AUSTRALIA: The NAB report showed Business Confidence sliding into the new year and we get the February Westpac Consumer Confidence Index tonight, another index that has been sliding in recent months.
CHINA: During the week ahead China will release January data on both Bank Loans and the broader Aggregate Financing Activity. Comments in late January suggested that bank lending was accelerating sharply in January (as it often does in the new year) and the Bberg consensus expects a jump to CNY2,200bn, which would be a 24-month high and be a strong outcome.
FRANCE: Consistent with slowing IP growth in the rest of the EZ, the Bberg consensus expects December YOY Industrial Production growth to slow to 1.7%, which would match the lowest since last July.
ITALY: The Bberg consensus expects December YOY Industrial Production growth to inch back up to a still-sluggish 1.4% from 0.9% YOY in November
SWEDEN: Household Consumption rose 3.2% YOY in November in the center of the 2.5-3.9% YOY growth rates for all of 2015 as consumers benefit from lower energy prices; not clear why there remain expectations for additional Riksbank easing on Thursday.
UK: Similar to the EZ countries, Industrial Production growth remains very sluggish, with the Bberg consensus expecting only a 1.0% YOY gain for December, up from 0.9% in November.
** A lackluster takedown with a tail of 0.9 and non-dealer bidding at 56.5% vs. 63% norm ***
* 3-year auction stops at 0.844% vs. a 0.835% 1-pm bid WI.
* Dealers were awarded 43.5% vs. 37% average of the last four 3-year auctions.
* Indirects get 41.5% vs. 50% norm.
* Directs take 15.0% vs. 13% average.
* Bid/Cover was 2.74 vs. 3.01 average of last four.
* Dealer Hit-Ratio: Dealers take 21.5% of what they bid for vs. 17% norm.
* Indirect Hit-Ratio: Customers take 99% of what they bid for vs. 91% norm.
* Treasuries were trading higher into the auction, failing to build in any meaningful outright concession for 3s. Since the results, Treasuries have held the price action.
* Volumes in the sector ahead of the auction were mixed for a 3-year auction day in cash-terms at 118% of norms and with a below-average 12% marketshare vs. 16% norms. Overall, Treasuries have had an above-average volume day at 117% of the 10-day moving average. 5s were the most active issue taking a 32% marketshare while 10s were second at 27%. 2s managed 13% while 7s got just 9%.
Via Stephen Stanley at Amherst Pierpont Securities:
Today at 10:52 AM
Based on the wholesale inventories release for December, I have good news and bad news. The non-auto wholesale inventories figure was down 0.2% in December, whereas BEA statisticians had assumed a small increase. The good news is that this means the inventory correction is a little further along than previously thought. The bad news is that the data imply another downward adjustment to the Q4 GDP tracking estimate of a tenth. So, that takes my running tally to +0.3%. We are clearly getting dangerously close to a negative reading. Nevertheless, lower inventories for Q4 is good news for the Q1 GDP forecast. I am now up to +2.4% for Q1, as the last couple of adjustments to Q4 have been on the inventory piece and thus have benefited Q1.
Meanwhile, since I am already writing, I can give a few sentences on the JOLTS data. Job openings surged in December to 5.6 million, almost returning to the high seen last July. Labor demand remains robust. There are a few other noteworthy developments in these numbers, though the data are somewhat dated (for December). Hiring levels were picking up in the fourth quarter (not surprisingly, given how strong the payroll readings were in November and December). Separations were rising too, but not because firms were laying workers off. In fact, the layoff rate slid to 1.1%, matching the series low (going back to the end of 2000). In contrast, quits jumped by nearly 200,000 in December, and the quits rate rose to 2.1%, the highest reading since 2008. This has been one of the additional proxies for labor market slack that Chair Yellen has cited in recent years. So, we have a large and rising pool of job openings, firms are hiring faster, and workers are increasingly willing to quit their jobs in order to take (or search for) a better position. That seeks all the boxes for a tight/tightening labor market, and it should be no surprise that wages are finally starting to firm up.
