Saturday, December 6, 2014

Weekly Commentary, July 28, 2013: Uninsurable Risks

June 24 – Financial Times (Alistair Gray and Pilita Clark): “Insurers have issued a rare warning that the speed at which the oceans are warming is threatening their ability to sell affordable policies in a growing number of places around the world. Parts of the UK and the US state of Florida were already facing ‘a risk environment that is uninsurable’, said the global insurance industry trade body, the Geneva Association. They were unlikely to be the last areas with such problems, said John Fitzpatrick, the association’s secretary-general… ‘Governments may have fiscal austerity issues in the short run. But in the long run they’re going to have big exposures – to repair damaged infrastructure from storms.’ …In spite of the losses from Sandy and a spate of natural catastrophes the previous year, overall global property insurance premiums have remained broadly stable outside loss-hit areas. However, insurers warn premiums have been kept artificially depressed in the short term because capital has flocked to the sector in the face of historic low interest rates.”

I found multiple reasons this week to think back to a March 2000 CBB, “A Derivative Story.” It was my fictional account of how cheap flood insurance spurred a spectacular boom and bust cycle on “a little town along the river”.

Basically, writing flood insurance during a drought provided extraordinary “return” opportunities. A speculative Bubble developed in the marketplace, whereby thinly capitalized speculators came to dominate the market for cheap insurance. The easy availability of inexpensive protection was instrumental in fueling a self-reinforcing economic Bubble along the waterfront. Between the building boom and inflating real estate prices, the amount of outstanding flood insurance ballooned (exponentially). As speculation in this marketplace turned manic, the entire insurance “industry” became precariously undercapitalized, especially in the context of rapidly inflating latent risks. Losses had been avoided for years – and many just presumed drought was the new normal. And in the unexpected event of torrential rainfall, most anticipated “hedging” potential flood loss exposures in the liquid marketplace for cheap reinsurance. Well, the insurance market collapsed in illiquidity with the inevitable arrival of a major flood. Financial and economic losses proved catastrophic in my sad little tale.

So have the Bernanke Federal Reserve and fellow global central banks been adeptly supporting the global economic recovery after 2008’s “hundred year flood” - as conventional thinking believes? Or have they instead been inflating history’s greatest Credit Bubble? Policy uncertainties and unstable global markets have again made this a pressing question.

The usual (“inflationist”) punditry has been in attack mode against Bernanke’s call to begin (most gingerly) the process of backing away from extraordinary crisis-period quantitative easing measures. They claim the recovery remains too weak and inflation too low to contemplate policy “tightening.” Some go so far as to claim the Fed is repeating its 1937 mistake, whereby tightening measures are said to have aborted a fledgling recovery and needlessly extended the Great Depression.

Every boom and bust cycle runs its own course. But I would strongly argue any comparison to 1937 is misguided. In no way do I believe the 2008 financial crisis was the current historic cycle’s 1929. There was indeed significant financial and economic stress in 2008/09. But there was definitely no global collapse in Credit or economic activity – no globalized economic depression. Actually, on a global basis debt growth has run unabated. And after a meaningful yet non-catastrophic setback in 2009, global GDP growth quickly recovered. With record outstanding debt, record GDP and near-record securities prices, it’s unreasonable to argue for unending depression-era fiscal and monetary stimulus.

More than a decade ago, Dr. Bernanke, with his “helicopter money” and “government printing press,” arrived on the scene with academic theories to fight the scourge of deflation. Well, the tech Bubble had burst - but I argued strongly at the time that THE greater Credit Bubble was very much alive and well. Extraordinary Fed stimulus was poised to inflate the fledgling mortgage finance Bubble. I argued in 2009 that THE Bubble hadn’t burst, instead unmatched global fiscal and monetary stimulus had unleashed the “granddaddy of them all” – the global government finance Bubble.

This is not “intelligentsia” – and I would add that recent market developments have again made this a most pertinent “debate.” Has the Fed been successfully countering a post-Bubble landscape - or has it instead been further inflating a historic Bubble? Do Dr. Bernanke’s academic theories of how the Fed must ensure there is ample “money” in the real economy to address insufficient demand really hold water? Or have zero rates and Trillions of QE simply flooded excess liquidity into already distorted global securities markets? Has Federal Reserve policy led to runaway Bubbles in dysfunctional risk markets – fueling an epic global “building boom along the river”?

I have in past CBBs noted key differences between the traditional government currency printing press and today’s newfangled electronic version. Traditional monetary inflations created government currency - purchasing power that worked to bid up prices throughout the real economy. The contemporary “printing press” creates electronic debit and credit entries that predominantly provide new purchasing power that bids up prices of financial assets. I have argued that this mechanism has been fueling dangerous securities markets and asset Bubbles around the globe. I have further argued that the Fed and central banks had unwittingly nurtured acute Bubble fragility to any potential reduction in central bank liquidity.

How does one reconcile massive ongoing “money printing” with deflating commodities prices and generally contained consumer price inflation? Well, perhaps the commodities market is the proverbial “canary in the coal mine” warning that QE has indeed fueled increasingly vulnerable Credit and asset Bubbles. The backdrop is increasingly reminiscent of the late-1920s, when many (including the Fed) believed weak commodity prices were a call for further monetary accommodation. I am today playing the role of the “old codgers” from the Roaring Twenties that warned of the dangers (and utter futility) of trying to sustain a deeply maladjusted system and historic financial Bubbles. While they were correct in their analysis, history has been unkind to these “liquidationists” and Bernanke “Bubble poppers.” Dr. Bernanke (and conventional thinking) is convinced the issue during the late-twenties and thirties was deflation and the Fed’s negligence in failing to print sufficient money supply. I am convinced that Bernanke’s analysis is flawed: the key issue was the Fed repeatedly placed “coins in the fusebox” during the twenties – in the process accommodating precarious financial and economic Bubbles.

Quantifying current Bubble risk is an impossible task. Global debt and securities markets easily surpass a hundred Trillion. Gross derivative exposures are in the many hundreds of Trillions. The now enormous Chinese and EM financials systems, in particular, lack transparency. The amount of global speculative leverage is unknown. The degree of global financial distortion and economic maladjustment will not become apparent until the next major period of market risk aversion and resulting tightened global financial conditions. For now, recent market gyrations support my view of precarious Latent Market Bubble Risks.

I’ll attempt to use some data to illustrate how Fed policymaking has greatly exacerbated already outsized market risks. As a crude proxy for “market risk,” I’ll combine outstanding Treasury debt, Agency debt/MBS, Corporate bonds, municipal debt and the value of U.S. equities – securities that fluctuate in the marketplace based upon perceptions of value, liquidity and risk. It is worth noting that “market risk” had inflated to $33 TN during the booming nineties, after beginning the decade at $10 TN. Importantly, the nineties saw a fundamental shift to market-based Credit instruments, with the proliferation of ABS, MBS, the GSEs and “Wall Street Finance” more generally.

