Month: June 2014

Yesterday we hinted at the one 'uncertainty' that was anything but at record-lows; and it seems Goldman Sachs (who recently opined on what's at stake in the Midterms) agrees that after a period of relative calm, the US political environment looks likely to become more uncertain again. Recent developments have raised the prospect of renewed political tensions this fall. While they suggest the chance of another government shutdown is not high, the political environment has changed enough that the deadlines are likely to create real uncertainty, and an agreement may be reached only at the last minute. Crucially, if Republicans succeed in capturing the majority in the Senate following the November midterm elections, the routine around fiscal deadlines that markets have become accustomed to over the last few years may become more unpredictable (and may spill over into another debt limit debacle).

 

Polarization is worst than ever… among polticians…

 

and the people…

 

Prediction Markets suggest election outcome is a toss-up.

 

Today, online prediction markets show a roughly equal probability of a Republican controlled House and Senate (implied probability: 45%) as a maintaining of the status quo (implied probability: 40%), although these measures have shown significant volatility YTD. At the start of the year the implied probability of status quo was approximately 55% (Rep. House & Senate 37%), while less than two months ago the markets saw a higher likelihood of Republicans taking the Senate and maintaining control of the House (~55%).

 

Via Goldman Sachs,

Political Risks Are Likely to Rise Somewhat This Fall…

Following the government shutdown and debt limit debate in October 2013, the US domestic political environment has not been an important factor for markets so far this year. Policy uncertainty, as measured for example by the Economic Policy Uncertainty Index, is reasonably low, the debt limit was increased earlier this year with little fanfare, and the absence of any meaningful deadlines since then has diverted attention from Washington. However, domestic political tensions seem likely to come back into focus a bit over the next several months.

Some of this has to do with the recent defeat of House Majority Leader Eric Cantor in the Republican primary election held in Virginia on June 10. This was notable because primary losses among incumbents are rare; they are even more uncommon among members of congressional leadership. Following the change in leadership, there has already been a shift in the stance that House Republican leaders are taking on certain items on the policy agenda for the next few months. There are three areas where Congress faces near term deadlines:

Export-Import Bank: The Ex-Im Bank provides roughly $30 billion annually in credit and credit guarantees to facilitate US exports, particularly for aircraft and energy- and industrial-related equipment. The bank’s authority to provide new export financing expires September 30, 2014. Congress typically extends this once every few years, and although House Republican leaders had until recently been supportive of renewing the bank’s authority, the new leadership team has indicated they prefer to let the Ex-Im Bank’s authorization expire. Democrats in both chambers of Congress are broadly supportive of the extension, while Senate Republicans appear to be looking for a middle ground.

 

Highway Bill: The federal highway program is financed out of a trust fund that takes in gasoline taxes, which are used to make payments to state governments for public transportation infrastructure projects. The highway program actually faces two deadlines: first, the program expires September 30 and must be renewed before then. However, Congress will probably need to act even sooner: gasoline taxes have not kept up with spending and the fund is expected to be depleted by August. To avoid disruption through year-end, Congress will need to transfer around $10bn from another source. However, lawmakers have not yet agreed, in either chamber, on how to finance this and time is running short. The Department of Transportation has indicated it may begin to delay payments to states for infrastructure projects if the situation has not been addressed by late July. In similar situations in the past, states have pulled back somewhat on construction spending as a result of the uncertainty, and could do so again if the issue is not resolved soon.

 

Spending Authority/Continuing Resolution: Congress must once again renew “discretionary” spending authority—i.e., spending on government operations, including defense, but excluding entitlement and credit programs—before it expires at the end of the current fiscal year on September 30. The top-line spending level was already negotiated as part of the agreement in late 2013 to partially reverse sequestration, so the debate now hinges mainly on the distribution of that spending and, more importantly, on disagreements on extraneous issues.

