Macro Man was confined to his sickbed for virtually all of yesterday, which means he felt only slightly better than those that entered January tilted over their skis long equities. Though he's currently viewing the world through a haze of lack of sleep and decongestants, a few things seemed worthy of comment:
* Obviously the China meltdown has grabbed the headlines, and with good reason. Insofar as the impending lift of the selling ban imposed over the summer was the catalyst for the mayhem, one would have to suppose that the authorities were at least partially OK with this sort of outcome. It's notable that USD/CNH has largely decoupled from the USD/CNY fixings (which themselves have risen smartly), again suggesting that this weakness comes with an official imprimatur. 'Twill be curious to see if the likes of cop[per can hold their recent range bases.
* Given that it seemed to feel like equity-geddon in some quarters, the performance of the US bond market was pretty uninspiring. Yes, stocks managed to claw back a decent chunk of their losses by the end of the day, but if I was sitting long 10's I'd have hoped for a better showing than a lousy quarter-point with Spooz down more than a percent. Williams' expectation of "between three and five" rate hikes this year was probably as close as we'll come to an official endorsement of the view of a hike every quarterly SEP meeting.
* You should never say never or always in this game. That being said, geopolitical concerns are almost always an immediate fade. Macro Man has been hearing concerns over Iran at roundtables for the better part of 15 years, and has yet to see any of those concerns come to fruition. Obviously, you want to keep an eye on what's going on, but he often feels like the professional worry industry vis-a-vis the Middle East tries just a little too hard to keep itself relevant (and paid.) In a year's time, you'd be hard pressed to pick out the latest diplomatic to-do between I ran and Saudi Arabia on the oil chart.
And now, back to bed. Hopefully today will bring clean lungs, a good night's sleep, and clarity on tomorrow's price action.
* Obviously the China meltdown has grabbed the headlines, and with good reason. Insofar as the impending lift of the selling ban imposed over the summer was the catalyst for the mayhem, one would have to suppose that the authorities were at least partially OK with this sort of outcome. It's notable that USD/CNH has largely decoupled from the USD/CNY fixings (which themselves have risen smartly), again suggesting that this weakness comes with an official imprimatur. 'Twill be curious to see if the likes of cop[per can hold their recent range bases.
* Given that it seemed to feel like equity-geddon in some quarters, the performance of the US bond market was pretty uninspiring. Yes, stocks managed to claw back a decent chunk of their losses by the end of the day, but if I was sitting long 10's I'd have hoped for a better showing than a lousy quarter-point with Spooz down more than a percent. Williams' expectation of "between three and five" rate hikes this year was probably as close as we'll come to an official endorsement of the view of a hike every quarterly SEP meeting.
* You should never say never or always in this game. That being said, geopolitical concerns are almost always an immediate fade. Macro Man has been hearing concerns over Iran at roundtables for the better part of 15 years, and has yet to see any of those concerns come to fruition. Obviously, you want to keep an eye on what's going on, but he often feels like the professional worry industry vis-a-vis the Middle East tries just a little too hard to keep itself relevant (and paid.) In a year's time, you'd be hard pressed to pick out the latest diplomatic to-do between I ran and Saudi Arabia on the oil chart.
28 comments
Click here for commentsMM - I'd recommend a tonic of sliced ginger root, lemon , tea and honey to aid recovery or alternatively introduce it to daily diet
ReplyI forget the best part - eat raw chillis
ReplyIt would take a lot to get MM to eat raw chilis. He should probably stick to the ginger root and lemon. Probably he went out all night and then took a turn for the worse after West Ham doing the double over Liverpool.
ReplyEquity bears might be nibbling on some chilis today though, looking at the overnight action in yen and bonds, there does seems to be a little bit of follow-through on yesterday's USDJPY unwind back to October levels. We'll see how the trading day unfolds in Europe - after more signs of weakness there punters just dumped € and EURUSD is below 1,08 again.
