Wednesday, January 17, 2007
The good news:
* NZ CPI was a smidge lower than expected overnight, declining 0.2% Q/Q and rising 2.6% y/y. This should keep the RBNZ from tightening next week, and has sent the kiwi dollar lower as a result (though naturally, not as much as Macro Man would like.) The short NZD alpha trade and the decision to delay the FX carry beta trade looks good from this perspective.
* UK wage data was lower than expected, as average earnings in December rose 4.1% y/y (3.7% ex bonuses.) This is well below the 4.5% region that has traditionally troubled the BOE, and the LM7 position has drifted back to the entry level as a result.
The bad news:
*The GG purchases were, shall we say, ill-timed. Although the financial cost has not been terribly onerous so far, Macro Man will have little patience to wear a loss in what is admittedly a speculative punt.
Depending on which newspaper you read, and when you read it, the BOJ is either a dead cert to tighten rates tomorrow or will wait til February. This has caused havoc in the short end of the yen curve, but it is not immediately clear to Macro Man why it need bother the foreign exchange market either way. 3 month yen LIBOR is currently 0.62%, and Macro Man cannot see that changing much no matter what happens tomorrow. He still retains an interest to sell yen on rallies.
After perusing yesterday's UK inflation data, Macro Man was struck by something quite remarkable. According to the ONS, utilities prices rose 15% y/y, which contributed significantly to the undesirable uptick in y/y inflation. Leave aside the issue of whether or not the BOE should be reacting to utilities inflation (because the demand for utilities is price and income inelastic in the short run, higher utility inflation actually represents a negative income shock)...what Macro Man wants to know is: how the %$*) can utility inflation be rising 15% year-on-year?
The bulk of the rise in utility inflation came from natural gas, the RPI price of which rose 40% y/y. Frankly, this beggars belief. Natural gas prices are a resounding 60% lower than they were last year (because of the shape of the nat gas curve, monthly changes are largely irrelevant)....yet for CPI purposes, they are up 40%!
Now, one of two things is happening here. Either the RPI measure is fundamentally flawed (and indeed, it does appear to lag spot prices by about twelve months), or the utility companies have taken up the mantle of ripping off consumers that the grocery stores and car dealers wore in the late 1990's. Given that the major gas companies have announced a price HIKE for next month despite a 60% decline in Feb natural gas since July, one can only conclude that the utility companies are absolutely nailing the UK consumer to the wall.
This should come as no surprise to those of us living in the UK. This is, after all, an island country, well-known for its damp weather, that had above-average rainfall last year, only for the major water companies in the south-east to proclaim a drought. The same water companies, which sustained substantial leakage problems (the real reason for the "drought"), reported profits in the range of £500 million - £1 billion. Rip-off Britain is back, only now you cannot dash to Calais to take advantage of cheap gas and water.
And for this, the BOE feels the need to raise rates. Hmmmm. Needless to say, Macro Man is talking his own book here, but he cannot help but think that the BOE is significantly underestimating the squeeze to UK consumers. After all, a vast majority of the UK does not earn City bonuses, and today's data demonstrates that annual real ex bonus wage growth is now -0.9%. Last week's rate rise will further squeeze homeowners already being stuffed by rip-off utility companies, rip-off petrol stations, rip-off Mayors of London (it now costs £4 to buy a one-way tube ticket- that's almost eight bucks to ride on a smelly, oft-delayed, non-air conditioned subway), and rip-off train companies.
Trading with your heart is generally a lousy way to earn a fortune, but Macro Man feels obliged to make a gesture in defiance of rip-off Britain. His short sterling position isn't sexy enough, he fears. He therefore spends $300k of premium (that's 30 bps of portfolio p/l) on a one year 1.70 one touch in GBP/USD. At a cost of 6% of the payout, he can buy $5 million worth of payout for that premium. It's a futile gesture, in all likelihood, but one that won't cost much.
But if the rip-off Britain/clueless BOE/shameless taxation by Gordon Brown chickens come home to roost? Well, the trade could be a home run, a slam dunk, a penalty shoot-out victory and a "six" all rolled into one.