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Wall Street Breakfast

Author: bmotrader   |   Latest post: Fri, 10 Sep 2021, 7:54 AM

 

Wall Street Breakfast: Treasury Mystery

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A prolonged drop in U.S. Treasury yields is catching bond and fixed income traders by surprise, as well as other investors in the broader financial markets. The 10-year U.S. Treasury yield dropped below 1.3% on Wednesday, and fell another 7 bps overnight to 1.25%, despite lingering concerns about rising inflation and a gradual removal of Fed stimulus. Treasury yields play an important role in the economy, affecting borrowing costs on everything from mortgages to corporate bonds.

What's happening? While the move has mystified many traders, some are ascribing the reverse to changing narratives and new developments.

"The market is sort of taking a deep breath," said Subadra Rajappa, head of U.S. rates strategy at Société Générale. "Are those optimistic forecasts [for economic growth and inflation] actually achievable?"

"All that seems to be implying that perhaps not only was the inflation transitory, but maybe some of the growth has been transitory," added Kathy Jones, Schwab's chief fixed income strategist.

"The muscle memory of markets is that governments will lock down again [due to the Delta variant] if they see cases rise, which means slower growth and that we are caught in a loop," explained Charles Diebel, head of fixed income at Mediolanum International Funds.

"Tuesday's [weaker] ISM reading just added more motivation to extend the move in Treasury yields lower," declared Ian Lyngen, interest rate strategist at BMO Capital Markets.

"A reduction in the Treasury General Account, which the U.S. government uses to run most of its day-to-day business, is being wound down, shrinking the supply of bonds," proclaimed John Luke Tyner, fixed-income analyst at Aptus Capital Advisors.

"A big portion of what we are seeing is a capitulation of the higher rates thesis," J.P. Morgan wrote in a research note. "Some short covering has occurred, but the breadth of bearish duration positions remains on par with 2017-2018."

Go deeper: Most analysts had expected 10-year Treasury yields to hit around 2% by this point in the COVID economic recovery, or at least by the end of 2021. In the first quarter alone, the yield soared from 0.9% to nearly 1.75% as the reflation trade took hold of the markets, but it looks like the move lower is now staying firmly in the opposite direction. Longer-term yields are also a closely watched economic barometer, with the rates tending to fall on a weakening growth outlook.

Trump sues social media

As he looks at the possibility of running again in 2024, former President Donald Trump has filed lawsuits against Facebook (FB) Twitter (TWTR) and Google (GOOG, GOOGL), as well as their chief executives. Once again, the case centers around Section 230 of the Communications Decency Act, which provides a liability shield for social media companies. Trump was ousted from the social media platforms in the wake of the U.S. Capitol attack on Jan. 6, following a rally that was timed to coincide with the counting of electoral votes for Joe Biden.

The argument: The Trump legal team maintains that his social media bans are unconstitutional, running afoul of the First Amendment on free speech. While private firms aren't subject to the First Amendment, Trump argues that protections under Section 230 mean social media companies should be considered extensions of the federal government, which can be sued and are subject to the same standards. The suit also takes aim at the legality of Section 230, an area Trump attempted to go after during his time in office.

"We're going to hold Big Tech very accountable," Trump said during a press conference at his Trump National Golf Club Bedminster in New Jersey. "If they can do it to me, they can do it to anyone."

Outlook: Most legal experts believe the strategy is doomed, but time will tell. It also comes after Trump shuttered his blog on June 2 only a month after opening it (likely due to low traffic), as well as other attempts at breaking into the social media space. Trump's chief spokesman Jason Miller even launched a Twitter clone last week, called Gettr, but it was beset with massive uploads of spam and porn, while hackers scraped the email addresses of more than 85,000 users through its API.

Stocks - Recovery concerns

It's a big down day for equities across the globe as worries resurface about the economic comeback from the pandemic. Japan declared a state of emergency in Tokyo for the upcoming Olympics, while the worldwide death toll from COVID-19 topped 4M late on Wednesday. Investors also continue to rotate into the safety of Treasuries, pushing the yield on the 10-year Treasury to its lowest since February.

Market movement: Equity benchmarks in Japan and China dropped 1% overnight and Europe is down more than 2% at midday. Things aren't looking brighter in the U.S., where futures linked to the Dow, S&P 500 and Nasdaq are all off by about 1.2%, a day after hitting fresh records. Meanwhile, the dollar edged higher, while oil slipped 1% to $71/bbl following a supply policy breakdown at the latest round of OPEC+ talks.

On the economic calendar: The Labor Department today will publish the latest round of jobless claims figures. Economists expect to see 350K first-time applicants for unemployment benefits for the week ended July 3, continuing a decline seen following the COVID-19 vaccine rollout. Fed minutes on Wednesday saw officials not ready to commit to a timeline for tapering, though they expected conditions to be "met somewhat earlier than they had anticipated at previous meetings."

Economy - Now hiring

Job openings remained at a record high of 9.2M in May, according to the latest data from the Labor Department, though quits dropped slightly to 3.6M, from a historic peak of 3.9M in April. The high demand for labor comes as the economy fully reopens and companies scramble to keep up with soaring sales. "Companies are turning away business because of the labor shortage and that's a shocking move," said Jennifer Lee, senior economist at BMO Capital Markets.

Bigger picture: The non-farm payrolls report from last Friday showed the U.S. adding 850K jobs in June, though it would take more than a year at that rate to restore employment to pre-pandemic trends. Millions of Americans who lost their jobs have yet to even begin looking around, or take offers, as industries hit hardest by the pandemic are on edge for workers. Restaurants, bars and hotels created 89K new openings in May before hiring 340K workers in June, but leisure and hospitality were also one of the only sectors where resignations continued to accelerate.

Economist commentary: "It seems reasonable to think that the looming September 6 expiration of enhanced benefits, and the full reopening of schools and childcare at the same time, is generating urgency among people in jobs to switch now, when employers are desperate," said Ian Shepherdson of Pantheon Macroeconomics. "The labor market could become much more crowded in the fall."

Automation - Robotic delivery

Delivering food is expensive, as well as a complex logistical operation. Apps usually earn money by charging restaurants a percentage of the order value and/or by leveling a service fee on consumers. To get around the costs, some companies are turning to technology like delivery robots, just as the pandemic supercharged the automation sector.

Frat party? Grubhub (GRUB), which recently merged with Just Eat Takeaway.com, plans to roll out suitcase-size rovers to 250 U.S. colleges this fall. The six-wheeled robots - built by Russian tech company Yandex (YNDX) - have the capacity to carry as much as 44 pounds, and have already been tested on the streets of Moscow and Ann Arbor, Mich. Once an order is placed, the rover picks up and delivers the food to the entered destination, where the customer unlocks its hatch through the Grubhub app.

"Robots don't need lunch breaks, there are no high turnover issues, they are easy to manage," said Artem Fokin, head of business development at the Yandex Self-Driving Group. "Customers are also excited to see them. They are a novelty."

Still hungry: The new partnership with Yandex is Grubhub's first foray into robotic food deliveries, but it has also focused on the college scene by acquiring a technology platform custom-designed for campus use. It's not the only one interested in automation. Earlier this year, DoorDash (DASH) scooped up robotics startup Chowbotics, whose signature robot called Sally can be used to craft meals ranging from poke bowls to salads.


 

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