Monday, 1 August 2011

Macro and Markets update - from SNAFU to FUBAR?

While the happy ending everyone was expected seems to be playing out with the debt ceiling debate, the ISM came out very ugly today, and I was afraid it would. It was a big miss at 50.9 from 55.3 in June ( a print below 50 would equate to recession). The confirmation of a double dip is more and more evident, and the NFP figures next Friday with the US unemployment rate will be key. It was another big miss for the Wall Street economists expecting 54.5 on average. The weakening data in between the two ISM from June and July was ominous. I really don't understand how these economists got it so wrong this time around (estimates were ranging from 51 to 56).

Let's face the facts, the US is in a "stagflationay light" environment. While inflation is clearly not a huge concern as it was in the 70s, the inflationary pressures coming from higher fuel prices and food prices are taking their toll on the US consumers (still 70% of GDP).
Housing is still depressed and corporations in the US, while presenting so far much better earnings than they counterparts in Europe, thanks to a weaker US dollar, are not hiring in the face of all uncertainties and sitting on a pile of cash, sitting idle, for the moment.

Manufacturing from Asia to Europe fell last month, how could it had been different for the US?

Demand has weakened on a global scale.

In the US, the production index fell from 54.5 in June to 52.3. New orders dropped to 49.2, the first contraction since June 2009.
The measure of orders waiting to be filled dropped to 45, the lowest level since April 2009.
A jobless recovery means a sluggish demand (household spending rose at 0.1%).

So what's the driving force behind some solid corporate earnings? Very simple, emerging markets strong growth and the expansion of the middle class in emerging markets. Manufacturers, in Europe and in the US have to rely on overseas demand, and the weak US dollar is helping more US exporters than European exporters.

So what happened today, is yet another session of flight to quality in Europe, while equities got pounced, the 10 year German government bond yield dropped to 2.47%. Two weeks ago roughly, it stood at 2.94%. Swiss Franc against both the US dollar and the Euro reached another record.

EUR/CHF intraday move, 1.14 to 1.10...

USD/JPY as well moving to a new high for JPY against dollar:

Bloomberg chart of the day:
Yep, running for the hills, and by the way 2 year Swiss bonds yields are at 0.17%.
One-Year Chart for Switzerland Govt Bonds 2 Year Note Generic Bid Yield (GSWISS02:IND)

2 year Swiss Yield falling fast from May' top (source Bloomberg).

And VIX index, surging still but not yet at March highs:

European peripherals? Well Greece touched 25% yield on the two year, following the new European plan and there was a furious short tightening squeeze on the 22nd of July, but it looks more and more like a distant memory:

Greek two bonds at 31% again.

And it is only Monday...

Now, back to the bunker.

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