Jan 30, 2013. Trend toward higher rates still in place.
–Trends that have been in place are continuing this morning, with yen weak against everything and EUR making new high vs USD. EUR/JPY now over 123.50. Stocks edging higher from yesterday’s gains. US interest rates are up, with the 30 yr bond contract making new lows.
–Today’s news includes Q4 GDP (expected 1.1%), ADP, 7yr treasury auction and FOMC announcement. Consumer Confidence yesterday was quite weak, coming out at 58.6 vs 65 expected, now catching up with other polls that have shown waning economic enthusiasm such as NFIB Small Business Optimism which had plunged to March 2010 levels, “one of the lowest readings in survey history.”
–However, yields continue to press higher, and the curve is steepening with all deferred euro$ calendar spreads making new highs. For example, red/gold pack spread gained almost 3 bps (over 159). There continues to be new buying of gold (5th year) eurodollar puts. Yesterday paper bought 7500 Gold March 9775 put with Gold June 9750p, paying 18 to 20.
–Against a backdrop of less than robust economic data it may seem odd that yields are rising and money is shifting from bonds to stocks, especially as the last FOMC introduced inflation and employment thresholds for removing accommodation. However, the Dec minutes suggested QE may taper off this year, which would make sense given a new Fed Chairman coming in next year, allowing more flexibility for policy changes. And this “out” will surely remain in today’s Fed Statement, “….the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.”
–It’s probably more appropriate to frame the recent bond sell off in terms of rate normalization, rather than a reflection of economic resurgence. 2% is still low for tens in a more normal environment. The big changes have been internal in terms of gradual improvements in housing and employment, and external, with Japan devaluing and China stimulating. Additionally, though this may be a minor factor, I have seen several articles noting that rate increases will add to the deficit as profits from the Fed’s portfolio decline and are no longer funneled to the treasury. In any case, the trend is currently in place for higher rates and a steeper curve in spite of economic uncertainties.
Jan 25. New high EURJPY…risk on?
–This morning finds the US bond flirting with 145 strike and tens below 132 strike as Feb options expire. New highs being made in USDJPY and EURJPY. In the former, 38% retrace from 2007 high of 124 to low just above 75 in 2011, is 94, looks like next target, currently 90.80. And in EURJPY the high in 2008 was 170 vs low of 94 in 2012, 38% is 123, now 122.
–EURUSD is also making recent new highs, apparently partly related to today’s LTRO repayment to the ECB, expected around €100 B. Risk of higher repay numbers suggest liquidity reduction and perhaps even more strength in EUR, though that might loop back into peripheral bond weakness.
http://www.zerohedge.com/news/2013-01-24/eurusd-vulnerable-ahead-ltro-friday
–Yesterday in the US there was new position buying in gold march 9800p for 6-6.5, 20k (EDH’17 underlying, 98.295s). Curve steepened a shade as ten year yield rose 1 to 184. There was also a buyer of 85k Feb VIX 16 calls with index just below 13, paid up to 0.55. I suggested yesterday in a note that VIX calls could be used to hedge a long US curve position. In any event, VIX still made multi year lows this week, and stocks are again higher this morning.
–Fed balance sheet now over $3 T. Adjusted Monetary base new high of $2.8 T. The liquidity has to go somewhere, right? And while stock inflation probably contributes to income inequality, the levitation of assets in dollar terms helps to alleviate underwater mortgages and underfunded pensions.
–Today’s news includes New Home Sales expected 388k from 377. Home sales have stabilized and edged higher… in 2007 New Home sales ran around 700k, but mortgage rates were 6%. Now with 30 year around 3.25% the annual rate is edging nearer to 400k.
Alex Manzara 312 432 4457
St. Louis Adjusted Monetary Base (BASE)
2013-01-23: 2,796.041 Billions of Dollars Last 5 Observations
Bi-Weekly, Ending Wednesday, Seasonally Adjusted, Updated: 2013-01-24 3:31 PM CST
Graph of St. Louis Adjusted Monetary Base
Jan 24. Divergence between stocks and treasury yield curve is growing
–Japan records largest ever trade deficit (FT headline) and USD/JPY is approaching new high. China flash HSBC PMI hit a new 2 yr high at 51.9. The theme in Asia is reflation, led by depreciation in yen and stimulus in China. It’s the opposite case in the EU. France PMI tumbled to 42.7. (Although eurozone composite improved to 48.2, a ten month high). Spain’s unemployment continues to increase.
