Tuesday, March 02, 2010
Another Monday, another percent in the S&P 500. Like Colt .45, the legend of Magic Monday works every time! Tuesday, however, is a different story; although equities are largely unchanged on the day, news that Greek public sector workers are planning to strike in protest of the government's austerity measures have sent the euro tumbling lower, scotching its nascent recovery. Macro Man has thus far been unable to verify whether Greek civil servants have demanded that the population of Berlin feed them grapes and fan them as they recline on Roman-style couches.
Down Under, meanwhile, the RBA put rates up to 4%, a level that seems almost (gasp) "normal", or, in the parlance of the RBA, "average." The strip is pricing in another 100 bps of tightening over the next year versus totday's 3m bill yields of 4.25%. That's only slightly more than is priced into the eurodollar strip, even though many punters don't expect the Fed to move rates over the next year. A break of the uptrend line in IRH1 could render it a nice short against long positions in other markets.
The risk, of course, is that the Australian property bubble bursts with a resounding "pop." While there are no obvious reasons for it to do so in the near term, it is nevertheless the case that most urban property markets are bum-clenchingly overvalued relative to local incomes; while this situation can obviously continue longer than most nay-sayers can remain solvent, recent experience in the US confirms that the day of reckoning cannot be postponed indefinitely.
Yesterday Macro Man highlighted sterling as looking particularly vulnerable, and he can only hope that The Twits were limit long with maximum leverage, as "Betty" got a right slap yesterday on what appeared to be flow related to the Pru/AIG deal. Although the queen's head has recovered slightly as news emerges of a better poll showing from the Tories (the lower-case twits?!?!?!), at this juncture it's hard not to share the wide-spread enthusiasm to flush the pound down the proverbial loo.
Macro Man cannot help but think, however, that the BOE will-sooner or later- face a day of reckoning of their own. Readers are by now no doubt weary of your author's anecdotes of his travails in locating a certain type of Audi estate for Mrs. M during the second half of last year, but his adventures in car-buying reflect a real hazard to a UK economy addicted to foreign manufactures: namely, that a weaker currency produces a negative supply shock as foreign producers either raise UK prices or withold product from the British market due to abject currency weakness.
Thus, despite relatively weak domestic demand, UK goods prices in the broad RPI index were up 6.5 y/y in January. While the VAT hike can explain some of that, of course, it doesn't explain why goods prices were up 5.3% y/y in December, before the normalization of VAT.
Thus, while Merve is sweating tepid M4 growth in this green and pleasant land, goods prices for the punters are rising at their fastest rate since before the last sterling crisis (i.e., its sordid ejection from the ERM in September 1992.)
Now, the last time that Macro Man checked, the BOE's mandate prescribes an inflation, rather than a money supply, target. So at the risk of beating a dead horse, he feels compelled to reiterate his belief that at some point over the next year, the Bank will face a day of reckoning, its very own Damascene moment, and all hell will break loose in UK financial markets. He looks forward to being there to pick up the pieces.