Archive - Jun 4, 2014 - Story

Bad news is absolutely great news this morning it would seem. Just as we noted (ironically) this morning, equity algos appeared set for new highs no matter how terrible (or good) data was... and sure enough, the S&P 500 is testing its record highs once again... With Q1 GDP expectations plunging and even the hopeful hockey-stick of Q2's resurgence are now being chipped away as one sell-side economist after another folds...

While the US media is still hung up on the idea of exporting its apparently abundaent gas to Europe to rescue them from Russia's iron-grip, the reality, as Cheniere Energy's CEO exclaimed "it's so much nonsense, I can't believe anyone believes it," and so it is that the Europeans, who have their own gas deposits may be left to solve their dependence issues alone. As Stratfor notes though, even with new supplies coming online, Russia's market share will not be threatened, though Moscow's ability to use natural gas prices and supplies as a political tool will diminish over time, particularly in countries outside its immediate borders.

The last 4 days have seen 10Y yields surge by over 20bps and recouple with equity market exuberance as the 'temporary' growth scare in bonds disappears into the mists of time (until the next one). This morning's farce in the markets was impressive as bonds managed to ignore all the weakness in hard data (weak ADP, dismal trade deficit, and worse productivity) and decided that what really matters is a seasonally-adjusted survey of the service industry.

On the heels of Markit US Services PMI printed a modestly disappointing 58.1 (missing the 58.2 hope and well below the early month Flash print but still 14 month highs), the ISM Services (we are unsure if this is seasonally-adjusted, manually-adjusted, or just adjusted) printed a healthy beat at 56.3 vs 55.5 expectations and rose to its highest since August 2013. Export orders dropped but employment improved - though still well below the pre-weather levels (while the employment sub-index for manufacturing dropped). We await SMRA's confirmation that this report is correct.

Surely humor like this (if not so much its accompanying forecasts on copper, China, the S&P, bonds, or anything else for that matter) is worth the $29.95 monthly subscription price alone. From today's "world-renowned" Gartman newsletter: "We’ve far too many ways to embarrass ourselves to put forth a forecast on today’s ADP report, so we shall simply await its release, but if we have to argue even slightly with the consensus we shall argue that the consensus is low and that there shall be more jobs created than the 210K guess-timate that is the consensus at the moment."

Remember when the "thesis" for Q2 growth was that just because Q1 was so horrible, Q2 will have to bounce back? Well, oops.

France has suddenly found itself battling two populist fronts: on one hand it had to continue its foreign policy track of siding with NATO and the US when it comes to Russian developments; on the other it had to responds to howls of protest from the population bashing the US for having the temerity to punish its flagship bank (recall "France Furious At US $10 Billion BNP "Masterful Slap", "Racketeering" Fine"). Today, it was revealed that in weighing the two evils, it picked what it thought was the lesser one, and as the WSJ reports "a group of 400 Russian sailors are scheduled to arrive on June 22 in the French Atlantic port of Saint-Nazaire to undergo months of instruction before some of them pilot the first of two Mistral-class carriers back to Russia in the fall, said one of these people."

Nonfarm productivity in the frost-bitten US in Q1 plunged at its fastest pace since Q1 2008. The 3.2% drop is considerably bigger than the 3% expected but was accompanied (oddly) by a rise in employee hours (so despite the catastrophic weather, everyone was going to work and working more) but producing less. Unit labor costs soared 5.7% - the most since Q4 2012.

The US trade balance collapsed in April dashing hopes for the exuberant hockey-stock rebound in Q2 GDP. This is the biggest trade deficit since April 2012 and the biggest miss from expectations since October 2008. The last 2 months have seen the biggest slide in the deficit in a year as trade gaps with the European Union and South Korea reach records and the deficit with China surged by $7billion to $28 billion. Impots of capital goods, autos, and consumer goods all set records. And Q2 GDP downgrades in 3...2...1...

The post-weather bounce is over in exuberant employment trends appears to be over. After January's plunge, the last 3 months have seen beats but May's data - printing at 179k (against expectations of 210k) is a major disappointment for the extrapolators and presses job griwth back to its lowest since January. Rubbing salt in the wound of recovery, April's data was revised downward. It was so bad, even the permabullish Mark Zandi was unable to spin the data:  "Job growth moderated in May. The slowing in growth was concentrated in Professional/Business Services and companies with 50-999 employees. The job market has yet to break out from the pace of growth that has prevailed over the last three years.”

• U.S. sets new import duties on Chinese solar products (Reuters)
• U.S.-China Solar-Products Dispute Heats Up (WSJ)
• China Mulls Offshore Yuan Gold Trade in Free Trade Zone (BBG)
• Insider-Trading Probe Could Snarl a Deal for Icahn (WSJ)
• KCG Holdings Suspects Its Trading Code Was Stolen (WSJ)
• ‘Period. Full Stop’ Is the New ‘At the End of the Day’ (BBG)
• Draghi not so goof for bonds: Investors Flag Risk of ECB Disappointing After Europe Bond Rally (BBG)
• But great for stocks: Equity Traders See Draghi Turning Throttle Up on Rally (BBG)

If yesterday's non-record, red-tick close can be attributed to algos applying the wrong ISM seasonal factor to the day, believing it was Wednesday instead of the permabullish Tuesday, today there is no such excuse, which is why we fully expect the unallowed redness with which futures are currently trading to promptly morph into a non-red color especially with the USDJPY doing it best to ramp to 103.000 levels overnight, stopping out all shorts, and push spoos to fresh record highs. It is an algo world after all.  It appears that already record low volatility is being pushed even lower in anticipation of numerous imminent data releases, including today's ADP and Services ISM (first, second and final release), tomorrow's ECB announcement and Friday's payrolls number. Which while good for low volume levitation means bank trading revenues continue to deteriorate forcing banks to pitch M&A deals to clients, which in turn result in even more synergies and more layoffs: because in order to preserve the bottom line, crushing real employment further is perfectly acceptable collateral damage.