Recap 2-20-14: Some Observations Supporting Risk-On in DM


The divergence between the US economy surprise index and treasury yields suggest that the market believes the recent string of weak data is temporary and weather driven.

The bad weather on the East coast finally appears to be abating, so this looks pretty reasonable. To the extent that bad data received over the next few weeks is likely to be attributed to weather effects, there is probably more room for positive surprises, and hence upside in yields and/or equity prices. Adding to this view is the fact that the money markets are back to discounting a minimal risk premium vs FOMC forecasts, which means that unless the data is bad enough to convince the Fed to delay its hiking schedule, the expected excess return at the front end is near zero.

Obviously, higher US yields are not likely to be positive for EM. February has been fairly quiet for EM so far, but how they react to a retest of yield highs will be a good indication of whether the adjustments to date have been sufficient.

Separately, this is a little late but here are some interesting charts from BAML’s Fund Manager Survey:

Finally, another great post by the NY Fed today, suggesting that despite all the recent talk regarding deflation in the Eurozone, few forecasters really believe it to be a real risk:

Measures of inflation uncertainty remain elevated… However, an examination of low tail risks indicates that survey participants are not worried about deflation. The low tail risks are based on the distribution of probabilities that individuals assign to deflation outcomes corresponding to the 50th, 75th, and 90th percentiles. While there was an increase in the probabilities of those respondents most concerned about deflation, the change was slight compared to the previous survey and the probabilities remain below values observed toward the end of the previous recession. Further, over half the respondents assigned no probability to deflation over either forecast horizon, similar to their recent responses


  • PMI:
  1. China Flash Mfg PMI declined to 48.3 vs 49.5 exp and prev
  2. EU Mfg PMI declined to 53 vs 54 exp and prev, driven by Germany. Germany dropped 1.8pts to 54.7 and France dropped 0.8 to 46.9
  3. EU Service PMI stable at 51.7 vs 51.9 exp and 51.6 prev
  4. US Markit PMI rose jumped to 56.7 vs 53.6 exp and 53.7 prev
  5. Philly Fed dropped to -6.3 vs 8 exp and 9.4 prev. But “comments suggested that much of the weakness was attributable to the severe winter weather that affected the region during the survey period”

EU Consumer Confidence declined to -12.7 vs -11 exp and -11.7 prev

Jobless Claims stable at 336k vs 335k exp and 339k prev

Wage Inflation / Minimum Wage:

  1. WMT said it’s looking at supporting an increase in the federal minimum wage. “Wal-Mart is weighing the impact of additional payroll costs against possibly attracting more consumer dollars at its stores” – Bloomberg
  2. The CEO of Gap announced to employees that, in line with its promise to “do more than sell clothes,” it will raise the minimum hourly rate for U.S. employees to $9 in 2014 and $10 in 2015 across its family of six brands. This will ultimately benefit about 65,000 store employees.

Upcoming Data:

  • Thu: BoJ January Minutes,
  • Fri: UK Retail Sales, CA Retail Sales, CPI, US Existing Home Sales
  • Mon: German IFO, EU CPI,
  • Tue: Italy Consumer Confidence, US Consumer Confidence, Case-Shiller House Prices
  • Wed: UKGDP, US New Home Sales
  • Thu: EU Money Supply, Canada Current Account, US Durable Goods Orders, Jobless Claims