A daily bond market chronicle
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2016 is 1.9 percent on October 14, down from 2.1 percent on October 7. The forecast of third-quarter real personal consumption expenditures growth fell from 2.9 percent to 2.6 percent after this morning’s retail sales report from the U.S. Census Bureau.
Via Stephen Stanley at Amherst Pierpont Securities:
The PPI was firmer than I had expected in September, rising by 0.3% total and 0.2% core (in both cases, one tenth above consensus and two tenths above my estimates). As you know, there are few categories where the PPI numbers correlate well with the current month’s corresponding CPI figures, but this report is worth discussing a little anyway. First, wholesale food prices were firmer than I had anticipated in September, rising 0.5% after falling by more than a full percentage point in both July and August. It appears that the slide in food commodity prices (fruits and vegetables, meats, dairy, etc.) may be winding down. For most of these categories, the CPI results tend to lag the PPI figures by a month or two, so this does not necessarily have significant implications for the September CPI but it could be meaningful in October and beyond. Second, when the core PPI is higher than expectations, I typically look to the “wholesale trade services” and “retail trade services” categories, which account for nearly a quarter of the core (and gauge profit margins of wholesalers and retailers, which are NOT prices, but that is a rant for another day!). However, in September, retail trade services fell by 0.9% so that the combined contribution of these two categories to the core was a full tenth lower than I had expected. This means, of course, that for the rest of the core (i.e. the pieces that actually measure prices rather than profit margins), the results were three tenths higher than I had anticipated. The breakdown points to some real price pressure bubbling up. Prescription drugs prices surged yet again, a phenomenon that is highlighted regularly in the newspaper. Apparel prices increased again at the wholesale level, which is a telltale sign that the deflationary impact of the past appreciation of the dollar has fully worn off. There is a long list of other categories, both goods and services, that posted significant advances in September.
None of this makes much of a difference for the September CPI. I still look for a 0.3% increase in the headline figure, driven by a seasonally adjusted rise in gasoline prices. Meanwhile, the core CPI may have advanced by 0.2% last month. I don’t have anything crazy going on in my core CPI forecast, but steady rises in many of the services categories mean that 0.2%’s, not 0.1%’s, will be the norm going forward. Education costs may have rebounded in September after coming in flat in August (with a rare outright decline in seasonally adjusted tuition).
There are also a handful of services categories within the core PCE deflator where the BEA uses the PPI figures instead of the CPI numbers. All in all, these PPI figures pointed to pretty firm inflation readings for the corresponding PCE results. Hospital charges are likely to be up, airfares appear to have rebounded on a seasonally adjusted basis, and the cost of investment services appears to have firmed.
In sum, today’s PPI numbers do not dramatically impact the immediate future (i.e. next Tuesday’s CPI release) much, but they are consistent with the notion that price pressures are beginning to accumulate and suggest that the consumer price readings may continue to be firm going forward. As I have noted, I suspect that the year-over-year PCE deflator figures, both headline and core, and going to get very close to 2% by the end of 2016.
Via TDSecurities:
US: Core Retail Sales Miss Masks Positive Details
· September retail sales rose 0.6%, in line with consensus expectations, while the August drop was revised up to -0.2% (previously reported -0.3%). Excluding autos and gas, retail sales rose a solid 0.3%, also in line with expectation, while the control group came in weaker than expected with a modest 0.1% increase.
· On the surface, the modest core print indicates a weak recovery following the declines recorded in the prior two months. However, the details of the report are more positive, with weakness seen in only a few components and relatively strong increases broadly based elsewhere.
· The September sales figures are consistent with Q3 real consumer spending near a robust 2.5% pace. Together with healthy levels of consumer sentiment and continued improvement in labor market conditions, today’s report is enough to keep a December Fed rate hike on the table.
Retail sales rose 0.6% in September following an upwardly revised 0.2% decline in August (previously reported -0.3%). Fueling the gains as expected were motor vehicle sales (+1.1%), presaged by the pickup in light weight vehicle sales, and gasoline stations (+2.4%), helped by higher gasoline prices. Similarly strong increases were recorded for furniture/home furnishings, building materials, sporting goods and food services/drinking places, leading retail sales (excluding auto and gas) up a solid 0.3% in September. The nonstore retail component (which includes online sales) also rebounded firmly by 0.3% after recording a decline in August (its first drop in over a year).