While allowing any of these three items to lapse would be somewhat disruptive, the key concern is enactment of a continuing resolution before September 30, to avoid another government shutdown. Until recently, this did not appear to be much of a possibility, but the growing dispute over the Ex-Im bank has raised the risk somewhat. In particular, there is a risk that several of these issues could be rolled together, forcing a single vote on all of them. Our best guess is that Congress will avoid a shutdown, either by allowing a shortterm extension of all three measures, or reaching some other arrangement that at least allows short-term extension of spending authority. That said, there appears to be a good chance that the decision will be left until the last minute in late September, which could lead to some renewed uncertainty ahead of the deadline.

Following the November election, Congress is likely to return for a “lame-duck” session before year end, to wrap up work on a number of deadline-driven items. This may include action in the areas noted above, along with a few other measures such as the extension of mainly corporate tax incentives that expired at the start of 2014. However, we don’t expect any significant policy changes.

…And Could Rise a Bit Further Next Year

The more important test will come in 2015, once the election result has taken hold. Our expectations for major policy changes over the next couple of years have been low because divided government is likely to persist under any of the likely election outcomes. That said, the form of divided government could potentially change.

Most observers do not expect the majority in the House of Representatives to shift, but the Senate appears much more competitive. For example, online prediction markets imply only a 5% or so chance that Democrats will gain the House majority, but slightly better than a 50% chance that Republicans will win the majority in the Senate. With 45 seats currently, Republicans need to win six seats to gain the Senate majority. At the moment, Republican candidates lead by double digits in three seats held by Senate Democrats, while another six Democratic and two Republican seats are essentially even in the polls. Depending on the outcome on November 4, the uncertainty regarding the Senate outcome could last beyond November. Two states with nearly even Senate races — Louisiana and Georgia — must hold a runoff election if no single candidate reaches 50% of the vote in November. Those elections would be held in December 2014 and January 2015 respectively.

The main domestic political risk for markets in 2015 seems likely to be the debt limit once again. Congress suspended the debt limit earlier this year until March 15, 2015. Similar to previous extensions, once the limit is reinstated it will be increased by the amount of debt issued to pay obligations during the suspension. The Treasury will once again use a variety of “extraordinary measures” to extend its borrowing capacity, which should allow operation under the debt limit until at least August and probably October before borrowing authority becomes constrained. If tax receipts are particularly strong, an increase might not be necessary until later in Q4 (Exhibit 2).

Over the last few years, the various fiscal debates that have at times proved disruptive to markets—debt limit deadlines, the government shutdown, sequestration, and the “fiscal cliff”—have all taken place with a Republican House and Democratic Senate. If the status quo prevails following the midterm election, the next debt limit may pose some risk but most market participants are now better able, we think, to anticipate the path to eventual agreement. This usually involves the House passing a measure with mostly Republican votes, the Senate passing a different measure with votes from both parties and the House then passing that bill shortly before the deadline, often with at least as many Democratic votes as Republican ones.

However, if Republicans win control of the Senate, markets will probably need to adjust to a new routine. In a scenario where Republicans hold majorities in both chambers, one possibility would be use of the budget “reconciliation” process to pass a debt limit increase coupled with other Republican priorities. Since only 51 votes are needed to pass legislation under this process, rather than the 60 votes often required in the Senate, this could in theory allow congressional Republicans to present the President with a debt limit increase, forcing him to either sign or veto it. While we have little doubt that the debt limit will be increased as necessary, this would add a new twist to what is already a potentially disruptive issue.

*  *  *

As Goldman concludes, this uncertainty is not priced in…

As the global election cycle begins to slow down… but with the President at the midpoint of his last term and policy uncertainty having abated (to a degree), we believe the market has not focused on what by all accounts looks like a toss-up in terms of Miterm election outcomes with no volatility being priced into the options market. To that end we focus on how a single-party Congress might impact the policy agenda and what needs to happen for that to occur.

via Zero Hedge http://ift.tt/1x2ofgr Tyler Durden

“The Japan Trade is in trouble,” warns BofA’s Macneil Curry (and rightly so after this week’s utter collapse in Japanese data and Abe’s soaring disapproval rating). Over the course of the past week both USDJPY and the Nikkei have broken key technical levels which point to further substantial downside in the weeks ahead.

