Consumer Confidence

While the gold standard may no longer exist, nations and international organizations still have 30,877 metric tons of bullion reserves, valued at about $1.77 trillion. The dollar has been the world’s reserve currency since the U.S. and allies agreed at the 1944 Bretton Woods conference to peg it to a rate of $35 per ounce of gold. It remained the most- traded legal tender after global currencies began freely floating in the early 1970s. The greenback dropped 12 percent against a basket of six major currencies since March 2009. The U.K. suspended the gold standard in 1931, Chatham House said. “Greater discipline on financial markets might have been helpful in inhibiting the reckless banking and excessive debt accumulation of the past decade,” the task force said. “However, with the onset of the global crisis, had gold had a more formal role to play, the rigidity it imposes might also have been a handicap when a more flexible policy response was required.” “For gold to play a more formal role in the international monetary system, it would be imperative for it neither to hamper the system’s performance nor to create unacceptable constraints on national economic policies,” the task force said.  Gold may “continue playing a significant role in the international monetary system, serving as a valuable hedge and safe haven, particularly in times when tail risks predominate.”

Last week saw dramatic dispersion among the major FX pairs as global and local influences caused significant moves in most of the key crosses. Goldman takes a look back at the key drivers of that volatility and then focuses on the week ahead as the EU Summit at the latter end is the main event risk while ongoing macro developments will be focused on the incessant rise in Crude oil prices and whether we start seeing knock-on impacts in the real economy.

As the Greek 'deal' is being finalized and we anxiously await next week's LTRO, it would appear that the market is now pricing in a very different way forward. EURUSD is soaring and decoupling (the other way) from risk assets as market participants begin to anticipate potential rate hikes in Europe to combat soaring energy prices, and furthermore that following the second LTRO, any and all easing expectations (and the pump to keep global asset prices afloat) will be squarely on the shoulders of the somewhat ambivalent Fed as the rest of the world already pumped about $2 trillion of cash into the market.

Bunch of irrelevant and reflexive (stock market is up so confidence - in what? manipulated markets? - is higher, so stock market is up so confidence is higher etc) stuff today, as the world central banks prepare to pump another $600-$1000 billion into the consolidated balance sheet and send input costs into the stratosphere. Somehow this is bullish for stocks. Luckily, it will finally break the EURUSD - ES linkage.

• U.S. Postal Service to Cut 35,000 Jobs as Plants Are Shut (BBG) -Expect one whopper of a seasonal adjustment to compensate
• European Banks May Tap ECB for $629 Billion Cash (Bloomberg) - EURUSD surging as all ECB easing now priced in; Fed is next
• Madrid presses EU to ease deficit targets (FT)
• Greek Parliament Approves Debt Write-Down (WSJ)
• Mentor of Central Bankers Fischer Rues Complacency as Economy Accelerates (Bloomberg)
• Draghi Takes Tough Line on Austerity (WSJ)
• European Banks Hit by Losses (WSJ)
• Moody's: won't take ratings action on Japan on Friday (Reuters)
• Athens told to change spending and taxes (FT)

• IMF Official: 'Huge' Greek Program Implementation Risks In Next Few Days (WSJ)
• European Banks Take Greek Hit After Deal (Bloomberg)
• Obama Urged to Resist Calls to Use Oil Reserves Amid Iran Risks (Bloomberg)
• Hungary hits at Brussels funds threat (FT)
• Bank Lobby Widened Volcker Rule Before Inciting Foreign Outrage (Bloomberg)
• Germany fights eurozone firewall moves (FT)
• New York Federal Reserve Said to Plan Sale of AIG-Linked Mortgage Bonds (Bloomberg)
• G-20 Asks Europe to Beef Up Funds (WSJ)
• New Push for Reform in China (WSJ)

And here is yet another reason why we will permanently ignore the pathologically lying real estate syndicate known as the NAR (link): December data was just revised from +5% to -0.5% (from 4.61 million to 4.38 million). Since December market expectations were for a +5.2% print, imagine the sheer horror the algos would have been faced with had the real number been reported on time. Needless to say, if this number had been unrevised, the January +4.3% increase would have been a decline. This way the aglos focused only on the immediate moment get two months of beats in a row. Huzzah. Anyone who trades anything based on this borderline criminal self-reporting enterprise needs to have their head checked. In other news, when will the LIBOR investigation finally target the NAR?

