It’s been a couple weeks since my last post.  Haven’t had a ton of inspiration from this rangebound market.  There’s a chance here that we might break the range, so I figured I’d write.  As Denny Green said, they were who we thought they were.  Frankly, I was a bit surprised that the May number tanked.  I was looking more to June, but for anyone who has been following my blog, you know this has been in the cards for some time. Where does the Fed go from here?  Boy it’s tough to predict 2 more hikes at this point. And I love how the media brushes that under the carpet.  Now I’m reading maybe September, but we haven’t even had the June meeting!!!  Just a month or so ago seemed to be a fait accompli, right?!?!

I guess I wasn’t so crazy calling for a test of 2% in April.  At the end of the day, all my talk about a new range and the truth is we are still stuck in my biggest range of them all and that’s #lowerforlonger.  I hate to sound like a broken record all the time, but haven’t we heard this song before??

#lowerforlonger #homeontherange #whatcomesaroundgoesaround #whatrecovery? #itain’tbroke #haveyoufeltit? #afunnythinghappenedonthewayto3%

-Philip Mancuso

When can we start calling some bull on this recovery?  First we had a “jobless recovery”. Now I’m calling for a consumer-less recovery.  We are clearly in a growth-less recovery. So how is this exactly a recovery?

We’ve been sitting on 2.42 support for a few days now and the consumer is doing its collective best to propel us off that support and back towards the lower end of the range.  A positive Monday opening would certainly confirm that much.  A close below 2.37 is necessary, 2.35 is great, 2.32 is fantastic for the projects of a solid bounce.  

If I get out of the micro view for a second, I’d like to go back to my 1/27 post, which is linked here for your reading pleasure.

https://themancusowatch.com/2017/01/27/it-was-at-this-moment-that-the-fed-realized-they-screwed-up/

As I indicated on that day, I’m putting a ton of stock in the consumer this year.  Given the “less recovery” I outlined above, at what point do we call bull on this recovery altogether and get back to the realization that things aren’t broke, they are just different.  The Fed’s inability to read this phenomena has done nothing but create huge Fed induced spikes in rates followed by an almost immediate sustained drop in rates.  This great for traders and vol seekers who are on the right side of it, but not the economy, which is what the Fed’s decisions are intended to best serve.   

Another shameless plug, here’s a link to that post:

https://themancusowatch.com/2017/03/10/things-arent-broken-they-are-just-different/

What does all this mean?  I’ve been calling for a 70/30 lower rates.  I’m still there.  I’m skeptical about the next 30-60 days as this period tends to be generally bond unfriendly. Particularly with the help of a May jobs number that we get in early June.  Brexit helped us last year, but I’m not sure we’ll get that help this year from and unexpected event.  I’d lock/float the range/ranges I’ve laid out in previous posts.  

For today, I’d lock anything that you are breathing a sigh of relief on.  As for the others, it makes sense to give it another day and play it day by day thereafter.  We’re at a pivot here, there’s another about 50 bps beyond that.  Therefore I’m roughly 65% lock here and 85% lock at that next gap down in yield.  To hold out the Mid-April low in yields should be reserved for late June closings or beyond.  #BullsAndBears

In the end, maybe the economy is just a bit of an ugly duckling that we have to learn to love. Hey, ugly ducks need love too…  

#LowerForLonger #WhatRecovery #IfItWalksLikeADuck #UglyDucksNeedLoveToo

-Philip Mancuso

How do we interpret today’s NFP?  

Do we get excited about the headline or remain skeptical over the negative revisions. Personally I see the avalanche of data from the past week as bond friendly in the aggregate.  Mostly misses and the Fed was not hawkish.  I concede the ISM services and labor cost numbers stand out a bit, but today’s big revision to March wages should take the edge off the former and weak GDP and slow retail sales do similarly for the latter. Not to mention, a Puerto Rico BK doesn’t exactly give me warm and fuzzies either.  I don’t want to overstate the significance of that, but if nothing else, it’s the first time a US State or territory has taken those drastic financial steps.