–In the US AAPL disappointed… FT headline: “Apple stock sheds 10% on growth worries”. Nasdaq made new highs yesterday but is about 35 lower this morning having tested this month’s lows. SP is only marginally lower.
–Interest rate futures were quiet yesterday. Feb options on treasuries expire tomorrow. News today includes Jobless Claims expected 360k and Leading Indicators expected +0.4.
–In the beginning of last year markets also rallied, with SP climbing from 1250 as the year started, to a new high over 1400 in March. Rates rose as stocks signaled growth ahead. The ten year yield rose to 240 (vs 183 now). Second blue eurodollar (which would have been EDM15) traded below 9800, vs 9879 for EDM16 now. Blue April 9875 straddle is just 27 bps. (expires in mid-April, EDM16 underlying). Given Asia reflation, improvement in domestic housing outlook, and the hint of a pullback in QE, the resilient bid for treasuries is surprising. Next Wednesday is FOMC meeting, which may shed more light on changes in QE.
January 21. Inflation signals?
Jan 21. I haven’t found that the inflation indexed (tips) market is particularly predictive over time, but I marked the spread between ten year tip to treasury note at a new high of 259.2. Know the last time that this spread was 260? April 2011. Know where red/gold pack spread was? 270. Red/gold is now around 143, and it traded to around 200 in March of last year. If an upturn in monetary velocity develops, it’s sayonara for US bonds, and we’ll see a much steeper curve.
–This morning tensions have escalated between China and Japan over disputed islands as military assets are positioned, risking conflict and raising uncertainties in the region. What is less uncertain is Japan’s goal to produce inflation. Depreciation of the yen could stoke global carry trades.
–Over recent history there are several examples of analysts saying that one catalyst or another isn’t big enough to make a material difference in economic forecasts. (‘Subprime is a minor part of the entire mortgage market.’ ‘Greece is just a small part of the EU’). Well Japan is 8.0 to 9.0% of the global economy, and I would say there are going to be ramifications when we see moves like a 20% appreciation in EUR/JPY over two months. –Business Insider cites a recent piece from Nomura which points to an upturn in Asian demand (ex-Japan). “This seems to reflect genuine Asian demand, rather than just demand for processing trade, as China‟s exports to Asia ex-Japan surged 28.9% y-o-y in December. This powerful force of intra-Asian trade gels with our view that Asian domestic demand is strengthening on very loose policies and robust capital inflows.”
Read more: http://www.businessinsider.com/asian-export-data-confirms-that-asian-demand-is-growing-into-something-big-2013-1#ixzz2IbryoBx0
Jan 18. Renewed BEARISH sentiment in US treasuries
–Important sentiment change yesterday. Strong housing data and a large drop in Jobless Claims sparked initial selling in interest rate futures, and a weak Philly Fed was virtually ignored. There was massive long liquidation in midcurve call spreads vs short puts. Greens closed down 6.75 bps as call spreads were sold and puts bought. Near the end of the day there was a buyer of 30k TYH 129/130 put spreads for 7, covered futures up to 131-25.5, (new position). EUR/JPY exploded 2.5 big figures to new highs. Weakness in yen is easily the biggest theme of the year and is a risk invitation. Stocks rallied to 5 year highs. ZeroHedge notes that the catalyst for a move to devalue yen: “Japan’s balance of trade has turned decisively negative for the first time since the Oil Shock of 1980…”
–I don’t think the data points to a particularly strong US economy even though I think the recovery in US housing prices is hugely important. But I do think that there’s about a 25% chance that yields in the US long end reset quite a bit higher over the near term with tens 2.40 to 2.50. Red/green pack spread at 32? Got to 60 last March. There are fairly low risk ways to express long calendars with options. Note that vols immediately firm up on sell offs, the market fears the downside.
–It may seem contradictory but european peripheral yields also have a chance to move higher. Not currently ‘peripheral’ but France has recently moved from below 2% to 2.18. Spain’s ten yr is almost perfectly negatively correlated with EUR recently; as Spain’s yield declined through the latter half of last year EUR strengthened, however, that strength poses huge economic problems for the EU that could easily cause renewed spread widening. But this time it may NOT lead to buying of US debt, as Asian stimulus is an overwhelming factor.
Jan 17. Can a revived housing sector provide economic sustainablility?
–Boring session Wednesday. Continued selling of premium with TYH atm straddle now around 3.8 vol, lowest in months.
