Putting the spice back into investing.

The windy city index

Wednesday, June 30, 2004
The Chicago Purchasing Managers Index was released today and the data spooked quite a few market participants. Why the shock? Well...
The Chicago Purchasing Managers "Business Barometer" dropped from 68 to 56.4, showing a pullback from the thirteen months of continued growth.
Ooops. Well, maybe not all that ooops. The Chicago index is usually much more volatile (windy anyone?) than the ISM. And the ISM was a little softer last month as well. So instead of getting all upset we should note that the reading is still in expansionary territory and that all we are seeing is a loss in relative momentum.

This gibes nicely with my view that we are headed for a deceleration in the rate of economic growth over the coming 12 months and that the Fed (remember them?) will probably not have to raise rates as much as many - or even most - people are thinking. Having said that I should add that we shouldn't read all that much into one point of data. The ISM is out tomorrow and we should see it somewhere around 60. Some pundits are making much out of the fact that prices paid was the only component of the index that rose - I'm not so sure that this is really news. It is very possible that we are seeing the lagging effects of rising commodity prices which have since declined.

Alright, rate decision this evening. Will probably only be able to comment tomorrow because of time zone shift so I'll see you then.

Morning roundup

Tuesday, June 29, 2004
Although tomorrow's FOMC meeting is still the firmly in the focus of most investors there have been other bits of financial news worth looking at. The price of oil declined to a two month low as Norwegian oil workers quit their strike and power was transferred to the nascent Iraqi government. The more interesting question is what gas prices will do ahead of the July 4 holiday weekend. Always keep in mind that the fabled guzzler of commodities, China, is but an oil-consuming minnow when compared to the SUV driving US whale.

Speaking of China: State Statistical Bureau spokesman Yao Jingyuan has been quoted as saying that the economy is cooling and on target for a soft landing in the second half. To this I say "fine, but who can really say what the Chinese economy is doing?" There is still much sentiment out there which argues that the soft landing has turned into a rout and that this will in turn lead to China gladly floating the yuan (which will then tank vs. the USD thereby giving exports a shot in the arm).

Is it just me or is the media really running lots of stories on "what will happen to indebted consumers when we get a rate hike"? A cursory look finds this, this or this. I always find it strange that people start to consider the effects of a regime switch only when it is staring them in the face. Oh well, I'm sure that everyone who financed their home via a short-term ARM is expecting a hike in income to compensate for the higher costs of borrowing.

Let's finish off with the FOMC meeting. In a nutshell: consensus is looking for a rate hike of 25bp - the big question that remains is what the wording of the accompanying statement will look like. Regular readers know that I'm not all that optimistic about the US economy going forward, so a measured pace of rate hikes (aka "Chinese water torture") is fine with me.

Thank You

CurryBlog was thrilled to welcome its 10.000th visitor yesterday. A hearty "thank you" goes out to everyone who dropped in over the past months!

Blogroll update

Monday, June 28, 2004
Another couple of fine additions on the Blogroll! Check out the Bondtrader's blog for your daily dose of the fixed income world. If financial markets are just a little to ephemeral why not try your hand at Ebay and the great Make Money on Ebay blog.

Step right up!

That's right - be first in line to enjoy a week chock full of data and decisions. We have the FOMC meeting and payrolls this week! But that's not all folks - stay tuned for the ISM, Consumer Confidence and Personal Income and Outlays to liven up your week.

The data on Personal Spending is out already. Spending grew by around 1% with around half of the gain being accounted for by inflation. Personal income rose by 0.6% - about equal to the number we saw in April. The PCE price deflator - a measure the Fed likes to watch - rose 0.5% which is consistent with the "low but rising" inflation picture the consensus is favoring right now.

You can be sure that inflation hawks will see impending doom in this number - but hey, do we really want 0% inflation?

Anyway, I still think that the high rate of demand we've been seeing over the past quarters has caused companies to adjust prices upwards to (re)capture some pricing power. This trend was exacerbated by the fact that firms were hesitant to increase production (i.e. hike supply) - they preferred to draw down inventories. It could be that we see increased supply come online over the next couple of months which might serve to dampen the rate of price appreciation.

