Anyone who went to bed with the EURUSD about to breach 1.30 to the downside may have been surprised this morning to see it trading nearly 150 pips higher. Checking the headlines for news of a Greek deal however would be futile, as one did not occur. Instead what did, were more promises of a deal being "imminent" even as Greece is doing all it can to appease intransigent creditors, offering GDP upside warrants (something that did not work too well for Argentina), with the IMF stating it demands guarantees that this time Greece will follow through with promises. Oddly enough the German demand for fiscal overrule has gotten lost in the noise but is certainly not forgotten and last we checked Merkel has not withdrawn this polite request. Still futures are up, primarily on a smattering of better than expected PMIs, in China and Europe. Alas, the Chinese PMI beat as discussed last night, was more of a cold water shower as the market had been hoping for much more defined promises of PBoC intervention and instead got a lukewarm Goldilocks economy which could last quite a bit longer without RRR-cuts. As for European PMI numbers being better than expected, we only wonder if these now correlate with the prevailing unemployment rate throughout the Eurozone.
- China’s factories in strong start to 2012 (FT)
- Merkel to court Chinese investors (FT)
- States to decide this week on mortgage deal (Reuters)
- Europe is stuck on life support (FT)
- IMF's Thomsen Says Greece Must Step Up Reform (Reuters)
- Tax cuts expiry to slow US growth (FT)
- Government health spending seen hitting $1.8 trillion (Reuters)
- Romney Win in Florida Primary Shows Strength (Bloomberg)
- EU regulator blocks D.Boerse-NYSE merger (Reuters)
- Greek Bondholders said to get GDP Sweetener in Debt Swap Agreement (Bloomberg)
- S. Korea Plans to Buy China Shares (Bloomberg)
No sooner have the supposedly close (and yet so far away) Greek debt negotiations increased haircuts but added desperate incentives such as GDP Warrants, then The Guardian is reporting that Greek PM Papademos is calling crisis meetings with Greek political party leaders as tensions are clearly growing between Greeks and their EU overlords/partners. The 'increasingly intransigent' negotiating team sent by Brussels is demanding even more severe austerity measures before sanctioning the new bailout funds. The incredulity at the complete mis-communication and increasing bifurcation is nowhere more clear than the divergence between FinMin Venizelos saying "We are one step [away]. I would say it is a formality away from finalizing (the debt relief agreement)," and the disbelief by Greek MPs that "The troika doesn't appear to be willing to accept any concessions whatsoever on reducing the minimum wage and scrapping bonuses," said the government aide. "No political party is willing to move either, saying wage cuts are a red line they are simply not going to cross. You tell me how this is going to be resolved. We have no idea and we're very worried."
What do the NAR, Consumer Confidence and CBO forecasts have in common? If you said, "they are all completely worthless" you are absolutely correct. Alas, the market needs to "trade" off numbers, which is why the just released CBO numbers apparently are important... And the fact that the CBO predicted negative $2.5 trillion in net debt by 2011 back in 2011 is largely ignored. Anyway, here are some of the highlights, but here is the kicker: "Had that portion of the decline in the labor force participation rate since 2007 that is attributable to neither the aging of the baby boomers nor the downturn in the business cycle (on the basis of the experience in previous downturns) not occurred, the unemployment rate in the fourth quarter of 2011 would have been about 1¼ percentage points higher than the actual rate of 8.7 percent"- translation: CBO just admitted that the BLS numbers are bogus and real unemployment is 10%. Thank you.
Below are some of the key events to have transpired in the overnight session. According to Bloomberg's TJ Marta, sentiment is broadly higher, with stocks, bond yields, FX higher, EU sovereign spreads tighter as markets focus on German unemployment, ebbing EU concerns, shrug off German retail sales, Greek debt. Whereas German retail sales unexpectedly fell -1.4%M/m vs est. +0.8%, unemployment fell more than expected -34k vs est. -10k. Italy December unemployment climbed to 8.9%, highest since the data series began in Jan. 2004, from a revised 8.8% in November. Commodities mostly higher, led by WTI +1.5%, 1.0 std. devs. EU leaders agreed to accelerate rescue fund, deficit control treaty . Greek debt negotiations remain in flux with Greece reporting progress, Germany expressing frustration over Greece’s failure to carry out economic. Portugal 10-yr yields fell after earlier touching euro-era record; yields of AAA-rated Finland, Norway, Sweden and Germany higher even as Coelho Says Portugal’s Debt Is 'Perfectly Sustainable.' Treasuries decline for first time in five days; 5-yrs yields yesterday touched record-low 0.7157%. SNB Says Currency Reserves Declined to 257.5 Billion Francs. Foreign Investment in Spain Shows EU38.6 Bln Outflow in Jan-Nov. ECB’s Nowotny Says ‘Can’t Be Sure’ Greece Will Stay in Euro. Belgium Borrowing Costs Rise at 105-Day, 168-Day Bill Auction. Finally, according to KBC, Irish Consumer Confidence Up As ‘Armageddon’ Averted. So every day the world does not end consumer confidence should be higher. Brilliant.
