A daily bond market chronicle
Via the Good Folks at Bloomberg:
WHAT TO WATCH:
* (All times New York)
Economic Data
* 10:00am: NAHB Housing Mkt Index, Jan., est. 58 (prior 57)
Central Banks
* 10:00am: Fed’s Powell speaks in Washington
Supply
11:00am: U.S. to announce plans for auction of 4W bills
11:30am: U.S. to sell $24b 3M bills, $24b 6M bills
Via Marc Chandler at Brown Brothers Harriman:
Dollar Mixed As US Returns From Holiday
– The US dollar’s strength is a product of both the expected trajectory of Fed policy and the fact that ECB and BOJ are still in aggressive easing modes
– German government appears to have indicated that it will not publicly oppose the ECB’s bond purchases, despite its private misgivings
– The ECB’s program will be considerably smaller than the BOJ’s, which is expanding its balance sheet by an incredible 1.4% of GDP per month
– We think the odds of a cut by the Turkish central bank today are pretty high
Price action: The dollar is mixed on the day. The euro is trading just below $1.16, while sterling is trading around $1.5150. The yen is underperforming, with the dollar rising back to ¥118.50. In the EM space, MRY is coming under pressure after the government revised its fiscal budget wider and downgrade the GDP forecast. Also of note, KRW is down 1% against the dollar, trailing the weaker yen. The MSCI Asia Pacific index rose 0.7%, with the Shanghai index bouncing back by 1.8% after yesterday’s losses. The Nikkei gained 2%. Of note, the India Sensex made new record highs, in part following news that the government will create incentives for the housing sector. Euro Stoxx 600 is up 0.75% near midday, but the DAX is flat despite the strong ZEW survey. US equity futures are pointing to a higher open. Gold is at a 4-month high near $1295.
The FT reports that the slightly better than expected GDP data from China has given a bit of a bid to the metals market.
Via the FT:
Dr Copper has admitted his prognosis for China was a touch too pessimistic.
Prices of industrial metals are firming after data showed that China’s economy grew by 7.3 per cent in the fourth quarter of last year, which was slightly ahead of economists’ forecasts.
The infrastructure and real estate focused economy also grew at 7.4 per cent for 2014, which was its worst annual performance since 1990, when foreign investors decamped in the wake of the Tiananmen Square massacre.
But markets have focused on the quarterly growth instead of the news-grabbing annual figure, with metals shining after a fierce sell-off last week that followed a plunge in oil prices.
Here is how the London-traded industrial metals benchmarks are doing:
As the FT’s Henry Sanderson reported here, some industrial metals are also in more demand than steelmaking material iron ore because while China’s economy and property market are slowing, car buying and investment in mobile phone networks in the country are still rising.
Via the good folks at Bloomberg:
IG CREDIT: Volume Falls; More Issuers to Exit Blackout Today
2015-01-20 10:44:38.88 GMT
By Robert Elson
(Bloomberg) — Trace count for secondary trading closed at
$12.2b vs $15.8b on Thursday, $12.4b last Friday. It was the
lowest volume session since $11.8b on Jan. 5.
