Holy smokes, this election really has #mademacrogreatagain. The DXY is breaking out, yields are rising/curves steepening, and for a couple of days at least it's actually paid to be forward looking. Macro Man has used this opportunity to take profits on a couple of trades that are getting carried along for the ride.
Although the chart would suggest that the Euribor curve has further to steepen, any time you can take 20 ticks out of a dead market it behooves you take take the money and run.
Similarly, the EMB chart looks terrible, but the head and shoulders target was met so Macro Man rang the register and said cheerio.
That being said, the rates market over the last couple of days has served as a happy reminder of the market as it used to be and why macro could make money. Even after the SPX rallied back to unched yesterday, you could buy the ED 2 vs 8 spread at 36 bps. That's at 50 now (the chart below was from earlier this morning.)
Looking ahead, there could be some interesting calendar set ups. Although we don't know how Janet Yellen will react to a Trump administration, we do know that she has been quite dovish for the last several years and that prominent Republican economists (John Taylor, for example) have suggested that rates should be raised more aggressively.
It seems reasonable to expect that in early 2018 Yellen will be replaced by one of these economists. The EDH7/Z7/U8 butterfly is priced close to flat. It probably won't move very much in the near future, but selling it allows one to bet that Yellen's replacement will be more aggressive than she will be as a low cost "bottom of the drawer" proposition.
Finally, although it's premature to think in these terms before we know the slightest thing about a Trump administration and its relationship with Congress, it's fun to look at some key macro variables sorted by year of presidential term. The equity market effect is well known:
...but did you know that industrial production growth tends to peak in the second year of a term? Or, putting it another way, new presidents are often welcomed with a recession; the last two have been.
Finally, T bill yields are a bit all over the shop depending ion whether you look at average or median rates. We know bill yields will be low in year 1; how they evolve after that of course depends on timing a recession. If a hawking Fed chief arrives in early 2018, might this set the stage for a 2019 contraction (defying the historical norms?)
It's too early to know but early indications are that it will be fun to figure out.
Although the chart would suggest that the Euribor curve has further to steepen, any time you can take 20 ticks out of a dead market it behooves you take take the money and run.
Similarly, the EMB chart looks terrible, but the head and shoulders target was met so Macro Man rang the register and said cheerio.
That being said, the rates market over the last couple of days has served as a happy reminder of the market as it used to be and why macro could make money. Even after the SPX rallied back to unched yesterday, you could buy the ED 2 vs 8 spread at 36 bps. That's at 50 now (the chart below was from earlier this morning.)
Looking ahead, there could be some interesting calendar set ups. Although we don't know how Janet Yellen will react to a Trump administration, we do know that she has been quite dovish for the last several years and that prominent Republican economists (John Taylor, for example) have suggested that rates should be raised more aggressively.
It seems reasonable to expect that in early 2018 Yellen will be replaced by one of these economists. The EDH7/Z7/U8 butterfly is priced close to flat. It probably won't move very much in the near future, but selling it allows one to bet that Yellen's replacement will be more aggressive than she will be as a low cost "bottom of the drawer" proposition.
Finally, although it's premature to think in these terms before we know the slightest thing about a Trump administration and its relationship with Congress, it's fun to look at some key macro variables sorted by year of presidential term. The equity market effect is well known:
...but did you know that industrial production growth tends to peak in the second year of a term? Or, putting it another way, new presidents are often welcomed with a recession; the last two have been.
Finally, T bill yields are a bit all over the shop depending ion whether you look at average or median rates. We know bill yields will be low in year 1; how they evolve after that of course depends on timing a recession. If a hawking Fed chief arrives in early 2018, might this set the stage for a 2019 contraction (defying the historical norms?)
It's too early to know but early indications are that it will be fun to figure out.
16 comments
Click here for commentsLong Bond making its first meaningful attempt to bounce, but it has to overcome the obstacle of the 30y auction today, so we'll wait and see. Yesterday's 10y auction was arguably the worst since March 2009, indicating a shift in sentiment and perhaps a short-term bottom close at hand.
