Month: January 2022

Bond bulls had the jam stolen from their donut to start 2022, but the question is – with today’s relative stability – is the bond bloodbath over… for now?

Source: Bloomberg

To answer that question, we need to consider what drove this sudden unrelenting two-day scream higher in yields.

Bloomberg’s Mark Cudmore highlights two significant drivers that are feeding off each other right now.

One is only temporary and the other will likely evolve into something different.

First, new year investment-grade bond issuance is putting upward pressure on yields, exacerbated by still poor liquidity.

As we noted earlier, this was the heaviest calendar since the first week of September meaning rate-lock demand was an extremely significant driver of yield-upside in the last two days…

So many theories about the blow up in yields, meanwhile the real reason is much more simple: rate locks:

thirteen borrowers priced $23.1BN across 30 tranches Tuesday, making it the largest single day volume for U.S. high-grade corporate bonds since first week of September.

— zerohedge (@zerohedge) January 5, 2022

This can become a short-term self-feeding dynamic, but it’s not a fundamental driver that can sustain over the medium term.

Second, Cudmore notes that a consensus is building that omicron’s economic impact will be more about exacerbating supply-side issues, hence boosting inflation rather than hurting aggregate demand too much.

The corollary is that if rate hikes do need to be stalled due to omicron’s growth impact, then more will ultimately be needed and hence a steeper curve.

There is a third potential driver of higher rates, as The Washington Post claims that “US lawmakers have held early talks on new COVID relief”. Nomura’s Rob Dent pours cold water all over that idea…

“I would interpret this headline with caution for three reasons.

• First, we have heard very little about this from Congressional leadership. The House is out, the Senate is bogged down with Build Back Better and voting rights. There is not a lot of momentum for another round of stimulus, and even the package that these two lawmakers discussed in December was only $68bn (vs about $5tn of pandemic-related fiscal relief since 2020).

• Second, there’s a growing consensus that Omicron is different from earlier waves in how mild it is, and growing speculation that it could mark a turning point for when the pandemic becomes endemic. The fast spread of Omicron means cases could subside just as quickly, dampening the need for additional stimulus as early as February.

• Third, the broader appetite in Congress for enacting additional stimulus is low. That has been reflected in Democrats’ inability to extend some of the pandemic-related programs like enhanced unemployment benefits and the expanded Child Tax Credit (which expired this month). If the US is forced to go into another lockdown, there may be renewed interest in another package, but so far we do not appear to be on that track.

The bottom line is that we probably shouldn’t expect much out of Washington this year unless things get really bad, i.e., a new, completely vaccine resistant variant. Outside of that, there may be narrow efforts to do something very simple like pass airline aid (a few billion) but that may be it.”

One final suggestion for the rise in yields is a narrative that highlights a confidence that the economy (and the market) can handle policy tightening.

However, as Nomura’s Charlie McElligott notes, the bond market is still going to be VERY susceptible to fits-and-starts, particularly with the Fed’s clear messaging trial-balloons on balance-sheet run-off taking a step-further yesterday with the WSJ’s “Fed Whisperer” Nick Timiraos piece yday

 Additional comments of said WSJ balance sheet run-off piece, again from Nomura Economist Rob Dent:

“He (Timiraos) usually has good “preview” pieces for messages the Fed wants out ahead of key releases.  The timing – one day before the Dec FOMC minutes are released – is probably not a coincidence. The article notes that Fed officials began to debate runoff at the Dec meeting.  Powell alluded to this, so we are largely expecting discussions on it in tomorrow’s minutes release, but the FOMC may not want to surprise people with that section.  It’s possible the minutes will be more hawkish than what Powell suggested at the press conference, similar to Nov.  We continue to believe the Fed will announce balance sheet runoff at the July meeting, effective August, with larger caps and a faster scale up relative to the post-GFC period ($12bn for TSY, $8bn for MBS, reaching $60bn and $40bn by Dec, respectively).”

