Saturday, November 8, 2014

01/13/2012 The Year of the Central Bank *

The start of a new market year is, undoubtedly, analytically intriguing. One wouldn’t think that the calendar should have such impact. Yet January arrives with a clean performance slate and an opportunity for new, perhaps not as unsullied, market dynamics. What’s the new game? The previous year’s underperformers can rather abruptly be transformed into darlings of the New Year (especially if those stocks have large short positions). The general market also tends to benefit from strong seasonal inflows. And if stocks can charge out of the blocks briskly, a plethora of bullish news and analysis is sure to follow.

Such a fluid backdrop is conducive to abrupt changes in analytical focus – a new prevailing “analytical regime” in a capricious marketplace. Last year’s now stale worries are easily dismissed, as a confluence of more constructive market trading action and news flow supports a major boost to bullish market sentiment. A short squeeze (buying to reverse short positions) – in positions that tended to be consistent with prior market focus/worries – works wonders in bolstering the perception of a more optimistic analytical outlook and diminished risk profile throughout the marketplace.

Despite today’s losses, the Banks (KBW Bank Index) have gained 10.3% in the first nine sessions of 2012. Bank of America is up 18.9%, Citigroup 16.8% and Morgan Stanley 9.9%. The Morgan Stanley Cyclical index has posted a quick 7.9% advance. After nervously following the euro tick for tick late in 2011, the marketplace has adopted a view that euro weakness is no longer something to fear. Indeed, the new analytical regime holds that a weaker euro is a welcomed consequence of the ECB having taken the type of decisive action required to finally resolve the European debt crisis. The ECB’s massive ($620bn) Long-Term Refinancing Operation (LTRO) has for now effectively contained the forces of crisis contagion. A weak euro is indicative of liquidity abundance supportive of European sovereign debt, the banking system and global risk markets more generally, at least according to the bullish perspective.

Here at home, the Fed has further solidified market complacency and emboldened risk-taking with talk of additional quantitative easing (QE3). Importantly, comments from members of the Federal Open Market Committee have been interpreted by the markets as suggesting that the Fed is ready to move forward with another major round of mortgage-backed securities (MBS) purchases, irrespective of the economic data or the market liquidity backdrop. It is my belief that the Fed is quite worried about Europe, global de-risking/de-leveraging, and the strengthened dollar. Especially if the euro faces additional selling pressure, the Fed will talk – and at some point implement- additional quantitative ease in hopes of dampening dollar bullish sentiment. With more Treasury purchases posing significant political risk, they’re cleverly building a case for buying MBS.

The backdrop has made it easy to forget that the European debt crisis was spiraling out of control just a few short weeks ago. European, U.S. and global equities have rallied to begin the New Year. Risk markets have performed well, and myriad measures of system risk have been flashing the “all’s clear.” There remain lingering worries that European banks might sit with their new liquidity in ECB deposits instead of using it to support sovereign debt markets. These fears were seemingly put to rest earlier this week when Spain’s banks were huge buyers at an oversubscribed Spanish debt auction. Italy and Spain successfully made it through a round of large debt auctions, with Italian and Spanish 10-year yields sinking to intra-day lows of 6.44% and 5.05% respectively (short-term borrowing costs have dropped dramatically). The collapse in Italy’s and Spain’s funding costs seemed to solidify the bullish view that European crisis risk could now be disregarded. The euro even rallied 1% yesterday.

Well, the euro today sunk 1.1% today to the lowest level since August 2010, as a number of developments pushed European risk back into the mix. First, Greek debt restructuring talks broke down. From the Institute of International Finance (IIF), the group representing the banks and other financial institutions holding Greek debt: “Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach…” Debt talks “have not produced a constructive response.” Negotiations have only become more complex over time, as Greece’s situation has further deteriorated and the hedge fund community has become a bigger operator in Greek debt. It is, as well, worth noting that two senior members of German Chancellor Merkel’s Christian Democratic Union party suggested this week that a Greek exit from the euro would no longer pose unbearable systemic risk.

