Page 2 of 4 CREDIT BUBBLE BULLETIN Z1 and the doves
Commentary and weekly watch by Doug Noland
Dudley: "We're obviously going to communicate in terms of how we're looking at things. Now, it's true that if we do something that's different than the market expectation, for example, follow a less accommodative path than what the market expects, that could cause a rise in long-term rates even though we're still adding accommodation. So, I think you have to distinguish between a change in market expectations about the path of monetary policy that can drive up short-term rates as opposed to adding, you know, buying assets. The decision about whether to taper or not, the market takes that as an independent judgment
on monetary policy. So there's a taper decision. Then there's a signal that the Fed has decided to do something differently than it's done in the past. So the market, I think, views it as, okay, if the Fed has changed what they're doing, they must have seen enough information to get them more confident. So, you can't really separate those two ... "
Dudley: "I can't speak for the committee, but I can speak for myself. In my mind, beginning to decide to reduce the pace of asset purchases from the current $85 billion pace requires sort of two things, in my mind. Number one, improvement in the labor market. And, number two, confidence that the economy is strong enough to support that improvement in the future."
Liesman: "Is that new? And if it's not new, why is it that the market didn't understand that beforehand?"
Dudley: "I don't think it's new. I think that what we did is completely consistent with what the chairman laid out in his June press conference. It's data dependent. It depends on how the economy is actually performing. The chairman never said that we were going to reduce the rate of asset purchases in September. He said later this year. I think that framework that he laid out is still very much intact. But we actually have to see, one, improvement in the labor market and, two, confidence that the improvement is going to continue in the future."
Liesman: "So if that's not new, then the market should have known that and it means the market thought that you believed there was improvement in the labor market and continued confidence in growth. Or did the market get the assessment of the economy wrong?"
Dudley: "Well, the economy has been a little bit weaker than we thought at the time of the June meeting. We haven't seen an acceleration in economic activity. You look at the Fed's forecast, it looks for acceleration of economic activity. The problem is that it's still a forecast. And if you look at our projections in September relative to June, you can see that we're actually expecting somewhat slower growth in the second half of 2013 than we were back in June."
Liesman: "So, if I can go back, do you have a reason for why people appeared to be surprised by the decision on Wednesday?"
Dudley: "I think my own personal view is that people jump to conclusions. I think we're trying to be very clear speaking; we're trying to be transparent. But sometimes people think that we're hinting at something. So the chairman talked about the potential path to beginning to taper, and he said later this year was possible if the economy evolves in line with our expectations. And people said, 'Oh, he must mean September.' But I think we're trying to be very plain spoken and I think people sometimes exaggerate - they sort of look for hints when we're trying to be as transparent as possible."
Liesman: "So is it possible there wasn't enough communication with markets in the lead up to the September meeting?"
Dudley: "Well, I think it's hard to communicate if you're not exactly sure what you're going to do at the meeting. I mean, that's one reason why you have the meeting. You know, the data have diverged from our expectations, but only modestly - only a little bit weaker-than-expected."
Liesman: "You repeated the remarks of chairman Bernanke from June saying that a taper was likely to happen later this year. Is that your opinion at this point, still?"
Dudley: "I certainly wouldn't want to rule it out. But it depends on the data. And the thing that we really want to emphasize is that it's driven by data, not by time. So when the chairman said later this year - that was conditioned on the economy behaving in a way in line with the Fed's forecast. So if the economy were behaving in a way aligned with the Feds June forecast, then it's certainly likely that the Fed would begin to taper later this year. But whether that's going to happen or not remains uncertain."
WEEKLY WATCH
The S&P500 declined 1.1% (up 18.6% y-t-d), and the Dow fell 1.3% (up 16.4%). The broader market outperformed. The S&P 400 MidCaps were little changed (up 21.9%), while the small cap Russell 2000 added 0.1% (up 26.5%). The Morgan Stanley Consumer index dropped 1.8% (up 22.0%), and the Utilities slipped 0.6% (up 5.5%). The Banks sank 1.8% (up 21.7%), and the Broker/Dealers lost 1.1% (up 46.6%). The Morgan Stanley Cyclicals were down 0.9% (up 25.9%), and the Transports fell 1.4% (up 24.3%). The Nasdaq100 increased 0.2% (up 21.4%), while the Morgan Stanley High Tech index slipped 0.4% (up 20.5%). The Semiconductors dipped 0.5% (up 27.8%). The InteractiveWeek Internet index declined 1.0% (up 27.5%). The Biotechs fell 1.0% (up 41.9%). Although bullion gained $11, the HUI gold index was down 1.2% (down 48.2%).
One-month Treasury bill rates ended the week at one basis point and three-month rates closed at two bps. Two-year government yields were unchanged at 0.33%. Five-year T-note yields ended the week down 7 bps to 1.40%. Ten-year yields dropped 11 bps to 2.63%. Long bond yields fell 8 bps to 3.69%. Benchmark Fannie MBS yields dropped 13 bps to 3.30%. The spread between benchmark MBS and 10-year Treasury yields narrowed 2 to 67 bps. The implied yield on December 2014 eurodollar futures declined 3.5 bps to 0.525%. The two-year dollar swap spread was two lower at 13 bps, while the 10-year swap spread was little changed at 16 bps. Corporate bond spreads widened. An index of investment grade bond risk increased one to 81 bps. An index of junk bond risk jumped 47 to 397 bps. An index of emerging market (EM) debt risk rose 29 to 334 bps.
