Feb 4. CRB and SPX…identical moves since QE2
Feb 4. Once again interest rate futures were pounded, with green euro$ pack down almost 10 bps…down 22 bps in two days. Ten year note has been in a range of around 3.28 to 3.53 for the past two months, but ended at 3.54..clearly probing for higher yields. New highs in red/green euro$ pack spread over 119 bps.
–Bernanke spoke yesterday, glad to take credit for QE2 in that stock prices were juiced, but denying any culpability for the concurrent rise in commodity prices. I ran a chart of the SPX overlaid with CRB, and they both started their recent rise around August, when hints of QE2 began, and tracked identically upward since then (chart attached). If I told as blatant a lie as Bernanke did to the National Press Club, my mother would have slapped me. Right…there’s no inflation, unless you eat rice (new high) or put gas in your car. Interesting that as soon as Bernanke began his speech gold shot up $20.
–Employment report today expected 146k with a rate of 9.5%. The market trades as if NFP will be much stronger, which wouldn’t be so surprising as Job Claims have trended lower. There’s an item on Bloomberg that Google, having announced intentions to hire 6000 people, received a record 75000 applications in a week. Currently the company employs just over 24000.
Jan 31. Egyptian protests spreading
Massive protests in Egypt overwhelmed all other news, sending stocks lower and treasuries higher. Demonstrations in mideast nations have the potential to spread like wildfire, sparking concerns in Saudi Arabia, Libya, Yemen, etc. Oil exploded as a result, as did precious metals.
–I wonder why now? Mubarak has been there for 30 years. Most of the American commentators I saw blather on about repressed freedoms and demand for democracy, certainly a component of current unrest. But soaring food prices combined with a lack of employment is a much more combustible combination, a fact that’s not lost on Mubarak, who told his newly appointed VP to create jobs and subsidize food. In my opinion, this situation is going to be contained just like the subprime mortgage crisis. Which is to say, it’s not. While there have been many natural disasters that have driven food prices higher, there can be no question that the US monetary liquidity pump is partially to blame for making all commodities a newly favored asset class to be hoarded in hopes of maintaining dollar purchasing power. It creates global uncertainty that is now shaking markets out of complacency. When one looks at the rapidity with which the situation turned in Egypt, sending stocks down 20+% in a week, it has to translate into a more cautious outlook for all investors.
–Reports late last week note that Spain’s inflation rate is over 20%. The next surprise could easily be more fireworks out of Europe…
Jan 27. FOMC ignoring inflationary signals
The Fed remains fairly downbeat on the economy, and insists on maintaining that inflation measures continue to trend lower. In some parts of the world, for example North Africa, it appears as if food and energy prices actually mean something. And when deposed leaders flee, they do so with gold. But here in the US, our displeasure is registered by steepening the yield curve. New highs in red/blue and red/gold euro$ pack spreads. Red/gold nearing 300 bps, and there is not much on the horizon suggesting it will stop. 2/30 treasury spread remains close to 400 bps. Ten year yield rose 10 bps to 3.42%. Talk out of Washington suggesting budget cuts and freezes isn’t convincing to the bond market.
–S&P cut ratings on Japan, weakening the yen. New recent high in EUR/JPY.
–New Home Sales jumped, though this measure is taken when a contract is signed, not when the contract actually closes. Data was for December. Higher rates threaten to slow both existing and new home sales. Chart below makes the big picture look a bit more sobering than one month’s data release.
–Today’s new includes Jobless Claims 405k, and Durable Goods +1.5%. Seven Year note auction.
Jan 24. The end of ‘adult supervision’
Obama’s State of the Union and FOMC both this week, (tue/wed). Obama’s new pro-business stance, along with focus on budget cutting and education are designed to play well to stocks. Continued loose Fed policy is also supportive. However, restraint in financial mkts is coming from outside, with rate increases in China and Brazil, and high food and energy prices. Higher rates at the long end of US curve also negative for housing. (If stocks have a bad week I think it will portend much more to come. GOOG and AAPL represent about $500 billion of market cap and although their losses are offset by gains in stocks like GE and Exxon, a drop in high fliers is negative. We’ve also seen breaks below upward sloping trendlines from 2008 in India’s SENSEX and (to a lesser extent) Brazil’s Bovespa. The strongest markets seem to be turning).
