Mar 16, 2018 - We will spare you that here and now (but may lean that way over the weekend ... to let this moment, 10yrs
The BondBeat Friday, March 16, 2018
See GP disclaimer HERE
What’s On OUR Minds On this 10th anniversary of JPM and Bear’s shotgun wedding we pause and reflect back on the past 10 years … LIFE moves forward and personally, the last decade has been, well, like any other out there. Extreme highs and yeah, some lows too but by and large, 10yrs of growth as a person and as a family has been rewarding. From a BUSINESS or markets perspective, well, Larry Kudlow prob had a better call than we did and at least we’re intellectually honest about it … perhaps to a fault. It is far easier to criticize (Kudlow … yeah he said to BUY STOCKS in 08) than look at our OWN calls and process of thought. We will spare you that here and now (but may lean that way over the weekend as we continue to let this moment, 10yrs ago today and how it is we got HERE. NOW … ) and we’ll remain IN THE MOMENT .... It is with that in mind, we’re going to look at a few things that are probably going to be big’ish talking points … Yesterday’s TICs for example … and we’ll do this here and now as we’ve not YET updated our POSITIONS.pdf to reflect all of this…. FIRST, we’ll point you TO the RTRS story in our bullets this morning as THEY have a visual of China (selling) and JAPAN (buying). FACT. China SOLD. Turning to some (BBG)SPIN … may or may NOT be worthwhile to look at the TICs data on top of the Fed’s own CUSTODY HOLDINGS … BBGs MLIV team had this up right AFTER the data 16:12 Don't Believe the Hype On China Treasury Sales No doubt those with of a certain tabloid mentality will crow about the decline in China's U.S. Treasury holdings, but don't believe the hype. After all, there was a pretty sharp sell-off during the month, so it could have well been a trading decision per some of the commentary a couple of months ago. More to the point, the Fed's own custody holdings of bonds on behalf of foreign central banks unsurprisingly tracks trends in China's own ownership reasonably well. And after a pause earlier this year, those holdings have re-accelerated again. That's hardly indicative of an institutional buyers' strike that's a prelude to crisis, now is it?
Note THEY offered up a shorter 5yr look. Correlation DOES strike us as tight … OR said another way, is only a recent divergence … which joins many OTHER RECENT DIVERGING visuals … we’ll spare you a look at USDJPY and 10s (have at this mornings STUFF.pdf and BMOs closing thoughts if you’d like) As is ALWAYS our desire … keeping things in context, lets take BBG visual above and give us all 10yrs for context
Gets MORE INTERESTING, no?
The BLUE LINE there is a more current and WEEKLY POINT OF DATA we receive from the FED. It is ALWAYS on our POSITIONS.PDF … While we have NOT YET updated it, here is copy of what WILL be up there over the weekend -- and NOTE in this instance we revert back to ONLY 5yr look:
Someone’s buying and perhaps there’s an issue with HOW the data is collected or reported. Or both. WE KNOW WHAT WE DO NOT KNOW. We then move along … and apologize ahead of time for bringing forward another look at LOIS. You need another SKYS FALLING -- LOOK AT LOIS RISING -- visual like you need someone else telling you about BITCOINS impending death cross. Still it fits along with our consistent process of thought to frame it AGAIN as NOTHING happens without consequence. To this we inject another from BBGs MLIV from yesterday MORNING 10:22 Libor-OIS Leads to 'Face-Ripping' Dollar Rally? Not Necessarily A chart making the rounds suggests that the dollar may soar as the Libor-OIS spread reaches a six-year high. In a twitter post, Raoul Pal, founder of Global Macro Investor, said the spread leads the dollar by three months: ``It suggests there is the possibility of a face-ripping $ rally. Not a prediction, but add it to 'interesting to watch,'" he wrote.
Historically, widening Libor-OIS spreads pointed to dollar funding stress, which supported the U.S. currency periodically. The difference this time, however, is that the spread reflects more supply of government bills and commercial paper, as Cameron Crise explained. There's the price of dollar and there's the quantity. The cost of dollar borrowing is rising because there are more borrowers, not because there's acute demand for dollars. As Richard Jones notes, the stability in basis swaps suggests that there's no shortage of the greenback:
The dollar indeed may be getting a respite after the relentless selloff at the beginning of the year. Risk appetite for overseas assets is souring. Growth momentum in Europe is slowing. The FOMC next week could turn hawkish. All these are encouraging developments for dollar bulls. But Libor-OIS may be the wrong place to look until the dollar actually is in short supply. Ye Xie Markets Reporter, New York STABILITY. FUNDING COSTS. USD … face ripping rally? TRUMPS injecting USD uncertainty almost DAILY via his twitter feed … How about we offer this from SocGen (also on this mornings STUFF.pdf)
March 15, 2018
FI WEEKLY Optimism wanes ...… Is the rise in front-end rates an implicit rate hike? The sharp increase in bill issuance and the rise in bill rates have put pressure on all front-end money market rates. The availability of collateral has exerted pressure on general collateral rates, while bills across the curve are now trading cheap relative to OIS (see Graph 3). Libor rates and other credit instruments that are closely linked to Libor, like commercial paper (CP) and floating rate notes (FRNs), have also risen sharply (see Graph 4). While there has been good demand for the additional supply of bills from money market funds (MMFs) and reserves managers, this has come at a price borne by the Treasury. With net bill issuance widely expected to top $400bn, we think issuance will continue to pressure the front end, with the seasonal increase in bill supply not likely to ease until April, when tax receipts start to come in. This could have a meaningful impact going into quarter-end, when money market rates typically come under pressure owing to balance-sheet constraints.
