Four thoughts after payrolls

* It's getting increasingly difficult for anyone to say that the US labour market (with the exception of that for friendly macro punters) is anything but robust.   Year on year growth in nonfarm payrolls is now 2.4%, the highest since Internet bubble was just past its zenith- and looks to be accelerating.  True, wage growth remains fairly tepid, but as Macro Man noted nearly a year ago, that looks to be as much of a global issue as a domestic one.



*  Macro Man believes that there is something of a false dichotomy being drawn in some of the will they/won't they debates on Fed tightening.   By any reasonable measure, financial conditions are very, very easy in the United States and throughout much of the world.  It seems to your author that many of the arguments as to why the Fed shouldn't or will not raise interest rates this year seem to involve hand-waving prophecies of doom about the fragility of the recovery, undesirably low inflation, etc.   Macro Man has covered inflation previously and has nothing to add on that front.

However, how fragile is the economy, really?  Economic growth is not being driven by the classic interest rate sensitive sectors, for the simple reason that non-security credit is not being allocated or demanded on the basis of price.  Rather, regulatory and balance sheet concerns are informing many of the lending and borrowing decisions of would-be creditors and debtors.  It stands to reason, therefore, that the deleterious impact of higher rates on the economy should be more modest than normal, insofar as the economy has not relied upon borrowing for growth.   (Yes, corporates have been borrowing in the bond market, and not always for good reasons.  But as observed previously, that appears to be less of a concern than previously thought.)

The only way that some of the hand-waving can reasonably be justified is if the hand-wavers believe that rates will go to neutral quite swiftly, taking financial conditions with them.  Frankly, Macro Man doesn't know anyone who believes that.

Therein lies the false dichotomy: monetary policy is not a choice between stupid ZIRP-world and neutrality; it's a choice between stupid ZIRP-world and still-accommodative policy for quite some time.  Given the state of the equity, bond, and labour markets, that looks like an easy choice from Macro Man's perch.

* The DXY is the gift that keeps on giving.   Macro Man noted that the current policy settings in Europe represent the perfect mix for euro weakness, and the single currency duly obliged by falling out of bed on the strong NFP figure.  Amidst the popping of champagne corks (French, of course- these days it's cheaper than California!) , your author thought it would be interesting to put the current dollar rally into context.   He took monthly data from the Fed's broad TWI, which goes back to 1973, and plotted each winning or losing streak as a cumulative columns chart.  Imagine his surprise when he found that the current 8-month winning streak (including March) is the longest in history!


Obviously, there have been four different 8-month losing streaks, so we are not quite in uncharted territory here.  Macro Man had two reactions to seeing this result.   The first, visceral reaction was to conclude that we are indeed probably overdue for a little correction to take some of the steam out of the market.

His second reaction, on the other hand, was to observe that there looks to be quite a bit of clustering and serial correlation of streaks.  Long losing streaks seem to group together, as do long winning streaks.  The secular dollar rally from 1995 to 2002, for example, had 8 different streaks lasting at least 4 months.   If, as seems likely, we are embarking on a new secular dollar bull, then even the most ardent longs should hope for a pullback.    There's a phrase that describes a correction after the onset of a strong rally.   That phrase is "buying opportunity."

* It was great to see daylight savings roll around again.  The sunshine seemed to last forever today, and the weather even obliged by rising comfortably above freezing for the first time in recent memory.   The sun was shining, the kids were gamboling in the back garden, and you could almost taste the onset of spring:



OK, maybe not quite yet.  But with temperatures slated to rise further this week, perhaps our long national nightmare is finally over....
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Nico G
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March 9, 2015 at 8:40 AM ×

German abysmal export figures this morning confirm what i've been repeating like an old coot: Europe will NOT be saved by a cheaper euro simply because most of its export clients are broke

Dax is defying any logic but a dumb world allocation of assets in the last investment universe that still seemed cheap, and was cheap for a reason, and now 20% overstretched

March on

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Skippy
admin
March 9, 2015 at 8:54 AM ×

For the bond bears, with apologies to ACDC (to the tune of TNT)

See me ride out of the flickers
on your, Bloomberg screen
Out for all defensive stocks I can get
If you know what I mean
Utilities to the left of me
REITS to the right
Ain't got no Twist
Ain't got no QE
But don't you start no fight

