Archive - Jul 3, 2014

"Do You Feel Wealthy, Punk?"

Whether it is Draghi's jawboning - which has slammed EURUSD back to 1.36, juicing the carry trade (in spite of his concerns) - or the better-than-expected payrolls data, US equities are surging and so are bond yields. The initial reaction to the good news was a selloff in stocks but that was quickly recovered as USDJPY lifted all stops through 102 and saved the day and the meme that all is well in the world. Treasury yields are up 3bp (long-end) to 6bps (short-end) as rate-hike expectations shift from July 2015 to June 2015. Gold and silver were slammed into the print and have rallied since.

Those following the labor force participation rate (which as even the Census Bureau showed is declining not so much due to demographics but due to older people working longer and pushing younger people out of the labor force as we showed yesterday) will hardly be surprised to learn that alongside today's impressive NFP print, the reason why the unemployment rate took another big step lower from 6.3% to 6.1%, was once again as a result of the number of people not in the labor force, which in June rose to a fresh record high of 92,120K, up 111K from June.

Q2 GDP hope remains as a significant surge in exports of automotive vehicles, parts, and engines stalled the collapsing trade balance for a very modest beat (still a $44.4 billion deficit). This is the 2nd biggest trade deficit since November 2012 as imports dropped $0.7bn and exports rose $2.0 billion. Saudi Arabia, interestingly, was largely responsible for the improvement in the trade balance as the deficit dropped from $4bn to $2.3bn. Hope springs eternal but the deficit is still considerably more of a drag on Q2 GDP than it was on Q1 GDP. Initial jobless claims continue to go nowhere but missed for the 5th week in a row).

For once the ADP was actually spot on: in June the US economy added 288K nonfarm payrolls, far above the 215K expected, and above the upward revised 224K from June. Further, May jobs were revised from 282K to 204K. This was the fifth consecutive month of job gains over 200K. The unemployment rate tumbled to 6.1%, well below the 6.3% expected. The brth/death adjustment added 121K jobs, compared to 205K previously, and a total of 452K so far in 2014.

No change... no change. Draghi's back and, just like RBA's Stevens last night, is ready to talk (but not jawbone) his currency down; explaining that any day now we might - just might - unleash a treaty-busting monetization of more debt that won't actually reach the real economy but will provide more ammo for carry-traders to leverage longs in peripheral nations sovereign debt. Since the last ECB NIRP unleashing, things have got worse for Europe... but it will take time we are sure... just wait until H2 2014...

Are you in the mood?

While up until now the virtual war between Saudi Arabia, openly calling for the ouster of Iraq's Maliki (whose words in retaliation were just as harsh) was primarily of words, things appear to be escalating on that front too following an overnight report that Saudi Arabia has deployed 30,000 soldiers to its border with Iraq after Iraqi soldiers withdrew from the area, Saudi-owned al-Arabiya television reported Thursday. The world's top oil exporter shares an 500-mile border with Iraq, where Islamic State of Iraq and al-Sham (ISIS) insurgents and other Sunni Muslim militant groups seized towns and cities in a lightning advance last month. King Abdullah has ordered all necessary measures to protect the kingdom against potential "terrorist threats," state news agency SPA reported on Thursday.

• Citigroup 190K
• HSBC 200K
• Goldman Sachs 210K
• UBS 215K
• JP Morgan 220K
• Deutsche Bank 225K
• Bank of America 225K
• Barclays 250K

Unlike a month ago, this time there are no NIRP announcement fireworks from the ECB which just announced it kept all rates unchanged, with the main refinancing operation rate flat at 0.15%, while the deposit facility continues its existence in NIRP purgatory at negative 0.1%.

• Obama Decries Big Bonuses at Bank Trading Desks as Risky  (BBG)
• India central bank seeks to swap gold to improve reserves quality (Reuters)
• There goes Q3 GDP: Arthur Strengthens to Become First Atlantic Hurricane (BBG)
• Airports Serving U.S. Tighten Checks on Stealth-Bomb Threat (BBG)
• Fear, cash shortages hinder fight against Ebola outbreak (Reuters)
• Brent Declines as Libya Rebels Say Ports Are Open (BBG)
• Shiites Train for Battle in Iraqi Holy City (WSJ)
• Dimon’s Cancer Has 90% Cure Rate With Demanding Therapy (BBG)
• Goldman says client data leaked, wants Google to delete email (Reuters)
• ECB Watchers in the Dark Look to Draghi for Illumination (BBG)

There is far less on the ECB table today compared to a month ago when expectations were massive and Draghi didn't fail to satisfy (with the usual set of half-baked, non-existant programs a la the OMT which still doesn't technically exist, 2 years after it was first revealed) and nobody expects any major announcements out of Mario Draghi. If anything, the market hopes the ECB head will use the press conference today to elaborate on the missing technicalities of the TLTRO. With inflation printing at 0.5% again, concerns of deflation will likely be mentioned once again. When it comes to the EUR reaction, the most bearish case would be for Draghi to discuss QE, and providing details of how a bond monetization operation would look like. More than the EURUSD, a bigger risk lies for peripheral bonds which are at risk if Draghi unveils details of TLTRO today that could hurt the periphery carry trade.

Once again, US equity futures are roughly unchanged (while Treasurys have seen a surprising overnight bid coming out of Asia) ahead of an avalanche of macroeconomic news both in Europe, where the ECB will deliver its monthly message, and in the US where we will shortly get jobless claims, ISM non-manufacturing, trade balance, nonfarm payrolls, unemployment, average earnings, Markit U.S. composite PMI, Markit U.S. services PMI due later. Of course the most important number is the June NFP payrolls and to a lesser extent the unemployment rate, which consensus expects at 215K and 6.3%, although the whisper number is about 30K higher following yesterday's massive ADP outlier. Nonetheless, keep in mind that a) ADP is a horrible predictor of NFP, with a 40K average absolute error rate and b) in December the initial ADP print was 151K higher than the nonfarms. Those watching inflation will be far more focused on hourly earnings, expected to rise 0.2% M/M and 1.9% Y/Y. Should wages continue to stagnate and decline on a real basis, expect to hear the "stagflation" word much more often in the coming weeks.