Trade Deficit

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Goldman Cuts US Q2 GDP Two Times In Two Hours





First Goldman released this just after the trade data came out:

The trade deficit improves broadly as expected to $48.7bn in May, as nominal exports rise (+0.2%) and imports fall (-0.7%) on the month. (The April trade deficit was revised up slightly from $50.1bn to $50.6bn). The improvement in the trade deficit, however, was driven by a decline in petroleum imports (and thus an improvement in the petroleum deficit) while the real ex-petroleum trade deficit actually widened from $40.3bn in April to $41.4bn in May. The trade report is a slight negative for our Q2 GDP growth tracking estimate which we lowered from 1.5% to 1.4%.

And, moments ago after the wholesale Inventories was released, Goldman came out with this:

Wholesale inventories rose in line with the consensus expectation in May (up 0.3%), but from a downward revised April level. As a result, we revised down our Q2 US GDP tracking estimate to +1.3% from +1.4%.

Luckily there aren't another 13 releases today or we may be in recession right now.

 
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Overnight Sentiment: Same Old Same Old





If anyone still actually cares, or trades, we just saw the third California muni bankruptcy in two weeks, German bonds priced at record low yields, and Spanish 2 year nominal yields just hit all time lows of -0.37%. Abroad Spain promised to crush its middle class even more by impairing retail held sub debt and hybrids, while forcing them to pay more taxes, a move which will lead to some spectacular Syntagma Square riotcam moments, yet which has sent Spanish bonds slightly higher. As for US equity futures, they continue the headless chicken dance higher even as company after company now rushes to preannounce horrifying Q2 earnings. And that's it in a nutshell.

 
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Daily US Opening News And Market Re-Cap: July 10





European equities are seen firmly in the green at the North-American crossover, with outperformance noted in the peripheral bourses. Overnight news from the Eurogroup has confirmed that the EFSF/ESM rescue funds will be given the powers to intervene in the secondary bond markets, easing sentiment towards the European laggard economies. Gains are being led by a particularly strong technology sector, with the riskier financials and basic materials also making solid progress. Asset classes across the board in Europe are benefiting from risk appetite, with the Bund seen lower and both the Spanish and Italian 10-yr yields coming below their key levels of 7% and 6% respectively. The moves follow a spurt of activity in Europe with a number of factors assisting the way higher.

 
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Why Germany's TARGET2-Based Eurozone Preservation Mechanism Is Merely A Ticking Inflationary Timebomb





We have covered the topic of the German TARGET2 imbalances previously, both from the perspective of what catalysts can lead the Bundesbank to suffering massive losses (the one most widely agreed upon being a collapse of the Eurozone, which explains why even discussions of that contingency are prohibited in Europe), from the perspective of its being an indirect current account deficit funding mechanism, and from the perspective of what is the maximum size TARGET2 imbalances, funded primarily by the Bundesbank, can grow to before eventually causing irreperable damage to the Bundesbank. Still, there appears to be ongoing mass confusion about the topic, with numerous economists proposing contradictory theories, all of which supposedly rely on traditional economic models. Today, to provide some additional and much needed color, we once again revisit the topic of TARGET2, and this time we look at arguably the most critical question: what happens when the TARGET2 imbalance bubble ultimately pops. And here is where the true cost to Germans becomes apparent, because there is no such thing as a "borrowing from the future" free lunch. Which is precisely what TARGET2 does, only instead of a direct cost, the post-TARGET2 world will result in the now traditional indirect cost of all monetary experiments gone awry: runaway inflation.

 
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Key Events In The Coming Week And A Preview Of Yet Another European Summit





Goldman recaps the past tumultuous week, and looks at events in the next 7 days, of which the key feature will be the next "latest and greatest" and most disappointing European summit on Thursday and Friday, where not even Greece is going any longer, and which not even the most resolute Europhiles expect to resolve anything: "The key event of next week is the EU summit. The latest European Economics Analyst details our expectations. In brief we expect to see finalization of the much-anticipated growth compact, involving financing for infrastructure investment and a restatement of the agenda for structural reform. We also expect announcement of a plan for ‘banking union’ in the Euro area, even if, owing to unresolved political differences, details are likely to remain sketchy on key issues—notably on how the implicit cost of providing fiscal backing for the Euro area banking system will be shared across countries."

