Philly Fed: Look Beyond the Headline

Via Millan Mulraine at TDSecurities:

US: The Philly Fed Headline Index is Misleading

·         The Philly Fed index surprised pleasantly to the upside, with the headline index rising to 4.7 in June from -1.8.

·         On an ISM basis, however, the index weakened to 46.0 from 47.6.

·         The details of the report were quite weak, with souring in sentiment towards new orders, capital investment, employment and unfilled orders.

The Philly Fed index rebounded into expansionary territory in June, with the headline index rising to 4.7 from -1.8. This was well ahead of the market consensus for a more modest rise to 1.0. However, the details of the report were quite weak. On an ISM basis, the index actually declined, falling to 46.0 from 47.6.

The key forward-looking indicators all moved in the wrong direction, with sentiment on new orders (down from -1.9 to -3.0), employment (from -3.3 to -10.9), unfilled orders (down from -8.6 to 12.6) and inventories (down from 2.5 to -9.9) all weakening, while the hours worked sub-index remained firmly in contractionary territory in June. Capital expenditure intentions also weakened, falling to 4.0 from 23.6. Sentiment on business activity 6-month hence also weakened, falling to 29.8 from 36.1. The disconnect between the details and the headline number is due to the fact that the headline index is not a composite of the sub-indices (as is the case of the ISM index is), but the result of a separate survey question.

Looking beyond the headline number, which belies the weak undertone in the details of the report, the takeaway is simply that the US manufacturing sector is continuing to struggle, and the sharp deterioration in the forward-looking indicators is particularly noteworthy as they suggest that the foray in expansionary territory for the headline number will prove to be very brief.

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“Long lasting…Persistent Factors”

In her post FOMC news conference yesterday Ms Yellen sounded as though she was channeling the secular stagnation theories of the fellow whose job she took, Larry Summers.

Via Reuters:

Evidence that the U.S. neutral rate of interest remains stalled near zero spurred the Federal Reserve to slow its expected pace of rate hikes on Wednesday, as policymakers signaled their hands may be tied until a rebound in global demand or other forces raise that key measure of the economy’s underlying strength.

In a news conference following the Fed’s latest meeting, Chair Janet Yellen said the central bank was still coming to grips with the likelihood that the neutral rate – the point at which monetary policy is neither spurring nor restraining economic growth – is stuck at a historic low and could limit the central banks room to maneuver.

In the Fed’s policy debate, “an important influence is what will happen to that neutral rate,” Yellen said, noting that the central bank’s “base case” is that the rate should rise alongside an improving economy and as “headwinds” from the 2008-9 financial crisis fade.

But “there are long-lasting, more persistent factors that may be holding down the longer-run level of neutral rates,” Yellen said.

“It could stay low for a prolonged time….All of us are in a process of constantly reevaluating where the neutral rate is going, and what you see is a downward shift over time, that more of what is causing this to be low are factors that will not be disappearing.”

Policymakers nodded directly at the problem in fresh economic projections that cut median estimates of the long-run federal funds rate to 3 percent, far below the levels common in the 1990s. Since the Fed began publishing policymakers’ economic projections in 2012, estimates of the long-run rate have been cut from 4.25 percent.

“There could be revisions in either direction,” Yellen said. “A low neutral rate may be closer to the new normal.”

HARD TO PINPOINT

Though difficult to pinpoint, estimates of the neutral rate provide a key yardstick to gauge whether a given federal funds level is stimulating or restricting the economy.

With the Fed still trying to encourage spending, investment and hiring, a low neutral rate means the Fed has less room to move before that stimulus is gone.

Fed estimates published online show little consistent movement in the neutral rate in recent years even as the labor market tightened and growth continued above trend, confounding expectations that it would move higher in an economy expanding beyond potential.

Officials cite a variety of possible explanations, but the result is the same: until policymakers are satisfied that the neutral rate is moving higher, they face an effective cap of 2 percent or even less on the federal funds rate.

