When doves fly

The ECB's thunder was stolen a bit on Wednesday, as three other central banks hit the tape with dovish developments.   The BOJ downgraded their inflation outlook, the BOE minutes revealed that the MPC lost its 2 hawkish voters, and of course the Bank of Canada cut rates, a mere twelvemonth after it first emerged as a tradeable macro theme.  

Lower oil prices were a common thread running  through these announcements; to paraphrase Prince, this is what it sounds like when doves fly.

Speaking of which, today is the day when we (almost certainly) finally get ECB QE.   The WSJ ran a story yesterday suggesting EUR50 billion per month of purchases, which while sizable was a bit less than the Fed bought when QE3 was in its pomp.  Of course, an open-ended commitment to continue these purchases for as long as necessary could render the ultimate size to be quite large indeed.

Of course, questions still remain, even if the WSJ leak is correct.   What bonds will be bought, from which countries?  Will the ECB buy them, or will the national CBs simply buy their own countries' bonds, per last week's report?  Will they touch the depo rate tomorrow, or indeed ever again?

At the time of writing (7 pm EST on Wednesday), the survey has generated 100 responses, roughly half of which occurred before the Journal story.

The results are summarized in the table below:



As you can see, the average respondent expected a total QE size of approximately 733 bio, with a median of 600 bio.  As you can see from the standard deviation, there were a few rather large outliers.   This is broadly in line with the prevailing consensus, and consistent with a year's worth of purchases per the leak.  An open-ended commitment that allows for a potential increase in size could be construed as a dovish surprise.

Roughly 1 in 5 respondents expected a 25 bp depo rate cut, so any move on rates would also be taken as a surprise.   That having been said, punters seem to feel that it's all in the price.   The EUR/USD expectation skews slightly to the high side, albeit with a pretty wide distribution (as seen by the more than 7 big figure SD!)  Curiously, 1.18 was the most common of the 100 responses.

On aggregate, readers expected a modest rally in the Eurostoxx 50, though again, with a wide distribution of responses.  Ironically, one of the tightest forecast distributions was EUR/CHF, where the SD of responses was "just" 3-and-a-bit percent.  On balance, there's not a whole lot here to sway Macro man one way or the other.  He's retaining a very modest euro short that offers plenty of room to add should either news or price offer an attractive opportunity.

Finally, it's perhaps worth noting that readers seem to expect the first Fed hike this September, with that meeting representing both the median and the mode of respondents.   The average response was for December 2016, but was heavily skewed by a few wags inputting 2020, 2038, and 2065 as the dates for lift-off.

One can only hope that these joking forecasts do not come to pass.  If they did, there would no longer be any macro hawks or doves....we'd all be dodos.
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Anonymous
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January 22, 2015 at 8:59 AM ×

tks... so lack of variation in eurchf prediction mean that is the big short (still) ?

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checkmate
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January 22, 2015 at 9:07 AM ×

After the fun to be had accumulating bonds in the months past 'cos we're all deflating I come into the actual event like Elsa The Lion completely 'Bond Free'.
This might be US QE all over again for yields for awhile.

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Anonymous
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January 22, 2015 at 10:48 AM ×

I thought my estimate of 2038 was optimistic if anything. It took the BoJ 17y for their first hike, and that was when the global economy was racing ahead all around them.

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mattyboy
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January 22, 2015 at 12:37 PM ×

well after all the talk the moment of truth. interesting set up overnight with all curves bear steepening into this. the market expects an inflationary bazooka thats for sure.... personally, the uneasy feeling persists, though Draghi has always shown himself able to deliver when needed. just cant shake this idea that there will be conditionality on said bazooka that will negate some (all?) of its impact. whether that's ratings-based criteria for inclusion like last Fridays leak, or even conditional upon meeting targets under the fiscal compact like the budget deficit, etc. though of course this would only blur the line between monetary and fiscal policy. lets get on with the show then

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Leftback
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January 22, 2015 at 3:08 PM ×

Coach "Super" Mario Draghi of the New European Patriots was "shocked" by allegations of "deflated bazookas" in the aftermath of the big QFL match.

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Leftback
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January 22, 2015 at 3:28 PM ×

After that first dodgy 15 minutes, we are now seeing the real game getting going. Bond selling would seem to make a lot of sense here, by analogy with the US QE programs.

+1 for Bond Free, "C".

In typical ECB style, Dr aghi has left himself room to jawbone as much as he wants regarding the conditionality. In the end it was a fairly substantial bazooka, although not on the same playing field as Kuroda. BoJ still Champs of the QFL.

