Monetary policy operates with a lag
July 18, 2022
–It takes six months to a year for monetary policy to take effect. The Fed’s first rate hike was in March, just four months ago. How do you know, as a central banker, if you’ve done too much? It’s probably when the yield curve has inverted to new lows. 2/10 ended the week at -21 bps, just under the lows made in 2006 and about 30 bps away from the 2000 low of -56. 5/30 is +3.5, off the low made last month (-17), but the current level is still right around levels from 2006. The red/gold euro$ pack spread ended the week around -23, well off the low made in March of -87, but still significantly below the bottom in 2006 (+10) and 2018 (-6). The curve is telling the Fed that conditions are tight, perhaps the reason that Waller and Bostic signaled 75 bps at next week’s meeting, even as scorching CPI (9.1) and PPI (11.3) made the case for 100.
–The ten-yr inflation breakeven ended the week at 237 bps. That’s still above the highs set in 2018 of 219 bps, but substantially off the year’s high of 303. U of Mich latest survey for 5-10 year inflation expectations fell to 2.8 from last of 3.1. August FF traded a low of 9746.5 last week post-PPI, only 4.5 bps away from what would be 100 bp hike of 9742.0. This morning they trade 9762.5, just 4.5 bps away from the 75 bp level of 9767.0.
–How, as a central banker, do you know if you haven’t done enough? One clue might be when equity markets and other asset values stabilize and rally. That’s a signal of financial accommodation. If asset values have contributed to an inflationary mindset, they must be deflated to change the psychology. JPM’s announced pause in share buybacks is likely an important cue, but the core message needs more emphasis.
–ECB and BOJ this week.
Front end trashed
July 14, 2022
–Huge plunge in near contracts as the market assesses odds for a 100 bp move at the July FOMC in the wake of 9.1% CPI. FFQ2 ended 9750, down 17.5, and this morning prints 9748.5; on a hike of 100 the contract should reflect a new Fed effective rate of 258 bps or 9742.0. A 75 bp hike would be 9767.0.
–EDU2/Z2 settled 36.5, a new low, down 6.5 on the day with U2 -30 and Z2 -23.5, while EDU2/U3 settled -31, also a new low. Therefore, EDZ2/EDU3 settled -67.5. EDZ2 remains the lowest contract, 9602 at yesterday’s settle. I.e. we’ll reach the terminal rate at end of year…but what exactly is neutral with inflation 9%? Bostic late yesterday said ‘everything’s on the table’ though this is the guy that favored a 25 bp hike in March, and in late May said the he planned to proceed “with intention and without recklessness” and suggested a September pause might be warranted.
–2/10 now -23 bps. The early April low was -8. Low in Nov 2006 was -19. Low on 4/10/2000 was -56. JPM and MS report earnings today, and an inverted curve is a large headwind for the banks. Dollar/yen this morning prints 138.80, which is another headwind!
–The fulcrum on the curve as related to yesterday’s action was ED March 24 to June 24…EDH4 was -0.5 on the day to 9700 and EDM4 was +1.5 on the day to 9712.0. Everything from EDM’24 back was up on the day, with the ten yr yield dropping 5 bps to 2.906%.
Big shots are just little shots that keep on shooting!
July 13, 2022
–Ten year auction a bit sloppy, wi was 2.94 just prior and came at 2.96%. Bid to cover soft at 2.34. Yield ended at 2.956, down 3.5 on the day. 2/10 anchored to the low, just under -8 bps as FFQ2 went 9767.5 offer late, pegging the July 27 FOMC to exactly 75 bps.
–CPI today expected 8.8% from 8.6% last, but Core expected lower at 5.7% from 6.0%. Late CLQ2 was 95.65, down 8.44 on the day. There was a rumor late yesterday of a headline 10.2% number which BLS denied. The Council of Econ Advisors has already warned that the number will be large, as it doesn’t reflect the recent decline in gas/oil prices. In a world of spin, maybe it’s not surprising that a high CPI number was “leaked”, (dare I say it’s almost admirable that the CEA is trying to get out in front) and maybe it’s not surprising that oil plunges just before Biden’s tete a tete with MBS.