However, as McElligott has made clear previously, the back-test of Fed policy-tightening running simultaneously with balance-sheet run-off has not been kind – see 4Q18; meaning there is still absolutely room for this hopeful “Pro-Cyclical” rally to get washed-out in a “Risk-Off” / FTQ / Duration type trade at the first sign of a harder economic slowdown, OR, “markets tantruming” with enhanced volatility (i.e. when Powell’s facepalm “long way from neutral” plus balance-sheet unwind on “auto-pilot” comments absolutely NUKED the S&P -20% btwn Oct to Dec 2018, before he infamously ‘bent the knee’ to markets under the guise of the unspoken “financial conditions” 3rd mandate)

As McElligott notes, obviously, if this above “financial conditions tightening tantrum” scenario were to play-out in true “policy error” fashion, we would expect the polar opposite trade to develop from what we are currently seeing this first week of 2022–from what is now “risk-seeking” Pro-Cyclical positioning into something that would be more “risk-off” and likely, Duration-sensitive.

Put simply, any jawboning on more aggressive policy-tightening and balance-sheet shrinkage will prompt a rapid test of the Powell Put strike and with it a knee-jerk bid for bonds, rejecting the ongoing rise in yields that has already become a theme for many this week.

So – is the bond bloodbath over? We suspect yes, for now. Heavy issuance technicals are done, omicron’s upside inflationary impact may quickly morph into greater fears about the short-term growth impact, any hope for new COVID relief is just wishful thinking, and belief in the narrative that ‘higher rates prove the ec9onomy is resilient’ will be shrugged off rapidly as long-duration stocks continue to get monkey-hammered and the Powell-Put is tested.

Manhattan’s newly elected DA, Alvin Bragg, has ordered prosecutors to stop seeking prison sentences for most offenses, and to downgrade felony charges in cases which include armed robberies and drug dealing, according to the New York Post.

In his first memo to staff on Monday, Alvin Bragg said his office “will not seek a carceral sentence” except with homicides and a handful of other cases, including domestic violence felonies, some sex crimes and public corruption. -NY Post

“This rule may be excepted only in extraordinary circumstances based on a holistic analysis of the facts, criminal history, victim’s input (particularly in cases of violence or trauma), and any other information available,” reads Bragg’s memo.

According to Bragg, whose campaign was funded in part with a $1 million donation from billionaire George Soros, also told assistant DAs that they must now keep in mind the “impacts of incarceration,” including whether it actually increases public safety (ZH: to keep violent criminals physically separated from the public? Uh, yeah…)

This is insane. You can carjack a dozen people at gunpoint, and as long as you don’t use the gun to seriously injure someone, the Manhattan DA won’t seek prison time for you. https://t.co/gubG1s5TDk

— Amy Swearer (@AmySwearer) January 4, 2022

When prosecutors want to put a convict behind bars, they can’t ask for more than 20 years for a ‘determinate’ sentence – i.e. one which can’t be reviewed or changed by a parole board, according to the report. 

What’s more, “The Office shall not seek a sentence of life without parole,” which according to state law is a punishment reserved for the worst offenders; murderers, terrorists, serial killers, cop killers, and people who kill children under the age of 14 during sex crimes or torture.

More via the Post:

Bragg’s memo also detailed the following instructions for prosecutors to reduce charges filed by cops in various cases:

• Armed robbers who use guns or other deadly weapons to stick up stores and other businesses will be prosecuted only for petty larceny, a misdemeanor, provided no victims were seriously injured and there’s no “genuine risk of physical harm” to anyone. Armed robbery, a class B felony, would typically be punishable by a maximum of 25 years in prison, while petty larceny subjects offenders to up to 364 days in jail and a $1,000 fine.

• Convicted criminals caught with weapons other than guns will have those felony charges downgraded to misdemeanors unless they’re also charged with more serious offenses. Criminal possession of a weapon in the third degree, a class D felony, is punishable by up to 7 years behind bars.

• Burglars who steal from residential storage areas, parts of homes that aren’t “accessible to a living area” and businesses located in mixed-use buildings will be prosecuted for a low-level class D felony that only covers break-ins instead of for more serious crimes. Those more serious crimes, class B and class C felonies, would be punishable by up to 25 and up to 15 years in prison respectively. 

