Month: July 2018

Americans spending outpaced their income for the 5th month in a row (after massive revisions), and thanks to those revisions, spending is up even greater than we were told previously…

After revisions, spending growth is its highest since Oct 2014…

 

Both spending and income growth MoM printed as expected +0.4% MoM, but May spending was revised from +0.2% MoM to +0.5% MoM…

Real personal spending missed expectations, rising just 0.3% MoM vs expectation sof a 0.4% rise (but May was revised notably higher).

Most interesting is the miss on Core PCE growth, rising 1.9% YoY (below expectations of a 2.0% YoY gain), the same growth as in May…

While we highly doubt this will do anything to shift Powell from his path of “1 hike/quarter until the world implodes”, it has sparked some dollar weakness.

via RSS https://ift.tt/2v2FJ3j Tyler Durden

Authored by Ron Paul via The Ron Paul Institute for Peace & Prosperity,

President Trump’s recent Tweets expressing displeasure with the Federal Reserve’s (minor) interest rate increases led to accusations that President Trump is undermining the Federal Reserve’s independence. But, the critics ignore the fact that Federal Reserve “independence” is one of the great myths of American politics.

When it comes to intimidating the Federal Reserve, President Trump pales in comparison to President Lyndon Johnson. After the Federal Reserve increased interest rates in 1965, President Johnson summoned then-Fed Chairman William McChesney Martin to Johnson’s Texas ranch where Johnson shoved him against the wall. Physically assaulting the Fed chairman is probably a greater threat to Federal Reserve independence than questioning the Fed’s policies on Twitter.

While Johnson is an extreme example, history is full of cases where presidents pressured the Federal Reserve to adopt policies compatible with the presidents’ agendas — and helpful to their reelection campaigns. Presidents have been pressuring the Fed since its creation. President Warren Harding called on the Fed to lower rates. Richard Nixon was caught on tape joking with then-Fed chair Arthur Burns about Fed independence. And Lloyd Bentsen, President Bill Clinton’s first Treasury secretary, bragged about a “gentleman’s agreement” with then-Fed Chairman Alan Greenspan.

President Trump’s call for low interest rates contradicts Trump’s earlier correct criticism of the Fed’s low interest rate policy as harming middle-class Americans. Low rates can harm the middle class, but they also benefit spend-and-borrow politicians and their favorite special interests by lowering the federal government’s borrowing costs. Significant rate increases could make it impossible for the government to service its existing debt, thus making it difficult for President Trump and Congress to continue increasing welfare and warfare spending.

President Trump will have a long-lasting impact on monetary policy. Two of the three sitting members of the Fed’s board were appointed by President Trump. Two more of Trump’s nominees are pending in the Senate. The nomination of economist Marvin Goodfriend may be in jeopardy because Goodfriend advocates “negative interest rates,” which is a Federal Reserve-imposed tax on savings. If Goodfriend is defeated, President Trump can just nominate another candidate. President Trump will also be able to nominate two other board members. Therefore, by the end of his first term, President Trump could appoint six of the Federal Reserve’s seven board members.

The specter of a Federal Reserve Board dominated by Trump appointees should cause some to rethink the wisdom of allowing a secretive central bank to exercise near-monopoly control over monetary policy. Fear of the havoc a Trumpian Fed could cause may even lead some to support the Audit the Fed legislation and the growing movement to allow Americans to “exit” the Federal Reserve System by using alternatives to fiat money, such as cryptocurrencies and gold.

Given the Federal Reserve’s power to help or hinder a president’s economic agenda and reelection prospects, it is no surprise that presidents try to influence Fed policy. But, instead of worrying about protecting the Fed from President Trump, we should all worry about protecting the American people from the Fed. The first step is passing the Audit the Fed bill, which Congress should do before adjourning to hit the campaign trail. This will let the people know the full truth about America’s monetary policy. Auditing, then ending, the Fed is key to permanently draining the welfare-warfare swamp.

via RSS https://ift.tt/2mZl1wU Tyler Durden

Anyone who has invested in Amazon (and held through the numerous subsequent drawdowns) over the past three decades has made a lot of money. But according to Bloomberg, one particular group of investors may have generated one of the greatest returns of all time: Jeff Bezos’ parents.

Bloomberg reports that according to a late 90’s prospectus, in 1995, Jackie and Mike Bezos invested $245,573 into their son’s then brand new e-commerce website: “It was a big gamble”, Mike Bezos, the stepfather of Amazon.com founder Jeff Bezos, said onstage during a 2015 event at the National Constitution Center in Philadelphia.

“I want you to know how risky this is,” the son told his parents, “because I want to come home at dinner for Thanksgiving and I don’t want you to be mad at me.”

If the Bloomberg analysis is correct, Bezos’ parents have no reason to be mad; in fact quite the opposite, because one IPO and three stock splits later, their original stake could be worth almost $30 billion today which would make them wealthier than Microsoft’s co-founder Paul Allen, the 30th-richest person on the Bloomberg Billionaires Index.

While their exact holdings are not publicly tracked, and it is a guessing game how much they own currently, Bloomberg has run several scenarios which conclude that in a “best case” the investment made by mom and pop Bezos would make them the greatest venture capitalist alive right now.

