It’s not a credit crunch sir. We just can’t approve YOUR application
July 18, 2023
–Retail Sales today expected 0.5% m/m. Quiet day in rates. Tens eased 2 bps to 3.795%. SOFR curve slightly more inverted with reds +2.125, greens +4.375 and blues +4.625. FFQ3 settled 9468.5 essentially sealing a hike next week (final settle should be ~9467.5 on 25bp hike). FFF4 settled 9466.5, essentially the same price as August, an indication that the market is taking the Fed at its word that no eases are coming this year, but probably no more hikes either.
–NY Fed SCE (Survey of Consumer Expectations) paints a picture somewhat at odds with Waller saying last week that banking turmoil in March hasn’t really led to a credit crunch. Below are bullet points with emphasis added:
- The application rate for any kind of credit over the past twelve months declined to 40.3 percent from 40.9 percent in February, its lowest reading since October 2020. Application rates declined to 11.9 percent for auto loans and 12.5 percent for credit card limit requests, but increased to 24.8 percent for credit cards, 6.5 percent for mortgages, and 5.3 percent for mortgage refinances.
- The overall rejection rate for credit applicants increased to 21.8 percent, the highest level since June 2018. The increase was broad-based across age groups and highest among those with credit scores below 680.
- The rejection rate for auto loans increased to 14.2 percent from 9.1 percent in February, a new series high. It increased for credit cards, credit card limit increase requests, mortgages, and mortgage refinance applications to 21.5 percent, 30.7 percent, 13.2 percent, and 20.8 percent, respectively.
- The proportion of respondents reporting that they are likely to apply for one or more types of credit over the next twelve months rose to 26.4 percent from 26.1 percent in February.
- The average reported probability that a loan application will be rejected increased sharply for all loan types. It rose to 30.7 percent for auto loans, 32.8 percent for credit cards, 42.4 percent for credit limit increase requests, 46.1 percent for mortgages, and 29.6 percent for mortgage refinance applications. The readings for auto loans, mortgages, and credit card limit increase requests are all new series highs.
A piece by Axios outlines a few other factors hitting the household sector this fall. 1) Student loan repayments start in October. 2) Pandemic-era funding for child care will end (estimate that 70k child care programs will close) 3) Work requirements for food stamps will come back into effect this fall. That will likely cause at least 500,000 people to lose their food assistance.
https://www.axios.com/2023/07/17/student-loans-child-care-medicaid-food-stamps-inflation
–In other news Ford fell about 6% yesterday as the price for its electric pick-up truck was slashed. That’s a bit over $3b in market cap. AT&T fell 6.8% to a new low, around $7b in market cap. Pretty big numbers, but from FT: Chinese developer Evergrande reveals $81bn loss from property crisis
Who to believe, the Fed or the market?
July 17, 2023
–Rate futures gave back some of the gains from the early part of the week as Waller’s hawkish Thursday afternoon speech spilled over (2 more hikes and need to remain restrictive). On Friday 10s rose 5.7 bps to 3.816%. SFRZ4 was the weakest contract, settling -20.5 at 9616.5, which was still up 32 on the week.
–Buyer of over 20k SFRH4/M4 3-month calendars on Friday at -42.5. Settled -41.5 (9501/9542.5). Position appears new. Low in the spread was -50.5 in January, while the high post-SVB was -15. Currently the spread is priced for easing in Q2. However, if it appears the Fed is able to maintain high rates, then spread should edge more positive. Obviously an event like SVB can also briefly benefit the spread. Note that while Powell, Waller et al say another two hikes are in the cards this year, the FFF4/FFQ4 calendar spread in fed funds settled -91 (9465.5/9556.5). This spread captures the first five FOMC meetings in 2024 and is nearly priced for 1% of cuts. SFRZ3/H4 is -33.0 (9468/9501) so spread tends to roll more positive…as long as the Fed can hold.
–News this morning is about China…from the FT: China’s economy loses momentum in the second qtr. The bombing of the Crimea bridge has also sparked market moves, as Russia immediately halted the Black Sea grain deal. Corn, wheat and beans all bid this morning.
–Saw that Donald Sutherland was trending today as it’s his birthday. Here he is as Oddball in Kellys Heroes. “Don’t hit me with them negative waves so early in the morning. Think: that bridge will be there…”
Demand from Aspirational Consumers has Softened. Huh?