• Drug dealers believed to be “acting as a low-level agent of a seller” will be prosecuted only for misdemeanor possession. Also, suspected dealers will only be prosecuted on felony charges if they’re also accused of more serious crimes or are actually caught in the act of selling drugs. That felony would mean facing up to seven years behind bars.

According to Bragg’s memo, “ADAs should use their judgment and experience to evaluate the person arrested, and identify people: who suffer from mental illness; who are unhoused; who commit crimes of poverty; or who suffer from substance use disorders,” while “Charges should be brought consistent with the goal of providing services to such individuals, and leverage during plea negotiations should not be a factor in this decision.”

Bragg claims the changes will “not only will, in and of themselves, make us safer; they also will free up prosecutorial resources to focus on violent crime.”

What’s more, “new initiatives and policies on guns, sex crimes, hate crimes, and other matters will be announced in the coming weeks.”

The head of the NYPD Detectives’ Endowment Association, Paul GiGiacomo, came out swinging against Bragg’s memo.

“Bragg gives criminals the roadmap to freedom from prosecution and control of our streets,” he said, adding “In Bragg’s Manhattan, you can resist arrest, deal drugs, obstruct arrests, and even carry a gun and get away with it.“

Meanwhile, the head of the NYPD’s largest union expressed “serious concerns about the message these types of policies send to both police officers and criminals on the street.”

“Police officers don’t want to be sent out to enforce laws that the district attorneys won’t prosecute,” said Police Benevolent Association president Patrick Lynch. “And there are already too many people who believe that they can commit crimes, resist arrest, interfere with police officers and face zero consequences.“

(h/t Byron York)

After Markit’s Manufacturing survey for December dropped to 12-month lows, the Service Sector survey also faded modestly

Source: Bloomberg

The IHS Markit US Composite PMI Output Index posted 57.0 in December, down slightly from 57.2 in November.

The latest data signalled a steep increase in private sector business activity, albeit largely driven by the service sector as manufacturing production rose at a relatively muted pace.

Input shortages, transportation delays and upticks in labor costs drove the rate of private sector input price inflation to a fresh series high in December.

Commenting on the latest survey results, Siân Jones, Senior Economist at IHS Markit, said:

“Service sector business activity growth remained strong in December, supporting indications of a solid uptick in economic growth at the end of 2021. Although the expansion in output softened slightly, the flow of new orders picked up, with buoyant client demand rising at the fastest pace for five months.

“The service sector continued to aid overall growth, as the manufacturing sector saw output hampered again by material and labor shortages. The impact of the latter, however, had a burgeoning effect on service providers as job creation rose at only a marginal pace amid challenges keeping hold of staff and enticing new starters. “Subsequently, soaring wage bills and increased transportation fees drove the rate of cost inflation up to a fresh series high.

“Business confidence strengthened at the end of the year to the highest since November 2020, as firms were hopeful of more favorable labor market and supply-chain conditions going into 2022. The swift spread of the Omicron variant does lace new downside risks into the economic outlook heading into 2022, however. Any additional headwinds or disruption faced by firms are likely to temper sentiment.”

Does this feel like a good time to be tightening monetary policy?

By Stefan Koopman, senior macro strategist at Rabobank

Italian Soap Opera

The market continues to trade omicron with a glass half full view, judging it hastens the virus’ transition from pandemic to endemic, albeit with record-setting numbers of illnesses, rising hospitalizations and deaths along the way. The acquired “wall of immunity” could then help protect against Covid’s next variant of concern, which will only be a matter of time as long as the virus rips through the global population.

This improvement in risk appetite, combined with higher inflation expectations due to seemingly unending supply-side constraints, weighs on global bond markets. The bear steepening of the UST curve causes the yen in particular to suffer. USD/JPY trades at 116; its lowest since January 2017. Rising yields also exert pressure on growth stocks. Finally, Brent oil trades at 80 dollar, holding onto its recent gains as OPEC+ approved the 400kb/d increase scheduled for February.

