For the week, the S&P500 gained 1.0% (up 12.7% y-t-d), and the Dow added 0.7% (up 11.0%). The S&P 400 Mid-Caps gained 0.9% (up 25.3%), and the small cap Russell 2000 rose 1.2% (up 26.2%). The Banks surged 3.3% (up 21.2%), and the Broker/Dealers rose 2.4% (up 5.5%). The Morgan Stanley Cyclicals gained 0.8% (up 25.1%), and the Transports added 0.5% (up 23.9%). The Morgan Stanley Consumer index increased 0.7% (up 12.4%), and the Utilities gained 0.9% (up 1.2%). The Nasdaq100 increased 0.5% (up 19.9%), and the Morgan Stanley High Tech index added 0.7% (up 14.8%). The Semiconductors were little changed (up 14.4%). The InteractiveWeek Internet index added 0.2% (up 33%). The Biotechs gained 0.9% (up 39.3%). With bullion up $6, the HUI gold index gained 0.5% (up 30.2%).
One-month Treasury bill rates ended the week at 6 bps and three-month bills closed at 14 bps. Two-year government yields rose 5 bps to 0.655%. Five-year T-note yields ended the week 9 bps higher to 2.05%. Ten-year yields rose 7 bps to 3.40%. Long bond yields ended the week 3 bps higher at 4.47%. Benchmark Fannie MBS yields were 5 bps higher to 4.24%. The spread between 10-year Treasury yields and benchmark MBS yields narrowed 2 bps to 84 bps. Agency 10-yr debt spreads declined 3 bps to 15 bps. The implied yield on December 2011 eurodollar futures rose 6 bps to 0.90%. The 10-year dollar swap spread declined one to 8.75 bps. The 30-year swap spread increased one to negative 27 bps. Corporate bond spreads were somewhat narrower. An index of investment grade bond risk declined one to 86 bps. An index of junk bond risk declined 9 to 437 bps.
December 23 – Dow Jones (John Kell and Kevin Kingsbury): “Long-term mutual funds had an estimated net outflow of $8.48 billion in the latest week as municipal-bond funds saw money rush from them at the fastest pace in at least four years… The data marked the fourth week since late November that investors pulled money from bond funds overall, which had seen a 99-week stretch of inflows….”
December 23 – Bloomberg (Charles Stein): “Bond mutual funds had the biggest client withdrawals in more than two years last week as a flight from fixed-income investments accelerated. U.S. bond funds experienced withdrawals of $8.62 billion in the week ended Dec. 15, up from $1.66 billion the week before…”
I saw no investment grade issues.
Junk bond funds saw inflows of $222 million (from Lipper). I saw no junk issues.
Converts issues included Ultrapetrol $70 million.
International dollar debt sales included Commonwealth Bank of Australia $250 million.
U.K. 10-year gilt yields declined 5 bps this week to 3.51%, and German bund yields fell 5 bps to 2.98%. Ireland yields surged 57 bps to 9.00%. Greek 10-year bond yields rose 28 bps to 12.18%. Ten-year Portuguese yields rose 17 bps to 6.61%, while Spanish yields declined 5 bps to 5.46%. The German DAX equities index added 1.1% (up 18.5% y-t-d). Japanese 10-year "JGB" yields declined 4 bps to 1.15%. The Nikkei 225 slipped 0.2% (down 2.5%). Emerging markets were mostly higher. For the week, Brazil's Bovespa equities index gained 0.7% (down 0.1%), and Mexico's Bolsa added 0.2% to a 2010 high (up 18.6%). South Korea's Kospi index added 0.2% (up 20.6%). India’s equities index gained 1.1% (up 14.9%). China’s Shanghai Exchange dropped 2.0% (down 13.5%). Brazil’s benchmark dollar bond yields declined 4 bps to 4.61%, while Mexico's benchmark bond yields were little changed at 4.55%.
Freddie Mac 30-year fixed mortgage rates dipped 2 bps last week to 4.81% (down 24bps y-o-y). Fifteen-year fixed rates declined 2 bps to 4.15% (down 20bps y-o-y). One-year ARMs rose 5 bps to 3.40% (down 98bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 12 bps to 5.51% (down 46bps y-o-y).