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Anonymous
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January 22, 2015 at 4:34 PM ×

rEUR Linkers on fire.

This will end badly.

RXA

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Polemic
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January 22, 2015 at 4:36 PM ×

Theres a lot of stuff obviously flying around that I don't follow.

I'm actually more interested to see if EM switch to EUR as their new funding tool rather than all this USD debt. Euro action must have a positive impact on EM too.

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checkmate
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January 22, 2015 at 4:43 PM ×

I want to know if those bond buyers of PIIGS still want them at these prices with 80% of QE non risk sharing ? To answer my own question ,no thanks. Indeed, would I even want bunds at these prices on the basis that inflation might actually tick up at some point ,no thanks. Would I want US at these prices IF yields elsewhere tick up in response ,no thanks.
No we wait for the Chinese to say this Yuan tooo expensiveee.

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Leftback
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January 22, 2015 at 5:28 PM ×

So far, so good for Super Mario. Nothing absolutely blowing up anywhere (SNB already did that), and equities tone is decidedly positive. Now we'll see whether safe havens are abandoned tomorrow or perhaps only after the Greek election. To us that seems the path of least resistance.

Sell vol, sell bonds, sell yen, sell .. (gulp) dollars?

Polemic, there was a ball-tampering scandal in the US at the weekend. A bit beyond me, but they let the air out of the pigskins apparently..

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CV
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January 22, 2015 at 5:45 PM ×

Agree LB, long bunds will be edgy here ... meanwhile, I am sure MM is working on something, but I did the most obvious one.

Apologies to Geri Halliwell!

---

The Eurostoxx is rising

Bears are getting low

According to our sources

The ECB’s the place to go



Cause' today for the first time

Just about half past two

For the first time in history

It's gonna start raining euros



It's raining euros

Hallejulah

It's raining euros

Amen



It's raining euros

Hallejulah

It's raining euros

Amen



The periphery is rising

Weideman’s getting low

According to our sources

The ECB’s the place to go



Cause' today for the first time

Just about half past two

For the first time in history

It's gonna start rainin euros



It's raining euros

Hallejulah

It's raining euros

Amen



I'm gonna go out

I'm gonna buy some

OTM IBEX calls



It's rainin euros

Hallejulah

It's raining euros

Every special euros



Open-ended big and mean

Just enough to make bears scream



God bless Mr. Draghii

He’s part of Europe too

He took over Merkel

And he did what he had to do



He fought the Mangler

To rearranged the sky

So that each and every euro punter

Could find the perfect hide



It's raining euros



Don't get yourself into long bunds

I know you want to



I feel lazy retail moving in

About to begin

Hear the thunder

Don't you loose your margin

Shut of your IG and stay in bed

(shut off the IG and stay)



It's raining euros

Hallejulah

It's raining euros

Amen



It's raining euros

Hallejulah

It's raining euros

Amen



It's raining euros

Hallejulah

It's raining euros

Amen



It's raining euros

Hallejulah

It's raining euros

Amen



It's raining euros

It's raining euros

It's raining euros

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mattyboy
admin
January 22, 2015 at 5:57 PM ×

did oil not get the memo from Draghi that the printer just got turned on? oh wait, that's euros its printing, not *dollars*

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Anonymous
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January 22, 2015 at 6:11 PM ×

DXY up over 1% today . As experienced FX traders know ,this is probably a 2 standard deviation event . 94.07 and new 5+yr high on way to 100

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washedup
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January 22, 2015 at 8:41 PM ×

Can't really add much to what's been said, the markets are pretty much going where they should and dragging people by their noses (or balls, as the case might be).

Generally a consensus day.

On the short bonds call though I am a bit skeptical, and here's why - in the US it turned out to be the right post QE trade because it reset growth and inflation expectations, and positioning was adverse to it at the time.
As far as the impact on the real economy,there was the obvious mortgage channel, plus a bunch of good old boys in TX/OK/ND borrowed the cheap money and went nuts acquiring land, flipped it to unsuspecting pvt equity (who had access to even cheaper money) at the top of the crude market, and promptly proceeded to the nearest ti#y bar to celebrate (that last piece is key to attaining an expansionary multiplier!)

Now, it has never been clear to me what a flood of euros would be used for, and given the difference in lending channels and market positioning (not to mention healthier and more mature sexual mores!), I will not be surprised if european bond bears continue to be frustrated after the initial party is over - no reason to stay long, but not a screaming short either, at-least to this punter.

Awesome to see Central bank chieftains leaking estimates to the press and trying to manage and best them to achieve the desired result - they are all Jeff Skilling now.