I have over the years argued that Credit is inherently unstable. The move to market-based debt instruments created an acutely unstable Credit system, instability that provoked a change at the Federal Reserve to a policy regime committed to backstopping the securities markets. For more than twenty years now, this new policy regime has led to an unending series of Bubbles, booms and busts, even more aggressive policy responses and only bigger, more precarious Bubbles. This is critical analysis that remains completely outside of mainstream economic thinking.

When Dr. Bernanke began his crusade against deflation risk back in 2002, “market risk” was at $29.7 TN. Extraordinary monetary stimulus (and resulting mortgage finance Bubble excess) was instrumental in market risk surging to $53 TN by the end of 2007, before dropping abruptly to $44.8 TN in 2008. During the past four years, “market risk” has inflated $16.7 TN, or 37%, to a record $61.5 TN. Perhaps more illuminating, as a percentage of GDP, “market risk” began the 1990’s at 182% and closed the decade at 323%. Post tech-Bubble asset prices had the ratio back to 284% by the end of 2002. By 2007, however, it had inflated all the way to 378%. In 2009 it fell back to 314%. It then ended 2012 at a record 392%. From another angle, over the past 10 years GDP increased $5.2 TN, or 50%, while “market risk” inflated $31.8 TN, or 107%. While conventional thinking subscribes to the post-2008 deleveraging viewpoint, I believe the data strongly support my re-leveraging and historic Bubble thesis.

Global insurance companies have come to believe that global climate change has made some locations “Uninsurable.” Extraordinary changes in the weather landscape have made areas so prone to potential catastrophe that risks cannot be effectively priced in the insurance market and reserved for by those writing policies.

I will posit that years of central bank intrusion and market domination have made global risk markets “Uninsurable.” “Market risk” has ballooned precariously higher, with massive issuance of non-productive government debt and other late-cycle private-sector Credit excesses. Meanwhile, central bank liquidity injections have inflated global asset market prices, while inciting speculation along with a manic global search for yield. Distorted "Bubble" global economies are increasingly succumbing to the debt and maladjustment overhang, while Financial Euphoria has seen securities markets inflate into dangerous speculative Bubbles.

There is a great flaw in the Bernanke doctrine of inflating the Fed’s balance sheet to both accommodate massive fiscal deficits and inflate securities markets, while using zero rates to force savers into the risk markets. This has led to an unprecedented (and problematic) mis-pricing of debt and securities prices globally, while incentivizing leveraging and speculation. Trillions of risk-conscious “money” has flowed into global markets (through ETFs, hedge funds, mutual funds, etc.) with little appreciation for the true risk-profile of global financial markets. One could say a Bubble in perceived low-risk “investing” evolved into a key facet of the overall global risk market Bubble.

There remains a perception that risks can be readily hedged and that central banks will ensure liquid markets even in the event that the marketplace moves to de-risk. But the marketplace cannot offload market risk. Risks can be shifted around the marketplace. Yet if the market en masse seeks to reduce risk there is no one with the wherewithal to take the other side of the trade. This issue becomes especially salient when market risks are exceptionally elevated; when risks are under-appreciated and misunderstood; and when most (sophisticated speculators, investors and unsophisticated “savers” alike) are heavily committed to the risk markets. That’s where I believe we are today.

Importantly, at least segments of the “global leveraged speculating community” must by now be increasingly impaired. The gold, precious metals and commodities “reflation trade” has been an unmitigated disaster. While not yet a full-fledged disaster, the popular emerging market (EM) trade is unraveling. The currencies and global leveraged “carry trades” have become perilous minefields. Global fixed income markets, more generally, are increasingly unstable and illiquid.

Extremely low market yields and risk premiums/Credit spreads ensured the speculators ramped up leverage in order to achieve their bogey 8-9% (pension fund acceptable) annual returns. The exchange-traded fund (ETF) phenomenon ensured that a couple Trillion flowed easily into all types of mis-priced asset classes. The torrent of leveraged buying and ETF flows brought unprecedented liquidity to generally illiquid U.S. corporate and municipal bonds. A torrent of leveraged buying and ETF flows brought unprecedented liquidity to EM markets that over the years earned their “roach motels” moniker. A torrent of flows ensured ultra-easy financial conditions that for four years have worked to validate the (mis)perception of minimal risk throughout U.S. and global markets.

Of course, New York President Dudley and other Fed officials have come out to comfort an unsettled marketplace. Dudley even suggested that the Fed could actually do QE bigger and longer if necessary. Such pandering is precisely why markets are these days so exposed to Bubble risks. The Fed has made such an incredible mess of monetary policy. Fed policies have fomented a historic Bubble, and there will no painless extrication. Various Fed officials have said the market has “misinterpreted,” “misunderstood,” and is “quite out of synch” with the Fed’s recent policy message. I don’t believe the market misunderstands the Fed as much as the Fed and market participants for years have misunderstood market risk dynamics.

Bubbles don’t inflate forever. I’ll assume that at least the sophisticated market operators now appreciate the rapidly escalating risk to EM markets and economies. I’ll assume there is newfound appreciation for the serious liquidity issues overhanging various markets. I’ll assume the leveraged players are responding to the new backdrop with plans for reduced leverage and risk. The sophisticated market operators will now work to “distribute” risk to the less sophisticated, a process they expect will be aided by ongoing Fed verbal and QE market support.

Prominent fund managers and bullish pundits have blanketed the airways the past few days with hopeful messages that the worst of the bond selling is over and that the great equities bull market remains intact. It’s just not going to be that easy. Outflows from bond, EM and stock funds have been enormous. Despite this week’s rally, the fear is that investors will be none too pleased when they see monthly/quarterly brokerage statements. The “sophisticated” surely don’t want to be in a situation where they’re fighting the “unsophisticated” to the exits. They need to see that feel-good bull market feeling return to risk markets relatively quickly - or else.

Above I mentioned how Federal Reserve doctrine changed during the nineties to support the proliferation of market-based Credit. During the decade, the market for derivatives and myriad types of risk insurance ballooned right along with Credit and market risk. I’ve argued over the years that Credit and financial market risk are actually Uninsurable – in that they are neither random nor independent events such as car accidents and house fires. Actually, it is the nature of market risk for losses to occur in particularly non-random and non-independent waves. Somehow the lessons of 2008 were quickly unlearned.

