Market Conditions

With a Labour Day market holiday across the continent, focus turns to the FTSE-100. The UK market is trading modestly higher with some strong earnings reports overnight lifting the index. Lloyds Group posted stronger than expected profits and reported confidence in the delivery of their financial guidance. The report has boosted Lloyds shares to become one of the top gainers of the day. Despite this, the financials sector is being held back from outperforming as Man Group fail to deliver on their sales figures, pushing their shares lower throughout the session.  The only notable data release of the European session was UK Manufacturing PMI, coming in below expectations with a reading of 50.5 as manufacturing output was dampened across April by Eurozone weakness and contracting new orders. Following the release, GBP weakness was observed, with GBP/USD touching upon session lows.  Pre-market, the RBA cut their cash target rate by 50BPS, a larger cut than expected. The board cited skittish market conditions and below trend output growth as the triggers for the rate cut. As such, AUD weakness is observed across the board and AUD/USD stops just short of breaking through 1.0300 to the downside.  Looking ahead in the session, participants look toward US ISM Manufacturing for March due at 1500BST/0900CDT as the next key data release.

Sampling several investment banks' opinions on what to expect out of today's FOMC decision in a few hours, one would be left with the impression that absolutely nothing will happen. Not surprisingly, this is what the official party line reps and warrants as well, as telegraphed by that faithful mouthpiece, Jon Hilsenrath. And yet if the Fed has finally understood that its role is only effective if it is surprising, this gives all us all the opportunity to not only doubt what the media and the sellside wants us to expect, but to naturally fade Goldman - one of the best trades in the past three years - who says: "We expect no clarity from Wednesday's FOMC statement and press conference on additional monetary easing. Fed officials will not close the door but are also unlikely to provide a clear hint of further action. Our forecast of additional easing hinges not on what Fed officials say this week, but on our expectation of continued weakness in the economic data." Of course it is possible that the Fed is merely staying true to its recent creed of being honest and transparent and telegraphing policy from miles away. And is thus forced until the market is actually driven by actual macro data instead of who buys how many gizmos using student loans. Or not. Because when in doubt, always ask i) what would Goldman Sachs sell and ii) what would PIMCO buy. The two are rarely both wrong at the same time.

European equities are seen making modest gains at the midpoint of the European session; however underperformance is observed in the FTSE 100, with the UK economy falling back into a technical recession with an advanced Q1 GDP reading of -0.2%. Data from the ONS has shown that the UK’s weak construction sector weighed down upon the relative strength in services and manufacturing, pushing the economy into contraction during the first three months of the year. Following the UK GDP release, GBP/USD spiked lower by around 40 pips and the Gilt moved around 30 ticks higher, with GBP remaining weak as the US comes to market. Elsewhere, the Bundesbank held a technically uncovered 30-yr Bund auction, with the German Debt Agency commenting that the results reflect volatile and uncertain market conditions. Following the results, the Bund printed session lows and remains in negative territory. Looking ahead in the session, participants look forward to the FOMC rate decision, and the Fed’s projections release.

As usual the market remains on tenterhooks for its next fix of Central Bank largesse and the following 11 days provide some rather large potholes for those addicted to the sweet nectar of freshly printed extreme monetary policy. Citi's Steven Englander provides some much-needed reality checking on what the market is expecting and what the FOMC/ECB might deliver, and all importantly, what the implications for risk-assets in general will be. The possibility of misunderstood language at the FOMC meetings seems very high even as the announcement of additional measures remains unlikely and perhaps more notably the Euro has sold off sharply when the ECB does not present a policy response to rapidly deteriorating market conditions - especially in light of the implicit tightening we have seen in Euro-zone aggregate rates. Rock meet hard-place.

Juxtaposing the market's recent movements, Nigel Farage's 'when-not-if' perspective on the end of the Euro, Weidmann's concerns, and now ECB's Noyer stunning self-delusion that, as Bloomberg notes:

*NOYER SAYS STEPS TO EXIT EURO CRISIS BEGINNING TO BEAR FRUIT
*NOYER: BANK FUNDING, MONEY MARKET CONDITIONS ARE MUCH BETTER
*NOYER: RECENT EXCEPTIONAL STEPS LET BANKS, GOV'TS STRENGTHEN
*WEIDMANN: RENEGOTIATION OF AUSTERITY A 'BLOW TO CREDIBILITY'

is more than some can bear. As Mr.Farage notes, in the face of the rapidly deteriorating situation in Europe, Barroso and his colleague's ever-smiling perspective on the Euro, "look ridiculous". With Spanish yields over 6%, banks trading at near record high levels of funding costs, Italian risk elevating, political event risk becoming critical, and now macro data turning even worse perhaps Noyer's comments that "delaying fiscal consolidation may lead to greater risks" are spot on - and yet nation after nation rises-up votes to 'deny' austerity.

All you need to know.

