Rough Patch for Auto Workers

December 20th, 2016 8:34 pm

Via Bloomberg:

GM and Fiat Chrysler Cut Jobs as Sales Swing Toward SUVs

by

David Welch

and

Jamie Butters
  • Seven plants to trim output of models including Chevy Cruze
  • SUVs like Chevy’s Trax ‘killing it’ at expense of sedans

For unionized auto workers, even amid a booming U.S. market, the only safe jobs of late have been building pickups and sport utility vehicles.

Within the next month, General Motors Co. plans to permanently cut about 3,300 employees at three car plants, as the largest U.S. automaker slashes production of models including the Chevrolet Cruze compact. The Detroit-based company also plans to temporarily lay off employees across five of its U.S. car factories, while Fiat Chrysler Automobiles NV trims production at two plants in Canada.

Workers are bearing the brunt of a shift in consumer preference toward trucks that’s been swift enough to cost them their jobs, even as total U.S. vehicle sales flirt with last year’s record. With cheap gasoline spurring demand for more fuel efficient SUVs and pickups, automakers have been forced to dial back car output to address swelling inventory.

“It’s a pendulum and now it’s shifting our way,” said Glen Johnson, president of United Auto Workers Local 1112 in Lordstown, Ohio, where 1,200 workers making the Cruze will be dismissed next month. “It wasn’t that long ago that gas was $3.50 a gallon and we were feeling for our friends in truck plants.”

GM’s plan to cut 1,300 workers at its Detroit-Hamtramck car plant was disclosed Monday in an official notice to the state of Michigan. The factory makes the Chevrolet Impala, Buick Lacrosse and Cadillac CT6 sedans, as well as the Volt plug-in hybrid.

Earlier Monday, GM said it was temporarily idling production at five U.S. passenger-car plants, and Fiat Chrysler said it would halt output for New Year’s week at two Canadian vehicle factories making Chrysler 300, Dodge Charger and Challenger sedans and Chrysler Pacifica minivans.

Cruze, Camaro

In November, GM said it planned to end a third daily shift building Cruze in Lordstown and dismiss 800 employees at its factory assembling the Chevrolet Camaro and Cadillac CTS and ATS models in Lansing, Michigan.

“It’s all car plants,” said David Whiston, an analyst for Morningstar Inc. “Compact cars and sedans are out of favor, so you have to cut the production.”

In using shorter-term shutdowns in January, GM is trying to reduce inventory from an almost 90 days supply to about 70 days by the end of next month, according to Dayna Hart, a company spokeswoman. In addition to the factories in Detroit-Hamtramck, Lansing and Lordstown, the plants being idled are in Bowling Green, Kentucky, and the Fairfax industrial district of Kansas City, Kansas.

The consumer shift from cars to crossovers and trucks “is projected to continue,” Hart said in an e-mail. “We are adjusting stock imbalances.”

Workers at Fairfax assemble the Buick Lacrosse and Chevrolet Malibu, while Bowling Green builds Chevy Corvette sports cars.

New Models

Several of the cars GM is dialing back production have been redesigned or are new to the market, including the Buick Lacrosse and Cadillac CT6, Whiston said. It’s rare for automakers to cut production of recently introduced models because consumers usually are keen to buy fresh designs, he said.

GM shares rose 0.6 percent to $36.61 on Tuesday in New York. Fiat Chrysler climbed 2.5 percent to $9.08, its highest closing price since Dec. 31.

Fiat Chrysler said it’s adding four off days following the Jan. 2 observation of New Year’s Day at plants in Windsor and Brampton, Ontario. The moves are to align production with demand, Jodi Tinson, a company spokeswoman, said in an e-mail.

The automaker has already stopped making the Dodge Dart and Chrysler 200 sedans. A Fiat Chrysler factory in Belvidere, Illinois, will make its last Jeep Compass and Patriot models this week and retool for Jeep Cherokee SUV production, Tinson said.

Ford Motor Co. said in October that it was cutting production at plants that make the Escape compact SUV and F-150 pickup. The comapny said Tuesday it’s idling its factory in Kansas City for the first week of the year to reduce inventory of the F-150 and Transit van.

SUV Additions

As automakers start to slow assembly lines, trucks and SUVs continue to sell at record levels. In November, total light-vehicle sales rose 3.7 percent to 1.38 million, a record for November, according to researcher Autodata Corp. The month’s annualized sales rate, adjusted for two extra selling days this November, beat expectations at 17.9 million vehicles.