The control group (retail sales excluding auto, gas, building materials, food services) eked out a 0.1%, indicating a weak rebound following two consecutive monthly declines. However, the softer than expected read was largely driven by declines in only a few components, notably electronics/appliances, department stores, and health/personal care stores, and a flat print on clothing/accessories. Otherwise, increases were broadly based with strong gains in several categories, as described above.
Overall, the details of the report are more positive than what the modest print on core sales suggests. Moreover, the sales figures are consistent with Q3 real consumer spending near a 2.5% pace. Together with healthy levels of consumer sentiment and continued improvement in labor market conditions, today’s report is enough to keep a December Fed rate hike firmly on the table.
Via Marc Chandler at Brown Brothers Harriman:
The dollar is mostly firmer against the majors ahead of US retail sales data. The dollar bloc is outperforming, while the yen and Norwegian krone are underperforming. EM currencies are mixed. THB and MYR are outperforming while SGD and the CEE currencies are underperforming. MSCI Asia Pacific was up 0.2%, as the Nikkei rose 0.5%. MSCI EM is up 0.7%, with Chinese markets up 0.1%. Euro Stoxx 600 is up 1.4% near midday, while S&P futures are pointing to a higher open. The 10-year UST yield is up 3 bp at 1.77%. Commodity prices are mixed, with oil up 1%, copper down 0.3%, and gold down 0.4%.
The US dollar is firm against most of the major currencies but remains within yesterday’s ranges, which seems somewhat fitting amid the light new stream. The high-yielding Australian and New Zealand dollars are resisting the stronger greenback, while on the week the Aussie and the Canadian dollar are the only majors to gain.
After recovering from $1.2130 to $1.2270, sterling ran out of steam. Near $1.22, it is off about 1.8% this week after last week’s 4.2% drop. It fell at the start of the week but has been consolidating within Tuesday’s range (~$1.2090-$1.2375). Today’s August construction figures were weaker than expected at 1.5% on the month. The median expectation was for a flat report for the second consecutive month. The fact that the July series was revised up to 0.5% offered sterling little consolation.
Sterling is not the weakest of the majors. The Swedish krona has the flag position. It is off a little more than 2% against the dollar this week, including about nearly a quarter percent slippage today. News this week has played on fears that the economic recovery will falter before the inflation cycle can catch up. CPI figures surprised on the downside this week after the previous week’s industrial and service production, and forward-looking industrial orders were all disappointments.
Ahead of the US retail sales report, the main economic news has been Chinese prices, where the surprise was on the upside. Consumer prices rose 1.9% in the year in September after a 1.3% rise in August. The Bloomberg median forecast was 1.6%. Food prices are still an important driver, rising 3.2%. Non-food consumer prices rose 1.6%.
More noteworthy was the fact that producer prices turned positive for the first time since 2012. The 0.1% year-over-year increase follows a 0.8% decline in August. The Bloomberg median forecast was for a 0.3% decline. This is important, especially after yesterday’s unexpectedly weak exports. Some fear increased risks that China will seek to export deflation. The higher than expected inflation readings may keep such anxiety at bay (for the moment).
That said, we note that as the onshore yuan played catch-up with the offshore yuan after last week-long holiday. Recognizing the US dollar’s strength, the yuan is recording its largest weekly loss since January. At the start of the year, it will be recalled that Chinese developments were still shaping the investment climate and risk appetite. Chinese stocks rose 2.0%-2.5% this week.
The MSCI Asia-Pacific Index fell 1.7% this week but snapped a five-day losing streak today with a 0.2% gain. The biggest move in the Asian markets today was the 4.5% rally in Thailand, the biggest in three years. Markets are pricing in a smooth transition following the death of the King, as the military assures stability. Today’s gains still leave the main index off 1.8% for the week.
European bourses are higher, led by the financials. The Dow Jones Stoxx 600 is up nearly 1.0%, poised to break a three-day slide. The financials are up 1.5%, and Deutsche Bank shares have recouped yesterday’s 2% drop. It has quietly strung together its third weekly advance.
