Recap 2015-02-05:


The current macro backdrop is inordinately bullish for equities. The broad factors that drive intermediate term equity returns – GDP growth and discount rates, are both strongly positive over a multi-quarter time frame. Barclays notes that after oil sell offs, the S&P 500 has rallied an average of 12% in the year after a trough (median 21%):

To be sure, the sample size includes recessionary and recover periods, which typically results in sharp equity rallies. But the broader message that the stronger earnings growth that tends to occur with a 2-3 quarter lag, along with flower interest rates resulting from weaker inflationary pressures work in conjunction to support equities prices should not be lost. Recall that the 36% rally in the S&P in the first 8 months of 1987 kicked off 12 months after oil prices started falling at the end of 1985 and 9 months after oil prices troughed in April 1986.

Separately, following my note from a couple days ago, I think an easing of the global duration squeeze is likely to allow a sharp reversal in EURUSD. I think we may see levels close to 1.25, if historical linkages reassert themselves.


This is a good read on the Greek situation:

FOMC Paper: Using our estimates of the changes over time in private expectations for the implicit policy rule, and estimates of the effects of the Federal Reserve’s quantitative easing programs on term premiums derived from other studies, we simulate the FRB/US model to assess the actual economic stimulus provided by unconventional policy since early 2009. Our analysis suggests that the net stimulus to real activity and inflation was limited by the gradual nature of the changes in policy expectations and term premium effects, as well as by a persistent belief on the part of the public that the pace of recovery would be much faster than proved to be the case. Our analysis implies that the peak unemployment effect—subtracting 1¼ percentage points from the unemployment rate relative to what would have occurred in the absence of the unconventional policy actions—does not occur until early 2015, while the peak inflation effect—adding ½ percentage point to the inflation rate—is not anticipated until early 2016.


  • BoE kept policy unchanged as exp
  • US Jobless Claims rose to 278k vs 290k exp and 265k prev
  • US Unit Labor Costs rose 2.7% in 4Q vs 1.2% exp. However, the 3Q print was revised down to -2.3% vs -1.0% prev.
  • The CME announced on Wednesday that it would be closing most open outcry futures trading pits in Chicago and New York as of July. Only options on futures contracts and S&P 500 futures pits are to remain open.


  • Fri: US Employment, Canada Employment
  • Mon: China Trade Balance, Japan Eco Watchers Survey, Canada Housing Starts, Australia NAB Business Confidence
  • Tue: UKIP, US NFIB Survey,
  • Wed: US Oil Inventories, UK RICS Housing Balance, Australia Employment,
  • Thu: BoE Inflation Report, US Retail Sales, Jobless Claims

4 thoughts on “Recap 2015-02-05:

  1. With all due respect, I can’t see how EURUSD can go to 1.25 with the ECB printing more than 1 Trillion Euros…..

  2. I think that depends on one’s interpretation of how balance sheet size relates to the exchange rate. If you graph out the relative sizes vs the FX rate, historically the correlation has actually been quite weak. That’s not to say that QE does not impact the currency, of course. Just that there are clearly other factors at play that are at least as important.

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