G3 Recap 5-11-11

Main Items:

  • BoE Inflation Report: Inflation if forecast to peak at 5% this year, up from 4.5%. It is also set to be above target the entirety of the following year. Growth forecasts were revised down to 2.7% for this year vs 2.9% previously, and 2.8% in 2012 vs 3.2% previously.
  • Mervin King: "The recent pattern of revisions to the projections over the next year — downward to growth and upward to inflation — has continued." Inflation “remains uncomfortably high and well above the 2 percent target. And there is a good chance that, if utility prices rise further later in the year, inflation will reach 5 percent."
  • Merkel endorses M Draghi as candidate for the ECB Presidency.
  • Upscale housing markets in California and NY could be hurt by efforts to scale back the presence of Fannie/Freddie – Congress will not renew the higher conforming mortgage limits come the summer’s end. NYT


  • China:
  1. M2 Growth slowed to 15.3% YoY vs 16.6% expected and previously
  2. CPI rose 5.3% YoY vs 5.2% expected and 5.4% previously
  3. IP rose 13.4% YoY vs 14.6% expected and 14.8% previously
  4. Retail Sales rose 17.1% YoY vs 17.6% expected and 17.4% previously
  5. Fixed Assets Investments grew 25.4% YoY vs 24.9% expected and 25.0% previously


  • Another sharp move in equities today which was likely driven by strong builds in energy inventory as well as position liquidation in commodity futures, after the CME hiked Gasoline and Crack Spread margin requirements. The S&P is down ~1.6% for the month, ~1.1% of which is due to commodities sectors:

    With a backdrop of falling growth expectations, it is easy to assume that the equity sell off is driven by growth worries, but thus far, it appears that equities are reacting more to commodity moves. Recall that the S&P hit a multiyear high just a week ago on May 2nd, even though macro data has been surprising to the downside for over 2 months now. The last time the two series disconnected this much was in 3Q09, (1st chart) and was coincident with a sharp, but temporary sell off in commodities: (2nd chart)

    History certainly doesn’t repeat, but many of the macro arguments for both higher oil as well as equity prices over the intermediate term still apply. As a result, perhaps 3Q09 could be a useful guide for the weeks ahead.