Archive - May 7, 2013

Following on the widely telegraphed rate cut by the Australian central bank overnight to a record low 2.75%, here comes a truly surprise move out of the Kenya Central Bank, and its Governor Njuguna Ndung'u whose central bank just showed the world how it's really done:

• KENYA CENTRAL BANK CUTS BENCHMARK RATE TO 8.50% FROM 9.50%
• KENYA CENTRAL BANK SAYS CONFIDENCE IN ECONOMY HAS INCREASED

As long as the confidence is there... Incidentally, the expectations, by those who have nothing better to do than forecast what the Kenya central bank will do, was for a mere 25 bps cut. We expect the credit carry traders out of Niarobi to scramble for yield in places like Greece, now that their cost of funding has dropped by over 10%. The good news for those doing the inverse trade, and looking to trade Kenyan Eurodollar futures, or the "Kenyo-dollar" as the case may be, is that there still is a long way to go before all time lows rate lows are taken out.

With retail stocks surging on the back of the any-minute-now recovery (justified by the might of the Federal Reserve printing press), we thought it perhaps useful to consider just how great things are in the retail sales space. Given the non-stop accelerating rise in the equity prices, retail sales must be accelerating or must have turned up green-shoot-like? Well not so much. As the following chart shows, while retail sales (ex-food) is still rising modestly YoY, it is doing so a decelerating pace (as income growth stagnates and discretionary income slumps). But for now, all we must believe is the market knows best (until, 2008-like) it doesn't.

In the beginning there were a handful of core nations equal in partnership and full of the excitement of a new venture. Much of the esprit was a desire to band together and compete against the United States for economic dominance and world power. Now we find the EU headquarters no longer staffed by equals but a useful front for Berlin which resides in another country. This point is critically important to understand. Yes, sure, the Germans will smile and nod and give way on agricultural supplements and on fishing rights and trivial matters but when it gets down to it and the decision is important; Berlin will have its way. The fact that the equity markets have done fabulously and that the interest rates for European sovereign debt have done remarkably well all rest on one thing and one thing only; the creation of money and a massive amount of it. Europe, and the rest of the world for that matter, has been transformed by the printing of money. The dislocation between economies and markets is huge and the glue is the twenty-four seven machinations of the printing presses. Politicians in Europe and America have taken a back seat to the heads of the world's central banks. Lastly, as I stare out at the horizon, you should understand the German viewpoint of the State. You win by being in control and control must always be exercised and never relinquished.

French industrial production came in considerably lower than expected overnight. France's output fell 2.5% YoY against an expectation of a mere 1.4% drop and manufacturing production dropped 4.9% YoY - almost its worst since the crisis. This data confirms what we have discussed in detail (here and here) that France is heading for a depression. After the briefest of renaissances in Q3 2012, the Gallic nation now looks set for a triple-dip recession, further stretching the core of an already tense European Union. The last few days have seen 10Y French debt yields increase a little (+17bps off the lows) but they remain (much as the rest of Europe) near record lows.

One of the widely accepted misconceptions surrounding the so-called "housing recovery" fanfared by misleading headlines such as this "Remodeling activity keeps up positive momentum", which in reality has merely turned out to be a housing bubble in various liquified "flip that house" MSAs (offset by continuing deteriorating conditions in those places where the Fed's trillions in excess reserves have trouble reaching coupled with ongoing foreclosure stuffing), is that "renovation spending", the amount of cash spent to upgrade and update a fixer-upper, has surged. Sadly, this is merely the latest lie about the US economy: as the attached chart showing renovation spending in the past 6 months, it has absolutely imploded, confirming that not only is a broad housing recovery a myth (instead of localized pockets of bubbly liquidity here and there), but that the US home-owning household is now more tapped out than at any time in the past two years.

Curious who the biggest casualty of last month's forced precious metal take down is? It may very well be John Paulson, who has systematically been blown out of all his concentrated positions in the past few years, and who, according to Bloomberg, just lost a record 27% in one month in his gold fund, and down 47% so far in 2013. If anything, it may explain the ongoing collapse in GLD holdings as he (among others) is forced to continue liquidating. The good news is that one levered players such as Paulson are finally blown out, there is hope that only far more rational, "non-weak handed" players remain at the table.

• Microsoft prepares U-turn on Windows 8 (FT), Microsoft admits failure on Windows 8 (MW), After Bumpy Start, Microsoft Rethinks Windows 8 (NYT)
• China reports four more bird flu deaths, toll rises to 31 (Reuters)
• Republicans shift stance on US budget (FT)
• NYC Tallest Condo Corridor Gets New Entrant With Steinway (BBG)
• U.S. Says China's Government, Military Used Cyberespionage (WSJ)
• China rejects Pentagon charges of military espionage (Reuters)
• Bank of China Cuts Off North Korean Bank (WSJ)
• Libya defense minister quits over siege of ministries by gunmen (Reuters)
• London Recruiter Says City Job Vacancies Rose 19% (BBG)
• Colleges Cut Prices by Providing More Financial Aid (WSJ)  or, said otherwise, loans
• Jeweler agrees to plead guilty in KPMG insider-trading case (LA Times)

The euro continues to not get the memo. After days and days of attempted jawboning by Draghi and his marry FX trading men, doing all they can to push the euro down, cutting interest rates and even threatening to use the nuclear option and push the deposit rate into the red, someone continues to buy EURs (coughjapancough) or, worse, generate major short squeezes such as during today's event deficient trading session, when after France reported a miss in both its manufacturing and industrial production numbers (-1.0% and -0.9%, on expectations of -0.5% and -0.3%, from priors of 0.8% and 0.7%) did absolutely nothing for the EUR pairs, it was up to Germany to put an end to the party, and announce March factory orders which beat expectations of a -0.5% solidly, and remained unchanged at 2.2%, the same as in February. And since the current regime is one in which Germany is happy and beggaring its neighbors's exports (France) with a stronger EUR, Merkel will be delighted with the outcome while all other European exporters will once again come back to Draghi and demand more jawboning, which they will certainly get. Expect more headlines out of the ECB cautioning that the EUR is still too high.