Strap on the seat belts , it's going to be a bumpy ride.....

Wednesday, May 29, 2013 12:17 AM

Spain Records Largest First Quarter Deficit in History; Tax Revenues Plunge 6.7% Year-Over-Year; Surprising Comments from German Finance Minister Wolfgang Shäuble

Spain keeps digging a bigger and bigger hole as the latest economic reports show.

In spite of massive tax hikes, overall revenue is down 5.3% YoY
Tax collections are down 6.7% YoY
VAT collection is down 9.9% in spite of a September increase in the VAT rate
Non-interest expenses are up 1.1% from a year ago
As compared to the first quarter of 2011, tax revenues have plunged by 58%
As compared to first quarter of 2011, personal income tax and other direct taxes have fallen almost 35%.

Those numbers are courtesy of Libre Mercado which reports Spanish Government has Largest January to April Deficit in History.

Surprising Comments from German Finance Minister Wolfgang Shäuble

So what does Shäuble have to say about this?

Please consider these Google-translated snips from the Libre Mercado report Wolfgang Schäuble supports Rajoy's policies and Cites "impressive" Results of the Spanish reforms.

Schäuble is convinced that "Spain has made enormous progress in recent years under the Government of Mariano Rajoy". So much so that now Spain "has a strong economy, reduced labor costs, has significantly increased its exports and has done a good job in restructuring its banking sector, also after the trial of the Troika".

Spain, on the right track

In this sense, on financial reform, says that "all international agencies agree that Spain is on the right path" also "regarding to the recapitalization of the banks." Asked if it is all done in the Spanish financial system reform, Schäuble gave their trust to the minister of economy and competitiveness Spanish: "It is my duty to give advice to my colleague and friend Luis de Guindos , he knows better than me what has to do ".

Over four-page interview in the Journal of Vocento, Schäuble never tires of positive messages about the Spanish economy. Not only speaks of "tremendous advances" for Spain Rajoy has achieved, but doubts that at one point made investors wary of the Spanish economy "no longer exists", not least because "Spain reject outright the possibility of not repay the loans made." "The state capital need could not be funded under acceptable conditions. This is the only reason that Spain has had to seek help from the European Stability Mechanism to recapitalize their banks," he added before insisting that "the figures and results "of Spain and its reforms" are impressive. "

What is Shäuble smoking?

Most likely Shäuble's comments are some sort of election ploy for chancellor Angela Merkel. If that's not it, he has lost his mind.

Mike "Mish" Shedlock

Draghi , Rajoy , Schauble , Merkel et al - they're going to need a bigger boat....

GUIDE

http://www.zerohedge.com/news/2013-05-29/european-credit-contraction-accelerates-spanish-loan-creation-craters

European Credit Contraction Accelerates, Spanish Loan Creation Craters

Submitted by Tyler Durden on 05/29/2013 09:03 -0400

Bond

Demographics

European Central Bank

Eurozone

There is a simple mnemonic for the Keynesian world: credit creation = growth. More importantly, no credit creation = no growth.And that, in a nutshell is the entire problem with Europe.

With the ECB unable and unwilling to engage in outright unsterilized credit creation (i.e., pumping low powered money into banks which can then invest in businesses buy stocks), the only hope for European growth is that its commercial banks will be net lenders and thus net contributors of credit money to the economy. However, as we first discussed over a year ago, Europe simply no longer has the debt capacity (either secured through unencumbered assets, or unsecured through future cash flow) against which banks can lend. Today's M3 data simply confirmed that for Europe a long, hard painful slog is best it can hope for. That is, assuming of course, the soaring unemployment, deteriorating demographics and collapsing welfare state do not lead to a revolution first as Wolfi Schaeuble warned yesterday.

From SocGen:

The broad monetary aggregate M3 expanded by €15 bn in April. We see this expansion as a technical correction from last month’s report. In fact, last month’s deceleration of M3 was largely attributed to the Cyprus events. However, the broad aggregate is still growing at a slow pace, well below its reference value of 4.5%. On the credit side, there is no sign of improvement. In fact, credit to the euro area private sector is contracting further to -0.9% yoy from -0.7% yoy.

Looking at the country level, we still see signs of credit crunch in the peripheral economies. In Spain, outstanding loan to non financial corporation is contracting at -19.1%. Yet, there is little incentive to borrow given the lack of confidence in future growth.

The key charts that matter: Eurozone M3 and net lending. The blue line is what should behappening. The brown line is what ishappening.

And a nation by nation breakdown. Oops, Spain.

All of the above is the bad news.

