Turn down the volume

Just when  you thought it was all set up for a make-or-break payroll release today, the ISM went and pulled the rug out from under the Fed's feet.  Or did it?   To be sure, yesterday's release was pretty execrable and put a dent into what had been a feel-good Q3.   (Sadly, not every economy can be an unstoppable juggernaut like the...er....UK.)   Then again, Q3 is still tracking at a healthy 3.2% even post-ISM according to the Atlanta Fed, and the ISM itself did not sound any undue alarm that the weak print was a herald of a darker future.  Perhaps most importantly, the last time the Fed hiked with the ISM sub-50 was in....December, when the index was a point lower than yesterday's release.

It does seem likely, though, that the ISM raises the payroll bar for a September rate hike.  In that vein, the recent history of August payrolls to disappoint the headline consensus (albeit with substantial subsequent upward revisions) may be telling.   Macro Man's model has undershot the actual figure quite substantially in recent months, and while the forecast is quite a bit higher this month it still rests below consensus at  160k.

In any event, yesterday's market response to the weak ISM confirmed, if only temporarily, that it isn't quite time to give up on GDX quite yet.  A 250k print today, on the other hand, might be a different story altogether.

Elsewhere, the BIS released the data from its triennial survey of FX and interest rates yesterday, and the results were quite interesting.   One can imagine global regulators cracking open a few bottles of fizz at the news that daily global FX volumes declined between 2013 and 2016.    How much is down to Dodd-Frank type regulation and how much is down to risk aversion is up for debate; either way, the sharp decline in spot (i.e., directional) volumes was quite notable.

Although the story wasn't quite the same in interest rate derivatives- total volumes went up again- it was interesting to note that the volume executed by large dealers declined for the second survey running.  This would certainly suggest that the impact of regulation is beginning to bite.  Interestingly, even though the US has mandated that swaps now trade via a SEF, volume in those instruments rose- and volumes in swaps traded in the US essentially doubled since 2013.  Frankly, Macro Man isn't quite sure what to make of that.

 On the flip side, interest rate derivative volumes collapsed in the Eurozone, falling by more than 40% since 2013.   As you can see from the chart above, US volumes exceeded those denominated in euros for the first time this millennium.    While this may well represent a crowding out of private sector activity by the ECB's monetary policy, it's worth noting that this impact was not observed in anything like the same magnitude in the US during its period of financial repression monetary policy.  Perhaps it says more about Eurozone banks than it does the ECB?

Either way, the survey represents a sobering reality check for those of us who do macro for a living.   For much of the past few years it's felt like the authorities are trying to strangle the life out of the market.   On this evidence, they just might be succeeding.

Note: It seems as if MM emails may be going to spam folders all of a sudden.  If you have quit receiving emails recently, please check your spam settings and ensure that Macro Man is a safe sender.