Feb 25. Bernanke semi-annual testimony Tuesday
–GBP made new low as Moody’s downgraded the UK late Friday. USD/JPY near new high apparently due to Kuroda as choice to head BoJ (favors monetary expansion). EUR is currently firming, awaiting Italy election outcome. HSBC flash PMI for China lower than expected at 50.4 (from 52.3 last).
–Bernanke speaks in Congressional semi-annual testimony on Tuesday. Bloomberg reported that earlier this month on 5-Feb, Bernanke “minimized concerns that the central bank’s easy monetary policy has spawned economically-risky asset bubbles in comments at a [private] meeting with dealers and investors this month…” For example in farmland and high yield debt. I haven’t watched this closely, but have seen more put buying recently on HYG, the high yield etf. http://www.bloomberg.com/news/2013-02-22/bernanke-said-to-minimize-asset-bubble-concern-at-meeting.html
–Treasury auctions 2’s, 5’s, and 7’s starting Monday. Yields edged lower on Friday with US tens down 1 bp to 1.965.
–Darden restaurants (Olive Garden, Red Lobster), joined Walmart in blaming the payroll tax increase and high gasoline prices for sliding same store sales. In other company specific news, Yahoo is ironically banning employees from working from home: “To become the absolute best place to work, communication and collaboration will be important, so we need to be working side-by-side. That is why it is critical that we are all present in our offices. Some of the best decisions and insights come from hallway and cafeteria discussions, meeting new people, and impromptu team meetings. Speed and quality are often sacrificed when we work from home. We need to be one Yahoo!, and that starts with physically being together.” Doesn’t that undercut products like yahoo chat?
Feb 21. Fed minutes add to QE uncertainty, markets adopt “risk off” posture
–From FOMC minutes: “…many participants also expressed some concerns about potential costs and risks arising from further assset purchases.” And, “A number of participants stated that an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the Committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred.”
–The market pared back its assessment of how long QE might last, but it’s also interesting to note just how much uncertainty there is among FOMC participants regarding future policy and communication.
–In terms of reaction, things snapped quickly into risk-off mode. Both SP and Russell made new highs for the move pre-minutes, but reversed with outside days and much lower closes. The dollar strengthened (DXY blew through 200 day ma), gold plunged, crude oil has a double top formation portending lower levels, copper has fallen over 4.2% in the past three sessions (including this morning). While some might conclude an immediate risk to the long end of the curve due to possible loss of the Fed’s sponsorship, flight to quality overwhelmed those concerns and treasuries closed slightly higher. As we have seen previously, risk assets suffer most when questions about the Fed’s commitment arise.
Feb 18. Monetization, the only game in town
–G20 gave Japan a pass on currency devaluation so USD/JPY testing new highs this morning. Japan is racing to the endgame of massive monetization without official objection from the G20, but certainly the heat is turned up regarding currency wars.
–In a way, the US policy response is embodied in an interview Greenspan did with Maria Bartiromo Friday when he said that it all boils down to the stock market, essentially tying the fate of the US economy to paper asset and housing prices. http://www.zerohedge.com/news/2013-02-15/greenspan-ignore-economy-only-stock-market-matters Although it wasn’t Bernanke speaking, it’s pretty clear that he too, has placed outsized emphasis on the “wealth effect” though one could argue that such policies are a major driver of income inequality. Ironically, Walmart on the very same day termed February sales a “disaster” as the payroll tax increase took effect. And Cisco said it’s likely to refrain from buying companies in the US or hiring in the US until moves are made to revamp the tax code. The Fed is using its last tool of endless QE in an attempt to blunt fiscal paralysis and to inflate away unfunded pension obligations. The end result has to be inflation and an erosion in confidence in long duration bonds. And higher prices don’t translate to the same unit sales, made obvious by Makers Mark ill-fated decision to water down their product. They were hoping to maintain unit sales by cutting quality, and having reversed the decision will now increase price. Fed policies are losing their efficacy, as Janet Yellen alluded to in her speech last week. For the short term the Fed is probably happy that Japan’s moves have juiced US equities, but the transmission to the real economy will prove illusory.
