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With today’s spike in Treasury yields, perhaps triggered by BoJ’s taper, Bond guru Bill Gross has called the end of the 25-year bond bull market…

In a tweet via Janus Henderson, Gross signals the bond bear has begun…

Gross: Bond bear market confirmed today. 25 year long-term trendlines broken in 5yr and 10yr maturity Treasuries.

— Janus Henderson U.S. (@JHIAdvisorsUS) January 9, 2018

Gross said last year that 10-year yields persistently above 2.4% would signal bear market.

He is correct that trendlines have broken but we have seen the occasional false-alarm breakout in the last 25 years…

10Y Treasury Yields…

 

5Y Treasury Yields…

 

Notably, the ‘other’ bond guru -Jeffrey Gundlach – has been flagging for higher yields for a while as copper has broken out relative to gold…

 

 

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Yesterday we showed that in this world where investors no longer sell, and where Goldman’s “risk appetite” indicator just hit an all time high, world stocks as measured by the MSCI World index have never had a longer stretch without a 5% correction.

What about just in the US?

Well, as discussed here previously, while US equity indices set a remarkable number of records for tight trading ranges in 2017 (e.g. in Jan-17 the Dow recorded its tightest trading range in 110 years and in Aug-17 the S&P 12-day close-to-close trading range fell to an all-time low of 0.32%), the S&P is also on track to set yet another record in early 2018.

Since March 16, 2016, as of January 8, the S&P 500 has gone for 386 trading sessions without a 5% drawdown. If the trend persists, in just 10 more days this will be the longest stretch without such a drawdown in history.

 

Can’t wait another 10 days to watch centrally-planned history being made? What about just 3? That’s how long you will will wait before we hit the longest stretch in history of subdued (<7%) realized global equity vol, unless of course something very bad happens in the next 48 hours.

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Five months after being pardoned by his longtime friend and political ally President Donald Trump, former Maricopa County Sheriff Joe Arpaio on Tuesday announced his intention to run for the Arizona senate seat presently held by retiring Senator Jeff Flake.

Arpaio was convicted of ignoring a federal court order in a racial-profiling case but was pardoned before he was sentenced. The longtime immigration hardliner will likely face Kelli Ward and Rep. Martha McSally in the primary. McSally is expected to launch her campaign within days and is widely viewed as the Republicans’ strongest general election candidate, according to the Washington Examiner.

 

I am running for the U.S. Senate from the Great State of Arizona, for one unwavering reason: to support the agenda and policies of President Donald Trump in his mission to Make America Great Again. https://t.co/ANppBdDOtp

— Joe Arpaio (@RealSheriffJoe) January 9, 2018

 

In a telephone interview with the Washington Examiner, Arpaio discussed his plans for the race, while shrugging off concerns about his age and about the controversy surrounding his pardon.

He promised that, if elected, he would unflinchingly support President Trump’s agenda.

“I have a lot to offer. I’m a big supporter of President Trump,” Arpaio said. “I’m going to have to work hard; you don’t take anything for granted. But I would not being doing this if I thought that I could not win. I’m not here to get my name in the paper, I get that everyday, anyway.”

Arpaio served as the elected sheriff of Maricopa County, which encompasses Phoenix and surrounding suburbs, for 24 years until a Democrat ousted him in 2016.

Through strict opposition to illegal immigration and unorthodox policing methods, Arpaio cultivated a national image as a tough, law-and-order cop. That made him a favorite of conservative media and popular on the GOP endorsement circuit as Republicans throughout the country sought to bolster their border security bona fides in primaries.

Arpaio said he’d be willing to compromise on DACA; he even has what he called a “far-out” plan for getting them in the country legally.

“I have a far-out plan, which may look stupid,” he said. “When they come to your attention that they’re here illegally, these young people, deport them back to Mexico — or whatever — and then try to put them on a fast track to come back into the United States legally with special permits. What’s wrong with that? They’d say they don’t know where their home country is, so let them go there and spend six months, because it might take that long to do paperwork to get them here legally and let them see their home country and see what it’s really like. They ought to be proud where they came from. I’m proud being an Italian American. I’m proud of Italy. I’m proud my father, mother came over, proud of it. So, you could kill two birds with one stone.”

“That would be no amnesty, everybody would be happy, you deport them and then let them come back with all their education here. I’m sure they could find a temporary job or help the foreign countries and build up relations and come back. That’s just a big picture that I have. People may say I’m crazy. What am I crazy about? It just makes sense.