–Well before the advent of electronic markets and automatic risk parameters, the exchange instituted a rule called “taking a shot”. There was a recurring joke…but not really a joke, about buying a one-way ticket to Rio before a big data release, and loading up on bond futures without the money in the account. Binary outcome: either a big move your way, and you gladly eat the cost of the airline ticket, or you disappear and leave the loss for the clearing firm. In those days, to be approved for exchange membership, (at least at the CME) two members had to guarantee you for $50k each. After that, the clearing firm covered losses. After that, all the clearing members of the exchange were on the hook. The ‘taking a shot rule’ said that if you didn’t have the money in your account to cover your day-trade, and you made a ton of money, the clearing firm was entitled to the profit. Good rule.
–It seems to me the entire world has now lurched into the ‘taking a shot’ mindset, just on a larger scale that circumvents the automatic electronic trading rules. I almost chuckled when I read the ‘whereabouts unknown’ story relating to the Three Arrows founders. Why, they’re in Rio!
2/10 and USD
July 12, 2022
–Attached is a chart of the 2/10 spread, at a new low of -8 bps at yesterday’s close. At the bottom of this note is an excerpt from the Jan 26 FOMC press conference with a prescient question from Jean Yung of MNI. She asked about the possible implications of an inverted curve, and Powell sort of brushed her off, noting that 2/10 was about +75 at the time. Well, it was a damn good line of inquiry, and here we are, with the curve signaling economic trouble ahead, even as tens are auctioned today. On the day yesterday, the ten year yield slipped back just under 3%, falling 10.4 bps to 2.99%.
–This morning NFIB Small business optimism (or lack thereof) was released. Here’s a clip from today’s press release:
“The NFIB Small Business Optimism Index dropped 3.6 points in June to 89.5, marking the sixth consecutive month below the 48-year average of 98. Small business owners expecting better business conditions over the next six months decreased seven points to a net negative 61%, the lowest level recorded in the 48-year survey. Expectations for better conditions have worsened every month this year.”
On my weekend note I mentioned that NFIB and Russell 2000 appear to be correlated and indeed, stocks are lower across the board this morning. However, USD strength is part of the equation with EUR tickling parity and US/Japan agreeing to address yen weakness (though Yellen said intervention is only warranted in rare cases).
–Barken speaks today, unlikely to be anything new. This note from Redfin getting some press yesterday:
Redfin: Roughly 60,000 Home-Purchase Agreements Fell Through in June, Equal to 14.9% of Homes That Went Under Contract That Month
***********************
From the Jan 26, 2022 FOMC:
JEAN YUNG. Thanks, Michelle. Chair Powell, some investors are expecting the yield curve could flatten, or even invert, after rate hikes begin. Would that worry you, and how important is that risk in the Fed’s consideration for adjusting policy?
CHAIR POWELL. So we, we do monitor the slope of the yield curve, but we don’t control the slope of the yield curve. Many flat—many factors influence longer-term interest rates. But it is something that we watch, and, and you will know that from when we had this issue a few years ago. And we take it into account, along with many other financial conditions, as we try to assess the implications of all those conditions for the economic outlook. So that’s, that’s one thing I would say. Another is, currently, you’ve got a slope. If you think about 2s to 10s, 2-year Treasury to 10-year Treasury, I think that’s around 75 basis points. That’s well within the range of a normal—of a normal yield-curve slope. So it’s something we’re monitoring. We don’t think of it as—I don’t think of it as some kind of an iron law. But we do look at it and try to understand the implications and what it’s telling us. And it’s—but it’s one of many things that we monitor.
JEAN YUNG. Can I follow up real quick and ask, if it—if it did invert, would you tie it to U.S. fundamentals? Or would it be driven by a much broader set of factors?
CHAIR POWELL. We’d—that’s, that’s a good question in, in real time. Obviously, U.S. long-term sovereign debt is an—is an important global asset. And it—and the fact that our rates are so much higher than, than other risk-free sovereign rates around the world may put something of a ceiling on our—on our rates. I don’t know. But it would really depend on the— on the facts and circumstances at that time.
Brief perspective on one-yr calendars
July 11, 2022
–Yields rose Friday on stronger than expected NFP of 372k. Ten year yield up 9.3 bps to 3.095%. August FF settled 9767.5, fully pricing a 75 bp hike at the July 27 FOMC. New low posted in EDM3/EDM4 one-year calendar at -64. The lowest one-yr calendar is EDH3/EDH4 at -71.