The good news is that for now at least Europe still is the proud recipient of exogenous credit creation, mostly from Japan and assorted US hedge funds, as well as various European banks rehypothecating sovereign bonds with the ECB. This has prevented the economic reality from spilling over into the bond sector as it did in 2010, 2011 and 2012. Soon the carry arb will disappear and slowly but surely European peripheral bonds will resume their traditional trading pattern, which will return the crisis squarely where it belongs.

In the meantime, Europe is delighted that it has bought itself some time in which to enact the structural reforms so desperately needed to make it a viable going concern. Oh wait, as theECB reported today Europe never did any of that because politicians were hoping and praying the bankers would fix it all.

Oops.

http://www.zerohedge.com/news/2013-05-29/death-carry

Death By Carry

Submitted by Tyler Durden on 05/29/2013 08:34 -0400

Authored by Bill Blain of Mint Partners,

These are not easy times for the global bond market. We’re looking at US Treasuries market (more below), and reckon this morning’s 10-yr spike to 2.23 is only the start. We could see more aggressive price declines as the curve steepens further. It’s only partly based on the better economic outlook and fears of the QE Taper. Japan banks will be among the biggest sellers due to the volatility and “death by carry”.Forget the stories Japan banks were buyers at the wides.. that’s wishful thinking from Treasury holders long and wrong on the US bond market.

Meanwhile, my Tech Chart Expert, Graham Joy points out some interesting data – “Dow 20 for 20 Turbo Tuesdays: up 11% on the year, but without Tuesdays would be only 0.2%!.. 20 Tuesdays in a row since Jan 25th!

But start in Japan where tensions are building.The Kuroda plan is failing to reign in JGBs - increasing bond volatility and weak demand for the latest 20-yr auction illustrate the widening credibility gap between what the BOJ expected and what’s actually happening! JGB futures vol is now highest since 2008.

What's required to calm the JGB market? Unfortunately, each passing day sees the BoJ's credibility chipped away. Far from lowering Japan rates, many analysts now believe the massive Kuroda QE ease was a desperate play likely to backfire, resulting in unsustainable interest rates. Kyle Bass in the ascendency! It’s a vicious negative feedback loop.

Step back a second. Yes, the plan does appear to have stalled, but what plan ever survives first contact with the enemy? That’s part of the problem – even a good plan could wither if exogenous forces, like a Treasury sell off, make it meaningless. After telling us how lower JGB rates were vital to the plan, Kuroda does not sound nearly so convincing when he's telling us the financial system can weather higher yields alongside an economic recovery! The FX boosted export recovery is highly vulnerable to reversal or at best slow down in the face of other countries competitively devaluing.

On the other hand, the reason Japan got away with the massive devaluation of the yen was the complicit support of China and US within G20 to ensure it was accepted as the most likely driver of global growth. I doubt other economies will get similar breaks. Remember the key market mantras: "Don't fight Central Banks" and more recently "Don't fight Kuroda". But.... if you see the Yen start a steady recovery, (fuelled by the more attractive rates), that’s the point to consolidate or even advance in a rearwards direction on Japan.

Back to the US. Rising home prices trigger further fears of an early taper to the mortgage part of QE. Take a look at expectations for US futures and they show the market anticipates rising rates. Can't fight what the market is telling you! Over the next couple of weeks I expect the market scribblers will play catch up – watch for the increased US economic estimates. Last year I took a bit of a flyer and blythely said US growth could be a surprising 3% plus by year end - despite the recent negativity and mixed noises off, I still think its achievable!

It all spells further rates sell off – and all the implications for other frothy asset bubbles.Rising US rates really will trigger a global bond bear market, so some advice for European banks still long of distressed assets held on "pretend and extend" banking books. (i.e. distressed European lending marked at par in the hope the global and European economies will recover sufficiently these assets will repay at 100.) Take a look at what Lloyds is doing.

Lloyds is auctioning its US$8.7 bln mortgage portfolio - smart move! WIth the market fearing the Fed may hold back on supporting US mortgage paper... then selling what used to be distressed product now makes sense... And remember, Lloyds is the UK bank with the good sense to take the pain when it could - selling off its Irish mortgage book and large chunks of distressed UK Commercial Mortgages. Sure it took the capital hit, but now looks significantly stronger institution.

How many other European banks should be considering similar "distressed asset sales"?Well this is the time to be doing it! We are in touch with a number of investment funds who are active acquirors of distressed assets. Too many European banks are still sitting on Spanish mortgage exposure (it’s going to get worse), European SMEs (its going to get worse), securitisations (they are going to get worse), etc etc.. Forget the asset class, and think about yesterday’s miserable French consumer sentiment – yep.. Europe is going to get worse!

