Overnight trading over the past week has been a bipolar affair based on algo sentiment about what is coming out of D.C. But which the last session was optimistic for some inexplicable reason that a deal on both the government shutdown and the debt ceiling out of DC was imminent, today any optimism is gone in the aftermath of the latest comments by Boehner on ABC, in which he implied that a US default is not unavoidable and that it would be used as more political capital, as it would be once again blamed on Obama for not resuming negotiations. As a result both global equities and US futures are down sharpy in overnight trading. And since the government shutdown, better known as a retroactively paid vacation, for everyone but the Pentagon (whose 400,000 workers have been recalled from furlough) continues it means zero government economic statistics in today's session with the only macro data being the Fed-sourced consumer credit report at 3 pm. This week also marks the unofficial start of the Q3 reporting season in the US with Alcoa doing the usual opening honous after the US closing bell tomorrow. JPMorgan’s and Wells Fargo’s results on Friday are the other main ones to watch to see just how much in reserves are released to pretend that banks are still making money. As usual, expect disinformation leaks that send the market sharply higher throughout the day, which however will only make the final outcome that much more painful, because as during every US government crisis in the past, stocks have to plunge so they can soar again.
While the world is currently glued to the events surrounding Syria; the reality is that such an event has very little to do with the real economy. The surges in expectations by business is very interesting given the actual demand that drives the real economy. Real employment remains weak and corporate earnings are struggling given the diminishing returns of cost cutting. The recent increases in interest rates also have a very important "tightening" effect on the "Main Street" economy which will also likely suppress consumption in coming months somewhat. Also not likely factored in to current survey's is the upcoming debt ceiling debate and the onset of the Affordable Care Act (ACA). The ACA is a de facto increase in taxes and there is a potential for further tax hikes coming from the budget debate. The current NFIB survey suggests that the economy is still stuck in "struggle mode" and an acceleration above 2% real economic growth is currently unlikely. The divergence between expectations and real demand will likely converge in the next couple of months so we will see businesses follow through with their optimisitic outlooks - "Overall, the Index of Optimism says the small business sector is going nowhere and that's what it feels like."
One of the main reasons that investors so often get caught up in major market meltdowns is due to the short-sighted, near term, focus of market analysts and economists. The data has to be analyzed with relation to the longer term trends and a clear understanding that all things, despite ongoing central bank interventions, do eventually end. The problem with the current environment is that the artificial inflations have detached the market from the underlying economic fundamentals which has historically led to larger than expected reversions and outright crashes.
Overnight news began in China where the CPI came in 2.7% versus consensus of 2.5% although PPI continues to decline at a faster pace than expected (-2.7% v -2.6%). While nobody believes the actual print, that the PBOC is telegraphing an inflationary "leak" shows its willingness to continue with pro-tightening measures which is why despite an Alcoa "beat", the SHCOMP was up only 0.37%. Elsewhere in China, Bloomberg news quoting Xinhua said that some district governments of Ordos of Inner Mongolia is struggling with finances and had to borrow money from companies to pay salaries of municipal employees. Ordos is the infamous "ghost town" spurred by the mining boom in Inner Mongolia. The Bloomberg article noted that Ordos local government entities have CNY240bn of debt versus CNY37.5 billion of revenue last year. And while the Alcoa "beat", helped handily by a hilariously "tapered" consensus into reporting day, did little for China it was the catalyst that pushed global stocks higher worldwide.
Not much in terms of economic data but lots of corporate news with the official Q2 earnings season kick off, as well as a plethora of Fed speakers which in a centrally-planned world, is all that matters.
Overnight, following the disappointing BOJ announcement which contained none of the Goldman-expected "buy thesis" elements in it, things started going rapidly out of control, and culminated with the USDJPY plunging from 99 to under 96.50 as of minutes ago, which was the equivalent of a 2.3% jump in the Yen, the currency's biggest surge in over three years. Adding insult to injury was finance ministry official Eisuke Sakakibara who said that further weakening of yen "not likely" at the moment, that the currency will hover around 100 (or surge as the case may be) and that 2% inflation is "a dream." Bottom line, NKY225 futures have had one of their trademark 700 points swing days, and are back knocking on the 12-handle door. Once again, the muppets have been slain. Golf clap Goldman.
Currency markets are anticipating the conclusion of the BOJ meeting on Tuesday. No changes are expected to the current policy scheme and asset purchase targets, but it is likely that the committee will introduce measures to try to stem JGB volatility. Based on their recent record, it is unlikely they will succeed. Later in the week, the focal point will shift to the US where the monthly Treasury statement on Wednesday and retail sales data on Thursday will shed more light on how automatic federal spending cuts are affecting the broader economy.
