Consumer Confidence

The Hilsenrath-Haggle Federal Open Market Committee (FOMC) is likely to ease monetary policy at the July 31-August 1 meeting in response to the continued weakness of the economic data and the persistent downside risks from the crisis in Europe. While we expect nothing more exciting than an extension of the current “late 2014” interest rate guidance to "mid-2015", Goldman adds in their preview of the decision that although a new Fed asset purchase program is a possibility in the near term if the data continue to disappoint, their central expectation is for a return to QE in December or early 2013.

Just when you thought it was safe to hope for more bad news being good news we complete the triumvirate of housing, manufacturing, and now confidence all beating expectations. But we Moar QE. Consumer Confidence just beat expectations for the first time in 5 months rising to its highest level since April as it appears the self-reinforcing 'Fed's got your back' belief once again becomes a self-defeating 'how can we QE when everything's peachy' scenario. To wit, 12-month inflation expectations rose from 5.3% to 5.4% - as we noted the inflation-argument for NEW QE here. This is simply remarkable levels of cognitive bias considering the savings rate just rose to a one-year high implying people are expectation deflation - dis-inflation at the least. It would appear that indeed - given the market's downward trajectory - that the stealing of one's own punchbowl realization is occurring.

European equities are trading in flat-to-positive territory going into the North American crossover with the FTSE-100 the primary laggard, being driven lower by individual earnings releases. Oil supermajor BP released a disappointing set of Q2 earnings, reporting a net loss of USD 1.39bln, pressing the stock lower by 4.25% at the midpoint of the European trading day. Data releases from Europe today have picked up in volume, but come alongside expectations, proving unreactive across the asset classes, as German unemployment changes matches estimates at a reading of +7K for July. The topic of a banking licence for the ESM has arisen once more, as German politicians have begun voicing their concerns on the issue, with a German senior lawmaker commenting that he cannot see an ESM banking licence becoming a reality. However, this appears to be another reiteration of the German political stance, and therefore not a particular shock to markets. With today the last trading day in the month, larger than average month-end extensions have proved supportive in the longer-end of the curve today, with notably large extensions in Germany, France and the Netherlands.

• Hilsenrath: Heat Rises on Central Banks (WSJ)
• Some at Fed Are Urging Pre-Emptive Stimulus (NYT)
• Obama Warns of Headwinds in Europe; Urges European Leaders to Take Decisive Action on Euro (WSJ) - also needs reelection
• ECB thinks the unthinkable, action likely weeks away (Reuters)
• Games Turn London Into ‘Ghost Town.’ (FT)
• Greek Leaders Seek to Defer Austerity Cuts (FT)
• Hong Kong Builders Unload Properties to Raise Cash for Land Rush (Bloomberg)
• North India Crippled by Power Cuts (FT)
• Euro-Area Unemployment Rate Reaches Record 11.2% on Crisis (Bloomberg)
• Italy's Monti sees hope of end to euro crisis (Reuters)

Another week of central bank watching ahead, and markets will play their customary game of chicken with the U.S. Federal Reserve and the European Central Bank.  Both central banks have policy meetings this week – the Fed’s concludes on Wednesday, the ECB’s on Thursday – and capital markets have been moving higher in recent days on the hope of coordinated action.  For investors and traders, this sets up a classic “Buy the rumor, sell the news” pattern for the week ahead - as the overarching theme is that human history repeats because human nature does not change.  But Nic Colas of ConvergEx asks the deeper question, and the one that will retard any lasting move to the upside, is how much central banks can do without help from fiscal policymakers.

Gold held steady above $1,620/oz on Monday, as investors wait for the central banks from Europe and the US to give definite signs on their plans for more QE. QE3 would be bullish for gold and increase the inflation outlook which would benefit gold as a hedge against the rising prices. The public is now interested in the yellow metal again, with investors adding to their physical positions. Market watchers will take their clues from the data out this week. More investors are trading euro gold than ever before and  using euro gold as the barometer of internal health of the gold market right now, says analyst Edel Tully of UBS.  Euro gold is up 9% this year versus US dollar gold's +3% performance. The markets await the Fed’s move.  Certainly some form of QE3 is inevitable whether it is announced this week or at the next FOMC meeting scheduled in early September

It's all about the central banks this week.

