Recap 2014-12-10


The move continues. Oil => HY => Equities => generalized deleveraging. And it’s all made worse by the fact that risk free yields (appropriately) didn’t fall that much.

There’s not much to do here, IMO, unless you have some sort of insight into short term movements in oil. Moves of this speed and magnitude will take a while to stabilize, and there aren’t many signs that that process has started yet.


  • RBNZ kept policy unchanged as exp:
  1. The exchange rate does not reflect the decline in export prices this year and remains unjustifiably and unsustainably high. We expect to see a further significant depreciation.
  2. Modest inflation pressures suggest the expansion can be sustained for longer than previously expected with a more gradual increase in interest rates.
  3. With output projected to grow at or above capacity, CPI inflation is expected to approach the 2 percent midpoint of the Reserve Bank’s target range in the latter part of the forecast period. Some further increase in the OCR is expected to be required at a later stage. Further policy adjustments will depend on data emerging over the assessment period.

China CPI declined to 1.4% YoY vs 1.6% exp and prev

An official in Iran’s oil ministry said oil could fall to $40 if OPECs solidarity breaks. OPEC said demand in 2015 will be the weakest in 12 years. Oil is down 2%.

The continued fall in crude oil prices is deepening a rift among the Bank of Japan’s policy board members, indicating that some of them may reject any push for extra stimulus next year… The decline has fueled speculation among market participants that the BOJ will be eventually forced to do something next year, even though BOJ officials have ruled out any incremental action… The presumption that the BOJ will be backed into a corner is something that the four board members who voted against the extra action had feared, people familiar with the BOJ’s policy say. They say that even if crude prices stay weak, the policy board members who voted against additional easing in October wouldn’t give in to pressure to automatically ease. – WSJ


  • Wed: Japan Machine Orders, UK RICS House Price Balance, AU Employment
  • Thu: US Retail Sales, Jobless Claims, New Zealand PMI
  • Fri: China Retail Sales, IP, US Core PPI, UMichigan Confidence, Japan Tankan
  • Mon: US Empire Mfg, NAHB Survey, RBA Minutes, China HSBC Mfg PMI,
  • Tue: EU PMI, UK CPI, German ZEW, US Housing Starts, Markit Mfg PMI, Japan Trade Balance

2 thoughts on “Recap 2014-12-10

  1. Thanks for posting your 2015 outlook last week, was very interesting to read as usual.

    On the point of ‘Oil => HY => Equities’ that you mention, why/how does the market choose to not focus on the relationship (e.g. last week) then suddenly choose to focus on it, i.e. this week?
    Isn’t the argument “cheaper oil + higher wage growth = great for the US” (and hence US equities) unchanged from last Friday’s NFP?
    Aren’t equity corrections more dependent on the realized hiking path vs. what’s been priced as opposed to just moving off the ZLB at a future time the STIR market already expects?

    It seems some of big consensus trades like USDJPY, Japan/US equities & flatteners that worked in a straight line from the October low ended up being due for a correction, and the reasons to justify it can always be found. Or am I completely naive?

  2. IMO, The main reason is that HY had overshot the oil move a couple weeks ago and was able to stabilize last week.

    My view is that this risk off move is not really macro related. As you noted, the data actually suggests stronger growth. I doubt it’s fears of Fed hikes that are driving things right now either given the front end yield have fallen.

    I think in general most reasons are ‘manufactured.’ In this case though, I do think the HY move is the key link between oil and other asset prices.

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