We are once again constructive on this afternoon’s $24 bn 3-year auction and see the risk of a stop-through in light of the recent takedowns of new 3s and the flight-to-quality influences that have been so influential in the New Year. On the other hand, the 3-year yield is at the lowest for an auction since March 2014 – an auction that tailed 0.3 bp. Nonetheless, the takedowns of this benchmark have recently gone very well, stopping-through or on-the-screws at each of the last 16 auctions – a dynamic we don’t feel compelled to bet against this afternoon. Volumes have been mixed this morning with 3s at 128% of the auction-day norms but with a below-average marketshare at 12% vs. 16% norm. Foreign demand will be a wildcard at this week’s auctions given the recent safe-haven inspired moves and for context overseas awards average 21% of the 3-year auction.
* 3-year auctions have recently met solid receptions, stopping-through (or on-the-screws) at all 16 of the most recent auctions for an average of 0.4 bp through.
* Investment Fund buying has decreased recently, taking 37% or $9.0 bn during the last four auctions vs. 40% or $9.7 bn at the prior four.
* Foreign bidding has upticked recently, averaging 21% at the last four auctions vs. 18% at the prior four. Foreign investors initially bought just $4.8 bn (15%) of the maturing 3-year; lower-end of the range.
* Maturities are on the upper-end of the range for this week’s trio of auctions at $54.4 bn, leaving net new issuance at just $7.6 bn – this provides ample cash for potential reinvestment.
* Technicals are bullish, but momentum is well into overbought territory. For initial resistance we have the intraday yield low of 78.5 bp and then an opening gap at 73.6 bp to 74.4 bp. Beyond there is the twice-held 70 bp resistance level. Initial support comes in at a volume bulge at 90 bp and then the top of the recent yield-range at 94.4 bp. Beyond there is a small opening gap at 99.3 bp to 99.6 bp for further support.
The results presented here reinforce our earlier message that corporate bond market liquidity appears ample based on the bid-ask spread and price impact measures. Nonetheless, some analysts argue that liquidity has in fact deteriorated, albeit in a way that is missed by the measures examined here. Indeed, an important caveat is that our measures cannot be estimated for bonds that trade rarely (for example, once a day). While this limitation is difficult to address, we will assess liquidity metrics across finer subgroups of bonds, in our next post.
Here is the Bloomberg summary of the article:
Bid-Ask Spreads Affirm ‘Ample’ Corporate Bond Liquidity: NY Fed
2016-02-09 12:37:37.812 GMT
By Alexandra Harris
(Bloomberg) — Conclusion based on estimating
“‘realized’” bid-ask spreads by comparing prices when a
customer buys from a dealer to prices when a client sells, NY
Fed’s Tobias Adrian, Michael Fleming, Erik Vogt and Zachary
Wojtowicz write in blog post.
* Calculate spread for a given bond and day using average buy
and sell prices, then average across bonds
* Calculations based on FINRA’s TRACE data
* Analysts argue that liquidity has deteriorated, “albeit in
a way that is missed by the measures examined here”
* An important caveat is that “our measures cannot be
estimated for bonds that trade rarely,” such as once a
* Bid-ask spreads depend on daily trading volume
* Spreads are “indeed narrower” for transactions larger
for round-lot ($1m-$5m) and block (+$5m) trades, 0.13%
than micro (less than $100k), 1.04%, or odd-lot ($100k-
* Price impact across various bond categories follows patterns
similar to bid-ask spreads
* “Very similar” for bonds with frequent and infrequent
trading; IG, HY also “of a similar magnitude”
* Surprising result is price impact per unit volume
declines with trade size
* NOTE: Post titled, “Corporate Bond Market Liquidity Redux:
More Price-Based Evidence,” is second of 10 in NY Fed’s
third series on liquidity
– After a meltdown in Asia, the global capital markets are stabilizing in Europe – Oil is trading up 1-2% even though the IEA reported that Saudi Arabia boosted oil output in January by 70k barrels to 10.2 mln bpd and Iraqi output hit a new record high – The economic data has been largely limited to German industrial output and trade figures; the US calendar is light – It seems that the EM bounce has run its course for now; Mexico reports January CPI
Price action: The dollar is mixed against the majors as markets calm down after a volatile Asian session. The Swiss franc and the yen are outperforming, while the Aussie and the Swedish krona are underperforming. The euro is trading flat near $1.12, while sterling is trading higher near $1.4450. Dollar/yen is trading lower near 115.20 after earlier falling as low as 114.20, a level not seen since late 2014. EM currencies are mostly firmer. RUB, PLN, and CZK are outperforming while PHP and INR are underperforming. MSCI Asia Pacific was down 3%, with the Nikkei plunging 5.4%. MSCI EM is down for the second straight day, at -0.5%. Chinese markets are closed all week, while many other Asian markets are closed for the first part of the week. Euro Stoxx 600 is flat near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is up 2 bp at 1.76%, while European bond markets are softer. Japan’s 10-year JGB yield went negative for the first time. Commodity prices are mixed, with oil up 1-2% and copper down over 1.5%.