–Just for a bit of historical perspective, the lowest I have seen for a one-yr on the 1st to 5th contract was -158 at the end of 2007 (most negative ever for a one-yr spread). In 2019, 1st/5th got as low as -90. The low for any one-yr spread in this cycle was -76 on July 1, it was the EDZ2/EDZ3 spread. Currently, that’s the 2nd to 6th contract; settled Friday at -61.5. The lowest mark ever for 2nd to 6th was -95, which was also at the end of 2007. Currently, EDH3/EDH4 is the 3rd to 7th spread. At -71, it’s at a new low for that slot. At the end of 2006 it reached -47.5, and the subsequent low was in 2019 at -39.5. These spreads are good at forecasting upcoming eases.
–Three-yr auction today, followed by 10s and 30s Tuesday and Wednesday. $/yen made a new high over 137 this morning.
–Below is a chart of 2nd to 6th. Top panel is the two contracts, bottom panel is spread. The ferocity of the current move is unequaled.
Euro$ futures pricing is clear. Crypto, not so much
July 10, 2022 – Weekly comment
Stronger than expected Jobs report solidified expectations for another 75 bp hike at the upcoming July 27 FOMC. Twos, fives and tens all started the week just above a yield of 2.8% but ended around 3.1%. Tuesday to Friday changes: two-yr 2.82 to 3.11, five-yr 2.82 to 3.14 and ten-yr 2.81 to 3.095. Thirty bp moves are not indicative of stable markets, and indeed the MOVE index posted a new high on Tuesday at 156, just shy of the covid surge high in 2020.
August Fed Funds (FFQ2) settled 9767.5 or 232.5 bps. Current Fed Effective Rate (EFFR) is 158, so another 75 bps takes it to 233. The lowest print on FFQ2 was June 15 at 9765, the date of the last FOMC meeting. At that point, the market was just slightly tilted toward fear of 100 in July. I suspect that will also occur this week, that is, we’ll see a print below 9767. The intervening high print on 7/1 was 9778.5, so even with that day’s weak Mfg PMI and decelerating new orders and employment components (49.2, 47.3) odds never favored 50 bps over 75.
Consider the changes in one-year Eurodollar calendars since June 15, the last FOMC. First, note that all near one-year calendars were in decline over that time frame, and the only positive one was EDU2/EDU3 which settled 54.5 on June 15. On Friday it settled 11, having plunged to -15.5 on July 5. The most negative one-year calendar is EDH3/EDH4, currently at -71. On June 15 it was also the lowest, but at that time it was -48.5. The point here is that even though all near contracts took a dive this week, forward spreads are clearly pricing more and more of an eventual ease. Below are levels:
June 15 July 8 change
EDU2EDU3 +54.5 +11.0 down 43.5
EDZ2EDZ3 -28.5 -61.5 down 33.0
EDH3EDH4 -48.5 -71.0 down 22.5
EDM3EDM4 -48.0 -64.0 down 16.0
EDZ2 9598.0 9614.5
EDZ3 9626.5 9676.0
EDH3 9587.0 9618.5
EDH4 9635.5 9689.5
A couple of things to note. On June 15, the lowest contracts on the strip, EDZ2 and EDH3 were above 4%. Now they are 3.80 to 3.85%. The EDH3/EDH4 spread has almost 75 bps of easing priced over that year period. The lowest any one-yr spread has settled over this cycle occurred last week with EDZ2/EDZ3 at -76 while EDH3/EDH4 was at -74. That’s not to say that the Fed is going to be successful in stopping inflation cold. It does however, suggest that large rate increases now will be quite effective in slowing the economy next year.
Why not just go 100 bps now to further crush forward inflation expectations? (The ten year breakeven has gone from 302 bps in April to 230 last week, ending Friday at 238). After the last 75 bp hike, which occurred in November 1994, forward one-year calendars plunged. For example EDU95/EDU96 (4th to 8th at the time) went from +68 in early November to -25 by mid-Dec. In the current episode, calendars have already moved to much more significant inversion. In other words, market signals already indicate recessionary conditions. There’s little to be gained by going more than is already being priced, especially with USD at its highest level since 2002.