And there was, of course, today’s news of imminent European sovereign debt downgrades from Standard & Poor’s. After the markets' close, Standard & Poor’s confirmed that France and Austria lost their “AAA” ratings. Italy, Spain and Portugal each saw their sovereign ratings cut two notches. Germany retained its “AAA,” although the rapidly depleting ranks of “AAA” does not bode well for the ratings (or size) of the European Financial Stability Facility (EFSF).

The Fed’s aggressive monetary policy actions back in 2007 and early-’08 failed to improve underlying U.S. mortgage and financial sector debt. I have argued that the Fed’s moves, and resulting added market distortions and excesses, likely only augmented systemic fragilities. While the markets have been focused on extraordinary measures from the ECB, S&P’s downgrades provide a reminder that the deterioration in European debt fundamentals runs unabated. Despite extraordinary ECB liquidity measures, the European debt crisis is not yet under control - let alone on course for resolution.

Everyone knows “Don’t fight the Fed.” Yet fighting the ECB has been a notably gainful exercise in the marketplace. The newfound 2012 bullish view holds that a now Fed-like Draghi ECB will be a much more formidable combatant. And with another huge round of ECB LTRO coming next month, and the Fed with an itchy trigger finger for QE3, the bullish analytical regime to begin 2012 is very much premised on the ongoing command of central banks over market forces.

My view holds that the ECB is on thin ice; the euro is on thin ice; and the European Credit system remains on thin ice. I doubt the ECB is capable of wresting control of the debt crisis from powerful market forces for any significant length of time. I appreciate that the markets have gravitated to a much more optimistic view, much to the benefit of global risk markets and overall sentiment. Yet this creates vulnerability to a return of risk aversion in the event that the marketplace begins to back away from bullish premises. My presumption is that the more sophisticated financial operators recognize ongoing system fragilities, but at the same time likely believe the LTRO facilities have bought some time. Speculators have grown comfortable with the game of using policymaker time purchases to pounce on those bearishly positioned. This dynamic incites “rip your face off” rallies, heightened market instability and, importantly, susceptibility to destabilizing market reversals and problematic air pockets.

The year 2011 proved a major setback for the view that policymakers had global debt crisis dynamics under control. Indeed, I would argue that the European sovereign debt crisis provided a historical inflection point with respect to the capacity for fiscal and monetary policy intervention to hold the downside of a Credit bust at bay. I expect circumstances in 2012 to confirm this dynamic of waning policy efficacy, but on a more global basis. Last year, markets witnessed how policy moves in Europe too often came with unintended consequences. The ECB’s LTRO facility has shifted sentiment back in favor of central bank policy power and effectiveness. But for how long?

I could envisage a scenario where euro weakness tightens the screws on the ECB. If capital flight has become a serious issue, ECB liquidity operations could become increasingly destabilizing. The markets are already anticipating the positive effects of LTRO part II scheduled for late-February. A faltering euro might have the Germans (in particular) questioning the merits of another open-ended liquidity facility. And there could be dissention as well in the ranks of the FOMC. Another round of MBS purchases in the face of buoyant risk markets, improving economic, labor and housing markets, and record low mortgage borrowing costs risks a decisive blow to already-depleted Federal Reserve credibility.

Granted, it’s only been two weeks. But markets are sure placing a great deal of faith in policymakers, in a year I expect such faith to be further undermined. One could adopt a view that, despite strongly bullish market sentiment, system stability hangs in the balance. The Year of the Central Bank? Has that look to it thus far.

For the Week:

The S&P500 increased 0.9% (up 2.5% y-t-d), and the Dow added 0.5% (up 1.7%). The Banks surged 4.4% (up 10.3%), and the Broker/Dealers rose 3.1% (up 7.3%). The Morgan Stanley Cyclicals jumped 3.8% (up 7.9%), and the Transports rose 2.1% (up 3.1%). The Morgan Stanley Consumer index gained 0.6% (up 1.0%), while the Utilities slipped 0.3% (down 3.2%). The S&P 400 Mid Caps gained 1.7% (up 3.1%), and the small cap Russell 2000 rose 1.9% (up 3.1%). The Nasdaq100 was up 0.7% (up 4.1%), and the Morgan Stanley High Tech index gained 1.5% (up 3.6%). The Semiconductors advanced 2.2% (up 5.2%). The InteractiveWeek Internet index added 0.2% (up 2.6%). The Biotechs jumped 6.8% (up 13.8%). With bullion up $21, the HUI gold index increased 0.3% (up 4.1%).

