But Mousie, thou art no they lane,
In proving foresight may be vain;
The best-laid schemes o' mice an' men
Gang aft agley.
-Robert Burns, To a Mouse
Well, Macro Man had the right idea to get long yesterday, but apparently so did everyone else, as equities were bid when he woke up and only briefly threatened to tickle negative territory in the morning before ripping in the afternoon. You know what they say about the best-laid plans...well, you do if you can read Scots, at least.
That's alright, at least his short-end trade came good, right? Err....no. The Dudley comments that the case for a September lift-off being less compelling than a few weeks ago were not particularly surprising- one might have thought that the recent 14-tick rally in EDZ5 was pricing just that- but that didn't stop the short end from ticking up further, because hey- PermaZIRP!
The long end received no such succor, however, as stories of Chinese selling similar to that reported here yesterday vis-a-vis Bunds began to percolate. The data was pretty solid, too; the 3m/3m rate of change in core durable goods turned positive for the first time all year.
Interestingly, spot VIX remained stubborn, closing at 30.32 despite Spooz going out more or less on their highs. Of course, the curve is sharply downward-sloping, which eliminates one of the prime attractions of selling vol (i.e., the roll-down of the VIX curve.)
While Macro Man is of the view that the fractured micro-structure of the market is a clear reason for implied and realized volatilities to be higher than those observed for much of the summer, he is not yet convinced that current levels in any way represent the new normal. As such, he will continue to use the 30 level as a touchstone for the sustainability (or lack thereof) of any market correction; with VIX here, he is happy to wait for his price (or price pattern.)
Interestingly, the FX market more or less disregarded the Dudley comments that the short end apparently took so deeply to heart. USD/JPY's back north of 120, the euro sub 1.14, and cable got shunted down the lift shaft some 370 pips below Tuesday's high. Macro Man frankly isn't sure what drove that weakness, as sterling performed comfortably worse than even the euro. While it's tempting to suggest the ongoing rise of left-wing loony Jeremy Corbyn has something to do with it, positioning is a much more likely culprit (what's new?)
In any event, the surge in the big dollar yesterday in spite of the Dudley comments would suggest that there was a lot of clearing out done earlier in the week, and that perhaps a few babies were chucked out with the bathwater. Now, the last week of August isn't normally the time to start rebuilding positions, but then again this has been a pretty unorthodox last week of the summer, so it seems likely that there was at least some real buying going on.
It's interesting to note that October seems to be getting a bit of play now as a "compromise date" for the Fed's lift-off. Like a lot of people, Macro Man has been running with the idea that the Fed would want to lift off in a quarterly meeting, with the full panoply of support via the SEP/press conference, etc. He still holds that view, but acknowledges that the Fed has stated pretty explicitly that every meeting is a live one, and they could in theory call a press conference to explain something after a non-quarterly meeting. The narrative emerging from this week's Jackson Hole conference will be particularly interesting in this regard.
At 3 ticks, the Oct/Nov Fed funds spread offers better than 7-1 odds of an October lift-off. It's not like betting on the Houston Astros to win the World Series (100-1) before the season starts, but it's pretty darned good as a cheap punt if and as a narrative over a possible October lift-off builds.
After all, cheap bets offering high potential payouts are a cornerstone of the best-laid plans of building a macro portfolio.