Caring about weak Chinese data is sooooo last month

And so the big week begins not with a bang but a whimper.   China's industrial production and fixed asset investment data for August both disappointed expectations, with the former printing just 6.1%- well below the government's 7% growth target.  The latter, meanwhile, registered its lowest level since 2000- two years before China's entry into the WTO and back when Pets.com was a thing.

On the plus side, however, retail sales data was a bit stronger than expected, continuing its recent uptick and putting paid to at least a few of the recent fears about the impact of the stock market decline and modest currency devaluation cutting into household demand.  As Macro Man noted last week, the rise and fall in equity prices was so swift that households probably didn't have sufficient time to adjust consumption patterns much in either direction.

                                  Source: Bloomberg

Although it is possible to construct excuses for the weak output data on the basis of the (in)famous military parade, it would seem churlish to deny that the economy continues to decelerate.   There surely cannot be many people these days who don't believe that China has slowed on both a structural and cyclical basis.  The important issue, however, is the degree to which that slowdown (and fallout from the FX regime) is priced into markets.   Macro Man has to confess that the more he looks, the more it seems that a lot of bad news is already in the price of a number of assets; heck, even this weekend's data mix offers at least a microscopic glimpse of the rebalancing that the West has been calling for for years.  Moreover, Friday's change in the RRR rules should further loosen domestic liquidity conditions, further mitigating the impact of any USD selling FX intervention.

Elsewhere, Spooz are rallying on Sunday night because caring about Chinese data is sooo last month and Dr. Pavlov Yellen is set to ring the bell on Wednesday; markets always salivate over a nice piece of bear steak seasoned with the essence of dove.  Having called a hike at this meeting some eighteen months ago, Macro Man has to concede that the tide has gone out and the Fed appears to be rather unlikely to move.

Although the normative question of whether extending the period of uncertainty over lift-off is good for anything or anyone, the Fed evidently believes (or at least hopes) that markets will settle if they do nothing on Wednesday (edit:  Thursday, old habits die hard) , so that is the most likely result.  Many readers have no doubt reached the same conclusion for themselves.

Thus, while Macro Man continues to think that his short January Fed funds but still has some juice on a hold to maturity basis, the reality is that they will squeeze higher on a no-go unless the Fed more or less explicitly promises a hike by year end, which seems inconceivable.  As such, he has cut half of the position for a modest profit- it's not a massive winner, but not terrible for a little tactical bet.  Moreover, ringing the register on it will give him the mental capital to re-sell at better levels should the expected squeeze materialize.

Finally, it's triple-witching this week as the S&P has seen its range shrink since the wild events of three weeks ago.  The odds would certainly seem to favor a big move one way or the other, with the combination of the Fed and expiry making the topside appear more vulnerable.   Perhaps that's the case, but Macro Man's already been burned once on the Dax recently, and is mindful of the way that markets have of confounding expectations.  He's therefore inclined to sit tight, though selling Spooz against the post-"crash" highs might bring a little joy from a tactical perspective.  More strategically, despite the bullish readings from his model he remains neutral at best; another 10-15% washout will make it a lot easier to be constructive.

Good luck to all this week.