MORNING BID – Apres Fed, le Deluge

Sep 18, 2014 13:34 UTC

The Kremlinologists turned out to be right, and the Federal Reserve left its “considerable time” language in its statement to assure the markets that it would be around for a while longer with rock bottom rates. It’s the divergent (to a point) reaction out of the markets themselves that is interesting to parse, and will be key to watch in coming weeks and months. The action in the stock market was to suggest the entire exercise was a snooze-fest, with stocks ending marginally higher (yes, the Dow at a new record) but not too far from where the major averages were trading just before the news. Which is to say the equity market, always the most optimistic of U.S. markets, has it in mind that low rates stay for now, and until “now” is “then,” it’s time to party.

Bond markets, inflation-protected securities and the currency markets saw things differently, and it’s those markets that may be more instructive to watch as the days and months go on and on. The five-year TIPS note saw its yield break above zero for the first time in ages, a sign that investors are starting to worry more about inflation, or higher Fed rates, which is interesting as consumer price data showed year-over-year inflation fall to a 1.7 percent rate earlier in the day. The dollar put together another strong rally, meanwhile, with the dollar index hitting highs not seen in 14 months and big rises against its main companions, the euro and the yen. And this is where the dot matrix comes in.

The dots, of course, are not an array of Janet Yellen’s prowess (or lack thereof) at the firing range, but the expectation from Fed officials on where they see rates in coming years. With 2017′s dots all suggesting rates at greater than 3 percent – and closer to 4 percent – the currency market has taken the hawkish outlook here, as Jens Nordvig, strategist at Nomura, said in an email to Reuters. There were two dissenters – the usual suspects, Charles Plosser of Philly and Richard Fisher of Dallas – who were not thrilled to see the statement so dovish, and so Nordvig takes all this and says that this should be “enough to sustain USD uptrend vs G10″ currencies, so, against the yen, euro, Swiss franc, pound and all the others.

He does warn, however, that the kind of uncertainty that would drive significant outperformance against the emerging markets currencies is not yet present, given rates are going to be low for some time, so that firm is closing some call options outstanding against the peso and ringgit while sticking with long bets against the yen and euro. “It will also soon be time to ask new questions on the Dollar. What will be the pace of tightening the US economy can cope with? What is the strength of capital flows into the US? Answers to these questions will determine whether the relatively sharp Dollar move in the last 2-3 months can be extrapolated over the next 3-6 months,” he wrote in late commentary Wednesday. There’s also the possibility, of course, that markets overreacted to the Fed – another soft jobs report would undo a lot of the recent gains in the dollar, or even a couple of other second-tier indicators reinforcing the notion that the outlook from individual Fed members on rates is just that – an outlook – and as a result cannot be trusted insomuch as the data will tell them what to do, dots and dollar strength and models be damned.

The dollar strength may be temporarily interrupted as investors await the overnight results of the Scottish referendum to decide whether the movie Braveheart was all for nothing (I think that’s what the vote is for, anyway). Varying polls have swung the pound wildly in recent days, but the latest set of polling seems to suggest a modest win for those who want to maintain the current situation, where Scotland remains the northern part of the United Kingdom rather than strike out on its own and force the English to build a 700-foot wall to keep them out (again, not sure if that question is on the ballot or not).

MORNING BID — Breaking it down, Fed style

Sep 17, 2014 14:58 UTC

It’s all over but the dissection of the Fed statement, due later today, which will follow with a Janet Yellen press conference after the U.S. markets get word of whether the Fed did or did not eliminate the “considerable time” bit from its statement that saw markets go into a tizzy all of Tuesday. At this point the market believes that phrase now may *not* be eliminated, which marks the second reversal in about a week on this point. No matter what, somebody is going to be caught leaning in the wrong direction, but if the latest intelligence is that the Fed’s statement won’t change materially until the October meeting, then the freshest bets are probably in the direction of those betting on that much. So if the statement does cut out that language or modifies it in any way, you could see a selloff in equities, the dollar and bonds.

