China Shares Rise on Optimism About Futures Trading, RRR Report: BBG. 4. China Ends Year of Stabilization on ... and not
The BondBeat Friday, January 20, 2017
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In The News …
1. U.K. Retail Sales Fall Most Since 2012 as Store Prices Rise: BBG 2. China cuts reserve ratios for big five banks temporarily amid cash crunch: sources: RTRS
3. China Shares Rise on Optimism About Futures Trading, RRR Report: BBG
4. China Ends Year of Stabilization on High as Consumers Spend: BBG Retail sales rise 10.9 YoY vs 10.7e; GDP @ 6.8% YoY vs 6.7e; Industrial Prod 6% YoY vs 6.1e
5. China's central bank says it offered temporary liquidity support to some banks: BBG
6. China's Xi says Chinese economy to keep growing steadily: RTRS
7. China GDP beats expectations but debt risks loom: RTRS
8. Yellen: near-term econ growth UNLIKELY TO PICK UP: FED 9. Yellen Backs Gradual Rate Rises as Fed Not Behind the Curve: BBG 10.
Gasoline Stockpiles Climb as Consumption Tumbles: @stevefeiss
Quick (& clickable) Links:
Items Of Interest Bloomy/EconODay Calendar
GP Documents: -
Econ Indicators 5yr & Under Index Spreads Daily Pivots
POSITIONS UPDATES
Japan BOT (on WoW basis) TICS – China, Japan SOLD (back in NOVEMBER); Foreign PRIVATE BOUGHT
YEAR AHEAD: 2017
StreetStuffWkly 01.17.17
StreetStuff 01.20.17
Technicals 01.20.17
What Happened Overnight Fri 1/20/2017 5:14 AM Morning. USTs are cheaper and (marginally)steeper, leaking lower in price over the course of just the last 30mins. Hard to pinpoint a specific catalyst (or EXCUSE) although we’d NOTE – OIL HIGHER and USDJPY up OVER 115 (so, Yen weakness, USD strength). ALSO would note the timing (just AFTER UKs WEAKER ReSale Tales that printed WEAKEST since 2012) and that we’re FOLLOWING {WB} and not leading. Gilts UP just OVER 3bps and US10s UP just shy of that. In OTHER news … China’s econ doing GREAT (ReSale Tales, GDP and Industrial Prod all up BETTER THAN EXPECTED – see clickables blow) AND with all this GREAT ECON INPUT, we learned (or think we learned) OF A RATE CUT THERE? Wait, WHAT? Right: “China cuts reserve ratios for big five banks temporarily amid cash crunch: sources” –RTRS below. Finally, last evening started out with some MORE YELLEN – econ growth unlikely to pick up in near-term (wait, what?) and Fed NOT behind curve, must not keep rates low too long (wait, what??). From p7 of her speech (clickable link below), “…economic growth more broadly seems unlikely to pick up markedly in the near term given the ongoing restraint from weak foreign demand and other factors that I mentioned, particularly in an environment in which monetary
policy is likely to become gradually less accommodative…” Alrighty, then. Let THAT settle in and note cheaper/steeper US rates price action at this very moment and note NO econ news today with only HARKER (philly, voter) comments @ 9a, the inauguration (1130a) and then Williams (nv) @ 1p. Have a great start to the day and end TO this week.
What’s On OUR Minds Tempted to simply repost what we offered YESTERDAY -- Ron Burgundy quote and all -- but that didn’t help anyone THEN and will continue to NOT help anyone now. We’re ALSO tempted to bring forward Ed Yardeni visual from yesterday’s note .. "...My Boom-Bust Barometer continues to rise vertically in record high territory. The same can be said for the two Weekly Leading Indexes compiled by YRI and ECRI."
We're right back up TO 2007 levels. And NOW we're supposed to be all excited about animal spirits, throwing ALL caution to the wind...Essentially, buying in to the concept that trees do in fact grow to the sky? This all gives US reason to pause. Fear of the unknown usually brings at least a bid to the treasury market. This time around as we await the inauguration of the 45th president we have a yield rally that will not give it up. Buy the rumor or sell the fact ? Nothing is working. Catching a falling knife
is no fun, but as we get over 2.50% on 10s we cannot help but think we are somewhat oversold. Dailys do NOT yet show it. WEEKLIES DO … for more, see this mornings TECHS.pdf And so, with all of THAT in mind … we dig even DEEPER to something ELSE we’ve never seen before and only stumbled on by accident last evening … from McClellan Financial on climate change and LOW RATES. Right. NOT typo...
