Archive - Jun 2014 - Story

As SocGen's Albert Edwards conveniently points out, during the excitement of the downward revision of Q1 US GDP from +0.1% to -1.0% investors seem not to have noticed a $213bn, 10% annualized slump in the US Bureau of Economic Analysis's (BEA) favored measure of whole economy profits, defined as profits from current production. Also known as economic profits, the BEA makes adjustments to remove inventory profits (IVA) and to put depreciation on an economic instead of a tax basis (CCAdj). Edwards shows the stark difference between the BEA's calculation for post-tax headline profits (up 5.3% yoy) and economic profits (down 6.8% yoy) in the chart below. In short: the plunge in actual corporate profits in Q1 was the biggest since Lehman!

It took the Fed long enough but finally even it succumbed to the reality of surging food prices when, as we reported previously, it hiked cafeteria prices at ground zero: the cafeteria of the Chicago Fed, stating that "prices continue to rise between 3% and 33%." So with input costs rising across the board not just for the Fed, but certainly for food manufacturers everywhere, it was only a matter of time before the latter also oo threw in the towel and followed in the Fed's footsteps. Which is what happened earlier today when J.M. Smucker Co. said it raised the prices on most of its coffee products by an average of 9% to reflect higher green-coffee costs.

Factory Orders beast expectations with a 0.7% rise (against expectations of a 0.5% rise) but this marks the 2nd month in a row after the February spike bounce back that growth has slowed and in fact shows the post-weather-slump recovery is anything but being sustained. Ex-defense, new orders for April actually fell 0.1% (after rising 1.1% in March)... simply put, the entire beat was driven by defense (does that sound sustainable? or like organic growth?) Non-defense factory orders were the weakest since January (in the middle of the catastrophic weather)

Monetary policy is diverging in the two largest economies, a trend that is set to shape funding markets for years to come. Before long, these divergent fortunes are bound to lead to large differences in policy. One might expect that movements in financial markets would reflect these expectations. However, so far, by and large, they have not. To my mind, investors should prepare for more volatility this year. A tightening in US monetary policy always causes fallout. This time will be no different. In fact, it may be worse, since the tightening starts from extremely expansionary territory.

We have shown the surge in short positioning that CFTC exposes via its Commitment of Traders data that has begun to see some covering; but despite Citi's protestation that the recent rally in bonds 'must' have cleared out the short base and squared positions, the truth is - the Treasury market is dominated by more than just futures and institutional clients have not been this short Treasuries since 2006. As JPMorgan's Client Survey exposes, as of the end of last week, active clients were adding to shorts... which could be a problem as the last time all clients were this net short, bond yields collapsed in the next few months...

Proving once again that you can't print your way to general economic prosperity, Abenomics took another shot to the chest last night as Japan's base wages failed to rise month-over-month for the 24th month in a row (the longest streak in history). Even after all the promises and hope of the spring wage negotiations, Abe's 'plan' to guilt employers into raising wages is not working; which is especialy problematic given the surge in inflation (as the 'real' wage slumped 3.1% in April) As Goldman warns, we caution against excessive expectations for sustained wage growth.

If Mario Draghi was waiting for the latest Eurozone inflation data to cement his decision to unleash negative deposit rates, if not more, in the Eurozone, he got it earlier today when Eurostat reported that May inflation tumbled to 0.5% - matching the cycle lows and the lowest since March 2009 - down from April's 0.7%, below the 0.6% expected, and less than half the ECB's target. In other words, despite everything tried in Europe nothing is working, and the most important chart - that showing the collapse in lending to private companies - not due to lack of supply but due to no demand, continues to be the most relevant one. Sadly, it is the one Draghi has shown over the past three years he has virtually zero control over.

