Sunday, December 14, 2014

Weekly Commentary, April 11, 2014: Financial Stability

“Each Spring, thousands of government officials, journalists, civil society organizations, and invited participants from the academia and private sectors, gather in Washington, DC for the Spring Meetings of the IMF and the World Bank Group. At the heart of the gathering are meetings of the IMF’s International Monetary and Financial Committee and the joint World Bank-IMF Development Committee…”

Wednesday’s opening IMF seminar was titled “Managing the Transition to Normality - Implications for Fiscal Policy.” From panel moderator Rob Cox (Reuters): “Or, as one of my colleagues said, ‘Isn’t this the panel where you ask the question whether the world is ready for a withdrawal of the punchbowl.’”

To commence the discussion, the audience was asked to vote “yes” or “no” to the question: “Is the time right for central banks to unwind unconventional monetary policies?” Not surprisingly, the vote went overwhelmingly in favor (63 to 37) of keeping the drinks flowing. There are reasons why monetary policy has throughout history been most effectively managed by disciplined and independent central bankers.

Federal Reserve Bank of Chicago President Charlie Evans represented the Federal Reserve. This panel discussion set off what became during IMF and related events an indictment of U.S. monetary policy. In a particularly interesting exchange, Citigroup’s chief economist Willem Buiter took strong exception with Fed policy. Buiter is no hawk. In other comments, he blasted the ECB for running tight monetary policy. Buiter is, however, emblematic of an increasingly vocal camp that sees Fed QE as high-risk, minimal reward policy. Evans was notably defensive. In my view, he is the last Fed official that should be representing U.S. policy at this juncture. Evans only fuels what is a mounting global lack of confidence in the Federal Reserve.

Charles Evans: “In the U.S. monetary policy is using the standard transmission mechanism. We’re trying to reduce financing costs. Auto rates are down and the auto sector is way back compared to where it was. Housing is better. Mortgage rates are down. And if you have the ability to refinance, or get a mortgage – it’s tougher these days because of the standards - then you can do that. So it’s the standard transmission mechanism. And we are indeed trying to get inflation up because we’re below target. What comes with that is wage increases, also up to where they ought to be. Wages are a symptom of inflation – using a lagging indicator – and they’re down around 2 to 2.25% right now. When they’re at a steady growth part of the cycle they ought to be about 3.5% - 1.5% productivity and 2% inflation target. So getting everything up – and getting inflation up to where it is supposed to be is an important part of all of this. So that benefits everybody.”

Citigroup chief economist Willem Buiter: “Monetary policy works with asset prices. By boosting equities, raising bond prices, weakening the currency and that’s exactly how it has happened. Not very effectively, because we have poor man’s monetary policy. Which is what unconventional monetary policy is. But it’s all we have. I would have preferred to see some additional measures on the fiscal side, which could have mitigated some of the income distributional consequences…”

Evans: “One of the big risks is that we withdraw our accommodative policies prematurely. I think it’s just human nature to start thinking ‘we’ve been doing this for a long time. Zero interest rates in the U.S. we’ve had them since December 2008. That must have been long enough. Maybe it’s time to start the process of renormalizing.’ Well, let me just remind everybody, inflation is 0.9% in the U.S. on our personal consumption expenditure index. We’re supposed to be hitting two. We’ve been under two for a long time. We should be averaging two. Overshooting would not be a problem as long as it’s done in a reasonable fashion. We should be averaging two. Around the world inflation is low. I think that’s a sign of weakness. I think it’s a sign of risk. I think this (an IMF video) is the conventional wisdom up there which is that the risks are probably lower than they were. And I can see a path where things are going to work out, you know, fine. And that’s kind of my modal forecast. But I think we’re trying to thread the needle in too many places. And if it starts coming off a little bit in one place it could continue to have that problem. Another thing I want to remind everybody is, taking the long view, the U.S. consumer is not nearly as strong as they were 15 years ago, when we looked to the U.S. for a sign of strength. It’s going to take quite a while for them to come back. And, in fact, there’s a tremendous number of income and skills challenges that a large part of the workforce have. And I’m not quite sure when that’s going to be repaired. So everybody needs to pick up their own economies and contribute themselves to the world economy. And that’s part of why I think we need to make sure we’re in this all the way until we’re actually out of it.”

Buiter: “It’s important to recognize that a central bank like the Fed doesn’t have a dual mandate – employment and inflation – no, there’s a triple mandate of financial stability.”

Evans interrupts: “No, no, no moderate long-term interest rates is usually the one that’s mentioned. And that would be moderate real interest rates and inflation.”

Buiter: “Financial stability is a key responsibility of every central bank. And if it’s a choice between inflation or whatever – and financial stability, then financial stability comes first.”

Evans: “Wow, that’s amazing! That’s amazing to me! Are you kidding me?”

Buiter: “What you see in the U.S. – and Jeremy Stein has pointed this out - you have this explosion of Credit froth and asset markets a lot of bubbly behavior. I wouldn’t want to pop a Bubble yet. But payment-in-kind bonds; covenant-light loans, leverage loans, high-yield loans…”

Moderator Cox: “Just like the good old days, 2006.”

Buiter: “In looking at it, in some ways the issuance of the highly risky instruments is now in excess of what we saw in 2007. And you have to allow for that. It might be necessary to raise rates before it can be justified on the grounds of inflation and unemployment.”

Evans: “I strongly disagree with that. I want to be very careful. Financial stability is very important. We have to make sure we’re as best on top of financial instability risks as we can be. But we have other tools. We have micro supervisory tools; we have macro-prudential tools; we’ve just passed new legislation in the U.S. and around the world. We have new standards. If those tools are inadequate to rein in a financial system that jumps all over the appropriate setting of monetary policy at a time when the unemployment rate in the U.S. is higher than where it peaked in the last recession – at 6.7% - at a time when inflation is 1% and what we own as a central bank is inflation, we need to provide accommodation. If we can’t do the right thing for those two mandates, but we have to raise the white flag and say ‘we’re going to have to drive unemployment up higher and inflation lower in order to preserve a financial system, which apparently would be adding negative social value,’ we’d have to examine that very carefully I think. I don’t think that’s the circumstances. But that’s very distressing to me.”

As many times as Dr. Evans repeats the mantra “U.S. monetary policy is using the standard transmission mechanism,” it does not alter the reality that there is nothing standard about the Fed’s QE/“money” printing experiment. In the U.S. and somewhat globally, downward pressure on consumer price indices is now used by the doves to justify even more central bank monetary stimulus. Consistent with the history of major monetary inflations, once commenced there is always plentiful justification and rationalization for just one more round of printing – and another... And the longer the inflation the greater the addiction.

The most notable indictment of Fed policy and the Bernanke doctrine came Thursday from a paper and talk by the highly respected Reserve Bank of India Governor Raghuram Rajan (former IMF chief economist and University of Chicago professor). “Competitive Monetary Easing: Is it Yesterday Once More?” is the most comprehensive critique of U.S.-led global monetary policy I’ve read. I extract heavily below, but suggest readers study Rajan’s exceptional 10-page paper.

