Eclectic Stuff

September 3rd, 2015 8:53 pm

Via Merrill Lynch Research:

Situation Room
ECB delivers for US credit
03 September 2015
Key takeaways
  • ECB President Draghi delivered a very dovish message that supports our European economists’ call for QE2 by December.
  • An expanded Eurozone QE program would be positive for US high grade credit.
  • 10-year senior bank bod spreads were 3-4bps tighter on the day, while industrials rallied anywhere from 1-8bps.

  • ECB delivers for US credit. As our European economists and strategists highlight ECB President Draghi delivered a very dovish message including a dovish statement, weak economic/inflation expectations and increasing the limit on how much the ECB can purchase of each bond issue under its QE program to 33% from 25%. That highlights our European economists call for the ECB to announce QE2 by December. An expanded Eurozone QE program would be positive for US high grade credit as on one side investors are pushed out of European fixed income and into the global markets – including US high grade credit, and on the other side USD issuance is diverted into the EUR market. Hence, while corporate bond spreads already opened about 1bps tighter today in continuation of the recent trend, the rally accelerated into the afternoon post-ECB even as the equity market faded to close nearly unchanged. At the end of the day 10-year senior bank bod spreads were 3-4bps tighter on the day while industrials had rallied anywhere from 1-8bps. Hans Mikkelsen  (Page 4)
  • Flows stabilizing. The recent relative market stability has allowed flows for mutual funds and ETFs to also stabilize across most asset classes, with a notable exception of EM bonds that continued to report significant outflows. Hence, stock funds had a $5.8bn inflow in the most recent week (ended on 9/2/2015) following outflows of $19.22bn in the prior week. The inflow to all fixed income was $3.55bn, up from a $1.77bn outflow the week before. Similarly the flows for money market flipped to a relatively large $19.54bn outflow, following a $12bn inflow in the prior week. Outflows from EM bonds continued, however, with a $2.99bn outflow in the most recent week, following outflow of $4.22bn and $2.49bn for the weeks ending on 8/26 and 8/19, respectively. Yuriy Shchuchinov  (Page 5)
  • ECB Review: Dovish preparations. Mostly words, but very credible, dovish words. We were expecting lots of dovish words today, and action to follow at a later stage (by December). Todays words were indeed very dovish, and the tweak to the limit for how much of an issue the ECB can buy, while not constitutive of a policy easing only a change in length/overall quantity of the programme would qualify for that is a nice, cheap way to provide strong credibility to their readiness, willingness and capacity to deliver more if need be. In simple words, the central bank will not allow technical issues to hamper QE. Gilles Moec, Ruben Segura-Cayuela, Sphia Salim, Ruairi Hourihane, Athanasios Vamvakidis (Page 7)
  • Initial jobless claims. Initial jobless claims were reported at 282,000 for the week ending August 29, up from 270,000 in the prior week (revised from 271,000 initially). This was slightly above expectations of 275,000 and boosts the four-week moving average to 275,500 from 272,250 in the prior week. The Labor Department said there was nothing unusual for claims and no states estimated claims, but still that the start of the school year may add to claims volatility. This is still a relatively low level of claims, consistent with labor market improvement. Lisa Berlin  (Page 8)
  • Trade re-distributes growth. The trade deficit in July narrowed to $41.9bn from $45.2bn in June (revised from $43.8bn initially). This was lower than the expected $42.2bn deficit. Exports increased 0.4% mom to $188.5bn, while imports declined 1.1% mom to $230.4bn. The trade deficit ex-petroleum declined to $33.8 from $37.9bn in the previous month. The real goods deficit declined to $56.2bn from $59bn previously. The real goods ex-petroleum deficit narrowed to $52.6bn from $56bn, showing a more fundamental improvement. Lisa Berlin  (Page 8)
  • ISM non-manufacturing slips but still strong. The ISM non-manufacturing composite declined to 59.0 in August from 60.3 in July, above expectations of a decline to 58.2. This is still a high-level for the index: excluding Julys 60.3 cyclical high, this months index level is the highest seen since December 2005. Although all of the components dipped lower, this is still a solid report showing strength in the services side of the economy. Lisa Berlin  (Page 9)
  • China Chartbook: Preview of August macro data: Weaker economic momentum, despite some better Aug data. We think China’s economic growth momentum in sequential terms may have weakened in August, though some major activity data, such as yoy industrial production (IP) and power-generation growth, could rebound on base effects. In our view, the volatile financial markets have likely dampened investment sentiment, the slump in global commodity prices could delay industrial restocking, and temporary government measures to create parade blue disrupted industrial and manufacturing activity in seven northern provinces/cities. Xiaojia Zhi, Sylvia Sheng  (Page 9)