So I guess the rate question is:  Oh my, are we sinking?   The bottom line is my float/lock assumptions remain intact.  There’s still plenty of time left on the day, but my sense is we’ll end it slightly positive.  I would further argue that we need to break 2.32 fairly early next week to back into that lower range mode.  

I don’t always celebrate cinco de mayo, but when I do it’s with lower rates.  Stay originating my friends.  

#Sink-oDeMy-o #HomeOnTheRange #LowerForLonger #StayOriginatingMyFriend

“Many of the truths we cling to are based on a certain point of view”

– Obi Wan Kenobi

The Fed held fast today, as expected, but our focus is on the entirety of the statement, more then focusing on the rate action.

I see both dovish and hawkish points in the statement.  I see a no move on the balance sheet as significant.  They scoffed at slowing growth, calling it likely transitory, but frankly the market hasn’t been buying it, hence 10s being closer to 2 then 3.  On balance I call this statement Dovish.  Not in words, more in my interpretation.  

Here’s what I mean:

1.  If the Fed wasn’t hawkish, further into a hike cycle, where the market has been bracing for it, does this signal some underlying concern about the data.

2.  I’ve blogged this 100 times; when has the Fed been right about growth??? Therefore, if they are ignoring Q1 weakness, yet still not moving, what happens when/if Q1 weakness turns into Q2 weakness or even 2017 weakness.  Further, if employment continues to strengthen per the Fed, how do we explain 98k. Frankly all of this rings a bit hollow to me.

All I can say is #LowerForLonger #WindowIsClosing #CanEveryQ1TankBeTransitory??  #98IsTheNext200k

ISM services did beat today.  So far I’d say nosiest of the rate stuff has gone in our favor this week and we wait for NFP Friday.  I wouldn’t change my ranges, so govern yourselves accordingly.  If you aren’t familiar with the ranges, please check our my previous posts.  We’d like to close below 2.32 today to stay in that lower range.  We are moderately weaker v 1:59.

#BullsAndBears

-Philip Mancuso

So we missed as I suspected.  Prices and employment a bit hot, but consumers not so much.  We gave it a shot, took the risk and we weren’t hurt.  We held 2.32.  Again, no big win here, just bought some time.  Next week is a big week:  ISM, ADP, NFP, Fed.  The bottom line is the data has been worsening so I don’t see tremendous risk here.  If you are counting eights and quarters you may want to be a bit more cautious.  End of day might get choppy with month end.  Frankly, I couldn’t arguing with locking around here.  Particularly on near term closings. 

If I can digress for a second.  Forgetting what rates do tomorrow, what the Fed does next week, etc, etc etc, can we talk about GDP for a moment.  

Firstly, Q1 is seemingly always weak.  I’ve tracked this in earlier posts.  So why anyone was thinking it wouldn’t be is beyond me.  Does it feel like groundhog day here?

I’d challenge anyone to show me why 2017 is any different from the last decade.  I just don’t see 3% in a minute as they say nowadays.

.7%?  Really?

-Philip Mancuso

As I touched on earlier in the week, I have this sense the market is coming around to the fact that #lowerforlonger is not #deadandburied.  From a trading standpoint we rejected 2.17, but perhaps more importantly have held support at 2.24.  This would indicate to me that we are consolidating ahead of next Friday’s Q1 GDP read.  Look, it makes sense.  Not two months ago the suggestion was that 3% on 10s was a fait accompli.  A dash of geopolitical noise, some ISM misses, a stunning NFP, weak sales and a sense that the Trump tidal wave may be more of a ripple and now 2.62 seems like a distant memory.   More importantly, if you’ve been following my posts, I don’t see how any of this was a huge surprise.  It seems to have happened every year for at least the last decade.  It seems our economic reality wasn’t altered, it was just hibernating for the winer.  Well there’s been #anawakening and perhaps next Friday we will feel it.  

