The most important event of the "coming" week was unexpected, and did not even take place during the week, but the weekend. So with Summers unexpectedly, and uncharacteristically out, here is what else is in store.
While the only market moving event of note had nothing to do with the economy (as usual), and everything to do with the Fed's potential propensity to print even more dollars and inject even more reserves into the stock market (now that Summers the wrongly perceived "hawk" is out) some other notable events did take place in the Monday trading session. Of note: while India's August inflation soared far higher than the expected 5.7%, rising to 6.1% from 5.79% (making life for the RBI even more miserable, as it is fighting inflation on one hand, and a lack of liquidity on the other), in Europe inflation decelerated to 1.3% from 1.6% in July driven by a drop in energy prices, while core inflation was a tiny 1.1%. In a continent with record negative loan growth this is to be expected. Additionally, as also reported, Merkel appears to be positioned stronger ahead of this weekend's Federal election following stronger results for her CDU/CSU, if weaker for her broader coalition. In Libya, oil protesters said they would continue stoppages at oil terminals until their demands are met in yet another startling outcome for US foreign intervention. Finally, some headline on Syria noted a Kerry statement "will not tolerate avoidance of a Syria deal", while Lavrov observed that it may be time to "force Syria opposition to peace talks." And one quote of the day so far: "Don't want market to become excessively exuberant" from the ECB's Mersch- just modestly so?
With bonds and stocks rallying (and the USD dropping) notably in the last few days, one could be forgiven for believing the Taper is off but Goldman's baseline forecast remains for a $10bn reduction in asset purchases - probably all in Treasuries - and $15bn is possible (though recently mixed labor data may choke that a little) and a strengthening of forward-guidance. As they note, the current redction in uncertainty (or rise in complacency some might say) has the potential to offset the tightening in financial conditions, barring another major outbreak of DC strife in the run up to the debt ceiling in late October/early November. However, what is most notable is Goldman's expectation that the Fed will start walking-back its unemployment-rate threshold as it has been clearly shown not to be a good catch-all indicator of broad economic and labor market performance. So it's data-dependent - but the data is unreliable at best and false at worst.
"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
Numbers, Numbers Everywhere...are any true?
That Housing Starts and Permits both missed expectations modestly is not a surprise: after all, NAHB hopium confidence aside, the builders have realized which way the interest-rate wind blows and grasp very well that in a rising rate environment demand for housing will go the inverse of up. Sure enough, housing starts rose from an upwardly revised 846K to 896K, missing expectations of a 900K print, while Permits rose from 918K to 943K, also missing the expected 945K print. Both misses were neglibile and largely covered by seasonal adjustments. However what really captures the dynamic behind the housing situation is the read-through into single (family) and multi-unit (investment rental properties). It is here that the divergence was most profound and tells a tale of one housing bubble which has popped, and another which is still going strong, if tapering.
Starting with the Asian markets this morning, it appear the roller coaster ride for markets continued overnight. Asian equities started the day trading weaker but shortly after the open though, all of Asia bounced off the lows following the previously noted surge in Chinese A-shares soaring more than 5% in a matter of minutes in what was initially described as a potential “fat finger” incident. As DB notes, alternative explanations ranged from a potential restructuring of the government’s holdings in some listed companies, to market buying ahead of a rate cut this coming weekend. All indications point toward a fat finger. The A-share spike has managed to drag other indices along with it though some gains have been pared. Yet for all the drama the Shanghai Composite soared... and then closed red. The region’s underperformer is the Nikkei (-0.75%). Elsewhere, the NZDUSD dropped 0.5% after a magnitude 6.8 earthquake struck the city of Wellington this morning. Looking at the US S&P500 futures are trading modestly higher at 1660. Looking ahead to today there is very little in the way of Tier 1 data to be expected. Housing starts/permits from the US and the preliminary UofM Consumer Sentiment reading for August are the main reports. The moves in rates and perhaps oil will probably offer some markets some directional cues.
Wonder why the Fed and the banks are so desperate to reflate the second housing bubble, to the delight of flippers and taxpayer consequences (deja vu) be damned? Simple: as Goldman points out in a note released last night, "without the boost from housing, real GDP growth would fall below 1% this year." That's the revised GDP by the way, the one that now includes iTunes song sales and underfunded pension plans in the sumtotal. Which in reality means that ex housing, GDP would almost certainly be negative. So the bigger question is what happens to housing which has already seen a shock to the system following the surge in interest rates in the past month and which hobbled both homebuilders and mortgage applications? This is what Goldman sees there: "On house prices, we have started to see the first signs of deceleration and expect a slowdown from the 10%+ pace observed over the past year. Our bottom-up house price model projects 4-5% annual growth rate in the next two years." Alas, since prices moves from top and bottom inflection point never happen in a straight line as everyone rushes to buy, or sell as the case may be, resulting in a skewed and pronounced move, once the reality seeps in that the artificial housing 'recovery' is over, watch what happens when everyone rushes for the door. That goes for GDP as well.
