Recap 2-22-13: Thoughts


It increasingly looks like we may be entering a period of moderate risk off.

In the Fed minutes, inflation expectations were not mentioned, but probably were still a concern. Current regional Fed Presidents are mostly career Fed employees, having learned the ropes a few decades ago when inflation was still the biggest Fed concern. It is very hard to change the pattern of thinking developed and followed such a long time ago. As a result, barring much weaker data, FOMC discussion will likely continue to focus on eventual QE exit. This is likely to be the case even though the FOMC leadership is likely much more dovish.

Improvements in the data also appear to be stalling a bit. US Jobless Claims this week was not good, and the 4 week average is just barely below the reading from 52 weeks ago, although the effects of Sandy may continue to be a distorting factor. US housing data also appear to be moderating, (NAHB did not improve last month and has missed expectations 2 months in a row) as mortgage rates in the US have increased to the highest level in 6 months. The PMI prints out of Europe yesterday were also unpleasant. There are also increasing concerns of a tightening cycle in China, given recent PBoC actions.

The US Sequester concerns + payroll tax hike effects look likely to hit at the same time. While the sequestration itself is probably not a big deal, the end of the continuing resolution on 3/27 could be. Failure to reach an agreement will lead to a Federal government shutdown, and the political climate suggests that things will likely go down to the wire again, and possibly over. Market discussion has not focused on this risk yet, although that will certainly change in the coming weeks.

Valuation wise, the S&P is just below the richest level in almost 3 years:

Positioning also supports a moderate risk off move. Global equity market momentum has been slowing for a few weeks now, while a BoA survey last week showed that respondents were the most bullish risk in several years. HY bond prices are near multi-decade highs. Furthermore, a JPM treasury survey showed that respondents were most short since July 2011.


  • The 2nd LTRO was just 61bn vs ~125bn exp. The cumulative repayment now stands at €212 bn (21% of initial take-up), leaving the LTRO cash in the system at €807 bn.
  • German IFO improved to 107.4 vs 104.9 exp and 104.3 prev. The business outlook for the construction sector reached its highest level since German reunification.
  • German 4Q GDP dropped -0.6% QoQ, driven by a sharp drop in Net Exports, which took GDP down by -0.8%.
  • Canada Core CPI declined to 1.0% vs as exp vs 1.0% prev
  • RBA governor Stevens said the Aussie was somewhat too high, but that he would not intervene unless the currency was significantly overvalued.
  • Hong Kong doubled the stamp duty on all properties above HK$2M as the government looks to clamp down on real estate prices – Bloomberg
  • USDA forecast US 2014 corn inventories will be the highest since 1988, while soybean inventories will double. Wheat inventories is projected to fall to 639mm vs 691mm prev

Upcoming Data:

  • Mon: China HSBC Flash Mfg PMI
  • Tue: US Consumer Confidence, New Home Sales
  • Wed: French Consumer Confidence, EU money Supply, UK 4Q GDP, US DGO, Bernanke Testifies, Oil Inventories, South Korea Mfg Survey, Japan PMI
  • Thu: Month End, German Unemployment, US Jobless Claims, Japan CPI, China Mfg PMI, HSBC Mfg PMI
  • Fri: US Sequestration starts. ItalyMfg PMI, UKMfg PMI, US Personal Spending, ISM Mfg