Here's a trash-up of today's biz headlines:
Cargill to shutter Black River commodities unit. Here's a better idea, trade from the short side.
$200 B in student loans up for possible refi: Your inability to pay isn't based on the 85k you dropped on your Masters of Latino Women's Studies degree, its the interest rate !
Soda Stream profit down by 2/3: Shocked making your own pop isn't working out, so of course Keurig wants in on it.
DB missing e-chats - LIBOR settlement in flux : The biggest financial scam in history still unfolding? Nothing to see, move along please. Hey there's Bruce Jenner in a dress!
WSJ Op-Ed page compares 3 expansions: Spoiler Alert, this one's the weakest. Unmentioned? The other 2 cover the 2 greatest credit expansions since the Industrial Revolution.
Don't Get Up Early to Trade Shanghai : Locale qualifier unnecessary.
"Here's a bar chart of my favorite pies. And a pie chart of my favorite bars." Marshall Ericson HIMYM
More data, more complexity, another brief chat with "must follow" Fed guy Matt Boesler of Bloomberg News. @Boes_ if you've been in a coma.
Longtime readers know a simple cocktail party trick we've talked about before as to GDP (Nominal or Real) and the 5 year Treasury yield. Basically, outside of recessions, the 2 should track each other. After the financial crisis and the introduction of QE/LSAP monetary pornography, the relationship morphed toward the 10 year yield. The "fudge-y factor" is the CPI as we compare a nominal yield to a real statistic. See @groditi 's earlier contribution on this.
Anywho, today's data have the GDP at 2.3 and the 10 year at 2.27. The 5 year settled at 1.62 and core PCE was up a smidge. The curve FLATTENED aggressively. So, if "Normalization" includes the process of reverting back to the old tried-n-true compass of 5 year yields, then two things can be inferred:
1. Short rates need to rise even at the present so called "anemic" growth rate. (Spoiler Alert-THEY ARE)
2. The transition to normalization will be less volatile the narrower the 5/10 spread (double spoiler-see flattening above).
Marginally slower growth rates make the transition more nerve racking, not unlike earlier this year. Nonetheless, a committed CB would still want to normalize the term structure and avoid the chart spike of the otherside - where rates are held too low relative to Nominal Growth...and Peter Schiff gets unlimited air time.
Have fun shooting down the concept, amazing your cocktail party guests with your knowledge, or suspend your disbelief and ride along.
The Fed showed again today why leaving OZ is so hard. It's easy to switch to a Qe regime when your economy/financial system is leading the world over the abyss. It is very hard, however, to snug up a bit when rest of said world is so sketchy. Domestically, this also highlights why the list of Central Banks successfully traversing the landscape out of a QE regime and back to a rates regime is so short.
To be fair, the Fed has done a decent job of slowly walking the markets back from massive LSAP's. The Taper Tantrum proved the system was healthy enough to handle a pretty serious shock. (A shock bigger than most still realize in our opinion.) Throwing the lever back to a rates regime with an initial move is proving much harder to do. Beyond a diversity of Board and Pres. views on the action lies the reality of a cornucopia of variables and moving parts. The "go slow" policy results.
We still feel, ultimately, a central bank is a domestic institution. We continue to believe a move in Sept is not only probable but needed. We have to make an attempt to leave the free money OZ if only to expose the weaknesses. Someday, sometime, the cycle will naturally turn and the ability to adjust rates down will be called on. Few (none) have been brave enough or savvy enough to pull off the switch. It's easy to get to QE. It's difficult to leave. Keep in mind, Dorothy left Oz to get back to the Dust Bowl.
240 minute atr
support and resistance
On the economic calendar:-
09:00 S&P Case-Shiller HPI (Consensus 0.3% v Prior 0.3%)
09:45 PMI Services Flash (Consensus 54.8 v Prior 54.8)
10:00 Consumer Confidence (Consensus 99.6 v Prior 101.4)
Richmond Fed Manufacturing Index (Consensus 7.5 v Prior 6)
State Street Investor Confidence Index
11:30 4 Week Bill Auction
13:00 2 Year Note Auction
The FI markets are essentially unchanged from May. The SP future has taken just 3 sessions to retreat to similar values. The Naz, after another attempt to go it alone, is back on the April highs just this week. The sideshow that was/is the Greek debt situation (I can't bring myself to call it a crisis) diverted attention away from what appears to be nothing more than a Summer, easy money shake-n-bake.
The volatility associated with "normalization" should commence soon. We are anxious to see the FI market handling of a well advertised change in the funding rate. It is our opinion that the adjustment will create some interesting technical shifts but ultimately, will not alter the calibration of monetary policy. In fact, we believe policy will be MORE accommodative, for a time, after the move. However, the primary benefit of zirp has been the suppression and compression of spreads. This benefit will be compromised by altering the prevailing funding status quo, no matter the advertised lead time.
The fact remains, the Fed will, by default position of its holdings, be stuck in a quantitative regime for years to come. Raising the FF rate to 35bp does nothing to the Yucca Mountain of IOUs sitting on their account. The problems come from hoards of paltry yielding, above par trading notes on everyone else's. Long time readers know we are very excited to see the Death Star fired with some heft into year end. (Sidebar: we are noticing a smattering of Turn Days positioning already popping up. By October, there should be a stampede.)
Bottom line: I hope you enjoyed the "Summer Stability" because the fun is about to begin.
Disclosure: Still have a pulse - still hate Ts