Recap 4-05-13: Thoughts


Some thoughts:

  • Investor perceptions are likely to be: “We are getting another early spring swoon, just like the last 3 years. So we should take some chips off the table.”
  • Talk of any QE withdrawal is now tabled. But that’s also kinda priced in.
  • At face value, the payrolls print is consistent with a substantial slowdown. But it was also kind of an outlier. Data has been weaker than expected the past couple weeks, but not quite this weak.
  • Seasonality: Prior year equity sell offs have actually started in May, with April flat on avg.
  • We will have to see if we get the same type of correction as the past few years. I think the size and length will depend on whether the data and asset prices re-couple, and if so, how much worse the data gets. Stocks are short term over sold, so we could bounce. Earnings season kicks off next week, which is likely to drive stocks for the rest of the month, as we are now done with the important economic data. I think a mid single digit correction in SPX is still the most likely, but it’s possible we see it next month. Price action next week should give some clues as to the timing.
  • European credit is getting a LOT of help from Japan. Periphery yields are lower by double digits today, although undoubtedly some of it is driven by short covering. EUR is up almost 2 big figures the past couple days. It’s not clear if the buying will spill over into EU equity products, but at this juncture it doesn’t appear likely. Below is a chart that sums up the decoupling. EU Economic Surprise Index in White, Bank index in purple, EURUSD in orange, 10y Italy spread over Bunds in yellow, inverted.

    I think the take away there is that there are some massive capital flows on the move, and while it’s unclear how much more is left, if you want to stay alive you better get out of the way! (See also: MXNJPY) Data and asset prices will eventually re-couple, as they always do, but it’s too early to trade that theme.

  • Citi: MoF portfolio flow data suggest that the soft core of Europe is in line to benefit from any increases in foreign demand by the Japanese. Japanese funds have been flowing out of Treasuries and Australian government bonds and consistently into European government bonds. The flows into EGBs have been predominantly into France over the last year,
  • The retracement in JGB yields last night got a lot of press. The color so far appears to be that JGB investors are a bit confused and trading in a knee-jerk fashion. I don’t think there’s much information content there. The backup in yields is certainly NOT due to investors rethinking whether the BoJ will succeed. Rather, it’s more likely that they are worried that they will succeed. In that context, the move is Nikkei & USDJPY supportive. Note that despite the payrolls print, Nikkei futures on the CME ended almost 2% HIGHER compared to when the cash market closed.


  • US Payrolls increased just 88k vs 190k exp and 236k prev. Unemployment DECLINED to 7.6% vs 7.7% exp and prev.
  • Avg hourly earnings were flat MoM vs 0.2% exp and prev. However, weekly hours increased to 34.6 vs 34.5 exp and prev
  • Canadian Employment dropped -54.5k vs +6.5k exp and 50.7k prev, driven by Full Time employment. Unemployment jumped to 7.2%vs 7.0% exp and prev

Upcoming Data:

  • Fri: US Employment, Canada Employment,
  • Mon: Japan Currency Acct, Japan Eco Watchers Survey, BoC Senior Loan Officer Survey, Business Outlook Survey
  • Tue: Swiss Unemployment, German Trade Balance, Swiss CPI, Canada Housing Starts, Building Permits,
  • Wed: China Money Supply, Trade Balance, Australia Employment,
  • Thu: US Jobless Claims, Canada New House Price Index