Archive - Dec 23, 2011 - Story

So much for ending the year on a positive economic tone: today's November durable goods number, while better than expected on a headline basis including volatile transportation data coming at 3.8% on expectations of 2.2%, was a big disappointment when looking at the core economic indicators such as Durables ex-transportation and non-defense capital goods orders ex-transportation, both of which missed, 0.3 vs 0.4% in the former case, and a whopping 11st devs for the latter: at -1.2% on expectations of 1.0% (Joe LaVorgna was +1.2%... of course), the worst since January 2011. Simply said the trend of downward GDP revisions is now coming to Q4 GDP which will likely see the consensus dip below 3.0%. While we are at it, why not stuff channels a little more: "Inventories of manufactured durable goods in November, up twenty three consecutive months, increased $2.0 billion or 0.6 percent to $368.8 billion. This was at the highest level since the series was first published on a NAICS basis and followed a 0.4 percent October increase. Transportation equipment, also up twenty three consecutive months, had the largest increase, $1.0 billion or 0.9 percent to $114.3 billion." And in other news, both consumer income (0.1%, exp 0.2%) and spending (0.1%, exp 0.3%) missed, pushing the savings rate lower again from an upward revised 3.6% in October to 3.5% in November. The reason consumers had to rely on their savings? "Private wage and salary disbursements decreased $7.1 billion in November, in contrast to an increase of $37.2 billion in October." And yet, "Government wage and salary disbursements increased $0.1 billion in November, the same increase as in October." But that's ok - for a slow motion economic trainwreck there is Obama and fudged labor data from the BLS; for everything else's there's Mastercard and soon to be unlimited lines of credit for everyone drawn straight from the Discount Window.

On the day of the 3 Year European LTRO, in a whim of fancy we wondered if contrary to all expectations, the European banks would not instead of using the money for any real releveraging (carry Trade) or deleveraging (switching out of expensive into cheaper debt) purposes, just park it with the ECB's deposit facility, an outcome which would be the worst possible case as it simply recycles ECB cash from on pocket into another without any incremental velocity. As it turns out, we were only half kidding: as of yesterday, the day after the LTRO, European banks parked almost half of the free €210 billion (recall that while gross LTRO proceeds were €489 billion, only €210 billion was net), or €82 billion, with the ECB's deposit facility, which incidentally brought the cumulative total to a new 2011 record of €347 billion, from  €265 the day before. And that is what monetary policy failure is all about.

It was just a little footnote to the LTRO announcement. Just a little statement that 40 billion of the collateral received by the ECB was newly issued, newly guaranteed Italian debt.  The more I think about it, the more uncomfortable I get. The ECB claims they have 40 billion of Italian government bonds on their books from the LTRO. The banks say they pledged 40 billion of Italian government debt. The Italian government doesn't acknowledge it as debt. Is this just a ploy to inextricably link the Italian banks to the government. The banks could have borrowed direct from the ECB. Bizarrely enough they may have even been able to post their own non government guaranteed debt directly but that was too obviously Enronesque? We are scared that as these contingent liabilities hit the spotlight we will find that the sovereign debt problem is far far bigger than we have realized. 

• Volumes remained thin across various asset classes ahead of market holidays related to Christmas and the New Year, together with a light economic calendar
• Moody’s maintained the US’s sovereign credit rating at Aaa, adding that the US rating outlook is negative on federal government debt ratio risks, and the US rating could move down if debt ratios and interest costs continue rising
• Outperformance was observed in Gilt futures partly helped by lacklustre economic data from the UK, which resulted in the UK 10-year yield falling below the 2% level and printing record lows
• According to European government sources, the S&P ratings report on 15 Eurozone members is expected in January

• Fed’s Once-Secret Data Released to Public (Bloomberg) - full excel spreadsheet link
• Call for QE to stave off euro deflation (FT)
• King Says Crisis Threatens Europe’s Economy as Stability Outlook Worsens (Bloomberg)
• Russia’s Medvedev calls for reforms, but protesters not satisfied (WaPo)
• EU's carbon tax meets turbulence (China Daily)
• IMF May Delay Boosting China’s Role as Members Fail to Back Quota Changes (Bloomberg)
• China's 2012 social housing target at 7 million (Reuters)
• Bini Smaghi Says ECB Should Use QE If Deflation Risk Arises (Bloomberg)
• Italy to Kick the Cash Habit as Monti Cracks Down (Bloomberg)
• U.S. House Speaker Boehner Signs On to Tax Deal (Bloomberg)

If you are looking to fill 20 minutes on this low volume pre-holiday 'trading' day with some sanity (away from the low correlation markets), look no further than the following interview between CMC Market's Michael Hewson and Roubini Global Economics' Megan Greene. From the evolution of the European sovereign debt crisis to a financial and political firestorm, the growing divergence between Merkel's demands and the rest of Europe's needs, to the band-aid plugs to practically unsolvable fiscal differences, she does an excellent job summarizing not just the problems, but the solutions' efficacy so far, and the troublesome future ahead. Furthermore, her perspective on the 3Y LTRO 'carry-trade' that it exacerbates the crisis and is a terrifying prospect fits with our view that while the prospect of this silver bullet is timely for year-end thin markets, the reality is far different (as we see in ITA and ESP bonds today). She notes that this effort will just strengthen the negative feedback loop between sovereign and banking systems. Expecting multiple Euro exits, she sees more can-kicking with jolts from mini-crisis to mini-crisis as the political will is just not there for Germany - ever. Monetary union is really a political choice, and with as many countries dropping out as she expects (as austerity fatigue increases), there will simply not be the political will to keep the Euro project going any longer.

Since the European markets opened we have seen modest selling pressure, admittedly with little to no volume and thin liquidity wherever we look. The overnight ebullience in ES (the e-mini S&P futures contract) was not matched by other broad risk assets as CONTEXT (the risk asset proxy) rose only mildly and is now dropping (back below US day session closing levels). The main drivers of correlated derisking are rallies in TSYs (levels and 2s10s30s compression) and mild selling pressure in JPY crosses (AUDJPY most notably). Oil and Copper are finding 'up' is the path of least resistance for now and Gold and Silver are also pushing higher even as the USD has started to rollover a little in the last hour or so. A weak UK services print and Italian consumer confidence has Gilts rallying and (pivot security du jour) BTPs selling off, as the former 2Y hits a record low 0.299% and the latter breaks 500bps over Bunds (in 10Y). Asset correlations have been ebbing and flowing all week and while credit and equity have largely been in sync (as the former reracks off the latter), we note that Sub financials are underperforming so far and Main (investment grade) and XOver (high yield) have leaked wider from the pre-open in Europe.