CPI and 30year auction
August 10, 2023
–CPI today expected 3.2 to 3.3% yoy from 3.0, with Core expected 4.7% from 4.8 last. Jobless Claims 230k. 30y auction.
–Curve slightly more inverted yesterday with 2s +4.2 bps to 4.80 and tens -1.4 to 4.01. Ten year auction result 3.999%.
–For the past 15 sessions FFX3 has settled 9456 to 59 or 5.444 to 5.41%, vs current Fed Effective of 5.33%. The November FF contract encompasses the Sept 20 and Nov 1 FOMCs, and is not quite at the 50/50 mark in forecasting another 25 bps hike. The market remains fairly certain that the Fed is done or has just one more hike. The more important question is how long FF can be held high before the ease cycle begins. Actually though, the dominant issue might become what happens with long end rates. Although there has been a small bond rally in the past few days, the trend favors higher yields. Inflation base effects become more of a headwind going forward, and energy is becoming more expensive. A general tightening of financial conditions (lower stocks, stronger USD, weak bank loan growth, a waning fiscal impulse) might translate into higher, not lower, bond yields. Inflation data will be important. If inflation data are slightly lower than expected but yields end higher, it will be a bearish signal.
The inflation problem is over… in China
August 9, 2023
–News that China has slipped into deflation (July CPI -0.3% yoy) has briefly overshadowed the US CPI report which will come out tomorrow. In the meantime, CLU3 trades 83.72, up 80 cents this morning, the highest level for the Sept contract in a year. US CPI is expected 3.2 to 3.3% yoy from 3.0 last, with Core 4.8% equaling the last reading. Ten year auction today.
–Philly Fed President Harker said he thinks the Fed might be at the point where it can hold rates steady. Curve bull flattened with the 2y note unch’d at 4.758, tens down 5 bps at 4.024% and the 30y down 5.4 bps to 4.202%. Near SOFR contracts slightly lower on the day while blues and golds were +5 to +6. Lowest one-yr calendar on the strip is Z3/Z4 at -142 (9465.0/9607.0), down 1.5 on the day.
–A couple of dates to be aware of: August 24-26 is Jackson Hole. Sept treasury opts expire 25-Aug. Sept FOMC is on the 20th. Oct treasury options expire 22-Sept.
–Equity prices are becoming a larger influence on rates. Sharp pullback yesterday morning in ES (low 4482 which was down 56) was substantially recovered by end of day. Not so fast WeWork; down 25% as the earnings call revealed substantial doubt about the company’s ability to remain viable. According to ZH, peak valuation $47b, went public at $8b now around $300m.
–US economy is a tale of two cities. Clip below doesn’t exactly square with the idea of plentiful high-paying jobs.
More Americans are tapping their 401(k) accounts because of financial distress, according to Bank of America data released Tuesday.
The number of people who made a hardship withdrawal during the second quarter surged from the first three months of the year to 15,950, an increase of 36% from the second quarter of 2022, according to Bank of America’s analysis of clients’ employee benefits programs, which are comprised of more than 4 million plan participants.
Oh it was just a lucky guess
August 8, 2023
–New recent highs in some of the treasury curve spreads. For example 5/30 is almost +11 bps having been -35 one month ago on July 6. 10/30 is around +18 from -3.6 on July 6. Yields across the curve were mixed, with 2y -3.3 bps to 4.756, 5y -1.5 to 4.148, 10y +1.6 to 4.074 and 30y +4.5 to 4.256.
–Large new buyer 22k TY week2 111.5/112.5cs for 15. Settled 16 ref 111-04. This morning the lower strike is in the money with TYU 111-185. What did you know? That Moody’s was going to downgrade small banks? That China’s exports (FT) “suffer the worst fall since start of pandemic”? That June’s Consumer Credit would show a decline in revolving? From the Cons Credit report by the Fed:
Revolving credit increased at an annual rate of 7.1 percent, while nonrevolving credit increased at an annual rate of 3 percent.
So, revolving credit at 3 pct is not keeping up with inflation. What does that say about retail in general? There’s been a lot of iffy news on the economic front, and the nearly 10% drop in AAPL (to yesterday’s low) is there for anyone to see. There’s also a snippet on ZH that more of China’s LGFVs (Local Gov’t Financing Vehicles) are missing payments on commercial paper. Amounts don’t seem to be that large, but perhaps it’s a prelude to US corporate debt which will need to be rolled in the next year or so.
The thing to remember is that there’s always someone out there with better info than you have.
