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Following October and November’s disturbing declines in Producer Prices, which many misread as an indication that the Fed will delay tapering for a few months, today’s PPI reversed the recent drop, and posted a 0.4% jump for the headline number in line with expectations, following two months of declines and the highest print since June’s 0.6% sequential increase. And while the Foods PPI dropped by 0.6% in December, Energy prices jumped by 1.6% once again the highest monthly increase since June. But it was the core increase of 0.3%, the highest jump since July 2012 that caught everyone’s attention. So is inflation finally seeping back in the production channel? Not really: as the BLS reported, “Nearly half of the December increase is attributable to prices for tobacco products, which climbed 3.6 percent.” So bad inflationary news for smokers. For everyone else (who eats and drives hedonically) the status quo still remains.

Still at a 1.2% increase in headline PPI, compared to expectations of 1.1%, and November’s 0.7%, this was the first beat in annual producer price inflation expectations since June, and means that this data point will not deter the Fed from tapering more as it has warned it will likely continue to do.

Broken down by components:

The breakdown in finished goods PPI:

Leading the December rise in the finished goods index, prices for finished energy goods increased 1.6 percent. Also contributing to the advance, the index for finished goods less foods and energy moved up 0.3 percent. By contrast, prices for finished consumer foods decreased 0.6 percent.

 

Finished energy: Prices for finished energy goods climbed 1.6 percent in December, the largest advance since a 2.5-percent jump in June 2013. Over half of the rise in December can be traced to a 2.2-percent increase in the gasoline index. Higher prices for diesel fuel and home heating oil also were factors in the advance in the finished energy goods index. (See table 2.)

 

Finished core: The index for finished goods less foods and energy moved up 0.3 percent in December, the largest advance since a 0.5-percent rise in July 2012. Nearly half of the December increase is attributable to prices for tobacco products, which climbed 3.6 percent. Higher motor vehicle prices also contributed to the advance in the finished core index.

 

Finished foods: The index for finished consumer foods fell 0.6 percent in December following no change in November. Leading the decrease, prices for fresh and dry vegetables dropped 13.4 percent.

The real question remains: will Japan continue to export its deflation to the world, and the US, and if so is the recent jump just a one-time fluke?

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After 5 months of missed expectations, Empire Fed manufacturing beat expectations by the most since Feb 2013, spiking to the highest since May 2012. Most sub-indices were positive but it is perhaps worth noting that despite all this exuberance, over 70% of companies expected no improvement in employment and over 80% expected no improvement in the average workweek. While inflation is nowehere to be seen, it is interesting that the Empire Fed’s Prices Paid index spiked this month by the most since March 2012. Hope remains that Capex and Tech Spend will pick up as the outlook index rose by the most in 5 months (though remains historically low).

 

 

Charts: Bloomberg

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As equity markets revert to their new normal BTFATH, Japanese-Yen-pinned reality, we thought a gentle reminder of the longer-term state of the real (not financial) economy would prod more than a few into the realization of just how ‘encouraged’ they should be by the nominal high after nominal high that is gloated over day after day…

 

 

(h/t @Not_Jim_Cramer)

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If yesterday it was JPM’s turn to shock and awe everyone with its adoption of FVA and impress with its non-GAAP revenues, today it is the turn of Bank of America to confuse everyone with its traditionally indecipherable earnings release. So here is the punchline. BAC reported revenues of $21.7 billion which beat expectations of $21.14 billion, although more importantly EPS of $0.29 vs expectations of $0.27. So how did BAC generate the better than expected top and bottom line? Simple – the top line beat was driven by the bank’s return to an aggressive extraction of non-income income from loan-loss reserve releases, which in the current quarter rose to $1.246 billion, up from $900 million a year ago. Considering the Bank had non-GAAP pretax income of $3.8 billion, this amount to just about a third of its earnings.

 

This was driven by the bank charging offsome $1.6 billion offset by just $0.3 billion in provisions.

This is what the bank had to say about its loan loss releases:

The provision for credit losses declined $1.9 billion from the fourth quarter of 2012 to $336 million, driven by improved credit quality. Net charge-offs declined significantly to $1.6 billion in the fourth quarter of 2013 from $3.1 billion in the fourth quarter of 2012, with the net charge-off ratio falling to 0.68 percent in the fourth quarter of 2013 from 1.40 percent in the year-ago quarter. The provision for credit losses in the fourth quarter of 2013 included a $1.2 billion reduction in the allowance for credit losses, compared to a $900 million reduction in the allowance in the fourth quarter of 2012.

