While the week may be starting quietly in Europe with the Easter Monday holiday, it's fixing to be a barn-burner on the western side of the Atlantic. For sure, the nascent theories of the return of inflation and April as a live meeting will be put to the test. Today features the PCE price data for February; remember that barring revisions, a monthly rise of 0.21% will put the y/y change at 1.8%, equidistant between the Fed's target and its year-end forecast.
How might the FOMC react to such a development? Wait no longer than tomorrow, when Janet Yellen speaks on the economic outlook and monetary policy at the Economic Club of New York. While a complete 180 from the March press conference seems highly unlikely, she could nevertheless present a more hawkish tilt and still remain consistent with her previous message, at least according to the perverse logic of modern central bank communications. Either way, Dudley will be able to reiterate the message when he speaks Wednesday afternoon. Thursday brings the flash CPI in Europe, and Friday of course sees the release of US payroll data for March- a month that has recently erred towards the side of weakness.
Throw in quarter-end on Thursday and you've got every reason to expect punters to play their cards (or at least their positions) pretty close to the chest this week. Nevertheless, the odd surprise or two could easily upset the apple cart. It certainly feels as if the street generally has not enjoyed this month. Macro was sideswiped by another ugly accident following the ECB meeting, and the dovish Fed did little to ameliorate the situation. While the sharp recovery in equities has been good for nominal returns, it certainly feels like real money spend the first half of the rally underweight; flow data suggests that the bulk of the buying (in terms of cash drawdown) has only come in the last couple of weeks, which would imply a reasonable performance lag. As such, we may need to wait for Friday before PM's feel comfortable deploying new thematic risk (with April's shiny new MTD P/L).
What does seem obvious is that trend followers are leaning pretty heavily long equities. Macro Man expanded the CTA proxy methodology unveiled on Thursday to a range of equity indices. The results are set out in the charts below. Interestingly, the only index in his universe which has not flipped long is the Nikkei, erstwhile darling of discretionary managers everywhere.
SPX:
Nasdaq 100:
Russell 2000:
Eurostoxx:
Dax:
FTSE:
Nikkei:
Hang Seng:
H Shares:
ASX 200:
What's notable from all of this is just how much the SPX has outperformed relative to its own history compared to other indices. There are probably two ways to look at this. The first is that the SPX is an oasis of success and that if you are inclined to short equities, you're better served looking at those markets displaying less upside impulse and with systematic stops in closer proximity. European indices, the Hong Kong listings, and the Russell stand out in that regard. The other prism through which to view these charts is that the SPX is the largest beneficiary of buybacks in the world, and that the vast bulk of the demand for SPX stocks has come from SPX managements. With earning season a couple of weeks away, that demand will dry up soon, possibly leaving Spooz extended and vulnerable. Macro Man frankly has some sympathy for both arguments, and reckons its best not to put all of one's eggs into a single (Easter?) basket.
How might the FOMC react to such a development? Wait no longer than tomorrow, when Janet Yellen speaks on the economic outlook and monetary policy at the Economic Club of New York. While a complete 180 from the March press conference seems highly unlikely, she could nevertheless present a more hawkish tilt and still remain consistent with her previous message, at least according to the perverse logic of modern central bank communications. Either way, Dudley will be able to reiterate the message when he speaks Wednesday afternoon. Thursday brings the flash CPI in Europe, and Friday of course sees the release of US payroll data for March- a month that has recently erred towards the side of weakness.
Throw in quarter-end on Thursday and you've got every reason to expect punters to play their cards (or at least their positions) pretty close to the chest this week. Nevertheless, the odd surprise or two could easily upset the apple cart. It certainly feels as if the street generally has not enjoyed this month. Macro was sideswiped by another ugly accident following the ECB meeting, and the dovish Fed did little to ameliorate the situation. While the sharp recovery in equities has been good for nominal returns, it certainly feels like real money spend the first half of the rally underweight; flow data suggests that the bulk of the buying (in terms of cash drawdown) has only come in the last couple of weeks, which would imply a reasonable performance lag. As such, we may need to wait for Friday before PM's feel comfortable deploying new thematic risk (with April's shiny new MTD P/L).
What does seem obvious is that trend followers are leaning pretty heavily long equities. Macro Man expanded the CTA proxy methodology unveiled on Thursday to a range of equity indices. The results are set out in the charts below. Interestingly, the only index in his universe which has not flipped long is the Nikkei, erstwhile darling of discretionary managers everywhere.
