Wednesday, April 15, 2015

The ECB protest in 3 pictures

1) German citizen realizes that she paid 100.20 for a bond and that she'll only get 100 back in 5 years

2) Constancio tells her its 100.40 bid now

3) A multi-strat fund offers her a $500 million book because of her bond trading acumen

Tuesday, April 14, 2015

The BOE forecasting model revealed

So the big news at the time of writing (9 pm NY time) is an FT story wherein a Greek official says that this time, they are serious about defaulting if the Eurozone doesn't show them the money.


It's been what, a good six weeks since the last farce in three acts featuring Greece and the Eurozone; Aristophanes would no doubt be proud.  While this apparently never-ending pas a deux is of course beyond tiresome, given the recent uber-surge in European assets, it's probably worth taking at least some note.

Indeed, after a number of months of stumbling to get out of their own way, peripheral equities have finally joined the party that the Dax has been enjoying for some time now.   However, when they start handing out "forecaster of the year" awards to Buzz Lightyear when Greece starts to rear its ugly head, and May is just a few weeks away....well discretion would appear to be the better part of valour.

While the euro looks understandably putrid, Macro Man is actually getting more interested in sterling as a potential short candidate.   To be sure, cable has already collapsed from the heady heights of 1.70 in less than a year, and it's difficult to see another 25 big figure decline over the next 12 months.

That having been said, monetary policy is nonexistent, and even commentary from Carney's Bank of England seems to derive from a magic 8-ball.

At the same time, it seems rather more likely than not that Mr. Bean Ed Miliband will be the next prime minister, thanks to gerrymandering and a coalition with the SNP.  Things could still change, of course, but it looks to be a very close-run thing, and the uncertainty hardly looks bullish for the currency.   Macro Man isn't pulling the trigger yet, but if we get a pop in cable back towards 1.50 over the next week or so, it will be hard not to.  Hey, even Mark Carney agrees!

Friday, April 10, 2015

A bit doo-lally

Macro Man isn't quite sure what to make of things these days.   Since the poor, illiquid payroll data, the USD has surged back, with punters evidently having seen the downdraft as a buying opportunity.

Curiously, the DXY retracement has not been matched by any sort of move in US rates; EDZ5, for example, is still pretty close to its highs of the year (albeit a few ticks off of last Friday's levels.)

Macro Man frankly didn't see that much in the Fed minutes to justify the rebound in the dollar, insofar as he has always assumed that the Fed is keeping their options open  as much as possible.   Perhaps others in the market needed a reminder of that fact.   Moreover, it's worth remembering that FX is always a story of relative rather than absolute relationships, and for better or for worse the $ still looks like the best game in  town- particularly if the economy picks up steam in the current quarter, as your author expects.  He suddenly feels rather underexposed to the theme, such is the vehemence of the dollar recovery this week.

No doubt there will always be some observers who will feel that the Fed's hands are tied by goings-on elsewhere.  Forget the idea that Europe might enjoy an upside growth surprise (which would surely give back some of what the strong dollar taketh away) or that Asian stocks are going a bit crazy.   Indeed, China appears to be using the equity market as a policy tool to goose domestic demand, and as a few of you have noted, things have gone a bit doo-lally.  

Of course, nothing could ever go wrong with assuming ad infinitum asset market growth, and the Federal Reserve needs to keep uber-easy monetary conditions out of a sense of solidarity with those economies stumbling through weak growth.  Or so, no doubt, some commenter called "搞笑的钱" will no doubt tell us.....

Tuesday, April 07, 2015

The day after

Sometimes, being left to ones own devices isn't such a bad thing, as Macro Man found yesterday.   He started with a nice 55 mile bike ride, soaking up the sun and scenery of a glorious New England spring day (while avoiding the myriad of potholes littering the roads.)  He then made delivery on a Christmas present to Mrs. Macro, taking her into New York to see a great show from one of their favourite bands.  Oh, and while they were there, his alma mater managed to reel in some sporting hardware (the replay of which he plans to watch after finishing this post.)

Superstitious/dovish/equity bullish readers may wish to recall that the Fed has never raised rates in years in which Duke has won the NCAA basketball tournament (1991, 1992, 2001, 2010, and of course thus far this year.)  Of course, over the past 30 years, there haven't actually been that many in which the Fed has hiked rates, so the correlation is as spurious as they come.