–Auctions kick off today starting with $42b 3-yr. 10s tomorrow.
–Attached chart is 10/30 yield spread in violet and SFRU6/SFRU7 in gold. Back end of the SOFR curve has been steepening with blue pack (4th yr) +1.75 yesterday and gold pack (5th) -0.125. Blues/golds track 10/30 fairly well.
We’re marking down prices and passing the savings to YOU
August 7, 2023
–Friday’s Payrolls weaker than expected at 187k, though Avg Hourly Earnings at 4.4% were higher than the expected 4.2. This week starts out fairly quiet, though Fed Governor Bowman speaks today. Over the weekend she said more hikes may be necessary, and that’s hikes with an S. [wasn’t no cop man. Was cops, SSS. Plural.] CPI on Thursday and PPI on Friday. CPI expected 3.3 from 3.0 last. Core 4.8 from 4.8 last. The ten-yr yield fell 13 bps to 4.058%.
From Bowman speech:
Given the strong economic data and still elevated inflation, I supported the FOMC’s decision in July to further increase the target range for the federal funds rate. I also expect that additional rate increases will likely be needed to get inflation on a path down to the FOMC’s 2 percent target.
–Treasury auctions of 3s, 10s, 30s start tomorrow.
–Almost Daily Grant’s by Philip Grant features a crystallization of problems besetting VC in an August 4 post titled ‘Capital Call’. A tech publication ‘The Information’ reports “…that so-called cram-down financings – in which existing investors are often heavily diluted in order to attract fresh capital – are increasingly in vogue…”
https://www.grantspub.com/resources/commentary.cfm
Here’s a snippet:
“We’re going to see a tidal wave of these companies doing reset rounds,” Greg Smithies, partner at real estate-focused v.c. firm Fifth Wall, predicted to The Information. “It’s just going to get worse before it gets better.” More than 900 private companies achieved a $1 billion-plus price tag in 2021 and 2022 alone according to Crunchbase, with some startups managing valuations equivalent to 100 times annual revenue. That was then, as down rounds represented some 30% of all startup financings in the first quarter according to law firm Wilson Sonsini, roughly triple the quarterly average going back to 2018.
–I believe it was March 2007 when Bear Stearns first leaked out information that there were problems in its mortgage portfolios. Then…
On June 22, 2007, Bear Stearns pledged a collateralized loan of up to $3.2 billion to “bail out” one of its funds, the Bear Stearns High-Grade Structured Credit Fund, while negotiating with other banks to loan money against collateral to another fund…
–Now… from ADG, “…industry mainstay Union Square Ventures has marked down the value of seven of its funds by nearly 26%.”
26%. That’s like the “quart of blood” technique
Whispers of 1987
August 6, 2023 – Weekly Comment
*************************************
When you tell the truth, have one foot in the stirrup
A friend who related this proverb last week said it was Spanish (he probably heard it first in that language) but apparently it’s of Turkish origin. Like all great proverbs, it’s universal. Truth can be dangerous.
And why downgrade now? At $1.4 TN, the federal deficit for the first nine months of the fiscal year was up 170% from comparable 2022. –Credit Bubble Bulletin
Fitch downgraded the US and faced a firestorm of (feigned) outrage from public officials and semi-public commentators. However, as everyone knows, there have been countless news articles about the explosion in interest owed on the ever-expanding government debt. Many Fed Chairs have warned about unsustainable US fiscal policies over time.
The US thirty-yr yield rose over 18 bps last week to 4.21%. Tens were up 9 bps to 4.058%. Perhaps one of the timeliest blogs I have seen relating to this week’s bond sell off was by Harris Kupperman “Kuppy”. It’s just a short read, dated July 23, but it questions market faith in the idea that US bonds will rally if equities roll over. “What if during the next time down, the US bond market rolls over, and acts more like Turkey’s bond market, instead of the US of old?? What is the financial outcome that would destroy the most speculators? Probably this outcome.”
https://pracap.com/when-the-log-rolls-over/
There are many hints that the tide of US liquidity which had been supporting US risk assets, has turned. For example, the TGA (Treasury General Acct) is back up to $460b from a low in May of about $50b, but probably needs to be replenished up to about $900b. After the blip higher in March related to banking failures, the Fed’s balance sheet has made a new recent low at $8.207T, having reached $8.734T in late March. In his last missive, Lacy Hunt cited the US non-bank domestic investor as the primary funding source for the US deficit. I.e. that money is sucked into treasuries as opposed to other assets. The Bank of Japan’s recent tweak of the JGB cap to 1% creates conditions for repatriation of Japanese capital. The 10-yr JGB ended the week at 65 bps from 47 bps last week. Monday’s SLOOS report noted tightened credit conditions. You can observe a lot just by watching.
