Archive - Dec 5, 2013 - Story

If yesterday's "great" news in the form of a 200K+ ADP, which sent the market sliding, was offset by the "ugly" news of the Service ISM which sent stocks soaring, today there are only "good cops" - first it was the revised Q3 GDP number print far above most expectations, purely on the back of inventory accumulation which however will now detract materially from Q4 growth, and at the same time, feeding the taper fire, the DOL announced that claims for the week ended November 30, which tumbled to 298,000 a 23K drop from a last week's upward revised 321K, the best print since September 2013, and the biggest beat of expectations of 320K since also September 2013, which was when the DOL started upgrading various computer systems making all data unreliable. And while futures assume the number immediately means the probability of a December taper surges, the DOL quietly added that it is "not unusual for claims to be volatile in holidays."

On the surface, the first revision to the Q3 GDP print, which initially came at 2.8%, was tremendous: at 3.6% well above the 3.1% expected, nothing could be better. Unfortunately, once again reading between the lines shows that all the "growth" was completely hollow and entirely on the back of the ongoing massive inventory accumulation, which rose from 0.41% in Q2 to 0.83% in the first Q3 revision, to an epic 1.68% in the current revision, or nearly half of all the "growth" in the economy. As for the most important component of GDP - personal consumption it once again declined, and dropped from 1.24% of the GDP number in Q2 to 1.04% in the first revision, to just 0.96% in the final Q3 revision - this was the lowest consumption contribution to GDP since Q3 2009! Bottom line: the US consumer is getting ever weaker, even as retailers and producers are stocking up more and more inventory to take advantage of the lack of consumer spending power.

Just how much will Draghi cut Europe's growth outlook? Just what measures will the Goldmanite take to lower the EUR this time? Just how short will the laflife of any such "unconventional measures" program be this time around? Just what assets would the ECB use as collateral for another "contingent" LTRO in a continent that has long since run out of unencumbrable assets? When is the non-existent OMT's term sheet finally coming? All these questions and more will hopefully be answered by Mario Draghi at the ECB's press conference set to start any second.

As we have been covering for the past year and a half, most explicitly in "A Record $2 Trillion In Deposits Over Loans - The Fed's Indirect Market Propping Pathway Exposed", when it comes to the pathway of the Fed's excess deposits propping up risk levels, it has nothing to do with reserves sitting on bank balance sheets as assets, and everything to do with excess deposits (of which there are now $2.4 trillion thanks to the Fed) which are used as Initial collateral by banks such as JPM and then funding such derivatives as IG9 in a failed attempt to cover a segment of the corporate bond market.

Unlike last month's surprising rate cut which caught about 95% of forecasters wrong-footed, today the ECB proceeded as expected, and did not cut rates, keeping the MRO rate at 0.25%, the Interest Rate at 0.75%, and the Deposit rate at 0.00%. From the ECB:

At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.25%, 0.75% and 0.00% respectively. The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 2.30 p.m. CET today.

Now all eyes on Draghi at the press conference in 45 minutes, where Draghi is expected to lower his assessment of European growth once more, and potentially announce some additional non-standard measures.

• Apple, China Mobile Sign Deal to Offer iPhone (WSJ)
• Japan approves $182 billion economic package, doubts remain (Reuters)
• Volcker Rule Won't Allow Banks to Use 'Portfolio Hedging' (WSJ)
• He went, he saw, he achieved nothing: Biden's Trip to Beijing Leaves China Air-Zone Rift Open (WSJ)
• Britain announces sharp upward revision to growth forecasts (Reuters)
• U.S. Airlines to Mortgage-Backed Debt Top List of Best ’14 Bets (BBG)
• Thaksin's homecoming hopes dashed as Thai crisis reignites (Reuters)
• Age of Austerity Nearing End May Boost Global Economy (BBG) - or it may expose that it was just corruption and incompetence at fault all along
• China aims to establish network of high-level FTAs (China Daily)

It has been a relatively quiet overnight session, if with a downward bias in the EURJPY which means futures are just modestly in the red. The action however is merely deferred, with a slew of macroeconomic reports on the horizon, chief of which is the ECB rate decision, which consensus has as unchanged at 0.25%, although Draghi's subsequent conference is expected to lead to EUR weakness, even if briefly, since the central bank is widely expected to downgrade both growth and inflation forecasts. DB adds that the recent rise in eonia — which may reflect concerns about the treatment of LTROs in the end-December AQR and be encouraging the accelerated 3Y LTRO repayments — may warrant a temporary liquidity easing: a special short-term tender; temporarily easing minimum reserve requirements; or — technically possible, if politically controversial — temporarily suspending the SMP sterilization process. Concurrent with the draghi conference, we also get the second revision of Q3 GDP, which consensus now expects to rise to 3.1%, as well as this week's initial jobless claims random number generator. Later in the day the Factory Orders update is expected to show a -1.0% decline, while Fed speakers Lockhart and Fisher round off the day.

As we said back in March, when Bitcoin's parabolic rise first started, it was only a matter of time before first one, then all central banks take on Bitcoin for the simple fact that it present too great a threat to the fiat system. Sure enough, on the chart below of BTC China it is quite clear just at what point overnight the People's Bank of China announced that Bitcoin is simply a virtual commodity and "isn't a currency with any real meaning" (paraphrasing Alan Greenspan), and that it officially bans financial companies from Bitcoin transactions.

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