Agree with MM's thoughts on bonds, but we haven't had a good panic in equities or another puke in oil prices yet. I think we should say let's see the first two employment reports of the year before we all sign on to the Four Off The Floor rate hikes idea. You used to be a lot more of a Fed skeptic, MM. What happened to you? Did they take you in the Eccles building and brainwash you one quiet night last summer?
While we are on the topic of bonds, another simple commentary here from a seasoned portfolio manager and market observer with a long memory (Marie Schofield) who thinks the bull market in bonds is alive and kicking into 2016. We agree:
ReplyBond Market Raises Caution Flag
LB: perhaps it's worth a small punt on shorting EUR.USD here. It is not improbable that Draghi comes back with another easing package in the not too distant future and short eur is certainly a less crowded trade than before the last ECB meeting.
ReplyNico, Abee: agree that cad is long term value at 1.4 on a range basis, but with a RBC cut a likely scenario in the next quarter, I would wait for that to occur or be more priced in before going long CAD. Depending on where oil is, CAD could be a great long the day after the next rate cut.
AUD.CAD appears to have broken that amazingly steep trendline for the last 1000 pips.
China Securities Regulatory Commission (CSRC) : This market will not go down. We guarantee it.
Reply"And the regulator will set limit to the proportion of shares that are allowed to sell for a certain period. Details of the rules will be released in the following few days."
http://tinyurl.com/j8kqwyr
Tom DeMark January 4 at 2:35pm
Replyhttp://www.bloomberg.com/news/videos/2016-01-04/what-china-s-selloff-means-for-u-s-stocks
Simple pattern in play:
ReplyCN equities - SELL
EU equities - SELL
US equities - BUY
"The WSJ reminds us oil is not the only commodity trading at multi-year lows. Metals are spectacularly cheap, too, and likely to get cheaper as huge supermines come on stream. These new mine projects were started during the boom, and because they can be very expensive to maintain when idle, they are being started up even though some are likely to run at a loss. The result should be still lower metals prices."
Replyhttp://acrossthecurve.com/
Further weakness lies ahead after Turnaround Tuesday, [note that this is in itself a frequent bear market phenomenon], which is allowing a few cheeky longs to slip out of the door unnoticed. If we are interested in spotting bear market dynamics now, we might expect to see a change in the market's perception of the employment numbers to Sell the Rumour (sell the ADP number on Wednesday and the day after, down to support levels) and Buy The News (buy the BLS NFP number on Friday, triggering a squeeze one week ahead of equity options expiration). Not sure if we are there yet, but it's something to keep an eye on.
ReplyI'm sorry, but the Accelerating Recovery crowd clearly spent the holiday snorting Charlie in Aspen and have no grasp of reality. It's going to be a long winter for the Hikers and Hawks Club, and Treasury shorts are in for a very rude awakening before long, once bond markets absorb the reality of the retrospective GDP corrections and realize what is actually going on in America.
This is not a problem. I get it, I really do:
ReplyThe explosion of settlement fails in US Treasury markets continues:
http://tinyurl.com/z8ml7yo
completely agree on the fade of the middle east troubles....normally those frictions would be expressed through an oil surge (which would be some kind of fade anyway), but without that tool to reflect this heightened friction, hard to really see how this is going to register on the global risk appetite-o-meters. There are significant things to monitor in Saudi and Iran, and we have do have some major changes to contend with...not just oil strategy but also w Saudi deputy crown prince (or whatever he is called) grabbing the reins, Saudi dry powder shrinking against a backdrop of shale technology etc...so something to monitor but hard to get too excited about a trade off it (but for maybe selling SPX vol right now).
ReplyThat's correct Macro Man. Ginger and Lemon and everything you've ever experienced will seem frivolous. Oh my, hasn't that lemon got some chi in it said the patient in bed.
ReplyJust attention diversion on part of the Saudi..