CA Update

Friday, June 25, 2004
The post on the Current Account Koan led to a number of comments which I encourage you to read. I still believe that the question is not if the deficit is sustainable or not - I would suggest that we look at how long the things will hold up until something gives. The risks inherent in the current situation (almost a pun!) wre nicely laid out in this Bloomberg column.
The deficit is more than 5 percent of gross domestic product, double or more the level economists say could be maintained indefinitely. At the very least, trimming it to a more manageable size will take several years during which consumption will stagnate and high long-term interest rates may hurt housing and business investment.
This is mostly the point I keep trying to make - nobody here is saying that the sky will fall but there is a real possibility that deflating the deficit will mean consuming less and/or paying more for the stuff you are buying.

There's life in the old dog yet.

If you were to talk to the housing bubble, it would tell you that the rumors of it's death were very much exaggerated. The market for homes just keeps powering on even as mortgage rates are rising. Interesting bit of news: prices are moderating somewhat as builders seem to be reducing prices as mortagege rates rise to keep housing relatively affordable.

Status Update

Wednesday, June 23, 2004
A heavy workload is preventing me from posting on a regular basis right now. I hope that I'll be able to resume regular service by Friday. Not that you're missing much - markets are pretty much range-bound as everyone is waiting to see what Sir Alan will pull out of the proverbial hat come the FOMC meeting.

Current Account Koan

Monday, June 21, 2004
Last Friday saw the release of the newest data on U.S. International Transactions or as some people like to put it: "the shocking truth about the current account deficit which will become ever larger and finally displace all life on earth."

I have the nagging suspicion that this data has achieved a metaphysical quality so I'd like to propose an economic Koan
If the current account deficit rises and nobody takes note, does the deficit really exist?
The current account deficit hit a new record level of around $145bn in the first quarter. The reason for the large gain can be found in the data on trade and especially in the higher costs for energy imports.

The markets were unimpressed by the data and they are right (at least in the short term). As long as the rest of world perceives the US to be an interesting investment opportunity and is therefore content to hold the US currency everything equals out. This is the situation we are in right now. Capital inflows into the US have been as large (and at some points larger) than the current account deficit.

This reflects the activity of some central banks such as the Bank of Japan who are trying to manage the value of the yen by selling their own currency for dollars. Capital inflows are also provided by private entities who decide to invest in the US for reasons of their own. As Alan Greenspan said in his Senate Confirmation hearings
There is an unquenchable demand to hold assets of claims against American residents largely because they are presumed to be safe and they're presumed to have significantly higher rates of return adjusted for risk than most other areas of the world
This nicely sums up today's situation. Private investors choose to hold dollar assets because they think that the US is a good investment right now. As economic growth is strong and inflation is still low their investment case seems intact. Many foreign (i.e. non US) companies choose to hold dollars because the US currency is still the financial lingua franca in most of the world. They have no reason to exchange the greenback for anything else right now.

So should we be wholly unconcerned about the current account deficit? Well no. Nobody can realistically force private investors to continue giving the US their money. If the economic backdrop in the US should change for the worse, private entities could start pulling their money out of the country. The same goes for companies who might want to sell the dollars in their cash registers - thereby putting pressure on the price of the greenback. This scenario would again put central banks in the spotlight as they would then have the fate of the US currencies in their hands.

Random thoughts

Friday, June 18, 2004
I was out to dinner with a mutual fund manager the other day and was mostly able to refrain from talking about business except for a few general comments on the economy. He said something which I found very intersting regarding some of the strong data we've been seeing in ISM-type indices. It seems that many of those questioned were genuinely surprised by the strength of the recovery and have belatedly switched to the optimists camp. Their positive answers are what we've been seeing over the past couple of weeks although some of the economic momentum may have already been lost - simply put: many of those questioned are "behind the curve".

This is making these diffusion indices look pretty good although I still suspect that we could be in for a slowing economy in the second half. This will then give the Fed pause in rapidly raising rates.

I leave you to your weekend diversions with a reference to my post over at Angry Bear's place which looks at policy traction in the US and the Eurozone.

An eye on the CPI

Wednesday, June 16, 2004
The (core) CPI came in pretty much in line with market expectations at a pretty modest 0.2% yesterday. The bond markets seemed to have been expecting a higher inflation rate and managed some price gains in the aftermath of the number's publication. A rebound in consumer confidence (the Iraq torture stories have run their course and gas is a little cheaper) couldn't convince market participants that the Fed will hike by a huge amount in a short time span.

