Friday, August 29, 2014

The race to the finish

Apologies for the lack of postings this week but Macro Man felt curiously uninspired by the ongoing rally in all manner of assets.  Big-figureitis is a well-known behavioural phenomenon, and now that we've traded SPX2K it will be interesting to see if profit-takers emerge.

Of course, with the end of the summer upon us (the Macro Boys are already back in school), following next Monday's Labor Day holiday it seems reasonable to expect trading desks to be fully staffed full of well-rested punters looking to make their years.  Indeed, it's become something of a depressingly familiar phenomenon in the macro space for traders to scuffle for the first eight months of the year before throwing a bunch of risk at the market from September onwards to snatch victory from the jaws of defeat.  Strangely, "put it all on black to recover your year" seems to be absent from most marketing materials....

This year, the first eight months have been unusually challenging; from the moment the market opened on Jan 2, many punters have been underwater thanks to sharp reversals in last December's favourite trades.

This naturally leads Macro Man to wonder where markets are likely to allocate risk over the next few months in 2014's version of the race to the finish line.  Naturally, he has his own suspicions, but he's curious what the informed readership of this space make of things.   With the Fed outlook likely to come under particular scrutiny, there is of course no guarantee that the market pricing of the past few months will predict future pricing.

So what say you, readers?  Please fill in the survey below.   Obviously the answers are necessarily simple, so if you have a theme or specific trade that is not listed, click on 'other' and fill in the blank.   If the form is working properly, respondents should be able to view the results.

EDIT:   You can see the results here.

Friday, August 22, 2014

Clowns to the left of me, jokers to the right

In her Jackson Hole speech today, Janet Yellen released a technical note detailing the construction of the Fed's new labor market conditions index (LMCI), which she cited as among the reasons to maintain an exceptionally accommodative monetary policy.

She failed to cite the fact that the index has enjoyed its longest uninterrupted string of quarterly gains in the nearly 40-year history of the indicator, a period which includes a labour market downdraft every bit as vicious as that of the Great Recession.


Moreover, she also fails to note that the cumulative improvement in the index has taken it to levels at which virtually every prior tightening cycle during the history of the indicator had already taken place.   Macro Man took the liberty of constructing such a cumulative index, using the data that the Fed very helpfully provided.

It's true that the index has yet to reach the apex of prior labour market cycles, but good Goddam, that's hardly a useful threshold to contemplate the start of a tightening campaign.   For those readers with short memories, the last two proper tightening cycles (starting Feb '94 and June '04) concluded with eye-watering bubbles caused by overly-easy monetary policy.

Small wonder, then, that Macro Man and other punters sometimes feel like we're caught in a Stealer's Wheel song....

Wednesday, August 20, 2014

The impossible trinity?

Just ahead of the week's big Fed events, and with the sour taste of the BOE's zigging and zagging left in the mouth, Macro Man cannot help but observe an unusual confluence of curious market pricing.  To wit, the SPX is near all time highs, while both bond prices and the DXY have also performed very strongly.

Economists are familiar with the term "impossible trinity", referring to the fact that a nation cannot have an open capital account, an independent sovereign monetary policy, and a fixed exchange rate simultaneously.   You can try, of course, but it always ends in tears (see Asia, 1997-98.)

In any event, since the advent of the euro as a credible alternative to the dollar as a reserve currency, in market terms it has been something of an impossible trinity to observe a strong equity market (meaning risk appetite is high), a strong bond market (demonstrating ample monetary liquidity), and a strong dollar (which has tended to benefit from either risk aversion or interest rate support.)

To demonstrate the anomaly of current market pricing, Macro Man constructed a simple index, wherein he took current pricing of the SPX, DXY, and 10y bonds (approximated by using the inverse of 10y swap rates), calculated the rolling 1 year percentile ranks for each market, and averaged them.  As the chart below illustrates, the current average (98.4th percentile) is the highest since the Internet bubble and its immediate aftermath, when the euro suffered from significant credibility issues (where are you now, Oskar Lafontaine?)

Now, perhaps we're observing a regime shift as the market prices the DXY off of European rates rather than US ones., while assuming (as some commenters have asserted) that rates are never going up again.  Perhaps.   The other alternative is that markets are currently holding a highly unstable equilibrium, which will come undone when subjected to some sort of shock, such as...oh....a hawkish surprise from the Fed.  

There is of course no guarantee that this will come this week.   Nevertheless, those loading up on Spooz, bonds, and USD's should be aware at just how unusual the current market pricing is.  Forewarned is forearmed!

Monday, August 18, 2014

Here we go again

So here we go again.

Stocks have (probably correctly) looked through ongoing tensions in Ukraine and are within a pitching wedge of the all time highs (well, the SPX at least.)  At the same time, fixed income markets are rowing merrily down the stream, with many bellwether Eurodollar contracts also close to the top end of the yearly range.

(BBG chart courtesy of the world's most deluded fantasy soccer player.)

The prices, incidentally, imply rates well below those suggested by the infamous dot scatter plots in the Fed's latest SEP- and indeed most of those before that one.

