Richmond Fed

Summary of key US events in the week ahead.

Wealth levies and a European banking system collapsing; dismal capital goods new orders; a miss for new home sales and Richmond Fed; almost the lowest volume of the year in stocks, and Treasury bonds trading at their lowest yield since the Cyprus debacle started - a perfect recipe to try a run to all-time closing highs in the S&P 500. The previous high close (not intraday) was 1565.17 on 10/09/07 and we missed it by less than 2 points today. What has taken us to these new post-Cyprus highs, safety - Staples, Healthcare, and Utilities (up 1-3% since 3/15 Cyprus). Banks remain battered with C, GS, and MS all down 5-6%. Treasuries and corporate bonds reflected a considerably different perspective on risk-appetite to stocks today. While the USD largely flatlined, with JPY weakening, EURJPY (and WTI it seems) led stocks higher on dismal volume. Gold, silver, and copper flatlined (following the USD's lead) but the disconnect between VIX/Stocks and Bonds/Credit was extreme by the close. VIX remains 1.5 vols higher than it was when stocks were last here and the protection bid in credit markets (and low volume in stocks) suggests equity algos simply forgot that Europe opens again in 8 hours.

Houston we may have a problem: with the DJIA trumpetedely hitting new all time highs day after day in March, one would expect that its traditional second derivative - US Consumer Confidence, would be at all time highs as well, or close thereby. One would be wrong, because according to the Conference Board, March consumer confidence plunged to 59.7 from 69.6, and well below expectations of a 67.5 print. Both components of the index dipped, with both the present situation and expectations indices sliding from 61.4 and 72.4, to 57.9 and 60.9, respectively. And just to make sure the S&P ramps to all time highs on ongoing miserable economic, corporate profit and, of course, sovereign insolvency news, we got both New Home Sales, dropping from 431K to 411K, missing expectations of 420K, and the Richmond Fed also missing expectations of a 6 print, dropping from last month's 6 to 3. All in all, if this latest round of ugly and rapidly getting worse economic data doesn't send the S&P to new all time highs, nothing will. Well, perhaps another European country going broke may do the trick...

Calmer markets today, but European officials are finding it hard to put the cat back in the bag.

Ben was in congress campaigning er, testifying mostly about the effectiveness of all things ZIRP and QE. He was grilled about possible risks with QE especially if interest rates should rise. The Bernank saying that interest rates would rise was unlikely but he then cavalierly stated if rates rise, the Fed would just “hold back on payments” er, stiff the Treasury. That’s no big deal for him since by then he’ll be down the road writing his memoirs, making speeches and joining some big Wall Street firm as a well-paid consultant. The Bernank was also asked if he noted any bubbles or market excess and said he saw none. 

Next week’s calendar is packed with important events and releases, aside of course from the biggest event of the week which are the Italian elections. In fact we already got the first one in the form of China's disappointing HSBC flash PMI which consensus expectations would print stable yet which dropped to a 4 month low. On Friday, the ISM is expected to come out mildly softer vs last month’s strong 53.1 print and consensus at 52.5. Chicago PMI will also be followed by markets on Thursday. On the central bank front markets will be primarily looking for further news on the BOJ leadership succession front. From the perspective of Fed speakers, Chairman Bernanke’s testimony ahead of the Senate Banking Committee will also be followed as markets continue to track the Fed’s assessment of the economic recovery. In the global currency warfare front, the Bank of Israel is expected to cut policy rates by 25bps on Monday, as well as the National Bank of Hungary on Tuesday.

This objective report concisely summarizes important macro events over the past week.  It is not geared to push an agenda.  Impartiality is necessary to avoid costly psychological traps, which all investors are prone to, such as confirmation, conservatism, and endowment biases. Also - from Citi's Steven Englander - what to worry about from this weekend's G-20 extravaganza...

At this point it has gotten painfully tedious, and the one phrase to describe trading is - Same Pattern Different Day. With equity futures closing decidedly weak on earnings reality after US market close, the slowly, steady overnight ramp seen every single day for the past month has returned as always, this time on yet another largely expected German confidence indicator beat (following the just as irrationally exuberant ZEW some time ago, and yesterday's far better than expected PMI), this time the IFO Business Climate, which printed at 104.2, on expectations of 103 and up from 102.4. This was driven by both the current assessment rising from 107.1 to 108 and the Expectations rising from 97.9 to 100.5. Naturally, all confidence indicators will be skewed in a way to prevent the market from doubting for a second that Germany may actually succumb to the same recession that has gripped all other European countries (which Germany is an inch away from after its negative Q4 GDP). In other words: there is hope. As for reality, UK Q4 GDP came in at -0.3% on expectations of a far lower drop to -0.1%, and down from the olympics-boosted 0.9% in Q3. The UK certainly can't wait for Mark Carney to come and show them how cable devaluation is really done, cause this time it will be different, if only it wasn't different for everyone else.

