Overnight, the market continued to digest news out of the UK that the formerly solid pro-war alliance has splintered following a historic vote by the House of Commons, leaving Obama to "go it alone." The result was a rather sizable slamdown in both crude and gold, accelerating as Europe opened for trading, and pushing gold back under $1400. This happened even as data out of Europe showed that European unemployment remained at a record high 12.1%, while inflation missed expectations and printed at 1.3%, or below 2% for the seventh month. Earlier in the session, headline data out of Japan showed that inflation had risen at the fastest pace since 2008. However, before the deflation monster is proclaimed dead, the core-core figure (excluding foods and energy) of the Tokyo CPI was down 0.4% yoy, unchanged since June for three months, suggesting that prices are still largely driven by energy-related costs. In other words cost-push inflation is rampant, which is the worst possible scenario and means the BOJ's QE is going to all the wrong place.
A quiet week to send off August ahead of a deluge of key data next week and as the fateful Septembr 18 FOMC announcement approaches. Still, quite a few macro events to keep track of.
Last week it was the Nasdaq, today it was the Eurex Exchange, which broke down "due to technical issues" shortly after 2 am Eastern and which was offline for over an hour. Further keeping a lid on liquidity and upward momentum is today's UK market holiday which has resulted in a driftless move lower across European stocks, following a red close in the Nikkei225. It only means that the inevitable ramp up in the disconnected from all fundamentals and reality market will have to come only during US trading hours when the NY Fed trading desk steps up its POMO-aided levitation.
Next weeks events placed within the larger context.
Just like the incredulous surge in last week's Manufacturing ISM which exploded higher from 50.9 to 55.4 (as we predicted following the Chicago PMI plunge hours before that), so today its non-manufacturing cousin soared in a desperate attempt to give the "all clear" on the US second half economy (at least until the inevitable hangover of course): at 56.0, up from 52.2, and smashing expectations of 53.1 (supposedly the weather was neither too hot nor too cold this time), this was the biggest beat of expectations since January 2012, pushing the index to the highest since February 2011 (when as we now know GDP was negative) and the biggest sequential jump since April 2009. Those part-time workers must really be putting their shoulder into it even though the employment index actually declined from 54.7 to 53.2. New orders soared although at the expense of Backlogs which dropped sharply into contraction mode: pulling activity forward again to telegraph momentum? Long story short - until reality returns and the surge in various global PMIs is moderated, as happened in 2012 and 2011 before it - the Taper once again appears to be on. We expect the September number to plunge just to keep the Baffle with BS theme going strong.
Readers may recall that in our commentary to yesterday's Chicago PMI disappointment we had a simple prediction "What this means for the ISM is not exactly clear due to the long-running tradition of baffle with BS, but on the surface it is hardly optimistic... which likely means ISM will explode higher." Sure enough, to no surprise at all, it just did with the headline ISM manufacturing print for July exploding from 50.9, trouncing expectations of 52.0 with the biggest beat in two years, and hitting 55.4, driven mostly by a surge in production which rose from 53.4 to a ridiculous 65.0, the highest since 2004. And while virtually all of the key subindices in yesterday's Chicago PMI dipped, today it is the opposite, with New Orders (+6.4), Employment (+5.7) and Deliveries (+2.1) all posting increases. Humorously, while Chicago PMI said Prices Paid exploded, today the ISM refuted that and indicated Prices Paid dropped to lowest in a year. One just has to laugh at the Chinazation of US economic data.
One of the unpleasant side-effects for the Fed's forecasting (insert laughter here) abilities, is that following today's GDP revisions, H1 annualized GDP is now 1.4%. It means that there is no way that the economy can grow fast enough in the second half (especially with such early disappointments to the second half as the just released Chicago PMI miss) to meet the Fed's forecast growth of 2.3%-2.6%. Which, in turn, means more egg on the face of Bernanke and the FOMC's 2013 forecasts. Which is precisely what Goldman just said.
So much for that "priced in" strong start to the second half. All those expecting a major move higher in the Chicago PMI after its June plunge from 58.7 to 51.6 will have to defer their hopes for one more month, following the headline print of 52.3, which missed expectations of 54.0. However, the headline number doesn't do the PMI full justice, because while the growth was driven by all the wrong reasons, namely margin crushing Prices Paid surging from 59.9 to 63.3 - the largest two month jump since 2010 - the much more important trifecta of New Orders (54.6 to 53.9), Production (57.0 to 53.6) and Employment (57.8 to 56.6) all dropped. What this means for the ISM is not exactly clear due to the long-running tradition of baffle with BS, but on the surface it is hardly optimistic... which likely means ISM will explode higher.
As readers are well aware by now, at 8:30 am today we get to see the rewriting of US GDP history back to 1929 with the revisions from the BEA. It’s a big last day of July with the Fed meeting coming after the GDP release. For GDP, real growth is expected to be as low as 1.0% in Q2. Opinions vary widely on today’s GDP number with one major US investment bank’s estimate as low as 0.2%, a number of bulge bracket banks at 0.5% while there are also plenty of economists above 1.5%. It is not news to anyone that nominal GDP is very low at the moment - especially in a world of nosebleed high debts - and today could see this have a 1-handle YoY (and at best a 2-handle) - a level not even normally seen at the depths of most recessions.
