Powell Losing the Narrative...Hawkish Talk Leading to Lower Rates..2 Yr Hit 2.99
Powell was relatively Hawkish in his testimony yesterday, but you could see the push-back as Senators, in our humble opinion, are starting to be more worried about a recession... Overnight US treasuries soared in price and hit much lower yields... 2 year treasuries hit 2.99 while 10 years hit 3.08... Both have reversed a few basis points as we write...Recession fears are complicating Powell's higher rate scenario... Will it be permanent? Have we seen the high yields of this cycle?.. Both 2 years and 10 years have moved 40 plus basis points lower in yield in the last week... 2 years going from 3.44 to 2.99 this morning.. While 10 years have moved from 3.49 to 3.08... Markets are fickle, but we can see recession fears starting to challenge inflation fears as a changing narrative...
European PMI's were much lower than expected, which caused a massive rally in EGBs this morning... At one point 10 year Bunds were 21 basis points lower in yield. 2 year Bunds went from 1.06 to .80... Very big moves... Norway raised rates more than expected with a 50 basis point move... We saw that Bridgewater has levered up in shorting European equities... Why anyone wants to disclose their positioning while it is live is beyond us... "(BN) Bridgewater Doubles Short Wagers in Europe to $10.5 Billion "
Powell testimony was not surprising yesterday... He wants to keep the brake on the economy and keep pushing rates higher... He continued to stick with the neutral rate being 2.5%, but he clearly wants to exceed that... Question is how his recession talk will be counterproductive to his rate hike mantra... The correlation is simple... Powell threatens to raise rates, recession talk heats up, rates go lower... 45 in 2 years and 41 in 10 years from last week to the low this morning... But we clearly saw a mood shift in the Senate, that if you think inflation is priority number one, then watch out for the recession number two priority which is catching up fast... We do not want to focus on politics, but we got a kick out of a tweet from Jim Bianco overnight, who brought up the point that Democratic Senators thought they were questioning the Secretary of Energy and not the Fed chair...as they focused on breaking up oil companies... We could not disagree more on breaking up oil companies... And we remember our old colleague , Peter Tchir, making the point about a year ago, that ESG was inflationary for energy... He could not have been more correct... Meanwhile in the last week the WSJ reported that gasoline sales were down 8.2% compared to the same week last year..., the 14th consecutive week that sales have lagged behind 2021 levels...Republican Senators pointed out that most of the move in energy prices happened before Ukraine was invaded by Russia... And that that inflation was more correlated to the excessive stimulus plan... In their defense, no one had a Covid playbook....
New issues were weaker yesterday only coming with about 3 billion.. The metrics looked awful... Less than 2 times oversubscribed with new issue concessions at 25 basis points... Again this was not a good representative sample size . IG CDX continues to hover around 100 while HY is better, at 563, after hitting 600 earlier this week.
Fed...Powell is up today in front of the House... He will not deviate from his testimony yesterday. But we will be looking for signs that the recession fears are making inroads on the inflation fears...both are important... If Powell can not get treasury rates higher than the challenge is whether to slow it down or double down... We doubt he slows it down, so we continue to expect 50 in July, depending on the June CPI report... Or it could go to 75.. Powell did admit there was a discussion last week about a 100 basis point move... We do not know how close it got...
Equities started out negative yesterday morning, were positive most of the day, and closed marginally negative... This morning S+P futures hit lows at 7.30 pm last night and 3.37 am this morning... And have bounced about 50 points... Now up 30... Our equity desk head pointed out yesterday how all markets seem to be correlated... Risk recession , rates, and and short covering... Which means the short covering in the middle of the day was by large funds and CTA's... We pointed out Tuesday how short Hedge funds were... And his quote " the more known recession is the less likely its going to come to fruition or if there is one my guess is its not very bad"
European equities are now higher... Same logic...weak economic numbers lead to a rally in bonds... A rally in bonds means the ECB has lost the edge in how much they can raise rates... And they have not even started yet... How silly are negative rates in a 9% inflationary environment... Central Banks need less bankers and politicians, and more traders, in determining when to move... Both the Fed and the ECB should have been moving mid to late last year...