August 9. China growth slowing…
–US interest rate contracts remained under slight selling pressure, underscored by tepid demand for the ten year note auction. Just before the auction the yield was 1.655, but the actual result was 1.68. Treasuries immediately traded to their lows but then modestly bounced back. In eurodollars there has been a buyer of blue Sept (3EU) 9850/9862 put spread with 9850/9875ps, for a price of 4, in size of 50k between Tuesday and Wed. The recent theme has been long liquidation and curve steepening.
–Today’s news includes the 30 year bond auction, Jobless Claims, expected 367k and Trade data, expected -47.5b from -48.7. It’s now about 2 1/2 years since Obama pledged in Jan 2010 that the US would double exports in five years. At the time, exports were running about $140 billion a month. Today’s data is for June, but as of May US exports were $180 billion. Not exactly halfway there, but improvement anyway.
–On the topic of politics, this is a bit dated, but the Obama comment, “…you didn’t build that” when describing business owners contrasts vividly with what his former Chief of Staff Rahm Emanuel says about business. From this June 7, 2012 interview: “I don’t create jobs. The private sector does. But I create conditions for businesses to grow and jobs to be created…” Maybe it would have been better if Rahm was the one that stayed in the White House. http://www.cnbc.com/id/47728576/US_Won_t_Fall_Off_Fiscal_Cliff_Rahm_Emanuel
–China’s Industrial Production growth is decelerating to slowest pace since 2009 at 9.2%. I saw a couple of news clips on weakening growth in China, both of which suggest more gov’t stimulus may result. It’s somewhat ironic that there’s a global call, dependency really, for central banks /policy makers to provide stimulus (a solution) when these same institutions oversaw the explosive debt growth that got us here in the first place. The risk that the market begins to lose confidence and demand higher rates for gov’t paper may be closer than it appears, even for US and Germany.
August 6. US curve steepens, signals caution for treasuries
–At first glance employment data was stronger than expected (NFP 163k vs 100), though revisions and an increase in the rate to 8.3% suggest a mixed picture. In any case, for the second Friday in a row, rates jumped, with tens closing 1.57%, right around the level from the previous Friday. However, this session indicates more weakness to come as the curve steepened to new recent highs, with red/gold up 11 bps to 130 and 2/10 treasury spread up 7 to 133. So even though tens barely made a new recent high in yield, red gold was 130 this Friday as compared to 121 on previous Friday 27-July. US rates are shifting to bearish sentiment. Stocks made new highs and the euro soared. Looks like EUR/JPY has bottomed. Crude had a nice run up. For whatever reason, many markets appear to be technically reversing. Even the Shanghai Comp is showing some signs of life. I had been thinking that tens would revisit 1.42 but now I think any rally close to 1.50 should be sold. I don’t know what the catalyst should be for higher rates. Maybe just too many longs. Maybe the bund leads everything lower…perhaps the auctions this week (3’s, 10’s, 30’s) won’t have a welcome reception, (in an otherwise quiet economic news week). In saying that he would focus on the short end, Draghi invited the market to steepen the curve.
–Geopolitical fireworks surrounding Syria could still cause a bout of flight to quality buying, but the market trades long.
July 27. Q2 GDP today, FOMC next week
–Draghi upped the commitment of the ECB to save the euro, sending risk assets higher. However, the curve was only slightly steeper in the US. Red/gold pack up just over 2 bps 110. The fact that responsibility for solving economic problems has fallen almost completely to the central banks probably doesn’t do much for business confidence. Wanton expansion of CB balance sheets may drive up prices, but it doesn’t necessarily lead to hiring. This snippet from BofA is instructive though it refers to an inflation target: “In his recent H-H testimony, Bernanke argued that raising the inflation target was unlikely to pass a cost-benefit analysis: ‘I am very skeptical that it would increase confidence among businesses and households and increase economic activity. I think it could create a lot of problems in financial markets as well.’ ”
–German bund has weakened the past several days perhaps an early omen that teutonic resolve to price stability will be eroded as more euro institutions do an end around the Bundesbank.
