Synthetic Payroll Day

Wednesday, March 31, 2010

Welcome to payroll day! OK, it's not literally payroll day, but given that a) we get ADP today, and b) markets are actually open on the day, punters might do well to treat this afternoon as a "synthetic" payroll day. After all, the ADP will presumably contain the "meat" of the payroll report anyways, which is private sector hiring; markets are surely clever enough to look through the Census hiring as temporary, right? Right?
While there has been much rumbling about the strength of Friday's payroll figure much of it will, after all, be that temporary government hiring. After all the ink spilled and bonds sold in anticipation of Friday's figure, Macro Man cannot help but wonder if it's now firmly in the price. A weak-ish ADP would be a useful test of that thesis.

Macro Man was also intrigued to see the leak in Caijing (sadly, he cannot find a link, but the story is alluded to here) that China will move back towards a managed crawl next month. Now, regular readers will know that your author has long supposed that the current hard peg would remain intact through H1, but given the brewing storm of protectionism in Congress, might the Chinese decide that discretion is the better part of valour and allow the RMB to jiggle before they are named (if not shamed) in the Treasury manipulators' report?

And if they do, would that not cause a) more hot money flows into China, and thus more reserve growth, and b) something of an entente between China and the US? If so, perhaps China might re-emerge as a buyer at Treasury auctions, which could come in handy at next week's 3, 10, and 30 year efforts.

Moreover USD/JPY, an asset price closely linked to US yields, has reached what might be presumed to be a local top. Not only has it bounced off the early-January high on this, the first day of the new fiscal year, but the seasonality turns bearish for much of April into early May.
While there's clearly no guarantee that any link between US yields and USD/JPY will be maintained at current levels/rations/whatever, it still gives Macro Man pause for thought. The US flattener, which was flavour of the month a couple of weeks ago, has retraced 61.8% of its move from late Feb to last week.

Call Macro Man crazy, but he finds himself sorely tempted to flirt with a bit of long duration or perhaps the flattener on synthetic payroll day...

Posted by Macro Man at 8:07 AM 11 comments Links to this post  

Book Talkin'

Tuesday, March 30, 2010

After a poor night's sleep, Macro Man was in a foul mood this morning as he stared bleary-eyed at his screens. That is, until he read this little pearl of investment wisdom, which induced a hearty burst of laughter:

Bill Gross May Be Predicting Bull Run in Stocks

March 30 (Bloomberg) -- This may be the best news for stocks in a long time: Bill Gross, who manages the world’s biggest bond fund, says the 30-year bull market in fixed-income securities is ending.

Though Gross, who runs Pacific Investment Management Co.’s $214 billion Pimco Total Return Fund, would never tell you to buy stocks, isn’t that what he means?

........

Full disclosure compels me to say that in even saying the words “bull market,” I’m talking my own book. My investments are in stock mutual funds. Smart people have a balance of stocks and bonds.

The column was laughable on a number of levels. Let us count the ways:

a) The very notion that for an equity market buoyed largely on a tide of over-abundant liquidity, that a period of consistently higher market interest rates could possibly be construed as bullish

b) That Mr. Gross's bearish comments on bonds directly translate into a view on stocks (it seems as if the author is wishcasting, not forecasting)

c) That Mr. Gross, Mr. "Dow 5000" himself, should in any way be construed as any sort of authority on equities.

At least the author concedes towards the end of the piece that he is talking his own book, something that Mr. Gross notably fails to do in his many media appearances. To be sure, any listener with a modicum of nous should assume that this is exactly what he is doing: Mr. Gross does run a business, after all, rather than a charity. (ed. note: Didn't he once offer to run the TARP for free, though?)

Still, Macro Man always has to chuckle when the media mindlessly parrots whatever view Mr. Gross is espousing at a particular time, as if he were some sort of impartial public utility.

It is a handy rule of thumb that everyone, including your intrepid author, has some vested interest in what they say; otherwise, why say it? And if you don't know where that interest lies, your chances of being played for a sucker are magnified greatly.

(Naturally, Macro Man is providing this advice as a public service, out of the kindness of his heart. Really!)

In any event, now that the Greek 7 year is away (if not up, up), perhaps we can focus on more prosaic issues: like the tidy upside surprise in yesterday's German CPI figures. To be sure, the absolute level is still quite low, but the trend is quite clear.

If (and yes, it's a big if) Greece manages to avoid sinking like the Titanic, at some point the ECB will have to dust off those policy normalization plans that they hinted at in December and swiftly shelved in January. Perhaps it's time to look at bearish ERZ0 structures again?

Posted by Macro Man at 8:36 AM 8 comments Links to this post  

A Quarter Of The Way Through

Monday, March 29, 2010

It's hard to believe that we're almost a quarter of the way through the year already, yet Wednesday marks the close of the third month of the year. It many ways feels as if the year has barely gotten started, intellectually; judging by the performance of many macro funds thus far this year, Macro Man suspects that he is not alone in his sentiments. Q2 isn't likely to start off much easier; how the hell is one supposed to play the first positive payroll figure of the cycle on a day when stock, bond, and futures markets (at least the pits) are all closed?

Of course, like Macro Man's alma mater, there are still a few days of March madness to navigate first (or is that winter madness)? European banks are back in the news this morning on reports that Vladimir O'Lennon will essentially nationalize the Irish banking system.

Unlike Greece, however, this is being taken as an isolated incident, at least judging by the performance of pan-European banks. Speaking of Greece, they've announced plans to sneak another bond issue into this little window of opportunity. Step right up, ladeeeez and gentlemen, and get yer bonds right here!

In any event, for all the talk of differentiation this year- and to be sure, there has been some divergence in the performance of, say, the SPX (+4.05% YTD) and the Eurostoxx (-0.36% YTD, -6.3% in $ terms)- that European banks chart looks verrry familiar. Where has Macro Man seen it before?

Oh yes, that's right. It's the copper chart.
OK, it's not one for one, but the V shapes bottoming in early February do bear a noticeable resemblance, don'tcha think? Of course, one one hears the word "copper" these days, one cannot help but think of the word "China." Given the V-shaped bounce in the good Dr. Cu and Chinese high fives over its impending, conveniently-timed trade deficit, one wonder if the old pig farmers have been up to their old shenanigans and buying copper like it's going out of style (which it eventually will!)

And while it's tempting to sit back and play for the "big one" in copper, equities, and most other things, the more profitable strategy has been to play "small ball": to trade in and out rather than trying to hit home runs. Whether that continues as March Madness gives way to Opening Day remains to be seen...

Posted by Macro Man at 10:21 AM 6 comments Links to this post  

Riddles

Friday, March 26, 2010

Q. What's big red and ugly, and has a long tail?

A. A US Treasury auction!

Last night's 7 year auction went just as poorly as Wednesday's 5 year, and while the downside follow-through in bond prices wasn't quite as bad as for the 5 year, that might simply be because Rip van Winkle the stock market finally noticed what was going on with bonds and performed a late-session swoon.

