recovery

• Global shares sink, following 7.3 percent drop in Japan's Nikkei (Reuters)
• When all fails, pull a Kevin Bacon: Japan Economy Chief Warns Against Panic Over Stock Sell-Off (BBG)
• White House Feeds IRS Frenzy by Revising Accounts (BBG)
• In any scandal, lying to Congress is tough to prove (Reuters)
• Debt limit resets at higher level, budget impasse grinds on (Reuters)
• China factory data to test political calculations (FT)
• European Leaders Saying No to Austerity (BBG)
• And yet, nobody wants in anymore: Iceland’s new coalition government suspends EU accession talks (FT)
• Oil Manipulation Inquiry Shows EU’s Hammer After Libor (BBG)
• The Fed Squeezes the Shadow-Banking System (WSJ)
• Diamond Said to Weigh Backing Barclays Alumni in Venture (BBG)
• Spain’s Private Jets Disappearing as Tycoons Cut Flights (BBG)

Once again: The FOMC minutes had nothing to do with overnight's events, especially since both Ben Bernanke and Bill Dudley made it very clear previously that for any tapering to occur (and which is supposedly bullish according to David Tepper, who may finally be done selling to momentum chasers) if ever, the economy would have to be be stronger (which is of course a paradox because it is the Fed's QE that is making the economy weaker). If anything, the minutes reminded us that there is a mutiny in the FOMC with finally someone having the guts to say on the record that Bernanke is blowing a bubble - something never seen before on the official FOMC record. And after all, the Nikkei opened way up, not down. It was only after the realization of what soaring bond yields mean for, wait for it, stocks (despite central planner promises that it is soaring bond yields that are a good thing - turns out, they aren't) that the sell-off really started. That, and of course copper, and the end of the Chinese Copper Financing Deals arrangement that has been China's illicit cross-asset rehypothecation scheme for years (more shortly). So in a nutshell, here is what has transpired so far, courtesy of Bloomberg.

For the first time since October 2012, HSBC's China PMI (Flash) printed at a sub-50 level (49.6) missing expectations (50.4) quite notably. This is the worst two-month drop in 17 months. This is problematic for the PBoC who are being arbitraged left, right, and center and know that any stimulus will merely serve to exacerbate the problems they face (as we noted here that China simply cannot function with 'moderate' growth). Every one of the main index's 11 sub-indices is signaling 'problems' - from slower rates of output, slower new orders, employment dropping at a faster rate, stocks rising, and output prices falling. As HSBC notes, "The cooling manufacturing activities in May reflected slower domestic demand and ongoing external headwinds. A sequential slowdown is likely in the middle of 2Q, casting downside risk to China’s fragile growth recovery." Of course, none of this should come as any surprise to ZH readers - as we noted here, Chinese power consumption grew at its slowest rate since May 2009.

As the global equity and bond markets grind ever higher, abundant signs exist that we are once again living through an asset bubble – or rather a whole series of bubbles in a variety of markets. This makes this period quite interesting, but also quite dangerous. This can be summarized in one sentence:  How could this be happening again so soon?

What is 410 words and is released precisely 180 seconds after the FOMC's minutes? Why Jon Hilsenrath's FOMC minute-parsing piece of course. Which we can only assume means Jon was on the "preapproved" list for early distribution and pre-analysis, because not even we can analyze and type that fast. We are confident he did not breach the embargo. Because that would not look good for the Fed already being investigated by the Inspector General for last month's humilating breach.

It seems that the recent rise in interest rates, instead of the typical (pre-depression) behavioral tendency to make people nervous and rush to lock in low rates, has once again stalled any hope of an organic housing recovery occurring. While the reams of hard data show that the housing recovery remains a fast-money investment-driven enigma (here, here, and here) - as opposed to real confidence-driven house-buying; we are still told day after day that housing is the backbone of the economy (despite construction jobs languishing and affordability plunging again). The fact of the matter is that the last 2 weeks have seen mortgage applications plunge at their fastest rate for this time of year (a typically busy time) since the financial crisis began. But that doesn't matter because housing must be recovering because the homebuilder ETF is up 2% today...

"The most notable statement made by Bernanke during the Q&A session was that the FOMC could potentially cut the pace of QE purchases "in the next few meetings," although this was predicated on a continued improvement in the outlook for the economy and confidence in the sustainability of that improvement. He also stated that the purchase pace will depend on incoming data and that the FOMC could either raise or lower the pace of purchases in the future. Our view continues to be that the December meeting and subsequent press conference is the most likely time that the Committee would announce QE tapering, although September is a possibility if the economy picks up more than we expect in coming months."

Surging nominal imports and a miss for exports just about sums up perfectly just how the reality of Abenomics is crushing the real economy as the market goes from strength to strength on the hope that recovery is just around the corner. For the 28th month in a row Japan trade deficit has dropped YoY and its 12-month average is now at its worst ever. Energy costs are driving up imports (and adjusted for the devaluation in the JPY, the data is simply horrendous. Of course, there are green shoots - CPI is not deflating as fast as it was... and 'some' inflation expectations are rising (though as we noted here that is simply due to the tax expectations). Contrary to expectations held by some in the bond market, the BOJ did not comment on the sharp fluctuation in JGB yields since April as a result of monetary relaxation - on the basis, we assume, that if they don't mention it, it never happened. The result post a nothing-burger of 'more uncertainty' from the BoJ, the Nikkei keeps screaming higher, JPY rallied then fell back, and JGBs are sliding higher in yield.

