Feb 20. China cuts required reserves for banks by 50 bps
China cut bank reserve requirements by 50 bps to 20.5%. From BBG regarding China “…property market slowdown and the weakest export growth since 2009, with the commerce ministry last week calling the trade outlook “grim.”
–Yet China and Japan, also of decaying trade fundamentals, have said they will act together through the IMF to help europe.
–Fitch ugraded Iceland to investment grade (how long will Greece be “shut-out” of debt markets if it leaves the euro? Three years for Iceland…) Also oil is near 105 at a new high (CLH at 104.72) as Iran is cutting oil exports to UK, France.
–The eurodollar curve steepened Friday. One-year calendar spreads have been edging higher. As of this morning for example, EDZ12/EDZ13 spread is trading 18.5, a new high since early December. (settled 16 friday, was as low as 9 in past month). There are a lot of existing positions that are long EDM2, U2 and Z2 at the money puts vs short puts in same month midcurves. New highs in calendar spreads could cause pain for those trades and might entail further selling pressure on reds.
–US economic news light this week. Treasury auctions of twos, fives and sevens kicks off tomorrow.
Feb 17. US economic data remains firm, stocks at new highs
Feb 17. Tens again flirting with 2% yield, closing +6 bps yesterday at 1.99 and this morning just above at 2.01%. Economic data continues to surprise on the strong side (and Core PPI was +0.4 yesterday); stocks chug to new highs. Today’s news includes CPI expected +0.3 with Core +0.2. Leading Indicators expected +0.5.
–I don’t know if this is interesting or not, but Blue eurodollar futures (4th year) total open interest is only 565k contracts. Blue June puts alone have 800k in open interest, mostly in 9837 and 9812 strikes.
–Crude oil continues to hold above $100/bbl. Central bank liquidity and Iran tensions are supportive of the price and not likely to change in the short term. Increasing gasoline prices seem to impact the economy with a lag, but I think we’re facing headwinds on energy prices. I was somewhat taken aback to see that commuter train fares had increased 34% when I went to buy a ticket yesterday. On the other hand, the mild winter in the midwest cut heating bills in half.
–Not much to say or report this morning, so I will fall back on the riveting topic discussed over drinks yesterday afternoon. The EDM2 9937/9950/9962 iron butterfly settled at 9.75. There is a chance of legging 10’s. Good sale. There.
–New high EUR/JPY at 104…was as low as 97 in early Jan, as yen continues to project weakness.
Feb 16. Trend has turned in favor of risk AVERSION
Feb 16. Not much of a net change in US interest rate futures yesterday – FOMC minutes suggested some members saw the need for more bond buying- but there were several things that suggest a turning point with respect to risk assets. First, AAPL had a huge reversal, on heavy volume and a large ($29) range, initially gapping higher but closing with a loss of nearly $12. S&P futures had the same pattern (of course) and closed near the low. As AAPL goes, so goes the US economy…
–Also, during this bout of “risk-off” USD-JPY is rallying to new recent highs at 78.80. Dollar strength underscores risk aversion. Also near contract euro$ vol is maintaining a bid versus reds, an indication of concern.
–The situation in Greece continues to drag on and is near the breaking point. Moody’s warned on a new slew of downgrades for various financial institutions including UBS, CS, MS, GS, C, DB. Near eurodollar contracts are being pressured this morning…feels like the dam may give way. However, longer treasuries aren’t seeing much of a yield decline. Auctions of 2, 5, and 7 year notes next week.
–Today’s news includes Jobless Claims expected 365k. PPI expected +0.4 with Core +0.2. (on a related note, crude oil priced in euro is at a new high), and Philly Fed, expected 9.5 from 7.3 last
Feb 15. PBoC Zhou says China will support eurozone
Feb 15. Once again the curve flattened with red/gold pack spread falling over 11 bps, (reds -0.375 and golds +10.875), to a new low of 147.5. Ten year yield fell 6 to 1.93%. Stocks tested the downside but came back to close at the highs.
–China’s central banker Zhou made comments that China will support the eurozone, lifting EUR. The global answer is central bank liquidity, it doesn’t matter what the question is. Today China, yesterday Japan’s increase in QE. The beneficial outcome is higher financial asset prices which in turn contribute to the health of the banking system. Higher basic commodity prices are simply a reflection of the market’s confidence in the ability of CBs to foster economic growth. The FOMC minutes are sure to explain it all this afternoon.
