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#Macro – $SPX, #Rates
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I love all the talk about how rates fell because the Treasury showed restraint by cutting its offerings. The Treasury is now expected to issue $776 billion over the three next months instead of the original projection of $816 billion. Meanwhile, the Treasury announced the size of its refunding auctions for the 10-year and 30-year this week on the $40 billion and $24 billion versus the estimates of $41 billion and $25 billion. So, they took $1 billion off the offering size. Big deal?!
Last month, the Treasury had a 30-year auction of just $20 billion in size, and it was a complete disaster, with the issue tailing by almost four bps above the when-issued rate, while the bid-to-cover ratio fell to 2.35 from 2.46 the previous month. The 3-year auction coming this week will also be larger than last month’s at $48 billion of $46 billion. The auction last month tailed by one bps and saw its bid-to-cover ratio drop to 2.56 from 2.75. Meanwhile, the 10-year will see a $40 billion auction this week, up from $35 billion in the last two auctions. The 10-year may have been the worst of all auctions last month because it tailed by 2bps and saw its indirect acceptance rate plunge to 60.3% from 66.3%. So, we will see how this week’s auctions go. Last month’s auctions were a disaster, and now, this month, the size has grown, and we should expect it to go better. Pay attention to the 1 PM ET time slot this week from Tuesday, Wednesday, and Thursday, when the auction results will be released. Better auctions mean rates go lower, and bad auctions mean rates go higher.
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The big reason why Treasuries rallied this week was that the market was betting on a refunding size of greater than $114 billion, and instead, it came in smaller. That caused some short-covering, and that caused rates to fall. The most interesting thing I noticed on Friday was that following the weaker headline jobs report, the 30-year plunged from 4.79% to 4.67% to close at 4.77%.
Not to mention, wages in the employment report came hotter, with year-over-year rising by 4.1% versus estimates of 4.0%. More importantly, last month was revised higher both month-over-month and year-over-year. The only saving point was that headline wage growth m/m came in at 0.2% versus estimates of 0.3%.
It was a similar showing in the 10-year rate, which bounced off its 50-day moving average and an uptrend since mid-July. It wouldn’t surprise me to see rates rise into these auctions as traders bet on them not going well.
S&P 500 (SPY)
Meanwhile, the S&P 500 rose to what is becoming a very important level of resistance at 4,375. It has significance from a few standpoints; it was a level of support and resistance going back to mid-August. It was level the index gapped below back below in late September and has been resistance since then. It also has the 61.8% retracement level that dates back to the September 1 to the October 27 lows. Where the index goes, this week tells a lot about the structure of the move since mid-July and what it likely means going forward.
So there are two options here: the index needs to gap higher and take that resistance level out at 4,375 to 4,400, or it fails to do so, and we retrace some lower. All the index did this week was retrace the declines from the previous week in nearly the same manner in which it fell, which, by the way, was a retracement of the rally from the week before that. This has happened on several occasions since the peak in 2022, and ultimately, the index has resolved in the direction of the larger trend, which in 2022 was lower and in 2023 had been higher until mid-July. If, indeed, this pattern persists and the trend now is lower, then the S&P 500 is likely to resolve lower and, based on previous examples, into a new low.
There was a clear cycle shift in July when the S&P 500 created a bearish engulfing pattern, just as a bullish engulfing pattern at the October 22 lows. If the market follows the typical pattern, then in the next week or so, the rally of last week will be erased. Again, this can be largely invalidated by the index being able to move firmly above 4,400, which has been the resistance zone, as noted above. That would probably set up a move higher back to 4,525.
I know this doesn’t go with the calls for seasonality, but then again, there is an old saying that goes something like markets don’t bottom on Friday, too.
Charts used with the permission of Bloomberg Finance L.P. 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.