GDPNow 05132015

Looking Pretty Calm Up Here You Guys

“Even though the S&P 500 has closed at an all-time high three times in the last week, investors are still waiting for breadth (i.e. more than just Carl Icahn Apple shares moving the market)…the current stretch of 61 trading days without a new high is the fourth longest drought of new highs in breadth for the entire bull market and the longest in nearly three years (December 2013).  At 61 days, though, the current drought of new highs in breadth has a ways to go before getting anywhere near the length of the three prior streaks.”  Meanwhile, “little conviction may actually be a good thing for stocks going forward…According to AAII, periods of unusually high neutral sentiment are typically followed by outsized returns in the equity market over the next six and 12 months…From 1987 until near the end of 2014, there were 71 instances of unusually high neutral sentiment.  Following such periods, the S&P 500 rose 86% of the time and averaged a 7.1% gain.”  Meanwhile, David Rosenberg says the current inflation and growth numbers are virtually perfect for stock investors: “In periods where real GDP growth is running between 2% and 3% at the same time that core inflation is between 1% and 2%, the average annual advance in the S&P 500 is 14.4%…Of course, the first-quarter GDP rate was atrocious, and the second quarter is looking weak as well, putting into doubt whether or not the U.S. economy can [produce] even 2% growth for the entire year  But don’t fret, according to Mr. Rosenberg’s table, the average S&P 500 advance when GDP falls to the 1% to 2% range slips only to about 13.7%.”

 

Under The Surface

“There’s a whiff of inflation in the air, thanks to Friday morning’s release of April’s Consumer Price Index (CPI).  The core CPI rose 0.3% in April, surprising economists and sending bond yields higher Friday morning…Core CPI is now up 2.6% annualized over the past three months…Is it strong enough to convince the Fed it can safely raise interest rates despite other weak recent economic reports?  Probably not, but it does provide some data in that direction.  However, the report also shows a 0% gain in real wages, which doesn’t bolster a case for inflation pressure.  Also, the year-over-year headline number posted a 0.2% decline.”  Meanwhile, “the debt millennials have incurred is a paradox for policymakers: A better educated workforce leads to a more powerful economy, but the rising costs of post-secondary education and inevitable interest rate hikes have created a looming debt trap for borrowers and a potential risk for the taxpayer.”  Meanwhile, next Friday we’ll find out if the Atlanta Fed’s GDPNow forecast is worth its salt.

 

WM: Josh Brown Gets Apocalyptic

 

Global: Academics Argue About War And Peace

Also, Zero Hedge got to use their three favorite words in this headline.

 

