If October's stunning(ly low) inflation print of 0.7% is what conventional wisdom believes is the reason for the surprising ECB rate cut (it isn't - the culprit was the record low increase in private loan creation), then the just released modest increase in Eurozone November CPI, which was expected to print at 0.8%, instead rising just above that, or 0.9%, will likely mean less surprises out of the ECB in the future. Core CPI (excluding food, energy, alcohol and tobacco) rose 1.0%, following a 0.8% increase in October and 0.9% expected, while the biggest headline bounce was in energy prices which rose from -1.7% to -1.1%, if still rather negative. Looking at the main components of euro area inflation, food, alcohol & tobacco is expected to have the highest annual rate in November (1.6%, compared with 1.9% in October), followed by services (1.5%, compared with 1.2% in October), non-energy industrial goods (0.3%, stable compared with October) and energy (-1.1%, compared with -1.7% in October).
Looking ahead at the week ahead, data watchers will be kept fairly occupied before Thanksgiving. Starting with today, we will see US pending home sales with the Treasury also conducting the first of 3 bond auctions this week starting with a $32 billion 2yr note sale later. We will get more housing data tomorrow with the release of housing starts, home prices as well as US consumer confidence. Durable goods, Chicago PMI, initial jobless claims and the final UofM Consumer Sentiment print for November are Wednesday’s highlights although we will also get the UK GDP report for Q3. US Equity and fixed income markets are closed on Thursday but US aside we will get the BoE financial stability report, German inflation, Spanish GDP and Chinese industrial profit stats. Expect market activity to remain subdued into Friday as it will be a half-day for US stocks and bond markets. As ever Black Friday sales will be carefully monitored for consumer spending trends. So a reasonably busy, holiday-shortened week for markets ahead of what will be another crucial payrolls number the following week.
Busy, Lackluster Overnight Session Means More Delayed Taper Talk, More "Getting To Work" For Mr YellenSubmitted by Tyler Durden on 10/25/2013 07:00 -0400
It has been a busy overnight session starting off with stronger than expected food and energy inflation in Japan even though the trend is now one of decline while non-food, non-energy and certainly wage inflation is nowhere to be found (leading to a nearly 3% drop in the Nikkei225), another SHIBOR spike in China (leading to a 1.5% drop in the SHCOMP) coupled with the announcement of a new prime lending rate (a form a Chinese LIBOR equivalent which one knows will have a happy ending), even more weaker than expected corporate earnings out of Europe (leading to red markets across Europe), together with a German IFO Business Confidence miss and drop for the first time in 6 months, as well as the latest M3 and loan creation data out of the ECB which showed that Europe remains stuck in a lending vacuum in which banks refuse to give out loans, a UK GDP print which came in line with expectations of 0.8%, where however news that Goldman tentacle Mark Carney is finally starting to flex and is preparing to unleash a loan roll out collateralized by "assets" worse than Gree Feta and oilve oil. Of course, none of the above matters: only thing that drives markets is if AMZN burned enough cash in the quarter to send its stock up by another 10%, and, naturally, if today's Durable Goods data will be horrible enough to guarantee not only a delay of the taper through mid-2014, but potentially lend credence to the SocGen idea that the Yellen-Fed may even announce an increase in QE as recently as next week.
Japan Drowns In Food, Energy Inflation; China's Liquidity Tinkering Continues As Does SHIBOR Blow OutSubmitted by Tyler Durden on 10/25/2013 06:03 -0400
Nearly one year into the Japan's grandest ever monetization experiment, the "wealth effect" engine is starting to sputter: after soaring into the triple digits due to the BOJ's massive monetary base expansion, the USDJPY has been flatlining at best, and in reality declining, which has also dragged the Nikkei lower dropping nearly 3% overnight and is well off its all time USDJPY defined highs. But aside for the wealth effect for the richest 1%, it is not exactly fair to say that the BOJ has done nothing for the vast majority of the population. Indeed, as the overnight CPI data confirmed, food and energy inflation continues to soar "thanks" to the far weaker yen, even if inflation for non-energy and food items rose by exactly 0.0% in September. Oh, it has done something else too: that most important "inflation", so critical to ultimately success for Abenomics - wages - is not only non-existant, in reality wages continue to decline: Japanese labor compensation has been sliding for nearly one and a half years!
Last week, the main area of focus was the political situation in the US where Democrats and Republicans finally agreed upon a short term fix to reopen the government and extend the debt ceiling. The conclusion of this saw equity markets rally to all time highs in Europe and the US, with the USD continuing to slide as markets turn their attention to the Fed’s QE programme and push back expectations of when the central bank will begin to pull back on asset purchases. With the government now reopen, attention will turn to the numerous data releases that were delayed but will now take place over the next two weeks, including the jobs report which is due on Tuesday. The release of this report will once again be used to help predict when the Fed will begin to taper QE however, recent comments from Fed members have suggested that October is likely to be too soon trim bond buying due to the lack of key macroeconomic data and the unknown economic impact as a result of the government closing for 16 days.
Dispassionate overview of the key factors shaping the investment climate in the week ahead.