Here’s what we know: between 2001 and 2016, they donated 595,027 shares to the Bezos Family Foundation which focuses on education for young people. The 25,000 shares they gifted in 2016 were worth about $20 million at the time. If they haven’t sold or donated anything else, the pair would own about 16.6 million shares, or 3.4 percent of the firm, making them the second-biggest individual owners after their son.

If that is indeed the extent of their sale, the return on their original investment would be about 12,000,000%, a performance that would make even the earliest bitcoin investors, not to mention venture capitalists, blush:

SoftBank’s $20 million bet on Alibaba has returned about 720,000 percent since 2000, according to calculations by Bloomberg. Sequoia Capital’s WhatsApp investment returned roughly 36,000 percent by the time Facebook Inc. bought the messaging service for $22 billion in 2014.

While overall tightlipped about his holdings, in 2015, Mike Bezos, a Cuban immigrant who also goes by Miguel, made some snarky comments back in Philadelphia: “We were fortunate enough that we have lived overseas and we have saved a few pennies so we were able to be an angel investor. The rest is history.“

He bought 582,528 shares in February 1995, according to the 1997 prospectus. Five months later, Jackie Bezos bought 847,716 shares. The wider Bezos family held this stock through four trusts at the end of 1999, another filing shows. The Jacklyn Gise Bezos 1996 Revocable Trust held 8.9 million shares, followed by the Miguel A. Bezos 1996 Revocable Trust with 4.8 million shares, while the Bezos Family Trust and the Bezos Generation Skipping Trust held 2.9 million and 675,000, respectively.

In a base case, Bloomberg calculates that after applying generic selling patterns and accounting for the disclosed donations, Jackie and Mike Bezos would still control $10 billion of shares. Even if they had unwound all of their Amazon holdings at the lowest possible price, they still would have reaped about $100 million.

The various scenarios are summarized below.

It’s not just Jeff’s parents: his siblings Mark and Christina may also be set for life after making a modest investment back in 1996, when they each bought 30,000 Amazon shares for $10,000 in 1996. If they haven’t sold any of those shares, their stakes would be worth about $640 million apiece.

Making great investments certainly runs in the family, because an early an investor in Google was none other than Jeff Bezos himself, who put $250,000 of his own money into the internet-search startup in 1998, according to the New Yorker. Those shares, valued at about $280 million at the IPO, would be worth more than $8 billion today, just in case Bezos’ $147 billion fortune from his AMZN share holdings wasn’t enough.

In an amusing twist, if Bezos’ parents had listened to investment advisors, their wealth would be far less, as “any self-respecting wealth adviser likely would have pressed the family to diversify their holdings given the “heightened consequences of such extreme individual company exposures,” according to Eduardo Gruener, co-founder of Miami-based multi-family office GFG Capital.”

Of course, this example could well be a case study in survivorship bias:

“Extraordinary returns don’t come around often” said Gruener. “Replace Amazon with nearly any other name in the market and the ending may have turned out as a nightmare.”

 

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It has been another relatively quiet session, as traders remain on the sidelines spooked by the sudden reversal in the growth/value trade following a sharp drop in tech stocks while keeping an eye on yields and currencies in the aftermath of the BOJ’s half-hearted attempt to steepen the JGB yield curve even as the central bank “forward guided” to years of easy policy to come as it slashed inflation expectations for FY19 (1.5% from 1.8%) and FY20 (1.6% from 1.8%). Meanwhile, the Eurozone added even more confusion after it reported that GDP unexpectedly slowed coming below expectations while inflation beat consensus, printing above 2.0% for the first time since 2012.

As a result, markets and futures are largely in the green, if only modestly so.

It all started with the BOJ, which took its time to announce just after 1pm local time that it is introducing forward guidance signaling that interest rates will stay low for an “extended period of time”, even as it tweaked Yield Curve Control parameters, which however were not adjusted in same manner as sources had previously hinted, disappointing markets and leading to a sharp drop in JGB yields.

As discussed earlier, in his best attempt to imitate Draghi, BOJ governor Kuroda left the key interest rates unchanged, saying he sees no need for additional easing for now while announcing policy tweaks, including reducing the amount of bank reserves subject to its negative interest rate and forward guidance for policy rates. The BoJ said the decision on asset purchases was unanimous and decision on YCC was made by 7-2 vote with Kataoka and Harada the dissenters, while it added it will permit upward and downward moves in 10yr yields but will buy JGBs promptly in the event of a rapid increase in yields. Furthermore, the BoJ adjusted its ETF allocation to include more TOPIX inclusion and lowered the balance of reserves for which NIRP is applied.

Kuroda also kept YCC mostly unchanged, reiterating that the BOJ will keep the 10-year yield at about zero percent even as the “tolerance band” of the 10Y around 0% would be doubled from 0.1% to 0.2%. For the market, this was not enough.

In sympathy, treasuries advanced and most European government debt nudged upward, although the JGB driven rally was faded through the European morning with respective curves off the flattest levels, in part after above consensus Eurozone CPI pressured bunds and euribors further.

Meanwhile, concerns about the ongoing tech rout kept equities under pressure, with Europe’s Stoxx 600 Index drifting lower even after BP and Credit Suisse reported positive earnings.