USA: BEA Is Looking Into “Residual Seasonality” In Their Data

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grilled cheese truck

Shockingly Sharp

Rising sovereign yields are making some equity investors nervous: “underpinning high share prices are rock bottom interest rates, and once yields climb companies will require stronger earnings growth to support their current valuations…’What has been scary about the last couple of weeks is that rates have been rising without a clear improvement in the economy.’”  Speaking of which, producer prices fell by 0.4% in April vs. an expected rise (duh) of 0.2%.  “Last month, the volatile trade services component, which mostly reflects profit margins at retailers and wholesalers, fell 0.8 percent after slipping 0.2 percent in the prior month.”  ICYMI retail sales weren’t exactly the rate-hike-hero everyone was hoping for: “while April’s payroll employment report put a Fed rate hike back on the table yet again for June, the (weak) retail sales report arguably took it off the table — yet again.  That should have been bullish for bonds.  Instead, the dollar took a dive on the soft-patch sales report.  The weaker dollar lifted the price of precious metals and oil…which also unnerved bonds.”  Speaking of which, a weaker dollar is the most crowded trade among lol no i’m kidding…kind of: “with the dollar expected to languish, some traders sank their money into assets that had been flattened by the dollar’s rally,” e.g. oil, euro, EM, sovereign bonds of Russia that kind of stuff.  “There is an element of reversal,” is something people are saying.  But let’s get back to interest rates: “the US bond yield has been joined at the hip with the German one all year…A 2% bond yield looks attractive for the US 10-year Treasury given the subdued outlook for the Fed’s rate hiking.  The problem is that if the German yield gets there, the US yield will be closer to 3%.  That would make it even more attractive as long as you didn’t buy the bond at 2%.”  Speaking of German yields, “the government bond selloff has been violent indeed, and has had its biggest effect in Europe (see rollercoaster)…the (German) 10-year yield, now around 0.74%, is nearly 15 times higher than its record low, reached on April 20.”  But consider this: “euro-denominated corporate bonds have displayed impressive resilience…the yield spread over government bonds has actually narrowed to 1.05 percentage points from 1.12 points on April 20.”  Some explanations for this might be that 1) the selloff reflects higher growth and inflation expectations, therefore corporates should benefit from a better economy, or 2) they’ll get theirs.  Meanwhile, colleagues at JPMorgan would like you to know about VaR shocks: easy monetary policy has “taken much of the guess work out of interest rates in recent years, causing bond market volatility to collapse.  In that environment, [Value at Risk] encourages traders to take on ever large positions.  Markets are now heavily populated by VaR-sensitive investors: hedge funds, mutual fund managers, dealers and banks.  When volatility ticks up, VaR also prods them to unwind those positions to avoid big losses, causing volatility to spike higher.  These movements are further exaggerated by the decline in bond market liquidity…’This volatility induced position cutting becomes self-reinforcing until yields reach a level that induces the participants of VaR-insensitive investors, such as pension funds, insurance companies or households.’”

 

SMH @WMT

“Wal-Mart Stores is preparing to launch a subscription fast-shipping service similar to Amazon Prime to boost its online business and take on Amazon.com, according to people involved with or briefed about the product.  Codenamed ‘Tahoe,’” which, I’ll stop you right there.  “Tahoe” doesn’t get you anywhere in the illiterate technocracy of today.  At the very least you could’ve spelled it “Taho.”  Anyways, Walmart apparently thinks it will eat Amazon while it dances on the tongue of Jack Ma.

 

Global: Foreign Money Is Pouring Into U.S. Real Estate, And It’s Not Just Houses

 

What: My 2004 Candidate Is Now Pitching Penny Stocks

“‘We’d love it if you joined with us in an investment,’ the silver-haired Clark, 70, says in a promotional video for a company called the Grilled Cheese Truck.”

uber driverÜber Wages Lag The Über Economy

“Today’s great paradox is that we feel the impact of technology everywhere — in our cars, our phones, the supermarket, the doctor’s office — but not in our paychecks…since the beginning of the personal computer revolution three decades ago, the median wage has remained stagnant…Too often, when people think about technology, they only think about the initial invention…Yet most major technologies develop over decades, as large numbers of people learn how to apply, adapt, and improve the initial invention…The problem isn’t that technology has eliminated the need for mid-skill workers overall.  New opportunities are there, but grasping them is difficult…If we meet that challenge, then large numbers of ordinary people will benefit substantially from new technology, just as they have for the past two hundred years.”  Meanwhile, “working for Uber might come with its perks, but it also comes without the benefits and protections many businesses provide for their employees.  That’s unfair and illegal, a Boston labor lawyer is now arguing in court, potentially threatening the business models of the dozens and dozens of popular apps that make up the so-called ‘on-demand economy’…her suit, and others like it, might fundamentally change the calculus used by the venture-capital firms pumping money into these businesses.”  Then again, “states could create new worker designations to fit this burgeoning industry,” both ensuring that “businesses would benefit from an easily scaled labor force,” and workers would benefit from “protections against earning less than the minimum wage.”  Meanwhile, “the U.S. stock market has been a compounding machine since the early-1900s.  As long as people continue to innovate and set out to improve their lives I see no reason why stocks can’t give investors a decent return above the rate of inflation in the future.”

