Beige Book

Hopes that today may finally see an increase in trading volatility and volume following yesterday's reversal session will likely be dashed as the event wasteland on the horizon continues for the third day in a row. As DB explains, the FOMC meeting minutes and Juncker’s visit to Athens are likely the two main sources for key headlines today. While backward looking and certainly predating Lockhart's hawkish comments from yesterday, the FOMC minutes today are expected to shed further light on the kind of policy currently under consideration and the economic conditions required before easing is warranted. One thing that will not be discussed is the circularity of launching more QE even as gas prices have never been higher on this day in history, soy and corn are back at all time highs, and the market trading at multi-year highs. As repeatedly explained before, the option for the FOMC include pushing out the targeted exit date for fed funds, providing “exit guidance” on balance sheet measures (i.e. asset sales), various mixes of additional balance sheet expansion (including the possibility of an open-ended QE program) and  cutting interest on reserves. It is virtually certain that none of these will be enacted at the Jackson Hole meeting in one week, 2 months ahead of the presidential election, but hope springs eternal.

Riots, chaos, mayhem—these are not the earmarks of a contented society... But can the stock market go up anyway??

In his testimony over the last two days, Bernanke has listed the 'fiscal cliff' as one of the two greatest risks to the US economy, along with the situation in Europe, and urged Congress to enact 'earlier rather than later' a plan that achieves 'short-term and long-term objectives,' with the primary short-term objective to adjust the timing of the near-term fiscal contraction "to allow the recovery a little more space to continue." . However, like us, Goldman believes that resolving the two key issues - the fiscal cliff and the need to raise the debt limit - will be more difficult than it was last year, for three reasons: (1) the "easiest" options to lower the deficit have already been adopted, so the remaining options touch more controversial areas than those enacted last year; (2) some members of both parties have indicated that they regret the agreements reached in 2010 and 2011, implying less willingness to compromise this year, and (3) both parties appear to be contemplating strategies that involve allowing most or all of the policies to change at year end, as a means to achieving their ultimate policy goal. Stunning! Sure enough, as debate on the fiscal cliff gets underway in earnest, the tone of rhetoric has predictably worsened. We suspect the only way they will ever agree is after the market makes it clear that any other path is unacceptable.

The Fed's Beige Book was just released and for those looking for cliff-dropping and panic-driven views of the plunge in the economy, we are sorry. The Beige Book was, well, beige. Some headlines, via Bloomberg:

• *FED SAW WEAKER U.S. MANUFACTURING, RETAIL SPENDING LAST MONTH
• *FED SAYS LOAN DEMAND `GREW MODESTLY' IN MOST DISTRICTS
• *FED SAYS MANUFACTURING EXPANDED `SLOWLY' IN MOST DISTRICTS
• *FED: HOUSING MARKET REPORTS `LARGELY POSITIVE'
• *FED SAYS DISTRICTS' BUSINESS CONTACTS `CAUTIOUSLY OPTIMISTIC'

The word-cloud highlights the 'continued activity' though does note 'demand pressures', 'slowed markets' and 'sales conditions'. Maybe we will just muddle through with our lower earnings and weaker outlooks but never quite bad enough to get Ben off the bench.

Middle East situation not really in the prices, as the tension in Syria is growing to new heights.

IMF annual review of EZ policies pitches a lot of already pitched ideas (QE, etc etc). No news

Nothing crisp from Ben – outside comments that “Europe is not close to having a long term solution”… Thanks for the thumb up!

European equities are trading in minor positive territory on light volume and a light economic calendar with the exception of the IBEX and the FTSE MIB which are down 0.3% and 0.4% respectively as US participants begin to come to their desks. Headline employment data from the UK was for the most part in-line with expectations, though the jobless claims change for June showed a 6.1K increase compared with the 5.0K expected, with downward revisions to May’s figures. The BoE minutes showed the July increase in APF was not unanimous at 7-2, and a GBP 75bln increase was also discussed, and that should the additional easing measures not work, a further rate cut would be examined. The final comment caused a spike to the upside in the short Sterling strip of 6 ticks, Gilt futures rose to make highs of 121.78, and GBP/USD to slide back below 1.5600, though the pair has since come off its lows and trades back above this level.