Federal Reserve Credit jumped $14.2bn to a record $2.388 TN (7-wk gain of $108bn). Fed Credit was up $168.6bn y-t-d (7.7% annualized) and $174bn, or 7.9%, from a year ago. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 12/22) rose $14.0bn to a record $3.351 TN. "Custody holdings" have increased $396bn y-t-d (13.7% annualized), with a one-year rise of $393bn, or 13.3%.
M2 (narrow) "money" supply rose $16.5bn to a record $8.830 TN. Narrow "money" has increased $296bn y-t-d, or 3.6% annualized. Over the past year, M2 grew 3.1%.
Total Money Market Fund assets (from Invest Co Inst) declined $9.3bn to $2.788 TN. Year-do-date, money fund assets have dropped $506bn, with a one-year decline of $484bn, or 14.8%.
Total Commercial Paper outstanding declined $8.0bn to $974 billion. CP has declined $196bn year-to-date, and was down $186bn from a year ago.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg’s Alex Tanzi – were up $1.395 TN y-o-y, or 18.3%, to $9.023 TN.
Global Credit Market Watch:
December 23 – Bloomberg (Joe Brennan): “Ireland’s High Court said Allied Irish Banks Plc can be taken over by the government without shareholder approval as the lender became the fourth bank to fall under state control since 2008.”
December 24 – Bloomberg: “China’s government failed to draw enough demand at a bill sale for the second time in a month as seasonal demand for funds and higher reserve-requirement ratios left banks with less cash.”
December 21 – Financial Times (Lina Saigol and Helen Thomas): “Dealmaking in emerging markets helped power a 16% rise in global mergers and acquisitions activity this year as companies moved to spend their cash piles outside of their home markets. Overall global deal value rose to $1,927.4bn – the highest level in two years and 16% more than the $1,656.8bn transactions announced during the same period last year.”
December 20 – Bloomberg (Alexander Ragir and Dawn Kopecki): “The first investigation into Brazil’s asset-backed securities industry, rising consumer delinquencies and the biggest rout of a bank stock in more than a decade are opening cracks in the country’s financial system. Funding costs for smaller banks have climbed since a Nov. 9 bailout of Banco Panamericano SA triggered the probe, pushing average yields on certificates of deposit to 12.9% from 11.8%. The market for selling loan portfolios has dried up, and funds of asset-backed commercial paper have had 2.3 billion reais ($1.3 billion) in redemptions since the rescue, according to Brazil’s capital markets association.”
Global Government Finance Bubble Watch:
December 21 – Bloomberg: “China backs the European Union’s efforts to ensure financial stability, Vice Premier Wang Qishan said… China supports the International Monetary Fund’s measures and ‘has taken concrete action to help some EU members counter the sovereign-debt crisis,’ Wang said…”
December 21 – Bloomberg (Svenja O’Donnell): “Britain’s budget deficit swelled to a record in November, underscoring the challenge facing Prime Minister David Cameron as his government prepares to implement the deepest spending cuts since World War II. Net borrowing was 22.8 billion pounds ($35.4 billion), compared with 16.7 billion pounds a year earlier…”
The dollar index added 0.1% for the week (up 3.4% y-t-d) to 80.474. On the upside for the week, the South African rand increased 2.1%, the New Zealand dollar 1.8%, the Australian dollar 1.7%, the Brazilian real 1.4%, the Japanese yen 1.3%, the Singapore dollar 1.2%, the Swiss franc 0.7%, the Canadian dollar 0.6%, the Taiwanese dollar 0.5%, the Norwegian krone 0.4%, the Mexican peso 0.3% and the South Korean won 0.2%. On the downside, the British pound declined 0.6%, the Danish krone 0.6%, and the euro 0.5%.
December 21 – Wall Street Journal (Tatyana Shumsky and Carolyn Cui): “As commodity prices soar to new records, the ability of a few traders to hold huge swaths of the world’s stockpiles is coming under scrutiny. The latest example is in the copper market, where a single trader has reported it owns 80%-90% of the copper sitting in London Metal Exchange warehouses, equal to about half of the world's exchange-registered copper stockpile and worth about $3 billion… Single traders also own large holdings of other metals. One trader holds as much as 90% of the exchange's aluminum stocks. In the nickel, zinc and aluminum alloy markets, single traders own between 50% and 80% of those metals, and one firm has 40%-50% of the LME's tin stockpiles.”