The impact does not seem to be limited to front-end money market rates – just over the past week, the 2yT rate has moved 3bp higher (from 2.25% to 2.28%) without a meaningful re-pricing of the fed funds path. Fair value for the 2yT, consistent with the path currently priced in for the fed funds rate (see Graph 5), is 2.22%. The 2yT is therefore trading roughly 7bp cheap to fair value, likely expressing some of the recent supply/demand pressures at the front end of the curve….
NO problem. NO funding stress just SUPPLY RELATED. OR … a problem … whereby we can clearly see … or think about how higher front end rates simply ARE doing gods work … um, we mean the FEDs work for it and yet we’re still talking about 3 becoming 4 on next weeks DOTS?? Said another way … have a look at The Belly -- as we did in this mornings TECHS … 5s vs 3s7s on a WEEKLY basis … maybe 5s have been holding in better than you think and, importantly, have some more room to run? We’ll end the week then NOTING anothers contrary call -- TD out with a STEEPENER yesterday … and yes, this too is on this mornings STREETSTUFF.PDF We GET why it is they offer that AS A TRADE and part of us agrees in principle BUT … we ALSO are sympathetic TO a Fed that seems to be on a mission to invert the curve, talking UP DOTS and the sell-side (and world, really) seems to be buying in whole-heartedly. A SURPRISE, then, COULD set The Belly en fuego and so here is a longer-term DAILY look at 5s30s for some context
The only thing we’d point out before hitting send is that 5s30s on this day 10yrs ago was just NORTH of 200bps on it’s way TO just over 100bps over the course of the next 90days. On THAT note, we’ll quit while we’re behind and crawl under the same rock we used for shelter 10yrs ago today … Wish YOU a great start to the day and end to the week! Best, Saul/Steve
Items of Interest
EconoDay Economic Calendar AND, ripped from the BBG:
Bloomy’s Fed-speak Calendar March 12th, 2018
GPs Key Econ Indicators January 16th, 2018 -> 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 10th, 2018- > 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 11th, 2018-> 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 March 16th, 2018 -> 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.
MMO for March 12, 2018 The Treasury surprised us last week by boosting the size of the 4-week bills yet again. In retrospect, we did not give enough weight to the Treasury’s desire to hold enough cash to cover five days of prospective outflows. That guideline has been essentially irrelevant for much of the past year due to debt ceiling constraints, but last month’s long-term debt ceiling fix gave the Treasury more flexibility in managing its cash reserves.
In The Press NOW:
March 15, 2018 5:30 a.m. ET
Trump Considers Measures to Pressure Beijing on Trade
The Trump administration is putting together a package of anti-China measures, including tariffs on at least an annual $30 billion of Chinese imports, to pressure Beijing to end requirements that U.S. companies transfer technology to Chinese firms. Updated March 15, 2018 10:27 a.m. ET
Economists Worry a Trade War Could Derail U.S. Growth Economists estimate President Trump’s steel and aluminum tariffs will reduce U.S. employment only modestly, but increasingly worry that foreign-trade disputes could escalate and damage the U.S. economy. Updated March 15, 2018 10:02 a.m. ET
Economists See Steeper Fed Rate Path, Stronger Inflation
Economists nudged higher their forecasts for how much the Federal Reserve will raise short-term interest rates this year to keep inflation under control as the economy strengthens. Updated March 16, 2018 6:20 a.m. ET
Global Shares Pause Amid Political Drama Stocks lacked a clear direction after a week marked by political drama, with discussions about new U.S. trade policies still dominating markets. March 15, 2018 1:59 p.m. ET
King Dollar Is Really Just a Grand Duke Strong-dollar advocates are on the march in the Trump White House. But the president’s policies could almost be designed to weaken the greenback Updated March 15, 2018 8:05 a.m. ET
To Lure Amazon, Cities Offer Perks but Unleash Unintended Demands U.S. cities vying for Amazon’s second headquarters risk facing an unexpected consequence to victory: Other companies will demand the same hefty tax breaks conferred on the online retail giant.
Why the Tax Law Might Make Your Car Payments Go Up The United States just started another epic borrowing binge. And if you borrow money — through a credit card, a mortgage or an auto loan — you could end up paying the price.
Toys ‘R’ Us Case Is Test of Private Equity in Age of Amazon
The toy retailer is another failure of financial engineering, one that could portend a potentially more ominous outlook for private equity in the digital era.
