Storm...in a teacup??

Macro Man's little corner of the world was supposed to be battered by a tropical storm yesterday, but in fact Labor Day turned out to be sunny and temperate with a hint of a breeze- a perfect late summer's day.   While it's often tempting to distill allegorical market references from real world occurrences, if anything the market appeared to do the opposite following Friday's payrolls.

Although the mediocre employment figure appeared to send any chance of a September rate hike gently into that good night, the market's eventual decision to act as if battered by an impeding rate hike storm was frankly a little puzzling on the face of it, coming as it did after two consecutive weaker than expected data prints.

Of course, the payrolls were not the US data release on Friday- July trade data came in better than expected, which nudged the GDP Now forecast back to 3.5% despite the mediocre employment figures.  Then again it's difficult to credit that the bond market, for example, was keying off of trade data.

No, it looked like a classic case of flow going through- in this case steepeners in the US curve- on an illiquid pre-holiday Friday, and sending little shockwaves through other markets given the apparent perversity of the price action.  Where we're left, however, is with bonds still treading in the corridor of uncertainty (yes, Macro Man knows that September futures are no longer front month, but his December chart is a little messy thanks to some bad data points.)

That being said, the short end market remains priced for a 25% chance of a hike this month, which seems broadly reasonable- and also means, given the history of the Fed over the last two decades, that they won't go.  Someone might want to tell the oil market, which has been clumped pretty badly recently.

On the other hand, GDX has snapped back smartly recently, justifying your author's decision to hang tight.  More broadly, however, the lack of an internally consistent market reaction merely speaks to the market's uncertainty about the Fed's reaction function.  Yes, it may have shifted in recent weeks given the rhetoric from the power base; however, given the frequency with which they have flip-flopped in the past, one can hardly blame the market for its lack of coherence, given that that's what they're receiving from the authorities.

For choice, Macro Man reckons that the FOMC stays on form and skips September given that it's not priced into the short end.  As limbs go, that's a pretty small one to climb out on, for sure.  he still sees value in short end steepeners, and frankly the flattening throughout the yield curve has been extreme enough to tempt one of take the other side.  Then again, given the global grab for yield, it's tough to stand in front of that particular freight train until you see signs that the conductors (Draghi, Kuroda) are looking to change course.