Archive - Jan 2013 - Story

Remember when the US economy was spun as shaking in its boots due to the "threat" from the fiscal cliff? Neither do US services. According to the just released Services ISM, the composite index spiked to a 56.1 print, a big beat of expectations of 54.1, and back to early 2012 levels. The biggest boost? Employment, which soared from 50.3 to 56.3, a jump in 6 points. It would appear that the Fiscal Cliff was an opportunity for financial firms, which were already laying off tens of thousands, to add many more. Or some other such convoluted logic which has become simply laughable now: even the ISM's own Nieves can't figure it out, saying the jump in employment was "surprising." Other components seeing an increase: New Orders up+1.2 to 59.3, and naturally Inventories + 3.0. Declines were recorded in Business Activity, -0.9 to 60.3, Prices down -0.4 to 56.5, Order Backlogs down -4.0 from 53.3 to 49.5, Inventory Sentiment whatever this is, down -4.5 to 58.0, and Imports down -6.5, to 49.0.

A good jobs report? Sure, if one is 55 and over. In December the American jobs gerontocracy continued its relentless course, and as the two charts below summarize since Obama's first term, some 2.7 million jobs in the 16-55 year old category have been lost. The "offset": 4 million jobs for Americans between 55 and 69. For all those young people graduating from college (with $150,000 in student loans) who are unable to get a job, here is our advice: tell your parents, and grandparents, to retire already. Oh wait, they can't because Bernanke destroyed their savings. Oops - better luck next time.

It would appear that even the venerable Art Cashin had to rub his eyes in incredulity at the recircling of the idea of the Treasury minting a "Trillion Dollar Platinum Coin" to solve the debt-ceiling 'problem'. His brief discussion on the idea is summed up perfectly in his final six words "anybody got an ebook on alchemy?"

Equities have only one direction (so far) since the payrolls report - leaking higher in general up around 3 points. On the other hand, Treasuries are also bid (though considerably more volatile - having chopped in a 4-5bps range since NFP). USD weakness and precious metal strength are a little more clear-cut but AAPL is fading.

A surprisingly uneventful report, as BLS reports that 155,000 Jobs were added in December, right on top of the 156,000 expected, and in line with the number needed to keep up with the growth in the population, or at least the Old Normal growth. The unemployment rate was 7.8%, vs the 7.7% expected: who else is surprised that the rate is now rising with Obama reelected and when a lower unemployment rate means an earlier end to QE4EVA? The November unemployment rate was revised from 7.7% to 7.8%, just so headlines can proclaim the rate was unchanged, even though it was fractions away from a 7.9% print, compared to November initial 7.7%. According to the Household survey a materially less, or 28,000 jobs were added even as the number of unemployed rose by 164K. Average hourly earnings for all employees rose 0.3% in December from November, compared to the 0.2% expected. The confusion continues as the BLS reports retail jobs were mysteriously down by 19,000 even as every retailer announced it was hiring the kitchen sink, while manufacturing jobs supposedly rose by 25,000 while the ADP report reported 6 months of reductions in a row. Construction jobs increased by 30,000. The Underemployment rate, U-6, remains steady at 14.5%. ADP, which will certainly be revised lower now, remains a farce.

The median Bloomberg expectation for NFP is 153k, Citi is at 140k; the central tendency of the forecasts is about 125-185k. Now that the Minutes are out and have raised market fears that the fed will pull back from ease earlier than anticipated, investors are worried about a repeat of 1994, when a surprise Fed tightening after a long period of easy money (by standards of those days) devastated fixed income markets. Then 10yr Treasury yields rose 170bps over a two month period. In that light, you have to respect bond market skittishness. However, you have to respect the market response. And if payrolls come anywhere near close to a 200k handle we will very likely see further a further equity and fixed income sell off. So there is the possibility that we will have a much more exciting morning after payrolls than anyone had anticipated.

