July 27. FOMC and employment report this week
–We’re on the verge of moving to much lower interest rates again. Perhaps the FOMC meeting this week will provide the fuel, or it might cause a dip to buy. Employment report is this Friday; the last one marked the lows in interest rate futures, perhaps for the year. Fives are 136 now, I think they are going to 110.
–Some near eurodollar calendar spreads made new recent lows. For example, EDH14/EDH15 dropped 5 bps to 33.5. As a point of reference, the white/red one year calendars were 8-15 in the beginning of May.
–Last week’s durables data points to continued weak capital expenditures. While employment data has been boosted by hiring in restaurants and bars, June’s food service sales fell 1.2%. The Nat’l Restaurant Ass’n Index has been pretty strong so perhaps the June data was an outlier, however the movie industry has also been hit with a series of flops, year to date box office is down 1.7%. The point is that discretionary consumer spending is slowing, and likely to ease further. Gains in payrolls are part timers. “One branch of [the new Obamacare] call center will be located in California’s Contra Costa County, where, reportedly, 7,000 people applied for the 204 jobs. According to the Contra Costa Times, however, “about half the jobs are part-time, with no health benefits.” http://www.nationalreview.com/corner/354556/obamacare-call-center-will-not-offer-health-care-benefits-employees-eliana-johnson
–“The National Treasury Employees Union, or NTEU, is encouraging its members to write their congressmen in opposition to HR 1780, a bill that would have federal government workers use health insurance exchanges to buy health insurance… The exchanges would take the place of the Federal Employee Health Benefits program that currently provides insurance to Treasury Department employees.” This union represents IRS employees who are supposed to enforce the Obamacare law, and they are opposing key provisions.
http://cnsnews.com/news/article/national-treasury-employees-union-urges-members-oppose-obamacare-themselves
–From fark.com citing Chgo Sun Times article: “Chicago’s debt is now over $10k per resident, and only one of the city’s four employee pension funds is more than 50% funded. This was before the recent triple downgrade of the city’s bond rating. But there’s no way they’re the next Detroit.”
–Effects of the sequestration, increased payroll taxes and higher energy prices operate with a bit of a lag. They are all going to bite in the second half. At the same time, we’ll be getting the announcement of a new Fed chair (after political wrangling and grandstanding). It’s worth recalling that the stock market crash of 1987 came just a couple of months after Greenspan started his term as Fed chief (Aug 1987). I can see no reason to be short treasuries inside of 5 years.
July 26. Now is the Summer of our discontent….made worse
–Settlement prices were obsolete about ten minutes after the floor’s closing bell as Hilsenrath apparently put out a blog suggesting that the employment threshold could be lowered before the Fed contemplates hiking the FF rate. The blue pack, under early selling assault of 2k lot block trades, had settled -5.375, but rallied 6 bps post bell. Tens, which were a bit over 261 during the day went down to 257. (Total open int in euro$’s surged 88k with reds accounting for over 70k, but the blues fell 14k).
–Some of the selling was connected to Summers being considered the instant front-runner as new Fed chairman, and comments that he had made (reported in the FT) that “QE in my view is less efficacious for the real economy than most people suppose.” Further…”Mr Summers gave a highly optimistic outlook for the US economy – even more so than the Fed’s recent forecasts – saying the risks to growth are significantly to the upside.”
–All recent Fed forecasts concerning growth have been too positive, and the potential new Fed chief thinks risks are to the upside? Huh? Why? because rates have jumped, or because the EU is going to roar back? After yesterday’s durables number, several shops lowered Q2 GDP estimates because shipments of non-defence cap goods (ex-aircraft) fell 0.9. So JPM for example, went from +0.9 to +0.7 for their GDP est and I saw other sub 1% estimates. Just for review, in Dec the Fed’s est for 2013 GDP was 2.3 to 3.0. In March, 2.3 to 2.8. In June 2.3 to 2.6. If Q2 GDP is 1%, then Q3 and Q4 will have to be over 3% just to hit the lower target of 2.3. Not going to happen.
–There has been significant political blow back to Obama’s consideration of Summers for the Fed, with Senate Democrats sending a letter urging that Obama choose Yellen. While the current Fed stance argues for curve steepening, sales of the back end based purely on Summers as new Fed chief are questionable at best.
