Peak Dance Moves
Doug Nolan
High yield CDS (Credit default swap) prices surged 22.4 this week to 336 bps, the largest weekly move since the (“liberation day”) week of April 4th (62 to 439bps).
Friday’s 13 bps jump was the biggest daily increase since May 21st (reports of Israel preparation for strikes on Iran’s nuclear facilities).
Investment-grade CDS rose four this week to 54 bps, the most since the week of May 23rd.
Friday’s 2.8 bps was the largest daily increase since May 21st.
High yield spreads widened 23 bps Friday to a five-week high of 301 bps, the biggest upside move since April 4th (up 40 to 427bps).
The week’s 27 bps widening was the most since the week of April 4th (87bps).
Investment-grade spreads widened four Friday (to 80bps), the largest since the seven bps jump on April 7th (to 116bps).
Leveraged loan prices dropped 0.22 this week to 97.31, the largest week drop since the week of April 11th (down 0.26 to 94.75).
Two-year Treasury yields sank 27 bps Friday to 3.68%, the largest one-day decline since the 30 bps drop on December 13, 2023 – when the Fed signaled the end of its tightening cycle and likely rate cuts to come in 2024.
In an extraordinary move, the rates market Friday priced in more than an additional cut (29bps) by the Fed’s December 10th meeting (to 3.71%) – with markets now anticipating 62 bps of rate reduction.
This followed a 10 bps w-t-d increase at Thursday’s close at 4.00% (only 33 bps of rate reduction), the high since February 13th.
The market is now pricing an 87% probability for a cut at the September 17th FOMC meeting.
Bond and rate markets were blindsided.
July Non-Farm Payrolls were reported at a much weaker-than-expected 73k (manufacturing down 11k).
But the shock and awe were with the revisions.
Initially reported at 147k, June payrolls were revised to only 14k (manufacturing down 15k).
The Two-Month Payroll Net Revision was a huge negative 258k.
A chunk of this was in the government sector.
Revisions dropped three-month average payroll gains to only 35k.
The Unemployment Rate rose from 4.12% to 4.25%.
From Bloomberg Intelligence: (Anna Wong, Stuart Paul, Eliza Winger and Estelle Ou):
“Bottom line: The July jobs report has changed the narrative.
The drastic backward revisions showed job growth close to zero in May and June — and July’s payrolls may also turn out to be flat or negative after subsequent revisions.
More importantly, the unemployment rate rose even as the labor force contracted.
Fed Governor Christopher Waller is right that labor-market conditions are not solid.
We see a growing likelihood the Fed will cut rates earlier and by more than our base case of just one cut this year, in December.”
I doubt this is the end of the story.
Interestingly, Non-Farm Payroll revisions placed recent monthly job growth in closer alignment to monthly ADP data.
And at 104k, ADP July job gains were ahead of forecast to the highest level since March.
Notably, job gains were registered in small, medium, and large companies, with a notable recovery in Services jobs after June’s weakness.
It’s worth noting that Non-Farm Average Hourly Earnings indicate ongoing moderate wage pressures, with July 0.3% pushing y-o-y gains to a stronger-than-expected 3.9% (2000-2020 annual avg. 2.5%).
The APD survey also suggests sticky wage pressures, with Job Changers seeing 7.0% pay gains (hasn’t been higher since August ’24).
Weekly Unemployment Claims (218k) remain at historically low levels.
Whether it’s the labor market, housing, or growth more generally, the U.S. Bubble Economy was extraordinarily unbalanced even before the administration’s new policies.
Tariffs will have meaningful impacts on prices, demand, and capital investment.
The immigration crackdown and deportations will be destabilizing for various industries.
It is reasonable to expect an impact on the labor pool, working to underpin wage pressures.
There surely was more to the dramatic rates and bond market reaction than downwardly revised jobs data.
It’s a hyper unsettled environment.
Difficult not to think of “dancing,” a party that really got raging after the Fed responded to the subprime mortgage blowup.
From the archives (July 2007):
“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”
Citigroup CEO Chuck Prince
August 1 – Bloomberg (Rene Ismail and Jeannine Amodeo):
“US leveraged-loan issuance skyrocketed in July as junk-rated borrowers flocked to the market largely to reprice debt, saving companies millions in interest expenses.