• Just like last year: A Postholiday Letdown for Retailers (WSJ)
• Obama Fights Republicans on Debt as Investors Seek Growth (BBG)
• Housing a Sweet Spot for U.S. Economy as Recovery Expands (BBG)
• House chooses Boehner as speaker again despite dissent (Reuters)
• Backlash pushes Republicans to seek cuts (FT)
• Jobs Lost Hit 5 Million With Rigged Currencies (BBG)
• Chavez still has "severe" respiratory problem (Reuters)
• Paris promises flurry of economic reforms  (FT)
• Investors Sour on Pro Stock Pickers (WSJ)
• Abe moves to ease South Korea tensions (FT)
• Wildfires Hit Australia Amid Worst Heatwave in Decade (BBG)
• Monti attacks ‘extremist’ rivals (FT)

While our previous visualization of the incredible impact of the ATRA seemed to clarify to many people exactly what 'compromises' had been made, the following infographic perfectly relates the stunning difference such a 'fair and balanced' act will make to both revenues and spending... just remember $1 billion (of $100 bills) would weigh 10 tons.

• After the worst post-Christmas market performance since 1937, we had the largest surge to kick off any year in recorded history
• The myth is that we are now seeing the clouds part to the extent that cash will be put to work. Not so fast It is very likely that much of the market advance has been short-covering and some abatement in selling activity
• As equities now retest the cycle highs, it would be folly to believe that we will not experience recurring setbacks and heightened volatility along the way
• The reality is that the tough choices and the tough bargaining have been left to the next Congress and are about to be sworn in
• The myth is that the economy escaped a bullet here. The reality is that even with the proverbial "cliff" having been avoided, the impact of the legislation is going to extract at least a 11/2 percentage point bite out of GDP growth

Investor relief that the US fiscal cliff has been averted and optimism that the political compromise will make a small positive contribution to 2013 GDP are, for now at least, making investors forget about longer-term implications for debt sustainability and (temporarily) relax on euro matters. The Italian general election is over seven weeks away and until then the focus will probably remain on US fiscal developments (or FOMC expectations). However, European debt repayments are expected to top EUR40 billion in January and following today's German auction the onslaught of European auctions begins along with the ECB meeting next week (no rate change expected) followed soon after by the Eurogroup finance minister meetings. Plenty of headline-risk worthy dates here...

FX markets and precious metals are continuing to trade weaker after hours along with Treasury yields (in some very gappy and unhappy ways) - but the S&P 500 futures are flatlining for now (as NKY futures push higher - merely playing catch up to ES since New Year's Eve). Odder and odderer...

With Spanish 10Y yields hovering at a 'relatively' healthy 5%, having been driven inexorably lower on the promise of ECB assistance at some time in the future, the market has become increasingly unsure of just who it is that keeps bidding for this stuff. Well, wonder no longer. As the WSJ notes, Spain has been quietly tapping the country's richest piggy bank, the Social Security Reserve Fund, as a buyer of last resort for Spanish government bonds - with at least 90% of the €65 billion ($85.7 billion) fund has been invested in increasingly risky Spanish debt. Of course, this is nothing new, the US (and the Irish) have been using quasi-government entities to fund themselves in a mutually-destructive circle-jerk for years - the only difference being there are other buyers in the Treasury market, whereas in Spain the marginal buyer is critical to support the sinking ship. The Spanish defend the use of pension funds to buy bonds as sustainable as long as it can issue bonds - and yet the only way it can actually get the bonds off in the public markets is through using the pension fund assets. The pensioners sum it up perfectly "We are very worried about this, we just don't know who's going to pay for the pensions of those who are younger now," or those who are older we would add.

Despite all the rancor about seasonally-adjusted ad hoc beats of holiday week retail sales (amid burgeoning discounts), the trend (post the Hurricane Sandy-driven surge) in GAFO (General Merchandise, Apparel and Accessories, Furniture and Other Sales) retail sales is most explicitly lower. As Bloomberg Brief notes, consumer incomes are in a fragile state and between the ATRA deal and a 'stable' at best unemployment picture, it seems that the YoY change in retail sales is indicating per capita disposable income is set to decline further. As Rich Yamarone concludes: it appears "You can't spend what you don't have." It seems 'tax-the-rich' is also misfiring as those making over $90k per year report recent spending at its lowest for this time of year since 2008.