Thursday, July 02, 2015

Post-payroll bullets

* So in an economy where a job gain of 223k and an unemployment rate of 5.3% is seen as a disappointment, and Spooz remain close to all time highs, the Fed is still scared to leave ZIRP-world.  What are they waiting for- rainbow unicorns to appear bearing magic lemonade to make any rate hikes painless?

* Quelle surprise- Greece didn't pay.  So now the referendum is the latest "absolute, final line in the sand" event.  What will people do if the Greeks vote "yes" but Syriza cannot/will not cave into the Eurogroup's demands?

*  The turnaround in the euro the other day was oh-so predictable.   All Macro Man had to do was leave an offer, which he missed getting filled on by 5 pips.

* Macro Man is being dragged into the present decade kicking and screaming.  He now finds himself doing more quick hits on Twitter than he previously imagined possible.   Follow along @Macr0man if you aren't already.

Tuesday, June 30, 2015

Getting the memo

Macro Man 28 June 2015 at 20:58

To: another old guy

what odds eur trades 1.12 by 5pm ny tomorrow?

Another Old Guy                   28 June 2015 at 21:21

To: Macro Man
Pretty high. I covered some of my short

Such is life in the trenches of the FX market, where EUR/USD closes well up on a day when equities and bond yields plummet thanks to the possible fracturing of the...err...EUR.  Still, the screw job wasn't totally unexpected, as you can see from the dateline of the email conversation from Sunday night.  Forewarned, as they say, is forearmed.

While the equity bounce off of the opening prints in Europe was also fairly predictable, you had to be quick as indices leaked badly into the close.   While yesterday's dip-buyers may conclude that what's doing once is worth doing twice, one would have to think that there will be a natural tendency to reduce risk across asset classes ahead of Greece, payrolls, 4th of July weekend, etc.

What this means for the euro isn't altogether clear.  It certainly trades like people are dripping short, but it's certainly worth asking how short the street is given the lengthy, meandering correction higher since the March lows.   One would think that anyone who's held on thus far wouldn't be inclined to close this week; if anything, the rally caused by weaker, shorter term hands represents an opportunity to add.

In the meantime, anyone with a heartbeat can hold out hope that today's leap second, which won't be noticed by 99.999% of the humans on the planet,  will somehow wreak the sort of havoc on the robots and the algos that they've been exacting on our markets for the past few years.  It probably won't happen, but hey- Arnold Schwarzenegger is starring in a Terminator movie these days so anything's possible, eh?

Monday, June 29, 2015

What I'd be trumpeting if I were Tspiras

Sunday, June 28, 2015

Slow motion chicken

Macro Man's back from a family holiday in rural Texas, and lo and behold it looks like we're finally nearing the end of the world's longest, slowest game of chicken.  Some five and a half years after Greece's naughty public finances first came under the microscope, the endgame at last appears to be nigh.

"Who cares?!?!?!" shouts my 26-year old alter ego.   "Greece isn't Lehman!"

Yes, it's true that Greece isn't Lehman.  Greece is not an intermediary to trillions of dollars worth of financial transactions across a myriad of counterparties, and issues of re-hypothecation of collateral and similar "oi, where's my money!" issues don't really exist.  (Unless, of course, you're the IMF or one of Greece's other official creditors, in which case you're probably thinking "oi, where's my money!")

That having been said, capital controls are capital controls, and -quelle surprise!- the "one-off" imposition of such measures in Cyprus turned out to be...err......not one-off.   On a happier note, capital controls in Cyrpus rolled off a couple of months ago, so any Greeks not prescient enough to get their money out of dodge can look forward to doing so in the summer of '17.

"Yeah, yeah, cry me a river," mutters the alter ego.  "There's only two things you need to know about this mess:   stocks are going on sale, and the Fed is never tightening.  You know what to do, baby!"

It's true that the initial reaction to these sorts of fiascos is rarely the final one, and there's usually some sort of retest regardless of the magnitude of the initial move.   That having been said, the alter ego has never seen anything remotely resembling proper distress in his "professional" life, and running out of Schaefer kegs at that great party in 2008 hardly qualifies as a "crisis."

"Low blow, old man, but at least now I can see where you got all that gray hair- listening to stupid war stories from embittered market veterans back when you still had game.   Janet knows what time it is, and she can- to use your analogy- hook us up with plenty of kegs of delicious Bud  Light Lime at the drop of a hat.  QE uber alles, or whatever it is the Germans say."

