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."
"Financial markets may have become too acustomed to what some have depicted as a Fed put," Dallas Fed's Fisher warns, causing "serious misallocations of capital."
- *FED'S FISHER SAYS U.S. INVESTORS CAN'T RELY ON A FED 'PUT'
- *FED'S FISHER RECOMMENDS TAPERING STARTING 'THIS FALL'
- *FISHER: FED MUST AVOID 'MARKET HAVOC' IN BOND-PURCHASE TAPERING
Once again, the non-voting 'feral hog' caller is a voice of some reason amid the calls for moar...
Compared to last week's macro-event juggernaut, this week will be an absolute bore, although with a bevy of Fed speakers on deck - both good and bad cops - there will be more than enough catalysts to preserve the "upward channel" scramble in the S&P and the zero volume levitation to new all time daily highs despite the lack of daily bad news. Speaking of Fed speakers, we have Fisher today, Evans’ tomorrow followed by both Plosser and Pianalto on Wednesday. The key overnight data point was the continuation of July PMIs out of Europe, this time focusing on the service industry. As Goldman summarizes, the Final Euro area Composite PMI for July came in at 50.5, marginally above the Flash reading and consensus expectations (50.4). Relative to the June final reading, this was a sold 1.8pt increase, and building on consecutive increases in the past three months, the July Euro area PMI stands 4.0pts above the March print. Solid increases were observed across all of the EMU4 in July, most notably Italy. The July reading is the highest Euro area PMI level observed since July 2011.
Last week: “A culture of dangerous greed and excessive risk-taking has taken root in the banking world.” Now: a quixotic moment for those senators from both sides of the aisle
Ben Bernanke blames fiscal policies out of Washington. However, it is starting to look more and more like Fed policy is equally to blame for the lackluster U.S. GDP growth.
A new data base decomposes OECD trade flows to discern the value added actually being done. Bottom line is that when this important economic concept is used, the bilateral US trade deficit with China appears considerably smaller than conventional approaches. And to anticipate potential criticism, it does not mean that one time series is lying...
It was shaping up to be another bloodbathed session, with the futures down 10 points around the time Shanghai started crashing for the second night in a row, and threatening to take out key SPX support levels, when the previously noted rumor of an imminent PBOC liquidity injection appeared ex machina and sent the Shanghai composite soaring by 5% to barely unchanged, but more importantly for the all important US wealth effect, the Emini moved nearly 20 points higher from the overnight lows triggering momentum ignition algos that had no idea why they are buying only knowing others are buying. The rumor was promptly squashed when the PBOC did indeed take the mic, but contrary to expectations, announced that liquidity was quite "ample" and no new measures were forthcoming. However, by then the upward momentum was all that mattered and the fact that the underlying catalyst was a lie, was promptly forgotten. End result: futures now at the highs for absolutely no reason.
A harbinger of things to come in other markets
This was one helluva week. Nevertheless current markets are still hooked on QE.
Hawkish Dallas Fed head Richard Fisher was relatively outspoken following a speech this morning in Toronto as some insightful truthiness leaked out. As Money News reports, Fisher exclaimed, "we cannot live in fear that gee whiz the market is going to be unhappy that we are not giving them more monetary cocaine," adding that, "only time will reveal the efficacy of current policy and whether the risks that I and more experienced observers like Paul Volcker fret over are as substantial as we surmise, or whether we have made much ado about nothing."
Not exactly a ringing endorsement of his hodgepodge of old ideas and new contradictions.