Recap 1-30-13: Tactical Outlook for Risk


A number of items have popped up recently. Most of them are not much important on their own, but when combined paints a bearish picture for risk assets.

Yesterday’s US Consumer Confidence number was surprisingly bad, and warrants a closer look. First, the difference between those responding ‘jobs plentiful’ vs ‘jobs hard to get dropped: (last print drawn in because BBG didn’t update for some reason)

Furthermore, the difference between those expecting higher incomes and lower incomes has fallen to the lowest level in more than 3 years:

Neither of these points are substantial on their own, but the size of the drops, in conjunction with broadly complacent sentiment and rich valuations (see chart below: forward PE is at the highest levels since early 2011, even though earnings growth expectations are substantially lower) makes them a point for concern.

Furthermore, the US Economic surprise index has turned south:

Higher Oil prices are starting to feed into gasoline and add to inflation expectations. Gasoline futures (orange) have increased off the lows and are halfway back to the highs. Along with price increases in other sectors, short term inflation expectations are not far from the highs of previous years.

Finally, the market tone is shifting. Market reaction to the ADP figure was minimal, despite the fact that is was better than consensus and the highest print since last March. Today’s close on the SPX is the worst 1 day change YTD. Several market participants I’ve spoken to seem to expect a mid to late February drop, which suggests the drop could happen before that.

With the positive month end bias ahead, risk assets could rally a bit more. A real sell off needs an ‘excuse,’ but once we get one the market seems likely to move lower.


  • US ADP Employment improved to 192k vs 165k exp and 215k prev
  • 4Q GDP printed -0.1% vs 1.1% exp on the back of sharp drops in defense spending, inventories, and net exports. The details, however, were much better. Personal consumption rose a solid 2.2%, while investment and housing also increased sharply.

Upcoming Data:

  • Thu: German Unemployment, US Personal Income, Jobless Claims, Chicago PMI
  • Fri: Europe PMI, ItalyUnemployment, US Employment, UMichigan Confidence, ISM
  • Mon: China HSBC Services PMI, RBA
  • Tue: European Services PMI, US ISM Non-Manufacturing

5 thoughts on “Recap 1-30-13: Tactical Outlook for Risk

  1. I agree with the consolidation view (see my 2 last posts). In my list of potential catalysts I have: 1/ EM correction due to JPY weakness or 10Y USD rise ; 2/ sequestration / debt ceiling fight starting; 3/ Europe – Italian election; Cyprus mess; Spain corruption scandal; Ireland asking for OMT; 4/ European reaction to strong EUR or US reaction to NJA FX weakness.
    BTW in terms of data, the details of the GDP report were ugly – all strength coming from car sales +0.62+0.25 (Sandy?), and equipment and software +0.86 (windows 8 + iphone5?). Furnishing was only +0.07, and residential investment +0.36, worst net exports at -0.25 isnt encouraging for the weak jpy policy.
    I love what you re doing. Certainly one of the best macro trading blog around. Txs

    1. Hi MacroTTT – thanks very much for your kind words! Indeed, much of the upside appears priced in here. It’s hard to go outright short – probably a bit early still – but maybe sometime in February. Lots of risk assets look rich-ish. Still looking for a catalyst, though.

      I like your blog also – looks like you have been putting a lot of thought into it! Keep up the good work!

      1. Thanks a lot. Actually, I am looking for a smart RV way to sell Italian equities against something (ahead of the elections), but can’t find what, certainly not Spain as the corruption issue seems to be gaining ground. Maybe France? As I have often been impressed by your long / short equity trade ideas… if you feel inspired, I am interested. (I am more of an FX / Fixed Income guy I must say). Txs.

        1. Well, the recent EU PMI prints were pretty good for Germany, and pretty bad for France. The signal vs noise there is not strong, but probably somewhat useful.
          My background also more rates oriented, so I’ll just say this regarding equity RV: it’s a lot noisier than you think it is! So I’d advise starting small and keeping stops wide. Just my 2 cents…

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