–Interesting chart compares shows high correlation between economic activity and garbage shipments, the latter of which has recently plunged (less purchasing, less stuff to dispose of). http://www.businessinsider.com/chart-of-the-day-the-us-garbage-indicator-economy-2012-7
–It’s not just CA: (Reuters) – Miami officials, who are seeking $40 million in union concessions, plan to declare “financial urgency,” which would allow the Florida city to unilaterally alter employee contracts, the Miami Herald’s website said on Thursday.
–Today’s news includes Q2 GDP expected +1.2%. Pressure is building on the Fed to announce open ended QE at next week’s meeting. I would suspect a bit more profit taking in US fixed income in front of FOMC given the relentless rally we’ve had.
–GM stock has trended lower the past few months, from around 27 in March to 19 currently. (Detroit News) “GM’s low stock price has prevented the Treasury from exiting the automaker. It still holds 500 million shares of stock in the company as part of its $49.5 billion bailout, or a 32 percent stake.
It needs about $53 a share in order to break even on its GM bailout. At current prices, it would lose $17.25 billion on the bailout.
July 20. Watch out below in stocks…
–I casually mark ten year treasury yield to ten yr inflation adjusted note at the end of pit trading (supposedly an indication of ten yr inflation). This entire year, even as rates have gone inexorably lower, the spread has never gone below 204 bps. The high has been around 244. Now 216. I’m not sure that it means anything, though I feel that there’s not much more upside in the long end of the curve. What is clear is that grains are exploding to record highs. Food costs at the retail level will follow. Oil was up 275 yesterday. Property taxes are going higher. All necessities are likely to become more expensive relative to gadgets.
–Not only does the flat curve and prop trading ban negatively impact the banking industry, here’s a piece from Reuters: “Lenders like Bank of America Corp and Wells Fargo & Co say they are facing mounting pressure to buy back bad mortgages they sold to investors, signaling that banks’ home-loan headaches could continue for years…Investors like Fannie Mae and Freddie Mac have been pressing banks to buy back bad mortgages for years, but in recent months those requests have intensified…”
–Curve was somewhat steeper yesterday. Heavy buying in front end contracts.
Click this link http://gregmankiw.blogspot.com/2012/07/progressivity-of-taxes-and-transfers
Short article about tax payments LESS gov’t transfer payments for 5 income levels. Interesting to note that the middle quintile now RECEIVES $1.05 in transfers relative to $1 paid in taxes…up until 2007 this “middle class” was a net contributor.
July 19. Unsustainable trends
–It’s remarkable that every time Bernanke gets in front of Congress he bluntly says that fiscal trends as they currently stand are unsustainable, yet treasury yields continue to decline. Tens remain below 1.5%. This is the same Congress that grills JPM about a large trading loss (in a quarter that was still profitable), while the WSJ reports that the US Post Office may default on a $5.5b August 1 payment for health care benefits and Congress does nothing to stem the bleeding. The same article notes that the PO loss was $3.2b in Q2. Maybe the solution is a scheme where the Fed should just buy Post Office bonds directly…
–Another article at Reuters says that states have been cutting support to state universities, causing general cutbacks at schools, rising tuition, and larger loan balances for students. (And many of those loans are funded by the federal gov’t, with increasing default rates).
http://www.reuters.com/article/2012/07/19/us-funding-state-idUSBRE86I04V20120719
–Spain just sold 5 year debt at 6.54%, while US 5’s are 60 bps. Would you lend to the Post Office at 60 bps?
–The trend in the US is for lower yields and a flatter curve… Trades continue to lean that way, for example buyer of 30k Gold Dec 9850/9875/9900c fly for 6.0. So stocks become the only game left in town.
–Pressure in the mideast is building with the US sending another aircraft carrier to the Gulf. The possibility of sudden escalation is rising as rebels in Syria appear to be turning the tide, raising the stakes for respective backers. A $30 spike in oil probably wouldn’t steepen the curve, but would certianly be negative for stocks.
–Today’s news includes Philly Fed -8.0 (from -16.6) Jobless Claims 365k, Leading Indicators expected -0.1.