But why sell distressed assets now? After all, won't the ECB backstop everything to prevent renewed Euro fears. We've seen the mother of benchmark distressed assets, Greece, trade up all the way from 20% to 8%. CFO's overseeing the distressed books must feel vindicated for not selling at the bottom of the market, and seeing values recover close to par in many instances. Well done.

But the next step is the difficult one - knowing when to sell. I reckon that point has come: we've seen sustained bond market gains and pretty much exhausted further upside. From here on in the risks are about deepening European recession eroding gains thus far.

Finally.... reading a predictable Torygraph rant this morning about how Portugal is likely to exit the Euro, the comment was made about Ireland's export led recovery. Bearing in mind the current unpleasantness directed at the Emerald Isle over its’ corporate tax rates and the fact all the major multinationals from Google, Mac, Amazon etc route all their profits through Ireland, thus dramatically "improving" the official numbers, I'd be grateful if anyone has seen any research on just how much the Irish economic recovery is a tax-driven sham? How much GDP has been distorted relative to what's actually made in Ireland? And how complicit has the government been in this illusion of robust Irish growth?

http://www.zerohedge.com/news/2013-05-29/eu-extends-deficit-deadlines-most-european-countries-admits-structural-adjustment-fa

EU Extends Deficit Deadlines For Most European Countries, Admits Structural Adjustment Failure, Kills Austerity

Submitted by Tyler Durden on 05/29/2013 08:22 -0400

Carry Trade

European Central Bank

Moments ago, the following European Commission website hit the interwebs, which can be summarized as follows:

EU EXTENDS DEFICIT DEADLINE FOR POLAND TO 2014
EU EXTENDS DEFICIT DEADLINE FOR SLOVENIA TO 2015
EU EXTENDS DEFICIT DEADLINE FOR PORTUGAL TO 2015
EU EXTENDS DEFICIT DEADLINE FOR NETHERLANDS TO 2014
EU EXTENDS DEFICIT DEADLINE FOR SPAIN UNTIL 2016
EU RECOMMENDS LIFTING DEFICIT REGIME FOR ROMANIA, LITHUANIA
EU RECOMMENDS LIFTING EXCESSIVE-DEFICIT REGIME FOR ITALY
EU SAYS 20 STATES CURRENTLY UNDER EXCESSIVE-DEFICIT PROCEDURES

Translation: the theatrical spectacle of Europe's austerity, which never really took place, is finally over. Going forward political incompetence will henceforth be known as just that: incompetence, and elected rulers will not be able to pass the buck to evil, evil, "austerity." More importantly, Europe has also proven without a doubt, that any "structural adjustments" on the continent are impossible, and that governments are locked in a spend till you drop mode.

For Europe's sake, it better find a sake of endogenous credit creation once the BOJ's carry trade fueled mask of all that is wrong with Europe fades away. Alas, following yet another painful M3 report, and an intractable ECB which refuses to monetize de novo and unsterilized (and simply can't "lack of fiscal union" reasons previously explained), where such credit creation will come from is unknown.

http://www.zerohedge.com/news/2013-05-29/red-dawn

Red Dawn

Submitted by Tyler Durden on 05/29/2013 06:58 -0400

This morning market participants turn on their trading terminals to see an unfamiliar shade of green: red.

Following yesterday's blow out in US bond yields, which have continued to leak wider and are now at 2.20% after touching 2.23%, the overnight Japanese trading session was relatively tame, with the 10Y JGB closing just modestly wider at 0.93%, following the market stabilization due to a substantial JPY1 trillionJOMO operation which also meant barely any change to the NKY225, while the USDJPY slipped in overnight trading below the 102 support line and was trading in the mid 101s as of this moment, pulling all risk classes lower with it. There was no immediate catalyst for the sharp slide around 3am Eastern, although there was the usual plethora of weak economic data.

The IMF cut its China 2013 and 2014 growth forecasts to 7.75%, from 8% and 8.2%, validated by news that nearly half of China's 80 major steel producers reported losses in April and that Chinese import iron ore prices fell below $120/tonne for the first time this year. In Japan, as we expected, following the BOJ's meeting with bond market participants, it found they wanted more frequent bond operations, a la the US daily POMO, and asked the BOJ to buy more 1-5Y notes, with the suggestion of smaller overall POMO operations, also as expected would happen now that the BOJ is merely a surrogate copycat of all the Fed does.