Arpaio described his conviction as a “political witch hunt” and said he alone arrived at his decision to run for the Senate. The examiner pointed out that, even if he loses in the primary, he’s likely to excite the same conservative base that help tank Flake’s approval ratings.

The former sheriff said he has not personally discussed his Senate bid with Trump and emphasized that he didn’t ask for the pardon nor did he know that it was coming. But Arpaio did not apologize for it, calling his conviction part of a political witch hunt by former President Barack Obama and his first attorney general, Eric Holder.

As one Twitter user pointed out, Arpaio is the second Republican candidate who has been convicted of a crime to announce his intention to run during the 2018 election cycle. The other is former New York Rep. Michael Grimm. Democrats, Arpaio said, will likely play up his conviction and lob accusations of bigotry his way.

But Arpaio says he’s not worried, and that these criticisms wouldn’t alter his hard-line approach toward immigration.

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Houthi rebels have released dramatic footage showing the use of a FLIR Systems sensor turret, manufactured by an American defense company, recording the moment a Surface-to-air missile shot down a Royal Saudi Air Force F-15 over Yemen’s capital, Sana’a.

On Monday, Houthi rebels released the infrared video, which shows the sensor tracking the F-15S (Boeing MFG.), while it was shot down over Yemeni skies, according to Saba News.

The video was first released by the Houthi-run al-Masirah television network on Monday, which shows the FLIR Systems logo on the top left of the frame. A separate statement by the group’s Saba News Agency says their forces shot down the Saudi warplane over northern Saada province on Sunday.

Yemen air defense on Monday morning fired a ground-to-air missile at a Saudi enemy warplane while it was flying over the capital Sanaa, the army said in a statement received by Saba. The targeted plane is F-15, read the statement without providing further details. Monday missile attack came one day after the Yemeni army shot down a Saudi warplane over northern Saada province.

In the video, the FLIR Systems sensor turret is seen in full working capacity as it tracks the Saudi warplane overhead. Watch the video below:

According to The Drive, if confirmed the downing of the F-15 could be somewhat embarrassing for the United States, considering the Americans have sold defense products to Yemen. (3 Flir Sensors delivered via U.S. to Yemen).

The Houthis say the downing of the F-15S is separate from the Jan. 7, 2018 incident, where rebel forces ‘supposedly’ downed a Saudi Tornado IDS/ECR attack aircraft. The Saudi-led coalition claims the Tornado experienced “a technical fault and crashed in the war zone,” despite Yemen’s Air Force and Air Defense commander Major General Ibrahim Al-Shami praised the army’s defense capabilities.

In October 2017, Houthis downed a U.S. MQ-9 Reaper drone flying over Yemen as President Trump ramped up bombings in the country. Further, the MQ-9 was taken out by a shoulder-fired man-portable air-defense system, or MANPADS. In December 2017, rebels fired ballistic missiles at critical assets inside Saudi Arabia fueling the war-torn region.

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Authored by Bryce Coward via Knowledge Leaders Capital blog,

It’s no secret that fluctuations in oil prices can lead to dramatic swings in headline price inflation, as chart 1 below shows. After all, not only does oil fuel the vast majority of transportation needs, it’s also a critical raw material used in consumer products far and wide, and much of the price swings in oil are passed on to consumers. With oil moving higher compared to year-ago prices, we should naturally expect a transitory boost to headline CPI as a result. In fact, if WTI crude prices stay flat through June, the year-over-year price increase would be 45%. But because oil market fundamentals are so strong currently, we think it a high likelihood that oil prices move higher from current levels. This would mean the year-over-year increase oil prices could be substantially higher than 45% by June, and that the headline CPI could be closer to 3% than the current 2.2%.

Wouldn’t a big increase in inflation driven by oil prices result in much higher long-term interest rates? Not necessarily.

It’s important to remember that long-term nominal interest rates are a function of three variables: growth expectations, inflation expectations, and term premium. Treasury Inflation Protected Securities (TIPS) rates, are the sum of growth expectations and the term premium (the added yield investors require to hold longer dated bonds). Because nominal treasury rates and TIPS rates are observable in the marketplace, we can infer what inflation expectations are by subtracting the TIPS rate from the nominal bond rate. In other words, if nominal 10-year bond yields are 2.5% and TIPS yields .5%, then market implied inflation expectations would be 2%.

The scatterplot below shows the relationship between changes in crude oil prices and changes in inflation expectations priced into the bond market. The positive linear trendline means that higher oil prices result in higher inflation expectations, as is logical. To be specific, for every $10 that oil prices rise compared to year-ago levels, inflation expectations will rise by 10bps. So far so good.