While some workers are losing out, GM said in October it will hire 650 workers at an SUV plant in Spring Hill, Tennessee, which once made cars for the defunct Saturn brand. Laid off workers could apply for jobs at other plants, GM’s Johnson said.

Many customers who might have otherwise bought a Cruze compact are driving home in the Chevrolet Trax small SUV, said Duane Paddock, owner of Paddock Chevrolet in Buffalo, New York. This year, Cruze sales through November have plunged 18 percent to 171,552. Deliveries of the Trax have climbed 23 percent to 71,009.

“With the Trax, we’re killing it,” Paddock said. “The Cruze and Malibu are great products. We’re just seeing people go to SUVs.”

The Trax’s success is positive for GM, but not for workers in Lordstown. GM builds the model in Mexico.

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Political Economy

December 20th, 2016 8:31 pm

Via Bloomberg:

Bond Investors Now Losing Most Sleep Over Rising Populism

by

Natasha Doff
  • Politics is the biggest concern for 31% in BofAML’s survey
  • Investors have “tweaked porfolios” for a more populist worl

 

Forget Federal Reserve interest rate hikes and rising inflation — the thing that’s really worrying bond investors at the moment is politics.

More than 30 percent of high-grade credit investors listed populism in politics as their biggest concern for the next 12 months, according to a Bank of America Merrill Lynch Global Research report published on Monday. Just 9 percent had named it as their main worry in a similar survey conducted in October, ahead of the surprise election of Donald Trump.

Investors are preparing for more surprises in 2017 after they were caught off-guard this year by the U.K.’s vote to leave the European Union and the unexpected rise of the U.S. president-elect. With elections fast approaching in France, the Netherlands and Germany, and anti-establishment leaders gaining support across the European Union, no one wants to be caught out again.

“December’s survey shouts ‘populism’ at almost every juncture,” analysts at Bank of America Merrill Lynch led by Barnaby Martin said in a research note to clients. “Investors have also tweaked their portfolios to prepare for a more populist world in 2017.”

Investors are preparing for the increase in government spending these leaders have promised by shifting to overweight positions in the bonds of industrial companies, according to the survey. They have also reduced long positions in corporate debt with a maturity of more than 10 years by 54 percent since October.

Thirteen percent of the 68 investors polled listed rising bond yields as their biggest concern, up from 6 percent in October, according to the report. The yield on the Bloomberg Barclays Global Aggregate Index jumped eight basis points to 1.67 percent this month, touching the highest level since January.

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Problems in China

December 18th, 2016 11:38 pm

Via WSJ:

Bond Selloff Shows Risks of China’s Efforts to Restrain Credit

Central bank’s tightening of short-term credit led to sharp market drops, forcing authorities to reverse course

 
By

John Lyons and
Rachel Rosenthal

 

China’s newly troubled bond market is showing how difficult it will be for Beijing to restrain the easy credit that rapidly expanded the country’s indebtedness over the past decade.

A gradual tightening of short-term credit by China’s central bank—combined with rumors of liquidity squeezes at brokers—prompted a mini-rout in the country’s $8 trillion-plus bond market last week, forcing authorities to reverse course and inject some $86 billion in short- and medium-term funds.

China’s main stock indexes also tumbled following moves by regulators to crack down on some speculative investors.

Adding to market worries, China’s currency, the yuan, has fallen to its lowest level against the U.S. dollar since 2008 as more Chinese move their wealth out of the country despite strict capital controls.

The bond selloff is raising concerns about the stability of China’s opaque and deeply intertwined credit markets.

 

“When you have an event like last week people take notice of it, you have to go back and review your China [investment] thesis,” said Jim Veneau, head of Asia fixed income at AXA Investment Managers in Hong Kong, with $2.2 billion under management.

“Everyone is nervous,” said Wang Ming, a partner at Shanghai Yaozhi Asset Management Co., which holds $2.9 billion in debt.

Like all bonds world-wide, Chinese bonds are under pressure from the U.S. Federal Reserve’s plans for faster interest-rate increases than some expected. China may guide its own rates higher to prevent the Chinese currency from weakening faster against the dollar, a scenario that would further squeeze Chinese borrowers in need of cheap finance.

China’s total debt surged to around $27 trillion this year, or 260% of gross domestic product, compared with 154% in 2008 at the start of a stimulus program to offset the financial crisis. It is continuing to grow at more than twice the pace of the economy.

Economists say growing amounts of money are flowing into less-productive channels, such as keeping struggling companies on life support, or feeding speculative investments in everything from property to bonds and steel.

 

China’s central bank has guided short-term lending rates higher in order to squeeze out borrowers who are using the cheap money to make risky bets and loans.

