Dallas Fed

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Markets On Edge, Follow Every USDJPY Tick

It is still all about the Yen carry which overnight tumbled to the lowest level since November, dragging the Nikkei down by 4.8% which halted its plunge at just overf 14,000, only to stage a modest rebound and carry US equity futures with it, even if it hasn't helped the Dax much which moments ago dropped to session lows and broke its 100 DMA, where carmakers are being especially punished following a downgrade by HSBC of the entire sector.  Also overnight the Hang Seng entered an official correction phase (following on from the Nikkei 225 doing the same yesterday) amid global growth concerns and has filtered through to European trade with equities mostly red across the board. Markets have shrugged off news that ECB's Draghi is seeking German support in the bond sterilization debate, something which we forecast would happen a few weeks ago when we pointed out the relentless pace of SMP sterilization failures, with analysts playing down the news as the move would only add a nominal amount of almost EUR 180bln to the Euro-Area financial system. Elsewhere, disappointing earnings from KPN (-4.3%) and ARM holdings (-2.5%) are assisting the downward momentum for their respective sectors.

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Frontrunning: January 27

  • Emerging sell-off hits European shares, lifts yen (Reuters) - but not really if you hit refresh since the latest central bank bailout announcement
  • Apple’s Holiday Results to Show Whether Growth Is Back (BBG)
  • Israel attacked Syrian base in Latakia, Lebanese media reports (Haaretz)
  • Abenomics FTW: Japan Posts Record Annual Trade Deficit as Import Bill Soars (BBG)
  • When all else fails, Spain's hope lie in a 16th century saint: Saint “might help Spain out of crisis,” says interior minister (El Pais)
  • Global Woes Fail to Send Cash Into U.S. Stocks (WSJ)
  • IMF's Lagarde sees eurozone inflation "way below target" (Reuters)
  • Minimum wage bills pushed in at least 30 states (AP)
  • AT&T Gives Up Right to Offer to Buy Vodafone Within 6 Months (BBG)
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Fed's Fisher Says "Investors Have Beer Goggles From Liquidity", Joins Goldman In Stock Correction Warning

"Continuing large-scale asset purchases risks placing us in an untenable position, both from the standpoint of unreasonably inflating the stock, bond and other tradable asset markets and from the perspective of complicating the future conduct of monetary policy," warns the admittedly-hawkish Dallas Fed head. Fisher goes on to confirm Peter Boockvar's "QE puts beer goggles on investors," analogy adding that while he is "not among those who think we are presently in a 'bubble' mode for stocks or bonds; he is reminded of William McChesney Martin comments - the longest-serving Fed chair - "markets for anything tradable overshoot and one must be prepared for adjustments that bring markets back to normal valuations."

The eye of the needle of pulling off a clean exit is narrow; the camel is already too fat. As soon as feasible, we should change tack. We should stop digging. I plan to cast my votes at FOMC meetings accordingly.

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Overnight Market Summary

Heading into the North American open, stocks in Europe are seen broadly lower, with consumer services seen as the worst performing sector, where the UK based retailers have underperformed amid fears that a combination of heavy discounting, along with bad weather, impacted heavily on overall performance. Of note, the SMI index in Switzerland underperformed throughout the session, with Swatch shares under pressure after officials were unable to say what caused the fire at the weekend at the co.'s ETA unit factory in Grenchen, which destroyed one workshop and damaged another. As expected, traded volume is far below the daily avg and this trend is expected to continue this week.  The euro is stronger against the dollar. Japanese 10yr bond yields rise; Italian yields decline. Commodities little changed, with silver, gold underperforming and natural gas outperforming. U.S. pending home sales, Dallas Fed manufacturing data due later.

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US Dollar Risks And The Four Fed Surprises

The Federal Reserve holds its last policy meeting of 2013 in the week ahead. In UBS' view there are four possible surprises that could affect the markets. From the odds of a taper to adjusting forecasts and from forward-guidance communication to the chances of a cut in the IOER, the FOMC meeting in the week ahead presents upside and downside risks to the dollar in the near term; even if UBS believes the longer-term will see USD strength against both the EUR and JPY.

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If You Don’t Trust the Fed, Here’s An Inside View That Confirms Your Worst Suspicions

Last month, we offered a plain language translation of the Warsh op-ed, because we thought it was too carefully worded and left readers wondering what he really wanted to say. Translation wasn’t necessary for Fisher’s speech, which contained a clear no-confidence vote in the Fed’s QE program. Now William Poole is more or less saying that we have no idea what’s truly behind the Fed’s decisions. But he doesn’t stop there. He’s willing to make a prediction that you wouldn’t expect from an establishment economist... Poole’s refreshingly honest take on the Fed’s inner workings – from someone who truly knows what goes on behind the curtains – is more than welcome.

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Fed's Fisher Blasts "Flaccid" Monetary Policy, Says More CapEx Needed

We warned here (and here most recently), the most insidious way in which the Fed's ZIRP policy is now bleeding not only the middle class dry, but is forcing companies to reallocate cash in ways that benefit corporate shareholders at the present, at the expense of investing prudently for growth 2 or 3 years down the road. It seems the message is being heard loud and very clear among 'some' of the FOMC members; most notably Richard Fisher:

"Without fiscal policy that incentivizes rather than discourages U.S. capex (capital expenditure), this accommodative monetary policy aimed at reducing unemployment (especially structural unemployment) or improving the quality of jobs is rendered flaccid and less than optimally effective... I would feel more comfortable were we to remove ourselves as soon as possible from interfering with the normal price-setting functioning of financial markets."

Perhaps Yellen (and others) will listen this time?

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Futures Go Nowhere In Quiet Overnight Session

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.

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Stock Futures Rise To New Record Highs On Carry-Currency Driven Ramp

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.

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Overnight Equity Levitation Interrupted On Strong Dollar, Weak Treasurys

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.

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Futures Flat As FOMC Begins 2-Day NOctaper Meeting

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.

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Dallas Fed Dumps From 19-Month High; Misses By Most In 6 Months

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.

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Picturing The Slow Rise And Quick Fall Of Fed Credibility

"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.

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Dallas Fed Soars To 20-Month High As Employment Stagnates

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.

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