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USIRYY: Inflation has peaked. Fed Pivot incoming? I'm not a macroeconomics guru or T.A. guru, and these charts are weird considering the only timeframe we have access to is the monthly line chart +. USIRYY has wicked into the golden pocket + 1.618 fib extension with Monthly RSI going into overbought territory + Monthly MACD cross. I'd be a lot more confident about inflation topping with one more pump to the upside tagging the 1.618 fib at 9.5% with monthly bearish divergence on both MACD on RSI. Regardless, I believe inflation is topping around this area, 8-10%.
ECONOMICS:USIRYYShort
by CrashWhen
2
Gauging Market Sentiment on Risk Using the IG/HY SpreadWhen the spread between High-Yield (HY) debt and Investment Grade (IG) debt contracts or expands, this can be perceived as the market demanding more or less compensation for the risk it perceives to be present in owning the HY debt against the IG corporate debt. (HY-IG) = Risk On/Risk Off market sentiment. Generally speaking HY debt a.k.a. Junk Debt, is considered more risky than IG debt. Because of this increased risk, the market demands a higher yield for taking on HY debt, also known as a ‘risk premium’ or ‘premium’ over the alternative investment opportunities the market provides. This yield premium on HY/JunkBonds can be viewed as ‘extra incentive’ for bids to take on the ‘riskier debt’. When this spread (white) contracts, we can see that the market (yellow) has a tendency to go up (risk on) and when the spread (white) expands we can see the market (white) has a tendency to go down (risk off). This is only one of many indicators I use to gauge ‘market risk sentiment’ and I thought I would share it. (Not financial advice.)
Editors' picks
FRED:BAMLH0A0HYM2Education
by The_Firewalker
12
Endgame for central banks far from doneThis week the UK economy posted its highest inflation reading in 41 years rising 11.1% year on year (yoy) in October. The recent jump is largely the result of the uprating of the household energy price cap in October. Core inflation moved sideways at 6.5% yoy. We expect this to represent the peak for UK inflation. As the base effects of high energy prices begin to factor in, headline inflation in the UK is likely to fall. At the same time, the ongoing recession is likely to strip away the underlying price pressures. This has been evident in lacklustre consumer demand alongside waning housing market activity. UK Government claws back its credibility with the Autumn Statement Meanwhile the UK Government’s fiscal statement released this week1, confirmed significant fiscal austerity with spending cuts and widening of the tax base amounting to around 2% of Gross Domestic Product (GDP) after five years, although its mainly backloaded. The energy price guarantee will now have its cap for average household dual tariff annual bill lifted from £2500 to £3000 from April 2023 and remain in place for a further 12 moths. This is less generous than the original plan to cap bills at £2500 for two years. The Office for Budget Responsibility’s (OBR) analysis suggests that the measures announced in the Autumn statement reduce the depth and length of the recession this year and next but leave the economy on a similar growth trajectory over the medium term. We expect real GDP to contract by 1.3% next year followed by growth of 2% in 2024. With this is mind, we expect the Bank of England (BOE) to pause its tightening cycle once rates get to 3.5% in December followed by 50Bps of cuts in H2 2023. Eurozone to endure a short recession Owing to the external supply shock, Eurozone has faced a similar inflation narrative as the UK. In October Eurozone inflation reached 10.6% yoy. We expect inflation to remain high in the next few months, however starting early next year, the annual rates should decline aided by the base effects from the surge in energy prices in 2022. Owing to which we expect European Central Bank to continue to tighten monetary policy until Q1 2023. On the positive side, while Eurozone will endure a recession in Q4 2022 and Q1 2023, we expect the recession to be less deep than previously expected owing to the less dire gas situation. This was evident in the November ZEW survey, which showed expectations gauge for the economy in the six months ahead improve significantly to -38.7 in November from -59.2 in October. This remains in line with our view that in six months’ time the Eurozone economy should be on its way out of a recession. Federal Reserve (Fed) speakers singing from the same hymn book Fed officials backed expectations they will moderate interest-rate increases to 50 basis points next month, while stressing the need to keep hiking into 2023. St. Louis Fed President James Bullard said policy makers should increase interest rates to at least 5% to 5.25% to curb inflation. He also warned of further financial stress ahead. Bullard’s comments came a day after San Francisco Fed President Mary Daly said a pause in rate hikes was “off the table.” Fed Governor Waller (one of the more hawkish Fed officials) emphasized that while rate hikes will likely slow to 50bp in December, the ultimate destination or “cruising altitude” will depend on labour market and inflation data. Waller echoed Atlanta Fed President Bostic’s concerns about labour costs pushing up service sector prices which in our view remains the key upside risk to inflation even as core goods prices have slowed. Fears are mounting that relentless rates increases will hit economic growth, with a critical segment of the Treasury yield curve at the most steeply inverted in four decades, historically such an inversion has tied in with a US recession. Maintaining a value bias within equities Amidst the challenging backdrop for global equities, we have observed the value factor outperforming the growth factor by 17.3%2 in 2022. Across global markets, European equities are trading at the deepest discount (32%) from price to earnings (p/e) ratio to their 15-year average owing to fears of the energy crisis being detrimental to the economy. The recent 3Q 2022 earnings season provided evidence that European earnings have remained stubbornly resilient despite the broader macro turmoil. A deeper dive into the sector level suggest that energy, transport, utilities and healthcare have seen some of the biggest increases to their Earnings Per Share (EPS) estimates in 2022. The WisdomTree Europe Equity Income Index outperformed the MSCI Europe Index in 2022. The performance attribution highlighted below illustrates that the higher exposure to value sectors such as materials, financials, healthcare, industrials, and energy contributed to the outperformance.
