Market Recon Friday

Good Morning,

The Week Behind

The week behind ended up being a bit more daunting than it looked on Monday when it was the week ahead. On top of a Presidential debate, an OPEC inspired rally for Crude, and the current trader angst visible in the Financial sector, you now just have to put Q3 to bed. Good luck.

Europe.

Most major European equity indices are in the hole this morning, but at least well off of their lows. On top of all of the woes connected to Deutsche Bank, German Retail Sales missed badly this morning. Then two hours later EMU Core CPI also missed expectations. That would normally convince market participants that the ECB would eventually bring more easy policy to the party. The thing is that they’re already doing too much, and pushing interest rates even lower will only further damage European banks. The ECB next meets on October 20th.

The Deutsche Bank Situation

Speaking of that Deutsche Bank situation. The bank’s systemic significance is undeniable. With an estimated 46T Euros ($51.5T) worth of gross derivative exposure, any kind of doubt over counter-party risk must be taken seriously. That’s why those hedge funds in the news yesterday did what they did. Purely a business decision that seems understandable. DB is also facing $14B worth of proposed fees from the US Department of Justice. This number, depending upon where DB is trading this morning is close enough to the firm’s market cap to make you look twice. From what I’ve been reading, the firm has set aside something like 5.2B Euros for litigation fees, and has sold an approximate 4.6B Euros worth of CoCo Bonds, which can be erased from the balance sheet. The firm would obviously not be able to raise money that way again, but it would reduce forward looking obligations. Deutsche Bank may be able to figure a way through this, but with no help apparently coming from the German government, Mario Draghi may have to say something in order to reassure the investment community. This Monday is a banking holiday in Germany, fyi. More pressure on the ECB.

Trader Focus. 

This morning, you see strength in Treasuries, or really all developed world sovereign debt, upward movement for some currencies like the US Dollar, and the Japanese Yen. Gold is also well above Thursday’s levels, and testing Wednesday’s resistance in dollar terms. What is not considered a safe haven, and has produced enough positive movement this week to provoke short-term profit taking is Crude. If the US Dollar continues to strengthen throughout the regular trading session, an acceleration of the selling in this space would not surprise me. However, keep in mind… there is a rig count number due at 1pm ET. For now, those balancing portfolios…  who are long the Financial sector (in my opinion) must now consider those positions speculative, at least until something clearly supportive is said.

Macro

08:30 – Personal Income (August): Expecting 0.2%, July 0.4% m/m.

08:30 – Consumer Spending (August): Expecting 0.2%, July 0.3% m/m. In July, the pace of growth for Income was actually greater than the pace of growth for Spending, even if just by a smidge. For May, June, and July, the story was vastly different. Economists might have loved it because the velocity of money increased as witnessed by the Personal Consumption Expenditures component of Q2 GDP, but it looks as if the consumer has had to slow it down in the third quarter, perhaps getting ahead of themselves. The consumer will only come back to stay when the consumer is comfortable. We are not close. Retail Sales for July & August have been awful. We’ll see the September print in two weeks.

08:30 – PCE Price Index (August): Expecting 1.0%, July 0.8% y/y.

08:30 – Core PCE Price Index (August): Expecting 1.7%, July 1.6% y/y. This is perhaps among the two or three most important macro-economic data-points that we run across in the course of a month. The headline print is meaningless, at least for now, and the month over month print will not impact the marketplace. What Fed watchers watch is the Core year over year print.  That item is expected to inch closer to the FOMC’s stated 2% target this month. For comparison, Core CPI has been running above 2% for ten months now. A hot print in this space will put added pressure on the Financial sector at a time of vulnerability. That same hot print would push the US Dollar higher, negatively impacting Gold, Oil, and Treasuries.

09:45 – Chicago PMI (September): Expecting 52.1, August 51.5. This number rarely comes in anywhere near consensus, and last month was no exception… badly missing expectations. This print has either missed, or beaten consensus opinion by a margin of at least 1.5 in every single month since August of 2015. Either something is wrong with every economist in the country, or something’s wrong the data. This item has lost some of it’s ability to impact the marketplace, likely due to this inconsistency.

10:00 – U of M Consumer Sentiment (September-rev): Expecting 90.0, Flashed 89.8.  The expectation for September as of two weeks ago was for something close to 91, so some kind of upward revision here today would not be a complete surprise, particularly given the robust Consumer Confidence release that we saw on Tuesday. The paradox of it all, is that, of these two items that should move similarly… Confidence has been improving regularly, while Sentiment has been rather stable, even running below trend of late. The broader market often does move on this item.

13:00 – Baker Hughes Rig Count (Weekly): Last Week 506 total, 416 oil. This is the last market moving release of the week, and will directly impact Crude prices, and Energy prices. What might be more interesting will be next week’s number after this week’s OPEC related pop.

13:00 – Fed Speaker: Dallas Fed Pres. Robert Kaplan will host a Q&A session in Dallas. Kaplan does not vote this year, but will join the committee in January. Kaplan is not the most outspoken of fed officials, but he did indicate earlier this week that he would have been okay with a September rate hike. Expect this speech to tilt hawkish, as did most of yesterday’s Fed speakers.

Friday’s Earnings Highlight

Before the Open: MKC (.94)