Saturday, November 8, 2014

Weekly Commentary, March 23, 2012: Interesting Juncture

Macro Credit, Bubble and speculative market dynamics analysis has reached another “Interesting Juncture.” There are a few premises that will be tested over the coming weeks and months – and quite contrasting possible scenarios to contemplate.

Let’s begin with the premise that global central bank market interventions are in the end destabilizing. The European Central Bank’s (ECB) $1.3 TN 3-year Long-Term Refinancing Operation (LTRO) liquidity facility was a game changer. Significant hedges and bearish speculations had accumulated across global markets last year as the European debt crisis spiraled out of control. The unexpected scope of the ECB’s intervention incited destabilizing reversals of positions and short squeezes, certainly throughout European debt markets and global equities.

These types of policy-induced market dislocations spawn market anomalies and uncertainties. On the one hand, this wouldn’t be the first time that a short squeeze/derivative unwind spurred a self-reinforcing rally. Strong markets always evoke positive news flow and analysis. Market rallies also bolster confidence and entice risk embracement, in the process loosening general financial conditions. Moreover, I would contend (as master of the obvious) that global markets have never been as susceptible to performance-chasing herd behavior. And, finally, market participants have generally been conditioned to expect buoyant markets and loosened Credit conditions to prove constructive for economic activity. Build a market rally and economic growth will come. These types of dynamics have in the past supported bullish market runs with legs.

On the other hand, policy-induced rallies create their own excesses and fragilities. First of all, and this is certainly the case with the ECB’s LTRO, central bank interventions further embolden the view that policymakers are fully and unabashedly committed to backstopping the markets. Disregarding risk has, again, paid dividends. Blind faith in policy measures again saw huge rewards. Incentivizing such behavior will now likely have an only greater role in dictating market dynamics. I have argued that the initial policy responses to the mortgage debt crisis back in 2007 and early-2008 – which fomented highly speculative global markets - only exacerbated systemic fragilities. Amazingly, in the spring of 2008 market participants had been convinced to largely disregard risk and position instead based upon the loosened policy backdrop. Perhaps in a couple years I’ll be writing “amazingly, in the spring of 2012…”

Especially here in the U.S., market participants are these days keen to downplay global macro risks. The ECB’s and concerted global central bank liquidity actions provided a powerful market signal. The reversal of bearish and hedging positions, as always, created the perception (and market appearance) of liquidity abundance. There is certainly nothing like a panic short squeeze to distort market pricing and inspirit “animal spirits.” And there is surely nothing comparable to hedge funds en masse simultaneously reversing short positions and going leveraged long in the markets for solidifying the perception of boundless liquidity.

After trading to 7.50% in late-November, 10-year Italian yields sank to a recent low of 4.80%. Spain’s 10-year yields fell from 7.07% to 4.82%. Yields throughout Europe dropped precipitously on the view that ECB liquidity would ensure strong ongoing demand for sovereign debt. And buoyant markets nurtured the view that Europe had turned the corner on its debt crisis. Bond markets, having turned desperately illiquid late in 2011, were suddenly enjoying panic buying. And while policy was the catalyst for the rally, I believe the market perception of ongoing liquidity abundance played a greater role in the marketplace than actual new central bank liquidity. Policymakers still enjoy the capacity to incite dramatic market rallies. It has, however, reached the point where markets require stunning policy measures - and it remains less than clear that resulting elevated market prices can be sustained.

Fundamentals have begun to matter again in Europe – and a shift away from the markets’ fixation on policy-induced liquidity would not be marketplace friendly. Not surprisingly, data this week confirmed weak economic underpinnings throughout the euro zone. With unemployment at almost 23% and economic activity further downshifting, the Spanish economy is essentially in depression. Spain has little hope of meeting its deficit reduction commitments, while the market is increasingly fearful of Spanish debt spiraling completely out of control. The trumpeted late-2011 push toward greater European fiscal discipline and integration is poised to lose all market credibility at the hands of its first test-case in Spain. And, surely, German reluctance to significantly boost Europe’s “firewall” is at least partially based on their view that a huge firewall (and resulting market distortions) would provide the wrong incentives for Spanish (and Italian and other) politicians.

