Tuesday, April 17, 2007
The major financial news of the day is that UK CPI printed a surprisingly high 3.1% y/y this morning, forcing Mervyn King to write a letter to Gordon Brown explaining himself. This news has not been welcome to Macro Man, as he’s taken alpha portfolio hits on the long short sterling and long cable one touch positions. Beta portfolio gains have not fully compensated for these losses, unfortunately. Numerologists will be pleased to see that cable has broken through “the deuce”, though has yet to breach its pre-Black Wednesday high of 2.0115. Should such a breach ensue, there is fairly clear sailing to the topside, technically.
The Dec short sterling contract, meanwhile, is fully pricing in two more rate hikes. In Macro man’s view, this means it’s too late to sell out the position, though he is not quite brave enough to add. In the letter, King noted that today’s CPI report didn’t materially change the Bank’s view from its February inflation report, and that they are prepared to look through the short term volatility in the data. If the data hasn’t altered the Bank’s view, therefore, it would appear unlikely to alter their behaviour- so Macro Man doesn’t think it realistic that they will hike more than twice for the rest of the year, and that the balance of risk remains tilted towards an economic deceleration and only one further tightening. Thus, he sits tight on short sterling.
Inflation data in the US is unlikely to have a similar impact, barring an equally extreme miss. That being said, the continued failure of core CPI to turn meaningfully lower may continue to provide headaches for the Fed. Perversely, the recent rise in US yields has been largely real-yield driven, as breakevens have edged from 2.48% to 2.45%. Fortunately, TIPS are priced off of headline inflation, which looks as if it is now accelerating on a monthly basis while turning higher on a y/y basis. Macro Man is sorely tempted to add a long breakeven spread to his beta portfolio, though that’s more or less what he will have once exercising the TYM7 put options this Friday
Particularly galling is the ease with which firearms may be purchased. At Wal-Mart you cannot buy music that uses the F-word too frequently or makes fun of Jesus, but you can buy a gun with virtually no questions asked. This seems perverse. True, the second amendment guarantees the right to bear arms- but then again, the first amendment guarantees freedom of speech. Somehow, the potential consequences of blasphemy are deemed more undesirable than the potential consequences of gunplay. Hmm....where have we heard this before?
The literal text of the (poorly worded) Second Amendment is as follows: “A well regulated militia, being necessary to the security of a free state, the right of the people to keep and bear arms, shall not be infringed.”
Macro Man reckons he’s hit upon the solution. Require all gun owners and buyers to sign up for the militia, today’s National Guard. If state laws cannot dissuade easy access to firearms, perhaps the prospect of a tour of duty in Iraq can.