Thursday, November 20, 2008
Where to start? The newsflow over the past twenty four hours has been very interesting indeed, as has the price action. Not that it's been a particularly lucrative twenty four hours....despite trying to rise above the noise, Macro Man has managed to top and tail himself a couple of times. Fun, fun, fun.....or B.
So yesterday, US CPI fell 1% m/m, the largest monthly decline in the history of the series by a fairly wide margin. Frankly, Macro Man isn't quite sure what to make of this. On the one hand, the absolute value of the decline, coming in a month of historic commodity price moves, was well below that of many, many monthly rises. This would appear to confirm that prices are stickier to the downside than the upside- thus providing some comfort against the threat of deflation. On the other hand, the print was so much more negative than any prior observation that it suggests that something has indeed changed, and corrosive, demand-driven deflation is a legitimate threat.
Certainly some central banks are taking that view, most notably the Fed. The October minutes suggest quite a bit of concern over a downward spiral, and yesterday Don Kohn confirmed that the Fed is indeed pursuing quantitative easing. There remains a a school of thought that this will spell disaster for the dollar; colour Macro Man skeptical.
Evidently, the Fed is not the only central bank focusing on the downside. The Central Bank of Turkey surprised markets yesterday by cutting rates 0.50%, despite a weak TRY and inflation currently well above target. That they did so with the IMF vultures swirling over Ankara was particularly surprising.
Switching gears, there a couple of market price developments that merit comment. The most obvious development yesterday was the SPX finally closing below 850.....from here, the next layer of support rests at the 2002 low around 762.
Slightly further off the beaten path, however, there are strange things afoot in credit markets. CMBS, a widely-owned asset class on banks' balance sheets, have been absolutely cratering in a parabolic fashion. The chart below shows the spread on a Markit AAA-rated CMBS index over Treasuries...this is likely to be the cause of the next wave of writedowns/capital raises/bankruptcies.
Bizarrely, however, long-dated swap spreads in the US are now quite sharply negative. In other words, despite the fact that banks hold a load of turds and their share prices are plummeting, markets are now pricing them as better credits than the US government over a 30 year horizon (despite being a substanitally worse credit on a 2 year horizon.) Anyone who believes that deleveraging and forced position liquidation has come to an end is invited to explain that one....
Speaking of position liquidation, short-term punters got it in both directions yesterday in currency-land, as EUR/USD inexplicably went uber-bid in the middle of the afternoon, prompting much sturm und drang over a trend breakout....only to inexplicably go uber-offered a few minutes later, closing at the bottom of the recent 1.25-1.30 range.
Recent price action and the staunch support at 1.25 brings the heady days of the summer of 2006 to mind. While it may be hard to believe given the rollercoaster ride on 2008, EUR/USD spent six months between 1.25 and 1.30 before finally breaking out near the end of the year and accelerating higher.
Observe that this was a continuation pattern....in other words, the formation ultimately resolved itself in the direction of the underlying trend. Macro Man looks for a similar outcome this time around.
Finally, he would be remiss in not calling attention to the farce that is the US automotive industry. Regular readers will know that your author is not particularly enamored of the US Government (either party), and generally dismissive of the efficacy of the US Congress.
However, he has to give Congress a tick for raking the chief executives of the Little 3 over the coals yesterday. How these bozos have the temerity to fly on private jets to DC with hats in hand to demand a bailout defies belief.
Perhaps if they drove to DC from Grosse Pointe (or Seattle!) in one of their poorly-built, gas-guzzling products, they'd gain a further grasp of why their companies are in such dire straits to begin with.