Valerie Tytel
@ValerieTytel
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ON MAT LEAVE. Bloomberg TV & Radio, Markets @business . New to media after +10 years across fixed income trading floors. Opinions mine.
London, England
Joined December 2021
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Nasdaq heads for one of its best quarters in a decade, up 17% in Q1. Second only to 2022’s Q2 30% rally on the monumental monetary easing during Covid. Both times, the Fed's balance sheet expanded. Latest 10% leg up on the Nasdaq coincided with Fed’s balance sheet adding $400bn
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Small US commercial banks hold 70% of the total CRE loan exposure. Record $862B was loaned to commercial real estate last year, a 15% increase from a year prior, data provider Trepp estimates.
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BOJ throws $50bn at USDJPY. $20bn in September, at least $30bn on Friday (FT reports) and more overnight. How much of their $1.2T currency reserves will they deploy before deciding Plan A isn’t working? Does ‘failed’ FX intervention mean YCC break is more or less likely?
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Permanent write-down language of Credit Suisse's AT1 bonds enabled the write-off. Had the loss mechanism been equity conversion, AT1 holders could have kept their place in the claims hierarchy ahead of shareholders, arguably
Permanent write-down is exception rather than the rule
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BOJ YCC break is a possibility you can’t ignore. JPY swap market reflects the desperation for a hedge. 10y swaps trade 30bps above the BOJ’s 25bp bond yield target - just as stretched as in mid June when US yields last topped
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Taking from
@JavierBlas
: “US has just 106 million barrels of diesel stockpiles. Last time inventories were that low in mid-October was in 1951. Inventories should be 30% higher this time of the year.” Fed have another wave of energy-led inflation coming?
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Bloomberg’s US Financial Conditions Index shows the economy back in expansion. Some worry it could reignite inflation. Powell has failed to push back meaningfully on this loosening since the summer. Will his tone change tomorrow? Will markets believe him?
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US CPI Today. Powell's main worry in February was the sticky core services ex housing component - but is it now trumped by the worry of credit conditions tightening? How does he weigh the two now?
The "supercore" component represents 56% of core inflation and remains elevated:
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European Bank AT1s Stumble. The decision by the SNB to wipe out CS's AT1s looks like it will lead to higher funding costs for European banks. AT1 new issue market may be shut for a while. When the market reopens, expect to see 10-12% coupons, up from 7-9% on bonds issued earlier
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European Banks Stocks Recover. Lack of any negative weekend news, little use of ECB's swap lines, and funding indicators showing no sign of stress lead many to ponder what the faff was about in Friday's session.
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Small US commercial banks lose 2% deposit base the week ending Mar15 (SVB collapse Mar10). But some hints the situation has stabilized since:
-H4 release: Fed's emergency lending hadn't spread past NY, SF Fed districts
-Fed commentary: Powell, Bostic say deposit flow stabilized
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Credit Suisse's CHF 16b AT1 bond wipeout is by far the biggest loss ever in Europe’s $275 billion additional tier 1 market.
Far outweighs the €1.35b loss by junior bond holders of Banco Popular in 2017, when it was absorbed by Santander.
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US Racks Up Near $1T Annualized Debt Costs. In June alone: 18% of spending went toward interest expense. Vs a year ago: Total spending rose 15%, up $100bn. Interest expense climbs 25%. Tax receipts fall 9.2%. Never before have tax receipts suffered such a drop w/o a US recession.
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Street upgrades to Nvidia's earnings forecasts were so substantial yesterday that the forward price to earnings actually FELL - making the stock look cheaper even with the 25% rally...!
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Potential Expansion of Fed's BTFP Considered. One of several options the Fed, FDIC, Treasury have weighed amid First Republic's troubles, sources tell Bloomberg. At what point does the tail risk of substantial Fed balance sheet expansion become reality?
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Japan’s FX intervention = QT. $50bn of dollar liquidity sucked out of the system as they sell their US treasuries to fund it. BOJ’s actions could arguably strengthen the dollar, exacerbate yield differentials, and add stress to USD funding, shown below:
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FT: "March is set to be the first month of net inflows into gold ETFs for 10 months, while the volume of bullish options bets tied to the funds has approached record levels."