Feb 13. Ten year note yield again testing 2%
–Yields edged higher yesterday with 10 year up 3.5 bps to 1.98, and this morning trading 2.00% in front of today’s ten year auction. 30 year bond to follow tomorrow. Curve was a bit steeper with 2/10 at 172 and red/gold pack spread up nearly 4.5 bps to 163.25. Recent high has been 166 which is being tested this morning.
–Today’s news also includes Retail Sales, expected +0.1 in January with Core +0.3. NFIB reading yesterday had a marginal rise from depressed levels.
–Art Cashin notes that the monetary base continues to make new highs, with possible inflationary repercussions. Charts attached. It feels as if the theme in the long end may be shifting from emphasis on economic growth (or lack thereof) to possible inflation, especially as stocks grind to new highs.
–Implied vol was down in dollars with all straddles down a bit. However, there continues to be interest in buying long dated puts and straddles in greens. There is also consistent buying in Short Dec midcurve 9937 straddle which traded 30 early, settled 29.0. Green March midcurve 9925 straddle settled at 12.5 ref 9928.5. I think there should be plenty of chance to scalp gamma with 31 days until expiration.
–Soc Gen reported a larger than expected quarterly loss, underscoring weakness throughout EU banking system.
“A messy set of fourth-quarter figures, with multiple exceptional items,” said a Paris-based trader…
http://research.stlouisfed.org/fred2/series/BASE
https://research.stlouisfed.org/fred2/series/MULT
Feb 12. Goodbye Yellow Brick Road
When are you gonna come down
When are you going to land
I should have stayed on the farm
I should have listened to my old man, Elton John
Feb 12. Today’s news includes NFIB Small business optimism survey, which is near historic lows as Obama dusts off tired economic proposals in this evening’s State of the Union address. Three year auction as well, and the newest “hawk” on the FOMC voter panel, Esther George, is scheduled to speak at 11:30 EST.
–I know that Janet Yellen is well respected at the Fed, but her speech yesterday regarding employment is notable for lack of critical and creative thinking. For example: “More recently, the aging of the population has put downward pressure on labor force participation, so employment hasn’t had to grow as quickly to keep pace with the potential workforce.” Really? Due to economic stress the participation rate of workers over 55 is the highest since the early 1960s. (St Louis Fed data). Look at the DATA!! http://research.stlouisfed.org/fred2/series/LNS11324230
–Then she launches into a discussion of whether unemployment is structural or cyclical, concludes it’s mostly cyclical, and therefore makes the leap that QE is probably the best response, “even though the efficacy of these [unconventional QE] tools was uncertain and it was recognized that their use might carry some potential costs.” I applaud her empathy for the plight of the unemployed, but her speech actually erodes credibility of the Fed in my opinion. *See text below.
–Turning from domestic to global policy: (Reuters) – “The Group of Seven nations are considering a statement this week reaffirming their commitment to ‘market-determined’ exchange rates in response to heating rhetoric about a currency war, G20 officials said on Monday.” You know what that means? That we’re in a global currency devaluation war that’s anything but “market determined”.
–And now moving eastward, on to China. From the Guardian: “China tightens concert rules after Elton John’s ‘disrespectful’ Beijing show.” http://www.guardian.co.uk/world/2013/feb/10/china-tightens-concerts-rules This is the new economic superpower. Afraid of Elton John because they have no confidence that they can control their own populace. So goodbye yellow brick road/ Where the dogs of society howl /You can’t plant me in your penthouse /I’m going back to my plough.
* (from Yellen’s speech) For the Federal Reserve, the answer to this question has important implications for monetary policy. If the current, elevated rate of unemployment is largely cyclical, then the straightforward solution is to take action to raise aggregate demand. If unemployment is instead substantially structural, some worry that attempts to raise aggregate demand will have little effect on unemployment and serve only to stoke inflation.
This question is frequently discussed by the FOMC.12 I cannot speak for the Committee or my colleagues, some of whom have publicly related their own conclusions on this topic. However, I see the evidence as consistent with the view that the increase in unemployment since the onset of the Great Recession has been largely cyclical and not structural.
Feb 11. This week brings State of the Union and Retail Sales
–Not much net change Friday in US rates. This week brings 3, 10 and 30 year bond auctions beginning Tuesday. State of the Union speech is Tuesday evening with Obama expected to focus on job creation through more spending on infrastructure, clean energy and education. Again.
