“I think it’s safe to say everyone will take a glass half-full approach”

By Heisenberg

It’s all in the spin.

As Bloomberg’s Richard Breslow wrote overnight, markets are prone to taking a “glass is half-full” approach these days when it comes to incoming data, as evidenced by the apparent emphasis on the bolded passage below and not so much on the not bolded passage:

  • China Feb. Consumer Prices +0.8% Y/y; Est. +1.7%
  • Feb. PPI +7.8% y/y; est. +7.7% (range +6.5% to +8.1%, 42 economists); Jan. +6.9%

This is the attitude traders will carry into the ECB meeting and to be sure, investors can point to Wednesday’s blockbuster ADP print as evidence that it’s the right attitude to have. Hopefully Friday’s NFP print will lend further support to the rosy narrative.

Still, there are signs that things may be coming apart. As I noted yesterday, HY is starting to wobble and the whole reflationary meme is undercut to a certain extent by plunging copper and, more recently, crude prices.

In any event, below find Breslow’s latest in which the former FX trader notes that grasping at reflationary straws isn’t “necessarily a bad thing if it’s based on an evolving interpretation of the global economy and not merely on a re-assessment of central bank reaction functions.”

Via Bloomberg’s Richard Breslow

Well, it’s a good one-two punch to finish off the week, with the ECB today and non-farm payrolls tomorrow. I think it’s safe to say that given the current mood among traders, they will be squarely focused on the glass half-full elements rather than grasp at signs for temperance.

  • That’s not necessarily a bad thing. If it’s based on an evolving interpretation of the global economy and not merely on a re-assessment of central bank reaction functions. And, to be fair, and relieved, the data has been better
  • The improvements in activity aren’t localized, as patches of improvement have been in the recent past. The Citi global economic surprise index is riding at pretty exalted heights. In short, things are better than forecasters expected them to be. And explains the rather chuffed mood which has galvanized the FOMC to see an opportunity and take it
  • You can witness the current animal spirits in how today’s China inflation numbers were perceived. The stronger — by a little — PPI grabbed the headlines, while the big miss in CPI, core and headline, were put off as a Chinese New Year distortion. Even if that isn’t borne out in the details. It’s the reflation argument that everyone is pointing to, with sovereign yields across the region taking it to heart
  • Which brings us to what parts of President Draghi’s message will traders hear? Undoubtedly the elimination of “or lower” after “rates are expected to remain at current levels” will be over-analyzed. Pleasing Yves Mersch may be part of Draghi’s consensus-building strategy, but not going to ultimately dictate policy
  • The expected upgrades to headline inflation and growth will garner big headlines, but this one mandate council can’t ignore the fact that core inflation is nowhere
  • At their last meeting they talked about the capital key and purchases below the depo rate. Is it really likely that they will over-optimistically follow the Fed’s lead and abruptly shift from dovish to a tapering discussion? Yet, not a few people think so. Positions speak louder than reality
  • We spend a lot of time talking about the effects on Fed decision-making in front of the French election. Yet oddly enough, the hawks think the ECB will be playing the base case, throwing caution to the wind on peripheral spreads
  • In the aftermath, a close below 1.0490 in EUR/USD will get the bears salivating. Back above 1.0640 and the charts will scream “failure”. As for the bunds, 40bp and 30bp yield extensions will both look like break-outs
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