As JPM takes off, US equities go vertical, and EURUSD overdoses on erectile dysfunction stop-hunting-algo medicine, the good old US consumer - that bastion of demand and foundation of all things GDP-based just said sentiment levels are the worst of the year so far. UMich Consumer Confidence Sentiment just printed 72.0 against expectations of 73.4 - the biggest miss since December 2009. Worst still is the plunge in expectations (economic outlook) to the lowest in 7 months as the 2-month drop is the biggest in a year. It would appear all is not well on Main Street - as the massive schism between ISM Composite relative strength and the reality of the economy remains. As an aside, given this morning's hotter than expected inflation data, 1 year ahead forecasts for inflation fell to their lowest in 19 months.
While GM can still fool some of the people, most of the time with near record channel stuffing, even as more and more are waking up and suing the company for just this, it seems the same type of strategy of load up dealers with unsellable electric cars has failed miserably in Europe. From WSJ: "General Motors Co. said Karl-Friedrich Stracke has stepped down as president of its loss-making European division, though the restructuring program initiated under his leadership will continue. GM said Mr. Stracke will take another, unnamed position at the U.S. auto maker and that Opel supervisory board chairman Steve Girsky will serve in his place on an interim basis. "Karl Stracke worked tirelessly, under great pressure, to stabilize this business and we look forward to building on his success," GM Chief Executive Dan Akerson said in a statement." The 'success' that as pointed out, has led to a loss-making divions. With successful leaders like these who needs failures?
June macro data is giving a 'cleaner' picture of the economic state of our great nation. With seasonal affectations (unusually warm weather and the rebound in auto production) out of the way, June macro data has very much surprised consensus to the downside as BofAML's economics team notes that 14 of the last 20 June indicators has come in below expectations. Over the next several weeks we will get more 'hard' data for June. The most important will be retail sales, industrial production and the durable goods orders report. Retail sales look likely to disappoint as weak chain store sales offset the modest tick higher in auto sales. And given the collapse in the ISM, we expect manufacturing production and durable goods orders to be soft. This data will determine if the FOMC has enough ammo to ease aggressively on August 1st (or wait til September 13th) which we expect to only be an extension of forward rate guidance to mid-2015 from late-2014 (and not the panacea of NEW QE). BofAML remains more concerned with the consensus outlook for H2 - particularly Q4 (with 14% YoY EPS growth expected despite just a 1% GDP growth rate) - as the recession in Europe and high level of uncertainty ahead of the US fiscal cliff will likely lead to slowing growth in H2. And for those hanging their hats on the housing recovery, it will not be enough to save the rest of the economy - Housing construction is now only 2.3% of GDP compared to more than 6% prior to the crisis. This means we need a decisive turn to significantly matter for GDP growth. In addition, we believe it would take a sustained period of price increases to reverse the negative wealth and confidence effects of the housing collapse. Households remain skeptical about the home as a store of wealth or an investment.
European equities are seen firmly in the green at the North-American crossover, with outperformance noted in the peripheral bourses. Overnight news from the Eurogroup has confirmed that the EFSF/ESM rescue funds will be given the powers to intervene in the secondary bond markets, easing sentiment towards the European laggard economies. Gains are being led by a particularly strong technology sector, with the riskier financials and basic materials also making solid progress. Asset classes across the board in Europe are benefiting from risk appetite, with the Bund seen lower and both the Spanish and Italian 10-yr yields coming below their key levels of 7% and 6% respectively. The moves follow a spurt of activity in Europe with a number of factors assisting the way higher.
In a market which was left for dead with virtually no hope of a CTRL-Peus Ex Machina, and which otherwise would have tumbled to close at the lows, we realized that something was missing. In fact we noted it less than an hour ago:
Need a Hilsenrath rooomer
— zerohedge (@zerohedge) July 6, 2012
Sure enough, moments ago, with minutes left in the trading day and week, here comes the Fed's favorite leaking scribe, advising the market that not all is lost, and that Pavlovian dogs can, and in fact should continue to salivate at ever poster of a half naked toner cartrdige.
- Beggars can't be choosers after all: Greece Drops Demand to Ease Bailout Terms (FT)
- It took journalists 4 years to get that under ZIRP all banks have to be hedge funds: US Banks Taking Risks in Search of Yield (FT)
- Made-In-London Scandals Risk City Reputation As Money Center (Bloomberg)
- Merkel Approval Rises to Highest Since 2009 After EU Summit (Bloomberg)
- Judge orders JPMorgan to explain withholding emails (Reuters)
- U.S. hiring seen stuck in low gear in June (Reuters)
- Germans Urged to Block Merkel on Integration (WSJ)
- Crony Capitalism Rules: Countrywide used VIP program to sway Congress (Reuters)
- Barclays’ US Deal Rewrites Libor Process (FT)
- Cyprus Juggles EU and Russian Support (FT)
- Delay Seen (Again) For New Rules on Accounting (WSJ)
- Lagarde Says IMF to Cut Growth Outlook as Global Economy Weakens (Bloomberg)
While it is seeming common knoweldge that the state of the economy has a significant bearing on the outcome of the presidential election in the US, Barclays notes that in the case of an incumbent running, economic performance appears to be most important. The three presidents who failed in a re-election bid in the post-war period (Gerald Ford in 1976, Jimmy Carter in 1980 and George Bush, Sr. in 1992) did so against a backdrop of weak growth, high unemployment, and low consumer confidence. These same factors all pose significant headwinds to the current incumbent. To overcome them, history suggests that unemployment would need to keep trending down and consumer sentiment would need to strengthen prior to the vote in November.