–Also Tuesday morning is NFIB’s small business optimism reading, which has been probing some of the lowest levels in survey history. http://www.nfib.com/research-foundation/surveys/small-business-economic-trends
–Wash Post reports that Obama “is considering a series of new executive actions aimed at working around a recalcitrant Congress, including policies that could allow struggling homeowners to refinance their mortgages, provide new protections for gays and lesbians, make buildings more energy-efficient and toughen regulations for coal-fired power plants…” http://www.washingtonpost.com/politics/obama-weighing-executive-actions-on-housing-gays-and-other-issues/2013/02/10/e966cc06-7065-11e2-8b8d-e0b59a1b8e2a_print.html
–That’s how it starts. Fast forward: Venezuela devalues and Argentina freezes grocery prices. Russia is following a different path having used oil revenues to amass “570 metric tons of the metal in the past decade” according to Bloomberg. “The more gold a country has, the more sovereignty it will have if there’s a cataclysm with the dollar, the euro, the pound or any other reserve currency,” Evgeny Fedorov, a lawmaker for Putin’s United Russia party in the lower house of parliament, said in a telephone interview in Moscow.
–In an otherwise quiet day Friday, there was continued accumulation of Short Dec 9937 straddles at 30.5. Must have about 15k now. There was also continued liquidation of gold June puts.
Feb 8. Treasury yields slip lower
–Massive put selling (liquidation) to start the day with about 35k Gold June euro$ 9775, 9750 and 9737 puts sold along with 5k Gold Sept 9750 puts. Delta equivalent about +11-12k futures. TYH 130.5p sold in size of at least 15k. Curve flattened with red/gold down nearly 4 bps to 156.4, off the Feb 1 high by 10 bps.
–Draghi was able to talk the euro down yesterday, though he appears to be entirely outgunned by Japan’s efforts. Japan is rolling out the tanks to reclaim exports, Draghi’s not sure if he wants to get into a currency war.
–Consumer Credit for December was $14.6 B, surprising because revolving (credit card) was DOWN a few billion while non-revolving, (car and student loans), was up a whopping $18.2B. As I have said before, it’s not deleveraging, it’s substituting low cost student loan debt for credit card debt. Default rates on student loan debt are exploding, but the government is the biggest holder and will likely end up forgiving large chunks of “student” debt.
–News today includes Trade Deficit, expected $46B. China’s Trade numbers were better than expected, supporting the idea of a rebound.
Feb 7. ECB meeting today
–I have been negative on the long end of the US curve, but yesterday turned short term neutral as peripheral EU bond yields remain stubbornly bid. Might as well include French yields as well. Additionally, after a meteoric rise in USDJPY, a target was hit; a pause in yen weakness would likely result in consolidation or reversals in other markts. SPH had a quiet day, however, a double top just above 1510 is holding for now. A close below Monday’s low of 1490 would suggest further profit taking (and likely correspond with curve flattening). Additionally SHCOMP is nearing last year’s high and should find resistance there (2478 vs current 2435). Brazil (IBOV) pretty much failed at last year’s high of 63430, having slightly exceeded that level reaching 63470 in early Jan. It’s now 58862. The point is that emerging markets show signs of being tired.
–The big event today is ECB meeting and press conference. EUR a bit higher in anticipation. US news includes Jobless claims expected 360k.
–Vol selling in treasuries. April TY 130.5 straddle settled 1’41, down to 4.5, having recently traded 5.0. Short term vol pressure allows longer term players to buy long dated out of the money puts (on greens/blues) for small premium outlay as insurance. Despite inaction out of the ECB, the larger theme of reflation will still likely result in a steeper US curve as the year unfolds.
Feb 6. Operation Last Resort
–USD/JPY at 93.65 this morning, another new high. From 2007 high 124.14 to 2011 low 75.35, 38% is 94.00…getting very close to this level, with a few old highs just above 94.00 in early 2010.
–US rates were higher yesterday with tens +4.5 bps to 201. Long March treasury puts continue to be rolled into April. There was a large option steepener trade done as block after the close. 55k 0EJ 9937/9912ps vs 3EJ 9837/9812ps, paid 3.0.
