FX

Via Marc Chandler at Brown Brothers Harriman:

EU Brinkmanship and US Job Reports in Focus

– Developments in Greece continue to develop around the script of brinkmanship
– The latest IMF reserve data gives some sense of the SNB’s activity last month
– Following the strong industrial orders data yesterday, Germany reported disappointing industrial output figures for December today
– We had two EM Inflation prints today (Brazil and Chile), but moving in opposite directions and suggesting opposite policy responses

Price action:  The dollar is mixed, but trading in narrow ranges ahead of the US employment data.  The euro is trading at $1.1440, despite generally weaker Eurozone data.  Sterling has been confined to a narrow range.  The negative impact from the disappointing UK trade figures may have been blunted by talk of sterling-supportive M&A as US Ball Corp has reportedly offered GBP4.3 bln for UK’s Rexam.  The Australian dollar is outperforming at 0.7830, despite the downward revisions to the RBA GDP and inflation forecasts.  In the EM space, currencies are mixed.  MYR and RUB are outperforming, helped by the rebound in oil prices.  BRL and ZAR are underperforming.  The MSCI Asia Pacific index closed slightly higher, helped by a 0.8% gain in the Nikkei.  Euro Stoxx 600 is slightly lower near midday, while S&P futures are pointing to a lower open. Greek 10-year yields are up 25 bp.

• Developments in Greece continue to develop around the script of brinkmanship.  The ECB’s decision to no longer accept Greek government bonds or state- guaranteed paper, but approving Emergency Lending Assistance (ELA) by the national central bank remains a key talking point today.  But after the ECB’s announcement, reports surfaced that the institution was split about the decision to restrict the use of Greek debt as collateral.  According to the ECB’s rotation schedule, several members that would likely be against the measure – such as Greece, Cyprus, Ireland and France – were not voting.  Separately, negotiations between German Finance Minister Schaeuble with his Greek counterpart Varoufakis yielded little in terms of compromise, as the colorful exchange between the two made clear.  “We agreed to disagree” Schaeuble said after meeting.  “We didn’t even agree to disagree from where I’m standing,” the Greek responded.
• The latest IMF reserve data gives some sense of the SNB’s activity last month.  Reserves rose by about CHF3.3 bln to CHF498.4 bln.  This understates the magnitude of the intervention because of the appreciation of the franc.  The franc appreciated sharply following the mid-month decision to abandon the cap.  The franc appreciated by 16% against the euro, which accounts about half of the SNB’s reserves.  It rose 8% against the dollar and 12% against sterling.  It is difficult to ascertain the precise amount of intervention, but it could between CHF50-60 bln.  A SNB member suggested last month that it may have cost the SNB CHF100 bln if it had continued to defend the cap.  The take away is confirmation that the abandonment of the cap did not mean that the SNB’s balance sheet had reached some limit or that it has embraced a free-float of the franc.  Some had speculated that the ownership structure of the SNB was the basis for the change.  Meanwhile, Denmark cut interest rates again yesterday (now -75 bp, the same as the SNB) to defend its narrow 1% band against the euro.
• Following the strong industrial orders data yesterday, Germany reported disappointing industrial output figures for December today.  The 0.1% gain contrasts with the 0.4% consensus expectation.  It might have provided another excuse to pare the euro’s gains ahead of US employment data.  Norway, on the other hand, reported a 1.3% increase in December’s manufacturing output.  The consensus had expected a 0.3% decline.  It is a particularly volatile time series, but that coupled with the continued recovery in oil prices has helped the krone.  In Spain, seasonally adjusted IP for December contracted by -0.9% y/y vs. +0.3% expected and flat y/y in November.  Elsewhere, the UK reported downbeat December trade figures.  The visible trade deficit widened to just over £10 bln, from a revised £9.3 bln.  This shows that lower oil prices have still not been decisive in improving the country’s external accounts.  But the data also brought a notable deterioration in the non-EU component.
• The RBA lowered its GDP and inflation forecasts.  This follows the bank’s surprise decision to cut rates by 25 bp earlier in the week.  Growth is now expected to come between 1.75-2.75% this year from the previous range of 2.0-3.0%, and CPI is seen at 1.25%.
• The US December trade deficit reported yesterday was larger than expected.  This suggests Q4 GDP growth will be revised down from the 2.6% advance report.  Indeed, the Atlanta Fed’s GDP Now model points to 2.1% growth in Q4.  The deterioration in the trade account was mostly due to a big jump in imports.  Exports fell slightly, and while this may add to fears about the strong dollar, we remain skeptical of the impact.  
• During the North American session, the US reports January jobs data.  Bloomberg consensus is at 230k vs. 252k in December.  Markets will be focusing on average hourly earnings, which was one of the biggest disappointments in last month’s reading.  Consensus is at 0.3% m/m (1.9% y/y).  Unemployment rate is seen steady at 5.6%.  Note there will be benchmark revisions to the establishment survey.  
• Canada also reports January jobs data.  Bloomberg consensus is at 5k vs. -11.3k in December.  But recall that the December drop was driven by part-time job losses (-46.3k), not the more important full-time jobs (+35k).
• We had two EM Inflation prints today, but moving in opposite directions and suggesting opposite policy responses.  Brazil reported January IPCA inflation right at 7.14% consensus, up from 6.41% in December and the highest since September 2011.  This is well above the 2.5-6.5% target range, and signals more tightening ahead despite the weak economy.  Next COPOM meeting is March 4.  Meanwhile, Chile reported January CPI at 4.5% y/y vs. 4.2% consensus and 4.6% in December.  Inflation here also remains above the 2-4% target range, but is falling back towards it (albeit slowly).  We think the central bank will remain on hold for the next couple of months, especially as core CPI rose to 5.5% y/y from 5.1% in December.  It should resume easing later this year, however, in response to the weak economy.

