The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Greek banks are not the only ones experiencing daily deposit withdrawals. Bankia, the Spanish bank that was half nationalized last week, is reportedly losing deposits and this will likely lead to a full nationalization at some point soon. The Spanish IBEX is at a fresh 9 yr low as also the country’s biggest banks, Banco Santader and BBVA are down another 2%+. Spanish 5 yr CDS is at a new high at 545 bps. The Spanish Finance Minister within the last 15 minutes is saying Bankia is not seeing ‘deposit flight’ and is saying depositors are safer now than they were before due implicitly from its nationalization. Bank runs is the European region’s worst nightmare and if anymore take place of substance, the ECB will have no choice but to step in with something. Spain did sell three debt issues out 3-4 yrs at about the target amount they hoped of 2.4b euros. The euro heavy Dollar index is higher for a record 14th straight day.

In Asia, Japan reported a better than expected Q1 GDP gain of 4.1%.

In the US, individual investor sentiment has gotten pretty bearish as AAII said Bulls fell to 23.6 from 25.4, the lowest since Aug ’10 while Bears rose to 46 from 42.1, the highest since Sept.

Because not much change occurred in the economy between the March and April FOMC meetings, there was not much new in the minutes from the April get together and why the April written statement wasn’t much different than in March. With respect to doing more, “several members indicated that additional monetary policy accommodation could be necessary if the economy recovery lost momentum or the downside risks to the forecast became great enough.” While non voting members attend the meeting, 8 of the 10 voting members are big time doves so this comment shouldn’t be a surprise. What is a surprise and also a shame is there never seems to be a discussion amongst Fed members of asking whether 1)Has Fed policy gone way too far already?, 2)Why hasn’t anything they’ve done worked on a sustainable basis? and 3)maybe Fed policy is an actual impediment to a better economy. The assumption remains in most of their minds that easing is good and the more of it even better to boost economic activity without any discussion of the negative consequences that in my opinion so far outweighs the perceived benefits. I sing with my awful voice to Bernanke, “If you wanna make the world a better place, take a look at yourself, and then make a change.”

“You ain’t a beauty, but hey you’re alright,” for now as I refer to the US$ where the euro heavy $ index is up for a 13th straight day for the 1st time ever. As gold is currently being treated as an anti $ asset, (its an anti ALL fiat currency asset), coincident with the $ rally the RSI in gold is at the lowest level since Sept/Oct ’08. As expected, the Greek election Part 2 will be held on June 17th. We now have another month to debate whether Greece stays or goes and if they go, how messy it will be for both them (not in doubt) and the rest of us (we’ll see). The Greek PSI bond maturing on Feb 24th, 2023 is down again to 14.5 cents on the euro. Italy’s 10 yr yield touched 6% for the 1st time since Jan this morning but backed off and Spanish yields are lower after the Mon-Tues spike. The euro basis swap is trading above 50 bps for the 1st time in 4 weeks but because of $1t of LTRO money, it’s well below the Nov high of 158. Portugal’s Q1 unemployment rate rose to a new euro high for them at 14.9%. In the UK, jobless claims unexpectedly fell. In the US, thanks to a new low in the avg 30 yr mortgage rate, refi apps rose 13% to an 11 week high but purchases fell by 2.4%.

After rising from 19 to 28 thru the winter months and falling to 24 in April, the NAHB home builder survey rose 5 pts to 29 in May, the best since May ’07 but still well below the breakeven of 50. Present conditions rose 5 pts and the Future Outlook was up by 3 pts. Prospective Buyers Traffic gained 5 pts to 23 in all regions except the West which has the greatest number of existing home inventory/foreclosure competition. While cheering the improvement, the NAHB chief economist said the “recovery could be stronger were it not for the significant impediments that the market continues to face with regard to builder and consumer access to credit, inaccurate appraisals, and more recently, rising materials prices.” He also leaves out still high existing home inventory and the secular decline in the homeownership rate. In their earnings conference call, the CEO of Home Depot put the market simply by saying “housing is better, but not that much better.”

The first May industrial number reported, the NY mfr’g survey, at 17.1 was almost twice better than expectations, up from 6.6 in April and vs 20.2 in March. New Orders were up almost 2 pts, Backlogs remained negative but were up about 2 pts and Inventories were higher by 3.5 pts. Employment was about 1 pt and the Avg Workweek rose to 12.1 from 6.0 but after falling from 18.5 in March. Prices Paid fell 8 pts to a 3 month low and Prices Received were down by 7 pts to a 5 month low. The caveat of the report was the 4th month in a row in the 6 month outlook which fell to 29.3 from 43.1, the weakest since Oct ’11. The individual components of the 6 month outlook were sharply lower across the board. An aside, the euro is now down on the day, rolling over as another meeting of Greek party leaders has broken down likely leading to a new election in June where the results will determine whether they stay in the euro or go.

