April 19. Success in the fight against deflation… McDonalds in Japan raises prices
–Stocks fell yesterday but not much net change in fixed income, though the curve edged to slight new lows, for example red/gold pack spread fell 2.626 bps to just under 247.
–This morning the yen is under renewed pressure as G20 refrained from censure of Abe policies. USD/JPY around 99.25, not quite at new high. Stocks have rebounded as a result (tacit acceptance of massive QE) and perhaps partially because of progress on the Boston bombings. ZH notes that McDonalds in Japan has raised prices… mission accomplished, we’ve created inflation! Abe and Kuroda celebrated over Big Macs and Cokes (though it’s hard to see how this transfers into wage increases and productivity improvement for Japanese labor and business).
–In the US Fed officials have been sounding a more cautious note. From BBG “Minneapolis Fed President Narayana Kocherlakota [thursday] called for guarding the inflation target “from below,” while James Bullard of St. Louis said Wednesday, “we should defend the inflation target from the low side.”
Really?? Sounds as if central bankers have resigned themselves to the probability of a summer swoon.
–There was an interesting snippet on Business Insider about bank earnings; that sales and trading revenues have plunged, but that wealth management and bond underwriting have been solid. Not surprising I suppose, low rates have fueled a reach for yield, exemplified by the hand-in-glove business segments that are better performers. “Hello Mr Client, these junk bonds provide a much better yield for your long term portfolio and will create wealth.” Probably a longer term plus that banks return to a stodgier model, but may also reflect negative implications for growth.
April 18. Rolling earthquakes
–The big picture is that markets are experiencing one large adjustment after another, perhaps analogous to the shifting of tectonic plates that create rolling earthquakes and various aftershocks. The first large move was the fall in the yen, and the change in sentiment towards AAPL which is down 42% from its high in mid-Sept. Gold was already moving lower, but precious metals were hit by vicious aftershocks in the past several days, and now copper and crude oil have rolled over… the damage is shifting from the speculative to the industrial and is apparent in some emerging markets like Brazil, with tremors in developed markets like DAX (new low for the calendar year yesterday). It seems to me like a world searching for a new equilibrium, and it’s not over yet, with policy makers generally oblivious to possible carnage, though they probably are unable to stop the wave anyway.
–According to BBG, the G20 draft will pledge to avoid competitive fx devaluations. But today’s Japan data shows that exports grew more than expected in March, with the US outpacing China as the largest export market. So for Japan, the policy of importing inflation and exporting deflation through a cheaper currency appears to be working. Not that it’s related to manipulation, but also worth noting that Weidmann yesterday sent the Euro tumbling when he suggested an ease by the ECB could be coming.
–US rate markets are generally stable, with spreads and yield levels indicative of slow economic activity and a reach for yield. Implied vol grinds lower, almost to the point of disbelief as a new seller of 5k Short Sept 9962 straddles came in at 10 yesterday, with 4 bps in intrinsic at 9958.5. 152 days until expiration!
–Today’s new includes Job Claims 347k, Philly Fed expected 3.3 from 2.0 and Leading Indicators expected +0.2.
April 17. Buyers remorse
–US interest rate futures eased lower as gold and stocks rebounded. Economic data was mixed, with strong housing starts but less strong permits, better than expected Industrial Production but a negative CPI print of -0.2. Today there are several Fed speakers. Beige Book in the afternoon.
–From Business Insider: “European new car registrations fell by another 10.2 percent in March from the same month a year earlier, marking the 18th consecutive monthly decline…”
–“In order for central banks to achieve their ultimate economic objective – which is growth and jobs – they have to push investors into taking more risk than is justified” says El-Erian in a WSJ interview. Everyone knows the Fed’s goal is a push for more risk to obtain “escape velocity”. But the possible next Fed chief, Janet Yellen, yesterday warned about central bank policies:
-YELLEN SEES SIGNS `SOME PARTIES ARE REACHING FOR YIELD’
-YELLEN SAYS LOW INTEREST RATES MAY PROMPT `TOO MUCH LEVERAGE’
–In a way these comments highlight the conflict of the Fed’s dual mandate, growth/jobs, and low stable inflation. The Fed has chosen to emphasize the former, buying job growth with a purchase price of increased risk, but is now going through classic stages of buyers remorse, because sometimes you DON’T get what you paid for, even if it is $40 billion a month.
April 14. Friday’s gold plunge: a bad omen for global finance?