–OPERATION LAST RESORT: The new launch of ANONYMOUS in retaliation for over-reaching by the justice dept in Aaron Swartz case. It’s also the theme of Japan’s Abe in terms of reflation. I wouldn’t be surprised if the ECB also latches on to this idea as renewed stresses in the banking system spur policy changes, but tomorrow’s meeting is likely too soon for any issues to be forced. The broad point is that globally, OP LAST RES is appearing to be an attractive policy choice. Ruh-oh. Which is not to be dismissive of Anonymous. The Federal Reserve reported it was successfully, if briefly, hacked. The FED! The entire US financial architecture is based on electronic debits and credits zipping around, and Anon’s new video is promising, reluctantly, to raise the stakes. I wouldn’t judge it as an idle risk. The idea of a flash crash, or a major service interruption is perhaps marginally more likely…
“Anonymous has observed for some time now the trajectory of justice in the United States with growing concern. We have marked the departure of this system from the noble ideals in which it was born and enshrined. We have seen the erosion of due process, the dilution of constitutional rights, the usurpation of the rightful authority of courts by the “discretion” or prosecutors. We have seen how the law is wielded less and less to uphold justice, and more and more to exercise control, authority and power in the interests of oppression or personal gain.”
Here is the video, very interesting…but may want to use discretion in viewing. Because they’re watching you.
http://www.youtube.com/watch?v=WaPni5O2YyI
Feb 4. Last year’s ten year low yield will not be seen again
–Not much net change in interest rate futures Friday; a short cover relief rally after employment data sputtered, and bonds made a new low settle. Pervasive weakness in yen is unrelenting. New high USDJPY to 92.80 and in EURJPY to 126.60, a 26% move in 2 1/2 months. The head of Japan’s Gov’t Pension Investment Fund (the world’s largest at $1.16T) is considering shifting some assets out of Japanese bonds and into emerging markets as yen devaluation policies are expected to cause an increase in JGB yields (BBG). This is just one indication of the huge ramifications of Japan’s strategy. According to the article, this fund has a 100 year horizon and rarely changes allocations. http://www.bloomberg.com/news/2013-02-03/japan-pension-fund-s-bonds-too-many-if-abe-succeeds-mitani-says.html Another move correlated with yen has been the steepening of the US curve. For example, in mid Nov when EURJPY was around 100, red/gold pack spread was 115-120. Yesterday red/gold closed at a new recent high of 166, up over 4 bps on the day.
–I think there are several reasons for a structural shift to bearish sentiment in bonds, some of which were rapid, like the change in yen policy, and some of which have been much slower moving, like improvement in housing and the plunge in households’ debt servicing costs. I don’t even pretend to grasp the entire picture, but the fact that last Wed’s huge miss in GDP (-0.1 vs +1.1 expected) failed to spark buyers, and indeed was met with new sellers is as crystal clear of a warning bell that longs are ever likely to hear. Friday’s Dutch Gov’t takeover of SNS Bank resulting in capital wipeout of equity and junior bondholder stakes would have been another clear excuse to seek comfort in the safety of US treasuries. Didn’t happen. My guess is that we will not see 1.40 tens again unless all out military conflict erupts, and maybe not even then. That’s not to say we can’t see reactions back to lower rates. For example, the ECB should be slashing rates to counter EUR strength, but only last week the Davos elite concluded that the crisis has run its course. We’ll see what Thursday’s ECB meeting brings.
–I am not in the mindset that a newly energized US consumer is going to lead a global growth charge. There are myriad complex reasons that rates could set higher: a pull back in Fed sponsorship, an upturn in the velocity of money, an increased perception of capital risks in bonds. But the chart below on Households Financial Obligation Ratio (and I know there are some contrary explanations) is quite dramatic.
http://research.stlouisfed.org/fred2/series/FODSP?rid=89&soid=1
Household Financial Obligations as a percent of Disposable Personal Income (FODSP)
2012:Q3: 15.74359 Percent Last 5 Observations
Quarterly, Not Seasonally Adjusted, Updated: 2012-12-18 12:01 PM CST
Graph of Household Financial Obligations as a percent of Disposable Personal Income