One and three-month Treasury bill rates ended the week near 2 bps. Two-year government yields declined 3.5 bps to 0.21%. Five-year T-note yields ended the week down 6 bps to 0.75%. Ten-year yields fell 9 bps to 1.87%. Long bond yields ended down 10 bps at 2.87%. Benchmark Fannie MBS yields were down 5 bps to 2.75%. The spread between 10-year Treasury yields and benchmark MBS yields increased 4 bps to 88 bps. Agency 10-yr debt spreads increased 3 bps to negative one basis point. The implied yield on December 2012 eurodollar futures dropped 13 bps to 0.565%. The two-year dollar swap spread declined 6.75 bps to 34.75 bps. The 10-year dollar swap spread increased one to 14.75 bps. Corporate bond spreads narrowed. An index of investment grade bond risk declined 4 to 116 bps. An index of junk bond risk dropped 10 bps to 656 bps.

Debt issuance remained strong. Investment grade issuers included JPMorgan $3.0bn, Target $2.5bn, Energy Transfer Partners $2.0bn, Toyota Motor Credit $2.0bn, Macy's $800 million, New York Life $500 million, Allstate $500 million, Kroger $450 million, Virginia Electric & Power $450 million, Valspar $400 million, Arizona Public Service $325 million, and Alabama Power $250 million.

Junk bond funds enjoyed inflows of $1.79bn (from Lipper). Junk issuers included MGM Resorts $850 million, Block Communications $250 million, Entergy $500 million, Amerigroup $475 million, Atwood Oceanics $450 million and Charger Merger $330 million.

I saw no convertible issuance this week.

International dollar bond issuance included Asian Development Bank $3.0bn, Rabobank $2.5bn, Indonesia $1.75bn, South Africa $1.5bn, Banco do Brazil $1.0bn, France Telecom $900 million, Korea Gas $750 mlllion, Banco Continental $500 million, and Automotores Gildemeister $400 million.

Italian 10-yr yields ended the week down 48 bps to 6.62% (down 41bps y-t-d). Spain's 10-year yields sank 48 bps to 5.19% (up 15bps). German bund yields dropped 9 bps to 1.76% (down 6bps), and French yields sank 29 bps to 3.06% (spread to bunds narrowed 20bps to 130bps). Greek two-year yields ended the week up 2,692 bps to 151.45% (up 2,591bps). Greek 10-year yields declined 52 bps to 31.02% (down 29bps). U.K. 10-year gilt yields declined 5 bps to 1.97% (down one basis point). Ten-year Portuguese yields sank 90 bps to 11.91% (down 86bps). Irish yields fell 32 bps to 7.65% (down 61bps).

The German DAX equities index rose 1.4% (up 4.1% y-t-d). Japanese 10-year "JGB" yields declined 3 bps to 0.95% (down 4bps). Japan's Nikkei gained 1.3% (up 0.5%). Emerging markets were mostly higher. For the week, Brazil's Bovespa equities index added 0.9% (up 4.2%), while Mexico's Bolsa slipped 0.7% (down 1.4%). South Korea's Kospi index gained 1.8% (up 2.7%). India’s Sensex equities index rose 1.8% (up 4.5%). China’s Shanghai Exchange jumped 3.8% (up 2.1%). Brazil’s benchmark dollar bond yields rose 3 bps to 3.44%, while Mexico's dollar bond yields were little changed at 3.67%.

Freddie Mac 30-year fixed mortgage rates declined 2 bps to a record low 3.89% (down 82bps y-o-y). Fifteen-year fixed rates fell 7 bps to 3.16% (down 92bps y-o-y). One-year ARMs declined 4 bps to 2.76% (down 47bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 2 bps to 4.56% (down 95bps y-o-y).

