Volume is nowhere to be found, which means risk was heavily bid and price marched on upward today. US FI saw outflows on short-end, with 3mo bill yields going up 2.5bps, but 10yr & 30yr Tsys saw minimal offering, diverging from the breakouts witnessed in equity & commodity/FX space.
The hourly chart of the 10yr Tsy yield shows a consolidation of the April-May risk aversion occurring. If yields can get a break above the 3350 level, that may indicate more risk appetite and continuation of risk rallies. If the level poses resistance and we get a selloff back to late May lows, expect risk to follow suit.
SPY & AUD/USD both broke out through late May/early June cycle highs today, with SPY/ES/SPX breaking their 200DMA as well.
Both risk assets have foreboding resistance levels above, however, as well as 50DMAs. The distribution in April-June is bearish, and the recent rallies off lows have been on low volume, so we are maintaining a bearish outlook with long risk hedges skewed for beta. The one asset that got bid today with little overhead resistance is gold, which is in a bullish triangle and looks primed for a breakout through 1250/oz soon.
Philly, Chicago, & Empire employment are all rolling over, and with last month’s abysmal private job gains in context of the census-fueled NFP gain, next month’s NFP data may show some serious underwhelming. Meanwhile, the NAHB/Wells Fargo Home Builders Index rolled over to 17 this month from 22 last month vs 21 consensus, as the first-time homebuyer tax credit expired. The Empire State Manufacturing Index rose to 19.6 in June from 19.1 last month, a tad lower than the median 20.0 estimates. With May’s Manufacturing PMI at 59.7, if the Empire State data is forecasting June’s PMI, then we may get another month or two of PMI > 55, but if this level breaks, we will be watching closer and closer for confirmation of an imminent double-dip.
Lots of talk about the ECRI WLI rolling over (presented below), and well-deserved in our opinion– though not confirming a double-dip, it is definitely indicating a slowdown in growth and the onset of the stimulus hangover.
3mo USD LIBOR is ignoring the recent reversal into risk, as interbank liquidity continues to dry up. These issues are even more magnified in the EURIBOR market. This is not good going forward, and unless there is a roll over in LIBOR spreads, credit will continue to deteriorate and equity will have no choice but to eventually catch up, hard and fast.
If the 10yr yield declines further from here, the flattening curve (3mo doesn’t have much more room to fall) + widening credit spreads (both interbank and corp-Tsy/CP-Tsy) may be a harbinger for future bearish action. If risk appetite spells outflows from Tsys and sends the 10yr yield back up, risk should be bid again and rallies will have legs.
But the sustainability of this whole game seems nil. After all, once rates do start rising (nominal zero floor + sov credit risk as Tsy avg maturity continues to plunge into record issuance), the whole backstopping/guaranteeing of FNM/FRE/related entities paper will be enormously bearish, as the presently artificially low borrowing costs will skyrocket, just as the sov funding costs do as well. The Fed’s Maiden Lane portfolios’ DV01 may be huge and terrible for financial markets, but the IR & duration risk to govt-backed paper will be grossly damaging to the US economy.