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An Update On The Bond Market, #GrowthSlowing & Yellen's Favorite Indicator

Takeaway: The yield on the 10-yr Treasury crashed on Friday's jobs bomb. Plus, an update on Yellen's favorite labor market indicator doesn't look good

An Update On The Bond Market, #GrowthSlowing & Yellen's Favorite Indicator - yellen yoyo

 

Here's analysis via Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning: 

 

"The 10-yr Treasury yield crashed on Friday's jobs bomb (that was in line with the change in Janet’s favorite labor market indicator index, more on that below) to 1.71%, which implies that A) the data is beating the Fed’s forecasters, big time, YTD and B) if she hikes into this, she’s going to implode all of the illusions of real growth (i.e. the aforementioned reflation trades)"

 

 

More on Yellen's favorite indicator...

 

The "Labor Market Conditions Index" contracted for the fifth straight month to down -4.8% in May. Meanwhile, the prior month was downwardly revised from -0.9% to -3.4%.

 

In other words, not good. 

 

An Update On The Bond Market, #GrowthSlowing & Yellen's Favorite Indicator - yellen s favorite

 

(For more on how the Fed could interpret all of this, check out "5 Charts: How Last Week's #JobsBomb Is Impacting Global Markets.")


MONDAY MORNING RISK MONITOR | U.S. JOBS SIGNALING LATE-STAGE RISK

Takeaway: Counterparty risk rose and European bank CDS widened last week as the NFP report put up another indication of the cycle's late stage.

 MONDAY MORNING RISK MONITOR | U.S. JOBS SIGNALING LATE-STAGE RISK - RM11

 

Key Takeaway:

A poor U.S. jobs report sparked warning signals last week, pointing to the late stage of the economic cycle as the labor market struggles to uphold strength. The 38k jobs added to non-farm payrolls in May was the lowest NFP reading since September 2010. As a reminder, this comes on the back of the recent positive (bad) inflection in Y/Y growth of initial jobless claims.  Interestingly, while financials CDS reaction in the U.S. was fairly muted, European financials CDS widened significantly, by 10 bps to 116 at the median. Additionally, the TED spread, which reflects counterparty risk, spiked by 4 bps to 40 last week. Finally, Chinese steel prices continued their bad omen for global growth, falling by -2.2% W/W to early-March levels, as the steam from China's reflationary credit push in 1Q runs out. 

 

Current Ideas:

MONDAY MORNING RISK MONITOR | U.S. JOBS SIGNALING LATE-STAGE RISK - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 0 of 13 improved / 5 out of 13 worsened / 8 of 13 unchanged
• Intermediate-term(WoW): Positive / 7 of 13 improved / 4 out of 13 worsened / 2 of 13 unchanged
• Long-term(WoW): Negative / 2 of 13 improved / 2 out of 13 worsened / 9 of 13 unchanged

MONDAY MORNING RISK MONITOR | U.S. JOBS SIGNALING LATE-STAGE RISK - RM15

 

1. U.S. Financial CDS – Swaps tightened for 7 out of 13 domestic financial institutions. CDS reaction to Friday's jobs report was fairly muted with a median change of zero week over week.

Tightened the most WoW: WFC, JPM, COF
Widened the most WoW: AXP, HIG, MET
Tightened the most WoW: AIG, HIG, AXP
Widened the most MoM: ACE, AGO, XL

MONDAY MORNING RISK MONITOR | U.S. JOBS SIGNALING LATE-STAGE RISK - RM1

 

2. European Financial CDS – Interestingly, European financials swaps reacted to the poor U.S. jobs report more than U.S. financials swaps. CDS mostly widened in the region with the median swap widening by 10 bps to 116.