A good way to describe the current environment is one of extreme monetary easing through unconventional policies. In a world where debt overhangs and the need for structural change constrain domestic demand, a sizable portion of the effects of such policies spillover across borders, sometimes through a weaker exchange rate. More worryingly, it prompts a reaction. Such competitive easing occurs both simultaneously and sequentially…
The key question is what happens when these policies are prolonged long beyond repairing markets – and then the benefits are much less clear. Let me list 4 concerns: 1) Is unconventional monetary policy the right tool once the immediate crisis is over? Does it distort behavior and activity so as to stand in the way of recovery? Is accommodative monetary policy the way to fix a crisis that was partly caused by excessively lax policy? 2) Do such policies buy time or does the belief that the central bank is taking responsibility prevent other, more appropriate, policies from being implemented? Put differently, when central bankers say, however reluctantly, that they are the only game in town, do they become the only game in town? 3) Will exit from unconventional policies be easy? 4) What are the spillovers from such policies to other countries?
…The macroeconomic argument for prolonged unconventional policy in industrial countries is that it has low costs, provided inflation stays quiescent. Hence it is worth pursuing, even if the benefits are uncertain. A number of economists have, however, raised concerns about financial sector risks that may build with prolonged use of unconventional policy. Asset prices may not just revert to earlier levels on exit, but they may overshoot on the downside, and exit can cause significant collateral damage.
One reason is that leverage may increase both in the financial sector and amongst borrowers as policy stays accommodative… Leverage need not be the sole reason why exit may be volatile after prolonged unconventional policy. Investment managers may fear underperforming relative to others. This means they will hold a risky asset only if it promises a risk premium (over safe assets) that makes them confident they will not underperform holding it. A lower path of expected returns on the safe asset makes it easier for the risky asset to meet the required risk premium, and indeed draws more investment managers to buy it – the more credible the forward guidance on ‘low for long, the more the risk taking. However, as investment managers crowd into the risky asset, the risky asset is more finely priced so that the likelihood of possible fire sales increases if the interest rate environment turns. Every manager dumps the risky asset at that point in order to avoid being the last one holding it.
Leverage and investor crowding may therefore exacerbate the consequences of exit. When monetary policy is ultra-accommodative, prudential regulation, either of the macro or micro kind, is probably not a sufficient defence. In part, this is because, as Fed Governor Stein so succinctly put it, monetary policy ‘gets into every crack’, including the unregulated part of the financial system. In part, ultra accommodative monetary policy creates enormously powerful incentive distortions whose consequences are typically understood only after the fact. The consequences of exit, however, are not just felt domestically, they could be experienced internationally.

Perhaps most vulnerable to the increased risk-taking in this integrated world are countries across the border. When monetary policy in large countries is extremely and unconventionally accommodative, capital flows into recipient countries tend to increase local leverage… By downplaying the adverse effects of cross-border monetary transmission of unconventional policies, we are overlooking the elephant in the post-crisis room. I see two dangers here. One is that any remaining rules of the game are breaking down. Our collective endorsement of unconventional monetary policies essentially says it is ok to distort asset prices if there are other domestic constraints to reviving growth, such as the zero-lower bound. But net spillovers, rather than fancy acronyms, should determine internationally acceptable policy…

For this is not the first episode in which capital has been pushed first in one direction and then in another, each time with devastating effect. In the early 1990s, rates were held low in the United States, and capital flowed to emerging markets. The wave of emerging market crises starting with Mexico in 1994 and ending with Argentina in 2001, sweeping through East Asia and Russia in between, was partially caused by a reversal of these flows as interest rates rose in industrial countries…

Conclusion: The current non-system in international monetary policy is, in my view, a source of substantial risk, both to sustainable growth as well as to the financial sector. It is not an industrial country problem, nor an emerging market problem, it is a problem of collective action. We are being pushed towards competitive monetary easing. If I use terminology reminiscent of the Depression era non-system, it is because I fear that in a world with weak aggregate demand, we may be engaged in a futile competition for a greater share of it. In the process, unlike Depression-era policies, we are also creating financial sector and cross-border risks that exhibit themselves when unconventional policies come to an end. There is no use saying that everyone should have anticipated the consequences. As the former BIS General Manager Andrew Crockett put it, ‘financial intermediaries are better at assessing relative risks at a point in time, than projecting the evolution of risk over the financial cycle.’ A first step to prescribing the right medicine is to recognize the cause of the sickness. Extreme monetary easing, in my view, is more cause than medicine. The sooner we recognize that, the more sustainable world growth we will have

April 10 – Dow Jones (Pedro Nicolaci da Costa): “Ben Bernanke seems to have already transitioned comfortably back into his new research role at a Washington think tank. Wearing a white button-down shirt--no tie-- and sounding much feistier than he did as Federal Reserve Chairman, Mr. Bernanke took issue with India central bank chief Raghuram Rajan’s suggestion that U.S. central bank officials should pay greater attention to the effects of their policies on overseas economies. ‘A lot of what you’ve been talking about today just reflects the fact that you are very skeptical about unconventional monetary policies,’ Mr. Bernanke said from the front row of the audience during the question-and-answer session of a panel discussion… You say the rules of the game should prevent policies with ‘large adverse spillovers and questionable domestic benefits.’ If you have a different empirical assessment, as Vitor and I do, and you think that these are effective policies and that in fact emerging markets are probably better off than if these policies had not been used, you would have a different view…’ Then, Mr. Bernanke got really professorial. ‘I do want to take you to task as a professor at the University of Chicago, ignoring money. You made a very clever equivalence ... between exchange intervention and unconventional monetary policies… There’s one very important difference which is that exchange rate intervention sterilized the effects on monetary policy or on the money supply. So you’re ignoring the money supply…’”

Not surprisingly, Dr. Bernanke remains convinced that QE – “money” printing – creates wealth and repairs financial and economic damage (consequences of the previous Bubble). Dr. Rajan argues persuasively that “extreme monetary easing through unconventional policies” has fostered another round of dangerous global financial and economic distortions. I’ve noted recently how the U.S. monetary policy debate pits the academic doves versus the real world hawks. Raghuram Rajan astutely melds academia with the real world in powerful analysis the academic inflationists won’t be able to lay a glove on (“ignoring the money supply”? You can’t be serious…).

Stocks took one on the chin this week. Analysts and market pundits struggled to come up with reasons for the market selloff. “The data look good.” The optimists believe the bull market has been driven by economic recovery and robust earnings. They, once again, scoff at the word “Bubble.” And they dismiss the prevailing roles played by QE and speculation. Meanwhile, we’re now five years into the historic – and increasingly unstable - “global government finance Bubble.”

