This week felt like a declaration that we have now moved away from on-hold to global tightening phase. US CPI, Swedish unemployment, Australian employment, UK CPI/BoE/Vlieghe combo, SNB currency assessment change and whatever caused the higher Eurozone yields on Friday. The Australian 90-day bills sell-off has now priced in 2.5 hikes for RBA in reds versus around 3 for BoC with BoC delivering first. I don’t like this pricing because the sentiment is different between the central banks. RBA have commented that growth is too low to hike. Yet, if/once the sentiment changes, what stops RBA from hiking? Given Australian reputation as a high-yielder, 2.5 hikes for 5 (2 done + 3 to come) in Canada might seem too low, not too high. Reputation aside, BoC last year had a paper that showed a nominal neutral rate of 2.75-3.75% and RBA showed their neutral rate is 3.5% in July, so about same space to move higher. I am not sure if it’s a good trade to bet on BoC versus RBA and if it should be through red STIRs or 10y bond futures. Given that 8th contract differential stood at 80 bps in 2016, pushing it now from 20 bps to negative doesn’t feel comfortable. Australian 2s10 is steeper than Canadian one, around 74 versus 40 bps, so long Australian 10y fut and short Canadian one is another option. A concern is that Australian 2s10 bear steepened while Canadian one bear flattened lately, so Australia-Canada 10y would be somewhat directional (and from this I infer that markets believe that Australia neutral rate can go up but it’s locked for Canada). The 10y spread between the two is also quite tight now by historical measures. I get a juicy rolldown to vol of 0.39 for long IR M9 - short BA M9, but the ratio is a lot lower for (back-of-the-envelope approximation) receiving Australian 10y rate and paying Canadian 10y rate (<0.1) that I use as a proxy for 10y gov futures. 2y swap differential is now zero between AUD and NZD, so perhaps praying for dormant RBNZ and reloading AUDNZD long around 1.09-1.095 is the most simple idea as it seems to have lagged the interest rate developments a lil bit. Past two weeks haven’t been kind to iron, nickel and copper, but I am not sure further slump will deter RBA unless the prices go back to winter 2016 levels, and that would be a very long road down there.
If you agree with the BoC's assessment of Canada's nominal neutral rate being in the 2.75 - 3.75 range, where do you think this puts the US neutral nominal rate?
It's a too elusive concept to agree, disagree or come up with own number. What matters is that BoC themselves believe in the number when determining how much they can move. The latest Fed's long-run projections were 2.5-3.5%, so 25bps lower. Economic textbook would probably compare GDP, population and productivity growth. OECD in 2012 pinned very long-run growth rates 2% for US, 2.2% for Canada. Short-run growth is heavily in Canadian favour. Canada's population growth is probably around 1%, calculated risk downgraded US population growth projections to 0.5% from 0.8% Census 2014 projections on lower migration assumptions. Productivity could go either way long-run. US has more innovative companies/top universities, but Canada scores a lot better on PISA. Short-run productivity hasn't been that different iirc. Employment/population is rougly the same in both countries. I don't think I gained anything from this comparison, though.
Let’s play another round of sucker’s game guessing what the Fed will do. Dotplot will move down but the median for 2017 will still point at a hike because there were just too many hawks to move to the dovish side. For 2017 core PCE will be downgraded big up to 1.4%, probably a lil bit for 2018. No change in forecasts would be quite hawkish. Yields returned to the June meeting levels, so it’s hard to argue that the downgrade is fully priced in. It’s also hard to argue that it’s not priced in either because everyone has seen the CPI numbers. So little is priced in that it’s hard to call for even less being priced. My ideas about the UXY-WN steepener are still quite vague. I don’t think I saw that Fed bid being removed from the long-end and possibly higher supply reflected in UXY-WN. Is ‘watching paint dry’ sufficient to move it? Don’t know. Will a typical bear flattening move compress the spread with disregard to QE unwind? Hopefully no because it’s already happened last week by 6 bps. EURNOK still looks high to me so happy to hold it. After the last Monday’s CPI beating no one probably expects any hawkish statements. 6m NIBOR – 2y swap rate differential of 20 bps looks depressed enough not to push it lower. If we price in some ECB hike chances, pricing in some NOK should not be that extreme. During the last meeting the bank did warn that cpi could drift lower, so it’s not a surprise for them either. June projection of 1.4% CPI-ATE for 2017 still looks attainable if the August dip was indeed temporary. Econ data looks good enough to me (IP, retail sales, trade balance, PMI, unemployment, credit growth). BoJ? Do nothing. Core is still at zero, wage growth is poor.
sld 1 WN Z7 @ 166.40625. Ultrabond yield is the same it was in the morning and 47 bps looks too tight for WN-UXY now.
week 18/09/2017 EDU1-EDU2: -1500 USD ED M8-M9-M0: +2250 USD Short EUR: -12.5 USD Short EURNOK: +1993 USD Short EURCZK: +653 USD UXY-WN steepener: -1969 USD Short ultra bond: -969 USD Long bund against gilt: +880 GBP, -140 EUR Short bund against ER Z0: -820 EUR ER Z7-Z8-Z9: +1500 EUR Short BA M9: +250 CAD Total: ~+2510 USD
WN Z7 is now going to initial target levels so closing it at 168 was premature and costly, but I am not sure the premise for the down-move is correct. Five trillion of uncollected revenues over 10 years is essentially doubling the budget deficit. Is it right to react to a fairytale plan when passing more realistic (healthcare) plans has failed?
The third quarter is over, so it’s 7.5 months for the topic. The positive thing is that I have been disciplined enough not to a skip single day of watching end of day quotes, calculated portfolio value weekly, managed to keep up with the economic data, news and central bank meetings and overall my perception is that in the past few months I spent many more hours watching intraday quotes/graphs and tried to connect it to fundamentals. Overall, discipline is up with respect to market watching and accounting. The negative things are that I don’t feel I have moved an inch further with idea generation or hypothesis testing. I still don’t see ideas in the markets. In the rare case ideas pop up in my mind, the reasoning behind the idea is often too vague to exactly replicate the reasoning next time I am thinking about it and there is no framework whatsoever to test if such ideas have worked in the past. The negative things are still weighing on my objectives. In Q3 portfolio is +15 374 up (+1.5%, 6.1% annualized, 3.5% annualized vol). The target vol is 7%, and I am still undershooting the target because of poor idea generation and inability to increase number of trades in portfolio at the same time to around 15. There were total of 15 trades in Q3 with 6 new and 9 carried over from previous quarters. There was an average of 9 trades outstanding at any time. Out of 15 trades 8 were losing ones with 1600 USD average loss, compared with -4900 average loss in the previous periods. The average winner is up slightly to 4100 from 3600 previously. Trading PNL (ex portfolio FX revaluation): YTD: +8136 USD, 0.3 Sharpe Q3: +16 304 USD Q2: -1483 USD Q1: -6685 USD Week 25/09/2017 EDU1-EDU2: +750 USD EDM8-EDM9-EDM0: 0 Short EUR: +1713 USD Short EURNOK: -1995 USD Short EURCZK: +990 USD UXY-WN steepener: +200 USD Short WN Z7: -625 USD Long bund, short gilt: +50 GBP, +260 EUR ER Z7-Z8-Z9: -750 EUR Short bund against ER Z0: +165 EUR Short BA M9: -750 CAD Total: ~+117 USD