Actually, it's "Deutschland, Deutschland ├╝ber alles," which is as succinct a summation of Eurozone economic policy as you're likely to find.  The irony, of course, is that the initial market reaction- to sell euros- is as nice a treat as German exporters could ask for to punish those naughty, naughty Greeks. 

That being said, the "collapse" in the euro is at present rather underwhelming, to say the least: at the time of writing EUR/USD is still well above where it was in late May.  If you'd known the payroll figure and that Greece would apparently finally lose the game of slow-motion chicken, you'd be asking for your money back to see EUR/USD at 1.10.

Actually, can I have my money back?

"Serves you right, Grandpa, for trading those stupid macro instruments.  So old and yet so naive.  Repeat after me:  the only asset class to own is stocks (or high yield if you're a bond guy.)  There are only three permissible positions: long, longer, and longest.   QED."

QED?  I didn't know that they still taught Latin in schools.

"It stands for 'Quantitative Easing, Dammit'!   That's the only thing that matters.  You can't fight the ECB and the Fed."

Actually you can, and that's typically how guys like me make money when guys like you are doing this.  Nevertheless, there's no point arguing about it.  You're going to buy stocks (or at least claim to have if they bounce back), and I am not.  Regardless of what you might think of the SPX, why anyone overweight Europe wouldn't reduce by quite a bit is a question that we're likely to find the answer to over the next week or two.

Front VIX, which closed in the mid-teens on Friday, will potentially be a useful guidepost in gauging how the market reacts, though obviously the more useful signals will come at higher levels.  In the meantime, Macro Man will look to add opportunistically to his short euro position and once again wonder if the yen is the unintended accident waiting to happen.  Good luck out there.

"You too, old man, and don't forget to take your Geritol."

Hmmph.  One more episode of Spongebob for you, young man, and then it's off to bed. 

Thursday, June 18, 2015

Stop Me If You've Heard This One Before

Stop me if you've heard this one before: the Fed shifts the dot plot lower, but still well above market pricing, Janet Yellen sounds as indecisive as the little old lady who takes five minutes to order a cup of coffee while ahead of you in the queue, and fixed income rips, the dollar sells off, and equities meander higher.


Shame on Macro Man for expecting anything different, and shame on them for continuing this farcical sham of a monetary policy regime, the goal of which seems to be to perpetuate the "everybody wins" mentality that pervades elementary education these days.  Perhaps in lieu of a brokerage statement, Macro Man can receive a participation medal instead?

The problem with everybody wins, of course, is that it works until it doesn't- and when it doesn't, participants find that they've made choices that may have seemed collectively rational but were individually pretty stupid.

Drawn from a blank sheet of paper, would current economic circumstances merit ZIRP?  Almost certainly not.  Yet whenever the Fed or those other fatuous fakers, the BOE begin to talk tough, their "threats" prove as empty as a beer can at the end of a college party.

We cannot, of course, trade the world that we'd like to see, merely that which we do so.  And in that world, the mistakes of the past are writ large, as ostensibly intelligent people blithely ignore the policy error that landed them in this corner to begin with.   And so, having started this post by quoting a Smiths song, it is perhaps only meet to end it with another:

Dip-buyers of the world, unite and take over.

Wednesday, June 17, 2015

Still waiting for lift-off

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points.

The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. The evidence accumulated over the intermeeting period indicates that output is continuing to expand at a solid pace and labor market conditions have improved.

The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters are roughly equal. With underlying inflation still expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability. 

These were the words that ushered in the last Federal Reserve tightening cycle, at the equivalent meeting in June eleven long years ago.  Despite the fears of the "taper tantrum" and "lift-off fever" over the last couple of years, it's quite clear that nothing like this sort of message will be conveyed in today's FOMC communique.

The real nub of the issue, of course, is whether the committee will signal the possibility of a rate hike in September- or at least their willingness to do so.  It seems almost inconceivable that the language of the statement wouldn't leave the door fairly wide for a hike in September should circumstances warrant;  as such, markets will revert back to the much-discussed dot plot to get a real sense for how likely the committee thinks such a move is.