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Polemic
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January 22, 2015 at 9:01 PM ×

I've said all I have to say here http://polemics-pains.blogspot.co.uk/2015/01/three-bells-in-row-and-euphoric-highs.html and can't be arsed to precise it.

having been impressed at eurusd dithering before it got moving ( and being agressively 'spot shag'ed by MM in the twitter sphere for it) . I now feel a bit 'post xmas' wondering what next in the bleak midwinter and probably planning a skiing holiday to get away from it all, Europe looks cheap but must stray into Chuffland, home of the psychopathic central bankers.

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Leftback
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January 22, 2015 at 9:09 PM ×

Bonds looking like a cockroach motel here...

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mattyboy
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January 22, 2015 at 10:17 PM ×

...then check me in. I like the look of the US long suite (room 2.44%)

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Anonymous
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January 23, 2015 at 7:29 AM ×

@LB and mattyboy, I'm' interested in both of your views.

I see the US Room 2.44 and compare it to the flophouses in the EU, and I gotta wonder why it isn't "fill yer boots" time.

Then again, I learned the "fill yer boots" phrase from LB, and he is saying don't do it. And as far as I can tell, part of that is due to the risk of the $ reversing. That being said, the $ keeps going straight up. As "retail Johnny", I don't like that straight up shit, because I've seen enough of the other side of that by now.

So, as they say, just wonderin'

- Whammer

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Leftback
admin
January 23, 2015 at 11:02 AM ×

Morning all, from a delightfully mild and sunny England. Cor, guv, this country is so nice I should really visit more often, especially as I have the passport, and a vote (oh, that part is less attractive).

First of all, credit to "washed" for this gem about the shale boom: "flipped it to unsuspecting pvt equity (who had access to even cheaper money) at the top of the crude market, and promptly proceeded to the nearest ti#y bar to celebrate (that last piece is key to attaining an expansionary multiplier!)"

Absolute masterpiece, mate. We bow in your general direction. Back in a mo.

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Leftback
admin
January 23, 2015 at 11:29 AM ×

Whammer, the time to fill yer boots with an asset is usually not when it has gone parabolic, or when it is bouncing up and down on the diving board at the top of that dodgy looking ladder. So, sadly that means we must say bye bye to our beloved Long Bond and also soon bid adieu to Bucky in almost any form, other than to hold on to our REITs for now.

matty boy, I see the spread between USTs and bunds, and my response is to say you're correct that UST holders will lose less money this year than their German counterparts. The easy trade here in Europe is to rotate into equities and high yield bonds and that's what is going to happen. Look at US 2009 and that's what we will see in EU in 2015. The CBs buy govies and hold 'em, banks sell govies and buy HY and equities.

We are now watching the very end of the front running of Draghi (buying up EU govies and selling € to buy $/USTs). Like all powerful trades, this one will unwind, with some pain for the late arrivals. When it does, the selling of $ will drive US rates somewhat higher as a consequence.

In these situations, one has to look around the investing landscape and buy what everyone hates, and that's when you fill yer boots. Notwithstanding a decent technical analysis from MM of EURUSD, I'd put EU equities in my bag for now, and try to make some room for Russia, Brazil, Aussie, gold miners, oil drillers, Norway in my boots, and Nigeria and the forgotten parts of Eastern Europe tied on to my shoelaces. It is going to be a wild and crazy year.


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Anonymous
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January 23, 2015 at 11:55 AM ×

Aussie? Struggling with that as a trade.Dutch disease has left the economy empty, and I dont see 80c as the inflection point to get any non mining investment returning. 60c maybe.

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checkmate
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January 23, 2015 at 1:21 PM ×

"The CBs buy govies and hold 'em, banks sell govies and buy HY and equities."

That's my read as well. Frankly ,if it were not to happen then the ECB has just wasted it's last shot. However, I don't think that will be the case. In essence , I think transfer the JBTD to European risk.

Although I sold my US bonds first and then my Euro bond holdings this week it wasn't because I suddenly woke up and thought we should short that. It was because if the formerly mentioned transfer is going to occur then the moneyflow will start to reverse gradually and I'd rather be slightly ahead of that than behind it.
If European risk can't start to get something from such a great currency devaluation then it's not going to happen at all. By the way I'd prefer midcaps to blue chips on this one.

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Anonymous
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January 23, 2015 at 7:19 PM ×

Thanks LB, and all. I'd buy you all a beer if I actually knew you were human. I've heard those stories about the Internets ;-)

-Whammer

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