Recap 9-30-11

Main Items:

  • US Personal Income declined -0.1% in Aug vs +0.1% exp and 0.3% prev. Spending declined to 0.2% as exp vs 0.8% prev
  • Core PCE was unchanged at 1.6% vs 1.7% exp
  • Chicago PMI improved to 60.4 vs 55 exp and 56.5 prev. The report was strong all around, with all major components improving above 60.
  • U Mich Confidence was revised higher to 59.4 vs 57.8 prev.


  • EZ CPI Estimate jumped to 3.0% in Sept vs 2.5% exp and prev. The surprise came from Italy, where inflation jumped to 3.5% YoY from 2.3%.
  • EZ UE was unchanged at 10% in Aug as expected.
  • Swiss KOF LEI declined sharply to 1.21 in Sept vs 1.3 exp and 1.61 prev
  • China HSBC Manuf PMI was unchanged at 49.9 in Sept.
  • Japan CPI was unchanged at 0.2% YoY in Aug vs 0.1% exp. The core measure was also unchanged at -0.5% vs -0.6% exp.


That Euribor futures reaction to the sharp upside inflation surprise to was, in my opinion, very positive. This should increase confidence in the ERZ1 recommendation from a couple days ago. In fact, this should support any sort of long bias in Euro rates.
Regular readers know that I’ve been expecting an EU recession for some time. However, this is still not yet the consensus view. Bloomberg consensus forecasts for EU GDP growth remains positive for all of 2012, and only 1 cut is expected. This suggests that there is room for bunds to rally. The jump in inflation will likely limit ECB action next week given their mandate on HICP, but at least 20-30bps of annualized inflation is coming through via VAT and other tax hikes, according to the HICP-CT measure.
Model based outputs suggest that Bobl yields are only at ‘fair value,’ but given the negative momentum of the data as well as the structural issues, they should be trading through these levels. Technically speaking, it appears the Bobl contract has found strong support at the range low / 50dma and is on its way up again. This all supports increasing duration exposure in Germany.




2 thoughts on “Recap 9-30-11

  1. seems to me that the increased money printing, liquidity provision, balance sheet expansion in soon to move to Europe (including UK) in another round of supposed aggregate demand creation. i’d say that makes the euro and cable susceptible to another leg down. who needs trade tariffs when tanking the currency is so much more politically acceptable and in the UK encouraged.

    my guess is ECB somehow or other gets Eonias back below the 75bp levels before progressing with rate cuts. negative real yields across the curve in the UK upcoming and inflation should be peaking in Eurozone.

    1. Agreed on EUR and Cable. At least until QE3 happens next year.

      A 75 or 50bp EONIA setting will help German debt a lot after the SNB purchases. German rates are going to be stupid cheap until Greek goes or French-German spreads blow out and people realize that doesn’t correlate with stupid cheap Germany yields.

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