 

Speaking Of Inflation

Eurostat is reporting “no inflation in the 19-member region (alt) in the year from April 2014, up from minus 0.1 per cent in March…The price of Brent Crude has risen over 20 per cent from April 1 to today…helping to lift consumer prices.  Core consumer inflation, which strips out more volatile prices such as those for food and energy goods, remained at a record low of 0.6 per cent.”  Furthermore, the ECB thinks that “longer-term inflation expectations had started to recover after hitting low levels in January.  ‘The decline observed over the previous two years has come to a halt.  These movements — with some differences — were also observed in the United States and the United Kingdom.’”  Meanwhile, Goldman connects the dots between inflation expectations and the equity risk premium: “we find it more challenging to rationalize high PE multiples.  A fundamentally-based argument would need to argue that relative to past rate-hike cycles, some combination of the following three factors would presumably need to hold true: that expected growth is higher, equity risk premia are lower, and/or risk-free discount rates are lower…the latter is the easiest [argument] to make…That said, if term premia are low due to low and falling inflation risk, and if equities hedge inflation risk better than fixed-coupon bonds, then the drop in term premia doesn’t necessarily imply higher equity PE multiples.  The links between bond premia and equity premia are subtle; one needn’t imply the other.”  Meanwhile, “given the amazing strength in the US dollar over the last six months, the lack of momentum in US (or Chinese) economic data and the effects of the oil crash still lingering, one thing virtually no one is predicting is any kind of comeback for the commodities market.”

 

USA: The Country’s Economic Gravity Is Moving West

 

USA: Of Bubbles, Synapses & Slime Molds


Global:
The Belief That We Are Going To Make Fewer Babies Indefinitely Is Behind Secular Stagnation

oliver twistEat Up

“The performance of the US stock market is quite impressive considering that there isn’t much of a spring in the latest batch of economic indicators.  The winter’s ice patch is looking more and more like the spring’s soft patch.”  “It is one of the market’s paradoxes that soft economic growth can be a fine climate for stocks.  As long as the economy is advancing, corporations can increase sales and profits.  But in a soft advance, interest rates stay low, keeping costs down.  The uncertain economy keeps Federal Reserve monetary policy easy, one of the main bulwarks of a bull market…Severe bear markets usually occur when the Fed is raising interest rates sharply to cool off inflation…low inflation and low rates increase the present value of future corporate earnings.”  Meanwhile, the Wall Street Journal says “core inflation readings would be even weaker but for the pace of gains in the BEA’s measure of housing costs, which counts toward about one-fifth of its core price index.  This was up 2.9% from a year earlier in February.  Absent that, core inflation would have been running at just 1%.  Housing counts for an even bigger chunk of the Labor Department’s consumer-price index, which is a big reason why its core measure has been running ahead of the BEA’s…The rental vacancy rate fell to 7% in the fourth quarter from 8.2% a year earlier…the lowest level since 1993.”  Meanwhile, “Japanese life insurers — some of the world’s largest institutional investors — plan to keep pouring money into U.S. debt this year as the list of countries able to meet their thirst for yield shrinks…Even though the roughly 2% current yield on 10-year U.S. Treasurys is a far cry from yields of 5% or better before the global financial crisis, it is still light-years better than the current 0.16% yield for German bunds with the same maturity or the 0.29% yield for 10-year Japanese government bonds…’Considering current yield levels, liquidity, hedging of currency exposure, the U.S. is likely the primary destination.’”  So inflation and rates are low, which means there’s a lot of “stocks are expensive, BUT” going on at the moment: “stocks are expensive but while rates stay low, and earnings avoid a serious collapse, money flows into them.  A strong catalyst — really bad earnings, a bad geopolitical event, or a surprise from the Fed — is needed before the market can jolt out of its steady ascent.”  Speaking of surprises, the “Make my day, Janet Yellen” crowd is eating their last free lunch: “what the market never worried about was whether the statement would include the most dreaded news: a rate hike, and because of that, every meeting was something of a free lunch for the market.  That is the case this week, too.  The Fed’s signals have been very clear: there won’t be a rate hike at the April meeting.  However, this is the last meeting at which that certainly presides.  After this, higher rates are firmly on the table.”

