Market Conditions

We noted yesterday that if the EUR got much stronger then peripheral Europe was going to lose much of its 'competitive' gains and while this is a notable surprise to many, we can't wait to hear how Draghi explains the decision given the world's insistence that Europe has turned the corner already... (which it clearly has not).

*DRAGHI SAYS EURO AREA GROWTH RISKS REMAIN `ON THE DOWNSIDE'
*DRAGHI SAYS EURO AREA INFLATION RISKS ARE `BROADLY BALANCED'
*DRAGHI: MARKET CONDITIONS POTENTIALLY NEGATIVE FOR ECONOMY
*DRAGHI SAYS UNEMPLOYMENT REMAINS HIGH
*DRAGHI: EURO AREA MAY FACE PROLONGED PERIOD OF LOW INFLATION

With only 3 of 70 economists surveyed by Bloomberg expecting a rate cut at tomorrow's ECB press conference, Credit Agricole's Frederik Ducorzet suggests seven signals to watch for from Draghi that could signal ECB easing ahead. Crucially, as BofAML puts it, "further euro appreciation is a problem, particularly for the periphery," and with empirical Phillips curves in hand, there is little room for further compensation via wage reduction. In other words, if Draghi stands pat (or doesn't offer up some sacrificial forward guidance hint of easing being likely), the drumbeat of social unrest in the periphery will grow ever louder.

Widely credited with being the seminal paper at the 2012 Jackson Hole conference and setting the scene for "threshold-based" policy, Michael Woodford discusses his views on the costs and benefits of "forward guidance" in this Goldman Sachs interview. The Columbia professor explains how he thinks about asset purchases versus forward guidance (it’s a mistake to think of asset purchases as a way to avoid having to talk about future policy intentions), and why the market and the Fed have seemed so disconnected at various points this year despite substantial attempts by the Fed to communicate more clearly (there were mistakes in communication, but that does not mean the situation would have been better if the Fed had instead kept its mouth shut, especially in such unprecedented times.) Ultimatley he warns, "by blinking when they did, I fear that they have made a negative reaction more likely in the future, because they are now back to square one, with people once again lacking a clear sense of how close the Fed is to tapering and thus vulnerable to surprise."

With the recent adoption of explicit forward guidance as a stimulative policy tool by the major European central banks, virtually every major central bank is now using the tool in some form. The potential benefits and dangers of such policies as central bank communications have evolved are unclear as "the form of guidance" matters. As Robin Brooks notes, and is so well illusrated below in the example of the Riksbank's and Norges Bank's 'failures', "[In terms of implications for rates] the jury is still out on how well forward guidance works. What is clear, though, is that markets prefer 'deeds' to 'words'."

In addition to the bevy of ugly European unemployment and inflation news just reported, the overnight session had a dollop of more ugly macro data for the algos to kneejerkingly react to and ramp stocks to fresh time highs on. First it was China, where the PBOC did another reverse repo, however this time at a fixed 4.3% rate, 0.2% higher than the Monday iteration and well above the 3%-handle from early October, indicating that China is truly intent on tightening its monetary conditions. Then Japan confirmed that despite the soaring imported food and energy inflation, wages just refuse to rise, and have declined now for nearly 1.5 years. Then, adding core insult to peripheral injury, Germany reported retail sales that missed expectations of a +0.4% print wildly, declining -0.4% from a prior downward revised 0.5% to -0.2%. And so on: more below. However, as usual what does matter is how the market digests the FOMC news, and for now the sense is that the risk of a December taper has risen based on the FOMC statement language, whether warranted or not, which as a result is pushing futures modestly lower following an epic move higher in the month of October on nothing but pure balance sheet and multiple expansion.  The big data week in the US rolls on with the highlights being the Chicago PMI and initial jobless claims, which are expected to print their first accurate, non-impaired reading since August.

