Yields drop on low inflation…and France
June 14, 2024
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–PPI supported the slowing inflation narrative with month/month readings of -0.2% and 0.0 Core. Yields continued to drop, with tens down 5.5 bps to 4.236%. Solid 30y auction; the 30 year yield ended at 4.40%. That yield level, 4.40%, is the halfway retracement from the low yield posted in late December, 3.954% to the high in late April of 4.81%. It took 4 months to go from the low yield to high, and about 1.5 months to retrace halfway back.
–New lows (for second day in a row) in near one-year SOFR calendar spreads:
M4/M5 -112 (9465.5/9577.5) and U4/U5 -111.5 (9486.5/9598).
In M4/M5 the low settle this year was -132.5 at the start of February.
In U4/U5 the lowest settle was -109.5 in early March. It ran all the way up to -65 at the end of April as reds sold off, but today’s settle is a NEW LOW for that particular spread.
Also new recent low in ten year breakeven (10y yield vs 10y TIP yield) at 221 bps. Edging a bit nearer to the Fed’s target.
–Snap election gambit by Macron is creating uncertainty. EUR now 1.0680 and looks like it can test April’s lows of 106. The spread between bunds and oats is widening, as shown on chart below (from end of day yesterday). In May the spread was 47 to 49 bps and now 70 (or 80 this morning). US rate vol firmed (rebounded slightly) yesterday as yields fell.
–BOJ said it would trim bond buying but left details for next meeting. Yen weakened but recovered.
Friday’s news includes U of Mich Consumer Sentiment and Inflation Expectations
Pushing the ease forward
June 13, 2024
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–Better than expected inflation news as month/month CPI was 0%. On a yoy basis, headline 3.3% and Core 3.4%. The FOMC dots shifted to just one ease into the end of this year with the estimate for FF at 5.1% from 4.6% in March. The projection for 2025 was also raised to 4.1% from 3.9%. In the press conference Powell stressed risks in trying to thread the needle between holding policy rates high for too long and easing too soon. The Core PCE inflation estimates were raised to 2.8% from 2.6% in 2024 and 2.3% from 2.2% in 2025. In terms of a ‘real’ rate, 5.1% vs 2.8% Core PCE is 2.3% for 2024 and 4.1% vs 2.3% is 1.8% for 2025, so the Fed expects to remain relatively restrictive for the foreseeable future.
–Market reaction included new lows in near SOFR 1-year calendar spreads. The lowest spread is now U4/U5 at -104 (9484.5/9588.5) down 10 on the day. Reds, the second year forward, were the strongest contracts on the strip as the Fed masterfully keeps moving the easing goalposts a little farther away in time. (Whites +4.625, reds +13.375, greens +13.5, blues +11.75) Stocks exploded higher. Implied vol in near SOFR contracts was hammered. For example, on Tuesday SFRU4 9481.25^ settled 18.25 and yesterday at 15.0. While the dots project one ease into year-end, FFF5 settled +6 at 9512.5 or 4.875%, which is 45.5 bps under the current EFFR. The market is still leaning toward the idea of two eases.
–I would note that in the March SEP, the FF projection difference between 2024 and 2025 was 75 bps (4.6 and 3.9). Now the difference is 100 bps, (5.1 and 4.1) which, in a way supports the deeper inversion between fronts and reds. Z4/Z5 settled at a new recent low -91, down 8 on the day (9513/9604).
–The March FOMC was on 3/20. At that time, Dec contract settles vs FF projections were as follow:
SFRZ4 9551.5 or 4.485% vs FF projection at 4.625%, so Z4 had an additional 14 bps of ease priced
SFRZ5 9624.0 or 3.760% vs FF projection at 3.875%, so Z5 had an additional 11.5 bps of ease
SFRZ6 9633.5 or 3.665% vs FF projection at 3.125%. So Z6 was 54 bps HIGHER than the Fed projection
Yesterday
SFRZ4 9513.0 or 4.870% vs FF projection at 5.125%, so Z4 had an additional 25.5 bps of ease priced
SFRZ5 9604.0 or 3.960% vs FF projection at 4.125%, so Z5 had an additional 16.5 bps of ease
SFRZ6 9630.5 or 3.695% vs FF projection at 3.125%. So Z6 was 57 bps HIGHER than the Fed projection
It seems as if the market believes that inflation will remain durably higher over the next few years and that forward rates over the next few years are likely capped between 3 and 3.5%.
