Friday, July 06, 2007
Just when you thought it was safe to get back in the water and sell the dollar down to zero, reality comes back to bite you in the rear. The buck, battered like it had gone twelve rounds with a 1988-vintage Mike Tyson, has come back in the last 24 hours after Jean-Claude Trichet failed to proclaim his vigilance on inflation and US data surprised to the upside.
Does Trichet's failure to use a certain V-word represent a scaling back of the likelihood of a September hike, or a shift towards a more sensible method of communication? Given that he specifically stated that he was not attempting to alter market expectations for September, one would have to include the latter. In that case, might it be accurate to suggest that the end of the tightening cycle could be drawing nigh, and that the ECB no longer feels comfortable in its ability to flag monetary policy developments several months in advance? That seems a reasonable assessment, and one that should increase the volatility around euro rate expectations in Q4 and into 2008. And that 'uncertainty premium' is yet another reason to avoid getting sucked into buying euros at current levels.
The UK, meanwhile, actually did experience a rate hike yesterday, taking base rates up to 5.75%. Although widely expected, it has produced much gnashing of teeth from the property- obsessed British press (four property-related articles on the rate hike in a single newspaper surely counts as an obsession?).
In the US, meanwhile, yesterday's non-manufacturing ISM suggested a continuation of the recent renaissance in US business confidence. One of Macro Man's very first posts last September asked "how can there be a recession when everyone's making so much money?", a question which still applies today. A simple composite ISM model with a surprisingly strong correlation to economic growth suggests that GDP should accelerate, rather than muddle through as is commonly supposed. Macro Man leaves it to the reader to determine what the impact might be on bond and currency prices.
Today, of course, sees the release of the always-tiresome nonfarm payroll data in the US. Is it Macro Man's imagination, or has the NFP data becomes less market-moving in recent months? Perhaps people have realized that the data is a crock. It's interesting to note, however, that the scope of revisions has been remarkably small over the last several months. Is the quality of the initial data getting better? Or are we overdue for a sweeping revision that will alter our perception of the trajectory of the US economy over the last several quarters? Time will tell.
Regardless, Macro Man was amused to see that virtually no one revised their payroll forecasts after the ADP survey showed job gains of 150k, 50k better than expected. Now, perhaps this is an acknowledgement that the ADP has been less than seer-like in forecasting the monthly payroll figure. Or maybe it's a reflection of the biases of many forecasters, who would prefer to anchor on a story of a weakening labour market to ft their (eventual) Fed rate-cut forecasts. Again, Macro Man leaves it to the reader to decide.
* FT: We must act when currencies become misaligned (by four US senators)
* FT: Clinton, Obama join forces to pile pressure on China
* New York Fed: Why a Dollar Depreciation May Not Close the U.S. Trade Deficit
Granted, the New York Fed article doesn't suggest that dollar depreciation has no impact, but rather that the US must curtail import volumes to meaningfully close the deficit. And while China, amongst others, could contribute to that by allowing the private sector to set the level of market interest rates in the US, American politicians don't seem to be clamouring for higher rates and household belt-tightening, strangely enough....