Catalyst Dates, 10 Things You Need to Know

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Market Moving Catalyst Events, Next Few Weeks into the Fed Decision
Sunday, May 22
•Cyprus will hold its parliamentary elections
•Austria will hold the second round of its presidential elections
•The AKP Party of Turkey will hold a meeting to choose the successor to Ahmet Davutoglu as Prime Minister
•The Greek Parliament is expected to vote on additional indirect taxation measures worth approximately 1% of GDP and on a contingency mechanism regarding the country meeting its primary surplus targets
Monday, May 23
•@ 5:30 a.m.: Federal Open Market Committee (FOMC) Member James Bullard Speaks on Monetary Policy
•@ 8:00 a.m.: San Francisco Fed President John Williams Speaks on Monetary Policy
•Federal Reserve Releases Data on Foreign Exchange Rates
•@ 10:00: Eurostat Releases Monthly Survey of EU Consumer Confidence
•@ 6:30 p.m.: Philadelphia Fed President Patrick Harker Speaks
Tuesday, May 24
•The Eurogroup will meet to review the completion of the first Greek bailout review.
•@ 10:00 a.m.: Census Releases Annualized Number of New Single-Family Homes Sold   During the Previous Month
•@ 5:00 p.m.: The House Natural Resources Committee is scheduled to hear opening statements in a Markup of legislation designed to address Puerto Rico’s financial crisis
Wednesday, May 25
•@ 10:30 a.m.: Energy Information Administration (EIA) Releases Weekly Data on Crude Oil Inventories
•@ 1:00 p.m.: Dallas Fed President Robert Kaplan Speaks
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Thursday, May 26
•Federal Reserve Releases Data on the Aggregate Reserves of Depository Institutions & the Monetary Base
•G7 Leaders’ Summit begins in Tokyo
•@ 4:00 a.m: European Central Bank (ECB) Releases Financial Stability Review
•@ 5:15 a.m.: Federal Open Market Committee (FOMC) Member James Bullard Speaks
•@ 8:30 a.m.: Department of Labor (DOL) Releases Weekly Unemployment Claims
•@ 10:00 a.m.: National Association of Realtors Releases Monthly Pending Home Sales
•@ 12:00 p.m.: Rep. Mick Mulvaney (R-SC) and R Street will host a Capitol Hill Conference on the future of housing reform and Mulvaney’s legislation to recapitalize the GSEs
•@ 12:15 p.m.: Federal Reserve Governor Jerome Powell Speaks on Monetary Policy
•April durable goods orders. Sales of big-ticket, long-lasting items such as dishwashers show consumers’ confidence and willingness to shell out big bucks.
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Friday, May 27
•Federal Reserve Releases Data on the Assets & Liabilities of U.S. Commercial Banks
•@ 8:30 a.m.: Bureau of Economic Analysis Releases Annualized Quarter-on-Quarter GDP Numbers
•@ 10:00 a.m.: University of Michigan Releases Surveys of Consumer Sentiment and Inflation Expectations
•@ 10:30 a.m.: Fed Chair Janet Yellen will be honored at Radcliffe and questioned by Gregory Mankiw, a former Chairman of the President’s Council of Economic Advisors. The event will also feature reflections from former Fed Chair Ben Bernanke
Wednesday, June 1
•The ISM manufacturing report for May. Manufacturing has been in recession. In April, this key economic barometer surprised to the upside, reaching its highest level of the year.
Friday, June 3
•Jobs Friday: The government said only 160,000 jobs were created in April, 40,000 less than forecast. That makes the May jobs report critical, as the Fed will learn if the nation’s job-creation machine is slowing or revving back up. Investors will also get a look at how the sizable services sector of the economy fared in May.
Tuesday, June 14
•May retail sales. Many retailers reported weak first-quarter earnings, although Walmart bucked the trend early Thursday, posting better-than-expected earnings and boosting its second-quarter outlet. Retail sales overall, however, surprised to the upside in April, rising 1.3%. Will sales stay strong and relieve fears of consumers slamming their wallets shut?
Wednesday, June 15
•The Fed announces its decision on interest rates and Chair Janet Yellen explains why in a press conference following the release of the Fed’s policy statement.
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Fedspeak Moving Markets

Fed’s Dudley: June is definitely a live meeting.
Today, he’s clearly making the point there’s a strong sense among the FOMC members that markets were underestimating tightening probability, echoing FOMC April minutes.

