After what is set to be six consecutive quarters of annual earnings declines - consensus now sees Q3 EPS dropping -2.1% according to Facset when as recently as the end of March, analysts were expecting EPS growth of 3.2% for the quarter - Wall Street has decided that it will take no more of this negativism, and expects S&P500 earnings to soar in the half, as shown in the following Deutsche Bank chart.

There is just one problem: contrary to the cheerful narrative of an earnings recovery, companies have been slashing H2 earnings, and as MarketWatch reports, at least 10 companies this week alone have lowered outlooks for the second half of the year.

Indeed, as we have been warning for months, and as Jeff Gundlach cautioned on his presentation last night...

... the EPS "hockeystick" has been once again indefinitely postponed; in fact what happens next will be a steep drop in forward EPS.

MW admits as much, saying that "Investors expecting the earnings picture to improve significantly in the year’s second half may want to keep an eye on a wave of sales and profit warnings from some large- and small-cap companies this week." Some examples: Ford Motor, Barnes & Noble, Tractor Supply, SuperValu, Sprout’s Farmers Market,  Pier 1 Imports, General Mills, HD Supply Holdings, EnQuest and Dave & Buster’s are among the companies tempering expectations for their second half.

So far, the flood of negative earnings warnings has not moved the needle on expectations for the third quarter, according to FactSet. But it wil: 78 of the 113 S&P 500 companies that have provided an outlook for the quarter have issued negative earnings-per-share guidance, according to FactSet senior analyst John Butters.

This number is set to surge for one simple reason: regular readers are quite familiar with what the latest "scapegoat" is - it is shown in the photo below.

As we said on August 31, when we first reported about Hanjin's bankruptcy, we said that "the global implications from the bankruptcy are unknown: if, as expected, the company's ships remain "frozen" and inaccessible for weeks if not months, the impact on global supply chains will be devastating, potentially resulting in a cascading waterfall effect, whose impact on global economies could be severe as a result of the worldwide logistics chaos. The good news is that both economists and corporations around the globe, both those impacted and others, will now have yet another excuse on which to blame the "unexpected" slowdown in both profits and economic growth in the third quarter."

Lo and behold, this is precisely what is about to take place, cue MarketWatch this morning:

The negative outlooks provided this week reflect a range of issues facing companies, some of which have emerged only recently.

 

For retailers, the bankruptcy of South Korea’s biggest shipping line and the world’s seventh biggest as measured by capacity, Hanjin Shipping, is a big risk, as it has left cargo valued at $14 billion stranded at sea, as the Wall Street Journal reported Wednesday. That’s because ships carrying its containers have been denied access to ports, or even been seized by some of the company’s creditors.

 

Coming right before the holiday season, that is likely to hurt a range of companies. Fashion-driven specialty retailers and clothing retailers making significant fashion shifts are most at risk from the Hanjin-related havoc, according to Cowen & Co. analysts. They name names, including Ascena Retail Group, Abercrombie & Fitch, American Eagle, Urban Outfitters, Gap, Michael Kors and Coach.

Further confirming our prediction, Cowen said that “an ability to chase into working trends could be limited if there are problems in the supply chain.” Others compared the issue to the strike by dock workers on the U.S.’s West Coast that began in the fall of 2014 and delayed shipments of goods for months. Deutsche Bank said companies that were especially hard hit by the port strike included sports retailers; home-furnishings companies such as Home Depot Inc., Lowe's Corp. and Bed Bath and Beyond and the crafts chain Michaels.

Of course, there is a far more critical issue: the demand is just not there. soft consumer spending has continued to "stump" analysts, although there is no secret: rising rents and health-care costs, have been the biggest catalyst crushing the US consumer, as we first explained in 2014, and as dollar store discounters confirmed two weeks ago, as we reported in ""Things Are Worse" - Dollar Stores' Startling Admission: Half Of US Consumers Are In Dire Straits."

Finally, with the oil rebound fading fast again, the EPS tailwind from energy companies may prove to be the final mirage in the much anticipated earnings rebound, as annual earnings are at best flat, and far from the dramativ contributor to the S&P bottom line. In fact, the biggest question remains whether or not Apple, whose earnings are 7% of the S&P's bottom line, can finally get out of its rut. Considering the company just said it would no longer report new product launch weekend sales - for obvious reasons - we can safely conclude that the latest forecast hockey-stick is not going to materialize, and if anything we may see the 6 quarter stretch of negative earnings continue into Q4 - an unprecedented 7 consecutive quarters of annual earnings declines.

The most anticlimiatic and predictable outcome to the biggest banking scandal to rock Wall Street in recent years, Wells Fargo;s fraudulent creation of 2 million (or more) fake customer accounts, has just concluded in the only possible way: with CEO and Chairman John Stumpf retiring.  

The stock has jumped on the news, up 2% in the after hours.

There are two outstanding questions here: i) the size of his retirement package, and ii) whether by exiting stage left, he leaves criminal and civil liability behind, or whether this time, the DOJ and/or SEC will actually prosecute the disgraced form chief executive.

The Full press release is below:

Wells Fargo & Company (NYSE:WFC) announced today that Chairman and Chief Executive Officer John Stumpf has informed the Company’s Board of Directors that he is retiring from the Company and the Board, effective immediately. The Board has elected Tim Sloan, the Company’s President and Chief Operating Officer, to succeed him as CEO, and Stephen Sanger, its Lead Director, to serve as the Board’s non-executive Chairman, and independent director Elizabeth Duke to serve as Vice Chair. Sloan also was elected to the Board.

 

Sloan’s appointment to CEO and election to the Board are effective immediately. He will retain the title of President.

 

Sanger said, “John Stumpf has dedicated his professional life to banking, successfully leading Wells Fargo through the financial crisis and the largest merger in banking history, and helping to create one of the strongest and most well-known financial services companies in the world. However, he believes new leadership at this time is appropriate to guide Wells Fargo through its current challenges and take the Company forward. The Board of Directors has great confidence in Tim Sloan. He is a proven leader who knows Wells Fargo’s operations deeply, holds the respect of its stakeholders, and is ready to lead the Company into the future.”

 

Stumpf, a 34-year veteran of the Company, joined Wells Fargo in 1982 as part of the former Norwest Bank, becoming Wells Fargo’s CEO in June 2007 and its chairman in January 2010.

 

“I am grateful for the opportunity to have led Wells Fargo,” Stumpf said. “I am also very optimistic about its future, because of our talented and caring team members and the goodwill the stagecoach continues to enjoy with tens of millions of customers. While I have been deeply committed and focused on managing the Company through this period, I have decided it is best for the Company that I step aside. I know no better individual to lead this company forward than Tim Sloan."

 

Sloan said, “It’s a great privilege to have the opportunity to lead one of America’s most storied companies at a critical juncture in its history. My immediate and highest priority is to restore trust in Wells Fargo. It’s a tremendous responsibility, one which I look forward to taking on, because of the incredible caliber of our people, and the opportunity we have to impact the lives of our millions of customers around the world. We will work tirelessly to build a stronger and better Wells Fargo for generations to come.”

 

Sloan joined Wells Fargo 29 years ago, launching a career that would include numerous leadership roles across the Company’s wholesale and commercial banking operations, including as head of Commercial Banking, Real Estate and Specialized Financial Services. He became president and COO in November 2015, when he assumed leadership over the Company’s four main business groups: Community Banking, Consumer Lending, Wealth and Investment Management and Wholesale Banking. Previously, he headed the Wholesale Banking group after serving as the Company’s Chief Financial Officer and, prior to that, as the Company’s Chief Administrative Officer.

 

Sanger has been a member of the Wells Fargo Board since 2003, serving as its Lead Director since 2012. Sanger also chairs the Governance and Nominating Committee and is a member of Human Resources Committee and Risk Committee. He was CEO of General Mills, Inc., a leading packaged food producer and distributor, from 1995 until 2007. He served as chairman of General Mills from 1995 to 2008. He also serves on the board of Pfizer Inc.

 

Duke has been a member of the Wells Fargo Board since 2015. She served as a member of the Board of Governors of the Federal Reserve System from 2008 to 2013, where she served as Chair of the Federal Reserve’s Committee on Consumer and Community Affairs and as a member of its Committee on Bank Supervision and Regulation, the Committee on Bank Affairs, and the Committee on Board Affairs. She also previously held senior management positions at banks including Wachovia and SouthTrust.

So, Elizabeth Warren 'Wins' by knockout.

Donald Trump's election taught politicians several valuable lessons, including, but certainly not limited to, the following:

1. More spending doesn't necessarily equate to victory
2. You can speak your mind without alienating voters...actually, a lot of voters kind of like/respect it
3. The American electorate is smart enough to see through blatant pandering based on race, gender, etc.
4. Rural populations in "flyover states" are absolutely fed up with the ruling elites of the establishment

But politicians aren't the only ones learning valuable lessons from Trump's stunning victory as advertising agencies have also been forced to admit that they have no idea how to market to the Midwest.  As the CEO of McCann Worldgroup pointed out the Wall Street Journal, Trump's victory highlighted the error of gearing marketing programs exclusively "toward metro elite imagery" saying that future efforts need to incorporate a bit more "Des Moines and Scranton" and a little less NYC and Los Angeles.

In the wake of Donald Trump’s election as U.S. president with a wave of support from middle American voters, advertisers are reflecting on whether they are out of touch with the same people—rural, economically frustrated, elite-distrusting, anti-globalization voters—who propelled the businessman into the White House. Mr. Trump’s rise has them rethinking the way they collect data about consumers, recruit staff and pitch products.

 

“Every so often you have to reset what is the aspirational goal the public has with regard to the products we sell,” said Harris Diamond, McCann’s CEO. “So many marketing programs are oriented toward metro elite imagery.” Marketing needs to reflect less of New York and Los Angeles culture, he said, and more of “Des Moines and Scranton.”

Like the large hedge funds and investment banks of wall street, most the people employed by the large, successful ad agencies happen to reside in NYC and Los Angeles.  And, while those offices are well staffed to target consumers in the large metropolitan cities of the U.S. , they are uniquely unqualified to speak to the hearts and minds of people living in the "flyover" states that they loathe to visit.  As one advertising CEO points out, a diversity hire “can be a farm girl from Indiana as much as a Cuban immigrant who lives in Pensacola.”

Some marketers, concerned that data isn’t telling them everything they need to know, are considering increasing their use of personal interviews in research. Meanwhile, some ad agencies are looking to hire more people from rural areas as they rethink the popular use of aspirational messaging showcasing a ritzy life on the two metropolitan coasts. One company is also weighing whether to open more local offices around the world, where the people who create ads are closer to the people who see them.

 

“This election is a seminal moment for marketers to step back and understand what is in people’s heads and what actually drives consumer choice,” said Joe Tripodi, chief marketing officer of the Subway sandwich chain.

 

Even as many ad agencies try to improve their gender and racial diversity, industry executives say they also need to ensure their U.S. employees come from varied socioeconomic and geographic backgrounds.

 

A diversity hire “can be a farm girl from Indiana as much as a Cuban immigrant who lives in Pensacola,” said John Boiler, chief executive of the agency 72andSunny, whose clients include General Mills Inc. and Coors Light. The agency plans to expand its university recruitment programs to include rural areas.

Like the pollsters who completely missed Trump's victory, advertising agencies admit that their customers will likely reduce spending over the next several months as everyone "re-calibrates" their models to reflect the fact that not everyone lives in NYC, San Francisco and Los Angeles.

Advertising executives also said the surprising outcome to the election would likely hamper advertising spending next year, as marketers try to figure out what implications the new administration’s decisions will have on businesses.

 

WPP’s GroupM, the largest ad buying firm in the world, had been anticipating U.S. ad spending would grow 3% to $183.9 billion next year. Kelly Clark, global CEO of GroupM, now said he anticipates ad spending growth in the U.S. will likely decline a few percentage points over the next six months. “We do believe that investment decisions will be delayed,” said Mr. Clark.

 

If agencies internalize the societal changes the election reflected, the content or tone of advertising could change, some ad executives predicted.

 

“The election will have spooked the liberal elite away from high concept, ‘make the world a better place’” advertising to “a more down-to-earth ‘tell me what you will do for me’ approach” said Robert Senior, worldwide chief executive of Saatchi & Saatchi, a creative firm owned by Publicis Groupe.