Futures on the S&P 500 and Nasdaq pointed to a slightly higher open before Apple’s results. Meanwhile, the euro climbed on positive inflation data from France and Germany, even as European GDP unexpectedly slowed and missed expectations.

• EU HICP Flash YY Jul 2.1% vs. Exp. 2.0% (Prev. 2.0%)
• EU CPI ex-Food, Energy, Alcohol & Tobacco Flash YY 1.1% vs. Exp. 1.0% (Prev. 0.9%)

Europe’s softer economic data was the latest to confirm that global uncertainty over the threat of a trade war is starting to weigh on sentiment and the economy; ECB President Mario Draghi last week singled out protectionism as a key risk to the region’s otherwise encouraging outlook. Europe’s GDP numbers followed data earlier showing Spain’s economy expanded 0.6 percent in the second quarter, slightly below forecasts. In France, growth also fell short of predictions.

There was more economic weakness, this time from China, whose manufacturing PMI dropped again in July, with slower credit growth this year denting demand and the imposition of the first round of U.S. tariffs taking a toll, and pressuring most commodities lower.

In FX, aside from a sharp move in the Yen as longs unwound positions, it was also relatively quiet: the Bloomberg Dollar Spot Index was little changed, set for its first monthly decline (-0.7%) since March, before the Fed starts its own 2-day policy meeting later Tuesday. The euro rose a third day as inflation accelerated further in July, despite a miss in GDP. Treasuries advanced along with euro-area bonds, while the yen weakened, after the Bank of Japan kept its 10-year yield target unchanged and introduced forward guidance to keep rates very low for an “extended period of time.”

Emerging-market shares slipped, while their currencies were steady even as Turkey’s lira extended losses.

Hungry for more? You won’t have long to wait as the next big monetary policy events this week include decisions from the Federal Reserve and Bank of England. After last week’s whopper of a GDP report, Markets are looking for confirmation of at least two more interest-rate hikes before the end of the year, while their British counterparts are also widely expected to increase borrowing costs, although some wonder if this may be a “one and done” affair.

WTI (-0.5%) and Brent (-0.6%) prices are ebbing lower in early European trade with oil prices set for their biggest monthly loss in 2 years. News flow remains light for the complex while Iranian President Rouhani continues to defend the nation’s “rights” to export oil. Meanwhile, spot gold (-0.2%) prices are relatively uneventful in recent trade while the DXY remains rangebound ahead of a few key risk events this week. Elsewhere, Shanghai rebar steel posted its best month in eight amid output curbs in China tightening supply.

Economic data include personal income and spending. Pfizer, P&G, Apple, and Cheesecake Factory are among companies reporting earnings.

Market Snapshot

• S&P 500 futures up 0.1% to 2,806.75
• STOXX Europe 600 down 0.1% to 390.51
• MXAP down 0.6% to 167.15
• MXAPJ down 0.2% to 541.91
• Nikkei up 0.04% to 22,553.72
• Topix down 0.8% to 1,753.29
• Hang Seng Index down 0.5% to 28,583.01
• Shanghai Composite up 0.3% to 2,876.40
• Sensex down 0.2% to 37,425.19
• Australia S&P/ASX 200 up 0.03% to 6,280.20
• Kospi up 0.08% to 2,295.26
• German 10Y yield fell 1.2 bps to 0.434%
• Euro up 0.2% to $1.1725
• Italian 10Y yield rose 19.6 bps to 2.672%
• Spanish 10Y yield fell 0.9 bps to 1.417%
• Brent futures down 0.3% to $74.78/bbl
• Gold spot down 0.2% to $1,219.15
• U.S. Dollar Index little changed 94.28

Top Overnight News

• Bank of Japan Governor Haruhiko Kuroda pushed through changes to his radical monetary stimulus program as the central bank prepares for a longer struggle to stoke inflation. While keeping unchanged its two major benchmarks — the negative interest rate and 10-year yield target — the BOJ took a number of steps to alleviate the strain on banks and the market distortions stemming from its policy
• A bumper day of euro-area economic releases showed the region’s vital signs remain good, but are slowing:
• Eurozone July CPI Estimate y/y: 2.1% vs 2.0% est (unrounded 2.149%); Core CPI 1.1% vs 1.0% est.
  • While the region’s economic expansion entered a sixth year in the second quarter, growth unexpectedly slowed to just 0.3 percent, the weakest in two years
  • WSJ: Trump has privately agreed to delay a potential shutdown or a fight over border wall funding until after the midterm elections, according to people familiar
• Canada’s bid to take part in senior-level NAFTA talks between the U.S. & Mexico later this week has been rejected, according to people familiar: National Post
• NYT: Trump administration is considering going around Congress and granting a $100b tax cut via tweaking capital gains calculations, according to people familiar
• Inflation accelerated further above the European Central Bank’s goal in July, though that was largely driven by stronger energy prices
• Unemployment in the euro region remained at the lowest since 2008
• Iran’s Revolutionary Guards, in unusually pointed language, called on President Hassan Rouhani to do more to prop up the rial after the currency fell to a historic low this week in anticipation of renewed U.S. sanctions.