In Europe, German May unemployment rose 21K on expectations of a 5K rise, Spanish April retail sales posted yet another negative print at -4.9% if a little better than expected, even though Eurozone M3 rose by 3.2% on expectations of a 2.9% increase. In the UK, May retail sales fell the most in 16 months CBI said; with the gauge of annual sales growth -11 vs -1 in April, est. +3

The biggest news of the night was a report byGerman Welt saying that Mario Draghi has lost the support of the ECB executive board on the issue of ABS purchases as a pathway to stimulate credit growth, with Mersch, Asmussen and Weidmann all voting against an ABS-purchase program. There also is more discord on the issue of negative deposit rates, an idea which may now be scrapped following Merkel's announcement yesterday that her reelection campaign would run on the message of a strong Euro: all EUR bullish developments, and thus Eurozone economy negative.

Key overnight highlights bulletized via Bloomberg:

Treasuries lower, 10Y yield at 2.195%, highest since April 2012, JPY strengthens; Treasury sells $35b 5Y debt, WI yield 1.08%, 5Y yield crossed 1% yesterday.
BoJ met with 56 bond market participants, said participants wanted more frequent bond operations and asked central bank to buy more 1Y-5Y notes; suggested smaller amounts of purchases at every operation
BoJ to release bond operation plan from June for tomorrow
OECD expects global growth to accelerate in 2014, with both the U.S. and Japan to outpace euro area growth
U.S. GDP +1.9% in 2013, +2.8% in 2014; Japan +1.6% in 2013, +1.4% in 2014; euro area -0.6% in 2013, +1.1% in 2014
SNB may have to raise rates to cool housing market: OECD
Euro area private sector loans in April fell 0.9% from a year ago after a decline of 0.7% in March, ECB said, contracting for 12th straight month
German unemployment rose 21k to 2.96m, for 4th monthly rise; est. +5k
U.K. May retail sales fell the most in 16 mos., CBI said; with gauge of annual sales growth -11 vs -1 in April, est. +3
IMF cuts its growth outlook for China to around 7.75% this year and next from its April forecast of 8% this year and 8.2% next year; urged government to undertake “decisive” policy changes to put economy on more sustainable path
Sovereign yields higher across the board, tracking U.S. yields. Asian stocks mixed, Nikkei +0.10%, European stocks lower across the board. U.S. stock index futures lower. WTI crude, metals lower; gold higher

Main catalysts via SocGen:

The 2.23% print on US 10y cash and 2.41% on 10y swaps overnight have capped a 60bp move this month alone and are enough to send a shiver down the spine of any seasoned bond market veteran. A much bigger than anticipated increase in consumer confidence in May and an improvement in the employment sub-component to a six-month high nailed the case for yields to extend their winning streak to a fifth successive week. It is likely to be an uncomfortable ride between now and the next FOMC meeting at the end of June, and hopes of a reprieve on 7 June (payrolls day) may prove in vain. With US yield differentials setting the tone in FX, the drop in USD/JPY risk reversals (bid for USD puts) is an anomaly waiting to be corrected. UST/JGB 2y spreads widened overnigght to 16bp, the highest since early April.

Swedish Q1 GDP and the Bank of Canada rate decision will bring some distraction from the US today. German unemployment and CPI data should keep additional ECB stimulus on ice. Inflation is forecast to have edged up to 1.3% vs 1.2%, marking only the first rise since December. EU M3 data are also due and though a rise in the annual rate is forecast, lending figures to households and NFCs in particular are expected to reaffirm the weak underlying demand for credit as indicated by the ECB’s own quarterly lending survey. A number of ECB council members took to the speakers’ circuit yesterday and the conclusion we make is that there is no consensus about negative deposit rates. No speakers are scheduled today. The EU will make its annual formal recommendation on budget policy. The FT reports this morning that budget deficit deadlines will be extended for France, Spain and the Netherlands and that it will lift the ‘intensive fiscal monitoring’ of Italy. The postponement of the deficit deadline has been coming since the early spring and the last G7 meeting stepped up calls to concentrate less on austerity and more on growth.

The Bank of Canada introduced the language of supporting considerable monetary policy stimulus in place for a ‘period of time’ two meetings ago and will not be making plans to change tactics today at what is governor Carney’s last meeting in charge as governor before he departs for the BoE. USD/CAD traded at a 1.0421 high in Asia and short-term prospects are intact for a first weekly close above 1.04 since June last year. Bulls now target 1.0447/50. USD/SEK firmed back over 6.71 and a successful break of 6.7168, the 14 December high, would open the door to 6.80. A 0.3% increase in qoq GDP would mark a return to positive growth after a flat Q4 12, but disappointing confidence surveys last week suggest a return to the top of the G10 currency table is not imminent for the SEK.

