Friday, June 06, 2008
Man oh man. Just when you think things can't any weirder, they turn around and do so. Yesterday saw ECB president Jean-Claude Trichet provide further evidence of his affection for late 80's hip-hop music. For having noted that consumer price inflation was likely to perform the Humpty Dance earlier in the year, JCT switched tack yesterday and in his monthly press conference said "Stop! Hammer time!"
For what else can you call promising to re-embark on a tightening cycle, possibly as early as next month, into a slowing economy? "Hammer time" is also a pretty good description of action in European fixed income, particularly at the front end, over the past 24 hours. Euribor has been crushed (check out December Euribor below), dragging short sterling, eurodollars, euroswiss, and many a punter's P/L with it. Eurostoxx sold off a bit yesterday, but today have roared back to trade at pre-Trichet levels.
And what, pray tell, can be more bullish for equities than a central bank forced to tighten into a slowing economy by inflation? Judging by yesterday's evidence, having your credit rating dropped by the ratings agencies, and both Ambac and MBIA rallied after S&P lowered their financial strength ratings.
No doubt job losses of "only" 30k or so in today's payroll report will be taken as a further cue to buy stocks. Clearly, yesterday's chain store sales report was uber-bullish; at +3% y/y, they were only down 1% y/y in volume terms! And the impact of the stimulus checks is clearly beginning to boost spending growth: just check out the recent 12 week surge in those chain store sales!
And hey- what could be more bullish for the economy and equities than a y/y decline in household wealth? Just look at how great is was to own equities during previous periods of wealth contraction, such as 2001-2002 and 1974!
But hey- at least the low level of interest rates is helping the economy to resuscitate. Hey, the housing market's gonna revive any day now....and mortgage refis can only go one baby, and that's up!
Yeah, Macro Man's a bit confused and, frankly, bitter at the resilience of equities. A little "f*** you" transactional friction hasn't helped, either. Judging from a couple of the comments yesterday, Macro Man is not along in his short-equity pain. And perhaps that's the real story here...markets are still trading off of positioning.
Because everything else that Macro Man looks at with respect to equities, including Mr. Trichet yesterday, screams "U can't touch this."