Federal Reserve Credit declined $17.8bn to $2.883 TN. Fed Credit was up $450bn from a year ago, or 18.5%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 1/11) dropped $7.5bn to $3.397 TN (17-wk decline of $77.4bn). "Custody holdings" were up $47.2bn year-over-year, or 1.4%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $948bn y-o-y, or 10.3% to $10.192 TN. Over two years, reserves were $2.552 TN higher, for 33% growth.

M2 (narrow) "money" supply surged $85.6bn to a record $9.751 TN. "Narrow money" has expanded 10.8% from a year ago. For the week, Currency added $1.6bn. Demand and Checkable Deposits jumped $64.8bn, and Savings Deposits rose $21.0bn. Small Denominated Deposits declined $2.2bn. Retail Money Funds added $0.4bn.

Total Money Fund assets increased $10.8bn to $2.704 TN. Money Fund assets were down $92bn over the past year, or 3.3%.

Total Commercial Paper outstanding rose $33.8bn to $963bn. CP was up $25bn from one year ago, or 2.6%.

Global Credit Watch:

January 13 – Bloomberg (Simon Kennedy, Patrick Donahue and Mark Deen): “France and Austria lost their top credit ratings in a string of downgrades that left Germany with the euro area’s only stable AAA grade as Standard & Poor’s warned that crisis-fighting efforts are still falling short. France and Austria were cut one level to AA+ from AAA and face the risk of further reductions, the rating company said… While Finland, the Netherlands and Luxembourg kept their AAA ratings, they were put on negative watch. Spain and Italy were also among the nine nations downgraded.”

January 11 – Bloomberg (Paul Tugwell): “Greece’s budget deficit in 2011 closed at about 9.6% of gross domestic product, the country’s Development, Competitiveness and Shipping Minister Michalis Chrisochoides said. ‘The deficit will be about half a percentage point down from 2010, at around 9.6%’ last year, Chrisochoides told a conference…”

January 12 – Bloomberg (Brian Parkin and Patrick Donahue): “A Greek exit from the euro would pose a ‘significantly smaller’ risk of contagion to the rest of the currency area than two years ago before Greece asked for aid, two lawmakers from Chancellor Angela Merkel’s party said. ‘The whole reason why we jumped into action wasn’t necessarily out of sympathy with Greece, but rather because we said that there could be a shockwave to the financial system,’ Michael Meister, deputy parliamentary caucus leader for Merkel’s Christian Democratic Union, said… ‘I think the scale of the threat from Greece has diminished.’”

January 11 – Reuters (Tommy Wilkes and Sarah White): “Hedge funds are taking on the powerful International Monetary Fund over its plan to slash Greece's towering debt burden as time runs out on the talks that could sway the future of Europe's single currency. The funds have built up such a powerful positions in Greek bonds that they could derail Europe's tactic of getting banks and other bondholders to share the burden of reducing the country's debt on a voluntary basis. Bondholders need to give up some 100-billion euros (US$130bn) of their investment in the planned bond swap, drawn up in October, but many hedge funds plan to stay out of it. They either prefer letting the country go under, which would trigger the credit insurance they have bought, or hope to get paid out in full if enough others sign up. That puts them in direct conflict with the IMF, which wants to force Greece's cost of financing down to an affordable level.”

January 13 – Bloomberg (Tony Czuczka): “Germany doesn’t support giving the European Central Bank a role in backing the euro area’s permanent rescue fund, the European Stability Mechanism, said Steffen Seibert, Chancellor Angela Merkel’s chief spokesman. ‘The federal government’s position is completely unchanged as far as the ECB is concerned,’ Seibert said…”

January 12 – Bloomberg (Namitha Jagadeesh): “The cost for European banks to borrow in dollars declined to the lowest in almost four months… The three-month cross-currency basis swap, the rate banks pay to convert euro interest payments into dollars, was 84 bps below the euro interbank offered rate…”

January 11 – Bloomberg (Jeff Black and Jana Randow): “Germany may be on the brink of recession after the sovereign debt crisis caused the economy to contract in the final quarter of 2011. Europe’s largest economy shrank ‘roughly’ 0.25% in the fourth quarter from the third, the Federal Statistics Office in Wiesbaden said….”