While the sell-off in bonds certainly raises challenges for both equities and growth, particularly if it is sustained and extended, at this juncture it's probably important not to over-dramatize things. Mortgage rates have held pretty steady; indeed, in the case of conforming 5/1 ARMs, according to bankrate.com, rates are more or less at their lows.

Q. How is Greece like a submarine?

A. People will only lend a hand when they're deep underwater.

So the EU has finally come up with a mutually-acceptable "plan" for Greece...though it didn't take Trichet long to put one in his own net by having a moan about IMF involvement on French TV.

While the details of the plan are still pretty murky, it is pretty clearly not a "bail out"...after all, you can only bail out a boat before it sinks. Rather, it seems as if it is more of a submarine safety net, designed to catch most of the collateral flotsam and jetsam should the Good Ship Greece go down (or, more to the point, should one of their bond offerings not go down.)

So what we're left with is an exercise in game theory. Greece will only get help if they cannot raise money/roll over their debt. Does that knowledge a) comfort the market in knowing that there is some sort of liquidity backstop, thus emboldening investors to
purchase Greek paper? The extension of the ECB minimum collateral threshold will also help in this regard. Or b), will the market now have a target to shoot at, knowing that the only way to get some sort of action on Greece is to shoot down one of its titanic auctions with all hands on board?

The initial reaction appears to be "a"; 5 year Greek CDS is currently 300 mid, down 15 bps or so from yesterday's close. But Macro Man wouldn't be surprised if the market doesn't have a go at probing scenario "b" at some point in the not-too-distant future.
Q. What's big and has loads of money and buys the snot out of USD/JPY at the direction of the MOF and definitely won't let us see 90 again?

A. Well, not the BOJ, because that would be intervention, and no other Japanese institution is allowed to conduct intervention.....right? Right?

Well, wrong, if the popular scuttlebutt, stirred up by an article in the Nikkei, is true. Word on the strasse (or is that the ?) is that Japan's Post Bank has been hoovering USD/JPY at the direction of MOF mandarins in a campaign of stealth intervention.

It would hardly be surprising, given that Japan is a) still looking pretty tepid, recovery-wise, and b) if they engaged in overt intervention, they would have some 'splainin' to do to an irate US Treasury and Congress.
Regardless, everyone's favourite trade is now back on the radar, helped, no doubt, by the sell-off in US fixed income. Current levels are something of a no-man's land, especially with just a few days to go until fiscal year end (with the assumed HIA yen-buying associated with it.) More than just about any other currency pair, USD/JPY has flattered to deceive over the last year.

If you can solve the riddle of when it will start performing sustainably...well, that'll be worth quite a bit more than a groan and a laugh.

Posted by Macro Man at 8:04 AM 17 comments Links to this post  

Is It Really That Easy?

Thursday, March 25, 2010

Sometimes, it's possible to overthink this business.

Maybe it's the case that this angry missive from Congress to Geithner....


...encouraged China to stay away from this week's auctions, which led to this rather ugly auction.....


....which produced this rather ugly price action:

Maybe it really is that easy sometimes. Late last year, Macro Man decided to put a little capital on what seemed like an all-too-obvious trade: short govvys of profligate Anglo-Saxons versus long govvys of Calvinistic Teutons.

The chart below shows the yield premium of the "short basket" versus the long Bunds (note that the different maturities reflect the cheapest-to-deliver of the relevant futures market.)
As you can see, the basket's widened some 45 bps in 3 months. Not bad at all for a trade designed around the simple question of "which market is going to see the most new issuance hit the private sector relative to 2009"? Obviously, the trade was helped yesterday by the poor auction and by A Darling's "I am out of a job anyway so I really can't be arsed, to be honest" budget yesterday.

Sometimes, the best trades really are that simple....

Posted by Macro Man at 9:03 AM 11 comments Links to this post  

Wham!

Wednesday, March 24, 2010

Yesterday, Macro Man suggested that the market needed a "wake me up before you go-go" call in the event anything interesting happened. Wham! Yesterday was chock full of interesting developments.

Macro Man has highlighted the attraction of long ten year swap spreads previously in this space. The good news is that it seems as if he had plenty of company in the view. The bad news is that we were all W-R-O-N-G. 10y swap spreads collapsed into negative territory yesterday on what appears to have been massive stop-outs. Savour, if you will, the irony: the financial sector, so recently saved by the largesse of Uncle Sam and the Fed is by one (admittedly imperfect) measure more credit-worthy than their saviours. It must be this kind of prudent lending that has done the trick.

Then, later in the day, when Uncle Sam had the odd billion or two of 2 year notes to auction, it seems as Sir Robin was the only decent bidder. (OK sure, actual bid/cover was pretty good, but it came on the heels of a decent concession with no snapback rally.) 2 year yields have now poked their head back above 1% as LIBOR continues to tick up. Hmmm.....
Of course, the big headline late in the day was that France and Germany agreed in principle that it was just about possible to help Greece in some conceivable circumstance. That's about as far as they've gotten, however, with disagreements still percolating amongst those who actually have a bit of money to slosh about. With Europe seemingly intent on snatching defeat from the jaws of victory, Asia could just not pass up the opportunity to give EUR/USD a little love tap in the night, sending it to new lows for the year. Technically, it must be said, the euro looks pretty dreadful.
Through all of this, of course, equities continue to meander their way merrily higher. At this point Macro Man cannot tell if they are wearing bullet-proof armour, warding off the slings and arrows of outrageous fortune.....or whether they are a doe-eyed naif, utterly unaware of the ugliness around them.

The popular explanation is that they are being floated on a tide of liquidity, which is of course possible. Of course, "liquidity" was also the explanation for the performance of risky assets in 2006...and my, didn't that end well! What is true, however, is that while the stock of money market assets remains large, it was dwindled significantly over the course of the past year: the $800 billion-plus decline represents the largest year-on-year percentage drawdown in the history of the series.

A market this disjointed should eventually offer some opportunities...once the dislocations begin to correct themselves. In the meantime, however, it all looks a bit like a recipe for a splitting headache (courtesy of -wham!- pounding one's head against the wall.) Oh well....maybe the forthcoming RMB revaluation will provide some opportunity...

Posted by Macro Man at 7:44 AM 12 comments Links to this post  

Mythology

Tuesday, March 23, 2010

Another day, and here we are looking at the same old to-and-fro with Greece. Someone leaks a story that the EU is discussing aid, which the Germans angrily deny...after which the Greeks themselves lambaste speculators and claim that they don't really need any help, anyways. Yaaawwwwnnnnn. And here's the euro, caught in the same tepid range of the last 4-5 weeks. It's a pretty sad state of affairs when a Wham! song most aptly describes the state of the market.

