Nov 29. Slow growth, deflationary pall, but capital still searching for returns
–(Reuters) “ECB data released on Thursday showed loans to the private sector shrank by 2.1 percent in October from the same month a year ago, equaling the biggest fall on record. A Reuters poll of economists had pointed to a contraction of 1.8 percent.”
–How can one say that the crisis in the EU has passed with this sort of data? It seems to me that lending goes down for a variety of reasons. Lack of demand, concerns about the credit quality of buyers, an abundance of bad assets already clogging the balance sheet. If those conditions exist for the banking system, they also exist for the sovereigns. Another LTRO does little to improve the situation besides providing banks with carry. Too little too late going into next year’s stress tests. Growth cannot be robust without credit growth, and unemployment of 12.1%, though slightly better than expected, cannot improve.
–Curve in US was modestly steeper Wednesday after the 7 year auction. Interestingly vol was a bit firmer going into the holiday. Economic data was mixed but Jobless Claims are resuming a downward trend. Tens were up 4 bps to 2.737 while red/gold euro$ pack spread jumped 6.5 bps to 283, getting fairly close to the year’s high around 298.
–Yen remains weak with EUR/JPY above 139. A weaker yen exports deflation and pressures other Asian exporters. China’s new fly over rules regarding the Senkaku islands are raising tensions as neighbors ignore the requirements, perhaps providing a headwind to the Nikkei rally.
–From Albert Edwards (cited on Zero Hedge)”… a recession seems a distant prospect in the minds of most investors. Yet one key precursor for a recession has now fallen into place. Slowing productivity growth means that unit labour costs are now running well ahead of output price inflation. This means a margin and profits downturn is now about to unfold. That typically is a key precursor of recession.”
Nov 27. Low rates. Long time. But can we be sure?
–Standout this morning is new high in EUR/JPY to 138.50, it was as low as 131.50 earlier in the month. Maybe it’s not so hard to reach 2% inflation when your currency depreciates 5% in less than a month. Nikkei futures not quite at new high, but close.
–Stubborn bid in US interest rate futures yesterday, which eased right after the pit close. As of pit close ten year yield had fallen over 4 bps to just under 2.70. Early trade featured curve steepening bias, with a buyer of 12k Jan Bond 129 puts 39-40 (new), though overall volume was light. New lows in some of the near one-year euro$ calendar spreads, for example June’14/June’15 fell 2.5 bps to close at exactly 1/4% (25bps), pushed lower in part by continued put selling on the EDM’15 contract. I saw in a BBG article that Spanish 2 yr yield has fallen to a new low as the ECB considers another LTRO (long term repo). Sort of ironic that EU banks will thus be encouraged to load up on more sovereign debt just as the ECB’s stress testing occurs next year. Weidmann has been an outspoken critic of the concentration of sovereign debt on bank balance sheets. On a somewhat related note from Pimco’s twitter account yesterday, “In a world of uncertainty, what PIMCO is most certain of: Policy rate at 25 basis on 12/15/2015”. I guess selling puts is free money, right? Who’s with me? Mental image of Will Ferrell streaking in Old School.
–A lot of news out today including Durables -2.0, Jobless Claims 330k, Chgo Fed Nat’l Activity 0.20, Chgo PMI 60.5 (after last month’s surge to 65.9) and the 7 year auction.
Nov 18. Underlying collateral behind treasuries is…student loans?!?!
