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HY-IG OAS Spread Significant Negative CorrelationHY= high yield option adjusted spread IG= investment grade option adjusted spread HY-IG Option Adjusted Spread showing significant inverse/negative correlation to the S&P500. When the HY-IG spread (white) rises we see the S&P500 (yellow) fall. The inverse is also true. Spread is currently trending down and SPX is rising which could be indicative of a short term shift towards a ‘risk on’ sentiment. Were the HY-IG spread’s trend to shift directions from down to up, we could infer that SPX would shortly after begin to trend in the opposite direction based on recent behavior. (not financial advice)
FRED:BAMLH0A0HYM2Education
by The_Firewalker
Is the US Economy Actually adding more jobs than expected?If you have been living under a rock for the past few days, unless you are not an economic savvy, the Bureau of Labor Statistics has released its newest Non-Farm Payrolls much above the expectation. The NFP rose by 263,000 last month, compared with an expected 200,000. At first, my reaction was that the FED will have to keep raising interest rates, especially as the US dollar reacted to this news by jumping 0.8%. However, I was skeptical as to how NFP jobs increased but the unemployment rate remained steady at 3.7% in an economy that is starting to experience drawdowns from inflation. So I made a research to analyze exactly what is going on. 1. What is happening in the US labor market? Today the NFP is at ~270,000 jobs, similar to mid-2018 when the labor market was defined as strong. It is much lower than the peak job creation in 2021 but 70,000 extra jobs compared to the expectation is a major difference. 2. What is happening with wage growth in the US labor market? Wage growth has increased by 0.6% month-over-month. This is way too strong for the FED's target of 2% in inflation. But why is it so high? Well, one of the reasons is that the supply of labor is not coming back. The participation rate remains way below pre-pandemic levels, even when accounting for an aging population. So if labor participation is low, job creation must be low to slow inflation, yet, the labor market appears to be healthy. Nonetheless, I wrote an analysis in October challenging the FED's data collection on job creation. "Once consumers have reached their credit limit, they will most likely look for another job. “About 38% of American workers have looked for a second job, while an additional 14% plan to” (LA Time, 2022). This justifies the reasons for more job creation in the U.S. economy as emphasized by the Biden Administration and the Fed, however, it is mostly people looking for a second or third job." Credit debt is increasing at an all-time high due to inflation. "U.S. households are spending $445 more every month due to inflation" (Lacurci G, 2022). So those who cannot keep up with their bills have to work more jobs or extra time. This makes total sense, especially when the Household Job Survey shows no jobs added in the past 8 months, while the Establishment Survey shows 2.7 million jobs added, which is the one used by the FED. Why such a large difference between the Household Job Survey and Establishment Survey? The answer lies in how the different surveys are run. For instance, the household survey counts people holding multiple jobs as one employed person. While the establishment survey counts all the jobs created, even if it is a second or third job. Based on the analysis I previously published, at least 700,000 Americans have had a second or third job in the last 12 months to make ends meet. 3. Where are jobs being created and lost? Being created: leisure, government, education, and healthcare. Being lost: goods, transportation, retail, construction, and utilities. Conclusion: The NFP survey is informing the market about Powell's next decision in December. The strong nominal wage growth and "strong" job creation argue there could be further rate hikes and hawkish talk from grandfather Powell. It is imminent before we will start to see weaknesses in the labor market. It is imperative to understand when will the turnover point of the labor market be and how bad to best position yourself, hence, we can start to see a FED pivot in early 2023 as the labor market weakens. This is for personal recording but feel free to comment and argue.
ECONOMICS:USNFP
by ssavi
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
10
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
14
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