As the markets have risen, it’s been way too easy to ignore very serious fundamental concerns. Alarming financial and economic deterioration in China will only incite aggressive fiscal and monetary stimulus. Stagnation in Europe ensures the ECB moves forward soon with QE. Weakening fundamentals in Japan guarantee more aggressive “money printing” from the Bank of Japan (BOJ). Consumer inflation stubbornly below the Fed’s mandated 2% target means the Yellen Fed will at some point employ more aggressive monetary stimulus.

In the real world, Chinese officials this week stated rather clearly that they won't be coming anytime soon with aggressive fiscal or monetary stimulus. These days they (belatedly) seem to better appreciate the risks associated with government-induced financial and economic excess. Perhaps increasingly vocal domestic opposition to Bank of Japan policy influenced a much less dovish tone this week from the BOJ. And there is little indication that the ECB is about to mount a massive U.S.-style market liquidity injection operation. As I’ve noted recently, there is an emboldened contingent at the Fed that wants out of the experimental “money” printing and market backstopping business.

What’s behind recent market instability? Well, cracks in the global Bubble are beginning to impinge U.S. securities markets. Trouble at the “periphery” has finally begun to impact risk-taking at the “core” – much as markets traditionally operate. For the most part, market participants are still living in the halcyon 2013 world. That world was inundated by central bank liquidity, with cracks at the periphery ensuring “money” flooded into the core (especially U.S. equities and corporate debt). Now, with the Fed in taper mode, the liquidity environment has begun to change. Market dynamics are beginning to normalize. De-risking and de-leveraging at the “periphery” will lead to waning liquidity and risk appetite away from the periphery. Contagion now starts to become an issue, as intense “risk on” begins its inevitable transition to “risk off.” There is rising trepidation in some quarters that the exit may be narrowing. Greed begins to turn to fear.

I especially appreciated Dr. Rajan’s attention to how monetary policy has exacerbated market “herding” and “crowding” behavior. This is a very pertinent issue. When “risk on” is in full display, rising leverage and securities prices prove self-reinforcing. Moreover, central bank liquidity injections and market backstop assurances spur risk-taking while dampening the impact on the occasional bout of “risk off.” At the same time, there is within the global marketplace these days an unprecedented pool of trend-following finance. Just combining the hedge fund and ETF universes gets one to almost $6.0 TN. And throw in the wild world of derivatives and structured products (with their dynamic hedging trading strategies) and you have an unbelievable capacity for trend reinforcing trading. It has seemingly worked wonderfully on the upside. The downside will be fraught with the risk of a major market accident.

From the perspective of my analytical framework, I view the hedge funds as the marginal operator in the marketplace – the marginal buyer, seller and price determiner. The now massive ETF world is more the market follower. Today, there are reasons to suspect the more sophisticated hedge fund operators have begun to take some risk off the table. So far this year, many popular trades have gone against the speculator community. The yen has rallied, pressuring those short the yen and those using the yen for financing “carry trades.” Rallies in gold and many commodities have punished those short. The dollar bulls have been disappointed along with the Treasury market bears. Markets have been volatile and especially tough.

In U.S. equities, the reversal in beloved technology and biotech stocks has inflicted pain on the speculators. The popular financial stocks have also begun to cause some grief. And, at least of late, many speculators were caught on the wrong side of a pretty ferocious short squeeze throughout the emerging markets (at least partially fueled by trend-following ETF flows).

So I’m seeing significant confirmation of the bearish thesis – fundamentally and more recently in the marketplace. The global liquidity backdrop has become less bullish. Central bank liquidity has peaked. A recovering yen restrains “carry trade” speculative leveraging, while changes in China’s currency management regime reduce the incentive for yuan “carry trades.” Especially with the prospect of Fed balance sheet growth ending later this year, the notion of the Fed as the markets’ liquidity backstop is now in question. From my perspective, the leveraged speculating community will need to adjust to a much less favorable backdrop for risk-taking and leveraging. The marginal operator in the marketplace is evolving from buyer to seller; from risk-taker to risk reducer and hedger; from liquidity provider to liquidity taker.

While I don’t expect market volatility is going away anytime soon, I do see an unfolding backdrop conducive to one tough bear market. Everyone got silly bullish in the face of very serious domestic and global issues. Global securities markets are a problematic “crowded trade.” Marc Faber commented that a 2014 crash could be even worse than 1987. To be sure, today’s incredible backdrop with Trillions upon Trillions of hedge funds, ETFs, derivatives and the like make 1987 portfolio insurance look like itsy bitsy little peanuts. So there are at this point rather conspicuous reasons why Financial Stability has always been and must remain a central bank’s number one priority (whether Dr. Evans appreciates this or not). Just how in the devil was this ever lost on contemporary central bankers?

For the Week:

The S&P500 dropped 2.7% (down 1.8% y-t-d), and the Dow fell 2.4% (down 3.3%). The Utilities gained 0.7% (up 9.7%). The Banks sank 5.0% (down 1.7%), and the Broker/Dealers fell 4.9% (down 8.5%). The Morgan Stanley Cyclicals were hit for 3.3% (down 1.0%), and the Transports dropped 2.8% (down 0.5%). The broader market was under pressure. The S&P 400 Midcaps fell 3.6% (down 1.8%), and the small cap Russell 2000 was hit for 3.6% (down 4.5%). The Nasdaq100 declined 2.6% (down 4.0%), and the Morgan Stanley High Tech index dropped 2.6% (down 1.3%). The Semiconductors fell 3.3% (up 4.7%). The Biotechs sank 5.0% (up 1.9%). Although bullion gained $14, the HUI gold index slipped 0.4% (up 14.1%).

One-month Treasury bill rates ended the week at 3 bps, and three-month bills closed at 4 bps. Two-year government yields declined 6 bps to 0.36% (down 3bps y-t-d). Five-year T-note yields sank 12 bps to 1.58% (down17bps). Ten-year Treasury yields were down 10 bps to 2.63% (down 40bps). Long bond yields were also down 10 bps to 3.48% (down 49bps). Benchmark Fannie MBS yields fell 10 bps to 3.33% (down 28bps). The spread between benchmark MBS and 10-year Treasury yields was unchanged at 70 bps. The implied yield on December 2015 eurodollar futures fell 15 bps to 0.975%. The two-year dollar swap spread was little changed at 13 bps, and the 10-year swap spread was unchanged at 12 bps. Corporate bond spreads widened. An index of investment grade bond risk increased 3 bps to 70 bps. An index of junk bond risk jumped 20 bps to 354 bps (high since early February). An index of emerging market (EM) debt risk rose 5 bps to 295 bps.

Debt issuance was mixed. Investment-grade issuers included Ventas Realty LP $700 million, Jackson National Life Global $500 million, Essex Portfolio LP $400 million and Worthington Industries $250 million.

