What Will Be Today's Rate Action?

by: Macro Man

This market just doesn't get any easier, does it? Consider that in the last day and a half, we've observed the following:

a) A stunning intraday rally on Tuesday off the S&P 500 Maginot line, apparently based on GM (NYSE:GM) sales figures, the flimsiest of possible justifications.

b) A late session collapse in European equities on Wednesday, led by erstwhile market leaders the miners. The basis for the sell-off appeared to be a modest correction in traded coal prices.

c) A follow-through-and-more from US equities, which took erstwhile positive catalyst GM to its lowest level since the first Eisenhower Administration and the SPX right back to the Maginot line.

d) A hugely weak opening in Europe, which suddenly reversed after the release of weaker-than-expected PMI data. After the release of the worst UK services PMI in history (which admittedly only goes back to 1996), the FTSE surged into positive territory and short sterling got clumped.

WTF? On issue #4, that's literally like some sort of Bizarro world.

Well, if you expected it to get any easier today, think again. 1:30 London time (8:30 NY time) today is one of the most influential moments in time that Macro Man can remember. For it is then that the US releases (a day early thanks to tomorrow's July 4 holiday) its monthly employment report and that Jean-Claude Trichet begins his press conference to explain today's rate action (widely expected to be a hike.)

The market broadly expects a hawkish Trichet, and normally, that's a pretty good bet. But Macro Man cannot help but think that the risk could be skewed the other way. Markets are discounting another 30-35 bps of tightening after today's 25-er. Yet the EUR/USD exchange rate is back towards its all-time high, even as forward looking indicators of economic activity have turned south. The chart below shows Germany's ifo survey with the ECB refi rate; as you can see, the ifo leads by a healthy margin and has turned sharply lower in recent months. Might the ECB throw a bone towards growth at 1.30 and suggest that policy is now neutral? Inquiring minds want to know.

In the US, meanwhile, the consensus expects correction of last month's "rogue" 5.5% print on the unemployment rate. Yet Macro Man's preferred indicator points to a further rise in the U-rate , so he reckons the risk is towards a weak number. The employment component of the ISm is also at levels that are consistent with a higher unemployment rate. Even if Macro Man is right about unemployment, the juxtaposition with Trichet means that today's EUR/USD price action is anyone's guess.


Perhaps a cleaner trade is in the yen, which tracks US yields very closely - see the chart of 2y yields and USD/JPY below. Macro Man has joined the ranks of frustrated traders with a long yen position (EUR/CHF shorts must feel the same way)....if he is right on today's figures, he should get some joy.

If he isn't, then he'll be happy to jettison and avoid the cardinal investment sin of turning a trade into an investment.