Crude breaks the pincers

Yesterday went just about as planned.    European equities enjoyed another solid day while the S&P took a breather and a little dip, justifying calls for Turnaround Tuesday.   Meanwhile, it looks like the pincers were broken in crude oil, which put in a very nice day to break through the little downtrend line...and unlike last week, it sustained a nice close above it.  If crude can break above the late-August highs (about a buck and a half away), expect CTAs to get stuck in to close their positions, which could be fun to watch.

By the time you read this, the BOJ will have announced policy, with relatively little expected for this meeting (but something like a 50/50 perceived chance of more easing at the month-end meeting.)   Recall that it was last October that Kuroda supplied the market with ammunition to drive the rip in USD/JPY and the Nikkei; both they and Japanese CPI have stalled, largely for reasons outside of the BOJ's control.  While Kuroda is undoubtedly clever enough to understand this, by the same token he faces pressures to keep the ball rolling; his press conference will be interesting in terms of any hints given as to the near-term prospects for policy shifts.

Readers will recall that Macro Man suggested selling the Nikkei just as the wheels were starting to come off of global equities; while obviously a shock easing is a risk to that view, other than that Macro Man finds the Japan trade to be really quite uninspiring at the moment.  If you feel like USD/JPY is stuck in the mud, you're not wrong; it's traded on both sides of 120 every day but four since the beginning of September.   Zzzzzzz.

Now, on to China.   YUM brands is reportedly considering a name change to YUK, not only because of the dismal quality of their culinary offerings, but also because of its tepid growth and disappointing earnings...which they laid squarely at the door of the Chinese consumer, as Chinese revenues only increased 2% y/y.   Given the contradictory message from this report and Nike's, it's hard to know how much this says about the consumer's spending power and how much of it is disenchantment with the Colonel's chicken.

Meanwhile, there was an interesting paper recently published by the SF Fed on China.   The ostensible purpose of the paper was to determine if China has a history of fudging its GDP figures via looking at other countries' export figures.  (The conclusion was that it used to, but the data is more reliable since the crisis....perhaps less pressure to grow at breakneck speed implies less pressure to lie.)

In any event, the authors identify a range of ancillary indicators, and various combinations of them, that offer a good (and reliable) proxy for Chinese activity.  Macro Man used an amended version to create a little indicator of his own (if anyone has access to a time series of the 5000 enterprises diffusion index of raw materials supply, by all means share!)  In any event, the indicator seems to track the recent trend of published GDP fairly well...

...albeit showing lower growth than the official number.   Then again, that's the widespread view the true state of Chinese growth, so it's no bad thing.  Interestingly, the high-frequency version of the indicator suggests a flat trajectory of growth over the past few months, which jives nicely with Macro Man's general view that China has slowed but isn't collapsing.

We're due to get the report on September's FX reserve data in the next day or so (EDIT: It was released last night, and showed a smaller than expected decline of $43 bio; while not sustainable ad infinitum, it certainly doesn't convey any sense of a rapidly deteriorating situation.)   this should be closely watched for clues to the severity of capital flight and the degree to which the current account is mitigating its impact.