 

China

“There are two main routes through which the slowdown could develop into something much worse…investment could slow sharply…[and] there could be a rise in household savings in response to concerns about falling household wealth, which is what happened during the US housing crash.  Given the bubble-like surge in equity prices, this may seem improbable, but it would become more likely if the equity surge ends in a crash.  The second route, also reminiscent of events in the US in the last decade, would be a financial crash led by stressed loans to the real estate or manufacturing sectors.”  Meanwhile, “Chinese companies are increasingly tapping the equity market for funds to pay down liabilities and invest in growth.  They’ve announced $82 billion of secondary stock offerings in 2015, a figure UBS Group AG predicts will increase to a record $161 billion by December.”  Also, “authorities have pledged to move toward a so-called ‘registration system’ where markets, rather than regulators, determine most aspects of an offering, including pricing and timing.”

 

WM: Consensus Expectations

Also, Why International Diversification Matters.

 

Greece: He Who Shall Not Be Named Shall Not Be In Negotiations

 

What: Socialist Muslim Slash Deflationary Force

potato

Global Prices And Political Boundaries

The “dollar-related drop in import prices is one of the things weighing on U.S. consumer prices, and one of the reasons inflation is running well below the Fed’s 2% target.”  This has led some to believe that the Fed will wait to see a turnaround in the dollar or, perhaps, stable import prices before raising rates.  “That won’t happen right away.  This is because purchases overseas are often contracted in dollars months ahead of time, so much of the dollar’s rally this year has yet to register in import prices.  The dollar’s effect on the prices consumers pay takes longer to show up, as much as a year….So even if recent signs that the dollar is leveling off hold, the pressure that its recent strength is exerting on prices will still very much be in evidence at the start of the summer.”  Meanwhile, “U.S. import prices fell in March as rising petroleum costs were offset by declining prices for other goods…Import prices dropped 0.3 percent last month after a downwardly revised 0.2 percent gain in February.”  Also, “China’s consumer price index maintained a sluggish year-on-year pace of 1.4 per cent in March, the same rate as in February, according to the government’s official figures…The producer price index, often regarded as a leading indicator for consumer prices, has been mired in deflation thanks to sliding domestic demand and chronic overcapacity…Producer prices deflated for a 37th consecutive month in March, falling 4.6 per cent, versus a 4.8 per cent fall in February…’The current bout of goods deflation in China and South Korea is the longest in postwar East Asia outside of Japan in the 1990s.”  Meanwhile, the Treasury Department says “South Korean authorities appear to have intervened in December and January to keep their currency from appreciating…South Korea’s trade surplus with the U.S. totaled $14 billion in the second half of 2014, larger than the $9.6 billion surplus from the same period a year ago.”

 

Great Hope News For All Economies

“When it comes to stocks, America is the big loser this year.  The S&P 500 is up just 1.6 percent through Thursday’s close, making it the worst among major market indexes for 2015…In Europe, the U.K.’s FTSE 100 is up 6 percent, France’s CAC 40 has climbed 22 percent, Germany’s DAX is up 24 percent and Russia’s RTS is up 27 percent.”  James Mackintosh says “these are weird indices which mix companies from across borders traded in different currencies…four of the five biggest contributors to the Stoxx 600’s rise this year have been from outside the eurozone, in Switzerland or Denmark.  Another two of the top 10 contributors are British, Glaxo and BP.  All have been helped by the plunging euro, as they are not traded in euros.”  Meanwhile, “Hong Kong is set to overtake Japan as the world’s third-largest stock market…Japan is poised to drop to No. 4 even as the nation’s shares almost double under Prime Minister Shinzo Abe…’the Japanese market is actually rising on hopes that monetary easing will help us escape deflation.  And if Chinese stocks are rallying on expectations the government will prop up the economy, that’s great news for all economies.’”

