Fixed Income Weekly — 8/30/23
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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Chart of the Day – No Reason to Move
Bespoke’s Morning Lineup – 8/30/23 – More Sluggish Employment Data
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“I am not a person of opinions because I feel the counter arguments too strongly.” – Mary Shelley
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If there’s one topic we can be confident that Mary Shelley wouldn’t be weighing in on if she was around today, it would be the economy. No matter which side you choose, there’s good evidence to support your view. Recession? How can we even entertain the thought with jobless claims and the unemployment rate both still at extremely low levels and the Atlanta Fed GDP Now tracking Q3 growth at 5.9%? OK, but with the yield curve on pace for a record streak of inversion, leading indicators down for more than a year straight, and manufacturing surveys deeply in negative territory, how can you not have a recession in your forecast? There’s merit to both arguments.
It’s a busy day for economic data, and it started off with the ADP Employment report. After a weaker than expected JOLTS report and a Consumer Confidence report which showed softening sentiment towards the labor market yesterday, the ADP report continued that trend coming in at 177K versus forecasts for an increase of 200K and follows four months where the reported number was well over 250K. Besides ADP, there is plenty of other data to contend with this morning including Wholesale Inventories (less bad than expected), revised GDP (down to 2.1% from 2.4%), Personal Consumption (slightly weaker), and Core PCE (2.0% vs 2.2% forecast). The only other report on the calendar today is the Pending Home Sales report (10 AM), which is expected to show a decline of 1%.
With two trading days left in August, it’s impressive to see that after heading into the week going all month without back-to-back positive days in the S&P 500, the S&P is now looking to string together its fourth straight positive day. That’s the good news. The bad news is that we’re heading into one of the toughest parts of the calendar. As shown in the composite chart of the S&P 500’s tracking ETF (SPY) over the last ten years, September has been the weakest part of the late summer/early fall consolidation period.
Below the chart, we have also included gauges from our Seasonality Tool which show how performance in the week and month after today’s date over the last ten years has compared to all other one week and one-month periods throughout the year. In the week after 8/30’s close, SPY’s median gain of 0.18% ranks in the 44th percentile relative to all other one-week periods. Over the next month, though, the median decline of 1.21% ranks in just the fourth percentile relative to all other rolling one-month periods. Just another reason very few people like to see summer end.
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The Closer – Yield Collapse, Dash For Trash – 8/29/23
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Looking for deeper insight into markets? In tonight’s Closer sent to Bespoke Institutional clients, we start out with a look at the drop in 2 year yields as well as the re-acceleration in home prices (page 1). We then dive into the latest JOLTS data (page 2) and huge miss in consumer confidence (page 3). Next, we show how yields have impacted rotation (page 4) before finishing with a recap of the 7 year note auction held this afternoon (page 5).
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Daily Sector Snapshot — 8/29/23
Bespoke Stock Scores — 8/29/23
Major Hurricanes Making US Landfall Since 1990
Hurricane Idalia currently has maximum sustained winds of just 75 miles per hour (MPH), but the storm is forecast to intensify as it barrels closer towards land, and by the time of the expected landfall on Wednesday morning, it is expected to have maximum sustained winds of 125 MPH making it a category-3 ‘major’ hurricane. Idalia is the 9th named storm of the 2023 hurricane season which still doesn’t reach its peak for another two weeks.
If Idalia does strengthen to a category-3 storm before making landfall, it will be the 19th major Atlantic hurricane to make a US landfall. The table below was created using information from Wikipedia and lists each of those prior storms with the most recent being Ian last September. Major hurricanes making landfall in the US have tended be sporadic over the last 30+ year. While there have been seven in the last six years, from late 2005 through August 2017, there was a nearly 12-year stretch without a single major hurricane making landfall.
Most hurricanes, even major ones, have an insignificant impact on the broader US economy. While Katrina, Harvey, and Ian had major impacts, a third of the 18 storms listed above didn’t even cause $10 billion in damages. We’d also note that for this analysis, we only looked at major hurricanes, so Super Storm Sandy didn’t make the cut even though it caused nearly $70 billion in damage. Even if they don’t ultimately have much of a lasting impact on the economy, we were curious to see if there were any trends related to market performance, so in the charts below we show the performance of the S&P 500 in the day and week after each of the prior hurricanes made landfall.
It may sound hard to believe, but the S&P 500 has tended to rally in the short-term following prior landfalls of major hurricanes on the US coast. In the day after the 18 prior landfalls, the S&P 500’s median gain was 0.32% with positive returns 72% of the time. One week later, performance was even stronger at 1.22% with gains 83% of the time. This could all be coincidence more than anything else, but given the preparations that go into storms like these, the costs involved can have a short-term stimulatory impact.
SEC Loss Supercharges Bitcoin (GBTC)
Bitcoin is surging today as news hit the tape that a judge ruled in favor of Grayscale over the SEC in an appeal to convert its Bitcoin Trust (GBTC) into an ETF. As a result, the Grayscale Bitcoin Trust (GBTC) is currently trading higher by over 16% on the day. After trading below its 50-DMA since 8/17, today’s jump has sent it back above that moving average and up to the high end of the range it has occupied since the spring.
Perhaps more impressive, the nearly 17% gain as of this writing puts GBTC on pace for its largest single day gain since July 26, 2021. Back then it had risen 24.27% in response to rumors (which never came to fruition) that Amazon would begin to accept bitcoin as a form of payment. Looking back further, only a handful of days since the start of 2020 have seen larger moves as today ranks as the 26th biggest single day gain in the trust’s history.
Again, it has been over two years since the last time GBTC rose over 15% in a single session. While not to say GBTC (and bitcoin more broadly) has not had its share of rollercoaster swings in that time, the 526 trading day gap between 15% one-day rallies is the largest streak without a 15% move in GBTC’s history dating back to 2015.
In the chart below, we show the daily volume (as well as volumes on a 50-day rolling average) over the past five years. As hopes for crypto have been tarnished by a number of negative catalysts, the past two and a half years have seen activity in GBTC fall dramatically versus the early 2021 peak. However, the surge in activity today has already seen over 14 million shares trade as of this writing. With a few hours still left to go in the trading day, it is shaping up to at least be GBTC’s busiest day since last November when FTX collapsed. Although the swing higher on strong volume has been impressive, and today’s news does provide some hope for crypto on the regulatory front, one day does not make a trend.
Chart of the Day – How You September Depends on How You Start
Bespoke’s Morning Lineup – 8/29/23 – Utilities Out of Power
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“You can’t have a better tomorrow if you are thinking about yesterday all the time.” – Charles Kettering
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After its first back-to-back gains of the month, the S&P 500 is poised for a lower open despite positive returns in Europe and Asia overnight. The parade of employment related data for the week kicks off today with the July JOLTS report. We’ll also get an updated read on Consumer Confidence from the Conference Board at 10 AM.
With just three days left in the month, the Nasdaq and the DJ Utilities Index (Utes) are on pace for a near record wide performance gap through the first eight months of the year. With the Nasdaq up just over 30% and the Utes down nearly 10% YTD, the nearly 40 percentage point gap between the two ranks as the third largest in history (dating back to 1971) trailing the 41.3 percentage point gap from 1991 and just slightly coming up short of the 39.9 percentage point gap in 2020 (August isn’t over yet though). The divergent performance of the two indices continues what has been a wild ride over the last few years. While this year has favored the Nasdaq, last year Utes outperformed the Nasdaq by a record amount.
A relative strength chart of the two indices really highlights the roller coaster highs and lows of the last three years. Despite this year’s massive outperformance of the Nasdaq, its relative strength versus the Utes is still well off its 2021 high.
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