Chart In Focus
High AMO Says Rates Should Stay Low
January 19, 2017
The Atlantic Multidecadal Oscillation (AMO) is a bit of data that climate researchers use in their modeling of global climate change. And it turns out that it has interesting messages for us about the long term trends in interest rates. I will spare you all of the details of the AMO’s computation, but you can download the data yourself at NOAA’s web site, and read more about it at this page. What we can see in the chart above is that there does seem to be a relationship between interest rates and global temperatures as modeled by the AMO. The data on AMO only go back to 1856, so we cannot yet see this relationship
through multiple iterations of the 60-year cycle. To help illustrate this correlation better, I have offset the AMO data forward by 6 years. Why there is that 6-year lag is not something I can answer. Climate scientists have long known that there is a 60-70 year cycle in global temperatures and other related data. And bond market analysts have long known about the 60-year cycle in interest rates. But these two groups of experts rarely talk to each other, nor look up this period’s other usages throughout the ages. A quick Google search shows lots of other 60-year periods of interest to people. ...Having better crop yields means lower food prices, which flows through into other commodities and then generally to the prices of almost everything. When cooling brings poorer crop yields, that leads to higher food prices, and inflation generally. That eventually affects interest rates as bond holders adjust their interest rate demands and expectations to reflect the changing inflation picture. Readers should understand that this is only true for the really long term trend in interest rates. There are other factors which act in the bond market on much shorter time scales, and so measures of global temperature changes like AMO are not all that useful as a timing tool. Here is a zoomed in look at just the last few decades of the relationship between the AMO and interest rates. ...And this point about temperatures and interest rates being related is important now because we have not really seen the cyclical downturn in the AMO which is due according to that 60-year cycle. Perhaps that is the effect of human influence on the climate system. Perhaps it is a reflection of natural factors. Ask me in about 50 years and I’ll give you a more precise answer. Irrespective of the cause(s) of temperatures remaining aloft, the resulting expectation is that interest rates should remain low (high on this chart’s inverted scaling). The next big peak for interest rates is due in 2040 according to the 60year cycle, but seeing global temperatures stay high should mean that we won’t have to see bonds make a start toward that 2040 peak for a while. Perhaps both will work extra hard to make up for lost time as 2040 gets closer. High temperatures should mean low rates for a sustained period over the next few years, which will assuredly puzzle the Fed and classical economists who do not understand the real relationship between climate and the economy. Tom McClellan Editor, The McClellan Market Report As crazy as THAT sounds, it is better than anything else WE could come up with … MORE over the weekend as all of this settles in … Have a great start to the day and end to the week and remember …
Best, Saul/Steve Items of Interest
EconoDay Economic Calendar AND, ripped from the BBG:
Bloomy’s Fed-speak Calendar January 20, 2017
GPs Key Econ Indicators January 4, 2017-> Our “Economic Graph Package” is used by some of our clients to include in their monthly or quarterly reports. We have most of the major economic indicators included to give an accurate snapshot of the economy. GPs 5yr & Under Summary January 5, 2017- > this is our chart package we call the “One to Five Year Daily”. It tracks agency bullet spreads to Treasuries, date to date, to compute the real maturity spread levels (in basis points) out to five years. We track agency callables against agency bullets and Treasuries. We compare equal maturity dates when tracking these spreads because the effective durations of callables are not stable. So over time we have a consistent methodology that we use to determine “value”. Please give us a call for more in depth explanation. GPs Index Spread Summary January 4, 