Bank of Japan
In addition to the bevy of ugly European unemployment and inflation news just reported, the overnight session had a dollop of more ugly macro data for the algos to kneejerkingly react to and ramp stocks to fresh time highs on. First it was China, where the PBOC did another reverse repo, however this time at a fixed 4.3% rate, 0.2% higher than the Monday iteration and well above the 3%-handle from early October, indicating that China is truly intent on tightening its monetary conditions. Then Japan confirmed that despite the soaring imported food and energy inflation, wages just refuse to rise, and have declined now for nearly 1.5 years. Then, adding core insult to peripheral injury, Germany reported retail sales that missed expectations of a +0.4% print wildly, declining -0.4% from a prior downward revised 0.5% to -0.2%. And so on: more below. However, as usual what does matter is how the market digests the FOMC news, and for now the sense is that the risk of a December taper has risen based on the FOMC statement language, whether warranted or not, which as a result is pushing futures modestly lower following an epic move higher in the month of October on nothing but pure balance sheet and multiple expansion. The big data week in the US rolls on with the highlights being the Chicago PMI and initial jobless claims, which are expected to print their first accurate, non-impaired reading since August.
The Bank of Japan's governor Kuroda proudly told the world "long-term yields are bound to rise at some point, but we can curb it when it happens," and on a grand scale - that is what they have done (for now). But market participants are growing increasingly concerned. As we have warned numerous times, the suppression of 'normal' volatility in teh short-term can only lead to larger uncontrollable moves in the future. As The FT reports, some worry, too, that the BoJ has pushed up JGB prices to the point where interest rates no longer bear any relation to the government’s creditworthiness - "effectively we have removed the light from the lighthouse." Some say the transition has been unsettling as many analysts talk more openly of the risks inherent in what the BoJ is trying to pull off. For one thing, liquidity has evaporated... "volatility looks low now, but if some investors start selling, the impact on the market could be much bigger than expected. That is a big risk."
Just as it is easy being a weatherman in San Diego ("the weather will be... nice. Back to you"), so the same inductive analysis can be applied to another week of stocks in Bernanke's centrally planned market: "stocks will be... up." Sure enough, as we enter October's last week where the key events will be the conclusion of the S&P earnings season and the October FOMC announcement (not much prop bets on a surprise tapering announcement this time), overnight futures have experienced the latest off the gates, JPY momentum ignition driven melt up.
The Bank of Japan will, for the first time in history, "own" all of Japan's GDP on its balance sheet some time in 2018 when its "assets" as a percentage of GDP surpass 100%, and then proceed in linear fashion to add about 10% of GDP to its balance sheet with every passing year until everything inevitably comes crashing down.
The euro system has many peculiarities as we have shown extensively on our blog. To a large extent the system can be analyzed as a “tragedy of the commons” problem. As is well known in economics, when a shared resource can be exploited in full by individuals with no exclusive property right, the resource will be overexploited.
The euro is a shared resource. Every national central bank can exploit it to the fullest while the cost will be shared by every member state.
The incentive in such a system is obviously rigged to its disfavor and it will eventually break down.
- Troops Forage for Food While Golfers Play On in Shutdown (BBG)
- Police suspect dental hygienist Miriam Carey was behind the wheel of Capitol chase (WaPo)
- Italian Senate committee starts Berlusconi expulsion process (Reuters)
- Swiss Regulator Probing Banks Over Foreign-Exchange Manipulation (WSJ)
- GOP Begins Search for Broad Deal on Budget (WSJ)
- No Jobs Report Means Economists Chew on Football Instead of Data (BBG)
- U.S. default seems unthinkable but investors have options (Reuters)
- Citigroup fined $30 million after analyst sent report to SAC, others (Reuters)
- FBI Snags Silk Road Boss With Own Methods (BBG)
- Recession Warnings Found in Asset Price Falls (BBG)
- Bank of Japan warns of severe global impact from U.S. fiscal standoff (Reuters)
With the government shutdown stretching into an improbable 4th day (and with every additional day added on, the likelihood that the impasse continues even longer and hit the debt ceiling X-Date of October 17 becomes greater), today's monthly Non-Farm Payroll data has quickly become No-Farm Payroll. However, just like on day when Europe is closed we still get a ramp into the European close, expect at least several vacuum tube algos to jump the gun at 8:29:59:999 and try to generate some upward momentum ignition in stocks and downward momentum in gold. In addition to no economic data released in the US, President Obama announced last night he has cancelled his trip to Bali, Indonesia, to attend the APEC conference and instead to focus on budget negotiations back at home - which is ironic because his latest story is that he will not negotiate, so why not just not negotiate from Asia? Ah, the optics of shutdown.
Despite the president's tongue-in-cheek warning to Wall Street that this time it's different, and it that "it should be concerned", that same Wall Street continues to roundly mock his attempts to talk it lower on the third day of America's "shutdown", knowing very well that if things ever turn bad, Mr. Chairman, aka the S&P chief risk officer, will get to work, and rescue everyone from that pesky thing known as losses. Whether the offsetting optimism was driven by made up China non-manufacturing PMI rising from 53.9 to 55.4, the highest in six months, or just as made up non-core European PMI data which also beat expectations despite Germany Services PMI continuing to telegraph a weakness, dropping from 54.4 to 53.7, is unknown and once again not important. So while futures are modestly lower if only until such time as the daily 3:58pm VIX slam takes place just before market close, do not expect any major moves in stocks until either the GOP finally folds and lets Obama have his way, or bundles all shutdown legislation into the debt ceiling negotiation, and careens the US right into the debt ceiling deadline on October 17 without any legislation in place.
Crashing luxury sales in China is a hard-to-swallow concept for the industry.
Fingers of Instability
Everything was proceeding according to central-plan with a gradual rise in risk and a decline in the USD until 4 am Eastern, when the German IFO Business Climate data was released and missed across the board (107.7 vs Exp. 108.0; Current assessment 111.4 vs Exp. 112.5; Expectations 104.2 Exp.104.0), reminding everyone now that Merkel is cemented for the near future, the immediate prerogative for Europe is to get the EUR lower, one way or another. A returning bid to the dollar also has pushed 10 Year yields under 2.70%, while once again sending various EM currencies sliding, and bringing back cross asset volatility to a world whose Sharpe ratio over the past several months has plummeted into negative territory. Increasing concerns about a government shutdown (misplaced) will likely prevent a solid bid from developing under markets.
Deflation - A derangement of money or credit, a symptom of which is falling prices. Not to be confused with a benign, i.e., downward shift in the composite supply curve, a symptom of which is also falling prices. In a genuine deflation, banks stop lending. Prices tumble because overextended businesses and consumers confront the necessity of selling assets in order to raise cash. When prices fall because efficient producers are competing to deliver lower-priced goods and services to the marketplace, that is called “progress.” In 2013, central bankers the world over define deflation as a fall in prices, no matter what the cause. Nowadays, to forestall what is popularly called deflation, the world’s monetary authorities are seemingly prepared to pull out every radical policy stop. Where it all ends is one of the great questions of contemporary finance.
Plowed $2 trillion of their Japanese deposit base into investments overseas then wondered why the economy at home languished
Japan’s vast network of local banks: caught between slack loan demand from businesses and the treacherous currents of Abenomics
The U.S. Mint’s sales of silver coins are heading for a record again this year, with sales of 33 million ounces (1,026 tonnes) to late August already matching the level of the whole of 2012.
Many other mints including the Perth Mint, the Royal Canadian Mint and the Austrian Mint have also seen a fall in sales recently but are set for record or near record sales again this year.