Gross Domestic Product

Whether it was Captain America's roadshow or Uncle-Sam 'wanting' your help, the US always seemed to maintain some semblance of class when propagandizing its citizens into buying its government bonds. Whether for patriotic or xenophobic reasons, it appeared to work. Japan, though, with its increasingly desperate demographic situation, deficits, downgrades, and well, general malaise of Koo/Keynesian-stuffed economic stagnation has turned to the next best thing - the all-girl band AKB48. As The Telegraph notes today, the all-female pop group will headline a summer campaign for "reconstruction bonds" aimed at financing projects in regions hammered by last year's quake-tsunami disaster. The debt campaign will see AKB48 - comprising about 90 performers, ranging in age from early teens to mid-20s - joined by sumo wrestling's champion Hakuho and female football star Homare Sawa, Japan's Jiji press agency reported. The group's bubblegum pop and synchronized dancing has proved a huge hit with young girls. Perhaps more disturbingly (and why Japan chose them maybe?) - running the gamut from girl-next-door to sultry temptress, the band also has a substantial male following - many of whom are older - who support a vast merchandising industry. Japan has the industrialized world's worst public debt, amounting to more than twice its gross domestic product - topping hard-hit eurozone countries including Greece, which have drawn fire from foreign investors over their fiscal management. All of this makes us wonder - Forget AKB48, how long until AK47 in musical, or primarily otherwise, format is used to encourage lending to sovereigns all around the "developed" world?

European stock futures saw a jump higher at the cash equity open as the Eurostoxx broke through yesterday’s high of 2160. Comments from the Italian PM from late yesterday, who said that the majority of ministers are in favour of Euro bonds was noted but the move was largely technically driven with stops tripped on the ascent. In reaction to this the European bond yield spreads in the 10yr part of the curve tightened aggressively with OAT’s outperforming once again edging back toward the psychological 100bps level. Meanwhile in the FX market the USD weakened in early trade on the renewed risk appetite which bolstered the gains in EUR/USD alongside touted option defence by a Swiss name at the 1.2500 level. Commodity linked currencies such as the AUD was the main benefactor of a moderate move higher in crude futures and precious metals but has been capped so far by offers at 0.9800. Into the North American open prices have pared, with European equities in the cash and futures both slipping into the red, excepting the DAX. A distinctly light calendar from the US with only the May final Michigan report due, coupled with an early closure in the Treasury pit today, ahead of the Memorial day holiday, means that volumes will likely decline into the latter stages of the US session today.

All yu need to read.

This is the REAL DEAL for Europe. Anyone who has some kind of counter-argument to these points either doesn’t understand the political environment we’ve entered (even Central Banks are fed up with bowing to political pressure from politicians) or is simply hoping that by ignoring these realities they (the realities) will go away.

While US banks have been busy refocusing their "creative financial products"-time over the past two months, instead defending against allegations of muppetism, or explaining how hedging is really betting it all on red, and then doubling down (just because the casino supposedly has the bank's back), Europe has been busy coming up with new and creative ways of betting on the demise of FaceBook. While official shorting of the most overhyped and overvalued company in history only became a reality for most investors today, Europe's banks have a head start courtesy of "innovated" structured products created by UBS, Commerzbank and Julius Baer. As Bloomberg explains, "the most actively traded structured products tied to Facebook since its IPO have been so-called put warrants, whose buyers profit if the shares drop below a pre-defined level, in some cases as low as $22, data compiled by Bloomberg show. UBS AG (UBSN), Commerzbank AG (CBK) and Julius Baer Group Ltd. (BAER) are among lenders that listed 1,504 warrants and certificates in Europe linked to shares of the social networking site that were offered at $38....“There has been strong demand on the put side, with the ratio between puts and calls at around 70/30” with “some people expressing deep downside views,” Heiko Geiger, the head of public distribution for Germany and Austria at Bank Vontobel AG in Frankfurt, said in an interview yesterday."

