Last week, there were relatively few US data releases, but Initial Jobless Claims continued to surprise on the positive side, while U of Michigan Consumer Sentiment saw a small decline. This week, the FOMC minutes on Wednesday with guidance on the Fed's balance sheet will be the key event. Aside from the Fed, there will be many key releases in the US with IP, CPI, and the regional business surveys. The market expects an increase of 0.6%mom in IP, 0.3%mom in CPI, and small gains in the surveys. ?In Greece, negative headlines over the new austerity package on Friday caused some reversal of the rally in the first part of the week, and as a result, we were stopped out of our short $/CAD recommendation (for a small potential gain). However, the Greek cabinet agreed on the new austerity measures late on Friday, and parliament appears to be on track for a positive vote. The Eurogroup meeting scheduled this coming week will be important to watch as well, and Greek GDP will give a sense of the cyclical damage caused by austerity.
Is It The Weather, Stupid? David Rosenberg On What "April In January" Means For Seasonal AdjustmentsSubmitted by Tyler Durden on 02/09/2012 16:48 -0500
Remember last year when the tiniest snowfall was reason for everyone and their grandmother to miss every possible estimate, always blaming it on the weather? Or rainfall in the spring? Or warm weather during the summer? Oddly enough one never hears about the opposite: the beneficial, and one-time, impact to trendline due to countertrend weather, such as the fact that we just had April weather in January. Granted, nobody in the programmed MSM will touch this topic, which is why we go to the most trustworthy filter of real economic data - David Rosenberg. "...Be careful in assessing the seasonally adjusted data when January weather feels like April. It was four to five degrees warmer than usual and the third fewest snowflakes to hit the ground in the past 50 years. On top of that, let's not lose sight of what real GDP did in Q4 — considerably below consensus view from last summer and sub-1% at an annual rate once inventories are stripped out. The only variable preventing real GDP from stagnating completely was the fact the price deflator collapsed to just 0.4% at an annual rate. If it had averaged to what it was in the previous three quarters, real GDP growth would have come in close to a 0.7% annual rate. Strip out the inventory build-up and real sales would have contracted at a 1.3% annual rate and recession would be dripping off everybody's tongue right now."
CPI, housing starts, jobless claims - last week will almost certainly to be revised to over 400k for the first time in months, and the Philadelphia Fed index.
Construction trends may be good for incumbents, but for homeowners, banks, and taxpayers, they're costly....
Quick summary of the week's main bullish and bearish headlines (as to the data behind the headlines, that's another matter)
Since the 2012 Outlooks have now slowed to a drip, its appears retrospectives are the stocking-filler of choice for the week. Goldman's economist group reflects on their '10 Questions for 2011', released at the end of December 2010, and finds they were correct seven times. The tricky thing about judging the 'score' is the magnitude of the error - or more importantly the magnitude of the question's impact on trading views. Jan Hatzius and his team have had their moments this year, for better or worse, in economic sickness or health but they have largely been accurate at predicting Fed policy (or should we say 'directing/suggesting' Fed policy), but were significantly off (along with emajority of the Birinyi-ruler-based extrapolators from the sell-side) on growth (high) expectations and inflation (low) expectations. Nevertheless, the lessons learned from over-estimating the speed of healing from the credit crisis and the disin- / de-flationary effects of a large output gap (which BARCAP would argue is not as wide) when inflation is already low and inflation expectations well anchored are critical for not making the same overly-optimistic mistake into 2012.
Once again we seem to have a discrepancy between what “credit” people think and what “equity” and “FX” people think. The broad market rallied strongly today, at least in part because of the LTRO. On one thing, everyone agrees, the take up rate will be high. There will be strong demand for the LTRO. What differs is the impact that will have on the market. At one end is a belief that banks will be borrowing this money so they can purchase new assets. The allure of carry will be too much to pass up, and with government encouragement, they will rush to purchase new sovereign debt and maybe even lend more. That will turn the tide in the European debt crisis since there will be buyers for every new issue, and the market can move on to “strong” economic data in the US. The other end of the spectrum is that the banks will use this facility to plug up existing holes in their borrowing. They won’t have to rely on the wholesale market or repo market as much as they can tap this facility. It will take some pressure off of the “money market” as banks won’t be scrambling for as much money every day, or over year end, but it won’t lead to new asset purchases by the banks. Banks need to deleverage and that hasn’t changed. The bonds can have a 0% risk weighting, but that doesn’t mean anyone, including the banks, believe it. The road to hell is paved with carry. That is an old adage and likely applies here.
The death throes of the debt-based consumerist lifestyle are already visible beneath the glossy propaganda of "rising revenues this Christmas season." Those revenues were obtained by selling goods at below cost, in the absurd hope that income-strapped, over-indebted consumers would make profitable "impulse buys." As Mish has documented, the "impulse buys" are being returned even before Christmas to the tune of hundreds of millions of dollars. The Fed is desperately attempting to re-inflate the debt bubble by lowering interest and mortgage rates and buying up all sorts of semi-toxic/impaired debt. What the Fed dreads is the reality we all feel and see: fear of the future due to diminished wealth and insecure incomes. If your assets have fallen in value, you feel poorer because you are poorer. Borrowing more at any interest rate will not make anyone feel wealthier. People who fear their income may plummet due to layoffs or their hours being cut are not in the euphoric mood to borrow more, and banks which cannot dare to lose more money loaning to people who will default have cut off credit to millions of previously rabid consumers of debt. Ask yourself this simple question: how much stuff could people buy if they could only spend surplus cash, after all their expenses and debt servicing payments were paid in full?