How the Olympic gods must look down in despair. Zeus, Athena, Apollo....one can only imagine them shaking their heads in disbelief at this sordid and sorry display. Indeed, this whole saga leaves Macro Man wondering if the entire Greek pantheon needs a little modernization; religion, after all, has always moved with the times.

And so, dear readers, allow Macro Man to suggest a few updates for inclusion in the next edition of Edith Hamilton's classic Mythology:

ΠΙΓΣ: Descendents of Bacchus, these brothers defy the Olympian mandate of moderation, only to encounter difficulties once the party ends and the hangover kicks in.

Σιυιλ Σερυαντσ: Gods of laziness.

Μερκελ: The Goddess of hard work and rectitude, who is famously unwilling to help those who do not sacrifice to her.

Παπανδρέου: A hapless mortal who is caught in the midst of a deadly combat between Μερκελ and the Σιυιλ Σερυαντσ.

Τιτλοσ: Latter-day underworld where the turds and detritus of the latter-day Hellenes are deposited.

ΙΜΦ: Legendary givers of aid to the needy who demand frequent sacrifices in return for their help.

Γολδμαν: God of good works such as, for example, helping one move loads of dodgy debt off the national balance sheet for only a modest fee.

Τριςηετ: The God of strong vigilance.

Σαρκο: Comic dwarfish character who flits about Olympus, annoying all of the other gods. Also, the god of philandering.

Βέρνάνκε: The God of bailouts, who unfortunately really belongs to another pantheon...and thus does not answer Greeks’ prayers.

Posted by Macro Man at 9:41 AM 17 comments Links to this post  

Monday Musings

Monday, March 22, 2010

Well, whether it was technical exhaustion, triple witching, or the passage of the [REDACTED] bill, equities have sagged since Friday's post. While it's tempting to get excited about the prospect of a(n overdue) meaningful correction, bitter experience has demonstrated the utility of waiting before layering meaningful shorts.

Still, if it's "all about liquidity", then it is probably worth noting another instance where the opening salvo of a tightening campaign has been fired. India's RBI tightened rates on Friday, between regularly-scheduled meetings. While the exact timing of the hike was a surprise, that they have chosen to start hiking should not be so: Indian wholesale price inflation is nearly back to the summer '08 highs, while CPI is rumbling along at mid-double digit levels.

While India is of course a very different economy from the US, that inflationary pressure has re-emerged so easily does bear watching. While US measures will of course be heavily impacted by rents, there would appear to be little standing in the way of a decent bout of supply-side manufactured goods price inflation.

And hey...when even American outsources decide that lobbying on China's behalf is pointless, the prospects of a protectionist cage match look better than ever.

Meanwhile in Europe, the Germans have once again said "nein!" to the prospect of a Greek bailout over the weekend. Though it's not exactly new news, the contrast between Germany's fiscal rectitude and the American willingness (under both Bush and Obama) to throw money at any old turd-maker in need of a spare $20 billion or so is striking.

The Treasuryt-Bund spread has moved sharply wider in recent months, taking US yields well above their German counterparts. However, there is ample historical precedent for wider spreads; indeed, in the second half of the 90's Treasuries routinely traded well over 100 bps over Bunds.
Add in a dash of short Gilts (though be wary of this week's Budget), and you have the recipe for one of Macro Man's favourite trades of the year thus far.

Posted by Macro Man at 8:02 AM 9 comments Links to this post  

Pennies In Front Of The Steamroller

Friday, March 19, 2010

Does the investment proposition to the left look attractive to you? Picking pennies up off the street ahead of an onrushing (OK, oncrawling) steamroller? If the past few years have demonstrated anything, its that while such a strategy can work on occasion, those who get greedy and stay for the last few pennies will eventually get flattened.

It seems as if this year, many (though by no means all) of the more popular profitable trading strategies have involved picking up pennies in front of the proverbial steamroller. The fabled front-end roll-up trade, discussed in this space on several prior occasions, is a prime example.

The more he looks across markets, the more that Macro Man feels that the re-introduction of some sort of risk/term premium into markets is probably overdue. To rely on central banks to cover your hide forever is, ultimately, just asking for a head-on confrontation with the steamroller.

The Swiss, as many FX punters know from bitter experience, are a prime example. It was little more than a year ago that the SNB got stuck into EUR/CHF like a piledriver, engineering a 4% rally in one heady day. And that was basically it. Presumably after some behind-closed-doors yelping from the ECB, the Swiss almost immediately pulled back to a "buy the dips" intervention style which lasted around nine months.

While this wasn't great for big-picture directional guys like your author, it at least provided a platform for range-traders, who could lean on the SNB bid at 1.51....until they couldn't. EUR/CHF has tumbled hard over the past three months since the SNB pulled the bid, turning into a startlingly volatile pair. The (presumably) final nail in the coffin came yesterday evening, when new SNB board member Danthine said that firms should prepare for higher rates and market-determined FX rates. Yowsah!

The December euroswiss contract current prices in 3m LIBOR at 0.63% from year end, up nicely from the current reading of 0.25%. While Macro Man doesn't really think that they'll put rates up over the course of the year, the chart looks perched on the edge of a precipice, having already shed some 20 ticks from the highs.
All of which brings us back to the US. Bloomberg carries a story suggesting that the discount rate could rise again ahead of the next FOMC meeting as part of the (cough, cough) "normalization" process. Meanwhile, it seems as if Macro Man isn't the only one scratching his head and wondering why 3m LIBOR is still hugging the top end of the FF target band. After 5 months of the kind of flatlining that would make PBOC proud, LIBOR has begun to slowly tick higher.
Could that rumbling be the sound of Jake firing up the steamroller? Hmmmm. Macro Man cannot help but observe that the latest rally, in which the financials have participated heartily has a) offered no real threatening price action to challenge weak longs, and b) come in the context of weak volume.
Calling turns is famously difficult, and Macro Man knows better than to try and stand in front of a risk-asset...err....steamroller. That doesn't preclude booking profits on longs however, which to his eye looks like a prudent way to avoid a head-on collision with the steamroller moving the other way.

Posted by Macro Man at 8:29 AM 9 comments Links to this post  

The Well Runs Dry

Thursday, March 18, 2010

Sometimes, the well just runs dry and you can't muster anything interesting to say. Today, alas, is one of those days for Macro Man. (Some observers might suggest that he suffers from this affliction on a daily basis.)

Oh sure, there's stuff going on: Aristophanes has given way to Sophocles once again, as the prospect of IMF involvement in Greece hovers like the Eumenides over Europe. Important, but somehow uninspiring at the same time.

