For the most part, however, markets were looking for important confirmation. It was received. Market participants have come to grips with the scope and complexity of the European debt crisis. And the marketplace recognizes the contrasting policy viewpoints and acute political challenges. The markets immediate focus has been less on “resolution” and more on “resolve.” Do they get it? Are German, French, European and global policymakers determined to bring out the big guns? Are the Germans feeling sufficient heat? Will the ECB, with Mr. Trichet soon out the door, show even more flexibility? Is the IMF prepared to play a significant role in European “ring-fencing”? Is the Federal Reserve prepared to do its part in stabilizing the general market backdrop, buying the Europeans time to resolve their differences and come up with a plan of attack?
This morning’s Bloomberg headline was just what the market doctor ordered: “EU Said to Consider Wielding $1.3 Trillion to Break Impasse.” From the article (James G. Neuger and Tony Czuczka): “Negotiations on combining the European Union’s temporary and planned permanent rescue funds as of mid-2012, while scrapping a ceiling on bailout spending, accelerated this week after efforts to leverage the temporary fund ran into European Central Bank opposition and provoked the French-German clash…”
The EFSF is a temporary rescue program scheduled to be replaced in 2013 by the permanent European Stability Mechanism (ESM). There has been talk of moving the inception of the EMS forward to 2012. And now, apparently, the possibility is being discussed to next year use the two facilities simultaneously. Wow, aggressive.
While not completely ruled out, at least the market’s enthusiasm for converting part of the EFSF into a sovereign bond insurance operation has dimmed on legal and operational issues. So, with the Germans wanting no part of the French idea of turning the EFSF into a leveraged bank structure, the ECB opposed to lending to the EFSF, and the insurance structure increasingly impractical, the notion of a big, sturdy and credible “ring-fence” to shield Italian and Spanish bonds was in serious jeopardy. While it was increasingly appearing a case of German and French irreconcilable differences, there was, importantly, no indication of a lack of resolve. The tape was painted this morning with market-encouraging headlines: “EU Says Barroso Confident That Crisis-Response Deal Reachable;” “German Official Says No Major Franco-German Differences on EFSF;” “German Official Says Alternative EFSF Leverage Model is With IMF.” The International Monetary Fund to the rescue for EFSF “leveraging” and viable “ring-fencing”? Again, quite aggressive.
Incredible amounts of noise out of Europe this week. Rather quietly here at home, the Fed is apparently fashioning its plan for additional quantitative easing. The Wall Street Journal headlined Jon Hilsenrath’s article this morning, “Fed is Poised for More Easing.” “Federal Reserve officials are starting to build a case for a new program of buying mortgage-backed securities to boost the ailing economy, though they appear unlikely to move swiftly… Moreover, Fed officials believe their past purchase programs helped to lift stock markets, by driving investors from low-risk investments toward riskier investments.”
Chairman Bernanke began dangling the “QE3” carrot a couple weeks back, as the global financial system came under heightened stress. Vice chairman Janet Yellen this afternoon said the Fed is “prepared to employ our tools as appropriate… Securities purchases across a wide spectrum of maturities might become appropriate if evolving economic conditions called for significantly greater monetary accommodation.” Chicago Fed President (and voting FOMC member) Charles Evans has of late become increasingly outspoken in his call for further policy actions, this week going so far as to state his tolerance for higher inflation in the cause of stimulating job growth. And Mr. Evans again espoused “unemployment targeting” (more conventionally, “mileposts”) suggesting the Fed should consider a stated goal of zero rates until the unemployment rate dips below, say, 7.0%. Some would argue “aggressive;” I’ll stick with “monetary policy lunacy.”
In a speech yesterday, Fed governor Daniel Tarullo called for the Federal Reserve to resume quantitative easing through another mortgage-backed security (MBS) purchase operation. “Within the FOMC and in the broader policy community, there has been considerable discussion of possible additional accommodative measures, from communication strategies such as forward guidance on the likely path of the federal funds rate to additional balance sheet operations. I believe we should move back up toward the top of the list of options the large-scale purchase of additional mortgage-backed securities, something the FOMC first did in November 2008 and then in greater amounts beginning in March 2009 in order to provide more support to mortgage lending and housing markets… A large-scale MBS purchase program has many of the benefits associated with purchases of longer-duration Treasury securities, such as inducing investors to shift to other assets, including bonds and equities. But it could also have more direct effects on the housing market.”
Is the Fed really poised to again expand its balance sheet through additional monetization of MBS? Well, the Federal Reserve should not be in the mortgage business – and they know it. It was not all that many months ago that the consensus view at the Fed was that it should move decisively to unwind its emergency operations and liquidate its holdings of mortgage securities. Federal Reserve operations would be limited to Treasury securities in order to minimize the Fed’s influence on market prices and to avoid potential political pressures that would invariably arise if the Fed began picking and choosing sectors to support in the marketplace (the mortgage marketplace has been too politicized for much too long – with rather conspicuous consequences).
These days, it’s easy to envision the closed-door discussions and backdoor agreements in Europe: “They’ll never agree to this. This is politically infeasible. Could we get this by them? Would the Bundestag revolt if we pushed it this far? Can we make a legal case for such an approach? Are the rules bendable? Can we drop the word “leverage” and instead use “efficiency” and “firepower”? Would the markets buy into this? How can we make this appear credible?”
And I find myself imagining back-room strategizing in some vacant office in the basement at the Federal Reserve Building in Washington, D.C. Inflation is elevated and the U.S. economy is not falling off a cliff, yet the chairman is really fretting the unfolding global crisis. So the “doves” quietly discuss the political realities, while concocting a strategy that will ensure they have the big “QE3” gun cocked and loaded. Importantly, Dr. Bernanke is convinced that the Fed must be ready and willing to demonstrate to the markets that it has the necessary firepower to stem any crisis before disruptions gain too much momentum. The hope is that, if the marketplace appreciates you carry a big bazooka and an itchy trigger finger, it significantly reduces the probability that the markets will stray to the point of requiring brute force.
