Archive - Jun 5, 2014 - Story

Two weeks ago we asked, rhetorically, "Whose Housing Bubble Is Bigger?" and showed the April home price increases in the UK and China.  Today, we have our answer. As the WSJ reports, "U.K. house prices rose at the fastest monthly pace in almost 12 years and to the highest level since before the global credit crisis in May, a survey showed Thursday, as demand for homes continues to outpace supply despite tougher new mortgage rules."

It was interesting this week to watch the media explode in a frenzy of reporting over the "stronger than expected" auto sales. The increase in auto sales to 16.9 million units was certainly a welcome number. However, was it really the "long awaited" sign of economic recovery that it was portrayed to be?

The ECB was kind enough to give a 204-word explainer on the most unconventional policy ever attempted by the European central bank. In the off chance said exhaustive primer is not sufficient, it was kind enough to refer all questions to this poor soul. 

A mere 2 hours after Mario Draghi unleashed a slew of liquidity providing, currency-war-fighting, inflation-boosting, but not expropriating savers, policy maneuvers, EURUSD has rallied all the way back to 1.36... the level at which it traded before he dropped his tape bomb. Just as we noted in the early morning, absent a full-scale QE it was a disappointment for the 'priced-in' jawboning, "which means the EUR will ultimately move higher after a kneejerk lower as the market forces Super Mario to do even more next time." Sure enough, that is happening...

Having used words and carried a smaller and smaller stick, President Obama - alongside his good buddy David Cameron - is holding a joint press conference to explain the great vengeance and extreme rebukes they are willing to shower on Russia if Putin doesn't bow down before the G-7 in Ukraine... We suspect this week's D-Day celebrations could get a little awkward...

On the day in which the ECB for the first time ever announced negative deposit rates, as in pay the bank holding the deposit, the ex-Goldman head of the ECB, Mario Draghi just confirmed he has a career in comedy when this monetary and political circus finally comes crashing down.

"It's completely wrong to suggest we want to expropriate savers" - Mario Draghi

... We are still laughing.

Former U.S. Attorney Anton Valukas report on GM's SNAFU is proclaimed as "extremely thorough, brutally tough, and deeply troubling," by CEO Mary Barra; but finds no collusion or conspiracy to boost bottom line at the expense of customers' lives. However, the report did find "a pattern of incompetence" and actions must be taken...

• *GM REPORT CONFIRMS BARRA DIDN'T KNOW OF ISSUE PRIOR TO RECALL
• *BARRA SAYS 5 EMPLOYEES DISCIPLINED
• *GM'S BARRA SAYS 15 REMOVED FROM CO FOLLOWING VALUKAS REPORT

Of course, none of this matters as easy credit is fueling the sale of more Kevorkianesque GM cars than ever before...

It was all fun and games until Draghi started speaking... the initial exuberance of what sounded like QE but wasn't really sent EUR to 1.35, stocks higher, and Treasury yields soaring. Then as reality sunk in that it was just not all that much... Gold started to surge, EUR rally back, stocks fade, and Treasurys rally... WTI crude is fading (and Bitcoin is rising) We're gonna need a bigger QE, Mario.

"Mission Accomplished" - We are sure in the world of escape velocities, terminal rates, risk premia, and endless free-money this all makes perfect sense... Irish 10Y bond yields are trading at 2.60% - below the US Treasury yield for the first time since 2007...

The much anticipated additional measures have been revealed:

• DRAGHI UNVEILS PACKAGE OF TARGETED LTROS, WORK TO PREPARE QE
• DRAGHI SAYS INITIAL SIZE OF TARGETED LTRO PLAN IS 400BLN EUROS
• ECB EXTENDS FIXED RATE FULL ALLOTMENT, SUSPENDS SMP STERILIZING
• DRAGHI SAYS PACKAGE INCLUDES PREPARATIONS FOR ABS PURCHASES

In other words, even more actions along what was expected: keep in mind the last time the ECB did €1 trillion in LTROs it did exactly nothing to boost inflation or the "real economy." Furthermore, the ABS purchases aren't activated: just being "prepared." However, what was not revealed was the biggest wildcard: European QE, which as we said repeatedly, won't happen until Europe's deflation is far worse, if ever.

Despite multi-year high levels of layoffs according to Challenger's data, and ADP disappointing, initial jobless claims continues to ride around the lowest levels since 2007. Seasonally un-adjusted data saw claims drop 12,481 on the week but after the magical adjustment, initial claims rose 8k on the week and modestly missed expectations. Overall, the number of people claiming benefits dropped 40,279 to new cycle lows.

Well he delivered NIRP... now it's time to really deliver. Having promised in the press release to announce further policy measures in the press conference, markets are holding back their enthusiasm for now. While we have already explained why any QE action she undertakes (whether small-scale SME ABS buying, LTROs, or large-scale sovereign bond buying) will not have any direct positive impulse to the real economy, we are sure even the merest hint of it will run stock markets higher, taking out stops all the way...

So the 'market' got what it wanted to start with - a rate cut into the red so banks can start charging for deposits - and despite an initial kneejerk higher in EUR and lower in stocks, they are now resuming to the path the central planners would like. EUR is down 40 pips and S&P futures up 4 points. The USD is rising (as EUR weakens) and there is significant pressure on gold and silver. Treasury yields are also sliding (despite the equity strength). The press conference is up next and Draghi has 'promised' to unveil more policy there... The reaction moves are fading as we post...so it better be good

Congratulations Europe: you now get to pay your insolvent bank to keep your deposits for you. Today's cuts summarized and largely as expected:

• Main Refinancing Rate cut by 10 bps to 0.15%
• Marginal lending facility cut by 35 bps to 0.40%
• Deposit facility rate cut by 10 bps to -0.10%. As in negative. As in deposits are now charged a fee.

And the ECB leave with the cryptic: "Further monetary policy measures to enhance the functioning of the monetary policy transmission mechanism will be communicated in a press release to be published at 3.30 p.m. CET today."