 

Hot Potatoes

Goldman Sachs says “passive ETFs aren’t being used passively by buy-and-hold investors.”  “One lingering knock against ETFs is that — in spite of their potential benefits of low cost, tax efficiency and diversification — their widespread use is turning ordinary long-term investors [into] fast-trading, global-macro focused buy-and-sell junkies.”  Furthermore, “the prevalence of ETFs seems to be influencing price moves…Correlations between stocks and sectors [have] been increasing since the 2008 financial crisis.”  Meanwhile, annualized turnover on the New York Stock Exchange “is down to 63% from a high of 110% in 2010;” however, “including trades on all marketplaces, the annual turnover rate in U.S. stocks is running at 307%…And that figure doesn’t include [ETFs], which get flung around like hot potatoes.  According to John Bogle, founder of the Vanguard Group, the 20 largest ETFs were traded last year at an average turnover rate of 1,244%.”

 

WM: 8-10% Average Return Is A Decent Goal That You Won’t Ever Actually See

 

What: Scott Stringer Thinks Scott Stringer May Have Misled Some Folks

children bucket stream

Some People Are Uncomfortable With Living In The Moment Data Dependency

“Yellen took the April meeting off the table for the first rate increase, but insisted that a June liftoff was a very real possibility, and that no June liftoff was also a very real possibility.”  Meanwhile, “twelve of 16 U.S. primary dealers that do business directly with the Fed said on Wednesday they see a rate liftoff in September or later. Just four of those responding to a Reuters poll stuck with June as their forecast…‘It was primarily the downward shift in their outlook on growth and inflation’…Policy makers lowered their median view of U.S. growth for 2015 to 2.3 to 2.7 percent, from an outlook in December of 2.6 to 3.0 percent, while reducing their outlook on core inflation for this year to 1.3 to 1.4 percent, from 1.5 to 1.8 percent three months earlier.”  Meanwhile, David Merkel plots FOMC members’ projections for inflation, fed funds and GDP over time, and expects “the FOMC to continue to err on the side of monetary lenience.”  “Yellen’s response to a question about standard formulas or mechanical rules for monetary policy illustrated that her responses were not intended to be evasive, but rather to emphasize the complexity and uncertainty inherent in the economy, and that simple rules, while useful for thinking about how the theoretical economy functions in the long run, are impractical for conducting monetary policy in the real economy in real time.”  Also, “you cannot understand life and its mysteries as long as you try to grasp it.  Indeed, you cannot grasp it, just as you cannot walk off with a river in a bucket.  If you try to capture running water in a bucket, it is clear that you do not understand it and that you will always be disappointed, for in the bucket the water does not run.”  Meanwhile, it’s Markets 1 Fed 0 you guys.

 

JPN: “When Japan Post Goes Public, People Who Are Not Interested In Equity Markets Will Become Interested In Them”

 

What: “A 3D View Of A Chart That Predicts The Future”

Related: Multi-Informational, Trans-Dimensional Finance Cube

spaceballs ludicrous speed

Prepare For Ludicrous Speed!