Last week, some bondholders, including asset managers and issuers of “wealth management products”—off-balance-sheet investment vehicles used by banks and other institutions to get around regulatory limits on lending—were likely squeezed too much. As a result, they began dumping government bonds—which are liquid and thus easy to sell—to raise cash, analysts say.

Some 40% of the assets in wealth management products—the biggest portion—was invested in bonds as of the first half of this year, up from 29% in 2015, according to Moody’s Investors Service.

The selloff sent China’s benchmark 10-year government bond yield to 3.33%, its highest level since September 2015. The 10-year bond yield had hit a 14-year low of 2.66% as recently as October. Yields move in the opposite direction of prices.

Last week’s sharp price drop has raised concerns that a larger bond rout may be in the offing. China’s stock markets crashed in 2015, wiping out $5 trillion of value, a fresh memory for many investors.

Many economists say China’s debt scale up may result in a crash similar to the 2008 mortgage crisis in the U.S., or a long slowdown such as Japan’s after its 1980s property bubble burst—or both.

The clearest sign that many Chinese are worried is the amount of money flowing out of China despite strict measures to stop it. China’s foreign reserves have dropped by 21% to $3.05 trillion in the past two years.

Chinese authorities are aware of the risks. On Friday, a senior Chinese government economic working group said for the first time that controlling financial risk and reducing asset bubbles had become a priority, according to a statement reported by Chinese state media. The country’s top decision-making body, the Politburo, issued a similar warning earlier this year.

As much as 15% of the value of bank loans to Chinese companies may go unpaid, researchers at the International Monetary Fund estimate. Even riskier are an estimated $8.5 trillion in off-balance sheet “shadow” finance issued by a matrix of banks and lightly regulated institutions.

A key question now is how much of China’s bond market is owned outright, and how much was bought with money borrowed under murkier circumstances such as shadow finance, raising risks. Analysts estimate leverage in the system overall is between 1.2- and 5-times assets, a relatively low figure, although in pockets of the market it can go much higher.

But since much of the financial system is lightly regulated, the true amount of leverage in the system is unknown. Market experts say asset managers routinely use bonds as collateral to buy more bonds, repeating the process many times over.

Rumors of defaults have rattled the market. Shares of Guangxi-based brokerage Sealand Securities Co., which has $7.2 billion in assets, stopped trading on Dec. 15 and a Chinese newspaper reported over the weekend that its executives met Friday with a large group of counterparties over losses related to bonds swaps. Sealand has denied it is in distress.

Economists say China’s central bank has the firepower to keep its debt markets from plunging by injecting more money into the system if necessary. And since most of China’s debt is issued in its own currency, the debt markets aren’t vulnerable to other shocks like currency devaluations. A closed capital account—which limits the ability of companies, banks and individuals to move money in or out of the country—will slow outflows.

“The crisis is not over,” said Zeng Xianzhao, a fund manager at Chongqing Nuoding Asset Management, with $28.7 million in assets: “The central bank’s liquidity injection only assuaged the crisis but didn’t solve it at its root.”

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FX

December 16th, 2016 7:23 am

Via Marc Chandler at Brown Brothers Harriman:

Markets Turn Quiet Ahead of the Weekend, Dollar Consolidates Gains

  • The dollar is consolidating today and the news stream is light
  • Greek tensions flared up this week, but appear to be subsiding into the weekend
  • The US report November housing starts
  • Central Bank of Russia kept rates steady at 10.0%, as expected; Colombia central bank is expected to keep rates steady at 7.75%

The dollar is mixed against the majors as the week winds down.  The Swedish krona and the euro are outperforming, while the Norwegian krone and the dollar bloc are underperforming.  EM currencies are mixed.  TRY and the CEE currencies are outperforming, while KRW and MYR are underperforming.  MSCI Asia Pacific was up 0.3%, with the Nikkei rising 0.7%.  MSCI EM is flat, with Chinese markets rising 0.2%.  Euro Stoxx 600 is up 0.2% near midday, while S&P futures are pointing to a lower open.  The 10-year UST yield is down 3 bp at 2.56%.  Commodity prices are mixed, with WTI oil down 0.5%, copper down 0.6%, and gold up 0.6%.

Some mild position squaring pressures are evident ahead of the weekend, and for many market participants the year is coming to an end.  Outside of the BOJ meeting next week, the calendar turns light and markets are moving into holiday mode.  

The Dollar Index is seeing this week’s gains trimmed, but it is up nearly 1.4% this week.  Although the election has seen the dollar’s gains accelerate, the current leg up began in early October.  The Dollar Index has risen in eight of the past 11 weeks.  

