Well, Yellen came and went and frankly didn't change the market's perception very much at all. Although she more or less telegraphed a hike next month she also tried to be dovish, characterizing the current policy setting as only "moderately accommodative" on several occasions. Perhaps unsurprisingly, the Q&A provided the most entertainment, much of which was unintentional.
Yellen admitted that the Fed will react to changes in economic circumstances brought about shifts in fiscal policy, noting that a fiscal expansion could well prove inflationary. Somewhat bizarrely, she also appeared to push back against the idea of a big infrastructure spend, claiming that there was limited room for the deficit or debt to expand. Could this be the same woman who was advocating for increased government investment spending in March? And the Fed wonders why some people think they are political... Either way, Yellen certainly did less to embarrass herself than the poor bugger who asked her about MBS purchases, whose questions suggested that bond math is several orders of magnitude too complicated for him. That this chap is somehow on a committee that's interested in monetary policy explains a lot about the functioning of the US Federal government.
Anyhow, it looks like "as you were" for markets- higher yields, higher dollar, and maybe even higher equities for a while longer. Here are a few charts that are grabbing Macro Man's interest as we close the week:
1) Fixed income beta throwing the baby out with the bathwater? It's interesting to observe that the euribor curve has moved in a similar fashion to eurodollars, albeit with a lower beta. It's peculiar because the central banks are at vastly different points in the policy cycle and domestic economic fundamentals are rather different.
2) Who needs Trumpomania when you have Obamarama? While there's a lot of excitement about a Trump infrastructure spend, the economy looks to be closing Obama's tenure in office on a high note. Housing starts were gangbusters and jobless claims were so few that the Labor Department could almost have listed each claimant individually on the data release. The Atlanta Fed's GDPNow estimate, meanwhile, is so strong it could almost be called "gangbusters."
3) Europe, alas, remains the Droopy Dog of major economies. The latest source of concern is wage growth, which can barely be called growth. Indeed, the y/y change in hourly wages is now the lowest since the inception of the Eurozone, having fallen precipitously in recent months.
source: @fwred
4) The DXY has broken its resistance level: paging Buzz Lightyear. Not much more to say, really.
5) Actually, there is. As of Thursday night, EUR/USD closed lower for the 9th consecutive day. (H/T Brent Donnelly.) This has never happened since the inception of the euro, though the single currency did rally ten straight days in 2003. Indeed, one has to go back to October 1993 for the last time that the euro or its ancestors fell this consistently. The upshot is that we are well due for a pause...but it will likely be a pause that refreshes.
Yellen admitted that the Fed will react to changes in economic circumstances brought about shifts in fiscal policy, noting that a fiscal expansion could well prove inflationary. Somewhat bizarrely, she also appeared to push back against the idea of a big infrastructure spend, claiming that there was limited room for the deficit or debt to expand. Could this be the same woman who was advocating for increased government investment spending in March? And the Fed wonders why some people think they are political... Either way, Yellen certainly did less to embarrass herself than the poor bugger who asked her about MBS purchases, whose questions suggested that bond math is several orders of magnitude too complicated for him. That this chap is somehow on a committee that's interested in monetary policy explains a lot about the functioning of the US Federal government.
Anyhow, it looks like "as you were" for markets- higher yields, higher dollar, and maybe even higher equities for a while longer. Here are a few charts that are grabbing Macro Man's interest as we close the week:
1) Fixed income beta throwing the baby out with the bathwater? It's interesting to observe that the euribor curve has moved in a similar fashion to eurodollars, albeit with a lower beta. It's peculiar because the central banks are at vastly different points in the policy cycle and domestic economic fundamentals are rather different.
2) Who needs Trumpomania when you have Obamarama? While there's a lot of excitement about a Trump infrastructure spend, the economy looks to be closing Obama's tenure in office on a high note. Housing starts were gangbusters and jobless claims were so few that the Labor Department could almost have listed each claimant individually on the data release. The Atlanta Fed's GDPNow estimate, meanwhile, is so strong it could almost be called "gangbusters."
4) The DXY has broken its resistance level: paging Buzz Lightyear. Not much more to say, really.
5) Actually, there is. As of Thursday night, EUR/USD closed lower for the 9th consecutive day. (H/T Brent Donnelly.) This has never happened since the inception of the euro, though the single currency did rally ten straight days in 2003. Indeed, one has to go back to October 1993 for the last time that the euro or its ancestors fell this consistently. The upshot is that we are well due for a pause...but it will likely be a pause that refreshes.