Below is a chart of an indicator cited by Jeffrey Gundlach, the copper/gold ratio vs the US ten-yr yield. This chart suggests a further decline in the 10-yr yield, though there are a couple of caveats. First, it’s true that Dr Copper has had a hard break since May. On a long term chart, it’s clear that gov’t stimulus (related to covid) lit a fire under copper in 2020, just as it did during the post-GFC period. The waning of gov’t support for the economy is now a factor which is withdrawing support from copper prices, similar to 2011. However, China likely plays a larger role now than before. Also, CPI peaked at 5.6% in 2008, significantly lower than what is expected this week at 8.8%. US Govt debt to GDP was 64% in 2008, had risen to 84% by the end of 2009, but is now 125%, while the Fed is now engaged in QT. All of which suggests a floor for 10 yr yields which may make this chart less useful.
Auctions this week begin Monday with the 3-year ($43b), 10s on Tuesday ($33b) and 30s on Wednesday ($19b) raising $31.6b of new cash. Williams speaks Monday at an end-of-libor event. Barkin on Tuesday should be nothing new; last speech was June 22. Waller on Thursday on the economic outlook; his main concern is in arresting inflation. Bostic on Friday.
CPI is released Wednesday, expected 8.8% from 8.6% last, with Core yoy 5.8% from 6.0% last. Beige Book on Wednesday afternoon. Bank of Canada expected to hike by 75. RBNZ and S Korea also on Wednesday, with 50 bp hikes expected by both.
PPI is Thursday, expected 10.7% from 10.8% last, with Core yoy 8.3% from 8.3%
Retail Sales on Friday.
NFIB Small Business Optimism is Tuesday, expected 92.5 from 93.1. The 2018 peak was 108.8. From the last NFIB “Small business owners remain very pessimistic about the 2nd half of the year as supply chain disruptions, inflation and the labor shortage are not easing.” Chart below shows that the Russell exploded higher as the Fed and Federal Gov’t poured on the covid stimulus. It appears as though small business owners never really bought into it.
OTHER MARKET THOUGHTS/CONCERNS
On Friday, July 8, Fed Vice Chair Lael Brainard gave a speech on crypto assets as related to financial stability. Here are a couple of excerpts:
We are closely monitoring recent events where risks in the system have crystallized and many crypto investors have suffered losses. Despite significant investor losses, the crypto financial system does not yet appear to be so large or so interconnected with the traditional financial system as to pose a systemic risk.
There are two specific areas that merit heightened attention because of heightened risks of spillovers to the core financial system: bank involvement in crypto activities and stablecoins. To date, crypto has not become sufficiently interconnected with the core financial system to pose broad systemic risk.
Brainard lists risks with crypto that are similar to traditional finance: leverage, settlement, opacity, runs and regulatory evasion. In both of the passages above, she says that crypto does not pose a systemic risk…yet. Her hedged language might make even the casual non-crypto observer a bit uncomfortable. Perhaps it’s no coincidence that two damning crypto stories hit my e-mail this week. The first is by Matt Taibbi, ‘The Financial Bubble Era Comes Full Circle’ dealing with an utter lack of opacity related to the Circle Reserve Fund (Fidelity and BlackRock are reportedly investors). The second is Doomberg’s ‘Wen Bazooka’ citing the failure of Terra/Luna, which spilled over to Celsius, and then to Three Arrows (reportedly with $3 billion in assets). I won’t attempt to sum up the details. I would only note that stories about crypto linked to financial stability, along with the Vice Chair saying the risks aren’t systemic only makes me conclude one thing. The risks are systemic.
