* First things first: for the last payroll day before the Fed meeting, Macro Man's model is relatively upbeat, looking for a figure of 210k. This is well above the ostensible consensus of 175k, though perhaps not above the whisper number after yesterday's ADP, nor what is priced into the bond market.
* Speaking of the bond market, the "key level" in 5 year yields turned out to be more of a Maginot line than impregnable fortress. The market closed November squarely above resistance and will close this week above it as well barring an abrupt volte-face. One need not subscribe to the "generational turn" thesis in fixed income to target a further rise in yields. That being said, Macro Man remains of the view that it is premature to call the generational turn, and he is also leery of the tendency of markets to top on good news.
* The real test for the bond market will be when negative consequences start to emerge from higher yields. While non-bank earnings etc. are naturally vulnerable to higher yields (and the higher dollar that ensues), as is mortgage borrowing to a degree, the real vulnerability comes in the form of financial asset valuations that are predicated on super-low rates and discount factors. Macro Man's equity model is starting to feel the pinch, however slightly: the current return forecast is the lowest in more than two years.
The reason is that the "liquidity factors" underpinning the bullish forecast are starting to ebb. While the growth-based factors have actually picked up recently, the impact has been swamped by a decline in the (still bullish) liquidity factors. This is clearly one to keep an eye on.
* So, too, are developments in Europe, and not just the weekend votes. Reuters has been excellent in the accuracy of their ECB "sources" stories over the past year or so, and the latest iteration suggests that while the ECB will extend QE next week, there will also be a qualifier to ensure that the market understands that the program has a finite lifespan. This is setting up to be another potential disaster for players in all things European, particularly the currency and front end govvies.
It's amazing to realize that since the end of July, 2s-10s Germany has steepened by 60 bps, 10 more than its en fuego US equivalent. Much of this has come from the rampant demand for short end paper, with Schatz trading more than 30 bps through the ECB depo rate. A lot of put structures have gone through in that part of the curve recently, and it's not hard to see why.
November's flash CPI printed its highest y/y rate in two and a half years. With oil priced in euros now surging on a y/y basis, readers are invited to consider what this might mean for inflation moving forward.
To be sure, the ECB is also aware, and Draghi has attempted to downplay the base-effect driven uptick in inflation. After all, we are still a long way from close to, but under 2% at the moment. That being said, it looks all but certain that the next several months will see us move further away from negative CPI as well. The sources story have given a hint of the hawks starting to unfurl their talons a bit. With the 2019 forecast expected to show CPI close to target, how long will it take with upside inflation beats before those talons are put to use?
* Speaking of the bond market, the "key level" in 5 year yields turned out to be more of a Maginot line than impregnable fortress. The market closed November squarely above resistance and will close this week above it as well barring an abrupt volte-face. One need not subscribe to the "generational turn" thesis in fixed income to target a further rise in yields. That being said, Macro Man remains of the view that it is premature to call the generational turn, and he is also leery of the tendency of markets to top on good news.
* The real test for the bond market will be when negative consequences start to emerge from higher yields. While non-bank earnings etc. are naturally vulnerable to higher yields (and the higher dollar that ensues), as is mortgage borrowing to a degree, the real vulnerability comes in the form of financial asset valuations that are predicated on super-low rates and discount factors. Macro Man's equity model is starting to feel the pinch, however slightly: the current return forecast is the lowest in more than two years.
The reason is that the "liquidity factors" underpinning the bullish forecast are starting to ebb. While the growth-based factors have actually picked up recently, the impact has been swamped by a decline in the (still bullish) liquidity factors. This is clearly one to keep an eye on.
It's amazing to realize that since the end of July, 2s-10s Germany has steepened by 60 bps, 10 more than its en fuego US equivalent. Much of this has come from the rampant demand for short end paper, with Schatz trading more than 30 bps through the ECB depo rate. A lot of put structures have gone through in that part of the curve recently, and it's not hard to see why.
42 comments
Click here for commentsbefore rates rise too much too fast Mnunchin would like to lock some rate issuing longer maturities in other words, stuff retail with unbearably long duration
ReplyItaly 30Y rate has shot up 50% since last summer meanwhile folks who were desperate enough to loan money to Italy for 50 years at 2.8% are now down big sure you might get your principal back in 50 years but your mark to market looks indernal
Did anyone see the front page of the Economist this week. Maybe LB is right after all ;).
