Overnight Focus

April 16th, 2014 9:37 pm

This is something that my friends at Pierpont Securities are putting out regularly and it is a nice little primer on the important data releases while we in the States are slumbering peacefully or otherwise.

Via Pierpont Securities:

AUSTRALIA: March data on auto sales, with YOYU comparisons negative for the last 7 months as consumer spending moderated. Also the NAB Business Confidence index for 1Q, with the weaker AUD helping boost business confidence in 4Q2013 to +8, strongest reading since 1Q2011.

CHINA: Property Prices for March, with prices up in 69 of 70 cities over each of the last 10 months, so will be watched carefully to see if signs that prices are weakening.

JAPAN: The Cabinet Office Monthly Economic Report for April likely to provide the first downgrade of conditions in about 18 months, a result of the impact of the consumption tax hike.

EURO ZONE: New car Registrations for the EU27, which have increased YOY during each of the 6 months ended February (+8.0% YOY).

RUSSIA: A slew of data for March that will provide an early indication of the magnitude of the impact of the Ukraine situation and global response on the Russian economy. Main focus will be on data on Real Retail Sales (BBerg consensus at 3.3% YOY), Real Wages YOY (BBerg consensus at 3.6%) and the Unemployment Rate (BBerg consensus at 5.7%); at 5.7% the UR would reach a 12-month high.

Merrill Lynch on Consumer Spending

April 16th, 2014 9:15 pm

Merrill Lynch is part of Bank of America which is a colossal retail bank which reaches into ever nook and cranny of America. The bank has access to info which allows then to track spending patterns and make some judgements about consumer spending based on credit card and debit card use. Here is this week’s take on the state of the consumer.

 

Via Merrill Lynch research:

  • Spending accelerated last week. Our internal card (credit and debit) retail (ex. gas) spending data show that spending accelerated to +5.0% YoY during the week of April 11th from just +0.9% YoY increase during the week of April 4th. However, this is still below the very robust 10.7% rise in spending during the second of week of April last year. Spending actually fell 3.3% YoY during the first week of the month last year, but that was likely a result of the timing of the Easter holiday, which was in the first week of April in 2012 (resulting in relatively higher spending during that week), but in the last week of March in 2013. For the month of March our internal card retail (ex. gas) spending data show a fairly low +0.1% MoM SA increase in spending, down from also subdued +0.2% increase in February. Note, however, that our internal data is often not a good predictor of the official Census Bureau data. On a regional basis, the total card spending (a broader category than retail ex. gas, but where we have the geographical breakdown) shows a significant March spending pick up in the Northeast (up 2.0% MoM), followed by the West (+0.6), South (+0.3%) and Midwest (+0.1% MoM increase).- Yuriy Shchuchinov (Page 4)

Beige Book

April 16th, 2014 2:13 pm

Via CRT Capital:

EIGHT OF 12 FED DISTRICTS SAY GROWTH `MODEST OR MODERATE’ << same as last month
– CONSUMER SPENDING ROSE IN MOST AREAS AS WEATHER IMPROVED
>> specifically cited by NY and Philadelphia
– PRICE PRESSURES mostly steady, scattered reports of increases
– LABOR MARKET CONDITIONS `MIXED BUT GENERALLY POSITIVE’
– MANUFACTURING HAS IMPROVED IN MOST DISTRICTS
– ‘Scattered’ Reports of Price Increases, Minimal Wage Pressures
– Housing varied, most saw modest home price rises, low inventories
** Okay we’re going through this and find nothing remarkably notable other than the acknowledgement of the weather impact.  Overall it reflects a modest to moderate sense of economic growth, very limited inflation and wage pressures, and mixed ‘but generally positive’ on labor markets. Yawn.
** The market is doing nothing with this report which is probably too much!

WSJ Article on Yellen Speech

April 16th, 2014 1:02 pm

Victoria McGrane usually plays second fiddle to the illustrious Jon Hilsenrath. Today she is the lead character in the play and writes on the Yellen speech. This story is circulating in the market currently.

Via WSJ:

Economy Has Improved, but Outlook Remains Uncertain
By VICTORIA MCGRANE And BEN LEUBSDORF

NEW YORK—Three “big questions,” including the outlook for inflation, will guide Federal Reserve officials as they consider whether the economy is finally healthy enough for the central bank to step back from its low-interest rate policies, Fed Chairwoman Janet Yellen said Wednesday.
On the inflation question, Ms. Yellen said a too-low rate is a bigger worry than the Fed’s easy-money policies sparking a surge in consumer prices. She said she rated the chances of inflation threatening to rise substantially above the Fed’s 2% target “as significantly below the chances of inflation persisting below 2%.”
The comment underscores the Fed’s plan to keep interest rates low for many more months, though Ms. Yellen went to lengths to keep the central bank’s options open. “Because the course of the economy is uncertain, monetary policymakers need to carefully watch for signs that it is diverging from the baseline outlook and then respond in a systematic way,” Ms. Yellen said in remarks prepared for delivery to the Economic Club of New York.
Though Ms. Yellen avoided making strong policy proclamations, she tried to lay out in some more detail what officials will be looking at when they decide to start raising interest rates. Many market participants don’t expect rate increases until the middle of 2015.
In addition to inflation, Fed officials must monitor the amount of “slack” in the labor market and other unforeseen developments that could push the economy off its expected course, she said.
On the issue of labor-market slack—or the degree to which the labor market is operating below its potential—Ms. Yellen reiterated her arguments from a late-March speech that she sees quite a bit of slack left in the labor market in measures other than the official jobless rate, which stood at 6.7% in March. Among those indicators of slack: labor-market participation continues to remain near historical lows and the number of workers who want full-time positions but are currently in part-time jobs remains elevated.
Fed officials must also stay vigilant for the unexpected, Ms. Yellen stressed. “What factors may be pushing the recovery off track?” is the question they must keep asking themselves, she said, pointing to past moments since the end of the 2007-09 recession where the economy appeared to be turning a corner only to be derailed.
It is vital to effective monetary policy making for officials to “monitor the economy for signs that events are unfolding in a materially different manner than expected and adjust policy in response,” she said.
Labor-market slack, low inflation and vigilance on “unforeseen economic developments” are the wild cards that are “likely to loom large” in policy makers’ assessment of “where we are on the path back to maximum employment and price stability,” the two pieces of the Fed’s dual mandate, Ms. Yellen said.
“It is very welcome news that a return to these conditions has finally appeared in the medium-term outlook of many forecasters. But it will be much better news when this objective is reached,” she said.