 

BofAML’s Macneil Curry explains…

Specifically, $/¥ has closed below its 200d average (now 101.71) for the first time since Nov’12, while the Nikkei has closed below 5wk trendline support (now 15,276). In both cases these breaks of support point to new 2014 lows before greater signs of stabilization. However, we must make clear that, despite our negative medium term outlooks, both of these markets remain in long term bull trends. We will look for these long term bull trends to re-emerge around the beginning of Q4, but for now we are BEARISH.

Chart of the week: $/¥ is breaking down

Since early Feb, $/¥ has been caught in a well-defined contracting range. NOW, the closing break of the 200d (101.71) says that the range trade is giving way for a bear trend. The downside is seen to at least 99.21, potentially 97.40

The Nikkei is rolling over

Similar to $/¥, the Nikkei outlook is turning negative. The break of 5wk trendline support (now 15,276) says that further weakness is coming. Minimum downside targets are seen to the multi-month range lows at 13,995, but weakness is more likely to extend to the confluence of support between 13,194/13,107.

*  *  *

And if JPY goes, we all know what happens to risk assets around the world (especially now the PBOC has removed the ‘easy’ carry trade in CNY; and Treasury “fails’ threaten to ‘tighten’ repo markets)

via Zero Hedge http://ift.tt/1mbTPpK Tyler Durden

“Tipping Point?”

 

via Zero Hedge http://ift.tt/1r2z15T Tyler Durden

Prosperity Requires Privacy

Privacy is a prerequisite for a prosperous economy.    Even the White House admits:

People must have confidence that data will travel to its destination without disruption. Assuring the free flow of information, the security and privacy of data, and the integrity of the interconnected networks themselves are all essential to American and global economic prosperity, security, and the promotion of universal rights.

Here are four ways mass surveillance hurts our economy …

1. Creativity – A Prime Driver of Prosperity – Requires Privacy

The Information and Privacy Commissioner of Ontario, Canada – Ann Cavoukian, Ph.D. – noted last month:

Privacy is Essential to … Prosperity and Well-Being

 

• Innovation, creativity and the resultant prosperity of a society requires freedom;

 

• Privacy is the essence of freedom: Without privacy, individual human rights, property rights and civil liberties – the conceptual engines of innovation and creativity, could not exist in a meaningful manner;

 

• Surveillance is the antithesis of privacy: A negative consequence of surveillance is the usurpation of a person’s limited cognitive bandwidth, away from innovation and creativity.

The Financial Post reported in February: “Big Brother culture will have adverse effect on creativity, productivity“.

Christopher Lingle – visiting professor of economics at ESEADE, Universidad Francisco Marroquín – agrees that creativity is a key to economic prosperity.

Edward Snowden said last year:

The success of economies in developed nations relies increasingly on their creative output, and if that success is to continue we must remember that creativity is the product of curiosity, which in turn is the product of privacy.

Silicon Valley is currently one of the largest drivers of the U.S. economy.  Do you think Bill Gates and Steve Jobs could have tinkered so creatively in their garages if the government had been watching everything they do?

Everyone who has every done anything creative knows that you need a private little space to try different things before you’re ready to go public with it.  If your bench model, rough sketch or initial melody is being dissected in real time by an intrusive audience … you’re not going to be very creative.

2. The Free Flow of Information Requires Privacy

Moreover, surveillance hampers the free flow of information as many people begin to watch what they say.  The free flow of information is a core requisite for a fast-moving economy … especially an information economy, as opposed to economies focused on resource-extraction or manufacturing.