Replyhaha yes CV - check this out
Replyhttp://winnersedgetrading.com/wp-content/uploads/2010/11/07-04-12_economist_covers.jpg
The lesson there is, economist covers have a decent record at calling short term inflection points, but the secular run tends to go on for quite a while - I don't think I (or for that matter LB or MM, judging by their recent comments) would have a problem with that notion - fits with a narrative of a kitchen sink trump administration nuking the dollar in 2018, which is about how long it would take to take out the checkbooks and dust them.
So…. thanks for the thoughtful post MM. Our bingo call is +180k, not that it matters.
ReplyLB thinks we may see selling of USD and equities today, more or less whatever the number is, b/c of the tendency in bull markets to Buy the Rumour (speculators) and Sell The News (traders). Few can argue that Bucky and Spoos are in a bull market and they have been benefitting from buying of the rumor (ADP leading to a >200k whisper number) this week for sure. Today's number provides an opportunity for traders to lock in profits.
Likewise we may see buying of Treasurys and gold today. In bear markets in bonds, there is a tendency to Sell the Rumour (hedge funds) and Buy the News (fixed income investors). Mr Bond is very close to being in a bear market (~20% off the peak), and gold is certainly in a bear market here. Bear markets are prone to sharp snap-back short covering rallies.
MM is correct, bonds have priced in a massive number here and even a slight disappointment will ignite a squeeze.
In case you wondered, here is the Economist cover:
Replyhttp://www.economist.com/printedition/2016-12-03
Thanks, CV, let's see if the Economist Cover indicator signals a Top. It is often like the Sports Illustrated curse…..
MM's observations on €-based inflation are well taken, btw, and may prove to be an important driver of FX going into EoY, given that we assume Dame Janet is Priced In, but also that we think she will be One and Done for 1 or 2 quarters.
ReplyThis is one reason why Draghi is unlikely to reveal any further enhancement of his fearsome armory next week. It's likely that his assortment of bazookas is going to stay in his pocket this time with inflation already having been primed by higher oil and the € having been at 1,05-1,10 or so for a month or two. We are long EURUSD, btw.
i am not sure about EURUSD if an Italian 'no' is confirmed on Sunday - Italian equities will probably open 2/3% down, another reason for speculators on spoos to sell longs before the weekend and buy next dip on Globex
ReplyNico - I think there is far greater ambivalence towards the italian referendum - first, it is thought a yes vote there may be more damaging long term. Second, how does anything there compare to the 1-2 punch of brexit and trump, which were much greater surprises than anything coming out of italy.
ReplyIt is clear that for the market to go down and stay down it needs to be because of something other than a populist backlash - the little guys can't even make their presence felt for more than 12 hours before wealth inequality surges again!
Nico, good point - but Italy leaving makes € closer to a reincarnation of the DM, not the lira.
ReplyAlso in the New World Order where Bucky is correlated with Spoos, € is now a RISK-OFF currency, no?
Actually, gold is still (by the classic definition) in a bull market here. It went from 1046 in 201512 to 1375 in 201607. It needs to fall twenty percent (1100) to officially enter a bear market.
ReplyI dont think we will have 3 out of 3 this year. If one cares for anecdotal evidence, most italians I speak to will vote no. Maybe that says more about the people I meet than the end-result. Still, the feeling is of giving too much power to someone who is ready to leave a mess if he doesnt get his way. Still long EUR, but will close today, not knowing how the reaction will be on Monday. Started yesterday -ES at 2190, after being confronted with nothing more than good news and roses in the foreseeable future under a Trump administration, with a rising SPX/USD/UST. Discount rates? What are those? Nevertheless, still long some core stocks. And is always good to know your friendly neighbour the POTUS-elect is watching for some of your shared holdings:
Replyhttps://www.bloomberg.com/graphics/tracking-trumps-web-of-conflicts
We are not going to celebrate nailing the BLS number, we are too classy for that (insert comments here !!).
ReplyA few quick questions: first for Bucky: "is that all you got?", and second, for all of the deflationists out there, "did you see the hourly wage number actually DECLINED?" Reflate that, my friends. Thirdly, to the punter who bought the XLF at 22.95 yesterday, "are you feeling lucky, punk?".
