Monthly Archives: June 2013

Classical Thursday

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On the economic calendar:-
08:30 Jobless Claims (Consensus 345 K v Prior 354 K)
          Personal Income (Consensus 0.2% v Prior 0.0%)
          Personal Outlays (Consensus 0.4% v Prior -0.2%)
09:45 Bloomberg Consumer Confidence Index

10:00 Pending Home Sales Index (Consensus 1.0% v Prior 0.3%)
10:30 EIA Natural Gas Report
11:00 Kansas City Fed Manufacturing Index (Consensus 4.0 v Prior 2.0)
3 Month Bill Announcement
6 Month Bill Announcement
13:00 7 Year Note Auction
15:00 Farm Prices
16:30 Fed Balance Sheet
Money Supply

10:15 - 11:00 Outright Treasury Coupon Purchases up to $5.25 billion

Speaking today:-
10:00 FOMC Member William Dudley
10:30 FOMC Member Jerome Powell
12:30 FOMC Member Dennis Lockhart

Say What ?

Two months of heavy wipe-down in the FI universe is now being neatly packaged in a critique of Fed communication confusion. We disagree. The Fixed Income market, although commonly referenced as the TLT, is a broad and diverse world. The breadth of devastation over the last 7 weeks is incredible. This was a sell off that provided essentially no "quality" to fly to.

Harking back to our long held criticism of the Ferguson Commission and Greenspan's "25bp at 2:15et every 6 weeks" gambit, its the CLEAR communication that is the problem. Market participants, from Iowa Stock Clubs to multi-B hedgies, act logically when guidance is "extended." In the "Greenspan Folly", he "promised" the path of forward rate increases and failed to consider the certainty with which bankers-shadow and light- could continue to supply credit into the wholesale funded system. Fast forward to the post credit super-cycle Fin Sys 2.0 and the Bernanke Fed bets the same forward guidance on the market will deliver a happier result.

At the same time, large banks have (due to both regulation and the extended low yield environment) reduced FI Desk capacity dramatically and reduced wholesale money funding exposure. This has created a sticky and rapidly seizing system. The customer side has morphed into a tricky stew of automated liquidity providers, small hit and runners (guilty) and Gigantor AUM monsters. Not exactly a market my economics professor would label "healthy"- deep, wide and resilient. The certainty that the low yield, low volatility scenario was here for years masked a bull market in leverage on the customer side as a yield chase. The mismatch dysfunction has exploded as the system attempted to gear down.

The melting ice that started the flood is the FX Reserve shift behind the real rate move (well explored by @exantefactor at Minyanville and further by @izakaminska at FTAlphaville. and right here by us) That the Chairman openly expressed confusion over this very movement when asked about it in the presser is not comforting. We anticipate still-er waters as the bodies float up over the rest of the Summer. BUT, if the pendulum swings to levering the inevitability of the return path, the flood could turn full Noah. Either way, don't listen to forecasters blaming CB mixed messages for the mess. This is happening because CBs have been saying too much for too long.

Classical Wednesday

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On the economic calendar:-
07:00 MBA Purchase Applications
08:30 GDP (Consensus 2.4% v Prior 2.4%)
Corporate Profits
10:30 EIA Petroleum Status Report
13:00 5 Year Note Auction

10:15 - 11:00 Outright Treasury Coupon Purchases up to $3.50 billion

Speaking Today:-
01:55 FOMC Member Narayana Kocherlakota
10:00 FOMC Member Richard Fisher


Yesterday, Minn. Fed President Narayana Kocherlakota held an impromtu conference call with reporters. The gist was to remind markets of the gravitational pull of the ZIRP. As we proposed last week, we feel the markets are adjusting to a Quantitative Easing Big Bang of real rates, dollar carry trades and international FX reserve flows. This complex and violent adjustment has been neatly packaged as the "tapering boogeyman." Kocherlokota put it this way, "We must bring that point forward and hammer it every time we talk about policy." "That point" was/is that the Funds rate would remain 0-25bp long after LSAPs not just tapered but ended.

We believe the unwind of several years of dollar carry has mostly taken place. We are watching China closely because we believe their cash crunching shadow banking (tipped by rising real yields here) was a precursor to floating the Renminbi. Contrary to Congressional calls of "manipulation", after some volatility, we think the Yuan would fall. (Since the 90's the Chinese have been very cognizant that floating the ccy was more a banking system risk than a trade flow risk.)

The credit component in money markets perked up yesterday as seen in Eurodollar strips. Five contributing banks raised their setting. Meanwhile, CME Group raised margins on the complex and the growing cleared swap contracts. The system is already burdened with collateral obligations and BBG reported chatter that the Euros were considering restricting bank rehypothication activities. Financial System 2.0 appears to go into lock-down mode quickly.

If the ZIRP gravity has any strength left, then  rates markets need to respond through the new (and considerably higher coupon) supply. Beyond that is a Holiday week and an employment report long over due for an upside outlier. In monetary policy, gravity's more of a guideline than a law.