Consensus expectations are interesting when they are very different vs the market price. Those situations typically mean that there is a relatively higher bar needed for data or news to surprise expectations in one direction rather than the other. Sometimes this is justified. There are often situations where the market underestimates the impact of say a policy move or a mispricing. But more often that not, the fact that the expectations distribution is skewed away from the market distribution can mean that the probability for price moves in one direction is higher than the other.
Currently, consensus expectations for 10y prices remain bearish relative to the market. The chart below shows the median Bloomberg forecast for 10y yields, 2 quarters forward, vs the current 6m10y forward rate in treasury space. At 30bps over, the dichotomy is quite high relative to history. In particular, note that the previous instances in prior years have all proceeded declines in yields. (i.e. mid 2012, 2011, and 2010) That certainly doesn’t mean that the pattern will recur, of course. Some strong data prints in the coming weeks, especially on either the employment or wage inflation side, may well justify the bearish stance. But if we don’t get that, or if Ukranian / Russian headlines worsen – the likelihood of an unexpected decline in yields seems somewhat more likely.
Beyond risk off and weak growth surprises, there is another item that may drive such a move. Housing, a key part of the US economy, is NOT coming back as expected. Since yields began rising ~12 months ago, the assumption has been that though there would be a short term impact from higher mortgage rates, that would eventually be offset by a general easing of credit along with better employment & growth. When the pickup didn’t happen earlier this year, weak demand was explained away by the weather. Now, however, there aren’t really many explanations left. The WSJ article today highlights this: (h/t JL)
In fact, according to some measures, the housing sector has been the biggest economic disappointment of the past month. This Bloomberg chart graphs data surprises over the past month by sector:
Historically, housing contributes roughly ~15-20% of total GDP variation. Almost all economists I know of have been building in ‘normalized’ housing growth to their overall GDP expectations, assuming a return to historically average levels of household formation & headship rates. It may well be the case that those assumptions are being challenged as the data fails to come in as expected. Indeed, that may be one explanation for why the 30y rate has moved lower by 50bps YTD. (!)
Separately, there was a good post by Macro Man (with a sharp new look) on conditionality of S&P performance in May based on the YTD returns through April:
So we’ll see we close out the month. The positive month end bias for risk assets kick in next week, so we could see a bounce.
- Japan CPI was stable at 1.3% vs 1.4% exp
- US Markit Services PMI declined to 54.2 vs 55.5 exp and 55.3 prev
- U Michigan Confidence ticked higher to 84.1 vs 83 3xp and 82.6 prev
- Russia credit was cut to BBB- at S&P with a negative outlook.
- Mortgage demand fell to the lowest level in 14 years as refinancing demand slumped sharply. “Softness in the housing market, if it deepens and undermines the broader economic outlook, could complicate the Fed’s efforts to dial back easy-money policies designed to support the recovery.” WSJ
- USDCNH trades up through 6.26. Existing structured products are experiencing negative cash flows and pushing the currency. The forward points are now starting to move spiking up 60-70 pips in 1yr and 120-150 in 2yrs during the session. 1yr vol traded up to 3.425% overnight.
- Mon: US Pending Home Sales
- Tue: Germany Gfk Consumer Confidence, UK GfK Consumer Confidence, Japan PMI, NZ Business Confidence
- Wed: Month End, Turkey Trade Balance, EU CPI, South AfricaBalance, US ADP Employment, CanadaGDP, US GDP, Chicago PMI, Australia PMI
- Thu: UK PMI, Yellen Speaks, Jobless Claims, PCE, ISM Mfg, Japan Employment