are Positioned (positions matter and SOME 10yy spec shorts covered while more were added out the curve …)

Sam Ro from TKer: Recession worries recede

Yardeni The Economic Week Ahead: February 12-16

Powell & Co. would like to see more evidence that inflation is falling toward their 2.0% target. They should get more of it this week. January's headline and core CPI inflation rates (Tue) should be 0.2% and 0.3% m/m, and 3.0% and 3.8% y/y, according to the Cleveland Fed's Inflation Nowcasting model. We will be focusing on these inflation rates excluding shelter (chart). They are already at the Fed's 2.0% target.

January's retail sales report (Thu) could be relatively weak. While payroll employment increased 0.2% during the month, the average workweek dropped 0.6%, while average hourly earnings rose 0.6%. This implies a weak 0.2% increase in private wages and salaries in personal income growth (chart).

In addition, January's auto sales skidded down to 15.0 million units (chart).

… On balance, it should be a good week for stocks and bonds as the inflation indicators--including January's PPI (Fri) and February's inflation expectations (Mon)--confirm that inflation continues to moderate, while the economy is growing albeit more slowly.

… THAT is all for now. Off to the day job…