Wholesale Inventories

UK and EU markets played catch up at the open this morning following Friday’s miss in the US non-farm payroll report. This coupled with on-going concerns over Spain has resulted in further aggressive widening in the 10yr government bond yield spreads in Europe with the Spanish 10yr yield edging ever closer to the 6% level. As a result the USD has strengthened in the FX market in a moderate flight to quality with EUR/USD trading back firmly below the 1.3100 and cable falling toward the 1.5800 mark. There was some unconfirmed market talk this morning about an imminent press conference from the SNB which raised a few eyebrows given the recent move in EUR/CHF below the well publicised floor at 1.2000, however, further colour suggested an announcement would be linked to the naming of Jordan as the full-time head of the central bank when they hold their regular weekly meeting this Wednesday. Elsewhere it’s worth noting that the BoJ refrained from any additional monetary easing overnight voting unanimously to keep rates on hold as widely expected. Meanwhile, over in China the latest trade balance data recorded a USD 5.35bln surplus in March as import growth eased back from a 13-month peak.

So far futures are broadly unchanged, following the release of a Chinese trade report which while showing a resumption in the trade surplus, on expectations of further trade deficit in March, showed it was primarily due to a slide in imports, not so much a rise up in exports, a fact which impacted the Aussie dollar subsequently. We already noted that in conjunction with the BOJ, this means that Asia's central banks will likely hold off on further easing, and defer to the Chairman, especially with food inflation in China still prevalent. Aside from that the traditional European weakness is back, where April Sentic Investors Confidence slid to -14.7 on expectations of -9.1: to be expected from a meaningless market-coincident indicator. Keep a close eye on PIIGS bonds where whack a mole is now firmly back as the LTRO benefit is long forgotten, 3 month half life and all that.

Moments ago we tweeted that today's surge in the trade deficit will force banks to start cutting GDP forecasts. Sure enough, Goldman as usual, is the first to set the tone, by cutting its ultra real time GDP forecast from 2.0% to 1.8%.

Today's key events in the US, as opposed to Europe, where in a few minutes the ECB is expected to do nothing.

There was not much to note in the overnight session, where aside from artificial market-boosting developments out of China (noted here) which have carried over into a risk-on mood for the US market, however briefly, Europe has been virtually unchanged following two quiet auctions by Austria and the Netherlands. Austria sold a total of €660m of 4% 2016 bonds, and €600m of 3.65% 2022 bond. Avg. yield 2016 bond 2.213% vs 1.96% in the previous auction, in other words the shorter borrowing costs roses, and the longer ones fell. Holland sold a total of €3.105b of 0.75% 2015 bonds; the target was up to €3.5b. with an average yield 0.853%. End result EURUSD is virtually unchanged for the day at 1.2770 as of this writing despite some serious short covering earlier (as expected), while the Italian BTPs remain unch at 7.15%. What is probably more disturbing and is to be expected, is that now virtually all the free cash from the December 21 LTRO (all €210 billion of it) and then some has been allocated to the ECB, where the Deposit Facility usage rose by nearly €20 billion overnight to a new record of €482 billion, €217 billion more than the December 21 notional. The question that should be asked is just what do banks know that lemming long-only investors don't. Hint - ask UniCredit.

Today we got another confirmation that the only "growth" in the economy comes courtesy of inventory stocking for that eventual day when the economy picks up and inventory can be sold at an actual profit, after wholesale inventories printed at 1.8% on expectations of 0.6%, up from 1.1% previously. We get it: economic growth now comes at the assumption that there will be economic growth in the future, thank you I in the GDP calculation. But the only chart that matters, and in keeping with our observations of pervasive channel stuffing at GM, is the following: the inventory to sales ratio for the car industry, which just surged to 1.62, or a level not seen since the summer of 2009. This is a 16.55% rise in the ratio or the biggest ever relative jump in the auto inventory/sales ratio in history. Translated: nobody is buying already built cars. But yes, keep blaming the collapse in auto "production" on Japan.

And another signal of economic slowdown: Wholesale Inventories, that wonderful plug for generic "growth" was unable to keep up with expectations, rising only 0.8% in April, below consensus of 1.0% and down from an upward revised March number of 1.3% (1.1% previously) meaning that Q1 growth may be revised higher at the expense of Q2. Even bigger was the miss in wholesale sales which plunged from 2.9% in March to just up 0.3%, well below consensus of 1.2%. Yet since today is one of those bad news is good news days, expect the Dow to close up triple digits. From the release: The U.S. Census Bureau announced today that April 2011 sales of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations and trading-day differences but not for price changes, were $393.5 billion, up 0.3 percent (+/-0.5%) from the revised March level and were up 14.4 percent (+/-1.4%) from the April 2010 level....Total inventories of merchant wholesalers...were $447.2 billion at the end of April, up 0.8 percent (+/-0.4%) from the revised March level and were up 13.8 percent (+/-1.2%) from a year ago." Lastly, the inventory/sales ratio was unchanged from March, coming at 1.14.

Import prices, wholesale inventories and a few speeches from Fed officials. Ceiling busting $32 billion 3 year auction in tow, and second to last POMO in current schedule also on deck.

A quiet data calendar to close the week, as eyes are now focused away from Europe and on the hill. Futures are up, commodities are surging, as the dollar destruction continues. There is no POMO.

Is the biggest driver to GDP growth (aside from the government's transfer payments of course) starting to ebb? November wholesale inventories printed at -0.2%, the first decline since 2009, a miss of expectations of 1.0%, and a drop from October's revised 1.7%.

The old faithful GDP boosting trick of accumulating inventories continues to work. The Census Bureau announced that September wholesale inventories jumped by 1.5%, matching the largest monthly increase in over two years, and coming in decisively over estimates of 0.7%. Furthermore, the prior number was also revised much higher from 0.8% to 1.2%, confirming what we already knew: namely that Q3 GDP is merely based on yet another stocking, which will soon need to be liquidated as end demand persists at being subdued, further impacting FIFO margins (as for LIFO, forgetaboutit). The biggest jump in inventories was in farm products (14.8%) and misc. durable goods (3.0%), while destocking was seen in lumber, prof and comp equipment, and... alcohol. The last one is self-explanatory.

Inventories sluggish as GDP bounce based on restocking delayed indefinitely. But at least consumer are confident they will keep hearing good news on TV.

The good news: wholesale inventories at -1.5%
The bad news: wholesale inventories at -1.5%

Estimates were for a -0.7% decline. January was -0.9%. Yes, the thesis goes we need inventory clearance to buy new inventory (cap goods), however it could also mean that inventory are merely getting cleared out...period... and nothing is replacing them, strangling economic output.