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Overnight Flows

Dealers report very light volumes overnight with some inconsequential (in notional terms) buying of 3s and 10s by central banks.

Dealers also note that various surveys demonstrate that clients express desire to be a better buyer on a dip today after the labor report.

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Corporate Trading Volume Remains at Very High Levels

Via Bloomberg:

IG CREDIT: Trading Volume Remains at Record High Levels
2015-02-06 11:05:39.669 GMT

By Robert Elson
(Bloomberg) — Secondary IG trading ended with a Trace
count of $21.2b vs record high $22.8b Wednesday, $19.2b last
Thursday.
* Yesterday’s $21.2b was 3rd highest day in the history of the
Trace Aggregates going back to Jan. 2005; second highest day
was $21.4b Tuesday
* 4-wk moving avg $16.6b, highest since at least Jan. 2005
* 10-DMA $17.3b
* 144a trading added $2.6b of IG volume vs $2.9b Wednesday,
$2.4b last Thursday
* Client flows remain evenly-weighted between buying and
selling, according to Bloomberg estimates
* Most active issues longer than 3 years
* CVECN 5.70% 2019 was first with 2-way client flows
accounting for 100% of volume
* BACR 2.75% 2019 was next with near even client flows at
100%
* ACT 4.85% 2044 was 3rd, client flows at 100% of volume
with buying 1.5x selling
* ACT 4.85% 2044 was 3rd, client flows at 100% of volume
with buying 1.5x selling</li></ul>
* MDT 4.625% 2045 was most active 144a issue; client flows
took 89% of the volume
* BofAML IG Master Index at +149 vs +150; 2014 range was +151,
seen Dec 16; +106, the low and tightest spread since July
2007 was seen June 24
* Standard & Poor’s Global Fixed Income Research IG Index at
+181, unchanged; +182, the wide for 2014-2015, was seen Jan.
16; +140, the 2014 low and new post-crisis low was seen
July 30, 2014
* Markit CDX.IG.22 5Y Index at 66.3 vs 67.9; 76.1, the wide
for 2014 was seen Dec 16; 55 was seen July 3, the low for
2014 and the lowest level since Oct 2007
* IG issuance totaled $20.15b, the highest day of 2015 vs
$9.85b Wed, $10.5b Tuesday, $9.5b Monday
* Week’s IG issuance now $50b; YTD $182.25b
* M&A-type deals prominant in pipeline

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Today’s Corporate Issuance

Via Bloomberg:

