New Home Sales
Last week, the main area of focus was the political situation in the US where Democrats and Republicans finally agreed upon a short term fix to reopen the government and extend the debt ceiling. The conclusion of this saw equity markets rally to all time highs in Europe and the US, with the USD continuing to slide as markets turn their attention to the Fed’s QE programme and push back expectations of when the central bank will begin to pull back on asset purchases. With the government now reopen, attention will turn to the numerous data releases that were delayed but will now take place over the next two weeks, including the jobs report which is due on Tuesday. The release of this report will once again be used to help predict when the Fed will begin to taper QE however, recent comments from Fed members have suggested that October is likely to be too soon trim bond buying due to the lack of key macroeconomic data and the unknown economic impact as a result of the government closing for 16 days.
Following last week's last two day panic buying driven not by data (since in the US it has been delayed until late October and November, and elsewhere in the world it is just getting worse) but by the catalyst that the US isn't going to default (yes, that's all that is needed to push the S&P to all time highs) and just hopes that the tapering - that horrifying prospect of the Fed reducing its monthly monetization by $15 billion from $85 to $70 billion in line with the decline in the US deficit - will be delayed until March or June 2014 because, you see, the Fed isn't sure how the economy is doing, it makes no sense to even comment on the market. Squeezes, momentum ignitions, rumors about what Messers Bernanke and Yellen had for breakfast, Goldman's 2015 S&P forecast of 2100: that's the lunacy that passes for market moving factors. News, and reality, have long since been put in the dust. Just keep an eye on flashing read headlines, and try to buy (remember: anyone caught selling by the NSA is guaranteed a lifetime of annual IRS audits) ahead of the algos. That's what Bernanke's centrally-planned "market" has devolved to.
In a world devoid for the past two weeks and certainly for foreseeable future of most US economic data (this week we get no CPI, Industrial Production and New Home Sales among others), markets are now reliant on China for an indication of how the economy is doing, which is why this weekend's weaker than expected Chinese exports (ignoring the fact that China trade data is largely made up) and higher than expected consumer price inflation (driven by higher vegetable prices), even as new yuan loans soared to CNY787 billion, well above the CNY675 billion estimate despite broader M2 slowing from 14.7% in August to 14.2% in September, means the Chinese economy is once again in a vice and following the summer's liquidity driven boost, is set to roll over. Which in turn means that once again the PBOC is flying blind: unable to inject more liquidity without risking broader inflation, while most indicators are already rolling over. In short, ugly and certainly rolling over Chinese economic indicators for the market to mull over on Columbus day, even though all this will be promptly forgotten once the Washington debt ceiling song and dance resumes and the now traditional 10:30 am surge grips the algotrons as the latest set of "imminent deal" rumors is unleashed.
New home sales meet expectations at 421k after downward revisions in the last month - which was already the biggest miss of expectations in over 3 years. This looks like the last hurrah rush for purchases as we got a dip lower in rates in July before the most recent surge higher. Bear in mind that the actual unadjusted number of homes sold was a mere 35k (the 3rd lowest in 2013) and 11k have yet to be started. In the meantime, median home prices continue to slide - now at 2013's lows and supply is rising at 5.1 months (unadjusted) this is the highest in 2013. It seems that as rates rise, just as we warned, speculative capital will exit (on uneconomic yields) and home prices ae forced lower on a stagant income vs higher rates affordability basis. Sure enough, median home prices have slumped to their lowest level since January 2013.
Early weakness in Asia driven by US-follow thru selling and ongoing concerns about the us fiscal showdowns as well as the debt ceiling, if not by actual news, resulted in a red close in both the Nikkei and SHCOMP, as well as other regional indices such as the Sensex. This then shifted to Europe, where however stocks reversed the initial move lower and are seen broadly flat, with Bunds remaining bid on the back of month-end, as well as coupon and redemption related flows. However the move higher in stocks was led by telecommunications and health care sectors, which indicates that further upside will require another positive catalyst. There was little in terms of fresh EU related macroeconomic commentary, but according to a report published by the European Banking Authority, the EU’s biggest 42 banks cut their aggregate capital shortfall with respect to the “fully loaded” 2019 Basel III requirements to €70.4bln as of December 2012. This is amusing since not one European bank has actually raised capital, but merely redefined what constitutes capital courtesy of a liberal expansion of RWA, Tier 1 and various other meaningless definition which works until such time as the perilous European balance kept together by the non-existent OMT, is tipped over.