July 17. Unsustainable muni finance. Bernanke hints at more QE today…
–Bernanke semi-annual testimony before Congress today. (An outline of more QE or other measures…) Yesterday’s Retail Sales were another disappointing miss, -0.5. Today’s news includes CPI expected 0.0 with Core +0.2. Industrial Prod +0.3.
–They’re not taking ten year note yields to new record lows for no reason. Thirty year bond yield is closing in on 2.5% (2.55). Bonds are forecasting disaster. Stocks aren’t, though US equities can probably be considered safe have for the world at this point.
–The IMF downgraded its 2013 forecast to 3.9% from 4.1%, likely to happen again in a couple of months. Food costs are a big worry. Dec Corn was up again yesterday. CZ was around 520 in mid-June, now 787, a rise of 55% in a month.
–Though the US may benefit from safe have flows from Europe (and China), there are many problems here with unsustainable budgets. Here are a couple of examples: BBG “The California Public Employees’ Retirement System earned 1 percent in the past fiscal year as slumping global stock prices dragged down the largest U.S. pension. ….The return for the 12 months through June 30 marks the third time in the past five years that it has failed to reach the 7.5 percent threshold needed to meet projected obligations. When Calpers underperforms, the state and its municipalities must make up make up the difference.” We already know how CA’s municipalities are doing…I’m sure the remaining cities will be happy to make up pension fund shortfalls.
–And from Reuters: “Illinois faces some of the worst fiscal problems in the United States.” “… the state moved into fiscal year 2013 with an estimated $7.5 billion to $8 billion in unpaid obligations,” “The state also continues to delay issuing corporate tax refunds, and owes over $100 million to other state funds to repay previous borrowing,” the comptroller said in the report.
–But here’s the kicker. Even though income tax rose from 3 to 5%… “Illinois collected 38.2 percent more in income tax revenue, a gain of $4.3 billion, in fiscal 2012. …Corporate tax receipts increased by $610 million or 33 percent…
However, base revenue only rose $2.331 billion, or 7.4 percent, when declines in transfers and falloffs in federal revenue were taken into account, the comptroller said.” So a significant revenue increase and not even a dent in unpaid bills…
July 13. Risk of a sudden drop in funding…
–China’s GDP was reported +7.6%, slowest in three years. Zerohedge has an article with this note: “Take a range of key indicators – from electricity usage, to Shanghai container throughput, to nationwide rail freight ton-miles, to steel output – and you will notice that none of these shows a rate of growth during the second quarter of more than 4% from 2011, and some are as low as 1%.” Bloomberg also has a piece questioning the data. So we can’t completely trust figures from the engine of global growth, can’t trust banks’ interest rate settings, but at least the ratings agencies are on top of things: Moody’s cut Italy. “Italy’s near-term economic outlook has deteriorated, as manifest in both weaker growth and higher unemployment, which creates risk of failure to meet fiscal consolidation targets,” Moody’s said. “Failure to meet fiscal targets in turn could weaken market confidence further, raising the risk of a sudden stop in market funding.”
–The risk of a sudden drop in funding is likely to be a recurring theme globally. In the US, it may have immediate relevance for muni financing, given increased bankruptcy filings, for example I just saw that Oakland, CA is looking to borrow $211 million to cover pensions. And the central banks of the world can’t plug the hole if private lenders retreat without massive money printing.
–US rates continue to edge lower as US treasury auctions sailed through at historic low rates. Today’s news includes PPI expected +0.4 with Core +0.2.
July 12. Negative feedback loop
–Heavy buying of front four eurodollar contracts led to a small rebound in the curve. Ten year auction went off at 1.459 on bid to cover 3.6. Fed minutes showed some members were open to further easing; individual Fed presidents have already indicated a willingness to do more in the past few days. But none of it appears to be helping Jesse Jackson Jr pull out of his mental funk.
–Asian stocks declined, in part due to disappointment with BoJ inaction. Nikkei declined for 6th straight day (-1.5%) and Hang Seng fell 2%. S Korea and Brazil cut rates.
