Climbing and descending

Macro Man is back in his seat after enacting the past few weeks' of price action in financial markets on the saddle of a bicycle.  First he went up, then down.  Soon he was going back up again; like the recent squeeze in oil, this rise was particularly painful.  Then he went down again, but not as fast as before.  Finally, he went back up, though not as high as the first couple of climbs.  Sound familiar?

Wednesday's piece seems to have been reasonably well-timed, as the ECB cuts its forecasts for the first time all year, increased the amount of each bond issue it can buy, and left the door open for an increase in the amount of the QE program.  Unsurprisingly, European equities had a solid day, even if they retreated from their highs.

As noted in the comments earlier this week, European multiples haven't really expanded since the ECB unveiled its QE program.  To some extent, of course, this may simply be a function of price action in EMU government bonds; after all, yields are higher than they were when the ECB made its first purchase.

Moreover, the experience from the Fed's many flirtations with QE is instructive.   While the first couple of QE episodes were helpful in maintaining the PE multiple of the SPX (multiples fell after the programs ended), they don't appear to have been especially helpful in pushing those multiples definitively higher.  Only QE3- the only QE program that wasn't immediately met with higher bond yields- succeeded in pushing multiples higher.

So there's no guarantee that we'll see a sharp rise in European multiples unless the ECB can jam Bund yields et al. back down.  Even then, of course, there's no guarantee, but it probably wouldn't hurt.

Today, of course, is more or less the last port of call of the S.S. Rate Hike before it sails off into a September sunset.  Market volatility has raised the bar for what the Fed will need to see if they are to move this month; frankly, however, if it's markets that they're worried about then the data is irrelevant...and if it's data that they're worried about, then one could argue that markets should be largely irrelevant.

It seems, however, that many at the Fed prefer to pursue the art of policy alchemy, trying to find the philosopher's stone that will create the perfect conditions- high growth/employment, rising inflation, strong and stable financial markets- for them to embark on lift-off.   Unfortunately, the interplay amongst all of those factors render it virtually impossible that they can all exist at once given the current state of the world.

In any event, Macro Man's model was startlingly accurate last month, missing the NFP number by a mere 7k.  This month's forecast is for a slight deceleration to 188k, which would likely be insufficient to engender a lift-off this month (or, perhaps, next.)   How newly-minted EUR/USD shorts will feel about that could be interesting to see; the ECB apparently gave the market a little carte blanche to have a pop.

Ultimately, however, it seems likely that markets are probably in for a little more up'n'down price action.  Just as Macro Man's cycling season isn't over, the market may well have a few more lung-busting climbs to make....followed by gut-wrenching descents at breakneck speed.   Macro Man can only hope that these moves will be as good for readers' healths as cycling is for his.