Simply buying more Treasuries these days risks a political firestorm. Direct monetization of Washington’s reckless borrowing and spending is simply intolerable. Besides, it would only increase the price of “safe haven” Treasuries at the expense of risk assets more generally and likely prove only more destabilizing when the markets fall into “risk off” mode. And - who would have thunk at 9.1% unemployment - the “inflation targeting” trump card is inoperable with year-over year inflation standing at almost 4.0%. So with all the public and political angst associated with a stubborn national jobs crisis, linking additional monetary ease to the unemployment rate might actually make for good political cover.
Perhaps the FMOC doves strategize along these lines: “As much as we’d rather not venture back into potentially risky MBS purchase operations, what politician would risk attacking the Fed for stemming foreclosures, reversing falling home prices, and allowing troubled borrowers to refi into lower-cost mortgages? We could slash household borrowing costs and stimulate some extra consumption in the process. We’d increase MBS prices and bolster market confidence, while incentivizing leveraged speculation throughout the massive mortgage marketplace. This would boost marketplace liquidity more generally. Plus, such talk would likely weigh on the dollar – and it is clearly better for the markets that dollar devaluation begins again in earnest. Oh, this is good - workable. Let’s get right on it.”
The Europeans are fretting that an expanded EFSF mandate will distort the Credit market. Understandably, the Germans and others worry that moves to “ring-fence” debt markets will take much needed pressure off of some profligate borrowers (especially Italy). There are further worries how market intervention, insurance/collateral schemes, and bailout mechanisms will create a multi-tier marketplace, whereby policy incentives create market preferences for certain borrowers at the expense of others (i.e. why buy French bank bonds when there are all these mechanisms supporting prices and liquidity for Italian sovereigns?). With the situation turning increasingly desperate, it appears the Germans will be compelled to make some concessions. It will undoubtedly leave a very bad taste in many a mouth.
At the Fed, it is clear that as an organization it has failed to learn important lessons. Again, from Tarullo: “A large-scale MBS purchase program has many of the benefits associated with purchases of longer-duration Treasury securities, such as inducing investors to shift to other assets, including bonds and equities.” Boston Fed President Rosengren stated this week that he’s not happy with the risk premium the market is pricing in for MBS, and the Fed should be prepared to do something about it. And today from Hilsenrath: “Mortgage rates are already very low, but some Fed officials believe they might be pushed lower. Moreover, Fed officials believe their past purchase programs helped to lift stock markets, by driving investors from low-risk investments toward riskier investments.”
Does the Fed still not appreciate the damage wrought from distorting market pricing mechanisms, incentivizing speculation and cajoling savers into risk assets? Do we really want to continue with this “tiered” marketplace that incentivizes mortgage lending and speculating at the expense of capital investment? It is not a jobs crisis so much as it is a crisis of market dysfunction and resulting cumulative structural economic impairment. Do our monetary officials today not appreciate the risks associated with pushing the vulnerable household sector further out of relative safety and into financial harm’s way? Having for years nurtured today’s acutely fragile financial structure, do they even begin to recognize how U.S. and global markets have succumbed to “Ponzi Finance” dynamics?
For now, the markets seem ok with things. It’s a fragile peace. Some have been stunned by the markets’ resiliency in the face of near Europe and market meltdowns, while many see confirmation of their bullish view – especially when it comes to U.S. equities. I tend to see confirmation of the thesis that markets are these days highly speculative and, in the end, dysfunctional. Markets should not be so dependent on what has increasingly regressed into Policymaking by the Act of Desperate Measures.
But it is what it is. We’ve arrive at a troubling late-stage of historic Credit, financial and speculative excess. The stakes have become incredibly high, and a speculation-rife marketplace has, strangely enough, turned comfortably numb playing this precarious game of chicken with global policymakers.
I’m particularly bothered by a few things. First, I fear policymakers are fighting a losing battle that essentially amounts to pandering to markets and more kicking the proverbial can down the road. And as much as they don’t want to face a market breakdown, it is similarly not in their or the system’s interest to see global risk markets lurch back up to unsustainable heights. The markets are playing for an inevitable “grand plan” from Europe but at the same time have little confidence that it will actually resolve very serious structural issues.
Second, the policymaking and market backdrop has fomented extreme uncertainty and volatility – along with a general environment where markets have lost the capacity to smoothly discount deteriorating fundamentals. Market adjustments now tend to arise violently, ensuring the most pain for the largest number of participants. I see little on the horizon in Europe that changes my view that global markets are in the initial phase of what will prove a challenging de-risking/de-leveraging period.
And, finally, I fear global market dynamics and Fed policymaking are propagating the worst-case scenario for the U.S. government finance Bubble. As was the case in Greece, Ireland, Portugal, Spain, Italy and elsewhere, a distorted market is content to accommodate profligate borrowing until it’s way too late. Is another round of Fed MBS QE going to help? A dysfunctional marketplace has, almost without exception, been incapable of imposing any degree of market discipline until the point when only exceptionally harsh and destabilizing “austerity” suffices. This isn’t how policymaking, markets and Capitalism are supposed to operate.
For the Week:
For the week, the S&P500 gained 1.1% (down 1.5% y-t-d), and the Dow rose 1.4% (up 2.0%). The Banks jumped 2.4% (down 25.5%), and the Broker/Dealers rallied 1.7% (down 27.7%). The Morgan Stanley Cyclicals rose 1.8% (down 15.3%), and the Transports jumped 2.6% (down 5.7%). The Morgan Stanley Consumer index gained 1.6% (down 2.8%), and the Utilities surged 2.6% (up 10.6%). The S&P 400 Mid-Caps gained 0.6% (down 5.1%), while the small cap Russell 2000 was little changed (down 9.1%). The Nasdaq100 declined 1.5% (up 5.3%), and the Morgan Stanley High Tech index slipped 0.8% (down 5.6%). The Semiconductors fell 2.3% (down 9.6%). The InteractiveWeek Internet index declined 1.3% (down 5.1%). The Biotechs gained 0.9% (down 10.9%). With bullion down $38, the HUI gold index was slammed for 6.9% (down 9.7%).