Coupled with a 2 percent inflation rate, the Fed’s target, that would put the “real” federal funds rate at zero. If inflation remains below target, the ceiling on the Fed would be that much lower as well.

That is a far cry from the 3.5 to 4 percent that the Fed’s policy rate has averaged since the 1990s, and means the central bank will treat each move with particular caution, current and former Fed officials say. In their policy projections on Wednesday, Fed officials slowed the pace of expected future hikes from four to three per year.

It also means the central bank would be stuck near zero, and more likely to have to return to unconventional policy in a downturn; it could also force discussion of whether to raise the inflation target in order to try to push the entire rate structure higher.

The Fed has been waylaid more than once in its rate hike plans by the state of the global economy, and held steady again on Wednesday in part because of Britain’s upcoming vote on whether to leave the European Union.

But recent data and Fed discussion of the neutral rate show the more chronic influence that low global rates and weak global growth may exert on the Fed.

According to the economic model typically cited by Yellen and others in discussing the neutral rate, conditions are ripe for it to move higher and give the Fed the room it needs to raise rates.

That model, developed by San Francisco Federal Reserve Bank President John Williams and the board’s Monetary Affairs director Thomas Laubach, estimates that the inflation-adjusted size of the U.S. economy moved beyond its potential nearly two years ago, and that the positive “output gap” has been growing larger.

In general a larger output gap would produce a higher estimate of the neutral rate. However, in the time since the economy moved beyond potential in 2014, the model’s estimate of the neutral rate has remained below zero in all but the first quarter of this year.

As the Fed contemplates when to move next, the dynamics working against it were obvious this week when the yield on Germany’s 10-year bond dropped into negative territory, helping keep the spread between it and the U.S. 10-year Treasury note near a euro-era high.

That gap in risk-free yields, and the United State’s general performance relative to Europe and Japan, has driven the dollar higher, curbed U.S. exports, and may have fed through to the recent hiring slowdown in the U.S. industrial sector – all factors that could help depress the neutral rate.

A move higher in U.S. target rates risks reinforcing those trends, likely leading the Fed to feel its way forward until Europe and Japan can also move from the zero lower bound – a day that may be far in the future.

“If anywhere along this path international conditions or skittishness become such that the dollar takes off and capital flows disrupt a weak world and all of that affects inflation and job gains, then we will have a real fundamental question for them to resolve,” said Jon Faust, a Johns Hopkins University professor and former advisor to the Fed board.

“How hard do we push on going it alone?”

(Reporting by Howard Schneider; Editing by David Chance and Andrea Ricci)

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Early FX

Via Kit Juckes at SocGen:

<http://www.sgmarkets.com/r/?id=h10bd347a,17574934,17574935&p1=136122&p2=f93d31def98c3e383b27f149b59c62a0>

The FOMC left rates on hold, lowering growth forecasts and the projections in the ‘dot-plot’ for Fed Funds. The BOJ also left rates on hold and the yen has rallied sharply. US equities initially reacted positively to the Fed’s dovish tone but suffered a late swoon that is reflected in EM currencies reversing yesterday’s gains too. Risk sentiment can’t be forever bolstered by a timid Fed, and the legacy of this move seems to me to be increased nervousness about the global economic outlook.

GDP forecasts are now for 2% growth this year and next, with a pick-up to 2.4% in 2018. The forecasts were previously 2.2, 2.1 and 3%. 3% growth forecasts have by and large gone from everything except fantasy-land in this cycle and maybe yesterday’s FOMC was the official acceptance of ‘new normal’. As for the ‘dot plot’ the 2016 plot is a straighter fight between one rate hike and tow, with six dot-plotters looking for a single hike this year, versus nine for two, while the average now looks for only three hikes in 2017. The end-2018 median dot is now at 2.35% vs 3% last time out As for Chair Yellen’s press conference tone, I thought she placed surprising emphasis on the two months of soft employment data (over-reacting to one or two data points is our job, surely) and definitely struck a more dovish tone than the pre-meeting talk of wanting to keep the market pricing in hikes implied. In short, there’s nothing here at all for dollar bulls and we will move back to data-watching.

