Authored by Ian Lyngen and Jon Hill of BMO Capital Markets
Today holds the promise of being a defining day in the US rates market; in large part due to the release of the first Covid-19 impacted employment data via initial jobless claims. The consensus is for 1.64 million new filers and we suspect the primary limiting constraint will be on the administrative side (i.e. there is undoubtedly more demand than is reflected in forecasts for this week’s number). The asymmetry linked to this morning’s print is relatively straight forward and, to a large extent, a matter of timing; a low claims figure will be dismissed as artificially positive based on delays in the filing pipeline, website outages, long lines, etc. On the other hand, a number >2 million would be interpreted as implicitly more accurate – even if shocking in its absolute scale. Regardless of one’s projections on how dire the employment situation eventually becomes, Powell’s rare NBC appearance doesn’t bode well for this morning’s first round of data. With this backdrop, our transition from bathtub sanitizer to bathtub hooch continues apace.
Our expectations for this session to represent an inflection point in financial markets goes beyond the new information on offer from the Department of Labor. In fact, claims will simply serve as a catalyst to gauge investors’ reaction function to the realized data versus ever-lower expectations. Bear with us here; rates have repriced dramatically throughout 2020, as have equities and risk assets – that much is unmistakable. The most relevant debate at the present moment is whether or not the economic negativity has gotten ahead of itself, or if there is another stage of adjusting to a weaker global growth and inflation profile yet to come. Each incremental piece of incoming virus-impacted data will serve to help further refine expectations as the error bands of forecasts are enormous at this stage.
This heightened level of uncertainty is evident throughout a variety of measures between the VIX at 65 and the MOVE’s recent peak above 163, there is no meaningful debate around whether or not price action has been choppy. Our baseline expectations are for the angst to moderate in terms of illiquid repricings; although not when it comes to the outlook for real global growth over the next several quarters. Sure, there will be certain subsets within the financial markets which reveal stress – industry specific leveraged energy and retail/hospitality quickly come to mind. However, the efforts of global central banks to provide a surplus of liquidity should ensure against a repeat of the issues seen in Treasuries during the course of the last two weeks.
Returning to the theme – why does today matter so much? In short, markets have been coiling this week and a poised for a break. 10-year Treasuries offer a ready example of this dynamic; with a range from 68.5 bp to 89.1 bp so far this week and stochastics decidedly mid-range, either the benchmark of all benchmarks has stumbled into equilibrium or this precarious balance is awaiting incoming information for the next move. 10s have also managed to hold between the 38.2% and 61.8% retracement levels (90.6 bp and 68 bp, respectively); which speaks to a ‘wait until there is more concrete data’ approach. This sentiment isn’t limited to the Treasury market; oil has had a similar week – albeit with the front-month WTI between $20 and $25 dollars a barrel it is challenging to derive any sense of optimism for a global rebound from the energy sector.
As a passing observation, price action appears to be increasingly disconnected from the coronavirus headlines. For much of the last few weeks, markets were responding tick-for-tick with the case/mortality reports. As investors are developing a more comprehensive understanding of the ramifications from the outbreak and its likely timeline in the US, we anticipate incoming Covid-19 tallies to be less directly correlated to moves in rates and risk assets.