July set a fresh record with $222.2 billion in loans launched, surpassing the prior $206.7 billion high set in January…
During the month, more than 180 new leveraged-loan tranches came through the market…
Managers of collateral loan obligations and exchange-traded funds that buy leveraged loans are flush with capital.”
August 1 – Bloomberg (Gowri Gurumurthy):
“US junk bonds gained for a third straight month in July, the longest gaining streak since September, on signs of broad economic resilience and strong corporate earnings.
The rally was propelled by CCCs, the riskiest tier of the high-yield market…
More than $35b deals were priced in July, the second-busiest month since September 2021.”
July 31 – Bloomberg (Sandy Hendry and Tim Hakki):
“Global tech bond sales jumped 83% this year and AI spending plans will drive more issuance.
Credit investors are welcoming these high-rated issuers awash with cash.
The $162 billion in bond sales by the sector, led by giants like AA+ Alphabet, is on course to top 2020’s record of $267 billion as yield spreads tighten during risk-on markets.”
August 1 - Bloomberg Intelligence’s Brian Meehan:
“Leveraged funds have rebuilt net short positions in Treasury futures to $1.18 trillion – approaching the historic levels last seen ahead of the 2020 Treasury market blowout, when crowded basis trades collapsed during the Covid shock.
Notional exposure is back near its highs…
The basis trade is back, but in a more disciplined form.
Leveraged net short in Treasury futures has climbed back to $1.065 trillion as of late July, just below the 2024 high of $1.1 trillion.”
July 31 – Wall Street Journal (Rolfe Winkler, Nate Rattner and Sebastian Herrera):
“The AI arms race is accelerating as the major tech companies add to their already gargantuan levels of spending.
The bets are paying off for investors, but not for all employees.
Alphabet’s Google, Microsoft, Amazon and Meta Platforms are set to spend nearly $400 billion this year on capital expenditures, largely to build their artificial-intelligence infrastructure.
That is more than the European Union spent on defense last year.
Those firms and others plan to boost outlays even more.
Morgan Stanley projects $2.9 trillion in spending from 2025 to 2028 on chips, servers and data-center infrastructure…
The investments are helping power big increases in the companies’ profits, pushing some of their share prices to records.”
August 1 – Reuters (Stephen Nellis):
“Apple CEO Tim Cook signaled… the iPhone maker was ready to spend more to catch up to rivals in artificial intelligence by building more data centers or buying a larger player in the segment, a departure from a long practice of fiscal frugality.
Apple has struggled to keep pace with rivals such as Microsoft and Alphabet's Google, both of which have attracted hundreds of millions of users to their AI-powered chatbots and assistants.
That growth has come at a steep cost, however, with Google planning to spend $85 billion over the next year and Microsoft on track to spend more than $100 billion, mostly on data centers.”
July 31 – New York Times (Mike Isaac, Eli Tan and Cade Metz):
“Over the summer, Matt Deitke got a phone call from Mark Zuckerberg, Meta’s chief executive.
Mr. Zuckerberg wanted Mr. Deitke, a 24-year-old artificial intelligence researcher who had recently helped found a start-up, to join Meta’s research effort dedicated to ‘superintelligence,’ a technology that could hypothetically exceed the human brain.
The company promised him around $125 million in stock and cash over four years if he came aboard.
The offer was not enough to lure Mr. Deitke, who wanted to stick with his start-up…
He turned Mr. Zuckerberg down.
So Mr. Zuckerberg personally met with Mr. Deitke.
Then Meta returned with a revised offer of around $250 million over four years, with potentially up to $100 million of that to be paid in the first year…”
July 29 – Bloomberg (Fareed Sahloul and Liana Baker):
“Dealmakers are brushing off lingering fears about trade wars and geopolitics, instead barreling into the traditionally quiet summer months with billions of dollars in M&A.
Transaction values are up almost a fifth this year at $2.2 trillion…
The latest boost to activity comes from almost $100 billion worth of announced deals in the US industrials sector.
