22nd May 2014
A very frustrating day. On the one hand it feels that the tide may finally be starting to turn in favour of a rate hike this year while on the other, the European and US data while strong are hardly blowing the doors off and bunds remain resolutely well bid. Data overnight was decent with PMI’s in China and Japan coming in stronger than expected and it was very encouraging to see a piece by Chris Giles in the FT calling for a 2014 rate hike (probably the first major press economist to make such a call). Following this, the 2nd estimate of Q1 GDP came in unrevised at 0.8% but the expenditure breakdown was very encouraging with a big rise in business investment (up 2.7% QoQ and 8.7% YoY, the highest level since 2008) and also a 0.8% QoQ rise in employee compensation. All this keeps the pressure on the BOE and the market felt heavy for much of the day without ever breaking significantly lower. Support today came from weak PMI’s from France (and bunds have really outperformed throughout the day with periphery weakening a little) and in the US stronger manufacturing PMI and Kansas City Fed manufacturing were balanced somewhat by a rise in jobless claims back to 326k. Net effect is bunds aside we have seen small losses in the UK and US bond markets but the bigger battles are clearly still to come. Tomorrow we are light on data and the market is likely to free wheel somewhat into the weekend, especially if bunds and euribors remain so well bid.
20th May 2014
Bear steepening day with reds and greens under pressure from the open and then pushed further on the back of stronger than expected CPI. The core annual rate jumped to 2% vs. 1.8% expectation and up 0.4% on the previous month, mainly on the back of airfares. The knee jerk move lower in the strip found support when the market digested the impact of base effects and holiday distortions, underlying the probability of a reversal next month. Subdued house prices and weaker PPI also added some weakness and confusion to the data . Despite elevated levels, market still feels short, even with the Carney telling us that rates aren’t moving (ever). Given the inflation report and the post Q&A session after, I’m not sure we are going to see the split in the committee tomorrow that we are hoping for. It’s hard to see the strength of the data sitting easy with all MPC members, however maybe it’s a month or two too early before the split becomes apparent. Looks like we will sit in a pretty tight trading range with the 10yrs being the sweet spot in the curve in terms of volatility.
16th May 2014
Further short covering today with short sterling again outperforming, yet again indicating the extent of positioning. As is so often the case when the market is in pain positions (whatever they are) get unwound and today was no exception. Things were exacerbated by a puke in peripheral bonds which seems to have led to a rush to unwind short UK v periphery (classic carry/QE trades) which has helped to push green short sterling another 7-8bp higher. Gilts are also joining in the party up 65 cents (although underperforming bunds which are supported by ECB easing expectations, today’s low SPF’s inflation forecasts and also cross market positioning v periphery). Pain in bond markets are also leaking through to equities with peripheral equities (in particular banks) which have had a storming year so far which leads to further flows to core bonds. 5y has again been the pivot point on the curve with 2×5 falling 1.5bp while 5×30 steepens 3bp. Fundamentals remain solid (jobless claims today sub 300k although US IP slipped on lower utility output) but positioning is the complete driver of markets right now and until that is cleared we will not see a sell off back to more reasonable yields.