Gross Domestic Product
Following the only major overnight econ event, which was the May German IFO Business Climate Index which dropped from 111.2 to 110.4 missing expectations of 110.9, the USDJPY has been on a soaring rampage higher hoping to push equities along with it (because now that gold manipulation is a proven fact, it is only a matter of time before the link between manipulating the USDJPY on thin volume with massive leverage and rigging the equity market is uncovered too), and at last check was just shy of 102.000. For now equity futures have failed to be dragged along although with the S&P all time high just around the horizon, the psychological level of 1900 staring the rigged market in the face, and the weekend just around the corner, it is virtually assured that the S&P will close at an all time high today - after all the people need to be confident when they go shopping at malls with money they don't have (but delighted by paper profits they haven't booked) so they boost the US non-GAAP GDP (at least before like Italy, the BEA too changes the definition of GDP to include cocaine and hookers). Finally, assuring a (record?) low-volume levitation today is the early closure of the bond pit ahead of Memorial Day holiday which also means only a skeleton crew of algos will be frontrunning each other to push the S&P over 1,900.
For two decades now mainstream Keynesian economists have been gumming about China’s remarkable economic boom and its accumulation of unprecedented foreign exchange reserves. The latter hoard has now actually crossed the $4 trillion mark. But this whole narrative is PhD jabberwocky with a Wall Street accent.
If oil is “just another commodity,” then there shouldn’t be any connection between oil prices, debt levels, interest rates, and total rates of return. But there clearly is a connection. As we have seen, rising interest rates will bring an end to our current equilibrium, by raising costs in many ways, without raising salaries. It will also reduce equity values and bond prices. A rise in the cost of extraction of oil, if it isn’t accompanied by high oil prices, will also put an end to our equilibrium, because oil producers will stop drilling the number of wells needed to keep production up. If oil prices rise (regardless of reason), this will tend to put the economy into recession, leading to job loss and debt defaults. The only way to keep things going a bit longer might be negative interest rates. But even this seems “iffy.” We truly live in interesting times.
Another day, another melt-up on the lowest volume of the year and VIX collapse. The Dow and the Nasdaq almost made it back to unchanged for the year; The Dow almost made it back to unchanged for May; but as the S&P surged towards its record highs once again, "most shorted" stocks led the way with a massive squeeze (almost 4% in the last 2 days). VIX broke back below 12 once again trading at its lowest in 14 months. Equity markets decoupled notably once again from bonds. Treasury yields rose once again at the long-end (30Y +8bps on the week, 5Y -1bps) but the steepening trend stalled today. The USD rose today (+0.2% on the week) led JPY weakness. USDJPY was in charge of stocks with a correlation over 90% once again. Commodities all closed higher with WTI testing $104 again. HP's 'early' release of earnings appeared to take the shine off things into the close as VIX gapped higher back above 12 to close...
A simple way of grasping the precarious situation China has found itself in is with this useful diagram which summarizes the negative loop that China's economy (which essentially means housing market which as SocGen recently explained is indirectly responsible for 80% of local GDP) could fall into should the government not promptly move to address the emerging dangerous situation, i.e., resume aggressive easing.
The key news overnight were global manufacturing PMIs which can be summarized as follows: Japan contraction; China contraction, but less than expected (as reported before); and most recently, Europe which expanded but dropped and missed, at 52.5, down from 53.4 and below the consensus estimate of 53.2. The weakness was fully driven by France which has moved back into a contraction phase in both manufacturing and services, which were 49.3 and 49.2, down from 51.2 and 50.4, respectively (although with the recent surge in train station remodelling, the mfg aspect may soon be boosted). The market soaked up the Chinese numbers with fervor, sending the algo-controlled USDJPY into a buying frenzy which in turn pushed up US equity futures, only to see a gradual fade of the Chinese euphoria when the European data hit.
China's HSBC Manufacturing PMI has now spent 3 years within 2 points of the crucial '50' demarcation between contraction and expansion but as the following chart shows, something seems 'odd' about the last few months apparent stability. Tonight China HSBC PMI printed a stunning 49.7 crushing the expectation of 48.3 (modestly above last month's 48.1) but still in contraction for the 5th month in a row (the longest contraction since Oct 2012). This was China's biggest spike in PMI in 9 months led by increases in new orders, production, and new export orders... but employment fell to new lows. Japan's Markit PMI also printed in 'contraction' territory for the 2nd month in a row - its first since Abenomics began.
