Across the Curve
Looking at your screens and seeing nothing but black? Don't worry, your internet feed did not get cut - it is just that virtually everyone else in the world is taking today off (although judging by recent volumes one could be forgiven to assume that it is "just another day"). Which is not to say that nothing is happening, with a surprising bigger than expected rate cut (50 bps to 3.75%) by the RBA crushing AUD longs overnight, and a Manufacturing ISM on deck which is far shakier now than it was before yesterday's major PMI miss. Compounding the concerns was a UK PMI print just barely above contraction territory at 50.5, below expectations of 51.5, down from 52.1. Finally, expect another record bout of GM channel stuffing which continues to be the only "shining" aspect of the now inflecting US recovery. To summarize with DB's Jim Reid: "Ahead of an important day, it has been a fairly quiet session for markets overnight. Most Asian markets (include Hong Kong, Singapore, Shanghai, and South Korea) are closed for Labour Day. Indeed much of Europe will be closed today. In terms of what's open overnight, the Nikkei is -1.2% but the ASX 200 is up +0.9%. China’s official PMI manufacturing inched a little higher in April to 53.3 from 53.1 in March but slightly below market consensus (53.6). For such a huge economy the Chinese official PMI series does seem to have been remarkably smooth of late as the reading has been gradually on the rise since hitting a recent low of 49.0 in November (50.3 in Dec, 50.5 in Jan, 51.0 in Feb, 53.1 in Mar, 53.3 in April). As we go to print the Reserve Bank of Australia has unexpectedly cut its key benchmark rate by 50bps to 3.75%. Indeed only 2 out of 29 economists polled by Bloomberg saw this coming. The market reacted aggressively post the announcement taking the front end bills 15-18bp lower in yields."
Another day of ugly news out of Europe, with both macroeconomic and monetary data coming in to confirm that downward slope of the European forward trajectory (not to mention funny: below is a chart of Greek retail sales. Hardly any commentary is necessary). Yet despite some recently gravity in the EURUSD, for the time being the futures are trending flat to slightly down, perfectly ambivalent as to how will ease first as long as someone eases. Will this sustain, or will a disappointing Chicago PMI at 9:45 am once again send stocks first plunging then soaring on hope of imminent NEW QE? We will find out shortly. In the meantime, here is a recap of the overnight market action.
S&P threatening to downgrade India... UK double dipping... Germany having a failed auction. It is all irrelevant, for the great fruit has spoken and people are buying iGadgets at record levels, which can only mean that once the great credit spree ends, Apple will likely be forced to use its $110 billion cash hoard to start an in house "Acceptance Corporation" vendor financing purchases of its products directly. And while the AAPL earnings beat has become a contrarian bet, now that even Gartman has said he is turning bullish on stocks, here is a summary of what happened and what will happen. In a nutshell, just like Apple was the only thing that mattered yesterday, today it is only the Fed and the subsequent press conference that matter, with the market likely to only take away whatever it wants to take away.
It' quiet out there... Too quiet, as everyone is awaiting the most important earning number of the quarter - that of Apple. Everything else is secondary. Here is how the secondary data is driving the market so far in the trading session.
Following yesterday's disastrous European economic data which basically missed everything, it was time for a Spanish Bill auction to fix everything, same as always (if only this time there was no surge in some German confidence index). Below is a recap of all of today's ECB cash recycling operations, aka auctions, which have given the overnight futures an uplifted. Still, we wonder why: the yields on all were higher across the board, which in turn means that sovereign funding is getting increasingly unsustainable.