Recall that at the last SEP in March, the median and mode of the scatter plot was at 0.625%, representing a 50 bp tightening from status quo.    Two committee members sat at unched, while four were above 1%.  Those four will almost certainly be marked lower; regardless of where they think rates should currently be, the fact is that there's only 4 meetings after this one 'til year end, which only leaves time for so many hikes.   Moreover, it's not as if the data has been gangbusters over the last few months, either.
No, the real issue is what happens with the ten committee members who plumped for either 0.625% or 0.875%.  It seems likely that some will move lower, but how many, and by how much?   As has been the case for some time, futures markets are pricing less than is currently "forecast" by the dots; the January '16 Fed funds futures contract implies a FF effective rate of 0.415%.  This is a shade under 30 bps higher than is priced for the month of June, so you'd have to say that there's not a massive amount more that these things can rally while still leaving a healthy chance of a hike this year at all.

For choice, Macro Man would expect a few defections into the bottom tier of the plot, with the bulk of the remainder clustered into the rows consistent with one or two tightenings.

How will markets react?   Hard to say.   The dollar hasn't exactly been running away, despite the ongoing nonsense in Greece.  Indeed, being short euros is a bit like being a fan of the Pittsburgh Pirates these days.   The team has spent the entirety of the time since May 23rd between 6 and 7 games behind the hated St. Louis Cardinals (who, like the Greeks, take a cavalier attitude towards the rules!), despite going 15-5 over that period.  Similarly, it seems like every time Macro Man looks at the euro these days, it's 1.12 and change- other than a brief foray lower right after payrolls.

It certainly trades like people are short euros/long dollars, and even USD/JPY has run out of steam since payrolls.  Once again, therefore, Macro Man cannot help but come to the conclusion that short-term opportunity looks better in fixed income (with the proviso that duration can be impacted by all sorts of non-monetary policy factors such as the game of [headless] chicken going on in Europe.)

As for stocks, on an index level Macro Man remains apathetic and on the sidelines.   In reality, this price action reminds him quite a bit of 2004, when Spooz went nowhere while hand-wringing over Fed tightening.  (Amusingly, Macro Man recalls referring to the 'monetary methadone' of 1% rates back then- he didn't know how good we had it!)   To be sure, European indices offer quite a bit more sizzle in both directions, though even there it feels as if there's still exposure to this Greek rubbish in the near term.   Colour him uninterested.

In the meantime, he looks forward to the day when he can read some text similar to that at the top of this post on the front page of the newspaper rather than the back end of a history textbook.

Tuesday, June 09, 2015

Hit and run

Hit and run.

On the one hand, it's a cowardly and morally despicable crime that involves high-tailing it away from the scene of a traffic collision, regardless of the severity of the injuries caused by the perpetrator.

On the other hand, it's a strategy occasionally used in baseball in which a runner on first base breaks for second and the batter attempts to direct the ball through the gap left by a fielder who moves to cover a putative throw from the catcher.

On the third hand (if you're an octopus or swim too often in Springfield's river), it seems to be the only way to trade profitably at the moment.  Consider market price action since the payroll number.   The dollar gapped higher and actually held most of its gains through Friday's close.  Since then, however, the euro has more than re-couped its losses...

...and it's not like you can blame it on some nonsensical Greek headlines.   For the first time in while, price action in USD/JPY has turned poor, as it too has given up all its gains (and perhaps the ghost?) since payrolls:

Fixed income has fared a little better in holding on to its moves, though it still looks a little squeezy.  Macro Man posited on twitter last Friday that the whites would give back their losses by Wednesday; although EDM6 is still the first red contract, simply extrapolating the last 30 hours' price action makes the forecast look accurate.

Interestingly, the one market that hasn't shown much sign of any giddyup is equities, where Spooz are currently trading at their lowest levels in a month.  In terms of elegant thematic consistency, this market is sadly lacking.

All of this leaves punters with two choices:  trade for the long haul and try to live through the noise (probably the best  course for maximizing risk-adjusted returns but the worst course for keeping the boss off of your back), or go full-on five minute macro and trade hit and run.   Sadly, this is probably the most realistic option for many punters, which in  many ways renders it a self-fulfilling prophecy.

The trick, of course, is to do it in the baseball sense (looking to score runs in small increments) rather than a vehicular sense, leaving a trail of injuries (including, potentially, your own!) in your wake.