Previewing the rest of this week’s events, we have a bumper week of US data over the next five days, in part making up for two days of blackout last week for Thanksgiving. Aside from Friday’s nonfarm payroll report, the key releases to look for are manufacturing ISM and construction spending (today), unit motor vehicle sales (tomorrow), non-manufacturing ISM (Wednesday), preliminary Q3 real GDP and initial jobless claims (Thursday), as well as personal income/consumption and consumer sentiment (Friday). Wednesday’s ADP employment report will, as usual, provide a preamble for Friday’s payrolls.
In addition to its three previously announced so far "Top Trades" for 2014 (see here, here and here), just over an hour ago Goldman revealed its fourth top recommendation to clients. To wit: Goldman is selling China equities (via the HSCWI Index), while buying copper (via Dec 2014 futs), or at least advising its flow clients to do the opposite while admitting that "for the long China equity/short commodity pair trade to “work” best, these two assets, which are usually positively correlated, will have to move in opposite directions." For that and many other reasons why betting on a divergence of two very closely correlating assets will lead to suffering, read on. Finally - do as Goldman says, or as it does? That is the eternal question, one whose answer is a tad more problematic since the author in this case is not Tom Stolper but Noah Weisberger.
Overview of the week's economic and poltiical calendar in the context of the investment climate.
- Winter storm lashes eastern U.S., threatens Thanksgiving travel (Reuters)
- Fed Reveals New Concerns About Long-Term U.S. Slowdown (BBG)
- Private equity keeps $789bn of powder dry (FT) - because they are "selling everything that is not nailed down"
- Merkel and SPD clinch coalition deal two months after vote (Reuters)
- Japan approves new state secrecy bill to combat leaks (BBC)
- CLOs are the new black: Volatile Loan Securities Are Luring Fund Managers Again (WSJ)
- Health website deadline nears (WSJ)
- Norway Debates $800 Billion Wealth Fund’s Investment Options (BBG)
- Set of global trade deals stalls (WSJ)
- Berlusconi To Learn Fate In Senate (Sky)
- Silvio Berlusconi withdraws support from Italy’s government (FT)
- Washington turns bond market upside (FT)
- China Air-Zone Move Expands Field of Islands Spat With Japan (BBG); Japan rejects China claim on airspace over disputed islands (FT)
- 'Great Satan' meets 'Axis of Evil' and strikes a deal (Reuters)
- Iran Pact Faces Stiff Opposition (WSJ)
- Allies Fear a US Pullback in Mideast (WSJ)
- India to resume paying Iran in Euros (Economic Times)
- At 'Business Insider,' it's time to sell (USA Today)
- More ECB currency war jawboning: ECB’s Hansson Says Rate Cut Options Not Fully Exhausted (BBG)
- Spy World Links Plus Obama Ties Stoke Concern About NSA Review (BBG)
- A disunited Europe will struggle even to disintegrate (FT)
The following Top Ten Market Themes, represent the broad list of macro themes from Goldman Sachs' economic outlook that they think will dominate markets in 2014.
- Showtime for the US/DM Recovery
- Forward guidance harder in an above-trend world
- Earn the DM equity risk premium, hedge the risk
- Good carry, bad carry
- The race to the exit kicks off
- Decision time for the ‘high-flyers’
- Still not your older brother’s EM...
- ...but EM differentiation to continue
- Commodity downside risks grow
- Stable China may be good enough
They summarize their positive growth expectations: if and when the period of stability will give way to bigger directional moves largely depends on how re-accelerating growth forces the hands of central banks to move ahead of everybody else. And, in practice, that boils down to the question of whether the Fed will be able to prevent the short end from selling off; i.e. it's all about the Fed.
It it walks like a duck, quacks like a duck and looks like a duck... Is it really a platypus? After all, this time is different... Right?
Within the last seven years 11 countries (Poland (2006), Russia (2008), Finland (2009), France (2009), Sweden (2010), Iceland (2011), Spain (2011), Denmark (2012), Singapore (2012), Canada (2012) and Japan (2013) have realized the need to appoint their own Arctic ambassadors. These ambassadors are used for analysis and situational assessments in the emerging “grand Arctic game,” with the ultimate aim of exploiting mineral resources and using the Arctic route for shipping cargo from Europe to Asia. At present, China’s Arctic initiatives suggest that Beijing is eager to camouflage its true interests in the region with environmental monitoring, Arctic life protection and concerns about indigenous peoples. At the same time, Beijing is dropping hints that China is not satisfied with the current balance of power in the Arctic region.
