John J. Hardy, FX Consultant
Risk appetite is trying to bounce after yesterday saw the heaviest consolidation in pro-risk trades in almost a month. The market is looking around for any excuse to jump back into the dominant pro-risk trend – is this justified? We’ve got some key event risks up today with forward implications for the USD.
Warning: the following paragraph contains sarcasm
Risk appetite was back from a reasonable consolidation over the last several days, at least partially on the release of JP Morgan’s earnings report this morning. It’s a bit hard to understand the market’s excitement about the company’s report considering the impossibly opaque nature of these megabanks’ balance sheets and even the admitted source of the earnings “beat”: fewer mortgage and credit card defaults mean the company can shift some of its funds away from loss reserves and presto-testo, you’ve got an earnings beat and a new wave of liquidity-enhanced risk-buying and HFT front-running descend on the market.
Here’s the catch: the drop in loss reserves was more than 200% of the increase in “earnings”. And JPM’s revenue dropped 8% for the quarter. So the strategy of not extending any credit to anyone seems to be paying off and JP Morgan’s shares are up sharply in pre-market. The plot could thicken going forward for the mega-banks: now that loss provisions have declined to virtually nil, and once the QE giveaways from the Fed draw to a close at the end of June, it will be interesting to see where these banks can manufacture their earnings. It won’t be from lending money. The real US consumer credit numbers have been moribund for a long time now (not the official one that is reported and is stuffed full of government financed student and other loans – by the way, that’s a great way to build up your younger generation: saddle them up with massive debt for over-priced educations.). This recovery is great, so let’s all just buy the dip. By the way: yes, that is a bit of hostility to the current market mentality the reader can detect…
Risk appetite was back from a reasonable consolidation over the last several days, at least partially on the release of JP Morgan’s earnings report this morning. It’s a bit hard to understand the market’s excitement about the company’s report considering the impossibly opaque nature of these megabanks’ balance sheets and even the admitted source of the earnings “beat”: fewer mortgage and credit card defaults mean the company can shift some of its funds away from loss reserves and presto-testo, you’ve got an earnings beat and a new wave of liquidity-enhanced risk-buying and HFT front-running descend on the market.
Here’s the catch: the drop in loss reserves was more than 200% of the increase in “earnings”. And JPM’s revenue dropped 8% for the quarter. So the strategy of not extending any credit to anyone seems to be paying off and JP Morgan’s shares are up sharply in pre-market. The plot could thicken going forward for the mega-banks: now that loss provisions have declined to virtually nil, and once the QE giveaways from the Fed draw to a close at the end of June, it will be interesting to see where these banks can manufacture their earnings. It won’t be from lending money. The real US consumer credit numbers have been moribund for a long time now (not the official one that is reported and is stuffed full of government financed student and other loans – by the way, that’s a great way to build up your younger generation: saddle them up with massive debt for over-priced educations.). This recovery is great, so let’s all just buy the dip. By the way: yes, that is a bit of hostility to the current market mentality the reader can detect…
Odds and ends
The market is abuzz with the news that the world’s central banks have turned into net gold buyers, according to a central bank poll. This was relatively apparent already from the action in precious metals markets over the last couple of years, one would imagine. On a related note, the US is a giant holder of gold reserves among the world’s nations, and if only the gold price would rise to about $8,000 according to one analyst (not my math!), the USD would be fully gold-backed. Of course, there are some who believe the “gold isn’t there” in the vaults, though I'm no fan of conspiracy theories.
The market is abuzz with the news that the world’s central banks have turned into net gold buyers, according to a central bank poll. This was relatively apparent already from the action in precious metals markets over the last couple of years, one would imagine. On a related note, the US is a giant holder of gold reserves among the world’s nations, and if only the gold price would rise to about $8,000 according to one analyst (not my math!), the USD would be fully gold-backed. Of course, there are some who believe the “gold isn’t there” in the vaults, though I'm no fan of conspiracy theories.
US Retail Sales was about as inline as any data release can be and the “ex Auto and Gas” reading was actually quite positive, considering the +0.3% revision to the Feb. data and the fact that gasoline prices ramped mercilessly in March, suggesting consumers were spending far more overall in the month than in previous months. Of course, when savings are discouraged and your currency is worth less every day, it’s tempting to spend what you’ve got.
Looking ahead
Later today we have two interesting event risks – the first being the results of the 10-year US treasury auction (usually published around 1300 NY time or 1800 GMT). The last two 10-year auctions have been pivotal for US long interest rates. In the week before the Feb 9 auction, 10-year yields rose to a local high of about 3.75%, only to fall to below 3.50% two weeks after the auction. Then yields rose a bit before the March 9 auction to 3.55%, only to fall sharply to below 3.25% within a week subsequently. Since then, yields have ramped higher in the belief that inflation is rampant and currency debasement is a serious problem as Fed policy is behind the curve and we have negative real interest rates. This make hard assets attractive (hello, silver melt-up) and long –term government bonds the least attractive investment. Still, at the last couple of long treasury auctions, foreign demand has been enormous , and yields have backed up to the 3.50% level for the 10-year. Today’s auction will help test how foreign entities view the US treasury market at these yields in light of the developments in other markets we have seen since early March.
