Inconsistencies

Monday, September 25, 2006

Consider the following:

1) US fixed income trading well through funds/cash rate, pricing in 2.5 rate cuts for next year. This is a pseudo-recessionary outcome.

2) The SPX is barely 1% off its high of the year set last week. The market has rallied in virtually a straight line since July 18, the day before Bernanke’s latter-day Humphrey-Hawkins testimony. This appears to be a purely liquidity-driven rally; the entire US yield curve has shifted down by 55-60 bps over the last two months. If the bond market is right about a near-recessionary outcome, then stock prices should be much lower than they are.

3) Commodity prices have come sharply lower. This, too, is a pseudo-recessionary outcome, albeit exacerbated by the Amaranth fiasco and the general exodus of long commodity index positions. Of course, base metals have fared rather better, though this is partially a function of the virtual absence of deliverable inventories in stuff like nickel at the LME.

4) EM wobbles but hasn’t yet fallen down. EM assets and currencies have finally started to lurch a bit lower, albeit in sporadic, non-contagion fashion. About time, too, some would say. Between a Thai coup, possible Ecuadorian default, Hungarian corruption, and Polish electoral uncertainty, the asset class has been buffeted by strong headwinds over the last week or so. All in all, however, emerging markets have traded relatively well (with the exception of the ZAR.) This is particularly the case in Asia, the most growth-sensitive of the EM regions. Now, this is perhaps simply a reflection of the soft landing being priced into US/developed market equities. Still, it doesn’t suggest that the global economy is hitting the proverbial wall.

5) Growth sensitive G10 currencies are trading well. The dollar bloc complex (AUD/NZD/CAD) have all traded rather better than expected given how the bond market has reacted to US growth data. Perhaps they are tracking the Baltic Dry Index instead of US macro data; the BDIY is showing an acceleration of shipping activity, which of course is hardly consistent with the sort of slowdown required to produce a $20 fall in oil.

So what are we left with? Bonds and oil say 1.5% US growth, US equities and most EM say 2.5% US growth, while the BDIY and dollar bloc currencies are saying 3.5% growth. There must be a trade here, but after recent mishaps Macro Man needs more time to reflect. At some point, though, these various asset markets will converge, and there will be money to be made when they do.

Posted by Macro Man at 10:54 AM  

0 comments:

Post a Comment