–PPI and 30 yr auction today.
CPI and FOMC
June 12, 2024
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–CPI and FOMC today. CPI month/month +0.1 expected with Core +0.3. On a year/year basis headline expected 3.4% from 3.4% last and Core 3.5% from 3.6%.
–FOMC March 2024 ‘dot’ or estimate for end-of-2024 FF was 4.6% or three eases. Today that dot will either show 1 or 2 eases, my guess is 2 which would take the estimate to 4.9%. SFRZ4 settled at 9507 (4.93%) +2.5 on the day, so two eases would probably lead to some upside in the contract. Recent low settle was 9497 at the end of last month. SFRM4 is 9465.5 so one ease could roughly be estimated at 9490, but in my opinion it’s highly unlikely that SFRZ4 would test that level. The 2025 dot was 3.9 in March; that may have to push a bit higher as well. SFRZ5 settled 9590 or 4.1%. SFRZ4/Z5 one-year calendar settled -83, or approximately three eases over next year; the spread has been in a range of -68.5 to -84.5 over the past month.
–It’s not the Fed’s job to comment on the level of USD, but $/yen remains above 157, CNY is at the low of the year vs USD and Indian Rupee is also at a historic low. Dollar liabilities are getting harder to service. My guess is that weakening labor (notwithstanding last Friday’s report) and a strong dollar will result in a somewhat dovish press conference.
–Yields fell yesterday. Ten year auction was solidly received, the yield fell about 6.5 bps on the day to 4.402%. AAPL exploded through the upper end of the range, closing at 207.15, up 7.25%, adding somewhere around $200 billion in market cap. Overall liquidity conditions seem frothy.
Ten year auction today. CPI and FOMC tomorrow
June 11, 2024
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–Yields edged a bit higher yesterday, with tens up 4 bps to 4.467%. European bond yields surged on election results; the French 10y rose over 12 bps to 3.223% as Macron called for a new snap election. Domestically, the three-year tailed with tens being auctioned today, followed by 30s Thursday. CPI and FOMC tomorrow.
–AAPL reversal day, closed -1.9% as yesterday’s AI presentation underwhelmed the market. There is now a triple top around 200, having just failed that level in July of last year, then again in December, and now yesterday. (yest high 197.30). Top of the AI craze?
–CLN4 up 2.38 late to 79.91/bbl. Besides the 10y auction, news today includes the NFIB Small Business Optimism Index, which has been consistently weak. It’s expected 89.7, same as last month.
–SFRZ4 was only down -0.5 yesterday to 9504.5 or 4.955%, essentially pricing the midpoint of one or two rate cuts by year end. The lowest contract on the strip is front June at 9465.25 and the peak contract is SFRU’27 at 9615.5. Over a greater than three year span the spread is just 150 bps. The gold pack, 5th year forward, settled yesterday just above 9610 or 3.90%. Not long ago the one-year calendars were more inverted than 150 bps. In 2001 and 2007-8 the Fed was forced to cut aggressively. In 2001, the Fed slashed 275 in six months, and in 2007 to 08, 300 bps of cuts in six months…with more cuts following in each cycle. As of now, the SOFR strip is projecting a ‘soft landing’ as rates 3, 4 and 5 years forward hover between 3.75 and 4%.
Euro reacts to elections
June 10, 2024
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–EUR was 108.93 (ECM4) on Thursday’s close and has now plunged to 107.55 following weekend elections in Europe. In Germany AfD made a strong showing and in France, Macron is calling for snap elections after his party was trounced, while “Italy’s PM Meloni comes out on top in EU vote, strengthening her hand…and boosting her standing both at home and abroad.” (RTRS). US equities are also under profit-taking pressure as are US treasuries, with downside follow-through in the wake of Friday’s higher than expected 272k NFP. Supply is a concern with 3, 10 and 30 year auctions slated this week (Mon, Tues, Thurs).
