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Futures, Global Markets Jump As Bond Rout Eases

Futures, Global Markets Jump As Bond Rout Eases

U.S. index futures jumped along with Asian and European markets, while the VIX declined for…

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Futures, Global Markets Jump As Bond Rout Eases

U.S. index futures jumped along with Asian and European markets, while the VIX declined for a fourth consecutive day, setting up Wall Street for a strong open as bond markets stabilized bringing some respite for markets whipsawed in recent weeks by concerns about tightening monetary policy.  As of 730am ET, S&P emini futures rose 38 points or 0.84%, while Nasdaq futures were up 1.3% or 187 points, while Dow futures were up 0.60% or 215 points. The 10-year U.S. Treasury yield retreated from levels last seen in 2019, dropping from 1.97% at their high yesterday to 1.92%, and yields across Europe also fell after France’s central banker said markets may be getting ahead of themselves in pricing rate hikes for this year. A dollar gauge slipped and cryptos jumped.

Much of today's rally is the result of Bank of France Governor Villeroy pushing back against market pricing yesterday, which suggests that there are indeed limits to just how far central banks are willing to be pushed by traders’ expectations. Still, despite today's stabilization, the risk of market swings remains elevated ahead of U.S. inflation data on Thursday, with investors facing a likely “irreversible hawkish shift” by major central banks, according to Ipek Ozkardeskaya, an analyst at Swissquote. “The choppy trading is here to stay,” she said.

Investors are weighing up still-robust corporate earnings against worries about a rapid withdrawal of pandemic-era stimulus. Data this week is expected to show U.S. inflation continues to overheat, potentially stoking bets on a more aggressive Fed liftoff in March. About 76% of S&P 500 firms that have reported results beat earnings estimates, with profits coming in more than 6% above projected levels.

“We’re still in an environment where a lot is going quite well for the economy,” Lauren Goodwin, a multi-asset portfolio strategist at New York Life Investments, said on Bloomberg Television. “It’s still an all-cyclicals story from our perspective.”

Peloton shares rose 4.5% in premarket trading, extending this week’s bounce amid renewed speculation that the fitness company could become a takeover target, and following news that CEO John Foley will step down. Lyft dropped 4.4% as the number of reported active riders missed analyst expectations. Some other notable premarket movers:

  • Alibaba (BABA US) could be active in U.S. trading after shares in Hong Kong jumped as SoftBank Group Corp. said it wasn’t involved in the Chinese tech giant’s filing of additional American depositary shares, allaying investor fears that the firm’s largest shareholder might be looking to cash out.
  • Lyft (LYFT US) fell 4.7% after reporting mixed results on Tuesday, underlining Covid pressures on ridership and growth. Still, it reported revenue for the fourth quarter that beat the average estimate. Analysts focused on positive trends for 2022, and see light at the end of the omicron tunnel.
  • Enphase Energy (ENPH US) gains as much as 19% in premarket trading after the solar company’s first-quarter revenue forecast beat the average analyst estimate.
  • Chipotle Mexican Grill (CMG US) jumped in postmarket trading after it reported sales that topped estimates as smoked brisket, strong delivery orders and higher prices helped results in the fourth quarter.
  • GlobalFoundries (GFS US) gained 4% postmarket after the semiconductor manufacturer’s first-quarter revenue and Ebitda forecast beat the average analyst estimate.
  • New Relic (NEWR US) shares slumped 23% in extended trading on Tuesday, after the application software company reported its third-quarter results and gave an outlook where it widened its view for an adjusted full-year loss per share.
  • Mandiant (MNDT US) rises 3.9% in premarket trading following an 18% surge on Tuesday after Bloomberg reported Microsoft is in talks to acquire the cybersecurity company. Mandiant also reported quarterly earnings after the close.
  • Gevo (GEVO US) is within months of hitting a potential inflection point in its cash flow profile, Citi writes in note initiating on stock with a buy rating and $5 target. Stock climbs 7.6% premarket.
  • Sundial Growers (SNDL US) shares climb 9.5% in extended trading after the Canadian cannabis producer said it has received a 180-day extension to regain compliance with Nasdaq’s minimum bid price requirement.
  • NCR (NCR US) shares jumped 11% in postmarket trading on Tuesday, after the company said it has launched a board-led strategic review process to evaluate a full range of strategic alternatives available.
  • Paycom Software (PAYC US) shares climbed 8% in extended trading on Tuesday, after the company reported fourth-quarter results that beat expectations and gave a full-year forecast that was ahead of the analyst consensus.
  • XPO Logistics (XPO US) gained 3.4% in extended trading after the transportation services company forecast adjusted earnings per share for 2022 that beat the average analyst estimate.
  • Adtalem Global Education (ATGE US) shares tumbled in extended trading after the company lowered its full-year forecasts for adjusted revenue and earnings per share.

In Europe, the Stoxx Europe 600 Index rose 1.5% as technology shares bounced back and carmakers surged. A raft of mostly positive earnings reports lifted sentiment. Adyen NV jumped more than 11% after the Dutch online-payments company reported second-half revenue growth that met analysts’ estimates. Amundi SA, Europe’s largest asset manager, climbed the most in a year after raking in more client cash than analysts’ expectations. Banks underperformed after disappointing results from ABN Amro Bank NV and Svenska Handelsbanken AB. Here are some of the biggest European movers today:

  • Adyen shares jump as much as 12% after the payments firm reported second-half net revenue in line with estimates and volumes that beat expectations. While analysts said the results were mixed, they are “enough,” given a negative buy-side view into earnings, Jefferies says.
  • Banco BPM gains as much as 6.7% after results from the Italian lender which Citi says highlight a “profound transformation.”
  • Pandora shares rise as much as 8.2% after the Danish jewelry maker reported results and provided guidance for the year. The forecast seems realistic, according to Citi.
  • Menzies shares gain as much as 42% to 475p after it rejected a preliminary and unsolicited 510p/share proposal from a unit of Agility Public Warehousing.
  • Vontobel shares jump as much as 8% after FY earnings exceed estimates and as the Swiss bank raised its dividend. The driving force behind the beat was the digital investing division, ZKB says.
  • GlaxoSmithKline shares fell as much as 1.4% after 4Q earnings. Jefferies says the company’s 2022 outlook was “as expected.” Citi says results and guidance “will do little to change investor sentiment.”
  • Transport giant DSV A/S said operating profit doubled in the fourth quarter, helped by rising freight rates and its most recent acquisition.
  • Equinor ASA, Europe’s second-largest supplier of natural gas, boosted its share buyback and increased the dividend after profiting from a surge in prices for the fuel.