27 comments
Click here for commentsDitto, as I was looking at the same stuff this morning. US bond charts show we are coming into prior resistance areas so we know why momentum is slowing (not necessarily the same thing as topping a trend) ,but maybe enough to be a consolidation area pending future data?
ReplyWhat did we make of the potential fiscal policy change equating to 5% of GDP with each 1% equating to 50bps of rates? Realistic or not ? Would we e talking about a future target of 4% on 30yrs?
I mean if this was to materialise it really gives me pause for thought because the % hit from historic lows on financing costs looking at debt positions assumed in the last 2yrs ...don't see how that's going to work out well for a lot of people.
Thinking maybe we could see a countertrend short setting up on USD/Yen 112ish to 106 range.
ReplyMerkel conference on Sunday. Expected to announce whether she runs again or not. The money is probably on yes given early announcement.
ReplyIf she says not running, things could get interesting in Euroland.
Having been long since Trump since the election, we are hedging our book 50% today in S&P500.
ReplyUS bond sell-off is not particularly concerning, apart from whatever it makes risk-parity do.
But the plunge in Euro fixed income has none of the US tail winds and bodes ill. Perhaps there is more than one reason for USD strength and there's been a greater risk-off movement than expected, hidden amongst the US treasury sell-off. This is showing up in places like the aussie dollar and EM as well.
Fortunately we have some bang on the money calls left in our pockets from a couple of months ago, which gives us some room for aggression on the short side.
We also think now is a good time to bet that the Trump trades pause.
"I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail."
ReplyPersonally would like to see Trump clear out the dead wood at the FED.
"Righty righty tighty tighty;lefty lefty loosey loosey"
The question, I suppose, is which way will the half opened/closed screw In trumps head turn?
Should give an alternative way of looking at things.
After the USD lift-off, we started yesterday a mid-size long position in EURUSD, at the very least to lock in some of this year's Fx gains. We agree with LB in that we also see some mid-term value in IQI, but we decided to pick up some individual cumulative preferreds instead.
ReplyOur +ES/-TF punt didn't work out great in the end, since TF keeps on climbing unencumbered. It seems we have shipping companies and the like to thank. We hope to see a new high or just a scratch in ES to join Nico in initiating a small -ES punt with a wide SL. Still mostly in cash, eagerously awaiting for december.
We still have the strange feeling of being stuck between a rock and an hard place with the US valuations being where they are and Europe going to have another (2? 3?) trial by fire.
Monetary policy doesn't increase GDP. In the main it causes a monetary transfer between different segments of the population that leads to a bringing forward of consumption from the future to the present. In that sense it smooths out the volatility of long term cycles without adding to total productive output in any meaningful way. You could say it buys time for some companies who have a future to ride out temporary or intermittent issues ,but of course in doing that it also delays the demise of companies who are basically uneconomical even obsolete.
ReplyI've been critical of central banks and their group think proponents ,but at the same time I have been sympathetic because it is clear that for many years goverments have seen much political benefit to be had from treating central banks as though they and they alone had all the answers to economic aliments and thus they alone were also responsible for economic failures.
It is surely the question that if monetary policy is pulling alone or in a different direction to fiscal policy then poor old central bankers are really limited in terms of the scope of what positive effect they can make on the economy.
Past time they just stood up ,put a brave face on it and stated that bluntly passing the parcel back where it belongs to goverments.If there's inequality it's a government failure supported by the limitations of central banks tools.
Ironically, we are now living in a time where many Joe Publics intuitively understand the failures (even perhaps without any real theoretical udersatnding), and that they have been screwed and they are voting that view. Laughably you get people like George Osbourne declaring " I didn't really understand the depth of feeling etc etc). Quel surprise son you have no life experience whatsoever that qualifies you to understand those thought processes so they pass you by until they slap you in the face. One thing I have learned is there is a truth to the old adage 'that if you want to understand a man you first have to be able to stand in his shoes'. I'd say to some posters I have read here please remember that when you think you understand what ordinary people are thinking. Consider first how 'ordinary' are you?