The UK, meanwhile, yesterday saw the release of data suggesting the sharpest drop in unemployment since John Major occupied Downing Street.

That's unalloyed good news, right? Well, perhaps not, given that it may simply be the latest manifestation of Soviet Britain. In any case, the rally in short sterling since the release of the data is evidence enough that this is a market best watched from afar, rather than in the trenches.

In lieu of anything else worth saying, Macro Man invites readers to take a trip down memory lane (courtesy of links provided by TW), back to the days when men were men, ciggies were smoked in the dealing room, and 35 cable was a big trade....



Posted by Macro Man at 9:47 AM 5 comments Links to this post  

Chermany

Wednesday, March 17, 2010

Well, in the end the FOMC announcement was much ado about nothing. There were a few tweaks- a couple of positive, one negative- to the January statement, and by 2.16 pm EDT markets were left back in "buy everything!!!" mode. As if there was any doubt, the rather unusual choice of language from the Three Stooges in Monday's press release left Macro Man wondering if the president plans to appoint Mr. Subliminal to the Federal Reserve Board of Governors.

As alluded to yesterday, Macro Man is starting to get a little uneasy by the risk asset/ short end roll up love-in. Exactly four weeks before yesterday, your author bought a bit of S&P exposure. He sold the position out yesterday for a tidy 7% gain: it all looks like it's going a bit too far, a bit too fast.

After all, rumbling beneath the surface of the "steady as she goes" monetary policy regime of major central banks (excepting an increase in short end funding from the BOJ) are the makings of a rather nasty bout of protectionism. This is something that's been on the radar for some time, but let's just say that the beeping from the screen is getting a bit louder.

Readers are encouraged to run, not walk, to the latest Martin Wolf piece in the FT, which does a good job of providing a common sense deconstruction of the positions held by China and Germany (or, as he terms them, "Chermany.") These are the two largest exporters of manufactured goods in the world.

Each, in their own way, has locked in an uber-competitive exchange rate with its major trading partners: Germany via EMU and China via serial piss-taking in currency markets. Each in their own way is acting hypocritically: neither wants their major customers to borrow profligately, but neither do they wish for them to quit buying.

One didn't have to be Cassandra, Tiresias, Nostradamus, or even Mystic Meg to forecast that Greece's entry into EMU would eventually cause problems. Macro Man was curious to see that Mr. Wolf arrived at the same conclusion that he himself reached long ago: that the most feasible country to leave EMU is Germany itself.

But hey, at least Greece chose to enter EMU. As has been discussed ad nauseum in this space, the US never signed up to Bretton Woods II: China (and, to a lesser degree, others in the region) imposed it unilaterally. To be sure, the US has reaped the same sort of benefits from BWII that Greece garnered from EMU: much lower than otherwise borrowing costs and a steady stream of much cheaper than otherwise goods from "the daddy" of the arrangement.

It has been a frequent lament of Macro Man and other interested observers in this space that the relevant multilateral institutions (IMF, G20) possess neither carrot nor stick to wean China off of BWII; nor do they seem particularly intent on acquiring them.

However, unlike Greece, the US is not part of a formal de jure currency union, merely a de facto one. The implication is that with sufficient political will, the United States can extricate itself from the current arrangement. To be sure, there may be demerits associated with such a move: higher borrowing costs as China stops buying/sells Treasuries.

But if the perceived benefits outweigh the costs, there are steps that can be taken. Perhaps it is not a coincidence that just a few weeks after the president announced his intention to double America's exports within 5 years, a) he takes China to task over their exchange rate and b) more importantly, the Schumer bill is revived.

After all, Wen Jinbao's complaints over the weekend about countries trying to weaken their currencies to boost exports would be laughable if they didn't constitute the rankest hypocrisy. While it's certainly true that China's trade surplus dipped sharply in February, let's see what it looks like in March without the New Year disruptions.

In the meantime the performance of other Asian currencies since the beginning of last year provide a pretty telling contrast to the flat-line trajectory of the RMB.
The great irony, of course, is that "standing up to China" hardly guarantees a boost to either exports or employment, particularly in the near term. Low value added manufacturing will merely shift to Vietnam or some other economy with a surplus of cheap labour. (Hey, at least Vietnam runs a c/a deficit!)

And by increasing import prices and borrowing costs, the near term impact of "super tariffs" would clearly be negative for risk assets: another reason to be wary of Spoos after this move. Ultimately, however, a rebalancing of the US economy towards less borrowing/consumption and more exporting can only be a positive...well, except for China, which is why they're so opposed to it in the first place.

Posted by Macro Man at 8:30 AM 11 comments Links to this post  

Will They Or Won't They?

Tuesday, March 16, 2010

"Will they or won't they?"

In ordinary circumstances, when such a question is asked on the day of an FOMC policy announcement, it refers to whether or not the Fed will adjust policy rates. Of course, the past three years have been anything but ordinary, and desperate times have called for desperate measures.

So when we ask "will they or won't they" of the Fed today, what we're really asking is whether or not they'll change the "extended period" language, which is popularly believed (though not officially sanctioned) to render a promise of no rate hikes for a period of six months thereafter. Desperate stuff indeed.

For choice, Macro Man would suggest that they give it another few weeks and then tweak the language at the next meeting. After all, having gone through extraordinary pains to assure the market that all its fumbling with the plumbing carried no monetary policy implications, the Fed would, in a sense, be contradicting itself by taking the first opportunity to alter language that (rightly or wrongly) is so intimately connected with the trajectory of monetary policy.

Still, that hasn't stopped markets from wondering (and scrambling.) Equity bears saw defeat snatched from the jaws of victory yesterday as it took the magic of Monday to erase what looked like a "Fed risk premium" down day.

More interestingly, the FX forward market has seen a scramble of dollar borrowing, sending the 3m EUR/USD points into negative territory. This, for the nonexpert, means that 3m USD interest rates are trading above those in the Eurozone. If you look at your screen and see that 3m LIBOR is 0.25% and 3m EURIBOR is 0.64% and wonder how this can be, well....it pretty much tells you what a mockery LIBOR has become.
In any event, while the demand for dollars may well be sourced in non-US banks potentially being cut off from cheap funding from the GSEs, it is nevertheless telling. Squeezes in $ rates/dislocation in the FX forward market have tended to accompany downdrafts in equities...so if you're thinking of a cheeky SPX purchase: caveat emptor.

The question then arises of whether the Fed should be contemplating policy tightening. Your view on this almost certainly depends on your view on US housing (outlook: poor), consumer savings, employment, pent-up capex demand, and other things. The Fed themselves have unsurpisingly highlighted "resource utilization" as a priume determinant of the the trajectory of monetary policy.

