Monday Macros.....
Will The Fed Back Up The Transitory Mantra 10 Year Treasuries Are Telling Us
We think there is a good chance of a less than Dovish surprise Wednesday, but first to the overnight markets... Treasuries are marginally lower and equities mixed, with the Nasdaq continuing its strength.. The Dow stocks, dominated by banks, continue to be marginal at best. Overseas equities continue to show strong ETF inflows as US strategists recommend Europe as Europe is at a better spot in the cycle to expand at given the vaccination outlook...Expect 20-25 billion of corporate issuance this week, mostly before the Fed meeting announcement Wednesday afternoon...
The Fed... This is clearly the focal point of this week... We doubt they say much, possibly some mumbling about tapering, but nothing significant.. The Dot plots could send a more Hawkish message than the treasury market is anticipating. Both JP, Stanley, and TD are recommending to be short given where we are in the rates spectrum... But what few are talking about is whether the Fed will change their rates of IOER and RRP... Given the technical's of the markets, this is one of the reasons longer rates and corporate spreads have been grinding lower... As the mutual funds and the banks continue to search for even minimal yields they are going out the duration and the spread curve to beat the zero rates of the front end... Typically the Fed only controls the short end of the curve (except for QE), but this time a minor adjustment in the short end could have a more than dramatic effect on long rates and spreads.
The Fed last week sold an average of 110 million a day of ETF's in their corporate unwind of assets held... These amounts are small enough that they had little impact on the markets... We expect to see the Fed continue their corporate unwind until all 14 billion of spread product is sold...ETF's will be first, we do not expect to see the bond unwind schedule for another few weeks.
Rates... What does the 10 year (rates traders) know that others do not?... As we said Friday, momentum traders flushed out the shorts, the reflation traders, and some of the bears from the markets... 10 years resistance, while 1.42 short term, is backed up by 1.36... 5 years could get to .66... We think the mantra being used will be reversed... 10 years bulls think about the economy slowing down after a fast reopening... They point to weaker car sales and transitory inflation... We disagree, we see a strong economy... We listened to Ed Hyman of Evercore on the Maria show over the weekend... 10% GDP growth in both the second and third quarters with 6%+ in the fourth quarter... We see some of the commodity inflation, ex oil, giving back some of their gains... But wage inflation continues to grow and now housing numbers, reflected by OER , are also growing...given the shortage of workers and the 20% increase of housing average prices , we think that these two anchors are not transitory and will reflect bigger and longer inflation numbers, which will worry the Fed... Add in that 25 states have reduced their unemployment compensation to get workers back to work over the next 2 months, including about 4 million unemployed workers, the non farm payroll numbers should start to finally make up the gaps that economists are missing.
Rates 2... Bond prices have been reacting to shorts and reflation stop outs... But this is not because they believe the transitory story of the Fed...it is because buyers are being forced to buy... Banks for the HQLA regulatory reasons... Short money funds because they can not operate at the zero rates offered in either the overnight markets or the repo markets... And pension funds who are now fully funded, and have sold equities and given money to insurance companies to buy annuities, which then go out and buy long duration corporates and treasuries....
We look for a disappointment from the Fed this week... No tapering will not start at this time... And will barely be discussed, but dot plots and a possible adjustment in IOER, could surprise the markets which are pricing in a very dovish Fed.