January 11 – Bloomberg (Anne-Sylvaine Chassany and Gabi Thesing): “Banks are hoarding the European Central Bank’s record 489 billion-euro ($625bn) injection into the banking system, thwarting attempts by policy makers to avert a credit crunch in the region. Almost all of the money loaned to 523 euro-area lenders last month wound up back on deposit at the… central bank instead of pouring into the financial system, according to estimates by Barclays Capital based on ECB data. Banks will use most of the money from the three-year loans to meet their refinancing needs for this year and next, analysts… estimate. ‘It’s illusory to think that the measure will translate into credit generation,’ Philippe Waechter, chief economist at Natixis Asset Management in Paris, said…”

January 10 – Bloomberg (Elisa Martinuzzi and Sonia Sirletti): “A 45% drop in UniCredit SpA shares over four days after Italy’s biggest bank announced a rights offer may deter European lenders from asking investors for help to meet requirements that they replenish capital. ‘Every bank will be trying to avoid doing a rights issue even more now,’ said Peter Braendle, a fund manager at Swisscanto Asset Management in Zurich. ‘The decline is really amazing. It doesn’t send a good signal.’”

January 11 – Reuters (James Mackenzie): “Organized crime has tightened its grip on the Italian economy during the economic crisis, making the Mafia the country's biggest ‘bank’ and squeezing the life out of thousands of small firms, according to a report… Extortionate lending by criminal groups had become a ‘national emergency,’ said the report by anti-crime group SOS Impresa. Organized crime now generated annual turnover of about 140 billion euros ($178.89bn) and profits of more than 100 billion euros… ‘With 65 billion euros in liquidity, the Mafia is Italy's number one bank,’ said a statement from the group, which was set up in Palermo a decade ago to oppose extortion rackets against small business.”

January 11 – Bloomberg (Angeline Benoit): “Prime Minister Mariano Rajoy may need to skirt Spanish law to backstop the nation’s indebted regions, mimicking the European Union’s dodging of its no- bailout rule to save Greece, Ireland and Portugal from default. ‘We consider the Spanish government should guarantee or take responsibility for the debt it has authorized the regions to issue,’ said Albert Carreras de Odriozola, Catalonia’s deputy finance chief… ‘It must be possible to talk and find a mechanism.’ Catalonia, Valencia, Andalusia and Madrid, which account for 60% of Spain’s economy, are shut out of markets as they brace to repay 9 billion euros ($11.5bn) to lenders this year…”

January 11 – Bloomberg (Sharon Smyth): “Spanish banks may be unable to generate more than 30 billion euros ($38bn) of the estimated 50 billion euros of extra provisions needed to clean up the banking system, Expansion reported, citing unidentified people in the financial industry.”

January 11 – Bloomberg (Zoltan Simon and Jones Hayden): “The European Union escalated its standoff with Hungary, keeping bailout talks on hold and threatening to cut subsidies as punishment for flouting the bloc’s rules on central-bank independence and deficit overruns… Hungary is trying to revive bailout talks with the EU and the International Monetary Fund after the organizations suspended them last month on concern a new central bank regulation violates monetary policy independence…”

January 11 – Bloomberg (Frances Schwartzkopff): “Denmark’s banks face a ‘significant challenge’ as they struggle to pay back senior debt, including state-backed bonds, the central bank said after concluding stress tests for the second half of last year. The Nordic country’s banks, which have been closing branches and cutting lending, may need to scale back their operations further to address their funding needs…”

January 9 – Bloomberg (James G. Neuger): “Europe’s newfound powers over national taxing and spending face a first test when the European Commission prods Belgium to make deeper savings just over a week into the budget year. Under authority granted last month, the commission will on Jan. 11 decide whether an emergency Belgian spending freeze is enough to drive the deficit below the euro-area limit in 2012.”

