Recap 1-22-14: CB Notes, Equity Mkts


Both the BoE and BoC press releases were dovish, despite the trend for improving data. Both noted low inflation in various ways. The BoE minutes noted that equilibrium unemployment may be lower than previously thought, which could give the MPC a green light to lower the UER threshold at an upcoming meeting. The BoC statement noted that the next move could be a cut, though that is already priced in by the market. Both central banks are likely mindful of the risks of a strong currency at this stage of their business cycles, and that is not likely to change.

Separately, here are a few interesting charts from the January BAML fund manager survey:

I’ve noted in the past that historical PE is not the right metric for a world with low growth and low inflation, which implies a lower discount rate, and hence a higher equity P/E that prices in lower expected returns. But until more investors come to accept that, equities may not be able to make significant headway. However, I also think that as price momentum starts up again, the investors with high cash balances will likely need to chase the market. The last time we saw both high cash balances as well as >50% of investors thinking that equities were rich was mid 2004, and the SPX was ~6% higher 6 months later.

Finally, the high cash balance suggests that corrections are likely to be limited in terms of size, duration, or both.

Also, there seems to be a disconnect between EM growth expectations and positioning:


  • BoJ retained their plan for an annual monetary base increase of 60t-70t yen. They see 2015 core CPI at +1.9%, unchanged from the October forecast.
  • BOJ Governor Haruhiko Kuroda: “Of course, there could be both upside and downside risks to the BOJ’s price forecast but such risks have not materialized, and if that’s the case, the current policy will continue.”
  • UK Employment dropped to 7.1% vs 7.3% exp and 7.4% prev. Jobless claims dropped by 24k vs 32k exp.
  • BoE Minutes:
  1. Employment had continued to grow at a faster pace than had been anticipated. The increase in employment was spread across industries, with particularly strong increases in construction and real estate activities, according to the latest Workforce Jobs estimates for Q3. A rising level of vacancies and survey evidence of continued strong hiring intentions suggested that recent employment strength would continue
  2. The rapid growth in employment had resulted in a sharper fall in unemployment than had been expected. In addition, the more timely claimant count measure of unemployment had fallen by a further 37,000 in November, pointing to a further decline in the headline LFS rate. These, together with the stronger outlook for employment, meant that the unemployment rate was now likely to reach the 7% threshold materially earlier than previously had been expected
  3. Pay growth had remained subdued. Whole-economy total pay had grown by 0.9% in the three months to October compared with the same period a year earlier. The slow pace of wage growth was likely to have reflected the continued and surprising weakness of productivity growth
  4. Weak pay growth also pointed to the continued existence of slack in the labour market. The unemployment rate remained higher than most estimates of its medium-term equilibrium value. And, while there was considerable uncertainty around such estimates, shifts in the composition of unemployment had suggested that equilibrium unemployment might be lower than previously thought.
  5. there could be more downward pressure on pay growth for any given rate of unemployment

BoC kept policy unchanged as exp, but the statement read dovish and included a reference to a possible future cut. (though that’s priced in by the market)

  1. The path for inflation is now expected to be lower than previously anticipated for most of the projection period. The Bank expects inflation to return to the 2 per cent target in about two years, as the effects of retail competition dissipate and excess capacity is absorbed.
  2. there have been few signs of the anticipated rebalancing towards exports and business investment
  3. recent data have been consistent with the Bank’s expectation of a soft landing in the housing market and a stabilization of household indebtedness relative to income.
  4. the downside risks to inflation have grown in importance. At the same time, risks associated with elevated household imbalances have not materially changed. Weighing these considerations, the Bank judges that the balance of risks remains within the zone articulated in October, and therefore has decided to maintain the target for the overnight rate at 1 per cent. The timing and direction of the next change to the policy rate will depend on how new information influences this balance of risks
  5. Charts from the MPR:

Australia CPI rose to 2.7% YoY vs 2.5% exp and 2.2% prev

Under pressure from financial regulators, the nation’s largest banks are declining to provide financing for some PE deals that carry too much debt (“too much” has been implicitly defined as 6x debt/EBITDA). The decision could drive up funding costs for the overall PE industry. WSJ

Of the non-financial members of the SPX, just 32% held 82% of all cash ($2.8T). AAPL alone has 5% of all corporate cash (~$150B). This is the highest level of concentration since at least 2000. FT

Upcoming Data:

  • Wed: China HSBC Flash Mfg PMI
  • Thu: EU PMI, Canada Retail Sales, US Jobless Claims, Markit PMI, EU Consumer Confidence, US Existing Home Sales
  • Fri: Carney Speaks, Canada CPI
  • Mon:
  • Tue:
  • Wed: