Pushes or shakes, abruptly

Waller

Chris Waller’s speech yesterday sounded like his current probability distribution for a December cut is 70/30 and the market has duly obliged, moving from 61% to 72%.

The most enjoyable part of the Waller speech was this:

Overall, I feel like an MMA fighter who keeps getting inflation in a choke hold, waiting for it to tap out yet it keeps slipping out of my grasp at the last minute. But let me assure you that submission is inevitable—inflation isn’t getting out of the octagon.

While “Submission is inevitable” is the kind of overconfident assertion that can come back to haunt a policymaker, this is still a fun analogy. Waller’s description of the December decision was highly conditional, and he went through a long list of economic data points that might change his mind.

On the next page, I have created a list of all the major economic data points between now and the FOMC meeting, and I used a yellow Hi-Liter® from the 1980s to mark the ones that Waller mentioned in his speech.

Data mentioned in Waller speech is marked in yellow

I will track the evolution of this data as we move forward.

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JOLTS

The fun starts at 10:00 a.m. today with JOLTS. That series has a strong tendency towards mean reversion as both the (actual vs. expected) and the number itself tend to flip flop between large ups and large downs. One would think that economists would factor this in, but they don’t do it adequately.

The chart here gives you an idea of the way JOLTS comes in strong and weak in succession, generally.

Looking at the data, you can see there is a bias for JOLTS to be strong because of the huge ramp higher post-COVID, but the general theory holds.

Last month’s JOLTS missed by 557,000, so that would put it in the far left column (< -400k) and would suggest that there is a greater chance of a strong JOLTS number today than a weak one. As is the case with many of these studies, you get something like a 60%/65% hit rate, max. Interestingly, the economist estimates are distributed super unevenly as the mode is 7600 but the average and median are closer to 7520.

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Final Thoughts

1. USDCHF is a bit disappointing so far as EURUSD bounced and Swiss CPI came in as expected. Rates pricing moved a tiny bit away from 50bps from the SNB.
2. Good ECB TPI explainer from Politico.
3. Donald being Donald.
4. Japan’s 30-year yield is above China’s.

Have a festive day.

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The Spectra FX Positioning and Momentum Report

Pullback in USD longs due to seasonality, entry point, and positioning concerns

 

Hi. Welcome to this week’s report. USD positioning has cooled as the market is worried about lack of downside EURUSD momentum, excessive USD long positioning, and negative USD seasonals into year end. This creates an opportunity for the USD to keep rallying if the macro environment cooperates. That is, the December Fed cut, the December BOJ hike, and the 25bp vs. 50bp December debates at the ECB and SNB could determine the dollar’s fate, along with any more information and/or noise on tariffs from the incoming Trump administration.

Observations

1. The unstoppable macro forces have banged into the immovable object of positioning and seasonality for now and we are anchored around 1.05 in EURUSD. Positioning in the USD has pulled back from the highs, as has the price of the DXY.

2. The EURUSD risk reversal spiked from -0.92 to -0.58 on EUR short covering plus selling of EURUSD puts last week, but is dribbling back down as the panic subsides. Interest rate differentials (Germany vs. USA) and core spreads (Germany vs. France) have both widened to levels not seen in years and this has kept downward pressure on EUR. This has been particularly intense in EURJPY as Japanese investors sell OATs and repatriate into yen.

3. Price action in CNH options has been notably different on this move higher in spot as the market was more than amply supplied with gamma in the 7.30 area over the past few weeks but now seems to be running short when we try to buy options in that area. This is bullish USDCNH and makes it easier for the USD to rally vs. G10.
4. Strong USD-negative seasonality and excessive long USD positions have been noted in many bank commentaries I have been reading and thus the third-derivative conclusion could be that everybody thinks that everybody is long USD and everybody also thinks that negative USD seasonality is important and therefore speculators are struggling to play the USD from the long side because it feels like there are too many crosswinds (and you’re getting long USD at bad levels). This, despite a convincingly bearish euro macro set up as US exceptionalism stands in stark contrast to European malaise.

https://www.reddit.com/r/dataisbeautiful/comments/1h4vs93/more_than_25_million_christmas_trees_are/#lightbox

good luck ⇅ be nimble