Archive - Jul 2013 - Story

UPDATE: All Change; now the knee-jerk rally in bonds and stocks is fading rapidly (and the USD is bid). S&P 500 and EURUSD have now retraced all gains.

It seems the markets are as confused as the Fed members. The initial knee-jerk bid for bonds, stocks, and gold was retraced soon after; only to be ignored for another push higher as we post. Interestingly FX markets are 'less' undecided - it is taper-off as the USD is being offered everywhere with little retrace. As the Russell 2000 hits an all-time intrday high, equities still feel unstable (and VIX dropped to 14.06%). It seems the "if confused buy" meme may just hit a wall today?

Discord appears to be the best word to describe the FOMC minutes but the baffle 'em with bullshit seems like the order of the day:

• FED SAYS SEVERAL ON FOMC SAW QE TAPERING LIKELY WARRANTED SOON
• FED SAYS MANY ON FOMC SAID LABOR GAINS NEEDED BEFORE QE TAPER
• FED SAYS FOMC SAW FISCAL POLICY RESTRAINING ECONOMIC GROWTH

As a reminder, uberdove Charles Evans wanted 200K or more in job gains in the past two quarters. Here's the thing - the average monthly job gain in the past 6 months is... 201,000. As for the punchline:

• HALF OF THE FED INDICATED IT LIKELY WOULD BE APPROPRIATE TO END ASSET PURCHASES LATE THIS YEAR - NOT SLOW END
• A FEW PARTICIPANTS INDICATED THAT THE COMMITTEE SHOULD SLOW OR STOP ITS PURCHASES AT THE JUNE MEETING - "OR STOP"

Communication matters apparently. But the key is that taper appears (forget about an all out stop) to be coming soon - and as usual - it's all data-dependent. Aside from that, it is the usual baffle with BS schtick. Most importantly, with half the Fed saying not just taper, but flat out end to QE by 2014, we now have a full blown mutiny in the Fed.

From 'Tapering' to concluding asset-purchases, and from rate-hike-expectations to exit strategies (and what other indicators may be worth watching), BofAML previews the all-important release of the FOMC's last meeting minutes.

Just like yesterday's 3 Year $32 billion bond auction, so today's 9-year 10-month $21 billion re-reopening of Cusip VB3 was largely much better than last month's auction, if not quite stellar, driven likely by the jump in rates, which rose from 1.81% in May, to 2.21% in June to 2.67% today, which was on top of the 2.669% When Issued, and the highest auction yield since July 2011 or right before the first debt ceiling crisis. Today's Bid To Cover, while better than last month's ugly 2.53, was still the second worst since August's 2.49. Finally, the internals were uninspiring, with Dealers taking down $9.5 billion of the precious collateral (10 Year was once again special today at -0.30%) or 45.2% of the total meaning Bernanke can proceed to monetize another $10 or so billion in the 15 Year range for one more month, slightly higher than the LTM average, while Indirects left with 38.6% (in light with the average), and Directs got 16.3% of the auction. Altogether a forgettable auction that was just good enough to relieve the now monthly collateral shortage that gets worst just before auctions.

Pentagon plans to send Egypt four F-16 fighter jets in the coming weeks: U.S. official #breaking

— Reuters US News (@ReutersUS) July 10, 2013

Nanex thinks this is blatant manipulation. We don't: we think the following rollercoastering, fractalized charts (shown both zoomed out and zoomed in) of intraday trading in AAPL stock merely confirm what happens when the only trading is that done by momentum ignition algos desperate to force stop cascades in a world devoid of actual volume, when the smallest trading burst leads to a complete collapse of the bid/ask stack. Although who knows: it may well be both...

It’s summer. Markets are supposed to be in the doldrums. But, that characterization hardly fits thus far this summer. What is different this year? We are nearing a possible inflection point in terms of Fed actions. The mere suggestion from the Fed that something is going to change is enough to supercharge markets, either up or down. If anyone was not convinced of market dependence on liquidity (and not fundamentals), the last thirty or so days should have clued them in. The Fed’s charter never included keeping markets levitating beyond where they should be. Now, at least de facto, it does. The Fed surrendered whatever independence it supposedly had. It is now just another tool of the political class. Stay tuned, this story has hardly begun.

WTI crude oil prices have jumped over 14% in the last 12 days (from $92.67 to $105.99) since Egypt erupted - and no, it's not 'growth' hopes as last night's collapse in China did nothing to dent the surging social-unrest-premium. It seems, as much as Egypt, that the total collapse in the Brent-WTI spread is becoming self-feeding now - back below $2.50, its lowest in over 31 months. So between infrastructure issues in the US, technicals in the market, and Middle-Eastern unrest-premia, we are looking at the possibility of $4.10 gas in the not-too-distant future if this is anything but instantly transitory.

