Against expectations of a further rise in inventory build of 0.7%, wholesale inventories rose only 0.3% in June (the same pace as in May) missing by the most since February 2013. With GDP now basically an exercise in inventory expansion and contraction (Q2 inventory estimate amounte to 40% of GDP), this 'miss' offers little hope for the initial Q2 rebound to hold its exuberance. In addition, wholesale sales also missed (up only 0.2% against expectations of a 0.7% rise) with growth slowing for the 3rd month in a row.
Late yesterday, after Nobel peace prize-winning president Obama revealed his latest military incursion, years of pent up can-kicking almost caught up with futures, which dared to tumble by a whopping 0.7%, a move which hit Europe far more than the US, and shortly after Europe's open, the Euro Stoxx 50 Index dropped 10% from its 2014 high, marking an official correction in Europe where the Dax continues to be the key risk indicator, and which dropped as low as 8,903 before recovering to a drop of only 0.9% while German Bunds continues to print record highs day after day on fears what the escalating Russian trade war will do to the German economy, and other such "costs." US futures meanwhile have seen most of their losses recovered thanks to the usual relentless low volume USDJPY levitation, which pushed ES down to just -0.2% after a nearly four times greater drop. Still, while futures may be surging, the 10 Year has not gotten the memo and remains stuck just above 2.36% or its lowest print since June 2013, a clear indication that at least the bond market has given up all hope of a so-called US recovery for the conceivable future. What is most important however, is that at this pace, the Friday confidence effect, i.e., a green close, may be recovered: let's all just wait and see what the NY Fed trading desk decides to do, and escalating world wars aside, let's just pretend that HY didn't just sugger the biggest weekly HY outflow in history didn't just take place.
Unlike last week's economic report deluge, this week has virtually no A-grade updates of note, with the key events being Factory Orders (exp. 0.6%), ISM non-mfg (exp. 56.5), Trade balance (Exp. -$44.9 bn), Unit Labor Costs (1.2%) and Wholesale Inventories (0.7%).
Following a ghastly week for stocks, the momentum algos were desperate for something, anything to ignite some upward momentum and stop the collapse which last week pushed the DJIA into the red for the year: they got it overnight with the previously reported bailout of Portugal's Banco Espirito Santo, where the foreplay finally ended and after the Portuguese Central Bank finally realized that the bank is insolvent and that no more private investors will "recapitalize" it further, finally bailed it out, sticking the stock and the subs into a bad bank runoff entity, while preserving the senior bonds. So much for Europe's much vaunted bail in regime and spreading of pain across asset classes. At least the depositors did not get Cyprused, for now.
This clown parade of clueless opinions (did we mention Goldman had BES at a buy until this morning?), stretched all the way to the very top with Bank of Portugal itself issuing the following pearl:
- BANK OF PORTUGAL SAYS BES DEPOSITORS CAN STAY CALM
Uhhh, what else would the Portugal central bank say? Panic and withdraw your deposits from a bank whose exposures to insolvent entities have been largely unknown until today (and even now).
Another day, another uncomfortable fact about Q2 not being the epic bounce back that so many had promised. Wholesale Inventories rose only 0.5% in May - following April's +1.1%. This is the slowest growth in 2014 and biggest miss of expectations since Dec 2013. Wholesale sales also fel back, missing expectations at +0.7%, to the slowest since Feb as April hopes fade. Cue, Q2 GDP downgrades in 3...2...1...
But... but... the VIX said everything is ok, and European rates were the lowest they have been in centuries... How can something possibly go wrong?
It just did.