IG CREDIT: $20.15b to Price in Highest Volume Session of 2015
2015-02-05 19:36:34.720 GMT

By Lisa Loray
(Bloomberg) — $20.15b expected to price today, highest
volume in a single session this year; weekly volume to $50.0b,
busiest week of 2015, and YTD volume to $182.25b.
* Domestics account for 62% of today’s volume, led by $8.0b
MRK 6-part offering, largest jumbo deal to date in 2015
* 3 FRNs are expected to price for $1.25b; YTD FRN volume
$20.4b
* Today’s trades tightened an average of ~15bp from IPT to
pricing
* Domestic Corps
* $8.0b Merck & Co (MRK) A2/AA 6-part
* $300m  2Y FRN at 3mL+12.5 (IPT 3mL+20A, guidance
3mL+15A)
* $1.25b 5Y at T+55 (IPT T+70A, guidance T+60A)
* $700m  5Y FRN at 3mL+37.5
* $1.25b 7Y at T+75  (IPT T+90A, guidance T+80A)
* $2.5b 10Y at T+95 (IPT T+110A, guidance T+100A)
* $2.0b 30Y at T+130 (IPT T+145A. guidance T+135A)
* $2.0b 30Y at T+130 (IPT T+145A. guidance T+135A)</li></ul>
* $1.0b Costco Wholesale Corp (COST) A1/A+ 2-part
* $500m 5Y at T+47 (IPT T+high 50s, guidance T+50A)
* $500m 7Y at T+67 (IPT T+high 70s, guidance T+70A)
* $500m 7Y at T+67 (IPT T+high 70s, guidance T+70A)</li></ul>
* Domestic Financials
* $2.2b MUFG Americas Holdings Corp (UNBC) A3/A 4-part
* $450m  3Y at T+80  (IPT T+95A, guidance T+85A)
* $250m  3Y FRN at 3mL+57
* $1.0b  5Y at T+95  (IPT T+115A, guidance T+100A)
* $500m 10Y at T+125 (IPT T+145-150, guidance T+130A)
* $500m 10Y at T+125 (IPT T+145-150, guidance T+130A)</li></ul>
* $1.2b JPMorgan Chase & Co (JPM) Ba1/BBB- Perp NC 5 at 6.125%
* IPT 6.25-6.375%, guidance 6.125-6.25%
* IPT 6.25-6.375%, guidance 6.125-6.25%</li></ul>
* EM
* $1.0b Cencosud S.A. (CENSUD) Baa3/BBB- 2-part
* $650m 10Y at T+337.5 (IPT T+mid 300s, guidance T+350A)
* $350m 30Y at T+420  (IPT T+low 400s, guidance T+425A)
* $350m 30Y at T+420  (IPT T+low 400s, guidance T+425A)</li></ul>
* $1.0b Japan Finance Org for Munis (JFM) A1/AA- at MS+48 (IPT
MS+50A)
* $1.25b Eskom Holdings (ESKOM) Ba1/BBB- 10Y at 7.375% (IPT
mid 7.00%)
* SAS
* $3.5b Caisse d’Amortissement de la Dette Sociale (CADES)
Aa1/AA 7Y at MS+21
* $1.0b African Development Bank (AFDB) Aaa/AAA 5Y Global at
MS flat

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Trade Deficit

Via Gennadiy Goldberg at TDSecurities:

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FX

Via Mark Chandler at Brown Brothers Harriman:

Beware of Greeks Bearing Collateral

– The ECB will no longer accept Greek government bonds as collateral and that Greek banks can have access to the national central bank via ELA
– The EU negotiations with Syriza remain tense and Greek markets have been hit
– ECB’s shot across the bow was not meant only for Greece, but it is a signal to others who are thinking about breaking from the austerity regime
– Following the election results, Syriza came out swinging
– Czech central bank meets and is expected to keep policy unchanged
– Ukraine hiked rates 5.5 percentage points (effective Friday) and basically floated the exchange rate

Price action:  The dollar is mostly weaker on the day.  The euro is up nearly 1%, trading around $1.1430 while cable is around $1.5240.  The Australian dollar is also outperforming, rising to $0.7810, though still within recent ranges.  The dollar is little changed against the yen at ¥117.40.  In the EM space, RUB is outperforming followed by TRY, while KRW and MYR are underperforming.  The MSCI Asia Pacific index was basically flat, with the Shanghai Composite erasing strong gains to close down 1.2%.  The Nikkei was also down 1.0%. Euro Stoxx 600 is down slightly near midday, while S&P futures are pointing to a lower open.  Greek 10- year yield is up nearly 60 bp after the ECB’s decision not to accept Greek bonds as collateral late yesterday.

