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The BondBeat Tuesday, October 24, 2017

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 BBG: Euro-Area Companies Expand Workforce as Order Growth Picks Up

 BBG: Bond Traders Are Piling Into a Fed-Proof Bet  BBG: Taylor’s Walk on Supply Side May Leave Him More Dove Than Yellen

 BBG: BOE Policy Makers Will be Wary of Making a Premature Hike  ZH: Gundlach Warns "The Order of The Financial System Is About To Be Turned Upside Down"

 Vanity Fair: Will Trump Oversee the Financial Apocalypse?  ZH: The One Economic Indicator That Is Making Goldman Turn Bearish Quick (& clickable) Links:

Items Of Interest

What Happened Overnight

GP Documents:

Tue 10/24/2017 5:25 AM

Bloomy/EconODay Calendar

StreetStuffWkly 10.23.17

Steeper and CHEAPER on relatively decent volumes. Europe leading this morning (or perhaps just catching down) as risk mkts mixed-topositive. EZs private sector growth remains FIRM – HIS Markit COMPOSITE FELL TO 55.9 from 56.7 and missed expectations (56.5) but fear NOT … as NOTHING can seemingly dent optimism and determination of stock jockeys (?). Their unbridled optimism seems to be taking a bit of the wind out of the bond market sails … Perhaps Gundlach’s Vanity Fair comments have something to do with it, too. See below for link thru to story AND ZH spin. In short, he’s BEARISH and now we’re staring right at CitiFX levels. This morning they write, “2.392.40% is HUUUUUGE on the US 10 year yield” … break higher HERE and 2.63 next…And so, steeper and cheaper it is as we head in this weeks supply – 2s this afternoon after USs Markit PMI and Richmond Fed Mfg. Get those bids in early and often…?

Technicals 10.24.17

What’s On OUR Minds

- Econ Indicators - 5yr & Under - ML Index Spreads

- Pivots (end of TECHs)

POSITIONS UPDATES

Specs RECORD SHORT 2s and 5s

StreetStuff 10.24.17

We are once again silenced, generally speaking, in awe of the markets seemingly and relentless move cheaper and steeper and while it feels as though its one of those moments where the price action is now becoming more of the story than any story CAUSING price action, we cannot help but offer a couple of conflicting visuals that give US reason to pause (and to consider where/how/WHEN to fade this move).

First, yesterday’s CFNAI -- MA3 …

This is FAR from ‘good’ while not necessarily SCARY BAD either, it feels as though the move in rates is NOT being driven by these 85 data points. Taking a bit of a deeper dive into ONE of the data points … C&I lending ...here WE look at the outright level as well the YoY rate of GROWTH

Best WE reckon after more than a handful of discussions with bankers, these C&I loans are what finance the (small)business cycle … Or not.

Be that as it may -- too much / deep a thought process for this moment in time? We’re all left staring AT 10s nearing 2.40, which was just recently described by CitiFX as, “HUUUUUGE on the US 10 year yield. A break of this resistance (close) would strongly suggest a move to re-test the trend highs at 2.63-2.64%. This follows a positive outside month in September throughout the curve (2’s, 5’s and 10’s) for the first time since May 2013.” For THAT and some of our own visuals of 2s to consider as we think about this afternoons auction, have a point and click up and through today’s HUUUUUUUGE Techs.pdf No way to sugar-coat them. The POSITIVES are the FACT that we’ve now got an outright concession AND specs are RECORD SHORT -- which makes sense as we consider negatives. The Fed is about to undergo change of leadership (?) as they continue to wind down the balance sheet and contemplate further tightening … With so little ELSE to add here / now, we’ll hit SEND and wish you a GREAT start to the day and as always, stand ready to help as you plan your 2yr auction trades and TRADE your 2yr auction plans! Best, Saul/Steve Items of Interest

EconoDay Economic Calendar AND, ripped from the BBG:

