Via Stephen Stanley at Amherst Pierpont Securities:
The May Treasury Refunding statement is very straightforward. The budget situation worsened over the past three months, which led to an increased in projected financing needs. This provides the Treasury with ample room to increase bill supply without cutting coupon issuance. Thus, Treasury is leaving coupon auction sizes steady for the next three months. The May refunding will be unchanged from February at $24 billion 3’s, $23 billion 10’s, and $15 billion 30’s. Treasury also noted that the cuts put in place in February for TIPS ($2 billion cuts in every auction) will be maintained for the next three quarters (i.e. no reassessment until the February 2017 refunding announcement).
The minutes from the Treasury Borrowing Advisory Committee provided a few additional bits of color around the Treasury’s decision. The presentation by Treasury officials makes explicit the link between the news at the margin on the budget and the Treasury’s decision to stand pat. Meanwhile, the TBAC suggested that the Treasury revisit the demand for bills (and thus the appropriate needed supply) later this year, after money market reform is implemented. As I laid out in my preview piece, I expect that fiscal developments will give Treasury officials all the room they need to increase bills and then some over the next few years (without the need for coupon cuts). In any case, with the Obama Administration winding down, I do not expect Treasury debt managers to take any more big swings this year, deferring to the next Administration
Posted in Uncategorized | Comments Off on More on Refunding
Via Stephen Stanley at Amherst Pierpont Securities:
Nonfarm business productivity declined at an annual rate of 1.0% in Q1, marking the fourth negative reading in the last 6 quarters. Productivity growth has averaged 0.5% since the beginning of 2011, and the latest figure does not change my view of the trend. Productivity should pick up over the balance of the year, as GDP growth is likely to return to the 2% vicinity or better over the balance of the year, but when all is said and done in 2016, I look for another ½% type of gain. Meanwhile, hourly compensation registered a crisp 3.0% percent annualized increase, slightly higher than the prevailing pace over the past two years (2.9% over the four quarters of 2014 and 2.5% over the four quarters of 2015), consistent with my view that wages are gradually picking up as the labor market tightens. The combination of firm pay and negative productivity yielded a 4.1% annualized jump in Q1 unit labor costs, the steepest quarterly rise in over a year. Over the past nine quarters (going back to the beginning of 2014), unit labor costs have risen at a 2.6% pace, well in excess of the Fed’s 2% inflation target, suggesting that labor costs are putting modest upward pressure on inflation. This gets to the point that I make every time productivity and unit labor costs figures are released, so I will make it again but only briefly. Economists have finally figured out that low productivity means slower potential growth and are belatedly moving their estimates of trend growth down (though I think there is significant work to be done there, as this economy most definitely is not capable of sustainable 2% growth). However, most economists have apparently not yet recognized that they need to make the same adjustment with respect to the “normal” or desirable pace of wage hikes. Firms are not going to pay workers for productivity that is not occurring. If productivity growth is a full percentage point slower than pre-crisis, then the “normal” wage growth figures should similarly be a full percentage point lower. Instead of pursuing 3% wage growth, the FOMC should recognize that anything much above 2% is probably going to put upward pressure on prices (as we see with the unit labor costs figures cited above). At a minimum, Janet Yellen and company need to recognize that the current pace of wage growth (somewhere in the 2% to 3% range, depending on which measure we choose to highlight) is not indicative of slack in the labor market.
The trade balance narrowed sharply, as we knew it would based on the advance figures released last week. The $40.4 billion trade deficit in March was the smallest in over a year. Both exports and imports of goods were down. We knew that from the advance release, but this report provides additional detail. Merchandise exports fell due to large declines for autos, pharmaceuticals, and diamonds, partially offset by a big rise in aircraft. The import drop was broad-based and probably reflects the vagaries of seasonally adjusting the data for the varying timing of Chinese New Year. Consumer goods imports rose by nearly $4 billion in February and swooned by $5 billion in March. In any case, the implications for Q1 GDP from today’s trade data are minimal.