And while I’m on the subject of risk management, it’s worth noting that for years one could simply mitigate risk by holding Treasuries (and bunds, agency debt, etc.). In the event of market turbulence, rising Treasury prices would work to offset declining prices for stocks, junk bonds and such. Problematically, Treasury prices have of late been declining right along with risk assets, as “safe haven”, risk asset and commodity prices all turn atypically correlated. There’s been a proliferation of “risk parity” strategies that are struggling under current market conditions. If things don’t normalize quickly, market participants will be forced to adjust their views of risk and liquidity management.

In a way, the Federal Reserve has for years circumvented “nature” by assuring market liquidity. It is this assurance that has empowered a booming derivatives “insurance” marketplace that operates on the specious assumption of “liquid and continuous markets.” The vast majority of derivative market insurance written requires some degree of “dynamic” hedging – i.e. selling of instruments to generate sufficient cash flow to pay on market insurance contracts sold/written. This is one of those key Latent Market Bubble Risks.

Global climate change is fundamentally altering the risk and the insurance marketplace, although “premiums have been kept artificially depressed in the short term because capital has flocked to the sector in the face of historic low interest rates.” Global central banks have unwittingly inflated risk and grossly distorted the risk “insurance” landscape across global risk markets. We’ll see how long “capital” continues to flock to global securities markets. Early indications of how global risk markets will function in the face of a reversal of flows are anything but encouraging.

For the Week:

The S&P500 gained 0.9% (up 12.6% y-t-d), and the Dow added 0.7% (up 13.8%). The Morgan Stanley Consumer index increased 0.4% (up17.4 %), and the Utilities jumped 3.0% (up 7.4). The Banks rallied 2.1% (up 19.8%), and the Broker/Dealers gained 1.0% (up 33.0%). The Morgan Stanley Cyclicals were up 0.6% (up 12.7%), and the Transports gained 1.0% (up 16.3%). The S&P 400 MidCaps jumped 2.1% (up 13.8%), and the small cap Russell 2000 gained 1.4% (up 15.1%). The Nasdaq100 rose 1.1% (up 9.4%), and the Morgan Stanley High Tech index added 0.1% (up 8.7%). The Semiconductors jumped 1.7% (up 22.0%). The InteractiveWeek Internet index rose 0.8% (up 15.4%). The Biotechs surged 5.0% (up 26.5%). With bullion down $62, the wildly volatile HUI gold index declined 1.2% (down 48.7%).

One-month Treasury bill rates ended the week at one basis point and three-month bill rates closed at 3 bps. Two-year government yields slipped a basis point to 0.36%. Five-year T-note yields ended the week down 3 bps to 1.395%. Ten-year yields declined 4 bps to 2.49%. Long bond yields fell 8 bps to 3.50%. Benchmark Fannie MBS yields dropped 12 bps to 3.32%. The spread between benchmark MBS and 10-year Treasury yields narrowed 8 to 83 bps. The implied yield on December 2014 eurodollar futures fell 11 bps to 0.675%. The two-year dollar swap spread declined 4 to 16 bps, and the 10-year swap spread declined 2 to 21 bps. Corporate bond spreads reversed course. An index of investment grade bond risk fell 7 to 87 bps. An index of junk bond risk sank 28 to 435 bps. An index of emerging market debt risk declined 9 to 341 bps.

Debt issuance remained slow. Investment grade issuers included ITC Holdings $550 million.

Junk bond fund outflows surged back to $3.1bn (from Lipper). Junk issuers included Valeant $3.2bn, Audatex North America $850 million, Gibson Energy $500 million, Transdigm $500 million, Hercules Offshore $400 million, Petroquest Energy $200 million, Creditcorp $165 million and Smith & Wesson $100 million.

Convertible debt issuers included Starwood Property Trust $400 million.

International dollar debt issuers included Neder Waterschapsbank $2.0bn, British Airways $750 million, IFFIM $700 million, British Telecom $600 million, Transcanada Pipeline $500 million, Swedish Export Credit $500 million, Nord Anglia Education $325 million and Mythen RE $100 million.

Italian 10-yr yields fell 7 bps to 4.54% (up 4bps y-t-d). Spain's 10-year yields declined 14 bps to 4.75% (down 3bps). German bund yields were little changed at 1.73% (up 41bps), while French yields rose 3 bps to 2.34% (up 34bps). The French to German 10-year bond spread widened 3 bps to 61 bps. Ten-year Portuguese yields slipped a basis point to 6.32% (down 43bps). Greek 10-year note yields fell 32 bps to 10.62% (up 15bps). U.K. 10-year gilt yields rose 4 bps to 2.44% (up 62bps).

Japan's unstable Nikkei equities index jumped 3.4% (up 31.6% y-t-d). Japanese 10-year "JGB" yields ended the week down 2 bps to 0.84% (up 6bps). The German DAX equities index gained 2.2% for the week (up 4.6%). Spain's IBEX 35 equities index increased 0.8% (down 5.0%). Italy's FTSE MIB was little changed (down 6.4%). With the notable exception of Chinese shares, emerging markets rallied. Brazil's Bovespa index recovered 0.9% (down 22%), and Mexico's Bolsa rallied 6.8% (down 7.1%). South Korea's Kospi index gained 2.2% (down 6.7%). India’s Sensex equities index recovered 3.3% (down 0.2%). China’s Shanghai Exchange sank 4.5% (down 12.8%).

Freddie Mac 30-year fixed mortgage rates surged a notable 53 bps to a two-year high 4.46%, with an eight-week gain of 117 bps (up 80bps y-o-y). Fifteen-year fixed rates were up 46 bps to 3.50% (up 56bps). One-year ARM rates jumped 9 bps to 2.66% (down 8bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 17 bps to 4.66% (up 39bps).

Federal Reserve Credit jumped $24.5bn to a record $3.443 TN. Fed Credit expanded $657bn during the past 38 weeks. Over the past year, Fed Credit surged $589bn, or 21%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $725bn y-o-y, or 7.0%, to $11.138 TN. Over two years, reserves were $1.267 TN higher, for 13% growth.

M2 (narrow) "money" supply rose $3.9bn to a record $10.594 TN. "Narrow money" expanded 6.6% ($661bn) over the past year. For the week, Currency increased $1.9bn. Total Checkable deposits fell $16.6bn, while Savings Deposits gained $11.6bn. Small Time Deposits dipped $3.5bn. Retail Money Funds jumped $10.5bn.

Money market fund assets rose $7.7bn to $2.594 TN. Money Fund assets were up $56bn from a year ago, or 2.2%.

Total Commercial Paper outstanding increased $2.0bn this week to $1.040 TN. CP has declined $25.8bn y-t-d, while having expanded $32bn, or 3.1%, over the past year.

