Recap 2014-08-19

Commentary:

NB: No updates the rest of the week.

Notable:

  • RBA minutes “noted the significant uncertainties around the growth forecast and the importance of considering risks to the forecast as well as the central projection.” The minutes noted that “GDP growth was likely to have slowed to a more moderate pace in the June quarter.”
  • UK CPI declined to 1.6% YoY vs 1.8% exp and 1.9% prev. The Core measure also fell to 1.8% vs 1.9% exp and 2.0% prev
  • US CPI declined to 2.0% as exp vs 2.1% prev. The Core measure was stable at 1.9% as exp
  • US Housing Starts jumped 15.7% MoM vs 8.1% exp and -4.3% prev. Building Permits jumped to 8.1% vs 2.8% exp and -3.2% prev,

Upcoming:

  • Wed: BoE Minutes, Fed minutes, Japan PMI, China HSBC PMI
  • Thu: EU PMI, US Jobless Claims, Markit PMI, Philly Fed, Existing Home Sales, EU Consumer Confidence
  • Fri: Canada CPI, Yellen & Draghi Speak at Jackson Hole
  • Mon: German IFO, US New home Sales, NZ Trade Balance

Recap 2014-08-18

Commentary:

The low growth => higher PV view is starting to get disseminated, but it’s not quite there yet. Shiller wrote an op-ed in the NY Times about high equity valuations, but he conclusion was disappointingly short of complete:

Shiller: It’s possible that bond prices account for today’s stock market valuations. But that raises another question: Why are bond prices so high? There are short-term explanations: the role of central banks, for example. But is there a compelling reason for prices of stocks and bonds (and maybe houses, too) to remain high indefinitely? … nothing I’ve come up with is a slam-dunk explanation for the continuing high level of valuations. I suspect that the real answers lie largely in the realm of sociology and social psychology — in phenomena like irrational exuberance, which, eventually, has always faded before. If the mood changes again, stock market investments may disappoint us.

On that topic, my two takeaways from this graphic from the WSJ:

  1. People have been comparing this rally with the 1990’s market. The macro backdrop is actually more similar to the 1950’s market, IMO. Either of those templates suggest the current rally may not even be half over yet, in terms of either time or price
  2. The outflow data suggest a repeat of the Feb price action

This chart from Brent Donnelly @ Citi is interesting:

Daiwa @DaiwaEurope observes that Japanese Labor Cash earnings are the highest in 4 years, but note that growth remains below 1% YoY.

Finally, this is a text book case of one sided reporting: http://www.nytimes.com/2014/08/15/business/energy-environment/traders-profit-as-power-grid-is-overworked.html

The NYTimes reporter did not get anyone to explain the other side of this story, so it comes off as an outrage. But if you replace “congestion contract” with “call option on power prices” this basically seems like a working market. Not free of abuses, but also not a market where people are getting fleeced. The Stanford economics professor does not come off well either.

Notable:

  • US NAHB rose to 55 vs 53 exp and prev.
  • Hilsenrath in the Journal said the Fed is confident it isn’t behind the curve and that they will raise rates at the appropriate time without stoking inflation or imperiling the nascent economic recovery. “Fed officials believe they have been served well keeping the money spigots open in an economy that keeps disappointing. They will need some more proof before they heed the warnings of those who say they’re falling behind the curve.”
  • Kurdish forces retook a key dam in Mosul with help from US air support. With Maliki’s resignation the US will significantly increase the aid sent to Iraq including more arms to both Baghdad as well as the Kurds.
  • Home sellers in London cut asking prices by the most in more than six years this month, trimming 5.9% off prices from the previous month. This is the largest drop since December 2007 tracked by Rightmove. “Buyers and sellers are becoming increasingly aware about personal finances, given that the cost of mortgages are going up and regulators are trying to bring availability down, this limits what buyers are willing or able to pay, and helps moderate sellers’ price expectations.” Prices across the UK dropped -2.9%.
  • ECB lending – economists cut their TLTRO demand forecasts. Analysts estimate that banks will borrow 650 billion euros ($870 billion) in the targeted longer-term refinancing operations, or TLTROs. That’s down from 710 billion euros estimated in last month’s survey. Bloomberg

Upcoming:

  • Mon: RBA Minutes
  • Tue: UKCPI, USCPI, US Housing Starts, Building Permits,
  • Wed: BoE Minutes, Fed minutes, Japan PMI, China HSBC PMI
  • Thu: EU PMI, US Jobless Claims, Markit PMI, Philly Fed, Existing Home Sales, EU Consumer Confidence
  • Fri: Canada CPI, Yellen & Draghi Speak at Jackson Hole
  • Mon: German IFO, US New home Sales, NZ Trade Balance

Recap 2014-08-15

Commentary:

