Risks from many directions
September 29, 2024 -weekly comment
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Little net change in US markets last week, even as huge events shook various parts of the globe. The US 10y yield rose just 3 bps to 3.751%. The 30y was up 3.2 to 4.099%. SPX +0.6% to 5738.17.
On the financial scoreboard, China’s stimulus package sparked a big rally in stocks and a sizable jump in yields. CSI 300 index surged 16% on the week! China’s 10y leapt from new lows approaching 2% to 2.18%. Perhaps I’ve mischaracterized the thrust of policy, but it seems to be targeted domestically rather than towards (deflationary) exports. Indeed the renminbi powered to the highest level in over a year to 7.011. In a broader context, DXY has weakened and is testing the bottom of a two year range from 100 to 107. Last at 100.38, the low in July 2023 was 99.58.
Below is a chart of ShanghaiComp priced in gold (idea from Rob Luxem at TJM who used CSI300) which looks, well…cheap. Not much of a stimulus boost on this chart, so far.
Escalation in Mideast hostilities with the confirmation of Hezbollah leader Nasrallah’s death raises risks of a much wider spillover. As of Friday, oil hadn’t responded at all as KSA abandoned its $100/bbl target. By Friday CLX4 was -2.82 on the week at 68.18. While China’s stimulus gave copper a big boost, oil faltered. Where’s the bet? A flood of supply from Saudi Arabia and a weaker US economy? Or supply disruptions and demand from China?
The natural disaster of Helene has left 3 million without power in the southeast US and has caused massive destruction to property. Here’s an old storm summary from William Dudley, former NY Fed President, speaking in 2017 regarding Hurricanes Harvey and Irma:
“Those effects tend to be pretty transitory,” Dudley said in a live interview with CNBC. “The long-run effect of these disasters unfortunately is it actually lifts economic activity because you have to rebuild all the things that have been damaged by the storms.” [what if Dudley’s wrong about ‘transitory’ this time?]
In previous natural disasters, bonds sold off because insurance companies sold bonds to pay claims. That doesn’t seem to occur anymore. Much of the burden has fallen to Federal and State governments, which of course, also must sell bonds, but for now, there appears to be adequate demand. Immediate loss of economic output is another major consideration.
Notwithstanding the price of oil, everything above would seem to lean towards a boost in inflationary pressures, due to increased demand and possible supply chain issues. Despite the yoy PCE price measure having only been 2.2% last week, the lowest since the start of the hiking campaign, the best news may be behind us.
The question of finding a home for new long-bond issuance may become a concern going forward. Clearly, the Fed is thinking about Treasury market liquidity and functioning as Vice-Chair for Supervision Barr’s speech last week indicated. Foreign demand for US treasuries is likely to waver, even from Japan, as last week’s election was a factor in the yen’s surge. My takeaway from Barr’s speech is that US banks will have to absorb more treasury supply, bolstered by the implicit promise of a positive curve even if inflation ticks back up. 2/10 treasury spread may perhaps pause here after a 75 bp run from late June, -50 to +23, but the trend is still strong and supported by fundamentals. In fact, comparing the price/yield of SFH5 (9661 or 3.39%) to everything on the treasury curve projects positive carry by spring…IF the pricing of the Fed’s aggressive front-loading is correct. The 5y yield is lowest at 3.558% and the funding level implied by SFRH5 is just 3.39%.
The week ahead is capped by the employment report, with NFP expected 146k from 142k last. Rate expected 4.2% from 4.2. ISM Mfg and JOLTs on Tuesday. Service ISM on Thursday.
| 9/20/2024 | 9/27/2024 | chg | ||
| UST 2Y | 353.7 | 356.3 | 2.6 | |
| UST 5Y | 348.3 | 350.7 | 2.4 | |
| UST 10Y | 372.2 | 375.1 | 2.9 | |
| UST 30Y | 406.7 | 409.9 | 3.2 | |
| GERM 2Y | 223.0 | 207.6 | -15.4 | |
| GERM 10Y | 220.8 | 213.3 | -7.5 | |
| JPN 20Y | 169.2 | 166.7 | -2.5 | |
| CHINA 10Y | 204.1 | 218.3 | 14.2 | |
| SOFR Z4/Z5 | -107.0 | -104.0 | 3.0 | |
| SOFR Z5/Z6 | 7.5 | 8.0 | 0.5 | |
| SOFR Z6/Z7 | 12.0 | 12.0 | 0.0 | |
| EUR | 111.59 | 111.66 | 0.07 | |
| CRUDE (CLX4) | 71.00 | 68.18 | -2.82 | |
| SPX | 5702.55 | 5738.17 | 35.62 | 0.6% |
| VIX | 16.15 | 16.96 | 0.81 | |
