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.
Lots of sellside squeals this morning following the epic bloodbath in China, where in addition to what we already covered hours ago, has seen at least five companies (China Development Bank, Shanghai ShenTong Metro, China Three Gorges Corp., Doosan Infracore China Co. and Chongqing Shipping Construction Development) delay or cancel bond offerings as the PBOC's admission of capital "misallocation" is slowly but surely freezing both bond and stock markets. And while the plunge was contained first to China, then to Asia, then to Europe (where the Spanish 10 Year once again surpassed 5% as expected following the carry trade unwind), with the arrival of bleary-eyed US traders the contagion is finally coming home. In a redux of last week, 10 Year yields are shooting up, hitting as high as 2.63% a few hours ago, while equity futures are now at the lows of the session. It could turn very ugly, very fast, especially if the Hamptons crowd were to actually read the stunning BIS annual report released on Sunday, which not even Hilsenrath explaining "what the BIS really meant" will do much to change the fact that the days of monetary Koolaid are ending.
"Recent bouts of positive correlation between equities, bonds and commodities suggest that the Fed’s stimulus inflated prices of financial assets, and removal of the stimulus could create a tail event in which prices of most of assets could go down. To reduce this risk, investors could diversify ‘safe haven’ assets away from treasuries and into other assets that are at lower risk in case of tapering. For instance, investors could increase allocations to equity index put options.... we think that the quick increase of net margin debt, and high ratio of margin debt to S&P 500 do point to an increased probability of a market correction and volatility increase in the second half of the year." - JPMorgan
All traders walking in today, have just one question in their minds: "will today be lucky 21?" or the 21st consecutive Tuesday in which the Dow Jones has closed green.
All else is irrelevant.
Worried that manipulated official data is the only thing one has to "predict" on a day to day basis in a world drenched with "Baffle with BS", where China expanding and contracting at the same time is perfectly normal, and where Chicago PMI soaring by an 8 sigma beat to multi year highs precedes by one day the lowest US manufacturing print in 4 years? Turns out that's not all - in addition to everything else, one should also realize that key market moving data continues to be disseminated ahead of its official release time to those who have the "funds" and the interest in trading on early leaks. Take today's key economic data point: the Manufacturing ISM. As Nanex shows, trading in SPY exploded at 09:59:59.985, which is 15 milliseconds before the ISM's Manufacturing number released at 10:00:00. Activity in the eMini (traded in Chicago), exploded at 09:59:59.992, which is 8 milliseconds before the news release, but 7 milliseconds after SPY. Surely someone decided to perform a massive headfake and like a plunging goaltender during a penalty kick just happened to guess the direction right. That, or the clock on the CQS tape is just a little off. Oh, and this is merely today's example of early distribution of data to those who have the means(and the funds) to trade on it. Everyone else - well, the saying involving a sucker, a poker table and confusion, is quite applicable right now...
So much for the Chicago PMI 8 Sigma renaissance. Moments ago the Manufacturing ISM came out and confirmed that all those "other" diffusion indices were correct, except for the "data" out of Chicago (yes, shocking). Printing at a contractionary 49.0, this was a drop from 50.7, well below expectations of 51.0 (and far below the cartoonish Joe Lavorgna's revised 53.0 forecast). More importantly, this was the worst ISM headline print since June 2009, the first sub-50 print since November 2012, while the New Orders of 48.8, was the worst since July 2012. Both Production and Backlogs tumbled by -4.9 and -5.0 to 48.6, and 48.0 respectively. In brief, of the 11 series tracked by the ISM, only 3 posted a reading over 50 in May. This compares to just 2 out of 11 that were below 50 in April. Oh well, so much for this recovery. But the good news for the market is that today is really bad news is really good news day, and stocks have soared as according to the vacuum tubes, the result means no taper. The farce must go on.
Sell in May and go away will be on every investor’s mind after Friday’s week performance. It’s always been when you sell that’s been the measure for this maxim to be effective. If so the high for SPY would have been May 21st at $167.17. Then there’s the reappearance of the Hindenburg Omen but that’s for another day’s discussion.
Succinctly summarizing the positive and negative news, data, and market events of the week...
Presented with little comment, aside to warn - beware the serial extrapolators...
- 550,000 SPY shares
- 10,000 June 2013 eMini futures contracts
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- 125 S&P 400 Midcap futures contracts
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- 10,000 10yr T-Note futures contracts
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- 5,000 Eurodollar futures contracts
- 750 Japanese Yen futures contracts
- 600 Euro futures contracts
So much for all the other diffusion indices, both around the world and in the US, telegraphing manufacturing contraction. Three minutes before its official release, the rumor was that the subscribers had seen a 58.7 print, on expectations of a 50.0 number, and up from 49.0 Sure enough, this is just what happened when the official number hit, leading the Chicago PMI to the highest print since March 2012: a 8 sigma beat to the consensus print and far higher than the biggest forecast. And while last time the plunge in the PMI was bullish for stocks as it meant no Tapering, today the beat is also bullish because it means QE is working, and as a result the stock market has wiped out all earlier losses. Looking at the report, backlogs, deliveries and employment all snapped out of sub 50 contraction, while production soared from 49.9 to a ridiculous 62.7. Even employment soared from 48.7 to 56.9. Amusingly, the only thing that dipped in April was Inventories, down from 40.6 to 40.4.
Everything was going so well in the overnight session, following some mixed Japanese data (stronger than expected production, inline inflation, weaker household spending) which kept the USDJPY 101 tractor beam engaged, and the market stable, until just before 2 am Eastern, when Tokyo professor Takatoshi Ito, formerly a deputy at the finance ministry to the BOJ's Kuroda, said overvaluation of the yen versus the dollar has been corrected, which led to a very unpleasant moment of gravity for the currency pair which somehow drives risk around the world based on what several millions Japanese housewives do in unison. The result was a slide to just 30 pips away from the key 100 support level, below which all hell breaks loose, Abenomics starts being unwound, hedge funds - short the yen and long the Nikkei - have no choice but to unwind once profitable positions, the wealth effect craters, and streams are generally crossed.
First, the important news: in a few hours the Fed will inject between $1.25-$1.75 billion into the stock market. More importantly, it is a Tuesday, which means that in order to not disturb a very technical pattern that will have held for 20 out of 20 Tuesdays in a row, the Dow Jones will close higher. Judging by the futures, this has been telegraphed far and wide: it is a Ben Bernanke risk-managed market, and everyone is a momentum monkey in it. In less relevant news, the underlying catalyst for the overnight rip higher in risk was the surge in the USDJPY, which left the gate at precisely Japan open time, and after languishing at the round number 101 support for several days, did not look back facilitated by what rumors said was a direct BOJ intervention via a Price Keeping Operation in which banks bought ETFs directly. This was catalyzed by the usual barrage of BOJ and FinMin individuals engaging in post-crash damage control and chattering from the usual script.