Spain’s Credit default swaps (5-yr) traded above 440 bps intraday today after beginning the month at 368 bps. Spain’s bond yields were 37 bps higher in two weeks (to 5.35%), with Spain’s CDS up 30 bps (to 431 bps) during the period. And while Spain CDS remain somewhat below highs from this past November, the marketplace should be quite concerned by the notably muted impact the massive LTROs have had on Spain's and Portugal’s bond and CDS pricing. Spain CDS traded below 40 bps for much of 2008.

Hedge funds and other speculators that were caught in an excruciating short-squeeze earlier in the year may just be enticed back into short positions in European bonds and risk assets. Such selling/shorting holds the potential to significantly alter the liquidity backdrop. And it is part of my current thesis that the hedge fund industry in general is somewhat impaired and trading with “weak hands.” When markets are rising – bonds, stocks, crude, commodities, emerging markets, etc. – they and others have got to participate. But having struggled for awhile now with poor performance, many hedge funds today have a low tolerance for pain (many risk losing their businesses with additional losses).

Perhaps “impaired” speculators help explain recent trading dynamics in resources equities, commodities and bonds. And if blood is smelled in Spain, Portugal or Italy, they will be compelled to participate on the downside with bearish positions (in the process pressuring the liquidity backdrop). If the global liquidity backdrop then begins to meaningfully deteriorate, a move to take some risk off the table could again create vulnerability to another bout of problematic global de-risking/de-leveraging dynamics. Rising European bond yields, higher sovereign CDS prices and somewhat increased prices for European bank CDS all have recently pointed to newfound vulnerabilities in Europe.

Do European market and “macro” concerns even matter to the U.S. stock market? In the near-term, maybe they do and, then again, maybe they don’t. There is no reason for backing away from the thesis that the backdrop remains one of historic “global government finance Bubble” excess. The market backdrop continues as one extraordinary bipolar “risk/speculation on” or “risk off.” Just a few short months ago we were reminded of the extent to which interlinked global markets remain susceptible to worries of faltering liquidity and other systemic concerns. But my framework forces me to be open to the notion of “decoupling.” I expect the aggressive global policy response to last year’s European debt stress to have little more than fleeting impact on underlying European debt deterioration. The same cannot necessarily be said in the near-term for the U.S. economy and markets.

A “simple” question: Is the U.S. stock market a Bubble? Have the Fed and global central bankers prolonged the U.S. Credit Bubble sufficiently to the point of having again incited Bubble dynamics within our equities market? Sure looks like it. As we’ve witnessed repeatedly for twenty-odd years now, every government bailout/policy response to a burst Bubble ends up inflating fledgling Bubbles to full-blown Bubble fruition excess. From my point of view, U.S. stocks were, at the minimum, a “fledgling” Bubble prior to recent LTRO and concerted global central bank liquidity operations.

There’s a lot I don’t know; here’s what I think I know: after last year’s dramatic loosening of financial conditions (recall that U.S. deficit reduction was at one point actually becoming an important issue), the predominantly government finance-driven U.S. economy has attained (in my nomenclature) “an increasingly robust inflationary bias.” While systemically distorted from egregious Washington fiscal and monetary excess, many fundamental factors (i.e. spending, GDP, corporate profits, etc.) are for now likely to support the bullish thesis. At the same time, global economies from Europe to China are increasingly vulnerable to the downside of Credit Bubble dynamics.

Not unimportantly, the U.S. today enjoys a competitive advantage in its capacity to sustain its Bubbles. Markets continue to grant U.S. policymakers all the flexibility in the world – and vice versa. This will likely not suffice for U.S. stocks if global markets and economies falter. It may matter tremendously if the current global liquidity backdrop continues.

There is a not that farfetched scenario where an over-liquefied global system decides it prefers the relative merits of U.S. equities. Could the U.S. economy and stock market in the near-term somehow win by default? The Morgan Stanley Retail index traded to a new all-time high this week. Despite today’s drubbing, the S&P 500 Homebuilding index sports a 28% y-t-d gain. The Morgan Stanley High Tech index is up almost 20% during the first quarter, in the most euphoric trading of technology stocks in years. Throughout the marketplace, the more speculative, high beta, and heavily shorted stocks are dramatically outperforming.