The euro recorded a 13-year low yesterday, just above $1.0365, but has remained above $1.04 today and reached edged through $1.0470 in the European morning before stalling.  At the same time as the euro recoups almost a cent of its losses, the US rate premium is also consolidating.  The US two-year premium rose this week above 200 bp for the first time since 2000.  The German two-year note is falling to new record lows today, but the US yield is also a little softer.  The 10-year premium of a little below 3.4% is the widest since 1990.  

The dollar is consolidating the gains that brought it to 10-month highs against the yen yesterday near JPY118.65.  Rate differentials have softened by a couple basis points, after the US premium rose to new multi-year highs.  The US two-year premium is a few basis points below the 1.46% seen yesterday, the most in nine years.  The 10-year premium is easing after reaching almost 2.52%, the most in eight years.  The yen is the weakest currency this week, falling 2.4% (~JPY118.10).  It is the sixth consecutive weekly gain.  The dollar has risen in 10 of the past 12 weeks against the yen.  

The news stream is light today.  The main reports have come from the euro area.  The final November CPI reading was unchanged from the preliminary of 0.6% on the headline and 0.8% on the core.  It is still lowflation, but deflation forces have been arrested, helped in no small measure by the doubling of oil prices over the past year.  

The eurozone reported an October trade surplus of 19.7 bln euro.  This was smaller than expected, but it is still substantial in absolute terms and relative to its own history.  Italy reported its figures today too.  Its 4.3 bln euro trade surplus is a little bigger than the average thus far this year, which compared with a 3.23 bln euro average in the first ten months of the year.    

The press is reporting that the new caretaker government is prepared to inject as much as 15 bln euros into Monte Paschi and small Italian banks.  Italian bank shares are slightly lower, which is paring the third consecutive weekly gain, during which time the bank shares index has risen by nearly 25%.  Recall Italian banks got crushed in H1 16, dropping nearly 60% before stabilizing in Q3 (+6.6%).  They were up 6.5% in October and November before surging this month.

More broadly, European bourses are paring this week’s gains.  The Dow Jones Stoxx 600 Index is off about 0.25% today to hold on to a 0.75% gain on the week.  It is the second consecutive weekly gain and the fifth advance in six weeks.  Year-to-date it is nursing a nearly 3% decline.   The MSCI Asia Pacific Index is up about 3.8% year-to-date.  The Nikkei added almost 0.7% today to extend its advancing streak to the ninth session and sixth week.  Since the start of October, there have only been two weeks in which the Nikkei fell.  

Greek tensions flared up this week, but appear to be subsiding into the weekend.  Greece’s 10-year bond yield rose 57 bp this week.  The confrontation revolves around the European finance ministers’ refusal to provide the debt relief that the IMF insists on, instead requiring Greece to pursue a 3.5% primary budget surplus as far as the eye can see.  The IMF and many economists do not think that is realistic.  In lieu of debt relief, the IMF insists that the only way make Greek debt sustainable is for deeper cuts in pensions.  

For its part, Greece appears to have overshot is primary budget surplus this year and the Prime Minister immediately spent it.  Parliament today approved an extra pension payment.  The sales tax in some of the islands particularly hard hit by the refugee crisis was also reduced.  This has annoyed some of the creditors, though France appears to be more sympathetic.  

The failure to secure debt relief won’t end well for Tsipras.  To minimize electoral losses, there is some thought that Tsipras may be quick to use extra budget savings to prepare for early elections.  Tsipras’ Syriza is trailing in the polls, but the losses would arguably be larger over time.  Tsipras and Merkel will discuss these issues today.  Merkel, who is tacking right ahead of her fourth run at Chancellor next year, has little room to maneuver.  

The US report November housing starts.  After October’s 25.5% surge, November will pull back.  On a trend basis, it has been a respectable year for US housing starts.  The 10-month average is about 1170k this year compared with 1097k in the first 10 months of 2015 and the best since 2008.  This is a roughly a 6.5% gain.  Permits will also be released and are expected to have slipped to snap a three-month modest advance.  A quiet North American session is expected.  Lacker will be the first Fed official to speak since the FOMC’s decision.  He is speaking shortly after midday in Charlotte.  Yellen gives a commencement speech on Monday, but it is not the forum to expand on the FOMC statement or her press conference, which she rarely does in any event.

