Low volatility is being driven, in BofAML's view, by both fundamental and technical factors. Fundamentally, the volatility of real economic activity and inflation has fallen to near 20 year lows in what some are calling the Great Moderation 2.0. However, the recent further collapse in volatility is also explained by a feedback loop fueled by low conviction, low liquidity, low yields and low fear. Central bank policy has been the largest explanatory factor of both the fundamentals and technicals... and that has BofAML concerned about the risks of short-term volatility spikes exacerbated by market illiquidity.
Q2 GDP Surges 4%, Beats Estimates Driven By Inventories, Fixed Investment Spike; Historical Data RevisedSubmitted by Tyler Durden on 07/30/2014 10:30 -0400
Moments ago the Commerce department reported Q2 GDP which blew estimates out of the water, printing at 4.0%, above the declining 3.0% consensus, as a result of a surge in Inventories and Fixed Investment, both of which added over 2.5% of the total print, while exports added another 1.23% to the GDP number. The full breakdown by component is shown below.
This week's US data onslaught begins today, with the ADP private payroll report first on deck (Exp. 230K, down from 281K), followed by the number of the day, Q2 GDP, which after Q1's abysmal -2.9%, is expected to increase 3%. Anything less and in the first half the US economy will have contracted, something the purists could claim is equivalent to a recession. The whisper numbers are to the downside since consumption and trade never caught up and the only variable is inventory as well as Obamacare, whose impact was $40 billion "contribution" in Q1 was entirely eliminated and instead led to a deduction, something we expect will be reversed into Q2. Following the backward looking GDP (which will be ignored by the sellside penguins if it is bad and praised if good) at 2:00 pm Yellen Capital LLC comes out with a correction on her call to short social networking stocks, as well as admit once again that the "data-driven" Fed really has no idea what it is doing and how it will tighten, but that tightening is imminent and another $10 billion taper to QE will take place ahead of a full phase out in October. Joking aside, the Fed is expected not to do much if anything, which may be just the right time for Yellen to inject an aggressively hawkish note considering her inflation "noise" refuses to go away.
A dispassionate look at the issues and events shaping the investment climate in the week ahead.
Fed Chair Janet Yellen will provide Congress with an update on the state of the economy, how rosy the future is, why she needs to keep rates lower for longer, and that there are no bubbles (oh apart from in bonds which everyone should sell because we need the collateral). These are her first comments since the FOMC press conference in mid-June and stocks have soared since then (as bond yields have tumbled) and she will have to tread a fine line between exuberant over headline job improvements and the need to keep over-inflated bubbles pumped full of cheap/free money for longer...
Two weeks ago we highlighted just how "screwed" Las Vegas is due to the catastrophic drought that is occurring (combined with almost total ignorance that this is a problem). As Bloomberg's James Nash reports, about 55% of Nevada, already the nation’s driest state, is under “extreme’’ or “exceptional’’ drought conditions, the worst grades on the U.S. Drought Monitor; but recently the situation has got even worse. Lake Mead, the man-made reservoir that supplies 90 percent of the water for 2 million people in the Las Vegas area, has been reduced by drought to the lowest level since it was filled in 1937, according to the federal government who explained "It concerns us all very much," as it is a resource used by 3 states. Simply put, The shortfall is endangering water supplies to the residents and 43 million annual visitors to the driest metropolitan area in the country.
You feel poorer because you are poorer.
U.S. consumers think one-year domestic price inflation will run 50-100% higher than the current headline Consumer Price Index that Wall Street uses to value financial assets. That surprising finding doesn’t come from the fringe "Inflation is nigh, repent!" camp; as ConvergEx's NBick Colas points out, it is the central observation of the New York Federal Reserve’s Survey of Consumer Expectations. This relatively new but rigorously designed monthly dataset polls 1,200 American households on a range of financial questions, from inflation expectations to household finances and labor market conditions. The news The Fed is hearing from the survey must be a bit tough to hear. Inflation expectations are significantly higher than their "Target" of 2% already, meaning any acceleration in prices will "Feel" higher than the central bank’s notional goals.
