There wasn't much to it, was there? Although there were a few changes to yesterday's Fed statement from the June edition, many of them were cosmetic, other than the bit about diminished near-term risks to the outlook. In the end, we really didn't learn a whole lot about the future, which in many ways is better than previous communications efforts, which at times appeared to be an active attempt to mislead the market (given the rapidity with which they were reversed.)
So of course bonds rallied, because it's 2016 and that's what bonds do; the long bond enjoyed its biggest rally in a month, as an example. It would appear that a few people were looking for more tangible hints of forthcoming action...or at least fearing them. That the short end also rallied with equities doing largely nothing would also suggest a resetting of expectations.
Of course, it could just be the case that bonds are looking at crude oil and counting the days/weeks until the Fed has another little panic about something that they cannot really control. Then again, while it seemed like a dead cert a few weeks ago that crude oil base effects would start to boost headline inflation soon, that hop may be ebbing. The last month with an average price less than the current level of prompt was December; a few weeks ago it looked like a lead pip cinch that August would start show solid y/y gains.
Macro Man doesn't pretend to be an expert in crude, but he has been interested to observe that the oil rig count bottomed at the end of May, when WTI was tickling $50/bbl. Since then, the count has dribbled higher even as crude has traded lower; unsurprising, really, given that the decision to take drilling facilities on or off line is based on lagged prices in the underlying. Still, the modest uptick in supply even as gasoline inventories rise (in contrast to the seasonal) suggests that the supply/demand dynamic may not be as rosy as some were hoping for a few months ago.
August has traditionally been a month for financial accidents; so have Macro Man's holidays. He is heading to the beach in South Carolina in the second week of August; perhaps an oil market/high yield accident will be the catalyst of the August crisis du jour (d'annee?) this time time around. Consider yourselves warned....
So of course bonds rallied, because it's 2016 and that's what bonds do; the long bond enjoyed its biggest rally in a month, as an example. It would appear that a few people were looking for more tangible hints of forthcoming action...or at least fearing them. That the short end also rallied with equities doing largely nothing would also suggest a resetting of expectations.
Of course, it could just be the case that bonds are looking at crude oil and counting the days/weeks until the Fed has another little panic about something that they cannot really control. Then again, while it seemed like a dead cert a few weeks ago that crude oil base effects would start to boost headline inflation soon, that hop may be ebbing. The last month with an average price less than the current level of prompt was December; a few weeks ago it looked like a lead pip cinch that August would start show solid y/y gains.
Macro Man doesn't pretend to be an expert in crude, but he has been interested to observe that the oil rig count bottomed at the end of May, when WTI was tickling $50/bbl. Since then, the count has dribbled higher even as crude has traded lower; unsurprising, really, given that the decision to take drilling facilities on or off line is based on lagged prices in the underlying. Still, the modest uptick in supply even as gasoline inventories rise (in contrast to the seasonal) suggests that the supply/demand dynamic may not be as rosy as some were hoping for a few months ago.
26 comments
Click here for commentsHave a good one MM, and helmets on newcomers. MM holidays usually bring fireworks!
ReplyHappy hols, MM. With the FOMC meeting being a non-event, does that now make the BoJ the world's central bank du jour?
ReplyDollar selling post FOMC seems overdone, remember there is another NFP day next Friday that might really cement expectations for the September meeting. We have been running a small EURUSD long and will cash that in today or tomorrow to add to our UUP positions. Liquidity whores have little to look forward to after this week's BoJ, except the ECB's August meeting.
Leftback, good to see your using what little freewill you have in deciding your investments, but be sure not to invest in any USA bank or company that represents USA officaldom. Otherwise your in for a nasty rebuttal.
Reply....addendum,I would rather be broke, cold and homeless in Moscow during a winter eating hand and mouth from the food inspector than getting out bed each day to trade USA government stock...let the club suck their cigars.
ReplyPersonally, I'd rather be rich, warm, and living on St. Barts - even if it did mean trading Treasuries. Regretably, that's a work-in-progress.
