Supernatural! US Payrolls Smash Expectations With 266K Jobs Added (Average Hourly Earnings Climbed 3.1% YoY)

Supernatural!

Hiring roared back in a big way in November. U.S. employers added 266,000 jobs last month, topping all expectations, according to a Labor Department report Friday. The surge was boosted by General Motors Co. workers returning to work after a 40-day strike.

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Meanwhile, average hourly earnings climbed 3.1% from a year earlier, beating forecasts.

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The US jobless rate dipped to 3.5% and the underemployment rate dropped to 6.9%.

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On the unexpected bounce in jobs, the 10Y-3M yield curve is no longer screaming recession.

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And the US Treasury Actives curve and US dollar swaps curves are pretty similar from 2 years to 10 years.

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Supernatural!

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Recession Around The Corner? Evidence From Treasury Market And S&P 500 Earnings Sentiment

It has been the longest bull market in modern history, enabled by massive Central Bank intervention. But with trade wars raging, Brexit, Presidential impeachment over something, etc., there remains a significant risk of a recession over the next 12 months.

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If we look at the normalized change in the 10Y-3M curve minus normalized change in 10Y yields, we can see a heightened recession risk.

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Lower yields and steeper curves are not a good recipe.

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And then we have the decline in S&P 500 earnings estimates.

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Recession coming?

The Way Out for a Global Economy Hooked On Debt? Even More Debt (??)

Apparently, debt control is out of the question in this era of low interest rates. There is seemingly only one way out … and that it is MORE debt.

(Bloomberg) — Zombie companies in China. Crippling student bills in America. Sky-high mortgages in Australia. Another default scare in Argentina.

A decade of easy money has left the world with a record $250 trillion of government, corporate and household debt. That’s almost three times global economic output and equates to about $32,500 for every man, woman and child on earth.

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Much of that legacy stems from policy makers’ deliberate efforts to use borrowing to keep the global economy afloat in the wake of the financial crisis. Rock bottom interest rates in the years since has kept the burden manageable for most, allowing the debt mountain to keep growing.

Now, as policy makers grapple with the slowest growth since that era, a suite of options on how to revive their economies share a common denominator: yet more debt. From Green New Deals to Modern Monetary Theory, proponents of deficit spending argue central banks are exhausted and that massive fiscal spending is needed to yank companies and households out of their funk.

Fiscal hawks argue such proposals will merely sow the seeds for more trouble. But the needle seems to be shifting on how much debt an economy can safely carry.

Central bankers and policy makers from European Central Bank President Christine Lagarde to the International Monetary Fund have been urging governments to do more, arguing it’s a good time to borrow for projects that will reap economic dividends.

“Previous conventional wisdom about advanced economy speed limits regarding debt to GDP ratios may be changing,” said Mark Sobel, a former U.S. Treasury and International Monetary Fund official. “Given lower interest bills and markets’ pent-up demand for safe assets, major advanced economies may well be able to sustain higher debt loads.”

A constraint for policy makers, though, is the legacy of past spending as pockets of credit stress litter the globe.

At the sovereign level, Argentina’s newly elected government has promised to renegotiate a record $56 billion credit line with the IMF, stoking memories of the nation’s economic collapse and debt default in 2001. Turkey, South Africa and others have also had scares.

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As for corporate debt, American companies alone account for around 70% of this year’s total corporate defaults even amid a record economic expansion. And in China, companies defaulting in the onshore market are likely to hit a record next year, according to S&P Global Ratings.

So called zombie companies — firms that are unable to cover debt servicing costs from operating profits over an extended period and have muted growth prospects — have risen to around 6% of non-financial listed shares in advanced economies, a multi-decade high, according to the Bank for International Settlements. That hurts both healthier competitors and productivity.

As for households, Australia and South Korea rank among the most indebted.

The debt drag is hanging over the next generation of workers too. In the U.S., students now owe $1.5 trillion and are struggling to pay it off.

Even if debt is cheap, it can be tough to escape once the load gets too heavy. While solid economic growth is the easiest way out, that isn’t always forthcoming.

Well, despite the conventional economic wisdom that public debt growth is fine as long as GDP grows at the same rate, the USA has almost always experienced higher rates of debt growth than GDP growth (YoY).

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Modern Monetary Theory (MMT) makes as much sense as this 1960s/1970s photo. (Is that New York Times opinion columnist Paul Krugman??)

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Achy-Breaky Curves: US Treasury Curve Flat For 5 Years, THEN Rises (Swaps Curve Inverted)

The US Treasury actives curve has gone achy-breaky.

