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Rates fell sharply today following a weaker-than-expected ISM report. The quarterly refunding announcement showed no significant shifts in how the Treasury plans to issue debt. With that, the 10-year fell to support at 4.4% and has bounced off that support level for now. The fantastic thing is the symmetry in the chart. In fact, on December 18, the 10-year broke out and rose above 4.4%; 16 bars later, it hit the high, and 16 bars from the midpoint, we were back at 4.4%.
The low today also marked the 61.8% retracement level on the 10-year from the move higher that started on December 9. Maybe the algos want us to think the symmetry continues and the 10-year returns to 4.15%. I guess we will find out.
With the 10-year rate down, it is unsurprising that the Japanese yen strengthened, falling below support at 154. The daily chart shows that the next significant test level is probably around 149.50.
For some time, an argument has been made that the USDJPY and the Nasdaq are highly correlated. However, that has not been discussed for some time now because the USDJPY has been weakening while the NASDAQ has been rising. I do not think there is enough evidence yet to support the case; there hasn’t been a meaningful and long enough divergence. But we may soon find out.
The 5-year USDJPY cross-currency basis swap spread has narrowed significantly over the past few weeks. This would suggest that the USDJPY carry trade is probably less attractive. So, the USDJPY strengthening may not have the same impacts it had over the summer.
Speaking of Japan, the 10-year yield has risen as the market adjusts to a world where the BOJ hikes rate further, removing the global anchor off the zero bound. However, at the same time, the China 10-year rate appears to be heading in the opposite direction and is on a collision course with the 10-year JGB.
Finally, history suggests implied volatility should rise tomorrow before Friday’s jobs report. This report will be unusual because the BLS is expected to adjust its calculation methodology. We already know that revisions were 818,000 lower than previously estimated from April 2023 to March 2024, averaging around -68,000 jobs per month. We will learn the remainder of the revisions on Friday, which could impact the headline nonfarm payroll number. I think there could be a good deal of hedging flows going into the news, and given that the VIX1Day closed today at 11, we see that rise significantly tomorrow.
-Mike
Terms By ChatGPT:
•Cross-currency basis swap spread – Measures the cost of swapping one currency for another in funding markets, affecting the attractiveness of carry trades.
•VIX1Day – A one-day version of the VIX, tracking expected volatility over the next trading session instead of the usual 30 days.
•BLS calculation methodology – Refers to expected changes in how the Bureau of Labor Statistics calculates employment data, which could impact reported job growth figures.
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This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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