Saturday, November 8, 2014

Weekly Commentary, April 6, 2012: Cracks in Europe

There were important developments this week on the liquidity analysis front. Tuesday’s release of the Federal Open Market Committee (FOMC) minutes (March 13 meeting) threw chilled water on market expectations for near-term additional quantitative easing. In Europe, Wednesday’s auction of Spanish 10-year bonds disappointed increasingly nervous markets. Demand for Spain’s debt has waned. This is a serious issue for a country suffering from deep recession, a troubled banking sector and ongoing borrowing requirements. Even from a bearish perspective, one would have expected the ECB’s massive liquidity operations to have bought Spain more than just a few short months.

It’s the nature of inflationism that once commenced the “money printing” just becomes incredibly difficult to stop. Over the years, U.S. and global markets have been conditioned to expect policy measures that ensure ongoing marketplace liquidity support. The ECB’s $1.3 TN LTRO liquidity facilities coupled with concerted global central bank liquidity measures were a game changer for global risk markets. Rapidly escalating de-risking/de-leveraging dynamics were stopped dead in their tracks. From my analytical framework, the key issue these days boils down to a fundamental question: did policy measures commence a new bullish liquidity cycle for global risk markets? Or, instead, did these interventions only foment a period of upside market dislocation and instability with attendant susceptibility to disappointment?

Many were quick to downplay the markets’ poor reception to the FOMC minutes. Only a “couple” committee members saw the potential need for additional quantitative easing, down from the “few” at the previous meeting. It is clear that the majority of committee members see no need for additional stimulus, although the markets last week were excited by Chairman Bernanke’s dovishness. The marketplace is less than appreciative of the steady chorus of mixed messages from various central bankers.

Yet the markets do believe that Dr. Bernanke retains a keen desire for additional stimulus, in spite of heightened internal and external pressures. Today’s data will embolden the doves, if not the bulls. And the markets remain quite confident that the Fed Chairman will move quickly to bolster the markets in the event of a return of market instability (the “Bernanke put”). This market perception inflates the market values of equities, bonds and risk assets more generally.

However, the markets this week clearly turned more sensitive to potential liquidity risks. In Europe, the markets took a meaningful step back toward instability. Spain’s 10-year yields jumped 41 bps to 5.74% (high since January 10), and the country’s two-year yields jumped 46 bps to 2.93% (high since January 24). Credit default swap (CDS) prices for Spain’s sovereign debt jumped 27 bps this week to 464 bps, the high since last November. Worryingly, Spanish bank CDS prices spiked significantly higher. Italian 10-year yields jumped 34 bps this week to 5.44%, the high since February 24. Italian CDS surged 21 to 418 bps (two-week gain of 38 bps). It is worth noting that Italian CDS traded at 127 bps one year ago; at that time Spain CDS was trading near 200 bps. Elsewhere in Europe, Belgium CDS rose 12 bps (245), France gained 10 bps (179), and Portugal jumped 26 bps (1,103). The new Greek 10-year bond saw its yield surge 96 bps this week to 21.50%, with a three-week gain of 372 bps.

And while policymaking plays a profound role in shaping market perceptions, my analytical framework recognizes the “global leveraged speculating community” as the marginal source of marketplace liquidity. When the speculators are building positions and adding leverage, the markets enjoy self-reinforcing higher prices, bullish sentiment and liquidity abundance. The markets do, however, remain acutely vulnerable to any serious move to pare back risk/leverage. We saw again last year how quickly seemingly robust global markets can falter and succumb to self-reinforcing liquidation and illiquidity.

Two articles this week from the Financial Times (Sam Jones) shed some interesting light on speculator activities: “Hedge Funds Make Most of Asymmetric Risks,” and “ECB Liquidity Fuels High Stakes Hedging.” “The European Central Bank’s moves to boost liquidity in the Eurozone are powering big returns for the high-stakes hedge fund strategy made notorious by the collapse of Long Term Capital Management more than a decade ago: relative value bond arbitrage.” Super.