Cause I'm Mr Bond, I'm dynamite
Mr Bond, I'll win the fight
Mr Bond, I'm the power load
Mr Bond, watch me explode

I've been low, flat and without vol
I'm a wanted man
Public charity number one
Understand
So lock up your EM
And lock up your Staples
Lock up your short Puts
And run for your life
The man is back in town
Don't you mess me round

Cause I'm Mr Bond, I'm dynamite
Mr Bond, I'll win the fight
Mr Bond, I'm the power load
Mr Bond, watch me explode

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checkmate
admin
March 9, 2015 at 10:09 AM ×

"Therein lies the false dichotomy: monetary policy is not a choice between stupid ZIRP-world and neutrality; it's a choice between stupid ZIRP-world and still-accommodative policy for quite some time."

Well put. It's observable that arguments often form up by simply overlooking 80% of the options on the continuum that goes from one extreme to the other. Appears to be human nature unfortunately.

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abee crombie
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March 9, 2015 at 1:27 PM ×

if Avg Hourly earnings were higher in this report, everyone would acknowledge that a hike is coming this year and its just a matter of when.

Will Yellen and Fischer overlook it? I wonder

Either way, the Fed can go back to 2% and pause and still be accomidative, assuming inflation picks up a tad.

Either way, the only way to play it so far has been in the DXY. Eurodollars have been range bound. One has to wonder what will happen to the dollar when/if the Fed does raise. Sell the fact?

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Anonymous
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March 9, 2015 at 1:36 PM ×

is that a picture of english countryside in the summer?

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Anonymous
admin
March 9, 2015 at 1:43 PM ×

PBR anyone? The oil, not the beer...

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abee crombie
admin
March 9, 2015 at 2:31 PM ×

For Nico, from Zerv.

it is such an exciting time in European markets. The ECB have learned from many of the QE mistakes in the US. Mario has an open ended QE3 type structure, and more importantly, he was bold enough to take rates negative. As many readers know I advocated a negative IOER in the US for a long while. In fact, I still suspect QE2 and QE3 would have never been necessary if the IOER went to -50/-100bps. By "transparently" exposing the overvalued nature of low risk assets through negative yields we could have started this recovery two or more years earlier. Instead we paid banks 25bps and let the bond fund industry keep telling folks it was ok to buy a 5 year note with a small positive yield. That was tragic, especially for the poor investor who held a 5 year note for the last 5 years. The point of QE is to get scared investors out of risk free assets at the bottom of an economic cycle. That's what restarts a broken economy. The FOMC let too many people sit at zero and feel comfortable. In Europe however Mario is going to make risk free life VERY uncomfortable. And that is why nearly every real money European asset manager must contemplate a mandate change. Of course, for the rest of us without any of these silly rules, the key will be to grab those European risk assets before the flow picks up in earnest!

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abee crombie
admin
March 9, 2015 at 2:36 PM ×

Why do i still hear ppl wanting to take a punt on PBR

1) the corruption scandal gets bigger by the day
2) 135B of debt
3) Estimated CapEx of 35B for the next few years vs Cashflow of maybe 30B but likely 20-22
4) BRL is going bonkers

There are lots of easier oil stocks to bottom pick than PBR

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Anonymous
admin
March 9, 2015 at 4:11 PM ×

Here we go...
Bundesbank confirms it entered Bond Market for ECB QE today
http://imgur.com/CEAgWFb

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Anonymous
admin
March 9, 2015 at 4:15 PM ×

BBG:ECB said to leave negative-yield losses unresolved in QE Accord

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Anonymous
admin
March 9, 2015 at 4:21 PM ×

"Twisting"...going further out on the curve... ECB won't buy bonds with yields lower than deposit rate.

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Anonymous
admin
March 9, 2015 at 4:25 PM ×

Japan's nominal GDP growth in 2014... 0%

http://www.esri.cao.go.jp/en/sna/data/sokuhou/files/2014/qe144_2/gdemenuea.html

Japan has become a joke. Europe will become the 2nd joke.

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Leftback
admin
March 9, 2015 at 4:27 PM ×

Skippy.

Nice. Just don't mention the cricket. JUST DON'T GO THERE.

