If you read this blog, you undoubtedly know that today's employment figure was a blowout. Beyond all the headline strength, even wages seems to have broken out; no doubt Yellen will take her Phillips curve model a-dancin' tonight.
It seems relatively safe to say that the under-30's should be bracing themselves for the first rate hike of their adult lives, barring cataclysm in the next six weeks. Markets understandably gapped on the print, and from a big picture perspective it's difficult to escape the idea that the multi-month correction in, say, the USD is over and normal service has been resumed.
It turns out that the "old school" methodology of buying a few USD every day to build a position was the correct one. That having been said, it seems reasonable to expect a little pause from a tactical perspective. Gold, for example, has been crushed, falling 8 consecutive days. Did you know that the longest daily losing streak for gold since 1980 has been 9 days?
Meanwhile, the eurodollar 2-10 curve trade first noted in this space at 99 is now 25 ticks onside, having hit the 38% retracement level from the downmove off the summer highs. Prudence suggests trimming 1/4 to 1/3 of the position to provide monetary and mental capital to re-add on a dip.
It looks like macro may be coming back....just in time to send this morning's post to you friendly local asset allocator!
It seems relatively safe to say that the under-30's should be bracing themselves for the first rate hike of their adult lives, barring cataclysm in the next six weeks. Markets understandably gapped on the print, and from a big picture perspective it's difficult to escape the idea that the multi-month correction in, say, the USD is over and normal service has been resumed.
25 comments
Click here for commentsBlisteringly good jobs number. As most of us comment-ers have been saying here for some time, the Fed will very likely put up rates in Dec. Bwahahaha...
ReplyLB is in New York City. Hmm.. the economy is never as weak, nor as strong as the shrill headlines would have us believe.
ReplyWe do hope no-one was bending over in front of Bucky this morning, we did warn about that. Hammock Capital was a happy place this morning as we outperformed equities and fixed income quite handily in the opening half hour.... we expect some FX follow through Monday, anyone buying commodities here wants their head examining. Next week, we'll see. Right now we are enjoying another day of portfolio outperformance over late-arriving momos.
It's always a blowout when we forget to play NFP Bingo. Innit, MM? LB was just having a lovely chat with a front desk bloke at the broker the other week and he was all about "short-term bond funds" to avoid "duration risk". Oo-er, missus. He's taken a right old rodgering this week. We attempted to debate this issue by drawing the likely YC trajectory post-hike (flattener), and thereby point out his true risk was of sitting in 1-2y and leaving his bottom in the air, but to no avail. This is probably why such blokes are on the desk, rather than on a trading floor, one suspects.
If anyone finds LB's reading glasses, can you please leave them behind the bar with Juliana at the Spanish place on Mulberry? Thanks. We are not quite sure what occurred, but they were mislaid.
well that should get Stoxx and Nikkei excited as the US markets pause
ReplyUp and at them!Up and atom
@LB - lol. Good work & rgds to Juliana ;)
ReplyWow. September NFP was really weak though so maybe this was to some extent a return to in line numbers, i.e. 200k average? But hourly earnings are impressive.
ReplyStill some juicy moves in yields make it tempting to start snagging up some TLT again. Wonder if that will work as well as the "buying of USD little by little" did during that little pause it had. In any reasonable medium term perspective it just seems that you're playing on the winning side against the ability of the government to sustain too much higher yields given a larger debt base. As long as UST yields go up, USD goes up (and oil down) unless the Bund follows, but Dr. Aghi will appear soon enough to drag the patient back to bed.
Shockingly good NFP may have surprised everyone, including the Fed, and I think we may see them backtracking in the next few weeks from the hawkish talk (see Polemic FMOC market expectation model). I see this as a bonus to be cashed in and intend to cash in on any remaining dollar longs early next week on follow through.
ReplyAlthough the expectation is now strongly in favor of a fed hike next month, have we not been here before ?? I am not going to bet they won't but no way am I going to bet they are based on their record to date, where they've missed every opportunity to hike since 2010. There is a reason for this and it is because they always pike out. They could surprise there someday, but who knows when that will be.
I can't believe how the market gets swayed from one end to the other with fed rate expectations, when actually nothing has happened.
Also, if they wanted to tighten, would they not first start draining reserves ? Increasing IOER to increase the Fed funds rate seems very inefficient and will put them at risk of being criticized for transfer payments to banks unnecessarily.
At the end of the day, if they were really worried about inflation, the huge amount of outstanding QE is a powderkeg for future inflation in the right environment, but they are in no hurry to drain it, so I see them in no real mood tighten or to hike. They seem instead to still be worried about deflation and talking hawkish periodically to retain their credibility as inflation fighters.
Booger, the Fed follows the markets, not the other way around ;-) When the market gives them the green light they will go. Very simple
ReplyApparently past Nov jobs reports were very strong as well, only to see proximate months decline. One month isnt a trend in NFP. That said, agreed with you on FX, ride it while you can
"Booger, the Fed follows the markets, not the other way around ;-) When the market gives them the green light they will go. Very simple"
ReplyExactly - the much more interesting thing to watch will be steepening/flattening of nearer maturities i.e. will the market price in one and done or continued tightening - my bet is the former.
