Although the big event of the week, the US Payrolls Report, isn’t due until Friday and today, Wednesday, brings us nothing but a raft of mixed indicators, I will be carefully watching the way in which the Treasury market trades.
On Tuesday, the 10-year note broke back above 2.20% yield which not only takes it back above the 100-day moving average but also places it, although currently in no man’s land, on the launch pad for a run much higher. The recent peak in yield was 2.29% in mid-September and before that very close to 2.50% from mid-June through mid-July.
Although markets are very hard to read across many asset classes, a continued rise in the Treasury yields would be consistent with an expected Fed move in December. The Eurodollar strip looks to be moving closer to a rate move being priced in with front month trading at an implied 3-month rate of 0.2091 but the contract for December 16th settlement is priced to imply 0.41% which would be more consistent with Fed Funds being at 0.25%. The Fed Funds contract itself still seems more ambivalent and it remains poised to go either way.
The US T-Bill market also doesn’t know which way to jump, with the 3-month bill still priced at 0.06% but the 6 month bill already at a much more healthy looking 0.26%
Although oil remains a key determinant, it resolutely refuses to give a major directional indication either. WTI closed last night in New York at US$47.87 ppb which, likewise, is neither here nor there.
Another great friend of longer term forecasters is the cash price for copper on the LME. The fall from US$6,500 per tonne in May to US$5,000 per tonne at the end of August was right in the centre of the commodity panic but since then it has traded pre or less sideways, having spent the past two months range trading in the US$5000.00/5,500.00 channel.
The last set of the indicators which one might consult is that of freight costs on the Baltic Exchange. I, too, was terribly excited when I first found CapeSize index although I have since learnt to forget it as the technicals with respect to available capacity at any one time are outside of the range of humble bond market operative.
Quoting the Baltic is the financial market’s equivalent of singing supercalifragilisticexpialidocious. Just for fun, however, the Baltic Dry peaked in June 2008 at US$9,589.00 per day per metric tonne and closed last night at US$680.00. All that tells me, if I have it right is that there are more ships floating around now than there were eight years ago. It does not tell me how busy they are.
PPI/CPI, payrolls and Yellen
I have heard many times in the past months that a given payroll figure or PPI/CPI release is the most important one in many years and I shall try to avoid hyperbole but for the first time in a long time I would be prepared to suggest that coming payroll number could be really important. The FOMC has indicated that it has gone beyond setting monetary policy holistically and that it will be drilling down further ahead of the December meeting. That said, it has, of course, given itself a get-out-of-gaol-free card by way of its allusion to inflation with its rather flexible definition and I also fear that on balance the Committee might lack the courage to tighten. Those folks at the Fed aren’t complete idiots (despite what George Mac thinks) but they do sometimes seem to struggle to get well ahead of the curve where they belong. It was said of the late Yasser Arafat that he never missed an opportunity to miss an opportunity. I wonder whether that epithet might not end up being passed to Madame Yellen.
If bond yields break to the upside – 2.25% is, as noted, a good place from which to go either way – then equities must naturally be overvalued. Equity bods, although they never quite get the macro thing, are however normally much better at pricing idiosyncratic risk and credit investors might be well advised to start reading equity research in order to help themselves from pouring the baby out with the bathwater if, as and when the big bond sell-off sets in. Hiding behind index weightings is for cowards.
Petrol-heads in the sand
Finally, not a day goes by without some new muck being raked up in Wolfsburg. We’ve done the diesel engines, now we’re doing the petrol ones. My past recommendation was to steer clear of the stock but to hang onto the bonds. I can’t see them defaulting but I do apologise for not having suggested that one dump the bonds too. I find the “bunker mentality” of the board deeply distasteful and its reluctance to stand up and be counted highly unbecoming. I can’t see it being the time yet to talk of breaking up the obviously unwieldy group and starting again, but the way bad news is escaping one bit at a time shows a management which is either lying through its teeth or is not in control. To that I can only suggest that a root and branch clear out is needed. Those people get paid millions because it is with them that the buck is supposed to stop. The buck, I’d suggest, has clearly stopped.
Glencore, my old bug-bear, on the other hand, might begin to make sense again. They are moving fast and decisively but I did always contend that the company is run by traders. That is what they are now doing and so far it is beginning to look better. A trading long maybe but nothing to get married to, because being able to act decisively in a crisis still does not bode well for the old Marc Rich boys’ ability to manage a long cycle business. Play the stock but not the bonds.