To be sure, there remains ample slack in the economy...but by most m6easures that slack is being reduced somewhat. The unemployment rate, even U-6, is well off its highs; industrial capacity utilization, meanwhile, has also begun to tick up steadily.
The appropriate question on the output gap is strikingly similar to that on interest rates: is it the level that matters....or the change? Academic opinion on monetary policy is mixed; the true answer is probably that they both matter, to some extent. So the question then becomes: how much narrowing of the output gap is required before the Fed feels compelled to adjust policy?

The correct answer is almost certainly "quite a bit more." But if the next question is "how much narrowing of the output gap will be required for the Fed to start wishing to give itself some flexibility in its decision-making?", then the answer might be markedly different.

A separate issue, of course, is whether the Fed keeps the funds rate as the primary isntrument of monetary policy, or whether they move to targeting interest on excess reserves (IOER.) Macro Man's understanding is that the latter is set by the Board of Governors, not the Open Market Committee; if that is the case, then targeting IOER will a) shunt the regional presidents further off to the side in terms of significance, and b) raise the question of when the hell the Fed plans to fill out the Board of Governors!

As an aside, students of history will recall that in the early days of the Fed, there was a clear split in the policymaking responsibilities of the regional presidents and the central Board of Governors...and didn't that work out well!

In any event, good luck for this evening, and may BB and co. give you what you wish for.

Posted by Macro Man at 8:55 AM 5 comments Links to this post  

Repo 105

Monday, March 15, 2010

With apologies to Lou Bega....

Ladies and gentlemen, this is Repo 105.
One, two, three, four, five
Everybody on the desk so come on let's call
To the European banks and the mighty house of Morgan
Dick Fuld says we gotta get it done
But I really don't wanna
Ring 'em up like I did last week
The market ain't deep and this crap ain't cheap
We do Treasuries, Agencies, our balance sheet gets longer
And as I continue, the smell is getting stronger
So what can I do I really beg you my Lord
To get a five percent haircut, not just a four
Anything shite, it's no good let me dump it
Please send in the trumpet

A little bit of Treasuries out the door
Ring 'em up again and do some more
A little bit of repo'd GSEs
A little less mortgage-backed is what I see
A little bit of ABS is awfully fun
A hundred fifty billion though is way too long
A little bit of repo ain't a scam
A little bit more? Dick Fuld's your man

Repo 105!

Jump up and down and move it all around
Our balance sheet ain't sound
Got one knee on the ground
Sent some stuff to the left
Get some dough from the right
Sell some bonds to the front
Buy 'em back on the side
Try it on once
Then try it on twice
And if the market can't tell
Then you're doing it "right"

Repo 105!

A little bit of Treasuries out the door
Ring 'em up again and do some more
A little bit of repo'd GSEs
A little less mortgage-backed is what I see
A little bit of ABS is awfully fun
A hundred fifty billion though is way too long
A little bit of repo ain't a scam
A little bit more? Dick Fuld's your man

I do it all to
Try to keep us out of a river of poo
We can run and we can hide
But some day we're gonna take a slide

A little bit of Treasuries out the door
Ring 'em up again and do some more
A little bit of repo'd GSEs
A little less mortgage-backed is what I see
A little bit of ABS is awfully fun
A hundred fifty billion though is way too long
A little bit of repo ain't a scam
A little bit more? Dick Fuld's your man

Posted by Macro Man at 8:31 AM 6 comments Links to this post  

Hut Hut....Hike!

Friday, March 12, 2010

Although the Super Bowl is long past us and the sports pages are now dominated by (delete as appropriate) NCAA basketball/Champions League/spring training/Man U takeover talk, Macro Man cannot get the familiar quarterback cadence (cunningly used as the title of today's post) out of his head.

As highlighted in this space yesterday, the market is aflame with rumours today that China will imminently hike either the RRR, its policy interest rates, or both. And not before time, in fairness. With CPI at 2.7%, the benchmark one year deposit rate (currently at 2.25%) is now comfortably negative. Nooooottttttt exactly what you'd call "appropriate" in an economy that rang up a 10.7% y/y growth rate in Q4.

Compare PBOC's lassitude with that of Malaysia's Bank Negara, which a week ago surprised markets by hiking 25 bps, taking its benchmark policy rate to 2.25%. While that is still pretty low, it's at least maintained a positive real interest rate; the last Malaysia CPI print was 1.3% y/y. And of course, the MYR has actually been permitted to strengthen this year (USD/MYR is down 4% already.) Oh, and Malaysia's GDP growth, while robust, is "just" 4.5% y/y....nowhere near China's.
Small wonder, then, that Barack Obama hit the tapes yesterday calling on China to quit...er....taking the piss. Might this have implications for the forthcoming Treasury "currency manipulation" report? Inquiring minds want to know....

In the US, meanwhile, every day that passes brings us a day closer to the first positive payroll figure, the draining of excess reserves, and, eventually, rate hikes. The last of these outcomes may still be some time away, in fairness. But still...Macro Man has had an uneasy feeling for some time that there was little risk premium priced into the eurodollar strip.

So he was very interested indeed sent him the chart below of eurdollar midcurve vol (essentially, the vol on shorter-dated options on longer-term eurodollar contracts.) While the absolute number may be high, the trend has been all one way, and there is now less of a "volatility premium" in this market than at any point in the last year...even as other CBs are starting to hike and the Fed itself is rumbling about exit strategies.
While some flow has already gone through the market, picking up some midcurve downside certainly doesn't look like the worst trade in the world, as a "bottom of the drawer" lottery ticket if nothing else. And if Ben Bernanke ever decides to act like Peyton Manning....well, the trade would score a touchdown.

Posted by Macro Man at 8:31 AM 13 comments Links to this post  

A China Catalyst?

Thursday, March 11, 2010

Although he personally finds equity markets to be fairly uninteresting at the moment, caught in some sort of soul-destroying (for those short stocks or long vol) drift higher, Macro Man has noticed a slight uptick in throat-clearing and finger-twitching from stock market bears of his acquaintance. Practitioners of chart-reading esoterica appear to be aligning around a view that a top is imminent; although he is not a card-carrying member of the Elliot Wave or (especially) Demark club, your author does tend to at least raise an eyebrow when their assorted congregations begin singing from the same hymn sheet.

In that vein, there are a couple of developments that may warrant attention. Gold, which until very recently had shrugged off dollar strength (or at least euro weakness) amdist stories of Chinese reserve buying, performed noticably poorly yesterday. Not only did it break the uptrend line off of the year's low, but it also has breached the 55-day moving average, which suggests that some of the momentum crowd may start bailing soon. And if gold loses its luster, the risks must surely rise that equities will, at least temporarily, find that their recent shine gets tarnished.
What could be the catalyst? At the risk of drawing from the same well once too often, Macro Man can only point at China. Last night saw the monthly data dump of price, monetary, and activity figures: in aggregate, the results suggested that the current uber-easy monetary settings are become less appropriate by the day.