When you get into too much debt, really bad things start to happen.  Sadly, that is exactly what is happening to Italy right now.  Harsh austerity measures are causing the Italian economy to slow down even more than it was previously.  And yet even with all of the (supposed) austerity measures, the Italian government just continues to rack up even more debt.  This is the exact same path that we watched Greece go down. But if Italy collapses economically, it is going to be a far bigger deal than what happened in Greece.  Italy is the ninth largest economy on the entire planet.

It was only a matter of time before Wall Street, overoptimistically hockeysticking everything as always, slammed its wrong Q2 GDP forecasts following the earlier miss in Wholesale Inventories, which printed at -0.5% on expectations of a +0.3% increase, and down from a downward revised -0.1% (was +0.2%). That time has arrived, with Barclays the first to slash its already stall speed 1.0% Q2 GDP forecast by a whopping 40% to 0.4%. Looking forward to the imminent revisions from Goldman and, of course, Joe "Almost as good as Groundhog Phil, almost" Lavorgna.

Immediately in the aftermath of the Snowden revelations, various political action committees and their ideologically affiliated polling services took to convincing the general public that according to "popular opinion", a "majority" of Americans found Snowden to be a [traitor|hero]. A month later, with the the dust having settled somewhat, the US public has had some more time to consider the implications of living in the United Stasi States of America. And sure enough, another poll has just been released, this time by Quinnipiac. Its findings are as follows: a majority of U.S. registered voters consider Edward Snowden a whistle-blower, not a traitor, and a plurality says government anti-terrorism efforts have gone too far in restricting civil liberties, a poll released today shows. Fifty-five percent said Snowden was a whistle-blower in leaking details about top-secret U.S. programs that collect telephone and Internet data, in the survey from Hamden, Connecticut-based Quinnipiac University. Thirty-four percent said he’s a traitor.

Another day of fraught wonderment ahead of us. What does it all mean? China economic data increasingly suggests there is a serious problem, (that’s still a few points below crisis – but recent experience suggests the politics of mobs can turn ugly with surprising speed!). On the other hand, yesterday’s US auctions went swimmingly well – so we can all relax about the taper? Er.. no. And while Spain gets a cheeky 15-yr bond issue completed (driven on the back of a large single order we strongly suspect), the Italians then get downgraded because of the weakening economy, deteriorating competitiveness and 1.9% negative growth outlook... “You can’t make this stuff up,”

"If central banks keep tacking and trimming as they edge away from accommodation, it may come to pass that none of their statements will carry much credibility. They could then lose control of long rates or, at best, stability in long rates might call for ever greater market intervention on their part. The end-result would be to render monetary measures largely useless as instruments of policy because central banks, with their controls jammed open, could never be sure of effecting any intended plan. Mr Bernanke and his co-thinkers may soon discover that, in taking a different line in coping with the current depression from that followed in the 1930s, they have fallen unsuspectingly into a trap from which escape will be painful."

The unaffordability-train rolls on in the US housing market. While it may destroy the housing-recovery-will-save-us meme (even as homebuilder stocks are the worst performing since the FOMC and many are sliding to 52-week lows), the facts are that a rising mortgage rate (now over 4.50% for the first time in 2 years) does reduce dramatically what the average household can afford to pay (given that people - unlike banks and governments - have limited incomes and balance sheets). Mortgage applications fell for the 8th week of the last 9 at the fastest year-over-year pace in 3 years and slumped to 2 year lows. This bodes extremely ill for home sales and the 'recovery' upon which it has already become dependent (as we noted here).

Gold is little changed near a one-week high, and is marginally higher in dollars as the dollar has retreated from a three-year high, and higher in most currencies. The gold market continues to digest the ramifications of gold borrowing costs surging to the highest since the post-Lehman Brothers scramble for gold bullion. Gold Forward Offered Rates (GOFO) or the cost to borrow gold remains negative and overnight the 1 month GOFO has gone from -0.106% to -0.11167%. Other durations eased marginally. The lack of liquidity in the the interbank London Good Delivery gold market (400 ounce gold bars) has pushed gold forward rates, known as “gofo”, into negative territory, meaning that gold for future delivery is trading at a discount to physical market prices – a rare situation that has occurred only after the Lehman Brothers collapse and near the bottom of the gold market in 1999. The last time forwards were negative was in November 2008, when a scramble for physical gold led a sharp price rally of 46% from $682/oz to over $1,000/oz between October 2008 and February 2009.