One-month Treasury bill rates ended the week at zero and three-month bills ended at one basis point. Two-year government yields were little changed at 0.26%. Five-year T-note yields ended the week down 5 bps to 1.06%. Ten-year yields declined 4 bps to 2.21%. Long bond yields rose 3 bps to 3.26%. Benchmark Fannie MBS yields declined 4 bps to 3.30%. The spread between 10-year Treasury yields and benchmark MBS yields was little changed at 109 bps. Agency 10-yr debt spreads increased one to negative 3 bps. The implied yield on December 2012 eurodollar futures declined a basis point to 0.675%. The 10-year dollar swap spread increased one to 20 bps. The 30-year swap spread increased one to negative 22 bps. Corporate bond spreads were mixed. An index of investment grade bond risk rose one to 131 bps. An index of junk bond risk declined 4 bps to 717 bps.
Debt issuance remains light. Investment-grade issuance this week included Sonoco Products $850 million and Mosaic $750 million.
Junk bond funds saw inflows surge to $2.27bn (from Lipper). Junk issuance included JM Huber $225 million.
Convertible debt issuers included Nuance Communications $600 million and Regeneron Pharmaceutical $400 million.
International dollar bond issuers included European Investment Bank $3.0bn, Brazil Electrobras $1.75bn, Pernod-Ricard $1.5bn, Korea National Oil $1.0bn, Export Development Canada $1.0bn, Turkey $1.0bn and Inter-American Development Bank $500 million.
Greek two-year yields ended the week up 294 bps to 73.13% (up 6,089bps y-t-d). Greek 10-year yields rose 10 bps to 23.10% (up 1,064bps). German bund yields declined 9 bps to 2.10% (down 86bps), while French yields rose 11bps to 3.24% (spread to bunds widened 20bps to 113 bps). U.K. 10-year gilt yields declined 8 bps this week to 2.53% (down 98bps). Italian 10-yr yields rose 10 bps to 5.88% (up 107bps), and Spain's 10-year yields surged 23 bps to 5.45% (down one basis point). Ten-year Portuguese yields surged 62 bps to 11.95% (up 537bps). Irish yields rose 9 bps to 8.13% (down 92bps). The German DAX equities index was little changed (down 13.6% y-t-d). Japanese 10-year "JGB" yields declined one basis point to 1.005% (down 12bps). Japan's Nikkei slipped 0.8% (down 15.2%). Emerging markets were mixed. For the week, Brazil's Bovespa equities index increased 0.4% (down 20.3%), and the Mexico's Bolsa rose 0.5% (down 9.2%). South Korea's Kospi index inched 0.2% higher (down 10.4%). India’s Sensex equities index declined 1.7% (down 18.2%). China’s Shanghai Exchange dropped 4.7% (down 17.5%). Brazil’s benchmark dollar bond yields jumped 14 bps to 3.77%, while Mexico's benchmark bond yields declined 5 bps to 3.46%.
Freddie Mac 30-year fixed mortgage rates dipped one basis point to 4.11% (down 10bps y-o-y). Fifteen-year fixed rates added a basis point to 3.38% (down 26bps y-o-y). One-year ARMs rose 4 bps to 2.94% (down 36bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 2 bps to 4.85% (down 39bps y-o-y).
Federal Reserve Credit declined $2.1bn to $2.838 TN. Fed Credit was up $430bn y-t-d and $554bn from a year ago, or 24%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 10/19) increased $5.1bn to $3.409 TN (5-wk decline of $66.4bn). "Custody holdings" were up $58.4bn y-t-d and $127.6bn from a year ago, or 3.9%.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $1.272 TN y-o-y, or 14.2% to $10.222 TN. Over two years, reserves were $2.816 TN higher, for 38% growth.
M2 (narrow) "money" supply rose $16.6bn to $9.621 TN. "Narrow money" has expanded at an 11.3% pace y-t-d and 10.2% over the past year. For the week, Currency added $0.6bn. Demand and Checkable Deposits sank $40.8bn, while Savings Deposits jumped $57.7bn. Small Denominated Deposits declined $3.0bn. Retail Money Funds increased $2.0bn.
Total Money Fund assets slipped $2.0bn last week to $2.634 TN. Money Fund assets were down $176bn y-t-d and $147bn over the past year, or 5.3%.
Total Commercial Paper outstanding dropped another $17.0bn (14-wk decline of $287bn) to $949bn. CP was down $22bn y-t-d, with a one-year decline of $196bn.
Global Credit Market Watch:
October 21 - Reuters: “Ever larger euro zone rescue packages risk causing more damage than the crisis they are trying to extinguish, European Central Bank policymaker Juergen Stark said on Friday ahead of a weekend summit aimed at tackling the bloc's debt crisis. ‘The financing that is provided is just to buy time, but to buy time to what end? (With) ever larger packages, there is a risk that water damage is much larger than damage done by the fire,’ he told a conference…”
October 21 – Wall Street Journal (Stephen Fidler): “Euro-zone governments still seemed a long way on Thursday night, ahead of two expected summits over the next week, from finding a way to boost the clout of the euro-zone's bailout fund without triggering unintended consequences that could worsen their crisis. In an interview Thursday, Olli Rehn, the European Union's economics commissioner, said that governments still had to make ‘basic choices’ on maximizing the firepower of the European Financial Stability Facility.”
October 21 – Bloomberg (Brian Parkin and Rainer Buergin): “German officials said there are several possible ways of involving the International Monetary Fund to boost the European Financial Stability Facility’s firepower to fight the euro-region debt crisis. Germany favors using an insurance model to leverage EFSF funds or deepening cooperation with the IMF to expand EFSF resources, a German government official said… Euro region leaders must hold talks with the IMF to discuss its involvement in EFSF operations and can’t on their own take any decisions on the subject at their Oct. 23 and Oct. 26 summits in Brussels, the official said.”
