Trade Deficit

Plenty of excuses out there for this evening's collosal miss in Chinese exports (-18.1% YoY vs an expectation of a 7.5% rise) mainly based on timing issues over the Lunar New Year (but didn't the 45 economists who forecast this data know the dates before they forecast?) This is a 6-sigma miss and plunges China's trade balance to its biggest miss on record and 2nd largest deficit on record. Combining Jan and Feb data (i.e. smoothing over the holiday), exports are still down 1.6% YoY - not good for the much-heralded global recovery. Exports to the rest of the BRICs were all down over 20% but no there is no contagion from an emerging market crisis.

A dispassionate and analytic of the macro developments for the week ahead. 

Despite stockpiles imploding and prices exploding in the short-term, The U.S. Energy Information Administration (EIA) has predicted that natural gas production in the US will continue to grow at an impressive pace. Right now output is close to 70 billion cubic feet a day and is expected to reach over 100 billion cubic feet per day by 2040. The trend is likely to continue without hitting a geologic “peak”, and along with this trend will come new marketing opportunities for America. The following exclusive interview with OilPrice.com answsers some of the bigger questions...

After learning that it snowed in China this winter following the release of the abysmal February Flash HSBC PMI numbers, we found out that there had also been snow in Europe, following misses across virtually all key French, German and composite PMIs with the exception of the German Services PMI which was the sole "beater" out of 6. To wit:

• Eurozone PMI Manufacturing (Feb A) M/M 53.0 vs Exp. 54.0 (Prev. 54.0); Eurozone PMI Services (Feb A) M/M 51.7 vs Exp. 51.9 (Prev. 51.6)
• German Manufacturing PMI (Feb A) M/M 54.7 vs. Exp. 56.3 (Prev. 56.5); German PMI Services (Feb A) M/M 55.4 vs Exp. 53.4 (Prev. 53.1)
• French PMI Manufacturing (Feb P) M/M 48.5 vs. Exp. 49.6 (Prev. 49.3); French PMI Services (Feb P) M/M 46.9 vs. Exp. 49.4 (Prev. 48.9)

Of course, economic data is the last thing that matters in a manipulated market. Instead, all that does matter is what the USDJPY does overnight, and as we forecast yesterday, the USDJPY 102 tractor beam is alive and well and managed to pull equity futures from a -10 drop overnight to nearly unchanged, despite the now traditional pattern of USDJPY selling during the overnight session and buying during the US session.

With exports up 9% but imports up a massive 25% YoY, Japan's Trade balance pushed to itslargest deficit on record. This is the 2nd largest drop in the trade balance on record - beaten only by March/April 2011 (the Tsunami and Fuskushima). The miracle of the J-Curve (the hoped for recovery in exports that will come any minute now from the devaluation of the currency) is simply non-existent!! We love the smell of GDP downward revisions in the morning... Foreigners sold Japanese stocks for the 4th week in a row for the first time in 16 months.

Overview of the events and data that will be of interest to investors. 

When it comes to complex systems and unintended consequences, the key phrase is "be careful what you wish for." A lot of people are remarkably certain that their understanding of how systems will respond in the future is correct. Alan Greenspan was certain there was no housing bubble in 2007, for example (or he did a great job acting certain). Some are certain the U.S. stock market is going to crash this year, while others are equally certain that stocks will continue lofting higher on central bank tailwinds. Being wrong about the way systems responded in the past doesn't seem to deter people from being certain about the future. Complex systems don't act in the linear way our minds tend to work.

The Turkish Lira may have halted its record collapse against "reserve" currencies - for now - but the reality is that nothing has changed for the better in Turkey, and in fact things continue to get worse.

A sneaky overnight levitation pushed the Spoos above 1800 thanks to a modest USDJPY run (as we had forecast) despite, or maybe due to, the lack of any newsflow, although today's first official Humphrey Hawkins conference by the new Fed chairman, Janet Yellen, before the House and followed by the first post-mortem to her testimony where several prominent hawks will speak and comprising of John B. Taylor, Mark A. Calabria, Abby M. McCloskey, and Donald Kohn, could promptly put an end to this modest euphoria. Also, keep in mind both today, and Thursday, when Yellens' testimoeny before the Senate takes place, are POMO-free days. So things may get exciting quick, especially since as Goldman's Jan Hatzius opined overnight, the third tapering - down to $55 billion per month - is on deck.

After Friday's surge fest on weaker than expected news - perhaps expecting a tapering of the taper despite everyone screaming from the rooftops the Fed will never adjust monetary policy based on snowfall levels - overnight the carry trade drifted lower and pulled the correlated US equity markets down with it. Why? Who knows - after Friday's choreographed performance it is once again clear there is no connection between newsflow, fundamentals and what various algos decide to do.  So (lack of) reasons aside, following a mainly positive close in Asia which was simply catching up to the US exuberance from Friday, European equities have followed suit and traded higher from the get-go with the consumer goods sector leading the way after being boosted by Nestle and L'Oreal shares who were seen higher after reports that Nestle is looking at ways to reduce its USD 30bln stake in L'Oreal. The tech sector is also seeing outperformance following reports that Nokia and HTC have signed a patent and technology pact; all patent litigation between companies is dismissed. Elsewhere, the utilities sector is being put under pressure after reports that UK Energy Secretary Ed Davey urged industry watchdog Ofgem to examine the profits being made by  the big six energy companies through supplying gas, saying that Centrica's British Gas arm is too profitable.

Although there are no policy making meetings, central banks will still dominate the agenda in the week ahead.  

Here come the downward revisions to the "strong" initial Q4 GDP print. Moments ago the December trade deficit was released, and it soared from the impressive November deficit print of $34.6 billion to a far less impressive $38.7 billion, far above the $36.0 billion expected, and an indication that, as we warned, the Q4 GDP revisions are imminent (unless of course inventory numbers rise even more to offset the weakness). As the BEA simply explains, "The deficit increased... as exports decreased and imports increased." Indeed.

Triffin’s Dilemma is that the country that issues the world’s reserve currency will have to choose between:

1 ) running a trade deficit in perpetuity - risking of a loss of confidence in its currency and solvency while the rest of the world enjoys an adequate supply of USDs.

or

2) running a trade surplus and enjoying an appreciation in the value of the dollar while the rest of the world suffers from a lack of liquidity and collateral.

Either way, there are negative implications for world growth. In the first example – in which the US runs a trade deficit in perpetuity – the US continues to add to its debt and risks undermining its ability to pay off that debt. In the second example – in which the US runs a trade surplus – emerging market currencies are put under pressure by the USD potentially leading to capital outflows, a higher cost of debt, and global financial instability.

• Global makets plunge (Reuters)
• Goodbye Mrs. Watanabe - Japan Sees Worst Developed-Stock Rout as Nikkei 225 Drops (BBG)
• Who could have possibly predicted this - Firms Pinched by Pressure to Hold Down Their Prices (WSJ)
• RBA Shifts to Neutral as It Signals Comfort With Aussie’s Level (BBG)
• Fractures Emerge Between Obama, Congressional Democrats (WSJ)
• Brazil suffers record trade deficit (FT)
• El Salvador fisherman washes up in Marshall Islands after year adrift (Reuters)
• Apple Quietly Builds New Networks (WSJ)
• One-year prison sentence for 21-year-old Twitter user who glorified terrorists (El Pais)

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.