Members Agreed to No Further Changes to Coupon Issuance: TBAC
2016-05-04 12:30:26.86 GMT
By Alexandra Harris
(Bloomberg) — Members of Treasury Borrowing Authority
Committee (TBAC) “broadly agreed” that no further adjustments
to coupon issuance are necessary, though demand for bills should
“continue to be evaluated over the coming quarters,”
especially as money market reforms go into effect in October.
* Deputy Assistant Secretary Clark said Treasury continues to
evaluate responses to recent request for information on
evolution of Treasury market structure
* Preliminary responses suggest participants “broadly
support” collection of data on Treasury market
transactions by official sector
* More variation in responses as to whether data should be
available to the public; discussions ensued about which
transactions should be publicly reported
* Committee listened to presentation of dynamics of overseas
fixed-income markets, effect on demand for Treasuries
* Monetary policy likely to be “on the whole, more
stimulative than previously thought”
* Medium-term challenges for Treasury also addressed; included
concerns about rise in interest rates may put costs of
Federal debt “into greater focus”
* Medium-term risks that may constrain Treasury’s
flexibility in determining its issuance profile, which
include economic downturn, changes to Fed policy
regarding UST reinvestments and decline in demand for
Treasuries from “less price sensitive investors”
For Related News and Information:
First Word scrolling panel: FIRST<GO>
First Word newswire: NH BFW<GO>
Posted in Uncategorized | Comments Off on Re Coupon Issuance
Six Months Out, the General Election Map Looks Tough for Donald Trump
By
NEIL KING JR.
Indiana has all but sealed it: The general election will likely feature a face off between Donald Trump and Hillary Clinton.
So with six months to go before Election Day, what are the rough outlines of the race? Can Mr. Trump win? If so, what would his path to victory be?
The debate over Mr. Trump’s viability in November has been underway for months, with his rivals—Sen. Ted Cruz, who suspended his campaign after the Indiana primary, and Gov. John Kasich—both portraying him as too unpopular and divisive to win. That’s a view widely held by many establishment Republicans and even more on the left.
First, let’s start with the map itself, which is unforgiving from the outset for any Republican candidate.
Since 1992, every Democratic nominee has won a solid chunk of 18 states and the District of Columbia, which together add up to 242 of the 270 electoral votes needed to win. Republicans, meanwhile, have held a solid chunk of 13 states with just 102 electoral votes.
The Cook Political Report offers a more charitable tally for where things lean right now, saying the Democrats likely have 217 safe votes to start, while the Republicans have 191. (But it’s worth noting here that George W. Bush won his two elections, in 2000 and 2004, by an average of just 20 electoral votes—absolute squeakers by any measure—while Barack Obama won his by an average of 159 electoral votes.)
So to triumph, Mr. Trump will have to alter the electoral map in historically dramatic ways. He will have to wrest away not just a few states—like Colorado, Virginia, Nevada or New Mexico—that went with Mr. Obama in both 2008 and 2012 and appear to be turning reliably blue. He will also almost certainly have to grab a couple of states—like Michigan, Pennsylvania or Wisconsin—that haven’t fallen into the R column since the 1980s.
Is there any sign at the moment that Mr. Trump may have the momentum to pull off such a feat?
Let’s look at the big picture first.
The overall horserace numbers don’t mean much as this point, but nor are they auspicious for the likely GOP nominee. In early May 2008, Mr. Obama was tied with John McCain in the Real Clear Politics running average of national polls. Four years ago, Mr. Obama was up on Mr. Romney by just 3 percentage points. In the same tally, by comparison, Mrs. Clinton now leads Mr. Trump by over 6 points.
At the same time, both candidates will be entering the general-election fight with unusual baggage, but for Mr. Trump the load is heavier. Mrs. Clinton, for instance, is seen negatively by 56% of registered voters, according to the most recent Wall Street Journal/NBC News poll. By comparison, just under a third of voters see her in a positive light.
For Mr. Trump, an astonishing 65% of voters hold a negative view of him, a number that has ticked up steadily since he entered the race in July. Less than a quarter have a positive view. No presumptive nominee in the modern era has entered a campaign with such high negatives.
Mr. Trump has built his success so far on winning outsize support from white, working-class voters, particularly men, while struggling to win majority support from the higher-educated women and minorities. That strength has led many observers to posit a victorious Trump path that leads through the Industrial Midwest, picking up multiple wins in Pennsylvania, Ohio, Michigan or Wisconsin.