From Sam Jones’ FT article: “Across the eurozone, and beyond, hedge fund managers are now pointing to ‘significant’ pricing anomalies on a scale not seen since 2008. A huge rally in credit has seen spreads tighten to pre-Lehman lows. The reason for most hedge funds is clear. For all of its protestations to the contrary, the European Central Bank’s longer-term refinancing operation is having as profound an effect on markets as quantitative easing. ‘The Fed and the Bank of England were early and significant proponents of QE; the ECB has only recently begun,’ Michael Hintze, the founder of the $11bn credit hedge fund manager CQS wrote… ‘The thinly disguised QE move by the ECB – LTRO – still has further scope for expansion,’ he said. ‘The LTRO was a game changer,’ says Suki Mann, a strategist at Société Générale. ‘We have seen the mother of all rallies in the first quarter – the third best quarter for credit ever.’ It was a question of buying risk, says Mr Mann – ‘the higher the beta the better.’”

The odds are decent that the markets have been set up for major disappointment. Market participants – and surely the speculators – have viewed the introduction of LTRO in similar light to quantitative easing: once started, policymakers will be held hostage to the markets and forced into ongoing liquidity injections. At long last, the markets have assumed, the ECB fell in line with the Federal Reserve and Bank of England. And once the risk market rally took off, there was intense pressure throughout the marketplace to participate. The bears were run over and the cautious were forced reluctantly to jump aboard. Exceptionally strong markets then bolstered the view that the LTRO had fundamentally changed the liquidity and risk backdrop. In this liquidity-induced euphoria, a fallacy took hold that Europe was well on the way to actually resolving its debt crisis.

There is support for the view that the unlimited nature of the LTRO was ill-conceived; that the ECB lost control as the liquidity facilities ballooned to unimaginable dimensions. But perhaps, instead of the beginning of something – might the LTRO actually prove to be something more akin to the beginning of the end? Rather than the ECB finally succumbing to the Fed’s inflationist policy doctrine, might the LTRO spur the Bundesbank (and others) to take a harder line with liquidity operations?

Whether one examines the LTRO or the Fed’s QE programs, the scope of these market interventions has become staggering. Resulting market distortions have been commensurate. The whirlwind of speculation has turned too unwieldy. And with the LTRO having incited powerful forces of re-risking and re-leveraging, European markets have actually become increasingly vulnerable to an abrupt deterioration in the liquidity backdrop.

The euro was hit for 1.8% this week. German bunds rallied, with spreads to other European borrowers widening meaningfully. The so-called “relative value bond arbitrage” and other leveraged strategies might have had a rough go of it. The Italian 10-year yield to bund spread widened 41 bps this week to 371 bps (9-wk high). The Spain to German yield spread widened 47 bps to 401 bps (wide since November). The French to bund spread widened 16 bps to the widest level since January 19. European equities performed poorly. Germany’s DAX dropped 2.5%, reducing its year-to-date gain to 14.9%. Spanish stocks were hit for 4.5% (down 10.6% y-t-d) and Italian stocks were smacked for 5.0% (up 0.8% y-t-d).

This week brought important confirmation for the thesis of heightened European market vulnerability. There’s a strong case that an important market inflection point has been reached in Europe. Once de-risking/de-leveraging dynamics commence in earnest they generally persist. Contagion effects build momentum. This week's global markets also appeared increasingly vulnerable. But how this might play out in our markets is less clear.

There was a certain amount of intrigue heading into today’s payroll data, not the least of which was that most markets were closed for the holiday. Many thought somewhat disappointing data would support Dr. Bernanke’s case for QE3, in the process bolstering the flagging “risk on” trade. Others, including myself, believed U.S. equities would prefer stronger data, employment growth that would support the “U.S. as relatively best performer” thesis. But at 120,000, the increase in confirm payrolls was the weakest reading since October (112,000) and below even the pessimistic estimates. Bonds surged on the news, as S&P 500 futures sank more than 1%. The dollar retreated somewhat on the news, although the currencies were mixed overall.

