For the week, the S&P500 gained 1.1%, and the Dow increased 0.8%. The Banks jumped 1.3%, and the Broker/Dealers gained 2.0%. The Morgan Stanley Cyclicals surged 2.6%, and the Transports advanced 1.4%. The Morgan Stanley Consumer index increased 0.4%, and the Utilities gained 0.9%. The S&P 400 Mid-Caps increased 0.4%, and the small cap Russell 2000 gained 0.5%. Tech was strong, with the Nasdaq100 jumping 2.7% and the Morgan Stanley High Tech index up 2.5%. The Semiconductors gained 3.4%. The InteractiveWeek Internet index jumped 3.1%. The Biotechs increased 0.8%. With bullion clobbered for $51, the HUI gold index started 2011 with a 7.2% loss.
One-month Treasury bill rates ended the year at 13 bps and three-month bills closed at 14 bps. Two-year government yields were little changed at 0.59%. Five-year T-note yields ended the week down 5 bps to 1.96%. Ten-year yields increased 3 bps to 3.33%. Long bond yields ended the week up 15 bps to 4.49%. Benchmark Fannie MBS yields were down 2 bps to 4.11%. The spread between 10-year Treasury yields and benchmark MBS yields narrowed 5 to 78 bps. Agency 10-yr debt spreads widened 2 bps to 10 bps. The implied yield on December 2011 eurodollar futures rose 6 bps to 0.79%. The 10-year dollar swap spread was little changed at 8 bps. The 30-year swap spread declined 6 to negative 29 bps. Corporate bond spreads were volatile but ended the week somewhat wider. An index of investment grade bond risk rose 4 to 89 bps. An index of junk bond risk increased 2 to 432 bps.
January 7 – Bloomberg (Tim Catts and Sapna Maheshwari): “Company bond sales in the U.S. reached a record this week and relative yields on investment- grade debt shrank to the narrowest since May… Issuance soared to $48.5 billion, eclipsing the $46.9 billion raised in the week ended May 8, 2009… Appetite for corporate debt is growing after annual sales topped $1 trillion for the second consecutive year…”
Investment grade issuers included GE Capital $6.0bn, Schlumberger $1.6bn, Toyota Motor Credit $1.6bn, Berkshire Hathaway $1.5bn, Met Life Global $1.5bn, Enterprise Products $1.5bn, Buckeye Partners $650 million, Plains All America Pipeline $600 million, Allegheny Technologies $500 million, Dr. Pepper Snapple $500 million, Healthcare Services $500 million, Tyco $500 million, Metlife $500 million, ERAC Finance $500 million, Amerigas $470 million, and Centerpoint Energy Resources $300 million.
Junk bond funds saw inflows of $743 million (from Lipper). A light week of junk issuance included CCO Holdings $1.1bn and Regal Entertainment $425 million.
Convertible debt issuers included WebMD Health Group $400 million.
International dollar debt issuers included Rabobank $2.75bn, Barclays Bank $2.0bn, Royal Bank of Scotland $2.0bn, Bank Nederlandse Gemeenten $2.0bn, Network Rail Infrastructure $1.5bn, Banco Bradesco $1.6bn, Bank Nova Scotia $1.25bn, Japan Municipal $1.0bn, Turkey $1.0bn, Australia New Zealand Bank $3.0bn, Macquarie Group $750 million, Sumitomo Mitsui Banking $1.5bn, BNP Paribas $1.0bn, Cemex $1.0bn, Bancolombia $520 million, Orix $400 million, and China South City $250 million.
U.K. 10-year gilt yields jumped 11 bps this week to 3.51%, while German bund yields fell 9 bps to 2.87%. Ten-year Portuguese yields surged 50 bps to 7.08%. Spanish yields jumped 16 bps to 5.50%, and Irish yields added a basis point to 9.07%. Greek 10-year bond yields jumped 15 bps to 12.60%. The German DAX equities index increased 0.5%. Japanese 10-year "JGB" yields jumped 8 bps to 1.195%. Japanese equities were out of the blocks quickly, with the Nikkei 225 jumping 3.1%. Emerging markets were mixed. For the week, Brazil's Bovespa equities index gained 1.1%, and Mexico's Bolsa increased 0.1%. South Korea's Kospi index dropped 4.0%. India’s equities index fell 2.1%. China’s Shanghai Exchange gained 1.1%. Brazil’s benchmark dollar bond yields fell 16 bps to 4.34%, while Mexico's benchmark bond yields dropped 13 bps to 4.35%.
Freddie Mac 30-year fixed mortgage rates dropped 9 bps last week to 4.77% (down 34bps y-o-y). Fifteen-year fixed rates fell 7 bps to 4.13% (down 37bps y-o-y). One-year ARMs dipped 2 bps to 3.24% (down 107bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 5 bps to 5.55% (down 54bps y-o-y).