This next chart is a scatterplot showing the relationship between changes in crude oil prices and changes in TIPS rates. The negative linear trendline means that higher oil prices result in lower TIPS rates, which as we mentioned earlier are the sum of growth expectations and the term premium.

To be specific, for every $10 that oil prices rise compared to year-ago levels, TIPS rates fall by 10bps. Now, we’ll be the first to admit that this model isn’t perfect (the dots aren’t uniformly distributed around the trendline), but it is representative of the path TIPS rates generally take when oil prices rise or fall considerably.

 

The mechanism that causes lower/higher TIPS rates when oil prices rise/fall a lot is the added tax/tax relief on consumers higher/lower oil prices bring.

Said differently, when oil prices rise a lot it slows down economic growth. So, even though inflation rises with higher oil prices, the lower economic growth that results can partially or wholly offset any rise in inflation such that long-term nominal bond yields may not be affected much at all.

That is to say, even if oil prices take off this year and headline inflation approaches 3%, nominal 10-year treasury yields may not move much at all, and TIPS yields may fall a lot.

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After a burst of record high job openings which started in June but declined in October, today’s November JOLTS report  – Janet Yellen’s favorite labor market indicator – showed another modest drop in job openings across most categories as the year wound down, with the total number declining from a downward revised 5.925MM to 5.8793MM, well below the 6.038MM consensus estimate, and the lowest since May, resulting in an Nov. job opening rate decline from 3.9% to 3.8%.

After the recent breakout, which started with the near record 414K monthly spike in job openings in June after years of being rangebound between 5.5 and 6 million, the latest job opening prints suggests that increasingly more vacant jobs are getting filled, although it is unclear if that is due to higher wages or looser employer standards. In any case, the fact that job openings is dropping is likely another modest negative for future wage growth.

 

 

The number of job openings was little changed for total private and for government. Job openings increased in retail trade (+88,000) but decreased in other services (-64,000), transportation, warehousing, and utilities (-60,000), and real estate and rental and leasing (-39,000). The number of job openings was little changed in all four regions.Now if only employers could find potential employees that can pass their drug tests…

It wasn’t just job openings that declined: total hires declined as well, dropping from a near record 5.592 million in October to 5.488 million in November. This is roughly the same as the May print of 5.472 million.

 

On an annual basis, the pace of hiring declined modestly from October’s sharp 7.5% jump to 4.3% in November, in line with recent historical averages.

 

The other closely watched category, the level of quits – which indicates workers’ confidence they can leverage their existing skills and find a better paying job – reversed last month’s increase, and in November declined modestly from 3.187MM to 3.174MM, suggesting workers were feeling just a little less confident about demand for their job skills than the previous month. The number of quits was little changed for total private and increased for government (+25,000). Quits increased in transportation, warehousing, and utilities (+25,000) and state and local government, excluding education (+15,000). Quits decreased in other services (-49,000), real estate and rental and leasing (-21,000), and mining and logging (-6,000).

 

And with a total 5.2 million separations (a 3.5% rate), this means that there were 1.7 million layoffs and discharges in November, virtually unchanged from October. The layoffs and discharges rate was 1.1 percent in November, down from 1.2% in the prior month.  The number of layoffs and discharges was little changed for total private, for government, and in all industries. The number of layoffs and discharges decreased in the Midwest region.

Putting all the data in context:

Job openings have increased since a low in July 2009. They returned to the prerecession level in March 2014 and

• surpassed the prerecession peak in August 2014. There were 5.9 million open jobs on the last business day of November 2017.
• Hires have increased since a low in June 2009 and have surpassed prerecession levels. In November 2017, there were 5.5 million hires.
• Quits have increased since a low in September 2009 and have surpassed prerecession levels. In November 2017, there were 3.2 million quits.
• For most of JOLTS history, the number of hires (measured throughout the month) has exceeded the number of job  openings (measured only on the last business day of the month). Since January 2015, however, this relationship has reversed with job openings outnumbering hires in most months.
• At the end of the most recent recession in June 2009, there were 1.2 million more hires throughout the month than there were job openings on the last business day of the month. In November 2017, there were 391,000 fewer hires than job openings.

 

 

Finally, and perhaps most notably, the Beveridge Curve (job openings rate vs unemployment rate), appears to be gradually normalizing after a nearly decade-long “drift” from its conventional pattern. From the start of the most recent recession in December 2007 through the end of 2009, the series trended lower and further to the right as the job openings rate declined and the unemployment rate rose. In November 2017, the unemployment rate was 4.1% and the job openings rate was 3.8%.

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