Across the Curve

CPI

As I noted earlier I did not focus on the CPI print this morning. I read through some research and here is the piece from TDSecurities which points out the disinflationary thrust of that report.

Via Millan Mulraine at TDSecurities;

• A dis-inflationary thrust has re-emerged owing to the collapse in energy prices. Headline consumer prices fell at its fastest pace since late-2008, posting a 0.3% m/m drop in November owing to a 3.8% fall in energy prices. The momentum in headline CPI continues to drift lower. The 3M SAAR is falling to -0.7% from 0.5% while the 6M SAAR plunged to 0.0% from 1.2%. The weakening trend in headline prices is expected to persist, and even if gasoline prices remain unchanged for the remainder of the month and into next year, headline inflation is on track to fall in December, and hit a trough of 0.0% y/y by May.

• Core prices were also weak on the month, rising at a very tepid 0.1% m/m pace. Beyond weak energy prices, there were some signs of softening in core commodity prices, which posted a 0.4% m/m decline – the biggest drop since November 2006. The softening in core commodities prices is an indication that some of the weakness in energy prices is beginning to filter through to core goods. Core services, however, remained relatively firm at 0.2% m/m.

• With global growth momentum continuing to weaken the bias is for energy prices to drift lower in the coming months, adding further downside pressures to US inflation. The deceleration in inflation momentum should exert a gravitational pull on break-even rates, with the 5Y5Y FWD rate potentially tugged through the 2.00% mark for the first time since 2010.

• Nevertheless, the transmission of the weaker energy prices to core prices will likely remain limited, shaving about 0.2ppt from the core inflation rate, which we expect to trough at 1.5% y/y by May, before drifting modestly higher thereafter and converging to the Fed’s 2.0% target by mid-2016.

• The modest deceleration in the standard core CPI measure (from 1.8% y/y to 1.7% y/y) has been mirrored by the TD Composite Core Inflation indicator, which has declined from 2.0% y/y to 1.9% y/y.

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TIPS

TIPS breakevens are trading well today. The 5 year break is at 118 versus 114 midday yesterday. The 10 year is at 168 versus 163 yesterday. The 30 year is at 197 currently versus 192 yesterday.

I will confess I have not paid rapt attention to the CPI report released this AM but one participant notes that the strength in TIPS derives from that print. According to him the rounded core CPI was less than 0.1 and that has led some TIPS mavens to believe/hope that the FOMC might take a dovish tack as some of the energy weakness flowed through to the core. A dovish FOMC would be a signal to wave in TIPS and ergo the sense of relief in that market this morning.

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MBS

Mortgages are having a fine day led by 3s which are 3 ticks tighter to Treasuries. Higher coupons are 1 to 1+ ticks better. One market maker suggested that most of what goes on this morning is position squaring ahead of the central bank.

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Swap Spreads

It has been some time since I wrote on other asset classes besides Treasuries.

I spoke to a market maker this morning and asked him what he thought the resting position is in the street as we approach FOMC time. He commented that traders had been in paid positions but the little mini October 15 like squeeze yesterday morning on the collapsing ruble squeezed many out. He thinks that positions are very close to even. He said the market is extremely illiquid and is subject to the last large trade. He did note that there was some robust buying of puts on Eurodollar contracts in the 1 year to 2 year sector late yesterday.

Spreads are mixed this morning and flows are light. Two year spreads are in 3/4 basis point and 5 year spreads are unchanged.  Ten year spreads are 1/4 wider and 30 year spreads are unchanged.

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FX

Via Marc Chandler at Brown Brothers Harriman:

Dollar Recovers, Oil Doesn’t

– The US dollar’s recovery that began yesterday continues today
– The FOMC meeting today is the main focus; US CPI figures to be released earlier are of little consequence
– Japan’s trade deficit was smaller than expected, but this reflected a surprise fall in imports
– The UK released both the MPC minutes and the latest labor figures
– The first round of the Greek presidential selection process is being held today
– Bank Indonesia intervened to lend the rupiah some support
– Brazil extends its FX swaps program

Price action:  The dollar is stronger against the majors ahead of the FOMC decision.  NOK and kiwi are underperforming, while sterling and the loonie are holding up a bit better and are nearly flat on the day.  The euro is trading near $1.2450, while cable is holding just above $1.57.  Dollar/yen has recovered further, trading back above the 117 level.  EM currencies are broadly weaker, with KRW and ZAR underperforming.  IDR is the best performer, helped by Bank Indonesia intervention.  MSCI Asia Pacific was down 0.3%, while MSCI EM is down for the ninth straight day.  Euro Stoxx 600 is down 0.4% near midday, while S&P futures are pointing to a higher open.  Oil prices continue to slide, with WTI down nearly 2% and trading below $55 again.

