A dispassionate discussion of the weekend events and a look at the week ahead.
While the market has been fixated lately on the question of when and how the Fed will taper its asset purchases, perhaps as important for the rates market (and the magic that levitates stocks) is the outlook for the Fed’s forward rate guidance. On this front, BofAML suggests that recent evidence shows the effectiveness of forward guidance is diminishing... already. Simply put, policy makers are finding it harder to convince markets that central bankers have more insight into the future course of the economy and policy than they actually do. Meanwhile, markets are learning that it can be painful to rely too heavily on forward guidance when the risk/reward of being long fixed income is asymmetrical when close to the zero lower bound. In BofAML's view, this should lead to a return to persistently higher front-end risk premiums than have prevailed over the last two years, barring a sharp deterioration in the economic outlook.
The highlight of today's economic releases will be the 8:30 am non-farm payroll data, expected to print at 180K jobs, up from July's 162K, and result in an unchanged 7.4% unemployment rate. The "most important jobs number ever " is neither, because even if it comes as a wild outlier to the good or bad side, the Fed is unlikely to change its tapering intentions this late in the game. Still, it will provide fireworks in a very jittery market and if the number is far stronger than expected, expect the 10 Year to finally blow out from below the 3% range which it breached briefly overnight, and never look back, at least not until there is an August 2011 wholesale risk revulsion episode and stocks tumble. Speaking of jittery, overnight the WSJ reports that if picked as Bernanke's replscament, Larry Summers' faces an uphill battle to get the votes of three key democrats on the Senate Banking Committee (Jeff Merkley, Sherrod Brown and Elizabeth Warren). It would be only fitting that the dysfunctional Democratic dominated senate now lashes out against the president, and in the process scuttles the market's only hope of maintaining its Fed-derived gains over the past five years... And there is, of course, Syria which is becoming increasingly problematic for Obama whose support in Congress is looking ever shakier. Will he go it alone in the case of a no vote?
JPY Tests 100.00 For First Time In 6 Weeks; US Treasury Curve Collapses To Flattest In 13 Months; Gold/Silver SlammedSubmitted by Tyler Durden on 09/05/2013 01:36 -0400
UPDATE 2: And there go the precious metals... with their ubiquitous 'opening' slamdown...
UPDATE 1: US Treasuries are now rallying urgently back from the edge as European markets awake (and the EUR slammed)... what else would one expect on ECB/BoE day?
The exuberance of the US day-session has flopped into the evening and Asian stocks, buoyed by a plunging JPY and the carry-mob is on a charge once again. USDJPY just broke back over 100.00 for the first time since July 25th managing to lift the Nikkei almost 1000 points since Friday's close. Most Asian stocks are higher (India +2.6%) but FX is more varied with the Rupiah, Baht, and Ringgit lower still as the Rupee strengthens modestly (as forwards compress too). The USD is bid against the majors with EUR cracking lower. The tale of the night though is US Treasuries which have slammed higher in yield once again. The spread between 5Y Treasuries and 30Y has plunged over 30bps in the last month and now hovers just above 200bps - its lowest in 13 months. This bear-flattening (belly and short-end is underperforming notably overnight) has driven the market's implied 10Y rate for year-end over 3% for the first time since July 2011. The entire forward curve of the Treasury complex is repricing higher in rates as 'absolute' NIM expectations drop.
With the value of the rupee plunging to new lows, the current account deficit at an all-time high and inflation running at nearly a ten-percent annual clip, India is in serious economic trouble. Indeed many are beginning to wonder whether the country is edging toward a replay of the events in the summer of 1991. Back then, an acute balance of payments crisis forced New Delhi into the indignity of pawning its gold reserves in order to secure desperately needed international financing. At a small public event the other week, Duvvuri Subbarao, the outgoing head of the central bank conceded that policymakers rarely learn from their mistakes: "...in matters of economics and finance, history repeats itself, not because it is an inherent trait of history, but because we don’t learn from history and let the repeat occur."
1:1 In the beginning, Ben Bernanke hath said, let there be liquidity.