ReplyCheckmate - from a few years back,but it still rings true.
https://youtu.be/LIh5dUOz824
I'm an ordinary man, nothing special nothing grand
I've had to work for everything I own
I never asked for a lot, I was happy with what I got
Enough to keep my family and my home
Now they say that times are hard and they've handed me my cards
They say there's not the work to go around
And when the whistle blows, the gates will finally close
Tonight they're going to shut this factory down
Then they'll tear it d-o-w-n
I never missed a day nor went on strike for better pay
For twenty years I served them best I could
Now with a handshake and a cheque it seems so easy to forget
Loyalty through the bad times and through good
The owner says he's sad to see that things have got so bad
But the captains of industry won't let him lose
He still drives a car and smokes his cigar
And still he takes his family on a cruise, he'll never lose
Well it seems to me such a cruel irony
He's richer now then he ever was before
Now my cheque is spent and I can't afford the rent
There's one law for the rich, one for the poor
Every day I've tried to salvage some of my pride
To find some work so's I might pay my way
Oh but everywhere I go, the answer's always no
There's no work for anyone here today, no work today
I'm an ordinary man, nothing special nothing grand
I've had to work for everything I own
I never asked for a lot, I was happy with what I got
Enough to keep my family and my home
And so condemned I stand just an ordinary man
Like thousands beside me in the queue
I watch my darling wife trying to make the best of life
And God knows what the kids are going to do
Now that we are faced with this human waste
A generation cast aside
And as long as I live, I never will forgive
You've stripped me of my dignity and pride, you've stripped me bare
You've stripped me bare, You've stripped me bare
"Yesterday a very high-powered panel of international banking whistleblowers met and told their stories in the European parliament. The questions raised were important. Among them was the Irish Whistleblower, Jonathan Sugarman, who when UniCredit Ireland was breaking the law in very serious ways reported it to the Irish regulator."
Reply"He related how he was not only ignored by his bank, the Irish regulator but also all the major political parties. He then pointed out that the Irish regulator claims that it always – and it is the law after all – informs the regulator of the home country of banks which have subsidiaries in Ireland, about any serious problems. In the case of UniCredit that would mean the Italian Central bank would have been told that Italy’s largest Bank was in serious breach of Irish law in ways that could endanger the whole banking system. The head of the Italian Central Bank at the time was a certain Mr Mario Draghi."
http://www.guengl.eu/news/article/whistleblower-protection-what-must-be-done
@ SLR
ReplyOl' Christie , shure you couldn't beat him with a big stick
Dipping another toe into the muck today in US fixed income, buying IQI, TLT and AGG. This stage of wearing the Kevlar suit, gloves and concrete boots is always the least fun, but invariably the most rewarding.
ReplyUUP/DXY, RSI ~80, most overbought for >3 years. XLF most overbought in more than a decade….
AUDUSD, EURUSD and JPYUSD already the most oversold since January. US long bonds, most oversold since 2007.
When we are not in the Hammock™, we live for this type of mean reversion trades. TLT and XLF reversion are our best bets here, especially as we assume that XLF is now being traded by bots off of 2s30s. Our FX punts are a little bit smaller for the time being as the trading extremes are not yet quite so marked as the others mentioned above.
@left good luck with your trade, but nothing in the price action on bonds is suggesting 'mean reversion' to me. Zigs and zags aside I think TLT is headed to 100 over a 2-3 month horizon - certainly hope you are right ST though would give me a chance to establish shorts higher up - lets call it the 'smart money' pop!
ReplyXLF I do agree with, since there is more to bank earnings than the steepness of the curve (Kashkari is proposing a capital ratio of 23.5%, wowza!).
yeah if the 30/35 year old bond rally is over, and considering the leverage used by speculators there is a road of stop sells to hell LB since you had such a good year go easy on the kevlar man, that market could inflict horrible pain before it gets better
Reply@Leftback,
ReplyYou're making the high probability play and that's the thing to do, but you know and I know having watched enough charts that really strong trends can and do defy overbought RSI signals . In fact it is the countertrend signals taken that creates the very covering that enables those momentum moves to go further and hurt the P & L. No matter that anyway. You're taking the probability play and let's be honest if you don't take them when the signals clearly flash then when exactly would you take them?
Hope it works for you.
We have some history calling medium-term tops in rates. 2011 was a famous example where the 10y peaked at around 4%, we got long around that spike, and then everyone called LB names for the rest of the year as 1y retreated down to 3% and we made money hand over fist. On that occasion it was a sentiment call, as there was no other living human who liked bonds in April 2011, and the volume of abuse was deafening. As of this moment, the response this year has been mainly pity... ;-) anyway, we are cautious, but optimistic. This selling episode in bonds has been deeper than the equity selling episode in Jan and Feb 2016, and that was a screaming buy for most of us here. So logic dictates this is worth a decent-sized punt.