–The pivotal area of the eurodollar curve is the red pack and has now extended to the first green. With a month to go until expiration the Green March 9925 straddle (2EH4) is being sold at 13.0 (settled 13.5). With ten months to go EOZ 9925 straddle is only 34. When front contracts decline due to momentary concerns about financial stress, the backs rally and the curve flattens.
–The yen fell on BoJ QE extension, with USDJPY finally getting above 78.50 without direct intervention. Trend may have finally turned…
Feb 14. Retail Sales slightly weaker than expected at +0.4%
–Moody’s cut european ratings (Italy, Spain, etc) and warned that France, UK and Austria might lose AAA ratings. Japan unexpectedly eased through further QE and will target 1% inflation rate. From WSJ: “In Tuesday’s meeting, the [BoJ] expanded that plan by ¥10 trillion, or about $130 billion. The facility, which includes low-cost loans, is now worth about ¥65 trillion, or $844 billion.”
–There was a buyer of 50k EDJ 9937p yesterday for 2.5 up to 3.25. (New position, open int +39k). Also a new buyer of 10k TYM 134c. Not that these buys could be related to pre-info on Moody’s… Unending liquidity injections by central banks can’t stop deterioration that even the rating agencies are being forced to acknowledge. Not good for commercial banks, and all at once, won’t be good for stocks.
–Energy trading on CME platform was halted yesterday due to a technical glitch (quote stuffing?). At the same time NYSE volume was the lowest (for non-holiday) in ten years, according to ZH. Are markets being damaged and final users driven away by algo trading? Good for CME?
–Difference between gov’t dealing with benefit programs and private sector? Pepsi put out a memo detailing cuts to matching for some 401K plans. Period.
In: Eurodollar Options
Feb 13. “Risk off” Friday as Greek situation dominates activity…
–Tens just can’t seem to stay above 2% yield as Greece is pushed to the precipice. The curve flattened by 8 bps to 170, as 2’s were unch’d and tens fell 8 to 1.97% yield. Red/gold pack spread dropped over 10.5 bps to 159.
–Clearly a “risk off” end to the week as stocks saw profit taking, dollar strengthened, and copper, which has had a 20% rally since mid-December low, came under selling pressure. AAPL however, eked out a small gain.
–The general level of US interest rates (and the curve) indicate a weakening economic environment. Other data also supports this conclusion, including an accelerating decline in US gasoline usage, the drop in US earnings estimates in Q1 from +8.0% to 0.0, and the falling Baltic Freight Index. (From Mish Global Econ Trends: “…petroleum usage is back to 1997 level and gasoline usage is back to 2001 level.”). The data on gasoline is rather startling; extremely weak. See links http://globaleconomicanalysis.blogspot.com/2012/02/huge-plunge-in-petroleum-and-gasoline.html and http://www.zerohedge.com/news/guest-post-why-gasoline-consumption-tanking
–On the other hand, economic data has been fairly firm. (We’ll see if big, back to back jumps in consumer credit translate into strong retail sales on Tuesday, expected +0.7). And equities have had a strong, steady, performance since the start of the year, especially emerging markets (EEM up about 15% since late December). I think the main catalyst for stocks has been increased liquidity, which is likely to decelerate.
Feb 10. US ten year above 2% as Greek deal nears
US rates rose yesterday as a Greek deal appeared to be at hand, with tens finally breaking through the 2% barrier and closing 2.05%. Improvement in jobless claims was also a factor. Curve was a bit steeper with 2/10 at 178, up 6 bps. Small changes are perhaps pointing the way forward. For example, the fed effective rate started the year at 7-8 bps, now 11. Once again, near one year eurodollar calendar spreads inched to new highs, with June/June at 13.0 and Sept/Sept +2 to 14.0. I marked ten year note to tip spread at 224, the highest since last August. These are modest moves, but perhaps indicate slight erosion in the bullish case for credit. Heavy trade in green and blue midcurve options is now tilted toward put buying and call selling, as those contracts have slipped back from the euphoria spurred by the Fed’s ‘low rates for three years’ pronouncement.
–Today’s news includes Trade data, expected -$47.8 billion. A headline in the FT notes that Chinese imports fell sharply in January…”Data will fuel concerns about Chinese growth.” Of course the focus remains the “on again, off again” Greek agreement, which this morning seems to be shaky.
–BBG reported yesterday that several traders were dismissed from RBS regarding possible manipulation of LIBOR settings; the article also mentions DB and Citi. On balance I would suspect an outcome of slightly higher settings going forward.
