while we slept; war OFF + bridge OPEN = riskON; TLTs vs 134.45 (2.44%) support; FI techs; retail riskin' UP; FRBSF - rent'flation
Good morning and happy PPI day. Happy, indeed as it appears they’ve called the war OFF,
HERE is the RTRS LINK and whether or not war is OFF is, as always, besides the point. Said it yesterday and will certainly say it again in the future. They bought bonds on the rumor and at some point will sell the fact. Facts are changing (intra)daily (as are rumors, irony and attempted comedy) and risk is celebrating, at least in the moment. Here’s CNBC banner markets AND STORY LINK
That in mind, here’s what happened in rates/global markets,
WHILE YOU SLEPT
Treasuries are lower and the curve steeper after a risk-on move overnight on word from Russia that they've returned some troops to their barracks (see link above). DXY is lower (-0.4%) while front WTI futures are too (-3%). Asian stocks were mixed with China shares outperforming on another liquidity injection, EU and UK share markets are all higher while ES futures are showing +1.4% here at 6:30am. Our overnight US rates flows saw mixed flows during Asian hours. As for the buyers, there was a 5k TU block buyer in addition to credit-linked long-end buying. Fast$ sold intermediates and 10's. During London's AM hours the news of Russia returning soldiers to bases led to an aggressive sell-off but the flows were light with sporadic dip-buying seen. Later this morning there will be a Fed buyback in the 4.5y-7y sector. Overnight Treasury volume was pretty solid at ~165% of average with 3yrs (243%) seeing some standout average turnover.
Same shop offered some news and a few charts where this one stood out,
US News: Fed officials call for measured response to inflation NYT Traders price deeper cuts with cycle peaking in mid-2023 BBG Bond market signals concern that Fed's bid to cool inflation will backfire FT 86% of white-collar workers say they want a hybrid workweek or they'll quit ZH The American west's megadrought is now the driest in at least 1,200 years AP The FRB San Fran on rents and inflation: "the extraordinarily large increases in two leading indicators of future rent inflation—asking rent inflation and house price inflation—point to significant upside risks to the overall inflation outlook. The potential increases are particularly significant for CPI inflation, which places a larger weight on shelter costs." FRBSF
… Our next attachment looks at TLT's, the 20+-year Treasury ETF. What stands out is that TLT's are nearing potentially key support derived by their pre-pandemic range low at ~134.45. This level is akin to the 2.44% range support for cash bonds. We'd guess that these levels, 134.45 and 2.44%, will be well-defended- as they were nearly a year ago.
… AND for some MORE of the news you can use » IGMs Press Picks for today (15 FEB) to help weed thru the noise (some of which can be found over here at Finviz).
In the category of haters gonna hate and bond traders gonna trade, THIS from BBG
… In a further sign traders see a Federal Reserve policy error in the making, bets on the central bank's next rate cut are beginning to heat up. Expectations for rate hikes have become ever more front-loaded in the futures market, with more than six seen this year. But Eurodollar markets now suggest less than two hikes are on the cards in 2023 and the growing possibility of a rate cut in 2024. That's a big change from just the beginning of this month when they suggested zero chance of a rate cut all the way through 2025. The thinking behind the moves hasn't really changed -- investors have been pricing for a while now the likelihood the Fed could push the U.S. economy into recession with aggressive hikes to combat sky-high inflation. The flattening Treasuries yield curve, inflation breakevens well off last year’s highs and still negative term premiums have suggested nervousness about the U.S. economic growth outlook for some time. But if futures move to price in a full rate cut or more in 2024, that should worry even the most risk-tolerant investor, which could lead to further volatility across global markets.
That’s right. Pricing in of CUTS. With these ‘far out’ expectations in mind, JEFF tracking the economy with THIS weekly report and shows,
Waiting Spring to spring the economy forward and reopening #4 to take hold. Whether or not the reducing of the balance sheet will have ANYTHHING at all to say about reopening #4 or 5, 6, etc…) remains to be seen. Here is some further reading offering the RUNDOWN ON THE RUNOFF (1stBOS),
Global central bank asset purchases will turn negative later this year, a sharp reversal from the flood of purchases that has continued into the beginning of 2022. Despite many central banks having started to taper, the monthly pace of global central bank government bond purchases stood at $160bn in January, a pace that still exceeds anything seen before the pandemic. By the end of the year, we expect central banks on aggregate to be reducing the bonds on their balance sheet by $60bn per month (Figure 1).