–With the Fed de-emphasizing QE and moving more toward forward guidance of FF as its main policy tool, it makes sense for the eurodollar curve to steepen. But the main message is that funding will remain cheap as far as the eye can see. At least that’s what I think will come out of next week’s FOMC.
July 25. July’s post-employment report rally comes to an abrupt end
–Most of the month’s trade in interest rate futures has been a grinding rally that erased the plunge from the unemployment report released July 5. Until yesterday. Tens rose about 7 bps in yield to 259. Red/gold pack spread jumped over 6.5 bps to nearly 267 as the gold pack closed -10.5. Euro$ straddles tacked on 1-2 bps. There is a heavy and relentless offer in the market that appears to be more than auction related. Fives went well yesterday at 141, 7’s auctioned today. Consistent put buying all day.
–The fundamental economic backdrop doesn’t support much higher rates, but other supply and demand issues are dominant currently. CAT released earnings yesterday, underscoring weak mining and construction. The big drop in Aussie yesterday is a reflection of weakness in China and commodities. From Evans-Pritchard yesterday regarding China: “Mr Li has vowed to break addiction to credit, which has mushroomed in five years from $9 trillion to $23 trillion, reaching 200pc of GDP. Fresh output created by each extra dollar of credit has fallen from a ratio of 0.85 in 2008 to nearer 0.2 today, proof of credit exhaustion.” From cnsnews:”…more than two Americans have been added to the food stamp rolls for every one job the administration says it has created.”
–Besides the 7 yr, news today includes Durables, expected +1.5. Job Claims 341k and KC Fed, expected 0 from -5…not normally important, but given the weak data from the Richmond Fed, worth a mention.
July 24. Ten years are rejecting sub 2.5% level
–Another very quiet day in interest rate futures. Ten year yield edged just above 2.5% to 2.513 as 5’s and 7’s are slated for auction today and tomorrow. Two year auction was uneventful.
–PMI data for the eurozone turned up, however, the HSBC flash PMI for China fell to an 11 month low at 47.7. The Japanese election solidified support for Abenomics suggesting more yen weakness to spur exports. Japan’s devaluation to grab export share could easily ratchet up tensions with China as that country’s economy crumbles. In terms of US impact, it may be a negative for US rates at the long end…chance that China pares back US treasury holdings as it tries to prop up its own economy?
–In addition to 5 yr auction, New Home Sales today are expected 481k.
–There’s a story in the Huff Post this morning that Obama is leaning towards Larry Summers to be the next Fed chairman. In any case, I think an announcement could be made in August, and a post-Bernanke Fed may inject a bit more uncertainty into the markets.
July 23. Quiet but steady US markets; 2 yr note auction today
July 23. Not much net change in interest rate futures Monday, but implied vol continues to get hit and some of the eurodollar calendar spreads edged to monthly lows. TYU 127.0 straddle settled Friday at 1’40, but closed 1’33 yesterday at 5.0 vol. Near one year calendars like EDZ13/EDZ14 came in by half a tick, closing at new recent low of 27.5. (Of course, in the beginning of May before the fixed income sell off this spread was around 13). Red/green pack spread settled just above 76, fully 22 bps below the high set on July 5th employment which was just above 98.
–Not much action in expiring August treasury options, with TYQ 127.0 straddle worth less than half a point at 31/64’s. There was some buying of TYQ 128c for 2.
–The star performer was gold, up over $40 to 1336, just above the 50 day moving average, testing old lows from mid-April and May prior to the hard sell off. Perceptions of slightly easier central banks and tightness in physical gold spurred today’s buying.
–Two year auction today, followed by 5’s and 7’s Wed and Thursday.
–While Portugal’s yields have pulled back from the danger zone, the Telegraph’s Evans-Pritchard notes that public debt in Portugal has surged 15 pts in the last year to 127% of GDP, Italy’s has gone from 124% to 130 and in Ireland “public debt has leapt by 18 points to 125pc in a single year.” These levels suggest that peripheral europe is still on the bubble.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/10196220/Europes-crisis-states-should-fight-back-with-a-debtors-cartel.html
July 21. Low rates as far as the eye can see
–Rates continued to drift lower Friday with tens closing just under 2.5%. Japan’s election solidifies support for Abe and yen depreciation.
