Small Account Size Killing My Vibe
How Not To Trade A Short-End Rates View
Do I need to start every one of these with some bullshit about you being with me on my journey to get back to trading profitability now?
Rewinding to last time and the time before (puuulll uuup), we’re bullish gold, EURCHF and gilts, with our open positions looking like the below. We also set out some trading rules to instil some discipline.
This time, I’m not going to spend any more time on the long gold thesis which we already did in detail. I don’t feel like we did the long gilts view justice so we’re going to have a deep dive into that. I also wanted to talk about how higher USDTRY is probably the most straightforward macro call to make but impossible to trade, but I ran out of time/wordcount so we can do that next time (unless I get distracted by something else lol). Finally, we’re gonna round out with a recap of our trading rules.
Let’s go.
Current Views & Recent Trading
I’m not gonna lie, we’re off to a kind of rough start since we started publishing our trades on Tuesday. We’re down £140 on our closed positions, listed below, on our capital of just over £5k. Given this initial shitshow I want to draw out another trading lesson for us while also talking about our long gilts view.
So since Tuesday, I’ve spoken in detail about two high conviction trades, long gilts and long gold, but you can see I’m still pissing around losing money yolo’ing into other crap.
I’m also still managing to lose money on what would be winning trades by setting my stop losses too narrow. For instance, I could have risked that £140 we lost pissing about on the long gilt futures position. We tapped out after an initial £24 loss in reality, but if we stuck with it, we’d be in a very healthy position (up around £120). Per the chart below, we missed the rip by setting our stop way too close – first horizontal line we entered, second we tapped out, the arrow is the move we missed (cry).
We already have a rule about setting our stop too close, but I’m going to add another one to prevent button pressing (entering positions on a whim).
Rule 7: Sleep on it.
Basically, from here, for the majority of the trades that I’m going to put on, they should be part of a longer thought process and I shouldn’t be randomly giving up capital shorting PLTR or going long GBPCHF because it feels right.
Anyway, the long 10yr gilts view. So we’ve had a long gilts call out since yields peaked out at 4.9% in early January, falling to 4.56% since then which has been driven by a repricing at the short-end of the yield curve. The yield curve steepened considerably from early December into early January, and we haven’t seen much movement there since (bottom pane).
We still like bullish gilts, with the expectations essentially a short end rates lower call while expecting stability in the curve slope.
We’ve had a bunch of economic data come in quite hot in the W/C 17 Feb, including unemployment (4.4% vs 4.5% expected), average total earnings growth (6.0% y-o-y vs 5.9% expected), CPI inflation (3.0% y-o-y vs 2.8% expected), CBI industrial orders (-28 vs -30 expected), GfK consumer confidence (-20 vs -22 expected), and retail sales (1.0% vs 0.6% expected).
More broadly, the economy looks set to do quite well in H1 2025, with households in a strong position to up consumption as real wage gains continued advancing sharply in H2 2024 while the savings rate picked up and the unemployment rate remained controlled. There were clear issues with lack of confidence in the economy (perhaps due to the Autumn Budget), but this looks set to subside in early 2025, indicating growth will pick up.
So why the lower rates call? To me, the BoE seems set to look through pretty much all of this, with the growth pickup expected from a low base, and upside for wage gains and inflation pretty much in line with BoE expectations – the Bank’s forecasts were already premised on a pickup of inflation to 3.7% come Q3 2025.
Here’s an extract from the February Monetary Policy Report:
CPI inflation was 2.5% in 2024 Q4, close to expectations at the time of the November Report. CPI inflation excluding energy has continued to decline over the past year reaching around 3¼% in the second half of 2024 compared with its peak of nearly 8½% in mid-2023 (Chart 1.1). In large part reflecting recent developments in global energy costs and regulated prices, headline CPI inflation is expected to rise quite sharply in the near term, to 3.7% in 2025 Q3. But the MPC judges that this pickup in headline inflation will not lead to additional second-round effects on underlying domestic inflationary pressures in the forecast (Key judgement 1).
Markets are pricing only 50bps of rate cuts in the SONIA curve come end-2025 and 0 cuts in 2026, which looks shy of the mark to me. This is especially weird to me in the context of how rate setters are judging the economy. The MPC have set out three cases on how they see inflation persistence, which are described well from this speech from the MPC’s Lombardelli in November.