Isn't it just glorious to see the Ivy League-educated, coastal elites admit that they know absolutely nothing about roughly 50% of the people residing in their own country?

It appears nothing can stop the upward moment of equities heading into the year end, and as has been the case for the past few weeks, US traders walk in with futures higher, propelled by European stocks which climbed to their highest in almost a year, while the dollar rose and bonds and gold fell, failing again to respond to a series of geopolitical shocks following terrorist attacks in Ankara, Berlin and Zurich. The yen tumbled after the Bank of Japan maintained its stimulus plan even as the central bank touted improving economic prospects for the Japanese economy.

"There was no particular surprise from the policy meeting, but investors are happy that the economy's fundamentals are finally rising after the BOJ expressed an upbeat view," said Takuya Takahashi, a strategist at Daiwa Securities.

In an amusing interlude during today's Kuroda press conference, in which the BOJ head said the BOJ is far from its target, Kuroda said that the BOJ continues to target 10 Year yield at "about 0%" and then added that it is meaningless to try to discuss "what about 0%" is, hinting to markets that as long as US yields keep rising, the Yen will keep falling.

European shares were steady with unease over the attacks balanced by gains by bank shares and the Milan market after Italy's government said it wanted approval for up to €20 billion to rescue troubled lenders. The Stoxx Europe 600 Index rose 0.1% to 360, pushed higher by deal activity in media and credit card services. Treasuries and gold reversed gains from Monday following a probable terror attack in Berlin, while Turkey’s lira pared losses sustained after the killing of Russia’s envoy to the country. The yen approached the weakest since February, rising above 118 versus the dollar after the central bank closed a tumultuous year for monetary policy by keeping its yield-curve and asset-purchase programs unchanged.

The dollar and rising bond yields again dominated, after Janet Yellen flagged the strength of the U.S. jobs market in a speech to students on Monday. That sent the greenback bouncing towards last week's 14-year high and it was at 103.40 on the index that measures it against other leading currencies, just short of its recent peak of 103.56.

"The biggest impact you see from the attacks in Berlin and Istanbul is the Swiss franc/euro," said Societe Generale FX strategist Alvin Tan. "But apart from that the dollar continues to be strong after we had some rather positive comments from Janet Yellen,"

China's CSI 300 index slid 0.6 percent, on Beijing's move to tighten supervision of shadow banking activities and on liquidity concerns, while Japan's Nikkei .N225 closed up 0.5 percent after the BOJ meeting. 

U.S. stock-index futures were also fractionally higher following a rally that sent equities to record levels. S&P 500 futures expiring in March up 0.1 percent to 2,263 at 6:03 a.m. in New York, while those on the Dow rise 24 points to 19,861. VIX dropped for fourth day, set for lowest close since August.

Energy markets were trading at session highs, with Brent rising above $55/bbl before U.S. stockpiles data due Tuesday, Wednesday. DOE inventories data to be published on Wednesday are forecast to show 5th week of reductions. January WTI near $52/bbl before expiry.  “We’re moving sideways as a whole, liquidity is lower at the moment,” said Giovanni Staunovo, commodity analyst at UBS in Zurich. “It’s range-trading still.”

The yield on U.S. 10-year Treasuries climbed four basis points to 2.58 percent, while gold slid 0.5 percent.

The most notable feature of overnight trading, according to Bloomberg, is the remarkable immunity demonstrated by markets to terror incidents this year, with initial knee-jerk reactions to buy haven assets after attacks fading quickly.

“The market response to each new terror event is less and less pronounced,” said Mike van Dulken, head of research at Accendo Markets. The move in European stocks “confirms ever-thickening investor skin.”

That said, with trading volumes decreasing before December holidays and year-end, investors may be loath to veer too far from the underlying market trends that have prevailed since the election of Donald Trump in November, namely favoring stocks and shunning bonds.

Bulletin headline summary from RanSquawk

• In a similar fashion to yesterday, European equities trade with little in the way of firm direction as newsflow remains light after the BoJ kept policy on hold
• Very quiet in the FX markets today, but the USD has received yet another push as North American players responded to comments from Fed chair Yellen
• Looking ahead, highlights include Turkish Rate Decision, Fonterra GDT auction as well as earnings from Nike and General Mills

Markets Snapshot

• S&P 500 futures up 0.1% to 2263
• Stoxx Europe 600 up 0.1% to 360.0
• MSCI Asia Pacific down 0.5% to 135.27
• Nikkei 225 up 0.5% to 19,494.53
• US 10Yr yield up 4 bps to 2.58%
• Dollar index up 0.2% to 103.38
• WTI oil futures up 0.1% to $52.17/bbl
• Brent crude up 0.1% to $54.99/bbl
• Gold spot down 0.4% to $1133.69/oz
• German 10yr yield up 3bps to 0.28%
• Portuguese 10yr yield up 5bps to 3.81%
• Italian 10yr yield up 6bps to 1.88%
• iTraxx Main down 0.3bps to 70.88
• iTraxx Crossover up 0.5bps to 290.36
• Euro spot down 0.17% to 1.0384
• Yen spot -0.7% to 117.90
• Copper down 0.06% to $5492/MT

Looking at Asian stocks, markets traded mixed despite a positive lead from Wall St where telecoms outperformed and sentiment was supported by hopes a Santa rally would push the Dow above 20,000. ASX 200 (+0.5%) took the impetus from US and was underpinned higher by miners after gold recouped some of the 2% declines it suffered last week. Nikkei 225 (+0.5%) shrugged-off early cautiousness as a weaker JPY post-BoJ kept the index afloat, while Hang Seng (-0.5%) and Shanghai Comp. (-0.5%) traded subdued as a firm CNY 250b1n liquidity injection by the PBoC was overshadowed by reports that China may tighten licensing procedures for insurance firms and could also increase financial and asset requirements for shareholders. 10yr JGBs traded higher with support seen following the BoJ policy decision to maintain the 10yr JGB yield target at around 0% as this raises speculation the BoJ could continue restricting rapid advances in yields as seen last week. However, prices then pulled back, while the yield curve also steepened amid underperformance in the super-long end.

The BOJ kept its bank rate unchanged at -0.1% as expected and maintained its target for the 10yr JGB yield at around 0%. The decision to maintain policy was conducted by 7-2 vote with Sato and Kiuchi as the dissenters, while the BoJ also raised its economic assessment for the 1st time in 18 months as it stated that the economy is likely to turn to a moderate expansion. RBA minutes from December 6th meeting stated that reducing rates further could carry risks for debt that outweighed any economic benefit but also added that domestic data has not been that encouraging.

In Europe, equities continue to trade flat on the session with muted price action across the board. On a sector specific basis, defensive sectors outperform in the form of Healthcare names while materials are the notable laggards. Mediaset (17%) continue their recent ramp, with Vivendi continuing to grow their stake in the Co. and stating they are looking to increase to 30%. Fixed income markets have seen similarly muted trade, with bunds marginally lower on the day, however remaining above the 163.00 level. Periphery spreads are marginally wider against the German benchmark for the most part amid the thin liquidity, with Italy continuing to remain in focus after the government took the first step for a bailout of their banking system.

In currencies, FX markets are very quiet but the USD has received yet another push as North American players responded to comments from Fed chair Yellen on the strength of the US labour market. USD/JPY has recovered back onto a 118.00 handle, but along with EUR/USD under 1.0400, we are seeing a severe lack of momentum in the market. This is not deterring USD bulls, who remain vulnerable to a short squeeze, but against GBP, we are seeing another push on the mid 1.2300's as EUR/GBP gets a fresh bid through .8400. Into year end, we have to expect some Euro based buying here. The commodity currencies are also under pressure against the greenback, with AUD looking to .7200, NZD sub .6900 and USD/CAD shaping up for a retest on the resilient 1.3500-1.3600 area. Only one trade in town at the moment and that is to buy USD dips, but proving strained at the present time despite the offered tone in USTs.

Looking at the day ahead, this morning in Europe we kicked off with German November PPI data came in at 0.1%, hotter than the -0.2% expected, and well above the -0.4% print in October. There’s no data due out in the US although later today though we are due to get China’s Conference Board leading economic index for November. It’s fairly quiet away from the data too although it’ll be worth keeping an eye on events in the UK where PM Theresa May is due to be questioned by the House of Commons Liaison Committee about her plans for leaving the EU, amongst other things

* *  *

DB concludes the overnight wrap

Sadly our final recap of the year is tainted by the sombre events in Germany, Turkey and Switzerland yesterday. The news of the assassination of Russia’s ambassador in Ankara came as Turkey and Russia were striving to rebuild their relationship over the conflict in Syria however the incident will now have the potential to reignite tensions again in the region. Meanwhile in Germany investigations are underway after a truck drove into a number of innocent bystanders at a Christmas market in Berlin. In Zurich three men have also been seriously injured following a shooting in an Islamic centre near the city’s main station. These events come after geopolitical concerns were already coming back into the spotlight following the seizure of a US drone in the South China Sea last week.

The biggest impact in markets from the events was in FX where the Turkish Lira (-0.75%) in particular underperformed, along with a number of other EM currencies. The MSCI EM equity index also closed -0.62% and so declining for the fourth consecutive session. In developed markets the feeling was generally cautious but resilient. The Stoxx 600 (-0.12%) closed a touch lower while the S&P 500 (+0.20%) edged slightly higher although unsurprisingly on seasonally thin trading volumes. The most interesting price action continues to be in sovereign bond markets. 10y Bund yields closed 6.9bps lower yesterday at 0.241% and have now moved up or down by at least 3.3bps for each of the last six sessions. 10y Treasury yields also dipped 5.3bps lower to close at 2.539%. While there was some suggestion that the moves reflected safe haven flows it appears that the blame was more last minute position clearing into year-end than anything else.

Before we go any further, this morning in Asia the focus has turned over to the BoJ meeting outcome. As expected there were no last minute holiday season surprises with the various policy measures all kept as is. Significantly, that also means that the BoJ will continue with its yield curve control policy which means targeting 10y JGB yields around zero percent. Where the BoJ was a bit more upbeat however was on its assessment of the economy. The BoJ now expects Japan’s economy to “turn to a moderate expansion” following a pickup in exports, improved domestic demand and business sentiment. Inflation forecasts are however expected to continue to be benign while the BoJ also pointed towards the risks to the outlook as including developments in EM and commodity exporting economics, developments in the US economy, Brexit and geopolitical risks. Governor Kuroda is scheduled to speak just after we go to print.

The Yen has weakened -0.40% following that while Japanese equity markets have rebounded following early modest losses. The Nikkei and Topix are currently +0.46% and +0.14% respectively. 10y JGB yields are also 0.6bps lower at 0.061% after touching a high of 0.090% last week. As we’ve highlighted a few times, it’ll be interesting to see how much the yield cap gets tested by the market next year. Elsewhere in Asia it’s a bit more mixed. The Hang Seng (-0.32%) and Shanghai Comp (-0.52%) are both in the red although the Kospi (+0.23%) and ASX (+0.43%) have both edged higher. US equity index futures are little changed meanwhile along with Gold and most of the commodity complex.

Moving on. The Italian banking sector was also back in the spotlight again yesterday following the news that the Italian government has asked Parliament to authorise up to €20bn through increasing public debt to rescue the nation’s ailing banks. Expect this story to rumble on today.

Elsewhere, Fed Chair Yellen also spoke yesterday at the University of Baltimore. However, as we were expecting there wasn’t a huge amount of new information. Speaking primarily on the labour market, Yellen said that “after years of a slow economic recovery, you are entering the strongest job market in nearly a decade” and that “there are also indicators that wage growth is picking up, and weekly earnings for younger workers have made strong gains over the past couple of years”.

There was also a bit of data to highlight yesterday. In the US we got the flash services PMI for December which came in weaker than expected at 53.4 (vs. 55.2 expected and 54.6 in the month prior). Combined with the manufacturing print from last week, that leaves the flash composite reading at 53.7 which is down 1.2pts from November. Elsewhere, in Germany the December IFO business climate index printed at 111.0 (vs. 110.6 expected) which is up 0.6pts from last month. The current assessment reading was reported as rising 1pt to 116.6 while the expectations component was little changed around 105.6.

