Expectations going in were apparently of no material change likely with some increase in dissents. It seems the market is initially disappointed by the Fed's lack of "we'll print 'til we die" comments as Bloomberg notes:
- *FED SAYS STRAINS IN GLOBAL MARKETS `HAVE EASED' BUT POSE RISKS
- *FED SAYS OIL, GAS `WILL PUSH UP INFLATION TEMPORARILY'
- *FED SAYS UNEMPLOYMENT `DECLINED NOTABLY,' REMAINS ELEVATED
Notably, economic "growth" has moved from modest to moderate, and inflation word count: 6.
Once again, credit markets have roared back to converge with equity's exuberance to close the day in line. Very soon after our earlier post on the divergence, the two bipolar markets began to converge rapidly. Will tomorrow's 4th time be the charm, we wonder?
Back to basics with some definitions:
DEFAULT, n. Semi-mythical celestial occurrence that passes by Earth every 76 years.
I was worried for a second about that Greek default, but I realise there's nothing to see now and all is well.
FEDERAL RESERVE, n. A wholly owned subsidiary of Goldman Sachs.
The Federal Reserve voted to give a few more billion dollars to Wall Street.
US GOVERNMENT, n. Another wholly owned subsidiary of Goldman Sachs.
We seem to be running out of Goldman Sachs alumni here in the Treasury. No, wait, we've still got hundreds of 'em.
In February, the US spent a third of a trillion to fund various government programs. Since only a fraction of this money was funded with tax revenues, the balance has to come from somewhere else. Like today's 10 year $21 billion Bond auction. In the aftermath of yesterday's weak 3 year, today's bond also priced at the highest yield since October, printing at 2.076%, just inside of the When Issued 2.08%, and a far cry from January's 1.90% as the Fed is expected to use the word inflation in just under 60 minutes. The Bid To Cover was 3.24, compared to the 3.12 TTM average. The breakdown of buyers was virtually unchanged from February's auction, and saw 42% taken down by Dealers, 38.6% go to Indirect Bidders, and Directs taking down 19.4%, or the highest since August. Once this week's auctions are concluded, total US debt will be $15.6 trillion as the ramp into October's (at the latest) debt ceiling fight, which promises to be the highlight of this election season, begins in earnest. Any minute now, the CBO will also release its revised grading of the President's budget, which will see the 2012 deficit forecast increase from $1.08 trillion to $1.2 trillion.
Mark Fisher Accused By CFTC Of Pulling An MF Global, Depositing Customer Funds Into Non-Segregated AccountSubmitted by Tyler Durden on 03/13/2012 - 12:49
Mark Fisher is a staple contributor on CNBC. Or at least was. According to various headlines flashing across both Bloomberg and Reuters, it seems that his MBF Clearing Corp is the first victim of the CFTC expanding its MF Global inquiry, and Fisher's MBF Clearing Corp of performing just the same "vaporization" activity that MF Global engaged in and that boggle regulators' minds.
MBF CLEARING CORP SUED BY CFTC FOR FAILIING TO SEGREGATE FUNDS
CFTC ACCUSES MBF OF DEPOSITING CUSTOMER FUNDS INTO A NON-SEGREGATED ACCOUNT THAT ROUTINELY HELD BETWEEN $30-90 MLN
CFTC ALLEGES CUSTOMER ACCOUNTS WEREN'T PROPERLY SEGREGATED
Oops. In other news, JPM and Jon Corzine are both completely innocent of anything. But at least the CFTC can say it has done its duty of punishing transgressors and all is now well.
While he does have some new philosophy (at X% off MSRP of course, coming to a Kindle near you) to preach, Nassim Taleb's re-emergence from the darkness of the media spotlight starts with a bang: "I realized that something wrong is going on, and only one candidate 'Ron Paul' seems to have grasped the issues and is offering the right remedies". He was given quite a lengthy period to proselytize as he outlines the Big Four problems he sees with the USA (and for that matter the world): Deficits (metastatic governments), The Fed, Militarism, and non-Bailouts (what is fragile should break early). As Ron Paul notes, "It's an illusion that the USD can bailout the world", Taleb makes many interesting, though a little murmur-some for our liking, points like "you don't gamble with hyperinflation" and his comparison between the US and the Soviet Union will surely raise some headlines as he rants of the growing divide between public and private employees standards of living, our "need to do something drastic about it" and on Obama/Government and deficit reduction that "the whole thing is rotten".