–Interest rates continued to fall Friday as Retail Sales, Consumer Sentiment and PPI all printed lower than expected. Tens fell 7 bps to 1.72, and of course the curve flattened as well with red/gold pack spread -6 bps to 1.52, nearing the previous Friday’s recent low of 149 (so far this calendar year low has been 142.6).
–The move in USDJPY has dominated many markets since late last year, highly correlated with the rally in SPX (and inversely tied, though much more loosely, to the price of gold. More on that below…) Late Friday the US Treasury released a report warning Japan with this passage: “We will continue to press Japan to adhere to the commitments agreed to in the G7 and G20, to remain oriented towards meeting respective domestic objectives using domestic instruments and to refrain from competitive devaluation and targeting its exchange rate for competitive purposes.” While US and Japan are cooperating on N Korea, currency wars may become a bigger issue. As it is, the rally in USDJPY appears to be stretched…
–The big mover on the day was gold, which fell $60 to levels last seen in the middle of 2011. Analysts pointed to Draghi’s comments that Cyprus may have to sell €400 million in gold as part of their restructuring, but of course that reason is simply another crack in the dam of world finance. (The Guardian): “If Cyprus can break the gold market, then [there are] many reasons to be worried, with Slovenia, Hungary, Portugal, Spain and Italy in line,” Milko Markov, an investment analyst at SK Hart Management, said. “It is a make-or-break moment for gold … if the market can’t handle the reallocation and Cyprus, then there is really a need for a bear market.”
–Many note that Italy could be next to be forced to tap its over 2000 tonnes of gold reserves (Let’s just call it a round number of $100B at $1500/oz). But it’s not just Italy that’s of concern. From the Telegraph quoting Mario Soares as elder statesman: “Portugal will never be able to pay its debts, however much it impoverishes itself. If you can’t pay, the only solution is not to pay. When Argentina was in crisis it didn’t pay. Did anything happen? No, nothing happened.” [Portugal has 382 tonnes of gold]. And from CNN: “I think this could be a turning point,” said Jonathan Spall, director of precious metals at Barclays Capital. “Central bank stocks of gold which had looked to be ringfenced in the bailout process could now seemingly come in to play.”
–So that’s the key. Germany, who recall asked to repatriate its own gold holdings from NY and Paris in mid-January, wants other countries to use their gold reserves to pay for their bailouts. Could that be the last straw for countries considering a euro exit? And Texas last month also announced intentions to bring its physical gold holdings back to its home turf…. crazy? Or a sign of just how rapidly confidence can fall in official institutions?
–Perhaps the fall in gold, silver, copper, is a reflection of deflationary concerns, which would be understandable given weakening econ data, the levels of Baltic shipping indices, softness in railcar loadings. But if it’s more about forced selling of sovereign reserves, it may have much more ominous overtones, which also drives a bid into US treasuries.
Links:
TREASURY REPORT http://www.zerohedge.com/contributed/2013-04-13/scariest-50-hours
GOLD HOLDINGS http://en.wikipedia.org/wiki/Gold_reserve#Officially_reported_gold_holdings
THE GUARDIAN http://www.guardian.co.uk/business/2013/apr/12/gold-selloff-cyprus-eurozone-crisis
CNN http://edition.cnn.com/2013/04/10/business/cyprus-gold/
BALTIC DRY INDEX http://www.dryships.com/pages/report.asp
US RAILCARS http://railfax.transmatch.com/
April 12. No one likes the Winklevoss twins
–Another quiet day in US rates yesterday; yields edged lower. April midcurves expire today in dollars, the Blue April 9887.5^ was sold heavily at 4.0, as of this writing the calls are 4 in the money (9891.5). A weak retail sales number could cause a gamma scramble to the upside.
–Today’s news includes Retail Sales expected 0.0 with +0.1 less autos, and PPI expected -0.2 with Core +0.2.
–My next topic was going to be worrisome economic trends, but I will instead go with my favorite Larry Summers quote: “One of the things you learn as a college president is that if an undergraduate is wearing a tie and jacket on Thursday afternoon at three o’clock, there are two possibilities. One is that they’re looking for a job and have an interview; the other is that they are an a**hole. This was the latter case.” He was referring to the Winklevoss twins. The world must agree, because as soon as news came out that they owned 1% of bitcoin supply, the market plunged from 266 to 78, faster than Nelson Bunker Hunt could say “silver corner”.
–Note that the initial high in TYM3 post-Cyprus depositor tax was 131-24…now pushing for 133.
–HuffPost notes that the Fed minutes revealed that several members were concerned about the high levels of student debt, which may be an impediment to future consumption. I have noted before that the public has substituted relatively high rate revolving credit card balances with lower rate student loans. Total debt hasn’t changed much… And, the federal gov’t is the largest issuer of student loans.
