A busy week, with a bevy of significant data releases, starting with the already reported PMIs out of China and Europe (as well as unemployment and inflation numbers from the Old World), the US Manufacturing and Services PMI, another Bill Dudley speech on Tuesday, US factory orders, statements by the ECB and BOE, where Goldman's new head Mark Carney will preside over his first meeting, and much more in a holiday shortened US week.
Following the Friday plunge in the ISM-advance reading Chicago PMI, it was a night of more global manufacturing data, which started off modestly better than expected with Japanese Tankan data, offset by a continuing decline in Chinese PMIs (which in a good old tradition expanded and contracted at the same time depending on whom one asked). Then off to Europe where we got the final print of the June PMI which continued the trend recent from both the flash and recent historical readings of improvement in the periphery, and deterioration in the core. At the individual level, Italy PMI rose to 49.1, on expectations of 47.8, up from 47.3; while Spain hit 50 for the first time in years, up from 48.1, with both highest since July and April 2011 respectively. In the core French PMI rose to a 16-month high of 48.4 from 48.3, however German PMI continued to disappoint slowing from 48.7, where it was expected to print, to 48.6. To the market all of the above spelled one thing: Risk On... at least until some Fed governor opens their mouth, or some US data comes in better than expected, thus making the taper probability higher.
Everything that's wrong with Amerika today...
Following South Korea's dip back into contractionary mode (PMI sub-50 for first time in six months - prompting JPY strength and NKY weakness, on implicit KRW weakness retaliation), it appears China's government-sanctioned PMI (printed at 50.1 relative to 50.8 prior and 50.1 expectations) is converging down to the nation's HSBC PMI (whose Flash print was 48.3 - final due at 2145ET). This is the equal lowest print in 9 months but provides just enough cover to the current administration to maintain its tight policy stance - even if it was the biggest MoM drop in 10 months. On a side-note, all PMI sub-indices also fell MoM. The market's response is modest AUD strength and Nikkei weakness which suggests investors were hoping for a little weaker data to push China a litte closer to folding on their bubble-popping position.
For all those unable to sleep tonight without the knowledge what Goldman thinks about this week's most important economic release, Friday's Nonfarm Payrolls number (and the unemployment rate, which is guaranteed to continue the previously observed divergence from GDP in a centrally-planned and completely "brokun Okun" environment), read on for your trivial Ambien. From Goldman "Our forecasts for the US dataset to be released this week will likely be mixed for rates... we think that payrolls will likely disappoint market expectations." As a reminder, consensus expectations are for a 165K print, declining from May's 175K, while Jan Hatzius now expects 150K. And with that the second great US renaissance which Hatzius forecast in late 2012 is being "tapered" away the same way his 4% GDP prediction in late 2010 devolved into sheer nothingness.
Many people believe there is a significant risk that the Irving Fisher debt-deflation theory of great depressions is still an economic threat today. They overlook the fact that Fisher published his theory examining debt-deflation events under a gold standard, which does not apply today. Financial credit contractions therefore take a different appearance. It is indicative of our economic biases that we completely overlook the differences between the sound money of 1929/30 and the infinitely expandable money of 2008/09. We make this error because today’s economists lead us astray with a fundamental belief that the state through monetary intervention can fix everything. Even though today’s economists are a broad church they follow beliefs instead of well-reasoned economic theory. Beliefs are better left to clerics.
The Fed has managed to remove some of the complacency in financial markets for now, but we would also argue that financial markets have managed to remove any complacency the Fed (and any other central banks) may have had regarding how easy the exit strategy from QE was going to be. As we discussed here, the market and the Fed are trapped in a prisoner’s dilemma, and, as Citi notes, the events over the past three weeks make it clear that 'collaboration' is the best strategy – i.e. a non-complacent market and no hawkish surprises from central banks. There is a big risk to this scenario though. As Citi explains, a risk that we fear not even the recent dovish messages by central banks may be able to do much about. The recent sell-off has, unlike the previous sell-offs this year, managed to trigger outflows in funds and ETFs; as we mentioned above, our credit survey reports the first outflows since 2008. The negative feedback loop which has been triggered around (retail-driven) fund and ETF outflows has gained a momentum of its own and the following four charts suggest bonds are in fact primed for the perfect storm.