–Late Thursday Moody’s downgraded several banks, GS, JPM, MS…yet on Friday the first two rose and MS was unchanged, swept up in the euphoria of new highs in stock indices. In euro$’s there was an early large (20k) buyer of blue Dec 9812c covered, synthetically bought the straddle for 23.5, yet it settled 22.5 (position was exit, open interest in calls fell 8k). Swap spreads made multi year lows Friday with the 5 year at just 10 bps (had been above 20 mid-year). The VIX fell and sits just over the low for the year around 12. Interest rate futures were nearly unchanged. All of the above is a reflection of complacency, in support of the “lower for longer” viewpoint, which the Fed has taken pains to communicate, resulting in reach for yield and risk. But I wonder if the time is coming when even treasuries start to lose their risk free luster. For example, I looked at Consumer Credit data, which continued to show negative yoy change in the revolving category of -2.9% yoy (for Sept). Yet the pace of total consumer credit is around 6%, all due to non-revolving auto and student loans. That is, government guaranteed student loans. Amazingly enough, of the $3 T total consumer debt, 23.7% ($716B) is held by the Fed’l gov’t. In 2008 that number was 5% ($135B), followed by 8.7, 13.4, 17.6 and 21.1%. As a point of comparison, consumer credit is about 1/3rd of total mortgage debt ($9.3T). Federal debt outstanding is just under $12T, so one could say that 6% of that is backed by student loans, which are defaulting at rates of 10-15%. At the same time, we see GE exiting the retail lending business. Crowding out? Another example of the Federal gov’t taking on risk that the private sector doesn’t want, just to keep the ball slowly rolling up the hill?
–Several Fed speakers in the early part of the week, notably Dudley at 12:15 EST, then Plosser at 1:30 Monday. On Tuesday Evans speaks at 2:15 and then Bernanke in the evening. CPI and Retail Sales on Wednesday.
Nov 15. Stocks love Yellen
Yellen at yesterday’s confirmation hearing: “I consider it imperative that we do what we can to promote a very strong recovery,”
–Rates fell again yesterday, with a strong performance in deferred eurodollars as the blue pack jumped 10 bps. New lows in some of the near spreads, for example EDH14/EDH15 fell 2.5 bps to 21.5. Red/green pack spread declined 4.75 and now rests at recent low of 70 bps. It had been at 79 in the first week of November prior to the employment report. In contrast, green/blue pack spread is 106.
–This morning the yen is weaker and appears to be breaking down from a five month holding pattern. Copper is also a bit weaker as metals have mostly ignored Yellen’s proposal of continued liquidity which was warmly welcomed by stocks (new highs). ESZ is higher this morning though Moody’s downgraded JPM, GS and MS.
–US data today: Empire State expected 5.5 and Industrial Production +0.1.
–Premium is for sale in US rate markets, with Jan ten year straddle at only 4.7 vol. Eurodollar straddles also lost 0.5 to 2 bps as fears of a move to higher yields have evaporated. November midcurves expire today.
Nov 14. It’s Jackie’s world, we just live in it.
“That’s outrageous, egregious, preposterous” –Jackie Chiles
Nov 14. It’s almost as if someone actually KNEW that Yellen’s testimony would be released on Wednesday afternoon and that she would dutifully say that the Fed has more work to do. In any case, interest rate futures added to already robust gains when the prepared remarks were released at 3:30 CST, with ten yr futures jumping 1/2 point from the 2:00pm close. Stocks also surged to new highs yesterday.
–Apparently JPM had a disastrous public relations campaign where the public could use twitter in direct dialogue with a top executive. It was cancelled by JPM with this tweet: “Bad idea. Back to the drawing board.” While JPM is a target of jest due to this mistake, it admitted the problem and moved on, something I wish the gov’t could do. In terms of the Fed (you thought I was going to refer to Obamacare, right?), many internal officials have concluded that QE has lost its power, or was never that effective in the first place. Bernanke, the champion of transparency, had pointed to rising stocks as a measure of QE’s success. Stocks are at new highs. Why is there “more work to do”? The wealth effect transmission isn’t cutting it. As my old coworker used to say, “That dog won’t hunt.”
–Global growth figures are soft in data released today. France GDP declined 0.1, Italy had 9th straight qtr of decline. Japan GDP was lower than expected due to “loss of momentum” (WSJ) in consumption and exports. The yen is probing new recent lows as more QE (it’s a global phenomenon) is the expected response.
