It's that time again, when a largely random, statistically-sampled, weather-impacted, seasonally-adjusted, and finally goalseeked number, sets the mood in the market for the next month: we are talking of course about the "most important ever" once again non-farm payroll print, and to a lesser extent the unemployment rate which even the Fed has admitted is meaningless in a time when the participation rate is crashing (for the "philosophy" of why it is all the context that matters in reading the jobs report, see here). Adding to the confusion, or hilarity, or both, is that while everyone knows it snowed in December and January, Goldman now warns that... it may have been too hot! To wit: "We expect a weather-related boost to January payroll job growth because weather during the survey week itself - which we find is most relevant to a given month's payroll number - was unusually mild." In other words, if the number is abnormally good - don't assume more tapering, just blame it on the warm weather!
The taper program distances the bankers from responsibility for crisis in our financial framework, at least in the eyes of the general public. If a market calamity takes place while stimulus measures are still at full speed, this makes the banks look rather guilty, or at least incompetent. People would begin to question the validity of central bank methods, and they might even question the validity of the central bank’s existence. The Fed is creating space between itself and the economy because they know that a trigger event is coming. They want to ensure that they are not blamed and that stimulus itself is not seen as ineffective, or seen as the cause. We all know that the claims of recovery are utter nonsense. The taper is not in response to an improving economic environment. Rather, the taper is a signal for the next stage of collapse. The real reason stocks and other indicators are stumbling is because the effectiveness of stimulus manipulation has a shelf life, and that shelf life is over for the Federal Reserve.
Apparently squeezed by an internal party split, The Hill reports that House Republican leaders have concluded that they cannot pass an increase in the debt ceiling without help from Democrats, abandoning plans to tie legislation either to ObamaCare or the Keystone pipeline. Having initially planned on these negotiation points, Boehner discovered he would not have enough votes to pass the bill... and folded. That left Republican leaders with no clear alternative to addressing the debt limit, which, as we noted is rapidly approaching at the end of February, as a combination of Republicans and Democrats will be needed to get a debt-limit boost through the House - leaving some Reps describing a clean debt-ceiling bill as "Capitulation."
It's snowing in New York so the market must be down. Just kidding - everyone know the only thing that matters for the state of global risk is the level of USDJPY and it is this that nearly caused a bump in the night after pushing the Nikkei as low as 13,995, before the Japanese PPT intervened and rammed the carry trade higher, and thus the Japanese index higher by 1.23% before the close of Japan trading. However, since then the USDJPY has failed to levitate as it usually does overnight and at last check was fluctuating within dangerous territory of 101.000, below which there be tigers. The earlier report of European retail sales tumbling by 1.6% on expectations of a modest 0.6% drop from a downward revised 0.9% only confirmed that the last traces of last year's illusionary European recovery have long gone. Then again, it's all the cold weather's fault. In Europe, not in the US that is.
Today's modest bounce in stocks - considerably removed after-hours - does not provide much hope for those looking to buy the dip with the Dow still down over 1000 points year-to-date. In fact, as we discuss below, troubling news just continues to pour in from all over the world... For those that are not interested in the technical details, what all of this means is that global financial markets are starting to become extremely unstable. Consider the following...
UDPATE: At today's Treasury auction - 4-week bills yield 13bps, 52-week bills yield 11.5bps... 1.5bps inverted!
Whether Treasury Secretary Lew's words were meant to calm and chaosify the markets yesterday, his comments on the debt ceiling have sparked a notable sell-off in ultra-short-dated Treasury Bills. As we noted previously the 2/28 ish date appears to be the market's bogey for now with the yield more than tripling from 3bps to 11bps in the last 2 days. CDS on the USA has also risen notably in the last few days with the 5Y now trading inverted to the 1Y cost of protection once again.
Alarms are going off in assorted plunge protecting offices, now that the USDJPY has breached the 102.000 "fundamental" support level, below which the Yen can comfortably soar to sub 100.000 in perfectly even 100 pip increments. The first trading day of February has brought another weaker session across Asia though some equity indices such as the KOSPI (-1.1%) are in catch-up mode given they were shut towards the back-end of last week. Over the weekend, the Chinese government published its latest official manufacturing PMI which showed a 0.5pt drop to 50.5, a six-month low, and consistent with consensus estimates. DB’s Jun Ma believes there was some element of seasonality affecting this month’s result including the fact that Chinese New Year started at the end of January (vs February last year), anti-pollution measures in the lead up to CNY and efforts to control government consumption around the holiday period. The official service PMI was released overnight (53.4) which printed at the lowest level since at least 2011. The uninspiring Chinese data has not helped market sentiment this morning, with the Nikkei plunging -2% and ASX200 once again under pressure. S&P500 futures have fluctuated around the unchanged line this morning although if support below the USDJPY fail solidly, then watch out below. Markets in Mainland China and Hong Kong remain closed for Lunar New Year.