Junk bond funds saw inflows of $640 million (from Lipper). Junk issuers included Chesapeake Energy $3.0bn, Consol Energy $1.6bn, BMC $750 million, TMX Finance $665 million, Viasystems $600 million, Exco Resources $500 million, FTS International $500 million, Atrium Window's & Doors $305 million, MPT Operating Partnership LP $300 million, Quad Graphics $300 million, Wise Metals $150 million and Vector Group $150 million.

Convertible debt issuers this week included Prospect Capital Corp $400 million.

International dollar debt issuers included Wind Acquisition Finance $2.8bn, Pakistan $2.0bn, Bank of Nova Scotia $1.5bn, BCPE $1.5bn, Mizuho Bank $1.5bn, Anglo American $1.0bn, European Bank of Reconstruction & Development $1.0bn, Lebanese Republic $1.0bn, Oversee-Chinese Banking Corp $1.0bn, Nederlandse Waterschapsbank $750 million, Turkiye Garanti Bankasi $750 million, Zenith Bank $500 million, Banco Santander $500 million, State Bank of India $1.25bn, GTL Trade Finance $500 million, Suam Finance $500 million, McDermott International $500 million, Abengoa Transmision $430 million, Empresa Nacional $400 million, Air Canada $400 million, Navios Logistics $375 million, International Bank of Reconstruction & Development $250 million, Gulf Keystone Petroleum $250 million, Citrus RE $150 million and Barclays Bank $100 million.

Ten-year Portuguese yields rose 11 bps to 3.96% (down 217bps y-t-d). Italian 10-yr yields increased 4 bps to 3.21% (down 92bps). Spain's 10-year yields gained 4 bps to 3.19% (down 96bps). German bund yields were down 5 bps to an almost nine-month low 1.50% (down 43bps). French yields dipped 2 bps to 2.01% (down 55bps). The French to German 10-year bond spread widened 2 to 51 bps. Greek 10-year note yields rose 13 bps to 6.27% (down 215bps). U.K. 10-year gilt yields fell 7 bps to 2.61% (down 41bps).

Japan's Nikkei equities index dropped 2.4% to a six-month low (down 14.3% y-t-d). Japanese 10-year "JGB" yields declined 4 bps to 0.605% (down 14bps). The German DAX equities index sank 3.9% (down 2.5% y-t-d). Spain's IBEX 35 equities index dropped 4.4% (up 2.9%). Italy's FTSE MIB index fell 4.4% (up 11.8%). Emerging equities were mostly higher. Brazil's Bovespa index rose another 1.5%, with a four-week gain of 15.3% (up 0.7%). Mexico's Bolsa slipped 0.5% (down 5.4%). South Korea's Kospi index increased 0.5% (down 0.7%). India’s Sensex equities index added 1.2% (up 6.9%). China’s Shanghai Exchange ended the week up 3.5% (up 0.7%). Turkey's Borsa Istanbul National 100 index increased 0.2% (up 7.3%). Russia's RTS equities index gained 0.9% (down 9.4%).

Freddie Mac 30-year fixed mortgage rates fell 7 bps to 4.44% (up 91bps y-o-y). Fifteen-year fixed rates declined 9 bps to 3.38% (up 73bps). One-year ARM rates dropped 4 bps to 2.41% (down 21bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 13 bps to 4.66% (up 69bps).

Federal Reserve Credit last week increased $6.9bn to a record $4.198 TN. During the past year, Fed Credit expanded $993bn, or 31.0%. Fed Credit inflated $1.388 TN, or 49%, over the past 74 weeks. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week rose $22.0bn to $3.316 TN. "Custody holdings" were up $20.3bn from a year ago, or 0.6%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $657bn y-o-y, or 5.9%, to a record $11.738 TN. Over two years, reserves were $1.331 TN higher for 13% growth.

M2 (narrow) "money" supply fell $37.0bn to $11.150 TN. "Narrow money" expanded $620bn, or 5.9%, over the past year. For the week, Currency was little changed. Total Checkable Deposits jumped $20.0bn, while Savings Deposits dropped $57.2bn. Small Time Deposits slipped $3.4bn. Retail Money Funds increased $3.4bn.

Money market fund assets fell $17.8bn to a 24-week low $2.612 TN. Money Fund assets were down $10.5bn from a year ago, or 0.4%.

Total Commercial Paper increased $4.4bn to $1.038 TN. CP was down $7.6bn year-to-date, while increasing $16bn over the past year, or 1.6%.

Currency Watch:

The U.S. dollar index declined 1.2% to 79.45 (down 0.7% y-t-d). For the week on the upside, the Swiss franc increased 1.8%, the South Korean won 1.8%, the Japanese yen 1.6%, the euro 1.6%, the Danish krone 1.3%, the Australian dollar 1.1%, the Norwegian krone 1.1%, the New Zealand dollar 1.0%, the British pound 1.0%, the Singapore dollar 0.8%, the Brazilian real 0.8%, the South African rand 0.7%, the Taiwanese dollar 0.7% and the Swedish krona 0.4%. For the week on the downside, the Mexican peso declined 0.3%.

Commodities Watch:

The CRB index jumped 1.5% this week (up 10.4% y-t-d). The Goldman Sachs Commodities Index increased 1.1% (up 3.2%). Spot Gold added 1.1% to $1,318 (up 9.4%). May Silver was unchanged at $19.95 (up 3.0%). May Crude jumped $2.60 to $103.74 (up 5%). May Gasoline gained 2.8% (up 8%), and May Natural Gas rallied 4.1% (up 9%). May Copper increased 0.6% (down 11%). May Wheat fell 1.4% (up 9%). May Corn declined 0.6% (up 18%).

U.S. Fixed Income Bubble Watch:

April 9 – Bloomberg (Charles Mead): “The biggest buyers of U.S. corporate bonds since the financial crisis may be the least likely to stick around when the Federal Reserve raises interest rates. Mutual funds have purchased about half of the company bonds that have been added to the U.S. market since 2008, equivalent to about $1.5 trillion of assets, according to Morgan Stanley… The shifting base is increasing the risk that five straight years of gains will end for a section of the market that’s been among the biggest beneficiaries of both mutual-fund demand and the Fed’s easy-money policies: shorter-term notes due in one to five years.”

April 10 – Bloomberg (Lisa Abramowicz): “Ashish Shah, who manages company- debt investments for a living, has a message for individuals who’ve poured $70.7 billion into junk-rated loans since 2012: You’ll probably be disappointed. Below-investment grade loans have attracted new cash for a record 94 weeks by promising interest payments that will float higher along with benchmark rates. The catch: More than 85% of the debt won’t actually do that until the three-month London interbank offered rate, or Libor, more than quadruples to exceed 1%, Morgan Stanley data show… ‘You’re a lot less well-protected than a lot of investors think they are, and that will be a rude awakening,’ Shah, head of global corporate-debt investments at AllianceBernstein… said…”

April 10 – Financial Times (Vivianne Rodrigues and Tracy Alloway): “Sales of a popular type of structured product have ballooned in the past couple of weeks to their highest levels since the build-up to the financial crisis, buoyed by investors’ continued thirst for yield. March saw the highest sales of collateralised loan obligations since May 2007, according to data from S&P Capital IQ. About $11.15bn of the bundled corporate loans were sold last month – topping the $10.74bn priced in March last year and eclipsing the $10.82bn issued in May 2007. CLOs typically bundle together leveraged loans made to companies but sometimes also include bonds and other securities to help boost returns for yield-hungry investors. The surge in sales has come in spite of market developments that, in theory, should have slowed them down significantly.”

