Crazy

It may be crazy, but Friday's outcome may just have opened the door for a Fed move in September, let alone by year end.   It seems nonsensical that this is up for debate; after all, throughout most of history when the head of the FOMC says something like "I believe the case for an increase in the federal funds rate has strengthened in recent months" the market duly responds.

But this is 2016 and this is Yellen's Fed, so after an initial gap higher in short end yields the market had to roar back to unched in quick order.  However, Stan Fischer was lurking in the wings, only to emerge to stick his size nines into the market on CNBC.  ("Hollywood" Bullard, of course, also appeared on the channel before Yellen's remarks hit the tape, because that's how he rolls.)

For sure, Friday's price action was sloppy- apparently designed to separate as many punters from their money as possible.  Or, if you were so inclined, to offer excellent entry points for tactical trades in whatever direction you might care to choose.  EDZ7 is as good an example as any of how messy it was for a while there until the market did the "right" thing.


Bonds have gone right back to test the base of the corridor of uncertainty discussed a week or two ago; if they're going to stop, it's likely to be here.

Meanwhile, for the time being at least the SPX has run out of oomph; 2200 proved to be a significant headwind, and momentum was tailing off even before the recent modest weakness.   That's usually a decent recipe for a correction.


(The dollar is also showing signs of life against a range of markets from the yen to gold.)

While the Fed is (ahem) "data dependent", they've often said that the outcome of policy meetings does not depend on a single number.   However, if one were brave stupid crazy to believe what was said by the inner circle on Friday, then another barnstorming payroll figure this Friday should tilt the balance in favour of a move in three weeks' time, more-than-50-percent-priced be damned.

All that being said, those fortunate enough to have caught some of this move in fixed income space will probably think long and hard about booking some profits this week (ditto for other asset classes come Wednesday.)   In fact, you'd be crazy not to.

Crazy enough to run the same trade for the same reason over and over again and expect a different result...


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Anonymous
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August 29, 2016 at 9:05 AM ×

Could we magic another really weak NFP number like we saw before Brexit vote. Keep the show on the road until Dec?

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Skr
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August 29, 2016 at 11:18 AM ×

When all else fails, Crazy gets the job done. All in.

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Anonymous
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August 29, 2016 at 1:45 PM ×

Hawkish speech friday as could be expected but september will be like : winter (elections) is coming and inflation is not (obviously it's Japan everywhere thanks to your nirp,zirp...) so we stand pat.

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washedup
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August 29, 2016 at 2:30 PM ×

@anon 1:45 that is my base case as well, but MM does raise some valid points about why (gulp) this time may indeed be different.The oddest thing in the speech, maybe even a tell, was the idea that they are close to raise rates but could expand asset buying - why would you want to write a bigger put if you didn't think a rate hike was indeed more likely?
Nah - like I said, I am sticking to my base case.


As an aside, the conspiracy theorist in me imagines a conversation between janet yellen and bill dudley over copious amounts of sherry where they lament their lack of control over 'structural reforms', which is code for fiscal policy, as the reason why their beautiful 5 year plans have only been half successful.

So what would the fed need to do to end up with a lot more influence over fiscal policy? Any opinions? I am keeping mine to myself for fear of sounding stupid.

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wcw
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August 29, 2016 at 3:53 PM ×

'Dovish' notes from Jim Hamilton and Larry Summers make a fellow wonder: is the Yellen Fed not too dovish but too hawkish?

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Leftback
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August 29, 2016 at 4:23 PM ×

End of month window dressing today? Machines buying the Dip? In any case, everything is bid (equities, bonds, USD) and we are back to USDJPY and Spoos recoupling after a decided correlation breakdown last week.

Now that the Fedspeak is over for a while, we should probably do two things: watch the price action (especially in bonds and the dollar) and lay in the hammock for a day or two. MM is likely to be proved correct in that a lot of people will want to lighten up their bets going into Friday - as the NFP number is likely to be the critical piece of data. One wonders whether a strong number would trigger a 5-10% September sell-off and thus provide the FOMC the excuse not to hike in September after all? Too cynical?

Once again, crude oil continues to trade heavy, looks like it will challenge the 50 day again this week after US rig count was unchanged. A break of support at $46 could open the way for a move to $44, and even a sharp drop below $40 isn't out of the question, especially if certain players decide to cash in their leveraged chips and exit the casino. Lower oil prices are still a source of deflationary tail risk that could come home to roost at some point.