ReplyHere we are being a little more circumspect than 2011 and have entered relatively slowly over 2-3 down days, using a variety of technical and sentiment indicators: RSI, fast and slow stochastics, "Death of Bonds" articles, and the fear of ownership of anything that has Treasurys, duration or note in the name. We waited for RSI<20 before getting long, which seems to be a cautious enough approach to have made money in Treasurys over the last 20 years or so. Remember that the European and Japanese fixed income guys with cash are looking across the ditch and they really fancy some of what is on sale here.
Enjoy the discomfort or enjoyment at Hammock Capital, as this swing trade rolls along. Not many of the punters here really likes to trade bonds much one way or the other, and only a few are buy-side credit market professionals, so it will be interesting to see what they say when they choose to weigh in. Usually there are a few early longs as bottoms are carved out but nobody wants to let on while they are in the process of getting 1-2% underwater, or more... :-)
We have a little bit of FX on as well, but are less confident of the ability of AUD, JPY and EUR to get one over on Bucky. There is one factor that would get it done however, and that follows in our next comment.
LB wants to correct a misperception that bonds will all go pear-shaped b/c "risk parity guys have blown up". This makes no sense here, b/c if risk parity is a 50.50 stock/bond mix, then those guys are up 5-10% in equities and down 3-7% in bonds depending on duration, risk tolerance and manager IQ. So if anything they did OK the last two weeks, but now they have the issue of rebalancing, which will mean they have to sell some equities and buy some bonds. Therefore, risk parity HF (as well as those horrible dated retirement funds will all need to rebalance, e.g. by selling XLF, SPY, IWM and buying TLT, AGG etc..
Another factor we should all think about is a return of the Lord Voldemort to the business of currency intervention. China will probably begin to jawbone well ahead of the big figure of USDCNY 7,00, and would certainly want to intervene if that number eventuates. Imagine waking up one Monday morning (because they love to do this stuff overnight) and it is suddenly raining USD, b/c PBoC wants to stem the capital flight. Suddenly JPY goes bid 1-2¥, Spoos gap down 20 handles, and all of a sudden everyone and their uncle are offsides (especially tiny punters who bought the XLF) and it is Risk Off City, US10y head South and snuggle up next to 2.00% again. One has to keep an open mind where China is involved, but if they do, it might be a bit tasty....
Replyhttp://mobile.reuters.com/article/idUSKBN13D13L?feedType=RSS&feedName=businessNews&utm_source=Twitter&utm_medium=Social&utm_campaign=Feed%253A+reuters%252FbusinessNews+%2528Business+News%2529
The risk parity guys lever up the bond part of the portfolio so the levered vol matches the equity vol - roughly speaking. So - a 50-50 mix of vol weighted equities and bonds may involve a 3X leverage on bonds. The recent bond moves have to have caused to massive pain to levered bond portfolios including this risk parity.
ReplyRisk parity also assumes bonds and stocks are negatively correlated. That can change. They may get positively correlated if they both move in response to inflation fears. We need to prepare for a regime shift that is likely to upend a lot of assumptions that have worked over the past 8 years or even since 1980 - in an era of secular dis-inflation - if inflation makes a reappearance as issue numero uno.
Overall , I worry about a financial landscape that has become hyper-adapted to the "new normal" - 1% growth, 1% inflation and ZIRP forever. So the way to win in that environment is to lever up like crazy and chase tiny incremental yield on massive leverage. If that has now changed - it is silly to assume there wont be casualties.
ReplyThe "new normal" was ofcourse had an overarching theme of globalization and huge trade flows , including a continuous annual trade deficit run by the US to the tune of $800Bn+, every year forever! Obviously that could not go on foever, but it was fun while it lasted pumping $ into the world that came back to play in out markets.
ReplyIf that is reversing - we wind up with a massive $ shortage in the world - maybe we are seing the early days of that. $3T + $ borrowings by EM corporates will cause some serious pain in a roll back of trade flows.
Wow - if this Trumponomics is for real it is really going to upend everything. Should be fun.