As quoted above, the White House states:

Assuring the free flow of information [is] essential to American and global economic prosperity, security, and the promotion of universal rights.

Mass surveillance makes people more reluctant to share information … and thus hurts the economy.

3. Mass Surveillance Hurts Productivity

Top computer and internet experts say that NSA spying breaks the functionality of our computers and of the Internet. It reduces functionality and reduces security by – for example – creating backdoors that malicious hackers can get through.

Remember, American and British spy agencies have intentionally weakened security for many decades. And it’s getting worse and worse. For example, they plan to use automated programs to infect millions of computers.

How much time and productivity have we lost in battling viruses let in because of the spies tinkering? How much have we lost because “their” computer programs conflict with “our” programs?

Microsoft’s general counsel labels government snooping an “advanced persistent threat,” a term generally used to describe teams of hackers that coordinate cyberattacks for foreign governments. It is well-known among IT and security professionals that hacking decreases employee productivity. While they’re usually referring to hacking by private parties, the same is likely true for hacking by government agencies, as well.

And the spy agencies are already collecting millions of webcam images from our computers. THAT’S got to tie up our system resources … so we can’t get our work done as fast.

Moreover, the Snowden documents show that the American and British spy agencies launched attacks to disrupt the computer networks of “hacktivists” and others they don’t like, and tracked supporters of groups such as Wikileaks.

Given that the spy agencies are spying on everyone, capturing millions of screenshots, intercepting laptop shipments, creating fake versions of popular websites to inject malware on people’s computers, launching offensive cyber-warfare operations against folks they don’t like, and that they may view journalism, government criticism or even thinking for one’s self as terrorism – and tend to re-label “dissidents” as “terrorists” – it’s not unreasonable to assume that all of us are being adversely effected to one degree or another by spy agency operations.

Bill Binney – the high-level NSA executive who created the agency’s mass surveillance program for digital information, a 32-year NSA veteran widely regarded as a “legend” within the agency, the senior technical director within the agency, who managed thousands of NSA employees – tells Washington’s Blog:

The other costs involve weakening systems (operating systems/firewalls/encryption). When they do that, this weakens the systems for all to find. Hackers around the world as well as governments too.

 

These costs are hard to count. For example, we hear of hackers getting customer data over and over again. Is that because of what our government has done?

 

Or, how about all the attacks on systems in government? Are these because of weakened systems?

4. Trust and the Rule of Law – Two Main determinants of Prosperity – Undermined By Surveillance

Trust is KEY for a prosperous economy. It’s hard to trust when your government, your internet service provider and your favorite websites are all spying on you.

The destruction of privacy by the NSA directly harms internet companies, Silicon Valley, California … and the entire U.S. economy (Facebook lost 11 millions users as of April mainly due to privacy concerns … and that was before the Snowden revelations).  If people don’t trust the companies to keep their data private, they’ll use foreign companies.

American tech companies – including Verizon, Cisco, IBM and others – are getting hammered for their cooperating with the NSA and lack of privacy protection. The costs to the U.S. economy have been estimated to be in the hundreds of billions of dollars. And see this and this.

And destruction of trust in government and other institutions is destroying our economy.

A top cyber security consultant notes:

If privacy is not protected while performing mass surveillance for national security purposes, then the people’s level of trust in the government decreases.

And as we noted in 2002:

Personal freedom and liberty – and freedom from the arbitrary exercise of government power – are strongly correlated with a healthy economy, but America is descending into tyranny.

 

Authoritarian actions by the government interfere with the free market, and thus harm prosperity.

 

U.S. News and World Report notes:

The Fraser Institute’s latest Economic Freedom of the World Annual Report is out, and the news is not good for the United States. Ranked among the five freest countries in the world from 1975 through 2002, the United States has since dropped to 18th place.

The Cato institute notes:

The United States has plummeted to 18th place in the ranked list, trailing such countries as Estonia, Taiwan, and Qatar.