Feb 8. Consumer Credit surges $19 bln in December
US interest rates moved higher yesterday, with ten year yield up 6 bps to 1.96 in front of today’s auction. 30 yr bonds auctioned tomorrow. The theme in options was put put buying and call spread selling, some appeared to be unwinding, but vol was better bid, confirming the price move lower. Gold jumped $25 in a nod to Bernanke’s comments which always indicate more liquidity for the cash strapped global economy. In a related development, Consumer Credit exploded by $19 bln yesterday and last month’s huge data was essentially unrevised. From BBG: “Consumer borrowing in the U.S. rose more than forecast in December, driven by demand for auto and student loans. Credit increased by $19.3 billion to $2.5 trillion.” That’s a lot of new Phoenix students and Chevy Volts. Of course, the spending (oops, not “spending” but “borrowing”) spree can be entirely explained by the jump in AAPL stock, up $100 or around 27% since late November, an increase of about $70 billion in market cap in two months. And BlackRock’s Fink is advising 100% in stocks!
–On the opposite side of the globe, (Business Insider quoting Nomura.) “data for January showed a shock 7.5% year-over-year fall in Chinese electricity consumption — the first such fall on record excluding the crisis.” The article concludes there was probably a large drop in industrial production.
Feb 3. Strong employment report (NFP +243k with 8.3% rate)
–Bernanke was generally downbeat in comments to Congress yesterday, noting that fiscal trends were unsustainable and warning about health care costs.
–US rates were little changed in front of today’s payroll report, expected 130-150k with rate of 8.5%. There was quite a bit of protective buying in blue midcurve put spreads after the recent rally, for example 40k 3EH 9875/9850ps (3.5s) and 10k 3EZ 9800/9750ps (9.0s). Non mfg ISM expected 53.3. [Actual NFP +243k…ten year note jumped from 1.83% yesterday close to 1.93% as of 10:00 CST]
–Gold is now around 1760, having started the year at 1600, a 10% jump. Easy money policies have juiced commodities and emerging market equities. Brazil ETF up about 13%. From BBG: “…futures contracts on 24 commodities from oil to copper rose 9.3 percent last month, the most since January 2006 …Gold and silver had the best start to a year since 1983, orange juice posted its biggest rally in more than three decades, the LMEX gauge of six industrial metals rose the most since 2006, and cattle futures advanced to a record.”
–Two Fed presidents at opposite ends of the spectrum commented on QE3 yesterday, Chgo’s Evans open to more accommodation and Dallas’ Fisher against. Even though against, ZH noted that Fisher is appropriately hedged: long over $1m GLD etf!
–From Mish Shedlock: “American Airlines needs $18.5 billion to cover its pension promises but it has only set aside $8.3 billion. That is a shortfall of $10.2 billion on $18.5 billion. In other words, a haircut of 55% on pension benefits will fix the problem.” The question is whether taxpayers should be on the hook (thru PBGC) for AAR’s pensions. The bankruptcy court is thus far saying no, but it seems that in the realm of public employees the answer is always Yes. Highlights the pension problems confronting many govt agencies…
Feb 1. Yields grind lower, but positive impact is questionable
–Bernanke testifies before Congress today about the economic outlook and perhaps about the decision to forecast rates and policy far into the future. There was a piece on Business Insider yesterday reviewing forecasts of major financial institutions from the previous year, for the unemployment rate, CPI, ten year treasury yield, GDP and EUR/USD. http://www.businessinsider.com/the-nostradamus-awards-the-best-and-worst-economists-of-2011-2012-2 Most were substantially wrong, especially with regard to the ten yr note yield (too high) and CPI (too low). GDP was actually 1.7, average of guesses was 2.6. So what makes the Fed think it can do much better over a longer time frame than these professionals with significant resources at their disposal? Even the CBO projects GDP for 2013 way below the Fed’s estimate. http://www.zerohedge.com/contributed/cbo-report-omg Indeed, skepticism about the Fed’s latest move towards more “transparency” is growing. Bill Gross’ monthly missive was important in that he notes negative aspects of low rates with regards to growth, and alludes to economic distortions, as did a piece in the FT. The Pimco piece echoed Bullard’s (St Louis Fed) analysis from Sept 2010, Seven Faces of the Peril. http://research.stlouisfed.org/publications/review/10/09/Bullard.pdf The point is that these comments indicate erosion of confidence in the Fed at the margin; uncertainty may actually increase.
–Other news today includes Job Claims expected 371k. Treasury vol faded from a strong open yesterday, though there was late buying of EDU and EDZ straddles. New low in red/green pack spread just below 26 bps.
