August 29. Rates moving higher more easily than they fall…
–Most of Tuesday’s fixed income rally was reversed yesterday as the treasury auctioned 5’s. In euro$’s there was quite a bit of put buying, mostly exits. Both Brazil and Indonesia raised rates, to 9 and 7% respectively as emerging markets try to stem capital flight. Interesting data from the IMF that emerging economies have overtaken developed: “According to the International Monetary Fund—the supplier of this data—advanced economies will have a purchasing price parity-adjusted GDP of $42.8 trillion in 2013, while that of emerging economies will be $44.4 trillion.” So when the Fed says it doesn’t take emerging market turmoil into consideration, it’s hard to believe. The administration has committed to expanding international influence while the Fed is turning inward? Summers will “fix” that. http://www.huffingtonpost.com/2013/08/28/gdp-poor-countries_n_3830396.html?utm_hp_ref=business
–News today includes Q2 GDP revision and Jobless Claims, expected 330k from 336k. As an aside, while employment data has improved, it’s hard to reconcile with the growing number of homeless panhandlers in Chicago. It used to be that there was one or two guys on the bridge from the train, now there are 4 on each side, morning and afternoon, and on nearly every corner in the loop, young and old, black and white. Not a sign of robust hiring, but perhaps it’s just summer in Chicago? Easily the worst I have ever seen.
–Treasury auction of 7’s this afternoon. Demand has been tepid as tapering looms and developing countries burn through dollar reserves by divesting treasuries.
–While there was buying of relatively near put spreads that were exits, the trade that is being added is buying Blue Oct 9675/9650ps financed with sales of Short(red) Dec 9900/9950 strangle. The Oct put spread is 50 out of money and trades around 4, only 44 days until expiry. Perhaps more of a bet on debt ceiling fight and aggressive tapering than economic resurgence.
August 27. Syria jumps into forefront
–Interest rate futures rallied in the wake of weak Durables (-7.3%), with ten year yield down nearly 2 bps to just above 280. Not much change in the curve. After the data, Goldman reduced Q3 GDP tracking from 1.8 to 1.7 while Morgan St cut from 2.7 to 2.3. While the Fed will certainly have to reduce near term projections for GDP at the Sept meeting, I saw a post from Vincent Reinhart that suggested new projections for 2016 might be bearish as Fed models are “mean reverting” and will forecast higher growth. However, ALL FOMC projections have been more optimistic than final data.
–Stocks are lower following Kerry’s speech suggesting military action against Syria is imminent. (Now back to the yahct). Treasuries are a bit higher and gold is at a new recent high having broken through 1400 (1411 currently). EM still in disarray as India rupee at new low and rupiah also getting crushed. Turkish lira at new low vs euro. China suggested the US go slowly on tapering due to EM stress, and while Fed officials at Jackson Hole said domestic considerations are the priority for Fed monetary policy, spillover effects from international market dislocations are definitely taken into account.
–Today’s news includes Consumer Confidence expected 78 from 80.3. German business confidence rose to the highest level in 16 months. Treasury auctions 2 yrs today as Sec’y Lew reports the US will bump up against the debt ceiling in mid October.
–There was a new buyer of about 50k FVV 118.25p yesterday, open interest increased by 41k. That strike is about 23 bps from FV settle yesterday…would suggest five year yield of nearly 1.85% on parallel shift.
Aug 22. Bond carnage continues; India Rupee plunging
–Selling pressure continued Wednesday in US fixed income after FOMC minutes as members were comfortable with Bernanke’s tapering plan. Just before the release, tens were at the highs of the session, but made new lows into the afternoon with further losses this morning as China’s PMI surprised to the upside at 50.1. Tens went above 2.92 this morning. Blue eurodollars fell 20 bps from just before FOMC to last night’s low. Eurozone data was also positive with PMI data the highest in two years.
–However, other Asian news is negative with the India Rupee continuing its dive to new lows. Indonesian rupiah also plunging, reminiscent of 1998. While one commentator noted that the positive employment report and last Jobless Claims were unknown at the time of the last Fed meeting (making the tapering case that much stronger), the Fed also didn’t know of subsequent EM dislocations. So while China and the EU may be stabilizing (may be…) other parts of the world are seeing increased stress that the Fed is sensitive to, so adjustment of bond buys is likely to be quite gradual.