 
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Guest Post: Is TARGET2 A Less Than Thinly Veiled Bailout For Europe's Periphery?





Recently, there has been an intense debate in Europe on the TARGET2 system (Trans-European Automated Real-time Gross Settlement Express Transfer System 2), which is the joint gross clearing system of the eurozone the interpretation of this system and its balances has provoked divergent opinions. Some economists, most prominently Hans-Werner Sinn, have argued that TARGET2 amounts to a bailout system. Others have vehemently denied that. Philipp Bagus adresses the question of whether this 'mysterious' system, that we have been so vociferously discussing, simply amounts to an undercover bailout system for unsustainable living standards in the periphery? Concluding by comparing TARGET2, Eurobonds, and the ESM, he notes that all three 'devices' serve as a bailout system and form a tranfer union but governments prefer to hide the losses on taxpayers as long as possible and prefer the ECB to aliment deficits in the meantime.

 
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David Rosenberg On Austerity, Politics, And The Light At The End Of The Tunnel





Gluskin Sheff's David Rosenberg may be cautious on the outlook for risk assets and cyclical securities over the near- and intermediate-term, but, he notes, change is always at the margin, and it usually starts in the political sphere. Austerity is not some dirty nine-letter word as the socialists in Europe would have you believe. It is all about living within your means and living up to your commitments. There is some good news in the United States with respect to this topic, but the uncertainty over the extent of next year's tax bite is likely to cause households and businesses to pull spending back and raise cash, at the margin, which means the economy won't turn around in time for Mr. Obama. As was the case with Ronald Reagan, just having a clear and coherent fiscal plan will part the clouds of uncertainty and encourage capital to be put at risk rather than sit as idle unproductive cash on corporate balance sheets. In a somewhat stunning sentence from the no-longer-a-permabear, he notes that "The future is brighter than you think", but just in case you are backing up the truck, he adds "this does not mean we will not have another recession, by the way — as we suffer through a deflationary debt deleveraging. I'm noticing a certain degree of despair these days, just as I am getting enthusiastic about the future. Much depends on what happens on November 6th and between now and then we still have the European mess, China hard landing risks and the U.S. debt ceiling issue to confront. Be that as it may, those with some dry powder on hand will be in a solid position to take advantage of whatever forced "panic" selling takes place."

 
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Overnight Sentiment: Europe Front And Center As BOJ Checks To Fed





With only new home sales (which we actually report as opposed to NAR goalseeked marketing materials) to hit the docket in the US, the only newsflow that matters again will be that coming out of Europe, which is holding an informal summit. As BofA reminds us, the summit was originally set up to discuss growth. Now, it is there for Grexit damage control. Today's discussions will focus on the use of existing tools for supporting short-term growth. Spain and Greece are likely to be on the agenda as well. On Greece, although discussions should focus on the pros and cons of a Greek exit, we believe there will be no communiqué other than to mention that Greece should stay in the euro area and implement the programme. On Spain, discussions will likely focus on the banking sector. The discussion will likely be around using the EFSF (or its successor ESM) directly to fund the banking sector, a step Germany opposed in the past. Overall, we do not expect many decisions from the summit. Rather, we expect a communiqué about what was officially discussed, and a date for a later rendezvous. In other words, "investors are likely to be let down by today's summit" (that was BofA's assessment). Also let down, were markets in the overnight session when the BOJ, contrary to some expectations, left its QE program unchanged. As usual keep an eye on headlines: record EUR interest means violent short covering squeezes if the algos sense a hint of optimism in any red flashing text (if only briefly, as the long-term outlook for the situation is quite hopeless).

 
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