“Before you can win, you have to believe that you are worthy.”
-Mike Ditka
If you’re a coach, player, or anyone who wants to succeed at the highest level in anything competitive, you should watch ’85: The Greatest Team In Football History. Yep, it’s about Da Bears.
It’s not about the consensus Bond Bears who got paid yesterday. Some just went uber bearish on Long-term Treasury Bonds after they’ve gone down (and bond yields have doubled) for the last 2.5 years as US growth and inflation have been accelerating.
A bond bear should be able to tell you everything you need to know about yesterday’s news. I can too. I can also add that tomorrow’s news on US Wage Inflation #accelerating is going to fortify their conviction. For now, that makes them right (and me wrong) on rates.
Back to the Global Macro Grind…
But why? Got Quad 2 (US growth and inflation accelerating at the same time) data? Yesterday’s ISM Services report for SEP was screaming Quad 2. Tomorrow’s jobs print is a September print too. Our call for Quad 4 in Q4 is not about SEP (Q3) data.
Just because you haven’t seen the Quad 4 US data yet (you’re seeing it in China, EM, and Europe), doesn’t mean you can’t lose money being early buying long-term Treasuries (TLT). The 10yr Yield chart looks “so good” that even people who don’t chart love the chart.
That’s what charts that are making higher-highs always look like.
This is the highest US yields have been since 2011. When we told you to start shorting long-term Treasuries in Q4 of 2016 (when the US economy ripped into Quad 2), “the chart” of the UST 10yr Yield looked like death.
So other than the “technical” zoom-factor that was perpetuated by The Machine (hedge fund platforms delta hedging directionally during and after big moves) yesterday, what drove Da Bond Bears into a frenzy?
- Oil (WTI) ripping through the June 2018 highs to new YTD highs of $76.25 this morning = inflation expectations
- European Yields continuing higher across the board (Italy’s 10yr Yield is +33bps in the last month)
- Tomorrow’s pending US Labor Data (and wage inflation #accelerating report) = inflation expectations
And since the market expects the Fed to expect yesterday’s news to be tomorrow’s…
The UST 2yr Yield (shorter term rate hike expectations) continues to ramp to a new high of +2.89% this morning. If we didn’t have this 24-hour energy move in the 10yr, the curve would be close to inversion this morning.
Back to the jobs report, there are some year-over-year modeling dynamics to be aware of ahead of tomorrow morning’s news…
The year-over-year “comp” (comparative base period) for NFP (non-farm payrolls) from last year is +14,000 (as in one-four! Hurricane Harvey et al distortion)… and that tells you pretty much everything that matters about the release, before the release:
All we need is +15,000 to get an acceleration in Y/Y payroll growth à which means the balance of risk to aggregate hours growth is (very) asymmetrically towards acceleration à which means even if wage growth is flattish sequentially, we should see an acceleration in aggregate income growth.
Of course the easy comp setup mostly reverses in OCT (as do most line items for US GDP, which is why we’re forecasting Quad 4 in Q4 and not in September).
The US labor market remains classic #LateCycle, but if you’re looking for pending headline-tourist-news that gets consensus to believe their record net SHORT position in the 10yr Treasury (see Chart of The Day), this should be a big part of that short-term narrative.
That’s the short-term. If you’re an intermediate-to-long-term investor who is trying to pivot from Quad 2 (long either US or Global Growth) into long duration (low beta Fixed Income), this is a better time and price to do so than any other time in the last 3 years.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 3.00-3.23% (bullish)
SPX 2 (bullish)
RUT 1 (bearish)
Nikkei 235 (bullish)
DAX 12135-12480 (bearish)
VIX 11.40-14.17 (neutral)
USD 93.50-95.78 (bullish)
EUR/USD 1.14-1.17 (bearish)
Oil (WTI) 69.64-76.92 (bullish)
Gold 1186-1214 (bearish)
Copper 2.74-2.86 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