January 11 – Bloomberg (Rebecca Christie and Peter Woodifield): “Even before the euro crisis, people were worried about Europe’s pension bomb. State-funded pension obligations in 19 of the European Union nations were about five times higher than their combined gross debt, according to a study commissioned by the European Central Bank. The countries in the report… had almost 30 trillion euros ($39.3 trillion) of projected obligations to their existing populations.”

Global Bubble Watch:

January 10 – Bloomberg (Susanne Walker): “The Treasury attracted record demand at today’s $32 billion auction of three-year notes as concern that a resolution to Europe’s sovereign-debt crisis is far off drove investors to the safety of the securities. The auction’s bid-to-cover ratio… was 3.73, the highest since at least 1993, when the government began releasing the data.”

January 12 – Bloomberg (Stephen Morris): “Sales of new leveraged loans in Europe are poised to decline by almost half this year as the region’s debt crisis stymies buyout activity and drives up borrowing costs amid new capital regulations for banks.”

January 11 – Bloomberg (Paul Dobson): “Germany got bids for 8.97 billion euros of five-year notes at an auction today, more than double the maximum sales target of 4 billion euros…”

January 11 – Bloomberg (Lilian Karunungan and Yumi Teso): “Dollar-denominated bond sales by developing-nation issuers are off to a record start, as borrowers from Indonesia to South Africa and Brazil tap the debt markets for more than $30.6 billion so far this year. The amount is up from about $19.9 billion in the same period last year and is the most since Bloomberg started compiling the data in 1999.”

Currency Watch:

The dollar index this week increased 0.3% (up 1.6% y-t-d). On the upside, the Brazilian real increased 4.0%, the New Zealand dollar 1.8%, the South Korean won 1.3%, the Mexican peso 1.0%, the Australian dollar 0.9%, the Taiwanese dollar 0.9%, the South African rand 0.6%, the Canadian dollar 0.5%, the Swiss franc 0.3% and the Singapore dollar 0.1%. On the downside, the Swedish krona declined 0.7%, the British pound 0.7%, the Norwegian krone 0.3%, the Danish krone 0.3%, and the euro 0.3%. The Japanese yen traded unchanged.

Commodities and Food Watch:

January 12 – Bloomberg (Lucia Kassai): “Corn crops in Brazil and Argentina, which produce 30% of the world’s exports, will lose 11 million metric tons of output after a drought caused ‘irreversible’ damage, forecaster Agroconsult said. Growers in Argentina will harvest 20 million metric tons of the grain in the current harvest, compared with 27 million tons estimated last month…”

The CRB index slipped 0.6% this week (up 0.8% y-t-d). The Goldman Sachs Commodities Index fell 1.6% (up 1.0%). Spot Gold gained 1.3% to $1,639 (up 4.8%). Silver rallied another 2.9% to $29.52 (up 5.8%). February Crude fell $2.86 to $98.70 (down 0.1%). February Gasoline dipped 0.6% (up 2.9%), and February Natural Gas sank 12.8% (down 10.7%). March Copper surged 5.9% (up 5.8%). March Wheat dropped 3.6% (down 7.7%), and March Corn sank 6.8% (down 7.3%).

China Bubble Watch:

January 13 – Bloomberg: “China’s foreign-exchange reserves dropped for the first time in more than a decade as foreign investment moderated, the trade surplus narrowed and Europe’s crisis spurred investors to sell emerging-market assets. The holdings, the world’s biggest, fell to $3.18 trillion on Dec. 31 from $3.2 trillion Sept. 30, People’s Bank of China data released in Beijing showed today. The quarterly drop was the first since the midst of the Asian financial crisis in the second quarter of 1998… PBOC Governor Zhou Xiaochuan said in remarks published this month that a global downturn may lead to ‘large’ capital withdrawals this year, highlighting a shift in risk from the influx of speculative funds that China had opposed during the 2009-2010 world economic rebound.”