Currency and 'Currency War' Watch:

June 27 – Bloomberg (Liz Capo McCormick): “Volatility in the $4 trillion-a-day foreign-exchange market is rising at the fastest pace since Lehman Brothers Holdings Inc. collapsed, catching traders off guard and wiping out gains in the carry trade. JPMorgan Chase & Co.’s Global FX Volatility Index has jumped 43% this year, heading for its biggest half-year increase since soaring 91% in the final six months of 2008. Swings in exchange rates have contributed to a 9% plunge in Deutsche Bank AG’s G-10 FX Carry Basket from a five- year high in April. The gauge measures returns of traders borrowing in nations with low interest rates and using the proceeds to buy in higher-yielding economies.”

The U.S. dollar index gained 1.0% to 83.14 (up 4.2% y-t-d). For the week on the upside, the Mexican peso increased 2.9%, the South African rand 2.9%, the South Korean won 1.1%, the Singapore dollar 0.7%, the Taiwanese dollar 0.5% and the Brazilian real 0.5%. For the week on the downside, the British pound declined 1.3%, the Japanese yen 1.3%, the Swiss franc 1.1%, the Australian dollar 0.9%, the euro 0.9%, the Danish krone 0.9%, the Canadian dollar 0.6%, the Swedish krona 0.2%, the Norwegian krone 0.2% and the New Zealand dollar 0.2%.

Commodities Watch:

The CRB index declined 0.9% this week (down 6.6% y-t-d). The Goldman Sachs Commodities Index increased 0.2% (down 5.5%). Spot Gold dropped 4.8% to $1,235 (down 26%). Silver declined 2.5% to $19.47 (down 36%). September Crude jumped $2.87 to $96.56 (up 5%). September Gasoline declined 1.1% (down 2%), and September Natural Gas sank 6.0% (up 5%). September Copper fell 1.4% (down 16%). July Wheat sank 7.1% (down 17%), while July Corn gained 2.6% (down 3%).

U.S. Bubble Economy Watch:

June 26 – Bloomberg (Dan Levy): “Kimberly Boortz began searching for a San Francisco condominium after seeing the heated demand for single-family homes in the city. Potential buyers would ‘elbow their way around’ showings, and only all-cash offers or bids well over the asking price would come out on top, she said. ‘There is insane competition in every part of this market,’ said Boortz… San Francisco’s median house price is poised to surpass $1 million this year after setting a record in May… Buyers have been making down payments of 35% in a market awash in wealth from tech workers and overseas investors, Mark said. Banks are offering loans exceeding $625,000 that are too big for government backing, known as jumbo mortgages, at interest rates only marginally above those for conforming loans… The San Francisco area had the biggest gain in home prices among 20 U.S. cities in the S&P/Case-Shiller index… Single-family house prices in April jumped 24% from a year earlier, compared with gains of 12% of the overall gauge, which was still the biggest advance in more than seven years. The median price for a single-family home sold in the city was $947,260 in May, up 2.7% from April and 32% from a year earlier… It topped the $932,350 record set in 2007… San Francisco condo prices set a record in each of the last three months, soaring 27% in May from a year earlier to a median $881,020… The peak in the previous cycle was $811,170 in March 2008.”

June 26 – Bloomberg (Kathleen Chaykowski): “U.S. auto thefts probably rose in 2012 after eight straight years of declines as criminals took advantage of California’s budget cuts and reduced police forces, an insurance-industry group said… ‘There were budget crunches in a lot of areas,’ Frank Scafidi, a spokesman for the Des Plaines, Illinois-based NICB, said… ‘There have been layoffs of police. There’s been less focus on non-violent crimes, because there’s been more focus, as there should be, on violent crimes and crimes against people.’ Modesto, California, including Stanislaus County, placed No. 1 in the ranking of auto thefts per capita in 2012. Thefts in Modesto increased by 29% from 2011… Modesto Police Sergeant Rick Armendariz estimated that staffing levels in the city have shrunk by 30% over the past four years… Eight of the 10 metropolitan areas with the highest 2012 theft rates are in California, including No. 2 Fresno, No. 3 Bakersfield and No. 4 Stockton. ‘California rates are going up because there’s no resources and no law enforcement,’ John Abounader, executive director at the International Association of Auto Theft Investigators, said… ‘Criminals know where the resources are and they go where they’re not.’”

June 26 – Bloomberg (James Rowley and Caitlin Webber): “It’s increasingly unlikely Congress will act in time to avert a doubling next week of the interest rate that low-income college students pay for subsidized federal education loans, said senators involved in negotiations. ‘We probably can’t get anything done this week,” Senator Tom Harkin… told reporters… Unless Congress acts, the interest rate on new subsidized Stafford loans will double on July 1 to 6.8% from 3.4%... About 7 million undergraduates borrow for college using the subsidized loans, for which the government pays the interest while these students are in school. Students must show financial need to qualify for these loans.”

June 26 – MarketNews International (Rebecca Christie, Jim Brunsden and Andrew Jon Hurdle): “The cost of insuring U.S. homes is rising in response to an increasing number of extreme weather events, and is expected to post further gains amid predictions for more wild weather as the global climate changes, insurance industry executives said. Homeowners' insurance premiums have risen at an annual rate of about 5% over the last three years… According to another measure by, an online service that represents eight major insurers in 45 states, the cost of new policies rose by an average of 15% in 2012.”

Federal Reserve Watch:

June 28 – Reuters: “As it considers scaling back asset purchases, the Federal Reserve must consider the overall economic improvements since it launched the stimulus and not give undue weight to the most recent economic data, a top Fed official said.. Highlighting the upcoming September policy meeting as a possible time when the U.S. central bank will need to consider reducing the quantitative easing program, Fed Governor Jeremy Stein ticked off several examples of improvement in the labor market since it was launched in September of last year. A longer view is needed for the Fed's policy-setting committee to make a good judgment and to avoid undue market volatility, Stein said… ‘The best approach is for the committee to be clear that in making a decision in, say, September, it will give primary weight to the large stock of news that has accumulated since the inception of the program and will not be unduly influenced by whatever data releases arrive in the few weeks before the meeting - as salient as these releases may appear to be to market participants,’ he said.”

June 27 – Reuters (Jonathan Spicer): “The Federal Reserve's asset purchases would be more aggressive than the timeline Chairman Ben Bernanke outlined last week if U.S. economic growth and the labor market turn out weaker than expected, the influential head of the New York Fed said… Pushing back hard against market concerns over the withdrawal of quantitative easing, William Dudley stressed… that the newly adopted timeline for reducing the pace of bond buying depends not on calendar dates but on the economic outlook, which remains quite unclear. Turning to the question of when the Fed will ultimately raise interest rates, Dudley, a close ally of Bernanke, went so far as to say that recent market expectations for an earlier rate rise are ‘quite out of sync’ with the statements and expectations of the policy-making Federal Open Market Committee…’If labor market conditions and the economy's growth momentum were to be less favorable than in the FOMC's outlook — and this is what has happened in recent years — I would expect that the asset purchases would continue at a higher pace for longer,’ he said.”