After a meltdown in Asia, the global capital markets are stabilizing in Europe. The US S&P 500 managed to recoup about half of its losses before the close yesterday, but this gave no comfort to Japanese investors. The yen’s strength and ongoing concerns about banks’ exposure to energy companies took the Nikkei down 5.4% and pushed the 10-year JGB yield into negative territory for the first time.
The Dow Jones Stoxx 600 is off 0.25% near midday in London. Telecoms and consumer staples are firm, but materials and financials are the largest drags. This plays on the bank-energy theme as well as more concerns about European banks. In particular, the contingent convertible bonds, which emerged as a part of the effort to strengthen bank balance sheets, are being “battle-tested.” The new Bank Recovery and Resolution Directive (BRRD), which exposes fixed income investors to a greater risk of being bailed-in, may also be a source of anxiety.
European bond yields are higher. Italian and Spanish bonds are nearly flat while core bond yields are 3-4 bp higher. Portugal appears to have struck a compromise with the EC over this year’s budget, and in some ways is as austere if not more so than the previous center-right government. The 50 bp increase in 10-year yields over the past five sessions, three times the increase that Spain (which is still trying to cobble together a government) is not a vote of confidence. Indeed, many suspect Portugal will be required to have a mid-course correction, i.e., more fiscal action when if slower growth risks a deficit overshoot.
Oil is trading 1-2% higher even though the IEA reported that Saudi Arabia boosted oil output in January by 70k barrels to 10.2 mln bpd and Iraqi output hit a new record high. It increased production by 50k barrels to 4.35 mln bpd. The US Department of Energy updates its short-term energy outlook and tomorrow reports the weekly inventory figures. The Bloomberg consensus calls for a 3.1 mln barrel build of crude stocks. This follows a 7.8 mln barrel build the previous week.
The economic data has been largely limited to German industrial output and trade figures. Both were disappointing. The slightly larger than expected decline in December factory orders reported last week gave little sign of the poor industrial output figures. Industrial production was expected to have risen by 0.5%. Instead, it fell by 1.2%. While the figure was dragged lower by the 3% decline in energy output, which was a function of the weather, consumer and capital goods output also fell.
Separately, Germany reported a slight decline in its trade balance to EUR18.8 bln from EUR20.5 bln previously. However, this masked a 1.6% decline in exports. The consensus expected a 0.5% increase. Imports also fell 1.6%, three times what the market anticipated. The EUR25.6 bln current account surplus puts the Q4 average at EUR24.3 bln compared with EUR21.0 bln average in Q3, despite a trade balance that was little changed in the quarter. German Q4 GDP figures are due before the weekend. The economy ended 2015 on a soft note.
The US calendar is light. The JOLTS report on the labor market and wholesale inventories are the main features but are not typically market-moving releases even in the best of times. Yellen’s testimony before the House Financial Panel tomorrow is awaited for fresh insight into what the Federal Reserve makes recent market developments, which seem more significant than the real sector data. After a poor Q4 GDP, the Atlanta Fed GDPNow model is tracking a little more than 2% growth in Q1 16. While the tightening of financial conditions has become an important focus, we note that dollar’s trade-weighted measure has fallen over the past week.