The meeting also brings with it the update on the Fed’s “central tendencies,” that is, its sure-to-be-incorrect projections on where the economy is going. Given the rebound in the second quarter that seems to have at least been somewhat sustained in the third quarter, it wouldn’t be surprising to see the Fed outlook for GDP bumped up for 2014 (currently 2.1 to 2.3 pct) and 2015 (at 3.0 to 3.2 pct – the Fed will predict 3 percent growth for the year-out period until we’re all Morlocks), and the unemployment rate expectations are projected to drop to maybe 5.7 to 5.8 percent from the current 6 to 6.1 percent expected at year-end. Which is all well and good, but it doesn’t give us a good sense, really, of what’s to happen going past the meeting.

What we may be looking for over a longer time frame is an elevation in volatility. Richard Leong, in a story last week, pointed out that the market is starting to see more options-related buying that suggest rising rates in the federal funds and eurodollar markets. In a Tuesday story he noted that various measures of volatility – including the Merrill Lynch MOVE Index, a measure of fixed-income volatility, is at levels not seen since mid-summer. The dollar is showing similar activity, with volatility in the currency markets finally picking up after being stagnant (ok, about as exciting as watching grass grow) for a good long period of months now. Nomura strategists are anticipating a further pickup in volatility post-Fed meeting among currencies, judging by options positioning.

The equity market isn’t quite there yet – the VIX still remains low, trading below 13, but volatility would be expected to pick up in other risk markets if the interest-rate arena begins to exhibit more gyrations. That’s because the moves in that market make it more difficult to fund carry trades to buy other assets – the dollar remains a cheap source of funds right now, but the cost of carrying such bets increases as rates rise and more importantly as the market gets more volatile. Where that leaves investors is unclear – Bank of America/Merrill Lynch notes that credit investors are going with shorter durations (which adjust more quickly as rates rise) and leveraged loans as the best choices over the next 12 months, and are a bit less sunny on high yield, which has the potential for some ups and downs in coming months.

MORNING BID – Just our imagination

Sep 10, 2014 12:46 UTC

Something has changed in the bond market in some ways – but it’s a bit difficult to tease out when you’re talking about yields still near very low levels. But there’s a sense that the San Francisco Fed’s paper on the way in which economists are underestimating the Fed’s own view of interest rates is a game-changer, or maybe it’s just that people are waking up to the idea that the Fed really does have to raise rates eventually, or even more so, that it’s an overreaction to a previous overreaction: backlash to the idea that the August jobs report was so lousy that the Fed was still firmly in “not doing anything ever” mode.

The dynamics of the long-dated market haven’t been altered all that much just yet – or rather, it’s a bit early to declare that. The 10-year is still hovering around 2.50 percent, and the spread between that and 10-year Treasury Inflation Protected Securities stands at about 2.11 percent, and it’s remained in a steady range for the last year-plus as well, actually trending lower in the last few months.

That may in some ways be a product of the expectation that the Fed is preparing to get moving on maybe changing its language related to keeping rates low for a “considerable period” of time at its September meeting next week. Given, again, that short positions have been substantially worked off in recent weeks, the bond market no longer has the same kind of knee-jerk reaction to rally drastically in the face of evidence saying the Fed is going to keep rates low.

The weak jobs report has kept the consensus pretty much intact – that the Fed is going to make a move at some point, and so the bull case for bonds loses a bit of its luster (if only a little) IFR notes that lots of corporate debt offerings and the reduced short base contribute mightily to this, but the action in two-year and three-year notes, where yields are closing at highest levels since 2011, does give weight to the idea that markets are ready to start shifting yields higher.

Of course, this bet has made widows and orphans out of many in the last year or so, which makes people reluctant to declare that this is the big one, a la Fred Sanford. The fed funds market isn’t suggesting much yet in this area, and eurodollar futures still show something similar to what was expected a few months ago – short rates in late 2016 look to be about a percentage point higher than where they’re projected in 2015 – so the inflation bug isn’t out there yet, and this slow, steady gradual shift is on its way.

The problem with all of this, of course, is that the Fed is in blackout mode – next week’s meeting will reveal much, everyone hopes, but without Fed speakers expected and a dearth of economic figures to come, it leaves the market to its own devices, on its own to try to game out what might be said. Markets have a way of letting their imagination run away with them, though.