Federal Reserve Credit increased $3.1bn to a record $2.411 TN (9-wk gain of $130bn). Fed Credit was up $194bn from a year ago, or 8.8%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 1/5) declined $6.1bn to $3.344 TN. "Custody holdings" were up $383bn from a year ago, or 12.9%.
M2 (narrow) "money" supply rose $14.0bn to a record $8.848 TN. Over the past year, "narrow money" grew 3.7%. For the week, Currency declined $2.1bn. Demand and Checkable Deposits surged $38.8bn, while Savings Deposits dropped $25.7bn. Small Denominated Deposits fell $3.7bn. Retail Money Funds added $6.6bn.
Total Money Market Fund assets (from Invest Co Inst) declined $12.2bn to $2.798 TN. Over the past year, money fund assets have dropped $509bn.
Total Commercial Paper outstanding declined $3.3bn to $966 billion. CP was down $101bn y-o-y, or 10.2%.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $1.444 TN y-o-y, or 19.0%, to a record $9.059 TN.
Global Credit Market Watch:
January 7 - Financial Times (Aline van Duyn and Michael Mackenzie): “Bond markets have started the year with a bang. A rush of deals from blue-chip companies…and dozens of financial institutions have raised hopes that 2011 will be another big year for issuance. With $99bn of debt sold in the bond markets so far this week – about half of it denominated in dollars – it is clear that investor demand for bonds… remains solid. Indeed, many analysts expect that sales this year will match the roughly $6,000bn of new bonds that were issued in 2010.”
January 5 – Bloomberg (Joao Lima and Anabela Reis): “Portugal sold six-month bills today, the first of Europe’s high-deficit nations to test investor demand in 2011 after the threat of default forced Greece and Ireland to seek bailouts last year. The government debt agency, known as IGCP, auctioned 500 million euros ($665 million) of bills repayable in July. The yield jumped to 3.686% from 2.045% at a sale of similar maturity securities in September…”
January 7 – Bloomberg (Richard Bravo): “CommScope Inc., the telecommunications-equipment provider that Carlyle Group is buying, led companies this week seeking more than $2 billion in leveraged loans in the U.S. as borrowers take advantage of a rally in the debt to finance acquisitions. Demand for U.S. loans has pushed prices on the debt to a two-year high with the S&P/LSTA U.S. Leveraged Loan 100 Index rising 6.8% since the beginning of 2010.”
January 4 – Bloomberg (Ben Moshinsky): “The European Union may give regulators power to block new products and limit trading risks at banks deemed too big to fail, as part of plans to protect public finances from future financial crises. National regulators of cross-border banks may be able to require ‘changes to legal or operational structures’ if the lender would need ‘extraordinary public financial support’ during a crisis, according to draft proposals…”
Global Bubble Watch:
January 7 – Bloomberg (Simon Kennedy): “Fears of a sovereign default are ‘manifest’ in Europe and will soon spread to Japan and the U.S. as governments struggle to control deficits, according to Citigroup Inc. economists led by former Bank of England policy maker Willem Buiter. ‘Despite the recent drama, we believe we have only seen the opening and second act, with the rest of the plot still evolving… There is absolutely no safe’ sovereign.”
January 3 – Bloomberg (Michael Tsang and Lee Spears): “More than half of the U.S. initial public offerings planned for this year are from private equity firms as KKR & Co., Blackstone Group LP and Carlyle Group try to sell some of their biggest leveraged buyouts. HCA Holdings Inc., Nielsen Holdings BV, Kinder Morgan Inc. and more than two dozen other companies owned by private equity firms have registered with the Securities and Exchange Commission to sell $14 billion of shares in IPOs…”
Currency Watch:
January 6 – Financial Times (Alan Beattie): “The International Monetary Fund has called for global guidelines on managing international capital flows, a sign of rising tensions as governments impose blocks on cross-border movements of speculative money. A report by IMF staff… said that the organisation needed to end its long silence on the matter. ‘In the aftermath of the global crisis, and especially now with resurgent capital flows requiring a considered policy response, it is not tenable for the fund to remain on the sidelines of a debate so central to global economic stability,’ the report concluded. Rapid surges of speculative money into emerging market currencies over the past year have produced a range of government responses. These include direct intervention in the currency markets, imposing taxes on short-term capital flows and increasing bank reserve requirements to damp down credit creation.”
