Jan 29. The important thing was, that I had an onion on my belt….
“We can’t bust heads like we used to, but we have our ways. One trick is to tell them stories that don’t go anywhere.” Grampa Abe Simpson – Union Buster
Look, there’s just not much to say about the week that just passed, notwithstanding a flurry of executive orders. The market story didn’t really go anywhere, reflected by the drop in VIX, now languishing just above the decade’s lows (10.58). Net changes were small, with a slight bias toward higher rates and higher stocks. Oh, I could regurgitate what a lot of famous investors/traders have already said: Gundlach. “…short German bunds. They are yielding 0.27 and Germany’s inflation rate is 1.7%. Historically, it is very rare to have a Bund yield below the inflation rate. The current gap is a record. The Bund yield is unsustainably low. “ That’s from Barron’s a couple of weeks ago; this week the bund edged to a new recent high of 48.4. Or, Kyle Bass on Bloomberg last Wednesday, “Inflation, set to increase in the U.S., will also spike in Germany, which will prompt a tapering of the European Central Bank’s bond-buying program and possibly an increase in interest rates.” Morgan Stanley said in a report this week that the Fed will stop mortgage re-investment in April of 2018.
So…. sell bonds, steepen the front end of the curve. I’ve been on that topic for a while, and there are still interesting plays being made to reflect those themes (some noted in the ‘Trade Thoughts’ section below). In the bigger picture, opportunities still abound, given that one-year Eurodollar calendar spreads are just slightly above ½% on the front end of the curve, and taper down to about ¼% from the last greens to the last blues. For example, EDU’17/EDU’18 settled at exactly 50 bps, and EDU’19/EDU’20 settled at exactly 25 on Friday. The point is that the market is still leaning toward the idea that the Fed is on course for two or maybe three (gasp) hikes a year at the outside, and those estimates are likely too low.
We can argue that moves have already started, and that the adjustment immediately after the election substantially decreased any ‘edge’ from entering positions at the current location given uncertainties that still plague the global landscape. I suppose that line of thinking plays right into the Fed’s handbook… ‘On the one hand there are fiscal stimulus risks, on the other hand there are global concerns…’ Oh, right, there’s a meeting of the FOMC this week. It’s on Wednesday, but perhaps would have been more appropriately scheduled a day later: Groundhog Day. The Fed has been pushed ever so slightly to acknowledge that there might be some upside risks. As Grampa might say, “WAKE UP AND SMELL THE COFFEE”. As mentioned last week, bond yields are going up globally, stocks are at new highs, copper is near new highs, inflation measures are increasing. The lows in oil were set in Jan and Feb of last year, so yoy comps will start to filter in NOW. As a clear example of ringing the bell, the National Federation of Independent Business Optimism Index simply exploded last time. Here are a couple of quotes from that report. “Small business is ready for a breakout, and that can only mean very good things for the U.S. economy.” The other two big movers in the survey, “Sales Expectations” and “Good Time to Expand,” jumped by 20 percentage points and 12 percentage points, respectively. “In this month’s report, we are also finding evidence that higher optimism is leading to increased business activity, such as capital investment.” (The next NFIB is Feb 7). It’s stunningly obvious that Trump is not afraid to make changes to reach his goals, and clearly his appointments are PRO-GROWTH, and PRO-INVESTMENT in the context of full, (if under) employment. Add in the prospect of protectionist trade measures and a Treasury Secretary that thinks the dollar is too strong… the inflationary tea leaves are brewing. As David Bowie might say, ‘it’s like putting out fire….with gasoline.’
Not only was vol hit in equities, it declined across the interest rate curve this week as well, with March US bond vol at only 10.0. Somewhat surprising in front of a week chock full of data including Personal Income and Spending on Monday, ISM reports mid-week, and the jobs data on Friday, in addition to the FOMC. Though this FOMC will not be followed by a press conference, the statement will likely have a hawkish bias. And, making up for the lack of a press conference, Yellen is scheduled for her semiannual testimony in front of the Senate on February 14. The St Valentine’s Day massacre, where she could easily set the market up for more rapid ‘normalization’ to counter the Trump effect.
Finally, as it’s the year of the Rooster, a quote from a famous figure born under that sign:
Some people feel the rain. Others just get wet. –Bob Marley
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| 1/20/2017 | 1/27/2017 | chg | |
| UST 2Y | 119.3 | 120.8 | 1.5 |
| UST 5Y | 194.0 | 194.1 | 0.1 |
| UST 10Y | 246.9 | 248.1 | 1.2 |
| UST 30Y | 304.8 | 306.0 | 1.2 |
| GERM 2Y | -67.1 | -66.6 | 0.5 |
| GERM 10Y | 42.1 | 46.2 | 4.1 |
| EURO$ H7/H8 | 56.0 | 55.5 | -0.5 |
| EURO$ H8/H9 | 42.5 | 44.0 | 1.5 |
| EUR | 107.03 | 106.99 | -0.04 |
| CRUDE (1st cont) | 53.22 | 53.17 | -0.05 |
| SPX | 2271.31 | 2294.69 | 23.38 |
| VIX | 11.54 | 10.58 | -0.96 |
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