–News today includes Housing Starts, expected 887k; there has been a gradual increase in positive housing data. From Mortgage News site: “Home prices increased on a year-over-year basis for the ninth consecutive month according to the CoreLogic Home Price Index (HPI) released today. The November HPI was up 7.4 percent from its November 2011 level and represented the largest jump in the index in nearly seven years.” This is important news, especially when one considers that household mortgages are the ONLY real category where deleveraging (whether by choice or not) has occurred. According to Fed’s Flow of Funds, Mortgage debt growth has been negative in 17 of the past 18 qtrs. In Q1 ’08 it was 10.6T, by Q3 ’12 (last available) it was only 9.5T. What this means is that many “underwater” homeowners are now likely to see the surface where they can REFI, which would provide strong support for the economy. I have seen/read a few things that indicate a demographic bulge of new possible households that represent ‘pent up demand’ since many people have been doubling up, i.e. kids moving back with parents. I am somewhat skeptical of relying on this group for growth, since they are also the demographic being saddled with student loans and Obamacare (young and healthy essentially pay for old and infirm). However, the sector that really brought down the US economy has turned the corner, though perhaps due to artificially suppressed rates. In any event, though the first half of 2013 is looking awful due to increased taxes and sequestration, things may improve in the latter half. (Some of these thoughts I’ve lifted from an interesting slide show presentation by Naufal Sanaullah, not to say I agreed with it entirely). http://www.businessinsider.com/naufal-sanaullah-guide-to-the-us-economy-in-2013-2013-1 If it does have merit, I would think that deferred one year calendar spreads in eurodollars are cheap. Indeed there were some option plays yesterday that benefit from steeper calendars.
–Other news today includes Job Claims expected 368k and Philly Fed expected 6.0 from 8.1.
Jan 16. AAPL’s loss off the top greater than $200B. Congress approves $50B for Sandy damage
–Retail sales were stronger than expected yesterday (+0.5), providing some support for most (but not all, see below) stocks. Transports made new highs. Comments by Amari (Japan Econ minister) warning about the yen becoming too weak and Juncker warning that the euro was ‘dangerously high’ caused unsurprising weakness in EUR/JPY…down to 118, (-150) and this morning it’s just above 117. Actually, given the 20% rally of the past two months the sell off appears modest. JGB’s have retraced about half of the yield increase from 68 to 82 bps, and US 10yr yield eased as well, falling almost 3 bps to 1.827.
–Today’s news includes CPI expected 0.0 with Core +0.1. Industrial Prod expected +0.2 from 1.1 last. Beige Book in the afternoon. Boston Fed’s Rosengren said yesterday more QE might be needed, he’s a voter this year.
–The World Bank cut its global growth forecast for 2013, from 3.0 to 2.4, vs last year’s 2.3.
–Apple closed solidly below 500 at 485, down 3%. It has lost $207b of market value in the past 4 months and is now back to levels from last Feb. To give an indication of the magnitude of the capital swing, Google’s market cap is only $237b. AAPL has lost an IBM, or more than the combined value of YHOO, FB, HPQ, Dell, RIMM and AOL, AND the total notional Feb gold open interest outstanding in COMEX with $15b left over. (204k contracts open in GCG3). Given that the entire consuming world seems emotionally tied into the company, I would think the wealth effect of AAPL in terms of increasing uncertainty might be palpable.
Jan 15.
–As usual it was a quiet Monday. However there was a large buyer of March Five Year 123.25 put for 6…about 17 bps out of the money. Adding to the position, open interest was up 34k to 99k. In eurodollars it was the opposite (larger on balance), a seller of Gold June 9775p on an exit, open interest fell 29k. In any case, yields edged slightly lower and the curve was flatter in front of Bernanke’s comments, which don’t appear to have had much impact.
–Stocks held to a relatively tight range as they have through January. A rumored private equity deal for Dell was positive; weakness in AAPL was a counterbalance. I would note that the Dow Transport index is nearing an all time high with yest touch of 5602. In July 2011, 5627 was the high. Of course right after that, in August 2011, stocks slid 15%.
