For the week, the S&P500 slipped 0.2% (up 6.4% y-t-d), and the Dow lost 0.3% (up 8.8%). The broader market was resilient. The S&P 400 Mid-Caps added 0.5% (up 9.6%), and the small cap Russell 2000 jumped 1.7% (up 8.2%). The Morgan Stanley Consumer index gained 1.7% (up 5.5%), and the Utilities rallied 1.8% (up 7.0%). The Banks sank 2.4% (down 5.2%), and the Broker/Dealers fell 2.4% (down 4.5 %). The Morgan Stanley Cyclicals declined 1.2% (up 5.1%), and the Transports dropped 1.6% (up 5.4%). The Nasdaq100 slipped 0.2% (up 7.3%), and the Morgan Stanley High Tech index dipped 0.1 % (up 4.1%). The Semiconductors declined 0.6% (up 7.1%). The InteractiveWeek Internet index added 0.2% (up 4.6%). The Biotechs jumped 1.8% (up15.5 %). Although bullion ended the week little changed, the HUI gold index sank 3.7% (down 10.1 %).
One-month Treasury bill rates ended the week at zero bps and three-month bills closed at 2 bps. Two-year government yields declined 2 bps to 0.53%. Five-year T-note yields ended the week down 3 bps to 1.83%. Ten-year yields increased 2 bps to 3.17%. Long bond yields added a basis point to 4.30%. Benchmark Fannie MBS yields were unchanged at 3.98%. The spread between 10-year Treasury yields and benchmark MBS yields narrowed 2 to 81 bps. Agency 10-yr debt spreads increased 2 bps to negative one basis point. The implied yield on December 2011 eurodollar futures was little changed at 0.42%. The 10-year dollar swap spread declined one to 8.0 bps. The 30-year swap spread was little changed at negative 25 bps. Corporate bond spreads were mostly little changed. An index of investment grade bond risk was unchanged at 90 bps. An index of junk bond risk declined 4 bps to 433 bps.
Junk bond funds saw inflows of $358 million (from Lipper).
U.K. 10-year gilt yields declined 2 bps this week to 3.36% (down 15bps y-t-d), and German bund yields sank 9 bps to 3.08% (up 12bps). Ten-year Portuguese yields dropped 33 bps to 8.99% (up 241bps). Irish yields rose 17 bps to 10.39% (up 124bps), while Greek 10-year bond yields declined 8 bps to 15.27% (up 281bps). Two-year Greek yields fell 43 bps this week to 24.14%. Spain's 10-year yields added 2 bps to 5.25% (down 19bps). The German DAX equities index declined 1.2% (up 7.1% y-t-d). Japanese 10-year "JGB" yields declined 2 bps to 1.12% (unchanged). Japan's Nikkei lost 2.1% (down 5.7%). Emerging markets were mostly lower. For the week, Brazil's Bovespa equities index dropped 1.8% (down 8.8%), and Mexico's Bolsa slipped 0.5% (down 9.1%). South Korea's Kospi index fell 1.3% (up 3.4%). India’s equities index was little changed (down 9.6%). China’s Shanghai Exchange increased 0.2% (up 2.2%). Brazil’s benchmark dollar bond yields were little changed at 4.31%, while Mexico's benchmark bond yields fell 8 bps to 4.10%.
Freddie Mac 30-year fixed mortgage rates fell 8 bps to 4.63% (down 21bps y-o-y). Fifteen-year fixed rates dropped 7 bps to 3.82% (down 42bps y-o-y). One-year ARMs were down 3 basis points to 3.11% (down 89bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 9 bps to 5.16% (down 45bps y-o-y).
Federal Reserve Credit surged $26.1bn to a record $2.713 TN (27wk gain of $432bn). Fed Credit was up $305bn y-t-d and $403bn from a year ago, or 17.4%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 5/11) jumped $8.5bn to a record $3.461TN. "Custody holdings" were up $110bn y-t-d and $397bn from a year ago, or 13.0%.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $1.834 TN y-o-y, or 23%, to a record $9.820 TN. Over two years, reserves were $3.131 TN higher, or 47% growth.
M2 (narrow) "money" supply jumped $28bn to a record $8.993 TN. "Narrow money" has expanded at a 5.2% pace y-t-d and 5.5% over the past year. For the week, Currency increased $1.9bn. Demand and Checkable Deposits increased $17.0bn, and Savings Deposits rose $10.2bn. Small Denominated Deposits fell $3.6bn. Retail Money Funds added $1.2bn.