The euro briefly dipped below $1.10 yesterday. Although there has been no follow-through selling today, it has not been able to distance itself from that threshold. There was no follow-through buying either after yesterday’s recovery. A nearby cap has been formed in the $1.1060-$1.1070 area, ahead of the prior support at $1.1080. The trendline that connects the January, June, and July lows was violated earlier in the week. It comes in near $1.1035, and a violation on the weekly charts is thought to have greater significance than only on the daily charts.
Benchmark yields are higher. European bond yields, except for Portugal, are 1-2 bp higher. Portugal’s yields have fallen 5 bp on the day and 12 bp on the week as comments from the finance ministry seemed to ease concern about DBRS review in a week’s time. It is the only one of the four rating agencies that the ECB accepts that regards the country as investment grade. There has been concern that it could lose it. We suspect that at most, DBRS will change the outlook from stable to negative.
UK 10-year gilts were flat coming into today, but the yield is up six basis points. It is the third weekly increase in the UK 10-year yield and sixth of the past seven weeks. During this seven-week run, the 10-year yield has risen from 56 bp to 1.08%.
The US 10-year yield is up three basis points on the day. At 1.78% it is still a couple of basis points below the multi-month high set in the middle of the week. Much rests on the US retail sales report. It is not good enough that more Americans are working a slightly longer week, and getting paid a little more. Households need to consume. Retail sales are around 40% of overall consumption.
After a poor August, Americans are believed to have gone shopping again in September. The headline may be flattered by stronger auto sales and higher gasoline prices. The key, however, is the GDP measure which excludes those two items and others goods, like building materials. After falling for two months, it is expected to rise around 0.4%.
The US reports PPI at the same time as retail sales. Markets are less sensitive to it. However, the takeaway, which will likely be underscored next week, is that US price pressures are building. This is not a “sky is falling” call, just simply point out a gradual trend. It may not yet be fully reflected in the University of Michigan’s inflation expectations measure. The August business inventories will also be incorporated into GDP trackers and forecasts.
From the Fed, Yellen and Rosengren speak at a Boston Fed Conference. Rosengren dissented in favor of an immediate hike. The market is more sensitive to the Chair’s remarks, but she may not address monetary policy in her opening remarks. But we’ll be watching.
Singapore reported advance Q3 GDP growth at 0.6% y/y vs. 1.7% expected. On a seasonally adjusted annualized basis, GDP contracted -4.1% vs. the flat reading that was expected. The MAS kept policy steady, as expected. It maintained its aim for no appreciation of its S$NEER trading band, and appears to be keeping its powder dry in case the economy slows further in 2017. Indeed, it noted that “Growth in the Singapore economy weakened and is not expected to pick up significantly in 2017.” Singapore also reported August retail sales, which came in at -1.0% y/y vs. +0.8% expected.
Colombia central bank releases its minutes. Minutes will be studied for clues about potential easing. CPI rose 7.3% y/y in September, lower than expected and the lowest since December 2015 but it remains well above the 2-4% target range and should preclude any easing near-term. The central bank has been on hold at 7.75% since its last 25 bp hike back in July. The next policy meeting is October 31, and no action is seen. We think the easing cycle will likely begin in Q2 2017.
Via WSJ:
By Rachel Louise Ensign
Updated Oct. 13, 2016 3:52 p.m. ET
Business lending abruptly downshifted in the third quarter, a puzzling move that may weigh on upcoming bank earnings.
For some time, business loans, also known as commercial and industrial loans, have been one bright spot for otherwise growth-starved banks, both large and small. But such lending fell by 0.1% in the third quarter, Federal Reserve data show.
Although small, the contraction from the prior quarter is the first such drop in six years, according to Morgan Stanley. That could drag on third-quarter bank earnings growth. Bank results are generally expected to be solid if not exciting. The biggest banks, such as J.P. Morgan Chase & Co., begin reporting Friday and into early next week; regional banks will report results over the next few weeks.
Possibly offsetting the drop-off: Other types of loans—including commercial real estate, mortgages and credit cards—grew in the quarter from the prior quarter, according to Fed data.
Bankers are hoping the sudden lurch in business lending is a blip. One point in their favor: the drop came shortly after Britain voted to leave the European Union, roiling markets and denting business confidence. After late August, business loans outstanding started recovering. Indeed, year-over-year growth rates for business loans remain positive, and that also rose through September.