When is the US stock market coming to terms that the un-hedged foreign profits of US MNCs will take a hit from the stronger dolly?? Never mind the same discount rate accredited for 'justified higher valuations' when the 10s was at 1.50%, also sink in...
ReplyAs LB says, the risk-parity blow up theme is overdone. There are many daily-priced RP funds, so any blow ups will take place publicly. AQRIX -4.1% for the month, +6.71% ytd. TLT -8.9%, +2.2%, SPY +2.2%, +8.7%. It looks like its doing just what it says on the tin...
ReplyRP. There might be nuances. Broadly are RP funds which are basically trying to manage the seesaw of policy between rates and growth more or less likely to be overweight yield or growth equity? Those shooting for equity yield and specifically in rate sensitive sectors will be taking a double hit from recent movements. Those are overweight big blue global growth are also taking hit because currency implications have already priced in the growth problems for the Apples of this world.
ReplySummarise it best by saying when is a so called balanced portfolio not actually really diversified form a change in economic policy and economic outlook? Would not be the first time people failed to get real diversification right.
I can't see that economic reality has changed all that much or at all with the trump vote. Bonds were due for a kicking and the move earlier this year was way overdone due to ECB QE1 and 2.
ReplyWhere this leaves us now with bonds ? I suspect LB is right that this is not the end of the secular bull market in bonds. But I'm wary buying bonds here, as Nico and Washed suggest, there is room for the market to kick participants who are still long for dead. Although long bonds is tempting here because sentiment just looks so shitty at the moment. It probably meets the sentiment criteria but not the duration of crappy sentiment criteria. I bought some after the 3 day dump but sold on the minor rally and it is not looking healthy enough to buy into again currently. I think I will wait for some more bottom formation or another severe downward move before initiating any long position again.
I suspect the Trump SPoos rally should end some time before Jan 20 when he actually takes office because the reality is likely to be nowhere near the narrative fantasy. The question is whether to short some here or wait for 2400 in January.
I completely missed the dollar moves but managed to catch a decent move in AUD.CAD after the election. CAD market positioning was very short and AUD very overbought.
Fed hike in Dec looks like a dead cert now. Will it turn out to be a mistake ? Trump and everyone else will surely blame the Fed when the economy turns south as it tends to do at the end stages of an expansion. Wouldn't like to be in Yellen's shoes. Must be like pulling straws with the rate hikes. A rate hike, strong dollar and the move in bonds could be the thing that eventually tips things over. US PMI was in an upswing before the election but it may peak out in the next few months.
Stepping back, does it make sense to pay higher multiples at this stage of an economic expansion, with rates and the dollar going up ? Oh yeah, I forgot, Trump got elected and that changes everything. Even Druckenmiller and Dallio say so.
" I suspect LB is right that this is not the end of the secular bull market in bonds."
ReplyLB, didn't actually say that. He is of the mind there is a 'swing trade' to be had. Gundlach more or less implied the same thing. However, both Gundlach and Dallio see this as the 'end of the secular bond market' in terms of long term trend following. I concur with that not because of Trump or indeed any single reason. I agree because I see a confluence of issues coming together to make it so.
Precision in defining terms here as become more important than ever because timeframe is everything when we are talking about the end of a 20 to 30 trend. They are like tankers , turning is a slow moving process that means swing trades and longer term trend following can co-exist. :)
ReplyI believe the rising USD and higher interest rate are indeed negative for multinationals which have a large portion of income from the rest of the world. But the next earning season is late Jan, which is still two months away. The index could still go higher before then. So maybe the key is to identify those multinationals and gradually short those single name stocks, especially those with thin margin and unlikely to directly benefit from the deregulation.
ReplyAnon 3:12 said "...maybe the key is to identify those multinationals and gradually short those single name stocks, especially those with thin margin and unlikely to directly benefit from the deregulation."
ReplyI think you'd need the kevlar for that as broad market effects (especially in today's post-factual market...) could see you correct but still losing money. Short multinationals (high % non-usd earnings) vs long domestic earners may isolate the idea more accurately.
Fidelity has an ETF (FEXPX) that invests "...primarily in securities of U.S. companies that are expected to benefit from exporting or selling their goods or services outside of the United States." that may be shortable.
The domestic component may be tougher to find. Something like IWM (Russell 2000) would be the traditional answer, but that may be already overbought for different reasons. AIRR ("American Industrial Renaissance") looks like a horse that's already bolted. XRT (retailers) the same. More research required...