Forty five years after the War on Poverty began, there are 49 million Americans living in poverty. That’s a solid good return on the $16 trillion spent so far. It’s on par with the 16 year zero percent real return in the stock market. We have produced a vast underclass of ignorant, uneducated, illiterate, dependent people who have become a huge voting block for the Democratic Party. Politicians, on the left, promise more entitlements to these people in order to get elected. Politicians on the right will not cut the entitlements for fear of being branded as uncaring. The Republicans agree to keep the welfare state growing and the Democrats agree to keep the warfare state growing -bipartisanship in all its glory. And the middle class has been caught in a pincer movement between the free shit entitlement army and the free shit corporate army. The oligarchs have been incredibly effective at using their control of the media, academia and ideological think tanks to keep the middle class ire focused upon the lower classes. While the middle class is fixated on people making $13,400 per year, the ultra-wealthy are bribing politicians to pass laws and create tax loopholes, netting them billions of ill-gotten loot. These specialists at Edward Bernays propaganda techniques were actually able to gain overwhelming support from the middle class for the repeal of estate taxes by rebranding them “death taxes”, even though the estate tax only impacts 15,000 households out of 117 million households in the U.S. The .01% won again.
...But at least housing has bottomed (it so difficult to even write that with a straight face). Our two economic indicators today continued the tradition of the last 2 months and both missed, with the Richmond Fed sliding to -3 on expectations of a +2 print, and down from +4: the lowest number since October 2011. And the other data point hinting to the Fed that it is needs to do something now, was the June Consumer Confidence number, which was lower 4 months in a row (for the first time since May 2008), and which declined from 64.4 to 62.0, missing expectations of 63.0, and the lowest since January, undoing all transitory, S&P500 driven gains of the year.
- On the continuing fraud that is Liebor: Libor Guardians Said to Resist Changes to Broken Rate (Bloomberg)
- Bank bailout to spark firesale of corporate Spain (Reuters) with Goldman and China just waiting
- EU Could Rewrite Eurozone Budgets (FT) but it won't because Germany will just say Nein again
- Congress Said to Delay Automatic Budget Cuts Until March (Bloomberg)
- China Says June Trade Improving in Sign Slowdown Stabilizing (Bloomberg)
- Biggest U.S. Banks Curb Loans as Regional Firms Fill Gap (Bloomberg)
- New York Fed Sells $4bn in Mortgage Debt (FT)
- Julian Assange’s fall from the heavens (Reuters)
- Wheeler to Lead N.Z. Central Bank as Kiwi Hits Exports: Economy (Bloomberg)
- Japan Lower House Passes Sales Tax Bill as Vote Divides DPJ (Bloomberg)
Goldman recaps the past tumultuous week, and looks at events in the next 7 days, of which the key feature will be the next "latest and greatest" and most disappointing European summit on Thursday and Friday, where not even Greece is going any longer, and which not even the most resolute Europhiles expect to resolve anything: "The key event of next week is the EU summit. The latest European Economics Analyst details our expectations. In brief we expect to see finalization of the much-anticipated growth compact, involving financing for infrastructure investment and a restatement of the agenda for structural reform. We also expect announcement of a plan for ‘banking union’ in the Euro area, even if, owing to unresolved political differences, details are likely to remain sketchy on key issues—notably on how the implicit cost of providing fiscal backing for the Euro area banking system will be shared across countries."
Beginning in 2011 the Federal Reserve begin releasing its economic forecast for the present year and two years forward covering GDP, Unemployment, and Inflation. The question is after 18 months of forecasting - just how good has the Fed at forecasting these economic variables? I have compiled the data from each of the releases for each category and compared it to the real figures and used a current trend analysis for future estimates.... The Fed has been slowly guiding economic forecasts lower since 2011. The reality is that 2.6% economic growth is not a boon of economic prosperity, corporate profitability, increasing incomes or a secular bull market. It is also not the "death of America" or the return to the stone age. What is important to understand, as investors, is the impact on investment portfolios, expectated real rates of returns and the realization that higher levels of market volatility with more frequent "booms and busts" are here to stay.
- Mario Monti: We Have a Week to Save the Eurozone (Guardian)
- Europe Central Bank Prepares to Relax Collateral Rules (WSJ)
- EU Banks' Risk in Eyes of Beholder: Worry Is That Lenders Are Boosting Gauge of Their Health (WSJ)
- Europe finally learns about subordination: Bailouts' Creditor Hierarchy Scares Private Bondholders (WSJ)
- Merkel Isolated in Race for Euro Crisis Solution (Spiegel)
- Fed’s Re-Twist May Lift Treasury Repurchase Agreement Rates (Bloomberg)
- China Said to Propose Keeping Limit on Local Government Loans (Bloomberg)
- Moody’s Downgrade Hits 15 Top Banks (FT)
- IMF Challenges Berlin’s Crisis Response (FT)
- Colombia to Auction Rights in 2013 to Gold and Coal, Not Coltan (Bloomberg)