While the Fed's interventions have certainly bolstered asset prices by driving a "carry trade," these programs do not address the central issue necessary in a consumer driven economy which is "employment." In an economy that is nearly 70% driven by consumption, production comes first in the economic order. Without a job, through which an individual produces a good or service in exchange for payment, there is no income to consume with. With the Federal Reserve now effectively removing the "patient" from life support, we will see if the economy can sustain itself. If this recent Bloomberg poll is correct, then we are likely to get an answer very shortly, and it may very well be disappointment.
Unlike most trading sessions in the past month, when the overnight session saw a convenient algo assisted USDJPY/AUDJPY levitation, tonight there has been no such luck for the permabullish E-Trade babies who are conditioned that no matter what the news, the next morning the S&P 500 will open green regardless. Whether this is due to ever louder fears that what is happening in China can not be swept under the rug this time will be revealed soon, but as of this moment both the USDJPY, and its derivative, US equity futures, are looking at a sharp lower open, as gold continues to press higher, while the traditional tension points such as Russia-Ukraine, and ongoing capital flight from some of the more "fringe" emerging markets, continues. Expect more of the same today as people finally peek below the Chinese surface to realize just how profoundly bad the situation on the mainland truly is. And while we realize macro news are meaningless, especially in Europe where the ECB is now the sole supervisor of all asset classes, the fact that Cyprus, Greece, Slovakia and Portugal, are all in deflation, and many more countries lining up to join the club, probably means that absent a massive global credit impulse, we have certainly reached the upward inflection point from the most recent $1+ trillion injection of liquidity by the Fed, not to mention the ongoing QE by the BOJ.
- Malaysia Says Stolen Passport User Had No Links to Terror Groups (BBG)
- Malaysia military tracked missing plane to west coast (Reuters)
- Freescale loss in Malaysia tragedy leads to travel policy questions (Reuters)
- Top German body calls for QE blitz to avert deflation trap in Europe (Telegraph)
- Firms Suffer 23% Drop in Asia Fees Amid Search for Cash (BBG)
- Putin Dismisses U.S. Proposal on Ukraine (WSJ)
- Lenovo says China strike an IBM matter, but it won't cut wages (Reuters)
- Congress to Investigate GM Recall (WSJ)
- New hedge funds face life or death battle for funding (FT)
- Muni Bond Costs Hit Investors in Wallet (WSJ)
- BOJ keeps stimulus in place, cuts view on exports in warning sign (Reuters)
- ECB Homes In on Risky Assets as Inspectors Fan Out Across Europe (BBG)
- Snowden: "The Constitution was violated" (Reuters)
Stocks in Europe failed to hold onto early gains and gradually moved into negative territory, albeit minor, as concerns over money markets in China gathered attention yet again after benchmark rates fell to lowest since May 2012. Nevertheless, basic materials outperformed on the sector breakdown, as energy and metal prices rebounded following yesterday’s weaker than expected Chinese data inspired sell off. At the same time, Bunds remained supported by the cautious sentiment, while EUR/USD came under pressure following comments by ECB's Constancio who said that financial markets misinterpreted us a little, can still cut rates and implement QE or buy assets. Going forward, market participants will get to digest the release of the weekly API report after the closing bell on Wall Street and the US Treasury will kick off this week’s issuance with a sale of USD 30bln in 3y notes.
The world and their pet rabbit was convinced yesterday that today's jobs number was both the most-important-number-in-the-world and didn't matter (because whether it beat or missed it was bullish for stocks). Seconds after the release that appeared to be true as JPY instantly dragged stocks to record highs (and the USD up and bonds and gold down). However, trumped by confirmation that the taper is continuing, Gazprom warnings, Lavrov threats, and finally reports of a Russian invasion, stocks leaked lower to Tuesday's ramp-day closing levels. Thanks to some last-minute JPY and VIX banging, S&P closed green for the 15th of last 16 NFPs. Despite intraday volatility, the USD ended the week unchanged, gold +1%, silver -1.5% and Treasuries +14bps or so (its worst week in 6 months!). Credit markets continue to be non-believers (with the high-yield bond ETF plunging this week). Critically, after last night's default in China, Iron Ore and Copper futures were crushed and we suspect Sunday night's Asia open could see more fireworks.
The 17th of February, 2014, marked the annual observation of George Washington's birthday and the 5th anniversary of the American Recovery and Reinvestment Act. At a cost of $19.90 for each dollar of economic growth, almost $8 million for each job created and a loss of nearly $600,000 of fixed investment, it is hard to suggest that the government interventions have been successful. The WSJ sums it up succinctly, "The failure of the stimulus was a failure of the neo-Keynesian belief that economies can be jolted into action by a wave of government spending... The way to jolt an economy to life and to sustain long-term growth is to create more incentives for people to work, save and invest." Of course, 5 years on, the Keynesian argument remains "fool proof." The only reason that the economy is not growing faster is because the government is not doing enough. However, if the economy slips back into a recession, it will simply be because the government did not do enough. You simply can't argue against logic like that.
- Frustrated by Karzai, U.S. Shifts Afghanistan Exit Plans (WSJ)
- Yellen Testimony Guide From Payrolls Report to Emerging Markets (BBG)
- Gold hits three-month high, shares up ahead of Yellen (Reuters)
- Tightfisted New Owners Put Heinz on Diet (WSJ)
- Senator describes "gruesome" bin Laden photos (Reuters)
- More reasons for the ongoing economic contraction: U.S. Winter Storm Seen Spreading Snow, Sleet Across South (BBG)
- Barclays Cuts Up to 12,000 Jobs as Quarterly Profit Falls (BBG)
- Boeing Considering 787-Size Medium-Range Jetliners (WSJ)
- AOL Chief Apologizes for ‘Distressed Babies’ Comment (BBG)
The current Administration has taken on the "war on poverty" as its primary battle ground going into the mid-term elections later this year. As NFIB's Bill Dunkleberg recently noted, "since it is an election year, the main theme will be addressing the disparities in income and wealth (i.e. tax the rich and increase welfare programs) rather than promoting policies that would create jobs and raise incomes in a growing economy. This year, policy will be all about votes." This isn't a new fight. As Robert Rector stated recently - that particular war has been less than successful.