I'm happy to say that the consensus is shifting towards the CurryView - the rate hikes will be measured and we will see a succession of 25bp hikes going forwards. The difficulty is that consumer's inflation perceptions are being influenced by high gas and food prices so the Fed will have to remain vigilant that perception doesn't turn into reality.
10:50 AM :: Karsten :: permalink ::

Rates on my mind

Tuesday, June 15, 2004
The CurryBlog singalong is back this week with a reworking of Georgia on my Mind. It is - of course - presented in honor of the late Ray Charles who your correspondent actually managed to see in concert (and it was a great concert).
Rates on my Mind
Rates, Rates,
The whole day through
Just any old data
Keeps rates on my mind

I'm saying rates
The thought of you
Comes as sweet and clear
As moonlight through the pines

Other assets reach out to me
Other markets smile tenderly
Still in peaceful dreams I see
The road leads back to you

I said rates,
Ooh rates, no peace I find
Just any old data
Keeps rates on my mind

Other assets reach out to me
Other markets smile tenderly
Still in peaceful dreams I see
The road leads back to you

No peace, no peace I find
Just this old, sweet CPI
Keeps rates on my mind
12:42 PM :: Karsten :: permalink ::

Ongoing Fed coverage

Our ongoing coverage of Fed-Speak continues today with a soundbite from Fed Governor Olson (no relation to the similarily named Olsen twins) who said that
We have seen some anecdotal indication of inflation and pricing power, but still not to the point where we can measure them [...]But it is a time to be alert to inflationary pressures.
Aha. The Fed Governor sees the economy firing on all cylinders but still not really moving - a view which is shared by CurryBlog. This is pretty different from what we've been hearing from the inflation hawks in the Fed (Poole et. al.) so anyone who is 100% convinced that we'll see a quick series of sharp hikes might be in for some surprise. The CPI data will help us adjust our inflation compasses to the correct bearings so we'll just have to wait.
12:13 PM :: Karsten :: permalink ::

Just say no to commodities!

Monday, June 14, 2004
It seems that a former director of two wheat growers associations stole money at work to speculate in commodities. I really love what the man said when he was caught
If you've never traded these stupid commodities, it's like getting hooked on drugs
I knew it all along... "Trading commodities, the crack cocaine of the new millenium"!
11:15 AM :: Karsten :: permalink ::

Another week starts...

...which means that I'm trying to organize myself. I started the process this morning by getting a cup of coffee and scanning apointments for the day. A client is nice enough to pay for my lunch today and this evening will see me at an (hopefully) interesting lecture.

European markets are open and nothing much is happening. The dollar is below the 1.20 mark vs. the EUR so I guess my short-term scenario is still intact. Verbal hiking is still rampant with the Atlanta Fed's Guynn saying that
The measured pace statement is "more of a plan than a pledge"
while the President of the Cleveland Fed weighed in with
"Preserving price stability will require the FOMC to increase the federal funds rate," said Pianalto, who votes on rate decisions this year. "The FOMC is going to be prepared to do what is required to fulfill our obligation."
These statements were backed up by the Head of the St. Louis Fed who tells us that
"It would be appropriate for the FOMC to move further and faster"
Alright already, so the Fed is going to hike. But where are they going to stop? The Atlanta Fed's Guynn gives us this little tidbit
"Based on what I know today, I'm comfortable with the notion that our path is unlikely to mirror 1994's policy moves"
The main difference is that this time 'round the markets are doing much of the Fed's work by themselves. Expectations of rate hikes are so high that the short end has risen by a considerable margin already. The only question is how the market will react to what really comes out of the next Fed meeting.

As inflation and rates have replaced market participant's fixation on payroll data we have a data feast tommorrow with the release of the May CPI data. I'm pretty sure that we'll see a number that will confirm that there is inflationary pressure in the economy, the fun part will be to see what the (fx) markets do with the data.

In other news: the football (soccer to some of you) game between England and France was great entertainment yesterday evening. Sort of reminded me of real life: you have everything under control for the longest time and then manage to lose it all in the space of 90 seconds (in market terms: "England blew up!").


Friday, June 11, 2004
My newest Postcard from Old Europe - Fed Watching - is up over at Angry Bear's place.

In the Doldrums

Thursday, June 10, 2004
I got home at around two last night after a very nice event with clients. This morning sees me staring at my screens trying to make sense out of what is going on - so all told a pretty typical day. My thought processes are pretty slow because of sleep deprivation so it took me a while to figure out that volumes in Europe are thin because there is a holiday in Frankfurt and most German market participants are enjoying their day off.

