David Fuller and Eoin Treacy's Comment of the Day
Category - Fixed Income
Design Options for an o/n Repo Facility
This note by Zolltan Pozsar for Credit Suisse may be of interest to subscribers. Here is a section:
Your Parents' Financial Advice Is (Kind Of) Wrong
This article by Julia Carpenter for the Wall Street Journal may be of interest to subscribers. Here is a section:
The typical U.S. home now sells for more than four times the median U.S. income, according to the Joint Center for Housing Studies at Harvard University. Between 1980 and 1999, home prices were closer to three times household income.
• Given the savings rates of the millennial generation born between 1981 and 1996, rental-listing company Apartment List estimates that two-thirds of millennial renters would require at least two decades to save enough for a 20% down payment on a median-priced condo in their market. Just 11% would be able to amass a 20% down payment within the next five years.
• The upshot: Millennial households had an average net worth of about $92,000 in 2016, nearly 40% less than Gen X households (people born between 1965 and 1980) had in 2001, adjusted for inflation, and about 20% less than baby boomer households (born from 1946 to 1964) had in 1989, according to data from the Federal Reserve.
So it’s time to kill the idea that student-loan debt is always “good debt,” to admit that buying a house isn’t always the right move, and to refashion these old expectations. It’s time for a new playbook.
Traders Still See Another Quarter-Point Fed Rate Cut by Year-End
This article by Emily Barrett for Bloomberg may be of interest to subscribers. Here is a section:
Futures traders still see about another quarter-point of easing from the Federal Reserve this year, after the central bank cut rates on Wednesday and said it will “act as appropriate” to sustain the economic expansion.
The rate on the January 2020 fed funds futures contract was about 1.63% after the central bank’s announcement. The dot plot accompanying the statement shows policy makers’ median projections are for interest rates to remain on hold this year and next, but the balance of views has shifted more dovishly.
Judging by this level, traders still expect one more cut in either of the Fed’s two remaining decisions this year -- on Oct. 30 and Dec. 11. This estimate of the market’s pricing assumes that the effective funds rate moves toward the middle of the Fed’s new target range of 1.75% to 2%.
Unhinged Money Markets Trigger Fed Action to Alleviate Stress
This article by Liz Capo McCormick and Alexandra Harris Bloomberg may be of interest to subscribers. Here is a section:
“There’s been a sea change in markets, and it’s one the Fed needed to respond to,” said Lou Crandall of Wrightson ICAP. “In the current market environment, there is just not enough elasticity in the repo market to handle the big seasonal swings of the banking system. The Fed needed to come in now and alleviate the immediate problem, while it is also working on long-term solutions.”
The Fed has considered introducing a new tool, an overnight repo facility, that could be utilized when needed to reduce pressure on key money market rates, but no decisions have been announced.
The New York Fed declined to comment on the events of this week.
Actions like the Fed took Tuesday were once commonplace, but stopped being so when the central bank expanded its balance sheet and started using a range of rates to implement its policy in the aftermath of Lehman Brothers’ 2008 collapse.
Securities eligible for collateral in the Fed operation include Treasuries, agency debt and mortgage-backed securities. In an overnight system repo, the Fed lends cash to primary dealers against Treasury securities or other collateral.
Fast Strike Against GM Breaks Years of UAW Negotiating Tradition
This article by Andrew Wallender for Bloomberg may be of interest to subscribers. Here is a section:
“I think that they were just very impatient in this round of negotiations,” said Marick Masters, a management professor and the director of Wayne State University’s labor studies program.
But there’s a flurry of complicating factors in ongoing negotiations. Union leadership is under increased scrutiny as federal prosecutors continue to unravel a sprawling culture of corruption among former UAW leaders and negotiators.
There also was a strong sense inside and outside the union that a strike was likely, Masters said. Such an outlook could have contributed to the speed with which the strike was called, according to the professor.
“It’s hard to say how far apart they are,” Masters said of the UAW and GM. “But I get the feeling that they are pretty far apart. So you hope that they come to their senses pretty soon. But it certainly has the makings to go on for a very long time with the caveat that when reality sets in, they’re probably going to want to sit down and see what they can do to bring things back together.”
Draghi Faced Unprecedented ECB Revolt as Core Europe Resisted QE
This article by Jana Randow for Bloomberg may be of interest subscribers. Here is a section:
The unprecedented revolt took place during a fractious meeting where Bank of France Governor Francois Villeroy de Galhau joined more traditional hawks including his Dutch colleague Klaas Knot and Bundesbank President Jens Weidmann in pressing against an immediate resumption of bond purchases, the people said. They spoke on condition of anonymity, because such discussions are confidential.
Those three governors alone represent roughly half of the euro region as measured by economic output and population. Other dissenters included, but weren’t limited, to their colleagues from Austria and Estonia, as well as members on the ECB’s Executive Board including Sabine Lautenschlaeger and the markets chief, Benoit Coeure, the officials said.
Jeffrey Gundlach Says U.S. on Pre-Election 'Recession Watch''
This article by Suzy Waite and John Gittelsohn for Bloomberg may be of interest to subscribers. Here it is in full:
The likelihood of U.S. recession before the 2020 election has grown, based on changes in the Treasury yield curve, according to Jeffrey Gundlach, the billionaire money manager and chief executive officer of DoubleLine Capital.
“We should be on recession watch before the 2020 election,” Gundlach said Thursday in London. “We’re getting closer but we’re not there yet.”
The odds of a U.S. recession before the election are 75%, said Gundlach, whose Los Angeles-based firm oversees more than $140 billion, reiterating a prediction he made in August.
The best signal of a recession is not an inverted yield curve, the money manager said. “It’s the inversion occurring and then going away.”
Yields on 2-year Treasuries exceeded those on 10-years in August, forming an inversion, before flipping back this month.
In other comments, Gundlach said:
* He’s turned “neutral” on gold, one of his previously recommended investments. “It’s had a big run.”
* The U.S. and China are unlikely to reach a long-term trade pact before the presidential election.
* It’s a “terrible time” to bet on U.S. housing and homebuilder stocks because of high inventory and weak demand.
As the Ice Age turns bond yields deeply negative, what happens next?
Thanks to a subscriber for this report by albert Edwards for SocGen which may be of interest. Here is a section:
Factors or Fundamentals, Quant Tremor Is Field Day for the Geeks
This article by Sarah Ponczek and Vildana Hajric for Bloomberg may be of interest to subscribers. Here is a section:
You wouldn’t know it from benchmarks, but beneath a tranquil surface violent swings are lashing traders along obscure fault lines. Companies like real-estate firms that rose the most in 2019 are plunging, and some that have trailed are being pushed out front. It’s been a mild reckoning for hedge funds and others who have bet on the status quo persisting.
Amid all the churn has been a renewed focus on a quantitative concept known as factor investing, which groups companies not by industry but traits such as how fast their prices move or profits rise. A question gaining currency in the past few days is whether these categories are just handy descriptions of twists in the market -- or are at some level guiding them.
“It seems very mechanical right now,” said John Swarr, investment specialist at Penn Mutual Asset Management, which has $27 billion under management. “If you look within some of these stocks that are being hit the hardest, some are in much better shape than others and yet they’re all being affected similarly,” he said. “It does feel like it’s a rules-based rotation.”