And then there’s Apple. The largest stock by capitalization in the U.S. market has gained 47% in value in less than three months. If that’s not a signal that virtually anything is possible when liquidity is overabundant and stock traders exuberant, I don’t know what is. The “right tail” scenario where markets get crazy speculative cannot be ruled out; the enormous speculator community may decide U.S. equities are the best game in town. After all, speculating is being rewarded much more handsomely than investing. As such, if liquidity remains abundant, more will speculate and less will invest. That’s the nature of Bubble Dynamics.

But there is as well the scenario where global markets again succumb to perilous “de-risking/de-leveraging” dynamics. Europe remains a mess and global Credit an ongoing accident in the making. China is demonstrating heightened financial and economic vulnerability. I expect the Germans to cap the ECB’s balance at near today’s level. The Bernanke Fed wants to assure the markets that the QE3 option is available as needed, although the Federal Reserve is under increasing internal and external pressure to conclude quantitative easing operations. Gas prices march upward.

Importantly, inflated global securities markets are again vulnerable to waning confidence in the capacity for policymakers to ensure ongoing liquidity abundance. And as the marginal source of global market liquidity, the “leveraging speculating community” could be a source of instability on the upside or downside of global markets – or both. Are the powerful players for now sufficiently confident in the global policymaker liquidity backstop? Or do they see recent market strength as merely a respite in an insuppressible global Credit, market and economic crisis? As I wrote in my opening sentence: “…Interesting Juncture.”

For the Week:

The S&P500 slipped 0.5% (up 11.1% y-t-d), and the Dow declined 1.1% (up 7.1%). The Morgan Stanley Cyclicals fell 2.0% (up 16.7%), and the Transports dropped 2.5% (up 3.9%). The Morgan Stanley Consumer index dipped 0.4% (up 4.3%), and the Utilities declined 0.4% (down 3.8%). The Banks were down 0.4% (up 25.8%), while the Broker/Dealers were up 0.3% (up 29.5%). The S&P 400 Mid-Caps declined 1.0% (up 12.7%), while the small cap Russell 2000 was little changed (up 12.0%). The Nasdaq100 added 0.6% (up 19.8%), and the Morgan Stanley High Tech index gained 0.4% (up 20.1%). The Semiconductors added 0.1% (up 19.5%). The InteractiveWeek Internet index jumped 1.6% (up 16.4%). The Biotechs were little changed (up 22.8%). Although bullion was about unchanged, the HUI gold index declined 0.6% (down 5.1%).

One-month Treasury bill rates ended the week at 6 bps and three-month bills closed at 7 bps. Two-year government yields were down a basis point to 0.35%. Five-year T-note yields ended the week down 3 bps 1.08%. Ten-year yields declined 6 bps to 2.23%. Long bond yields fell 10 bps to 3.31%. Benchmark Fannie MBS yields were little changed at 3.13%. The spread between 10-year Treasury yields and benchmark MBS yields widened 6 bps to 90 bps. The implied yield on December 2013 eurodollar futures declined 3.5 bps to 0.845%. The two-year dollar swap spread was little changed at 26 bps. The 10-year dollar swap spread increased 1.5 to 7.5 bps. Corporate bond spreads were wider. An index of investment grade bond risk increased 3 to 91 bps. An index of junk bond risk jumped 63 to 605 bps (must have been the homebuilders).

Yet another week of strong debt issuance. Investment grade issuers included AIG $2.0bn, Morgan Stanley $2.0bn, Capital One $1.5bn, Bank of America $1.25bn, Syngenta Finance $750 million, Caterpillar $600 million, Sempra Energy $600 million, Husky Energy $500 million, Zions Bancorp $300 million, George Washington University $300 million, Northeast Utilities $300 million, Great Plains Energy $290 million, Raymond James $250 million, San Diego Gas & Electric $250 million, Tufts University $250 million and Southwest Gas Corp $250 million.

Junk bond funds saw inflows rise to $978 million (from Lipper). Junk issuers included Cimarex Energy $750 million, Alliance Data Systems $500 million, USPI $440 million, AK Steel $300 million, Terex $300 million, Cenveo $225 million, J.B. Poindexter $200 million, IDQ Holdings $220 million and Kemet Corp $110 million.

I saw no convertible debt issuance.