CDS is once again (still) in the spotlight. We have moved on from debating whether or not a Credit Event has occurred in the Hellenic Republic, to concerns about whether the CDS market will settle without a problem. There is a lot of talk about “net” and “gross” notionals and counterparty risk. What I will attempt to do here, is build a CDS world for you. We will look at various counterparties, the trades they do, and the residual risks in the system. It will be loosely based on Greek CDS but some liberties will be taken. None of the institutions are real world institutions (in spite of how much they sound like some people we know). It is a simplification, but to make it useful, it has to be robust enough to give a realistic picture of the CDS market/system.
The continual restatement by endless talking heads of the compression in Italian bond spreads/yields as some indicator of success and recovery in Europe is becoming nonsensical. Short-end rates have become anchored, and as UBS notes today, the huge liquidity injections have caused structural breaks between curve slop and spread levels (curve now at its steepest since EUR inception). However, what makes the nonsense-speak greatest is the disappointment in terms of market reaction post LTRO2. After the previous two major liquidity injections (LTRO1 and the Reserve Requirement shift) we saw a considerable spread compression very soon after. However, in the two weeks since LTRO2, Italian spreads have gone nowhere (and have in fact seen notably larger volatility and intraday decompression in the last few days post-Greece). With theeconomics of the carry trade diminished, and the market fully priced in LTRO's impact, expectations of further improvement in Italy's bond curve seem entirely dependent on more surprise liquidity (unlikely short-term) as the carry-trade engine appears to have run out of fuel (or collateral maybe?)
If there is one thing that can be said about Obama's previously noted announcement at 11 am Eastern highlighting "new efforts" to enforce our "trade rights" with China (aka launch the stray inaugural .22 calibre bullet into the China-US DMZ) is that the algos in charge of the market will love it and send stocks soaring just because. Oh, and if China were to just incidentally make live for FoxConn products that little bit more difficult in retaliation, so be it. That will be bullish as well, certainly for the NASDAPPLE.
Last month, the world's biggest hedge fund, Bridgewater, issued a fascinating analysis of deleveraging case studies through the history of the world, grouped by final outcome (good, bad and ugly). As Dalio's analysts note: "the differences between deleveragings depend on the amounts and paces of 1) debt reduction, 2) austerity, 3) transferring wealth from the haves to the have-nots, and 4) debt monetization. Each one of these four paths reduces debt/income ratios, but they have different effects on inflation and growth. Debt reduction (i.e., defaults and restructurings) and austerity are both deflationary and depressing while debt monetization is inflationary and stimulative. Ugly deleveragings get these out of balance while beautiful ones properly balance them. In other words, the key is in getting the mix right." Of these the most interesting one always has been that of the Weimar republic, as it certainly got the mix wrong.
As Apple gaps open by another 1% at $558, it stands less than $14bn (in market cap) away from being larger than the entire US retail sector. The good news: it still has a ways to go before eclipsing the retail and the semi sectors combined.
Yesterday we presented the view of JPM's Michael Feroli of what today's FOMC statement may say (one word: inflation). Here is what Goldman believes: "Today's FOMC statement should be relatively uneventful. The committee is likely to acknowledge the stronger labor market data and the upward pressure on headline inflation, which will undoubtedly be characterized as temporary. We also expect a softening of the phrase that “[s]trains in global financial markets continue to pose significant downside risks to the economic outlook,” although we do not expect it to disappear entirely. At the meeting, the staff is likely to give a presentation on additional easing options, followed by an extensive committee discussion. (This will not show up in the statement and will only become visible to the outside world when the FOMC minutes are released three weeks later.) We still think that the committee will announce further easing before the end of the second quarter, when Operation Twist concludes. However, our confidence in this view has fallen on net, partly because of the stronger labor market and slightly higher inflation data and partly because Chairman Bernanke chose not to repeat his very dovish comments from the January 25 FOMC press conference at the February 29 Monetary Policy Testimony." Remember: admitting inflation means no QE any time soon (and also admission that all the other central banks have succeeded in staving off deflation for a few more months courtesy of $2.5 trillion in excess liquidity injections in under 2 quarters).
What do European credit markets know that equities don't? For the 3rd day in a row, credit markets snapped higher at the open and have then sold off considerably - diverging bearishly from European equities. At the same time, European sovereigns (most notably the pivot securities of Italy and Spain) are now 20-25bps wider (in spread) from Friday's Greece 'deal' announcement. European financials are underperforming dramatically.