Thursday, May 01, 2008
Today is a highly momentous one for residents of London and, one could argue, the entire United Kingdom. Residents of the capital go to the polls to vote for the new mayor, facing a choice between a Commie (Ken Livingston, the incumbent), a clown (Boris Johnson, most famous for his gaffes), and a copper (Brian Paddick, an ex-policeman who's not famous for anything.)
Really, the choice is between the first two, with supporters of the latter appearing to be critical in determining the ultimate winner. To a degree, this election is something of a referendum on the Labour government, which has seen its popularity swiftly crumble. More viscerally, it will be taken by those in the City, whose spending and driving habits are anathema to the Trotskyite Livingston but nevertheless a significant driver of UK economic growth, as a reason to either rein in or amplify their pessimism on all things UK.
Speaking of pessimism, yesterday's data did relatively little to mollify Macro Man's on the US economy. While the ADP data was much better than expected, its recent track record of forecasting payrolls has been shoddy. The employment component of Chicago's PMI survey was atrocious, though the headline reading on the survey wasn't so bad. But the GDP figure, which more or less met expectations with a barely positive print, represented an unhealthy combination that offers little reason for near-term optimism. Of the 0.15% non-annualized quarterly gain, the entirety and more was explained by a rise in inventories. Every other major component showed a tepid at best contribution, even by the relatively poor standards of the last couple of years. One can only assume that the inventory build was unintentional, and raises the spectre of a Q2 unwind that could depress domestic activity, rebate checks or no.
As noted yesterday, the Fed announcement was a bit beige; Macro Man supposed that one could interpret any way you please. What's interesting is that a couple of key barometers of financial market risky assets have approached but not breached levels that would appear to usher in at least a tactical risk-asset love fest.
The SPX broke 1400 just before and after the FOMC announcement, but there was little appetite to follow through; the close must have been disappointing to bulls.
Similarly, USD/JPY flirted heavily with resistance around 105 earlier in the day but failed to breach it, thanks in part to reported Golden Week offers from exporters. Watching these two charts in tandem is probably not a bad idea; if both break and hold, it should suggest that the risk trade is "on, baby." However, if they both continue to jiggly about without showing much inclination to break through, it will send a powerful signal that all is not well in Denmark.....or make that risky financial assets.
For today, however, Macro Man would be loathe to read too much into price action. Most of Asia and Europe have been out today, and markets such as EUR/USD have moved quite a way on thin volume. Although the ISM is out today, the main data event will of course be tomorrow's payroll data.
Macro Man didn't know what to make of yesterday's Fed announcement, and he doesn't know whether these risk-asset resistances will break. He therefore retains the strategy of trying to concentrate most of his risk in core views, and keeping the overall risk usage fairly low.