Thursday, June 14, 2007
Macro Man finds himself in a rather unusual spot these days. Despite the recent bout of market volatility, and despite a horribly timed foray into a long duration bet, he finds himself making more money than expected so far in June. It's a welcome change, in his experience, from the usual situation; this in turn is perhaps down to the human tendency to remember one's winners with crystal clarity (thereby forming expectations of profitability) while compartmentalizing the losers in the dim recesses of the psyche, subject to recall only with an effort.
Yesterday featured more ups and downs than Space Mountain, with an early-session bond market rout reversing sharply after bond-unfriendly data. A market-friendly Beige Book simply added fuel to the fire, propelling US equities to their largest point gain of the year. Fortunately for Macro Man, his short SPM7 call position looks set to settle within shouting distance of strike (so he is collecting decay this week), while his equity sector bets are also paying off. Meanwhile, EUR/USD vega continues to tick higher, generating more value for the FX powerball tickets. And of course, the G10 carry trade remains alive and well.
That having been said, the week is only 2/3 over, with the most difficult period (US PPI today, CPI, IP, TIC, and Michigan tomorrow) to come. Macro Man remains of the view that inflation is an issue, and was frankly somewhat surprised at how little attention was paid to the import price data yesterday, which showed a larger-than-expected 0.9% rise in May. Perhaps most remarkably, the US is now importing inflation from China for the first time in the (admittedly short) history of the price series. While the y/y change is barely positive, the year-to-date change is running at a 1% annualized pace. If and as this trend intensifies, expect more discussion about the potential end of the Great Goods Price Disninflation trend.
However, that's a theme that will play out over quarters, if not years. It won't necessarily impact financial market prices in the near term, however much Macro Man might wish it to be so.
Taking a step back, it's probablyalso useful to put the recent bout of volatility in context. Macro Man looked at the 3 month moving average of VIX, MOVE (a measure of fixed income vol), and a rolling average 3m historical vol of USD/JPY and EUR/USD.