July 16, 2023 – Weekly Comment
************************************
Burberry’s Q1 “comparable store sales in the Americas fell 8%.” The CFO cited softened demand from “aspirational consumers”. I’m a bit bewildered. What in the hell is an aspirational consumer? In my mind I have an image of someone who pays more than they can afford, using credit, in order to portray an image. Perhaps in that category are the 17% of people that borrowed to buy cars or trucks and have a monthly payment of $1000 or more. Makes me think of the John Prine song ‘Dear Abby’.
Dear Abby, dear Abby
My feet are too long
My hair’s falling out and my rights are all wrong
My friends they all tell me that I’ve no friends at all
Won’t you write me a letter, won’t you give me a call
Signed bewildered
Bewildered, bewildered
You have no complaint
You are what you are and you ain’t what you ain’t
So listen up buster, and listen up good
Stop wishing for bad luck and knocking on wood
Perhaps the aspirational consumer is making her own bad luck. Of course, I had to look up the definition of the individual causing Burberry’s plaid fabric to fray and got this description: “Today’s consumer doesn’t dream of owning something, but becoming someone.” Got it.
Anyway, it’s not just Burberry. Johnson Redbook same store yoy sales actually contracted. A decline in the aspiration for basic necessities? Rick Rieder (Blackrock) in a BBG interview said this, “When you have a consumer-oriented, service-oriented economy, it’s much more stable than people give credit to.” He argues that recession odds are “grossly overstated… without some massive shock to the system” but also notes that restrictive rates over time will bring inflation down. On the other side, from Steph Pomboy: “Here’s your ‘indefatigable’ consumer. Weekly Same Store Sales just entered contraction. And that’s BEFORE accounting for inflation.”
[chart below on Redbook]
Here’s a tweet from Valerie Tytel of BBG regarding the latest US Fed’l Govt budget numbers:
US racks up near $1T Annualized Debt Costs. In June alone: 18% of spending went toward interest expense. Vs a year ago, Total spending rose 15%, up $100bn. Interest expense climbs 25%. Tax receipts fall 9.2%. Never before have tax receipts suffered such a drop without a US recession. (emphasis added)
Cameron Crise notes interest payments as a % of GDP aren’t as bad as the 1980s, but it “seems unlikely that current fiscal trends (with a deficit of 8.5% of GDP) are sustainable.”
Retail Sales are released Tuesday, expected +0.5 m/m vs +0.3 last.
The big consumer and driver has become US government. According to the Fed’s Z.1 quarterly report, from Q1 2019 to Q1 2023, Household debt has increased from $15.68T to $19.16T, or 22%. Business sector debt from $15.79T to $19.97T or 26.5%. Federal Gov’t exploded from $18.09T to $27.15T or 50%. The Fed’s efforts to restrain growth and inflation are somewhat nullified by massive gov’t deficits. That is, until capital markets become less inclined to buy US bonds. This past week, the market was happy to finance the US deficit at lower yields. Lower than expected inflation data (3% CPI yoy, PPI 0.1%) sparked an inspired rally. The five-yr dropped over 30 bps in yield to 4.03%. Tens eased by 23bps to 3.816%. On the SOFR curve, Dec’25 and March’26 led the way, rallying 40 bps to 9665 and 9669, at yields just over 3.7%. Financial conditions eased significantly, with SPX gaining 2.4% on the week and the dollar index closing at 99.91, the lowest level since April 2022, and down 12.5% from last September’s high.
While next week’s 25 bp hike is nearly fully priced, with FFQ3 settling 9469.0 or 5.31% essentially at what will be the new Fed Effective at 5.32 or 5.33%, the Fed needs to tamp down on forward rates to prevent inflation expectations from rekindling. Inflation comparisons are likely to become harder for the Fed. John Mauldin’s weekend note cites Ed Easterling and Jim Bianco: if CPI readings were to remain at a steady 3% annualized rate month-over-month through the end of the year, then inflation at the end of the year will be 4.3%. If inflation runs at 0% the rest of this year, then the rate will be about 2.8%.
