CPI

Earlier we reviewed the overnight plunge in China stocks, especially those related to the real-estate market in the aftermath of the latest move by the State Council to be far more hawkish than expected, in its effort to curb property inflation. The economic and market weakness that resulted has followed through to overnight US and European futures, even as peripheral bonds are trading roughly unchanged, surprising many who thought this weekend's Beppe Grillo statement on the future of Italian debt and presence in the Eurozone would be market moving: it wasn't as Grillo said nothing that he had not already made quite clear. In other, more recent economic news, UK construction PMI imploded to recession levels, plunging to 46.8 from 49.0, far below expectations and the lowest print since October 2009, setting the stage for much more Goldman-led reflation by the BOE. Also negative was the drop in the Eurozone Sentix Investor Confidence index which tumbled to -10.6 from -3.9 on expectations of -4.3, sending the EURUSD deep into 1.29 territory. It appears the Sentix excludes the soaring German confidence, which two weeks ago was the sole driver of all upside, not once but twice in one week. Today we get the first day of the sequester being digested by the market - this togetger with an empty macro calendar in the US means rumors and headlines will determine how far GETCO's algo push the stop hunts during the first and last 30 minutes of trading.

In the upcoming week the key focus on the data side will be on US payrolls, which are expected to be broadly unchanged and the services PMIs globally, including the non-manufacturing ISM in the US. Broadly speaking, global services PMIs are expected to remain relatively close to last month's readings. And the same is true for US payrolls and the unemployment rate. On the policy side there is long lost with policy meetings but we and consensus expect no change in any of these: RBA, BoJ, Malaysia, Indonesia, ECB, Poland, BoE, BoC, Brazil, Mexico.  Notable macro issues will be the ongoing bailout of Cyprus, the reiteration of the OMT's conditionality in the aftermath of Grillo's and Berlusconi's surge from behind in Italy. China's sudden hawkishness, the BOE announcement and transition to a Goldman vassal state, and finally the now traditional daily jawboning out of the BOJ.

My generation, born during or near post World War II, has been quite fortunate. Those of us lucky to have been born in the US during this period hit a sweet spot of both place and history. The economy thrived, standards of living soared and many avoided the numerous wars that dominated the Twentieth Century. Today, the future does not look so bright. Economies are stagnant, standards of living are declining and the threats of war increase. Younger generations will have more difficult lives than my generation. Life has its own ways of ensuring that TANSTAAFL (“There ain’t no such thing as a free lunch”) is enforced. My twilight years now present major challenges. Because high inflation and a market collapse are real possibilities, I (and millions of others who believe similarly) am forced into playing the wildly dangerous game of financial chicken. When we should be enjoying our retirement and grandchildren, government has forced us to take risks that even wild teenagers likely would avoid.

The numbers we are faced with are so large, the COLA changes are really just a rounding error.

I look at two problems confronting Japan. Despite huge monetary easing and extended QE, deflation not inflation remains the dominant price characteristic. Many who think that QE drives currencies and creates inflation really need to come to grips with Japan. The other problem Japan is encountering is that foreign investors have responded to the policy signals by rotating out of Japanese bonds and into Japanese stocks. However, Japanese investors have not stepped up their export of savings to protect it. Instead over the past four weeks, Japanese investors have sold more foreign assets than any four week period for more than a decade.

If the new year started off with a bang, March is setting up to be quite a whimper. In the first news overnight, we got the "other" official Chinese PMI, which as we had predicted (recall from our first China PMI analysis that "it is quite likely that the official February print will be just as weak if not more") dropped: while the HSBC PMI dropped to 50.4, the official number declined even more to just barely expansionary or 50.1, below expectations of a 50.5 print, and the lowest print in five months. This was to be expected: Chinese real-estate inflation is still as persistent as ever, and the government is telegraphing to the world's central banks to back off on the hot money. One country, however, that did not have much hot money issues was Japan, where CPI declined -0.3% in January compared to -0.1% in December, while headline Tokyo February data showed an even bigger -0.9% drop down from a revised -0.5% in January. Considering the ongoing surge in energy prices and the imminent surge on wheat-related food prices, this data is highly suspect. Then out of Europe, we got another bunch of PMIs and while French and Germany posted tiny beats (43.9 vs Exp. 43.6, and 50.3 vs 50.1), with Germany retail sales also beating solidly to cement the impression that Germany is doing ok once more, it was Italy's turn to disappoint, with its PMI missing expectations of a 47.5 print, instead sliding from 47.8 to 45.8. But even worse was the Italian January unemployment rate which rose from 11.3% to 11.7%, the highest on record, while youth unemployment soared from 37.1% to 38.7%: also the highest on record, and proof that in Europe nothing at all is fixed, which will be further confirmed once today's LTRO repayment shows that banks have no desire to part with the ECB's cash contrary to optimistic expectations.

It has been yet another quiet overnight session, devoid of the usual EURUSD ramp, and thus ES, at the Europe open (although it is never too late), which has seen the Shangai Composite finally post a meaningful rise up 2.26%, followed by some unremarkable European macro data as Eurozone CPI came as expected at 2.0%, and German unemployment just a tad better, at -3K, with consensus looking for 0K. Italy continues to be the wildcard, with little clarity on just who the now expected grand coalition will consist of. According to Newedge's Jamal Meliani, a base case scenario of Bersani/Berlusconi coalition may see a relief rally, tightening 10Y BTP/bund spread toward 300bps. A coalition would maintain current fiscal agenda and won’t implement any major reforms with fresh elections being     called within a year. A Bersani/Grillo coalition is least likely, may slow reforms which would see 10Y BTP/bund spreads widening to 375bps. Of course, everything is speculation now, with Grillo saying no to any coalition, and moments ago a PD official saying against a broad coalition. But at least the market has it all priced in already - for more see Italy gridlock deepens as Europe watches nervously.

• Italy sold EUR 6.5bln in 5y and 10y BTPs this morning, solid b/c and competitive yields, especially when considering the  uncertain political situation in Italy.
• Moody's also said that Italian election is indirectly credit negative for other pressured EU sovereigns.
• Fears rise that ECB plan has a weakness as the strings in the Eurozone bond buying programme may be its frailty.

What could go wrong with the housing 'recovery' in 2013? To answer this question, we need to understand that housing is the key component a middle class squeezed by historically high debt loads, stagnant incomes, and a net worth largely dependent on their home. In response, Central Planners have pulled out all the stops to reflate housing as the only available means to spark a broad-based “wealth effect” that would support higher spending and an expansion of household debt. This returns us to the key question: Are all these Central Planning interventions sustainable, or might they falter in 2013?  Once markets become dependent on intervention and support to price risk and assets, they are intrinsically vulnerable to any reduction in that support. Should these supports diminish or lose their effectiveness, it will be sink-or-swim for housing. Either organic demand rises without subsidies and lenders originate mortgages without agency guarantees, or the market could resume the fall in valuations Central Planning halted in 2009.

Following last night's very disappointing China HSBC PMI numbers, one would think that the traditional EURUSD, and thus ES, overnight ramp would be missing or at least delayed, especially ahead of a very possible risk off day such as Italian election day. One would be wrong. Because some time after midnight eastern, in what can only be seen as a celebration of Argo's choice as a best picture, the EURUSD resumed its upward ramp on absolutely no news, pushing the pair higher by nearly 100 pips in a smooth diagonal line, and dragging US futures up with it as usual. The catalyst apparently is that with Italian exit polls mere hours away (due out at 2pm GMT), market talk is that Berlusconi's resurgent chances have been hobbled due to a low turnout in the pro-Berlusconi northern states (recall that Lombardia is the key state for the elections) following a quick read of a Reuters recap article. What is ignored is that the referenced Reuters article also notes the "surge in protests votes being cast" in the first day of voting, which means less votes on an absolute and relative basis for Bersani and Monti, even if Berlusconi ends up getting less of the Northern vote. Of course, nobody actually has any clue what the exit polls look like. In fact, with a hung parliament a distinct possibility even assuming a Bersani-Monti coalition, both Goldman and JPM have said a 50-100 pip widening across the Italian curve is possible should a Hung Parliament develop (for more read here). But for now hope dominates and is both squeezing the shorts and causing yet another algorithmic stop hunt in FX, and thus every other asset class. Don't be surprised all of overnight's gains, and much more to be wiped out minutes after 9 am eastern when the first Italian exit polls emerge.

Here are ten things that out to be on your radar screens this week and a view on their importance.

For several long months now, the market has been treated to an unadulterated diet of such gross monetary irresponsibility, both concrete and conceptual, from what seems like the four corners of the globe and it has reacted accordingly by putting Other People's Money where the relevant central banker's mouth is. Sadly, it seems we are not only past the point where what was formerly viewed as a slightly risqué "unorthodoxy" has become almost trite in its application, but that like the nerdy kid who happens to have done something cool for once in his life, your average central banker has begun to revel in what he supposes to be his new-found daring – a behaviour in whose prosecution he is largely free from any vestige outside control or accountability.  Indeed, this attitude has become so widespread that he and his speck-eyed peers now appear to be engaged in some kind of juvenile, mine's-bigger-than-yours contest to push the boundaries of what both historical record and theoretical understanding tell us to be advisable.

While Abenomics has failed in spurring exports, while the rise in the Nikkei has benefited some 1-2% of the population, the most direct consequence of crushing the yen some 20% is that energy costs, virtually all of them imported, are if not surging, then about to soar to all time highs.  In other words, our sincerest condolences to Japan, for whom this winter will be a very cold one (and a very hot summer follows), unless of course in Japan, like in the US, energy costs don't matter when calculating CPI and inflation and the consumer can spend any amount to keep themelves warm, or cold as the case may be.

Today's drivers and their implications.

Wal-Mart just called the Fed out. Inflation is already seeping into the system in a big way. Indeed, if you account for real inflation (not the Fed’s phony CPI measure), the US economy contracted by over 1% last quarter.