Today accounted for much of this week’s decline in ten-year Treasury yields. Fixed income spreads were generally resilient in the face of heightened European stress and resulting pressure on global risk markets. If Friday’s Treasury rally is sustained Monday, it will be interesting to monitor various Credit spreads (many Credit instruments did not trade Friday). There is growing market chatter regarding huge positions in various Credit indices being traded by major market operators (including JPMorgan). I would tend to see such a backdrop raising the odds of market fireworks if the reemergence of European debt stress provokes a bout of general risk aversion. With markets now poised for a weak Monday opening, those positioned aggressively “risk on” will have a long weekend to contemplate an increasingly unsettled backdrop.

U.S. stocks were lower for the week, although they significantly outperformed Europe and most global bourses. While today’s data don’t help the cause, it’s too early to dismiss the possibility that U.S. equities have been anointed “best game in town” by the sophisticated market operators. At the same time, I see added support for the view that much of the global leveraged speculating community is operating with “weak hands.” When markets head south – albeit Spanish stocks and bonds, commodities or gold equities – there's intense pressure to liquidate positions and cut losses. At the same time, our Bubble markets have a history of trying to ignore European developments. At the minimum, it is at this point reasonable to presume that the recent halcyon period for global risk markets is winding down.

At the end of the day, the fate of the current global “bull market” will likely be determined by the willingness of the Fed and ECB to continue aggressively expanding their balance sheets. Markets over recent months again succumbed to Bubble dynamics, largely on the presumption that determined policymakers have things under control. This confidence has fomented only more egregious speculative and leveraging excesses – along with resulting fragilities.

One can point to a momentous policy flaw: policymakers have believed that it's critical to underpin financial markets during periods of stress, while failing to appreciate that this policy course nurtures dependencies and susceptibilities. Over the years – and certainly going back to policy responses in 2008/09 and more recently with QE2 and LTRO – extraordinary policy measures have created acute dependency to ongoing liquidity measures. Each intervention sows the seeds for the next even grander intervention. At some point policymakers will simply not be able to deliver.

For the Week:

The S&P500 slipped 0.7% (up 11.2% y-t-d), and the Dow declined 1.1% (up 6.9%). The Morgan Stanley Cyclicals fell 1.8% (up 14.3%), while the Transports increased 0.6% (up 5.3%). The Morgan Stanley Consumer index added 0.2% (up 5.8%), while the Utilities dipped 0.4% (down 3.0%). The Banks were hit for 1.7% (up 24.1%), and the Broker/Dealers were down 2.5% (up 23.4%). The S&P 400 Mid-Caps fell 1.0% (up 12%), and the small cap Russell 2000 dropped 1.5% (up 10.4%). The Nasdaq100 gained 0.3% (up 21.3%), while the Morgan Stanley High Tech index fell 1.9% (up 19.4%). The Semiconductors fell 3.5% (up 16.1%). The InteractiveWeek Internet index declined 2.0% (up 15.6%). The Biotechs lost 1.7% (up 24.1%). With bullion down $30, the HUI gold index sank 6.7% (down 11.6%).

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 about a basis point to 0.32%. Five-year T-note yields ended the week down 14 bps to 0.90%. Ten-year yields fell 15 bps to 2.055%. Long bond yields dropped 12 bps to 3.22%. The implied yield on December 2013 eurodollar futures declined 4 bps to 0.74%. The two-year dollar swap spread increased 4 to 29 bps. The 10-year dollar swap spread increased 1.5 to 9.3 bps. Corporate bond spreads widened. An index of investment grade bond risk was up 9 to a seven-week high 100 bps. An index of junk bond risk jumped 41 to 615 bps (high since 1/17).