• The ECB will no longer (as of February 11) accept Greek government bonds as collateral and that Greek banks can have access to the national central bank via the Emergency Lending Assistance.  That news broke late in North America yesterday.  The euro fell around a cent on the news.  The real development today is that the impact remains largely confined to Greece.  As this became clear, and that the ECB would lift the ELA borrowing cap by 10 bln euros, the single currency recovered in the European morning.  It is above levels that were prevailing when the news initially broke.  
• Following the election results, Syriza came out swinging.  It first pressed for debt forgiveness and then offered a sketch of a bond swap scheme.  The IMF, EU, and Germany did not like it.  The ECB was the bludgeon.  This was not a technocrat decision.  It was a discretionary political decision.  It could have waited until closer to the end of the month and let elected officials work it out.  Like the Heisenberg’s uncertainty principle, the mere fact of officially observing that it was not confident of a new agreement will be reached made that outcome more likely.  Greek markets have been hit.  Yields are sharply higher (10-year yield up around 60 bp to 10.30% and three-year note yield is up 170 bp to 18.03%).  Greek stocks are off about 5.5%, led by financials, which are down around twice as much.  European peripheral bond yields are 1-3 bp higher, and most markets in Europe are lower.
• It is interesting to note that Spain is performing a little worse than Italy.  ECB’s shot across the bow was not meant only for Greece, but it is a signal to others who are thinking about breaking from the austerity regime.  Don’t let the dispute between the ECB and Berlin over monetary policy confuse the issue.  The ECB wants the national governments to do their part – structural reforms – and it is willing to do its part to boost inflation in line with its mandate, but it does not want to call into question the austerity regime.  In fact, Draghi has said that ordo-liberalism is part of the ECB’s DNA.  Before the dispute over monetary policy, Draghi was affectionately called the Italian Prussian in a German magazine.  
• The news stream is light with three new data points.  First, Australia’s retail sales for December rose 0.2%.  However, China’s required reserve cut after local markets closed yesterday, talk that the PRC demand for iron ore remains strong, and reports of Japanese interest has seen the Australian dollar trade higher, recovering from yesterday’s late decline.  
• Second, Sweden reported stronger than expected industrial output.  The 1.7% increase in December compares with a consensus forecast of 1.0%.  However, this was negated by the whopping 11.4% year-over-year decline in industrial orders.  We would not want to read too much into the decline in orders though it weighed on the krona.  It was largely a base effect.  The 5.1% increase on the month is almost more than the cumulative increase in the previous eleven months.  Last December, industrial orders rose 13.6%.  
• Third, which is consistent with the meme we have observed, is that while the political matters are heating up and deflationary forces strengthen, the eurozone economy is enjoying better economic data.  Germany reported strong factory orders.  The 4.2% m/m rise in December factory orders was more than twice the consensus expectations, and the year-over-year rate stands at 3.4%, rather than 0.7%.  Over the last couple of weeks, M3 and bank lending have improved, PMIs are firmer (except France).  Retail sales have firmed.  This is not to suggest a surge in growth is at hand.  Rather, we do expect the decline in the euro, oil, and yields to offset some of the other headwinds the region faces.  
• US reports data derived from Q4 GDP figures.  The implication of a somewhat disappointing growth number is downside risk to productivity and upside rise to unit labor costs.  After last week’s sharp fall in weekly initial jobless claims, this week’s report will draw interest.  However, the labor market focus is on tomorrow’s national report.  US December trade balance today has the potential to impact Q4 GDP revision expectations.  The market may also be sensitive to disappointing exports, as one of the much talked about issues is the knock-on effects of a strong dollar.  
• The Czech central bank meets and is expected to keep policy unchanged.  However, it could extend its forward guidance deeper into 2016 as the overall economic outlook remains vulnerable.  There has been some talk that the bank would re-set its FX policy to a weaker fix against the euro, but this is unlikely to happen at this juncture, in our view. December industrial and construction output and trade will be reported Friday.
• Ukraine hiked rates 5.5 percentage points (effective Friday) and basically floated the exchange rate.  The hryvnia promptly fell over 30% against the dollar.  The central bank will cancel the daily indicative rate and its dollar auctions, but currency controls remain in place.  We believe the move was unavoidable, as foreign reserves fell to a cycle low of $7.5 bln in December.  Ukraine officials are hoping for new IMF money to shore up reserves.  With talks ongoing in Kiev, the UAH flotation may be one of the requirements to getting more money.  After all, the IMF would not want money used in a futile attempt to prop up the currency.