Asian equities jumped the most since Jan. 12 to snap a two-day slide, boosted by Chinese tech shares including Alibaba Group Holding Ltd. The MSCI Asia Pacific Index advanced as much as 1.5% to a two-week high, helped by Japan and a rally in a Hong Kong technology index with consumer-discretionary shares also gaining. Alibaba was the biggest contributor to the Hang Seng Index, which jumped 2.1% to lead Asian benchmarks, after SoftBank Group Corp. said it wasn’t involved in the Chinese e-commerce firm’s filing of additional American depositary shares. China’s broader market also rose after state-backed funds’ intervention helped stage a strong recovery late in Tuesday’s session.

“Now it comes to the point where people will start to focus on economics and corporate earnings growth,” said Eva Lee, the head of Greater China equities at UBS Global Wealth Management Chief Investment Office. “Upward revisions of earnings will be a crucial signpost that we’ll be looking for.” Investors will focus on key U.S. inflation data on Thursday that could impact the outlook for future U.S. rates. Market participants will also keep an eye on central bank policy decisions this week, including those in India and Indonesia

Japanese equities rose, driven by gains in electronics and auto makers after the yen weakened. Service providers also boosted the Topix, which gained 0.9%. SoftBank was the largest contributor to a 0.9% rise in the Nikkei 225 after reporting results and confirming plans for an Arm IPO. The yen gained slightly after dropping 0.4% against the dollar overnight. “U.S. rate hike expectations have been priced in somewhat by now,” said Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management. “So there are going to be fewer situations where we see big selloffs triggered by rate-hike worries.”

Indian stocks gained for second straight session as automobile and banking companies rose on expectations that the monetary policy panel will keep benchmark interest rates unchanged to focus on growth.  The S&P BSE Sensex climbed 1.1% to 58,465.97 in Mumbai, while the NSE Nifty 50 Index advanced by a similar measure. Eighteen of the 19 sector sub-indexes compiled by BSE Ltd. climbed, led by a gauge of automobile companies. The Reserve Bank of India’s monetary policy panel will conclude its three-day meeting on Thursday. All but one of the 39 economists surveyed by Bloomberg News expect the main repurchase rate to be held steady at 4%. Consumer prices in India rose for a third straight month in December. But the headline number is still within with the central bank’s 2%-6% target band, which allows policy makers the room to look away as some global peers lift rates to fight inflation. HDFC Bank contributed the most to the Sensex, increasing 2.5%. Carmaker Maruti Suzuki was the top gainer at 4.1%, its biggest surge since Jan. 25. Out of 30 shares in the Sensex index, 27 rose and 3 fell.

In rates, Treasury futures advanced paced by European bond rally after ECB policy makers pushed back on rate-hike expectations. Yields are richer by 2bp to 4bp across the curve led by intermediates, 10-year is down 3bps to 1.92%, flattening 2s10s by more than 1bp. Treasuries advance erodes outright concession for 10-year new-issue auction at 1pm ET. Fed speakers include Bowman and Mester. Auction cycle continues with $37b 10-year note, following strong demand for Tuesday’s 3-year sale, in which primary dealers were awarded record low share; cycle concludes Thursday with $23b 30-year new issue.

In FX, the Bloomberg Dollar Spot Index slipped as the greenback traded weaker against all of its Group-of-10 peers, with risk-sensitive currencies performing best. Benchmark Treasury yields fell up to 4bps, led by the long end as they halted a four-day rise. The euro bounced after a day low of $1.1403; yields across Europe fell after France’s central banker yesterday said markets may be getting ahead of themselves in pricing rate hikes for this year. Gilts rallied as traders pared their bets on Bank of England rate hikes, while the pound gained against a weaker dollar. Focus today will be on a speech from the BOE’s chief economist Huw Pill, with the market on the lookout for clues on the pace of tightening. Japan’s super-long bonds outperformed the benchmark 10-year note as the Bank of Japan refrained from stepping up bond purchases. The yen edged higher.

In commodities, oil held a drop as traders weighed tensions in Eastern Europe and the resumption of Iran nuclear talks. Aluminum traded near the highest level in more than 13 years. Bitcoin slipped below $44,000.

Looking at the day ahead data releases include the German trade balance and Italian industrial production for December. From central banks, we’ll hear from Bank of Canada Governor Macklem, BoE chief economist Pill, the ECB’s Schnabel and the Fed’s Bowman and Mester. Finally, today’s earnings releases include Disney, L’Oréal and Uber.

Market Snapshot

  • S&P 500 futures up 0.7% to 4,543.50
  • STOXX Europe 600 up 1.5% to 472.19
  • MXAP up 1.4% to 190.27
  • MXAPJ up 1.6% to 624.22
  • Nikkei up 1.1% to 27,579.87
  • Topix up 0.9% to 1,952.22
  • Hang Seng Index up 2.1% to 24,829.99
  • Shanghai Composite up 0.8% to 3,479.95
  • Sensex up 1.1% to 58,445.55
  • Australia S&P/ASX 200 up 1.1% to 7,268.33
  • Kospi up 0.8% to 2,768.85
  • German 10Y yield little changed at 0.21%
  • Euro little changed at $1.1420
  • Brent Futures down 0.5% to $90.37/bbl
  • Gold spot up 0.1% to $1,827.06
  • U.S. Dollar Index little changed at 95.56