January 4 – Bloomberg (Ron Harui and Wes Goodman): “Currency traders that seek profits by borrowing in nations with low interest rates to fund purchases in countries with higher yields are losing more money than at any time in at least a decade. The strategy lost 2.5% in 2010 as the dollar -- a favorite for financing the trades because of record low U.S. rates -- appreciated, according to an index compiled by UBS… That’s more than the 0.98% drop in 2008…”
The U.S. dollar index jumped 2.6% to 81.08. On the upside for the week, the Mexican peso increased 0.9%, the Canadian dollar 0.5%, and the South Korean won 0.3%. On the downside, the euro declined 3.6%, the Danish krone 3.5%, the Swiss franc 3.3%, the Swedish krona 3.3%, the Norwegian krone 2.8%, the Australian dollar 2.7%, the New Zealand dollar 2.6%, the South African rand 2.6%, the Japanese yen 2.4%, the Brazilian real 1.4%, the Singapore dollar 0.8%, the British pound 0.4%, and the Taiwanese dollar 0.2%.
Commodities and Food Watch:
January 5 – Bloomberg (Rudy Ruitenberg): “World food prices rose to a record in December on higher sugar, grain and oilseed costs, the United Nations said, exceeding levels reached in 2008 that sparked deadly riots from Haiti to Egypt. An index of 55 food commodities tracked by the Food and Agriculture Organization gained for a sixth month… The gauges for sugar and meat prices advanced to records. Sugar climbed for a third year in a row in 2010, and corn jumped the most in four years… Food prices may rise more unless the world grain crop increases ‘significantly’ in 2011, the FAO said…”
January 6 – Associated Press: “A giant bluefin tuna fetched a record 32.49 million yen, or nearly $396,000, in the first auction of the year at the world's largest wholesale fish market in Japan. The price for the 754-pound (342-kilogram) tuna beat the previous record set in 2001…”
The CRB index dropped 2.7%. The Goldman Sachs Commodities Index (GSCI) fell 1.8%. Spot Gold fell 3.6% to $1,370. Silver sank 7.2% to $28.71. February Crude fell $2.98 to $88.40. February Gasoline was little changed, while February Natural Gas added 0.2%. March Copper dropped 3.8%. March Wheat declined 2.5%, and March Corn sank 5.4%.
China Bubble Watch:
January 5 – Financial Times (Patti Waldmeir): “China’s automotive market, the largest in the world, is expected to grow strongly this year in spite of Beijing’s decision to phase out some tax incentives and restrict new car sales in the capital, analysts forecast… Beijing has gradually eroded tax incentives for small vehicles introduced in 2008 to help the Chinese market recover from a temporary hiatus… Other Chinese vehicle makers have yet to report annual sales for 2010 but motor analysts expect total sales of about 17.5m to 18m vehicles – up about 30% over 2009. Most car market analysts in China expect sales in the 20m range for 2011.”
January 5 – Bloomberg: “China’s efforts to stem inflation by curbing access to loans are driving companies to borrow record amounts in commercial paper, even as interest costs more than doubled in 2010. Sales of the short-term notes may rise about 20% this year following last year’s 45% increase to a record 678 billion yuan ($103 billion)…”
January 4 – Bloomberg: “Companies in China may raise more than 400 billion yuan ($61bn) this year from initial public offerings after first-time sales climbed to a record in 2010, PricewaterhouseCoopers LLP said.”
January 5 – Bloomberg: “China’s central bank will examine lending and capital levels at domestic banks each month to determine reserve requirements for individual lenders, the China Securities Journal reported. Banks may face higher requirements if their capital adequacy ratios fall below mandated levels…”
January 4 – Bloomberg: “China will likely see ‘strong’ increases in salaries in the five years through 2015 as the nation’s supply of labor dwindles and consumers begin to spend more and save less, Credit Suisse Group AG said… Wages may increase to be equal to 62% of China’s gross domestic product by 2015 from 50.5% last year… Economic growth may be about 9% a year from 2011 through 2015 as wages rise by 19% annually… Private consumption may climb to 41.7% of GDP in 2015 from 35.6% last year, it said. China’s leaders said last month that boosting incomes is a major task for the nation in its next five-year plan…”
India Watch:
January 7 – Bloomberg (Tushar Dhara and Kartik Goyal): “India may need to raise interest rates this month if inflation pressures continue, Chakravarthy Rangarajan, the prime minister’s top economic adviser, said after food prices jumped the most in almost six months.”
Asia Bubble Watch:
January 7 – Bloomberg (Chinmei Sung): “Taiwan’s exports rose 19.1% in December from a year earlier, the Ministry of Finance said…”
Latin America Watch:
January 5 – Bloomberg (Matthew Bristow): “Brazil’s industrial output rose more than economists expected in November… Production rose 5.3% in November from a year ago, led by a 14.2 percent jump in automobile production…”
January 7 – Bloomberg (Matthew Bristow and Alexander Ragir): “Brazil’s consumer prices rose more than economists expected in December, pushing last year’s inflation rate to the highest since 2004. Consumer prices… rose 5.91% last year…”
January 7 – Bloomberg (Alexander Cuadros and Iuri Dantas): “Brazilian financial shares tumbled in Sao Paulo, with the benchmark gauge heading to the biggest two-day drop in six months, on concern government measures to contain currency gains and restrict credit will hurt earnings.”