Debt issuance slowed during the short week. Investment grade issuers included Apache Corp $3.0bn, Hartford Financial $1.55bn, Kaiser Foundation Hospital $1.0bn, Met Life $500 million, and Stanford University $140 million.

Junk bond funds saw inflows drop to $286 million (from Lipper). Junk issuers included HD Supply $1.625bn, Cengage Learning $750 million, Offshore Group $775 million, Sandridge Energy $750 million, Nesco $280 million, New Gold $300 million, Actuant $300 million, Nesco $280 million and Heckmann Corp $250 million.

I saw no convertible debt issuance.

International dollar bond issuers included Vivendi $2.0bn, Daimler Finance $1.75bn, VT Bank $1.5bn, Samsung $1.0bn, Delhaize Group $300 million, and Globo Communicacoes $300 million.

Spain's 10-year yields surged 41 bps this week to 5.74% (up 70bps y-t-d). Italian 10-yr yields jumped 34 bps to 5.44% (down 159bps). Ten-year Portuguese yields rose 70 bps to 11.95% (down 82bps). The new Greek 10-year note yield surged 96 bps to 21.50% (3-wk gain of 372bps). German bund yields fell 6 bps to 1.73% (down 9bps), while French yields jumped 10 bps to 2.98% (down 16bps). The French to German 10-year bond spread widened a notable 16 to 125 bps. U.K. 10-year gilt yields declined 5 bps to 2.16% (up 18bps). Irish yields were up a basis point to 6.75% (down 151bps).

The German DAX equities index fell 2.5% (up 14.9% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.99% (up one basis point). Japan's Nikkei sank 3.9% (up 14.6%). Emerging markets were mostly under pressure. For the week, Brazil's Bovespa equities index declined 1.1% (up 12.2%), and Mexico's Bolsa slipped 0.3% (up 6.3%). South Korea's Kospi index dropped 2.3% (up 11.1%). India’s Sensex equities index gained 0.5% (up 13.1%). China’s Shanghai Exchange rose 1.9% (up 4.9%) in a holiday-shortened week. Brazil’s benchmark dollar bond yields rose 2 bps to 3.19%.

Freddie Mac 30-year fixed mortgage rates declined a basis point to 3.98% (down 89bps y-o-y). Fifteen-year fixed rates dipped 2 bps to 3.21% (down 89bps). One-year ARMs were unchanged at 2.78% (down 44bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 3 bps to 4.58% (down 89bps).

Federal Reserve Credit declined $29.5bn to $2.843 TN. Fed Credit was up $223.5bn from a year ago, or 8.5%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 4/4) jumped $13.3bn to $3.487 TN. "Custody holdings" were up $67.3bn y-t-d and $80.1bn year-over-year, or 2.4%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $840bn y-o-y, or 8.9% to $10.287 TN. Over two years, reserves were $2.432 TN higher, for 31% growth.

M2 (narrow) "money" supply jumped $37.6bn to a record $9.825 TN. "Narrow money" has expanded 7.8% annualized year-to-date and was up 9.5% from a year ago. For the week, Currency increased $2.3bn. Demand and Checkable Deposits rose $12.8bn, and Savings Deposits jumped $25.6bn. Small Denominated Deposits declined $4.4bn. Retail Money Funds increased $1.3bn.

Total Money Fund assets dropped $15.2bn to $2.590 TN (low since August). Money Fund assets were down $105bn y-t-d and $154bn over the past year, or 5.6%.

Total Commercial Paper outstanding declined $6.1bn to $931bn. CP was down $28bn y-t-d and $162bn from one year ago, or down 14.8%.