Asian equity markets traded mostly subdued after the continued tech sell-off in US where all majors declined and the Nasdaq posted its worst 3-day performance in 4 months, while disappointing Chinese PMI data and tightening concerns heading into the BoJ policy announcement added to the cautiousness. ASX 200 (+0.1%) and Nikkei 225 (-0.1%) were mixed with Australia just about kept afloat amid outperformance in telecoms and gains in commodity-related sectors, while the Japanese benchmark was weighed alongside widespread uncertainty regarding potential BoJ policy tweaks which proved to be less hawkish than some had feared as the central bank maintained its long-term yield target at 0% and provided forward guidance that rates will be maintained at very low levels for an extended period. Elsewhere, Hang Seng (-0.5%) and Shanghai Comp. (+0.3%.) were downbeat after the PBoC skipped repo operations for an 8th consecutive occasion and as participants digested Chinese Official Manufacturing and Non-Manufacturing PMI missed expectations in which the latter fell to its weakest in nearly a year. The Shanghai Comp., however, rebounded into positive territory before the close. Finally, 10yr JGBs initially began on the back-foot as yields continued to gain heading into the BoJ but then recovered after the central bank kept its long-term yield at 0.0% and although it announced more flexibility in allowing yields to move higher and lower, it also signalled to act if there is a rapid increase in yields

Top Asian News

• BOJ to Allow Flexibility in Bond Operations, Adjusts ETF Buying
• China Sovereign Bonds Head for First Monthly Decline in Six
• Coal Goes From Summer Boom to Bust on Ample Supply in China
• Mizuho Profit Rises 36%, Led by Share Sale Gains and Fee Income

European equities are trading with no firm direction (Eurostoxx 50 +0.1%) in the aftermath of a slew of pre-market earnings. Italy’s FTSE MIB outperforms its peers as Leonardo (+8.8%) lifted the index after a guidance upgrade, local banks are also supporting the Italian benchmark. Sector-wise, Energy names are fuelled amid oil giant BP (+0.8%) reporting strong numbers, while Financials are boosted by optimistic earnings from Credit Suisse (+1.2%) in-turn lifting its peers with Deutsche Bank (+2.0%), SocGen (+1.3%) Commerzbank (+0.8%), UBS (+1.0%) all higher in sympathy. Looking ahead, FTSE 100 giant Shire are to report around mid-day, while major auto-producing countries are meeting in Geneva today to discuss US Auto tariffs.

Top European News

• EDF Raises Low End of 2018 Profit Target as Earnings Climb
• Elementis Rethinks $600 Million Deal Amid Investor Revolt
• StanChart’s Surging Costs Hinder Profit Growth for CEO Winters
• Sanofi Narrows Profit Outlook as New Drugs Seen Delivering
• Lufthansa Sees Fare Gains Lifting Profit, Offsetting Fuel Costs

In FX, although the Dollar has benefited from yet another bout of Yuan weakness on fixed and free-floating grounds, ‘strong’ sell signals from end of July portfolio rebalancing models are still weighing overall.  AUD/JPY  Flanking the G10 spectrum into month end, with the Aud boosted by much stronger than expected Aussie building approvals overnight and forming a firmer foothold above 0.7400 vs the Usd, but possibly hampered by hefty option expiry interest between 0.7410-25. Conversely, the Jpy is underperforming after the BoJ policy meeting and more flexible or technical changes to its QE framework rather than any real hawkish shift, not to mention the addition of very dovish rate guidance. Hence, Usd/Jpy is back over 111.00 and testing 111.50+ close to 10 and 21 DMA convergence around 111.47 plus a Fib at 111.51, while Japanese exporters were reportedly on the offer from 111.30-50 for month end. Note, however, Aud/Jpy has rallied through 82.50. CAD/NZD – Also bucking the firmer overall trend and down vs their US peer, albeit not as weak as the Jpy. The Loonie has been undermined by Canada’s exclusion from high level NAFTA talks between the US and Mexico, although off worst levels approaching 1.3100 and back near the middle of a 1.3020-95 range ahead of a raft of data, including May GDP, June PPI and raw materials prices. Meanwhile, the Kiwi is still hovering above the 0.6800 handle, but not helped by a deterioration in NZ business sentiment or activity outlook.

In commodities, WTI (-0.5%) and Brent (-0.6%) prices are ebbing lower in early European trade with oil prices set for their biggest monthly loss in 2 years. News flow remains light for the complex while Iranian President Rouhani continues to defend the nation’s “rights” to export oil. Meanwhile, spot gold (-0.2%) prices are relatively uneventful in recent trade while the DXY remains rangebound ahead of a few key risk events this week. Elsewhere, Shanghai rebar steel posted its best month in eight amid output curbs in China tightening supply.

Looking at the day ahead, we’ll get the June PCE and the Q2 ECI data should be the main focus, while the July Chicago PMI and July consumer confidence data are also slated for release. Along with the Apple numbers, Procter & Gamble, Pfizer, BP and Credit Suisse earnings are also due.