So far, bankers are cautious and perplexed. “We see it slowing down over the course of the quarter, we don’t know why,” U.S. Bancorp Chief Executive Richard Davis said of commercial lending at his bank’s investor day in September. “Is it affected by the pending election? Is it because of the Brexit? What is it?”
BB&T Corp. Chief Executive Kelly King in September attributed the slowdown to anxiety that may dissipate after the election. Mr. King says some of his clients have “trucks with 250,000 miles, 300,000 miles” and “20-year-old computers” but aren’t investing in upgrades because of uncertainty about the future.
Other bank executives have hypothesized that seasonal changes in car dealership borrowing and less demand from energy companies may also be factors.
“You hear a lot of different anecdotal answers from customers,” Grayson Hall, the chief executive of Birmingham, Ala.-based Regions Financial Corp. , said in September, “Anyone’s guess is as good as mine.”
A drop in this type of lending, which consists of banks’ non-real-estate loans to businesses, adds to banks’ profitability woes. Overall bank profits have been under pressure for some time thanks to the lackluster economic recovery and superlow interest rates.
The gloomier scenario is that the business-lending metric is a sign of a broader economic slowdown that lasts beyond the quarter, said Barclays PLC analyst Jason Goldberg.
That could have further-reaching consequences, especially when it comes to the Federal Reserve and its next move on interest rates. Last December, relief seemed to be in sight for banks when the Fed raised rates and said it expected to continue hikes in 2016.
Such a move could be expected to boost banks’ net-interest margins, or the profit margin they make by borrowing money from depositors and lending it out. But a further Fed increase has failed to materialize.
Until the Fed does so, banks must rely on loan growth to try to increase net interest income. Double-digit rates of commercial-loan growth in recent years helped with that effort.
The stall in commercial lending growth has prompted analysts to cut earnings expectations for some lenders. Morgan Stanley, for instance, last week trimmed estimates for the third quarter and 2017 for a number of banks including Comerica Inc., KeyCorp and Zions Bancorp.
Individual banks’ loan growth often deviates from the broader Fed data, but many of the large U.S. lenders have also forecast a slowdown in these loans. Bank of America Corp. , for instance, said loan growth had moderated in the third quarter because of less mergers and acquisitions activity and companies tapping less of their available lines of credit.
Via Bloomberg:
China’s factory-gate prices rose for the first time since 2012, relieving a source of global disinflationary pressure and indicating further stabilization in the world’s second-largest economy.
Years of deflation for China’s factories has abated as global commodity prices recover and domestic demand stabilizes on the back of past stimulus. Given a close link between the country’s factory-gate costs and its export prices, the swing to positive may ease disinflationary pressures in Europe, the U.S. and other big buyers of China’s wares.
“It is a very good sign,” said Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole. “It tells us that the profitability of Chinese companies is likely to continue to increase.”
“The end of PPI deflation is a good signal for the economy’s stabilization,” said Gao Yuwei, a researcher at Bank of China in Beijing. “PPI is expected to be remain expansionary in the coming months.”
Iris Pang, senior economist for Greater China at Natixis SA in Hong Kong, said the pickup in factory prices was driven by gains in coal and copper prices amid a government push to scale back overcapacity. But to keep prices in positive territory, authorities will need to shake up the steel sector next, which will likely prove more difficult, Pang cautioned. “Cleaning up small coal factories is easier than cleaning up steel factories,” she said.
Zhu Qibing, chief macro economy analyst at BOCI International (China) Ltd. in Beijing, said the PBOC should be vigilant on potential inflation, and the room for further easing is limited.
