Eclectic Topic Via Merrill Lynch

March 30th, 2015 9:47 pm | by John Jansen |

Via Merrill Lynch Research:

Monday, 30 March 2015
Situation Room
No longer more bang for the buck
Summary
  • US IG credit has compressed significantly to EUR IG and the EUR/USD basis swap has declined further.
  • As result, on a currency hedged basis there is no longer more attractive value in USD over EUR denominated spreads.
  • Thus, following the recent compression in USD credit we no longer recommend that investors swap out of EUR, into USD credit.
  • No longer more bang for the buck. Following the February rally in US credit, and post-QE struggles for European credit, US IG credit has compressed significantly to EUR IG and the EUR/USD basis swap has declined further. As result, on a currency hedged basis there is no longer more attractive value in USD over EUR denominated spreads. Specifically we find that 10-year USD spreads for European issuers are 15bps wider than EUR denominated counterparts on a currency hedged basis, down sharply from 46bps at the beginning of the year. For US issuers spreads are now 4bps tighter in USD than EUR, a reversal from earlier this year where they were 15bps wider. Since earlier in the year we have recommended that investors swap out of EUR, into USD credit. However, following the recent compression USD credit no longer offers superior value to EUR and we take off this recommendation. In fact going forward the risk is that EUR spreads outperform. – Hans Mikkelsen, Yuriy Shchuchinov, Jon Lieberkind, Barnaby Martin, Ioannis Angelakis, Souheir Asba (Page 4)
  • The US consumer’s reality. In the 19 March US Economic Weekly, “The consumer’s shopping cart: half full“, we argue that while the retail sales report is an important early sign of monthly consumer spending, it is incomplete and can be misleading. We made three arguments: (1) retail sales are released in nominal terms, which means big swings in prices can send misleading signals; (2) the data are revised, sometimes significantly as more complete data are available; and (3) retail sales give a partial picture of the consumer, only capturing a third of total spending. After controlling for these factors, consumer spending looks stronger in 1Q than suggested by the retail sales figures. Indeed, we are tracking growth of 2.5% qoq saar for real consumer spending. This is only just below the average annualized growth of 2.8% in 2014. Michelle Meyer (Page 7)
  • China Economic Watch: Beijing steps up property easing measures. Easing measures to boost the weak property market. The PBoC issued a circular today loosening mortgage lending standards in an effort to boost the ailing housing market. It lowered the minimum down-payment ratio for second-home mortgages to 40% from 60%. It also loosened the housing provident loan policy. In a coordinated move, the Ministry of Finance (MoF) shortened the holding period to exempt home buyers from paying the capital gains tax to 2 years from 5 years. While largely expected by the market, these easing measures represented a positive surprise, as the magnitude of second-home mortgage down-payment ratio reduction was 10pp larger than expected. Today’s policy move is consistent with our expectations that Beijing would introduce more easing measures to help home buyers, after a slew of weak data recently. We believe the new policies will provide support to upgrading demand and sentiment in the property market, and reflect the government’s determination to stabilize growth this year. – Sylvia Sheng, Xiaojia Zhi (Page 8)
  • Auto Monthly: Motorin’: March SAAR expected at 16.8mn. SAAR estimate at 16.8mn, GM +2%, F +0%, FCA +5%. We expect U.S. light vehicle sales in March to run at a SAAR of 16.8mn units, up from a SAAR of 16.5mn a year earlier. We estimate that GM sales will be up 2% YoY, after adjusting for selling days, driven by continued strong pickup sales. We forecast Ford sales to be flat YoY, after adjusting for selling days, as fleet sales have been weak while the F-Series ramps up. We expect FCA sales to rise an adjusted 5% YoY, continuing the robust momentum in trucks (Jeep and Ram) and the more recent momentum in cars. – Douglas Karson, Mark Hammond, Max Hubbard (Page 6)
  • Consumers frostbitten in February. Consumer spending rose 0.1% mom in February, disappointing expectations of 0.2%. Personal income surged 0.4% mom for the second consecutive month and pushed the saving rate up to 5.8% from 5.5%, the highest since December 2012. With headline PCE rising 0.2% (+0.1708% unrounded) real spending actually contracted 0.1% mom, which is the first monthly decline since April. January was also revised lower to reflect a 0.2% increase in real spending, versus 0.3%. Feeding these data into our GDP tracking model sliced off 0.4pp from 1Q, leaving us at 1.3% qoq saar. Looking at the components, the 2.8% decline in real auto sales was the biggest downward driver, though food services also fell 0.5%. A 1.2% increase in utilities and 1.3% rise in gasoline and other energy goods provided a small offset. These data suggest that harsh weather kept consumers indoors, cranking up the heat and staying warm. As expected, the Fed’s preferred measure of inflation, the core PCE price index, inched up 0.1% (+0.1340 unrounded) mom. This pushed up the yoy rate to a still-low 1.4%, from 1.3% in January. Housing continued to support the index, rising 0.3% mom. Financial services prices provided the next biggest boost, up 0.4% mom. On the flip side, transportation services prices fell 0.8% mom.
  • Pending sales surge. Pending home sales surged 3.1% mom in February, coming in well above expectations of a modest 0.3% increase. The index reached the highest level since June 2013, and was up 12.0% yoy versus 6.1% yoy in January. This reinforces the positive signal from the new home sales data, which were also strong in February. Strength in the Midwest was the biggest driver, with sales jumping 11.6%. Also, the West saw a 6.6% gain. Meanwhile, sales fell 2.3% in the Northeast and 1.4% in the South. The data are encouraging, but we caution against reading too much into it given that housing data can be quite noisy, especially during the winter months, and can see sizeable revisions. Looking ahead, we are hopeful that these data are an early sign of a solid spring selling season.Alexander Lin (Page 8)
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