April 9 – Bloomberg (Ari Levy): “Facebook Inc.’s $2.3 billion deal for Oculus VR Inc. left the 9,522 backers of the startup’s online fundraising campaign with T-shirts and trial products. Oculus initially raised cash on Kickstarter Inc., a service that rewards donors with test versions of its wares and other token compensation. Newer crowdfunding sites are giving investors the chance to earn something else: money. CircleUp Network Inc. offers equity in private companies, while Funding Circle Ltd. lets investors buy company debt. College graduates can turn to Social Finance Inc. to refinance loans with help from alumni. The crowdfunding market is taking off, altering how capital gets deployed, as projects, companies and individuals flock to the Web for fundraising instead of tapping banks and big financial firms… ‘It’s going to be a big market and it’s going to change how a lot of small businesses finance themselves,’ said Arun Sundararajan, a professor at New York University’s Leonard N. Stern School of Business. In all, online crowdfunding jumped 89% to $5.1 billion last year, according to Massolution, a research firm.”

April 9 – Bloomberg (Michelle Kaske): “Puerto Rico’s new general-obligation bonds have fallen to the lowest price since their sale last month after the Government Development Bank said it hired law firm Cleary Gottlieb Steen & Hamilton LLP. The Caribbean island of 3.6 million people issued a record $3.5 billion junk deal March 11 at 93 cents on the dollar, giving it time to revive a struggling economy. The bonds traded yesterday with an average price of 92.29 cents, down from as high as 96.58 cents March 12…”

Federal Reserve Watch:

April 10 – Financial Times (Chris Giles): “The governor of India’s central bank warned on Thursday that the extraordinarily loose monetary policies in rich countries are threatening to break down co-operation among leading economies. In an explosive speech on the fringes of the International Monetary Fund spring meetings, Raghuram Rajan said the prolonged period of ultra-loose monetary policy in developed countries would lead emerging markets to build defence reserves that would hinder global growth. ‘Any remaining rules of the game are breaking down,’ Mr Rajan warned. Mr Rajan, a former economics professor at University of Chicago, said it was inconsistent for advanced economies to tell poorer countries to keep their exchange rates stable at the same time as pursuing policies that led to huge destabilising flows of hot money across the world… Saying he would ‘take [Mr Rajan] to task’, Mr Bernanke said the difference between QE and exchange rate manipulation was that the former added to world demand while exchange rates diverted it.”

April 9 – Bloomberg (Michelle Jamrisko and Ilan Kolet): “A welcome relief from rising health-care costs for U.S. consumers is being less warmly received at the Federal Reserve. The slowdown is frustrating the efforts of Chair Janet Yellen and her colleagues to lift inflation out of the doldrums, suggesting they will need to press on with record-low interest rates. Price increases, not counting volatile food and energy costs, decelerated to a 1.1% year-over year pace in February from 2% two years earlier, with medical goods and health-care services accounting for almost a third of the slowdown… The cost of health-care services rose just 0.8% in February from a year earlier, compared with an average 2.6% pace in the prior 10 years. Prices of medical goods such as prescription drugs rose 2.2%, down from the 10-year average of 2.7%.”

U.S. Bubble Watch:

April 11 – Bloomberg (Zachary Tracer): “Weak demand for home loans continued to drag on results at Wells Fargo & Co. and JPMorgan… as the two largest U.S. mortgage lenders grappled for pieces of a shrunken market. Even as interest rates hovered at historically low levels, new home loans tumbled 67% to $36 billion at… Wells Fargo, the biggest originator. JPMorgan posted a 68% drop to $17 billion, and the bank predicted it would lose money on mortgage production for the full year. Both lenders are paring staff to keep expenses in line with demand for loans, which has waned as investors and cash buyers dominate sales.”

April 8 – Bloomberg (Romy Varghese): “U.S. states took in 6.1% more revenue in fiscal 2013 than they did the year before for a record $846.2 billion, according to the Census Bureau. It was the third consecutive increase… Revenue rose 4.7% from 2011 to 2012, and 7.3% from 2010 to 2011… The figures reflect higher income-tax collections resulting from strong financial markets and an incentive for taxpayers to take profits before higher federal tax rates began, said Donald Boyd, a senior fellow at the… Nelson A. Rockefeller Institute of Government…”

April 10 – Reuters: “Venture capital funding for U.S. start-ups hit its highest mark since 2001 during the first three months of the year and 11 companies were valued at $1 billion or more, underscoring the increasingly pricey environment for entrepreneurs, according to… consultancy CB Insights. Venture capitalists invested $9.99 billion across 880 deals in the first quarter of 2014. The dollar amount jumped by 44% compared with the same quarter in 2013…”

April 10 – Bloomberg (Anthony Effinger and Katherine Burton): “When Dan Weissman worked at Goldman Sachs Group Inc. and, later, at a hedge fund, he didn’t have to worry about methamphetamine addicts chasing his employees with metal pipes. Or SWAT teams barging into his workplace looking for arsonists. Both things have happened since he left Wall Street and bought five mobile home parks: four in Texas and one in Indiana. Yet he says he’s never been so relaxed in his life… Weissman, a University of Michigan economics graduate, attributes his newfound calm to the supply-demand equation in the trailer park industry. With more of the U.S. middle class sliding into poverty and many towns banning new trailer parks, enterprising owners are getting rich renting the concrete pads and surrounding dirt on which residents park their homes. ‘The greatest part of the business is that we go to sleep at night not ever worrying about demand for our product,’ Weissman, 34, says. ‘It’s the best decision I’ve ever made.”

April 8 – Bloomberg (Oshrat Carmiel): “Manhattan developer Bill Rudin hadn’t planned to start selling apartments at his Greenwich Village project until the end of this year. He began rethinking that strategy after getting cornered at a cocktail party. ‘People came up to me and said, ‘We want to buy, we want to buy. When can we buy?’ Rudin said… He opened a sales office in October for the Greenwich Lane, a complex under construction at the site of the shuttered St. Vincent’s Hospital, after an online sign-up list of would-be buyers for the 200 condominiums drew 1,100 names. More than half of the units at the development, still largely a field of dirt and skeletal towers, have sold at prices averaging $3,500 a square foot, in line with other projects downtown and a new luxury benchmark for the area.”

