CPI

What happens when we roll back into the next official recession, unemployment soars, and consumers really stop spending? What is revealed when you look under the hood of this economic recovery is that it is a complete and utter fraud. The recovery is nothing but smoke and mirrors, buoyed by subprime auto debt, really subprime student loan debt, corporate stock buybacks, and Fed financed bubbles in stocks, real estate, and bonds. The four retailers listed below are nothing but zombies, kept alive by the Fed’s ZIRP and QE, as they stumble towards their ultimate deaths. The coming recession will be the knife through their skulls, putting them out of their misery.

A look at next week's data in the somewhat larger context, and a look at interest rate differentials

After a week of relentless FX volatility, spilling over out of China and into all other countries, and asset products, it was as if the market decided to take a time-out overnight, assisted by the PBOC which after three days of record devaluations finally revalued the Yuan stronger fractionally by 0.05% to 6.3975. And then, as a parting gift perhaps, just as the market was about to close again, the Chinese central bank intervened sending the Onshore Yuan, spiking to a level of 6.3912 as of this writing, notably stronger than the official fixing for the second day in a row. In fact the biggest news out of China overnight is that contrary to expectations, the PBOC once again "added" to its gold holdings, boosting its official gold by 610,000 ounces, or 19 tons, to 1,677 tones.

With everyone now focused on what China's daily Yuan fixing will be ever night, there was some confusion why last night the PBOC decided to devalue the CNY by another 1.1% to 6.4010, despite its promise that the devaluation would be a "one-off" event, taking the 3 day devaluation to just about 4.5%. However, subsequently in a press conference, central bank vice-governor Yi Gang said that the PBoC will continue to step in when the market is ‘distorted’, that there is no economic basis for the Yuan to fall continuously and that it will look to keep the exchange rate ‘basically stable’. The Vice-Governor also said that the PBoC will closely monitor cross-border capital flows and that reports suggesting the Central Banks wants to see the currency depreciate 10% are ‘groundless’. Which is ironic considering after just 3 days, the PBOC is already half the way there!

Asset price inflation, a disease whose source always lies in monetary disorder, is not a new affliction. It was virtually inevitable that the present wild experimentation by the Federal Reserve - joined by the Bank of Japan and ECB - would produce a severe outbreak. And indications from the markets are that the disease is in a late phase, though still short of the final deadly stage characterized by pervasive falls in asset markets, sometimes financial panic, and the onset of recession.

Overnight the world realized that there is much more devaluation to come,  which in turn led to a tidal move higher in the EURUSD as the European banks who had been short the EURCNH (probably the same ones that were long the EURCHF in January ahead of the SNB shocker) continued covering their exposure, and in turn pushed the EURUSD well above 1.11, while the CHF continued to tumble alongside the USD at least when it comes to Europe. In Asia, and local emergin markets, however, it was a different FX story enitrely.

Despite claiming yesterday's devaluation was a "one-off", The PBOC has devalued the Yuan Fix dramatically for the 2nd day in a row - now 22 handles weaker than Monday's Fix. Offshore Yuan is trading at 4 year lows against the USD. The carnage from this dramatic shift is just beginning as global equity markets (US futures to China cash) are tumbling, US Treasury bond yields are crashing, gold is up, China credit risk is at 2 year highs, and China implied vol has exploded to 4 year highs. Ironically, China's government mouthpeiece Xinhua explains "China is not waging a currency war; merely fixing a discrepancy."

It appears - according to the narrative assigned by the mainstream media - that any weakness in asset prices should be bought because China will inevitably have to unleash pure QE (as opposed to the modestly watered down version currently underway) or some combination of RRR cuts. This is 'western' thinking as the go to policy of the rest of the world's central banks has been - put on pants, print money, paper over cracks, proclaim victory. However, in China there is one big problem with this... stoking inflation... and most crucially the social unrest concerns when suddenly a nation of newly minted equity losers can no longer afford their pork (which is facing record shortages)...

Following last week's economic data tempest, capped with the disappointing US nonfarm payrolls, which has provided virtually no clarity on just what the "(Dow Jones) data-driven" Fed will do in a world in which not only is the US economy rolling over, but China is imploding, commodity deflation is raging, and global stock markets are propped up by a handful of stocks, the coming week will be far less exciting (which is just how the Hamptons crowd wants it).

Following last week's bad news for the economy (terrible ADP private payrolls, confirmed by a miss in the NFP) which also resulted in bad news for the market which suffered its worst week in years, many were focused on how the market would react to the latest battery of terrible economic news out of China which as we observed over the weekend reported abysmal trade data, and the worst plunge in Chinese factory prices in 6 years. We now know: the Shanghai Composite soared by 5%, rising to 3,928 and approaching the key 4000 level because the ongoing economic collapse led Pavlov's dog to believe that much more easing is coming from the country which as we showed last night has literally thrown the kitchen sink at stabilizing the plunge in stocks.

"The future is unknown and we are not dealing with markets that are free markets anymore...now we have government interventions everywhere. [But] in the last say twelve months, I have observed an increasing number of academics who are questioning monetary policies. That's why I think they will take the gold away and go back to some gold standard by revaluing the gold say from now $1000/oz to say $10,000 dollars. An individual should definitely own some physical gold. The bigger question is where should he store it? because... the failure of monetary policies will not be admitted by the professors that are at central banks, they will then go and blame someone else for it and then an easy target would be to blame it on people that own physical gold because - they can argue - well these are the ones that do take money out of circulation and then the velocity of money goes down - we have to take it away from them... That has happened in 1933 in the US."

On Saturday, we got what we called a stark "reminder of just who is lying hunched over, comatose in the driver's seat of global commerce" when China reported that exports fell 8.3% in July, far more than consensus and the most in four months. On Sunday, we got still more evidence of China’s economic malaise as producer prices plunged 5.4%, the largest Y/Y decline since 2009.

Here is an overview of next week's events and data placed in the larger context.  

The demise of the dollar has been greatly exaggerated.  Here is how I see the near-term outlook. 

Here comes today's main event, the July non-farm payrolls - once again the "most important ever" as the number will cement whether the Fed hikes this year or punts once again to the next year, and which consensus expects to print +225K although the whisper range is very wide: based on this week's ADP report, NFP may easily slide under 200K, while if using the non-mfg PMI as an indicator, a 300K+ print is in the cards. At the end of the day, it will be all in the hands of the BLS' Arima X 12 seasonal adjusters, and whatever goalseeked print the labor department has been strongly urged is the right one.