Recap : Time to Start Shorting Duration

Commentary:

After being bullish duration for the past couple months, I think the party is ending. Here are some signs:

  • We got a pretty weak jobless print today followed by a weak EU PMI, but yields still ended higher.
  • As I’ve noted previously, yields (orange) and economic data surprises (white) in the US are diverging:

  • Key FOMC members have all stated that their assessments and forecasts for economic data have been unchanged over the past several months. Yet the front end is at the richest levels in 6 months. More specifically, despite median FOMC forecasts of a 1.0% FF rate at the end of 2015, the Fed funds market is pricing in a rate of just 60bps. Not only is there no risk premium there, the premium is negative!

  • The front end is at the richest level in 6 months. (it’s worth noting on its own as a technical observation)
  • One risk is that the weak housing data have lowered FOMC participation or staff expectations for growth over the next couple years. But this should be offset by the fact that such a change would lower potential GDP also, which limits the impact on estimated output gap.
  • Another risk here is that ECB easing is much larger than expected. But given the history of ECB reticence, as well as the fact that EUR 5y swap rates have increased since it hit a low a week ago, suggests this risk is mostly priced in already. (Having said that, note that French Mfg PMI printed below 50 today. After leading global growth in 1Q, the EU is likely to become more of a follower. So the case for additional ECB easing has increased, Weidmann’s comments not withstanding. BUT this may be the last ease. It will depend on both the future growth rate as well as the rate of change for the EUR. Even if there is another ease, however, it probably won’t be for a while yet, and the bar will be higher, given that it will have to be more unconventional.)

If this plays out as expected, what are the implications for other asset classes? On that matter, I am skeptical that there will be much of an effect. After all, we are just talking about yields going back to the range that has prevailed all year.

Separately, here are a few nice charts from GS on changes to BoE projections:

Notable:

  • EU PMI
  1. EU Mfg PMI declined to 52.5 vs 53.2 exp and 53.4 prev
  2. Germany Mfg PMI declined to 52.9 vs 54 exp and 54.1 prev
  3. France Mfg PMI declined to 49.3 vs 50.5 exp and 50.6 prev

US Markit flash Mfg PMI improved to 56.2 vs 55.4 prev

Japan PMI improved to 49.9 vs 49.4 prev

China HSBC PMI jumped to 49.7 vs 48.3 exp and 48.1 prev

US Jobless Claims jumped to 326k vs 310k exp and 297k prev

Existing Home Sales rose 1.3% MoM in April vs 2.2% exp

Canada Retail Sales declined -0.1% MoM in March vs +0.3% exp, with about half the miss coming from autos

UK GDP rose 0.8% as exp. Private Consumption was stronger while Fixed Capital Formation was lower

Turkey CBRT cut the Benchmark Repo Rate to 9.5% vs 10.0% exp and prev

South Africa SARB kept policy unchanged as exp

BOE’s Carney warned insurers that he will hold their top executives accountable in the same way that he has cracked down on Britain’s errant bankers – Reuters

The Thai military said it was staging a coup just days after imposing martial law; the army chief said he was forced to assume control in order to restore peace – Bloomberg.

Japan Post Insurance, which has the equivalent of $846 billion (500.92 billion pounds) in assets, is increasing its investment in Japanese stocks by an estimated 300 billion to 350 billion yen, or up to $3.5 billion, in the fiscal year that began in April, a more than 50 percent rise from last year. Reuters

GS: former Under Secretary of International Affairs at the US Treasury, Tim Adams: A sustained depreciation for six months or longer would probably prompt a lot of cage rattling. But given other US priorities – namely, the situation in Ukraine and possible further Russian sanctions – a recognition that a weaker Chinese currency in the midst of weaker Chinese activity is understandable, and that the Chinese are adhering to a policy of greater flexibility that we advocated, it is hard to see this becoming a greater concern any time soon. The recent favorable labor market numbers have also taken some of the pressure off, at least in the near term… The best way to deal with real concerns is through quiet, behind-the-scenes diplomacy with the Chinese. The US government/Treasury is in constant conversation with the appropriate Chinese authorities. There will always be some in Washington who want to take a much more muscular approach – using the “currency manipulator” designation, the WTO, or counter-veiling duties – but those are minority voices… you can cry wolf just so many times before it becomes apparent that the probability of the US Congress actually doing something is pretty low. The Chinese are savvy about it at this point. Certainly in the current context, if we did not take action when the current account was 10% of GDP, it is hard to imagine that we are going to take action when it is 2% of GDP and the currency has already appreciated meaningfully.

Upcoming Data:

  • Fri: German IFO, CanadaCPI, US New Home Sales
  • Mon: US Holiday, BoJ Minutes,
  • Tue: US Durable Goods, Consumer Confidence, Kuroda Speaks, NZ Business Confidence
  • Wed: German GfK Consumer Confidence, EU Money Supply, Australia Private CapEx
  • Thu: Canada Current Account, US Jobless Claims, US Pending Home Sales, New Zealand Building Permits, UK Gfk Consumer Confidence, Japan Unemployment, CPI
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