• Finland (which with Holland account for 50% of the Eurozone's AAA rated countries), just says "Ei" to stripping ESM subordination (Bloomberg)
• Libor Rate Scandal Set to Spread (WSJ)
• #ByeBarclays flashmob descends on bank (FinExtra)
• What is financial reform in China? (Pettis)
• Cities Consider Seizing Mortgages (WSJ)
• China Beige Book Shows Pickup Unseen in Official Data (BBG)
• China’s New Rules May Curb Credit Growth, CBRC Official Says (BBG)
• India Said to Pay in Euros for Iranian Oil Due to Rupee Hurdles (BBG)
• Wealthy Hit Hardest as France Raises Taxes (FT)
• Euro Bank Supervisor Faces Hurdles (WSJ)

The game continues.  Talk up the economy, talk down printing and pray. If the market heads into the Fed meeting at current levels it runs the risk of being disappointed.  If this is combined with continued economic weakness then the real set up happens between the June meeting and the August one.  It is in that interim period that the market could throw another one of its hissy fits and beg for more liquidity.  Money supply growth is extremely sluggish right now all over the world.  The velocity never happened and the global economy is rolling over.  The Fed is already behind the curve and so when they are forced to act the infusion will have to be huge just to stem the momentum. Mike Krieger suggests people go back and look at different asset classes from the prior two lows in China’s M2 year-over-year growth rate.  The first one occurred in late 2004.  The M2 growth rate then accelerated until around mid 2006.  In that time period gold prices went up around 65% and the S&P 500 went up 20%.  In the second period of acceleration from late 2008 to late 2009 gold was up 65% and the S&P500 was up 15%.  We are at one of these inflection points and considering the DOW/Gold ratio is still holding gains from its countertrend rally from last August of almost 40%, this is probably one of the best entry points to buy gold and short the Dow of any time in the last decade.

All you need to read.

Everyone will be scouring for apocalyptic suggestions (need.moar.NEW Kew - EEE) in the following...

• FED SAYS `HIRING WAS STEADY OR SHOWED A MODEST INCREASE'
• FED SAYS ECONOMY EXPANDED AT `MODERATE PACE' LAST MONTH
• FED SAYS `AUTOMOBILE SALES GENERALLY REMAINED STRONG'
• FED: `CONTACTS WERE SLIGHTLY MORE GUARDED IN THEIR OPTIMISM'
• FED SAYS `INFLATION REMAINED MODEST ACROSS DISTRICTS'
• FED SAYS MANUFACTURING EXPANDED, CONSUMER SPENDING WAS STEADY
• FED ECONOMIC SURVEY COVERS PERIOD FROM LATE APRIL UNTIL MAY 25
• FED SAYS DEMAND WAS STRONGEST IN AUTO AND STEEL MANUFACTURING

...And won't find them. So: just what basis will the Fed have to do more QE again? Paging Jon Hilsenrath: Jon? Jon?

Market Turbulence As Global Economies Falter: The European debt-crisis, the derailing of Chinese economic growth and an underemployed United States all point toward a “global crunch”. 

10 Minutes to go until the ECB.... very likely disappoints again. As it usually does. There is simply too much pent up hope in what Mario Draghi will say or do, as always happens at critical junctions for the insolvent continent. Recall the same happened in November, only for the world to have to bail out Europe following a non-announcement by the ECB as Europe was imploding. Finally, why should the ECB do anything, when the public debate has already started about the US bailing out Europe: why should Draghi further infurtiate Germany's taxpayers when it has a free put option on Bernanke doing what he does best in two weeks. But for now: RISK ON. For at least a few more minutes.

One word explains the overnight action: confusion. After opening down 10 points just shy of unchanged for the year following fearful Asian trade, futures have rebounded and are now almost unchanged courtesy of a UK-market which is offline for the next two days, letting Europe take advantage of another day of impotent rumor-mongering and wolf-crying, this time focusing on a 7pm press conference in which Merkel will say more of the same vis-a-vis Europe's non-existence Banking Union, but at least Europe will have closed at the highs. Not much on today's docket so expect more kneejerk reactions to rumors, which have a positive half-life measured in the minutes.

While every soon-to-be-retired boomer and his or her long-only asset-manager stock-broker commission-leecher lies awake at night in the forlorn hope that Ben "I'm-all-in" Bernanke finds another pile of printing presses to make use of in his game of Global No-Limit Texas Central-Banking; the economy, judging by 'selective' macro data and today's Beige Book, is limping along quite happily with no need for QE3 anytime soon (and that spells trouble for a market that is entirely dependent on the spice flow of liquidity and not just the stock of central bank assets). The sad truth is, as we first pointed out back in early February, that the economy is significantly less upwardly mobile than it 'optically' appears (or the market signals it to be) thanks to the extreme weather that has occurred and so while the spin-masters will attempt to make every headline look like we are in self-sustaining recovery mode, the Fed knows full well the reality is far different (hence Bernanke's recent comments) and yet they have not admitted to this animal-spirits-shattering reality (yet). Perhaps this shockingly simple 'chart-that's-worth-a-thousand-words' will force their hand as the correlation between regions showing extreme positivity within today's Beige book and the regions with the extremest weather disconnects is, well, extreme itself. It seems the Fed is caught between a rock of stagnating inaction and a hard-place of independence-removing LSAP.