BMO: “Today’s Session Will Be An Inflection Point In Markets”
Authored by Ian Lyngen and Jon Hill of BMO Capital Markets
Today holds the promise of being a defining day in the US rates market; in large part due to the release of the first Covid-19 impacted employment data via initial jobless claims. The consensus is for 1.64 million new filers and we suspect the primary limiting constraint will be on the administrative side (i.e. there is undoubtedly more demand than is reflected in forecasts for this week’s number). The asymmetry linked to this morning’s print is relatively straight forward and, to a large extent, a matter of timing; a low claims figure will be dismissed as artificially positive based on delays in the filing pipeline, website outages, long lines, etc. On the other hand, a number >2 million would be interpreted as implicitly more accurate – even if shocking in its absolute scale. Regardless of one’s projections on how dire the employment situation eventually becomes, Powell’s rare NBC appearance doesn’t bode well for this morning’s first round of data. With this backdrop, our transition from bathtub sanitizer to bathtub hooch continues apace.
Our expectations for this session to represent an inflection point in financial markets goes beyond the new information on offer from the Department of Labor. In fact, claims will simply serve as a catalyst to gauge investors’ reaction function to the realized data versus ever-lower expectations. Bear with us here; rates have repriced dramatically throughout 2020, as have equities and risk assets – that much is unmistakable. The most relevant debate at the present moment is whether or not the economic negativity has gotten ahead of itself, or if there is another stage of adjusting to a weaker global growth and inflation profile yet to come. Each incremental piece of incoming virus-impacted data will serve to help further refine expectations as the error bands of forecasts are enormous at this stage.
This heightened level of uncertainty is evident throughout a variety of measures between the VIX at 65 and the MOVE’s recent peak above 163, there is no meaningful debate around whether or not price action has been choppy. Our baseline expectations are for the angst to moderate in terms of illiquid repricings; although not when it comes to the outlook for real global growth over the next several …read more