Regarding tonight’s french election.
A lot of market participants say “whoever wins, even Le Pen, Impact on economy will be small”.
I know the eco programs of candidates are not game-changing. But what if Le Pen changes the constitution to make French law above EU law?
And in an Orban-like way she decides to upend the rule of law, leading the EU to block funds?
And without the “nextgen” dynamic and a franco-germain tailwind, can the ECB really hike 200bp?
There’s a lot of leniency here from market participants.
The TV debate will be ver important and

I wanted to expand on the French Election risk as the feedback has been very positive on the scenario I highlighted.
TL/DR: I don’t expect Le Pen to win but one needs to be careful about priors (this is not 2017).
It’s important to reflect on how the campaign went:
1/x Le Pen in early 2021 tried to “tone down” her far-right speech as the conservative party was in a vacuum. But she lost her edge and the regional elections as a result.
Zemmour saw an opportunity (he was just a TV pundit until then) and picked up the zeitgeist.
2/x

Emmanuel Macron just had his meeting this weekend and raised the issue of his victory not being guaranteed.
It would be a huge blow to France, but the recent tightening of the second-round polls is starting to worry.
The main issue is of course the turn-out and the motivated
1/x voters.
In 2017 we had a “Front Républicain”, which meant parties were calling to vote Macron to barrage Le Pen.
And 2.4m voters who didn’t bother to show up at the first round ended up voting Macron.
2/x

Couple thoughts on how the pricing of central banks relates to the past.
Going to post some charts. Hopefully people won't be as snarky as @jeuasommenulle and understand I didn't get "matplotlib for dummies"for xmas.
1/x First is a 2008 analogue; you think Japan wasn't gonna be forced to hike by the market like the ECB? Think again.
Plus some interesting thoughts on the co-drivers of USDJPY and FX-hedged bonds
2/x

Getting a lot of questions about rates/fx correlations breaking, vols being elevated/low (@MG_Macro and @jturek18 esp)
So here are a few charts to think about it.
TL/DR: Rates vol is high, FX vol low-ish.
1/x Looking at how 2Y Rates are priced vol wise in USD and EUR, you can see the vols are spectacular in EUR, but fwds are soft of low in both.
We have also exploded the forwards since the Sep FOMC.
I added a few FOMC for context of pre/post hiking cycles.
2/x

Couple thoughts from this week-end.

The Fed communication hasn’t been crystal clear lately. Daly in particular I blame given her 180 between her mid-November speech (“we should not be hasty”) and he recent comments (“hike and QT”).
1/x The NFP data has solidified the March hike probability. “Faster, Punchier, Longer” was my motto last year and we’re getting there.
The question now stems as to whether we can price more hikes this year or if we are already at the neutral pricing as implied by the SEP dots.
2/x

Cool thread but got some comments. Especially because 2018 was a special year.
First we had Volmageddon in Feburary and we need to take that into account.
Wasn't the best time (especially year end) for taps on shoulder.
That created a "difficult" environment.
1/x

https://twitter.com/tdgraff/status/1478762443442642950

2/x Also we had China economy in slowdown. LVMH warned in the summer if I recall, Trump Listed $200bn for 10% tariffs in July etc.
That alongside nervosity didnt help a market which was very very short rates already. Even RM were flat back end.
2/x

Ok @MarketBlondes teased me into publishing stuff I wrote in April.

https://twitter.com/MarketBlondes/status/1463869250146377728

@MarketBlondes In 1957 the world was struck with a flu pandemic which killed around 1m people worldwide, including circa 100k in the US alone.
The US came into the pandemic with a general drop in activity, from capex to housing.
Sounds similar?
2020 saw a large drop in capex and housing.
1/x

Numerous questions about TRY today and @jnordvig did a good job raising some but lacked charts.
So the thing is. This year foreign liabilities were getting better but this month we had a bit of a drawdown.
And when that happens well the currency takes a dive every time.
1/x And the thing is, since 2018, foreign liabilities have grown exponentially.
To MMT people, that's what happens when you don't control your currency. Funny stuff happens. But I'm sure Erdogan will give everyone a pony.
2/x

Couple charts I think are interesting. First is that LA ports are unloading small ships and wait is now around a month to unload from anchoring.
Scarcity effect will continue for some time given that backlog.
1/x We have the Survey of Professional Forecasters next month and the revisions are likely to pick up at least 10bp for 22 & 23.
That will go into the FOMC SEP.
2/x