FRED:T5YIE
by aneekaguptaWTE
1
Corporate Credit Conditions: Part 4In part 4 we look at the all in yield of investment grade (IG) and high grade (HY) credit, and why, despite OAS spreads resting at long term median, there still may be considerable investment value in the all-in-yields of short to intermediate maturity IG notes and ETFs. Understand, this discussion does not constitute an investment recommendation, only an illustration of a portion of my corporate investment and evaluation process. The yield of a corporate security is primarily comprised of two elements, the base rate and the credit spread. The base rate is the treasury rate (either real or extrapolated) at the matched point of the yield curve and the credit spread is the compensation for the higher default risk and the occasional periods of higher than normal volatility. The combination of the two is the all-in-yield. In other words, when you purchase a corporate bond, you receive a base rate (the risk free treasury rate) instrument with a compensatory credit spread. In most periods, the yield premium serves to reduce the volatility of the corporate compared to the treasury. In other words, corporate returns are generally driven by changes in treasury rates. There are exceptions. In 2008 all-in-yields rose sharply (to all-time highs) even as rates fell. In this period, the widening was entirely due to widening credit spreads rather than rising rates. The sharply wider credit spread reflected fear of massive defaults (which were not realized). Currently the ICE BofA Investment Grade Corporate Index (C0A0) all-in-yield is 6.24%. This for an index with an 8.3 year duration. This is the highest all-in-yield since June 2009 and picks up roughly 244 basis points (bps) to the duration matched point on the Treasury curve (extrapolated from the US Treasury daily par curve). When adjusted for expected default and downgrade risk, the all-in-yield is attractive, even given the growing evidence of a new downgrade cycle. Unfortunately, the index (and LQD) has a duration over 8 years. This implies that for every 100 basis point increase in yield (whether driven by increases in yield or spread), that the investment will lose roughly 8%. Clearly, an investment in the IG index has a tremendous amount of rate risk. Assuming another 100 bps increase in Treasury rates and perhaps 100 basis points of spread widening implies a roughly 16% decline (8 year duration, x 200 bps higher in yield), consuming three full years of yield. Unless you believe that yields and spreads have peaked, there is considerable risk in the trade. Due to the flatness of the curve, front end corporates with their much shorter durations offer much better risk reward profile. For instance, the effective yield of the 1-5 year investment grade index (CVA0) is 5.38% and the duration is only 2.65 years. In other words, only a 100 bps give in yield with only about 1/3 of the rate/spread risk. If the combination of five year rates and spreads increase 200 bps over the next year, the -5.3% implied price change would consume only one year of the investments yield. Anything less than a cumulative 200 bps would produce a positive nominal return. High yield with its shorter duration (roughly 4 years) and at major resistance in the 9.5% range is also interesting mathematically. The beginning yield of 9.5% provides tremendous cushion against the combination of rising base rates and widening credit spreads. Extrapolated over two three and five year periods, losses and defaults would have to be extreme to create negative period returns. Once a fundamental relative value proposition is reached, traditional technical tools can be employed to design a trade and set risk management levels. Throughout this series we have made the case that the largest driver of corporate returns is the change in treasury rate. Begin by assessing the treasury charts (in this case 2 and 5 year Treasuries). After assessing those charts, move to more specific corporate charts. Begin by looking at broad index yield and OAS charts and then drop directly to charts that more closely resemble the proposed trade in terms of duration and credit quality. There are investment grade and high yield ETFs and funds available in most ratings and maturities. And finally, many of the topics and techniques discussed in this post are part of the CMT Associations Chartered Market Technician’s curriculum. Good Trading: Stewart Taylor, CMT Chartered Market Technician Taylor Financial Communications Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.
