Looking backward, looking forward

Looking backward  Friday's payroll number had something for everyone:  a strong headline (confounding many expectations, including Macro Man's, a solid household survey (U6 declined again), but abysmally weak earnings.  Even there, mitigating circumstances arose, given that the survey week included the 12th but not the 15th, thereby possibly missing some pay periods.

To be sure, such a calendar scenario has generally spelled a negative surprise on the wage front, as the chart below (which Macro Man got second hand but believes is from Barclays) illustrates.

Still, given the Fed's desire to see wage growth to provide an impetus for broad-based price rises, Macro Man figured that we'd see a dovish response to the data.  As it was, the data proved to be an interesting litmus test for sentiment, and the fact that the short end sold off, tried to rally back, and then sold off again was telling.

That being said, there was zero movement in the front March contracts, with the market still pricing a rather minuscule chance of a rate move next week.  This may be Macro Man's book talking, but it would be refreshing to see them not kowtow to to desecrated altar of market expectations for once and instead trod their own path.  Note to Fed:  your credibility isn't enhanced if you can be led around by the nose.

In any event, there would appear to be more room for fixed income repricing just based on the risk asset pricing to date.   While the short end and Spooz don't quite march in lockstep, they're correlated enough to suggest that Eurodollars (in this case, the slope between the 2nd and 6th contracts) have some catchin' up to do.  All the more so insofar as risk asset weakness has been the "error term" to explain the Fed's reticence to move forward with normalization despite generally positive news on both planks of the dual mandate.

Looking forward  It looks like more of the same from China, where the news from the NPC appears to be full throttle (and half speed) ahead.   True, the official growth target was nudged down to 6.5-7.0%, but this appears to be more an acknowledgement of reality than a deliberate downshift.   After all, the budget deficit target was moved up (to a larger deficit than last year's target, though a smaller one than last year's out-turn) as was growth in M2 and credit.  Less bang for more bucks...it's an all-too-familiar story.

The commitment to keep the RMB "basically stable" can be seen through a lot of lenses...after all, that  phrase can be used to describe Charlie Sheen on occasion.  The ongoing emphasis on the RMB from the authorities provides a strong suggestion that it is now a, if not the, primary focus of FX policy...with the implication that USD/RMB will be much more a function of broader dollar volatility than it has in the past.

Moreover, "basically stable" can still entail the odd moment or two of weakness...just ask Charlie!  Macro Man's calculation of the CFETS basket is now on its lows, as you can see below.  Note that lost in the shuffle of your author's personal fast market last week was a release on the CFETS website noting that the basket was at 99.63 at the end of February, down from 102.93 at the end of November.   Macro Man's version is some 15 bps below the official version...but then again, it was 14 bps below the official version when the latter was first promulgated last December.  He cannot for the life of him figure out where they get their numbers from, but he is fairly satisfied that he's copied their methodology given how closely the index changes have matched.

For choice, Macro Man would expect the index to dribble a little lower for the rest of the year, particularly if the dollar experiences a setback against other currencies.  It's far easier to "hide" a depreciation when USD/RMB is edging lower...