Following the FOMC surprise, no less than twelve Fed speeches will provide some "clarifications" on where the Fed now stands. It is very likely that this subject will continue to dominate the discussions of market participants. At the same time, US data will get scrutinized after the recent weakening and to see how warranted the Fed's concerns were. Two US consumer sentiment surveys, durable goods orders, and the third reading of Q2 GDP are important. In addition, monthly consumption and income data for August provide more information on the third quarter and of course there will be interest in the latest weekly claims numbers after some distortions in recent readings.
The German elections came and went, with Merkel initially said to have an absolute majority, but in the end being forced to design a Grand Coalition. Still, the punditry has been tripping over each other desperate to make that result (or any other result) positive for Europe , which despite now paving the way for policy continuity, together with the latest round of less than impressive Eurozone PMIs (following the strongest China HSBC PMI in 6 months) failed to inspire appetite for risk in Europe this morning where stocks have traded mixed. What is amusing is that everyone expected, the second Merkel gets reelected things in Europe would start going pump in the night - sure enough, the Italian FTSE-MIB is underperforming in early trade amid reports that Italy's economy minister Saccomanni threatened to step down if the country does not stick to its pledges it made to the European Commission. However to a certain degree, the negative sentiment towards Italy was offset by €4.8bln of coupon payments and €24.1bln of redemptions from Italy which is eligible for reinvestment this week. With a second Greek 2-day strike in one week scheduled for Tuesday and Wednesday, look for Europe's catalytic event to unclog, now that the German political picture is set, culminating with the 3rd (and 4th) Greek bailouts and probably more: after all Europe now needs a lower EURUSD (recall Adidas' warning), and that usually means a localized crisis.
We would be the first to espouse the view that, in speculative markets, the 'sentimentals' can long trump the fundamentals, but there is a counterpoint to such a projection, not that many wish to countenance it. The dispiriting truth is that some of the steam has already gone out of the US and were this to continue to be the case, given that esteemed institution’s pathological aversion to short-term difficulty, the Fed's "taper" might yet prove an all too short-lived gesture in the direction of a belated restoration of monetary sanity. As the following 3 charts suggest, equity 'sentimental' valuations are at extremes and fundamentals are deteriorating rapidly, making for an uncomfortable rock- and hard-place-straddle for a Fed that faces 4 reasons it has to Taper (sentiment, deficits, technicals, and international resentment).
In the 21st century economy, if you want to stay employed, seek out a field that is ascending rather than declining. Most people understand that technology is fundamentally changing the nature of work and employment. These changes are also having a profound effect on the state of the US economy...
"In the spring, the risks to growth seemed to be fading. The economy was weathering the fiscal shock. Politicians decided to delay battles over the budget and the debt ceiling, passing a continuing resolution to fund the budget through September and postponing the debt ceiling drop-dead date to some time in the fall. Meanwhile, financial markets in Europe had settled down, the European economy showed signs of improvement, and commodity prices were stable. In their June directive the FOMC made it official: “The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall.” Unfortunately, we seem to be entering another of those periods of elevated risk. Three concerns are emerging."
- Bank of America
No matter how hard the Washington crowd tries to sell an economic recovery, inconvenient and contrary facts keep rearing up to shatter their mythmaking. Few people any longer believe the claims of declining unemployment or low inflation at least based on purchases they make. The fable of a housing recovery is now crumbling. The recession, declared over in June 2009, never ended. Some wonder how bad the recession/depression might have been had government not acted. Others worry that we will find out when the Fed tapers. For lack of a better term, the process the entire country is headed for is “Detroitification.” At this stage, the damage is done and cannot be undone quickly enough to avoid this crisis. Even if there were time, there is no way that politicians would willingly address the problem.
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.
Next weeks events placed within the larger context.
Quick, dispassionate overview of the fx market.