Posted on by The Daily Shot Editor: Lev Borodovsky

The Treasury curve is nearing inversion

The Daily Shot: 22-Mar-22
• Rates
• Equities
• Credit
• Energy
• Cryptocurrency
• Emerging Markets
• China
• Asia – Pacific
• The Eurozone
• The United States
• Food for Thought

 

Rates

1. There was more hawkish rhetoric from Jerome Powell on Monday, indicating that he is open to one or more 50 bps rate hikes.

We will take the necessary steps to ensure a return to price stability. In particular, if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so.

The probability of a 50 basis point increase in May (as opposed to 25 bps) climbed above 60%.
 

 
Source: Reuters   Read full article  
 
• Eight 25 bps rate hikes (seven in addition to the one we just had) this year have been fully priced in. Could we see nine?
 

 
• The 2-year Treasury yield blasted past 2%.
 

 

 
• The market is increasingly confident that the Fed will be cutting rates at the start of 2024.
 

 
• At what point will the Fed stop raising rates? Here is a forecast from Wells Fargo (consistent with the peak in the chart above).
 
Source: Wells Fargo Securities  
 
• The market expectations for the long-run (“terminal”) overnight rate jumped.
 

——————–

 
2. The Treasury curve is nearing inversion, with the 10yr – 3yr spread already in negative territory.
 

 

 
• The 2yr-3yr-5yr butterfly spread hit a multi-year high as the curve kinks around the three-year point.
 

——————–

 
3. Powell suggested that we should be looking at the short end of the curve (which has been steepening) for signals on the economy.
 
Source: Bloomberg   Read full article  
 

——————–

 
4. The drawdown in the Treasury market has been remarkable.
 
Source: BofA Global Research; @MikeZaccardi  
 
5. It’s worth noting that the 10-year Treasury yield tends to drop after the conclusion of quantitative easing.
 
Source: Andreas Steno Larsen   Read full article  
 
6. Global bond yields are surging.
 
• Canada:
 

 
• The UK:
 

 
• Germany:
 

 
By the way, here is Austria’s 100-year bond price.
 

 
• Switzerland:
 

 
• Australia and New Zealand:
 

Back to Index

 

Equities

1. Stocks have been resilient in the face of an increasingly hawkish Federal Reserve. But if we follow the 2018-19 trend, there is more pain to come.
 
Source: Morgan Stanley Research; @SamRo  
 
2. The latest selloff did not see the volume spike that tends to accompany investor capitulation.
 
Source: @MFHoz  
 
3. Positioning remains bearish.
 
Source: Goldman Sachs; @WallStJesus  
 
4. BofA’s Financial Stability Risks Index (based on the bank’s fund manager survey) points to downside risks for the market.
 
Source: BofA Global Research  
 
5. Downside risks for housing stocks have risen with bond yields.
 
Source: @MrBlonde_macro  
 
6. Banks are not keeping up with rising bond yields (chart shows the SPDR regional banking ETF relative to the S&P 500 vs. the 10yr yield).
 
Source: @MrBlonde_macro  

Back to Index

 

Credit

1. High-yield ETFs continue to see outflows.
 

 
Here is the situation for corporate credit as a whole.
 
Source: BofA Global Research; @Mayhem4Markets  

——————–

 
2. Investment-grade debt continues to underperform (2 charts).
 

 
Source: Deutsche Bank

Back to Index

 

Energy

1. Brent crude is gunning for $120/bbl again.
 

 
• The disruption in global oil supplies is expected to be substantial.
 
Source: @JavierBlas, @IEA  
 
• Will the EU stop buying Russian oil?
 
Source: Reuters   Read full article  

——————–

 
2. European natural gas futures dropped below €100/MWh as Russian gas keeps flowing.
 

 
3. This chart shows the US oil supply cost curve.
 
Source: @BloombergNEF   Read full article  

Back to Index

 

Cryptocurrency

1. Bitcoin’s buying pressure is strongest during US and European trading hours, while a majority of selling pressure occurs during Asia hours.
 
Source: @glassnode  
 
2. Bitcoin-sensitive stocks are starting to outperform BTC.
 
Source: @TimmerFidelity  
 
3. The US, Kazakhstan, and Russia have taken the reins of hashrate dominance (computing power) since China’s mining ban took effect.
 