Central Bank of Russia kept rates steady at 10.0%, as expected.  The message was fairly hawkish but consistent with past statements.  It noted that the scope for easing is limited near-term, but it will consider cutting in H1 2017.  For now, the bank said it will keep policy “moderately tight.”  Inflation has fallen to a cycle low 5.8% y/y in November, but remains well above the end-2017 target of 4%.  The bank said that risks of not meeting this target have “subsided somewhat.” We believe a rate cut will be seen around March or April is disinflation continues, but a lot will depend on the external environment then.

Colombia central bank is expected to keep rates steady at 7.75%.  One lone analyst out of 36 polled by Bloomberg sees a 25 bp cut.  CPI inflation has eased four straight months from the peak of 9% y/y in July to the cycle low of 6% in November.  This is still well above the 2-4% target range, but the disinflation will be welcomed.  Colombia reports October retail sales and IP today also.  The former is expected at -1.0% y/y and the latter at +2.7% y/y.  The economy remains weak, but the central bank will find it hard to cut rates next year if the Fed is hiking them.    

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Swap Spreads

December 15th, 2016 8:53 pm

This is an interesting piece on 30 year swap spreads by my friend and former colleague Steve Liddy. I am reproducing the graphs which he includes but they do not translate well to my low rent retired guy hobby blog. That is entirely my fault and not his.

 

Via Steve Liddy:

When Lehman Brothers collapsed, in 2008, and the rate markets plunged long end swap spreads collapsed with them. Previously swapped hedges, with a  then bankrupt entity had to be reset, in a market where risk tolerance and balance sheet usage were being taken away, then by the banks themselves. Add to that the increased long end UST issuance needed to fund the various government bailout programs and you had yourself all time low 30y swap spreads. In the process of this wave of receiving, the friendly neighborhood RV hedge fund got stopped out on all the ‘cheap balance sheet’ trades that had consistently paid out a nice annuity. And, well the mortgage player…we all know…so no natural long end payor.

Twice since there have been periods where long end spreads rallied sharply:

-In ’09 with the announcement of QE1, that was short lived as ‘traders’ all believed all that liquidity would cause an inflationary nightmare, and were taken to task once the extreme FED actions did not lead the economy back..oh yeah, that euro crisis
-So, for 2yrs, roughly between 2/2010 and 2/2012 Bond spreads bounced around between -20 and flat
-Then in early 2012 the Op Twist talk began, officially becoming policy in 9/2012 and the heavy long end buying continued with QE3, until finally ending in 10/2014
-Since then swapped corporate issuance, Asset-Liability receiving needs and nobody to take the other side drove swap spreads to the recent all-time lows
-Along the way, RV funds did dip toes in the water attempting to buy Strips and Long End paper on asset swap, but they were simply not ever really able to force a true move wider

Well, now with elections results making the idea of a more aggressive FED, and possible inflationary pressures (forgive me while I laugh..inflation..so funny-unless you’re sending a kid to college) rates are backing up…at a time when the world is long a ton of fixed income, especially long end IG. Well here’s the problem, now regulatory issues prevent The Street from warehousing any large inventories, so how is a poor asset manager going to shed their duration? Could there be a new natural payor here? Watching the ultra-bond contract get pummeled has left the low coupon 2045/46 sector in tough spot. Liquidity is poor, DV01s are big and screen bids seem to be good for 5. Oh yeah..its year end, so that should toss a little gas on this fire.

If I were seeing selling, I’d be paying in swaps, even here at the recent ‘wides’. Every duration survey known to man has accounts long their IG bogey, and that has spilled over into duration. They can’t sell bonds..at least not that many bonds until ‘The Donald’ and his people come in and change the rules.

30y swap spreads

3.00% 11/45 vs spot 30y swaps…I still think this will be the out…maybe Mr RV comes back?

Good luck and enjoy the evening…Steve

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FX

December 15th, 2016 7:50 am

Via Mark Chandler at Brown Brothers Harriman:

Greenback Extends Gains on Back of Fed

  • The Federal Reserve delivered the widely expected hike yesterday; Yellen made two important points that ought not to be lost
  • The SNB kept policy steady and repeated its usual threat to intervene; the Norges Bank surprised many by leaving its rate path unchanged
  • The Bank of England is ahead and no change is expected in the neutral bias
  • Bank Indonesia and Bank of Korea both kept rates steady, as expected
  • Peru central bank also expected to keep rates steady; Banco de Mexico is expected to hike rates

The dollar is broadly firmer against the majors after the FOMC decision.  The Norwegian krone and sterling are outperforming, while the yen and Kiwi are underperforming.  EM currencies are mostly weaker.  RUB and TRY are outperforming, while ZAR and MXN are underperforming.  MSCI Asia Pacific was down 2%, even with the Nikkei up 0.1%.  MSCI EM is down 1.6%, with Chinese markets falling 1.1%.  Euro Stoxx 600 is up 0.3% near midday, while S&P futures are pointing to a higher open.  The 10-year UST yield is up 6 bp at 2.63%.  Commodity prices are mixed, with Brent oil up 0.8%, copper down 0.3%, and gold down 1.1%.