–Detroit’s bankruptcy and Chicago’s downgrade (‘we got your back Detroit, right behind ya’) focuses attention on unfunded liabilities. “Early this year, the Pew Center released a survey showing that 61 of the nation’s largest cities — limiting the survey to the largest city in each state and all other cities with more than 500,000 people — had a gap of more than $217 billion in unfunded pension and health care liabilities.” It’s worth keeping in mind, and not lost on the Fed, that entrenched politicians would rather inflate away these crushing burdens rather than face them, and nowhere is that more obvious than in Illinois.
–In a broader perspective, there seems to be a plethora (that’s right, PLETHORA) of market dislocations recently that I’m sure are related but I can’t quite connect. For example, the extreme premium of near contracts in WTI crude, negative gold forward rates, fails in the treasury market (and ZH noted similar problems in Japan), top line revenue misses in earnings reports. It’s not apparent in the euro$ curve, but I get a sense that short term financing is getting gummed up. It might be that another big dollop of Japanese QE will mask underlying problems, but I have an uneasy sense that funding is getting a little more precious. And municipal finance in the US could be another signal. (Like a frying pan across the forehead). Banks need more capital, and it’s not just due to Basel rules. The WSJ ran this headline: ‘Beijing Lending Shift May Force Banks to Raise Capital’. The Fed, of course, is simply a LONG way from raising rates.
–Here are a couple of links and quotes regarding Detroit, Chicago, etc.
http://www.suntimes.com/21392468-761/financial-hurricane-hits-chicagos-bond-rating.html
http://www.freep.com/article/20130721/NEWS06/307210073/
“As examples of the results: Chicago recently saw its credit rating downgraded because of a $19-billion unfunded pension liability that the ratings service Moody’s puts closer to $36 billion. And Los Angeles could be facing a liability of more than $30 billion, by some estimates.”
“Last Monday, the bond rating house Moody’s also downgraded Cincinnati’s general obligation bonds, citing “budgetary pressure” from pension contributions.”
–And this isn’t exactly market related, but I am including it anyway to add a little perspective to the Trayvon Martin protests. Chicago had at least 4 dead and 11 wounded in shootings, including a six year old girl and 14 year old boy; most were between 20 and 29. We call it “the weekend” and it’s a travesty. Maybe Stevie Wonder should consider adding Chicago as well as Florida to his “do not perform” list. Maybe Chris Matthews should apologize on behalf of everyone everywhere. I don’t mean to diminish Obama’s comments on this topic, which I would say were of historical importance. http://www.businessinsider.com/obama-trayvon-martin-race-speech-video-text-2013-7 However, the nation faces a mountain of related problems that need to be addressed as well. http://www.chicagotribune.com/news/local/breaking/chi-chicago-shootings-violence-july-20-to-21-20130720,0,110934.story
http://www.chicagotribune.com/news/local/breaking/chi-chicago-crime-shooting-20130721,0,487617.story
July 10. China’s trade data reflects slack global demand
–Today brings the US ten year note auction, FOMC minutes, and late in the day at 4:10 NY time, Bernanke speaks followed by Q&A. There is little reason to backtrack on the idea of modest tapering in September since the damage has already been absorbed.
–Yesterday saw a big drop in EUR, threatening April’s low, as Asmussen said that an ‘extended period’ for low rates was over a year (even though Draghi specifically avoided putting any sort of definition on the amount of time). Downgrade of Italy by S&P accelerated the move. Strength in the dollar index has previously been correlated with negative reaction in equities, but stocks went merrily higher through the day.
–Ten year yield edged a couple of bps lower to 2.625 in front of today’s auction. In May the 10yr auction yield was 1.81, in June 2.209. Implied vol was marked significantly lower, with TYU 125.5 straddle falling from 2’38 to 2’26 (7.3 to 6.9 vol). Lower vol suggests that fear of a new leg lower in treasuries has subsided. The curve flattened in conjunction with lower vol, with red/gold pack spread down 5.25 to 276.