–(Reuters) – Stockton and San Bernardino, the two California cities that have filed for bankruptcy protection, are both considered test cases in the epic battle over whether municipal bondholders or pensioners will absorb most of the pain when a government goes broke. San Bernardino has decided to pay Calpers (pensions) and not the bondholders…the point is: SOMEONE doesn’t get paid, and it’s going to happen more and more. The only question is who?
April 11. KPMG uses the ‘Fed leak’ defense: “See? everone’s doin’ it”
–Yields went higher as the treasury auctioned 10’s, and leaked Fed minutes indicated growing momentum for the idea of pulling back on QE this year. The curve steepened with 2/10 up 5.5 to 140.5. (Maybe the KPMG guy can just use the Fed leak defense: “it was all just a big unintentional mistake…sorry…all good now, right?”)
–On the eurodollar curve, the red pack (2nd yr) to green pack (3rd) spread is 34 bps. But the green to blue (3rd to 4th) is 57 bps, a loose indication that tightening expectations are centered somewhere in 2016. And indeed there was some decent buying of blue June midcurve put spreads yesterday (9875/9850 for 4.0, new). On the other hand, there has also been concerted selling of straddles; they’ve been taking 0.5 to 1 bp out of Blue Sept 9875 straddle every day, settled at 36 yesterday vs 39.5 last Thursday. So at a rate of 0.5 bp a day, with 156 days until expiration (~110 business days), we should hit zero around the middle of July! (and maybe then have enough movement to scalp gamma and make some premium back). I guess my point is, and it’s not backed up by study, is that blue premium is a bit cheap relative to green, especially given the shape of the curve. Just the roll up from EDU16 should be worth something like 16 bps…
–Lagarde was on CNBC saying the US should try to get its budget in better shape, yet the Post Office was denied the ability to stop Saturday mail delivery (and save $2b/yr) by Congress. Obama budget doa.
–Stocks soared to new highs, but bitcoin took a dramatic tumble of some 40%. Not to draw parallels but speculative blow ups CAN occur; stocks are making new highs with lower stochastics> bearish divergence. USD/JPY also made a new high yesterday, but I think it will stall around these levels. Nikkei should also stall, it is now nearing 62% retrace from 2007 high to 2009 low…
–Jobless Claims expected 365k and treasury auctions 30 yr today.
April 10. So why invest?
–Little change in the short end of the dollar curve. Longer dated treasuries crept to higher yields in front of auctions (10’s today and 30’s tomorrow). Ten year yield closed just under 175. Implied vol continues to rot. For example, TYK 133 straddle settled at 1’06 last Thursday (ref 132-28), and yesterday at 0’52 (ref 132-26), a 25% loss in value in 3 trading days. TYM went from 1’38 to 1’24. EDZ4 9950^ was 43 last week, now 39. EDM5 closed at 9937.5, the atm April straddle which expires Friday is 3.0! For volatility, go to Japan, where trading halts in the bond market are becoming commonplace and tens rose 6 bps to 58.
–Besides the 10 yr auction, Dallas’ Fisher speaks at 1:00 NY time, followed by Fed minutes at 2:00.
–Stocks press to new highs, though transports are lagging, as are bond etf’s. A zerohedge piece notes similar divergences in early 2012.
–While CNBC economists appear mixed to leaning positive about growth prospects, the NFIB (Nat’l Federation of Independent Business) is telling a different story: “After another false start, small business confidence has sputtered and stalled again. For the sector that produces half the private GDP and employs half the private sector workforce -— the fact that they are not growing, not hiring, not borrowing and not expanding like they should be, is evidence enough that uncertainty is slowing the economy. Virtually no owners think the current period is a good time to expand, because they simply don’t know what the future holds. So why invest? And with the lack of any sustainable fiscal policy or a federal budget, no one’s banking that Washington will be at forefront of any meaningful change. Overall, it appears that there will be little growth coming from the small business half of the economy; as the world economy slows, even big business may suffer.” — NFIB chief economist Bill Dunkelberg
April 9. Japan’s increase in QE doing Fed’s heavy lifting; US can taper off QE…
–US interest rate futures fell yesterday and the curve steepened, erasing Friday’s move to new lows. Dollar/yen was the star performer, exploding to a high of 9937, nearing 50% of the last large leg down from 2007 high of 123.95 to the 2011 low of 75.35 (99.65). Ten year swap spread posted a new high of 19 as treasury outperformance continues (spread was around 8-10 in mid March); Japanese investors are thought to be pouring into non-yen bond markets.
