The drama unfolding in Athens has caused another jump in Greece’s bond yields, as markets anxiously watch the political games ahead of the snap Greek election on January 25.
Germany has moved to quash a report on the weekend that Greece would be allowed to exit the eurozone if the radical anti-austerity party, Syriza, rides to power at the polls later this month, but investors are clearly a little concerned.
The three-year Greek bond yield climbed up 69 basis points to 12.63 per cent this morning amid continued jitters over the outcome of the election. The 10-year yield rose 20 bp to 9.19 per cent.
Germany was forced to deny a report published in Der Spiegel magazine on the weekend that Chancellor Angela Merkel would be prepared to abandon her commitment to keeping Greece in the eurozone. Fears of a Grexit was one of the factors that helped to push the euro to a nine-year low overnight.
Former Greek prime minister, George Papandreou, launched a new party on the weekend, the Movement of Democratic Socialists, in a move that further muddies the political landscape ahead of the election.
Analysts at Rabobank suggest the volatility will continue until the Greek public go to the polls. They said:
Going forward, the wealth of known unknowns re. the Greek election on Jan 25 (the outcome, the potential govt formation, the character of the next govt – of note here being whether Syriza will soften its crowd-pleasing antagonistic stance vs. the country’s official creditors should it be victorious) is likely to inject significant volatility into the GGB market.
Posted in Uncategorized | Comments Off on Greek Yields
By Robert Elson
(Bloomberg) — The final Trace count for secondary trading
was $1.9b Friday vs $2b New Year’s Eve. 2014 secondary trading
high was in Jan., low in Dec.
* 144a trading added $158m of IG volume vs $295m
* BAC 4.00% 2024 was the day’s most active issue with dealer-
to-dealer flows accounting for 65% of volume, client selling
35%
* WFT 6.50% 2036 was next with client flows taking 100% of
volume
* ENBCN 4.90% 2015 was 3rd with client trades accounting for
100% of volume
* MUFG 3.85% 2015 was most active 144a issue; client buying
took 100% of the volume
* BofAML IG Master Index at +145 vs +144 ; +151, the wide for
2014 was seen Dec 16; +106, the low for 2014 and the
tightest spread since July 2007 was seen June 24
* Standard & Poor’s Global Fixed Income Research IG Index at
+173, unchanged; +177, the wide for 2014 was seen Dec 16;
+140, a 2014 low and new post-crisis low was seen July 30
* S&P HY index at +581 vs +576; Dec 16 saw the wide for 2014
at +644
* Click here for S&P spread history in a 10-year lookback
* BofAML HY Index at +508 vs +504; +571, the wide for 2014 and
the widest spread since Nov 2012 was seen Dec 16
* Markit CDX.IG.22 5Y Index at 67 vs 66.3 at year end 2014;
76.1, a new wide for 2014 was seen Dec 16; 55 was seen July
3, the low for 2014 and the lowest level since Oct 2007
* December’s IG issuance was $60.5b; 2014’s was $1.395t
* Pipeline continues to grow; list includes expected domestic,
SSA January issuers; M&A-related deals for 2015
* 2015 has expected multibillion refis
* Serial January issuers:
* GE Capital may open 2015 issuance
* JPM a likely January issuer, based on historical record
* BAC historically issues in January
* GS often issues in January, has large maturities in 2015
* ABIBB, BRK have history of January issuance
* ABIBB, BRK have history of January issuance</li></ul>
* Serial SSA January issuers added to pipeline
* EIBKOR may be first Asian issuer in new year
Posted in Uncategorized | Comments Off on Corporate Bonds
Prices of Treasury coupon securities are registering modest losses in the first fully staffed session of the New Year. The yield on the benchmark 5 year note has climbed to 1.632 from 1.612 at the close on Friday. The yield on the 7 year note has increased to 1.939 from 1.915. The yield on the 10 year note has edged higher to 2.129 from 2.111. The yield on the Long Bond has increased to 2.703 from 2.69. on balance the yield curve is flatter. The 5s 10s spread has narrowed to 49.7 from 49.9. The 5s 30s spread has narrowed to 107.1 from 107.8. The 10s 30s spread has flattened to 57.4 from 57.9. The 2 s 5s spread has steepened to 94.3 from 93.1. That spread had reached a cycle low at that previous level. The 2s 5s 10s spread had traded as cheap as 51.6 on December 29 which was a cycle wide for that spread. It has collapsed to 44.6 this morning. Throughout most of 2014 the 5s 10s spread flattened dramatically while 2s 5s spread flattened but not as noticeably. As the date for possible rate hikes draws closer the 2s 5s spread should continue to narrow and should richen 2s 5s 10s as the 2s 5s flattening becomes more pronounced.