June 24 – Bloomberg (Rich Miller and Joshua Zumbrun): “The Federal Reserve under Chairman Ben S. Bernanke has committed itself to a monetary strategy for this year and beyond that will be difficult to undo under a new chairman. Under Bernanke’s leadership, the Fed has set out clear markers for the conditions that need to be met to moderate and eventually end its asset-purchase program and then begin increasing interest rates. As a consequence, the identity of the chairman next year is unlikely to matter as much as in the past. ‘Usually, the Fed chairman comes in with a clean slate to do whatever they want,’ said Michael Feroli, chief U.S. economist at JPMorgan… and a former researcher with the central bank. ‘Whoever comes in this time is going to inherit a pretty rigid structure.’ Bernanke’s second four-year term as chairman ends on Jan. 31.”

June 25 – Financial Times (Claire Jones, Robin Wigglesworth and James Politi): “A top US central banker on Monday warned the ‘feral hogs’ of financial markets against trying to force the Federal Reserve to shelve plans to slow its bond buying, as yields on US Treasuries climbed to their highest level since August 2011. Richard Fisher, president of the Dallas Federal Reserve, said… that the Fed had anticipated a lively market reaction to last week’s announcement that it was considering bringing an end to its $85bn/month bond purchases. But Mr Fisher, a member of the rate-setting Federal Open Market Committee, warned that markets should not think the Fed would end up propping up the economy indefinitely, or that it could be pushed to keep buying treasuries at the same pace and, in so doing, keep inflating asset price bubbles… Mr Fisher made it clear he believed bubbles had developed in a number of financial markets, mentioning emerging markets and real estate investment trusts. He also noted that companies issuing bonds with a triple C rating, which is junk status, could now borrow for less than 7%.”

June 25 – Reuters (Ingrid Melander): “Markets have overreacted to the U.S. Federal Reserve's plans to stop buying bonds but part of the problem is a lack of clarity over how it will be done, the International Monetary Fund said… ‘The Fed has no clue what will happen when it starts selling assets,’ IMF Chief Economist Olivier Blanchard told a meeting of the Institute of International Finance… ‘So it cannot make any commitments in term of quantities."

U.S. Fixed Income Bubble Watch:

June 28 – Financial Times (Robin Wigglesworth, Michael Mackenzie and Josh Noble): “Central banks sold a record amount of US Treasury debt last week while bond funds suffered the biggest ever investor withdrawals as markets shuddered at the prospect of the US Federal Reserve ending its quantitative easing programme. Holdings of US Treasuries held at the Fed on behalf of official foreign institutions dropped a record $32.4bn to $2.93tn, eclipsing the prior mark of $24bn in August 2007. It was the third week of outflows in the past four.”

June 26 – Bloomberg (Charles Stein): “U.S.-listed bond mutual funds and exchange-traded funds saw record monthly redemptions of $61.7 billion… The redemptions surpassed the previous monthly record of $41.8 billion, set in October 2008, according to… TrimTabs Investment Research… Investors withdrew $52.8 billion from bond mutual funds and $8.9 billion from ETFs during the period…”

June 28 – Dow Jones (Michael Aneiro): “For the third time in the past four weeks, investors pulled more than $3 billion out of junk-bond mutual funds and exchange-traded funds, withdrawing $3.1 billion from such funds in the past week, according… Lipper. Like the $3.3 billion outflow seen two weeks ago, it ranks among the top single-week outflows in market history, overshadowed only by the single-week record $4.6 billion net outflow recorded three weeks ago.”

June 27 – Reuters (Sam Forgione): “Investors in funds based in the United States pulled $8.62 billion out of taxable bond funds in the latest week, marking the first four-week streak of outflows from the funds since 2008, data from Thomson Reuters' Lipper service showed on Thursday. The outflows from taxable bond funds over the week ended June 26 were up from outflows of $507.9 million the prior week. Stock funds, meanwhile, had outflows of $6.8 billion over the reporting period, the most since late April.”

June 28 – Reuters: “U.S. municipal bond funds reported $4.53 billion of net outflows in the week ended June 26, the largest withdrawal on record going back to 1992 and more than twice the $2.22 billion of net outflows the week before, according to…Lipper…”

June 28 – Bloomberg (Jody Shenn): “Government-backed U.S. mortgage bonds are poised for their largest quarterly loss in almost two decades, with some of the debt extending declines today. Fannie Mae’s 3 percent, 30-year securities fell 0.2 cent today to 97.5 cents on the dollar…, down from about 103 cents on March 28… A Bank of America Merrill Lynch index tracking the more than $5 trillion market lost 2% this quarter through yesterday, the most since the start of 1994. Mortgage securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae have been among the hardest hit… ‘What just occurred is indicative of just how important QE is,’ Brad Scott, Bank of America’s… head trader of pass-through agency mortgage securities, said…”

June 24 – Bloomberg (Sarah Mulholland): “Yields on Fannie Mae and Freddie Mac mortgage bonds that guide U.S. home-loan rates extended increases sparked by a potential slowing of the Federal Reserve’s debt purchases. Fannie Mae’s current-coupon 30-year securities climbed 0.08 percentage point to 3.52%..., the highest level since August 2011… The yields have risen from a record-low of 1.68% reached Sept. 26…”

June 25 – Financial Times (Vivianne Rodrigues and Stephen Foley): “The broad sell off in fixed-income assets has hurt few corners of the US debt markets as much as municipal debt. The $3.7tn market for tax-exempt securities… has seen prices plunge, yields trade at 2-year highs and state governments and agencies cancel or postpone almost $2.6bn in sales in the past week. Fundraisings for hospitals in California, schools in Georgia and for the New York transportation system, which is still being repaired after Hurrican Sandy, are among those that have been pulled. ‘We are expericenicing quite a bit of selling in munis and not all of it has been very orderly,’ said Stephen Winterstein, chief strategist in municipal fixed income at Wilmington Trust Investment Advisors. ‘At one point, it felt a bit like 2008 when we saw a tremendous amount of volatility and illiquidity in markets.”

June 25 – Bloomberg (Brian Chappatta and Emily Freeman): “The U.S. municipal market is poised for its worst monthly loss since 2008, leading investors to offer a record amount of tax-exempt debt as yields surged to 25- month highs… Institutional bondholders such as mutual funds put about $2 billion of munis up for sale yesterday, the most since at least 1996… Yields on 10-year AAA munis jumped to 2.88%..., the highest since May 2011.”