When thinking of Australia, one traditionally imagines a country that is nothing but a secondary derivative of China's trade surplus, and an unpegged currency that allows for more trading flexibility than the Yuan. As a result, recurring calls warning of a housing weakness in the country are often ignored as there always appears enough liquidity to mask the issue just long enough. That may all soon be changing. Earlier today, insurance company Genworth Financial pulled the IPO of its Australian unit, sending its shares plunging by over 20% and its default risk soaring. Unfortunately for GNW, and soon for the entire Australian financial sector, instead of merely blaming market conditions, in the IPO, which was supposed to take public up to 40% of the company's Australian mortgage business, and has instead been delayed to 2013, GNW laid out a far more nuanced, and detailed explanation of what is happening. Alas, it also may be the canary in the coalmine that has been so long overdue in yet another regional, bubblelicious housing market.

Addressing his perception of lessons learned from the financial crisis, Ben Bernanke is speaking this afternoon on poor risk management and shadow banking vulnerabilities - all of which remain obviously as we continue to draw attention to. However, more worrisome for the junkies is the total lack of QE3 chatter in his speech. While he does note the words 'collateral' and 'repo' the proximity of the words 'Shadow, Institutions, & Vulnerabilities' are awkwardly close.

All eyes were on Europe again today, where Italy sold debt for the second day in a row, only this time instead of 1 year and lower Bills, the Tesoro came to market with On and Off the run issuance maturing in 3 through 11 years. And as was to be expected, with a substantial portion of the debt maturing after the LTRO 3 year window, the auction was mixed, far weaker than yesterday's LTRO-covered Bill issuance, and the maximum target of €5 billion was not met, instead a total of €4.884 billion was sold. Furthermore yields surged compared to previous auctions. "The funding environment is getting tougher for the periphery. Overall we believe the spreads are biased towards further widening although we still prefer Italian debt over Spanish," said Michael Leister, a strategist at DZ Bank.What is most worrying is that the funding picture is again deteriorating rapidly, although not as fast as in Spain, even as LTRO cash is still sloshing around European banks. What happens when it runs out?

Last week we had the Fed's hawks line up one after another telling us how no more QE would ever happen. We ignored them because they are simply the bad cops to the Fed's good cop doves. Sure enough, here comes Bernanke's right hand man, or in this case woman, hinting that one can forget everything the hawkish stance, and that ZIRP may last not until 2014 but 2015! Which, by the way, is to be expected: since ZIRP can never expire, it will always be rolled to T+3 years, as the short end will never be allowed to rise, until the Fed has enough FRNs in circulation to absorb the surge in rates without crushing the principal, as explained yesterday.

When it comes to energy, and specifically crude oil trading, few names are as respected, if controversial, as former Citi star trader, Andrew Hall, whose $100 million pay package in 2008 forced Citi to sell energy unit Phibro to Occidental. He currently is primarily focused on his own fund Astenbeck, where he trades what he has always traded - commodities, and primarily oil. As such, his view on the oil market is far more credible than that of the EIA, or any conflicted Saudi Interests. So what does he have to say about the biggest wildcard currently in the energy market, namely whether or not Saudi Arabia, can push its production from its recent record high of just under 10,000 tb/d to the 12,500 tb/d that would be needed to replace all lost Iranian output (a question we asked rhetorically two weeks ago). The answer? Don't make him laugh.

And... goldilocks. The ADP report, which was expected to print at 206K came just where it was expected, at 209K, almost magically so, in what is probably the closest number to consensus in a long time. The previous number was revised to 230K, which means this was the 2nd drop in 3 months, and the first drop of the 3 month rolling average in the past 6 months: peak private jobs? And while the ADP has historically been a horrendous predictor of the NFP headline, this gives no actionable hint to those wishing to trade the payroll data, which in turn means that if Bernanke wants to undo his "New QE" skepticism, the decision will have to wait until Friday when equities are closed.

More pain in Spain has been the theme so far in the European morning as poor auction results across three lines has resulted in significant widening in the 10-yr government bond yield spreads over benchmark bunds with the Spanish 10yr yield up some 24bps on the day. In combination with this the latest Germany Factory orders also fell short of analysts’ expectations and as such the lower open in bund futures following yesterday’s less than dovish FOMC minutes has been completed retracted and we now sit above last Friday’s high at 138.58.

So much for the Hatzius and Hilsenrath prognostications. Headlines coming in:

• FOMC SAW NO NEED TO EASE ANEW UNLESS GROWTH SLOWS, MINUTES SHOW
• MOST FOMC PARTICIPANTS SAW `LITTLE EVIDENCE OF COST PRESSURES
• FOMC PARTICIPANTS SAID LABOR MARKET CONDITIONS HAD IMPROVED
• MOST FOMC PARTICIPANTS EXPECTED INFLATION RATE AT 2% OR LESS
• MANY FOMC PARTICIPANTS SAW `EASED' STRAINS IN GLOBAL MARKETS
• MOST ON FOMC SAW TEMPORARY IMPACT FROM RISING OIL, GAS PRICES
• FOMC SAID SIGNIFICANT OUTLOOK CHANGE COULD ALTER 2014 RATE PLAN

Apparently $4 gas has an impact.

Although not quite there yet, it will soon be time to go shopping...