Speculation that the ECB might, as part of its proposed bond-buying programme, announce an interest rate target (or band) for short-dated peripheral government bonds has sparked a further rally in Spanish and Italian bonds in the past week. Such an 'unlimited' move is a complete volte face from past policy, but Daiwa's research team believes hopes that the announcement of an interest rate or spread target would spare the ECB the pain of having to intervene in the markets at all are flawed in our view. For the ECB to credibly communicate an interest rate or spread target requires it to quantify the excess risk premia. Given the inherent inaccuracy (or falsehoods) of the forecasts underlying these estimates, the ECB would risk having to review these targets regularly, leaving markets uncertain about their permanence. The success and the sustainability of any future ECB interventions will ultimately depend on the peripheral governments’ ability to meet the conditionality required - and we know how that has ended up - always and every time.
The tried strategy of "Baffle them with BS" continues today following the release of the June (two month delayed) Case Shiller data. Because whereas last week we showed that New Home Prices are plunging, and the average new home price just dropping to its 2012 lows, when it comes to the Case-Shiller index, things are looking up. In June, the Top 20 composite index rose by 0.94%, well above the expected increase of 0.45%. How much of this is due to the REO-to-Rental program in which we are now seeing actively securitization of rental properties, which in essence is converting more and more of the Residential market into commercial real estate, remains unclear. For now it is clear that those entities with access to cash are buying up properties in beaten down areas in hopes these will be filled by renters. On the other hand, the truth is that summer months always see the biggest pricing gains, and following the May data revision, which rose at a revised rate of 0.97%, one may observe that the pricing increase has now peaked even according to delayed CS data, and has begun its traditional rolling over pattern. And a pattern it is. As the second chart below shows very clearly, housing is now merely in the dead cat bounce phase of a broad housing quadruple dip, each one having been facilitated by either Fed or ECB intervention. We give this one a few more months before it too resumes the downward trendline so very well known to Japanese homeowners, and falls in line with the data reported by the Census department.
As Robin might say "Riddle me this Batman": how can an country, supposedly growing its economy at over 7%, with factory output up over 9%, manage all of this superlative production while rail traffic is shrinking at almost 5.4% annually?
Beggars can once again be choosers. In other news, non-news (the Catalan bailout was announced at least two times before) is news again, and magically drives the amnesiac market all over again.
Up until now, the title of "Spain's scariest chart" belonged to one depicting its youth (and general) unemployment, both of which are so off the charts it is not even funny (especially to those millions of Spaniards who are currently unemployed). As of today we have a contender for joint ownership of said title - Spain's monthly deposit outflows, which in July hit the highest amount ever, and where the YTD deposit outflow is now the highest on record. One look at the chart below confirms that nobody in Spain got the June 29 Euro summit memo that "Europe is fixed"...
- Ringing endorsement: Lithuania to Adopt Euro When Europe Is Ready, Kubilius Says (Bloomberg)
- Credit Agricole net plunges 67% on losses in Greece and a writedown of its stake in Intesa Sanpaolo SpA (Bloomberg)
- Europe finally starting to smell the coffee: ECB Urging Weaker Basel Liquidity Rule on Crisis Concerns (Bloomberg)
- Japan Cuts Economic Assessment (Reuters)
- France’s Leclerc Stores to Sell Fuel at Cost, Chairman Says (Bloomberg)
- China Eyes Ways to Broaden Yuan’s Use (WSJ)
- Berlin and Paris forge union over crisis (FT)
- Brezhnev Bonds Haunt Putin as Investors Hunt $785 Billion (Bloomberg)
- Republicans showcase Romney as storm clouds convention (Reuters)
- ECB official seeks to ease bond fears (FT)
- German at European Central Bank at Odds With Country’s Policy Makers (NYT)
By now everyone is well aware that the payback for the absolute zero that was August in terms of newsflow and events, the first quiet August in three years, will be September, which as we and others dubbed, will be "Crunchtime" for Europe. And with September now just days away, and with the transitionary Jackson Hole forum virtually assured to be the latest dud, with Draghi surprisingly bowing out at the last minute (even as Buba's Jens Weidmann is still set to attend), and with Bernanke guaranteed to do nothing more than just jawbone some more without real action, the time to refresh on what to expect over the next 30 days has come, courtesy of this annotated calendar from SocGen.
