You down with GDP?

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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

Float/lock math for GDP tomorrow

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So we have held the bigger range nicely, sitting at 2.29 as I write.  ECB helping today with an as expected announcement, so now the path is clear for what I would expect to be a fairly pure reaction to the number, whatever it is.  My sense is it will be a bad number. Keep in mind that historically this number changes by as much as 1% in either direction before the final revision is posted, so there’s so risk to placing bets on either side beyond the assumed risk.  You may be right even if you’re wrong and vice versa.  Regardless of what happens tomorrow, save a blowout to the upside, #lowerforlonger seems well intact and I’d continue to lock/float the range as prescribed.
So here’s the trick.  What’s the range?  Is it 2-2.3, 2.3-2.6, 2.17-2.3?  You get the idea.  I’m not sure that matters and here’s why:  I think you are in one of three camps.  Someone that has been chasing rates since November, someone chasing since early 2017 or someone that just got into the game.   I see the risk/rewards as different for each…  
1. For folks hanging on since 2016, you really have little to lose here.  Float seems pretty obvious.
2. For those who go into a couple months back, even as late as mid March, the play is a bit more difficult.  We’re as much as 2 points off the bottom and only 75 bps off the year’s best levels.  My bias would be a bit more towards locking here.   #bullsandbears
3. Lastly, for those that jumped in around 4/18 and missed by a couple days and have been chasing, this I see as a bit more of a 50/50 proposition.
My bias would be to float anything two weeks out or more here.   Even if tomorrow doesn’t go our way I don’t see us getting absolutely clubbed on the number alone.  If you’re closing in the next week or so, you don’t have time to ride out a hit, so there has to be a bit more of a lean towards locking.  One caveat is that it’s not always just about domestic data so don’t forget #wearenotalone
In the end if I had to smash all of these together here’s my bottom line is:  70/30% bad number + we’ve already backed up since 4/18 = float.  Discipline is key here though.  You can’t chase the loser.   If you lose 25-30 bps on the bet, you lock it down and move on.  I also can’t stress this enough, we are contemplating probabilities and not absolutes.  I see the #risk/reward proposition as the main driver in the decision.
 Why?  #pigsgetslaughtered
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-Philip Mancuso

There’s been an awakening… Have you felt it?

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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

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Something funny happened on the way to 3%

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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/

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98 is the new 200

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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.     

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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

Mastering the Fed

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What may be the best non-holiday week of the year, The Masters has officially kicked off in Augusta, albeit in a weather related start and stop fashion.  For those who haven’t been, what an amazing experience it is.  The majesty, the tradition.  The place where time stands still.  Where sandwiches and adult beverages can be had for what seems like 1955 prices.  More importantly, where you are still expected to say thank you and you’re welcome, although as a patron it’s almost exclusively THANK YOU.  

Just in time for the Par 3 contest to kick off today, the Fed minutes were just released and we’ve decidedly moved lower (higher yields).  Not in a big way, but given our recent trend to lower rates you get this sense that we hit a road block on the road to 2.0.  Here’s my take:  Near term, I don’t don’t love the implication.  We’re talking about balance sheets and reinvestments and these have been hot topics of late.  The Fed has been a huge buyer and that pretty heavy lifting has to be picked up by someone.  Pun intended.   If I push out a bit further however, I can find some things I like about these minutes. Firstly, the consensus was that fiscal stimulus wouldn’t hit until next year.  That doesn’t mean soon and could even mean not at all.  We also know about how well the Fed seems to predict these things.   ; )  

Perhaps more importantly there was a re-affirmation that hikes would be gradual, predictable and well telegraphed.  We’ve liked this in the past.   What do these two positives coupled with a balance sheet move versus a rate hike move tell me? #lower4longer  

We like that too.

So what does this mean?  The bottom line is we are at the lower end of our range.  If we clear Friday without any major events that would push rates lower, I’d expect the range to remain intact for a few weeks.  If you are a follower, you know what to do.  If not, subscribe AND read previous posts!!!  Watch out for a smattering of market movers in the interim, but bigger picture is Q1 GDP and PS, N-man ISM missed pretty good this morning.  In the end, if we were hoping to have real direction after getting through everything we needed to get through this week save NFP, the answer is sorry not sorry. Fore Left and we’ll wait on Friday.

#homeontherange #lower4longer #fore #tradition 

If I can get off topic a second.  My son’s HS baseball team is raising money for Pediatric Cancer.  I’d never use this forum to hawk fund raisers for the kids, but this is a different story and is a tremendous cause.  To be clear, my son has already hit his goal.  He did that on day one by donating his own money, so againI’m not reaching out for any personal gain.  It’s never the right time for someone to fall ill, but for a child, well I just couldn’t imagine it.  Please do what you can and while I’d say that myself or my son appreciate it, in reality, the families we are helping are the ones that really do.  

Here’s the link:

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

Thank you

-Philip Mancuso

ADP, as easy as 123, ECB, NFP, GDP baby you and me

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It’s a huge week for data, not the least of which is ADP tomorrow and NFP Wednesday.  

As you know I love the ISMs, which are noticeably absent from the title as they didn’t have the foresight to give them a name that rhymes.  Well, we’re getting those this week and in fact we’re through the first two rounds of of ISM somewhat unscathed.   We made our way down to the bottom of the range and have rejected a break below earlier today. It stands to reason that we wouldn’t break unless something big happened.  That ammo is certainly in the chamber this week, but I’m not sure we’ll get what we are looking for. We’re getting help from abroad as the ECB is starting to pull back on the hawkishness. I’m really looking forward to Q1 GDP later in the month.  Some of the early reporting strength will either be supported or debunked by this number and by the time the dust settles I believe the tone for early Summer rates will be set by Q1 GDP above the early March numbers.  

If I had to put a number on it I’d say 65-35 we test 2% sometime soon.  

As a follow up; that Mall strength I noted a few posts back, not so much the last two trips. I’m still watching though…

-Philip Mancuso