 

***

 

Actually, the decline began under President George W. Bush. For 20 years the U.S. had consistently ranked as one of the world’s three freest economies, along with Hong Kong and Singapore. By the end of the Bush presidency, we were barely in the top ten.

 

And, as with so many disastrous legacies of the Bush era, Barack Obama took a bad thing and made it worse.

But the American government has shredded the constitution, by … spying on all Americans, and otherwise attacking our freedoms.

 

Indeed, rights won in 1215 – in the Magna Carta – are being repealed.

 

Economic historian Niall Ferguson notes, draconian national security laws are one of the main things undermining the rule of law:

We must pose the familiar question about how far our civil liberties have been eroded by the national security state – a process that in fact dates back almost a hundred years to the outbreak of the First World War and the passage of the 1914 Defence of the Realm Act. Recent debates about the protracted detention of terrorist suspects are in no way new. Somehow it’s always a choice between habeas corpus and hundreds of corpses.

Of course, many of this decades’ national security measures have not been taken to keep us safe in the “post-9/11 world” … indeed, many of them [including spying on Americans] started before 9/11.

 

And America has been in a continuous declared state of national emergency since 9/11, and we are in a literally never-ending state of perpetual war. See this, this, this and this.

 

***

 

So lawlessness infringement of our liberty is destroying our prosperity.

Put another way, lack of privacy kills the ability to creatively criticize bad government policy … and to demand enforcement of the rule of law. Indeed, 5,000 years of history shows that mass surveillance is always carried out to crush dissent.  In other words, mass surveillance is the opposite of rule of law versus rule of men.

Free speech and checks and balances on the power of government officials are two of the main elements of justice in any society. And a strong rule of law is – in turn – the main determinant of GDP growth.

via Zero Hedge http://ift.tt/1iKBik2 George Washington

oFrom IceCap Asset Management

Is Earth Round or Flat

The Global Hunt for Taxes

Back in his day, Christopher Columbus was known as a swashbuckling adventurer willing to risk his life and limb for a boat ride. His thirst for adventure discovered many things, including the fact that the earth is round, and not flat.

Then in 2005, American journalist Robert Friedman declared the opposite in that the world isn’t actually round, but flat as a pancake. His best selling book explored how technology was changing the way people, businesses and countries do business.

Yet today, a mere 9 years later, legions of financial analysts, economists, elected and unelected officials are declaring the world is neither flat nor round, but a bunch of individually, wrapped islands completely separate, independent and unaffected by anything outside of their respective borders.

Call us old-fashioned, but we lie squarely on the side of Christopher Columbus. Yes, the world is indeed round and what goes around, comes around so to speak. Financially speaking, it’s our view that it is impossible today for any major country to function independently from anyone else. Economically, if most countries are doing well then it is highly likely any laggards will be dragged along for the ride too.

Of course, the opposite is also true. If the majority of the big economic countries are not doing well, then it is highly likely the rest will follow them down the garden path

Today, most major countries are struggling. In Europe for example, recent GDP data shows the old world growing at +0.8%. Hardly the acceleration needed to declare victory over the debt crisis. Italy in particular, is really struggling with what now looks like another return to recession, while everyone’s favourite socialist country – France, also disappointed with no growth to speak of at all.

Meanwhile, emerging market countries – the darlings of the pre-2008 crisis continue to grow, but at half the rate of what they regularly achieved previously during their boom years.

There is some good news. The United Kingdom has now officially returned to the same level it was prior to the 2008 crisis. And then there is America – the self proclaimed economic engine of the world.

At first glance, America seems to be firing on all cylinders. Over the last 4 years, the country has averaged +2.4% growth. Measured another way, the American economy increased from $13.8 Trillion to $15.6 Trillion, for a total 4 year gain of $1.8 Trillion.