• The US dollar’s recovery that began yesterday continues today.  The euro reached the 50% retracement objective of its slide since mid-October (~$1.2565) and now is more than a full cent lower.  The dollar’s slump against the yen ended just above the JPY115.50 level, also a key technical retracement level.  The dollar’s high today was JPY117.50.  
• This is not to say the dollar’s recent decline was purely technical, but that squaring of positions – not a change in fundamental views – seemed like the main driver.  The dollar’s slide began after new highs were recorded on December 8.  Since then, the implied yield of the December 2015 Eurodollar futures fell by more than 20 bp.  The implied yield on the December 2015 Fed funds futures contract fell 18 bp.  We think this reflects ideas that the disinflation impulse from the first and secondary impact of the drop in energy prices will limit the Fed’s hikes next year.  
• The FOMC meeting today is the main focus.  The US November CPI figures to be released earlier are of little consequence, though for the record the headline is likely to ease (from 1.7% to 1.4% with downside risks, while the core is seen as sticky (unchanged at 1.8%).  Within the FOMC statement, the key interest is in how the Fed modifies the statement relating to interest rates remaining low for a considerable time after the asset purchases are complete.  The asset purchases are over.  The statement will change.  Some expect the entire phrase to be eliminated.  
• We suspect that it will be replaced with something focusing the market’s attention on economic data.   We expect that recent data (including retail sales, auto sales, and industrial output that followed the strong employment data) will spur the Fed to upgrade its economic assessment.    
• How the statement characterizes inflation and the downside risks posed by the decline in energy prices will also come under scrutiny.  As Fischer and Dudley have already hinted, we expect the FOMC to look past the short-term impact and to instead focus on the stimulus side.  It is not simply that consumers spend shift spending from gasoline to something else, but rather that something else is likely, based on consumption patterns, to have a greater multiplier effect for the domestic economy.  
• There has been some talk that market volatility may force the Fed to slow down the preparation for the normalization of monetary policy.  We suspect too much is being made of the volatility.  In October, some, including a regional Fed president, spurred such thinking.  The minutes suggest that the FOMC considered commenting on the volatility, but decided against it.  We see no compelling reason for the Fed to change its collective mind now.  
• In our understanding of how the Fed operates, we think the statement is the most important communication tool.  The Fed’s forecasts (dot-plot) are too noisy to get anything but broad brush strokes.  Unemployment and inflation forecasts will likely be trimmed.  We expect the long-term Fed funds forecast, which we assume is the long-run equilibrium level, will also be shaved.  
• There are a few other developments today to note.  First, oil prices are about 1% lower.  The API figures showed a build rather than a draw down.  Kuwait estimates that the surplus now is around 2 mln barrels.  There is more talk of Brent falling below $50 a barrel.  
• Second, Japan’s trade deficit was smaller than expected, but this reflected a surprise fall in imports.  Exports were also weaker than expected.  The November trade deficit stood at JPY892 bln.  This was about JPY100 bln smaller than expected.  Exports rose 4.9% year-over-year.  The market had anticipated a slowing to 7.0% from 9.6% in October.  The lackluster Japanese exports may help explain why there has not been as much of a push back against the depreciation as the cries of currency wars have suggested.  Japanese imports fell 1.7% from a year ago, following an upward revision to 3.1% in October from 2.7%.  This could be reflecting the decline in oil prices.  
• Third, the UK released both the MPC minutes and the latest labor figures.  The minutes showed the same 7-2 vote.  Although the meeting was held before the recent soft CPI figures, we don’t expect the hawks have changed their stance.  Indeed the rise in the average weekly earnings (October) from 1.0% to 1.4%.  Excluding bonus payments, earnings rose 1.6% and may spur another convert to the hawkish side next year.  The claimant count fell 27k after a revised 25k decline in October (from 20.4k).  
• Fourth, the first round of the Greek presidential selection process is being held today.  The results should be out around 1730 GMT (1230 pm EST).  There is little chance that the government will deliver the 200 votes needed to confirm its candidate Dimas.  The importance of this round is to see Samaras’ progress.  His ruling coalition has 155 seats, and he needs 180 votes by December 29 in the third and final round.  Picking up less than 10 seats would be disappointing.  Picking up more than 15 would be exceptional.  We suspect the risks are asymmetrical to the downside.  That said, recent polls show that Syriza’s lead in the polls has narrowed and is within a statistical draw.  
• Bank Indonesia intervened to lend the rupiah some support.  Indonesia is the latest EM country to show concern about recent currency movements.  In a press conference afterwards, Deputy Governor Adityaswara said the bank was comfortable with an exchange rate between11900-12300.  We’ve always believed that policymakers should not identify any particular exchange rate levels, in order to keep an element of unpredictability.  The central bank also confirmed that it had bought local currency debt as well, though the amounts involved were small.
• Brazil central bank Governor Tombini informally announced yesterday that the FX swaps program will be extended.  The program is set to expire at the end of this year. He noted that new daily issuances will likely be between $50-200 mln, which supports our view that the swaps program is getting bigger, not smaller.  Decreasing it is equivalent to buying USD, and would likely feed into even greater BRL losses.  While most would probably like to start shrinking the amount of outstanding swaps, it would be suicide to do so in this market environment.
• The Czech central bank meets and is expected to keep rates steady at 0.05% and to maintain the koruna cap.  Despite modest improvement in the economic data, we believe headwinds on the economy will build.  We see current loose policies being maintained into 2016.  EUR/CZK is likely to continue trading near the 200-day MA (27.55 currently) with risks of upside spikes as EM sentiment sours.

