With Philly Fed surging to record highs (along with stocks) but Services PMI dropping "as the recovery fades," it was left to Dallas Fed to split the buy good news or buy bad news dilemma this morning. It was bad news - from 2012 highs, Dallas Fed plunged to 7.1 (against 12.7 expectations) for the biggest miss in 16 months. Production fell, capital expenditure and employment subindices all fell and New Orders collapsed at the fastest rate since April 2013 (to 2014 lows). Even hope faded as the outlook index dropped.
While today's key events were supposed to be the Jackson speeches first by Janet Yellen at 10:00am Eastern and then by Mario Draghi at 2:30 pm, Ukraine quickly managed to steal the spotlight yet again when moments after the first Russian humanitarian aid convoys entered Ukraine allegedly without permission, Kiev first accused Russia of staging a direct invasion, even if moments later it changed its tune and said it had allowed the convoy in to "avoid provocations." In other words, your daily dose of Ukraine disinformation, which initially managed to push futures down some 0.3% before futs regained virtually all losses on the subsequent clarifications. Expect much more conflicting, confusing and very provocative headlines out of Kiev as the local government and the CIA try to get their story straight.
Remember all those allegations that Obamacare would be an unmitigated disaster for businesses, especially smaller companies? Well, now we have proof.
So much for extrapolating record profit margins holding up the equity "market"...
Philly Fed has beaten expectations for 6 months in a row with its biggest surge since the 2009 lows. Against expectations of 19.3, Philly Fed printed 28.0 - highest since March 2011 all-time highs. All sounds awesome right? Umm, no, 7 of 9 internal declined including - New Orders tanked, Employment tumbled, Prices Paid plunged, and Prices Received slumped. So, in case you were wondering how it is possible that Philly Fed surged given such shitty internals, the 6-month forecast index ("hope") just surged to 22-year highs. And not only that: put all hopes of that long-delayed CapEx renaissance on hold: "While most broad indicators of future growth have been improving, the survey’s future capital spending index has been slipping. Although the index decreased just 1 point this month, its reading, at 17.5, is now the lowest it has been in seven months."
The main event of the week will be Yellen's long awaited speech at the Jackson Hole 3-day symposium taking place August 21-23. The theme of this year's symposium is entitled "Re-Evaluating Labour Market Dynamics" and Yellen is expected to deliver her keynote address on Friday morning US time. Consensus is that she will likely highlight that the alternative measures of labour market slack in evaluating the ongoing significant under-utilisation of labour resources (eg, duration of employment, quit rate in JOLTS data) have yet to normalise relative to 2002-2007 levels. Any sound bite that touches on the debate of cyclical versus structural drivers of labour force participation will also be closely followed. Unlike some of the previous Jackson Hole symposiums, this is probably not one that will serve as a precursor of any monetary policy changes but the tone of Yellen's speech may still have a market impact and set the mood for busier times ahead in September.
Friday's main event, Ukraine's alleged attack of a Russian military convoy, has come and gone, and as we mused on Friday has promptly faded into the memory of all other fabricated headlines released by the country engaged in a major civil war and an even more major disinformation war. To be sure, Germany's DAX has recovered virtually all losses, US futures are up about 9 points, and the 10 Year is back to 2.37%. One wonders what algo-slamming headline amusement Ukraine has in stock for us today, although anyone hoping for a quick "de-escalation" (there's that word again) will have to wait following yesterday's meeting of Russian, Ukraine, German and French ministers in Berlin where Russia's Lavrov said he saw no progress on Ukraine cease-fire, Foreign Minister Sergei Lavrov says in Berlin, adding that a cease-fire should be unconditional.
Non-ideologically laden overview of the key issues shaping the investment climate in the week ahead.