Employment Anecdotes

September 3rd, 2015 12:08 pm

Via Ian Lyngen at CRT Capital:

*** This month’s employment proxies are mixed and lightly skewed lower with 7 negative vs. 6 positive.  However, the negative data points are especially relevant, namely initial claims, ISM, ISM non-manufacturing, and ADP.  On the other hand, the positive anecdotes include the Labor Differential returning to 0.0 – highest since Jan 2008. ***

1) Initial Claims for NFP-survey week were higher at 277k Aug vs. 255k July. Highest for an NFP-survey week since April.
2) Empire State Employment decreased to 1.8 Aug vs. 3.2 July. Average Workweek moved lower, reaching -1.8 Aug vs. +4.6 July.
3) ISM Non-Manufacturing Employment decreased to 56.0 Aug vs. 59.6 July – but still >50 and consistent with job growth.
4) ISM Manufacturing Employment decreased in Aug to 51.5 vs. 52.0 July – second consecutive decline.
5) ADP Employment Change -lower-than-expected at 190k Aug vs. 200k consensus and 177k July.
6) Liscio’s employment forecast is below consensus at +205k NFP and +199k private-NFP.  UNR seen unchanged at 5.3% vs. 5.3% consensus.
7) Historically, the September NFP (August data) release has a bias to disappoint, doing so 61% of the time for an average miss of -60k.  When the release surprises on the upside (39% of occurrences) the average is just +24k.

1) Challenger Layoffs were lower at +2.9% YoY Aug vs. +125.4% July.  Monthly change was -64.5k vs. +60.8k July.
2) Continuing Claims for Aug NFP-survey week were lower at 2.266 mm vs. 2.269 mm June.
3) Philadelphia Fed Number of Employees increased to +5.3 Aug vs. -0.4 July. Average workweek increased as well to 8.5 Aug vs. 4.7 July.
4) Labor Differential: Jobs-Hard-to-Get minus Plentiful increased to 0.0 Aug vs. -7.5 July.
5) Chicago PMI showed the employment gauge improved to 49.1 Aug vs. 46.2 July – but still <50.
6) The September Unemployment print (August data) comes in lower-than-expected 33% of the time, higher 28% and as-expected the balance.  The lower prints have averaged -0.15% vs. higher prints that have a +0.22% norm.

1) NFIB employment index

Overnight Data Preview

September 3rd, 2015 12:02 pm

Via Robert Sinche at Amherst Pierpont Securities:

Sales Trading
Today at 11:58 AM


Non Manufacturing ISM

September 3rd, 2015 11:01 am

Via Stephen Stanley at Amherst Pierpont Securities:

The August ISM non-manufacturing survey moderated a little from July’s extraordinary readings but was still very strong.  The headline index posted a fall of just over a point to 59.0, the second-highest figure (behind July) since 2005.  Both the new orders and production components remained well above 60, in both cases the two best readings of this expansion.  The employment gauge cooled to 56.0 in August after surging to nearly 60 in July, but the 56 reading is still above the averages of the past few years (54.3 in 2013 and 54.9 in 2014) and the year-to-date figure for 2015 (55.6).  Meanwhile, the backlogs index rose by another 2½ points to 56.5, the highest reading since 2007, suggesting that demand is so strong that it is beginning to overwhelm producers.  I would also note that the ISM spokesman indicating that there was “no sign” that global events were affecting the U.S. services sector.

The prices index slipped by 3 points but remained above 50 in contrast to the manufacturing ISM prices index (39.0).  Indeed, input prices for non-manufacturers continued to increase for a sixth straight month (I would also note that for a fourth straight month, respondents noted paying more for “labor”).