SPX:
Dax:
FTSE:
H Shares:
What's notable from all of this is just how much the SPX has outperformed relative to its own history compared to other indices. There are probably two ways to look at this. The first is that the SPX is an oasis of success and that if you are inclined to short equities, you're better served looking at those markets displaying less upside impulse and with systematic stops in closer proximity. European indices, the Hong Kong listings, and the Russell stand out in that regard. The other prism through which to view these charts is that the SPX is the largest beneficiary of buybacks in the world, and that the vast bulk of the demand for SPX stocks has come from SPX managements. With earning season a couple of weeks away, that demand will dry up soon, possibly leaving Spooz extended and vulnerable. Macro Man frankly has some sympathy for both arguments, and reckons its best not to put all of one's eggs into a single (Easter?) basket.
24 comments
Click here for commentsThe data indicate that the Fed should be hiking but their last meeting indicated they are not focusing on domestic data. They are more worried about tail risks from a high dollar so they are going to let inflation run and let the dollar slide. That's my simpleton's interpretation. And the with the price action in EUR.USD and USD.JPY lately, I am pretty paranoid about going long dollars and getting stopped out again. It would have to be a better signal or price level than what is there currently. But perhaps that's just my recency bias.
ReplyWashed: it is as you suggest, the 'property bubble' has set off a virtuous cycle with property construction replacing the commodity boom ! In Australia at least, the mining boom 4% growth has been replaced by a property bubble induced 2% growth in the last year. Which has surprised nearly everyone, because who would have thought property could replace such a massive collapse in the TOT. But there you go, strange things happen. Anyway, it will be interesting to see how things play out going forward. The Australian economy is now almost entirely dependent on housing, but is doing better then expected (Q.4 GDP print and last years Q.3 revision hit out of the ballpark, employment also stronger than expected), contributing to the recent rally in AUD.
The last Australian property bears appear to be capitulating with the Canadian example recently being particularly disheartening. The thinking being, even if there is a recession in Australia, perhaps house prices will still go up as in Canada(amazing that, house prices still going up there, despite a recession last year). House prices in Australia were white hot at the end of last year but are down a measly 3% so far this year so it is not clearly a top. Employment is still strong. But fundamentally, it is looking like a bubble because the income to service debt is falling in terms of lower commodity prices and stagnant or falling household income. Things probably continue well until prices actually turn, but when they do as one of the anons said, it will probably be an interesting sight to behold.
A few upside economic surprises are well overdue in the US. Not many people are positioned for another run up towards DX 100, and you know what happens when too many people get on the same side of the boat at the same time.....
ReplyWith things percolating nicely in terms of US inflation, fueled by the Q1 drop in USD and recovery in $wti, the chances of another overnight CNY massacre are rising by the week. Remember that nothing has changed in China, they still need to devalue steadily to prevent a catastrophic slowdown. Add in a little unscheduled Spring surprise from Dame Janet and there might be some pain ahead for dollar bears. Not saying this will happen, just painting the dark side of the picture for those reading a glossy copy of "FedGirl" (for the articles, of course) while wearing rose-colored spectacles.
Well the PCE inflation number is not as high as I expected, but I believe that the trend is still here. While we are waiting for the US inflation to show up, inflation in China had already moved in. Maybe someone has already noticed, but I want to point out that meat and vegetable prices had jumped between 50% to more than 100% between the beginning of the 2016 and now. Rice, wheat, corn, and soybean are not there yet, but the prices of all other food stuffs are going up, maybe except for fruits.
ReplyNow previous Chinese inflations all started with food inflation and they were always the focus of policy-makers' minds. Now with rising inflation in China and the huge debt problem at the same time, I see PBOC has very few options. The least resistance path seemed to be 1) more capital control 2) stable exchange rate 3) acceleration of debt re-packaging and re-structuring.
I just checked stock prices of several meat producers such as Tyson food, and a little surprised that this sector is near this all time high and barely dipped during the panic at the beginning the year.
From Jeff Saut
ReplySome seers suggest what we have just experienced is an upside “blow off” top in the equity markets, and termed it a rally in a bear market, driven by the surprise dovish verbiage from the Federal Reserve on February 16 (read: upside panic). We, however, do not see it that way. It is our belief we remain in a secular bull market! While it is true the equity markets are pretty extended on a trading basis, with all but one (healthcare) of the S&P macro sectors overbought (chart 2), we think that, after a pause/pullback, stock markets will extend their rally. This belief is imbibed by the belief the economic recovery will surprise
Re TSN - while I dont know much about the stock, I would say that Food & Bev stocks are way overbought by all those jumping into the Consumer Staples theme (SAFETY at any price!). Late stage crowding if u ask me, as its been mostly driven by PE expansion and cost cutting as sales are flat/declining, but again not a sector expert. Perhaps I wrong. Grants had a nice write up on it last week
@abee, calling a secular bull is a big ask with stagnant earnings and rates at all time lows and (slowly) rising.
Reply@abee,
Replyanon 3:39 here, could you please point me the article of Grants? Thank you
A policy controlled market has become a reality. Every dip in the MKT is still an opportunity to short $VIX products. Nothing has changed until the board loses this shape.
