Yesterday was a day for small discoveries and little projects. Here are a few:
1. The spread between repo rates and EONIA — which I watch as a proxy for the collateral shortage in Europe — is not normally strongly correlated with the EURIBOR-EONIA spread, a measure of funding stress. Thus, the co-movement of the two in 2012 suggests that there was a common factor that was driving both. This was probably, of course, the European crisis.
2. Last week I saw a chart that appeared to show a strong relationship between credit spreads and corporate leverage in Europe. I wondered whether there was a similar relationship in the US. I could only get data on the Bloomberg going back to the mid-1990’s, but there did appear to be a relationship between the debt/profits ratio of US corporates and the BBB spread. The point about Europe was that credit spreads fell in 2012 as corporate leverage (surprisingly) increased; in the US, corporate leverage remains low.
3. I often say that there is not a strong relationship between corporate profit growth and earnings growth. Yesterday I tested this assertion, and found it to be broadly true. Using YOY percentage changes, there is a weak, but statistically significant, relationship (R-squared = 0.24) between profit growth and GDP growth based on quarterly data going back to the mid-1960’s.
4. I wondered whether Japanese property might be behind the equity market in factoring in the effect of the looser policy environment in Japan. I did not look at property values directly — buying Japanese property directly would be difficult — but at Japanese REIT’s. These have outperformed the equity market over recent months, and in aggregate are trading at a small premium to net asset value. There is not an obvious value trade to be done here.
5. How can we tell whether the outlook for the labour market has improved “substantially”, as the Fed would require to end its asset-purchase programme? I have made a simple composite index for the labour-market outlook. I combined two rate-of-change series (non-farm payrolls and initial jobless claims), two levels series (the unemployment rate and the employment-to-population ratio) and an assessment of the general economic outlook (the Bloomberg consensus GDP growth estimate for the next calendar year). The index shows little improvement since a peak early in 2012, which is at least consistent with the Fed’s decision to embark upon QE3.
I mentioned yesterday that a vote on the debt ceiling had been scheduled in the House. The Republican plan is to raise the ceiling for three months, with a requirement that both chambers agree a plan for long-term deficit reduction, on pain of lawmakers having their salaries withheld. American politics remains a circus with the Republicans in the role of lead clown — the idea of pushing lawmakers around by restricting their salaries is ridiculous. Still, from a market point of view, the debt ceiling issue is likely to go away.
As everybody is reporting, the BoJ adopted a 2% inflation target and will continue its asset purchases at a rate of Y13tr/month once the current programme ends at the end of this year. It was hard to see how the BoJ could have surprised to the upside, and the JPY is up a little, presumably because there was no immediate increase in the rate of asset purchases.
There seem to be articles everywhere that talk about the excellent prospects for equities. Bloomberg has a particularly effusive one today. In themselves, these articles usually contain no information, but their prevalence may contain some: they are much more common towards the top than towards the bottom.