| 7/1/2022 | 7/8/2022 | chg | ||
| UST 2Y | 284.1 | 311.7 | 27.6 | |
| UST 5Y | 289.4 | 313.9 | 24.5 | |
| UST 10Y | 289.9 | 309.5 | 19.6 | |
| UST 30Y | 312.7 | 326.4 | 13.7 | |
| GERM 2Y | 51.5 | 52.7 | 1.2 | |
| GERM 10Y | 123.2 | 134.5 | 11.3 | |
| JPN 30Y | 122.6 | 124.2 | 1.6 | |
| CHINA 10Y | 282.9 | 283.9 | 1.0 | |
| EURO$ U2/U3 | -13.5 | 11.0 | 24.5 | |
| EURO$ U3/U4 | -42.5 | -47.5 | -5.0 | |
| EURO$ U4/U5 | 8.5 | 3.0 | -5.5 | |
| EUR | 104.30 | 101.86 | -2.44 | |
| CRUDE (active) | 108.43 | 104.79 | -3.64 | |
| SPX | 3825.33 | 3899.38 | 74.05 | 1.9% |
| VIX | 26.70 | 24.64 | -2.06 | |
https://taibbi.substack.com/p/the-financial-bubble-era-comes-full
https://www.federalreserve.gov/newsevents/speech/brainard20220708a.htm
Payrolls Friday
July 8, 2022
–Yields pressed higher going into today’s payroll report, with treasuries all ending above 3% (2y 3.037, 5y 3.051, 10y 3.002 and 30y 3.19). NFP today expected 268k from 390 last. Avg Hourly Earnings yoy expected 5.0% from 5.2% last. Bullard and Waller continued to make the case for policy front-loading; FFQ2 fell 1.5 bps to 9770.0, placing high odds on another 75 bp hike at the July FOMC, which would take EFFR up to 233 bps and thus FFQ2 to 9767.0. FFF3 settled 9666.5 or 333.5 bps, so if the Fed were to hike 75 in July, the market has about 100 bps more penciled in for the final three meetings of the year. Dollar Index DXY is at a new high 107.51 this morning, with ECU2 (eurofx future) at a new low 1.0160.
–EDH3/EDH4 is the lowest one-yr eurodollar calendar on the strip at -65.5, so there’s almost as much of an ease priced into that one-year period as there is a hike being priced for July’s FOMC.
–Next week’s auctions will kick off with Monday’s $43b 3-yr, followed by $33b 10s on Tuesday and $19b 30s on Wednesday. CPI is released on Wednesday morning.
–CLQ2 is 102.17 this morning, well down from the June high over 120, but stabilizing after Tuesday’s plunge to nearly 95. MNI yesterday cited John Kirby in reporting that Biden will meet with MBS this month; perhaps in the absence of a pledge to supply more oil KSA is simply pressuring the market as a goodwill gesture.
From Reuters on July 5
HOUSTON (Reuters) -More than 5 million barrels of oil that were part of a historic U.S. emergency reserves release to lower domestic fuel prices were exported to Europe and Asia last month, according to data and sources, even as U.S. gasoline and diesel prices hit record highs.
from a post by MNI July 7
US: White House Confirms Biden Meeting With Saudi Crown Prince MBS
US National Security Council Spokesperson John Kirby has confirmed to an on-the-record virtual press briefing with the White House press pack that President Biden will meet Saudi Crown Prince Mohammad Bin Salman (MBS), the de facto leader of Saudi Arabia, during his upcoming trip to the Kingdom.
And then, depression set in
July 7, 2022
–Flattener yesterday as Fed minutes warned of the risks of entrenched inflation. Red eurodollar pack was the loss leader in rates, closing down 19.5 bps; EDH4 and M4 were both -20 on the day. The two year yield jumped 14 bps to 2.955%, while tens rose 10 bps to 2.908%, enough of a move to cause a new low in 2/10 spread at -4.7. EDU2/EDU3 rose 13 bps to -2.5 (9676, -5.5, and 9678.5, -18.5). Huge technical failure in TYU, which came within a few 32’s of the May 26 high at 120-19+ early in the session, but then reversed hard to settle 119-01+.
–EDZ2 remains the lowest contract on the strip at 9631.5 or 3.685%; the Z2/H3 spread settled -10. Weakness in EDZ2 appears to be related to the ‘turn’ as the SOFR strip has the Dec contract at 9668.5 and March 9667.5 (SFRH3 is the lowest on the SFR strip). So, Dec/Mar ED is -10 and Dec/Mar SOFR is +1. FFF3 settled 9666.5 so everything points to an end of year culmination to the Fed’s hiking campaign, at a target of 3.25 to 3.5. FFQ2 settled 9771.5 or 228,5 bps, very close to pricing 75 at the FOMC on July 27, which would put the EFFR at 233. There will be three more FOMCs after the July meeting in 2022: Sept 21, Nov 2 and Dec 14.
