By Tim Knight
By Kevin Muir
This afternoon some big shooter put on a monster U.S. steepening / German flattening bond trade. The specifics of the trade were;
- buy 100,174 US five-year treasury futures
- sell 63,887 US ten-year treasury futures
- sell 65,362 German bobl futures (5-year)
- buy 29,145 German bund futures (10-year)
I did get a few pings asking if I was busy writing some tickets, but alas, the ‘Tourist’s positions have a lot less digits. According to Bloomberg, this position has $4.7 million of DV01 risk (dollar-value per basis point). That’s way above my pay grade, but it’s worth thinking about the rationale behind this whale’s trade.
Let’s break the trade into two parts. The first is the US side. The trader bought the five-year US treasury future and sold the ten-year US treasury future. This half of the trade will profit if the U.S. treasury yield curve steepens between the 5 and 10 year portion of the curve.
See this Bloomberg article for a look at the ingredients in a policy stew that looks like it was scraped off the floor of Worst Cooks in America. Click the headline for the article.
Federal Reserve policy makers seem to be working at cross purposes.
In laying out plans to ease some constraints imposed on banks after the financial crisis, the Fed is moving to free up tens of billions of dollars for financial institutions to lend to promote faster economic growth.
At the same time it is reducing its balance sheet and gradually raising interest rates to restrain credit creation and keep the economy in check.
So tell me, why are they speaking out of both sides of their orifice? Is it because of the need to keep an object in motion (in this case, a hyper-stimulated economy within a Keynesian debt-for-growth system) hurtling forward at an ever increasing pace? Why can’t we just have a quiet end and soft landing to the boom that began in 2009? Ha ha ha, you know the answer already.
How quickly things change in these markets. In the report two weeks ago, the markets reflected a pretty obvious slowing in the global economy. In the course of two weeks, what seemed obvious has been quickly reversed. The 10-year yield moved up a quick 20 basis points in just a week, a rise in nominal growth expectations that was mostly about inflation fears. The economic news over the last two weeks does not appear to support the move in rates but our process puts more emphasis on markets and less on individual economic reports. So, I’ll accept that inflation fears – and fear of the Fed’s response – have driven rates higher over the last week. Whether those fears are warranted is open to question.
Even after the move up in rates, the overall outlook for the economy hasn’t changed much. Real interest rates are still stuck in the same range they’ve been in since mid-2013 and the nominal 10-year rate is within a similar range that has prevailed since 2011. Both though are right at the top of those ranges and the obvious question is whether rates will continue higher. Or to put it a little differently, is nominal growth – real growth plus inflation – about to move into a new, higher range?
While I can’t answer that question definitively, I do have my doubts. Every tightening cycle in my career has seen long-term rates peak at a lower level and I don’t think this one will be any different. The 10-year rate has already doubled from the lows, a bigger move than any tightening cycle in my career (and this is the fourth major one). It is tempting to say this time will be different because the Fed held short rates lower for longer this time than even the last cycle when that caused so many problems. But it seems to me that doing so makes the economy more sensitive to higher rates, not less. Debt levels are higher today, in the US and globally, than they were in the last cycle. Higher rates will bite sooner than they have in the past.
As for inflation, earnings reports and company calls indicate that companies are not able to pass through rising raw materials costs and that is hitting margins. That’s what drove the selloff in Caterpillar shares this week after a very good earnings report and it isn’t just one company having that problem.
Could interest keep rising? Obviously, the answer is yes but that depends on the economic data and how market participants interpret that data with respect to Fed policy. We’ve already seen some moderation in sentiment and in the regional Fed surveys. We get a durable goods report tomorrow and Q1 GDP Friday. Expectations are for growth of about 2%. Anything significantly different than that view will probably move markets.
Economic Growth & Investment
By Otto Rock
It’s goldbug tinfoil hat time at IKN, because this is weird:
After running up the way it has recently and right in the middle of a period of intense market turmoil, just the type of action that makes gold safe haven strategies attractive, gold inventories at GLD have stalled at 856.89mt and stayed right there for nine days running. That’s also just under the record since Trump came to power. Parrot required:
Regular readers know that IKN doesn’t jump quickly into conspiracy theories and blather about Bildebergs and “THEM!!!”, but your humble scribe is also keenly aware that markets get rigged from time to time. There is something amiss here, it’s not as if gold should be ignored at the moment. Data from here of course.
