Trade Deficit

Today's ZH articles in audio summary! "I remember 9/11 quite clearly. I was only a small tower at the time..." 8pm Everyday @ New York Time.

America's July trade deficit came in slightly better than expected, printing at $42 billion, compared to expectations of $44.4 billion, on exports of $183.3 billion and imports of $225.3 billion, which was to be expected in light of the ongoing drop in Chinese net trade surplus. After all global trade is a zero sum game. The better than expected number was an increase from the revised July deficit of -$41.9 billion, revised lower from $42.9 billion in June. And while GDP beancounter calculations will generate slightly higher Q3 GDP forecasts as a result of the number and revision, the reason for the "improvement" is an ongoing contraction in global trade, which is anything but favorable for the world's economies for which any diversion from a status quo M.O. means longer-term pain.

Equities traded lower in Europe today as market participants continued to book profits after a rally to 13-month highs on growing concerns that even though the Constitutional Court in Germany will dismiss the injunction, it may enforce certain conditions. In addition to that, yesterday’s comments from Spain’s Rajoy who said that the new ECB backstop makes a bailout for his country less urgent. As a result, there is a risk that markets may scale back their expectations of an imminent full-scale bailout and in turn lead to another speculative attack on Spanish bonds. This, together with touted profit taking, saw the short-end in Spain and Italy come under pressure (2y Spanish yield up 8bps and 2y Italian yield up 7bps). In turn, this supported duration assets throughout the session. Looking elsewhere, the looming elections failed to deter investors from the latest DSL tap, which drew a record low yield. Going forward, the second half of the session will see the release of the latest Trade Balance data from the US, as well as the weekly API report. In addition to that, the US Treasury will sell USD 32bln in 3y notes.

A world of ongoing global integration leads to rising global trade and to rising competition between companies from different countries and to some degree also between the countries themselves. Some countries have benefited from rising global trade and strengthened their positions, expressed by rising trade surplus; other countries have come under pressure, expressed by rising trade deficit. These global trade imbalances are a consequence of competitive differences. Deutsche Bank note that investors invest in companies and the countries are the platform of the companies. Therefore, an understanding of global competiveness of countries is key for investors. It is most helpful to look at the combination of competiveness and hourly wages. The more competitive a country is, the higher its wages can be justified. There is a clear relation between the two variables. Countries below the regression curve have a strong competiveness rank relative to their labour costs while countries above the curve have a lower competiveness rank relative to their labour costs. Greece is one of the most extreme outliers, but Italy, Spain, and Argentina are also above the curve. They have a long way to go to get close to competitive - but then again - why would they care?

Playing the disconnect, for now. 

European bourses are down at the North American crossover, all ten sectors in the red, on thin volumes and a distinct lack of data and news flow from the EU and the UK. The risk-off tone in part attributed to the much wider than expected Japanese trade deficit for July, whose exports also fell the most in six months, raising investor concern once again that Asian economy as a whole is stalling. Elsewhere, investor caution over the Greek debt crisis is once again mounting, as EU’s Juncker visits Athens today to meet with the Greek PM Samaras. Overnight it was reported that Greece would present EUR 13.5bln in budget cuts today, higher than the previous EUR 11.5bln, and whilst the country is not asking for more money, Samaras might request more time to implement them. Lawmakers in Netherlands remain critical of providing more aid for the country and continue to push for more reforms, such as spending cuts and privatization, with the Dutch Finance Minister de Jaeger commenting earlier that it is not a good idea for Greece to get more time.

"Houston, we have a problem"

One of the most vocal advocates of a NEW QE announcement next month, at either the FOMC meeting or Jackson Hole - Goldman Sachs - has just pulled the plug. From Jan Hatzius: "The US economic data continue to look a bit stronger. Tuesday’s retail sales report for July beat expectations, while inventory accumulation showed a further slowdown in June. Our Q3 GDP tracking estimate edged up to 2.3%. The recent news also has implications for Fed policy. While QE3 at the September 12-13 FOMC meeting remains possible, our best estimate is that it will take until late 2012/early 2013 before Fed officials return to balance sheet expansion." Just as we have been saying. Which means the Fed is now out of the picture until the end of 2012. And with corn prices where they are, so is the PBOC. As for the ECB - talk to Rajoy, who will do nothing as long as 10 Year yields are under 8%. Which means that, as explained previously, Spain and Italy, and in fact the entire world, must all be destroyed first, before they are saved.

With less than three months to go, the outcome of the November election remains highly uncertain. SocGen notes that, as always, economic performance over the coming months will be a key determinant of who wins and who loses. If the elections were held today, the most likely outcome would be a Republican win in both Congressional races and a Democratic win in the race for the White House. This means that any new significant legislation will almost certainly have to be a product of compromise. In this sense, we may very well be looking at a status quo in terms of bipartisanship and gridlock which have dominated Washington politics over the past few years. This would be bad news at a time when the country faces a number of serious challenges with significant long-term implications. From the economy to long-term fiscal health, and from the debt-ceiling to Housing, Healthcare, and Energy policy differences, the following provides a succinct review.