–Interesting that last week we saw two examples of rejection of “adult supervision”, Google’s Schmidt, and Volcker for Obama. GOOG stock didn’t seem to like the change, big outside day and a close below trendline from August. I don’t know how Obama’s shift to business cheerleader is going to play out, but it feels like another step of crumbled resistance to TBTF financial institutions.
–Since the beginning of the year the Fed effective rate has been around 18, had a few lower readings right at the beginning of the year. Fed Fund contracts are trading 99.83 or above out to July…seems like worth a short.
–There’s is a bit more talk of Japan reaching a breaking point in terms of public finances, with an aging population and huge deficits. I think this ought to negatively impact yen, even if another bout of risk aversion occurs. Actually, the US dollar is probably now the “funding currency” which will see gains in the event of risk aversion, and higher global rates should siphon off support for yen and JGBs.
Jan 21, 2011. States explore bankruptcy
–A few notes this morning. NYT article says Congress is quietly considering how to allow states to declare bankruptcy or otherwise eliminate crushing debt and pension obligations. CA Gov Brown declared a ‘fiscal emergency’. Article on BBG says Spain may have a difficult time lining up investor support for Cajas. Margins again raised on silver and gold…both were under heavy profit taking pressure, as was copper. Obama replacing Volcker with GE’s Immelt. The country is edging farther from Bedford Falls and more towards Pottersville. Finally, both German and French business confidence jumped.
–In yesterday’s interest rate trading the curve steepened to new highs. 2/30 just under 400 bps. Red/gold pack spread up 7 bps to 292.5 as golds sank 18 bps. Tens are beginning to feel as if they want to test 3.50%. I was completely wrong in thinking we would end closer to 3.20%, in a week with no treasury auctions, (but net POMO buying). This has been a very bad week for QE proponents. Feb treasury options expire today.
–In terms of states’ problems, it seems to me that the solutions are either that muni investors take a haircut, or obligations are steathily transferred to the Federal govt. Former OMB director Peter Orzag argues in an op-ed in the FT that US state problems are nowhere near comparable to Greece. I guess we’ll see how the market sorts it out, but the demand for higher rates to compensate for risk gives a clue, (as does the steeper curve).
–Finally, food product inflation is unending: New Delhi, Jan 20 (PTI) Cardamom futures prices rose by Rs 11.30 to Rs 1,528 per kg today, as speculators enlarged their positions on the back of strong demand in the spot market.
Jan 19. Curve steepens; 2/30 near 400 bps.
Curve steepened to new highs with 2/10 up about 3 bps to 278. Red/gold also made a new high of 285.5, up 7.25 bps on the day. That’s pretty much as high as red/gold had been all last year, though in mid Dec before the roll it got to around 300. Whether due to signs of economic strength, or due to inflationary concerns, or a combination thereof, the back end appears to be losing sponsorship.
–The first two green straddles settled a bit lower than Friday. I marked Grn June 9775 straddle at 63.0, probably on the cheap side if long dated treasuries are vulnerable.
–In contrast to the long end, Fed Fund contracts are edging higher in price. For example, FFJ (April) settled 99.84, only 16 bps. So far this year Fed effective rate has been around 16 -17 bps so the price itself isn’t completely surprising, I guess it’s just another sign of Fed liquidity that finds its way into stocks and commodities.
–I can’t help but think that higher rates are going to translate into weaker real estate sales, especially at the low and middle. Once again, the Fed makes a compelling case for consumers to take short term adjustable rate mortgages in order for the cash flow to work. And then re-sets inevitably occur. The difference this time is that low short term rates aren’t causing price increases, because credit availability is also tighter.
Jan 17. MLK day starts a quiet week/shipping data raises questions
–Light news week. China’s President Hu visits the US, heightening dollar/yuan issues. TIC data tomorrow.
–A lack of treasury auctions combined with about $15-20 billion Fed buybacks should be supportive of bond prices this week.
