Daily Economic Update: January 22, 2024

Friday's University Consumer Sentiment index far exceeded expectations with strength everywhere and slightly lower inflation expectations.   As people who have read this blog for a while know, some believe this report is highly negatively correlated with gas prices which are holding fairly steady at levels that are at least 10% lower than a year ago and well off the highs.  How continued tensions in the Middle East might impact oil, nat gas, and gasoline prices remains unknown, but the data shows the U.S. has somewhat stealthily become the world's leading producer of oil and gas.

Stock prices hitting all time highs despite rising yields.  The 2's10's un-inversion watch is getting real with 10Y yields only ~20bps below 2Y yields.  Entering a steepener (betting on an increase in the difference between long-term yields and short-term yields) trade back in March or July/Aug 2023 when the 10Y was yielding 100bps below the 2Y, looks like it would have been a pretty good trade. For the uninitiated a 2s10s Steepener trade can be constructed using interest rate futures (Treasury Note Futures...it can be traded with other products as well) in one of three ways: 

1. Duration Neutral - you Buy/Long 2Y Treasury Note Futures while simultaneously Sell/Short 10Y Treasury Note Futures with both legs of the trade sized to have the same Dv01 (generally you are short a lower quantity of 10Y note contracts than you are long 2Y note contracts).
   
   
2. Bull Steepener (you think short-term yields will fall more quickly than long-term yields) - you Buy/Long more Dv01 in 2Y Note Futures than you are Short Dv01in 10Y Note futures.  The idea here is you think the steepening of the curve will come from lower 2Y yields.  You run risk that the curve steepens but the steepening is a result of the 2Y falling moreso than from the 10Y rising.
   
   
3. Bear Steepener (you think long-term yields will rise more quickly than short-term yields) - you Sell/Short more Dv01 in the 10Y Note Futures then you Long Dv01 in the 2Y Note futures. The idea here is you think the steepening of the curve will come from higher 10Y yields moreso than lower 2Y yields.

A summary of this can be found here, courtesy of CFA Refresher Reading: Yield Curve Strategies

I'm not sure how much more room the steepening of the 2s10s curve has to run, but we've certainly have had plenty of years of experience with a "normal" yield curve shape where 10Y yields were over 100bps or more higher than 2Y yields.  If I had to build a case for why trading a steepener might not work well from here it would probably be a narrative that tied to a central bank policy that the market believes is overly restrictive, leading the market to price in higher 2Y yields and lower their future growth and inflation forecast leading to lower 10Y yields.  Alternatively a scenario where the Fed embarks on Yield Curve Control or QE could plausibly also lead to further flattening/inversion.

Of course if you strongly believed that the steepening would occur from just the 2Y yield going lower or from the 10Y yield going higher you could just make a bet simply on one leg of the above "steepener" trades.  And if you believe the Steepener has run it's course, you could trade Flatteners by reversing the direction of the trades above.

The week ahead features PCE, a look at 4Q GDP, Treasury Auctions, some PMI's and Bank of Canada and ECB rate decisions.

XTOD: So if you're a Davos class type — in finance, private equity, multinational business, certain think tank/academic/nonprofit types who depend on political connections — your gut instinct is to SURVIVE at all costs.  If that means a deal with the populist, well then...Suddenly we have — as at the start of this thread — Blackstone's CEO saying, "Hey... we can't afford another Biden admin. Maybe we should keep an open mind about alternatives..."  Or Jamie Dimon of JPMorgan saying "Actually, Trump WAS right after all..."  It's still early days, but you can see the line of thinking is taking form with some of the cannier Davos types:

"I want to survive and stay in the game, so it's time to dump progressives, neoliberalism, and woke stuff, and play ball with Trump."  Watch this space people.

XTOD: Theres no fucking way the Fed eases 150 bps into ATHs in both equities and RE, so if you are an RIA get ready to switch your bullshit narrative from 'Fed cuts' to 'The market can handle higher rates'.  No charge for the advice 

XTOD: The S&P 500 closed at an all-time high.  The Russell 2000 is still in a bear market*, down more than 20% from its high.  That's never happened before.

XTOD: Jill Biden trying to distract from her comments about Hunter’s drug abuse, and ending up under a giant banner reading “Hunter High,” is straight out of a VEEP episode

XTOD: 2008: Wall Street has a bust, the whole U.S. economy crashes 2023: Tech has a bust, the U.S. economy ignores it completely and does great  Finance is more systemically important than tech, which is why it should be regulated more.

XTOD: Like everyone else, at one point, I had zero readers and zero listeners. We all start out naked and afraid. Then your mom starts checking out your stuff, or perhaps a few friends give a mercy-listen, and the fragile snowball grows from there.