- Victory for Merkel Over Fiscal Treaty (FT)
- Everyone wants a mediterranean colony: China's NDRC Delegation Visit Greece to Boost Economic Ties (Xinhua)
- As Florida votes, Romney seems in driver's seat (Reuters)
- Greece’s Papademos Seek On Debt Deal by End of Week (Reuters)
- Banks Set to Double Crisis Loans From ECB (FT) - as Zero Hedge predicted two weeks ago
- S&P: Doubling Sales Tax Won’t Help Japan Enough (Bloomberg)
- Toshiba cuts outlook after Q3 profit tumbles (Reuters)
- Blackrock’s Doll says Fed’s QE3 is Unlikely, In Contrast to Pimco’s Gross (Bloomberg)
Growth. It's what every economist and politician wants. If we get 'back to growth', servicing debts both private and sovereign become much easier. And life will return to normal (for a few more years). There is growing evidence that a major US policy shift is underway to boost growth. Growth that will create millions of new jobs and raise real GDP. While that's welcome news to just about everyone, the story is much less appealing when one understands the cost at which such growth comes. Are we better off if a near-term recovery comes at the expense of our future security? The prudent among us would disagree.
That the fine economists at the San Fran Fed are known to spend good taxpayer money in order to solve such challenging white paper conundrums as whether water is wet, or whether a pound of air is heavier than a pound of lead (see here and here) has long been known. Furthermore, since the fine economists at said central planning establishment happen to, well, be economists, they without fail frame each problem in such a goal-seeked way that only allows for one explanation: typically the one that economics textbooks would prescribe as having been the explanation to begin with. Today, is in some ways a departure from the default assumptions. In a paper titled "Why is Unemployment Duration so Long", a question which simply requires a brief jog outside of one's ivory tower to obtain the answer, Rob Valleta and Katherin Kuang, manage to actually surprise us. And while we will suggest readers read the full paper attached below at their leisure, we cut straight to the conclusions, which has some troubling observations. Namely, they find that "the labor market has changed in ways that prevent the cyclical bounceback in the labor market that followed past recessions... In addition, anecdotal evidence suggests that recent employer reluctance to hire reflects an unusual degree of uncertainty about future growth in product demand and labor costs."Oddly enough, this is actually a correct assessment: the mean reversion "model" no longer works as the entire system has now broken, and since the administration changes rules from one day to the next, companies are not only not investing in their future and spending capital for expansion, and hoarding cash, but have no interest in hiring: an observation that previously led to a surge in profit margins, yet one which as we pointed out over the weekend, has now peaked, and margins have begun rolling over, even as the rate of layoffs continues to be at abnormally high levels, meaning all the fat has now been cut out of the system. Yet it is the following conclusive statement that is most troubling: "These special factors are not readily addressed through conventional monetary or fiscal policies." And that is the proverbial "changeover" as the Fed has just acknowledged that both it, and Congress, are completely powerless at fixing the unemployment situation. In which case is it fair to finally demand that the Fed merely focus on just one mandate - that of controlling inflation, and leave the jobs question to the market, instead of making it worse with constant central planning tinkering which only makes it worse by the day?
Japan recently made waves with the news that its total debt would hit north of one quadrillion yen over the next several months: a number greater than the GDP of the entire Eurozone. Yet the one saving grace for Japan has long been the strawman that the bulk of its debt is locally held, and thus the risk of a sharp sell off is minimal as the capital has to be recycled within the borders of Japan, especially as the USA and soon the rest of the world will provide the same returns on debt as Japan, which has been locked in a 30 year deleveraging cycle, does. However, one thing that continues to be widely ignored is the demographic top that Japanese society is experiencing as ever more workers enter retirement, and there is no replenishment of young workers (perhaps Spain can export some of its youth to Tokyo?). This may change soon because as the AP reports, the Japanese population will be cut by 30% by 2060. Furthermore the country's workforce of people aged 15 to 65 will shrink to half the population (a BLS wet dream as under those conditions the US unemployment rate would be very negative). Alas, the prospect of Japan's population of 128 million dropping by 1 million every year over the coming decades, should be sufficiently sobering. This naturally means that any existing paper supply-demand equilibrium will soon have to start being reevaluated. But by 2060 we will likely have bigger problems than placing the 1 billion googol in JJBs that have to find a buyer to fund the country's deficit. Lastly, we would love to see one of those charts showing how many working people will have to fund each and every retiree by the year 2060, first in Japan, and then in every other country.
