Sigh, Q3 restatement: +9929 USD, not +16304. Entered wrong ED months in PNL sheet instead of: This fly was +750 USD, not ~+7000. My PNL calculation discipline is good enough now so I will stop posting it weekly.
long 1 CO Z7 @ 57.78. We're some 60 cents up today on peshmerga fighting rumours and hopefully it will be pushed higher when europe opens. With everyone except Russia and Israel siding against kurds i don't think they'll escalate the situation, but it will take a few days to confirm the situation is okay, so i dont think that we'll fade this 60 cent move today.
Last week was spectacular with no gains in any positions: > gilt outperformed bund, check > flatter eurodollar durve with less curvature in ED4-ED8-ED12, check > EM currencies beaten, check > NOK is still failing to appreciate despite the oil prices, check > EURCZK, EURUSD, bund swap spread, ER fly, BA M9 all around zero pnl 10y AUd bond futures look interesting now at 260 bps. Yield dropped over 20 bps over past two weeks with weak CPI and weak retail sales numbers. At this stage with weak CPI I'd expect bull steepening because the question for the central bank is how soon and not what direction, but instead we had bull flattening. Pushing 10y down 20 bps while removing only 16 bps of tightening in red 90 day bills looked excessive. Behind the weak CPI there was higher non-tradables inflation and labor costs growth. Over the past six months unemployment went down and participation rose, so this is more for a case of bull steepening. Among the negatives is a few points fall in PMI's over the past 2-3 months, though. Media headlines suggest the EM currencies were beaten because of US hike concerns, but this looks rubbish to me. Red eurodollars or 10y haven't moved much, EUR or JPY did not notice that either. MXN, BRL, TRY, ZAR, all four have problems. In MXN the "free-market party" wants to prescribe car makers where they should source their components, in BRL congress is busy unarming the constitutional court instead of passing the pension reform, in TRY central bank independence is under threat at the time it's needed the most and in ZAR economic looting never stops. I expected that looting would quiet down after KPMG was caught assisting big scale corruption, Supreme Court reinstated charges against Zuma and all the Eskom stories, but looks like I was wrong. I am surprised how patient Moody's have been with their IG rating. That said, ZAR looks cheap, yield is good, so happy to keep holding. For some reason petrocurrencies don't want to appreciate. NOK, RUB, CAD all failed to strengthen over the past month. The problem is finding something expensive to trade against CAD and RUB. There is enough short EUR exposure and shorting USD doesn't look like a good idea to me. AUD, NZD, JPY look fairly valued to me.
It’s interesting if this time it’s different for Japanese inflation. It’s been a long time since biz confidence was so high (53 services PMI and 54+ eco outlook) and at the same time there were at least some signs of wage growth. I don’t know if it matters but Chinese PPI is now high, so maybe it’s positive for global price developments. BoJ noted this change too in their September summary of opinions. It’s not clear what it means for JPY if inflation does come. Does it strengthen because objective is closer so BoJ will potentially tighten? Does it weaken because BoJ promised to keep policy easy until inflation is consistently above target? Does it strengthen because the market does not believe that BoJ could keep buying JGBs with inflation at 2%? Perhaps there is anything interesting in some forward breakevens but it’s outside my scope. This week’s MNB minutes shed some light why they think that the Hungarian curve should flatten. Their argument is that curve steep is risky for financial stability because with a flatter curve borrowers would borrow long-term and reduce their refinancing risks. This makes little sense to me, especially in the context of MNB using a few tools to drive down short-term rates, so I am now even more certain that their objective is something else other than targeting inflation. The complaint comes almost a year after the curve has in fact steepened and over 50 bps downtrend in 2 year yied. In this period CPI picked up from 1.1% to 2.2%, core from 1.2% to 2.6% and wage growth from 8.2% to 13.2%. Unfortunately, PLNHUF still has not visited the sub 71 level where I wanted to go long. Other thoughts: Italy-Germany spread is getting too tight at <180 bps in Dec futures. BB OAS has been widening since late October, but not in any way reflected in Italy-Germany. Maybe I should update BB for BBB OAS since s&P raised the Italian rating.. also in late October.