–Italy is shaking down Apple, oops, what I mean to say is that Italy believes Apple has avoided paying €1 billion in taxes owed to its gov’t. It’s not exactly news that strapped governments have become more aggressive in tax collection efforts. But I heard a story yesterday that takes it to a new level. And file this one under hearsay; I have absolutely no documentation. But as a friend said, it would be hard to make it up… All gov’ts levy fines on businesses once in a while, just ask aforementioned JPM. But in France, apparently some large companies have been slapped with big fines of dubious legal standing, knowing that companies will fight in court and have the levies overturned years hence. In the meantime, these amounts are (supposedly) being tallied on gov’t books as Accounts Receivable to make budget numbers appear better. It almost feels like I’m living in Chicago…oh.
–Thirty year bond auctioned today. Trade data and Jobless Claims (330k) as well, along with Yellen hearings.
Nov 13. Ten year auction today, Yellen hearing tomorrow
–Atlanta Fed’s Lockhart said yesterday that he would like to see movement toward the 2% inflation target before tapering… Inflation is “stable but too low”. His case wasn’t helped by commodities yesterday as crude oil, gold, silver and copper declined to levels last seen in early August. Dec Crude is around 93, having traded 108 in mid-August. Good for energy consumers; maybe lower gas prices will offset the effect of surging health insurance rates!
–Ten year auction today. Yellen confirmation hearing on Thursday.
–Though there was a downside bias in interest rate markets yesterday, with tens up another 2 to 277, there was a seller of about 15k Jan bond 128 puts which was an exit, as open interest fell 8k.
–Muni finance continues to get increased press. Reuters has a piece about a small CA town considering bankruptcy and Fitch notes in their recent downgrade of Chicago that if the city was to properly fund its pension system, property taxes would have to rise by 136%.
–Interesting item in American Prospect; “In 1960, the three biggest private-sector employers in the US were Ford, GM and AT&T. Today, the three biggest private-sector employers in the US are Walmart, Yum Brands and McDonalds.” http://prospect.org/article/40-year-slump
–Good ZeroHedge piece comparing current environment to 1936-37, with similar Wall Street Journal articles: http://www.zerohedge.com/news/2013-11-12/7-more-years-low-rates-and-then-war
Nov 12. Rates poised to move higher
–Quiet session yesterday though underlying concerns about tapering prospects were reflected by several spreads. For example, red/gold euro$ pack spread edged to a new high of 285, up slightly more than 2 bps. According to futures, 2/10 also made a slight new high, I estimate 244.5. Implied vol was slightly firmer in tens. Bloomberg notes an increase in vol associated with risks of higher rates. http://www.bloomberg.com/news/2013-11-12/volatility-seen-in-treasuries-as-traders-brace-for-higher-yields.html
I would expect to see more interest in blue and gold euro$ midcurve puts…
–The dollar is stronger this morning, especially against the pound and yen. UK inflation was less than forecast at only 2.2% yoy, GBP looks like it has put in a broad based top.
–While the Nikkei is higher as the yen falls, emerging markets are turning lower. After having made new lows in late June/early July and then rallying strongly, Brazil, Korea, India, China all have shown weakness in the past two weeks, perhaps another indication that a withdrawal of liquidity due to US tapering is seen as a looming risk. (Forced deflation from Japan’s devaluation campaign is another factor).
–News today includes NFIB small business optimism, expected 93.3. Chicago Fed Nat’l Activity was +0.14 last, the first plus in six months, is also released today. Three year auction.
–Fitch downgraded Chicago yesterday due to pension problems. (AP) “Fitch dropped the rating from AA- to A- on $8 billion in general obligation bonds, backed by property taxes.”
November 8. S&P cuts France to AA. Payrolls expected +120k.
–ECB cut rates yesterday and France was rewarded with a downgrade to AA by S&P today. Euro/yen which was 135.50 in late October closed on the low yesterday at 131.50 as the ECB tiptoes into zero rate territory, uncomfortably joining the BoJ and Fed.
–While US Q3 GDP printed 2.8, it appears as if an inventory build may impede growth for the next quarter. US rates declined slightly in sympathy with the ECB cut. Red/green pack spread fell a bit over 2 bps to a new recent low of 70. There continues to be a large seller of red June to Green Dec, rolling longs as June open int fell 23k while Dec rose 78k. Blues were strongest on the board closing +7.0. Ten year yield fell 2.5 bps to 2.61 (supply next week with 3, 10, 30 yr auctions).
