Archive - Sep 22, 2011 - Story

Another day, another chance for the BLS to fudge jobs data by revising last week's claims miss to an even worse number: sure enough last week's -428K drop was just revised to -432K. Which means that this week's consensus miss, which was at 420K, is irrelevant, with the weekly number coming at 423K because all headlines will blare than claims actually declined by 9K. The game has become so old (and we mean old: the BLS has been doing this very same fudge for 2 years in a row now) we are stunned anyone falls for it. And one thing that will also most certainly be ignored is that the 423K number is really 427K because as the BLS reported, a -3,776 drop in claims in Texas was due to "Fewer layoffs due to holiday" - well the holiday is over. Lastly, and most troubling for the economy is that another massive 103,000 people dropped off extended benefit claims in one week. Just as troubling is that 1.7 million people have dropped off the government's dole in the past year as can be seen in the chart below: these are people that haven't gotten a job, they have just stopped being counted by the govt.

While nobody will actually care about today's set of high frequency economic updates, seeing how the world's implosion has now been validated and it is all up to the global central banks to bail us out (which they will fail at miserably), as has been anticipated on this blog for months, here is what the algos, who are the only ones trading US economic headlines now, have to look forward to.

• The FOMC decided to implement “Operation Twist”, however provided a downbeat assessment of the US economy yesterday, and warned of “significant” downside risks to the economic outlook
• Manufacturing PMI reports from China and the Eurozone came out worse than expected
• According to an article in the FT, BNP Paribas is in talks with Qatar to secure investment. However, the report was later denied by co.’s CEO
• The USD-Index traded higher amid risk-averse trade, which in turn weighed upon EUR/USD, GBP/USD and commodity-linked currencies

If you think this morning has a September 12, 2008 smell and feel to it... You are right. Complete and total CDS bloodbath in sovereigns and fins means a global bailout may not be imminent, but the market sure demands it as contagion has been upgraded to gangrene. Bernanke has now officially blown it with the twist and Mr. Market demands a $1 trillion+ LSAP, or else...

While the bulk of the re-recessionary fears this morning came out of China where economic contraction is now fully raging, Europe is not helping after both Manufacturing and Services Flash PMIs came in worse than expected, and far worse than previous, and more notably with the Services PMI printing below 50, or contracting for the first time in 2 years. In a nutshell, Manufacturing came in at 48.4, Services  at 49.1, both missing consensus of 48.5 and 51.0, and far lower than prior 49.0 and 51.5 respectively. As Reuters notes, "None of the 37 economists polled by Reuters had predicted that services activity would contract and this is the first time the index has been below the 50 mark that divides growth from contraction since August 2009....It was a similar picture in the manufacturing sector, which had driven a large part of the bloc's recovery. The factory index dropped to its lowest level in two years at 48.4, slightly below expectations of a fall to 48.5. "The numbers are still consistent with some GDP growth, so it does not signal recession just yet," said Martin Enlund at Handelsbanken. "That said, we are seeing a slow-motion train crash in the euro area, where credit contraction risks leading to a new recession by Christmas unless governments face up to the task swiftly and forcefully." In other words, on one hand I) the perpetual shining beacon in Europe: economic growth against all odds courtesy of Germany, has now been dimmed, and on the other, II) the liquidity run on Europe's banks is raging even harder, especially with II being reinforced by I, and immediately sending BNP 3M USD Libor from 0.385% to a year+ high of 0.39% as the average Li(e)bor has risen for nearly the 50th consecutive day from 0.356% to 0.358%.

Something odd is happening. Germans are leaving the ECB. First Weber, then Stark. Why would senior German officials withdraw from the ECB just at a time when they should seek greater influence? One explanation: to avoid having a conflict of interest once Germany re-instates the Bundesbank as the leading central bank of Europe. Currently, Germany and Greece are engaged in a game of chicken; the Germans do not want the first “domino” of the Euro zone to fall, and the Greeks know that. Each time Greece nears default, Germany agrees to a last-minute stick save without offering a far-reaching solution. Their aim is to limit the funds actually flowing to Greece. This, of course, guarantees the crisis to simmer on indefinitely, preventing a recovery in Southern Europe. But, as with every game, this one will have to end one day. Especially as German and Dutch 5-year CDS approach 100 bps. France’s CDS rocket has long left the launch pad, reaching 190 bps recently.

It's possible that the problems in sovereign debt in Europe continue to get worse rather than better, because we are treating the wrong "disease". Everyone has been talking about the risk of "contagion". That makes me think of scientists working in pristine high tech labs searching for a cure, of technicians working on computer models, estimating spread patterns, and citizens walking around with face masks to stop the spread of the "disease". What we have is gangrene.

No big surprise as Europe opens to a crowd of sellers. The EUR has stabilized from its drop a little in the last hour or so but commodities and PMs continue to slide. Italian banks appear to be bearing the brunt for now with Intesa and Unicredit down 4-5%, but most of the major banks are down at least 3%. Credit markets appear worst hit overall with dramatic moves in XOver and Senior Financials. As we noted in a previous post, Asian credit was hit hard, particularly the major sovereigns and for now S&P futures are back to their overnight lows down around 1% from the US close.

China's HSBC Flash Manufacturing PMI was released earlier this evening and showed continued weakness at 49.4 (below 50 implying a majority of manufacturers saw conditions deteriorating). The continuing moderation of growth is weighing on the Shanghai Composite which is down around 2% but it is the CDS market that is really cracking. 5Y China CDS is now an additional 20bps wider than the 10bps decompression we saw during Wednesday and is back to March 2009 levels at 167bps. It seems global markets are disrupted.

UPDATE: A number of Asia-Pac Sovereigns are cracking wider this morning.