Monday Macros
Treasuries Hold For Now as Oil Plunges on Delta Variant Issues From China
Japan was closed this am so the activity started in London time... Treasuries have held their lows on Friday from the stellar employment number... The three numbers were are watching in treasuries is 1.31 10 years, .78 5 years and 134 10 year futures... They have held for now but we have three major treasury auctions Tuesday, Wednesday, and Thursday... And while we have 5 Fed speakers this week, nothing said it as clearly as Clarida did last week, which will only be altered during Jackson Hole in a little over 2 weeks...
This morning there were strong bids for Bunds, along with the 4% plunge in oil. Weakness in Gold and Silver is due to the weaker commodities in general and the better than expected move in the dollar Friday... Chinese PPI came out above expectation of 9%, and there remains multiple stories of closures in China due to Delta variant...Equities are mixed with the Dow down the most...Nasdaq is higher, and S+P slightly lower... Nothing significant...MS sees Covid peaking in three weeks, we saw no documentation as to why.
Interest rates are key... The Fed is clearly behind the curve in the tapering story... But we think Powell needs to see one more employment number to make his announcement on tapering, which we see at the September meeting...GS has reduced their year end call for 10 years to 1.60 from 1.90 and their 10 year Bund call from 0% to -.15... We see the first call as easy, but the Bund call currently looks like a stretch....
Inflation... Wage inflation continues to run at a much higher pace than the Fed is comfortable with from an inflation front...but from a employment perspective, and lower income perspective, they are happy with the trends... But the Fed can not call inflation transitory forever... And Fannie Mae came out with an housing inflation outlook that says that they expect the rate of shelter inflation to pick up to 4.5% over the coming years and higher still, if house price growth does not cool off soon... This is not transitory... Has inflation peaked, maybe, but whether it has or not, it is much higher than the Fed wants and they will have to address it sooner rather than later. CPI is expected to be 5.3% YOY on Wednesday, where BB intelligence is at 5.5%...PPI, on Thursday is expected to be 7.1%... While these numbers are a slightly lower than the previous month, they are way too high to justify the current level of 10 year interest rates . What's wrong with this picture, GDP at 6.5%, CPI above 5%, and a unemployment rate that is down to 5.4%, with 9 million plus jobs out there... And a 10 year at 1.28%... An money manager in Barron's thinks that 10 years will be 2.5 to 3% in the first quarter... We don't see that.
Anecdotal observations... Two from yesterday... We went over to the local store to pick up some snacks for company yesterday... We talked with the manager... We asked how is business... She said pretty good, but they continue to have trouble with finding help... We said, we hear that is a big problem... She responded that that is about to change... People are already reaching out to her looking for jobs when their unemployment insurance ends next month... Huh.. Both the Fed and the government told us that was not true...but it is... Second, our niece was over yesterday... She works for the biggest hospital in the state, sterilizing equipment at night for the Doctors... The Hospital just told her that she was getting a raise, all of them were getting a raise, because the Hospital wanted to get in front the competition for workers, because they do not want to lose employees...... Wage inflation is going to continue to soar above expectations... And while we do not see stagflation, we see inflation with us, long beyond the terms of the current Fed governors.
Equities... To use Leon Cooperman's line from WSW this weekend, he is a fully invested bear. While the equity averages continue to toy with new highs, many equities have been slammed.. The rotation has been significant... We picked this up from a colleague from a large Spac desk. " We have spent the past few months with 90% buy tickets on the desk (all below trust (10)). Last week its been 90% sell tickets. With 94% of the 433 spac deals already trading below trust. 30 of the last 50 spacs are below 10, and 23 of those are below 9" ...not a good sign but JPM is out there saying "equities will be largely immune to price gyrations in "bubble " areas... Stocks and bonds yields will probably resume advances in tandem as markets get comfortable with peak liquidity and tapering"... So where does this leave us? Still with equities but very nervous, and while the Delta variant looks controllable with vaccines, the markets are just too high with Central Banks Bound to cut back in the next 6 months... We said mid August, or the Jackson Hole Conference was our fear point, we are closing in on that.
One savior remains corporate bonds... Still strong demand with another 30 billion expected this week... Spreads still in the range..