As Fed attempts keep rates high and let the balance sheet expand: bullish gold, bearish DXY
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@VMRConstancio
Swiss AT1s have different rules
Permanent write-down language of Credit Suisse's AT1 bonds enabled the write-off. Had the loss mechanism been equity conversion, AT1 holders could have kept their place in the claims hierarchy ahead of shareholders, arguably
Permanent write-down is exception rather than the rule
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Banking sector stabilizes. Fed's lending drops, flows into MMF slow. We will hear more directly from bank CEOs in earnings
14th: WF, JPM, Citi
18th: BofA, GS
19th: MS, US Bancorp, Citizens Zions
20th: EW Bancorp, Comerica, KeyCorp, Truist
Financial, Fifth Third
21st: W. Alliance
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Perceived Credit Access Deteriorates. NY Fed's monthly consumer credit survey shows share of households reporting credit harder to obtain vs a year ago hit a record high in March. But, Fed Williams says he "hasn't see clear signs yet of credit conditions tightening".
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Credit Suisse Writes-Off $17 Billion AT1 Bonds. But existing shareholders receive $3.2 Billion. Wiping out AT1s before imposing shareholder losses is unprecedented. Did regulators open up another can of worms with this decision? Will this raise bank funding costs long term?
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Shorts Unwound in Frond End SOFR Futures. But what could make them come roaring back?
>Thurs: Low jobless claims, Fed's H4 data showing no further take-up of BTFP, lending kept to NY/SF Fed districts
>Fri: Hot PCE, Fed's H8 data shows no small US bank deposit outflows
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Positive Real Fed Funds. The Fed funds effective rate trades above core inflation for the first time since 2019, tempting markets to believe we've hit the sufficiently restrictive stance Powell was looking for. One more and done from the Fed in this cycle...
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European Luxury Stocks Take a Dive. Liquid way to play the crisis in confidence around Chinese growth? LVMH, Hermes, Kering recently upgraded their outlook based on strong Q1 China demand. But, after the shockingly weak China data, those upgrades are now put into question.
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JGB yields surge 16bps in two days. Only larger spikes during the past decade: Dec '22, when the YCC band was widened; and May '13, when Kuroda's new QE program experienced some early teething problems.
How quickly will JGB yields rise to 'fair value' and where exactly is that?
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As US regional banks report, most conclude the worst of the banking crisis is behind us. But yet, this sentiment has failed to lift the KBW regional bank index. KBW underperforms the S&P by over 35% as valuations remain severely damaged
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Tech Rally Continues. Nasdaq up 5% in 10 sessions and breaks to fresh YTD highs again. All despite 2y yields rising 30bps and DXY strengthening 1.6%. In fact, 30-day correlation between Nadsaq futures 2y yields most positive in three years.
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Sharp Tightening of Financial Conditions. Bloomberg's index reflect tightest conditions seen in this cycle. US regional banks come under pressure from deposit outflows. Regional banks key for extending credit to the real economy. Is this just the beginning or over reaction?
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"UBS has also insisted on a material adverse change that voids the deal if its credit default spreads jump by 100 basis points or more, the people said."
Article does not cite which CDS contract. For guide, UBS 5y CDS rose 70bps since 9th March. CS's has risen nearly 600bps:
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Market didn't buy Powell's softened tone yesterday, instead choosing to hear that 50bp is the new base case for March. Front end hardly budged. 2s10s inverted to a new low. Focus shifts to Friday's NFP. Will it continue its impressive string of beats?
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Oil erases all 2022 gains. Time-spreads have flipped into contango, signaling a supply glut as global demand wanes. WTI’s 1 month/6 month time-spread slumped to a two year low this week. Brent aggregate open interest is at its lowest since 2015 as traders cut positions
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Real estate was already the most shorted industry across global equities, according to a March 17 report by S&P Global Inc. It was the third most-shorted sector in the US.
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2 year notes rally 70bps in three days - largest move since the week of 1987 Black Monday.
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FDIC’s Gruenberg, Fed’s Barr, Treasury's Liang to speak before US Senate Today. Hearings come as recent market optimism sees bank stocks recover and 2y yields rise 45bp in two sessions. Market prices even odds of a Fed hike on May 3rd.
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ECB terminal rate rises 60bps in a month, jumping above 4%. Euro-Area inflation print on deck today, focus on the core reading. The country prints have all come in above expectations this week:
Germany 9.3% vs 9.0% exp.
France 7.2% vs 7.0% exp.
Spain 6.1% vs 5.7% exp.
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First Republic jitters ignite a front end rally. More cuts now priced in SOFR Jun23-Jun24 curve than at any point during the banking turmoil in March: 170bps of cuts. Likelihood of a hawkish Fed next Wednesday diminish.
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FIMA sees a $60bn draw. Repo facility that was established during Covid to be used by central banks who do not have open swap lines. First meaningful draw. The average weekly number was $32bn, Wed's number was $60bn, suggesting need for dollars lasting more than one day.
