Archive - Dec 14, 2012

In what must be one of the scariest data points for equity bulls, Industrial Production just printed above all economist's estimates with its largest rise since Dec 2010. This 2.5 sigma beat of expectations is the biggest beat since December 2010 and, given that it was data that Ben Bernanke did not have at his previous FOMC meeting, we suggest, ever so humbly, that surely this will play into his qualitative assessment of the economic thersholds and reduce the likelhood of him accelerating his bond-purchases scheme. The driver of such exuberant Industrial Production... Motor Vehicle manufacturing; which as we already know produced the largest channel-stuffing debacle in history. Sustainable? We don't think so... As previous downward revisions appear to have provided a much bigger than expected rebound from Sandy-scuppered prior levels.

The 20th century gave us Marcel Duchamp and "Fountain"... The 21st century gives us Steve Jobs and Hobo with iPhone.

If yesterday's better than expected initial claims numbers were bad for the market (as they implied the approach of the Fed's QEnd), today's CPI should dissolve some fears of an imminent, and very unrealistic, end to easing. Because as the Fed explained, employment is only one component of the QEnd calculus, inflation is another. And with November CPI dropping 0.3% sequentially (up 1.8% Y/Y), on expectations of a -0.2% M/M, and +1.9 Y/Y, also the biggest sequential decline since 2008, there is not much to worry about on the inflation front... as long as one doesn't count other inflation "expressions" such as modern art, insurance costs, student tuition, or even the S&P and other credit funded items into account. Core CPI also missed the expected rise of 0.2%, growing at 0.1%. Biggest components of the price drop were energy prices, declining (-4.1%) from October, Apparel (-0.6%) and Used cars and trucks (-0.5%) - thank you GM channel stuffing. Alternatively, prices rose for food at home (+0.3%), Electricity (+0.7%) and food away from home (+0.3%). We may need some more QE4EVA+1^{^?} soon if this continues.

It is often said that a picture paints a thousand words; in the case of this image, we fear that a photo might just kill a thousand Apple Bulls' hopes. Unlike the euphoric (and perhaps 'paid') crowds that emerge to wait night-after-night under the stars in the hopes of being one of the first to get their hands on next-generation iMaterial, it appears the Chinese are just not that bothered when it comes to iPhone5. The photo below, via WSJ's China Real-Time Report, shows the line (all two people) waiting outside of the Beijing Apple Store on the day of the launch of iPhone5 in China. Before you ask; no, one of them is not Gene Munster doing channel-checks. As the article notes, this is arguably "the least eventful launch of an Apple device in the company’s four-year history in the Chinese capital." They go on to note, "at 8 am on Friday, when the store opened to hurrahs from employees, only two consumers stood inside a cordon set up by Apple, though they were joined by a desultory snow man someone had made on a bench near the entrance," and we understand the snowman was under-impressed with the iPhone5. Perhaps this sole image is the best reflection of a 'fad' product and why the 'fad' stock price just pierced generational lows (at $517.48 in pre-market). WWJTD?

Overnight the Shanghai Composite index rose 4.3%, marking its biggest advance since October 2009, supported by the latest HSBC flash manufacturing PMI which came in at 50.9 vs Exp. 50.8 (Prev. 50.5) – 14-month high, and with hopes for supportive policy direction to come out of this weekends central economic work conference where Chinese leaders will look to set next years GDP target and layout more information on policy for urbanisation. As such WTI crude has been trending higher since the Asia session testing around the USD 87.00 to the upside with close to a 1 USD gains ahead of the NYMEX pit open. In terms of Europe, bund volumes have been light as markets head closer toward the Christmas break with European manufacturing and service PMI’s having little sustained impact with Italian and Spanish 10yr government bond yield spreads over German bunds seen 2.5bps and 3.5bps tighter respectively. Elsewhere, in the FX market there has been talk of US names selling 1 week 25 delta risk reversals in positioning ahead of this weekend’s Japanese elections.

