Hats Off to the Bank of England

by: Macro Man

Zowie!

Macro Man tips his hat to Merv the Swerve and the Bank of England's Monetary Policy Committee. Your author has been critical of Mr. King in the past, but is pleased to see that Merv has belatedly seen the light; namely, that policy easing is required to prevent depression, not recession.

Despite the fact that Macro Man's indicator suggested that the BOE should ease dramatically, he was skeptical; so much so that he had put on some small bets on disappointment, per Thursday's post. Still, it's a case of better late than never when it comes to grasping reality, and it seems as if Merv and co. have finally realized that there is no demand-driven inflation pressure in the UK economy.

On the other hand, the smuggest man in finance saw no need for extraordinary measures; unsurprising, really, given that a) he doesn't believe that there is any sort of credit crisis in Europe, and b) he still appears to inhabit a bubble where 320 million people think he's a diamond geezer. Most punters that Macro Man knows would disagree on both counts.

In any event, UK base rates are now below Bundesbank rates for the first time since 1993 - your author's first year in financial markets. Perhaps it's a coincidence that UK growth was double that of Germany over the ensuing five years....then again, perhaps it isn't.

Speaking of growth (or lack thereof), Friday was the latest iteration of the statistical folly that is the US employment report. After a skein of truly putrid employment indicators, including Wednesday's ADP report, the Street was probably expecting a decline of 200k or more in payrolls, well under the supposed consensus of a 65k loss.

As always, Macro Man is focusing on the less noisy unemployment rate; his favourite "tell" on that is suggesting that the rate will soon be knocking on the door of 7%, well above the latest reading of 6.1%.

None of this is good news for risk assets, of course. Macro Man was frankly bemused to see Eurostoxx futures down some 8.5% on the day by Thursday's NY close. At this juncture Macro Man has tilted his book very slightly towards a "risk off" regime, though he could easily tilt back towards "risk on" should circumstances warrant.

Perhaps more importantly, he continues to run a relatively low risk profile - only 20% of max. Given the Brownian motion of most asset market prices last week, he is content to run mostly slow-burn, medium-term macro trades; trying to trade the noise will only result in him getting his hat, let alone his face, ripped off.