The biggest fear of the Federal Reserve has been the deflationary pressures that have continued to depress the domestic economy. Despite the trillions of dollars of interventions by the Federal Reserve the only real accomplishment has been keeping the economy from slipping back into an outright recession. However, when looking at many of the economic and confidence indicators, there are many that are still at levels normally associated with previous recessionary lows. Despite many claims to the contrary the global economy is far from healed which explains the need for ongoing global central bank interventions. However, even these interventions seem to be having a diminished rate of return in spurring real economic activity despite the inflation of asset prices. The risk, as discussed recently with relation to Japan, is that the Fed is now caught within a "liquidity trap." The Fed cannot effectively withdraw from monetary interventions and raise interest rates to more productive levels without pushing the economy back into a recession. The overriding deflationary drag on the economy is forcing the Federal Reserve to remain ultra-accommodative to support the current level of economic activity. What is interesting is that mainstream economists and analysts keep predicting stronger levels of economic growth while all economic indications are indicating just the opposite.
"The economy is amazing right now - employment is recovering, innovation is going and housing is reviving. What's not to love?" This was a statement we heard in the media to justify the recent rise in the stock market. However, back in the real world, what is clear from the two composite indexes is that the broad economy, and by extension underlying employment, has clearly peaked and has began to weaken. This is well within the context of historical trends and time frames. While the mainstream analysts and economists continue to have optimistic views for a resurgence in economic activity by years end the current data trends, both globally and domestically, suggest otherwise.
So much for Europe's "recovery." In a quarter when the whisper was that some upside surprise would come out of Europe, the biggest overnight data releases, European standalone and consolidated GDPs were yet another flop, missing across the board from Germany (+0.1%, Exp. 0.3%), to France (-0.2%, Exp. 0.1%), to Italy (-0.5%, Exp. -0.4%), and to the entire Eurozone (-0.2%, Exp. 0.1%), As SocGen recapped, the first estimate of eurozone Q1 GDP comes in at -0.2% qoq, below consensus of a 0.1% drop. The economy shrank by 1.0% yoy, the worst rate since Dec-09. The decline of 0.5% qoq in Italy means that the economy has been in recession continuously since Q4-11. A 0.2% qoq drop in France means the economy has ‘double-dipped’, posting a second back-to-back drop in GDP since Q4-08. The increase of 0.1% qoq in Germany was disappointing and shows the economy is not in a position to support demand in the weaker member states (table below shows %q/q changes).
There was a time three months ago, when "beating" German confidence served as an upward stock and EURUSD catalyst not once but twice in the same week. One would therefore assume a German confidence miss, such as with today's German ZEW, which barely budged from 36.3 to 36.4 on expectations of a rise to 40.0, with the current situtation dropping from 9.2 to 8.9, on expectations of a rise to 9.8, should be risk negative. Well, it wasn't: it is the new normal after all, and in fact the EURUSD jumped in a kneejerk reaction at 5 am, rising over 1.3000, albeit briefly, assisted by ZEW members saying that respondents do not see a further ECB rate cut - well, of course not - they are Germans, and Draghi isn't. Perhaps the news of a better than expected Eurozone Industrial Production print, which rose from 0.3% to 1.0%, on expectations of a more modest increase to 0.5%, is what catalyzed the subsequent drop in both the EUR, and US stock futures. The IP strength was driven by Germany, Spain and Netherlands offset be decline in France and Italy.
Gluskin Sheff's David Rosenberg exclaims we are currently are witnessing the Potemkin rally (the phrase Potemkin villages was originally used to describe a fake village, built only to impress). The term, however, is now used, typically in politics and economics, to describe any construction (literal or figurative) built solely to deceive others into thinking that some situation is better than it really is. Ben Bernanke, recently proclaimed “The Hero” by Atlantic Magazine, is the “Wizard of Potemkin.” Since 2009 Bernanke has engage in massive monetary experiments. These experiments lead to future dislocations. There is no doubt that the Fed wants inflation. The problem is they may get more than they ask for. We are currently witnessing the slowest economic recovery of any post-WWII period. However, It is important to challenge your thought process. Read material that challenges your views. Here are David's rules...
Succinctly summarizing the positive and negative news, data, and market events of the week...
Sam Zell: "This is a very treacherous market," thanks to the giant tsunami of liquidity, "the problems of 2007 haven't been dealt with," and given the poor macro data and earnings, "we are suffering through another irrational exuberance," leaving the entire CNBC audience speechless when he concludes, "the stock market feels like the housing market of 2006."
In a shocking state of affairs, it would appear the stock market's wealth effect is not rubbing off on the real economy. The National Federation of Independent Businesses (NFIB) shows 0% of their members planning to hire. One can only presume we need moar QE, moar deficits, and moar wealth effect.