Market indexes and recessions are two very different data series...
~ Doug Short
It seems like it was only Friday that Goldman's daily GDP forecast adjustment team revised its GDP lower. Oh wait, it was. Since it is another day ending in -y, here comes Hatzius' crack commando team with yet another downward revision.
When in doubt, baffle with bullshit. Just a day after the Chicago PMI posted its biggest collapse in years (not to mention the absolutely horrendous Durable Goods number), leading everyone to believe that the ISM, and Q3 GDP will be absolutely abysmal, here comes the Manufacturing ISM number, printing far above expectations of 49.7, and well above the last print of 49.6, and in fact posting its first increase since May of 2012. This means that the ISM to Chicago PMI gap is now the widest since September 2009. Perhaps the White House's Alan Krueger had run out of explanations for why the economy is collapsing into Q4, and finally made sure going forward all economic data will be better than expected. At least until the election of course. The biggest movers in the September ISM print: New Orders, Prices, and Employment, all of which posted numbers solidly in the 50+ range. Now we look forward to either an epic beat in the Services ISM next, or a complete collapse to continue treating everyone like mushrooms. In other news, construction spending plunged to -0.6% from -0.4%, on expectations of a +0.5% increase. But who cares: today housing is irrelevant as somehow the US manufacturing industry is improving, all other signs to the contrary be damned.
Bizarrely, and even after slapping my screens several times to make sure things were working, real opening levels in EGBs very quite simply FLAT. All flat! Haven’t seen that in ages!
Had to slap my screens again tonight, given the tons of “unchanged” data in EGBs. Have decorrelated from equities, as has the USD (closing about unchanged).
Cue Stagflationary Recession: Chicago PMI Huge Sub-50 Miss, Back To September 2009 Levels; Prices Paid SpikesSubmitted by Tyler Durden on 09/28/2012 08:57 -0500
QE1, QE2, Operation Twist 1, Operation Twist 2, a Fed balance sheet that is now expected to be $5 trillion in 2 years, and all we get is a lousy manufacturing economy that according to the Chicago PMI just dipped into contraction, or for all intents and purposes, recession, printing its first sub-50 print, 49.7 specifically, on expectations of a 52.8, and down from 53. This was the lowest since September 2009 and the biggest miss in 4 months. Specifically, the employment index came at a two and a half year low, New Orders, Backlogs and Deliveries had their 3 month moving averages at the lowest since Mid 2009, and Capital Equipment printed at a 17 month low. But not all hope is lost: at least prices paid soared for the third consecutive month to 63.2 from 57. Cue not just recession, but stagflationary recession. It also means that both the Manufacturing ISM and Q3 GDP will be a total disaster. Time to start pricing in QE X to be followed 24 hours later by QE X+1. The central bank cartel is starting to lose
The "mañana" approach to fiscal management, that Spain is known for, presented what is generally perceived as overly optimistic growth forecasts for 2013 and lacked details on structural reform resulted in another risk off session. As a result, Spanish stocks continued to underperform (IBEX seen lower by over 5% on the week), with 10y bond yield spread wider by around 12bps as market participants adjusted to higher risk premia. The state is due to sell 2s and 5s next week, which may also have contributed to higher yields. As a reminder, Moody’s review on Spain is set to end today, however there is a chance that the ratings agency may extend the review for another couple of months or wait until the stress test results are published to make an announcement. In other news, according to sources, Greece could return to its European partners for a Spanish-style rescue of its banking sector, as the country is looking to ease the burden via another writedown of its debts or a strong recapitalisation of its banks (no official response as yet). Going forward, the second half of the session sees the release of the latest PCE data, as well as the Chicago PMI report for the month of September.
Those confused by yesterday's rapid move higher in stocks, which fizzled by day's end, which was catalyzed by the non-event of the Spanish budget declaration which will prove to be a major disappointment as all such announcement are fated to be, can take solace in the following summary by DB's Jim Reid: "Yesterday's risk rally on the back of the 2013 budget announcement coincided with a trend seen over the last couple of years of rallies into month and quarter ends. We'll probably get a clearer picture of underlying sentiment by early next week with the new quarter starting, especially as it commences with a bang with the Global PMI numbers on Monday." In this vein, tonight's overnight sentiment showing weakness confirms yesterday's move was one which merely used Spain as a buying catalyst without reading anything into it. Because an even cursory read through shows major cracks. Sure enough the sellside readthroughs appeared this morning: "In our view the Spanish 2013 budget is based on a too optimistic GDP growth assumption" from Citi. Once again, the market shot first, and asks questions later, as the weakness in the futures confirms, EURUSD retracing all overnight gains, and Spain now 1.6% lower on this, as well as uncertainty of today's latest non-event - the local bank stress test vers 304.2b - whose results will be announce at noon NY time, and which just may find Bankia (and its Spiderman towel collection) is quite solvent once again.
