Cor blimey, Spooz take a dip below 2100 and already the IMF is whingeing for the Fed to delay rate hikes 'til next year! The irony, of course, is that both FX and rates settled down a bit after the recent P/L destruction- or. for those fortunate enough to fade the extreme, provided some immediate gratification.
Today of course is payroll day, and strange as it may seem with the Fed teetering on the verge of signalling rate hikes if and when things improve, Macro Man somehow feels that this number won't change things very much. To be sure, Yellen still bleats occasionally about slack in the labour market, but let's face it- the job market is among the least of the Fed's concerns at the moment, given the tepid rate of headline growth and the ongoing undershoot in inflation.
To be sure, a double-digit number would push expectations of lift-off even further back, possibly establishing Christine Lagarde as some sort of savant. On the other hand, a blow-out number would lead to some more short term duress for fixed income, but will it really change the dynamic for the Fed until underlying economic momentum returns? Probably not.
For what it's worth, Macro Man's model suggest a print of 194k, somewhat below the 220k consensus but close enough that it probably wouldn't matter (excepting a massive out trade on wages or the unemployment rate, of course.) The irony, of course, is that real wage growth has ticked up nicely (if only temporarily) this year, though neither growth nor the Fed funds rate are showing much inclination to ratchet higher.....
Today of course is payroll day, and strange as it may seem with the Fed teetering on the verge of signalling rate hikes if and when things improve, Macro Man somehow feels that this number won't change things very much. To be sure, Yellen still bleats occasionally about slack in the labour market, but let's face it- the job market is among the least of the Fed's concerns at the moment, given the tepid rate of headline growth and the ongoing undershoot in inflation.
To be sure, a double-digit number would push expectations of lift-off even further back, possibly establishing Christine Lagarde as some sort of savant. On the other hand, a blow-out number would lead to some more short term duress for fixed income, but will it really change the dynamic for the Fed until underlying economic momentum returns? Probably not.
For what it's worth, Macro Man's model suggest a print of 194k, somewhat below the 220k consensus but close enough that it probably wouldn't matter (excepting a massive out trade on wages or the unemployment rate, of course.) The irony, of course, is that real wage growth has ticked up nicely (if only temporarily) this year, though neither growth nor the Fed funds rate are showing much inclination to ratchet higher.....
33 comments
Click here for commentsWhat kind of model are you using, if you don't mind my asking?
ReplyFT: I believe the parameters of the equation are starting to shift for the FED; this is the only way one can explain the reluctance of Janet to acknowledge the so-so recent data.
ReplySure, she is managing expectations and won't give up the mantra of the recovery unless she has her back to the wall;
On the other hand, the FED is under assault: be it in congress or
http://www.bloomberg.com/news/videos/2015-04-15/stan-druckenmiller-zero-interest-rates-unnecessary-now
(worth listening to if you haven't already) or
https://www.youtube.com/watch?v=dvJSK4viVMs
(Paul Tudor Jones' TED talks) which is another implicit criticism of the FED as policy is creating inequalities
and the list is endless....
In conclusion, I think the willingness of the FED to hike is political and tactical and not so much related to data noise.
Europe is so much much more fun to trade - gigantic intra day vola - you are wasting precious intellect on spoos
ReplyAgree with nico. US dull.
ReplyYellen shpuld raise rates 2bp. That would help emloyment by hours worked as another 2 million man hours are wasted interpretting it.
FT: spoos could get interesting for a few days; Europe has a bit of a headstart and the US should catch up nicely...
Reply"On the other hand, a blow-out number would lead to some more short term duress for fixed income, but will it really change the dynamic for the Fed until underlying economic momentum returns? Probably not."
ReplyMM - first not sure if you consider 280K a blowout or not - I am intrigued by your comment on its implications for the fed - are you saying that this number is not relevant till IP and real sales hook up? Don't you see a potential core CPI problem brewing regardless of GDP growth being low? The participation rate spike is interesting too - it is dovish in the sense that it says the slack is 'real' and not a figment of Ms Yellen's imagination, but it is also rather meaningless till it translates into higher productivity down the line - in other words, just cuz they're looking don't mean they're gonna find.