With the market realization slowly dawning that Bernanke will not announce anything of note at this year's Jackson Hole meeting, especially with the NFP number following the symposium expected to demonstrate another improvement in the economy, and ahead of the FOMC meeting in the second week of September, many hopes were resting on the shoulders of Draghi, whose ECB has now become a backup option when it comes to jawboning markets higher on empty promises. It is the same ECB which is also expected to announce something, anything on September 6, or else the market will really get angry after "believing" Draghi back in July as he said, and not delivering anything for two months straight. At this point however, the Jackson Hole meeting appears to be a complete dud because as was just reported, Mario Draghi, who was previously scheduled to speak on August 30, has decided to skip the meeting entirely. According to Bloomberg, citing an ECB official, Draghi won’t be attending Jackson Hole forum this year, and the reason given is "due to workload in coming days."
Yesterday, Spain was kind enough to advise those who track its economy, that things in 2010 and 2011 were in fact worse than had been reported, following an adjustment to both 2010 and 2011 GDP "historical" data. Today, we learn that Q2 data (also pending further downward adjustments), contracted by 0.4% sequentially in Q2, in line with expectations, but somehow, and we have to figure out the math on this, the drop on a Year over Year basis was far worse than expected, printing at -1.3% on expectations of just a -1.0% decline. However, while its economic collapse is well known by all, the surprise came in the deposits department which imploded by a whopping 5% in July, plunging to 1.509 trillion euros at end-July from 1.583 trillion in the previous month. Keep in mind this is after the June 29 European summit which supposedly fixed everything. Turns out it didn't, and the people are no longer stupid enough to believe anything Europe's pathological liar politicians spew.The good news: Greek deposits saw a dead cat bounce after collapsing by ridiculous amounts in the past several years: at this point anyone who puts their money in Greek banks must surely realize that the probability of getting even one cent back is equal odds with going to Vegas and at least having a good time while watching one's money burn.
If the unofficial end of the European summer season comes with the return of those 9-saying Germans who dash every carefully laid plan to stuff German taxpayers with the European bailout bill for the second year running, the official end is when the Greeks come back from their German-sponsored two week vacation in the Cyclades (soon to be known as Nieder-Niedersachsen) and start bombing things. Which is precisely what happened two hours ago. From Reuters: "A makeshift bomb exploded outside a National Bank of Greece branch in Athens early on Tuesday, causing minor damage but no injuries, police said. Windows were smashed and four parked cars suffered minor damage in the blast, which took place about 4 a.m (0100 GMT) in the western suburb of Ilion." Luckily nobody was hurt. However, it would not look good on the front page of German papers that the general Greek population is not ungrateful for the continued ECB recycling of ponzi cash, but has decided to take out an ATM machine or two, which is why... "We suspect it is linked to terrorism," said a police official who declined to be named. Sure enough, when all else fails, blame something: Bush, a glitch, or terrorism.
The impact of unsustainable production in Chinese Steel-making plants, to avoid the inevitable employment consequences, has created a 'glut'. This excess inventory will need to be worked through before spot Iron Ore (and Coking Coal) prices can stabilize. Morgan Stanley believes the sharp raw material price declines since mid-July followed a collapse in Chinese steel prices and aggressive margin compression. This is in turn has resulted in aggressive thrifting of raw material purchases. More recently, the price declines have accelerated with Chinese re-bar and HRC prices reaching 33-month lows. In their view, prices of steel making raw materials can recover in 4Q 2012 and in 2013, but spot prices for both iron ore and coking coal first have to fall below the marginal cost of seaborne (not Chinese) production to drive out the short-term supply overhang - Iron Ore prices could fall 17% further before this 'stabilization' and spot coking coal over 8% from current levels.
No sooner had Azumi announced his rather unsurprising admission (via Bloomberg) that:
*JAPAN CUTS ASSESSMENT OF DOMESTIC ECONOMY
*AZUMI SAYS HE SEES RISK OF GOVT FUNDS DRYING UP
then Aussie Home Sales came in much weaker than expected (and their lowest in six months). The repatriation of JPY accelerated - dragging JPY higher and snapping all the other majors lower relative to the USD; and AUD weakened significantly (though already priced for some easing). Of course, as a funding pair for everything still, the AUDJPY carry-unwind is weighing on equity futures (though minimally for now).