Nine Event Risks for the week ahead: identified, discussed and assessed.
Previous month's epic miss and hurriedly revised expectations from UMich confidence was 'baffled with schizophrenic bullshit' when the Conference Board printed at near record post-crisis highs earlier in the week. It is perhaps not unexpected that despite a drop MoM, following the huge miss last month that UMich confidence would very modestly beat expectations. As in the last 2 cycles, we saw an echo surge in confidence and that has now (just as in the last two cycles of confidence) begun to fade. Both current conditions and economic outlook fell MoM.
- Even Obama's fans has turning on him: "The Decline and Fall of 'Hope and Change'"
- European Stocks Drop, Head for Worst January Since 2009 (BBG)
- Euro-Area Inflation at 0.7% Builds Rate Pressure on ECB (BBG)
- Japan’s Inflation Accelerates as Abe Seeks Wage Gains (BBG)
- Unpossible - this is the USSA: Detroit Debt Proposal Favors Pension Funds (WSJ)
- Keystone Report Said Likely to Disappoint Pipeline Foes (BBG)
- YHOO still pretending someone cares about it: Yahoo says detected hacking attempt on email accounts (Reuters)
- How Google's Costly Motorola Maneuver May Pay Off (WSJ)
- Mexico Surpassing Japan as No. 2 Auto Exporter to U.S. (BBG)
While everyone focuses on the turmoiling in Emerging Markets, a good, old standby is back - the periodic "debt ceiling" IMAX tragicomedy. Recall that the debt limit, which has been suspended since October 17, is scheduled to be reinstated on February 8. At that time, the nation will be operating right at the debt limit, and the Treasury Department will use extraordinary measures to temporarily issue additional public debt to meet federal financial obligations as it always does during episodes of political posturing that without fail take place until the 11th hour, 59th minute, and 59th second. However, unlike last year when there was a 5 month interval between hitting the debt ceiling, and the day the Treasury's funds fully ran out - the infamous X Date - this time the emergency measures will only last a limited time. What this means when looking at a calendar, is that the Treasury may not have sufficient cash-on-hand to cover all obligations due as soon as February 28.
Confidence is soaring (or sliding) depending on what survey you choose to believe. The UMich confidence's collapse (the biggest miss in 8 years) has been matched by more 'baffle 'em with bullshit' as the Conference Board beats expectations by the most in 5 months and pushes back towards 2013 highs (near the highest in over 5 years). Both the Present situation and Expectations rose notably - despite 1.4 million people losing their benefits, a lackluster holiday season for retailers, and stagnant incomes - but the Present Situation index rose to the highest since April 2008.
For a brief moment this morning - following Jim Cramer's exclamation that anyone who is still bearish following the China Trust bailout is "stupid" - there was hope that the drama had stopped unfolding. However, it has not. JPY carry continues to be battered and that is dragging every levered-long trade lower from European bonds to US small caps. The invincible Trannies have collapsed and are now -3.25% in 2014; having risen more than 6.5% from the Taper decision day, Trannies have tumbled to a mere 0.8% gain. But the S&P 500 and Russell are catching down to the Dow's underperformance and have given up their post-taper gains. Rather stunningly, Discretionary and Homebuilders are now the worst performing S&P sectors from the taper. VIX has surged to touch 19% - its highest since October 9th. Treasuries are modestly bid (1-2bps at best) and the USD is flat (despite major swings in AUD, CAD, and JPY). Credit is trading back to 3-month wides and stocks are catching down.
With all eyes focused on China (shadow bank liquidity fears), Emerging Market currencies, and US equities; something very concerning has been going on in short-dated Treasury Bills. The ultra-short-term remain bid (near zero yield) as the saftey crush demand bids for them but move out one month - across the dreaded late-February debt-ceiling debacle maginot line - and suddenly yields are exploding! The March 16th yields have screamed from 1bps to 12.75bps in the last 2 days - now above the October debt ceiling levels..
Overview of forces impacting stocks, bonds and currencies.