October 21 – Bloomberg (G. Neuger and Stephanie Bodoni): “European finance ministers grappled with an assessment that Greece’s economy is deteriorating as they began a six-day battle to stave off a default and shield banks from the fallout. A review by European and International Monetary Fund experts showed Greek bond writedowns of 60% and more official aid would still leave the country with a debt load bigger than its annual economic output by 2020. Finance ministers braced for ‘tough’ talks at a crisis- management marathon running until Oct. 26, as pressure mounted to stamp out debt woes that threaten to infect the global economy.”
October 20 – Bloomberg (Rainer Buergin and Brian Parkin): “Europe’s new bailout fund may be authorized to provide credit lines amounting to as much as 10% of a country’s economy, a draft document shows. Some German lawmakers said that would put an intolerable burden on taxpayers. The enhanced fund, called the European Financial Stability Facility, may be able to offer loans to countries ‘before they face difficulties raising funds’ in bond markets, the draft guidelines obtained by Bloomberg News show. The document also says that the EFSF, which is authorized to buy government debt, should buy no more bonds in the primary market than private investors.”
October 21 – Bloomberg (Brian Parkin): “Boosting the firepower of Europe’s bailout fund, known as the European Financial Stability Facility, won’t push up Germany’s current level of agreed guarantees of 211 billion euros, Finance Ministry spokeswoman Silke Bruns told reporters…”
October 20 – Bloomberg (Kati Pohjanpalo): “European plans to boost the region’s temporary rescue fund through leverage disguise the potential costs and underestimate the risk of losses, the head of Finland’s parliament finance committee said. ‘I’m worried about the tendency to continually try and move toward mechanisms with small direct cost, but increased risk,’ Kimmo Sasi, who heads Finland’s parliament finance committee and advises lawmakers how to vote on European rescue policy, said… ‘If insurance is given, one must understand the risk could be realized and not think that the risk would be any smaller than in loans or guarantees.’”
October 20 – Bloomberg (Anabela Reis): “Portuguese banks are being squeezed by demands that they boost capital as the government’s effort to reduce the deficit deepens the recession. Echoing the struggles of their Greek counterparts, Portuguese lenders are unable to tap the financial markets for funds and hobbled by debt-laden state companies. At the same time, international regulators are forcing them to raise capital as they’re dependent on the European Central Bank for funds. ‘Being Portuguese is what is penalizing their financing at the moment,’ said Filipe Silva, a fund manager at Banco Carregosa in Oporto, Portugal. ‘Financing will only get better when the state is able to give out signs of credibility.’”
October 20 – Bloomberg (Vivek Shankar and Boris Cerni): “Slovenia, like fellow euro members Spain and Italy, had its sovereign credit ratings cut by Standard & Poor’s due to a deteriorating fiscal outlook as Europe’s debt crisis takes its toll. The long-term rating of the Alpine nation that adopted the euro in 2007 was reduced to AA- from AA…”
Global Bubble Watch:
October 21 – Wall Street Journal (Jon Hilsenrath): “Federal Reserve officials are starting to build a case for a new program of buying mortgage-backed securities to boost the ailing economy, though they appear unlikely to move swiftly. The idea would be to target any new efforts by the central bank at the parts of the economy that are most severely impeding a recovery—the housing and mortgage markets—by working to push down mortgage rates. Lower mortgage rates, in turn, could encourage more home buying and mortgage-refinancing, and help the economy by freeing up cash for consumers to spend on other goods and services. Mortgage rates are already very low, but some Fed officials believe they might be pushed lower. Moreover, Fed officials believe their past purchase programs helped to lift stock markets, by driving investors from low-risk investments toward riskier investments.”
October 21 – Bloomberg (Michael Patterson and Selcuk Gokoluk): “Companies in emerging markets have record amounts of international debt coming due just as financing costs rise to a 16-month high and their currencies sink the most since 2008. Businesses in the 10 biggest developing economies have at least $54 billion of foreign-currency bonds maturing in the next 12 months, the most since Bloomberg began compiling the data in 1999. The market for new international debt issues dried up after emerging-nation currencies tumbled 11 percent from this year’s high…”
October 19 – Bloomberg (Tim Catts): “China’s purchases of bonds issued by American companies surged in August to the highest level in more than three years as the biggest foreign lender to the U.S. diversified its holdings amid record-low Treasury yields. … China’s net purchases of U.S. corporate bonds accelerated to $1.79 billion, the most since buying reached $3.82 billion in June 2008… Chinese holdings of Treasuries fell by the most in at least a decade during the month.”
Currency Watch:
The U.S. dollar index slipped 0.3% this week to 76.40 (down 3.3% y-t-d). For the week on the upside, the Japanese yen increased 1.2%, the Swiss franc 1.0%, the British pound 0.8%, the South Korean won 0.8%, the Swedish krona 0.5%, the Australian dollar 0.4%, the Canadian dollar 0.3%, and the euro 0.1%. On the downside, the Mexican peso declined 3.2%, the South African rand 2.6%, the Brazilian real 2.4%, the Singapore dollar 0.6%, and the New Zealand dollar 0.3%.
Commodities and Food Watch:
The CRB index fell 1.9% this week (down 6.5% y-t-d). The Goldman Sachs Commodities Index declined 1.1% (down 0.2%). Spot Gold lost 2.3% to $1,642 (up 15.6%). Silver dropped 3.0% to $31.19 (up 0.9%). December Crude added 40 cents to $87.40 (down 4%). November Gasoline sank 5.0% (up 9%), and November Natural Gas fell 2.0% (down 18%). December Copper dropped 5.4% (down 27%). December Wheat rallied 1.5% (down 20%), and December Corn gained 1.4% (up 3%).
China Bubble Watch:
October 19 – Bloomberg: “China’s banking regulator sought to ease concerns about the health of the nation’s lenders and the informal lending market, vowing to control risks and stressing measures already taken by the government are showing results. Ratings companies and investment analysts have ‘underestimated’ the nation’s determination and ability to carry out reforms, and are ‘talking down’ the nation’s economy and banking industry, Chairman Liu Mingkang said… The regulator is paying ‘great attention,’ Liu said.”
