The ear-piercing screech of the German export machinery as it down-shifts....
- What's wrong with this headline: Obama authorizes secret support for Syrian rebels (Reuters)
- Hilsenrath promptly dusts off ashes of sheer propaganda failure, tries again: Fed Gives Stronger Signals of Action (WSJ)
- Fed Hints at Fresh Action on Economy (FT)
- Fed Poised to Step Up Stimulus Unless Economy Strengthens (Bloomberg)
- IMF Chief Lagarde Praises Greece, Spain for Efforts (Bloomberg) - efforts to beg as loud as possible?
- US sanctions against bank 'target' China (China Daily)
- Trimming China's Financial Hedges (WSJ)
- ganda central bank cuts key lending rate to 17 pct (Reuters)
- Greece Agrees €11.5bn Spending Cuts (FT) - Agrees? Or does what a good debt slave is told to do
- Germany Retains Stable AAA Outlook at S&P After Moody’s Cut (Bloomberg)
- Spain’s Bond Auction Beats Target as Borrowing Costs Rise (Bloomberg)
- Hilsenrath: Heat Rises on Central Banks (WSJ)
- Some at Fed Are Urging Pre-Emptive Stimulus (NYT)
- Obama Warns of Headwinds in Europe; Urges European Leaders to Take Decisive Action on Euro (WSJ) - also needs reelection
- ECB thinks the unthinkable, action likely weeks away (Reuters)
- Games Turn London Into ‘Ghost Town.’ (FT)
- Greek Leaders Seek to Defer Austerity Cuts (FT)
- Hong Kong Builders Unload Properties to Raise Cash for Land Rush (Bloomberg)
- North India Crippled by Power Cuts (FT)
- Euro-Area Unemployment Rate Reaches Record 11.2% on Crisis (Bloomberg)
- Italy's Monti sees hope of end to euro crisis (Reuters)
Our earlier discussion of the rapid slowdown in Asia trade volumes and the anecdotal evidence of growthiness issues across many industries brings up the seemingly dichotomous relationship between top-down 'data' such as GDP or PMI and bottom-up sector-level activity. As BofAML points out, there has been a significant improvement in data collection in this activity data which enables 'outsiders' to cross-check macro data and potentially obtain leading information. As markets have become skeptical of China's macro data, so the effort to search for alternative measures such as power output, container throughput, and rail transport seems worthwhile. Though not perfect by any means, the higher frequency data mapping flowchart below and a comprehension of the upstream vs downstream activity flows seems to go a long way towards building a credible view on the real state of the Chinese economy - for better or for worse.
While bad news may be good news for the market hoping that it will spur more stimulative measures from the Fed to boost asset prices - for Main Street America bad news is just bad news. More importantly, the decline in consumer confidence continues to perpetuate the virtual economic spiral. As the consumer retrenches the decline in aggregate end demand puts businesses on the defensive who in turn reduces employment. The reduction in employment, and further stagnation of wages, puts the consumer further onto the defensive leading to more declines in demand. It is a difficult cycle to break.
June macro data is giving a 'cleaner' picture of the economic state of our great nation. With seasonal affectations (unusually warm weather and the rebound in auto production) out of the way, June macro data has very much surprised consensus to the downside as BofAML's economics team notes that 14 of the last 20 June indicators has come in below expectations. Over the next several weeks we will get more 'hard' data for June. The most important will be retail sales, industrial production and the durable goods orders report. Retail sales look likely to disappoint as weak chain store sales offset the modest tick higher in auto sales. And given the collapse in the ISM, we expect manufacturing production and durable goods orders to be soft. This data will determine if the FOMC has enough ammo to ease aggressively on August 1st (or wait til September 13th) which we expect to only be an extension of forward rate guidance to mid-2015 from late-2014 (and not the panacea of NEW QE). BofAML remains more concerned with the consensus outlook for H2 - particularly Q4 (with 14% YoY EPS growth expected despite just a 1% GDP growth rate) - as the recession in Europe and high level of uncertainty ahead of the US fiscal cliff will likely lead to slowing growth in H2. And for those hanging their hats on the housing recovery, it will not be enough to save the rest of the economy - Housing construction is now only 2.3% of GDP compared to more than 6% prior to the crisis. This means we need a decisive turn to significantly matter for GDP growth. In addition, we believe it would take a sustained period of price increases to reverse the negative wealth and confidence effects of the housing collapse. Households remain skeptical about the home as a store of wealth or an investment.
Your one stop summary of all the notable bullish and bearish events in the past week.
