QE Halt Would Be 'Too Violent' for Market: Fed's Fisher
While notably 'not' the Fed's opinion, Dallas Fed head Richard Fisher provided more than a few compellingly truthy comments in this excellent discussion with CNBC's Rick Santelli. It is fiscal policy that is holding us back, he warns, "we have a massive fog here," and despite the extremely accommodation monetary policy, we are not seeing the transmission to job creation." The "conditions of total uncertainty," mean the politicians are holding us back; but it is when Santelli asks him about the Fed's exit that things get a little uncomfortable, "no central bank anywhere on the planet has the experience of successfully navigating a return home from the place in which we now find ourselves." When pressed he exposes the flaw (much to the chagrin of Kuroda and Bernanke we suspect), "somewhere we have to have practical limits as to where we can build the balance sheet. We're moving in the direction of a $4 trillion balance sheet. We know we can't go on forever."
The weakness in economic data (not to be confused with the centrally-planned anachronism known as the "markets") started overnight when despite a surge in Japanese consumer spending (up 5.2% on expectations of 1.6%, the most in nine years) by those with access to the stock market and mostly of the "richer" variety, did not quite jive with a miss in retail sales, which actually missed estimates of dropping "only" -0.8%, instead declining -1.4%. As the FT reported what we said five months ago, "Four-fifths of Japanese households have never held any securities, and 88 per cent have never invested in a mutual fund, according to a survey last year by the Japan Securities Dealers Association." In other words any transient strength will be on the back of the Japanese "1%" - those where the "wealth effect" has had an impact and whose stock gains have offset the impact of non-core inflation. In other words, once the Yen's impact on the Nikkei225 tapers off (which means the USDJPY stops soaring), that will be it for even the transitory effects of Abenomics. Confirming this was Japanese Industrial production which also missed, rising by only 0.2%, on expectations of a 0.4% increase. But the biggest news of the night was European inflation data: the April Eurozone CPI reading at 1.2% on expectations of a 1.6% number, and down from 1.7%, which has now pretty much convinced all the analysts that a 25 bps cut in the ECB refi rate, if not deposit, is now merely a formality and will be announced following a unanimous decision.
With 40 minutes to go, as the world's media focused intently on all-time new highs in the S&P 500 - following a 20 point rip off pre-market lows, seemingly encouraged by the worst miss in Dallas Fed ever - it seems interest in actually participating is lagging significantly. Today's volume pro-rata on the NYSE and in S&P futures is among the lowest non-holiday day in months. There has been no 'rotation' as Treasuries are modestly bid. VIX is not participating in the surge at all. And the 'shorts' have started to outperform on the day (following the squeze earlier).
If this doesn't send the S&P to new all time highs nothing will. Moments ago the Dallas Fed reported its April General Business Activity report and in short it was the biggest miss to expectations on record, plummeting from 7.4 to -15.6, on expectations of a 5.0 print and the lowest since July 2012. It was also the biggest one month drop on record. Since all of this will be attributed to balmy spring weather in New Zealand, extra rainfall in the Russian Steppes, the US sequester, evil European fauxterity, Cyprus deposit confiscation, and of course, Bush, there is no point in commenting on this disaster at all. And why comment: judging by the market's response which is now at the day's highs, it is not as if anyone even pretends any data matters. The only hope now for those expecting a 20,000 on the DJIA is that the ISM due out soon, will print at 0 and everything will be permanently fixed. In other news the daily prayer to praise St. Bernanke begins at 11 am when POMO ends. Please orient yourself to face the Marriner Eccles building when bowing down.
- Obama to report to his bosses today: Obama Meets With Blankfein, Dimon and Moynihan Today (BBG)
- 2007 is here all over again: Seeking Relief, Banks Shift Risk to Murkier Corners (NYT)
- Kuroda Calls BOJ Inflation Target 'Flexible' (WSJ)
- Lagarde warns over three-speed world (FT)
- N. Korea’s Retro Propaganda Calls U.S. Boiled Pumpkin (BBG)
- Luxembourg To Ease Bank Secrecy Rule, Share Data In 2015 (BBG)
- Bank of Korea Keeps Policy Steady (WSJ)
- BOE Stimulus Dilemma Persists as Inflation Seen Higher (BBG)
- EU Sounds Alarm on Spain (WSJ)
- Qatar gives Egypt $3bn aid package (FT)
- RBNZ Says Deposit Insurance May Increase Risk of Bank Failure (BBG)
- Plosser Calls for Reducing QE Pace Citing Gains in Labor Market (BBG)
- Obama budget aims to kick start deficit-reduction talks (Reuters)
QE "is not a Buzz Lightyear policy," Dallas Fed's Fisher explains to Bloomberg TV's Stephanie Ruhle, "this will not go on forever." He admits there are limits to their (and implicitly the ECB or BoJ) policies - "we just have to figure out what they are." The always outspoken fed head goes on to explain why he believes the Fed's policy should be "dialed back... Not go from wild turkey, the liquor by the way, to cold turkey; but certainly slowing it down now." The too-big-to-fail banks are absolutely gaining from a substantial cost-of-funding advantage (over smaller banks) with their implicit government guarantee and Fisher expresses disappointment in the reams of pages that constitute new regulation adding that he would prefer "a simple statement saying they understand there is no government guarantee... It could be written by a sixth grader," as Dodd-Frank "needs repair." His fears are exacerbated by Cyprus as he notes, "[in Cyprus] you have an economy that is held hostage by bank failure and institutions that are too big to fail. We cannot let that happen in the U.S. ever again and the American people will not tolerate it."
