headlines

• China Output Growth Slows as Leadership Handover Looms (Bloomberg); Weak China trade data raises Beijing spending stakes (Reuters)
• Italy Q2 GDP revised down to -0.8% year-on-year on weak domestic demand (Economic Times)
• Troika disagreed with €2 billion in Greek "cuts" (Reuters)
• No Greek bottom in sight yet: Greek IP, Manufacturing Output plunge compared to year earlier (WSJ)
• France's Hollande sees 2013 growth forecast about 0.8 pct (Reuters), France plots tax hikes of up to 20 bln euros (Reuters)
• Euro Crisis Faces Tests in German Court, Greek Infighting (Bloomberg)
• Geithner sells more AIG stock (FT)
• Japan infuriates China by agreeing to buy disputed isles (Reuters)
• Euro crisis to worsen, Greece could exit euro: Swedish FinMin Anders Borg (Economic Times)
• ‘Lead or leave euro’, Soros tells Germany (FT)
• German MP makes new court complaint against euro plans (Reuters)
• Obama super-Pac in push to raise $150m (FT)

Suddenly the delicate balancing of variables is once again an art and not a science, ahead of a week packed with binary outcomes in which the market is already priced in for absolute perfection. Per DB: We have another blockbuster week ahead of us so let's jump straight into previewing it. One of the main highlights is the German Constitutional Court's ruling on the ESM and fiscal compact on Wednesday. On the same day we will also see the Dutch go to the polls for the Lower House elections. Thursday then sees a big FOMC meeting where the probabilities of QE3 will have increased after the weak payrolls last Friday. The G20 Finance Ministers and Central Bank Governors will meet on Thursday in Mexico before the ECOFIN/Eurogroup meeting in Cyprus rounds out the week on Friday. These are also several other meetings/events taking place outside of these main ones. In Greece, PM Samaras is set to meet with representatives of the troika today, before flying to Frankfurt for a meeting with Draghi on Tuesday. The EC will also present proposals on a single banking supervision mechanism for the Euro area on Tuesday. If these weren't enough to look forward to, Apple is expected to release details of its new iPhone on Wednesday. In summary, it will be a good week to test the theory that algos buy stocks on any flashing red headlines, no longer even pretending to care about the content. Think of the cash savings on the algo "reading" software: in a fumes-driven market in which even the HFTs no longer can make money frontrunning and subpennyiong order flow, they need it.

Ken Burns and Alfred Hitchcock are movie makers. 'The Ken Burns Effect' - panning and zooming to focus attention on a certain isolated piece of the full picture; and the 'Hitchcock Zoom' - a 'shocking' dramatic change in perspective; keep the viewer occupied and entertained by material that would otherwise look a little staid and to ensure that attention is paid to the precise piece of the picture that the director wishes to be the center of focus. As Grant Williams ruminates on the Draghi Scheme (The Dreme), the devices of Burns and Hitchcock came to mind as central bankers attempt to either unsettle the viewers or make them focus on a specific part of the whole, rather than the big picture. For the last eighteen months, we, the viewers, have been manipulated by a seemingly never-ending procession of Eurocrats, bureaucrats, technocrats and who-said-thats to look at a very precise part of the economic picture rather than be allowed to step back and try to take in the wider situation. Accordingly, we thought this week we would take a step back, ignore where the Ken Burns Effect of Draghi’s words were pointing our attention, turn a blind eye to the conflicting rhetoric emanating from the various actors in the Theater of the Absurd and concentrate on the big picture - to try and make sense of the broader reality in Greece, Spain, TARGET2, and The Dreme. It damned near gave us vertigo.

By now much has been written about the joke that was the collapse in the labor force participation rate. Perhaps too much, especially for a topic which as we predicted back in early 2011, would be the primary fudge factor allowing mainstream media headlines to blast America's economic renaissance. Remember: it is all about "confidence." Little, however, has been said about the constituents of this dramatic plunge to a 31 year low, namely the simplest distinction: that between genders. As the chart below shows, when one spreads the labor force by sex, the Friday data is particularly sad for one class of workers: Men. Because as the seasonally adjusted data shows, the labor force participation rate for men just printed at 69.8%. It has never been lower.

