Recap 12-5-11


  • US Non-Mfg ISM declined to 52 in Nov vs 53.9 exp and 52.9 prev. This is the weakest reading since Jan 2009.
  • Fed officials are close to finishing an overhaul of how they indicate their policy plans to the public; the article says officials will probably spend much of their Dec. 13th meeting trying to reach agreements on the new communications policies and could be on pace to introduce the new measures early in 2012. The two major goals of the Fed are “Be more explicit about the Fed’s goals for inflation and employment, and articulate more clearly the interest-rate strategy to meet those goals”; in addition, the WSJ says, “the new communications strategy could lay the groundwork for Mr. Bernanke and his colleagues to take other measures to spur growth if the economy fails to improve or deteriorates.”
  • Senate Democrats offered a new proposal on Monday to extend the Social Security payroll tax cut. Details are scare. Republican Senator Coburn said that he expects both the payroll tax break and Unemployment Insurance provisions to be extended.


  • S&P put all 17 EuroZone countries on credit watch negative, meaning there is a one-in-two chance of a downgrade within 90 days. S&P told the six governments it would conclude its review “as soon as possible” after the summit. It told governments: “[I]t is our opinion that the lack of progress the European policymakers have so far made in controlling the spread of the financial crisis may reflect structural weaknesses in the decision-making process within the eurozone and European Union.”
  • London Times reported over the weekend that the ECB is preparing a € 1 trillion cash injection for the euro zone. Mario Draghi is said to be working on a plan that would “pave the way for a colossal market intervention.” The article said the plan would only be carried out if Euro leaders can reach deals on broader political reform. “It is understood that the ECB is willing to more than double its existing bond-buying efforts if it is protected from any possible losses.”
  • Sarkozy and Merkel said that an agreement with has been reached.
  1. Want automatic sanctions on deficits over 3%; only a "qualified majority" could block automatic sanctions.
  2. Agreed on private sector contributions to future bailouts. Will not replicate private sector contributions seen in Greece deals. Agree that Greece was a unique situation that will not be repeated.
  3. To advance institution of the permanent ESM facility to 2012 (from original plan of 2013).
  4. Seeking a stronger role for the IMF, reconfirm ECB independence.
  5. Reiterates once again that euro bonds are not a solution for the current crisis.
  6. European Court of Justice will examine debt limits but will not be able to veto member state budgets.
  7. Treaty changes could be limited to the 17 euro zone states.

Monti proposed a 20bn austerity program from 2012-2014, with the aim of balancing the budget by 2013. (1.3% of GDP)

Italian PMI Services improved to 45.8 in Nov vs 44.1 exp and 43.9 prev

EU Sentix Investor Confidence declined to -24 in Dec vs -21 exp and -21.2 prev

UK PMI Services improved to 52.1 in Nov vs 50.5 exp and 51.3 prev


  • China’s Non-Mfg PMI declined to 49.7 in Nov vs 57.7 prev. The HSBC measure declined to 52.5 vs 54.1 prev
  • Australia Services PMI declined to 47.7 in Nov vs 48.8 prev
  • Putin’s party only garnered 50% of the parliamentary vote vs 64% four years ago. The presidential election is next March.

Commentary & Links:

  • Putin’s party’s loss of votes could have some negative ramifications for Russian investors.
  • Every major HFR hedge fund return index is negative as of the end of Nov, vs +1.1% for the S&P total return index. (h/t Riholtz)
  • Android smartphone users need to be aware of this rootkit installed on their phones
  • The London Times article says that the ECB is willing to buy more bonds if it is protected from losses. Presumably, this requires ratification of changes to the EU treaty first, which is likely to take several months. There is likely to be a fairly amount of political gamesmanship around this issue, which will add volatility. In the meantime, while the EU bond market will continue to operate without the ECB backdrop. This suggests that the EU is subject to further deleveraging pressures as sovereign bond issuance and bank debt maturities picks up early in 2012.
  • Every opinion piece I’ve read advises being long until the EU summit this Friday and them flipping short. This suggests that risk assets may top out before the summit.
  • This chart from Goldman suggests that corporate profits are likely to remain high as a share of GDP. The trend of improving efficiency = lower cost of labor per unit of output. (h/t Kedosky)