Couple points on NFP print
1) Women's non white labor force not picking up which might be a daycare problem and as such the supply problem is still there.
Which means more job switching, higher quits and more scope for wages to continue higher.
1/4 2) Seasonal Adjustments which have a massive impact this month on the Hospitality sector with NSA -413k and SA +74k. My seasonal adjustment gives me +154k. Not a massive adjustment but it's more in line with the ADP data this month (which was outlier for L&H)
2/4

Couple things on CPI. First team transitory/reopen wins and it's just fair.
Still some fair hikes in love motels but overall its calmer.
1/x What I find interesting is shelter rent though.
First because we have a continuation of the "cheap states" inflation.
Detroit continues to rise.
Driven once more by the nice stuff.
Thank you Blackrock.
2/x

As rates continue to rally I'm starting to worry we might get some more pressure in EUR rates.
There's been decent unwind of shorts in USD and some decent reduction in EUR this week.
1/x Trend Followers have had similar momentum with decent buying of govies (and selling of commodities).
2/x

A couple recent studies in the US which make me believe the OER rise will not be as bad as we believe despite a red-hot housing market.
1/x First is the NBER study looking at where people moved during COVID.
They didn't go far and ended at the periphery of the city rather than move to smaller cities/towns.
nber.org/papers/w28876
2/x

So a milestone has been reached.
5k followers.
It feels weird as I still struggle with the idea so many people could be interested in what I have to say.
In a sense it is very humbling.
So maybe time for a couple background items. I’n obv French (from the wine selection) and from the western region of Brittany.
Is there any reason to be proud? None. But nonetheless I do feel it is my home and love this land of mine.

We’re starting to see some nervousness amongst market participants with regard to rates moves and the positioning.
All my positioning trackers continue to show market quite short rates, though there has been some decent change by some players.
1/x In particular a couple things strike me:
CTAs are now NOT forced sellers. Ie a move higher in rates is not making them increase their FI shorts.
Here is the current positioning, and a move of 10bps higher in the next month will not force them to add to their shorts.
2/x

Listened to the latest OddLots with @econjared (thanks @BRzymelka for h/t).
The inflation discussion continues as the data keeps its variance. One thing is certain: the Fed will struggle like us to read any short term dynamics out of those prints.
1/x I believe we can take two points out of this podcast:
a)The WH wants workers to get back bargaining power
b)Companies/Investors are cash rich but don’t invest in long term projects: taxes are a way for government to fix that
2/x

Quick thread here as I get a lot of questions with regards to “why the risk-off”.
• SPX Options expired last week dropping a huge amount of gamma which was protective of downside short term.
1/x • CTAs are better buyers of US Bonds
To give you an idea the 30y UST signal is -50%.
If we sell-off 25bp in the next month that moves it to -62% but if we rally 25bp it moves it to -10%.

2/x

So this bond rally looks like deleveraging. There's been strong paying since the start of the year, as we got into the reflation.
Now Powell is pushing against "fast" and the market is caught a bit too short. Hence strong flattening.
1/x UK in particular is at risk because between Brexit and reflation and no negative rates, plus two smart BOE guys leaving (@GVlieghe and Haldane), market not sure of direction. And as you can see today even 2s got bid.
CTAs in gilts are also much better buyers of 10s and 30s.
2/x

So I was talking about 1958 recently and @Fullcarry didn't know the link so I thought, if he doesn't know then maybe it's time to re-up as we say (because he's clever and knowledgeable but there are so many hours in the day you can use to play with your dogs).
1/x So the thing is as everyone is posting (cc @pearkes), housing and car sales are on fuego in the US (and looking at prices in my London hood this morning, it's the same here).
Auto loans were crashing last year but we can expect a resurgence, and looking at sales in China...
2/x

So I've been a bit silent lately but Covid has hit me a bit both physically and mentally. Anyway let's be honest that Archegos story is quite interesting and though I think it's just a case of "mate it's never going to fall 25%" it begs some interest thoughts for after.
1/10 Prime brokers are likely to have to reduce the leverage they provide, or equivalently increase the margins they need.
Looking at a portfolio of 60/40 US Bonds and stocks, a move from weekly VaR (value at risk) from 95% to 97% is a 40bp increase in the risk of the portfolio.
2/10