At second glance, during the exact same time frame the US Federal Reserve printed money totalling $3.3 trillion. While viewing the data in Chart 1 on the next page, we ask you to really think about what you are seeing. Essentially, using a money printing machine to produce $3.3 Trillion only helped to grow the US economy by $1.8 trillion.

Obviously, the Americans didn’t quite get the bang for their buck they were expecting, and this is the point we make – despite trillions in Dollars, Pounds, Yen and Euros of economic stimulus, world economic growth remains a rather big disappointment.

As there are always consequences, the major consequence of massive money printing followed by low economic growth is the one few investment analysts, economists, and big bank investment committees speak about. Now, whether the reason for this silence is a business decision, lack of product to express the view, or even plain ignorance, the fact remains the connection isn’t being made. And worse still, it isn’t being communicated to the majority of investors around the world.

Maybe this lack of communication can be blamed on Christopher Columbus, or Robert Friedman. More likely however, the real target of blame is the current culture imbedded in the financial industry that central bankers do know what they are doing and eventually they will deliver the world from its current economic funk.

In fact, the current state of economic, monetary and fiscal policies has become so severely warped and twisted that for the first time ever, we have economics and business graduates that have spent their entire academic career in a period with 0% interest rates, money printing and subsidized lending.

Think about this for a moment, our future leaders have established their entire economic and monetary belief system during the most bizarre economic moment in the history of the world. To them – this is normal. In many ways, it’s very much the same as the film “The Truman Show” where unknown to him, Jim Carey lives his entire life within a manmade bubble, only to eventually discover his entire belief system was manufactured by the director and producers of the show.

In our opinion, it’s rather quite obvious that the world’s policy makers absolutely know that the economic and financial world isn’t quite up to par. In some ways they should be congratulated and maybe even admired for stoically making many very bold decisions. In other ways, they should read their report card and admit their failures.

Just because you sit in the corner office and make bold decisions, doesn’t mean you are right. The corporate world is famous for firing under performing workers. Those that make bad business decisions rarely find themselves with the opportunity to continue making even more bad business decisions. It’s mind boggling that the world’s central bankers are not treated the same way.

In our mind, it’s become rather obvious that current stimulus plans are not working. Rather than scrap the madness and start over, our world political and economic leaders insist on a rather bizarre analysis that what they are doing is actually correct. But the reason for its ineffectiveness is that they haven’t done enough of it. In other words, yes the central banks and governments of the world have certainly dug themselves into a pretty deep hole. Yet, instead of trying to climb out or shout for help, they ask for more shovels – dig deeper! Chart 2 on the next page shows the amount of money printing that has been initiated since 2008. Considering that the previous 100 years produced no money printing by the world’s major countries, the current amount is rather shocking to say the least.

And this brings us to the consequences of all of this digging by our central banks. Despite massive amounts of stimulus, global growth remains stagnant. The reason for the lacklustre rebound is due to businesses and individuals slowly withdrawing their money from the economy.

Many people have commented that all the world really needs is a little more confidence. Once people and companies become more comfortable they’ll start to spend again. This view is 100% correct – but what’s missing from this analysis is the reason confidence is declining. The reason for the decline is due to the very policy actions of our governments and central banks to help restore confidence. Their actions are actually causing people to have less confidence – talk about irony.

When it comes to money, no magic formula or pixie dust can be applied to make it behave differently than it should. Individuals and companies both live in a world where you can only spend what you make. If you spend more than what you make, you need to borrow to make up the difference. Eventually, you will have reached your borrowing limit and then you have to start repaying your debt, or if you cannot repay – you default on your loans, and whoever lent you the money takes a loss. Simple enough.

Governments also use money and rarely spend less than what it collects in taxes. The difference of course is referred to as a deficit, and the only way money math works is to borrow money to equal the difference.

