How about a nice warm cup of...

Another day, another shot across the bows from the Fed.  True, Boston Fed President Eric Rosengren was speaking in a personal capacity, rather than attempting to convey the will of the committee.  But in a modern  forward guidance, dot-plot world, every comment- particularly those of voters- is parsed closely and can influence (or confuse!) the public as to the likely trajectory of Fed policy.  And so, less than a week after Janet Yellen sang hosannahs to the fixed income rally and the magic pixie dust that it sprinkled over the US economy, Mr. Rosengren said yesterday that

" my own sense is that financial markets may have reacted too strongly. My assessment is that the U.S. economy is continuing to improve despite the headwinds from abroad. If my forecast is right, it may imply more increases in short-term interest rates than are currently priced into futures markets"

Well gee, I wonder why?  What could possibly have caused red December eurodollars to rally nearly 40 ticks over the last three weeks?   Could it be.....Satan?  Err....no.  It was the FOMC, of course, the very committee Rosengren votes on.  As it happens, Macro Man generally agrees with the statement

quoted above.  But with the policy outlook so cloudy and the mechanism so reliant on communication and guidance, it would be quite helpful if the Fed could get their house in order and deliver a consistent message during this time of uncertainty.  Perhaps it's beating a dead horse, but it really would be nice if the non-core members would just...well, you know. 

 Elsewhere, Spooz 'n' blues were in the news again yesterday after Jefferies' David Zervos was rushed to the hospital after sustaining a dislocated shoulder while patting himself on the back.  It's certainly true that the most mindless of "liquidity grab" strategies has performed strongly since mid-January, though it did have a nasty hiccup starting in early December.

While the chart above seems to suggest that the strategy has worked in more or less a straight line, the performance under the hood is actually quite interesting.  Macro Man ran a rolling 6 month Sharpe ratio calculation for his version of Spooz n Blues, and he found that the strategy a) exhibits a semi-regular cyclicality, and b) that performance is generally deteriorating over time, registering lower highs and lower lows in the Sharpe.

None of this is to suggest that a "sell everything" call is the proper one at the moment.  If anything, the chart above would suggests that the strategy could continue to deliver solid returns for another few months.   Of course, valuations matter, and one might reasonably consider that prices for both legs of the strategy and other risk parity vehicles are stretched.   When even an erstwhile arch-dove like Rosengren is saying that the front end looks stretched, it's difficult to be enthused about being long, Yellen's paeans notwithstanding.

Then again, with crude starting to melt lower, perhaps Yellen will be able to shift focus back towards domestic inflation when she plays her next round of whack-a-hawk.  Either way, with the market seemingly complacent (if that's possible) on crude, a slump back to $30/bbl would almost certainly be an unwelcome surprise.  As a reminder some of the risk management stops in Macro Man's intermediate CTA model come in at around $34.   He ran a short term version of the model as well, which suggests that quick-trigger models are perched on the precipice of going short again.

 Macro Man has stuck with his initial short SPX clip of the other week.  While it's roughly 1% offsides, it's been fairly easy to hold, as equities have shown little sign of upside impulse.  Given the downturn in crude and the impending earnings season, he way well decide to let a bit more fly over the next couple of days.