Could a hot US job print invalidate the downward trend in bond yields?
The US 10 year is flirting with the massive 4% levels again. A close above it and things could become even more "dynamic" to the upside. Note 21 day right here, while 50 day remains way higher. Source: Refinitiv, TME
One of the major risk for equity markets in the short-run is Euphoria that prevailed at the start of the year. In other words, positioning is uber-bullish and can only go down from here
As Goldman trader Cullen Morgan writes, after 9 consecutive weeks higher in the S&P (quite a rarity), sentiment and positioning in US equities is very stretched. On the positioning front, US futures length (see chart below) now stands near record highs. In past instances when non-dealer positioning has been greater than $130bn, near term returns have been strong, while returns further out (3-months to 1-year) tend to skew more negative… With the latest data at +$158bn, Goldman traders are very wary of this now being a larger headwind. Similarly, CTA positioning in US Equities is approaching 2023 highs. Bottom-line: any geopolitical or macro news (e.g too hot US jobs print) might lead to higher bond yields might might put some downside pressure on equity markets.
10-Year Treasury Yield Options Bet
Ahead of US jobs data, an Options Trader bet $625,000 that the 10-Year Treasury Yield would surge to at least 4.15% by Friday's close. If the yield were to jump to 4.20%, the bet would pay the trader $10 million in profit. Source: Barchart, Bloomberg
Correlation between Equity and Bond returns
Source: BlackRock, Ayesha Tariq, CFA
Chinese stocks are trading near all-time lows relative to GDP, while US stocks are trading near all-time highs relative to GDP
Perhaps for good reason... but that's a massive spread. Source: Swordfishvegetable
Citi, JPMorgan, BofA and Morgan Stanley have collectively reduced their exposure to China by about a fourth since 2020
Source: Lisa Abramowicz, Bloomberg
US interest rate futures are beginning to shift back in the less dovish direction
Odds of 7 or 8 interest rate cuts in 2024 have halved this week. Also, odds of rate cuts beginning this month are down to just 7%. However, the base case still shows 6 rate cuts for a total of 150 basis points in 2024. This is double the 3 rate cuts forecasted at the Fed's latest meeting. Source: The Kobeissi Letter
While many economists and financial analysts look at the 1970s as a potential playbook for the current decade, the 1940s could be an interesting reference to consider as well
The 40s was a decade of war and high budget deficit and rising debt level in the US. Monetary policy was mainly about financial repression, i.e keeping rates low despite temporarily high inflation. Overall, it was positive for risk assets. Source: Win Smart, FRED