Yellen Speech

April 16th, 2014 12:52 pm

There is nothing new in the Yellen speech. She does cite all the factors which the Committee will assess when it decides on labor market slack. She avers that some of this is “nuanced” judgement which I think that they can do whatever they wish whenever they feel like. She also cites the lingering effects of the crisis and the probability that growth will remain below pre crisis levels for a number of years. This paragraph near the very end of her discourse struck me as informative as I think it is dripping with the view that short term rates will be anchored near zero for a very long time:

“Finally, the Committee began explaining more fully how policy may operate in the period after liftoff, indicating its expectation that economic conditions may, for some time, warrant keeping short-term interest rates below levels the Committee views as likely to prove normal in the longer run. FOMC participants have cited different reasons for this view, but many of the reasons involve persistent effects of the financial crisis and the possibility that the productive capacity of the economy will grow more slowly, at least for a time, than it did, on average, before the crisis. The expectation that the achievement of our economic objectives will likely require low real interest rates for some time is again not confined to the United States but is shared broadly across many advanced economies.26 Of course, this guidance is a forecast and will evolve as we gain further evidence about how the economy is operating in the wake of the crisis and ensuing recession.”

The curve has flattened over the last hour and 5s 30s which was 185.3 at 950AM is now 181.9. In the post March 19 flattening I do not believe that we have been much flatter than 179. (Once again I do not have a charting service and that is from memory so please yell and correct me if I am wrong. )

Federal Reserve Event Risk

April 16th, 2014 11:01 am

This is an interesting article by two academics who author a blog called House of Debt. The authors wanted to learn who bears “Federal Reserve Risk”. They studied which instruments move the most on days when Federal Reserve policy decisions move the markets. They studied June 19 2013 when the FOMC announced that they were thinking about tapering.They studied September 18 2013 when the FOMC deferred tapering and finally they used March 19 2014 which was the occasion of the Janet Yellen rookie mistake press conference.

With Ms Yellen scheduled to speak in 90 minutes this is a worthwhile read.

Treasury Market

April 16th, 2014 10:46 am

The Treasury market has sagged but most of that sag was in the overseas session and the market right now is virtually unchanged from where I market it at 543AM this morning. Traders cite the impending speech by Ms Yellen as a factor for the lack of activity. One trader favored steepening trades into her speech. He thinks that she can not and will not say anything that the street will conjure as hawkish and in the attempt to do that she will probably steepen the curve. That trader believed that she would focus on the myriad factors which she enumerated as measures of slack in the labor market and how those measures are still quite distant from signalling a robust labor market.

Swap Spreads

April 16th, 2014 10:31 am

Swap spreads are wider today. I have heard of isolated hedging (paying) by end users. The one trader with whom I spoke stressed the “isolated” word and believed that it was not the beginning of some thematic move. He also noted that the notional amounts involved were small.

Two year spreads are 3/4 basis point wider and 5 year spreads are 1/4 basis point wider. Tens are 1/2 basis point wider and 30s are 1/4 basis point wider.

Corporate Bond Spreads

April 16th, 2014 10:19 am

Corporate bond spreads are unchanged to a basis point tighter this morning. Activity in the secondary is light.

Yesterday Walmart priced a 3 year and a 10 year and a 30 year. The pricing and subsequent trading in the secondary market is reflective of a market that is not pricing the event risk and credit risk embedded in a corporate bonds. I am not disparaging Walmart as the company is a stellar credit and shrewd to take advantage of investors search for yield.

The initial price talk on the 3 year tranche was 25. It priced at 17 and as we speak it is 15/12. The initial talk on the 10 year was 80 and it priced at 70 and is currently 63/61. The initial talk on the 30s was 100. It priced at 90 and is currently 83/81.

And so it goes.

Corporate Bond List Thus Far

April 16th, 2014 10:04 am

Not exactly household names but here is the list courtesy of the good folks at Bloomberg:

Bank Nederlandse Gemeenten B’Mark Aaa/AA+  7 yr
spread set ms+41
Office Cherifien de Phosphate/ OCP SA TBD na/BBB-    10 yr 144A Reg S
guidsance 5.875% area

Reliance Standard Life Global Funding II 300mm A2/A+  5 yr FA Backed 144A
Reg S mtn’
ipt +low 100′s
Braskem Finance Limited 250mm Baa3/BBB-  re-open 6.45% 2/2024
ipt $102.5 area
Nationwide Mutual Insurance Company 400mm (ng) A3/A-  30 yr 144A reg S
ipt +187.5 area              surplus notes