June 26 – Bloomberg (Brian Chappatta): “Illinois paid 17% more in extra yield than in April as it issued $1.3 billion of general obligations, less than a month after lawmakers failed to bolster the nation’s worst-funded state pension system. The deal was Illinois’s first since its credit rating was cut after legislators left the state capital on May 31 without striking a deal on retirement costs. The issue included uninsured bonds maturing in July 2023 that yielded 4.46%... The revised yield is about 1.5 percentage points more than benchmark munis. In April, the state sold 10-year securities yielding 3.3%, or 1.29 percentage points above AAAs.”

June 26 – Bloomberg (Brian Chappatta): “The yield penalty on Michigan’s debt has climbed 40% in less than two weeks as defaults by Detroit and two school districts lead investors to question the state’s commitment to protect bondholders. Buyers demand about 0.49 percentage point of extra yield to own general obligations of Michigan instead of benchmark securities…”

June 25 – Bloomberg (Romy Varghese): “Municipal-bond investors are demanding the biggest yield penalty since 2010 on Pennsylvania issuers as the state’s budget chief warns that a growing pension deficit threatens the commonwealth’s credit rating.”

June 24 – Bloomberg (Emily Freeman and Brian Chappatta): “Georgia led municipal issuers postponing $286 million in debt sales as yields in the $3.7 trillion U.S. local-securities market rose to the highest since October 2011. Issuers had planned to sell about $9 billion in long-term debt this week, the most since April… Georgia’s postponement… joins delayed deals by municipalities including Covington, Tennessee, and Kentucky’s Fayette County School District.”

June 25 – Bloomberg (Sarika Gangar and Lisa Abramowicz): “Sales of longer-term corporate bonds in the U.S. are plunging to the lowest level in nine months as investors face $110 billion of lost market value after the measure peaked last month. Issuance of dollar-denominated investment-grade bonds maturing in at least 15 years has fallen to 11.6% of the total in June, down from 16.6% in May and the least since 10.1% in September… Apple Inc.’s $3 billion of 3.85% bonds due in 2043, sold three days before Treasury yields began the biggest two-month surge in a decade, have plunged 12.9 cents to 86.5 cents on the dollar, with the yield climbing to 4.69%.”

June 26 – Bloomberg (Victoria Stilwell): “Redemptions from high-yield bond funds, spurred by Treasury yields at the highest in almost two years, threaten to derail stable credit conditions for the riskiest U.S. companies, according to Moody’s… The credit grader’s list of companies rated B3 with a ‘negative’ outlook and lower rose to 160 as of June 1 from a post-recession low of 146 three months earlier… Rising yields and fund redemptions may drain the market liquidity that has bolstered corporate balance sheets and lowered default risk, according to Moody’s analysts led by David Keisman. U.S. junk-rated debt has fallen 3.6% in June, poised for its worst monthly loss since September 2011, Bank of America Merrill Lynch data show.”

June 26 – Bloomberg (Krista Giovacco): “TransDigm Group Inc.’s plan to pay a debt-funded dividend of as much as $1.8 billion ran into Federal Reserve Chairman Ben S. Bernanke’s timetable for stimulus reduction as the company sold fewer bonds than its maximum goal.”

EM Bubble Watch:

June 26 – Bloomberg (Gabrielle Coppola and Boris Korby): “The worst sell-off in developing- nation debt in more than four years and nationwide protests in Brazil are shuttering the world’s largest emerging-bond market for the first time since August. Meatpacker Minerva SA last week became the second Brazilian company to cancel an overseas bond sale this month as average borrowing costs for the nation’s issuers surged 1.23 percentage points to a four-year high of 7.11%... Corporate dollar bonds in Brazil have lost 9.3% this year… After Brazilian companies borrowed $22.9 billion internationally in the first five months of the year, the third- fastest pace on record, no offerings of at least $500 million have been completed in June…”

June 26 – Bloomberg (Ben Bain): “The tumble in Mexico’s longer-dated bonds is disrupting the nation’s effort to shield itself from a surge in global interest rates by lengthening debt maturities. Mexico said June 24 it’s cutting the amount of bonds due in 20 years and 30 years that it’ll sell in the next three months by 6 billion pesos ($453 million) versus this quarter as yields on the notes soared an average of 1.28 percentage points in the past month…”

June 28 – Bloomberg (Benjamin Harvey): “No country has been harder hit by speculation that the U.S. will curb its unprecedented monetary stimulus than Turkey, whose current-account deficit makes its economy one of the most dependent on foreign capital. While bonds in 17 of the 19 major emerging markets tracked by Bloomberg slid…, Turkey underperformed. Yields on the nation’s two-year notes surged 249 bps since then, compared with 211 in Indonesia, the second-biggest increase.”

June 26 – Bloomberg (Selcuk Gokoluk): “Turkey’s widening current-account deficit is betraying the nation’s dollar-bond market, which is set for its worst month since October 2008… Investors in Turkey’s sovereign dollars bonds have lost almost 14% this month… That compares with a 7.3% average loss for emerging-market external debt in June, the indexes show… The nation’s current-account deficit swelled to $8.2 billion in April, the biggest monthly shortfall since March 2011.”

June 28 – Bloomberg (Jungah Lee): “South Korean corporate debt sales slumped this quarter to the least since 2008 as borrowing costs surged… Offerings slid 20% from the first three months of the year to 7.43 trillion won ($6.5bn), the least since the third quarter of 2008… Benchmark yields for three-year AA-rated corporate notes in Korea rose to a 10-month high at 3.48% on June 24.”

Global Bubble Watch:

June 24 – Financial Times (Claire Jones): “Central banks must head for the exit and stop trying to spur a global economic recovery, the Bank for International Settlements has said following a week of market turbulence sparked by the US Federal Reserve’s signal that it would soon cut the pace of its bond buying… Often referred to as the central bankers’ bank, BIS said the global economy was ‘past the height of the crisis’ and its goal was ‘to return still-sluggish economies to strong and sustainable growth’. ‘Alas, central banks cannot do more without compounding the risks they have already created,’ the BIS said, adding that delivering more ‘extraordinary’ stimulus was ‘becoming increasingly perilous’. ‘How can central banks encourage those responsible for structural adjustment to implement those reforms? How can they avoid making the economy too dependent on monetary stimulus? When is the right time for them to pull back ... [and] how can they avoid sparking a sharp rise in bond yields? It is time for monetary policy to begin answering these questions,’ the report said.”

June 28 – Bloomberg (Sarika Gangar): “Global corporate bond sales, after the busiest start to a year on record, are falling victim to the fastest increase in borrowing costs since 2008 with the worst June for offerings in almost a decade. From the U.S. to Europe and Asia, $188.8 billion has been raised in the corporate bond market this month, bringing sales for the year to $1.99 trillion…”

June 27 – Bloomberg (David Yong): “For the first time since August, junk bonds are trading below par amid speculation that companies will have a harder time meeting debt payments as the Federal Reserve prepares to reduce its extraordinary stimulus measures and China reins in its shadow-banking system. Average prices on speculative-grade corporate notes dropped to 99.42 cents on the dollar on June 25, from a record 106.04 cents in May, according to Bank of America Merrill Lynch’s Global High Yield Index. The declines were led by Asia, which saw prices tumble to 97.2 cents, the lowest level in a year.”

