February 7, 2023

Chair Powell, Take 2

Powell is the only thing that matters today as we see whether he
changes tune on total indifference to the loosening in US financial
conditions since June. Post his dovish FOMC, we’ve got a huge
bounce in ISM and New Orders and the lowest Unemployment
Rate in my lifetime. The last time the UR was 3.4, the Beatles were
recording Abbey Road and Neil Armstrong was getting ready for
his trip to the moon. At right, just for fun, a list of all the months
where US Unemployment was below 3.5%.

If the esteemed Chairman feels like the market reaction to his

presser and/or the subsequent run of data has the Fed message
Brent Donnelly offside, he can set the record straight today. There is room for huge
volatility today at noon as the market should react whether Powell
bdonnelly@spectramarkets.com holds the line on the “disinflation, we won!” narrative or delivers
(212) 398-6230 something more squeamish.

Sidenote with regard to that table at right: There was a recession in

July 1953. And another in December 1969. That is to say,
extremely low unemployment is a normal condition right before the
start of a recession, but the timing is impossible. Unemployment
was extremely low in 1951, 1952, and 1953, then recession. It was
extremely low from 1966 to 1969, then recession. A very low UR
is not a sign that recession is imminent, nor is it a sign that
recession is not imminent. It’s a lagging indicator.

I think risk/reward into Powell is to bet on a hawkish outcome and

higher dollar because the weak side in fixed income continues to
be higher yields and the short USD positions are not yet completely
cleansed. The market can’t process the change in narrative fast
enough.

Also, the bearish equity signal from (VIX up + SPX up >1%) since
stocks closed last Thursday at 4179 (see am/FX: Stocks down,
USDCAD up) is still in force. The half-life of the signal in the past
Do you recognize this guy? has been about 5 trading days, so it’s reasonable to stay bearish
into Wednesday/Thursday. Obviously Powell matters most today,
but we are still in the window where excess euphoria can continue
to unwind and that reinforces the asymmetry through the
Chairman’s interview at the Economic Club of Washington. There
Current Views is no prepared text, so Powell has a chance to freestyle today.
Long USDJPY @ 132.08
Stop loss 130.34 Yields and bond vol
Take profit 134.69 Keep in mind that a critical facet of the equation for equity markets
Long USDCAD @ 1.3393 is the volatility of yields. The stock market can handle slowly rising
Stop loss 1.3279 rates but higher rate vol and higher rates at the same time is
Take profit 1.3644 generally bad for stocks.
Long 07FEB EURGBP call
Here’s a chart of the MOVE Index (1-month, yield curve weighted
spread 0.8870/0.8920 bond volatility) vs. SPX over the past year or so. Bond market
(expires today)
volatility is in blue and the series is inverted because higher bond
market vol = lower stocks, generally.
 SPX vs. bond market volatility (MOVE Index, inverted)

While Powell is key today, the other key to the bond market will be the January data for the US. It looks like we might
have hit some kind of crazy sentiment extreme in December and the January data look substantially better around
the world as China reopening hopes and warm weather in Europe have helped steer us away from the abyss. Here
is a heat map so you can see what has come out so far. The first four lines are ISM and ISM new orders, then you
have the various jobs figures and then NAHB housing and Michigan.

The persistent strength of the jobs market stands out, as does the bottomy look to the December data. We need
more Q1 2023 data to get a clearer view of what’s going on because sentiment data are all over the place and jobs
data don’t tell us much since we have known the US jobs market is tight for more than a year.

USDJPY
Japanese wage data released last night is not great for my long USDJPY view as bonuses and revisions have
launched Japanese YoY wage data up through the top of a 20+ year range. See chart on next page.

I think Powell is much more important than Japanese wages in the short run, but in the bigger picture, stonking wage
growth means increased normalization speed and magnitude, ceteris paribus. Another risk worth keeping in mind is
that I’m a believer in following leaks in the Japanese media, but the Amamiya leak could always be wrong. Now that
Amamiya is more priced in, if they end up nominating a hawk, USDJPY will dump. Then again, the sell side seems
hesitant to believe the Amamiya news so perhaps it’s not really fully priced yet.

