Archive - Jun 9, 2011

Wondering what lit a fire under the EURUSD? Wonder no more, courtesy of Reuters:

• New bailout for Greece likely to total about EUR 120bln according to Eurozone sources
• New bailout may comprise EUR 30bln from private sector, EUR 30bln from privatisations, up to EUR 60bln from EU/IMF
• Remaining loans from initial Greek bailout would be disbursed alongside new bailout, according to Eurozone sources

And yes, as predicted the final amount will be far greater than previous expectations of under €100 billion.

We have already noted our amusement at Sorkin's inaccurate and dictated defense of Goldman's housing short position previously (apparently the DCF expert has absolutely no understanding of such concepts as DV01, delta, gamma, capital structure priority, gross vs net notional, and exposes so many other misconceptions that we will simply wait for the official Goldman 8K to come out, as opposed to this unofficial one, before issuing out full debunking of any Goldman defense). One thing we did not note, however, that needs disclosure, is the glaring conflict of interest in ARS' puff piece. As Taibbi pointed out, it is none other than Goldman who is a critical backer of Sorkin's Dealbook. To wit: "Barclays Capital, Goldman Sachs, Sotheby’s and Tata Consultancy Services
are charter advertisers for the relaunch of DealBook." Indeed, it is perhaps time to have a disclaimer at the end of every article that there is substantial squid pro quo involved in namesdropping-for-brownnosing modus operandi. But even that is nothing compared to the latest attempt to glorify those who perform god's work on earth. Below is a snapshot of FierceFinance's spirited defense of Goldman Sachs. The author mocks the concept of Sorkin as an apologist for those who enjoy seeing their name in a good light in the NYT and on HBO: "Sorkin might be accused of trying to bolster his base with his report--Wikipedia describe him as "an apologist for Wall Street/Goldman Sachs." I kid you not. But Sorkin makes a lot of sense when discussing how one unit in a very large company may be hell-bent on shorting the market even as another unit in the same company may be stuck with certain securities." It is not the ongoing misunderstanding of previously noted concepts, but the actual advertisement as part of the piece. Once again, we see that only those who directly get funding from Goldman Sachs would be willing to destroy their credibility by coming to its defense.

Regular Zero Hedge readers are aware of our consistent noting how in the past several years, the BLS has relentlessly imposed an guaranteed upward bias to prior initial claims revisions, to the point where it has become a statistical farce (today's upward revision of last week's number from 422K to 426K being just the latest indication). It is thus to our surprise and disappointment to find that even Bloomberg has ceased to keep track of prior revisions: one wonders if the BLS may have had some close conversations with the only media which back in 2009 dared to challenge the Bernanke Put.

Soundbites from the Trichet conference:

• TRICHET: ECB SEES "UPWARD PRESSURE" ON EURO AREA INFLATION
• TRICHET: "STRONG VIGILANCE" NEEDED ON INFLATION RISKS; ECB WILL ACT IN FIRM AND TIMELY MANNER; ECONOMIC UNCERTAINTY REMAINS "ELEVATED"
• SEES 2011 INFLATION AT 2.5% TO 2.7% VS PREV 2.0% TO 2.6% *TRICHET SAYS HIGHER INFLATION FORECASTS REFLECT ENERGY COSTS
  
• TRICHET: COMMODITY, ENERGY COSTS DRIVING PRICE PRESSURES; UNDERLYING PACE OF MONETARY EXPANSION RECOVERING
• TRICHET: UNDERLYING PACE OF MONETARY EXPANSION RECOVERING; MONETARY STANCE IS "ACCOMODATIVE"
• TRICEHT: GREECE NEEDING ABOUT EU45B OF NEW LOANS; GREECE WILL GET EU57B OF LOANS UNTAPPED FROM 2010; RAISE EU30B FROM ASSET SALES THRU '14
• TRICHET: ECB TO SECURE FIRM ANCHORING OF PRICE EXPECTATIONS; ECB "WILL DO ALL THAT IS NEEDED" ON INFLATION
• TRICHET: NON-STANDARD MEASURES ARE TEMPORARY
• TRICHET: ECB TO KEEP FIXED RATE ALLOTMENT TENDER FOR 3 MONTH LTRO OPERATIONS FOR Q3
• TRICHET: ECONOMIC ACTIVITY EXPECTED TO BE SOMEWHAT DAMPENED BY BALANCE SHEET ADJUSTMENT
  

The EURUSD chart looks like an EKG

There is nothing to excuse last week's once again disappointing jobless claims number which came at 427K, even as the lemming horde was expecting an improvement to 419K. The previous number of 422K was revised as is always the case higher to 426K, in an attempt to make the W/W deterioration seem less than expected. Continuing claims on the other hand surprised to the upside, coming in at 3,676K on expectations on 3,700K, with the previous revised higher to 3,747K from 3,711K. Ever more people continue to drop out of the 99 week category as 52K fell out of EUCs and Extended Benefits. Elsewhere, the US trade balance came in better than expected as the US imported less: the US Trade Balance in April came at -43.7bln M/M vs. Exp. -48.8bln, with the Previous -48.2bln, Revised to -46.8bln. The only number however that matters is the continued deterioration in claims.

The ECB's press conference, which lately has been seeing rather aggressive questions from the press corps (especially if the Finns are present like last time) and very rambling non-answers from Trichet can be followed live below. Expect to see some volatility in the EUR as a result of Trichet's carefully chosen words. Once again, the keyword of note is "vigilance."