2017-> We use certain Merrill Lynch indices, which are described at the top of each graph, to try and determine optimal entry and exit points for each sector. Though the indices should have similar durations, they commonly don’t match precisely so we’ve included the green line (which should be read off from the right axis) to allow you to take the curve into account when looking at historical spread relationships. GPs Daily Pivots January 20, 2016 -> the pivot point is essentially a mechanism for analyzing the short-term supply and demand factors affecting the market. It has limited applications for long- term decision making. Professional futures floor traders, also known as locals, are the biggest proponents of the pivot technique. Scalpers, brokers, market makers, and other short-term traders also use the technique, while upstairs or longer-term traders occasionally look at the pivot for
ideas of what the floor traders are doing. The pivot point is basically the weighted average price of the previous trading day, calculated as the average of the previous trading day’s high, low, and closing prices. It represents the major point of inflection each day. Unless there has been significant market news between the previous trading day’s close and the current trading day’s opening, locals often try to test the near term support, resistance, and pivot point. For example, many floor traders cover their shorts and go long into the pivot level if the market opens above the pivot point and starts to sell off. Well, it’s once again that time for information OVERLOAD and so we remind you … clicking up the StreetStuffWeekly.pdf will bring you to a few paged SUMMARY – a cliff notes version, if you will – of what some of the brightest minds and best SELLSIDE analysts are saying and thinking. WE have focused mostly on things directly impacting US RATES so you’ll find lots of specifics as well as economics AND EVEN a couple of the more notable equity thoughts. Just because. Here are OUR ‘cliff notes’ of what stood out this weekend and what you’ll find on the PDF WE’VE LINKED TO:
StreetStuffWEEKLY January 17, 2017 (some of) What you’ll find and WHY you’ll wanna point/click – UPDATED from this weekends version:
Barclays NEAR HITTIN BID on MUNIS: An Encouraging Start … we have to exercise caution at current levels. We are not prepared to throw in the towel just yet, but if municipals continue to outperform near term, we would recommend taking a pause and waiting for better entry points down the line... Barclays GLOBAL ECON: Trump enters to solid global macro data … Tough trade policy in the form of a border tax could increase US core inflation by 0.5-1.0pp and reduce real GDP growth by 1.0-1.5pp. BMO weekly on REAL yields, “…real yields give us a way to measure the speed of adjustment that
markets (and central banks) are imposing on borrowers. What the history of real yields in our charts shows is that a large move in nominal yields and a commensurate drop in breakevens can be much more traumatic for markets (which would show up as a real yield spike). It’s much easier, for example, to see the 2013 taper tantrum on this chart (blue line) as then chairman Bernanke pushed real yields 100 bp higher (from very low levels) while inflation was still fairly muted causing future inflation expectations to fall further. That resulted in an amplified shock to risk markets and helped lead to a significant, though temporary, increase in corporate spreads. Spreads eventually leveled off as real rates stabilized and began to decline, but the Fed’s hawkish speak in 2015 created another increase in real yields that was fairly sustained and culminated in the pressure appearing on very leveraged borrowers in Asia. Eventually, that led to high yield spreads moving wider as well…”
Citi UNDERWEIGHT MBS (from NEUTRAL) Citigroup on POSITIONS, “…Both our Aggregate
UST measures, including and excluding
Eurodollars, are > 5 std. devs short.
DB on BALANCE SHEET: … The potential for Fed balance sheet unwind again emerged last week as a key market theme. An abrupt end to SOMA reinvestment is worth 25 bp in higher 10y yields. If the Fed were to sell securities outright, a pace of $50 billion/month could push yields another 35 bp higher.
GSAM short duration GSs Kostin -- check out ROTATION INDEX (and get ready to sell stocks/buy bonds? Said NO ONE EVER??)