I found this article the other day on yahoo that suggests I may not be the only one who has: 

https://www.yahoo.com/news/first-time-since-trumps-win-economic-news-isnt-getting-better-142715566.html

I’ll go back to my 1/27 post calling for this move:

https://themancusowatch.com/2017/01/27/it-was-at-this-moment-that-the-fed-realized-they-screwed-up/

From my vantage point, if growth slowed to 1.6% in 2016 and we start 2017 with a clunker, how can the Fed continue to justify 3-4 hikes?  So how do we play it?  If you want to play the micro range it’s 2.17-2.24.  A wider range is 2-2.28.  I still think it would be tough to challenge 2 prior to next Friday, but we may seem some betting ahead of the number so I couldn’t rule it out.   Here’s a bonus chart of Fannie 3’s.

-Philip Mancuso

If you’re a follower of my posts you understand that I’m clearly on the winning side of this call, but even I’m surprised we’re approaching 2 on the 10s ahead of GDP.  

Sure there is always that buy the rumor sell the fact thing, but my guess was they’d want to actually see the bad number first this time given the headwinds lower rates faced. That said, some things have changed and I sense a palpable shift in the consensus view on rates right now.  Enter geo-political noise, a bad NFP out of nowhere (or was it), ISM misses for what seems like the first time in about 7 months, the sense that Trump isn’t the cure all for fiscal stimulus and what you get is perhaps a mini-capitulation that 3.0 isn’t coming any sooner than it didn’t come in 2014.  

As I’ve addressed in previous posts, this post March rally is pretty typical.  I called for a 2 point rally in Fannie Mae’s 3s with a top side of 3 points.  Well we are 1 tick shy of 3 points right here.  Which brings us to a pretty big pivot, and I’m not convinced we are going to break through here.  On 4/7 I wrote  “If I had to put a number on it I’d say 65-35 we test 2% sometime soon”.  I’d likely up that to 75% today.  

#lowerforlonger #notsofast #measuredpace #slowisthenewfast #thisiswhatitsoundslikewhendovescry #75% #throwbacktuesday

PS For throwback Tuesday I’m including a few links to some oldie but goodies to get any newbies caught up.  I’d also recommend going back through the last 3 or 4 blog posts as well.   

Enjoy

-Philip Mancuso

https://themancusowatch.com/2017/04/04/adp-as-easy-as-123-ecb-nfp-gdp-baby-you-and-me/

https://themancusowatch.com/2017/03/10/things-arent-broken-they-are-just-different/

https://themancusowatch.com/2017/02/15/the-wheels-on-the-bus-go-round-and-round/

https://themancusowatch.com/2016/12/21/do-you-see-what-i-see/

So much for a blockbuster NFP.

98k, negative revisions and a miss in hours set us up for an interesting April.  Combined with some weakness in the other data points from last week, and I think we’re set up for an interesting Q1 GDP read.  I surely like the #lower4longer play here, notwithstanding Friday afternoon’s sell off.  As I mentioned Thursday, the range is likely to remain intact through the NFP, and despite a really good attempt to break through on a terrible number, we closed above 2.30, 2.38 in fact.  The approach here should be to continue to lock/float the range, with perhaps a bit less caution.

If we chart this year’s March bounce (see below), you’ll notice we got back just a bit over the 200 I suggested was there, if just for a moment early Friday morning.  We’ve obviously faded since.  I can’t stress enough that up around that high in price there are some significant technical implications, so I wouldn’t read too much into finishing in the red other than 2.0 just wasn’t meant to be on Friday.   At the moment we’re set to open flatfish, so while I’m disappointed we’re not poised to rally, we also aren’t auto-tanking.  So we got that going for us, which is nice (congrats Sergio).  It is a fairly slow week for data, but we begin to heat up at the end of the week.     

PS  I want thank my fellow Primer’s for supporting the Pediatric Cancer cause I posted Thursday.   As I mentioned, my son had already hit his goal by donating his own money, but our efforts pushed the entire team beyond their goal!  While there have been some tremendously generous contributions, even just $1 could change the lives of those battling this horrible disease.  Please join our fight and please share the link with others so we can really make a difference!  Here’s the link for those who missed it.  

https://donate.go4thegoal.org/fundraiser/947640

-Philip Mancuso