–Today’s employment report expected to show NFP +120k. Personal Income and Spending also out expected +0.3 and +0.2, while Core PCE prices expected +0.1 (the inflation part of this report is the most important aspect).
–Stocks saw big reversals. Nasdaq closed at its lowest in 2 weeks even as Twitter IPO’d successfully. I’m not going to read too much into the big reversal on large volume, or the record margin debt, or the stretched valuation levels. What I will say though, is that I bought some Dec 150 puts on Goldman yesterday which appears to have a triple top and fell 2.4% yesterday…seems to have sidestepped the limelight as JPM is fined every other day, but JP was down only 0.9% yest. [this is NOT a recommendation!]
Nov 5. Fed speakers support dovish outlook
–Slight rebound in interest rate futures after Friday’s slide. Ten year yield -1.5 to 2.60. New low in the first two one-year eurodollar calendar spreads with Dec 13/14 down 1 at 17.5 and March’14/March’15 down 1.5 at 24.5. The latter compares to March’15/16 at 73.0, a difference on nearly 50 bps as an option on tightening.
–Tapering delay… From BBG: “Monetary policy in the United States is likely to remain highly accommodative for some time,” Fed Governor Jerome Powell said yesterday in a speech in San Francisco. Boston Fed President Eric Rosengren backed further easing to “achieve full employment within a reasonable forecast horizon,” while James Bullard of the St. Louis Fed said in an interview on CNBC he wants the Fed to “meet our goals,” singling out inflation.
–Goldman’s Hatzius looks for the Fed to lower the employment threshold to 6.0% by the March FOMC, citing new papers by top Fed officials.
–Today’s news includes non-mfg ISM expected 54.5 from 54.4. Richmond Fed’s Lacker speaks but not expected to deal with policy.
–Appears to have been some fresh selling of treasury vol, for example TYH 125.5^ settled down 8 at 2’60 on an increase in open interest. Jan straddle also down 8 to 1’62 (5.1 vol); premium quickly evaporates on upticks, reversing bids associated with higher rates.
–Interesting link http://www.businessinsider.com/european-bank-deleveraging-2013-11
Oct 30. FOMC statement today. No drama (or press conference) expected
–FOMC announcement this afternoon. Other news includes ADP expected 138k, CPI expected +0.2 with Core +0.2 as well, and the 7 yr treasury auction. (Clues on jobs, inflation, and treasury dislocations caused by QE all in the hours before the Fed statement).
–Yesterday’s PPI data indicates continued low inflation, well under the Fed’s target. Y-o-y PPI only +0.3 though ex-food and energy +1.2.
–Stocks are at new highs and bonds are also rallying going into the Fed meeting. The previous two FOMC meetings were also preceded by stock rallies which saw pullbacks immediately afterwards.
–On the public front, municipal finance problems are being increasingly highlighted in the press. Reuters has a piece on San Bernardino CA which quit paying into Calpers for pensions as it declared bankruptcy. “You can’t make not paying Calpers cheap and easy, because then it creates this tremendous incentive for other cities to file for bankruptcy and stop meeting their obligations.” Homeowners walked away from underwater mortgages, will cities start walking away from pension obligations? http://www.reuters.com/article/2013/10/30/us-usa-municipality-sanber-idUSBRE99T01020131030
–New lows in some parts of the yield curve. Red/gold pack spread fell 1.5 to just over 252, about 50 bps under the high set a couple of months ago. Implied vol continues to edge lower. Ten year yield hugging the 2.5% level.
–Upcoming cuts in food stamps (Friday), uncertainty about pension payments and increased insurance costs for people that are losing coverage under Obamacare do not make for strong underlying fundamentals in the near term, and create deflationary forces weighing on the economy. The EU is facing similar pressure as banks try to rebuild capital in front of stress tests rather than extend new loans.
