Curve Flattening as Big Banks Up Fed Rate Calls...Bostic... Month End
Big Banks upped their calls for the number of rate hikes over the weekend... Goldman, JPM, and Wells all went to 5.. Bank America went to 7... And Rafael Bostic, in an FT interview, had a headline that said the Fed could go 50 in March... Although if you read the article, his base case is 3 rate hikes of 25 this year, very different from the headline... Similar to Powell non comments last week trying to leave optionality on the table... The WIRP on BB went from 4.75 hikes in 2022 on Friday to 4.95 today, effectively 5... We remain in the camp that Powell is still a Dove in Wolf's clothing, and will likely not do more than 4... But there are outliers calling for 50 in March (Nomura) and some talking 75... We do not see that happening...
There are two markets this week, the end of the month today and the outlook for the rest of the week... Big Boys in equities are getting more bearish and some scared... Goldman's Kostin is worrying that his 5100 S+P End of Year level is looking too aggressive... Morgan Stanley's Wilson, the bear of the last few years, is doubling down on his call of S+P 4000... Now lets go to today.
Overnight treasuries flattened and the 10 year Bund, the last remnant of negative rates in the 10 year sector, is back to zero. The front end of the treasury curve responded to the call of additional rate hikes from the big banks mentioned above... No records were hit, but the 2/10 and 2/30 flattened further... The forward 2 year 2/30's inverted, but cash is still well positive...10 years hovered in a range of 1.77-1.80... If the long end continues to stay in a range, partly on the theory that the Fed is trying to overcompensate for not moving last year, and could potentially send the economy into a recession, than maybe long rates will be more range bound than the market thinks... This is not our call, but that is out there... An old partner of mine from 20 years ago, sent a message Friday that said Kashkari made the following comment last week
Kashkari wisdom... seems he said that he is comforted by the fact the long end is supported, suggesting "seeing long yields it seems we are not that far away from neutral". We could not find the quote anywhere so take it with a grain of salt... But if the long end stays stable than would a 2% 2 year send the economy into recession?... Not likely...
Equities were range bond overnight,,, they just started to head towards their lows with S+P down 20 points...But with S+P down 7% this month and Russell 2000 and Nasdaq down 12% this month, respectively, coupled with the US aggregate of bonds down a little over 2% this month, we WOULD EXPECT TO SEE A BIG REALLOCATION FROM BONDS TO STOCKS TODAY, BEING THE END OF THE MONTH... So today may not be a good indication of how the week ends...
Employment numbers become more important this week as that is now the Powell backbone justification as to how high he can raise rates... If he sees problems in the employment picture, he could balk about raising aggressively... Wrightson points out that the BLS will introduce new population controls derived from the 2020 Census... This will affect the seasonal's and could alter the numbers ... Meanwhile Atlanta First quarter GDP is either side of zero, well off the fourth quarter of 6.9% of last week... Powell focuses on Jolts data, which comes out tomorrow...Barron's has an article saying that Covid skews the Jolts data..."Vaccine mandates, along with associated firings for not getting vaccinated and Omicron related absenteeism , all combine to skew Jolts data..".
Rates...10 year has been in 1.70-1.90...currently 1.80... 2 years are above 1.20, with our near term objective of 1.31... 5 years are holding in , refusing to break 1.70... And keeping the 5/30 curve honest for now in the mid 40's... There has been a massive about of 5/30 flattening trades put on in the futures space...we have support at 35... And resistance at 58...
Credit... Corporate spreads have been widening and issuance has been off.. We expect 20-25 billion to come to market this week, but that could either soar to higher numbers or reverse...Our friend Lisa Abramowicz of BB wrote an article that we will forward shortly "Credit Traders Lack Edge in Fed's New Regime"... Interesting...starts off with "Credit traders are accustomed to being regarded as the smartest in the market's room."... We like that because our day job is trading credit...She goes on to say that credit spreads are below what the highs were for junk bonds in 2021...we disagree using the CDX HY index which broke through the highs of 2021 and to the highs of late 2020.. Given the widening today to 348, we see the next support level on the charts of about 410... So the widening has begun, but buying continues... But our trading desk still thinks there is fear in the liquidity of the corporate bond market... As we have said over the last 5 years, big banks have taken away balance sheet and VAR from trading desks due to the Fed and their manipulation of rates...it will take some time and profits for it to return...
Expect another very choppy week... We would like to say the worst of equity trading is behind this, but not until we see some light at the end of the tunnel of fear... Have a good week...