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What to Watch Today

Via Bloomberg:

WHAT TO WATCH:
* (All times New York)
Economic Data
* 7:30am: Challenger Job Cuts y/y, Jan. (prior 6.6%)
* 7:30am: RBC Consumer Outlook Index, Feb. (prior 53.3)
* 8:30am: Non-farm Productivity, 4Q preliminary, est. 0.1%
(prior 2.3%)
* Unit Labor Costs, 4Q, est. 1.2% (prior -1%)
* Unit Labor Costs, 4Q, est. 1.2% (prior -1%)</li></ul>
* 8:30am: Initial Jobless Claims, Jan. 31, est. 290k (prior
265k)
* Continuing Claims, Jan. 24, est. 2400k (prior 2.385m)
* Continuing Claims, Jan. 24, est. 2400k (prior 2.385m)</li></ul>
* 8:30am: Trade Balance, Dec., est. -$38b (prior -$39b)
* 9:45am: Bloomberg Consumer Comfort, Feb. (prior 47.3)
Central Banks
* 7:00am: Bank of England seen maintaining 0.5% bank rate
* 7:30pm: Reserve Bank of Australia issues statement on
monetary policy
Supply
* 11:00am: U.S. to announce plans for auction of 3M/6M bills

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Record Volume Once Again in Corporate Bonds

Via Bloomberg:

IG CREDIT: Record High Trading Volume Set for 2nd Day
2015-02-05 10:50:55.909 GMT

By Robert Elson
(Bloomberg) — Trace count for secondary trading ended with
a new record high of $22.8b vs previous record of $21.4b
Tuesday, $20.8b last Wednesday.
* First time over $22b in the history of the Trace Aggregates
back to Jan. 2005 vs yesterday’s first time over $21b
* $20b had been reached only 3x since Jan. 2005
* 10-DMA $17.0b
* 4-wk moving avg $16.4b, highest since Jan. 2005
* 144a trading added another $2.9b of IG volume
* Most active issues longer than 3 years
* PETBRA 5.375% 2021 was first with 2-way client flows
accounting for 68% of volume
* PETBRA 6.25% 2024 was next with near even client flows
at 85%
* SYY 4.50% 2044 was 3rd, client flows at 75% of volume;
selling twice buying
* SYY 4.50% 2044 was 3rd, client flows at 75% of volume;
selling twice buying</li></ul>
* BNDES 5.50% 2020 was most active 144a issue; client flows
took 100% of the volume
* BofAML IG Master Index at +150 vs +151; 2014 range was +151,
seen Dec 16; +106, the low and tightest spread since July
2007 was seen June 24
* Standard & Poor’s Global Fixed Income Research IG Index at
+181, unchanged; +182, the wide for 2014-2015, was seen Jan.
16; +140, the 2014 low and new post-crisis low was seen
July 30, 2014
* Markit CDX.IG.22 5Y Index at 67.9 vs 66; 76.1, the wide for
2014 was seen Dec 16; 55 was seen July 3, the low for 2014
and the lowest level since Oct 2007
* IG issuance totaled $9.85b Wed. vs $10.5b Tuesday, $9.5b
Monday vs $18.5b last week; stats include tenors, ratings,
sectors
* 3 deals set to price today

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Running Out of Policy Tools

With interest rates at zero and below the FT discusses the proposition that currencies are the only tool left in the policy quiver to stimulate growth.