The BOJ sounded optimistic about the domestic environment but more concerned about the global one, which is partly a code for concerns about China, partly a reference to the yen, which just powers on. At some point MOF/BOJ will respond to yen strength but are still bruised after the BOJ miss-handled the move at the end of January and intervention is more likely the other side of USD/JPY 100 than this side. I’m glad we put a short CHF/JPY trade into the FX Outlook, if only because I can now stop agonising about the yen rallying further than I expected it to. And yes, in these next few days of pre-referendum nervousness, GBP/JPY can fall even further.

Other overnight news saw solid Australian jobs data (17,900 new jobs, but all part-time, rate steady at 5.7%), better than expected New Zealand Q1 GDP (0.7 q/q, 2.8% y/y). That’s not an AUD/NZD-friendly set of data!

Today sees an ECB Bulletin, UK retail sales (exp +1% ex auto fuel, another good month) a BOE meeting (no change ahead of the referendum, obviously) and US CPI data (exp 1.2% headline and 2.2% core). As 10-year Note yields test 1.5% and TIIPS yields fall, the dollar will remain under pressure unless risk aversion and weaker US equities undermine emerging market currencies more broadly. The point where that happens is surely approaching but is it here yet?

Tactically, for now, short GBP/JPY looks the best trade out there for anyone who can manage the volatility and has a horizon of less than a week.. We’ll stay with the short CHF/JPY, AUD/NOK and short NZD/CAD trades we recommended in the FX outlook, though the last of these is looking beaten-up this morning.

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FX

Via Marc Chandler at Brown Brothers Harriman:

The US dollar is higher against the major currencies but the Japanese yen and the New Zealand dollar.  The dollar fell to new two-year lows against the yen to JPY103.55 before bouncing in the European morning back to JPY104.40.  The Kiwi was helped by better than expected Q1 GDP.  The euro and sterling are within yesterday’s ranges.  The euro has been able to resurface above $1.13 since Monday.  Bids have been found a little below $1.12.  UK reported better than expected retail sales, but the referendum keeps a lid on the pound.   Soft employment data weighs on the Aussie.

Global equities are lower.  MSCI’s Asia-Pacific Index is off 1.1%, its third loss this week.  European markets are lower as well, nursing a 0.8% loss near midday in London.  Financials are the weakest sector, with a 1.7% drag.  Core bond yields are little changed, while peripheral European benchmark 10-year rates are higher (2-3 bp in Spain and Italy, 8 in Portugal).  A hawkish Fed was to be negative for emerging markets, but dovish dot plot has not helped.  The MSCI Emerging Market equities are off 1%.  The dollar is firmer against most of the emerging market currencies.  The South Korean won and Taiwanese dollar edged slightly higher.  East and Central European currencies have done the poorest.  The continued slide in oil prices and industrial metal prices weighs on Russia and South Africa.

Officials and events have conspired to shake the already fragile market confidence.  The Federal Reserve noted yesterday, its widely anticipated decision not to lift its rate target, which the long-term equilibrium target rate is likely lower than previously thought.  In her press conference, Yellen recognized that some of the headwinds the economy faces, like demographics, may last a long time.

The Bank of Japan also stood pat, but despite acknowledging the deterioration of inflation and inflation expectations, it retained its forecast that inflation will hit its target in the fiscal year that begins next April.   The markets’ response was similar to its reaction to the BOJ’s late-April decision to stand pat as well.  The yen strengthened from already elevated levels, and Japanese shares sold off hard.  The 3% loss today in the Nikkei brings its losses this week to a little more than 7%.

