while we slept; "War means industry"; should the 4% (10yy)debate be resurrected (watch 3.1%); fibo construction zone
Good morning … Today’s story begins with a brief (ZH)recap of what sure was,
Ugly, Tailing 5Y Auction Sends 10Y Yield To Highest In Two Months
I begin this way because this JHOLE week full of front-end (FOMC and global central planning rates sensitive) SUPPLY and one part of the price action over the past several sessions is to accommodate this in the very short run. Another component of the price action is clearly an attempt to game the Feds ending point. On THAT, I cannot help but think we’re a long ways away and so, we thankfully hand the baton off from the very front-end (2s and 5s) TO the somewhat longer-term and perhaps funTERtaining 7yr sector …
This afternoons liquidity event (aka 7yr AUCTION) will be a barometer of DEMAND and so, I’ll ask if you Got7s?
Concession or something more dire at hand? Momentum (slow stochastics, bottom panel) are overSOLD and we’re right at recent peaks (3.20%) … above HERE and, well, we’ll have to get a thicker crayon and redraw everything … A BREAK (of 3.20%) makes sense given it IS the last full trading week of the summer and we’re staring down JHOLE turn of events in just a few hours.
… here is a snapshot OF USTs as of 705a:
… HERE is what another shop says be behind the price action, you know,
WHILE YOU SLEPT
Treasuries are modestly higher with the curve little changed (ex-roll impacts). DXY is lower (-0.25%) while front WTI futures are little-changed. Asian stocks were paced mostly higher by China-linked exchanges after steps taken to boost growth there (link above), EU and UK share markets are little changed while ES futures are showing +0.5% here at 7am. Our overnight US rates flows were unavailable at press time and overnight Treasury volume was about average all across the curve overnight.… We show examples of the 'oversold' conditions in Treasury 2's, 5's and 30's in our first three attachments this morning with daily momentum in the lower panel . These set-ups strongly hint of a market loaded for bear, tactically. Of particular note, the second picture shows Treasury 5yrs appearing on the cusp of a new bull signal with the sell-off since August 2nd's heave-ho looking distinctly long-in-tooth. So the price -derived ideas here are that: A) A Duy-like re-hash of the Fed's well-worn refrains tomorrow might not be enough to sustain these yield levels or B) any hawkish spasm (perhaps one led by the algos) could or should be a short-lived affair absent a major and unexpected shift from Powell and others at Jackson Hole? That's what the prices suggest right now, anyway.
… and for some MORE of the news you can use » IGMs Press Picks for today (25 Aug) to help weed thru the noise (some of which can be found over here at Finviz).
There may be little else to add ahead of JHOLE … but that never stops the printing press of Global Wall Street and so, a few things to consider.
Goldilocks,
Hiring Freezes and Falling Job Openings: More to Come
… Our analysis suggests that the recent anecdotes of layoffs and hiring freezes are reflected in the up-to-date, alternative measures of job openings, and will be increasingly reflected in coming JOLTS reports. However,Our analysis suggests that the recent anecdotes of layoffs and hiring freezes are reflected in the up-to-date, alternative measures of job openings, and will be increasingly reflected in coming JOLTS reports. However, we still expect job openings to fall further, as other companies are likely to adjust their hiring needs. A recent survey of US business executives by PwC indicated that 47% of companies are considering or plan on reducing their company’s overall headcount.. A recent survey of US business executives by PwC indicated that 47% of companies are considering or plan on reducing their company’s overall headcount.
… Second, our index of hiring expectations over the next six months has moderated sharply since March (Exhibit 3). The index now stands at 2019 levels, when monthly payroll growth averaged 164k, far below the recent pace of job gains.
Hmmm … didn’t we go over that one from PwC just YESTERDAY? That was then and this is now … one firm’s first take of the student debt cancellation,
MS: Student Loan Forgiveness & Forbearance
The White House has cancelled up to $10k or $20k in federal student loans with income caps and extended the moratorium on interest payments. We size up the economic implications and read-through for consumer ABS and consumer finance.
Although there is precedent for extending student loan forbearance, implementation of the loan forgiveness program is uncertain, as there are legal questions surrounding the President's authority to cancel student debt via executive order. Such a policy might require action by Congress, which dims prospects for passage given a variety of procedural and political constraints.
While the total implied total dollar amount of student loan forgiveness is considerable, we do not see it having a large multiplier over the forecast horizon given that student loan forgiveness influences longer-term planning and expenditures instead of near-term purchases.
We see more downside to near-term spending if student loan forbearance were to end, given the cost of resuming monthly debt service payments, but this program has been extended through the end of 2022. We think it is likely that the moratorium will not be extended into 2023, as we are finally getting a formalized forgiveness proposal.
Forgiveness could temporarily improve subprime credit quality, but resumption of payments adds to credit deterioration risks in 2023. Proposed federal student loan debt forgiveness should reduce ~20% of the total federal debt burden and benefitting lower FICO consumers. While forgiveness lowers debt loads, we view the more meaningful impact as a lifting of the moratorium in January, 2023. Evidence suggests that borrowers who have not made any payments since moratorium has been in effect have already seen more credit stress than those who have made payments, presenting further risks to 2023 credit deterioration, in our view.