Top Overnight News from Bloomberg

  • After the inexorable surge of Treasury yields this year, investors are weighing how much of the damage from anticipating Federal Reserve rate hikes has already been done
  • A relief rally spread across the world’s biggest government bond markets on Wednesday after yet another policy maker from the European Central Bank pushed back against traders betting on a rapid pace of interest-rate hikes this year
  • One of the biggest players in global trade signaled disrupted supply chains rattling economies from Vietnam to Germany may be just months from returning to normal, easing concerns of a more protracted period of shipping chaos that has fanned consumer inflation, wreaked havoc on retail inventories and slowed factory production
  • Bank of Japan Governor Haruhiko Kuroda faces a growing challenge to convince investors that a policy pivot isn’t on the horizon following a wave of hawkish turns by global central bankers
  • China has renewed its campaign to keep commodities markets in check, as the government tries to prevent raw materials prices from overheating while it takes steps to stimulate a faltering economy
  • Iceland’s central bank delivered its biggest interest- rate hike since the 2008 crisis, trying to quell inflation spurred by a rampant housing market. The Monetary Policy Committee in Reykjavik lifted the seven-day term deposit rate by 75 basis points to 2.75%, the highest level in almost two years

A more detailed look at global markets courtesy of Newsquawk

Asian stocks traded higher with earnings releases in focus and following the positive handover from Wall St where the major indices finished near the best levels of the day despite participants remaining in limbo ahead of US CPI. ASX 200 (+1.1%) was lifted by notable outperformance in the tech and financials sectors with the latter boosted by firm gains in Australia’s largest lender CBA which reported a 22% jump in H1 cash profit. Nikkei 225 (+1.1%) rose above 27,500 with biggest gaining stocks driven by earnings releases including IHI, AGC and Nissan, while Toyota reported a record 9-month profit and SoftBank was boosted after it began to pitch the ARM IPO. Hang Seng (+2.1%) and Shanghai Comp. (+0.8%) conformed to the constructive mood after reports yesterday that Chinese state funds stepped in to slow the market decline and with Hong Kong firmly boosted by a rebound in tech.

Top Asian News

  • Hong Kong Virus Cases Top 1,000 as Outbreak Overwhelms Hospitals
  • Top UAE Lender First Abu Dhabi Bank Offers to Buy EFG Hermes
  • Philippines in No Rush to Tighten Monetary Policy: Diokno
  • Hong Kong Reports 1,161 Covid Cases; Hospitals ‘Overwhelmed’

European bourses are firmer in a continuation of positive APAC/US trade, catalysts light thus far going into Thursday's US CPI. Sectors are all in the green with Banking and Tech names lagging and outperforming respectively given the yield environment. US futures post broad-based gains in a continuation of yesterday's action awaiting Central Bank speak.

Top European News

  • Adyen Rises Most Since IPO as Volume Growth Beats Estimates
  • Inflation-Stoking Supply Crunch Is Set to Ease in Second Half
  • Glaxo Expects Profit to Rise as Drugmaker Prepares for Split
  • Japan Ready to Divert Gas to Europe If Russian Supply Disrupted

In geopolitics:

  • French Presidency said leaders of Germany, France and Poland expressed joint support for Ukrainian sovereignty and implementation of Minsk ceasefire agreement, according to Reuters.
  • European and US regulators told banks to prepare for the threat of a Russian cyberattack, according to Reuters.
  • Russian Deputy Foreign Minister calls reports of possible US THAAD missile systems being supplied to Ukraine as a provocation, via Reuters citing Ria.
  • UK Foreign Minister Truss is set to fly to Moscow today to meet with Russian Foreign Minister Lavrov; PM Johnson will meet the Polish PM/President and NATO Secretary General on Thursday.
  • Satellite images showed unusual activity at a North Korean shipyard, according to Yonhap citing a US think tank.
  • Syrian air defences downed a number of missiles from Israeli aggression, while the Israeli military said a Syrian anti-aircraft missile fired towards Israel exploded in mid-air, according to Reuters.
  • Iran has unveiled a missile with a range of 1450km, via Tasnim.

In Fixed Income, bonds regroup after Tuesday's meltdown, but fade ahead of 10 year T-note supply and two Fed speakers. Spanish Bonos underpinned by strong demand and tight pricing for new 30 year benchmark. Bunds marginally outpace Gilts post-ECB's Villeroy questioning the hawkish reaction to revised guidance and pre-BoE's Pill.

In FX, the greenback ground down, but off recent lows ahead of Fed speakers on the eve of US CPI. High beta and cyclical currencies outperform on risk and relative rate or policy outlook dynamics. Yen underpinned by softer UST yields and protected by Fib resistance below decent option expiry interest. Euro retains grasp of 1.1400 handle irrespective of ECB’s Villeroy expressing the view that markets have reacted too hawkishly to policy pivot. Rouble remains optimistic about reaching a resolution to feud with Ukraine and the West Russian government and CBR have agreed on crypto regulation and Russia will recognise crypto assets as currencies, according to Kommersant

In commodities, WTI and Brent are choppy and relatively rangebound awaiting fresh developments amid incremental geopolitical updates.
White House Economic Adviser Bernstein told CNN that releasing more oil reserves from the SPR is an option. Japan, at the request of the US government, has decided to secure necessary LNG stocks and accommodate some of this for Europe, via NHK citing sources; subsequently confirmed. Russian Permanent Representative to the EU Chizhov says that Russian can raise nat gas supplies to Europe once a request is made to do so, according to Sputnik News Spot gold/silver are steady and continue to reside around familiar levels and technical marks. Turkey will announce a scheme this weekend to encourage households to convert gold into Lira according to Reuters. Copper initially benefitted from the upbeat risk sentiment but then faltered in late trade and with China eyeing iron ore price stability measures. China's market regulator says will take further measures to ensure iron ore price stability, while it will strengthen market supervision and crackdown on price irregularities and hoarding.