Bloomy’s Fed-speak Calendar OcTAPER 23rd, 2017

GPs Key Econ Indicators October 2nd, 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 October 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 October 11, 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 OcTAPER 24th, 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 SELL-SIDE 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 OcTAPER 23rd, 2017 Here’s what we passed along over the weekend, we’d kindly point your attention TO the following: “…More immediately germane to the Treasury market will be near-term supply considerations. Starting on Tuesday, we will see $26 bn 2s, followed by $34 bn 5s, and a $28 bn 7-year auction to cap the supply cycle for October. This gross supply figure of $88 bn is made far less troubling by offsetting maturities totaling $81.9 bn which will leave the net new cash needed to fund supply at just $6.1 bn – the lowest since January. The backup in yields has improved the prospects for the auction process and the Treasury Department is no longer tasked with selling bonds at the highs. That said, we’re cognizant that if the market breaks down beyond the 2.40% level in 10-year yields, there may be a significant enough tone-shift to keep aggressive bidding at bay as investors look for better buying opportunities closer to month-end…To be clear, we’re not advocating an immediate long as the shift in Fed messaging is material and has the potential to put even more pressure on 5s in the medium-term. Rather, we’ve noted previously that 5s respond to changes in Fed messages relatively easily and we’d look for a continued cheapening in the 5-year sector, and perhaps the November auction or a Taylor chair announcement, as a spot to pick a long...” -BMOs weekly, “Beltway Brinkmanship” “...Conversations we are having with clients: Peak growth and drawdown potential ...Our economists expect that US GDP will continue to grow at a healthy rate but decelerate from 1H 2017. Following 2Q GDP growth of 3% and September US CAI at 3.6%, they forecast real GDP growth of 2.5% in 2018. Our economists also estimate that easing financial conditions this year have boosted GDP growth by 50-100 bp. This tailwind is unlikely to persist as the Fed continues to tighten. However, in the near term investors may discount any volatile economic data releases as a consequence of recent hurricanes...The biggest risk to equity market valuation is rising interest rates. Our economists believe that the Fed will hike in December and four times next year, while market pricing implies 2-3 by year-end 2018. Rising rates should weigh on equity valuations, just as P/E multiples compressed during the last three hiking cycles. However, since the Fed began hiking in December 2015 the S&P 500 forward P/E multiple has expanded by 10% to 18.5x. Rising inflation data or a hawkish shift in messaging from any of the major global central banks could lift long-term bond yields and spark a sharp valuation unwind. Financials should benefit from stronger activity and rising rates...Ample buyback capacity also reduces the risk of near-term drawdown. Policy uncertainty and lack of “dip” to buy explains the 16% fall in S&P 500 buybacks in 1H 2017 vs. 1H 2016. However, authorizations are up 18% YTD. Weak stock prices would be countered with buybacks, buffering downside…” -GSs US Weekly Kickstart, “...30 years after Black Monday, nervous investors search for the cause of the next drawdown”

“...I don’t think providing the averages of the up and down moves is so relevent – a couple of years really have an overpowering influence. In other words, I’m not comfortable even hinting that the ‘average’ gain is about 36 bp and the average drop in yields is about 28 bp, but there you go … don’t have a strong opinion. My thoughts are that yields are consolidating off of generally oversold conditions and can gyrate without much direction, at least not enough to capture more than a few bp worth of interest, as we wring our hands over, amongst other things, 1) the next Fed chairman, 2) the state of tax reform, 3) whatever is going on with healthcare, NAFTA, Catalonia, jeez, Tillerson and data which, to cite the Beige Book, affirms modest and moderation in all things. Again, with Dec Funds giving 80.2% odds for a hike, June going for most of another hike, I think it’s fair to say the ‘worst’ is priced in for now. I’m not sure what else the market is focusing on. Fishing around, there’s JPY vs. 10s which, per the chart that follows, looks bullish JPY and the correlation is clear. Again, I’m not chasing a rally in a big way -- maybe 10s can move to 2.23+% -- and more inclined to be a little defensive, certainly into strength, per my seasonal concerns expressed earlier…” -David Ader/Seasonal Historic Patterns Take a Holiday

StreetStuff OcTAPER 20th, 2017 TRADE IDEAS: NatWEST – LONG 5s Barclays: Trade Recommendation: Long OTR 3s versus Old 3s” DB: Trade Recommendation - Leveraged 2s/10s flatteners SocGEN: Sell 7yT in 3s7s10s Treasury fly

