Jan 9. Ten year yield edges lower…auction today should be a test. CONSUMER CREDIT
–A lot of bullish trades in interest rate options yesterday. For example, Green Sept 9925/9937c spd bought vs 9875p (sold put for 1.5 credit) 20k. TYJ 128.5 put were sold about 20k from 23 to 25, with last batch being sold at 23 vs 130-25. (both new). Curve flattened as ten year yield fell a bit over 3 bps to 187, (what had been the upper end of the yield range prior to last week’s break out).
–Yen weakening again as Reuters reports BoJ may double inflation target to 2%. In the US, ten year treasuries auctioned today.
–Consumer credit was up another $16 billion in November. Looks solid at first. Confident consumers. The interesting dynamic is that most of the increase was non-revolving, i.e. student loans and autos. Revolving credit was up at an annual rate of only 1%, which sort of dovetails with reported increase in retail sales. Non-revolving was up 9.5%. Obviously, student loan debt is being substituted for credit card debt. Duh. It’s all there on the Fed website. Deleveraging?? Total Cons Credit was $2.529b in 2007, now 2.752, so that’s not lower, but… REVOLVING (credit cards) went DOWN from $1008b in ’07 to $834 now, a decline of over 17%. Who plugged the hole? FED’L GOV’T education loans, that’s who. Fed’l Gov’t as a HOLDER of consumer credit went from $93b in 2007 to $521b now. FIVE TIMES HIGHER! Who wouldn’t want to substitute 12% card debt with 6% gov’t debt? [footnote on fed website explains that gov’t holdings are for education loans, doesn’t say what they’re actually USED for] Is that actually a sign of organic strength in the economy?
http://www.federalreserve.gov/releases/g19/current/default.htm
–But instead of attacking the problem…hey…we need to contain costs at the STATE schools, which might put competitive pressures on the private schools, no, that’s not the strategy at all. The admin is working on new debt s-t-r-e-t-c-h or forgiveness plans for student loans. What do we call it? STIMULUS.
Jan 7. Possible trend change in US long rates…
–Employment data came out pretty much as expected with NFP up 155k. Yields continued to edge slightly higher. New high in 2/10 treasury spread near 165, up only 1 bp Friday but fully 15 bps from the end of the year last Monday. Red/gold pack spreads rose 2.5 bps to 150.75. Tens +1.5 to 191.5.
–All treasury puts (except Feb expiration in bonds) saw increases in open interest, an indication the market still perceives risk to the downside. Treasury auctions 3’s, 10’s and 30’s this week.
–VIX has plunged below 14 since the fiscal cliff deal sparked the rally in stocks, with SPX apparently ready to challenge the high of 1576 set in 2007. (SPX close 1466). Going into the end of the year VIX hit 23, current level of 13.8 is about as low as it gets.
–I don’t think economic data on its own would argue for a sustained rise in US yields. However, the bombshell out of the minutes suggesting a wind down of QE at the end of the year, along with an inability to tackle structural fiscal issues, and more talk about the “platinum coin” as a solution to the debt limit might tilt the market’s collective consciousness toward the bear scenario. Add in Japan’s pledge to weaken its currency and stoke inflation, and measures by China to support demand, and it may be enough to spur a rush toward the exits in the crowded long bond trade. Bruce Krasting had an interesting take on Fed minutes, suggesting that perhaps Bernanke wants to put Fed policy in a more neutral stance going into the end of his term one year from now. http://brucekrasting.com/bernankes-legacy-problem/ He notes that Greenspan was raising the FF rate going into the end of his tenure to leave a more open table for Bernanke. Perhaps a stretch, but maybe the Fed wants to also take a small step back from being the only game in town for the economic policy of the country. Note that there are several Fed speakers this week: Lacker tomorrow, George, Bullard and Kocherlakota Thursday.
