G3 Recap 5-5-11

Main Items:

  • ECB kept policy unchanged as expected. Trichet did NOT use ‘strong vigilance.’
  • BoE kept policy unchanged as expected
  • US Initial Jobless Claims jumped to 474k in April vs 410k expected and 429k previously. The Dept of Labor estimated that special factors added roughly 28K unadjusted filings in the week. Excluding these special factors, claims would have been around 440K seasonally adjusted. The Department of Labor stated that the late Easter Holiday and the timing of Spring Breaks throughout the nation created considerable difficulty in seasonally adjusting the data in April.
  • US Unit Labor Costs increased 1.0% in 1Q vs 0.8% expected and -0.6% previously
  • CME hiked Silver margins again, the 5th time in less than 2 weeks. Maintenance margins will be 16k starting next Month, compared to 8.7k on 4/25.


  • UK PMI Services fell to 54.3 in April vs 56 expected and 57.1 previously
  • China HSBC Services PMI was roughly unchanged at 51.6 in April vs 51.7 previously


  • The risk reduction appears to have spread from silver to oil and then equities today. As these types of events are caused by positioning, it is difficult to say when it will end, but the panicked price action across the commodities complex suggests we may be potentially near the end of the move.
  • Are we at an inflection point? The Treasury market seems to think so.
    1yr swap yields are at levels not seen since just before QE2:

    10yr Treasuries are pricing in an unusual and stagflationary mix of low growth and higher inflation. In fact, the differential between inflation breakevens and real yields are at all time highs:

    As was the case in early 2008 and late 2010, current levels are unlikely to stabilize here. Either growth expectations revert to higher levels, or inflation expectations will come down. (Note that <20% of the CPI basket is commodities driven, and in any case, the commodities complex has sold off sharply) As was the case in 2010, my personal opinion is that we are not going into a recession. However, that doesn’t preclude a replay of the 2010 growth scare. Note that the current 10yr Treasury yield of ~3.2% has been less frequent that other levels since the end of 2007: (histogram of daily 10yr yield closes below)

    Implied rates vol remains low, so now is may be a good time to take advantage of the observation that yields are NOT in a stable zone. 3m 10y Future Straddles cost 3’20 or so last I checked. Not too expensive relative to the 4pt move over the past 4 weeks.


3 thoughts on “G3 Recap 5-5-11

  1. having been in North Carolina when the storms/tornadoes blew over, i am kinda surprised how little folks have mentioned the possible impact these had given their size and impact. weekly claims data perhaps would be the first to pick this up.

    a few weeks ago we discussed how the curve should be flattening going into the end of QE2 though probably a bear rather than bull flattener. anyway, my sense is that the curve should continue flattening. selling break evens still makes sense to me … as a hedge, pay 2y notes.

    looks like BRICS finally feeling brunt of inflation and reacting further to it. i wonder how a mix of real yields becoming less negative in EM space versus staying negative in USD should affect asset prices. care to buy some AUD/JPY fx vol?

    1. Hey Bert – welcome back! Glad you survived the tornadoes, it looked pretty bad. Good point on their impact on jobs, haven’t seen that connection anywhere. And while we’re on the topic of natural disasters, the massive flooding along the Mississippi probably has an impact also.
      The weakish reaction of stocks to payrolls today (we haven’t convincingly taken out yesterday’s high yet!) is making me nervous re: risk assets. Goldies came out with the a note on it last night, have to agree.
      I think you’re right on the rates market. The front end doesn’t have anywhere to go but higher, but carry might hurt. Breakevens don’t make sense in light of the macro data, and with all real yields short of 7yrs negative, the risk seems pretty one way.

  2. my 2 cents is that rates market reacts to establishment survey … equity markets reacts to household survey … which was -190K … that and the 9% unemployment rate would make me nervous too if we couldn’t hold a bid here on risk … wild card being what talk of QE3 but i don’t see that happening being for a few months. i would also probably keep a close eye out on copper as some sort of leading/coincidental indicator.

    not sure whats going on with fed funds or where GC is clearing but perhaps a money market steepner better than outright selling 2Y, at least in terms of carry.

    anyway, another way to do all this is to sell US BEI versus buying some market where inflation pipeline still pointing up, not so dependent in oil and currency susceptible .. ie UK BEI.

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