We have known that observers would under-estimate US vigor. This worked nicely through Q4. Naturally they won’t miss on every release but if we have the trend, we then have a more accurate look at the economic landscape just ahead, and thus a better opportunity to capture price change.
Such a flaw does not always exist; that is, consensus is sometimes well linked to reality ahead. Or, sometimes the flaw is minor, to be left alone. Three or four times per year however the flaw is one of major proportions. It is our primary task to isolate these events, that is, to close the pattern ahead of other observers.
Naturally the US is not booming. Some point to today’s GDP print as proof of that as 2/3's of the growth is in inventories. Fine. We are not interested in absolutes. Only consensus, that which is priced in at a given moment in time, and, our understanding of reality ahead; our understanding of reality just ahead is that business spending, a revived consumer and continued improvement in the labor market will drive growth through expectations, H1.
Clients were advised early on to set trades with our anchors in mind, using any correction as an entry point. That is, we wanted to exploit “weak” releases; we still do. Thus, any substantial market move related to yesterday’s Dec Home sales print or today’s Q4 GDP release was/is to be exploited. (Yesterday’s Dec Durables print did fit our anchor as it reflected strong capital goods orders, thus better business investment ahead.) Only operate at the margin, never in a rush for goodness sake and certainly not in this environment. In the broadest sense, trades can be applied through FX, or equity, or, if and when the E-Z situation defuses, more by the way of FI.
For example, look for opportunity to own the term structure, it having been artificially depressed by E-Z events. Course of least resistance for Q1 is wider. We have that trade open from Oct/11, the trade moving nicely early on, then being put back a tad by flight from E-Z problems, now expanding again. We cannot predict for example Portugal’s near term fate, other wild card events, but certainly in no shape manner or form do clients want to execute the reverse trade because Fed generosity in the face of “surprising” vigor is the recipe for a steeper curve. We can recommend 5 - 10, which was put on at 101, expanded nicely, then back in to 101 give or take, late Dec, last 117. We can look for a near term target of 130 on this spread, perhaps 315, 2-30.
Finally, we predicted earlier that the US would distance other developed credits (Canada the exception) and that clients were to set trades with that in mind. We especially isolated Germany and predicted a “surprising” slowing Q4, understanding early on that she was not immune. We also highlighted that the E-Z banks’ response to the new Tier I cap standard would be to simply shrink their books. Today’s release shows the Dec flow of loans to E-Z firms in a near free fall. Some dismiss this release as history, meaningless, being pre-ECB generosity. They are mistaken. It is to be the trend, H1.
Robert Craven
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