Dealers reported active client flow to begin the New Year. Real money in Japan sold 7 year through 10 year paper for the perceived safety of the 5 year sector. Central banks sold 5 year paper and bank portfolios engaged in modest sized buying of the 4 year sector.
In overnight news German state CPIs fell sharply and the market awaits the national data. The Euro fell sharply to a multi year low and the breach of 1.20 triggered stops at that level. The slide in the Euro reflects concerns about Greek elections, a weekend story about German apathy regarding a Greek exit from the Euro and the prospects for sovereign QE at the next ECB gathering. The Markit PMI of UK construction dipped to its lowest level since July 2013.
There is no meaningful data scheduled for release in the US today.
The new issue market for corporate bonds turned quiescent at year end. The flip of the calendar page to read 2015 should change that and I would expect for a quick surge of issuance.
Posted in Uncategorized | Comments Off on January 05 2015 Opening
The new year has started with a decided momentum to lower yields, as the implosion in commodity markets continues and currency volatility remains high as positions are adjusted after year-end to reflect growing imbalances. Draghi’s comments from several days ago appear to be the catalyst for the drop in EU government bond yields to new historic lows, as 5yr Germany has turned negative and 10yr Bunds have broken 50bp. The suggestion from Draghi that deflation risk exists, while still remote, and that policy will be adjusted to reflect the risks, has allowed Bunds to follow long-end JGBs to historic low yields, with just 30yr JGBs yet to make new lows under 1.21%, having rallied all the way to 1.24% in recent weeks.
30yr Bunds, at 1.31%, are just 7bp above 30yr JGBs as the global reach for yield continues to be driven by expansive CB balance sheets and lack of traction to growth momentum from low nominal yields as collapsing headline inflation raises real yields. The question for 2015 will likely revolve around the headline versus core inflation trajectory, as inflation pass-through to lower prices is potentially offset by increased growth momentum in energy importing countries/sectors once the negative effect of a crash in energy prices has been absorbed and the consequences identified in terms of recession/high yield markets. With energy prices still searching for a bottom, any conclusive outcome remains months away, even though the Federal Reserve appears to have decided the net outcome will likely be positive.
From this standpoint, the US yield curve continues to flatten while 5yr note yields failed to make new highs over 1.87% as 2 and 3yr notes took the brunt of ongoing hawkish FOMC comments. Yellen’s mention of no rate hikes for the next 2 meetings also blurred an otherwise dovish FOMC statement, which retained ‘considerable period’ while also paying a little more deference to the collapse in market based measures of inflation compensation.
Those measures have rebounded in recent days, with 5yr break-evens parting ways with oil and gasoline futures as new year money appears to have been allocated to the sector. 5yr real yields have dropped around 20bp from the 47bp highs and are currently around 12bp in the money since auction, at 27bp. However, we do think that such allocations will need to be supported by a rebound in energy prices fairly quickly, otherwise TIPs will suffer from ongoing hawkish Fed comments, such as those from Mester this morning. The 30yr long bond is also testing the 2.67% lows, while the failure of 5yr yields to make new highs despite a hawkish FOMC suggests that the hawkish message is increasingly being rejected by shorter and shorter maturities.