ReplyAs we pointed out yesterday while the 12yo were w*nking off, dollars and rates can't rise this quickly w/o some pain, and we are starting to see that in the rate-sensitive sectors today. mREITs, preferreds and munis are all being taken behind the woodshed today. All of these are things that we like, but have stayed away from buying all year on valuation grounds.
To LB and others, this is where it gets interesting. There is nothing we like better than to sit on our arse in the Hammock until people start panicking - mindlessly dumping yield-producing vehicles out the window at attractive prices, at which point we like to amble over there, rake up a few piles at a time and load the wheelbarrow.
We assume that the hysteria over equities reflects the assumption that Trump will succeed in tax reform and deregulation, as well as defeating the main enemy (not ISIS, but Global Deflation). Laudable aims in many ways, but curb your enthusiasm.
It's almost like a mirror image of 1980, but instead of Whip Inflation Now, it is Reflate Or Bust. But it is not going to be that easy. He will have to fight the fiscal conservatives within his own party, as well as Dame Janet and her regime of slow growth financial repression, not to mention a slowdown in China, which continues to weaken CNY and strengthen USD.
Meanwhile, we are all enjoying the vol. It has been a massively Macro month already, although as always there are going to be some funds that have completely cocked this up. It's been a bad year for Egos in the markets. We expect a few more of these are going to be taken out on a stretcher before the year is out. It's not over for the Risk Parity guys, they are in big trouble.
http://ibankcoin.com/flyblog/2016/11/10/markets-are-high-on-trump-dow-surges-to-record-highs/
Reply@LB, I suspect DJT solves fiscal conservatives using Ryan's magic asterisk. Cut some high profile programs (the ACA is gone, I think it is safe to say), cut taxes even more, build some things that employ rural white folks, wave the magic asterisk and voila. Saint Ronnie didn't worry about deficits, and neither will DJT or Paul Ryan.
ReplyA John Taylor Fed will be fascinating to watch.
On markets, RE will be interesting eventually, but if markets and John Taylor make financing expensive, entering anything with ex- or implicit leverage will be risky a while.
Copper is over $2.50.
I know Trump has campaigned as a hater of low rates. But how does Trump fight an FX war with a hawk? And doesn't a guy who is taking a gamble want the Fed to suppress rates while he increases supply of 10 and 30 year yields? Of all of his campaign promises that would be broken, this one seems to be among the most easiest to break. Especially if the guy in Ohio sees his adjustable mortgage rate skyrocketing?
ReplyThe XLF is at 8 1/2 year highs on a steeper yield curve - and hopes for repeal of Dodd-Frank? This election result has turned into every right-wing banker's wet dream about making it with Ann Coulter, even the ones who didn't see it coming.
ReplyIt would be truly ironic if Obama turned out to have be remembered like Herbert Hoover, sitting in the White House while the rich got richer, and Trump ends up being cast as FDR, rebuilding rural America. Don't laugh, we live in a strange world.
Bondmageddon is well and truly here. As always with these things the magnitude and velocity of it is larger than even our most bearish projections. Yet given the spread between JGBs/bunds and Treasurys, we think that these yields will look attractive soon, if only to European and Japanese investors. A 3% long bond might get a few people excited.
LB is also interested in the potential for buying higher yielding munis and preferreds as these knives continue to plummet. The Kevlar gloves are ready, but not yet donned.
Bloomberg Markets: Dow Jones Industrial Average closes at new all-time high
ReplyMy advice - sell stocks... hahahaha yes, ok.
This shift in narrative really seems ominous. If equity land was built over years on basically the low rate narrative, simply replacing "low" with "high/rising" could potentially just turn things upside down quickly, especially accompanied with the high valuations and stagnant sales growth, lowering risk premium should be compensated by falling price since earnings won't do it. I can buy that any infrastructure plan and trade restrictions can drive manufacturing/import prices and inflation higher but I'm not sure whether it would generally translate into higher earnings. Like MM said in a generally depressing equity environment there'll be winner and loser sectors. Look at low beta consumer/food stuff (eg. GIS,PEP) reacting to this narrative shift. Add in the mega large debt pile and gradually rising servicing costs doesn't look good.
