Read on the Trading Floor - 27 Oct 2023
Today’s focus… Mixed US data, Fixed Income Momentum Waning .. is a US recession coming?
Macro Themes At Play
Theme 1 - Mixed bag of US data...
This afternoon's data has been no different to the prints from earlier in the week, contradictory signals, with the forward-looking market focused on the potential of the Us economy peaking in Q3 and an impending slowdown as the US economy drops back from its Q3 highs...
Drop in Michigan consumer sentiment from 68.1 to 63.8 but not as bad as expected 63.
Consumer expectations dropped by 9.9% to 59.3 .... weaker business conditions and consumer worries over personal finances
Hotter Core PCE relative to last month but only in line with forecasts
ING - Falling real US incomes raise doubts about the outlook for spending and inflation
Capital Speculator - Early Q4 US GDP Guesstimate Points To Sharp Economic Slowdow
After a week of bond vigilantes being in control of the narrative, US fixed income has closed the week below where it started. An impressive turn around given the weakness in the 2yr and 5yr auction earlier in the week.
2s opened at 5.12% and closing around 5.05%
5s opened at 4.93% and is closing around 4.81%
10s opened at 4.93% and is closing around 4.86%
The recovery started with the 7yr auction and was aided by the mixed US data over the past 24/48hours. Similarly, USDJPY tried above 150 overnight in thin APAC session and has reversed into the close 149.60. Friday's are well known to be laundry days, as short-term positions built up on the week get squeezed. The curve is data dependent, and we now look into the early Nov calendar to see what NFP and CPI will bring ... In the short term, month end rebalancing can also see duration demand.
Brent Donnelly am/FX - Bad News Only, Please
Source: Trading Economics.
Theme 2 - get set for a weekend of bearish FinTwit
Nasdaq has been beaten down and we can't say we weren't warned, Burry did buy a lot of downside protection. Sentiment will be extremely negative on social media, 1987 comparisons, real rate Armageddon etc etc … the tail events get the clicks and views
Theme 3 - As bearishness sentiment hits euphoria, the Santa rally still has a chance, if the stars align…
US data softens but doesn't collapse to end the year, confirming the Fed being done
After his meetings with PBoC and SAFE, China hits the large fiscal button sitting in the middle of Xi desk...
Bonds will be relieved if BoJ don't widen again next week
Buybacks restart for corps... Treasuries have to get those shares in before bonuses are paid by the end of Jan / early Feb. (Everyone loves it when they get striked at the high of the year which is so often the case in Feb)
Israel don't launch a full-scale ground assault on Gaza
Window dressing, rotation, rebalancing etc etc etc … seasonals still have a chance once Fixed Income vol can moderate, which brings us back to point 1, duration needs US data to soften…
Who am I kidding, at best we should first look for signs of consolidation, short term squeeze but There is Now An Alternative #TINAA… long end duration offers a guaranteed income profile with dividend yield not offering enough premium relative to the uncertainty surrounding equities to end 2023 and into 2024.
Consumers are rotating from party time to budgeting, covid savings are unwinding, inflation is eating into wage gains. We may not be at negative NFP just yet, but we’re still on watch for the labour market to crack, after all that's what the Fed needs and wants to get inflation back to target.
Theme 4 - getting your homework done early… Next week brings BoJ, Fed, BoE, NFP and of course AM month end rebalancing.
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