Archive - Jun 16, 2011 - Story

While this morning litany of economic news was modestly better than expected, it really did nothing to change the picture that the US is rapidly regressing into another recession. Initial claims came at 414K, better than expectations of 420K, but as always expect next week's number to be revised higher to 418K or so: last week's number was as always pushed up from 427K to 430K. Far more importantly, this is the 10th consecutive week in which the initial claims data prints over 400k. Bullish? Continuing claims was just worse than the consensus of 3,670K, at 3,675K, down from an upward (of course) revised 3,696K from 3,676K. The biggest change was attributed to New York state, where 4,060 fewer layoffs were seen in the construction, mfg and retail industries, followed by California with 2,510 fewer claims due to a "Shorter work week, as well as fewer layoffs in the service industry." So shorter work weeks are now economic positive. Lastly, on the claims front, the 99 week cliff is pushing ever more people from under the government subsidy wing as 115K people dropped from ongoing EUC and Extended Benefits. The EUC 2008 number is 3,293,507 compared to 4,798,009 a year ago: nearly 1.5 million people have now lost the weekly government check to sit around and look for jobs. Looking at housing starts, the seasonally adjusted annualized number for May was 560,000, just above the 541,000 from April, although below the 580,000 from May 2010. Consensus expected 545K new home starts for the month, or a 4.2% increase from the unrevised April number of 523K. In other words, the starts data was both a miss and a beat, depending on what the baseline used is: revised or unrevised. On an unadjusted basis, there were 55.6K units in May started on, with multi-family units jumping to 13.1K, the highest since September 2010's 13.2k. Lastly, the Q1 current account balance, a largely delayed and irrelevant number, came at -119.3 billion, on expectations of -130 billion.

• Europe Faces ‘Lehman Moment’ as Greece Unravels (Bloomberg)
• Lenders Dig In on Rules (WSJ)
• White House Says Limits on War Powers Don’t Apply to U.S. Mission in Libya (Bloomberg)
• Canada seeks US tax law exemption (FT)
• Czech transport workers strike over austerity (FT)
• U.K. Retail Sales Drop More Than Forecast (Bloomberg)
• Ireland Opens New Front as ECB Battles to Avert Another Meltdown (Bloomberg)
• Papandreou to name new cabinet (FT)
• Samsonite Slump, Market Tumble Loom Over Prada IPO Pricing (Bloomberg)

• Risk-aversion remains the dominant theme, with particular emphasis on Greece
• According to Eurozone and banking sources, Germany is pushing to delay the second rescue package for Greece until September, which was later reiterated by a German government source
• IMF's Zhu said the IMF is very concerned by Greece, and the situation has changed dramatically in the last 24 hours. However, EU's Rehn said he is confident that Greece will get the next tranche in July, and will be able to avoid a default
• There are growing signs of diminishing confidence in the Greek PM Papandreou, as the number of deputies resigning from the ruling party grows. The PM is chairing a meeting of lawmakers at 1630 local time today
• A sharp decline in retail sales data from the UK weighed on GBP/USD
• The IEA raised its 2011 oil demand forecast, which provided support to WTI crude futures

Yesterday we first pointed out the sudden jump in the FRA-OIS spread in both EUR and US terms, as the preliminary glimmers of a liquidity crisis are starting to manifest themselves in ultra short-term funding markets. While we will keep an eye on this spread which we expect to continue blowing out slowly until it eventually blows out very fast, earlier today all eyes were on the LIBOR-OIS. Which we are confused by: by now there is not one market participant who thinks LIBOR is even a remotely non-manipulated metric by the BBA member banks (and whatever happened with all those Libor manipulation lawsuits?). In a nutshell one can indicate LIBOR is any number between 0 and infinity and it would have virtually no implications since virtually nobody funds using LIBOR anymore. Which is why we were shocked to learn that someone, in this Central Bank funded world, still uses interbank liquidity. This in turn leads us to conclude that adverse liquidity conditions, while not even remotely scaled to where they were in the Lehman days, are started to get truly ugly behind the scenes. The note below summarizes why traders are once again acutely focusing on liquidity conditions, which in turn are driving up risk prices. If... when Greece defaults, look for all appropriate liquidity spread indicator to blow out to levels far wider than those seen during the Lehman crisis, as the terminal Ice-9ing of the system finally sets in.

An important set of indicators for assessing the state of the slowdown: jobless claims, current account, housing starts, and Philly Fed. Expect another confirmation that the economy is in a re-re-recession.

Greek, Portuguese and Spanish debt is under pressure this morning. Greek bonds are being decimated with the 2 year government note now over 30%. Irish bonds remain stable despite Ireland’s finance minister’s reasonable assertion that some senior bondholders must share the burden of losses. European equities are also under pressure on concerns of a “Lehman moment” in the Eurozone debt crisis. The increasing talk of a “Lehman moment” in Europe is due to real concerns that a sovereign default could lead to contagion and a new global credit crisis which could send shock waves through markets and see risk assets come under pressure. This time, the situation may be worse involving as it does both large sovereign and bank debtors and given the fact that it will be both a credit and solvency crisis. Talk of “financial Armageddon” is hyperbole – at the same time there are serious risks and investors and savers should prepare by owning less risky, high quality, liquid assets that will protect from these risks and the attendant risk of a currency crises. This is clearly seen in the increasing preference of central banks internationally to favour gold as a monetary and reserve asset over the major currencies such as the dollar, the euro and pound. Eurozone Central Banks Net Buyers of Gold in 2011 for First Time Since Inception of Euro – Global Central Bank Gold Demand Increases by 43% So Far in 2011

This morning Greek CDS is trading at a spread of 1,900 bps: a level that seals the fate of Greece, whose bonds are being sold into a bidless market. Two primary factors have totally shocked the market: one is that, as Reuters, reports, Germany now "wants the deadline for for a second
Greek rescue package to be pushed back to September, reflecting the
problems Europe is having hammering out the details, EU and banking
sources said on Thursday." This means that Greece may well run out of cash in the interim, but it appears that Germany is now fine with that outcome. The other news comes from Athensnews.gr which reports that the exodus of MPs from ruling PASOK is now picking up: 'Ruling Pasok MP Yiorgos Floridis on Thursday tendered his resignation, the second ruling party MP to resign in the space of two days, followed by Ectoras Nasiokas, Larisa Pasok MP. George Lianis was the first Pasok MP to resign on Tuesday afternoon. In addition, veteran Pasok MP and former minister Vasso Papandreou asks for an extraordinary meeting of Pasok parliamentary group. Floridis resigned from his MP post, but did not declare himself an Independent, thus in effect "returning" the seat to Pasok." With the PASOK already slender majority in parliament in its current formation, these ongoing defections mean that, just as we warned, the mid-term fiscal proposal will likely fail in parliament and Greece will do what Ireland should have done, and what in fact Greece should have done a year ago, and voluntarily leave the eurozone. It also means that keep a close eye on the FRA-OIS and Libor-OIS spreads as today all liquidity hell can break loose now that a break up of the eurozone appears certain.

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