Feb 18. US Yields SURGE! Big Trouble in Little China
First, here’s a link to my favorite compilation of economic charts from Business Insider:
http://www.businessinsider.com/bi-most-important-charts-in-the-world-2015-2#
Interesting themes are: the onset of US wage increases, budding growth in the EU, problems in CHINA
–Yesterday yields exploded higher, with tens up 12.6 bps (from Friday) to 214.3. The 38% retracement from the high of 303 at the very end of 2013, to the low this year of 164 is 217; the area from 217 to 220 should be strong support for the futures contract. Nearly all euro$ calendar spreads made new highs as the curve bear steepened. Red/gold pack spread surged by 9.25 bps to 127. The peak one-year calendar, Sept’15/Sept’16 rose 5 to 92.5 bps. There was some notable straddle buying, for example Blue March for 25 and 25.5, and in the TYM 127 and 126.5 strikes for 3’04 to 3’06, but implied vol was somewhat subdued given the magnitude of the underlying move in futures. Waves of selling appear to be driven by hopes of a Greek extension deal, long liquidation, and curve flatteners being exited.
–Every crosscurrent of economic news is on display this morning with the dominant factor (in terms of US rates) being domestic wage growth. If wages truly begin to accelerate then the Fed’s last excuse for restraint falls by the wayside. There are several charts on the BI site that show possible improvement in wages, and this was a BBG headline today: (Bloomberg) “U.K. unemployment fell to its lowest rate in more than six years as pay growth picked up in the fourth quarter in a sign that pressure on labor costs may be starting to build.” FOMC minutes from the last meeting are released this afternoon.
–One of the other BIG global themes is that of currency debasement, also on display this morning as Indonesia unexpectedly cut rates (leading to a weaker rupiah) and the RBA’s Stevens overtly referred to the benefits of rate cuts in weakening the Aussie$. Japan was the first to take the devaluation plunge with massive QE, the ECB is now joining, but the real pressure is building on China as $/CNY is at the top of its range at 6.255, and appears ready to bust out to the upside. A weaker currency in China will export another round of global deflation in my opinion. Again, there are several references in the BI charts, but here’s a headline from today’s WSJ: “Pressure builds to weaken yuan…Investors see more pain ahead for the Chinese yuan, as pressure mounts for Beijing to address slowing growth by devaluing its tightly controlled currency.”
–One last note in relation to the US economy is growing loan delinquencies in auto and school debt. From FT: ”
Two categories of loans showed worsening payment records, however. By far the worst delinquency rates are in student loans, where 11.3 per cent were overdue by 90 days or more. That was up from 11.1 per cent in the third quarter.
More individuals had problems with auto loans too, the figures showed, with the delinquency rate rising to 3.5 per cent, from 3.1 per cent in the previous quarter. This comes as the number of auto loans made to borrowers with poor credit histories increases.”
Big Trouble
http://www.imdb.com/media/rm2560466432/tt0090728
