The weakness in economic data (not to be confused with the centrally-planned anachronism known as the "markets") started overnight when despite a surge in Japanese consumer spending (up 5.2% on expectations of 1.6%, the most in nine years) by those with access to the stock market and mostly of the "richer" variety, did not quite jive with a miss in retail sales, which actually missed estimates of dropping "only" -0.8%, instead declining -1.4%. As the FT reported what we said five months ago, "Four-fifths of Japanese households have never held any securities, and 88 per cent have never invested in a mutual fund, according to a survey last year by the Japan Securities Dealers Association." In other words any transient strength will be on the back of the Japanese "1%" - those where the "wealth effect" has had an impact and whose stock gains have offset the impact of non-core inflation. In other words, once the Yen's impact on the Nikkei225 tapers off (which means the USDJPY stops soaring), that will be it for even the transitory effects of Abenomics. Confirming this was Japanese Industrial production which also missed, rising by only 0.2%, on expectations of a 0.4% increase. But the biggest news of the night was European inflation data: the April Eurozone CPI reading at 1.2% on expectations of a 1.6% number, and down from 1.7%, which has now pretty much convinced all the analysts that a 25 bps cut in the ECB refi rate, if not deposit, is now merely a formality and will be announced following a unanimous decision.
The week ahead will be driven by the heavy end-of-month data schedule. In addition to the usual key releases like ISM and payrolls and ECB meeting, this week we also get an FOMC meeting - though it will hardly see much more than a nod to the weaker activity data of late. For the ECB meeting a full refi but not a deposit rate cut are priced now. Outside the FOMC and the ECB meeting there will be focus on the RBI meeting in India, with a 25bp cut priced in response to lower inflation numbers recently.
With China and Japan markets closed overnight, activity has been just above zero especially in the critical USDJPY carry, so it was up to Europe to provide this morning's opening salvo. Which naturally meant to ignore the traditionally ugly European economic news such as the April Eurozone Economic Confidence which tumbled from a revised 90.1 to 88.6, missing expectations of 89.3, coupled with a miss in the Business Climate Indicator (-0.93, vs Exp. -0.91), Industrial Confidence (-13.8, Exp. -13.5), and Services Confidence (-11.1, Exp. -7.1), or that the Euroarea household savings rates dropped to a record low 12.2%, as Europeans and Americans race who can be completely savings free first, and focus on what has already been largely priced in such as the new pseudo-technocrat coalition government led by Letta. The result of the latter was a €6 billion 5 and 10 year bond auction in Italy, pricing at 2.84% and 3.94% respectively, both coming in the lowest since October 2010. More frightening is that the Italian 10 year is now just 60 bps away from its all time lows as the ongoing central bank liquidity tsunami lifts all yielding pieces of paper, and the global carry trade goes more ballistic than ever.
Non-Manufacturing ISM Joins All Other Economic Misses, Prints At Lowest Since August, Biggest Miss In A YearSubmitted by Tyler Durden on 04/03/2013 10:14 -0400
Spot the common thread: Chicago PMI, manufacturing ISM, ADP and now Non-manufacturing ISM. If you said all big misses, give yourself a pat on the back. Because in the New Normal, the recovery apparently goes backward and downward especially when funded by what is now some $400 billion in QEternity. Despite expectations of a modest decline from 56.0 in February to just 55.5, the March Services ISM dropped to 54.4, the lowest since August, and the biggest miss in one year, with the critical New Orders components declining by 3.6 to 54.6, Employment down by 3.9 to 53.3 - the lowest since November, and Exports down 4 with imports up 5 surely doing miracles for GDP. Why the big miss? Three reasons: the post Sandy rebuilding effort is over; the abnormally strong winter seasonal adjustments have phased out and now is the time to pay the piper, and of course, the complete collapse in global trade as we have been hammering for the past year, now that Europe is in the worst depression since the 19th century. But don't worry: there is a POMO for that, and for everything else to give the impression that just because the Bad Bank formerly known as the Fed will onboard every piece of toxic garbage that is not nailed down, one can safely ignore reality for ever and ever.