Waller’s speech late Thursday was an effort to convince the market that funding rates will likely increase and will stay relatively high. Key takeaways are, 1) that there is scant evidence of a credit crunch related to banking turmoil and bankruptcies in March. 2) That the Fed’s ‘forward guidance’ effectively tightened before the rate hikes even occurred, meaning that arguments that lags have yet to work their way through the economy are less convincing. 3) That large [rate hike] shocks force the economy to react and adjust more quickly than small shocks, and therefore it’s not likely that the economy will encounter a Wile E Coyote type ‘cliff’.
In a hawkish summary from Waller:
I see two more 25-basis-point hikes in the target range over the four remaining meetings this year as necessary to keep inflation moving toward our target. Furthermore, I believe we will need to keep policy restrictive for some time in order to have inflation settle down around our 2% target.
Key excerpt on the Fed’s “forward guidance”:
The 2-year yield went from 25 basis points in September 2021 to around 200 basis points by the March 2022 FOMC meeting. Even though we had not raised the policy rate nor did we get the policy rate up to 200 basis points until August 2022, the markets priced in a nearly 200 basis point increase in the expected policy rate before we actually raised it. This forward guidance effectively shaved off about 6 months from the usual 12- to 24-month lag that one might conjecture would be needed to see the 200 basis points of actual tightening affect the economy.
Powell had also noted the increase in the 2-year yield prior to actual rate hikes, but I find Waller a bit disingenuous in implying that the Fed deftly controlled the narrative. Rather, the market knew the Fed was behind the curve and forced action.
Waller also mentioned the Phillips Curve. From Investopedia, “The Phillips curve is an economic theory that inflation and unemployment have a stable and inverse relationship.”
Why do these guys keep talking about the Phillips Curve? It doesn’t work. Listen up buster, and listen up good: If you have to describe actual economic outcomes by saying the shape of the theoretical curve adjusted and changed, then it’s worthless. Move on. Live in the NOW.
What we do know is that funding rates are higher than inflation measures, a fact which will be punctuated by next week’s hike in Fed Funds. Waller didn’t mention the yield curve, but short rates well above longer term yields implies a lack of business demand for longer term borrowing to invest in longer term projects. Policy rates are restrictive. As Rieder said, just “…let them marinate through the system.”
OTHER THOUGHTS / TRADES
I’m more in the camp that a shock could easily come and create a harsh market reaction. The move in $/yen from 145 to 138 this month is a shot across the bow that funding strategies based on yen rates could blow up spectacularly. 10y JGB is back up at 47 bps, nearing the 50 bp cap. BOJ policy meeting is July 27/28.
In terms of a possible economic ‘cliff’ Reuters notes: U.S. Chapter 11 bankruptcy filings jumped 68% in the first half of 2023 from a year earlier, Epiq Bankruptcy, a provider of U.S. bankruptcy filing data, said on Monday [7/10]. Danielle DiMartino Booth says 60% of people who bought homes in 2022/2023 are struggling to make payments.
There has also been significant buying (over 100k) SFRZ3 9487.5/9500cs for 2.5. Settled 2.0 vs SFRZ4 9468.0. Pay 2.5 to make 10. Probably requires easing before the end of the year to fill out, but if the July hike is the last one, and the market becomes convinced that the July hike will be reversed in December, this call spread could easily play. Contract expires 15-Dec and FOMC is 13-Dec.
I saw several articles that conclude, if the Fed is done hiking, then buy duration. While I believe the July hike is likely the last, I think the Fed will try awfully hard NOT to ease until forced. I think the curve could steepen, led by the short end, without much of a yield drop on the long end. The 30yr yield appears to have had a false breakout above 4.0%, having gotten to 4.047% on 7/7 only to fall back to 3.92% on Friday. Another move over 4% will catch a lot of traders offsides.
