Submitted by Rational Capitalist Speculator [23]
Bull
+ The U.S. economy is now in a sustainable expansion:
- The January U.S. non-farm payrolls report shines, while prior months are revised higher by 60K. A gain of 243K marks the strongest pace of job creation since April. [24] Furthermore the unemployment rate falls to 8.2% from 8.5%. Job creation was widespread. The key cog for a sustainable recovery is now in place.
- Improvement in the Chicago Fed Midwest Manufacturing index [25] and Dallas Fed Manufacturing survey [26] culminate in a strong national ISM reading of 54.1, the highest since June of 2011 (with positive backlogs to boot [27]). Looking ahead, a resurgence in business spending in December (Core Durable Goods orders are revised higher to 3.1% from 2.9%), within a stronger factory orders number of 1.1% [28] signal further growth for the beacon of the U.S. recovery in the months ahead.
- The service sector, which accounts for close to 90% of the economy, is reaccelerating [29]. January’s print is the strongest in 11 months, led by New Orders, Production, and Employment sub-indicies.
- Consumption remains healthy, as car sales have their best January in 3 years [30]. On the horizon, the payroll tax credit is set to be extended [31], relieving the economy of excessive fiscal contraction. Who knows, we might even get further tax cuts [32]!
- Don’t look now, but the ECRI’s leading indicator growth rate is higher for the 3rd consecutive week [33] and is now at its highest level since late August. ECRI, it’s time to admit that you and the rest of the bears were wrong.
- Consumer confidence continues to recover. While the Conference Board showed a setback, Bloomberg’s Consumer Comfort index [34] just hit its highest monthly average in more than half a year.
+ The global economic outlook is improving:
- In Europe, Germany’s unemployment rate hits a record low [35] and her economy reverts back to growth according to the Markit PMI [36]. For the Eurozone as a whole [37], Chris Williamson, Chief Economist at Markit says, “Euro area manufacturing has started 2013 surprisingly well, suggesting the region may avoid a slide back into recession.”
- UK consumer confidence rises to the highest in 7 months [38] on lower inflation.
- Russia reports better than expected economic growth, with GDP rising 4.3% vs. expectations of 4.1% [39].
- In Japan, industrial production surges [40]4%.
- China PMIs point to a soft-landing [41] for the most important link of the global recovery. Premier Wen is looking to stimulate [42] the small business sector.
+ In Eurozone political and financial news, European nations take one step closer to integration [43] with 25 out of 27 nations signing the new fiscal compact treaty. Moreover, leaders signal strong resolve to save the region, as talk of initiating a €1.5 Tn bailout fund [44] is making the rounds. Meanwhile, the Spanish 10-yr [45] yield breaks under 5%, the Italian 10-yr [46] yield breaks under 6%, the Belgian 10-yr [47] yield breaks under 3.7%, and the French 10-yr [48] yield breaks under 3%. Markets signal that a strong firewall is in place for a Greek and/or Portuguese default. As a hefty insurance policy, the second LTRO on February 29th will likely be more than double the size of the first one (@ ? €1Tn) [49], thus reinforcing the firewall for the banking system from a Greek or Portuguese default. Besides, the Greek default has been on investors’ radars for so long, even martians on Pluto know that Greece is defaulting. A climax would result in a rally as uncertainty is lifted.
Bear
- The end game is coming into view for the Eurozone:
- Germany has demanded [50] that Greece cede its budgetary sovereignty to the EU, a request Greece has declined [51]. Furthermore, stiff resistance [52] from Greek political leaders to implement further austerity makes for another “Papandreaou referendum-like” showdown with the troika. And for the trifecta, the Hellenic republic has warned [53] that it may need even more bailout cash.
- Portuguese bond yields are repeatedly [54] hitting record highs; hard default #2 is rapidly approaching.
- In Ireland, a solid majority [55] demand a referendum (guaranteeing a defeat for the army of unelected technocrats in Brussels). As Hollande eloquently stated [56], “Where democracy retreats and politics pulls back, the markets advance.”
- Hollande is creating daylight [57] between himself and Sarkozy in the French presidential election (here’s [58] a primer on what he wants to do).
- On the region’s economic front, austerity is biting, hard. Italian business confidence slumps to the lowest in 2 years [59]. While Germany is benefiting from a weaker Euro, it’s coming at the expense of the rest of the Eurozone; the region’s unemployment rate remains near the highest since 1998 [60]. French consumer spending dives 0.7% [61] vs. expectations of a gain of +0.2%. Even worse, German December retail sales tank 1.4% vs. expectations of a 0.5% gain [62] (the 4th decline in last 5 prints); so much for a low unemployment rate. Meanwhile, on the financial front, banks are using some of the LTRO money to buy sovereign bonds; but that’s about it. They continue to de-leverage [63], cutting off credit to the Eurozone and undermining any recovery in the region. Furthermore, post-crisis highs in FX swaps between the ECB and the Fed [64] point to tight liquidity conditions, despite unprecedented worldwide coordinated monetary loosening [65].
- The throes of stagflation are in plain view; China “unexpectedly [66]” holds off on reducing reserve requirements for banks, opting instead for reverse-repurchase contracts. Simultaneously, here’s [67] what a popping housing bubble looks like. Protests are progressively more intense [68].
- On the U.S. economic front, the S&P Case-Schiller index flags a deepening double-dip for the 99%’s largest asset [69]. Lower home prices will anchor consumer confidence over the medium-term. Over the short-term, rising gas prices [70] are starting to damage confidence; the Conference Board’s survey disappoints, printing 61.1 vs. expectations of 68.0 [71] (led by a decline in the present situation).
- Israel/Iran continues to bubble [72] underneath the facade of bullish sentiment. No groundbreaking announcements were made after the UN inspection. Instead, it’s looking increasingly clear that the U.S. is no longer in control [73] of the situation; an Israeli unilateral attack could come in as soon as 3 months [74].