Futures Tumble As "Deflation Monster" Rages In Europe; EMs Continue To Rumble

Tyler Durden's picture

The wild volatility continues, with markets set to open well in the negative wiping out all of yesterday's gains and then some, only this time the catalyst is not emerging market crashing and burning (at least not yet even though moments ago the ZAR weakened to a new 5 year low against the USD and the USDTRY is reaching back for the 2.30 level) but European inflation, where the CPI printed at 0.70%, dropping once again from 0.8%, remaining under 1% for the fourth straight month and missing estimates of a pick up to 0.9%. Perhaps only economists are surprised at this reading considering last night Japan reported its highest (energy and food-driven) inflation print in years: so to explain it once again for the cheap seats - Japan is exporting its "deflation monster", Europe is importing it. It also means Mario Draghi is again in a corner and this time will probably have to come up with some emergency tool to boost European inflation or otherwise the ECB will promptly start to lose credibility - is the long awaited unsterilized QE from the ECB finally imminent?

European equities have traded in the red from the get-go with underperformance in financials, after being put under pressure by Banco Popular in Spain, whose bad loan ratio soared further, compounding fears of a weak credit market in the periphery after recent M3 data showed private sector credit contracting at the fastest pace on record.

The latest Eurozone CPI release came in at 0.70% vs. Exp. 0.90% and has presented ECB President Draghi with a headache, raising the prospect of more policy easing by the ECB. This led to a bull flattening of the Euribor curve and downward pressure on EUR/JPY and USD/JPY despite earlier support being provided for EUR through monthended buying by the Buba in EUR/GBP. Elsewhere, Bunds have been provided support following the CPI reading and month-end buying.

Looking at the day ahead, the focus comes back to the data beginning with  Eurozone inflation for January which may have some bearing ahead of next week’s ECB meeting. The consensus is that the headline will print at 0.9% YoY (vs 0.8% previous) while the core estimate will be slightly lower at 0.8%. Euroarea unemployment data for December will also be released today. In the US the focus will be on the Chicago PMI ahead of next week’s ISM. Personal income/spending and the final Univ of Michigan consumer confidence reading round out this week’s US data calendar. Note that China’s official manufacturing PMI will be released early on Saturday morning (London 1am) – consensus is expecting a print of 50.5. This will be closely watched following the deceleration suggested by the HSBC manufacturing PMI (49.5). Mastercard and Simon Property Group will report earnings prior to the US market open today.

Overnight Headine Bulletin from Bloomberg and RanSquawk

  • European equities have remained in the red from the open after being put under pressure by financials following Banco Popular's pre-market update.
  • The latest Eurozone CPI release came in softer than expected and has consequently raised the prospect of further ECB policy easing.
  • Looking ahead for the session there is the release of Canadian GDP, US Personal Income, PCE Deflator, Chicago PMI and Univ. of Michigan Confidence.
  • Treasuries gain for fifth day, 10Y yield falls to new low since Nov. overnight, headed for biggest monthly gain in a year as selloff in EM currencies resumes.
  • Euro-area consumer prices rose 0.7% in Jan., the fourth straight reading below 1%; ECB’s target for inflation is just under 2%
  • Japan’s inflation accelerated in December, industrial output gained and a measure of demand for workers strengthened, signaling gains for Abe’s campaign to end two decades of stagnation
  • The largest banks in Europe will have to show their capital won’t dip below 5.5% of assets in an economic crisis, the European Union’s top banking regulator said
  • Ukraine’s opposition accused President Viktor Yanukovych of foul play as he took sick leave and his Defense Ministry asked for “urgent” steps to counter what it said was an escalation the nation’s political crisis
  • Sovereign yields decline. EU peripheral spreads widen. Asian equity markets mixed, with Nikkei and Shanghai lower, European  markets and U.S. stock-index futures fall. WTI crude and copper lower; gold higher

US Data Docket

  • 8:30am: Employment Cost Index, 4Q, est. 0.4% (prior 0.4%)
  • 8:30am: Personal Income, Dec., est. 0.2% (prior 0.2%); Personal Spending, Dec., est. 0.2% (prior 0.5%); PCE Deflator m/m, Dec., est. 0.2% (prior 0.0%)
  • 9:45am: Chicago Purchasing Managers, Jan., est. 59 (prior 59.1, revision 60.8)
  • 9:55am: UofMich. Confidence, Jan. Final, est. 81.0 (prior 80.4)
  • 11:00am: Fed to purchase $3.75b-$4.75b in 2018 sector

Asian Headlines

Japanese National CPI (Dec) Y/Y 1.6% vs. Exp. 1.5% (Prev. 1.5%) (BBG) Core CPI posted the first annual rise in 5 years, a sign that the Bank of Japan's QQE policy is working.