Additionally, the company paid only $406 million in reported taxes on pretax income of $3.845 billion, or a 10.6% effective tax rate. How does this compare to the historic average of 25%? Obviously, it’s much lower. But all is fair in sellside analyst love and making up non-GAAP numbers.

And finally, let’s not forget the elephant in the room: litigation reserves: at $2.3 billion this was the biggest one-time item in recent years.

Ok, so BAC would have missed wildly if it hadn’t dug into its bag of usual accounting tricks. But what about the organic business? Well, since banks traditionally make money not as hedge funds but as lenders, here is the bottom line: in Q4, just like with Wells, mortgage origination crumbled by a whopping 49%! This led to a $1.1 billion loss in the CRES group, a drop of $2.6 billion compared to a year ago.

As for how the bank’s trading operation fare this quarter, the answer : flat to down.

Here is what BAC had to say:

Net income of $0.2B

• Excluding DVA and U.K. tax charge, net income of $0.3B declined from both comparative periods as revenue improvement was offset by litigation expense

Excluding DVA, sales and trading revenue of $3.0B increased $483MM, or 19%, from 4Q12 and was consistent with 3Q13

• FICC revenue increased $292MM, or 16%, from 4Q12 and $47MM, or 2%, from 3Q13 as stronger results in credit and mortgage products offset weakness in rates and commodities
• Equities revenue increased $191MM, or 27%, from 4Q12 due to market share gains, higher market volumes and increased client financing balances, but declined 7% from strong 3Q13 results

Bottom line: virtually no change from a year ago.

Also of note. VaR declined from 100 a year ago to just 74.

Finally, as for how the bank sees its future, well: here are the bank’s employees at different points in time. The trend is clear.

Full presentation below:

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Today’s AM fix was USD 1,238.00, EUR 908.56 and GBP 753.91 per ounce.
Yesterday’s AM fix was USD 1,248.75, EUR 913.10 and GBP 760.97 per ounce.

Gold fell $11.40 or 0.91% yesterday, closing at $1,243.20/oz. Silver slipped $0.26 or 1.27% closing at $20.19/oz. Platinum rose to a two-month high of $1,446.75 yesterday on concern that industrial unrest at the world’s three biggest platinum producers will weigh on output in South Africa, the biggest producing country.

Gold retreated for a second session today. A rally in stock markets prompted by stronger than expected U.S. retail sales data may have led to profit taking.

HOW TO STORE GOLD BULLION – THE SEVEN KEY MUST HAVES – Download Here

Platinum in U.S. Dollars – (Monthly – 2004 to Today)
 
China has granted licenses to import gold to two non Chinese banks for the first time, according to Reuters. The move to take advantage of the largest gold consumers is gathering pace. China’s gold imports more than doubled last year to over 1,000 tonnes – ousting India as the biggest buyer – as demand soared to unprecedented levels.

 

The Baltic Dry Index,  a measure of commodity-shipping rates, has collapsed 39% in just the nine trading days of 2014. It has fallen from 2277 at the end of December 2013 to 1370 today. This key indicator of global economic health is a warning signal for the global economy in 2014.

Marc Faber told Bloomberg TV in an interview that, “I prefer physical gold and silver, platinum to bitcoin. How do you value a bitcoin? I can value gold to some extent and compare say gold to the quantity of money that is floating around the world, to the wealth increase, and to the monetary base increase, to the credit increase, and so forth and so on, and to the production costs. So I have an idea of where gold should be.”

A diversified precious metals portfolio with allocations to gold, silver, platinum and palladium remains prudent.

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Day two of the bounce from the biggest market drop in months is here, driven once again by weak carry currencies, with the USDJPY creeping up as high as 104.50 overnight before retracing some of the gains, and of course, the virtually non-existent volume. Whatever the reason don’t look now but market all time highs are just around the corner, and the Nasdaq is back to 14 year highs. Stocks traded higher since the get-go in Europe, with financials leading the move higher following reports that European banks will not be required in upcoming stress tests to adjust their sovereign debt holdings to maturity to reflect current values. As a result, peripheral bond yield spreads tightened, also benefiting from good demand for 5y EFSF syndication, where price guidance tightened to MS+7bps from initial MS+9bps. Also of note, Burberry shares in London gained over 6% and advanced to its highest level since July, after the company posted better than expected sales data. Nevertheless, the FTSE-100 index underperformed its peers, with several large cap stocks trading ex-dividend today.