–Yesterday, “A Ukrainian military source cited by Sky News confirmed this is’ the first Ukrainian Air Force (UAF) air-delivered munition delivered against a target within Russia’.”
–This week’s news includes CPI and FOMC on Wednesday. FOMC dot-plot will shave at least one ease from the estimate for 2024, as we’re already halfway through the year. As of Friday’s settles in December SOFR contracts, the market is pricing between 1 and 2 eases in 2024 and another 3 cuts in 2025. SFRZ4 settled 9505, or 4.95%. Current EFFR is 5.33, one ease would be 5.08% or 9492 while two cuts would equate to 4,83% or 9517. Of course, SOFR contracts also price odds for FOMC meetings embedded in their terms, but for now we can say the market is priced for 1 to 2 cuts in 2024, and SFRZ5 is 9597.5 or 4.025%. Therefore Z4/Z5 is -79.5. The SOFR curve repriced on Friday from a lean toward 4 cuts in a given year to more like 3-3.5.
–Implied vol was hit in rate futures, though the expiring midcurves aren’t particularly cheap. 0QM4 9550^ settled 18 vs SFRM5 9550.5, 2QM4 9600^ settled 18.0 vs SFRM6 9604.5. VIX ended Friday at 12.22, A WSJ article over the weekend: ‘Beneath the calm market, stocks are going haywire’. Here’s a snippet:
“Under the calm surface, however, there is furious paddling. Only once in the past 25 years have stocks swung about like this while the overall market stayed so placid. Traders in the options markets are betting on its continuing: Prices indicate the biggest swings in stocks for at least 10 years relative to the prevailing calm for the S&P 500.”
–Kevin Muir (MacroTourist) had cited the ‘dispersion trade’ as a possible risk some time ago…
Net Worth looks fine…
June 9, 2024 – Weekly comment
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The global economic system is debt-based. Below is an image of US Household Net Worth, released by the Fed last week in the Z.1 report, updated through Q1.
Liabilities are barely increasing (red bars), yet assets (equites and residential RE) just keep powering higher. That’s what various officials mean when they say Household balance sheets are in good shape. Of course, that’s in the aggregate. The coveted assets of the lower end of the balance sheet spectrum are torches and pitchforks. I guess this chart would make sense if productivity were on a tear higher, and maybe part of it is the AI craze. The other way it makes sense is if the measuring stick of the US dollar is deteriorating, which of course it has done, in terms of purchasing power.
After the 2007/09 Great Financial Crisis there was a lot of talk about the shifting of liabilities from the private sector to the Gov’t balance sheet. In that context, the above chart makes more sense.
Around 10 years ago, Q4 2014, HH Assets were $101T, Liabilities $14T and NW $87T. In Q1 2024, Assets are $181T, Liabilities $21T and NW (rounded) has nearly doubled to $161. The liability side has really been kept in check, up only 50%. Must be a really frugal and innovative populace. Of course, when one considers that at the end of 2014, Federal Gov’t Debt was $14.4T is 2014 and has now more than doubled to $29.9T (Z.1), it begins to appear as though private debts HAVE shifted to the public balance sheet, boosting equities, but perhaps making the aggregate snapshot look less healthy. FT’s top headline Sunday is ‘IMF warns US on ballooning fiscal debt’.
In the movie Planes Trains and Automobiles, there’s a funny scene where Del Griffith, shower curtain ring salesman (John Candy), and Neal Page, slick advertising exec (Steve Martin) are stranded on the highway, watching the rental car they were just in smolder and burn after a harrowing accident. Neal Page starts to laugh a little and Del Griffith, who caused the accident, is surprised, but he starts to laugh too.