| 7/7/2023 | 7/14/2023 | chg | ||
| UST 2Y | 492.9 | 474.7 | -18.2 | |
| UST 5Y | 433.3 | 402.9 | -30.4 | |
| UST 10Y | 404.6 | 381.6 | -23.0 | |
| UST 30Y | 403.1 | 392.1 | -11.0 | |
| GERM 2Y | 325.3 | 321.0 | -4.3 | |
| GERM 10Y | 263.7 | 251.2 | -12.5 | |
| JPN 30Y | 126.8 | 138.2 | 11.4 | |
| CHINA 10Y | 264.3 | 264.7 | 0.4 | |
| SOFR U3/U4 | -96.0 | -123.5 | -27.5 | |
| SOFR U4/U5 | -66.5 | -76.0 | -9.5 | |
| SOFR U5/U6 | -14.0 | -13.0 | 1.0 | |
| EUR | 109.70 | 112.26 | 2.56 | |
| CRUDE (CLU3) | 73.77 | 75.32 | 1.55 | |
| SPX | 4398.95 | 4505.42 | 106.47 | 2.4% |
| VIX | 14.83 | 13.34 | -1.49 | |
https://www.mauldineconomics.com/frontlinethoughts/flip-side-of-the-inflation-coin
https://www.investopedia.com/terms/p/phillipscurve.asp
Plenty of liquidity
July 14, 2023
–Core PPI yoy only 2.4%. New lows in the dollar index seemed to unleash buckets of liquidity with SPX +0.85% and the ten year yield down nearly 10 bps to 3.76%. The 2-yr note which had been over 5% a few days ago, fell another 12.7 bps to 4.613%. DXY had been over 104 in early June and ended yesterday at 99.77.
— On the SOFR curve new low settle in SFRZ3/Z4 spread at -162.5 (9474.5 +6.5/9637 +21.5). Previous low settles were -158.5 on March 9 and -161 on May 1. Low of the cycle in SFRU3/U4 was -177 on Jan18, and in SFRM3/M4 was -192 on May 4, and I believe the latter has been the low for any one-yr calendar.
–New recent low in SFRH4/M4 at -46.5. It’s pretty hard for a 3-month calendar spread to trade sub-negative 50, especially in what is supposedly a tightening environment. Lowest settle on this spread was -50.5 in mid-January.
–Large continued buying in SOFR call spreads, SFRZ3 9487/9500cs 2.5 paid 70k. SFRH4 9600/9700cs 10.75 paid 20k, bring aggregate position to about 80k.
–It’s been an amazing rally in fixed income. Some of the back contracts are trading similar to the immediate aftermath of SVB. For example, SFRM5 which was about 2 ¼ years forward settled at a low of 9632.5 on March 8 and rallied to 9672 by March 13, 39.5 bps. SFRU5 is about 2 ¼ years forward currently, and settled 9617 on July 6, soaring to 9675.5 yesterday, up 58.5 bps. Of course, action in nearer contracts is much different now vs the ‘banking crisis’, but this rally has been sparked by low inflation data which, due to base effects, was NOT completely unexpected.
–30y bonds ended at 3.894%, down 8bps on the day. The move above old highs at 4% appears (for now) to have been a false breakout.
–Speaking of bank issues, JPM, Citi, WFC, State Street and BLK all report today. Retail Sales on Tuesday.
Comforting signals, for now
July 13, 2023
–CPI headline was 3.0 yoy (expected 3.1) and Core just 4.8%. Both at lows for this calendar year with headline at the lowest since April of last year. Today PPI is expected at just 0.4% yoy, with ex-food & energy 2.6%. Of course WTI was pretty much between 68 and 72 last month, and yesterday was more like $76/bbl, highest level in 2 1/2 months.
–Financial conditions shifted to a decidedly easier bias over the past few days. Since last Friday, July 7, the ten yr yield plunged 20 bps from 407 to 387. Dollar index from 102.27 to 100.53. SPX from 4400 to 4480.
SFRZ4 from 9584.5 to 9613.5…a larger than 25 bp forward ‘ease’. [These marks were taken before futures settlement, DXY now 100.28, ESU3 4520, SFRZ4 settle 9615.5 with 10y yield 3.855%]. Probably not what the Fed wants to see, as easier conditions can lead to renewed inflation expectations. Additionally, while base effects were a huge factor for yesterday’s CPI win, yoy comparisons will begin to get a bit tougher going forward. The Fed has steadfastly tried to convey the idea that rates will stay elevated. However, the red SOFR pack which is one year forward, starting with SFRU4, is now at a price of 9621 or just 3.79% from 4% on Tuesday, about the same yield as 10s. SFRZ3/SFRZ4 spread is again close to being inverted by 1.5% (settled -147.5, 9468 and 9615.5).
