November 8, 2023
As indicated in this week’s ATW, I would expect Treasuries and risk markets to follow through from last week’s QRA and Fed-induced rallies. A consolidation, of course, is always welcome as markets queue up for the next leg ahead.
Treasuries have stabilised at close to Friday’s close, with a sizeable US 10y auction later today for $40bn, the largest since July 2021.
As near-term rate hike premium is reduced across major central banks, the cumulative nature of pricing means short-end cut pricing is creeping higher for G10 without data having deteriorated.
The below shows terminal rate pricing for EUR, GBP OIS now vs two weeks ago.
There's a limited macro data schedule this week, but there are plenty of central bank speeches that could offer more guidance on policy (28 appearances from FOMC, ECB and BoE in total). Fed hawks could be more interesting, ECB speakers less so. BoE’s Pill features again on Thursday.
Most ECB officials agree that rate-cut discussions are too early and that we are likely at peak rates. Holzmann reiterated that the ECB should be ready to hike again if required, but he is an outlier. Lagarde's FT interview on Friday is the main event.
BoE's Bailey's keynote address on Wednesday should reiterate familiar "higher for longer" messaging. Below is a full guide to this week’s events.
Oil prices slipped over 4% on Tuesday to levels last seen in July. This was also the largest 1-day drop since early October.
Although the reasons behind the slide are not clear, commodity strategists see five factors contributed: 1) weaker data prints from China (PMIs, trade balance), 2) Technical breaks, 3) Unwind of geopolitical tension premiums, 4) revision of EIA forecasts, 5) upcoming review of Saudi Arabia and Russia supply cut decisions.
Keep an eye on the 80-USD price mark with a substantially significant put open interest in Brent. With peak gamma reaching $80, we will likely see aggressive selling into it.
I haven’t updated the carry/roll analysis for a while. US 2-10s, for example, would still need to steepen by 88 bps over a year to make money. This is often not mentioned by all those who advocate steepeners. With bond volatility subsiding a bit, carry trades might be back in vogue into year-end.
Let’s now explore what the momentum and reversal models have been flagging and offering up for us. This is a reminder to revisit the detailed guide I have put together for you to understand what the colourful charts signify.