The S&P bounced sharply off intraday lows, which appears to be a positive, but on the daily candles, it has not been able to rally above resistance, which is a combination of the previous support area prevailing during most of July, as well as the 50 day moving average. With the positive bias from option expiry week over, the risk is another downturn next week:

Price action in sovereign yields look exhaustive. A bounce seems likely next week, although for how long and how far remains an open question:

Very interesting:

http://www.nytimes.com/interactive/2014/08/15/magazine/bad-paper-debt-collector.html

Notable:

  • Canadian Employment Revision:
  1. Employment +41.7k vs 20k prev, driven by part timers
  2. UER declined to 7.0% vs 7.1% prev, participation rate was stable as exp

US Empire Mfg declined to 14.69 vs 20 exp and 25.6 prev

UMichigan Confidence declined to 79.2 vs 82.5 exp and 81.8 prev

US Core PPI declined to 1.6% YoY as exp vs 1.8% prev

Upcoming:

  • Mon: US NAHB, RBA Minutes
  • Tue: UKCPI, USCPI, US Housing Starts, Building Permits,
  • Wed: BoE Minutes, Fed minutes, Japan PMI, China HSBC PMI
  • Thu: EU PMI, US Jobless Claims, Markit PMI, Philly Fed, Existing Home Sales, EU Consumer Confidence

Recap 2014-08-14 : Bunds

Commentary:

Ay Caramba! Bund yields broke below 1% today, as EU GDP was flat QoQ vs +0.1% exp and +0.2% prev. Of the 4 major countries, only Spain posted a positive print. The Europe is Japan view is now fairly common thinking. But does this really make sense? Let’s take a step back.

First, let’s take a look at what very long term EU yields are pricing. The chart below shows 30y real yields in white, and inflation swaps in orange. As the chart shows, markets are pricing in BOTH of the following:

  • the ECB will miss its inflation target over the next 3 decades. Historically, the 30y inflation swap rate will price in a premium given the duration. It is now at 2%, a level not seen since the period following the Lehman bankruptcy
  • EU Growth will likely* be zero over the next 3 decades. Or the ECB will eventually conduct a massive Kuroda-style QE. Either way, with real yields at zero – the lowest level since early 2013, when EU breakup fears were widespread – the market is discounting some very weak growth outcomes

Are those scenarios justified? Certainly not. I don’t know of anyone who really thinks the EU will have no growth for 3 decades. In fact the Bloomberg consensus forecast for 2016 EU growth has actually been fairly stable this year, moving between 1.5 to 1.65%:

This suggests that market consensus is likely NOT that EU growth will be zero over the long run. In fact, even Japan had positive real growth during the previous decade.

But let’s assume that the EU will follow a Japan like scenario. What would it look like? Well, some readers may be surprised that 10y JGB yields actually stayed well above 1% for most of the previous decade, outside the Asia crisis and QE periods:

There isn’t much of a long term inflation swap market for JPY assets, but an interpolated rate on the few instruments that did exist showed that even in Japan in the previous decade, short term real yields remained well above zero.

Up until now, EU risk free rates seemed most attractive to pay on a relative basis. Given current pricing, however, they are now attractive enough to pay on an absolute basis.

The trick, as usual, is getting the timing right. And that question – like many timing questions in macro space – may be impacted by the Fed. The chart below shows 10y bund yields vs Fed Funds. Note that historically, two factors have coincided with lows for German yields: Fed hikes and when Fed Funds are higher than bund yields. Those instances are marked by vertical lines below:

Given current trajectories, one or both of those catalysts are likely to occur sometime over the next 12 months. Keep an eye open for low carry ways to pay EU rates. They will eventually – ahem – pay off.

Notable:

  • US Jobless Claims rose to 311k vs 295k exp and 289k prev
  • France Payrolls rose 0.1% in 2Q vs -0.1% exp and prev. Wages rose 0.4% as exp
  • France GDP was flat in 2Q vs +0.1% exp and 0.7% prev
  • Germany GDP fell -0.2% in 2Q vs -0.1% exp and 0.8% prev
  • NZ Mfg PMI was stable at 53 vs 53.3 prev
  • NZ Retail Sales rose 1.2% QoQ vs 1.0% exp and 0.7% prev
  • Wal-Mart cut their outlook: Walmart updated full year EPS guidance to a range of $4.90 to $5.15, from a previous range of $5.10 to $5.45. This range includes third quarter EPS guidance of $1.10 to $1.20. The new full year guidance reflects incremental investments in e-commerce and higher U.S. health-care costs than previously anticipated. h/t Jordan

Upcoming:

  • Fri: UKGDP, US Empire Mfg, PPI, UMichigan Confidence
  • Mon: US NAHB, RBA Minutes
  • Tue: UKCPI, USCPI, US Housing Starts, Building Permits,
  • Wed: BoE Minutes, Fed minutes, Japan PMI, China HSBC PMI
  • Thu: EU PMI, US Jobless Claims, Markit PMI, Philly Fed, Existing Home Sales, EU Consumer Confidence

