Hilsenrath on Saturday Morning

November 22nd, 2014 7:13 am

Via Jon Hilsenrath at the WSJ:

Central Banks Move to Boost Global Growth

Steps by China, ECB Lift Stocks, but Risk Lurks

The People’s Bank of China headquarters in Beijing. Bloomberg News

Two major central banks moved Friday to pump up flagging global growth, sending stock markets soaring but raising new questions about the limitations of a seven-year effort to use monetary policy to address economic problems.

The People’s Bank of China announced a surprise reduction in benchmark lending and deposit rates, the first cuts since 2012, after other measures to boost faltering growth fell short. Hours later, European Central Bank President Mario Draghi said the bank might take new measures to boost inflation, now near zero, his strongest signal yet that the ECB is getting closer to buying a broader swath of eurozone bonds.

The moves came less than two weeks after the Bank of Japan said it would ramp up its own securities-purchase program known as quantitative easing, or QE, as the Japanese economy fell into recession.

The twin steps Friday, half a world apart, sent global stock prices sharply higher, bolstered the U.S. dollar and boosted oil prices.

The Shanghai Composite Index rose 1.4%, while Germany’s DAX index jumped 2.6%. The Dow Jones Industrial Average finished up 0.51%, and at 17810.06 is now closing in on the 18000 threshold that has never been surpassed. The Nikkei rose 0.3%.

Amid the flurry of central bank activity, the dollar was the winner among global currencies, rising 0.27% against a broad index of other currencies to put it up 9% for the year.

Though the moves toward easier money in Europe and Asia are good for investors, they come with multiple risks. They could perpetuate or spark asset bubbles, or stoke too much inflation if taken too far. Also, they don’t address structural problems that policy makers in each economy are struggling to fix.

The steps, particularly in Europe, represent a subtle endorsement of the Federal Reserve’s easy-money approach to postcrisis economics, but come as the U.S. central bank shifts its own low-interest-rate policies. The Fed last month ended a six-year experiment with bond purchases, and it has begun talking about when to start raising short-term interest rates as the U.S. economy improves, though those discussions are early and rate increases are likely months away, at the earliest.

Global economic weakness creates a dilemma for the U.S. If the Fed pulls away from easy money as other central banks ramp up money-pumping policies, it could drive up the value of the U.S. dollar, straining U.S. exports. It also could put downward pressure on U.S. inflation and on commodities prices, which are typically denominated in dollars.

Eswar Prasad, a Cornell University professor and former International Monetary Fund economist, said those developments would make it harder for the Fed to move ahead on rate increases.

The latest actions suggest that policy makers in the major economies are growing more desperate as they confront weakening domestic prospects, particularly when soft global demand is weighing down prices and keeping inflation at levels many central banks consider alarmingly low.

“We cannot be complacent,” said Mr. Draghi in Frankfurt. “We have to be very watchful that low inflation does not start percolating through the economy in ways that further worsen the economic situation and inflation outlook.”

Annual inflation was running at 0.4% in the eurozone last month, far below the ECB’s 2% target, a sign of feeble underlying economic growth.

Mr. Draghi’s comments raised expectations the ECB might soon buy large amounts of corporate debt or government bonds of eurozone members. Bond buying is intended to hold down long-term interest rates and drive investors into riskier assets to stimulate borrowing, investment and spending. The practice is a challenge in Europe, where the central bank faces restrictions on its ability to purchase individual country debt.

Europe and Japan have similar problems: Flat-to-declining economic output that is pulling inflation down below 2% targets. China also is seeing a downward pull on consumer prices and outright deflation in its industrial sector, signs of an economy losing momentum, albeit from a much faster growth pace.

The Fed pursued low-rate, QE experimentation for half a decade. It pushed U.S. short-term rates to near zero in December 2008 and promised to keep them there for long periods. Convinced that wasn’t enough, it then launched several rounds of bond purchases that helped push its portfolio of securities, loans and other assets from less than $900 billion to more than $4 trillion.

