After tumbling overnight to just around 101.80, the USDJPY managed to stage a remarkable levitating comeback, rising all the way to 102.3, which in turn succeeded in closing the Nikkei 225 at the highs, up 1% after tumbling in early trade. The Shanghai Composite was not quite as lucky and as fear continue to weigh about a collapse in China's credit pipeline, the SHCOMP was down more than 0.8% while the PBOC withdreww even more net liquidity via repos than it did last week, at CNY 98 billion vs CNY 48 billion. That said, this morning will be the fifth consecutive overnight levitation in futures, which likely will once more surge right into the US market open to intraday highs, at which point slowy at first, then rapidly, fade again as the pattern has seemingly been set into algo random access memory. Which in a market devoid of human traders is all that matters.
Initial jobless claims rose for the first time in 4 weeks - with, oddly, no upward revision of previous data - but beat expectations for the 3rd week in a row. In the prior week the best state was New York, where claims dropped by 17,548 due to "Fewer layoffs in the transportation and warehousing, educational services, and food services industries." However, the rise in continuing claims - the most in over 2 months - is perhaps the most notable - missing expectations by the most in 8 weeks. This is notable since this week was the survey period for the all-important Non-Farm Payrolls (well less important now given Yellen's comments).
In the aftermath of yesterday's key market event, the FOMC's $10 billion tapering and elimination of QE with "QualG", not to mention the "dots" and the "6 month" comment, the USD has been on fire against all key pairs, with the EURUSD sliding below 1.38, a 150 pip move in one day which should at least give Mario Draghi some comfort, but more importantly sending the USDJPY soaring to 102.500 even as US equity futures continue to slide, and not to mention the Nikkei which tumbled -1.7% to just above 14,000 overnight. Perhaps the biggest take home message for traders from yesterday is that the Yen carry trade correlation to the Emini is now dead if only for the time being until DE Shaw and Virtu recalibrate their all-important correlation signal algos. The other big news overnight was the plunge in the Yuan, tumbling 0.5%, 6.2286, up 343 pips and crushing countless speculators now that the "max vega" point has been passed. Expect under the radar news about insolvent trading desks over the next few days, as numerous mega levered FX traders, who had bet on continued CNY appreciation are quietly carted out the back door. Elsewhere, gold and other commodities continue to be hit on rising fear the plunging CNY will accelerate the unwind of Chinese Commodity Funding Deals.
It was another day of ugly overnight macro data, all of it ouf of China, with industrial production (8.6%, Exp. 9.5%, Last 9.7%), retail sales (11.8%, Exp. 13.5%, Last 13.1%) and fixed asset investment (17.9% YTD vs 19.4% expected) all missing badly and confirming that in a world of deleveraging, the Chinese economy will continue to sputter. Which is precisely what the "bad news is good news" algos needs and why futures levitated overnight: only this time instead of latching on to the USDJPY correlation pair, it was the AUDJPY which surged after Australia - that Chinese economic derivative - posted its third best monthly full-time jobs surge in history! One can be certain that won't last. But for now it has served its purpose and futures are once again green. How much longer will the disconnect between deteriorating global macro conditions and rising global markets continue, nobody knows, but sooner rather than later the central planner punch bowl will be pulled and the moment of price discovery truth will come. It will be a doozy.
Following yesterday's abysmal employment and service data which led to an unchanged close it quite clear that the market has returned to a mode where it ignores all newsflow - at least the bad, which is due to the weather, the good news is due to the recovery - and instead is simply driven by such "fundamental drivers" as the momentum and position of the Yen carry trade. And overnight the USDJPY positively exploded following news that the Japan advisory committee has decided the nation's pension fund, the GPIF, does' t need a domestic bond focus. Implicitly this means that the GPIF will soon be able to purchase stocks like Facebook and Tesla, which is a guaranteed way of generated short-term gains and longer-term total losses for the Japanese pensioners. Of course, when the latter happens, nobody will have been able to foresee it and some scapegoat somewhere will be summarily fired. As for what this means for futures, the drift higher has made SPOOs rise once more and at last check was just below if not at new all time highs on an ongoing barrage of increasingly negative macro news.
Three unlucky attempts in a row to retake the S&P 500 all time high may have been all we get, at least for now, because the fourth one is shaping up to be rather problematic following events out of the Crimean in the past three hours where the Ukraine situation has gone from bad to worse, and have dragged the all important risk indicator, the USDJPY, below 102.000 once again. As a result, global stock futures have fallen from the European open this morning, with the DAX future well below 9600 to mark levels not seen since last Thursday. Escalated tensions in the Ukraine have raised concerns of the spillover effects to Western Europe and Russia, as a Russian flag is lifted by occupying gunmen in the Crimean (Southern Ukrainian peninsula) parliament, prompting an emergency session of Crimean lawmakers to discuss the fate of the region. This, allied with reports of the mobilisation of Russian jets on the Western border has weighed on risk sentiment, sending the German 10yr yield to July 2013 lows.