Looking at the day ahead, this morning in Europe we’re kicking off in Germany where the November PPI data will be released followed thereafter by the UK’s CBI distributive trends survey for this month. There’s no data due out in the US although later this afternoon we are due to get China’s Conference Board leading economic index for November. It’s fairly quiet away from the data too although it’ll be worth keeping an eye on events in the UK where PM Theresa May is due to be questioned by the House of Commons Liaison Committee about her plans for leaving the EU, amongst other things.

Unilever shares soared this morning after food conglomerate Kraft-Heinz, backed by Warren Buffett and Brazil's 3G, confirmed it made a £112bn takeover offer for Unilever, leading to a 11% surge in the shares of the London-listed Anglo-Dutch conglomerate, the biggest one day surge since 1987. Shares of Kraft Heinz rose over 4% premarket in New York.

In a statement issued shortly after the FT reported earlier on Friday that Kraft Heinz had made an approach to Unilever, Kraft said that Unilever declined its initial offer, but added "while Unilever has declined the proposal, we look forward to working to reach agreement on the terms of a transaction."

The U.S. food and beverage maker said it is uncertain that any further formal proposal will be made to Unilever or that an offer will be made at all. It also said the terms of any such transaction are uncertain.

With Unilever's market capitalization of £112bn, a potential takeover would be one of the largest in history. The company is the world’s fourth-largest consumer goods company by sales, with revenues last year of €52.7 billion. As the FT adds, "a deal would unite some of the biggest brands in the global consumer good industry, adding the likes of Dove and Knorr to the Kraft Heinz roster, which spans Philadelphia cream cheese, ketchup and Weight Watchers."

Following the news, Mondelez dropped 5.2% pre-market, Kellogg -2% and General Mills -0.9%, as a potential deal has dampened speculation that other packaged food companies could be targets for KHC.

In the statement just filed by Unilever, in which it recommends holders take no action, it announced that Kraft-Heinz had offered $50/share for the company.

As the takeover was first reported by the FT Alphaville blog, there was immediate speculation how widely it was leaked first. Sure enough, volume of bullish Unilever options rallied in the past two days. As Bloomberg points out, on Unilever’s U.S. ticker, 10,909 calls traded on Feb. 15, the most since 2011 and compared with 232 puts; 5,186 bullish contracts changed hands on Feb. 16 versus 31 bearish bets. March $45 and $40 calls were the most active on Feb. 15; March and May $45 calls were the most traded on Feb. 16.  On the Dutch ticker, call volume jumped to 24,649 on Feb. 16, the most since September and more than double put trades. March EU40 calls were the most traded on Feb. 16.

The SEC will be busy tracking down just who leaked what.

Via Disobedient Media

An investigation has revealed that the Teachers Insurance and Annuity Association—College Retirement Equities Fund (TIAA)'s ties to a land grabbing scheme in Brazil had previously unnoticed connections to the Clinton Foundation, Senator Elizabeth Warren, the Open Society Foundation and Warren Buffet's Berkshire Hathaway Group. The land grab occurred at the same time as a leadership reshuffle at the TIAA and contributed to a worsening situation where poor Brazilians were forced off of their land and activists seeking to stand in the way are increasingly being threatened and in some cases, murdered.

I. The TIAA Participates Financially In Corporate Efforts To Disenfranchise Poor Landowners In Brazil

The TIAA is a Fortune 100 financial services organization that is the leading retirement provider for people who work in the academic, research, medical and cultural fields. As of June 30, 2016, they served over 5 million active and retired employees participating at more than 16,000 institutions, with $889 billion in combined assets under management. The TIAA has since 2008 participated in the purchasing of Brazilian farmland through the group Radar Propriedades Agrícolas which is 81% owned by a TIAA-CREF unit and 19% by Brazilian billionaire Rubens Ometto Silveira Mello through his sugar and biofuels company Cosan. Cosan is described by NPR as being one of Brazils most notorious "land grabbers." Cosan tells the Brazilian authorities that it controls the venture through its seats on the board but the TIAA lists Radar as one of its “majority-owned affiliates.”

In 2010, Brazil's government attempted to change laws concerning foreign ownership of land and bar groups like the TIAA from continuing their involvement in the scheme as part of a wave of rising nationalism and a concerted push to return control over the energy industry to domestic parties. To the bypass this legislation, the TIAA merely created a new vehicle called TIAA-CREF Global Agriculture LLC (TCGA), which was 51% owned by Cosan. The New York Times described the new organization as "largely indistinguishable" from the previous one, with many of the same employees and executives. Other investors included the Second Swedish National Pension Fund (AP2) and the Caisse de dépôt et placement du Québec (CDP) and the British Columbia Investment Management Corporation (bcIMC) of Canada.

After the formation of this group, the TIAA began to ramp up land purchases through Cosan around 2012. Instead of acquiring farms directly through Radar, TCGA funds are invested through a separate company, Tellus Brasil Participações Ltda, (Tellus), that is also managed by the Brazilian sugar company Cosan. As can be seen in the diagram below, TCGA by way of two Brazilian subsidiaries, owns 49% of Tellus with Cosan owning the other 51%. Since Tellus is 51% owned by the Brazilian company Cosan, the company is not subject to Brazilian regulations restricting foreign ownership of farmland.

As these land purchases have increased, international non-profit group GRAIN has highlighted disturbing facts indicating that the TIAA is acquiring farms secured from poor landowners by violent local business figures in a process known in Brazil as "grilagem." The TIAA refuses to disclose the exact locations of the various farms they hold, but ACORN was able to trace a number of them to the Brazilian states of Maranhão and Piauí. Their investigations reveal that the TIAA acquired multiple farms in Maranhão were acquired from a notorious land grabber and businessman, Euclides de Carli e Joacir Alves. The discovery raises questions about exactly how many farms the TIAA is acquiring from land grabbers across Brazil.

The TIAA's actions are contributing to what ACORN describes as a larger process of land speculation, expansion of industrial agriculture plantations that are fueling land grabbing, environmental destruction, labour exploitation and numerous social and health calamities across rural Brazil. It has also fueled a culture where local power figures have begun to murder environmental activists in increasing numbers. Some of these murders have occurred in the same states that the TIAA operates farms in. In 2015, environmental activist Raimundo Santos Rodrigues was murdered the state of Maranhão as part of what The Washington Post described as a disturbing rise of activist deaths at the hands of land grabbers in Brazil. This spree of murders has even included government officials, such as the city of Altamira's secretary for the environment, Luiz Alberto Araújo in the state of Pará. The involvement of the TIAA, whether directly or indirectly, in this trend raises deep concerns about their investment program in Brazil.

II. The TIAA And It's President Have Close Financial And Professional Ties To The Clinton Foundation, George Soros and Warren Buffet

Though the TIAA's involvement in Brazil has been reported by the press, there has been no disclosure that the TIAA and their President have close ties to the Clinton Foundation, George Soros and Warren Buffet's Berkshire Hathaway group, both financially and professionally through Swiss reinsurance company Swiss Re. These facts are incredibly important, as the TIAA's current President assumed his position the same year that the TIAA became involved in Brazil.

The TIAA President and Chief Executive Officer is Roger Ferguson, a graduate of Harvard University and School of Law. Prior to joining TIAA in April 2008 (the same year that the TIAA became involved in the land grabbing scandal), Mr. Ferguson was the head of financial services for Swiss Re, Chairman of Swiss Re America Holding Corporation, and a member of the company's executive committee. He also formerly served as the Vice Chairman of the Board of Governors of the U.S. Federal Reserve System and sits on the boards of Alphabet, Inc., General Mills, Inc., and International Flavors & Fragrances, Inc. Mr. Ferguson has very close ties to the Clinton family, and was listed by online financial news source Investopedia as a potential pick for Hillary Clinton's Secretary of the Treasury. He was also an attendee of the 2009 Clinton Global Initiative Annual Meeting.

Mr. Ferguson is also connected financially and professionally to George Soros and Warren Buffet. The George Soros Foundation is a major investor in Leapfrog Investments, a private equity firm. Other investors in Leapfrog Investments include the European Investment Bank, JP Morgan, Prudential Financial, Metlife, the German Federal Ministry for Economic Cooperation and Development, and most significantly the TIAA and Swiss Re. Warren Buffet's Berkshire Hathaway Inc. sank billions into Swiss Re in 2009, just after Mr. Ferguson took up his position at the TIAA. Buffet has since offloaded a portion of his stake in Swiss Re in 2015, ending a five year long tenure as the reinsurance group's largest investor.

Senator Elizabeth Warren also holds much of her wealth in the TIAA-CREF's Traditional fund, where her and her husband each hold accounts in the amount of at least $1 million. Warren's wealth has brought her large shares of criticism in light of her purported support for working and middle class Americans.

The involvement of the TIAA in Leapfrog Investment alongside Swiss Re raise questions about Roger Ferguson's incentives to involve the company in investment schemes that have lead to the disenfranchisement of poor farmers in Brazil and contributed to a culture where land grabbers are increasingly emboldened and willing to kill not just environmental activists, but also Brazilian government officials. Mr. Ferguson's apparent close ties to Swiss Re create further concerns about any potential influence Berkshire Hathaway may have had in the TIAA. The farmland scandal also creates concerns about Mr. Ferguson's apparent close connections to the Clinton Foundation and Senator Elizabeth Warren, given her involvement with the pension fund and the cozy relationship Mr. Ferguson had with the Clinton Foundation and Global Initiative.

Despite being a publicly traded organization, the TIAA's Board of Overseers does not appear to have clearly established guidelines about who is involved with the selection process for board members. Even more concerning is the revelation that the Board of Overseers was established by the Carnegie Foundation in 1937 to supposedly distance itself as a sponsor of the organization. Until questions about the leadership selection process at the TIAA can be suitably answered, the apparent involvement of such a large number of special interests in the TIAA will continue to dog the organization in light of their decision to participate in foreign investment rackets that seek to harm both the environment and small time landowners.

European stocks are modestly in the green as gains in banks and oil companies offset declines in miners. Asian stocks and S&P futures rise with Emerging-market stocks extending their longest winning streak since August on the back of the 5th consecutive daily drop in the USD.

The euro rose to the strongest in six weeks after a French presidential debate eased market concerns about a possible Le Pen win: the first French debate was reportedly won by centrist Emmanuel Macron. For those who missed it, last night saw the first televised debate between the candidates. Those who tuned in may be feeling a little jaded as the debate ended up lasting a whopping three and a half hours. There were plenty of head to head moments between Macron and Le Pen in particular which included much finger pointing and also amusing bouts of sarcasm. Immigration was unsurprisingly a hot topic while the exchanges also moved over to the economy and various policy measures. The general feeling was certainly one of it being lively however. Markets were largely waiting for some sort of conclusion about who came out on top though and following the debate an Elabe poll (covering 1157 respondents) found that Macron was seen as the winner of the debate at 29% with Melenchon second with 20%. Fillon and Le Pen came in joint third at 19% and Hamon came in fifth at 11%. An Opinionway poll showed 25% for Macron; in both polls Fillon and Le Pen were tied at 19%.

"From the point of view of international investors, this is a positive as it keeps France's position in the euro zone secure, or at least not weaker," said DZ Bank analyst Rene Albrecht.

As a result, the average probability of Macron win implied from betting odds climbed 2ppts to over 63%...

... boosting the Euro and peripheral bonds while pressuing Bunds. It’s worth noting that there are another two debates to come prior to the first round election on April 23rd. It's also worth noting that Hillary Clinton was seen as the comfortable winner in all the US Presidential debates.

Taking a cue from the debate polling which showed Macron as the most convincing, German bonds slid from the open, with French election risks seen waning. Losses extended in bunds after stronger-than-expected U.K. inflation data pressured gilts lower, with 10y U.K. yields climbing by around 6bps. MPC-dated SONIA rate jumps to price in almost one full hike by August 2018. The easing of French election risk has firmed rate-hike expectations for the ECB. Euribor strip has bear steepened from the open, with market pricing now showing over 20bps of rate increases priced by Sept. 2018.  ECB rate expectations have seen the 5y sector on the German curve underperform, now cheaper by around 2bps on the 2s5s10s fly.  French bonds meanwhile opened higher after the debate, with 10y yields dropping as much as 4bps. The move was quickly faded, as has been repeatedly observed in similar bouts of optimism around the French election. OATs now little changed.