Reply"In 2008, the $10 trillion asset class of residential mortgage backed securities (RMBS) was entirely based on the Common Knowledge that it was impossible to have a nationwide decline in U.S. home prices. When that Narrative failed, the entire inverted pyramid came crashing down. In 2016, the $10 trillion asset class of negative rate sovereign bonds is entirely based on the Common Knowledge that there is no limit to the greater foolishness of Central Banks. If this Narrative fails, the entire inverted pyramid will come crashing down again"T
Replythe last 'Epsilon Theory' posts are magistral
And how will CB fail ? You have a run on currency And everyon everyon n uys gold ?
Replyhttp://www.marctomarket.com/2016/07/great-graphic-how-us-recovery-stacks-up.html
Reply...Marc to Market discusses the strength of the US recovery, and its weakness. However, he doesn't speculate about the ongoing stimulation of said economy for these 8 years and why that hasn't increased the curve. Nor does he opine what a Fed rate hike might do...
I think he believes we are on the ZIRP train forever...
@MacroMan "He is heading to the beach in South Carolina in the second week of August"…..
ReplyNicely done - casually tuck away the most important statement of the year, and the last remaining source of edge in this business, in the last sentence!
Italy households on the hook as bank depositors own almost half of vulnerable junior bonds. Have called numerous relatives in Italy to get their money out of Italian banks.
Replyhttp://bloom.bg/2axlS4B
This should scare the hell out of every sane person...
ReplyWhy the Federal Reserve is rethinking everything
https://www.washingtonpost.com/news/wonk/wp/2016/07/27/why-the-federal-reserve-is-rethinking-everything/
@anon 3:08 not sure what in the article freaked you out - seemed to re-cycle current consensus views, and more importantly doesn't exactly explain the premise of the title. Am I missing something?
ReplyThat said, it does underscore that asset investors are 99.999% convinced we will never see inflation ever again in our lives especially in Europe and Japan, at the same time that the implications for being wrong on that assumption are gargantuan. There are (by my calculation) roughly $30-40 TN of bond (and bond like product) appreciation, with relatively high duration, sitting in bank, insurance, and 401(k) portfolios as paper gains - I can tell you that the door out of that theatre is probably not as wide as people think - I can also tell you that a $10 TN paper loss feels very different than a $10 TN paper gain, and can radically modify behavior.
Hey Leftback, did you get that research note...let me spell it out for ya.
Reply"Despite what the New York Stock Exchange chatter is , I don't have to do jack shit what any American tells me!" period.
Broke , but still have one of the best perks ever..haha
Re bonds, the big issue would seem to be: both Presidential candidates of arguably the world's most important economy are proposing massive fiscal stimulus. Hillary may not be able to act on those proposals with a Republican congress, but Trump could. At what point do bond markets start taking the polls seriously and price the risk of Trump winning and driving inflation higher with fiscal stimulus? At what point do equity players who are way over-weight everything dividend-yielding and way under-weight everything cyclical realize they have on the 100%-wrong position for a Trump presidency?
Reply@johno - why would you assume that Trump will keep the promise of manufacturing inflation via fiscal stimulus, but not give it all back in deflation caused by tariffs and duties?
ReplyPart of the problem is no one really knows WTF the guy wants, least of all the man himself - Trump right now is an attitude, not a political candidate, so I would guess punters are just going with the flow and the narrative created by central bank (and wall street) research till they know more. My point was that I think uncertainty in bond pricing is fairly high and to put it lightly, a bit under-appreciated.
The declines in crude are getting headlines, and maybe for people with shorter horizons than me they are tradeable, but I'm not worried about what it's saying about the demand picture. I'm sure most people here have seen the charts showing distillate seasonal supplies higher than average, and the cushing-is-full freakouts, and the raw DOE crude storage numbers. But lets back up for a minute. What happens to capital intensive businesses when rates are low - hurdle rates drop, capacity gets built, supply increases - possibly faster than demand. Upstream is not the only part of the E&P picture that gets affected by this. Pull up OSCACUTC - cushing total tank capacity. It's up 62% from 2011. How about OSCATFTC - total US crude tank farm capacity - its up 54% from 2011. Capacity of the entire system has grown enormously, while capacity utilization of said tanks has remained pretty steady. Whats filling these tanks? OPEC oil. As long as they are willing to ship us oil for $40, there are guys out there willing to build tanks to store it. Not insignificant scale here either - ~close to 500 million barrels - thats close to a full 2 years of OPEC production. I submit that in the long term, this is the miscalculation OPEC has made with their "pump to put um out of business" plan. Demand is fine. Yes, there were some leveraged producers that are gone. But with robust future curves this trend can continue for a long time to come. Meanwhile, on the upstream side, with cash costs mostly positive for NA oil its not nearly as dire as a year ago. This is also a positive for the economy as a whole - the risks from supply shocks from any of the "running with scissors" OPEC producers is modest at best.