Gold falls for a second day. Spanish bonds advance, while Bunds snap a three-day gain ahead of a EU5b debt sale. Portugese bonds rise, as the govt. sells 12-month bills at the lowest yield since 2009. The dollar rises off a two-week low against the euro.

Looking elsewhere, despite the risk on sentiment, USD index remained supported by hawkish commentary by Fed members, as well as the surge higher by USD/JPY overnight which benefited from a positive close by the Nikkei 225 index which posted its biggest one-day gain in four months. Going forward, market participants will get to digest the release of the latest Empire Manufacturing report, PPI and DoE data, as well as earnings by Bank of America.

• S&P 500 futures up 0.2% to 1836.7
• Stoxx 600 up 0.6% to 333.2
• US 10Yr yield down 0bps to 2.87%
• German 10Yr yield up 1bps to 1.82%
• MSCI Asia Pacific up 0.6% to 139.5
• Gold spot down 0.5% to $1239.3/oz

US Event Calendar

• 7:00am: MBA Mortgage Applications, Jan. 10 (prior 2.6%)
• 8:30am: Empire Manufacturing, Jan., est. 3.5 (prior 0.98)
• 8:30am: PPI m/m, Dec., est. 0.4%  (prior -0.1%); PPI Ex Food and Energy m/m, Dec., est. 0.1% (prior 0.1%); PPI y/y, Dec., est. 1.1% (prior 0.7%); PPI Ex Food and Energy y/y, Dec., est. 1.3% (prior 1.3%) Central Banks
• 9:15am: BoE’s Carney speaks in London
• 12:50pm: Fed’s Evans speaks in Coralville, Iowa
• 2:00pm: Fed releases Beige Book
• 5:45pm: Fed’s Lockhart speaks in Atlanta

Overnight news bulletin from Bloomberg and RanSquawk

• Stocks traded higher since the get-go in Europe, with financials
  leading the move higher following reports that European banks will not
  be required in upcoming stress tests to adjust their sovereign debt
  holdings to maturity to reflect current values.
• World Bank lowered China 2014 and 2015 growth forecasts, with China 2014 growth forecast cut to 7.7% from 8.0% forecast in June.
• Treasuries steady, 10Y 2.871% after stronger than forecast U.S. Retail Sales yesterday pushed yield up from lowest since early December.
• Germany’s GDP probably slowed in 4Q, increasing about a quarter of a percent compared with 0.3% in 3Q, according to the Federal Statistics Office
• EU lawmakers clinched a deal to toughen the bloc’s financial-market rulebook, backing sweeping measures that will put the brakes on high-frequency trading and curb speculation in commodity derivatives
• China’s broadest measure of new credit fell in December while money-supply growth and new yuan loans trailed estimates amid a cash crunch and government efforts to curb speculative lending
• Senators retreated to their partisan corners after the chamber failed to advance a Democratic plan to restore emergency jobless benefits that expired Dec. 28.
• The Obama administration said it would ramp up Obamacare outreach in 25 cities to lure younger people to the program after a report showed about 70 percent of the initial customers are 35 years of age or older
• Requiring the NSA to get a warrant each time it wants customer records from phone companies won’t hinder terrorism probes, members of a White House advisory panel said days before Obama plans to announce changes to spy programs
• Sovereign yields higher; EU peripheral spreads narrow. Asian and European equity markets gain; U.S. equity-index futures higher. WTI crude and copper higher, gold falls

Global

The World Bank raised its world growth forecast for 2014 and 2015, raised Eurozone 2014 GDP to 1.1% from 0.9%, increased Japan 2014 GDP growth figure to 1.4% from 1.2%, but lowered China 2014 and 2015 growth forecasts with China 2014 growth forecast cut to 7.7% from 8.0% forecast in June. (BBG/TTN)

Asian Headlines

Credit Suisse believes the BOJ needs to stimulate sooner rather than later with easing on the cards in Feb or Mar meetings. (CS)

Chinese New Yuan Loans (Dec) M/M 482.5bln vs. Exp. 570.0bln (Prev. 624.6bln) (BBG)

Foreign Reserves (USD)(Dec) M/M 3280.0bln (Prev. 3660.0bln, Rev. 3662.7bln)

EU & UK Headlines

ECB said in a letter to EU lawmakers it is not foreseen that held-to-maturity sovereign debt portfolios will be marked-to-market in European bank stress tests. (BBG/RTRS)

Peripheral bond yield spreads are seen tighter this morning in Europe, with EFSF attracting solid demand for its 5y syndication, where books are said to be around EUR 12bln.