SPECTRA MARKETS: LOOK FORWARD 2

 Japan YoY cash earnings (includes bonuses), 1991 to now

I’m sticking with long USDJPY and long USDCAD but there are risks! The EURGBP call spread is going to be touch
and go into 10am expiry. I hope that we will be able to stay above the 0.8920 strike.

Final Thoughts
This week’s Positioning and Sentiment Report is below. Please note that the CFTC is having technical issues and
therefore the latest CFTC data is from 24JAN. That data moves pretty slow anyway, but just know there is no update
to the data this week.

Don’t be a chicken today.

good luck ⇅ be nimble

SPECTRA MARKETS: LOOK FORWARD 3

 The Spectra FX Positioning and Momentum Report
The post-ECB yield meltdown and subsequent quantquake (plus strong ISM and NFP) have just about completely
neutralized positioning. While EURUSD calls and USDJPY puts remain heavily owned in options land, spot positions have
been wiped clean as everything popular has been rinsed in a typical late JAN/early FEB reversal of favored new year
trades. There is a tendency for the most popular trades of the year to face a reckoning between the 3rd and 6th week of
the year because P&L tolerance is low, and excitement and engagement levels are high at the turn of the year. 2023 has
been no exception.

G10 FX Positioning and Momentum

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Five Observations
1. CFTC positioning remains sticky with short AUDUSD especially unperturbed by the recent rally from 0.6200 in
October to 0.7160 last week. As you can see in the chart, positioning mostly follows price, but there are long lags
as the primary determinant of CFTC positioning is long-term trend. While it might feel like AUDUSD has had a nice
rally if you are sitting there staring at it all day, in the bigger picture the weekly trend lower that triggered the CFTC
to flip short in 2018 is still in place. This is a good example of how CFTC data can be very, very slow moving. A
break of 0.8000 would most likely be required to break the downtrend and trigger a flip in CFTC Oz positions.

CFTC AUD positioning (% of open interest, left y-axis) vs. AUDUSD (right y-axis)

2. The market’s brief flirtation with long GBP was batted back by a dovish Bank of England and the rebirth of the
USD. Three sell-side strategists were the first to dip their toes in the bullish GBP waters up at 1.2380 or so, and
that was a good contrarian signal. Here’s what we said about it in the Spectra Positioning Report at the time:

(from January 24) … GBP has outperformed as sentiment turns from bearish to neutral and even bullish
in spots. Three FX strategists at large banks put out bullish GBP recommendations this week as price
drives news. Suddenly people are wondering if there is more risk premium to come out post-Truss. That
seems a little bit absurd at 1.2400. Not that the risk premium is knowable, just that that’s the argument
for bullish GBP after a 19-big-figure bounce.

3. There was a massive quant unwind last week and that first took bunds up, then took precious metals down, then
expanded to a wider blast radius, injuring most of the China reopening and soft landing trades. Anything that was
working for CTAs in 2023 took flak in last week’s action. Gold, silver, and oil are all suffering not from global
demand worries, but from excessive bullish herding.

4. Equities rallied with the VIX last week which is a classic sign of short-term overexuberance. Yes, the US data was
a catalyst for the turn, but the market was alrready vulnerable because the apes were back in full force and dogs
like CVNA were flying to the moon. Carvana traded from $3.70 in early January to $20.00 late last week as the
most-shorted stocks were part of the short-term positioning apocalypse story.

5. FX momentum indicators are all near flat now as impulsive negative momentum in the dollar and positive
momentum in gold, stocks, and bonds has reset to zero.

That’s this week’s report. Thank you for reading.

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 Joe Biden, age 26

This is Joe Biden the last time the US Unemployment Rate was 3.4%

SPECTRA MARKETS: LOOK FORWARD 6

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