2010 08 30

Light (but poor) day in terms of economic data.

• US consumer spending rose 0.4% from last month which met expectation but real disposable income fell. Conseqently we saw savings rate fall slightly to 5.9% in July from 6/2% in June. Rising savings and desire to pay down debt is healthy in the medium to long term but it will continue to cause pain in near term economy

• Dallas Fed survey showed plummeting manufacturing activities in Texas region.

What has been going on

The main unfolding theme in July has been deceleration US activity:
• Weak housing
• Drop in durable goods orders
• Huge downward revision in Q2 US GDP
• Renewed rise in jobless claims
• Falling manufacturing

Meanwhile, Europe seems to hang in better. Flash reading for Aug PMI in Eurozone fell to 55 from 56.7 – bigger drop than expected but still a very healthy figure. August IFO survey came in very strong for Germany and Swiss Aug KOF survey also shows continuing strength.

Bernanke’s Jackson Hole speech basically said the Fed would do keep interest rate low as long as it takes for them to see recovery. If anything yield curve is going to get flatter from here.

Looking ahead

I expect US ISM manufacturing survey to come in very poorly on Sep 1 (the thunder may be stolen on Aug 31 by weak Chicago PMI data) and would push stocks and commodities lower. The next major economic data would be US August nonfarm payrolls and unemployment rate which is also likely to be poor. I believe first week of September would be a poor one for risk assets.

There is a lot of noise coming out of BoJ getting concerned over strength of JPY. The fact is that this is all rhetoric and there is nothing central banks of a major floating currency nation can do to impact FX. Just look at Switzerland. Traders are smelling weakness and only driving the Yen higher. The fact is that with the entire world in low interest rate regime there is nowhere to put carry trade on – and this will continue to prevent JPY from weakening. I do not think we would see JPY above 90 this year or the next.

It would be very interesting how China’s economic data come out. Their manufacturing activities, as indicated by PMI, have fallen sharply as well and it would be very interesting to see what that number comes out to be on Sep 1. I do expect EM to continue to show strength.

In short, I fail to see what would provide boost to stocks, energy and metals. September has been disastrous in many years and I would say let’s take caution on the safe side. I think in Oct on we can put long US vs short Europe trades as Europe economic data catches up with US on slow down. But for now I advocate staying market neutral with trades focused on relative value, agriculture and currency (although these days it’s hard to tell whether risk would drive USD up or down).

As I stated before my favorite trades are (in order of conviction):

• Long DAX vs short Nikkei
• Long copper vs oil
• Long gold
• Long MSCI EM vs MSCI World
• Long commodities vs stocks
• Long bonds
• Short GBP, Euro and CAD. Long CHF and AUD