StreetStuff OcTAPER 24th, 2017 BMO: “As a result, we’re still leaning into longer-term flatteners but are wary of 2s/5s steepening moves that may arise from the outcome of a hawkish Fed conversation next week, a less-dovish than expected ECB missive on Thursday, or further progress on tax cuts. Should any of those offer steepening events, we’ll hopefully achieve levels that offer a better risk/reward as we leg into flatteners. A final concern for a longer-end steepening (5s/30s) could also be the Treasury refunding on November 1st and whether the document will contain anything more substantive on the possibility of ultra-long issuance. While that may result in a knee-jerk steepening, we’re not confident it will be truly durable and aren’t fans of ultra-long supply.” Citi Global ECON View: “ECB QExit Strategy: more patience than confidence” DB makes “The case for Powell as Fed chair … We appear to be coming down to the wire in the Fed chair selection process. The president has indicated he intends to make this decision before he leaves on his next trip abroad on November 3. Based on various news reports and “chatter” emanating from around the White House, a five-way race has narrowed. The President did mention over the weekend that Janet Yellen is still in the race, as are a “few” others. In our book, Yellen comes ahead of the other candidates, but if she turns out not to be selected, attention is focusing increasingly on Jay Powell and John Taylor. Recent chatter also seems to suggest a tandem is possible, with one of these two serving as chair and the other as vice chair. In this note, we argue that a Powell-led Fed makes more sense…” DBs Alan Ruskin discusses REACTION FUNCTIONS of FED, “…iv) Most important: the differences in policy approach between Taylor and other candidates will be more important when growth slows, than currently in the current upturn. In current circumstances it is expected

that the Fed's institutional depth will depersonalize some of the decision making, at least when growth is near trend. However, in a slowdown, it could make the world of difference how a Fed Chair approaches unorthodox policies. Given serious concerns that the near zero slower bound on rates will be tested in the next recession, the approach to QE (and Taylor's views on "diminishing returns to QE") could become enormously important. Similarly, Taylor or Warsh would represent a significant diminution in 'the Greenspan put'. The market's knowledge of this should immediately add to longer-dated implied volatility…” GS on COPPER in 2018 – GOING HIGHER

GS on BOJ: “No changes expected, but watch for a possible proposal for additional easing at the next MPM”

Technicals OcTAPER 24th, 2017 w/PIVS: 5s vs 2.01; 10s vs 2.37; 30s vs 2.89 Daily Pivots are RESISTANCE What you’ll find and WHY you’ll wanna point/click:  

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   

GP: on 2s ahead of auction, OUTRIGHT breaking HIGHER, very little else to add … On a RELATIVE basis (vs 1s3s), spread just north of the middle of its RANGE. SPECS. RECORD. SHORT…. Amherst Pierpont: S&P500 Overbought...Does It Matter? With the equity market seemingly oblivious to risks of less stimulative monetary policies and global events, the S&P500 RSI shows the most overbought condition since March 1, although the consolidation at that time was a simple flattening process (correction in time) rather than a significant correction in price. BBG: EUR/USD Top Reinforced After Key Resistance Line Defended Again BMO (on 2s): A broad upsloping channel in 2s that started after the Trump election is nearby in a selloff and offers strong support at 1.658% which also coincides with a very tight channel that started in September. Past that level, we also see 1.733% as a support that held in a few instances in 2002 and 2003. A Bollinger band top provides first support at 1.564% which is very close to nearby levels. On a rally, we have the first significant resistance at previously conquered support of 1.448% which was major resistance in 2003 and 2008. Levels past that include the 50, 100 and 200 day moving averages at 1.397%, 1.373% and 1.310% respectively. 1.310% also is the aforementioned channel bottom and will provide very stiff resistance in a large rally. RSIs and stochastics both look well into oversold territory but have looked oversold for some time now. CitiFX: 2.39-2.40% is HUUUUUGE on the US 10 year yield. A break of this resistance (close) would strongly suggest a move to re-test the trend highs at 2.63-2.64%. This follows a positive outside month in September throughout the curve (2’s, 5’s and 10’s) for the first time since May 2013. CitiFX: EURUSD pushing on good support levels … 1.1730: Recent low and possible short-term double top neckline. A break would suggest a move towards 1.16. Such a move, if seen, would take us below more important supports at Natixis on 10s: It will take a recovery back above the resistance at 125.09 to lessen the risk of a pullback below the major support levels around 124.23-124.25. Natixis on 30s: A pullback below the support at 151.14 is unlikely. Watch out rather for rebounds towards the major resistance at 152.29. A breakout above this last level would reduce selling pressures