Despite the softening of the Fed’s outlook, the dollar finished little changed against the yen yesterday.  On Tuesday, Bloomberg has the greenback closing the North American session at JPY106.11 and on Wednesday at JPY106.01. The dollar was sold to JPY103.55 in Asia before stabilizing in the European morning.  Although Japanese officials, including Kuroda and Cabinet Secretary Suga, indicated they were watching the currency, there was no intervention.

The break of JPY105 without intervention strengthens our understanding that intervention will not be aimed at defending a certain level as if a line has been drawn…in sand.  The intervention needs to be in a specific context of disorderliness.  Given the FOMC’s decision and guidance, the BOJ’s decision, the looming UK referendum, the slump in equities, are the fundamental drivers of the yen’s strength.

That said, this is the fifth consecutive session the dollar has fallen against the yen.  The dollar has fallen every session this month but two.  In this period, the yen has gained 6.2% against the dollar (6% against the Chinese yuan), 5.1% against the euro and 8.3% against sterling.

Australia contributed to the downbeat economic news with a disappointing May jobs report.   The headline job growth of 17.9k (expectations for ~15k) masked that these were all part-time jobs, and that last month’s 9.3k loss of full-time jobs was really twice as large (18.2k).  Separately, Australia reported the second consecutive month of falling vehicle sales.  The 1.1% fall in May follows a 2.8% fall in April.  Sales in Q1 were up about 2.3%.

The disappointing data and weaker commodity prices saw the Australian dollar move back from yesterday’s highs near $0.7440 toward the lows.  Today’s low of $0.7345 is just ahead of the low from the previous two sessions around $0.7335.   New Zealand, on the other hand, reported better Q1 GDP of 0.7% (rather than 0.5%), lifting the year-over-year pace to 2.8% from 2.3%.  The Australian dollar was also sold against its Tasmanian cousin

Sterling is also trading within yesterday’s range, though is about a third of a cent lower on the day as North American markets prepare to open.  News that May retail sales jumped 0.9%, well more than the market expected failed to offset the anxiety over next week’s referendum.  The Evening Standard poll captured the spirit of what many sense.  Excluding the “don’t know”, the survey found 53% favor leaving and 47% favor remaining in the EU.  This is nearly a complete reversal of the results of the survey conducted in April.

The Bank of England meets, but like the Swiss National Bank meeting earlier, is unlikely to be much of a market factor.  There is no doubt that it is on hold.  Carney may say something about contingency planning. However, his Mansion House speech is tipped to be on crypto-currencies.  Osborne is expected to take up the referendum in his talk.

The US data are unlikely to spur a strong market response as investors continue to digest the FOMC meeting and keep on eye on the latest polls and odds of the UK referendum.  The data, for the most part, is not the stuff the will sway Fed officials one way or the other.  Weekly jobless claims are expected to be near their four week average (269k) during the week that the national survey was conducted.  The June Philadelphia Fed Business Outlook survey is expected to improve from a depress May level.

Then there is CPI.  The core rate may tick up to 2.2% year-over-year from 2.1%.  There has been a gradual increase in core CPI.  The 24-month average is 1.9%.  The 12-month average is 2.0%.  The 6-month average is 2.2% (as is the three-month average).

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China Sells Stocks and Bonds

This Bloomberg article quotes Brad Setser of the Council on Foreign Relations. He recently worked in the Obama Administration and has resumed blogging after a seven year hiatus. I highly recommend his blog, Follow the Money.

Via Bloomberg:
June 15, 2016 — 7:00 PM EDT
Updated on June 16, 2016 — 12:32 AM EDT

Equity holdings fall $126 billion from July, U.S. data show
Drop of 38% compares with 9% reduction for all foreigners

For the past year, Chinese selling of Treasuries has vexed investors and served as a gauge of the health of the world’s second-largest economy.

The People’s Bank of China, owner of the world’s biggest foreign-exchange reserves, burnt through 20 percent of its war chest since 2014, dumping about $250 billion of U.S. government debt and using the funds to support the yuan and stem capital outflows.

