Wednesday, July 18, 2007
Moving on to more serious matters, the newsflow is coming fast and furious this week. Yesterday saw higher-than-expected inflation in the UK, and while today's earnings data were soft the unemployment rate was lower than expected. Glenn Stevens made an interesting speech overnight which appeared to accept the high level of the Aussie dollar; this comes in sharp contrast to the dismay expressed by Kiwi policymakers, which explains why long AUD/NZD is such a popular (though, to date, underperforming) position amongst macro punters.
Quite frankly, Macro Man isn't really sure what to make of that. It seems a bit premature for the soverign wealth funds to be stepping up to the plate, but would certainly represent the sort of size that those institutions could shift. It is premature to conclude that the rest of the world has begun to see value in US equities on the basis of one month worth of data. However, if the June TIC shows a similarly large inflow, it would provide a useful explanation of how and why the US equity market has managed to shrug off the seemingly endless torrent of bad news on subprime and housing generally (another horrible NAHB last night, incidentally.)
Today, of course, sees the rel;ease of CPI in the US (and Canada) and, more significantly, Big Ben's semiannual testimony before Congress. While he will almost certainly mark down the growth and inflation forecasts for 2007, Macro Man does not expect him to alter the outlook for 2008.
More significantly, Macro Man does not expect BB to turn more dovish on inflation. To do so would prompt the obvious rejoinder from the committee: "Then, given subprime and housing, why the *&$@ don't you cut rates?" Moreover, to play down the cost of living would fly in the face of common sense, given that US households have to pay for food and energy.
Macro Man is alo wary of the equivalent testimony last year, when Bernanke disappointed those looking for hawkish testimony by throwing a bone to the doves. This served to reverse the prevailing market trend of the past couple of months, as the DXY chart above illustrates. With the dollar index at a similar (though opposite) extreme today, Macro Man is wary that Big Ben could sound relatively hawkish, leading to a sell-off in bonds and a short squeeze in the dollar. While this won't necessarily represent an end to the trend of dollar weakness against Europe and the dollar bloc, it is enough to encourage Macro Man in his prior posture of staying away from the weak dollar train. After all, the TIC data appears to demonstrate that contrary to popular belief, in the absence of central bank bids the dollar needn't fall forever.