In fitting with the pre-holiday theme, and the moribund liquidity theme of the past few months and years, there was little of note in the overnight session with few event catalysts to guide futures beside the topping out EURJPY. Chinese stocks closed a shade of red following news local banks might be coming under further scrutiny on their lending/accounting practices - the Chinese banking regulator has drafted rules restricting banks from using resale or repurchase agreements to move assets off their balance sheets as a way to sidestep loan-to-deposit ratios that constrain loan growth. The return of the nightly Japanese jawboning of the Yen did little to boost sentiment, as the Nikkei closed down 104 points to 15515. Japan has gotten to the point where merely talking a weaker Yen will no longer work, and the BOJ will actually have to do something - something which the ECB, whose currency is at a 4 year high against Japan, may not like.
Looking ahead at the week ahead, data watchers will be kept fairly occupied before Thanksgiving. Starting with today, we will see US pending home sales with the Treasury also conducting the first of 3 bond auctions this week starting with a $32 billion 2yr note sale later. We will get more housing data tomorrow with the release of housing starts, home prices as well as US consumer confidence. Durable goods, Chicago PMI, initial jobless claims and the final UofM Consumer Sentiment print for November are Wednesday’s highlights although we will also get the UK GDP report for Q3. US Equity and fixed income markets are closed on Thursday but US aside we will get the BoE financial stability report, German inflation, Spanish GDP and Chinese industrial profit stats. Expect market activity to remain subdued into Friday as it will be a half-day for US stocks and bond markets. As ever Black Friday sales will be carefully monitored for consumer spending trends. So a reasonably busy, holiday-shortened week for markets ahead of what will be another crucial payrolls number the following week.
Another day, another carry currency-driven futures melt-up to daily record highs (the all important EURJPY soared overnight on the return of the now standard overnight Japanese jawboning of the JPY which sent the EURJPY just shy of a new 4 year high of 138 overnight), and another attempt by the ECB to have its record high market cake, and eat a lower Euro too (recall DB's said the "pain threshold" for the EUR/USD exchange rate - the level at which further appreciation impairs competitiveness and economic recovery - is $1.79 for Germany, $1.24 for France, and $1.17 for Italy) this time with ECB's Hansson repeating the generic talking point that the ECB is technically ready for negative deposit rates. However, with the halflife on such "threats" now measured in the minutes, and soon seconds, the European central bank will have to come up with something more original and creative soon, especially since the EURJPY can't really rise much more without really crushing European trade further.
An overview of recent developments, include the political developments in the US Senate, that may weigh on the dollar in the days ahead.
This morning US futures are an unfamiliar shade of green, as the market is poised for its first red open in recent memory (then again the traditional EURJPY pre-open ramp is still to come). One of the reasons blamed for the lack of generic monetary euphoria is that China looked likely to buck the trend for more monetary policy support. New Premier Li Keqiang said in a speech published in full late on Monday that adding extra stimulus would be more difficult since printing new money would cause inflation. "His comments are different from what people were expecting. This is a shift from what he said earlier this year about bottom-line growth," said Hong Hao, chief strategist at Bank of Communications International. Asian shares struggled as a result slipping about 0.2 percent, though Japan's Nikkei stock average bounced off its lows and managed a 0.2 percent gain. However, in a world in which the monetary tsunami torch has to be passed every few months, this will hardly be seen as supportive of the "bad news is good news" paradigm we have seen for the past 5 years.
So much for the government shutdown - as one of the just released manufacturing ISM respondents so candidly put it, "The government shutdown has not had any impact on our business that I can determine, nor has it impacted any supplier shipments." And speaking of the ISM itself, it naturally rejected everything that the Markit PMI noted, and printed at 56.4, beating expectations of a 55.0 print, the 5th beat in a row, and the highest print since April 2011. Sadly, it was not 66.4 or 76.4 to at least partially "confirm" the Chicago ISM surge. So while virtually all ISM components rose, with exports spiking by 5 points to 57.0, it was the employment index that dipped yet again, from 55.4 to 53.2, the lowest since June, but in the New Normal who needs jobs when one has Schrodinger diffusion indices to confuse everyone on a daily basis. Either way, while stocks did not like yesterday's exploding Chicago PMI and dipped on fears of a December taper, today's 2 years ISM high is one of those good news is good news instances, and ES soars as usual.
If anyone needed confirmation that yesterday's soaring Chicago PMI data (to the highest since March 2011) was a typical "Made In Chicago" fabrication, then look no further than today's final MarkIt US Manufacturing PMI, which instead of soaring as its Chicago counterpart, tumbled from 52.8 to 51.8, the lowest print since October of 2012 as the report indicated "only modest improvement in business conditions", "output growth weakest for over four years", and "new orders increasing at the slowest pace since April." Then again, in the New Normal world in which data reports separated by 24 hours are expected to indicate diametrically opposite things, this is quite normal, and if nothing else, absolutely bullish. Why? Who knows, but cratering Manufacturing Output is surely beneficial to the stock market, if not the actual economy.
