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Bond Market Strategy
Treasury 10-yr
Yield Trend: The Movie click on image to view movie
If you can't see it, you can't trade.
Friday, September 23, 2022
This is the second time the market sold off on a “hawkish” Powell. First was Jackson Hole, and now this week the Fed meeting. January Fed funds futures were pricing in 75 bps and 100 bps more to end the year at 4.25%. Fed forecasts ended up being 75 bps, and 125 bps more. Not that much of a difference. Still the markets fell. Stocks partly didn’t like Powell at the press conference around 310pm ET saying the housing market needs to go through a correction to get back to normal price growth. Not sure why the Fed Chair is talking about the value of American’s homes. At the end of the week, stocks continued to crash at a speed and total decline that we used to call a financial crisis. Financial crisis that the Federal Reserve is supposed to steer the economy through. Instead, they are going to continue to raise rates rapidly. The Friday S&P 500 YTD loss 22.5% versus -23.1% worst on June 16.
Friday, September 16, 2022
We thought the stock market’s reaction to Powell at Jackson Hole was bad enough, but now the one-day reaction to the 0.6% core CPI news for August on Tuesday eclipses that. The market reaction seems to be, forget the recession, there’s too much inflation here now and still coming, so the Fed is going to raise rates higher than 4%, at least in their outer-year forecasts next week. The CPI headline miss was -0.1 expected and 0.1 actual, core CPI miss 0.3 expected and 0.6 actual. Market reaction seems typical for events like this: Target with too many inventories, and FedEx withdrawing forecasts (didn’t they just raise the earnings forecast in June?). Stocks look like an over-reaction, but the problem remains how high will the Fed funds rate go, only 2.5% at the moment. 10-year yields volatile, but amidst the chaos closed the week at 3.45%, still below where Fed says its target rate is going.
Friday, September 9, 2022
Treasury yields rose this week. More talk of the Fed funds rate going to 4.0% this year, but yields still don’t know how to price this or won’t. In other Fed tightening cycles, 10-year yields have tended to stop around the same level as the Fed’s final rate hike. Maybe bonds think inflation has peaked, or perhaps traders are weighing the risk of a sharper economic slowdown. Canada isn’t too far north of us and we were surprised to see employment has dropped 3 months in a row: a recession sign.
Stocks rallied back after falling 10% since mid-August. Far enough. The low was Tuesday with 10-year yields jumping 15 bps and the dollar hitting new highs. Most of the move looks technical, the downtrend line from August broke on Friday’s close. Wonder what the Minneapolis Fed President thinks after being happy to see stocks fall 3.4% after Jackson Hole. Probably not a good policy for the Fed to hope for a weak stock market. Stocks do tend to look a year or two down the road.
Friday, September 2, 2022
Stocks kept falling this week as Treasury yields kept rising. The market hasn’t figured out where 2-year or 10-year Treasury yields should trade if, as Cleveland Fed President Mester said again this week, they move rates to 4% and keep them there all next year. The 10-year yield peaked at 3.5% back in June when the Fed did its first 75 bps rate hike to all of 1.75%. The markets thought the labor market wasn’t as strong, jobs, unemployment, wages, and yields came down, especially in the short-end with the 2-yr yield dropping 11 bps to 3.40%. The S&P 500 was up as much as 1.3%, but news headlines shortly after 12 noon “Gazprom says Nord Stream to stay shut in blow to Europe” sent stocks lower. August Fed funds futures (adjusted) are still close to 50/50 between a 50 or 75 bps Fed hike on September 21—3.19% Thursday, 3.145% Friday. 3.145% is 58% chance of 75 bps.
Friday, August 26, 2022
A shocking turn of events this week. On Friday, the S&P 500 fell back more than a third from its long rally from the June 17 low which puts the uptrend in jeopardy. Recession isn’t here so the Fed is still pushing rates higher, is that what this is all about? We might have known that already, although Powell turned thumbs down on market recession talk, two consecutive quarters of negative GDP and all, saying today, “While the latest economic data have been mixed, in my view our economy continues to show strong underlying momentum.” Okay. The yield curve flattened Friday thinking more rate hikes. At Friday’s close 10-year yields were 3.04% and 2-year yields were 3.38%. Are more rate hikes coming? Latest Fed forecast is 3.5% this year, 3-7/8% in 2023. New update September 21. Beware. Powell waits for more data on whether to go 75 or 50 bps: October Fed funds adjusted is 3.155%.
