CPI

The meeting between Merkel and Sarkozy on Monday is likely to be the main focus of next week, as well as continued debate of the Greek PSI. Overall, this process is likely to push the EUR lower in the next couple of weeks, while the missing details for better fiscal policy coordination are getting negotiated. On the macro side, IP in Germany will have slowed by 0.2% mom in November and consensus expects the aggregate Euro-zone IP to have contracted by the same amount. But we also get November IP in many other places, including the UK and India. Already released over the weekend, Chinese money supply data has been stronger than expected and the amount of new loans issues in December is clear evidence of policy easing.

• Markets await US Non-Farm Payrolls data, released 1330GMT
• UniCredit experiences another disrupted trading session, trades down 11%, then returns to almost unchanged
• Iran causes further unease with plans to engage in wargame exercises in the Strait of Hormuz

• So very encouraging - IMF's Lagarde: euro likely to survive 2012 (Reuters)
• Drop Greek bond plan, urges ECB council member (FT)
• Soros says EU break-up would be catastrophic (Reuters)
• Japanese Banks Get 'Stress Tests' (WSJ)
• Hungary Pledges Compromise on IMF Loan (Bloomberg)
• Confidence in London property falls (FT)
• Fed nears an adoption of an inflation target as Bernanke pushes transparency (Bloomberg)
• Seoul and Tokyo seek to ease Iran oil ties (FT)

These are not mega trends, but they will prove to be important.

• Iowa result leads to GOP confusion (FT)
• Romney ekes out Iowa caucus victory (FT)
• MF Global sold assets to Goldman before collapse (Reuters)
• China’s Wen Jiacao sees ‘relatively difficult’ first quarter (Bloomberg)
• German Scandal Adds to Pressure on Merkel (WSJ)
• US mortgage demand fell at year-end, purchases sag (Reuters)
• Bank worries hit Europe stocks, euro down (Reuters)
• Martin Wolf: The 2012 recovery: handle with care (FT)
• SNB Chief’s Wife Defends Dollar Trades (Bloomberg)
• China Home Prices Slide Amid Reserve-Ratio Speculation (Bloomberg)

All eyes were on Germany this morning, where up to €5 billion in new 10 Year Bunds would hit the market, with many dreading a repeat of November's failed auction. As it turns out, the auction was a success in relative terms, with the government getting bids of €5.14 billion or more than the desired maximum - something it could not do two months ago. At the end of the day, Germany sold €4.06 billion and the resulting bid/cover ratio of 1.3 was well higher than the failed auction of November which came at  1.1, when a large amount of paper was retained and bids were not enough to cover the amount of paper on offer. Wednesday's auction is still below the average of 1.54 seen at 10-year sales in 2011 and a 19 percent retention rate is also above the 2011 average. In other words, as we suggested, the November failure has nothing to do with the Buba pushing the ECB into auction and everything to do with prevailing rates: the average yield dropped to 1.93 percent from 1.98 percent but the dwindling returns on offer due to the sharp rally in safe-haven assets as the euro zone debt crisis has intensified have led to lower than average demand at recent German auctions. And while the auction was better than expected it was still quite weak, which explains why the EURUSD is trading at overnight lows, back at around 1.2980. Not helping things is Hungary, which had a failed bond auction last week, and whose IMF rescue package is now in tatters. As a result the CDS on the country just hit an all time record 688 bps and moving much wider, while the forint dropped to record lows. As everyone knows if Hungary falls, which is now operating in a bailoutless vacuum, Austria will tumble promptly next. Next, leading to a blow out in Spanish-Bund spreads is a report in Spanish Expansion which said that Spain may request EU, IMF loans to help banks. In other words - this morning's news shows a potential risk reflaring in the European core, periphery and deep periphery which was immune until now. And finally, a UniCredit €7.5 billion new stock issue pricing at a whopping 43% discount to market price shows that fair value of actual demand for European banks is about half of where the artificially propped up price is (recall Europe still has a short selling ban)

2011 was an abysmal year for the global insurance industry, which had to cover yet another enormous increase in damages from natural disasters. Unknown to most casual observers is the fact that during the past few decades the frequency of weather-related disasters (floods, fires, storms) has been growing at a much faster pace than geological disasters (such as earthquakes). This spread between the two types of insurable losses has moved so strongly that it prompted Munich Re to note in a late 2010 letter that weather-related disasters due to wind have doubled and flooding events have tripled in frequency since 1980. The world now has to contend with a much higher degree of risk from weather and climate volatility, and this has broad-reaching implications. And critically, it has a particular impact on food.

The ECB cutting rates to preserve zee price stabeeleetee? Sure, great idea. What about the one and only actual mandate: inflation. Well, here is what it looks like in Italy. Thank god it is under control. In other news, the ECB is now on collision course with reality and Germany, having used up its last remaining bullet.

Unlike yesterday's PPI which surged past even the highest expectations, the September CPI came right in line, rising by 0.3%, just as predicted, and down from 0.4% in August. The index for all items less food and energy increased 0.1 percent in September, its smallest increase since March. The index for apparel declined in September after a series of sharp increases, and the indexes for used cars and recreation turned down as well. The indexes for new  vehicles and household furnishings and operations were both flat. The shelter index rose, but posted its smallest increase since April, while the indexes for medical care, airline fares, and tobacco all increased. And in crawling along the bottom news, Housing Starts soared by 15% to 625,000 from a revised 572K and well above expectations of 590K. That this number was not as strong as headlined, is that it was driven exclusively by multi-family units (5+) which came at 227K, a surge from the 148K in August. Since these numbers have been crawling at the bottom for years, and all moves are merely kneejerk reactions, in this case to accrued buildup following a weak summer season, it should be largely ignored (or else interpreted as a build up of unnecessary inventory: remember that whole foreclosure halt?), especially since Housing Permits of 594K missed expectations of 610K, and declined from a revised August print of 625K. Lastly completions were basically unchanged at 647K compared to 634K in August. Summarizing it all? Noise.