Still, the numbers suggest that is a very tall order. One poll in Pennsylvania, leading up to last week’s primary there, showed Mr. Trump lagging Mrs. Clinton by 15 points among registered voters. Winning the Keystone State would also require eradicating a 310,000 Democratic vote advantage statewide in 2012. In Philadelphia County alone–not likely to be ripe Trump territory in November–Mr. Obama enjoyed a nearly 500,000 vote edge in 2012.
Meanwhile, recent polls in Michigan and Wisconsin also showed Mrs. Clinton up by comfortable margins over Mr. Trump. At the same time, a poll this week shows Mr. Trump lagging badly in must-win Florida.
So could there be a victorious Trump path through the Midwest, even if Mrs. Clinton won all the other swing states that Mr. Obama controlled in both 2008 and 2012? Yes, and it would look like this: If Mr. Trump managed to sweep Pennsylvania, Ohio, Michigan and Wisconsin, he would secure exactly 270 electoral votes. The last time a Republican made that sweep was in 1984, when Ronald Reagan won every state but one.
OK. It’s time. Analysts and investors are starting to see this as a serious possibility.
Over at UBS, Paul Donovan has had a stab at advising clients on what to do in preparation for a Trump-Clinton showdown. In a podcast today, he said:
The problem is what to price in.
Markets are not good at pricing in non-binary situations. Complicating matters… what happens in Congress could make as much of a difference as what happens in the White House.
The uncertainty is compounded by a certain vagueness around what Trump’s policies might be. In addition, the announced or presumed policies of the two candidates are sufficiently far apart to make pricing in probabilities of the two platforms extremely difficult to achieve.
Good luck.
Posted in Uncategorized | Comments Off on Pricing Trump Risk
* (All times New York)
* Economic Data
* 7:00am: MBA Mortgage Applications, April 29, no est.
(prior -4.1%)
* 8:15am: ADP Employment Change, April, est. 195k (prior
200k)
* 8:30am: Trade Balance, March, est. -$41.2b (prior –
$47.1b)
* 8:30am: Non-farm Productivity, 1Q P, est. -1.3% (prior
-2.2%)
* Unit Labor Costs, 1Q P, est. 3.3% (prior 3.3%)
* 9:45am: Markit US Services PMI, April F, est. 52.1
(prior 52.1)
* Markit U.S. Composite PMI, Apr F, no est. (prior
51.7)
* 10:00am: ISM Non-Mfg Composite, April, est. 54.8 (prior
54.5)
* 10:00am: Factory Orders, March, est. 0.6% (prior -1.7%)
* Factory Orders Ex Trans, March, no est. (prior
-0.8%)
* Durable Goods Orders, March F, est. 0.8% (prior
0.8%)
* Durables Ex Transportation, March F, est. -0.1%
(prior -0.2%)
* Cap Goods Orders Non-defense Ex Air, March F, no
est. (prior 0%)
* Cap Goods Ship Non-defense Ex Air, March F, no est.
(prior 0.3%)
* Central Banks
* 6:30pm: Fed’s Kashkari speaks in Rochester, Minn.
* Supply
Posted in Uncategorized | Comments Off on What to Watch Today
The US Treasury has debated a sweeping overhaul of the $13tn government bond market, including a proposal to buy back old debt as officials focus on the health of trading in a core asset of many global investment portfolios.
The idea being discussed would involve retiring older Treasury debt, then replacing it with new benchmark securities, which are more widely traded, according to people familiar with the matter.
The overhaul, which would be designed to improve trading conditions, has only been quietly discussed and could go nowhere as current Treasury officials are likely to leave office after November’s elections.
But the topic is now also gaining ascendancy among industry participants, while discussion of extensive debt buybacks highlights an official focus on the structure and efficiency of the Treasury market after wild price swings stunned investors in October 2014.
The US Treasury is in the midst of reviewing the structure of the market, billing it as the “most comprehensive” review in decades. Part of that review is focused on complaints from banks and investors that the ease of buying and selling Treasuries has deteriorated, reflecting poorer “liquidity” conditions.
