Roll Over, Beethoven

Macro Man’s back in the saddle, or at least his office chair, this morning. Just in time for that noisiest of days, the US payroll report. Unwillingly or not, it is difficult for a macro manager to avoid getting sucked into the mosh pit of NFP. One can only hope that the end result produces more of a Ode to Joy.

Speaking of Beethoven, it certainly looks like a lot of things are starting to roll over. Going beyond the usual peaks and valleys of market price action (more on which below), it certainly does look like the second derivative of growth data is starting to look decidedly weedy.

A roll over in economic surprise indices, noted in this space on several occasions, is axiomatic as forecast profiles are adjusted. But it looks like we are now seeing an adjustment in the actual underlying trend of economic data….potentially heralding the onset of the second half of the much-ballyhooed “W” profile?

Last night’s auto sales figures, the first after cash for clunkers came to an end, is a case in point. Sales fell back nearly to their early year lows, with domestic sales in particular undershooting expectations. So while consumption should show a nice rosy pop in Q3, we’re setting up for a rather less positive figure in this, the new current quarter.

Similarly, the inventory cycle appears to have finally turned. The ISM new orders-inventories spread, which soared earlier in the year, fell sharply in yesterday’s report. While this suggests that inventories are being built in real time, which is actually accretive to GDP, there is likely to be a decent offset as some of that build comes from imported goods, widening the trade deficit.

At the same time, in the absence of a sustained rebound in final demand, the end result will just be another undesired increase in inventories, which will then need to be run down next year.

Looking back at the last cycle, the ISM orders/inventories spread peaked in March before heading back down over the next several months. The stock market swiftly followed suit.

In that vein, this week’s weakness in the SPX (and other risky stuff like Eastern European currencies) could be telling. As readers have no doubt observed, many major indices, including the SPX, have broken what appears to be a pretty important support line.

But wait…..stop me if you’ve heard this one before. One could have (and, in the case of your author, has) drawn a large number of similar trendlines over the past six and a half months…..none of which have worked terribly well.

So while bearish risk structures are making some pretty sweet music this week, from Macro Man’s perch the jury remains out. Yes, the data has rolled over like Beethoven…but having been burned before, he will reserve judgement before playing the Victory March….it could all still go to the dogs.

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