US Event Calendar

• 8:30am: Personal Income, est. 0.4%, prior 0.4%; Personal Spending, est. 0.4%, prior 0.2%
  • PCE Deflator MoM, est. 0.1%, prior 0.2%; PCE Deflator YoY, est. 2.3%, prior 2.3%
  • PCE Core MoM, est. 0.1%, prior 0.2%; PCE Core YoY, est. 2.0%, prior 2.0%
• 8:30am: Employment Cost Index, est. 0.7%, prior 0.8%
• 9am: S&P CoreLogic CS 20-City MoM SA, est. 0.2%, prior 0.2%; CS 20-City YoY NSA, est. 6.4%, prior 6.56%
• 9:45am: Chicago Purchasing Manager, est. 62, prior 64.1
• 10am: Conf. Board Consumer Confidence, est. 126, prior 126.4; Present Situation, prior 161.1; Expectations, prior 103.2

DB’s Craig Nicol concludes the overnight wrap

Only one place to start this morning and that’s with the BoJ, where overnight the central bank has kept its policy rates unchanged as widely expected by a majority vote of 7-2. The statement itself has included only very minor tweaks including a vague reference to allowing upward and downward movement in the 10y JGB yield, as well as the introduction of forward guidance. As expected inflation forecasts have been cut for FY19 (1.5% from 1.8%) and FY20 (1.6% from 1.8%) while the BoJ has also shifted ETF purchases from tracking the Nikkei to the Topix. A reference to reducing the size of financial institutions’ balances at the BoJ subject to negative rates was also introduced.

Governor Kuroda is due to speak at 3.30pm local time (7.30am BST) which should help clarify some of the language in the statement. The main question mark appears to centre around that addition of allowing JGB yields to move “upward and downward to some extent mainly depending on developments in economic activity and prices” but also responding “promptly” to a rapid increase in yields. The forward guidance reference refers to the BoJ’s intention to “maintain the currently extremely low levels of short and long-term interest rates for an extended period of time” so this could also be a talking point.

The early take is that the statement is probably slightly dovish however and that appears to be how markets are interpreting it with 10y and 30y JGB yields down -3.2bps and -4.7bps respectively to 0.059% and 0.775%. The Yen has whipsawed a bit but is back to little changed as we type while the Nikkei pared early losses of around -0.75% and is now up +0.24%. Other markets in Asia are flat to slightly down.

Also having their say this morning are China’s July PMIs which came in slightly softer than expected. The manufacturing PMI was the lowest since February after falling 0.3pts to 51.2 (vs. 51.3 expected) with the new orders and new export orders components both down (the latter below 50 for the second consecutive month). The bigger move was in the non-manufacturing PMI which fell a full point to 54.0 (vs. 54.9 expected), leaving the composite at 53.6 and down 0.8pts from June.

Going into the BoJ this morning markets yesterday were hardly waiting around with a decent rise in bond yields and curves bear steepening certainly the main macro story. Indeed 10y yields across Europe finished broadly +4bps to +6bps higher with Bunds in particular ending +4.2bps higher at 0.444% – the highest yield since June 13th. The 2s10s curve ended +2.8bps wider too while Treasuries, although ending off their yield highs, saw 10y yields (+1.9bps) test last week’s nine-week highs again, although they have rallied all the way back this morning.

The 2s10s curve also nudged back up to around 30bps and 2s30s up to 44bps. It wasn’t much better for US equity markets meanwhile in what was a bit of a copy and paste from Friday’s session. The NASDAQ closed down -1.39% last night for what was the third consecutive daily loss for the index of at least 1% – the first time that has happened since August 2015. The heavyweight FANG names led the way with the NYSE FANG Index (-2.83%) also notching up a third consecutive daily loss – the cumulative three-day decline of -8.95% also the biggest in three years. The market cap of that index has also lost $244bn in those three days – roughly equivalent to the GDP of Egypt. It’s worth noting that Apple results are out after the close tonight so expect the market to be fully tuned in given all the turmoil in the tech sector at the moment. The S&P 500 and DOW also closed down -0.58% and -0.57% respectively yesterday although Banks (+0.43%) did benefit from the yield move.

That backdrop for US equities came despite global growth proxy Caterpillar reporting better than expected results yesterday. As a reminder it was back in Q1 that management spooked markets with that “high water mark” comment during the Q1 earnings call which had markets questioning whether or not we’d seen the peak. However yesterday the company talked about “continued strength in many of our end markets” and also “strong demand” for orders well into  2019. Indeed a deeper look at their results showed that revenues were up across all geographic regions as well as the big three business segments. The company also added that it will be offsetting up to $200m in tariff costs in the second half of this year through raising prices and cutting costs.

In other news, while bonds were well offered yesterday the inflation data in Europe didn’t particularly move the dial. Germany’s flash July CPI reading printed in line at +0.4% mom, helping to keep the annual rate unchanged at +2.1% yoy. Spain however was a little bit on the softer side with the -1.2% mom reading one-tenth below expectations. As a reminder this afternoon we’ll get the June PCE and Q2 employment cost index prints in the US. Consensus for the core PCE reading is +0.1% mom while the ECI is expected to come in at +0.7% qoq. Our US economists also expect a relatively soft +0.1% mom core PCE reading which could push the annual rate down one-tenth to +1.9% yoy. However, our colleagues make the point that these forecasts should be taken with a grain of salt given the BEA’s benchmark revisions.  Recent quarters’ core inflation data were revised upwards, with Q1’s year-on-year rate increasing by about 15bps to
1.75%, potentially signifying a firmer inflation trend.