Following a blistering two days of upside activity in Europe and a manic depressive turn in the US in the past 48 hours, the rally is now be running on fumes, and may be in danger of flopping once again, especially in Spain where the IBEX is tumbling by over 3% to a fresh 3 year low. Still, the Spanish 10 year has managed to stay under 6% and is in fact tighter on the day in the aftermath of the repeatedly irrelevant Bill auctions from yesterday, when the only thing that matters is tomorrow's 10 Year auction. Probably even more important is that the BOE now appears to have also checked to Bernanke and no more QE out of the BOE is imminent. As BofA summarizes, "The BoE voted 8-1 to leave QE on hold at their April meeting: a more hawkish outturn than market expectations of an unchanged 7-2 vote from March. Adam Posen - the most dovish member of the BoE over the last few quarters - took off his vote for £25bn QE, while David Miles judged that his vote for £25bn more QE was finely balanced (less dovish than his views in March)." Even the BOE no longer know what Schrodinger "reality" is real: "The BoE judged that developments over the month had been relatively mixed, with a lower near-term growth outlook, but a higher near-term inflation outlook. However, they thought that the official data suggesting very weak construction output and soft manufacturing output of late were “perplexing”, and they were not “minded to place much weight on them”." Naturally, this explains why Goldman's Carney may be next in line to head the BOE - after all to Goldman there is no such thing as a blunt "firehose" to deal with any "perplexing" issue. Finally, the housing market schizophrenia in the US continues to rule: MBA mortgage applications rose by 6.9% entirely on the back of one of the only positive refinancing prints in the past 3 months, which rose by 13.5% after a 3.1% drop last week. As for purchases - they slammed lower by 11.2%, the second week in a row. Hardly the basis for a solid "recovery."
If yesterday was risk off on concerns Europe is sinking following last week's disastrous Spanish long-term auction, today is risk on after Italy managed to successfully place 91 and 361-Day bills, in line with expected amounts, if at much higher yields, and lower Bid To Covers. Specifically, Italy sold €3 billion in 91 day bills. The yield soared from 0.492% on March 13 to 1.249%, while the Bid to Cover plunged from 2.23 to 1.81. Same for the 361-Day Bill auction, where €8 billion in Bills (in line with target) were sold at 2.840%, double the yield of 1.405% from a month ago, and a Bid To Cover just modestly better: from 1.38 to 1.52. As usual the market continues to blatantly ignore the thin white line of bond issuance: every Bill and Bond auction that matures within the maturity (3 Years) of the LTRO will succeed: period. It is the ones maturity longer than 3 years - such as Spain's last week - that are the test. Comparing one to another is apples and oranges. But risk on don't care, and as a result futures are surging disproportionately, even as Spanish and Italian bonds are just modestly tighter following the bond results. But we will once again meander whack-a-mole style from auction to auction until the market is reminded of this little nuance. In other news, Iran just announced it is following its cut in Greek and Spanish exports, by halting exports to Germany next, while continuing the theme of 2011 Deja Vu, Indonesia's Aceh was struck two hours ago with a massive 8.7 Earthquake, with an 8.8 aftershock off Sumatra, coupled with a tsunami warning. Luckily, there are no initial reports of casualties or major damage.
UPDATE: Treasuries still bid with 10Y -12bps ay 2.06%, 7Y -12bps at 1.44% and 5Y comfortably back under 1% -9bps.
Risk-Off. Treasury yields dropped around 12bps across the curve from pre-NFP as the 10Y yield drops the most in 5 months. Equity futures are down the most in a month (20pts off pre-NFP levels) and testing lows as they catch up to credit weakness. IG credit is testing 100bps for the first time in over 2 months and HY credit is back over 600bps - its widest in 3 months. Gold has popped $10 or so to over $1640 and it appears we have a new FX regime with USD weakness implying market weakness as JPY strength (on repatriation and carry unwinds back to one-month highs) is the most impressive (and AUD weakness for same reason). EURUSD is leaking higher as is swissy, as the EUR-USD swap spread model converges on EURUSD's fair-value. Of course markets are thin, but ES (the S&P 500 e-mini futures) is trading relatively actively and testing lows once again as they close - not pretty at all as ES ends the week with the heaviest 3-day loss in four months (perhaps notably ending at 2011's May high print level).
