Former trader Richard Breslow is out with his latest daily missive and if nothing else, it’s useful in terms of helping everyone keep perspective.
Basically, Richard wants you to focus on the data but as he correctly acknowledges, “numbers have more and more immediate effect with little lasting impact.”
That’s a symptom of a world where central banks are in constant communication with markets. There’s no utility in forming a long-term view on anything and that, in turn, is one of the main reasons why vol. can’t sustain a bid and why risk premia continue to compress.
Breslow also suggests that the Fed Chair announcement isn’t as consequential in the near-term as it seems, but the one thing we would add there is that by choosing Powell (which he probably will), Trump is ensuring that the communication loop which keeps vol. suppressed will remain firmly entrenched. If he were to up and choose Taylor, the market might well puke.
In any event, on the off chance you’re inclined to care more about the data than about Mueller and Powell, here’s a piece you’ll like…
It’s a week chock-a-block with news and events we would ordinarily be feverishly dissecting. Three major central bank meetings and no shortage of inflation data. Did I mention non-farm payrolls in the U.S. and China PMIs? And virtually no one cares. Running neck and neck for pride of place in the morning meetings is the identity of the next Fed Chair and who is likeliest to have been indicted by the Independent Prosecutor. And that really is a shame.
- Coming off a week when the ECB took another baby step toward normalization and the Fed concluded its first month of balance sheet run-off, it’s an indication of just how far we haven’t come. Every number now comes with a caveat as investors are reminded once again that data-dependence is an outdated concept that was just meant as a place holder for “on hold indefinitely.” Numbers have more and more immediate effect with little lasting impact
- When the choice of Chair is announced, the algorithms will swing into action. Just think about how they behaved when we got “favors” or “leaning toward” crossing the wire. There will be no stopping it. But armchair analysis of how any of these choices will behave when faced with the real-world challenges of the job is more like picking your fantasy sports team before the season starts than dispositive policy analysis
- None of the potential nominees are an obviously bad choice and whoever is selected will attempt to project themself as mainstream at the outset. Powell isn’t going to announce a delay in rate hikes while he is busy deregulating the banks. Nor is Taylor going to channel his inner Volcker. Having the dollar move a percent or Treasury yields move 10 basis points is just an exercise of market churn and stop-loss hunting
- We treat the selection of the Fed Chair as if it’s the most important news of the year. Whatever we think it will mean is likely to have a similar shelf life as do the year-ahead conviction trade lists. The facts will change and so will their reaction functions
- The announcement of arrests from the Mueller investigation isn’t a laughing matter. Yet it’s being treated with all the fanfare of a pre-Academy Award talk show. It may or may not affect how we feel about the last election results, but it won’t immediately cure the outcome. Or help anyone come to terms with why equities have been so resilient. But some of this week’s numbers might
- It’s not a good idea to ignore the data, even if at times it’s tedious to stare at the screens. Ultimately it’s the numbers that will define the next trends