In a brief though detailed clip, Stratfor's VP Peter Zeihan discusses the risk of contagion from Greece and the 'creative' - if not self-centered - suggestions for a solution to these problems. Earlier in the week we described Deutsche's suggestion of a dual currency - the GEURO - and that is where Zeihan focuses, noting that "The Greek economy is as deliciously non-competitive as the German economy is hyper-competitive" - this mismatch is the core of the crisis. The GEURO (trading as gEUROQQ on the pink sheets) plan doesn't address this mismatch but extends it just a little longer while bailout funds will continue to funneled through Athens to the country's lenders (read European banks) but private capital would be unlikely to flow and without outside capital, they would be unlikely to stimulate the growth they need to regain any kind of solid footing. Greek debt levels to GDP would rise (not fall) under the plan as EUR debts would remain but GEURO incomes (devalued) would be the source of GDP - making a long-term recovery even less likely. The only winners - simple: foreign banks who have exposure to Greece. The Stratfor VP goes on to note that the vast bulk of Greek debt is held by the ECB, IMF, and the Greeks (Greek banks) adding that private losses would not be catastrophic in the event of another Greek default - though we point out that it is the contagion effects (as we have so critically established in the past) that makes the Greek imbroglio so important to watch.

Wondering what caused the sudden spike in the EUR? Wonder no more, for JPM's Greg Fuzesi merely put into words what everyone else had been speculating since this morning, namely more easing coming from the ECB. To wit: "We suspect the ECB's first response will be in terms of new liquidity measures. The committment to supply unlimited liquidity at the regular refis (1-week, 1-month and 3-month) expires in mid-July and an extension of this should be announced at the June meeting. Whether the ECB will also announce some LTROs (likely of maturites up to one year) at the June meeting is less clear. Its latest commentary suggested that it is not minded to move this early and that it will wait instead for the outcome of an internal review that it is conducting about the effectiveness of its policy tools so far. Waiting until July would also give the ECB a better sense of the political situation in Greece after the election. Hence, we pencil in the announcement of 1-year LTROs for the July meeting. Beyond this we expect the main refi rate to be cut 25bp at the September meeting, with the deposit facility rate remaining at 0.25%. This implies that the ECB will respond very incrementally to the current macroeconomic weakness." To summarize: help us Obi-Mario Draghi, you are our only hope.

In a absolutely shocking development, initial claims for the week ended May 5 printed in line with expectations of 370K, but to make the Mainstream Media's life easy and unleash all those "Initial Claims Decline by 2,000" headlines, last week's number was increased from 370K to 372K (ignore that NSA number increased by 2,515). Continuing claims missed expectations of 3250K printing at 3260K, but down from an upward revised 3289K. Needs to say this week's 370K adjusted print will be revised higher to 372-373K and the MSM will fall for it all over again. More importantly, the ongoing collapse in those collecting extended benefits now that legislation has halted extensions is becoming more acute: 40K dropped off Extended Claims and EUCs. More importantly, Durable Goods rose by 0.2% in April to $215.5 billion, as expected. However, when removing the traditionally volatile transportation component, Durable goods slid by 0.6% on expectation of a 0.8% increase; compared to -0.8% in March; Cutting out Capital Goods and Non-Defense Aircraft, the collapse was even worse, printing at -1.9% on expectations of a 0.8% print. And the March number was slashed from -0.8% to -2.2%. The is now the second in a row (see below). Cue downward revisions to Q2 GDP any second.

Peripheral stock indices underperformed in early trade, with banks under considerable selling pressure amid renewed tensions in credit markets. Wave after wave of poor data from the European PMIs and the German IFOs placed shares under further pressure and talk of macro names selling EUR/USD weighed on the pair. As a result, in the fixed income space, the German 2/5 spread traded at levels not seen since December 2008. However as the session progressed, stocks staged a decent recovery, which coincided with unconfirmed market talk of an asset reallocation trade, together with talk of Asian real money accounts buying French OATs, which in turn prompted sharp tightening in FR/GE 10y bond yield spread. This also supported EUR/USD, which after coming close to making a test on the 1.2500 barrier is now trading little changed. In other news, the ONS reported that the UK economy shrank by 0.3% in the first three months of the year, more than previously thought. The downward revision was due to a bigger contraction in construction output than previously estimated. Despite this, FTSE in the cash has persisted, and is the strongest performing index in Europe today.