December 22 – Bloomberg (Mark Shenk): “Crude oil rose to the highest level in more than two years after government reports showed that U.S. supplies dropped and the country’s economy grew more than previously estimated in the third quarter."
December 20 – Bloomberg: “China’s coal imports may jump 60% in 2011 on strong demand from power plants, said UOB Kay Hian Ltd… The world’s largest consumer and producer of coal boosted imports by 38% to 133.93 million tons in the first 10 months of 2010…”
December 22 – Bloomberg (Jake Lloyd-Smith): “Farm-commodity prices including corn will extend rallies next year driven by increased demand from emerging markets including China… and higher energy costs, according to Rabobank Groep NV. There was ‘rampant demand’ for agricultural commodities from China, and rising corn prices may drive gains in other grains, according to a report… Surging crude-oil costs, low global food stockpiles and a weakening dollar may also bolster prices…”
December 22 – Financial Times (Javier Blas): “Mexico has taken the unusual step of insuring itself against the effect of rising corn prices on tortilla, a food staple for millions in the country, in the latest sign of growing concern about food inflation in emerging countries. Rising food inflation has become a big headache in countries from Mexico to China and India as bad weather has ruined crops, forcing prices up. Food accounts for up to half of all household spending in emerging countries, compared to just 10 to 15% in Europe and the US.”
December 22 – Bloomberg (Katia Cortes): “Coffee production in Brazil, the world’s biggest grower, may drop to the least in four years in 2011, pushing up prices as trees enter the lower-yielding half of a two-year cycle, Agriculture Minister Wagner Rossi said. Growers will harvest 37 million bags, down 23%...”
The CRB index surged 2.7% (up 16.2% y-t-d). The Goldman Sachs Commodities Index (GSCI) jumped 2.8% (up 19.8% y-t-d). Spot Gold added 0.4% to $1,381 (up 26% y-t-d). Silver gained 0.7% to $29.33 (up 74% y-t-d). January Crude jumped to $91.51 (up 15% y-t-d). January Gasoline surged 5.4% (up 19% y-t-d), and January Natural Gas increased 0.4% (down 27% y-t-d). March Copper rose 2.4% (up 27% y-t-d). March Wheat jumped 3.5% (up 45% y-t-d), and March Corn rose 2.9% (up 48% y-t-d).
China Bubble Watch:
December 24 – Bloomberg: “China needs to return to a ‘prudent monetary policy’ to curb prices and control total money supply, the People’s Bank of China said…”
December 20 – Bloomberg: “China’s inflation may exceed 5% to 6% in some months of next year, the People’s Daily reported today, citing Ba Shusong, a researcher at the State Council’s Development Research Center.”
December 21 – Bloomberg: “China must prepare for a long-term fight against inflation as price gains this year will exceed the government’s target, the nation’s top planning agency said… Full-year inflation will be 3.3% , CCTV cited Peng Sen, vice chairman of the National Development and Reform Commission... China will have a more complicated task managing prices in the future, Peng was cited as saying.”
December 22 – Bloomberg: “China raised gasoline and diesel prices today by less than half of what crude oil has gained in the past month as the world’s fastest-growing major economy seeks to contain inflation. The price of gasoline will rise by as much as 4%..., the third increase this year in the world’s second-largest oil consumer.”
December 21 – Bloomberg: “Auto sales in China may outstrip the U.S. for a third consecutive year in 2011 as the world’s largest carmakers… estimate sales will grow by as much as 15%.”
December 24 – Bloomberg (John Duce): “Hong Kong will record the worst year for roadside pollution since the city started collecting readings in 1999, according to calculations made by Bloomberg based on government data.”
December 24 – Bloomberg (Toru Fujioka): “Japanese Prime Minister Naoto Kan plans to cap new bond sales at 44.3 trillion yen ($534 billion) in 2011 to finance a record budget as he tries to spur corporate demand and bolster growth.”
December 23 – Bloomberg (Tushar Dhara and Pratik Parija): “India’s food inflation accelerated to a six-week high, adding pressure on authorities to curb a jump in onion prices that has forced the nation to halt exports of the staple this week and toppled governments in the past. An index measuring wholesale prices of agricultural products including lentils, rice and vegetables compiled by the commerce ministry rose 12.13%... from a year earlier..."