Retail sales surged 22.1% y/y, and while IP disappointed at just 12.8% y/y (versus a 19% consensus forecast), the undershoot looks like a seasonal adjustment issue; YTD y/y IP rang up a better-than-forecast 20.7% result. Lending and money supply figures also slightly overshot the consensus forecast.

Perhaps most importantly, however, the price data continued to show an acceleration in inflation. PPI and CPI both exceeded expectations (at 5.4% and 2.7%, respectively); significantly, non-food CPI ticked up to 1% y/y.
Why does this matter? Well, it was only last week that PBOC announced that they are pursuing a 3% inflation target for the year; from their perspective, therefore, today's data dump contained little cheerful news. Conspiracy theorists have observed that China hiked its RRR on January 12 and February 12; a swift glance at the calendar reveals that tomorrow is March 12.

Some analysts are also suggesting that an exchange rate adjustment might be imminent; of course, many of these same chaps have been saying the same thing for a number of months now, so their "nudge, nudge, wink, wink" assertions are best taken with an unhealthily large dose of sodium chloride.

Still....if China does move the RRR, hike rates (by some feng shui-compliant multiple of the number 9), or move the FX rate, it could be the catalyst that the bearish priests of chart-reading arcana are looking for.

Posted by Macro Man at 8:56 AM 12 comments Links to this post  

Thoughts On Trade

Wednesday, March 10, 2010

It was all looking like an orthodox drift higher in equity markets last night until the SPX rolled over in a late-session swoon, perhaps on rumours that the government would flog out its considerable holding in Citigroup? Regardless, Macro Man's Bloomberg inbox lit up with comments on the heavy futures selling driving the 7 point reversal.....perhaps this is a sign of the top?

Uh....OK. We'll disregard the fact that in the context of the past couple of years, a 70 bp move in the index within half an hour constitutes more of a "baby's hiccup" than a reversal. No, what made Macro Man laugh was the commentary on the "heavy futures selling." Perhaps there was a large order or two that went through....but even so, aggregate end-of-session volume was utterly unremarkable by the standards of the past couple of weeks- which themselves haven't exactly been a hotbed of activity. If you've found yourself musing that equity markets haven't been particularly interesting recently, perhaps this is an example of why.
China, on the other hand, has become very interesting indeed, and this morning saw the release of February's trade data. While the Feb balance was a bit better than expected, the margin ($7.61 bio versus the expected $7.15 bio) was as thin as a gnat's whisker. What is sure to grab (Chinese) policymaker attention is the fact that a) the surplus is a mere fraction of its 2008 highs, and b) that trend import growth now appears to be very comfortably outstripping trend export growth. It's not exactly a picture that screams out "Reval now!" to Voldemort and chums, is it?

Of course, the Chinese have been saying that "the FX rate won't affect the trade balance" for so long now that Europe and the US could justifiably throw the argument back in their faces at the current juncture. Certainly one region where abject currency weakness a competitive exchange rate has yet to pay many noticeable trade dividends is the UK.

Yesterday saw the release of January trade data...and they were pretty brutal. The goods balance fell to nearly £8 billion, its worst since July of 2008....not exactly what you'd expect with the pound languishing in the gutter, is it? You can't even really argue that it's a J-curve effect, as import growth has been matched almost perfectly by export growth. Maybe it really is as simple as the classic water-cooler lament that "the UK just doesn't make anything that anyone wants to buy."
Now, the overall picture isn't quite as bad, given Britain's tasty services surplus. (Though if Comrade Adair Turner has his way, who knows how long that will persist?) Regardless...it's not a particularly comforting sign for sterling, as it raises the question of just how far the pound will have to fall before it starts supporting the trade balance. In his current mindset, Merv might just want to find out. All aboard the "sterling lower" train then.....at least until, the conductor starts to Swerve.

Posted by Macro Man at 8:18 AM 11 comments Links to this post  

20 Questions

Tuesday, March 09, 2010

It's been a bit of an indifferent start to the week- yesterday's US equity volume was the lowest of the year- and Macro Man is frankly struggling for inspiration. What better time, then, to play another game of 20 Questions?

1) Per yesterday's post, will the US Treasury cite China as a currency manipulator next month?

2) When will the Chinese finally adjust the FX regime (defined as allowing USD/RMB to trade below 6.80 or above 6.85)?

3) What, if any, monetary policy changes will the Fed make this year?

4) Will the FOMC ever be fully staffed again?

5) Who's the first to hike policy rates: Fed, ECB, or BOE?

6) What trades first in cable: 1.30 or 1.70?

7) Man United has won the league three times in a row, been to two straight Champions' League finals, and this year retained a cup trophy for the first time in their long history. What, exactly, are all the fans and the Red Knights bitching about?

8) Have we seen the peak in US 2's- 10's?

9) Are we in for another 2-3 years of slowly eroding house prices in the US and non-London UK?

10) What odds on more QE from the BOE this year?

11) Which trades first in the SPX: 1050 or 1200?

12) Who's going to win the NCAA tournament?

13) Have we seen the last of the snow for this year (fingers crossed)?

14) Is Macro Man going to be wrong about both of his political non-predictions this year (no hung Parliament, no loss of either house by the Democrats)?

15) Has the consensus abandoned the double-dip/W-shaped economic profile in the G4 economies?

16) Do all Americans of "Generation X" vintage and younger regard their Social Security statements with as much scepticism as Macro Man?

17) Will the ECB (and, presumably, others) really start performing their own sovereign ratings, thereby reducing the significance of the ratings agencies?

18) How can anyone be enthused at buying the short end in the US/UK/EMU at these levels?

19) Will the UK get downgraded by the end of next year?

20) When will oil break out of this $65 - $85 range?

Posted by Macro Man at 9:27 AM 22 comments Links to this post  

Zhou Me The Money

Monday, March 08, 2010

Well, when all was said and done Friday's payroll report wasn't half bad. The BLS clearly scuffled with figuring out just how much of an impact the snow had on the data, but even so with only a marginal adjustment for the weather you'd end up with a pretty decent set of figures.

The reaction in equities and "pro-risk" currency pairs was fairly predictable, though the decent performance of European currencies may have been a modest surprise. The star performer was, of course, the yen complex; Macro Man can only wonder if the absence of trolls on Friday was due to the registration requirement or the fact that they were all stopping out of long yen possys...

In any event, while the strip has rolled over, thus far the extent of the damage has been pretty modest. EDZ0 (the fourth contract, for another few days at least) is currently threatening its uptrend line, but at this juncture is only a dozen ticks or so off its highs. What continues to worry Macro Man about the short end is the amount of positioning in the complex: the lower line in the chart below shows aggregate open interest in the eurodollar strip. As you can see, it dwarfs anything observed in 2009 (during which there were obviously a couple of bum-clenching sell-offs.