US Event Calendar

  • 7am: Feb. MBA Mortgage Applications -8.1%, prior 12.0%
  • 10am: Dec. Wholesale Trade Sales MoM, est. 1.5%, prior 1.3%; Wholesale Inventories MoM, est. 2.1%, prior 2.1%

DB's Jim Reid concludes the overnight wrap

Our latest monthly EMR survey aimed at market participants is now live. Given the major rates selloff so far this year there’s a heavy bias towards questions on that and its implications, such as where you think the Fed and ECB will take policy this year. We also ask whether you think the Russia/Ukraine situation will be worse, similar or fading from view in a couple of months? Given the recent vol this will hopefully be a good gauge of current sentiment, so all help filling it in is much appreciated. The link is here and it’ll close on Friday.

That global bond rout showed no sign of abating in yesterday’s session, with yields climbing to fresh highs as markets digested sovereign issuance on both sides of the Atlantic and investors continued to brace for tighter global monetary policy. For a sense of quite how unprecedented this current run is, yesterday marked the 11th consecutive session in which 10yr bund yields moved higher, which overtakes a run of 10 successive increases we saw around New Year 2000 and is something we haven’t seen in the data going all the way back to German reunification in 1990. That 11th straight gain saw them rise a further +3.9bps to a post-2019 high of 0.26%, just as 10yr French OATs (+5.7bps) also hit a post-2019 high of their own yesterday. As on Monday however, higher yields across the continent coincided with a further widening in peripheral spreads, with the gap between 10yr BTPs and bunds up another +2.7bps to 158bps, whilst the Spanish 10yr yield spread over bunds also widened +0.8bps to 86bps. In both cases that leaves them at their widest since July 2020, although Greek spreads were a notable exception after the massive +22.0bps widening on Monday, and actually came down -4.9bps yesterday to 218bps.

After the European close, we did begin to see some initial pushback against the market’s very hawkish interpretation to the ECB’s decision last week, with Bank of France Governor Villeroy saying that “I think there were perhaps reactions that were very high and too high in recent days.” That saw the Euro slip back slightly immediately after the remarks, though it swiftly recovered to only end the session down -0.24% against the US Dollar. This afternoon we’ll hear from Isabel Schnabel on the Executive Board who’s taking part in a Twitter Q&A, so it’ll be interesting to see if she echoes those comments.

In the US, treasury yields followed the selloff in Europe, as the 10yr yield continues to get closer to breaching 2% for the first time since August 2019, coming within 3bps at its intraday peak of 1.97%, before ultimately closing up +4.7bps yesterday to 1.96%. Treasury yields have lagged the selloff in European sovereign yields since the hawkish showings from the ECB and BoE last week, though Treasuries made up ground following the strong employment and average hourly earnings data Friday morning, which has raised the stakes for tomorrow’s CPI as a potential catalyst for US rates. Fed funds futures are currently pricing approximately a 35% chance of a 50bp rate hike in March, and 5.45 rate hikes (assuming 25bp increments) for 2022 as a whole. For reference, our US economists see the year-on-year CPI increasing to +7.2%, which would be the highest going back to 1982.

The latest spike in yields didn’t prove as damaging to equities as some might have expected, with the S&P 500 (+0.84%) paring back early losses to move higher on the day, as part of a broad-based advance that left 381 companies in the green, and only three sectors lower on the day. The NASDAQ (+1.28%), FANG+ Index (+1.97%) of mega-cap stocks, and the small-cap Russell 2000 (+1.63%) all outperformed the S&P, with the Russell 2000 posting its third consecutive advance. For Europe there was a more muted performance and the STOXX 600 (+0.01%) eked out a marginal gain, but the prospect of ECB rate hikes has continued to be incredibly supportive for banks, and the STOXX Banks index (+2.24%) hit a post-2018 high, with its YTD performance now standing at +13.60%, the best performing STOXX 600 sector YTD.

One factor helping sentiment yesterday were more positive noises on the geopolitical front, with the latest meetings between various leaders raising hopes among investors that there could be some sort of de-escalation between Russia and the West over Ukraine. Obviously this can and has fluctuated day-to-day, but comments yesterday from President Macron that he “obtained that there will be no worsening and escalation” from his meeting with President Putin helped take some of the geopolitical risk premium out of various assets. Indeed by the close, Brent crude oil prices were down -2.06% to $90.78/bbl, which is their largest daily decline of 2022 so far, the MOEX Russia equity index surged +2.33%, and European natural gas futures were down -2.88% to a one week low.

Overnight in Asia, equity markets got off to a strong start following the positive performance on Wall Street. The Hang Seng Index (+1.98%) is leading the gains, with Alibaba shares up +7.28% in Hong Kong after SoftBank said they weren’t involved in the filing of further American depositary shares. Additionally, the Shanghai Composite (+0.40%), the CSI (+0.25%), the Nikkei (+1.09%), and the Kospi (+0.93%) are all trading in the green this morning. Going forward, equity futures are indicating a positive start in the US and Europe as well, with contracts on the S&P 500 (+0.44%), and DAX the (+0.66%) both advancing.

Otherwise, yields continued to rise in Japan with the 10-year JGB yield moving up to +0.215%, closer to the BOJ’s +0.25% ceiling, although those on 10yr US Treasuries are down -2.3bps this morning. Meanwhile, Iron ore futures in Singapore slumped from a 5-month high of $153 to $144 per ton after Chinese regulators cautioned information providers against fabricating prices to drive them up.

On the data front, the US monthly trade deficit came in at $80.7bn in December (vs. $83.0bn expected), which leaves the annual deficit at $859.1bn. That’s a second consecutive annual increase in the US trade deficit, having been at $676.7bn in 2020 and $576.3bn in 2019. Otherwise, the NFIB’s small business optimism index in January fell to an 11-month low of 97.1 (vs. 97.5 expected), but Italian retail sales unexpectedly rose +0.9% in December (vs. -0.3% expected).

To the day ahead now, and data releases include the German trade balance and Italian industrial production for December. From central banks, we’ll hear from Bank of Canada Governor Macklem, BoE chief economist Pill, the ECB’s Schnabel and the Fed’s Bowman and Mester. Finally, today’s earnings releases include Disney, L’Oréal and Uber.

