A SHARP SELLOFF FOR TREASURIES ACROSS THE ENTIRE SPECTRUM

Yesterday Treasuries sold off significantly across the spectrum.  Many are searching for an obvious catalyst.  Even though the data was nominally stronger than expected, it should not have elicited such a violent reaction.

Was the selloff the result of a significant increase of corporate bond supply, offerings that were postponed several weeks ago?  Is it the result that QT is now being fully implemented?  Is it the result of a surging dollar and collapsing yen which has sidelined the largest buyer of US debt?

Probably all the above amplified by the continued acceptance that today’s inflationary variables are becoming more entrenched, variables including rising OER and energy prices and the dearth of workers.

Regarding workers, Labor Secretary Marty Walsh stated that the country needs to overhaul its immigration system, calling the lack of available workers to fill jobs a “bigger threat” to the economy than inflation, further stating “We do not have enough worker to fill all the job openings that are out there.

Many times the labor participation rate (LPR) has been discussed.  If the LPR rose to pre pandemic levels of 63.4% from today’s 62.4% level, the labor department estimates 3 million more workers would be in the workforce increasing the unemployment level to around 5.5%.

The LPR was 66.2% several months before the onset of the Great Financial Crisis of 2008-09.

Labor is the largest cost of production and labor costs today has morphed into “cost push inflation,” inflation that either erodes margin and profitability or significantly increase inflation.

Perhaps the Labor Secretary’s correct response would have been more conducive policies that include the roll back regulations/policies that encourage workers to return to the workforce.  For many months FRB Chainman Powell forecasted these workers would return to the workforce with the expiry of enhanced unemployment benefits occurred.  Such did not occur.

Regarding energy, OPEC + announced a token 100,000-barrel reduction in oil production.  Analysts are split as to whether this is just signaling over its concern about the discrepancy between the physical and paper market or whether OPEC + can materially increase production.

Also as widely discussed, Russia has suspended natural gas shipments to France “indefinitely” because of “technical issues.”  France is stating this is economic warfare and there will be shortages this winter.

Commenting about QT and the lack of buyers for our debt.  Russia announced it intends to diversify their foreign reserve holdings into “friendlier” countries debt and currency.  The US dollar is the world’s only reserve currency.  As discussed several months ago, the US forced Russia into default because it froze its foreign reserves.  Is the lack of foreign buyers a possible ramification of this policy?

Israel has doubled its reserves in Yuan from 3% to 6% because of Administration policy.

Partially changing topics, Bloomberg writes “European energy trading risks grinding to a halt unless government extend liquidity to cover margin calls of at least $1.5 trillion.”  Will this morph into a larger and systemic issue?

European governments are warning of potential blackouts because the lack of adequate energy supplies during the winter.  These margin calls and the shortage of available supplies are largely related to the war in Ukraine amplified by the heavy reliance upon unreliable renewable energy sources, source that lack storage capabilities.

Some are now beginning to question the feasibility of green energy policies, further elaborating that political zeal was perhaps placed before the good of society.

What will happen today?

Last night the foreign markets were down.  London was down 0.61%, Paris down 0.32%  and Frankfurt down 0.42%.  China was up 0.09%, Japan down 0.71% and Hang Seng down 0.83%.
Futures are up about 0.25%. as the markets appear oversold.  The 10-year is up 3/32 to yield 3.32%.  The Beige Book, or the compilation of statistics utilized at the upcoming Fed meeting is released today.  How will the markets respond?

 

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.