One down, four to go

Well, by the sound of it, we're one down, four to go in terms of lift-off next month.  Dennis Lockhart's comment that he is "very disposed" to put rates up next month is about as explicit a non-binding pre-commitment as you can get.    One would have to presume that Jeff Lacker, traditionally a hawk, would also fall on that side of the fence, so perhaps in reality it's "two down, three to go."

So of course, equities ripped and the dollar lost ground today, because #LOLMacro.  Macro Man's more aggressive pals at the 'Squid might point to their own Jan Hatzius re-affirming his bid to join a rather literary indie music group as a rationale for post-payroll price auction;  your author prefers to chalk it up to positioning, algos, and the calendar.   LOLMacro indeed.

It seems reasonable to posit that the rally-sellers will emerge in Spooz over the next half percent or so; stripping away the bells and whistles of a candle chart, a simple line graph illustrates where the futures have typically failed on a closing basis.  As you can see, it's not terribly far away.


The euro, meanwhile, is starting to remind Macro Man of his collegiate attempt to read Henry James for a literature class; it's wearisome in the extreme and leaves one without the will to press on.  Contrary to Macro Man's expectation, the yen has been a much better trade.   Of course, the commodity complex (both currencies and underlying) and selected EM have been better still, so there you go.

The zillion dollar question, of course remains whether the Fed can engineer some sort of policy normalization without creating a negative spillover.  After six-plus years of QE and ZIRP (and at least another one in the pipeline outside of the US) it is of course tempting to answer with a resounding "no."  However, it is worth recalling that equities typically don't properly crumble until financial conditions get restrictive....and Yellen has been at great pains to promise that that won't be the case for a long time.  Then again, what the Fed thinks is restrictive and what the economy/markets feel as restrictive aren't always the same thing.

That credit spreads have started to widen is telling; that phenomenon is usually a (very early) precursor to the top of the economic and equity market cycle.   However, it seems premature to try to identify the ding-dong highs of the cycle before the Fed has even removed the ladle, let alone to punch bowl.



As such, it is perhaps more proper to regard the lift-off not as the beginning of the end, but as the end of the beginning.
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Nico G
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August 11, 2015 at 7:21 AM ×

yep

the (credit) iTraxx crossover 190 double bottom in July 2007 was indeed the perfect alarm - credit people move briskly while it takes a couple of months for the six pack Joes to boost and boast their equity portfolios - although you could argue that the smart money has already sold its high growth stocks. I am totally biased but imho das Spooz has already topped

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washedup
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August 11, 2015 at 8:59 AM ×

Been waiting for the CNH re-valuation for a while now - there will be a few more of these in our future I contend, plus a general evisceration of the RR to around 6% from 17%, with no real impact.

MM re: the negative spillover comment, as I have posted numerous times, the wise men of the federal reserve do NOT get the negative convexity impact of currency moves - this always been and shall continue to be their achilles heel at major risky asset inflection points. The irony is that if they did, it still wouldn't matter because frankly there is very little of that world they control.

In and of itself, 25 to 50 bps is nothing, what matters of course is if its enough to tumble some dominos via currency impacts, In that sense this is a very different regime than say 2004-06, which is often cited by the 'rate hikes are good in the beginning' crowd. It does bear some similarity to 1999-2000, but if the biggest mass hysteria in the history of the US financial markets in modern times is one's exhibit A for creating a melt-up case, I don't have much to say.

Nico - spoos topped in sentiment terms last Sep the day of the Alibaba IPO, in an orgiastic culmination of the two mass delusions of our time, namely the relentless rise of China and startup FOMO - the fact that its managed to put up another 100 or so points since then (with who knows how much more to go) just goes to show how much a few big names are pulling the index, not to mention the under-appreciated fact that shorts went the way of the dodo bird the last 3 years. Of course now bulls of various stripes point to the very lack of positive sentiment as a reason to buy!

LB - have a hunch you may have to get off the hammock soon - things they are about to get interesting...

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Anonymous
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August 11, 2015 at 9:41 AM ×

Guys, would like your view on EURUSD level for end year, I see point for USD strengthening but question is how much already priced in and whether worth the risk? Thanks

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Anonymous
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August 11, 2015 at 10:30 AM ×

Well German exports to China are getting the double whammy of slowdown and devaluation. Dax understands this. Apple sales might not be so hot either....

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Cityhunter
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August 11, 2015 at 11:24 AM ×

@Anon 10:30 am

Yep, German car makers have been massively hit. No way out yet.

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Bruce in Tennessee
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August 11, 2015 at 11:54 AM ×

Well, I'm probably not the only doofus to make this comparision, but in this day and time, devaluations are more akin to a all-inclusive tariff to me...overnight 2% advantage on your exports and 2% more costly on those imports..

...If you are trying to build a command consumer economy with homegrown goods....in a time of economic weakness...

...BUT...if you called it a tariff.... a rose by any other name....