The policies didn’t cause the hyperinflation or obvious asset bubbles that some lawmakers and critics feared. The fact that the U.S. economy is now doing better than Europe’s or Japan’s suggests the policies helped boost growth, although the degree of support is a matter of great disagreement among economists.

Some observers have doubts about whether easy-money policies will work now in the places adopting them.

“Central banks have done about as much as they can,” said Liaquat Ahamed, author of “Lords of Finance,” which documented the mistakes global central bankers made before and during the Great Depression.

Japan, he said, is burdened by a highly inefficient domestic economy, and Europe by a fragmented and fragile banking system. Pumping cheap credit into these economies won’t directly fix those problems, he said. “They may be just copying the U.S. when they have different problems,” he said. “The world has relied too much on central banks.”

In the U.S., Fed officials have been frustrated that they were being relied on to spur growth while the Obama administration and Congress feuded over fiscal policies that slowed growth in the short-run without addressing projected long-run budget deficits.

China is a different story. In developed economies, where growth is slower, short-term interest rates have already been pushed to near zero and central banks have employed unorthodox measures to boost growth. Rates in China are higher, leaving the central bank more room to reduce them if it wants to spur borrowing and spending.

China this year could miss its annual growth target of 7.5% for the first time since the 1998 Asian financial crisis. Economic output grew by 7.3% in the third quarter, its slowest pace in more than five years.

Until now, the People’s Bank of China, under longtime governor Zhou Xiaochuan , has resisted calls from within the government, the market and the corporate sector to cut interest rates. Officials feared that broadly opening the credit spigot would worsen China’s debt problems and put the economy at greater risk, according to officials at the central bank.

Instead, it tried to channel credit to sectors deemed important for China’s growth, including small and rural businesses and government-financed low-income housing projects.

On Friday, the central bank said it cut its benchmark one-year loan rate by 0.4 percentage point to 5.6%, larger than typical reductions of 0.25 percentage point. It also cut its benchmark one-year deposit rate by 0.25 percentage point to 2.75%.

The PBOC’s chief economist, Ma Jun, said Friday the risk of deflation, or falling prices, is putting “upward pressure” on inflation-adjusted, or “real,” interest rates, which contributed to the decision to cut benchmark rates now.

Swap Spreads

November 21st, 2014 11:29 am

Swap spreads are interesting today as there is some idiosyncratic movement. Two year spreads have tightened 3/4 basis point and 3 year spreads are tighter by 1 1/2 basis points. Those sectors have traded off of movements in the Eurodollar pit and those movements have pushed spreads tighter. In the 30 year sector spreads had tightened as much as a basis point but are now back to unchanged. There was quite a bit of receiving in the long end on the back of some structured note issuance which made dealers receivers.

In the belly of the curve spreads are about 1/4 basis point  wider (5s 7s and 10s) as a lack of corporate issuance and some buying of Treasuries ahead of month end leads to wider spreads.

Corporate Pricings Today

November 21st, 2014 10:57 am

Via Bloomberg:

IG CREDIT: List of New Issues Expected to Price in U.S. Today
2014-11-21 15:25:57.806 GMT

By Greg Chang
Nov. 21 (Bloomberg) — The following is a list of new
issues expected to price today:
* Caterpillar Financial Services Corp. $750m A2/A
* $500m 5Y & $250m 10Y (will not grow)
* IPT 5Y +75, 10Y +105 (both area)
* Books: BofAML, JPM, RBS, SG
* Books: BofAML, JPM, RBS, SG</li></ul>
* Kommuninvest i Sverige Aktiebolag $500m Aaa/AAA
* 4Y FRN; 144A/Reg S
* Priced 3mL+3
* Denoms: $200k x $1k
* Books: C, NOM, RBS
* Books: C, NOM, RBS</li></ul>
* Mandated:
* Republic of Chile (Aa3/AA-) appointed Citi, HSBC and
Santander to arrange series of fixed income investor
meetings in Europe and U.S.
* EUR and/or USD transaction may potentially follow,
subject to market conditions and internal/regulatory
* EUR and/or USD transaction may potentially follow,
subject to market conditions and internal/regulatory


November 21st, 2014 10:51 am

TIPS are ” en fuego” today as central banks continue to debase their currencies. The dovish Draghi speech and the rate cuts in China have awakened sleeping commodities and slumbering TIPS buyers.