Yet, this seemingly perpetual access to debt has proven to be an open ticket for most governments to evolve into spendthrift characters of the worst kind. Months, years and decades of deficits and borrowing have literally pushed the natural laws of money and mathematics to the limit. With many countries having reached this limit, the inclination is to keep the money party going – which of course is the reason for 0% interest rates, money printing, bank bailouts and robbing savings from the poor to pay the rich.

While most media outlets only focus on the growth story of our world, we find it interesting that very few ever discuss the debt story. There are many reasons for this. For starters, you can see growth but you cannot see debt. When you see a nice car parked in front of a nice house, full of a nice family who takes nice vacations, most people say “wow, it must be nice to be rich.” Since you cannot see the debt used to become so nice, perhaps you should be saying “wow, they must have a lot of debt.”

As most countries continue to spend more money than they collect in taxes, the amount of debt continues to grow. And, this brings us to the global hunt for taxes. Because our economies are growing slower than our debt levels, the only other way for governments to improve their financial lot is to either reduce spending or to increase taxes.

More in the full note inside (pdf)

via Zero Hedge http://ift.tt/1x1Tt7s Tyler Durden

Submitted by Adam Taggart via Peak Prosperity,

 

via Zero Hedge http://ift.tt/1x1HeaW Tyler Durden

Is it any wonder we are where we are when no lesser esteemed group than The American Bankers Association Education Foundation offers this sound advice for ‘divvying up a dollar’…

 

 

Source: Bits and Pieces

via Zero Hedge http://ift.tt/1vlgi3j Tyler Durden

The low volatility of the capital markets should not be confused with high confidence by investors at the moment.  The outlook for the US economy has been clouded by the unexpectedly large drop in Q1GDP and weak real consumption in April and May.  

 

There is great uncertainty over the world’s second largest economy and the extent that the weakness in house prices the proverbial canary in the coal mine.  At its peak, the housing sector, broadly understood to include construction and furnishing, accounted for nearly a quarter of GDP.  

 

Japan, the world’s third largest economy, is struggling after the retail sales tax increase.  However, official still sound confident–that the direct impact is not as bad as feared and the economy will bounce back quickly.  

 

The euro zone appears to be expanding, but enjoys no momentum.  France, with the second largest economy may be contracting again.   The impact of the ECB’s negative deposit rate continues to be studied by investors and policy makers alike.   Neither the negative deposit rate nor the other rate cuts and promise to expand the central bank’s balance sheet by another 400 bln euros before the end of the year has succeeded in driving the euro lower, yet.  

 

By the end of next week,  there is likely to be greater clarity of these issues and more.  Here is our top ten.  

 

1.  US:  A combination of robust auto sales and another 200k+ increase in non-farm payrolls may go a long way toward easing some creeping pessimism about the state of the economy.  The June auto sales figure will likely confirm the strongest quarter in seven years.  Jobs growth of more than 200k would extend the streak to five months, a feat not seen since the Sept 99-June 00 period, just before the  internet bubble burst.   The Market New International consensus is for a 208k rise; the Bloomberg consensus is for 215k while the Reuters consensus is for 217k increase.  The ISM/PMI readings also give no reason to expect anything but a sharp rebound in the US economy.  The cynics may talk about a contraction in Q2, while the pessimists talk about low-2% growth and the optimists are above 3%.

 

2.  Targeted government efforts and renewed exports appear to have helped the Chinese economy stabilize.  This will likely be confirmed by the June PMI data.    The yuan appears poised to appreciate further in the days ahead after finishing last week at a two-week high.  Money market rates are rising, and there appears to be heightened demand for yuan ahead of quarter-end.  In addition, there is a sense in some quarters that officials will not encourage yuan depreciation ahead of the next round of Strategic Economic Dialogue with the US.  

 

3.  The collapse in Japan’s overall household spending in May (-8.0% year-over-year vs. -2.3% expected after -4.6% in April) warns that the tax may be taking a large toll on consumption than expected.  However, output does not appear to have been hit as hard.  This may be the message from the Tankan survey and May industrial output figures due out in the days ahead.  That said, sentiment among the large manufacturers is expected to have declined, snapping a five quarter advance. 

