Breslow: "The Pain Trades Are Giving Traders Headaches"

Richard Breslow, former fund manager who currently writes for Bloomberg, starts of the week with a recap of how traders are reacting to the so-called key pain trades, and refuse to accept a shift in sentiment when it comes to the "dovish yet hawkish" Fed or the "hawkish yet dovish" ECB.

The Pain Trades Are Giving People Headaches

There does come a point when we just can’t seem to resist playing with our heads. It’s bad enough when others try to do it to you. But psyching oneself out is no way to make a living. Especially when you trade for a living.

  • This week we’re going to be treated to meeting minutes from both the Fed and the ECB. On top of that, enough central bank speeches to more than fill in the time between economic releases. The interesting thing is that traders seem to have already decided what they plan to take away from these events, skipping the part where we actually hear what the officials have to say.
  • The Fed has been hiking. Their speeches have been consistently optimistic on the traction that’s been achieved toward reaching their mandate. And more, rather than less, portraying a board on the same page. Yet the pain trade keeps traders reacting much more to any perceived dovishness.
  • The price action from New York Fed President Dudley’s no “great urgency” to hike comments was almost laughable. He didn’t retract “a couple” more 2017 hikes, which isn’t even priced in. How does a market searching for any clues on the timing of balance sheet normalization allow itself to indulge in such an over-reaction?
  • The Fed’s $4 trillion in holdings represents one of two things. They keep reinvesting and have plenty of room to get the funds rate up, even if the yield curve stays flatter than you’d expect. Or, they start letting it roll off and you will witness de facto tightening that will shake buyers of the 10-year at 2.40% to their core. The former keeps confusing traders because it always looks like 10-year bond yields are sending out warning messages.
  • Meanwhile, despite European inflation numbers that left something to be desired, people are in desperate search for some clue as to ECB snugging, tapering, anything, please. After all, a lot of numbers have been better. Haven’t they? It’s not that the ECB is behind the curve, it’s the curse of negative rate insanity. Somehow, it just seems unlikely that President Draghi will choose this week to channel his inner- Trichet when he delivers his two speeches.
  • We already know the ECB has reduced its PSPP monthly target starting today. Just don’t expect them to double-up and hint its duration will be cut short.
  • On Friday we get non-farm payrolls. Another good number is forecast. Although I suspect secretly people are wondering about payback from last month’s beat. This number has a lot of flexibility to the down-side without derailing the Fed, but I wonder if a miss will get an outsized reaction, as everything not overtly hawkish seems to get.