Finally, another data point supporting my view that inventories need to be pared is the inventory sentiment gauge for non-manufacturers, which measures the net proportion of respondents who think that inventories are too high.  This index jumped to 69, matching the highest reading in the history of the data (going back to 1997).  I am not entirely sure what to make of the fact that both order backlogs and inventory sentiment are at multi-year highs, but I still look for a slower pace of inventory accumulation going forward.

On the ECB and (Separately) China

September 3rd, 2015 10:58 am

Via Robert Sinche at Amherst Pierpont Securities:

As usual, the press likes to hype developments…because that is what they do, and the Bloomberg headline (I pick on them because that is all I have) is “Draghi Unveils Revamped QE Program as ECB Downgrades Outlook”. To be sure, the ECB staff projections did revised down both real GDP and headline CPI forecasts (see below), the growth outlook on the expectation of weaker export momentum and the inflation outlook largely on weaker energy prices and the modest rebound of the EUR recently. However, a “Revamped QE Program”??? That is a stretch, as the only announcement was an increase in the percentage ownership of an individual security to 33% from 25%, unless that higher ownership would create a “minority blocking power” for the ECB, in which case it remains at 25%. However, Draghi is a master of making much out of little, and he did reiterate ECB flexibility to adjust the existing QE program (ending in September 2016) in duration, pace and magnitude. In other words, they are not actually changing any of those measures…but they could… (if you kids don’t quiet down I will pull over this car…). As usual, the headlines got folks all excited with a bounce lower in bond yields and higher in equity futures, but those moves appear to have been an overreaction that quickly fizzled.

Having followed China developments relatively closely over the last few decades, the one constant seems to be that China does things only in the best interests of China. So what interests me is that while there was a major display of military strength to celebrate the 70th anniversary of victory over Japan in WWII (really gives, is that a real reason to display strength? I think the statute of limitations is up on that one!) the leadership also announced a 300,000 reduction in the standing army by 2017, a reduction of about 10%. To me that is not small and likely represents some of the fiscal strains that appear to be developing as trend growth slows, a decision by the leadership to allocate those resources to other parts of the economy. While China works assiduously to display military and economic strength, it appears the foundation is not as solid as they would like folks to believe.

Buy Bunds

September 3rd, 2015 9:58 am

My friend and former colleague Steve Liddy has just written piece in which he suggests buying Bunds against Treasuries in the 10 year sector. He includes a chart which often does not translate well when I cut and paste it to my low rent blog. I apologize to Steve and my readers for that.

Via Steve Liddy:

The ECBs new bond buying cap is a dovish move, and likely augments the
argument for increased buying or extension of the 9/2016 end date. With the
sheer amound of supply coming here, the lack of agreement on what the FED wi
do 9/17, and the talk of the risk parity trade that has seen foreign selling
USTs in order to support local currencies it would seem, to me, this spread
likely to move more inverted here. I’d like to buy this down in the -139/40
zone and then use the -134/5 (recent high levels) as a stop, and would targe
150 as first zone to reevaluate. That said, if the ECB is going to be more
dovish, we can see where, and how quickly, bunds can richen. It’s one I don’
mind getting in a little earlier and allowing to run a bit more, so sizing i

Trade Balance

September 3rd, 2015 9:04 am

Via Millan Mulraine at TDSecurities:

The trade balance improved sharply in July, with the deficit falling to $41.9B from $45.2B the month before. This was a better performance than the market consensus for a more modest decline to $42.2B, and the improvement was on account of the 0.4% m/m rise in export activity and the 1.1% m/m drop in the import bill. Real trade activity also improved markedly, as the deficit declined to $56.2B from $59.0B the month before. Excluding petroleum, the real deficit dropped to $52.6B from $56.0B.
The rise in export activity in July reversed some of the weakness over the past two months, and the rebound was driven by broad-based gains across most components. The only exception was consumer goods demand, which declined 2.5% m/m as some of last month’s 5.0% surge is surrendered. Service sector exports rose at a decent 0.3% m/m pace. Import activity weakened broadly, driven by the 5.2% drop in consumer goods demand and the 5.3% m/m drop in food and beverage imports. In both cases, the reversal reflects some give-back from the strength in the prior month.