January 10 – Bloomberg: “China’s import growth fell to a two-year low in December, underscoring a slowdown in the fastest- growing major economy that deepens risks for the global outlook. Imports rose 11.8%... The moderation caused the trade surplus to increase to $16.5 billion in the month, as exports advanced 13.4% December. Signs of domestic demand moderation bolstered forecasts for monetary easing -- spurring a gain in local stocks…”

January 12 – Bloomberg (Katya Kazakina): “Pablo Picasso has been dethroned. The world auction market’s top earner in recent years must yield to Chinese artist Zhang Daqian (1899-1983), according to a report from French research company Artprice. Zhang generated $506.7 million in auction revenue in 2011. Close behind was compatriot Qi Baishi (1864-1957) with $445.1 million… ‘When you couple China’s abundance of money and its rich history of collecting in all the categories of art, it’s not a surprise,” said Larry Warsh, a New York-based collector.’"

January 12 – Bloomberg: “China’s inflation cooled to a 15-month low and producer-price gains were the smallest in 2 years in December, leaving the government more room to support growth as a global slowdown hurts exports. Consumer prices rose 4.1% from a year earlier…”

January 11 – Bloomberg: “Savers in China have had negative returns on their bank deposits for the longest stretch in 16 years, leaving Premier Wen Jiabao less scope to cut interest rates to sustain economic growth. …Inflation has exceeded the benchmark one-year deposit rate for 22 months…”

Japan Watch:

January 12 – Bloomberg (Eleanor Warnock): “Japan’s current-account surplus narrowed in November as a strong yen and weak overseas demand hampered the nation’s recovery from the March earthquake. The gap shrank 86% from a year earlier to 138.5 billion yen ($1.8 billion)…”

January 11 – Bloomberg (Emi Urabe and Tsuyoshi Inajima): “Tokyo Electric Power Co. is in talks with banks to borrow as much as 2 trillion yen ($26bn) to help stave off bankruptcy as it compensates victims of the Fukushima nuclear disaster and decommissions reactors, according to two people with knowledge of the negotiations.”

January 12 – Bloomberg (Kathleen Chu and Katsuyo Kuwako): “Tokyo’s office rent fell 3.7% in 2011 from a year earlier to a record low as vacancy rates remained high, according to Miki Shoji Co…”

India Watch:

January 11 – Bloomberg (Anurag Joshi and Rajhkumar K Shaaw): “Indian companies with a record $5.3 billion of convertible bonds due this year may see borrowing costs more than quadruple after the worst performance among the world’s 10 biggest stock markets.”

Latin America Watch:

January 12 – Bloomberg (Matthew Bristow and Joshua Goodman): “Brazil’s November retail sales rose at the fastest pace in 15 months, sending the yield on interest-rate futures contracts higher as traders pared bets on rate cuts. Sales climbed 1.3% from October… Sales rose 6.8% from a year earlier.”

Unbalanced Global Economy Watch:

January 12 – Bloomberg (Scott Hamilton): “The U.K. economy barely expanded in the fourth quarter, with growth in 2011 slowing to half the pace of the previous year…”

Central Banking Watch:

January 11 – Bloomberg (Scott Hamilton and Mayumi Otsuma): “Bank of Japan Governor Masaaki Shirakawa said there are limits to what monetary policy can achieve and governments must implement ‘necessary’ reforms to aid the global economy. ‘Providing liquidity as ‘a lender of last resort’ is, in essence, a policy to ‘buy time,’” Shirakawa said… ‘It is essential that the necessary structural reforms take place while time is being bought, as the time that we can buy becomes progressively more expensive.’”

January 11 – Bloomberg (Jody Shenn): “Ben S. Bernanke is signaling his willingness to double down on a three-year bet that’s failed to revive housing, showing the extent of the Federal Reserve chairman’s effort to wrest a recovery from the deepest recession. Since the Fed started buying $1.25 trillion of mortgage bonds in January 2009, the value of U.S. housing has fallen 4.1%, and is down 32% from its 2006 peak, according to an S&P/Case-Shiller index. The central bank is poised to buy about $200 billion this year, or more than 20% of new loans, as it reinvests debt that’s being paid off. Some Fed officials have said they may support additional purchases that Barclays Capital estimates could total as much as $750 billion.”