Via the FT:

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World Wallowing in Debt

The FT has an informative article on global debt levels. The author notes that the world is more highly leveraged now than it was  in 2007 prior to the crisis.

Via the FT:

February 5, 2015 12:02 am
Debt mountains spark fears of another crisis

Ralph Atkins

The world is awash with more debt than before the global financial crisis erupted in 2007, with China’s debt relative to its economic size now exceeding US levels, according to a report.

Global debt has increased by $57tn since 2007 to almost $200tn — far outpacing economic growth, calculates McKinsey & Co, the consultancy. As a share of gross domestic product, debt has risen from 270 per cent to 286 per cent.

McKinsey’s survey of debt across 47 countries — illustrated in an FT interactive graphic — highlights how hopes that the turmoil of the past eight years would spur widespread “deleveraging” to safer levels of indebtedness were misplaced. The report calls for “fresh approaches” to preventing future debt crises.

“Overall debt relative to gross domestic product is now higher in most nations than it was before the crisis,” McKinsey reports. “Higher levels of debt pose questions about financial stability.”

Overall, almost half of the increase in global debt since 2007 was in developing economies, but a third was the result of higher government debt levels in advanced economies. Households have also increased debt levels across economies — the most notable exceptions being crisis-hit countries such as Ireland and the US.

“There are few indications that the current trajectory of rising leverage will change,” the report says. “This calls into question basic assumptions about debt and deleveraging and the adequacy of tools available to manage debt and avoid future crises.”

Countries that McKinsey warns face “potential vulnerabilities” because of high household debt include the Netherlands, South Korea, Canada, Sweden, Australia, Malalysia and Thailand. “It is like a balloon. If you squeeze debt in one place, it pops up somewhere else in the system,” says Richard Dobbs, one of the report’s authors.

One “bright spot,” McKinsey says, is evidence of deleveraging by banks. Financial sector debt relative to GDP has declined in the US and a few other crisis-hit countries, and stabilised in other advanced economies.

China’s total debt, including the financial sector, has nearly quadrupled since 2007 to the equivalent of 282 per cent of GDP. That was higher than in the US — although China is lower if financial sector debt is excluded to avoid double counting. McKinsey warns of risks in China’s property sector, local government financing and a rapidly expanding “shadow” banking system.

The country’s overall debt “appears manageable”, McKinsey says, but its indebtedness would restrict its ability to compensate for slower long-term growth in advanced economies.

“Before the [post-2007] crisis there was one area where debt was very low and stable, and that was China,” says Luigi Buttiglione, head of global strategy at hedge fund Brevan Howard and co-author of a report in September on global indebtedness. “When there was a crisis in the west, China could lever up. Now that is not the case.”

The report is likely to fuel debates among economists about what is an appropriate level of debt in an economy. McKinsey argues much of the expansion in developing countries has reflected the healthy development of financial markets, but in advanced economies high debt could constrain growth and create fresh financial vulnerabilities.

High debt levels could make it harder for central banks to “normalise” monetary policy without disrupting the real economy — the US Federal Reserve plans to raise interest rates this year for the first time since 2006. “High debt levels are an outward sign of structural problems,” says Charles Dumas, chairman of Lombard Street Research.

The report comes as Greece this week has pushed for a radical rethink by its creditors of ways of tackling its debt and economic problems. Among the “fresh approaches” McKinsey suggests are innovations in mortgages and other debt contracts to better share risks between borrowers and creditors. Other steps it discusses to prevent future crises include debt reschedulings and even writing off debt bought by central banks under “quantitative easing” programmes.

If debt held by government agencies and the central bank were excluded, Japan’s government debt to GDP ratio would fall from 234 per cent to 94 per cent. But such quick-fix “deleveraging” could itself cause financial turmoil, McKinsey acknowledges.

McKinsey’s conclusions echo warnings by the Bank for International Settlements in Basel, which acts as a think-tank for central bankers. BIS research had found that “when private sector credit-to-GDP ratios are significantly above their long-term trend, banking strains are likely to follow within three years”, Jaime Caruana, BIS general manager, said in a speech late last year.

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