We thought most readers would be rather surprised to learn what the result of a simple Bloomberg query comparing S&P EBITDA per share (BBG mnemonic TRAIL_12M_EBITDA_PER_SHARE) to the S&P looks like. For one: not only is corporate LTM EBITDA per share not at all time highs (it is well off the record levels seen in 2008), but it is at levels last seen in January 2007. But perhaps most surprising is what happens when on juxtaposes the S&P500's EBITDA level relative to the actual S&P. The stunning result is charted below:

With US Macro no longer the clean dirty shirt, the 'hope' of a recovery from the Spring swoon has faded rather quickly according to Goldman's latest Global Leading Indicator (though obviously not David Kostin). The modest April pick up - driven mainly by sentiment indicators as opposed to hard data - has faded as the reality of economic deterioration was more pronounced as both the Philadelphia Fed headline and the New Orders less Inventories components (the advanced proxies for Goldman's Global PMI aggregate) fell to the lowest level in more than six months. The S&P GSCI Industrial Metals Index also made new lows and fell for the third month in a row. The CAD and AUD TWI Aggregates weakened, driven primarily by a weaker AUD, and US Initial Claims also worsened from last month. But apart from that... as Goldman notes, the decline in momentum was a bit more substantial in May than many had expected.

Up until today, the narrative was one trying to explain how a soaring dollar was bullish for stocks. Until moments ago, when Bill Dudley spoke and managed to send not only the dollar lower, but the Dow Jones to a new high of 15,400 with the following soundbites.

• DUDLEY: FED MAY NEED TO RETHINK BALANCE SHEET PATH, COMPOSITION
• DUDLEY SAYS FISCAL DRAG TO U.S. ECONOMY IS `SIGNIFICANT'
• DUDLEY: FED MAY AVOID SELLING MBS IN EARLY STAGE OF EXIT
• DUDLEY: IMPORTANT TO SEE HOW WELL ECONOMY WEATHERS FISCAL DRAG
• DUDLEY SAYS HE CAN'T BE SURE IF NEXT QE MOVE WILL BE UP OR DOWN

And the punchline:

• DUDLEY SEES RISK INVESTORS COULD OVER-REACT TO 'NORMALIZATION'

Translated: the Fed will never do anything that could send stocks lower - like end QE - ever again, but for those confused here is a simpler translation: Moar.

Silver’s recovery yesterday from being 10% lower at one stage to recouping these losses and then rising over 2% was very positive technically. The key reversal is leading some to postulate that we may have seen the bottom or are close to a bottom. 

Since the BoJ enunciated its actions on April 4th, the world has decided that consuming risk assets (the riskier the better) is the path to salvation. While it makes perfect sense that some level of inspiration for a global recovery makes sense (though hardly) given Japan's actions, it beggars belief that the most broke of broke peripheral European nations would see equity moves of such magnitude. On the 50th anniversary of Chaos Theory (more on this later today), it is perhaps worth remembering its central lesson – that complex interrelated systems create unexpected outcomes from seemingly benign inputs. It appears the complex inter-related world in which we live is becoming more and more chaotically unstable at the margin and this current euphoria does not approximately determine the future.  There are more than enough variables out there – the butterflies flapping away – which can change outcomes in an instant.

Another event-free day in which the only major economic data point was the release of UK CPI, which joined the rest of the world in telegraphing price deflation, despite bubbles in the real estate and stock markets, printing 2.0% Y/Y on expectations of a 2.3% increase, the lowest since November 2009 and giving Mark Carney carte blanche to print as soon as he arrives on deck. In an amusing twist of European deja-vuness, last night Japan's economy minister who made waves over the weekend when he said that the Yen has dropped low enough to where people's lives may be getting complicated (i.e., inflation), refuted everything he said as having been lost in translation, and the result was a prompt move higher in the USDJPY, quickly filling the entire Sunday night gap. That said, and as has been made very clear in recent years, data is irrelevant, and the only thing that matters, at least so far in 2013, is whether it is Tuesday: the day that has seen 18 out of 18 consecutive rises in the DJIA so far in 2013, and whether there is a POMO scheduled. We are happy to answer yes to both, so sit back, and wait for the no-volume levitation to wash over ever. The US docket is empty except for Dudley and Bullard speaking, but more importantly, the fate of Jamie Dimon may be determined today when the vote on the Chairman/CEO title is due, while Tim Cook will testify in D.C. on the company's tax strategy and overseas profits.

All major US cash equity indices closed an odd shade of 'green' today which some have called 'red' - though only marginally and Treasuries ended the day practically unchanged (with 10Y +1bps). But the real action took place away from these two asset-classes. Precious metals were monkey-hammered at their open overnight but staged a miraculous recovery leaving gold with its best gain since June 2012 (didn't hear too much about that on TV?). Credit markets notably under-performed - never managing to get into the green on the day. VIX rose over 0.5 vols to close back above 13%. On the bright side, only a few more hours until Tuesday...