Things took a dramatic turn on Thursday, as a rapidly escalating US bond selloff undercut domestic equities, negating the good vibes engendered by Jerome Powell’s repudiation of market speculation around even larger rate hike increments from the Fed.
Treasury yields surged on a combination of factors, including a record four-quarter increase in unit labor costs, which underscored fears of the very wage-price spiral Powell said the Fed doesn’t yet see evidence of.
At the same time, it’s likely the pound’s dramatic slide had knock-on effects. The BoE decision was a debacle, in my judgment. The bank hiked rates a fourth consecutive meeting, but the decision revealed dissent on both sides. The new forecasts projected double-digit inflation and a sharp growth slowdown. Effectively, the MPC adopted stagflation as the base case for the UK economy. The pound plunged more than 2% against the dollar (figure below).
That kind of move doesn’t happen in a vacuum. (“This is bowling. There are rules.”)
The read-through was a stronger dollar, which isn’t generally conducive to risk-on. Disorderly dollar strength often manifests as a kind of “all purpose” (if you will) tightening impulse. Thursday’s surge found the greenback recouping a sizable portion of Wednesday’s Fed-linked drop.
Other factors cited by traders for the Treasury selloff included larger-than-anticipated corporate supply, fast money steepener bets emboldened by the removal of the 75bps tail risk (although I’d note the front-end sold off sharply on Thursday too), flattener stop-outs, the absence of real money demand and, old faithful, a generalized buyer’s strike with supply looming and worries that without an even more assertive Fed, inflation won’t abate.
10-year yields neared 3.10%, in and around where they sat when Powell’s infamous “long way from neutral” misstep set in motion a very rough quarter for equities and credit in late 2018.
Also on Thursday, data showed US mortgage rates jumped 17bps from last week, to 5.27%, the highest since late summer 2009 (figure below).
That’s around 140bps on an eight-week rolling basis, for those keeping track at home.
Home price gains in the US are now destined to slow. There’s no way around it. From here, demand will hang on demographics and appetite from real estate investors. Regular people are being priced out of the market or, at the least, down the ladder.
In any event, the scene in US equities by noon Thursday was mayhem. Total mayhem.
Apparently there is some chatter that Putin is upping the anti to more directly threaten the use of nuclear weapons. That may explain some of the buying in the short end which is forcing specs out of curve flatteners.
No. For one thing, two-year yields are 12bps higher. There’s selling in the short-end, not buying, it’s just not as pronounced as it is at the long-end. Also, the nuclear war trade would be bullish for the US long-end, not bearish. Nobody hears “nuclear drills” and thinks “sell the safest asset on Earth.”
Perhaps. But flight from fear buying most often appears in bills. But each case is unique.
I’d suggest you don’t listen to “chatter” unless it comes directly from real desks executing real trades.
Correct.
Thanks for the wise advice folks.
In my view earnings reports are the best view on “Unit Labor Costs”. So far corps have handled them pretty well imo. Doesn’t mean ti will not be an issue but corp mgmts are paid to deal with “issues”. I am not sure the employment picture will be static in the next year.
Smokey this is not Nam, this is bowling, there are rules. We are entering a world of pain.
Unless I am mistaken, I heard Powell day “long way from neutral” and perhaps even “very long way from neutral” yesterday during his presser. Anyone else catch that? Or was I daydreaming.
Found it in the transcript: “You know, the point is we’re a very long way away from neutral now.”
In hindsight yesterday sure looks like a dead cat bounce for US equities. Mark it zero Smokey!
Anyone who doesn’t believe that all US markets flow directly by Fed policy, and only Fed policy, hasn’t been paying attention for the past 4 years.
Worst pandemic in over 100 years? No problem, the Fed will dump money into the economy and look at the massive gains in the stock market, housing, commodities, crypto, and used cars!
Historic inflation out of control? No problem, QT will reverse all gains made and not sold.
Anyone willing to bet things look up as soon as QE is announced again?
Minor point, but there was an actual shortage of cars available to buy. But you’re right on all the other points.
When everyone has cheap money there is a shortage of everything.