Events in Cyprus stem from precisely the same source as the surge in US home prices, namely monetary expansion by the Fed.
Timing couldn’t be worse.
- JPMorgan Report Piles Pressure on Dimon in Too-Big Debate (BBG)
- Employers Blast Fees From New Health Law (WSJ)
- Obama unveils US energy blueprint (FT)
- Obama to Push Advanced-Vehicle Research (WSJ) - here come Solar-powered cars?
- BRICs Abandoned by Locals as Fund Outflows Reach 1996 High (BBG)
- Obama won't trip over Netanyahu's Iran "red line" (Reuters)
- Samsung puts firepower behind Galaxy (FT)
- Boeing sees 787 airborne in weeks with fortified battery (Reuters)
- Greece Counts on Gas, Gambling to Revive Asset Sales Tied to Aid (BBG)
- Goldman’s O’Neill Says S&P 500 Beyond 1,600 Needs Growth (BBG)
- China’s new president in corruption battle (FT)
- Post-Chavez Venezuela as Chilly for Companies From P&G to Coke (BBG)
Three sticks and three chances for a poke in the eye. On the other hand they could be kindling for the fire or perhaps the first ingredients of alphabet soup. You see, this is what makes things so tough; we all stare at the same things, the same events and reach wildly different conclusions. The media hands out each stick as presented by the government, a corporation or someone else in a supposed leadership position. The somewhat wise can grasp that there are three sticks and not just one and the good minds recognize not only the three sticks but see that it can be made into the first letter of the alphabet. In this light then let us consider the recent proposal from the Federal Reserve Bank of Dallas. Under the banner of limiting the government’s support for the large U.S. banks in case one were to fail the Dallas Fed has proposed capping assets at $250 billion and of walling off investment banking from the bank...
If the last three days were spared an overnight ramp in US futures, today this has not been the case as the new carry pairs of choice, the USDJPY and EURJPY, have seen constant gradual levitation overnight, pushing the correlated US OTC markets higher and setting the stage for the tenth consecutive, and perfectly artificial, Dow Jones increase. It is notable just how broken the old direct EURUSD-ES correlation is in times when correlation desks can offset selling pressure by shorting Yen and obtain local funding. That said, even the USDJPY appears to have stalled out in the low/mid 96 range - it is unclear what the catalyst pushing the Yen much lower will be, as virtually all rhetorical ammunition used by the BOJ and its affiliates, has by now been well and truly used up, and the daily talkdown sessions are merely a regurgitation of previous talking points.
This objective report concisely summarizes important macro events over the past week. It is not geared to push an agenda. Impartiality is necessary to avoid costly psychological traps, which all investors are prone to, such as confirmation, conservatism, and endowment biases.
Following last night's very disappointing China HSBC PMI numbers, one would think that the traditional EURUSD, and thus ES, overnight ramp would be missing or at least delayed, especially ahead of a very possible risk off day such as Italian election day. One would be wrong. Because some time after midnight eastern, in what can only be seen as a celebration of Argo's choice as a best picture, the EURUSD resumed its upward ramp on absolutely no news, pushing the pair higher by nearly 100 pips in a smooth diagonal line, and dragging US futures up with it as usual. The catalyst apparently is that with Italian exit polls mere hours away (due out at 2pm GMT), market talk is that Berlusconi's resurgent chances have been hobbled due to a low turnout in the pro-Berlusconi northern states (recall that Lombardia is the key state for the elections) following a quick read of a Reuters recap article. What is ignored is that the referenced Reuters article also notes the "surge in protests votes being cast" in the first day of voting, which means less votes on an absolute and relative basis for Bersani and Monti, even if Berlusconi ends up getting less of the Northern vote. Of course, nobody actually has any clue what the exit polls look like. In fact, with a hung parliament a distinct possibility even assuming a Bersani-Monti coalition, both Goldman and JPM have said a 50-100 pip widening across the Italian curve is possible should a Hung Parliament develop (for more read here). But for now hope dominates and is both squeezing the shorts and causing yet another algorithmic stop hunt in FX, and thus every other asset class. Don't be surprised all of overnight's gains, and much more to be wiped out minutes after 9 am eastern when the first Italian exit polls emerge.
From remarks by the Dick Fisher of the Dallas Fed:
- The Fed has artificially sustained markets
Thank you for the admission, oh FOMC member. And to think just 4 years ago anyone accusing the Fed of using its "invisible hand" and doing everything in its power to solely focus on the stock market was labeled a "conspiracy theory" crackpot. One wonders what other "conspiracy theories" will be admitted by the Fed as fact in another four short years?