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Good Morning: The Long & the Short of it and The Bigger Picture - 26 March 2019 - ADM ISI

Ostwald, Marc
08:58 (33 minutes ago)

to Marc

- Digesting BoJ March summary, Fed Rosenberg comments and French Business
Confidence; awaiting US Consumer Confidnece, Housing Starts and House
Prices plus many more central bank speakers; busy day for govt bond sales

- Fed Rosenberg comments on balance sheet composition lean against yield
curve inversion chatter

- US Consumer Confidence: further uptick expected, but high Present
Situation and Jobs Plentiful perhaps vulnerable to setback given
recent narrative on economy

- Morning Call audio file:

- Charts/Tables: US 2/10 yr, 5/30 yr & 3-mth/30yr & Fed rate probabilities



Another evening of UK parliamentary Brexit drama, or rather feckless shenanigans, gives way to a busy day for surveys and central banks speakers. Statistically there are another strong though lower than expected 10.4 German Gfk Consumer Confidence reading that follows hot on the heels of yesterday's rebound in the Ifo Business Climate, which once again flashed yet another red signal about the reliability of PMIs, and indeed emphaszied by the uptick in French Business Confidence (104 vs. 103), which encouragingly saw both Production outlook sub-indices rise. Ahead lie US Consumer Confidence, Housing Starts and both S&P/CS and FHFA House Prices. But outside of the Brexit farce, it will be another busy run of Fed, ECB and BoE speakers which will probably command most attention, even if their dovish 'guidance' highlights an unspoken admission that they basically are facing a version of Hirschmann's 'hiding hand'; (which argues that creativity is the key problem solving tool when we face unexpected situations; and that it is only via the experience of impotence when faced with the unexpected that we develop the innovative knowledge to solve problems, and that ‘rational choice’ often stifles innovation and creativity). It is also a busy day for government bond sales, which sees Italy sells CTZ (Zeros) & BTPei, the UK offers 30-yr I-L Gilts, while Germany and the US sell 2-yr - which follows CNY 30.5 Bln of Muni debt sales in China. In terms of the overnight flow of news, the summary of the March BoJ policy meeting highlighted that there is very much a live debate on taking further policy action in light of the weakness in the economy, though the divisions between the dovish activists (e.g. Harada) and those concerned about exacerbating the squeeze on the financial sector due to QQE. Boston Fed's Rosengren comments on weighting the Fed's balance sheet to holding shorter maturity Treasuries is worth noting, as are his comments that the yield curve inversion has to be seen in the context of a benign inflation environment, and the very low level of rates. In passing, I would note that none of 2s/10s (+16 bps), 3mth / 30yr (+44 bps) or 5s/30s (+67 bps) are in fact inverted, and that the volume of column inches being devoted to this topic is a lot of hot air, which is primarily aimed at justifying markets now discounting a 55% chance of a Fed rate by September and a 70% chance by December.

** U.K. - Where to now for Brexit? **
- By voting for the Cooper/Letwin amendment, parliament now has control over tomorrow's series of indicative votes on alternatives to the May Withdrawal Agreement, which will likely put most options on the table, and by that very fact will not produce a majority for any of them. It would de facto require a leadership style election process to achieve a majority, i.e. eliminating the least popular options before going to a second and probably third round to establish a compromise option. But with so little time available, and the fact that it would be an indicative vote only, and thus offering no guarantee that it would be adopted as government policy, though it could possibly serve as the basis for some changes to the 'Political Declaration'. Per se the fact of the matter is that this will ultimately probably achieve very little, it does NOT remove the risk of accidental hard Brexit, which requires parliament to vote for something, or a third vote on May's Withdrawal agreement, and indeed it could still open the way to a snap general election.

** U.S.A. - Mar Consumer Confidence / Feb Housing Starts **
Consumer Confidence is expected to build modestly on February's very sharp rebound to 131.4 (predicated on a sharp bounce in Expectations to 103.4 from January's recent low of 89.4), and edge up to 132.5. The key elements will be whether the Present Situation Index can hold at last month's 18 year high of 173.5, which may to a large extent depend on how buoyant the Labour Differential remains, having just manage a fresh cyclical high last month at a very robust 34.3. Recent economic news and the 'negative' media and market narrative around it suggest some downside risks. Housing Starts are projected to largely sustain their 18.6% m/m Jan rebound, dipping modestly to 1.215 Mln SAAR from 1.230 Mln, with Building Permits expected to remain very robust at 1.30 Mln.


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