TD: Keep Calm and BUY TIPS UBS: Remain long REAL duration but reduce size given events next week UBS: Q4 GDP tracking at 1.8%, -0.4pt from early January WELLS: expect INTERMEDIATE curve to FLATTEN (2s10s to hit 100bps) and 10s30s to steepen …
AND THERE’S MORE … MUCH, MUCH MORE
StreetStuff January 20, 2017 What you’ll find and WHY you’ll wanna point/click. Barclays Global Rates Weekly “Great Expectations … In the US, we believe a gradual reduction in the Fed’s balance sheet should not put undue upward pressure on term premia. Most investors already expect the Fed to begin phasing out reinvestments in mid-2018. Fed Chair Yellen’s comments suggest that front-end yields still have room to reprice higher. We maintain our 3s10s curve flattener recommendation… Overall, while balance sheet reduction argues for higher term premia, as the private sector would need to pick up the slack, we believe the overall effect would not be large, as most expected a reduction sometime in 2018, anyway. One also needs to consider the flip side of Fed’s balance sheet. Cash on balance sheets of commercial banks counts as high quality liquid asset (HQLA) and is currently high because of high excess reserves in the system. As excess reserves decline, resulting in lower cash on bank balance sheets, banks may respond by increasing their holding for other HQLA assets such as Treasuries and agency securities, providing the needed duration demand (Figure 4)…” Barclays ON GDP NEXT WEEK, “…as a result, we revise our official forecast for Q4 GDP growth lower to 2.0% from 2.5% previously…” BMO: “……Our technical charts on 10-year breakevens show the same with breaks jumping out of a nearby rates channel and projecting to 2.18% before hitting a broader channel top. The move higher in nominal yields after the auction and the fact that 10-year yields were lagging the curve on the day also suggested to us that at least some buyers were buying 10year TIPS on a breakeven basis (which would require selling nominal 10s versus a real yield long). Almost on cue, once the hedging flow subsided, nominal yields started to fall after the auction with the belly (5s-10s) leading the move.” Citi on MBS SUPPLY, “……We revise higher our projection for net MBS supply to $185bn in 2017 if primary mortgage rates stay at 4.0% (Figure 1)…” MSs US Treasury DAILY COMMENT (Wieseman): “…Market participants are on the lookout for MBS convexity related paying after the backup in yields the past two days, but our desk hasn't seen it noticeably yet…” AND THERE’S MORE … MUCH, MUCH MORE
Technicals January 20, 2017 w/PIVS: 5s vs 100-05; 10s vs 95-30; 30s vs 96-24+ Daily Pivots are RESISTANCE What you’ll find and WHY you’ll wanna point/click:
GP: 5s30s DAILY – levels to watch are break ABOVE 110bps and below 105/04; 10s DAILY maintains BEARISH MOMENTUM (slow stochastics) and shorter-term MAs: 21d @ 2.4476, 40d @ 2.4368 and 50d @ 2.38 -- all NOW levels of RESISTANCE; 10s WEEKLY maintains BULLISH MOMENTUM (slow stochastics) BBG (on 10s breaking badly): UST 10Y Yield May Reassert Uptrend If 21-DMA Breaks at Close BBG: on stocks and the TICK GO
Commerz WEEKLY (bearish THEN BULLISH): Yields remain bid in their ranges; (10y yield, DAILY) “Should still slide towards the 38.2% Fibonacci retracement at 2.14 but should first rise to 2.49/52” GS “Global Reflation Trade - Final Leg Starting Now. The below charts have started to send a unified signal – the “Global Reflation” trade is entering its next (and final) leg. The expected timeline for these targets to be met are at a minimum of 1 month and no longer than 3 months. The majority of the mentioned assets have been in a 4th wave correction and are now signaling the end of that move (i.e. start of a 5th and final wave). This is supported by a bullish key day reversal in USDJPY, 38.2% retracement (of wave 3) not being violated by FX & Rates assets and oscillators broadly crossing over at the bottom of their range. US 10-year yields – Biased higher. Target 2.74%. Not below 2.30%. US 2-/10-year curve – Steeper to 143bps. No lower than 112.91bps…” Kimble: Will it be different this time for stocks and bonds? … Will it be different this time, in that bonds will breakdown from this long-term rising channel with 0% bulls?...”
MMO for January 16, 2017 In The Press NOW:
Jan. 20, 2017 1:33 a.m. ET
China’s Economy in 2016 Was a Stimulating Story, But 2017 Looks Stormy Beijing envisions a pivot away from stimulus this year, but that could unravel if tensions with Trump escalate
Updated Jan. 20, 2017 12:21 a.m. ET
China Leans on Familiar Stimulus Playbook to Hit 6.7% Growth Beijing expected to double down on old growth drivers this year Jan. 19, 2017 9:00 a.m. ET
Mall Closures Ripple Through Small Town America Sears and Macy’s closings at an Ohio shopping mall are a one-two punch for a region already battling retail flight and a changing economy Updated Jan. 19, 2017 2:18 p.m. ET
Economic Tests Await Trump
President-elect Donald Trump inherits an economy in much stronger shape than at either of the past two inaugurations, but major questions loom over how he can boost productivity and deliver on his growth promises. Updated Jan. 19, 2017 7:04 a.m. ET
The Mortgage Market’s $1 Trillion Pocket of Worry Nonbanking firms take on bigger share of FHA-backed mortgages Jan. 19, 2017 8:00 p.m. ET
Janet Yellen Sticks to Steady Outlook on Rates Federal Reserve Chairwoman Janet Yellen said she doesn’t see the U.S. economy at risk of overheating and doesn’t expect growth to pick up much soon, comments suggesting the central bank is sticking to its plan of raising interest rates cautiously in the months ahead. Updated Jan. 20, 2017 6:07 a.m. ET
In Retirement, It’s Save Now or Pay (a Lot) Later Given a choice between satisfying our immediate needs and desires or focusing on the future, the here and now typically wins out. That impulse doesn’t bode well for retirement savings.