International dollar bond issuers included Volkswagen $3.35bn, Rio Tinto $2.5bn, Lloyds Bank $1.5bn, Rexel $400 million, Corporacion GEO $400 million and Kommunalbanken $300 million.

Spain's 10-year yields jumped 17 bps to an eight-week high of 5.35% (up 31bps y-t-d). Ten-year Portuguese yields sank 104 bps to 12.23% (down 54bps). Italian 10-yr yields ended the week up 18 bps to 5.03% (down 200bps). German bund yields dropped 19 bps to 1.86% (up 4bps), and French yields fell 7 bps to 2.94% (down 54bps). The French to German 10-year bond spread widened 12 bps to 108 bps. The new Greek 10-year note yield surged 177 bps to 19.55%. U.K. 10-year gilt yields declined 17 bps to 2.27% (up 30bps). Irish yields were down 6 bps to 6.71% (down 155bps).

The German DAX equities index was hit for 2.3% (up 18.6% y-t-d). Japanese 10-year "JGB" yields dipped 2 bps to 1.02% (up 4bps). Japan's Nikkei declined 1.2% (up 18.4%). Emerging markets were mostly lower. For the week, Brazil's Bovespa equities index dropped 2.8% (up 16.0%), while Mexico's Bolsa added 0.2% (up 3.4%). South Korea's Kospi index slipped 0.4% (up 11.0%). India’s Sensex equities index declined 0.6% (up 12.3%). China’s Shanghai Exchange fell 2.3% (up 6.8%). Brazil’s benchmark dollar bond yields declined 3 bps to 3.11%.

Freddie Mac 30-year fixed mortgage rates surged 16 bps to a 21-week high 4.08% (down 73bps y-o-y). Fifteen-year fixed rates jumped 14 bps to 3.30% (down 74bps). One-year ARMs increased 5 bps to 2.84% (down 37bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 4 bps to 4.61% (down 77bps).

Federal Reserve Credit dipped $0.3bn to $2.871 TN. Fed Credit was up $289bn from a year ago, or 11.2%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 3/20) jumped $11.1bn to $3.477 TN (7-wk gain of $56bn). "Custody holdings" were up $57bn y-t-d and $76bn year-over-year, or 2.2%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $884bn y-o-y, or 9.4% to $10.265 TN. Over two years, reserves were $2.430 TN higher, for 31% growth.

M2 (narrow) "money" supply rose $12bn to a record $9.813 TN. "Narrow money" has expanded 8.7% annualized year-to-date and was up 9.8% from a year ago. For the week, Currency increased $1.2bn. Demand and Checkable Deposits rose $8.0bn, and Savings Deposits jumped $10.8bn. Small Denominated Deposits declined $3.5bn. Retail Money Funds fell $4.5bn.

Total Money Fund assets dropped $15.5bn to $2.622 TN (low since August). Money Fund assets were down $73bn y-t-d and $110bn over the past year, or 4.0%.

Total Commercial Paper outstanding declined $5.6bn to $931bn. CP was down $28bn y-t-d and $149bn from one year ago, or down 13.8%.

Global Credit Watch:

March 20 – Bloomberg (Paul Dobson): “Spain’s bond-market rally, fueled by cheap central-bank loans, hasn’t eradicated concern the nation will struggle to control its deficit, according to prices of securities that insure against a sovereign default… While yields have declined, the cost of credit-default swaps on the debt is higher than the day before the central bank announcement. ‘The ECB’s non-standard measures are providing an important liquidity solution to what remains a solvency problem,’ said Richard McGuire, a senior fixed-income strategist at Rabobank… The loan provision ‘hides rather than addresses the systemic weakness driving the crisis,’ he said. Spanish banks increased their holdings of the nation’s bonds to 202 billion euros ($268bn) in December, compared with 178 billion euros a month earlier… They borrowed 152 billion euros from the ECB in February, three times as much as they were taking a year ago.”

March 21 – Bloomberg (Angeline Benoit and Tom Keene): “Spain has never been so close to default and Greece, Ireland and Portugal may need further bailouts, Citigroup Inc. chief economist Willem Buiter said. ‘Spain is the key country about which I’m most worried,’ Buiter, a former Bank of England policy maker, said… ‘It’s really moved to the wrong side of the spectrum and is now at greater risk of sovereign restructuring than ever before.’ …‘The European Central Bank has drowned the markets and the banks in liquidity,’ Buiter said. ‘There’s a general feeling of near euphoria at the moment which leads those drowning in liquidity to believe that all troubles are over.’”

