Recap 2014-07-29

Commentary:

The US Consumer Confidence survey asks whether respondents are likely to buy a home in the next six months. It is interesting to note that the series has fallen off, but remains at historically elevated levels:

This series tends to lag home price momentum, but it is interesting to note how strong it is now, especially relative to where it was during the housing bubble. Also interesting is the differential between those who expect incomes to increase vs decrease. It has been ticking higher, but is still at levels last seen in the prior two recessions:

The JPMorgan Treasury all clients survey shows the most outright shorts since July 24, 2006. However, the last time the longs vs shorts differential was at these levels was two weeks ago, and before that, in May:

GS: Historically, a simple and effective way to gauge the pace of economic activity on the Euro periphery has been to look at the PMIs, which have tended to explain between 70% and 80% of the variation in GDP growth. Since the escalation of the Euro area crisis in 2010, this link has broken down, however, with the PMIs over-predicting the pace of recovery on a pretty systematic basis… with this the case in all the important periphery countries (Spain, Ireland, Italy, Greece). Furthermore, we found that the predictive link from PMIs to growth continues to work for the core (Germany and France), which led us to speculate that perhaps it was something specific to the periphery – for example, financing constraints on firms as a result of ongoing stress among periphery banks – that has caused the relationship to break down.

There is little evidence that the disconnect between the PMIs and periphery growth has been abating. If we only look at the data that are new since our initial piece (Q3 2013 to Q1 2014), we find that the residuals have not been shrinking across the periphery. The average size of the residuals between Q3 2013 and Q1 2014 is -0.4 standard deviations for Italy (narrower), -1.3 standard deviations for Spain (wider), -1.1 standard deviations for Greece (narrower) and -1.4 standard deviations for Ireland (wider). There is little pattern across the periphery of these residuals becoming smaller, even though financial conditions in Spain have improved materially… While a reading of 50 may in pre-crisis days have indicated positive growth on the periphery, it today may only indicate flat growth, as the external financing constraints prevent better sentiment from translating into growth.

Notable:

  • US Consumer Confidence improved to 90.9 vs 85.4 exp and 85.2 prev
  • Japan Unemployment jumped to 3.7% vs 3.5% exp and prev. This may be an aberration, however, as the Job the Applicant Ratio ticked higher to 1.10 vs 1.09 exp and prev. Note that both measures were recently at the strongest levels in well over a decade.

  • Deutsche Bank Q2 stated pre-tax profit of €917mn is adjusted to strong clean pre-tax profit of €1,929mn (JPMe €1,701mn clean). Basel 3 CET1 fully loaded ratio at 11.5% up from 9.5% in Q1 14 (of which 2.5% driven by capital raise).
  • The China Electricity Council cut its 2014 demand-growth forecast to between 5.5% and 6.5%, from 6.5% to 7.5% – Bloomberg
  • Ukraine’s military is heading towards victory over rebel forces. While most of the focus has been on Russia’s supplies of sophisticated weaponry (inc the missile used to down the Malaysia Air plane), Ukraine’s military has enjoyed a series of battlefield victories and is close to delivering a knock-out blow against rebel forces. Donetsk is the last big revel stronghold and Ukraine is said to be preparing to weaken the city before launching an assault. Russia is still a wild card – as the rebels head towards defeat Moscow could accelerate its shipments of aid and weaponry – FT
  • a group of Argentina’s creditors who accepted restructured debt following a ’01 default have agreed to waive a clause that will help the government negotiate w/hold-out debt holders. This clause is widely believed to be the main obstacle preventing Argentina from striking a deal w/hold-outs. FT
  • High-touch equity trading is holding its own according to the WSJ. High-touch trading accounted for 55% of all equity volume in ’13, down only slightly from 57% in ’12 and 56% in ’11. Meanwhile, as overall market volumes shrink and liquidity thins, buy-side firms are conducting more of their business via high-touch (the present volume environment makes electronic trading more difficult). Buy-side firms say that one of the main advantages of high-touch trading is the ability to move a large block of stock w/o alerting or impacting the market. "As liquidity decreases, the attraction of high-touch trading increases," said Michael O’Brien, director of global trading at Eaton Vance. WSJ

Upcoming:

  • Tue: NZ Building Permits
  • Wed: France Consumer Confidence, GermanyCPI, US ADP, FOMC, UK GfK Consumer Confidence, AustraliaBuilding Approvals
  • Thu: Month End, Japan Housing Starts, EU Unemployment, CPI, US Jobless Claims, Chicago CPI, Australia PMI, China PMI,
  • Fri: EU PMI, US Employment, ISM
  • Mon: China Non-Mfg PMI, Australia Retail Sales, Turkey Inflation, EU PPI, AU Services PMI, Trade Balance
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