Via Kit Juckes at SocGen:
The world still in a spin, as the man wo sounded as though he had a permanently sore throats all those years ago. Sterling, of course, isn’t so much in a spin as in a dive. Tombstoning, FX style. A switch from a necessary and ultimately helpful fall in sterling’s value, led by downgraded growth and interest rate expectations, is threatening to become a more toxic move, led by a sharp jump in risk premia. If the risk premium on UK assets goes up, it goes up for gilts, equities and sterling together; a full breakdown in current correlations between these assets isn’t some kind of theoretical risk now. Chinese inflation data grabbed the overnight headlines, PPI +0.1 y/y, CPI +1.9. Higher oil, commoduity and food prices, and a weaker Yuan, are all doing their thing. The government has bought some growth too, though the sense that they’ve paid up for it is inescapable. Still, they’ve also bought positive newsflow and have regained control over poolicy. The yuan’s not weaker today but it does provide an Asian bias for softer currencies at the same time as the positive inflation data provide a supportive backdrop for risk sentiment. Which in G10 FX-land means USD/JPY is above 104 and if we get decent US retail sales this afternoon, we can make a push towards 105. It’s a slow move, but it is going in the right direction. The US retail sales data are the only big event on the calendar. We expect a 0.7 headline gain, 0.5 ex autos and that keeps the underlying trends intact. The US economy trundles on, a Dec rate hike is on the cards and bond investors are fatigued. As long as the bond sell-off is limited in scale and speed (so far, so good and there are limits to how high yields can get) it’s good for the dollar. As for the FX weekly, The Timees they are a changin’…. <http://www.sgmarkets.com/r/?id=h1185843b,189cd915,189cd916&p1=136122&p2=ef3121549449c95d77370d7b2878e3c2>
Bob Dylan once warned “writers and critics who prophesize with your pen” to keep their eyes wide open and not to speak too soon because the world’s still in a spin. That’s probably sound advice, but as the dollar recoups half of its post-January fall, we should recognise the battle raging between Fed rate expectations driving the dollar up and the threat that dollar strength scares investors (again).
[http://email.sgresearch.com/Content/PublicationPicture/234067/1]
Volatility – Hawkish Fed vibes have seen EUR/USD break its yearly trend. The market should now eye the next supports towards the bottom of the range at 1.0820 and 1.0530. Since January, the EUR/USD has essentially been driven by the S&P realised volatility, while US short rates explain it only when the influence of equity volatility is removed. Fed fears mean higher yields and vulnerable US equities (strong negative correlation), which implies higher S&P volatility. This leads to a lower EUR/USD. Buy a EUR/USD 2m European digital put, strike 1.0750 KO 1.0450. This option sells the expensive volatility and generates 10x leverage with risk limited to loss of premium.
[http://email.sgresearch.com/Content/PublicationPicture/234067/2]
Technicals – Near term, the Dollar Index is heading towards potential of an inverted H&S and graphical level at 98.50, which will be an intermittent hurdle. The USD/SEK is piercing above a descending trend drawn since 2009 and now probing last year’s highest levels of 8.89/8.92. Short term indicators are a bit overstretched, highlighting the possibility of a pause.
[http://email.sgresearch.com/Content/PublicationPicture/234067/3]
Quant The static SG Sentiment indicator has dropped into the risk-averse area. The SG Quant Fund remains long in carry and EM currencies. The biggest longs are in AUD, NOK and BRL. The most sizeable shorts are in SEK, EUR and ILS.
[http://email.sgresearch.com/Content/PublicationPicture/234067/4]
Via Bob Elson at Bloomberg:
IG CREDIT PIPELINE: EDC to Price Global 5Y
2016-10-14 09:24:53.860 GMT
By Robert Elson