MONDAY MORNING RISK MONITOR | U.S. JOBS SIGNALING LATE-STAGE RISK - RM2

 

3. Asian Financial CDS – Last week, bank swaps were tighter in China, mostly flat in Japan, and wider in India.

MONDAY MORNING RISK MONITOR | U.S. JOBS SIGNALING LATE-STAGE RISK - RM17

 

4. Sovereign CDS – Sovereign swaps mostly widened over last week. Portuguese swaps widened the most, by 9 bps to 270.

MONDAY MORNING RISK MONITOR | U.S. JOBS SIGNALING LATE-STAGE RISK - RM18

 

MONDAY MORNING RISK MONITOR | U.S. JOBS SIGNALING LATE-STAGE RISK - RM3


5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. Turkish and Russian swaps led the way, tightening by -13 bps to 260 and by -14 bps to 248 respectively.

MONDAY MORNING RISK MONITOR | U.S. JOBS SIGNALING LATE-STAGE RISK - RM16

6. High Yield (YTM) Monitor – High Yield rates fell 5 bps last week, ending the week at 7.24% versus 7.29% the prior week.

MONDAY MORNING RISK MONITOR | U.S. JOBS SIGNALING LATE-STAGE RISK - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 2.0 points last week, ending at 1905.

MONDAY MORNING RISK MONITOR | U.S. JOBS SIGNALING LATE-STAGE RISK - RM6

8. TED Spread Monitor  – The TED spread rose 4 basis points last week, ending the week at 40 bps this week versus last week’s print of 36 bps.

MONDAY MORNING RISK MONITOR | U.S. JOBS SIGNALING LATE-STAGE RISK - RM7

9. CRB Commodity Price Index – The CRB index rose 1.8%, ending the week at 189 versus 185 the prior week. As compared with the prior month, commodity prices have increased 4.9%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | U.S. JOBS SIGNALING LATE-STAGE RISK - RM8

10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 8 bps.

MONDAY MORNING RISK MONITOR | U.S. JOBS SIGNALING LATE-STAGE RISK - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index was unchanged last week at 2.00%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

MONDAY MORNING RISK MONITOR | U.S. JOBS SIGNALING LATE-STAGE RISK - RM10

12. Chinese Steel – Steel prices in China fell 2.2% last week, or 50 yuan/ton, to 2267 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.

MONDAY MORNING RISK MONITOR | U.S. JOBS SIGNALING LATE-STAGE RISK - RM12

13. Chinese Non-Performing Loans – Chinese non-performing loans amount to 1,392 billion Yuan as of March 31, 2016, which is up +41.7% year over year. Given the growing focus on China's debt growth and the potential fallout, we've decided to begin tracking loan quality. Note: this data is only updated quarterly.

MONDAY MORNING RISK MONITOR | U.S. JOBS SIGNALING LATE-STAGE RISK - RM4

14. Chinese Credit Outstanding – Chinese credit outstanding amounts to 148.7 trillion RMB as of April 30, 2016 (data released 5/13/2016), which is up +15.8 trillion RMB or +11.9% year over year. Month-over-month, credit is up +656 billion RMB or +0.4%. Note: this data is only updated monthly.

MONDAY MORNING RISK MONITOR | U.S. JOBS SIGNALING LATE-STAGE RISK - RM20

15. 2-10 Spread – Last week the 2-10 spread tightened to 93 bps, -1 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | U.S. JOBS SIGNALING LATE-STAGE RISK - RM13

16. CDOR-OIS Spread – The CDOR-OIS spread is the Canadian equivalent of the Euribor-OIS spread. It is the difference between the Canadian interbank lending rate and overnight indexed swaps, and it measures bank counterparty risk in Canada. The CDOR-OIS spread tightened by 1 bps to 40 bps.

MONDAY MORNING RISK MONITOR | U.S. JOBS SIGNALING LATE-STAGE RISK - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


Invite | Brexit: Should I Stay or Should I Go?

Takeaway: Join us for this call!

Hedgeye Potomac is hosting a special call with Alexander Nicoll to discuss Brexit – will the UK vote to stay or leave the EU on June 23rd? 

 

Nicoll will discuss the events leading up to the UK vote and what the outcome of the vote spells for the UK and EU.  (Hint: he believes the UK will ultimately vote to Stay...).