Japan Watch:
October 21 – Bloomberg (Yumi Ikeda, Monami Yui and Toru Fujioka): “Japan will sell about 800 billion yen ($10.4 billion) of additional government debt to the market this fiscal year to fund earthquake reconstruction and help companies cope with a strong yen, the Ministry of Finance said. The total for investors such as banks and life insurers will be a record 145.7 trillion yen…”
India Watch:
October 21 – Bloomberg (V. Ramakrishnan): “India’s 10-year bonds fell, pushing yields to a three-year high, on concern accelerating inflation will spur the central bank to boost borrowing costs next week.”
Asia Watch:
October 20 – Bloomberg (Chinmei Sung): “Taiwan’s export orders increased by the least in two years in September, indicating the export-led economy remains under pressure from a faltering global recovery. Orders… climbed 2.72% from a year earlier, after a 5.26% gain in August…”
Latin America Watch:
October 19 – Bloomberg (Matthew Bristow): “Brazil’s central bank cut borrowing costs by half a point for a second straight meeting, as growth in Latin America’s biggest economy slows amid Europe’s sovereign-debt crisis. The bank’s board, led by President Alexandre Tombini, voted unanimously to reduce the benchmark Selic rate to 11.5% from 12%...”
Unbalanced Global Economy Watch:
October 21 – Bloomberg (Theophilos Argitis): “Canada’s annual inflation rate unexpectedly accelerated in September, and a measure of price increases that factors out volatile items reached the highest in almost three years… The consumer price index increased 3.2% in September from a year earlier…”
October 21 – Bloomberg (Jennifer Ryan): “Government debt in the euro area swelled to a record last year, complicating the efforts of nations in the region to stem Europe’s fiscal crisis. All 16 countries that were using the euro last year increased their debt load, boosting the region’s average to 85.4% of gross domestic product from 79.8% in 2009…”
U.S Bubble Economy Watch:
October 20 – Bloomberg (Frank Bass and Timothy R. Homan): “Federal employees whose compensation averages more than $126,000 and the nation’s greatest concentration of lawyers helped Washington edge out San Jose as the wealthiest U.S. metropolitan area, government data show. The U.S. capital has swapped top spots with Silicon Valley… with the typical household in the Washington metro area earning $84,523 last year. The national median income for 2010 was $50,046. The figures demonstrate how the nation’s political and financial classes are prospering as the economy struggles with unemployment above 9% and thousands of Americans protest in the streets against income disparity, said Kevin Zeese, director of Prosperity Agenda… ‘There’s a gap that’s isolating Washington from the reality of the rest of the country,’ Zeese said. ‘They just get more and more out of touch.’”
October 20 – New York Times (Michael Cooper): “The warning by the State of Washington’s economist was unusually blunt, a far cry from the kind of dry, green-eyeshade language that often cloaks such announcements: ‘We are in the fragile aftermath of the Great Recession, where a return to normalcy seems like a mirage in the desert — the closer we get to it, the further it moves away.’ The upshot: Washington’s weaker-than-expected tax collections have led the state to project that it will take in $2 billion less than it expected when its two-year budget took effect in July. Gov. Christine Gregoire… called a special legislative session for next month so the state, which has cut $10 billion in spending since the recession began, can weigh more cuts. Other large states face similar problems… Florida, California, New York and New Jersey have all seen their tax collections come in below expectations in recent months…”
October 19 – USA Today (Dennis Cauchon): “Students and workers seeking retraining are borrowing extraordinary amounts of money through federal loan programs, potentially putting a huge burden on the backs of young people looking for jobs and trying to start careers. Students are borrowing twice what they did a decade ago after adjusting for inflation, the College Board reports. Total outstanding debt has doubled in the past five years — a sharp contrast to consumers reducing what's owed on home loans and credit cards.”
Central Bank Watch:
October 21 – Bloomberg (Scott Lanman and Jennifer Oldham): “Federal Reserve Vice Chairman Janet Yellen said a third round of large-scale securities purchases might become warranted if necessary to boost a U.S. economy challenged by unemployment and financial turmoil. The central bank should also give ‘careful consideration’ to Chicago Fed President Charles Evans’s proposal to tie the near-zero interest-rate pledge to specific levels of unemployment and inflation, Yellen said…”
October 20 – Bloomberg (Mark Bentley and Steve Bryant): “Turkey’s central bank raised the overnight lending rate and dropped a reference to reducing its benchmark rate in future, boosting the lira. The central bank in Ankara increased the overnight rate to 12.5% from 9% and kept its key one-week repo rate at 5.75%...”
Fiscal Watch:
October 20 – New York Times (Robert Pear): “Social Security recipients will get a 3.6% increase in benefits next year to help keep up with inflation, the first such cost-of-living adjustment in three years… The automatic increase will begin with payments that go to nearly 55 million Social Security beneficiaries in January.”
Real Estate Watch:
October 19 – Bloomberg (David M. Levitt, Hui-yong Yu and Dan Levy): “The U.S. commercial real estate market has slowed in the past three months as the sputtering economy and a pullback in debt financing limited deals, cooling a recovery from Washington to California. A total of $49.8 billion of commercial property changed hands in the third quarter, down from $58.5 billion in the previous three months… The 15% decline is the second-biggest since the first quarter of 2009…”
Speculation Watch:
October 20 – Bloomberg (Michael J. Moore): “The biggest Wall Street firms posted their worst quarter in both trading and investment banking since the depths of the financial crisis as they face questions about the future of their business. JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley posted $13.5 billion in trading revenue minus accounting gains for the third quarter, down 35% from a year earlier. Investment- banking revenue plunged 41% from the second quarter to $4.47 billion.”
