Friday, August 03, 2007

A snoozer

Imagine Macro Man's surprise when, ten minutes after the data release, two differnt brokers noted that "clients don't really know how to react to the number." The prior view that the figure was largely irrelevant appears to have been vindicated.

On balance, the number was weak- but not diastrously so. Headline and household employment was low, and the unemployment rate was a couple of high school burger-flippers away from jumping to 4.7%. That monthly payroll growth has slowed sharply is clear- that the Fed will care is not.
The uptick in the U-rate, while surprising, is hardly disastrous and looks very similar to what was observed late last year. Moreover, it should also be viewed through the lens of the recent downward revisions to GDP. Those should lead to upward revisions to unit labour costs, as output per worker has evidently been lower than previously though. This in turn might imply that NAIRU is a bit higher than previously believed as well. And lest we forget, both the three and six month averages for payroll growth are in the 125-130 range- levels that the Fed appears to believe are consistent with trend.

As such, the preferred setup remains in play- market strength until 2.15 EDT on Tuesday, no real loosening of Fed language, and the onset of Wave C at 2.16 EDT on Tuesday.

As such, it's probably wise to leave a few orders to play the anticipated set-up:

* Macro Man will sell his residual long SPY position in the alpha portfolio at 150;
* He will sell his EWZ position at 67;
* He will bid 25.50 for 120,000 XHB to offset his long put position;
* He will bid 117 for $15 milion USD/JPY to hedge his straddles

Best to use the current quiet period to adjust portfolios; if Macro Man is right, it should all kick off in the second half of next week.

UPDATE: Doh! Super-weak services ISM and Bear Stearns on negative outlook by S&P may have wrecked the game plan, though would make any non-throwing of an easing bone by the Fed that much more powerful....


T said...

Unemployment up, labour costs up, are you suggesting stagflation is showing up in the numbers?
Whither fed policy then?

Anonymous said...

Great blog by the way. First on my list to read (along with bsetser).

Macro Man said...

T, to a degree, that's what we've already seen. Economic output over the last year has been decidedly below trend, and yet core PCE has only now crept under the top end of the Fed target range. And lest we forget, the non-cloud cuckoo measures of inflation suggest that price rises this year have been very robust indeed.

The tone of recent Fed comments and studies suggests that continued sub-trend growth is preferable to a loosening of inflation expectations, so I reckon you need to see the U-rate at or through 5 to bring an easing onto the agenda.

Certainly the last consumer confiednce data don't suggest that will happen soon....

Anonymous said...


I just watched Jim Cramers video and I am very scared now. He says we have ARMEGEDDON. I am going underground for the time being.

Can you let us know what is going on exactly ?

PS : If you watch the video more than once, you might get very scared too. ONLY ONCE PLS.

Macro Man said...

Cramer just needs a red nose in that video to complete the consummate clown routine.

Is there some distress amongst certain mortgage borrowers? Yes.

Is there distress amongst people who thought that buying high-yielding "AAA" paper was free money, and so stuffed their portfolios with turds? Yes.

Is there distress amongst people like Cramer who evidently think that the Fed should target positive equity returns instead of inflation and employment? Yes.

Will there be more losses? Yes.

Will there be more hedge funds closing? Yes.

Will the market go down more? Almost certainly yes.

Is this the end of the world? No.

This is a painful repricing of credit risk, and a timely reminder to people that if anything seems too good to be true, then it probably is.

Anonymous said...

This is not a system liquidity crisis like LTCM, so the Fed should be circumspect in its statement ... allowing Cramer's brain to explode on air next time.