–In any event, treasuries remain weak, with big jumps in open interest yesterday and firming of implied vol. Red/gold up over 6.5 to new high of 297. While there’s no question that higher mortgage rates will become a big headwind for housing, the steepness of the curve probably helps in some areas, and enhanced income could ultimately benefit underfunded pensions.
–News today includes Job Claims expected 329k from 320, PMI Mfg 53.5 and Leading Indicators expected +0.5. Jackson Hole confernece also starts, but there is little press about it as Bernanke isn’t attending.
–Interesting note from Breitbart.com, “Outside of the federal government’s Bureau of Labor statistics, the Gallup polling organization also tracks the nation’s unemployment rate. While the BLS and Gallup findings might not always perfectly align, the trends almost always do and the small statistical differences just haven’t been worthy of note. But now Gallup is showing a sizable 30 day jump in the unemployment rate, from 7.7% on July 21 to 8.9% today. ”
http://www.breitbart.com/Big-Government/2013/08/21/Gallup-Unemployment-jumped-from-77-to-89
Aug 15. Inflation concerns?
–Not much net change in interest rate futures yesterday…no bounce. However, the back end of the curve firmed ever so slightly with gold euro$ pack up 2 bps. Notable buyer of 14k TYX (Nov) 123 p for 46 to 47 …new position, 30 delta. (Late Oct expiration…timed for debt ceiling/budget battle? )
–Quite a bit of data today with CPI expected +0.2 both Core and Headline. The main CPI number has been fairly volatile over the past year, ranging from +0.7 to -0.4. Jobless Claims expected 330k, Empire State 10.0, Industrial Production +0.3 and Philly Fed expected 15.0 from 19.8.
–The idea of increasing inflation seems to be gaining traction as David Rosenberg put out a piece indicating a shift from deflation to inflation as skilled labor tightens, etc. (Link below) Japan appears to have turned the corner as well, though Reuters reports that talk of a corporate tax cut there is being muffled as an increase in the sales tax looms (fiscal retrenchment may hinder the fight against deflation). However, yoy Core PPI was up only 1.2 yesterday. On the other hand, precious metals are showing signs of life with gold rebounding from lows in early July and silver gaining nearly 7% in the past 6 sessions. Crude stronger this morning nearing $108. The Canadian $ and Aussie are also firming, with Canada’s chart (futures) tracing out a similar path to the ten year note. However, in the past few sessions those paths have diverged as Canada continues to strengthen while bonds tanked.
–The other theme that bears watching is possible weakness in stocks as margin debt is near all time highs and there are multiple Hindenburg omens along with other technical signs that the market is overbought. A violent pullback would likely translate into bond support; not as likely on a grudging sell off.
August 14. Bond yields jump
–Yields jumped yesterday with tens up over 11 bps to 2.714. While 5’s and tens are still below high yield marks set on the July employment report (tens had gotten to 2.74), 30 yr bonds did equal that high at 3.755 (up 9 bps yesterday). A paper from the SF Fed suggests that QE provided only a modest boost to the economy, estimating an increase of just 0.13 to GDP after QE2, and that forward guidance is essential to favorable results. However, a shift in Fed stance to reliance on forward guidance as its main policy tool seems to create risk of a much steeper curve, as positive carry over the longer term becomes less certain. 2/10 rose yesterday by 8.5 bps to 238.5, just 1bp shy of this year’s high. Of course better economic data is also a factor in rising long end yields, and news in the EU has improved as both France and Germany beat Q2 growth estimates with rates of +0.5 and +0.7. The Fed wants to avoid a yield surge like the one in 1994 that precipitated global financial crises, but with the possibility of another debt ceiling battle as the Fed begins to taper, that risk increases. Next target in tens is around 2.90, a 38% retrace from 2007 high of 5.30 to 2012 low of 1.40 (around 123 1/4 in TYZ). TYV 122/123/124p fly settled 6/64 yesterday.
