Macro Insights/Report: The Forward Curve
The path
I just finished the Interest Rate Primer and I wanted to expand on this with a simple example in markets today:
Pricing:
When we talk about positioning or the implied expectations of assets, this has almost nothing to do with sentiment. Positioning is ALWAYS reflected in dollars. Sentiment can be manipulated with ridiculous sources. The market is always made up of dollars. This is why risk premias and the vol complex are critical to monitor. They actually reflect the premiums and discounts traders are paying (not stupid surveys).
One principle you want to remember: When something is priced to perfection, you basically always want to take the other side.
What is an example of this? Well, when we were moving into the last FOMC meeting, we has basically priced the most hawkish scenario. 2 year swaps were pricing 5% which was incredibly unrealistic in my view:
I laid this out in a report noting that a “hawkish pivot” was so unlikely and the pricing of the market created asymmetry to the downside in short-end rates:
Where are we now?
There is a clear setup in how traders are positioned in the short end. We are between the FOMC meeting buying and the selling that occurred during the NFP and CPI print.
Why do these matter? As I noted in the interest rate primer (link), the buying and selling that occurs around these catalysts provide a window of positioning:
The implication of this is that we would need NEW information with a stronger impulse than was priced in at the NFP or CPI print to push ZT ABOVE that level. Inversely, to move BELOW the FOMC level, we would need to see NEW information from Powell on the probability of hikes. In the interim, we remain between these ranges.
As I stated in the interest rate primer, you need to identify asymmetry for trade:
When ZT is chopping range bound between these ranges, there is no asymmetry for a directional trade. However, if ZT moved down on a data release without a significant change in the reason buying occurred at FOMC, then this can create asymmetry to get long ZT.
Understanding the logic for WHY buying and selling is occurring sets the context for you to interpret opportunity on the fly. For example, if ZT sells off on a data print but there isn’t a significant change in the stance of Powell on hikes then this creates an opportunity.
We don’t have a ton of catalysts this week but the FOMC minutes today could move this a little.
I will be breaking down these tensions and the specific asymmetry that exist in the interest rate report this week for paid subscribers. This is where the alpha generation takes place.
Volatility will come