China began their Lunar New Year holiday today, with the Shanghai Comp to remain closed until February 7th. (RANsquawk)

EU & UK Headlines

ECB has asked Europe's biggest banks to disclose loans on balance sheets that are at risk of default as part of its asset quality review, according to a document. (BBG) The move will provide the ECB with a clear view of diverging bank practices in different Euro states and allow better comparisons across the monetary union. The results could show which banks in the Euro-area will be forced to raise capital in order to meet the ECB's standards.

ECB's Nowotny said the Euro Area is expected to move to positive, albeit still very weak growth this year. (RTRS)

Eurozone CPI Estimate (Jan) Y/Y 0.70% vs. Exp. 0.90% (Prev. 0.80%)
- Eurozone CPI Core (Jan A) Y/Y 0.80% vs. Exp. 0.80% (Prev 0.70%)

Eurozone Unemployment Rate (Dec) M/M 12.0% vs Exp. 12.1% (Prev. 12.1%, Rev. 12.0%)
German Retail Sales (Dec) M/M -2.5% vs. Exp. 0.2% (Prev. 1.5%, Rev. 0.9%)
German Retail Sales (Dec) Y/Y -2.4% vs. Exp. 1.9% (Prev. 1.6%, Rev. 1.1%)
Barclays preliminary pan-Euro agg month-end extensions: +0.13y (12m avg. +0.07y)
Barclays preliminary Sterling month-end extensions:+0.19y (12m avg. +0.06y)

US Headlines

Barclays preliminary US Tsys month-end extensions:+0.06y (12m avg. +0.07y)


European equities have remained in the red from the open after being put under pressure by financials following Banco Popular's pre-market update which revealed a significant increase in their bad loan ratio. Elsewhere, underperformance has been observed in the DAX following negative broker recommendations for Deutsche Bank and Fresenius. In terms of stock specific movers, LVMH and BT Group are seen up around 6% and 2% respectively after their positive pre-market reports, with BT raising their EBITDA outlook.


EUR/JPY and USD/JPY were put under pressure, with the move lower being triggered by the release of softer than expected Eurozone CPI data which prompted broad based EUR weakness. However, EUR/USD later completely reversed the move after being supported by month-end buying of EUR/GBP by Buba. Elsewhere, credit indicators such as FRA rates remain contained near yesterday's levels for TRY and ZAR, while 3x6 FRA is bid (highest since August 2013), with EUR/HUF also bucking the trend and trading close to 2y highs.


Asian buyers of Iranian oil have reduced their purchases of the nations crude by 15% in 2013, with shipments only expected to recover marginally despite the easing of sanctions by the West on Iran. (RTRS)

Japan’s December crude imports down 1.1% Y/Y, according to data released by Ministry of Economy, Trade and Industry. (BBG)

SPDR Gold Trust GLD said its holdings rose 0.08% to 793.16 tonnes on Thursday from 792.56 tonnes on Wednesday, to post its first 2-day gain since 2012. (BBG/RTRS)

India's Finance Ministry said the government and RBI are vigilant and all steps will be taken to ensure stability in financial markets in the wake of the US Fed's decision to further trim its monetary stimulus. (PTI)

* * *

We conclude with Jim Reid's overnight summary

The S&P500 (+1.13%) posted its best performance of 2014 yesterday, on the back of a “less bad” day for emerging markets, an in-line US GDP print and a generally positive corporate earnings tape. But most of that momentum faded after the US closing bell, as the combined earnings disappointments from techheavyweights Amazon and Google took S&P500 futures down 9 points shortly after the closing bell.