- Ukraine, Russia Fail to Reach Deal in Natural-Gas Talks (WSJ)
- Boko Haram Kidnaps More Girls in Nigeria (WSJ)
- Déjà vu: echoes of pre-crisis world mount (FT)
- Money market rates hit new low as ECB moves gain traction (Reuters)
- 'Dark Pools' Face New SEC Probe (WSJ)
- Buffett Ready to Double $15 Billion Solar, Wind Bet (BBG)
- White House-Congress rift over Bergdahl deal deepens (Reuters)
- Taxpayers Face Big Medicare Tab for Unusual Doctor Billings (WSJ)
- Lean Retirement Faces U.S. Generation X as Wealth Trails (BBG)
- Employers’ skills gap claim does not show up in US wage data (FT)
- He is holding out for the Zuckerberg overbid: Donald Sterling says LA Clippers not for sale (WSJ)
The tidal patterns of this market have become so well-known to even the least observant: push the USDJPY (or other JPY carry pairs) higher starting around 6am Eastern, then ramp it just before US open to launch cross-asset momentum ignition algos in FX which then carry over to spoos and the broader "market." In the meantime, overnight selling of USDJPY allows a reset before ensuing buying during the US daytime session. Rinse. Repeat. Sure enough, just after 6 pm Eastern, the same USDJPY which catalyzed yet another all time high close had been sold off, leading to a 0.85% drop in the Nikkei and US equity futures which are showing an unprecedented ungreen color. Don't worry though: the pattern is too well-known and practiced by now, and we fully expect USDJPY levitation to pick up shortly, which is the only signal ES-algos need, trampling over any kind of newsflow both good and bad, and leading to yet another all time record high which it goes without saying is completely detached from any underlying reality at this point and at any time over the past 5 years.
Wall Street has a problem. In all their excitement about how terrible Q1 was - and ths how awesome Q2 and beyond will be - it forget to check in with the firms that were busily stacking inventories in their snow-covered factories around the nation. Wholesale inventories rose 1.1% in March (which is still in Q1 remember) - smshing expectations for the 3rd month in a row (all in Q1 remember) and the 2nd biggest spike in 2 years. Each time we have seen such a spike, the following months saw a notable decrease. Desk chatter is already of a 0.3% boost to Q1 GDP and a 0.2% cut to Q2 GDP - just as hope was getting going once again.
It has been a very quiet session so far, and despite the slow-mo levitation in the USDJPY, its impact on US equity futures has been minimal if not negative. In fact, following yesterday's latest late day tumble, which Goldman summarized as follows, "Equities tried and failed again to break 1885, it continues to be the level that we can’t escape"... it would appear we are increasingly changing the trading regime, and as Guy Haselmann explained simply, markets are slowly but surely coming to the realization that the Fed's crutches are being taken away (that they may well return following a 20%, 30%, or more drop in the S&P is a different matter entirely) and that the economy will not grow fast enough to make up for this. Perhaps the most notable "event" is the sheer avalanche of banks pushing up their forecasts for an ECB rate cut (and or QE start) to June following Draghi's yesterday comments. And so the 1 month countdown begins until the end of forward guidance, or until the ECB "shatters" its credibility as expained yesteday.
This week, markets are likely to focus on US ISM Nonmanufacturing, services and composite PMIs in the Euro area (expect increases), ECB’s Monetary Policy Decision (expect no change in policy until further ahead), and Congressional testimony by Fed’s Yellen.
- Top Medicare Doctor Paid $21 Million in 2012, Data Shows (BBG)
- Separatists build barricades in east Ukraine, Kiev warns of force (Reuters)
- Greece launches sale of five-year bond (FT)
- High-Frequency Trader Malyshev Mulls Accepting Outside Investors (BBG)
- U.S. defense chief gets earful as China visit exposes tensions (Reuters)
- GM Workers Who Built Defective Cars Fret About Recall (BBG)
- Kerry, Congress Agree: Superpower Status Not What It Was (BBG)
- Crimeans Homeless in Ukraine Seek Solace in Kiev Asylums (BBG)
- JPMorgan's Dimon says U.S. banks healthy, Europe lagging (Reuters)
The positive sentiment stemming from a positive close on Wall Street and saw Shanghai Comp (+0.33%), Hang Seng (+1.09%) trade higher, failed to support the Nikkei 225 (-2.10%), which underperformed its peers and finished in the red amid JPY strength as BoJ's Kuroda failed to hint on more easing. Stocks in Europe (Eurostoxx50 +0.32%) traded higher since the open, with Bunds also under pressure amid the reversal in sentiment.
Alcoa kicked off earnings season yesterday, with shares up 3% in after-market hours. Focus now turns to the release of the FOMC meeting minutes.
There is a reasonably quiet start to the week before we head into the highlights of the week including the start of US reporting season tomorrow, FOMC minutes on Wednesday and IMF meetings in Washington on Friday. On the schedule for today central bank officials from the ECB including Mersch, Weidmann and Constancio will be speaking. The Fed’s Bullard speaks today, and no doubt there will be interest in his comments from last week suggesting that the Fed will hike rates in early 2015.