Chart of the Day: Is It the Best or Worst Time of the Year?
Fixed Income Weekly — 9/20/23
Searching for ways to better understand the fixed income space or looking for actionable ideas in this asset class? Bespoke’s Fixed Income Weekly provides an update on rates and credit each week. We start off with a fresh piece of analysis driven by what’s in the headlines or driving the market in a given week. We then provide charts of how US Treasury futures and rates are trading, before moving on to a summary of recent fixed-income ETF performance, short-term interest rates including money market funds, and a trade idea. We summarize changes and recent developments for a variety of yield curves (UST, bund, Eurodollar, US breakeven inflation, and Bespoke’s Global Yield Curve) before finishing with a review of recent UST yield curve changes, spread changes for major credit products and international bonds, and 1-year return profiles for a cross-section of the fixed income world.
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Bespoke’s Morning Lineup – 9/20/23 – Place Your Bets
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“There is one kind of prison where the man is behind bars, and everything that he desires is outside; and there is another kind where the things are behind the bars, and the man is outside.” ― Upton Sinclair, The Jungle
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It’s Fed Day, and while these are always eventful days for the markets, there is basically zero chance that the Federal Reserve makes any change to rates this afternoon, so the real focus will be on the Summary of Economic Projections (SEP) and Powell’s press conference at 2:30. Outside of the Fed announcement, there is no economic data on the calendar, but we will get earnings reports from FedEx (FDX) and KB Home (KBH) after the close. Heading into the opening bell, equity futures are higher, while yields, the dollar, and crude are all modestly lower.
Investors are on tenterhooks this morning waiting for the latest economic projections and statement on interest rates from the Federal Reserve. With control over the cost of credit and supply of money in the economy (and a nice marble building), the Federal Reserve is in a powerful position. However, even the most powerful people can’t predict the future, and the ability of the men and women who make up the committee to predict where the economy is going probably falls somewhere between Jimmy the Greek’s record on Sunday NFL games in the early 1980s and Pete Rose’s betting percentage on the 1987 Reds. Despite that reality, when the statement and economic projections hit the tape in a few hours, billions in capital will be shifted based on their contents, and traders will make and lose fortunes based on how they were positioned heading into the announcement. Play ball!
It was just over two months ago that headline CPI for June dropped to 3.0% and investors thought some real progress had been made on inflation. With that progress, the view has increasingly been that the Fed would move to the sidelines taking a wait and see approach towards interest rate policy. Unfortunately, for fixed income investors, though, interest rates have done nothing but go up. Since 7/13, the day after the June CPI report, yields have been higher across the curve to levels not seen in at least 15 years. At the very short end of the curve, the 3-year yield is up just 5 basis points (bps), but two-year yields are up 34 bps, and 10-year yields have shot up 50 bps.
In terms of how those higher yields impact price, the iShares 20+ Year Treasury ETF (TLT) is down 8% and back down near its lowest levels since 2011. Talk about a lost decade!
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The Closer – Savings Cushion, Loan Repayments, Canada CPI, Housing, Indeed – 9/19/23
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Looking for deeper insight into markets? In tonight’s Closer sent to Bespoke Institutional clients, we begin with a look at household cash balances and the surge in student loan repayments (page 1). We then review Canadian inflation (page 2) and US residential construction data (pages 3 and 4). After a recap of the latest 20 year bond reopening (page 5), we run through the latest job postings data from Indeed (pages 6-8).
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Daily Sector Snapshot — 9/19/23
Chart of the Day – Is the VIX Too High?
Dividends (DVY) Get Payback on Growth (VUG)
Checking in on our Trend Analyzer tool, the clear biggest losers over the past week have been growth stocks. As shown in the snapshot below, almost all of the growth ETFs regardless of market cap have fallen over 1% in the past week. Although these are the same groups that have posted some of the biggest gains on a year to date basis, that recent drop has brought them back below their 50-DMAs with some like the Russell Mid-Cap Growth ETF (IWP) and small-cap Russell 2,000 Growth ETF (IWO) falling into oversold territory.