“By buying cheap issues and funding the buybacks with issuance of rich on-the-run securities, the Treasury could enhance liquidity in these issues, while decreasing its borrowing costs,” said Prudential Fixed Income in response to the Treasury’s review.
The US Treasury sells large amounts of government debt every month with large Wall Street banks and brokerages helping underwrite the sales.
Investors value owning these fresh issues, also known as ‘’on-the-run’’ securities, because they trade more frequently. Bolstering the size of current benchmarks, with a focus said to be on the 10-year note, could improve market liquidity.
The US Treasury would then buy older, less liquid and therefore cheaper debt across the market, which could in theory then be reissued at a lower yield. In recent months, yields on older issues have risen more than those for recently sold debt, suggesting adeterioration in liquidity.
‘’Dealers would be in a better position to provide liquidity to customers looking to sell off-the-runs if there was a known buyback schedule that would allow them to unload the position,’’ said Lou Crandall, economist at Wrightson Icap.
Publicly, Treasury officials have played down liquidity concerns. Antonio Weiss, counsellor to the secretary of the US Treasury, said in testimony to the Senate Banking Committee in April that, “there is no compelling evidence of a broad deterioration in liquidity”.
In February 2015 minutes from the Treasury Borrowing Advisory Committee, a group of industry participants that discuss refunding issues with the US Treasury, it was suggested that the Treasury conduct further investigation into buybacks.
The idea is not new. Between March 2000 and April 2002 the Treasury bought back $67.5bn of existing securities as the financing needs of the government decreased, according to refunding documents.
In a number of refunding documents released by the Treasury since 2014, reference has been made to test procedures of small scale buy backs, to ensure that the Treasury is operationally capable of implementing such a procedure.
The US Treasury explicitly states in those documents that the tests should not be seen as a “signal of any pending policy changes”.
Posted in Uncategorized | Comments Off on Radical Proposal to Restructure Treasury Market
There is one question many investors are asking, and that is whether the dollar has turned
Some caution against extending dollar shorts may have been spurred by the proximity of the US jobs data
In addition to the UK construction PMI, the eurozone reported its services and composite PMIs
In addition to the ADP report, the US releases March trade, April Markit services and composite PMIs, March factory and durable goods orders, and Q1 productivity
There was very little consensus on what triggered the big EM selloff yesterday, which continues today
The South African Reserve Bank warned of a medium to high probability that the nation will be downgraded to sub-investment grade; we agree
The dollar is mostly firmer against the majors. The euro and the yen are outperforming, while the Kiwi and sterling are underperforming. EM currencies are broadly weaker. CNY and the CEE currencies are outperforming while RUB, MYR, and KRW are underperforming. MSCI Asia Pacific ex-Japan was down 1.3%, with Japan markets closed until Friday for Golden Week. MSCI EM is down 1%, despite Chinese markets being largely flat. Euro Stoxx 600 is down 0.9% near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is flat at 1.79%. Commodity prices are mostly lower, with oil mixed and copper down 1%.
There is one question many investors are asking (after noting that with Cruz dropping out of the Republican primary, Trump has secured the nomination), and that is whether the dollar has turned. The greenback has extended yesterday’s reversal higher. The euro had briefly poked through $1.16 and closed on its lows a little below $1.15. Sterling peaked above near $1.4770 and finished near $1.4535 for a potential key reversal. Despite weakness in US stocks and a sharp drop in US yields, two usual props for the yen, the dollar recovered from JPY105.50 to over JPY106.50.
The Australian and Canadian dollars fell sharply. The RBA surprised many by cutting rates, but as we know from the euro and yen’s strength easier monetary policy has not dominated the exchange rate channel. The point is that both the Australian dollar posted an outside down day while the US dollar recorded a potential key reversal against the Canadian dollar.
Although follow-through US dollar’s gains have been recorded, they have been marginal, except for sterling. Sterling has, until yesterday, managed to shrug off recent disappointing data. Yesterday’s disappointing manufacturing PMI has been echoed by the construction PMI. It fell to 52.0 from 54.2. The sector accounts for less than 7% of the UK economy but it is at a three-year low and manufacturing is contracting. The services PMI is out tomorrow. A small decline from 53.7 in March is expected. The general dollar environment seems key for sterling. A break of $1.4450 would likely target $1.4375, which is a retracement objective and the 20-day moving average, which sterling has traded above since April 18.