As for the other data yesterday. In the US, the July Dallas Fed index was above expectations at 32.3 (vs. 31.0 expected) while the prices paid and prices received indices both moderated from last month’s 7-year high. Elsewhere the June pending homes print rose for the first time in three months to an above market print of +0.9% mom (vs. +0.1% expected), but the lack of available homes for sale still contributed to an annual fall of -4.0% yoy on an unadjusted basis. Meanwhile the Euro area’s July economic confidence (112.1 vs. 112.0 expected) and business climate index (1.29 vs. 1.35 expected) were broadly in line, while the final reading for consumer confidence was confirmed at -0.6 and unchanged from June. Back in the UK, June mortgage approvals edged up to a 5-month high of 65.6k (vs. 65.5k expected) while the June consumer credit was also above market at £1.6bn (vs. £1.4bn expected). So fairly solid credit data in the UK.

Aside from that, the only other point to note were some fairly hardline comments from US Commerce Secretary Ross. He noted that it makes more sense to take an “aggressive stance” with China while the US economy is doing well, in part because “there’s more ability for the economy to absorb whatever short-term problems may come”. He used the analogy of going into a diet, where “it’s no fun in the beginning…maybe a bit painful…but at the end of the day, you’re kind of happy with the end result”. In contrast China’s Foreign Minister Wang Yi noted yesterday that “China’s door of dialogue and negotiations remains open, but any dialogue must be based on equality and mutual respect”. Elsewhere on NAFTA, Mr Ross noted that “our most close-to-completion negotiations are with NAFTA, particularly with Mexico” and “there’s a pretty good chance that we could be on a pretty rapid track with the Mexican talks”. That helped the Mexican Peso rally +0.49% versus the dollar yesterday meaning it is now up over +11% since mid-June.

Looking at the day ahead, attention will turn to the aforementioned BoJ press conference which kicks off after we go to print. Datawise, we’ll get the preliminary July CPI prints for France, Italy and the Euro area this morning along with the advance Q2 GDP release for the Euro area. In the US, as noted above June PCE and the Q2 ECI data should be the main focus, while the July Chicago PMI and July consumer confidence data are also slated for release. Along with the Apple numbers, Procter & Gamble, Pfizer, BP and Credit Suisse earnings are also due.

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In the end, BOJ governor Haruhiko Kuroda tried his best to pull off a Mario Draghi – introducing a tightening event while smothering it in “easy” forward guidance – and failed.

While Kuroda was not faced with anything nearly as dramatic as announcing the end of QE as Draghi did last month, the BOJ head still tried having his monetary easing cake while somehow modestly steepening yield curves to give Japanese banks a little extra support now that the BOJ has been forced to admit that its inflation targeting timeframe has been a disaster, and QE will continue indefinitely, or at least until it runs out of bonds to buy. For now, it is unclear if he will succeed, especially since the market’s reaction was not what Kuroda had expected, and for good reason: the “market” knows well that even the smallest gambit to reverse policy would blow up in Kuroda’s face. But that doesn’t mean he won’t try.

As a reminder, here is what happened overnight: as previously leaked to the press, the BOJ took – or at least tried to take – several steps to alleviate the strain on banks and the market distortions stemming from its policy while keeping unchanged its two major benchmarks – negative interest rate and the 10-year yield target of 0%. The central bank added modest flexibility on rates while keeping the 10Y anchored at 10%, it also pulled a page out of the ECB’s playbook and added forward guidance on rates, while making small superficial changes to its ETF buying program.

The initial response was underwhelming, with JGB yields sliding after the announcement was released just minutes after 1pm local time, as the market realized that contrary to the leaks, the BOJ would keep its Yield Curve Control in its current form.

For those who missed our initial report, here are the key highlights from the most anticipated BOJ statement in 2 years:

• Negative interest rate of -0.1 percent maintained, but will apply to fewer reserves to cushion the impact on commercial banks
• Target yield for 10-year bonds remains 0%
• The BOJ added language stating that “the yields may move upward and downward to some extent mainly depending on developments in economic activity and prices.”
• Just like the ECB, the BOJ added forward guidance to its policy rates, with a commitment to keep the current extremely low levels for short- and long-term interest rates for an “extended period of time”
• Overall purchases of exchange-traded funds are kept at 6 trillion yen ($54 billion) but those linked to the Topix will increase to 4.2 trillion yen, from 2.7 trillion yen, further reducing the weighting of the narrower Nikkei 225

Perhaps in an attempt to reverse the market’s initial disappointment, during the press conference that followed a few hours later, Kuroda indicated that the BOJ will tolerate 10-year yields deviating as much as 0.2% from zero, compared with 0.1% now as the decline in JGB trading meant market function has been declining. However, even here Kuroda was afraid to go too far, and said he doesn’t think there is a need to keep expanding the range.

In other words, instead of blowing out as far as 0.1%, the 10Y JGB may now hit as much as 0.2% before the central bank steps in with one of its fixed-rate operations.

