A perfect mix

Well, Super Mario looked happier and more relaxed yesterday than he had in quite some time, n'est-ce pas?  Obviously, there were no fresh policy initiatives to unveil given that the ECB has yet to commence the implementation of the QE purchase program previously announced.

Nevertheless, Mario had a twinkle in his eye, perhaps because he had some forecast upgrades to deliver on growth this year and next.  Indeed, in aggregate the ECB now expects the Eurozone economy to be nearly 1% larger by the end of  next year than they did just three months ago.  The evolution of the forecast profile is nicely sketched out in the table below, from Jefferies:

Of course, some of that upgrade is a function of the ECB itself, and the announcement of the QE policy.   The assumption of "we have done something, ergo it will work" is often a dangerous one that begets complacency, as we have seen all too often over the past few years.  In fairness, though, things do seem to be ticking over a little more.   As Draghi proudly noted, the credit impulse is sparking to life a wee bit, and basic measures of sentiment are now pointing higher.

From a currency punter's perspective, meanwhile, the policy and economic mix appears to be a perfect one to engender currency weakness.   Tight fiscal policy?   Check.   Loose monetary policy, with a commitment to remain that way for a (ahem) considerable period?   Check.   The growth outlook improving, and with it the prospects for C/A surplus-dampening domestic demand?   Check.

Who knows, we might even see a reduced private sector demand for some segments of the EZ bond market.   After all, Draghi noted that the ECB would not buy bonds through the deposit rate (currently -0.20%, and likely to stay there if the forecast profile materializes.)  By a stunning coincidence, Schatz (i.e German 2 years) closed yesterday at...wait for it....-0.20%!

Of course, as Swiss franc traders will attest, just because a CB puts an implicit (or explicit!) floor under something doesn't mean that the floor will hold ad infinitum.   That having been said, holding bonds offering negative yields is a position that costs money to carry, so the at the very least reducing the prospect of capital appreciation surely diminishes their allure for some holders.   Bobl (5 years) at -0.07% in many ways looks even worse!

Regardless, the chart of these things would appear to suggest that the party is over, for the time being at least.

While it would be nice to focus on the medium term prospects for the euro given the perfect policy mix for shorts, the realpolitik of modern macro for many punters is that today's payroll figure is now more important, for the time being of course.   Given the intense focus on the Fed's "patience", a misstep on the data front could shift the market's timetable presumptions, perhaps engendering the sort of short squeeze that we haven't seen all year.

Macro Man has often scuffled in March, and he isn't alone.   An analysis of the CS macro hedge fund index reveals that since 2000, March has been the worst month of them all for the industry.  Now, that in and of itself is not a reason to slash risk...but assuming that the market has not become exclusively populated by 30-year old "know-it-alls", it might be reasonable to posit that punters with as much gray hair as your author might be somewhat sensitive to signs of a trend reversal at this time of the year.

For what it's worth (admittedly not much, given the noise in the data), Macro Man's model yet again looks for a somewhat lower than consensus reading for payrolls, forecasting a print of just over 200k.   In the unlikely event that his forecast were to prove to be spot on, it's hard to envisage too strong of a market reaction, unless there was disturbing news on the unemployment rate or wage front.  To be sure, any sane central bank wouldn't be troubled by a 200k print.....and most crazy ones wouldn't, either.

In any event, Macro Man's little PA portfolio has had a nice start to the year, so as noted previously he has trimmed some of his short euros.  He also took a little profit in fixed income as well, just enough to feel emboldened to add if there is a silly rally after tomorrow's figures.

These are merely tactical adjustments, however.     After all, the perfect policy mix doesn't come around too often....so when it does, you really don't want to spend too much time on the sidelines.