The Saturday Hark Back - 11 Nov 2023

Capturing the themes of the week when there’s more time to digest them.

Nov 11, 2023

The Hark Back

The key narratives that drove markets last week:

@HarskterHQ is delighted to see the end of last week and is looking forward to next week's US CPI print ... some key data to finally trade off. It's natural but tedious to endure a period of consolidation after the explosive unwind of the October trades ... long USD, paid rates, short equities and long commodities. CB's have tried to tame the animal spirits but the soft landing, US recessionist group are firmly in the belief that the Fed has hit peak rates and the Santa seasonal rally is only the start of the Fed 'peak rate' market surge to new heights.

#1. Forward Guidance is dead...

God, I wish JPow stuck to his word and it was true. The endless and repetitive CB chatter last week was tough to watch, with every last word and detail monitored by the street due to the vacuum of key US data. As we sit at a crossroads wondering if we've seen the lows in assets or is this ultimately another squeeze to fade, everyone was hoping for a sliver of inspiration or momentum one way or another.

A hot mic ended up being the most interesting part of the week as every Central Banker focused on higher for longer, being too early to cut etc etc etc ... haven't we traded this regime again and again in 2023...

What gave the Fed/ECB chatter some credence is the elevated inflation expectations. Economies maybe slowing, fiscal support dwindling but the consumer still expects higher prices and ultimately higher wages... As Nagel put it, this last period will be the toughest to fight. Bond markets confidence that inflation has been beaten - might still be at stake given rising consumer inflation expectations.

Bloomberg - US Consumer Long-Term Inflation Expectations Reach 12-Year High
ECB Consumer Inflation Expectations rose to 4% in 1yr ... double the ECB's mandate and 80bps above the 3.2% staff forecast for next year.
Reuters - Euro zone consumers raise inflation expectations in headache for ECB

However, ING are calling peak rates for major CB's - Our view on central banks

#2. Let's see about the 30year auction ... was it a "technical" failure or a buyers strike for US duration?

The news of a USB key being used for key trade settlements has bought the long end sometime as the market considers the impact the ransomware attack on ICBC had on the 30 year auction. Sadly, it will be Nov 20^th before we see another test of the market's appetite for duration with the 20 year auction scheduled for that day (once the government doesn't shutdown on the 17^th... more below). The 20 year is commonly a tough point to fund so it will be watched intently to see if there truly is a buyer's striker driving the curve de-inversion.

FT - Ransomware attack on ICBC disrupts trades in US Treasury market
Morgan Stanley - Are the Worst Bond Returns Behind Us?
RIA - Bond Bear Market. Is It Dead, Or Just Hibernating?
BNYM - Fed QT To Continue Well Into 2024
Man Institute - Views From the Floor: Tighter and Tighter
JP Morgan US Rates - Death Cab for QT?
Bloomberg - Fed Sees Risks for Banks From US Office Space, Interest Rates

US2s10s ... still haven't made it above 0.0....

Source Bloomberg

#3. US Recession Watch

The Sahm Rule "monster" was the focus for the week... much loved, much spoken about, much tested, often modified and even potentially disliked and misunderstood....

Claudia Sham - The Sahm rule: I created a monster
Claudia Sahm - Quick update on the Sahm rule
Bloomberg - Why My Recession Rule Could Go Wrong This Time: Claudia Sahm
am/FX - Follow Up re: Modified Sahm Rule
The Macro Tourist - THE SAHM RECESSION INDICATOR
Axios - Why higher U.S. unemployment is a worry

No matter, the market is firmly on US recession watch after a few signals the labour market is starting to soften. This is a trade many have tried to invest in throughout 2023, some have fallen in love with and as the maturity wall hits, credit starts to tighten, fiscal impulse starts to dwindle, it feels like this time is as good a chance as any that we may see a substantial slowdown. At least below par growth to aid the Fed to get inflation back to target.

@HarskterHQ would be a lot more confident in that call if it 2024 wasn't an election year. Why would Biden go to the polls after blowing out the deficit, spending $5trillion on his "Bidenomics" projects only for voters to feel the negative wealth impact of a recession just as he returns to the polls... The timing is off, something has to give, the Fed is forecasting two cuts next year, is the market overconfident in expecting 4?

The Capital Spectator - US Economic Slowdown Watch
Liberty Street Economics (NY Fed) - Credit Card Delinquencies Continue to Rise - Who Is Missing Payments?
Stenos Signals - New credit data suggests a wave of bankruptcies is coming
ING - Bank caution to tighten the squeeze on the US economy

#4. Back to Washington as shutdown risk looms

Moody’s negative watch dominated Friday evening as the agency remains the only one of the Big 3 that maintains a AAA rating on the United States.

Bloomberg - US Credit-Rating Outlook Changed to Negative by Moody’s

Veteran's day was an interesting time to drop the news story as the market was still digesting the 30 year tail auction from earlier in the week. Ultimately the political focus is on the cost the government is now paying to finance the deficit ... This is crucial to the latest debate / shutdown risk as Biden now comes up against new House Speaker Mike Johnson.

Bloomberg - US Debt Interest Bill Rockets Past a Cool $1 Trillion a Year
Macro Hive - Marc Goldwein on the Unprecedented US Budget Problem and How to Fix It
Axios - Mike Johnson's 10-day shutdown test threatens to end speaker honeymoon
The Dispatch - House GOP Gives Mike Johnson (Some) Leeway in Averting a Shutdown
Axios - “Tired of taking crappy votes”: GOP divisions force Mike Johnson to punt on spending bills
ZeroHedge - Speaker Mike Johnson Pumps The Brakes On Biden Impeachment

#5. Bullish signals from the Equity world...

As the holidays approach, it's difficult to be bearish, and there are plenty of positive signals coming from the equity space, even if the "breath of the most recent rally is being questioned by ZeroHedge...

Adam Mancini - SPX Is About To Breakout A 4 Month Downtrend
Sam Ro TKer - A bullish earnings story is brewing 📈
TKer by Sam Ro - Here comes Wall Street's 2024 outlook for stocks 🚨
Bloomberg - HSBC Strategists See 10% Rally in Global Stocks on Soft Landing
BofA - The Bull Case for US Stocks

In particular, @HarksterHQ would like to draw your attention to an excellent new source of research that has come to our attention over the past few weeks, the

Nautilus Research’s Substack

. Their latest piece (Maybe it's Not a Repeat of the 2000 Bubble) compares the Current Set Up on S&P Software Index With The Concentrated Breadth in 2000 - They Don't Look the Same….

The Nautilus team have on average of over 20 years experience in research and the investment management industry. They have been publishing their systematic signals for their hedge fund clients for over a decade. Their track record is outstanding and @HarksterHQ is looking forward to following their recently launched Substack...

Top 5 Podcasts of the Week:

TG Macro/ Navigator TV - Market Quarters with Brent Donnelly and Tony Greer
S&P - Monetary policy moves in Central Europe and Central Asia
J.P. Morgan - Global Data Pod Weekender: Slow-Mo still got Mojo?
Andrew Sheets / MS - Will the Bond Market Suffer from Tax-Loss Selling?
Goldman Sachs - The $100bln opportunity: How anti-obesity drugs are re-shaping healthcare and consumer behaviour

The Week Ahead

Looking forward to next week...

ING - Key events in developed markets and EMEA next week.
SEB - US inflation, Biden-Xi meeting
S&P Global - Week Ahead Economic Preview
UBS - The week in review and preview
Newsquawk - Week ahead - Highlights include Biden-Xi meeting, US CPI, Retail Sales, China Activity Data

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