–Auctions this week of 3’s, 10’s, 30’s; begins with 3yr today. NFIB small business optimism data (or lack thereof) is also today. FOMC minutes are tomorrow. Cleveland’s Pianalto yesterday joined others in calling for less QE: “Slowing the pace of purchases could help minimize the potential risks associated with our large and growing balance sheet”, and BlackRock is also asking the Fed to “rein in” QE (FT).
–N Korea is warning foreigners to leave S Korea as the possibility of a missile launch looms. In addition to risks of conventional war, a new cyberwar document came out last week: The Tallinn Manual. From a Der Spiegel article: “Benzel’s voice doesn’t falter when she describes a war scenario she calls “Cyber Pearl Harbor.” This is what it could look like: “Prolonged power outages, a collapse of the power grid and irreparable disruptions in the Internet.” Suddenly, food would not reach stores in time and cash machines would stop dispensing money. “Everything depends on computers nowadays, even the delivery of rolls to the baker around the corner,” she says.” This manual attempts to distinguish when cyber attacks go from commercial nuisances to acts of war. Interesting read (thanks YZ)
http://www.spiegel.de/international/world/expanding-combat-zone-the-dangerous-new-rules-of-cyberwar-a-892238-2.html
–China’s inflation reportedly slowing to 2.1%. However, China’s data is a bit murky, as outlined in this Reuters story about off balance sheet lending: http://www.reuters.com/article/2013/04/08/us-china-banks-shadow-risk-idUSBRE93705F20130408
No way to quantify the magnitude of bad loans, but the article notes that dubious loans made to businesses and local gov’ts that can’t be serviced are being taken by Trust companies, which wrap them up in what are called “Wealth Management Products” or WMPs, and sold to investors, thus allowing bad economic actors to roll their debt. The sh*t always seems like it’s wrapped up in a three letter acronym, like SIV’s, etc. “Trust companies and brokerages probably aren’t buying many bad loans directly, analysts and industry executives say, but they have become a vital source of credit, allowing banks to arrange off-balance-sheet refinancing for maturing loans that risky borrowers cannot repay from their internal cash flow.” “Trust companies sell wealth management products (WMP) to raise funds so they can purchase loans that banks want off their books. WMPs are then marketed through bank branches as a higher-yielding alternative to traditional bank deposits.”
April 8. Alcoa announces today….
Below is chart of Alcoa (AA, white line) with the generic price of 2nd contract in Aluminum (orange line). I had read a snippet on a financial news website that Alcoa “sets the tone for earnings season.” Perhaps there is some predictive power associated with a “miss” or “beat” on earnings, but given that AA and aluminum are both near multi-year lows, I’d say the longer term picture is iffy at best.
April 8. New lows in the yen…Japanese investors search for safer yields
–Normally when one thinks of “hot money” flows, it’s in conjunction with emerging economies that become overwhelmed and destabilized. But given uncertainties in the EU, the overt goal of Japan to depreciate the yen (‘smashing’ success), and N Korean belligerence, US capital markets are the “beneficiaries” of internat’l capital. Even without a weaker than expected employment report US treasury yields might have fallen; Friday saw a new recent low in tens at 1.69%, down nearly 7 bps. The curve flattened to new lows with red/gold euro$ pack spread down 4.75 to below 148. Implied vol was sucked out with long dated green euro$ straddles losing a couple of bps.
–From Mauldin, “Thus, any Japanese household (and Japanese households are the most liquid-asset rich in the world) has to be thinking of putting some of the US $9trn currently sitting in cash into other currencies. And every hedge fund has to be wondering why they should not sell 10 year JGBs yielding 40bps in a falling currency, and then buy US, UK or French bonds yielding 1.75 to 2%.”
–In spite of the relative attractiveness of US assets, SPX had an outside week and closed lower, as did Nasdaq, but SPX had made a new high for the move. Though it seems that stock market moves have little to do with macro growth trends, it’s worth noting comments by the NY Fed’s Dudley: “The increase in payroll tax, the rise in high income tax rates, the increases in taxes associated with the Affordable Care Act, and now the sequester—-if sustained—-will result in fiscal drag of about 1 ¾ percentage points of GDP in 2013….in an ideal world, fiscal policy would have broad-based bipartisan support. That would reduce uncertainty and reassure households and businesses that the U.S was on a sustainable long-term path. Instead, we have nearly the opposite: significant retrenchment in the near-term, but no credible action over the long-term, with partisan divisions and significant uncertainty about what will happen next.”