April 9 – Bloomberg (Christopher Palmeri): “Aaryn Costello is searching for the perfect dress, a 30-inch-long light-blue number with a sparkly bodice and a detachable white cape. That would be the Princess Elsa dress from the Walt Disney Co. hit ‘Frozen,’ the most sought after fashion item among the kindergarten set. Stores across the U.S. are sold out, and originals are being offered for as much as $1,600 on Ebay Inc. Desperate parents are sewing their own or shelling out up to $225 for replicas on craft sites like”

Ukraine/Russia Watch:

April 10 – Reuters (Alexei Anishchuk): “President Vladimir Putin warned European leaders… Russia would cut natural gas supplies to Ukraine if it did not pay its bills and said this could lead to a reduction of onward deliveries to Europe. In a letter to the leaders of 18 countries, he demanded urgent talks with Europe on pulling Ukraine's economy out of crisis but made clear his patience was running out over Kiev's $2.2 billion gas debt to its former Soviet master. His comments were Russia's most explicit threat to cut off gas to Ukraine, a move that could worsen a dispute over Moscow's annexation of Crimea that has resulted in the worst East-West crisis since the end of the Cold war in 1991.”

April 9 – Bloomberg (Ilya Arkhipov): “President Vladimir Putin told his government to draw up a plan to replace Ukrainian imports, saying Russia can’t subsidize its neighbor forever. Addressing the cabinet outside Moscow today, Putin backed Foreign Ministry calls to overhaul Ukraine’s constitution to ease tensions in the country’s eastern provinces, where pro-Russian separatists have seized official buildings. He urged more talks with the administration in Kiev before proceeding with an idea to demand that Ukraine pay in advance for energy.”

Global Bubble Watch:

April 8 – Bloomberg (Frederik Balfour): “A 15th century porcelain cup sold to Chinese businessman Liu Yiqian for HK$281 million ($36 million) at Sotheby’s Hong Kong today, setting an auction record for a Chinese work of art. A packed auction room erupted into applause today after the hammer went down on Liu’s phone bid… ‘This is the holy grail of ceramics,’ James Hennessy, a Hong Kong-based dealer, said… ‘People, emperors and collectors have always aspired to own one of these, and the opportunity doesn’t come along often.’”

April 9 – Bloomberg (Katya Kazakina): “Martial Raysse hadn’t had a solo U.S. show for more than four decades when the 78-year-old French artist’s Pop paintings of neon-faced beauties went on view at Luxembourg & Dayan gallery in New York last May. To reintroduce Raysse to the American market, the gallery produced a hardcover catalog with archival materials and scholarly essays. It brought in Raysse, his wife and assistant from Issigeac, France, for the opening, hosted a brunch for more than 60 journalists and held a dinner for 30 collectors and curators at Michelin-starred Cafe Boulud. Surging values for postwar and contemporary works are inspiring dealers and collectors to rediscover artists long overlooked. It’s a matter of supply and demand: With the mega wealthy from Beijing to Bogota snatching up pieces by Jeff Koons and Andy Warhol as both a pastime and investment strategy, many buyers are seeking cheaper alternatives to trophy art. Galleries are going back in history for under-the-radar material that’s fresh, affordable and acclaimed.”

April 9 – Bloomberg: “Growing balance sheet problems in China are putting the world economy at risk because of the country’s ongoing reliance on credit-fueled investment to drive growth, the International Monetary Fund has warned. The fund called on the Chinese government to rein in ‘rapid’ credit growth, warning that the authorities will find it increasingly difficult to contain balance sheet problems. ‘Economic activity continues to be overly dependent on credit-fueled investment, and vulnerabilities are rising,’ the fund said… ‘Reining in rapid credit growth and curtailing local government off-budget borrowing are near-term priorities, critical for containing rising risks… The IMF noted that Chinese structural reform could mean ‘significant spillovers’ for the Asia region, particularly economies in the regional supply chain or which sell their commodities to China. Financial sector problems in China, involving trust product repayments or with local governments struggling to service their debt, may also mean more market volatility at home and abroad.”

April 7 – Bloomberg (Katherine Burton and Saijel Kishan): “Paul Tudor Jones, Michael Novogratz and Louis Bacon, hedge-fund managers that profited last year from bets on macroeconomic trends, posted losses in the first quarter as some of those trades turned against them. Markets gyrated in the first three months of the year as investors fled developing countries in anticipation of further reduction in U.S. monetary stimulus, Russian President Vladimir Putin annexed Ukraine’s Crimea region and Japanese stocks tumbled. The losses for macro managers have caused them to cut some of their bigger bets, Anthony Lawler, a money manager at the $120 billion Swiss firm GAM, wrote…, though their views -- including that Japanese stocks will rise and the U.S. dollar will gain -- could make money later in 2014, he said. ‘The directional conviction trades did not play out in the first quarter, despite a strong underlying thesis,’ Lawler wrote. ‘Later this year there may be upside for some of these larger trades such as long US dollar positioning, the Japan reflation trade and the China slowdown risk.’”

April 11 – Bloomberg (Katherine Burton): “High-frequency trading has been good to billionaire Ken Griffin. His Citadel LLC returned more than 300% in a fund started as a high-frequency strategy in late 2007… The $830 million pool, which added other strategies in recent years, beat the 44% gain of the U.S. stock market in the six years through 2013 as well as Griffin’s two main hedge funds, which together have $8.8 billion in assets and rose 45% in the period.”

April 8 – Bloomberg (Ye Xie and Alexandria Baca): “Investors are piling into emerging-market exchange-traded funds at the fastest pace in seven months as they dump technology companies in favor of cheaper stocks. Investors added a net $3.1 billion into U.S.-based ETFs focused on emerging-market equities and bonds this month through yesterday, heading for their biggest monthly inflow since September… Funds investing in global technology companies lost $1.3 billion over the past five days, the most among 12 industries tracked by Bloomberg.”

EM Bubble Watch:

April 10 - New York Times (Landon Thomas Jr.): “As fears mount about emerging markets, American mutual fund investors with significant exposure to bonds issued by indebted companies in fast-growing economies may be at risk, the International Monetary Fund warned in a report… Bonds issued by big companies in Brazil, China, Russia and Turkey have seen explosive growth in recent years after central banks around the globe started making extraordinarily large purchases of government and corporate bonds. Given rock-bottom interest rates in the developed world, investors flocked to such high-yielding debt, long seen as the riskiest slice of the emerging-market asset pie. In the Global Financial and Stability Report, I.M.F. economists highlighted the trouble spots on the financial horizon, noting the potential for growth to slow and interest rates to rise. As that happens, they estimated that problematic corporate loans could increase by as much as $750 billion and many companies may be pushed into default… ‘Many of the funds that are buying these companies don’t even know what they are buying,’ said Elizabeth R. Morrissey of Kleiman International Consultants, an emerging-market investment monitoring and analysis firm. ‘All of a sudden, we have Joe Middle Class loading up on emerging-market bond E.T.F.s. That is a little frightening.’” …In its report, the I.M.F. said that annual corporate bond issuance from emerging markets had more than tripled since 2008, with a record $300 billion sold last year. As a result, countries like China, Hungary and Malaysia have corporate debt of more than 100% of gross domestic product.”