The reversal in the UK rate outlook is instructive in this regard, while GBP has gone from being the poster child for QE effectiveness to again performing the function of escape valve for an economy in need of stimulus. The BOE has quietly gone from warning of a potential rate hike last November to seeing most analysts push their forecast back to 2016 for the first hike. True, measures to combat an over-heating housing market have been adopted, akin to a rate hike and better focused, while the deflation risk from Europe and collapsing headline inflation have raised the risk of being ‘pre-emptive’. For now, the US economy has powered ahead with 2 back-to-back near 5% GDP quarters, while a transitory price shock has been seen as positive in the medium term.
Posted in Uncategorized | Comments Off on A Market Opinion
The ECB head granted an interview to a German newspaper and said he cant exclude the possibility of deflation in the Euro area and hinted at QE. The Euro trades near 4 1/2 year lows and sovereign debt of peripherals is screaming tighter. I follow US/Spain in the 10 year sector and that spread this morning is Spain 66 basis points through US. I marked that spread on Wednesday at 59 basis points. As recently as December 23 the spread was trading at 49 basis points.
Via Bloomberg:
Draghi Says ECB Prepares Action as Deflation Risk Non-Negligible
By Jana Randow and Alessandro SpecialeJan 2, 2015 4:55 AM ET
European Central Bank President Mario Draghi said he can’t exclude the risk of deflation in the euro area, hinting that the likelihood of large-scale quantitative easing is increasing.
“The risk that we don’t fulfill our mandate of price stability is higher than it was six months ago,” Draghi said in an interview with German newspaper Handelsblatt. “We are in technical preparations to alter the size, speed and composition of our measures at the beginning of 2015, should this become necessary, to react to a too-long period of low inflation. There’s unanimity in the ECB council on that.”
While policy makers agree in principle, the debate over whether fresh stimulus is needed at this point has reopened a rift on the ECB’s Governing Council that now comprises 25 officials after Lithuania joined the currency region on Jan. 1. With inflation seen turning negative this year, some have warned of a deflationary spiral, as others have urged waiting to allow previously agreed measures to show their effect.
Draghi said on deflation that “the risk cannot be entirely excluded, but it is limited” and “we have to act against such risk.” Asked how much the ECB will have to spend on government bonds, he said “it’s difficult to say.”
Italian and Spanish bond yields dropped to record lows after the interview was published and the euro fell to the weakest since June 2010. The single currency was down 0.5 percent at $1.2045 at 8:22 a.m. Frankfurt time. The Governing Council will hold its next monetary-policy meeting on Jan. 22.
Posted in Uncategorized | Comments Off on Dovish Draghi
Currencies: The euro broke below the mid-2012 low to trade at $1.2035, rapidly approaching the June 2010 low of 1.1877. Euro-area final PMI manufacturing for December came in slightly lower at 50.6, but more significantly, Draghi made some more dovish comments during an interview to a German newspaper yesterday. He reinforced the ECB’s reediness to act and his concerns about deflation. The New Zealand dollar is the weakest major currency on the day, falling to $0.7750 against the dollar, but still well within recent ranges. The pound is also underperforming, falling to a 16-month low of 1.5470 after a weaker UK PMI figure for December, at 52.5 compared with 53.6 expected. The dollar is back above the ¥120.0 level against the yen, in part supported by comments by BoJ governor Kuroda saying that the bank still has tools to meet the CPI target. The Indonesian rupiah fell over 1% following a shockingly weak set of trade prints for December. Exports fell -14.5% y/y (exp. -4.5%) and imports were -7.3% (exp. +0.1%), leading to a -$426 mln trade deficit. The ruble is back on the defensive again, falling 1.0% against the basket.
Equities: In contrast with the weak US close on Wednesday and the mood in European stocks today, the Asian markets that were open traded mostly higher. India was up 1.3% and Korea up 0.6%. Indices are mixed in Europe. The Dax is underperforming at -0.8% but the Spanish Ibex and the Italian FTSE are up around 0.8%. US futures are up 0.4%.
Fixed income: US Treasury yields are up 3-4 bp across the curve. In Europe, periphery yields are mostly lower, led by Greek 10-year debt down 27 bp, while Portuguese and Italian yields are down 16 and 7 bp, respectively.
Today: The US releases final manufacturing PMI for December, expected to tick higher to 54.0, but still below last December’s print of 55.0. December ISM will also be released, expected to fall slightly to 57.5.