Following yesterday's upside surprise in the PPI, it was only logical that CPI would come higher than expected. However, printing at a 0.7% swing M/M, or the highest in years, was not expected. Broad CPI came at 0.5% in July after dropping -0.2% in June, or 3.6% Y/Y. This was far more than consensus which expected 0.2%. Core CPI however was in line with expectations at 0.2%. The reason for the surge? Gas, food and clothes. "The gasoline index rebounded from previous declines and rose sharply in July, accounting for about half of the seasonally adjusted increase in the all items index. The food at home index accelerated in July and also contributed to the increase, as dairy and fruit indexes posted notable increases and five of the six major grocery store food groups rose...The apparel index continued to rise sharply, increasing 1.2 percent in July; it has increased 3.9 percent over the past three months....The index for nonalcoholic beverages increased 0.9 percent in July as the coffee index continued to rise sharply." Elsewhere confirming that as expected the unemployment situation is deterorating, with 408K initial claims printing, on expectations of 400K, and making sure we dont have a revised 19 out of19 week of consecutive 400K+ prints was last week's revised 395K claims to, hold on to your seats, 399K.  That's right: a 1K in jobs breaks the trend, huzzah! Just as importantly, those on EUCs and Extended benefits continued to plunge, dropping by 43K in the last week. And most frightening, the one year change in Americans receiving Emergency Compensation (EUC) has plunged from 4.7 Million to 3.1 Million. That's 1.6 million Americans who no longer even collect any benefits from the government.

A busy data schedule, with the CPI, existing home sales, jobless claims and the Philly Fed index, all of which will be ignored as the market focuses entirely on European headlines once again.

Following hotter than expected Chinese CPI, futures have taken another major, with ES now down 1.7%, same as the DJIA, and NQ down 1.8%. The reason: Chinese July CPI which came at 6.5%, hotter than the consensus 6.4%, and indicative that contrary to expectations, the politburo is still focusing purely on dealing with Bernanke's exported inflation. It also means that there will be no joy in Mudville and China will not serve as the much needed growth dynamo to push the entire world out of the re-depression. The breakdown in component shows that food inflation jumped 14.8% versus non-food inflation rising 2.9%. Elsewhere PPI came in line with expectations at 7.5%. "China’s rising inflation is likely short lived given falling food prices, especially pork," Bloomberg economist Michael McDonough says. True, however the much needed panacea for the overnight malaise that has gripped the world market is not forthcoming, and the ball is now squarely in the Chairsatan's court.

Politico reports that the latest development in the constantly changing and oh so theatric "struggle" to find a compromise on how to raise the debt ceiling by $2.5 trillion, is one which will not only not do anything to fix the deficit situation but will in fact set America back, as a key part of the "savings" will come precisely from the same change in the definition of inflation courtesy of the Chained CPI introduction, which the democrats previously blasted, and for good reason: because it will be an implicit theft from Social Security. Recall that the last time this was proposed the AARP started foaming in the mouth within minutes. The broad strokes of the plan are as follows: "The once moribund Senate “Gang of Six” regained new life Tuesday after Oklahoma Sen. Tom Coburn unexpectedly rejoined the group — and more senators are now coalescing around a new proposal that would cut the debt by as much as $3.7 trillion over the next decade.  According to a copy of the plan, obtained by POLITICO, the group would impose a two-step legislative process that would make $500 billion worth of cuts immediately followed by a second bill to create a “fast-track process” that would propose a comprehensive bill aimed at dramatically restructuring tax and spending programs. The plan calls for changes to Social Security to move on a separate track, and establishes an elaborate procedure for considering the measures on the floor." And here is the kicker: "The $500 billion in cuts would come from a range of sources, including shifting to a new consumer price index to make cost-of-living adjustments to Social Security." Care to wager what the bulk of this $500 billion will come from: that's right - social security, whose deliverable obligations will plunge as suddenly the inflation variable in the actuarial calculation will very mysteriously be cut courtesy of Senate-endorsed theft.

If we are in a deflation, why are we having inflation? But, if we are having inflation why haven’t we seen prices go crazy? I explain why inflation is just starting.

So much for the Empire Manufacturing index being a harbinger of an economic pick up. With virtually everyone on Wall Street expecting a positive print, with the average at +5.00, the actual number of -3.76 comes as yet another confirmation of the (f)utility of Wall Street groupthink. While it was a modest bounce from the June -7.79, this first July manufacturing indication, which coming negative means the contraction is now well into its second month, and has ugly undertones for Q3 GDP, which we expect most banks will revise their expectations lower in the aftermath of yesterday's JPM downgrade of the US economy. And while there was some good margin news with Prices Paid dropping by 13, or more than Prices Received which declined by 6 points, a far more troubling indicator this month is the collapse in the Number of Employees Index to 1.11 from 10.20, or the lowest of 2011. This is not good for July NFP numbers after the already atrocious June employment data. Elsewhere on the inflationary front, CPI missed expectations of a -0.1% drop, instead printing at -0.2%, the lowest since June 2010. The reason was the 4.4% plunge in the Energy Index, the largest drop since December 2008. That said, the core CPI was unchanged at 0.3%, higher than expectations of 0.2%, due to increases in prices for shelter, apparel, new vehicle, used cars and trucks and medical care. In other words: all the things that people need right after food and gas. We would venture to guess that in addition to S&P < 1,000, core CPI coming in negative is the other QE3 gating factor.