Treading warily

Although the passage of month/quarter end should once again open up the taps for risk-taking, Macro Man (and he imagines a number of others) is treading a bit warily.  For all the ink (or, in this day and age, bytes) spilled over the equity market, the SPX is pretty much unchanged on the year.  To be sure, there's been stuff to do in single names and sectors bets, but in terms of big-picture index-level risk taking, it's proven to be a fairly fallow field.

Moreover, the longer the skein of weak (albeit weather-impacted) releases continues, the more bold the market will become in second-guessing the Fed and its presumptive resolve to raise rates this year.  EDZ5 is now back at the highs of the year, and at this juncture Macro Man isn't particularly inclined to get involved some more.  In the span of a few months, the onus has pretty clearly shifted to the data justifying a hike, rather than justifying standing pat.  Calls for QE4 look more like wishcasts than forecasts, but clearly you don't need another round of QE to lose money being short fixed income.

This week, of course, sees the release of another payroll report, with the consensus forecasting a still-robust  reading just shy of 250k.   While the ADP has proven to be not particularly useful in real-time forecasting (the correlation to NFP is much higher after all the revisions are in place than at the time of initial release), yesterday's well below-consensus reading was still noteworthy, insofar as it reinforced a pre-existing narrative.  Ditto for the ISM.

What really gives Macro Man the willies, however, is not the data itself but the liquidity environment in which it will be released.  Readers with sharp memories may recall that the March 2012 payroll figure was released on Good Friday in early April- as this week's will be.  Stock and futures markets were and will be closed, leaving short-staffed desks to manage as best they can in bonds and GLOBEX.

Three years ago, market consensus was for  a solid number of 201k, down slightly from the previous month's 227k.  In point of fact, it came in at 120k, way below the lowest forecast in the Bloomberg consensus.   Unsurprisingly, carnage ensued, with the 10y yield gapping lower, a gap which held through the announcement of QE3 later that year.  Macro Man also recalls a particularly nasty gap higher in USD/MXN (he was short), among other dislocations.

With a full quarter's worth of scuffle from the US economy, no net gains in the SPX, and most short fixed income positions offside, Friday looks like a particularly acute opportunity for a capitulation.  No guarantees of that of course....just a general feeling of uneasiness that it's not a great time to be taking a lot of risk.   Sounds like a perfect time to tread warily.