Queen Elizabeth II and Prince Phillip visited the Bank of England’s gold vault and wonders like most people how the things got so bad.   Back in 2008, when the monarch visited the London School of Economics she described the credit crunch as ‘awful.’ .  Fast forward to 2012, the heart of Europe’s  4 year-old debt crisis while the Queen of England hears a financial expert compare the debt crisis to a flu epidemic or an earthquake, as hard to predict. This comparison is truly patronizing and an insult to the Queen’s intelligence. Although I am not English have some respect for your elders, especially your Queen, Britons!  Pensioners in England can recall hard times during the World War when items like sugar were a luxury.  In this new era of credit you have people complaining if they can’t borrow to have their new BMW financed to match their Cotswold’s country house or Spanish holiday home. The Queen was informed that since financial risk has been managed better (need we mention Libor?) than it was in the past, people became complacent.  She smiled and said, ‘But people had got a bit...lax, had they?’  Her Royal Highness also suggested that the Financial Services Authority may not have been hard-line enough in its policing. She said: ‘The Financial Services – what do they call themselves, the regulators – Authority, which was really quite new … it didn’t have any teeth.’ It’s rather ironic that the tour showed the gold vault since a good portion of the UK gold reserves were sold off from 1999-2002, when gold prices were at their lowest in 20 years. 

The Richmond Fed's Jeffrey Lacker, a 2012 voting member of the FOMC, who has so far been the sole objector to the Fed's policy of exiting a hole by continuing to dig deeper, has released his traditional "good cop" response to Bernanke's QE4EVA plan. The highlights: "I disagreed with the Committee’s decision to continue purchasing additional assets to stimulate the economy. With economic activity growing at a modest pace and inflation fluctuating close to 2 percent — the Committee’s inflation goal — further monetary stimulus runs the risk of raising inflation and destabilizing inflation expectations....Deliberately tilting the flow of credit to one particular economic sector is an inappropriate role for the Federal Reserve....I have dissented previously against the use of date-based forward guidance, and I supported the decision to drop such language at the December meeting....monetary policy has only a limited ability to reduce unemployment, and such effects are transitory and generally short-lived. Moreover, a single indicator cannot provide a complete picture of labor market conditions. Therefore, I do not believe that tying the federal funds rate to a specific numerical threshold for unemployment is an appropriate and balanced approach to the FOMC’s price stability and maximum employment mandates." Of course, his objection is duly noted, and summarily rejected and forgotten.

• Obama, Boehner hold "frank" meeting amid "fiscal cliff" frustration (Reuters)
• Rice Ends Bid Amid Criticism (WSJ)
• EU summit delays crucial decisions (FT)
• EU moves to cap bank bonuses at 2 times annual salary (CBC)
• Europe Wins a Battle, but Not Yet the War (WSJ)
• Banks Spurn Europe Bond Rush Amid Central Bank Loan Largesse (BBG)
• German-French Sparring Over Euro Caps 2012 Crisis Fight (BBG)
• Fed begins stress tests on bank liquidity (FT)
• Draghi’s rallying cry for new EU powers (FT)
• EU Seeks Plan to Handle Failing Banks Amid Cost Concerns (BBG)
• Berlusconi says Monti has strong EU backing (FT)
• Abe Set for Japan Victory Faces 7-Month Window to Keep Hold (BBG)
• Japan's Abe would try to keep China ties calm-lawmakers (Reuters)

In a world in which the Fiscal Cliff, including headlines, rumors, leaks, and mere whispers thereof, is the main show, all other data points are at best supporting data actors. There was a lot of support overnight - for the futures, which once again closed the prior session at the lows - with a battery of PMIs released, starting with the December HSBC China Flash PMI which printed at a excel picture perfect 50.9 vs an expectation 50.8 and above 50 for the second straight month, which sent the Shanghai Composite up 4.32%, and wiped out the bitter aftertaste from the Japan December large manufacturer Tankan index which tumbled to -12 on expectation of a -10 print, confirming the Japanese recession is deteriorating at the worst possible time. Then after China, Markit released a bevy of European PMI data which came in mixed: Services PMI rose from 46.7 to 47.8 in December, beating expectations of a 47.0 print, while the Manufacturing PMI rose modestly from 46.2 to 46.3, missing expectations of a 46.6 result. The biggest wildcard once again was Germany, where the Service PMI, like in the US, posted a sizable rise, posting above 50 for the first time in months, or at 52.1 on expectations of 50.0, and up from 49.7 last, although more disturbing was the ongoing collapse in German manufacturing which dipped from 46.8 to 46.3, on expectations of a rise to 47.2. French manufacturing data did not help posting a tiny rise from 44.5 to 44.6, missing expectations of a 45.0 print. Economic data was further confounded when Spain released its quarterly home price update, which dipped 3.8%, accelerated last quarter's -3.3% drop, and sliding by a massive -15.2% in Q3, faster than the -14.4% drop in Q2, and confirming Spanish housing has a long way to go before it is fixed.

Global Central Banks agree to another year of access to FRBNY FX Swap Lines