Recap 10-14-11

Still having wordpress issues… sorry again for the delay.

Main Items:

  • US Retail Sales Ex Auto & Gas increased 0.5% in Sept vs 0.4% expand 0.1% prev.
  • US Import Prices rose 13.4% YoY in Sept vs 12.4% exp and 13% prev
  • U Michigan Confidence declined to 57.5 in Oct vs 60.2 exp and 59.4 prev. The outlook index fell to its lowest level since May 1980.


  • EU Core CPI increased to 1.6% YoY in Sept vs 1.5% expand 1.2% prev
  • China Data in Sept:
  1. CPI declined to 6.1% YoY as exp vs 6.2% prev
  2. PPI declined to 6.5% YoY vs 6.9% exp and 7.3% prev
  3. New Loans declined to 470bn in 550 exp and prev
  4. M2 growth declined to 13% YoY vs 14% expand 13.5% prev

EURUSD has been a difficult trade for many macro managers this year. In particular, many have been surprised at its resilience in the face of Eurozone stress. This is reflected in the following chart, where EURUSD (white) has not really moved at all in response to a sharp widening in the Itraxx Financials CDS index. (purple) Instead it has moved in almost lock step with interest rate differentials,(red) a relationship that has held steady for a long time:

It appears that real money has just been unwilling to abandon or diversify away from the Euro, possibly because there aren’t any other good currency choices outside the dollar. The flow data actually shows that portfolio flows into the Eurozone has been increasing, with a majority of the investment in money market and fixed income products: (no points for guess the buyers…)

This observation, along with the fact that speculative positioning in the EUR is now quite short, suggests that this Euro rally can continue as risk assets squeeze higher.

On another note, there has been a dichotomy between consumer sentiment and consumer spending data. Real retail sales (orange) is running well above consumer sentiment. (white) Of course, some of the divergence is due to the fact that the retail sales series is the change, while sentiment is not. But even after accounting for this, Consumer sentiment at multi-decade lows do not jive with real retail sales growth of 4%. One possible point to consider is that the survey vs spending populations are now sufficiently different that they will no longer be as correlated. In particular, retail sales may be overweighting wealthy & business spending, whereas the sentiment survey puts a large weight on the poor & unemployed, whose spending patterns may not really impact the retail sales growth data. If so, consumer sentiment will have lower correlations with other economic data series going forward.