March 22 – Bloomberg (Tony Czuczka and Patrick Donahue): “Italy and Spain would be ‘too big to be saved’ by the euro-area’s financial backstop and debate should focus on the firewall’s quality rather than its size, German Finance Ministry official Ludger Schuknecht said. Ideas ‘floating around’ to boost Europe’s defenses against the debt crisis aren’t ‘the ideas that the mega-firewall fans might like,’ Schuknecht, who heads the ministry’s department of fiscal policy, international finance and monetary policy, said… ‘Italy and Spain are too big to be saved by these kind of numbers that we are putting into the window,’ he said. Making the firewall credible to markets ‘is much more important than talking about big numbers that are afterwards just a show.’ European finance ministers are due to decide at a meeting on March 30-31 whether to augment the 500 billion-euro ($658bn) European Stability Mechanism…”

March 20 – Bloomberg (Paul Dobson): “Greece’s bonds and credit ratings are factoring in a third bailout for the nation that analysts and investors say will require greater concessions from its international creditors. Within a week of euro-area member states giving their formal approval to a second bailout package for Greece, the International Monetary Fund said the country may require additional funding or a further debt restructuring… ‘It’s still a very steep mountain to climb,’ said Harvinder Sian, a senior fixed-income strategist at Royal Bank of Scotland… The restructuring deal ‘doesn’t do anything to put Greece on a sustainable path,’ he said. ‘A third bailout will become necessary.’”

March 23 – Bloomberg (Henrique Almeida): “Portugal’s town halls face default amid 9 billion euros ($12bn) of debt unless the government provides aid soon, said Fernando Ruas, president of the nation’s association of municipalities. ‘At a company we call it insolvency,’ Ruas said… ‘It could happen that some town halls could have to restructure their debt if the government doesn’t intervene.’ Ruas blamed a decline in money transfers from the government in Lisbon to municipalities for their growing financial woes… Prime Minister Pedro Passos Coelho is cutting spending and raising taxes to meet the terms of the 78 billion-euro rescue.”

March 21 – Bloomberg (Hannah Benjamin): “Europe’s busiest day for corporate bond sales in two years prompted Societe Generale SA credit analysts to increase their 2012 issuance forecast by about 40% to ‘closer to’ 100 billion euros ($132bn).”

March 21 – Bloomberg (Zoe Schneeweiss): “Former European Central Bank Governing Council member Axel Weber said that he sees the crisis continuing. ‘We aren’t in year one after the crisis, but in year five of the crisis,’ Weber said… ‘The crisis will continue for several rounds.’”

March 22 – Bloomberg (Zeke Faux): “Governments that criticize credit-rating companies for downgrading countries should start their own ratings firm, according to Moody’s Corp. Chief Executive Officer Ray McDaniel. ‘Public institutions that have both the expertise and credibility among market participants should provide credit views on sovereigns,’ McDaniel wrote… in a paper called ‘A Solution for the Credit Rating Agency Debate’ that was posted on the… company’s website.”

Global Bubble Watch:

March 19 – Bloomberg (Zeke Faux and John Detrixhe): “Bonds of all types worldwide are generating their biggest losses since 2010 this month, raising concern that the four-year bull market that pushed interest rates to record lows may be ending as the flood of easy money from the U.S. Federal Reserve subsides. ‘For a very long time, the market dynamics in interest rates have been overwhelmed by Fed monetary policy,’ said Jeffrey Rosenberg, chief investment strategist for fixed-income at… BlackRock Inc., the world’s biggest money manager which oversees $3.5 trillion. ‘Has the big inflection point been reached?’”

March 20 – Financial Times (Robin Wigglesworth and Nicole Bullock): “Have corporate bond markets, buoyed by a successful Greek debt restructuring, a recovering US economy and the European Central Bank’s lending, rallied too far, too fast? That is the question some bankers, fund managers and analysts are starting to ask, after a ferocious rally this year. Many companies are borrowing at or near record low costs, and issuance has soared. Even the riskier end of the bond market – the most vulnerable to any bad economic tidings – is enjoying strong investor demand. ‘Bond markets are defying gravity,’ says Farouk Ramzan, head of European debt markets at Lloyds… ‘It has a bubble feel to it.”