MORNING BID – Sound as a pound

Sep 9, 2014 14:01 UTC

Global ructions are dominating asset flows right now, and we’re not even talking about violent events such as the ongoing Russia-Ukraine conflict, the rise of Islamic State in Iraq and Syria, or the Israel-Palestine situation. Right now smaller events – yet uncertain ones – seem to be affecting the larger markets a bit more, contributing to a decided shift in factors that U.S. assets are reacting to.

The bond market is no longer just about a steady belief in lower-for-forever activity from the Federal Reserve, but about the expectation for more flows from overseas as U.S. assets look more attractive and the U.S. dollar continues to strengthen. The dollar had a banner session against the pound with the threat of Scottish independence growing more and more possible (cue everyone yelling “Freedom!” while being drawn and quartered), as the messy considerations surrounding what happens to oil revenue and the diminution of the U.K. economy is considered. It also threatens to drive more flows toward the dollar as the Bank of England might be expected to hold off on raising interest rates when they had been expected to be the first central bank to act.

Still, the overall level of interest rates from the world’s four major central banks (including Japan and the ECB) is still quite low – about 200 basis points lower than where the 2000-2004 cycle troughed (the real rate is somewhere between 0 and -1 percent right now). Even as the Fed starts to bump rates higher next year, at the earliest, the accommodative nature of the other major banks should investors fully invested in various markets, including the United States. Rates are more likely to come under pressure – the expectation has been for bond yields to rise, a losing bet for months on end now, and yet it persists.

It’s even spread to Fed officials, with the San Francisco Fed noting in a paper that Fed projections are for the fed funds rate to be around 1 percent at the end of 2015 (private economists think about 0.8 percent), and to 2.5 percent at the end of 2016 versus a 1 percent rate thought logical by economists. That does set up the possibility of disappointment, although it’s fair to say the Fed is often a bit too optimistic about expectations for the economy, inflation and other indicators – they’ve been known to regularly overestimate how growth is going to strengthen over the last few years. It’s possible that the fact that the Fed has its hands on the lever means the staff forecasts about rates should be taken somewhat more seriously, but since they’ve been wrong as much as they have, we won’t.

MORNING BID – Laboring for insights

Sep 4, 2014 13:02 UTC

The unemployment report occupies a unique position as a bit of a lagging indicator (especially when it comes to wage growth) and yet the most important economic figure that markets look at on a monthly basis. Various indicators point to the likelihood of another strong report come Friday that should accelerate recent trends in markets – more gains in the stock market (with a helping of the “this means the Fed is going to cut us off from the punch bowl blah-blah” stuff) and more strength in the dollar, regardless of whatever incipient gains the euro can muster after the European Central Bank meeting.

Underlying indicators to watch suggest that the U.S. economy has started to move more dramatically higher, whether it’s from the Federal Reserve’s Beige Book or Goldman Sachs’ analyst indicator, a composite of analyst commentary that functions as sort of a “corporate Beige Book.”

Some of the striking data out of this include better-than-expected strength in the consumer spending area, where Goldman expects consumption to rise to about 2.5 to 3 percent over the rest of the year. Their index is above 60 now for the fourth month running – like the ISM data, 50 signals growth – and they’re seeing particularly good strength in new orders and sales/shipments, also pointing to better demand.

That should translate once again to more hiring as the economy moves into the middle of this expansion, one that didn’t see the post-recession pop that many expected and instead as a substitute has put together a long, grinding string of more than 60 months of steady but unspectacular growth.

With the recent shift in jobless claims to a consistent figure around 300,000 on a weekly basis – and sometimes lower – and consumer confidence rebounding, the key figure to watch on Friday is probably again the U-6 figure on labor force underutilization, the broader measure of unemployment the Fed likes to look at rather than just the unemployment figure itself. Since the beginning of 2013, as the regular unemployment rate has dropped to 6.2 percent from 7.9 percent, the U-6 rate has dropped more sharply to 12.2 percent from 14.4 percent. The number of unemployed has dropped to 9.67 million from 12.32 million in that time. The labor force has been stubbornly stagnant, rising to 156.02 million from 155.69 million in Jan. 2013, and so the participation rate hasn’t budged all that much – it’s actually fallen to 62.9 percent from 63.6 percent, and the inability of people to get back into the labor force because they’re discouraged has been an Achilles heel for the jobs market since this recession ended.