How do we get a fundamental change away from this extend-and-pretend which prevails not only in Europe but also the world? History tells us that we only get real changes as a result of war, famine, social riots or collapsing stock markets. None of these is an issue for most of the world - at least not yet - but on the other hand we have never had less growth, worse demographics, or higher unemployment since WWII. This is a true paradox that somehow needs to be resolved, and quickly if we are to avoid wasting an entire generation of youth. Policymakers try to pretend we have achieved significant progress and stability as the result of their actions, but from a fundamental point of view that’s a mere illusion..

Despite the ongoing antics in Washington the market remains less than 5 points (at the time of this writing) from its all-time closing high.  If the markets were concerned about economics, fundamentals or potential default; stock prices would be significantly lower.  The reality is that as long as the Federal Reserve remains convicted to its accommodative policies the argument for rationality is trumped by the delusions of Mo' Money. We have seen these "Teflon" markets before - do we really need to remind you what happens to a Teflon pan when you finally scratch the surface? In the meantime here are 5 things to ponder as the week progresses...

Are we on the verge of another major economic downturn?  In recent weeks, most of the focus has been on our politicians in Washington, but there are lots of other reasons to be deeply alarmed about the economy as well.  Economic confidence is down, retail sales figures are disappointing, job cuts are up, and American consumers are deeply struggling.  Even if our politicians do everything right, there would still be a significant chance that we could be heading into tough economic times in the coming months. Our economy is being fundamentally transformed, and the pace of our decline is picking up speed.  The following are 22 reasons to be concerned about the U.S. economy as we head into the holiday season...

Pulling from an extensive record of public speeches and FOMC meeting transcripts, Goldman Sachs reviews Fed Chair-nominee Janet Yellen's views on a number of policy-relevant issues.

TedBits - Newsletter

With a surprisingly apologetic note, IB just hiked margins on yet more of the "cult" momentum stocks that have signified the dot-com 2.0 bubble. Almost as if they know they know that their actions are the final straw on the camel's back:

We sincerely apologize for exercising our discretion to modify requirements with short notice, but believe this action to be warranted given the current market conditions.

Today's 30% hike follows Monday's 100% rise in margins and affects stocks such as TSLA (-16.5% from highs), QIHU, and SFUN.

The government shutdown has removed key algo-dependent headline-making economic data from our daily lives such as incomes, spending and retail sales. However, we have anecdotal signals from trade industry data (pace of dining out has stalled and anyone but the hghest earners are seeing consumer comfort plunge) and from-the-horse's mouth we have CEO comments. Here is what is on the US retailers' mind...

Fingers of Instability

Back in April, in a desperate scramble to raise liquidity courtesy of a hail mary Goldman syndicated term loan, we penned "Confused By What Is Going On At JCP? Here's The Pro Forma Cap Table And The Cliff Notes", where in addition to the obvious - that this is merely buying a few months for the melting icecube company which with every passing day is closer to a Chapter 11 (or 7) bankruptcy filing - we also laid out that what Goldman was doing was merely positioning itself to be at the top of the company's capital structure with a super secured and overcollateralized credit facility, through what is effectively a pre-petition DIP...  As it turns out we only had to wait for five months before the same Goldman that raised the company's emergency liquidity term loan turned around and launched a vicious attack on the same company that paid it millions in dollars in underwriting fees. Specifically, what Goldman just did is write a report (perhaps one of the best bearish cross-asset investment theses we have seen to come out of the firm in a long time) in which it laid out, in a lucid and compelling manner, why JCP is doomed. The report is titled appropriately enough: "Initiate on JCP with Underperform: Looking for cash in the name"... and not finding it.

Much attention has fallen on the Fed's recent announcement that a new fixed-rate, full-allotment overnight reverse repo facility is in the works (so much so that both shadow banking experts Singh and Stella have opined on the issue). It appears that despite the Fed's "best efforts" at communication, not enough clarity has been shed on the topic. So here is Bill Dudley's explanation.