Notwithstanding the weakness in import activity the overall tone of this report was constructive, indicating some improvement in trade activity going into the start of the Q3. In effect, this report suggests that the external sector will continue to be a modest source of support to domestic economic activity this quarter as the drag from the strong dollar continues to dissipate

Very Light Volume Overnight

September 3rd, 2015 7:13 am

Via David Ader at CRT Capital:

OVERNIGHT FLOWS: Treasuries were little changed overnight with the curve modestly flatter.  Overnight volumes were light with cash trading at 51% of the 10-day moving-average while TY came in at 41% of the norm.  10s were the most active issue, taking a 30% marketshare while 5s managed just 27%.  2s and 3s combined to take 29% at 13% and 16%, respectively.  7s took 10% while the long-bond ended with a below-average 4%.

Reverse Conundrum

September 3rd, 2015 7:08 am

Via the FT:


Central banks and bond investors spent a lot of the past decade worrying about the savings glut from China, emerging markets and the recycling of petrodollars. Now there is a new concern: it might be over.

Emerging market foreign exchange reserves soared from $1tn to $8tn between 2003 and summer last year, but since then have begun coming down again. In part this is because of the fall in dollar terms of reserves held in euros and yen, but large sums are also being spent by EM central banks to defend their currencies as fast money leaves in a hurry — with Goldman Sachs estimating China alone might have burnt through more than $100bn in the past two months.

Bond yields have been behaving as though there is something holding them back during the equity carnage of the past week, remaining far more stable than equities after the initial drop last Monday (see chart).

Some think the stability is helped by reserve selling offsetting buying by those fleeing for safety as shares gyrate. It seems more likely to be due to yields having already fallen from 2.5 per cent earlier in the summer to 2.2 per cent by the time the equity sell-off began in mid-August. But the unwinding of reserves could have serious effects, with even Denmark now being forced to defend its currency peg to the euro.

It is natural to think of sales as a clear negative, as they help to push up bond yields, the opposite of the so-called “Greenspan conundrum” of 2004-6, when higher US interest rates had little effect on yields.

US shares and bonds

But reserves are circular. If a Chinese investor sells renminbi for dollars, China can sell some of its US bonds to buy the renminbi and defend its currency. Only if the private investor is as cautious as China’s central bank and buys bonds would nothing change. Assuming they choose riskier assets, the capital should be put to more productive use, good news for the economy in the long run.

The effect on bonds is far outweighed in the short term by the outlook for growth, jobs and inflation. But as the Federal Reserve considers raising rates for the first time since 2006, it may face a Greenspan conundrum in reverse as reserve selling means yields rise more than it expects.

Debt Service Fears

September 3rd, 2015 6:52 am

Thanks to my friend Steve Liddy for forwarding this Bloomberg article:

Falling Currencies Raise Debt-Service Fears Across Africa (2)
2015-09-03 09:43:55.62 GMT

(Updates currency in fifth-last paragraph.)