We expect negative implications for consumer ABS performance metrics. While forgiveness could provide some benefits, we expect that the moratorium ending will outweigh these impacts at the start of 2023. At this point we see the potential for increases in delinquencies and decreases in prepays across consumer ABS.
Here’s a fun one … latest update from everyone’s favorite balance sheet guru — Zoltan — good to see him inbox this late yest ahead of JHOLE
War means industry.
Wars cannot be fought with supply chains that crisscross a globalized world, where production happens on faraway, little islands in the South China Sea, from where chips can be transported only if airspaces and straits remain open…
Global supply chains work only in peacetime, but not when the world is at war, be it a hot war or an economic war. The low inflation world had three pillars: cheap immigrant labor keeping nominal wage growth “stagnant” in the U.S., cheap Chinese goods raising real wages amid stagnant nominal wages, and cheap Russian natural gas fueling German industry and Europe more broadly. Implicit in this “trinity” were two giant geo-strategic and geo-economic blocks: Niall Ferguson called the first one “Chimerica”. I will call the other one “Eurussia”.
Both unions were a “heavenly match”: the EU paid euros for cheap Russian gas, the U.S. paid U.S. dollars for cheap Chinese imports, and Russia and China dutifully recycled their earnings into G7 claims. All sides were entangled commercially as well as financially, and as the old wisdom goes, if we trade, everyone benefits and so we won’t fight. But like in any marriage, that’s true only if there is harmony. Harmony is built on trust, and occasional disagreements can only be resolved peacefully provided there is trust. But when trust is gone, everything is gone, which is the scary conclusion from Dale Copeland’s book:
Economic Interdependence and War
Reviewing 200 years of history, including the Napoleonic and Crimean wars, the book explains that “when great powers have positive expectations of the future trade environment, they want to remain at peace in order to secure the economic benefits that enhance long-term economic power. When, however, these expectations turn negative, leaders are likely to fear a loss of access to raw materials and markets, giving them an incentive to initiate crises to protect their commercial interests”. This “theory of trade expectations” holds lessons for understanding not only today’s conflict between the U.S. on the one hand, and Russia and China on the other, but also the outlook for inflation. Put simply…
…if there is trust, trade works. If trust is gone, it doesn’t. Today, trust is gone: Chimerica does not work anymore and Eurussia does not work either. Instead, we have a special relationship between Russia and China, the core economies of the BRICS block and the “king” and the “queen” on the Eurasian chessboard – a new “heavenly match”, forged from the divorce of Chimerica and Eurussia…
With trust now gone, I suppose we’ll have to lean MORE on the price action itself … who you gonna believe, me or your own lyin’ eyes?
BAML: Secular trends fly into Jackson Hole
Key takeaways
•Secular trends flirt with resuming as we approach the Jackson Hole conference and end of summer chop.
• DXY > 109.30, US 10Y > 3.10% and CL1 > 95.35 will look like uptrend breakouts. Otherwise short term drops follow.
• Also inside: USDCNH bullish pennant pattern targets. Still trend bullish USDKRW to 1400. Some optimistic US 2s10s signals.… US 10Y Yield: 10Y yield’s head and shoulders top formed in July is almost invalidated. One more selloff that breaks above 3.1% favors a bear wedge and 3.38/3.50%. The secular bull market technically ended this year and 10Y yield just retested/held the channel breakout point (polarity) so a wedge pattern and yield above 3.1% may also mean new YTD highs. If 10Y > 3.1% = sell. 10Y < 2.95% = bull flag (buy for 2.70%).
A wedge pattern (higher yield) challenges a head and shoulders (lower yield)
… US 10Y: Should the 4% debate be resurrected?
After 10Y yield spiked to and collapsed from 3.5% in June to 2.51% in August, talk about 4% subsided. This drop in yield retested the channel line and 200m SMA as “yield support.” For the past twenty or so years these lines were “yield resistance.” In technicals, retesting and holding such a breakout point is called polarity and it often results in a phrase “breakout, retest, launch?” So if the aforementioned daily chart moves to invalidate the head and shoulders top in favor of a wedge continuation pattern with a break above 3.1% then yes we should start resurrecting some higher yield scenarios because they may be entering a rare “launch” phase.
More from the CHARTS department … UBS notes,
In early August and despite the break of our key support at 2.71%, we highlighted US 10 year yields as oversold and a bounce candidate into deeper August before moving into a lower yield high and setup for a new down leg into late Q3.
From a pattern perspective, the August rebound is corrective, which we see as confirmation that the current bounce is just a rebound and not the start of a new breakout campaign. With our daily trend momentum reaching overbought extremes, we think the bounce is already mature although short-term we cannot rule out an extension on the upside around this week’s Jackson Hole meeting.
And Kimble notes,
Major Stock Market Indices Enter Fibonacci “Construction” Zone
Finally, here’s a live look at my reaction TO Bidesn’s latest attempt to buy young voters,
… THAT is all for now. Off to the day job…