Treasuries Hold For Now as Oil Plunges on Delta Variant Issues From China
Japan was closed this am so the activity started in London time... Treasuries have held their lows on Friday from the stellar employment number... The three numbers were are watching in treasuries is 1.31 10 years, .78 5 years and 134 10 year futures... They have held for now but we have three major treasury auctions Tuesday, Wednesday, and Thursday... And while we have 5 Fed speakers this week, nothing said it as clearly as Clarida did last week, which will only be altered during Jackson Hole in a little over 2 weeks...
This morning there were strong bids for Bunds, along with the 4% plunge in oil. Weakness in Gold and Silver is due to the weaker commodities in general and the better than expected move in the dollar Friday... Chinese PPI came out above expectation of 9%, and there remains multiple stories of closures in China due to Delta variant...Equities are mixed with the Dow down the most...Nasdaq is higher, and S+P slightly lower... Nothing significant...MS sees Covid peaking in three weeks, we saw no documentation as to why.
Interest rates are key... The Fed is clearly behind the curve in the tapering story... But we think Powell needs to see one more employment number to make his announcement on tapering, which we see at the September meeting...GS has reduced their year end call for 10 years to 1.60 from 1.90 and their 10 year Bund call from 0% to -.15... We see the first call as easy, but the Bund call currently looks like a stretch....
Inflation... Wage inflation continues to run at a much higher pace than the Fed is comfortable with from an inflation front...but from a employment perspective, and lower income perspective, they are happy with the trends... But the Fed can not call inflation transitory forever... And Fannie Mae came out with an housing inflation outlook that says that they expect the rate of shelter inflation to pick up to 4.5% over the coming years and higher still, if house price growth does not cool off soon... This is not transitory... Has inflation peaked, maybe, but whether it has or not, it is much higher than the Fed wants and they will have to address it sooner rather than later. CPI is expected to be 5.3% YOY on Wednesday, where BB intelligence is at 5.5%...PPI, on Thursday is expected to be 7.1%... While these numbers are a slightly lower than the previous month, they are way too high to justify the current level of 10 year interest rates . What's wrong with this picture, GDP at 6.5%, CPI above 5%, and a unemployment rate that is down to 5.4%, with 9 million plus jobs out there... And a 10 year at 1.28%... An money manager in Barron's thinks that 10 years will be 2.5 to 3% in the first quarter... We don't see that.
Anecdotal observations... Two from yesterday... We went over to the local store to pick up some snacks for company yesterday... We talked with the manager... We asked how is business... She said pretty good, but they continue to have trouble with finding help... We said, we hear that is a big problem... She responded that that is about to change... People are already reaching out to her looking for jobs when their unemployment insurance ends next month... Huh.. Both the Fed and the government told us that was not true...but it is... Second, our niece was over yesterday... She works for the biggest hospital in the state, sterilizing equipment at night for the Doctors... The Hospital just told her that she was getting a raise, all of them were getting a raise, because the Hospital wanted to get in front the competition for workers, because they do not want to lose employees...... Wage inflation is going to continue to soar above expectations... And while we do not see stagflation, we see inflation with us, long beyond the terms of the current Fed governors.
Equities... To use Leon Cooperman's line from WSW this weekend, he is a fully invested bear. While the equity averages continue to toy with new highs, many equities have been slammed.. The rotation has been significant... We picked this up from a colleague from a large Spac desk. " We have spent the past few months with 90% buy tickets on the desk (all below trust (10)). Last week its been 90% sell tickets. With 94% of the 433 spac deals already trading below trust. 30 of the last 50 spacs are below 10, and 23 of those are below 9" ...not a good sign but JPM is out there saying "equities will be largely immune to price gyrations in "bubble " areas... Stocks and bonds yields will probably resume advances in tandem as markets get comfortable with peak liquidity and tapering"... So where does this leave us? Still with equities but very nervous, and while the Delta variant looks controllable with vaccines, the markets are just too high with Central Banks Bound to cut back in the next 6 months... We said mid August, or the Jackson Hole Conference was our fear point, we are closing in on that.
One savior remains corporate bonds... Still strong demand with another 30 billion expected this week... Spreads still in the range..