"Fifty years and $20 trillion later, LBJ's goal to help the poor become self-supporting has failed."
However, while the Administration will use the argument to garner votes in an election year, the most interesting aspect about the income inequality debate is that it is the very policies of the current Administration that is fueling the income shift.
While economists are raising their forecasts for 2014, there seems to be little change in the real underlying fundamentals. Much has been made of the modest uptick in NFIB optimism last month, but small businesshope remains 6 points below pre-recession average levels; and as Bill Dunkleberg notes so succinctly: "The President thinks the way to address the malaise in the economy is to give another $26 billion to the long-term unemployed, shown to produce new jobs by 'independent economists' (we know who that is) according to the President. If you borrow $26 billion from China and give it to consumers, it probably does have a positive impact, but does nothing to fix the economy or encourage labor force participation or improve the labor force." It is quite apparent from both individuals and businesses that the government is the real issue that is impeding economic progress. Maybe it's time that the current Administration did a little less talking and did a little more listening to what the real drivers of the economy are saying.
Following yesterday's major market drubbing, in which the sliding market was propped up by the skin of Nomura's (and BOJ, and Fed's) teeth at 103.00 on the USDJPY, it was inevitable that with Japan returning from holiday there would be a dead cat bounce in the Yen carry pair, and sure enough there was, as the USDJPY rose all the way back up to 103.70, and nearly closed the Friday gap, before starting to let off some air. However, now that US traders are coming back online, Japan's attempts to keep markets in the green may falter, especially since it only has a couple of ES ticks to show for its efforts, as for the Nikkei which dropped 3% overnight, it has now lost all US "Taper" gains.
There has been much debate in Washington about how to get the economy growing again. Unfortunately, fiscal policy has done little to address the core of economic growth, which is the consumer, or the productive investment required to generate real employment and wage growth. As Schumpeter observed, "there are no entrepreneurs without capital." Simply put, there are no companies, and no jobs, without investment first. For anyone irrespective of ideology to deny the latter brings new meaning to willful blindness. Until we focus on creating an environment that leads to greater investment opportunities by business owners we will likely see a further deterioration in personal consumption. There is currently a fine line between expansion and contraction within the overall economy, and while hopes are that 2014 will be a "breakout" year for the economy, the current economic data trends suggest otherwise.
The grind higher in equities, and tighter in credit, continues as markets brush aside concerns about a December taper for the time being. Overnight futures levitation has pushed the Fed balance sheet driven record high S&P even higher, despite as Deutsche Bank points out, the fact that we had three Fed speakers advocate or talk up the possibility of a December taper, including the St Louis Fed’s James Bullard who is viewed as a bit of a bellwether for the FOMC. Bullard said the probability of a taper had risen in light of the strengthening of job growth in recent months. Indeed, he noted that the best move for the Fed could be a small December taper given the improving jobs data but below-target inflation readings. The Fed could then pause further tapering should inflation not return toward target during the first half of 2014. Looking at today’s calendar, the focus will be on US JOLTs job openings - a report which Yellen has previously highlighted as an important supplement to more traditional labour market indicators. US small business optimism and wholesale inventories are the other major data releases today. As mentioned above, US financial regulators are due to announce Volcker rules at some point today although as we just reported, the CFTC's meeting on Volcker was just cancelled due to inclement weather.
The US data flow is relatively light which is typical of a post-payrolls week but it’s worth noting wholesale inventories on Tuesday and retail sales on Thursday. Importantly US House and senate negotiators are supposed to come to an agreement on a budget before the December 13th deadline. A lot of optimism has been expressed thus far from members of congress, and there are reports that a budget deal will be unveiled this week.
In yet another miracle of modern-day macroeconomics, despite the soaring stock market and better-than-expected government-provided data (soft surveys mostly), the small-business (supposedly the core driver of jobs and growth in the US economy) saw optimism collapse at the fastest rate since Sandy (supposedly due to the government shutdown). This is the fifth month in a row that NFIB optimism has missed expectations (the worst - absent Sandy - since March 2012). 7 of the 10 sub-components were negative with the biggest plunge coming from those who expect the economy to improve. Seems like another good reason to BTFATH...
Following a brief hiatus for the Veterans Day holiday, the spotlight will again shine on treasuries and emerging markets today. The theme of higher US yields and USD strength continue to play out in Asian trading. 10yr UST yields are drifting upwards, adding 3bp to take the 10yr treasury yield to 2.78% in Japanese trading: a near-two month high and just 22 bps away from that critical 3% barrier that crippled the Fed's tapering ambitions last time. Recall that 10yr yields added +15bp in its last US trading session on Friday, which was its weakest one day performance in yield terms since July. USD strength is the other theme in Asian trading this morning, which is driving USDJPY (+0.4%) higher, together with EM crosses including the USDIDR (+0.6%) and USDINR (+0.6%). EURUSD is a touch weaker following a headline by Dow Jones this morning that the Draghi is concerned about the possibility of deflation in the euro zone although he will dispute that publicly, citing Germany’s Frankfurter Allgemeine Zeitung who source an unnamed ECB insider. The headline follows a number of similar stories in the FT and Bloomberg in recent days suggesting a split in the ECB’s governing council.