Recap 10-23-13


Consensus now seems to be for a March taper, although I think in general people are unsure. Bernanke’s speech in May was a surprise, and the decision to not taper was an ever bigger one. The new debt ceiling also gets hit by mid March. All in all, it’s fair to say that no one knows when the taper will happen, but it’s not likely in the near future.

I thought that 10y yields above 2.75% for an extended period would drive a slowdown by 2Q next year, but with the retracement, that looks much less likely now. As one would expect, carry and risk on trades are back. Unhedged carry trades seem kind of like picking up pennies on the road, however… you are essentially betting on your ability to sniff a taper before the market, and the front end of the yield curve is already sitting right on top of FOMC projections. And the information ratio of holding a TY future (with a 1.8% yield and 5.5% vol) is just ~0.3.

US stocks seem to be on a cusp, sitting at the uptrend line. Market seems to expect a correction, but note that it could also re-accelerate higher. There is a lot of misunderstanding of what is driving stocks, but I will do a separate analysis of that in the future. The only point I want to make now is that given this backdrop, “fair” PE could realistically be >20 vs 16.7 now.

AU rates also seem interesting. Market is expecting one more RBA cut, with the recent strength in AUD$ a factor. But it is worth noting that recent RBA statements has changed and has stopped mentioning FX strength as a problem. Rather, they have just noted that a weaker FX could help… but that is the case with most developed economies. Model outputs suggest that the last cut was a mistake, and with the recent strength in the inflation data there, a further strengthening in business or labor market data could shift the RBA stance toward the hawkish side. Of course, the resource investment peak is still an overhang, but the data suggests that the knock-on effects have been contained so far. In any case, one could also make the argument that as the resource boom was something of a one-off, its contribution to growth to GDP over the past decade should not fully be seen as an increase in potential GDP.

Finally, these charts from BAML last week was interesting:


  • EU Consumer Confidence improved to -14.5 in Oct as exp vs -14.9 prev
  • AU CPI rose 1.2% QoQ vs 0.8% exp, although the trimmed mean measure was inline at 0.7%. Many banks have expecting a further cut now expect them to happen later.
  • White House economic advisor Jason Furman said the government shutdown may have cost 120k jobs in October.


  • The selloff in Asia was attributed to a spike in short term rates in China. Shibor increased 42 basis points to 4%, the most since July. The central bank suspended reverse repos refraining from adding liquidity while corporate tax payments drained cash from the system. Yesterday’s quote from the PBOC advisor on tightening policy to tame inflation is already taking place.
  • China could unveil fresh property curbs in Q4 to help clamp down on overheating prices
  • China’s biggest banks tripled the amount of bad loans written off in 1H, writing off $3.65bn in debt.
  • The Journal said Chinese demographics are deteriorating and could trim GDP growth by ~3% annually between 2012 and 2030.

Upcoming Data:

  • Thu: EU PMI, US Jobless Claims, Markit PMI, Japan CPI
  • Fri: GermanyIFO, UK 3Q GDP, US Durable Goods Orders, UMichigan Confidence
  • Mon: Italy Business Confidence, US Capacity Utilization, Pending Home Sales, Japan Retail Trade, Overall Household Spending
  • Tue: Germany GfK Consumer Confidence, French Consumer Confidence, US Retail Sales, Consumer Confidence
  • Wed: US ADP Employment, CPI, FOMC, JapanPMI, UK GfK Consumer Confidence, Australia New Home Sales, Building Approvals