Archive - Mar 22, 2012 - Story

An ugly day all around as European sovereign CDS jump the most in three weeks...

                    5Y                       10Y             5/10's
ITALY           374/382  +15      365/385         -10/0
SPAIN          432/440  +15      426/446          -5/5

While some believe we can decouple from the primary and secondary impacts of a China slowdown (jst what happens if we all decouple from the world?), it seems like wishful thinking that the growth engine of the world can now be waved aside on the back of "well, they will just re-stimulate and will be well" especially given where oil prices are currently. Michael Cembalest is little more sanguine that us on China's growth  (expecting 7-8% GDP growth to fuel Asian economic activity) but given the 'easing' that has already occurred in China: Chinese government has injected more liquidity; expanded the quota for foreign equity investment; cut bank reserve requirements; delayed tighter capital adequacy rules; created a program through which municipalities can issue bonds with government guarantees (rather than having to borrow from banks); eased first time homebuyer restrictions; and injected capital into its biggest banks; and yet still the macro data is leaking weaker as these 12 charts highlight only too harshly.

Commodities are broadly under significant pressure but nowhere is it more noteworthy than in Crude (even though the USD is only modestly higher on the day). Brent is falling but WTI is underperforming as it trades down on the day at the biggest drop in over three months. Brent-WTI is leaking higher though as the focus shifts increasingly to Brent. WTI and Brent are trading down close to the SPR-rumor spike-low levels as China and Russia both raise the rhetoric against the US on Iran.

Depending on debt to fuel nominal growth leads to an economic death spiral. Sometimes one chart says it all. Charted against consumer credit, the S&P 500 (SPX) collapsed after the 2000 dot-com bubble burst and has been tracing out a descending channel since then. The Fed's injections of liquidity via trillion-dollar purchases of toxic mortgages and Treasury bonds does not funnel money into productive investments--all it accomplished was to further incentivize speculative churning and financialization to enriched the few at the expense of the many. So sit back, tighten your seatbelts and enjoy the death spiral ride, brought to you by the Federal Reserve and your elected servants of the financial Elite.

FX traders of the world have been forlorn for a week or two as the lack of directional guidance from the anti-guru-du-jour Thomas Stolper of Goldman has been sorely lacking. Worry no more. He is back with with his latest 'Fadance' (/fey-dyns, verb/ - "Advice" which Goldman Sachs provides to "muppets") in that he prefers to be short USDJPY from 82.8 (suggesting JPY strength on the back of seasonal patterns and the recent deterioration in the trade balance as being transitory temporary). Given his recent track record, being long the USD against the JPY would seem appropriate and his stop (and therefore the target) at around 84.5.

It will come as no surprise to many that the warm-weather-induced ebullience and renaissance in the US housing market is perhaps floundering as all that demand was dragged forward. Today's notable miss in the FHFA Home Price Index (at unch vs an expectation of +0.3%) is ugly but the huge downward revision from +0.7% to merely +0.1% in the previous month is now the ninth consecutive notable downward revision.Add to that the fact that FreddieMac just reported mortgage rate cracking over 4% (from 3.92% to 4.08%) and the ugly data on MBA applications and...well at least we're decoupling.

We have covered the topic of BLS seasonal adjustment to death and beyond, as well as the endless expansion of those dropping out like flies from the labor pool (did those not in the US labor force, one way or another, whether due to mistracking, statistical aberrations, or outright data manipulation, increase by 1.2 million in January? It did? Next question... or does the government now desperately need an apologist for its own upwardly biased data 'mismanagement'?). Yet some of the formerly relevant elements at the less than cutting edge of asset management-cum-blogging decided to call out Art Cashin for daring to point out just this glaringly obvious seasonal adjustment issue. Of course, Art does not need us rushing to his defense. He can do a good enough job on his own.

Fed chairman Ben Bernanke is covered in a long profile by Roger Lowenstein in the Atlantic. The sympathetic account takes the reader blow-by-blow through the criticism that he has received from virtually all quarters during his tenure as Fed chair. What Lowenstein hones in on are the reviews and criticisms of Bernanke’s performance in “resurrecting the economy” — the interest rate policy, his interpretation of the dual mandate, quantitative easing, Operation Twist, etc. But for a piece that clocks in at 8,287 words, Lowenstein pays scant attention to the emergency actions taken to save the financial system itself.