–China trade data released today was soft, the worst yoy performance of exports since 2009 (ZH), with WSJ calling it a reflection of slack global demand.
July 9. Profit taking on Monday after yield surge
–Solid bounce Monday after Friday’s drubbing of the long end. Ten year note fell about 6.5 bps to 2.645. Treasury auctions 3 yrs today, followed by tens and bonds Wed and Thursday. Curve flattened slightly relative to Friday’s surge, red/gold pack spread narrowed nearly 6 bps to 281.
–The auctions this week are important to determine whether much higher yields in the long end will attract buyers.
–EDZ14 (second red) actually erased all of Friday’s loss and closed up 7 at 9928, exactly where it settled last Wednesday (prior to 4th of July holiday). All following contracts remain lower. Near contracts (out to a year) are not pricing tightening fears. In that sense, the Fed has conveyed its message that tapering isn’t really about tightening, but more about normalization. However, with the Fed having done everything possible to force curve flattening, it’s not so surprising that the change in strategy, even though it might be marginal, created such a large response.
–Consumer Credit for May was released yesterday afternoon, up a huge $19.6B. Even revolving credit showed strong gains.
–In eurodollar options there was liquidation of some large positions, buying back shorts in 0EU 9950/9925p spreads (20k) and 0EH 9950/9925p spreads (60k) to sell Green March 2EH 9887/9862 and 9887/9850p spds. Open interest in 2EH 9887p fell by 64k. Right along with general theme…profit taking on steepeners.
July 8. NFP sparks bond panic
–Carnage in back end of the curve as the employment report was slightly stronger than expected with NFP +195k. Ten year yield rose nearly 1/4% to 2.71. Red/gold pack spread jumped 27 bps to just under 287. Green/blue pack spread was up 11 to 109; colleague Art Main notes it’s the highest level of this spread ever (since 1989 which is probably when blues were introduced).
–I’ve read that the Fed considers the 1994 tightening cycle as a mistake which led to the blow up of Orange County and indirectly fed into the Mexican Peso crisis. The Fed fund target started 1994 at the then rock bottom rate of 3%, and in a series of hikes beginning in February, ultimately rose to 6% in February 1995. The bond yield went from 6.3 in Jan to 8.0 in December, a percentage yield increase of 25%.
–Though the absolute level of the ten year yield is still low by historical standards, it has nearly doubled in a year, from around 1.50% in July 2012 to 2.71 now. On a percentage basis this has been a monster move, and while it causes some to get off the fence and lock in rate protection, it’s also likely to have a negative influence on growth which the Fed will consider at the FOMC at month’s end (July 31).
–Supply this week, 3’s 10’s and 30 year bonds beginning tomorrow. Auctions may continue dampening enthusiasm on treasuries for the short term, but a five year yield of 1.59 represents juicy carry compared to recent history. On the other hand the last gold, June’18 contract, settled Friday near 4% (96.005). Gold pack (5th year) was down a whopping 35 bps Friday.
July 5. Employment report and forward guidance, higher US long rates?
–FORWARD GUIDANCE. (BBG) Draghi [on thursday] told reporters in Frankfurt that the ECB planned to keep its interest rates low or even lower for an “extended period” and that it was injecting a “downward bias in interest rates for the foreseeable future.”
–So rather than use long term repos to explicitly keep funding costs known, forward guidance is now being used. Euro fell over 1% and is threatening lows from April and May. British pound took out June’s low in the wake of the Bank of England meeting.
–The US curve is steepening; probably a better bet to hold German bunds and hedge the currency risk rather than US treasuries, where the funding cost has become less certain and the major buyer known as the Fed has announced plans to pare back purchases. Further, a slowdown in Asia led by China likely means less dollars are recycled into treasury purchases from that part of the world. (It’s hard to interpret news that China will suspend industry specific data from PMI releases as anything other than trouble).
–The stronger dollar will once again become a challenge for US exporters, and probably for the US equity market as a whole, as QE has been a major source of support of US financial asset prices.
–Today’s NFP expected 165k with rate of 7.5. US data will now likely become much more important, and, after today’s big report, there’s not much next week. However, Tuesday kicks off treasury auctions of 3’s, 10’s and bonds. FOMC minutes on Wednesday.