Following the rather stunning shenanigans of Q1 GDP with regard healthcare spending (as we detailed here), we thought, four years after its passage in 2010, it worth analyzing Obamacare's economic impact? Beforehand, economists generally believed that the broader coverage would raise the demand for healthcare goods and services, although there was some disagreement about related effects on healthcare inflation. In reality, as UBS notes, there was too much optimism about a positive immediate economic impact and a negative price inflation effect.
The economic releases of the past few days are putting the lie to the Keynesian escape velocity myth. The latter is not just around the corner—-and 2014 is now virtually certain to mark the fifth year running when the boom predicted by Wall Street economist at the beginning of the year fizzled as actual results unfolded.
Following yesterday's S&P surge on the worst hard economic data (not some fluffy survey conducted by a conflicted firm whose parent just IPOed and is thus in desperate need to perpetuate the market euphoria) in five years, there is little one can comment on how "markets" react to news. Good news, bad news... whatever - as long as it is flashing red, the HFT algos will send momentum higher. The only hope of some normalization is that following the latest revelation of just how rigged the market is due to various HFT firms, something will finally change. Alas, as we have said since the flash crash, there won't be any real attempts at fixing the broken market structure until the next, and far more vicious flash crash - one from which not even the NY Fed-Citadel PPT JV will be able to recover. For now, keep an eye on the USDJPY - as has been the case lately, the overnight USDJPY trading team has taken it lower ahead of the traditional US day session rebound which also pushes the S&P higher with it. For now the surge is missing but it won't be for longer - expect the traditional USDJPY ramp just before or as US stocks open for trading.
Remember when in January 2014, Q1 GDP was expected to rise 2.6%? Well, here comes the final Q1 GDP revision and it's a doozy: at -2.9%, far below the -1.8% expected and well below the -1.0% second revision, it is an absolute disaster, and is the worst print since Q1 2009.
Between the second and final revision of Q1 GDP something dramatic happened: instead of contributing $40 billion to real GDP in Q1, Obamacare magically ended up subtracting $6.4 billion from GDP. This, in turn, resulted in a collapse in Personal Consumption Expenditures as a percentage of GDP to just 0.7%, the lowest since 2009!
The S&P500 has now gone 47 days without a gain or loss of more than 1% - a feat unmatched since 1995, according to AP. Overnight markets are having a weaker session across the board (except the US of course). Even the Nikkei is trading with a weak tone (-0.7%) seemingly unimpressed by the Third Arrow reform announcements from Prime Minister Abe yesterday (and considering in Japan the market is entirely dictated by the BOJ, perhaps they could have at least coordinated a "happy" reception of the revised Abe plan). Either that or they have largely been priced in following the sizable rally in Japanese stocks over the past month or so. Abe outlined about a dozen reforms yesterday including changes to the GPIF investment allocations and a reduction in the corporate tax rate to below 30% from the current level of 35%+. Separately, the Hang Seng Index (-0.06%) and the Shanghai Composite (-0.41%) 98closed lower as traders cited dilutive IPOs as a concern for future equity gains.
Judging by the surprising reversal in futures overnight, which certainly can not be attributed to the latest data miss out of Europe in the form of the June German IFO Business Climate report (print 109.7, Exp. 110.3, Last 110.4) as it would be naive to assume that centrally-planned markets have finally started to respond as they should to macro data, it appears that algos, with their usual 24 hour delay, have finally discovered Dubai on the map. The same Dubai, which as we showed yesterday had just entered a bear market in a few short weeks after going turbo parabolic in early 2014. It is this Dubai which crashed another 8% just today, as fears that leveraged traders are liquidating positions, have surfaced and are spreading, adversely (because in the new normal this needs to be clarified) to other risk assets, while at the same time pushing gold and silver to breakout highs. Recall that it was Dubai where the global sovereign crisis started in the fall of 2009 - will Dubai also be the place where the first domino of the global credit bubble topples and takes down the best laid plans of central-planners and men?