In any event, it is difficult to argue the dollar is strong near JPY107 and with the euro just below $1.15. Although the US reported an increase in auto sales after a soft March (17.32 mln units annualized rate in April vs. 16.46 mln in March), it has difficult to see the fundamental triggers for the dollar’s recovery. Over the last five sessions, the US 2-year premium over Germany has narrowed by 10 bp. The US 10-year premium over Japan narrowed 7 bp yesterday. Nor was there a change in the market’s contention that a June Fed move is highly unlikely. The implied yield of the June Fed funds contract is 38 bp. The average effective Fed funds rate is 36-37 bp. There is half a basis point spread between the bid and offer.
Some caution against extending dollar shorts may have been spurred by the proximity of the US jobs data. The median guesstimate from Bloomberg’s survey is for ADP to come in at 195k today and for a 200k rise in nonfarm payrolls at the end of the week. We understood the FOMC statement last month to acknowledge the continued improvement in the labor market but noted it was not spilling over to consumption. To us, this means that a decision to hike in June needs more than just a good jobs report.
The $1.1465 area was the first technical target for the euro, and it saw $1.1470 in Europe. We suspect a break of the $1.1400-1.1430 area is needed to give more credence to views that the euro has peaked. The dollar has more work to do against the yen. The JPY108 area (and more like JPY108.75) needs to be recaptured to solidify the dollar’s low.
In addition to the UK construction, the eurozone reported its services PMI and composite. Although the service PMI slipped to 53.1 from 53.2 flash reading, the composite was unchanged from the initial reading of 53.0, which is down from 53.1. The eurozone economy then is largely stable at the start of the Q2. German and French preliminary reports were revised slightly lower. Italy’s economic recovery continues. The 52.1 services reading compares with 51.2 in March, and the composite bounced back (53.1) after a three month slowing in Q1. Spain’s 55.1 services PMI was a little lower than the 55.3 reading in March, but it is above the median forecast on Bloomberg. The 55.2 composite reading is the second consecutive gain.
In addition to the ADP report, the US releases the March trade balance, which may help economists begin thinking about revisions to the 0.5% Q1 GDP. The same applies to factory orders and durable goods orders. The March data are more important for economists than investors. A good ADP report, coupled with the gains in auto sales, suggests the US economy is strengthening in Q2. The disappointing manufacturing ISM earlier this week showed a broader even if not a quicker recovery. Both Markit and ISM report their service sector readings today for April. Both are expected to have ticked up from March.
There was very little consensus on what triggered the big EM selloff yesterday. Some cite the weaker than expected Caixin PMI, but we note that EM held up OK after that data release during Asian hours. Others point to some hawkish Fed comments during North American hours. However, we note that intensified EM selling began during the European morning, when risk off sentiment picked up as equities sold off.
Whatever the cause, the EM selling continues today. Positioning is probably playing a larger role than fundamentals right now, and so further losses seem likely. MSCI EM is down 1% today, and has fallen four straight days now. Yet it has retraced only a quarter of the 2016 rally. As long as the market maintains its dovish view of the Fed, EM assets should eventually stabilize.
The South African Reserve Bank warned in its Financial Stability Review of a medium to high probability that the nation will be downgraded to sub-investment grade. The bank noted that a downgrade would likely lead to capital outflows that affect local currency government bonds, increasing the cost of funding while also reducing credit to the private sector. Corporate profits would likely decline and household debt levels would likely increase. We agree, and have long warned that South Africa loses investment grade from at least one agency this year.
European Central Bank policy is helping to sustain growth in the euro area economy, though the pace is “tepid” and inflation remains too low, according to Markit Economics.
Markit said its composite Purchasing Managers Index was at 53 in April — above the 50 level that divides expansion from contraction. A services gauge was at 53.1, with business confidence rising to a three-month high and growth in new orders accelerating.
