Trade Deficit

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Same Trick Different Week: "Initial Claims Decline Following Revision"; Deficit Surge Pushes Q1 GDP To 1.5%

Stop us when this sounds familiar. Last week's 365K number has been revised to 368K, which is where the expectations for this week's print were. Instead, we got 367K claims this week, a 1K beat to expectations, which will be a 2K miss next week of course, but at least the pre-election propaganda media has their headline: "Initial Claims improve by 1,000." And scene. Naturally, the same thing happened for continuing claims, which beat expectations of 3275K, printing at 3229K, with the last week's print revised to 3290K from 3276K. The more disturbing form an end demand standpoint data, is that yet another 40K dropped off extended claims and EUCs. Finally in what is the best new for the market, and worst for the Economy, is that the March trade deficit soared to $51.8 billion, on expectations of -$50 billion, which was the biggest trade balance drop in 10 months. What this means is that Q1 GDP which already is tracking at 1.9%, just got lobbed to 1.5%. Yes: the Q1 GDP first revision will likely show the 2.2% number is now in the low to mid 1% range.

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Overnight Sentiment: Oversold Bounce Overdue

There was no good news overnight: CSCO (a rather prominent DJIA member) imploded on global demand weakness, China posted a larger than expected trade surplus which however was due to a greater than expected drop in imports, European industrial production was slightly better in Italy but offset by worse than expected news out of France (as for Greece - forget it), while all the attention continues to be focus on how the Greek endgame plays out, and now Spain too. Still, futures are on the cusp of greenness simply because following 6 days of declines stocks are oversold, and will desperately try to rally into any good news: such as initial claims later today, which will once again be spun as "declining" following a bigger upward revision to last week's number, making this week's appear to drop... at least until next week. As usual be on the watch for any erroneous headlines based on spurious rumors out of Greek developments: these tend to more the EURUSD, and thus ES, quite violently.

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Previewing This Week's Key Macro Events

Goldman summarizes what to look forward to in the next few days, when once again fundamental will be ignored and all attention will be on the ECB. "The Week ahead will be dominated by global PMI and US labour market data as the two key releases. A few central banks meetings are on schedule, but market consensus suggests clearly that that ECB will not change its policy, while the RBA will likely cut interest rates by 25bp. There are also central bank meetings in Columbia, Thailand and the Czech Republic.  The impact of these events on the FX markets, in particular the key activity data, will mainly be driven by the usual risk-on/risk-off mechanics. Moreover, with cyclical data generally weakening, chances are that risk-off currencies could perform relatively better this week. Some additional Yen strength is therefore possible, as well some under-performance of pro-cyclical currencies. The AUD may be worth some particular attention with the RBA meeting this week and the Chinese PMI - both key drivers of the currency."

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Previewing Today's Q1 GDP Print

In 45 minutes we will get the first unrevised big picture look of how the US economy did in the record hot weather-boosted first quarter of 2012. Consensus is looking for a +2.5% print, although according to some preliminary analysis, the weather, which simply pulled "demand" forward, may have resulted in an up to 30-40% increase in the baseline print. Whether or not that is the case depends on the flow through Q2 data, which so far has been quite horrible as we showed yesterday, but far more importantly, on how much debt the Treasury issues, as when one cuts out the noise, the only thing that does matter for "growth" is what the net re-leveraging in the system is. Everything else is mostly weekly BLS BS that only serves to increase the general level of Schrodingerian confusion. Anyway, for those who enjoy observing the trees and ignoring the forest, here is a preview of what to expect today, first from Bloomberg and then from Goldman.

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Overnight Sentiment: Zen-like After Initial Revulsion

Futures are unchanged after dropping steeply overnight following the Spanish re-downgrade as the Italian 5/10 year bond auction was bad, but still passed (somehow the lack of the European bond market ending is good news). This is ironic with Europe very much on edge following the release of very disappointing EU data, with German confidence, French consumer spending, Spanish unemployment all worse than estimates. Offsetting all of the negativity to some extent is the gross JPY10 trillion and net JPY5 trillion injection by the BOJ, which is a harbinger of what will happen west of Japan when push comes to shove. And so now all eyes turn to US GDP, which, continuing the Constanza bizarroness, better miss for stocks to surge, as a beat of consensus of 2.5% will mean the Chairman was not joking when he told the world he was morphing from a dove to a hawk (if only for theatrical purposes).

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Guest Post: Where’s The Crisis?

The thing about GDP, is that it doesn’t really measure wealth creation, or the size of the economy. It measures a derivative of that: money circulation. If Congress passed a law saying that everyone in America had to smoke meth (hey, if you can mandate the purchase of health insurance, why not mandate drug consumption in the name of increasing GDP?) and gamble all their disposable income on horse racing, GDP would almost certainly improve. And that’s growth, right? Except it isn’t. Real growth comes from innovation, productivity, imagination, and hard work. You can attempt to quantify it, but there is no easy catch-all number that will give you a quick and simple insight.