–Reds/greens steepened most yesterday, +6.25, while green/blue gained 5.75 and blue/gold +2.75.
–Today’s news includes PPI expected +0.3 with Core +0.2.
Aug 12. The risk for bond prices is to upside, what if the Fed DOESN’T taper?
–Treasuries continue to grind to lower yields with the new ten year down 1 bp to 2.578. Volume was quite light, and open interest declined across the treasury curve, suggesting short covering. (2’s -4900. 5’s -15k, tens -3700, bonds -5600. But euro$’s added 43k positions). Tapering is still a hot topic as we get get closer to the Sept FOMC. But as far as the bond market is concerned, I believe it’s fully priced in. Consider the budget deficit as % of GDP: in 2009 it was over 10%. It has fallen even since to 7% in 2012 and is expected to be just 4% in 2013 (CBO). In a $16 trillion economy 1% is $160 bln, so a change from 7 to 4% is $480 billion or $40 billion per month. It’s not as though the treasury has decided to issue $40 bln less per month, but the loss of $10 to $20 billion in Fed purchases should have no appreciable effect, especially given the rise in rates at the longer end that has already occurred. Now, what happens if the Fed DOESN’T taper. Tens could easily drop right back to 2.30, which would be over 2 points in futures.
–This afternoon the gov’t budget number for July is released, expected -$96 billion. Retail Sales on Tuesday.
Here is a link from Calculated Risk on the budget deficit:
http://www.calculatedriskblog.com/2013/02/cbo-deficit-to-decline-to-24-of-gdp-in.html
Aug 7, 2013. Reallocation in US weighs on stocks, the great counter-rotation
–Ten year auction today, followed by Consumer Credit at the end of the session.
–Japan down 4% today and US stocks opening weaker. Some attributing the sell off to more certainty about near term tapering, but perhaps the Japan sell off has something to do with RADIOACTIVE WATER CONTAMINATION from Fukishima. That situation is getting worse, to the point that the Japanese gov’t now thinks it may have to step in because Tepco isn’t quite containing the problem. It’s a global disaster.
–The US markets appear to be in the midst of allocation out of stocks and into bonds. Reasonable time for such programs to take place with stocks near highs, earnings season over, rates at relatively attractive levels, and the ten year auction which allows ease of buying the treasury side. Even though economic data out of both the US and EU has been better, bonds have been quite resilient; a counter trade against stocks will catch some shorts by surprise.
–There was a story yesterday about Passport Capital divesting all agency securities as perceived risks increase. Obama made a speech about improved housing, and has said that agencies should be private, undermining confidence in gov’t guarantees. Additionally, the agencies are supposed to pare down their portfolios…to who?
–Story on zerohedge; Only 40% Of Federal Student Loan Borrowers Are Currently Making A Payment. I think the biggest asset of the Fed’l gov’t is college loans…worth a lot less than the amount being carried on the books.
Aug 5. Terrorism concerns resurface
–Very different reactions when comparing this employment report and the last one. On July 5 rates had been moving higher in the month prior, and new highs were set in many rates/spreads. On that day, NFP was 195 with 7.6 rate and Avg Hrly earnings +0.4. Ten year yield hit 274, 2/10 spread 232, red/gold euro$ pack spread 287, all new highs. Last week’s news, prior to Friday’s number, suggested a better economy with ISM surging and Jobless Claims falling. Indeed on Thursday curve measures did make new highs, with 2/10 at 238 and red/gold 289, ten yr yield just shy of old high at 272. On Friday of course, the ten year yield dropped 12 bps to 260, 2/10 fell 9 to 230.5 and red/gold plunged over 16 bps to 273, as payrolls rose 162 at a rate of 7.4. The conclusion is that sellers were exhausted. Those that had needed short hedges had already placed them, weaker longs had already capitulated. Which augers for a drift to higher prices, unless capped by this week’s auctions of 3’s, 10’s and 30’s. Probably the most bullish item in this report (for fixed income) was the fall in avg hourly earnings from +0.4 to -0.1, a disinflationary signal. HuffPost:The labor-force participation rate, which measures the percentage of working-age Americans who are working or looking for work, fell to 63.4 percent in July, near a 35-year low.