Finally Del says, “What?” And Neal responds, “You finally did it to yourself. Good luck turning the car in!” Now they’re laughing harder and harder and Neal asks, “How could you rent that thing anyway, without a credit card?” Del, “Oh I gave this girl behind the counter a set of shower curtain rings.” Then Neal becomes serious and says, “You can’t rent a car with shower curtain rings Del.” It turns out that Del used Neal’s Diner Club credit card (a relic of the past).
I sort of consider Del Griffith to be the Federal Gov’t and Neal Page the public. I came to that conclusion after Friday’s employment data which sparked a 15 bp jump in the 10y yield to 4.428%. I’m not saying the data was manipulated to appear strong (though there seems to be quite a divergence between the establishment and household surveys). Maybe it’s just that the BLS’s Birth/Death plug factor isn’t quite capturing the latter half. In any case, Fed’l Gov’t efforts to juice economic growth in whatever way possible before the election might come back to scorch the public through higher yields. Maybe it’s going to be hard to pay for things with a charred Diner’s Club card. It’s funny when it just appears that an inept gov’t is buried in debt (You did it to yourself!). It’s not so amusing when the public starts to get the bill, in one way or another.
Auctions of 3 ($58b), 10 ($39b) and 30 ($22b) years are Monday, Tuesday and Thursday, bracketing CPI and the FOMC on Wednesday. The last auction cycle didn’t go that well…everything tailed. With respect to the FOMC, the new 2024 FF dot projections should be interesting. In March, the 2024 estimate was 4.6% or three eases, and the 2025 estimate was 3.9, up from December’s 3.6. The main question is whether the 2024 dot will shift to just one cut or two; my guess is two. So that would take the end-of-2024 FF estimate to 4.9. (SFRZ4 settled Friday at 9505 or 4.95%, essentially pricing 2 cuts). But then can 2025 remain constant at 3.9? That may have to shift up slightly as well, which the market expects. SFRZ5 settled 9584.5 or 4.155%; Z4/Z5 spread at -79.5. Considering the PCE deflator, for end of 2024 the PCE price index was penciled in at 2.4, last reported at 2.7%. Core was estimated 2.6, last at 2.75%. Those will likely remain the same, though the risk is a shift higher. Overall, I would deem the dot-plot risk to be slightly hawkish, which will be countered perhaps, by a more dovish press conference. A counterbalance to the ECB’s ease followed by a hawkish press conference.
FFQ4 settled at 9469 or 5.31%, just 2 lower than the current 5.33% Fed Effective and down 1.5 on the week. Therefore, there is little priced in for a July 31 rate cut. FFF5 settled 9504 or 4.96%, pricing between 1 and 2 cuts by year end.
CPI yoy expected 3.4% from 3.4 last. Ex Food and Energy expected 3.5 from 3.6. On Monday, NFIB Small Business Optimism is expected 89.6 from 89.7 last, still lower than the COVID spike. The divergence between data points like NFIB and Chicago PMI, which both indicate recession, and data like NFP is rarely more stark.