The biggest winner, however, was the Euro, which rose to just shy of 1.08, the strongest in more than a month.

“When you consider how many people have been worried about this election and how cheap the euro is, if that risk were to go away then there’s the potential for money to flow into Europe,” said Andrew Sheets, chief cross-asset strategist at Morgan Stanley in London. “That would be another form of volatility. There’s always a risk of large moves when valuations are extreme -- and the euro is quite cheap.”

The dollar index fell below 100 for the first time since early February and was down almost half a percent on the day. The currency was on the defensive after Chicago Federal Reserve President Charles Evans reinforced the perception that the U.S. central bank will not accelerate the pace of its interest rate hikes. He said on Monday that two more interest rate hikes this year were likely, disappointing investors who had anticipated rates would be increased more quickly. The greenback is on its longest losing streak since November after the Federal Reserve’s dovish message on the speed of monetary tightening last week.

European stock markets opened higher after a rally in Asia, where MSCI's broadest index of Asia-Pacific shares outside Japan hit 21-month highs. U.S. stock futures pointed to a positive start for Wall Street, which had suffered on Monday as investors worried that President Donald Trump's plan to cut taxes and boost the economy would take longer than expected to realize.  South Korea led gains among Asian emerging markets, with the Kospi jumping 1 percent to the highest since July 2011. Hyundai Motor Co. climbed 8.6 percent amid market speculation over a possible stake purchase by Elliott Management. The Stoxx Europe 600 Index added less than 0.1 percent at 9:48 a.m. in London. Banking stocks outperformed, led by Italian and French lenders, as worries over the French presidential election further abated. Mining stocks lost ground, trimming recent sharp gains. Futures on the S&P 500 rose 0.1 percent. The benchmark gauge fell 0.2 percent on Monday.

The 10-year U.S. Treasury yield briefly fell to two-week lows following the comments to 2.461 percent. It last stood at 2.48%. Oil prices rallied on expectations that an OPEC-led production cut to prop up the market could be extended. Prices for front-month Brent crude futures LCOc1, the international benchmark for oil, gained 1 percent to $52.13 per barrel.  OPEC members increasingly favor extending the output curb beyond June to balance the market, sources within the group said, although they added this would require non-OPEC members such as Russia to also step up their efforts.

Elsewhere, Deutsche Bank was in focus as the subscription period for a capital raising began on Tuesday.  Also today, Nike, FedEx, and General Mills are among companies scheduled to publish results

* * *

Bulletin Headline Summary from RanSquawk

• Sentiment in Europe received a lift from the open as participants reacted to a perceived strong performance from Macron in last night's French presidential debate.
• GBP ramps higher after inflation rises to the highest level since Sep'13
• Looking ahead, focus will Canadian retail sales, API crude report as well as comments from Fed's George and Mester.

Market Snapshot

• S&P 500 futures up 0.2% to 2373.5
• STOXX Europe 600 up less than 0.1% to 378
• MXAP up 0.1% to 149
• MXAPJ up 0.3% to 483.23
• Nikkei down 0.3% to 19,455.88
• Topix down 0.2% to 1,563.42
• Hang Seng Index up 0.4% to 24,593.12
• Shanghai Composite up 0.3% to 3,261.61
• Sensex down 0.3% to 29,432.19
• Australia S&P/ASX 200 down 0.07% to 5,774.62
• Kospi up 1% to 2,178.38
• German 10Y yield rose 2.8 bps to 0.468%
• Euro up 0.5% to 1.0795 per US$
• Brent Futures up 0.9% to $52.06/bbl
• Italian 10Y yield rose 0.7 bps to 2.364%
• Spanish 10Y yield fell 0.4 bps to 1.843%
• Gold spot down 0.4% to $1,229.24
• U.S. Dollar Index down 0.4% to 100.01

Top Overnight News from BBG

• PPG Said to Ready New Akzo Offer After Failed $22.4 Billion Bid
• Fed’s Dudley Says Wells Fargo Shows Bank Culture Needs Improving
• Google Overhauls Policies After Uproar Over YouTube Videos
• Deutsche Bank Said to Face Regulatory Fines Over Currency Trades
• Mideast Airlines Say New U.S. Restrictions Will Force Changes
• BlackRock Likes Property Even After Yellen Calls Prices ‘High’
• BMW Sees 2017 Profit Rising Slightly as Spending Exceeds Target
• Banking Panel Senators Make Bipartisan Call for Growth Proposals
• Baidu’s iQiyi Signs Pact With Warner Bros. on Movie Rights
• Chevron Says New LNG Projects Unlikely in West Australia
• NYSE Says It Has Identified, Fixed Cause of Arca Disruption

In Asian Markets, the major equity indices traded somewhat mixed following a similar lead from Wall St., where financials underperformed and participants were indecisive amid a lack of tier-1 data releases. ASX 200 (-0.1%) was dampened by weakness in telecoms and underperformance in the financial sector, while Nikkei 225 (-0.4%) lagged on return from an extended weekend, although downside was stemmed as USD/JPY nursed losses. Elsewhere, Hang Seng (+0.3%) and Shanghai Comp. (+0.3%) were kept afloat following the continued liquidity operations by the PBoC which resulted in a 2nd day of net injections. Finally, 10 year JGBs traded higher amid a dampened risk tone in Japan and with the BoJ present in the market for a total JPY 1.15tIn of JGBs ranging from 1-10yr maturities. PBoC injected CNY 50bIn 7-day reverse repos, CNY 20bIn in 14-day reverse repos and CNY 10bIn in 28-day reverse repos

Top Asian News

• SoftBank Is Said to Invest in WeWork at $17 Billion Valuation
• Downer Makes A$1.26 Billion Takeover Offer for Spotless
• McDonald’s China Says It’s Not Affected by Ban on Brazil Meat
• Billionaire Damani’s Avenue Supermarts Shares Double on Debut
• Modi-Backed ETF May Fuel India Sales After $1.4 Billion Haul
• China H Shares Rise to Highest Since 2015; Power Producers Gain
• M1 Bids May Not Come Above S$2.20/Share, Religare’s Jin Says
• India’s HPCL to Use Honeywell Clean-Fuel Technology
• Freeport Indonesia Restarts Copper Concentrate Mill: Spokesman

European risk sentiment received a lift from the open as participants reacted to a perceived strong performance from Macron in last night's French presidential debate. As such European equities opened higher, with Euro Stoxx 50 spending much of the session higher by around 0.5%. On a sector breakdown, financials are among the best performers as Deutsche Bank trades higher on the session after going ex-subscription to their capital raising plans. Elsewhere Akzo Nobel are among the best performers on a stock specific basis as M&A news continues to circulate, with pre-market reports today suggesting PPG is preparing a renewed takeover offer for the Co. The notable data of the session, came in the form of UK CPI, with the higher than exp. reading (Y/Y 2.3% vs. Exp. 2.1%) seeing gilts underperform and sending GBP/USD towards 1.2450. The GBP strength has further exacerbated pressure on the USD, with the USD-index slipping below 100, while the French presidential election saw EUR/USD touch 1.0800. Fixed income markets have been pressured by the aforementioned risk on sentiment, with Bunds down 35 ticks on the session, while OATs saw a paring of some of their initial losses in the wake of reports that PM Cazeneuve asked govt. members not to back Macron.

Top European News

• EU Makes U.K. Wait to Start Brexit Talks as Trigger Date Set
• Macron on Top After First Debate of French Presidential Election
• Porsche SE Posts Profit as Owner Clan Plans to Buy Out Piech
• Swiss Watch Slump Extends Record Decline as U.S. Exports Slide
• Fingerprint Cards Withdraws Dividend Plan as Revenue Plummets
• Abertis Gives Information on Ruling on AP-7 Accounting Treatment
• Swedish Casino Company Takes Breather From Deals to Drive Growth
• Poland Needs Innovation to Catch Up With West, World Bank Says

In currencies, the Bloomberg Dollar Spot Index slipped by 0.2 percent, following a 0.1 percent drop Tuesday. The euro was up by 0.5 percent at $1.0796, while it rose versus all of its G-10 peers. The British pound traded 0.7 percent higher after data showed U.K. inflation rose faster than expected. The main mover of the morning has been GBP, which had been trending higher ahead of the inflation report to trip above 1.2400. In the wake of the  release, GBP continued its ascension after CPI beat expectations, subsequently stoking expectations that the overshoot will force the Bank of England to act through potentially hiking rates, as such, a 25bps hike is now fully priced in by Aug'18. Elsewhere, a reassuring performance from Macron in the first presidential TV debate has buoyed EUR, with the currency touching 1.08 against the greenback. RBA minutes from Mar 7th meeting stated that it judged steady policy was consistent with growth and inflation targets and that rising AUD/USD would complicate economic transition. RBA also stated that economic growth is to accelerate gradually to above potential over the next 2 years and higher commodity prices could last longer than first thought given the stronger global demand.

In commodities, West Texas Intermediate oil climbed 0.8 percent to $48.60 before U.S. inventory data on Wednesday and as Libya prepared to restart crude shipments from major ports. Copper slumped 0.7 percent amid signs supplies are returning; disruptions caused the metal to surge last month to the highest level since 2015; prices slipped after reports that the union for workers on strike at the BHP Billiton Escondida copper mine held talks with the company and also coincided with a 4% drop in Dalian iron ore futures during Asian trade. Gold (-0.4%) prices pulled back from 2 week highs after four days of gains, while the softness in the USD index has supported oil prices with Brent futures above USD 52/bbl and WTI above USD 49/bbl ahead of the API inventories after market.

Looking at the day ahead, in the US the diary remains sparse with just the Q4 current account balance reading expected. Away from the data this morning we are expected to hear from the Fed’s Dudley and BoE’s Carney at a bank ethics event in London, while this afternoon we are due to hear from the Fed’s George and then this evening the Fed’s Mester is due to speak. The EU finance ministers meeting will also continue in Brussels this morning.

US Event Calendar

• 8:30am: Current Account Balance, est. $129.0b deficit, prior $113.0b deficit

Central Banks

• 6:35am: Fed’s Dudley, BOE’s Carney Speak at Bank Ethics London Event
• 12pm: Fed’s George Speaks in Washington on U.S. Economy and the Fed
• 6pm: Fed’s Mester Speaks at University of Richmond
• 9:45pm: Boston Fed Rosengren Speaks in Bali at Asia-Pacific Meeting

DB's Jim Reid concludes the overnight wrap

Will France wake up this morning feeling more confident about the upcoming Presidential race? Well last night saw the first televised debate between the candidates. Those who tuned in may be feeling a little jaded as the debate ended up lasting a whopping three and a half hours. There were plenty of head to head moments between Macron and Le Pen in particular which included much finger pointing and also amusing bouts of sarcasm. Immigration was unsurprisingly a hot topic while the exchanges also moved over to the economy and various policy measures. The general feeling was certainly one of it being lively however. Markets were largely waiting for some sort of conclusion about who came out on top though and following the debate an Elabe poll (covering 1157 respondents) found that Macron was seen as the winner of the debate at 29% with Melenchon second with 20%. Fillon and Le Pen came in joint third at 19% and Hamon came in fifth at 11%. It’s worth noting that there are another two debates to come prior to the first round election on April 23rd. It's also worth noting that Hillary Clinton was seen as the comfortable winner in all the US Presidential debates.

Prior to the outcome from that poll the Euro did touch as low as 1.072 overnight versus the US Dollar but bounced post the news and hit a high of 1.078, or up just under half a percent with the market seemingly comforted  that the debate failed to yield any further support to Le Pen’s chances. The Euro is now sitting at 1.076 as we go to print. Meanwhile equity markets are once again a bit mixed. Having been closed on Monday bourses in Japan are open again with the Nikkei currently -0.27%. The ASX (-0.16%) is also down however there are small gains for the Hang Seng (+0.31%), Shanghai Comp (+0.19%) and more notably the Kospi (+1.02%). US equity index futures are also up about +0.20% while Gold is -0.57% so suggesting a slightly more positive environment for risk at the margin this morning.