The Fed’s balance sheet runoff is likely to be quicker than in 2017-19. A passive reduction in reinvestments (rather than active selling) could see Treasuries run off at $60bn per month by the end of the year, double the pace of the last reduction cycle. MBS holdings are likely to decline at a similar pace, but there is a higher possibility of active sales if the Fed turns more hawkish.
The ECB will step down the pace of asset purchases when its PEPP program expires in March, and is likely to stop net purchases entirely in Q3. However, we do not expect balance sheet runoff until at least the end of 2024. Elsewhere, the Bank of England and Bank of Canada are set to reduce bond holdings this year. The Bank of Japan and central banks of Australia and New Zealand are likely to keep bond holdings broadly constant.
Balance sheet reduction on its own should have little direct impact on financial conditions. In the 2017-2019 cycle, Fed balance sheet runoff had little traction on the shape of the yield curve, mortgage spreads, or the term premium (Figure 3). In our view, most of the value from balance sheet adjustments is through a signaling effect: if a reduction is tacked on to earlier and faster rate hikes, it can powerfully communicate a hawkish shift.
The hawkish shift in rate hike expectations has gathered pace. Upside surprises in developed economy inflation data continue. We now expect the Fed to raise rates 175bps this year, starting with a 50bp hike in March. The ECB is likely to start hiking in December, and we expect the Bank of England to hike three more times this year. A broad range of global central banks, particularly in emerging economies, has already started hiking (Figure 4).
Inflation and global industrial production growth should peak in Q1. There is evidence of global goods supply pressures easing. In other words, the mix of data is likely to become less supportive of further hawkish shifts, and might offer some respite in the recent cycle of ever-higher rate expectations.
All of this leads ME to think of the FED PUT and it’s being described to be NOT what we all think — by Rich Bernstein,
The Fed's "put" is not what you think it is
We all love alliteration (“lily-livered”, anyone?) but when it comes to the “Powell Put” or the “Powell Pivot”, we think investors need to understand the facts and intentions of the Federal Reserve before accepting a saying just because it rolls smoothly off the tongue…With the macro environment vastly different than the beginning of the 2017/2018 hiking cycle, we think market participants would be wise not to draw too many parallels between the Fed’s reaction function then and now. It is clear to us that, although behind the curve, the Fed’s intentions are to begin a new hiking cycle, reacting to markets only insomuch as tightening financial conditions affects credit markets and the availability of capital. The “Powell Put”, so to speak, not only has a lower strike than most appreciate, but likely is on a completely different asset class than many assume.
Economic prognostications aside, here are some updated and shorter-term TECHNICAL levels to keep in mind,
5yy: We turned tactically bearish again at resistance at 1.825%, with scope for support at 2.00%, where we would turn tactically neutral. Resistance is seen at 1.745%, below which we would also turn tactically neutral.
10yy WEEKLY: We opened a (cautious) tactical bearish again following last week’s pullback to resistance at 1.975/965%, with next support seen at 2.16/18%, where we would turn tactically neutral. Next resistance is seen at 1.89%, below which we would turn tactically neutral.
And 30yy: We stay tactically bearish, looking for a move to support at 2.42%, where we would turn tactically neutral. We would also turn tactically neutral below resistance at 2.19%.
When the facts (prices) change, the levels change. NOTED. In OTHER markets (ie STOCKS), it appears that retail has turned bullish. Why do I say this? Because I believe everything I read, to whit
Barcap: Equity Risk Pulse: Retail Investors Turn Bullish. Surprisingly, equity markets remain unfazed about the aggressive Fed's tightening cycle this year. In fact, retail investors piled $48bn into equity funds last week. Asset managers however have turned cautious, and decline in protection demand bottomed last week.
Okie dokie … so retail getting longer’er as the Fed is looking into selling bonds and hiking (until something breaks — as per 2024 RATE CUTS visualized above). I’ll leave one last link for any still caring about rent’flation nation as it may / may NOT be one of the deciding factors. THIS ECONOMIC LETTER from FRBSF
The letter CONCLUDES,
As the U.S. economy recovers from the effects of the COVID-19 pandemic, some increase in rent inflation should be expected, given that landlords can ask for higher rents when prospective tenants are employed and earning higher incomes. However, the extraordinarily large increases in two leading indicators of future rent inflation—asking rent inflation and house price inflation—point to significant upside risks to the overall inflation outlook. The potential increases are particularly significant for CPI inflation, which places a larger weight on shelter costs. Still, the potential additions to PCE inflation of about 0.5pp for both 2022 and 2023 are important to consider in light of the Federal Reserve’s 2% inflation target.
… that’s all for now. Off to the day job…