Caring about weak Chinese data is sooooo last month

And so the big week begins not with a bang but a whimper.   China's industrial production and fixed asset investment data for August both disappointed expectations, with the former printing just 6.1%- well below the government's 7% growth target.  The latter, meanwhile, registered its lowest level since 2000- two years before China's entry into the WTO and back when Pets.com was a thing.


On the plus side, however, retail sales data was a bit stronger than expected, continuing its recent uptick and putting paid to at least a few of the recent fears about the impact of the stock market decline and modest currency devaluation cutting into household demand.  As Macro Man noted last week, the rise and fall in equity prices was so swift that households probably didn't have sufficient time to adjust consumption patterns much in either direction.


                                  Source: Bloomberg

Although it is possible to construct excuses for the weak output data on the basis of the (in)famous military parade, it would seem churlish to deny that the economy continues to decelerate.   There surely cannot be many people these days who don't believe that China has slowed on both a structural and cyclical basis.  The important issue, however, is the degree to which that slowdown (and fallout from the FX regime) is priced into markets.   Macro Man has to confess that the more he looks, the more it seems that a lot of bad news is already in the price of a number of assets; heck, even this weekend's data mix offers at least a microscopic glimpse of the rebalancing that the West has been calling for for years.  Moreover, Friday's change in the RRR rules should further loosen domestic liquidity conditions, further mitigating the impact of any USD selling FX intervention.

Elsewhere, Spooz are rallying on Sunday night because caring about Chinese data is sooo last month and Dr. Pavlov Yellen is set to ring the bell on Wednesday; markets always salivate over a nice piece of bear steak seasoned with the essence of dove.  Having called a hike at this meeting some eighteen months ago, Macro Man has to concede that the tide has gone out and the Fed appears to be rather unlikely to move.

Although the normative question of whether extending the period of uncertainty over lift-off is good for anything or anyone, the Fed evidently believes (or at least hopes) that markets will settle if they do nothing on Wednesday (edit:  Thursday, old habits die hard) , so that is the most likely result.  Many readers have no doubt reached the same conclusion for themselves.

Thus, while Macro Man continues to think that his short January Fed funds but still has some juice on a hold to maturity basis, the reality is that they will squeeze higher on a no-go unless the Fed more or less explicitly promises a hike by year end, which seems inconceivable.  As such, he has cut half of the position for a modest profit- it's not a massive winner, but not terrible for a little tactical bet.  Moreover, ringing the register on it will give him the mental capital to re-sell at better levels should the expected squeeze materialize.

Finally, it's triple-witching this week as the S&P has seen its range shrink since the wild events of three weeks ago.  The odds would certainly seem to favor a big move one way or the other, with the combination of the Fed and expiry making the topside appear more vulnerable.   Perhaps that's the case, but Macro Man's already been burned once on the Dax recently, and is mindful of the way that markets have of confounding expectations.  He's therefore inclined to sit tight, though selling Spooz against the post-"crash" highs might bring a little joy from a tactical perspective.  More strategically, despite the bullish readings from his model he remains neutral at best; another 10-15% washout will make it a lot easier to be constructive.

Good luck to all this week.

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Anonymous
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September 14, 2015 at 7:43 AM ×

Dmoes your model stay bullish if there's another 10/15% washout?

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methinks
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September 14, 2015 at 10:28 AM ×

"...unless the Fed more or less explicitly promises a hike by year end, which seems inconceivable."

Why would this be inconceivable? I would think it's a rather elegant solution to the "can they really hike if markets aren't pricing a hike?" dilemma you mentioned in another post recently. Yes, there is the data-dependency mantra of course, so they cannot make an outright commitment to hike in Dec -- but they could still telegraph that they strongly expect to do so, with the caveat that a serious deterioration in the data might call for a change of plan.

This scenario is also one of the few ways for Yellen to build consensus in a meeting where there will be particularly strongly held views both on the hawkish and dovish sides, each of which can plausibly claim support in the data. (The other would be to hike now while pretty aggressively guiding down expectations for the future fed funds path through the dot plot, but I doubt this is what they'll go for as I think Yellen herself is in the Dec camp.)

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CJ
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September 14, 2015 at 11:32 AM ×

couldn't you effectively do the "hawkish" hold scenario by announcing that there will be a press conference following the Oct meeting? That would serve to put the mkt on notice that a hike is coming by year-end...

