May 7. RBA cuts rates. US 3 year auction
–Very quiet session Monday, though there was grudging downside follow through from Friday’s employment sell off. Red/gold euro$ pack spread settled at new high just above 158.5, up 2.625 bps on the day. Ten year note gained almost 3 bps to 1.769, with TYM 132-215 settle, though it is approaching levels that should provide strong support. (Charts below).
–Australia cut rates by 25 bps to 2.75%. Aussie dollar making new recent low. Today’s US news includes three year auction, followed by 10’s and bonds Wed and Thursday.
–EDM15/M16 one year spread notched a new closing high of 50. Large long position from 46 to 47.5.
–The Fed’s Jeremy Stein listed on BBG calendar as a speaker tomorrow at a panel discussing ‘dollar funding and lending at global banks’. Possibly important if he follows up on his early Feb speech regarding overheating in credit markets. From Feb 7, “…my reading of the evidence is that we are seeing a fairly significant pattern of reaching-for-yield behavior emerging in corporate credit.” If anything that pattern has become even more apparent.
http://www.federalreserve.gov/newsevents/speech/stein20130207a.pdf
–And, to the prosaic…”The recession caused more car owners to fix and maintain their own vehicles, according to repair site AutoMD. The 2013 DIY Report from the “free online automotive repair resource” found that the number of people tackling do-it-yourself auto repairs hasn’t dropped this year, even though the economy is on the rebound.
–Below is a chart (from late Monday) TYM contract. The level 132-11 looks to be good support: it is 38% retrace from early March low to last week’s high. It is the low subsequent to the April 5 employment report (red circle on the right, lows of 132-11 and 132-105) and it is the high at the end of March, a few days after the Cyprus deposit grab news. Below that is a yield chart of ten year note; 38% retracement there is 1.79%. $/Val bp in tens is around $81.50 in the TY contract.
May 6. Bonds reject the highs as improvement in employment tempers bond bulls
–Massive bond sell off Friday, on NFP of 165k. Though somewhat stronger than expected, the details of the employment report were not particularly robust, for example there was a large gain in working “part time for economic reasons”. According to Peter Schiff fast food restaurants have cut previously full time workers to below 30 hours to avoid Obamacare, and hired other part-timers to fill the slots.
–Tens rose 11 bps to 1.74%. Curve steepened hard, with 2/10 up 9.5 to 152.4 and red/gold +14.25 to over 156. Trade appeared to be primarily long liquidation as open interest in euro$’s, 2’s, 5’s, bonds and ultras all declined, though tens rose. Equities surged to new highs.
–The bounce in the curve and reversal in rates suggests bond highs are in place for the time being. 2/10 had traded all the way from 180 in the early part of March to 143 on Thursday, nearly 40 bps. Likely in a range from 145 to 165 going forward.
–From the Telegraph: “Oskar Lafontaine, the German finance minister who launched the euro, has called for a break-up of the single currency to let southern Europe recover, warning that the current course is “leading to disaster”.
http://www.telegraph.co.uk/finance/financialcrisis/10039329/German-euro-founder-calls-for-catastrophic-currency-to-be-broken-up.html
–There appears to be more uncertainty in the market and much broader acceptance of the Fed’s role in pumping up asset prices, even on CNBC. From an El-Erian speech: “Ride the central bank wave. The more intervention done by one Central Bank forces other countries to do more. The Fed forced Japan into its policy shift. Japan has now forced the ECB to move further.” Further in the speech: “…do not give up liquidity cheaply. In the world today it is very binary. It will either end well, or very badly, with no middle ground. Optionality and liquidity is the key to surviving and profiting from a binary world.” http://www.zerohedge.com/news/2013-05-04/mohamed-el-erian-putting-it-all-together
May 3. NFP Friday
–Employment report today with NFP expected 140k Copper having a strong rebound this morning, up 10 cents. Spanish tens below 4%. EU lowered forecasts for growth.
–German bund futures exploded to a new high yesterday above 147, as Draghi said the ECB had an open mind regarding negative deposit rates. Bund yield hit 1.16%.
–US rates fell marginally as well, with tens at 163. Curve made a new low with 2/10 at 143. Stocks bounced as financial assets are chased; IBM was able to sell 7 year debt at 1.625.