Tyler Durden Wed, 02/09/2022 - 08:01

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The End Game Approaches

The pendulum of market sentiment swings dramatically.  It has swung from nearly everyone and their sister complaining that the Federal Reserve was lagging…

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The pendulum of market sentiment swings dramatically.  It has swung from nearly everyone and their sister complaining that the Federal Reserve was lagging behind the surge in prices to fear of a recession.  On June 15, at the conclusion of the last FOMC meeting, the swaps market priced in a 4.60% terminal Fed funds rate.  That seemed like a stretch, given the headwinds the economy faces that include fiscal policy and an energy and food price shock on top of monetary policy tightening. It is now seen closer to 3.5%.  It is lower now than it was on when the FOMC meeting concluded on May 4 with a 50 bp hike.  

In addition to the tightening of monetary policy and the roughly halving of the federal budget deficit, the inventory cycle, we argued was mature and would not be the tailwind it was in Q4. While we recognized that the labor market was strong, with around 2.3 mln jobs created in the first five month, we noted the four-week moving average of weekly jobless claims have been rising for more than two months.  In the week to June 17, the four-week moving average stood at 223k.  It is a 30% increase from the lows seen in April.  It is approaching the four-week average at the end of 2019 (238k), which itself was a two-year high.  In addition, we saw late-cycle behavior with households borrowing from the past (drawing down savings and monetizing their house appreciation) and from the future (record credit card use in March and April).  

The Fed funds futures strip now sees the Fed's rate cycle ending in late Q1 23 or early Q2 23.  A cut is being priced into the last few months of next year.  This has knock-on effects on the dollar.  We suspect it is an important part of the process that forms a dollar peak.  There is still more wood to chop, as they say, and a constructive news stream from Europe and Japan is still lacking.  The sharp decline in Russian gas exports to Europe is purposely precipitating a crisis that Germany's Green Economic Minister, who reluctantly agreed to boost the use of coal (though not yet extend the life of Germany's remaining nuclear plants that are to go offline at the end of the year), warns could spark a Lehman-like event in the gas sector.  

At the low point last week, the US 10-year yield had declined by around 50 bp from the peak the day before the Fed delivered its 75 bp hike.  This eases a key pressure on the yen, and, at the same time, gives the BOJ some breathing space for the 0.25% cap on its 10-year bond.  A former Ministry of Finance official cited the possibility of unilateral interventionWhile we recognize this as another step up the intervention escalation ladder, it may not be credible.  First, it was a former official.  It would be considerably more important if it were a current official.  Second, by raising the possibility, it allowed some short-covering of the yen, which reduces the lopsided positioning and reduces the impact of intervention.  Third, on the margin, it undermines the surprise-value.  

Ultimately, the decline in the yen reflects fundamental considerations.  The widening of the divergence of monetary policy is not just that other G10 countries are tightening, but also that Japan is easing policy.  A couple of weeks ago, to defend its yield-curve-control, the BOJ bought around $80 bln in government bonds.  The odds of a successful intervention, besides the headline impact, is thought to be enhanced if it signals a change in policy and/or if it is coordinated (multilateral).  

There are a few high frequency data points that will grab attention in the coming days, but they are unlikely to shape the contours of the investment and business climate.  The key drivers are the pace that financial conditions are tightening, the extent that China's zero-Covid policy is disrupting its economy and global supply chains, and the uncertainty around where inflation will peak. 

Most of the high frequency data, like China's PMI and Japan's industrial production report and the quarterly Tankan survey results, and May US data are about fine-tuning the understanding of Q2 economic activity and the momentum at going into Q3.  They pose headline risk, perhaps, but may be of little consequence.  It is all about the inflation and inflation expectations: except in Japan. Tokyo's May CPI, released a few weeks before the national figures, is most unlikely to persuade the Bank of Japan that the rise in inflation will not be temporary.  

With fear of recession giving inflation a run for its money in terms of market angst, the dollar may be vulnerable to disappointing real sector data, though the disappointing preliminary PMI likely stole some thunder.  The Atlanta Fed's GDPNow says the US economy has stagnated in Q2, but this is not representative of expectations.  It does not mean it is wrong, but it is notable that the median in Bloomberg's survey is that the US economy is expanding by 3% at an annualized rate.  This seems as optimistic as the Atlanta Fed model is pessimistic.  May consumption and income figures will help fine-tune GDP forecasts, but the deflator may lose some appeal.  Even though the Fed targets the headline PCE deflator, Powell cited the CPI as the switch from 50 to 75 bp hike.  

In that light, the preliminary estimate of the eurozone's June CPI that comes at the end of next week might be the most important economic data point.  It comes ahead of the July 21 ECB meeting for which the first rate hike in 11 years has been all but promised.  Although ECB President Lagarde had seemed to make clear a 25 bp initial move was appropriate, the market thinks the hawks may continue to press and have about a 1-in-3 chance of a 50 bp move.  The risk of inflation is still on the upside and Lagarde has mentioned the higher wage settlements in Q2.  That said, the investors are becoming more concerned about a recession and expectations for the year-end policy rate have fallen by 30 bp (to about 0.90%) since mid-June.  

A couple of days before the CPI release the ECB hosts a conference on central banking in Sintra (June 27-June 29).  The topic of this year's event is "Challenges for monetary policy in a rapidly changing world," which seems apropos for almost any year.  The conventional narrative places much of the responsibility of the high inflation on central banks.  It is not so much the dramatic reaction to the Pandemic as being too slow to pullback.  In the US, some argue that the fiscal stimulus aggravated price pressures. On the face of it, the difference in fiscal policy between the US and the eurozone, for example, may not explain the difference between the US May CPI of 8.6% year-over-year and EMU's 8.1% increase, or Canada's 7.7% rise, or the UK's 9.1% pace.

