The T Report: ECB, NFP, Don’t Hold Your Breath Waiting for Rotation into Equities

Jobless claims better than expected and back to levels where we had been earlier this year (after they were revised upwards). This data has been so consistently revised higher, that the market is taking it with a grain of salt.

Spanish and Italian bonds are holding onto to most of their earlier gains on the back of more auctions and the ECB meeting. So far Draghi has had a very measured tone. If the meeting ends without a change in his tone, I would expect weakness to resume. The market has come to expect, and in fact depend on, central bank intervention. I don’t see a natural buyer of the longer dated Spanish and Italian debt without real hope of an aggressive ECB.

We get ISM later this morning, but the market is really going to focus on NFP tomorrow. That is the key. Most data points to the likelihood of a significant miss, though the employment portion of Manufacturing ISM and today’s jobless claims give hope to the bulls. I expect a miss as so much of the earlier gains were just pulling seasonal jobs forward. Construction projects planned for April, were able to start in February.

MAIN, IG, and HY CDS indices all tried to stage minor rallies this morning and have since drifted back to unchanged. Given the strength we have seen, particularly in IG, that is not surprising, but may be a sign that once again the market has reverted from being too bearish to overly optimistic.

The belief that “everything” is priced in is overwhelming. The only thing I hear more than that, is the view that decoupling is occurring, and not just with the U.S. decoupling from Europe, but with different countries within the EU decoupling. That theory may or may not be correct (I don’t think it is), but it certainly seems fully priced in. The divergence of markets in Spain and Italy compared to Germany and the U.S. is huge. Option premiums also reflect that. I continue to look at buying the underachievers against shorting the “decoupled” markets.

Finally, on Bloomberg TV yesterday we did a segment looking at “fixed income” ETF flows. Within the ETF space, it was clear that high yield has been attracting money, over $6 billion year to date, and treasuries have had basically $0 flows. The theory that investors who have piled into bonds will revert back to equities seems wrong. They aren’t moving into the “safety” of 2% 10 year treasuries, they are moving into junk bonds. That makes sense as mediocre domestic growth is enough for most of those companies to avoid serious problems, and earning 6.5% to 8% of income while being senior in the capital structure offers a lot of appeal, and I believe that appeal is longer lasting than those waiting for the rotation back into equities realize. It may be a subtle difference, but deciding to invest your “bond” money in high yield is very different than investing in treasuries. I believe active management is valuable here and that flows into traditional mutual funds and separate accounts are also strong, but focused on the ETF’s, at least in part because the flow data is so much easier to get and to aggregate.