* 10-DMA $15.0b
* 144a trading added $1.7b of IG volume vs $2.1b Thursday,
$1.9b previous Friday
* Most active issues longer than 3 years
* VZ 4.40% 2034 was the day’s most active issue with 2-way
client flows accounting for 59% of volume; client
selling 3:2 over buying
* MS 2.375% 2019 was next with trades between dealers
taking 80% of volume; MS exits blackout period this
morning, has $1.9b maturing Monday
* KFT 5.00% 2042 was 3rd; client flows at 69%
* KFT 5.00% 2042 was 3rd; client flows at 69%</li></ul>
* ODEBRE 6.75% 2022 was most active 144a issue; client flows
took 100% of the volume
* BofAML IG Master Index at +153, unchanged; 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
unchanged at +182, the wide for 2014-2015; +140, a 2014 low
and new post-crisis low was seen July 30, 2014
* Click here for S&P spread history in a 10-year lookback
* Markit CDX.IG.22 5Y Index at 71.7 vs 73.2; 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 was $2.5b Friday vs $17.65b Thursday, $1.75b
Wednesday, $10.35b Tuesday and Monday’s $11.15b
* Pipeline of expected domestic, SSA January issuers; M&A-
related deals for 2015; AA kicks of earnings this afternoon
* JPM exits blackout period this morning; JPM a likely January
issuer, based on historical record
* Serial January issuers:
* GE Cap’s history as serial January issuer held; JPM too
* GS, exited blackout Friday, often issues in January, has
large maturities in 2015
* ABIBB has history of January issuance
* ABIBB has history of January issuance</li></ul>
Prices of Treasury coupon securities have posted modest gains when viewed against levels which prevailed in late New York trading on Friday but remain at the low end of levels which prevailed in the futures market yesterday and last evening. When compared against the late New York levels the yield on the 5 year note has slipped to 1.268 from 1.296. Similarly, the yield on the 7 year note dropped to 1.583 from 1.614. The yield on the 10 year note plumbed the depths below 180 as it has edged lower to 1.799 from 1.84. The yield on the Long Bond fell to 2.421 from 2.454. The yield curve manifests mixed movements within those yield changes. The 5s 10s spread flattened to 53.1 from 54.4. The 5s 30s spread flattened to 115.3 from 115.8. However, 10s 30s steepened to 62.1 from from 61.4. The 5s 10s 30 spread narrowed a basis point to -9. The 2s 5s 10s spread richened to 25.8 from 26. Dealers report yen funded buyers of spread product in the belly of the curve as well as real money sellers of both 10s and 30s.
The big news story overnight was the GDP from China. On a YOY basis the growth was a tad better than anticipated at 7.4 percent and also a tad better than expected in Q4 at 7.3 percent. Retail sales and IP printed in line and slightly firmer than forecasts. The bottom line is that growth in China is slowing but there is no hard landing as the descent remains quite controlled.
In another development the IMF paints a gloomy picture of the global economy. That august agency has lowered its forecast for global growth in 2015 to 3.5 percent from 3.8 percent and to 3.7 percent from 4 percent in 2016. The US remains the engine of global growth as IMF forecasters have raised their estimate for this year to 3.6 from 3.1.
Some who wrote overnight remarked on the Hilsenrath WSJ story which I posted yesterday afternoon (here). That article reports that the FOMC is still on track to raise rates this year and that caused the market some consternation and led to the lower prices in the futures market which I noted in the opening paragraph.
The Treasury market broke to new low yields last week from about the 1.90 level and traded down to 1.72 percent on 10s. At current levels are at about the midpoint of that range. I do not see a trade here and would prefer to wait for better location. If we move below 1.75 I would look for a spot to sell and if we leak back towards 1.875 then I am better buyer. To a large extent we are in the hands of Mr Draghi and whatever he chooses to announce on Friday. Many with whom I converse think he will underwhelm expectations and hope for a sharp uptick after the announcement which they could sell. That worked in the US in the various incarnations of QE here.
Via the NYTimes:
75 is the approximate number, in millions, of millennials that the United States will have this year. The total of millennials — those born from 1981 to 1997 — will reach 75.3 million, overtaking baby boomers (1946 to 1964) as the United States’ largest living generation.
How does a generation that has stopped enrolling members manage to keep growing? An influx of immigrants, according to a new report from the Pew Research Center. And, of course, members of the boomer generation, currently at 74.9 million, are beginning to die in greater numbers.
But deciding who belongs to which generation is neither an exact science nor a settled debate. While demographers long ago agreed on the dates defining the baby boom, many young people now considered millennials could one day be reclassified into the following generation (whatever we decide to call it).
“In order to do my analysis, I needed to define who is the youngest millennial,” said Richard Fry, a senior research associate at Pew and author of the report. “But it’s not clear yet when the millennials have ended and the next generation began.”