We may see some initial strength in equities and weakness in bonds today, but it will likely be transitory, as Dame Janet would say. Weekly options are expiring, and punters will be exiting those positions today. Looking ahead to the Dec expiration, there is an absolute truck load of in-the-money XLF calls out there, and that's not bullish.
Mr Shorty is going to experience some Cold Steel in the fixed income market before very long. It is clear that there are a lot of hedges that have to be lifted starting today and into next week. The yield curve is going to flatten. Gaps will be filled. Bucky is tired. Goldfinger is showing signs of life, and Mr Bond is going to Die Another Day.
washed - don't need the market to stay down dipping is plenty enough i'd be covering on Globex just like Trump day when folks were sleeping. Italy or not, Spoos price action is pointing down i'm happy to see Evil Speculator going short finally (even if i don't follow his calls he is good company)
ReplymedMac 3 out of 3 sounds a bit wishful and someone telegraphed - if the polls are once again to be faded then you'd get a yes. I lived 3 years in Italy and my understanding is that they are absolutely hopeless when it comes to 'mainstream' politics and many would personally like to kick that arrogant dick Renzi in the face so frankly, polls could be right this time. It is their chance, once again, to vote against establishment and your 3 out of 3 becomes a global trend, a return to nations, the end of the globalist illusion.
LB -it's all about the timeframe i guess while technically you can play a bounce to 1.10, an Italian no will trounce the pair and parity will be in the cards. That is immediate timeframe, longer term getting Italy and other dysfunctioning economies out of the Euro, you are right, is positive for EURUSD you probably have a much longer timeframe than most here
Nico, for the time being, simply playing a bounce in EURUSD to the 1,09-1,10 area.
ReplyAlessandro di Battista for PM !
ReplyDoes nobody care about the Austrian election which could have much bigger impact than the expected "NO" in Italy?
Replyoh we do
Replylisten up if you are looking for a safe currency, have missed the train on USD, and are wary (rightly) about the EUR there is always the GBP at still a sexy discount
[book talk mode OFF]
Agree with @washedup at 1:55pm: bond markets are broadly pricing in a "No" vote in the Italian referendum, and the inability to pass reforms in Italy won't exactly be a surprise. Also, the "No" vote has consistently held a lead in the opinion polls. Plus many insiders believe Renzi will stay even in the event of a "No", and he has to consider limiting the inevitable fallout to Italian bank sentiment. My take is that it will be a narrow "No", Renzi will stay, there will be a contained sell-off and the difficult process of dealing with bank recapitalization will continue. Perhaps if the fallout is steep enough, it may strengthen Renzi's hand in dealings with the EU to nudge them to water down new bail-in rules as an exception to fix Italian banks.
ReplyOn the political surprise front, the Netherlands election in spring 2017 may provide more of a shock wave for markets to tackle.
"Mr Shorty is going to experience some Cold Steel in the fixed income market before very long. It is clear that there are a lot of hedges that have to be lifted starting today and into next week. The yield curve is going to flatten. Gaps will be filled. Bucky is tired. Goldfinger is showing signs of life, and Mr Bond is going to Die Another Day."
ReplyHmm, ok. I take that. It is looking like a decent setup here. As for the EURUSD, it will be biased for the upside next week I think given that it is more likely to rally on hints that the ECB won't do QE forever, than it is to plunge on a QE extension. I do, however, agree with Nico ... if the political throw of the dice is unfavourable in the next few months, (first in Italy, and then in the Netherlands, and then in France), look out below!
By the way, this is also why Schatz has been rallying so hard I think. The market always discounts euro panic in the front-end spreads I don't understand why everyone always is looking at 10y spreads.
I stand by my point earlier. I think Yellen and Trump could well end up with a USD bull no matter what they do.
Not to say that these elections aren't all politically and sociologically interesting, but which one is going to move the needle on Monday morning? Austria. Lovely country, small economy. Presidential post is largely ceremonial, so: no, we don't care as much about it. Italy is important to Europe for any number of reasons, not least b/c of the fact that French and German banks have propped up its bankrupt banking sector.
ReplyInteresting post here, not sure if MM already alluded to this - but the bund-US10y spread is at 27-year wides:
http://blog.gavekalcapital.com/?p=12307
European and Japanese fixed income investors will be anxious to lock in some of that yield in Treasuries. Bond bears beware, for the Death of the Widowmaker may have been greatly exaggerated, and it can strike back viciously at times.
