Notes From Underground: Bye, Bye Pappy Van Winkle

At the end of 2017, my readers may recall that I did an unusual thing. I made a prognostication as where the 10-year yield will end the year. I said the 10-year would end the year at 3.41 percent, to which a friend offered up a bottle of Pappy Van Winkle bourbon if the rate reached that level. (The yield was 2.60 percent at the time.) Well, I’m throwing in the towel as it looks like 3.26 percent looks to be the top for the year. I guess I will have to enjoy a lesser-quality libation.

Up next is unemployment Friday. The consensus is for 190,000 jobs created with the overall rate unchanged at 3.7 percent. Most importantly, the average hourly earnings (AHE) is for a gain of 0.3 percent. It is the AHE that holds the market’s attention, which will be meaningless unless the number is either 0.1 percent or 0.5 percent. I mention this because all of the tumult in the market has already caused interest rates to rally as investors sell equities and purchase interest-yielding assets in search of safe harbors. There is discussion that with the dramatic drop in GLOBAL EQUITY MARKETS the FED may release a dovish statement a the next meeting. If AHE is very strong the DATA-DEPENDENT FED will be far more HAWKISH, forcing a correction to the last few days dramatic drop in yields.

However, if AHE is soft, the market has already built in a possible reduction in the FED‘s level of NEUTRAL. A strong AHE OUGHT to provoke a further flattening in the curve. The key indicator for me will be if the 5/30 curve can drop below its 200-day moving average by the Friday close. (The curve is currently 32.6 basis points.)

My reasoning is this: When I had discussed the beginning of the flattening more than a year ago, the 5/30 led the way as it flattened with far more velocity than the 2/10. Now, the flattening has created a technical picture that portends a move to correct some of the previous price action by moving above the 200-day moving average. (It’s also worth nothing that the 50-day moving average has crossed through the 200-day.) Technicals are just one of many tools but in this turbulent times it is important to know where important areas of support and resistance reside.

When the U.S. jobs data is released, we will see Canadian labor data. The market consensus is for 11,000 jobs created with the unemployment rate remaining at 5.8 percent. The Canadian data has been rendered meaningless due to the Bank of Canada’s decision Wednesday to leave rates at 1.75 percent. Governor Poloz directed a very dovish outlook for Canada, which sent the Canadian dollar to yearly lows on Thursday. The BOC cited geopolitical tensions and trade conflicts as the culprit for moderating the global economic expansion. But a key area of concern for Canada has been the huge hit to oil revenues as huge inventories because of the lack of pipelines and other modes of transportation have resulted in Canadian oil being offered at HUGE discounts to other supplies. Alberta, where the heart of the Canadian oil industry resides, has just announced an almost 10 percent cut in oil production.

This led to a DOVISH BOC on coming economic growth as job cuts are likely to occur. Let me add one other key ingredient to the dovish BOC: With all the talk about the flattening U.S. curve, the market needs to be aware that the Canadian yield curve has been the flattest of them all, moving down to 5 BASIS POINTS before the central bank’s rate decision. On Thursday it steepened back to 8 basis points. The flat yield curve will keep the BOC on notice after its recent tightening moves. The last thing Governor Poloz wants is a strengthening currency when economic signals are flashing caution.

***I was having a chat with John Brady from R.J. O’BRIEN (a person of great knowledge about the eurodollar and Treasury market) Thursday. I was bemoaning the proliferation of China experts. Having studied with one of the true giants in Chinese politics, Professor Ed Friedman at the University of Wisconsin in Madison, I am overly sensitive as to what passes for expert analysis. It was Professor Friedman who raised my level of knowledge of global political economics. Mr. Brady passed me a bit of wisdom: “When it comes to China–those who speak don’t know, and those who know don’t speak.”

The Twitter world is filled is headlines emanating from the vast world of China experts, which also drive headline readers. I urge patience before you attach your capital to the newest headline. The world is awash with China headlines for there is money to be made providing volatile and incendiary news regardless the source. My barometer is the YUAN. It seems to have more credibility.