The Federal Reserve delivered the widely expected hike yesterday.  A year ago, it suggested four hikes in 2016 were likely appropriate.  The market never accepted that, and as the year progressed many derided it.  Yesterday the Federal Reserve’s projections anticipated three hikes next year instead of the two that were anticipated in September.  

The distribution of the forecasts illustrates what happened.  In September, 7 of the 17 members expected Fed funds would finish 2017 in the 1.25%-1.50% range or higher.  Yesterday, 11 did.  In September, 10 members expected that Fed funds would finish 2017 in the 1.0%-1.25% range or lower.  Now 6 do.  

Yellen made two important points that ought not to be lost.  First, she noted that the change in the median forecast was small and was the result of a few members changing their forecasts.  Second, and arguably more important, some (but not all) of the participants incorporated changes in fiscal policy.  This gives meaning to the old saw about a camel being a horse made in committee.  We did not anticipate a change in forecasts based on fiscal policy that is impossible to make judgments on yet.    

What changed in the market’s reaction function is that the rise in US rates was an adjustment in the real rate.  That is to say that it appears that inflation expectations did not change.  Here we measure inflation expectations by the 10-year breakeven rate (inflation-linked bond yield vs. the conventional bond yield).  For example, the 10-year US yield is up 14 bp on the week while the 10-year break-even is down three basis points this week.  

There are several other developments today, though the dollar’s rally and bond sell-off appear driven by the Fed.  Equity markets are more mixed, with Asia following the US lower, and Europe is mostly moving higher.

First are the central banks.  The Swiss National Bank kept policy steady and repeated its usual threat to intervene.  It appears that it will accept some modest franc appreciation.  Norway’s Norges Bank surprised many by leaving its rate path unchanged.  Many had expected that although there would be no change in policy, the central bank would lower the rate path due to the krone’s strength.  However, officials seemed more concerned about financial excesses and real estate prices.  The krone is the only major currency not to have fallen against the dollar today.  The Bank of England is ahead.  No change is expected in the neutral bias.  Of note sterling and interest rates are higher than when the MPC last met.  

Second are the economic reports.  There are three to note.  Australian reported stronger than expected labor data, even though the unemployment rate rose to 5.75 from 5.6%.  The participation rate rose more (64.6% from 64.4%).  The 39.1k net new jobs created were all full-time positions, and the October series was revised higher.  The Australian dollar is faring second best among the majors today, off 0.2% as it dips below $0.7400.  Initial support is pegged near $0.7370.  

The flash eurozone PMI composite was, as expected, unchanged at 53.9.  The three-month average is 53.7, which is the highest since Q4 15.  It suggests Q4 growth is firm around 0.4%.   The details are interesting.  Manufacturing jumped to 54.9 from 53.7, but services unexpectedly fell to 53.1 from 53.8.  This is clearly a function of something in Germany.  France’s manufacturing and service reading were both above expectations, finishing a difficult year on a firm note.  

Elsewhere, we note that the details of the TLTRO will be released.  The average take-down of the first two was about 32.5 bln euros.  The amount is seen as generally disappointing.  The Greek government claim to use its overshoot on the primary budget surplus target to make an extra pension payment and ease the sales tax in the islands hit by the refugee crisis brought a strong rebuke from the ESM.  This pressured Greek assets.  Today’s reports suggested that France was breaking from the ESM to side with Greece.  

The euro has fallen two cents from yesterday’s high.  Last year’s low was set in late March just below $1.0460 and the lowest since 2003.  There is little on the charts until we get closer to $1.0075 and then the psychologically important $1.00.  A move now back above $1.0550 would likely signal a consolidative phase.  The US two-year premium over German has jumped to 2.05%.  Many will only see the Fed’s hand in this, but look closer, and you’ll see that the German two-year yield fell to new record lows near minus 80 bp.  The adjustments to the securities lending program by the ECB and Bundesbank have not been sufficient to ease the pressure in the repo market.  Year-end considerations exacerbate this pressure.  

Rising US yields are lifting the greenback against the yen.  It has approached JPY118.50, the highest since last February.  It dipped briefly below JPY114.80 yesterday.  There is little chart resistance until the JPY120 area.  Europe has extended Asia’s advance.  In the two weeks through last Friday, foreign investors bought about JPY680 bln of Japanese equities and JPY1.39 trillion of Japanese bonds.  Much of the equities are likely on a currency-hedged basis.  The bonds may be financed in the cross-currency swap market rather than in the spot market.