Gold may not be 'money' to the Chairman, but it sure is to Turkey. The WSJ reports that "The Turkish government, facing a bloated current-account deficit that threatens to derail the country's rapid expansion, is trying to persuade Turks to transfer their vast personal holdings of gold into the country's banking system." The reason: "The push to tap into the individual gold reserves—the traditional form of savings here—is part of Ankara's efforts to reduce a finance gap that is currently about 10% of gross domestic product." In other words, "sequester" the population's hard assets (politely of course), and convert these to paper to fund the country's creditors, both foreign and domestic. Mostly foreign. In other words, Southeast Europe is slowing becoming the staging ground for the 21st century equivalent of Executive Order 6102, where first Greek, and now Turkish gold, is about to be pulled from point A to point B, where point B is some top secret vault deep under London.

As we approach the US day session open, Europe is on a similar trend to yesterday with broad market weakness. European sovereigns, most notably the fulcrum securities in Italy and Spain - but also France, are at their worst levels in three weeks with Italian 10Y back over 5% yield and Spanish 10Y back over 5.5% (near its worst level since mid January). The LTRO Stigma (the spread between LTRO-encumbered banks and non-LTRO-encumbered banks) has jumped again and is near its worst levels since the initial LTRO at over a 90bps differential. Corporate credit and stocks are also notably weaker as credit decompresses to catch up with stocks weakness as CDS roll technicals unwind.

Same old, same old from the BLS: with initial claims expected to print at 350K, we get a number that is just better, or 348K - supposedly the best since February 2008, however one which will be revised to about 351K next week, hence a miss, in line with the perpetual +3K upward statistical bias each and every week demonstrated by the BLS, which is no longer even funny. To be sure, last week's 351K was just raised to 353K, just so that headlines can announce a 5K drop in claims week over week. Continuing claims printed at 3.352MM, down from an upward revised 3.361MM. And yes, initial claims are lowest since February 2008... Until one adds the continuing claims, EUCs and Extended Claims as seen in the chart below. The 99 week cliff saw a total of 18K drop from total rolls: these are now 1MM lower compared to a year ago.

The global economy remains on shaky ground.  China’s manufacturing activity contracted for its 5th straight month, the US recovery is still very early to call, and the euro zone debt crisis may not be finished. Eurozone PMI data is due later today which will show how the economy is doing after Greece averted default earlier this month. Thomson Reuters GFMS have said that gold at $2,000/oz is possible - possibly in late 2012 or early 2013. Thomson Reuters GFMS Global Head of metals analytics, Philip Klapwijk, featured on Insider this morning and advised investors to "buy this gold dip”.  Gold should be bought on this correction especially if we go lower still as we may need a shake-out of "less-committed investors." Klapwijk suggested that a brief dip below $1,600 is on the cards but the global macro environment still favours investment, notably zero-to-negative real interest rates and he would not rule out further easing by either the ECB or the Fed before year end.

With ZIRP and LTRO it is hard to get a good read on the Spanish yield curve and what anything means.  Spanish 10 year yields have risen 9 days in a row, 5 year yields have moved higher 8 out of 9 days, and the 2 year has been much more mixed, until recently. The 2 year yield is out 19 bps in those 9 days, but 18 bps of that move has occurred the last 2 days.  The 2 year bond fits the sweet spot of LTRO, is likely to be held by banks in non mark to market accounts, so it has been stable, but it has even started to leak a little.  The move is small, almost trivial, yet with all the things working to support 2 year bonds, it is curious that it is able to widen at all, let alone 18 bps in 2 days.

Remember Europe's so-called success story - Ireland? Time to scratch it off the list, as the "best performing" PIIG, and "peripheral reform" wunderkind, just reminded everyone that the only true success story in Europe is that other I country - Iceland, after its fourth quarter GDP unexpectedly dropped 0.2%, well below consensus estimates of a 1.0% GDP boost. Odd - recall that back in October, following the announcement that Greece would be allowed to extract a bondholder haircut, initially at 50% and ultimately at 78.5%, we said that "this means that Portugal, Ireland, Spain and Italy will promptly commence sabotaging their economies (just like Greece) simply to get the same debt Blue Light special as Greece." Looks like Ireland is well on its way to doing just that, and the GDP slide is actually not all that surprising. Next: prepare for more "surprising" GDP misses from Portugal, Spain and, of course, Italy.