San Francisco Fed

San Francisco Fed head John Williams - known for his extremely dovish views on monetary policy (and support of record accomodation)  - appears to have taken some uncomfortable truth serum this morning. In a speech reminiscent of previous "froth" discussions and "irrational exuberance" admissions, Williams explained:

• *WILLIAMS SAYS POLICY MAY YIELD ASSET BUBBLES, UNINTENDED RESULT
• *WILLIAMS: ASSET-PRICE BUBBLES AND CRASHES 'ARE HERE TO STAY'
• *WILLIAMS: ASSET-PRICE BUBBLES ARE 'CONSEQUENCE OF HUMAN NATURE'

His words appear to reflect heavily on the Fed's Advisory Letter (from the banks) from 3 months ago - warning of exactly this "unintended consequence." This, on the heels of Plosser's recent admission that the Fed was responsible for the last housing bubble, suggests with the black-out period before September's FOMC about to begin, the Fed is sending us a message that Taper is coming - as we know they are cornered for four reasons (sentiment, deficits, technicals, and international resentment).

In the US, retail sales on Friday will be the main data release. In addition, Congress will return from its 5-week recess on Monday and will likely keep their focus on Syria this week. Finally, San Francisco Fed President Williams (who does not vote on FOMC policy this year) will speak on Monday. Last week, Williams argued that the FOMC should maintain its focus on the unemployment rate, despite its limitations. After Friday's employment report saw the unemployment rate drop again due to falling participation, this issue is likely to resurface. The Fed's communication blackout period begins on Tuesday so Williams will be the last FOMC speaker before the September meeting ends on the 18th.

Just when the market thought it had priced in a new equilibrium without (or with - it is not quite clear) a Syria war, here comes Thursday with a data dump that will make one's head spin. Central bankers are once again on parade starting overnight, when the BOJ announced no change to its QE program and retaining its monetary base target of JPY270 trillion. The parade continues with both the BOE and ECB, the latter of which is expected to address the recent pick up in Eonia rates and take praise for the recent very much unsustainable "recovery" in the periphery even as Germany continues to slide lower (this morning's factory orders plunged 2.7% on exp. -1.0%), which in turn lead the Bund to pass above 2.0% for the first time since March 2011. Speaking of bonds blowing out, the US 10Y is now just 6 bps away from 3.00%, the widest since July 2011, and likely to breach the support level, taking out a boatload of stops and leading to the next big step spike in rates as the second selling scramble ensues. And just to keep every algo on its binary toes, today we also get a NFP preview with the ADP private payrolls at 8:15 am (Exp. 180K, down from 200K), Initial Claims (Exp. 330K), Nonfarm Productivity and Unit Labor Costs (Exp. 1.60% and 0.9%), Factory Orders (Exp. -3.4%), Non-mfg ISM  (Exp. 55), Final Durable Goods, EIA Nat Gas and DOE Crude Inventories, oh and the G-20 meeting in St. Petersburg where Putin and Obama are not expected to share much pleasantries, and where John Kerry's swiftboat may not be allowed to dock.

A quiet week to send off August ahead of a deluge of key data next week and as the fateful Septembr 18 FOMC announcement approaches. Still, quite a few macro events to keep track of.

Last week it was the Nasdaq, today it was the Eurex Exchange, which broke down "due to technical issues" shortly after 2 am Eastern and which was offline for over an hour. Further keeping a lid on liquidity and upward momentum is today's UK market holiday which has resulted in a driftless move lower across European stocks, following a red close in the Nikkei225. It only means that the inevitable ramp up in the disconnected from all fundamentals and reality market will have to come only during US trading hours when the NY Fed trading desk steps up its POMO-aided levitation.

“For my own part I did not see and did not appreciate what the risks were with securitization, the credit ratings agencies, the shadow banking system, the S.I.V.’s — I didn’t see any of that coming until it happened.” - Janet Yellen, 2010

With impeccable timing.

The words of central bankers have for a very long time been poured over by those believing their utterances to have mystic qualities, but we now live in an era where their fallibility is coming into question. The Governor of the San Francisco Fed has written a paper debunking the effectiveness of quantitative easing where monetary policy is "uncertain", a state of affairs that has been with us since QE was started and reinforced by Bernanke's two recent press conferences. To taper or not to taper; will he or won't he? Your guess is as good as mine.  “No pain no gain”, is what my fitness trainer tells me with irritating relish and frequency, but you know what? He's right! So what should our central banks and politicians be doing? Debt is the problem so deleveraging has to be the answer.

It can't happen... It can't happen...It can't happen...  It just happened.

Not much in terms of economic data but lots of corporate news with the official Q2 earnings season kick off, as well as a plethora of Fed speakers which in a centrally-planned world, is all that matters.

It's been a long time since Hilsenrath actually reported news instead of serve as a leak dissemination service for the New York Fed. Today was one of those time with news from the WSJ that the Obama administration, and specifically Jack Lew, has begun assembling a short list of candidates for the Federal Reserve chairmanship, in the expectation that Ben Bernanke won't seek reappointment when his second term ends in January. According to Hilsenrath, since the decision on whether the Chairsatan stays or goes is all his, Bernanke may decide to stay for a few more years of QEasing, however he won't: "many of Mr. Bernanke's friends and associates believe he wants to step down when his term expires, after nearly eight years overseeing the central bank's response to the most serious economic downturn since the Great Depression."

With part two of today's Fed-a-palooza due out shortly in the form of the May 1 FOMC meeting minutes, here is an informative recap of the current roster of assorted birds at the FOMC via Bank of America. Of course, since every decision always begins and ends with Ben, and soon his replacement Janet, all of below is largely meaningless.

On one hand we have bad Hilsenrath sending mixed messages saying the Fed may taper sooner (with good Hilsenrath chiming in days later, adding it may be later after all), depending on whether HY bonds hit 4% YTM by EOD or mid next week at the latest. On the other, even resolute Fed doves are whispering that a tapering may occur as soon the summer, so in a few months, and halt QE by year end. Bottom line - confusion. So who better to arbitrate than the firm that runs it all, Goldman Sachs, and its chief economist Jan Hatzius, who issues the following Q&A on "tapering." His view: "not yet." Then again, Goldman is the consummate (ab)user of dodecatuple reverse psychology, so if Goldman says "all clear" the natural response should be just as clear.

Those hoping for a slew of negative news to push stocks much higher today will be disappointed in this largely catalyst-free day. So far today we have gotten only the ECB's weekly 3y LTRO announcement whereby seven banks will repay a total of €1.1 billion from both LTRO issues, as repayments slow to a trickle because the last thing the ECB, which was rumored to be inquiring banks if they can handle negative deposit rates earlier in the session, needs is even more balance sheet contraction. The biggest economic European economic data point was the EU construction output which contracted for a fifth consecutive month, dropping -1.7% compared to -0.3% previously, and tumbled 7.9% from a year before.  Elsewhere, Spain announced trade data for March, which printed at yet another surplus of €0.63 billion, prompted not so much by soaring exports which rose a tiny 2% from a year ago to €20.3 billion but due to a collapse in imports of 15% to €19.7 billion - a further sign that the Spanish economy is truly contracting even if the ultimate accounting entry will be GDP positive. More importantly for Spain, the country reported a March bad loan ratio - which has been persistently underreproted - at 10.5% up from 10.4% in February. We will have more to say on why this is the latest and greatest ticking timebomb for the Eurozone shortly.

A sign of "economic and political turmoil"