ReplyMeanwhile, the rest of the commodity space is holding up pretty darn well. NG1, copper, heck even the ags are holding steady.
I guess my point is I think CL1 signaling power onto the rest of the economy needs to be neutralized by the substantial changes to the whole supply chain there and a lot of what I read seems to be ignoring this.
Washed - a clear fiscal stimulus plan with firm political support is more headline risk to incorrectly positioned punters then a tariff annoucement maybe ? i.e. a louder fire alarm in a crowded theater, regardless of whether the theater was actually on fire or not.
ReplyS&P is consolidating and probing. Russell looks stronger and Nasdaq the best with the juggernauts killing earnings and analysts raising every higher target prices for FB etc (though FB stock may go down from over hype they are just killing it and still have great prospects, hard to find many stocks like that these days)
ReplyBut now that Q2 earnings are gonna be largely done, Q3 and Q4 are likely to show less of a surprise, especially if growth stays where we are at.
Perhaps we are consolidating for a rip higher to 2200. But I hope we go back to 2100 .. that will be a real test...if not buy EEM. its holding here even with oil lower. Says something
@anon 5:18 - 'clear' , 'plan' , and 'firm' are non-sequiturs when it comes to anything proposed by US presidential nominees, specially trump, and even more so to base investment decisions on - this ain't China where 1.3 BN people jump when the apparatchiks in Beijing demand so - we won't know whats realistic till mid 2017 at the earliest, and perhaps even later if the economy keeps muddling along and there is no particular urgency to frame one outside of general ball scratching. Therefore, as far as sentiment effect of headlines, what happens in Japan for fiscal stimulus in the next few months is the most one can expect.
Reply@T I am generally of the opinion that energy firms will eventually find a way to become profitable at low prices rather than have the market bail them out with costs staying high - I think its a stock pickers landscape rather than a macro long. As for NG, well, we are having a hot as balls summer, but it will eventually be over, and there will be a few months heading into winter to contend with. As for OPEC having miscalculated, don't forget the middle east were also expected to be the biggest source of LT demand growth outside of China till about two years ago, so you may want to be careful as an energy bull what you wish for!
Oil demand LT really, after more than a decade of handwringing, still keeps boiling down to China - and f@#d if I know whats about to happen there - I know a gamble when I see one.
abee you'll see your 2100 in August guaranteed
Replyim bidding in the low 2060s
Nico ... do you have a view as to how the rest of the year will work out, after your 2060s are reached in August?
ReplyWhy are investors "starved of yield"?
ReplyCan they not simply hold cash or the short end and wait. Wait for a good price, a bargain, yield in itself means nothing.
@Nico: thank you for referring to Epsilon Theory
ReplyI follow oil markets. The short term is uncertain, as the world is awash in refined products. Longer term, there is no way but up. While most have n=been focused on US shale, that at its peak was less than 5% of supply and is not the high cost producer. The focus should be on offshore. It is around 1/4 of total supply, and none works at current prices. These are long lead time projects, so offshore production was up in 2015. But come 2018, you are looking at 2+million b/d declines. So unless prices move much higher in 2017, to stem the decline in shale, 2018 will bring major imbalance and much higher prices.
ReplyAny that focus on demand are missing boat. Peg increase in demand at 1.5 million b/d. You will be within 300,000 b/d of where actual demand ends up. On the supply side, there are a dozen countries that you cannot predict production within 300,000 b/d. You get supply right, you get price right.
thanks for that Flowthrough
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