In the absence of major data releases, the focal point of the week for markets becomes the release of the minutes of the May FOMC meeting. The most notable change in the statement was the inclusion of the new language: “the Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.” In the May meeting minutes, the market will be looking for any clarification of the motivation behind this change as well as any evidence that the committee members may be becoming less comfortable with the unemployment rate threshold or more specific about tapering timelines and dates.
A quiet day unfolding with just Chicago Fed permadove on the wires today at 1pm, following some early pre-Japan market fireworks in the USDJPY and the silver complex, where a cascade of USDJPY margin calls, sent silver to its lowest in years as someone got carted out feet first following a forced liquidation. This however did not stop the Friday ramp higher in the USDJPY from sending the Nikkei225, in a delayed response, to a level surpassing the Dow Jones Industrial Average for the first time in years. Quiet, however, may be just how the traders at 72 Cummings Point Road like it just in case they can hear the paddy wagons approach, following news that things between the government and SAC Capital are turning from bad to worse and that Stevie Cohen, responsible for up to 10-15% of daily NYSE volume, may be testifying before a grand jury soon. The news itself sent S&P futures briefly lower when it hit last night, showing just how influential the CT hedge fund is for overall market liquidity in a world in which the bulk of market "volume" is algos collecting liquidity rebates and churning liquid stocks back and forth to one another.
Aside from light volume there’s no argument with the tape. It’s quite positive but much overbought. Earnings news is beginning to wane leaving less for bulls to respond to. Many previous reliable technical indicators are succumbing to all the money printing. Looking at those markets where QE is not taking place perhaps reveals the real market conditions.
In a day devoid of any A-grade economic data, the stop hunting GETCO USDJPY algos had no choice but to look forward to such reflexive C-grade indicators as the UMich Consumer Confidence index, where the polled "consumers" are confident if the market is up and the market is up if "consumers" are confident. Sure enough, the USDJPY literally exploded by over 50 pips and broke the 103 level (send the Yen derivative, the S&P500 spiking) when moments ago the UMich index posted a hilarious reading of 83.7, the highest since August 2007, up from 76.4, and smashing expectations of 77.9 by the most in... ever. Whether this was driven by a near record low in consumer savings, by the collapse in real wages, by the deteriorating Q1 retail results such as WalMart's showing consumers are out of cash, or if all this was irrelevant as everyone on the UMichigan rolodex was long Tesla is unknown. It just is what it is because in a world in which collapsing economic data leads to a record high "market", one buys first, buys second, then BTFD if there is D, and only then are questions asked.
Those hoping for a slew of negative news to push stocks much higher today will be disappointed in this largely catalyst-free day. So far today we have gotten only the ECB's weekly 3y LTRO announcement whereby seven banks will repay a total of €1.1 billion from both LTRO issues, as repayments slow to a trickle because the last thing the ECB, which was rumored to be inquiring banks if they can handle negative deposit rates earlier in the session, needs is even more balance sheet contraction. The biggest economic European economic data point was the EU construction output which contracted for a fifth consecutive month, dropping -1.7% compared to -0.3% previously, and tumbled 7.9% from a year before. Elsewhere, Spain announced trade data for March, which printed at yet another surplus of €0.63 billion, prompted not so much by soaring exports which rose a tiny 2% from a year ago to €20.3 billion but due to a collapse in imports of 15% to €19.7 billion - a further sign that the Spanish economy is truly contracting even if the ultimate accounting entry will be GDP positive. More importantly for Spain, the country reported a March bad loan ratio - which has been persistently underreproted - at 10.5% up from 10.4% in February. We will have more to say on why this is the latest and greatest ticking timebomb for the Eurozone shortly.
On the surface, Abenomics - the radical unlimited stimulus plan put in place by newly elected Japanese PM Shinzo Abe – appears to be working. The Nikkei is up 68% since July, 2012, the yen has weakened by 30% over the same time frame, and Japanese consumer confidence is up sharply to the highest levels in six years. The theory behind Abenomics is that the rising stock market will create capital, and the falling yen will make Japan’s export-based economy more competitive in global markets, while newly profitable companies will hire more workers. In order for Abenomics to work, four things have to happen (below). Don’t hold your breath. Japan is a bug in search of a windshield. Longer-term, Abenomics is a recipe for disaster - have no illusions about that. But short-term … that’s another matter entirely, and therein lies opportunity.
