G3 Recap 5-10-11

Main Items:

  • US Import Price Index rose 11.1% YoY vs 10.4% expected and 9.7% previously.
  • US NFIB Small Business Optimism declined to 91.2 in April vs 91.8 expected and 91.9 previously.
  • Toyota production will likely return to normal 2-3 months sooner than expected the Nikkei reported.
  • Reports of Mortgage Fraud Reach Record Level – WSJ
  • Last night, the CME increased crude oil margins by 25%
  • The Bank of Japan on Tuesday decided to bolster its capital as a provision against potential losses from an asset-buying scheme, giving it room to ease monetary policy further – Reuters


  • UK RICS House Price Balance improved to -21 in April vs -23 expected and previously
  • Chinese Trade balance was better than expected in April at 11.4bn vs 3.2bn expected as Imports came in well below expectations.
  • Swiss CPI fell back to 0.3% YoY in April


  • It’s probably time to take a shot at shorting 10yrs. While economic surprises have not yet turned, they are now at levels that have historically not persisted for long outside of recessions:

    When we combine this with the facts that Treasury yields are rich, posted their first reversal in a month, while vols remain low – buying puts on the 10yr future seems to be a pretty attractive bet. Who knows – we could get a replay of the 4Q09 price action.


6 thoughts on “G3 Recap 5-10-11

  1. What’s your opinion on QE2 end in June, by the way? That’s the main confusing variable for me, really.

  2. Saw this today too… Couldn’t pull the trigger though because I’m not convinced the stock market isn’t about to roll over. I’m thinking the commodity selloff is just taking a breather, but will resume it’s downtrend – taking stocks and treasury yields along with it. All related to the ending of QE2.

  3. end of QE2 effectively a tightening measure which should bring down inflation and hence nominal GDP expectations. i don’t think this is negative for the long end of the curve and may very well increase vol of risky assets. i’m no technical guru, but charts of commodity heavy equity indices like TSX, ASX or FTSE look like they stalling unable to make new highs … despite good news.

  4. Thanks for sharing your thoughts everyone.

    I honestly am thinking that the end of QE2 will be a non event. It has just been so well telegraphed and discussed that it seems unlikely to cause major shifts in macro flows in the short term.

    On the other hand, if we agree with the Fed and Goldies that it is the stock of treasuries instead of the flow that impacts the economy, then the fact that net issuance will be higher after QE2 will, as Bert said, be a tightening event. However, as this is also well telegraphed in advance, I think the short term effects will be small.

    Farther out, the debt ceiling discussions probably introduce some additional volatility. Where we are in the presidential election cycle suggest that the debt ceiling will be raised, but it could be raised much less than expected. Historically, debt ceiling discussions have not had much of an impact on treasury yields because the budget deficit have been small, but the current high levels suggest that even apparently small shifts in the outlook for the budget deficit could have an impact on treasury yields, although much of the effect will likely be felt relative to swaps and corporates.

    The short term outlook for treasury yields are uncertain – and I definitely agree with the view that global equity index momentum appear to be stalling, and poses downside risks for yields. However, the downside surprises to the macro data is likely to end in the coming weeks, and the price action and low cost of vol makes betting on higher yields fairly cheap. I have a tight stop on it, and I’m ready to bail if I’m wrong. BUT – if I’m right, then yields will likely retrace 20 or even 40bps, and puts will return a multiple of their premium. This also makes the bet worth making, IMO.

  5. as you say, all about risk return of individual trades and payoff ratios versus whatever else you may have in your book.

    i’m not quite sure what the pain trade is for the market overall right now except for commodities taking a real thumping … but that’s predicated on a series of (serious) global tightening measures … and that doesn’t seem to be on the cards.

    speaking of which, mervyn king finally worried about inflation?! who woulda thought! seems utilities promising 25% increases in natural gas prices will be uncomfortable at a number of levels … talk about misguided energy policy.

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