This is at a time when we have real economic growth barely above 2% and nominal growth of just over 3% (abysmal by any standards) after six years of monetary easing and 5 years of QE1; QE 2; Operation twist; QE “infinity” and huge fiscal deficits. After last week Citi notes it is not clear that this set of policies is going to end anytime soon. It seems far more likely that these policies will be continued as far as the eye can see and even if there are “anecdotal” signs of inflation this Fed (Or the next one) is not a Volcker fed. This Fed does not see inflation as the evil but rather the solution. Gold should also do well as it did from 1977-1980 (while the Fed stays deliberately behind the curve). Unfortunately Citi fears that the backdrop will more closely resemble the late 1970’s/early 1980’s than the “Golden period” of 1995-2000 and that we will have a quite difficult backdrop to manage over the next 2-3 years.
Last night Japan reported August CPI/inflation news that at least on the surface were astoundingly good: at 0.8%, the core CPI (excluding fresh irradiated food) was more than expected and higher than July's 0.7%. And yet, even the most absurdly clueless economist is silent this morning in their praise of Abenomics, which supposedly has succeeded in its one goal - bringing sexy inflation back. Why? Perhaps the reason is that whereas Keynesian inflation in which prices and wages are broadly if modestly rising as a result of a properly functioning monetary system, is indeed just what the Doctor of modern economics ordered, soaring input costs driven by FX differentials and current account flows, "offset" by plunging wages is precisely the opposite of what Abenomics was supposed to be. Which is exactly what is going on in Japan.
Investors may be trapped in a ‘greater fool theory’ in thinking they can all unwind risk at the same time. Over-regulation, shrinking bank balance sheets, and fewer market makers mean that market liquidity is challenged. Retracting Fed dollars is always far more difficult than creating them, particularly in the current environment. The FOMC scientists have been working in their lab tweaking models to assess marginal benefits, but it is blinding them from seeing the underlying risks that are building. They openly ask what signs of troubles are evident, but the morphine drip has been in use for so long that they can’t see that the current calm may be replaced with an uncontrollable monster unleashed when the sedation fades.
Japan’s core CPI (which excludes perishables) surged 0.7% y/y in July, but the upturn is largely due to higher prices for energy that reflect rising import prices due the yen’s weakness. Despite global exuberance at Abe's "progress", BNP notes that there are still no signs of price growth for rent and service prices, factors behind Japan’s protracted deflation. Crucially, BNP believes that Abenomics could lead to four possible medium-term outcomes: (1) Continued deflation (35% probability), (2) Financial repression (40%), (3) High inflation (15%), and(4) Happy end to deflation via revived trend growth (10%). Furthermore, even if this happy ending scenario were to unfold, that does not mean that structural problems, like the swelling public debt and insolvent social welfare, will be headed for resolution.
The day when the Fed will begin the unwind of its latest QE program (for the fourth time) has finally arrived (as has the day when an impeachment committee will vote whether to ban Berlusconi from public office, but understandably that is getting far less press). In a few short hours the answer to all those questions of whether and how much of the taper was priced in, will be revealed. But while the Taper discussions will dominate the airwaves, as they have for the past five months, there actually were some news in the world that had nothing to do with the US Politburo in charge of capital markets and the US economy, located in the Marriner Eccles building. Here is a brief summary.
The most important event of the "coming" week was unexpected, and did not even take place during the week, but the weekend. So with Summers unexpectedly, and uncharacteristically out, here is what else is in store.
The July FOMC statement was a bit more dovish than expected, including (1) an explicit reference to the risks posed by higher mortgage rates, (2) more dovish language on below-target inflation, and (3) a statement that the Committee "reaffirmed its view" that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends. We will read the minutes from the July meeting with an eye toward any clues on the likelihood of near-term tapering and potential changes to the forward guidance.
Albert Einstein, a man who knew a thing or two about celestial mechanics, supposedly once called compound interest "the most powerful force in the universe." While the remark was likely meant to be funny (astrophysicists can be hilarious), it sheds light on the often overlooked fact that small changes, over time, can yield enormous results. The same phenomenon may be at work in our economy. A minor, but persistent under-bias in the inflation gauge used in the Gross Domestic Product (GDP) may have created a wildly distorted picture of our economic health. So the next time you see a GDP report remind yourself that the "deflator" should really be called the "distractor." It's there to distract you from the truth.
Starting with the Asian markets this morning, it appear the roller coaster ride for markets continued overnight. Asian equities started the day trading weaker but shortly after the open though, all of Asia bounced off the lows following the previously noted surge in Chinese A-shares soaring more than 5% in a matter of minutes in what was initially described as a potential “fat finger” incident. As DB notes, alternative explanations ranged from a potential restructuring of the government’s holdings in some listed companies, to market buying ahead of a rate cut this coming weekend. All indications point toward a fat finger. The A-share spike has managed to drag other indices along with it though some gains have been pared. Yet for all the drama the Shanghai Composite soared... and then closed red. The region’s underperformer is the Nikkei (-0.75%). Elsewhere, the NZDUSD dropped 0.5% after a magnitude 6.8 earthquake struck the city of Wellington this morning. Looking at the US S&P500 futures are trading modestly higher at 1660. Looking ahead to today there is very little in the way of Tier 1 data to be expected. Housing starts/permits from the US and the preliminary UofM Consumer Sentiment reading for August are the main reports. The moves in rates and perhaps oil will probably offer some markets some directional cues.