Recap 2014-08-08 : Bunds, Stocks


Bunds & EUR swaps have been a common source of pain in macro land these days. Yields on both hit record lows today, although both bounced back from the lows of the day. The general macro thesis there is simply that the ECB is highly unlikely to keep policy rates at an average level below 1.5% for 10 years. The inflation target is 2%, real growth pre-crisis averaged above 2%, and even the 5y average growth rate, which includes both the Lehman as well as the EU crisis, is 0.

The market, of course, is not swayed by those long term, valuation based arguments right now, and is instead appears most focused on the recent inflation miss on 7/31. Since then, 5y5y fwd EUR inflation swaps has fallen back to the levels prevailing before the past cut. With the TLRTOs taking place next month, however, there will be no new initiatives from the ECB for at least a couple months. This is where central bank credibility is hugely important. And the fact of the matter is – the ECB only has credibility in containing upside inflation. As a result, the credibility of the ECB protecting against disinflation is coming into play: (a 5y5y print below 2% is essentially a loss of that credibility)

As we have seen several times over recent years, it is usually not a good idea to bet on a central bank losing is credibility in achieving its mandate. One of the following will eventually happen: the data turns, the policy changes, or leadership changes. (i.e. BoJ) Nevertheless, the nature of the ECB decision making process has resulted in this situation and rational arguments aside, the price action is causing pain, including in the portfolio of yours truly!

Having said that, there are signs that the low in EU HICP prints may be near. PPI (orange line below) has bounced, which has historically coincided with higher or stable headline inflation prints:

And Unemployment (orange below, inverted along with trend extrapolation) has already improved 0.5% from the highs, which has historically been supportive for inflation prints:

Like most investment strategies, the rationale behind a bet and the timing are different considerations, and thus far, the timing has simply been wrong. This is also the type of situation where experience with risk management is often the reason for an ultimate + or – on the PL. Trade sizing and structuring are the reasons a losing trade can be held when the timing is off. Here’s to hoping that my readers have not over extended themselves.

Separately, is it time to buy the dip in equities?

My bias is negative. Despite the fact that valuations in major indices are the cheapest in some time, (Eurostoxx is finally ‘cheap’ by my metrics – the first time in over a year!) my expectation going into the sell off was a deeper and/or longer correction – to roughly 1875 on SPX, sometime near the turn of the month. I don’t see a reason to change that assessment given prevailing readings on sentiment and technicals.

Having said that, here is a great chart from Raymond James (via tBP) putting things into perspective. If we define a bull market start as when it makes a new nominal high, this one is only 1.3 years old vs a historical minimum of 5 and an average of 14:

Some more discussion on why disruption in the US seems to be slowing:


  • BoJ left policy unchanged as exp
  • Canada Employment was weak, rising just 0.2K vs 20k exp and -9.4k prev. However, the Unemployment rate declined to 7.0% vs 7.1% exp and prev as the participation rate declined to 65.9 vs 66.1 exp and prev
  • Japan Eco Watchers declined to 51.5 vs 53.3 prev
  • RBA SMP:
  1. The unemployment rate is likely to remain elevated for a time and is not expected to decline in a sustained way until 2016.
  2. Relative to three months ago, when near-term prospects for non-mining activity appeared to be improving, the recent softness in some indicators has increased the uncertainty around the strength and timing of the pick-up in consumption and non-mining investment. For some time now, nonmining investment has been forecast to pick up strongly beyond the next year or so, consistent with past behaviour following troughs in non-mining investment. With only tentative signs of improvement in near-term indicators, the timing of the pick-up has been pushed out a bit further
  3. These identified, and other unknown, risks mean that there is significant uncertainty about the path for GDP and inflation.

Australia Home loans rose 0.2% MoM vs 0.6% exp and 0.0% prev

US Unit Labor Costs rose 0.6% in 2Q vs 1.0% exp. However, the 1Q print was revised up to 11.8% vs 5.7% prev The 12 quarter moving average has been comparable to the late 90’s:

China’s trade surplus printed $47.3bn up from $31.56bn last month and well above estimates of $27.4bn. Exports surged 14.5% versus 7% expected. Imports declined -1.6% versus +2.6% expected. The 12 month average in USD terms is near all time highs:

a record $7.1B was pulled from junk funds and ETFs this week according to data out Thurs night. This was the 4th consecutive week of outflows. FT

Homebuilders Earnings via JPM: Homebuilders – the group had an outright bad season as a number of firms raised margin/pricing concerns. DHI was prob. the biggest large-cap disappointment.

Israel/Gaza truth breaks down after rocket fire resumes. Hamas militants in Gaza resumed rocket strikes against Israel early Friday after a 72-hour cease fire agreement broke down. Reuters

WSJ: Fair Isaac Corp. said Thursday that it will stop including in its FICO credit-score calculations any record of a consumer failing to pay a bill if the bill has been paid or settled with a collection agency. The San Jose, Calif., company also will give less weight to unpaid medical bills that are with a collection agency… Consumers often are unaware that their insurance company isn’t paying a medical bill and can end up in default and in collection without knowing it, said Anthony Sprauve, senior consumer credit specialist with Fair Isaac… More than half of all debt-collection activity on consumers’ credit reports comes from medical bills, according to the Federal Reserve… FICO scores have many competitors but are the most widely used. Lenders used them in 90% of consumer and mortgage loan decisions, according to a study this year by the CEB TowerGroup, a financial-services research firm… Fair Isaac releases new scoring models every few years, and it is up to lenders to choose which ones to use. The new score will likely be adopted by credit-card and auto lenders first, says John Ulzheimer, president of consumer education at and a former Fair Isaac manager. Mortgages are likely to lag, since the FICO scores used by most mortgage lenders are two versions old. The impact of the changes on borrowers is likely to be significant. Accounts that are sent to collections, including credit-card debts and utility bills, can stay on borrowers’ credit reports for as long as seven years, even when their balance drops to zero, and can lower their scores by up to 100 points, said Mr. Ulzheimer. The lower weight given to unpaid medical debt could increase some affected borrowers’ FICO scores by 25 points, said Mr. Sprauve.


  • Mon: Canada housing Starts, Australia NAB Business Confidence, House Price Index
  • Tue: German ZEW, US NFIB Survey, WASDE reports, Japan 2Q GDP
  • Wed: GermanyCPI, UK Employment, BoE Inflation Report, US Retail Sales, Dudley Speaks, NZ Mfg PMI, Retail Sales, UK RICS House Price Balance
  • Thu: France, GDP, Payrolls, Germany GDP, EU CPI revision, US Jobless Claims
  • Fri: UKGDP, US Empire Mfg, PPI, UMichigan Confidence
  • Mon: