While all eyes and ears will conveniently and expectedly be on the Fed announcement and press conference in a few hours, the real action continues to take place in China, where the liquidity crunch is becoming unbearable for the local banks (and will only get worse the longer Bernanke and Kuroda keep their hot money policies). The CNY benchmark money-market one-week repo rate was 138bp higher overnight to a 2 year high of 8.15%. The 7 day Interest-Rate swap rose for a record 13th day in a row jumping +10 bps to 4.08%, the highest since September 2011. China sold 10 Year bonds at a 3.50% yield, above the 3.47% expected, and at a bid to cover of 1.43 which was the lowest since August 2012. Moody’s commented that local government financing vehicles (LGFVs) pose significant risks to Chinese banks. LGFVs accounted for 14% of loan portfolios at end-2012 according to Moody’s.
"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
Not so long ago, the Congressional Budget Office (CBO) said it expected the U.S. government to register a budget deficit in the current fiscal year of $642 billion. But hold on a minute... The budget deficit so far (as of May 31, 2013) has already hit $626.3 billion, and we still have four more months to go in the government’s current fiscal year! The U.S. has been the family that spends more than it earns for many years now. In the short term, spending more than one takes in can work (especially if the Fed just prints new money and gives it to the government to pay its bills). But in the long term, if fundamental changes are not made to the government’s spending habits, financial chaos just starts all over again. Posting a budget deficit year after year is not sustainable. The debt-infested eurozone nations did very much the same; they borrowed to spend. Look where they are now.
In the week ahead, we get the usual middle-of-the-month batch of early business surveys, including the New York Empire, Philly Fed and Eurozone Flash PMIs. The second key focus will be a number of important monetary policy meetings, including the FOMC, as well as the Swiss, Norwegian Turkish and Indian policy decisions. The latter two are particularly interesting in the light of the recent EM weakness. The main event this weak will be the FOMC meeting after the recent market focus on the timing of tapering of the QE3 program. Swings in bond markets related to the FOMC meeting could be the primary source of FX volatility this week.
Thursdays may be the new Tuesdays (if only this week), but so far Fridays are still just Fridays, and no mysterious overnight levitation is here to open the market 0.5% higher. The Nikkei 225 retraced a fraction of Thursday’s losses overnight as the positive close on Wall Street and a dovish interpretation of Hilsenrath’s WSJ piece yesterday allowed the Japanese indices to recover from the worst levels of the week. USD/JPY has pared Thursday’s bounce and trades lower as the Bank of Japan’s minutes showed one member of the board proposing the advantages of limiting the bank’s QQE program to just two years in order to avoid financial imbalances. Overnight in China, as we warned yesterday, the liquidity situation got even worse, when the PBOC's attempt to drain liquidity failed to sell some 30% of the planned 15 billion yuan in 273-day bills (more on this shortly), leaving the banks screaming Uncle and on the verge of a full-blown liquidity crisis: we expect rumors, and news, of more banks failing to roll over overnight liquidity to hit the tape shortly.
We showed yesterday the truly dreadful state of this economic recovery had one odd bright (green) spot, US auto production (and sales). While cash-for-clunkers started it, and easy money from the Fed expanded it (via credit for an ever-growing cohort of subprime borrowers), the car companies have now reached back into the bag of old tricks that blew them up before - incentives in May jumped to 8% of market value - or almost $2,500 per vehicle - the highest in over 2 years. If things are going so well in this 'recovery' why are the car makers forced to squeeze margin for volume... The problem, as BusinessWeek reports, is that increasingly rich incentives aren't moving the needle much on sales.
Japan goes to bed with another absolutely ridiculously volatile session in the books following a 5%, or 637 point move higher in the PenNIKKEIstock Market closing at over 13514, which if taking the futures action going heading to Sunday night into account was nearly 1000 points. With volatility like this who needs a central bank with price stability as its primary mandate. The driver, as usual, was the USDJPY, which moved several hundred pips on delayed reaction from Friday's NFP data as well as on a variety of upward historical revisions to Japanece economic data, but not the trade deficit, which came at the third highest and which continues to elude Abenomics. Fear not: one day soon consumers will just say no to Samsung TVs and buy Sony, or so the thinking goes. erhaps the most interesting news out of Asia was the spreading of FX vol tremors to a new participant India, which is the latest entrant into the currency wars, even if involuntarily, where the Rupee plunged to 58, the lowest ever against the dollar.
