A reader very kindly pointed out that my figures for BBoP yesterday were out of whack. (Thanks Vandals!) It appears I made the mistake of forgetting to adjust the GDP figures in the denominator to annual equivalents. As a result, the flow figures as a pct of GDP were 4x what they should’ve been. As the Current Account is quite a bit lower than initially noted, this lessens the size of the required adjustment. But at 2.5% of GDP, it is still near the highest level in history, and suggests eventual mean reversion. The other observations in yesterday’s note remain unaffected.
Some weekly chart observations:
The recent historical pattern for SPX has been pullbacks just past the 20 week moving average over the course of 3 to 6 weeks before stabilizing. If this pattern holds, it suggests a continuation of the sell off until late August or mid Sept, to levels from ~1900 to ~1850:
US yields do not look ready to break out yet:
2s30s retraced sharply from the lows this week, but in the larger picture appears to be simply recovering from an over extension to the downside. The falling trend does not look to be at risk, at least not yet.
Bund yields continue to call, breaking previous lows. My view on that is different from the typical technician interpretation, however, which is that broken support/resistance levels usually lead to further momentum. Bund yields actually have a history of breaking previous lows by a small amount before recovering. Given the macro back drop, I think this is another such instance – and I think the break to new lows has driven the capitulation of the final group of shorts.
The EUR chart does not look particularly inspiring in either direction. 1.35 has been a pivot level for a while, so the break to the downside last week may have emboldened bears. But at the same time, the cross has a history of fake breaks of that level, highlighted in the chart below. With the doji in the candle chart this week, I am wary that this may again be a head fake.
Finally, via tBP, look at this chart, and if you live in the US, count your blessings:
- US Employment was ‘goldilocks.’ Not too hot, not too cold:
- Payrolls declined to 209k vs 230k exp and 288k prev, although that was revised up to 298k.
- Unemployment ticked up to 6.2% vs 6.1% exp and prev. But the participation rate ticked higher 62.9 vs 62.8 prev
- Hourly Earnings was stable at 2.0% YoY vs 2.2% exp Hous worked was stable as exp
- US ISM improved to 57.1 vs 56 exp and 55.3 prev
- EU PMI was revised down 0.1 to 51.8, as the negative German revision offset the positive French revision
- UK PMI declined to 55.4 vs 57.2 exp and 57.5 prev
- Italy PMI declined to 51.9 vs 52.5 exp and 52.6 prev
Australia PMI improved to 50.7 vs 48.9 prev
China PMI improved to 51.7, vs 51.4 exp and 51 prev. This was the highest level since April 2012. US Core PCE was stable at 1.5% vs 1.4% prev
The WSJ reports that a number of prominent credit funds are adding to bearish wagers:
- Mr. Lippmann, who at Deutsche Bank placed bets against crisis-era mortgages, is among those who think trouble spots may be forming. He started his own hedge fund, LibreMax Partners LP, in 2010 and is buying credit-default swaps on corporate debt, people familiar with the investments said.
- Mr. Birnbaum, who was grilled by Congress in 2010 for his subprime trades while at Goldman Sachs, has more than doubled his bets this year against junk bonds issued by low-rated U.S. companies, according to investor documents for his Tilden Park Capital Management LP hedge fund and people familiar with his thinking. His bearish positions total about $4 billion.
- Apollo Global Management APO -1.37% LLC, the $159 billion private-equity giant, also recently rolled out a fund to bet against junk debt
- Other hedge-fund firms currently building up bearish credit positions include Fir Tree Inc. and Carlyle Group LP’s Claren Road Asset Management LLC unit, according to people familiar with the firms
The Ebola outbreak could introduce some volatility if it spreads to DM population centers:http://www.nytimes.com/2014/08/02/world/africa/african-leaders-and-who-intensify-effort-to-combat-ebola-virus.html
- Mon: China Non-Mfg PMI, Australia Retail Sales, Turkey Inflation, EU PPI, AU Services PMI, Trade Balance
- Tue: RBA, EU PMI, US ISM Non-Mfg, NZ Employment,
- Wed: US Trade Balance, Australia Employment
- Thu: BoE, ECB, Canada Building Permits, US Jobless Claims, Australia Home loans, Japan Eco Watchers
- Fri: German Current Account, Canada Employment, US Unit Labor Costs, China CPI