The T Report: Weak Data and European Debt Concerns

The data this morning was weak.  Jobless claims looked bad.  Expectations of 350k and an actual print of 359k.  Some headlines read that the number was an improvement from last week, but only because last week’s data was revised up by 16k.  Not horrible numbers, but so much hope has been placed on an improving job market, that people have to worry about that thesis.  The big battle has been over how influential (and correct) the weather and seasonal adjustments have been on the strong January and February numbers.  It looks more and more that the NFP data was  inflated and we are due for some pretty big disappointments there in the months ahead.

Even with stock futures down, they aren’t yet back to the lows of yesterday.  That is in spite of Spanish 10 year yields higher by 10 bps and back to 5.4% and even Italy backing up a little, 6 bps to 5.16%.  I do find it strange that Italy trades better than Spain in 10 years, but worse in 5 years, though LTRO and a lot of other factors may be at play there, but it does seem a little strange.

Credit continues to be “ok”.  It isn’t great, but there is no real selling pressure and in the cash market, the tone remains that buyers are in the wings, just waiting for better prices and for stocks to bounce.  Credit ETF’s all saw spreads widen a little yesterday.  Nothing dramatic and still largely in line with broad “risk on” / “risk off” moves.  There is further weakness this morning, especially in the CDS indices, as some hedges are coming back into the market, but with IG18 still trading 5 bps rich, there is no sign of panic, and if anything, complacency still reigns supreme.

Our views remain the same – long HY17 vs HYG, underweight HYG and LQD, short IG18.  We are looking at the “compression” trade, long HY18 vs short IG18, but not convinced the time is right given how long the market feels, and that HY always seems to get picked on at the start of any down move.  Looking at short Main vs long IG as the US does seem more removed from problems in Europe, and it is becoming clear that nothing has been fixed in Europe and some of the issued that had been papered over are starting to be exposed again.