• At least 74 dead in crashes similar to those GM linked to faulty switches (Reuters)
• Obama Calls for $1 Billion Europe Security Fund; Will Increase U.S. Military Presence in Eastern Europe (WSJ)
• Euro Inflation Slowing More Than Forecast Pressures ECB (BBG)
• China accelerates as euro zone stumbles (Reuters)
• Russia says Ukraine situation worsening, submits U.N. resolution (Reuters)
• Secondary Sales Squeeze Investors (WSJ)
• Barclays Said to Start Cutting Jobs in Investment Banking Unit (Bloomberg)
• Backlash Grows on Release of Sgt. Bowe Bergdahl in Taliban Prisoner Swap (WSJ)
• For fallen soldiers' families, Bergdahl release stirs resentment (Reuters)
• PIMCO's Gross stares at record outflow (Reuters)

Considering that both key overnight news reports: the Chinese HSBC PMI (printing at 49.4, vs 49.7 expected) and the Eurozone CPI print from a few hours ago (print of 0.5%, down from 0.7% and below the 0.6% expected), we find it odd that futures are red: after all this is precisely that kind of negative data that has pushed the market to record highs over the past five years. And speaking of odd, considering the ongoing non-dis-deflation in Europe, the fact that Bunds and TSYs are being sold off today makes perfect sense in a New Normal bizarro world.

Earlier today we reported that even as the western media blackout of events in Ukraine gets more black, the ongoing civil war is getting ever more uncivil, following a Ukraine fighter jet attack on the east Ukraine town of Lugansk, in which it struck not only the local administration building, but a neighboring area, resulting in numerous civilian casualties and injuries. Kiev was quick to deny that it was using its airforce on its own people, claiming instead that the explosion quite clearly caught on tape was merely locals trying to unsuccessfully shoot at the fighter jet. So for your viewing displeasure, because the reality of yet another fratricidal war is hardly enjoyable, and so readers can make up their own minds, here is the moment of the fighter jet bombing caught on tape, as well as the tragic consequences.

In just about any realm of activity this nation does not know how to act. We don’t know what to do about our mounting crises of economy. We don’t know what to do about our relations with other nations in a strained global economy. This is a society in deep danger that doesn’t want to know it.

As we noted previously, it is likely that whatever Draghi does this week "will not deliver a significant impulse to the real economy" in Europe but while negative rates are almost guaranteed (based on the consensus), reviving the ABS market (via focused QE) is being heralded by many as a positive swing factor. Unfortunately, as SocGen explains, even if the ECB began purchasing ABS in H2 2014, the size and reach of the market is not enough to move the scale as Europe acts desperately to avoid a Japanese-style lost decade.

Throughout history, Chinese reformers have fallen short and met grisly ends. Why did they always fail? If in the 21st century, rulers still hold the same thoughts and ideas as those reformers in history. If they do not boldly seek to reform the system for the benefit of the nation and the people but try to maintain the existing system, then they shouldn’t even try to reform. Otherwise, even if the reforms don’t fail, they will bring chaos, and could hasten the arrival of revolution.

Despite this weekend's exuberance over an oddly exuberant "20th month of expansion" official China PMI (survey) given the hard-macro-data that has been exhibited by the reforming nation, it seems China's 'other' PMI (HSBC/Markit - less biased to larger SOEs) just missed expectations (for the 7th month in a row), fell and printed in contraction for the 5th month in a row as China's economy is clearly bifurcating between the have (government's help) and have-nots... (as employment continued to plunge) which are you investing in?

A number of Vietnamese officials have now threatened to bring legal action against China over their territorial dispute in the South China Sea; but it does not seem to be having any impact on China's efforts to defend and sustain their presence. As Bloomberg reports, a total of five Chinese fighter jets have now been deployed to the area of exploration in disputed waters off the coast of Vietnam today (compared to 1 previous day) citing Fishing Control Department under Vietnam’s agriculture ministry. China has refused to answer the case the Philippines filed with an international tribunal at The Hague. It is likely to pursue a similar strategy if Vietnam appeals to international law in its own disputes with China.