Germany sells EUR 4.104bln in 1.00% 2019 Bobl (new), b/c 1.7 (Prev. 1.6) and avg. yield 0.9% (Prev. 0.68%), retention 17.9% (Prev. 17.8%). (BBG/RTRS)

Eurozone Trade Balance SA (Nov) M/M 16.0bln vs. Exp. 14.8bln (Prev. 14.5bln, Rev. to 14.3bln)

Eurozone Trade Balance NSA (Nov) M/M 17.1bln vs. Exp. 16.5bln (Prev. 17.2bln, Rev. to 16.8bln)

US Headlines

US House of Representatives passed the bill funding US government through January 18th. US Senate Majority Leader Reid said the omnibus bill vote will probably be on Friday. (BBG)

Equities

Financials outperformed in Europe, as credit spreads tightened following reports that European banks will not be required in upcoming stress tests to adjust their sovereign debt portfolios they hold to maturity to reflect current market values. As a result, the likes of Commerzbank, Deutsche Bank and other major EU based financials traded with gains of over 2%. At the same time, Spanish giant Santander traded ex-dividend and as a result underperformed broader sector. Also of note, the FTSE-100 index underperformed its peers, with several large cap stocks trading ex-dividend today.

FX

In spite of the broad based risk on sentiment, USD index remained supported by yet another grind higher by USD/JPY overnight after the Nikkei 225 index posted its biggest one-day gain in four months, as well as hawkish Fed commentary from the night before. At the same time, firmer USD, together with World Bank lowering its China 2014 and 2015 growth forecasts resulted in broad based pressure on AUD, with the pair falling below its 21DMA in the process.

Commodities

China 2014 oil demand to rise about 4% to 518mln Mt and net crude imports to increase 7.1% to 298mln Mt in 2014, according to CNPC data. Also of note, Brent crude may drop to USD 100/bbl to USD 108/bbl this year and WTI oil may rise to average USD 97/bbl to USD 105/bbl, according to CNPC forecasts. (BBG)

No Libyan crude is been pumped to ports outside state control as all fields are under regular army control. (Libya News Agency)

US API Crude Oil Inventories (Jan 10) W/W -4140k vs. Prev. -7310k
– Cushing Crude Inventory (Jan 10) W/W 152k vs. Prev.1190k
– Gasoline Inventories (Jan 10) W/W 5400k vs. Prev. 5580k
– Distillate Inventory (Jan 10) W/W -1700k vs. Prev. 5170k

Indian gold demand this month has halved from a year ago despite the fall in prices and expectations of better purchases in the wedding season as consumers are being cautious and younger people prefer to spend on fancy gadgets rather than the precious metal. (indiatimes)

US Mint cut silver-coin supply to 500,000-600,000 for next week, but said that allocation is to increase in following week. The US Mint also state that silver-coin sales today were 191,000 and that 203,500 silver-coins remain this week. (BBG)

* * *

Deutsche’s Jim Reid concludes the overnight event recap

Yesterday was indeed a stronger day (S&P 500 +1.08%) seemingly on better than expected retail sales data (0.2% vs 0.1%) although the negative revisions (-0.1ppt in October and -0.3ppt in November) could allow this report to be interpreted as slightly weaker net net. The fact that the most recent month was stronger seemed to be the dominant factor for investors though supported by the fact that 10yr USTs rose 4.5bps. Elsewhere the November US business inventory data showed a +0.4% gain (0.3% consensus) after an upwardly revised reading of +0.8% in October. But DB economists point out that business sales surged by +0.8% in November, so the net effect was to keep the business inventories to sales ratio at 1.29 for the seventh consecutive month.

A couple of Fed hawks in Plosser and Fisher were on the newswires, the former supporting the Fed’s gradual windup of QE in 2014 and Fisher arguing for a more aggressive end. In one of the more colourful speeches I’ve ever read from a Fed representative, Fisher made an analogy that the market had “beer goggles” from QE and was prone to a correction. Fisher who is a voter this year, said he planned to argue for a faster exit to QE and will vote accordingly. It was interesting to see that equity markets brushed off the comments from Plosser and Fisher (both voters this year), while Monday’s comments from Lockhart (also supporting a gradual 2014 taper) had a larger impact.

