Week Ahead - Apr 15-19
VAR Shock Impact
I hope everyone is having a nice weekend. Before we discuss the week ahead, I had the pleasure of jumping on the Steno Research podcast on Thursday to talk about the economy, markets and inflation. Check it out at Macro Sunday .
A couple anecdotes on last week’s data. CPI obviously came in hot, but PPI came in lighter than feared. Well, it turns out that was primarily due to a seasonal adjustment applied to energy prices, so the energy contribution was far smaller than spot gasoline and oil prices implied. This suggests upside going forward via revisions and catch up.
One of the elements that was a notable surprise in CPI was electricity prices. As the chart below demonstrates, these are scary increases and with AI requiring substantial needs for electricity, this will become a major political issue in the coming election.
Onto the week ahead. Tomorrow’s retail sales is the noteworthy data print for this week, with some housing data Tuesday, Wednesday and Thursday. Retail sales will be very important for demonstrating the consumer remains strong. Consensus is for 0.3% MoM, and for control group of 0.2%. I think we beat those expectations. We also get NZD CPI Monday night, and CAD CPI Tuesday right before a moderated panel with both Powell and Macklem, which should be interesting to see how the BOC is looking at policy differentiation between the two economies.
Last week had a number of mini VAR shocks. For those unfamiliar, many multi-asset class or multi-strategy investment firms like to allocate capital to risk-takers on a VAR basis. VAR is an imperfect measure as it requires many assumptions, but it’s widely used because risk managers can estimate the downside risk with one number. Well, when we get volatility explosions, and large moves in multiple asset classes, VARs go up a lot. As VAR goes up, risk managers require de-risking of portfolios. The result is that we get a series of positioning led moves in markets, so expect erratic price action for the near future that may be hard to explain. Anyone who is sitting on unrealized gains will need to think about whether they want to lock that in or not.