April 9 – Bloomberg (David Biller): “Brazil’s consumer prices rose more in March than economists estimated after the central bank board slowed its pace of interest rate increases. Inflation… accelerated to 0.92% from 0.69% in February… That was faster than forecast by all 40 analysts surveyed by Bloomberg… Annual inflation quickened to 6.15% from 5.68%, marking its fastest rate since July.”

April 9 – Bloomberg (Agnes Lovasz): “Russian capital outflows in the first quarter were the largest since the last three months of 2008… Net outflows totaled $50.6 billion, more than double the $17.8 billion that left in the previous quarter… In the final quarter of 2008, capital outflows were $132.1 billion. Outflows for the whole of last year reached $59.6 billion.”

April 11 – Bloomberg (Selcuk Gokoluk and Kyoungwha Kim): “Turkey’s lira weakened for a third day, while bonds and stocks fell, as Moody’s… lowered the nation’s credit-rating outlook to negative 11 months after upgrading the debt to investment grade. Moody’s cut the outlook from stable, citing ‘increased pressure on the country’s external-financing position driven by heightened political uncertainty and lower global liquidity,’ which hurt investor confidence.”

China Bubble Watch:

April 10 – Reuters (Aileen Wang and Adam Rose): “Chinese Premier Li Keqiang ruled out major stimulus to fight short-term dips in growth, even as big falls in imports and exports data reinforced forecasts that the world's second-largest economy has slowed notably at the start of 2014. Li stressed… that job creation was the government's policy priority, telling an investment forum on the southern island of Hainan that it did not matter if growth came in a little below the official target of 7.5%. ‘We will not take, in response to momentary fluctuations in economic growth, short-term and forceful stimulus measures,’ Li said… ‘We will instead focus more on medium- to long-term healthy development.’ His comments are among the clearest yet on the government's plans for the economy, which has rattled global investors this year with a surprisingly lackluster performance.”

April 10 – Financial Times (Jamil Anderlini): “The rift between China’s two most important financial regulators is not especially rare but it matters more now because of fears the country could face its ‘Lehman moment’. In fact, it is partly fear of a financial crisis, particularly in the huge ‘shadow banking’ sector, that has caused relations between the China Banking Regulatory Commission and the People’s Bank of China, the central bank, to become so poisonous. Several people familiar with the matter said relations between the two bodies turned especially nasty in June, when the central bank allowed liquidity to dry up in the interbank market. That sent short-term interest rates soaring and confronted investors with the prospect of a Chinese financial crisis for the first time in a decade. People involved in that episode say the central bank opted to manufacture a liquidity squeeze intentionally because of frustration at the regulatory commission’s inability to rein in shadow banking activity.

April 10 – Financial Times (Jamil Anderlini): “A bitter turf war between China’s two most important financial regulators is hampering policy co-ordination just as the country’s debt-laden financial system is starting to show signs of real strain. The China Banking Regulatory Commission and the People’s Bank of China, the central bank, have always been rivals, but now rising tensions are obstructing reforms and efforts to tackle risks in the financial sector, according to officials from both agencies. From the outside, the Chinese system can often look like a monolithic structure but the various arms of the bureaucracy are often engaged in vicious institutional battles that can delay or even hamstring policy. In just one example of how rancorous the split has become, several people familiar with the matter say a Financial Stability Council chaired by the PBoC and including the heads of the main financial regulatory bodies has met just once since it was established last August… The council has not been able to meet because of opposition from the CBRC, which has vehemently objected to what it sees as a power grab by the PBoC. In recent weeks the central bank, which has responsibility for overall financial stability in China, has expressed frustration at the CBRC’s unwillingness or inability to rein in the off-balance sheet activity of the state-controlled banking system, which has ballooned in recent years. The PBoC also feels the CBRC is too close to the state banks and has failed to get a handle on the scale of problem loans at many of the country’s smaller lenders.”

April 11 - Reuters (David Brunnstrom): “The Chinese government and central bank should be ‘very cautious’ in implementing any stimulus programs because they tend to be less efficient than natural market forces in boosting growth, a People's Bank of China official said… Yi Gang, a vice governor of the bank, also told a conference in Washington… that Chinese economic growth of ‘a little bit more, a little bit less’ than 7.5% was acceptable… ‘Any kind of stimulus package should be very cautious in the sense that you should believe that the market driver is the natural and the most efficient way to grow, and a stimulus growth driver is not as efficient as the natural market driver,’ Yi said. ‘And the government and the central bank should be very cautious.’”

April 11 – Bloomberg: “China’s Ministry of Finance failed to sell all of the bonds offered at an auction today for the first time in 10 months amid speculation short-term interest rates will climb as corporate tax payments tie up funds. The ministry sold 20.7 billion yuan ($3.3bn) of one-year debt today, less than the planned issuance of 28 billion yuan… The average yield of 3.63% compared with the median estimate of 3.4% in a Bloomberg News survey…”

April 8 – Bloomberg (Justina Lee): “China’s first default is prompting investors to discriminate against privately-owned companies, boosting demand for local government bonds even as the central bank warns of the dangers of a $2.9 trillion pile of debt. The yield on Tieling Public Assets Investment and Management Co.’s seven-year notes plunged 126 bps this year to 6.64% and Changxing County Transportation Construction Investment Co.’s debt also rallied… The average yield on 2021 debt rated AA fell three basis points this year to 7.58%, while that for notes ranked A climbed 13 bps to 11.68% on April 4… ‘After the credit event, fund allocation has become less efficient and more biased toward government-related industries,’ said Xu Gao, a Beijing-based economist at Everbright Securities Co. ‘Investors have pushed up the risk premium, but as they believe that LGFVs have government support, the higher risk premium has only appeared in private companies’ bonds.’”

April 9 - Caixin Online (Wu Hongyuran): “Bad loans have sharply increased for many Chinese banks as more companies struggle to make repayments, data from recent bank annual reports show. The total value of non-performing loans at 12 major banks was 467 billion yuan on Dec. 31, an increase of 76.3 billion yuan ($12.3bn), or 19.5%, from the beginning of 2013. Earlier data from the regulator show the entire banking industry’s bad loans increased by 99.2 billion yuan last year to 592.1 billion yuan… The total amount of bad loans may have increased by another 60 billion yuan in the first two months of this year, an executive of a large bank said… The regulator has issued a notice to its regional offices and major financial institutions that requires them not to hide toxic assets or be in a hurry to call in loans, thus forcing more borrowers into liquidity problems, bankers with knowledge of the requirements said. ‘Bad loans in general are showing signs of spreading and contagion,’ a senior banking analyst said. ‘In 2012, they were concentrated in relatively small industries such as trading companies. The next year, they spread to big ones and big enterprises.’ Among the defaulters were subsidiaries of big state-owned enterprises (SOEs), which banks normally view as safe clients, a loan officer at a joint-stock bank said. In many cases, he added, the parent SOEs did not save their subsidiaries, mostly because they were in deep trouble themselves.”

