Climbing and descending

Macro Man is back in his seat after enacting the past few weeks' of price action in financial markets on the saddle of a bicycle.  First he went up, then down.  Soon he was going back up again; like the recent squeeze in oil, this rise was particularly painful.  Then he went down again, but not as fast as before.  Finally, he went back up, though not as high as the first couple of climbs.  Sound familiar?

Wednesday's piece seems to have been reasonably well-timed, as the ECB cuts its forecasts for the first time all year, increased the amount of each bond issue it can buy, and left the door open for an increase in the amount of the QE program.  Unsurprisingly, European equities had a solid day, even if they retreated from their highs.

As noted in the comments earlier this week, European multiples haven't really expanded since the ECB unveiled its QE program.  To some extent, of course, this may simply be a function of price action in EMU government bonds; after all, yields are higher than they were when the ECB made its first purchase.

Moreover, the experience from the Fed's many flirtations with QE is instructive.   While the first couple of QE episodes were helpful in maintaining the PE multiple of the SPX (multiples fell after the programs ended), they don't appear to have been especially helpful in pushing those multiples definitively higher.  Only QE3- the only QE program that wasn't immediately met with higher bond yields- succeeded in pushing multiples higher.




So there's no guarantee that we'll see a sharp rise in European multiples unless the ECB can jam Bund yields et al. back down.  Even then, of course, there's no guarantee, but it probably wouldn't hurt.

Today, of course, is more or less the last port of call of the S.S. Rate Hike before it sails off into a September sunset.  Market volatility has raised the bar for what the Fed will need to see if they are to move this month; frankly, however, if it's markets that they're worried about then the data is irrelevant...and if it's data that they're worried about, then one could argue that markets should be largely irrelevant.

It seems, however, that many at the Fed prefer to pursue the art of policy alchemy, trying to find the philosopher's stone that will create the perfect conditions- high growth/employment, rising inflation, strong and stable financial markets- for them to embark on lift-off.   Unfortunately, the interplay amongst all of those factors render it virtually impossible that they can all exist at once given the current state of the world.

In any event, Macro Man's model was startlingly accurate last month, missing the NFP number by a mere 7k.  This month's forecast is for a slight deceleration to 188k, which would likely be insufficient to engender a lift-off this month (or, perhaps, next.)   How newly-minted EUR/USD shorts will feel about that could be interesting to see; the ECB apparently gave the market a little carte blanche to have a pop.


Ultimately, however, it seems likely that markets are probably in for a little more up'n'down price action.  Just as Macro Man's cycling season isn't over, the market may well have a few more lung-busting climbs to make....followed by gut-wrenching descents at breakneck speed.   Macro Man can only hope that these moves will be as good for readers' healths as cycling is for his.
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Anonymous
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September 4, 2015 at 9:59 AM ×

Does anyone think that Central Banks are like the oil industry?

The FED is OPEC while the other CB's represent the other side of the oil industry.

OPEC could control the oil sector for so long but, ultimately, became overwhelemed by the oversupply in the market and had to "pull the plug".

The FED has had control for so long. Are they beginning to lose control in the face of other CB's enacting QE, depegging from USD, selling US debt? Is the FED hike moment similar to OPEC's move last year? Similar consequences?

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Error404
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September 4, 2015 at 12:20 PM ×

Anonymous @0959 Interesting analogy. Better than evens chance the answers to your questions are all "yes".

The thing about cycling is that too much is likely to lead to one or more knee replacements. Feels to me as though that's where we're heading - economically and politically. The next couple of years (apologies, for this crowd I should say "bonus accrual periods") are likely to be interesting. Which is more than can be said for today's - or any other - NFPs. Just another set of statistically challenged 'data'points to keep the markets churning. Anybody here old enough to remember when monthly US trade figures were used to the same effect back in the '80s?

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amplitudeinthehouse
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September 4, 2015 at 12:27 PM ×

You in training for the tour de france , Macro Man, while you wait out for the next move. Hey Champ, how did your french stablemate end up after the last leg south of france, he set a cracking pace out in front for the world to see what genius he is, Hey Champ!...Do tell the frenchie his invited south of the Bordeaux for the next spectacle of the hill climb, where we are sure he'll set up another cracking pace due to his obligation to settle your outrageous CONsultant fees for setting up a marvelous spectacle.

CONsultant..LOL

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river
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September 4, 2015 at 1:47 PM ×

Crude stays in BB25

http://stockcharts.com/h-sc/ui?s=$wtic&p=D&b=5&g=0&id=p41298869661

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CJ
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September 4, 2015 at 1:50 PM ×

Absent continued eq mkt volatility heading into the Sept FOMC mtg, I don't see how they can avoid commencing normalization if they truly believe in an "earlier, but shallower" rate cycle.

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abee crombie
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September 4, 2015 at 2:12 PM ×

NFP, well what did you expect? another mixed bag (headline lower, revisions higher, wages higher, private payrolls lower) but not sure it is the number that will make or break the fed this month... that is more likely up to the slot machine which is the S&P 500.

Yen & Nikkei certainly not harbouring good things... S&P might take a cue..

Damn how did I miss the AUD (or CAD) trade .. was between 0.90 and 1.05 for 2 years after china peaked ...lots of time as the party in FX only really started a year ago. Congrats to those who got on it. That is surely something I wont miss next time (but I guarantee I will miss something else ;-)

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Steadfast
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September 4, 2015 at 6:02 PM ×

Totally agree that this Fed is trying to line up way too many ducks in a row before moving, though some recent comments from Fed officials seem to hint that they'd like to back away from this.

August NFP probably not big enough to give September more than a 25% chance. If they don't move, I'd expect them to redouble efforts to keep October & December in play. Net result might still be a modest tightening in financial conditions?

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Anonymous
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September 4, 2015 at 7:50 PM ×

re abee: had audcad forever but just didn't move in the time frame i expected and was eating up risk - got out and a few months later .....
i guess could have got back on but just didn't have enough pnl elsewhere to pull trigger

whats that thing about trading and timing?

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Hwa Jurong
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September 8, 2015 at 2:54 PM × This comment has been removed by a blog administrator.
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