Bank Indonesia kept rates steady at 4.75%, as expected.  CPI inflation accelerated to 3.6% y/y in November after the trough of 2.8% in August.  This remains in the bottom of the 3-5% target range, but is the highest rate since April.  BI last cut rates 25 bp in October but stood pat in November.  Rising global uncertainties should keep the bank on hold for now.

Bank of Korea kept rates steady at 1.25%, as expected.  CPI inflation was steady at 1.3% y/y in November.  While still below the 2% target, it is the highest rate for the year.  In light of domestic political uncertainty and heightened external risks, we think the BOK will remain on hold for the time being.  Last move was a 25 bp cut in June.  While the BOK noted downside risks to the economy have increased, we think rising price pressures will likely prevent it from easing near-term.

Banco de Mexico is expected to hike rates 25 bp to 5.5%.  However, the market is split.  Of the 25 analysts polled by Bloomberg, 17 see a 25 bp hike, 7 see a 50 bp hike, and 1 sees no hike.  We see a decent chance of a 50 bp move.  November CPI rose 3.32% y/y, the highest since December 2014 and above the 3% target for the second straight month.  PPI ex-oil rose 7.87% y/y while headline PPI rose even more (8.4% y/y).  It seems that the inflation pass-through is really starting to bite and will require Banxico tightening next year as well.

Peru central bank is expected to keep rates steady at 4.25%.  CPI rose 3.3% y/y in November, and remains above the 1-3% target range.  Easing won’t be seen until next year, if at all.  Indeed, it will be generally hard for EM central banks to be cutting rates while the Fed is raising them, even is domestic price pressures ease.    

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Irrational Exuberance Redux

December 14th, 2016 1:48 pm

Via Robert Sinche at Amherst Pierpont Securities:

The DJIA 14-day RSI touched 85 earlier this morning, the highest 14-day RSI since late November 1996. Interestingly, Former Fed Chair Greenspan discussed “irrational exuberance” in a speech delivered December 5, 1996, about 10 days after that high in the 14-day RSI.

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Data Points Analyzed

December 14th, 2016 9:30 am

Via TDSecurities:

US: Downbeat November Retail Sales Balanced By Firming Producer Price Pressures

 

·         Retail sales registered a weak 0.1% increase in November, missing expectations for a 0.3% rise. Paired with downward revisions to October, the figures leaving Q4 real consumer spending tracking on a more downbeat note though still consistent with a healthy 2%+ pace, held in place of strong consumer fundamentals.

 

·         Details of the report were more positive than the topline figures suggest. Declines were concentrated in only a few categories (motor vehicles, sporting goods, and department stores) while increases were widely spread elsewhere. To some extent, the subdued November sales may reflect a payback from the strong sales gains recorded in September and October. Owing to the November weakness as well was the underperformance of nonstore retail category (which incorporates online spending) despite rosy reports on Black Friday online shopping. If anything, the bounce expected for online retail sales (10% of overall sales) could be more of a December story.

 

·         The weaker than expected retail sales report came alongside an upbeat PPI report, which posted a strong 0.4% m/m increase on the back of continued firming in core goods prices and a jump in trade margins. With the Fed decision just a few hours away, market reaction was neutral. In our view, today’s report offer little implications to the December FOMC meeting, which is expected to lift rates by 25bps but maintain the dovish status quo.

Details: Retail sales rose 0.1% in November following a downwardly revised 0.8% rise in October (previously reported 0.8%). As expect, motor vehicle sales gave a negative contribution (-0.5%) in line with the marginal slip in unit auto sales to 17.8m units vs 17.9m, while gasoline station receipts posted a modest lift on the back of higher gasoline prices. The downside surprise can be traced to abrupt declines in sporting goods and miscellaneous store retailers as well as an unusually weak internet sales (nonstore retail). Clothing store sales also came in flat.  The remaining categories recorded increases but on balance not strong enough to offset the weakness elsewhere.

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Gundlach Posits 3 Percent 10 year ion 2017

December 14th, 2016 5:22 am

Via Bloomberg:

Gundlach Says 10-Year Treasuries Topping 3% Would Punish Markets

by

John Gittelsohn
  • Manager says U.S. stocks, bonds and housing could suffer
  • DoubleLine fund has beaten 90% of peers over last three years

Jeffrey Gundlach, chief investment officer of DoubleLine Capital, said interest rates may climb to 3 percent on 10-year Treasuries by next year as deficits and inflation rise under a Donald Trump presidency, a move that would hurt markets.