In an unscheduled release moments ago the Fed's Plosser just explained why he was the sole dissenter with the FOMC's announcement. Here is the punchline: "I cast a dissenting vote because I opposed retaining the statement language that reads "…it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends." I viewed such language as an inappropriate characterization of the future path of policy and so may limit the Committee's flexibility going forward."... "In addition, the economy today is very close to achieving the central tendency outcomes for 2015 reported in the December 2013 Summary of Economic Projections. Specifically, the central tendency projection for unemployment at the end of 2015 was 5.8 to 6.1 percent, and that for inflation was between 1.5 and 2.0 percent. From this perspective, we are nearly 18 months ahead of where the Committee thought we would be just seven months ago." He concludes: "the Committee's statement does not appear to reflect what was once thought to be appropriate policy based on the behavior of unemployment and inflation."
It appears - judging by today's shenanigans - that good news for Main Street (rising employment costs) is bad news (for stocks), though obviously there are other factors; but tomorrow's payrolls data is the last best hope before the Fed finishes its taper for them to pull a 'data-driven' U-turn out of the bag. Consensus is for a drop from last month's exuberance at 288k to 230k (with Barclays slightly cold and Deutsche slightly hot). The fear, for market bulls, is that the print is anti-goldilocks now - not bad enough to provide excuses for lower-longer Fed rates; and not high enough to justify the hockey-stick of miraculous H2 growth priced into stocks. Average S&P gains on NFP Friday are 0.5% but recently have become more noisy.
For a centrally-planned market that has long since lost the ability to discount the future, and certainly respond appropriately to geopolitical events, yesterday was a rough wake up call with a two punch stunner of not only the MH 17 crash pushing the Ukraine escalation into overdrive, but Israel's just as shocking land invasion of Gaza officially marking the start of a ground war, finally dragging global stocks out of their hypnotized slumber and pushing risk broadly lower across the globe, even if the now traditional USDJPY and AUDJPY ramp algos have woken up in the past few minutes and will be eager to pretend as if nothing ever happened.
By the magic of hopes and dreams, Philly Fed's headline index soared to cycle highs at 23.9. Smashing the 16.25 expectation, this is the highest since March 2011 (and almost the highest in the recovery cycle). This is a 4-standard deviation beat. While most of the 'current' subindices improved with new orders exploding to their highest in 10 years (really!?). Great news right? Well no - the outlook 6-months forward sees employment drop, workweek drop, and capex investment plans drop to its lowest since January...
Slowly but surely, all those cans that many hoped were kicked indefinitely into the future, are coming back home to roost. The biggest impact on global risk overnight have been undoubtedly the expanded Russian sanctions announced by Obama yesterday, which have sent the Russian Micex index reeling to six week lows (as it does initially after every sanction announcement, only for the BTFDers to appear promptly thereafter), with the biggest hits saved for the named companies such as Rosneft -5.6%, Novatek -5.1%, and others Alrosa -5.7%, VTB Bank -4.3%, Sberbank -3.4% and so on. Then promptly risk off mood spilled over into broader Europe and at last check the Stoxx600 was down 0.8%, with Bund futures soaring to record highs especially following news (from the Ukraine side) that a Russian warplane attacked a Ukrainian fighter jet. Not helping matters is the end of the dead cat bounce in Portugal where after soaring by 20% yesterday on hopes of a fresh capital infusion, Espirito Santo has once again crashed, dropping as much as 11%, driven lower following downgrades by both S&P and Moodys, as well as the realization that someone was pulling everyone's legs with the rumor of an equity stake sale.
Another round of overnight risk on exuberance helped Europe forget all about last week's Banco Espirito Santo worries, which earlier today announced a new CEO and executive team, concurrently with the announcement by the Espirito Santo family of a sale of 4.99% of the company to an unknown party, withe the proceeds used to repay a margin loan, issued during the bank's capital increase in May. This initially sent the stock of BES surging only to see it tumble promptly thereafter even despite the continuation of a short selling bank in BES shares this morning. Far more impotantly to macro risk, it was that 2013 staple, the European open surge in the USDJPY that has reset risk levels higher, while pushing gold lower by over 1% following the usual dump through the entire bid stack in overnight low volume trading. Clearly nothing has been fixed in Portugal, although at least for now, the investing community appears to have convinced itself that the slow motion wreck of Portugal's largest bank even after on Sunday, Portugal’s prime minister said taxpayers would not be called on to bail out failing banks, making clear there would be no state support for BES.
A look at key events and data in the week ahead.