Weekly Signal & Noise Filter
Slowly then Suddenly
The projection of a slowing economy has become a reality. GDP growth for Q3 was suddenly downgraded from 3.4% early last week to 2.8%. The latest Q4 projection is now 2.3%.
Pinebrook expects this projection to worsen. To be clear, the slowing is not expected to be recessionary.
If not recessionary, does this matter? Does anyone care? Should they?
The bond market cares. However, last week’s price action as explained in social media circles as a referendum on alleged easy monetary policy in the context of a strong economy that has head-faked the Fed into a reflationary policy mistake, is putting the cart before the horse.
Sprinkle in dash of electoral uncertainty, most of which revolves around the idea of more fiscal spending, and it not only makes sense that yields should have moved up but that they will continue to move up. Wash, rinse and repeat, and shorting the long-end has become the perfect easy trade.
It’s never easy. The 10-year note was trading in a range throughout the week and closed each day within 1-basis point of the prior day (4.28, 4.28, 4.29, and 4.28, Monday through Thursday, respectively). The graph below is of the 10-year futures contract for the week.
The idea that the bond market suddenly woke up on Friday to electoral fears or concerns of an inflationary supernova is ludicrous on the face of it. Ditto for concerns of sticky inflation, supply concerns, or “buyer’s strikes”. These are all “known-unknowns”, to quote former U.S. Secretary of Defense Donald Rumsfeld, and they possess no new marginal informational value.
The macro data release on Wednesday, October 30 at 8:30am, was favorable to duration, taking the bid on the 10-yr futures contract to a weekly high. This data included the Q3 GDP data and the associated consumption and GDP price index data.
In Pinebrook’s view, the initial catalyst for the bond selloff on Wednesday came from across the pond. An announcement by U.K. Chancellor of the Exchequer Reeves indicated that the upcoming budget deficit would be greater than expected. This triggered a gilt yield spike of 20-basis points, with follow through selling on the Continent and in the United States.
The price action is what it is, and we must accept it as such despite our personal PNL misgivings.
What must be pointed out is the erroneous attribution to Friday’s price action to old marginal information. Thus, recycling old tropes to fit the price action does not make them valid. They are simply another broken clock in the world of trading.
On the surface, the new marginal information – found in negative labor market revisions – was bullish duration. Price action divorced from this development suggests other new factors at play, not the ones we already know about and that are priced.