Nevertheless, the will they/won't they debate has evolved from "foregone conclusion" to "well, I could envisage a scenario where they don't."  To be sure, June is almost certainly off the table, as there are just not enough datapoints between now and that meeting to meaningfully confirm that the recent bout of weak activity is indeed ephemeral.

Macro Man remains of the view that lift-off will occur later this year, and suspects that the bar for raising rates is probably lower than many think.  A hospital patient suffering from critical injuries or a virulent illness is placed into intensive care; once the acute phase of the threat to the patient's health has passed, he is moved to a normal treatment protocol without the bells and whistles of the ICU.

After six years in intensive care, the time has surely come for Dr. Yellen and co. to shift the patient down the hall.   After all, you never know when you'll need space in the ICU.  Macro Man speaks as someone who got off the Oxycontins within 24 hours of each of his ACL surgeries; obviously, some patients do not find it so easy to wean themselves from opiate-based painkillers, ironically developing new health problems from the treatment of old ones.

Similarly, over the last quarter-century, easy Fed monetary policy has been a sort of gateway drug for misallocations of capital, sowing the seeds for each successive iteration of financial crisis.  As some commenters have pointed out recently, corporate debt issuance has been roaring thus far this year in what looks to be largely an exercise in balance sheet leveraging to goose EPS.  That's not necessarily a bad thing, a priori, if conducted within reason and from a healthy starting point.   Unfortunately, economic actors are not known for acting within reason when the tantalizing allure of financial leverage rears its head.

Sometimes you need to be challenged to ultimately succeed.  If you have too easy a ride for too long, as the Kentucky basketball team did, you can run the risk of failure when faced with the novelty of being under pressure.

Friday, April 03, 2015

Dionne Warwick sings the Good Friday Payroll Blues

Thursday, April 02, 2015

Treading warily

Although the passage of month/quarter end should once again open up the taps for risk-taking, Macro Man (and he imagines a number of others) is treading a bit warily.  For all the ink (or, in this day and age, bytes) spilled over the equity market, the SPX is pretty much unchanged on the year.  To be sure, there's been stuff to do in single names and sectors bets, but in terms of big-picture index-level risk taking, it's proven to be a fairly fallow field.

Moreover, the longer the skein of weak (albeit weather-impacted) releases continues, the more bold the market will become in second-guessing the Fed and its presumptive resolve to raise rates this year.  EDZ5 is now back at the highs of the year, and at this juncture Macro Man isn't particularly inclined to get involved some more.  In the span of a few months, the onus has pretty clearly shifted to the data justifying a hike, rather than justifying standing pat.  Calls for QE4 look more like wishcasts than forecasts, but clearly you don't need another round of QE to lose money being short fixed income.

This week, of course, sees the release of another payroll report, with the consensus forecasting a still-robust  reading just shy of 250k.   While the ADP has proven to be not particularly useful in real-time forecasting (the correlation to NFP is much higher after all the revisions are in place than at the time of initial release), yesterday's well below-consensus reading was still noteworthy, insofar as it reinforced a pre-existing narrative.  Ditto for the ISM.

What really gives Macro Man the willies, however, is not the data itself but the liquidity environment in which it will be released.  Readers with sharp memories may recall that the March 2012 payroll figure was released on Good Friday in early April- as this week's will be.  Stock and futures markets were and will be closed, leaving short-staffed desks to manage as best they can in bonds and GLOBEX.

Three years ago, market consensus was for  a solid number of 201k, down slightly from the previous month's 227k.  In point of fact, it came in at 120k, way below the lowest forecast in the Bloomberg consensus.   Unsurprisingly, carnage ensued, with the 10y yield gapping lower, a gap which held through the announcement of QE3 later that year.  Macro Man also recalls a particularly nasty gap higher in USD/MXN (he was short), among other dislocations.

With a full quarter's worth of scuffle from the US economy, no net gains in the SPX, and most short fixed income positions offside, Friday looks like a particularly acute opportunity for a capitulation.  No guarantees of that of course....just a general feeling of uneasiness that it's not a great time to be taking a lot of risk.   Sounds like a perfect time to tread warily.

Wednesday, April 01, 2015

The Condundrum, Mk. II

The number of words that Ben Bernanke has written explaining why market interest rates are so low in his new blog: 2,560

Mentions of "asset purchases":   0

Mentions of "QE": 0

Mentions of "regulation": 0