Archive - Jul 2011 - Story

Today's economic data barrage:

• Initial claims at 405K, better than consensus 415K. This number is probably totally bogus due to next week's imminent revision much higher: last week's number was revised from 418K to a whopping 427K; 4 week moving average 423.8K; Driver likely lack of auto plant shutdowns, says Bloomberg economist Joseph Brusuelas
• Non seasonally adjusted claims up 45K to 470K
• Continuing Claims 3,727K vs. Exp. 3,680K. And another massive reivision higher: previous at 3681K, revised to 3712K.
• The Unemployed on EUCs and Extended Benefits continue declining, down 16K in the week ended June 25
• PPI in June fell 0.4% M/m vs est. 0.2% decline (range 0.6% drop to 0.3% rise) - biggest drop since February 2010; PPI ex. food, energy up 0.3% vs est. 0.2% gain (range 0.1%-0.3%); Less threatening inflation situation’’ helps Fed if they have any thoughts of QE3, says Bloomberg economist Rich Yamarone
• June Advance Retail Sales up 0.1% vs est. 0.1% drop (range 0.7% decline to 0.5% gain); Ex. autos unchanged, matching est. (range 0.8% drop to 0.5% gain); Ex. autos and gas up 0.2% vs est. 0.4% gain (range 0.1%-0.8% rise); Unexpected rise in motor vehicles, parts likely behind increase in headline; may be “somewhat suspicious,” says Brusuelas

Well over a month after predicting the second Greek "bailout" plan was just hot air, we are not only back to square minus one but heading backward. And while the market's attention is now focused on Italy, and soon Spain and Belgium, the weakest link still is Greece, whose bankruptcy, despite all the posturing may be coming sooner than most expect. It appears that Germany is once again in the renegade drivers' seat and has reverted to its core plan of taking its chances with a Greek default, breaking away from the ECB's position, and ultimately saying let the chips fall where they may. To wit, from Market News: "Lars Feld, a member of the German government's Council of Independent Economic Advisers, on Thursday criticized the European Central Bank for blocking a restructuring of Greek debt."

Italy may not be Greece, but its important to remember that Greece wasn't Greece just 15 months ago. It seems like we have been talking about the problems in Greece for ages, but the reality is the market let them price a big "successful" bond deal in March of last year. While it is important to remember that the Troika has shown great support for sovereign debt, its also important to remember the market got it horribly wrong last year.

• European Leaders Delay Summit Meeting Over Greece (NYT)
• Tensions Escalate as Stakes Grow in Fiscal Clash (NYT)
• China Growth Suggests Tightening Ahead (WSJ)
• Banks, Regulators Still Jostling Over EU Stress Tests (WSJ)
• Obama and lawmakers face fresh doubts on debt deal (Reuters)
• Italy money supply plunge flashes red warning signals (Telegraph)
• ECB: Greek Debt Outcome Depends Mainly On Greek Government (Market News)
• Helaba pulls out of European stress tests (FT)
• India Says All ‘Hostile’ Groups Are Suspects After Mumbai Blasts Kill 17 (Bloomberg)
• Greece PM says second bailout needed urgently (Reuters)

Retail sales, jobless claims, producer prices, and a second day of testimony from the Fed Chairman. Let's see if the market can price in QE3 for the third time in a row on all the same data.

Key highlights from the just released JPM results:

• JPMorgan 2Q adj. EPS $1.27 vs est. $1.21; rev. $26.78b vs est. $24.91b
• CEO Jamie Dimon sees card losses improving next quarter, sees mortgage taking some time to resolve issues, possible we will incur additional costs along the way
• 2Q reserves $29.1b, release of $1.3b vs release of $2.6b in 1Q, coverage ratio 3.83% vs. 4.1% in 1Q
• I-banking: rev. $7.31b, down 11% Q/q, up 16% Y/y
• Fixed inc/equity mkt rev. $5.5b, down 16.7% Q/q, up 19.6% Y/y
• I-banking fees $1.9b, up 37% Y/y
• Hired more than 10,000 employees year-to-date

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
Market Recaps to help improve your Trading and Global knowledge

Gold has risen to new record nominal highs at $1,594.45 per ounce and silver has surged another 3% to over $39 per ounce after yesterday’s 6% rise. Today’s London AM Fix gold fix was $1,592.50 £987.54 and €1,119.04 – all of which are new record nominal highs. European stock markets are lower after Asian equity markets were mixed overnight with the Nikkei falling 0.27%. European debt markets are under pressure this morning with Spanish and Italian bond yields rising towards 6% again. Ireland’s 10 year and 2 year yields spiked to new record highs at 14.13% and 20.9% prior to sharp falls which had the hallmarks of sovereign intervention - possibly the ECB or China. The U.S. had its Aaa bond rating placed on review for possible downgrade by Moody’s which cited the “rising possibility” that the debt limit won’t be raised on a timely basis. U.S. treasuries have also been sold this morning. Concerns that QE3 and the printing and electronic creation of hundreds of billions of dollars and Obama’s walkout from debt ceiling negotiations is not helping dollar and bond market jitters and has led to the record dollar gold price.