“Euro zone consumer prices fell by less than expected in February while unemployment eased in January for the third month in a row.”  Unemployment “fell for the third month in a row to 11.2 percent in January from 11.3 percent in December.”  Consumer prices “fell 0.3 percent year-on-year in February after a 0.6 percent annual drop in the previous month.  Economists polled by Reuters had expected a 0.4 percent price decline.”  As in the United States, headline and core inflation are diverging: “Without the volatile energy and unprocessed food components…prices grew 0.6 percent year-on-year, the same as in January.”  “The further drop in unemployment should be supportive to euro zone consumers and they are benefitting from the boost to their purchasing power coming from deflation.”  Meanwhile, across the pond: “with gasoline prices already rising again, consumers may be suspicious that the price declines won’t last (alt).  ‘If people perceive something as transitory, they are less likely to spend the money’…inflation and growth could be weaker than expected and the Fed could delay raising rates.  If oil prices resume their declines, it could push overall prices down more, creating new worries…’It will be hard for the Fed to start tightening when the headline inflation number is negative.’”  However, despite the uncertainty around inflation and oil prices, “the Fed’s confidence in the US economy is driving them to policy normalization.  The labor market improvements are key — as long as unemployment is falling, confidence in the inflation outlook is rising.”  Also, “the Fed is sending a clear message that the subsequent path of rates is also very uncertain, and they don’t think that uncertainty is being taken seriously by market participants.”  Meanwhile, academics at the Booth School of Business say that the uncertainty around the ‘natural’ rate “argues for more ‘inertial’ monetary policy than implied by standard version of the Taylor rule,” resulting in “a later but steeper normalization path for the funds rate compared with the median ‘dot’ in the FOMC’s Summary of Economic Projections.”

 

Let’s Be Clear: China Is Not Racing To The Bottom

“The People’s Bank of China, the central bank, cut the benchmark one-year lending rate (alt) by 25 basis points to 5.35 per cent and the one-year benchmark deposit rate by the same amount to 2.5 per cent on Saturday night…many Chinese analysts and policy makers have been calling for further monetary easing as growth continues to slide and deflation looms…Last week, central bankers from the eurozone and Japan voiced optimism that their policies of quantitative easing and currency depreciation would be successful in staving off outright deflation.”  This is where comparing monetary policies of China and Europe/Japan gets really interesting.  Bill Gross and others argue that there’s a “contest going on in global financial markets where the ‘home country’ seeks to outdo the competition in a race to the interest rate bottom…an undeclared currency war is what the world is experiencing.”  While this certainly seems to be the case for Europe and Japan, the Chinese are more like currency pacifists: “Given the large foreign debt exposure by Chinese firms and limited development of onshore foreign exchange market, the PBoC may not tolerate a sharp RMB depreciation (more than 5 percent).  Such a large depreciation could lead to huge foreign exchange losses of Chinese firms, potentially destabilizing the fragile banking system.  In addition, a relatively strong currency will also help China rebalance its economy to a services-led economy.”

 

USA: If A Company Can’t Wait To Tell You, Then It’s Probably Good News

 

AAPL: To Wear, Or Not To Wear

“So Apple now wants to pull off something that no company has ever managed before: it wants to reverse a cultural trend that it had created itself.  It wants us to start wearing a watch again.”

 

Global: Bitcoin’s True Value Might Not Be The Currency, But The Engine That Makes It Possible

no deflation in core prices Feb2015real adjusted earnings going up feb 2015

Divergence

Tumbling oil prices have dragged US inflation into negative territory (alt) for the first time since 2009 — but excluding the influence of energy there are signs of steadier price growth.  The consumer price index fell 0.1 per cent on an annual basis in January,” however core inflation “showed an annual gain of 1.6 per cent…unchanged from the prior month.”  Furthermore, “a mix of falling inflation and rising wages last month gave Americans their biggest real raise in more than six years.  Inflation-adjusted hourly earnings jumped a seasonally adjusted 1.2% in January, the largest monthly gain since December 2008.”  Meanwhile, consumer confidence and sentiment indices don’t seem to agree with the pundits about the distress of the middle class.  Here’s the bottom line: “If the extra disposable income [from cheaper gasoline] finds its way into higher discretionary spending it could prove a boost to inflation in the months ahead.”  So…why isn’t the Fed worried about collapsing breakevens (inflation expectations)?  For one thing, these expectations are built from security prices indexed to headline inflation.  But here’s Janet Yellen to explain why she ain’t scared: “We refer to this…as ‘inflation compensation’ rather than ‘inflation expectations’…The risk premium that’s necessary to compensate for inflation, that might especially have fallen if probabilities attached to very high inflation have come down.”  In other words, if the Weimar routine stops convincing people, then the risk premium embedded in inflation-indexed securities should drop.  They’re sticking to this idea in the latest Monetary Policy Report: “information gleaned from 10-year inflation options…suggests that investors may have recently become more concerned about lower inflation outcomes and less concerned about higher inflation outcomes.  This shift could reflect an increase in the investors’ perceived likelihood of low inflation outcomes, but it could also reflect an increased willingness to pay higher premiums for insurance against such outcomes as well as other possible factors.”

