risk takes a pause….for the moment (Thursday)

Risk on sentiment has effectively taken its first breather of the year on this 10th day of January, led by disappointment over US/China trade talks and gridlock in Washington, while Treasuries lead global curves steeper after yesterday’s FOMC minutes. Nothing major as of yet, but global fixed income benefits as equities and commodities back up slightly. Treasuries are trading lower in yield except for the long end, with the curve continuing to steepen smartly, while equity futures trade slightly lower but toward the upper end of their overnight range.

Just before the Asian open, coordinated statements after mid-level meetings between China and the US disappointed slightly as the US statement highlighted Trump administration’s on-going concern with protecting US interests. Soft CPI and PPI data out of China rekindled fears of deflation in Asia later in the session, and risk decided to sit this one out. From the outset, Treasuries saw their 2019 favorite buyer show up, with Japanese lifer lifting 7s and 10s, other Japanese real money accounts lifting small 10s and 30s; hedge fund used this bid to 10s to enter into more 2/10s swap steepeners after yesterday’s FOMC minutes discussed the possibility of shortening Fed’s duration profile in UST and MBS. After the Tokyo lunch, flow saw better deal-related receiving in USD 10y and 30y swaps, while Asian bank paid in USD 5y swaps again. Asian central bank was small buyer of 5s, much lesser size than earlier this week and last. Reds led the rally higher on the funding curve, with RV account buying EDH0 and cash 2s, but selling 30s more aggressively outright and on the curve against 2s as Treasuries retraced slightly into the European open. Aussie bonds reversed yesterday’s pressure, taking a cue from the soft Chinese inflation data, while JGBs were underpinned from the open, and added to gains after a fairly decent 30y auction. Asian bourses were mixed, Hang Seng again outperforming (+.22%) while NIKKEI led decliners (-1.3%); most other bourses, including China, were very marginally lower.

The European open saw better bid to bunds, as market appears to have digested yesterday’s avalanche of EUR supply and local markets repriced at lower yields. This was further evidenced by the smart tightening in Portugal and Spain after their supply yesterday, although BTPs saw better domestic bank selling after a strong showing early this week; bunds found support from a lighter overall calendar. Conversely, gilts started lower and have stayed there ahead of a large supply calendar in GBP over the next 24 hours. Early European bid to Treasuries faded with RV leading the selling in cash 30s and TYH contracts, the latter against receiving in USD 10y swaps. Macro account was seller of US 10s to buy German bunds, while real money account sold US 5s against bobls. Some bank buying of gilts materialized mid-session, but activity wound down ahead of the ECB minutes at 7:30 AM ET (which were a nonevent). European equities are mixed, largely unchanged, while US equity futures claw their way back toward unchanged ahead of the US open.

Today’s economic calendar includes only weekly claims, with other releases are delayed by the government shutdown. Don’t worry though, as a bevy of scheduled Fed appearances will fill the void, highlighted by Powell’s appearance before the Economic Club of Washington at 12 PM ET; his text will not be released, and he will take questions from the moderator. Also on the docket, we have Barkin (8:35 AM ET on long-term growth), Bullard (12:40 PM ET, economy and monetary policy), Evans (1 PM ET, economic forecasting), Kashkari (1:20 PM ET, immigration and growth), and Clarida (5:30 PM ET, Money Marketeers in NYC). And lest we forget, the Fed will wrap up this week’s issuance with $16BN in reopened 30y bonds at 1 PM ET. It should be interesting to see who shows up after the Fed threw out the possibility of reducing its holdings in this sector yesterday.

Very interesting start to the year, and I’ll throw this out as an example: even with a nice risk on trade since Jan 1 (i.e., SPX up 3.4% in first full week), 10y yields have only backed up 6 bps. The large and aggressive buying out of Japan and the willingness of accounts to utilize some balance sheet in the new year certainly are easy explanations, but something has to give here. Yesterday’s technicals seemed to set up for a test of higher rates only to utterly disappoint after cash equities opened, as we tagged yesterday’s projected high but avoided the projected low by 1.5 bps! It’s already feeling like a visit from the Clue Salesman would be helpful. But what the heck, let’s call the range in TYH today at 122-01+ to 121-17. It will be important to get through a minor value gap we have down at 121-24 if you are truly going to back up to 121-17, with real risk to the market a rally here as global demand seems to be overwhelming uninspired technicals thus far this year. Further support in TYH comes in at 121-14, 121-10+, 121-03, and 120-29+. Resistance comes in at 121-28+, then the 122-01+, 122-09, and 122-13. Don’t have any great ideas conditionally as would prefer to get a few better technical signals first.

Have a great Thursday,