By Paul Wallace and Chris Kay
(Bloomberg) — In the past decade, countries across Africa,
encouraged by surging commodity prices and a global appetite for
high-risk debt, sold dollar bonds to finance everything from
roads to railways to tuna-fishing fleets.
Now commodity prices have halved and African currencies are
tanking, making the bond payments tougher and raising the
possibility of a debt crisis on the world’s poorest continent.
The risk of such an outcome is denting the outlook for
countries from Ghana to Mozambique. Africa in recent years
boasted most of the world’s fastest-growing economies and lured
investors hungry for assets yielding more than those in the rich
“There’s certainly been a turn in sentiment around Africa,”
Giulia Pellegrini, a sub-Saharan Africa economist at JPMorgan
Chase & Co., said from London. “There is a perception, in some
cases grounded in reality, that some African countries have been
borrowing rather quickly. Weaker exchange rates make it harder
for them to service their debts.”
Investors don’t have to look far back to find emerging-
market crises brought about by too much foreign debt. Asia’s
financial turmoil of 1997 and 1998 was triggered by Thailand’s
baht tumbling, making the country’s foreign debt unpayable.
Mexico in 1994 and 1995 was caught short when a peso devaluation
raised payments on its dollar-linked bonds.
Not all African countries have overloaded on debt. Nigeria,
Africa’s biggest economy and oil producer, had external debt
equivalent to less than 2 percent of gross domestic product last
year, while its ratio for overall borrowing, including in local
currency, was 10 percent, according to Standard Bank Group Ltd.
For the region as a whole, total government debt amounted to 30
percent of annual output, compared with 41 percent for emerging
markets, according to the International Monetary Fund.
“Sub-Saharan Africa is still among the least-indebted
regions in the world, probably the least indebted,” said Jan
Dehn, head of research at London-based Ashmore Group Plc. “In
general, debt is not a concern.”
Still, of the region’s roughly 50 countries, the 16 that
have issued Eurobonds — foreign currency bonds typically
denominated in dollars — may be among the most vulnerable.
Ghana, whose main exports are gold and oil, has seen its
foreign debt ratio more than double to 38 percent since 2006,
the year before it sold the first of its $2.75 billion of
Eurobonds. Senegal’s borrowing levels are now higher than when
the west African country was given relief under the Heavily
Indebted Poor Countries Initiative, or HIPC, 10 years ago. And
Mozambique, which issued a dollar bond for the first time in
2013 when state-owned tuna company Empresa Mocambicana de Atum
SA borrowed $850 million, said in June it needed to restructure
the security because it was too expensive.
Rising concern about sub-Saharan Africa means countries
that have signaled plans to tap the Eurobond market this year,
including Ghana, may find it tough to win over investors. Dollar
bonds from the region have lost 3.8 percent this quarter, the
most among emerging markets.
Yields have soared. Those on a $1 billion security due in
April 2024 for copper-rich Zambia rose to 10 percent for the
first time in August. Ghana’s dollar yields climbed above 10.5
percent for the first time since December, while Nigeria’s
reached 8.5 percent, more than 300 basis points above levels in
May. That compares with an average yield of 5.1 percent for
emerging-market dollar-denominated government debt, according to
data compiled by Bloomberg.
“Investors are less and less likely to have appetite for
Africa’s debt, in light of what’s happening now,” said Rick
Harrell, an analyst at Boston-based Loomis Sayles & Co. LP,
which oversees $240 billion. “I’m really worried about some
countries,” including Ghana and Zambia, he said.
Falling local currencies are adding to the pressure by
making it more expensive for countries to repay external bonds.
Ghana’s cedi, Zambia’s kwacha and Mozambique’s metical have all
weakened more than 15 percent against the dollar this year.
Investors are concerned that slowing growth in China will
depress prices of commodities from oil to copper, and about the
first hike in U.S. interest rates since 2006. That would draw
capital out of emerging market assets.

Debt Burdens

Sub-Saharan Africa’s growth will be 4.2 percent this year,
down from 4.6 percent last year and 5.7 percent in the first
decade of the 2000s, the World Bank said in a June report.
“Debt-to-GDP ratios for the countries with increased bond
market access have picked up in recent years,” the bank said.
“While debt burdens remain manageable, continuing currency
depreciations against the U.S. dollar could lead to a rapid
increase in the value of foreign-currency debt for these
Some nations have already called on the IMF for help. One
was Ghana, which agreed to an almost $1 billion loan with the
Washington-based lender in February. West Africa’s second-
largest economy came unstuck after the government ramped up
borrowing to cover budget deficits caused by salary increases
for public workers and falls in commodity exports.
Others may have to follow suit if commodity prices don’t
rebound, according to Pellegrini.

’Immense Pressure’

Zambia’s central bank warned on Aug. 28 that the kwacha was
“under immense pressure” because of the falling price of copper,
from which the southern African nation derives 70 percent of
export earnings. The government has so far ruled out an IMF
loan. The kwacha dropped 4.2 percent to 9.7922 per dollar, a
record, by 11:36 a.m. in the capital, Lusaka.
Loomis’s Harrell says investors may have to prepare for
another round of restructurings similar to HIPC. The
negotiations would be more fraught this time, given the
involvement of Eurobond investors, he says. Previously, African
governments were negotiating almost solely with development
institutions such as the World Bank and the IMF.
“If a restructuring occurs, it will definitely include the
private sector and it will make it more complicated,” Harrell
said. “Private investors would have to take some losses.”
Prospects for governments in the region with plenty of
dollar bonds are hardly positive, says Andreas Kolbe, head of
emerging market credit strategy at Barclays Plc.
“Overall debt levels, and external debt levels, are rising
in most countries in Sub-Saharan Africa,” he said. “There are
only very few exceptions. That’s a concern, particularly in the
current global macroeconomic environment. It could make access
to financing more difficult.”