Payrolls Redemption

The market has been fairly well behaved in the lead up to and into the first week of the new budget year. 3s have broadly been oscillating from the high 40s to the low 60s and the 10s have also seen a 15 or so point range from 70 to the mid 80s. I have been playing this fairly well by shifting and rebalancing my 3s10s curve but ,at the same time, I've also been occasionally kicking myself for not going all-in by playing those ranges outright.

The very low retail sales and building approvals figures which sprung forth on 3 July were a bit of pleasant surprise for me, because I had really been fearing more strong data but I held on because of the core view that the RBA would not hike and that the data (and especially the CPI figure) would eventually prove this, at least out to August.

Low wages, the high AUD, the high hurdle set by the previous CPI, home lenders raising fixed rates, the rumours of excess domestic inventories and the fall in bond prices all gave good reasons to believe that the RBA would more than likely not go so soon. The election might also put some political pressure on the RBA not to hike, so I figured, on the balance of risks, being long, at least out to 3 years was the right move for now.

Leading into payrolls, I did something I don't usually do. I printed out a copy of my blotter and took it home with me. I figured that I wanted to give it the same attention that I would if I was on the desk. My view was that the surprises were probably going to be to the upside (on the number) and I had various orders at the bottom of the ranges to buy since I was thinking that any sell-off would be short-lived because our market was had limited space to move until the July CPI and also because I couldn't see any significant further lowering of unemployment in the US (ie. massively high payrolls number).

At 10pm or so, I pried myself away from my girlfriend and set up Bloomberg and made a call to Boyd at UBS to place a few bids in ambush positions below. After that, all there was to do was wait.

As it happens, it pretty much turned out exactly as I guessed.

Payrolls comes out 132k against 125 expectation and the June figure is revised from 157k to 190k. The unemployment rate remains at 4.5%. Strong result but not overwhelming. The market buzzes around a little and then sells down with the 3s down from 54 to 50 and the 10s from 74 to 69.5. I get filled paying 50 for 100 and 70 and 69.5 for 100 each. The market drifts back up again, 3s back to 55 within an hour and ending at 51.5; 10s back to 75 before closing at 72.

I was tempted to sell at least these new positions back as the market rallied back but my book was short and this is the bottom of the range so I'd rather build up my longs, hoping to ride it back up to the top of the range again at least one more time before it breaks out to find a new range again.

The feeling that these small successes in July has given me has been just the tonic I've been yearning for. Despite the pain endured in May/June, it has been a fantastic learning experience, at least for me. Even better because I seem to have survived it (from an employment perspective).

The problem I see with labelling a market as range-bound or trending, and further to that, defining a range or piling into a trend, is that it is fundamentally a generalising and complacent view. The market will always ultimately punish complacency and I've learned that no forward-looking view is completely correct at the time because a view ultimately only expresses a balance of risks based on present information on a non-deterministic outcome. John gave me a great piece of wisdom saying:

"The only thing that is always right is the market"

It is very easy to fall into a lazy, complacent position when you trade a low volatility market like Aussie bonds. I can't imagine the same situation forming in my mind trading Hang Seng index futures. Getting stung early into my career is the best thing that's ever happened to me and now it's up to me to apply the lessons taught.

Retail trade and payrolls and playing the range have given me a nice start to this year but I'm ready for anything to happen.

Position: Overall small short/square.

Futures: Very long short end. 3/10s curve looking for a bull steepening move.

Best case: Weak domestic data. US long end weakening without taking the short end with it (bull steepening preferred). Equity market correction would be good.

Worst case: Very strong domestic data. High CPI number. Bear flattener caused by maybe strong data (domestic or US) plus flight to quality in the long end perhaps.