Ray Dalio, founder and co-chief investment officer of Bridgewater Associates, L.P. and one of the most successful hedge fund managers of all time told Maria Bartiromo last week that he owns gold and that he sees no “sensible reason not to own gold”. The interview was part of the Council on Foreign Relations (CFR) Corporate Program's CEO Speaker Series, which provides a forum for leading global CEOs to share their priorities and insights before a high-level audience of wealthy and influential CFR members. The respected hedge fund manager suggested that a depression and not a recession was likely and warned of social unrest and the risk of radical politics as was seen with Hitler and the Nazis in the Depression of the 1930’s. Dalio spoke about how “gold is a currency” and when asked by Bartiromo “do you own gold?”, he smiled and said “Oh yeah, I do.” The admission elicited a laugh from the CFR audience. Dalio’s interview is important as it again indicates how slowly but surely gold is moving from a fringe asset of a few hard money advocates and risk averse individuals to a mainstream asset. Wealthier people and some of the wealthiest and most influential people in the world are slowly realising the importance of gold as financial insurance in an investment portfolio and as money. This will result in sizeable flows into the gold market in the coming months which should push prices above the inflation adjusted high of 1980 - $2,500/oz. The interview section where Dalio is asked about gold by an audience member begins in the 43rd minute and can be seen here.
After this morning's low volume stop-run to the highs (divergent from Spain's 10Y fulcrum security), we have gone nowhere during the day-session so far - even with a small miss on Chicago PMI and beat in Confidence. But with a few minutes to go until his big moment, markets are trading in a QE-ON mode in anticipation of Ben's big words (except FB -4%). Treasury yields down, USD down, Stocks Up, Gold Up, Oil Up. Primed for disappointment...
Weidmann rejected suggestions that he was isolated on the ECB Governing Council in having such reservations. "I hardly believe that I am the only one to get a stomach ache over this," he said. Alexander Dobrindt, a senior German politician who has been the Executive Secretary of the Christian Social Union of Bavaria since 2009, was more direct, saying Draghi risked passing into the history books as the "currency forger of Europe". A conservative ally of Merkel, Dobrindt echoed Bundesbank’s Weidmann that Greece should leave the currency bloc by next year. The comments show the huge divisions in Germany over the debt crisis now in its 3rd year and the understandable concerns of inflation and even hyperinflation. The Bundebank and senior politicians and allies of Merkel may thwart Mario Draghi’s big plans to do “whatever it takes” to solve Europe’s financial collapse. One way or another, the euro is certain to fall in value in the long term.
If there was one thing the market did not nead 24 hours ahead of the FOMC in the aftermath of the better than expected Case Shiller May print (yes, 2 months ago) it was a follow up beat by the Chicago PMI, as this would only make any further forceful QE tomorrow less than likely. Sure enough, this is just what happened, as the PMI printed better than expected rising from June's 33 month low, printing at 53.7 from 52.9 in June on expectations of a modest decline to 52.5. And so in a market in which everything continues to be driven by hope and prayer that Bernanke will wake up at just the right angle, Risk is once again suddenly OFF. If there was one saving grace it is that the Seasonally adjusted Employment index plunged from 60.4 to 53.3 (60.0 to 57.0 NSA) which is the lowest print since July 2011 which in turn brings it back to May 2010. This leaves hope that the NFP print on Friday will come negative. However, that will be too late for the August FOMC meeting. Oh well, there is always hope that in September the Fed's mind will change as long as some more horrible economic data comes between now and then.
Gold held steady above $1,620/oz on Monday, as investors wait for the central banks from Europe and the US to give definite signs on their plans for more QE. QE3 would be bullish for gold and increase the inflation outlook which would benefit gold as a hedge against the rising prices. The public is now interested in the yellow metal again, with investors adding to their physical positions. Market watchers will take their clues from the data out this week. More investors are trading euro gold than ever before and using euro gold as the barometer of internal health of the gold market right now, says analyst Edel Tully of UBS. Euro gold is up 9% this year versus US dollar gold's +3% performance. The markets await the Fed’s move. Certainly some form of QE3 is inevitable whether it is announced this week or at the next FOMC meeting scheduled in early September
While it is unclear today if good news is bad, bad news is good, or if economic news even matters when all that matters is how much money central planners are willing to release into the market, the just released Chicago PMI did post a modest rebound after the near record May plunge. Printing at 52.9, the number was modestly better than May's 52.7, and higher than expectations of 52.3. The question then is whether this is good or bad for hopes of more NEW QE?With 8 of 11 respondents clearly noting that business is slowing down as inventories are rising, those who are concerned no more easing will come this year can likely breathe a sigh of relief. And while most of the indices were more or less in line, the forward looking spread between backlogs and inventories (indicative of future business demand) is the highest it has been since December 2008. What happens when one has too much inventory that can not be sold? Ask NKE longs this morning.
Goldman recaps the past tumultuous week, and looks at events in the next 7 days, of which the key feature will be the next "latest and greatest" and most disappointing European summit on Thursday and Friday, where not even Greece is going any longer, and which not even the most resolute Europhiles expect to resolve anything: "The key event of next week is the EU summit. The latest European Economics Analyst details our expectations. In brief we expect to see finalization of the much-anticipated growth compact, involving financing for infrastructure investment and a restatement of the agenda for structural reform. We also expect announcement of a plan for ‘banking union’ in the Euro area, even if, owing to unresolved political differences, details are likely to remain sketchy on key issues—notably on how the implicit cost of providing fiscal backing for the Euro area banking system will be shared across countries."