 

Today’s Highs Are Tomorrow’s Middle

Stocks might be overbought, but momentum remains on their side.”  Pause.  Breathe.  “Another consolidation is due, but timing is difficult [to predict]…Overbought indicators can stay overbought and the market can continue to grind higher.”  Meanwhile, Cullen Roche says “there’s a strong tendency in the financial markets to live in the extremes…But like most things in life, the best place to be is often somewhere in the middle.  Living on the extremes results in extreme and oftentimes irrational outcomes.”  Furthermore, “there’s great drama to be mined with breathless analysts telling us that the lastest data point from 20 minutes ago is a game-changer…Unfortunately, it’s never really clear what stress points will be crucial the next time, or when.  The next best thing is keeping an eye on a proxy that draws on a broad set of cyclical signals…That’s a yawn if you’re looking for snappy headlines, but it’s the only solution if you’re trying to minimize the potential for surprises in the art/science of business-cycle analysis.”

 

China: Foreign Companies Fleeing China En Masse As Costs, Risks Rise

The story about companies offshoring from China seems to be building an audience…stay tuned.

 

Global: Blackstone Would Rather Be Berkshire

 

WM: 5 Tips For Savvier Consumption Of Financial Media

 

Buffett: Nutrition Tips From A Billionaire Investor

 

What: This ATM Is Ruthless

cat and mouse

Apparently The Fed Had A Meeting Last Month

The Fed released the minutes from their January meeting (alt) yesterday, and so far the interpretation appears to be “lower for longer” thanks to this passage: “Many participants indicated that their assessment of the balance of risks associated with the timing of the beginning of policy normalisation had inclined them toward keeping the federal funds rate at its effective lower bound for a longer time.”  Keep in mind that these minutes are from the way back when; a time when we didn’t know that January was a blowout month for new jobs, that jobless claims would hold steady despite slashed energy capex, that job openings would climb to the highest level since 2001, and that unit labor costs would bounce back from 4Q.  Also, spending too much time analyzing the minutes of a meeting will make you crazy.  That being said, bonds rallied because markets are efficient (alt): “the yield on the benchmark 10-year Treasury note settled at 2.067%, down from 2.141% on Tuesday.”  Mohamed El-Erian isn’t buying the rally: “I wouldn’t push that timetable much beyond June.  And when the Fed does start raising rates…it will do so in a very gradual process.”  Also, here’s something to consider: the Fed is signaling a shift towards core inflation as the most appropriate indicator of inflation.  As you know, core is stripped of energy and food, which makes achieving a 2% inflation target easier when you are in the middle of a massive decline in energy prices.

 

“Grexit” Is More Tom & Jerry Than It Is Game Theory

Europe was getting along nicely yesterday when news broke that “the [ECB] agreed to raise the provision of Emergency Liquidity Assistance (ELA) [available to Greek banks] to 68.3 billion euros.”  A hopeful Greek banker said that “assuming the present outflow trends persist, it is enough to carry us over for another week.”  Okeydoke.  Temporary fix; kinda like a bridge over troubled waters, no?  Then this also happened: “Greece formally requested a six-month extension to its euro zone loan agreement on Thursday, offering major concessions as it raced to avoid running out of cash within weeks, but immediately ran into strong objections from EU paymaster Germany.”  A super cynical German banker said that the extension request was going “in the direction of a bridge financing,” so, y’know, can’t have any of that.  Meanwhile, fund managers surveyed by BAML are more swayed by loose monetary conditions than the cat and mouse shenanigans of Greece.  “Eurozone exposure jumped massively to +56% overweight from +20%.  This is the second highest exposure to Europe in the survey’s history.”  Also, Morgan Stanley doesn’t want to talk game theory: “After four years of persistent growth disappointment, we believe that Europe is on the verge of an upgrade cycle.”  Meanwhile, rumors are rumoring about that Tom the ECB will impose cheese capital controls on Jerry Greece.