Considering BoE MPC members: Dhingra and Ramsden are firmly in case 1, Taylor is flitting between 1 and 2, Bailey, Breeden, and Pill are in case 2, with Greene and Lombardelli between 2 and 3 and Mann firmly in case 3.
maintains a great tracker of who sits in which camp here, which I agree with.It appears quite clear that there is a critical mass that is willing to maintain 25bps cuts every quarter for the foreseeable. I think the bar is quite high to knock Dhingra, Ramsden, Taylor, and Bailey off this path, meaning we just need one other to support this continued pace of cuts. This could be pretty much any of them, even at the more hawkish end, Lombardelli and Greene have so far been voting for 25bps cuts every quarter and even Mann could be supportive. Mann confused many with a vote for a 50bps cut in the February meeting, in line with her view that the MPC should be closely guarding against tail risks with an activist approach (aggressively hiking, holding, or cutting, as opposed to gradualism).
Furthermore, even though we have had some recent upside surprises, the data important to the MPC has continued to evolve in line with expectations. Private sector pay growth came in a little hot at 6.1% y-o-y for Oct-Dec, but still below BoE expectations of 6.2%. Services inflation jumped from 4.4% in December to 5.0% in January, but was still below the BoE’s 5.2% forecast.
I’m importantly here not making an argument which considers whether current supply side inflation could remain sticky, in a similar way that it did in 2021/22. This is something that I’m not writing off and I am watching out for, but I think we can avoid considering this for now for several reasons.
First, with the BoE expecting a rebubbling of headline inflation, even if inflation proves to be persistent in 2026, it would be surprising for this to move markets in early 2025. Second, with the labour market loosening and a much weaker demand side, the likelihood of inflation not being transitory appears much lower than in 2021/22. Third, the MPC are happy to explain this away for now. Mann (our most hawkish MPC member), spent a chunk of time in a recent speech explaining why sticky supply side inflation looks unlikely.
If you hadn’t noticed, I’ve made an entire argument here on why I think market pricing for short-end rates is too high, and I’m about to pile into a ten-year gilts trade. Why? Well I’d love to be trading SONIA STIRs right now, but I’m facing some serious constraints due to account size – I need around 4x my current capital to trade STIRs. And 2 year gilts aren’t available on my platform (IG Trading) either, soo here we are trading a short-end view with ten year gilt futures.
If you want an example of how badly this can go, last time I mentioned my biggest loss of 2024 was fading the major post Autumn Budget statement gilt sell off. I didn’t really want to be trading bonds here – I thought the major hawkish Bank Rate repricing didn’t make any sense and I wanted to fade the move in STIRs. Instead, I went long gilts. From then, STIRs traded sideways and gilts bombed… So here we go again.
Another issue with trading gilts on my fairly small account is minimum trade size. In line with our previous rules, we’re setting our stops wider than at least one day’s average trading range… But the smallest position size I can take trading gilts means we need to risk around £150 of our capital, which is quite a bit larger than I’d like…
OK that’s all for now, I wanted to talk about how short lira is one of the easiest macro calls to make but impossible to trade given the high carry and bulk of the down moves now coming just after 11pm GMT (after the roll) when spreads are too wide to trade. Maybe we can do that next time.
So maybe we’ll be long gilts by the time our next edition comes out.
Finally, here is an update on our trading rules, adding in our new rule, number 7.
Our rules
Rule 1: Cut your losses and let your wins run.
Rule 2: Right-size your trades.
Rule 3: Only trade what you know.
Rule 4: Don’t instinctively fade.
Rule 5: Set stops no closer than 1 day’s average trading range.
Rule 6: The trend is your friend, only enter positions when you’re on the right side of your moving averages.
Rule 7: Sleep on it.
JB Macro is my blog, where I splurge out my brain (normally) once a week. I’m building a following for my passion, writing about economics and markets, and I would love to have you on board. Please consider pressing the subscribe button below (it’s free!!). Thank you, James.
This newsletter is for informational purposes only. It does not constitute investment advice or an offer to invest. The views expressed herein are the opinions of JB Macro exclusively. Readers should conduct their own research and consult with professional advisors before making any investment decisions.