–The market is signaling smooth sailing ahead. And the WSJ leads off with this headline: Is the banking crisis over? We could be about to find out [as bank earnings start]. An interest rate curve with short rates higher than long rates is not a good environment for banking or the economy in general. However, markets are now breathing a big sigh of relief. Yes, a hike for July 26 remains solidly priced, with FFQ 9470 or 5.3%. But after the year 2023 ends, easing starts…
–Large exit seller yesterday 50k SFRZ3 9550/9650cs 4.75 to 5.0 (5.0s), but a later buyer of Z3 9487.5/9500cs for 2.5 in around 40k (2.25s). Buyer of SFRH4 9600/9700cs added 20k more longs at a price of 10.0, aggregate now over 70k. Settled 10 vs 9499.
–Earnings season starting to get underway. JPM releases on Friday.
–Along with PPI, Jobless Claims expected 250k. 30y auction as well.
Headline inflation expected 3%. Mission accomplished?
July 12, 2023
–CPI today, expected headline 3.1 from 4.0 and Core 5.0 from 5.3 last. No matter what it’s not likely to change expected hike on July 26, with Aug FF settling 9470 or 5.3%. FFF4 settled 9460.5.
–SOFR curve flatter (more inverted) yesterday. SFRZ3 -4.0 at 9459.5, Z4 -2.0 at 9594.0, Z5 +2.5 at 9640.5 and Z6 +5.0 at 9652.0. A couple of notable downside trades on Z3, about 35k of each bought:
SFRZ3 9450/9400/9375/9350 p condor, paid 13.0 and Z3 9425/9412.5/9400p fly paid 1.25. Both target 5.75-6.00 FF.
–SOFR midcurves for July expire Friday. SFRU4 settled 9562.0 and the atm 0QN3 straddle settled 20 bps. Quite expensive. 2QN3 9637.5^ settled 16.0 ref SFRU5 9635.0.
–Nice push of 2-3/64ths lower in treasury straddles in last couple of minutes prior to settle, appears to be market makers successfully painting lower marks.
–10 year auction today, along with Beige Book.
–Johnson Redbook showed year/year contraction in same store sales. Other anecdotal information also suggests a sluggish consumer…with respect to Rolex watches anyway.
https://watchcharts.com/watches/brand_index/rolex
Yen firming
July 11, 2023
–DXY getting weaker; gold getting a little bounce. $/yen from 144.30 to 140.42 in four sessions.
–Consumer credit, expected $20b in May was actually $7.24b with non-revolving (auto and student loans) falling $1.26b. High financing rates, falling used car prices and the possibility that student loans may actually have to be paid off are likely reasons.
–Today NFIB small business optimism is released. It was 89.4 last and 89.0 for April, lows since 2013. Three year auction as well, followed by 10s and 30s Wed and Thursday. CPI tomorrow.
–Yields fell yesterday despite hawkish Fed comments. Daly, of course, echoed Powell in saying a couple more hikes may be needed this year. Five-year led the drop, down nearly 9 bps to 4.244%. On the SOFR curve reds, greens and blues, +11.875, +12.75 and +10.5. SFRZ3/Z4 one-year calendar fell 9.5 bps to -132.5 (9463.5/9596.0) and is again the lowest one-yr spread, with H4/H5 -128.
–Disturbing stat from JA on the explosive increase in Americans with disability. From mid-2014 to 2019 the number was fairly constant at 29-31 million. Since covid it’s pretty much straight up to over 34 million (new high). And that’s BEFORE they reinstate the military draft.
https://market-ticker.org/akcs-www?blog=Market-Ticker-Nad
Deflation – making sure it doesn’t happen here (in Beijing)
July 10, 2023
–The title is from Bernanke’s famous 2002 speech. Maybe it’s worth a review by the new PBOC chief, Pan.
By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
China’s CPI was 0.0% yoy and Factory gate prices for June fell for the 9th consecutive month, marking the steepest decline since December 2015. (PPI -5.4% yoy)
–In the US, CPI is released Wednesday (expected 3.0 to 3.1%), and there are Fed speakers lined up for the next few days. Today, Barr on bank capital rules, then Daly, Mester and Bostic, starting at 11:00 EST. Tomorrow Barkin and Kashkari. Treasury auctions 3s, 10s and 30s starting tomorrow. Consumer Credit today.
–Friday’s employment report was softer than expected with NFP 209k and the previous two months revised down by 110k. Avg Hourly Earnings were +4.4% yoy, higher than expected.
