Archive - Oct 7, 2013

One of the most frequent questions related to the debt limit is whether the Treasury could prioritize payments in order to remain below the debt limit while continuing to make what it deems to be essential payments. As Goldman explains below, technical complexities and legal uncertainties might prevent a full prioritization of all payments, but they do believe (trillion-dollar-coin idiocy aside) that the Treasury could ensure that enough cash is available to make interest payments on Treasury securities.

Curious why recently the US stock market has dislocated from its most trusty correlation counterparty: the size of the Fed's balance sheet? Simple: the market is now starting to factor in the end of QE, because while tapering may have been delayed it has not been cancelled. And while the Fed has done everything in its power to destroy the market's discounting function, when it comes to frontrunning the Fed the market can still think ahead. Especially when frontrunning is no longer on the table. Which is precisely the basis for the just released forecast by SocGen's Alain Bokozba, which extrapolates what will happen when the Fed's balance sheet stops rising, and applies the same drop to stocks as was seen at the end of QE1 (-16%) and QE2 (-17%) and concludes that the "end of QE3 would cost the S&P500 15%" and that following that, absent even more QE of course, "the US equity index should remain relatively flat, burdened by higher yields (rate hikes in mid-2015), a higher US dollar and limited earnings growth (Return on Equity is already high), but supported by better economic prospects and a new shareholder value cycle, staving off a bear market." Or, as SocGen calls it, "the Big Sleep."

Having been dismissed on the first day of the shutdown, precious metals have surged back in the last few days and this morning, as no deal was achieved (surprising equity market 'investors' who seemed so sure Friday afternoon), are pressing up to post-shutdown highs. With the S&P near post-shutdown lows, and Treasuries only marginally bid, it seems precious metals are benefitting from the anxiety seen in USA CDS and short-term bills (+3bps more at 14bps today) at the resilience of the status quo.

The government shutdown has removed key algo-dependent headline-making economic data from our daily lives such as incomes, spending and retail sales. However, we have anecdotal signals from trade industry data (pace of dining out has stalled and anyone but the hghest earners are seeing consumer comfort plunge) and from-the-horse's mouth we have CEO comments. Here is what is on the US retailers' mind...

It was less than four weeks ago that the Reserve Bank of India, under new head Raghuram Rajan, stunned the world on September 20 when it announced that it would both hike its repo and cash reserve rates in an inflation fighting step, while lowering its marginal standing facility rate by 75 bps to 9.5% in order to boost banking sector liquidity, hence "bipolar policy" of the kind most recently seen in Europe. Moments ago, the RBI once again showed that when faced with the option of consumer pain, i.e. runaway inflation, and preserving a banking status quo, i.e. liquidity, the central bank will always choose the latter, when in a surprising move the RBI cut its Marginal Standing Facility rate by further 50 basis points, from 9.5% to 9.0%.

While the ongoing government shutdown, now in its second week, means even more macro data will be retained by the random number generators, central banks are up and running. This means that in the upcoming week the key event will be the release of the FOMC minutes from the last meeting at which the Fed surprised almost the entire market by not tapering asset purchases as effectively pre-announced.  There are MPC meetings in the UK, Brazil, South Korea and Indonesia. The main focus, however, will be on the US political situation still. Data that will most likely be delayed this week includes the US Trade balance, JOLTs, Wholesale and Business inventories, Retail sales, PPI, Import Prices, and the Monthly Federal budget.

• A U.S. Default Seen as Catastrophe Dwarfing Lehman’s Fall (BBG)
• Software, Design Defects Cripple Health-Care Website (WSJ)
• Gunmen kill 5 Egyptian soldiers near Suez Canal, 2 people die in blast (Reuters); Egypt death toll rises to 53, streets now calm (Reuters)
• Three retailers sell Apple iPhone 5C for $50 or less (Sun Sentinel)
• New American Economy Leaves Behind World Consumer (BBG)
• Dow's Exiles Often Have Last Laugh (WSJ)
• Macy's Puts China Online-Expansion Effort on Hold Amid Economic Slowdown (WSJ)
• Gold Befuddles Bernanke as Central Banks’ Losses at $545 Billion (BBG) - just ask the BIS gold selling team: they are unbefuffdled
• Markit Group Said to Avoid U.S. Antitrust Claims as EU Proceeds (BBG) - being owned by the banks has benefits
• Paulson leads charge into Greek banks (FT) - and scene for the Greek banking sector

Overnight trading over the past week has been a bipolar affair based on algo sentiment about what is coming out of D.C. But which the last session was optimistic for some inexplicable reason that a deal on both the government shutdown and the debt ceiling out of DC was imminent, today any optimism is gone in the aftermath of the latest comments by Boehner on ABC, in which he implied that a US default is not unavoidable and that it would be used as more political capital, as it would be once again blamed on Obama for not resuming negotiations. As a result both global equities and US futures are down sharpy in overnight trading. And since the government shutdown, better known as a retroactively paid vacation, for everyone but the Pentagon (whose 400,000 workers have been recalled from furlough) continues it means zero government economic statistics in today's session with the only macro data being the Fed-sourced consumer credit report at 3 pm. This week also marks the unofficial start of the Q3 reporting season in the US with Alcoa doing the usual opening honous after the US closing bell tomorrow. JPMorgan’s and Wells Fargo’s results on Friday are the other main ones to watch to see just how much in reserves are released to pretend that banks are still making money.  As usual, expect disinformation leaks that send the market sharply higher throughout the day, which however will only make the final outcome that much more painful, because as during every US government crisis in the past, stocks have to plunge so they can soar again.