Treasuries seemed to shrug off the QE-on trade from yesterday in the lead up to this morning's big disappointment from Bernanke. Gold lost it first and then as the statement came - with no mention of hyperinflation, helicopters, or new printers - so equities dumped - gapping down to converge with the rest of risk assets. The USD rallied as its cloests relative neighbor in disaster the EUR legged lower and the USD strength exaggerated commodity weakness further (Silver and Copper worst but all falling). ES is back to the post-ramp open on cliff on Friday at the magic 1340 level but momentum is not in its favor now and Treasury yields are reverting lower now also. Financials were the early laggards and have extended losses with GS back in the red and JPM down notably.
We said to expect nothing from the Chairman today. We were right (and those "strategists" who said to look for a negative IOER announcement were dead wrong). And now, here is Goldman with its Humphrey Hawkins post-mortem.
It appears that The Bernank has followed his central banking peers around the world and passed the torch on to someone else (since perhaps he has realized his own lack of omnipotence - or more simply he knows the market has become self-aware of QE and needs to reset expectations to have any hope of a QE impact). It's not the first time he has vociferously noted the impact of the fiscal cliff but this time, based on the following word-cloud prominence of the word 'fiscal', it is front-and-center as while he did leave the door open for further policy action - he clearly checked to his congressional co-conspirators.
Animal Farm rears its European head, where we learn that some bailout agreements are more subordinated than others. Bloomberg brings us the details of the just completed collateral deal between Finland and Spain, which has terms identical to that of Greece, where there was absolutely no debate about whether bailout loans were senior to public and private sector debt. Following this deal the semantics of the ESM subordination, implied or explicit, should also end.
- Collateral deal bilateral between Finland, Spain, Finnish Finance Minister Jutta Urpilainen spoke to reporters.
- Deal structured as Greek collateral was
- Other countries not asking for collateral - YET!
- Collateral to come from deposit guarantee fund
- Negative pledges mean deal can’t be directly with state
While there was little surprise in today's Industrial Production report, which rose 0.4%, on expectations of a 0.3% rise, however offset by last months' revision from -0.1% to -0.2%, it was the critical Capacity Utilization data that has some analysts concerned. But first, and continuing with the theme of "housing has bottomed", it is worth noting that of all the major market groups contributing to the overall index, only Construction saw a decline in June industrial production, dropping by 0.3%, following another drop of 1.4% in May. As for Capacity Utilization, it missed expectations materially, printing at 78.9% on expectations of the first 79%+ print (post revision) in 2012. In other words, the June number is the same as February's, following full year revisions that have taken down the maximum to 78.9 reached in February and April, and now June. In yet other words, even as the US continues stocking up on record amounts of inventory month after month, the business verticals are simply unable to expand. So with Cap Utilization having plateaued, will all the excess LIFO inventory be remarked to fair value? And what happens to corporate equities when a valuation allowance is taken to finally reflect reality?
The can has been kicked. The austerity has been implemented. The revenues have fallen. And as we see in the chart below, the pace of local government distress is accelerating. As has been made so clear in the past, defaults cluster; and sure enough it is starting, as tensions between unions and city managers become irreconcilable.
There are various reasons why not only we at Zero Hedge are big fans of Hugh Hendry. One of them of course is his uncanny ability to not only tell the truth, but to bash his competitors faces into it (as Joseph Stiglitz so vividly recalls), even if it means running squarely against the consensus. The other reason are self-aware statements such as this one via the FT today: "What I found was that when I speak in person, and especially when it’s television and timing is so acute, it gives the impression that I am cavalier and, if you will, full of myself,” says Mr Hendry, speaking by phone from his office in Bayswater, central London." Hendry was obviously discussing his self-imposed media blackout which unlike other prominent financiers is not being used for book sales promotion purposes but appears quite genuine. It also means he won't get to collect $200/appearance fees as a guest contributor on CNBC but we digress. "The danger when people look at that from a distance is that they try to align that with the guy that they’ve just given $50m or $75m to and it’s not the same person." iI is sad that none of the other talking muppet heads and "daily pundits" who appear on financial comedy TV to merely blow smoke up assorted holes and talk their books, don't share Hendry's revelations a little more often.
Today's June CPI came and unlike virtually every other print in the past 2 months, wasn't an abysmal miss: printing at 0.0% for the headline and 0.2% for the core, it was precisely in line with expectations. As the chart below shows, there has been one month of declining headline CPI in 2012 - and somehow this is supposed to usher in hundreds of billions in QE and/or the Fed volunteering to destroy the short-term funding market using negative IOER rates. Brilliant.
If Krugman is to be believed, the state of global sovereign nation balance sheets must be excellent as there are now 12 major nations with 2Y interest rates below 1.00% with 4 of those nations having joined the Negative-Interest-Rate-Policy (NIRP) club. Canada, Sweden, USA, UK, Japan, France, Austria, and Finland are all currently below 1.00%. Holland, Germany, Denmark, and Switzerland are all currently negative.
