After a three-month surge to 5 year highs, beating expectations month-after-month, it seems surging mortgage rate and surging gas prices trump (at least for now) the all-time record high in stock prices. This is the first drop in 5 months, the first miss in 4 months but what is most worrisome for the apparent discounting mechanisms of the 'efficient' markets is the plunge in future expectations (after a 3 month surge of hope) even as the present situation continues to rise in survey respondent's minds. This is particularly worrisome in the employment outlook as those that see fewer jobs in the future rose and those that see more jobs in the future fell for the first time in 4 months.
While the market's eyes were fixed on the near record slide in Japanese Industrial Production (even as its ears glazed over the latest commentary rerun from Aso) which did however lead to a 1.53% jump in the PenNikkeiStock market on hope of more stimulus to get floundering Abenomics back on track, the most important news from the overnight session is that the PBOC's love affair with its own tapering may have come and gone after the central bank came, looked at the surge in 7 day market repo rates, and unwilling to risk another mid-June episode where SHIBOR exploded to the mid-25% range, for the first first time since February injected RMB17 billion through a 7-day reverse repo. The PBOC also announced it would cut the RRR in the earthquake-hit Lushan area. And with that the illusion of a firm and resolute PBOC is shattered, however it did result in a tiny 0.7% bounce in the SHCOMP.
After a slow start in the week, there is a substantial pick up with announcements from the FOMC, ECB and BOE (as well as monetary policy updates from the RBI, RBA, Israel, and Czech Republic) with the possibility, if not probability, of a Fed update on tapering expectations. On Wednesday we get the much expected wholesale GDP revision which will boost "growth data" all the way back to 1929 and is expected to push current GDP as much as 3% higher, and on Friday is the "most important NFP payroll number" (at least since the last one, and before the next one), where the consensus expects a +183K print, and 7.5% unemployment. All this while earnings season comes to a close.
Hopes that Kuroda would say something substantial, material and beneficial to the "three arrow" wealth effect (about Japan's sales tax) last night were promptly dashed when the BOJ head came, spoke, and went, with the USDJPY sliding to a new monthly low, which in turn saw the Nikkei tumble another nearly 500 points. China didn't help either, where the Shanghai Composite also closed below 2000 wiping out a few weeks of gains on artificial hopes that the PBOC would step in with a bailout package, as attention turned to the reported announcement that an update of local government debt could double the size of China's non-performing loans, and what's worse, that the PBOC was ok with that. Asian negativity was offset by the European open, where fundamentals are irrelevant (especially on the one year anniversary of Draghi FX Advisors LLC "whatever it takes to buy the EURUSD" speech) and renewed M&A sentiment buoyed algos to generate enough buying momentum to send more momentum algos buying and so on. As for the US, futures are indicating weakness for the third day in a row but hardly anyone is fooled following two consecutive days of green closes on melt ups "from the lows": expect another rerun of the now traditional Friday ramp, where a 150 DJIA loss was wiped out during the day for a pre-programmed just green closing print.
Despite consumer confidence at a six-year high, the latest AP survey of the real America shows a stunning four out of five U.S. adults struggle with joblessness, are near poverty, or rely on welfare for at least parts of their lives amid signs of deteriorating economic security and an elusive American dream. Hardship is particularly on the rise among whites, based on several measures. Pessimism among whites about their families' economic futures has climbed to the highest point since at least 1987.
Despite more than two-third of respondents expecting interest rates to rise in the year-ahead, and inflation to increase; and despite dramatically higher current mortgage rates and a surging gas price, consumers haven't been this 'happy' since July 2007. Unfortunatley for those expecting something more, it appears the slightly-better-than-expected print is not good enough to cause the market to plunge (in a good-is-bad "we've done our job" manner) and not bad enough to cause the market to soar (in a "we need moar animal spirits manner). Of course, we've seen this before (here and here) and it doesn't end well.
For the second consecutive day futures have drifted lower following a drubbing in the Nikkei which was down nearly 3% to just above 14K (time to start talking about the failure of Abenomics again despite National CPI posting the first positive print of 0.2% in forever and rising at the fastest pace in 5 years) and the Shanghai Composite which dropped to just above 2000 once again, after PBOC governor Zhou saying that China has big economic downward pressure and further reiterated prudent monetary policy will be pursued. This is despite Hilsenrath's latest puff piece which pushed the market into the green in yesterday's last hour of trading and despite initial optimism which saw stocks open higher following forecast-beating EU earnings gradually easing and heading into the North American open stocks are now little changed. It may be up to the WSJ mouhtpiece to provide today's 3pm catalyst to BTFATH, or else it will be up to the circular and HFT-early released UMichigan confidence index to surge/plunge in order to push stocks on any red flashing news is good news.
A new Nielson survey on global consumer confidence for the 2nd quarter this year reveals that confidence is improving around the world. It works out to 55% of people around the world that believe that we are currently going through a recession, which means that this is the lowest figure surveyed for over two years.