(Bloomberg) — Expected to price today:
* Export Development Canada (EDC) Aaa/AAA, to price $1b Global
5Y, via managers Barc/CA/HSBC/TD; guidance MS +21 area
LATEST UPDATES:
* Korea Hydro & Nuclear Power (KOHNPW) Aa2/AA, mandates BNP/C
for investor meetings Oct. 18-20
* Enersis Americas (ENRSIS) Baa3/BBB, mandates
BBVA/C/JPM/MS/SANTAN for roadshow Oct. 17-19; intermediate
maturity deal expected to follow
* International Finance Corp (IFC) Aaa/AAA, to market 5Y
inaugural Forest Bond, via BNP/BAML/JPM; at least $75m may
price week of Oct. 24
* Hyundai Capital Services (HYUCAP) Baa1/A-, to hold investor
meetings from Oct.17, via C/HSBC/Nom
* Kingdom of Saudi Arabia (SAUDI), to hold investor meetings
Oct. 12-18, via C/HSBC/JPM along with BoC/BNP/DB/GS/MS/MUFG;
144a/Reg-S 5Y/10Y/30Y deal expected to follow
* Sirius International Group (SIRINT) na/BBB/BBB-, has
mandated AMTD/BoC/C/JPM/WFS for 144a/Reg-S USD bond; last
issued in 2007
* Honeywell (HON) A2/A,announced a possible 4Q debt
refinancing in its guidance release Oct. 6
* May consider refinancing 2018, 2021 bonds, BI says
* Darden Restaurants (DRI) Baa3/BBB, filed debt shelf, last
seen in 2012
* Darden announced a new $500m share buyback program in
its 1Q earnings release
* Yes Bank (YESIN) Baa3/na, plans to raise $500m by year’s end
* Republic of Namibia (REPNAM) Baa3/BBB-, to hold non-deal
investor meetings Oct. 7-13, via Barc/JPM/StanBk
* ICBC NY Branch (ICBCAS) A1/A, hires BNP/BAML/C/WFS for
investor meetings Oct. 11-14; USD $benchmark issue expected
to follow
* Asciano (AIOAU) Baa3/BBB-, names ANZ/BNP/Miz for investor
meetings Oct. 10-28; it is a non-deal roadshow; last priced
a USD deal in 2011
* Western Union (WU) Baa2/BBB, filed debt shelf; last issued
Nov. 2013 following Oct. 2013 filing
* Nafin (NAFIN) A3/BBB+; mandates BofAML, HSBC for investor
meetings Sept. 27-28; USD-denominated deal may follow
* Analog Devices (ADI) A3/BBB; ~$13.1b Linear Technology acq
* $5b loan received after $11.6b bridge (Sept. 26)
MANDATES/MEETINGS
* HollyFrontier (HFC) Baa3/BBB-; investor calls Sept. 15-16
* Banco Inbursa (BINBUR) –/BBB+/BBB+; mtgs Sept. 7-12
* Woolworths (WOWAU) Baa2/BBB; investor call Sept. 7
* Sydney Airport (SYDAU) Baa2/BBB; investor calls Sept. 6-7
* Korea National Oil (KOROIL) Aa2/AA; meetings from Sept. 6
* Industrial Bank of Korea (INDKOR) Aa2/AA-; mtgs from Aug. 22
* Sumitomo Life (SUMILF) A3/BBB+; investor mtg July 19
M&A-RELATED
* Bayer (BAYNGR) A3/A-; ~$66b Monsanto acq
* Hybrid bond sales planned; part of $57b bridge (Sept.
14)
* Danaher (DHR) A2/A; ~$4b Cepheid acq
* Sees financing deal via cash, debt issuance (Sept. 6)
* Couche-Tard (ATDBCN) Baa2/BBB; ~$4.4b CST Brands acq
* Expects to sell USD bonds (Aug. 22)
* Pfizer (PFE) A1/AA; ~$14b Medivation acq;
* Expects to finance deal with existing cash (Aug. 22)
* Danone (BNFP) Baa1/BBB+; ~$12.1b WhiteWave (WWAV) Ba2/BB
* Co. Says deal 100% debt-financed, expects to keep IG
profile (July 7)
* Zimmer Biomet (ZBH) Baa3/BBB; ~$1b LDR acq
* Plans $750m issuance post-completion (June 7)
* Great Plains Energy (GXP) Baa2/BBB+; ~$12.1b Westar acq
* $8b committed debt secured for deal (May 31)
* Abbott (ABT) A2/A+; ~$5.7b St. Jude buy, ~$3.1b Alere buy
* $17.2b bridge loan commitment (April 28)
* Sherwin-Williams (SHW) A2/A; ~$9.3b Valspar buy
* $8.3b debt financing expected (March 20)
SHELF FILINGS
* Starbucks (SBUX) A2/A-; debt shelf; has $400m maturing Dec.
5 (Sept. 15)
* Brunswick (BC) Baa3/BBB-; automatic mixed shelf; last issued
in 2013 (Sept. 6)
* Enbridge (ENBCN) Baa2/BBB+; $7b mixed shelf (Aug. 22)
* IBM (IBM) Aa3/AA-; automatic mixed shelf (July 26)
* Nike (NKE) A1/AA-; automatic debt shelf (July 21)
* Potash Corp (POT) A3/BBB+; debt shelf; last issued March
2015 (June 29)
* Tesla Motors (TSLA); automatic debt, common stk shelf (May
18)
* Reynolds American (RAI) Baa3/BBB; automatic debt shelf; sold
$9b last June (May 13)
* Statoil (STLNO) Aa3/A+; debt shelf; last issued USD Nov.