On the other end of the spectrum, there are only a small handful of ETFs in this screen that have risen over the past five days. The strongest of those has been the Select Dividend ETF (DVY) with a nearly 1% gain in the past week. That has cut into modest year to date declines (few other ETFs in this screen are also down year to date, but those are also dividend or low volatility focuses). In other words, price action over the past week has to some degree been a rotation of year to date performance.
In the charts below, we show the ratio of the Dividend ETF (DVY) versus the Growth ETF (VUG). The ratio has been in a steep downtrend throughout 2023 meaning growth has trumped dividend payers. However, this month’s reversal of that outperformance has resulted in the ratio to break out of that downtrend. Zooming out, that rebound in the ratio has also coincided with an uptrend line off of late 2020 and 2021 lows. Time will tell how lasting this reversal in relative performance will be, but from a purely technical standpoint, it has come at a logical point.
Housing Starts and Building Permits Go Separate Ways
Building Permits and Housing Starts are always reported on the same day, but today’s report for the month of August was one of the more bizarre ones we’ve seen in some time. While Building Permits topped consensus forecasts by 100K (1.54 million vs 1.44 million), Housing Starts had a big miss coming in at just 1.28 million versus forecasts for a pace of 1.44 million. In the case of Starts, it was the biggest miss relative to expectations since February 2019 and the weakest monthly print since June 2020. In terms of the divergent results relative to expectations, going back to at least 2002, it was the first time that either Building Permits or Housing Starts missed expectations by at least 100K while the other beat forecasts by at least 100K.
As shown in the table below, all of the strength and weakness in this month’s report was due to fluctuations in multi-family units. While multi-family starts were down 26% m/m, multi-family permits were up 16% m/m. Single-family units, meanwhile, were much more restrained with starts down just 4% while permits were up 2%. Thus, what looked like a very volatile report at the surface was more grounded below the surface.
Looking at Housing Starts on a 12-month average basis shows that activity has slowed sharply over the last year. At an average of 1.41 million over the last twelve months, total Housing Starts were the lowest in August since February 2021.
Again, while overall starts and permits have been driven by swings in multi-family units, both single-family permits and starts have actually started to stabilize and turn higher over the last two months. If that trend can continue in the months ahead, it would be a positive shift in the trend.
B.I.G. Tips – Chart Watching
Bespoke’s Morning Lineup – 9/19/23 – Divergent Housing Data
See what’s driving market performance around the world in today’s Morning Lineup. Bespoke’s Morning Lineup is the best way to start your trading day. Read it now by starting a two-week trial to Bespoke Premium. CLICK HERE to learn more and start your trial.
“The very idea of the power and the right of the people to establish government presupposes the duty of every individual to obey the established government.” – George Washington’s Farewell Address, 9/19/1796
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Futures are looking at a modestly positive open this morning even as crude oil and treasury yields are higher. Buildings Permits and Housing Starts were just released, and this was one of the weirder reports we have seen in a while. While Building Permits topped consensus forecasts by about 100K, Housing Starts missed forecasts by about 150K! The reaction in futures has been modestly negative, but at this point, investors have their sites set on the FOMC tomorrow.
While it’s on pace for its third straight day of declines today, the US Dollar Index has had a big rally over the last two months that took it to its highest levels of 2023. With that strength, the 50-day moving average (DMA) has been catching up to the 200-DMA which has also just started to turn higher. Given the trajectory of both moving averages, the Dollar Index is likely to have a ‘Golden Cross’ in the coming days which occurs when a short-term moving average (like the 50-DMA) crosses up through a longer-term average (like the 200-DMA) as both are rising. Technicians consider these types of patterns to be bullish over the longer-term, but often their record in theory is much different than in actual practice.
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