The auction yesterday went quite well with strong indirects and a diminished award to dealers. There has been follow through buying of the sector today.

The 10 year is trading at 188 which is 3 basis points better than the close (these are breakevens) and 5 basis points better than the worst levels at 182 1/2/ 183. The 5s are trading at 153.5 and 30s are trading 202.5.

Excellent Analysis

November 21st, 2014 10:10 am

Via Richard Gilhooly at TDSecurities:

The rate cut from China and another revamped speech from Draghi, with increased urgency to get inflation higher rapidly, have Break-evens significantly higher today, supported by a jump in commodity prices. The latter has bolstered commodity currencies, in addition to another strong core CPI print in Canada, while $/Yen is moving lower on some comments that the Yen’s decline has been “too rapid” and the sharp drop in Eur/Yen is driving both Euro lower and Yen higher versus USD. Sterling is trading lower with the Euro and also with the second UKIP MP being elected.

The comments from Draghi showed increased concern over the low level of spot inflation with the comment that shorter-term inflation expectations “have been declining to levels that I would deem excessively low” according to Draghi. “We will do what we must to raise inflation and inflation expectations as fast as possible”. The rhetoric shows more aggression and urgency than before, while supporting the thrust with suggestions of broadening even more the channels through which they intervene, “by altering the size, pace and composition of our purchases”. The DAX got the message and rallied more than 200pts, while peripheral spreads are significantly tighter.

However, core fixed income markets are also edging lower in yield, with 10yr Bunds at 77bp and just 2bp away from historic lows. The Treasury-Bund spread is stuck at the highs of 157bp and while it is likely to make new highs, 10yr Treasury yields will likely be held low, or lower, as Bunds break under 75bp. Even in the UK, following strong retail sales data yesterday, short sterling red pack contracts rallied 6 ticks and another 4 ticks today, with the focus now on inflation components of data releases rather than the growth implications of strong sales, driven increasingly by price discounting. Every component of UK retail sales showed a price drop, with y/y deflation running at its lowest since 2002, coming after the brief Sep-11 deflationary shock.

Long-end Treasuries are 1bp lower in yield, with 5-30s 2bp flatter, and 10yr yields are unchanged despite the S&P +18pts. Again, exceptionally strong Philly Fed left Treasury yields 2bp lower in 30yrs yesterday and 1bp lower in 5yrs. While off the low yields of the day, the point is that the price components of Philly Fed were sharply lower and even in the US we continue to trade inflation sub-components, such as last week’s strong UoM confidence and cycle low 5y inflation component.

So, with inflation break-evens higher following the 10yr auction and today’s China rate cut/Draghi combo, has anything really changed?

Draghi has needed to make more promises because his ones to date have fallen short, with just €10bn in balance sheet added over 6 weeks of covered bond purchases. Even with 3 rounds of US QE and super-charged QQE from the BOJ, inflation expectations remain mired at multi-year lows and survey data in the US is approaching historic lows. Central Banks are slowly proving themselves unable to deliver on their promises of higher inflation and sustainable growth and even if “deflation” is not the ogre that has been suggested, the one thing being exposed is that Central Banks are powerless to influence this outcome, while alienating competitors via the currency channels, as the latest move in Euro-Yen has undoubtedly done, hence the volume increase from Draghi this morning.