It took the ECB a year of endless behind the scenes Machiavellian scheming to restart the SMP program (which was conceived by Jean-Claude Trichet in May 2010, concurrent with the first Greek bailout). The markets soared with euphoria that this time will be different, and that the program which is a masterclass in central planning paradox, as it is "unlimited" yet "sterilized", while based on "conditions" none of which have been disclosed, and will somehow be pari passu for new bond purchases while it retains seniority for previous purchases of Greek and other PIGS bonds, will work - it won't, and the third time will not be the charm as we showed before. Yet it has been just 48 hours since the "bailout" announcement and already Europe is being Europe: namely, it turns out that nobody wants the bailout.

There is only one event on pundits and traders minds today: the ECB's press conference, during which Draghi will announce nothing material, as the substance of the bank's message has been leaked, telegraphed and distributed extensively over the past three weeks before just to gauge and test the market's response as every part of this latest "plan", which is nothing but SMP-meets-Operation "Tsiwt" was being made up on the fly. And not even a weaker than expected Spanish short-term auction in which €3.5 billion in 2014-2016 bonds were sold at plunging Bids to Cover, sending yields paradoxically spiking just ahead of what the ECB should otherwise announce will be the buying sweet spot, can dent the market's hope that Draghi will pull some final detail out of his hat. Or any detail for that matter, because while the leaks have been rich in broad strokes, there has been no information on the Spanish bailout conditions, on how one can use "unlimited" and "sterilized" in the same sentence, and how the ECB can strip its seniority with impairing its current holdings of tens of billions in Greek bonds without suddenly finding itself with negative capital. Elsewhere, the Swedish central bank cut rates by 25 bps unexpectedly: after all nobody wants to be last in the global currency devaluation race. Ironically, just before this happened, the BOJ's Shirakawa said that he won't buy bonds to finance sovereign debt: but why? Everyone is doing it. Finally, in news that really matters, and not in the "how to extend a ponzi by simply diluting the purchasing power of money" category, Greek unemployment soared to 24.4% on expectations of a rise to "just" 23.5%. This means there was an increase of 1.3% in Greek unemployment in one month.

Yesterday's "leak" of Draghi's comments that it is not monetization if just the tip only bonds with a maturity of 3 years or less are monetized, aka, legitimate monetization does not cause inflation was so horribly handled that the ECB huffed and puffed in a desperate attempt to appear angry, even though it was absolutely delighted that it had even more ammo in its war against Germany. Today, the leakage continues only this time nobody cares that Draghi's desperation is hitting the headlines left and right. As a result, Draghi literally pulled a carbon copy of Hank Paulson, and while he did not have a three page term sheet in hand, threatened that the Euro would end unless he was allowed to monetize short-term bonds. Here's looking at your Germany. From Bloomberg: "European Central Bank President Mario Draghi said the bank’s primary mandate compels it to intervene in bond markets to wrest back control of interest rates and ensure the euro’s survival. Mounting his strongest case yet for ECB bond purchases, Draghi told lawmakers in a closed-door session at the European Parliament in Brussels yesterday that the bank has lost control of borrowing costs in the 17-nation monetary union."

Yesterday we dedicated significant space to the most recent piece of perfectly ludicrous propaganda out of the ECB, namely that monetizing debt with a maturity up to three years is not really monetization but is instead within the arena of "money market management" (images of Todd Akin defining when something is 'legitimate' and when it isn't swimming our heads). The implication of course is that debt under 3 years is not really debt, but some mystical piece of paper that nobody should be held accountable for. Hopefully all those consumers who have short-maturity credit card debt which nonetheless yields 29.95% APR are made aware of this distinction and decide to follow through with Mario Draghi's logic, which is about to take the war of words between Germany and the ECB to the next level. Sure enough, this is precisely the news item that is dominating bond risk markets this morning, if not so much futures, and sending Spanish and Italian 2s10s spreads to record wides on hopes Draghi will definitely announce some sub 3 year monetization program for the PIIGS. Bloomberg summarized this best last night when it commented on the move in the EURUSD, since retraced, that we now have speculation Draghi's move will bolster confidence.  In other words: the market is now hoping there is hope. Sure enough, even if Draghi follows through, for the ECB to monetize Spanish bonds, Spain still has to demand a bailout, which however is now absolutely out of the question as mere jawboning has moved the entire highly illiquid curve so steep Rajoy (and Monti) have absolutely no reason to hand over their resignations (i.e., request a bailout). And so we go back to square one. But logic no longer matters in these markets.