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The French Presidential Election Is Underway

Update: according to Belgian Le Soir, first exit polls show that Hollande is not surprisingly ahead, with 27% of the vote, 25.5% for Sarkozy, 16% for Marine Le Pen, and 13% for Jean-Luc Melenchon. More or less just as expected, and setting the stage for the runoff round which will be Hollande's to lose. French speakers demanding a minute by minute liveblog, can find a great one over at Le Figaro, and an English-one can be found at

As of 8 am CET, polls are open in the first round of the French presidential elections where voters are expected to trim the playing field of ten to just two candidates, incumbent Nicholas Sarkozy and his socialist challenger Francois Hollande, who will then face off in a May 6 runoff, where as of now Hollande is expected to have a comfortable lead and take over the presidency as the disgruntled French take their revenge for an economy that is contracting, an unemployment rate that keeps rising (see enclosed) despite promises to the contrary, and as their to "express a distaste for a president who has come to be seen as flashy following his highly publicized marriage to supermodel Carla Bruni early in his term, occasional rude outbursts in public and his chumminess with rich executives.....France is struggling with feeble economic growth, a gaping trade deficit, 10 percent unemployment and strained public finances that prompted ratings agency Standard & Poor's to cut the country's triple-A credit rating in January." In a major shift for the country, Hollande would become France's first left-wing president since Francois Mitterand, who beat incumbent Valery Giscard-d'Estaing in 1981. As Reuters reports, "Hollande, 57, promises less drastic spending cuts than Sarkozy and wants higher taxes on the wealthy to fund state-aided job creation, in particular a 75 percent upper tax rate on income above 1 million euros ($1.32 million)." The Buffett Rule may have failed in the US but La Loi de Buffett is alive and well in soon to be uber-socialist France. Yet it is not so much Hollande's domestic policies, as his international ones, especially vis-a-vis the European Fiscal Treaty, Germany, and most importantly the ECB, that roiled markets last week, causing French CDS to spike to the widest since January. In other news, goodbye Merkozy, hello Horkel as the power center shifts yet again to a new source of uncertainty and potential contagion.

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Guest Post: Floating Exchange Rates - Unworkable And Dishonest

Milton Friedman was a proponent of so-called “floating” exchange rates between the various irredeemable paper currencies that he promoted as the proper monetary system. Many have noted that the currencies do not “float”; they sink at differing rates, sometimes one is sinking faster and then another. This article focuses on something else. Under gold, a nation or an individual cannot sustain a deficit forever. A deficit is when one consumes more than one produces. One has a negative cash flow, and eventually one runs out of money. The economy of a household or a national is therefore subject to discipline—sooner or later. Friedman asserted that floating exchange rates would impose the same kind of forces on a nation to balance its exports and imports. He claimed that if a nation ran a deficit, that this would cause its currency to fall in value relative to the other currencies. And this drop would tend to reverse the deficits as the country would find it expensive to import and buyers would find its goods cheap to import. Friedman was wrong.

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Frontrunning: April 17

  • This is just hilarious on so many levels: Japan Will Provide $60 Billion to Expand IMF’s Resources (Bloomberg) - just don't look at Fukushima, don't look at the zero nuclear plants working, don't look at the recent trade deficit, and certainly don't look at the Y1 quadrillion in debt...
  • US Senate vote blocks ‘Buffett rule’ (FT)
  • Reserve Bank of Australia awaiting new data before considering rate move (Herald Sun)
  • Merkel Offers Spain No Respite as Debt Cuts Seen As Key (Bloomberg)
  • RBI cuts repo rate by 50 bps; sees little room for more (Reuters)
  • China allows banks to short sell dollars (Reuters)
  • Central bankers snub euro assets (FT)
  • Shanghai Econ Weakening’ Mayor Vows to Pop Housing Bubble (Forbes)
  • Wen's visit to boost China-Europe ties (China Daily)
  • Madrid threatens to intervene in regions (FT)
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At Least One Italian Export Is Soaring: Gold

When one thinks PIIGS, one usually imagines countries with collapsing economies, 50%+ youth unemployment, and current account deficits so large they are about to drag down the ECB, Bundesbank and Germany. And while that is absolutely correct for the most part, there is one product which the PIIGS, or in this case Italy, are all too happy to export in size. Gold, and not just to anywhere, but to that ultimate safe haven - Switzerland. From BBC: "Italian exports of gold ingots to Switzerland have soared in recent months, data has shown. Exports to Switzerland were 35.6% higher than in February 2011 "mainly because of sales of non-monetary raw gold", statistics agency Istat said. This followed a 34.6% year-on-year rise in exports to Switzerland in January." And the absolutely funniest attempt at spin ever:  "Experts say improvements in the trade deficit could be a sign that Prime Minister Mario Monti's economic reforms are starting to take effect." Uhm, when the country is exporting the only real asset it has for when it will need to backstop its own currency following the inevitable collapse of the EUR, this is not exactly a sign that the country's reforms are taking effect, but rather that everyone else in Europe is stockpiling the precious metal in advance of "some" event, which is coming.

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Sheila Bair's Modest Proposal To Fix Everything: Hyperinflation

This one is actually quite funny, although we feel that the MMTers, the Neo-Keynesians, the Econ 101 textbook fanatics, and the government apparatchiks out there will fail to appreciate the humor. However, we are a little concerned how many of those in charge read into this a little too much, and decide to make this official policy...

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Goldman Raises Q1 GDP Forecast To 2.5% On Trade Deficit Data

US fiscal and monetary policy summarized: Baffle them with B(L)S data. This is what happened most recently this morning, when as we noted the labor data is finally reverting to a far weaker trendline now that the weather effect first written about here in February, has been fully exposed. And if it was only that it would be case closed: more QE is coming, especially with headling PPI coming less than expected. However, we also had trade data that came in $6 billion better than expected, a number we said would result in imminent Q1 GDP hikes. Sure enough, here comes Goldman. "The US trade deficit declined to $46.0 in February following a deficit of $52.5bn in January. Most of the improvement reflected a sharp decline in real goods imports, which fell by 3.9% (month-over-month). We suspect that the weakness reflects in part seasonality related to the Chinese New Year holidays. Real goods exports also declined during the month, falling by 1.0%. On net, the report raised our tracking estimate of Q1 GDP growth to 2.5% from 2.3% previously." So what is a poor Fed chairman to do to keep the goldilocks illusion going, yet have a QE way out? Well, blame China for a jump in GDP helps. For everything else we have the weather.

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