It would appear that the Horatio Alger myth - that hard work and pluck will lift a person from dire circumstances to enviable success - is not living up to expectations for Americans. As WSJ's Lauren Weber notes, 40% of Americans think it’s fairly common for someone to start off poor, work hard and eventually rise to the top of the economic heap but a new Pew study shows that in reality, only 4% of Americans travel the rags-to-riches path. Unfortunately, they discovered considerable “stickiness” at both ends of the income spectrum and that Americans attached to the rags-to-riches myth might be disappointed to know that other countries show greater mobility among have-nots - "this is what we call the 'parental penalty,' and it's really high in the U.S. - If you’re born in the bottom here, your likelihood of sticking in the bottom is much higher."
With better US labor market data, the key event in the upcoming week could well be the Yellen nomination hearing in the Senate Banking Committee. Yellen will likely deliver brief prepared remarks followed by questions from members of the committee. Yellen is expected to be relatively circumspect in discussing potential future Federal Reserve policy decisions in the hearings. Nonetheless, the testimony may help clarify her views on monetary policy and the current state of the economy. Yellen has not spoken publicly on either of these topics since the spring of this year. In addition to the nomination hearing, there will be a series of Fed speeches again, including one by Chairman Bernanke.
With the recent adoption of explicit forward guidance as a stimulative policy tool by the major European central banks, virtually every major central bank is now using the tool in some form. The potential benefits and dangers of such policies as central bank communications have evolved are unclear as "the form of guidance" matters. As Robin Brooks notes, and is so well illusrated below in the example of the Riksbank's and Norges Bank's 'failures', "[In terms of implications for rates] the jury is still out on how well forward guidance works. What is clear, though, is that markets prefer 'deeds' to 'words'."
- Morning Humor from Hilsenrath - Fed Balance Sheet Not Seen Returning to Normal Until at Least 2019 (WSJ)
- Health Policies Canceled in Latest Hurdle for Obamacare (BBG)
- Was there anything RBS was not manipulating? RBS Said to Review Currency-Trading Practices Amid Probe (BBG)
- Sebelius to Testify Before House Panel (WSJ)
- And more humor: Spain's Statistics Institute Confirms End of Recession (WSJ) ... and now we await the triple dip
- Finally some credible reporting on Yellen's "foresight" - Yellen feared housing bust but did not raise public alarm (Reuters)
- Japan government moves closer to Fukushima takeover (FT)
- China to step up own security after new NSA allegations (Reuters)
- Blackstone Vies With Goldman in Spain Rental Housing Bet (BBG)
- In new U.S. budget talks, Republican proposal has flipped the script (Reuters)
Once the economy's capital structure is distorted beyond a certain threshold, it won't matter anymore how much more monetary pumping the central bank engages in – instead of creating a temporary illusion of prosperity, the negative effects of the policy will begin to predominate almost immediately. Given that we have evidence that the distortion is already at quite a 'ripe' stage, it should be expected that the economy will perform far worse in the near to medium term than was hitherto widely believed. This also means that monetary pumping will likely continue at full blast, as central bankers continue to erroneously assume that the policy is 'helping' the economy to recover.
In addition to the already noted repeat spike in Chinese overnight repo rates as the PBOC refuses to inject liquidity for nearly a week offsetting the "news" of a better than expected HSBC PMI, the other kay datapoints to hit in the overnight session were various European PMIs which were broadly lower across the board. Of note being the French, which missed both the Manufacturing Index (49.4 vs 50.1 expected, down from 49.8) and the Services (50.2 vs 51.0 expected, down from 51.0) and Germany, which missed in Services (52.3 vs 53.7 expected, same as September), while modestly beating Manufacturing at 51.5 vs 51.4 expected, up from 51.1 last. On a blended basis, the Composite Flash PMI fell from 52.2 to 51.5, against the consensus expectation of a modest rise (Cons: 52.4). Today's correction brings to a halt a series of six consecutive monthly rises in the Euro area composite PMI.