Read on the Trading Floor - 03 Nov 2023
Today’s focus… Soft Data, ILS, OIL, Gaza, Israel and AI
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Macro Themes At Play
Theme 1 - Tough week for bond vigilantes
Softening US manufacturing sentiment, softer global data (Bloomberg - Maersk Slumps After Forecasting Weak Global Trade Until 2026), better than feared QRA release, BoJ activity in the jgb market and a welcome reset of the labour market strength. The Fed want a period of below par growth to take inflation back to target, this weeks labour market and sentiment data most certainly assisted.....
ISM Mfg 46.7 vs exp 49.0
NFP - 150 vs exp 180
Manufacturing - 35k vs exp -10k... altho likely to return following UAW strike
Atlanta Q4 GDPNow 1.2%
However, the short term this has been a paid trade / large position squeeze, as Brent Donnelly tweeted, the "massive volume surges often mark important turning points. They are an indication of panic and forced liquidation / stop outs. The record high day in TLT (the US bond ETF) was the low."
Looking into the rest of Nov and early Dec there is a long list of US economic data prints ... NFP, PCE, CPI, IJC, ISM etc before the Dec meeting ... a data dependent Fed will need these prints to maintain their recent softness and allow this "peak rate" narrative permeate through the system.
TLT Volume surge markets the low
Source: Brent Donnelly
Theme 2 - Gaza / Israel / Oil / ILS
As Blinken arrives in the middle east on his latest peace keeping mission, the initial impact the geopolitical tensions had on assets has already unwound. Oil is back below $82 and USDILS clearly below 4.00. The ground incursion has not been as "devasting" as many feared, the risks of a regional escalation are still relevant but there is comfort in assigning a lower probability at this stage.
Politico - Thinking beyond Netanyahu
Axios - Netanyahu after Blinken meeting: No temporary ceasefire in Gaza without hostage release
Bloomberg - Israel-Hamas War Latest News: Blinken's Visit, Gaza Death Toll, Aid Package
Bloomberg - Israel-Hamas War: Blinken Meets Netanyahu With Hostages on Agenda
UBS Washington Weekly Podcast - Israel-Hamas War, AI, Chip design tech and Crime
USDILS and CL1 ...
Source Bloomberg
Theme 3 - AI, Sunak and Biden
Sunak played Oprah, interviewing Elon who as usual made some big statements on AI, whilst Biden got ahead of the summit and announced some of his own regualtion. @HarksterHQ found the MS podcast particularly informative... reskilling is key for the labour market, as well as soft skills the AI models can't replicate.
The NY Times - Harris to Announce Steps to Curb Risks of A.I.
MS - US Economy: What Generative AI Means for the Labour Market
FT - Sunak's AI summit succeeded, but not in the way the UK hoped
Theme 4 - Vol in Fixed Income
There has been a lot of focus in the press on the volatility within fixed income. However, it feels to us that the Move Index is only reverting back to the pre-GFC / QE regime... this will be a healthy macro trading environment as compression of yield spreads reduces. Maybe the "wild" or incoherent moves were actually over the past decade of QE, when bond yields didn't function properly as CB's set the price not private investors, or the underlying fundamentals of the issuing countries.
Bloomberg - US Treasury-Bill Demand: Wall Street Is Watching for Signs of Cracks
Pension & Investments - Leading economist Mohamed El Erian gives his take on the Fed, fixed income and why cash is king
Move Index back to the pre-QE range
Source Bloomberg
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just spitballing' here, but what if the yield curve goes back into steep inversion? does that mean that we have a second recession coming? asking for a friend