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WTI breaks $95 overnight in a fast tightening market. Oil's rally is defying headwinds from a stronger dollar. Timespreads show bullish backwardation across the curve. Prices pushed further by data showing shrinking US crude inventories.
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US 2y yields squeeze 30bps lower as the banking sector tumbles. The big 4 US banks lost $47bn in market cap by the close yesterday. The drop in 2y yields undoes Powell's words and then some. NFP up next. Would a consensus print cement 50bps or has this playbook changed?
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UK front end rates rally as a 50bp BOE hike in August thrown into doubt. Today's soft core CPI print see the terminal rate fall below 6% after hitting near 6.5% only two weeks ago. Market assigns 50% probability of a 50bp hike on August 3rd that would take the base rate to 5.5%
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Fed's New Dot Plot: what could be revealed? A shift higher, perhaps a wider dispersion, or higher for longer message with '24 dots moving up are the options worth considering.
I'll take you through it:
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Commodity shock of this size lead to recession. Oil prices have now deviated 50% from trend, every time this has happened it’s led to a recession.
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Jobless Claims Tick Up - hinting at recession coming or just some plain old labor market normalization from extremely tight levels? Pre-covid recessions began with weekly claims at 383k, far above yesterday's 245k:
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Massive week for macro on deck
Tue 13 - UK employment data , US CPI
Wed 14 - US PPI, FOMC rate decision
Thu 15 - China MLF, China data dump, ECB rate decision, US retail sales
Fri 16 - BOJ decision
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2y Breakevens Shrug Off Oil's Rally. Lack of rise in inflation breakevens as oil heads toward $100 signals the gains in oil are mostly about supply, not demand, and hence not inflationary. Your take?
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ECB Passive QT Begins. Reduction €15bn per month in March until June. Passive roll-off from APP facility only, not PEPP. ECB assets = €9T, of which govt bonds €5T. Markets swallowed an effective net debt supply of €280bn in 2022, but with QT 2023's it balloons to +€600bn
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UBS, DB, HSBC, SocGen, BNP's AT1s close 5-6 points lower after Monday's session, recovering marginally from the open. Broadly, European credit spreads recovered after opening up near 5-month wides. ITRX IG 5Y CDS trades 2.5bps tighter at the close. Contained for now it seems.
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From FT: “AT1 holders were sacrificed so the finance ministry could try to save some face with international equity holders after denying them a vote on either side of the transaction,” says one of the bankers advising on the takeover.
h/t
@PaulJDavies
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MKTS WEEK AHEAD
Mon 3 - China PMI manuf, Japan Tankan survey, US ISM manuf
Tues 4 - RBA decision, US JOLTS
Wed 5 - RBNZ decision, US ISM services
Thurs 6 - China PMI services, US initial jobless claims, US bond market early close (2pm NY)
Fri 7 - US NFP, US bond/stock closed
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BBG: "Bank analysts estimate UBS could need as much as $10 billion more AT1s — just when the legitimacy of that asset class has been brought into question broadly, and the Swiss version of it especially."
@marcusashworth
@PaulJDavies
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Credit Suisse posts a huge net loss in 3Q of CHF 4bn, plans CHF 4bn capital raise, warns of impairments of CHF 2.9bn until 2024. Short selling interest hit 19% of free float going into earnings.
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US CPI: Core services in white - making up over 50% of the contribution to headline. The main cost in delivering these services is wages - with unemployment running at 50 year low and wage inflation robust, the Fed is worried about the tight labor market stoking further inflation
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MKTS WEEK AHEAD
Mon- China IP, German IFO
Tues- US wholesale inventories , US consumer conf
Wed- Australia CPI
Thur- Spain CPI, German CPI, US GDP 4Q (third), US jobless claims, SARB decision, Banxico decision
Fri- China PMIs, Japan Tokyo CPI, France CPI, Eurozone CPI, US PCE
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Breadth of the stock rally extends into small caps. Russell 2000 outperforms nearly 4% in the last four sessions vs SPX and Nasdaq. RTY now up 5.3% YTD.
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Mentions of "Labor Shortages" in earning calls of S&P 500 companies trends lower. 4Q 22 hears 77 mentions; well off the highs of 310 mentions in 3Q 2021's earnings calls. 97% of S&P 500 companies have reported.
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Recent data from the US Treasury shows $5.2 billion spent on student loan repayments since Aug. 28th and a total of $9.2 billion since Aug 1st. How quickly will this impact consumption? And by what magnitude? Doubts on the lasting strength of the consumer grow.
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March Madness: markets edition.
Kicks off with Fed Chair Powell's testimony to the Senate on Tuesday. Any hints on his view of the string of strong data being a one-off? Will he continue his use of the word "disinflation"?
