Thursday Macros
Markets Awaiting Non Farm Tomorrow...But Treasuries Continue to Have A Bid
There were some good flows overnight in the Treasury futures markets, not so much in cash... First there were selling, where one large player bought a chunk of FV puts, those are puts on 5 year futures, this sent 10 years to the overnight high of 1.20... But then we saw a large buyer of 135.5 of TYU calls, those are 10 year futures... And some strong swap receiving and buying in the London space... And as NY has come in, there is more buying... Still we are only up a couple of ticks, but one would have thought the Clarida headlines from yesterday would send the market trending in the higher yield direction.
1) (BN) *CLARIDA: CONDITIONS FOR RAISING RATES COULD BE MET BY END-2022
2) (BN) *CLARIDA SAYS RISKS TO HIS INFLATION OUTLOOK ARE TO THE UPSIDE
3) (BN) *CLARIDA SAYS HE'S BEEN SURPRISED BY SIZE OF BOND YIELD DECLINE
This was enough yesterday to send the 10 year from a low yield of 1.125 up about 10 basis to our support of 1.22... This was the same move of magnitude when the 10 year hit the exact same level two weeks ago and swooshed back to 1.22... If we attack the 1.125 number again, that will be third time testing it, which is usually when it breaks... Next level would be 1.05 and then .99....
Lets keep talking about the Fed... Bullard and Kaplan had interviews with the press yesterday, both continued their hawkish views, no surprise there... But we saw Mary Daly on PBS last night where she said "Tapering could start late 2021 or early 2022"... Waller speaks today, he is the protege of Bullard, and we know he will be hawkish... So the real question now, is whether Clarida was talking Powell's book... And that is why the employment number tomorrow is crucial to where the Fed thinking is... Inflation has been ignored (not Clarida) and the delta variant has not curtailed business as yet, but it could.... As for other Central banks, they are now starting to change their tune...ECB and Fed are still keeping rates at absolute Kelvin lows, but Brazil raised rates 100 yesterday and said they will more than likely raise another 100 next month... BOE said today that they will start selling securities when rates reach 1%...RBA is continuing with there tapering program, And other small CB's ,like the Czech Republic, are thinking about raising... There are probably 10 more...
Employment tomorrow... Expectations remain at 870,000... But there are still three widely known firms that have numbers over 1.15 million....Goldman, Citi, and Jefferies...GS said they may adjust their numbers after the claims today, but said that the reasons for the low ADP number are not the same reasons to reduce tomorrow's non farm...
Corporates continue to come to the party like it is 1999... No worries... Demand remains off the charts and spreads have maintained a solid range..6 companies came yesterday in IG, raising 4.8 billion, bringing the week to date number to 23 billion... We already see a heavy day today taking shape with the Barclay book soaring above 11.5 billion for their 1.5 billion hybrid deal... Investors can not get enough...in Junk, GPS Hospitality sold debt for the first time as 3 issuers priced 1.65 billion... That makes over 11 billion of junk this week... Heck at this rate maybe we should try to sell a junk bond on our commercial building.
The next 26 hours is going to be tricky... While the Fed clearly wants higher long term rates, and Clarida said as much yesterday, our colleagues at Oxford Economics weekly investor survey again showed that most investors are still positioned for higher yields, not lower ones... So unless we get a blowup employment report, expect a back up to be bought... And if we get a squirrelly number tomorrow, then 1% 10 years is not out of the question...
As for equities, we see that GS raised their S+P target to 4700, but our gut feel is that equities are having some major indigestion, so be wary of a 5% corrective move.