January's hopium catchphrase of the month was that Europe's recession would be "technical" which is simply a euphemism for our Fed's beloved word - "transitory." Based on the just released Euroarea PMI, we can scratch this Euro-accented "transitory" addition to the lexicon, because contrary to expectations that the Euroarea composite PMI would show expansion at 50.5, instead it came out at 49.7 - the manufacturing PMI was 49.0 on Exp of 49.4, while the Services PMI was 49.4, on hopes of expansion at 50.6, which as Reuters notes suggests that firms are still cutting prices to drum up business and reducing workforces to cut costs. This was accompanied by a overnight contraction in China, where the flash manufacturing PMI rose modestly from 48.8, but was again in contraction at 49.7. We would not be surprised if this is merely the sacrifice the weakest lamb in the pack in an attempt to get crude prices lower. So far this has failed to dent WTI much if at all following rapidly escalating Iran tensions. What is curious is that Germany and France continue to do far better than the rest of the Eurozone - just as America has decoupled from Europe, so apparently have Germany and France. This too is surely "sustainable."

• Spiegel: Stop the 130-billion bank transfer! (Spiegel)
• Greece Wins Bailout as Europe Chooses Aid Over Default (Bloomberg)
• Greek pro-bailout parties at all-time low, poll shows (Reuters)
• Eurozone agrees €130bn Greek bail-out (FT)
• Top Banks in EU Rush for Safety (WSJ)
• Medvedev Adviser Says Kudrin Would Be Better Prime Minister (Bloomberg)
• US and Mexico in landmark oil deal (FT)
• McCain calls for US to support Syria rebels (FT)
• Coal Shipments to India Overtaking China on Fuel Shortage (Bloomberg)
• Gillard Shrugs Off Ousting Threat (WSJ)

The week ahead is fairly light on big ticket data releases, but what is released will provide more evidence of the strength of global activity. The most important of these will be the flash PMIs for China and the Euro area and the German IFO reading . There is no consensus expectation for the China print, however the Euro area indices are both expected to rise slightly, as is the German IFO. In terms of cyclical hard data, Taiwan export orders and IP for Singapore and Taiwan, Euro area industrial orders and trade data from Japan and Thailand will be notable. Admittedly the data from Asia is likely to be complicated by Chinese New Year which fell in the third week of January, and presumably this is why the consensus expects such a sharp drop in Taiwan IP, however the data are still worth watching for indications of the strength in global activity. Generally, consensus expectations for these prints are not particularly encouraging and any 'beats' would be a positive surprise. It goes without saying that ongoing negotiations towards signing off on Greece's second package will also remain on the radar screen. As we write, Reuters has posted suggestions that the debt swap will be open by March 8 and complete by March 11.

What a difference a quarter makes: back in Q4 2011, in light of the imploding global economic reality, the only recourse equity bulls had to was to point out that corporate profitability was still at all time highs, and to ignore the macro. Fast forward a few months, when Europe's economic situation continues to deteriorate with the recession now in its second quarter, China's home prices have just slumped for a 4th consecutive month (forcing the PBOC to do only its second RRR cute since November), Japan is, well, Japan, yet where the US economic decoupling miracle is now taken at face value following an abnormally high seasonal adjustment in the NFP establishment survey leading to a big beat in payrolls and setting the economic mood for the entire month (with flows into confidence-driven regional Fed indices and the PMI and ISM, not to mention the Consumer Confidence data) as one of ongoing economic improvement. That this "improvement" has been predicated upon another record liquidity tsunami unleashed by the world's central banks has been ignored: decoupling is as decoupling does damn it, truth be damned. Yet the bullish sentiment anchor has flip flopped: from corporate profitability it is now the US "golden age." How long said "golden age" (which is nothing but an attempt to sugar coat the headline reality for millions of jobless Americans in an election year) lasts is unclear: America's self-delusion skills are legendary. But when it comes to corporate profit margin math, things are all too clear: the corporate profitability boom is over. As Goldman points out: with the bulk of companies reporting, in Q4 corporate profits have now declined by a significant 27 bps sequentially, and an even more significant 52 bps excluding Apple.