• World’s Oldest Shipping Company Closes In Industry Slide (Bloomberg)
• Japan Growth May Slow to Half Previous Pace as Exports Wane (Bloomberg)
• China Export Growth Slides As World Recovery Slows (Bloomberg)
• Weidmann tries to muffle not spike Draghi's ECB guns (Reuters)
• Draghi lays out toolkit to save eurozone (FT)
• Concerns grow over prospects for sterling (FT)
• RIM Said To Draw Interest From IBM On Enterprise Services (Bloomberg)
• UN urges US to cut ethanol production (FT)
• Goldman Sachs Leads Split With Obama, As GE Jilts Him Too (Bloomberg)
• New apartments boost US building sector (FT)

ECB to EU governments: “Guys, we won’t fly solo…”

Bond Market to ECB “Show me the money!”

Equity market “Someone said Money? Buy!”

The surprising economic beats, even as Europe and now China slide, continues, following better than expected initial claims, which were released early as someone broke the news embargo, and trade deficit data. In the week ended August 4, 361K people filed initial jobless claims, lower than the upward revised 367K, and below expectations of 370K. This is the 5th week out of 6 in which claims have beat expectations, and heading into the September FOMC meeting, especially in the aftermath of the "blistering" August NFP report, any hope that the Fed will do anything forceful can now be taken off the table. Continuing claims rose by 53K from 3,279K to 3,332K. Adding to the economic tailwind was the June trade deficit, which narrowed by 11% in June, down to $42.9 billion from $48.7 billion, and well below the expected print of $47.5 billion, down on sliding energy prices (back in June - as a reminder crude has soared 20% since then). The reason was a 0.9% rise in exports and 1.5% drop in imports. As Bloomberg observes, "this is likely the last report that shows the narrowing of the deficit this quarter." Finally, perhaps the most notable move that will pass largely unobserved is that in the week ended July 21, a whopping 127K dropped off extended claims, which means no more free $400 weekly checks, and a corresponding hit to iGadget purchases and retail sales.

• Gu Kailai Trial Has Ended, verdict imminent (WSJ)
• Greek unemployment rises to 23.1 pct in May, new record (Reuters)
• Greece’s Power Generator Tests Euro Fitness Amid Blackout Threat (Bloomberg)
• Fannie Mae, Freddie Mac Results May Ease Wind-Down Push (Bloomberg)
• Monti takes off gloves in euro zone fight (Reuters)
• U.S. Fed extends comment period for Basel III (Reuters)
• HP in $8bn writedown on services arm (FT) - must be good for +10% in the stock
• News Corp in $2.8bn writedown (FT) - must be good for +10% in the stock
• Japan to Pass Sales Tax Bill After Noda Avoids Election Push (Bloomberg)
• China May Set New Property Controls This Month, Securities Says (Bloomberg)

It has been a quiet session overnight (and that will continue until the Germans come back from vacation) punctuated by Mario Draghi's attempt to jawbone the market into submission again, this time following the release of the ECB monthly report in which it basically regurgitated Draghi's still misunderstood speech in it said it may buy bonds if strict conditionality is ensured, the same conditionality that Spain said it would not comply with, yet which European bond traders continue to misunderstand, because Spain will not request a bailout as long as its 10 Years are trading below 8% yield. Of course, nobody wants to sell first, until the selling actually begins. Then it will be waterfall. In other news Greek industrial production rose by a tiny amount from below sea level, rising by 0.3% in June following a 2.9% decline previously. This however must be due to the Greek workers' enhanced efficiency - Greek unemployment just rose yet again to the mindblowing 23.1%, from 22.6% - a new all time high (with youth unemployment just 45% away from 100%). And so the race between Spain and Greece over who can hit 50% unemployment first continues. Another notable economic milestone was crossed after the IFO institute euro-area economic climate indicator declined for first time this year, pushing the EURUSD to just above 1.2300. There were also more bad news from the UK whose trade deficit widened more than expected hitting GBP10.1 billion vs GBP8.7 billion estimated, with a record GBP28.3 billion good deficit, led by oil, cars and chemicals. In other news the European collapse continues unabated, yet the market which has long been nothing but a central bank policy tool and no longer discounts anything is perfectly oblivious to what is happening. There was one notable final change: the Chinese economy accelerated its own deterioration, and this time, courtesy of the specter of soaring food prices and a CPI print above estimates, it is very much powerless to even threaten with more easing.

After last week's event-a-palooza, where the headlines, the spin, the erroneous HFT trading, and the propaganda (Draghi is too cold; Draghi is too hot; Draghi is just right) just refused to stop, we finally enter the summer proper where all of Europe is on vacation, as is congress. Add on top of this a very light macro event week and an earnings season which has seen the bulk of companies already report, and we expect the volume in the coming 5 days to be among the lowest recorded in 2012, and thus in the past decade. Which of course means that the cannibalization among the market makers will continue as more and more firms succumb to "trading anomalies."