| 5/31/2024 | 6/7/2024 | chg | ||
| UST 2Y | 489.1 | 487.0 | -2.1 | |
| UST 5Y | 452.6 | 445.2 | -7.4 | |
| UST 10Y | 451.2 | 442.8 | -8.4 | wi 442.7 |
| UST 30Y | 465.2 | 454.7 | -10.5 | wi 454.7 |
| GERM 2Y | 309.7 | 308.3 | -1.4 | |
| GERM 10Y | 266.4 | 262.0 | -4.4 | |
| JPN 20Y | 187.2 | 176.5 | -10.7 | |
| CHINA 10Y | 231.9 | 231.0 | -0.9 | |
| SOFR U4/U5 | -81.5 | -88.5 | -7.0 | |
| SOFR U5/U6 | -38.5 | -41.0 | -2.5 | |
| SOFR U6/U7 | -8.5 | -10.0 | -1.5 | |
| EUR | 108.48 | 108.18 | -0.30 | |
| CRUDE (CLQ4) | 76.73 | 75.22 | -1.51 | |
| SPX | 5277.51 | 5346.99 | 69.48 | 1.3% |
| VIX | 12.92 | 12.22 | -0.70 | |
Gearing up for a July FOMC cut
June 7, 2024
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–ECB delivered a 25 bp cut, as expected, but Lagarde tried to temper enthusiasm for further easing. EUR ended a bit higher and is unch’d this morning. US yields closed slightly lower with tens down 1 bp at 4.277%; futures are going into today’s employment report at the top end of the range since April. NFP expected 180k from 175k and the rate is expected unchanged at 3.9%. The market appears to perceive risk is weighted to a weak number – heavy buying of week-2 FV calls. FV wk2 107c 19 paid for 30k and 107.25c 14.5 paid for 15k. Settled 21 and 15.5 vs FVU4 106-2575. Open interest in FV week-2 calls alone was +69k. Week-2 options expire 14-June, so next week’s CPI and FOMC are covered. There has already been a significant rally in all rate futures this week, but the fear is that there’s more to come. Ten year yield down nearly one-quarter pct since Friday. Same thing on the SOFR strip: SFRM5 +24.5 to 9569.5, SFRM6 +25 to 9622 and SFRM6 +26 to 9635.5 just since Friday, 31-May.
–Also out today is lagging data…Q1 Fed Z.1 report at noon, which highlights Household Net Worth. It will be reported as significantly higher due to the rally in stocks from Jan to March. Also, Consumer Credit, expected +10-11 billion. More obvious cracks are opening regarding Consumer finance, but this data is for April.
–New lows in the first two SOFR one-year calendars with M4/M5 -101.75, down 1.5 on the day (9467.75/9569.5) and U4/U5 -99, down 1.5 on the day (9489.5/9588.5). There was a monster buyer of 180k SFRM4 at 9466.75. New, as open interest jumped 140k. Appears to be a great risk/reward trade as a cut in July would add about 12 bps to the contract. As of now, FFQ4 settled 9472.5 or 5.275 vs Fed Effective 5.33, so around 22% odds of an ease at the July 31 FOMC.
AI is not like DOT COM
June 6, 2024
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–It’s all about NVDA which joined MSFT and AAPL with a market cap over $3T. GDP is $28.5T so the value of these three is about 35% of GDP. I got one of those ‘your memories from this day’ emails yesterday, and the attached Nasdaq chart was included.
From March 1999 to March 2000, Nasdaq doubled (NDX-100). Currently NDX is a bit over 19k; at the start of 2023 it was around 11k, not quite doubling in a year and a half. Of course, rates were high at that time (a friend kept reminding me, “It doesn’t matter, these tech companies don’t borrow money”). Dot.com mania was in full swing. And of course, going into the turn of the century Y2K fears were being plastered across headlines: Bank computers would stop working, air traffic control would fail, etc. There was a lot of investment in new systems By March of 2021 it was pretty much a full round trip, 72% off the high.
–Bank of Canada cut 25 yesterday. ECB on tap to do the same today. ADP was weaker than expected at 152k but ISM Services vaulted higher to 53.8. Rates still ended lower, with tens down another 5 bps to 4.287%. On Friday, to end last week and month, tens were 4.512%. As of yesterday, a drop of 22.5 bps, essentially a rate cut, just like the Bank of Canada and ECB, except the Fed’s not in on it (but we can expect Powell to blather about the weakening job market next week).
–Because the very front end of the US curve is pinned, the reds (1-year forward) were the leaders on the SOFR strip, with March, June and Sept 2025 contracts +5.5 to 9544, 9567.5, 9587). Near one-year calendars made new lows with M4/M4 at -100.25 and U4/U5 -97.5… 4 ease territory.
–Got my name in the paper yesterday (Sun Times)…of course it didn’t have anything to do with market stuff, but rather was from a picture I had taken and shared with a friend – a cicada emerging from its shell. The constant undulating buzz from this mass of insects is now a constant…and it’s loud!
