Recap 8-09-13


Very interesting:


  • Canada Employment dropped -39.4k in July vs +1-k exp and -0.4k prev. Unemployment rose to only 7.2% vs 7.1% exp and prev as the participation rat dropped to 66.5vs 66.7.
  • RBA Statement on Monetary Policy:
  1. GDP forecast lower by 0.25% to 2.25% for the year. “GDP growth is now expected to remain below trend through to around the middle of next year, before picking up to above trend in 2015.”
  2. Employment growth is expected to be only modest over the next few quarters, consistent with the below-trend growth of the economy. This will see the unemployment rate increase gradually for a year or so.
  3. Overall, the forecast for inflation is broadly unchanged from that in the May Statement
  4. At its recent meetings the Board had noted that the inflation outlook would afford some scope to ease policy further, if needed to support demand. The recent price and wage data do not suggest any lessening of that scope from an inflation point of view, and the expectation is for inflation to be consistent with the target even with the effect of the depreciation. At the same time, indicators of demand have generally been a little soft of late, and the outlook for activity has been lowered, with growth expected to remain below trend for a time.
  5. Fun Charts:
  • China Data:
  1. M2 growth rose to 14.5% vs 13.9% exp and 14.0% prev
  2. CPI: stable at 2.7% vs 2.8% exp
  3. IP jumped to 9.7% vs 8.9% exp and prev
  4. Retail Sales growth declined to 13.2% vs 13.5% exp and 13.3% prev
  5. Anecdotals: Auto sales and bank lending all topped expectations. Importantly, electricity production (which many consider a more “honest” gauge of growth) surged 8.1% in Jul (JPM)

Japan M2 growth declined to 3.7% vs 3.8% exp and prev

Upcoming Data:

  • Mon: Japan 2Q GDP, US WASDE reports, US RICS House Price Balance, Japan Machine Orders, Australia NAB Business Confidence
  • Tue: UK Inflation, German Zew, US Retail Sales, Australia Consumer Confidence
  • Wed: France GDP, Employment, BoE Minutes, UK Unemployment,
  • Thu: UK Retail Sales, US Jobless Claims, CPI, NAHB Survey, Philly Fed
  • Fri: US Labor Costs, Housing Starts

4 thoughts on “Recap 8-09-13

  1. Thanks for that link; very interesting.

    It seems the mood music has changed in the last few weeks, with fear of being wrongfooted by a China slowdown replaced by fear of missing the bounce. The poster child for this seems to be the CAD, which shrugged off truly horrible domestic data last week to focus on some Chinese straws in the wind instead.

    This has got my spider sense tingling, and I’m out of those AUD bill flatteners et al that we discussed a few weeks back, given the Aussie short end’s exquisite sensitivity to any perceived turns in the cycle (if anything, I’m guessing this tendency has been exacerbated by the extreme vol we’ve seen in summer 2011 and again summer 2012, which probably thinned out the herd a fair bit).

    Even trying a heretical cheeky punt MXEF vs SPX to go with my long Eurostoxx divis vs SPX.

    I’d be interested to hear if your thoughts on AUD rates have changed at all since mid-July?

    1. Hi Vandals,
      Yup, people definitely seems to be getting more optimistic. It’ll be interesting to see how far that will go. China real M2 hasn’t really changed much over the past 12 months, so I’m not sure how much to read into it all. I suspect that (bearish) expectations should normalize vs trend data levels, but that’s about it.
      IMHO, on a outright basis, AUD rates look rich, even the short end. But the trend is clearly towards weaker employment, so even if this assessment is right, this could resolve itself over time.
      The steepness of the curve is hard to model, but has some correlation to changes in the short end levels, so this argues for stabilization or some steepening. Having said that, on a macro basis, the steepness of the curve still doesn’t make sense. We’ve discussed how the RBA probably won’t want to tighten policy until after mining capex bottoms given that the risks there are mostly to the downside, and we are at least several quarters away from that data point.
      The relationship of AU rates to China is well noted. I would add, however, that over the past couple years, Chinese stocks have actually lagged AU rates by roughly 1 quarter. So I am not sure how the China data will impact AU rates going forward. 20-30bps per qtr of positive carry is still enticing, so on net, I’d wager that flatteners are noticably less attractive vs a month ago but still interesting…

      1. Thanks for your thoughtful and detailed reply. On Aussie rates, I think I have a reasonable handle on the RBA’s reaction function given they have been pretty clear and consistent; on my Antipodean rate-trading peers, not so much. They’ve been quick to jump the gun at perceived turns a number of times, and my guess (just a hunch) is that the experiences of the last two summers will have made them even more gun-shy. Hence, with my sense that a narrative is gaining traction, even if it ultimately turns out to be spurious, I’m ducking for cover….or perhaps this is all an elaborate rationalisation to intellectually justify clearing the decks so I can enjoy my upcoming holiday in peace.

        On a somewhat related note, have you seen this? Nothing that we don’t already know, but I like the way they put it all together. The second chart on p.22 is a real doozy, and probably the best argument against Chairman Summers :-)

        Thanks again for the quality blog.

        1. You are right on Au rates so far! Nice timing.
          Thanks for the link – that was an interesting chart indeed. I think the only thing that presentation missed is how much additional treasury demand came from US banks due to the new risk weightings.
          Thanks for the compliment and enjoy your vacation!

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