2014 (May 9)
* Corporate Office (OFC) Baa3/BBB-; debt shelf (April 12)
OTHER
* GE (GE) A1/AA-; Ratings cut by S&P on assumption of
increased debt for next couple of yrs on possible
acquisitions (Sept. 23)
* Israel Electric (ISRELE) Baa2/BBB-; said to hire C, JPM for
at least $500m bond sale in 4Q (Aug. 8)
* Visa (V) A1/A+; CFO says will issue $2b debt for buybacks by
yr end (July 21)
* Investment Corp of Dubai (INVCOR); weighs bond sale (July 4)
* Alcoa (AA) Ba1/BBB-; upstream entity to borrow $1b (June 29)
* Discovery Communications (DISCA) Baa3/BBB-; may revisit bond
market this yr, BI says (May 18)
* American Express (AXP) A3/BBB+; plans ~$3b-$7b term debt
issuance (April)
Via Stephen Stanley at Amherst Pierpont Securities:
Initial jobless claims continued to surprise to the downside, plumbing depths not seen in a very long time. Initial claims were unchanged in the week ended October 8 at a downwardly-revised level of 246,000, the lowest reading since 1973. The four-week average broke below 250K for the first time in 43 years. This marks a clear move to the downside, as the average in the first half of the year was 269K, a level we have not seen, even once, since June. Not that we should be shocked. When the labor market gets very tight, firms do not want to lay off anyone that they suspect they might want to re-hire at some point because chances are, they will not be available when the firm tries to call them back.
Meanwhile, the total number of people collecting benefits declined by 16K to 2.046 million, the lowest reading since June 2000. However, the workforce was smaller then. The insured unemployment rate has moved down to 1.5% (this is the 7th time at that level in total this year and the fourth week in a row) , the lowest on record (going back to 1970). That includes the 2000 period when the unemployment rate had a 3-handle. So, there may be 3 or 4 doves on the FOMC who still believe that there is substantial slack in the labor market, but the more compelling argument in my view is that we are moving/have moved into clearly tight territory, which is why wage hikes are (finally) accelerating to a pace in excess of what productivity growth and cost-of-living adjustments would dictate..
Via Marc Chandler at Brown Brothers Harriman:
Dollar Edges Higher Even as US Rates Soften
The dollar is mixed against the majors. The yen and the Swiss franc are outperforming, while sterling and Aussie are underperforming. EM currencies are broadly weaker. THB and PHP are outperforming while KRW and ZAR underperforming. MSCI Asia Pacific was down 0.7%, as the Nikkei fell 0.4%. MSCI EM is down 1.2%, with Chinese markets up 0.1%. Euro Stoxx 600 is down 1% near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is down 3 bp at 1.74%. Commodity prices are mixed, with oil flat, copper down 0.8%, and gold up 0.3%.
The US dollar is firm, and the euro has slipped below $1.10 for the first time since late-July. The dollar’s gains against nearly all the major and emerging market currencies are being attributed to the FOMC minutes, which underscored ideas that another hike was drawing near. Yet US interest rates are a lower today. Both the two and 10-year yields yesterday rose to their highest levels in four months (87 bp and 1.80% respectively). Both are now 2-3 bp lower.
The FOMC minutes suggested that understandings of the labor market were a critical issue that divided members. Yesterday’s JOLTS data in this context was not particularly helpful, as it is reported with an additional month lag behind the non-farm payrolls. The August JOLTS report showed the biggest drop in job openings year. The takeaway was that job growth is healthy, but slower. The decision to include a risk assessment for the first time since January in the FOMC statement coupled with the minutes underline that debate at the Fed is over the timing of the move, not direction.
Meanwhile, the main news today has been China’s trade balance. The $42 bln surplus was much smaller than the market had expected. The median forecast from the Bloomberg survey was $53 bln, which would have been a small increase from August’s $52 bln surplus. It is the smallest surplus since the Lunar New Year distortions that saw the trade surplus fall to $32.5 bln and $29.6 bln in February and March.