Following the dramatic outperformance of Treasurys (compared to stocks) since the beginning of April many have been fast to proclaim Bill Gross wrong (when he is merely early) in his decision to abandon the asset class, while other prominent deflationists have been pounding their chest, claiming how right they have been. Well, as the chart below shows, the recent UST move has to be put in context, and the context is not pretty for "deflation." What is more troubling is that according to a technical resistance levels, the period of abnormal bond strength may be over. On the other hand, should the ratio of the UST/SPX breach above the 0.97 level, the down cycle will be broken and it may be time for a new regime of consistent Treasury outperformance.

While the bulk of the economic newsflow continues to come from outside of America, looking at our own mess today we see jobless claims, wholesale inventories, the trade balance... and Janet.

As expected the main financing rate is unchanged at 1.25% (and by implication the Marginal Lending Facility remains at 2.00% while the Deposit Facility remains at 0.50%). The EURUSD is drifting modestly higher but nothing remarkable. The key continues to be the upcoming conference.

European CDS is wider across the board. SOVX is 203 which is 4 wider on the day, and liquidity seems to have broken down completely as I'm seeing 3 bp bid/offer spreads rather than the more customary 2 bps. That is after it widened 10 bps yesterday. Fins at 163 (+4 on day) and Fin Subs 279 (+12 on the day) are also trading extremely poorly. Fin Subs, although fairly illiquid deserve special mention. They were 15 wider yesterday and although it is hard to tell with the rolls, it looks like they are almost at the widest levels of last March at the height of the first time the market noticed the sovereign debt crisis. The sovereign bond market looks to be in rough shape as well. Greek 10 year bonds are back below 54 on a price basis (16.35% yield). They have given up most of the late May gains. It rallied on the comments that the EU wanted a plan to bailout Greece again. It is fading on the fact that in spite of wanting a plan, it seems very difficult to come up with a workable plan.

• Obama Considering Another Stimulus Tax Cut (New Republic)
• Taxes on the menu in debt-reduction talks (Reuters)
• Americans torn over debt limit (WaPo)
• Dimon Challenges Bernanke on Wall Street Regulation (Bloomberg)
• The Great Property Bubble of China May Be Popping (WSJ)
• Beige Book confirms break in supply chain(FT)
• Trichet May Play ECB Rate Card as Germany Risks Split on New Greek Rescue (Bloomberg)
• Slow growth to anchor Bank rates despite price pressure (Reuters)
• President Obama Authors The Economic Recovery That Isn’t (Forbes)
• New Cracks in Oil Cartel (WSJ)

The key news today is not out of the US, but out of Europe, where the ECB will shortly announce that it will hold its main refinanincing rate flat at 1.25% (in line with the BOE's just announced "unchanged" decision, keeping rates flat at 0.5%), though what everyone will focus on is what will be said in the news conference following the decision, where the key phrase is "Strong Vigilance", whose utterance will send the EURUSD much higher on expectations for another 0.25% hike in July. It will also mean that inflation in the Eurozone continues to run up and is still largely out of control, as stagflation threatens not only the UK, but the core of Europe as well. From Reuters: "The ECB is expected to use higher staff inflation forecasts, to be published during Thursday's post-policy meeting news conference, as justification for higher interest rates to come -- probably starting with a rise to 1.50 percent next month. The ECB's Governing Council began meeting at 0700 GMT. The bank raised its main refinancing rate to 1.25 percent from 1.0 percent in April, its first tightening in two years. In the post-meeting news conference, ECB President Jean-Claude Trichet is expected to say the bank will exercise "strong vigilance" over price pressures, using a phrase that in the past signalled a hike was a month away. He used that code in March to flag April's rate rise." There is also a very minor chance that the ECB will hike rates today: "Firming cost pressures -- euro zone producer prices rose by more than expected in April -- mean a rate rise cannot be ruled out this month though the ECB's decision not to signal a hike makes it very unlikely. "I don't think the door to a hike in June is completely closed but given that the ECB has historically pre-announced a rate hike, a hike in June would be a surprise and would assume a change in communication strategy," said Nick Matthews at RBS." The problem is that every incremental rate hike simply means that the interlocked PIIGS markets will be further locked out of markets, as short term funding rates continue rising ever higher: the irony, stated simply, is that by fighting inflation for the healthy countries, the ECB is making the unhealthy ones even worse.

Gold is marginally lower while silver is showing strength again today after yesterday’s 'worst ever' OPEC meeting ended in disarray and saw oil prices surge. Markets await today’s ECB rate decision and signs as to whether interest rates are set to rise sooner rather than later. Signs of an interest rate rise in July should see the euro and gold rally versus the dollar. The precious metals are also likely to be supported by further sharp falls in peripheral markets bonds, particularly Greece, this morning. While all eyes are on the ECB today, there was a reminder late yesterday that it is not just the Eurozone that is struggling with debt. Fitch Ratings said it would put US debt on watch in early August if Congress fails to raise the federal debt limit. OPEC, the oil cartel’s increasing impotency was seen yesterday when Libya, Iraq, Angola, Ecuador and Algeria sided with increasingly influential Iran and Venezuela rather than Saudi Arabia and its allies Kuwait, Qatar and United Arab Emirates. Also, Japan’s nuclear crisis is leading to a decline in nuclear energy production, possibly long term in nature, and China’s massive drought has led to marked decline in hydroelectric energy production. There is increasingly the real risk of an oil crisis especially given the very tense geopolitical situation in North Africa and the Middle East. Separately, Iran announced it planned to treble its capacity to produce highly enriched uranium which alarmed western powers and was deemed ‘provocative’ by one international relations analyst. Oil prices have risen over 10 times since 1999. For gold prices to just catch up with the price increases seen in ‘black gold’, gold would have to rise over $2,500/oz (10 X $250/oz).

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