–At these interest rates, the US markets are pricing economic stagnation. Not to belabor the point, but there is simply no way that pensions and endowments can make anywhere near target investment returns with tens at 1.5% unless stocks surge. QE focus has to be US equities…another 25 or 50 bp drop in tens is unlikely to provide any stimulus at all… Municipal bankruptcies are an indication the US is at risk of a negative feedback loop, perhaps not so much in terms of housing or other hard asset prices, but perhaps in the idea that current growth and tax prospects aren’t likely to keep pace with unfunded liabilities. And an aging population of consumers responds accordingly.
–Today’s news includes Jobless Claims, expected 375k and 30 year bond auction. Bond currently around 2.6% yield.
July 11. More cracks in muni finance…
–More of the same US interest rate trading. New lows in the curve. 2/10 at 123 bps. Red/gold pack spread down 3.6 to 111, new low for the year. More buying in gold euro$ midcurve call structures…see below for details.
–Ten year treasury auction today. FOMC minutes at 1:00 Chicago time. 30 yr bond tomorrow.
–A couple of snippets regarding China’s slowdown: From BBG, Wen says investment is the key to stabilizing growth. And from WSJ: “China is increasing state spending to counter its sharpest decline in growth since the financial crisis.”
–Meredith Whitney was right about municipal bankruptcies, just took a bit longer than forecast: (Reuters) “The city council of San Bernardino, California, voted on Tuesday to file for bankruptcy, marking the third time in recent weeks a city in the most populous U.S. state has opted to seek protection from its creditors.” And in the Chicago Trib: “Moody’s Investors Service on Tuesday downgraded Chicago Public Schools’ bond rating after the cash-strapped district proposed a budget that would deplete its financial reserves… Moody’s lowered its outlook for the district from stable to negative, citing its $5.9 billion in general obligation bond debt.” One city agency with $6 B in debt!!
–A twist on the strong May consumer credit number. “Spending for discretionary items at venues like hotels, clothing stores, restaurants and bars declined in May, according to First Data. Meanwhile, credit spending at general merchandise stores, including value retailers and discount stores, increased, providing some evidence that Americans living on a budget are borrowing for their shopping instead of using cash.”
–Midcurve buying: Gold Sept 9850/9862/9875/9887c condor 4.5 paid for at least 15k. (Underlying EDU16 settled 98.53). Blue Dec 9887/9900/9912/9925 c condor bought for 4.0 in total 25k (underlying EDZ’15 settled 98.90). Seller of 0EZ 9950/9962cs vs Gold Dec 9837/9850c spd 3.5 for 10k. Nothing with a huge payout given premium outlay, these trades work best in a low vol grinding rally.
July 10, 2012. New lows in US curve; is “worst case” already priced?
July 10. Themes remain the same. Deterioration in europe (though the euro stabilized) and a flatter US curve. 2/10 made a new low at 125 as the ten year yield fell to 151 in spite of this week’s auction schedule. Red/gold pack spread dropped over 5 bps to a new low of 114.5. The rally in deferred contracts over the past several months has been stunning. For example, since the low in mid-March, EDU16 (gold Sept) has rallied from 9720 to 9850, 130 bps in 4 months. Perhaps 2/10 can get to 100 bps, but I feel that the risk of steepening is growing. The administration is talking about extending Bush era tax cuts (for incomes under $250k). The idea of pulling out all stops to juice the economy going into the heart of the election cycle is compelling. Also, the eurozone is taking steps on Spain’s banking problems with direct funding and an attempt to separate banks from the sovereign’s balance sheet.
–Fed speakers are all talking up QE3 (Rosengren, Evans, Williams)….they’ve thrown in the towel with respect to organic growth. But I am finally seeing a lot of road and infrastructure projects. The data has been bad, though May consumer credit showed a large increase. It’s clear that Asia is slowing, Shanghai Comp is at the lows from the start of the year, and things like Port of Long Beach CA traffic declining 7.2% yoy in May indicate less trade. But perhaps the US curve already has priced in “worst case” scenario. This week’s auction results may be quite important… 3’s today followed by tens and long bonds Wed and Thursday.