–Continuing the topic of transportation, there is an interesting court case claiming UAL skirted $300 million in taxes by setting up an office in a rural Illinois town, rather than in its main Chicago office, to buy its jet fuel. City of Chicago, County of Cook, is considering joining the lawsuit, because it’s just not ethical business practice, and besides, they need their cut. Ironically, the Chicago Tribune just reported on fare increases for public transit: “All types of CTA passes went up in price today, from a 16% hike on the 30-day pass to 74% on the one-day pass.” Regular one way fares are not changing unless you buy a ticket at O’Hare airport which will be $5 rather than $2.25. So, it’s ok to gouge airport travelers but not ok for a company to try to avoid the usurious grip of the state. Think of the teachers.
–Today’s news includes PPI expected -0.8 with Core +0.2. Retail Sales +0.2 but +0.5 less autos and gas. Empire State expected 0.0 from -8.1.
–In other news, Germany wants to repatriate the gold that the US Fed is holding. Fully holding in safekeeping. Not lending it out or anything like that… As times get tough, distrust grows, even among the most august institutions.
Jan 14. The trillion dollar platinum coin idea is dead…for now
–Trillion dollar platinum coin idea as an end-around play to avoid the debt ceiling was killed by Treasury and the Fed. Perhaps the zerohedge post about a sack of devalued currency being exchanged for a few boxes of beer in Belarus caused the clear light of day to prevail that currency should actually mean something.
–Bernanke speaks today at 4:30 NY time today. PPI and Retail Sales Tues.
–After early weakness Friday ten year futures traded higher. Cash yield slipped 2 to 1.87. The push toward higher rates since the Fed minutes raised the possibility of an early end to QE has abated for now. Bernanke’s comments today are likely to further suppress fears that the QE rug could be pulled. Additionally, the bite of increased payroll taxes is now becoming tangible as paychecks are rec’d in the new year, perhaps negatively impacting consumption.
–While monetary stimulus measures are being reconsidered in the EU (no rate cut) and in the US, Japan’s efforts are providing support for (asian) stocks. Nikkei is up 20% since Nov and 14% since Dec. Shanghai is up 17% since the beginning of Dec. However, China’s efforts to spur the economy aren’t without costs. Beijing is under heavy smog alerts daily. From Business Insider: “The wild card in the Chinese car industry is pollution. In Guangzhou, the nation’s third largest city, lotteries have been created by the government to cut down on auto traffic. This is certain to undermine sales. The precedent could be matched in Beijing and Shanghai, which have among the most polluted air of any huge metro areas in the world.” The same article notes that China car sales were up only 4.3 in 2012 and expected up only 7% in 2013.
–On the other hand, while Bloomberg runs the following story, “Euro Leaders Declaring Worst Is Over Turn to Economy Woes” suggesting that the crisis has been averted, euro strength will create a whole new set of competitive problems for the EU. “The worst is over” rarely if ever means that the worst is over.
Jan 11. Abe continues to crush yen. Draghi stands pat. New Fed decidedly dovish.
–US interest rates rose as the ECB refrained from cutting rates and the US treasury auctioned 30’s. Tens up 4 bps to 1.892. The curve steepened; some deferred eurodollar calendar spreads notched new highs, for example red/green pack spread up just over 2 bps to new recent high of 33.
–The euro soared yesterday, especially against the yen. EURJPY up over 2 big figures to 116.90 and this morning at 118 as Abe announced a 10.3T yen stimulus package. Also this morning China inflation figures higher than expected. Inflation (or lack thereof) is becoming a theme. My bet is that Abe will beat it in Pyrrhic victory. At least he knows what he’s trying to do. In the US Kocherlakota indicated Fed policy might be too tight considering lack of inflation. In contrast Esther George, (KC Fed Pres, new voting member) outlined risks of inflation and other possible imbalances from easy monetary policy. The press seems to think she’s the new ‘hawk’ filling Lacker’s shoes, but I read yesterday’s speech and thought it was tepid. I personally don’t conclude that she will become the ‘dissenter’. Against other new Fed voters though, like Evans of Chicago, she may look absolutely Santelli. (Though Bullard could yet lean more hawkishly, also voting this year).
–When you read the Dec Fed minutes, it’s peppered with “one member” or “one participant” who either objected, voiced concern, or indeed “viewed additional purchases as unwarranted”. Lacker. It’s like the cartoon with the exasperated jury foreman sticking his head out the door to order lunch: “11 turkey sandwiches and 1 cheeseburger. 11 Cokes and 1 Dr Pepper…” The point is that this new Fed leans dovish, we lack Lacker, and the market may yet test them with a steeper curve, perhaps sparked at the margin by Japan’s experiment, or by China’s mismangement.