Total Money Fund assets jumped $28bn last week to a 12-wk high $2.751 TN. Money Fund assets were down $59bn y-t-d, with a decline of $127bn over the past year, or 4.4%.
Total Commercial Paper outstanding jumped another $29.0bn to a 26-wk high $1.159 Trillion. CP was up $190bn y-t-d, or 44% annualized, with a one-year rise of $56bn.
Global Credit Market Watch:
May 9 – Financial Times (Ralph Atkins): “Finland will remain a ‘constructive member’ of the eurozone, despite the rise of its Eurosceptic True Finns party, but will lobby hard in the future for economic discipline across the 17-country monetary union, its central bank governor has indicated. ‘We need to stay a constructive member of the team… It has been beneficial to us. The basic line should not change.’ The success of the anti-European Union True Finns in last month’s national elections has threatened to undermine investor confidence in the eurozone’s ability to address its debt crisis… The True Finns, previously a fringe party, won 19% of the vote and a possible place in the Helsinki government.”
May 13 – Bloomberg (Andrew Davis): “Greece, Ireland and Portugal, the euro region countries that needed 256 billion euros ($366bn) in emergency aid to avoid default, may all see their debt loads exceed the size of their economies this year. Greece’s debt, already the biggest in the euro’s history at 143% of gross domestic product last year, will jump to almost 158% this year and 166% in 2012… Portuguese debt will surpass total economic output for the first time this year, growing to 101.7% of GDP, while Irish debt will reach 112%, the forecasts show.”
May 13 – Bloomberg (Andrea Wong): “China’s government didn’t sell all of the debt offered at auctions today, failing to draw enough orders for the first time in 2011 as this year’s fifth increase in lenders’ reserve-requirement ratios cooled demand.”
May 9 – Financial Times (David Oakley in London and Kerin Hope): “Greece has denied that it is considering leaving the eurozone but its looming cash crunch could revive fears that the bloc’s debt crisis may spread to Spain. The admission at the weekend by George Papaconstantinou, finance minister, that Greece was seeking European Union help to finance its debt obligations in 2012 and 2013, rather than return to markets, is set to fray investors’ nerves… Greece’s plight could dash hopes that Portugal’s bail-out announcement last week had drawn a line in the sand in the more than year-long debt crisis.”
May 13 – Bloomberg (Camila Russo and Drew Benson): “Yields on Argentina’s benchmark peso bonds are rising to an eight-month high as the government reports slower inflation and steps up criticism of private economists who say price increases are double the official rate. Yields on inflation-linked debt due in 2033 rose 38 bps… this week to 9.72%...”
Global Bubble Watch:
May 9 – Bloomberg (Rebecca Christie and Ian Katz): “Treasury Secretary Timothy F. Geithner will urge China to allow higher interest rates when he meets with Chinese leaders this week, as the U.S. extends its push for a stronger yuan. Geithner will say China should relax controls on the financial system and give foreign banks and insurers more access, said David Loevinger, the Treasury Department’s senior coordinator for China.”
May 11 – Bloomberg (Josiane Kremer): “Greek Prime Minister George Papandreou said Europe needs to move toward issuing common bonds to help tackle the region’s fiscal crisis. Europe needs to stop playing a ‘blame game’ and ‘move forward,’ Papandreou said… Issuing a common bond would be ‘one solution’ toward this end, he said.”
May 11 – Bloomberg (Peter Woodifield and Rodney Jefferson): “The U.S. dollar is going to be a ‘total disaster’ in the long term because of the country’s position as the world’s largest debtor and the policies being pursued by Federal Reserve Chairman Ben S. Bernanke, according to investor Jim Rogers. The Chinese yuan is likely to be a ‘safe’ currency, although it is difficult for investors to buy, Rogers… told a conference… ‘The situation is getting worse and I expect to see severe problems in the U.S.,’ Rogers said… ‘Dr Bernanke doesn’t understand economics, he doesn’t understand finance, he only understands printing money and we can’t quadruple the amount of money in the next slowdown.’ U.S. government debt is currently 93% of gross domestic product compared with 60% before the financial crisis and is set to rise further in the next few years.”