While we’re on France, we thought it would be worth highlighting a report published by our colleagues yesterday in Europe summarising the results of their recently conducted global cross asset survey about investors’ views of asset  returns one week after the French presidential election. They summarise that a Le Pen or a Left win is, perhaps unsurprisingly, strongly associated with Negative or Very Negative risk asset outcomes. A Centre win is  mainly associated with Positive (but not Very Positive) outcomes, suggesting investors remain cautious about the economic environment, regardless of outcome. Many investors are neutrally positioned, but of non-neutral investors there is a distinct tilt towards long volatility and long hedges. A negative outcome is largely associated with high equity vol and sharp equity falls. In a positive outcome, the majority expectation is for limited equity upside only; however, we highlight a notable tail of expectations in the highly positive scenario, i.e. for very low vol and large equity upside. In rates the dominant expectation is for stable / higher yields regardless of election outcome. FX markets show a more bearish tilt, with EURUSD below parity in a negative outcome. In addition, upside is more limited – only 26% of respondents see EUR/USD above 1.10 in a positive outcome.

Moving on. In what was an otherwise very quiet day for the most part yesterday, it was the chorus of Fedspeak which markets were most concentrated on. Of  particular focus was the Chicago Fed’s Evans who made the case for the Fed hiking 2 or 3 more times this year. Evans also said that he expects inflation to hit 2% in 2018 and that things are “much more balanced around the outlook” than they were two years ago. The Philadelphia Fed President Harker also spoke and said that he expects the Fed to overshoot the 2% inflation target “a little bit” and that he would not rule out a faster or slower pace of hikes in 2017 than the three he has projected so far. Finally there was a much more dovish angle to the Fedspeak yesterday too with Minneapolis Fed President Kashkari also speaking. He said that “we do not have a high inflation threat right around the corner” and that ‘I’d be very surprised if core inflation reaches 2% this year”. He also said that “the data are basically moving sideways, so I’m asking, what’s the rush to raise rates”.

Aside from the Fedspeak, there wasn’t a huge amount more for markets to feed off aside from some political related stories. The G-20 news from the weekend came and went however a lot of the focus was on the news that the FBI has confirmed that it is conducting a broad inquiry into a possible link between President Trump’s presidential campaign in 2016 and Russia. Meanwhile here in the UK we got the confirmation that PM Theresa May will trigger Article 50 on March 29th and so officially starting the clock on negotiations. The European Council President Donald Tusk confirmed that he will present the draft Brexit guidelines to the EU27 members states within 48 hours. It’s worth noting also that a provisional plan for the EU to hold a summit on April 6th to discuss early negotiation plans has been pushed back to late April/early May, all of which obviously eats into PM May’s negotiating time frame.

Over in markets the end result of all the Fedspeak and various political related headlines was a very modest risk off start to the week. The S&P 500 ended -0.20% by the closing bell and so confirming a third consecutive daily decline following last Wednesday’s big post-FOMC rally. The Stoxx 600 (-0.17%) was down a similar amount and fell for the first time since last Tuesday. The exception was once again in EM however where the MSCI EM index (+0.70%) rose for the seventh consecutive session. In government bonds 10y Treasury yields dipped 4bps to 2.462% and are now down to the lowest yield since March 6th having touched an intraday high of 2.628% a week ago. In Europe bond markets didn’t really do much although Greek bonds were a bit weaker after Eurogroup head Jeroen Dijsselbloem said at a finance minister’s meeting that “some key issues” still remain to be sorted out between Greece and its creditors and that talks will continue and intensify in coming days.

Moving on. Yesterday’s data was fairly thin on the ground. In the US the sole release was the Chicago Fed national activity index which came in at a better than expected 0.34 in February (vs. 0.03 expected) and in doing so has pushed the three-month average up to 0.24 which is the highest since December 2014. In Germany PPI was reported as rising +0.2% mom in February which was a little less than expected. Meanwhile in the UK the Rightmove index of house prices showed prices as stable at +2.3% yoy in March. The other data concerned the latest weekly ECB CSPP holdings where the average daily run rate last week of €363m more or less matched the average €367m since the program started.

Looking at the day ahead, this morning in Europe the focus will be on the UK where we will get the February CPI/RPI/PPI data (with headline CPI expected come in at +0.5% mom and headline RPI at +0.8% mom). We will also get the February public sector net borrowing data in the UK and then the March CBI industrial trends survey. This afternoon in the US the diary remains sparse with just the Q4 current account balance reading expected. Away from the data this morning we are expected to hear from the Fed’s Dudley and BoE’s Carney at a bank ethics event in London, while this afternoon we are due to hear from the Fed’s George and then this evening the Fed’s Mester is due to speak. The EU finance ministers meeting will also continue in Brussels this morning.

Here comes even more of that deflation the Fed hates so much.

Walmart stock is getting whacked, as is the broader grocer sector, after Amazon announced moments ago that the acquisition of Whole Foods will close on Monday, and that in keeping with the company's tradition of stealing market by underpricing its competition, it will cut prices at Whole Foods once the deal closes.

In its press release, Amazon announced that its acquisition of Whole Foods Market will close on Monday August 28, 2017, and the two companies "will together pursue the vision of making Whole Foods Market’s high-quality, natural and organic food affordable for everyone. As a down payment on that vision, Whole Foods Market will offer lower prices starting Monday on a selection of best-selling grocery staples across its stores, with more to come."

Just in case it was not clear, it then added that "starting Monday, Whole Foods Market will offer lower prices on a selection of best-selling staples across its stores, with much more to come. Customers will enjoy lower prices on products like Whole Trade bananas, organic avocados, organic large brown eggs, organic responsibly-farmed salmon and tilapia, organic baby kale and baby lettuce, animal-welfare-rated 85% lean ground beef, creamy and crunchy almond butter, organic Gala and Fuji apples, organic rotisserie chicken, 365 Everyday Value organic butter, and much more."

“We’re determined to make healthy and organic food affordable for everyone. Everybody should be able to eat Whole Foods Market quality – we will lower prices without compromising Whole Foods Market’s long-held commitment to the highest standards,” said Jeff Wilke, CEO of Amazon Worldwide Consumer. “To get started, we’re going to lower prices beginning Monday on a selection of best-selling grocery staples, including Whole Trade organic bananas, responsibly-farmed salmon, organic large brown eggs, animal-welfare-rated 85% lean ground beef, and more. And this is just the beginning – we will make Amazon Prime the customer rewards program at Whole Foods Market and continuously lower prices as we invent together. There is significant work and opportunity ahead, and we’re thrilled to get started.”

 

“It’s been our mission for 39 years at Whole Foods Market to bring the highest quality food to our customers,” said John Mackey, Whole Foods Market co-founder and CEO. “By working together with Amazon and integrating in several key areas, we can lower prices and double down on that mission and reach more people with Whole Foods Market’s high-quality, natural and organic food. As part of our commitment to quality, we’ll continue to expand our efforts to support and promote local products and suppliers. We can’t wait to start showing customers what’s possible when Whole Foods Market and Amazon innovate together.”

The responses in WalMart stock was quick and painful, as shareholders anticipate even further margin compression, while AMZN has almost recouped the day's losses on expectations of more market share gains.

Also getting pummeled is the entire Whole Foods supplier space, including United Natural Foods, Hain Celestial, TreeHouse Foods, Post, General Mills, Snyder’s-Lance, which have dropped to session low on the announcement which is expected to squeeze the supplier channel on reduced pricing.  As a result, the S&P 1500 Packaged Food Index has sunk to session low, and is on track for biggest loss since November.

The day has finally arrived: today the Fed will officially announce the start of its balance sheet shrinkage (full preview here) while keeping rates unchanged, perhaps hiking again in December (market odds at 56%), while revising its economic projections and "dots", most likely in a lower direction.

And while we wait for the announcement and press conference after 2pm, US index futures - as well as European and Asian equities - are little changed, signaling a pause for Wall Street’s three major benchmark indexes after they hit new all-time highs ahead of the Federal Reserve’s policy announcement due today. They probably will not be changed after 2:30 pm, however, especially if Yellen surprises on the hawkish side. Don't look at the dollar for clues though: The DXY fell less than 0.1% against a basket of major currencies and was down against the euro, the yen and sterling. The Bloomberg Dollar Spot Index fell a second day, with the U.S. currency confined to a narrow trading range, as Treasury yields edged lower; broad lack of directional catalyst seen over the session as traders awaited the FOMC decision.

“If we move closer to a U.S. rate hike, that should come along with a bit more dollar strength and euro weakness which would harden the ECB’s exit case and be a headwind for government bonds,” said Commerzbank strategist Rainer Guntermann.

Ahead of the Fed, Europe's Stoxx Europe 600 Index was mixed alongside S&P 500 futures and a fractionally higher session for Asian equities. The dollar slipped, the euro and yen gained and the British pound jumped as data showed U.K. retail sales rose more than forecast in August. Spanish assets showed resilience even as the government stepped up its crackdown on an illegal separatist referendum planned for the Catalonia region. The Mexican peso swung after a 7.2 magnitude earthquake struck. Benchmark crude rose but struggled to break $50 a barrel. US Treasuries halted a three-day decline awaiting the Fed's interest-rate projections. New Zealand’s dollar led gains versus the greenback after an election poll showed the ruling National Party ahead, while the pound advanced after U.K. retail-sales data beat forecasts.

Financial markets remain largely calm - even after President Donald Trump used a UN speech to threaten to annihilate North Korea - as all eyes turn to Wednesday’s Fed decision. Expectations are high that the central bank of the world’s biggest economy will unveil plans to start shrinking its $4.5 trillion balance sheet, while any clues on the chances of a rate increase this year could tip the balance - market expectations of another hike in 2017 are at about 50 percent.

Asian stocks swung between gains and losses as investors awaited the Fed. The MSCI Asia Pacific Index rose 0.2 percent to 164.44 even as most shares declined, after earlier falling by the same magnitude; the gauge closed Tuesday at its highest level since December 2007. The Topix index ended the session in Tokyo almost flat at the highest since August 2015. Australia’s S&P/ASX 200 and the Kospi index in Seoul closed slightly lower. The Hang Seng Index in Hong Kong swung between gains and losses with the Shanghai Composite Index, before both advanced.  Telecommunications and energy stocks advanced, while utilities and consumer shares slipped. SoftBank Group Corp. was the biggest boost the gauge while Sony Corp. was among the biggest drags after Credit Suisse Group AG downgraded the stock, saying earnings may plateau in fiscal 2019. Japanese shares fluctuated in a narrow range throughout Wednesday’s session as investors awaited the outcome of the U.S. Federal Reserve’s policy meeting. The benchmark Topix index ended little changed, with about five shares declining for every four that rose. Nintendo Co. and telecommunications companies provided the most support, while chemicals and pharmaceutical shares were the biggest drags. The yen strengthened slightly against the dollar following a three-day. 1.2 percent drop

The Asia benchmark has risen about 22 percent this year, outstripping the S&P 500 Index’s 12 percent advance to a record, as investors looked past tensions between the U.S. and North Korea. Further gains may lie ahead because the Fed is expected to leave rates unchanged and may use “slightly dovish” language when announcing its decision later Wednesday in Washington, said James Soutter, a fund manager at K2 Asset Management in Melbourne. “Lower for longer rates probably means the U.S. dollar remains weak,”  Soutter said in an email. That’s “a positive for Asian stocks."

Elsewhere, the New Zealand dollar surged after a poll put the ruling National Party back in the lead ahead of the main opposition Labour Party ahead of this weekend’s election. And the fixing of the yuan remained in focus as investors try to gauge where the People’s Bank of China wants the currency. In a notable move in Chinese rates, the local 5Year bond yield had its biggest move since March.

What has changed? China 5 yr makes biggest jump since March pic.twitter.com/RZKz4gOBUp

— Sunchartist (@Sunchartist) September 20, 2017

Similarly, European equities are little changed for a second day, unwilling to make major moves ahead of any potential Fed surprises: the Stoxx Europe 600 Index was unchanged. Zara owner Inditex SA was among the worst performers after posting first-half earnings that missed analysts’ forecasts, while Kingfisher Plc was the best gainer after reporting France retail profit for the first half that beat the average analyst estimate.

In rates, the yield on 10-year Treasuries declined two basis points to 2.22 percent, the largest drop in almost two weeks. Germany’s 10-year yield fell two basis points to 0.44 percent, the biggest drop in almost two weeks. Britain’s 10-year yield declined less than one basis point to 1.327 percent.

