FT anxiety is high and risk could fly up to the stratosphere

Outlook

US data this week includes CPI tomorrow, the Beige Book on Wednesday, retail sales on Thursday and consumer sentiment on Friday. As already discussed, CPI will get a base effect and likely jump from 1.7% in Feb to 2.5% or more. The WSJ economists survey gets a forecast of 3% by June before retreating to 2.6% by December. Th economists also foresee the first tightening in mid-2023 instead of the 2024 now expected by the Fed.

The potentially biggest news of the week may well be the market response to the huge US bond issuance, $120 billion. From near 1.60% last week, we could see a rise back to nearly 1.75%, again. Today the Treasury offers $58 billion in 3-year notes and $38 billion in 10-years. Tuesday is really scary--$24 billion in 30-years.

Next week it’s $24 billion of 20-years, and the week after that, an estimated $183 billion, comprised of $60 billion in 2-years, $61 billion of 5-years and $62 billion of 7-years. All told, the US will be issuing $373 billion this month, a new record high, “once the remaining auctions for inflation-protected government securities and other notes are factored in” (FT).

Analysts told the FT anxiety is high and risk could fly up to the stratosphere. Foreign buyers are counted on to keep demand going and prevent a replay of the dismal 7-year auction in Feb that set off a storm. After all, the US has a fat differential over (almost) everybody else.

If the bond market responds as it did to the 7-year auction in Feb–tepid foreign demand and the dealers stuck with the paper–why should we not expect the same currency market response? In other words, if demand is weak, price fall and yields rise, and the dollar follows the yield. You have to twist it a little, but this can be seen as a risk aversion response. We haven’t been talking much about risk-on/risk-off in recent days, but it probably never really goes away.

That would mean all or nearly all of the new signals will be wrong and have to be reversed again. We might also note that ex-Canada, the Anglo currencies are the ones not thriving–sterling, the dollar, AUD. The Australian dollar in particular “should” be recovering like the CAD.

What is the risk? It’s too soon to tell. So far we continue to see short dollar position-paring. But the bond market can freak out and trash all our charts. At the least, expect higher volatility.

Tidbit: In Minnesota, cops killed another black man over the weekend. According to Reuters, the offense was air fresheners hung from the rearview mirror. The defense begins today in the Chauvin trial, the prosecution having already broken into bits all of the expected defenses–drugs, weak heart, fear of the crowd, police training.

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