There’s some hope this is changing, again, based on consumer confidence figures and manufacturing and service-sector surveys pointing to improved demand and confidence. And the Fed’s Beige Book pointed to specific job shortages – tech workers in the Boston region, truck drivers in New York – but still yet not enough to really suggest the increase in demand that brings out 300,000-plus jobs reports every month. For August, the expectation is for about 225,000 in nonfarm payrolls growth, and for earnings to rise 0.2 percent on the month.

MORNING BID – Long in the tooth

Sep 3, 2014 13:28 UTC

A frequent refrain among commentators is that this ongoing growth in the stock market has to ‘come to an end’ at some point because of, well, mostly because it’s been going for a while and that it’s gone entirely too far in the last few years.

Given the market’s penchant for 50 percent corrections since the turn of the century, the latter point can’t be discounted entirely, but the former – that essentially, the bull market is endangered because it’s long in the tooth – feels a bit reductive. The day’s figures on car sales due out from the major automakers are likely to support the worries people have about a slowdown that’s just a short drive away from the economy going into a ditch, or something like that (it’s not as if the economy is awesome right now), but the belief in a mid-cycle slowing in some key consumer metrics is probably more the ticket.

Right now the business cycle points to the U.S. being in a mid-cycle area – business inventories are 6 percent higher than a year ago but that doesn’t appear out of whack, notes Dan Greenhaus of BTIG. Job growth has been better than it has been since 2000 (1.375 million private sector jobs in the last six months), and that may underscore how sluggish the growth has just been for 15 years and perhaps less about what’s happening now – the new normal many discuss isn’t emerging now, just confirming the activity of the last decade-and-a-half, where the heaviest fuel for job growth was in the ill-considered housing bubble era of 2005 and 2006.

Furthermore – and the recent August experience probably overstates this – low volatility and still ho-hum capital spending suggest the expansion has further to go as well, as the kinds of imbalances present (too much spending on pie-in-the-sky projects that will take too long to finish) aren’t there just now (examples would be the Empire State Building, World Trade Center, Shanghai World Financial Center, Burj Khalifa in Dubai – basically, when the world’s next tallest building is under construction, it’s time to sell).

With this in mind Morgan Stanley even predicts the S&P could get all the way to 3000 if the economy continues to grow at this steady pace with 6 percent earnings growth for the next five years. Those types of predictions are the kinds of things that usually get people in trouble amid long-running expansions, but Morgan Stanley also points out that the jobless claims figures dropping to the 300,000 range and consumer confidence moving up into the 90s readings really reflects (finally) recovery from the deleveraging that dominated the last several years. (We pause once again to consider just how awful this recession was.)

MORNING BID – European Deflation

Aug 28, 2014 14:16 UTC

Never say the Europeans aren’t cautious. The dollar has been on a roll of late, in part because of the market’s growing expectation for more stimulus from the European Central Bank before long that would include some kind of larger-scale quantitative easing program after a speech last week from Mario Draghi that European markets seem to still be reacting to several days later. Reuters, however, reported that the ECB isn’t quite likely to do move quite so fast (heard this one before) and that took some of the wind out of the dollar’s sails and boosted the euro a bit.

Some of the move in the euro will depend on the trend in European yields, where everything is going down – German Bunds continue to make their way rapidly toward zero, and Bund futures remain in an overwhelming bullish trend, per data from Bank of America-Merrill Lynch. Analysts there also anticipate the dollar is going to experience some kind of medium-term correction – but remains in rally mode otherwise. There’s a headwind there for equities from that – rising greenback makes U.S. goods more expensive, but the gains are still only in earlier stages, and haven’t pushed into territory that would otherwise indicate surprising strength that we haven’t seen in some time.