Were you under the impression that your credit card transactions are private? If so, I am sorry to burst your bubble. As you will see below, there are actually multiple government agencies that are gathering and storing records of your credit card transactions. And in turn, those government agencies share that information with other government agencies that want it. So if you are making a purchase that you don't want anyone to know about, don't use a credit card. This is one of the reasons why the government hates cash so much. It is just so hard to track. In this day and age, the federal government seems to be absolutely obsessed with gathering as much information about all of us as it possibly can. But there is one big problem. What they are doing directly violates the U.S. Constitution.
Mortgage rates have increased more than 1 percentage point since early May, jumping half a percentage point since last week’s FOMC meeting, raising concerns that this rapid rise may derail the housing recovery and dim the outlook for the broader economy, especially in the context of generally tighter financial conditions. As Goldman notes, the rise in mortgage rates may impact the economy through two broad channels: (1) the direct impact on construction activity and home sales, which feed into the residential investment component of GDP, and (2) the indirect effects of lower home prices and less refinancing activity on consumption. Goldman estimates Housing Starts could plunge 11% in the coming quarters, total home sales could drop 7%, residential investment may fall 6 percentage points, could weigh on home prices, and pull up to 0.4 percentage points from real GDP growth - presenting a significant downside risk to their somewhat rosy current outlook.
Despite best effort to immunize banks from rate swings and debt MTM risk, a substantial amount of duration exposure has remained with the glorified hedge funds known as FDIC-insured bank holdings companies under the designation of “Available For Sale” (AFS) or those which due to their explicit short-term trading fate, would have to be subject to mark to market moves. It is the bottom line impact of these securities that threatens to crush bank earnings in the just concluded second quarter by an amount that could be as large as $25 (or more) billion.
Update: The Muslim Brotherhood offices have been set on fire...
It appears the re-civil-war in Egypt is gathering pace. What started at tens of thousands has swelled to hundreds of thousands of people crowded into the infamous Tahrir Square. As the live feed below shows, for now it is lasers, fireworks, but fires are starting to breakout and small skirmishes with police are being reported as the crowds call for Morsi's ouster. Morsi's supporters/civil servants, meanwhile, demand that "the elected president has to complete his term. We will not relinquish this even at the cost of blood."
One of the sad narratives of the financial meltdown of 2008 and its aftermath is that it was and remains the result of unbridled capitalism. Too much freedom spoiled the economic broth. We must never tire of explaining the fallacies in the thinking of those who think the Great Recession is a clear case of the failure of capitalism. In fact, it is a quintessential example of the failures of interventionism to bring about anything other than economic destruction and relative impoverishment.
The president of the European Parliament, Martin Schulz, said he was "deeply worried and shocked about the allegations of U.S. authorities spying on EU offices" made in a report published Sunday by Der Spiegel. The latest round of NSA 'transparency' suggests U.S. intelligence agents bugged EU offices on both sides of the Atlantic, leaving some EU lawmakers calling for concrete sanctions against Washington - calling for an immediate investigation into the claims and suggesting that recently launched negotiations on a trans-Atlantic trade treaty should be put on hold. "If the media reports are accurate, then this recalls the methods used by enemies during the Cold War," notes one German minister, adding that, "it is beyond comprehension that our friends in the United States see Europeans as enemies." Schulz concludes, "It would be an extremely serious matter which will have a severe impact on EU-US relations."
Day after day we are bombarded by the sound and fury of each and every macro-economic data point that is then extrapolated as meaning either a) it's bad enough that the Fed will be behind us forever more, or b) it's good enoughthat we are on the path to self-sustainable escape-velocity based utopia. The US, especially, seems to have been proclaimed the cleanest dirty shirt ("where else are you going to put your money" is mantra'd into our minds - especially odd now since treasury yields exceed equity dividends by such a large margin). But, as usual, a glimpse at the data and reality hits the investor squarely in the face. The following 12 charts of global macro surprise indices - i.e. just how well nations are doing relative to PhD economist expectations - should summarize the sturm und drang we suffer each day.
UPDATE: It appears the site is up for some (premium members?)
When we first noticed, we assumed Treasury.gov was down for un-scheduled maintenance, but now, 10 hours later, it appears the site is down for other reasons? Overwhelmed by NSA DDoS attacks (as government pension funds seek more information on where their investments are heading)? Sequestration claimed the Webmaster? Hacked? Or simply the first cost-cutting measure for a Fed who just suffered their largest loss ever in a quarter (of course, that is, if they were bound by 'normal' mark-to-market rules). There are no explanations as yet.