Thursday, 2 June 2011

Sub-par recovery - Macro Update and outlook - Risk off...

Complacency could not last that long.

Sooner or later the markets had to take a close look at the weaker than expected data released recently and the implications.

ADP came yesterday at a very weak 38K, meaning that all economists forecasters had to revised agressively their estimates for Friday's NFP.
Everyone was expecting 175K and we got 38K. This is a major slowdown from the December-April average of above 200K, according to the ADP private employment report.

Everyone expecting a short term sell-off of UST 10 year due to discussions around the debt ceiling and budget debates, earlier this year have been hugely mistaken including myself. Mea culpa.
I posted earlier this year that I was expecting a continued surge in the TBT ETF in my post
"Dumb and Dumber - QE2 and the risks linked to global rising Yields in 2011". I got it badly wrong. When facts change, I have to change my facts (ProShares UltraShort 20+ Year Treasury ETF, NYSE:TBT).
Global bond market returned 0.93% in April and another 1.1% in May. US Treasuries returned 1.46%.
Given the weaker than expected US economy, the FED is in no position to raise rates. That's what you have in a balance sheet recession when you are facing still very strong deflationary forces.

Given Mr Market latest sell-off and risk-off mood, I would expect further tightening in UST. The economic recovery is just too weak.

Last week I indicated the issues still surrounding the US housing market and the implications for bank stocks. I advised last weak to stay clear. US Banks stocks have in fact so far reached their lowest point in 2011.
Bank of America down 4.3% to USD 11.24.
Wells Fargo down 5% to USD 26.84.
JP Morgan fell 3.4% to USD 41.76.
Citgroup down 3.7% to USD 39.65

In addition to the housing drag on the economy in general and for bank stocks in particular, rising US Treasuries isn't going to help them as well. It could further reduce bank profitability, by reducing the income banks receive on loans they make.

S&P/Case-Shiller nationwide home price index for the U.S. fell 4.1% y/y in Q1...a new cycle low:

Falling house prices will affect banks, translating in higher loan losses as collateral values fall and subdued mortgage loan growth. As I said before watch out for rise in loan provisions in future bank earnings report.

So what do we end up with according to the latest data?

We have weaker growth than expected, weaker job creation than expected, weaker housing market than expected and very weak loans to the private sector, private equity and venture capital activity. And consumer confidence is in the dumpster...

David Goldman in his Inner Workings blog is painting the situation it bluntly in his latest post:

"Here’s the String, As in “Pushing on a String”

ISM index for U.S. manufacturing activity fell as well sharply in May from a strong 60.4 to 53.5. Lowest since September 2009. Costs pressure from the rise in commodities? Most likely. Given surge in inflation in China caused by a surge in wages, how long is it going to take to have inflation
exported back to the US and starting to bite corporate margins?

A PMI reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent that it is generally declining.
If PMI falls next month below 50, we will come closer to a double dip. Simple as that:

Time for QE3?

Interesting comments in zerohedge about David Rosenberg's views:
In Preparation Of The Fed's Last Doubling Down: David Rosenberg Believes QE3 Will Be Nothing Short Of "Operation Twist 2"

This week winners:

  • Poland's GDP Grows 4.4% in Q1 2011.

  • Canada's economy accelerated to an annualized growth rate of 3.9% q/q in Q1 2011.

  • Russia's gross domestic product (GDP) has grown 4.1% year-on-year in the first quarter of 2011.

This week losers:

  • Australian Economy Contracts 1.2% in Q1. Biggest contraction in 20 years...

  • India GDP Growth Slows to 7.8%. Slowest pace in five quarters.

  • Japan's Economy Contracts 0.9% in Q4.

  • UK's mortgage approvals, fell to 45K (peak was November 2006 at 129K approvals).

Same story for some of the peripherals.

  • Greece downgraded by Moody's from B1 to Caa1, outlook negative.
According to Markit, Greek 5 year Sovereign CDS is now around 1470 bps and Portugal at 700 bps.

Europe issues are yet to be resolved and the game still being played by European politicians is kicking the issues down the road. Time is running out fast.

Given's very recent price action in the market, it doesn't look like we are going to have a nice and quiet summer. Brace for more trouble ahead. Core solvency issues for Greece have yet to be adressed and politicians are desesperately trying to keep kicking the restructuring can down the road.The macro picture is weaker than expected. Risk-off...

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