Friday thoughts

Apologies for yesterday's no-show, but Macro Man had to drop his children at JFK for a kids-only holiday in Blighty.  Given the, ahem, "efficiency" of both the air and road transport systems, your author got home late and was too tired to do anything but hit the sack.

So.   The story of the week has been, if anything, the slightest of pushbacks against the "loadsamoney for everyone forever" narrative that has shaped much of the central bank narrative recently.   Consider:

* Kristin Forbes said in the Telegraph that the BOE needs to see more evidence before cutting rates

* Kuroda pooh-poohed the notion of helicopter money in a BBC radio interview

* Draghi played yesterday's press conference with a straight bat, offering little hint that the ECB might change the capital key metric for allocating bond purchases.

As such, it is perhaps unsurprising to see a continued gentle back up in bond yields and a decline in gold.

However, there are mitigating circumstances for each of these:

* Yesterday's UK retail sales data was putrid, and of course we get the flash PMIs this morning.  The consensus looks for quite a big tumble (down more than 4 points for manufacturing and 3 for services), but that consensus is based off of nothing but sheer conjecture at this point.  It's kid of hard to take the under when the forecast is for such big drops, but to be honest nothing short of a rise in sentiment would be particularly surprising.

* While the BOJ obviously wants to maintain independence, at this point it's hard to even argue for helicopter money until the government passes a supplementary budget and, importantly, issues more JGBs.

* Draghi did say that the ECB was willing, ready, and able to deliver more easing if such were required.   While not quite "whatever it takes", it did at least provide rhetorical cover for further easing at the September meeting.

Perhaps Draghi's most pointed comment was about the travails of the European banking sector, which he described as a "profitability, not a solvency" issue.   That's all well and good, of course, but if you extend profitability issues long or deep enough, they have a funny way of turning into solvency issues sooner or later.   This is particularly the case for an industry such as banking, where balance sheets are enormous in relation to shareholders' equity; a slight downward nudge to the value of assets held, and you can create a solvency issue straightaway.  Do you really believe that every loan on European banks' balance sheets are marked correctly?

Switching gears, it's been noted here and elsewhere how remarkable it is that the VIX has fallen so far, so fast.   On the face of it, of course, it's not surprising that vol is low with the SPX near all time highs.  Still, with all the potential risks out there, it nevertheless raises an eyebrow.  Spot VIX is currently 6% below the 1 SD Bollinger bands around the 40 day moving average; while not unprecedented, it is pretty low.

What is close to unprecedented, however, is the steepness of the curve.   Macro Man plotted the rolldown of the 3rd vs the 1st VIX futures contracts, and compared it to the level of the spot VIX.  The ensuing scatter plot looks a bit like a jellyfish or a comet; either way, the current reading, marked in red, is clearly an outlier.   In many ways, this steepness reflects the market's concerns over various bricks in the wall of worry.  When the curve flattens, that will be the sign that complacency has set in....and that's the time to load up on puts, if you're lucky enough to see it happen.

This weekend sees another G-20 meeting in China, which perhaps explains the recent handbrake turn in the RMB/CNH.   If it persists into next week, meanwhile, we can have a greater degree of confidence that enough is enough.