Wednesday, October 21, 2009
Macro Man has previously observed that blog traffic can sometimes say a lot about the significance of market events or interest in a particular theme. If this is the case, then it appears that concern about the weakness of the dollar is very real, as yesterday's post generated a near-record level of traffic. This was largely due to the fact that a few high profile sites very kindly linked to Tuesday's post, but still....someone has to be interested enough in the subject to click through. For the first time in a couple of years, Macro Man finds the subject of external imbalances to be of paramount interest, and since Brad Setser moved on to bigger things, there is perhaps a dearth of commentary on the subject.
Regardless, the drumbeat of dollar weakness rolls on, as the buck is back close to its lows of the year against the euro. Exotic barriers around 1.50 have, by all acccounts, helped put a lid on spot for now, but one would have to believe that it's only a matter of time before the level breaks. Hell, even sterling has continued last week's bid tone; if the BOE minutes don't hint at an appetite for more QE in December, one might reasonably conclude that the Queen's head could enjoy another dies mirabilis.
Although equities had a bit of a setback yesterday, the pro-risk drumbeat marches on (despite the swirling winds of financial and economic protectionism.) While the Bank of Canada intimated yesterday that loonie strength would stay their hand on rates for another couple of quarters, another strong currency phobic CB, the RBNZ, changed its tune by suggesting that the strength of the kiwi would not preclude rate hikes.
And in the London morning, China leaked its September industrial production figure, due to be released tomorrow, at a better than expected 14.1%. You could almost literally hear the risk longs shouting "hip hip hooray!"
Regular readers will know that Macro Man has been (incorrectly) fairly sceptical of the green shoots phenomenon and has fought the equity rally (if not position-wise, at least intellectually) for much of the way up. One factor that he almost certainly underestimated, or missed altogether, is that of margins. As a top-down macro guy, he doesn't really gt his hands dirty with company- or sector-specific margin analysis; he has neither the data nor the expertise to do so.
But as a top-down macro guy with a penchant for crafting little indicators, he does have a proxy that he was watched for the last few years to give him a rough idea of what margins are like. Simply put, he looks at the y/y change in US CPI ( a proxy for corporate selling prices) against the y/y change in finished goods PPI ( a proxy for corporate costs.)
To be sure, the proxy isn't perfect, nor is it intended to be. But it ain't half bad as a rough-and-ready indicator, as you'll observe that prior "negative margin" readings have typically coincided with recessions/bear markets/ticking timebombs.
As you can observe, after plunging to record negative territory in H2 of last year (a period that coincided with near-record negative equity performance!), the margin proxy screamed higher earlier this year. Macro Man ignored this signal to his detriment. Today, the margin proxy is stabilizing at relatively high levels which, much as Macro Man may hate to admit it, could suggest upside profit surprises (such as those observed thus far for Q3) if maintained.
Rest assured that he will pay this little indicator a bit more attention in the future; it won't just be with currencies that Macro Man gets back to his roots.