With market sentiment growing so relentlessly sour in recent sessions, it seems that the EM bounce has run its course for now. This despite what we viewed as an improved global liquidity backdrop for EM. We note that MSCI EM has fallen two straight days now after hitting the 50% retracement objective of the December-January drop near 747 on Friday. It is currently trading near 731, and a break below 709 is needed to set up a test of the January 21 cycle low near 687.
Mexico reports January CPI, and is expected to rise 2.52% y/y vs. 2.13% in December. It reports December IP Thursday, expected flat y/y vs. 0.1% in November. Price pressures could be rising, but the economy is clearly facing headwinds. If the Fed stays on hold March 16, we expect Banxico to do the same on March 18. The peso is a major factor for the central bank at this point, even though there hasn’t been much inflation pass-through yet. Banco de Mexico held two separate dollar auctions Monday, but USD/MXN still tested (but failed to break) the all-time high near 18.80 from last month. Eventually, new highs should be seen.
Now that analysts are comparing markets to Tom Cruise movies, it must be a sign we’ve all lost the plot. But at least it’s not Cocktail, because that would make no sense.
Michael Every, head of financial markets research for Asia Pacific at Rabobank, has compared current events to Cruise’s relatively recent sci-fi flick, ‘Edge of Tomorrow’. It’s a bit like Source Code, but with aliens, writes Peter Wells.
Mr Every explains his choice:
Not because earth is threatened with invasion by giant alien monsters (I’m bearish, but I’m not that bearish!) Yet one key plot device from the film rings true:
Tom Cruise knows that the battle he is fighting ends in bloody defeat for his forces despite all their hi-tech hubris; and he knows this because every time he dies he is forced to play the same day out over and over again in an endless loop of déjà-vu.
So where’s the analogy? Mr Every says authorities, policymakers and the like have “learned next to nothing” from the global financial crisis, or even any that preceded it. “They also keep repeating the hubristic mantra that ‘one more rate cut will do it’…and then, after a pause, the markets show them they are still wrong. And it keeps happening over and over again.”
The Bank of Japan is the latest in the list, after it declared its redoubled intention to defeat deflation and then cutting interest rates into negative territory last month.
So it seems markets have adopted the rallying cry of other Tom Cruise movies – Jerry Maguire – as central banks backflip and commit to more easing. Show me the money!
Mr Every concludes:
Please note all this is happening with China still firmly on holiday, underlining that it isn’t only Beijing that is behind the financial markets’ problems. As I’ve long tried to stress, China faces huge challenges and a major currency devaluation seems inevitable this year, but weakness there is only problematic because it sits alongside weakness everywhere else.
No question’ policy makers were effective in crisis years ago
Focus turns to G-20 finance chiefs meeting in Shanghai
Central banks are running into diminishing returns from their use of easy monetary policies, seven years after first championing quantitative easing to save the world from depression.
The new reality is clear across global financial markets: The Standard & Poor’s 500 Index fell on Monday to a 22-month low as bank shares dropped to their weakest since 2013. Japan’s benchmark equity index careened on Tuesday toward levels unseen since 2014 and the yield on the country’s 10-year bonds dipped below zero for the first time. Stocks are also falling in Europe, where memories of the region’s debt crisis are being stirred by rising bond yields in Portugal and a slide in Greek banks.
All that despite the Bank of Japan’s surprise shift to negative interest rates, the European Central Bank’s signal it will deploy new stimulus next month and speculation the Federal Reserve will slow its campaign to raise interest rates. Underscoring the lack of policy potency is that the yen and euro are both climbing even as policy eases.
“The markets are wondering, well, we’ve had these non-conventional monetary policy experiments for the last six or seven years and they haven’t caused a sustainable boost to global growth, so what will the latest moves do,” said Shane Oliver, head of investment strategy at Sydney-based AMP Capital Investors Ltd. “It’s a reasonable question to ask given the events of the last few weeks.”