There is a case to be made that we are still too close to the pandemic to put the experience in a broader context. This may also be true because the effects are still rippling through the economies.  In the big picture, central banks, leaving aside the BOJ, appear to have responded quicker this time than after the Great Financial Crisis in pulling back on the throttle, even if they could have acted sooner.  Some of the price pressures may be a result of some of the changes wrought by the virus.  For example, a recent research paper found that over half of the nearly 24% rise in US house prices since the end of 2019 can be explained by the shift to working remotely, for example. 

The rise in gasoline prices in the US reflect not only the rise in oil prices, but also the loss of refining capacity. The pandemic disruptions saw around 500k barrels a day of refining capacity shutdown.  Another roughly 500k of day of refining capacity shifted to biofuels.  ESG considerations, and pressure on shale producers to boost returns to shareholders after years of disappointment have also discouraged investment into the sector.  The surge in commodity prices from energy and metals to semiconductors to lumber are difficult to link to monetary or fiscal policies.  

Such an explanation would also suggest that contrary to some suggestions, the US is not exporting inflation.  Instead, most countries are wrestling with similar supply-driven challenges and disruptions.  That said, consider that US core CPI has risen 6% in the year through May, while the ECB's core rate is up 3.8%, and rising. The US core rate has fallen for two months after peaking at 6.5%.  The UK's core CPI was up 5.9% in May, its first slowing (from 6.2%) since last September.  Japan's CPI stood at 2.5% in May, but the measure excluding fresh food and energy has risen a benign 0.8% over the past 12 months.  

Consider Sweden.  The Riksbank meets on June 30.  May CPI accelerated to 7.3% year-over-year.  The underlying rate, which uses a fixed interested rate, and is the rate the central bank has targeted for five years is at 7.2%.  The underlying rate excluding energy is still up 5.4% year-over-year, more than doubling since January.  The policy rate sits at 0.25%, having been hiked from zero in April.  The economy is strong.  The May composite PMI was a robust 64.4.  The economy appears to be growing around a 3% year-over-year clip.  Unemployment, however, remains elevated at 8.5%, up from 6.4% at the end of last year.  The swaps market has a 50 bp hike fully discounted and about a 1-in-3 chance of a 75 bp hike.  The next Riksbank meeting is not until September 20, and the market is getting close to pricing in a 100 bp hike.  Year-to-date, the krona has depreciated 11% against the dollar and about 3% against the euro.  

In addition to macroeconomic developments, geopolitics gets the limelight in the coming days.  The G7 summit is June 26-28.  Coordinating sanctions on Russia will likely dominate the agenda and as the low-hanging fruit has been picked, it will be increasingly challenging to extend them to new areas.  

At least two important issues will go unspoken and they arise from domestic US political considerations.  Although President Biden has recommended a three-month gas tax holiday, he needs Congress to do it.  That is unlikely.  Inflation, and in particular gasoline prices are a critical drag on the administration and the Democrats more broadly, who look set to lose both houses.  And the Senate and Congressional Republicans are not inclined to soften the blow.  Talk of renewing an export ban on gasoline and/oil appears to be picking up. The American president has more discretion here. This type of protectionism needs to be resisted because could it be a slippery slope. 

The other issue is the global corporate tax reform.  Although many countries, most recently Poland, have been won over, it looks increasingly likely that the US Senate will not approve it.  Biden and Yellen championed it, but the votes are not there now, and it seems even less likely they will be there in the next two years.  The particulars are new, but the pattern is not.  The US has not ratified the Law of the Seas nor is it a member of the International Court of Justice. Some push back and say that the US acts as if it were.  That argument will be less persuasive on the corporate tax reform.  

NATO meets on June 29-30.  For the first time, Japan, Australia, New Zealand, and South Korea will be attending.  Clearly, the signal is that Russia's invasion of Ukraine is not distracting from China. Most recently, China pressed its case that the Taiwan Strait is not international waters.  Some in Europe, including France, do not want to dilute NATO's mission by extending its core interest to the Asia Pacific area and distracting from European challenges. NATO is to publish a new long-term strategy paper.  Consider that the last one was in 2010 and did not mention Beijing and said it would seek a strategic partnership with Russia.  Putin's actions broke the logjam in Sweden and Finland, and both now want to join NATO, but Turkey is holding it up.  


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Bonds

HW+ Member Spotlight: Ben Bernstein

This week’s HW+ member spotlight features Ben Bernstein as he shares why it’s an interesting time to be tracking the housing market and all of the…

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This week’s HW+ member spotlight features Ben Bernstein, director at Axonic Capital, an investment firm with a deep focus on the structured credit sector of the financial markets. Prior to that, Bernstein held leadership roles in Odeon Capital Group and JPMorgan Chase.

Below, Bernstein answers questions about the housing industry:

HousingWire: What is your current favorite HW+ article and why?

Ben Bernstein: Logan and Sarah’s Monday podcast is my go to. Logan cuts through all the noise and delivers clear concise opinions rooted in the data. So not only do I get updates on what is going on in the housing market but I learn which data points are relevant and how to analyze them. And Sarah always asks insightful questions. On top of that, it is super entertaining!

HousingWire: What has been your biggest learning opportunity?

Ben Bernstein: My biggest learning opportunity (and weirdest job I ever had) was every job I ever had. I started my career at Bear Stearns on February 23 2008. To say that was an interesting time and place to start a career would be an understatement. Two weeks later I was working for JPMorgan and eventually made it to a desk whose focus was working out of the assets that brought Bear down in the first place.

Think funky bonds linked to housing like subprime RMBS and CDOs. Getting to dig deep into what these bonds were and how the underlying mortgages impacted them was priceless. I started at Axonic, a credit fund focused on investments linked to residential and commercial real estate, in November of 2019.

Another interesting time to join an investment firm! Three months later, I was working remotely and figuring out how to be productive from home. Fourteen years into my career and my biggest learning opportunity is right now.

I’m learning new stuff every single day whether it be about the bond market, housing, trading, macro economics, etc. All I need to do is turn around and ask a question out loud and I’ll learn something new.

HousingWire: What is the best piece of advice you’ve ever received?