Italy will issue a new 30-year bond via syndication today, just three weeks before the soap opera of Italian politics really starts to absorb the attention of investors (to be fair: the 10yr BTP-Bund spread has already widened to 130 bps; the most in over a year). The Chamber of Deputies has set January 24 as the start date of the election to replace President Mattarella. A total of 1,009 electors, both lawmakers and regional representatives, will then cast secret ballots in a series of voting rounds until one candidate wins the required majority (i.e. a two-thirds majority in the first three rounds, an absolute majority in every consecutive round). This ‘papal-style’ process could easily span several days and has in the past led to big surprises, in particular when none of the frontrunners was able to command a majority among the electors (e.g. the 1992 election of Oscar Luigi Scalfaro was particularly notorious).

The president is elected for a seven-year term. The role is largely ceremonial, but it has been demonstrated time and again that he (or she?) has extensive powers when a new government needs to be formed. Recall, for instance, that Mattarella opposed the appointment of the Eurosceptic university professor Paolo Savona as Italy’s Finance Minister in 2018. Prime Minister Mario Draghi has already indicated to have an eye on the job and commands the support of the centre-left. The centre-right has rallied behind comeback ‘kid’ Silvio Berlusconi. The Five Star Movement, still the biggest in parliament, wants Mattarella to stay on even as they pressed for impeachment when he blocked the appointment of Savona. It will probably take a while before the governing coalition can agree on a cross-party presidential candidate.

While a Draghi presidency would undoubtedly be regarded as a positive for markets, as a ‘beacon of stability’ in the next seven years, his high international standing and strong personality may not work for ambitious political leaders of other parties, such as the Brothers’ Giorgia Meloni. A safe pair of hands for prime minister is difficult to find too. His appointment could therefore also risk an early general election, just as the total number of MPs and senators will be cut from 945 to 600. This makes it impossible to predict the presidential election with any degree of confidence; don’t be surprised if this soap opera delivers some incredible intrigues, before the electors ultimately end up with a low-profile, centrist candidate as a compromise. Rimanete sintonizzati!

Turning back to the US, the JOLTS report showed quits reaching a new all-time high in November. A little more than 4.5 million employees voluntarily decided to leave their jobs, as the number of openings (10.6mn) continued to exceed the number of unemployed jobseekers (6.9mn). The quits rate reached new record highs in four sectors (accommodation and food, healthcare and social assistances, professional and business services, and state and local government) and across establishment sizes. The private quits rate even rose to 3.4%, another record high as well, suggesting that an increase in the y/y rate of the Employment Cost Index for 21Q4 is on the cards. This data point will be published on January 28. Recall that Powell said at the December press conference that a strong reading for Q3 ECI –which measures gross labor income and isn’t impacted by employment shifts across industries and occupations– nudged him to pivot on inflation.

That said, on the ‘cost side’ of inflation, the Manufacturing ISM provided some better news. Even though the headline number fell a bit short of expectations with a figure of 58.7, this 2.4 point drop wasn’t bad news at all. The prices index was down 14.2 points to 68.2; the supplier deliveries index down 7.3 points to 64.9. These are still elevated levels that point at constrained production –and shortages caused by the surging omicron variant may throw another spanner in the works– but the survey does indicate there are clear signs of improved delivery performance. This suggests the pressure on core PCE inflation may start to abate.

Day ahead

The minutes from the December FOMC meeting may shed some light on the potential pace of rate hikes, as the decision to double the pace of tapering opened up the possibility of an earlier lift-off. Even Minneapolis Fed President Kashkari decided to bring forward two rate increases into 2022. While he believes that the demand shock will soon subside, he has less confidence in how quickly supply will return to normal. His essay is worth a read. It underlines that policy makers in developed economies grapple with opposed concerns of slowing demand and supply-side price pressures. Do they sit on their hands and run the risk of second round effects giving rise to self-sustained inflation, or raise rates and potentially weigh on the recovery by using a demand-management tool to address a supply-side issue? If even Kashkari gets nervous…

A few weeks ago, Dr. Anthony Fauci hinted that the federal government would soon change its definition of “fully vaccinated” to include not just the two original shots but at least one booster dose as well.

But in the latest indication that Dr. Fauci has succeeded in pushing this scheme, the good doctor said Tuesday during a lecture at the National Institutes of Health that new terminology would be used in place of the “fully vaccinated” language. Instead of referring to somebody as “fully vaccinated”, they will be referred to as having their vaccinations “up to date” to reflect the notion that they have gotten their booster shots.

