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 – Shorting a dull market, and other cliches

May 28, 2014 13:43 UTC

There are a million cliches people lean on to explain some aspect of the market that’s otherwise baffling, and the key one this week – the cliche du semaine – is something along the lines of, “You don’t want to short a dull market.”

And indeed this has been a bit of a dull one lately. The S&P 500 grinds to new highs, accompanied by the Dow transports, with the industrials not that far off.

Even the much-maligned Russell has outperformed the S&P on a relative basis for the last four days, so some of the divergence between the small-caps and the big caps has been worked off to bring valuations a bit more in line (even if the Russell’s weakness stands as one big counterpoint to all the kumbaya talk we’ve been having lately).

Recent volumes have been really weak – trading last week was 22 percent less than the average week, per Mike O’Rourke of JonesTrading.
So there’s some concern that a breakout in the stock market – which we’re seeing now – accompanied by lackluster volume somehow means it’s not “real” in a sense. But try telling that to anyone who bought into the market two or three years ago and has watched it do almost nothing but ride higher since. At this pace, corrections become much less frightening and the worrying only increases when things get truly hairy.

Which brings us to another cliche – the one about too much complacency. A look at volatility right now does underscore the way in which the market is in full Hakuna Matata mode, with one-month VIX implied volatility falling to 38.9 percent, the lowest ever, according to Credit Suisse. VIX options, therefore, are near their cheapest levels ever, and the cash VIX is hanging around the 11 range, so it’s not even ready for its Bar Mitzvah.

(And three-month implied volatility of about 12.5 percent is actually a bit rich, given realized volatility has been a bit more than 10 percent in the last three months – traders are betting on a somnambulant market and getting a market that’s the functional equivalent of rotting tree bark.)

The constructive part of all of this is that the market continues to rotate through various sectors. Old technology like Microsoft had a turn leading the way, which followed good gains for utilities, and the financials were stronger on Tuesday.

Dennis Dick of Bright Trading LLC in Las Vegas pointed out some of the cliches that keep him a bit worried – the lack of worry in total and no real catalysts to keep these things moving – but said, once again, that it’s a difficult environment to make the short selling work.

Which, of course, is only an issue if you’re a die-hard short.

MORNING BID – Janet Yellen’s rain (snow) check

Feb 27, 2014 14:16 UTC

This is the thing about delaying the new Fed chair’s follow-up testimony by two weeks due to bad weather, you actually make the second hearing something that’s potentially interesting. (It will depend, of course, on whether members of the Senate Committee ask provocative questions, and while you can lead a horse to water, well, you know.)

In the interim two weeks since Janet Yellen last appeared before Congress, the U.S. economic picture has gotten much more muddled. That’s mostly because of poor retail sales and employment figures, and the out-of-control situation in Ukraine which has led to a regional flight of some assets. There’s also been some interesting comments from the likes of Fed Governor Daniel Tarullo, who suggested the Fed should be paying more attention to the formation of asset bubbles and the use of monetary policy to curb them. That anyone is surprised at this shows how pervasive the “Fed put” option has become in the discussion of Fed activities, so we’ve really lowered expectations here.

Meanwhile, Boston Fed head Eric Rosengren said the Fed is looking very closely at activities in emerging markets, which is sort of obvious in a sense but contradicts, if only modestly, Yellen’s thoughts two weeks ago. And really, the Fed’s ability to influence economic activities overseas in some of the world’s developing markets or troubled spots is even weaker than what it can exert over U.S. demand. So maybe it’s just one to grow on.
Either way, Yellen would probably want to comment on the situation, if, again, a smart senator would think to … well, never mind.

Overnight, the situation in the Ukraine has worsened, with armed gunmen taking control of regional government headquarters in Crimea, vowing to be ruled from Russia. The Ukrainian hryvnia continues to sink while the Russian ruble plumbs new five-year lows, surpassing the previous day’s losses, and a bit of risk-off action can be seen in the zloty and a bit of better buying in Treasuries, where the 10-year yield was lately at 2.66 percent. Fund flow figures will be key to watch here to see if overseas flows increase to the U.S. or at least to the developed areas of Western Europe and Japan.

Morning Bid — The Minutiae of the Minutes

Jan 8, 2014 13:52 UTC

December’s last salvo before going into holiday mode was the surprise Federal Reserve decision to trim its monthly $85 billion in bond buying to a more modest (but still enormous) $75 billion, that helped balloon its balance sheet to north of $4 trillion.

Suffice to say, on some levels, there was a bit of a disconnect here: The Fed’s inflation outlook showed inflation not getting back to its 2 percent target for a long time (like, forever; several years out, it was seen as just sneaking its way over 2 percent, never mind what Charles Plosser of Philly says).

With the Fed’s minutes due out later Wednesday, there are a number of unanswered questions about the Fed’s decision as Ben Bernanke exits and Janet Yellen (confirmed on a 56-26 vote, with “OMG IT’S COLD” coming in third place with 18 votes) enters the scene:

THE SCHEDULE OF REDUCING STIMULUS
There’s been no guidance on this so far. Ben Bernanke, in his final press conference as the Fed head, said he could envision a steady reduction in $10 billion increments at each meeting, which would drop the monthly buying to nothing by the end of 2014. Richard Fisher, Dallas Fed head and now a voting member for 2014, said he would be comfortable with a more accelerated rate of purchases. And dovish John Williams of San Francisco said yesterday he’d expect to see the end of buying by year-end.

So it will be interesting to see any commentary on this – whether a faster pace was considered or not. (There will probably be some boilerplate on the Fed saying it could ‘reduce at a faster pace’ or ‘resume additional purchases’ or something. Just as a warning.)

But the October minutes provide some clues, as the Fed said some participants “mentioned that it might be preferable to adopt an even simpler plan and announce a total size of remaining purchases or a timetable for winding down the program. A calendar-based step-down would run counter to the data-dependent, state-contingent nature of the current asset purchase program, but it would be easier to communicate.”

ECONOMIC EXPECTATIONS
Recent inventory figures, construction data and durable goods orders point to better-than-expected figures for the fourth quarter, and a first quarter where the economy gains momentum. The baseline projection for GDP growth in the fourth quarter has been for around 2.5 percent, but it could be higher thanks to a boost in exports.

The Fed sees 2014 GDP growth of 2.8 to 3.2 percent, which may end up being optimistic, while they see inflation as not much of a threat.
Yellen, in the past, has been more explicit about the idea of living with additional inflation, if needed, to help reduce unemployment, so there’s that. Again, that central tendency only ticks up to 2 percent in 2015 and 2016, and that’s the just the upper end of the Fed’s forecasts.

THE CONSUMER OUTLOOK
October’s minutes sounded a note of caution when it came to regular people, saying that “consumer sentiment remained unusually low, posing a downside risk to the forecast, and uncertainty surrounding prospective fiscal deliberations could weigh further on consumer confidence.“

Said fiscal shenanigans have receded for the time being (give it a day or so), which has removed a layer of uncertainty, though it’s debatable that consumers make decisions based on what’s happening in Washington to begin with. But a weak September payrolls figure and a few limp sentiment surveys put the Fed in a mind to be more concerned, and later economic figures don’t show a similar kind of worry.

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