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Leftback
admin
March 9, 2015 at 4:29 PM ×

@C (checkmate)

Thanks for the junior school teacher scolding. I'll go and stand in the corner until break. Does LB have to wear the Dunce cap as well?

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checkmate
admin
March 9, 2015 at 4:48 PM ×

LB,
No ,this is a very special school. Please escort the beautiful leggy blonde to the changing rooms picking up a joint from lost property has you pass by. Be warned though that if you don't mend your ways you'll have to stay overnights.

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Leftback
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March 9, 2015 at 5:31 PM ×

C, that's exceedingly dangerous, as I would have to pass the bike sheds on the way, which might lead LB to episodes of repeated detention.

Please check the long and checkered history of LB being "wrong". Certainly LB has been early or very early numerous times (= trader's "wrong"), but often correct in the end. In Spring 2010 LB was absolutely vilified on this board for 6-8 weeks for buying Treasuries, and ended up winning big. So, please, by all means, continue ride the USD, currently more crowded with drunken celebrants than Dhaka third class rail.

I think what FM is trying to say is that loads of Anons are going to huff and puff about European equities being expensive, but that by analogy with US QEasing, European equities will just go on getting more expensive for some time. In any case, it's bollocks to state that a market still absolutely full of 5-6% dividend yields can be expensive. Eh, Polemic?

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checkmate
admin
March 9, 2015 at 6:00 PM ×

When the Yen/USD stops keeping on giving I'll be happy to change my tune meanwhile a trend is a trend and the development continues to give the appearance of further continuance. Hell, I might even throw you a couple of Geishas to keep your 'chin up'.

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FunnyMoney
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March 9, 2015 at 9:06 PM ×

@LB (5:31) - Well said sir.

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Nico G
admin
March 9, 2015 at 9:42 PM ×

if you take that exorbitant dividend yield for perennial then hey why not, sure

people are still totally misreading Greece and the domino effect to come

so hedge your zeros sorry, euros at least

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Nico G
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March 9, 2015 at 9:47 PM ×

6% dy is reach by any standard

http://www.topyields.nl/Top-dividend-yields-of-EURO-STOXX-50.php

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Polemic
admin
March 9, 2015 at 9:52 PM ×

Exactly Lb , unless those yields are in errrr.. Herbalifos (Spanish fly version)

But yes . my maxim .. equities that pay a div can go to infinity and still out perform a 0% yield bond. And even eqs that don't pay a div can go to infinity and outperform a negative yielding bond.

Pol

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kbong
admin
March 10, 2015 at 4:46 AM ×

oops... I didn't realise it was a typo, thought it was a nice pun, Payrools... NFP Roolz for sure...
also @leftback, I presume you mean the Bangladesh match specifically :p

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Leftback
admin
March 10, 2015 at 4:51 AM ×

Yes, we are long SAN, E, REPSOL, TEF, TOT on that list. There are 5-6% yields all over the place in "Greater Europe", which therefore includes things like BP, and energy stocks not in the Stoxx 600, e.g. ÖMV, EDP, for example, and then if you are willing to go a bit off the beaten path there are other >5% yields in Hungary, Russia, Austria and Portugal. I know, I know, everyone hates those countries, but that's the point. I dare say Pol has turned up a few more as well. Europe is going to be there for some time, chaps....

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Nico G
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March 10, 2015 at 5:24 AM ×

i am an actuary by education and quite bloody gobsmacked that sophisticated folks could compare equities to bonds

ok, ok, 'risk' is so 1990s. we live in 'risk on' era where the first four letters do not mean risk any more

noone could put the European equities orgy better than macronomics last week end :

http://macronomy.blogspot.co.uk/2015/03/credit-information-cascade.html

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Anonymous
admin
March 10, 2015 at 8:01 AM ×

@Nico: duration is overrated, don't you think ?

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Anonymous
admin
March 10, 2015 at 8:47 AM ×

As an actuary, one might become obsessed with certain kinds of grave terminal risk.....?

