Muddling through

Yesterday was the least interesting day that Macro Man can recall in quite some time.  To be sure, it was Columbus Day in the US, which is kind of a holiday (and kind of isn't), and a number of other countries were also closed.  Still, given the OMG China/Fed/Oil/Payrolls/Spooz! whirlwind of the last couple of months, it felt like a typical quiet summer's day got lost in the space/time continuum and emerged, blinking, on October 12th.

What's moderately interesting is that lost in all the sturm und drang of Battleground SPX, other asset prices that are typically useful signposts for either financial stress or euphoria could not seem less engaged with the great economic debates of the day.  USD/JPY, for example, rinsed everyone who was involved in the span of a few days in August, and since then has done quite literally nothing.   Macro Man calculates the 1 month realized vol as 4.5%, but even that seems high given that the price seems stuck at 120 give or take a few pips.



To be sure, this could merely reflect a lack of positioning and more interesting (or painful) trading conditions elsewhere.  The euro, for example, has broken out of the pincers observed last week, as has gold.  On the surface, that might suggest a further bout of USD weakness, particularly in light of the ongoing renaissance in EMFX.  On the other hand, oil got severely rejected in its first go at the 100 and 200 day moving averages yesterday, so it's difficult to call this a can't miss opportunity to play dollar weakness.

Indeed, if anything Macro Man would generally characterize this as an abeyance of the broader theme of dollar strength.  How one wishes to trade this clearly depends on time horizon, intellectual flexibility, etc.   Personally, when it comes to secular themes (where the default position would be long dollars in this case), he tends to view being flat as equivalent to being limit short, a moderate position as being flat, and a limit long position as being...well...limit long.   At the moment he has a very small long dollar position that is the equivalent of a modest short in this framework.  More nimble punters may well be tempted into outright dollar shorts as the Fed flip-flopping continues.  (There is, however, no truth to the rumor that a popular breakfast food chain has purchased the Eccles Building and plans to rechristen it as the Waffle House.)

Speaking of the Fed (because it seems a necessity to do so on a daily basis), Macro Man had a little fun poring through some data yesterday.   A number of Fed speakers, including Yellen, have made a bit of a song and dance about inflation expectations and concerns that there could be some erosion of the public's long-term view on future price rises.  One would normally expect that expectations, particularly those in the long run, would match either the central bank's target, or at least resemble the trajectory of realized inflation.

Macro Man plotted the 1- and 5-year forward inflation expectation series from the University of Michigan alongside the core PCE deflator, which the Fed believes is the most accurate measure of inflation.   Quelle surprise: did you know that the last time that core PCE inflation was the same level as either inflation expectation series was 1992?


While it is true that current 5-year expectations are at the lower end of the range of the past few years, it's also the case that the highest level of expectations came in early 2008...which wasn't exactly a harbringer of any type of spiral, and was largely looked through (except by a certain European central bank).  Moreover, the trend in expectations over the past couple of decades pretty much defines "stability."

As a citizen, what's more troubling is that the central bank seems to think inflation is a lot lower than the populace does, assuming that expectations tend to at least loosely anchor around observed inflation.  That's an argument that's been fought and lost, however, so there's not much point getting worked up about it.   As it is, any further erosion of any measure of the public's inflation expectations can and will be taken as the next excuse for FOMC inaction.

Switching gears briefly, at the time of writing China has released RMB-denominated trade data, which show yet another larger-than-expected surplus in September- indeed, a record month surplus of Y376.2 billion.  Although imports were slightly weaker than expected, the large beat of the consensus was driven by stronger-than-expected exports.



Perhaps uncoincidentally, the PBOC fixed the RMB at its strongest level since the deval, with the strongest daily rise in nearly a year.  Thus far, Macro Man's base case on China appears to be playing out, i.e. a muddling-through as the market's worst fears slowly defuse. Muddling through is never a sexy forecast, but quite often it's a correct one....
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Anonymous
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October 13, 2015 at 7:37 AM ×

I worked the City in 1989 and 90 and each day made yesterday look a jubilee party. Participants are like junkies and NEED more vol. I say: Any day that doesn't see murder mayhem chaos crash is an f-ING good one. Hail the boring! --Cass

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Polemic
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October 13, 2015 at 7:46 AM ×

Here you go MM.

http://economistsview.typepad.com/timduy/2015/10/brainard-drops-a-policy-bomb.html

Whilst talking about muddling.. have some more Fed muddling.

