Große Woche

March 6, 2023

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Große Woche

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This could be an epic week as we get: RBA, Powell, a Lowe speech, ADP, Bank of Canada, JOLTS, claims, Bank of Japan, NFP and Canada jobs. And probably some other stuff, too. Here’s what I am thinking to start off.

1. Over the weekend, China looks to have snipped some of the right tail off the economic outcomes distribution. There was a cohort of investors and traders thinking there could be an epic stimulus and reopening in China, similar to USA 2021, as China came back with a vengeance. They seem to be taking more of a prudent approach. With a real-estate driven balance sheet recession still clouding things, the whole setup looks a bit less explosive. The base case hasn’t really changed, though, and global equities are fine so I’m not sure there is a trade to be short AUD. RBA is tonight and miner dividends will support AUD in waves between now and 13MAR so it’s a crosswinds situation and not a clear long or short.

2. The reduction in the probability of a highly reflationary super-stimmy China reopening has taken the heat off global fixed income. That last run up as the market got excited about the Fed going 50 in March has been rejected with vim and TLT shorts are now stranded on an island reversal. The bond charts show a variety of false breaks and reversal patterns. Like this one.

TLT Island Reversal after false break of the 2023 low

TLT is the 20-year+ Treasury Bond ETF

The drop in US yields helps USDJPY shorts, though USDJPY is higher than I would have thought given the move in 10s.

3. The BOJ meeting on Thursday night is in play. I believe there is a 25%-35% chance that the BOJ makes another move at this meeting (similar to December 2022 meeting) because the information on wages is strong enough to justify it.

Japan trade unions are looking for a 4.49% raise this year, the first time the figure has been above 4% since 1998. Toyota and Honda have already accepted 5%, Nintendo gave 10%, and Uniqlo handed out raises of 18% to 40%. The BOJ does not need to wait for any more information. The solid wage rise condition for ending aggressive monetary easing has been met. See page 8 of this Kuroda speech, or do a CTRL-F for “wages.” I like sticking with USDJPY shorts into BOJ.

4. So much US jobs data this week and as much as it doesn’t suit my bearish USDJPY view, I must admit there is nothing in any high-frequency data series that suggests imminent US labor market weakness. You can slice and dice the seasonality and all that stuff as much as you want. Strong January does not beget weak February. But with NFP not until Friday, I’m willing to hang onto USDJPY shorts through ADP and JOLTS as they are less important and more random.

5. There is nothing priced in for the Bank of Canada this week and I would think it will be a nothingburger. They are pausing for now and while the labor market continues to roar, other data like GDP and inflation have cooled just  enough to allow the pause to continue for now.

6. A few people wrote to me about Friday’s piece, outlining the many differences between now and 1995. I did not mean to overstate the analogy or make a direct comparison to the 1995 macro setup. My point was only that people were quite bearish at the end of 1994 on the back of an aggressively tightening Fed and that view did not work out because higher rates don’t always impact the economy exactly as people expect. But it is fair to point out that the Fed cut rates in mid-1995. And they probably are not cutting this year. So I do agree it’s not a great analogy on the macro side, but on the psychology side I still think it fits pretty well. Other feedback that I got on that piece was that maybe we are just in for a long slogging range trade in stocks. I can get behind that thesis for sure.

We have already been in a 3650/4200 range for almost a year (with one short-lived breach of each side). Why not six or twelve more months? That sure seems to be what vol markets think.

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Final Thoughts

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If you are interested in large language models (LLM), GPT-3, and the current AI wave… I would take an hour and read the two articles linked below. The first one is kind of hard to understand, but one thing I learned maybe 10 years ago or so is that it’s OK to read stuff that you don’t fully understand. You get some of it, and that’s OK. Similar to how when you read a poem, you might not understand everything but portions of the message get through and those portions are meaningful or useful. Same thing when reading academic papers. Don’t panic if you don’t understand everything. You can still extract useful information.

I feel like after reading these two pieces, I have much better understanding of LLM.

https://www.lesswrong.com/posts/D7PumeYTDPfBTp3i7/the-waluigi-effect-mega-post

https://nymag.com/intelligencer/article/ai-artificial-intelligence-chatbots-emily-m-bender.html

Have a stochastic but parrot-free day.

good luck ⇅ be nimble

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https://www.newyorkfed.org/research/college-labor-market/index#/outcomes-by-major

Labor Market Outcomes of College Graduates by Major (worst 15 by highest UR).

Nursing and education were hardest hit by COVID retirements and quits and thus unemployment rates in those fields are de tiny. Fine arts, sociology and philosophy tend to always fall near the bottom of tables like this as they do not produce skills directly applicable to as many hard-to-fill jobs.

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