Beige Book

In what may be a first in at least 3-4 months, instead of the usual levitating grind higher on no news and merely ongoing USD carry, tonight for the first time in a long time, futures have drifted downward, pushed partially by declining funding carry pairs EURUSD and USDJPY without a clear catalyst. There was no explicit macro news to prompt the overnight weakness, although a German 10 year auction pricing at a record low yield of 1.28% about an hour ago did not help. Perhaps the catalyst was a statement by the Chinese sovereign wealth fund's Jin who said that the "CIC is worried about US, EU and Japan quantitative easing" - although despite this and despite the reported default of yet another corporate bond by LDK Solar, the second such default after Suntech Power which means the Chinese corporate bond bubble is set to burst, the SHCOMP was down only 1 point. The Nikkei rebounded after strong losses on Monday but that was only in sympathy with the US price action even as the USDJPY declined throughout the session.

Friday saw panic selling in gold as the metal broke $1,500 in a free-fall move. Is this a sign of “risk on” or something more sinister? Perhaps Cyprus is a major seller or there’s a large margin call somewhere. Some even assert some countries with debt problems are selling gold to raise capital to finance their country’s needs.

This objective report concisely summarizes important macro events over the past week.  It is not geared to push an agenda.  Impartiality is necessary to avoid costly psychological traps, which all investors are prone to, such as confirmation, conservatism, and endowment biases. 

Following yesterday's Beige Book extravaganza of mediocrity, ConvergEx's Nick Colas decided to do what the kids today call a “Mashup” – mixing different sources to create a new experience. Instead of mixing popular songs, he compared the Beige Book with Google “Trend” analysis for a variety of search phrases.  Take, for example, the message from the Fed that the housing market is recovering. Google searches for “Get a mortgage” are, in fact, very near record highs and over 100% higher than 2007.  On the Fed’s claim that leisure travel is picking up, the Google data is less supportive. On auto demand – an important factor in this recovery – the Google “Buy a car” trend data does look solidly higher.  Finally, the job picture is still mixed.  Google says that if you are unemployed in Chicago, drive to Dallas.  The Fed’s Beige Book seems to concur. The question is not whether the Fed could engineer this nascent recovery.  The question is “Can it last?”  For that, we’ll need some new songs.  And some fresh data in the coming months.

In today's overnight trading, it was all about Europe (and will be with today's BOE and ECB announcements), where things continue as they have for the past six months: when it is a problem that can be "solved" by throwing bucketloads of money, and/or guaranteeing all risk, things appear to be better, such as today's EUR5.03 billion Spanish bond auction (the 0.03 billion part being quite critical as otherwise how will the authorities indicate the pent up demand by the Spanish retirement fund and various other insolvent ECB-backstopped Spanish banks for Spanish debt). And while events that can be "fixed" with massive liquidity injections are doing better, those other events which rely on reality, and the transfer of liquidity into the real economy, are just getting worse and worse. Sure enough, today we also learned that French unemployment rate just hit a 13 year high. But it wasn't only the French economy that continued to slide into recession: Germany wasn't immune either following "surprising" news that German January Factory Orders tumbled -1.9% M/M on expectations of a 0.6% rise, down from a revised 1.1% in December. The great equalization in Europe continues, as the PIIGS, kept still on artificial life support do everything in their power to drag down the core.

Markets reacted without much conviction either way and for the most part took a break even as POMO was fully operational. One sector leading markets higher were financials, which we profiled in today ina short video highlighting SDPR Financial ETF (XLF). As premium subscribers know, we’ve been pretty active in XLF and are looking to add to our existing positions.

Another Beige Book comes and goes providing little real color as to anything useful about the real world. The excessive use of words synonymous with 'mediocre' appears to be the best we can do (on a $1 trillion deficit?) - but of course, the Dow is still near all-time highs...

• *FED SAYS ECONOMY GREW AT 'MODEST TO MODERATE PACE' IN FEBRUARY
• *FED SAYS 'MANUFACTURING MODESTLY IMPROVED IN MOST REGIONS'
• *FED SAYS SEVERAL DISTRICTS REPORTED 'RESTRAINED HIRING'
• *FED SAYS MOST DISTRICTS SAW MODEST PRESSURES ON PRICES
• *FED SAYS 'WAGE PRESSURES WERE MOSTLY LIMITED'

Of course, the spin will be, at least it's not bad... the S&P is 3 points off the highs, BTFD. Perhaps of most note, though: "Many District contacts commented on the expired payroll tax holiday and the Affordable Care Act as having restrained sales growth."

Today, the Federal Government's office in D.C. will be closed due to weather: we note this because supposedly someone would notice a difference. Not the sequester, no matter how hard the administration would like to blame it for today's shutdown, but the weather is to blame. Stone McCarthy explains what this means for today's economic reports. "The Office of Personal Management announced Wednesday, March 6 that federal government offices in the Washington, DC area would be closed due to weather. As a result, the usual lockup procedures for the release of economic data will be suspended. The only economic report of note set for release by the federal government on Wednesday is the data for factory orders in January. It will be published on the Census Bureau website at 10:00 ET as scheduled. The Federal Reserve's Beige Book is scheduled for release at 14:00 ET on Wednesday, and we anticipate it will be available on that website at the announced time."