WHAT TO WATCH:
* (All times New York)
Economic Data
* 9:45am: Markit US Manufacturing PMI, Dec. final, est. 54
(prior 53.7)
* 10:00am: Construction Spending, Nov., est. 0.4% (prior 1.1%)
* 10:00am: ISM Manufacturing, Dec., est. 57.5 (prior 58.7)
* ISM Prices Paid, Dec., est. 43.0 (prior 44.5)
* ISM Prices Paid, Dec., est. 43.0 (prior 44.5)</li></ul>
Posted in Uncategorized | Comments Off on what to Watch for Today
AAA has calculated that the drop in gasoline prices will save consumers of that product $75 billion in 2015.
Via Bloomberg:
AAA Says Motorists May Save $75 Billion on Gasoline This Year
By Mario ParkerJan 1, 2015 12:00 PM ET
The rout in crude oil prices may mean as much as $75 billion in gasoline savings for U.S. drivers in 2015, according to AAA.
Americans saved $14 billion on the motor fuel last year compared with 2013, Heathrow, Florida-based AAA, the country’s largest motoring group, said by e-mail. Pump prices dropped a record 97 consecutive days to a national average of $2.26 a gallon yesterday, the lowest since May 12, 2009.
A global glut of crude oil and a standoff between U.S. producers and the Organization of Petroleum Exporting Countries over market share has been a boon for consumers. U.S. production climbed in 2014 to the highest in three decades amid a surge in output from shale deposits. Oil capped its biggest annual decline since the 2008 financial crisis.
“Next year promises to provide much bigger savings to consumers as long as crude oil remains relatively cheap,” Avery Ash, an AAA spokesman, said by e-mail yesterday. “It would not be surprising for U.S. consumers to save $50-$75 billion on gasoline in 2015 if prices remain low.”
U.S. benchmark West Texas Intermediate crude dropped 46 percent in 2014 while Brent oil, the international benchmark that contributes to the price of gasoline imports, fell 49 percent.
“It’s getting lower because what happened? We drilled in the United States,” Peyton Feltus, president of Randolph Risk Management in Dallas, said yesterday in a telephone interview. “We’re buying more of it from ourselves, which is a great economic multiplier.”
Gasoline Futures
There is “significant uncertainty” over the cost of crude this year as lower prices may force companies to curb production and may also lead to instability in other oil-producing countries, the motoring group said.
Gasoline futures fell 48 percent in 2014 to close at $1.4353 a gallon yesterday on the New York Mercantile Exchange.
The average U.S. household will save about $550 on gasoline costs this year, with spending on track to reach the lowest in 11 years, the Energy Information Administration said Dec. 16.
Gasoline prices are inelastic, meaning they have little effect on demand for the fuel, Feltus said.
That leaves people with more money to spend on other products or save, he said.
“They’ve got more disposable income and they’re going to have even more in the coming months,” Feltus said. “Gasoline prices are going to go lower than anybody thought they could.”
Posted in Uncategorized | Comments Off on Falling Gas Prices Equal Tax Cut Department
The U.S. economy enters 2015 with the strongest momentum in at least a decade and as the fittest of all the industrialized nations. The question is whether that muscle can help yank the rest of the world out of its doldrums.
“Our expectation is for a fairly robust U.S. economy, and that’s where the good news starts and ends,” said Adolfo Laurenti, chief international economist for investment and advisory firm Mesirow Financial. “Everything else in the world looks choppy.”
The nation added 2.7 million jobs in 2014 through November, the best year for employment growth since 1999. Economic output registered its best six-month stretch since 2003. Claims for jobless benefits have been running lower than at any point since 2000.
But after six slow years of economic recovery, the test for the U.S. is no longer just about overcoming employer reluctance to hire and lingering damage from the housing bubble. It is whether the U.S. can thrive when so much of the world is stumbling.
Plunging oil prices, while good for consumers and their spending power, are expected to slow economic growth in petroleum-producing regions ranging from Russia to Africa to Latin America. Geopolitical worries from the Middle East to Eastern Europe hang over swaths of the globe. The eurozone remains lethargic with some of its members, like Italy, tumbling into a third recession since the financial crisis.