In the years to come, demographers will sift through all sorts of evidence to arrive at a final date range. If it turns out that people born in 1997 have more in common socially and politically with those born in, say, 1994 than those born in 1985, they could be reassigned, instantly shrinking today’s millennial mass by several million members.
Indeed, there are signs that today’s 18-year-olds do not really fit in.
“One of the defining events typically associated with millennials is that they grew up experiencing 9/11,” Mr. Fry said. But those born in 1997 “would have been 5 years old when the attacks happened,” not usually an age when global events leave formative impressions.
These sorts of judgment calls are the reason Generation X remains smaller than those before and after it (leading to the nickname The Middle Child Generation). Generation X is defined as people born from 1965 through 1980 — not just a time when fewer children were born in the United States, but at 16 years, a relative short period in demographic terms.
There is power in numbers, and the size of the millennial generation will carry some benefits for its members.
For one, expect the often-maligned generation to push back against negative stereotyping, said Jeffrey Arnett, a psychologist at Clark University who has written extensively on millennials.
“They are tired of being stereotyped by boomers, whom they view as ruining the world for them,” he said. “This could allow them to demand more respect than they’ve gotten so far.” Perhaps more important, it will give them “more power in the conversation about where American society should go in particular.”
With so many members, millennials are likely to wield more power in the workplace, too, said Jan K. Vink, a demographer at Cornell University.
“You will have more young people with less experience” making up the work force, he said. “It will affect productivity, but also opportunity. With a generation retiring, there will be more opportunities for people to move up in the work force.”
But don’t be too quick to draw any conclusions based on the assumption that birth date determines character, Dr. Vink said.
“People tend to add social characteristics to a certain generation, but you cannot tie that to a year of birth,” he said. “Just like some people like to tie some generalization to race or religion, you cannot put everybody in the same couple of years in the same box.”
Especially when there are 75 million of them, give or take.
The FT has posted an article which details the latest carnage from the Swiss National Bank’s decision last week to untether the franc. It also details the angst which regulators are suffering as they survey the damage.
A leading European foreign exchange broker filed for administration on Monday and a Danish bank conceded it faced heavy losses as the UK’s market regulator stepped in to assess the damage wreaked on the industry by last week’s violent swing in the Swiss franc.
The Financial Conduct Authority sent letters to an unspecified number of currency brokers on Friday asking them to update the regulator about any impact the Swiss move could have had on their balance sheets, according to a person familiar with the situation.
Global markets were left reeling last Thursday when Switzerland unexpectedly abandoned its currency ceiling against the euro. In one of the most damaging currency swings in the modern trading era, the Swiss franc soared in value, leaving investment banks across the world with big losses and hitting foreign exchange brokers particularly hard.
Alpari became one of the biggest casualties when a last-minute rescue ended in failure. Meanwhile, Denmark’s Saxo Bank was forced to admit on Monday that it was likely to suffer losses.
The fallout of the Swiss franc’s move has heightened scrutiny of a lightly regulated industry in which customers are often offered large amounts of leverage by companies to entice them to trade. London has been the venue for many of these brokers as it remains the world’s main hub for currency trading.
Punters deposit money with the broker and use it as collateral to borrow a much larger amount and magnify their trading positions. In London it is customary to offer 100-200 times the amount deposited into an account, although higher sums are available.
Some brokers had a policy of covering client losses beyond their deposit in the short term, thus allowing customers to gear up their accounts. Violent market moves — such as that of the Swiss franc last week — mean investment prices fluctuate substantially and can trigger immediate calls for large payments of margin from customers, who may not be able to pay immediately.
Some brokers such as IG Group, CMC Markets, Swissquote, Oanda and Interactive Brokers, survived the Swiss franc’s violent gyrations, but sustained losses. US-based FXCM, which handled a record $1.4tn in trades made by individuals last quarter, took a $300m cash lifeline from Leucadia National, owner of investment bank Jefferies, to ward off fears it would breach its capital requirements while New Zealand’s Global Brokers was forced to close.