Fixed income markets have always focused closely on news about the US macro-economy; while traditionally, equity market participants have focused more on the “micro” data – in particular, news about current and prospective corporate earnings – to form their views about the relative attractiveness of different stocks or the market as a whole. Goldman finds that the financial crisis changed all that. The responsiveness of the US equity market to economic news increased dramatically, now showing about twice as much sensitivity to macro data as it did in the years before the financial crisis. While micro data remains important - especially in quantifying just how much QE-hope the market is 'abiding' by, macro news is likely to be the critical driver of equity markets until the global economic outlook is considerably brighter than it looks today (or macro decouples from Fed/ECB jawboning). On average the market’s responsiveness to all these economic indicators suggests that we are still very much living in a macro world. In the meantime, there are some exceptions to the fairly consistent reactions to economic news that we see between equity and bond markets.

• Draghi Says ECB To Do Whatever Needed As Yields Threaten Europe (Bloomberg)
• Spain not mulling seeking further EU help (Reuters)... and it won't need a Bank bailout either. Oh wait
• Weak lending adds pressure for ECB action (Reuters)
• Sweden's economy still resilient to eurozone woes (Reuters)
• Bo Xilai’s Wife, Zhang Xiaojun, Prosecuted for Homicide (Xinhua)
• China’s Changsha City Unveils $130 Billion Investment Plan (Bloomberg)
• Foreclosure Filings Increase in 60% of Large U.S. Cities (Bloomberg)
• Free ECB’s hand to aid states, says minister (FT)
• Hungarian Premier Says Aid Deal Not Near (WSJ)
• Nomura Chief Resigns Over Insider Trading Scandal (NYT)

Visitor volume to Las Vegas is the highest since 2007, despite rising hotel rates, but gaming revenues are near flat.  Online gambling is popular with Europeans – the Brits and Greeks in particular – yet it has slowed over the past 3 months. ConvergEx's latest off-the-beaten-path economic indicator – gambling – shows an increasing global reluctance to leave household finances at the whims of blackjack and poker tables, be they in actual casinos or online betting parlors. Discretionary spending behavior is reliant on consumer sentiment and economic outlook; gambling is the ultimate “luxury item” because there’s absolutely no guaranteed return, so gambling behavior is a near real-time indicator of changes in consumer confidence.  Our gambling indicators, both domestic and abroad, show what feels a lot like recessionary behavior and point to another leg down in the latter half of 2012.

Risk-off trade is firmly dominating price action this morning in Europe, as weekend reports regarding Spanish regions garner focus, shaking investor sentiment towards the Mediterranean. The attitudes towards Spain are reflected in their 10yr government bond yield, printing  Euro-era record highs of 7.565% earlier this morning and, interestingly, Spanish 2yr bill yields are approaching the levels seen in the bailed-out Portuguese equivalent. As such, the peripheral Spanish and Italian bourses are being heavily weighed upon, both lower by around 5% at the North American crossover.

The Financial Services Authority (FSA) primary role is to make retail markets for financial products and services work more effectively, and so help retail consumers to get a fair deal. In June 2006, the FSA created its Retail Distribution Review (RDR) programme which they are enacting in order to enhance consumer confidence in the retail investment market. The RDR has a target for full-implementation of 31 December 2012. The RDR is expected to have a significant impact on the way in which financial services are delivered to retail investors in the UK. The primary delivery mechanism of financial services to retail customers is via approximately 30,000 Independent Financial Advisers (IFAs) who are authorised and regulated by the FSA. They are expected to bear the brunt of the force of the RDR. Gold bullion is set to benefit from the axing of commission for IFAs and the implementation of the RDR “should be regarded as a game changer” for gold as an investment in the UK, according to the World Gold Council. Managing director of investment Marcus Grubb, says: “These extremely challenging times mean it’s impossible to quantify the risks for UK investors. They are facing an unprecedented combination of threats to their assets including extreme and unexpected market shocks that can trigger widespread value destruction.” “As UK investors reduce allocations to traditional investments such as equities and bonds and increasingly dash to cash, they face a double whammy, with the potential for stagnation of capital due to the lack of returns from cash and the increased possibility of inflation as a result of ongoing monetary stimulation.”

While bad news may be good news for the market hoping that it will spur more stimulative measures from the Fed to boost asset prices - for Main Street America bad news is just bad news.  More importantly, the decline in consumer confidence continues to perpetuate the virtual economic spiral.  As the consumer retrenches the decline in aggregate end demand puts businesses on the defensive who in turn reduces employment.  The reduction in employment, and further stagnation of wages, puts the consumer further onto the defensive leading to more declines in demand.  It is a difficult cycle to break.

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.