Fedspeak
*DUDLEY: WILL GET BACK TO 2% INFLATION WITH ABOVE-TREND GROWTH
*DUDLEY SAYS BIGGER UNCERTAINTY IS WHAT’S GROWTH GOING TO BE
*DUDLEY: I’M PRETTY CONFIDENT WE’LL GET BACK TO 2% INFLATION
*DUDLEY SAYS LABOR MARKET SHOWING SIGNS OF WAGE PRESSURES
*DUDLEY: CORE INFLATION PRETTY STABLE DESPITE ENERGY AND DOLLAR
*DUDLEY: BECOMING MORE CONFIDENT INFLATION WILL RISE BACK TO 2%

*DUDLEY SAYS INFLATION EXPECTATIONS SHOWN STABILITY RECENTLY
*DUDLEY: MUST ALWAYS ASK IF DOING ALL WE CAN ON PAYMENT SECURITY
*DUDLEY: FED SYSTEM WAS NOT PENETRATED IN BANGLADESH BANK CASE
*DUDLEY: MANY SIGNS IN ECONOMY POINT TO SATISFYING FED GOALS
*DUDLEY: MKT PRICING OF FED HIKE ODDS WAY TOO LOW PRIOR MINUTES
*DUDLEY SAYS IT’S ALL ABOUT IF DATA EVOLVES WITH EXPECTATIONS
*DUDLEY: FED WON’T LOSE CREDIBILITY IF DATA DON’T WARRANT HIKE
*DUDLEY: FINANCIAL CONDITIONS ABSOLUTELY DO MATTER
*DUDLEY: MONETARY POLICY WORKS THROUGH FINANCIAL CONDITIONS
*DUDLEY: HOW FINANCIAL CONDITIONS EVOLVE AFFECTS POLICY STANCE

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Justifying Lower for Longer

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The key to trading around Fed policy comes down to understanding credit risk.  The serpent inside the market will ultimately over power the Federal Reserve, take the steering wheel out of Janet Yellen’s hands once again.

Yesterday, the all important Fed minutes referenced the month of June,  7 times.  After spending much of February and March talking rate hike expectations far out into the future, in recent days they’re just starting to prepare the market for a summer rate hike.

Although, yesterday’s Fed minutes are from formerly private conversations between Fed governors during the April 27 FOMC meeting, more recent comments from Governors Williams and Lockhart are clearly talking up possible summer rate hike action.

Likewise, as we noted yesterday morning recent economic data has been more supportive.

File_000 (3)

Over the last two years, central bankers (in particular the Fed) have moved the student body all the way to the left, then all the way back to the right, over and over again.  Understanding this disingenuous game is the key to trading around the vicious market moves in equity, foreign exchange and credit markets.

Pick up our latest Bear Traps Report here

Justifying Lower for Longer

It’s interesting to note, if you examine the Fed minutes, over the years there have been some startling developments.  From 1995-2005, references to “economic growth” took up 45% to 51% of the conversations behind closed doors.  Today, focus on growth only makes up 23% to 28% of the minutes in recent years.

On the other hand, references to “inflation” have surged from 8% to 10% in the 1995-2005 period, to over 23% today.  As the Fed has had to justify their foolishly shallow policy path (not hiking interest rates 2008-15) in recent years, they’ve used low inflation as the excuse De jure.  This data is from LDA Analysis and ACG Analytics.