The U.S. dollar index rallied 1.2% to 75.76 (down 4.1% y-t-d). For the week on the upside, the Japanese yen increased 0.2%. On the downside, the South African rand declined 1.8%, the Swedish krona 1.4%, the Norwegian krone 1.1%, the New Zealand dollar 1.0%, the Brazilian real 1.0%, the Australian dollar 1.0%, the Swiss franc 0.9%, the Danish krone 0.9%, the Euro ).9%, the Mexican peso 0.9%, the Canadian dollar 0.6%, the British pound 0.6%, the Singapore dollar 0.5%, and the South Korean won 0.2%.
Commodities and Food Watch:
May 13 – Bloomberg (Madelene Pearson): “Gold demand in India, the world’s biggest consumer of bullion, strengthened this year as record prices failed to deter buyers, according to Kotak Commodity Services… UBS AG said this week its gold sales to India are more than 10 percent higher this year as demand grows outside the traditional wedding and festival periods… ‘Overall demand is good, it is almost like last year, or a little better,’ Rajesh Mehta, chairman of Rajesh Exports Ltd., India’s largest jewelry maker and exporter, said… Demand surged 66% to 963.1 tons in 2010…”
May 9 – Bloomberg (Asjylyn Loder): “Hedge funds were caught with bullish oil bets near record highs last week as crude plunged 15%, the biggest decline in more than two years.”
The CRB index gained back 0.3% (up 1.7% y-t-d). The Goldman Sachs Commodities Index rallied 1.4% (up 8.2%). Spot Gold was little changed at $1,495 (up 5.2%). Silver slipped 0.8% to $35.01 (up 13.3%). June Crude rallied $2.47 to $99.65 (up 9.1%). June Gasoline declined 0.5% (up 25%), while May Natural Gas increased 0.3% (down 3.6%). July Copper was little changed (down 10%). May Wheat fell 3.9% (down 12.4%), and May Corn declined 0.5% (up 8%).
China Bubble Watch:
May 10 – Bloomberg (Madelene Pearson): “China’s inflation held above 5% in April and lending exceeded analysts’ estimates, signaling that further monetary tightening may be needed to cool the fastest-growing major economy. Consumer prices rose 5.3% from a year earlier and banks extended 740 billion yuan ($114bn) of local-currency loans… Today’s data showed that inflation has exceeded Premier Wen Jiabao’s 4% target each month this year.”
May 12 – Bloomberg (Madelene Pearson): “China’s inflation is spreading beyond food, signaling Premier Wen Jiabao’s strategy of quarter-point interest-rate increases every two months has yet to contain consumer prices. Clothing costs climbed 1.4% in April from a year earlier, the biggest gain since 1997… Non-food inflation held at 2.7%, the fastest pace in at least six years… Higher wages and commodity costs are adding to price pressures…”
May 13 – Bloomberg: “China may limit interest-rate increases over the rest of the year, focusing on other tools for combating inflation as the government seeks to cool prices without choking off growth. The central bank yesterday raised banks’ reserve requirements for the fifth time this year. The half-point increase takes effect May 18 and will boost levels for the nation’s biggest lenders to a record 21%.”
May 13 – Bloomberg: “Chinese developers’ profit margins are set to shrink as they build public housing projects to stay on good terms with the government. China is aiming to add a record 36 million units of affordable or social housing in the next five years, to cover 20% of the country’s residential market, the government said.”
May 13 – Bloomberg (Sophie Leung): “Hong Kong raised forecasts for growth and inflation after the economy expanded 7.2% in the first quarter, the fastest pace in a year and more than any of the estimates…”
May 13 – Bloomberg (Aki Ito, Keiko Ujikane and Mayumi Otsuma): “With his nation’s economy contracting under disaster damage of as much as 25 trillion yen ($310bn), Bank of Japan Governor Masaaki Shirakawa is signaling that his biggest worry is inflation. At stake for the student of Milton Friedman is protecting the bank’s independence from financing public spending, as urged by lawmakers after the record March 11 earthquake. Shirakawa… instead oversaw a 40-trillion yen boost in short-term funds, eschewing the scale of longer-dated asset purchases the Federal Reserve mounted after confidence in credit markets collapsed and the U.S. entered its worst recession since the Great Depression.”
Latin America Watch:
May 13 – Bloomberg (Iuri Dantas): “If you’re getting a bikini wax in Brazil, you’re likely to find that the cost is rising. And if you’re an economic policy maker, that’s a problem. As with more prosaic services ranging from car repair to dentistry, the price of waxing is rising faster than most components of the nation’s economy. That’s pushing inflation above the government’s target and may force central bank… to prolong interest-rate increases this year. Price increases for services, which make up 24.1% of Brazil’s benchmark inflation index… rose 8.57% in the year through April, the fastest pace in at least 15 years.”
