Wholesale Inventories

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.

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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.

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• Greece launches sale of five-year bond (FT)
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• 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.

Unlike most trading sessions in the past month, when the overnight session saw a convenient algo assisted USDJPY/AUDJPY levitation, tonight there has been no such luck for the permabullish E-Trade babies who are conditioned that no matter what the news, the next morning the S&P 500 will open green regardless. Whether this is due to ever louder fears that what is happening in China can not be swept under the rug this time will be revealed soon, but as of this moment both the USDJPY, and its derivative, US equity futures, are looking at a sharp lower open, as gold continues to press higher, while the traditional tension points such as Russia-Ukraine, and ongoing capital flight from some of the more "fringe" emerging markets, continues. Expect more of the same today as people finally peek below the Chinese surface to realize just how profoundly bad the situation on the mainland truly is. And while we realize macro news are meaningless, especially in Europe where the ECB is now the sole supervisor of all asset classes, the fact that Cyprus, Greece, Slovakia and Portugal, are all in deflation, and many more countries lining up to join the club, probably means that absent a massive global credit impulse, we have certainly reached the upward inflection point from the most recent $1+ trillion injection of liquidity by the Fed, not to mention the ongoing QE by the BOJ.

Stocks in Europe failed to hold onto early gains and gradually moved into negative territory, albeit minor, as concerns over money markets in China gathered attention yet again after benchmark rates fell to lowest since May 2012. Nevertheless, basic materials outperformed on the sector breakdown, as energy and metal prices rebounded following yesterday’s weaker than expected Chinese data inspired sell off. At the same time, Bunds remained supported by the cautious sentiment, while EUR/USD came under pressure following comments by ECB's Constancio who said that financial markets misinterpreted us a little, can still cut rates and implement QE or buy assets. Going forward, market participants will get to digest the release of the weekly API report after the closing bell on Wall Street and the US Treasury will kick off this week’s issuance with a sale of USD 30bln in 3y notes.

Wholesale inventories missed expectations and rose at their slowest rate since July 2013 at a mere 0.3% MoM. However, the more concerning aspect (aside from the inventory build in Q4 that is now over and means GDP downward revisions to come for Q4 on) is that 2013 saw the weakest growth in inventories since 2009's collapse. At a mere 3.96% YoY, 2013's wholesale inventory growth is the 2nd slowest in a decade.

A sneaky overnight levitation pushed the Spoos above 1800 thanks to a modest USDJPY run (as we had forecast) despite, or maybe due to, the lack of any newsflow, although today's first official Humphrey Hawkins conference by the new Fed chairman, Janet Yellen, before the House and followed by the first post-mortem to her testimony where several prominent hawks will speak and comprising of John B. Taylor, Mark A. Calabria, Abby M. McCloskey, and Donald Kohn, could promptly put an end to this modest euphoria. Also, keep in mind both today, and Thursday, when Yellens' testimoeny before the Senate takes place, are POMO-free days. So things may get exciting quick, especially since as Goldman's Jan Hatzius opined overnight, the third tapering - down to $55 billion per month - is on deck.

Risks surrounding the looming release of the latest jobs report by the BLS later on in the session failed to weigh on sentiment and heading into the North American open, stocks in Europe are seen higher across the board. The SMI index in Switzerland outperformed its peers since the get-go, with Swatch Group trading up over 3% after the company said that it expects good results for 2013 at operating profit and net income level. At the same time, in spite of stocks trading in the green, Bunds remained better bid, with peripheral bond yield spreads wider as market participants booked profits following the aggressive tightening observed earlier in the week amid solid Spanish bond auctions, as well as syndications by Ireland and Portugal. Fake Chinese trade data failed to boost Chinese stocks, which dropped anoter 0.7% and is just 13 points above 2000 as Shanghai remains one of the world's worst performing markets since the financial crisis. The yoyoing Nikkei was largely unchanged. All eyes today will be fixed on the headline streamer at 8:30 when the latest nonfarm payrolls report is released.

The "polar vortex" (no, really) which is about to unleash even record-er cold temperatures upon the US may be the greatest thing to happen to the economy: after all once Q1 GDP estimates miss once again, what better scapegoat to blame it on than cold winter weather during... the winter. However, for the overnight markets, the weather seems to have had an less than desired effect following both much weaker Services PMI data out of China, and after the entire USDJPY ramp achieved during Bernanke's late Friday speech evaporated in the span of two hours in Japanese Monday morning trading, sending the Nikkei reeling lower by 2.35%. One reason for this may be that like in the early summer when both the Yen and the Nikkei froze in a rangebound formation, South Korea has vocally started t0 complain about the weak Yen, which as readers may recall was one of the catalysts to put an end to the surge in the USDJPY and EURJPY. This time may not be different, furthermore as Goldman forecast overnight, it now expects a BOK rate cut of 25 bps as soon as this Thursday. Should that happen expect the JPY coiled-short spring to pounce.