 

The call will take place on Wednesday, June 8th at 11am ET with Nicoll giving prepared remarks followed by Question & Answer.

 

 

KEY TOPICS ON THE CALL WILL INCLUDE 

  • How did the UK get to a vote and where do the divisions lie between political parties?
  • What are the arguments for staying and leaving?
  • Who will win?
  • What are the financial, political, and cultural impacts on the UK from Brexit?
  • What’s the impact of Brexit on the EU and Eurozone?  Could another country vote to break free?

 

ABOUT ALEXANDER NICOLL

 

Alex Nicoll is a Consulting Member of the International Institute for Strategic Studies, a London-based think-tank. Previously he was a member of the Directing Staff of the Institute as Director of Editorial, and also headed the defense program.  Before joining the IISS he was a journalist at the Financial Times newspaper for 18 years, with posts covering international capital markets, Asia, and defense. Earlier, he was a foreign correspondent for Reuters news agency, with posts in Hong Kong, Paris, Tehran and New York. 

 

 

CALL DETAILS

 

Toll Free:

Toll:

UK: 0

Confirmation Number: 13638701

Materials:  Click Here (available one hour prior to the call)

 

 

Ping for more information.

 


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5 Charts: How Last Week's #JobsBomb Is Impacting Global Markets

Takeaway: Fed head Janet Yellen could crush markets this afternoon if she doesn't pivot back to dovish in her speech at 12:30pm.

5 Charts: How Last Week's #JobsBomb Is Impacting Global Markets - rate hike cartoon 11.17.2015

 

The latest macro market read through on Friday's #JobsBomb goes like this:

Dovish Fed = Down Dollar = Reflation Up

 

In short, imagine what would have happened to the reflation trade if the jobs report wasn’t a bomb…

 

Here's analysis via Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning: 

 

"They eviscerated the Dollar on the jobs bomb (and ISM Services slowing print of 52.9 for May) taking USD down -1.6% on the day (massive 1-day move) and ramping up everything that is inversely correlated to it (which, at this point, from Gold to Russian and Australian stocks, are a lot of things) – can they do this daily?"

 

 

To sum up the post #JobsBomb market reaction...

 

 

Take a look at the ramp in gold...

 

 

Meanwhile, in commodity-driven markets abroad...

 

Australian equities popped.

 

 

Australian equities are just one example of the many markets tethered to reflation that are up this morning. Similarly, Oil jumped another +1.1% on the latest thinking that Dovish Fed = Down Dollar. On that, Russian stocks are up +1.7%.

 

Over in Japan, central planners can't stop the bleeding.

 

In the past week, Down Dollar = Up Yen = You guessed it... Down Nikkei (it's still crashing).

 

 

Speaking of crashing... 

 

The same story rippling through Japan is handicapping Italian equities. (Down Dollar = Up Euro = Down FTSE MIB)

 

So where do we go from here?

 

For those of you keeping score, here's the past seven months of frenetic Fed pivots:

 

  1. HAWKISH (December) raising rates in front of a horrible Q1 slow-down (economic and profit cycle)
  2. DOVISH (March/April) trying to undo the hikes with rhetoric, devaluing Dollars to reflate asset prices
  3. HAWKISH (May) post the stock market bounce and Atlanta Fed GDP Tracker rising

 

Now the market is expecting the Fed to go dovish but what if Yellen & Co. don't deliver? A final note on Fed policy from Hedgeye CEO Keith McCullough in this morning's Early Look:

 

"For those of you who get the game we are in, the only thing that matters to macro markets right now is which way the Federal Reserve pivots from here. Post Friday’s Jobs Bomb, not going back to dovish during Yellen’s 12:30PM speech could crush markets."

 

In other words, heads up. It could get ugly.


