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.
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Nico G
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May 1, 2014 at 9:45 AM ×

May day May day

of the many short gammas on flash May 6th, who had the balls to stick to edging close to close uh?



happy May first - we love May

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abee crombie
admin
May 1, 2014 at 3:43 PM ×

Nice post MM, you know the market is giddy when the Fed even points to a recovery in GDP which they have been notoriously poor at predicting. But it seems like 2011 or 12 all over again, no one cares what IS happening but what might happen. 3% growth at some point I guess.

Otherwise earnings have been decent, but the rotation out of small cap and Nasdaq is very concerning still, they cant buy a bid yet. Housing, like mentioned before is still a question mark. The builders seem confident but if we dont see it in the numbers by June I think something will have to give (home prices or the stock market for all housing related)

As for the CapEx cycle, I have been thinking, perhaps the knowledge economy you dont spend as much on R&D and now with startup nation 2.0, you just acq-hire talent/infrastructure. Certainly the pharma model is moving towards it (Valeant). However if you look at the MLPs they certainly are spending (and issuing)

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Anonymous
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May 1, 2014 at 4:10 PM ×

"year-over-year headline PCE +1.15% & core-PCE +1.21% both < FOMC 2% target"

https://twitter.com/BobBrinker/status/461880164448612352/photo/1

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Anonymous
admin
May 1, 2014 at 5:31 PM ×

C Says
Totally off subject. I am struck more and more how todays global unrest amongst (you name it) countries resembles the late 60's and 70's. Issues from labour organising in some emerging through to social unrest via nationalistic notions. God ,you know what I do believe I might still have my Scott MacKenzie 45 somewhere here. I think we will have pick a different destination to march to as San Francisco is just too expensive. I'd suggest Detroit ,but the lyrics don't work that well.

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Macro Man
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May 1, 2014 at 7:29 PM ×

Might I suggest "This Is Not A Song, It's an Outburst" by Detroit native Rodriguez? 40 years after its release and it doesn't really sound out of place...

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Anonymous
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May 2, 2014 at 1:03 AM ×

Even though I'm certainly old enough to know that Rodriguez song, it was new to me. Good one!

- Whammer

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