G3 Recap 4-12-11

Main Items:

  • US NFIB Small Business Optimism declined to 91.9 in March vs 95.0 expected and 94.5 previously
  • US Import Price Index jumped 2.7% MoM in March vs 2.1% expected on the back of commodities, taking the YoY rate to 9.7% vs 8.6% expected and 6.9% previously
  • Fukushima Reactor meltdown was upgraded to a level 7 nuclear disaster, on par with Chernobyl.
  • BoC kept rates unchanged as expected. “The Bank expects that the economy will return to capacity in the middle of 2012, two quarters earlier than had been projected in the January MPR”


  • UK CPI rose just 0.3% MoM in March vs 0.6% expected and 0.7% previously. This took the YoY rate down to 4.0% vs 4.4% expected and previously. Core CPI fell to 3.2% vs 3.3% expected and 3.4% previously. Food prices dropping 1.4% MoM appeared to have been a big driver of the surprise.
  • The ONS also estimated that the VAT hike increased CPI 0.8% YoY in January.
  • UK BRC Like for Like Retail Sales dropped -3.5% YoY, the biggest drop in the history of the series going back to 1995.
  • UK RICS improved to -23 from -26 as expected.
  • German Zew Survey of Economic Sentiment dropped to 7.6 in April vs 11.3 expected and 14.1 previously.
  • Swedish CPI rose 2.9% YoY in March as expected vs 2.5% previously
  • South Korea kept repo rates unchanged at 3% as expected
  • Australian NAB Business Confidence declined to 9 in March from 14 previously


  • UK CPI Data was quite a shocker. When combined with the weak BRC sales data and RICS print, and the general risk off moves globally, short sterling rallied sharply.
    The question is – how much of the inflation data is transitory, and how much is will be paid back? Lacking a CPI model of my own, I can only turn to the market. Interestingly, UK Inflation swaps, which are based off of RPI, barely moved on the day, which is corroborated by Linker breakeven price action.

    Thought the CPI-RPI basis can be volatile, the data appears to continue warrant betting on hikes here, although people are now expecting the first hike date to be pushed back. Given the price action of commodities, however, the balance of near term risks has clearly shifted, so stops should be tight – especially since we are now just below price highs for the year for many of the white short sterling contracts.

  • With earnings season kicking off, now is a good time to review earnings expectations. The chart below shows the change in the estimated 2011 S&P operating EPS so far this year. As you can see, it’s been a pretty smooth ride up, and is now higher by 2.9% vs expectations on Jan 5th:

    However, top down estimates suggest that this pace, which is factoring in 14% YoY growth, is likely to be faster – potentially twice as much.

    The S&P is now trading at less than 13.5x expected 1yr forward earnings – equivalent to a 7.4% earnings yield. This supports the idea that equities remain the most attractively priced major asset class.