Looking backward, looking forward

Looking backward  Friday's payroll number had something for everyone:  a strong headline (confounding many expectations, including Macro Man's, a solid household survey (U6 declined again), but abysmally weak earnings.  Even there, mitigating circumstances arose, given that the survey week included the 12th but not the 15th, thereby possibly missing some pay periods.

To be sure, such a calendar scenario has generally spelled a negative surprise on the wage front, as the chart below (which Macro Man got second hand but believes is from Barclays) illustrates.


Still, given the Fed's desire to see wage growth to provide an impetus for broad-based price rises, Macro Man figured that we'd see a dovish response to the data.  As it was, the data proved to be an interesting litmus test for sentiment, and the fact that the short end sold off, tried to rally back, and then sold off again was telling.

That being said, there was zero movement in the front March contracts, with the market still pricing a rather minuscule chance of a rate move next week.  This may be Macro Man's book talking, but it would be refreshing to see them not kowtow to to desecrated altar of market expectations for once and instead trod their own path.  Note to Fed:  your credibility isn't enhanced if you can be led around by the nose.

In any event, there would appear to be more room for fixed income repricing just based on the risk asset pricing to date.   While the short end and Spooz don't quite march in lockstep, they're correlated enough to suggest that Eurodollars (in this case, the slope between the 2nd and 6th contracts) have some catchin' up to do.  All the more so insofar as risk asset weakness has been the "error term" to explain the Fed's reticence to move forward with normalization despite generally positive news on both planks of the dual mandate.


Looking forward  It looks like more of the same from China, where the news from the NPC appears to be full throttle (and half speed) ahead.   True, the official growth target was nudged down to 6.5-7.0%, but this appears to be more an acknowledgement of reality than a deliberate downshift.   After all, the budget deficit target was moved up (to a larger deficit than last year's target, though a smaller one than last year's out-turn) as was growth in M2 and credit.  Less bang for more bucks...it's an all-too-familiar story.

The commitment to keep the RMB "basically stable" can be seen through a lot of lenses...after all, that  phrase can be used to describe Charlie Sheen on occasion.  The ongoing emphasis on the RMB from the authorities provides a strong suggestion that it is now a, if not the, primary focus of FX policy...with the implication that USD/RMB will be much more a function of broader dollar volatility than it has in the past.

Moreover, "basically stable" can still entail the odd moment or two of weakness...just ask Charlie!  Macro Man's calculation of the CFETS basket is now on its lows, as you can see below.  Note that lost in the shuffle of your author's personal fast market last week was a release on the CFETS website noting that the basket was at 99.63 at the end of February, down from 102.93 at the end of November.   Macro Man's version is some 15 bps below the official version...but then again, it was 14 bps below the official version when the latter was first promulgated last December.  He cannot for the life of him figure out where they get their numbers from, but he is fairly satisfied that he's copied their methodology given how closely the index changes have matched.


For choice, Macro Man would expect the index to dribble a little lower for the rest of the year, particularly if the dollar experiences a setback against other currencies.  It's far easier to "hide" a depreciation when USD/RMB is edging lower...
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Anonymous
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March 7, 2016 at 11:42 AM ×

It's interesting to see so many people here view the current situation as a bear market. However when I see oil approaching $37, and iron ore jumping 19% (the biggest one day gain on record), coupled with unilateral agreement that the ECB, BOJ, PBoC will do whatever it takes to support equities, I fail to believe the bearish case. We will see...

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just a punter
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March 7, 2016 at 11:59 AM ×

I am starting to thinking some of these anons are blind, cause regulars like pol etc have been going on about long commods, inflation surprise and ems before it even happened.

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abee crombie
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March 7, 2016 at 1:39 PM ×

Interesting NFP thoughts MM. However if most of the recent slide in yields has been due to the lowering of Term premiums, (TIPS discussion before) wouldnt it be better to play the long end (or 5 year at least) vs the short end in terms of normalization? No offense but I think trying to short the front end has been a bitterly brutal trade, though I do hear you on risk vs reward.

On Yuan, can ppl please stop beating the drum that China needs a lower FX rate to stimulate trade. The country is already running record trade numbers! Yes exports are down (as they are world wide) but imports are down even more. If China devalues the Yuan whom are they going to export to? Uggh, this line of reasoning is so rampant in the markets today.

