Prepare for the worst, and you'll rarely be disappointed

Under-the-hood price action suggests that there are lot of flamingos being hunted at the moment.  The decline of the dollar is the most obvious, not just in currency terms but also against a range of commodities.  Dollar-led deflation has been a key theme of financial price action  over the last year (even if it didn't make it into enough investment portfolios early enough); given the apparent climb-down from the Fed, it's now being unwound, if only temporarily.

Far from fulfilling Kuroda's hope of generating yen weakness and unbridled Nikkei joy, NIRP has thus far rampaged through Tokyo markets like Godzilla after a detour at the sake factory.  Although not technically a head and shoulders, the USD/JPY formation below is nevertheless ominous, particularly in light of last week's BOJ whiff.   A break below the neckline and it's goodnight, Irene from a technical perspective.

Of course, dollar weakness cuts both ways, as evidenced by the recent renaissance in gold, copper, iron ore, and that Alcoa chart posted yesterday.  Miners have fared particularly well, no doubt because of a combination of rallies in the underlying metals and short covering.   Despite a few hairy moments, Macro Man remains long the GDX  he bought a few weeks ago.   It looks to have broken out, though he wants to see the $17 level go before he considers adding any more.

The distribution of risks around today's payroll number presents an interesting question.   On the one hand, almost all tightening has been priced out for the Fed this year, despite their stated desire to be able to hike several times.  Moreover, the walloping that the dollar and yields have received recently would suggest a significant flush, thereby leaving ample room for both to go higher on signs of strength.

That being said, generally speaking the data has been very weak- substantially weaker than Macro Man was expecting, and clearly not just down to the mechanistic impact of a simple quarter point rate raise.   A very weak number would amplify these concerns, and clearly do nothing to dissuade either fixed income perma-bulls or equity bears from pressing their bets.   Moreover, given how close the dollar complex is to some key technical levels, further weakness could prompt a reassessment from more strategic players.  All in, Macro Man comes down on the side of a weak figure prompting the more violent reaction, loathe as he is to simply extrapolate the last few days' price action into the future.

Perhaps he's also coloured by the output from his model, which has produced its weakest forecast since January of last year, expecting tepid payroll growth of just 145k.   That would almost certainly put paid to March as a rate hike proposition, though the market had already come to that conclusion over the last few weeks.  However, another few months of weak data could well start a drumbeat of recession talk, so any figure that might expedite that process needs to be taken seriously.  While Macro Man doesn't like to bet on the outcome of a payroll number- too much noise, not enough signal- it's clearly prudent to anticipate where the market is most vulnerable.  Prepare for the worst, and you'll rarely be disappointed....