In commodities, gold advanced 0.3 percent to $1,315.36 an ounce. Oil prices rose after Iraq’s oil minister said Organization of the Petroleum Exporting Countries producers and others were considering extending a supply cut and after data showed U.S. crude stocks were lower than expected.

Aside from the Fed, economic data include mortgage applications and existing home sales. General Mills is reporting earnings

Bulletin Headline Summary From RanSquawk

• GBP & NZD see initial bids following Retail Sales and Election Polls
• UK PM May intends to make a EUR 20bln Brexit payment offer to the EU, according to the FT
• Looking ahead, highlights include DoEs and the FOMC announcement & press conference

Market Snapshot

• S&P 500 futures little changed at 2,505.10
• STOXX Europe 600 up 0.03% to 382.25
• MSCI Asia up 0.2% to 164.48
• MSCI Asia ex Japan up 0.2% to 544.19
• Nikkei up 0.05% to 20,310.46
• Topix unchanged at 1,667.92
• Hang Seng Index up 0.3% to 28,127.80
• Shanghai Composite up 0.3% to 3,366.00
• Sensex up 0.03% to 32,413.08
• Australia S&P/ASX 200 down 0.08% to 5,709.09
• Kospi down 0.2% to 2,412.20
• Brent futures up 0.9% to $55.61/bbl
• German 10Y yield fell 1.0 bps to 0.442%
• Euro up 0.1% to $1.2011
• Italian 10Y yield fell 2.4 bps to 1.756%
• Spanish 10Y yield fell 1.0 bps to 1.546%
• Gold spot up 0.2% to $1,313.11
• U.S. Dollar Index down 0.1% to 91.68

Top Overnight News from BBG

• Investors looking to own exposure on the euro need to pay the stiffest premium since December 2016 when it comes to a Federal policy decision
• Even as the Fed will likely hold rates today, futures suggest another Fed hike could happen this year
• Oil rises on signs the pace of U.S. stockpile gains is slowing as refiners resume operations after Hurricane Harvey, boosting crude demand
• At least 248 people were confirmed dead after a 7.2 magnitude earthquake struck near Mexico City
• Bitcoin is looking increasingly likely to splinter off again in
  November, creating a third version of the world’s largest cryptocurrency
• Hurricane Maria was on course to hit Puerto Rico just two weeks after Irma caused as much as $1 billion in damages
• Impact of pound fall on goods inflation may have peaked, BOE says in quarterly agents’ summary of business conditions
• Capital Four, which is the largest European high-yield bond fund, is now cutting down on risk as higher interest rates loom on the horizon
• Merkel pact with SPD still looks most likely after Germany votes
• Abe said to delay fiscal 2020 primary balance target: Nikkei
• U.K. retail sales rise 1% m/m in Aug. vs est. +0.2%
• Japan Aug. exports rise 18.1% y/y; est. +14.3%
• Bain Is Said to Plan Toshiba Deal Close Despite Legal Threat
• Thyssenkrupp and Tata to Create Europe’s No. 2 Steelmaker
• Maersk Sells Tankers Unit for $1.17 Billion to Holding Company
• After Reaping 40% in Turkey, Traders Eye 2017’s Worst Stocks
• Noble Group CDS Ruling Puts Payouts in Doubt in Market Feud
• OPEC Has Success at Last, But Oil Revival May Be Short-Lived

Asia markets saw an indecisive trading day amid a cautious tone ahead of today’s FOMC announcement. The looming risk event initially sapped the momentum from another record close on Wall St. and kept bourses in Australia and Japan subdued, while Chinese markets also conformed to the tentativeness after a significantly weakened liquidity operation by the PBoC. However, sentiment then gradually improved throughout the session which helped Nikkei 225 (Unch), Hang Seng (+0.2%) and Shanghai Comp. (+0.2%) pare losses, although gains were only superficial as focus remained on the FOMC and ASX 200 (-0.1%) continued to lag amid weakness across its major industries. 10yr JGBs were flat with participants sidelined amid an enhanced liquidity auction in which the b/c fell from previous, while the BoJ also kick starts its latest 2-day policy meeting where it is widely anticipated to refrain from any policy tweaks. PBoC injected CNY 20bln via 7-day reverse repos and CNY 10bln via 28-day reverse repos. PBoC set CNY mid-point at 6.5670 (Prev. 6.5530) Japanese Trade Balance Total Yen (Aug) 113.6B vs. Exp. 104.4B (Prev. 418.8B).

Top Asian News

• China Is Said to Mull Relaxing Foreign EV Maker Restrictions
• Buffett-Backed BYD Looks Overcharged on China Electric Car Bets
• Philippine Tax Reform Bill Heads for Senate Plenary Debates
• Iron Ore Sinks as ‘Peak Steel’ Call, Supply Angst Rattle Market
• Yuan Fix Back in the Spotlight as Traders Track PBOC Signals
• Bitcoin’s Likely to Split Again in November as Debate Rages On

European equity markets trade close to flat levels, as much of the anticipation is on the Fed decision and press conference later in the session. Kingfisher is the notable out-performer following their better than expected trading update, while Thyssenkrupp also trade in the green, following agreeing a JV with Tata Steel. Bonos have been surprisingly calm ahead of the Catalonia independence referendum, where we saw earlier reports stating that the Spanish Police have arrested the Catalonian Jr Minister. 10y spreads to Bunds have been tighter by over 10bps to 111.3bps, from a wide of 123bps earlier this month. Much fixed income anticipation was on the new German 30y Bund auction, with a B/C of 1.8 and an average yield of 1.27%. Gilts saw some bearish pressure following the stela Retail Sales report from the UK, falling 30 ticks as a reaction and printing fresh recent lows

Top European News:

• Banks Are Said to Hire Lazard to Solve Turkey’s Biggest Default
• Zara Owner’s Profitability Drops to Eight-Year Low on Euro
• Volkswagen Comeback Pushes Europe Bond Sales Past Trillion Euros
• U.K. Retail Sales Rise More Than Forecast as Consumers Stir
• Kingfisher Gains Most Since 2011 in ‘Litmus Test’ for Sector
• NorteGas Energia May Sell EUR Benchmark 5Y, 10Y Bonds Tomorrow
• Major Lender Requests Bailout as Russian Banking Woes Spread

In currencies, GBP was the outperformer early in the EU session, evident of the aforementioned strong Retail Sales report from the UK, printing the largest increase since April. Cable was pushed towards the week’s high around the 1.3619 area, finding some resistance around these levels and retracing much of the move, trading back at pre-announced levels. EUR/GBP bears also took advantage of the strong figures, reversing the failed attempt to attack yesterday’s high. The latest New Zealand election poll sparked some early volatility on the futures open, with the seemingly market friendly, National Party regaining ground in the One News Poll (National Party 46% (+6%), vs. Labour 37% (-7%), vs. Green 8% (+1%)). AUD/NZD trades back inside the 2017 range and back below 1.1, a close below 0.9 could see the 1.1 – 1.03 2017 range once again become the trading pattern in the pair. The DXY remains range bound as much focus is on the Fed later in the session

In commodities, oil markets have seen slow trade, with WTI’s attempt of a successful break of yesterday’s high failing, and now consolidating back in the post API range. Elsewhere, Saudi Aramco will be able to release its financial accounts in early 2018 if the government decides where they plan to list the oil giant, according to sources.

Looking at the day ahead, Germany’s August PPI printed at 2.6%, vs 2.5% yoy expected; in the US, data wise there is MBA mortgage applications and existing home sales. Onto other events, the main story is the FOMC rate decision in the US, followed by Yellen’s press conference at 14:30 EDT. Elsewhere, EU’s Chief Brexit negotiator Michael Barnier will speak and the OPEC’s panel of technical representatives will meet to discuss production cuts.

US Event Calendar

• 7am: MBA Mortgage Applications, prior 9.9%
• 10am: Existing Home Sales, est. 5.45m, prior 5.44m
• 10am: Existing Home Sales MoM, est. 0.18%, prior -1.3%
• 2pm: FOMC Rate Decision (Upper Bound), est. 1.25%, prior 1.25%
• 2pm: FOMC Rate Decision (Lower Bound), est. 1.0%, prior 1.0%

DB's Jim Reid concludes the overnight wrap

I was casually watching CNBC yesterday afternoon, listening on my headphones while doing some work. So generally minding my own business. However I nearly spilt my coffee when the anchor suddenly asked one of the guests whether he thought Jim Reid was "crazy" for the conclusions of his latest report. I suppose they say all publicity is good publicity. One pastime I'm strangely addicted to is occasionally reading the comments section of the more 'far out there' financial market blogs whenever they quote one of my pieces. Yesterday was no exception with hundreds of comments from readers at the bottom of one questioning  me (a polite way of putting it), my profession and then discussing numerous random conspiracy theories which in the past have included whether or not man walked on the moon. To be fair, my dearly departed  father was absolutely convinced that man on the moon was a Hollywood stunt. I spent years trying to have a rational conversation with him about it. Alas I never got him to change his mind.

Hollywood are unlikely to make a movie about the last 6 days of trading as the S&P 500 (+0.11%) saw its 6th consecutive session where the intraday range was no larger than 0.35%. This is the first time that this has happened since Bloomberg started collating intra-day data back to April 1982. I suspect with the Fed concluding their FOMC today this run will come to an end.

For those who may have missed it, DB’s Peter Hooper and his team expects the reinvestment tapering to begin on October 1 and that the Committee will also signal, via its economic projections and in Yellen’s commentary during the press conference, that it still anticipates raising rates one more time this year so long as incoming data are supporting its projections for inflation and growth. In their view, the median Fed expectation of three rate hikes next year will likely also remain intact despite downward revisions to individual forecasts.

Staying in the US, Trump’s debut speech at the UN general assembly seemed to have lots of punchy rhetoric but little material policy implications. On North Korea, he said “if US is forced to defend itself or its allies, we will...totally destroy NK” and that “rocket man is on a suicide mission for himself and for his regime”. On Iran, he said its nuclear program is “an embarrassment to the US” that should be revisited. He also stressed the importance of sovereignty for individual nations, noting “as president of US, I’ll always put America first”. Finally, on the UN, he said the institution was often associated with “bureaucracy and process”, although later noted that he hopes disputes would be resolved via the UN. Notably, other world leaders including Germany’s Merkel, Russia’s Putin, UK’s May and China’s President Xi were absent from  the meeting given their domestic commitments.

Turning to Europe, Reuters reported that the Euro’s strength is causing a rift among ECB policymakers on the timing and approach to the unwinding of QE. Sources told Reuters that Germany is ready to wind down the bond purchase program, while others prefer to reduce the monthly pace of buying, with earlier reports suggesting the scenarios discussed involved reducing the monthly buying to €20bln-€40bln (from €60bln). The split of opinions may mean no definitive end date for QE will be set when officials formally met in October. There was some talk of a delay on the decision until December.

Looking at how markets are kicking off on FOMC day over in Asia, we've pared back earlier losses following stronger than expected Japanese August import (15.2% yoy vs. 11.6% expected) and export (18.1% yoy vs. 14.3% expected) figures. As we type, markets are mixed but broadly unchanged, with the Kospi (-0.04%) and ASX 200 (-0.19%) down slightly, while the Nikkei is flattish and the Hang Seng is up 0.23%. Notably, Japan’s Abe is holding a press conference on 25 September, with speculation suggesting that a snap early election will be called. Returning to yesterday, US equities edged up slightly with all three bourses at fresh all-time highs. The S&P and Nasdaq were both up 0.1% and the Dow rose 0.18%. Within the S&P, gains were led by the telco sector (+2.25%), partly buoyed by merger talks between Sprint and T-Mobile. European markets were also higher, but little changed, with the Stoxx 600 (+0.04%) and DAX (+0.02%) broadly flat, while the FTSE 100 advanced (+0.30%) for the second consecutive day.

Core bond yields were also little changed, with Bunds and French OATs 10y yields down slightly (c0.5bp), while 10y Gilts continued to underperform (+2.7bp).