–EDZ2 is emitting a whiff of credit concerns (and that’s why we liked libor based futures); the plunge in commodities will likely cause some stress as well. Speaking of stress, there was an interesting tweet about auto repos yesterday (link below, salient part around 4:30). According to this report, pre-pandemic 2018 to 2019 repos were about 1.8 million each year. Halfway through this year we’re ALREADY at 2.2 million. I was not able to double check this data, but if autos were a big part of the inflation wave, the implication is that we’re in for a hard reverse. “And then, depression set in.”
–Data today includes Challenger job cuts, Jobless Claims expected 230k, Trade balance. DXY (dollar index hit a new high yesterday at 107.26).
Commodity washout
July 6, 2022
–Commodity dump with CLQ2 (WTI) down over $10 at one point; late market was 99.62 down 8.82 but this morning CLQ2 is back just above 100. Other products hit hard as well, for example Sept Wheat down 39 cents and Copper down 19 cents. The ten year breakeven (treasury yield minus inflation indexed note) made a new recent low of 232 bps, having seen a peak of just over 300 in April. The Fed appears to be successfully squeezing out inflationary expectations by replacing them with expectations of a hard recession. The high in this spread in 2018 was around 219 bps. In that year the Fed hiked to an ultimate peak of 2.25-2.50%, higher than the b/e spread.
–New low in EDU2/EDU3 one-yr calendar at -15.5 (down 2 on the day). Remarkably, as recently as June 14 this spread was positive 66. It is STILL the highest one-year calendar until EDH4/H5 which settled -13.5. One other spread worth mention is FFQ2/FFF3, Aug to Jan Fed Fund spread, which settled 98 bps, down 8 on the day. Recent high in this spread was 144.5 on June 13. There are FOMC meetings on July 27, Sept 21, Nov 2 and Dec 14. The July meeting is prior to the August contract of course, so the Aug/Jan spread captures three meetings. 50, 25, 25? A lot will depend on the July outcome and how the market reacts. Current EFFR is 158, another 75 in July would mean 233 and just 50 would mean 208. So Aug FF either 9767 or 9692; FFQ2 settle 9773.0. In any case, the bias next year is for Fed easing.
–Heavy sales of SFRH3 9825c at 10.5 and 11. Settled 10 vs 9679.5, about 40k sold which appear to be an exit. The quick reference is the CME website Daily Bulletin, but apparently the exchange doesn’t think the product is important enough to produce a daily volume and open interest sheet for SFR options.
–Today’s news includes JOLTS (job openings easing lower), ISM Services expected 54 from 55.9 and the FOMC minutes.
–Here’s an amusing quote from Yahoo Finance: “Monthly sales volume on the largest NFT marketplace, OpenSea, plunged to $700 million in June, down from $2.6 billion in May and a far cry from January’s peak of nearly $5 billion.” I honestly can’t believe there is still $700 million of volume!
Will inflation ‘catch down’ to the new economic reality?
July 4, 2022 – Weekly comment
Fierce decline in US rates in the past week, punctuated by a drop of nearly 11 bps in the five-year yield on Friday alone, to 2.894%. On the week the 2yr declined 21.4 bps to 2.84%, fives 28 bps, and tens 22.5 bps to 2.90%.
The rally in red Eurodollars was astonishing. EDH’24 and EDM’24 both fell 47.5 bps in yield on the week, to settle at 9720 and 9729. To give a sense of changes in the curve, here are weekly changes on December contracts:
EDZ2 9631.5 +05.0
EDZ3 9707.5 +45.0
EDZ4 9732.5 +43.0
EDZ5 9718.0 +28.0
EDZ6 9699.0 +19.0
So, nearly ½ percent of forward tightening was erased from next year. EDZ2 is the lowest contract on the curve at 9631.5 or 3.685% as the expectation of near-term hikes continues in conjunction with the Fed’s inflation fighting campaign. However, the market perceives great cost in terms of future economic activity, as EDZ2/EDZ3 plunged 40 bps on the week to a new low of -76 bps (the lowest one-year calendar on the strip). The Fed’s goal of crushing inflation expectations appears to be working, as the ten-yr breakeven between the treasury and tip fell to 235 bps this week, having been as high as 300 bps in late April.
It’s clear even from the brief table above that there was a mad scramble to exit curve flattening trades. For example, the red/gold Eurodollar pack spread jumped over 25 on the week, from -11.5 to +14.375. The table shows red Dec (EDZ3) vs gold Dec (EDZ6) having gained 26 to settle at 8.5. The constant maturity red/gold pack spread was as low as -87 on April 1.