–SOFR curve steepened with reds +6.375, greens +2.125 and blues -1.25. Similarly, the 2y yield dropped 7.3 bps t0 4.93% while 30s rose 2.8 to 4.03%. Current (Monday 6:30 ET) 30y yield is 4.06%, the highest since last November. Tens are 4.068, also through all highs since November; the pre-SVB high in March was 4.059.
Who funds the US lifestyle
July 9, 2023 -weekly comment
*******************************
I had created a chart in 2016, with the US 5y5y inflation swap overlaid with China yuan (below). At that time a familiar refrain, especially after China devalued in 2015, was that China was exporting deflation. Indeed, depreciation in the Chinese currency appeared to be correlated to decreasing inflation expectations. There was much hand-wringing in the US related to the scourge of decelerating prices.
I updated and modified the chart (below) using the ten-year treasury/tip breakeven and adding the Japanese yen. From 2012 to 2015 the yen depreciated from 78 to 125. From the start of 2014 to the end of 2016 the yuan depreciated from 6.00 to 6.95. The ten-yr breakeven went from above 2.5% in 2013 to sub 1.5% in 2015-2016. In the chart CNY and JPY are inverted.
In recent history the yen has depreciated from nearly 100 at the start of 2021 to 150 in late 2022, now 142. Yuan started 2022 around 6.32 and is now 7.22. The ten-yr breakeven has gone from 3% to 2.25%. I’m not sure whether USD will continue its relative strength. In fact, on Friday $/yen had a fairly large counter-trend move, ending the week at 142.21 from over 145 to start the month of July.
Many have postulated that the BOJ might find it necessary to change policy, though Ueda seems to be in no hurry. Japan’s 2y note has a yield of -5 bps, and the 10y which is currently capped by policy at 50 bps, ended the week at 42 bps. Japan’s headline inflation is 3.2%. Renewed strength in the yen would likely be rather problematic for many global trades dependent on borrowing yen at 0% to deploy in higher yielding assets. Friday’s yen bounce bears watching.
An additional thought to bring into the mix was sparked by yet another excellent Doomberg article.
https://doomberg.substack.com/
The piece starts by noting the US is limiting sales of advanced semiconductor chips to China, with China responding by restricting exports of gallium and germanium. According to google China produces 90% of the former and 60% of the latter. The question posed is, which end of the spectrum creates more economic dominance, sophisticated final stage production or critical inputs? China wants both.
Whether done fairly or unfairly, China’s appropriation of intellectual property for complex manufacturing processes has expanded the nation’s power. The example Doomberg uses is BYD Auto, which “…has exploded into the top-selling EV maker in the world. Recent developments indicate an intent to press its many advantages beyond China’s borders.” This company sells more units globally than Tesla. Its new Seagull model starts at $11,300 according to Reuters. Nikkei Asia reports from Shanghai that “Sixteen automakers – including BYD, Telsa, and Chinese state-owned companies that have formed joint ventures locally with major Japanese, US and European automakers – on Thursday agreed to avoid excessive competition in the Chinese market, including ‘abnormal pricing.’”
I’ll tell you right now what’s “ABNORMAL” and that’s this clip from ZH:
Edmunds’ second-quarter vehicle transaction data shows that 17.1% of [US] consumers who financed a new car signed on for four-figure [> $1000] monthly payments. This now stands at a record high, up from 12.2% a year earlier. Before Covid, the figure was around 4.3%.
BYD Seagull
The old economic model was ‘vendor financing’ where the US bought manufactured goods from China, and China bought US bonds. Yellen’s visit rekindles hopes of a return to that model. Recently the US bond market has become more turbulent as the Fed hammers home a message of high rates for longer. This week’s ADP surge of 497k was partially offset by weaker than expected NFP of 209k, but yields still closed at the highs.
The five year yield ended the week at 4.333% (+20.5 bps) with 10’s at 4.046% (+23 bps) and 30s at 4.031% (+18). FV futures open interest is at a record 5.2 million, having been around 3.2m in late 2020. TY hit record open interest of 4.9m in May and ended the week at 4.8m. The hedgers have embraced the futures market as 10y yields surged from 3.4% in May. The five-yr yield is only about 8 bps from last year’s high 4.446% and 10s made a new high for this calendar year and now stand less than 20 bps below last year’s high of 4.245%. BBG notes heavy outflows from credit ETFs HYG and LQD with $1.13b withdrawn from the $13b HYG and $760m from the $35b LQD.