• China Pledges More ‘Fine-Tuning’ in Support for Growth (Bloomberg)... more promises, just never any actual funding
• Spain Calls for Help to Lower Borrowing Rates (AP)
• China Is a Black Box of Misinformation (Bloomberg)
• Fed data expose US$100bn JP Morgan blunder (IFRE)
• EU Chiefs Clash on Bonds Amid Call Greece Keep Cutting (Bloomberg)
• Spain to Recapitalize Bankia in Latest Bailout (WSJ)
• The running schizo tally: EU urges Greece to stay in euro, plans for possible exit (Reuters)
• The Seeds of the EU’s Crisis Were Sown 60 Years Ago (Bloomberg)
• Fed's Bullard says orderly Greek exit possible (Reuters)
• Some Big Firms Got Facebook Warning (WSJ)
• Chesapeake Raises Big Bet in Ohio (WSJ)

If there was one catalyst for the market to be "convinced" of an imminent coordinated liquidity injection, as Zero Hedge first hinted yesterday, or simply a 25-50 bps rate cut from the ECB as some other banks are suggesting and Spain's ever more desperate Rajoy is now demanding, it was the overnight battery of European Flash PMI, all of which came abysmal, throughout Europe, the consolidated Eurozone PMI posting the worst monthly downturn since mid-2009, the PMI Composite Output and Manufacturing Index printing at a 35 month low of 45.9 and 44.7 respectively. PMIs by core country were atrocious: France Mfg PMI at 44.4 on Exp of 47.0 and down from 46.9, a 36 month low; German Mfg PMI at 45.0 on Exp. of 47.0 and down from 46.2. The implication, as the charts below show, is that GDP in Europe is now negative virtually across the board. Adding insult to injury was the UK whose GDP fell 0.3%, more than the 0.2% drop initially expected. The cherry on top was German IFO business climate, which tumbled from 109.9 to 106.9 on Expectations of 109.4 print, as the European crisis is finally starting to drag the German economy down, or as Goldman classifies it, "a clear loss in momentum." What does it all add up to? Why nothing but a massive surge in risk, as the market's entire future is now once again in the hands of the #POMOList, pardon, the central banks: unless the ECB steps up, Europe will implode due to not only political but economic tensions at this point. Sadly, as in the US, by frontrunning this event, the markets make it more improbable, thus setting itself up for an even bigger drop the next time there is no validation of an intervention rumor: after all recall what sent stocks up 1.5% yesterday - a completely false rumor of a deposit insurance proposal to come out of the European Summit. It didn't, but that didn't prevent markets to not only keep their massive end of day gains, but to add to them. it is officially: we have entered the summer doldrums, when bad is good, and horrible is miraculous.

All you need to read.

While hard information is scarce, concerns about deposit flight from Greek banks have increased since the 6 May elections. To the extent that such flight arises from liquidity concerns, the ECB can contain it (or its impact) via its various monetary policy and ELA operations. But, as Goldman Sachs notes in its Focus today, the ECB cannot deal with concerns about bank solvency and/or deposit currency redenomination. That requires a pan-Euro area guarantee of the Euro value of bank deposits by the fiscal authorities.  Politically, it will not be domestically popular in Germany (inter alia) to extend such guarantees, however much Germany may benefit from arresting the financial instability deposit runs may cause. And institutionally, in order to contain the threat of free-riding on the guarantee of others, entering into a pan-Euro area deposit guarantee would need to be associated with a deepening of the pan-Euro area system of financial supervision and regulation. This would involve substantial loss of sovereignty relative to the status quo and require significant institutional innovation. However, attractive in principle, even Goldman agrees with our skeptical perspective that it is unlikely that such a guarantee can be implemented credibly in short order. So, what would you do with your hard-earned deposits? Demand them or leave them at the bank on the basis that the EU leaders will do what they promise - this time is different.

"The next big financial crisis we will face will not come from Europe", Charles Biderman of TrimTabs notes, "but rather from China." In a brief but thought-provoking clip, Charles takes on the corruption in the 'manufactured' GDP data and outlines three more critical real-time (hard-to-fake) data points (electricity consumption, railcar-loadings, and bank-loans) that suggest China is potentially already in a recession. "Most investors do not even think this is possible", he adds, as China is the hope that so many market participants hold on to as the engine of global growth. Add to this the collapsing real-estate bubble, on which the TrimTabs-Truthsayer provides some interesting color - relating to private-public relationships and demand (and prices) are dropping rapidly. This dismal (and somewhat shocking) conclusion that China could already be in recession only stokes the fires of money-printing-expectations of course - though Charles does add (and in keeping with our 'there's no such thing as decoupling' meme) - "What a mess this world is becoming as Europe and now China is contracting - leaving very little to justify global stock prices to be as high as they currently are" and while collapse may not be imminent, Biderman ends by stating that "The Central Banks cannot levitate asset prices forever" - leaving the question of when not if the drop occurs.