- Solyndra Cola: California aims to 'bottle sunlight' in energy storage push (Reuters)
- Ackman may sues himself after all - Penney Board Assails Director William Ackman, Considered 'Rogue' After Releasing Deliberations (WSJ)
- CFTC subpoenas metals warehousing firm as inquiry heats up (Reuters)
- Obama Plan to Revamp NSA Faces Obstacles (WSJ)
- Japan growth slows in second quarter, adds to sales tax uncertainty (Reuters)
- China Urbanization to Hit Roadblocks Amid Local Opposition (BBG)
- Parents Losing Jobs a Hidden Cost to U.S. Head Start Budget Cuts (BBG)
- US seeks better access to Africa as part of trade pact review (FT)
- Singapore Cuts Trade Outlook as China Slowdown Caps Recovery (BBG)
- White House Sifts Fiscal Ideas With Band of Senators (WSJ)
- Spain may ask United Nations for support over Gibraltar (Reuters)
- Michigan Safety Net for Boomers Frays on Bankrupt Detroit (BBG)
The middle of the month brings a mixture of second-tier macro numbers punctuated by the market-moving (and Taper-cementing) retail sales report. We get IP, CPI and PPI from the US this coming week. In terms of hard activity numbers, US retail sales on Tuesday will be the highlight which as a reminder is, in addition to Jackson Hole, seen as one of two key pre-Taper catalysts to keep an eye on. Outside the US, the key data will be the quarterly publication of German, French and Eurozone GDP, as well as Japanese GDP, which has already been released (weaker real growth, higher inflation). The second week of the month also tends to show the first survey results with the Phily Fed and Empire surveys on Thursday. In Germany the ZEW will come on Tuesday. Finally, from an FX point of view, we will be focused on balance of payments related data, with the trade balance in India and TIC data in the US. After a few very weak TIC releases in recent months we would expect more evidence of weak capital inflows into the US.
Despite an overnight surge in the Chinese markets, with the Shanghai Composite closing up 2.4% following reports that China will not only continue with its "liquidity tightening" operation by, paradoxically, cutting RRR for smaller banks, but launch a stimulus for several Chinese provinces and city governments "on the quiet" in the form of jumbo-sized bank loans, and GDP news in Japan that were so bad they were almost good (although not bad enough to close the Nikkei in the green) US futures continue to take on water following the second worst week of 2013 as the market now appears resigned to a Taper announcement in just over 5 weeks (as we have claimed since May). News in Europe continues to be bipolar, with the big picture confirming that only dark skies lie ahead following yesterday's news that a new Greek bailout is just around the corner, or rather just after the Merkel reelection (even though Kotthaus perpetuated the lies and said a second cut in Greek debt is not on the agenda - although maybe he is not lying: maybe only Greek deposits will be cut this time), offset by on the margin improvements in the economic headlines, even as credit creation remains not only non-existent but as the FT reports (one year after Zero Hedge), some €3.2 trillion in financial deleveraging is still on deck meaning an unprecedented contraction in all credit-driven aggregates (one of which of course is GDP).
In May 22 testimony to the Joint Economic Committee of Congress, Fed Chairman Ben Bernanke issued another of many similar positive interpretations of central bank policy. Yet again, he continued to argue that quantitative easing has decreased long-term interest rates and produced other benefits. The Fed's polices have not produced the much-promised re-acceleration in economic growth. The standard of living - defined as median household income - has fallen back to the level of 1995. The best approach would be for the Fed to recognize the failure of QE and end the program immediately, thereby allowing price distortions in the markets to correct themselves. By ending the illusion that the Fed can take constructive actions, this might even serve to force federal government leaders to deal with the growing fiscal policy imbalances. Otherwise, debt levels will continue to build and serve to further limit the potential for economic growth.
Despite rising gas prices, rising mortgage rates, slowing income growth and the rise of 'low-quality' part-time jobs, 'con'sumer 'con'fidence 'con'tinues to rise to post-recession highs. However, as Citi's FX Technicals group notes, for the 3rd time in the last 17 year period we may be looking at a 4-year-4-month rise in consumer confidence before a turn lower again; and in spite of the Fed's rosy forecasts (and the market's expectations), we should be careful being too quick to believe that the sluggish economic dynamic that has 'dogged us' for the last 6 years is yet fully behind us.
The optimism over the housing recovery has gotten well ahead of the underlying fundamentals. While the belief was that the Government, and Fed's, interventions would ignite the housing market creating an self-perpetuating recovery in the economy - it did not turn out that way. Instead it led to a speculative rush into buying rental properties creating a temporary, and artificial, inventory suppression. The risks to the housing story remains high due to the impact of higher taxes, stagnant wage growth, re-defaults of the 6-million modifications and workouts and a slowdown of speculative investment due to reduced profit margins. While there are many hopes pinned on the housing recovery as a "driver" of economic growth in 2013 and beyond - the data suggests that it might be quite a bit of wishful thinking.
Everything is going to be just great. Haven't you heard? The stock market is at an all-time high, Federal Reserve Chairman Ben Bernanke says that inflation is incredibly low, and the official unemployment rate has been steadily declining since early in Barack Obama's first term. Of course we are being facetious, but this is the kind of talk about the economy that you will hear if you tune in to the mainstream media. They would have us believe that those running things know exactly what they are doing and that very bright days are ahead for America. And it would be wonderful if that was actually true. Unfortunately, as I made exceedingly clear yesterday, the U.S. economy has already been in continual decline for the past decade.