December 21 – Bloomberg (Jason Gale): “A lack of toilets costs India more than $50 billion a year, mostly through premature deaths and hygiene-related diseases, a study found. Illness, lost productivity and other consequences of fouled water and inadequate sewage treatment trimmed 6.4% from India’s gross domestic product in 2006, or the equivalent of $53.8 billion, according to the study by the World Bank’s Water and Sanitation Program.”
December 24 – Bloomberg (Rajesh Kumar Singh and Abhishek Shanker): “India’s government is planning to make an unsolicited bid to counter a A$3.9 billion ($3.9 billion) offer from Rio Tinto Group for Riversdale Mining Ltd.”
Asia Bubble Watch:
December 24 – Bloomberg (Jake Lloyd-Smith): “Increased demand for food in Asia will help to boost prices next year, fuelling faster consumer inflation, according to Yougesh Khatri at Nomura… Costlier food was likely to hit Asia hard as edible goods account for ‘a fairly large chunk’ of the baskets that governments use to calculate the pace of price changes, said Khatri… ‘That is likely to show up as particularly severely impacting CPI next year,’ Khatri said…”
December 24 – Bloomberg (William Sim and Frances Yoon): “South Korea may face the risk of a foreign capital influx and asset bubbles if borrowing costs are increased further to curb inflation, the finance ministry said. ‘Raising interest rates to contain inflation could easily cause herd behavior in foreign capital inflow and create asset bubbles,’ the Ministry of Strategy and Finance said…”
December 21 – Bloomberg (Chinmei Sung): “Taiwan’s export orders increased 14.34% in November from a year earlier, the Ministry of Economic Affairs said…”
December 23 – Bloomberg (Shamim Adam): “Singapore’s inflation rate rose to the highest level since January 2009… The consumer price index climbed 3.8% in November from a year earlier…”
December 24 – Bloomberg: “Vietnam’s inflation rate accelerated to the highest level in 22 months after currency devaluations stoked import costs and credit expansion spurred domestic demand. Prices increased 11.75% in December from a year earlier…”
Latin America Watch:
December 22 – Bloomberg (By Iuri Dantas and Matthew Bristow): “Brazil’s central bank signaled today it may start increasing interest rates next month, after forecasting inflation next year will be faster than previously expected. Policy makers raised their 2011 inflation forecast to 5%, up from 4.6% in September…”
December 22 – Bloomberg (Katia Cortes): “Farmers in Brazil, the world’s second-biggest crop exporter after the U.S., are increasing borrowing to buy equipment at the fastest pace in at least seven years as prices for coffee, soybeans and sugar advance. Loans for tractors, harvesters and plows jumped 64% to 8.2 billion reais ($4.8 billion) in July to November from the same period a year earlier…”
December 22 – Bloomberg: “State Grid Corp. of China completed the purchase of seven electricity distribution businesses in Brazil for $989 million, the government said. Beijing-based State Grid will run electricity transmission services in the southeast of Brazil and supply power to Brasilia, Sao Paolo and Rio de Janeiro…”
Unbalanced Global Economy Watch:
December 21 – Bloomberg (Scott Reyburn): “Christie’s International sold a record 3.2 billion pounds ($5 billion) of art and other collectibles in 2010… The total, comprising worldwide auction and private sales, surpassed the company’s previous high of 3.1 billion pounds for 2007, said Christie’s… The provisional 2010 sales rose 52% from 2.1 billion pounds a year earlier.”
December 20 – Bloomberg (Paul Dobson and Keith Jenkins): “France risks losing its top AAA grade as Europe’s debt crisis prompts a wave of downgrades that threatens to engulf the region’s highest-rated borrowers, with Belgium also facing a possible cut, analysts and investors said. Moody’s … said Dec. 15 it may lower Spain’s rating, citing ‘substantial funding requirements,’ and slashed Ireland’s rating by five levels on Dec. 17. Standard & Poor’s is reviewing its assessments of Ireland, Portugal and Greece. Credit default swaps show it’s more expensive to insure French debt than lower-rated securities from countries such as the Czech Republic and Chile.”
December 24 – Bloomberg (Angus Whitley): “Takeovers in Australia surged to a record this quarter, renewing investment bankers’ hopes that 2011 will uncork a backlog of deals in a commodities-led revival.”
U.S. Bubble Economy Watch:
December 24 – Bloomberg (Cotten Timberlake): “U.S. online sales jumped 15% this holiday season, spurred by ‘aggressive’ marketing by Web- based retailers, a research firm said.”