While it is unclear if the ECB intervened in the second Italian bond auction of the week (we will know better over the weekend when the ECB provides the weekly change in its bond purchasing program), the much anticipated issuance of 5 and 15 year bonds is now in the rear view mirror. As Reuters says, "Italy sold almost 3 billion euros of medium- and long-term government bonds on Thursday in a sale which analysts said went well although the Treasury had to pay the highest premium on record to sell 15-year paper. The gross yield on the 5-year BTP jumped to 4.93 percent, the highest yield in auction since June 2008 and compared with 3.90 percent in the last auction a month ago. The new 15-year benchmark drew bids 1.49 times the amount offered and a gross yield of 5.90 percent, the highest on record. The auctions were seen as a key test of market appetite for the country's debt after it got sucked into the debt crisis, sending its benchmark 10-year yields briefly above 6 percent on Tuesday for the first time since the euro's launch in 1999." The prior 5 and 15 year bonds priced at 3.90% and 5.34% respectively, and 1.28 and 1.33 for the Bid To Cover. Yet with the 15 Year trading at 5.99% just prior to the auction, it does seem that there was a positive surprise. We will bring you any stories of ECB or Chinese intervention as we see them.

Update: OBAMA: "THIS MAY BRING MY PRESIDENCY DOWN BUT I WILL NOT YIELD ON THIS" -- REPUBLICAN AIDE; Perhaps Obama may want to put the country ahead of his own interests this one time...

So far the Moody's threat is having precisely zero impact on the debt ceiling farce, with just 8 days left until July 22. But the latest development is certain to jar both S&P and Fitch, not to mention Dagong, out of hibernation. Reuters reports that President Barack Obama abruptly ended a tense budget meeting on Wednesday with Republican leaders by walking out of the room, a Republican aide familiar with the talks said. The aide said the session, the fourth in a row,
was the most tense of the week as House of Representatives Speaker John
Boehner, the top Republican in Congress, dismissed spending cuts offered
by the White House as "gimmicks and accounting tricks." Either Congress has become the best orchestrated reality TV show in history or, and this is a big or, the market should really consider panicking soon.

Recently I compared the 2007 equity topping pattern to that of the current market. The premise being today as in 2007 the US economy is quite possibly entering economic recession. Long gone are the days of equity markets being forward looking as proven in 2007 when they peaked just two months before contraction began. A similar pattern is also playing out in the 10 year treasury. I suspect a topping market is more a function of psychology and less technicals or macro data. The money making bull is slowly dying while the bears are eager for their turn to shine. The result of this clash of views and buying power is dictated more by emotional, whipsawing action where convictions in one's position and volatile price action make coexistence difficult if not impossible.

Wait, what is this? Selling in both ES and bonds? Surely you jest: after all money just goes from one to the other right? Bzzzz. Wrong.

David Galland:
You were involved with Harry Browne during the last great inflation in
the U.S. How does the increase in the money supply that kicked off in
2007-2008 compare in terms of scale to what went on leading up to the
inflation in the ‘70s?

Terry Coxon: The
comparison is pretty muddled. In terms of the M1 money supply – the
total of checkable deposits and hand-to-hand currency – we haven’t yet
gotten near the persistently high growth rate that occurred in the
1970s. But the growth in the monetary base has been far more rapid than
what happened in the 1970s. There is some time delay between growth in
the monetary base and growth in M1, but to make the picture really
cloudy, I'm afraid the comparison turns out not to be very useful.
Unlike in the 1970s, the Federal Reserve is now paying interest to banks
on their reserves.

Risk ES closes. 30 ES points in 3 days. Thank you momos and robots.

BOOM: "The review of the US government's bond rating is prompted by the possibility that the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes. As such, there is a small but rising risk of a short-lived default. Moody's considers the probability of a default on interest payments to be low but no longer to be de minimis. An actual default, regardless of duration, would fundamentally alter Moody's assessment of the timeliness of future payments, and a Aaa rating would likely no longer be appropriate. However, because this type of default is expected to be short-lived, and the expected loss to holders of Treasury bonds would be minimal or non-existent, the rating would most likely be downgraded to somewhere in the Aa range."