Dissecting Some Data

Yesterday's data points proved sufficient to suck in more buyers of US and Eurozone fixed income, though it remains to be seen whether payrolls and next week's ECB will spit them out.  At the very least, the data provided a bit more drama than the Fed statement, which was largely uneventful and gave equity buyers another excuse to fill their boots.  Barring a sharp decline tomorrow, it looks like US equities will enter payroll day close to all time highs for the third month in a row.

Although Eurozone CPI recovered modestly to 0.7% y/y, it nevertheless undershot expectations for a rise up to 0.8%.  Given the recent rhetoric from the ECB, combined with the strength of the euro and a decline in excess liquidity below the "magic" 100 billion barrier, this surely makes action at next week's meeting a done deal, right?

Long-time ECB watchers will know that there is rarely such a thing as a "done deal" in Frankfurt, however (except perhaps ill-timed rate hikes smugly delivered by M. Trichet.)   Moreover, yesterday's data can also provide an explanation as to why at least one important cadre of the European monetary authority appears to be dead-set against further easing.  Hard as it is to believe, given the ongoing travails of the Eurozone economy, the continued labour market slack in the Anglo-Saxon world, and the stuttering growth in emerging markets, but the job market in Germany is absolutely in Brand.   Not only is the current 6.7% unemployment rate the lowest since unification, but other than three months right before East and West Germany united, it's the lowest since 1981!  Small wonder, then, that the Germans have fought against further easing to bail out the "lazy" southern countries.

With red euribors on their contract highs and offering negligible carry to the spot fixing, Macro Man can only wish recent purchasers good luck and God speed.

Switching gears to the US, the Q1 GDP was a shock relative to the published consensus, but less so if one takes a step back and merely recalls the disruptions caused by the weather for the first 6-8 weeks of the year.   Of course, one could reasonably query why the weather should drive weakness in net exports and inventories, two of the major drivers of the downside surprise.  In fairness, capital expenditure was also weak, which one could rationally blame on the weather disruptions.  Of course, that doesn't explain why corporates seem more interested in distributing cash than spending it, and in spending it on M&A acquisitions rather than capex.  There certainly seems to be a risk that firms have skipped the capex cycle and cut straight to the leverage cycle (borrowing to finance buybacks or M&A deals.) 

Finally, it's also worth noting that the robust (cough) consumption growth was driven largely by spending on healthcare (Medicare payback, presumably) and housing/utilities (Macro Man certainly spent more on heating than usual last quarter.)

Meanwhile, the news on labour compensation was underwhelming, to say the least.   The ECI printed a tepid 0.3% quarterly rise, with the yearly gain slumping to just 1.8%.   Meanwhile the Senate garnered insufficient votes to raise the minimum wage.   Regardless of where one falls on the true long-term economic impact of the latter, it's not difficult to construct a scenario in which the juxtaposed headlines "Labor Compensation Falls to 32 Year Low" and "Senate Nixes Rise in Minimum Wage" exact a small hit on consumer confidence.

The Bloomberg consensus calls for a 3% rise in real GDP for each of the next five quarters.  Perhaps that will be right- hey, Chicago PMI ripper higher to 63!  However, the deeper that Macro Man digs, the more that this looks set up for disappointment.  While it's clear that the market will want to sell fixed income on a strong payroll number, it is not at all clear to your author that this will prove to be a wise course of action.