XTOD: Opening day is just 69 days away!

Daily Economic Update: July 3, 2024

On the 2Y Anniversary of the 2s10s inversion, a steepener trade is starting to work.  The bond market seems to now care again about fiscal issues and how tariffs could lead to sticky inflation.  Will this bear steepener hold, who knows.

In data, JOLTS showed more openings than expected, but downward revisions muddy the picture some as does the fact that the leading category of job growth is government (actually that's less surprising).  In Fedspeak, Powell said he continues to see disinflationary progress and is characterizing risk as two-sided, with concerns about softening in the labor market.   The 2Y remains near 4.75% and the 10Y near 4.45%.  Stocks enjoyed more new records.

Meanwhile researchers from the St. Louis Fed seem a little less sanguine about inflation:

"To conclude, the mean inflation expectation only rose from about 2% before the pandemic to 2.5% in May 2024. However, the standard deviation also increased substantially, and the skewness switched from negative to positive, signaling right-tail risks on inflation expectations. The analysis in this post suggests that both second- and third-order moments should be taken into account to make assessments about future inflation and their risks."

It's an early market close but before we get there you have to wade through the deluge of data which includes ADP Employment, Jobless Claims, ISM Services and Factory Orders.  At/after the close the Minutes of the last FOMC meeting come out.  Then after fireworks and the UK general election (which Labour is expected to win in a landslide), Friday will go right into the Jobs Report.

XTOD: Strip clubs are always the most leading indicator of all...good old RICK has absolutely collapsed, this has led 2 of the last two recessions. 

XTOD: LISTENING EARS, please.  The stock market corrects when the Fed actually CUTS rates.

Until then, as it pertains to recession:   3) Unemployment lags the 3rd most (it historically rises after recession has begun)  2) Inflation lags the 2nd most  1) The stock market lags the most

XTOD: The Japanese yen is at a 37 year low, it’s the best time to plan a trip to Japan.

XTOD: Kamala for nominee futures are skyrocketing right now, doubled since noon:

XTOD: Year to date returns. Pretty wild. 

S&P 500: +15.23%

S&P 500 Equally Weighted: +4.96%

S&P 600 Small Cap Value: -5.4%

XTOD: “Once you have enough for beans and rice and taking care of your family and a few other things, money is a story. You can tell yourself any story you want about money, and it’s better to tell yourself a story about money that you can happily live with.”  — Seth Godin

XTOD: “Courage is not simply one of the virtues, but the form of every virtue at the testing point.” — C.S. Lewis

XTOD: Always stick to what makes you weird, odd, strange, different. That’s your source of power.

Daily Economic Update: March 25, 2025

Sorry if this post is incoherent.  I wrote it with an experimental neuralink device while exercising "squatters rights" in a $2 million property in NY and taking Ozempic.

Who would you like to sue?  We've got shoppers suing Hermes because Birkin bags are rare, expensive and they won't sell them to just anyone, you need to buy a bunch of other stuff to prove you're worthy first.  On top of that we've got a suit against Starbucks because oat milk is a surcharge and some people are dairy intolerant (apparently lactose intolerance is recognized as a disability).  I have decided to follow on with lawsuits against every company in the food and beverage category because: (a) healthy food is generally more expensive than junk food and (b) I have a kid with celiac, which requires him to be gluten free.  Last I checked gluten free food is ridiculously expensive and not offered at every single restaurant. They shouldn't be able to limit my access to healthy food or charge more for gluten free food, right?  Capitalism and Supply and Demand be damned.

Last week was a nice week for equities despite Friday's down day.  The tensions around the terrorist attack in Russia and the failing ceasefire negotiations in Israel are reminders that there are plenty of geopolitical risks still out there.

We start the week with 2Y Treasuries at 4.60% and 10Y at 4.20%.  Anyone willing to trade a 2's10's Steepener here?

More inflation data on the week ahead with the Fed's preferred PCE measure on Friday.

On the week ahead:

Monday: Fedspeak, new home sales

Tue: Durable goods orders, home price indexes

Wed: Gov Waller

Thur: Jobless Claims and a 3rd read of 4Q2023 GDP, UofM asking people about gas prices

Fri: PCE, Powell

XTOD: Doing what everyone else thinks you should is a sure path to the same results as everyone else.

XTOD: Take pride in your effort, not your talents. Your talents are a gift, you didn't do anything to earn them. You should take pride in what you do w/ them. True excellence comes from combining gifts with dedication and effort. (Working & studying hard/practicing consistently)

XTOD: Resendo Tellez, a 27 y/o from Wasco, California was Arrested earlier today after an Incident occurred this morning in which he was a Witness to a Fatal Accident at an Amtrak Rail Station, which involved a Person being Struck by a Train and Killed, before Tellez decided to then take the Severed Leg of the Victim and was later Filmed by a Passerby as he attempted to Eat the Human Leg.

