I saw an interesting interview last week with Chris Cole (Artemis Capital).  He gave an example of the Cold War, where we had peace (low volatility) however any number of things could have happened that could have triggered a nuclear disaster.  Since he is a vol trader, he was referring to the current environment of high risk but low volatility.

I suppose I had been thinking something similar, in that I have been saying the tail risks to both sides have been quite large.  It’s somewhat unusual to think that we can get a huge move and not have a good feel on direction.  In fact, if we are 75+bps from here by the end of June (not my central prediction – just my range), it would not surprise me.  I just have no strong view on direction, so I have not done anything other than buy some cheap crisis protection.  I had been leaning slightly bullish, mostly because everyone is bearish and we haven’t been able to sell off.  Now I’m not saying to go out and buy vol.  You can’t exactly go out and buy straddles/strangles without a timing view because we have seen from past years that could be lighting money on fire.  But like Chris Cole, I do think about the extreme scenarios and rather than spend a lot of outright premium, think about what the curve would look like and position accordingly.

The calendar is action-packed right now, and so we could easily get some events to help shape our longer-term view.  We have a number of potentially critical turning points in the next two weeks:

  1. Trump is scheduled to speak to Congress on Tuesday Feb 28. After about a month in office, we should get some kind of framework for whatever he is thinking.  I said a few weeks ago that the post-election selloff was based on the prospects of fiscal stimulus.  We still have no idea what that is.  We will probably get a knee-jerk reaction to any specifics he gives on stimulus.  However, the main thing to consider is whether his proposal could get passed.  If he intends to put out something “phenomenal” knowing Congress would never approve and throw them under the bus, that could be counter-productive in getting anything reasonable passed.
  2. The PCE data on March 1. The CPI data was high, but the inflation data the Fed looks more carefully at is the PCE.  One reason[1] for large selling of FFJ7 would be if you thought we could get a spike in either the PCE inflation data or in payrolls the following week, to get a March hike.  All other things being equal, I would expect the whites to stay offered until PCE passes.
  3. Fischer and Yellen speak on March 3. I doubt either of them will say anything new, but you never know if the events of earlier in the week would move them.
  4. A Day Without a Woman protest on March 8. I know this is officially not an “anti-Trump” protest.  But it unofficially is.  I mean the organizers’ other stated issues include: “protecting immigrants,” “we need healthcare” and “reducing gun violence.”  C’mon – how is this not anti-Trump?!?  I realize the whole civil disorder thing may sound absurd.  However, the Trump haters who have been concerned about Trump being an autocrat just got a large push with his banning of several prominent news agencies from the White House press corps.  This is what dictators do – control the media.  Just having the outlets that are favorable to him is a step in that direction.  This move will drive a larger wedge between the Trump lovers and haters.  That being said, I suppose there are many publications that make fun of him or comment on his stupidity.  Eh hem.  I could see how he would not want to associate with the left-leaning press, but I think it’s supposed to be part of the job.
  5. ECB meeting on March 9. Any time one of the Pillars has a meeting, we need to pay attention.  The inflation and growth data have been better recently (thanks to a weaker EUR), but they have other (bigger) nearer-term concerns.  Euribor futures have been rallying like mad despite the better data.  This is going to be a pivotal year for the future of the EU with all the political and financial issues facing the bloc.
  6. European Council summit on March 9. This was one rumored date for invoking Article 50, but this is not looking very likely right now, with so little time to go.  However May did go out of her way to emphatically say we will get Article 50 by the end of the month, so this could happen at any time, after she gets through the House of Lords.
  7. Employment Report on March 10. I’m not sure why it’s not on March 3.  I would think most people would expect some pull-back from the strong January figures.  The March meeting is live, so any outlier print could swing the decision.  I just think the inflation data could be more important.

And that all leads up to the FOMC meeting on March 14-15.  I am of the opinion that the Fed will skip if everything is in-line (on news, inflation and labor).  I discuss some things I will be looking to do in the next Calendar Strategy section.

[1] I think there are two major reasons to sell FFJ7.  The other reason would be if the longer end bulls wanted some protection on a high inflation print or stronger data.  The thinking would be that because of the recent stronger data, FFJ probably couldn’t rally more than a few bps going into the next Fed meeting.  We have seen firm nearer-term meetings in the past on longer-end rallies.  The last thing you want if you were going to start taking a large bullish position is to get killed on a high inflation print.