Markets are unusually steady, mortgages, bonds and stocks -- although not truly “steady,” just not moving.
The US 10-year T-note has traded between 2.85% and 2.97% since early February, in a disquiet world, an eternity. Two little excursions above 3.00% and below 2.80% could not hold long enough for an album snapshot.
The Fed is still coming, at an imperceptible but unstoppable pace, like Kilauea lava. You can stand right next to it, feel the heat, marvel at it, and no need to hurry away. This week one car was parked at a safe distance, but at the crucial moment would not start, and... oops. Is that the fate of the 10-year? Fed-sensitive 2-year T-notes reached 2.55% today, the spread below 10s the narrowest in this cycle.
CPI for April slowed down, as have retail sales, again -- no pressure for the Fed to pick up its pace. Nor reason to stop, either. Housing heat is confined to metro areas, but is hot, on a national basis underestimated because the countryside is flat or worse.
To understand today’s steady but unstable markets requires a short excursion into the velocity of information at trading desks. By 1870, thirty years after the invention of the telegraph -- the first long-distance information at light speed -- stock market information flowed along telegraph lines to “tickers,” so-called for the sound they made as they printed stock symbols and prices on to paper tape, about one inch wide.
A “ticker tape parade” honored a celebrity in a storm of waste tape tossed from high windows. The tape was subject to delay, magnifying market crashes, but these machines were state of art until almost 1970 when computers began to track trades. When I first sat down on a bond trading floor in 1983 the Fed had just replaced the chalkboards used to record its trades.
Then things picked up speed. A blight of small amber CRTs infested desks, hot little buggers, in rows stacked three-deep. Each one showed one active market; a bond trader might have a dozen screens open just to watch various Treasurys, and of course currency and stock screens for context.
And news. Holy smokes, news. The ticker lives on, the crosswise flow of trades mixed with news scrolling below CNBC and Bloomberg TV. To this day known as “the tape.” Associated slang: to be surprised by a news item is a “tape bomb.”
You are short Treasurys. The Fed is coming and the trade is a no-brainer. You’re into your fourth cup of coffee, almost up to full-vibrating speed, and on the tape appears ***REAGAN SHOT***. Every desk on earth buys Treasurys in a panic for safety, and your short is way under water in the ten seconds before you can get out -- if you can find an e-bidder on-screen that fast. Bye-bye bonus.
By the 1990s every desk had CNBC on all day, just in case some talking head blew up something. The morning of 9/11 on that set... it is still astounding to watch initial concern for an airline accident switch to something far worse. Many people believe that the collapse of Bear Stearns in March 2008 was caused by a questionable CNBC story.
On trading desks watching the flow of news is as natural and necessary to life as breathing. So today, what is news life like for our over-caffeinated heroes?
War is big. Markets get emotional, sell and buy a lot when shooting starts. Our heroes know that they can’t predict things (only the math dweebs with their algorithms think they can, until dragged out by their heels). But it’s essential to measure probabilities. Not load up all on one side of a market, but carefully wagered and hedged. But you’ve got to be on the right side of the market more often than not, lest “Dominoes” clamped on the roof of your car.
We have pulled out of the Iran deal, reimposing sanctions. Europe is mad at us. China is busy with itself. Israel and Saudi Arabia are thrilled. Putin trying to renew Soviet glory by acquiring Syria, which is occupied by Iranian soldiers and Iran-client Hezbollah... who knows what the Czar is up to. Yemeni rebels daily launch Iranian missiles at the Saudi capital. The immediate response to pull-out: an Iran missile volley from Syria at Israeli targets, and a massive Israeli response.
How would you like to trade that? Play it safe, or stick with good-economy trades?
Kim Il Jong may have seen the light, economic rescue by the South better than brinkmanship and starvation, or may have underway one of the great rope-a-dopes of all time. Trade on the potential outcomes? Or protect yourself? How?
Speaking of trade, we have early-stage trade war going with Europe, Asia, and North America. Pretty much everybody with something to trade. Bet on resolution, if only to accommodate the US and buy time, or bet that somebody doubles down, if only for pride?
The US has entered another spending-borrowing binge. Although 2018 tax receipts are bigger than forecast (from individuals, not corporations, of course), the US Treasury is elbowing into markets. This week it sold $21 billion in new 10s and $17 billion in new 30s and the market ate ‘em up with no harm to rates. We entered this form of bulimia 50 years ago, and it’s clear that the world loves our IOUs. The problem from the illness is domestic. By the end of this year, Treasurys in markets will total $16 trillion. If the Fed hikes 1% in the next year, add $160 billion to annual interest cost, and oh-by-the-way which spending will we cut, or whose taxes will we raise to offset? Or will we borrow more to pay the interest?
How would you like to trade that one, today?
The most unquantifiable single item today: what is the extent of US power? Our military power relative to the world has waned ever since 1945. Should we pursue disengagement, pick our spots, as Obama tried? Or should we re-assume a muscular footing, not for self-aggrandizement or glory, but once again be the world’s cop, for stability’s sake?
I am greatly surprised (a common event) that in a dollar-dependent world of globalized commerce, Treasury-imposed sanctions on the banking system seem to make the US more powerful than ever. When and how to use that power? Likely outcomes? Economic effect here and everywhere? Trade on that today?
Right. That’s why markets are not moving. And not stable.
US 10-year T-note in the last year, stuck:
Fed-predicting US 2-year T-note in the last year, NOT stuck:
The NFIB survey of small business continues its disconnect, overall optimism at historic highs, but actual conditions going nowhere:
The full, time-lapse tape shows the lava taking most of a day just to cross this road, but just like the Fed, inevitable is inevitable. The owner said that losing the R2D2 mailbox was worse than the Mustang: