Just one guy's attempt to make sense of what is likely to happen in the coming days.
- Euro left reeling after ECB's liquidity splurge (Reuters)
- Coalition Emerges to Battle Islamic State Militants (WSJ)
- Ukraine Gas Chief Takes on Gazprom in Race With Winter (BBG)
- Nato leaders fail to agree spending targets (FT)
- JPMorgan Had Exodus of Tech Talent Before Hacker Breach (BBG)
- Mercedes-Benz Sales Rise Despite Weak German Demand (WSJ)
- Secret Network Connects Harvard Money to Payday Loans (BBG)
- ICE looks to crack financial data market (FT)
In what will hardly be a good sign for tomorrow's "critical" non-farm payrolls report, moments ago ADP reported that in August only 204K private payrolls were created in the US economy, below the downward revised 212K in July, and below the consensus estimate of 220K. The good news, as Carlos Rodriguez, president and chief executive officer of ADP said, is that "August marks the fifth straight month of employment gains above 200,000, continuing an encouraging trend for the U.S. labor market.” Just barely. The bad news: this was the lowest ADP print since March, and hardly the "lift off" trend that many were expecting. Notably, the June 281K jobs print was revised even higher to 297K the highest in years and makes one wonder how much forward demand was pulled back into Q2 as a result of abnormally easy credit conditions and generous government spending.
A record-breaking surge in monthly credit creation and a trillion Yuan of QE-lite was enough to provide a glimmer of hope into the tumbling Chinese economy for one or maybe two months but with the real estate market continuing to free-fall, it should be no surprise that China's PMIs finally catch down to the erstwhile reality simmering under the surface in the ultimate centrally-planned economy. China's official government PMI dropped from 30-month highs, missed expectations and the early month flash print, to less exuberant 51.1 reading (with Steel industry new orders totally collapsing) with both medium- and small-companies printing contractionary sub-50 levels. Then (after Japan's PMI beat - of course it did as hard data crashes worst on record), HSBC China PMI also missed, printing a slightly expansionary 50.2 Showing, as BofA warns "the two PMIs both show that the current recovery is relatively weak and choppy..." and RBS adds "we expect the government to interpret such an outlook as challenging its growth target and to take more, and more significant, measures to support growth."
The Wall Street Journal's Jon Hilsenrath unleashed an instantaneous reaction to today's FOMC minutes and the message is clear - markets are much less uncertain than the Fed about the timing (sooner rather than later) of the first rate-hike. The minutes of the meeting, Hilsy notes, provide fresh evidence of an intensifying debate inside the central bank about when to respond to a surprisingly swift descent in the unemployment rate and rising consumer prices. The minutes appeared to reflect a slightly more aggressive stance than Ms. Yellen's testimony.
The attached Barron’s article appeared in December 2007 as an outlook for the year ahead, and Wall Street strategists were waxing bullish. Notwithstanding the advanced state of disarray in the housing and mortgage markets, soaring global oil prices and a domestic economic expansion cycle that was faltering and getting long in the tooth, Wall Street strategists were still hitting the “buy” key. In fact, the Great Recession had already started but they didn’t have a clue: "Against this troubling backdrop, it’s no wonder investors are worried that the bull market might end in 2008. But Wall Street’s top equity strategists are quick to dismiss such fears."
Following last week's collapse in new home sales (and last month's massive beat and surge in pending home sales), it was likely not a total surprise that pending home sales would slow, but the -1.1% MoM print is the worst in 2014 (and the biggest miss in 2014). The median existing home price continues to rise (up 4.3% year-over-year) but this is the slowest rate of gain since March 2012. NAR is quick with the excuses and this time.. no weather is to blame.
- The Kerry Konfusion Kontinues: Kerry urges Kurds to save Iraq from collapse (Reuters)
- Abe Unveils Japan’s New Growth Strategy (WSJ)
- Because the recovery: Avon to Cut 600 Jobs as CEO McCoy Seeks to Trim Expenses (BBG)
- Iraqi Parties Pressure Prime Minister Nouri al-Maliki to Step Down (WSJ)
- Ukraine Rebels Call Cease-Fire to Match Government Truce (BBG)
- IRS accused of obstruction over lost emails in Tea Party affair (Reuters)
- IRS chief scorched as 'liar' (WND)
- Big Investors Missed Stock Rally (WSJ)
- U.K. Jury Finds Coulson Guilty of Conspiracy to Intercept Phone Voice-Mail Messages (WSJ)
- HSBC to halve countries served by private bank, sells assets (Reuters)
- Bond Market Has $900 Billion Mom-and-Pop Problem When Rates Rise (BBG)
This week brings PMIs (US and Euro area ‘flash’) and inflation (US PCE, CPI in Germany, Spain, and Japan). Among other releases, next week in DMs includes [on Monday] PMIs in US (June P), Euro Area Composite (expect 52.8, a touch below previous) and Japan; [on Tuesday] US home prices (FHFA and S&P/Case Shiller) and Consumer Confidence (expect 83.5, same as consensus), Germany IFO; [on Wednesday] US Durable Goods Orders (expect -0.50%, at touch below consensus) and real GDP 1Q anniversary. 3rd (expect -2.0%) and Personal Consumption 1Q (expect 2.0%), and confidence indicators in Germany, France and Italy; [on Thursday] US PCE price index (expect 0.20%), Personal Income and Spending, and GS Analyst Index; and [on Friday] Reuters/U. Michigan Confidence (expect slight improvement to 82, same as consensus), GDP 1Q in France and UK (expect 0.8% and 0.9% yoy, respectively), and CPI in Germany, Italy, Spain and Japan.
As we noted previously, it is likely that whatever Draghi does this week "will not deliver a significant impulse to the real economy" in Europe but while negative rates are almost guaranteed (based on the consensus), reviving the ABS market (via focused QE) is being heralded by many as a positive swing factor. Unfortunately, as SocGen explains, even if the ECB began purchasing ABS in H2 2014, the size and reach of the market is not enough to move the scale as Europe acts desperately to avoid a Japanese-style lost decade.
Ahead of this Thursday's ECB meeting, speculation is rife about what Mario Draghi will announce, and as the following Nomura chart highlights most pundits are convinced that the most likely announcement is a cut in the refi and deposit rate with a probability of around 90%, an LTRO in distant third at 34%, and a full blown QE dead last with 10%. However, as SocGen predicts, which is rather aggressive in its assumptions expecting a negative deposit rate of -0.1%, a targeted LTRO to "boost lending to the private sector", and a "signal" of €300 billion in asset purchases, the bulk of this new-found liquidity will almost exclusively go to boost capital markets, and the wealth effect. As for the broader economy? "We do not expect the 5 June measures to deliver a significant impulse to the real economy."
With real incomes stagnant and the cost of everything from food, school tuition and healthcare premiums skyrocketing for millions of Americans, it appears that borrowing against one’s home is once again a key source for consumption, if not survival, for the nearly extinct socio-economic demographic known as the middle-class. The Wall Street Journal reported yesterday that home-equity lines of credit (Helocs) had increased at a 8% rate year-over-year in 1Q14...The new American Dream.
A dispassionate look at the week ahead.
According to the Chinese financial publication Securities Daily, emergency real estate rescue packages have been launched in large cities such as Wuxi, Nanning, Hangzhou, Tianjin, Tongling and Zhengzhou in the last month alone..."if a borrower does not fulfill the loan repayment obligations as agreed in the contract, the guarantee institutions will have to repay the housing loans..." What a surprise – a government guarantee. The market is imploding and defaults are going through the roof. Property vacancy rates in Zhengzhou are an astounding 23%. So the government is putting taxpayers on the hook. In other words, the government is panicking. But it’s not working... so much excess inventory has built up, a major slowdown was inevitable. And like the butterfly that flaps its wings, a slowdown in China has substantial effects on the rest of the world.
After the initial crash in many of the commodities backing China's shadow-banking system's ponzi, levels recovered modestly as rumors were spread of bailouts, stimulus, and in fact the exact opposite of what the Chinese government had declared it was trying to do. That ended for Iron Ore this weekend when, as The FT reports, China announced plans to get tougher on loans for iron ore imports as concerns grow that steel mills are using import loans to stay afloat in defiance of policies to reduce overcapacity in heavily polluting and lossmaking industries. Iron Ore prices tumbled overnight, closing near the lowest levels since Sept 2012 as it appears the PBOC and CBRC are serious and set to implement the tougher rules on May 1st.