Demand has been rather soft all week long. First it was $44B worth of 3-Year Notes. On Wednesday, it was $33B worth of 10-Year Paper that the Treasury Department brought to auction.
The macro has not been strong. April's Trade Balance had done a number on the Atlanta Fed's GDPNow running snapshot of U.S. second-quarter economic "growth." April Wholesale Inventories barely made a dent. The model now stands at +0.9% (q/q, SAAR) for the current quarter, falling a little too close for comfort toward contractionary territory.
Remember, the U.S. economy had already contracted (-1.5% q/q SAAR) in the first quarter, A second successive quarter, even if there is no "official" designation, would place the U.S. economy in what most folks consider to be an economic recession. Even if second-quarter contraction is avoided, a number such as +0.9% would still leave the U.S. economy in contraction for the first half of the year, a distinction I don't think anyone wants to see.
On Wednesday, demand for that 10-Year Note auction would have to be considered "so-so" or mediocre at best. The issuance priced at a high yield of 3.03%, tailing the 'When Issued" last sale of 3.018% quite badly. Bid to cover landed at 2.41, well below the six-month average of 2.5. Indirect Bidders, which are mostly foreign accounts and probably mostly foreign central banks, took down 63.6% of the issue, down from 70.3% in May, and also well below the six-month average of 69.1%. Direct (U.S.) Bidders took down 19.4%, which was on the high side, leaving dealers with 17% of the deal. That's well above the six-month average of 13.6% that has been left to dealers.
I think the implication is clear. If foreign accounts and central banks are going to be buying less and less U.S. sovereign debt (hasn't the Fed itself stopped?), leaving a greater portion of this market to domestic buyers and dealers, then the yields awarded are going to be more and more the result of fair market price discovery. In addition, at least in theory, less demand for U.S.-denominated debt means less demand for U.S. dollars themselves. We have not seen the U.S. Dollar Index weaken the past two days, but that may be as much a result of an ever-weakening Japanese yen as it is due to anything else. On that note, the ECB decides on policy this morning.
The U.S. Treasury will bring $19B worth of 30-Year Bonds to market this afternoon, along with 1-Month, 2-Month, 3-Month, 6-Month, and 1-Year T-Bills late this morning.
Whirlwind
Equity markets showed weakness on Wednesday in response to a bevy of market pressures.
The slowing macroeconomic situation put the whammy on the Dow Transports as that index gave up 3.81%, with every single component of that index trading lower. The pain there was felt across the truckers, the railroads, delivery services and maritime shipping rather equally. Ryder System ( R) was the top performer among the Transports on Wednesday, at -1.75%. The Dow Transports became the first major equity index, on Wednesday, to surrender the 21-day exponential moving average (EMA) this week:
Weakness was felt across the semiconductor space as well, as DRAM prices continue to fall, impacting memory names, and as Intel ( INTC) executives appeared to make an effort to "talk down" the current quarter, citing a number of headwinds for the company. The Philadelphia Semiconductor Index hung onto its 21-day EMA by a thread:
While the Dow Jones U.S. Semiconductor Index did close (just a smidge) below that thin, green line:
Most of the rest of the more highly followed equity market indexes did manage to close above their 21-day EMAs, as that green line has become the primary technical focus for traders and investors this week and last.
For the session, smaller-caps led larger-caps to the downside. The S&P MidCap 400 gave up 1.83%, and the S&P SmallCap 600 and Russell 2000 spit up 1.69% and 1.49%, respectively. The S&P 500 was beat up for 1.08%, while the Nasdaq siblings (Composite & 100) outperformed broader markets (-0.73%, -0.76%).
Beyond the macro, and beyond Intel, investors could blame sharply rising prices for several non-core commodities such as WTI Crude, gasoline, and corn. You may end up with core inflation doing what the Fed wishes, but with a very disobedient headline print. If not for May this Friday, then for June next month.
The road ahead is strewn with potential. Potential for what? I don't know. We've never unwound a close to $9T central bank balance sheet before, let alone do so as the entire economy skates on the thinnest ice seen in these parts for quite some time. Liquidity is overrated, said no one ever.
My House Is Worth...
Give me a second. Who's got a calculator?
The Mortgage Bankers' Association posted their weekly data on Wednesday morning, as they always do. Applications contracted 6.5% week over week for the week ending June 3 (last Friday). This was a fourth consecutive week of declining mortgage applications across the U.S. Applications have now fallen to a 22-year low, as applications to refinance dropped 7.1% from last week and new purchase applications fell 5.6%.
