Archive - Mar 8, 2013 - Story

At the lows, the USD had its best gain in 9 months today, but a small give back into the European close leaves EURUSD back below 1.30 having hit its lowest in three months. It seems the EUR-USD exchange rate has recoupled perfectly with the Fed/ECB balance sheet shifts. Bond spreads are tumbling amid this 'devaluation' as Spain's 10Y spread to Bunds has dropped to its lowest in a year (though Italy remains well above one-year lows). Spanish stocks also surged - up 5.5% this week! And Europe's VIX has plunged back to one-month lows. What's not to like? Oh apart from the macro fundamentals that are crashing everywhere in Europe.

From Goldman: "We recommend closing long positions in 5-year Spanish bonds, one of our Top Trade recommendations for 2013. Since inception on 6 December, the position would have returned 5.5%. On 6 December 2012, we recommended going long Spanish 5-year government bonds (SPGB 5 ½ 30-July-17 – the 5-year generic at the time), with an initial target of 3.50%. On January 11, the yield fell below 3.50% and we extended the target to 3.00%. Since inception, the 5-year Spain has rallied 111bp, from an initial yield of 4.29% to 3.18% currently (mid-market)."

While correlation is not causation (and money doesn't grow on trees), the following chart may help explain today's 'surprising' weakness (for now) from the open despite the 'goldilocks' data...

Inequality has many sources, but political and technological dynamics are key factors. Few commentators dare wonder if the entire model of distributing output via wages is broken. Those few who do dare wonder if there simply won't be enough paid work to go around have a conventional solution: the Central State should tax the remaining wage earners (and everyone's unearned income) and pay everyone without a job a guaranteed annual income. In the State-dominated consumerist economy, this is the only possible conceptual solution, because it gives the State more power and distributes enough income to keep the consumer-based economy well-greased. Is there no other model?

The build in wholesale inventories was a remarkable four times expectations at +1.2%. This is the biggest surge (and largest beat) since December 2011. GDP-enhancing 'if we build it, they will buy' attitudes pervade but the sames data was desparately disappointing. Wholesale sales dropped 0.8% (against an expectation of a 0.1% rise) for the biggest drop in 3 months and one of the lowest since the crisis 'ended'. Wholesale inventory-to-sales ratio rose to its equal highest since mid 2009 - it seems a lot has been banked on the consumer's return as the inventory build was dominated by Computers, Lumber, and Drugs wheras the sales drop saw Farm Products and Petroleum biting.

In a testament to just how euphoric stock markets are right now, James K. Glassman the co-author of the fabled Dow 36,000 — a book published in 1999 that claimed that stock prices could hit 36,000 by as soon as  2002 (and which quite understandably is now available for just 1 cent per copy) — has written a new column for Bloomberg View claiming that he might have been right all along... The uber-optimistic atmosphere permeating much of the financial press is frightening to me. The resurrection of the Dow 36,000 zombie is a symbolically significant event that likely signals much the same thing as it did first time around: a correction.

Working (or looking for a job) in the wrong industry? Find out with the chart below, which shows where the job additions (and lack thereof) were in the month of February.

When it comes to government data, every silver lining has a cloud. Sure enough even today's NFP number, which on the surface was quite acceptable, had its share of thorny issues. Those who track the quality composition of the jobs, as opposed to just the quantity, will know that the part and full-time jobs breakdown has long been a major issue. And not unexpectedly, in February according to the Household Survey, the number of full-time jobs declined by 77K from 115,918 to 115,841. The offset: a jump in part-time workers which rose from 27,467 to 27,569, or 102K. Part-time jobs, for those who are unaware, are "jobs" only in the broadest of definitions. But the most surprising development in February from a quality standpoint was that the number of multiple job-holders rose by a massive 340K, which just happens to be a record. One wonders: how many actual people got new jobs, as opposed to how many qualified single individuals ended up getting more than one job in February in order to boost that much needed weekly income to sustainable levels.

It seems wherever one looks post the 'magnificent', 'goldilocks', 'biggest jump in part-time jobs ever' payroll print that markets are shifting in a 'Fed will need to tighten sooner' direction. Everywhere that is, apart from stocks of course...

