Waiting game

Yesterday could be summed up by the simple statistic that volume in the S&P 500 was the lowest since New Year's eve, and the change on the day was a puny 13 basis points. Such is the stuff of payroll week, when markets often seem to resemble a football match in which each team is content to settle for a 0-0 draw.

That's not to say that there hasn't been volatility; after all, the past 24 hours has seen EUR/USD fall from 1.5650 down to just over 1.55, then roar back to trade up to a high of 1.5724. OK, yesterday's initial jobless claims figure was pretty lousy, but in general you'd have to say that there has been a general lack of "signal" to explain this noisy price action.

But really, the state of play in financial markets can be encapsulated by the US 2 year note. The June future looks to have traced out a textbook head and shoulders top, with the neckline having broken on an intraday basis on both Wednesday and Thursday. However, follow-through has been negligible, and indeed as Macro Man types the price is hugging the neckline as tightly as possible.
Depending on the data, this formation will either represent an interim top at the front end of the US curve, or a successful test of support that has flushed out the weak longs. So what is one supposed to do? In a world of continuous price liquidity, the obvious answer would be to wait for the payroll data and then trade accordingly. Unfortunately, as quant models learned to their chagrin last summer, we do not live in a world of continuous price liquidity; in fact, in the event of an informative payroll figure today, the price is likely to gap most of the way towards the eventual price objective of the formation. So despite the tasty-looking set-up, there doesn't really appear to a good trade.

Welcome to financial markets, circa April 2008.

So how will the data pan out? Regular readers will know that Macro Man does not believe in looking at the monthly payroll change number, as the statistical noise and revisions far outweigh the current trend, thus pushing the noise: signal ratio of the payroll data towards infinity.

Macro Man much prefers the unemployment rate as a less noisy (albeit more lagging) indicator, and here, he would very much be in favour of taking the "over" on the market consensus estimate of 5%. Macro Man's favourite indicator, the jobs hard to get component of the Conference Board consumer confidence survey, took another jump last month to a new cyclical high. JHTG is suggesting that the unemployment rate should be printing between 5.2% - 5.5%, a sentiment echoed by the rise in continuing jobless claims yesterday.
Such an outcome should weaken the dollar and equities and support fixed income; however, whether such moves endure more than a couple of hours may depend on whether the market is finished jettisoning unwanted positions and reducing risk. And at this point, Macro Man has relatively little conviction that this is the case; as such, he continues to run miniscule risks until we return to a more thematic environment.
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Steven
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April 4, 2008 at 12:41 PM ×

I've never heard of a neckline ass before. Must be a new TA thing.

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Macro Man
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April 4, 2008 at 1:18 PM ×

Whoops. I guess the neckline ass is the bloke that's betting the farm on it, either way.

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Mr. Prop
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April 4, 2008 at 7:34 PM ×

When it comes to the US labor market, it is all doom and gloom. Clearly, umeployment rate is heading north. But lets recall a fact or two. First, financials are the epicentre of Armageddon. They represent 40% of all corporate profits, but just 5% of employed workers. Second, 30% of SP500 profits are now outside US borders. The dollar is dropping like a stone and is helping the reflation effort. America can grow food. Not surprisingly exports/gdp is providing a countercylical force. Beyond that corporates outside financials have good balance sheets, and investment levels are already fairly lean. There is no urgent need to slash jobs like in previous down turns. The spin here is all RAGING BULL stuff. Dont get caught bearish at the bottom. As for 2y notes, they received a stay of execution, that is all. They were boosted by payrolls, but unless things turn ugly again and the BSC inflection point is just a blip, the Fed is nearly done. Maybe they cut to 2.0 maybe 1.75. Either way, 2y notes are ridicously priced. Recall that when rates were 1.0% between June 2003 and 2004, the average price was 1.87%. That was when deflation fear raged. With inflation near 4.0% good luck to those who see value in the 2y at a negative 2.0% real yield and the equity market reflating. The Fed is signalling to all to strap on risk. Dont fight the Fed, they got more bullets to shoot. Ben is way past helicopters. He will save the day. But, bears are a resilient lot, I will grant you that. However, I am once again acquring a taste for bear steak...

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t
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April 5, 2008 at 3:27 PM ×

Hey MM your fame is spreading:
iTulip "who offers consistent and level-headed opinions on the markets"
and
Russ Winter
Just thought you may enjoy the 'up'.

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