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Mortgage Refi Applications Deader Than A Norwegian Blue
Finally, the US Treasury 10-year yield has pierced the 3% barrier and NOT immediately dropped back. The 10-year yield stands at 3.03%.
How about the 30-year mortgage average? The Bankrate 30Y mortgage average rate is now 4.50%.
By Tim Knight
Google (oh, sorry, I forgot to use the stupid name that no one uses – Alphabet) had a pretty bad day. I’m sure the management is a bit baffled what the hell they are supposed to be doing, since blowout earnings don’t help the way they used to. Even though the stock exploded higher yesterday afternoon, it barfed all over itself Tuesday.
The June NASDAQ 100 was lower overnight as it extends the decline off April’s high. Wall Street is setting up for another day in the red as U.S. Treasury yields kept stepping higher above 3%. U.S. stock futures are poised to open with sizeable losses as nervous investors pressure global equity markets and keep an eye on yields. A packed day of corporate earnings could help drive direction, with results from Twitter, Comcast and Boeing expected to come in before the market open. Stochastics and the RSI remain neutral to bearish signaling that sideways to lower prices are possible near-term. If June extends the decline off April’s high, April’s low crossing at 6306.75 is the next downside target. Closes above the 50-day moving average crossing at 6770.74 would confirm that a short-term low has been posted. First resistance is the 50-day moving average crossing at 6770.74. Second resistance is the reaction high crossing at 6951.00. First support is the reaction low crossing at 6408.50. Second support is April’s low crossing at 6306.75.
The June S&P 500 was lower overnight as it extends the decline off last Wednesday’s high. Stochastics and the RSI are neutral to bearish signaling that sideways to lower prices are possible near-term. If June extends the decline off last Wednesday’s high, the reaction low crossing at 2584.50 is the next downside target. Closes above the 50-day moving average crossing at 2691.51 would confirm that a short-term low has been posted. First resistance is April’s high crossing at 2718.00. Second resistance is the reaction high crossing at 2741.00. First support is the reaction low crossing at 2584.50. Second support is April’s low crossing at 2554.00.
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See “a classic capitulation to a rising trend”
History often repeats. So, one way to make an educated guess about the future is to look at the past.
With that in mind, let me share with you a valuable observation from our market analysts: Overseas investors tend to jump into U.S. stocks near tops, and sell heavily near bottoms. In other words, their market actions usually are a contrarian indicator.
In a moment, I’ll show you why this knowledge is relevant today. But first, let’s see how this information has served our subscribers in the past.
Our first stop is this chart from the September 2000 Elliott Wave Financial Forecast.
The publication noted:
America has become Alzheimer Nation. Nothing is remembered for more than a few minutes. The news media, which used to function as a sort of collective brain, is a memory hole that events are shoved down and extinguished in. An attack in Syria, you ask? What was that about? Facebook stole your…what? Four lives snuffed out in a… a what? Something about waffles? Trump said… what? Let’s pause today and make an assessment of where things stand in this country as Winter finally coils into Spring.
As you might expect, a nation overrun with lawyers has litigated itself into a cul-de-sac of charges, arrests, suits, countersuits, and allegations that will rack up billable hours until the Rockies tumble. The best outcome may be that half the lawyers in this land will put the other half in jail, and then, finally, there will be space for the rest of us to re-connect with reality.
What does that reality consist of? Troublingly, an economy that can’t go on as we would like it to: a machine that spews out ever more stuff for ever more people. We really have reached limits for an industrial economy based on cheap, potent energy supplies. The energy, oil especially, isn’t cheap anymore. The fantasy that we can easily replace it with wind turbines, solar panels, and as-yet-unseen science projects is going to leave a lot of people not just disappointed but bereft, floundering, and probably dead, unless we make some pretty severe readjustments in daily life.
Still Over 2x Hourly Earnings Growth
Yes, The Federal Reserve is removing its excessive monetary stimulus at a sloth-like pace.
Home price growth is still growing a greater than 2x hourly earnings growth and has been since 2012.
By Tim Knight
Among my shorts are companies that make money by developing weapons to slaughter human beings (to say nothing of the fact that Pentagon spending is, more than anything else, responsible for plunging our country into ruinous debt – – a debt that will never be repaid). Anyway, it’s nice to see war manufacturers suffer. Apocalypse Now.