“Cause I’m T.N.T, I’m dynamite. T.N.T, and I’ll win the fight. T.N.T, I’m a power load. T.N.T, watch me explode.”
-AC/DC
AC/DC is one of the greatest rock bands in history. Their songs are like Birkenstocks, they never really go out of fashion. This may be harsh, but if you don’t like AC/DC . . . I’m not sure we can be friends.
Not everything stays in fashion in perpetuity. In fact, currently U.S. government bonds are decidedly out of style. The much-vaunted TLT (20 Plus Year Treasury Bond ETF) is down some -50% from its August 2000 peak. TLT has been TNTed!
Not to worry though . . . if you hold those 20-year Treasuries to maturity you will eventually get paid back. Or will you? According to data from the U.S. Treasury, the federal government added $275BN in debt to its balance sheet last weekend. (On the bright side, in comparison, I don’t feel so bad about my bar tab from the Soho Grand last weekend.)
The federal balance sheet is deteriorating, and their income statement is an absolute disaster. According to the same source, in the year-to-date, the federal government is running a deficit of $1.52 trillion. This is up more than 50% from the comparable period last year.
Then there is borrowing costs. In Q2 2023, the U.S. government's interest payments on its debt were $905 billion. This is up 30% Y/Y and, not surprisingly, an all-time high. Said another way, the U.S. government paid $2,746 in interest in Q2 per person in the United States, which is more than $10,000 annualized.
Just another reason why The People are pissed.
Also, another reason why Treasuries are so weak . . . the U.S. is a bad credit!
Interestingly, the corporate bond market continues to yawn. At the moment, BofA BBB US Corporate Index Option-Adjusted Spread is at a relatively benign 1.58. This is well off the highs of the year at north of 2.00. It is also much lower than pandemic highs of near 5.0.
We’ve been negative on high yield for going on 22 months. Given the tightness of spreads and increasing probability of a recession, this remains an asset class to remain underweight. Afterall, in a recession, cash flows and the ability to repay debt slow.
Back to the Global Macro Grind…
Later this morning, the government will release September Non-Farm Payrolls. On Wednesday, the ADP private payrolls printed a big miss at +89,000 and down -50% from the prior month. Unfortunately, this miss was not enough to take rates down.
At the moment, most of Wall Street is begging for people to lose their jobs and the recession to finally begin. Since the idea of a “soft landing” is no longer elevating the markets, we obviously need a recession to keep the equity music on!
That sounds like a “Highway to Hell” to me. Rest assured though, Chicago Fed President Goolsbee said yesterday he sees no signs the economy is moving off “the golden path”. Nothing to worry about!
The labor data coming into today’s Non-Farm Payrolls was not that clear cut. Certainly, the ADP Report slowed. On the other hand, JOLTS (job openings) recently accelerated M/M, weekly jobless claims remain well off their highs at +207K, and the most recent survey data suggests a tight labor market.
Even if NFP is a disappointing number, that won’t necessarily mean it is enough to arrest the rapid increase in rates. One thing that we can be more certain of is that it is likely to be a volatile day in the equity markets.
According to our partners at Tier1 Alpha:
- ATM IV (implied volatility) jumped 2.88 points ahead of today NFP report, pricing in an expected move of 1.4%.
- The rise in volatility was largely driven by a demand for Puts options, with 0dte (zero days to expiration) contracts being the weapon of choice for tactically hedging the event.
So,
- with dealers still in negative gamma, the conditions are set for a potential “overreaction” to the implications of a hotter than expected NFP report.
- If SPX starts to trend lower, market makers will be forced to sell futures into the decline, which will exacerbate the move and drive-up volatility levels.
As a result,
- a move outside of a ~1% range could kick start some larger selling flows from vol control funds, which could also amplify volatility.
Are you prepared to be “Thunderstruck”?
At the moment, our Top Macro ETFs continue to reflect a largely #Quad3 and #Quad4 type environment. As of yesterday, these were the top ranked positions by size:
- FDRXX, TBIL, TFLO, UUP, USO, INDA, CTA, XLE, URA, AMLP, URNM, NLR, EWJV, MSOS, PFIX, BTAL, UAE, XOP, SMIN, IAK, CYA, INDY, PSCE, SQQQ
Lots of high yielding cash, inflation beneficiaries, and even some cannabis in case things get really bad.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 4.57-5.00% (bullish)
UST 10yr Yield 4.46-4.85% (bullish)
UST 2yr Yield 4.97-5.18% (bullish)
High Yield (HYG) 71.95-73.54 (bearish)
SPX 4 (bearish)
NASDAQ 13,001-13,367 (bearish)
RUT 1711-1786 (bearish)
Tech (XLK) 160-167 (bearish)
Energy (XLE) 84.43-93.56 (bullish)
Utilities (XLU) 54.00-59.74 (bearish)
Shanghai Comp 3065-3142 (bearish)
Nikkei 30,440-32,014 (bullish)
BSE Sensex (India) 65,104-66,423 (bullish)
DAX 14,990-15,491 (bearish)
VIX 16.36-20.85 (bullish)
USD 105.30-107.11 (bullish)
EUR/USD 1.042-1.64 (bearish)
USD/YEN 147.98-150.12 (bullish)
GBP/USD 1.204-1.227 (bearish)
CAD/USD 0.721-0.736 (bearish)
Oil (WTI) 82.03-95.53 (bullish)
Nat Gas 2.80-3.24 (bullish)
Gold 1 (neutral)
Copper 3.51-3.72 (bearish)
Silver 20.32-22.85 (bearish)
AAPL 168-177 (bearish)
Bitcoin 26,358-28,252 (neutral)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
