Early January we recommended clients sell (S-L) the US term structure, then 285, 2-30, 110, 5-10. That exercise has come against us, last 295,111. The position should be closed.
Early January we recommended clients own (L-S) the UK term structure, then 288, 109. The UK exercise has worked satisfactorily, last 311, 121; half the gains are to be realized and the balance taken forward.
In the US we had expected a consumer wilt tied to the administration’s tax policy; that is, we had expected something less than was priced in. There was a consumer pause in January but nothing like we expected. Second, we had expected less job creation than materialized, the large revisions to Nov and Dec catching us flatfooted. Both of these factors may well kick in for Feb and March; that’s fine, but risk control has us out as the market crowd did not come to agree, for now. There is the ever-present chorus from the poor house of those who were right, simply “right” at the wrong time.
In the case of the UK, the recipe for an expanded term structure – central bank generosity in the face of building price pressures – was well in place early January; in fact, had been since early December. And of course recent Bank of England comments that inflation will overshoot the 2% target for several more years, in fact breaching 3% later this year, are made to order. There was something else that motivated this strategy and that was a modest under-estimation by most economists of reported, real-sector vigor. We suspected for some time that perhaps one cannot take all official UK releases at face value, GDP being a prime culprit. We of course are not alone in this; what was provided was then the “surprising” prints in Payroll and particularly in Services. Thus we had a bit of a leg up in understanding the risk to these key releases.
Robert Craven
Early January we recommended clients own (L-S) the UK term structure, then 288, 109. The UK exercise has worked satisfactorily, last 311, 121; half the gains are to be realized and the balance taken forward.
In the US we had expected a consumer wilt tied to the administration’s tax policy; that is, we had expected something less than was priced in. There was a consumer pause in January but nothing like we expected. Second, we had expected less job creation than materialized, the large revisions to Nov and Dec catching us flatfooted. Both of these factors may well kick in for Feb and March; that’s fine, but risk control has us out as the market crowd did not come to agree, for now. There is the ever-present chorus from the poor house of those who were right, simply “right” at the wrong time.
In the case of the UK, the recipe for an expanded term structure – central bank generosity in the face of building price pressures – was well in place early January; in fact, had been since early December. And of course recent Bank of England comments that inflation will overshoot the 2% target for several more years, in fact breaching 3% later this year, are made to order. There was something else that motivated this strategy and that was a modest under-estimation by most economists of reported, real-sector vigor. We suspected for some time that perhaps one cannot take all official UK releases at face value, GDP being a prime culprit. We of course are not alone in this; what was provided was then the “surprising” prints in Payroll and particularly in Services. Thus we had a bit of a leg up in understanding the risk to these key releases.
Robert Craven
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