I’ve been a bit punch-drunk for most of this year by all the headline bombs we have been a little behind the markets on.  There are a lot of things we have no competitive advantage trying to guess (since others in the markets have some insider information or just better leading information sources).  I wasn’t sure why the Fed was in such a rush to hike in March, when they are gradual and data-dependent and there was no pressing data.  I wasn’t sure why the Fed is in a rush to normalize the balance sheet by “later this year”, when they are gradual and data-dependent.  I wasn’t sure why Dudley would suggest a pause when the balance sheet is normalized, when we don’t know what the markets will look like then.  On Friday, we got some weak inflation and growth data that may raise questions on all of the above.  I wasn’t sure why people thought Trump would want a hawk in the FOMC, when he is a real estate guy.  On Thursday, we found out the President likes low rates (he will be picking a few Chairs and Governors this year).  I wasn’t sure why Mnuchin kept saying he wanted a stronger dollar when it went against Trump’s trade policy.  On Thursday, we found out Trump likes a weaker dollar.  I wasn’t sure why we didn’t get the “regular” “inexplicable” January fixed income rally.  Maybe we are instead getting it in March/April.  And I have absolutely no idea how equities are holding up, when the VIX is higher and there is a crisis bid in fixed income, gold and some FX.

Again, the best course of action is to jot down all my thoughts, take a step back and evaluate them.


  • Trump seems to be doing his best impersonation of Michael Corleone. Towards the end of the Godfather, he gets rid of all of his enemies in one fell swoop, with no warning.  Syria missiles.    Afghanistan Mother of All Bombs.  Check.  North Korea?  We have many military bases in Japan and Korea.  Sending the aircraft carrier as a signal is very un-Corleone-like.  And with North Korea, it does seem like we can get China (and possibly Russia) on board, using trade and sanctions as leverage.  Maybe.
  • Trump likes low rates. Imagine that!  A real estate guy likes low rates.  I guess we could have done something with this, but people who were supposedly “in the know” seemed to imply in media outlets that he would want some kind of rules-based hawk (i.e. Taylor).  But if you think about it, does any President NOT want low rates?  Is any President ever going to choose low inflation over higher employment?  Trump won because of promises of jobs – nobody cares about inflation.
  • The gorilla must’ve “married” a leprechaun. I still have no idea what their final play is (or was).  But the headlines have mostly gone the bull’s way the past week.  From North Korea, Syria, to the French elections to the Trump comments.  But I suppose it could have been foreseen… I mean even *I* thought the risk of geopolitical headlines going into the summer was going to be towards bullish fixed income.  As my old manager used to say, good traders put themselves in a position to get lucky.


  • That CPI and Retail Sales were surprising. But it is just one month of data, and at least in the case of Retail Sales, could have been Easter-induced, weather-induced or refund-induced.  Let’s not jump off the recovery bridge just yet. 
  • This could be an era of cooperation between the three superpowers, unless Trump does something stupid to mess this up. Trump seems to have a slight bipolar disorder, as his chatter has not been consistent.  But at the end of the day, when he (or his representative) meets with the other leaders, there is more cordiality.  I think there is a lot more to be gained from working together, than from being divisive.
  • Trump likes a weaker dollar. Imagine that!  Someone obsessed with the trade balance likes a weaker dollar.  It always confused me when Mnuchin kept talking up the dollar.  Are you not on the same team?  It just seems like the answer to a lot of the US trade policy differences could be solved with a weaker dollar and no need for any kind of border tax.
  • Trump may keep Yellen on. I’m not sure Trump would want a Democrat and someone who will be 71 to head up the Fed.  I suppose Greenspan was 80 when he ended his stint.  But apparently, it’s not uncommon for Fed chairs to be renominated by Presidents of opposing parties (Clinton renominated Greenspan, Obama renominated Bernanke).  In any event, if Yellen gets another term, does this change the timeline of the near-term hikes and the ending of reinvestments “later in the year”?
  • What happens to that “kink” from the tapering of reinvestments “later this year”? As previously mentioned, any number of things could get the Dec meeting to get priced back in again relative to the rest of the curve.  One of those scenarios was a pause.  Does it take just one pause to move the Fed off of “later this year”?  Or is Yellen intent on getting this going by year-end?


  • Think about a reasonable dovish new Fed Chair. I think of someone “like” Dudley (who is not actually likely because he is a Democrat).  Even he thinks 2 more hikes this year, and probably 3 more next year!  That is dovish relative to the rest of the Fed, but uber-hawkish relative to the market.  And if Yellen is kept on, do you know what that means?  That’s right!  75-3.0% longer term rates.  So this rally makes no sense if it is not on the back of some large recession or noticeable stimulus disappointment probability.
  • While I can see us not getting stimulus until later this year or even next year, I do not think the Fed hikes were predicated on near-term stimulus. As Yellen herself has said, the course of Fed rate normalization was not predicated on stimulus.  They weren’t predicated on 0% Retail Sales either, but still.

After getting slapped around for a while, I think we need to regroup and go over what things we believe in:

  • Do we believe in in the recovery? The price action early next week will be telling in terms of what the markets think – in particular, to what extent the weaker data was priced in.  There are people who get advance indicators (like credit card spending, local retail sales, etc.) and there are others who are really good at dissecting the seasonals (like Easter and Q1).  I think the new weak data from Friday should be worth about 5-8bps or so as a baseline, with EDM7 and EDU7 participating more than in the past.  So depending on the level of crisis (i.e. we’re not at war), the markets will add or subtract some from this baseline.  I fully expect the gorilla to jam in the thin overnight markets.  But where we are midweek could be interesting.  I see no reason to think this month of data is going to be a trend.  Q1 data has been strange in past years, it’s possible it’s weather, Easter or slower tax refunds.
  • Do we believe in some kind of stimulus? Fixed income sold off a bunch post-election and equities rallied a bunch in anticipation.  The balance of risks change depending on the answer to this question.  For me, it’s not a question of “if” we get stimulus, but “when”.  This year may be difficult, but as next year’s Congressional elections get underway, it’s going to be really difficult on uncooperative Representatives to show up empty-handed.  This is especially true if the economy starts weakening.

The answers to the above will have some implications for the curve, as discussed below.  In this environment where we are at an information disadvantage to the market (we are heavily headline-dependent and there are others in the market who know them in advance), we can try to get an edge in our analysis of the curve.