November 21st, 2014 9:13 am

The risk on rally is coursing its way through the corporate bond market,too. The IG 23 is 1 3/4 tighter at 64  64 1/2. Long dated financial paper is 2 basis points to 4 basis points tighter. Here is a  run for your edification:

C  24      129/126        126/123          -3
WFC 24      106/103        104/101          -2
BAC 24      129/126        125/122          -4
JPM 24      117/114        114/111          -3
GE  24        88/85          86/83            -2
GS  24      143/140        140/137          -3
MS  24      140/137        138/135          -2

Guest Post

November 21st, 2014 9:09 am

My friend and former colleague Steve Liddy whose musings I have chosen to intermittently reproduce here notes minutes ago that the 5 year forward inflation rate which the FOMC follows is at a cycle low. I hope the Bloomberg chart is readable and as always that is the fault of this blog and not Steve Liddy.

Via Steve Liddy:

Is at a new cycle low…


November 21st, 2014 9:05 am

Mortgages are opening pretty much in line with Treasuries. One dealer reports solid buying overnight on the back of real money buying and Federal Reserve buying yesterday.

The Draghi speech and the rate cut by China have fostered a risk on mentality today and that should benefit MBS in the days ahead as well.

Dealer Positions

November 21st, 2014 6:40 am

Via the good folks at Bloomberg:

IG CREDIT: IG Dealer Positions in Short Issues at Series High
2014-11-21 11:24:07.747 GMT

By Robert Elson
Nov. 21 (Bloomberg) — Dealer positions in corporate bonds
rose $800m to $33b as of Nov 12. $45.9b, seen March 5, was the
high for the series Fed began April 2013; $23b low was Aug 2013.
* Investment grade positions:
* Short issues rose $428m to $4.3b, a new high for 2014
and for the series that began in April 2013; $1.2b low
Aug 2013
* Positions longer than 13 months fell $878m to $11.1b;
$16.3b, the high, was seen Mar 12, 2014, low of $5.4b in
Aug 2013
* Commercial paper positions at $11.7b, rose $901m;
$19.9b, the high, seen Mar 5, 2014 and $7.2b, the low,
seen Jan 1, 2014
* Commercial paper positions at $11.7b, rose $901m;
$19.9b, the high, seen Mar 5, 2014 and $7.2b, the low,
seen Jan 1, 2014</li></ul>
* High yield positions rose $349m to $5.8b; $1.1b, a new
series low was seen Oct 22, 2014; high of $8.4b was seen
June 2013
* Total dealer positions in all Treasuries rose $20.2b to
$68.5b; in a look-back to Jan 2007 the high was $146b in Oct
2013, -$194b was seen July 2007

Secondary market Corporate Bond Trading

November 21st, 2014 6:35 am

Via Bloomberg:

IG CREDIT: Highest Volume Thursday of 2014; MDT May Be Next Week
2014-11-21 10:46:15.610 GMT

By Robert Elson
Nov. 21 (Bloomberg) — The final Trace count for secondary
trading was unchanged at $18.4b, the highest Thursday session of
the year; the previous Thursday session was $15.5b.
* 10-DMA $15.6b, ties the January high for 2014; 10-DMA of
only Thursday sessions $15.8b
* VZ 5.15% 2023 topped the most active list with client buying
2.3x client selling
* BofAML IG Master Index at +135, unchanged at the new wide
for 2014, vs +134; +106, the low for 2014 and the tightest
spread since July 2007 was seen June 24
* Standard & Poor’s Global Fixed Income Research IG Index
unchanged at +168, the new wide for 2014; +140, a 2014 low
and new post-crisis low was seen July 30
* Markit CDX.IG.22 5Y Index closed at 66.4 vs 66.6; 55 was
seen July 3, the low for 2014 and the lowest level since Oct
2007; 2014 high of 74.5 was seen Feb 3
* BABA led IG issuance totaled $10.925b vs $4b Wednesday
* MTD IG issuance at $127.25; YTD IG issuance now $1.323t
* MDT deal may be as soon as next week; pipeline