On the surface, the economic atmosphere of the U.S. has appeared rather calm and uneventful. Stocks are up, employment isn’t great but jobs aren’t collapsing into the void (at least not openly), and the U.S. dollar seems to be going strong. Peel away the thin veneer, however, and a different financial horror show is revealed. With the Ukraine crisis now escalating to fever pitch, BRIC nations are openly discussing the probability of “de-dollarization” in international summits, and the ultimate dumping of the dollar as the world reserve currency. The U.S. is in desperate need of a benefactor to purchase its ever rising debt and keep the system running. Strangely, a buyer with apparently bottomless pockets has arrived to pick up the slack that the Fed and the BRICS are leaving behind. But, who is this buyer? At first glance, it appears to be the tiny nation of Belgium. Clearly, this is impossible, and someone, somewhere, is using Belgium as a proxy in order to prop up the U.S. But who?
Has there been an economic recovery? The statistical data clearly shows that this has been the case. However, the 100 million Americans that currently depend on some sort of social assistance to "make ends meet" are likely to disagree with that view.
Fiat money is at base a form of indirect wealth transfer from those forced to hold the money to those issuing the money.
In a well-crafted 688 words published just 5 minutes after the minutes were exposed to the public, the Wall Street Journal's Jon Hilsenrath provides what bullish equity market believers might consider one of his more hawkish commentaries on what the Fed is really thinking. "Federal Reserve officials turned their attention to longer-run issues at their April policy meeting," he noted; adding that discussion of the Fed's "exit strategy" from low interest rates has heated up in recent weeks. His summation - lots of talk, no action... not what the bad-news-is-good-news crowd wants to hear.
FOMC Minutes Show Fed Fears No Inflation Risk; Worries About Complacency, Discusses "Low Level Of Volatility"Submitted by Tyler Durden on 05/21/2014 14:03 -0400
These are the minutes from an FOMC meeting that raised economic assessments for the year the day that Q1 GDP printed at +0.1%. No big surprises from the minutes...
- *FED SAW NO INFLATION RISK IN FUELING JOB GROWTH, MINUTES SHOW
- *FOMC PARTICIPANTS SAW `NEARLY BALANCED' RISKS TO ECONOMY
- *A NUMBER OF FOMC PARTICIPANTS SAW POSSIBLE RISK IN WEAK HOUSING
- *SEVERAL FOMC PARTICIPANTS SAID LOW VOLATILITY MAY SIGNAL RISK
More of the same from the FOMC minutes - which have been carefully prescribed to reflect just enough confusion as to provide every stock bull (and bond bear) with just enough ammo to BTFD once more unto the breach. With 2 Fed speakers yesterday and 4 today, it seems the Fed is keen to interpret the minutes for everyone through the only tool they have left - communications... Volatility is a concern due to complacency; low rates have consequences; new normal terminal rate lower than historical norm; taper will proceed; doves more dovish, hawks more hawkish.
It's the same old story: in order to make its economy appear healthier than it is, India attempted to centrally-plan and force a country of 1.2 billion to stop buying gold, going against centuries of, pardon the pun, tradition. It failed, and the result was an epic surge in gold smuggling. So now, with a new government in place, India is considering lifting the world's most draconian gold capital controls since FDR issued Executive Order 6102. Will it? And what will that mean for the price of gold? Find out soon enough.
Western companies have buybacks that only reward shareholders here and now; the East actually spends capex to invest into the future. Case in point: today's "holy grail" gas deal announcement, which in addition to generation hundreds of billions in externalities for both countries over the next three decades will result in an immediate and accretive boost to GDP, to the tune of $55 billion for Russia and $20 billion for Beijing.
Socialist-Motion Trainwreck: France Mistakenly Orders 2,000 Trains Which Are Too Wide For Its PlatformsSubmitted by Tyler Durden on 05/20/2014 20:13 -0400
In a time before the New Normal "fairness doctrine" where socialized companies such as GM have 60% more recalls in 5 months than they had sales in the prior year, a story such as the following would belong at best to a surreal "Polak" joke. Unfortunately, in this centrally-planned day and age, it is all too real. Reuters reports that in order to boost GDP and to cement that even under hard-core socialism France is still a manufacturing powerhouse, the French national rail company SNCF had ordered some 2000 trains for an expanded regional network from the national rail operator RFF. There was just one problem: the trains were too wide.