Recap 2014-08-13

Commentary:

None

Notable:

  • BoE Inflation Report was dovish. Carney:
    All of these labour market signals tell us that slack is being used up at a faster pace than we had anticipated… But that’s not the end of the story. A range of other indicators suggest there was more slack in the first place. In particular, pay growth has been remarkably weak, even as unemployment has fallen rapidly… But it also seems there has been an increase in labour supply at a given wage rate, especially among older age groups… Whatever the causes, these developments point to the economy being able to sustain a higher level of employment and lower rate of unemployment without generating additional inflationary pressures. Indeed, continued low wage growth has enabled firms to expand their margins despite the sharp increase in employment. In the Committee’s best collective judgement, the degree of slack has narrowed somewhat, and our central estimate is now broadly in the region of 1% of GDP. In light of the heightened uncertainty about the current degree of slack, the Committee will be placing particular importance on the prospective paths for wages and unit labour costs… The Committee’s guidance remains unchanged: increases in Bank Rate, when they come, are likely to be gradual and limited… The MPC’s expectations for gradual and limited rate increases are shared broadly by markets.
  • UK Employment was strong, with jobless claims -33.6k vs -30k exp. ILO UER declined to 6.4% as exp vs 6.5% prev.
  • UK Weekly earnings were weak, -0.2% in June vs -0.1% exp. The May figures were revised up however, to 0.4% from 0.3%.
  • US Retail Sales was flat MoM vs +0.2% exp and prev. The Control Group rose just 0.1% vs 0.4% exp and 0.6% prev
  • France CPI was stable at 0.6% as exp. Germany’s figure was not revised.
  • Japan 2Q GDP declined -1.7% QoQ vs -1.8% exp and +1.6% prev
  • China M2 dropped sharply to 13.5% vs 14.4% exp and 14.7% prev. also dropped sharply to 6.7% vs 8.6% exp and 8.9% prev
  • China IP declined to 9.0% vs 9.2% exp and prev
  • China Retail Sales declined to 12.2% YoY vs 12.5% exp and 12.4% prev

Upcoming:

  • Wed: NZ Mfg PMI, Retail Sales, UK RICS House Price Balance
  • Thu: France, GDP, Payrolls, Germany GDP, EU CPI revision, US Jobless Claims
  • Fri: UKGDP, US Empire Mfg, PPI, UMichigan Confidence
  • Mon: US NAHB, RBA Minutes
  • Tue: UKCPI, USCPI, US Housing Starts, Building Permits,

Recap 2014-08-12: BAML FMS

Commentary:

BAML survey take away: buy stocks soon. (Not Japan though)

Notable:

  • German ZEW dropped sharply to 8.6 vs 17 exp and 27.1 prev
  • US NFIB Survey improved to 95.7 vs 96 exp and 95 prev
  • Australia NAB Business Confidence improved to 11 vs 8 prev
  • AU House Price Index rose 10.1% YoY vs 9.3% exp and 10.9% prev
  • USDA WASDE reports, End Stocks for Aug:
  1. Corn: 1808M vs 1996M exp and 1801M prev
  2. Soybeans: 430M vs 415M exp and prev
  3. Wheat: 663M vs 661M exp and 660M prev

Upcoming:

  • Tue: Japan 2Q GDP
  • Wed: GermanyCPI, UK Employment, BoE Inflation Report, US Retail Sales, Dudley Speaks, NZ Mfg PMI, Retail Sales, UK RICS House Price Balance
  • Thu: France, GDP, Payrolls, Germany GDP, EU CPI revision, US Jobless Claims
  • Fri: UKGDP, US Empire Mfg, PPI, UMichigan Confidence
  • Mon: US NAHB, RBA Minutes
  • Tue: UKCPI, USCPI, US Housing Starts, Building Permits,

Recap 2014-08-11

Commentary:

Busy day today, so I’m just going to share some interesting charts:

From Quantifiable Edges:

Via MS & @georgepearkes:

@davos:

Notable:

  • Canada Housing Starts rose to 200.1k vs 193k exp and 198.2k prev
  • Turkey – PM Tayyip Erdogan secured his place in history by winning the nation’s first direct presidential election. Reuters.

Upcoming:

  • Mon: Australia NAB Business Confidence, House Price Index
  • Tue: German ZEW, US NFIB Survey, WASDE reports, Japan 2Q GDP
  • Wed: GermanyCPI, UK Employment, BoE Inflation Report, US Retail Sales, Dudley Speaks, NZ Mfg PMI, Retail Sales, UK RICS House Price Balance
  • Thu: France, GDP, Payrolls, Germany GDP, EU CPI revision, US Jobless Claims
  • Fri: UKGDP, US Empire Mfg, PPI, UMichigan Confidence
  • Mon: