Tuesday, January 27, 2009
For some reason, the world seems to be a somewhat less awful place today. Sure, there's plenty of violence all over the globe, the airwaves are still polluted by the brain-suck that is reality TV, and today's front page trumpeted that 70,000 people around the world lost their jobs yesterday (while Gordon Brown still has his.)
Nevertheless, markets are percolating as a faint whiff of recovery drifts through the air. Stocks are well off their lows and global fixed income markets suddenly look vulnerable. The newsflow would appear to encourage the view that the worst has been priced and that, on the margin, things will start to get better. Take Europe, for example, where Macro Man has offered the occasional gentle criticism of the ECB's reading of the economy.
This morning's ifo exceeded the consensus forecast, led by an uptick in the expectations component. Jean-Claude Trichet 1, Macro Man 0?
Markets seem to be pricing something like that. After rallying for four straight months in virtually a straight line, the front end of Europe has sold off sharply over the last couple of days, tacking 27bp onto 2 year German yields sicne Friday's close.
There are reasons for scepticism, however. While the io exeeeded expectations, this doesn't obscure the fact the current conditions component fell to a fresh all-time low, nor that the headline index barely moved. Moreover, the very people who compile the survey suggested that there remains no change in the economic downtrend and that the ECB has room to cut rates quite a bit more. Finally, it is worth noting that a well-known fund preumed to operate with non-public information was rumoured to be taking profits and/or hedging its European front end longs over the past few days.
Is it true? Who knows. But if you get into a trade because someone else is doing it, and then you think they might be cashing out, what would you do?
In the US, meanwhile, we can all rejoice that the financial crisis is over. After all, what other conclusion are we to take from the fact that Pfizer has been able to secure $22.5 bio in bank loans to finance its acquisition of Wyeth? If the M&A pipeline is open, baby, then let the good times roll!
As always, the small print matters. The rate at which they are borrowing (7% or so over one-year swaps) wouldn't look out of place in Vinny the Loan Shark's book of business. For the time being, PFE is a AAA-rated company; what does this borrowing rate suggest about the availability of credit for large universe of firms with less shiny ratings?
Meanwhile, the conference board's leading indicator unexpectedly rose 0.3% yesterday, offering further hope that the worst is past- at least according to the anecdotes provided by macro Man's counterparty banks. Again, colour Macro Man sceptical. Money growth added a full percent to the monthly change; given the collapse in monetary velocity, money growth will have a much lower-than-usual impact on actual growth. Moreover, the 3m/3m rate of change is still sharply negative (5.5% annualized.)
Macro Man likes to track the level of the ECRI weekly leading indicator; as the chart below illustrates, while it has quit collapsing, there is no real observable bounce.
To be clear, Macro Man isn't suggesting that the data isn't going to improve; given the mooted size of the Obama stimulus package, the real surprise would be if it didn't at some point in Q2. But as Macro Man has said on a number of occasions, the most important component of any enduring recovery is time. So you'll have to pardon him if he doesn't run after the light at the end of the tunnel; he has a funny feeling that it might be an oncoming train.