The questions now become: How hard of a landing is in store? How long before the Fed officially pivots back toward the easing bias apparent in markets? Will equities and other risk-assets enthusiastically embrace the pivot, or will the reality of declining earnings be the dominant theme?
The data last week clearly points to a receding economy. Pending Home Sales yoy -13.6%. Mfg PMI 53.0 from 56.1 last, with the Employment component falling further to 47.3 and New Orders slipping below 50 (to 49.2) for the first time since covid. Q1 GDP final -1.6% and the Atlanta Fed’s GDPNow was last released on Friday at -2.1% for Q2, having been estimated at +2.1% as recently as early May. There was a sliver of progress on the inflation front, as Core PCE prices yoy printed 4.7% from 4.9%.
The good news is that a lot of commodity prices have deflated recently, from Corn to Copper to Cotton. HGU2 (Sept Copper) was 4.75 in late April and is now 3.57. CZ2 (Dec Corn) was 761 in mid-May, now 607. CTZ2 (Dec Cotton) was 130 in mid-May and is now 97.50. The bad news is that even though these commodities signal some relief on inflation input prices, the volatility also raises odds of economic dislocations. The most important commodity, Crude, has had a pullback as well, in response to the administration depleting the Strategic Reserves, but it’s now rebounding. CLQ2 (Aug WTI) was 120 in early June, fell back to 102, but is currently about halfway back, over 110. Keeping with the theme of C’s, we might as well give a shout-out to crypto, with yet another “crypto lender” Vauld, announcing the suspension of customer withdrawals. From the company’s statement: “…we have made the difficult decision to suspend all withdrawals, trading and deposits…” helpfully adding, “…arrangements will be made for customer deposits as may be necessary for certain customers to meet margin calls in connection with collateralised loans.” In other words, we’ve accentuated the pressure on your collateral by making the unavoidable decision to close, but we’d still like you to adhere to our margin agreements since your collateral no longer has the value to support your loan. It could be a South Park episode.
When does a run on a lender snowball into a systemic problem? It’s when one lender after another comes to the jarring realization that collateral is quickly losing the value to support loans. How can collateral adjust lower so quickly? Because it was artificially pumped up by low funding rates. How do we know it can’t possibly turn into a systemic run? Because the Fed has stress tests and all the banks passed them. THAT’S HOW. I know I feel better.
Thank goodness we have political leaders to address the problems. Here’s Illinois Governor JB Pritzker, who announced the magnanimous gesture of suspending the scheduled increase in the Illinois gas tax through election day. Gas stations are required to post signs at the pump informing consumers of this suspension. What the signs DON’T say is that it’s a savings of $0.02/gallon. My last fill up was $5.65 instead of $5.67. I saved 20 cents. The net effect is about the same as this guy switching to Diet Coke.
This week we have JOLTS and non-Mfg ISM on Wednesday, followed by the FOMC minutes. The employment report is released on Friday. Auctions of 3s, 10s and 30s next week, beginning July 11.
| 6/24/2022 | 7/1/2022 | chg | ||
| UST 2Y | 305.5 | 284.1 | -21.4 | |
| UST 5Y | 317.5 | 289.4 | -28.1 | |
| UST 10Y | 312.4 | 289.9 | -22.5 | |
| UST 30Y | 325.8 | 312.7 | -13.1 | |
| GERM 2Y | 81.3 | 51.5 | -29.8 | |
| GERM 10Y | 144.2 | 123.2 | -21.0 | |
| JPN 30Y | 123.0 | 122.6 | -0.4 | |
| CHINA 10Y | 284.9 | 282.9 | -2.0 | |
| EURO$ U2/U3 | 24.5 | -13.5 | -38.0 | |
| EURO$ U3/U4 | -36.5 | -42.5 | -6.0 | |
| EURO$ U4/U5 | -5.0 | 8.5 | 13.5 | |
| EUR | 105.58 | 104.30 | -1.28 | |
| CRUDE (active) | 107.62 | 108.43 | 0.81 | |
| SPX | 3911.74 | 3825.33 | -86.41 | -2.2% |
| VIX | 27.23 | 26.70 | -0.53 | |
