Tuesday, April 17, 2007

Some stag, not much (core) flation

Taken at face value, today's US data hasn't done too much to threaten the market's view of a stagflationary outcome fo the US economy. Industrial production fell 0.2%, which was a weaker than expected out-turn. While manufacturing was actually quite solid, up 0.7%, the substantial revisions to the back data lowered the estimated capacity utilization by roughly half a percent. In other words, the economy has more slack than previously thought.

Core inflation, meanwhile, was closer to zero than it was to the expected 0.2% monthly rise. Nevertheless, the headline came in at the expected 0.6 m/m and 2.8% y/y. And soon after, Chuck Plosser hit the tapes that the Fed is still worried about inflation, blah blah blah. Either way, it looks like a recipe for continued underperformance of $ assets and, by extension, the USD. Macro Man therefore buys £15 million 2 week 2.02 cable calls for 0.26% of face, a small premium outlay of about $78 k. Should sterling remain uber bid and the dollar broadly offered, this trade could offer a reasonable amout of leverage.

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