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Booger
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October 13, 2015 at 11:47 AM ×

Actually, I thought the trade balance for China was worse than expected in terms of what it means for China GDP growth. The imports number was below forecast, and the forecast was already very low based on last months dismal number. This to me indicates a bigger slowdown in GDP than likely priced in. This is quite EM negative and has kicked oil down but there is some divergence as EM FX has not really adjusted.

I don't think this has been fully digested but when it is, I think it is likely the EM rally is over. Which is a shame as I was hoping for 0.75 on aud.usd to short from. 0.73 will have to do and leave some ammo dry in case it gets to 0.76

On usd.jpy, yep it is really coiling up and when it breaks it should be real interesting.

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Polemic
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October 13, 2015 at 12:01 PM ×

Chinese data can be what ever you want it to be but the key point is that it wasn't disastrous and the bear case is the norm.

This roll over in risk is so so so textbook I find it hard to believe it isn't too good to be true. I am running trailing stops to trip into longs again. If it goes down, no pain. If it turns and keeps going up then good stuff,. If it spikes up and then dumps then OWWWWW..

full thoughts here http://polemics-pains.blogspot.co.uk/2015/10/a-very-public-rollover.html

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Anonymous
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October 13, 2015 at 12:16 PM ×

re polemic 12:01
I wish i could share your enthusiasm with spoos at 2020 but to me they look to have limited upside and i have been scale seller while trying to hold onto to eu longs.
the earnings beat game is not one you should fall for, bar is low but 2016 estimates way too high- i think you will not get any clarity from cfos and those estimates will come down as we get into year end. with margins also under pressure spoos are a big yours.
i am trying to stay nimble and while was lucky to catch the rip post non farm, i am firmly back net short.
good luck all

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Booger
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October 13, 2015 at 12:18 PM ×

Pol, we have had 10 days of rallying, so I am not sure we need seriously bad news to correct here, merely worse than expected news or even no good news. I think it is at least good for a few cents on EM currencies. Spoos I am staying away from shorting but EM currencies seem like low hanging fruit after the recent bear market rally to me.

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Polemic
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October 13, 2015 at 12:20 PM ×

Very true Booger, but if this is going to go down properly again and get a move on then I would consider a new weight of bad news in the scales of direction a help. A normal correction fine,, as I say I am not long .. I will be going long if this turns higher again.

(Pol notes the comment bull/bear indictor at 2-0 to the bears so far)

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Nico G
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October 13, 2015 at 12:52 PM ×

make it 3-0

Europe has rolled over this morning as expected

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Nick
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October 13, 2015 at 1:19 PM ×

4-0: few % lower till whatever it takes later in the month.


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Nico G
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October 13, 2015 at 1:25 PM ×

new J&J $10bn buyback announced 'to stabilise sliding stock price'. oh really

high 5 guys keep on borrowing at bottoming rate to buy your own overvalued stocks while you cash in on your options before it's too late. Do you have any idea of what happens to your balance sheet when rates shoot up and your equity shrinks?

in a couple of years we will look at this 2014/2015 era as the worst corporate mistake/wealth extraction in financial history. I do not remember a more acute, obsessive quest for immediate wealth than today, at the expense of shareholders and the society at large

meanwhile in Brazil more top executives are coming forth to pay back the $100m they got in bribes from Petrobras, kindly hosted by Switzerland

get rich at any cost, steal from your government, send your money to UBS, and your kids to Miami. The proverbial south American fallacy

back to caipirinhas

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Corey
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October 13, 2015 at 2:18 PM ×

FRBSF letter models natural rate of interest much lower: http://www.frbsf.org/economic-research/publications/economic-letter/2015/october/gradual-return-to-normal-natural-rate-of-interest/

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winginit
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October 13, 2015 at 2:38 PM ×

Earnings starting to come in market will keep a close look on what’s going on in China.
I am willing to keep this short of mine for a tiny bit longer. Guess that puts me on the bear side.
4-1 for now

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Polemic
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October 13, 2015 at 2:42 PM ×

5-0 I think you mean

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winginit
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October 13, 2015 at 2:51 PM ×

If 5-0 on the bull/bear indicator means I am a bear. Yes sir.

Just thought it was the other way around.

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Anonymous
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October 13, 2015 at 3:04 PM ×

Shorts should be fine here, they can carry on averaging down until Dow 20000 lol.

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Nick
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October 13, 2015 at 3:21 PM ×

5-1, where are all other buyers?

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