The "down in European hours, and surge as soon as Europe is closed" trade is once again so well telegraphed even Mrs. Watanabe is now in it. Sure enough US futures are red as European shares slide for the second consecutive day, with 16 out of 19 sectors down, led by banks, travel and leisure. Spanish and Portuguese bond yields are up. Not much data overnight, except for Chinese Non-manufacturing PMI which rose modestly from massively revised numbers: February adjusted to 57.3 from 48.4; January to 55.7 from 52.9 - and that, BLS, is how you do it. European PPI rose 3.6% Y/Y on estimates of a 3.5% rise, while the employment situation, or rather lack thereof, in Spain gets worse with an 8th consecutive increase in jobless claims, rising by 38,769 to 4.75 million. Bloomberg reports that Spanish home prices are poised to fall the most on record this year, leaving one in four homeowners owing more than their properties are worth, as the government forces banks to sell real-estate holdings. Francois Hollande, France’s Socialist presidential candidate, widened his lead over President Nicolas Sarkozy in voting intentions for the second round of the 2012 election, a BVA poll showed. Italian bank stocks are notably down and today seems set to be the third consecutive day in which we see trading halts in Intesa and Banca Popolare. Few more weeks of this and the financial short-selling ban is coming back with a vengeance. Yet all of this is irrelevant: the bad news will simply mean the global central banks will pump more money, putting even more cracks in the monetary dam wall, and the only question is how long before US stocks decide to front-run the European close, and whether European stocks will rise in sympathy, just because they get to close one more day.
The main event of the past 48 hours: the Chinese "Schrodinger" PMI, which came much weaker or stronger, depending on whether one uses the HSBC or official data (which always has a seasonal jump from February into March) has been forgotten. Any bullish sentiment from a 'hard landing-refuting' PMI (which incidentally means less chance of easing), was erased following a very weak Japanese Tankan sentiment report, which saw exporters fret about a return to Yen strength. Naturally, the market response was to immediately shift hopes and dreams of more easing to the BOJ, if the PBOC is for the time being off the hook. Alas, since the BOJ's actions have traditionally had much less impact on global markets, stocks are not happy. This was followed by a bevy of Eurozone data, where unemployment rose to 10.8% from 10.7%. And while this deterioration was expected, the slide in French PMI was not, dropping from 47.6 to 46.7, on expectations of an unchanged print. The modest bounce in German PMI and especially in the UK from 51.5 to 52.7, where QE is raging, were not enough to offset fears that it is now "France's turn" and that global PMIs are once again showing that the recent $2 trillion in global liquidity equivalent injections have already peaked, in line with expectations: after all the half life of central planning interventions is getting progressively shorter.
A bevy of economic data misses overnight, including German and UK retail sales, Japan industrial production, UK consumer confidence, and a European economy which is overheating more than expected (2.6% vs 2.5% exp, although with $10/gas this is hardly surprising), and futures are naturally green. The reason: the broken record that is the European FinMins who are now redirecting attention from the slowly fading LTRO impact to the good old standby EFSFESM, which according to a statement by de Jager has now been agreed on at €800 billion, lower than last week's preliminary expectation for €940 billion in joint firepower. That this is nothing but a headline grabber is as we have noted before, as there is much doublecounting, capital allocation to and by the PIIGS as well as funding already assigned. It will likely take stocks some time before the realization dawns that this is not new capital and liquidity entering the markets, unlike QE on either side of the Atlantic, while the amount is largely inadequate to fill the multi-trillion liquidity shortfall, let alone "solvency" of European sovereigns and banks. So for now enjoy the greenness all around.
Bad news is once again good news. Asia sells off on Monday's weaker profit news; the Bank of Spain says that the Spanish economy is expected to see a negative print in Q1 which if confirmed will ensure a fresh recession while the budget statistics released by the Spanish government yesterday showed further deterioration in its fiscal situation, per DB. The deficit for the first two months of the year was €20.7bn and this does not include state and regional governments’ budgets; lastly American housing slump accelerates as MBA mortgage applications drop for the 7th consecutive week with applications down 2.7%, on the back of a 4.6% decline in refi applications, the lowest since December 7. And futures are...green. Which is to be expected, since good news is good news, and bad news is, thanks to the Fed, and in this case uber-dove Rosengren, who said more stimulus is on the table, better news. It is now obvious that the Fed will not rest until the market is at fresh all time distorted, manipulated, nominal highs.