–Financier Ron Perelman was on CNBC yesterday morning and encapsulated the current environment when asked about the companies he owns (paraphrasing) ‘no top line revenue growth, for example Revlon has something like 2-3% and that’s the best one. We see only 0-2% gains in revenue but have been very good at controlling expenses. No increases in employment.’
–Several analysts and news sources yesterday highlighted the extreme level of NYSE margin levels. Last couple of times margin debt has been this high stocks have had large sell offs.
http://www.bloomberg.com/news/2013-05-02/near-record-nyse-margin-debt-leads-to-caution-chart-of-the-day.html
–Additional US news includes non-mfg ISM and Factory Orders.
May 2. Little reaction to FOMC, ECB today.
–The FOMC caused little market movement though the statement cited fiscal policy as restrictive and said QE may be either reduced or increased. I read the latter as the Fed preparing markets for a change in amount, but lean towards less QE. The WSJ and FT chose to emphasize the idea of more QE. I’m sure the Fed wants to send that message to the politicians: “you have shirked responsible budget decisions by default, so we’ll reward your well-heeled constituents by pumping more money into the system so that stocks and other risk assets levitate.” Maybe.
–While it is clear that growth is slowing (or stopped), Fed members have more recently focused on risks of unbridled QE. In terms of depressed growth, yesterday’s ISM employment component at 50.2 was as low as it has been any time since late 2009. Business Insider post from today: Public Spending On Construction Hits Its Lowest Levels Since 2001. www.businessinsider.com/the-incredible-decline-of-public-construction-spending-2013-5#ixzz2S80OrKcB Copper’s price action reflects slowdown, falling around 10 cents yesterday to a new low, now nearing $3. Oil also had a large drop (though not to new lows).
–There was a large bearish trade in EEM (Emerging Mkt ETF), a buyer of 240k May 42.5 puts for 0.42. These puts are near 50 delta, avg volume in EEM is around 50m shares, this trade alone is equivalent to a sale of 10m shares.
–ECB this morning, cut expected. France sold 10’s at record low 1.81%. Eurozone PMI showed mixed improvement, though Germany fell to 48.1 from 49.
–US interest rates did fall somewhat yesterday, with new lows in the curve. 2/10 fell 3 bps to 143.6. Red euro$ pack to all deferred contracts either thru or near recent lows. However, there was a large option put spread spread fading the move: +50k EDH6 9900/9875ps to sell EDH5 9950/9925ps for 2.0 debit.
–US news includes Trade deficit, expected 42.5B and Jobless Claims 345k
April 30. As US borrowing needs fall, the Fed will taper QE
–Just a few disparate pieces of news: First, from a few days ago, Sallie Mae had to cancel a bond offering due to lack of investor interest at a 3.5% coupon. Second, Deutsche Bank raised €5B through new stock issuance. Third, the US announced that it’s paying down $35B in Apr-Jun quarter. All relating to investor flows and behavior.
–Starting with the last item, the US is going to pay down debt this quarter. Last year’s same quarter the US borrowed $172B. As recently as Feb, the estimate was for a borrowing need of $103B. As Peter Orzag mentioned on BBG tv, there has been a short-term (-sighted?) combination of increased taxes and the sequester. Over the next qtr borrowing needs are expected at only $223B. According to OMB the deficit for FY 2013 was projected $973B, but I saw another article, perhaps reflecting this new info, of an estimate of $845B, and at $972 the % of GDP was expected to fall from 7 to 6. These are LARGE improvements. The Fed’s current QE is for $45B/month of longer term treasuries, or $540B/yr. I believe the Fed has to modify (taper) their buying program simply because they will be monetizing nearly ALL issuance. No wonder yields are down, supply will be withdrawn while the US gov’t is being restrictive regarding fiscal policy, perhaps contributing to an economic slowdown in general (as data misses indicate).
–But on a global stage DB easily raised €5b, diluting existing shareholders, yet the comfort of bringing capital ratios up caused the stock to surge nearly 8% after an initial swoon. A piece on ZeroHedge said that DB has the largest derivatives book of all banks at $73 TRILLION. Now I am not anti derivatives, but I do know that €5B is a drop in the ocean compared to that portfolio. Further, DB raised capital because the ratings agencies were concerned about DB’s balance sheet. If the new model is for depositors to “bail-in” banks, should they be worried about a gargantuan derivatives book? A little far fetched I am sure, given DB’s tbtf status… (But depositors in Slovenia, which may need to tap funds, perhaps have a more visceral concern).