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washedup
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August 11, 2015 at 1:52 PM ×

bruce - the only conundrum is that supposedly that is exactly what China was moving away from, i.e. transitioning to a consumer focused economy with fewer exports and higher imports - this action, while understandable to me, really should make people re-think the thesis that China will be anything more than a deflated toy factory to the rest of the world in the medium term which I define as 5 to 7 years. This tells me Beiing is panicking about the hit to exports and worker job security caused by a weakening KRW, and is finally smelling the coffee on the global currency moves of the last 9-12 months. I assume the recent BoP data was the disaster that spurred them into this, but that stuff tends to move in the same direction for a while.
So Chinese goods which represent 30% of our import basket just got 2% cheaper - doesn't seem like a big deal, but you know, butterflies and wings and all that.

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hipper
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August 11, 2015 at 1:59 PM ×

Did China really purposefully devalue or was it just a coincidence? Cause it looked like they just took a step toward a "semi-floating" currency through allowing the daily middle fix to move accordingly to previous day close instead of just pre-determining it. So doesn't the market get more control now? And a perhaps more interesting question would be what the real value of CNY should be now. Overvalued or perhaps fair territory? USDCNY was never below 6 before and why should it go there now if accumulative capital flows have already been net negative for 5 straight quarters. Certainly if it turns out to be overvalued then it's going to start weighing further on the weak trade growth.

Well purposeful or not I guess considering the already lax global trade environment this can't be a good thing, especially for exporters to one of the few major surplus countries. But the question is since August almost half way through will a 2% FX move by itself have enough time to create any meaningful impact on any possible export data. Don't know but even if it did it doesn't seem plausible to expect that said impact would have enough time to spill over to other economic indicators before Sep 16-17.

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Winginit
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August 11, 2015 at 2:29 PM ×

A simple trader’s contemplations; China devalues along with an economy that’s starting to look, shall we say, shaky.
This possibly putting pressure on Chinese inflation/prices. Adding a devalued currency to the prices in the rest of the world, where does that leave us? The west, the buyers of China manufactured goods. The Chinese export of deflation continues and hiking of rates in the west will be re-evaluated and postponed? Because soon we’ll have BMW and the rest of the Chinese-exporting western companies having to admit they were in fact wrong when they said they didn’t see any slowdown in china.

Will we ever see rates normalize..

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Leftback
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August 11, 2015 at 2:40 PM ×

End of an Era, indeed. I can remember a time when most of MM's portfolio was long CNY forwards... that and AUDUSD made for some easy riding for a few years. In other news, the US Treasury decline to label China as a currency manipulator - because, well "they are all doing it..." As far as the end of year EURUSD targets are concerned, we guess that there may be some surprises in store as EU data picks up, and that USD will be swinging lower by December, so our guess is a lower EURUSD dead ahead but the May high of 1,14 will be reached, and we might even break into 1,15-1,20 area by year's end. Feel free to hit me over the head with that later if you want.

A small victory lap today for LB (and others here) who predicted not only that the Festival of Grextension would be celebrated, but pointed to August as the likely time for it to be held, based on the repayment schedule. As such, holding a few calls in Greek names has been an enjoyable if minor distraction from the main task at hand, viz. looking at charts in the hammock.

Today's move in Treasuries feels like it is overdone, like someone was short across the curve and got rear-ended in the classic manner by the overnight move in China. So this might be a good fade for a trade. Another group likely to get taken out and shot again in the next few days are the metals and miners, as USD will surely firm again this week.

Btw, totally with you on Henry James, MM. Turgid in the extreme. The Bostonians, yawn... we won't be reading that one in the hammock. It's raining here today so we are in the indoor version of the Hammock. We have become quite fond of this style of investing, and we think there will be more summers of the Hammock ahead as the tightening cycle continues at glacial pace, and punters get used to day trading Treasury futures and options to stave off the boredom.

Like MM, we don't see a Fed hike precipitating a "Big One", but 7-10% corrections often happen when there is a lot of margin debt and also when no-one thinks there can be a 7-10% correction ever again, Mr Market being a bit naughty that way. We are also waiting for some babies and bathwater action in August, one last panic in the REITs, MLPs, muni space???

Enjoy your energetic non-hammock day, everyone.

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Winginit
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August 11, 2015 at 2:50 PM ×

If the contemplations were not clear above: I obviously mean western companies exporting to China might have to re-evaluate

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Anonymous
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August 11, 2015 at 3:30 PM ×

Gone in 60 seconds...
"In the middle of the night, a startup that had raised $5.5 million dissolved and disappeared. It deleted its Twitter accounts, Facebook pages, and Google+ profile. It changed its website to say it was "pausing operations.""

http://www.businessinsider.com/zirtual-suddenly-laid-off-400-employees-via-email-2015-8#ixzz3iW6ZZlKO

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Anonymous
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August 11, 2015 at 4:20 PM ×

Gee, I thought PR was going bankrupt...Puerto Rico Sewer Water Authority files to sell $750M bonds via BofA, JPM, Popular, Santander

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CV
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August 12, 2015 at 8:16 AM ×

Amen MM,

"That credit spreads have started to widen is telling; that phenomenon is usually a (very early) precursor to the top of the economic and equity market cycle. However, it seems premature to try to identify the ding-dong highs of the cycle before the Fed has even removed the ladle, let alone to punch bowl."

This is the key! Fits my world view exactly.

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Leslie Lim
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August 22, 2015 at 9:47 AM ×

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