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Michael McDonough's  Instablog

Michael McDonough
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Michael is an economist and primary contributor to the Bloomberg Brief: Economics Newsletter. To subscribe either go to {BRIEF <GO>} for terminal users, or alternatively for non-terminal users. The Economics Brief is intended for portfolio managers, traders,... More
My company:
Bloomberg LP
My blog:
Fiat Economics
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  • Chinese Daily Food Price Index Shows Pricing Pressure Abating
    Chinese prices may be poised to grow at a slower pace in April, Bloomberg Brief’s Daily Chinese Food Price Index indicates. The index showed consistent declines during the month. 

    The daily price index is up 27.2 percent on an annual basis, down from a peak of 33.8 percent in early March. That peak coincided with China’s highest inflation reading since July 2008.  

    Bloomberg Brief derives the daily Chinese food price index using 104 daily agricultural prices from cities across China as measured by Shanghai JC Intelligence. 

    This index has a strong correlation with overall Chinese CPI over the past year due to food’s strong weighting of about 30 percent in China’s inflation index. That is high relative to other countries -- the U.S. weighting is 15 percent - meaning increments in food prices heavily influence the headline inflation release.

    The historical relationship between the two, leaving all else equal, implies Chinese inflation growth slowed to between 5.0 and 5.2 percent on an annual basis in April from March’s 5.4 percent. The March figure was the highest in more than two years.

    While a slowing in the pace of price increases would be seen as evidence that China’s tightening is working, inflation still seems likely to remain above 5 percent. China’s inflation target is 4 percent up from 3.3 percent last year, indicating more tightening from the Central Bank is likely, in the form of rate increases or additional reserve requirements.


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    May 04 8:33 AM | Link | Comment!
  • Bloomberg Brief: CBOE's New Skew index as a Forward Looking Indicator for the S&P 500
    The current level of the CBOE ’s new Skew Index indicates that a sharp decline in the S&P 500 over the near-term has become more likely.

    Recent political unrest in the Middle East and North Africa helped lead the Skew index to its highest levels since 2006 on Feb. 18. While the index has retreated from its high, chances of a two- or three-standard-deviation change in the S&P 500 remain elevated.

    The CBOE Skew Index attempts to measure tail risks — the probability of a sharp decline of two or more standard deviations on a 30-day log return basis — of the S&P 500. The index is derived from the prices of S&P 500 options, which are also used to calculate the widely quoted VIX index, which tracks volatility.

    When the index is equal to 100, there is no perceived tail risk. When the index rises, so does the risk of a sharp decline in the S&P 500. According to the CBOE , the index typically trades between 100 and 150, with an average of about 115.

    On Feb. 18, the Skew index reached 136.4, implying a nearly 12 percent risk-adjusted probability of a two-standard-deviation decline in the 30-day log return of the S&P 500. As of Friday, the index fell back to 128.8, which implies a still elevated 10 percent chance of the same decline. At the index’s average of 115, the chance falls to 6.4 percent.

    Based on its 2010 predictive abilities, this new index may bear watching. On April 20, it hit a 2010 high of 134.2, just three days before the S&P 500 ended a three-month, 15 percent rally and began a 16 percent decline of similar length.

    **Excerpt from the Bloomberg Brief to subscribe go to or {BRIEF <GO>} on the terminal
    Feb 28 8:03 AM | Link | Comment!
  • Modified Misery Index, Oil Exports at Risk

    **An excerpt from the Bloomberg Brief {BRIEF <GO>} or

    As unrest persists in the Middle East, home together with Africa to nearly 60 percent of the world’s crude oil exports in 2009, the price of oil has spiked. The map highlights a Bloomberg Brief modified misery index of Middle Eastern and Northern African countries alongside the size of their crude oil exports, shown with black bars. Saudi Arabia had the most crude exports in the region in 2009, averaging 6,345 thousand barrels a day.

    The modified misery index adds each country’s youth unemployment rate, annual inflation and the number 10 — the score for a perfect democracy — and subtracts the Economist Intelligence Unit’s democracy index score. Bahrain, not shown on the map, has a modified misery score of 29.7 and, as of 2007, average refined petroleum exports of 240,000 barrels per day.

    Feb 23 9:11 AM | Link | Comment!
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