The Saturday Hark Back - 18 Nov 2023

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

The Hark Back

The key narratives that drove markets last week:

The current setup is a carbon copy of last year, with Q3 marking peak US economic data and we're naturally mean reverting, softening into year-end. Furthermore, a lot of the year ahead pieces that are populating Harkster.com (more below) are focused once again on peak bond yields, investing in the Fed pivot trade, maturity cliff and of course a US recession as real rates tighten, credit lending into the economy slows. 

Q4 2022 - USDJPY, USDCNH, US10s and bottom panel SPX. 

Source Bloomberg 

US10s to trade 4%??? 4 Fed cuts in 2024???

It’s a favourite pastime for the market to automatically project large moves to continue another 3/4/5% … This 10s repricing has caught many off guard, but asking for it to continue in a straight line to 4% feels like a very high bar, especially considering the technical levels it would have to work through (Chart below from Brent Donnelly). The US economy is slowing but it’s not falling off a cliff (yet). 

Source:

Friday Speedrun

Furthermore, ECB and Fed are now priced for 100bps of hikes next year despite a large divergence in economic data, is there a trade there? Will the Fed cut before Biden goes to the polls? Will Dems deliver a fiscal giveaway to boost Biden’s chances?

Positioning is a painful thing, can continue longer than one hoped, but fading “four cuts in the next year" headlines has worked post covid, especially if the US data shows some consolidation (still nfp/cpi to print before the last Fed meeting). A period of below par growth, but not a deep recession will cement the Higher For Longer mantra. 

For now, we've found a new equilibrium in 10s around 4.35/65% as positioning re-balances and the opposing themes fight for supremacy. As QT continues, the private buyer has a greater influence on price, let's see if they return in the 20 year auction next week (more below). 

The market has tried this Fed pivot before, the forward guidance from the Fed is not what we should be listening too (unless we hear something new from the plethora of Fed speak), our focus should solely be on the incoming US data. There are signs of softness in the labour market, we all know the housing market is slowing but the next 1% will be harder for the Fed to achieve. Dropping from 3% inflation sub 2% will take at least another year according to the mean of the street’s forecasts and of course longer in the Fed’s SEP. On that note, what will the Dec SEP look like, will the Fed leave another hike in their dot plot? Will they pushback against markets pricing of deep 2024 cuts? 

• ING - The Fed is done and market rates have peaked – so what now?

• BCA - Timing The Fed Pivot To Rate Cuts

• The Last Bear Standing - Playing the Pivot

• Bloomberg - Ken Griffin Says Fed’s Credibility At Risk If It Cuts Rates Too Soon

• Bloomberg John Authers - Soft Landing: Bond Markets Turn and Turn, But There's No Pivot

As glorious as the recent turn in inflation has been for global assets, FirstTrust via The BondBeat remind us of how impactful this inflation tax has been on lower income households … “food prices have now risen thirty-nine months in a row and are up 24% since before COVID, owing to the significant money creation over the last few years”. Voters, households wont forget the pain, in fact are still living through it ... FT - The feelgood factor will remain elusive

Finally, JPM Global Data Pod Weekender (Juuust right? Not quite) taking a closer look at the inflation data shows sufficient reason to be cautious and recognise that the inflation threat is not eliminated.

A sample of the pieces populating our Year Ahead channel on Harkster.com... 

• JPM - What’s the Outlook for Energy Markets in 2024?

• BofA - The Bull Case for US Stocks

• ING - FX Outlook 2024: Waiting for the tide to come in

• Morgan Stanley - Ellen Zentner: 2024 U.S. Economic Outlook

• Goldman Sachs - Why the global economy and markets can continue to outperform in 2024

• ING - 3 Key FX themes for 2024

• UBS - Year Ahead 2024 - A new world

Top 10 Reads of the Week on Harkster.com:

• Claudia Sahm
  - Why might this time be different?

• kyla scanlon
  Newsletter - How Social Media Shapes Economic Perception

• Steno Research - Great Game - 3 reasons why trump will win and 1 reason he won't

• Man Group - Views from the Floor - Is it Time for Japan’s Mid-Cap Value Stocks to Shine?

• Bloomberg - Brace for Elections: 40 Countries Are Voting in 2024

• Bloomberg - Amid High Mortgage Rates, Higher Share of Americans Outright Own Homes

• WSJ - Wall Street Loves Washington’s New Debt Approach—for Now

• Ashenden Finance SA
  - Soft landing? What does the street think

• James Picerno - 10year UST Yield ‘Fair Value’

• Russell Clark, Capital Flows and Asset Markets - TLT - THE NEW WIDOWMAKER. 

The majority of these links appear in our new "HarksterPro - Intraday Market Colour" channel. If you click on "Select Channels", you should find under "Added Recently" our latest additions to the app. @HarksterHQ will use this new channel to flag good articles/sources of content as well as headlines/market moving events. 

Top 5 Podcasts of the Week: 

• Schroders - The Value Perspective with Joe Peta, the author of Moneyball for the Money Set. 

• The Rest Is Politics - Braverman sacked and Cameron returns

• The Inflation Guy / Mike Ashton - This Month’s CPI Report - Miles to Go Before We Sleep

• Steno Research - Are central banks insolvent?

• UBS Top of the Morning - Opportunities in high quality bonds

The Week Ahead

Thanksgiving week so naturally the expectations are for a dull one, but there are three key events that can impact equities, US fixed income and oil. Three of the main thematic drivers since labour day in early September.

• Nvidia's Earnings will tell us a lot about the exposure in MAG7 and if AI is different

• 20 Year Auction - following the historic 30y tail, the market will want to see whether there is appetite for duration and if indeed the 30y was adversely impacted by a malware attack. 

• OPEC now expected to extend their cut into spring as well as Biden's SPR refill decision providing support for oil at the bottom of its multi month range.

  • FT - Opec+ weighs further oil production cuts as anger mounts over Gaza

Week ahead previews populating harkster.com

• SEB - Riksbank rate decision in the limelight

• Newsquawk - Week Ahead 20-24th November

• ING - Key events in developed markets next week

• Nomura - The Week Ahead – FOMC Minutes, UK Autumn Statement, Japan CPI and Riksbank Policy Decision

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