Saxo Bank said it would fulfil all of its regulatory capital requirements though it would also be likely to incur some losses from customers unable to pay their debts. The group doubled its margin requirements for Swiss franc trades last September to 8 per cent, which effectively halved the amount of leverage available to customers to around 12.5 times.
Meanwhile KPMG was appointed as special administrator to Alpari (UK) Ltd after the group failed over the weekend to agree a rescue takeover deal. “We have had a number of enquiries from interested parties in relation to the company’s business,” said Richard Heis, one of the KPMG administrators. “We will be speaking with these parties and others over the next few days, and hope to secure a deal to preserve the business and jobs as far as possible.”
Alpari, which employs about 170 people in London, has nearly $100m in client money which has been segregated under FCA rules.
The FCA is in the middle of a root-and-branch review of the retail forex sector, still under wraps. Its so-called thematic review last year looked into 40 banks, brokers and asset managers, including providers of contracts-for-difference. It found that firms were failing to get the best terms on client trades, leaving customers millions of pounds out of pocket.
It shares similar concerns, according to FCA insiders, to France’s Autorité des Marchés Financiers, which published a paper last year outlining that 85 per cent of customers lost money through retail-forex trading. It is still unclear what proposals, if any, might result from the FCA’s ongoing review, and whether it may result in action.
Via the WSJ:
Federal Reserve officials are on track to start raising short-term interest rates later this year, even though long-term rates are going in the other direction amid new investor worries about weak global growth, falling oil prices and slowing consumer price inflation.
After their next policy meeting Jan. 27-28, officials are likely to repeat in their statement that they can “be patient” about rate increases. That means no moves for at least the next two meetings—or not until June at the earliest, they have indicated in recent public statements and interviews. At the same time they aren’t likely to signal an alarm about developments abroad that would indicate a meaningful shift in their plans.
Many Fed officials have signaled they expect to start lifting their benchmark short-term rate from near zero around the middle of the year. Recent developments in the economy and markets have caused some trepidation among Fed officials and, if sustained, could cause them to delay acting. However several have indicated recently they still expect to move this year and are withholding judgment on delay.
“I think it is important to get started and to start normalizing policy,” St. Louis Fed President James Bullard said in an interview with The Wall Street Journal on Monday. “Even once we start to normalize, interest rates would be extraordinarily low.”
While European officials are near launching a new bond-buying program known as quantitative easing to boost feeble growth and low inflation, Fed officials are generally upbeat about U.S. economic prospects. U.S. inflation is below the Fed’s 2% objective, but the unemployment rate fell—to 5.6% in December, which many Fed officials take as a sign that wage and price pressures could be building in the domestic economy. They have held short-term rates near zero since December 2008 and want to start moving them up before those pressures gather force.
Some investors have been betting the Fed will hold off on rate increases. In fed funds futures markets—where traders stake out positions on the expected Fed target rate—the average expected rate for the month of June has drifted down from 0.20% to 0.16% since the beginning of the year, a sign investors in these markets see a diminished likelihood of a midyear rate increase.
“I would have guessed June up until this past week,” Harvard University economics professor Jeremy Stein, a former Fed governor, said in an interview last week.
One worrying development for Fed officials is a drop in yields on 10-year Treasury notes below 2%. Boston Fed President Eric Rosengren said in an interview last week the decline raised questions about whether investors believe the Fed’s forecast that inflation will rise toward 2% in coming years. Treasury yields tend to move in line with inflation. If investors believed inflation was set to rise, yields on government bonds would be rising, not falling.
But other officials believe the drop in bond yields is being caused primarily by global capital flows–most notably a rush of investors into U.S. assets and out of lower-yielding European investments. These officials are prepared to look through the drop in bond yields for now until there is more convincing evidence U.S. inflation has taken a sustained turn lower.