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Manish Singh
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March 10, 2015 at 9:38 AM × This comment has been removed by the author.
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Manish Singh
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March 10, 2015 at 9:38 AM ×

to paraphrase a famous quote in EUR/USD context - EUR/USD Long "if not now then when, if not us then who". I have indicated before that EUR/USD long is a good trade and I am sticking with it.
Fully agree with Abee Crombie's take on implication of ECB's negative rates. Long European equities and long eur/usd for me

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CV
admin
March 10, 2015 at 10:08 AM ×

I am obviously joining LB in the corner with that cony hat (I had to Google that, funny!). I wonder when the yield advantage in some beaten down EM (cough, starts with B and ends wil ZIL) will actually dawn on markets. But let us just say, that it aint happening yet! European stocks will be fine ... we can discuss fundamentals later Nico, now is not the time.

Meanwhile, our fierce scribe has one again proven an adept punter with that EURUSD call. As a macro dude, allow me to explain what that means for the economic data. Exports/earnings will go up this year and core inflation will rise very soon (you're welcome ;)). Chinese data looking ugly, but that basically ensures that rates remain low and QE pumps keep priming. The thing is ... only a brave fool, excluding those poor souls being forced to it, would raise rates here because the USD shows show that it eventually will kick back very strongly through the FX market. This is the reverse BOP discourse all over. We need lower rates to avoid to much money flowing in cramping our style!

I am still worried about something snapping in China, but Yellen is a side show for me. The big opportunities is in the EUR carry trade currently flooding global markets. It is happening, look at the capital account data in the Eurozone.

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hipper
admin
March 10, 2015 at 10:12 AM ×

Thx Nico, excellent article.

Important to note how different US vs. EZ QE's are. US at the time had more net-debt issuance (bigger deficits), bigger mortgage and corporate credit markets to absorb the QE money where as Europe is completely in the opposite corner with lower deficits, austerity policy and tighter bank collateral requirements and smaller alternative credit markets. That's why rates react so sensitively, because if they sell one government bond they have very few choices other than go buy another one. Or they won't sell at all, leading QE bid bond prices going up in larger increments.

Potentially, if there were laxening of collateral requirements, it would probably help the huge liquidity pool in bonds escape captivity to form even larger bubbles elsewhere (equities). But I don't know where these regulations are headed atm.

As the post points out, long duration bonds are especially vulnerable as we might presume that the base deflationary effects of oil start fading off, and weakening euro will push import costs up. I'm not sure these will be the correct kinds of "healthy inflation" e.g. lacking wage pressure but hey - inflation is what Dr. Aghi wanted so I guess anything will do.

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Cityhunter
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March 10, 2015 at 10:53 AM ×

Finally correction is coming to DAX...

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Anonymous
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March 10, 2015 at 10:53 AM ×

FT says:
I guess the catalyst for a 10/20 % correction is now clear; it's not a question of if but when.
Per BIS recent data, the stock of USD denominated corporate and bank debt in EM is roughly 9 Tln USD;
In the other corner, the Oil E&P related debt is 5 Tln (with some overlapping but not much)
It's the 97/98 configuration all over again which led to Greenspan easing; this time, it will be Yellen not raising providing the fuel for the last blow off top in equities sometimes between Q4 15 and Q2 16.
But not before we have some kind of severe HY related panic and some EM dislocation.
My view is that the small risk aversion evident today is not yet the big thing;
Back in 2007, the first subprime jitters were in end of Feb early March; then we had the summer scare but with CBs starting to accomodate the markets, the eventual S&P high was in October.
I would expect that correction to start sometimes in the May/ June window (game theory proves that information can be in the market but the lag between awareness and price action can be pretty long).
Still, the short term risk is that by mid to end of March, stockbuybacks will have to stop in prevision of the April reporting season.
With the current febrility, I guess we will have some volatility.

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Martin T.
admin
March 10, 2015 at 2:40 PM ×

Thanks for the praise on the Macronomics post Nico

Best

Martin T

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Nico G
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March 10, 2015 at 9:00 PM ×

well hats off Martin you write the sharpest financial literature of today

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Martin T.
admin
March 10, 2015 at 11:13 PM ×

Gee Nico, I am going to blush. Blogs like Macro Man and other like pragcap.com got me thinking and writing. Thanks again for the praise. Much appreciated given the time spent on trying to write up some interesting thoughts around macro.

Best,

Martin

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checkmate
admin
March 11, 2015 at 9:31 AM ×

Thanks for that Blog link Nico and thanks to martin. I agree ,it's first rate material.

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