June 24 – Bloomberg (Abigail Moses): “The market for options on credit derivatives indexes has surged more than 40% in the past month to $98.8 billion as investors search farther afield for cheap hedges protecting against a sell-off in the bond markets. The contracts, which give investors the right but not the obligation to buy or sell indexes of credit-default swaps at a certain price, have doubled from $48.7 billion a year ago…”

Global Credit Watch:

June 26 – Bloomberg (Matt Robinson): “Corporate creditworthiness in the U.S. is deteriorating at the fastest pace since 2009 with earnings growth slowing as yields rise from record lows. The ratio of upgrades to downgrades fell to 0.89 times in the first five months of the year after reaching a post-crisis high of 1.55 times in 2010, according to data from Moody’s… At Standard & Poor’s, the proportion has declined to 0.83 as of last week from 1 a year earlier. The Federal Reserve has pumped more than $2.5 trillion into the financial system since markets froze in 2008, helping companies improve profitability by lowering their borrowing costs… The trend of improving credit quality has slowed as profits are slowing,’ Ben Garber, an economist at Moody’s… said… ‘As the recovery matures, companies are liable to get more aggressive in taking on share buybacks and dividends.’”

China Bubble Watch:

June 27 – Bloomberg: “The jolt Premier Li Keqiang delivered to China’s financial system emulates a playbook crafted by predecessor Zhu Rongji in the 1990s, inflicting short-term pain in the anticipation of long-term gain. Li, who took office in March, sent the clearest message yet the past week that China’s new leadership team wants lenders to rein in credit expansion, depriving money markets of liquidity in the biggest squeeze in at least a decade. Next steps may include tightening that sends some smaller financial institutions into bankruptcy, according to analysts at Nomura… Zhu’s strategy of cutting the size of state enterprises with millions on the payrolls helped set the stage for years of growth in excess of 10%. With a focus now on a slower expansion pace that avoids asset bubbles or bad-loan crises, Li and his team face a possible backlash from indebted local governments and state banks that are among the world’s largest by market value. ‘You’ve got to use a hammer to change this system,’ said James McGregor, a Beijing-based former chairman of the American Chamber of Commerce in China and author of the 2012 book ‘No Ancient Wisdom, No Followers: The Challenges of Chinese Authoritarian Capitalism.’”

June 26 – Dow Jones: “The recent statements by China's central bank have calmed the nation’s financial markets but further measures can be expected to address deeper market problems, a former adviser to the People's Bank of China said… ‘The PBOC's recent statements have calmed panicky markets,’ said Li Daokui… ‘But this is just the first step. If there are no follow-up reforms, market volatility will reappear.’ The central bank on Tuesday said it had extended credit to certain financial institutions but didn't specify which ones or how much… Mr. Li didn't give details of the reforms he anticipated but banks have been accused of channeling too much credit into projects that don't support the underlying economy.”

June 25 – Bloomberg: “China’s biggest squeeze on credit in at least a decade is increasing the chance that Li Keqiang will be the first premier to miss an annual growth target since the Asian financial crisis in 1998. Goldman Sachs Group Inc. and China International Capital Corp. yesterday joined banks from Barclays Plc to HSBC Holdings Plc in paring their growth projections this year to 7.4%, below the government’s 7.5% goal… ‘The current leadership is trying to build its reputation in a different way than the previous administration, which felt that its target was holy and had to be met regardless of the circumstances,’ said Louis Kuijs, chief China economist at Royal Bank of Scotland Group Plc in Hong Kong, who previously worked for the World Bank.”

June 26 – Bloomberg (Kyoungwha Kim and Helen Yuan): “The equivalent of about $7 billion in yuan bond sales have been postponed during China’s two-week cash crunch and treasurers say they remain cautious despite central bank reassurances the squeeze is temporary. Domestic debt sales dropped 42% so far in June to 179.4 billion yuan ($29.2bn), poised for the worst month since January 2012… At least 22 companies including China Development Bank Corp. canceled or delayed sales. Average yields on one-year AAA rated corporate debt surged 148 bps this month to 5.428%, the highest since October 2011.”

June 28 – Bloomberg: “Borrowing costs for Chinese banks have surged the most in at least six years this month as rating companies say a cash crunch threatens to swell bad loans. The yield spread for one-year AAA bank bonds over similar-maturity sovereign notes jumped 56 bps so far this month to 163 bps, the most in ChinaBond records going back to 2007.”

June 25 – Wall Street Journal Asia (Lingling Wei and William Kazer): “China’s crackdown on rampant credit growth is starting to slam bank shares and take a toll on the country's vast informal lending system. China stocks posted their worst one-day loss in nearly four years on Monday as shares of midsize banks plunged, contributing to a broad regional decline in equities and commodity markets. The benchmark Shanghai Composite Index slid 5.3% to… its lowest level since December…Meanwhile, one corner of what is known as China's shadow banking system has seen a marked slowdown in recent weeks. China’s trust companies -- which raise money from wealthy individuals by selling investment products that pay higher returns than bank deposits, then lend out the money to businesses unable to get loans from traditional banks -- have scaled back issuance of investment products as the cash shortage has shaken investors' confidence… A total of 178 such investment products have been sold so far this month, according to Use Trust… The total is less than half of the volume sold in the first three weeks of last month. ‘The future of the industry is now entirely up to the central bank's policy stance,’ said a senior executive at Ping An Trust, a large trust company owned by one of China's largest insurers, Ping An Insurance…”

June 24 – Bloomberg (Rachel Evans): “Bank of China Ltd., Export-Import Bank of China and China Development Bank Corp. led gains in Asian bond risk last week as Moody’s… and Standard & Poor’s warn credit curbs threaten some lenders. Prices of swaps tied to Bank of China, the nation’s fourth- largest lender, rose 70.4 bps last week to 192.4… The cost of insuring Asian corporate and sovereign bonds from default surged 27.6 bps last week, the most since November 2011, CMA prices show. CDB, the nation’s biggest policy lender, scrapped a bond sale as the People’s Bank of China said today that lenders must control liquidity risks from credit expansion… ‘Non-performing loans are likely to rise more rapidly in the coming months as weaker borrowers find refinancing conditions more challenging,” Bin Hu, senior analyst at Moody’s, wrote… ‘Another risk is that the PBOC’s actions will make banks more nervous about each other’s creditworthiness.’”