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Secondary market corporate bond trading yesterday

Via Bloomberg:

IG CREDIT: Spread Widening Accelerates, New 2014 Records Set
2014-12-17 10:57:55.136 GMT

By Robert Elson
(Bloomberg) — The final Trace count for secondary trading
was $13.6b vs $11.6b Monday and $17b the previous Tuesday. 10-
DMA at $15b vs $15.5b as $18.1b on Dec 2 falls from the count;
10-DMA of only Tuesday sessions $15.5b.
* 144a IG trading volume was not available
* Trace most active list not available
* Most active issues, according to Bloomberg estimates:
* VZ 6.55% 2043 with 2-way client flows accounting for 74%
of volume; client selling 4.5:3 over buying
* APC 3.45% 2024 was next with evenly weighted 2-way
client flows taking 61% of volume
* FCX 3.875% 2023 was 3rd; client flows took 55% of volume
* FCX 3.875% 2023 was 3rd; client flows took 55% of volume</li></ul>
* BofAML IG Master Index at +151, a new wide for 2014, vs
+147; +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
+177, a new wide for 2014, vs +175; +140, a 2014 low and new
post-crisis low was seen July 30
* S&P HY index made a new wide for 2014 at +644 vs +629
* S&P spread history
* BofAML HY Index at +571, a new wide for 2014, widest spread
since Nov 2012, vs +552
* Markit CDX.IG.22 5Y Index closed at 76.1, a new wide for
2014, vs 74.4; 55 was seen July 3, the low for 2014 and the
lowest level since Oct 2007; previous 2014 high of 74.5 was
seen Feb 3
* No IG issuance
* Month’s IG issuance now $60.5b; YTD $1.395t
* M&A-related deals dominate pipeline for 2015
* 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

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December 17 2014 Opening

Prices of Treasury coupon securities have tumbled in overnight trading as the frantic risk off theme which dominated trading yesterday has faded. The yield on the benchmark 5 year note has climbed to 1.556 from 1.513 at the close of trading in New York yesterday. The yield on the 7 year note has edged up to 1.883 from 1.846. The yield on the 10 year note has increased to 2.093 from 2.061. The yield on the Long Bond has moved to 2.721 from 2.692. The yield curve continues its power flattening trend with several keep measures touching cycle lows. The 5s 10s spread has narrowed to a cycle low of 53.7 after closing at 54.8 yesterday. The 5s 30s spread is also at a new low of 116.5 following a 117.9 close. The 10s 30s spread is 62.8 versus 63.1. The 5s 10s 30s spread richened to -9.1 versus -8.3 at the close. The 2s 5s 10s spread cheapened to 42.2 from 41.3.