XTOD: Breaking News - Pete Rose is now claiming it wasn’t him.   It was his Translator ( pictured below) https://pbs.twimg.com/media/GJT_pbHXMAA34I6?format=jpg&name=900x900

XTOD: This week I reintroduced my Ultra-Millionaire Tax.   It’s time for millionaires and billionaires to start paying their fair share.

XTOD: the lowest earning 40% of americans pay no income tax  the top 1% of american earners pay 40% of all income tax

XTOD: Bitcoin: Crypto’s Original Use Case:  The coin that Warren Buffet called “rat poison squared” is now a $1.3 trillion global asset sought after by some of the largest financial institutions in the world—with the potential to disrupt a wide range of markets.

Daily Economic Update: May 1, 2024

In another data point that dashes rate cut hopes, the Employment Cost Index data from the BLS showed wages and benefits rising at the fastest pace in the last 3 months and rising at a 4.2% pace YoY from last March.  The 2Y closes the month back above 5% while stocks finished the month on a down note to close out a losing month, the first since last October.  To start the month of May, the 2Y is 5.05% and the 10Y is 4.68%.  With the curve flattening yet again, is anyone willing to trade a steepener here?

May starts on a busy note with the details of Treasury issuance, JOLTS, ISM Manufacturing and of course, the FOMC decision.  While you wait for Powell, you're welcome to peruse my previous FOMC recaps here.

As for the FOMC meeting, we all know the data hasn't inspired the kind of confidence a 'data dependent' Fed desires before initiating rate cuts.  Recent Fedspeak following the last FOMC meeting all point to H4L, but it will be interesting to see if any there is anything new as it relates to how the Fed views the categories that are most responsible for the 'sticky' inflation.  Secondly, will there be any questions about the 'neutral rate' given both stubborn inflation and strong growth?   Remember when Powell spoke at J-Hole and how the Fed was navigating by the stars?   And remember how nobody has any clue exactly how to measure R-Star?

XTOD: Overlapping Generations macro says old retired people sell their assets to buy labour services (and things produced with those labour services) from the working young. A (demographic) labour shortage means asset prices fall, relative to wages. I'm not seeing it. Yet  Plus: the prices of "long" assets (houses, equities, etc.,) should fall in anticipation of that future (predictable) labour shortage.

I'm not seeing that either. Yet.  I don't know why, either. Yet.

XTOD: It's fair to say that Yellen-JPOW have failed. They clearly wanted to curb the deficit not through spending (politically impossible in an election year), but through lower inflation => lower rates, lower cost of debt, lower deficit => lower cost of debt etc... This is not happening and they need a plan B.  

They need it urgently because the cost of debt is spiraling totally out of control.

XTOD: This morning’s ECI and housing price inflation figures confirm what I have suspected and feared. Inflation is not securely trending to target levels.  Note that the ECI has accelerated from previous quarterly, semi-annual and annual levels. I suspect it has been understating labor cost inflation of late because of reduced work requirements associated with WFH. 

The home price inflation figures are also cause for concern that shelter inflation is not durably declining. With higher interest rates and higher unit prices, rents will at some point reaccelerate. 

Note, that as many have pointed out, bottlenecks have been easing over the last year or so reducing inflation momentum. This will not be forever and given geopolitics may reverse.

Financial conditions are now loose by historical standards.  All reasons why the 

@FederalReserve  is in a treacherous environment, should have been more careful about easing signals and now should be very cautious about possible rate cutting.

XTOD: "Do not spoil what you have by desiring what you have not; remember that what you now have was once among the things you only hoped for." — Epicurus

Daily Economic Update: September 5, 2024

Job Openings continued to decline in another sign of labor softening. Hiring, layoffs and quits all rose slightly, but overall, these measures look like they are back to pre-pandemic levels.  The Fed Beige book also featured some commentary indicative of a slowing labor market.

Bonds rallied with yields falling on the data, causing the 2s10s curve to finally uninvert, if only you had traded a duration neutral or bull steepener.  We still have Jobs Friday on the come.  As it stands were back to slightly inverted with 2Y at 3.77% and 10Y at 3.76%.

With the 10Y fliring with 1Y lows, should I get a job processing mortgage refis? Is that a wave that's coming?

Meanwhile the financial malaise in China continues on, remember things like the collapse of China Evergrande and the like used to make headlines, now as China sinks further into a debt and export fueled funk, you barely hear a whimper.

