Little bit of this and that - the economy, Michael Hudson on the warfare engulfing Europe, a Santa Clause rally (anyway?)
- Merkel, Sarkozy Unite as S&P Issues Warning (Bloomberg)
- Austerity package key to Italy averting collapse (FT)
- GOP Rejects Democrats' New Payroll-Tax Bill (WSJ)
- Europe can get out of crisis (China Daily)
- Belgium, at Last, Forms Government (WSJ)
- Geithner to Add US Weight to Euro Zone Talks (CNBC)
- Asia Faces ‘Much Greater’ Global Risks: ADB Says (Bloomberg)
- Understanding sectoral balances for the UK (FT)
Given the better-than-expected ISM print earlier, one could be forgiven for believing that the US is just fine thank you very much. Our earlier discussion of the dispersion in the ISM sub-indices, and yesterday's discussion of the PMI 'catch-up' nature of the very recent pre-holiday seasonal orders given the unusual slump in October may weaken the decoupling view but strategists will extrapolate trends as normal. Whether you believe in tooth-fairies or decoupling, Goldman's Global Leading Indicator continues to accelerate downward and moved into negative territory for the first time since August 2009. Amid a broad deterioration in components their outlook for global growth remains soft, even as the US export miracle remains alive and well.
The somewhat incredible rise in consumer confidence this morning is the largest absolute jump since April 2003 from prior revised 40.9 to 56. On a percentage basis, only the April 2009 reversion was higher as this represents a 4 standard deviation elevation from its long-term mean. Of course, its all about expectations, as the sub-index jumped from 50 to 67.8 - which is still only back to July 2011 levels.
House prices, consumer confidence and comments from a whopping five Fed officials.
- Welcome LSAP: Dealers See Fed Buying $545B Mortgage Bonds (Bloomberg)
- And more central planning: Central Banks Ease Most Since 2009 to Avert Contagion (Bloomberg)
- Italy’s PM in austerity race, IMF denies in aid talks (Reuters)
- OECD Cuts Growth Forecasts, Blames Euro Crisis (Bloomberg)
- Thanksgiving Weekend Sales Set Record (Bloomberg) - we give this story one week before the truth comes out
- China Eyes European Assets (Reuters)
- US Urges Speedier Action on Debt Plight (WSJ)
- Chinese Profit Growth Slowing as Real-Estate Curbs Bite (Bloomberg)
- China Vice Premier Says Property Curbs to Stay, Xinhua Says (Bloomberg)
By now the broader population has been inundated with reports of what a stunning retail experience Black Friday was. And for those who haven't just head over to CNBC: "Sales rose an estimated 6.6 percent to a record $11.4 billion on Black Friday, typically the busiest shopping day of the year for Americans, while the traffic at stores rose 5.1 percent, according to ShopperTrak. The day's sales growth was the strongest percentage gain since 2007, when sales rose 8.3 percent on the day after Thanksgiving, said Ed Marcheselli, chief marketing officer at ShopperTrak, which monitors retail traffic." This is happening despite the savings rate recently dropping to pre-Depressionary level, and despite revolving consumer credit (as in not cars and colleges), continuing to contract. That there is more than enough fine print will be largely irrelevant for the mainstream media which will naturally trumpet this as the next best thing to the S&P actually rising for once: "More than 120 stores at the Mall of America opened at midnight. The crowd at that point was about 15,000 people. Mall operators estimated that it was the largest crowd ever at the mall, which is big enough to hold seven Yankee Stadiums. While eager shoppers emerged from stores around the country lugging big-screen TVs and bags full of video games and toys, it was far from certain that people will pull out their wallets for much more than the best deals this year. Shoppers with limited budgets started using layaway at chains such as Walmart as early as October. Retail shares fell more than the overall market on Friday. "Americans are still worried about jobs, still worried about the economy," said Mike Thielmann, group executive vice president at J.C. Penney, who noted that shoppers were buying gifts and for themselves, and said jewelry was selling well." Yet what really caught our attention was the Retail Group comparison of this "record" black Friday Weekend. From Bloomberg: 'RETAIL GROUP SAYS SECOND-BEST BLACK FRIDAY WEEKEND WAS IN 2008." As a reminder, Thanksgiving 2008 happened just after a nearly 400 point plunge in the S&P in two months as can be seen in the chart below. Which begs the question: with the world on the verge every single day once again, is it a coincidence that people spent more than they did only compared to 2008 when the world was once again ending. In other words, did Americans really spend "like there is no tomorrow" (more so than ever that is)... and what happens when the bill (because there is no doubt the purchasing was entirely on credit) is in the mailbox?
