Commie, Clown, or Copper?

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.
Next Post »


Click here for comments
May 1, 2008 at 1:31 PM ×


What is your view on the Fed? Seems to me that rate cuts have ended and that any further meltdown in sub prime will be dealt with by means of liquidity injections (basically getting funding to those who need it like opening up the discount window etc etc).

In my mind the next move in rates is higher, to deal with inflation issues.


Macro Man
May 1, 2008 at 1:55 PM ×

Well, I expect the broad tone of the dataflow to be bad for much of the rest of the year. This should mean rates remain on hold at the very least, perhaps for quite some time (at least a year.)

Having thrown in their lot with the reflation crowd, I don;t think the Fed can credibly find inflation fighting religion until the credit and economic battles show signs of being won.

That having been said, perhaps Mr. Prop is right and that the Fed now wishes to wean the market off of the monetary heroin of rate cuts, and replace it with the monetary methadone of sustained low interest rates.

May 1, 2008 at 3:12 PM ×

With everyone focusing on the Fed, it is worth contemplating that (as you've pointed out to anyone who'll listen) and as aptly parodied by Mel Brook's politically incorrect Blazing Saddles", There's a New Sheriff In Town...

The old western Mule Song, was the Oscar-nominated theme from the soundtrack, and it too is apt...

He rode a blazing saddle
He wore a shining star
His job to offer battle
To bad men near and far
He conquered fear and he conquered hate
He turned our night into day
He made his blazing saddle
A torch to light the way

When outlaws rule the West
And fear fills the land
A cry went up for a man with guts
To take the West in hand
They needed a man who was brave and true
With justice for all as his aim
Then out of the sun rode a man with a gun
And Bart was his name, yes Bart was his name

Zhou "Bart" Xiaochuan, that is...
Should the townfolk be scared?

Macro Man
May 1, 2008 at 3:21 PM ×

Should the townfolk be scared? They should if they need blood thinner.

And for the time being , it looks as if Bart may be more interested in having a pissing match with Lou "Lisa" Jiwei of CIC than saving the West from the bad guys.

Mr. Prop
May 1, 2008 at 7:02 PM ×

Oil is ruining the scenario. Has it really topped? It has a pattern of 10%-13% corrections and then resuming the uptrend. I thought there was on last gasp into May 7th, but that call is looking shakier by the moment. Oil rules. There was not much chance that the rising stocks, higher yields, and rising oil could co-exist. I thought that meant spoooz would struggle to stay above 1400 and reds were gold (perhaps a bad analogy considering the wilting yellow metal). But in retrospect it was not Reds, but oil puts that was the right trade. Unless oil reverses back to the highs and the bubblonians have one more last gasp, it is hard to believe that the expected 25-40pt correction in stocks would occur. Wait, 1407 to 1379 was 28pts. Crappolla I forgot to buy...oh well, NFP help. I feel as if I am in hope mode on the risky asset correction at this point. Any chance Bush attacks Iran tonight?

Macro Man
May 1, 2008 at 7:27 PM ×

Yes, perhaps the real pain trade is equities scream higher while Europe enjoys a day off and macro guys wait for NFP. Word on the strasse is the energy is dead, long live big cap tech. Grip it and rip it, baby!

Oil puts are/were the trade...I personally could see another 5-10 dollars lower, particularly if Voldemort stays away from EUR/USD.

For equities, on the other hand, maybe some low delta calls are the way to play a melt-up 'em and hope you don't need 'em.