Jan 4. Gamechanger
Jan 4. Early weakness in interest rate futures was sparked by stronger than expected ADP (215k vs 140 exp) which caused some shops to ratchet up today’s NFP estimates (~170-190). The real accelerant was release of the Fed minutes which said that sev’l members wanted to end QE in 2013. Some Fed members are uncomfortable with the gargantuan increase in the balance sheet… I would again point to the Dallas Fed paper outlining the many (loner term) risks of ultra easy monetary policy and conclude that these ideas are gaining credence within the Fed, thereby raising uncertainty about the future path of policy. Given all the efforts made by the Fed to hone communication, this change in tone is a gamechanger.
http://dallasfed.org/assets/documents/institute/wpapers/2012/0126.pdf
–Tens rose 6.5bps to 1.90% to break through the upper end of recent yield range. All eurodollar one year calendar spreads made new highs. However, consider the absolute level of EDZ13/EDZ14 which rose 3 to 24.0. If the Fed were actually to remove accommodation by the end of 2013, this spread should be SUBSTANTIALLY higher. Risk to recent low of 13.5.
–Gold and silver were hammered after minutes and look quite vulnerable to a larger correction. This to me raises important questions. Fed largesse has supported precious metals and stocks. Is weakness in gold a canary for stocks? Will a change in Fed support of QE impact equities more than bonds? (I think so, ultimately). What if we are already in recession now? (as I suspect). When the US is again downgraded, as I think is likely by at least one rating agency, will bond yields take another leg up?
–Clearly US treasuries are embracing the bearish scenario. And of course there are more auctions next week (3, 10, 30). I saw a note that mentioned 1994, when yields surged after the Fed began to tighten following over a year of then ultra low 3% FF. I remember thinking at the time that an increase in rates might spur companies to get off the fence and move ahead with investments/projects. I don’t really think we are in the same environment now, but perhaps worth considering.
–No uncertainty in Japan. Policy makers (Abe) want inflation and a weaker yen, and they are getting it. Yen is getting crushed and Nikkei up 2.8% today. If central bank liquidity pumps up financial assets (as is clear in Japan), then the flip side also bears respectful notice. Even the possibility of an early end to QE entails consequences. Several Fed speakers this afternoon…maybe today’s action WON’T be all over with the NFP release.
Jan 3. Stocks soar yesterday…treasury yields rise
–It wasn’t just the US stock market which exploded higher as a result of the fiscal cliff deal. India, Brazil, DAX, Korea Kospi, Shanghai, Hong Kong, Japan etc all surged. Perhaps it’s more than just the US political system that is sparking a rise in financial assets. More related to central bank monetary measures as Ambrose Evans-Pritchard suggested yesterday? (And the expectation that the PBoC will supply more liquidity).
–In US interest rates the tone is bearish and trades reflect the mood. There is an accumulator of gold june 9775 put (EDM’17 underlying)….+20k for 15 yest bringing total to around 60k. Also a buyer of EDZ’5/Z’7 spreads for 124.5 to 125 in 10k.. appears to be new from open interest. In gold March 9850/9875/9900 c fly there was a seller of 40k at 4.5….exit.
–There is a seasonal tendency for rates to test higher levels in Q1…for the past three years the high yield for the year occurred in Q1 (or early April). Tens ended yesterday at 1.835, up 9 bps …but there are several old levels around 184-187 since August providing strong resistance (futures price support).
–News today includes ADP expected +150k and Jobless Claims 363k. Employment report Friday will likely determine whether yields break out to the upside or not.
–Just a couple of other notes. In 2012 “Japan’s population last year declined by 212,000, the biggest drop on record” (BBG) as number of births fell. Long term negative for yen contributing to bad demographics…
–Iran is telling residents to flee Isfahan (about 200 miles south of Tehran) due to radiation risk from nuclear plant (or uranium enrichment effort gone awry).
–More news about low level of Mississippi river creating transportation bottlenecks. Spillover into higher food prices?
Jan 2, 2013. Fiscal cliff averted
–Fiscal cliff averted; stocks continue Monday’s anticipatory rally and bonds decline. Next up: debt ceiling negotiations.
–Though markets have breathed a sigh of relief, it’s difficult to conclude that the real economy will respond accordingly. Payroll taxes are still going up 2% as the Bush cut expired. Confidence has been shaken. For example, last week’s Nat’l Restaurant Association report showed a stunning recent increase in restaurant operators who expect conditions to worsen in next six months (attached). Small business owner optimism reflects the same negative trend. On the other hand, Ambrose Evans-Pritchard predicts that extraordinary central bank liquidity pumping will belatedly ignite stocks… “Stocks to soar as world money catches fire, Calvinst Europe left behind”. http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9773911/Stocks-to-soar-as-world-money-catches-fire-Calvinst-Europe-left-behind.html
For now the markets have have voted to embrace the positive.