Gundlach, who has called the president-elect’s policies bond unfriendly, said the effects would be felt across the U.S. economy. The benchmark Treasuries are currently trading at close to 2.5 percent.

“We’re getting to the point where further rises in Treasuries, certainly above 3 percent, would start to have a real impact on market liquidity in corporate bonds and junk bonds,” Gundlach said Tuesday during a webcast presentation on his DoubleLine Total Return Bond Fund. “Also, a 10-year Treasury above 3 percent in my view starts to bring into question some of the aspects of the stock market and of the housing market in particular.”

The Federal Reserve is expected to raise its Fed Funds rate by 0.25 percent on Wednesday for the first time this year and only the second time since the 2008 financial crisis. Gundlach said on the webcast that he will be looking after the meeting for signs that Fed members are growing inclined to raise rates more aggressively in the next couple of years as the economy heats up.

Gundlach’s $58.3 billion DoubleLine Total Return Bond Fund returned 1.9 percent this year through Dec. 12. Investors pulled $1.4 billion from the fund in November, the Los Angeles-based firm said on Dec. 2, as rates climbed following Trump’s Nov. 8 win. The fund, which invests mostly in mortgage-backed securities, has beaten 90 percent of its Bloomberg peers in the last three years and 93 percent over five years.

Gundlach said on Tuesday’s call that he has increased the average duration of holdings in his fund as rates have risen since July, while still holding debt with a shorter duration — and lower risk — than the benchmark Bloomberg Barclays U.S. Aggregate bond index.

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Au(ch)

December 14th, 2016 4:17 am

Via Bloomberg:

Gold Beaten Down as Fed’s Rate-Hike Countdown Enters Final Hours

by

Ranjeetha Pakiam
  • Fed seen boosting interest rates for the first time this year
  • Bullion is worst commodity performer after sugar this quarter

Gold traded near a 10-month low before an interest rate decision from the Federal Reserve, with investors expecting policy makers led by Chair Janet Yellen to deliver the central bank’s first hike of the year just as U.S. equities power to records.

Bullion for immediate delivery was at $1,159.97 an ounce at 1:49 p.m. in Singapore from $1,158.54 on Tuesday, when prices fell for the third time in four days, according to Bloomberg generic pricing. The metal sank to $1,151.44 on Monday, the lowest since February, as fund holdings shrank.

Gold has been battered in the final quarter of the year, and is the worst performer after sugar on the Bloomberg Commodity Index, as the Fed gears up to tighten and on growing optimism that a Donald Trump presidency will spur growth. The S&P 500 Index and the Dow Jones Industrial Average are at all-time highs, providing an alternative to non-interest bearing bullion. A gauge of the dollar is near the highest since at least 2005.

“Gold is going to be the least likely candidate for investors to put their money into among all the commodities in 2017,” Bob Takai, chief executive officer and president of Sumitomo Corp. Global Research Co., said by phone from Tokyo. Prices may trade between $1,050 and $1,250 next year, although bullion may get support from any geopolitical tensions arising from Trump’s diplomatic and foreign policies, according to Takai.

Holdings in exchange-traded funds are spiraling lower with prices, contracting for a 23rd straight day as of Tuesday in the longest losing stretch since May 2013. The assets fell 1.1 metric tons to 1,830.6 tons, the lowest since June, data compiled by Bloomberg show.

‘Stumbling Block’

“The strong dollar, rising interest rate is definitely going to be a very big stumbling block for the gold price,” said Takai. “Maybe people want to buy crude oil and base metals, which are going to be benefited by fiscal policy by China and fiscal policy of the U.S.”

While the rate increase may hit bullion initially, gold could still perform well if real interest rates remain low. The Fed’s previous hiking cycle took place from June 2004 through June 2006, when it increased by 25 basis points 17 straight times. Gold climbed those three years. It also surged in the first half of 2016 in the wake of last year’s inaugural rate increase.

Views differ on the outlook. Singapore-based Oversea-Chinese Banking Corp., the most accurate bullion forecaster tracked by Bloomberg in the third quarter, said last week that it expects lower prices in 2017 as the Fed delivers two additional rate increases.

For the bulls, Commerzbank AG has forecast prices may rise to $1,300 by the final quarter of next year and $1,400 in 2018 on low real rates and increased demand, with additional upside from potential global upsets. The London-based manager of the Old Mutual Gold & Silver Fund expects gold will strengthen as the Fed fails to increase rates fast enough to keep up with inflation.

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