The U.S. stock market rally has recently passed its fourth anniversary after the terrifying lows of March 2009. During that time, massive and unconventional reflationary policy from the Federal Reserve has managed to lift the S&P 500 to new all-time highs. But perhaps even more improbably, it has finally (for now?) built a floor under U.S. residential real estate prices. This 'Less Bad' Recovery continues in other ways as well. Jobs have been created. Not good jobs. Not high paying jobs. Not full time jobs. But some rudimentary sets of tasks and responsibilities that could be called jobs. There has also been deleveraging. But here, too, the scale of debt reduction is nothing close to the unadjusted figures often touted in the media. Americans, and more generally, OECD citizens, remain highly burdened by debt. When combined with poor wage growth, this explains the continued suppressed demand so pervasive in developed nations. And of course, oil prices – as expressed through prices at the pump – remain stubbornly elevated and are likely to persist at their new elevated level. Combined, these factors have kept a lid on consumer confidence and make for a precarious disparity between the stock market and the real economy. Welcome to the Great Constraint - a growing failure to thrive.
There are a dozen significant economic indicators that are warning that the U.S. economy is heading into a recession. The Dow may have soared past the 15,000 mark, but the economic fundamentals are telling an entirely different story. If historical patterns hold up, the economy is heading for a very rocky stretch. But most average Americans are not that concerned with the performance of the stock market. They just want to be able to go to work, pay the bills and provide for their families. During the last recession, millions of Americans lost their jobs and millions of Americans lost their homes. If we have another major recession, that will happen again. Sadly, it appears that another major recession is quickly approaching. The following are 12 recession indicators that are flashing red...
Gluskin Sheff's David Rosenberg exclaims we are currently are witnessing the Potemkin rally (the phrase Potemkin villages was originally used to describe a fake village, built only to impress). The term, however, is now used, typically in politics and economics, to describe any construction (literal or figurative) built solely to deceive others into thinking that some situation is better than it really is. Ben Bernanke, recently proclaimed “The Hero” by Atlantic Magazine, is the “Wizard of Potemkin.” Since 2009 Bernanke has engage in massive monetary experiments. These experiments lead to future dislocations. There is no doubt that the Fed wants inflation. The problem is they may get more than they ask for. We are currently witnessing the slowest economic recovery of any post-WWII period. However, It is important to challenge your thought process. Read material that challenges your views. Here are David's rules...
The President will take questions from the White House reporters at 1015ET. Will he mention the equity market at all-time highs? The strength of the housing market? The 'rising' unemployment rate? The 'falling' macro economy?
Total collapse. That is the only way to explain what just happened with the Chicago PMI which imploded from 52.4, and printed at a contractionary 49: the first sub-50 headline print since September 2009. But that's not all: Deliveries, Prices Paid and Production all hit their lowest since 2009; Backlogs posted their tenth month of contraction in the past 12 months. And what's worst for the Department of Making Shit Up, Employment plunged from 551. to 48.7, its third month over month decline. Actually another way to phrase it: complete disaster. Obviously this number explains why S&P should have no problems crossing 1,600 today. Because for that other Department: of Propaganda and Creating money out of thin air, this means only one thing: the Fed is preparing to print ONE KROOGOL MORE!
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.
The final print for UMich Consumer Confidence beat expectations but that is about the best anyone can hope to glean from it. A slight improvement from the preliminary April data, the current and outlook economic indices both dropped for the first time this year and it has now been four months of no change year-over-year in this important sentiment indicator as today's measure of 'happiness' is exactly the same as that of April 2012. Perhaps US consumer are the most confident because their personal savings are now the lowest they have been in the past five years.
Confused about the latest disconnect between reality and propaganda, this time affecting the (foreclosure-stuffed) housing "recovery" which has become the only upside that the bulls can point to when demonstrating the effectiveness of QE now that the latest attempt at economic recovery has failed miserably both in the US and globally? Gluskin Sheff's David Rosenberg is here to clear any confusion.