Markets hit the panic button

Oh dear.

Today's retail sales release has prompted a wave of ugly price action, as markets reach for the panic button that they haven't used since way back in...err.....October of last year.

Is the reaction justified?  Who's to say- people trade for a variety of reasons, since utility functions are not completely aligned across all segments of economic actors.   That, as they say, is what makes a market.

From Macro Man's perch, however, the uber-squeeze-du-jour in fixed income is reaching levels where it starts becoming very interesting indeed to take the other side.  To be sure, the December sales numbers were poor and disappointing, no matter how you slice them.  That having been said, disappointments of this nature are far from unprecedented, and indeed the underlying trend in core sales still appears to be on a reasonable track.   The chart below shows Macro Man's preferred method of tracking economic momentum, showing the 3m/3m annualized rate of change in headline and ex autos/gas sales.  As you can see, the headline figure has swung down to levels which are weak but seem to have happened every 10 months or so over the last few years.   The core figure, meanwhile, sits at 4.9%- above its average since the start of 2010.

Now clearly, a month or two more of poor numbers will make this chart look very different.   If and when that happens, Macro Man reserves the right to change his mind.  Until it does, however, your author will respect the vagaries and random nature of high frequency economic data and expect a mean reversion in months to come.   And that, ladies and gentlemen, means that today's squeeze-o-rama rally in rates is meant to be faded.   And so, after a month or so on the sidelines, Macro Man has done just that, taking the other side of his longstanding EDZ5 contract as it flirted with all-time contract highs at 99.35.

FX, meanwhile, is following Macro Man's roadmap almost to a T, with the dollar remaining firm against the euro while sagging badly against the yen.  The collapse in EUR/JPY already this year has been little short of astonishing; it's wiped out all of the the post-BOJ rally and a little more.

On an exclusive basis, Macro Man can reveal the contents of a recent meeting between the BOJ and ECB.  Pay particular attention to the second verse:



If USD/JPY were to break last month's panic lows  just above 115.50, things could get very ugly indeed.

As for stocks, Macro Man took the opportunity this morning (with the assistance of a kind reader who knows who he is) to refresh the medium-term equity model that he has run for the last seven years.  As long-time readers will recall, the model purports to forecast the total return of the SPX over the ensuing 12 months.   Although the exact number of the forecast is not expected to be exactly right, the shape of the forecast profile, particularly in relation to underlying volatility, is what is truly important.

As the chart below indicates, if anything the underlying story for stocks has improved over the last few months.  Certainly fixed income is giving little competition- the dividend yield of the SPX is now higher that on 10 year Treasuries!

Suffice to say that there appears little reason for equities to hit that panic button, at least based on the factors that this model captures (which have worked very well for your author over a long out-of-sample period.)

Whether weak sales and low oil is sufficient reason for rates and FX markets to do remains to be seen....but colour Macro Man sceptical at this juncture.