Ben Bernstein: The best piece of advice I’ve ever received was what is important is what you do when no one is looking. Your reputation, work ethic, success, productivity and integrity are all linked to what you do because you know you need to do it as opposed to what you think other people want you to do.

HousingWire: What’s 2-3 trends that you’re closely following?

Ben Bernstein: I don’t think anyone will be surprised by the trends I’m following these days: Inflation, credit spreads, housing prices and how they are all intertwined. Fortunately I have smart people around me (including HousingWire) to give me their opinions on where we are headed. It’s my job to put it all together. The past two years have been some of the most interesting times in markets and from where I sit I don’t think that will change any time soon.

HousingWire: What keeps you up at night and why?

Ben Bernstein: What keeps me up at night is the state of the housing market. 35+% home price appreciation since COVID-19 began. Two months supply of housing. Mortgage rates going up faster than they ever have. There’s a lot going on!

One thing as bond traders that we do is we look down before we look up. In other words we look at risk before we look at upside. An overheated housing market is something we pay close attention to because we don’t want prices to go down precipitously but we don’t want inflation to run away either. So it’s really an interesting time to be tracking the housing market and all of the ancillary markets that are impacted by it.  

To become an HW+ member, click here.

For more information on HW+ benefits, click here.

To view past issues of our HW+ exclusive HousingWire Magazine, go here.

The post HW+ Member Spotlight: Ben Bernstein appeared first on HousingWire.

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Economics

Risk Appetites Improve Ahead of the Weekend

Overview: Equities are higher and bonds lower as the week’s activity winds down. Asia Pacific markets rallied, paced by more than 2% gains in Hong Kong…

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Overview: Equities are higher and bonds lower as the week's activity winds down. Asia Pacific markets rallied, paced by more than 2% gains in Hong Kong and South Korea. Japan's Nikkei rallied more than 1%, as did China's CSI 300. Most of the large markets but South Korea and Taiwan advanced this week, though only China and Hong Kong are up for the month. Europe's Stoxx 600 is up 1.3% through the European morning, its biggest advance of the week and what looks like the first weekly gain in four weeks. US futures are trading around 0.6%-0.8% higher. The NASDAQ is 4% higher and the S&P 500 is 3.3% stronger on the week coming into today. The US 10-year yield is virtually unchanged today and around 3.08%, is off about 14 bp this week. European bonds are mostly 2-4 bp firmer, and peripheral premiums over Germany have edged up. The US dollar is sporting a softer profile against the major currencies but the Japanese yen. Emerging market currencies are also mostly higher. The notable exception is the Philippine peso, off about 0.6% on the day and 2.2% for the week. Gold fell to a five-day low yesterday near $1822 and is trading quietly today and is firmer near $1830. August WTI is consolidating and remains inside Wednesday’s range (~$101.50-$109.70). It settled at almost $108 last week and assuming it does not rise above there today, it will be the first back-to-back weekly loss since March. US natgas is stabilizing after yesterday’s 9% drop. On the week, it is off about 10% after plummeting 21.5% last week. Europe is not as fortunate. Its benchmark is up for the 10th consecutive session. It soared almost 48% last week and rose another 7.7% this week. Iron ore’s 2% loss today brings the weekly hit to 5.1% after last week’s 14% drop. Copper is trying to stabilize after falling 7.5% in the past two sessions. It is at its lowest level since Q1 21. September wheat is up about 1.5% today to pare this week’s decline to around 8%.

 

Asia Pacific

Japan's May CPI was spot on expectations, unchanged from April. That keeps the headline at 2.5% and the core rate, which excludes fresh food, at 2.1%, slightly above the 2% target. However, the bulk of that 2.1% rise is attributable to energy prices. Without fresh food and energy, Japan's inflation remains at a lowly 0.8%.

The BOJ says that Japanese inflation is not sustainable, which is another way to say transitory. In turn, that means no change in policy. The fallout though is increasing disruptive. The yield curve control defense roiled the cash-futures basis and the uncertainty about hedging may have contributed to the soft demand at this week's auction. In addition, interest rates swap rates have risen as if the market is seeking compensation for the added uncertainty. Meanwhile, for the fourth session there were no takers of the BOJ's offer to buy bonds at a fixed rate.

The approaching month-end pressures saw the PBOC step up its liquidity provisions and injected the most in three months today. Still, the seven-day repo rate rose 16 bp to 1.17%. In Hong Kong, three-month HIBIOR rose to 1.68%, the highest since April 2020. Australian rates moved in the opposite direct. Australia's three-year yield fell 14 bp today after falling 10 bp in each of the past two sessions. It has fallen every day this week for a cumulative 43 bp drop to 3.20%. It had risen by slightly more than 50 bp the previous week. There was a dramatic shift in expectations for the year-end policy rate. The bill futures imply a year-end rate of 3.17%, which is about 68 bp lower than a week ago. It had risen by a little more than 150 bp in the previous two weeks.

The dollar traded in a two-yen range yesterday, but today is consolidating in a one-yen range above yesterday's low near JPY134.25. The pullback in US yields has been the key development and the dollar is lower for the third consecutive day. If sustained, this would be the longest losing streak for the greenback in three months. The Australian dollar is straddling the $0.6900 level, where options for A$1 bln expire today. It is mired near this week's low, set yesterday near $0.6870. Australia's two-year yield swung back to a discount to the US this week after trading at a premium for most of last week and the start of this week. The greenback was confined to a tight range against the Chinese yuan below CNY6.70 today but holding above CNY6.6920. The greenback traded with a heavier bias this week and snapped a two-week advance with a loss of around 0.3% this week. The PBOC set the dollar's reference rate at CNY6.7000, a little below the median forecast (Bloomberg survey) of CNY6.7008. It was the fourth time this week that the fix was for as weaker dollar/stronger yuan.