But let’s face it all of this pales in the face of the start of another NFL season. Sports sometimes is a good reminder that what you think might or should happen, doesn’t always happen, something unexpected can cause a change in fortunes.  It's called uncertainty.  Or this quote from a recent NY Fed Liberty Street article: 

"professional forecasters cannot really predict what kind of uncertainty regime will materialize in the future, but they seem to have a good grasp of what regime we are in at the moment."

On the day ahead it's jobless claims, ADP employment and ISM Services. 

XTOD: In sum:  Labor market in decent shape but a little looser than would be ideal and the trend is towards further loosening. With inflation getting closer to target any further loosening is unnecessary and something Powell has rightly said he would act to prevent.

XTOD: WSJ: Harris plans to propose a less drastic increase in the top capital-gains tax rate than outlined by Biden. Her advisers believe a more modest increase could encourage investment in entrepreneurship & access to capital for small businesses https://wsj.com/politics/policy/kamala-harris-to-pare-back-bidens-capital-gains-tax-proposal-14c537b1 via @WSJ

XTOD: Some statistics: Saudi oil production is today lower than 20 years ago. Oil prices, adjusted by inflation, are the same as in 2004.  Saudi population has increased >50% in the last 20 years.

XTOD: US Households now have 42% of their financial assets in stocks. That's the highest percentage on record with data going back to 1952.https://creativeplanning.com/charlie

XTOD: Lack of market concern for geopolitics is astounding. Red Sea chaos, Türkiye in BRICS, Iran attack, Libya, Russia, China... changing world order. Some investors referred to it as “simulation” - when perception of the world is different from reality

XTOD: You can never invite the wind, but you must leave the window open…

Daily Economic Update: June 27, 2024

 

"You don't realize how easy this game is until you get up in that broadcasting booth." - Mickey Mantle

Financial services loves to provide predictions and when data is slow it appears to be louder.  Like Mickey Mantle quipped, everyone is an expert from the sidelines, willing to provide you with an opinion on the stock market, the direction of yields, the Yen, etc.  As Warren Buffett says: “Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.” Not everyone gets to that point of acknowledgment.

It will be interesting to see in hindsight who the dumb money is that doesn’t yet realize it’s dumb, the firm that’s been playing poker for an hour and hasn’t figured out the fact that if they can’t figure out who the patsy is at the table it’s them.  The guys who think they’re the smartest guys in the room, but aren’t and just don’t know it yet. Is it the soft landing crowd, the hard landing crowd, the crypto crowd, tech crowd, the CRE crowd, etc.?  Don’t ask me, I acknowledge I’m dumb.

Don't worry the first debate and PCE will give pundits plenty to talk about over the remainder of the week.

Bank stress tests showed everyone passed, while absolute stressed, worst case loss levels increased. In a few days we’ll see banks reaction to these test via what they do what dividend and buyback policies. 

Sales of new homes fell more than expected.  The 5Y note auction was solid, but yields rose on the day.  The 2Y is 4.76% and the 10Y grinded higher and is now 4.34%.   With 2's10's back near 50bps inverted, I'll ask again, is anyone willing to trade a steepener here? One of these years it will work.

The Yen at 36 year weakness against USD sitting 160.59 is certainly not a beneficiary of central bank divergence.  I know some warnings have been issued by the IMF but I'm a little surprised there haven't been a ton of recent articles about how the strength of the USD since 2021 is a potential risk to emerging markets that issued USD-denominated debt. 

On the day ahead it's Q2 GDP (2nd), Durable Goods, Pending Home Sales, Old Guys On TV in primetime.

XTOD: Nate Silver has published his first 2024 election model prediciton…It gives Trump a 66% chance of winning.   In my opinion, Nate is the best mainstream election forecaster in the game. He’s also said many times that he personally does not want Trump to win.

XTOD: An insightful piece by  @mjmauboussin  on Market Concentration. 

"Many investors have a sense that concentration is too high because it has risen sharply from a much lower level. But perhaps we should ask whether concentration was too low before."

XTOD: Dollar strength cannot be stopped right now ... Bloomberg Dollar Index now at its highest since last November

XTOD: The US yield curve continues to confound many: Rather than dis-invert by now as many had expected, the 2s-10s curve is back at its December (more inverted) level of -50 basis points.

What is also notable is the lack of agreement on why this has taken place:

From those interpreting the curve as a warning about a US recession to those dismissing the curve's economic information content.

XTOD: Tiny, repeatable choices compound as days turn to weeks, weeks to months, and months to years.   Working out tomorrow won't change your physique much, but working out every day for the next year will increase your chances of staying in shape.