Archive - Apr 13, 2012

No surprises in today's release of US CPI, which unlike China's still searing inflation (which is the PBoC's way to check to Bernanke on more easing) came just as expected at 0.3% headline and 0.2% core, or 2.7% Y/Y.  From the release: "The indexes for food, energy, and all items less food and energy all increased in March. The gasoline index continued to rise, more than offsetting a decline in the household energy index and leading to a 0.9 percent increase in the energy index. The food index rose 0.2 percent as the index for meats, poultry, fish, and eggs increased notably. The index for all items less food and energy rose 0.2 percent in March after increasing 0.1 percent in February. Most of the major components increased in March, with the indexes for shelter and used cars and trucks accounting for about half the total increase for all items less food and energy. The indexes for medical care, apparel, recreation, new vehicles, and airline fares increased as well, while the indexes for tobacco and household furnishings and operations were among the few to decline in March." The items rising the most in March sequentially: fuel oil at 2.7%, gasoline at 1.7% and apparel at 1.3%. The only decliner was electricity at -0.8%, courtesy of nat gas plunging. With a record hot summer approaching, this is a good thing.

Gold bullion remains supported, mostly due to a pickup in physical Indian and Chinese gold demand this week. There are expectations of sustained Indian consumption next week in the lead up to the Akshaya Tritiya festival later this month.  Western physical buying remains unusually anaemic - for now. In recent years, April and May have been positive months for gold in terms of returns (see table above). April has returned 1.4% per annum in the course of the current bull market since 2000.  May has returned 1.75% per annum in the course of the current bull market since 2000. Interestingly, the last month of Q1 and Q2, March and June, have been negative in terms of returns. March in particular has seen the poorest returns for any month in the last 11 years with average falls of 0.6%.  Therefore the very poor performance of gold in March 2012 (-6.4%) may represent another buying opportunity as it did last year (see chart below) and in previous years.

Risk-aversion is noted in the European markets with all major European bourses trading lower heading into the US open. Participants remain particularly sensitive to Spain following a release from the ECB showing that Spanish bank’s net borrowing from the ECB hit a new record high at EUR 227.6bln in March against EUR 152.4bln in February. Further pressure on the equity markets was observed following the overnight release of a below-expected Chinese GDP reading, coming in at 8.1% against a consensus estimate of 8.4%. As such, markets have witnessed a flight to safety, with Bund futures up over 40 ticks on the day. In the energy complex, WTI and Brent futures are also trading lower, as the disappointing Chinese GDP data dampens future oil demand, however a failed rocket launch from North Korea may have capped the losses.

• ECB Seen Favoring Bond Buying Over Bank Loans (Bloomberg)
• Italians Rally Against Monti’s Pension-Overhaul Limbo (Bloomberg)
• Spain Cracks Down on Fraud as Rajoy Says Aid Impossible (Bloomberg)
• Europe’s Capital Flight Betrays Currency’s Fragility (Bloomberg)
• China’s Less-Than-Forecast 8.1% Growth May Signal Easing (Bloomberg)
• China Banks Moving to Lower Mortgage Interest Rates (China Daily)
• Fed Officials Differ on Need to Keep Rates Low to 2014 (Bloomberg)
• North Korea Confirms Rocket Failure (Reuters)
• Yuan Lending Set to Cross New Border in Pilot Plan (China Daily)

Earlier today JPMorgan announced results that were better than expected, with revenue of $27.4 billion on expectations of $24.1 billion, and EPS of $1.31 or $5.0 billion, on expectations of $1.17. As previously noted, the bank increased its dividend to $0.30/share, and has authorized a $15 billion new repurchase, which however will likely not be a sizable factor, as JPM has already said with the stock price at the current level buybacks are not accretive. As for the EPS beat, as usual the one-time items swamped everything else, of which the primary one, reduction in loan loss reserves which is the traditional way for the bank to pump up the bottom line, accounting for $1.8 billion or $0.28/share. We are curious how Jamie Dimon will justify this accelerating release even as the firm's Nonperforming loans increased for the first time in years from $10 billion to $10.6 billion: just the TBTF put or something else? Other amusing "one-time" items were the $1.1 billion ($0.17/share) from the WaMu bankruptcy settlement as well as a $0.9 billion loss ($0.14/share) loss from DVA this time hurting the bank as JPM's CDS tightened in Q1. Also curious was a substantial $2.5 billion expense for additional litigation reserves, which is certainly not a one-time item now that every bank is suing JPM and is merely a catch up for Dimon to where he should have been reserved. That, or something else - just what is JPM seeing that others are not (hint: ask Bank of America). This number will continue rising. So net of the real one-time items, EPS was less than a $1.00.

Get those rotten tomatos ready

On Easter Friday we presented the parabolic egg that Italy laid in March in the form of Italian bank borrowings from the ECB, which had surged by a record €75 billion to €270 billion from €195 in one month. Of course, since the US market was closed and everyone was preoccupied with the ugly NFP report, nobody paid much attention. Today, however, everyone is paying attention as Italy's counterpart in the unsalvageable periphery - Spain, just posted its monthly consolidated Eurosystem borrowings update for March. And if last week's Italian data was the Easter egg, today's parabola is the Friday the 13th funny, because Spain bank borrowings from the ECB in March soared by... €75 billion, or precisely the same amount as Italy, to €227.6 billion, the highest ever, and a 50% increase over the €152 billion in February. The result: Spain CDS touching 491 bps according to CMA, just 2 bps shy of the November all time wides. Other securities impacted: 10 Year Spanish yield + 10 bps to 5.92%, and a spread over bunds now well into the 400 bps, or 418 bps to be precise. Italy is also catching the contagious bug, with its own 10 year starting to grind wider yet again, now at 5.47%. We have the feeling as more wake up this morning, that this latest glaring confirmation that the PIIGS banks now exist solely courtesy of the ECB, will not be liked by many.