Friday, May 27, 2011

Krugman: Inflation Notes

Earlier this year I shared the view with Hugh Hendry that the UK was (is) going through a soft-patch and that, the headline and core inflation numbers are somewhat distorted and would likely come down as some time passed, with austerity kicking in, global deceleration in growth and the base effect of tax hikes and energy price shock.
All in all, the UK is still on the asset purchase strings and the last 2 quarters brought 0% growth in total.

Krugman brings a short piece by Adam Posen of the BoE:
The UK’s economic performance over the past year is no surprise. When you tighten fiscal policy significantly after a major financial crisis, both history and mainstream economics would tell you to expect what we have now : no growth in broad money or credit, persistently high interest spreads for small businesses and households, flat or contracting private consumption and retail sales, a dearth of construction and declining real wages – all only partially offset by some expansion in exports. In such a situation, you should expect little domestically generated inflation, and that is also just what the UK has.
The recent consumer price inflation rates above 4 per cent result from this year’s value added tax increase and the recent energy price shock. Removing those factors, UK inflation has averaged 1.5 per cent over the past year – including any remaining effects of sterling’s past decline. Of course, higher taxes and energy prices shrink British real incomes, but the monetary policy committee was right not to respond to them, and should not do so now.
The trade I had in mind at the time was receiving a 3m18m flattener through Short Sterling futures-spread, the L-M1L-Z2 @ 1.54% on March 2nd. (On the same day a Euribor flattener receiver, @ 1.16% (ERM1ERZ2)).
It seems likely there isn't a lot of juice left in them with the front-futures expiring in 3-4 weeks.

I'm waiting for Eclectica's April letter to see Hendry's comments on Japan and this Short Sterling receiver. It should be very interesting

*Disclaimer: charts and data are presented as I receive/see them. Sources are usually not checked for validation and my own calculations are of 'back of the envelope'-type. I am aware that some math that I do myself might be wrong and/or misleading to some extent. In financial markets the rate of change of economic data is often more important than the actual level and the perception of 'what is priced in' is more important than 'what is actually going to happen'. This is actually the way people pick entry and exit points. So... yes, sometimes you might say 'This guy is an idiot, this is way wrong!' with a high conviction, being right. Not to worry. Markets are made of expectations and the clash of conviction between its participants. Portfolio managers know that being an idiot is sometimes profitable and being smart is often a bad choice. It is all reality, sometimes good, sometimes bad. By the way: corrections to my analysis and intelligent debate is welcome. theintriguedtrader AT gmail do com

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