Wednesday, January 30, 2008
Fresh off the successful passage of his Life in the UK exam, Macro Man is now ready to get stuck into the rest of the week. He suspects he's not alone in that regard, as the preliminaries of the first two days of the week now give way to more heavyweight event risk: GDP, ADP (OK, that's more of a welterweight), and the Fed today, PCE and the Chicago PMI tomorrow, and of course unenjoyment/ISM day on Friday. You can almost hear Michael Buffer stepping up to the the mic and bellowing "Let's get ready to rumble!"
The most obvious event risk of the day is the Fed, though by now a further 50 bp cut is widely discounted. Macro Man's take is that another half-pointer would ignite at least a bit more upside in equities and other risk assets, weigh on the dollar, and naturally steepen the curve. However, these moves could easily be short lived, particularly in equities, in the event of unfavourable developments on Thursday and Friday. It would apprear prudent to not bet the ranch on a single datapoint, such is the potential for these markets to turn on a dime over the next few days.
In the last few months of 2007, Macro Man took the view that the Fed was perhaps making too much use of macroeconomic tools like Fed funds, and insufficient use of microeconomic tools to address the ruptures in the money market. Well, in mid-December they announced the TAF, and six weeks later we can assess the initial impact of the program. The chart below shows the 3 month TED spread, and as you can see it has narrowed sharply since the TAF announcement was made.
It begs the question of "what took them so long?", but being late is still probably better than doing nothing at all. Observe that the spread has been relatively sticky around 1%, well above the levels prevailing before the crisis kicked off in mid-2007. That's not necessarily the end of the world, mind you; the world's central bankers (and, it must be said, many market participants) bleated for a long time about the low level of risk premia embedded in financial asset prices, so swinging the other way for a while is no bad thing. And given that we're still firmly in the world of writedowns and bailouts , you can hardly say it's not justified.
Macro Man's "muddle through" view on the US economy received something of a fillip yesterday with the release of much-stronger-than-expected durable goods data orders data. Mechanically, the strong core shipments data (+2%) and inventory data (+0.8%) should buoy the Q4 GDP figure released today, as they are plugged straight into the GDP model equation. Incidentally, the latter figure conforms to Macro Man's view that much of the recent softness in the data has been down to an undesired inventory build-up late in the year, which will take a couple of months to work out- just as it did this time last year.
However, Macro Man is not yet prepared to dislocate his shoulder in patting himself on the back for his prescience. The orders data is extremely volatile, and on a 3m/3m basis the trend is still negative. If not matched off with final sales, heavy orders can generate an even larger inventory build...and that is the stuff of which recessions are made. So while the inventory figures are not terribly timely, and not sexy at all, if you want to know where the US economy is going you could do much worse than to follow inventory trends- either via the official data or through surveys such as the ISM.
Elsewhere, in Macro Man's soon-to-be adopted "homeland", Swervin' Mervyn has been re-upped for another 5 years in the Threadneedle Street hot seat, while mortgage approvals sank to their lowest level in a dozen years. Several readers have asked about whether Macro Man has the inclination to add to his sterling short at current levels. For the time being, he does not; the time to add will be when Merv throws in the towel and starts slashing rates more aggressively. And for that, he'll need to see a more pronounced drop in either inflation or activity. Macro Man is prepared to wait.
Finally, as noted yesterday, recent quant fund ruptures seem to have generated a small pullback in Macro Man's large cap/small cap strategy. The OEX/RUT spread is now approaching the uptrend line of the past year, and now would appear to be a reasonable time to add risk to a position that Macro Man would expect to carry for a long time.
Macro Man will therefore up the nominal position size to $15 million per leg, buying 99,000 OEF and selling 93,250 IWM half an hour after the market opens today.