ReplyMaybe they were afraid of the Arab Spring, hence are trying to keep the population occupied
on the theme of being saviours of the Sunni faction. Who needs modern day comfort which was bought with dinosaurs oil.
The Fed has had difficulty getting its inflation forecasts right for some time. Given that inflation targeting (and not employment data) is now arguably the central tenet of Dame Janet's policy agenda, one might be forgiven one's skepticism:
ReplyFed Model Sees Lower Inflation Ahead
There is, of course, a version of events that has a recovery of economic activity in Europe and a firming of energy prices that then triggers a recovery in EMs, a sudden and somewhat disorderly drop of 10-20% in the USD over six months, and the eventual unleashing of a nasty little bout of Stagflation in the US. It is possible this is what Fed hawks are most afraid of, but of course this problem would be entirely of their own making, having jawboned the dollar higher relentlessly for two years.
With oil supply levels still off the charts this seems like one of the more unlikely scenarios in the immediate future. Brent has been forming a bottom, but if the recent technical supports break, the price of crude threatens to fall still lower towards $30 and even into the $20s. There will be knock-on effects in high yield, Treasury, US energy and emerging markets if this does happen and this remains our base case for the time being.
I know MM doesnt like zerohedge but this one is good.
Replyhttp://www.zerohedge.com/news/2016-01-05/we-frontloaded-tremendous-market-rally-former-fed-president-admits-warns-no-ammo-lef
Will the FED change direction? Seems people in general try to outguess each other on when the FED will ease again.
Leftback - Regarding inflation...it's always been a choose your stat type of measurement. Fed wants to use core CPI because it tells the story they want people to follow. Median CPI which is a better measure in almost all ways is already at 2.46%. It won't take much recovery in commodity prices to see over 3% pretty quickly. Now I don't believe that the Fed will hike 4 times this year but every bp they raise will increase monetary velocity and increase the inflation number.
ReplyI'm talking my book (I work in the oil industry) when I look at inflation data so grain of salt here, but there are two courses of action for investors like myself. 1.) GDP recession, >3% inflation and Fed hikes. 2.) GDP recession, >2% inflation and no more Fed hikes. It's not a pretty picture for retail folks like myself but a decent cash position, TIPS (or iBonds for individuals), and a commodity allocation seems likely to weather the storm better than most.
As always I'm open to criticism.
" I don't believe that the Fed will hike 4 times this year but every bp they raise will increase monetary velocity and increase the inflation number"
ReplyInteresting contrarian perspective and one that feels out of the box, but only because of recent history - there certainly used to be a school of thought that suggested that the initial stages of fed hikes tended to be pro-cyclical not as an effect, but as a cause - needless to say, the adherents to this view have been beaten, gagged, clubbed, and locked in the basement for a few years by the de-flationistas - thanks for those muffled sounds from downstairs Mashall Jung - you may be on to something there - stagflation can be cooked up multiple ways and thats certainly one.
Washed - I'd like to claim I synthesized the concept, but I'm not that smart. I will refer you to Michael Ashton who runs the blog: http://mikeashton.wordpress.com
ReplyMichael's blog is a great primer in inflation for people like me who don't know too much. He's a founding father of CPI swaps and CME's CPI futures contract. A good summary of his position on interest rates, monetary velocity and inflation comes from a 2013 entry that states:
"Inflation doesn’t respond to rates but to money. And not to reserves, but to transactional money. Transactional money responds not to total reserves, but to banking activity and the resulting level of required reserves…which the Fed is unable to directly affect. When the Fed begins to taper, and then to somehow drain reserves, I predict it will have almost zero impact on the inflation process until the excess reserves have been drained.
Indeed, if interest rates rise when the Fed begins to do this, it will perversely tend to increase the velocity of money, which tends to vary inversely with the opportunity cost of holding cash balances (that is, velocity goes up when interest rates go up, all else equal). It’s not the only thing that matters, but it’s pretty important.