As for equities, I can fully guarantee that today's 2.4% yield on the 10y is going to look better than the (non-existent) yield on those cash-burning biotech start-up names once the IBB starts plunging again. That thing is in a bear market, by the way, and is making a right shoulder, so sell the rips.
"there is always the GBP at still a sexy discount"
ReplyWe love it when you 'talk dirty'.
"if the political throw of the dice is unfavourable in the next few months, (first in Italy, and then in the Netherlands, and then in France), look out below! "
ReplyIf all of that were to actually happen there won't be a 'below' left worth calling one and it will be the buy of your life time.
From Marketfield
ReplyNovember's ISM Manufacturing Survey generated a reading of 53.2, above expectations of 52.5 and consistent with a steady period of growth for the industrial sector. This equals June for the strongest report of 2016 and the 12 month ma has continued its climb higher to 51, its best level since December. The improvement seen in the last few months suggest that the overall industrial sector has seen a meaningful improvement in conditions which we believe largely reflects the stabilization of energy and mining industries where the prior weakness had been concentrated. This is somewhat reminiscent of the 1998 dip in the index, which was ultimately followed by a powerful last leg to the economic cycle, although that period of weakness was more broadly based than the 2015 decline in activity.
The various sub indexes contained few surprises. New Orders were steady at 53, close to the 12 month ma at 53.7, while Production rose to 56, its highest level since January 2015. Export Orders remained positive at 52, but it is a little early for this survey to reflect the impact from the recent USD surge. Employment remained positive at 52.3, despite which the ADP survey still indicated modest job losses for November. The Prices Paid index was steady at 54.5, pulling the 12 month ma into positive territory at 50.8. Again the recent sharp increase in both metals and energy prices will not have had time to influence the survey, and it will be interesting to see what number next month's responses generate/
We repeat the following regarding the Euro [as apart from share prices of European banks, which is another story]. Every weak "Southern European" country (Greece, Portugal, Spain, Italy and this also includes France) that leaves, or threatens to leave, the € actually makes it stronger and closer in value to the (notional) value of the DM. The situation in Holland is rightly more of a concern b/c the "Dutch €" would be one of its stronger (Northern European) components. A Nexit would be more serious than Brexit since UK was, after all, not a part of the €. One wonders if a compromise solution might be available for the Dutch, who are among the most committed Europeans? Maybe we are getting closer to a two-tier €, as MM has discussed on occasion?
ReplyEquity markets are set up to trade lower, and gold to trade higher. European events at the weekend might provide the narrative.
Btw, as of yesterday's close, DBLTX and PTRAX were at 3 year and 5 year lows, respectively. Even the "Bond Kings" have taken it in the rear end over the last few weeks, so there is no sign that they were able to hedge interest rate risk at all. I assume all they are able to do in those monster funds is to play with duration and then quietly raise a modest cash position when yields plunge (e.g. June and July) and try to buy bonds at the yield spikes. Do people get paid for that brilliance? :-)
Lb
ReplyIf I believed the market was rational then I would agree. Take it I stopped belie ing that a long time ago.
"If all of that were to actually happen there won't be a 'below' left worth calling one and it will be the buy of your life time."
ReplyYeah, I agree with that. Also, playing the euro on a "euro" break-up doesn't really make much sense. But I think the market would discount it via weakness in the euro initially in anticipation that Germany(!) would be the one leaving, and the rest huddling up with a "southern" euro. Anyway, for me the best "indirect" € break-up trades for those really into punting this are.
1) Short German industrials/DAX who would be crushed as German devalued.
2) Short EURDKK, long DKK MBS/govies
3) Short EURCHF, long CHF govies.
Basically the dirty pegs run by the DNB and SNB would crumble.
Claus
ground zero input on the labor market by Gary Gordon regarding that monthly farce of payroll reporting
Reply"..... within a week of arriving back in the United States this past November, she secured two part-time lab assistant positions. That's right. My kid works while pursuing her biology degree at the University of California in San Diego.
Why am I writing about my daughter's triumphs? Beyond the fact that she is my favorite go-getter on the planet? In a nut shell, it occurred to me that she accounted for two - count them, two - of the 178,000 new jobs created in November.