Meanwhile, the main reason why Kuroda was unable to indicate tightening is that also today the BOJ sharply cut its inflation forecasts, suggesting it’s preparing for an even lengthier battle to generate 2% price gains, and further widening the gap with central bank peers who are moving away from crisis-era policies. The headline of the BOJ’s statement underscored the goal: “Strengthening the Framework for Continuous Powerful Monetary Easing.”

“The BOJ is now more engaged and prepared to fight a long-run battle against deflation or disinflation,” said Shigeto Nagai, Head of Japan Economics at Oxford Economics.

Meanwhile, “Putting forward guidance in the statement just merely acknowledges what the BOJ has been implementing, and it just means the bank will continue to carry on YCC without changing the framework” said Akio Kato, trader at Mitsubishi UFJ Kokusai Asset Management.

As a result, Japan’s 10-year JGB sank 4 points to 0.062%, the lowest in more than a week…

… while the Japanese yen decreased 0.4 percent to 111.50 per dollar, the weakest in more than a week.

The Topix stock index sank 0.8% to the lowest in a week on the biggest decrease in almost four weeks, dragged lower by banks as hopes of even a modest sustainable steepening in the yield curve proved false.

Perhaps the most important datapoint in the entire announcement was Kuroda’s implicit admission he has failed on the bank’s stated goal of hitting 2% inflation. The central bank now sees core consumer prices rising just 1.1% in the current fiscal year through March, down from 1.3% projected previously. The estimate for fiscal 2019 was cut to 1.5%, from 1.8%, while fiscal 2020 was trimmed to 1.6%, from 1.8%.

“Prices and wages are both rising, but the central bank’s previous forecast that 2 percent inflation would be reached in the 2019 fiscal year has been delayed” Kuroda said, and the BOJ head also admitted what we predicted all the way back in 2012, in why QQE would fail: “Inflation did rise to 1.5% a fast acceleration, but wages didn’t rise, stopping consumption” Kuroda said, and conceded that he “does’t have a calendar for reaching 2% inflation, but believe prices will gradually rise.”

Maybe. Just not in the near term, which is why for all the leaks of rumors tightening, the BOJ just extended its easy policy runway by another 2 years to give inflation one final chance to hit its target.

“They tried their best to avoid the perception of tapering or normalization by introducing the forward guidance,” said Nagai, confirming that the most recent topic of dinner conversation at the Basel Tower was how Kuroda can successfully imitate what Draghi pulled off recently.

“The guidance is vague but gives some assurance that the current easing measures will continue at least into fiscal 2020, after checking the side effects of the planned consumption tax hike.”

Which is great: nobody expected Kuroda to be able to hypnotize the market like Draghi; he does however have a far bigger problem – whether he wants to admit it or not, Draghi is tightening and tapering for one simple reason: the central bank is running out of bonds to buy. And when the downward sloping curve below hits 0, it’s game over.

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Authored by Hans-Werner Sinn via Project Syndicate,

Twenty years after the formal creation of the euro, few can honestly say that the single currency has been a success. After fueling a massive credit bubble in Southern Europe in its first decade, it gave rise to an array of complex monetary-policy and transfer schemes in its second – and more trouble is looming as it enters its third…

In May 1998, irrevocable conversion rates for the currencies that would be merged into the euro were implemented. In a sense, this makes the single currency just over 20 years old. The first decade of its life had the feeling of a party, particularly in Southern Europe; but the second decade brought the inevitable hangover. Now, as we enter the third decade, the prevailing mood seems to be one of increasing political radicalization.

The original party was a cornucopia of cheap credit, which capital markets happily issued to the countries of Southern Europe under the protection of the euro. For a while, these countries finally had enough money to increase public-sector salaries and pensions, as well as spur private consumption and investment.

But the credit flooding into these countries created inflationary bubbles, which burst when the 2008 financial crisis in the United States spread to Europe. As capital markets refused to extend further credit, Southern Europe’s previously halfway-competitive but now overpriced economies soon ran into serious trouble.

The Southern Europeans’ response was to start printing what they could no longer borrow. Aided by the European Central Bank – which loosened its collateral policy for refinancing credits and increased its tolerance for emergency liquidity assistance and credits under the Agreement on Net Financial Assets – they drew hundreds of billions of euros out of the monetary system through so-called Target overdrafts. And from 2010 onward, they were the recipients of EU fiscal rescue packages.

But, because financial markets viewed these rescue packages as insufficient, the ECB, in 2012, issued a promise to cover unlimited member-state government bonds under its “outright monetary transactions” program, turning them into de facto euro bonds. Finally, in 2015, the ECB launched its quantitative-easing program, whereby member states’ central banks bought €2.4 billion ($2.8 billion) worth of securities, including €2 billion of government bonds. Accordingly, the eurozone’s monetary base grew dramatically, from €1.2 trillion to over €3 trillion.

But, rather than using the extra money to lubricate their domestic economies, Southern European countries used it to carry out payment orders to Germany. They forced the Bundesbank to credit the purchase of goods, services, real estate, corporate shares, and even whole companies – or at least to credit the filling of bank accounts in Germany that would be readily available for asset purchase should the risk of a euro breakup arise. The purchases of goods and services are one of the reasons for Germany’s huge export surpluses.