What’s happening in part is that there’s been a definitive change in how bond markets are viewed – even the peripheral markets like Spain and Italy are less favorable as investments when compared with the United States; Merrill analysts foresee more of a move into U.S. fixed income assets after several months of seeing European funds garner strong inflows (the count is $158 billion to $86 billion, favor the Europeans so far this year). So what’s going on here? Many investors have been perpetually frightened of “catching a falling knife,” and the number of big-name bond managers who have shied away from Treasuries on the assumption that the Fed was going to declare the party over in due course are a great many. “The perceived tail risk associated with Eurozone bonds is lower than that for U.S. bonds,” they write.

Then again, this year has been a class study in foiled expectations, particularly in the bond market. Rates have remained stubbornly low; the bullish investors in the government market have reaped big rewards, and even if the U.S. dollar creeps higher, the ongoing interest out of pension funds for higher yielding credit will continue to pressure yields. And Merrill sees more buying in the bond market from foreigners, an increasing percentage of that from Europe and other investors. That should again benefit the dollar, which is expected to stay near where it is.

MORNING BID – Down in the Jackson Hole

Aug 15, 2014 12:43 UTC

The markets ease into a traditionally slow period with not much to look forward to other than the Federal Reserve’s Jackson Hole conference due next week, where the highlight, naturally, will be anything Janet Yellen says regarding the state of the labor markets. The chances of the Fed signaling a new shift when it comes to policy are slim – Yellen has proved to be a cautious speaker thus far, interested in furthering Ben Bernanke’s way of telegraphing as much as possible when it comes to policy alterations, and Yellen is more so, her “six months” comment from a few months ago notwithstanding. As Jonathan Spicer and Howard Schneider reported a few days ago, Yellen is much more interested in fighting an inflation war than dealing with a persistent deflationary/lousy economic environment to dominate the headlines, so the expectation should be for lower rates for longer, and not to expect a lot of surprises out of Wyoming next week.

Goldman Sachs economists not that Yellen had sounded a bit more positive on the labor market in July, but even still their belief when it comes to the slack that exists in the jobs market is still too great to bear much more than the end of quantitative easing/bond buying and perhaps a move to a couple of small rate increases around the middle of next year that, well, won’t hurt too much given the Fed’s policy rate still sits between 0 and 25 basis points. The forecasts from Reuters most recently put the first rate hike somewhere in the April to June range, which fluctuates depending on the strength of the economic figures.

The markets still haven’t entirely shed the notion that a more permissive Fed is a good thing, and so bad-is-good reactions still are more frequent than one might want. Still, Goldman notes that various labor force indicators still point to a jobs market operating far below capacity or the level of strength that the Fed wants. Some aspects have improved – job openings are rising, which points to desire for more employees, and payroll growth compared with potential labor force growth has been solid, but the hiring rate, quits rate, wage growth figures and participation rate still remain on the low side – so there’s just not the kind of job growth that will push everything else forward too. Morgan Stanley analysts recently noted that the University of Michigan’s final survey of consumers still finds ordinary folk not that enthused about spending in part because of labor-market weakness.

How the market positions headed into the last part of the year also depends on the Fed. Merrill Lynch data shows a net 78 percent of investors polled in one of their surveys expect higher rates in the next 12 months, the highest level since 2011, which is likely to affect positioning and result in more curve-flattening activity.

(This column will be on hiatus for a week next week)

MORNING BID – Minute by minutes

Jul 9, 2014 13:44 UTC

The bond market remains pretty much tethered to the 2.50 percent to 2.60 percent range that’s prevailed for the 10-year note for quite some time now, with the primary catalyst being today’s release of the Federal Reserve’s minutes from its most recent meeting. The relevant data that investors are probably paying most attention to – the jobs report last week, the JOLTS jobs survey, shows some more things that is meant to keep the Fed engaged rather than moving toward an imminent increase in rates. The quit rate – the rate at which people leave jobs for others – is still historically a bit on the low side, not at a level that would make the Fed more comfortable that the kind of labor-market dynamism needed for the Fed to shift to raising interest rates. Fact is, the central bank just isn’t there yet.