 

USA: Observe The Virtuous Cycle: Walmart Edition (Alt)

“Like-for-like sales at the world’s largest retailer rose 1.5 per cent in [4Q 2014]…’These changes will give our US associates the opportunity to earn higher pay and advance in their careers.’”

 

WM: Discipline Is More Valuable Than Insurance (Hedges, Market Timing Etc.)

 

WM: A Bunch Of Interesting Charts

 

JPN: 10-Year Yields In Japan Have Doubled In One Month (Alt)

 

USA: Student Loans Maybe Don’t Have A Huge Impact On Homeownership?

 

WM: Can We Talk About The Financialization Of Lean Hogs For A Minute?

Fed purchases of US Treasury and Agency bonds

Quantitative Tightening?

“At the heart of the challenge facing the Fed is a notion in economics that there is a short-run trade-off between unemployment and inflation…But the estimate of how low unemployment can go is imprecise and moves around depending on what else is happening in the economy…In the absence of hard-and-fast rules, Fed officials are watching wage gains”– you know all this.  The NFIB released more data on small business activity today and “the most positive news from the small business sector continued to be the demand for labor…Hiring might be higher if not for the difficulty in finding skilled workers.  The January survey found 26% of small business owners reported having job openings they cannot fill right now…’The percent of owners reporting higher worker compensation held at 25%, the best reading since late in 2007.’”  Also, the JOLTS survey released this morning shows “US job openings climbed to more than 5m in December…The figures, which eclipsed expectations for a rise to 4.98m, reached its highest level since January 2001…the monthly JOLTS survey is a favourite of Ms Yellen and the strong reading could prompt a relatively hawkish assessment of the labour force.”  Meanwhile, who says you have to raise rates before you sell the bond portfolio?  “A rate hike without draining reserves requires the use of facilities such as RRP, TDF, and others to temporarily drain reserves.  The permanent draining of reserves through letting the bonds runoff would start the process towards a system where a normal supply/demand market could exist for fed funds.”  QE “has added trillions of dollars of deposits to the banking system.  If those deposits were gone the fight for loans would be different…an overnight rate hike wouldn’t slow/tighten the channel of lending as much as a gradual balance sheet reduction.”  Meanwhile, here’s a bunch of graphs on the Fed’s current balance sheet, RRP balances, other central bank assets, etc.

 

No End In Sight

“As for staying power as an oil producer, North Dakota has 11 billion to 14 billion barrels of recoverable oil, according to the state, or 7.4 billion, according to the 2013 U.S. Geological Survey.  ‘That’s enough to keep the state drilling for the next 20 to 25 years, with existing wells expected to continue to produce oil for 45 years.’”  Furthermore, the IEA expects the supply growth of US shale to “slow to a trickle but regain momentum later, bringing its production to 5.2 million barrels per day (bpd) by 2020…The United States will remain the world’s top source of oil supply growth up to 2020.”  Meanwhile, Texas is producing the lion’s share of job cuts so far in the energy industry.

 

China: Slowing More Than Expected? Imports Fell 21% In January

 

USA: Google, Alibaba, Apple And…Warby Parker Who The Hell?

 

EU: Germany Can Smell Your Fear

But not the wine on Varoufakis’ breath.

Also, Greeks maybe like capital controls less than they like putting money in a Greek bank.

 

WM: Apparently There Is More Than One Reason Why Apple Likes Free Money Bonds In Switzerland


WM:
Kid Rock Demonstrates Price Rigidity Denial