Over the weekend, we characterized markets as “despondent.”
Some of that’s probably seasonal but you get the increasingly palpable sense that everyone is just waiting around on something to snap.
We kind of bump along from data point to data point with nothing really making a dent in terms of risk assets, a fact which at this point seems to have even the most bullish of market participants confused. Perhaps, as Bloomberg’s Richard Breslow suggested this morning, it’s because “weak numbers follow strong ones, ad seriatum, and no one seems to have any credible idea why.”
It seems possible that we may have reached “peak statistics” (so to speak) last year when the BEA introduced “residual seasonality,” a concept that effectively allows the agency to double-adjust GDP data. Between that and the multiple revisions we’re already subjected to, one starts to wonder if maybe the “fake” numbers out of China are actually more “real.”
If you’ve ever taken an advanced statistics course, you know that you can make the numbers say whatever you want them to say, but on the way there it’s easy to get lost in your own numerical narrative. We’d liken it to times when we start writing with the aim of ending up with a punchline about say, oil prices but somehow end up theorizing about the long-term sustainability of fractional reserve banking. It’s possible they’ve simply lost control of the statistics monster and now it just spews meaningless figures that are impossible to interpret. So one day we get a blockbuster jobs number, the next day we get an abysmal GDP print. Zooming out a bit we’ve got an unemployment rate which basically suggests everyone has a job and yet if we’re being honest with ourselves, the economy is basically not growing at all.
As we mentioned on Saturday, Bank of Japan governor Haruhiko Kuroda’s explicit directive to review the effectiveness of central bank policy is disturbing, to say the least. It’s kind of like going all in at the poker table and then right before the river comes out you take a bathroom break to review your decision. The point being that there’s really no use reviewing it now except for posterity. You pushed your chips. Now you just have to see where the cards fall. Here’s a bit of color from Morgan Stanley:
“Wonder if Sept. review will be a recognition that negative rates are not the stimulus BOJ had hoped for. BOJ seems to be giving itself room to come up with a flexible plan that does not back them in a corner.”
The first sentence there is correct. The second, not so much. The BoJ is trying to evaluate the extent to which they already have backed themselves into a corner. One interesting thing to watch is whether the yen becomes disconnected from the Nikkei. Kuroda’s going to be buying trillions more in ETFs, so it’s conceivable that Japanese stocks could rise even if the yen strengthens. Frontrunning of that dynamic might well explain this:
Crude is lower again on Monday which should come as a surprise to exactly no one. Last week we noted that you didn’t need to be an energy analyst to see that the summer driving season wasn’t making a dent in gasoline inventories. That’s a nice way of saying there’s still a supply/demand imbalance. That being the case you can expect demand from refiners to collapse even more than it usually would this time of year. Here’s a look at where we are on WTI and Brent to start the week:
And here’s a snapshot of positioning (specs sold 16K contracts last week):
Finally, here’s a bit of commentary out this morning from SocGen along with the curves:
“While we are bullish for next year, we continue to be cautious for the rest of this year. Weak global refining margins, refinery run cuts, upcoming seasonal weakness for both crude and product demand, and high global crude and product inventories are all reasons for caution on prices. A broadly balanced global market won’t do much to change the inventory picture. Given the absence of a near-term bullish fundamental or geopolitical catalyst, for the time being, the path of least resistance for oil prices continues to be lower. Having said that, we also believe that there is a limit to this correction. We expect crude prices to bottom out in the high $30 range.”
(Charts: SocGen)
So that’s where we are on the macro side of things headed into the new month. For now, we’ll close with a nice soundbite Jeffrey Gundlach gave to Reuters late last week:
“The artist Christopher Wool has a word painting, 'Sell the house, sell the car, sell the kids.' That’s exactly how I feel sell everything.
Or, summed up in one picture:
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