Though the sentiment felt a little better in emerging markets, there were still pockets of instability across the EM complex. On the fixed income side, the CDX EM index continued to widen (+2.5bp) and there was a persistent flight to quality theme as core 10yr bond yields firmed at the expense of Hungary (+12bp), Turkey (+10bp) and South Africa (+2bp). EM FX bellwethers including the ZAR (+0.95%) and RUB (+0.63%) had much needed relief rallies against the USD, but pressure continued to mount on the Turkish lira (-0.36%) and the lesser-reported Hungaran forint (-0.87%). The latter has lost almost 7% in value against the USD in January alone. Turkey’s finance minister ruled out capital controls yesterday leaving the market wondering exactly what other Plan B measures that Prime Minister Erdogan was planning to announce in the coming weeks. Meanwhile, the Reserve Bank of India’s governor Rajan warned about that global central bank coordination had broken down, and said that his developed market counterparts had a part in restoring that cooperation.

Looking at Asian markets this morning, it has been fairly quiet with Hong Kong, Singapore, Mainland China, Taiwan and South Korea closed for Chinese New Year. Most of these markets will only gradually return early-to-mid next week, so liquidity will continue to be fairly patchy during the Asian time zone. Of the equity markets which are open, there’s been some focus on the Nikkei which dropped sharply after the lunch break and is currently at session lows of -1.5% - dragging with it US equity futures (-0.2%). Today’s losses in Japan have been attributed to a several disappointing quarterly earnings and month end rebalancing. Indeed, it’s been a fairly uninspiring reporting season so far for Japanese stocks with less than half of Nikkei constituents beating/meeting analyst expectations on the earnings line, compared with the approximately two-thirds who did so last reporting season. In terms of macro data, preliminary Japanese industrial production numbers for December came in at +1.1% MoM which was slightly below the 1.3% expected. Japanese CPI was a bit higher than forecast at 1.6% (vs 1.5% expected).

Before we review the US dataflow, we should note that the Bloomberg Economic Surprise Index has fallen back into negative territory. The index started the year at 6 month highs, but has fallen sharply in recent weeks as a few disappointments on the housing, payrolls and durable goods fronts bring market expectations back down. On that note, US pending homes sales (released yesterday) fell 8.7% MoM (vs a fall of 0.3% expected) and initial jobless claims were higher than expected at 348k (vs 330k expected). Q4 GDP printed at 3.2% which was consistent with Bloomberg median expectations. In the detail of the report, the strongest components included consumption which grew 3.3% which was the second strongest rate since the end of the recession.

A surge in Q4 exports (11.4% vs. 3.9% previously) amid soft import growth (0.9% vs. 2.4%) pushed net exports to the highest reading since the end of the recession. Meanwhile, the softer components of the report were residential investment (-9.8% vs. +10.3% previously) and federal government spending and investment (-12.7% vs. -1.5%). There were also no major surprises in terms of the Core PCE which came in at 1.1% (Bloomberg consensus 1.1%). The WSJ’s Hilsenrath points out that this is well below the Fed’s December 2012 prediction that Core PCE would range between 1.6% to 1.9%.

On the topic of US inflation, DB’s economists Hooper et al write in their latest Global Economic Perspectives that recent core inflation has been depressed by both temporary and fundamental factors. On the temporary side, a one-time sequester-related decline in health care inflation reduced core inflation by about 0.15% points this past year. Fundamentally, a stronger US dollar and substantial domestic and global slack have reduced inflation pressures. Peter believes, however, that inflation should turn the corner this year. As US economic activity remains above trend, economic and labor market slack should decline, and rising wage pressures along with stable and more elevated inflation expectations should exert upward pressure on inflation. With unemployment trending towards the Fed’s guidance hurdles, the Fed has made it clear that its policy decisions going forward will place increased weight on low core inflation. Hooper et al believe that this inflation outlook could lead the Fed to quicken the pace of QE reduction from current expectations of $10bn per meeting after mid-year.

In our own 2014 outlook ('The taper-bubble tightrope'), we outlined a view that policy makers will likely walk a very fine line this year between withdrawing liquidity too quickly and facilitating problems in markets/economies that have become addicted to central bank activity. We continue to think we may see a few wobbles first that encourage central banks to err more on the side of caution. So in our forecasts we thought H2 would be better than H1 as by then we may have European QE (or equivalents), an increase in BoJ purchases and potentially the Fed pausing from their seemingly preordained tapering path. We would have a more bearish view if we thought central banks would not be so market friendly in 2014 as a number of unresolved global issues remain.