–For the first time (I believe) the CME paused trading for 5 seconds in tens and bonds just prior to the employment release (after 7:29 but before 7:30) as large buy orders allegedly came in that would have run the market up before the actual data. Or before the data was released to the vast majority. That’s one way to uphold the embargo…
http://blogs.wsj.com/moneybeat/2013/08/02/cme-treasury-futures-trade-paused-just-before-jobs-report/
–Non mfg ISM today expected 53.0. Not much other economic news out this week. Terrorism concerns may provide marginal treasury bid as the White House held a high level meeting on new threats.
August 2. Yields surge in front of today’s Employment Report
–The last employment release on July 5 was when rates previously hit their highs for the year, 161.4 in fives, 2.74 in tens, 3.714 in bonds. Yesterday, the bond yield exceeded that high by 6 bps, but tens were about 2 bps shy at 2.72 and fives 11.5 below the old high at 1.50. Stronger than expected data overwhelmed Wednesday’s Fed statement with tens leaping 14 bps in yield and gold eurodollars -17.5 (in price). ISM was 55.4, vs previous 4 months which had been clustered around 50. Red/gold pack spread hit a new high of 289, up 12.25 on the day as curve steepened. 2/10 up to 239, also a new high.
–Today’s employment report expected to show a gain of 175-185 in NFP with 7.5% rate. Also released today, Personal Income and Spending, with Core PCE price index expected +0.1.
–Stocks roared to the upside, defying expectations of Fed tapering. On the other side of the world, Toyota reported strong earnings, the direct result of a weaker yen, and the Nikkei is up 40% year to date with a 3.3% gain today, as Japan ramped up QE efforts this year. So Japanese equities have responded directly and emphatically to QE, while the Fed’s plan to wean the market off of QE has had no discernible effect except in the long end of the curve.
–Regarding the effect of higher mortgage rates on housing, a $200k, 30 yr loan at 3.5% is $898/mo. At 4.5% it’s $1013…only $115 more a month, but still, an increase in the monthly payment of 12.8%. Enough to derail housing? Perhaps not, but certainly a headwind.
July 30. Seven Faces of The Peril
–Rates edged slightly higher yesterday on low volume. This morning Aussie testing new lows as RBA’s Stevens doesn’t see impediments to further easing. Japan stocks bounced and Shanghai stabilized, but looking at the Shanghai Composite chart visually defines a failed market.
–Going into tomorrow’s FOMC the market looks for clues to tapering. Core PCE price index is near historic lows around 1%, though the Fed has said that factors holding inflation down appear to be transitory. It’s worth looking back at Bullard’s paper from exactly 3 years ago, July 29, 2010, “Seven Faces of ‘The Peril’ “. His conclusions (1) The FOMC’s extended period language may be increasing the probability of a Japanese-style outcome for the US and (2) on balance, the US quantitative easing program offers the best tool to avoid such an outcome. http://research.stlouisfed.org/econ/bullard/pdf/SevenFacesFinalJul28.pdf
–The “Peril” is falling into a Japan style deflationary trap, an “unintended steady state” of low inflation coupled with official policy rates near the zero bound. One might argue that the US is nowhere near this state as equity prices are near all time highs and housing prices recover. So maybe that’s why policy makers are rejecting Bullard’s conclusions and again emphasizing forward guidance while turning back from QE. However, the official statistics reflect the peril: Near zero policy rates, very low and falling inflation, sub 1% growth.
–Interesting article on China, the curse of the tallest building… http://www.bloomberg.com/news/2013-07-29/china-is-set-to-suffer-the-skyscraper-curse.html On July 20, the Broad Group broke ground on Sky City on the outskirts of the south-central city of Changsha. The skyscraper will rise 838 meters (2,749 feet) into the heavens to become the world’s tallest building. If that weren’t feat enough, the project aims to wrap up construction in 90 days and at almost half the cost of Dubai’s Burj Khalifa, which it would top.