That was a pretty strong print. 12-month MA is as high as it has been in the last 20 years, including the late 90's with its white-hot jobs market. Finding weakness in the underlying report by looking at the constituency of the jobs strikes me as goalseeking. So unless the fed moves the goalposts again you have to think rates are rising (with the implicit multiple compression and margin hit double whammy).
ReplyBut never fear, hours later we get Dudley out to soothe the markets fears.
“The appropriate stance of monetary policy will be influenced by how financial market conditions respond to the Federal Reserve’s actions,” Dudley said
If this isnt tail wagging dog I don't know what is. Of course financial markets are not going to like a rate rise, but isn't the "appropriate stance" of monetary policy based on something other than ED's and ES's?
This all strikes me as more of the same where the fed lacks the spine to create discomfort for financial markets. Nevermind that ZIRP implies a limited ability to respond to future problems - its somehow more important to keep financial markets happy today than to have policy options tomorrow?
I get that there is a feedback loop here and markets are important, but lets not kid ourselves - the markets today are not what they were 10 years ago. The feedback loop today is more about markets driving policy driving markets than it is economy driving markets driving economy. In the medium term the fed needs to remove itself from this feedback loop, and the only way that can happen is if they disentangle themselves from the day to day whims of wall street.
But thats not the fed we have today. The way I read this is something along the lines of 25bp by December, than as long as spoos throw a mild temper tantrum (lets call it a 3% decline) they will be on hold for 1H2016. This seems like a flattener trade on 2s10s or something ought to work - if 10yr is working off a hike schedule like we have seen in prior cycles. Also unless this is incorrect the rally in financials today is just flat out wrong - we are looking at a flatter yield curve for 2016, not the steepener driving everyone into XLF.
T - I actually do think your comments imply steepening - the front of the curve will be artificially suppressed by the fed's general lack of ballsiness, while the back end would sell off on heightened inflation concerns both based on ongoing data as well as the fed's lack of will to do anything about it - not sure why u think otherwise.
ReplyI actually think this move will eventually short circuit the feedback loop you talk about, because obviously the back end is what matters for equity valuations, housing prices, borrowing costs, buybacks and the like - I can't even pretend to know the exact nature of the end game, but it will involve some kind of a pass the baton in the next 2 years or so, from the over dependence on fed policy to more of a fiscal move, which as we know can only be brought about by clear signs of financial instability or panic.
As for the move in financials, I am skeptical about the rally because there is way more to them than just the yield curve - I mean if the curve keeps steepening but loan growth is abysmal and they keep getting blamed daily by presidential hopefuls for everything but cancer, how is it great exactly?
MM/Left - any thts on steepening/flattening?
washed up/Mr T, on XLF and financials. Remember that banks have been getting bludgeoned with fees and extra reporting requirements. Diamond's annual letter talked a lot about it. If those just stay the same, they have some good earnings power. And remember, financials are always "Cheap" compared to the market, so it might just be another rotation. MLP's are looking very interesting to me.
ReplyThe bigger question for me will be what will happen to housing if 10 and 30 year rates keep going up. So far i dont think it is that material but above 4.25% in 30year we started to see housing really slow. XHB seems to be shrugging recent rate moves off as well. I think that will be a ceiling again. So we still have some rooom to run there. As for EU, the bunds seemed strong. Perhaps there are willing buyers at 1%.