The shifts may strengthen the argument of opponents to the “whatever it takes” approach by central banks to stoke inflation expectations, appetites for risk and, ultimately, economic growth.
“Right at the beginning, there’s absolutely no question that what the central banks did was totally appropriate to try to get the markets operating again,” William White, an adviser to the Organization for Economic Cooperation and Development, told Bloomberg Television on Tuesday. “More recently, the objective of that policy has changed totally. It’s trying to stimulate aggregate demand. The honest truth, I think, is it’s not capable
of doing that in a sustainable way.”
To be sure, the main economies aren’t in the shape they were in 2008, when the Fed turned to asset purchases in an effort to unfreeze credit markets. Job growth in the U.S., Germany, U.K. and Japan indicate that while expansions have been below their long-term averages, they may prove durable. Also, cheap oil may spur spending by companies and consumers, and fiscal policy is turning stimulative in some economies.
Such narratives were absent on the Tokyo Stock Exchange Tuesday, where the Topix index nosedived 5.5 percent, the most since August, without any fresh news about the economy or even worries about China to serve as a trigger for sales. The yen gained for a second straight day, trading at 115.18 as of 6:45 p.m. in Tokyo.
Financial companies were among the hardest hit, fueled by concern that the BOJ’s adoption of negative rates will hurt their margins. The Topix Banks Index is down 21 percent since the day before Governor Haruhiko Kuroda led a 5-4 vote to follow European counterparts into charging banks for some of their reserves, complementing the BOJ’s record asset-purchase program.
While Kuroda called his new plan the “the most powerful monetary policy framework in the history of modern central banking,” it’s packing nothing of the punch he got from his original stimulus announcement in April 2013, or his expansion of the program in October 2014.
In Europe, traders also are increasingly doubtful about ECB President Mario Draghi’s ability to weaken the currency by delivering more policy surprises. There, too, bank shares have led declines, with the Euro Stoxx 600 Banks Index tumbling 5.6 percent on Monday alone. Portugal’s 10-year bond yield has risen to its highest since 2014, while Greek stocks are the weakest since 1990.
Across the Atlantic, Fed Chair Janet Yellen also addresses lawmakers this week under pressure to strike a balance between sounding confident on the domestic economy and recognizing the risks posed from abroad and in markets. Goldman Sachs Group Inc. is among those to switch its forecasts recently, to a June Fed rate increase instead of March.
Traders in China are enjoying a break from the carnage, as their markets are closed this week for the lunar new year holiday. Monetary policy makers in that country have been constrained in their own monetary stimulus out of concerns about reigniting a credit boom and sending the yuan’s exchange rate sliding further against the dollar.
With calls from some quarters for coordinated moves by the world’s top economies, one opportunity for joint communication — if nothing else — comes in a little over two weeks, with the Group of 20 finance chiefs meeting in Shanghai. ECB Executive board member Benoit Coeure said on Monday that “global coordination” will be discussed by the G-20.
For all the current disappointment in markets, central banks show no sign of shrinking from further action. Kuroda and Draghi have both said there are no limits to their easing programs. Central banks could still cut rates even more deeply, buy more bonds or commit to longer time-frames for easy money.
“The notion that central banks and regulators could not act if the financial panic were to turn into a serious threat to the real economy and hence to jobs looks wrong,” said Holger Schmieding, chief economist at Berenberg Bank in London. “Central banks can bolster confidence if they really have to in order to support the real economy.”
Yet for Japanese companies considering wage and investment plans for the fiscal year that starts April 1, the current market ructions pose a threat to sentiment. The BOJ itself identified the danger of market volatility to confidence in its decision to ease further last month.
“The period of central bank ‘shock and awe’ operations is likely to be behind us,” Stephen Jen, co-founder of SLJ Macro Partners LLP in London and a former International Monetary Fund economist, wrote in a note on Friday. “This will be the year that ‘gravity’ will overwhelm the central bank policies,” he said, recommending selling equities during rallies.
The $102 Billion of Bank Debt That’s Making Investors Nervous
2016-02-09 09:52:31.616 GMT
By Tom Beardsworth and Cordell Eddings
(Bloomberg) — Last year’s sure thing in credit markets is
quickly becoming this year’s nightmare for bond investors.