Global Credit Watch:

April 2 – Wall Street Journal (David Enrich and Sara Schaefer Munoz): “Even as the European banking crisis shows signs of easing, lenders across the Continent are engaging in a variety of maneuvers to avoid, or at least delay, coming to terms with potential problems lurking on their books. Some banks are concocting unorthodox structures designed to improve all-important capital ratios, without raising new capital or moving unwanted assets off their balance sheets. Others are engaging in complex transactions with struggling customers to help temporarily avoid loan defaults… Banks now have greater flexibility to pursue such tactics because of the roughly €1 trillion ($1.33 trillion) of cheap three-year loans that the European Central Bank recently handed out to at least 800 lenders.”

April 5 – Bloomberg (Angeline Benoit and Lucy Meakin): “A slide in Spanish stocks and bonds deepened as investors’ concerns that Prime Minister Mariano Rajoy may require international aid rattled markets… A rally triggered by more than $1 trillion of European Central Bank loans to the region’s financial institutions to stave off a credit crunch is running out of steam and, while Italian Prime Minister Mario Monti is pressing ahead with an economic overhaul, Rajoy is failing to meet deficit targets amid a worsening recession. ‘Stress has returned to the periphery of the euro area,’ David Mackie, chief European economist at JPMorgan…wrote…”

April 5 – Bloomberg (Meera Louis): “The International Monetary Fund said Spain’s new budget proposal will need to be assessed as the country struggles to meet European Union targets and demand for the nation’s debt slumps. ‘The challenges that Spain is facing are severe,’ IMF spokesman Gerry Rice told reporters… ‘Market sentiment remains volatile. This calls for sustaining the reform.’ Prime Minister Mariano Rajoy said Spain’s situation is one of ‘extreme difficulty’ and signaled that his budget cuts are less painful than a bailout would be. Spain sold 2.59 billion euros ($3.4bn) of bonds yesterday, just above the minimum amount it planned for the auction and below the 3.5 billion-euro maximum target.”

April 2 – Bloomberg (Sharon Smyth): “Spanish home prices are poised to fall the most on record this year, leaving one in four homeowners owing more than their properties are worth, as the government forces banks to sell real-estate holdings. Home prices will decline 12% to 14%, according to research and advisory company R.R. de Acuna & Asociados…”

April 3 – Dow Jones (Christopher Emsden and Giovanni Legorano): “When Italian Prime Minister Mario Monti returns from a self-styled road show in Asia, he will find a citizenry reeling from new taxes, reports their neighbors don't pay taxes, soaring utility bills and comments from business leaders that the future is going to be worse. ‘The government risks getting caught up in mud and quicksand,’ Enrico Letta, a senior official in the center-left Democratic Party and a strong Monti supporter, said…”

April 3 – Bloomberg (Lorenzo Totaro): “Prime Minister Mario Monti may need to rework his plan to ease firing rules in Italy to protect the proposed labor market overhaul from a constitutional challenge, the former head of the country’s high court said. ‘There are some uncertainties in terms of equality and fairness and that is in addition to doubts on whether such a complex and twisted mechanism can work out, or, on the contrary, create problems rather than fixing them,” Cesare Mirabelli, a former president of Italy’s Constitutional Court, said… The labor law plan passed March 23 by the Cabinet allows companies to fire workers for economic reasons without the threat of a court ordering their reinstatement. Employees would be entitled to as much as 27 months pay as compensation.”

April 5 – Bloomberg (Henrique Almeida): “Some of Portugal’s municipalities may need to restructure their debt once the government determines the exact amount they owe, a spokesman for Parliamentary Affairs Minister Miguel Relvas said. ‘We are waiting to find out the overall debt figure,Antonio Vale said… ‘It may be possible that some town halls restructure their debt.’”

Global Bubble Watch:

April 6 – Bloomberg (Stephanie Ruhle, Bradley Keoun and Mary Childs): “A JPMorgan Chase… trader of derivatives linked to the financial health of corporations has amassed positions so large that he’s driving price moves in the $10 trillion market, traders outside the firm said. The trader is London-based Bruno Iksil, according to five counterparts at hedge funds and rival banks who requested anonymity because they’re not authorized to discuss the transactions. He specializes in credit-derivative indexes, a market that during the past decade has overtaken corporate bonds to become the biggest forum for investors betting on the likelihood of company defaults. Investors complain that Iksil’s trades may be distorting prices, affecting bondholders who use the instruments to hedge hundreds of billions of dollars of fixed-income holdings.”