ReplyJust 42bps to lowest 30yr UST yield ever.
ReplyBooger, the Canadian property market is really not being driven by Canadians.
ReplyMacro Man - I share in your view that buybacks set the US market apart from others. I think the whole transmission mechanism from rates and QE to stock prices is different in the US. US corporates are far more willing to opportunistically borrow at low rates to buyback shares or do M&A than their global peers. Also, I think US pension and institutional money is more willing to move up the risk spectrum to replace assets sold to the Fed in QE operations whereas their European peers are more constrained by regulation. Put another way, when the Fed bought treasuries, the sellers took their money and bought IG bonds with it. Some of those bonds may have been issued by corporates for buybacks/M&A, or they may have been sold by holders who took some of the proceeds and bought HY, and those HY sellers may then have moved a notch up the risk spectrum to equities. In Europe however, we only saw a Pavlovian "QE means buy equities" flow from mostly foreign/US managers in H1 last year, but without any follow through from corporates or real money. I figure so long as the US IG market remains open and corporate balance sheets are in OK shape, it'll be hard for the US market to underperform. When those conditions no longer obtain, then the US market is probably heading for a big fall. I can see the fall being abrupt, if there were some shock that changed corporate profitability at once or closed credit markets, but I can also see a scenario where over some years, fewer and fewer corporates have the balance sheets to aggressively buyback stock and prices bleed lower.
ReplyBooger/Washed - That's a great observation on property bubbles easing the fallout in commodity producers like Oz and Canada. I think those calling for the RBA and BoC to cut have underestimated that. Part of the strength in those property markets has come from low rates, but another big tailwind has been Chinese money. I watch the latter for a signal to turn bullish on rates in those countries. In particular, if the CNY came under more pressure from outflows and prompted much tighter capital controls (not a big devaluation in my view), I'd expect rate cuts in said countries.
@MM, wouldnt you say that US Equities are in a secular bull market? I am not nearly as bullish as Saut, but if you look at the charts and even more so compared to World Equities, I dont think you can really argue differently. Now what will happen in the future is unknown and certainly they look toppy over the past 15months or so. I think his argument is that we are in a bull until proven otherwise. Its a fair point of view and has worked historically for US equity markets. (buy & hold and sell only when you have convincing evidence)
ReplyAs much as I belive there is a property bubble in Canada & Australia, when compared to other major cities they arent as outrageous, and for the Asian buyer with a family probably offer a better alternative to raise a family vs LA, NYC, London, Paris etc. I just feel bad for the avg worker there, needing at least $1m to buy a home. But i guess its been the same way in london for over 20 years and yet ppl still want to move there. So who knows
http://www.grantspub.com for the article, though you have to subscribe.
abee/MM - Not that there is a chance in hell of resolving the 'secular bull market or not' debate today, but I think we can all agree that 1982 was the start of a secular bull run in DM equities- pretty much every factor that contributed to that run (16% interest rates headed to zero, credit about to explode, the invention of the CB put, favorable demographics, technology, growth of financial leverage and engineering, explosion in world trade as % of gdp for the next 3 decades) seems to either have run its course or is at least stagnating. We may STILL be in that secular bull market and it may not have ended yet, but I'm with MM that to expect this to be an inflexion point for another 15 year run seems implausible. I will stop short of saying such a run is impossible, because if there is a game changing technological revolution around the corner that gives another boost to productivity, or maybe a biotechnology revolution that just makes everyone more bullish and optimistic (or even the creation of a powder, added to municipal drinking supplies, that could do so literally!) then of course we could be talking about Dow 40k in 2025 - the bull case is build on the unknown unknowns, I think, whereas the bear case is a bit more hard nosed.
ReplyAnother big leg up in equities or "blow off" would seem to require a new buyer. After two horrible bear markets in the last decade and a half, I'd think US investors are unlikely to play the part of sucker again for some time. Corporates are the big buyers/suckers in US equities now (Dalio estimated buybacks/M&A to be ~70% of net buying in a bbg interview last year) and they seem only able to keep the S&P flat since Fed QE-related flows stopped. But there are the unknown unknowns, as washedup says …
ReplyFake CEOs and fake companies?
Replyhttp://finance.yahoo.com/news/israel-colombia-whos-laundering-money-060903479.html
Global trade is growing at 50% of global GDP, despite global GDP slowing down. So what´s up with that? Could it be that the difference equals to leverage?(Oh no!)
ReplyThe 57 Trillion USD global debt increase since the financial crisis and regulation are having severe consequences for asset managers and asset management models: 40% of high yield debt bonds didn´t trade for the first two months of this year!