Friday, August 19, 2022
Bond yields moved higher this week continuing the trend. Yields fell on the second quarter of negative GDP late in July for a few days, recession meaning the Fed will halt, but Fed speak continues to say they are still going. The UK inflation report on Wednesday at 2am ET also helped push yields higher. 10-year yields reached 3.0% on Friday with bond investors trying to price in a 3.5% Fed funds rate at the end of the year, 100 bps higher than today. The September 21 Fed decision is still split between 50 or 75 bps based on October Fed funds futures. Stocks fell 1.3% Friday and we hope tech didn’t drop on the 10-year yield’s approach to 3.0%. Stocks also fell hard on Wednesday’s higher inflation out the U.K. at 2am ET. There’s a weekly downtrend line that stocks bounced off of at the week’s 4,325 S&P 500 high on Tuesday. We will see if it can get through there next time.
Friday, August 12, 2022
New high this week for stocks on the rebound from the S&P 500’s 24.5% high-low recession magnitude loss. The Wednesday 0.0% CPI report following a 1.3% jump last month was the catalyst with the S&P 500 rallying 2.1% on the day. Stocks closed Friday above the 4,227 50% retracement of that 24.5% drop, encouraged by market lore that the bear market is over once stocks come back more than 50%, i.e. they don’t revisit the bottom again. Except for the Global funding crisis in the summer of 2007 before the recession with a smaller 11.9% decline: stocks rallied back through the 50% retracement and made a new record high before collapsing over 50% in the Great Recession and financial crisis. Bond yields headed back up despite 0.0% CPI: some Fed officials said they aren’t done. Fed funds futures are close to evenly split between a 50 or 75 bps rate hike on September 21.
Friday, July 22, 2022
Recession level jobless claims Thursday 830am ET brought bond yields down from the 3.07% high for the week, 15 minutes after the ECB 50 bps surprise, closing Thursday at 2.88%. Incredibly, for a second straight month, you had to be up at 315am ET Friday for France manufacturing PMI, falling below 50 (contraction) to 49.6 from 51.0 expected. Bonds were rallying big time before the 945am ET July US PMI for services at 47.0 versus 52.7 in June. Market is thinking recession will stop the Fed rate hikes. Stocks broke higher this week until Friday. Snap earnings Thursday after the close sent the stock down 39.1% on Friday (slowing demand for the online ad platform), dragging down tech; the S&P 500 fell 0.9% on Friday, down 16.9% YTD. The market’s worst close this year was 23.1% on June 16. Things are looking up for bonds and stocks, with the economy heading down, for now.
Friday, July 15, 2022
June CPI was the economic report of the week and the 9.1% year-year figure sent 10-year yields to their 3.07% eco news high for the week on Wednesday, before Friday’s 2.92% close. The bond market has recession on the brain, and more inflation means more Fed rate hikes that could bring on recession. The yield curve flattened dramatically a couple hours after CPI: 2s/10s closing -22 bps Wednesday from -7 bps on Tuesday. If the yield curve remains negative on average for July, the earliest a recession would occur would be 13 months later which means August 2023 based on our proprietary model. The S&P 500 keeps finding support at 3750 for some reason, no matter what the news. Stocks appeared to welcome Fed Governor Waller’s no 100-bps comment on Thursday morning, and lifted further after retail sales rose 1.0% Friday, forgetting it’s not real after 1.3% CPI.
Friday, July 8, 2022
Inconsistent reaction to news, like is recession good or bad for stocks, but S&P trying to climb higher if no (huge) earnings surprises. Jump in like we did, the water's fine. S&P 500 closed down 18.2% YTD on Friday, up from weakest close for the year -23.1% YTD on June 16. 10-yr Treasury 3.08%. 2s10s curve inverted starting Tuesday this week forecasting a recession months from now.
Tuesday, July 5, 2022
Nice headline. "Dow recovers from 700 point drop as investors look for signs of recession." Write your own. Fed cut rates in 2007 before the recession and stocks went to a new all-time high. Except the S&P 500 eventually fell 57.7% from that all-time high as the financial crisis and Great Recession got rolling.
Friday, July 1, 2022
Hard to believe 10-yr yields closed 2.89% early Friday for the July 4th weekend versus the year’s 3.50% high on June 14. Market doesn’t know Fed thinks it is going to double its 1.75% rate by the end of the year. We thought bonds had learned better, but not the case: whenever the ISM manufacturing index comes down from the high 50s or 60s closer to the 50 line that separates an expanding manufacturing sector from a contracting one, the bond market rallies. Friday’s yield low of 2.80% was made after the ISM report. Stocks made their low at the same time as bond yields with stocks confused whether recession means the Fed stops rate hikes or recession is bad for earnings. Speaking of recession, GDP fell 1.6% in Q1, and the Atlanta Fed GDPNow Q2 guess went from +0.7 to -1.0% after consumption Thursday, and to -2.1% after ISM.
