Sept 21. Euro$ calendar spreads suggest a subdued economy in spite of strong corporate debt growth
–The dollar, even without the benefit of a Fed hike, is firming against other currencies this morning. Central bank economists at the ECB (Peter Praet) and BoE (Andy Haldane) have warned that weakness in the global economy could spur the need for additional accommodation. France was downgraded by Moody’s. In eurodollars, the calendar spreads continue to compress, with EDH6/EDH7 edging to a new 0.5 bps low of 63.5 on Friday. The peak one year spread is now EDM6/EDM7 at only 64 bps. One might expect the delay by the Fed to result in higher spreads in the back end of the curve; a ‘less now means more later’ mentality…but the red to green pack spread (2nd to 3rd year) remains stubbornly anchored to around 1/2%, i.e. red/green settled at only 51.875 bps Friday. In a simplistic sense one could say the market expects only two 25 bp hikes in any give one-year time frame.
–From Wednesday to Friday close, the five year note dropped 18 bps in yield. The treasury auctions 2’s, 5’s and 7’s so there will likely be a pause for breath. Activity is likely to be dominated by equity market gyrations.
–The Fed’s Z1 flow of funds quarterly report was issued Friday. Total credit growth was only 4.4% annualized (respectably at the average of 2014). In the go-go years of 2006 and 2007 credit growth was 8.4 and 8.1%. Mortgage debt is finally picking up again with growth of 2.2%, consumer credit was up 8.1% (student debt and autos), while the biggest net change was in corporate debt, up 8.7% to a record outstanding amount of $7.9 trillion. A sign of confidence by the corporate sector? Or a sign that corporate buybacks have run their course? Same questions with bloated business inventories to sales, a sign of increased confidence? Or what Keynes might call, unintended investment?