Now if you talk about capital flight, that is a much different story

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abee crombie
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March 7, 2016 at 1:57 PM ×

While we are on the topic of employment, anyone know where one can find good data on Chinese employment figures? I know there is the PMI component and also some surveys from banks and China Beige Book, which isnt easily accessible to all

Any thoughts would be appreciated.

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Anonymous
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March 7, 2016 at 4:04 PM ×

Real world..."Hundreds of financial analysts are being replaced with software."

http://www.nytimes.com/2016/02/28/magazine/the-robots-are-coming-for-wall-street.html?_r=3

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Anonymous
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March 7, 2016 at 4:07 PM ×

Anonymous
just a punter said..."I am starting to thinking some of these anons are blind"


There have been 20-100+% pops in dry bulkers today, That is based on what improvement, what fundamental?

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Anonymous
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March 7, 2016 at 4:54 PM ×

Oil at 2016 high. SP500 crosses 2000. Dow futures up 100 pts. It's a bear market ;-)

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Anonymous
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March 7, 2016 at 4:54 PM ×

US : Jefferies says "February Fed Labor Market Condition Index (LMCI) fell 2.4 points after falling a downwardly revised 0.8 points in Jan.

Oh my, that's the worst LMCI since 2009.

imagine that

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Beancounter
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March 7, 2016 at 5:02 PM ×

I'm firmly in the 'the world is not ending camp' and have been for a while. IMHO the market has been completely divorced from reality, certainly in terms of commodities, em currencies, AUD etc etc. Loads of mispricing and hopefuly some macro punters took advantage and made some money. It's been a pretty good macro environment and continues to be so, not that you'd think it, looking at the big macro fund returns.

But hey what do I know, I'm just a beancounter.

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Anonymous
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March 7, 2016 at 5:07 PM ×

Is LB's "Happy-Clappy Index" peaking today?

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just a punter
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March 7, 2016 at 5:11 PM ×

Well for aud its understandable, the rba has come out on record stating they liked audusd at 71 (And later even said they liked 68). Now at 74 the local talk is of another incoming soon, but who knows.

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abee crombie
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March 7, 2016 at 7:49 PM ×

For the perma bulls, JBTF types, and aglo traders check this out


http://jpmorgan.reutersinsider.com/jpmorganview/


I think it explains the headwinds the market faces to attract REAL money over the next several months.

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Confused
admin
March 7, 2016 at 7:49 PM ×

SPX is following Oil tick for tick, and has been for some time now. Anyone have a clue as to why? Why is the oil price mandating the price of an equity index that has nothing to do with oil? And if equity indexes are ruled by correlation algos, why does anyone bother with fundamental/macro analysis & the like?

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Leftback
admin
March 7, 2016 at 7:58 PM ×

We have enjoyed this little burst of reflationary enthusiasm, as we are structurally and perpetually long a small basket of reflationary vehicles, via miners and EM equities, European integrated oils and the like. So yes we have loved it, and we are even long some VALE so the squeeze in iron ore, crude oil etc has been quite lovely, thank you very much. But a squeeze it clearly has been in commodities, and as such it will lead to a sell-off, as once the shorts cover and a few elephants trample them into the dust there will be no-one available who needs to buy. So we are just trimming happily once again today.

Happy-Clappy? Oh yes, it certainly was very jolly first thing today after all that Chinese nonsense about 7% growth that led to many commodity shorts experiencing the fate of Edward the Second. Seriously though, soon we will be looking for the Chinese GDP inside a fortune cookie [which also has nothing to do with Chinese anything, that's my point!].

Mr Market looked at the SPX 2005-2010 area (the mid-December dip) and turned right around and retreated. Lots of things seem to very extended, whether one looks at sentiment or technicals, many upper Bolly bands are now stretched to the limit of their elasticity etc...

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Must Read
admin
March 7, 2016 at 8:13 PM ×

http://www.theguardian.com/world/2016/mar/07/revealed-30-year-economic-betrayal-dragging-down-generation-y-income?CMP=share_btn_fb

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Leftback
admin
March 7, 2016 at 8:17 PM ×

A quick note to point out that at local maxima (i.e. short term Tops), Spooz start to diverge negatively from the upper Bolly band, usually after a series of kisses without penetration. This clearly happened in May 2015, early November 2015, and it is going on again right now. Happy-Clappy sentiment measures obviously prevailed on all three occasions. We're cautious here.