Friday, June 24, 2022
S&P 500 left a few gaps in the charts this week which we hope won't be revisited down below. 3.1% rally on Friday with stocks up 1.5% before the 10am ET Michigan Consumer survey saying long-term inflation expectations were revised down to 3.1% from 3.3% two weeks ago in preliminary report. Powell said the 3.3% number a factor in the sudden shift to a go-big 75 bps move at the June meeting. Market discounts 2.5% Fed funds rate July 27 and 3.0% Fed funds rate on September 21.
Friday, June 17, 2022
S&P 500 closes 3674.84 down 22.9% YTD. Fed not budging with higher rates forecast of 3.5% by December. Waiting for recession to stop them. In the meantime, maybe regulators can force banks to pay interest on savings accounts. Not 0.07%, we were thinking the 1.58% daily effective Fed funds rate on June 16 after the Fed hiked rates to 1.75% on Wednesday. Don't waste time with gasoline prices or building new refineries that no community will allow. Pay interest on savings now. Inflation hedge.
Wednesday, June 15, 2022
Stocks traded down like soybean futures Friday and Monday leaving some gaps in the charts. Tuesday's 2022 low held during today's trading with the 2pm ET Fed meeting announcement. 75 bps expected after Wall Street Journal "leak" Tuesday afternoon before stocks closed. 3.5% Fed funds rate forecast at the end of the year not expected. Treasury yields fell anyway with 10-year close 3.29%. S&P 500 down 20.5% YTD.
Friday, June 10, 2022
CPI worse than expected and stock sell-off left a gap in the charts as CPI is released 830am ET before 930am ET stock market open. A gap that will need to be filled if you are an optimist. Sell-off couldn't break the old low close on May 19 with its down 18.2% YTD. May 19 close 3900.79, today 3900.86.
Thursday, June 9, 2022
Stocks stayed within last Thursday, June 2nds range until breaking out to the downside today. Last Thursday's low was hit when Brainard was talking about not being able to pause at the September meeting. That news was shrugged off but today the S&P 500 broke that low when it was down 1.0% on the day and ended 2.4% lower. Maybe some nervousness ahead of CPI inflation tomorrow, but the big news sending rates up and stocks down in Europe was the ECB meeting where indeed they will hike rates in July.
Friday, June 3, 2022
Felt like a huge day after 390K payroll jobs that were too strong to keep the Fed from marching rates higher. Except S&P 500, even if falling 1.6% Friday close-close from Thursday, is still trading within the wide trading range high-low days on Wednesday and Thursday this week. Hate to forecast, but it looks like stocks will move higher. Market is holding.
Wednesday, June 1, 2022
Bond rally down from 3.20% on May 9 petered out this week. Jump in yields really started Monday when Americans were doing Memorial Day barbeques. A little earlier actually as European bond yields rose early hours New York time Monday on German inflation. The Fed governor Waller "several" 50 bps moves was 11am ET Monday, but was written up as a reason for the higher bond yields Tuesday. ISM manufacturing wasn't down it was up, and job openings remained high at 11.4 million at the end of April, and this sent 10-year yields to a 2.91% close tonight.
Monday, May 30, 2022
BOJ's Kuroda: Don't expect cost-push inflation to lead to sustainable price hikes. This was Bernanke's idea as well in the housing bubble inflation years with crude oil shooting higher. Idea was for central bank not to chase commodity price inflation with rate hikes. Falling commodity prices at consumer level could bring down inflation in next several months we guess. Meanwhile, core PCE inflation monthly increases definitely tamer already at 0.3% increases in February, March, April.
Friday, May 27, 2022
Stock rally continues. The market tried to break the 20.9% low early in the week. Couldn't even post a new low close for the year. Today's rally is stronger consumer spending and hint inflation has turned or at least cannot get much worse. 10-year Treasuries seem to want to rally, but cannot break through. Treasury trading closes early for Memorial Day weekend at 2pm ET today.
Friday, May 20, 2022
Hawkish Fed this week and this month's options expiry is today. New low for S&P 500 this year hit earlier in session down 20.9% from all-time highs. Started with Target earnings Wednesday morning. Won't be long now. Fed's anti-inflation measures and aggressive messaging is going to break/brake/break the economy. Bet on it.
Friday, May 13, 2022
On Thursday, S&P 500 down 19.9% from record high now discounts a recession. 10-year yields close 2.92% on Friday. Guessing game remains how high Fed funds rate (it's only 1% now) needs to go to slow the economy and stop additional rate hikes from the Fed. Bond yields okay here sort of if Fed doesn't go higher than 3.5%.
Wednesday, May 11, 2022
Stocks holding Tuesday's low where S&P 500 down as much as 17.9% from the highs this year. CPI worse than expected, but still looks like it may have peaked at a very high level.