Elsewhere, peripherals have continued to outperform, with Italian and Spanish 10y yields down 2.5bp and 3bp respectively. Over in the US, yields were slightly higher (2Y: +0.5bp; 10Y: +1.6bp) yesterday, but are firmer (-0.7bp) this morning. Turning to currencies, Sterling was range bound intra-day on reports of whether Foreign Secretary Boris Johnson will resign or be sacked after his unauthorised Brexit manifesto but closed the day little changed (+0.06% vs. USD). Elsewhere, the US dollar index dipped 0.28% and the EURUSD gained 0.33%. In commodities, WTI oil rose 0.57% and Iron ore fell 4.06% as concerns build that Chinese steel production may be close to a peak. Precious metals have slightly recovered (Gold +0.28%; Silver +0.60%) after two consecutive days of weakness, while industrial metals broadly rose, with Copper (+0.04%), Zinc (+2.23%) and Aluminium (+1.38%) all up modestly.

Away from the markets and back to Brexit. Yesterday was an evolving day on the political front. Initially, the Telegraph reported that Foreign Secretary Boris Johnson may quit if PM Theresa May oppose his Brexit demands in her big speech later this week. Perhaps in response to this, Bloomberg reported that PM May has called a special cabinet meeting and avoided answering whether Johnson will resign or not. Then finally, later reports suggest the situation has been defused with Johnson planning to attend her keynote speech at Florence and that PM May plans to pay €20bln divorce payment to the EU to kick start the stalled Brexit talks. We can’t wait to hear what she has to say.

Elsewhere, the FT reported that France’s Emmanuel Macron will outline his proposal for EU reform in a speech on 26 September, potentially including themes such as a separate budget, a finance ministry and an EU monetary fund. This broadly echoes earlier comments made by EC President Juncker in his State of Union address where he called for a tighter EU integration.

Finally, the power of Amazon on traditional bricks and mortar stores has been shown again with Toys R US officially filing for Chapter 11 after c12 years under private equity ownership. Notably, its October 2018 bond now trades at 26c versus 97c at the start of this month. Elsewhere, S&P noted that 24 US retailers have filed for Chapter 11 this year, compared to 18 for all of 2016. So in a low default world the retail sector is certainly bucking the trend.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, August housing starts were soft, edging down 0.8% mom (vs. 1.7% expected), in part due to the impact of Hurricane Harvey. However, building permits were stronger than expected, rising 5.7% mom (vs. -0.8% expected) and leaves annual growth at 8.3% yoy. The level of permits has now returned to 1.3m, which is in line with this year’s high in January. Moving along, higher fuel prices have helped to drive a 0.6% mom increase in import prices in August (vs. 0.2% expected). Elsewhere, the 2Q current account deficit was -US $123.1bln (vs. -US$116bln expected), equivalent to c2.6% of GDP.

In Germany, the ZEW survey was above market expectations in the lead up to elections. For the current situations component, the reading came in 87.9 (vs. 86.2 expected) and on the expectations component, it was also higher at 17 (vs. 12 expected) – the highest in ten months. In the Eurozone, the ZEW survey on expectations rose to 31.7 (vs. 29.3 previous), while the July construction output came in at 0.2% mom (vs. 0.2% previous).

Looking at the day ahead, Germany’s August PPI will be out early in the morning (0.1% mom, 2.5% yoy expected). In the UK, there is retail sales for August (0.1% mom for core expected). Over in the US, data wise there is MBA mortgage applications and existing home sales. Onto other events, the main story is the FOMC rate decision in the US, followed by Yellen’s press conference at 14:30 EDT. Elsewhere, EU’s Chief Brexit negotiator Michael Barnier will speak and the OPEC’s panel of technical representatives will meet to discuss production cuts.

Negative Population Growth, Inc., has issued a November report warning that America is no longer making enough babies to keep pace with deaths. The report blames, the ‘baby bust’ phase on the millennial generation (1980-2000), who are having children at record low rates.

Their attitudes towards marriage, procreation, and materialism changed dramatically after the Great Recession when the economies of the world came to a screeching halt. After a decade of excessive monetary policy from the Federal Reserve. The millennials have been forced to take out an excessive amount of debt such as auto loans, consumer debt, and student loans in an era of wage stagnation. This has fundamentally changed the game for millennials and perhaps changed the course of the United States. The implications of falling birth rates in a low growth economic environment coupled with massive amounts of debt - is a perfect storm that will lead to the next crisis. 

Falling birth rates in the United States have been classified of what some call the ‘baby bust’. Like any bubble, there must be a bust cycle and when it comes to births in the United States — that time, is now. According to the report, some demographers are “freaked out by the falling birth rate, an occupational hazard for people who spend their professional lives scrutinizing population statistics”. As the demographic winds shift, the United States is preparing for a ‘Japanification’ period of lower birth rates and a much old generation to strain the economic and healthcare systems.

According to the Centers for Disease Control and Prevention, the number of babies born declined by 338,000 or 8.7% between 2007 and 2016. Over the period, the national fertility rate declined from 69.3 to a historic low of 62.0 in 2016. For more color, the peak was in 1960 at 118 after World war II, ever since it’s been in decline.

As a result, the national fertility rate (all ages) broke a bearish flag (chart below) and fell -11% between 2007 and 2016. To keep pace with deaths, moms need to have 2.1 births, but that is not the case today with 1.8.

“The fertility rate decline is driven entirely by millennial mothers in their teens and twenties,” said the report.

 

“Birth rates for all age groups of women under 30 fell to record lows in 2016,” it added.

Besides poor economic conditions and a transitioning economy, the report added the increased “availability and effectiveness of sex education and contraceptives for males and females” have played a large role in reducing the birth rate for millennials.

Despite demographers freaking about out by the falling birth rates, the report offers an insight into how others are dealing with the negative trend,

The United States is not alone in the demographic shift of less birth rates, as it’s evident below. Major developed economies and emerging growth economies are feeling similar pain.

The report says “we have been here before” relating today’s economic-stress to the 1930s and the late 1970s coinciding with ultra low brith rates for the younger generation. Interesting enough, the report asks: Is it different this time? 

As the paper suggests– it is different and millennials are increasingly delaying kids or just outright abandoning altogether.

The report lists four reasons why this time is different:

• A 2016 study of Census data from Pew Research found nearly one-third of young adults (ages 18-34) live with their parents, slightly more than the proportion that live with a spouse or partner. Not since record keeping began in 1880 has living at home for this age group outpaced living with a spouse. “They’re concentrating more on school, careers and work and less focused on forming new families, spouses or partners and children,” Richard Fry, lead author of the Pew report, said of millennials. Although student debt is often blamed, it may not be the dominant factor: the trend is stronger for those without a college education.
• When it comes to marriage, millennials say “I don’t” more than any previous generation. Research by the Urban Institute finds that if current trends continue, 30.7% of millennial women will remain single by age 40, approximately twice the share of their Gen-X counterparts. The data show similar trends for males. Marriage rates fell drastically during the Great Recession, but they had been declining for years prior to that event. At this point even a return to pre-recession levels will not prevent marriage rates among millennial women from falling below those of Gen-Xers by age 40.4 Ironically, the aversion of millennial females to marriage may reflect their economic strength vis a vis males: “Sharp declines in the earning power of non-college males combined with the economic self-sufficiency of women — rising educational attainment, falling gender gap and greater female control over fertility choices — have reduced the economic value of marriage for women.”
• A cross-generational study conducted at Wharton School of Business found more than half (58%) of millennial female undergraduates do not plan to have children. That is nearly three-times the 22% of Gen-X female undergraduates who did not want children when surveyed in 1992. Results were similar for male students. (The researchers compared surveys of the Wharton graduating class of 1992 and 2012.) While Gen-X women felt “motherhood fulfilled their need to help others” millennial females believe they can serve the greater need by succeeding at work. For millennial men “doing good” is increasingly connected to creating greater balance between work and family. Not surprisingly, they are less likely to think of themselves as the sole breadwinner. Even millennials who do want children say they do not see a clear path toward it.
• Immigrants are the wild card. They account for 15% of U.S. millennials, up from 6% of the prior generation.8 Although birth rates for foreign-born millennials are generally above those of native-born, a recent study by the Center for Immigration Studies finds that the gap is narrowing.9 From 2008 to 2015: birth rates for foreign-born women ages 15 to 19 fell 50.6% versus a 43% drop for native-born in that age cohort; birth rates for immigrant women 20 to 24 fell 40.5% versus a 28.5% decline for native-born. The Total Fertility Rate – a measure of the number of children a woman can be expected to have in her lifetime based on current patterns – fell 21.5% for immigrant women and 15.4% for native-born women over that period. The implication is clear: When it comes to family size, immigrant millennials have embraced the “smaller is better” ethos of the larger, native-born millennial community. That is good news to those of us who believe a smaller population is in the national interest.

Welcome to the new normal: Millennials will be the first generation that the American dream will most likely not be attainable, as show on the home ownership rate below. Since the real estate boom of the 2000s, homeownership rate for people under thirty-five has literally fallen off a cliff.  The report explores a number of factors of why this trend exists: student debt and the lingering impact of the Great Recession… 

Another new normal: With the introduction of Uber and Lyft fewer millennials are driving– leading to a shake up in the auto industry. The conventional wisdom among automakers are that millennials will unlock a new tranche of demand, but that narrative is going cold as the sharing economy disrupts.

Meanwhile, General Mills in 2016 ran a national advertising campaign targeting the millennial generation titled: ‘make more babies’… The type of conditioning is self-evident of one large corporation that is clearly aware of the low birth rate trend.

The Washington Examiner sums it all up,

Authored by Dr. D via Raul Ilargi Meijer's The Automatic Earth blog,

Part 1 "Bitcoin Is A Trust Machine" here.

You have to understand what exchanges are and are not. An exchange is a central point where owners post collateral and thereby join and trade on the exchange. The exchange backs the trades with their solvency and reputation, but it’s not a barter system, and it’s not free: the exchange has to make money too. Look at the Comex, which reaches back to the early history of commodities exchange which was founded to match buyers of say, wheat, like General Mills, with producers, the farmers. But why not just have the farmer drive to the local silo and sell there? Two reasons: one, unlike manufacturing, harvests are lumpy. To have everyone buy or sell at one time of the year would cripple the demand for money in that season. This may be why market crashes happen historically at harvest when the demand for money (i.e. Deflation) was highest. Secondly, however, suppose the weather turned bad: all farmers would be ruined simultaneously.

Suppose the weather then recovered: the previous low prices are erased and any who delayed selling would be rich. This sort of random, uncontrolled, uninsurable event is no way to run an economy, so they added a small group of speculators into the middle. You could sell wheat today for delivery in June, and the buyer would lock in a price. This had the effect of moderating prices, insuring both buyers AND sellers, at the small cost of paying the traders and speculators for their time, basically providing insurance. But the exchange is neither buyer, seller, nor speculator. They only keep the doors open to trade and vet the participants. What’s not immediately apparent is these Contracts of Wheat are only wheat promises, not wheat itself. Although amounts vary, almost all commodities trade contracts in excess of what is actually delivered, and what may exist on earth. I mean the wheat they’re selling, millions of tons, haven’t even been planted yet. So they are synthetic wheat, fantasy wheat that the exchange is selling.

A Bitcoin exchange is the same thing. You post your Bitcoin to the exchange, and trade it within the exchange with other customers like you. But none of the Bitcoin you trade on the exchange is yours, just like none of the wheat traded is actual wheat moving on trucks between silos. They are Bitcoin vouchers, Bitcoin PROMISES, not actual Bitcoin. So? So although prices are being set on the exchanges – slightly different prices in each one – none of the transfers are recorded on the actual Bitcoin Ledger. So how do you think exchanges stay open? Like Brokers and Banks, they take in the Bitcoin at say 100 units, but claim within themselves to have 104.

Why? Like any other fractional reserve system, they know that at any given moment 104 users will not demand delivery. This is their “float” and their profit, which they need to have, and this works well as far as it goes. However, it leads to the problem at Mt. Gox, and indeed Bear Sterns, Lehman and DeutscheBank: a sudden lack of confidence will always lead to a collapse, leaving a number of claims unfulfilled. That’s the bank run you know so well from Mary Poppins’ “Fidelity Fiduciary Bank”. It is suspected to be particularly bad in the case of Mt. Gox, which was unregulated. How unregulated? Well, not only were there zero laws concerning Bitcoin, but MTGOX actually stands for “Magic The Gathering Online eXchange”; that is, they were traders of comic books and Pokemon cards, not a brokerage. Prepare accordingly.

