As vol continues to strangle any substantive macro trends, we’ll get back into the cycle of Economist articles to lead off the week.
This week’s article for your macro consumption is the annual updating of the Economist Big Mac Index. I must confess to having a soft spot for the Big Mac Index. During my freshman year of college, my intro economics prof introduced the concept to the class. I found it fascinating, and it really connected the dots for what this whole endeavor is about--the quest to find some common “currency” by which we can assign value, or at least give us some evidence by which to make some subjective judgements. For me, it suddenly all made sense. By the end of the year I dropped my plan to be a political science major and the rest is history.
So there you have it--here’s what I see as the takeaways, modest as they might be:
Sweden still very high on the “overvalued”, and actually appreciating more.
And it’s had a nice run lately, taking EUR/SEK from 9.80 to 9.53--SEK rates have underperformed EUR rates owing to some relatively good data and the potential for the Riksbank to move off of the lower bound of repo rates. That said, 2y2y rate spreads haven’t done much-- if I were to plot this out on a regression the residual is very close to zero.
I’ll confess that I haven’t spent a great deal of time thinking about the land of my ancestors--but is there a good argument we’ll see a faster normalization of rates by the Riksbank than the ECB? Unlike with the fed, inflation could arguably be converging towards the 2% target.
Sweden CPI and CPIF (CPI w/ a constant interest rate( source: Statistics Sweden
Growth? Not too shabby.
YoY GDP Growth source: Statistics Sweden
Figures for IP look more encouraging--- likely part of the broader trend in the European business cycle. I’d love to hear anyone with a more educated view here, but looks like eur/sek may have gotten a little ahead of itself. Good spot to take a crack at long eur/sek...9.50 looks likely to provide good resistance and an easy point to walk away if it breaks down and/or there is a persuasive move in the forward rate spread.
2) Brazil--BRL has been on a very good run. A very wise friend once told me “when you are bullish, buy BRL. When you are bearish, sell MXN.” Given the political situation in both countries and a convergence in their interest rates, that’s not quite as true as it used to be, but the market sure seems to think so. I continue to like the potential in Brazil, but the politics will continue to be a three-ring-circus--indeed, how many currencies rally when the ex-president is sentenced to almost ten years in prison? Last week I alluded to the Mexican political maxim that “energy reform will be done in darkness.” Well, the metaphorical lights are about to go out in Brasilia...and maybe sooner in Rio. Politicians know what they have to do, they have the goods on the table, and soon they will be forced to do it. Stay long BRL.
3) ZAR...not as expensive as it used to be--and well, if your answer to the above question was “South Africa”, you would be correct. I think the question is when to get long here--rates are still attractive, and the only institutional respite in the whole country right now is probably the SARB... and you have the wild card option that Zuma is finally sent packing, to retirement, jail, or Zimbabwe...anywhere other than the presidency.
4) Lastly….I know I am fly-over country, but where in the US does a Big Mac cost over $5? Maybe I buy too many Happy Meals to notice? Who would pay $5.30 for a Big Mac when $7 buys you a burger at Five Guys?
Update: FRED led me wrong--in the initial version of this post the inflation and growth data I pulled from the normally reliable St. Louis Fed website “FRED” was wrong. I have updated the post to show the correct data, now taken from Statistics Sweden.