Risk markets are losing their patience. The Eurozone situation is approaching a major climax. This is by far the most important story to follow in the coming days and weeks. U.S. Economic data has been quite encouraging and the economy remains muddling along. If Europe took care of business quickly, global stock markets would rally sharply. The S&P 500 could possibly make a run at the bull market highs. Unfortunately, there is a major ongoing political crisis in the region. There are 3 options. Still, a Eurozone blowup would undoubtably sink the U.S. recovery. The ball's in Europe's court and they need to take action. If they act now, it may still be on time to avert a Chinese hard-landing. The bulls would end up as winners and risk assets would make a comeback. It has really all come down to this binary variable in the short-term. Government officials wanted Globalization, well they've got it.
As America prepares to spend its meager savings (which today were reported to have increased modestly from 4 year lows of 3.3% to 3.5%) and dip even more in debt on yet another epic shopping exodus which begins in just over 24 hours and continues through the end of the year, whereby people are somehow once again fooled into believing they "save money" by "spending money", those with a more pragmatic eye may wonder if this will be the weakest holiday shopping season in a decade, if the economy indeed mimics the stock market (the opposite, not so much), and whether it is now time to finally short consumer discretionary stocks with impunity. Goldman's Zach Pandl answers this question and more with his "Q&A on Holiday Shopping." To wit: "The US consumer looks mixed heading into the holiday season. On the one hand, growth in consumer activity slowed significantly this year. On the other hand, the most recent spending numbers have shown an incremental improvement. In addition, job growth has been holding up, which should underpin spending. Retail industry groups expect year-over-year growth in holiday sales of 2-3%, down from a 4-5% increase last year. The GS/ICSC 2011 Holiday Spending Intentions Survey also seems consistent with slightly slower growth than last year." Naturally, this being Goldman, if there is a way to take the other side of the bet (or do what GS is doing and not its clients) that is probably not such a bad idea.
Anyone who has not taken the pre-Thanksgiving day off may regret it as in addition to a Eurozone whose core is now officially imploding we have possibly one of the busiest economic days of the year to top it all of right into what will likely be the thinnest volume days. Expect massive manic depressive mood swings on the smallest of blocks.
The last six months have been anything but 'normal' in terms of market movements. Whether equity, bond, or FX markets, the high correlations and crashing disconnects have at times been incredible - leaving every risk manager's VaR calculation and desk-quants gamma-hedging program sorely lacking. Goldman specifically surveys the largest moves across asset-classes of the last six months and finds that it is policy announcements that have been far larger drivers of outsize market moves than economic data. This is a significant departure from the previous six months and while neither policy or economic outcomes are specifically harder to hedge, it is the Knightian uncertainty of the desparate policy-makers that is perhaps most worrisome going forward - especially given the lack of resolution anywhere in the world.
Though late to the party as usual, the proverbial man on the street – along with members of mainstream media and Wall Street heavyweights – is finally waking up to the decade-long, 700% increase in the price of gold, joining a growing buzz around the monetary metal. From questions whether gold is in a bubble to predictions that soaring prices are just around the corner, one thing is clear: a new phase of awareness for gold is upon us. How far might it move before these troubling times are over?
The week ahead is light on data. The highlight of the week will be the publication of the PMIs in the Eurozone and the IFO in Germany. We expect business sentiment to deteriorate but only modestly. There is also the release of the first of several monthly China PMIs. Durable Goods and the FOMC minutes in the US will also be interesting to watch. Data in the US has been reasonably stable and have continued to surprise mostly on the positive side, albeit less so recently as expectations have adapted. Sub-trend growth will lead the Fed to consider its easing options again, but possibly not until sometime next year. An important US event this week will be the deadline for the fiscal Super Committee, which will likely fail to deliver a plan to cut the budget deficit by $1.2tn over the next 10 years. Though markets do not expect a plan before the deadline, it is likely that the focus on structural US imbalances intensifies during the week. This could well become an even more risk-averse environment, leaving few options to go short the USD. As our weekly FX idea, we therefore like short $/JPY, aiming for a move back to the pre-intervention lows.