April 21. Let’s Dance…put on your red shoes and dance the blues
–Yields jumped yesterday as crude oil surged to a new high for this calendar year, with other commodities also showing strength. The ten year yield rose 6.8 bps to 185. Blues (4th year) were the weakest on the Eurodollar strip, closing -9.0. Euro$ calendar spreads rose, with Dec’16/Dec’17 closing at 26.5, up 3 on the day.
–It’s been a dramatic sentiment shift since the Fed signaled an easier stance in March, and since stimulus in China kicked in. Some of the base commodities, for example iron ore, have had monster rallies. Interest rate futures are stubbornly (yesterday anyway) pricing in a slight inflation premium.
–There’s a lot of press coverage this morning of Soros saying that China’s debt fueled economy resembles the US in 2007-8 before the implosion. An article on Business Insider puts total debt to GDP at 249% but I have seen higher estimates. From BBG: The broadest measure of new credit in the world’s second-biggest economy was 2.34 trillion yuan ($362 billion) last month [that’s simply a staggering amount], far exceeding the median forecast of 1.4 trillion yuan in a Bloomberg survey and signaling the government is prioritizing growth over reining in debt.
What’s happening in China “eerily resembles what happened during the financial crisis in the U.S. in 2007-08, which was similarly fueled by credit growth,” Soros said. “Most of money that banks are supplying is needed to keep bad debts and loss-making enterprises alive.”
–I can’t help thinking of Citi’s CEO Charles Prince, from July of 2007 (prescient…) “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,” he said in an interview with the FT in Japan.
(Subject is from David Bowie’s Let’s Dance).
–There were a couple of additional items this morning noting that Chinese credit spreads are widening and swap rates are increasing. ECB today. In the US we have Jobless Claims expected 265k. Philly Fed expected 9 from 12.4, and Chicago Fed Nat’l Activity…the three month moving average has been negative for 5 straight months.