Looking at the day ahead, the focus comes back to the data beginning with  Eurozone inflation for January which may have some bearing ahead of next week’s ECB meeting. The consensus is that the headline will print at 0.9% YoY (vs 0.8% previous) while the core estimate will be slightly lower at 0.8%. Euroarea unemployment data for December will also be released today. In the US the focus will be on the Chicago PMI ahead of next week’s ISM. Personal income/spending and the final Univ of Michigan consumer confidence reading round out this week’s US data calendar. Note that China’s official manufacturing PMI will be released early on Saturday morning (London 1am) – consensus is expecting a print of 50.5. This will be closely watched following the deceleration suggested by the HSBC manufacturing PMI (49.5). Mastercard and Simon Property Group will report earnings prior to the US market open today.

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Vice's picture




Sudden Debt's picture

as mommy used to say when I had a little problem like that...


Global Hunter's picture

yer mam is a practioner of the tough love.

Sudden Debt's picture



I don't know... I love fig jam, blueberry jam, strawberry jam.... I'm just saying, don't give it up yet...

NoDebt's picture

In the printing business, which I used to be in, we never called it a paper jam.  It was a "misfeed."

Sudden Debt's picture

when my printer blocks up I call it "A GODDAMN ROTTEN PIECE OF SHIT"

RSloane's picture

Nonsense. While Obama is busy writing executive orders perhaps he will fix the problem in the EU with a simple sentence.

Global Hunter's picture

said with a smirk and his nose pointing to the sky...after a big rail of course.

RSloane's picture

Of course. What's the point of being king unless you can be smug about it.

Ghordius's picture

Deflation is only a monster IF you have too much debt and are accumulating further debt, for example by living above your means. this is valid for all kind of households, be them private, governmental or corporate

Sudden Debt's picture

America will be debt free for a while soon when they downpay their debt to the chinese with American savings so for the US it's not a problem

disabledvet's picture

depends on how big this energy boom inside the USA is.

There is a lot to this comment however.

For ten million bucks you can set up a energy company right now and if you hire the right people it will be cash flow positive and paid off in one year.

After that it becomes a question of what to do with all the cash flow. Since right now it's all about building pipelines there really isn't a log to be made in distribution.

The two easiest ways forward are to buy municipal debt (fund Government at the local level) and buy interest in energy intensive industries. (Industrials/Chemicals.)

Another more risky approach is to get into Banking.

Crawdaddy's picture

Here is a link to an article entitled "The Deflation Monster" from Jude Wanniski, written in 1996. Interesting to see the parallels and difference compared to today. Of course 1995 was long before Bennie and the InkJets came along.


"In a deflation, it is nice to be an intellectual producer—producing goods and services out of your head, not out of the earth—and buying real estate and commodities at ever lower prices. But eventually all economic activity suffers from doubt and disinformation, panic and overshoot, when the monetary standard declines.

This is the deflation monster now chewing away at the economy’s foundations.  It is so rare that few economic theorists were prepared for it. We cannot undo the damage that has been done, but we can prevent further deterioration as the deflation unfolds."

Oldwood's picture

The shortage of narcotics is only a problem if you are an addict.

Global Hunter's picture

Up to Lexington 1-2-5, feel sick and dirty more dead than alive I'm waiting for my man, got 25 dollars in my hand.

Sometimes the thrill of the chase (to score/pick up) is better and more thrilling than the high itself for the addict.

Cage Rattler's picture

New 5 year low for the ZAR? Are you sure? Data accurate?

DavrosoftheDaleks's picture

Will be an interesting trade for ZAR this year as precious metals heat up.  Maybe lower fuel costs, plus a slack in labor supply looks bullish for GDX and GDXJ.

headhunt's picture

Once the truth starts to leak, all Ponzi schemes disintegrate quickly.


stant's picture

no super bowl rally

papaswamp's picture

Quite a bit of UST manipulation going on. Far in excess of market moves. Someone is trying to keep the borrowing bubble going.

johnnyarrowmaker's picture

So you want inflation - easy - raise interest rates by 5% - everything will cost more!  Suddenly wage demands rise, and the money circulates faster.


firstdivision's picture

Fearing deflation is like fearing death, do you live your whole life in fear, or do you live your life?  Like death, deflation is unavoidable, and will become embraced when we realize it will end the pain.

