In fitting with the pre-holiday theme, and the moribund liquidity theme of the past few months and years, there was little of note in the overnight session with few event catalysts to guide futures beside the topping out EURJPY. Chinese stocks closed a shade of red following news local banks might be coming under further scrutiny on their lending/accounting practices - the Chinese banking regulator has drafted rules restricting banks from using resale or repurchase agreements to move assets off their balance sheets as a way to sidestep loan-to-deposit ratios that constrain loan growth. The return of the nightly Japanese jawboning of the Yen did little to boost sentiment, as the Nikkei closed down 104 points to 15515. Japan has gotten to the point where merely talking a weaker Yen will no longer work, and the BOJ will actually have to do something - something which the ECB, whose currency is at a 4 year high against Japan, may not like.
Another day, another carry currency-driven futures melt-up to daily record highs (the all important EURJPY soared overnight on the return of the now standard overnight Japanese jawboning of the JPY which sent the EURJPY just shy of a new 4 year high of 138 overnight), and another attempt by the ECB to have its record high market cake, and eat a lower Euro too (recall DB's said the "pain threshold" for the EUR/USD exchange rate - the level at which further appreciation impairs competitiveness and economic recovery - is $1.79 for Germany, $1.24 for France, and $1.17 for Italy) this time with ECB's Hansson repeating the generic talking point that the ECB is technically ready for negative deposit rates. However, with the halflife on such "threats" now measured in the minutes, and soon seconds, the European central bank will have to come up with something more original and creative soon, especially since the EURJPY can't really rise much more without really crushing European trade further.
Following a brief hiatus for the Veterans Day holiday, the spotlight will again shine on treasuries and emerging markets today. The theme of higher US yields and USD strength continue to play out in Asian trading. 10yr UST yields are drifting upwards, adding 3bp to take the 10yr treasury yield to 2.78% in Japanese trading: a near-two month high and just 22 bps away from that critical 3% barrier that crippled the Fed's tapering ambitions last time. Recall that 10yr yields added +15bp in its last US trading session on Friday, which was its weakest one day performance in yield terms since July. USD strength is the other theme in Asian trading this morning, which is driving USDJPY (+0.4%) higher, together with EM crosses including the USDIDR (+0.6%) and USDINR (+0.6%). EURUSD is a touch weaker following a headline by Dow Jones this morning that the Draghi is concerned about the possibility of deflation in the euro zone although he will dispute that publicly, citing Germany’s Frankfurter Allgemeine Zeitung who source an unnamed ECB insider. The headline follows a number of similar stories in the FT and Bloomberg in recent days suggesting a split in the ECB’s governing council.
For those curious what Bernanke's market may do today, we flash back to yesterday's AM summary as follows: "Just as it is easy being a weatherman in San Diego ("the weather will be... nice. Back to you"), so the same inductive analysis can be applied to another week of stocks in Bernanke's centrally planned market: "stocks will be... up." Add to this yesterday's revelations in which "JPM Sees "Most Extreme Ever Excess Liquidity" Bubble After $3 Trillion "Created" In First 9 Months Of 2013" and the full picture is clear. So while yesterday's overnight meltup has yet to take place, there is lots of time before the 3:30 pm ramp (although today's modest POMO of $1.25-$1.75 billion may dent the frothiness). Especially once the market recalls that the NOctaper FOMC 2-day meeting starts today.
Last month was all ponies and unicorns as hope was extrapolated that a 19-month high in the Dallas Fed meant this time was different and not entirely cyclical as we have pointed out again and again. Once again it seems the government-budget-based hope has collapsed as even optimism for the future dropped to its lowest in 4 months. This is the biggest miss of expectations on six months and the lowest print in 5 months. Reflecting the margin pressures that we discussed previously, prices received dropped dramatically as price paid soared.