Friday, May 6, 2022
10-year yield closes 3.14% after 428K jobs report. Higher bond yields depress stocks. Talk from former Fed officials about the need for a 3.5% Fed funds rate (2.5% supposed to be neutral for economy) to fight inflation is lifting bond yields. No sign of an economic slowdown yet. S&P 500 new 2022 closing low down 13.5% YTD. The low from Monday held today so the total high-low decline in 2022 remains 15.7% at worst point. Every recession since 70s has seen stocks fall at least 20%.
Thursday, April 28, 2022
Stocks were unable to close below the March 8 4170.70 low for the year earlier this week, although still time as this is written Thursday morning. Real GDP fell 1.4% in Q1 2022 reported this morning, although the data show a possiblity of a better core PCE inflation number due out on Friday morning. For all the worries about world growth, S&P hasn't fallen 20% yet, where a 20% sell-off or more is the norm for every recession since the 1970s.
Thursday, April 21, 2022
A reversal of fortune for stocks today despite last night’s Tesla earnings with Tesla closing 3.2% higher today. Sell-off being blamed on Powell as no one else is around although stocks fell at the same basic rate all day long. S&P 500 was up 1.2% on the day at the opening highs, and was down 0.6% on the day at 1:17pm ET when Powell was speaking on an IMF panel saying front-loading was necessary because of higher inflation and 50 bps would be on the table at the May 3-4 meeting. Yes that’s it, and 50 not a big deal given August Fed funds futures have discounted 50 bps rate hikes at the next three Fed meetings. S&P 500 closed down 1.5% and if this was the futures market, we’d say stocks are getting ready to break sharply lower.
Thursday, April 14, 2022
End of holiday shortened week. 10-yr yield 2.83% versus 2.66% last week Friday April 8. Fed funds futures and market expectations still okay with 2.5% Fed funds rate at the end of this year, including 50 bps rate hikes on May 4 and on June 15, and we guess 25 bps moves the final 4 meetings of the year. No real sign of a slowdown yet in the economy even with retail sales ex-gasoline falling 0.3% in March as reported today. Sleeper stat is nonfuel imported goods prices reported this morning. In the year ending March 2022 prices are up 7.5% and the year before ending March 2021 these prices were 3.8% higher year-on-year. Inflation a global problem, not just USA, USA, USA.
Friday, April 8, 2022
10-year yields made a new 2022 high at 2.73% on Friday. You know the Fed is getting tough when Fed Governor Brainard wants to wage war on inflation. She spoke Tuesday before the Opportunity and Inclusive Growth Institute that is at the Minneapolis Fed. There won’t be any economic growth if the Fed raises the cost of borrowing with massive interest rate hikes and an aggressive balance sheet wind down. Brainard is waiting on a confirmation vote to replace Clarida as Fed Vice Chair later this month. Bond yields went higher on Thursday, possibly mortgage-hedge sales with Wednesday’s close above 2.50% the first time. Bullard moved yields higher still on Thursday with a 3-3.25% Fed funds rate on his wish-list in the second half this year. Just sticking with the next three Fed meetings, August 2022 Fed funds futures are discounting two 50 bps rate hikes and one 25 bps move. Stay tuned.
Friday, March 25, 2022
Bonds touched 2.50% today closing at 2.48%. They are priced for a Fed funds rate peak this cycle of 2.5%. The only problem is the Fed funds rate might be there at 2.5% in December this year, the fastest tightening in years. In fact, we used to think 200 bps of rate hikes a year was too much for the economy, but we will see. The shift from we won't tighten to help the recovery to we will aggressively tighten to help bring inflation under control has happened too fast. We will watch for any sign of economic weakness if not recession because of higher rates and higher energy prices.
Tuesday, March 22, 2022
Powell shouted fire in a crowded theatre Monday saying Fed needed to move rates up expeditiously to neutral in a speech with headlines hitting 1230pm ET. He said if they needed to do a 50 bps move they would do it. If they needed to move rates above neutral to slow inflation they would do it. S&P 500 fell 1.1% on what it thought it heard. 10-year yields traded as high as 2.32% on Monday and are trading 2.37% now on Tuesday afternoon. Stocks stop caring about Powell and are moving to new highs.
Monday, March 14, 2022
10-yr yield new high, starting early overnight as European markets opened mostly, 10-yr Treasury close at 2.14% from 2.00% Friday. Something to do with the Fed announcement on Wednesday at 2pm ET about how many rate hikes are coming in 2022. Market expecting 7 more rate hikes, 25 bps at each of the remaining 7 Fed meetings this year, so ending at 2.0% the Fed target rate from 0.25% today.
Thursday, March 3, 2022
Market risks are getting impossible to quantify as the Russian invasion intensifies and looks unlikely to stop. 10-year Treasury yields are 1.84% tonight and S&P 500 at the close down 8.4% year-to-date. Starting to hear Q1 2022 US company earnings will not be as good because Q1 2021 fiscal stimulus falls out of the equation, but...