 

4.  The euro zone highlight will be the ECB meeting.  After significant steps in early June, it is unreasonable to expected anything but a re-articulation of the ECB’s message.  It needs to monitor the impact of the new measures, and the TLTROS scheme is not launched until September.  The ECB stands ready to take additional measures if needed.  Among these measures could be purchasing asset-back securities, but more technical and regulatory work is needed.  As inputs into the ECB’s decision will be the latest PMI prints, M3 and credit expansion (or contraction, as has been the case, into its third year), retail sales and the flash June inflation and unemployment report.  

 

5.  The UK’s Cameron has suffered two stinging defeats.  The first was domestic when his parliament denied his will in Syria (Would other British prime ministers have resigned?).  The second was last week, at the hands of the other EU heads of state (save Hungary) who ceded authority to the 40% of the eligible voters who participated in the EU Parliamentary election in order to rebuke the UK.   If Cameron wanted to strengthen the anti-EU sentiment in the UK, he might not have been able to devise a better strategy.  On the other hand, many officials immediately had “buyers’ remorse” and offered compromising statements (which do not appear to have legal standing, yet).   Nearly everyone agrees in the abstract that there needs to be reform in the EU, but nearly everyone disagrees with the particulars.  

 

6.  The March 2015 short-sterling futures contract has recouped about half of the loss suffered in response to BOE Governor’s volta face at the Mansion House.  The monthly series of PMI reports are expected to suggest the UK economy continues to stabilize at a relatively strong level of activity. The FPC minutes that will be released Tuesday may generate insight into how prepared officials are to scale up their efforts and the market’s nonplus reaction to the initial tweaking of macro-prudential measures.  

 

7.  The Reserve Bank of Australia meets on July 1.  It will not change policy, but it will update its forward guidance.  It will likely further evolve, helping investors realize that officials are somewhat less confident about the transition away from mining.  May retail sales will be reported on July 3 and will likely show the fragility of the consumer, especially following the announcement of tighter fiscal policy. The Australian dollar appears to be trading near its best level of the year on a trade-weighted basis.   The risk that the RBA dials up its rhetoric regarding the currency.  

 

8.  On July 3, the same day that the ECB meets and the US reports the monthly employment data, Sweden’s Riksbank meets.  It is expected to announce a 25 bp rate cut. Demand, reflected in the recent retail sales report and the trade balance, is weaker than expected, and the country is still flirting with deflation.  Consumer prices have declined by 0.2% in the year through May, though the core measure is still up 0.4%.  Governor Ingves has been most reluctant to cut rate rates, but finally has succumbed the weight of logic and the preponderance of evidence.  At his press conference, he is likely to suggest that this is a one-cut.  The ECB’s rate cuts have signaled an end to the euro’s uptrend against the Swedish krona, which carried to its highest level since late 2011.   The euro faces initial resistance in the SEK9.20-SEK9.22  and then SEK9.27-SEK9.30.  

 

9.  Canada appears to be moving in the opposite direction. After a weak start to the year, the Canadian economy has accelerated.  An April print of 0.4%, due Monday, will put it on track for 3% growth in Q2.  Markets are closed on Tuesday for Canada Day, but on Thursday, Canada is likely to report a smaller trade deficit, with some risk of a surplus after the Vancouver Port strike ended. 

 

10.  There are several geopolitical situations coming to a head.  The EU is threatening top levy a new rounds of sanctions against Russia unless it begins cooperating with Organization for Security and Cooperation in Europe (OSCE) and respecting the ceasefire.  Japan’s Prime Minister is likely to affirm a controversial new interpretation of its Constitution that would permit it to come to the military assistance of its allies.    On July 1, the Iranian parliament is expected to formally begin talks that will likely lead to a new government.

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