One of the hallmarks of the ongoing European economic depression has been the complete implosion in the continent's automotive sales (here and here) and as Reuters summarized last week, there is little hope of a rebound for a long, long time. Curiously, where Europe has seen complete devastation, the US has been surprisingly resilient, and even when factoring in for such traditional gimmicks as channel stuffing, performed most notoriously by GM, which in March had the second highest amount of cars parked on dealer lots in its post-bankruptcy history, car sales have been rather brisk which in turn has allowed the US to report manufacturing numbers which, until the recent PMI and ISM data, were better than expected. One does, wonder, however, how much of a factor for this has been the forward demand-pull impact of Hurricane Sandy in late 2012, when as a result of tens of thousands of cars being totaled in tri-state area flooding, consumers scrambled to car lots to buy new autos. Well, we may have found the reason for the recent disappointing performance in both the Chicago PMI and the Manufacturing ISM - the positive effect from Sandy is finally fading, as today's domestic car sales show, which posted a surprising decline in March, especially in non-Trucks which dipped to the lowest since October 2013, and the first miss in total light vehicle sales SAAR since October.
Typically, when the ISM-leading Chicago PMI has a horrible print as it did last week, the subsequent ISM response in a "baffle with BS" centrally planned regime is one of a stunning beat just to make sure all vacuum tubes are kept on their binary toes, and the bad news is good news, good news is better news meme continues propagating. Not this time: moments ago, the March ISM printed at 51.3, the biggest miss to expectations (of 54.0) in 13 months, in fact below the lowest estimate, driven by a collapse in New Orders which tumbled from 57.8 to 51.4, as the rapid deceleration in the US economy is confirmed in virtually every recent metric. The good news, and what will be used to spin the market back into green following its epic 0.2% selloff on the news, is that the Employment Index rose from 52.6 to 54.2, the highest since June 2012. Elsewhere, the 1.2% increase in construction spending came in better than estimated... on a seasonally adjusted basis. Unadjusted it had its biggest drop since July 2011 but who cares: we all live in a seasonally-adjusted "reality" in which only the daily record S&P prints matter. And now, with yet another economic miss in tow, we resume your regularly scheduled no-volume Federal Reserve mandated "stock market" levitation.
Summary of key US events in the week ahead.
Succinctly summarizing the positive and negative news, data, and market events of the week...
As the holiday weekend starts and quarter ends, what better time is there to go out on a new S&P 500 Index high? The new high was in the cards.
One thing bulls should worry about is a report that pension plans may rebalance as much as $29-35 billion out of stocks to bonds and other assets with the quarter end. We’ll see how that works this coming week.
In what may be a stunning development, today the market may actually respond to an adverse piece of economic news by going lower. The news, in this case was the February Chicago PMI which tumbled from 56.8 to 52.4, the lowest since December and far below expectations of a 56.5 print - the biggest miss in 11 months. This was driven by a plunge in New Orders which tumbled from 60.2 to 53.0, the most since May 2011, although virtually every other components was ugly: Production posted the weakest print since September 2009, Order backlogs had its ninth month of contraction in the last year, Inventories had their 4th contraction in the last six months, Supplier Deliveries were the longest in 15 months, and so on. Ironically, only Employment was relatively normal dropping a small 0.6 from 55.7 to 55.1. And for those claiming there is a housing recovery, we present this excerpt from one of the respondents: "a company we buy steel from, they also pre-cut steel for new home construction, back in 2007 they shipped 110 rig packages per week, today they ship 2 rig packages per week, and for carpenters, for one employed there are 15 unemployed." Housing recovery, sure. How about unleashing the millions and millions in shadow units either entering or exiting the jammed foreclosure pipeline, where millions live mortgage free just to avoid an avalanche of selling? Let's see what recovery you have then.
The BTFD mantra is alive and well in a market, where futures overnight briefly dipped to a low of -0.5% only to be set to open at record high, following the biggest one day drubbing in China in months, where the Shanghai Composite closed -2.82% after new rules were issued by the Chinese banking regulator to limit the expansion and improve the transparency of so-called “wealth management products”. The products, which are marketed as higher yielding alternatives to bank deposits, are often used to fund risky projects including property developments, short-term corporate lines of credit or for speculative purchases of commodities and have been identified as contributing to the rise of shadow-banking in China’s financial system. As Deutsche reports, Fitch estimates the total amount of outstanding wealth-management products was around 13 trillion yuan at the end of last year—equal to about 15% of total banking-system deposits. Japanese equities were also weaker overnight (Nikkei –1.3%) and the yen is 0.3% firmer against the dollar after BoJ Governor Kuroda told parliament that he has no intention of buying foreign bonds because doing so could be seen as currency intervention. Finally, South Korea informally entered the currency wars after it slashed its GDP forecast from 3% to mid-2%, announcing it would use "interest rates" to boost growth, which naturally means use of monetary means and directly challenging the BOJ.