Updated Jan. 19, 2017 11:31 a.m. ET
Wall Street Analysts Have a New Reason to Say ‘Buy’ The ability to line up private meetings for investor clients has become a vital revenue source for securities firms, increasing the pressure on analysts to be optimistic. Those who recommend selling a company’s stock sometimes are denied access.
Opinion: The biggest threat to your money now? Ignoring the scent of a bear market By Mark Hulbert
Published: Jan 20, 2017 5:20 a.m. ET
Stocks are overvalued; approach with caution and be contrarian
China’s Economy Grows Strongly, Yet Central Bank Eases Policy By KEITH BRADSHER40 Minutes Ago
Rising debt helped fuel growth last year. But the central bank told big banks that they could lend even more during an upcoming holiday period.
In Navient Lawsuits, Unsettling Echoes of Past Lending Crisis By JESSICA SILVER-GREENBERG and STACY COWLEY
The largest U.S. collector of student loan payments is accused of engaging in the sloppiness and misleading tactics seen in the subprime market.
Does Navient Handle Your Student Loans? What Have Your Experiences Been? By THE NEW YORK TIMES
Navient, the nation’s largest servicer of student loans, has for years misled borrowers, according to lawsuits.
Published 8:03 p.m. ET Jan. 19, 2017
Yellen: Lift rates gradually, don't run 'hot' economy
US 10-year yield crosses 2.5% as Trump inauguration looms
The yield on 10-year US government notes has climbed above the 2.5 per cent mark for the first time in more than two weeks as Donald Trump prepares to assume the presidency.
Trump & Brexit vote are boosting economy, says BlackRock’s Fink
The election of Donald Trump and the Brexit vote has helped boost small businesses and consumer spending as previously disillusioned voters feel they finally “have a voice” in the global economic order, Larry Fink has said.
Fading Brexit cheer or just a blip? Analysts react as UK retail sales slump in December
Signs of a slowdown?
Eurozone GDP growth, inflation forecasts get a lift – ECB forecasters
Economic growth and inflation is expected to rise faster than previously expected in the eurozone this year, according to the European Central Bank’s latest quarterly survey of professional economists.
2017-01-20 09:25
Sovereign fund banks on prospects in United States China's sovereign fund China Investment Corp, which manages about $800 billion assets including $200 billion of overseas investments, is actively looking for investment opportunities in the US infrastructure and manufacturing sectors－to graft their products and industries onto the Chinese economy, a senior executive told the World Economic Conference in Davos, Switzerland.
From The Blog-O-Sphere: Here you’ll find postings and research from the likes of Barry Ritholtz’s Big Picture, Pragmatic Capitalism, Kimble Charting and Zero Hedge - along with everything else we stumbled across that WE need to point out … The point of all this is to pass along things that strike us as interesting – even though they may NOT be our very own
Bonds and Equities Are Syncing Back Up Again January 19, 2017by Eric Bush, CFA in
On 11/4/16, the 65-day correlation between between the S&P 500 and US 10-year treasury yields was as negative as it had been at anytime since June 2007. The 65-day rolling correlation was -30% compared to a 73% correlation that had occurred just a few months earlier in June. The negative relationship seems to be short lived as the 65-day correlation is once again moving positive as it is currently 24% and the 22day correlation is now at 50%. The 120-day correlation remains at 0% but will begin trending higher as indicated by the shorter-term correlations. It is worth remembering that the longer term correlation between stocks and bonds flipped after the Asia crisis in the late 1990s. Stocks and bonds were negatively correlated from 1966 to 1998 and since then have been positively correlated as deflation has become a more prominent fear than inflation generally speaking. The four year correlation stands at 30% today and while it is well off the highs of the last several years, the last chart indicates that it is still at an unusually high level since 1875.
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