Stepping back into macro

It seems only fitting given today is Leap Day that Macro Man take a large step back from focusing on intraday noise and get back to looking at proper macro developments.   There is no dearth of things to talk about, even if G20 proved to be something of a damp squib.  Although Macro Man has generally taken the view that some of the China doom-mongering is overstated, even he has to concede that PBOC governor's calls to "remain calm, all is well" were as hollow as they were predictable.   Meanwhile, the CNY remains as weak as ever on a basket basis....

Last Friday's economic data in the US certainly put the cat amongst the pigeons as the core PCE deflator surpassed expectations and nudged up to 1.7%, albeit buy the slimmest of margins.  Although Macro Man had warned of potential upside surprises earlier last week,  the health care component cited here was a paltry contributor to the monthly gain, rounding to zero.  This was less even than the deflationary durable goods measure, which notched a 0.1% monthly gain- just its twelfth of the decade.



Still, thanks to some favourable base effects, it's hard to escape the idea that for the time being, the inflationary arrow is pointing north.  What's notable is that core PCE inflation is already above the central tendency for the year  projected by the FOMC in the December SEP, and the committee has established a solid track record of forecasting with the rear-view mirror.  Even if the forecasts don't change much in the March SEP, with the unemployment rate more or less at target and inflation suddenly just three/tenths of a percent from the same, if you didn't know any better you'd have thought that a rate hike next month would be a gold-plated lock, wouldn't you?   To be sure, the short end did sell off on Friday.   Just look at the adjustment in the 1 year-forward market pricing for Fed funds....

...if you happen to own a jeweler's loupe, you can just about make it out.  Combining the two charts above generates a rather interesting result.   While there's obviously more to framing market expectations than merely spot inflation, it should surely play a significant role for an inflation-targeting central bank (even if it's only half the target.)  The empirical evidence, however, suggests that market pricing is negatively correlated with inflation.  While part of this is of course a residue of the Fed's forward guidance earlier in the decade, developments more recently certainly seem problematic.  After all, the entire raison d'etre of an inflation target is to inform the public's expectations of longer-term inflation trends and the central bank's reaction function.   To paraphrase Inigo Montoya, "You keep using this policy.   I do not think it does what you think it does."

Depending on your perspective, the chart above can represent an ineffective communication strategy, an irrelevant statistical quirk, or a substantial opportunity.   Per last Monday's post, Macro Man did sell a bit of Fed funds futures ahead of Friday's number, though inevitably it wasn't enough in retrospect.   One does wonder how strong Friday's employment data needs to be to drag the March FOMC meeting back onto the table.  Regardless, the market is clearly not priced for anything remotely resembling 2% core PCE this year, so there appears to be a clear asymmetry there.

Finally, Macro Man is aware that he's been very quiet on the whole Brexit issue.   Barring unforeseen circumstances he hopes to sketch out a few thoughts tomorrow...but one of the upshots of his take is that the recent rally in EUR/GBP looks like a fade.
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Anonymous
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February 29, 2016 at 7:34 AM ×

Not sure how the governance structure of G20 communiques work but Germany was pretty clear before hand on not communicating any fiscal actions? "Germany against G20 fiscal stimulus package: Schaeuble".

Still the press release read:

"The G-20 members agreed to use monetary, fiscal and structural tools to boost growth, according to a final communique released in Shanghai on Saturday. Underscoring concerns over the limitations of central bank-led stimulus, "monetary policy alone cannot lead to balanced growth," the document said."

"Monetary policy alone cannot lead to balanced growth". How is that for saying it without saying it...

So the effective way forward will definitely be a more pragmatic view of the deficits etc...

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Anonymous
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February 29, 2016 at 11:31 AM ×

I have been doing some research into who these "BTFD" posters might be (you know, the guys who are always long equities) and today I saw this on CNBC:

Warren Buffett: Have bought more stocks since the end of the year, "we're almost always a buyer of stocks..."
Buffett to CNBC on markets: "... stocks will go up over time..."

Coincidence? I think not.

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Booger
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February 29, 2016 at 11:42 AM ×

I think the pendulum is turning in terms of repricing at least another hike for the year. Not hard to imagine unemployment falling to 4.7% and hard not to imagine a rate hike being priced in again if that occurs.

Pol's - yes-no, they definitely will, no they won't Fed hike meter in action again.

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Anonymous
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February 29, 2016 at 1:21 PM ×

How Central Bankers have destroyed your retirement:

http://www.mauldineconomics.com/frontlinethoughts/zirp-nirp-killing-retirement-as-we-know-it/

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Bruce in Tennessee
admin
February 29, 2016 at 2:30 PM ×

Everyone has heard of Big Hat, No Cattle...but I was reading a SF novel last night about a fellow who had to make a decision and his reason for being unsure was:

Too many dots, not enough lines...

...another wonderful investing week begins..