Looks like the sun has gone behind the clouds in China for a bit! Not only are the solar panels creating friction between China and the EU, but now it turns out that last month saw Chinese export growth unexpectedly decrease.
The uncertainty about when the Fed will begin tapering its programme of asset purchases has increased volatility, both pushing and pulling on global financial markets. “at this juncture, the markets are more concerned about tapering than about weak [US and global] growth,” says MIG Bank’s Chief Economist, Luciano Jannelli.
It never ceases to amaze that we vote people into positions. Those people that we have voted in elect in turn (or just go ahead and appoint without an election, making it all look very transparent) other people who are not as important but who will have the possibility of choosing (apparently in an “open, merit-based, and transparent manner”) someone who will be more important than they are, but less important than the first person that is in the voting/appointment chain.
History may not repeat but it certainly rhymes and when it comes to the animal spirits of human fear and greed, nowhere is that more evident than the 'surveys' of confidence that US citizens have undertaken for thelast 30 years. As the following two charts show, while many are exuberant at the rise in confidence of late, it is a pattern we have seen play out twice before - and both previous times - it did not end well...
Back on Monday, following the huge miss in the Manufacturing ISM, in collaboration with Nanex, we exposed yet another instance of blatant headline data frontrunning in "15 Milliseconds Of HFT Fame: Watch Today's Early Leak Of The ISM Print" where we showed aggressive trading amounting to tens of millions in notional contracts ahead of the 10am release of the key economic indicator. We assumed that just like every other lament about a market that is front-run by those "who have the means", manipulated (by the Fed of course - remember when that was just a conspiracy theory: good times) and simply broken, it would disappear in the ether forever. After all: why bring attention to facts when hopium is sufficient for the E-Trade baby to retire rich and famous before it has hit 2. We were delighted to learn that CNBC's Eamon Javers picked up the torch and actually did some further investigating, which in turn led to an actual admission out of Reuters that it "inadvertently" sent out the data to "a select group of high frequency traders, many of whom immediately traded on the information before it was available to the wider market, CNBC has learned." Inadvertently? The humor just never stops.
The airwaves are full of stories of economic recovery. One trumpeted recently has been the rapid recovery in housing, at least as measured in prices. The problem is, a good portion of the rebound in house prices in many markets has less to do with renewed optimism, new jobs, and rising wages, and more to do with big money investors fueled by the ultra-cheap money policies of the Fed. It seems entirely wrong that the Fed bailed out big banks and made money excessively cheap for institutions, and that this is being used to price ordinary people out of the housing market. Said another way, the Fed prints fake money out of thin air, and some companies use that same money to buy real things like houses and then rent them out to real people trying to live real lives. At the same time, we are also beginning to see the very same hedge funds that have re-inflated these prices slink out of the market now that the party is kicking into higher gear – all while new buyers are increasingly having to abandon prudence to buy into markets where the fundamentals simply aren't there to merit it. Didn't we just learn a few short years ago how this all ends?
Consumer confidence in the US stands at 76.2 in May 2013 (1985=100). That’s an increase from 58.4 in January. The Conference Board’s figures show that things have not looked so good for months. Things seem to be looking up. But, is the US consumer right to believe in the market and that the economy is getting better and the medicine is working?
This is no time to be complacent. Massive economic problems are erupting all over the globe, but most people seem to believe that everything is going to be just fine. In fact, a whole bunch of recent polls and surveys show that the American people are starting to feel much better about how the U.S. economy is performing. Unfortunately, the false prosperity that we are currently enjoying is not going to last much longer. Unfortunately, the majority appear to be purposely ignoring the economic horror that is breaking out all over the globe.