Curveballs
April 9, 2023- Weekly Comment
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An article on Reuters from Thursday is headlined, ‘Powell’s curve’ plunges to new lows, flashing US recession warning. The spread is that of the yield on current 3m bills vs 18 months forward.
From the article:
“Powell’s curve … continues to plunge to fresh century lows,” Citi rates strategists William O’Donnell and Edward Acton said in a note on Thursday. Refinitiv data showed the curve was the most inverted since at least 2007. [now -170 bps]
Of course, the simplest thing has always been to just look at the Eurodollar futures curve. I thought I would take this one last opportunity to actually print the ED spread, first to seventh quarterly contracts, currently June’23 to Dec’24. (spread in lower panel)
Above is a link to the Reuters article. The original Fed paper was from August 2018. Below is the abstract, emphasis added:
The spread between the yield on a 10-year Treasury note and the yield on a shorter maturity security, such as a 2-year Treasury note, is commonly used as an indicator for predicting U.S. recessions. We show that such “long-term spreads” are statistically dominated in models that predict recessions or GDP growth by an economically more intuitive alternative, a “near-term forward spread.” The latter can be interpreted as a measure of the market’s expectations for the near-term trajectory of conventional monetary policy rates. Its predictive power suggests that, when market participants expected—and priced in—a monetary policy easing over the subsequent year and a half, a recession was quite likely in the offing. We also find that the near-term spread predicts four-quarter GDP growth with greater accuracy than survey consensus forecasts and that it has substantial predictive power for stock returns. Yields on bonds maturing beyond 6-8 quarters are shown to have no added value for forecasting either recessions, GDP growth, or stock returns.
The euro$ and SOFR corves have been inverted for quite some time. The pictured spread has been consistently inverted since Sept 2022. ED =-205.5 while SFRM3/Z4 = -198.5. The extra 7 bps in dollars reflects a small credit aspect embedded in EDM3, and likely strengthens the ‘predictive power’ of the spread.
OK. I know it, you know it, and Powell knows it. The market has been pricing ease while Fed officials have been jawboning against any near-term rate cuts, even though the Fed dots for end of 2023 to end of 2024 indicate 75 bps of easing. As a friend likes to say, “How ya left?”
Jim Bianco posted this amusing synopsis on twitter:
Market narratives so far in 2023
Jan = Soft landing
Feb = No Landing
Mar = Hard Landing
How’s it left for April? Well, Friday’s employment data were slightly better than expected, with NFP 236k and a rate of 3.5%. Avg Hourly Earnings fell to a rate of 4.2% from 4.6% last. The odds of a 25 bp hike in May rose to nearly 70% with FFK3 settling 9501.5.
SFRZ3 settled Friday at 9571.0. -19.5 on the day but +1 on the week. SFRZ4 settled 9704.0, -16.5 on the day but +16.5 on the week.
SFRU3/U4 one-year calendar settled at a new recent low -152.5 (9535.0/9687.5), more than erasing the March rally associated with the failure of SVB. The range in SFRU3/U4 in March was -148.5 to -62. The low for the cycle was set in Jan at -177. Maybe a less-hard landing?
Here are just a few news snippets regarding recent and upcoming events:
(BBG) – US bank lending contracted by the most on record in the last two weeks of March, indicating a tightening of credit conditions in the wake of several high-profile bank collapses that risks damaging the economy. [fell $104b]
Consumer credit for February was released Friday with revolving credit +5.0% SA annual rate, and non-revolving +3.4, both relatively low. It’s interesting to look at the published financing rates comparing 2022 to February 2023:
New Car, 60-month. 5.36% to 7.48%
New Car 72-month. 5.50% to 6.97%
Credit Cards:
All accounts 16.26% to 20.09%
Accts assessed interest 17.91% to 20.92%
Personal Loans 9.87% to 11.48%
This week kicks off earnings season.
(WSJ) First-quarter profits are projected to drop 6.8% from the same period a year earlier.
(Reuters) Analysts expect S&P 500 earnings to fall 5.2% in the first quarter from the year-ago period, I/B/E/S data from Refinitiv showed.
See? It’s already getting better.
Three, ten and thirty year auctions begin Tuesday.
CPI is released Wednesday, expected 5.2% from 6.0%. Core expected 5.5% from 5.5% last. FOMC minutes from the March 22 meeting are released Wednesday afternoon.
PPI on Thursday
Retail Sales Friday
TOKYO, April 9 (Reuters) – The Bank of Japan will likely modify or end its bond yield control policy due to increasing side-effects such as the hit to financial institutions’ profits, former deputy governor Hiroshi Nakaso told a newspaper interview published on Sunday.
Is sponsorship of massive borrowing needs by the US being eroded?
OTHER THOUGHTS / TRADES
A WSJ article notes, ‘Binance.US Struggles to Find Bank to Take Its Customers’ Cash’.
With the shuttering of Signature and Silvergate, the regulatory noose is closing. The CFTC last month sued Binance Holdings Ltd. From the article, “Binance.US and Binance say they are separately managed. But both have the same majority owner, crypto tycoon CZ…”
A failure of Binance would add to shockwaves from SVB.
The next three FOMC meetings are May 3, June 14 and July 26. There is no Fed meeting in August. FFN3/FFQ3 settled -9.5 (9502.5/9512.0). A rate change in July is worth about 4.8 bps in the price of FFN3. The market is targeting the July meeting for an ease (call it 50/50 for now). Of course, SFRM3/SFRU3 3-mo spread settled -29.5 (9505.5/9535.0) so it’s clear the market continues to price ease in Q3.
| 3/31/2023 | 4/6/2023 | chg | ||
| UST 2Y | 406.2 | 382.1 | -24.1 | |
| UST 5Y | 361.5 | 336.2 | -25.3 | |
| UST 10Y | 349.4 | 329.4 | -20.0 | wi 332.5 |
| UST 30Y | 369.2 | 354.0 | -15.2 | wi 354.5 |
| GERM 2Y | 268.3 | 255.4 | -12.9 | |
| GERM 10Y | 229.2 | 218.3 | -10.9 | |
| JPN 30Y | 124.2 | 130.0 | 5.8 | |
| CHINA 10Y | 285.8 | 286.4 | 0.6 | |
| SOFR M3/M4 | -131.0 | -158.5 | -27.5 | |
| SOFR M4/M5 | -57.5 | -53.0 | 4.5 | |
| SOFR M5/M6 | -5.5 | 1.5 | 7.0 | |
| EUR | 108.73 | 109.22 | 0.49 | |
| CRUDE (CLK3) | 75.67 | 80.70 | 5.03 | |
| SPX | 4109.31 | 4105.02 | -4.29 | -0.1% |
| VIX | 18.70 | 18.40 | -0.30 | |
NOTE: I used Thursday closes as treasuries didn’t trade on Friday
https://www.federalreserve.gov/econres/feds/the-near-term-forward-yield-spread-as-a-leading-indicator-a-less-distorted-mirror.htm
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THIS….was the Bud for me. Not anymore.