@BloombergTV
@daniburgz
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Potential Fed Curveballs Today? Watch out for a possible dovish dissent and a change of tone on reserve constraints. I'll break it down for you here:
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Treasury Yields Look to Break to New Cycle Highs. Across the curve 5y, 10y, 30y yields are ~5bps away from the closing highs set back at the end of August.
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USDJPY opens 0.7% lower in early trade. Ueda comments that ending negative interest rate policy by year end is a possibility.
Bank of Japan Could End Negative Interest Rate Policy; Ueda Tells Yomiuri Shimbun He’s Watching Wages, Prices
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2y Yields Swing Back to Previous Fed Meeting Levels. What a round trip. Recent optimism in equity markets sees 2y yields rise as markets move to price a 25bp hike from the Fed today.
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SPX sees a -5.25% retracement since July highs. Sees the worst three day slide since mid March of -2.7% . In Thursday's session - total put option volume on US exchanges reached levels not seen since March as demand for downside protection picks up.
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Terminal rate (blue) now decently above Fed's (yellow). Friday's Fedspeak: Bullard told us he's worried the pace is too slow, not that the Fed's terminal rate too low. Mester told us her "dot" hadn't moved since the Dec. projections. We get the updated Dot Plot + SEP on Mar22
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This limits the read-across to the broader European market slightly. But the fallout of Credit Suisse's AT1 write-off throws up some existential questions about the future of AT1s in general. Some investors may not hang around for any answers and leave the market for good.
-BI
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Gilts trade poorly. 2y trades solidly thru 5%. 100bps of hikes priced until September, meaning a 50bp move is due at 1 of the next 3 meetings. Terminal rate nears 6% by Feb ‘24. Bailey has talked down expectations before, will he attempt again? Gilts might not handle it kindly...
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SVB Collapse Sends Fed Rate Trajectory on Lower Path. March meeting now sees 15bp hike priced, down from nearly 45bp less than a week ago. Terminal rate falls nearly 100 basis points to 4.8% from 5.7% last Tuesday. Fall out across global bond markets:
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$120bn Poured into Money Market Funds in a Week. Not only are deposits fleeing regional banks into "implicitly" backed "too big to fail" banks - deposits also fleeing into explicitly backed government money market funds. More than $5T is now parked in the cash-like vehicles
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Dollar strength-whose fault? Energy dependent countries (UK, Ger) push their currencies weaker by their own actions too. Large spending programs to shield economies from higher energy prices will only spur further currency weakness…and higher yields. Is that the Fed’s problem?
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Credit spreads widened on Friday, but still far below levels from Sept '22 and the move wasn't drastic: CDX IG moved +4bps wider, worst performing sectors were subordinated financials +12.5bp wider.
US Financials - SNR and SUB OAS indexes
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Painful session for fixed income yesterday extending so a far in the European session. Aussie front end bonds have a worse day today on the follow thru from the Bank of Canada surprise hike than they did on their own surprise hike two days ago! AUD 3y 17.5bps higher in yield.
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Global 2y Yields on the Rise Again. Market digests Friday's NFP beat by pricing a Fed funds terminal rate above 5%. US 2y yields see 50bp intraday rise in the last three sessions: from 4.03% Thursdays low to 4.49% yesterday's high. Will Powell add flames or cold water later?
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@NickTimiraos
Using the TA <GO> function on Bloomberg - searching for trending words in earnings calls. Here are number of mentions of "Labor Shortages" in earnings calls of Russell 3000 compared to last 8 quarters:
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Hawkish dot plot reflects TWO more hikes. Not only that: 12 of the 18 members thought so. But the dovish press conference leaves many to believe these further hikes are ‘aspirational’ in nature…
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Can Powell signal a slower pace of hikes while pushing back against interpretation that it implies a lower terminal rate? Current pricing of the terminal rate stands at 5%
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WEEK AHEAD FOR MARKETS
Mon 20 - US markets closed
Tues 21 - Feb Prelim PMIs across UK, Europe, US; German ZEW
Wed 22 - German IFO, FOMC minutes
Thurs 23 - US GDP (2nd reading), Jobless claims, Fed Bostic & Daly speak
Fri 24 - Japan CPI, US PCE, Fed Jefferson, Collins, Waller
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Mkt leans to pricing 25bp Fed hike. Narrative is that the market is in control here - the Fed will do what the market prices, they don't like to surprise. Uncertainty extremely high on what the DOTS will reveal on the rate path from here. USD 3m1y swaption vols vs 3m30y vols:
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US PCE and Fed Hawks on Deck Today. Some banks recently revised their core PCE MoM number higher to 0.5%, consensus currently 0.4%. Revisions higher came after the hot PPI print. Fed Mester, Fed Bullard, Fed Waller speak after the data.