Taking a quick look at overnight markets, Asian equities have bounced back from yesterday’s weakness to post some solid gains on the day. The Nikkei (+2.1%) has managed to pare back most of yesterday’s 500 pt fall helped by the dollar/yen which is now firmly back above 104. Indeed, dollar strength is evident across the board (dollar index +0.25%) at the expense of EURUSD (-0.34%) and AUDUSD (-0.6%). In China, the latest money supply data was slower than expected and showed that aggregate financing was 1.23 trillion yuan ($204 billion) in December compared with 1.63 trillion yuan a year earlier. Bloomberg notes that the second half of 2013 saw a record decline in new credit. The Shanghai Composite (-0.6%) is lagging other bourses today and copper futures are down 0.8%. On a related note, we should highlight that the Baltic Dry freight index has started the year with nine straight declines, totalling a 36% decline in the YTD.

Yesterday also saw the release of inflation data in the UK, France and Italy. In France (0.8% s 0.8% previous) and Italy (0.7% vs 0.7% previous), inflation remained at or very close to post-financial crisis lows. The UK print was interesting. After spending 48 consecutive months above the Bank of England’s 2.0% target, UK inflation finally returned back to 2.0%, which was slightly below consensus estimates of 2.1%. DB’s UK economist George Buckley points out that UK inflation is still above all other G7 economies but he highlights at least seven important factors that could well send inflation lower over the coming year. Amongst these reasons is that fact that unit wage costs were running at a rate of just 1.2% yoy in Q3 last year and may well have posted an outright decline in Q4 relative to a year earlier. Also, the BRC just last week reported shop price deflation of 0.8% yoy – the weakest print since the series began. In addition, the continuation of slow rates of upstream price inflation (also published yesterday) should retain the downward pressure on headline inflation. In terms of FX, the sterling’s appreciation is likely to be an important source of disinflation going  forward.

The US bank earnings season got off to a solid start backed by the earnings beats from JP Morgan and Wells Fargo. In a quarter marred by a number of one-offs, JPM recorded some impressive growth in its investment banking (fees +11% q/q) and FICC trading (+7% q/q). The bounce back in FICC trading revenues provided some relief to bank investors particular after the investment banking community recorded a lacklustre Q3 in fixed income trading. On a less positive note, despite expectations of a strong Q4 for equities across the industry, JPM posted a 30% drop q/q in the equity trading division. DB’s equity analysts note that mortgage production, as expected, declined sharply—production revenue declined 15% on a 42% drop in originations and a 23% decline in applications as rising mortgage rates bite into that business. There were no major surprises in the Wells Fargo result though we noted the mortgage bellwether reported its mortgage originations amounted to $50bn, compared with the $125bn reported a year earlier and $80bn in the prior quarter. Continuing the theme of poor earnings performance from the consumer-discretionary sector, Gamestop fell almost 20% (its biggest one day loss in 11 years) after the company cut its Q4 profit due to weaker-thananticipated console game sales.

In other news, many have noted that following the softening of leverage ratio and Liikanen proposals, the trajectory of regulatory pressure for European banks has been easing of late. Indeed this may have partially explained some of the 5ppt outperformance of European banking stocks compared with the Stoxx600 over the last month. The easing regulatory environment was confirmed again yesterday after newswires published a letter from Mario Draghi to the Chair of the European Parliament’s Economic and Monetary Affairs Committee saying that it is “not foreseen” that hold-to-maturity sovereign exposures will be marked-to-market in upcoming ECB stress tests (Financial Times). The news will probably provide a bigger boost to banks in peripheral Europe. Balancing against this, it was also reported yesterday that some Basel Committee officials are pushing for a higher leverage ratio despite recently giving banks some relief on the way the figure is calculated. As it stands, Basel’s 3% leverage ratio is merely a minimum floor – it is thought many local regulators will raise requirements beyond this. The Fed is also thought to be contemplating a 5% ratio at the operating company level and 6% leverage hurdle at the holding company (Reuters).

Turning to the day ahead, the data docket consists of Spanish CPI and the NY Empire Fed manufacturing and US PPI. Bank of America reports Q4 earnings today before the opening bell.

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