After a blistering October for stocks, drunk on yet another month of record liquidity by the cental planners, November's first overnight trading session has been quiet so far, with the highlight being the release of both official and HSBC China PMI data. The official manufacturing PMI rose to 51.4 in October from 51.1 in September. It managed to beat expectations of 51.2 and was also the highest reading in 18 months - since April 2012. October’s PMIs are historically lower than those for September, so the MoM uptick is considered a bit more impressive. The uptrend in October was also confirmed by the final HSBC manufacturing PMI which printed at 50.9 which is higher than the preliminary reading of 50.7 and September’s reading of 50.9. The Chinese data has helped put a floor on Asian equities overnight and S&P 500 futures are nudging higher (+0.15%). The key laggard are Japanese equities where the TOPIX (-1.1%) is weaker pressured by a number of industrials, ahead of a three day weekend. Electronics-maker Sony is down 12% after surprising the market with a profit downgrade with this impacting sentiment in Japanese equities.
Good news (Chicago PMI) was very bad news and sent stocks into freefall early on. Hedgers then appeared to lift their protection (sending VIX lower) and igniting a surge back to the highs in stocks, tagging the stops, and then stocks slumped to end October (among the best month in the year for most indices) with a 2-day losing streak (the first in over 3 weeks) but EU stocks outperformed. Stocks had been ignoring the "taper-on" trends in Bonds (7Y TSY +5bps on week), USD (+1.3% on week), and precious metals (-2% on the week), but into the close, volume picked up and equities tumbled. Silver and Gold were monkey-hammered lower (ending Oct +1% and-0.3% respectively). FX markets saw USD bid aggressively (though CAD strengthened against the greenback). Credit remains considerably less enthusiastic than stocks. An ugly close for stocks... (blamed on Israel for now)
If US consumers were miraculously supposed to regain all their confidence when the government reopened (even if companies completely ignored said shutdown according to the epic jump in the Chicago PMI - the biggest jump in 30 years), so far that has failed to happen based on the latest weekly Bloomberg consumer comfort index, which moments ago hit -37.6 down from -36.1 a week earlier, its lowest print since October 2012. With this drop the index has extended its five-week retreat that accelerated during the federal government’s partial shutdown and has slowed – but not stopped – in the two weeks since. Today the index is 21.3 points worse than its long-term average and 6.3 points worse than this year’s average. And what is more worrisome for The Fed, they have lost "the rich" as the comfort of the highest income survey participants has fallen to its lowest in 7 months - collapsing back to its 'normalized' divide with the 'poor'.
Sometimes you just have to laugh... Chicago, it would seem, felt not just no bad impact from the government shutdown (that so many asset managers and CEOs have proclaimed as the reason for any slowdown - and the need to avoid a Taper) but it roared to its highest since March 2011. This blew expectations away by the most on record (8-sigma). New orders are at the highest level since October 2004. October’s advance in the Barometer was its biggest monthly increase in over 30 years and only the third time in the past decade the Barometer has risen for four consecutive months. US equities are not happy about this apparent 'taper-on' improvement (and have dropped 8 points on the release) - though it appears seasonals are playing a major part.
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.
In the upcoming week, the key event is the US FOMC, though we and the consensus do not expect any key decisions to be taken. Though a strengthening of forward guidance is still possible, virtually nobody expects anything of import to be announced until the Dec meeting. In the upcoming week we also have five more central bank meetings in addition to the FOMC: Japan, New Zealand, India, Hungary and Israel. In Hungary we, in line with consensus, expect a 20bps cut to 3.40% in the policy rate. In India consensus expects a 25bps hike in the repo rate to 7.75%. On the data front, US IP, retail sales and pending home sales are worth a look, but the key release will be the ISM survey at the end of the week, together with manufacturing PMIs around the world. US consumer confidence is worth a look, given the potential impact from the recent fiscal tensions.
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.
While hardly as followed as the other two key US manufacturing indices, the Mfg ISM and the Chicago PMI, the recently introduced Markit PMI, which comes from the same firm that tracks manufacturing data across the rest of the world, shows that in addition to the sliding job picture in September (and soon October), one other aspect of the US economy that took a big hit in October was manufacturing. As Markit just reported, "the U.S. manufacturing sector grew at its weakest pace for a year in October... based on approximately 85% of usual monthly survey replies. The flash PMI index registered 51.1, down from 52.8 in September, and was consistent with only a modest rate of expansion." Not only was this the lowest headline print in one year, and should the drop continue it would be the worst print since 2009, not only was the New Order index had its weakest number in 6 months, but worst of all, the Output index, plunging from 55.3 to 49.5, had its first contrationary print since 2009!