And with that in mind, that means those investors clamoring for higher rates are probably going to continue to see their expectations unmet for a longer period of time, and with sovereign buyers from Europe and Japan wandering outside those halls, there’s an ongoing bid in the market that continues to thwart short-sellers who are just waiting for that right moment to bet against the bond market. That’s been a lonely trade of late – or rather, a popular trade, just a big loser as trades go.

Players in the markets may also be looking to see whether the Fed discusses the other exit strategies it has — reverse repos and the like — making that another thing to watch for in the late release. Dealers have been divided on whether the Fed will raise rates merely to 25 basis points or direct to 50 — our most recent polls are split on this, but a move to 50 would probably assuage a few of those who think the Fed is getting behind the curve.

Earnings play a factor in this equation as well however. The decline in earnings estimates has actually been subdued in the second quarter, compared with the first quarter, according to Goldman Sachs, which suggests a pickup in activity after the weak first quarter. Earnings don’t really get going for another few days, but the signs of growth will be what investors worried about valuations are looking for. The current valuation situation, as Chuck Mikolajzcak wrote in a story yesterday, points to some measures that are worrisome – the Case Shiller PE figure, for instance – while a couple of others like operating P/E, suggest only slightly expensive levels. With more strategists starting to worry of a correction, earnings would go a long way toward supporting equities.

MORNING BID – Crypto-sale of the Century

Jul 1, 2014 13:38 UTC

Details on the sale of about 30,000 bitcoin have been spare, but what can be inferred by reading through the lines is that the sale of about $18 million went a lot better than many expected – particularly those who expected to get the coins on the cheap somehow. The prevailing market rate at the end of Monday was about $639, according to Coindesk, currently the leader in the pricing world, and the chatter trickling out was that the unsuccessful bidders – including hedge fund Pantera and SecondMarket’s Barry Silber, who put together a consortium of more than 40 bidders – aimed too low in one of those “Price is Right” moves but without the warmth of Bob Barker to confront you when you lose on these things.

With that in mind the speculation on just where the auction ended up can run wild – did it go for $650? $700 for the lot? Perhaps; those commenting on twitter and to Reuters in a story from Gertrude Chavez and Nate Raymond on Monday were suggesting that there were plenty of newer bidders in the process, firms that have been just getting going in the bitcoin world and probably wouldn’t mind to get their hands on a large stake even at a somewhat elevated price.

Either way, it points to the possibility of more sales from the U.S. Marshals, who are still hanging onto another 144,000 bitcoin that it obtained off a hard drive from Ross Ulbricht, who is accused of running the Silk Road online drug ring, which was shut down last year. (Keep in mind of course the Marshals Service hasn’t released any results.)

Whatever its inauspicious beginnings, that the USMS was able to stage such a successful sale of the crypto-currency means the product has been given real legitimacy as it sold with substantial demand, and leads to more sales later. So there’s only so many times one can say this is fake before one has to think somewhat differently.

BANNER YEAR
Bitcoin is down about 16 percent on the year, so it’s been a loser in a year where almost everything else has gone well in the first half. In a somewhat uncommon fashion, both stocks and bonds, along with gold and oil, are all higher on the year. YTD asset performance

That’s a surprise in both the equity and debt markets, where higher interest rates were supposed to sap investor enthusiasm for bonds and reduce the attractiveness of stocks as well. But markets are funny and instead the second half begins with the S&P not far from a record and bond prices surging (high yield bonds, notably, were at their tightest rates against U.S. Treasuries in 2007). We’ll be looking at this a bit later, but suffice to say some people in the credit world are starting to get somewhat nervous about this, believing that the rally has come far enough.

With that there’s some adjustment going on among big credit managers who see the opportunities in riskier credit waning. Fund flows remain strong, though, so what’s a person to do? Either way, the excesses that many discuss when it comes to credit don’t seem to quite be there yet – but they are starting to move closer. The Fed remains very much in the game, but there are plenty of strategists who believe it won’t be more than a few months before they start to pull back, which means a rough ride for almost everyone else.

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