The US currency got a boost yesterday as the impending rate hike seems to have filtered through to traders in the fx markets. If you ask me, I think that we'll see some continued strength in the greenback which might take us back down below the 1.19 mark vs. the EUR on the back of the rising differential in interest rates. Hawkish comments on US interest rates are gaining much market traction as the consensus seems to be that rising rates will not immediately kill off the recovery.

We saw data on mortgage applications yesterday. The story: people are still financing to buy (although activity is moderating) while refinancing is being killed off. No big surprise there.

All conspiracy theorists must be having a field day with the decision by the BLS to delay the release of May's PPI data. The quoted reason
BLS staff are working to resolve unexpected difficulties in calculating the index this month
can't be the truth - surely the evil government is trying to hide the fact that prices are rising faster than spam fills my inbox!
10:36 AM :: Karsten :: permalink ::

Not much news

Wednesday, June 09, 2004
The last couple of days didn't provide us with much data to write about. This dearth of hard facts led to markets focusing on other news such as utterances by Fed Chief Greenspan. Our favorite oracle spoke to central bankers meeting in London (no more letter writing?) and - as always - remained nicely ambiguous on policy by saying:
The Committee is of the view, as you know, that monetary policy accommodation can be removed at a pace that is likely to be measured. That conclusion is based on our current best judgment of how economic and financial forces will evolve in the months and quarters ahead.
which he followed up with
Should that judgment prove misplaced, however, the FOMC is prepared to do what is required to fulfill our obligations to achieve the maintenance of price stability so as to ensure maximum sustainable economic growth.
This led to some softening in the bond market but as the comments were nicely balanced price movements were nothing to write home about.

Nothing much else happened. The most interesting story that came out of the G8 meeting so far has been the story about US school children giving eight sea turtles names which reflect the G8 members. The "French" turtle is called "Bon Jour", the English turtle is called "Tea Cake" and so on. The German turtle got the name "Ormanda". The office of Georgia's Governor Perdue was nice enough to explain that "Ormanda" is a German word and means "from the ocean". Problem is that Ormanda is not a German word at all. It seems that the winning entry was picked from here - they list Ormanda as being German and meaning "of the sea".
11:02 AM :: Karsten :: permalink ::


Monday, June 07, 2004
Hello everyone! I just got back from my yearly lecture at HHL, the Leipzig Graduate School of Management and I am just too tired to write anything substantial right now. See you back tomorrow.

Payrolls are...

Friday, June 04, 2004
...in at +248k in May. Unemployment rate unchanged at 5.6% - most people were expecting 5.5. Quick look: Bund future down 30 ticks, european stock markets generally up. The dollar slightly stronger vs. the EUR.

Some shooting from the hip: good number, nothing too extreme - better than consensus but not a blowout. This should give pause to those who are expecting a 50bp hike by the Fed in June.


Today the first Friday of this month aka "Payroll Day". Markets are looking for 225k new jobs in the report. The Goldman Sachs / Deutsche Bank auction is telling us a different story - expectations there are for 259k new jobs. For more information on economic derivatives you can visit here or here.

Currency call: the greenback will probably need something above 260k new jobs to appreciate against the EUR as the market is expecting a strong number.

New Postcard

I invite you to head over to the Angry Bear to read my newest Postcard from Old Europe. This week's column looks at the US election from an economic point of view.
11:21 AM :: Karsten :: permalink ::

Blogroll update

Thursday, June 03, 2004
I blogrolled Tufte's Economics Classes Blog yesterday. Dr. Tufte has started the blog as a teaching aid in his ECON 2010 (Principles of Microeconomics) class. Students are required to post (and comment on other posts) as part of the class. I find the idea great and am very interested in the student's post. It might even provide the net with new econobloggers! I'd like to thank sex-scandal and economics blogger Michael Kantor for the pointer.

Another new entry is voluntaryXchange which seems to be a great blog (they have CurryBlog on their A-list). But the Blog has much more going for it than its impeccable taste - the blog features a great mix of posts. I encourage you to visit frequently!
12:24 PM :: Karsten :: permalink ::

Singalong time

It seems that the Fed Chairman has started writing letters to convey his institition's intentions. The letter to Sen. Paul Sarbanes (now why does that name sound familiar?) was written on May 14 and released yesterday.