I am thinking of loning some EDZ5 or EZH6. the market seems to be implying a faster rate path than I think the fed will take. I think its likely the Fed pauses at 25/50bps for a few meeting to re-asses. Any thoughts? Of course if the data does pick up, you probably will get run over pretty quick on itra day moves
4.25% in 30 year mortgage rates that is
ReplyIf the market is really expecting 25bps in September and another in December, as some suggest, then the front end has some catching up to do. 3 and 6 month T bills would be a good place to start watching. The long end has taken a beating, it always gets hammered first, and we think that has some way to go. How far? Well, Abee is right, there is a limit, maybe 2.75% in 10y, 3.50% in 30y, 4.25% 30y mortgage, beyond which a lot of things start seizing up. Right now, we still have negative Schatz, and until that ridiculousness finds equilibrium somewhere more sensible, we will probably see more weakness in US govies as well.
ReplyWe still have our doubts about the real strength of the US economy, jobs market, and the prospect of 2015 rate hikes. It's a good time to just watch and wait, at least until European bond markets begin to be priced more sensibly. At some point the arb created by the spread between US10s and bunds will once again be irresistible.
The only group that matters right now - the banks - are up 8.5% the last 10 weeks. $BKX
ReplyBill Gross on Friday June 5: There is an effort underway to steepen the yield curve
Replyhttp://media.bloomberg.com/bb/avfile/News/Surveillance/vOWKSX5aPGo4.mp3
Finally the virus has been exterminated..with exigent expertise from the macro man gamers. So'long you f¥¥ckers down south..e
ReplyEmails on rigging LIBOR rates went directly to the trade desk at the Bank of England...
Replyhttp://www.wsj.com/articles/boe-official-received-emails-relating-to-libor-manipulation-prosecutor-says-1432729106
Is this speculative or something else...
Replyhttp://soberlook.com/2015/06/unprecedented-levels-of-activity-in.html
Is this fraud or something else...
Reply1 in 5 companies now reports "made-up, phony numbers" inflating earnings > 50%
"An analysis of results from 500 major companies by The Associated Press, based on data provided by S&P Capital IQ, a research firm, found that the gap between the "adjusted" profits that analysts cite and bottom-line earnings figures that companies are legally obliged to report, or net income, has widened dramatically over the past five years."
"At one of every five companies, these "adjusted" profits were higher than net income by 50 percent or more. Many more companies are in that category now than there were five years ago. And some companies that seem profitable on an adjusted basis are actually losing money."
http://www.cnbc.com/id/102740412
Not fraud, everything is perfectly legal, as always.
ReplyWhat I find more interesting is the fact that this topic grabbed some headlines. This has been going on for a couple of years again and nobody complained, including my friends the analysts.
Am building a short on china with same sizing method used early 2000 on nasdaq. Rock n roll
Replynico - make sure you also buy extra underwear just in case.
ReplyJust kidding - good luck and all that - out of curiosity what would u see as the best vehicle to short? FXI?
BBG: "With China’s stock market more than doubling in the past year, consumers like Tom Zhang are deferring big-ticket purchases to chase the rally. The Beijing resident was deciding between a Buick and a Volkswagen Passat before concluding his 300,000 yuan ($48,000) would be better off in equities. He was right, as his holdings soared to 800,000 yuan in value in little more than a year. “I feel like I am good at this, that I can make more,” Zhang, 26, said as he left a branch of Qilu Securities Co. in Beijing. “Why would I kill the hen when there are more eggs on the way? I can always buy my car later.”
ReplyLooking very leaky all over the place ... pretty happy with my healthy cash pile at the moment.
ReplyTurnaround Tuesday tomorrow?
Incidentally, on the U.S. curve ... I think the Fed could well hike FASTER than the market expects, but (obviously) with a lower terminal rate. Key takeaway; don't look at the 2s10s, all the action will be in the 2s5s. I think 2-year rates will break higher, but not 5y ... indeed, look for 2s5s inversion for when the pain starts in earnest.
Of course, this is inconsistent, I guess, with most players already having locked in low rates at the LONG end, but there are always someone out there who needs to fund short.
FED June hike scenario: What if Yellen was to hile rates in June, to show she's not so leaky ahead of the DoJ investigation??