March 20 – Bloomberg (Lisa Abramowicz and Sapna Maheshwari): “For the first time in almost six years, the riskiest of junk bonds are proving the only haven in the U.S. corporate bond market. Firms from Delaware Investments to Morgan Stanley are targeting bonds rated CCC and lower, which have returned 0.95% this month while all other tiers of company debt are posting losses…”

March 21 – Bloomberg (Svenja O’Donnell): “Britain’s budget deficit almost doubled in February as taxes fell and spending surged, leaving Chancellor of the Exchequer George Osborne little room to meet his full-year goal… Net borrowing excluding support for banks was 15.2 billion pounds ($24.1bn), the highest for any February on record, compared with 8.9 billion pounds a year earlier… The median of 17 forecasts in a Bloomberg News survey was for a shortfall of 8 billion pounds.”

March 21 – Bloomberg (Cecile Vannucci and Nikolaj Gammeltoft): “Traders are unwinding bearish bets on U.S. financial shares at the fastest rate in nine years, convinced the results of last week’s stress tests will revive a rally that has lifted the industry 41% since October.”

March 19 – Bloomberg (William Selway): “Wall Street securities firms cut their inventory of U.S. municipal bonds to a seven-year low in 2011 in a shift that may worsen the $3.7 trillion market’s biggest decline since October. Dealers and brokers reduced state and local-government bond holdings by 21% last year to $31.5 billion at the end of December, the lowest since 2004…”

Currency Watch:

The dollar index declined 0.6% this week to 79.32 (down 1.1% y-t-d). On the upside, the Japanese yen increased 1.3%, the Swiss franc 0.8%, the euro 0.7%, the Danish krone 0.7%, the British pound 0.2% and the Swedish krona 0.2%. On the downside, the South African rand declined 1.6%, the Australian dollar 1.2%, the South Korean won 0.8%, the New Zealand dollar 0.8%, the Mexican peso 0.6%, the Canadian dollar 0.6%, the Brazilian real 0.6%, the Norwegian krone 0.5%, the Singapore dollar 0.3%, and the Taiwanese dollar 0.1%.

Commodities Watch:

The CRB index declined 1.1% this week (up 3.0% y-t-d). The Goldman Sachs Commodities Index lost 1.0% (up 9.1%). Spot Gold was little changed at $1,662 (up 6.3%). Silver declined 1.0% to $32.27 (up 15%). May Crude lost 71 cents to $106.87 (up 8%). April Gasoline added 0.8% (up 27%), while April Natural Gas declined 2.2% (down 24%). May Copper fell 1.8% (up 11%). May Wheat dropped 2.6% (unchanged), and May Corn fell 3.9% (unchanged).

China Watch:

March 23 – Bloomberg: “Chinese banks misclassified about 20% of their outstanding loans to local governments, understating the risk that slowing revenue will cut borrowers’ ability to repay, a person with knowledge of the matter said. The China Banking Regulatory Commission told lenders last month that they had incorrectly placed about 1.8 trillion yuan ($286bn) of loans to local government financing vehicles in the safest category of lending… Agricultural Bank of China Ltd., the nation’s third-largest lender, yesterday unexpectedly posted its first drop in quarterly profit since its 2010 listing after creating more provisions than analysts had estimated. Local governments in China, prohibited from directly taking out bank loans or selling bonds, have set up more than 6,000 financing companies to raise funds for projects such as stadiums, roads and bridges, the National Audit Office said… About 8.2 trillion yuan of a total 9 trillion yuan of loans to the financing vehicles were classified as fully covered by cash flows as of Dec. 31… Local-government revenue grew 15% in the first two months of this year to 1 trillion yuan, compared with a 36% jump a year earlier…”

March 21 – Bloomberg: “China’s ouster of senior Communist Party official Bo Xilai last week added a new dimension to an opaque leadership transition under way in Beijing this year: news about the succession has become tradable. Speculation of a coup yesterday spread on the Internet, helping spark the biggest jump in credit-default swaps for Chinese government bonds in four months.”