This week, of course, see the release of both the July Fed minutes and the annual Jackson Hole symposium at the end of the week.  The theme for the latter, "Re-Evaluating Labor Market Dynamics" is particularly apt given the speed at which various thresholds have been blown through in the US and UK.

One doesn't exactly need Holmes' power of deduction to presume that at least a portion of the conference will be an apologia for Yellen's relentless cherry-picking of negative facts to support the initial conclusion (or is that mantra?) of "more accommodation is needed."  Your author has demonstrated on a couple of occasions that current labour settings are less atypical than Yellen might have you believe.

Of course, Macro Man's opinion and two bucks will get you a cup of coffee and not much else, so one has to remember to focus on what one thinks the Fed will do, rather than what they should do.    Even there, however, it is important to recall that next month's Fed looks likely to introduce some clarification on what the monetary policy of the future will look like, and perhaps also offer a few tweaks to the communication strategy.

These will be seen as another successfully surmounted step on the road to tightening.  Moreover, with markets currently pricing quite a bit less tightening than the median FOMC participant, the risk looks skewed to the downside from Macro Man's perch.   If for some reason this week's cherry-picking at Jackson Hole isn't as effective as expected....well, that could be the catalyst for a nice little downtrade.

Wednesday, August 13, 2014

You wonder why macro isn't making any money?

Short sterling pricing before UK Mansion House evening, June 12th:

The money quote from Mark Carney's speech:

"This has implications for the timing, pace and degree of Bank Rate increases....It could happen sooner than markets expect."

The trend in economic subsequent data has been broadly neutral:

And yet the BOE releases in inflation report today that, accompanied by Carney's testimony, has been seen as overwhelmingly dovish.   As a result, current pricing of short sterling is as follows:

If you're paying attention, you may notice that this now prices lower rates and less near-term tightening than was the case when Carney issued his warning two months ago:

Remember, kids:  Carney folk are frauds and their games are rigged against you!

Tuesday, August 12, 2014

Guardians of the Financial Galaxy

Macro Man had the, ahem, "pleasure" of taking his youngest, Macro Boy the Younger, to the cinema over the weekend to view the latest comic-book blockbuster, Guardians of the Galaxy.   As he was watching and averting questions about Jackson Pollock, it occurred to him that many of the characters bore more than a passing resemblance to some of the "heroes" of financial policy-making that he's observed over the years.  Call them Guardians of the Financial Galaxy, if you will:

Peter Quill:  He's a bit shifty, a bit of a know-it all, and he's been living in a region of the galaxy that's not where he was born.  Even when he's trying to do the right thing, he can move the goalposts and hoodwink people to get what he wants.   He has a number of unconventional gadgets that help aid him along the way.   He's the star of the show, as he'd no doubt tell you if you asked him.   Who could it be but Mark Carney?   (Apologies to James 'Hollywood' Bullard, but the casting director thought he was a bit out of his depth.)

Gamora:   A woman in a made-dominated world, she kicks ass while cleaning up a lot of other people's messes.  With the guts to be bold when it's required, she's not afraid to leave her natural surroundings to fight for what she believes in.   In  a bit of a surprise, Gamora is represented by Gill Marcus  of the SARB.

Rocket:   A smug know-it-all who isn't quite as clever as he thinks he is, certain aspects of Rocket's physiognomy recall a well-known Wall Street Journal writer who's the frequent recipient of dodgy leaks from the Fed.  However, it would be grossly inappropriate to elevate Mr. Hilsenrath to such a prominent position, so we must focus on Rocket's winning personality.   His hectoring, badgering tone and seeming inability to recognize his own tactical failings will be instantly recognizable to anyone who ever sat though one of Jean-Claude Trichet's  press conferences.

Drax the Destroyer:  In his comfort zone he appears all-powerful  and can intimidate lesser beings to bend to his will.   However, when confronted with larger forces his strength is impotent, and it turns out he isn't actually all that clever; some of his policy choices are actively harmful to the greater good.  His nickname says it all, really, and the fact that the character shares a name with a prominent interest rate futures brokerage is icing on the cake.   Who could it be but Alan Greenspan?

Groot:  This half-creature, half tree is notable for his strength and his inability to say anything but one phrase.   From her wooden performances in press conferences and Congressional testimony to her endless repetition of the "more accommodation needed" mularkey, Janet Yellen is Groot.

Friday, August 08, 2014

A few things we've learned this week

1) The ECB does not wish to become a sausage factory

2) Russian banks can still access ECB liquidity, but only if they bring a note from their mother, two box-tops from Cheerios, and promise really hard not to use the money to circumvent sanctions

3) Actually, given the Russian counter-sanctions and their devastating impact upon the Norwegian lutefisk industry, scratch the Cheerios requirement

4) ECB rates may stay low til the end of the decade...rumours abound that another Dutch candidate
 will succeed Draghi

5) As one commenter noted, the days of + Sharpe lazy longs in credit are over....roll on the days of 5+ Sharpe lazy longs in Bunds!

6) The 4-week average in initial jobless claims has hit eight-and-a-half year lows.   Based on Macro Man's assessment of the current environment, roughly half of the claimants are macro punters

7) In a change from the last 2,000 years, the Middle East is a disaster

8) Although the top may well be in for credit, we're not quite at the point where it goes down in a straight line