According to TBAC schedule, the increase in this week’s auctions are as follow: July vs August:
3y $40b to $42b
10y $32b to $38b
30y $18b to $23b
And then there’s AAPL. A loss of about 7% this week equates to the evaporation of about $200 billion. In the grand scheme of things, no big deal…except that the US consumer is losing steam.
Here’s an update of “Blues and Spoos”, first cited by David Zervos, that I had written about on May 28 (Feeling the blues). At that time I thought increased forward rates would negatively impact stocks. Very UN-timely. Since the end of May SPX rose 9% at last week’s high and is still up 6.5% even with last week’s sell off. The yield on the rolling blue pack is only 17 bps higher, from 9669 to 9652. However, I think the gap bears watching as many equity cheerleaders cite lower forward yields as evidence of ‘normalization’ that will normally result in new all-time highs for stocks. It’s normal.
Below is an interesting tweet from CME Group Interest Rates:
Long-end in focus: On an elevated volume day for Treasury options Aug. 3, T-Bond options traded 375,000 contracts. This was the highest in 2.5 years and ranks 11th all-time. Notably, this accounted for 23% of the day’s total UST options volume vs. the YTD avg. of 11%.
All of a sudden it’s the long end of the treasury curve that appears to be untethering. In that connection, I am showing charts below using the 30y yield as opposed to tens. On the SOFR curve the longer end is more correlated with blues. Net changes on the week: SFRM4 +16 to 9529.0, SFRM5 +13 to 9639.0, SFRM6 unch’d at 9653.5 and SFRM7 DOWN 7.5 to 9650.0.
Comparing 1987 to Now
I have included two charts. The top is from 1987, leading up to the Black Monday crash, October 18, 1987. From October 1986 to the high in August, SPX rallied 35%. There was a pullback in April as bond yields rose. In late August, as the 30y yield exceeded the May high, which had been the high for calendar year 1987, stocks began a more serious decline (red line). From the low in January to the high yield in October, the 30y went from 7.28% to 10.22%, a move of 40pct.
Below is the current situation. From October 2022 to August (so far) SPX has rallied 27%. As the 30yr yield exceeded the high for this calendar year, stocks have turned lower (red line). The 30y yield increase from January to last week’s high is 3.54% to 4.29%, only about 21pct. Perhaps, because the magnitudes of this year’s moves have been a bit more subdued, the October crash will only be 10 to 15% instead of 20-25% from 1987. Oh, I’m just kidding of course. But there does seem to be a certain amount of symmetry. THIS IS NOT A RECOMMENDATION TO BUY OTM OCT SPX PUTS.
By the way, the title of the 1987 Jackson Hole Conference held August 20-22 was ‘Restructuring the Financial System’. One of the first presenters was Franklin R Edwards with this (pre-crash) zinger: ‘Can Regulatory Reform Prevent the Impending Disaster in Financial Markets?’
https://www.kansascityfed.org/research/jackson-hole-economic-symposium/restructuring-the-financial-system/
This year’s Conference is slated for August 24-26. “Structural Shifts in the Global Economy”
| 7/28/2023 | 8/4/2023 | chg | ||
| UST 2Y | 489.3 | 478.9 | -10.4 | |
| UST 5Y | 419.3 | 416.3 | -3.0 | |
| UST 10Y | 396.7 | 405.8 | 9.1 | wi 405.0/04.5 |
| UST 30Y | 402.7 | 421.1 | 18.4 | wi 420.5/20.0 |
| GERM 2Y | 305.1 | 301.4 | -3.7 | |
| GERM 10Y | 249.2 | 256.1 | 6.9 | |
| JPN 30Y | 138.5 | 160.9 | 22.4 | |
| CHINA 10Y | 266.3 | 265.7 | -0.6 | |
| SOFR U3/U4 | -91.0 | -108.0 | -17.0 | |
| SOFR U4/U5 | -86.0 | -77.5 | 8.5 | |
| SOFR U5/U6 | -20.5 | -8.5 | 12.0 | |
| EUR | 110.19 | 110.10 | -0.09 | |
| CRUDE (CLU3) | 80.58 | 82.82 | 2.24 | |
| SPX | 4582.23 | 4478.03 | -104.20 | -2.3% |
| VIX | 13.33 | 17.10 | 3.77 | |
https://fred.stlouisfed.org/series/D2WLTGAL
https://fred.stlouisfed.org/series/WALCL
Pre-NFP 10y yield +11 bps to 4.187%
August 4, 2023
–NFP expected 200k from 209k last but there are many higher estimates. Avg Hourly Earnings expected 4.2% from 4.4%. Weekly Hours has become more important, expected 34.4 from 34.4 last. Rate of 3.6%. Given this week’s yield surge, today’s employment report has added importance, it’s the last one before Jackson Hole Conference (8/25). Since Friday the 30y yield is up about 28 bps, with 14 bps of that coming yesterday, to 4.302%. Yesterday both 2/10 and 5/30 made new recent highs. 2/10 at -70.4 (4.891/4.187) and 5/30 +0.5 (4.297/4.302). Continuation of a bear steepener will cause major pain. This concern is being priced into options, with the rise in US vol outperforming tens (as shown on chart).