March 23 – Bloomberg: “Should China push ahead with reform or return to a more government-directed economy? It’s a familiar question made more urgent by the downfall of Bo Xilai, seen by many as a leader of the Communist Party’s conservative faction. The party’s People’s Daily newspaper last month strongly supported more reform in an editorial, and a research arm of China’s Cabinet joined a call by the World Bank for a smaller state role in finance and industry. Bo, the ousted party boss of Chongqing, pursued a different approach: a top-down push for social equality, with a stronger role for government. The tension focuses on two models… The Chongqing model is named after the southwestern region Bo oversaw until his ouster March 15. A predecessor of his, Wang Yang, has championed a strategy encouraging growth of more capital-intensive, value-added industries, and tilting toward grassroots political empowerment.”

March 19 – Bloomberg: “China’s February home prices posted the worst performance in a year with almost half of the cities monitored by the government falling from a year ago… New home prices fell in 27 of 70 cities last month from a year earlier and prices were unchanged in six cities… That is the worst since the government began at the start of 2011 releasing individual data for 70 cities instead of a national average.”

March 20 – Bloomberg: “China, the world’s largest oil consumer after the U.S., increased gasoline and diesel prices for the second time in less than six weeks after crude gained last month the most in a year. Prices will rise by 600 yuan ($95) a metric ton… after the three crude grades tracked by the National Development and Reform Commission climbed more than 10%... Refiners will charge 7% more for gasoline and 7.8% more for diesel, the biggest price increases in more than two years…”

March 20 – Bloomberg: “China’s vehicle sales this year will probably miss their 8% growth forecast as the slowing economy and rising fuel costs curb buying, said an official at the state-backed auto association… Total vehicle deliveries may fail to increase by even 5% because of the ‘difficult’ economic backdrop, Gu Xianghua, deputy secretary general of the China Association of Automobile Manufacturers, said… Demand for commercial automobiles may be affected the most, falling as much as 8%, Gu said.”

March 20 – Bloomberg: “There has never been a better time to buy a Mercedes-Benz in China. The problem for luxury carmakers such as Daimler AG is that the incentives are likely to get even bigger. Mercedes dealers are offering record markdowns of 25% on high-end models such as the S300 sedan…”

India Watch:

March 19 – Bloomberg (V. Ramakrishnan, Kartik Goyal and Jeanette Rodrigues): “Indian Finance Minister Pranab Mukherjee missed his budget-deficit target by the most in three years and announced a 12% increase in debt sales, sending bond yields to a two-month high. The shortfall in finances in the year ending March will be 5.9% of gross domestic product, 1.3 percentage points more than the goal, Mukherjee said in a March 16 speech…”

Latin America Watch:

March 21 – Bloomberg (Camila Russo): “Argentina’s budget deficit is swelling to the widest in at least a decade as government spending surges, eroding confidence in the outlook for economic growth and reducing demand for longer-term bonds. Argentina posted a 2.7 billion peso ($619 million) deficit in January and February, a record in data going back to 2000, after spending jumped 34% last month from a year earlier while revenue increased 30%.”

Europe Economy Watch:

March 22 – Bloomberg (Patrick Henry): “Euro-area services and manufacturing output contracted more than economists forecast in March. A euro-area composite index based on a survey of purchasing managers in both industries dropped to 48.7 from 49.3 in February… Economists forecast a gain to 49.6… ‘The exports side is doing rather well, but indicators point to another economic contraction in the first quarter,’ said Christoph Weil, a senior economist at Commerzbank… ‘The debt crisis is far from over and there are still a lot of risks…”

March 21 – Bloomberg (Angeline Benoit): “The rise in Spanish exports slowed in January, undermining the only growth driver left to the euro region’s fourth-biggest economy as the strictest austerity push in decades tips it into a second recession since 2009. Exports grew 3.9% from a year earlier in January, compared with 6.6% in December, and 32% last year… Prime Minister Mariano Rajoy’s People’s Party government overhauled Spanish labor rules on Feb. 10, making it easier for companies to cut payroll in times of downturn… Public spending is seen contracting 11.5% after 2.2% last year, while a 24.3% unemployment rate will push household spending down 1.4%, after a 0.1% drop in 2011. The economy will contract 1.7% as export growth slows to 3.4% this year from 9% last year and 13.5% in 2010…”

