Read on the Trading Floor - 06 Nov 2023
Today’s focus… Sahm Rule and Fed Speak
Macro Themes At Play
Theme 1 - A quiet start to the week
After last week's historic repricing of assets, it was asking a lot for the momentum in the position squeeze to continue into this week. Rates 2s/5s/10s (Chart 1) have all sold off today, whilst ESA has consolidated below the key resistance pivot 4400-4430. A natural consolidation, as traders / investors wait for the next set of key US data to dictate whether the Fed have indeed paused and/or the US recession is on the horizon.
Adam Mancini - Rest Day For SPX; Another Big Leg Up Incoming? November 7th Trade Plan
Wolf Street - Highest-Ever Treasury Short Positioning by Hedge Funds into Last Week Was “Accident Waiting to Happen,”
Morgan Stanley - Will the Equity Market Rally Last?
Capital Flows and Asset Markets by Russell Clark - IS SHORT TLT DONE? PART TWO
Chart 1: US 2s / 5s / 10s sell off.. the correction of the correction
Source: Bloomberg
Chart 2: 4400-4430 pivot resistance band that has defined H2
Source: Bloomberg
Theme 2 - Fed's October SLOOS report showed tighter standards and weaker demand
All categories of loans to households saw tighter standards
Banks reported weaker demand for home equity lines of credit (HELOCs).
Credit card and other consumer loan types reportedly tightened and demand weakness
Bloomberg - “In answering a special question on why the change in standards, the most frequent response was a less favourable or more uncertain outlook, along with reduced tolerance for risk, deterioration in the credit quality of loans and collateral values, and concerns over funding costs.”
Stenos Signals - New credit data suggests a wave of bankruptcies is coming
"The demand for loans, especially among SMEs, remains subdued relative to larger corporations. The survey result is in line with a 5-7% credit contraction, which is less bad than 2008 but worse than 2001" (Chart below)
Theme 3 - Sahm Watch
After Friday's nfp print, everyone is focused on the 50bps trigger for the Sahm rule / recession indicator.... Note: a three-month moving average of the unemployment rate of 4% would trigger the rule. One month at 4% does not cut it....
Claudia Sahm - Quick update on the Sahm rule
The Macro Tourist - THE SAHM RECESSION INDICATOR
However, it is worth nothing Claudia Sahm's past comments... The Sahm rule: I created a monster... “Sahm rule is a widely followed indicator of recessions. It's gotten a lot of attention from experts who use it to argue we're not in recession and others who weaponize it to say one is coming.”
Theme 4 - Fed Speak... Are financial conditions tight or lose?
After the fireworks of last week, the data dependent Fed has a slow US calendar to navigate with only the University of Michigan surveys in focus. As a result, it will be Fed speak that will most likely determine where US fixed income ends the week.
If USD weakens, equity and rates markets continue to rally .... will the Fed rhetoric change to drive Dec back onto the table? Are the fed simply selling call options on assets with QT... for years we focused on the Fed put, but this new Fed loop leaves the market vulnerable to further Fed tightening as soon as assets "try" to perform.
Source Bloomberg - Time EST
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