8.5%

• Pope steps down, citing frailty (Reuters)
• Japan’s economic minister wants Nikkei to surge 17% to 13,000 by March (Japan Times)
• Venezuelan devaluation sparks panic (FT)
• Rajoy releases tax returns, but fails to clear up doubts over Aznar years (El Pais)
• Companies Fret Over Uncertain Outlook (WSJ)
• Home Depot Dumps BlackBerry for iPhone (ATD)
• Kuroda favors Abe's inflation target, mum about BOJ role (Kyodo)
• A Cliff Congress May Go Over (WSJ)
• U.S., Europe Seek to Cool Currency Jitters (WSJ)
• Radical rescue proposed for Cyprus (FT)
• Franc Is Still Overvalued, SNB’s Zurbruegg Tells Aargauer (BBG)
• Northeast Crawls Back to Life After Crippling Blizzard (WSJ)

The markets generate noise and a signal.  Reasonable people can and do differ on which is which.  This brief note address the signals for the yen and euro.  Secondarily it looks at sterling and the Australian dollar. 

It has been another quiet overnight session, with macro data decidedly mixed and "adjusted", because while the key German December Industrial Production number came in sequentially at 0.3% on expectations of a 0.2% rise, it fell more than expected on an unadjusted Y/Y basis, dropping 1.1%, on expectations of just a 0.5% drop. On the other hand, Spain's industrial output not unexpectedly stagnated for a 16th consecutive month, plunging by 6.9% in December in line with expectations, and sliding by a whopping 8.5% Y/Y. In bond auction news, Spain sold some €4.61 billion in 2015, 2018 and 2029 bonds, all pricing with yields substantially higher than recent January auctions, which in turn sent the Spanish 10 Year to 2 month highs of 5.52% after the auction, however it has since regained most of the losses.

Due to job destruction in the private sector that is gasping for air.

We have not been shy about exposing the massive (and unsustainable) bubble of credit being blown into the economy via Student Loans from the government. We have not been afraid to note the dramatic rise in delinquencies among these loans - and the implications for the government. However, as Bloomberg reports, it appears the impact of this exuberance has come back to bite the colleges themselves. In what can only be described as a vendor-financing model, the so-called Perkins loans (for students with extraordinary financial hardships) have seen defaults surging more than 20%. The vicious circle, though, has begun as the ponzi of using these revolving loan funds to 'fund' the next round of students is collapsing thanks to the rise in delinquencies. Schools such as Yale, Penn, and George Washington are becoming very aggressive at going after delinquent student borrowers. While financially hard-up graduates complain of no jobs, the schools are not impressed: "You could take a job at Subway or wherever to pay the bills ... It seems like basic responsibility to me," but perhaps that is the point - avoiding responsibility is seemingly rewarded in the new normal.

Deutsche Bank co-CEO: “In this uncertain world, I cannot exclude anything."

Russia, Kazakhstan and Turkey expanded their gold holdings in December, seeking to diversify their foreign reserves and protect from currency devaluation risk. Russian gold holdings climbed 2.1% to 957.8 metric tons or 30.793 million ounces, according to data on the International Monetary Fund’s website. The increase in December takes the increase in Russian gold reserves in 2012 to 8.5%.  The Russian central bank has said that they will continue buying gold. The pace of the purchases may vary, First Deputy Chairman Alexei Ulyukayev told reporters this month.  He denied that there is a 10% target for gold’s share in the reserves according to Bloomberg

It is funny what one finds when one actually looks at the data behind the headlines, such as in this case the trumpeted amazing return of investors to the US stock market. Because what one does find is that after that one blistering week after the new year, in which wealthy individuals dumped cash they had put aside (for lack of knowledge of what the dividend tax would be in 2013), we now have, for the second week in a row, seen a material outflow from US equity funds as tracked by Lipper, bringing the total two week outflow from the domestic equity sector to some $5.8 billion. Oh, and the great non-rotation out bonds continues with some $8.5 billion pumped into taxable bond funds and $2.3 billion into municipal bonds in the past two weeks.

• Fed Pushes Into ‘Uncharted Territory’ With Record Assets (BBG)
• Next up in the currency wars: Korea - Samsung Drops on $2.8 Billion Won Profit-Cut Prediction (BBG)
• China Warns ‘Hot Money’ Inflows Possible on Easing From Abroad (Bloomberg)
• BOJ Shirakawa affirms easy policy pledge but warns of costs (Reuters)
• Merkel Takes a Swipe at Japan Over Yen (WSJ)
• Wages in way of Abe’s war on deflation (FT)
• Italian PM under fire over bank crisis (FT)
• Senior officials urge calm over islands dispute (China Daily)
• Spain tries to peel back business rules (FT)
• Rifts Over Cyprus Bailout Feed Broader Fears (WSJ)
• Soros Says the Euro Is Here to Stay as Currency War Looms (BBG)

Gold edged up and Tokyo gold hit a record multiyear high after the Bank of Japan announced a bold, some would say reckless, $117 billion ‘stimulus’ program as expected. The BOJ’ package included doubling its inflation target to 2% and making an open-ended commitment to asset purchases from next year.