In the pre-QE ZIRP era, it took just $1.50 to generate $1.00 of GDP, today it takes $7.00.  This is the price of leverage / debt on a society.  “This is extremely rare and dangerous” says billionaire Stan Druckenmiller.

“Credit risk will veto the Fed’s desired policy path in 2016.”

Our Larry McDonald, on CNBC, December 2015

 

The chances of a July rate hike have surged from 14% to 40% in recent days (see below).

July

The yield on the U.S. 10 year Treasury popped 10bps higher yesterday.

One big problem? There is less and less liquidity in the global bond markets than ever before in modern times, U.S. Treasuries are no exception.

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Over the years, the “sell side” (global banks) had been the natural lubricant providing liquidity between “buy side” accounts (mutual funds, hedge funds, asset managers).  As Dodd Frank has morphed global banks into a fraction of their former selves, we’re seeing more and more violent swings in the global bond markets.

According to work compiled by the Bear Traps Report, from 2014-16 on both FOMC rate decision and Fed Minutes release days, the moves in the U.S. 10 year Treasury are 2 standard deviations greater than normal market periods.  Markets have become a meat grinder to asset managers, managing risk has become much more difficult.

Ten years ago, a typical Wall St trading desk had $2-3B of capital at their disposal, today that number is in the  $200-$400m neighborhood.

The unintended consequences of regulation have been found in disturbing market dislocations.  Get out the popcorn, we’re looking up at the stage, watching just the first act of this show.

US 10s Munutes

We have a report on trading ideas for illiquid markets, join us…

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June

Join our Larry McDonald on CNBC’s Fast Money, Wednesday May 18, at 5pm.

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“The risk-reward in betting on Fed action in the July – September time frame is the most attractive in three months. Global credit and economic risks shot the March and June rate hikes right between the eyes, took the steering wheel out of Janet’s hands. This will position the Fed to start signaling for a July hike, sometime in the next 45 days. That would be a dollar positive; gold / commodities / EM negative. She’ll likely try and get back in the driver’s seat. In recent years, the rebound in Q2 vs Q1 GDP has been meaningful, north of positive 1%.”

The Bear Traps Report; May 2, 2016

 

Fed fund futures exploded higher today as the market is starting to price in a June interest rate hike from the Federal Reserve.

Across the street, banks are revising their rate hike forecasts just weeks after pushing them out into the future.

Goldman, we’re told now has June as their “base case.”

 

FOMC

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Target $TGT Retail Indicator, Gloomy CEO Today

Join our Larry McDonald on CNBC’s Fast Money, Wednesday May 18, at 5pm.

 

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Today’s 52-week lows are ALL retail:
 
* Foot Locker
* Nordstrom
* L Brands
* Gap
* Macy’s
* Target
 
 
Shift to Online Sales Impact:
At least some of the pressure on retailers’ corporate earnings has come from the Shift!
 
Online sales as a % of yoy Growth for Sector
 
2015-16: 9-11%
2012-13: 4-6%
 
Bear Traps Report Data
 
 
Target TGT CEO in earnings call sounds gloomy target:
“after Easter sales and traffic trends softened noticeably”
Retail vs S&P

 

Target CEO
“competitors have excess inventory which will extend promotional environment into months ahead”
TGT
TGT -10% here today
 
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Classic Q2 Seasonal Bounce in the U.S. Economy, Inflation. The Fed now has some ammo for a Hike

Join our Larry McDonald on CNBC’s Fast Money, Wednesday May 18, at 5pm.

Pick up our latest Bear Traps Report here.

“The risk-reward in betting on Fed action in the July – September time frame is the most attractive in three months. Global credit and economic risks shot the March and June rate hikes right between the eyes, took the steering wheel out of Janet’s hands. This will position the Fed to start signaling for a July hike, sometime in the next 45 days. That would be a dollar positive; gold / commodities / EM negative. She’ll likely try and get back in the driver’s seat. In recent years, the rebound in Q2 vs Q1 GDP has been meaningful, north of positive 1%.”