Unlike the session before, there has been little actionable news overnight, with the euphoria from the record high DJIA still translating into a buying panic, and forcing algos to buy futures because other algos are buying futures, and so on, simply because nothing says cheap like all time high prices (and forward multiples that are higher than 2007 levels). The one event so far was the Europe's second Q4 GDP estimate which came in as expected at -0.6%, the fifth consecutive decline in a row. More notable was that Q4 exports tumbled by 0.9% which was the biggest fall since Q1 2009. And while the news has served to keep the EURUSD in line and subdued ahead of tomorrow's ECB conference, the stock market buying panic has moved to European stocks which continue to ignore fundamentals, and are soaring, taking peripheral bond yields lower with them, despite ongoing lack of any clarity what happens in Italy as Bersani is ready to propose a government to parliament which is certain not to pass. But in a world in which fundamentals and reality have lost all significance, and in which only momentum and hope matter, we expect that risk will continue being bid in line with central bank balance sheet expansion until this tired 4 year old last recourse plan no longer works.

When you get this close to a record it’s just a matter of time before it gets taken out generally. Why today? Well, China reversed course psychologically by now stating it would expand “deficit spending by 50%” after just Monday putting the clamps theoretically on their housing bubble. That provided a big lift to Asian and European shares. With the latter more ECB talk about defending the eurozone and euro was fed bulls. Global markets also feasted on Fed Vice-Chair (the woman who would be king?) Janet Yellen that QEternity is not gonna change.

In the upcoming week the key focus on the data side will be on US payrolls, which are expected to be broadly unchanged and the services PMIs globally, including the non-manufacturing ISM in the US. Broadly speaking, global services PMIs are expected to remain relatively close to last month's readings. And the same is true for US payrolls and the unemployment rate. On the policy side there is long lost with policy meetings but we and consensus expect no change in any of these: RBA, BoJ, Malaysia, Indonesia, ECB, Poland, BoE, BoC, Brazil, Mexico.  Notable macro issues will be the ongoing bailout of Cyprus, the reiteration of the OMT's conditionality in the aftermath of Grillo's and Berlusconi's surge from behind in Italy. China's sudden hawkishness, the BOE announcement and transition to a Goldman vassal state, and finally the now traditional daily jawboning out of the BOJ.

The Great Recession had one effect on Americans you don’t hear much about - regular illicit drug use increased by approximately 2.5 million users in 36 months, from 2007 to 2010.  The year 2011 (the most recent data available) saw a slight decline to an estimated 8.7% (from 8.9%) of all Americans regularly using illegal drugs, but, as ConvergEx's Nick Colas notes, this is still 19.5 million people who would find it difficult to pass a pre-employment drug test.  Drug use and testing does not (of course) explain the still high levels of national unemployment on their own.  Issues of cyclical sluggishness and select structural issues still hold the reins here.  But as policymakers struggle to keep the country’s unemployment rate on a downward trajectory, it does seem clear that national drug policy and state-level lawmaking are working at cross-purposes.  With drug use among the unemployed at levels double their full-time employed peers (17% versus 8%), and marijuana use on a solid uptrend, national drug policy and macroeconomic priorities appear to be on different – and conflicting – tracks.

In its somewhat typical fashion, the Beige Book was dominated by the four 'M' words 'mixed', 'moderate', 'measured', and 'modest' as any weakness was blamed on fiscal cliff uncertainty (even though macro data and the market itself seems to have shrugged all of that silliness off rather dismissively). Employment conditions were little changed, Real Estate prices rose in 11 districts,and energy sector activity was mixed:

• *FED: TRENDS IN WAGES, PRICES, EMPLOYMENT 'RELATIVELY UNCHANGED'
• *FED REGIONAL BANKS REPORT 'MODEST OR MODERATE' ECONOMIC GROWTH

Unleash the anecdotal spin...

Those who went long Boeing in the last few days on hopes the "smoking battery" issue had been resolved, especially following Ray LaHood comment's he would fly the Dreamliner, which is rapidly becoming the Nightmareliner for Boeing, anytime anywhere, are about to be grounded, as is the entire 787 fleet of All Nippon Airlines and Japan Airlines following yet another incident forcing an emergency Dreamliner landing. This happened after ANA "alarms indicated smoke in the forward area of the plane, which houses batteries and other equipment, the airline said, and there was a "burning-like smell" in the cockpit and parts of the cabin. The plane landed at Takamatsu airport in western Japan, where the 129 passengers were evacuated using the plane's emergency chutes. The plane also carried eight crew members. ANA said that the exact cause was still undetermined. The event was designated as a "serious incident" by Japan's transport ministry, setting off an immediate investigation by the Japan Transport Safety Board, which dispatched a team to the scene." The result - a 4% drop in the stock so far premarket, and if any more airlines are to ground their fleet the implications for the backlog could be devastating, it will only get far worse for both the company and the Dow Jones average, of which it is part.

After relatively large moves in the foreign exchange market since nearly the start of the year, participants were particularly vulnerable to commentary that encouraged a reversal of trend. Japan's Amari got the ball rolling, suggesting that the yen's decline has been sufficient and that excessive strength had been corrected. This encouraged a bout of short-covering and took some shine off the other major currencies as cross positions were unwound.

Then Juncker's comments hit in the North American afternoon yesterday, claiming that the euro's exchange rate was dangerously high. Again the market's reaction was more about positioning than about the policy signal. Part of the demand, after all, for the euro has been coming from some of the largest asset managers returning to the Spanish and Italian bond markets, believing that the Open Market Transaction scheme is indeed a viable backstop.