LIVE MARKETS Falling demand for funds poses a risk for US Treasuries

  • Main American indices in red; Nasdaq down about 1.7%; banks outperform
  • Weakest S&P sector in technology; biggest winner in finance
  • Euro STOXX 600 index down ~ 0.8%
  • The dollar is soaring; gold, drop in crude oil; bitcoin earnings
  • The 10-year US Treasury yield is ~ 1.44%

December 14 – Welcome home for real-time market coverage presented by Reuters reporters. You can share your thoughts with us at [email protected]

DROP IN FUND DEMAND POSES RISK FOR US CASH FLOW (1112 EST / 1612 GMT)

Record-breaking net decline of more than $ 500 billion in U.S. Treasuries held by investment funds in the third quarter raises the risk of higher rates and volatility in 2022, especially as the Federal Reserve cuts back on purchases government debt, according to John Canavan, senior analyst. at Oxford Economics.

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The decline, which was focused on T-bills held by money market funds, came as the supply of T-bills was reduced, holdings of US bonds and US notes by investment funds were shrinking. roughly flat and the Fed remained a big buyer of Treasuries, Canavan wrote in a report. Monday.

He added that “the market will have to find other sources of support going forward, as the Fed has already started to cut (quantitative easing), and we expect the buying to end by March 2022”.

Foreign investors hold the largest share of treasury bills. However, foreign allocations in Treasury auctions, while strong, have not offset the sharp decline in allocations to investment funds in recent months, which has helped fuel an increase in volatility since mid-year. -September, Canavan noted.

“As markets face persistent inflation and investors position themselves for a hike in Fed key rates, we expect the decline in demand for investment funds and the further decline in demand for investment funds. Federal Reserve maintains heightened volatility through early 2022, “the report said, adding that should push rates higher, with the benchmark 10-year yield hitting around 1.75% in the first quarter of 2022.

(Karen Pierog)

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RTIRING ON AN OPEN FIRE: PRODUCERS, SMALL BUSINESSES, FED FEEL THE INFLATION HEAT (1045 EST / 1545 GMT)

Welcome to the Fed on Tuesday, where inflation is hot and the Federal Reserve is feeling the heat.

And with the melting of the polar ice caps, mercury is also on the rise at Santa’s workshop at the North Pole, according to the November PPI print.

The Department of Labor’s Producer Price Report (PPI) (USPPFD = ECI), a measure of the prices that U.S. goods producers get for their goods at the factory gate, has arrived much warmer than expected. by analysts, unexpectedly accelerating to 0.8% from 0.6% and well above the consensus of 0.5%. Read more

Year over year, headlines jumped to 9.8%, while the core figure (which excludes food, energy and business services) gained 0.6 percentage points to 6.9% .

“Price measures have been well above target for much longer than expected,” said Rubeela Farooqi, chief US economist at High Frequency Economics. This data supports the Fed’s move to faster cut that will likely precede faster policy tightening next year.

As the chart below shows, the core PPI, along with other major metrics, has been put into orbit, sailing well above the Federal Reserve’s 2% average annual inflation target.

The image he paints provides a clear enough rationale for the Fed to stop beating the word “transitional” like a shuttlecock in its badminton monetary policy game.

Inflation

And, increasingly, American companies plan to pass these prices on to the consumer.

As the National Federation of Independent Businesses (NFIB) Optimism Index (USOPIN = ECI) rose 0.2 points to 98.4 last month, you would never know by accompanying the press release. of the NFIB.

“The outlook for business conditions is not encouraging for small business owners as lawmakers are proposing additional mandates and tax increases,” writes Bill Dunkelberg, chief economist of the NFIB. “Owners are also pessimistic, as many continue to deal with challenges such as runaway inflation and supply chain disruptions impacting their business at this time. “

And the typical interviewee puts his money where he speaks, that is to say on the consumer’s plate.

As Lydia Boussour, Chief US Economist at Oxford Economics, points out:

“Small businesses continue to pass higher prices on to consumers,” Boussour said. “The share of companies raising prices – a leading indicator of core inflation – jumped 6 points to a new high of 59%. And a sign that high inflation is not going to go away any time soon, with the share of companies planning to raise a new record. “

The rise in the optimism index is attributable to a slight decrease in the inability to find skilled workers and an increase in inventories.

It should be noted that the NFIB is a politically active membership organization.

Inflation

Wall Street fluctuated in morning trading, with market-leading technology stocks weighing on the three major US stock indexes.

The Dow tipped nominally into negative territory as its losses were mitigated by financials.

Value stocks (.IVX) are pale green, while growth stocks (.IGX) are steadily declining.

(Stephen Culp)

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AND THEN IT WAS TUESDAY: S&P 500 EXTENDS ITS SALES (1001 EST / 1501 GMT)

US stocks faltered in early trading on Tuesday, as the latest in a series of hot inflation reports appeared to raise concerns about when the Fed would remove the punch bowl.

That said, all three major stock indexes are at initial lows as the blue chip Dow Jones turns green as producer prices were well above consensus, just as the Federal Reserve calls its policy meeting. two-day monetary policy, during which inflation concerns were likely to take center stage.

Value stocks (.IVX) are enjoying a better session than growth (.IGX) and the biggest drag for the S&P 500 and Nasdaq, again, are the market-leading tech-plus megacaps.

Apple Inc (AAPL.O) is the exception, resuming its march towards the $ 3 trillion market capitalization mark.

Meanwhile, in Washington, lawmakers were expected to vote on increasing the federal government’s debt limit, ending a multi-month standoff. Read more

Here’s your opening snapshot:

Instantaneous opening

(Stephen Culp)

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COULD THE MERGING OF MICRO-CAPS RESULT IN AN S&P 500 ACCIDENT? (9:00 am EST / 1400 GMT)

Despite a strong start to 2021, micro-caps struggled to keep pace for much of the year.

The iShares Micro-cap ETF (IWC.P) peaked in mid-March and is posting a 15% year-to-date gain compared to the SPDR S&P 500 ETF Trust (SPY. P).

It’s worth noting that on a weekly basis, the IWC / SPY ratio peaked in mid-March just ahead of a 15-year resistance line:

SPY12142021

Perhaps unsurprisingly, it was also around this time that the retail-oriented meme stock mania was most intense. Highly speculative stocks, like micro-caps, tend to have greater volatility and therefore are inherently riskier than larger-cap stocks. They can therefore be particularly sensitive to the main drivers of liquidity and psychology.

Recently, the performance disparity between IWC and SPY has been particularly acute. Since November 8, the IWC has lost more than 13%, while the SPY has lost only 0.6%, coming off a new closing record last Friday.

With this, the IWC / SPY ratio plunged to its lowest level since November 2020.

During this time, the severity of the ratio’s decline from its peak has been particularly marked. In fact, since the IWC peaked in relative strength against the SPY, the 40-week rate of change of the ratio has slumped to an all-time low.

It now remains to be seen whether the micro-cap ship can be turned around amid the season of fiscal losses and Fed fear.

However, worryingly for the S&P 500, from 2007 to 2020, SPY’s five biggest drops from record territory were all preceded by a prolonged divergence in the IWC / SPY ratio.

(Terence Gabriel)

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Terence Gabriel is a market analyst at Reuters. The opinions expressed are his

Our Standards: Thomson Reuters Trust Principles.

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