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Corey
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August 29, 2016 at 4:29 PM ×

Sept. is possible the same way that "anything is possible" in the realm of possibilities. But, my read is more in line with Greg Ip of WSJ who said something to the effect that Fisher was raising the odds of a Sept. hike to ensure that they get one done in Dec. Anyhow plenty of Fedspeak left, so we shall see.

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Leftback
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August 29, 2016 at 6:01 PM ×

Obviously there were times in the past where ADP was wildly out of step with the BLS number, but of late they have been closer to the mark. Nevertheless, employment number week often seems to set up a trading situation where the ADP number triggers a "(buy/sell) the rumour" trade on lighter volume and then punters fade that into the NFP number, resulting in "sell/buy the news", usually on much heavier volume.

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JMT
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August 29, 2016 at 6:44 PM ×

As seems the case for every NFP, Friday's number again may get the 'most important number since...' title, as the probability for a Sep tightening climbs. DB's Peter Hooper opined on BBG TV this morning that the Yellen/Fischer/Dudley photo op in Jackson Hole was to portray unity, and with Fischer and Dudley both talking up a move, Yellen's more cautious tone may simply have been to maintain the perception of uncertainty. Fischer speaks again tomorrow which should help clarify things.
(One-more-move-and-done "Hollywood" (voter) said that with continued supportive numbers he would vote for a Sep tightening.)
IMHO, the recent breach of 1.60%, sets the market up for a good 20+ bp selloff in 10s over the next couple of weeks, and am structuring puts accordingly.

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Anonymous
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August 29, 2016 at 8:30 PM ×

Moody’s:

"The now chronically faster growth of corporate debt relative to net revenues has hoisted nonfinancial-corporate debt up from Q2-2012’s cycle bottom of 81.0% to Q2-2016’s estimated 93.0% of net revenues. The latter far exceeds where the ratio stood immediately prior to the starts of the three latest recessions. Corporate debt approximated 87.4% of net revenues in Q4-2007, 84.1% in Q4-2000, and 80.5% in Q2-1990"

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Anonymous
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August 29, 2016 at 8:33 PM ×

What should I do with my emerging market bonds?

ishares JP Morgan USD Emerging Market Bond Fund Shares
https://twitter.com/jmanfreddi/status/770340052434087936

Fund flows emerging markets bonds…
https://twitter.com/jmanfreddi/status/770339466993078272

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Anonymous
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August 29, 2016 at 8:41 PM ×

Early warning on payroll numbers:

Markit:
"Softer business activity growth was mainly linked to muted new business gains in August. Reflecting this, latest data signalled that new work expanded at the slowest pace since May and remained much weaker than its post-crisis trend. This contributed to a renewed slowdown in job creation during August, with payroll numbers rising at the least marked rate since December 2014. Some firms reported that subdued demand conditions and the need to cut costs had led to more cautious staff hiring plans and the non-replacement of leave"

"Need to cut costs"...Layoffs are coming.

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Leftback
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August 29, 2016 at 8:44 PM ×

If you believe that the dollar has considerable room to move to the upside from here, then given the good run that EM assets have had, one might want to take some profits off the table.... it's all a question of one's overall philosophy on the USD.

Some evidence there that EMB might be about to roll over? It's been a big part of the Reach for Yield, and we've seen this so many times - it always ends badly, see chart for 2013 - EMB didn't do well during the Taper Tantrum.

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abee crombie
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August 29, 2016 at 9:16 PM ×

No idea on the Dollar vs EM here, though I would think we probably arent going back to Feb levels but that doesnt mean we cant retrace here. Tell me where HYG is going as well

Damn I felt like a near lunatic for suggesting to buy corporates in February as the starts were aliging for a big crash, now I cant find anything yielding under 5% again. HYG busted oil co's skew the comps. Most fixed income is expensive here. better to look at LQD. sure the spread is of some value but i think ppl are being too complacent again. But you gotta play the game when ppl are dancing or something like that, Chuck Prince said in 2007.

Dax breakout looking suspect, however DAX and SX5E earnings projections are creeping higher. Im waiting for S&P to do something stupid before touching this market....

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abee crombie
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August 29, 2016 at 9:18 PM ×

yielding over 5%, sorry

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Anonymous
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August 29, 2016 at 11:17 PM ×

European markets are not pricing any sort of surprise from Draghi. Compare this to December when market got ahead of itself in advance and , even though he delivered something, capitulation followed.

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Panda
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August 30, 2016 at 5:25 AM ×

This USD story also affects gold too. I wonder if the Gold Miners ETF (GDX) is a good short at this point.

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