Archive - Feb 27, 2013 - Story

As expected, the January Durable Goods was a big miss to expectations, printing at -5.2% on an anticipated plunge in aircraft orders, worse than the expected -4.8%, and a plunge from the downward revised 4.3% in December. However, where there was a glimmer of hope, was the ex-transportation number, which rose modestly from 1.0% to 1.9%, on expectations of a 0.2% flat print. More curious, was the schizophrenic split in Capital Goods Nondefense ex aircraft, notably the Orders, which soared 6.3% on expectations of a 0.0% print, and up from a revised -0.3% in December, versus a drop in Shipments of -1.0%, down from 0.2% previously. As Bloomberg's Joe Brusueals called it, a "classic split decision" reflecting fiscal drag via reduced defense spending, modest gains in core economy.  Bloomberg economist Rich Yamarone added that the decline in shipments of nondefense capital goods ex-aircraft was "not a promising start" for 1Q business investment. We agree, as uncertainty in the US economy is back on the table and adding to European uncertainty.

Today’s big event was Italy's 10% auction. Buyers can’t ignore yield, and we suspect many were “encouraged” to participate. But a decent Italy auction doesn't change the brutal facts. Electoral fall-out blankets the Euro battlefield, but it was decisions made years ago that have brought us to this blasted heath. Markets are caught in... Stalemate. On one side you have the disbelief on the Italy election (although why markets are surprised we cannot fathom) and all that entails about rising uncertainty on the Euro. On the other is the fact buyers need to invest. From there it becomes a debate about whether the Italy election was just another minor stumble that can be glossed over, or is it part of a more significant fundamental shift? We suspect market fears, uncertainty, and the global fundamentals will likely see the Euro crisis reveal itself again in four distinct ways in coming months.

There's a reason why Wall Street is so "beloved" by 99% of the people, and that reason is today best summarized by Jamie Dimon's 'witty' retort to Mike Mayo, perhaps the most hated banking analyst, who asked the JPM CEO a simple question - why affluent customers would not pick UBS over JPM due to a mismatch in capital ratios, to which Dimon's response is even simpler: "that's why I'm richer than you." No logic, no rationale: all about the bottom line, which to Jamie at least is all that matters. As for Mr. Dimon's pending application to purchase a Micronesian private island, we would surmise that the wealth mismatch is far more due to the too big fail banking system which means every time Mr. Dimon uses hundreds of billions in excess deposits to corner the IG9 market or to pursue any other uber-levered venture which blows up in his face even as the firm's highly accurate VaR.xls spreadsheet outputs the RAND() function, the government, also known as JPM's OpCo 1, will rapidly rush to bail him, and his riches, out.

• Italy sold EUR 6.5bln in 5y and 10y BTPs this morning, solid b/c and competitive yields, especially when considering the  uncertain political situation in Italy.
• Moody's also said that Italian election is indirectly credit negative for other pressured EU sovereigns.
• Fears rise that ECB plan has a weakness as the strings in the Eurozone bond buying programme may be its frailty.

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• Wal-Mart's Sales Problem—And America's (WSJ)
• Investors fret that Italy may undermine ECB backstop (Reuters)
• Monti Government Mulls Delaying Monte Paschi Bailout (BBG)
• Norway Faces Liquidity Shock in Record Redemption (BBG)
• ECB's Praet Says Accommodative Policy Could Lose Effectiveness (BBG)
• EU Chiefs Tell Italy There’s No Alternative to Austerity (BBG)
• New Spate of Acrimony in congress As Cuts Loom (WSJ)
• BOE's Tucker hints at radical growth moves (FT)
• Kuroda Seen Getting DPJ Vote for BOJ, Iwata May Be Opposed (BBG)
• Russian Banks Look to Yuan Bond Market (WSJ)
• Dagong warns about rising debt (China Daily)
• Italy Election Impasse Negative for Credit Rating, Moody’s Says (BBG)

With little on the event calendar in the overnight session, the main news many were looking forward to was Italy's auction of €2.5 billion in 5 and €4 billion in 10 year paper, to see just how big the fallout from the Hung Parliament election was in the primary market. As SocGen explained ahead of the auction: "The target of Italy's 2017 and 2023 BTP auction today is a maximum EUR6.5bn, but in order to get to that tidy amount the Tesoro may be forced to offer a hefty mark-up in yield to compensate investors for the extra risk. Note that Italian 6-month bills were marked up at yesterday's sale from 0.731% to 1.237%. Who knows what premium investors will be asking for today for paper with the kind of duration that is not covered by the ECB OMT (should that be activated)? Will Italian institutions, already long BTPs relative to overall asset size, be forced to hoover up most of the supply?" The outcome was a successful auction which, however, as expected saw yields spike with the 4 year paper pricing at 3.59% compared to 2.95% before, while the 10 Year paper priced some 60 bps wider to the 4.17% in January, yielding 4.83%. The result was a brief dip in Italian OTR BTP yield, which have since retraced all gains and are once again trading in the 4.90% range on their way to 5%+ as JPM forecast yesterday. And as expected, talk promptly emerged that the auction was carried by "two large domestic buyers" in other words, the two big local banks merely levered up on Italian paper hoping furiously that they are not the next MF Global.