ReplyI'm wondering REIT land though, if the yield curve manages to hold its steepening shape shouldn't that slowly translate in larger net margins? Of course assuming real estates don't crash. Then it might be wise to keep LBs literal wheelbarrow close nearby for panic dumps as they might be the better way to go forward.
Shouldn't Trump economic policy be bullish for REIT? I remember that I read on NYTimes that his tax policy is very friendly toward real estate developers. Consider this is the his expertise and is likely to be a part of his "business friendly" package, REIT seems to be a good buy given the assumption that the yield drop is overdone.
ReplyI actualy sold my REM today. Partly because a bond dump hits the financing side and also because as a GBP based investor a lot of my profit was FX which I think has run its course. It s been a fantastic yield but I m willing to step back for a while.
ReplyAnd as for narrative. It's interesting to see dow do 1300 points up from the low on a swing on nothing more than narrative.
ReplyMore here.. http://polemics-pains.blogspot.co.uk/2016/11/a-narrative-narrative.html
Tech stocks got schlonged today. As Pol mentioned on his blog, was that because people think Trump will "get revenge" on them?
ReplyIcahn et al buy the nuts out of limit down. Buy Eurex open, Emini is 20 handles off limit. Algod and 12yr olds are conditioned to buy gaps when their historical analysis takes in Brexit etc. Momo takes over. Had Emini been heavy limit down into Eurex open, story may have played out differently. Divergence all over the place. Markets going to react to every Trump utterance. Trump brought Vol back and there's nothing the Central Banks can do about that!
ReplyVery rarely are campaign promises kept. Bush 1 and no new taxes, Clinton and middle class tax cuts, and Obama and no individual mandates (and of course, you can keep your Doctor and plan). Bush 2 actually tended to do what he said and se how that turned out. Why should anyone think what Trump said will be carried out? His wall in places will be a fence, but he will tell his followers it is like a wall and will not lose a vote. His infrastructure will include pipelines, like Keystone and DA, and he will claim that counts (and is even better as taxpayers do not have to foot bill).
ReplyAt some point REITs will be a buy. Maybe not Friday, but soon as valuations are pretty good if you go to smaller cap with a bit of hair. Think VER, SNR, CCP.
While timing is tricky, short campaign promises and go long lower interest rates for longer.
he wont keep all of his promises but I think he will make a honest hard push on the major ones. He knows he is not in with GOPe and all he has is being popular. He knows if he doesnt deliver he will lose that and become a 1 termer, assuming he wants more then 1 term.
Replyquestion is which ones he discards and which ones he is serious (not watered down) about.
Wonderful to see the left-wing, liberal, "democrats" RIOTING about the outcome of a democratic election (because they lost), and having spewed their diatribe about Trump causing divisions in society, these left-wingers proceeded to: murder a few innocent people, attack and cause GBH to many others, attacked the pets of bystanders, stole cars, wrecked and looted businesses and are now calling for the assassination of the President-Elect.
ReplyOn this Remembrance Day, remember that the Nazi movement arose out of socialism and left-wingers.
Tech stocks are getting slammed because they were the coolest thing in town and now a 50x PE doesn't look so good next to old school companies at 6x that are about to get billions of cash showered on them.
ReplyThe Democrats declared war on three of the ten or so industries: financials, pharmaceuticals, mining/energy and maybe industrial goods as well, if you wind back to Bill's trade policies.
Hilary was going to regulate the cr*p out of these companies, never mind this would hurt the poorest the hardest, even if they kept their jobs. There were teams of the high flying righteous ready to swoop in and tell everyone what to do. I feel sorry for her, all those briefings she demanded and read, all those years where thousands of people were jostling for roles in her administration.
There is a real chance regs get wound back.
Even social issues such as abortion restrictions have silver linings. Unplanned pregnancy is no doubt impoverishing for mothers, but good for demographics and the people who make it into the world. Who's to know how the moral balance really ends up.
I want to know what it means if Dodd Frank gets wound back from here.... Return of (explicit) prop desks? Banks can seed hedge funds and private equity... All of a sudden finance is exciting again.
A bunch of strategies that barely worked at zero rates become more profitable with a base rate.
Surely if rates rise in the US other countries follow.
I'm a foreigner and would have voted Hilary, but am weirdly excited about the whole thing.