Recap 3-01-13


Mind dump on SPX:


  • Very strong US Data. Quite impressive – no doubt about it! Consumer Confidence, New Home Sales, Core Capital Goods Orders, Pending Home Sales, Jobless Claims, ISM, ALL surprised to the upside. One caveat, however, is that we’ve seen this pattern before. For 4 years running now, we have gotten strong economic surprises in Feb. In the past 3 years, however, the data surprises peaked in Feb/Mar and declines for the next 4-5 months. So one risk is that seasonality adjustments that are an artifact of the last recession continue to impact the data.
  • Gasoline futures have dropped sharply as of late, which will boost spending, but it will take some time before effects are felt
  • Technicals. Shrugged off the down move, close to unchanged for the week.


  • Sequester may have a bigger effect than people think. Yes, it’s only ~50bps of GDP, but the bulk of the impact is likely to hit within 2-3 months, which means that’s a 2-3% hit to GDP growth on an annualized basis. It is quite possible that the effect is mitigated, via either the way it’s implemented by the White House or a deal, but since the market is expecting a minimal impact, odds are for a surprise to the downside
  • Europe. I know I’ve said that in the longer run, the Italian elections won’t be that big of a deal, but in the shorter term, most of the risks are skewed to the downside. Political jockeying suggests that coalitions may take time to form. Most scenarios will be interpreted negatively by the market, and money is starting to move away from the periphery again, as evidence by bond spreads. Also, European data has been pretty weak. French and Italian PMI were both unpleasant, after some marginal improvements in recent months.
  • Monetary Policy. Not an outright negative per se, but it’s probably worth noting that the ‘put’ is farther away. A recent Fed paper showed that under baseline projections, the Fed will have a small negative capital for a few years. In conjunction with inflation expectations that are at the higher end of the range, the hurdle for additional easing appears to be higher. And as a smart acquaintance pointed out, it makes no sense for the ECB to ease now to help Italy, after the Italian electorate appeared to reject the ECB’s austerity prescription.
  • Valuation is rich relative to the past few years.
  • Technicals. Higher volatility, slowing momentum, (SPX basically unchanged the past 3 weeks) defensive rotation. (Best two sectors for February were Staples and Utilities. Worst were Materials and Energy)

Other Opinions:

  • WTI seems rich and over-owned. I think we will see sub $90 at some point.
  • MXN also appears quite rich, although a correction from here will probably need a global risk off event.
  • RBA likely to keep policy stable next week, with a possible reduction in its dovish bias. Over the past month, data has broadly been stable, with improving employment, decent capex plans, and importantly, a weaker currency.


  • US ISM jumped to 54.2 in Feb vs 52.5 exp and 53.1 prev, the highest print since June 2011
  • Bersani rules out grand coalition w/ Berlusconi. Republica says Grillo is “open” to a continuation of the Monti administration to continue the urgent reform process. Berlusconi reportedly said that that Italy needs new elections.
  • China PMI declined to 50.1 vs 50.5 exp and 50.4 prev. The HSBC measure also dropped to 50.4 vs 50.6 exp and 52.3 prev
  • Italy Mfg PMI dropped to 45.8 in Feb vs 47.6 exp and 47.8 prev
  • UK Mfg PMI dropped to 47.9 vs 51 exp and 50.8 prev
  • Japan CPI declined -0.2% YoY as exp

Upcoming Data:

  • Sun: Kuroda testifies in front of the Diet
  • Mon: AustraliaCurrent Account, China HSBC Services PMI, RBA
  • Tue: Italy / UK / US Services PMI, EU Retail Sales
  • Wed: EU 4Q GDP, US ADP Employment, BoC, Oil Inventories, Australia Trade Balance
  • Thu: BoJ, French Employment, BoE, ECB, US unit Labor Costs, Jobless Claims,
  • Fri: Japan Eco Watchers Survey, China Trade Balance, Canada Housing Starts, Employment, US Employment, Banxico