While China’s sales of Treasuries have slowed, its holdings of U.S. equities are now showing steep declines.

The nation’s stash of American stocks sank about $126 billion, or 38 percent, from the end of July through March, to $201 billion, Treasury Department data show. That far outpaces selling by investors globally in that span — total foreign ownership fell just 9 percent. Meanwhile, China’s U.S. government-bond stockpile was relatively stable, dropping roughly $26 billion, or just 2 percent.

“China’s U.S. portfolio doesn’t just consist of Treasuries,” said Brad Setser, a senior fellow at Council on Foreign Relations in New York. “To gauge China’s activity in the market it’s increasingly important to look beyond the Treasury market.”

The liquidation of shares suggests China’s central bank was still under pressure to raise dollars and smooth the yuan’s depreciation even though Treasuries selling abated, including through suspected custodial accounts in Belgium. The equities reduction reminds investors that while China’s $1.4 trillion trove of Treasuries dwarfs its other foreign assets, it has accumulated enough U.S. stocks to influence global markets.

“Selling some of its equities is a reasonable way of raising the cash needed to finance the big drawdown in reserves,” said Setser, a former deputy assistant secretary for international economic analysis at the Treasury.

The PBOC’s press office directed questions to the State Administration of Foreign Exchange, the arm of the central bank that manages the nation’s reserves. Officials at SAFE didn’t respond to a request for comment.
Market Sliver

While the amount China unloaded is a sliver of the $23 trillion U.S. equity market, it’s significant when compared with holdings of other big investors. The largest American mutual fund, the Vanguard Total Stock Market Index Fund, oversees about $373 billion.

The Treasury doesn’t break down its data into private and official holdings. Yet China’s capital controls limit the candidates capable of amassing such a hoard of U.S. equities. Also, private Chinese ownership of foreign stocks remained stable in 2015, signaling that the selling originated from an official source, SAFE data on international investments indicate.

Given that China’s private holdings of equities abroad are smaller than the nation’s U.S. holdings as reflected in the Treasury tally, “one can reasonably infer that SAFE, whose reserve assets are not included separately in the net international investment position, holds many of the equities,” Setser said.
Turmoil Buffer

Switching to selling stocks allows the PBOC to retain safer, more liquid assets such as Treasuries that it can unload easily in times of turmoil. Two rounds of declines in the yuan in the last 10 months spurred market volatility worldwide and led investors to monitor China’s reserves as a measure of how much of its war chest the country was burning through to combat capital flight.

Dumping equities may prove to be a savvy move, considering that the S&P 500 Index has gone 13 months without a new high on a closing basis. China, which more than doubled its holdings of U.S. stocks during the bull market that began in 2009, wouldn’t be alone among government-affiliated sellers of investments abroad. Sovereign funds from Qatar to the United Arab Emirates and Russia have been liquidating assets since crude began tumbling in 2014.

“The Chinese, or other people for that matter, are taking the view that sitting in U.S. equities is presumably quite risky, and I’m not surprised they’re shifting,” said Fredrik Nerbrand, global head of asset allocation at HSBC Bank Plc in London. “This seems like more of a generation of cash more than anything else, and probably a de-risking of their portfolio.”

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BOJ Inaction

Maybe the BOJ was taking its cue from 17th century English poet John Milton’s famous sonnet which concludes with the famous line, “They also serve who only stand and wait”. Maybe the BOJ thought that its  paralyzing inertia would not move markets. They were wrong as yen surged versus the dollar.

Via the WSJ:
By Alex Frangos
Updated June 16, 2016 1:21 a.m. ET
0 COMMENTS

The Bank of Japan had its reasons to wait. But the cost of inaction could seem rather large in retrospect.

