Wednesday October 18, 2006 - 09:53:34 GMT
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Black Swan Capital - www.blackswantrading.com
Bonds vs euro
‚ÄĘ The Bank of Japan's September meeting showed policy makers are monitoring the risk of business investment overheating the economy and expect inflation to accelerate. (Bloomberg)
‚ÄĘ Key Reports (GFT):
10/18/2006 7:00 US MBA Mortgage Applications n/a n/a
10/18/2006 8:30 US Consumer Price Index (YoY) 2.2% 3.8%
10/18/2006 8:30 US CPI Ex Food & Energy (YoY) 2.9% 2.8%
10/18/2006 8:30 US Housing Starts 1645K 1665K
10/18/2006 8:30 US Building Permits 1705K 1727K
‚ÄúAs religious readers of Paul Krugman (the New York Times columnist), we had expected the Bush tax cuts to be an unmitigated disaster. Because of President Bush‚Äôs ‚Äúfiscal recklessness‚ÄĚ we thought, in 2003, that the US would stay in a recession.
‚ÄúThen we felt that the recovery would be a profitless recovery. When the profits hit record highs, we then feared that the recovery would be jobless. When the US economy ended up creating more jobs than anyone had thought possible, we fell back on our default position, namely that the Bush tax cuts had endangered the US fiscal position and that we were set to leave mountains of debt to grand-kids etc‚Ä¶ (at least the US, unlike Japan or ever larger parts of Europe, has grand-kids to leave debt to!).
‚ÄúAnd today, here we are, with our back against the wall as tax receipts in the US are absolutely booming. Maybe, instead of reading Mr Krugman, we should have remembered what Milton Friedman once told us: ‚ÄúI‚Äôve never met a tax cut I did not like‚ÄĚ. If so, we may have been able to foresee that, over the past six quarters, tax receipts have been growing at 2.5x the growth rate of US nominal GDP?‚ÄĚ
FX Trading ‚Äď Bonds vs. Euro
If the US economy is cranking a bit faster than expected and yesterday‚Äôs core PPI is indicative of what we might see today in the core CPI (the rate the Fed likes better than that pesky one that includes real world stuff like food and energy), then its not a stretch to say bonds look ‚Äúpricey.‚ÄĚ But, even though Fed players have been warning, there isn‚Äôt a consensus on inflation concerns.
‚ÄúAlmost unnoticed among the hawkish voices last week was the change in posture by the normally hard-line Bill Poole. The St. Louis Fed president differentiated himself from the pack, saying inflation risks have receded in recent weeks while growth is looking shaky. Poole told Reuters rate cuts would be appropriate if ‚Äėall the news breaks on the downside,‚Äô writes Caroline Baum of Bloomberg.
CPI (core) Chart Monthly Jan 2002 through Aug 2006:
US 30-yr T-Bond Futures Daily:
And of late, the euro (EURUSD) has been tracking closely with the movement of the 30-yr T-Bond Futures:
If bonds tank on today‚Äôs news, indicating some inflation premium moving back into the long end of the curve, then this chart says sell euro. If core-CPI is tame, and bonds rally, soft Fed chatter will resume in earnest, buy euro.
It‚Äôs an easy game, assuming you have a friend at Labor Department.
Jack Crooks, Black Swan Capital Black Swan Subscription-based Service
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