Prices

Although yesterday's price action was generally uninteresting with respect to the magnitude of most market moves, the reaction of fixed income markets to the tepid CPI print was perhaps worthy of notice.  The data was, after all, disappointing, with core inflation registering its first decline in the y/y rate of change since last May.

Even with the strong recent performance of risk assets, one might have thought that this might kindle another round of fixed income buying, particularly with Dennis Lockhart disavowing any support for a hike at this month's meeting.  However, bonds and the short end both sold off moderately on the day, which was all the more surprising given that equities took a break from their recent squeeze.

An incipient signal that enough's enough and that it's time to start moving the price the other way?   Perhaps.  This weekend's IMF/WB meetings in Washington will see the usual confab of policymakers and punters, and it's not an unreasonable assumption to think that word might filter to Ms. Yellen that things are a bit better than she feared in her recent teeth-chattering communications.

It's interesting that despite steepening (and breakevens) being a consensus trade since the dovish Fed a month ago, neither has really performed particularly well.     2s10s still looks like a decent steepening bet with a tight stop below 100, but the concern is that there's already a lot of money in the trade that may rapidly be getting bored.  And if the Fed does sound more upbeat in a couple of weeks, isn't there a risk of a further flattening?

It looks like a great set up to go short the front end again (markets "always" top on good news, remember?) , but man...it's hard to get excited about it.  Macro Man's lost count of the number of times he's thought that over the last year or two, only to get a few days of joy and then...pffffft.  As such, he might sit this one out until it becomes a lot closer to can't lose.  If that means missing it, so be it.

Elsewhere, speaking of prices work has continued apace on Macro Man's CTA proxy models.  He's at the point where he has it cranking out position recommendations in a few markets, most notably FX.   As a sense check, he compared the historical model output with IMM non-commercial net futures positions as a percentage of the spec open interest.   The results are broadly encouraging; the charts below plot the IMM position versus Macro Man's for the EUR, JPY, GBP, CHF, AUD, CAD, and MXN:

The scales for the model positioning are relatively unimportant, as they are a function of a totally arbitrary vol target.  What's encouraging, however, is that the models tend to pick up on the broad moves in IMM (read: CTA) positioning, albeit with a bit less noise.  The correlations for every currency but the CHF are in the 70's, which is a pretty solid result for a single model trying to replicate the behaviour of a population.

For what it's worth, current model positions as of last night's close are as follows:

There's plenty more to be done; Macro Man ideally wants to model a range of markets and compare the P/L of the models with historical CTA performance.  If he can come close to matching it, then he'll know he has a pretty good handle on what trend following positions are out there...and where they are likely to flip.

Stay tuned!