While the news flow is dominated by Cyprus, it will be important to not lose sight of the developments in Italy, where we will watch the steps taken towards forming a government. The key release this week is likely to be US consumer confidence. Keep a watchful eye on the health of the consumer in the US after the tax rises in January. So far, household optimism and demand has held up better than expected. The IP data from Taiwan, Singapore, Korea, Thailand, Japan will provide a useful gauge on activity in the region and what it reflects about global activity, however Chinese New Year effects will need to be accounted for in the process.
If the new year started off with a bang, March is setting up to be quite a whimper. In the first news overnight, we got the "other" official Chinese PMI, which as we had predicted (recall from our first China PMI analysis that "it is quite likely that the official February print will be just as weak if not more") dropped: while the HSBC PMI dropped to 50.4, the official number declined even more to just barely expansionary or 50.1, below expectations of a 50.5 print, and the lowest print in five months. This was to be expected: Chinese real-estate inflation is still as persistent as ever, and the government is telegraphing to the world's central banks to back off on the hot money. One country, however, that did not have much hot money issues was Japan, where CPI declined -0.3% in January compared to -0.1% in December, while headline Tokyo February data showed an even bigger -0.9% drop down from a revised -0.5% in January. Considering the ongoing surge in energy prices and the imminent surge on wheat-related food prices, this data is highly suspect. Then out of Europe, we got another bunch of PMIs and while French and Germany posted tiny beats (43.9 vs Exp. 43.6, and 50.3 vs 50.1), with Germany retail sales also beating solidly to cement the impression that Germany is doing ok once more, it was Italy's turn to disappoint, with its PMI missing expectations of a 47.5 print, instead sliding from 47.8 to 45.8. But even worse was the Italian January unemployment rate which rose from 11.3% to 11.7%, the highest on record, while youth unemployment soared from 37.1% to 38.7%: also the highest on record, and proof that in Europe nothing at all is fixed, which will be further confirmed once today's LTRO repayment shows that banks have no desire to part with the ECB's cash contrary to optimistic expectations.
The Chinese PMI may be slowing down (first HSBC, official one coming out soon), but why bother when according to MarkIt it is now the US' turn to carry the torch of economic growth, reality notwithstanding. As the just released Chicago PMI indicated, in February the broad index rose to 56.8, higher by 1.2 points and beating expectations of a 54.0 print. It is only logical that with the rest of the world in contraction mode, and China about to enter, that the US would have the highest print in 11 months (or Q1 2012, when US GDP was just a tad higher). Or not. Remember: it is all about playing along the script that always, at some place, there is at least some growth taking place. That said, while last month cojoined PMI and Mfg ISM were flipped, as has happened nearly every month in the past year to keep everyone baffled with BS, today's PMI beat likely means that the Manufacturing ISM will be a miss, which according to GETCO's algos will be just as positive for stocks, as today's beat.
It has been yet another quiet overnight session, devoid of the usual EURUSD ramp, and thus ES, at the Europe open (although it is never too late), which has seen the Shangai Composite finally post a meaningful rise up 2.26%, followed by some unremarkable European macro data as Eurozone CPI came as expected at 2.0%, and German unemployment just a tad better, at -3K, with consensus looking for 0K. Italy continues to be the wildcard, with little clarity on just who the now expected grand coalition will consist of. According to Newedge's Jamal Meliani, a base case scenario of Bersani/Berlusconi coalition may see a relief rally, tightening 10Y BTP/bund spread toward 300bps. A coalition would maintain current fiscal agenda and won’t implement any major reforms with fresh elections being called within a year. A Bersani/Grillo coalition is least likely, may slow reforms which would see 10Y BTP/bund spreads widening to 375bps. Of course, everything is speculation now, with Grillo saying no to any coalition, and moments ago a PD official saying against a broad coalition. But at least the market has it all priced in already - for more see Italy gridlock deepens as Europe watches nervously.