Yesterday, it was Thomas Stolper who capitulated on his latest incursion into the field of 0.000 batting, when he closed his long EURUSD reco (only for the EUR to jump today of course). We can hardly wait for him to announce he is again long the EURUSD for the clearest EUR short signal possible. That said, it still left outstanding the Goldman Russell 2000 recommendation noted here previously. Sure enough, in the aftermath of yesterday's return of risk with a vengeance, Goldman is taking steps to make sure it locks in at least some profits on its RUT 2000 target of 860 by hiking the stop to 810 from 765. The reason? "What has clearly changed in the past week -- and the catalyst for this "leash tightening" -- is that European sovereign risks have reemerged, with continued near-term support for Greece now much more uncertain than we or the markets had previously assumed. With the amplification of these hard-to-assess risks emanating from Europe, and data continuing to support our main thesis, we think that protecting the gains at this point with relatively tight stop is prudent" But why if Europe is suddenly fixed, on the completely meaningless news that the ECB is funding Eurozone central banks with magic money on their Greek bond losses, even as the actual debt notional is not changing at all. At this point, we doubt we are the only one who no longer care.

The task of the financial/political/media Status Quo is to convince Americans to overlook the abundant evidence of economic deterioration and focus on heavily juiced "evidence" of robust "growth." The game plan is this: if the Status Quo can convince you that the economy has righted itself and from here on in everything will get better and better, every day and in every way, then we will abandon financial rationality and start buying homes we can't afford on credit, cars we can't afford on credit and boatloads of stuff from China that we don't need on credit (of course looking cool is a "need," i.e. having an iPad to carry around). In other words, believing it is so will make it so. That is the essence of the campaign to stimulate "animal spirits" confidence: though the economy is actually tanking, if they can only convince us the Dow is moving to 15,000 and then on to 20,000, jobs are being created left and right and things are looking up everywhere, then the resulting piranha-like shopping-feeding-frenzy will create the expansion that is currently chimerical.

Earlier today we got another indication that Europe's recession will hardly be a "technical" or "transitory" or whatever it is that local spin doctors call it, after the European December Industrial Output declined by 1.1% led by a whopping 2.7% drop by European growth dynamo Germany, which slid by 2.7% compared to November (which in turn was a 0.3% decline). This was worse than the Greek number which saw a 2.4% drop, however starting at zero somewhat limits one's downside. Yet even as the German economic decline accelerated, German ZEW investor expectations, which just like all of America's own consumer "CONfidence" metrics are driven primarily off the stock market, which in turn is a function of investor myopia to focus only on nominal numbers and not purchasing power loss - a fact well known to central bankers everywhere - do not indicate much if anything about the economy, and all about how people view the DAX stock index, which courtesy of the ECB's massive balance sheet expansion, has been going up. And if there has been any light at all in an otherwise dreary European tunnel, it has been the dropping EURUSD, which however has since resumed climbing, and with it making German industrial exports once again problematic. Which in turn brings us back to the primary these of this whole charade: that Germany needs controlled chaos to keep the EURUSD low - the last thing Merkel needs is a fixed Europe. It is surprising how few comprehend this.

You know there is a reason why Europe just came crawling with an advance handout looking for US assistance: Moody's just went apeshit on Europe.

• Austria: outlook on Aaa rating changed to negative
• France: outlook on Aaa rating changed to negative
• Italy: downgraded to A3 from A2, negative outlook
• Malta: downgraded to A3 from A2, negative outlook
• Portugal: downgraded to Ba3 from Ba2, negative outlook
• Slovakia: downgraded to A2 from A1, negative outlook
• Slovenia: downgraded to A2 from A1, negative outlook
• Spain: downgraded to A3 from A1, negative outlook
• United Kingdom: outlook on Aaa rating changed to negative

In other news, we wouldn't want to be the company that insured Moody's Milan offices.