That is, going out to 5 years, the US Treasury actives curve is overall flat, with undulations.

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And the US dollar swaps curve is higher at 3 months than at any other point on the curve.

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Here is a video of me forecasting the US Treasury yield curve.

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High-Beta Stock Trade Seizes Up Right After Everyone Piled In

High beta investment strategies are great … when the market is rising. But low (and negative beta) strategies seem appropriate when investors anticipate an equity market downturn.

Bloomberg — The market, it’s said, finds a way to maximize the pain. For everyone who fell in love with cyclical shares just in time for them to drop the most in two months this week, it’s an adage they can relate to.

Lurches in retail, technology and commodity stocks are spelling trouble for newly christened macro bulls, sending an exchange-traded fund that tracks high-volatility shares to its first decline since October. Back on top are health care, utilities and real estate, defensive sectors that dominated all year.

While none of the moves were huge, they stung fund managers who hoped economically sensitive industries were tickets to redemption after 71% of them trailed benchmarks through October. Betting on volatile shares has been a hallmark of late-season recovery strategies that looked like a sure thing as the S&P 500 rallied. This week was a reminder they’re not.

High-beta ETF falls for first week in five

Among struggling equity managers, a spate of improving economic reports opened their eyes to the possibility a pivot point was at hand for cyclicals. The veil lifted, mutual funds dutifully raised overweight exposure to the highest level in two years, according to Goldman Sachs, increasing allocations toward industrials and semiconductors and away from utilities and staples.

Here is the Invesco High Beta ETF, having a historic beta (relative to the S&P 500 index) of 1.30.

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The Invesco bond fund has a beta of 0.073.

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Invesco’s mortgage ETF (primarily backed by agency MBS) has a beta of … -0.025 relative to the S&P 500 index.

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Lastly, we have the Invesco Muni fund with a beta of 0.044.

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Of course, investors can hedge market downturns using options.

And we are talking about BETA and not BETO!

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Deutsche Bank Slides On ECB Warnings As It Plans To Replace 18,000 Workers with “Robots”

Deutsche Bank made the news, both in terms of an ECB warning and job cuts.

First, Deutsche Bank shares led rivals lower Wednesday after the European Central Bank warned that low interest rates could lead to excessive risk taking that could threaten the single currency area’s financial stability and noted deteriorating earnings prospects for regional lenders.

Deutsche Bank, like a number of Eurozone banks, has been crushed since peaking in 2007.

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Of course, DB’s earning per share have been plunging like the German battleship Bismarck (along with the share price).

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Cutting expenses is one way to increase EPS.

According to MishGEA, Deutsche Bank to Replace 18,000 Workers with Robots. Mark Matthews, head of operations for Deutsche’s corporate and investment bank, told Financial News that machine learning algorithms “massively increased productivity” and “redistribute capacity.”

The London-based news organization said that Deutsche is pushing to “automate large parts of its back-office” via a new strategy called “Operations 4.0,” as part of its $6.6 billion savings initiative over the next three years.

Matthews told FN that the machine learning tools helped to save “680,000 hours of manual work” and that it “so far used bots to process 5 million transactions in its corporate bank and perform 3.4 million checks within its investment bank.”

Of course, Meadows is referring to machine learning algorithms, not robots like in “Lost in Space.”

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Now GMU finance students will understand why I force Python and Matlab on them in my classes!

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To paraphrase the late Johnny Horton, “The Germans had the biggest bank that had the biggest guns.”

Fed Monkey? Mega Bond Sell-Off Spurs $1.2 Billion Outflow From Treasury Fund As Gold Futures Decline

As Europe shows signs of economic life and US recession fears dim, we are seeing an exodus from long-dated Treasuries and a large turnover in gold futures. But are markets expecting more active intervention by The Fed? (Aka, Fed Monkey).

(Bloomberg) — Investors are pulling the plug on a strategy tracking long-dated Treasuries as U.S. stocks trade near all-time highs.

The iShares 20+ Year Treasury Bond exchange-traded fund, ticker TLT, posted its worst week of outflows on record, with traders yanking more than $1.2 billion, according to data compiled by Bloomberg. The 10-year U.S. government bond yield soared in the span, approaching 2%.

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Meanwhile, gold futures fell to a three-month low as contracts equal to over 3 million ounces changed hands in half an hour on the Comex.

In the 30 minutes ended 10:30 a.m. in New York Monday, 33,596 contracts were traded, more than triple the 100-day average for that time of day. Futures have declined in recent weeks as growth concerns ebbed, damping haven demand for the precious metal.