–On to Sallie Mae, which pulled a $225 million offering because investors have trepidations about the 90-day delinquency rate of 39%. The US government guarantees many of the student loans that SLM grants; I am not sure of the amount. I have read that student loans are the biggest “asset” of the US gov’t though. The stock has gone from 17 to 20.50 this year; it was nearly unchanged yesterday.
–On the equity side, there seems to be little concern about quasi government institutions like SLM and DB; both have implied gov’t backing. So did FNM and FRE… And, the Fed is driving a fool’s quest for yield through risk. For example Dow Jones Utilities are up 23% from mid-November. But the pulled SLM bond deal shows there are limits.
–News today includes ECI expected +0.5. Chicago PMI expected 52.4 same as last. Consumer Confidence expected to bounce to 62. Auction announcement tomorrow, possible cut back? ISM and FOMC also tomorrow.
–Yesterday’s data included more fodder for bond bulls as PCE yoy was only 1.0%.
April 29. Big week ahead: FOMC, ISM, ECB and NFP
–The dollar is lower against almost everything this morning, with gold now nearly regaining everything lost on the April 15 plunge. GCM up 17 this morning to 1470. On April 12 gold closed around 1500, the day before it was around 1580, so while it’s not as though it has been a complete reversal, the current price is fully 150 higher than the April 15 low.
–I had seen an article noting that gold was losing some of its appeal as the US budget deficit shows improvement, and indeed the US deficit is expected around 6.5/7.0% of GDP as opposed to previous crisis readings greater than 10%. I didn’t see the specific piece, but heard that Stone/McCarthy surmised that future auction amounts could be cut somewhat. Of course, if the Fed DOESN’T taper off QE, that would mean monetization of an even greater share of US issuance.
–In any event, Friday’s weak Q1 GDP of 2.5 vs 3.0 expected, spurred a flattening of the curve to new recent lows, with 2/10 down 3 bps to just above 145. All back month calendars pressed to new lows. For example there is a large long in EDM15/EDM16 at 47ish, it closed 43.5.
–On an anecdotal level, it’s amazing to see the distortions caused by Fed policy. A friend has been buying 4-8 unit buildings as rental investments for a while in the Wicker Park, Bucktown area in Chicago. He had appointments Saturday to see six fresh listings, and by the time of his showings 4 had gone under contract; such is the competition. I am not saying all of Chicago is intensely competitive, but parts are. On the other hand, it seems as if loan demand for more productive purposes is sadly lagging.
–Today’s news includes Personal Income/Spending, expected +0.4 and +0.1, with Dallas Fed expected 5.0.
April 26. BoJ’s Kuroda expects to hit 2% inflation target in FY 2015
–Once again US interest rates were little changed yesterday as auctions concluded with the 7 year. Not much reaction to BoJ meeting; Kuroda expects to hit 2% inflation target beginning in fiscal year 2015 (April start). USD/JPY currently lower on the day. Perhaps it’s somewhat interesting that the BoJ expects inflation right in the same time period that a large calendar spread in euro$’s was bought…been a large buyer this week of EDM15/EDM16 for 46.5/47.5 (closed yesterday at 45.5).
–US news today includes Q1 US GDP expected 3.0% but nearly all news articles temper the expectations by mentioning that things are currently slowing.
–Next week’s FOMC is Wednesday. Given that Bernanke announced that he is skipping Jackson Hole this year, I think big changes from current FOMC policy are quite unlikely. As mentioned previously, it appears as though Bernanke would like to leave a “clean slate” for his successor. If anything, voices counseling moderation regarding QE have increasingly engaged the debate. The risk to the market should probably lean toward less accommodation over the end of the year, which should give pause to those expecting ever tighter credit spreads.
–May treasury options expire today with TYM stapled to the 133 strike and bonds to 148.
April 25. Search for yield continues
–Once again quiet in the interest rate arena, though Durables yesterday were a big miss to the downside at -5.7. Today brings Jobless Claims expected 350k and 7 yr auction (following well received 5’s).
–British Pound soaring this morning as UK Q1 GDP squeaked out +0.3 gain. Spain unemployment hit a new record over 27%. It appears Letta will form a new gov’t for Italy. More talk of Japanese lifers diversifying into foreign bonds.