Japan’s central bank scheduled its policy meeting Thursday after the Federal Reserve’s to be able to react to whatever the Fed did. The Fed signaled fewer rate increases were coming, which means a weaker dollar, which means a stronger yen, which means the heat should have been on the BOJ to pull some sort of trigger. Instead, it will wait for its meeting at the end of July, also scheduled the day after the Fed’s next rate-setting meeting.

So why did the BOJ do nothing? The economy should get a boost from the government’s decision to delay an impending value-added tax increase. And activity data hasn’t been terrible of late. Domestic political considerations may have played a role with an upper house election scheduled for July 10; the BOJ may have wanted to stay clear.

Yet inflation isn’t on the BOJ’s side. The policy statement accompanying the decision noted consumer inflation will be negative or zero “for the time being.” A stronger currency will ensure that.

The strong yen means import prices will continue to fall, negating any virtuous effect from the rally in commodities of late. And with destabilizing events such as “Brexit” on the horizon, a further strengthening of the yen could make life increasingly uncomfortable for Japanese exporters and Japanese stocks, which are already off 17% this year.

There is a fair amount of skepticism that even if the BOJ expands asset purchases incrementally, say, deeper into exchange-traded funds or into corporate bonds, or sets benchmark rates more negative, that it won’t make much of a difference anyway. But with outright deflation again looming, and the Fed holding back, the BOJ is unlikely to stay inactive for much longer.

Write to Alex Frangos at [email protected]

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No Cooperation in the Oil Patch

Via Bloomberg:

Elena Mazneva
Ryan Chilcote
ryanchilcote
June 16, 2016 — 5:48 AM EDT

U.S shale production may start to rebound next year on prices
Global period of low oil prices could last 10 to 15 years

It makes no sense now for Russia and Saudi Arabia, the world’s biggest oil suppliers, to work together to influence the market, even as U.S. shale production is poised to rebound next year, Russia’s Energy Minister said.

Without a “force majeure with prices,” there’s no point in talking about joint action, Alexander Novak said in an interview on Bloomberg TV on the sidelines of the St. Petersburg International Economic Forum. “The door is always open,” but there should be “a desire and a need” for cooperation, which is not the case now, he said.

The collapse in Brent crude prices to a 12-year low in January squeezed out high-cost producers, helping to reduce oversupply and ultimately boost prices. A tentative deal between Russia, Saudi Arabia and other major producers to freeze output in order to stem the glut was abandoned in April, in part because a Saudi-led OPEC policy of pumping without limits seemed to be paying off.

“We are in a global period of low oil prices now and such periods may last 10 to 15 years,” Novak said. Still, today’s price of about $50 a barrel is enough to proceed with investments, which suits both producers and customers, he said.

At current prices, U.S. shale production will probably start recovering early next year, Novak said. “Shale production can pick up quickly,” he said. “A recovery cycle may take six to nine months on a price increase.” There are also risks that prices will fall if crude production in Canada, Libya or Nigeria rebounds after supply disruptions in those countries. “We just should watch the market closely now,” he said.

Novak met Venezuela’s Oil Minister Eulogio Del Pino to discuss cooperation between members of the Organization of Petroleum Exporting Countries and non-members, including a Venezuelan proposal for an output “band” system, according to an e-mailed statement from the South American country’s oil ministry.

Novak was expected to meet new Saudi Minister of Energy and Industry Khalid al-Falih in Beijing this month at the G20 energy summit. While the meeting is possible, it’s not confirmed yet, Novak said.

While the government in Moscow prepares to draft the nation’s 2017 budget using an average oil price of $40 a barrel, Novak said it may reach $50. Brent crude this year has averaged about $40 a barrel.

In a later interview, Novak reiterated a plan to increase crude output to about 540 million metric tons this year and set next year’s target “somewhere in the range” of 525 million to 545 million tons. Crude exports may rise about 3 percent this year to roughly 252 million tons, and the trend is likely to continue next year, he said.