Europe

The week that marked the sixth anniversary of the UK referendum to leave the EU could have hardly gone worse. Consider:  The May budget report showed a 20% increase in interest rate servicing costs. Inflation edged higher. The flash June composite PMI remained pinned at its lowest level since February 2021. The GfK consumer confidence fell to -41, a new record low. Retail sales slumped by 0.5% in May and excluding gasoline were off 0.7%. Separately, as the polls had warned, the Tories lost both byelection contests held yesterday. And perhaps not totally unrelated, the Cabinet Secretary revealed that at the Prime Minister's request a position his wife in the royal charity was discussed. This continues a pattern that had included trying to appoint her as Johnson's chief of staff when he was the foreign minister and plays on the image of crass favoritism.

The risk of a new crisis in Europe is under-appreciated. In retaliation for Europe's actions, which in earlier periods, would have been regarded as acts of war, Russia has dramatically reduced its gas shipments to Europe. Many Americans and European who scoff at Russia's "special military operation" may be too young to recall that America's more than 10-year war in Vietnam was a police action and never officially a war. Now, the critics are incensed that Moscow has weaponized gas, while overlook the extreme weaponizing of finance. Aren't US and European sanctions a bit like weaponizing the dollar and euro?  In any event, Putin has ended the European illusion that it would determine the pace of the decoupling from Russia's energy. Germany's Economic Minister and Vice-Chancellor heralds from the Green Party. The gas "embargo" has forced him to swallow principles and allow an increased use of coal. Habeck increased the gas emergency warning system and drew parallels with the Lehman crisis for the energy sector. 

It is with this backdrop that the Swiss National Bank felt obligated to hike its deposit rate by 50 bp last Thursday (June 17). The euro had been trading comfortable in a CHF1.02 to CHF1.05 trading range since mid-April. Judging from the increase in Swiss sight deposits, the SNB may have intervened in late April and early May. However, in recent weeks there was no "need" to intervene and sight deposits fell for four consecutive weeks through June 17. The euro traded at three-and-a-half week lows against the franc yesterday, trading to CHF1.0070 for the first time since March 8. In fact, the Swiss franc is the strongest of the major currencies this week, rising about 1.15% against the dollar and about 0.75% against the euro.

The German IFO survey of investor confidence weakened again but did not seem to impact the euro. The assessment of the business climate slipped (92.3 from 93.0). This reflected the mild downgrade of existing conditions (99.3 from 99.6) and the sharper drop in expectations (85.8 vs. 86.9). This is the most pessimistic outlook since March, which itself was the poorest since May 2020. The euro remains within the range seen Wednesday (~$1.0470-$1.0605). It closed near $1.05 last week. There are options for almost 1.2 bln euros that expire there today but have likely been neutralized. Assuming the euro holds above there, it will be the first weekly gain since the end of May. Par for the course today, sterling is also trading quietly in a narrow half-cent range above $1.2240. If it closes above there, it too will be the first weekly gain in four weeks. Sterling's range this week has been roughly $1.2160 to $1.2325. The US two-year premium over the UK has risen for the Monday and is now around 110 bp, up from about 88 bp in the first part of the week.

America

Bloomberg's survey of 58 economists produced a median forecast of 3.0% for Q2 US GDP. Only five of them see growth lower than 2%. The median has it remaining above 2% in H2 before slowing to what the Fed sees as long-term non-inflationary growth of 1.8% throughout next year. The market does not share this optimism. The shape of the Fed funds and Eurodollar futures curve suggests investors sees the Fed breaking something sooner. Given where inflation is, it is hard to take seriously talk about the Fed front-loading tightening, what it is doing is catching up. But monetary policy impacts with notorious lag, and as several Fed officials have acknowledged, financial conditions began tightening six months before the first hike was delivered. The Fed funds futures strip has terminal rate around 3.5% by late Q1 23. The first cut priced in for Q4 23.

The US reports May new home sales. There are supply issues that are important here, but it will likely be the fifth consecutive monthly decline. Through April, they were off 30% so far this year. New home sales stood at 591k (saar) in April. At the worst of the pandemic, they were at 582k in April 2020. The University of Michigan survey was specifically mentioned by Fed Chair Powell at his press conference following the FOMC's decision to hike by 75 bp. The final report is rarely significantly different than the preliminary report, but it cannot help by draw attention.

Mexico's central bank unanimously delivered the widely expected 75 bp hike in its overnight rate to take it to 7.75%. It was the ninth hike in the cycle that began last June for a cumulative 375 bp. The move followed slightly firmer than expected inflation in the first half of this month (7.88%) and stronger than expected April retail sales. The key is that it matched the Fed's move. It indicated that it will likely move just as "forcefully" at its next meeting in August. The swaps market has almost another 200 bp more of tightening this year. Banxico also revised its inflation forecast. Previously, it saw inflation peaking in Q2 22 at 7.6% and now it says the peak will be 8.1% in Q3. It has inflation finishing the year at 7.5%, up from 6.4%. Separately, reports suggest the US is escalating complaints that President AMLO's energy policies, favoring the state companies, violates the free-trade agreement.

The US dollar rose a little more than 3.5% against the Canadian dollar in the past two weeks as the S&P 500 tumbled nearly 11%. With today's roughly 0.25% pullback, the greenback doubled its loss to 0.50% this week, and the S&P 500 is up about 3.3% this week coming into today. The macro backdrop for the Canadian dollar looks constructive:  strong jobs market, better than expected April retail sales reported this week and firmer May price pressures. The market 70 bp hike priced in for the July 13 Bank of Canada meeting. The year-end rate is off four basis points this week to 3.41%. In comparison, the US year-end rate is off about 13 bp this week to about 3.44%. The US dollar is off for the sixth consecutive session against the Mexican peso. The peso is the strongest currency in the world this week, leaving aside the machinations of the Russian rouble, with a 1.8% gain, including today's 0.2% advance through the European morning. The greenback frayed support around MXN20.00 yesterday for the first time in nearly two weeks. It is spending more time below there today with a move to MXN19.96. A convincing break of the MXN19.94 area could signal a move toward MXN19.80. There is a $1 bln option expiring at MXN20.00 today, and the related hedging may have weighed on the dollar. 


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