The infallible one writes
The current backdrop of low inflation and underutilized resources suggests that the transition to a more neutral policy stance can be undertaken at a pace that is likely to be measured
Wow. What news! The market didn't look to closely and Treasuries briefly gained when market participants realized that they were looking at old news.

Richmond Fed President Broaddus went on record as saying that markets are looking for a 25 bp hike in June and added that only a weak jobs report would deter the Fed from raising ("...be looked at closely"). So market consensus was reaffirmed - 2% Fed Funds by year-end is still the official scenario.

For all of those angry that they're not getting letters from the Fed (no, not the Feds) I present you with CurryBlog's newest singalong. Do-re-mi and off you go...
Please Mister Greenspan

Oh yes, wait just a minute mister Greenspan
Wait, wait mister Greenspan
(Mister Greenspan look and see) oh yeah
(If there's a letter in the bag for me)
Please mister Greenspan
(I've been waiting a long long time)oh, yeah
(Since I heard from that Fed of mine)

There must be some mail today
From my Fed so far away
Please mister Greenspan look and see
If there's a letter, a letter for me

I've been standing here waiting Mister Greenspan
So patiently for just a hike
or something better
Saying rates are trending higher
Please Mister Greenspan

(Mister Greenspan look and see) oh yeah
(If there's a rate hike in the bag for me)Please mister Greenspan
(I've been waiting a long long time)oh, yeah
(Since I heard from that Fed of mine)

So many days you passed me by
See the leverage rising high
You didn't hike to make me feel better
By leaving me as a massive bettor

[...] Lyrics from the Beatles with a little tweaking.
12:02 PM :: Karsten :: permalink ::

ISM and other data in a nutshell

Wednesday, June 02, 2004
Yesterday's ISM report came in a tad stronger than most people were expecting. Most metrics kept looking good - the employment data was very solid, a fact that should bolster expectations ahead of the payroll data on Friday.

In short: production and new orders are still strOng, only the pace of expansion is moderating. Manufacturing employment is gaining momentum while prices paid for inputs have remained more or less steady.

A word of caution: employment and inflation are lagging indicators strong data here will only confirm that much of what we think we're seeing (strong GDP numbers) is actually happening. The view into the future isn't as yet all that bright - leading indicators have been turning down all over the place so we shouldn't expect the current expansion to continue forever at the current pace.

The outplacement firm Challenger released a survey on layoffs yesterday which got some press along the lines of "Job cut plans rise". Nothing to get uptight about (unless you're getting laid off that is), as job cuts are still way below numbers seen in the past two years.

In other news: construction spending was very robust again. This could positively impact Q2 GDP so we might see some economists adjust forecasts upward in the next couple of days.

In all a pretty good day. We have no real big data points today so we'll just have to find other excuses for what the market does today.

Inflation Watch

Tuesday, June 01, 2004
Friday saw the release of the Fed's favorite measure of inflation at the consumer level. The April PCE data was pretty benign with the core and overall number up only 0.1% for the month. If you look at the data yoy you get a rise of 1.4% vs. the 1.8% seen in (core) CPI. This is still below the 2% watershed which most people consider to be the line in the sand in the fight against inflation.

Speaking of which: if you discount all the noise being made about oil and (in the US) gasoline prices you might start wondering where inflation is coming from. Energy isn't such an important contributor to overall costs as it was in the past and we are not seeing higher costs via sharply rising wages.

I would opine that a modicum of pricing power has returned and companies are going with the flow. Recent surveys such as the one produced by the NFIB have shown that very many businesses are in the process of raising prices. This could support earnings going forward as I don't really believe that there is real (ex energy) cost pressure in the economy as yet.

What I find disturbing about the entire situation is that I still believe that the economic expansion will moderate in the second half of the year. If the Fed decides to slam on the brakes now we might see a really sharp slowdown.

If you take a really dire view you might even see disinflation pop up again. If you subscribe to Mark Twain's dictum that "history doesn't repeat, it rhymes" and take a look at the behavior of the Japanese economy in it's post-bubble phase (hint: look at bond yields) you might want to stock up on government bonds right about now.
11:37 AM :: Karsten :: permalink ::

Blogroll update

I updated my blogroll with Rick's spy and qqq trading blog yesterday - so remember to go over there for your daily dose of trading information.
11:28 AM :: Karsten :: permalink ::