Former trader and current man who is going to repeat his order at the drive-through just one more time before swerving out of the line and laying on the horn as he peels out of the parking lot, Richard Breslow, is out with his Thursday missive and it’s a critique of … something?
From what I can tell, Breslow is upset about the market’s reaction to this print:
That was well worse than even the most pessimistic estimate and it immediately catalyzed a move lower in AUDUSD:
Breslow seems to think that reaction was unwarranted or at least to the extent that it reflects the market’s fixation with central bank reaction functions (i.e. terrible retail sales equals dovish RBA equals sell the Aussie).
He compares that to the knee-jerk move in the krona we saw late last month when the market learned that Ingves isn’t going anywhere. We highlighted that amusing price action in “How To Sink A Currency Without Doing Anything.” Here’s what that looked like:
Richard flags that as another example of how markets are too focused on central banks and not focused enough on the economic backdrop (“no matter that investors love trying to buy the currency precisely because the numbers have been impressive.”)
Of course what Breslow is describing below is actually a two-way information exchange. It’s impossible to disentangle this. Markets react to data according to how they think central banks will interpret that same data. Then central banks react to the way markets reacted and again, that latter reaction was originally predicated on the market’s perception of central banks. It’s a loop from which there is no escape.
So that’s the context for Richard’s latest which you can find below…
Via Bloomberg
I really hope we aren’t in for a renewed bout of deflation. I’m not referring to the suppression of price pressures, which I’m not expecting. Rather to the sense of market participants that things maybe aren’t as good as we thought despite all the good global numbers. And that momentum has jumped the shark. As soon as those central bankers started moderating their upbeat messaging and began stewing on what could go wrong down the road, traders were quick to take it to heart. Investors are apt to have a strong belief that history tends to repeat itself.
- Animal spirits is a valuable ingredient not only when trying to build up escape velocity from a recession but to propel things to a sustainably better place. Investors had come around to embracing the notion that we just might be on our way. The glass half-full approach. But caution, mistrust, the search for competitive advantage or outright blunders by the powers-that-be risk exacting a very steep cost. Unless, of course, all the alleged bubbles people rail about are your bread and butter
- Until recently, a bad number in Australia would have been explained in the context of other things going quite well. There was a lively debate on when not if a rate hike was coming. Well, they got that bad miss today, with retail sales being ugly. We’re all data-dependent on some level, but the futures pricing for the next rate acted like the game had radically changed. I could hear traders the world over muttering, “Here we go again”
- In Sweden the market was quick to overreact to the perceived dovish implications of Riksbank Governor Stefan Ingves being appointed to an additional term. No matter that investors love trying to buy the currency precisely because the numbers have been impressive
- We still operate in an environment where the expected reaction functions by central banks have way too much influence, not only on market direction and economic analysis but everyone else’s general spirits. For traders, data-dependence still relies on central bankers’ mood swings, not economic releases. It’s true for investment decision-making by corporations as well. It can be a virtuous or vicious cycle depending on how it’s spun
- The willingness of people to keep asking me if it is time yet to buy the Spanish dip derives not from a reevaluation of the challenges faced, but the assumption that somehow the ECB will now be on notice to the need for them to prepare a response. That’s a shame, because while it could possibly paper over yet another problem by splashing out some dough, it just sets us up for the next time. And reminds us that they remain in crisis mode. Cue the return of the dour mood