Readers will recall that for April, New Home Sales, Pending Home Sales, Existing Home Sales, and Housing Starts all fell short of consensus. For most of those series, April was a second or third consecutive month of declines. For Existing Home Sales, which is the largest slice of the housing pie, April was not only the third consecutive month in decline, but also the weakest monthly print for total sales since July 2020, when almost nobody was leaving their residence for any reason.
Yet, the Case-Shiller HPI has not yet shown any weakness in housing prices. For March, which is the most recent month that we currently have results for, this data-point showed year-over-year housing prices across 20 U.S. cities having increased 21.2%, which was the strongest print for that space since the cows came home. Can home prices hold up on weak underlying data such as this? Case-Shiller goes to the tape with April numbers on June 28.
Oh, Bloomberg News reports that July Lumber Futures dropped to $573 per 1,000 board feet on Wednesday, a nine-month low. Just sayin'.
It's About Time
On Wednesday, SEC Commissioner Gary Gensler spoke publicly. Gensler said, "It's not clear... that our current national market system is as fair and competitive as possible for investors. I think we can do better here for retail investors."
At issue is "payment for order flow" where wholesale trading groups pay brokers for batches of orders.
The Financial Times reports that among proposals possibly being made would be what is being termed "order by order competition," which could possibly include auctions to decide which trading firms would handle orders from smaller investors. At present, 90% of retail flow is sent to a small group of wholesalers.
Quite frankly, this issue has come up for discussion often since the fracturing of U.S. equity markets in the early 2000s. My opinion? How about exposing all orders to a centralized public auction, such as the New York Stock Exchange or the Nasdaq Market Site? The problem with price discovery, other than high-speed, keyword-reading algorithms that often force overshoot, is the fracture of the marketplace itself.
How can there possibly be countless markets where any security can trade without leaving someone in the dark? How can anything be fairer than an ongoing two-sided public auction at a centralized location that ensures each best bid and offer is exposed? What could be fairer to those trying to assess risk than to force a centralization of the process that allows a "book" of inferior bid and offers to accumulate so that traders and the public at large might better understand the discounting process? Might even give rebirth to the art of block trading, which is all but dead. "Under rule 127...
More Departures
It seems as if Meta Platforms
On that note, in two weeks, as of the close of June 24, as FTSE Russell reconstitutes its indexes, META itself will be migrating from the Russell 1000 Growth index to the Russell 1000 Value index. Makes sense, trading at 16 times forward-looking earnings, after two successive quarters of negative year-over-year earnings growth and most recently, just 7% revenue growth.
What Now?
It appears that Twitter ( TWTR) has agreed to share a vast amount of data concerning the content on its social media platform with Tesla ( TSLA) CEO Elon Musk in the wake of Musk's threat to abandon his acquisition of the company. Twitter's ( AAPL) plans to share a "firehose" of data with Musk that it would usually sell to companies monitoring the social media site.
The ball is now in Elon's court. Twitter plans to go to shareholders in early August with the "agreed upon" deal.
Do It Yourself?
On Wednesday, we learned that, at least initially, Apple ( AAPL) will handle the financial aspects of its new "buy now, pay later" offering (known as Apple Pay Later) announced on Monday, itself, through a wholly owned subsidiary, Apple Financing LLC.
The subsidiary will oversee credit checks, and make its own decisions on loans. For now. Apple Pay Later will let consumers pay off any Apple Pay transaction over four payments across six weeks. This program will start in the U.S. and then expand.
You see much demand for four payments across six weeks? Me neither. I pay my bills once a month. I bet most folks probably do as well. I doubt very many want to monitor checking account outflow (automated or not) that reoccurs every two weeks or so.
That's why Apple is working on Apple Pay Monthly Installments, which I think there would probably be see much greater demand and enthusiasm. This plan is likely to rely on "already in business" financial partners including Goldman Sachs ( GS) , the issuer of Apple's Apple Card that uses the Mastercard ( MA) payment network.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 207K, Last 200K.
08:30 - Continuing Claims (Weekly): Last 1.309M.
10:30 - Natural Gas Inventories (Weekly): Last +90B cf.
13:00 - Thirty Year Bond Auction: $19B.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)
(AAPL and MA are holdings in the Action Alerts PLUS member club . Want to be alerted before AAP buys or sells these stocks? Learn more now. )