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Nico G
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September 14, 2015 at 12:49 PM ×

markets will react much worse if Yellenco kick the hiking can down the road (December)

and markets won't be happy if they get the 25 bips hike this week

either way the case for immediate upside on equities - besides expiry technicals - dumbfounds me. i see an obvious spooz retest under 1850 soon enough and whether US and Europe more especially will print a higher low will be a big, big tell the weeks after

for as it is, noone can tell where equities will trade by year end we're in uncertainty land and that itself bodes for more weakness. You will need real real fear for this market to bottom and we have not seen this yet; any grind up from here would paint a very fragile technical picture

Mr T if you are reading i do not need the end of the world for my view to play out unfortunately i am being very pragmatic, i wish i could be optimistic, but that 6 year house of cards is what it is we are left with super fragile markets for the time being

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Anonymous
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September 14, 2015 at 1:34 PM ×

2015.75 (October 1, 2015) marks the beginning of another trend according to Armstrong’s Economic Confidence Model model.

2007.15 (February 27, 2007) was a major top in financial markets in Martin Armstrong’s Economic Confidence Model. The date was set back in 1985. 27, 2007

Shanghai stock index plunged 8.8%

February 28, 2007

DOW drops 400 points, India down 4%, Singapore minus 3.7%, Japan down 2.9%, South Korea minus 2.6%, and Hong Kong down 2.5%.


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Anonymous
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September 14, 2015 at 2:57 PM ×

Fitch: Fed Lift-off Matters for Emerging Markets as EM debt has risen by $2.9trn since 2008

Just 2.9 trillion: Well, get to work. Let's double it.

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washedup
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September 14, 2015 at 5:44 PM ×

MM - nice post as usual - and with reference to:
" More strategically, despite the bullish readings from his model he remains neutral at best; another 10-15% washout will make it a lot easier to be constructive."
I get a strong sense that is THE consensus at this point among puntville denizens - needless to say, consensus on a trading plan is quite different from consensus on a trading position, but it does make one wonder in what material way events will make people deviate from this script n the coming days. It would be comical, for example, if equities just calmly settled down into a new trading range around 1950 for much longer than proud VIX owners at 27-30 could digest!

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Anonymous
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September 14, 2015 at 9:30 PM ×

As much as i'm yearning for a further washout (Spooz in the 1700s) I don't think we're going to get it. The Fed conference, JBTFDers and the integrity of the Chinese statistical office will keep us out of there for the rest of the year. My money's on establishing a pithy new range here.


I am no technical analyst (in fact i think it's total b/s), but I know a lot of money out there is "technically" minded - wouldn't the 'ascending triangle' on the daily SP chart suggest that we should have passed the point at which the pattern should have resolved to the upside? My TA 101 books tell me that these patterns resolve well before the apex, and Thursday is probs right on that point.

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Macro Man
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September 14, 2015 at 9:59 PM ×

Actually Anon, it looks more like a rising wedge to me, which is a bearish (in this case) continuation pattern.

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washedup
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September 14, 2015 at 11:12 PM ×

anon - these congestion triangles are continuations 2/3rd of the time - break of 1940 opens up pretty decent downside technically - its certainly possible the fed meeting creates that chance.
That said, my point, and one I think u agree with, is that the max pain move here is for the market to not go anywhere for a couple of weeks and just f@#k with a market thats paid through its nose for gamma.

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Anonymous
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September 14, 2015 at 11:47 PM ×

Small speculators have never been as net short Spoos according to cftc report. Large short equities and long vix coming into fomc and triple witching.

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river
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September 14, 2015 at 11:52 PM ×

http://stockcharts.com/h-sc/ui?s=$natgas&p=D&b=4&g=0&id=p31528294151

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Nico G
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September 15, 2015 at 10:22 AM ×

European charts are literally hanging over a cliff and a myriad of long-only friends are sweating this week they still have not trimmed their long exposure

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booger
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September 15, 2015 at 1:17 PM ×

Surely, there must be a bit of a risk on rally if Yellen waits again. It seems too obvious, but that has been the pattern of the past and we haven't broken down enough to warrant being so bearish as to break based on a non rate hike. 2020-2050 seems like good value to look for short spoos post FOMC.

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