Wednesday Macros
Treasuries Fail to Break Next Level For Now...Backoff.. Fed Inflation Questioned
Hedge funds got the upper hand yesterday after covering their shorts over the last few weeks... They knew that CPI would be high and bet on the old adage "buy the rumor, sell the fact"..otherwise meaning that the CPI would not have the follow through to push yields higher, at least for now...HF thought they could shake out the large short positions from the CTA community... So they bet on the 10 year auction at 1.68, and the long bond auction yesterday, both went well...they got 5 years towards the .83 level, 10 years towards 1.60 and long bonds 2.29, but they have not broken those levels... A Friday close below these yields could lead to an acceleration to .75 5 years, 1.47 10 years and 2.21 long bonds... We still like higher rates for the quarter.
Inflation... Multiple stories out of multiple reporters in the BB space today questioning inflation...almost like the Fed has plants within BB... They seem to be taking the Fed viewpoint that the Fed is still worried more about deflation than inflation... Maybe so, but inflation is real and is not going away, we will tend to discount these stories for now... Fed is up today with 5 speakers... Powell at Noon and Clarida at 3 will be the ones we are focusing on...Even though Kaplan seems the most honest of them for now, looking at the markets from a street perspective, rather then from the academic perspective of Powell and Clarida...
Credit issuance and swap spreads... We talked with one of the BB reporters yesterday in the credit space... By his calculations only 1.35 billion was priced yesterday... We see it closer to 20 billion as we added in super sovereigns like the 8 billion World Bank, IADB of 4.25 billion, JFM and Ontario teachers, among others...most of this, if not all of this, was swapped, which put pressure on swap spreads yesterday and lead to lower yields towards the end of the day...but it was not all good for credit and the 4 billion Tencent deal was pulled off the market because of the turmoil of the Huarong situation in China where government guaranteed bonds continue to plummet, some with yields above 60% in the short end...
Equities...classic... One could see the inverse correlation in full vogue the last few days and the lower yields on the 10 year lead to higher Nasdaq and Faang prices...even though the Nasdaq 100 is up over 8% the last month the Russell is lagging down over 5%, that is a 15% differential ... Big numbers... So much for the rally, and kudos to MS who advised us to sell the Russell about a month ago.
The war continues between hawks and doves in fixed income and bulls and bears in equities... Yesterday the doves did well and made some serious coin, but they could not get the hawks to cry uncle... We expect the war to continue, our opinion is that the hawks will win out, inflation will be a big black eye problem for the Fed and we see higher interest rates, but not today... As for equities, they continue to be steamy, but we do not see the catalyst for a near term correction... So continue to play the ranges and see what today's Fed speak brings...meanwhile we continue to look at a trending move in swaps, so be careful how you hedge
Treasuries Fail to Break Next Level For Now...Backoff.. Fed Inflation Questioned
Hedge funds got the upper hand yesterday after covering their shorts over the last few weeks... They knew that CPI would be high and bet on the old adage "buy the rumor, sell the fact"..otherwise meaning that the CPI would not have the follow through to push yields higher, at least for now...HF thought they could shake out the large short positions from the CTA community... So they bet on the 10 year auction at 1.68, and the long bond auction yesterday, both went well...they got 5 years towards the .83 level, 10 years towards 1.60 and long bonds 2.29, but they have not broken those levels... A Friday close below these yields could lead to an acceleration to .75 5 years, 1.47 10 years and 2.21 long bonds... We still like higher rates for the quarter.
Inflation... Multiple stories out of multiple reporters in the BB space today questioning inflation...almost like the Fed has plants within BB... They seem to be taking the Fed viewpoint that the Fed is still worried more about deflation than inflation... Maybe so, but inflation is real and is not going away, we will tend to discount these stories for now... Fed is up today with 5 speakers... Powell at Noon and Clarida at 3 will be the ones we are focusing on...Even though Kaplan seems the most honest of them for now, looking at the markets from a street perspective, rather then from the academic perspective of Powell and Clarida...
Credit issuance and swap spreads... We talked with one of the BB reporters yesterday in the credit space... By his calculations only 1.35 billion was priced yesterday... We see it closer to 20 billion as we added in super sovereigns like the 8 billion World Bank, IADB of 4.25 billion, JFM and Ontario teachers, among others...most of this, if not all of this, was swapped, which put pressure on swap spreads yesterday and lead to lower yields towards the end of the day...but it was not all good for credit and the 4 billion Tencent deal was pulled off the market because of the turmoil of the Huarong situation in China where government guaranteed bonds continue to plummet, some with yields above 60% in the short end...
Equities...classic... One could see the inverse correlation in full vogue the last few days and the lower yields on the 10 year lead to higher Nasdaq and Faang prices...even though the Nasdaq 100 is up over 8% the last month the Russell is lagging down over 5%, that is a 15% differential ... Big numbers... So much for the rally, and kudos to MS who advised us to sell the Russell about a month ago.
The war continues between hawks and doves in fixed income and bulls and bears in equities... Yesterday the doves did well and made some serious coin, but they could not get the hawks to cry uncle... We expect the war to continue, our opinion is that the hawks will win out, inflation will be a big black eye problem for the Fed and we see higher interest rates, but not today... As for equities, they continue to be steamy, but we do not see the catalyst for a near term correction... So continue to play the ranges and see what today's Fed speak brings...meanwhile we continue to look at a trending move in swaps, so be careful how you hedge
