Yesterday, today, and tomorrow

Europe is yesterday's news. No, Macro Man is not commenting on the long-gone period of European geopolitical hegemony, nor indeed about the 2006 European economic recovery. For once, he is being literal, as yesterday saw rate decisions from the Bank of England and ECB.

The BOE cut rates 0.25%, finally reacting do the deterioration in financial and economic conditions. It is almost certainly the first of several cuts, particularly as borrowing is unlikely to be cheaper without substantially lower base rates. Today's Times carries an interesting table on the front page showing the sharp increase in "arranging fees", which means that the ultimate cost to borrowers continues to rise- thus necessitating more BOE easing if it is to have an impact.

Unsurprisingly, the pound got whacked on the back of the announcement, and cable is now down more than 2% since the fateful Economist cover a week ago. Interestingly, cable is approaching fairly key support, as depicted in the chart below, and EUR/GBP is close to breaking out as well. Perhaps after allowing for a tactical pullback, it will be time to re-activate the strategic sterling short dicsussed in January.
In the Eurozone, the ECB unsurprisingly left rates unchanged. But ECB president Trichet left markets in no doubt that the bank is nowhere close to even contemplating the onset of an easing campaign. Particularly telling were the bank staff's economic forecasts: while 2008 growth range was revised down by 0.3%, the inflation range was forecast up by half a percent, to 2-3%. An inflation forecast whose most optimistic outcome is the top of the ECB's acceptable range is pretty darned hawkish.

While markets have been surprisingly receptive this month to selling the euro on the basis that the ECB will have to revert towards a more dovish stance, Macro Man is wondering if these trades aren't perhaps a few months premature. The ideal time to sell euros is probably on the downside of the inflation "hump", when the ECB is more likely to change tone. As the chart below illustrates, the hump may just be getting started.

Today, of course, sees the release of payroll figures in the US. Macro Man is ashamed to admit that he's unsure of how to play this. The recent equity rally, particularly this week's on the subprime mortgagee bailout "news", has been impressive. But has it also been partially predicated on hopes of a 0.50% cut from the Fed, which from Macro Man's vantagepoint appears fairly unlikely?

If so, then a reasonably strong number, such as that implied by ADP on Wednesday, could be a negative. So, too, could a negative number, which may raise fears that the Fed is behind the curve and that recession is already here. Such a view is surprisingly prominent amongst commentators and the blogosphere; then again, it's difficult to make compelling reading out of "muddle through." That happens to be Macro Man's view, which is why he must resort to gimmicks like the Holmes stories and yesterday's Christmas wish list.

In any event, despite the apparent breach of the resistance zone on the S&P 500, there remains reason for concern. Volume, as proxied by the SPY below, has been declining as prices have risen. That is not a good sign and warns that the rally may be corrective in nature. All in, Macro Man is fairly relieved to have a reduced risk profile, as his indecision over payrolls warrants caution.

There are now little more than three weeks left in the year, and risk assets are, to a degree, perched on a knife edge. Reasonable data and an aggressive Fed could prompt a moonshot melt-up in risk assets. A resumption of credit concerns, recessionary data, and a Fed that doesn't "get it", on the other hand, could easy generate a retest of the lows.

Six weeks ago Macro Man posted a poll on the S&P that showed a lack of consensus on the market's direction. In some ways, one could argue that the results presaged the volatile period of trading that ensued. Given that the S&P is now at the same level as when the poll was originally published, it seems an apt moment to repeat the exercise and see if readers' biases have shifted in light of the last six weeks' newsflow. At least it would be if Macro Man's IT systems weren't as hung over as much of the City of London appears to be. If and when his issues resolve themselves, he will try and post a new poll to see if sentiment has shifted.