EUR 8.70 For Business Accounts Only

The Morning Track ground-hogs

- The Morning Track – Ground Hogs by Bob Savage
http://trackresearch.com/articles/the-morning-track-ground-hogs/

US jobs day and markets are buying USD ahead of the event risk that labor tightness drives higher rates, more FOMC response. The March Fed hike is priced but after the 2% labor cost surprise from 4Q yesterday, and the stronger ADP, some see 220,000 NFP and 2.7% y/y wage costs driving the view of a Fed behind the inflation curve. Some of the bond pain in the US is self-induced thanks to the US Treasury plans and the larger US budget deficits post tax reform. This is a bit like the ground hog seeing its shadow and predicting 6-more weeks of winter. US bond yields are reaching levels where CAPM models and MBS will pay attention. Mortgage convexity returns to bond trading lexicons. There is nothing sure about the FOMC reaction function with a new Chair Powell and a number of key Governor seats vacant. Labor costs are a key focus elsewhere as well with the IG Metal Union call for 6% y/y hike an example – and with strikes there in the 3rd day for the sector. More to the poin
t, the trading up of US rates has been the event over the last 24-hours – and its spooking markets globally. The US 30Y break of 3% begets selling of Gilts and Bunds today. The BOJ had to intervene to cap its 10Y rates – offering to buy unlimited amounts of JGBs at 0.11%. Some of the pain in Europe is self-induced – as ECB Nowotny comments drive the periphery today - “I make no secret of the fact that we are now in a situation where, from my point of view, we should end the bond buying program,” he said in an interview with the Oberoesterreichische Nachrichten newspaper. “This will then also bring a rise of long-term interest rates,” he added. Some of the pain in equities is related to the move up in rates today, some of it comes from FX, some of it is self-induced by earnings or policy shifts. Note that India is testing its bull market with a capital gains tax – so equities off 2% plus after 30% gains last year. The point of equities and bonds both diving t
oday is that markets have seen this darkness before and the winter predictions of higher volatility, worse trading liquidity and trouble aren’t new. The biggest stand out to suggest the repeat and rinse of risk is just that and not more comes from Japan today. The problem is that rates in the US vs. Japan used to predict the direction for the USD. Then China let the CNY move from 6.50 to below 6.30 and many see a weaker USD regardless. But this correlation of CNY over JPY maybe nearing an end – blame that on the Lunar New Year or the 6.20 level being more important. If you want to watch the barometer for trouble after jobs have USD/JPY on your screen.