On Tuesday, railroad Union Pacific Corp. agreed to purchase Norfolk Southern Corp. in a tie-up valuing its smaller rival at around $85 billion including debt.
It’s the biggest-ever deal in the railroad industry and the largest overall to be announced in 2025.”
Markets are hooked on dancing.
The more sophisticated appreciate how abruptly the music ends.
Interesting moves by some of the “private Credit” players.
KKR & Co stock sank 2.7% Friday, with a two-day drop of 5.2%.
Apollo Global Management sank 4.8% Friday, with Ares Management down 2.6% over two sessions.
The KBW Bank Index fell 2.3% Friday for a two-session decline of 3.6%.
The week’s 4.6% loss was the largest since the week of April 4th (13.8%).
The Broker/Dealers’ 1.6% Friday decline boosted two-day losses to 2.6%.
Friday financial losses included Wells Fargo (3.5%), Capital One (3.5%), and Bank of America (3.4%).
Robinhood lost 3.1%.
It’s worth noting Friday’s four bps increase in European (subordinated) Bank CDS was the biggest increase since June 19th (“Trump Set to Decide Within Two Weeks Whether to Strike Iran”).
The 11 bps jump in European high yield CDS was also the most since June 19th.
Friday’s 6.4 jump in EM CDS (to a one-month high 161 bps) was the largest since April 10th (22 to 217bps).
The MAG7 Index dropped 3.1% in Friday trading, the largest one-day decline since April 21st.
Amazon sank 8.3%, Meta 3.0%, Apple 2.5%, and Nvidia 2.3%.
The Semiconductors ended the week with a 4.5% two-day drop.
It has been a pretty electrifying three-month dance party.
Everything got even crazier, as “terminal phase excess” took full advantage of a dramatic loosening of financial conditions.
The President’s tariff pause unleashed powerful short and “gamma” squeezes.
Buy the dip and FOMO went nuts.
When it hardly seemed possible, levered speculation took it up another notch.
Liquidity over-abundance ensured the manic AI arms race went only more berserk.
President Trump over six short months has consolidated astounding power.
The “Trump put” triggered another round of financial free-for-all.
In ways, it’s more powerful than even the Fed “put.”
How could that be, with the Fed’s arsenal of rates cuts and QE underpinning its market backstop cred?
“Terminal phases” are characterized by an exponential rise in systemic risk.
On the stock side, inflating prices detach from deteriorating fundamental prospects – while surging market prices stoke industry investment booms that further inflate corporate earnings.
In credit, there’s a surge in the quantity of increasingly unsound loans.
Here you can also think Treasuries, speculative leverage, subprime leveraged loans and “private Credit”.
A historic surge in risk hedging is one manifestation of this massive increase in systemic risk.
In the stock market, players are ready to buy put options and derivative hedges that offer protection against a market downturn, while hedge fund operators and others will boost short selling.
Bond speculators and investors are keen to use derivatives to protect against Treasury losses, while shorting liquid Treasuries to hedge corporate credit, mortgage securities, munis, and myriad structured products.
This creates latent instability.
If many within the marketplace move to offload risk, as they began to do in April, markets quickly turn illiquid and prone to dislocation.
However, these outsized bearish hedges and derivatives create rocket fuel for market reversals and rallies.
When speculative Bubble markets inevitably find themselves in trouble, the President has the power to trigger powerful “squeezes” with a sentence or two on Truth Social.
Who needs the Fed “put” when the President’s will be exercised so predictably.
No need for the Fed’s balance sheet, not when “terminal phase” dynamics hold the potential for equity market squeezes, derivatives “gamma squeezes,” FOMO, and leverage speculation to unleash massive liquidity generation.
Never has an individual wielded such power.
There’s huge downside to the “Trump put.”
Importantly, it only stoked and perpetuated perilous late-cycle excess.
The President is betting the ranch on one hell of an endless rave party.
He’s spiking the punch with the dancers already stupid drunk.
The Ecstasy Party will end with one ugly hangover.
Sure seems we’ve witnessed enough of late to ponder Peak Dance Moves.
The President holds keys to both the bank vault and the asylum.