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Anonymous
admin
February 29, 2016 at 2:43 PM ×

Over last 9 days there's been $101B of new corp issues & IG spreads have tightened 15bps in that time (200 --> 185)

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Anonymous
admin
February 29, 2016 at 3:31 PM ×

ECB's QE has failed as Eurozone back in deflation again.

http://bloom.bg/1pk8jaW

German rates negative now out to 9 years.

Double down baby...go for it. #arrogance?

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Anonymous
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February 29, 2016 at 3:45 PM ×

Who would have thought...

"Japan’s banks have almost stopped lending to one another in the overnight market, threatening to undermine the impact of the central bank’s negative-rates stimulus."

http://www.bloomberg.com/news/articles/2016-02-28/kuroda-negative-rate-bazooka-fizzles-on-overnight-lending-freeze

When you are in a hole just dig it deeper.

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Anonymous
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February 29, 2016 at 4:10 PM ×

You all need to read this:
http://thereformedbroker.com/2016/02/25/abundance/

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Polemic
admin
February 29, 2016 at 4:52 PM ×

anon 4.10
Been a pet hteme of mine that not only do we have too much supply, the next gen really dont want to won stuff either so demand is falling. Shoebox appartment, ipad, internet stream and an artisan burger/coffee/gin joint next door and sorted. We are evolving into Daleks. ( see that pic of Zuckerberg and his VR wired up clones at that confernce that was doing the rounds)

Or do you think we need a nice war to destroy it all? May not be too far off.


BTW .. I am more and more convinced taht commodities are going to rip higher. charts, sentiment, unexpected growth, complacent defaltion thoughts etcetceetcetceetetcetectectecetcetc

Pol

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washedup
admin
February 29, 2016 at 5:28 PM ×

So now abundance is bad? Newton, Pasteur, Watt, Baird, thanks but no thanks for F#4ng us over with your fancy science and inventing stuff.
Pol I think this stuff is rear view mirror somewhat - weirdly, the trend no one seems to talk about much is the one where the marginal cost of creating deflation (otherwise known as inverse labor productivity) is rising relentlessly. Also, it isn't necessarily obvious to me that the millennial tendency to rent (or lease, or try for a few minutes and discard) instead of owning, is just a process of commoditizing the luxury goods of yesterday, so internet bandwidth now becomes very scarce over time and becomes the next source of inflation while everyone snoozes about it and currently takes it for granted,just as it becomes the staple of everyday living and directly or indirectly makes its way into the cost of goods, that sort of thing. Weren't these same arguments made in the 1950's and 60's about new culture and technology? Cycles….

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Anonymous
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February 29, 2016 at 6:24 PM ×

regarding Chicao pmi and all these sentiment surveys its a bit opposite of europe in 2010 ...forget sentiment surveys look at activity data and there's a decent growth coming out of the US- enough that you can forget bout -ive rates.
i have added to short bonds and some bund puts-expect QE announecemnt to mark a top in bund yields.
everybody so tilted to this deflation side that inflations trade starts looking good here- staying lon glom equities and short FI
price action supportive as well- take a guess here- last 12 days in IWM- how many down?(3 2 of which were 10bps)
some unloading at 50d avg here but given how much vols come in calls side premium is a decent risk reward( still )here i feel

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Anonymous
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February 29, 2016 at 6:43 PM ×

The Fed is not on hold - wage growth is taking off - they'll have to act.

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Jim
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February 29, 2016 at 6:55 PM ×

XOM priced $12B of bonds across 8 tranches; BAC $2B of 10y sub bonds; looks like a $17B day

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Celeriac1972
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February 29, 2016 at 6:56 PM ×

4:10 on abundance

Thank you for sharing - I enjoyed reading this. I don't think that the central proposition holds water well though. ABundance and scarcity can be seen as two sides of the same coin, and I see nothing that has happened in the last year as supporting the idea of a GENERAL shift from one paradigm to the other.

Polemic's idea of decreasing consumption doesn't ring true to me either. For sure consumption patterns have changed, but I suspect only in the same way as demand for blacksmiths has decreased. Demand for server space, encryption technology, beard wax and craft beers is probably on the up. With growing populations etc I think that an increase in aggregate demand is a safe baseline assumption, and it's important not just to look at "people like us".

The one exception I would perhaps make is that there is an oversupply of money. Now where has that led to in the past...? I showed a savvy friend an avert for a Porsche 993 priced at nearly £100k and was delighted when he responded by saying something along the lines of "Is that how little money is worth nowadays?".

MM - I am looking forward to reading your thoughts on Brexit etc. This is my topic of the week so your interest is timely!

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Anonymous
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February 29, 2016 at 9:10 PM ×

Ackman gotta be puking now

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Anonymous
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February 29, 2016 at 10:21 PM ×

Things I did not know...Fed only hiked once in its history that didn't lead to recession: Greenspan in '94.