No fooling. Each part-time post has been (or will be) counted as a new addition forged by a "robust" U.S. economy. What will largely be ignored? The disappearance of 446,000 jobs from the labor force last month alone.
Sadly, the financial media highlight the headline U-2 unemployment rate (4.6%). It paints a rosy picture. What should they be talking about? They should focus on the 95.1 million working-aged individuals who are not employed (37.3%). If you want to understand why so many Americans believe that their children are going to experience a lower standard of living in the future than what they themselves have experienced, look no further than the labor force participation rate."
From My observations here, it is clear that nobody knows what the heck is going on.... JBTFD V JSTFR at the moment. For me it is JSAFM (just scalp any f*cking market) for a handy 1-3%. Fun to be had for the run up to Christmas. As me grandpappie used to say °if you haven't made your money by now, you're not going to make it, by year end.
Replyhttps://youtu.be/g3ENX3aHlqU
Arrivederci
I read that the Richmond Park by election is taken to be as a 'surprise' and a vote against a UK EU exit.
ReplyI am not sure exactly what 'surprise' is to be found in that a constituency that voted strongly to remain in Europe should also choose to vote for the only party (Lib Dems) who have signalled that they will fight to stay in Europe.
Clearly , I am going to have to work on understanding of the English Language. Alternatively , I can reconcile myself to the fact that on aggregate many people are unwilling or unable to separate bias from analysis when reaching conclusions.
Now what are the implications of that for a rational market theory?
Skr, isnt it pretty obvious what is going on. US equities grind higher, even as hedge funds playing sectors cause crazy moves, us dollar is strong, everything European still sucks,japan is still a punters paradise and china is stimulating its economy through infastructure. The real question is how long this all can continue with us rates mvoing higher. For now markets dont care too much in aggregate but interest rate moves take time to filter into real economies. I suspect we will start to see effects by q2 next year. Lets see.
ReplySkr, isnt it pretty obvious what is going on. US equities grind higher, even as hedge funds playing sectors cause crazy moves, us dollar is strong, everything European still sucks,japan is still a punters paradise and china is stimulating its economy through infastructure. The real question is how long this all can continue with us rates mvoing higher. For now markets dont care too much in aggregate but interest rate moves take time to filter into real economies. I suspect we will start to see effects by q2 next year. Lets see.
ReplyHeres what the FT expects on the Italian referendum
Reply"No’ vote expected to lead to higher bond yields, lower share prices and weaker euro"
You know what that means gents - if the aforementioned event comes to pass, expect lower bond yields, higher share prices, and a stronger euro!
Music to Left's ears I am sure.
LOL.
ReplyShort positions in US10y are extreme, in fact the largest in six and a half years. Coincidentally, the last peak was in May 2010, and coincided with LB going all-in long Treasuries prior to a long and painful squeeze for the aforementioned Shorties.
@ Leftback
ReplyNot so good for your EUR long.."Al Jazeera reporter: "We are whispered now there are exit polls suggesting big win for NO side."
looks like 3 out of 3
Replyi warned you about the euro
not 3 out of 3, because it was expected (that's what I meant). But yeah, 3 out of 4 for the populist movement. Short € since opening. But parity still seems distant atm (but nearer)
ReplyAustria counts for a fraction of Italy so let's agree on 3 out of 3.1
Replyunless Italian president nominates a 'technical' PM there is a massive mess to expect from new Italian elections
that reality should sink local markets for a while
Will we be able to buy Italy (EWI) at 20 or lower tomorrow?
ReplyAhah sure. Nice speech from Renzi. Almost if one should forgive and forget and not ask for his resignation, as "threatened"
ReplyLB, isn't it the net position which really matters? Doesn't look particularly stretched in the latest release although it is nice to see the sharp rise this week. Mildly suggestive of panic.
ReplyI am long ZNH17 btw.
5 who thought they ruled the world
Replyhttps://twitter.com/WHLIV/status/805566249216438273/photo/1
just read the Economist article referenced in the comments, this is from the first para... "India, which has troubles of its own making (see article), has seen its currency reach an all-time low against the greenback...."
Replyone would expect the people writing the 'cover story' for the Economist to have a basic grasp of interest rate parity - or is that too much of an ask nowadays!