The Bear Traps Report; May 2, 2016

We’re seeing a hint of inflation coupled with Fed governors on the speaking tour keeping a summer rate hike in play.  In just eight trading days, the U.S. 2 Year Treasury bond yield has surged 15bps to +0.83%, a substantial move for a short term government bond.  The German 2 year yield is all the way down to -0.51% (see below).

As we stressed to subscribers in our May 2nd Bear Traps report, we don’t think they will hike in June, July or September, but they will give it a try.  Once again, the beast inside the market will stop them, as it did in September of 2015 and March 2016.

US 2s

As oil has nearly doubled since February, gas prices just came in with largest surge since August 2012.  The yield spread between U.S. 2 year Treasuries and German 2 year bunds is near record levels (see below).  You get 1.35% more for lending to Uncle Sam, this is putting a bid into the US Dollar.

2s

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Headline industrial production advanced 0.7% in April, exceeding the consensus forecast of a 0.3% gain.

IP

After the Fed shot the March rate hike right between the eyes, the U.S. dollar plunged during the 60 day period between early March and May.

The Winner?

In April, U.S. overall industrial output surged (see above), there was  greater output of consumer goods, particularly motor vehicles and parts.

 

CPI Pop

Stripping out fuel and food, the gain in so-called core consumer prices was propelled by services, with costs for rents, medical care, auto insurance and airline fares all increasing. Prices for goods — such as household furnishings, which fell the most since in six years — acted as a check on the CPI’s advance. Federal Reserve policy makers will likely want to see whether the higher prices stick as they consider the appropriate time to raise interest rates again. – Bloomberg noted.

  • Rose 0.4 percent (forecast was 0.3 percent), most since February 2013

CPI Surge

CPI

  • Increase driven by higher prices for gasoline, rents and medical care
  • Core CPI, which excludes food and fuel, advanced 0.2 percent after 0.1 percent gain
  • CPI increased 1.1 percent year over year; core CPI up 2.1 percent

Bloomberg data

Bottom Line

Remember, the Fed doesn’t have to hike rates.  Last summer, they signaled for a September rate hike, the U.S. Dollar surged and global credit risk took the steering wheel out of Janet Yellen’s hands.

On August 22, 2015 We Tweeted @convertbond:

1. Fed hints at #ZIRP Exit
2. US $ Surge
3. Commodity Plunge
4. Global Economic Risk
5. Corp Default Risk
6. EM Currency Risk
7. Fed on Hold

There are three key trades around this latest dollar surge….

Pick up our latest Bear Traps Report here.

 

 

 

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Futures: Chances of a June / July Rate Hike Surge Most in 3 Months

Join our Larry McDonald on CNBC’s Fast Money, Wednesday May 18, at 5pm.

Pick up our latest Bear Traps Report here.

“The risk-reward in betting on Fed action in the July – September time frame is the most attractive in three months. Global credit and economic risks shot the March and June rate hikes right between the eyes, took the steering wheel out of Janet’s hands. This will position the Fed to start signaling for a July hike, sometime in the next 45 days. That would be a dollar positive; gold / commodities / EM negative. She’ll likely try and get back in the driver’s seat. In recent years, the rebound in Q2 vs Q1 GDP has been meaningful, north of positive 1%.”

The Bear Traps Report; May 2, 2016

 

As you can see in the quote above, earlier this month we emphasized that long dollar position trades should benefit from a hawkish shift from the Fed.

We’re happy that the Fed Funds Futures for July have moved from 14 to 24% over the last week.

The U.S. Treasury curve is the flattest since 2007. The 2-year has gone from 68 to 80 bps over the last few weeks. The market is starting to price in July Fed action.

Pick up our latest Bear Traps Report here.

WIRP June 2
US Dollar Ripping

DXY hit $94.70 today up from below $92 earlier this month.

The next President of the United States is going to have an enormous impact on the Federal Reserve as Fed Chair Yellen’s term ends in 2018.

Pick up our latest Bear Traps Report here.

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