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Anonymous
admin
February 29, 2016 at 10:28 PM ×

Since 2007

$26T of New Corporate Debt
Yields: 5% to 3%

$30T of New Government Debt
Yields: 4.1% to 0.80%

Bloomberg

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March 1, 2016 at 1:05 AM ×

One noteworthy item is the out-performance of "Main Street" type investments/stocks this year while high-end stock exposures are suffering. Going back and forth on whether this is a healthy broadening, or the start of problems and the sign of cracks from a negative wealth-effect sensitivity...

Wall Street vs. Main Street stock exposures

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peter smith
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March 1, 2016 at 4:24 AM ×

forgive me off ZH but I so so agree with this

unregulated off balance sheet disaster....

But WMPs are dangerous. In fact, we flagged them as an 8 trillion black swan back in August on the way to asking what would happen if China’s shadow banking sector were to collapse altogether.

This is space that’s running what amounts to an enormous maturity mismatched fraud. Of course the describes the entire fractional reserve banking system, but in the case of China’s WMPs, it’s all on the verge of implosion. Don’t believe us? Just ask anyone who bought into products sold by Fanya Metals’ Shan Jiuliang.

This is a very real threat to the Chinese banking sector. The multifarious nature of the space's liabilities makes it virtually impossible for anyone to assess what the embedded risks are. As we first documented last summer, some 40% of credit risk is carried off balance sheet and that figure might well have grown recently, especially considering mid-tier bank's propensity to extend new credit through new cateogries of channel loans that are classified as "investments" and "receivables"

In any event, China is desperate to revive the credit impulse and that means keeping the shadow banking space alive. Here's BofA with more on China's ticking WMP time bomb:

Growth rate accelerated. By the end of 2015, WMP balance reached Rmb23.5tr, up 56.46% YoY. Astonishingly, growth rate accelerated last year compared to the year before despite a high base – in 2014, the balance grew from Rmb10.2tr to Rmb15.0tr, up 47.25% YoY. The key drivers of this accelerated growth are joint stock banks whose WMP balance rose from Rmb5.67tr to Rmb9.91tr, up 74.8% YoY; city commercial banks, Rmb1.7tr to Rmb3.07tr, up 80.6% YoY. On the other hand, the big four state-owned enterprise (SOE) banks’ balance rose by a more moderate 53.2% YoY (from Rmb6.47tr to Rmb8.67tr) while foreign banks’ balance declined by 25.6% (from Rmb0.39tr to Rmb0.29tr).

Liquidity risk is rising. The outstanding balance of open WMPs, of which buyers can subscribe or redeem largely at will, reached Rmb10.32tr, up 96.95% YoY. They accounted for 44% of bank-run WMPs balance as of Dec 2015, up from 35% a year earlier. The increased share of open WMPs adds to the duration mismatch in the shadow banking sector and makes the system more prone to liquidity shock in our view. In 2015, banks issued Rmb158.41tr worth of WMPs, i.e., Rmb13.2tr a month on average. If WMP buyers decide to ‘go on strike’ for whatever reason, a liquidity crunch in the shadow banking sector could quickly develop in our view.

Implicit guarantee still largely in place. Only Rmb1.37tr worth of open WMPs, representing 13% of the total, are priced based on NAV. Also, the portion of closed WMPs that are priced similarly is tiny. This means that the vast majority of WMPs are still sold with the so-called “expected return”, which is largely viewed as promised return by WMP buyers by our assessment. In 2015, only 44 WMP products, or 0.03% of matured products during the year, caused investors to lose money. This loss ratio appears unusually low in our view. It is interesting to note that most of the 44 products were sold by foreign banks.

Individual buyers still dominant. As of Dec 2015, individual investors, including high net-worth individual investors, accounted for Rmb13.34tr WMP balance, or 56.6% of the total (institutional investors, 30.6%; inter-banks, 12.8%). They subscribed to Rmb101.49tr of the newly issued WMPs during the year, representing 64.1% of the total. Mood of individual investors are more volatile than institutions in general.


The bottom line is this: if this implodes, it will not only tank the entire Chinese banking system but the global economy as well, as the amount of liabilities here is quite frankly enormous.

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Anonymous
admin
March 1, 2016 at 11:54 AM ×

Celeriac1972 / Anon 4:10 on abundance

The point abound abundance is not that we have general abundance of everything.

Manufactured goods, people, capital are in abundance. The impact of abundance is to drive down profit margins, wages and returns e.g there are 100 shale oil companies all making a loss rather than 10 making a profit.

Goods which we cannot quickly (or maybe at all) increase the supply of like property in major cities SF/London/Sydney/Vancouver see massive price rises as capital chases them.

So the impacts are varied and complex. We can all afford iphones and netflix but only a few can afford a family home in a major city. Jobs and wages are under constant downward pressure and that is unlikely to change in the future decades.

-- JM

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