This open ended policy surprised some that expected a small rise in the BOJ's $1.1 trillion asset-buying and lending program.

On Wednesday, there is a scheduled vote in the U.S. Congress proposed by Republicans on the U.S. borrowing limit.

AAPL stock is currently trading at or just under the $500 "generational bottom" in the premarket session, or nearly a one year low, following news first from Japan's Nikkei that Apple has slashed orders for iPhone 5 components, and then from the WSJ, that demand for the flagship phone was far less than expected, resulting in a cut in orders in the supply chain. Per the WSJ: "Apple's orders for iPhone 5 screens for the January-March quarter, for example, have dropped to roughly half of what the company had previously planned to order, the people said.  The Cupertino, Calif., company has also cut orders for components other than screens, according to one of the people.  Apple notified the suppliers of the order cut last month, the people said."

The credit markets this week already look very different to how they ended last year. As BofAML's Barnaby Martin notes, beta-compression, flatter curves and credit outperformance versus equity have all been abundant themes of late. Relative value is still there, when one looks closely, but is unfortunately not what it used to be. He adds that "things in credit have started to feel a lot like 2007 again," and while he believes the trend is set to continue (though slower) and the liquidity-flooded fundamentals in the high-yield bond market have been holding up well, it is trends in the leveraged loan market, that continue to deteriorate, that are perhaps the only canary in the coal-mine worth watching as global central bank liquidity merely slooshes to the highest spread product in developed markets (until that is exhausted). The rolling 12m bond default rate among European high-yield issuers fell to 1.8% in December, whereas loan default rates rose to 8.5%. With leverage rising, the hope for ever more greater fools continues, even as everyone is forced into the risky assets.

The main macro event today will be the interest rate announcement by the ECB due out at 7:45 am (with the Bank of England reporting earlier on its rate and QE plan, both of which remained unchanged as expected, which will remain the case until Carney comes on board) which is expected to be a continuation of the policy, with no rate cut despite some clamoring by pundits that Draghi should cut rates even more. Overnight, we got Chinese December trade (better than expected) and loan (slightly worse than expected) data, coming in precisely as a country which has a new communist politburo leadership implied they would. Of particular note was that the US has now replaced the EU as the largest Chinese export market: what happens when the euro weakens even further? But at least the net benefit to European GDP as a result of declining imports will, paradoxically, help. Elsewhere, Spain auctioned off more than than the expected €4-5 billion in its first 2013 auctions of 2015, 2018 and 2026 bonds, sending the 10 year SPGB yield to under 5%, or the lowest since 2010, a process driven by expectations of a Spanish bailout. Thus the incredible odyssey of Schrodinger Spain continues, whose interest rates are improving on hopes it is insolvent. Fundamentally, things got better nowhere, with Greek unemployment rising to 26.8% in October from 26.0% previously, while bad loans in Italy soared by 16.7% Y/Y to €121.8 billion, while loans to businesses dropped at the fastest pace ever. And so the scramble to offset the trade and economic collapse of Europe using central bank tools continues.

Bailing out the corrupt Greek elite or stockholders, bondholders, and counterparties of putrid banks, or privileged speculators is one thing, but....

• London Quantitative Hedge Funds Report Second Year of Losses (BBG)
• Berlusconi Forms Alliance in Comeback Bid (WSJ)
• Japan to Buy ESM Bonds Using FX Reserves to Help Weaken Yen (BBG)
• Japan Mulling BOJ Accord Linked to Employment, Mainichi Says (BBG)
• Samsung Expects Record Operating Profit (WSJ)
• Boeing 787 Dreamliner Fire Probed, Blaze Adds to Setbacks (BBG)
• BOJ's Shirai: Open to Firmer Inflation Target (WSJ)
• HSBC N.J. Client Admits Conspiracy in Offshore Tax Case (BBG)
• Lampert to Assume CEO Role at Sears (WSJ)
• Abe prepares fresh stimulus measures (FT)
• U.S. Set for Biggest State-Local Jobs Boost Since 2007 (BBG)
• Pakistan Seen Needing IMF Bailout as Rupee Drops Before Vote (BBG)