Separately, April CPI was flat m/o/m but up by 2.3% y/o/y. This is down from 2.7% and the slowest pace of gains since Feb ’11 but the 15th straight month above the new Fed target of 2.0%. The core rate was up .2% m/o/m and 2.3% y/o/y (matching the fastest pace since Sept ’08). Owners Equivalent Rent, 24% of CPI, rose .2% for the 9th month in the past 11 as landlords continue to gain pricing power with lower vacancy rates and the secular decline in homeownership. Apparel prices rose by .4%, new vehicle prices by .4% and used cars by 1.5%. Commodity prices, 40% of the index, fell by .2% but was up .2% ex f&f. Bottom line, we hear all the time from the Fed how sanguine inflation is (CPI index though at a new record high) but hourly earnings continue to grow less than inflation and savers in fixed income lose purchasing power everyday.

April Retail Sales rose just .1% but that was in line with estimates. Sales ex auto’s and gasoline were up also .1% but that was below expectations of up .3%. Building materials, which were helped by the nice weather that saw solid gains Dec thru Mar, fell by 1.8% m/o/m. The core rate of sales which takes out auto’s, gasoline and building materials was up .4%, a touch better than the forecast of up .3%. Sales gains were seen for furniture, electronics, supermarkets, drug stores, sporting goods, online retailers and restaurant/bars and fell at Dept stores and clothing specialty stores. Bottom line, after the prior few months of weather helped consumer shopping, April was a give back month

Outside of the Greek stock market, if there is one stock to watch as an indicator of what the market thinks of the chances Greece stays in the euro or not, watch De La Rue. Traded in London, they make physical currency and if Greece leaves the euro, a lot of drachma will have to be created and De La Rue would be the likely maker of it. http://www.delarue.com/ProductsSolutions/BanknoteProduction/. Today, De La Rue hit a 52 week high, up 3.2% on the day.

Asian markets mostly gave a yawn to another attempt by Chinese authorities to stimulate growth with their RRR cut. The Shanghai index in particular traded down by .6% to a 3 1/2 week low and copper is falling to a 3 month low. The main worry this morning though is again Europe with Greece likely headed for another election next month with it basically being an up or down vote on its Euro membership. The growing possibility of Greece saying bye bye has put the entire region into the realm of the unknown in terms of the economic ripple effects. Spanish and Italian bond yields are spiking and the cost of insuring against a Spanish default is now more expensive than for Hungary. The European bank stock index is dropping to a 3 month low and the iTRAXX European financial CDS is wider by another 16 bps. The US$ and Treasuries are again the beneficiary of the stated overseas worries with the DXY index higher for an 11th straight day. With respect to the economic collateral damage to what’s going on overseas on an already lackluster US economy, we’ll see the 1st May industrial numbers this week from the NY and Philly mfr’g regions.

The preliminary UoM confidence number at 77.8 was above expectations of 76, up from 76.4 in April and the highest since Jan ’08. The Current Conditions component led the gain as it rose 4.4 pts while the Outlook fell .6 pts. While a coincident indicator rather than something leading in terms of consumer behavior, it’s likely that the continued drop in gasoline prices had a positive impact as one yr inflation expectations fell to 3.1% from 3.2%, matching the lowest since Dec ’10. AAA said gasoline prices as of yesterday fell another .04 on the week to $3.73, the lowest since late Feb.

The Spanish IBEX is falling 3%+, falling sharply over the past hour after Spanish authorities said they want higher loan loss provisioning against bad debt from the country’s banks, meaning a further shrinking of the banks thru asset sales and more dilution if equity needs to be raised. The IBEX is again testing the lowest level since ’03 as Banco Santander and BBVA are both down about 5%. Bankia is down for a 6th straight day by another 3.5%. In response, the Spanish 10 yr yield is back above 6% and 5 yr CDS is wider by 5 bps to 515 bps.

The toughest sale of the week for the US Treasury, debt going out 30 yrs without inflation protection with a yield barely above 3%, not too much higher than stated inflation, went well. The yield of 3.09% was well below the when issued of 3.11% and the bid to cover of 2.73 was above the previous 12 month avg of 2.64. Also, direct and indirect bidders took the most amount since Dec, leaving dealers with the balance. This auction also comes less than 2 months before Operation Smother the Yield Curve ends. Bottom line, whether its comfort with inflation in the midst of falling commodity prices, concerns with growth or desperation on the part of insurance companies and pension funds, who usually haunt the longer end of the curve, for any yield they can get, the US Treasury is certainly getting a bargain with selling such cheap paper. By selling more longer ended paper over the past year, the US Treasury has lengthened the average maturity of US marketable debt to almost 63 months as of yr end ’11 vs an average of 56 over the last 5 years and 59 months over the past 30 years. They still should be more aggressive in pushing it more years into the future to reduce the rollover risk as notwithstanding all the Fed’s wishes, rates won’t stay low forever.

Spanish and Italian stocks are closing near their highs of the day (up 3.3% and 1.7% respectively) and even the Athens market closed up 4.2%. Also, the Spanish 10 yr yield is back below 6% at 5.98%, down 10 bps on the day after spiking by 24 bps Wednesday. After jumping 14 bps yesterday, the Italian 10 yr yield is in by 8 bps. Also, CDS in both are narrower after spending the morning wider, particularly with Spain after it hit a record high yesterday. The European bank stock index is higher by 2.5% after falling 3.8% in the two prior days. The iTRAXX European financial CDS is in 3 bps at 263 bps after trading at 268 this morning which was a 3 month high. The euro, while still higher vs the US$, remains below 1.30 and the pound is hovering at the highest level since Oct ’08 vs the euro.