Caveat emptor.

Switching gears, Macro Man's email/Bloomberg message box lit up like a Christmas tree over the weekend as PBOC governor Zhou made some comments touching upon the RMB exchange rate. Depending on which news source you read, he either said that Voldy will move the RMB exchange rate....or that he won't (any time soon at least.)

It seems as if we're not at the stage where PBOC statements on the currency are going to be parsed as closely as an FOMC statement (or, dare we say, a Harry Potter story.) Sadly, Macro Man's Mandarin ain't what it used to be, so like all other foreign devils he is reliant on the translation services of others.

Unsurprisingly, the nature of the translation that you get is dependent on the viewpoint of the translator. What does seem clear is that Zhou characterized the unwavering peg of the USD/RMB rate as a emergency, "crisis" setting which differs from the previous "normal" crawling peg.

Of course, that "normal" setting only existed for three years, and we're closing in on two years for the "emergency" regime (in addition to a decade before July '05), so one could credibly wonder which policy really is "normal."

Still, the fact that Zhou is willing to even publicly comment on the exchange rate and muse upon the future of the current regime suggests that change will come...eventually. But while sell-side analysts may froth at the mouth at the prospect of "correctly" calling for a move in the RMB, those who actually have risk on the table are justifiably more sceptical, essentially saying "Zhou me the money", as you can see from the less than explosive move in the 1 year NDF overnight.

The question is: will the US Treasury be singing the same tune (Zhou me the money) when it comes time for the semi-annual report on currency manipulation? As enticing as it would be for China to be named (if not shamed), somehow Macro Man doesn't think that the Treasury has the cojones to do it, just like they haven't since 2003. Perhaps Obama can hire Rod Tidwell into Treasury.....?!?!

Posted by Macro Man at 8:43 AM 14 comments Links to this post  

Short End Musings

Friday, March 05, 2010

OK, first things first. Sadly, the last few days have seen the emergence of a particularly boorish class of troll in the comments section, all of whom appear dedicated to proving the proposition that half the world has a double digit IQ. While Macro Man does not enjoy moderating/deleting abusive comments from cretins, neither does he wish to see himself or this space overrun by drooling vermin. He has therefore decided to impose a registration requirement on comments; while it may prove irksome for regular commenters to register for some sort of OpenUser ID, it will hopefully separate the wheat from the raw sewage, so to speak.

And now, on with the show. Today sees the monthly sacrifice at the altar of statistical noise, the US payroll figures, and there seems to be a school of thought that last month's snow will depress the data artificially. While this may in fact be the case, the recent rally in fixed income suggests to Macro Man that risks lay in the other direction.

White/red eurodollars seem to be extremely well-populated; given that, it was very curious indeed to see effective Fed funds tick up to six month highs yesterday. There were all sorts of stories circulating, from limiting GSE lending in FF to domestic institutions to the withdrawal of the GSEs from the funds market altogether. Either way, effective funds (and by extension, LIBOR) bear watching; from Macro Man's perch, the strip is already priced to perfection.
While focus in the US and Europe remains on the (admittedly glacial) progression of exit strategies, in the third member of the G3 the policy bias is rather in the other direction. The Japanese press is full of leaked stories today that the BOJ will expand its extraordinary measures to "support the economy", which an observer might reasonably translate as "weaken the yen."

However, it is not immediately clear that extending/increasing term lending in the money markets will have much, if any, impact. The US- Japan 3 month money spread is more or less zero, and is currently bounded at just 25 bps in favour of the $. Moreover, the relationship between LIBOR spreads and USD/JPY is indifferent at best; the weekly correlation since 2000 is 0.33, but as the scatter plot below demonstrates, there is a pretty wide dispersion of regimes. (The current observation is in red.)
Ten year swap spreads have historically had a much stronger relationship (corr = 0.57) with USD/JPY, both because of the correlation with outward bond flow and given the veritable Fuji of toxic exotic structures that link the exchange rate with swap yield differentials.
To be sure, there have been different regimes in the swap differential- USD/JPY relationship as well, but the link has generally been much stronger than with front end yield spreads. As you can see, the current observation shows USD/JPY as cheap against both the linear and polynomial regressions by some 5-15%. So while the literal impact of an extension of BOJ policy might be limited, the signalling value might be greater. Of course, all bets are off until the end of the month, with reams of JPY reportedly scheduled for repatriation under Japan's HIA program.

As that flow runs its course, however, 'twill be tempting to have a pop at the long USD/JPY trade closer to the end of the month, though for many punters it may be a case of "thrice bitten, fourth time shy." Macro Man can only hope that the recent proliferation of trolls is amongst them....

Posted by Macro Man at 8:16 AM 23 comments Links to this post  

Greek Marathon

Thursday, March 04, 2010

Man, this Greek saga (myth? legend?) just rumbles on and on and on, doesn't it? The last 24 hours has seen a raft of developments, from

a) yet another austerity package announcement (insert joke about the newly Spartan lifestyle of Greek civil servants here.)

b) The IMF (Greece's future partner in reform) welcomed the announcement.

c) So did Moody's, but they also said Greece still needs to show that it can raise funds in the capital markets.

d) The ECB's Nowotny said that it was "unacceptable" that Greece's fate (at least in terms of collateral eligibility at the ECB window) was in the hands of one ratings agency. (The phrase "don't shoot the messenger" springs to mind here.) In any event, rumours have begun to swirl that the ECB will start issuing its own ratings to member sovereigns. Somehow, Macro Man suspects that Greece will sneak in under the "tenderable" bar.

e) The authorities have launched a probe into sovereign CDS, with some reports suggesting that they would ban naked ownership of protection.

f) Quelle surprise! Greece announced the launch of a new 10 year issue this morning.

Whew! That's a lot to digest...and we still have the ECB announcement/press conference today, where punters will want to see whether the bank returns to competitive tenders on its refi ops. Lost in all the kerfuffle about Greece is that, despite the veritable Everest Olympus of negative headlines over the past several weeks, that (in)famous Greek 5 year issue is trading above par.

Still, Macro Man wonders if demand for the new issue will be quite as strong as that for the 5 year, given the extraordinary number of Maalox moments that owners of the latter have had to endure. Still, the prospect of a ban on naked ownership of protection could generate a bit of demand for fresh Greek paper; 'twill be interesting to see if the indicative spread (current mid swaps plus 310) narrows as the book builds.

After all, it's not exactly like fixed income markets are trading what Macro Man would call "sensibly." 10 year swap spreads, a trade that looks right on so many levels, is performing horribly on the only one that matters: actual market pricing. Perhaps it's the weight of positioning or perhaps it's simply a dearth of convexity hedging; either way, it's looking depressingly like these puppies have a date with a negative destiny.