After a slow start in the week, there is a substantial pick up with announcements from the FOMC, ECB and BOE (as well as monetary policy updates from the RBI, RBA, Israel, and Czech Republic) with the possibility, if not probability, of a Fed update on tapering expectations. On Wednesday we get the much expected wholesale GDP revision which will boost "growth data" all the way back to 1929 and is expected to push current GDP as much as 3% higher, and on Friday is the "most important NFP payroll number" (at least since the last one, and before the next one), where the consensus expects a +183K print, and 7.5% unemployment. All this while earnings season comes to a close.
Hopes that Kuroda would say something substantial, material and beneficial to the "three arrow" wealth effect (about Japan's sales tax) last night were promptly dashed when the BOJ head came, spoke, and went, with the USDJPY sliding to a new monthly low, which in turn saw the Nikkei tumble another nearly 500 points. China didn't help either, where the Shanghai Composite also closed below 2000 wiping out a few weeks of gains on artificial hopes that the PBOC would step in with a bailout package, as attention turned to the reported announcement that an update of local government debt could double the size of China's non-performing loans, and what's worse, that the PBOC was ok with that. Asian negativity was offset by the European open, where fundamentals are irrelevant (especially on the one year anniversary of Draghi FX Advisors LLC "whatever it takes to buy the EURUSD" speech) and renewed M&A sentiment buoyed algos to generate enough buying momentum to send more momentum algos buying and so on. As for the US, futures are indicating weakness for the third day in a row but hardly anyone is fooled following two consecutive days of green closes on melt ups "from the lows": expect another rerun of the now traditional Friday ramp, where a 150 DJIA loss was wiped out during the day for a pre-programmed just green closing print.
No surprise in today's most important economic report: just as we predicted first thing this morning, "In keeping with the tradition of Baffle with BS, we expect the ISM to come in well above expectations to offset the major Chicago PMI disappointment." Just as expected, the headline June ISM just printed at 50.9, a beat of expectations of 50.5, and up from May's 49. And just to make sure everyone is completely baffled with unbelievable BS, while the New Orders number rose from 48.8 to 51.9, and Production (+4.8), Prices (+3), Inventories (+1.5), and Deliveries (+1.3), all rose, it was the time of Employment Index to drop from 50.1 to 48.7: the first sub-50 print since September 2009. In other words, just as every week/strong economic report is offset by a matchin strong/weak economic report a few days later, expect this Friday's NFP to come in blistering and to deny the ISM weak jobs number especially since Goldman is now warning of a "disappointment" to consensus (and with that put the Taper tantrum back front and center).
Following the Friday plunge in the ISM-advance reading Chicago PMI, it was a night of more global manufacturing data, which started off modestly better than expected with Japanese Tankan data, offset by a continuing decline in Chinese PMIs (which in a good old tradition expanded and contracted at the same time depending on whom one asked). Then off to Europe where we got the final print of the June PMI which continued the trend recent from both the flash and recent historical readings of improvement in the periphery, and deterioration in the core. At the individual level, Italy PMI rose to 49.1, on expectations of 47.8, up from 47.3; while Spain hit 50 for the first time in years, up from 48.1, with both highest since July and April 2011 respectively. In the core French PMI rose to a 16-month high of 48.4 from 48.3, however German PMI continued to disappoint slowing from 48.7, where it was expected to print, to 48.6. To the market all of the above spelled one thing: Risk On... at least until some Fed governor opens their mouth, or some US data comes in better than expected, thus making the taper probability higher.
A devastating 49.0 in April, a surge to 58.7 in May, and then a crash right back to 51.6 in June, far below the expectation of a 55.0, and just above the lowest economist forecast of 51.5. This was the biggest monthly crash in over 4 years. What's another name for this hilarious data series? Why the Baffle with BS Index of course, or Chicago PMI for short. What many saw as definitive proof of an industrial rennaissance in the May number (which only led to a huge ISM disappointment), will mean the economy stasis continues which should at least be good for the market. And since Baffle with BS must continue, look for the Mfg ISM, for which Chicago is a leading indicator, on Monday to be a solid beat. As for the PMI, fear not: it's the weather's fault.
Overnight newsflow (which nowadays has zero impact on markets which only care what Ben Bernanke had for dinner) started in Japan where factory orders were reported to have risen the most since December 2011, retail sales climbed, the unemployment rate rose modestly, consumer prices stayed flat compared to a year ago, however real spending plunged -1.6% significantly below the market consensus forecast for +1.3% yoy, marking the first yoy decline in five months. This suggests that households are cutting utility costs more so than the level of increase in prices. By contrast, real spending on clothing and footwear grew sharply by 6.9% yoy (+0.6% in April) marking positive growth for a fourth consecutive month. Simply said, the Japanese reflation continues to be limited by the lack of wage growth even as utility and energy prices are exploding and limiting the potential for core inflation across the board.