1:6 And so each among them sayeth the following benediction: “May the Fed bless you and keep you; may the Fed extend its balance sheet to shine upon you; and may the Fed lift up asset prices and protect you from harm”
It was overall a fairly dismal month for most assets as Deutsche's Jim Reid notes sentiment was weighed down by a) ongoing tapering fears, b) a further shakeup in EM assets and currencies, and later during the month c) the escalating tension in Syria. Clearly returns in fixed income and the broader emerging market space were tapered down further by tapering concerns but DM equities were also not immune to the softer risk backdrop. The biggest loser in August were EM bonds, followed by Wheat and the S&P 500. The biggest gainer in Auguest was Silver followed by Brent crude and Chinese stocks.
If you were a totally bankrupt European Government relying on the promise of additional funds from Germany to stay in power and your options were A) start cranking out better data now with the promise of future bailouts from Germany or B) having to deal with a German Chancellor who wants out of the Euro… which would you choose?
This is our first out of four series where we look at all the various bail-out schemes concocted by Eurocrats.
Today we look at how the ECB has evolved since 2007. In the next three posts we will look at the Target2 system, various fiscal transfer mechanisms and last, but not least the emergence of a full banking union.
Nearly four years after Zero Hedge first suggested an HFT tax should punish algos that "churned" quotes and blasted empty bids and offers to stimulate "momentum ignition" strategies, and generally corrupt market structure in a way that lead to both the flash crash, the BATS IPO farce, the FaceBook IPO debacle and the Nasdaq 3 hour crash, the first such tax is now a reality. And while it is not, and likely never will be implemented in a major (if declining) exchange such as the NYSE or Nasdaq, the first country to finally put an end to millions of parasitic empty quotes is Italy.
The president gave a speech on August 22 in Buffalo outlining his proposal to “reform” the student loan program. He acknowledged that the program has some problems, but assured the audience they are easily fixed. Just take the principles behind Obamacare and apply them to education. The president personally “guaranteed” that his proposals would make college more affordable. Here’s the plan..
The “Great Rotation” consensus is now under pressure. A “buyers strike” is suddenly visible in late August as investors see the potential for event risk in coming weeks. September is seasonally the weakest month of the year for risk assets and the S&P500 has not recorded an official “10%” correction in 2 years, so it is no surprise that US equities, in particular, are taking a bit of a breather here. But is there something more sinister at play than a healthy correction in risk assets? Conflict (policy, military), Rates (liquidity), Asia, Speculation (forced selling) and Housing are all potential catalysts for a much more contagious autumn market event.
WWhile there may have been a verbal attempt by the Obama administration to diffuse Syrian tensions in the aftermath of Thursday's shocker out of the House of Commons, the action on the ground so far is hardly conciliatory. Or rather water, because a sixth US warship has now anchored in proximity to Syria, joining the recently arrived fifth destroyer USS Stout, which joined the warships already "breathing down Assad's neck." From AP: "Five U.S. Navy destroyers - the USS Gravely, USS Mahan, USS Barry, the USS Stout and USS Ramage - are in the eastern Mediterranean Sea waiting for the order to launch. And the USS San Antonio, an amphibious assault ship has now joined them. The USS San Antonio, which is carrying helicopters and can carry up to 800 Marines, has no cruise missiles, so it is not expected to participate in the attack. Instead, the ship's long-planned transit across the Mediterranean was interrupted so that it could remain in the area to help if needed." So in addition to a cruise missile based force, the US is now bringing in the marines? The justification that they are there "just in case" seems a little shallow in context.
Everything you wanted to know about the potential Syrian conflict (and didn't want to read) in 10 handy infographics...
On the surface, the just printed revised Q2 GDP number was great: following a preliminary print of 1.7%, the just revised number of 2.5% (beating expectations of 2.2%), up from 1.1% in Q1, should make everyone happy (well not the market which desperately need bad news to go higher). However, as usual, the real news is underneath the surface, which is where we find that both real components of GDP growth, Personal Consumption and Fixed Investment were actually revised lower from the preliminary print. Specifically, Personal Consumption as a contributor of the 2.5% final number was revised from 1.22% to 1.21% (well below the average Personal Consumption number since 2010 of 1.58%), while Fixed Investment was revised from 0.93% to 0.90%. So where did the 0.8% upside come from? It came entire from net trade, which contributed precisely 0.8%. Imports were revised from detracting 1.51% from GDP to just -1.11%, while exports added not 0.71% as previously expected but 1.11%, thus changing the net trade contribution from -0.80% to 0.00%. The remaining two components, Inventories and Government Consumption, were a wash, with one adding 0.2% while the other subtracted 0.1% from the preliminary number.