Dealers report an active session with solid flow from clients. Early in the session bank portfolios sold the 3 year through 5 year sector. Real money in japan bought 2 year notes. Real money sold 10 year spread product. Central banks sold 5 year spread product. European banks bought the 5 year sector.

Three months ago today on September 17 Ms Yellen met the press following conclusion of that FOMC meeting. Since that date there has been a dramatic shift along the yield curve and I think it is worth noting so we have some perspective. I always note levels prior to major events and all the levels from that day are from about 145PM just prior to release of the statement at 200PM. The 5s 10s spread was 81 versus 53.7 this morning. The 5s 30s spread was 157.5 then while it was 116.5 this morning. The 10s 30s spread has not flattened as much as it has narrowed 62.8 from 76.5 on September 17. The 5s 10s 30s butterfly was + 3.5 then and rests this morning at -9.1. The 2s 5s 10s spread is virtually unchanged. I marked that spread at 42 on September 17 and 42.2 this morning. That suggests to me that we could see some richening  of that spread. If the FOMC in its infinite wisdom decides to remove the “considerable period” language then there should be some considerable pressure and repricing of the 2 year point and I think that 2s 5s will flatten harder than 5s 10s on that outcome.

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Bank Of England Minutes

Via Bloomberg:

*BOE INTEREST-RATE VOTE 7-2; ASSET-PURCHASE VOTE 9-0

*BOE SAYS U.K. NEAR-TERM ACTIVITY STRONGER THAN ANTICIPATED

*BOE MINORITY: SURVEYS SUGGEST WAGE GROWTH MAY PICK UP SHARPLY

*BOE MINORITY SAYS SHOULD LOOK THROUGH SHORT-TERM PRICE CHANGES

*BOE SAYS EURO-AREA OUTLOOK REMAINS SUBDUED

*BOE MAJORITY SAYS SIGNS OF WAGE-GROWTH PICKUP PROMISING

*BOE SAYS OIL-PRICE DECLINE IS NET STIMULUS FOR U.K. ECONOMY

*BOE MINORITY: JOBLESS DROP SUGGESTS RAPID SLACK ABSORPTION

*BOE MAJORITY SEES CLEAR RISKS IN BOTH DIRECTIONS ON OUTLOOK

*BOE SAYS U.K. INFLATION MAY SLOW TO BELOW 1% IN DECEMBER DATA

*BOE MAJORITY SAYS STRONGER PAY GROWTH NEEDED FOR CPI TARGET

BOE Voted 7-2 as Majority Said Stronger Pay Growth Needed
By Jennifer Ryan

(Bloomberg) — The Bank of England voted 7-2 to keep interest rates at a record low this month as the majority said a “promising” pickup in wage growth wasn’t enough to raise concerns about the outlook for medium-term inflation.

“As yet, pay growth was only roughly in line with, rather than in excess of, productivity growth,” the Monetary Policy Committee led by Governor Mark Carney said in the minutes of its Dec. 3-4 meeting. Further increases would be required “to be consistent” with meeting the 2 percent inflation goal, it said.
In the minutes, which were largely similar to the November meeting, the MPC said “by far” the most significant developments on the month were the continued drop in oil prices and a reduction in market interest rates. It said the former would be a net stimulus to the economy by lowering costs for companies and boosting real incomes.

In its analysis, the MPC said near-term activity in the U.K. and the U.S. “appeared a touch stronger than previously thought,” while the euro-area outlook remained subdued.

For the majority, there was as yet not a case for raising the benchmark rate from a record-low 0.5 percent, though the divisions on risks to the outlook within that group persisted from the previous month, according to the minutes.
While there was a risk U.K. economic growth might soften further than anticipated, there was also a chance that slack could be eroded faster than forecast, boosting inflation. “As before, individual members ascribed different probabilities to these risks.”

For the minority, Martin Weale and Ian McCafferty, a rate increase now was justified. They said policy makers should look through the short-term price movements that had pushed inflation down to 1 percent, and a drop in unemployment was “consistent with the rapid absorption of slack.”