By mid-2018, the net amount of payment orders to Germany through the Target system had risen to €976 billion. As a perpetual overdraft drawn from the Bundesbank, this money was not unlike the International Monetary Fund’s Special Drawing Rights, except that there is much more of it – a sum greater than all of the funds IMF countries are willing to loan to one another. Spain and Italy alone drew down about €400 and €500 billion, respectively.

Despite – or because of – this windfall, Southern European countries’ manufacturing sectors are still a long way from regaining competitiveness. In Portugal, for example, the output of the manufacturing sector is still 14% below what it was in the third quarter of 2007, after the first breakdown of the European interbank market. And for Italy, Greece, and Spain, that figure is 17%, 19%, and 21%, respectively. Meanwhile, youth unemployment is above 20% in Portugal, more than 30% in Spain and Italy, and almost 45% in Greece.

Now that we are entering the euro’s third decade, it is worth noting that Portugal, Spain, and Greece are all governed by radical socialists who have abandoned the concept of fiscal responsibility, which they call “austerity policy.” Worse still, Italy’s establishment parties have all been swept away. The country’s new populist government – comprising the Five Star Movement and Lega Nord – intends to increase the country’s debt substantially to pay for its proposed tax cuts and guaranteed-income scheme; and it might threaten to abandon the euro altogether if the EU refuses to play along.

In view of these facts, even the most committed euro enthusiast cannot honestly say that the single currency has been a success. Europe has quite plainly overextended itself. Unfortunately, the great sociologist Ralf Dahrendorf was right to conclude that, “The currency union is a grave error, a quixotic, reckless, and misguided goal, that will not unite but break up Europe.”

It is hard to see a clear path forward. Some argue for still more debt socialization and risk sharing at the European level. Others warn that this would push Europe into an even deeper quagmire of financial irresponsibility. The attendant capital-market distortion would cause severe economic damage, which Europe can scarcely afford, given its difficult global competitive position vis-à-vis an emerging China and an increasingly aggressive Russia and America. One way or another, the euro’s third decade will decide its fate.

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Italy’s populist Interior Minister and leader of the nationalist League party, Matteo Salvini – who recently became Italy’s most popular politicians – was accused by opposition politicians on Monday of creating a “climate of hate” in Italy following a spate of racist attacks that have coincided with his anti-immigration drive.

In the latest assault, which Reuters reports was “possibly motivated by racism”, a black Italian athlete Daisy Osakue was injured early on Monday when unknown assailants drove alongside her in a street near the northern city of Turin and hurled an egg at her face.

Osakue herself was not quick to pass judgment: “I don’t want to play the sexism or racism card, but people should be able to go out without someone attacking you out of the blue,” said Osakue. “They are just cowards.”

Neither were the local police, who questioned whether she had been victim of racism, saying there had been similar assaults that had targeted white locals.

However, opposition politicians swept aside those concerns and the violence dominated local media: “The attacks against people of different color skin is now an EMERGENCY. This is now obvious, NOBODY can deny it, especially if they sit in government,” former center-left prime minister Matteo Renzi wrote on Twitter. The United Nations predictably also voiced its alarm, saying it was “deeply worried” by the situation.

“We can not tolerate this escalation of indiscriminate violence, which reveals an alarming racial matrix,” said Felipe Camargo, the southern European chief of the U.N. refugee agency.

This attack, and others like it, come at a time when Salvini has launched a crackdown on illegal immigration since entering a coalition government last month, closing Italian ports to migrant rescue boats and urging officials to apply tougher rules on asylum requests.

“Is there a racism emergency in Italy? Don’t be stupid,” Salvini said in a statement on Monday in response to the clamor over Osakue. Turning the tables on his accusers and saying he stood alongside any victim of violence, he added: “Certainly the mass immigration allowed by the left hasn’t helped matters.”

Meanwhile, with Donald Trump better known as Adolf Hitler among the world’s liberal community, Salvini too has been granted a “unique” nickname after a popular Christian magazine comparing him to Satan on its front cover last week. He has also come under fire from human rights groups and factions within the Roman Catholic Church for his uncompromising stance on migration;

And, pouring gasoline on the fire, Salvini tweeted “so many enemies, so much honor,” tweaking a well-known saying of Italy’s World War Two dictator Benito Mussolini on the 135th anniversary of his birth.

According to Reuters, at least eight migrants from various African countries have been shot by air rifles since the start of June in possible racist attacks. In addition, a Roma baby was hit by an air pellet and risks being paralyzed for life. The Italian who fired the gun has denied aiming at the child.

Meanwhile, The U.N. migration agency (OIM) said there had been 11 racist attacks in Italy since mid-June. “(This represents) an extremely worrying trend of violence and racism,” it said.

In typical fashion, the League leader also dismissed concerns over racist attacks in Italy, saying migrants were to blame for a third of all crimes in the country. “This is the only true drama,” which explains his fervent desire to get all of them out of Italy.

Predictably, his comments only exacerbated the left’s anger: “Violence is multiplying everywhere. But he denies it,” said Maurizio Martina, head of the opposition Democratic Party (PD). Unfortunately for the PD, and its plunging popularity in the polls, identity politics no longer is a short-cut to political success. In fact, as Salvini has demonstrated so clearly, it is a shortcut to precisely the opposite.

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