Imports and exports were weaker than expected, and this plays on ideas that the Chinese economy is continuing to slow (though other data has shown it is stabilizing). Exports fell 10% after falling 2.8% in August. Some deterioration was expected, but only about a third of what was reported. Imports fell 1.9% after rising 1.5% in August. Of note, exports to the EU fell 9.8%, and exports to the UK fell 10.8%. China may be more exposed to Brexit than generally perceived. Exports to the US fell 8.1%. Steel exports fell for the third month to stand at their lowest levels since February.
Among imports, two products stand out. First, as a new strategic reserve site went online, China’s crude oil imports reached a new record high. Second, China’s copper imports fell for the sixth month to the lowest level since February 2015. Demand slowed, and domestic output increased. Domestic smelters increased output by 8.7% to a new record (5.5 mln tons) in the year through August.
Investors have turned cautious. Equities continue to slip lower. The MSCI Asia-Pacific Index is off 0.7% for its fifth consecutive decline. The losing streak matches last month’s May and April’s run. Recall it started the year with a seven-session slide. MSCI Emerging Market equities are off 1.1%, for the third consecutive losing session.
The Dow Jones Stoxx 600 is off 0.8%. It is the third day of declines and the sixth of the past seven sessions. The weakest sector is financials, which are down twice the overall market. Deutsche Bank shares are off 2.55%, which is the biggest loss this month and is sufficient to push shares lower on the week. The losses come as the SEC fined the bank another $9.5 mln for failing to properly safeguard non-public information, while reports suggest the bank has implemented an immediate hiring freeze. Italy’s bank share index is off 1.5%.
The euro held above $1.10 in Asia after it was approached in North America yesterday. European participants took it to $1.0985 before the single currency found a bid. The $1.1040-$1.1060 offers the initial cap. The dollar initially traded at its best level against the yen since late-July near JPY104.65. However, it was sold down a big figure to JPY103.55 in Asia. It has straddled the JPY104 level in the European morning. The yen’s 0.25% gain makes it the strongest of the major today.
Sterling is consolidating its losses but remains fragile. The $1.2090 low from Tuesday continues to hold. The wide ranges seen since the “flash crash” at the end of last week may be gradually easing. So far today, sterling has been confined to about 0.8 cents. Yesterday’s range was a little more than two cents. Sterling is struggling to sustain upticks above $1.2200. Above there, sellers may re-emerge near $1.2250.
The Australian dollar is the weakest of the majors today, with a 0.25% loss through the European morning. The Chinese trade figures, news that October inflation expectations ticked up to 3.7% from 3.3% (matching the high for the year), and Fitch’s warning that a housing slump is the biggest risk saw the Australian dollar near $0.7500. Buyers emerged in late Asian activity, and Europe took it back through $0.7540. The Aussie has pulled away from the $0.7700 cap that it had repeatedly tested in vain. It may have bottomed here today (near-term view). A move above $0.7585-$0.7625 band would spur another test on the cap.
The US reports import prices and initial jobless claims. Import prices are expected to firm in September, and a rise of more than 0.2% may warn of bigger than expected rise in tomorrow’s PPI reading. That said, the retail sales report tomorrow (released at the same time as the PPI) is the more important of the two releases.
Weekly jobless claims were lower than expected last week, but it is next week’s report that coincides with the monthly survey for non-farm payrolls. The Fed’s Harker and Kashkari speak, but here too, tomorrow’s event, Yellen’s speech at a Boston Fed conference, overshadows the regional Fed Presidents.
South African prosecutors are reportedly willing to review the Gordhan decision. ZAR saw a bit of a relief rally yesterday, but has given up those gains today. While volatility is likely to remain high with each related headline, we think the bottom line is that Gordhan will eventually be forced out. Any rand bounces should be viewed as an opportunity to lighten up ZAR exposure, as we remain committed to our call for downgrades to sub-investment grade.
Banco de Mexico releases its minutes. At that September 29 meeting, it hiked rates 50 bp to 4.75%. The next policy meeting is November 17, and much will depend on how the peso is trading. The central bank is concerned with the inflation pass-through from the currency. Our base case is steady rates on November 17, followed by a hike on December 15 to match the US if the Fed hikes December 14.
Peru’s central bank is expected to keep rates steady at 4.25%. The central bank has been on hold since it last hiked 25 bp to 4.25% back in February. CPI ticked higher to 3.1% y/y in September, back above the 1-3% target range after spending one month within it. We think the tightening cycle is over, but easing is unlikely until 2017.