February payrolls rose by a whopping 236,000, much better than the 165,000 expected. However this takes place as the January number was revised from 157K to 119K. The unemployment rate slides to 7.7%, on expectations of a 7.9%. This was the lowest unemployment rate since December of 2008. The civilian labor force dropped as usual from 63.6% to 63.5%. The household survey saw an increase of 170K jobs in February, following a 17K increase in January.

The Great Disconnect not only continues but worsens. We go back to the Great Singularity which is that the tide is still in as caused by the world’s central banks who have flooded the globe with little blue and green pieces of paper. When I was growing up there was a maxim that, “Money doesn’t grow on trees.” Now, by God, there are Money Trees in Washington and Frankfurt. It is a miracle of nature and something to behold. Even the price of gold, the alternative currency, is now manipulated by the central banks as they sell into any rally and control the Relative Value part of the equation. The inmates are now in charge of the asylum.

The Bloomberg Chart of the Day shows silver tonnage in exchange- traded funds backed by the metal rose for four straight months, while holdings for gold ETPs dropped in January and February. Silver futures may jump 20 percent this year to $34.50 an ounce from yesterday’s settlement of $28.808 in New York on investment demand and industrial use, said Rohit Savant, a senior commodity analyst at the New York-based research company. Holdings in silver ETPs rose 3.6 percent in the two months ended Feb. 28, reaching a record 19,699 metric tons on Jan. 18, data compiled by Bloomberg show. Last month, assets in gold ETPs fell 4.1%. Sales of American Eagle silver coins by the U.S. Mint jumped to a record in January and more than doubled in February from a year earlier, the Mint’s website showed. China’s imports of the metal surged 14% in January, the biggest monthly gain since July.

• Firms Send Record Cash Back to Investors (WSJ)
• And in totally opposite news, from the same source: Firms Race to Raise Cash (WSJ)
• China warns over fresh currency tensions (FT)
• Hollande faces pressure over jobs pledge (FT)
• Obama efforts renew ‘grand bargain’ hopes (FT)
• Shirakawa BOJ Expansion Gets No Respect as Stocks Cheer Exit (BBG)
• Japan’s Nakao Defends Easing as China’s Chen Expresses Concern (BBG)
• Boeing Had Considered Battery Fire Nearly Impossible, Report Says (WSJ)
• ECB Chief Plays Down Italy Fears (WSJ)
• China moves to make its markets credible (FT)
• Euro Group head says UK at risk of 'sterling crisis' (Telegraph)

SYFMUDD

The same pattern we have seen every day for the past week is back - slow overnight levitation as bad news piles on more bad news. What bad news? First as noted earlier, a collapse in Chinese imports and a surge in exports, which as SocGen explained is a harbinger of economic weakness in the months to follow, leading to yet another negative close for the Shanghai Composite. Then we got the UK January construction data which plunged by 7.9% according to ONS data. Then the Bank of Italy disclosed that small business lending was down 2.8% in January. We also got a negative Austrian Q4 GDP print.  We also got Spanish industrial output plunging 5% in January (but "much better" than the downward revised -7.1% collapse in December). Capping the morning session was German Industrial Production which not unexpectedly missed expectations of a 0.4% increase, printing at 0.0%, although somewhat better than the horrifying Factory Orders print would have implied. Finally, the ECB announced that a total of EUR4.2 billion in LTRO 1+2 will be repaid in the coming week by 8 and 27 counterparties, about half of the expected, and throwing a monkey wrench in Draghi's narrative that banks are repaying LTRO because they feel much stronger.  Yet none of this matters for two reasons: i) the Japanese Yen is back in its role as a carry funding currency, and was last trading at 95.77, the highest in four years, and with Jen shorts now used to fund USD purchases, the levitation in the stock futures was directly in line with the overnight rout in the Yen; and ii) the buying spree in Spanish bonds, with the 10 Year sliding overnight to just 4.82%, the lowest since 2010.

Below are the expectations of the biggest banks for today's Nonfarm Payroll number to be announced in just over two hours:

• Morgan Stanley +135K
• Barclays Capital +150K
• Goldman Sachs +150K
• Bank of America +160K
• JPMorgan +165K
• HSBC +179K
• Deutsche Bank +180K
• UBS +190K