–Tens are again testing mid Dec level of 1.84 to 1.86 yield, with 30 yr around 3%. Option positions over the past week or so have favored the bearish view, for example TYG 132.5p have been bought in size of about 20k recently.
–Today’s news includes ISM, expected 50.5 from 49.5.
Dec 31, 2012. Happy New Year
–Happy New Year. Still no budget deal. The lack of new details in negotiations on Friday afternoon caused a sharp end of day sell off in stocks… visualization of a fall from a cliff. This morning stocks have found tentative footing with SP’s churning near the midpoint of November low and December high, supported in part by a jump in China PMI (HSBC) to 51.5. Little change in fixed income given the fall in equities, bolstering bond bears conviction that a move to higher rates is just around the political corner. However, economic data continues to be mixed at best. For example, Chicago PMI was up a bit and Jobless Claims have been trending lower, but the Employment Index in Chicago PMI plunged from 55.2 to 45.9. While increased tax bites relating to the cliff are still uncertain, Obamacare regulations are known, and are likely to weigh on employment at least in the beginning of the year.
–Henry Blodget has an interesting slide show on Business Insider saying “We Don’t Have a Spending Problem…” which shows quite visibly that we DO have a spending problem related to ‘transfer payments’ of Social Sec’y and Medicare.
http://www.businessinsider.com/government-spending-and-taxes-2012-12
–While total fed’l tax revenues as a % of GDP are around 17%, explosive growth in social programs now consume around 15% of GDP. So if everything else were cut to zero, (defense, interest, gov’t salaries, etc) then the budget would just about balance. Obviously we don’t need a balanced budget, but we do need to change the trajectory of some spending programs. The longer it takes to accomplish that, the more likely it is to dampen private business investment even though another byproduct is extremely low rates.
Dec 28. More fiscal cliff drama
It’s all about fiscal cliff negotiations now. The bigger picture is what will happen when agreement is reached. Since August tens have been in a range of just below 1.6% to around 1.85, having tested 1.84 earlier this month. We are now in the middle with yesterday’s close of 1.72. Many are looking for an upside breakout to higher yields. I suppose fiscal agreement could lead to a sustained stock rally (though I am skeptical), and certainly labor data is somewhat better with Jobless Claims of 350k pretty much at the year’s low. Housing continues its recovery. However, inflation expectations are stable, at least if gold is considered a barometer. Perhaps a lack of confidence in US debt could spark a bond sell off, but I would think that would happen in France before the US, and ten yr yield there remains around the low of year just below 2%. Only with strident yen bashing has the JGB yield started to notice, moving from 72 to 78 bps.
–There are a few signs of economic strength, for example FT notes that iron ore prices have surged 60% in four months (improvement in China), and Port of Long Beach in CA reports Nov volumes up over 20%, though for the first 11 months of the year imports are -0.3 and exports up only 2.0. But Baltic Dry Freight Index has recently dropped again and is bouncing around yearly lows. Consumer Confidence plunged to 65.1 versus expected 70, finally moving in the same direction as small business confidence, which has been sinking. It just doesn’t seem as if there’s enough evidence to argue for a sustained rise in yields…
–Chicago PMI today expected 51.0 from 50.4.
Dec 27. Debt limit joins fiscal cliff
–Geithner informs us the debt limit either has been hit or will be by year end, adding further drama to fiscal cliff talks. Many analysts say lack of action may push the US into recession…probably in recession already.
–News today includes Jobless Claims expected 365k. New Home Sales expected 375k. Consumer Confidence expected to fall to 70 from relatively strong level of 73.7.
–A few miscellaneous notes; Social Sec’y Admin reported a deficit of $47.8b in fiscal 2012, with record 8,827,795 on disability. In June 2011 there were only 94.75 million people employed full time in the private workforce, 17.8 m employed by government (fed’l state local), so about 112.5 million employed full time. Amazing that disability is more than half the am’t of gov’t workers and nearly 8% of all full time workers.
–Chicago Tribune notes slowing barge traffic due to low water level of Mississippi. I saw another article that said levels are down 16 feet, barges are forced to carry lighter loads, and higher prices for transported goods are likely to result.
