Mr. Bond, they have a saying in Chicago

"Mr. Bond, they have a saying in Chicago.  'Once is happenstance.   Twice is coincidence.  Three times is enemy action.'"

                                     -  Ian Fleming, Goldfinger

And so it proved yesterday, as the intrepid bond sellers following the weak ISM and payroll data would have done well to heed Auric Goldfinger's warning.  As it was, the bond and currency markets concluded that yesterday's appalling services ISM was indeed enemy action and beat a hasty retreat to the exits.  Five year yields notched their biggest yield decline since the immediate aftermath of the Brexit vote, while the EDZ6/Z8 spread is now back towards its tights, pricing LIBOR just 25 bps higher over the two years covered by the spread.

And really, it's hard to blame them.   In the nearly 20 years since the launch of the non-manufacturing ISM, the weighted composite measure has only been lower during the two recessions of the last decade and during the March 2003 invasion of Iraq.  Needless to say, the GDP growth forecast implicit in the current reading is very dismal indeed.

In one way, however, the decline in fixed income yields was something of an anomaly.  After all, that's what is "supposed" to happen.  For much of this year, the relationship between economic surprise and yields has been tenuous at best.   The chart below plots the rolling 6 month correlation between changes in the Citi US economic surprise index and Treasury yields of various tenors.  Note that the calculation is done on weekly data to smooth out some of the noise.   As you can see, over the last six months there has been precisely zero correlation between long bond yields and economic surprise.   Small wonder that global macro strategies are struggling!

More generally, a scan of economic surprises reveals little to get excited about, with two notable exceptions.   With an irony so delicious that it's just been awarded a Michelin star, those two stalwarts just happen to be home to two of the most hated currencies of the past few months: the UK and New Zealand.     The failure of the hard data in the UK to conform to the post-Brexit dip in sentiment has confounded many expectations, including those of your author.   Suffice to say that he's been out of his sterling short for quite a while now and he's rather happy that way. 

As for the kiwi, the skyrocketing of the NZ surprise index is quite possibly the "missing link" to explain recent NZD outperformance.   When Macro Man bought AUD/NZD the other week, he was under no illusions that he was buying the ding-dong lows, and sized accordingly.  It may well be the case that either Aussie data needs to surpass expectations or that the trend in its neighbour tails off for the trade to work.  Either way, Macro Man can be patient- a requisite with a trade like Aussie/Kiwi.

Squaring the circle, Fleming's prophetic quote at the top of today's post serves as a timely reminder of how difficult it is to get the better of Mr. Bond these days.   Outside of what Yellen and co. are doing, the global trend towards low yields remains a strong one; can you believe that 5 year German yields are now -0.55%?  It's hard to see any value whatsoever there, but with Draghi on Thursday can you blame the market for not wanting to be short?

Somehow it feels like Hollywood should re-make Goldfinger to account for the new ZIRP/NIRP reality.  (Fun fact: in the novel, Goldfinger keeps a portion of cash holdings in Venezuelan bolivars, which at the time was one of the world's stronger currencies.)  It would be hard to replicate Shirley Bassey's iconic theme tune, however.   Perhaps they could get Justin Timberlake to record "It's My Franc in a Box" instead?