Later today we have two interesting event risks – the first being the results of the 10-year US treasury auction (usually published around 1300 NY time or 1800 GMT). The last two 10-year auctions have been pivotal for US long interest rates. In the week before the Feb 9 auction, 10-year yields rose to a local high of about 3.75%, only to fall to below 3.50% two weeks after the auction. Then yields rose a bit before the March 9 auction to 3.55%, only to fall sharply to below 3.25% within a week subsequently. Since then, yields have ramped higher in the belief that inflation is rampant and currency debasement is a serious problem as Fed policy is behind the curve and we have negative real interest rates. This make hard assets attractive (hello, silver melt-up) and long –term government bonds the least attractive investment. Still, at the last couple of long treasury auctions, foreign demand has been enormous , and yields have backed up to the 3.50% level for the 10-year. Today’s auction will help test how foreign entities view the US treasury market at these yields in light of the developments in other markets we have seen since early March.
Also up today we have the US Fed’s Beige Book, where wording not only on the strength of the wording on economic trends, but inflation will be in focus. While some of the Fed Board of Governors can fiddle with their econometric, inflation-suppressing models at the Eccles building in Washington, the Beige book is a survey of real business conditions from all of the regional Fed districts and represents an attempt to survey the real economy and its participants. This will be interesting input as we look toward the next FOMC meeting on April 27, which will finally likely show the first dissenting votes since Hoenig the hawk became a non-voter at the first of the year. Still, whether it will move the doves in the near term is doubtful, considering recent rhetoric from the likes of Dudley, Yellen, Evans and Bernanke himself.
If risk appetite goes on the defensive again, we should focus on the 55-day moving average on the S&P500, which has proven a key litmus test for the direction of risk on several occasions in recent market history.
Also watch for president Obama’s speech on “fiscal discipline” later today, in which he is likely to announce the speaking points for his 2012 budget, which will no doubt include positioning for the 2012 election campaign. The president will argue for an end to the Bush tax cuts for higher earners and the Republicans will never agree. The more interesting part of the debate will center on entitlement spending, because if the two parties can’t agree on taxation, they might have a better chance at looking at the spending side. And entitlement spending, though it is the area most in need of reform if the US is ever to save its currency and balance its budget, has been considered a “hands off” topic. Current Fed revenues only barely cover entitlement spending (health care and social security) All of the rest is debt financed. If the Fed steps away permanently from financing the deficit at the end of June and now that China is spooked on the US debt trajectory – who would continue to finance US profligacy? The implications are enormous and over the next 18 months it is do or die time for the dollar.
Economic Data Highlights
- New Zealand REINZ Housing Price Index rose +0.5% MoM vs. +2.3% in Feb.
- New Zealand Mar. House Sales out at -5.1% YoY vs. -10.5% in Feb.
- Japan Mar. Domestic CGPI out at +0.6% MoM and +2.0% YoY vs. +0.4%/+1.9% expected, respectively and vs. +1.7% YoY in
- Australia Apr. Westpac Consumer Confidence out at 105.3 vs. 104.1 in Mar.
- Germany Mar. Wholesale Price Index out at +1.3% MoM and +10.9% Yy vs. +1.2%/+10.7% expected, respectively and vs. 10.8% YoY in Feb.
- Switzerland Mar. Producer and Import Prices out at +0.4% MoM and +0.4% YoY as expected and vs. +0.5% YoY in Feb.
- UK Mar. Jobless Claims Change out at +0.7k vs. -3.0k expected and -8.5k in Feb.
- UK Feb. Average Weekly Earnings ex Bonus rose 2.2% (3M/YoY) vs. 2.2% expected and vs. +2.3% in Jan.
- EuroZone Feb. Industrial Production out at +0.4% MoM and +7.3% YoY vs. +0.8%/+8.0% expected, respectively and vs. +6.3% YoY in Jan.
- US Mar. Advance Retail Sales out at +0.4% MoM and +0.6% ex Autos and Gas, vs. +0.5%/+0.5% expected, respectively.
Upcoming Economic Calendar Highlights (all times GMT)
- US Feb. Business Inventories (1400)
- Canada BoC Monetary Policy Report (1430)
- US Weekly DoE Crude Oil and Product Inventories (1430)
- Australia RBA’s Stevens to speak in NY (1700)
- US Fed Beige Book Survey (1800)
- EuroZone Bundesbank’s Weber to Speak (2100)
- US Fed’s Bullard to Speak (2100)
- UK BoE’s Posen to Spean in NY (2200)
- New Zealand Mar. Business NZ PMI (2230)
- UK Mar. Nationwide Consumer Confidence (2301)
- Australia Mar. New Motor Vehicle Sales (0130)
- NEw Zealand Mar. Non-resident Bond Holdgins (0300)
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