The report suggests the 19-nation economy grew at an annual pace of 1.5 percent at the start of the second quarter. While expansion remains steady, there are signs that this is being partly fuelled by discounting, with a gauge of prices charged falling.
“The sustained euro-zone growth contrasts with slowdowns in the U.S. and U.K., suggesting the ECB’s more aggressive stimulus is helping,” said Markit economist Chris Williamson. Domestic demand “is picking up which, alongside the weaker currency, is helping to offset sluggish external demand.”
While inflation remains well below the ECB’s goal, policies including cutting interest rates to record lows, expanding bond purchases and starting an additional loan program for banks appear to be having an impact, according to Markit.
The biggest increases in services output growth were in Spain and Germany, Markit said. France returned to expansion following two months of contractions, and growth improved in Italy.
Posted in Uncategorized | Comments Off on European Growth
The dollar’s slide was interrupted yesterday as angst about the global economy overtook relative real yield trends as the dominant driver. Oil was down, the dollar bounced and high-beta and commodity-sensitive currencies corrected. Current FX trends are overwhelmingly the result of positions being taken off, rather than fresh ones being put on and that encourages slightly chaotic moves. Stephanie Aymes and her Technical Analysis team warned yesterday here<http://www.sgmarkets.com/r/?id=h106db23c,16d9c5cc,16d9c5cf> that “The Dollar Index is now at the ‘make or break level’ of 92.50/92.10, the lower part of the broad 1- year consolidation zone which intersects the upward channel limits in force since 2008 and 2011 lows. More importantly, 92.50/92.10 corresponds to the neckline of the Double Top pattern the Index has been tracing after it failed to overcome the stiff resistance of 100.40. Should the Index break durably below 92.50/92.10 (weekly close) it would imply a potential down move towards the projected potential which is located near 85 levels.” I’ve never made a secret of my inability to draw straight lines but we’ve either had a ‘fake break’ on an intra-week basis, that leaves the range, and the dollar’s uptrend intact, or we’re setting up for a bigger dollar fall if we end below these key levels at the end of the week.
This a time for head-scratching rather than jumping to conclusions. Friday’s US payroll data may help unfog the US economic outlook a bit (though they may just continue to confirm that this low wage-growth, low productivity jobs ‘boom’ goes on). But either way, the US data will determine the weekly close in DXY and therefore provide food for thought for the technicians.
In the meantime, we’re sticking with shorts in EUR/RUB, GBP/NOK, USD/CAD because we believe that the oil price will hold up; we’re still short NZD/USD and we’re still short DKK/SEK. And yes, we’d still, rather wait to get long USD/JPY closer to 100 and short EUR/USD closer to 1.20. The second chart shows USD/CAD which has fallen faster than the oil price bounce alone would seem to justify. The CAD bounce was always about valuation as much as oil-correlation however.
Oil and the Canadian dollar, tight stops but stick with it.
NZD has fallen a bit further after overnight labour market data (strong employment, higher unemployment, soft wage growth). NZD looks too high relative to relative rates will look vulnerable if NZD/JPY breaks 72.5, and is our favourite G10FX ‘sleeper’ trade to position for the next round of weaker Chinese data.
A poor UK manufacturing PMI took the wind out of the pound’s sails yesterday and it was that, rather than oil or any other Norwegian factor which keeps the GBP/NOK downtrend intact. EUR/GBP looks like a buy at these levels, but we’ll stick with GBP/NOK shorts. UK construction PMI data are due.
Sweden’s services PMI dipped to 52.6 from 54.9min April, and the Riksbank Minutes may not so much for the SEK either. We are still short DKK/SEK on growth divergence grounds. European services PMIs won’t tell us much that’s new,
The US data calendar sees the non-manufacturing ISM (exp 55 vs. 54.5 last), ADP (+200k),trade data (-$41.1bn) and factory goods orders. The press is more interested in Ted Cruz’s decision to quit the race to be Republican Presidential Nominee. A strong non-manufacturing ISM would however, play to the notion that Q1 US economic softness was, yet again, a function of seasonality more than the recovery running out of steam. And if that’s the case, the Fed tightening hiatus and the dollar’s dithering, are temporary.