Unbalanced Global Economy Watch:
May 14 – Financial Times (Richard Milne and David Oakley): “High inflation, low growth. Sound familiar? The spectre of 1970s-style ‘stagflation’, banished for decades, has crept back into investors’ consciousness. Oil prices may have tumbled from recent highs, but crude remains well above $100 a barrel. Sharp rises in the price of food staples are already causing pain in many of the world’s emerging economies. Now, central banks in the US and UK have downgraded their growth forecasts and raised those for inflation. With recovery still fragile in the US and many parts of Europe, there are fears rapidly increasing prices for fuel and food could begin to push up prices of other goods and services more quickly… ‘Stagflation is the biggest risk for the markets,’ says Robert McAdie, global head of credit research and strategy at BNP Paribas. ‘Inflation is real and here to stay. It is a serious issue especially if growth remains weak. If this leads into stagflation, then all bets are off for the markets and the global economy.”
May 13 – Bloomberg (Gonzalo Vina): “Average incomes in Britain fell in the most recent fiscal year and there is further pain to come as the government cuts welfare programs to tackle the budget deficit… Earnings declined by 3.8% in real terms in the 11 months through February after growing through the recession of the previous two years…”
May 13 – Bloomberg (Christian Vits and Jeff Black): “Germany and France powered economic growth in the euro area in the first quarter as booming exports fueled domestic spending in the bloc’s core, offsetting turmoil sparked by sovereign debt woes in Greece, Ireland and Portugal. German gross domestic product jumped 1.5% from the fourth quarter and French GDP rose 1%... Growth in the 17-nation euro region accelerated to 0.8% from 0.3%…”
May 9 – Bloomberg (Jana Randow): “German exports surged in March to the highest monthly value ever recorded, boosting growth in Europe’s largest economy. Exports… jumped 7.3% from February, when they gained 2.8%...”
May 13 – Bloomberg (Joao Lima): “Portugal’s economy shrank for a second quarter in the three months through March, putting the country back into recession as the government tries to cut spending and raises taxes to narrow its budget deficit. Gross domestic product dropped 0.7%...”
U.S. Bubble Economy Watch:
May 11 – Bloomberg (Bob Willis): “The U.S. trade deficit widened more than forecast in March as the highest oil prices in more than two years boosted imports, eclipsing record exports. The trade gap rose 6% to $48.2 billion, the biggest since June… Sales abroad climbed by the most in 17 years… Imports climbed 4.9% to $220.8 billion, the highest level since August 2008… Exports increased 4.6%, the biggest gain since March 1994, to $172.7 billion.”
May 10 – Bloomberg (Alex Kowalski): “Prices of goods imported into the U.S. rose more than forecast in April as a slumping dollar and growing economies overseas pushed up the cost of fuel and food. The 2.2% increase in the import-price index followed a revised 2.6% gain in March… Other reports showed distributors boosted inventories and small businesses lost confidence… Compared with a year earlier, import prices increased 11%, exceeding the 10% increase projected by economists…”
May 13 – Financial Times (James Politi): “The financial health of Medicare and Social Security is deteriorating faster than expected, according to a report that will fuel the political battle over fiscal policy and the debt limit. The trustees of the two government health and pensions schemes for elderly Americans forecast… that Medicare will exhaust its funds in 2024, five years earlier than predicted, while Social Security will be insolvent in 2036, one year sooner than thought. The new projections… came three days before the US was set to reach its debt ceiling of $14,300bn. Amid a fractious political climate and sharp divisions over budgetary policy, Republicans, Democrats and the White House have so far failed to increase the country’s borrowing authority. In the absence of a deal, the Treasury department has warned of a sovereign default in the world’s largest economy as early as August.”
Central Bank Watch:
May 11 – Bloomberg (Rainer Buergin): “German Chancellor Angela Merkel signaled her backing for Mario Draghi as the next president of the European Central Bank, leaving the Bank of Italy governor unopposed by Europe’s political leaders.”
May 11 – Bloomberg: “Bank of England Governor Mervyn King said that inflation remains ‘uncomfortably high,’ and officials signaled they may need to raise interest rates later this year even as the economy struggles to build momentum. ‘The recent pattern of revisions to the projections over the next year -- downward to growth and upward to inflation -- has continued,’ King told reporters… Inflation ‘remains uncomfortably high and well above the 2% target. And there is a good chance that, if utility prices rise further later in the year, inflation will reach 5%."