Source: @Aoyon_A  
 
4. Ether’s short-term volatility is trading at a discount relative to bitcoin.
 
Source: Skew   Read full article  
 
5. Crypto investment products saw the second consecutive week of outflows, led by Bitcoin and Ethereum funds.
 
Source: CoinShares   Read full article  
 
6. Bitcoin balances at crypto exchanges continue to move lower.
 
Source: Glassnode   Read full article  

Back to Index

 

Emerging Markets

1. Egypt hiked rates, …
 

 
… and the Egyptian pound dropped 14% amid deteriorating foreign reserves.
 

 
Source: Al Jazeera   Read full article  

——————–

 
2. Russia is no longer publishing its FX reserves.
 
Source: Bank of Russia   Read full article  
 
Separately, this chart shows Russia’s imports by source and product.
 
Source: @WSJ   Read full article  

——————–

 
3. Economists are downgrading South Africa’s growth forecasts.
 

 
4. Brazil will complete Latin America’s political shift to the left.
 
Source: Reuters   Read full article  
 
Source: @PredictIt  

Back to Index

 

China

1. Supply stresses remain elevated.
 

 
2. The Evercore ISI survey of multinationals points to weakens in business activity ahead.
 
Source: Evercore ISI Research  
 
3. More downside risks for Hong Kong stocks?
 
Source: Morgan Stanley Research; @SofiaHCBBG  
 
Short-selling turnover has been climbing.
 
Source: @SofiaHCBBG  

Back to Index

 

Asia – Pacific

1. Dollar-yen surged above 120 as the monetary policies diverge. The yen no longer trades as a safe-haven currency.
 

 
Separately, Tokyo electricity prices soared this week.
 
Source: Bloomberg   Read full article  

——————–

 
2. Taiwan’s export orders remain very strong, topping forecasts.
 

 
3. Consumer sentiment in New Zealand hit the lowest level since 2008.
 

 
4. Next, we have some updates on Australia.
 
• Hedge funds covered their AUD shorts last week as Beijing stepped in to support China’s markets.
 

 
• Consumer confidence keeps deteriorating.
 

 
• The labor market is moving into uncharted territory.
 
Source: ANZ Research  

Back to Index

 

The Eurozone

1. Germany’s PPI blasts past 25%.
 

 
2. The Evercore ISI survey of multinationals points to a weak Eurozone PMI report.
 
Source: Evercore ISI Research  
 
3. Wells Fargo expects “a 25 bps ECB rate increase in December 2022 and another 25 bps rate increase in March 2023”.
 
Source: Wells Fargo Securities  

Back to Index

 

The United States

1. Supply chain stress levels remain elevated.
 

 
One way to ease supply issues (and therefore inflation) is by slowing consumer demand. Will the Fed’s aggressive rate hikes accomplish this without forcing the economy into recession?
 
Source: PGM Global  

——————–

 
2. When is the start of the next recession? Here is a survey from Deutsche Bank.
 
Source: Deutsche Bank Research  
 
3. Next, we have some data on household excess savings.
 
Source: Goldman Sachs; @SamRo  
 
4. How long will it take for goods and services spending to revert to pre-pandemic levels?
 
Source: Morgan Stanley Research  
 
5. COVID concerns among US consumers continue to ease.
 
Source: Goldman Sachs; @SamRo  

——————–

Back to Index

 

Food for Thought

1. Public spending on childcare and early education:
 
Source: Wells Fargo Securities  
 
2. US residential retail electricity price:
 
Source: EIA   Read full article  
 
3. The SWIFT payment network
 
Source: @WSJ   Read full article  
 
4. Share of global Fortune 500 revenues:
 
Source: EC   Read full article  
 
5. African wheat imports by source:
 
Source: Statista  
 
6. Sanctions’ use globally:
 
Source: Goldman Sachs  
 
7. Support for US foreign policy initiatives:
 
Source: Echelon Insights   Read full article  
 
8. The percentage of Catholics by country in Europe:
 
Source: ECB   Read full article  
 
9. Overestimating the size of minority groups:
 
Source: YouGov   Read full article  

——————–

Back to Index