April 2 – Bloomberg (Nikolaj Gammeltoft, Liz Capo McCormick and Cecile Vannucci): “Markets for equities, bonds and currencies are the calmest they’ve been since 2007, and that’s making some investors nervous. Options that protect against Standard & Poor’s 500 Index losses plunged 64% in the last two quarters, the most ever… Interest-rate volatility is near a five-year low, while demand for hedges against extreme moves in the dollar is close to the weakest since 2008. Bank of America Corp.’s Market Risk cross-asset volatility index reached a level not seen since November 2007."

April 4 – Bloomberg (Craig Torres and Cheyenne Hopkins): “Federal Reserve Bank of Richmond President Jeffrey Lacker said a U.S. law restricting proprietary trading at banks and scheduled for enactment in July may be ‘impossible’ to implement. The so-called Volcker rule… is aimed at reducing the odds that banks will make risky investments with their own capital and put depositors’ money at risk. Lacker said bank trading books were ‘kind of tangential’ to the financial crisis of 2008-2009, when bank capital was eroded by losses on risky mortgages, many of them bundled into complex securities.”

April 3 – Bloomberg (Krista Giovacco): “Private-equity firms from KKR & Co. to Apollo Management LP are contributing to a drop in leveraged loan sales in the U.S. as buyouts dwindle. Companies obtained $150.8 billion of high-yield, high-risk loans during the first three months of the year, down from $174.7 billion in the same period of last year…”

April 4 – Dow Jones (Al Yoon): “More than half of loans in commercial mortgage-backed securities made at the market peak in 2007 remain outstanding even though they were scheduled to mature last quarter, according to loan-research service Trepp LLC. The data shows investors remain unforgiving of loose underwriting practices of the past. Of the $9.5 billion in loans reaching maturity last quarter, only 38.5% were paid off without any losses to debtholders… About 43% are outstanding without resolution, with the rest either extended or paid off, including those with a loss.”

Currency Watch:

The dollar index rallied 1.2% this week to 79.89 (down 0.4% y-t-d). On the upside for the week, the Japanese yen increased 1.5%, the Brazilian real 0.2%, the Canadian dollar 0.2%, the South Korean won 0.1%, and the New Zealand dollar 0.1%. On the downside, the South African rand declined 2.7%, the Swedish krona 2.0%, the euro 1.8%, the Danish krone 1.8%, the Norwegian krone 1.8%, the Swiss franc 1.6%, the Mexican peso 1.3%, the British pound 0.9%, the Australian dollar 0.4%, the Singapore dollar 0.2%, and the Taiwanese dollar 0.1%.

Commodities Watch:

The CRB index slipped 0.6% this week (up 0.4% y-t-d). The Goldman Sachs Commodities Index was little changed (up 6.9%). Spot Gold dropped 1.9% to $1,636 (up 4.7%). Silver sank 2.3% to $31.73 (up 13.7%). May Crude increased 29 cents to $103.31 (up 4.5%). May Gasoline rose 1.0% (up 26%), while May Natural Gas lost another 1.7% (down 30%). May Copper declined 0.8% (up 11%). May Wheat ended the week down 3.4% (down 2%), while May Corn gained 2.2% (up 2%).

China Watch:

April 2 – Bloomberg (Frances Schwartzkopff): “China, the world’s biggest cigarette market, may suffer slower economic growth because of cancer and other chronic diseases that are hurting the labor force, Health Minister Chen Zhu said. Non-communicable diseases which cause prolonged sickness are responsible for four out of five deaths in China, compared with about 63% globally, and absorb about 70% of the nation’s health spending… Fighting the threat requires tighter scrutiny of the tobacco industry, linked to 1 million deaths in China, he said.”