The riskiest European bank debt generated returns of about
8 percent last year, according to Bank of America Merrill Lynch
index data, beating every type of credit investment globally. In
less than six weeks this year, those gains have been all but
wiped out, even after interest payments.
Investors are increasingly concerned that weak earnings and
a global market rout will make it harder for banks to pay the
interest on at least some of these securities, or to buy them
back as soon as investors had hoped. The bonds allow banks to
skip interest payments without defaulting, and they turn into
equity in times of stress. Deutsche Bank may struggle to pay the
interest on these securities next year, a report from
independent research firm CreditSights earlier on Monday said.
The bank took the unusual step of saying that it has enough
capacity to pay coupons for the next two years.
“The worries about these bonds represent real fears that
the European banking system may be weaker and more vulnerable to
slowing growth than a lot of people originally thought,” said
Gary Herbert, a fund manager at Brandywine Global Investment
Management LLC, which oversees about $69 billion in global
fixed-income assets. “It’s the epicenter of growth concerns
globally. And it doesn’t look pretty,” he added.
Money managers’ concerns are spreading even to safer bank
bonds, underscoring how investors are running away from risk
across a broad range of assets now, from stocks to commodities
to corporate bonds. The cost of protecting against defaults on
safer U.S. and European financial debt known as senior unsecured
notes has jumped to the highest level since 2013.
European banks are looking less solid since their last
earnings reports. Deutsche Bank for example last month posted
its first full-year loss since 2008, and its shares have
plunged. Credit Suisse’s shares plunged to their lowest level
since 1991 after the Swiss bank posted its biggest quarterly
loss since the crisis.
Banks have issued about 91 billion euros ($102 billion) of
the riskiest notes, called additional Tier 1 bonds,since April
2013. The problem is the securities are untested and if a
troubled bank fails to redeem them at the first opportunity or
halts coupon payments investors may jump ship, sparking a wider
selloff in corporate credit markets.
“It’s the first thing that gets cut from portfolios,” said
David Butler, a portfolio manager at Rogge Global Partners,
which oversees about $35 billion of assets. “When the wider
credit market turns, it leaves investors exposed.”
The notes were issued in Europe and offer some of the
highest yields in credit markets, at an average 7 percent,
compared with an average yield for European junk credits of less
than 6 percent, according to Bank of America Merrill Lynch
But critics say banks are too opaque, the notes are too
complex to be properly understood, they’re too varied and too
much like equity to be considered bonds. With so many unknowns,
the risks are high.
“Basically you have the upside of fixed income and the
downside of equity,” said Gildas Surry, a portfolio manager at
Axiom Alternative Investments. “AT1s are instruments of
regulators, by regulators, and for regulators.”
Investors are not just concerned about banks missing
interest payments, they are also worried about whether banks
will redeem the notes at the first opportunity. Rising borrowing
costs may make banks less likely to redeem the notes, which
would force investors to hold the bonds for longer than they had
“It’s a risk factor that seems more pressing to the
market,” said Jonathan Weinberger, global head of capital
markets engineering at Societe Generale SA in London. “Certain
bank treasuries would be economically advantaged to let them
extend rather than call and refinance.”
It wouldn’t be the first time a bank has passed up the
chance to call notes. Deutsche Bank didn’t redeem 1 billion
euros of subordinated bonds in 2008, saying it would be more
expensive to refinance the debt. That led to a slump in the
bank’s shares and a jump in the cost of insuring its borrowings
The German lender’s 650 million pounds of 7.125 percent
perpetual bonds on Monday fell to less than 70 pence on the
pound, their lowest since being issued in May 2014. UniCredit
SpA’s 1 billion euros of 6.75 percent bonds have dropped to less
than 75 cents from 94 cents at the start of year. The Italian
bank reports earnings on Tuesday.
“If your business is financial markets related, stress in
the markets not good for you,” said Timothy Doubek, who helps
manage $26 billion of corporate debt at Columbia Threadneedle