Surging Greek and Portuguese bond yields? Plunging Italian bank stocks? The projected GDP of the Eurozone? In the grand scheme of things, while certainly disturbing, none of these data points actually tell us much about the secular shift within European society, and certainly are nothing that couldn't be fixed if the ECB were to gamble with hyperinflation and print an inordinate amount of fiat units diluting the capital base even further. No: the one chart that truly captures the latent fear behind the scenes in Europe is that showing youth unemployment in the continent's troubled countries (and frankly everywhere else). Because the last thing Europe needs is a discontented, disenfranchised, and devoid of hope youth roving the streets with nothing to do, easily susceptible to extremist and xenophobic tendencies: after all, it must be "someone's" fault that there are no job opportunities for anyone. Below we present the youth (16-24) unemployment in three select European countries (and the general Eurozone as a reference point). Some may be surprised to learn that while Portugal, and Greece, are quite bad, at 30.7% and 46.6% respectively, it is Spain where the youth unemployment pain is most acute: at 51.4%, more than half of the youth eligible for work does not have a job! Because the real question is if there is no hope for tomorrow, what is the opportunity cost of doing something stupid and quite irrational today?
In addition to telling everyone to short the euro and go long the dollar (wink) Goldman Sachs is kind enough to summarize what the recurring Eurocentric rumor-based headlines of the coming week will be: "The week ahead starts with the EU Heads of State Summit, where discussions will be focused on finalizing negotiations around the fiscal compact, where we think important progress has been made, not least by allowing individual countries to police each other's budget policies. Attention will also be squarely focused on Greece, where negotiations over PSI continue, in addition to negotiations between the Troika and the government. The IMF mission is scheduled to remain in Athens at least through Friday. The week also brings important bond auctions, starting with Italy on Monday (at 5- and 10-year tenors), followed by France and Spain on Thursday. Outside of Europe, key data include the slew of global PMI's on Wednesday. Consensus sees China's PMI slipping below the 50 threshold in January. We are slightly more cautious than consensus on the ISM, expecting an essentially unchanged reading. The week ends with the all-important nonfarm payroll release. We think nonfarm payroll growth probably slowed somewhat in January given less of a boost from favorable weather and seasonal factors. However, we think the pace of employment growth, combined with weak labor force participation, may still be enough to pull the unemployment rate down a touch."
A brief and comprehensive summary of the main events in the past week, both good and bad.
While the ubiquitous pre-European close smash reversal in EURUSD (up if day-down and down if day-up) was largely ignored by risk markets today (as ES - the e-mini S&P 500 futures contract - did not charge higher and in fact rejected its VWAP three times), some cracks in the wondrously self-fulfilling exuberance that is European's solved crisis are appearing. For the first day in a long time (year to date on our data), European stocks significantly diverged (negatively) from credit markets today. While EURUSD is up near 1.3175 (those EUR shorts still feeling squeezed into a newsy weekend), only Senior financials and the investment grade credit index rallied today, while the higher beta (and better proxy for risk appetite) Crossover and Subordinated financial credit index were unchanged to modestly weaker today (significantly underperforming their less risky peers). European financial stocks have dropped since late yesterday - extending losses today - ending the week up but basically unch from the opening levels on Monday. High visibility sovereigns had a good week (Spain, Italy, Belgium) but the rest were practically unchanged and Portugal blew wider (+67bps on 10Y versus Bunds, +138bps on 5Y spread, and now over 430bps wider in the last two weeks as 5Y bond yields broke to 19% today). The Greek CDS-Cash basis package price has dropped again which we see indicating a desperation among banks to offload their GGBs and needing to cut the package price to entice Hedgies to pick it up (and of course some profit-taking/unwinds perhaps). All-in-all, Europe's euphoric performance has started to stall as perhaps the reality of unemployment and crisis in Europe combine again with US's GDP miss to bring recoupling and reinforcement back.
Ok, I exaggerate. But that’s my cynical first impression after finding the following diagram in the briefing book for the gathering of the good and the great at the World Economic Forum in Davos, Switzerland. As you can see “Severe income disparity” is #1 on the Top 5 risks list this year, after having failed to make the short list for the preceding 5 years. Now it’s not as though the attendees of Davos were completely inattentive to the economic plight of the less fortunate all this time. “Economic disparities” was on last year’s laundry list of risks and was featured prominently in the executive summary of 2011's report. But the urgency has been ratcheted up quite a bit this year: note the new modifier “severe” and the use of the more specific “income” rather than “economic”. But wait, there’s more.