***Two things to ponder: Where is Vladimir Putin at this OPEC meeting? If Russia wants to harm Trump-imposing sanctions, wouldn’t it behoove Putin to stick it to Trump by cutting production and raising oil prices? (Especially as winter is beginning to expose us to extreme cold.) Second, if the economy is as strong as many maintain, why are GLOBAL BANKS are performing so lousy? Japan, Europe and the U.S. … what a poor technical picture not in sync with the positive outlook of Jerome Powell. I need a drink!

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5 Responses to “Notes From Underground: Bye, Bye Pappy Van Winkle”

  1. Chicken Says:

    Hello Sailor Jerry? 😉

  2. Rob Syp Says:

    Tinkers to Evers to Chance today’s version in the markets could easily be Langone to Zell to Coooperman. Thank goodness we have these men go on the tube and call it the way they see it with such bravado

  3. kevinwaspi Says:

    Ominous that you would surrender on Pearl Harbor Day my friend.
    You are always welcome to share my bottle of Booker’s!

  4. Michael A Temple Says:

    I think there has been an EPIC development in the RED EDs for the past couple of weeks as stock market VOL has exploded, mostly to the downside.

    For the past couple of years, the RED EDs were perfectly content to FOLLOW the FED and its dot plot…”EVERYBODY” could see that the markets were copacetic and sanguine as long as Powell carefully calibrated his hikes and let EVERYBODY know it was a gradual thing and that the markets could adjust.

    Fast forward to the mayhem since the September highs….As of the past week or so, it is now abundantly clear that the RED EDs are LEADING and not FOLLOWING the FED.

    This is a huge sea change and it dovetails with the pancaking/inverting action of the yield curve, the message of which is that a slowdown is nigh and that rate structure will drop much lower in the near future, so lock in some of that duration NOW.

    As Powell delivered dovishness last Wednesday and then the Great Orange One delivered us a trade victory with China (To Be Determined—especially after the highly provocative arrest and extradition of Huawei CFO–daughter of the founder), you would have thought that the yield curve might have widened (not gapped, but widened)…Instead, the yield curve called BS on all this “happy talk” and just gobsmacked Powell in the mush.

    NOT what Powell wanted to see. As highlighted by Bloomberg and several others, the leveraged loan market had a myocardial infarction this past week. JPM had to reprice a $200ishMM loan by lowering the offering price 7 full points…..Several other deals had to be cancelled. Back in late Sept/early Oct, nearly 63% of all levered loans traded at par or above…Now? More like 5-10%.

    The market is telling the Fed that all is suddenly not well in the gearing/infrastrucure/plumbing of financing….That is a REAL TIME INDICATOR that trumps (ha ha) any and all AHE statistics ad nauseum as they are merely capturing data that is already old and stale. Markets always are a discounting mechanism, telling us what will soon come to be, not what currently is.

    Do you think CEO’s are rushing out tonight to ramp up capex (ha ha) or to continue to buy back stock (How’s that working out for you, GE?)

    Might Xi Xiping decide that the only and proper way he can “save face” is to take hostage Tim Cook or some other top level Apple Exec who is traveling in Viet Nam and have them arrest him and extradite him to Beijing?

    RED EDs are now leading the Fed…The Fed is, quite literally, behind the curve. The spread between EDZ19 and the ED2020s is now POSITIVELY sloped, which means Mr Market is saying the FED will be easing after DEC 2019…..

    Methinks the easing/cutting begins by Memorial Day at the absolute latest and could easily start well before that as further financing markets “close”….There is already an incipient crisis developing within the GNMA mortgage servicers business…So bad, that GNMA has sent out emergency “contingency letters” to its servicers, especially the non-bank lenders who are getting squeezed/destroyed by the impact of the recent rate hikes….Similar gumming up of the finance mechanisms is going to soon hit the huge CLO machines on the Street.

    This is precisely when a CB is supposed to be easing…Add in the global dollar shortage of all the various overseas debtors (hello China), and you realize that Mr Market KNOWS a whole lot more than Powell, at the moment.

    What to do? What to do? Cash is suddenly king….Maybe a nice 5-year or 3=year UST….And finally, some gold.

    Generally speaking, gold begins to rally nicely AFTER the LAST Fed hike….I think the last hike is in two weeks with the Fed on Hold/PAUSE into 2019….A resumption of the big bad bear in the new year from whatever relief rally may still lie ahead will trigger an INTER-MEETING cut by the FED.

    Got gold?

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