Friday, July 02, 2010
Team Macro Man are somewhat busy today and will be enjoying the delights of summer sporting events rather than waiting for the outcome of the NF lottery. But here are some brief TMM thoughts:
TMM is not sure what the whisper number is for private payrolls, but we would guess it is closer to +80k than the Bloomberg consensus of +110k. There does seem to be a consensus that people are not really short risky assets, and yesterday's price action suggesting another round of short-covering would support this view. As suggested by the moves in US Financials & Gold yesterday, the remaining reflationists are still hurting, so bounces will be used as an opportunity to reduce risk by those participants.
Even entrenched bulls are struggling to argue with two months of disappointing US data. That said, however, USTs have struggled to hold on to their gains the past couple of days despite equities extending and, peak-to-trough, since China announced its new FX policy, equities have fallen nearly 11% with little bounce. US holidays can often mark general market turns, and with the 38% Fibonacci retracement from the March lows to the April highs close by together with the psychological 1000 level all piling up ahead of earnings, the risk-reward is not obvious.
The divergence with Europe, however, only appears to be getting larger with financial stress having fallen significantly following increasing clarity with respect to the stress tests and the ECB's LTRO/MRO take-up (TMM found the level of attention on such esoteric details of the money market rather amusing), still-strong demand at sovereign auctions (Spain yesterday), a large tightening in peripheral & semi-core bond markets over the past few days (see chart below), and reasonably strong European PMIs yesterday suggest that the crisis has not yet spilled over into European growth.Together, this suggests that should the number be strong, Equities will squeeze (yesterday's hammer will be an excuse), but EUR/USD has the potential to squeeze even more. However, if the number is bad, weakness will be led by those economies leveraged to the US - EUR/CAD & EUR/MXN look prime suspects - and the remaining assets that have yet to materially price in a disinflationary theme: Gold. Yesterday provided some hints of this as even Gold joined in the Euro squeeze-fest, and we are pretty sure that was Gold/Euro-driven, as it gapped through the rising trend of the last couple of months. USTs will lag, however, with breakevens moving at the expense of real rates.