MMO for October 23, 2017 …October Employment Report The payroll data that are due out next Friday are likely to show a substantial rebound after the September decline. We look for an increase of 300K, but we consider that forecast to be conservative. The net change over the September-October period would be just 267K, which is 50K to 100K less than would have been implied by the trend in place before the hurricanes. If anything, the risk is that October will see a more complete snapback than we currently anticipate. If we are going to have a large miss this month, it is likely to be on the high side of our 300K estimate rather than the low side. The weekly jobless claims numbers are a major reason why we think the risks in the October payroll data are skewed to the high side. Both initial and continuing claims had reached 40-year lows prior to the storms, and both have fallen even further this month – despite the fact that claims remain slightly elevated on balance in the states that were directly affected by the hurricanes. While the initial claims figures are not closely correlated with payrolls on a monthly basis, they both reflect the same broad trends in labor market conditions. And in this particular case, the rapid reversal of the spike in jobless claims suggests that the September disruptions were largely transitory. In The Press NOW:

Oct. 24, 2017 5:30 a.m. ET

ECB Must Strike Right Balance in Scaling Back Bond Purchases European Central Bank President Mario Draghi overcame fierce resistance three years ago to roll out a historic bond-buying program. Ending it could be an even more delicate task. Updated Oct. 23, 2017 7:00 p.m. ET GOP Faces Tough Decision on Bipartisan Health Bill Republicans will decide in coming days whether to embrace or set aside a bipartisan health bill, a decision potentially made harder by President Trump’s statements praising the effort but opposing the bill itself

Oct. 23, 2017 7:38 p.m. ET

U.S. Ports Busy With Imports for Holiday Shopping Waterborne shipments rose 4.9% in September over last year, research firm says

Oct. 23, 2017 7:15 p.m. ET

Dividend Fears Take Toll on GE Shares Shares of General Electric took another pounding, reflecting investor fears that a conglomerate that was once the bluest of blue chips faces challenges daunting enough to force a dividend cut.

China’s Entrepreneurs Squirm Under Xi’s Tightening Grip

The Communist Party increasingly asserts its authority over business leaders, weakening their drive to invest and eroding confidence in the country.

Trump’s promises leave GOP with fewer options on tax bill The president’s pledges, including a vow to not touch tax benefits for 401(k) retirement plans, add to the pressures lawmakers face as they try to deliver big tax cuts while minimizing the effect on the deficit.

Treasury Department sides with Wall Street, against federal consumer watchdog agency on arbitration rule The Consumer Financial Protection Bureau, a watchdog agency, has moved to block such clauses. Lawrence Summers: The Business Roundtable’s outlandish tax cut claims

Published 7:02 a.m. ET Oct. 20, 2017 | Updated 11:07 a.m. ET Oct. 23, 2017

2018 Social Security check might not grow after Medicare hit

Sign of a top? US households increasingly bullish on stock prices

It is one of the great Wall Street legends: Joe Kennedy managed to dodgethe 1929 crash by exiting the market when the person shining his shoes began dishing out tips Comparisons can be drawn to the current state of the equities market in which non-professional investors have become increasingly bullish as stocks relentlessly climb to new peaks.

S&P to UK consumer lenders: The good times won’t last forever

Analysts at S&P Global Ratings have warned companies offering consumer loans to be careful not to let attractive returns cause them to excessively loosen their underwriting standards, echoing cautious remarks from the Bank of England.

Gauge of eurozone business conditions slips more than forecast in October

A measure of business conditions in the eurozone fell more than expected this month, with executives in the services sector reporting a slowdown in activity growth

Rents in most cities globally are too high 24 Oct 2017 - 5:31am

China growth and global inflows to drive HK stocks rally into fourth quarter 24 Oct, 4:49am

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… See GP disclaimer HERE