After learning that it snowed in China this winter following the release of the abysmal February Flash HSBC PMI numbers, we found out that there had also been snow in Europe, following misses across virtually all key French, German and composite PMIs with the exception of the German Services PMI which was the sole "beater" out of 6. To wit:
- Eurozone PMI Manufacturing (Feb A) M/M 53.0 vs Exp. 54.0 (Prev. 54.0); Eurozone PMI Services (Feb A) M/M 51.7 vs Exp. 51.9 (Prev. 51.6)
- German Manufacturing PMI (Feb A) M/M 54.7 vs. Exp. 56.3 (Prev. 56.5); German PMI Services (Feb A) M/M 55.4 vs Exp. 53.4 (Prev. 53.1)
- French PMI Manufacturing (Feb P) M/M 48.5 vs. Exp. 49.6 (Prev. 49.3); French PMI Services (Feb P) M/M 46.9 vs. Exp. 49.4 (Prev. 48.9)
Of course, economic data is the last thing that matters in a manipulated market. Instead, all that does matter is what the USDJPY does overnight, and as we forecast yesterday, the USDJPY 102 tractor beam is alive and well and managed to pull equity futures from a -10 drop overnight to nearly unchanged, despite the now traditional pattern of USDJPY selling during the overnight session and buying during the US session.
Word count of the word "weather" in Joe LaVorgna's latest note explaining away today's third consecutive miss in retail sales and initial claims: 8. The humor, however, is this punchline: "Eventually, though, we should see some impressive weather-related snapback in economic activity." Wait, so the weather will deposit a few thousand dollars in all tapped-out US consumers' bank accounts? You do learn something every day.
It was only two weeks ago when Goldman's Jan Hatzius, as we predicted he would, took a hammer to its GDP forecasts for Q1 GDP upon the shocking realization that Q4 "growth" was all inventory driven. This morning, the hammering resumes as Goldman, in the aftermath of today's disastrous retail sales, not only cut its Q4 2013 GDP forecast from 2.8% to 2.4% (vs the 3.2% initially reported), but slashed its current quarter estimate from 2.3% to 1.9%. As a reminder, this number was 3.0% three weeks ago. Once again, nothing beats an economist forecast to know what the future will not be.
At 339,000 initial jobless claims, this is the 3rd miss in thelast 4 weeks and back above the 8-month average suggesting that the best in the layoff trajectory of this 'recovery' is over. Continuing claims remains slid modestly and, of course, emergency benefits remain at zero. Of course, as we showed here, it is not layoffs (and thus initial jobless claims) that matters - what is crucial is that there is no hiring...
Initial claims rose very marginally week over week (with the declining trend of early 2013 now over); continung claims rose more - considerably more than expectations - with its biggest 7-week rise since early 2009 to the highest in 6 months; but the major news is the drop in Emergency Unemployment Compensation beneficiaries from 1.37 million to (drum roll please) zero! Congress decision not to extend this beenfit means there are 2 million fewer people on benefits than a year ago. The 1.4 million drop also means the number of people NOT in the labor force is about to rise by the same amount, which as we explained before, means the US unemployment rate is about to drop by up to 0.8%, which means the January unemployment rate could be as low as 5.9%.
Initial claims beat expectations very modestly (326k vs 328k expected) and hover at their average level of the last 6 months. Non-seasonally-adjusted saw initial claims surge to 438k. It would appear the trend of improving claims has ended for now. What is perhaps more worrying is the continuing claims surged by their most in over 5 years - at 3.03 million, this is the highest in 6 months (and the biggest miss in 6 months. It is worth noting that this is before the emergency benefits for 1.3 million Americans disappear (which will likely begin to show up next week or the week after).
The positive momentum in equities slowed in Asian trading with losses seen on the Nikkei (-0.4%), and HSCEI , the SCHOMP unchanged and EM indices such as the Nifty (-
0.1%). In Australia, a disappointing December employment report saw a 23k fall in jobs for the month against consensus expectations of rise of 10k. The 10yr Australian government bond has rallied 5bp and the front end is outperforming as a number of investors expect the RBA to continue its easing bias over 2014. AUDUSD has sold off -1.1% to a three year low of 0.881. The ASX200 closed up 1.2% however, boosted by mining-giant Rio Tinto (+2%) who reported better than anticipated Q4 production. Amid recent fears of a Chinese growth deceleration, Rio Tinto reported record levels of production of iron-ore, coal and bauxite. In FX, USDJPY is finding further support in Asia, adding 0.1% to yesterday’s 0.38% gain to trade not too far from the 105 level. Which is also why the S&P futures are trading modestly lower: without a major breakout in the Yen carry, there can't be a sustained ramp in the US stock market which is driven entirely by the value of the Yen, which in turn is a reflection of the expectations of future BOJ easing.
The Department of Labor states that there is no indication that the winter storm affected this week's numbers (though they are likely to remain volatile through January) as jobless claims dropped from a ubiquitously revised-upwards 345k to 330k this week - the lowest level since the end of November (even as NSA data jumped from 451k to 486k on the week). Continuing claims rose modestly back into the middle of the range of the last 4 months just like initial claims. The emergency claims data is lagged so we will not see the impact of congressional decisions on that until 2 weeks from now but its worth noting that the data we alreayd have shows 104,000 dropping off the rolls. California, Pennsylvania, and Michigan topped the initial claimants list with California worse than this time last year.
Despite the BLS claiming no states estimated their data and the previous week's apparently errant (but significantly not revised lower), the claims data this week saw its biggest week-over-week percentage drop since January 2006 (which ironically almost perfectly bottom-ticked the previous 'recovery' claims improvements). Continuing claims, however, rose for the 3rd week in a row - the largest 3-week rise in since March 2009! Of course, the more critical part of the labor department's report is the end of the Emergency Unemployment Compensation (EUC) program which will pay one more claim this week and then 1,333,332 will begin to lose their benefits. EUC benefits cannot be paid for any week of unemployment after Dec 28th (which, of course, is great news for the unemployment rate).