Thursday Macros
The Fed come out swinging their bats yesterday and the markets were no where prepared for that... The talk about accelerating rates coupled with balance sheet reduction told the markets the Fed has come out with the potential to use all tools to fight inflation... This is what happens when the Fed has been behind the curve for so long... We said earlier in the week to expect the low price/high yield of treasuries the morning of the employment number... It looks like that is what is going to happen...
Rates.. Getting slaughtered slowly... We raised our target for the week on 5 years to 1.495, we are about there right now at 1.475... 10 years barely got to 1.70 yesterday but are now at 1.75... 1.77 was the high yield last year, that will probably be taken out... And 2 long bonds does not seem to be holding, now at 2.13... And it is not just the US... Only two European 10 years remain in negative yield territory, with Bunds and the Swiss... It looks like Bunds, trading at -.047, will be the next to flip.... We thought it would happen this year, but did not think it would happen in the first week of the year... But there was a reason for our madness that rates would take it on the chin, as we thought that the Fed was going to move much more quickly that markets anticipated..
Equities... The Nasdaq stocks did not like the change in heart from the new Hawkish Fed... The inverse correlation between rising rates and plummeting long duration Nasdaq stocks was evident yesterday ... With day 4 staring, the Nasdaq is down 3.5% YTD as of last nights close... And down another 80 points right now...S+P is only down a point... So there is room for higher rates with a stronger economy and some light at the tunnel for a positive equity market...FYI, Nasdaq futures are down 6.4% from its November 22 high... So not corrective territory yet...
Fed...Daly speaks at 11.30 in Ireland, but the topic is not clear... However, Bullard speaks at 1.15, and is clearly focused on the US Economy and Monetary Policy... This speech will have sparks attached to it... Both Bullard and Waller have been behind the Fed of Kansas City report that says the Fed should reduce the balance sheet along with raising rates... Expect Bullard to support that and he is a voter this year.... So we will be focused on that speech... But the reality is that the markets need to get adjusted to the New Fed HAWKISHNESS... And we are not there yet...
NonFarm... With ADP out yesterday with almost a double of the expectation, we wonder why more economists are not raising their expectations for numbers tomorrow... The expectations was raised from 400 to 433, but we think the number could be a clear outlier tomorrow... More reason for a move in 10 years to 2%... Mizuho was out this morning talking about a 3% 10 year.
The world is not coming to an end with the Fed Hawkishness... Financial conditions remain loose and New issue corporates continued to come yesterday at a steady pace... Yes some are front running the fear of higher rates, but the demand remains "like a rock"...Spreads have moved out small amounts so far, with CDX IG out to 52 and CDX HY out to 306... But 20 billion came yesterday, with a good chunk of Formosa bonds coming to market...The weekly total surpassed 54 billion, well above the 35-40 that was predicted. Order books were 2.2x oversubscribed offerings moved 23 basis from IPT, and new issue concessions were .2 basis... So the demand is still there...Even junk saw some good demand as Ford was able to come to market in the 7 year space at 127 spread with a 2.90 coupon... Have you seen Ford's stock???/ tripled from a year ago going from 8.68 on 1/6/21 to 24 now..
Expect another choppy day... But we expect our support levels to hold for at least a few hours... Remember there were a massive amount of puts bought on 10 year futures... So the downside is still vulnerable