–Speaking of diversification, interesting post on Bloomberg about central banks moving into equities.
http://www.bloomberg.com/news/2013-04-24/central-banks-load-up-on-equities-as-low-rates-kill-bond-yields.html
The article notes that bonds just aren’t providing enough yield: “While consumer prices are rising at a 1.5 percent annual rate in the U.S. and 1.7 percent in the euro area, the average yield to maturity of securities in Bank of America Merrill Lynch’s Global Broad Market Sovereign Plus Index fell to an all- time low of 1.34 percent on April 23…” Might as well have had the title, “Central banks push other central banks, and every other investor, into more risk.” At the same time, AAPL, which is taking advantage of low rates to issue bonds to return cash to shareholders, will not receive a top investment rating from S&P or Moody’s. In some ways, AAPL’s move dovetails with the Fed’s strategy; issue bonds to yield starved pension funds and either buy back shares or give cash to shareholders who then recycle the money into other equities…i.e. pile on the risk.
April 24. Hacked AP newswire tweet
–Rates were nearly unchanged yesterday. In fact, it has really been pretty much of a sideways market since the last employment report on April 5, when lower than expected payrolls caused a bullish surge in tens to a close at 133-05, vs yesterday’s close of 133-025, and bonds at 148-00 vs 148-03 yesterday. I guess it’s no wonder that vol has been crushed.
–Stocks closed at the highs, EUR was weaker. Several news sources are saying the ECB will cut next week.
–The big event of the day was the AP newswire tweet about bombs at the White House, revealed within minutes to be the work of a hacker, but not before stocks took a quick spike down. While the physical violence of the Boston Marathon terrorist attack is visceral, a hacked tweet points up system wide vulnerability that could affect institutional trust and confidence.
–I recall when I was a clerk on the phones at the bond pit, when yes, there were newswires tucked off in the corners of the trading floor, but almost all news traveled by voice over phone and all trades (well, maybe not all) went through the pit. It seemed fast, back in the late ’80s! So the desk heard a bearish bond rumor and I immediately picked up Mel’s line and breathlessly relayed the ‘news’ expecting an immediate trade. He listened, and then proceeded to ask where I had heard it, how long ago, etc, patiently trying to determine source and validity. Mel knew what he was doing, and I never forgot that. Might help if the whole market became a bit more circumspect.
–Today’s news includes Durables expected -2.8 from +5.7 and Five Year auction.
April 23. Economic cracks widening
Good news yesterday in that yields in peripheral countries fell (Italy -16 bps to 4.05) but bad news in that yields are also edging lower in developed countries, signaling economic malaise. German ten yr at 1.23%, the low of the past 9 months, and US 10yr slipped below 1.70%. Indeed, data from yesterday and today points toward weakness as German PMI’s all fell below 50 (Composite output 48.8 vs 50.6 last). China HSBC Flash PMI was also lower at 50.5, sending Shanghai Comp -2.5%. A Reuters piece notes weakening exports from Taiwan and Korea. “Exports from South Korea, another big supplier to the global tech industry, fell by 3.1 percent for the first 20 days of April from a year earlier.”
–In the US, cracks have shown in big multi-nat’ls with IBM down 12% since April 11 close, and GE down 10%, both as a result of disappointing earnings released a few days ago. CAT lowered forward guidance and as of yesterday’s open was down 20% from February’s high, but did have an impressive bounce with a big outside range and closed at the high on heavy volume. In spite of stronger gold yesterday, copper fell and is testing new lows for the move this morning.
–In eurodollars, about 45k EDM5/EDM6 (grn/blu) traded 46.5- 47.5, said to be a buyer, spread closed unch’d at 46.5. Open interest reveals that it’s a new position (+38k and 49k respectively). The market continues to perceive a chance of tightening around this time frame; the spread between red and green pack is just below 31 while green to blue is 54. I would also note that all euro$ calendar spreads are at the low end of the range and implied vols are softening, which I take as clues pointing toward lower interest rates in general. I wouldn’t be surprised to see bunds test 1% and US tens at 160. It’s against this backdrop that Harry Reid is reportedly trying to push through an internet sales tax code…
–Today’s news includes New home sales expected 419k and 2 yr note auction. The end of this week and next have more substantial news releases, BoJ and US Q1 GDP on Friday, FOMC and ISM next Wednesday, Employment report next Friday.
