Morning Note | Oct 26, 2022 | PIMCO Taxable CEF Update

Good Morning!

Futures are lower (first day in four) with the Nasdaq significantly lower (-1.8%) after disappointing Big Tech earnings reports for the quarter.  The big movers are MSFT (-5.8%), GOOGL (-6.4%), and TXN (-4.6%) premarket.  META ("Facebook") is down -4.1% ahead of earnings today.  Yields and real yields are lower this morning, weakening USD. Commodities rallying led by metals. Today’s macro data is focused on housing and inventories.  Australia headline inflation hits 32 year high, with annual core inflation 6.1% versus 5.6% forecast.  

GOOGLs weaker report was driven by lower ad revenue as the company also stated they would add new employees at half the pace of the previous quarter.  

With the Tech earnings misses last night this (I) makes a meltup more difficult; (II) may give investors a timeline for an “earnings recession”; and, (III) may mean that we may retest lows over the next few months.  

The Case-Shiller Index of US residential shows home prices in August were 13% higher than the same time last year, but lower than the 15.6% seen in July. The month-over-month drop is the largest on record, as higher interest rates price-out potential buyers. The data highlights the impact of tightening Federal Reserve policy as the Fed combats inflation. Housing makes up about one-third of the CPI index, so any slowdown in housing or rent prices will likely have a large impact on inflationary prints.

All this is to say that the data clearly shows a massive slowdown in the US economy.  While a recession may be averted (we continue to not think so), Fed Funds cuts are still priced in for next year- a so-called Fed pivot. 

There are few people who would have thought that treasuries would be down so much at the start of this year- especially if the economy was headed into a recession, the dollar surging, and the stock market down more than 20%, and commodity prices sagging.

Most of this is due to the central banks around the world selling their inventories of US treasuries- a result of Fed tightening. Other central banks have had to sell their US treasuries in order to prevent a significant drop in their currencies vs the US dollar.  

So the current bear market in treasuries ends once the bull market in the US dollar ends.  And that relies on the Fed stopping the rate increases to either pause or pivot. That relies on the economy moving from 'inflationary pressured' to disinflationary environment.  

CEF NAVs continue to move lower in munis thanks to rates moving higher and a large amount of net sellers.  High yield and loans have done ok with little change over the last week.  Preferreds are around the flat line as well.