Time to Relocate Macro Man Towers?

There have been two interesting pieces of financial market news over the past twenty-four hours. The first of these was last night's release of the minutes of the Fed meeting on September 18, which resulted in the 0.50% easing that has subsequently produced the risk-asset lovefest of the past several weeks.

Macro Man's alpha portfolio is positioned short dollars and long US fixed income, via TIPs. His beta portfolio is positioned long equity and long FX carry. So he had every reason to hope for a dovish set of minutes that would propel his profitability to further heights. And while his portfolio has appreciated handsomely over the past twenty-four hours, his interpretation of the minutes was that they showed little sense of urgency to ease policy further.

True, the committee noted that housing was an ongoing concern while inflation was less of a worry. Near-term forecasts were marked down acccordingly, and the decision was taken to cut rates to address this change in circumstance.

Yet the minutes also noted that the FOMC's underlying concern was credit conditions. Since the day before the announcement, conditions have eased noticably, as both spreads and absolute borrowing rates have come lower. Yes, there has not been a complete normalization of conditions in certain markets, notably that for jumbo mortgages. But it seems safe to assume that some of the Fed's concerns have been mitigated by the slow improvement in conditions.

Most other aspects of the minutes, meanwhile, suggested that the rationale for further easing has evaporated.

"household wealth likely was providing a diminishing impetus to the pace of spending, reflecting recent declines in stock market wealth and an apparent further deceleration in house prices." With US equities making all time highs, it seems safe to assume that stock market wealth is now providing a renewed tailwind.

"Such a measure should not interfere with an adjustment to more realistic pricing of risk or with the gains and losses that implied for participants in financial markets." As one of Macro Man's favourite analysts wrote yesterday, "the risk ignored return is back." Indeed, Macro Man's immediate intepretation of the 0.50% rate cut was "damn the torpedoes, full speed ahead" with the risk-asset trade. As anyone short stocks, credit, or carry would tell Ben, the 0.50% easing has interfered with a normalization of risk premia, in a very substantial way. Hell, look at the equity reaction to the minutes themselves!

"Inflation risks could be heightened if the dollar were to continue to depreciate significantly." Evidently Mr. Bernanke needs to eat breakfast at the office more often.

All in, the FOMC exhibited more confidence in the US consumer than Macro Man expected. At the same time, financial conditions have eased further since the FOMC's September announcement. The justifiable market conclusion was to reduce the priced-in likelihood of Fed easing, and that's pretty much exactly what happened.

What's remarkable, though, is how many analyses of the minutes appeared to be coloured by the positions (either literal or intellectual) of the person conducting the analysis. Goldman's US daily, for example, was titled "The hawkish read seems misguided." In a remarkable coincidence, Goldman has been among the most economy-bearish houses on the street, and has looked for the deepest rate cuts. A bond market long of Macro Man's acquaintance was also dismissive of the market interpretation, noting that the Fed marked down its near-term forecasts and stated that they remained worried about the credit environment.

When Macro Man observed that the staff also forecast above-trend growth for 2009, he dismissed this fact as utterly irrelevant. Equally "irrelevant" was the fact that financial market conditions had eased noticably since the meeting.

Perhaps. But this willing dismissal of apparently contrary evidence is a dangeous thing, and suggests to Macro Man that there is the potential for an adverse market reaction should the Fed dampen further hopes of rate cuts. The Treasury market is at an interesting juncture; TYZ7 has broken one uptrend line and is hovering just above a former resistance, now support, line around 108-12. Macro Man will look to sell 100 contracts on a break of 108-10 as a way to play the Fed no-go that might undermine some of his other positions.

The second interesting piece of news was a statement from the Monetary Authority of Singapore, who announced a modest tightening of policy. Singapore's monetary policy is conducted through the exchange rate, with the SGD managed against a nominal FX basket. For the past seveal years, the MAS has pursued a policy of allowing the SGD to appreciate modestly against the NEER basket parity. This has produced a pretty sharp SGD appreciation against one of the major basket consitutents, the USD:

In any case, the MAS announced that they will allow the pace of SGD appreciation against the basket to accelerate. As neither the basket nor the appreciation target are published, the to-the-pip implications are difficult to assess. But with y/y GDP growth of 9.4%, the rationale for the move is pretty obvious. And the general implications are also pretty obvious: the SGD should continue to appreciate steadily against the USD. (As an aside, the desire for tighter policy has also provided a welcome boost to Macro Man's SGD swap position.) If only Singapore could export monetary policy makers to...oh....China?!?!?!

Finally, it's worth noting the potentially colossal mistake that Alistair Darling may be making with the UK budget. While the details and interpretation are still sketchy, Mr. Darling apparently wants to screw non-domiciled foreigners residing in Britain by imposing a £30,000 annual tax on them. For someone like Macro Man, the upshot is that he evidently has the following choices:

a) Becoming 'domiciled', and allowing the UK government to tax his worldwide income- those bits that Uncle Sam doesn't already tax him for, that is

b) Paying an extra £30,000 per year for the privilege of having no vote, waiting in absurdly long passport queues, and getting rained on for eleven and a half months a year

c) buggering off, and telling Mr. Darling where he can stick his tax.

I wonder which one he will choose? The ironic thing is that the tax is being portrayed as a means to raise revenue from "super rich" foreigners, a caste of which Macro Man is sadly not a member. £30,000 is about 5 seconds' worth of income to someone like Roman Abramovich, but is enough to encourage many productive members of UK society to leave for good, taking their income taxes with them.

Macro Man can only hope that the final policy does not conform to his interpretation, else it might be time to think about relocating Macro Man Towers to a more favourable milieu....