Central Bank Watch:

March 22 – Bloomberg (Susan Li and Fion Li): “Federal Reserve Bank of St. Louis President James Bullard said the U.S. and world economies risk elevated inflation that persists for years should developed nations mistime their exits from easy monetary policies. ‘Once inflation gets out of control, it takes a long, long time to fix it,’ Bullard said… ‘Ultra-easy’ policies across the Group of Seven nations… may be retained for too long, he said. U.S. monetary policy may be at a ‘turning point’ and the Fed’s first interest-rate increase since the global financial crisis could come as soon as late 2013, Bullard said… Over the decades, central banks are ‘known for overstaying their welcome on policies’ and the hardest thing for policy makers is picking turning points, he said…”

March 19 – Bloomberg (Scott Hamilton): “Bank of England policy makers Adam Posen and David Miles maintained a push for more stimulus this month as the majority favored waiting to monitor the ‘substantial risks’ to the medium-term inflation outlook. Posen and Miles wanted to increase the target for bond purchases by 25 billion pounds ($40 billion) to 350 billion pounds…”

March 21 – Bloomberg (Matthew Brockett): “European Central Bank board member Joerg Asmussen said policy makers must start to plan an exit from emergency lending measures that have pumped more than 1 trillion euros ($1.3 trillion) into the banking system… ‘The timing of the exit depends on developments in financial markets,’ Asmussen said, according to Die Zeit. ‘Clearly it is still too early to begin, but we must start to carefully prepare the exit.’ One shouldn’t assume the ECB will make any more three-year loans to banks, Asmussen was quoted as saying. The debt crisis is not over and it’s unclear whether the current calm on markets is deceptive, he said.”

March 23 – Bloomberg (Tony Czuczka): “Juergen Stark, the German who quit as the European Central Bank’s chief economist last year, said liquidity the ECB has injected into the financial system boosts the risk of inflation, Handelsblatt reported. The running time of the central bank’s three-year loans to banks to fight the euro-area debt crisis is long and makes it more difficult to design an exit strategy to reduce liquidity, Stark, a former ECB Executive Board member, told the… newspaper…”

March 19 – Bloomberg (Emma Ross-Thomas): “Spanish Prime Minister Mariano Rajoy may be enjoying the European Central Bank’s emergency funds too much for Mario Draghi’s comfort. Rajoy’s loosening of a pledge to cut Spain’s deficit within days of the central bank’s latest three-year loan offering to banks has confronted the ECB president with just the behavior it wants to avoid. ECB officials are concerned the respite they have won for the region’s most vulnerable nations has eased pressure on them to address the budget shortfalls that first provoked the turmoil. ‘There’s a moral hazard element to this,’ Ken Wattret, chief European economist at BNP Paribas… said… ‘The ECB is clearly worried that in some countries the lower the risk premium on sovereign debt, the less urgency there will be to make some changes.’”

March 21 – Bloomberg (Matthew Brockett): “Former European Central Bank board member Lorenzo Bini Smaghi said Germany is making too much of the risks the ECB has taken onto its balance sheet. ‘The Germans are worried about the future of the euro,’ Bini Smaghi wrote… ‘They see above all the exponential growth in the balance sheet of the ECB and fear that they, as the biggest shareholder, will pay the highest price if something goes wrong. But despite all the risks, which certainly mustn’t be ignored, one shouldn’t overlook the safety measures.’”

Muni Watch:

March 21 – Financial Times (Nicole Bullock and Hal Weitzman): “Moody’s has slashed the credit ratings of more than $2.5bn of debt issued by Detroit in a move that could trigger payments related to its swap agreements, placing further pressure on the city’s precarious finances. More than $2bn of Detroit’s debt was downgraded… by two notches to B2 from Ba3. A downgrade below Ba3 results in a termination of agreements that swap payments on a chunk of that debt from floating to fixed rates. That termination allows Detroit’s counter-parties to demand a payment of $350m over the next seven years, the mayor’s office said… Detroit has accumulated debts of more than $10bn, and its budget deficit could swell to $270m by the end of June…”