As the US Treasury auctions $40b in 3s, $32b 10s and $18b 30s this week, the question of demand becomes paramount. Funding rates exceed yields. On the SOFR curve, SFRZ4, a year and a half from now, is the first contract with a yield below the 5y, i.e. positive carry. SFRZ4 is 9584.5 or 4.155% with 5s at 4.33%. SFRH5 at 9604.5 or 3.955% is the first contract below the 10y yield. Sure, you can use Japan’s rates for funding…for how long?
CPI on Wednesday is the big data release for the week, expected to decline to 3.1% yoy mostly due to base effects, with Core 4.9 to 5.0 from 5.3 last. (CPI will be below Japan’s inflation rate). Barr, Daly, Mester and Bostic speak Monday and are all likely to lean hawkishly. Mester has always favored monetary restraint, Daly is squarely in Powell’s camp, and Bostic seems to be toeing the party line since his regulatory issues surfaced. Barkin and Kashkari on Wed, Waller on Thursday.
| 6/30/2023 | 7/7/2023 | chg | ||
| UST 2Y | 487.2 | 492.9 | 5.7 | |
| UST 5Y | 412.8 | 433.3 | 20.5 | |
| UST 10Y | 381.5 | 404.6 | 23.1 | |
| UST 30Y | 385.2 | 403.1 | 17.9 | |
| GERM 2Y | 319.6 | 325.3 | 5.7 | |
| GERM 10Y | 239.2 | 263.7 | 24.5 | |
| JPN 30Y | 123.5 | 126.8 | 3.3 | |
| CHINA 10Y | 264.0 | 264.3 | 0.3 | |
| SOFR U3/U4 | -103.0 | -96.0 | 7.0 | |
| SOFR U4/U5 | -83.0 | -66.5 | 16.5 | |
| SOFR U5/U6 | -21.0 | -14.0 | 7.0 | |
| EUR | 109.13 | 109.70 | 0.57 | |
| CRUDE (CLQ3) | 70.64 | 73.86 | 3.22 | |
| SPX | 4450.38 | 4398.95 | -51.43 | -1.2% |
| VIX | 13.59 | 14.83 | 1.24 | |
Strap in for NFP
July 7, 2023
–US 30y yield just above 4% at futures settle. 2y just above 5%, having surged as high as 5.12%. 10s added nearly 10 bps to end at 4.041%.
–ADP rose a whopping 497k in front of today’s payrolls which are expected 230k, but now with a wide dispersion of estimates. Leisure and hospitality added 232k jobs. The ADP figure sparked instant selling of rate futures, with red SOFR contracts plunging 24-24.5 bps at the lows, before coming back to settle -8 in the pack (avg change of the 4 contracts). Greens settled -14.375, blues -16.375. Steepening over this part of the curve is testament to Powell’s vow of keeping rates high longer, and likely negative for risk assets in general. The sell-off in back contracts, if sustained, represents a tightening of financial conditions.
–Lorie Logan (Dallas Fed President) gave hawkish comments, starting with the first line:
To put it concisely, I remain very concerned about whether inflation will return to target in a sustainable and timely way. And I think more-restrictive monetary policy will be needed to achieve the Federal Open Market Committee’s (FOMC’s) goals of stable prices and maximum employment.
https://www.dallasfed.org/news/speeches/logan/2023/lkl230706
–Vol ramped up hard. SFRM4 calls mostly unch’d to up 1 bp even as futures settled down 6.5. SOFR straddles all up 2-5 bps. TYU atm 110.5^ settled 2’43 or 8.2, highest over the past month. To give an isolated comparison, on March 8, as contracts made new lows just prior to SVB, the 7th quarterly was SFRU4 at a price 9569 and the 8th was Z4 at 9601. Long dated straddles on the two contracts were 135 bps and 144.5 with 555 and 646 dte. The ten year yield was 3.97%. Yesterday, the 7th was SFRH5 at 9598.5 and the atm straddle 162 bps with 617 dte. SFRM5 settled 9610 with straddle at 168.
–Attached is 30y yield chart. Fourth time testing 4% since December, with successively higher lows on pullbacks.