“We’re using the terminology now ‘keeping your vaccinations up to date,’ rather than what ‘fully vaccinated’ means,” Fauci said during a National Institutes of Health lecture Tuesday.

“Right now, optimal protection is with a third shot of an mRNA or a second shot of a J&J.”

This follows a decision by the CDC on Tuesday to shorten the time frame for Pfizer-BioNTech’s COVID booster jab, which can now be administered within five months of the initial two-shot series, instead of six. Meanwhile, a CDC advisory panel is expected to recommend boosters for teenagers during a meeting on Wednesday.

According to certain research studies, Pfizer’s vaccine provides a 25x increase in neutralizing antibodies that fight the variant while Moderna’s booster produces a 37x increase in antibodies. Meanwhile, two doses of Johnson & Johnson’s vaccine cut hospitalizations in South Africa by 85%.

“We are continuing to follow that science and it is literally evolving daily. And as that science evolves, we will continue to review the data and update our recommendations as necessary,” CDC Director Rochelle Walensky said at a White House briefing Dec. 15.

Dr. Fauci made his remark about the new terminology for people who have had all their shots in response to a question about Israel’s plans to dole out a fourth shot.

“We need to find out what the durability of protection of the third shot is before we start thinking about the fourth shot,” Dr. Fauci replied.

The only question now is how much longer until the US green lights a fourth shot (and then a fifth, and then a sixth) much like Israel is doing…

Despite an attempt to impose a strict curfew on Kazakhstan’s largest city overnight and a ‘state of emergency’ across all locales hit by unrest, protesters are reportedly storming government buildings in Almaty, as chaos continues on the streets amid clashes with police, now in the fourth day of angry crowds raging against a dramatic hike in gas prices after government-imposed caps were lifted on liquefied petroleum gas on Saturday, which meant prices at the pump immediately more than doubled and tripled in some places.

Kazakh President Kassym-Jomart Tokayev has accepted the resignation of the government in the one-party state. “Tokayev said on Wednesday morning that he had accepted the resignation of the cabinet led by Prime Minister Askar Mamin, and ordered the acting cabinet to reinstate price controls on Liquified Petroleum Gas (LPG),” Al Jazeera reports. There were reports of gunfire heard in Almaty throughout the night and into the morning, and emerging unconfirmed reports of casualties from protests in various cities and towns.

⚡️⚡️⚡️ Right now, the storming of the Presidential Administration of Kazakhstan begins. #BreakingNews #Breaking #Kazakhstan #Казахстан #protests pic.twitter.com/iuOiCDDvor

— Aleksander Onishchuk (@Brave_spirit81) January 5, 2022

But it’s looking too little too late as the continuing unrest is now targeting the government, despite President Tokayev warning the prior day that “Calls to attack government and military offices are absolutely illegal,” and vowing that “The government will not fall” in a national TV address.

And now… he’s vowing “maximum toughness” in his response to the protests and riots.

KAZAKH PRESIDENT SAYS HE WOULD ACT AS TOUGH AS POSSIBLE – TV

KAZAKH PRESIDENT SAYS HE WILL STAY IN THE CAPITAL – TV

KAZAKH PRESIDENT SAYS HE TAKES OVER AS SECURITY COUNCIL CHAIRMAN – TV pic.twitter.com/t4ciMFGKE9

— Russian Market (@russian_market) January 5, 2022

Perhaps to save and ensure his own political rule, there’s some rapid backtracking taking place on the prior weekend removal of price control caps, as Tokayev—

…also ordered the acting cabinet to broaden price controls to petrol, diesel and other “socially important” consumer goods.

The moves followed clashes in Almaty overnight between police and thousands of protesters who had called for the government’s resignation.

“Old man out” – some are reportedly shouting. In more than one major city, footage shows buildings on fire, and police trying to restore order through riot control tactics like flash bangs and rubber bullets.

‘Live fire’ is also being reported, but the situation remains murky, also as there seems to be few if any foreign journalist crews on the ground amid the mayhem.