December 20 – Bloomberg (Mary Schlangenstein): “The six largest U.S. airlines have built a $23.8 billion cash hoard to cut debt and build a cushion against future shocks, bucking a pattern in other industries of returning money to investors. As the carriers dig out from two years of collective losses, stockholders must be content with the knowledge that the group led by United Continental Holdings Inc. may be better protected against fuel-price surges and recessions, according to analysts at Fitch Ratings and Standard & Poor’s.”
Central Bank Watch:
December 23 – Bloomberg (Ben Livesey and Ken McCallum): “Bank of England Markets Director Paul Fisher said U.K. interest rates will rise ‘to a normalized position’ of about 5%, the Daily Telegraph reported… The central bank won’t ‘be putting up rates so quickly’ as to cause ‘negative reaction’ and will only tighten policy quickly if the strength of the economy demands it, Fisher said…”
December 21 – Reuters (David Lawder): “The U.S. government fell deeper into the red in fiscal 2010 with net liabilities swelling more than $2 trillion as commitments on government debt and federal benefits rose… The Financial Report of the United States, which applies corporate-style accrual accounting methods to Washington, showed the government's liabilities exceeded assets by $13.473 trillion. That compared with a $11.456 trillion gap a year earlier. Unlike the normal measurement of government intake of receipts against cash outlays, accrual accounting measures costs such as interest on the debt and federal benefits payable when they are incurred, not when funds are actually disbursed.”
December 23 – Bloomberg (Michael B. Marois and Greg Giroux): “California, facing $28 billion in deficits, may see its congressional clout wane as slowing population growth deprives it of a new seat in the U.S. House of Representatives for the first time in its 160-year history. The U.S. Census Bureau reported this week that California’s population climbed 10% in the last decade to 37.3 million people, its slowest rate ever. The Golden State’s growth cooled because of souring housing prices, technology-industry job losses and lower levels of migration.”
December 23 – Bloomberg (Terrence Dopp): “New Jersey’s pension-funding deficit increased by $8.05 billion, or 18%, this year to $53.9 billion as the state failed to make contributions. The unfunded pension liability was $45.8 billion as of June 2009. New Jersey also faces an unfunded liability of $66.8 billion for providing medical care to retired public employees…”
December 20 – Bloomberg (Terrence Dopp): “New Jersey Governor Chris Christie said U.S. states face a ‘day of reckoning’ as they contend with looming budget deficits in the wake of the longest recession since the 1930s. Christie, who cut $1.3 billion in aid to schools and municipalities this year to close a $10.7 billion deficit, said states’ pension and debt costs have grown to be ‘unsustainable.’ Benefits, education and health care will be reduced in many states, he said… ‘The day of reckoning has arrived,’ said Christie… Areas such as education and pensions ‘were third rails of politics. We are now left with no alternatives.’”
December 21 – Bloomberg (Peter Cohn): “Cash-strapped states and municipalities will lose tax revenue of about $8 billion in 2011 under the extension of Bush-era income tax cuts. Revenue- generators excluded from the measure include subsidies for taxable Build America Bonds and payments to state housing authorities. Those provisions were scuttled in final negotiations on the $858 billion tax-cut extension measure…”
December 22 – Bloomberg (Christopher Palmeri and Pat Wechsler): “Washington State may not pay for glasses anymore. Massachusetts already chopped dentures. As of Oct. 1, North Carolina no longer covers surgery for the clinically obese. Governors nationwide are taking a scalpel to Medicaid, the jointly run state and federal health-care program for 48 million poor Americans, half of whom are children. The single biggest expense for states, Medicaid consumes about 22% of their total $1.6 trillion in expenditures, more than what is allocated to elementary and secondary education…”
December 22 – New York Times (David M. Halbfinger and Noah Rosenberg): “A state oversight board… moved a step closer to seizing control of Nassau County's finances, saying the county had failed to close a $350 million budget deficit despite months of dire warnings.”
December 22 – Bloomberg (Cristina Alesci and Zachary R. Mider): “Cerberus Capital Management LP’s bet on Chrysler survived bankruptcy and the 2008 financial crisis to recoup about 90% of the original investment… The hedge-fund and buyout manager said yesterday it will sell Chrysler’s former auto-lending unit to Toronto-Dominion Bank for $6.3 billion cash.”