Daily Market Data Dump: Monday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, and rates and bond spreads. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products

 

CLICK TO ENLARGE

 

Daily Market Data Dump: Monday - equity markets 6 6

 

Daily Market Data Dump: Monday - sector 6 6

 

Daily Market Data Dump: Monday - volume 6 6

 

Daily Market Data Dump: Monday - rates and spreads 6 6

 

Daily Market Data Dump: Monday - currencies 6 6


Jobs Report Bomb

Client Talking Points

USD

They eviscerated the Dollar on the jobs bomb (and ISM Services slowing print of 52.9 for May) taking USD down -1.6% on the day (massive 1-day move) and ramping up everything that is inversely correlated to it (which, at this point, from Gold to Russian and Australian stocks, are a lot of things) – can they do this daily?

UST 10 YR

Yield crashed on the news (that was in line with the change in Janet’s favorite labor market indicator index, btw) to 1.71%, which implies that A) the data is beating the Fed’s forecasters, big time, YTD and B) if she hikes into this, she’s going to implode all of the illusions of real growth (i.e. the aforementioned reflation trades).

Sectors

Get #TheCycle right and you’ve had your sector styles right – Utilities up huge on Friday +1.6% to +15.7% YTD – Financials down huge -1.4% to -1.3% YTD. Getting whipped around trying to day trade this is as easy as staying with the fundamental #GrowthSlowing TREND.

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
6/5/16 80% 0% 0% 4% 8% 8%
6/6/16 76% 0% 0% 6% 12% 6%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
6/5/16 80% 0% 0% 12% 24% 24%
6/6/16 76% 0% 0% 18% 36% 18%
The maximum preferred exposure for cash is 100%. The maximum preferred exposure for each of the other assets classes is 33%.

Top Long Ideas

Company Ticker Sector Duration
MCD

McDonald's (MCD) is testing fresh beef in 14 Dallas-area restaurants in an attempt to become a modern progressive burger company and better compete with smaller, premium chains. Part of the reason they haven’t done this in the past is because there hasn’t been enough supply of fresh beef for their demand.

 

The initiative will expand further to more markets over the course of the year to test both consumer perception and their supply chains ability. This could be a big move for MCD that will undoubtedly improve food quality and consumer perception of the company.

 

Also in the news over the last couple of weeks is MCD’s plan to move its HQ from Oak Brook to downtown Chicago. Although not important from an operational perspective immediately, it will help the company attract and retain top talent which will be beneficial overtime. MCD remains one of our top ideas in the Restaurant space.

TLT

Friday’s jobs report represented a complete shift to any renewed expectations of a June/July hike. The yield spread ended the week pinned near the bottom of the cycle low at 92 basis points (10yr-2yr yield %). And, looking at real-time rate hike expectations, the bid-yield of December 2016 Federal Funds Futures Contracts dipped 8 basis points day-over-day, implying the market’s expectations for the first rate hike is now in 2017!

GLD

That was the commentary that closed out a deflationary month of May – USD +3.1% with Gold -6.3% and the long end of the Treasury curve and the S&P roughly flat. Fast forward a week. Gold, the Treasury market, and Federal Fund futures don’t buy the hawkish rhetoric for a second.

 

We’ve shown our chart of the Y/Y% change in Non-Farm Payrolls numerous times, so Friday’s Jobs report was no surprise to us. Consumption and labor market strength are classic late-cycle indicators, but eventually these indicators peak and roll-over in rate-of change terms. Here's the Jobs Report breakdown:

  • Non-Farm payroll additions totaled +38K in May vs. +160K est. and +160K prior. While the number was a bomb for those who follow the month-to-month sequential change (which is useless), we expected the weakness. To be clear, history paints a very clear picture. NFP additions peaked in Q1 of 2015 and have since rolled over. It’s part of #TheCycle

Three for the Road

TWEET OF THE DAY

That explained the entire market move on Friday Jobs Bomb = Dollar Down -1.6% --> Rates crashed, Utilities and Gold ripped, Financials fell

@KeithMcCullough

QUOTE OF THE DAY

You have to learn the rules of the game.  And then you have to play better than anyone else.

   -Albert Einstein

STAT OF THE DAY

Greg Maddux had a ERA of 1.56 in 1994 while pitching 202 innings for the Atlanta Braves.


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