On Wednesday we got a lesson in what’s (apparently) important and what (apparently) isn’t.
You’d think the blockbuster ADP print should have presaged a risk-on session – Fed Minutes be damned.
Call me crazy, but it kind of seems like Fed Minutes used to be something you kinda let come and go without a thought. An “event” only a bit more notable than the beige book.
But with 10Y yields seemingly in the driver’s seat in terms of dictating how the reflation trinity (stocks, bonds, dollar) is feeling, balance sheet shrinkage and how the Fed plans to carry it out is as important a topic as anything. Certainly more consequential than an ADP print. Or so it seems.
Below, find some thoughts on that and a lot of other things from former FX trader Richard Breslow who is feeling a bit pensive ahead of the Trump/Xi meeting and ahead of Friday’s (supposedly) all-important jobs print.
From a strictly selfish point of view, I like it when markets fly around a bit. Of course, I’m not trying to nurse a portfolio, but I am quite interested in how asset prices are behaving and whether they seem interesting or not. And suddenly we’ve gone from boring to tense. Being anxious might not feel good at the time, but with it comes opportunity. And after all, that’s what the business is all about. Or used to be.
- The question you need to be constantly asking yourself is whether any given move or news is fundamentally important or at the margin? Does it break new ground or is just a data point? Will there be some policy response or not?
- If you have a view, and your position, or more problematically, all your positions, are merely different ways of expressing the same theory, then it may be that every zig and zag falls into the former category of importance. But that’s not the way a responsible or profitable portfolio is constructed
- We talk a lot about the search for Alpha, but it’s difficult to achieve without taking advantage of the different Betas of various assets that can make even rangebound markets a pleasure to navigate. Your whole year can’t be tied to whether a given level holds or breaks. Everyone wants to be the celebrated home-run hitter. But they strike out a lot
- In the grand scheme of things, yesterday’s ADP report wasn’t all that important. Just another number, albeit a good one, far away from the next rate decision. Treat it, as the market did, accordingly
- On the other hand, the Fed plunging head first into balance sheet reductions is something bearing a great deal of weight. But trust me, other than 5s/30s steepening and the market realizing that once again the dot plots are of dubious probative value, no one knows what it might mean. But it will have long-term consequences. Hence the very justifiable bout of concern
- The most worrying comment wasn’t balance sheet yes or no, but from NY Fed President Dudley saying, he isn’t worried about a “violent” market reaction to balance-sheet reductions “because it is already factored in”
- Today’s China-U.S. summit meeting is an event that could also have enormous implications — in both directions. I can’t help but be intrigued by the fact that while everyone is looking at the S&P 500, this morning the Shanghai composite traded at its highest level of the year