–Both S&P PMI Composite (52.0) and ISM Services (52.7) were a touch lower than expected. However, the possibility of additional hiking is still being priced. Lowest contract on the FF curve remains November with FFX3 9457.5, 9.5 bps lower than August which is 9467 and pegged to the current EFFR at 5.33%.
–Ten year inflation-indexed note yield is 1.815; as the attached chart shows that’s at the high of the year, and actually the high since 2009.
–Now for some high-level dissection of yesterday’s earnings. AMZN: good. AAPL: bad. However, AAPL (sales decline for the third consecutive quarter) has market cap of $3T and AMZN $1.3T. Russell 2k is around $2.3 to 2.4T.
–Dedio rule. When a market (USU for example) goes into a big economic report at an extreme high or low, it usually continues in the same direction.
Psychology shift
August 3, 2023
–.Interesting steepener yesterday. 2y down 2 bps to 4.887 while tens were up 3 bps to 407.3. New recent high in 2/10 to -81.4. Just before the July 26 FOMC it was -105. Lowest SOFR one-yr calendar is now SFRH4/H5 at -126 (9487.5/9613.5) while SFRZ3/Z4 is -125 ((9464/9589). Recent low in Dec/Dec was -162.5. 30y new yield high 4.16%, Note: I mistakenly referred to last year’s high in 30y as 4.245%, it’s actually 4.40%. The ten-year high last October is 4.245%.
–Stocks fell with SPX -1.4% and Nasdaq Comp -2.17%, partially in response to the Fitch US downgrade, with the avalanche of treasury supply and the BOJ yield tweak likely contributors. In the four months from March, SPX has run from 3900 to 4600, approximately 18%, just to put yesterday’s pullback to 4500 into context. However, the oxygen supply of liquidity seems to have turned which will spark a ‘sell rallies’ mindset rather than ‘buy dips’. Three, ten and thirty year auctions next week raising $18b in new cash, according to TBAC schedule.
–ADP surprising beat, with 324k jobs added vs expected 190k.
Today’s news includes Productivity expected +2.3%. S&P Composite PMI was 52.0 last
Factory Orders, Durable Goods and ISM Services
AAPL and AMZN after the bell
Bizarre
August 2, 2023
–Bold move by Fitch to downgrade US from AAA to AA+. There will certainly be severe retributions against the company. In 2011 when S&P did the same thing, the CEO was booted faster than a Ukrainian prosecutor. [well, son of a bitch, he got fired]
From Wikipedia:
In order to mend its relationship with the US government, S&P asked its then-CEO to step down, a mere 18 days after the US was downgraded. S&P announced on August 23, 2011, that Deven Sharma would step down as a Chief of Standard & Poor’s effective September 12, 2011, and would leave the company by end of the year.
Over/under on Paul Taylor’s time left at Fitch?
–Here’s a tweet by Larry Summers: “The US faces serious long-run fiscal challenges. But the decision of a credit rating agency today, as the economy looks stronger than expected, to downgrade the US is bizarre and inept.”
“Bizarre and inept?” Federal tax receipts are down 5% yoy and the Federal gov’t is borrowing $1.9T in H2. The gov’t has decided not to refill the drained SPR because prices are high. Certainly LOOKS like we’re on a “permanently high plateau”, right Larry?
–This morning risk assets under pressure. Oil at new high with CLU2 over $82/bbl.