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Some Corporate Bond Stuff

Via Bloomberg:

IG CREDIT: Lowest Volume Wednesday Session Since December
2016-06-16 09:37:57.974 GMT

By Robert Elson
(Bloomberg) — Secondary IG trading ended with a Trace
count of $15.5b vs $13.9b Tuesday, $18.3b the previous
Wednesday. Secondary IG trading lowest of any Wednesday since
$3.4b on Dec. 30, 2015.

* 10-DMA $14.6b; 10-Wednesday moving avg $17.8b
* 144a trading added $2.5b of IG volume vs $3b Tuesday, $3.5b
last Wednesday

* The most active issues:
* HSBC 2.00% 2018 was 1st with client flows accounting for
93% of volume
* WFC 3.00% 2026 was next with client and affilate flows
taking 51% of volume; client buying 1.8x selling
* WFC 4.40% 2046 repeats as 3rd with client and affiliate
trades taking 60% of volume
* SIEGR 5.75% 2016 was most active 144a issue with client
flows taking 100% of volume; client buying 4.4x selling

* Bloomberg US IG Corporate Bond Index OAS at 160.7 vs 160.2
* 2016 high/low: 220.8, a new wide since Jan. 2012/150.8
* 2015 high/low: 182.1/129.6
* 2014 high/low: 144.7/102.3

* BofAML IG Master Index at +160 vs +159
* 2016 high/low: +221, the widest level since June
2012/+152
* 2015 high/low: +180/+129
* 2014 high/low: +151/+106, tightest spread since July
2007

* Standard & Poor’s Global Fixed Income Research IG Index at
+205 vs +204
* +262, the new wide going back to 2013, was seen
2/11/2016
* The widest spread recorded was +578 in Dec. 2008

* S&P HY spread at +655 vs +653; +947 seen Feb. 11 was the
widest spread since Oct. 2011
* All time wide was +1,754 in Dec. 2008

* Markit CDX.IG.26 5Y Index at 85.2 vs 84.2
* 73.0, its lowest level since August, was seen April 20
* 124.7, a new wide since June 2012 was seen Feb. 11
* 2014 high/low was 76.1/55.0, the low for 2014 and the
lowest level since Oct 2007

* Current market levels
* 2Y 0.672%
* 10Y 1.557%
* Dow futures -60
* Oil $47.32
* ¥en 104.22

* IG issuance totaled $1.795b Wednesday vs $2.05b Tuesday;
June now stands at $59.755b
* May ended at a record $209.51b; stats and recap
* YTD IG issuance now $863b

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Credit Pipeline

Via Bloomberg:

IG CREDIT PIPELINE: OZRK Sub 10Y May Price Today
2016-06-16 09:25:23.73 GMT

By Robert Elson
(Bloomberg) —

LATEST UPDATES

* Bank of the Ozarks (OZRK), expected to price $125m
subordinated 10Y hybrid, via Sandler O’Neill
* KT Corp (KOREAT) Baa1/A-, schedules investor meetings June
16-24, via BNP/BAML/C/Nom, for possible USD 144a/Reg-S
* ITC Holdings (ITC) Baa2/BBB+, held investor meetings June
13-14, via BAML/JPM/WFS; it filed an automatic debt
securities shelf; last issued May 2014
* Kookmin Bank (CITNAT) A1/A, mandates BAML/CA/HSBC/Miz to
arrange investor meetings June 13-17; issuance may follow
* SMBC Aviation Capital (SMBCAC) mandated C/CA/JPM/RBC/SMBC
for investor calls June 8-9; a potential US$ 144a/Reg-S
offering may follow
* Dubai’s Emaar Properties (EMAAR) Ba1/BBB-, plans potential
USD bond sale
* Raymond James Baa2/BBB, had BAML/JPM/RayJ arrange investor
meetings June 13-15; last priced a new deal in 2012
* USAID Ukraine (AID) heard to be in the works with possible
full faith & credit deal
* Omega Healthcare Investors (OHI) Baa3/BBB-, held investor
meeting, via BAML/JPM, June 14
* Kingdom of Saudi Arabia (SAUDI), weighing sale of $10b-$15b
after end of Ramadan in July
* May replicate Qatar’s $9b sale by issuing 5y, 10y, 30y
bonds, sources say
* Merck & Co (MRK) A1/AA; has not priced a new issue since
Feb. 2015, $1.5b matured May 18
* General Electric Company (GE) A3/AA-, has yet to issue YTD;
parent GE Co has $11.1b maturing this year, $2.3b matured in
May
* GE may be among high grade industrials to add leverage
in 2016, BI says in note (see point 3)