More footage from Alma-Ata.#BreakingNews #Breaking #Kazakhstan #Казахстан #protests pic.twitter.com/tlgVbPMxGi

— Aleksander Onishchuk (@Brave_spirit81) January 5, 2022

According to NetBlocks on Wednesday, the nationwide internet outage has endured. “Kazakhstan is now in the midst of a nation-scale internet blackout after a day of mobile internet disruptions and partial restrictions,” the net monitoring group writes. “The incident is likely to severely limit coverage of escalating anti-government protests.”

Almaty #Kazakhstan right now: these protestors are on some extra shit, attacking an APC like their lives mean nothing pic.twitter.com/4C9BpmLNtW

— Don (@donhoxa) January 4, 2022

A number of public buildings especially in Almaty appear to be on fire, and now there’s concern the capital of Nur-Sultan could come under threat next. Reuters reports the intensifying situation on Wednesday as follows:

An Instagram live stream by a Kazakh blogger showed a fire blazing in the office of the Almaty mayor, with apparent gunshots audible nearby. Videos posted online also showed the nearby prosecutor’s office burning. Earlier on Wednesday, Reuters journalists saw thousands of protesters pressing towards Almaty city center, some of them on a large truck. Security forces, ranked in helmets and riot shields, fired tear gas and flash-bang grenades.

In Kazakhstan’s Aktau city, on the Caspian Sea, what look like civilians have been filmed halting a military truck. pic.twitter.com/EpQNPT1yDA

— Bryan MacDonald (@27khv) January 5, 2022

Authorities are now vowing to stamp out the actions of “extremists” amid accusations that innocent bystanders have been injured by the outraged mobs. Reuters continues:

The city’s police chief said Almaty was under attack by “extremists and radicals”, who had beaten up 500 civilians and ransacked hundreds of businesses. A presidential decree announced a two-week state of emergency and nighttime curfew in the capital Nur-Sultan, citing “a serious and direct security threat to citizens”. States of emergency were also declared in Almaty and in western Mangistau province, where the protests first emerged in recent days.

Given emerging reports that in a number of cities police and military personnel are completely overwhelmed, the violence is likely to get worse before things calm, despite the desperate attempts to announce the return of fuel price controls. 

Footage circulating on social media also reportedly shows security forces completely overwhelmed in Almaty as crowds beat up one national guardsman on a street corner. pic.twitter.com/PnQJMZLXI2

— Bryan MacDonald (@27khv) January 5, 2022

developing…

Authored by Paul Joseph Watson via Summit News,

Australian Prime Minister Scott Morrison has threatened to deport tennis champion Novak Djokovic if his proof of vaccine exemption is “insufficient.”

Djokovic was one of 26 applicants who successfully applied for a vaccine exemption to enter the country in order to defend his Australian Open title, which he has won nine times previously.

The world number 1 has repeatedly refused to reveal if he’s been jabbed and decried the medical apartheid that is being imposed via vaccine passports.

However, after some expressed anger that Djokovic was given special treatment, Morrison said the tennis player would be on the next plane home if his vaccine exemption reasons weren’t deemed valid.

“No special rules for Djokovic” says Scott Morrison, Australian PM 🎾 pic.twitter.com/gRfSjXOAVI

— Mirror Sport (@MirrorSport) January 5, 2022

“There should be no special rules for Novak Djokovic at all. None whatsoever… We await his presentation and what evidence he provides us to support that,” Morrison told a press conference earlier today.

“My view is that any individual seeking to enter Australia must comply with our border requirements,” he added.

“Now Novak Djokovic, when he arrives in Australia, he has to if he’s not vaccinated, must provide acceptable proof that he cannot be vaccinated for medical reasons to be able to access the same travel arrangements as fully vaccinated travellers.”

“So we await his presentation and what evidence he provides us to support that. If that evidence is insufficient, then he will be treated no different to anyone else and he’ll be on the next plane home.”

Djokovic announced he was traveling to Melbourne for the tournament with a tweet encouraging his fans to “feel love & respect towards all beings on this wonderful planet.”

That sentiment isn’t shared in Australia, where the unvaccinated have been treated little better than criminals for much of the past year, having been relentlessly demonized by the media and persecuted by the state.

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