Japan Watch:

April 2 – Bloomberg (Keiko Ujikane and Masahiro Hidaka): “Sentiment among Japan’s largest manufacturers failed to improve in March as executives predicted the yen will rebound against the dollar, hurting exporters’ sales and profits.”

India Watch:

April 5 – Bloomberg (Swansy Afonso): “Jewelers in India, the world’s biggest bullion buyer, closed shops for the 20th day, extending the longest shutdown to protest against a 1% excise duty on non-branded gold ornaments, a trade group said. More than 90% of the stores across the country were closed today…”

Europe Economy Watch:

April 2 – Bloomberg (Simone Meier): “Euro-region manufacturing contracted for an eighth month in March, adding to signs the 17-country economy continued to shrink in the first quarter. A manufacturing gauge, based on a survey of purchasing managers, fell to 47.7 from 49 in February…”

April 5 – Bloomberg (Gabi Thesing): “German industrial output fell more than economists forecast in February as cold weather kept workers off construction sites. Production decreased 1.3% from January… Economists forecast a drop of 0.5%...”

April 5 – Bloomberg (Jennifer Ryan): “U.K. manufacturing output unexpectedly declined for a second month, indicating the economy’s return to growth may be uneven. Factory output fell 1% from January, the most since April…”

April 4 – Bloomberg (Frances Schwartzkopff): “Denmark’s housing market remains ‘fragile’ and prices may continue to decline as the fallout of the country’s property bubble feeds through the economy, Fitch Ratings said… ‘The housing market remains fragile and house prices may have further to fall,’ Fitch said.”

Global Unbalanced Economy Watch:

April 5 – Bloomberg (Nichola Saminather): “Australian homes listed for sale jumped ‘dramatically’ by 5.4% in March to a four-month high, according to SQM Research Pty. Homes offered for sale climbed to 387,958 from 368,123 in February…”

U.S. Bubble Economy Watch:

April 6 – Bloomberg (Michael McDonald): “U.S. local-government payrolls fell to the lowest level in more than six years in a sign that municipalities still face fiscal strains almost three years after the end of the recession. Employment by local governments… dropped by 3,000 in March to 14.1 million, the lowest since February 2006… State payrolls helped offset the loss, showing a third straight month of gains, rising 2,000 to 5.1 million. It’s the longest streak of job increases at that level since 2008.”

April 3 – Bloomberg (Alison Vekshin): “In 2005, Stockton, California, unveiled a gleaming new arena and ballpark on its riverfront, part of a $145 million plan to draw people downtown. The city east of San Francisco, a shipping hub for wine and almonds, is now negotiating with creditors to stave off bankruptcy. The 10,000-seat arena, a glass-walled symbol of the city’s fight against a soaring crime rate and downtown blight, was one piece of a redevelopment boom that also saw the addition of a 5,000-seat minor league ballfield, a 650-space parking garage, a 66-slip marina and the purchase of an eight-story City Hall. …Today the new City Hall stands empty because the government can’t afford to move in. The parking garage may be seized by creditors because the city defaulted on $32.8 million in bonds.”

April 5 – Bloomberg (Hui-yong Yu): “The biggest surge of Seattle-area apartment construction in a quarter century is threatening to undercut the growth in rents, a trend that’s also emerging in such U.S. cities as Washington and Houston. Seattle went from ‘dead last’ in rent increases three years ago… to 13th out of 88 markets last year, according to Axiometrics… The construction boom spurred by rising rents is now stoking concern that revenue growth may stall as an increasing number of units compete for tenants. ‘We went from almost a desert to a big pipeline’ in two years, said David Young, the… managing director… for commercial broker Jones Lang LaSalle Inc. ‘There will be a glut in 2013 and 2014 just because of the amount of new product.’”

