My Thoughts On The Trading Week Ahead – 5/6-5/10
As we look ahead to this week’s trading, although there isn’t a ton of US macro data on the calendar, we are reminded that Yellen has a lot of paper to sell this week. $125bn combined of 3y ($58bn), 10y ($42bn) and 30y ($25bn). Treasury generally sells these three issues in the same week and this $125bn combined compares to $121bn in February, $112bn in November and $90bn in August (the first months post QRA are always the highest for the next three month period). Number go up!
Given the Apple stock buyback news, we should also get a pretty sizable bond offering from them next week which will add to the fixed income supply coming down the pipeline.
The economic data we got this past week for the most part showed an economy that is starting to slow but possesses very sticky inflation pressures. This is going to make it harder for the Fed to provide accommodation any time soon as the Fed needs to keep rates higher for longer to bring inflation down to target.
Although Chair Powell sounded dovish at the May press conference and did deliver QT tapering beginning in June, I don’t believe that he spoke for the entirety of the Fed last week. We have already heard from Fed’s Bowman who once again cemented her position as the most hawkish Governor on the FOMC, as she suggested that rate hikes are still on the table as there remain upside risks to inflation. She commented: “While the current stance of monetary policy appears to be at a restrictive level, I remain willing to raise the federal funds rate at a future meeting should the incoming data indicate that progress on inflation has stalled or reversed.”
Even Fed’s Goolsbee (becomes a voter in July), considered amongst the most dovish Fed members, wouldn’t admit that rate hikes weren’t discussed at the meeting when he was pressed about it in an interview.
We will hear from various other Fed members this week including hawks like Barkin (voter), Kashkari (non-voter) and Logan (non-voter) as well as more dovish members like Jefferson (voter), Williams (voter), Collins (non-voter), Cook (voter) and Daly (voter). Fed watching nerds like me will be listening closely to get a sense of what triggers members are looking for from the upcoming data to suggest whether or not they think risks to their next move should be more dual sided between a cut and a hike in order to bring inflation back down to target. Clearly there was some talk of rate hikes at this most recent meeting which means that it will be harder for Powell to kick off an easing cycle later this year unless we have a drastic slowdown in the labor market, something that is yet to be observed.
I still contend that Powell needs unanimous consent before starting this rate cutting cycle in an election year as he has been the consensus building Fed chair for years and has only had one dissenting vote since Covid. A rate cut decision with dissenting votes would be seen as highly political and I think this would tarnish his reputation as well as the Fed’s credibility (assuming that is something they still care about).
The Fed has put itself in a box here. They are afraid to raise rates and put more pressure on the economy but also can’t really cut rates because it will further awaken animal spirits and inflation expectations. They can’t use their balance sheet as a tool to drain liquidity more aggressively because they want it to operate in the background like watching paint dry (and beginning the tapering of QT next month adds liquidity on the margin which is ridiculous but don’t get me started on that).
As for Treasury, we learned last week that tax receipts are coming in lighter than expected while spending growth continues to accelerate, so the need for duration issuance is going to be with us for a while and remains difficult for folks to front-run given the size. The strike price for Yellen to provide liquidity relief to the markets aside from her token buyback operations is at a lower level in risk asset prices from here.
With inflation pressures still elevated and more duration supply coming, it will be very interesting to see how the bond market handles the new issues.
I suspect we are going to continue to see rising yields, rising term premiums and higher compensation needed for the private sector to take down this capacity, which should keep pressure on risk assets over the next week.
I am short small caps as my preferred vehicle to capture what I think will be pressured risk markets in the weeks to come.
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