For the week, the S&P500 gained 1.1% (down 1.5% y-t-d), and the Dow rose 1.4% (up 2.0%). The Banks jumped 2.4% (down 25.5%), and the Broker/Dealers rallied 1.7% (down 27.7%). The Morgan Stanley Cyclicals rose 1.8% (down 15.3%), and the Transports jumped 2.6% (down 5.7%). The Morgan Stanley Consumer index gained 1.6% (down 2.8%), and the Utilities surged 2.6% (up 10.6%). The S&P 400 Mid-Caps gained 0.6% (down 5.1%), while the small cap Russell 2000 was little changed (down 9.1%). The Nasdaq100 declined 1.5% (up 5.3%), and the Morgan Stanley High Tech index slipped 0.8% (down 5.6%). The Semiconductors fell 2.3% (down 9.6%). The InteractiveWeek Internet index declined 1.3% (down 5.1%). The Biotechs gained 0.9% (down 10.9%). With bullion down $38, the HUI gold index was slammed for 6.9% (down 9.7%).
One-month Treasury bill rates ended the week at zero and three-month bills ended at one basis point. Two-year government yields were little changed at 0.26%. Five-year T-note yields ended the week down 5 bps to 1.06%. Ten-year yields declined 4 bps to 2.21%. Long bond yields rose 3 bps to 3.26%. Benchmark Fannie MBS yields declined 4 bps to 3.30%. The spread between 10-year Treasury yields and benchmark MBS yields was little changed at 109 bps. Agency 10-yr debt spreads increased one to negative 3 bps. The implied yield on December 2012 eurodollar futures declined a basis point to 0.675%. The 10-year dollar swap spread increased one to 20 bps. The 30-year swap spread increased one to negative 22 bps. Corporate bond spreads were mixed. An index of investment grade bond risk rose one to 131 bps. An index of junk bond risk declined 4 bps to 717 bps.
Debt issuance remains light. Investment-grade issuance this week included Sonoco Products $850 million and Mosaic $750 million.
Junk bond funds saw inflows surge to $2.27bn (from Lipper). Junk issuance included JM Huber $225 million.
Convertible debt issuers included Nuance Communications $600 million and Regeneron Pharmaceutical $400 million.
International dollar bond issuers included European Investment Bank $3.0bn, Brazil Electrobras $1.75bn, Pernod-Ricard $1.5bn, Korea National Oil $1.0bn, Export Development Canada $1.0bn, Turkey $1.0bn and Inter-American Development Bank $500 million.
Greek two-year yields ended the week up 294 bps to 73.13% (up 6,089bps y-t-d). Greek 10-year yields rose 10 bps to 23.10% (up 1,064bps). German bund yields declined 9 bps to 2.10% (down 86bps), while French yields rose 11bps to 3.24% (spread to bunds widened 20bps to 113 bps). U.K. 10-year gilt yields declined 8 bps this week to 2.53% (down 98bps). Italian 10-yr yields rose 10 bps to 5.88% (up 107bps), and Spain's 10-year yields surged 23 bps to 5.45% (down one basis point). Ten-year Portuguese yields surged 62 bps to 11.95% (up 537bps). Irish yields rose 9 bps to 8.13% (down 92bps). The German DAX equities index was little changed (down 13.6% y-t-d). Japanese 10-year "JGB" yields declined one basis point to 1.005% (down 12bps). Japan's Nikkei slipped 0.8% (down 15.2%). Emerging markets were mixed. For the week, Brazil's Bovespa equities index increased 0.4% (down 20.3%), and the Mexico's Bolsa rose 0.5% (down 9.2%). South Korea's Kospi index inched 0.2% higher (down 10.4%). India’s Sensex equities index declined 1.7% (down 18.2%). China’s Shanghai Exchange dropped 4.7% (down 17.5%). Brazil’s benchmark dollar bond yields jumped 14 bps to 3.77%, while Mexico's benchmark bond yields declined 5 bps to 3.46%.
Freddie Mac 30-year fixed mortgage rates dipped one basis point to 4.11% (down 10bps y-o-y). Fifteen-year fixed rates added a basis point to 3.38% (down 26bps y-o-y). One-year ARMs rose 4 bps to 2.94% (down 36bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 2 bps to 4.85% (down 39bps y-o-y).
Federal Reserve Credit declined $2.1bn to $2.838 TN. Fed Credit was up $430bn y-t-d and $554bn from a year ago, or 24%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 10/19) increased $5.1bn to $3.409 TN (5-wk decline of $66.4bn). "Custody holdings" were up $58.4bn y-t-d and $127.6bn from a year ago, or 3.9%.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $1.272 TN y-o-y, or 14.2% to $10.222 TN. Over two years, reserves were $2.816 TN higher, for 38% growth.
M2 (narrow) "money" supply rose $16.6bn to $9.621 TN. "Narrow money" has expanded at an 11.3% pace y-t-d and 10.2% over the past year. For the week, Currency added $0.6bn. Demand and Checkable Deposits sank $40.8bn, while Savings Deposits jumped $57.7bn. Small Denominated Deposits declined $3.0bn. Retail Money Funds increased $2.0bn.
Total Money Fund assets slipped $2.0bn last week to $2.634 TN. Money Fund assets were down $176bn y-t-d and $147bn over the past year, or 5.3%.
Total Commercial Paper outstanding dropped another $17.0bn (14-wk decline of $287bn) to $949bn. CP was down $22bn y-t-d, with a one-year decline of $196bn.
Global Credit Market Watch:
October 21 - Reuters: “Ever larger euro zone rescue packages risk causing more damage than the crisis they are trying to extinguish, European Central Bank policymaker Juergen Stark said on Friday ahead of a weekend summit aimed at tackling the bloc's debt crisis. ‘The financing that is provided is just to buy time, but to buy time to what end? (With) ever larger packages, there is a risk that water damage is much larger than damage done by the fire,’ he told a conference…”
October 21 – Wall Street Journal (Stephen Fidler): “Euro-zone governments still seemed a long way on Thursday night, ahead of two expected summits over the next week, from finding a way to boost the clout of the euro-zone's bailout fund without triggering unintended consequences that could worsen their crisis. In an interview Thursday, Olli Rehn, the European Union's economics commissioner, said that governments still had to make ‘basic choices’ on maximizing the firepower of the European Financial Stability Facility.”