Once again the US Department of Truth succeeds in fooling the algos: today's November Housing Starts number was a blockbuster: at 685K annualized units, it came higher than the highest estimate (range was 600K to 655K), and certainly higher than the average estimate of 635K. It was obviously higher than the downward revised previous number of 627K. All great: housing soaring, employment must be back. Right? Wrong. One peek under the covers shows where all the "growth" comes from - the entirety of the surge was due to the absolutely hollow 5+ multi-family units which jumped by a whopping 25% sequentially, and which as everyone in the industry knows are nothing but inventory padding by homebuilders who "build just to build." Unfortunately, as the all important 1 Unit structure trendline shows, there is absolutely no improvement in this critical series. But hey - it fooled the robots. And now it will take at least 12-24 hours before vacuum tubes process the reality of this latest spin. By then, however, we may well have had our Christmas rally.
- According to an EU source, EU finance ministers failed to agree on raising ESM/EFSF EUR 500bln joint ceiling. However, Eurozone finance ministers agreed to provide EUR 150bln in bilateral loans to the IMF for bailout use, according to an EU statement
- Stronger than expected IFO data from Germany, together with successful T-Bill auctions from Spain helped risk-appetite
- Weakness in the USD-Index provided support to EUR/USD, GBP/USD, commodity-linked currencies, and WTI crude futures
For today's humorous detour, we go back in time, some could say to prehistoric days, and pull the 2011 year end predictions by Blackstone's grizzled (date of birth Valentine's Day, 1933) Vice Chairman Byron Wien posited back on January 1, who for 26 years in a row tries to predict the future. And fails. Well, technically he did get gold right. And yes, there are two more weeks left in 2011: Wien may still be proven right... crazier things have happened.
Last week we pointed out some curious observations from Fortress on commodities and the state of the Chinese market courtesy of secondary industrial metals, notably steel: "The investment landscape for industrial metals is becoming increasingly more difficult to navigate. As highlighted in last month’s letter, we are continuing to see a rapid deceleration of growth in China, specifically within the cyclical industries. A recent trip to visit steel companies outside Beijing underlined the impact of extremely tight liquidity and continued restrictive policy in the Chinese housing market. Steel capacity cuts – through idling or accelerated maintenance outages – are now commonplace and the speed of these cuts has certainly surprised the market. Construction is the principal end-market blamed for this weakness; given the very large inventory overhang and the continued lack of liquidity, this is not surprising. In our equity universe, we have also seen numerous companies expressing concerns regarding China construction demand. Zoomlion, China’s second largest construction machinery company, recently said, "Demand for construction machinery has shrunken drastically and growth will no doubt continue to slow next year." Within the context of declining housing starts, plummeting transaction volumes and the beginning of a meaningful move down in housing prices, these shifts in the steel market have been an interesting harbinger of more substantial problems in the Chinese economy. Our principal concern is the extension of housing weakness into the banking system through the mechanism of both failing developers as well as the opaque and informal lending. We are concerned that the recent strength in iron ore, steel and copper has been misinterpreted by the market. In our view, any suggestion that the Chinese market is undergoing a substantial restock is misplaced." Today, we get a confirmation of just this warning courtesy of Citigroup which has charted weekly Iron Ore China port inventories and of broad steel inventories. Needless to say, domestic steelmakers, who better than anyone know the state of domestic end product demand, have seen the writing on the wall, and have one message for the world: short Brazil and Australia.
While one of the bigger commodity funds out there, in this case Fortress Commodities Fund, has not done too hot recently (down 7.4% in October), which it humbly admits to and says, "the month of October was a wakeup call for us and we are adjusting accordingly" here are some must read perspectives that lead the Fortress Commodity group to conclude that "We're Long Gold, Short Base Metals, Patient Crude Strength Seller & Buyer Of Corn On Any Real Flush In Prices." Oh, and that it's "macroeconomic outlook remains pessimistic."
The decoupling desperation hits just keep on coming. After revising last week's 390k number as usual higher to 393K, today's soon to be revised higher jobless claims number hit 388k - the lowest since April, on expectation of 395k. Naturally the robots took one look at the number and completely ignored the fact that Europe's slow motion implosion continues because a few thousand people fired less apparently is good news. Naturally, that corporations, which have already cut all the fat and now have fewer and fewer people left to fire is of secondary importance. After all the decoupling thesis must survive at all costs because if not for America, which together with everyone else, has exported $338 billion more than they have imported - a mathematical idiocy which was noted yesterday - then the world is apparently doomed. And confirming just how "strong" the US economy is, or at least reports thereof, was both the continuing claims number which came in at 3,608K on expectations of 3,635K (previous revised of course higher from 3,615K to 3,665K), while housing starts and permits both beating expectations and coming at 628K and 653K, on expectations of 610K and 603K; even as both previous prints were revised lower. That multi-family units once again came at an abnormally high 183K is also irrelevant - 1 unit came virtually unchanged at 430k. But none of this matters: if the blistering economic data of this week, Ministry of Truthed as it may be, is not sufficient to convince the market that the US can decouple from the European catastrophe, nothing can. Naturally, if Europe is not fixed within one month, comparable "beats" in December will be simply ridiculous and completely non credible, and the BLS will be forced to actually report the truth on what the global slow down looks like.
- Focus remains on the debt and political turmoil surrounding Spain and Italy, with particular widening observed in the Spanish/German 10-year government bond yield spread. There was market talk of the ECB buying the Spanish and Italian government debt
- Spain had a lackluster bond auction, with the auction yield printing an Euro-era high
- Fitch said that the Euro-zone contagion poses a threat to the US bank rating outlook. Eurodollar and Euribor futures have remained under pressure throughout the European session
- Italian PM Monti said will fully implement the previous government's letter of intent to the EU, and will consider necessity of additional measures
- GBP/USD gained around 30 pips following higher than expected retail sales data from the UK