April 9 – Bloomberg (Robin Emmott and Marc Jones): “China is investigating some companies’ use of bond proceeds, people familiar with the matter said, as concerns mount defaults may increase in the nation’s $4.2 trillion onshore debt market. The National Development and Reform Commission, the nation’s top planning agency, began conducting a nationwide special inspection of the corporate bonds under its supervision in March… Most new note issues regulated by the NDRC are sold by local-government financing vehicles… Local-government financing vehicles, a means by which provinces and regions in China raise funds, must repay 352.6 billion yuan ($57bn) of debt this year, according to Everbright Securities Co., the most since the firm began compiling the data in 2000.”

April 8 – Bloomberg: “As a thick smog hung over Beijing last year, Stephanie Giambruno and her husband decided it was time for her and their two girls to return to the U.S. Giambruno’s husband stayed back in China for his job as general manager of a global technology company… While it’s hard to be apart, Giambruno says Beijing’s record air pollution left them no choice. She saw friends’ children develop asthma. Their own daughters, at age 6 and 21 months, were often forced to remain indoors. ‘It’s not a way to live, to keep your baby inside with an air filter running,’ she said. As bad air chokes Chinese cities, some expatriates are starting to leave families in their home countries, the latest sign of pollution’s rising cost to the more than half-a-million foreigners working in China and the multinationals seeking to retain them. Smog in Beijing was worse than government standards most days last year, and environment ministry statistics show that 71 of 74 Chinese cities failed to meet air-quality standards.”

April 11 – Bloomberg (Zhang Dingmin): “The northwest city of Lanzhou warned its 2.4 million residents not to drink tap water after benzene levels were found to exceed national limits by 20 times. Pictures posted on the Twitter-like Weibo account of the official Gansu Daily newspaper showed what purported to be Lanzhou citizens making a run on bottled water in a local supermarket.”

April 9 – Reuters: “China's capital Beijing is taking a novel approach to protecting doctors from growing levels of violence from angry patients: volunteer ‘guardian angels’. The campaign will recruit students, medical workers and other patients to act as middlemen between doctors and those in their care to defuse disagreements and smooth over tensions… Doctors in China have come under increasing threat as the country's healthcare system struggles to cope with low doctor numbers, poor levels of training and rampant corruption inflating the price of care. This has seen a number of fatal attacks by patients on doctors in the past year.”

Japan Watch:

April 9 – Wall Street Journal (Takashi Nakamichi and Tatsuo Ito ): “Bank of Japan Gov. Haruhiko Kuroda on Tuesday acknowledged the possibility of weaker growth following the recent sales tax increase, but said he doesn't see any need for further monetary easing, and has no doubt about the central bank's ability to meet its inflation target. ‘I am not contemplating any additional easing measures at this point,’ Mr. Kuroda said… following the BOJ's latest monetary policy meeting. Mr. Kuroda also said he is ‘as convinced as before’ that the central bank can generate 2% inflation by spring next year, its main policy goal. Earlier Tuesday, the BOJ stood pat on monetary policy, sticking to its upbeat assessment of the economy, as the impact of a sales tax increase at the start of this month remains unclear.”

April 10 – Bloomberg (Isabel Reynolds): “Japan’s dispatches of fighter jets to pursue Chinese aircraft rose by a third in the past year to a record 415 times, reflecting growing tensions stemming from a territorial dispute in the East China Sea. Planes and Coast Guard ships from both countries regularly tail one another around a chain of uninhabited islands known as Senkaku in Japan and Diaoyu in China. Tensions over the dispute have led to a deterioration in Sino-Japanese relations at a time when both countries are increasing military spending.”

Europe Watch:

April 9 – Reuters (Robin Emmott and Marc Jones): “The European Central Bank will get ready to make large-scale asset purchases but is still a long way off embarking on such a plan and will first assess whether the inflation outlook has changed, ECB policymakers said. Faced with inflation rates running far below its target, the ECB last week opened the door to turning on its money-printing presses with so-called ‘quantitative easing’ (QE)… But senior ECB policymakers stressed on Monday that they saw no immediate need for action, while there was a long way to go before they followed other major central banks… and embarked on QE. The ECB still needs to navigate its way through an array of issues on the design of any QE program, and work fast to develop the market for asset-backed securities (ABS) should it decide to buy them under the plan.”

April 9 – Bloomberg (Jeff Black and Alessandro Speciale): “Mario Draghi’s asset-purchase plan to ward off deflation may be lacking one key element: enough assets to buy. Since the European Central Bank President buoyed investors last week by saying policy makers backed quantitative easing as a way to boost prices if needed, officials including Governing Council member Ewald Nowotny have signaled any purchases may center on asset-backed securities. While that makes sense in an economy funded mostly by bank loans, it’s also a market Draghi once described as ‘dead.’ The ECB’s focus on ABS for monetary easing risks guiding it toward a policy that might be slow to evolve and far smaller than the 1 trillion euros ($1.4 trillion) in bond purchases it has already simulated… ‘A preference for ABSs has been expressed time and again - and in fact it is the first asset class that would make sense for the ECB to buy,’ said Marco Valli, chief euro-area economist at UniCredit Global Research… ‘The market’s revival is conditional on the regulator changing capital requirements. Until this changes, jump-starting the ABS market is difficult and demand for these securities will remain weak.”

April 7 – Bloomberg (Corina Ruhe): “ECB Governing Council member Jens Weidmann says at an event in Amsterdam that ‘I gave an interview to a news wire which I think was widely interpreted by people who hadn’t read it. Some of them had the impression that there was a change in position.’ Weidmann says: ‘If you read the interview, I said I will apply the same benchmark I apply to the OMT, to the SMP, to any new program of sovereign bond purchases.’”

April 8 – Bloomberg (Rainer Buergin and Patrick Donahue): “German Finance Minister Wolfgang Schaeuble said the violation of deficit rules by previous governments in Germany and France was a ‘grave mistake’ and urged all euro-region countries to stick to the regulations. His comments to lawmakers in the lower house of parliament… come a week after President Francois Hollande signaled that France will seek another delay to its deficit-cutting commitments… ‘It was a grave mistake that Germany, together with France, were the first to break the stability pact,’ Schaeuble told lawmakers, prompting applause from the ranks of his Christian Union bloc. ‘And we’re drawing the lessons from exactly that.’”

April 11 – Bloomberg (Alastair Marsh): “Asset-backed debt was denounced for causing the financial crisis. Now the securities are being seen as a savior for Europe’s economy. The European Central Bank signaled this week that plans to ward off deflation may center on asset-backed securities, while policy makers are promoting an expansion of the market. The efforts come as sales of the bonds fell to $102.5 billion in Europe last year from $449 billion in 2007 and less than the $174 billion of issuance in the U.S….”