Central Bank Watch:

April 4 – Bloomberg (Matthew Brockett and Jana Randow): “European Central Bank President Mario Draghi said policy makers are prepared to act against inflation threats if needed, while assuring investors that the ECB doesn’t plan to withdraw emergency stimulus any time soon. ‘All the necessary tools are available to address upside risks to price stability in a firm and timely manner,’ Draghi told reporters… At the same time, it’s premature to talk about the ECB’s exit strategy, Draghi said… The ECB is balancing the threat of inflation in Germany, Europe’s largest economy, against the need to fight the sovereign debt crisis. While nations from Greece to Spain are battling recessions and record unemployment, workers in Germany are winning some of the biggest pay increases in 20 years.”

April 4 – Bloomberg (Jana Randow and Zoe Schneeweiss): “The Austrian Central Bank will join Germany’s Bundesbank in rejecting as collateral bank bonds guaranteed by member states receiving aid from the European Union and the International Monetary Fund. ‘We will do that as well,’ Christian Gutlederer, a spokesman for the…institution, said… The Bundesbank was the first of the region’s central banks to make use of a change in European Central Bank collateral rules announced on March 23. The ECB no longer obliges members to accept bank bonds guaranteed by governments ‘whose credit assessment does not comply with the benchmark for establishing its minimum requirement for high credit standards.’”

April 4 – Bloomberg (Joshua Zumbrun and Jeff Kearns): “Federal Reserve Bank of Richmond President Jeffrey Lacker said financial markets had assigned too high a probability that the Fed would begin a new round of asset purchases to reduce borrowing costs and spur economic growth. ‘I was surprised a couple months ago at the probability market participants seemed to ascribe to further easing,’ Lacker, a voting member of the Federal Open Market Committee, told reporters… ‘While further easing is obviously something that’s conceivable, I wouldn’t favor it unless conditions deteriorated quite substantially” for growth and inflation.”

Muni Watch:

April 2 – Bloomberg (Brian Chappatta): “The biggest wave of state- and local-government debt refinancing in two decades is helping fuel the longest winning streak for municipal bonds since 2007. With interest rates near the lowest since the 1960s, refundings made up 68% of the $72.2 billion of sales in the first quarter… At that pace, the full-year total would be the most since at least 1993, said John Hallacy, head of municipal research at Bank of America Merrill Lynch.”

April 4 – Bloomberg (Darrell Preston): “Taxable municipal bonds are poised to extend their best rally in 18 years as supply shrinks and buyers gain confidence that ‘hundreds of billions’ of dollars of defaults predicted by analyst Meredith Whitney won’t occur. The extra yield investors demand to hold top-rated taxable debt due in 10 years instead of equivalent-maturity tax-exempts narrowed to 0.67 percentage point March 23… That’s the least since tracking began in 1994…”

April 4 – Bloomberg (Steve Matthews and William Selway): “The city of Mesa, Arizona, fired 125 employees in 2009 as tax collections dropped amid a housing slump and a recession. Now, it is filling vacancies, training a class of police recruits for the first time in three years, and Mayor Scott Smith says he’s confident ‘revenue levels are going to stabilize.’ …After four years of shuttering fire houses, cutting school budgets and firing teachers and police, these governments are starting to steady as tax revenues rebound. Public employment at all levels declined by just 7,000 in the first two months of this year, well down from the 22,000 monthly average in 2011…”

Real Estate Watch:

April 5 – Bloomberg (Hui-yong Yu): “Demand from technology and energy-industry tenants led the U.S. office market to its fifth straight quarterly gain in net occupancy, with San Francisco leading the country in rent growth, Reis Inc. said. Office landlords had a net increase in leased space of almost 6 million square feet (557,000 square meters) in the three months through March, compared with 6.1 million square feet a year earlier… The vacancy rate dropped to 17.2 from 17.6% in the first quarter of 2011. Occupancy and rents are increasing…”