October 21 – Bloomberg (Brian Parkin and Rainer Buergin): “German officials said there are several possible ways of involving the International Monetary Fund to boost the European Financial Stability Facility’s firepower to fight the euro-region debt crisis. Germany favors using an insurance model to leverage EFSF funds or deepening cooperation with the IMF to expand EFSF resources, a German government official said… Euro region leaders must hold talks with the IMF to discuss its involvement in EFSF operations and can’t on their own take any decisions on the subject at their Oct. 23 and Oct. 26 summits in Brussels, the official said.”
October 21 – Bloomberg (G. Neuger and Stephanie Bodoni): “European finance ministers grappled with an assessment that Greece’s economy is deteriorating as they began a six-day battle to stave off a default and shield banks from the fallout. A review by European and International Monetary Fund experts showed Greek bond writedowns of 60% and more official aid would still leave the country with a debt load bigger than its annual economic output by 2020. Finance ministers braced for ‘tough’ talks at a crisis- management marathon running until Oct. 26, as pressure mounted to stamp out debt woes that threaten to infect the global economy.”
October 20 – Bloomberg (Rainer Buergin and Brian Parkin): “Europe’s new bailout fund may be authorized to provide credit lines amounting to as much as 10% of a country’s economy, a draft document shows. Some German lawmakers said that would put an intolerable burden on taxpayers. The enhanced fund, called the European Financial Stability Facility, may be able to offer loans to countries ‘before they face difficulties raising funds’ in bond markets, the draft guidelines obtained by Bloomberg News show. The document also says that the EFSF, which is authorized to buy government debt, should buy no more bonds in the primary market than private investors.”
October 21 – Bloomberg (Brian Parkin): “Boosting the firepower of Europe’s bailout fund, known as the European Financial Stability Facility, won’t push up Germany’s current level of agreed guarantees of 211 billion euros, Finance Ministry spokeswoman Silke Bruns told reporters…”
October 20 – Bloomberg (Kati Pohjanpalo): “European plans to boost the region’s temporary rescue fund through leverage disguise the potential costs and underestimate the risk of losses, the head of Finland’s parliament finance committee said. ‘I’m worried about the tendency to continually try and move toward mechanisms with small direct cost, but increased risk,’ Kimmo Sasi, who heads Finland’s parliament finance committee and advises lawmakers how to vote on European rescue policy, said… ‘If insurance is given, one must understand the risk could be realized and not think that the risk would be any smaller than in loans or guarantees.’”
October 20 – Bloomberg (Anabela Reis): “Portuguese banks are being squeezed by demands that they boost capital as the government’s effort to reduce the deficit deepens the recession. Echoing the struggles of their Greek counterparts, Portuguese lenders are unable to tap the financial markets for funds and hobbled by debt-laden state companies. At the same time, international regulators are forcing them to raise capital as they’re dependent on the European Central Bank for funds. ‘Being Portuguese is what is penalizing their financing at the moment,’ said Filipe Silva, a fund manager at Banco Carregosa in Oporto, Portugal. ‘Financing will only get better when the state is able to give out signs of credibility.’”
October 20 – Bloomberg (Vivek Shankar and Boris Cerni): “Slovenia, like fellow euro members Spain and Italy, had its sovereign credit ratings cut by Standard & Poor’s due to a deteriorating fiscal outlook as Europe’s debt crisis takes its toll. The long-term rating of the Alpine nation that adopted the euro in 2007 was reduced to AA- from AA…”
Global Bubble Watch:
October 21 – Wall Street Journal (Jon Hilsenrath): “Federal Reserve officials are starting to build a case for a new program of buying mortgage-backed securities to boost the ailing economy, though they appear unlikely to move swiftly. The idea would be to target any new efforts by the central bank at the parts of the economy that are most severely impeding a recovery—the housing and mortgage markets—by working to push down mortgage rates. Lower mortgage rates, in turn, could encourage more home buying and mortgage-refinancing, and help the economy by freeing up cash for consumers to spend on other goods and services. Mortgage rates are already very low, but some Fed officials believe they might be pushed lower. Moreover, Fed officials believe their past purchase programs helped to lift stock markets, by driving investors from low-risk investments toward riskier investments.”
October 21 – Bloomberg (Michael Patterson and Selcuk Gokoluk): “Companies in emerging markets have record amounts of international debt coming due just as financing costs rise to a 16-month high and their currencies sink the most since 2008. Businesses in the 10 biggest developing economies have at least $54 billion of foreign-currency bonds maturing in the next 12 months, the most since Bloomberg began compiling the data in 1999. The market for new international debt issues dried up after emerging-nation currencies tumbled 11 percent from this year’s high…”
October 19 – Bloomberg (Tim Catts): “China’s purchases of bonds issued by American companies surged in August to the highest level in more than three years as the biggest foreign lender to the U.S. diversified its holdings amid record-low Treasury yields. … China’s net purchases of U.S. corporate bonds accelerated to $1.79 billion, the most since buying reached $3.82 billion in June 2008… Chinese holdings of Treasuries fell by the most in at least a decade during the month.”
Currency Watch:
The U.S. dollar index slipped 0.3% this week to 76.40 (down 3.3% y-t-d). For the week on the upside, the Japanese yen increased 1.2%, the Swiss franc 1.0%, the British pound 0.8%, the South Korean won 0.8%, the Swedish krona 0.5%, the Australian dollar 0.4%, the Canadian dollar 0.3%, and the euro 0.1%. On the downside, the Mexican peso declined 3.2%, the South African rand 2.6%, the Brazilian real 2.4%, the Singapore dollar 0.6%, and the New Zealand dollar 0.3%.
Commodities and Food Watch:
The CRB index fell 1.9% this week (down 6.5% y-t-d). The Goldman Sachs Commodities Index declined 1.1% (down 0.2%). Spot Gold lost 2.3% to $1,642 (up 15.6%). Silver dropped 3.0% to $31.19 (up 0.9%). December Crude added 40 cents to $87.40 (down 4%). November Gasoline sank 5.0% (up 9%), and November Natural Gas fell 2.0% (down 18%). December Copper dropped 5.4% (down 27%). December Wheat rallied 1.5% (down 20%), and December Corn gained 1.4% (up 3%).