Replyanon 5:28pm
ReplyThere is no DOJ investigation. That was stated to provide her cover in refusing to comply with Congressional subpoena. Remember Solyndra and being told there was an FBI investigation. The FBI raided the company, removed the documents and dumped them in the Potomac. No prosecution. It's remarkable that almost every federal agency thumbs there nose at Congress.
June hike would be effing hilarious. But it isn't going to happen, sadly...
ReplyWe are all working on the September playbook now. Let's assume that MM and CV are both right about parts of it, and this is becoming consensus now anyway. A September rate hike, then a December one, and maybe two more in 2016, to reach a 1% level in mid 2016, and perhaps a terminal "New Normal" rate of 2% in 2017?. If that's the case, everyone who is in T bills out to 3y on the curve has some adjustments to make. The long end may well be close to its equilibrium level here already if this model is valid, or at least most of the pain is over. Waiting for a bit more bond revulsion before filling my boots.
mREITs are being hammered again. It's two things. One, long end rates drifting higher hurts the book value of MBS in the portfolio. Second, fear of higher short term funding rates. So the guys with the largest leverage are probably in some difficulty. In the end by September it will all be OK, but further dividend cuts might be ahead, by which time it's probably time to buy. Not much action in the preferreds, a sign that Real Money isn't as bothered as small punters, who always get this one wrong almost every year, buying a 8% yield in the common at the top and then bailing out of it when it's back up to 12-15%.
washed-up i borrowed a couple of (hundreds of) nappies from my baby girl. The sizing is meant to survive another 20% upside. You never know with the kings of gambling but it is already parabolic enough imho
Replyyou are curious about the shorting vehicle yes well, i might tell you the day before i cover my short
Overheard some folks recently saying they were moving money from "stocks and bonds" into "fixed income". With market insight like that, one can only speculate on how silly things might get when people hear that interest rates went up recently and "it might affect the bonds in your 401k" "But I don't have bonds, I have fixed income..." Oh, Lord.... deliver them....
ReplySo MM and CV are laying out a case for Plan A. The September to Remember. There is still a Plan B, of course, which is to do no such thing as we re-enter a period of Slow Growth and hikes are once again put on hold - a Carneyesque BoE-style manoeuvre. Kevin Warsh has suggested recently that hikes are completely the wrong way to go and that the Fed should instead reduce the size of the balance sheet first by allowing bonds to mature. Readers will remember LB also suggesting this as a way to moderate the rate of rise of the USD associated with Plan A. The interesting thing is that although the long end is clearly out front in anticipating Plan A, the short end of the curve is screaming Plan B. Someone is going to be wrong....
ReplyThis is quite good:
ReplyYour Grandfather's Bond Market
In a nutshell, very slowly rising rates erase nominal returns, real returns probably negative. 1950s bond market. To make any money at all, you have to swing trade or take on extra risk...
anon 5:28 - beginning to think they might have leaked it to you! Isn't this how rumors get started? And couching it as a defense for the DoJ - hannibal lecteresque duplicity indeed...
ReplyJokes aside - I think a June hike is certainly not a tail event, and way more likely than the market thinks, but odds still favor a later hike.
Left I really think the mREIT selloff is baby with the bathwater, in that on balance there will be more origination open to them as the Fed's MBS portfolio starts to wane - therefore the curve steepening means NAV taketh away, NIMs giveth back - think of it as prospective margin growth in an increased market share environment - all assuming a lack of idiocy on part of the management teams when it comes to hedging of course.
As far as the Fed exit via reduction in balance sheet - what do you think they'd rather do - raise rates and hope the dollar doesn't immediately them over, or sell treasuries into an illiquid, strong equity, increased inflation environment thereby sending rates into a tizzy and weakening the housing market, and who knows what else?
Speaking of the dollar, anyone have a theory for why it randomly dumped today? Heavy Euro buying is what I heard - crystal.
A disturbance in financial markets is near IMO.
ReplyGreece's only hope of a favorable deal may be by panicking markets
ReplyShort interest on $SPY= 320M shs ($67.1B); 1st time since Feb'12 mkt been short > than 300M shares.
Reply