Mind the big picture

Treasuries took a bit of a spanking today on the back of unexpectedly strong US inflation numbers. May CPI had been forecast to be 0.2% month on month and 2% year on year, but reported in at 0.4% and 2.1% respectively.

At a time when the UK is already being confronted with the prospect of a Bank of England tightening rather than the earlier than expected merchants had been expecting, the prospect of a tightening by the Fed shook markets.

The problem is that by way of the rather silly policy of offering forward guidance, the Fed, like the Bank of England, has made a rod not only for its own back but for most of the rest of the financial system too.

Fed supremo Janet Yellen has two options, neither of which is particularly compelling. She must now either come out and declare inflation is the Fed’s primary concern as it is focusing on unemployment which is not good or she must assert that the forward guidance which was given and which was based on the state of the labour market is no longer valid in which case she joins Mark “The Magician” Carney who is surely burning the midnight oil while trying to prove first to himself and ultimately to the rest of us that a logarithmic U-turn is a straight line.

Over the past months I have heard economists and strategists on morning shows on the telly and on wireless defending forward guidance. I don’t know what they have for their breakfast but I wouldn’t mind a drop or two of it – without ice and lemon at this time of the morning please. That said, the fear has been the absence of inflation. I cannot imagine the Fed making the same mistakes which the BoJ made a decade or so ago when it tightened too aggressively and too soon and in doing so it killed off whatever nascent recovery there might have been in the Japanese economy.

Inflation is probably the least of the Fed’s worries and as government owns the largest call option on inflation – fiscal revenues naturally rise in line with rising prices but debt and debt service costs do not – both the White House and Congress would frown on any hastiness on the part of the Fed in terms of tightening policy. My guess is that the markets have got this one wrong and treasuries remain a decent short-term buy.

Markets seem to love falling victim to the temptation to micro-analyse the actions of the central banks which are currently painting monetary policy with a big roller rather than with a fine badger hair brush. There is, for better or for worse, nothing subtle in what they are doing and my guess is that the slightly higher-than-expected CPI isn’t going to make the difference; not that they’ll tell us that.

On this side of the Atlantic, UK CPI went the other way and undershot with the May report showing MoM price changes of –0.1% as opposed to market consensus of +0.2% with annual CPI falling to 1.6%. RPI fell to 2.4%. Here the MPC will be aware of the figures but whether they will significantly influence the timing of the first tightening move is, in my view, also doubtful.

Alstom fight

Meanwhile, on a completely different subject, the fight for Alstom is picking up. Siemens’ counter to the GE bid approach was supposed to offer a European solution, but the Germans have now teamed up with Mitsubishi in order to file a joint bid. The white knight is now anything other than white and with GE rapidly shuffling the deck in order to turn up the jobs protection card, I would suggest that its chances of winning the prize are now higher than they were.

Remarkably, Alstom only has just over €4.5bn of outstanding bonds but they are BBB– rated and the chances are that whoever wins and however structurally subordinated these remain, they will look a lot better.

No surprise therefore that they have rallied sharply through the bid process. The longest outstanding Alstom issue, the 41/2/% 3/20 is now trading at just below asset swap +100. There is still plenty of value in there as GE issues of similar maturity are pegged around +40 and Siemens’ debt is below +20. A cheeky buy if one can find any in the open market.

Alas, for me it already that time of the week again as I will be out for the last two days of the week. Tomorrow I disguise myself as a gentleman in top hat and morning suit in order to attend Royal Ascot. I read recently that there are only two classes of people left in this country – those with tattoos and those without them. We are a funny bunch where the height of social standing at Ascot is to be able to munch a picnic in the car park rather than being one of the masses who have to sit down at a table to eat … weird lot, us British.