The Labor Department reported Friday the U.S. consumer price index rose just 0.8% in December from a year earlier, well below the Fed’s goal. But the weak reading is being driven largely by falling energy prices, something officials believe will pass.
Excluding volatile food and energy items, so-called core prices rose 1.6% on the year. That’s slower than a 1.7% annual gain in November and 1.8% in October. If sustained it could cause Fed officials to change their plans, but so far many officials don’t believe the inflation backdrop has materially shifted.
The worry is that inflation well below the 2% goal goes hand-in-hand with a soft economy.
“The level of inflation is not so low that it can alone justify a policy rate of zero,” Mr. Bullard said in a speech Friday. He wants the Fed to start raising rates by March, earlier than most other officials.
San Francisco Fed President John Williams said in a speech Friday the middle of the year may still be the best time for the U.S. central bank to increase rates.
Given the health of the broader economy, “what I’m really watching for is underlying inflation—wage growth, prices,” he told reporters later. “My forecast is once we get through this slow path in inflation it will start moving back,” he said, adding, “I’m not expecting inflation to be 2% when we raise interest rates. I don’t need to be at the goal when we raise the rates.”
While Fed officials appear likely to stay the course at their coming meeting, they are heading toward important and potentially difficult decisions at their subsequent meeting in March. If they are to raise rates by June, they would signal it in March by removing from their statement the language about patience. Continued declines in core inflation or bond yields at that point could convince them to delay such a shift. On the other hand further gains in employment and economic growth would encourage them to proceed toward rate increases.
Central to their internal deliberations ahead of the March meeting is a debate about how low the jobless rate can fall before it stirs wage and inflation pressure. Fed officials estimate the “natural rate” of unemployment—meaning the rate below which wage pressures increase—is between 5.2% and 5.5%.
Mr. Rosengren said he was considering revising this estimate down because the jobless rate has fallen to near the 5.2%-5.5% range without triggering any sign of wage pressure. He said he suspected some of his Fed colleagues also were considering moving this estimate down. The lower the estimate goes, the more patient they might be before raising rates.
The NYTimes is carrying a story which says that the richest eighty billionaires on the planet control as much wealth as the bottom 50 percent of the global population (3.5 billion people).
Via the NYTimes:
The richest 1 percent are likely to control more than half of the globe’s total wealth by next year, the charity Oxfam reported in a study released on Monday. The warning about deepening global inequality comes just as the world’s business elite prepare to meet this week at the annual World Economic Forum in Davos, Switzerland.
The 80 wealthiest people in the world altogether own $1.9 trillion, the report found, nearly the same amount shared by the 3.5 billion people who occupy the bottom half of the world’s income scale. (Last year, it took 85 billionaires to equal that figure.) And the richest 1 percent of the population, who number in the millions, control nearly half of the world’s total wealth, a share that is also increasing.
The type of inequality that currently characterizes the world’s economies is unlike anything seen in recent years, the report explained. “Between 2002 and 2010 the total wealth of the poorest half of the world in current U.S. dollars had been increasing more or less at the same rate as that of billionaires,” it said. “However since 2010, it has been decreasing over that time.”
Winnie Byanyima, the charity’s executive director, noted in a statement that more than a billion people lived on less than $1.25 a day.
“Do we really want to live in a world where the 1 percent own more than the rest of us combined?” Ms. Byanyima said. “The scale of global inequality is quite simply staggering.”
Investors with interests in finance, insurance and health saw the biggest windfalls, Oxfam said. Using data from Forbes magazine’s list of billionaires, it said those listed as having interests in the pharmaceutical and health care industries saw their net worth jump by 47 percent. The charity credited those individuals’ rapidly growing fortunes in part to multimillion-dollar lobbying campaigns to protect and enhance their interests.
Via a fully paid up subscriber:
19-Jan-2015 14:48 – BUNDESBANK STILL STRIVING TO PUT LIMITS ON ECB QUANTITATIVE EASING – SOURCES FAMILIAR WITH THE DEBATE ..rtrs