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Is The Fed Monkey recession prevention system working?

A thanks to our veterans on this Veterans’ Day!

 

Uncle Jay’s Band: Vanguard Sees US Inflation Rising With Gradual China Trade Tension Easing (Possible Rate Increase?)

With inflation expectations rising, will Uncle Jay’s Band intervene even more than they have at recent FOMC meetings?

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IF inflation rises, The Fed may be tempted to raise rates. But will it be enough to justify a rate increase at the December FOMC meeting?

(Bloomberg) — The bond market may be about to get confirmation of its rebounding inflation wagers, according to Vanguard Group Inc. strategist Anne Mathias.

The $5.6 trillion asset manager is among proponents of the view that market-based measures of inflation expectations will extend their climb from a three-year low.

Potential progress in U.S.-China trade negotiations has been a key contributor, along with the Federal Reserve’s signaling on Oct. 30 that it would need to see a significant pickup in inflation before lifting rates.

Five-year breakeven rates — a proxy for anticipated annual increases in consumer prices into 2024 — touched a four-month high of 1.64% last week, with nominal yields surging as well. Developments on the trade front aside, bond traders’ bearish shift may now hinge on inflation data to be released this week.

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Treasury Inflation Protected Securities (TIPS) have been on the rise in 2019 as inflation has been rising.

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And the interest rate volatility cube is lighting up!

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Of course, China could always pull a “Lucy” on the USA in the trade talks.

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What will Uncle Jay’s Band do?

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Get into the groove and let the good times roll!

S&P 500 Near All-time High, But Appears To Be Nearing Peak (China? Fed Bubble Team? Hindenburg Omen? Bollinger Bands?)

The S&P 500 Index’s second fresh high this week saw the equity benchmark close just shy of 3,047 on Wednesday and continue its upward trajectory toward an overbought level.

Its GTI Global Strength Indicator — a smoothing oscillator showing the strength of a price — reached 66.5 intraday, the highest since mid-July. Earnings and Friday’s U.S. payrolls report may help to determine whether the technical gauge triggers its first sell signal since that month or remains in a neutral zone between 30 and 70.

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Technical indicators are adored by many (just not academics). BUT if you believe in Bollinger Bands … the S&P 500 index (white line) is near the upper limit of its upper band (pink).

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Do you believe in the Ichimoki Cloud? Currently, the NYA (New York Stock Exchange) is trading ABOVE the cloud.

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How about the Hindenburg Omen? It was correct in signaling a market downturn way back in 2007, but has not really been a good forecast of market corrections since 2007.

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Elliott Wave? The NYA seems to be at the top of wave.

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Of course, The Federal Reserve impacts markets. As of today, the Fed Funds Futures market is predicting no rate cuts at the December FOMC meeting and no rate cut until the March 2020 meeting.

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The then there is the China trade deal where China is indicating “no deal” unless the US rolls back more tariffs on Chinese imports.

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Do we settle for Pabst Blue Ribbon in the China trade talks or go for Heineken?

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In bubbles, I dream.

 

Fed Will Purchase $4.65 Billion 3-7 Year Treasury Coupons Next Week (These Rates Were Made For Dropping)

These rates were made for dropping.

(Bloomberg Intelligence) — The New York Federal Reserve will purchase T-bills twice next week. Besides bills, it will buy the 3-4.5 year and 4.5-7 year coupons using MBS runoff proceeds. In this note, we look at the bonds the Fed is unlikely to purchase, given its self-imposed buying criteria; for T-bills, the Fed avoids those with four weeks or less to maturity. 

The Fed has several criteria for adding bonds to its portfolio. The trading desk will limit System Open Market Account (SOMA) holdings to a maximum of 70% of the total outstanding amount of any security. It also won’t purchase securities trading special in the repo market for specific collateral, newly issued nominal-coupon securities and those that are cheapest to deliver into an active Treasury futures contract. Exclusions also include securities that mature in four weeks or less.

The exhibit shows bonds the Fed likely won’t purchase, based on these conditions.

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Here is a snapshot of the 3-7-year sector of Treasury coupons outstanding and their spread relative to a theoretical relative-value spline curve. The Fed will look to purchase securities that are cheap to its own relative-value model.

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The US Treasury curve slope (10Y-3M) has creeped into positive territory.

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And mortgage rates continue to rise again.

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Yes, these rates were made for droppin’. And that’s just what they’ll do.

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