June 28 – Bloomberg: “Beijing told its 20 million residents to avoid outdoor activities as a U.S. Embassy pollution monitor showed levels of smog surpassing hazardous levels in the Chinese capital. Concentrations of PM2.5, fine air particulates that pose the greatest health risk, rose to 520 micrograms per cubic meter at 3 p.m. near Tiananmen Square from an average of 260 in the past 24 hours… That reading was more than 20 times higher than the World Health Organization recommendations of no higher than 25 for day-long exposure.”

Japan Bubble Watch:

June 24 – Bloomberg (Anna Kitanaka, Toshiro Hasegawa and Yumi Ikeda): “Japan’s central bank probably promised too much when it set a goal of lifting inflation to 2% within two years, according to Takahiro Mitani, president of the country’s public pension fund. History is against the Bank of Japan as it undertakes unprecedented asset purchases in pursuit of a pledge to overcome 15 years of deflation, Mitani, the 64-year-old head of the 112 trillion yen ($1.14 trillion) Government Pension Investment Fund, said… It’s been 21 years since annual inflation in Japan exceeded 2%... ‘It’s going to be very difficult,’ Mitani said. ‘The BOJ think that if they say they will take bold measures to bring about inflation, then inflation expectations will rise and as a result prices will rise. But reality isn’t that smooth. Even in the bubble, inflation was only about 1%.’”

Latin America Watch:

June 25 – Bloomberg (Blake Schmidt): “The record rout in Brazilian bonds is deepening on speculation President Dilma Rousseff’s vow to boost spending to placate protesters will swell the budget deficit at a time when a stagnating economy saps tax revenue. Brazil’s real-denominated bonds due 2023 have plunged this month, causing yields to jump to a 15-month high of 11.63% on June 21 even as the Treasury offered to buy back the notes in five unscheduled auctions this month… Rousseff, whose government recorded the biggest deficit in almost four years in April, urged fiscal restraint in a meeting with governors and mayors and then pledged to earmark 50 billion reais ($22bn) more to upgrade urban transportation.”

Europe Watch:

June 27 – Bloomberg (Jim Brunsden, Rebecca Christie and Fred Pals): “European Union finance chiefs struck an agreement on how to handle failing banks, a step they said would bolster investor confidence and help overcome the euro- area financial crisis. In seven hours of emergency negotiations in Brussels that wrapped up at about 1:30 a.m. today, ministers settled on guidelines for assigning losses to private creditors and regulating public assistance. They also spelled out when governments can step in and established a role for the European Stability Mechanism, the euro area’s 500 billion-euro ($651bn) firewall fund.”

June 28 – Bloomberg (Rebecca Christie and James G. Neuger): “European Union leaders are set to scale back promises of support for ailing banks when central euro-area bank supervision starts next year, raising questions about the scope of their crisis-fighting plan. A June 26 proposed statement for a two-day Brussels summit dropped a commitment from earlier drafts for EU states to put ‘credible backstops’ in place for restructuring and recapitalization before the European Central Bank conducts asset-quality reviews of lenders prior to taking command of oversight of banks in the currency bloc in 2014.”

June 26 – Bloomberg (Frances Schwartzkopff): “Danish consumers, who owe banks more than three times their disposable incomes, are about to find out how sustainable that debt load is as interest rates rise… Though the government and central bank have long argued Denmark’s private debt burden is backed by some of the world’s biggest pension savings, record consumer borrowing has prompted warnings from the European Commission and the International Monetary Fund. The Systemic Risk Board in Copenhagen said this week it will investigate private debt growth in response to international concerns.”

June 25 – Bloomberg (Marta Waldoch): “Poland’s record-low interest rates are failing to boost bank lending, which is being hammered by the weakest economic growth in more than a decade and unemployment hovering around a six-year high. Corporate loans fell in the 12 months to May for the first time in 28 months, while credit for households grew at the slowest pace this year…”

France Watch:

June 27 – Reuters (Ingrid Melander and Catherine Bremer): “French consumer confidence has hit an all-time low just as the state auditor warned that a likely economic contraction would knock the government off-course from this year's deficit reduction target. June consumer confidence fell to the lowest level since records began in 1972 and households are more pessimistic than ever about their future living standards, according to an index released on Thursday by national statistics institute INSEE… France's Cour des Comptes, a quasi-judicial body that oversees state accounts, warned in an annual review that with the public spending deficit heading for nearly 4% of economic output this year, missing a 3.7% official target, structural reforms must be implemented immediately to cut spending.

June 28 – UK Guardian: “Francois Hollande would be forgiven for having his mind on domestic issues today, with the latest economic news underlining the challenge he faces back home. France's national debt has hit a new record high of €1.87 trillion euros, or 91.7% of GDP… - up from 90.2% three months earlier. Paris is budgeting for the debt stock to peak at 94.3% in 2014, but with the country in recession there are growing fears that targets could be missed.”

June 26 – Reuters (Luke Baker and Nicholas Vincur): “France cranked up criticism of the European Commission on Wednesday with one official calling its president Jose Manuel Barroso a lame duck and suggesting he should never have been appointed. Stepping up a war of words that has rumbled for two weeks, the Socialist speaker of France's lower house of parliament dismissed Barroso, a former centre-right prime minister of Portugal, as a ‘casting error’ who could not be relied upon…. The dispute stems, at least in part, from comments Barroso made in an interview this month that appeared to criticize France for seeking to restrict free trade negotiations with the United States, saying such an approach was ‘extremely reactionary’ and likening it to the anti-globalization movement.”

Italy Watch:

June 26 – Financial Times (Guy Dinmore): “Italy risks potential losses of billions of euros on derivatives contracts it restructured at the height of the Eurozone crisis, according to a confidential report by the Rome Treasury that sheds more light on the financial tactics that enabled the debt-laden country to enter the euro in 1999. A 29-page report by the Treasury, obtained by the Financial Times, details Italy’s debt transactions and exposure in the first half of 2012, including the restructuring of eight derivatives contracts with foreign banks with a total notional value of €31.7bn."

June 27 – Financial Times (Guy Dinmore): “Italy’s judiciary has opened an inquiry into the Treasury’s use of derivatives to hedge public debt after reports that the state faced potential losses of billions of euros on contracts restructured during the eurozone debt crisis last year. Nello Rossi, Rome’s deputy prosecutor, told the Financial Times… that he would meet the various institutions involved, including the Treasury, the Bank of Italy and state auditors. He stressed, however, that this was not a criminal investigation… ‘The state of Italy’s finances are like the formula for Coca-Cola. It is a secret,’ said Renato Brunetta, spokesman for the centre-right People of Liberty, which formed a coalition government with prime minister Enrico Letta’s centre-left Democrats in April. ‘There is total opacity in the finance ministry,’ Mr Brunetta added.”