Macro Man thinks they should still work in the long run, but hey- you know what they say about that. At the very least, the trade has turned into a marathon: a test of endurance and stamina instead of a measure of quick-twitch speed.

Speaking of painful ordeals, health care is now a banned topic, except as it impacts financial market pricing. There is really no point having (or in my case, hosting) a debate in which a significant portion of the participants essentially stick their fingers in their ears, close their eyes, and shout "the government are morons so there's no point even trying to change anything!!!"

They are of course welcome to that opinion, and should they wish to express that view, they should feel free to visit the appropriate venue to vent. But after another day of being told "ooh, you Europeans just don't understand anything" by people whose idea of exotic travel is a visit to Bob's Country Bunker, I've had enough.

Off topic health care posts now incur the risk of deletion.

Posted by Macro Man at 8:45 AM 62 comments Links to this post  

Some People Just Like a Good Moan

Wednesday, March 03, 2010

Some people just like a good moan every so often. Take, for example, your intrepid author; when the morning train service faces yet another severe disruption (courtesy of a fire in the London Bridge area), does he resignedly shrug his shoulders and adopt the standard "musn't grumble" attitude of the plucky Brit? No! He instead seizes the opportunity to make "clever" cutting remarks to his friends or, in their absence, random passers-by.

Similarly, when the deputy governor of PBOC says "hey, we're getting worried about inflation" but the Chinese Commerce Minister says "we're gonna stick to our own pace" and "keep the yuan basically stable", does Macro Man stay silent? Of course not! What's the use of hand-crafting a soapbox if you cannot step upon it every so often to point out that the Chinese currency peg is a patent absurdity: in what possible world can it make sense for the world's second largest economy (and owner of the world's largest current account surplus) to mechanistically link its currency value to that of the world's largest economy (and owner of the world's largest current account deficit)?!?!

Still....when it comes to having a good moan, Macro Man must tip his cap to the undoubted creme de la creme, the cadre of European policymaking "elites" who see fit to pronounce upon matters of international finance. Monday's comment from Jean-Claude "Zed" Juncker about the torture implements he keeps in his basement were as remarkable as they were misguided.

While hit-n-run buyers of sovereign CDS protection are pretty clearly suboptimal from both a social and market utility perspective, speculative focus on the sordid fiscal shenanigans of Greece has unearthed a pattern of malfeasance that would make the Gimp blush. For the DOJ to potentially start investigating bearish euro bets is beyond ludicrous.

There weren't any complaints last year, when the euro fell more sharply against the dollar than it has thus far in 2010. (Particularly perceptive readers may also observe that EUR/USD is actually some 10c higher than it was this time last year.)
Moreoever, it was JUST THREE MONTHS AGO that a certain "Z. Juncker, esq." said that "the euro was overvalued and that some adjustment in that area would be desirable." Unless, evidently, that adjustment was based on a fundamental flaw in the single currency project, in which case the perpetrators should be subjected to Zed's dodgy extracurricular fantasies.

M. Juncker, Macro Man salutes you. Your capicity to moan far outstrips his and, he suspects, just about everyone else's. Well, perhaps except for this chap, who's struck upon a cunning plan to fix the stock market!

Posted by Macro Man at 8:34 AM 66 comments Links to this post  

The Day of Reckoning

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.
Source: Demographia

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.

Posted by Macro Man at 9:06 AM 33 comments Links to this post  

Still Standing

Monday, March 01, 2010

Readers will be pleased to hear that after a week of blizzard-like conditions in La Plagne (similar to those which were his undoing last year), Macro Man is still standing after his return to the slopes. To be sure, he wasn't quite as good as new: he dialled down his all-action style to concentrate on his technique, and by the end of the week his knee was sufficiently tender to curtail his time on (and off) the piste. Still, coming as it did just ten months after his ACL reconstruction, the trip could only be called a success.

As he returns to the rugged terrain of global financial markets, Macro Man cannot help but see parallels between some of the prices flickering on his screen and the skiers with whom he so recently shared the snow-drenched Alps. Consider:

* Totally in control: Voldemort continues to lead the rest of the world on a merry dance of "will they or won't they?" move the exchange rate. Like an expert skier, SAFE exerts total control over the direction of the RMB, and like that expert skier USD/RMB blazes a trail that is more or less a straight line.

The recent news that China has conducted a "stress test" of various industries to determine their response to an exchange rate appreciation if, of course, welcome; the reported wailing from low value-added manufacturers of vanishing profits in the event of a 3%-5% rise in the RMB is not. After all, there's no divine right to a trade surplus.
Macro Man stands behind his non-prediction that any FX adjustment will not occur in H1; while the market has embraced the stress test news by sending 3m NDFs "crashing" to their lowest levels since mid-2008, observe that the absolute value of the implied reval is still pretty low. SAFE remains completely in control.

* Can get up and down the mountain with the occasional (serious) wobble. The yield graph of Greek benchmark debt resembles nothing so much as the Alpine landscape that Macro Man recently departed. Making a significant bet on the outcome of the Greek crisis clearly takes a lot of intestinal fortitude, given the outrageous swings in news, sentiment, and price on a daily basis.

Indeed, the whole situation strikes Macro Man as quite similar to a skier careening down the mountain, arms windmilling furiously. Every time you think that they are going to crash spectacularly, they manage to pull out a recovery- the latest of which is the reputed plan to get state-owned institutions in Germany and France to snaffle up zillions worth of Greek debt.
Still, until the intrepid skier is safely at the bottom of the slope, sipping on a vin chaud or biere pression, you cannot fully count on their safety. So, too, it is with Greece; doubts remain about the legality of the European bailout, and even if it goes through there are no guarantees that it will permanently solve lax fiscal policies and uncompetitive trade standing.

*King of the snowplow who spends most of his time falling down. Given that a couple of readers have pointed out Britain's relative ineptitude at the Winter Olympics (despite Amy Williams winning a gold this year), and in honour of the Mr. and Mrs. Twit who a) shouldered their way between Mrs. Macro and Macro Boy the Elder in the lift queue, and b) literally pushed Macro Boy down in the "starter's gate" for the chairlift because he was waiting for his mother, Macro Man is pleased to give this award to sterling, which cannot get out of its own way recently.

Whether it's the suggestion that Merv and co. will embark on a titanic program of QE2, or the recent polls suggesting that Labour is now just 2 points behind the hapless Tories (which, according to the tortured nature of British democracy, would give Labour a 55-seat lead in Parliament), or even the news that the (British) Prudential wants to buy AIG's Asian business for a cheeky $35 billion, sterling has fallen faster than Marion Rolland:



Macro Man can only wish the same for the Twits.....

Posted by Macro Man at 8:01 AM 15 comments Links to this post