Any and all negative overnight news are now completely ignored as the scramble for risk hits the usual fever pitch following Bernanke's latest attempt to transfer cash from safe point A to ponzi point B, aka stocks. First, China's industrial firms suffered a rare annual drop in profits in the first two months of 2012 mainly in petrochemicals, metals and auto firms, the latest signs of weakness in the world's No. 2 economy and reinforcing the case for policy easing, according to Reuters. This was the first Jan-Feb profits downturn since Jan-Aug 2009. Profits fell 5.2 percent so far in 2012, according to the industrial profitability indicator, published by the National Bureau of Statistics (NBS) every month. The last period that China reported nationwide industrial profit fall was in the first eight months of 2009. Then there was the German GfK Consumer Confidence which unlike yesterday's IFO, missed: nobody cares. Also on the negative side was an earlier auction of Spanish Bills which sold EUR 2.58 billion, just barely off the low end of a target issuance of EUR 2.5-3 billion. As noted however, neither this, nor the series of US disappointments which looks set to end March with 15 of 17 estimate misses is relevant. To wit: French consumer confidence soared to 87 on expectations of 82, as the easiest and lowest common denominator to boost risk assets is now abused everywhere, by UMich, by Germany and now by France. And why would people not be confident - stocks everywhere are higher despite fundamentals. After all if something fails, there is a central planner to fix it. Never forget - the taxpayer credit card has no limits. Net result - green across the board.
Remember all those European PMIs which imploded over the past month, destroying any hopes of a rapid rebound from Europe's technical recession? You can forget them now because the one indicator which tracks the level of the manipulated stock market more than anything else, German IFO business survey, just came better than expected, at a whopping 109.8 compared to expectations of 109.6 print, same as the previous one. And that is all it takes for futures, and the EURUSD to ramp, which in turn plants the seeds for another confidence ramp next month and so on. Here is Goldman's take: "The assessment of current conditions remained unchanged at 117.4, while expectations increase to a level of 102.7 after 102.4. Looking at the different sectors it shows that confidence in the manufacturing sector was broadly stable on a high level (14.0 after 14.3), while construction saw a small decline after a surge over the last couple of months (2.3 after 3.3; confidence stood at -13.2 in October). Confidence in the retail sector also recorded a strong gain (106.6 after 3.7), while wholesale saw a decline (12.8 after 15.0). This is a strong report with business conditions remaining significantly above their long-term average of 101.1. The rebound in business conditions after a soft spot during October to January is indicative for a rebound in the underlying momentum in the economy." Well, no, if anything it is indactive that Germans were happy to reap the benefits of a few trillion in liquidity which in turn pushed markets higher, and making Germans even more confident despite the big miss in German PMI in March. But for now a big drop in the market is unwelcome so let's focus on reflexive, Catch 22 indicators. Even Goldman is perplexed on the spin: "Only the release of the 'hard' data in the coming weeks will show which survey is giving the correct signal with respect to the underlying momentum of the German economy. But in any case, the March IFO argues against taking, at least for now, the PMIs at face value."
Yesterday we discussed extensively how the narrative of US decoupling, which has so far trumped everything else, is finally fading, is coming to an abrupt end, and with no other "plotline" to take its place, as China, Europe and corporate profits are all in the dumps, the only option is for more easy money to come soon. However, with crude sticky this will be a problem in an election year. Today, this sentiment has become even more acute as new Greek 2023 bonds have for the first time trade over 20%, with weakness spreading to all the other PIIGS, and talk of yet another LTRO already picking up pace. The question of what if any assets European banks is luckily ignored for now. So as futures turned red once more, here is Bank of America summarizing the bearish market sentiment this morning.