Read on the Trading Floor - 26 Sept 2023
Today’s focus… yields, leverage in the basis trade, government shutdown, core PCE, climate economics and more...
Theme 1: positioning in fixed income markets garners attention in main stream media
Bond yields continue to set the tone across assets... what started with the BoJ widening in August has engulfed the market in mid-September as 'higher for longer' becomes the CB anthem of Autumn 2023. Jamie Dimon has warned us that the World is Not Ready For the Fed's Stagflationary Response (ZeroHedge). Every day post Fed it seems like 10y real rates and/or 30y mortgage rates have simply been fighting it out for the headline of being the last to hit a fresh mutli-decade high. As pressure on fixed income mounts and the government is now funding $33trillion of debt at ~5%, let's not forget poor old Congress Reps (more below) fighting it out over a debt ceiling raise... it was a lot easier to run a deficit at the lower bound.
@HarksterHQ is happy to leave the basis trade explanation and risks to the experts. In Man Group's piece Views from the Floor - Macro Signals Suggest Risk-On Continues, they highlight the key risks global CBs are fearing... "if the current trend of asset managers going long and hedge funds shorting Treasury futures (through the basis trade) continues as more Treasuries are issued, any unforeseen events may spark a re-run of the 2020 and March 2023 scenarios. In the current environment two scenarios could force hedge funds to rapidly unwind their basis trades: one if the market moves against them; for example, if their repo position becomes too punitive to roll. The other one would be if bond market volatility forces them to post more margins for their short Treasury bond positions"
Source: Man Group
Despite the aforementioned Asset Manager holdings, BNY Mellon Short Thoughts (Behind The Rise In Treasury Yields) shows a shift in their UST activity relative to the past 3 years.
"…for most of the post-lockdown period real money flows had been quite robust and implacable. That has changed: as yields have risen in the last few months, we see net selling for the first time since the summer of 2021. Investors had been content to buy into rising yields (falling prices) for most of the year until August, which of course, coincides with the onset of bear steepening. Supply and demand fundamentals continue to auger for higher yields, in our view. We expect the 10y Treasury yield to move towards 5% by the end of the year"
Some further reading on the rise in Treasury yields and the basis trade that has caught the attention of our user base on harkster.com over the past 24/48hours...
FT: The debt-fuelled bet on US Treasuries that's scaring regulators
ING FX Daily: US bond market sets the FX tone
Concoda: Money Market Brief
JPM Asset Management: The investment implications of a rising federal deficit
ABN Amro: Global Monthly - The inflation comeback?
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Theme 2: US Government shutdown and don't forget about Core PCE...
As the market finally gets set on a September theme of long USD, paid rates, short equities.... the potential / impending government shutdown comes at a difficult time for PMs, market makers, households and authorities. The WSJ: (Shutdown Would Blindfold Fed in Piloting Course on Rates) reports the previous times in 1996 and 2013 when a Federal funding lapse delayed jobs and inflation reports. Not ideal for calendar vol spreads, option premium spent on Oct 6 NFP USD calls, etc etc .... As is normally the case when one side is engulfed in civil war (WSJ: Kevin McCarthy Stares Down GOP Holdouts in Critical Vote) the other brings a short term bill to kick the can / buy more time... Bloomberg reporting a short-term bipartisan funding deal maybe found but the legislation would present a challenge for House Speaker McCarthy.
Some further reading of note on the now annual government shutdown festivities...
The Dispatch: House Republicans Saddle Up for More Chaos (Even their own colleagues aren’t sure of what the GOP holdouts want from the spending impasse.)
Fortune: Congress moves into crisis mode with a government shutdown just days away
Once again with consensus sentiment aligning on 10yr rates trading 5% (by year end), Friday's release of the August core PCE reading is crucial (Previous 4.2% exp 3.9%). The market is forecasting the Fed's favourite inflation gauge to come in under 4% for the first time since 2021. More from The Gryning Times: Little Risk to Raise.
Theme 3: UAW strike impacts 2024 battleground and wage (inflationary) agreements
Biden is to make history by hitting the UAW picket line today (Axios)... "It's the first time a sitting president has ever visited a picket line, and a sign of just how critical a resolution of the autoworkers strike, now in its 12th day, has become for the president. It will be a battleground state for 2024 election". It comes at a crucial time for northern state workers as Ford have announced construction on a planned Michigan EV battery plant has stopped
ING (Surging oil prices: a new concern for central banks) look back at the 70's and discusses the impact higher real wage growth can have on CB's (in)ability to fight inflation.
Theme 4: Net Zero Economics
The evolution of net zero policy and the fact decarbonization delivers local costs for global benefits is at the forefront of the recent "adjustment" in targets from western governments. With short term growth concerns as well as the inflationary impact of some ESG policies, governments are looking to delay / spread out the impact. ING ( New York Climate Week: It’s all about acting faster and together) make the point that firms/countries need to decarbonise the value chain not siloed sectors. "Scope 3 emissions make up the ballpark of most sectors’ total emissions, and companies have realised that decarbonisation needs collective efforts from themselves as well as their suppliers and consumers."
Some of the most popular research pieces on our platform today that are focused on ESG / carbon neutral policy and its impact on markets
Bloomberg: BlackRock, State Street Among Money Managers Closing ESG Funds
WSJ: Trillions in Climate Funds Could Sow Turmoil in Poor Nations
Axios: China's top climate official says no to a fossil fuel "phase out" provision at COP28
Slow Boring: Why climate policy is hard
And to finish on a positive note, maybe it's not all bad news on the climate front with The Guardian quoting a more optimistic Executive Director of IEA, Faith Birol (chief economist). “Solar photovoltaic installations and electric vehicle sales are perfectly in line with what we said they should be, to be on track to reach net zero by 2050, and thus stay within 1.5C. Clean energy investments in the last two years have seen a staggering 40% increase.” (Staggering’ green growth gives hope for 1.5C)
Have a great day and Keep Smiling
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Finally, four pieces of note from @HarksterHQ Daily Reading List
Daily Chartbook: #287
The MacroTourist: Private Feed Recap via Email
MacroVisor: Charts of the Week
Brent Donnelly: AUD Lower into M/E
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Net zero is in the initial stages of its death throes
Hate to burst your bubble; but the Guardian is fake news. Net Zero is a scam.