Mueller Orders Trump Business to Surrender Files on Russia
By MICHAEL S. SCHMIDT and MAGGIE HABERMAN It’s the first known time that the special counsel, Robert S. Mueller III, has demanded that documents directly related to President Trump’s businesses be turned over.
March 16, 2018
Trump decides to remove national security adviser, and others may follow In yet another jolt to the senior ranks of his administration, President Trump is ready to remove H.R. McMaster but is willing to take his time to ensure that the three-star Army general is not humiliated and that he has a strong successor lined up, according to people familiar with the plans. New sanctions are Trump’s strongest move against Russia but fall short of what Congress wanted The sanctions follow months of criticism that the White House has been slow to counter Russian aggression. But the steps taken fell well short of the full penalties Congress has authorized.
Toys R Us struggled in part because we’re not having enough babies. What does that say about the nation’s future? It’s really hard for an economy to grow when the birth rate is declining.
Analysts: Toys R Us might have survived if it did not have to deal with so much debt After a private-equity takeover, the retailer devoted precious resources to paying off $5 billion.
Stay woke or we’ll have another financial crisis It's not lost on consumer advocates that Congress is loosening rules for big banks on the 10th anniversary of the start of the financial crisis.
In a time of high demand and limited inventory, spec houses are making a return Constructing unsold homes can have risks and rewards for both developers and buyers.
Updated 5:04 p.m. ET March 15, 2018
Toys R Us files for liquidation, likely spelling its end in the U.S. Published 2:15 p.m. ET March 15, 2018
Homeowners gained average of $15,000 in home equity last year – or $908 billion in total
Eurozone inflation nudged lower
Inflation in the euro area was slightly cooler than previously thought in February, according to the final reading of prices by Eurostat.
BoE warns of ‘material risks’ from Brexit
The Bank of England warned that regulatory authorities and politicians in both the UK and the European Union are not doing enough to prevent the “material risks” of disruption presented by Brexit that are hanging over vast numbers of financial contracts such as derivatives contracts and insurance policies, even if a transitional arrangement is agreed.
Investors pump record $43bn into global equities market Global investors ploughed a record $43bn into stock funds and ETFs in the past week, with an inflow that exceeded the previous record set after the 2016 election of Donald Trump.
US to unite G20 allies against Chinese ‘national security threat’ 16 Mar 2018 - 6:09am
Updated: 2018-03-16 06:50
Risk tempered by economy's steady success, experts say
Foreign investment sees growth momentum US largest business lobbying group warns Trump against potential tariffs on China 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…
THURSDAY, MARCH 15, 2018
10 key charts updated The economy grew 2.5% last year, which is a bit stronger than its annualized rate of growth during the expansion which began in mid-2009, and there's evidence that growth picked up a bit over the course of the year, likely due to a significant increase in business and consumer confidence. Regardless, my reading of the market tea leaves suggests that the market's expectation for future growth is only slightly higher than what we've seen in the current expansion. Although the sharp cut to the corporate income tax rate has found its way into a substantial rise in stock prices (because reducing the tax rate means that the discounted value of future after-tax earnings translates into a one-time boost to current valuations), the market has yet to price in a substantial increase in future growth fueled by the increased investment and jobs creation that the tax cut was designed to achieve. (And to be sure, there is still no convincing evidence of a significant pickup in business investment.) The market is moving in an optimistic direction, of course, as witnessed by rising real and nominal yields, but we're still in the early innings..
Chart #7
Chart #7 compares the real and nominal yields on 5-yr Treasuries (red and blue lines) with the difference between the two (green line), which latter is the market's expectation of what the CPI will average over the next 5 years. With 5-yr inflation expectations today at 2.15%, the market is reasonably sure the Fed will be able to hit its 2% inflation target (on the core PCE deflator, which tends to run about 30 or 40 bps lower than the CPI). Looking ahead, the market sees pretty much the same amount of inflation that we have seen over the past few decades. The market is thus fairly confident that the Fed is not going to do much going forward, and whatever it does, the Fed is unlikely to be too tight or too easy. You may not agree with that assessment, but that's what the market tea leaves are saying. Chart #8
Chat #8 shows how sensitive the stock market is to bouts of anxiety, as proxied by the ratio of the Vix "fear" index to the 10-yr Treasury yield. The latest market correction was triggered earlier this year by concerns that rising nominal yields might threaten economic growth, but that quickly faded, only to worry more recently that Trump's tariffs might spark a global trade war. Whatever the case, the market is not very worried these days, nor is it very optimistic.
…As I noted last October, and as has proven recently to be the case, rising growth
expectations would almost surely result in an unexpected rise in real and nominal interest rates. Higher-than-expected rates would depress bond prices, and, in similar fashion, could depress the market's PE ratio (which is the inverse of the earnings yield on equities, and thus similar to a bond price), thus limiting further gains in equity prices to a rate that is somewhat less than the increase in earnings. The days of booming equity markets are fading, but there is still decent upside if and when the market begins pricing in faster growth and the business community follows through with increased investment and faster jobs creation. Meanwhile, there is no obvious reason to worry about a recession or a major stock market correction.