We are now four-for-four (five-for-five if we include the drastic downward revisions in the Chicago PMI) for regional Fed business outlooks taking a serious (and consistent) turn for the worse. Kansas Fed manufacturing just missed expectations turning negative once again. Amid the sub-indices (which were broadly weak) was a plunge in employment as it fell to August 2009 levels. This weakness in Kansas follows Richmond's quadruple dip, Empire State's weakness, and Philly's major miss and in aggregate suggests a very weak ISM to come. Of course, all of this flies in the face of today's US PMI which beat expectations and pushed to recent highs.

While the trend has been your friend in US equities for the last few months; the trend in US Macro data has also been consistent - but negative over the last few weeks. Today, for the first time in almost five months (thanks to misses on existing homes and the Richmond Fed) the US Macro index turned negative. In the past this has marked the start of the market's realization that things are not just dipping but are cycling lower. This is also the weakest 'macro' start to a year since the crisis began - and seasonally is prone to become worse not better from here. It seems, however, that the only reality that is required for any prognosticator or commission-taker is that of nominal stock prices (as self-confirming bias creating data) - just as it was in late-2007.

So much for the latest "recovery." While everyone continued to forget that in the New Normal markets do not reflect the underlying economy in the least, and that the all time highs in the Russell 2000 should indicate that the US economy has never been better, things in reality took a deep dive for the worse, at least according to the Empire State Fed, the Philly Fed, and now the Richmond Fed, all of which missed expectations by a huge margin, and are now deep in contraction territory. Moments ago, the Richmond Fed reported that the Manufacturing Index imploded from a 9 in November, 5 in December and missed expectations of a 5 print at -12: this was the biggest miss to expectations since September 2009.

As DB's Jim Reid summarizes, "it is fair to say that newsflow over the next 72 hours will be fairly thin before we head into a tense final few business days of the year." It is also fair to say, that the usual tricks of the new normal trade, such as the EUR and risk ramp as Europe walks in around 3 am, precisely what happened once again overnight to lift futures "off the lows", will continue working until it doesn't. In the meantime, the market is still convinced that some compromise will appear miraculously in the 2 trading sessions remaining until the end of the year, and a recession will be avoided even as talks now appear set to continue as far down as late March when the debt ceiling expiration, not cliff, will become the primary driving power for a resolution. That said, expect to start hearing rumors of a US downgrade by a major rating agency as soon as today: because the agenda is known all too well.

The Richmond Fed's Jeffrey Lacker, a 2012 voting member of the FOMC, who has so far been the sole objector to the Fed's policy of exiting a hole by continuing to dig deeper, has released his traditional "good cop" response to Bernanke's QE4EVA plan. The highlights: "I disagreed with the Committee’s decision to continue purchasing additional assets to stimulate the economy. With economic activity growing at a modest pace and inflation fluctuating close to 2 percent — the Committee’s inflation goal — further monetary stimulus runs the risk of raising inflation and destabilizing inflation expectations....Deliberately tilting the flow of credit to one particular economic sector is an inappropriate role for the Federal Reserve....I have dissented previously against the use of date-based forward guidance, and I supported the decision to drop such language at the December meeting....monetary policy has only a limited ability to reduce unemployment, and such effects are transitory and generally short-lived. Moreover, a single indicator cannot provide a complete picture of labor market conditions. Therefore, I do not believe that tying the federal funds rate to a specific numerical threshold for unemployment is an appropriate and balanced approach to the FOMC’s price stability and maximum employment mandates." Of course, his objection is duly noted, and summarily rejected and forgotten.

Bloomberg's Joshua Zumbrun has released a much overdue, MSM apocryphal, somewhat realistic outlook on the endspiel of Bernanke's central planning: i.e., the unwind of the Fed's balance sheet that from just under $3 trillion will reach $5 trillion by the end of 2014. We say "somewhat" because the conclusion in the article is that there is some hope still for an orderly wind down of the Fed's assets without a complete market collapse. The reality is that there is no such hope.

Ok. It’s not that the Greek deal is nothing. But then again, third strike. Eventually expected, or at least hoped for. Hence, lack of concrete follow-through. So, now it’s there. And now what? You Ain’t Seen Nothing Yet? What is there to see??? Pitch the markets some input, something concrete, something to feed off, something to see!