Unleashing more “money” and craziness is an especially perilous undertaking at this most stretched “terminal phase.”
There’s a strong case to make that markets and finance haven’t been so perverted since fateful 1929.
And the markets and President Trump just feed off each other’s dance steps.
Record markets and a President that couldn’t be more emboldened.
Without the past few months of market exuberance, it’s a different tariff regime this week.
Markets accommodate at their own peril.
Meanwhile, markets have the risk blinders placed firmly.
The leverage lending and “private Credit” Bubbles turn more dangerous by the week.
The AI mania and arms race bring new meaning to “overheated.”
Loose conditions and liquidity overabundance underpin all of it.
The markets’ lesson from April was that the “Trump put” was real and really powerful.
It should have been that market liquidity is especially tenuous at this very late stage of the cycle.
Deleveraging lurks.
It’s hard for me to believe most folks are comfortable with such unprecedented power operating out of the Oval Office.
I’m uncomfortable.
Markets should be.
Increasingly unhinged.
For posterity, Friday highlights from Truth Social:
3:32 am EST: “Jerome ‘Too Late’ Powell, a stubborn MORON, must substantially lower interest rates, NOW. IF HE CONTINUES TO REFUSE, THE BOARD SHOULD ASSUME CONTROL, AND DO WHAT EVERYONE KNOWS HAS TO BE DONE!”
5:08 am EST: “STRONG DISSENTS ON FED BOARD. IT WILL ONLY GET STRONGER! ‘TOO LATE!’”
5:51 am EST: “Too Little, Too Late. Jerome ‘Too Late’ Powell is a disaster. DROP THE RATE! The good news is that Tariffs are bringing Billions of Dollars into the USA!”
9:53 am EST: “Based on the highly provocative statements of the Former President of Russia, Dmitry Medvedev, who is now the Deputy Chairman of the Security Council of the Russian Federation, I have ordered two Nuclear Submarines to be positioned in the appropriate regions, just in case these foolish and inflammatory statements are more than just that.
Words are very important, and can often lead to unintended consequences, I hope this will not be one of those instances.
Thank you for your attention to this matter!”
11.09 am EST: “I was just informed that our Country’s ‘Jobs Numbers’ are being produced by a Biden Appointee, Dr. Erika McEntarfer, the Commissioner of Labor Statistics, who faked the Jobs Numbers before the Election to try and boost Kamala’s chances of Victory.
This is the same Bureau of Labor Statistics that overstated the Jobs Growth in March 2024 by approximately 818,000 and, then again, right before the 2024 Presidential Election, in August and September, by 112,000.
These were Records — No one can be that wrong?
We need accurate Jobs Numbers.
I have directed my Team to fire this Biden Political Appointee, IMMEDIATELY.
She will be replaced with someone much more competent and qualified.
Important numbers like this must be fair and accurate, they can’t be manipulated for political purposes.
McEntarfer said there were only 73,000 Jobs added (a shock!) but, more importantly, that a major mistake was made by them, 258,000 Jobs downward, in the prior two months.
Similar things happened in the first part of the year, always to the negative.
The Economy is BOOMING under ‘TRUMP’ despite a Fed that also plays games, this time with Interest Rates, where they lowered them twice, and substantially, just before the Presidential Election, I assume in the hopes of getting ‘Kamala’ elected – How did that work out?
Jerome ‘Too Late’ Powell should also be put ‘out to pasture.’
Thank you for your attention to this matter!”
12:44 pm EST: “In my opinion, today’s Jobs Numbers were RIGGED in order to make the Republicans, and ME, look bad — Just like when they had three great days around the 2024 Presidential Election, and then, those numbers were ‘taken away’ on November 15, 2024, right after the Election, when the Jobs Numbers were massively revised DOWNWARD, making a correction of over 818,000 Jobs — A TOTAL SCAM.
Jerome ‘Too Late’ Powell is no better!
But, the good news is, our Country is doing GREAT!”
3:05 pm EST: “‘Too Late’ Powell should resign, just like Adriana Kugler, a Biden Appointee, resigned.
She knew he was doing the wrong thing on Interest Rates.
He should resign, also!”
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