Bonds have already priced Core Capex decline and are looking forward
Oct 25, 2019
–Quiet day Thursday with barely any change in fixed income. November treasury options expire today with TYZ comfortably sitting between 129.75 and 130. I would note that on the eurodollar curve, the peak contract is now the 2nd red, namely EDH21 at 9855.0. The peak had been the 8th contract recently; the move forward perhaps is a tiny signal of steepening further back. For example, 2/10 ended above 18, a new recent high. Implied vol continues to fall in rates with the news calendar light (Michigan Consumer Sentiment and Inflation expectations today). VIX sub-14 as earnings reports appear to have little impact, with indices pressing for new highs.
–A twitter post from David Rosenberg yesterday: “The legendary Paul McCulley once told me that his favorite leading macro indicator is the yoy percent change in the 3-mo moving avg of Core Capex Orders. It just crossed below the zero line.” The chart below is informative; the decline in durables in the last half of 2015 coincided with plunges in oil and emerging markets. Yields made their historic lows in the US in mid-2016, and revisited those lows earlier this year. The surge in activity in 2018 was due to tax cuts and repatriation, in hindsight perhaps a ‘sugar high’. However, yoy comparisons are likely to start becoming much easier.
–Next week brings the Fed rate cut and Employment report.