The important thing here is that an exchange is not Bitcoin. On an exchange, you own a claim on Bitcoin, through the legal entity of the exchange, subject only to jurisdiction and bankruptcy law. You do not own Bitcoin. But maybe Mt.Gox didn’t inflate their holdings but was indeed hacked? Yes, as an exchange, they can be hacked. Now you only need infiltrate one central point to gain access to millions of coins and although their security is far better, it’s now worth a hacker’s time. Arguably, most coins are held on an exchange, which is one reason for the incredibly skewed numbers regarding Bitcoin concentration. Just remember, if you don’t hold it, you don’t own it. In a hack, your coins are gone.

If the exchange is lying or gets in trouble, your coins are gone. If someone is embezzling, your coins are gone. If the Government stops the exchange, your coins are gone. If the economy cracks, the exchange will be cash-strapped and your coins are frozen and/or gone. None of these are true if YOU own your coins in a true peer-to-peer manner, but few do. But this is also true of paper dollars, gold bars, safe deposit boxes, and everything else of value. This accounts for some of the variety of opinions on the safety of Bitcoin. So if Polinex or Coinbase gets “hacked” it doesn’t mean “Bitcoin” was hacked any more than if the Comex or MF Global fails, that corn or Yen were “hacked”. The exchange is not Bitcoin: it’s the exchange. There are exchange risks and Bitcoin risks. Being a ledger Bitcoin is wide open and public. How would you hack it? You already have it. And so does everybody else.

So we’ve covered the main aspects of Bitcoin and why it is eligible to be money. Classically, money has these things:

 

1. Durable- the medium of exchange must not weather, rot, fall apart, or become unusable.

2. Portable- relative to its size, it must be easily movable and hold a large amount of value.

3. Divisible- it should be relatively easy to divide with all parts identical.

4. Intrinsically Valuable- should be valuable in itself and its value should be independent of any other object. Essentially, the item must be rare.

5. Money is a “Unit of Account”, that is, people measure other things, time and value, using the units of value to THINK about the world, and thus is an part of psychology. Strangely that makes this both the weakest and strongest aspect of:

6. “The Network Effect”. Its social and monetary inertia. That is, it’s money to you because you believe other people will accept it in exchange.

The Score:

 

1. Bitcoin is durable and anti-fragile. As long as there is an Internet – or even without one – it can continue to exist without decay, written on a clay tablet with a stylus.

 

2. Bitcoin is more portable than anything on earth. A single number — which can be memorized – can transport $160B across a border with only your mind, or across the world on the Internet. Its portability is not subject to any inspection or confiscation, unlike silver, gold, or diamonds.

 

3. Bitcoin is not infinitely divisible, but neither is gold or silver, which have a discrete number of atoms. At the moment the smallest Bitcoin denomination or “Satoshi” is 0.00000001 Bitcoin or about a millionth of a penny. That’s pretty small, but with a software change it can become smaller. In that way, Bitcoin, subject only to math is MORE divisible than silver or gold, and far easier. As numbers all Bitcoin are exactly the same.

 

4. Bitcoin has intrinsic value. Actually, the problem is NOTHING has “intrinsic” value. Things have value only because they are useful to yourself personally or because someone else wants them. Water is valuable on a desert island and gold is worthless. In fact, gold has few uses and is fundamentally a rock we dig up from one hole to bury in another, yet we say it has “intrinsic” value – which is good as Number 4 said it had to be unrelated to any other object, i.e. useless. Bitcoin and Gold are certainly useless. Like gold, Bitcoin may not have “Intrinsic value” but it DOES have intrinsic cost, that is, the cost in time and energy it took to mine it. Like gold, Bitcoin has a cost to mine measurable in BTU’s. As nothing has value outside of human action, you can’t say the electric cost in dollars is a price-floor, but suggests a floor, and that would be equally true of gold, silver, copper, etc. In fact, Bitcoin is more rare than Rhodium: we mine rare metals at 2%/year while the number of Bitcoins stops at 22 Million. Strangely, due to math, computer digits are made harder to get and have than real things.

 

5. Bitcoin is a unit of account. As a psychological effect, it’s difficult to quantify. Which comes first, the use of a thing, or its pricing? Neither, they grow together as one replaces another, side-by-side. This happened when gold replaced iron or salt or when bank notes replaced physical gold, or even when the U.S. moved from Pounds and Pence to Dollars and Cents. At first it was adopted by a few, but managed to get a critical mass, accepted, and eventually adopted by the population and entirely forgotten. At the moment Bitcoin enthusiasts do in fact mentally price things in Bitcoins, especially on exchanges where cross-crypto prices are marked vs BTC. Some never use their home currency at all, living entirely according to crypto-prices until home conversion at the moment of sale, or as hundreds or thousands of businesses are now accepting cryptocurrencies, even beyond. For them it is a unit of account the way Fahrenheit is a unit within the United States.

 

6. Bitcoin has the network effect. That is, it is widely accepted and publicly considered money. It’s in the news, has a wide following worldwide, and exchanges are signing up 40,000 new users a month. It’s accepted by thousands of vendors and can be used for purchases at Microsoft, Tesla, PayPal, Overstock, or with some work, Amazon. It’s translatable through point-of-sale vendor Square, and from many debit card providers such as Shift. At this point it is already very close to being money, i.e. a commonly accepted good. Note that without special arrangements none of these vendors will accept silver coins, nor price products in them. I expect if Mark Dice offered a candy bar, a silver bar, or a Bitcoin barcode, more people would pick the Bitcoin. In that way Bitcoin is more money than gold and silver are. You could say the same thing about Canadian Dollars or Thai Bhat: they’re respected currencies, but not accepted by everyone, everywhere. For that matter, neither are U.S. dollars.

Note what is not on the list: money is not a unit created or regulated by a central authority, although governments would like us to think so. In fact, no central authority is necessary or even desirable. For centuries the lack of monetary authority was historic fact, back with medieval markets through to private banks, until 1913, 1933, 1971, and the modern evolution into today’s near-total digital fiat. Besides the technical challenge, eliminating their overhead, oversight, control and corruption is the point of Bitcoin. And right now the government’s response to Bitcoin is a strange mixture of antipathy, ignorance, oppression, and opportunity. At $160 Billion it hardly merits the interest of a nation with a $500 Billion trade deficit, and that’s spread worldwide.

This leads into one of the spurious claims on Bitcoin: that it’s a refuge for drug smugglers and illegal activities. I assure you mathematically, that is not true. According to the U.N. the world drug trade is $435B, 4 times the total, and strictly theoretical value of Bitcoin, coins locked, lost, and all. Besides if you owned $160B coins, who would you transfer them to? You’re the only user. $435B/year can only be trafficked by major banks like as HSBC, who have paid public fines because money flows that large can’t be hidden. This is so well-known the U.N. suggested the drug-money flows may be one reason global banks were solvent in ‘08. Even $160B misrepresents Bitcoin because it had a 10-fold increase this year alone. So imagine $16B total market cap. That’s half the size of the yearly budget of Los Angeles, one city. Even that overstates it, because through most of its life it’s been around $250, so imagine a $4B market cap, the budget of West Virginia.

So you’re a drug dealer in illicit trades and you sell to your customers because all your buyers have Bitcoin accounts? Your pushers have street terminals? This doesn’t make sense. And remember as much as the price of Bitcoin has risen 40-fold, the number of participants has too. Even now, even with Coinbase, even with Dell and Overstock, even with BTC $10,000 almost no one has Bitcoin, even in N.Y.C. or S.F.. So who are these supposed illegal people with illegal activities that couldn’t fit any significant value?

That’s not to say illegal activities don’t happen, but it’s the other half of the spurious argument to say people don’t do illegal acts using cash, personal influence, offshore havens, international banks like Wells Fargo, or lately, Amazon Gift Cards and Tide Detergent. As long as there is crime, mediums of value will be used to pay for it. But comparing Bitcoin with a $16B market cap to the existing banking system which the U.N. openly declares is being supported by the transfer of illicit drug funds is insanity.

Let’s look at it another way: would you rather: a) transfer drugs using cash or secret bank records that can be erased or altered later or b) an public worldwide record of every transaction, where if one DEA bust could get your codes, they could be tracked backwards some distance through the buy chain? I thought so. Bitcoin is the LEAST best choice for illegal activities, and at the personal level where we’re being accused, it’s even worse than cash.

We showed that Bitcoin can be money, but we already have a monetary and financial system. What you’re talking about is building another system next to the existing one, and doubling the costs and confusions. That’s great as a mental exercise but why would anyone do that?

In a word: 2008.

It’s probably not an accident Bitcoin arrived immediately after the Global Financial Crisis. The technology to make it possible existed even on IRC chat boards, but human attention wasn’t focused on solving a new problem using computer software until the GFC captured the public imagination, and hackers started to say, “This stinks. This system is garbage. How do we fix this?” And with no loyalty to the past, but strictly on a present basis, built the best mousetrap. How do we know it’s a better mousetrap? Easy. If it isn’t noticeably better than the existing system, no one will bother and it will remain an interesting novelty stored in some basements, like Confederate Dollars and Chuck-e-Cheez tokens. To have any chance of succeeding, it has to work better, good enough to overcome the last most critical aspect money has: Inertia.

So given that Bitcoin is unfamiliar, less accepted, harder to use, costs real money to keep online, why does it keep gaining traction, and rising in price with increasing speed? No one would build a Bitcoin. Ever. No one would ever use a Bitcoin. Ever. It’s too much work and too much nuisance. Like any product, they would only use Bitcoin because it solves expensive problems confronting us each day. The only chance Bitcoin would have is if our present system failed us, and fails more every day. They, our present system-keepers, are the ones who are giving Bitcoin exponentially more value. They are the ones who could stop Bitcoin and shut it down by fixing the present, easy, familiar system. But they won’t.

Where has our present system gone wrong?

The criticisms of the existing monetary system are short but glaring. First, everyone is disturbed by the constant increase in quantity. And this is more than an offhand accusation. In 2007 the Fed had $750B in assets. In 2017 they have $4.7 Trillion, a 7-fold increase. Where did that money come from? Nowhere. They printed it up, digitally.

The TARP audit ultimately showed $23 trillion created. Nor was the distribution the same. Who received the money the Fed printed? Bondholders, Large Corporations, Hedge Funds and the like. Pa’s Diner? Not so much. So unlike Bitcoin, there not only was a sudden, secret, unapproved, unexpected, unaccountable increase in quantity, but little to no chance for the population to also “mine” some of these new “coins”. Which leads to this:

Near-perfect income disparity, with near-perfect distribution of new “coins” to those with access to the “development team”, and zero or even negative returns for those without inside access. Does this seem like a winning model you could sell to the public? Nor is this unique to the U.S.; Japan had long ago put such methods to use, and by 2017 the Bank of Japan owns a mind-bending 75% of Japanese ETFs:

So this unelected, unaccountable bank, which creates its coin from nothing without limit or restraint, now owns 75% of the actual hard labor, assets, indeed, the entire wealth HISTORY of Japan?

It took from the Edo Period in 1603 through Japan-takes-the-world 1980s until 2017 to create the wealth of Japan, and Kuroda only 6 years to buy it all? What madness is this?

Nor is Europe better. Mario Draghi has now printed so much money, he has run out of bonds to buy. This is in a Eurozone with a debt measuring Trillions, with $10 Trillion of that yielding negative rates. That’s a direct transfer from all savers to all debtors, and still the economy is sinking fast. Aside from how via these bonds, the ECB came to own all the houses, businesses, and governments of Europe in a few short years, does this sound like a business model you want to participate in?

So the volume of issuance is bad, and unfairness of who the coins are issued to is as bad as humanly possible, giving incredible advantages to issuers to transfer all wealth to themselves, either new or existing.

But if the currency is functional day-to-day, surely the issuance can be overlooked. Is it? Inflation is devilishly hard to measure, but here’s a chart of commodities:

CPI:

The US Dollar:

or vs Gold (/silver):

Does that look stable to you? And not that Bitcoin is stable, but at least Bitcoin goes UP at the same rate these charts are going DOWN. One store coupon declines in value at 4% a year, or may even start negative, while the other gives steady gains to loyal customers. Which business model would you prefer?

But that’s not all...

*  *  *

Part 3 tomorrow...