–While US equity markets remain well bid, as do commodity markets, I find it a bit puzzling that the Baltic Freight indexes have turned lower, and are near the nadir set in late 2008/early 2009. Especially since energy costs continue to move higher. Also the railfax report (link attached) while showing impressive yoy gains in freight traffic, seems to have slowed down in terms of rate of change. Further, the ‘Waste and Scrap’ shipments appear to have taken a turn down. Again, this is perhaps nothing but a cyclical phenomenon, but with the JOC Industrial Materials index near new highs, one would think that scrap shipments might be a bit stronger.
http://railfax.transmatch.com/
http://www.dryships.com/pages/report.asp
(cut and paste links for charts)
Jan 14. Trichet voices inflation concern, EUR rallies
Jan 14. Ten year treasury yield fell 6 bps to 3.30% as this week’s auctions culminated with the 30 year bond. Jobless claims jumped 35k, though trade data signified stronger GDP growth. The curve was flatter with 2/10 down about 5 bps to 272. European rates went the other way as Trichet voiced concern about inflation, causing red euribor contracts to drop about 18 bps. German inflation data out this morning was highest in two years due to energy costs. EUR/USD exploded higher, but silver had fallen by $1/oz late in the day, and copper is looking toppy as well.
–Midcurve January options expire today, with many pegging the 9900 strike in EDH12 (settled 9907 yest), though I wouldn’t be surprised to see 99125 strike come into play.
–Plenty of data including Retail Sales expected +0.8%, CPI expected +0.4% and +0.1 Core. Ind Production expected +0.5 with Capacity 75.6.
–Muni bond funds continue to drop, though apparently CDS on Illinois fell from about 360 to 295 bps after the state jacked up taxes (income tax from 3 to 5%). However, there was also an article about banks simply abandoning foreclosed homes in Chicago, and many predictions about businesses leaving the state. The crunch in state finances continues; it’s getting to the point where China is going to have to come in to support bonds of CA, IL, etc.
Jan 13, 2011. Sell volatility in a managed financial world
Portugal’s bond auction yesterday was anticlimactic as it was supported by China. It is as if the market has found religion in the idea of global central planning and a managed financial system. Such confidence, and the idea of a monetary authority ‘put seller’ has translated into heavy selling of US financial options. For example, there was a seller of about 50k EDH12 9900p yesterday (mostly covered); EDH12 9900 straddle went from 67 to 64. March treasury vol again made new recent lows, and what activity has occurred in TYM has also been initiated by sellers. It’s no use standing in front of the option sellers in the short term; I would think the same dynamic would result in flatter calendar spreads in the euro$ curve.
–Another global connection, admittedly a stretch, concerns the ‘haves’ and ‘have nots’. In Tunisia, there is rioting over lack of jobs and huge food price increases. In the US, Zales Jewelry (ZLC) rose 30% yesterday on the back of strong holiday sales. Tiffany (TIF) has run from 40 to 65 in four months. The global monetary authorities have aided and abetted a commodity price run, the CRB made a new high yesterday and is at 50% retrace of the big fall from 2008 highs. (Oil is above 50%). Financial assets have also benefited. The rich get richer (and buy jewelry), but beware of a “Let them eat cake” mindset. Tunisia is small, but in the US 43 million receive food stamps. While the markets might applaud global financial authorities with subdued volatility, the prospect of increased societal volatility and a centrally planned means of control in response is what concerns me.
–In terms of good news for US economy, WSJ had a note yesterday that Q1 fiscal year tax revenues had increased 9%. Perhaps a sign of more sustained growth. –Today’s news includes PPI expected +0.8 with Core +0.2. Trade deficit expected $41 B. Job Claims 405k. 30 year bond auction.
Jan 12. Portugal’s 10 yr auction below 7% yield
–Much awaited Portugal bond auction went off successfully, aided by ECB and Asian buying. Pressure abating in Europe at this moment.
–Today is the US ten year auction, followed by 30 year bonds tomorrow. The treasury is also set to release tentative schedule for the next round of Open Market Purchases. There are a couple of things that could cause a bit of a concession… Plosser spoke yesterday and thinks QE could “backfire” and Dallas Fed’s Fisher is likely to voice the same sentiment today. Also, oil was up around $1.50 yesterday, threatening recent highs, and precious metals were strong, a reminder of inflationary concerns. I think buyers will ultimately come in for auctions, as european stress continues, but the risk is probably to the downside for the next couple of days. Beige Book released this afternoon.
–Implied vol compressing in interest rate futures, with March treasury vol at lower end of recent range (FVH at new recent low).
–While the stock market presses to better levels, and there is a general feeling of stronger economic growth, it is worth noting that the back up in mortgage rates over the past couple of months is likely to slow the housing market, which is really a more pervasive asset class. Additionally, higher gasoline prices are a challenge. However, there is good news as well, the WSJ had an item in its editorial section noting that federal revenues are up about 9% in the first fiscal quarter.