China’s economy, long seen as a global growth engine, has been hit by slumping real estate, weak domestic demand and tumbling industrial production. In the third quarter, China grew 7.3% from a year earlier, but that was its slowest rate in five years. Japan has notched two quarters of contraction, heralding another recession.
Many of the world’s politicians and central bankers are struggling to jump-start the global economy, either because of the challenges of debt overhangs and aging demographics in advanced economies or because of an unwillingness to deploy some of their own powers in unpopular ways.
In this world of rising risks, many companies seek out the U.S. as a safe harbor. “The geopolitical developments matter much more than many people believe,” Joe Kaeser, chief executive of Siemens AG of Germany, said in a presentation last month. “That’s why we invest in the United States, as certainly the most attractive, most safe geopolitical region.”
To be sure, the U.S. has weathered global weakness before. International turmoil has a history of denting U.S. growth but not toppling it.
The Asian and Russian financial crises of the late 1990s caused a scare, and even led to the implosion of a major U.S. hedge fund. But “even though there was a big slowdown in global industrial production, it had essentially zero effect on the U.S. economy,” said Wells Fargo global economist Jay Bryson. “In the modern era, I cannot think of a cycle here that was caused by a slowdown abroad.”
The rest of the world, too, has become less dependent on the U.S., blunting the positive impact of a healthier U.S. economy. As recently as 2002, the U.S. accounted for 32% of world GDP, according to the World Bank. That share declined over the next decade and has sat around 22% since 2011. The U.S. is by far the world’s largest importer, but it accounts for just 13% of global imports, down from 16% in 2005.
The world is more globalized than ever before, and the linkages among financial markets have increased. But the U.S. is less reliant on trade than any other economy. According to the World Bank, exports made up 14% of U.S. GDP in 2012, the most recent year for which full international figures are available. That compared with 27% for China, 32% for the U.K., and 45% for the eurozone.
Recent recessions underscore the point that the U.S. economy often acts on its own. The recession that began in 2007 followed the crumbling of U.S. home prices and was exacerbated by the collapse of U.S. financial institutions. The 2001 recession came amid a bursting tech-stock bubble. Recessions in the early 1980s and ’90s came after monetary tightening campaigns by the Federal Reserve. Soaring oil prices choked the economy in the 1970s.
The combination of domestic strength, global weakness and plunging oil prices could present a challenging landscape for global central banks.
Federal Reserve Chairwoman Janet Yellen has laid the groundwork for the central bank to raise interest rates around midyear, bringing to an end a nearly seven-year era of short-term interest rates near zero. But she will need the economy to cooperate in order to unite the Federal Open Market Committee around a campaign to tighten monetary policy.
The U.S. has now recovered all the jobs lost during the recession and enters 2015 with record employment, and if recent trends continue, the labor market this year will reach the Fed’s estimates for what is considered full employment. Yet not all is well. The labor-force participation rate is near the lowest since the 1970s, wage growth has remained weak, and an elevated number of part-time workers want, but can’t find, full-time work. Those who become unemployed remain that way for an unusually long time.
Meanwhile, measures of inflation are likely to drift even further from the Fed’s goals. The central bank believes inflation below 2% makes it harder for people to pay off debts, and more difficult for monetary policy to goose the economy.
“Markets are strongly hinting that global deflationary trends are so strong the Fed will have trouble hitting 2% for quite some time,” said Michael Gapen, chief U.S. economist for Barclays and a former Fed economist.
The European Central Bank and Bank of Japan may see their goals of juicing economic growth complicated by falling inflation. Already, aging populations and enormous debt burdens—problems that can’t be swiftly addressed—weigh on economic growth. Japan and Europe appear set to move toward further monetary easing in 2015 even as the Fed begins tightening. Those divergent policy paths could pose a new family of challenges.
The Dow Jones Industrial Average closed above 18000 for the first time in late December. If the bull market continues to March, it will be six years old. But the tide of buoyant markets has a history of turning when least expected, and a tightening of U.S. monetary policy could create a challenging environment for equities.
