Recap : Low Vol Environment to Persist, BoJ Stasis, the NDX H&S


After Paul Tudor Jones’ Ira Sohn presentation, stories about how low vol is impacting macro returns are popping up. But this really shouldn’t be a surprise. I noted last December in the 2014 Trade ideas update:

The lack of macro volatility as well as fairly stable central bank policies mean that opportunities for good macro bets is also likely to diminish.

People argue that vol will come back. Yes it will, but probably not significantly until the next recession. There will be some vol around the first Fed hike but then it will die down and then it could be quiet until another downturn. That is what happened in the last cycle anyway – and we had a lot of commodity driven inflation uncertainty then also! The Vix averaged ~12.5 from 2005 until mid 2007. The fact of the matter is that macro volatility will remain low and the market has gotten more and more efficient. One result of that is that there is less volatility, and to some extent, less trading. The IB revenue declines at the major banks are a testimony to that.

Brent Donnelly at Citi noted that the BoJ minutes included this bit:

“Some of these members added that, while economic growth itself had been at a lower rate than projected, an estimation of the output gap based on the degree of utilization of production factors, such as labor and production capacity, indicated that the output gap had recently narrowed to around zero.”

This suggests that the hurdle to additional easing may be notably higher than the consensus thinks. Central bankers spent a great deal of time on the output gap on the ingrained assumption that the gap is a major driver of core inflation. So if several members of the BoJ believe that the gap is zero, then a few months or even a few quarters of weak data will not affect that assessment, since trend growth in Japan is so low.

Finally, I read a whole bunch of posts today about how the Nasdaq is about to form a bearish head and shoulder formation. Here is the longer term chart of the last several times that happened:

Technical Analysis has its uses. But most of it assumes a range break following certain patterns. The likelihood of such breaks, however, can often be better discerned using a macroeconomic toolkit that extends beyond chart patterns.


  • Yellen :
  1. One cautionary note, though, is that readings on housing activity–a sector that has been recovering since 2011–have remained disappointing so far this year and will bear watching.
  2. Another risk–domestic in origin–is that the recent flattening out in housing activity could prove more protracted than currently expected rather than resuming its earlier pace of recovery.
  3. the Committee recognizes that an extended period of low interest rates has the potential to induce investors to "reach for yield" by taking on increased leverage, duration risk, or credit risk. Some reach-for-yield behavior may be evident, for example, in the lower-rated corporate debt markets, where issuance of syndicated leveraged loans and high-yield bonds has continued to expand briskly, spreads have continued to narrow, and underwriting standards have loosened further. While some financial intermediaries have increased their exposure to duration and credit risk recently, these increases appear modest to date–particularly at the largest banks and life insurers.
  4. More generally, valuations for the equity market as a whole and other broad categories of assets, such as residential real estate, remain within historical norms. In addition, bank holding companies (BHCs) have improved their liquidity positions and raised capital ratios to levels significantly higher than prior to the financial crisis.
  5. For the financial sector more broadly, leverage remains subdued and measures of wholesale short-term funding continue to be far below levels seen before the financial crisis.
  6. the Federal Reserve is considering whether additional measures are needed to further reduce the risks associated with large, interconnected financial institutions.

Putin said he will be pulling troops away from the Ukrainian border while urging separatists to postpone the May 11 referendum. The White House and NATO noted that there is no evidence of troop movements yet.

RBNZ Governor Wheeler: "If the currency remains high in the face of worsening fundamentals, such as a continued weakening in export prices, it would become more opportune for the Reserve Bank to intervene in the currency market to sell New Zealand dollars.”

NZ Unemployment was stable at 6.0% in 1Q vs 5.8% exp. Average Hourly Earnings rose to 0.7% QoQ vs 1.0% exp and 0.3% prev

Australia Retail Sales Growth declined to 0.1% vs 0.4% exp and 0.2% prev

Japan Markit Services PMI dropped to 46.4 vs 52.2 prev

China HSBC Services PMI declined to 51.4 vs 51.9 prev

US Unit Labor Costs jumped to 4.2% in 1Q vs 2.8% exp and -0.1% prev. Productivity dropped -1.7% vs -1.2% exp and +1.8% prev

Alibaba formally filed a $1B placeholder IPO as speculated overnight. Reports indicating the company will likely raise $20B once it completes the IPO process.

HSBC quarterly earnings fell 18% on weakness in Asia, where revenues dropped 32%. Total revenues fell 13.8%. –Dealbook

U.S., Singapore reach agreement on tax evasion: U.S. Treasury -Reuters

Upcoming Data:

  • Wed : UK RICS House price balance, Australia Employment
  • Thu : BoE, ECB, Canada Housing Starts, US Jobless Claims, RBA Minutes
  • Fri : Canada Employment, Brazil Inflation, USDA Ag Report
  • Mon: Japan Eco Watchers Survey, Australia Home Loans, House Price Index
  • Tue: ChinaData, TurkeyCurrent Account, GermanyZEW, US NFIB, Retail Sales, RBNZ News Conference
  • Wed: UK Employment, BoE Inflation Report, US PPI, New Zealand PMI, Japan GDP