Recap : SPX, 30y, BAML FMS


So the S&P finally broke above 1900 today, but tepidly and with little fanfare. I’ve been noting that fears of substantially higher interest rates may be a key impediment to higher PE ratios this year – and it seems that may continue to be the case. The rally so far has been driven by EPS growth rather than PE expansion. (The chart below shows how trailing PE has actually been stable all year) Given that EPS growth is gradual, this suggests that despite making new highs, the S&P is not yet ready for upside “breakout.” In other words, the low vol environment is likely to persist.

Separately, there has been much consternation this year on the size of the 30y move YTD. Explanations have included falling long run Fed expectations (the neutral rate) and Fixed Income supply shortage / Increased demand from pensions, positioning, the ECB, Ukraine / Geopolitics, among others. These theories have come from everybody, from the research desk at the banks, to the trading desks, to the NY Fed blog. The fact of the matter is – no one knows, at least with any certainty. So it’s funny to read recent commentary that it’s time to get short… based on really nothing else than the fact that yields have retraced higher some over the past several days. I propose a simpler and much more plausible explanation: the ‘fair,’ market clearing yield was too high at the beginning of the yield and the market is simply coming back towards ‘equilibrium.’

Finally, here are some interesting charts from BAML’s monthly Fund Manager Survey:

Risk taking appears abnormally low given consensus expectations of better growth:

Cash levels are at the highest level since mid 2012, (!) and close to levels that have marked market BOTTOMS: (note the above chart shows risk levels at the same level that marked lows during 2004 & 2005)

There is plenty of room for EM to rally – the percentage of respondents saying EM is overvalued is at the lowest level in almost 15 years. The last time

Finally, this was a great post:

The new thing to disrupt for tech companies is REGULATION. I.e. break the law to provide a better or cheaper service to consumers. Uber is leading the way – don’t be surprised if more follow!


  • US NFIB improved to 95.2 vs 94.5 exp and 93.4. This was the highest print since 2007.
  • Retail Sales rose 0.1% MoM vs 0.4% exp. The prior month figure was revised higher to 1.5% vs 1.1% prev. The control group fell -0.1% vs 0.5% exp. The prior month figure was revised higher to 1.4% vs 1.0% prev. It looks like Easter seasonality had an impact.
  • Germany ZEW Expectations dropped sharply to 33.1 vs 40.0 exp and 43.2 prev. The Current Situation survey improved. Historically, GDP peaks after expectations crosses below the current situation survey:

  • Australia Home Loans declined -0.9% MoM in March vs +1.0% exp and 2.3% prev.
  • Australia House Prices rose 1.7% QoQ in 1Q vs 3.0% exp and 3.4% prev
  • China Data:
  1. IP slowed to 8.7% YoY vs 8.9% exp and 8.8% prev
  2. Retail Sales slowed to 11.9% YoY vs 12.2% exp and prev

Turkey Current Account was stable at -3.19Bn vs -3.3bn exp

The Journal said the Bundesbank is open to taking significant stimulus measures depending on the ECB staff’s 2016 inflation forecasts. The measures the Bundesbank would consider include a reduction in the ECB’s refi and deposit rates, extension of full refi allotments until mid-2016, a new fixed-rate LTRO, and some purchases of asset backed securities (i.e credit -easing. However, it remains resistant to large-scale asset purchases of private or public debt (i.e QE).

Upcoming Data:

  • Tue: RBNZ News Conference
  • Wed: UK Employment, BoE Inflation Report, US PPI, New Zealand PMI, Japan GDP
  • Thu: EU GDP, US Empire Mfg, US CPI, Jobless Claims, Philly Fed
  • Fri: ECB’s Coeure Speaks, US Housing Starts, U Michigan Confidence,
  • Mon: RBA Minutes
  • Tue: UK CPI, Japan Trade Balance