MANDATES/MEETINGS

M&A-RELATED

* Shire (SHPLN) Baa3/BBB- completes takeover of Baxalta (BXLT)
Baa2/BBB-, now lowered by S&P, in ~$32b deal buy $18b loan
to be refinanced via debt issuance (Jan 18)
* Zimmer Biomet (ZBH) Baa3/BBB, to acquire LDR for ~$1b; co.
said it plans to issue $750m of sr unsecured notes after
deal completion
* Air Liquide (AIFP) A3/A-, held calls regarding Airgas
refinancing; planned to refinance the $12b loan backing the
deal via a combination of USD, EUR long-term bonds
* Bayer (BAYNGR) A3/A-, said to secure $63b financing, via
BAML/CS/GS/HSBC/JPM, for Monsanto (MON) A3/BBB+ bid; co.
likely will issue $20-$30b bonds to refinance part of the
bridge loan
* Great Plains Energy (GXP) Baa2/BBB+ to issue long-term
financing including equity, equity-linked securities and
debt prior to closing of Westar Energy (WR) A2/A deal; says
financing mix will allow it to maintain investment-grade
ratings
* 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)
* Molson Coors (TAP) Baa2/BBB-; ~$12b MillerCoors buy
* $9.3b bridge (Dec 17)
* Teva (TEVA) Baa1/BBB+; ~$40.5b Allergan generics buy
* $22b bridge; $5b TL commitment (Nov 18)
* Duke Energy (DUK) A3/A-; $4.9b Piedmont Natural buy
* $4.9b bridge (Nov 4)
* Anthem (ANTM) Baa2/A-; ~$50.4b Cigna buy
* $26.5b bridge (July 27)

SHELF FILINGS

* Tesla Motors (TSLA); automatic debt, common stk shelf (May
18)
* Debt may convert to common stk
* Reynolds American (RAI) Baa3/BBB filed automatic debt shelf;
sold $9b last June (May 13)
* Statoil (STLNO) Aa3/A+, files debt shelf; last issued USD
Nov. 2014 (May 9)
* Corporate Office (OFC) Baa3/BBB-; debt shelf (April 12)
* Rogers (RCICN) Baa1/BBB+; $4b debt shelf (March 4)

OTHER

* Discovery Communications (DISCA) Baa3/BBB-; may revisit bond
market this yr, BI says (May 18)
* Ford Motor Credit (F) Baa2/BBB; may have ~$7b issuance this
yr (May 10)
* Wal-Mart (WMT) Aa2/AA; 2 maturities in April (April 1)
* GE (GE) A1/AA+; $25b debt possible for M&A, buybacks (Jan
29)

Posted in Uncategorized | Comments Off on Credit Pipeline

Peripheral Spreads

The dramatic reversal in spreads on peripheral European bonds continues unabated. I just clocked 10 year Spain trading 4 basis points cheap to US (1.60 Spain vs 1.56 US). Yesterday morning that spread was – 10 (Spain rich to US) and last Thursday morning Spain was 29 rich to US (Spain 1.39 vs US 1.68).

The same trend manifests itself in Italy, though Italy still trades rich to US. This morning 10 year Italy is 7 basis points through the US. Yesterday it was 24 through and one week ago it was 40 basis points rich.

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