Quite a performance from spoos considering the dollar breakout - instead of displaying any real worries, we just mildly rotated between EM/commodities and tech - maybe they are just waiting for the former to go to zero weighing so it effectively turns into nasdaq and they can rally it to the moon!
Anyway, one day's price action and all that.
Abee/washed: although it is undoubtedly true the fed will do what the market indicates the few days before the decision (in that they do not want to "surprise" the market and cause any hiccup), they have somehow managed not to hike for so long by massaging expectations.
ReplyNow that a rate hike is expected, I think it is very possible and probable that they will take back the hawkish talk in the next few weeks and bring back "policy flexibility", that the Dec meeting is still "live" etc. etc. It is also possible and probable that we will get some data points in between that are not so super. We still have a month to go and with FF futures pricing in 70% rate hike now, I think there is a good chance it will be lower between now and a few days before. So perhaps next week is a good place to cash in dollar longs even if there is a rate hike.
If it was a 2 days before then, I would have a punt on the odds playing out.
And mixing up the above is whether Draghi announces anything at the next ecb, which is 2 weeks before the fed meeting? It would be surprising if the ECB acted knowing the Fed was likely to act and if the ECB acts, one presumes that it would be likely to make the Fed less likely to act.
ReplySpoos is in the same place it was back in April when USD and euro were here also. Dax is significantly lower (800 pts or so).
ReplyBbg article
Reply"China’s exports declined for a fourth straight month in October, adding to signs of mounting headwinds facing the world’s second-largest economy.
Overseas shipments dropped 3.6 percent in October in yuan terms, the customs administration said Sunday, compared with a 1.1 percent decline in September. Imports fell for a 12th straight month, declining 16 percent in yuan terms, after a 17.7 percent decrease the prior month. The trade surplus was 393.2 billion yuan ($61.9 billion)."
A big week od adata ahead (globally) and then, there's this on Thurs:
Reply"The Board of Governors of the Federal Reserve System is hosting a two-day conference on "Monetary Policy Implementation and Transmission in the Post-Crisis Period," to be held on November 12-13, 2015, in Washington, D.C.
The conference aims to bring together academic and central bank economists, financial market practitioners, and policy makers to stimulate debate and research on frameworks, channels, and instruments pertaining to the implementation and transmission of both U.S. and foreign monetary policy since the end of the global financial crisis. Approximately one and a half days of the conference will focus on academic research, while the remainder will feature policy presentations and panel discussions."
Anon 11:40 am
ReplyGlobal and domestic figures look horrific. Market "should" be down huge Monday. China Oct. Exports Fall 6.9% Y/y in Dollar; Est. -3.2%. Very strange trading day in Tel Aviv Maof index, opened with a gap higher and closed on the low as outside key reversal.
China gold reserves in ounces ( 55.38 million troy ounces or about 1,722.5 tons )
Replyhttp://imgur.com/RxkplSH
Gold means nothing or does it?
If anything, I have become an expert in picking out road signs and pop corn in order to remain Anonymous
ReplyLB found his reading glasses, they were behind the bar with Juliana. Thanks to whomever left them there.
ReplyWaiting for 1-2 days of follow-through strength in USD before making our next move. A big dump in gold would not be a big surprise tomorrow morning. This has been an interesting and tricky investing year, and it's not over yet.
meanwhile container price on the Shanghai-France route dropped from $4000 to $450 in 4 years. No typo there, and no chance that China is anything but hard landing.
ReplyRosy reading glasses for anyone buying risk assets here.
Nico
ReplyIf Ryan Air did cruises ...
Oh, those awesome CDS spikes...good memories..wasn't that a time...
Replyhttp://imgur.com/7KrwVCs
Out of interest MM, why trade the 10-2 spread?
ReplyWhy not the 10-1 or the 7-2 ... for example
Any basis for this or just as good as any at expressing long vs. short
I like to look at 8-wide calendar spreads because the time difference- two years- roughly approximates the length of a tightening cycle. Moreover, with the curve so flat, you get more bang for your buck with wider spreads IMHO. As for why start with the 2nd contract vs the 1st...well, it kind of mitigates the risk of short term distortions (and keeps you in the trade if you forget to roll!)
Replyok thanks.
Replyand why not just short the 10?
is there some margin benefit?
(have never traded int rate futures)
There are some margin benefits, and trading spreads reduces the beta to the underlying just a touch. Moreover, there are carry considerations as well; the ED 2-10 spread has positive carry (ie, the ED 1-9 spread is currently 5 ticks wider than the 2-10 spread, representing positive carry; ED9 is currently 12 ticks higher than ED10, representing negative carry.)
Replythanks - very interesting on the carry point
Reply