If the Labor Market Stalls, it ALL stalls
June 5, 2024
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–Yields continued to tumble Tuesday, with tens -6.4 bps to 4.336%. JOLTS way lower than expected at 8.059m vs 8.355 exp. A couple of SOFR 1-yr spreads made new recent lows: Z4/Z5 at -84 (9512.5, 9596.5), down 3 on the day, and H5/H6 at -69.5, down 1.5 on the day. The front M4/M5 spread is still the most inverted and that one’s approaching the ‘four rate cut’ level at -95.25, down 7 on the day (9466.75/9562). FFQ4/FFQ5 settled -98.5 (9471.5/9570). Eases are still expected, and sentiment is again shifting to more rather than less.
–Of course the payroll data is out on Friday, but BBG had this little snippet yesterday: “…there’s more weak labor market data to come when the full Quarterly Census of Employment and Wages (QCEW) for 4Q23 is released tomorrow.”
https://www.bls.gov/cew/home.htm
| Quarterly Census of Employment and WagesQuarterly Census of Employment and Wageswww.bls.gov |
–QCEW is a BLS product. I skimmed a couple of things, but what immediately struck me was the table showing % changes in wages in the 10 largest counties in the US. Six of these, Cook, IL (Chgo), Maricopa, AZ (Phoenix), Dallas, TX, Orange, CA (LA), San Diego CA and Miami-Dade FL showed a NEGATIVE year-over-year wage!
–Another interesting snippet: (RTRS) reports Japanese real wages down 25th month in a row. The article reports that Japan nominal wage is 296,864 yen/month, or $1913.28 given the exchange rate. From google: “According to the latest figures by the Bureau of Labor and Statistics, the average salary in USA per month is $5,677 or $68,124 per year.” This week’s Market Huddle featured Tucker Scott, who mentioned similar stats to argue that the yen is way undervalued.
–We’ll see what Friday’s data brings, but the market is clearly postulating that the Fed is going to weigh the JOBS part of the dual mandate more heavily than inflation going forward. Of course, perhaps a small margin of the ftq bid yesterday had to do with the plunge in Mex Peso and in India’s SENSEX after the poor showing by Modi’s party.
–US equities seem to be cheering for a looser Fed. If the Fed leans easier due to deteriorating labor markets, that spells recession. Not likely to be equity positive. Patrick Ceresna (MacroVoices) notes that in January, 90% of stocks in the SP500 were above their 50 DMA. In March, it was 85%. Now…just 37%!
–ADP and ISM Services today.
Black Keys playing at the neighborhood bar down the street
June 4, 2024
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–This past weekend I mentioned a few developments in the financial landscape that echoed initial problems in 2007 which culminated in the GFC. Of course, today’s issues – problems in private credit and commercial real estate funds – probably don’t rise to the same level of systemic stress. However, Monday’s trade certainly had a whiff of something not quite right in the financial architecture.
–For example, 5, 10 and 30 year yields sank 10-11 bps (10y down 11.2 to 4.40%). Implied vol in treasuries firmed up. Gold rebounded and oil was hammered, with CLN4 down nearly $3/bbl late at 74.05 (and it’s below 73 this morning). USD traded lower. Just FEELS like something is going on beneath the surface. Stocks were weaker early but floated back to edge slightly positive given the cue of lower interest rates.
–ISM Mfg weakened at 48.7 vs 49.5 expected. New Orders soft, but the Employment component was 51.1, stronger than estimated. JOLTS today 8350k exp vs 8488k last. In the anecdotal news dept, a story making the rounds is that several major concert tours have been cancelled (J-Lo) while some artists shift to smaller venues (Black Keys). From a Yahoo article: “SeatGeek said in an email that the average resale ticket price to attend a summer concert is down to $213 from $257 around this time last year.” DEFLATION! Thanks Taylor. There are also legal actions pending against Live Nation and Ticketmaster which may be contributing to a slower season.
‘they want to get my gold on the ceiling/ i ain’t blind, just a matter of time/ before you steal it’