–Before Rahm Emanuel became mayor of Chicago, Daley privatized parking meters in the city. Rates for street parking are going up in 2013 from 5.75 to 6.50 per hour downtown (13% but less outside city center). As a part of this deal, the city owes the company for lost revenue due to street closures, and due to free parking for disability tags, an am’t having grown to $61 million. The city is disputing the bills, which arise in large measure from lost revenue from disability parking…the city representative says there is widespread abuse (is that the parking company’s fault?)…and they want to settle for about 10% of the amount outstanding.
–Another example of the global trend of a previous deal made by former gov’t agents being saddled onto the current population.
Dec 13. Fed announces thresholds to determine policy
“We also understand sales to be an indicator and they are very bad industry-wide. I am seeing the worst results in locations near shopping where we are usually the strongest during Christmas. Watch for some really bad retail numbers! Talked to someone from Target over the weekend who confirmed.”
Above is purely anecdotal evidence, a note from someone who owns fast food locations. I don’t even know the region of the country… but to say that the worst results are coming from what should be the strongest is eye-catching.
–Fed announced $45b of new QE per month and tied changes in ZIRP to inflation over 2.5% and unemployment below 6.5%. Massive statement by the Fed recognizes tremendous deflationary weight on the economy. So, like other central banks they are trying to manufacture inflation, (which hasn’t worked for Japan but perhaps they are seeing a glimmer of hope as the yen slides). But from the view of a pension fund manager needing 6.5% to 8% to hit target, he might say if the Fed buys every treasury bond I will NEVER achieve those returns, which in turn causes states to raise taxes to make up for pension fund shortfalls. Others nearing retirement conclude they need to save more/spend less as investment income dwindles. In some ways QE adds to deflationary pressure, especially given demographics. And lack of volume also bodes poorly with respect to the ‘wealth effect”….from BBG: “Stocks are changing hands less often this year, with trading volume on U.S. exchanges falling about one-third from 2011 levels.”
–Perhaps gold and silver and stocks are giving ground simply because of ‘buy the rumor, sell the fact’ rebalancing. SP’s are hanging right around election day levels, having failed from a post-Fed surge. Interest rates moved higher and the curve steepened, with tens up 5 bps to 169.5. 2/10 treasury spread made a new recent high of 145.7 (range on the year has been approx 118 to 200). There has been a reasonable amount of bearish positioning in eurodollars, for example a buyer yesterday of 30k blue March 9887/9862ps for 3.5, and a buyer of 30k Green March 9937/9925/9912p tree flat. However, open interest in all these strikes, while growing, is only about 90k each.
–News today includes Job Claims exp 370k. PPI -0.5 and Retail Sales for Nov expected +0.5 less auto/gas.
Dec 10. European data continues to point to weakness; presents downside risk for FOMC Wednesday
–Slightly better than expected employment report Friday saw ten year yield edge higher to just over 1.62. NFP 146k but previous months revised lower. Curve in eurodollars steepened with red/gold up a bit over 3 bps to 115, barely even qualifying as a dead cat bounce on its way to new lows (recent low 112). In the very front end, EDZ/EDH settled at new low of -1. However there are new highs…in food stamp usage (47.7m).
–There was a late new buyer of 25k TYG 132.5p.
–Monti’s resignation is being blamed for a drop in Italian stocks this morning (-3.3%), though data out of France also symbolizes eurozone woes, with Industrial Production -3.6 year over year, and business confidence dropping. Spain and Italy yields are rising, though France remains under 2% at 1.95 in spite of looming budget and banking problems.
–Against the weak european backdrop comes the FOMC announcement Wednesday, with the market expecting additional QE of $40B month as twist expires, essentially monetizing all new treasury supply.
–In the US I have seen several stories recently about slowing sales at restaurant chains, which are considered by some analysts to be a major indicator of true consumer strength. For example David Rosenberg notes that spending on eating out “peaked at +5.7% yoy in July and has since slowed to 4.4%, the softest pace in eight months.” In this holiday time of noise regarding retail sales/consumer spending, perhaps it’s reasonable to focus on this canary in the coalmine. Below is a one year chart comparing SP500 with the Dow Jones restaurant and bar index.
http://bigcharts.marketwatch.com/industry/bigcharts-com/industrychart.asp?timeframe=OneYear&compidx=SP500&symb=&industrySymb=DJUSRU&x=30&y=11
[Click to Resize]