Posted in Uncategorized | Comments Off on Can the US Thrive in the Face of Global Weakness
China Factory Gauge Slips to Lowest Level Since June 2013
By Bloomberg NewsDec 31, 2014 8:21 PM ET
A Chinese manufacturing gauge slipped to the lowest level in 18 months, adding pressure on policy makers to do more to support growth.
The government’s Purchasing Managers’ Index (CPMINDX) fell to 50.1 in December, compared with November’s 50.3 and a median estimate of 50 in a Bloomberg News survey of analysts. Numbers above 50 indicate expansion.
Investors’ expectations for more monetary easing have sent stocks soaring, with the Shanghai Composite Index registering its biggest annual gain since 2009. Weakness in the housing market is weighing on an economy that probably expanded last year at the slowest pace since 1990, according to economists surveyed by Bloomberg News.
“China’s deepening real-estate correction is the primary cause of the current slowdown,” Bill Adams, senior international economist for PNC Financial Services Group in Pittsburgh, wrote in a note before today’s data release. “The drag from the real-estate sector will be partially offset by modestly better demand for Chinese exports in 2015.”
A manufacturing gauge released yesterday by HSBC Holdings Plc and Markit Economics fell to a seven-month low.
The Chinese economy grew 7.4 percent last year and the pace will cool to 7 percent this year, according to Bloomberg’s survey. Shanghai’s benchmark stock index rose 53 percent last year, with most of the gain coming in the fourth quarter, when the central bank cut interest rates.
The government’s manufacturing index, released by the National Bureau of Statistics and the China Federation of Logistics and Purchasing in Beijing was based on responses to surveys sent to purchasing executives at 3,000 companies.
A services PMI rose to 54.1., compared with the previous month’s 53.9, according to a separate report today from the NBS and the CFLP.
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The rout in crude oil prices may mean as much as $75 billion in gasoline savings for U.S. drivers in 2015, according to AAA.
Americans saved $14 billion on the motor fuel last year compared with 2013, Heathrow, Florida-based AAA, the country’s largest motoring group, said by e-mail. Pump prices dropped a record 97 consecutive days to a national average of $2.26 a gallon yesterday, the lowest since May 12, 2009.
A global glut of crude oil and a standoff between U.S. producers and the Organization of Petroleum Exporting Countries over market share has been a boon for consumers. U.S. production climbed in 2014 to the highest in three decades amid a surge in output from shale deposits. Oil capped its biggest annual decline since the 2008 financial crisis.
“Next year promises to provide much bigger savings to consumers as long as crude oil remains relatively cheap,” Avery Ash, an AAA spokesman, said by e-mail yesterday. “It would not be surprising for U.S. consumers to save $50-$75 billion on gasoline in 2015 if prices remain low.”
U.S. benchmark West Texas Intermediate crude dropped 46 percent in 2014 while Brent oil, the international benchmark that contributes to the price of gasoline imports, fell 49 percent.
“It’s getting lower because what happened? We drilled in the United States,” Peyton Feltus, president of Randolph Risk Management in Dallas, said yesterday in a telephone interview. “We’re buying more of it from ourselves, which is a great economic multiplier.”
Gasoline Futures
There is “significant uncertainty” over the cost of crude this year as lower prices may force companies to curb production and may also lead to instability in other oil-producing countries, the motoring group said.
Gasoline futures fell 48 percent in 2014 to close at $1.4353 a gallon yesterday on the New York Mercantile Exchange.
The average U.S. household will save about $550 on gasoline costs this year, with spending on track to reach the lowest in 11 years, the Energy Information Administration said Dec. 16.
Gasoline prices are inelastic, meaning they have little effect on demand for the fuel, Feltus said.
That leaves people with more money to spend on other products or save, he said.
Gasoline expenditures account for about 5 percent of household costs, according to the Bureau of Labor Statistics’ Consumer Price Index.
“They’ve got more disposable income and they’re going to have even more in the coming months,” Feltus said. “Gasoline prices are going to go lower than anybody thought they could.”