January 4 – Bloomberg (Carlos Manuel Rodriguez and Crayton Harrison): “Mexico expects to raise its economic growth estimate for 2011 from the current forecast of 3.9% as U.S. industrial production and internal demand improve, Finance Minister Ernesto Cordero said.”
January 5 – Bloomberg (Randy Woods): “Chile’s economy expanded faster than economists estimated in November… The central bank’s Imacec economic activity indicator rose 6.2% from a year earlier, exceeding the 5.3 percent median estimate…”
Unbalanced Global Economy Watch:
January 7 – Bloomberg (Greg Quinn): “Canadian employment rose for a third straight month in December, led by a surge in factory jobs, capping a year where all the positions lost in the 2009 recession were regained. Employment rose by 22,000… The jobless rate was unchanged from November’s 7.6%...”
January 7 – Bloomberg (Jana Randow and Jeff Black): “Germany’s recovery broadened in 2010 as consumer spending strengthened and companies increased investment in Europe’s largest economy. Retail sales may have increased as much as 1.6% in 2010…”
January 7 – Bloomberg (Kati Pohjanpalo): “Finland’s gross domestic product expanded an annual 5.5% in October, Helsinki-based Statistics Finland said…”
January 6 – Bloomberg (Paul Abelsky and Peter Laca): “Russia’s inflation rate rose to the highest in 2010 in December as more expensive food and increasing consumer demand spurred price growth, putting pressure on the central bank to raise borrowing costs. Inflation accelerated to 8.7%...
U.S. Bubble Economy Watch:
January 7 – Bloomberg (Simone Baribeau): “Employment at local governments, which provide almost 11% of all U.S. nonfarm jobs, fell to its lowest level in more than four years last month as municipalities cut payrolls to balance budgets. Workers employed by local government fell 0.1% to 14.2 million… after cities, towns and counties cut 20,000 jobs… ‘State and local government is just getting hit in every possible way on the revenue side,’ after the recession curbed property, income and sales tax receipts, said Heidi Shierholz, an economist with the Economic Policy Institute…”
January 7 – Bloomberg (Bob Willis): “Employers in the U.S. added fewer jobs than forecast in December, confirming Federal Reserve Chairman Ben S. Bernanke’s view that it will take years for the labor market to heal. Payrolls increased 103,000, compared with the median forecast of 150,000…"
Central Bank Watch:
January 7 – Bloomberg (Scott Lanman): “Federal Reserve Chairman Ben S. Bernanke said the unemployment rate will probably fall slowly even with a pickup in U.S. growth this year, signaling no change in the central bank’s monetary stimulus. At the pace of improvement projected by Fed officials, ‘it could take four to five more years for the job market to normalize fully,’ Bernanke said…"
Fiscal Watch:
January 7 – Bloomberg (Catherine Dodge and Peter Cohn): “U.S. House Republicans, who swept into power promising to rein in the federal deficit, have proposed policies in their first week that would make the shortfall worse. Moves to repeal President Barack Obama’s health-care law and promises to extend Bush-era tax cuts and offer other breaks would add more than $1 trillion to the deficit over the next 10 years, based on reports from the nonpartisan Congressional Budget Office and the Joint Committee on Taxation.”
Muni Watch:
January 7 – Bloomberg (Simone Baribeau and James Rowley): “Congressman Paul Ryan, the Budget Committee chairman in the U.S. House of Representatives, said Republicans don’t intend to save states from debt defaults. ‘We are not interested in a bailout,’ the Republican…said… Ryan said some states are ‘already telling us’ that, when asked how he would respond if he was told one was in danger of defaulting. U.S. states face a combined $140 billion in deficits in the next fiscal year…”
January 4 - New York Times (Steven Greenhouse) -- Faced with growing budget deficits and restive taxpayers, elected officials from Maine to Alabama, Ohio to Arizona, are pushing new legislation to limit the power of labor unions, particularly those representing government workers, in collective bargaining and politics. State officials from both parties are wrestling with ways to curb the salaries and pensions of government employees, which typically make up a significant percentage of state budgets.”
California Watch:
January 3 – Bloomberg (Alison Vekshin and Christopher Palmeri): “Jerry Brown took the oath of office as California’s governor, 36 years after he first stepped into the job, promising residents an ‘honest’ budget. Brown… takes command of the nation’s largest state by population at a time when California faces $28 billion in budget deficits during the next 18 months.