January 11 – Bloomberg (Vivien Lou Chen and Joshua Zumbrun): “One Federal Reserve bank president said further asset purchases may be needed to spur the world’s largest economy while another warned that even the current policy of easing carries the risk of financial turmoil. Fed Bank of San Francisco President John Williams said… he sees a ‘strong’ case for new purchases of mortgage bonds given his expectation that inflation will fall below 1.5% this year. His counterpart in Kansas City, Esther George, said more time is needed to judge the impact of record-low interest rates. The remarks underscore the division on the Federal Open Market Committee, which next meets Jan. 24-25…”

January 9 – Bloomberg (Simon Kennedy): “European Central Bank President Mario Draghi may act more like Ben S. Bernanke than Jean-Claude Trichet in 2012. With the euro area’s debt crisis pulling its economy into a second recession in three years, Draghi soon may cut the ECB’s benchmark interest rate below 1% for the first time and help banks by further inflating its balance sheet, which already has ballooned 17% since he took office Nov. 1.”

U.S. Bubble Economy Watch:

January 11 – Bloomberg (Laura Marcinek): “Banks and other financial firms may lose 150,000 jobs by the middle of 2013, said Richard Bove, an analyst at Rochdale Securities LLC. ‘The financial industry in my view is going to shrink by about 150,000 people over the next 12 to 18 months,’ Bove said…”

January 11 – Bloomberg (Noah Buhayar): “Allstate Corp., Travelers Cos. and State Farm Mutual Automobile Insurance Co. are among insurers raising homeowners’ rates after damage from natural disasters defied industry projections. Allstate, the No. 2 U.S. home insurer, boosted prices for its namesake brand of home policies by 5.6% in the nine months through Sept. 30 and has said more increases are coming. Travelers is raising rates after re-evaluating U.S. storm risk. State Farm, the largest U.S. home insurer, has charged homeowners more nationwide for three straight years. Near-record-low interest rates cut insurers’ investment income, and tornadoes, wildfires and Hurricane Irene increased claims costs in the U.S. last year… Policyholder-owned State Farm raised homeowners’ rates 3.6% last year… That follows a 7.3% increase in 2010 and a 9.7% increase in 2009.”

Real Estate Watch:

January 12 – Bloomberg (Dan Levy): “Banks may seize more than 1 million U.S. homes this year after legal scrutiny of their foreclosure practices slowed actions against delinquent property owners in 2011, RealtyTrac Inc. said. About 1.89 million properties received notices of default, auction or repossession last year, down 34% from 2010 and the lowest number since 2007… One in 69 U.S. households received a filing.”

January 12 – Bloomberg (Oshrat Carmiel): “Manhattan apartment rents jumped 9.5% in the fourth quarter as landlords emboldened by increasing demand cut concessions and pushed price increases in what’s traditionally the slowest leasing season. The median effective rent… rose to $3,121 a month…”

January 10 – Bloomberg (Oshrat Carmiel): “Manhattan office leasing climbed 16% last year as tenants agreed to occupy the most space in more than a decade, Cushman & Wakefield Inc. said. A total of 30.1 million square feet (2.8 million square meters) of new leases were signed in 2011…”

California Watch:

January 10 – Bloomberg (James Nash and Michael B. Marois): “California Governor Jerry Brown’s proposed sales- and income-tax increases are likely to raise $2 billion less than projected, largely because of ‘volatility’ in taxes on capital gains, the state’s fiscal analyst said.”

January 11 – Bloomberg (Christopher Palmeri and James Nash): “California Governor Jerry Brown’s plan to balance the state budget in part with higher taxes on the wealthy depends on a group of top earners that shrank by one-third from 2007 to 2009. Tax returns with adjusted gross incomes topping $500,000 fell to 98,610 in 2009, the latest year available, from a recent peak of 146,221 two years earlier…”

Muni Watch:

January 10 – Bloomberg (Darrell Preston and Tim Jones): “Illinois faces borrowing costs more than quadruple its 10-year average in a sale of $800 million of bonds after it became the lowest-rated U.S. state because of unpaid bills and the worst-funded pension system. Illinois state and local general-obligation bonds yielded 182 bps more than top-rated debt yesterday… That’s more than four times the 10-year average of 43 bps…”