They also said it was possible that the “real rate of interest consistent with stable inflation over the medium term was now rising.”

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Ravaged Ruble Rebounds

The Russian currency has rebounded from its ignominious slide yesterday as the Finance Ministry announced that the currency is undervalued and also stated that it has begun to intervene in the market to support the currency. According to the WSJ the Finance Ministry holds $7 billion in reserves. That is not exactly a Hank Paulsen or Mario Draghi style bazooka and I think will need some assistance from the central bank which holds $416 billion in reserves.

Via the WSJ:

MOSCOW—The ruble strengthened in early trade Wednesday after the Russian Finance Ministry said the beleaguered currency is “extremely undervalued” and announced plans to start selling its excess foreign-exchange holdings.

But trading remained volatile, with the currency falling as much as 5% against the dollar shortly after the market opened and then reversing to trade more than 5% stronger. In late morning, the ruble was trading around 66.40 a dollar, down from 67.50 at the end of Tuesday. Oil prices were slightly weaker.

The Finance Ministry said it “considers the ruble to be extremely undervalued and has started selling foreign currency from its balances on the market.”

The ministry later said its holdings total about $7 billion, but it didn’t specify how much it would sell. “We’ll be selling for as long as we need to,” the Interfax news agency quoted Deputy Finance Minister Alexei Moisseyev as saying.

“Calming the population and pre-emptively addressing any banking sector issues is of the utmost importance, especially ahead of the weekend,” Alfa Bank said in a note. “However, given yesterday’s price action [the ruble swung 32% intraday without much central bank support], it seems that the monetary authorities at least for now are willing to let the market find its own equilibrium.”

The central bank, which has vastly greater currency reserves of $416 billion, showed no sign of intervening in the market Wednesday, traders said. Its limited sales of dollars and euros in recent days—it spent $1.96 billion on Monday—haven’t been enough to slow the ruble’s drop.

“The big market theme is still of position liquidation,” said Société Générale strategist Kit Juckes. “Money is leaving Russia rather than short ruble positions being put on.”

After an emergency meeting Tuesday with Prime Minister Dmitry Medvedev , Russian officials said additional measures were planned to stabilize the financial markets. A 6.5-point interest rate rise to 17% on Monday night did little to calm the markets Tuesday, and the ruble plunged to record lows of 80 a dollar, before recovering some of the lost ground late in the day.

President Vladimir Putin has maintained public silence on the ruble’s woes this week. His spokesman told a local newspaper Tuesday that he planned no “special statements’ on the situation but would likely address it at his annual news conference, scheduled for Thursday.

Valentina Matvienko, speaker of the upper house of parliament, played down the crisis saying, “this has to be viewed like bad weather which will pass. We can’t oversimplify the situation but we shouldn’t sow panic because that will only make things worse,” the Interfax news agency quoted her as saying at the opening of the session Wednesday.

Many Russians reacted with shock this week to the huge drops in the exchange rate, gyrations reminiscent of financial crises in 2008 and 1998 that battered the economy and confidence. Banks reported surging demand for foreign currency, with lines at branches and ATMs and some running out of dollars and euros. Interfax reported that a number of major banks in the industrial city of Chelyabinsk had run out of foreign-currency cash.

Retailers also were scrambling to keep up. Major Auto, a large chain of car dealers, said it suspended sales of autos Tuesday amid the ruble moves, though many models, especially luxury brands, had already sold out. Consumers had been racing to spend their depreciating rubles on durable goods such as vehicles, appliances and electronics in recent weeks before stores raised the ruble prices.

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Obama Amnesty Action Deemed Unconstituional

The Volokh Conspiracy blog at the Washington Post reports that a Federal District Court judge in Pittsburgh has declared President Obama’s executive order amnesty for illegal immigrants unconstitutional.

The ruling was in a criminal case and in the real world it will not affect the broad fiat issued by the President which changes existing immigration law. The article also notes that twenty four states have sued the President questioning his right to unilaterally change an act of Congress. I am not a lawyer but I think that one will ultimately end up in the Supreme Court. I am also not enough of a Constitutional scholar to know how the Court might adjudicate that conflict.

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