Now, ordinarily when the Fed is raising rates, they’re also draining reserves – so the increase in money velocity is balanced by the decline in money to some degree. That won’t happen this time. When rates go up, velocity will go up, but the quantity of (M2) money will not change because it is driven by a multiplier that acts on required reserves. That means inflation may well rise as interest rates increase, at least for a while."
@Anon - 4:36 PM
ReplyYes, this was v good (and amusing). To have an FOMC member state: we (the Fed) bought over +$1 trillion in market securities and front-loaded the equities rally, and the ECB, BOJ and PBoC also inflated equities markets via QE.
Makes me laugh when I think of all the people (quite a few here) who said: "Central Banks aren't pushing up equities markets" lol.
@Marshall Jung very insightful - many thanks for that link (why didn't I know about it?).
ReplyBasically the idea is that rates threaten to rise, hence mortgage activity has a mini spike as people bring forward purchases, corporate chieftains have a last little pillage the coffers to buy back stocks party, capex is front loaded etc etc - I get it - problem is the biggest channel for that effect, given the general malaise in industrial capex and the unattractiveness of equity valuations, is housing - if it stays reasonably strong (and to your point, if crude stops slitting its wrists on a daily basis) then we could very well see this friendly little blast from the past called stagflation make a cameo appearance in the next 6-9 months.
Just a side note that if that scenario came to pass, being long spoos and blues (yup, that rock of modern era portfolio construction) would perform about as well as a S&M club in Riyadh.
All very reasonable and classical macroeconomics there, Marshall, but where do you see ANY evidence of an increase in the velocity of money?
ReplyFRED M2V
As for inflation, at these low levels you can generate a lot of noise around the mean. For example, my personal CPI is much higher than 2% [b/c I am a renter in NYC] and I don't buy much oil or gasoline, but if you own a house with no mortgage your CPI might be negative this year, so you can see there is a lot of game playing with inflation calculations. But to use a physics analogy, I am not sure the usual rules governing the analysis of rate hikes and money velocity holds down here near Absolute Zero, where instead of Superconductivity we seem to have Infinite Resistance to monetary velocity. We are still in an era of ZIRP/QE, look, even if the Fed has moved off the Zero Bound, the balance sheet remains enormous and there are no imminent signs that the Fed will shrink it any time soon, so you can argue we still have highly accommodative policy with low real interest rates.
[Btw, I am not talking a part of my book [10% or so], where I remain long EM stocks, miners and European oil stocks, in case I am badly wrong about the 2016 outlook for US rates.]
@washed - I understand your concern about valuations and capex opportunities. However, I fear that the whole analysis starts veering off into investor psychology at that point. Theory tells us that velocity will increase because opportunity cost of cash is high when interest rates go up. But theory is just that right? Maybe people will turn their noses up at trading cash for interest returns and just hold balances in a bank account.
ReplyFor now I'm keeping an eye on CPI for signals and respecting the fact that any sign of life in the commodities markets will have an outsize effect on inflation.
@Left - You have valid concerns, and I can't refute them in any meaningful way. If a measly 25-50 bp hike cycle doesn't feed through to velocity (let's give the FRED chart a quarter or two to respond) then it may be an issue of excess reserves. And that isn't something the Fed can, or wants, to do anything about. And if that's the case then we are going to be stuck in some sort of Dante-like level of investing hell where returns are practically non-existent for retail folks like myself.
ReplyI am not sure our investment returns depend on Fed's action. Collectively, maybe, but it is not exactly the point on this blog. We all try to outperform some benchmarks and certainly work to beat the Libor here.
ReplyI would think that the additional economic activities motivated by the expectation of more rate raises would be substantial to make a difference on financial markets.
would not be substantial ....
Replyfor the above comment
Extract entrails from chicken. Read before disgarding. Then make a chicken broth with the remainder.
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