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- How big tech stays offline on tax (Reuters)
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- U.S. and UK fine high-speed trader for manipulation (Reuters)
- Key witness takes stand in SEC case against Goldman's Tourre (Reuters)
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- Bentley SUV gives £800m boost to UK car industry (FT)
In a day in which there was and will be virtually no A-list macro data (later we get the FHFA and Richmond Fed B-listers), the inevitable low volume centrally-planned levitation was attributed to news out of China, namely that Likonomics has set a hard (landing) floor of 7% for the GDP, and that just like other flourishing economies (Spain, Italy, California) China would invest in "monorails" to get rid of excess capacity, as well as a smattering of European M&A activity involving Telefonica Deutscheland and KPN. In Japan, the government upgraded its economic view for the 3rd straight month and also raised its view on capex for the 1st time in 4 months: who says the (negative Sharpe ratio) PenNikkeistock market is not the economy? All this led to a 2% rise in the Shanghai Composite - the most in 2 weeks - and the risk on sentiment also resulted into tighter credit spreads in Europe, with the iTraxx Crossover index falling 4bps and sr. financial also declining by around 4bps, with 5y CDS rates on Spanish lenders down by over 10bps. Naturally, US futures wouldn't be left far behind and took today's first major revenue miss of the day, that of DuPont, which beat EPS and naturally missed revenue estimates, as bullish and a signal to BTFATH (all time high). On the earnings side, in addition to Apple, other notable companies reporting include Lockheed Martin, Altria, AT&T and UPS.
With earnings season in full swing as some 20% of the S&P is expected to report, the quieter macro picture moves to the backburner especially with the Fed now silent for a long time. Looking at key central banks events, at the Turkey central bank meeting this week, Goldman expects that the bank is more likely to deliver a moderately hawkish “surprise” and hike the lending rate by 100bp to 7.5% (7.0% for primary dealers), and leave the key policy (1-week repo) and the borrowing rates unchanged at 4.5% and 3.5%, respectively. Among the other central bank meetings this week, benchmark rates are expected to remain unchanged in New Zealand, Philippines and Colombia, in line with consensus, while a 25bp cut is expected to be announced at the Hungary MPC meeting.
Don't look now but futures are up as usual, driven higher by both good and bad news. The biggest event of the weekend, if largely priced in, was the victory by Abe's coalition in the upper-house leading to the following seat breakdown. Of course, judging by the Yen and market reaction, which barely managed to eek out a gain: its first in four trading days, the event was largely of the "sell the news" type despite such bold proclamations: "Abe’s victory in the upper house is bullish for Japanese equities and the Japanese economy as a whole, as the removal of political headwinds bolsters the government’s ability to press forward with all ‘three arrows’ of its growth strategy," John Vail, Tokyo-based chief global strategist at Nikko Asset Management Co., which manages $162 billion, wrote in an e-mail. Elsewhere in Europe, Portugal bond yields have plunged by roughly 60 bps on news that the Portuguese President Silva has backed the centre-right coalition government, consequently ruling out snap polls. Well, what else is he going to do? This also comes on the heels of a Goldman report that said a second bailout for the country will be necessary and will likely be discussed in the fall. That too is bullish. What also was bullish in Europe apparently is that government debt hit a new record high of 92.2% of GDP. Remember: debt is wealth so just buy more futures. Looking forward to the US, the market will focus on the latest existing home sales data, the Chicago Fed activity index, as well as earnings report releases from McDonalds, Texas Instruments and Halliburton and a bunch of other companies that will beat EPS and miss revenues.
Claiming he wasn't afraid to let everyone in attendance know about "the real mess we're in," Federal Reserve chairman Ben Bernanke reportedly got drunk Tuesday and told everyone at Elwood's Corner Tavern about how absolutely fucked the U.S. economy actually is. Bernanke, who sources confirmed was "totally sloshed," arrived at the drinking establishment at approximately 5:30 p.m., ensconced himself upon a bar stool, and consumed several bottles of Miller High Life and a half-dozen shots of whiskey while loudly proclaiming to any patron who would listen that the economic outlook was "pretty goddamned awful if you want the God's honest truth." "Look, they don't want anyone except for the Washington, D.C. bigwigs to know how bad shit really is," said Bernanke, slurring his words as he spoke. "Mounting debt exacerbated—and not relieved—by unchecked consumption, spiraling interest rates, and the grim realities of an inevitable worldwide energy crisis are projected to leave our entire economy in the shitter for, like, a generation, man, I'm telling you."
Mortgage rates surging, check! Oil prices surging, check! Consumer Confidence surging, check? Equities surging, check? A funny thing happens when consumers face higher energy prices and mortgage rates - but, it seems, that this time is different (for now)...
It is becoming much more apparent that, as we have seen each year for the past three, the Fed's prediction of stronger economic growth by the end of 2013 will be revised lower from the current level of 2.5%. Either Bernanke was lying back then or is he lying now? The problem is that the Fed is literally caught in a "liquidity trap" from which there is currently no escape. If they reduce liquidity the markets tank, taking down consumer confidence and negatively impacting the economy. If they keep the liquidity going they will inflate an asset bubble which will ultimately burst destroying the financial markets and the economy. The choice is, ultimately, a lose-lose scenario even as the bullish case for equities persists. Of course, as Chuck Schumer stated to Bernanke at the last Humphrey-Hawkins testimony, "You are the only game in town."