Market participants are likely rethinking the narrative headed into the new week after Friday’s payrolls shocker. Suddenly, the idea of a “V-shaped” recovery doesn’t seem quite as absurd as it did just a week previous. (Some readers will say it’s still a ridiculous notion, and I wouldn’t totally disagree.)
Of course, nothing says the rest of the data will play along. A month from now, we could very well discover that “the greatest comeback in American history” (as Trump called the May jobs report) was a head fake. But for right now, the combination of a stunning beat on the world’s most important economic indicator, rampant reopening optimism, stimulus aplenty and, tangentially, the extension of the OPEC+ cuts with an emphasis on compliance, makes for a reflationary setup.
The Fed is on deck, and the market will be looking for any pushback against the rise in long-end yields. Yield-curve control (YCC) is almost surely coming to the US, it’s just a matter of when and what part of the curve the Fed will target. One thing is for sure: A disorderly rise in borrowing costs at a time when Steve Mnuchin is flooding the market with supply to fund virus relief is a non-starter. 10-year yields rose 24bps last week, the most since September, when bonds were bludgeoned in a brutal snapback after August’s big rally that inverted the 2s10s.
The Fed will taper bond-buying to $4 billion per day this week – we’re a long way from the $75 billion per day pace that prevailed briefly during the worst days of the crisis. Markets are looking for guidance about what’s next. Most see the Fed settling on a monthly amount, but there’s a chance they continue to manage things on a week-to-week basis.
“We see the most likely outturn — perhaps 65% probability – as being that the Fed will announce a ‘steady state’ pace of QE around $65-$85 billion/month until further notice in a sort of QE infinity”, Deutsche Bank’s Stuart Sparks said Friday. That’s not necessarily a call on the June meeting – it’s just a general comment on what’s coming eventually. “We would put the probability around 30% that no formal announcement will be made, instead leaving the trajectory of purchases to the weekly announcements”, Sparks went on to say.
The market doesn’t expect YCC until September, but you never know. “The Fed has no policy surprises in store at this week’s meeting. The key message will be on forward guidance”, SocGen said Sunday. “Lower-for-longer rate guidance is the key. We see the Fed shifting to yield-curve control in due course, but not yet”.
The curve is bear-steepening pretty aggressively of late, and opinions vary on what’s behind the move. The standard explanation is that a deluge of corporate issuance (see the figure) is colliding with Treasury supply and reopening optimism to catalyze a sell-off at the long end. But some have a more nuanced take.
Recent steepening in the curve has catalyzed a meaningful rotation in equities. Those inclined to “look under the hood” (so to speak) will be watching more than just the benchmarks this week.
The pro-cyclical rotation trade is in focus, and there will be plenty of interest in whether value, banks, energy, and the like, can continue to outperform. One high beta product is coming off an astounding week.
Meanwhile, tensions with China could heat up, especially if the White House feels emboldened by the jobs report and surging US equities.
Mike Pompeo and Global Times Editor Hu Xijin took turns calling each other Nazis over the weekend, in a truly silly exchange made even more ridiculous by Hu using a screengrab from Sputnik, one of Russia’s two English language propaganda outlets.
What you see below is the Chinese propaganda machine responding to the US propaganda machine by way of a tweet with a screenshot from Russian propaganda. To paraphrase Fletch, “It’s all propaganda nowadays”.
China had not fought a war in 32 yrs, while the US has fought continuously on 4 continents. The US withdrew from many UN agencies that help bring world peace, while China is a staunch defender of UN. The US also launched an unprecedented trade war. Who is more like Nazi Germany? pic.twitter.com/bxbIdQCTKa
— Hu Xijin èƒ¡é”¡è¿› (@HuXijin_GT) June 7, 2020
China logged a record trade surplus in May, data out over the weekend showed. Imports plunged more than expected, partly as a result of falling prices for commodities, while exports fell less than forecast thanks to shipments of medical supplies abroad.
It’s probably not a good idea to read too much into China’s trade data right now. Distortions are everywhere, as external demand is still depressed from the lockdowns, and the plunge in commodity prices likely affected the headline imports figure.
At a press briefing in Beijing on Sunday, the head of the State Council Information Office hit back at allegations that China engaged in a coverup around the origins of COVID-19.
“Some foreign politicians and media have presumed guilt for the origin of the virus, put labels on the virus and politicized the epidemic”, Xu Lin chided, adding that “the fabricated assumptions are utterly baseless, unreasonable and disrespectful of science”.