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Polemic
admin
March 7, 2016 at 8:27 PM ×

must read - Must not read,

Another "someone else has got what i want, I can't get it, it's unfair, give it to me" article. Yeeeeeee aaaaaaawn

The great leveler is death, Just wait. Or come to power, make smoking compulsory for the over 60s (or to be safe over 50's), ban state medical aid other than morphine to cancer sufferers over 70, and have 'do not resuss' tattooed on everyone over 80.

I blame too much pocket money for raising expectations!

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Polemic
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March 7, 2016 at 8:44 PM ×

On markets and oil tick of stick for SPX .. no it isn't. Oil up boat loads SPX fading. this leads on to LB's observation re divergence and correlation break down. We saw it at the bottom and I think we are seeing something similar now, so agree with LB.

And on commodity squeeze. Just look at performance differences between metals with futures mkts vs the that don't. the non futures ones not feeling much love. So agree there too. nearly run.

The specs are giving a life line to commercials who are drowning by giving them better levels to hedge at buying them a few more months, but equally delaying the demise of folks who should already have been taken out of the commodity producing gene pool. There is a difference between striving to prolong life and striving to prolong death. In may cases the latter is currently applying.







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Just a punter
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March 7, 2016 at 9:59 PM ×

Pol you not going with ur inflation commods feedback loop anymore ?

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Polemic
admin
March 7, 2016 at 10:57 PM ×

Hi Jap.

I am going with it but it is still set in speculative land. Ie prices up inflation pushes higher.. specs buy more. As for physical spot supply/demand not much has changed yet.
Certainly not by 19% worth of iron price as seen today

But inflation expectations seem to track oil prices pretty accurately. Pick what causality you want out of it but inflation expectations are also set in speculative land.. by definition.

My biggest worry is Thursday re ECB. Draghi appears to have an unholy relationship with the energy components probably because of that infl exp / oil correlation. I am worried it causes an underdeliverance of stimulus.

So.. inflation feedback loop in place. Just think speed of washout of spec shorts means a pause until that inflation is seen.

Seems to me that the markets of 2016 work like this...

Pick a theme
Trade to theme
Re-peddle theme armed with price move to justify.
Momentum algos models join in and price accelerates. Assumption theme is correct because price is doing what would be expected if theme correct.
Look for macro/stats/correlations/overlaying charts from history to support theme of theme.
Push price further.
Pick up ruler and pencil and extrapolate a line as to where price will go.
Use ruler price momentum theme and theme of theme to rubberstamp 100pct validity of forecast.
See everyone onboard.

Price stops moving and then reverses.
Just position covering don t worry.
Momentum algos are tripped the other way and accelerate the move.
Question validity of move and push short term positions to long term because the theme is not dead it's only resting. It's price moves.
Start to use facts that have been there all along but ignored to question theme.
See more algos reverse the price as momentum gains.
Have your really really certain position lose so much money you have to close it even though you know the theme is not dead.
Try not to look at theme as you are out of position and the world is nuts.
Blame someone else.
Find new theme.





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Anonymous
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March 7, 2016 at 11:01 PM ×

Remember the S&P at exactly 666 back on the 6th of March a mere seven years ago today? Happy anniversary to all who were there to experience it ...

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Leftback
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March 8, 2016 at 1:07 AM ×

Ah yes. 3.45pm or thereabouts, I remember it like yesterday, it was 666.79, the Bottom of all Bottoms.

Punters ahoy, is it me or is the yen gaining strength and the USDJPY rally failing here? Late-arriving longs didn't notice.

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river
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March 8, 2016 at 1:08 AM ×

@Anon(March7,2016)at 11:01 PM

LB's bottom call:-)!!!


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river
admin
March 8, 2016 at 1:13 AM ×

I have been fan since..helped me decipher Mark Carney's bs regarding int rate hikes. Helped my family save a lot of dough in r/e investments.

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Canuck Banker
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March 8, 2016 at 2:33 AM ×

I don't get the S&P rallying on the back of relation expectations emanating from China. If commodities go up, so does inflation sooner or later, and with that, rates. Would that not end the CB sponsored liquidity orgy, which would crush US multiples? Seems like wanting to have your cake and eat it too.

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abee crombie
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March 8, 2016 at 3:25 AM ×

Chinese export orders collapsed. ...Thank you China for making me look stupid again( see my comments above on trade balance) . Will be interesting to dig into the data tom.

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