The legitimacy of vulgar acts has been making headlines recently and so this morning's rumors of Mario Draghi's insistence to the European parliament that direct ECB buying three-year sovereign bonds is not 'monetary' state-financing got us thinking - just what is 'legitimate monetization' or perhaps "It's not monetization if..."

AUDJPY is getting smacked hard in this evening's admittedly thin trading given the US holiday. China's double-whammies of PMI data (both official and HSBC versions - with the latter revised lower from Flash to its lowest level since March 2009) and some weak Aussie retail sales data is weighing very heavily on the critical carry trade pair. S&P 500 futures traded down in line with AUDJPY from Friday's close but once the China PMI came as weak as it was so the 'Good is Bad', the PBoC have to do something crowd started buying and dragged ES up a few points. Juxtaposing these dismal macro data was a better than expected China Services PMI and Aussie manufacturing index - as the Schrodinger 'economy is good and bad' headlines continue to confound. For the 'bad-is-good' crowd who see stimulus as the solution, we offer three words 'steel overcapacity' and 'malinvestment' and a must-read story from Reuters on the Chinese turning on themselves...

Bernanke takes the wind out of the market's euphoric sails: "Substantial further expansions of the balance sheet could reduce public confidence in the Fed's ability to exit smoothly from its accommodative policies at the appropriate time. Even if unjustified, such a reduction in confidence might increase the risk of a costly unanchoring of inflation expectations, leading in turn to financial and economic instability."

Following a series of bad economic news (Eurozone unemployment, rising inflation, plunging retail sales in Germany, Spain and Greece) out of Europe, and the usual sound and fury out of the ECB signifying nothing (was there finally news that Weidmann and/or the Buba are endorsing anything Draghi is doing - instead of seeking to potentially quit his post leaving the ECB in limbo? No? Then stop flashing red headlines which are completely irrelevant), the EURUSD has decided to go on its usual countersensical stop hunt higher in hopes an algo or two will push it even higher on nothing but momentum, with has one purpose only: to allow the pair enough of a buffer so that when it does fall after the J-Hole disappointment, it has more room to drop. And as European newsflow fades into the periphery, everyone is once again focusing on Wyoming where Bernanke is now broadly expected to do absolutely nothing. What else are market participants focusing on? Here is the full ist courtesy of Bloomberg daybook.

My blood pressure is up, my nails are bitten down to the quick, I haven’t slept in days. I’m ready for Ben.

The fulcrum security is bleeding; 10Y Spanish government bond spreads jumped 19bps today, the largest gain in almost a month, and are trading back above 525bps over Bunds (the worst in over three weeks). Even the front-end of the Spanish and Italian bond curves lost ground today - as the game of chicken between Rajoy and Draghi continues - with the ridiculous brinksmanship highlighting the entirely dysfunctional dis-union that really exists behind the scenes. European equity markets drifted lower all day, slammed lower after the US opened (with Germany's DAX underperforming - thanks to weak Autos - no surprise there for us), but bounced a little into the European close. EURUSD slumped 70 pips from its post-US-open intraday highs today - ending at 1.2500. Europe's VIX jumped back above 28% (from 21% just 10 days ago) - its highest in a month. Credit widened on the day, financials underperformed, and notably credit did not jump into the close like stocks did.

As the Dow crosses 13000 and S&P crosses 1400 - the wrong way - the noise from Europe is picking up:

*IMF SAYS IMPLEMENTING MEASURES A `MAJOR CHALLENGE' FOR GREECE
*IMF: No Request From Spain For IMF Financial Help
*SLOVAK PREMIER FICO SEES 5O% CHANCE OF EURO AREA BREAKUP

Bah, what does the Slovak premier know: it is not like he is a member of the Eurozone. Oh wait...

EURUSD has fallen 50pips from its intraday highs; Spain 10Y (+19bps to 525bps) is at 3-week wides.