Friday, April 13, 2007
Macro ManNow, today's open letter was written tongue-in-cheek: but only just. The drumbeat of tit-for-tat protectionist/mercantilist/beggar-thy-neighbour economic policymaking is growing louder by the day. Reserve managers buy unfathomable amounts of dollars and in response, Congressmen rush to join the Smoot-Hawley International Tariffs Help Extend the American Dream Society (see if you can figure out what the abbreviated name is....)
Someone has to be an adult, and as painful as it is for Macro Man to admit it (given his general aversion to "official" intervention in markets), the IMF is the obvious candidate. The alternative- that recent trends accelerate in a parabolic fashion- would almost certainly have unpleasant consequences.
Yesterday, Macro Man had a pop at China, a favourite target in these e-pages. Many others had a similar response to China's enormous reserve growth in Q1. One interesting explanation that's been bandied about is that the parabolic increase in Q1 reserves reflects the maturation of some swaps that were traded a few years ago. Now maybe this is the case and maybe it isn't- we won't really know until we see more data. Regardless, Macro Man isn't sure that it matters. Either PBOC was playing silly buggers last quarter, or they were playing silly buggers a couple of years ago. Either way, it is difficult to avoid the conclusion that they are playing silly buggers.Moreover, China's reserve growth stands out only because the existing stock is so darned big. On a rate of change basis, China doesn't particularly stand out from its peers. Since the middle of 2006, FX reserves in China, Russia, and India have all grown by more than 20%. So even if the jump in Chinese reserves has a logical explanation...then what the hell are Russia and India playing at?
Intriguingly, today sees the release of US trade data for February. An absolute shocker would provide an interesting backdrop for this weekend's IMG/G7 discussion, to say the least. Macro Man originally thought that there was a reasonable chance of a large widening due to higher oil prices. However, a glance at the the import price data reveals that America's terms of trade actually improved slightly in February. So any blowout would have to come from volumes rather than prices, which would appear rather unlikely given the softness of domestic demand during the month.
Nevertheless, interesting trends are emerging in US trade prices. It looks increasingly like the great goods price deflation trend, which has helped keep core inflation relatively low, has come to an end. The chart below shows the y/y change in the price of imported manufactured goods- the last couple of years certainly look like a change in trend from the late nineties/early noughties! Even import prices from China rose last month! This is one of the reasons why Macro Man loves keeping TIPS in the portfolio.
Elsewhere, M. Trichet performed as expected, signalling in ECB semaphore that a June rate hike remains on the cards. When the euro failed to come off on any 'sell the fact' action, that set the stage for the next leg of the squeeze higher. We're now barely a percent away from the all time high of EUR/USD. If the IMF doesn't do its thing (which would shift the focus away from the € and towards the yen, RMB, etc.), then we could be popping champagne corks on Monday afternoon.
One trade that is not causing Macro Man to sip champagne is the WTI/Brent spread. Continued inventory overhang at Cushing has caused WTI to lag badly in the latest run up in oil, and the Dec 07 contract now trades at a discount to its lower quality counterpart. The trade is singlehandedly responsible for losses in the alpha portfolio this month and has knocked half a percent off of overall performance. Macro Man will want to see an improvement soon, or it might be time for remedial action.