The Good, the Bad, and the Ugly

The good news:   Bank Monte dei Paschi rallied 6% yesterday!

The bad news:  It was only a 1.6 cent rebound.

The ugly news: DB keeps dropping like a stone (another 4.4% yesterday), and its Cocos are starting to get shellacked again.

The good news:   The services ISM delivered its strongest reading since last November, printing 56.5.  Coming on the heels of a stronger than expected ISM report, perhaps the US economy is kicking down the wall of worry?

The bad news:  The GDPNow forecast for Q2 isn't looking as strong as it was, with growth now tracking at 2.4%, down from 2.8% the day before the Brexit vote.  Much of the downgrade appears to be a function of weaker residential investment, which may seem odd given the housing-boosting effects of lower rates.   Speaking purely anecdotally, however, in Macro Man's own little corner of La-La Land something like 5% of the entire housing stock is currently for sale, representing 13 months of supply.   Now, this says more about the finance industry than it does about US housing generally, but either way it's a little eye-watering.

The ugly:   The initial read on Macro Man's payroll number does not look good, with a current forecast of just 85k.  Adjusting for the Verizon employees going back to work, that still only puts us as 120k, well below consensus.  Such an outcome, were it to materialize, could easily get the Fed doves to push the "Achtung!" button yet again- lord knows it's had a regular workout recently.  In the comments section yesterday, a reader asked Macro Man to share his thoughts on the significance of Friday's number.  Frankly, Macro Man isn't sure that it's that significant at all. 

With the spectre of Brexit uncertainty set to loom for the next several months, it's difficult to credit that the policymakers depicted in yesterday's minutes would countenance tightening any time soon.   After all, anyone who takes TIPS breakevens at anything remotely approaching face value either doesn't understand what they're doing or has an overtly dovish agenda; Macro Man will leave it to the reader to decide which of those applies in this case.   He had to laugh when he saw that some FOMC members had already started moaning about the possible hit of higher energy prices on consumer spending; no doubt this was the same crew that moaned about the impact of low energy prices on resource employment and investment a few months ago.

While stocks once again took the dovish Fed to heart, at this juncture you'd have to think that just about all of the juice has been squeezed out of of the "easy Fed" trade.  Amazingly, there is just 5 bps of tightening priced in for the FOMC over the next twelve months; at the beginning of the year, there were 58 bps priced for the equivalent period.

Now, with only a 20% chance of one hike over the next year in the price, you can of course make an argument that a super-strong number will have an outsized effect; after all, with so little priced into the market, the balance of risk is tilted firmly in one direction.  This is all true.

However, the lesson of the past several years is crystal clear (and your author has a few scars to prove it); fixed income sell-offs resulting from strong payrolls are a fade.   After all, the Fed has generally tended to look on the downside of life, and it's clearly paid for investors to do the same (other than large cap US equity investors, for whom it's paid to act like the "see no evil, hear no evil" chimpanzees.)

In fact, Macro Man saw a remarkable statistic yesterday; since the March FOMC announcement, fully 49% of the daily cash closes in the SPX have been between 2070 and 2110 (less than 2% apart.) Yep, it's been a difficult road to travel while being an SPX bear.   A safer alternative might be to watch for bearish action from afar;  the screen below might be a good place to start looking.