- Merkel Backs Debt Sharing in Germany Amid Closer EU Push (Bloomberg)
- With a ruling as early as today, here are four health care questions the Supreme Court is asking (CBS)
- George Soros - Germany’s Reticence to Agree Threatens European Stability (FT)
- China Stocks Drop to Five-Month Low (Bloomberg)
- The New Republic of Porn (Bloomberg)
- That's a costly detached retina: Greek Lenders Postpone Mission to Athens (FT)
- Spain Asks for Aid as EU Fights Debt Crisis (FT)
- Wolfgang Münchau - Why Mario Monti Needs to Speak Truth to Power (FT)
- U.S. Banks Aren’t Nearly Ready for Coming European Crisis (Bloomberg)
- MPC Member Wants £50bn Easing (FT)
- India Boosts Foreign Debt Ceiling by $5 Billion to Defend Rupee (Bloomberg)
For how much longer can they try to hide it?
Just about an hour before the US non-farm payroll number is expected to print, and finally resolve the lingering question whether the Chairman will print in 3 weeks, things in Europe have gone from horrible to zombie. A series of horrendous economic reports out of Europe including record Eurozone unemployment, a confirmation of the final European PMI plunge including the second largest monthly decline on record in UK manufacturing, and various soundbites from Syriza's Tsipras, have pushed the EUR to fresh two year lows, Spanish CDS to new all time wides German 2 Year bonds joining Switzerland in negative terriroty, and finally, Bloomberg, as noted earlier, to be "testing" a placeholder for a post-Euro Drachma. As BBG summarizes: "European markets fall, led by consumer & tech stocks with the German market underperforming. The euro falls against the dollar and German 2-yr yields drop into negative territory. Chinese manufacturing PMI data below expectations, though above the 50 level; European manufacturing PMI in line with expectations, below 50. Euro-zone unemployment met expectations and seems likely Irish voters endorsed the EU fiscal treaty. Commodities fall, led by oil & natural gas. U.S. nonfarm payrolls, unemployment data due later." In summary - all data today fits with Raoul Pal's less than optimistic presentation from yesterday.
Despite all the stories of apocalypse now there is a fighting chance that Greece will stay in the eurozone for the time being. This is the real tragedy of course, but unfortunately for all involved there just isn’t the political appetite for “Grexit”. The Germans have done their sums and if Greece leaves they are in deep, way above the top of their lederhosen. The Greeks of course want to stay on the euro gravy train, but it is German gravy and Siemens almost certainly built the loco. Merkel is increasingly isolated but being from the old East Germany she is almost certainly dangerous when cornered. The option for her may not be kicking the Greeks into touch, but taking Germany back to the DMark and leaving the French to sort the mess out. This is something her Finance Minister, who looks increasingly like one of Peter Sellers’ characters in Dr Strangelove, would heartily approve of and might even get her re-elected.
With earnings season now virtually over, it is time to ask why, despite a majority of the companies beating expectations, is the S&P inline with where it was when earnings season started. There are two main reasons why the market has not been impressed: the percentage of "beaters" is nothing spectacular on a historical basis as was shown previously, especially in the aftermath of aggressive cuts to Q1 top and bottom line forecasts heading into earnings reports; more importantly, even with Q1 earning coming out as they did, the bulk of the legwork still remains in the "hockeystick" boost to the bottom line that is completely Q4 2012 loaded, as bottom up consensus revisions to the rest of 2012 are negative despite Q1 beats. As Goldman summarizes: "1Q 2012 will establish a new earnings peak of $98 on a trailing-four-quarter basis. With 88% of S&P 500 market cap reported, 1Q EPS is tracking at $24.10, 1% above consensus estimates at the start of reporting season and reflecting 7% year/year growth." So far, so good. And yet, "Despite the positive surprises, full-year 2012 EPS estimates are unchanged relative to the start of earnings season, and currently stand at $105 vs. our top-down forecast of $100. Over half of consensus 2012 earnings growth is attributed to 4Q. Margins at 8.8% have hovered near peak levels for a year, but consensus expects a sudden jump in 4Q to a new peak of 9.1%. We forecast a further decline to 8.7%."
Few have been as steadfast in their correct call that the US economy sugar high of the first quarter was nothing but a liquidity-driven, hot weather-facilitated uptick in the economy, which has now ended with a thud, as seen by the recent epic collapse in all high-frequency economic indicators, which have not translated into a market crash simply because the market is absolutely convinced that the worse things get, the more likely the Fed is to come in with another round of nominal value dilution. Perhaps: it is unclear if the Fed will risk a spike in inflation in Q2 especially since as one of the respondents in today's Chicago PMI warned very prudently that Chinese inflation is about to hit America in the next 60 days. That said, here are some of today's must read observations on where we stand currently, on why 1937-38 may be the next imminent calendar period deja vu, and most importantly, the fact that Rosie now too has realized that the next credit bubble is student debt as we have been warning since last summer.