Tuesday – January 3, 2023
European bond markets rallied yesterday and again in the overnight session. Reports are showing that European inflation is moderating. This resulted in our Euro gains today. Treasuries weren’t in the office to follow the first leg of that rally, but they did open stronger today. UMBS are up 42 bps early and 10y is down 9
Investors, still reeling from a spell of wonky predictions, are expecting a volatile year of trading. Fed policy will
dictate how stocks and bonds perform, with some traders already seeking out opportunities resulting from risk assets getting sold off.
Recession concerns also continue to linger as investors ponder whether Fed tightening will push the US economy to a hard or soft landing. All eyes will be on the jobs report this week, as softening in the labor market remains the Fed’s focus.
Given that Jerome Powell’s focus has been the surprisingly strong jobs report, I could see a situation where bad news is good news – i.e. a weak report would trigger a rally in stocks and bond as it would increase the chances that the Fed will pivot from a tight monetary policy to a neutral one.
Jerome Powell discussed the three basic inputs to inflation. First, there are the supply chain issues, which manifested themselves early on in the pandemic. Second, there is housing which had its biggest impact beginning in 2022. Finally, there is services ex-housing, which basically means service sector wage growth. The supply chain issues have largely been fixed, and housing will probably fade by summer. The final component – services ex housing – is the focus of the Fed. Which means any negative news in the labor market will perversely be positive for the markets.
Manufacturing exhibited the fastest decline since May of 2020, according to the S&P Global Purchasing Managers Index. Sinking demand for inputs and greater availability of materials at suppliers led to a further easing of inflationary pressures. In fact, the rate of input price inflation fell below the series trend. Selling price hikes also eased, albeit still rising steeply.
Also got a recession warning from IMF head Kirstalina Georgieva. Expects 1/3 of the world’s economies to go into recession.
Oil is about $80/barrel – though that is with low China demand. Will change if/when they reopen.
One major source of tradeflows was hefty slate of new corporate bond issuance. This is normally a headwind that pushes rates higher. The same is true for the large block trade that hit around 10:30am ET. While both of these headwinds exerted their expected forces, bonds nonetheless scratched out moderate gains to begin the new year.