Hedge Funds Are Ultra-Bearish On US Treasuries

Let's get after it with the vigor and passion of French protesters who took over the Paris Stock Exchange last week.

Market

Prices as of 4 pm EST, 4/21/23

Macro

The US House of Representatives will be voting on a spending and debt bill this week.

• The proposal—put forth last week by GOP Speaker Kevin McCarthy—includes $4.5 trillion in spending cuts as well as a $1.5 trillion increase in the $31.4 debt limit.

• It’s a familiar game of chicken but stress is showing in markets where the cost of insuring US debt for one year (via credit default swaps) is at its highest on record.

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Meanwhile, 87% of respondents in a Bloomberg survey of professional investors expect a Fed funds rate of 3% or lower.

• The same investors also expect the US dollar’s weakness to continue.

• In addition to problems at home, many see a rise in the yen or yuan as the main source for the greenback’s decline.

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S&P Global’s April Flash US Composite PMI rose to 53.5—the highest reading since May 2022—for its third straight expansionary reading.

• Services activity growth reached its highest level in a year, increasing well above market expectations to 53.7.

• Manufacturing PMI beat expectations more modestly, pointing to the first expansion in factory activity in 6 months.

S&P Global

Stocks

The tech sector is off to its best start to a year relative to the S&P 500 since 2009.

• The strong YTD performance reflects investor optimism that the Fed will soon reverse its aggressive monetary policy stance…but are they too optimistic?

• Justification for current tech stocks valuations (~25x earnings) would require at least 300bps in rate cuts (or more than 5x what markets are pricing in).

• The earnings outlook isn’t helping either: analysts predict the sector’s profits will tumble 15% in Q1.

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Individual investors in Q1 bought equities and ETFs at a rate third only to the first quarters of 2021 and 2022.

• Total purchases of single stocks and ETFs totaled $77.7 billion over the first 3 months of the year.

• Buying peaked in February, however, and has slowed since the collapse of Silicon Valley Bank.

• Investors are also increasingly preferring ETFs over single stocks, suggesting a lower appetite for risk.

• According to Vanda Research, the average retail investor’s portfolio is still down ~27% from November 2021.

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Hedge funds have never been more bearish on US Treasuries.

• Leveraged investor net shorts on 10-year Treasury futures have climbed to a record high after increasing for 5 consecutive weeks.

• Their positioning suggests they don’t anticipate a near-term recession despite higher rates.

Bloomberg

Energy

Weak US economic data and softening gasoline demand pushed down weekly oil prices for the first time in roughly a month last week.

• Nearly all the gains stemming from OPEC+’s surprise cut earlier this month have been wiped out as the outlook for global demand wanes.

• Analysts are uncertain crude prices can bounce back without an expansion in refiner margins, which have fallen ~50% from their mid-2022 highs.

Earnings

So far, 18% of the S&P 500 has reported.

• 76% have beaten EPS estimates (above the 5-year average but below the 10-year average)

• 63% have beaten revenue estimates (below the 5-year average and equal to the 10-year average)

• Blended earnings and revenue growth rates are at -6.2% and 2.1%, respectively.

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What we’re watching today:

• Coca-Cola KO

• Canadian National Railway CNI

• Cadence Design CDNS

• Ameriprise AMP

• Alexandria Real Estate ARE

• Brown & Brown BRO

• Packaging of America PKG

• Cadence Bank CADE

• First Republic Bank FRC

Top Headlines

• Presidential election: More than half of Americans do not want to see a Biden-Trump rematch in 2024.

• Earnings risk: Vocal Morgan Stanley bear Mike Wilson thinks investors are too optimistic about earnings.

• Insider optimism: On an individual and company basis, insider buying in March was the highest since May 2022.

• Outflows: Credit Suisse saw $68.6 billion in outflows during the first quarter.

• European first: Luxury giant LVMH became the first European company to eclipse $500 billion in market value.

• Chapter 11: Bed Bath & Beyond has filed for bankruptcy protection and plans to liquidate (unless it finds a last-minute buyer).

• Ride-sharing: Lyft will cut ~1,200 jobs to lower costs and remain competitive with Uber.

• Semis: The semiconductor industry’s sharpest slowdown in more than a decade is lasting longer than expected.

Week Ahead

• Monday: Chicago Fed National Activity Index, Dallas Fed manufacturing

• Tuesday: Redbook, Case-Shiller Home Price Index, CB Consumer Confidence, new home sales, Richmond Fed manufacturing/services, Dallas Fed services

• Wednesday: Durable goods, retail & wholesale inventories

• Thursday: Q1 GDP, initial jobless claims, pending home sales

• Friday: Personal income & spending, PCE Price Index, Chicago PMI, Michigan Consumer Sentiment

• Crypto

Prices as of 4 pm EST, 4/21/23

• CBDC adoption: Government staff in Changshu, China will be paid in the central bank’s digital currency from June onwards.

• Gold-backed CBDC: Zimbabwe will introduce a gold-backed digital currency as legal tender.

• Asset flows: Six straight weeks of inflows into digital asset investment products ended after investors pulled out $30 million last week.

• Liquidations: Bitcoin’s ~9% drop last week resulted in $650.9 million in long liquidations.

• Blue chip NFTs: Floor prices for both CryptoPunks and Bored Apes fell well below $100,000 last week for the first time in months.

Deals

• Software: Shares of Software AG jumped nearly 50% after a takeover offer from private equity firm Silver Lake.

• Shoring up: PacWest Bancorp is considering the sale of its lender finance division to free up capital and reduce its balance sheet.

• Fashion: A week after unloading Bonobos, Walmart will sell its plus-size fashion brand Eloquii to FullBeauty Brands.

• M&A fees: Partner pay at US law firms took a hit in 2022 after a drought in dealmaking.

• Global IPOs: The global market for new offerings is showing signs of strength after $25 billion worth of IPOs were priced in March.

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