The next couple of days should be fairly interesting. The SPX did indeed close above its 200 day moving average, as did the Eurostoxx….but of course, this came after what’s already been a super-strong rally. Immediate follow-through has been tepid, to say the least, for what it’s worth (i.e., not much.)
Similarly, the dollar looked like it was really on the rack yesterday, only to catch a magical bid against the yen late in the London morning, which has since filtered through into other stuff today. It’s no biggie if you’ve been along for the ride, of course, but if you’re trying to re-immerse yourself like Macro Man is, it just makes things a bit trickier.
On the surface, the macro data out of the US yesterday had everything that a risk-asset bull could ask for. The ISM was strong, particularly in the details, with new orders breaching 50 for the first time since late 2006. Meanwhile, the personal income data seemed to be just perfect: stronger-than expected income and spending, and a tasty bump in the savings rate to a new fourteen-year high of 5.7%.
The details of the latter report were somewhat less serendipitous, however. A closer look at the source of income revealed that most of the surprising increase in income was actually government handouts, e.g. transfer payments. Although one data point is hardly sufficient to confirm a trend, the fact that Uncle Sam’s largesse was largely tucked away rather than spent was a tick in favour of Macro Man’s core view- e.g. that the “recovery” will disappoint as household savings are rebuilt. It’s Ricardian equivalence before your very eyes!
Moreover, the recent rise in oil prices, if sustained and continued, will take a significant bite out of households’ disposable income. If it also pressures nominal rates higher, as has seemed to be the case over the last month, that will at some point provide a headwind to further equity strength.
The recovery in US 10-year inflation breakevens this year has been nothing short of stunning, as they’ve retraced nearly 80% of their H2 2008 collapse. Much of this adjustment has come via higher nominal rates; TIPS yields haven’t done a whole lot over the last couple of months.
While it’s well-known that TIPS don’t really represent any sort of market-implied inflation forecast, they do represent some sort of measure of market dysfunction; during times of stress, no hedge fund wants illiquid, capital-sapping stuff like TIPS on their books. That TIPS have held in there recently suggests that market liquidity is returning…just as you’d expect from the equity rally.
Hey, Macro Man even managed to trade an FX option yesterday without incurring the immediate mark-to-market hit that characterized all of his trades in Q1. While the directional timing is a bit tricky, that he can once again access the option market to take bigger bets makes it a good time to get stuck in once again.
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