China Bubble Watch:
October 19 – Bloomberg: “China’s banking regulator sought to ease concerns about the health of the nation’s lenders and the informal lending market, vowing to control risks and stressing measures already taken by the government are showing results. Ratings companies and investment analysts have ‘underestimated’ the nation’s determination and ability to carry out reforms, and are ‘talking down’ the nation’s economy and banking industry, Chairman Liu Mingkang said… The regulator is paying ‘great attention,’ Liu said.”
Japan Watch:
October 21 – Bloomberg (Yumi Ikeda, Monami Yui and Toru Fujioka): “Japan will sell about 800 billion yen ($10.4 billion) of additional government debt to the market this fiscal year to fund earthquake reconstruction and help companies cope with a strong yen, the Ministry of Finance said. The total for investors such as banks and life insurers will be a record 145.7 trillion yen…”
India Watch:
October 21 – Bloomberg (V. Ramakrishnan): “India’s 10-year bonds fell, pushing yields to a three-year high, on concern accelerating inflation will spur the central bank to boost borrowing costs next week.”
Asia Watch:
October 20 – Bloomberg (Chinmei Sung): “Taiwan’s export orders increased by the least in two years in September, indicating the export-led economy remains under pressure from a faltering global recovery. Orders… climbed 2.72% from a year earlier, after a 5.26% gain in August…”
Latin America Watch:
October 19 – Bloomberg (Matthew Bristow): “Brazil’s central bank cut borrowing costs by half a point for a second straight meeting, as growth in Latin America’s biggest economy slows amid Europe’s sovereign-debt crisis. The bank’s board, led by President Alexandre Tombini, voted unanimously to reduce the benchmark Selic rate to 11.5% from 12%...”
Unbalanced Global Economy Watch:
October 21 – Bloomberg (Theophilos Argitis): “Canada’s annual inflation rate unexpectedly accelerated in September, and a measure of price increases that factors out volatile items reached the highest in almost three years… The consumer price index increased 3.2% in September from a year earlier…”
October 21 – Bloomberg (Jennifer Ryan): “Government debt in the euro area swelled to a record last year, complicating the efforts of nations in the region to stem Europe’s fiscal crisis. All 16 countries that were using the euro last year increased their debt load, boosting the region’s average to 85.4% of gross domestic product from 79.8% in 2009…”
U.S Bubble Economy Watch:
October 20 – Bloomberg (Frank Bass and Timothy R. Homan): “Federal employees whose compensation averages more than $126,000 and the nation’s greatest concentration of lawyers helped Washington edge out San Jose as the wealthiest U.S. metropolitan area, government data show. The U.S. capital has swapped top spots with Silicon Valley… with the typical household in the Washington metro area earning $84,523 last year. The national median income for 2010 was $50,046. The figures demonstrate how the nation’s political and financial classes are prospering as the economy struggles with unemployment above 9% and thousands of Americans protest in the streets against income disparity, said Kevin Zeese, director of Prosperity Agenda… ‘There’s a gap that’s isolating Washington from the reality of the rest of the country,’ Zeese said. ‘They just get more and more out of touch.’”
October 20 – New York Times (Michael Cooper): “The warning by the State of Washington’s economist was unusually blunt, a far cry from the kind of dry, green-eyeshade language that often cloaks such announcements: ‘We are in the fragile aftermath of the Great Recession, where a return to normalcy seems like a mirage in the desert — the closer we get to it, the further it moves away.’ The upshot: Washington’s weaker-than-expected tax collections have led the state to project that it will take in $2 billion less than it expected when its two-year budget took effect in July. Gov. Christine Gregoire… called a special legislative session for next month so the state, which has cut $10 billion in spending since the recession began, can weigh more cuts. Other large states face similar problems… Florida, California, New York and New Jersey have all seen their tax collections come in below expectations in recent months…”
October 19 – USA Today (Dennis Cauchon): “Students and workers seeking retraining are borrowing extraordinary amounts of money through federal loan programs, potentially putting a huge burden on the backs of young people looking for jobs and trying to start careers. Students are borrowing twice what they did a decade ago after adjusting for inflation, the College Board reports. Total outstanding debt has doubled in the past five years — a sharp contrast to consumers reducing what's owed on home loans and credit cards.”
Central Bank Watch:
October 21 – Bloomberg (Scott Lanman and Jennifer Oldham): “Federal Reserve Vice Chairman Janet Yellen said a third round of large-scale securities purchases might become warranted if necessary to boost a U.S. economy challenged by unemployment and financial turmoil. The central bank should also give ‘careful consideration’ to Chicago Fed President Charles Evans’s proposal to tie the near-zero interest-rate pledge to specific levels of unemployment and inflation, Yellen said…”
October 20 – Bloomberg (Mark Bentley and Steve Bryant): “Turkey’s central bank raised the overnight lending rate and dropped a reference to reducing its benchmark rate in future, boosting the lira. The central bank in Ankara increased the overnight rate to 12.5% from 9% and kept its key one-week repo rate at 5.75%...”
Fiscal Watch:
October 20 – New York Times (Robert Pear): “Social Security recipients will get a 3.6% increase in benefits next year to help keep up with inflation, the first such cost-of-living adjustment in three years… The automatic increase will begin with payments that go to nearly 55 million Social Security beneficiaries in January.”
Real Estate Watch:
October 19 – Bloomberg (David M. Levitt, Hui-yong Yu and Dan Levy): “The U.S. commercial real estate market has slowed in the past three months as the sputtering economy and a pullback in debt financing limited deals, cooling a recovery from Washington to California. A total of $49.8 billion of commercial property changed hands in the third quarter, down from $58.5 billion in the previous three months… The 15% decline is the second-biggest since the first quarter of 2009…”
Speculation Watch:
October 20 – Bloomberg (Michael J. Moore): “The biggest Wall Street firms posted their worst quarter in both trading and investment banking since the depths of the financial crisis as they face questions about the future of their business. JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley posted $13.5 billion in trading revenue minus accounting gains for the third quarter, down 35% from a year earlier. Investment- banking revenue plunged 41% from the second quarter to $4.47 billion.”