Hello Traders and Investors and thank you for joining me for another edition of the Magnelibra Markets Podcast, I’m your host Mike Agne and today’s episode #19 is entitled “US Dollar and Yields Higher, What's Changed?”
But first a quick regulatory disclaimer:
DISCLAIMER: The following podcast is for educational purposes only. This is not a solicitation to buy or sell commodity futures or options. The risk of trading securities, futures and options can be substantial and may not be appropriate for all listeners.
Well we don’t think anything has really changed, but we know bond markets were jolted by Fed Governor Chris Waller who reiterated that the FOMC was “data dependent” and that he only sees 3 cuts this year as opposed to the markets expected 6. He also said that he saw no reason that the FOMC would need to move quickly.
Well that’s funny considering we know CRE and MultiFamily are taking it on the chin and that eventually these discounted sales are going to show up on the balance sheet of the banks and written down, they will also be hitting credit unions, pension funds and insurers. The interesting thing to note is that we already see the major banks increasing their loan loss reserves and we know insurers are raising premiums like mad, are they raising because they need to cover the losses on their investments?
Time will always tell, but for now, the markets used yesterdays Fed verbiage to hit the bond market down driving 30Y yields out to 4.303% the highest levels in over a month! When we look at the US yield curves we can see that the 5Y on out is in a nice normal slope and we will expect the 2Y to come in line once the FOMC does make their initial cut:
As far as the curves US Yields curve, it was a nice parallel jump with the 5s and 10s adding a little over 11 bp on the day:
This does not change our outlook on things, rather we talked about the bonds and the potential for profit taking to occur which we would gladly use to add on to our front end yield curve steepening plays in our Model Tracker, which had a bunch of changes today and we will cover that later in the podcast here.
We also saw Empire Manufacturing Survey, which was absolutely atrocious dropping to -43.7 the lowest since the height of the Covid pandemic and blowing expectations of -4.0!
So when Fed Gov. Waller said the FOMC is data dependent, he can say such ludicrous things because we truly don’t know what data he is actually referring to. What we see now and coming down the pipe tells us the FOMC will have to get ahead of this far quicker than they want the market to believe.
We also know the reality of the higher interest rate regime crushes the US budget because it is paying $1.1T in interest alone. Long time Magnelibra Markets followers have seen us post this data chart of the 5Y yield corresponding with the total interest cost and the expense in relation to the US GDP. What it proves is that our debt system which used to have a positive GDP output for every new $1 in debt, now creates only 55 cents in GDP growth, this is truly a disaster in the making and time is not on the US governments side which means rates will resume their ZIRP trajectory in no time:
Alright we won’t go to far into what transpired yesterday, but let’s look at the settles and see how the day washed out. We know bond futures were hit hard and the long end futures were down over 2 points, the equity markets were down as well led by the Dow dropping 239 points and the Russell 2k losing 23.8. The Dollar was stronger across the board against every major with the Suisse dropping 119 pips. Energy was mixed and so to were Metals as Copper was higher but Gold and Silver both lower on the day:
As far as the Futures Model Tracker there were significant changes to it as it moved from a Hedged Long sentiment to a Hedged Short now. As we noted earlier, we will continue to favor steepening positions in the US curve, but today the tracker reduced longs in the SP500 and Dow and added short in the Nikkei and closed out the Russell2k long, it also added a sale in the Euro and Pound and closed out the long Yen. The tracker also added on to the short RBOB and reduced the long in Silver. So take a look at the positioning, Hedged Short is not something we have seen in awhile and we aren’t sure this is the start of something larger but have now begun to see weakness and the tracker will keep a tight eye on any further additions or subtractions to this new theme:
When we look at the MEGA8s it was virtually unchanged as Nvidia stole the show up $16.72, wow was Nancy Pelosi right, go figure! We also added a new hedge for this grouping using the 410C expiring Friday so take a look at that and see if your data is confirming what we are seeing in regards to this sideways movement going on here:
OK we have Retail Sales at 8:30am Est expected 0.4% for December, let’s just see how this one shakes out. For now we believe the markets are ripe for some movement and have coiled up here and today’s bond move seems curious to us, as does the FX move and this doesn’t seem to jive with the higher equity price theme for now. OK we will have more tomorrow. Things are heating up and we know Iran has made some moves and they have a new alliance with Russia with both parties agreeing that any aggression against either party is an aggression against both parties. This doesn’t sound good for US strategic initiatives and as we have said time and time again, when mankind becomes desperate, well bad things can happen and maybe all this debt has finally tilted the scales of global cooperative agreements, we hope not, but it sure seems that way!
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