Team Macro Man are picking their fingers up off the floor with their teeth having failed to catch a falling knife yesterday.
So what kicked all this off then? Well the only "news" was the downgrading of Chinese growth expectations (those Communist party guys love to leak their data...) and a story that Japanese exporters aren't hedged enough with respect to the Euro. With the rates moves already in place that last straw saw JPY take off. Meanwile, the Chine PMI leak-induced sell off was followed by the usual rumour of some Chinese tycoon going bust and bailing out of everything. The rest of the move appears to be price driven...
The deflation trade goes ballistic even if core PCE comes in higher than expected: the double dippers are in charge of the 'hood. The US curve has been more flattened than a penny on a rail track, and even Gold begrudgingly comes off from its highs. We don't know how long Gold can hang on to its "inflation on money printing" prop whilst the rest of the World applies the steel press to the US curve on the deflation argument. Can you have both? That is a question Team Macro Man will have a go at answering below...
As in last Thursday's post, Team Macro Man is astounded as to how quickly some quarters of the fixed income market have begun to price in deflation. The latest chart we want to bring to attention is the 5y5y forward nominal UST yield, which is plumbing depths not seen since April 2009, in line with 10yr yields themselves. But what is interesting is that the bulk of the moves have been Real Rate-led (see below chart, brown line 10yr real yields), not by inflation breakevens (white line, 10yr breakeven). In fact, 10yr Real yields are now within a whisper of their lows in March 2008 during the TIPS collateral squeeze. Odd indeed...Or is it? Team Macro Man, above, noted its confusion that despite the curve bull-flattening and seemingly pricing in a deflation trade, that Gold still feels more bid than an iPhone4 at a media convention. A quick chat with a seasoned FX Spot Shag yields the response "well, we flatten the curve because of deflation, an' then we buy Gold 'cos they'll print more money". Experience has taught Team Macro Man that, often, over-thinking things is counter-productive, and Occam's razor applies. The below chart shows Gold (white line) vs. a proxy for 10yr Real Yields (brown line - constructed from US, UK, EU & JN inflation swaps weighted by GDP) on an inverse scale. Funnily enough, they seem to be saying the same thing...So perhaps the real situation here is that though many Gold Bugs have bought Gold on the inflationary argument, they are finding new support from double dippers' deflationary arguments driving yields lower. Heads I win, Tails I win... GGUF!!! How odd. Either breakevens need to come lower, or Gold and Real Yields look vulnerable to a correction... The battle here is not Bond vs. Goldfinger. This time they are on the same side fighting Oddjob.
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