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After such a strong Jan for risk assets, many asking why stocks have been resilient to the recent repricing ~40bps higher in the Fed's terminal rate in Feb. Are equity valuations too stretched here? Or perhaps the turn of the Fed's cycle is in sight - its time to buy?
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Does the US regional bank crisis cause a credit contraction? Regional banks are key to lending to the real economy. Goldman citing banks under $250bn account for 80% of CRE lending, 50% of C/I lending.
When will we see the impact? Does the Fed wait until it shows up in data?
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SPX closed above its 200-week average, after dipping below on Friday. MS’s Mike Wilson sees stocks rallying further in the short term - but warns a significant break of this level could see stocks decline 7.5% to 3400 or lower. Goldman reports later today.
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Just how bad is it? Pretty bad. Bonds maturing in 10 years or more have slumped 46% since peaking in March 2020. That’s just shy of the 49% plunge in US stocks in the aftermath of the dot-com bust at the turn of the century.
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ECB Decision in 5 Hours. Markets pricing a coin toss todays meeting, 38bps. Credit Suisse shares recover in premarket and CDS tightens. Bloomberg's Mark Cudmore: "ECB will deliver a 50bp hike and it won't be a policy mistake"
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Could the decline in volatility, esp Treasury volatility, spur further risk taking? Popular VAR models use 90-day historical volatility to measure risk in a portfolio. Just over 90 days ago implied volatility in USTs peaked after the first soft US CPI print...
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h/t
@EddBolingbroke
Speculative positioning, according to CFTC data for the week ending Mar 21, shows shorts wiped out:
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German yields across the curve move substantially higher this week. 2y, 5y, and 10y yields rise 20bps in three sessions. This underperformance of European fixed income vs US yesterday saw EURUSD strengthen nearly 1%
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Fed Balance Sheet Back in Expansion. Adds $300bn in days.
Discount Window: +$153B
New BTFP: +$11B
Loans to FDIC: +$142B
Compare to the weekly peak of emergency lending in 2008, $440bn:
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DXY on the retreat again and becoming the major theme this quarter. Fallen nearly 4% since US CPI last week and fallen over 6% from its Sep 28 peak. Likely to put a bid under risk assets more broadly.
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Emerging Market ETF Outflows Continue. Across stocks and bonds, last week saw biggest outflow in 6 months - capping a 4th straight week of outflows. Shift comes as Fed terminal rate climbs. Question being: are the real yields in EM bonds enough to justify the risk-taking?
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German yields hit multi-year highs across the curve as the repricing of the Fed's path reverberates through assets. February's bond selloff sees the US 6mo T-Bill yield top 5.1% - nearly on par with S&P earnings yield (5.25%) and average US investment grade bond return (5.5%)
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The dollar suffers the worst month in 12 years as one of 2022’s top bet crumbles. The clearer Fed trajectory from here weighs on the greenback, allowing market pricing of the terminal rate to stall near 5%. Eyes on Powell speaking later today on the US labor market.
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We get updated commercial bank deposit data tomorrow for the week ending March 14th
Fed's H8 Release: deposit breakdown between large (top 25, in white ) and small institutions (blue). Will it be more drastic than feared?
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This January will go down as one of the best month EVER for US Treasury auctions. Every single auction printed below-market yields. Indirect demand soared - new all time records made. A reflection of how convinced the market is that these yield won’t be around for much longer?
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Powell shows preference to over-tighten. Risk of doing too little out weighs the risk of doing too much. A glimmer in the opening statement that maybe the “Brainard Pause” camp had made some friends, but nope - Powell came out hawkish in the press conference.
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Dollar's Dominance Dissipates - from a 20 year high to now nearly unchanged on a 12 month horizon. DXY on a 4 day loosing streak (-1.7%) on soft landing hopes. Yesterday's weak PPI along side lack of surprises in weekly jobless claims added fuel to the soft landing trade.
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Nice fixed income meltdown on the (globally) strong PMI data yesterday. Feels like 2022 all over again - hotter than expected data, terminal rate shifts higher, and risk gets clobbered
US: 2y +10bp, 5y +15bp, 10y +14bp - all new 2023 highs
Gilts: 2y +17bp, 5y +18bp, 10y +15bp
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US front end continues to reprice higher in yield since the hot NFP print on Feb 3rd. 2y yield hits 4.64%. Fed’s Williams states 5-5.5% is still the “right framing” for year end rates. Fed’s Harker sees the Fed funds peak above 5%, but unclear how much
Eurodollar move since NFP:
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