And so it begins...Last Friday the Spanish government published a proposal to cut government expenditure and raise taxes to reduce the fiscal deficit by 56.4billion euros by 2015. I have outlined why austerity will not work in Europe, but it looks like this is a lesson Europeans will have to learn for themselves--for a second time. The writing is on the wall in Ireland, who ailed in the same ways that Spain is currently ailing, but what Lord Merkel wants, Lord Merkel gets. The immediate malaise from these austerity measures will be large-scale social unrest, which is already being planned by many of the 50% of the country's unemployed young people. Regardless of one's stance on the economic merit of austerity, what is indisputable is that riots are real and riots do not end well. With nothing to lose, this round of Spanish austerity protesting has the potential to end in catastrophe.
Goldman Beats Modest Estimates As Prop Trading Revenue Plunges; Avg Employee Comp Slides 16% From Year Ago To $343,003Submitted by Tyler Durden on 07/17/2012 07:56 -0400
On the surface, Goldman's results, which unlike JPM and Citi do not break out the contribution of DVA, aka the top and bottom line contribution from Goldman's CDS blowing out in Q2, were good because they beat expectations of $6.26 billion in revenue and $1.18 in EPS, printing at $6.63 billion and $1.78/share. Of course, going back 3 weeks and the bottom line estimate would have missed then consensus EPS, but who cares: after tall the firm guided down and all the algos know is that GS beat. The problems arise when one spreads the various top line segments which portend nothing new: Client Flow, a proxy for general credit trading, dropped from $3.5 billion to $2.2 billion in Q2, but better than Q2 2012 when it was just $1.6 billion. However, client flow in equities was an abysmal $1.7 billion, down from $2.3 billion in Q2 and $1.9 billion last year as increasingly less people opt to use Goldman's REDi platform or its equity sales team. But most troubling was the epic collapse in the firm's Investing and Lending group, aka its highest margin, Prop Trading operation, which in the aftermath of the JPM fiasco mysteriously saw its revenue collapse from $1.9 billion to a mere $203 million, down from $1 billion a year earlier, and only the second lowest number in the past 3 years. Did the JPM CIO CDS repricing scandal force all banks to suddenly reevaluate their books and mark mid-market? We don't know, but there were no reason why Goldman's prop traders should have generated only $200 million in a quarter in which the bulk of the heat was focused on JPM and others. And finally, in terms of employee retention, Goldman employees can not be happy: in Q2 average comp to the firm's 32,300 total staff also declined to a multi-year low of $343,003, down from $350,864 last quarter, and down 16% from $408,958 a year earlier.
- Lieborgate fallout: Bank of England Governor Sir Mervyn King faces MPs (Telegraph)
- Yahoo's brand new CEO to seek maternity leave shortly (NYT)
- China’s Foreign Investment Drops 6.9% In June (Bloomberg)
- Falling property investment drives China H1 FDI drop (Reuters)
- German Court Delays Ruling on Fund (WSJ)
- Fed's George Says U.S. Growth May Not Exceed 2% in 2012 (Bloomberg)
- China Echoes 2009 Stimulus Planned Railway Spending Boost (Bloomberg)
- ZEW: Investor Outlook For German Econ At Six-Month Low (MNI)
- Fed Shifts Focus To Jobs As Unemployment Stalls Above 8% (Bloomberg)
- Goldman Builds Private Bank (WSJ) - lock in those deposits asap
- UniCredit, Intesa Among 13 Italian Banks Cut By Moody’s (Bloomberg)
A large blaze has broken out in a 42-story tower block in the center of the Turkish city of Istanbul. Firefighting crews brought the fire under control, rescuing those who had been trapped inside by the flames. Watch footage of the fire here.
When it comes to insight into what is on Ben Bernanke, nobody is quite as capable as the firm that runs not only the NY Fed, but virtually every other central bank in the world: Goldman Sachs. Below we present Jan Hatzius' thoughts on what to expect when Bernanke takes the stand at 10 am today when he delivers the first day of his semi-annual Humphrey Hawkins presentation to Congress. Many expect him to hint at more QE, and lately a tempest in a teapot (to use the parlance of our times) has erupted over the possibility that the Fed will lower IOER to 0 or even negative. Here is what Goldman has to say about that: "we do not expect an IOER cut at this time." In fact, Goldman is rather skeptical Bernanke will hit at much if anything, especially with bond yields already at record lows: after all, how much more frontrunning of the Fed's bond or MBS purchases is there? Instead look for much more grilling on the Fed's role in Lieborgate: congress is now realizing it is woefully behind its UK political cousins when it comes to reaping points from years of global Libor manipulation. More importantly, Maxine et al have finally finished all those "Libor for absolute corrupt idiots" books they ordered almost a month ago so they are truly prepared.