Editors' picks
FRED:BAMLH0A0HYM2EY
by CMT_Association
16
Trade Weighted US Dollar Index: Broad, Goods and Services❓How long will the dollar appreciate? 🏦 The Federal Reserve dollar indexes are designed to help estimate the overall effects of U.S. dollar exchange rate movements on U.S. international trade. 📈 There are three indexes: (1) the broad dollar index (this index), which is constructed using the currencies of the most important U.S. trading partners by volume of bilateral trade, and two sub-indexes, which split the currencies in (2) the broad index into advanced foreign economies (AFE) and (3) emerging market economies (EME). The broad dollar index contains the currencies of 26 economies for which bilateral trade with the United States accounts for at least 0.5 percent of total U.S. bilateral trade. It includes the Euro Area, Canada, Japan, Mexico, China, United Kingdom, Taiwan, Korea, Singapore, Hong Kong, Malaysia, Brazil, Switzerland, Thailand, Philippines, Australia, Indonesia, India, Israel, Saudi Arabia, Russia, Sweden, Argentina, Venezuela, Chile and Colombia. 🤔 Trade-Weighted Dollar Index vs. the U.S. Dollar Index (DXY or USDX) Created in 1973, DXY is composed of a basket of six currencies: Euro (EUR), Japanese yen (JPY), British pound (GBP), Canadian dollar (CAD), Swedish krona (SEK), and Swiss franc (CHF). 💶 The EUR is, by far, the largest component of the index, making up almost 58% (officially 57.6%) of the basket. The weights of the rest of the currencies in the index are: JPY (13.6%), GBP (11.9%), CAD (9.1%), SEK (4.2%), CHF (3.6%). When the Fed introduced the Trade Weighted Dollar Index, it hoped to create a better alternative to the USDX, namely by using more currencies and periodically reviewing the index's composition. 📚 More info: fred.stlouisfed.org www.federalreserve.gov www.investopedia.com
FRED:DTWEXBGS
by andre_007
Bitcoin in connection to Home Sales 🚨🚨Update: Bitcoin in connection to Home Sales We just saw a channel break dear Crypto Nation - last time seen at Corona sell-off🚨🚨 If Home Sales find the way back into the channel BTC might recover as well Let me know your thoughts in the comments🤗 ⬇️⬇️⬇️ Likes and Follow for updates appreciated🤗 Disclaimer: Not financial advice Do your own research before investing The content shared is for educational purposes only and is my personal opinion
ECONOMICS:USEHS
by Crypto4Everybody
US Inflation Rate, YoY, Double Top? - Long-term ViewPresently, the inflation rate in the US has started falling, which increases expectations for a pivot - end of interest rate hikes. And factually, we can actually expect it. The supply of M2 Money Stock (M2SL) and its annual growth rate are decreasing. The global economy is shifting, as leading economic index (LEI) indicate. This will undoubtedly put pressure on the Federal Reserve to cut interest rates. However, after the current crisis, the economic recovery will cause a recurrence of inflation. So, if that is the case, the next decade will be marked by tight monetary policy and high inflation. This situation will let the central banks introduce a new monetary system based on CBDCs using incentives such as cheaper credit. Check also my related ideas. Enjoy
ECONOMICS:USIRYY
by MichaelFX_ICT
Corporate Credit Conditions: Part 3As discussed in part two (prior installments linked below), the duration mismatch between LQD and HYG renders the ratio useless as a tool to assess credit distress or changes in investor preference. Credit ETFs, must be compared to a duration matched ETF, Treasury security or index to be useful. There is also the difficulty in comparing spreads across investment cycles. For instance, credit quality across both investment grade (C0A0) and high yield (H0A0) indexes have changed significantly over the last three years. During the pandemic recession over 200 billion of investment grade (IG) debt was downgraded to high yield (HY). This improved the quality of IG, making it less susceptible to a downgrade cycle. Additionally, the debt refinancing wave of the last three years left record cash on IG balance sheets, sharply reducing their need to issue new debt into the higher rate environment. In fact, IG interest coverage is at a record high of 12.8 times. The combination should result in significantly less IG spread widening than in past recessions/downgrade cycles. A way to monitor risk preferences is to utilize the arithmetic difference between HY and IG OAS. The idea is that as investor preferences swing between risk on and risk off, that the spread between the risk premiums will reflect this. If credit conditions are deteriorating, the spread will widen as investors demand a greater risk premium. When the Fed began tightening the spread was 226 basis points (bps). The initial surge peaked in June at +529 bps and has now narrowed to 339 bps, only 113 bps higher than the start of the year. Viewed in this manner, it is again hard to see why the Fed would be overly concerned. To place this spread difference into historical context I again plot 1 and 2 standard deviation bands around the regression line. Its not surprising that with both IG and HY OAS at their historical mean (see parts one and two) that the spread would also be at its historical mean. Again there is little in the data that would suggest that the Fed should be alarmed with credit or suggesting that there is compelling investment value. In the final part of this series we will examine the extremely high all-in-yields of IG bonds and use traditional technical methods to reach an opinion on BBB (the lowest rung of IG) credit. And finally, many of the topics and techniques discussed in this post are part of the CMT Associations Chartered Market Technician’s curriculum. Good Trading: Stewart Taylor, CMT Chartered Market Technician Taylor Financial Communications Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.
Editors' picks
FRED:BAMLH0A0HYM2
by CMT_Association
4
GDP is Bad and You Should Feel BadThe GDP number of 2.7% growth is being propped up by net exports, while consumption is at a cycle low. This is horrible for earnings expectations and risk assets. Net exports were at a low in prior quarters, making the economy look worse off than it was. Now the economy is actually worse off than it is and the metric is instead making it look better. This is why the NBER doesn't use "two quarters of negative GDP" to date recessions. There are too many false signals. Don't fall for the GDP meme. The pain is coming.
FRED:GDPC1Short
by coinhoIio