Thursday Macros
Last night there were headlines that the government shut down/ debt ceiling debacle, would be contained for now as the Congress kicked the can down the road with a continuing resolution to December 3... Do not be surprised if we have similar trials and tribulations then... Nonetheless equities, both in the US and Europe, rallied to their highs about 4 am... Then in Europe they gave back all of their equity gains, while US futures gave back about half... Treasuries are weaker, but the 10 year has sustained about a 3 basis range overnight... Again, this move is not meaningful, and we would be surprised to see large ranges today... It is both month end and quarter end, and the flows should be index related along with reallocations ... Friday, or possibly next week, could be the start of another large move.
Rates... We look at recent moves in three waves... The first was the upward move due to inflation and supply chain issues in the beginning of the year... That brought 10 years to 1.77 and 5 years to .98... Then as the shorts got excited and positions got overextended we reversed where 10 years got to 1 and 5 years to the low 60's... Now we are in the third leg, where rates should now take out the recent high yields and go on to the next level... We see 5 years getting to 1.31 and 10 years to 2 %... Won't happen right away but it will happen...probably won't be a great fourth quarter for equities, but as long as corporate bond issuance and demand stay strong, we don't see more than a 10% correction... Maybe a bit more
Fed... 7 speakers today including Powell in front of Congress... How much more can they say?... Hawks are hawks and even Doves know they have to taper.. The time line has been set... Assuming next weeks employment number is not ridiculous in either direction, tapering should be announced and implemented in November... If we were them, we might wait a touch to see the October number just beyond their meeting date in November... Nonetheless tapering is a little more than a month away, and regardless of what Harker says about a "boring" tapering, expect tremendous volatility in the rate structure and the curve... As for Powell, we reviewed his comments yesterday about inflation and supply chains... While he has finally relented that he understated them most of the year, he now seems to have religion... Supply chains are not just bad, they are collapsing, as a headline of Seeking Alpha said last night... Powell now thinks 2022 is when supply chain issues will be mitigated... Did you see the latest moves in
1) Solar panels ...Shanghai Silicon spot prices are up 300% since August
2) Food prices...China's disappointing harvests and Brazil's disastrous crops
3) Energy prices and supply... Panic in the UK...
4) Housing prices and rent increases...some cities seeing 25% yearly increases
5) Power outages throughout China...Even Chinese Manu are looking elsewhere
It is going to be an ugly winter for the stagflation argument... So we think the rate structure will take it on the chin...but if we are wrong, it will be because the risk structure takes it on the chin and rates become more range bound.
Corporate bonds continue to come with strong demand...as does HY...Evergrande is a disaster, but we read that the Head of PBOC had bankers together this morning to get them to support real estate and homes, with the continuing lending of money ... We think Evergrande will be contained, but there is plenty of wrong in China right now... And that is not going away... And for those reporters who still think that Evergrande is going to pay interest on dollar bonds that are trading in the 20's, your only hope is that Citi is the trustee...
Do not expect much today... But lots of Fed speak...and continue to watch the curve..5/30 at 108 is a key level that is worth watching, especially if it breaks... US corporate bonds remains the least dirty shirt in the global laundry...Treasuries are down 2.17% this month...corporates down .94% but HY is up .04 and up 4.59% YTD. Have a good day