Re FED meeting in April: PBOC is sending smoke signals to the FED by continuing to fix CNY lower. Message: d-o-n-´-t d-o i-t
17 bucks for the weekly spx straddle and yellen speaks tomorrow and obv payrolls on friday. seems like an easy buy to me. other than that have a z6z7 steepener as i am not of the opinion that the fed will have to reverse so soon. struggle to understand how z6 prices 29 bps of hikes but z7 is pricing in just 26.5 for all of 2017.... sure recession risks increase every year this recovery gets longer in the tooth, but the fed will refuse to hike at the first sign of tighter global financial conditions, so i don't see them blasting fed funds this year then backtracking and scrambling to fix their mistake. the fact that the curve hasnt steepened after that fomc meeting is bewildering to me. while most would argue that if it didn't go then, it likely never will, i am stubborn and will hold.
Reply*oops 22 bucks for the straddle, i cant read
ReplyMr Market will likely do the Fed's work for them by selling Spoos and heading lower into the FOMC meeting. Among other dynamics at work here, there are many punters who need to raise some cash here to pay Uncle Sam on or before April 18th. Seasonals are really quite weak for equities during the second half of March and it's one of the more reliable cyclical factors.
Replyabee is correct, we're still in a secular bull market for US equities. People can point to various data points and/or negative sentiment but I have various negative data points/sentiment going back to the early 90s and US equities have still moved much higher. The simple answer lies in a weekly/monthly price chart. Here you will see US equities in a MASSIVE uptrend, currently having pulled back slightly and consolidating before another MASSIVE move higher. What will drive this move? Probably the continued CB put and corporate buy-backs followed by the return of inflation and a move to risk assets as everyone piles out of fixed income etc into equities.
ReplyOf course those bearish equities might be proved right, but they've been persistently wrong for the last 8 years, and from a longer-term investment point of view have been wrong for the past 30 years. Chance are they are wrong again now.
Just a note re chinese money in au re, no doubt lots of it come in (Its not just chinese, but malaysian, singaporean etc along with tales of using au re to launder the money), asian money usually target specific suburbs in melb/Sydney (Its like a herd moving to the popular asian suburbs on the east coast) Whereas re prices have been stable and rising in a broader range then that on the east coast. That being said though, there is over supply in apartments in melb cbd now and some stories are floating that chinese buyers that bought off the plan were hit by chinese cap control and couldnt complete payments (Simalar stories in hk...). Also wa (Perth and mining boom towns) Is already seeing re market go down which is not a surprise with commodity bust. Re housing downturn here the major banks doubtful debts were at cycle lows and hence vulnerable and authorities are aware, so some arm twisting happened behind the scenes and hence the big capital raisings last year by the majors.
Replythat being said though if Aus re mkt goes south you dont need to be discriminate you just short the asx. The fear of a housing bust has been simmering so long in the back of peoples minds (Hell some locals want a housing bust so they can afford something) That any real sniff of it will make ppl run for the hills.
We really are the lucky country as i think we have the second longest streak of years (26 Now ?) without a recession (Norway holds the longest I think ?) And as per booger if we can keep the balls up in the air for a bit longer we may take the record off norways hands. But that means there is an entire generation that has never lived a recession here so when it inevitiably happens it will be a sight to see.
but until the music stops we need to just keep dancing.
Not so sure about the sustained return of inflation as yet, we still need to resolve the situation with commodities. Crude oil put in a bottom, but was that merely the Q1 low or The Low for $WTI? There are now some clear signs that the recent run-up in crude oil and other commodities may have come to an end, see this from Marc to Market:
ReplyCommodities Rolling Over?
anon 10:15 - you could be right - however, I am curious about one thing - no sarcasm or criticism intended - if the people who are bearish equities have been wrong for 30 years and every thing you look at points to their continuing to be wrong, what do you get by coming to a board like this? is it as simple as helping decide whether to be 99% or 95% invested?
ReplyThx for ur thts.
Anon at 10.23 Here. An article on au major banks doubtful debts at cycle lows and credit cycle turning.
Replyhttp://www.afr.com/business/banking-and-finance/financial-services/australian-credit-cycle-may-have-finally-turned-20160328-gnsc26
even more hilarous we have a macquarie bank (Investment bank) Who is currently using the au gov bank guarantee to ignore risks and just lever up and buy junk bonds to the gills. Afr has an article on that too.
quote
Reply"40% of high yield debt bonds didn´t trade for the first two months of this year"
"using the au gov bank guarantee to ignore risks and just lever up and buy junk bonds to the gills"
could be my actuary background but am 1010% sure the disaster will come from corporate bonds
too many folks have rushed to loan too much money accepting far too low yields from far too fragile balance sheets
then the secondary market (banks) goes apeshit leverage on them as you know they always do
leverage on fixed income was 30x in 2007 they have repeated the same financial suicide
this is not exactly a prediction - it is already happening in Europe (cf. banks) and the unwinding of portfolios ain't pretty (as per quote1 about scarce liquidity)