Archive - Sep 4, 2014

With his shirt sleeves rolled up and tie askew, Joe Biden went full-metal-jacket yesterday in a blistering speech in comfortable New Hampshire.  Calling ISIS "Barbarians," Biden then proclaimed, "The American people are so much stronger, so much more resolved than any enemy can fully understand,” adding that "We don’t forget. We take care of those who are grieving, and when that’s finished, they should know we will follow them to the gates of hell until they are brought to justice, because hell is where they will reside." By 'we', we assume he means non-combat-boots-on-the-ground-wearing humanitarian advisers?

Borrowing more money at cheaper rates might provide short-term liquidity, but it does nothing to reduce your leverage in the real world. This is why, generally speaking, all Central bank policy is failing to generate growth: Central Banks can’t really do anything to remedy the situation!

Now that the US is just bombing Iraq just for the hell of it, having long since dropped the veil of doing so for "humanitarian" reasons which was the original pretext given a month ago, it needs to start showing positive results. Moments ago it may have gotten the first validation that its strategy of bombing runs is working following an Al Arabiya report that the aide of ISIS leader Abu Bakr al-Baghdadi has been killed after a strike on the ISIS-held city of Mosul, in northern Iraq, citing the Iraqi defense ministry said Thursday. Another ISIS figure was also declared dead, the ministry added.

Despite 2 straight months of weakness in Services PMI, ISM's non-manufacturing index (adjusted for whatever meme is required) exploded to 59.6, another huge beat, and its highest since August 2005. The Business Activity index is highest since 2004, employment highest since Feb 2006, but new orders (domestic and export) dropped.

From the earlier August flash print of 58.5, Markit's US Services PMI rose modestly to 59.5 but has now fallen 2 months in a row to the lowest since May. While a solid number in 'expansionary' >50 territory, pressure on margins continues as input cost inflation picks up. Employment gained also, prompting Markit to question "how long policymakers will be comfortable with the economy growing at this pace before hiking interest rates?"

WARNING: THIS POST IS NOT SUITABLE FOR VIEWING WITH  FOOD, BEVERAGES AND GOLF

Draghi cut rates and announced ABS/covered bond purchase plan to start next month.  Balance sheet between TLTO and purchase scheme to increase by ovre 1 trillion euros

After several months of disappointing trade data which dragged on GDP for the past two quarters, the July trade balance finally was a welcome beat of already low expectations, printing at a deficit of $40.5, better than the $42.4 billion expected, and an improvement from the downward revised deficit of $40.8 billion in July. The deficit declined as exports increased more than imports. The goods deficit decreased $0.2 billion from June to $60.2 billion in July; the services surplus was nearly unchanged from June at $19.6 billion. And yet, even as the deficit contracted, the trade balance excluding the shale revolution, has almost never been worse.

Having promised "whatever it takes" and now doing what many thought was un-possible, Mario Draghi has managed to smash EURUSD back to 14-month lows below 1.30 (without actually buying one bond - just promising) and has sent yields on most European bonds negative to 2Y (and Germany near negative in 4Y).

Mario Draghi broke new ground once again this morning by pushing rates even negative-er. We are sure the ECB's top man will further explain how ABS purchases, TLTRO, and even sovereign QE are just around the corner (so keep buying)...

In what will hardly be a good sign for tomorrow's "critical" non-farm payrolls report, moments ago ADP reported that in August only 204K private payrolls were created in the US economy, below the downward revised 212K in July, and below the consensus estimate of 220K. The good news, as Carlos Rodriguez, president and chief executive officer of ADP said, is that "August marks the fifth straight month of employment gains above 200,000, continuing an encouraging trend for the U.S. labor market.” Just barely. The bad news: this was the lowest ADP print since March, and hardly the "lift off"  trend that many were expecting. Notably, the June 281K jobs print was revised even higher to 297K the highest in years and makes one wonder how much forward demand was pulled back into Q2 as a result of abnormally easy credit conditions and generous government spending.

While everyone was expecting Mario Draghi to announce ABS purchases, few if any had expected the ECB to also cut rates. Which it just did whacking its corridor rates across the board by 10 bps, in the process sending the Deposit Facility rate even further into negative territory, now down at -0.2%.

• The interest rate on the main refinancing operations of the Eurosystem will be decreased by 10 basis points to 0.05%, starting from the operation to be settled on 10 September 2014.
• The interest rate on the marginal lending facility will be decreased by 10 basis points to 0.30%, with effect from 10 September 2014.
• The interest rate on the deposit facility will be decreased by 10 basis points to -0.20%, with effect from 10 September 2014.

• Global stocks bounce on sign ECB could launch ABS program (Reuters)
• Putin unveils Ukraine ceasefire plan, France halts warship (Reuters)
• Poroshenko Flummoxes Investors With About-Face on Truce (BBG)
• No Free Lunch for Companies as IRS Weighs Meal Tax Rules (BBG)
• Turkey Struggles to Halt Islamic State 'Jihadist Highway' (WSJ)
• Lego Becomes World's Largest Toy Maker on Movie Success (WSJ)
• U.N. says $600 million needed to tackle Ebola as deaths top 1,900 (Reuters)
• Goldman Sachs Named 'Stabilization Agent' for Alibaba Stock Offering (WSJ)

Even as the NATO summit began hours ago in Wales, conveniently enough (for Obama) at the venue of the 2010 Ryder Cup, so far today geopolitics has taken a backseat to the biggest event of the day - the ECB's much hyped and anticipated announcement. So anticipated in fact that even as it has been priced in for the past month, especially by BlackRock which is already calculating the Christmas bonus on its "consultancy" in implementing the ECB's ABS purchasing program and manifesting itself in record low yields across Europe's bond market, Reuters decided to milk it some more moments ago with the following blast: "Plans to launch an asset-backed securities (ABS) and covered bond purchase programme worth up to 500 billion euros are on the table at Thursday's European Central Bank policy meeting..." The notable being the size of the program, which at €500 billion, is precisely what Deutsche Bank said a week ago the size of the ABS program would be. Almost as if the bank with the world's biggest derivative exposure is helping coordinate the "Private QE"...

Sterling fell sharply yesterday as traders became nervous of a possible vote for Scottish independence. The referendum on Scottish independence from the United Kingdom takes place on Thursday 18th September. 

While the referendum and the potential impact of an independent Scotland have been on the horizon for some time, the approaching vote in two weeks is causing upheaval for the British pound in currency markets, and also more general macro uncertainty in the regional economic and monetary system.