"There's no alternative in making monetary policy but to communicate as clearly as possible, and that's what we tried to do," is how Bernanke defended the Fed's actions over the last six months. But, as the WSJ's Jon Hilsenrath rather snarkily explains, the Fed's 'communications strategy' was a stumbling effort to let the public know what was going on as their efforts to telegraph strategy left investors confused at key points about where it was heading, and some misread Mr. Bernanke's intentions about the bond-buying program and interest rates.
At 12.8, the Dallas Fed manufacturing survey printed at its highest since Feb 2012 - handily beating the 5.6 expectation. Driven by a surge in production and Capacity Utilization, the headline - as they all seem to do - shows some worrying sub-index movements. New Orders expanded at a slower pace for the 3rd month in a row, volume of shipments fell to a 4 month low, and employment-related indices were all weak (wages fell, number of employees fell, and average workweek fell). Even the outlook (six months ahead) fell back from last month's level.
11 of the 15 sub-indices for the Dallas Fed manufacturing outlook fell month-over-month with new orders, production, and finished goods notably weak. Of course, the modest headline beat will be all we hear about as the US economy makes 'progress'; but under the surface there is an even more concerning factor. While the number of employees rose modestly, the average employee workweek collapsed at its fastest pace in 2 years (and the last 2 months have dropped the most in 3 years) as it seems the Obamacare-effect smashes the workweek back to its lowest since October 2009.
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.
When “QE Infinity” Turns Into A Pipedream: Hot Money Evaporates, Rout Follows – See Emerging MarketsSubmitted by testosteronepit on 08/21/2013 12:27 -0400
The Fed and other central banks have accomplished a huge feat: a worldwide tsunami of hot money. Which is now receding.
France is the odd duck on the Continent. It is neither a petulant member of the Southern European financial disasters nor a member of the Northern European banner of austerity nations. France, as we discussed here and here, is the swing country in Europe. It waives about with the wind depending upon the subject. The bonds of France trade just behind those of Germany. While we are sure the portfolio managers on the Continent require diversification. Where the market is pricing French bonds now may turn out to be a rather serious mistake in judgment.
The good, if fake, Chinese "data" releases continued for a second day in row, dominating the overnight headlines with a barrage that included CPI, PPI, retail sales, industrial production, fixed investment, money growth, car sales, and much more (summary recap below). Needless to say, all the data was just "good enough" or better than expected. Yet judging by both the Chinese market (which is barely up, following the drop on yesterday's "surge" in made up trade data) and the US futures, not even algos are dumb enough to fall for the goalseek function in China_economy.xls. Either that, or traders are taking the "rebound" in the Chinese economy as a further indication that the Taper (which will take place in September), will take place in September. And since global risk sentiment continues to be driven by the USDJPY, the Yen pushing to overnight highs is not helping the "China is bullish" narrative.
Evans, who is one of twelve Federal Reserve Presidents, believes that the economic indicators “are actually really better” and this signals a new, more firmer indication from the Fed that tapering is going to happen.
If the Fed drop the ball and move too quickly they could endanger the fragile economic recovery, on the other hand if they move too slowly they could stoke inflation in the near term.
Dallas Fed's Fisher: "We Own A Significant Slice Of Critical Markets. This Is Something Of A Gordian Knot"Submitted by Tyler Durden on 08/05/2013 11:56 -0400
"This is a delicate moment. The Fed has created a monetary Gordian Knot. Whereas before, our portfolio consisted primarily of instantly tradable short-term Treasury paper, now we hold almost none; our portfolio consists primarily of longer-term Treasuries and MBS. Without delving into the various details and adjustments that could be made (such as considerations of assets readily available for purchase by the Fed), we now hold roughly 20 percent of the stock and continue to buy more than 25 percent of the gross issuance of Treasury notes and bonds. Further, we hold more than 25 percent of MBS outstanding and continue to take down more than 30 percent of gross new MBS issuance. Also, our current rate of MBS purchases far outpaces the net monthly supply of MBS. The point is: We own a significant slice of these critical markets. This is, indeed, something of a Gordian Knot."