Yesterday:
–Steepener as 30yr yield makes a new high for 2023 at 4.102 (+8.9 bps). Last year high 4.245. DV01 on USU is about $141 for $100k, so a test of 4.25 should be about 2 points lower or 121. (USU settle 122-31). Two year yield was only +3.4 bps to 4.908. Tens also above 4% (4.043 at futures settlement)
–As a small indication that the market is showing some respect for this move: SFRZ4 settled -5 at 9582 and the 0QZ3 9587.5^ settled 79.5 vs 80.5 on Monday (-1). In SFRZ6 the contract settled -9 at 9650, and the 3QU 9650^ settled 67.5 vs 66.75 on Monday. The 3QU 9650^ settled 66 on Monday. The point is that premium on more deferred contracts strengthened on a relative basis as the curve steepened. 2/10 + 5.6 to -86.5 and 5/30 +2.2 to -14.2.
–Today brings ADP expected 190k
–ISM Mfg was a bit weaker than expected yesterday at 46.4 with prices 42.6, but weaker data elicited no buying in longer dated treasuries.
–End of the day there was a DV01 $1m FV to WN steepener. Prices 106-190 vs 130-10.
–Early in the session a seller of about 30k SFRH5/M5/U5 fly at -7.5. Settle prices 9607/9623.5/9632.5 so settled -7.5. This morning’s open interest suggests new position: H5 +33k, M5 +72k, U5 +10k. The trade doesn’t seem to have much of a tailwind in terms of curve roll as the fly in front, Z4/H5/M5 settled -8.5
It’s a bit circular
August 1, 2023
–Lacy Hunt of Hoisington said that the $1.4 trillion deficit so far in the 3 quarters of this fiscal year was financed primarily by private domestic non-bank investors. If they haven’t quite gotten their fill yet, US Treasury “…on Monday announced it expects to borrow USD1.007 trillion in privately-held net marketable debt in the third quarter and an additional USD852 billion in the fourth quarter.” (MNI) Big numbers.
–SLOOS report indicated somewhat tighter credit conditions. From the report:
When asked about reasons for tightening standards or terms during the second quarter, the most frequently cited reason was a less favorable or more uncertain economic outlook. Major net shares of banks also reported a reduced tolerance for risk, deterioration in their liquidity positions, worsening industry-specific problems, increased concerns about the effects of legislative changes…
–So banks are more wary of lending to the public due to uncertainty, but the public is happy to park money with the government for the same reason? We used to call that “crowding out”. High gov’t yields divert money to public debt, which in turn is used to backstop banks whose capital positions are deteriorating, so funding to productive enterprises becomes more difficult to secure. That’s called death-spiral-nomics folks.
–Yesterday CLU3 settled at 81.80, a new high for this calendar year. In other energy news Niger is cutting off uranium supplies to France. France gets 15% of uranium from Niger and generates 68% of electricity production with nuclear.
–US rate futures slightly higher on the day. Ten year yield -1.4 bps to 3.953%. 30-yr holds above 4% at 4.013%. Today’s news includes JOLTS expected 9.6m from 9.8 last. ISM Mfg expected 46.8 from 46. AAPL and AMZN Thursday.
https://home.treasury.gov/system/files/221/TBACRecommendedFinancingTableQ32023-05032023.pdf
Bull runs
July 31, 2023
–Today’s news includes Fed’s Sr Loan Officer Survey (SLOOS) which may indicate tighter credit conditions. Dallas Fed Mfg.
–Treasury releases financing estimates; TBAC /Treasury presentation is Wednesday
https://home.treasury.gov/policy-issues/financing-the-government/quarterly-refunding/most-recent-quarterly-refunding-documents
–PCE prices on Friday were friendly. PCE yoy 3.0% and Core 4.1%. Yields fell, with tens -4.7 bps to 3.967, while thirties hold above 4% at 4.027.
–New buyer 100k SFRH4 9700/9725cs for 1.0. Settled 1.0 (5.0/4.0) vs 9482.
–CLU3 prints 81.20/bbl this morning. Highs in this particular contract this year: 81.75 on Jan 23. 81.44 on April 12.
–BOJ trending on my Musk feed as an unscheduled bond buying operation occurred on JGBs with the yield now around 60 bps.
Below I present three charts showing bull markets. All inextricably intertwined. Or is that inexplicably. See if you can tell what they are.
The top chart is Frozen Concentrated Orange Juice. New historic all-time high.
The next is the percentage of Congress over age 70 (lavender)
The bottom is the average monthly payment on new cars. (blue)