GrinandBearit's picture

These triple digit futures gap downs rarely stay that way.

TPTB will do the best to rescue it today, but next week the market will drop through the S&P 1700's like a knife through warm butter.


Peter Pan's picture

Deflation of prices is not a problem as long as debt also are allowed to deflate (i.e. be written off).

Asset deflation is what is needed to make housing affordable to the younger generations.

Debt deflation and an upward shift in interest rates are a MUST for normalisation of the free market.


notadouche's picture

How can you have true asset deflation when the government's sole purpose the last decade has been to "prop up" the very assets that less wealthy people would benefit from should they be allowed to deflate under normal market conditions?  

The results thus far has been the inflation in the goods and services the masses neeed to survive on a daily basis and deflation or at least "stabilization" in the assets that wealthy people count on to continue to be labeled as "wealthy"

Exactly what the political class desire yet in direct conflict to what they pay lip service to.  Go figure.

new game's picture

read the disclaimer; you could lose the principle investment, there is no guarantee of future returns...

johny2's picture

taper down the hatches. 

new game's picture

the lid is 1250 au

the bottom s & p is 1750

let the battle rage!

KidHorn's picture

This is what will happen today. Gold will get monkey hammered around 9 AM by someone who decides it's a good idea to dump a lot of gold all at ounce when it's thinly traded. The dowdaq 500 will slowly creep up all day and end green.

Disclaimer: I've seen this movie many many times.

buzzsaw99's picture

PC LOAD LETTER, wtf does that mean?

Greshams Law's picture

Damn it feels good to be a gangsta.

ghostzapper's picture

Same levels and a lot of noise in between.

1772-1773 has still held so far let's see if Henry lets it even test it again or how many sailors he puts down on deck to protect this.  1812ish up top but boy it looks like they will need more hopium injections than we've seen this week to make a run at it.  yup, it's boring watching and waiting.  

Fed "tapers" verbally but not literally and Draghi has even more cover for ECB QE and the cheerleaders slap each other on the back and tell each other how brilliant they are.  

ghostzapper's picture

Looks like we might find out if the Fed can defend 1772-1773 this morning.  Today could be quite interesting.  I won't be shocked with a surge in volume today.  

ghostzapper's picture

Already tested this zone twice today.  You gotta admit these levels have been pretty fuckin accurate.  But nah forget about charts just watch CNBC.  

TheCosmicTaco's picture

Deflation my ass. When the price of a coffee goes down at Starbucks on the Champs Elysees, then I'll believe in your goddam deflation monster.

Fuck you, Draghi.

AdvancingTime's picture

The games central bankers are playing in supporting their and other currencies has reached a dangerous level, we may be in the "red zone". Currencies are important chips in the commerce of government and the business of running a country. History has shown that in the past both leaders and governments have fallen with the demise of their coin. The volume of trades, the sheer magnitude of monies flowing back and forth across borders has become staggering. This area of finance has become the worlds largest casino, where players have the potential to quickly suffer staggering losses. More details below,


silvermail's picture

It is very strange that there is no one asshole, which in any discussion, begin intrusive to advertise their crappy bitcoin.

GrinandBearit's picture

A tulip bulb is just a tulip bulb... no matter how you spin it.

the not so mighty maximiza's picture

give everyone raises, you will get your inflation bitchez

TrustWho's picture

You need a great deflation scare to set off hyper-inflation.

The gold standard up to 1931-32 controlled currency printing in Great Depression and the more austere civil attitude controlled printing up to ww II. This made all the Keynesian trained economist--with Bernanke led Fed, the Great Depression expert--think the dollars that go to heaven in a credit default crisis can be replaced by smart central bankers. The problem--Austrian Economist are correct.

THe general direction is being set. The global flow will create many surprises.

1stepcloser's picture

I you like your debt based monetary system, you can keep your debt based monetary system.    All these people talking debt free, pay down debt...ahhh thats against the systems interests... They don't call it debt based for kicks...