And a full overnight recap via DB's Jim Reid as usual:

Yesterday’s sharp selloff in US treasuries has been extended overnight with the 10yr benchmark up 4bp at 2.2% in Asian trading, coming after Tuesday’s +16bp move to 2.17%. Meanwhile in Japan, 10yr JGB yields are up 4bp as they edge closer to the 1% mark (0.93% as we type). Kuroda’s speech at a BoJ conference this morning had little effect on markets with the Governor’s key message being that no financial system is perfect in the face of global uncertainty. In other BoJ-related headlines, there were some interesting comments PM Abe’s economic adviser, Koichi Hamada, who was quoted as saying that Korea “shouldn’t blame” the Japanese central bank if Korean growth slows due a weaker yen, but instead “they should demand the Korean central bank have a proper monetary policy”. Hamada also urged Kuroda to ease monetary policy further should it be needed.

The news comes as PM Abe unveiled a 5yr plan that details a number of structural reforms to achieve growth, but the issue of corporate tax rate cuts is reportedly undecided at this stage. Attention now shifts to the BoJ’s meeting with JGB-market participants later today (8am London time) which may provide more detail on the central bank’s upcoming market operations. As we type, USDJPY is down to 101.56 while the Nikkei is barely higher.

Elsewhere in Asia, equity markets are trading with a positive tone led by gains on the KOSPI (+0.9%), ASX200 (++0.16%) and Shanghai Composite (+0.4%). The Hang Seng (-0.7%) is underperforming the broader region weighed by property developers amid concern that home sales are slowing in Hong Kong. Asian credit markets opened 2-3bp weaker as the rise in rates dampens demand for longer duration EM credit. In China, DB and the IMF have both revised the country’s growth forecasts downwards in the last 24 hours. The IMF cut its 2013 and 2014 growth forecasts to 7.75%, versus previous estimates of 8% and 8.2% in 2013 and 2014 respectively. DB's economist Jun Ma revised down his Q2 GDP forecast to 7.7% yoy from 7.9%, the 2013's full-year GDP growth forecast to 7.9% from 8.2% and his 2014 GDP growth forecast to 8.8% from 8.9%. Jun writes that the changes reflect a delay in growth recovery due to slower-than-expected transmission of total social financing into real economic growth and the short-term impact of anti-corruption measures. Overnight, the head of China’s Iron and Steel Association said that the price of steel and iron ore may below the 2012 lows. Indeed, Chinese import iron ore prices fell below $120/tonne for the first time this year on Tuesday, which is weighing on the Australian dollar (0.5% lower this morning at a fresh YTD low of 0.956).

More on yesterday’s UST selloff which saw the 10yr yield close at its highest level since April 2012. The 16bp rise in yields was the highest one day rise in 19 months. This brings the cumulative rise in yields to 50bp since the beginning of this month - spurring the return of “Great Rotation” talk. The majority of yesterdays move came after the release of the Conference Board’s US consumer confidence data which printed at a post-GFC high of 76.2 (vs 71.2 expected). There were also reports of technical selling after stops were triggered around the 2.08% to 2.10% level.

Yesterday’s 2yr tnote auction didn’t help either after it recorded its lowest bid-to-cover ratio (3.04x) since February 2011. The weakness wasn’t confined to US rates with 10yr yields in the UK (+5bp), Germany (+4bp) and French (+4bp) rising yesterday, while Spanish (-4bp) and Italian (-2bp) yields firmed. Outside of rates, equities had a solid day with the Stoxx600 (+1.3%) having its best day in more than a month. The index has climbed for 12 consecutive months, its longest winning streak since 1997 – and its YTD gain of 10% is its best start to a year since 1998 (Bloomberg). Across the Atlantic, the S&P500 initially traded as high as +1.4% but pared gains later in the session to close up 0.7% after some late-session concerns about Fed tapering. The Dow Jones had another strong Tuesday (+0.7%) which CNBC notes is the 20th consecutive positive Tuesday close, extending the longest Tuesday streak in Dow Jones history. The second longest streak was in 1927 when the Dow recorded 15 consecutive positive Tuesdays. Among the only risk assets to underperform were gold (-1%), silver (-1.5%) and US credit (CDX IG +0.5bp) – unsurprising given the talk about Fed tapering yesterday.

Turning to the day ahead, we have German inflation and unemployment data, Eurozone monetary data and the latest Italian business confidence reading. The European Commission will be releasing its economic policy recommendations for all 27 EU members today. Newswires are suggesting that the Commission may ease budget targets for France, Spain and the Netherlands. The Bank of Canada makes their policy announcement later today. In terms of the US, the focus will be on today’s 5yr treasury auction and the Boston Fed’s Rosengren (FOMC voter) will be speaking towards the end of the US session.

Catharsis Ours

Wednesday, May 29, 2013