Debt issuance remained quite strong in what has been a record month. Investment grade issuers included Wal-Mart $1.75bn, Southern California Edison $1.6bn, Denali Borrower $1.5bn, News America $1.0bn, Ford Motor Credit $1.0bn, AIG $1.0bn, Edwards Lifesciences $600 million, Marsh & McLennan $500 million, Liberty Property $450 million, Whiting Petroleum $400 million, Jackson National Life $350 million Marriott $350 million, Principal Life $350 million, Ventas Realty $850 million, Ralph Lauren $300 million, VCI Lease $156 million, and Valley National Bank $125 million.
Junk bond funds saw strong inflows of $3.08bn (from Lipper). In what is already a record month of junk issuance, this week's issuers included GM $4.5bn, Gannett $1.25bn, ADT $1.0bn, Aviation Capital Group $1.0bn, Howard Hughes Co $750 million, Continental Wind $600 million, Energy Gulf Coast $500 million, Nationstar Mortgage $475 million, Titan International $400 million, Avanti Communications $370 million, CPG $315 million, Sinclair Television $350 million, Grain Spectrum Funding $330 million, Allegion $300 million, Artesyn $250 million, Clayton Williams Energy $250 million and Beazer Homes $200 million, million.
I saw no convertible debt issues this week.
The long list of international dollar debt issuers included BHP $5.0bn, Mexico $3.9bn, Bank of Montreal $2.5bn, BP Capital $2.4bn, Royal Bank of Canada $2.0bn, Finland $1.5bn, Rogers Communications $1.5bn, Bangkok Bank $1.5bn, Cemex $1.4bn, CNOOC Curtis Funding $1.3bn, Caixa Economica Federal $1.25bn, Enbridge $1.15bn, African Development Bank $1.0bn, Export Development Canada $1.0bn, Societe Generale $1.0bn, Credit Agricole $1.0bn, Standard Charter $1.0bn, Kommunalbanken $1.0bn, Deutsche Annington $1.0bn, Interamerican Development Bank $1.9bn, Meg Energy $800 million, China Uranium Development $600 million, Embotelladora Andina $575 million, Coca-Cola Icecek Uretim $500 million, Woori Bank $500 million, Korea Hydro & Nuclear Power $500 million, GS Caltex $400 million, and SPCM $250 million.
Ten-year Portuguese yields dropped 30 bps to 6.72% (down 3bps y-t-d). Italian 10-yr yields jumped 13 bps to 4.41% (down 9bps). Spain's 10-year yields increased 6 bps to 4.35% (down 92bps). German bund yields dropped 17 bps to 1.78% (up 46bps). French yields fell 11 bps to 2.33% (up 33bps). The French to German 10-year bond spread widened 6 to 55 bps. Greek 10-year note yields sank 39 bps to 9.21% (down 126bps). U.K. 10-year gilt yields fell 21 bps to 2.71% (up 89bps).
Japan's Nikkei equities index ended the week little changed (up 42.0% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.67% (down 11bps). The German DAX equities index slipped 0.2% for the week (up 13.8%). Spain's IBEX 35 equities index was up 0.6% (up 13.0%). Italy's FTSE MIB dropped 1.8% (up 8.4%). Emerging markets were mostly lower. Brazil's Bovespa index declined 0.7% (down 11.8%), and Mexico's Bolsa fell 0.8% (down 6.4%). South Korea's Kospi index added 0.3% (up 0.7%). India's volatile Sensex equities index sank 2.7% (up 1.6%). China's Shanghai Exchange fell 1.5% (down 4.8%).
Freddie Mac 30-year fixed mortgage rates sank 18 bps to a nine-week low 4.32% (up 92bps y-o-y). Fifteen-year fixed rates were down 17 bps to 3.37% (up 64bps). One-year ARM rates were down 2 bps to 2.63% (up 3bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 8 bps to 4.65% (up 55bps).
Federal Reserve Credit expanded $22.6bn to a record $3.695 TN. Over the past year, Fed Credit was up $898bn, or 32.1%.
M2 (narrow) "money" supply was up $4.0bn to a record $10.794 TN. "Narrow money" expanded 6.6% ($672bn) over the past year. For the week, Currency increased $1.8bn. Total Checkable Deposits fell $4.6bn, while Savings Deposits rose $9.6bn. Small Time Deposits declined $3.0bn. Retail Money Funds were little changed.
Money market fund assets jumped $35.9bn to $2.694 TN. Money Fund assets were up $118bn from a year ago, or 4.6%.
Total Commercial Paper outstanding gained $17.3bn to $1.064 TN. CP has declined $1.6bn y-t-d, while increasing $74bn, or 7.5%, over the past year.
Currency Watch
The U.S. dollar index added 0.1% to 80.52 (up 0.9% y-t-d). For the week on the upside, the Japanese yen increased 1.1%, the British pound 0.8%, the Swiss franc 0.5%, and the South Korean won 0.2%. For the week on the downside, the Mexican peso declined 2.2%, the South African rand 2.0%, the Brazilian real 1.9%, the New Zealand dollar 1.1%, the Swedish krona 1.1%, the Norwegian krone 1.1%, the Australian dollar 0.8%, the Singapore dollar 0.4%, and the Taiwanese dollar 0.1%. The euro, Danish krone and Canadian dollar were little changed.
Commodities Watch
The CRB index slipped 0.2% this week (down 2.7% y-t-d). The Goldman Sachs Commodities Index declined 0.4% (down 1.6%). Spot Gold added 0.8% to $1,337 (down 20%). Silver declined 0.4% to $21.83 (down 28%). November Crude dropped $1.88 to $102.87 (up 12%). October Gasoline fell 3.1% (down 3%), and November Natural Gas sank 4.6% (up 7%). December Copper added 0.3% (down 9%). December Wheat rallied 5.7% (down 12%), and December Corn gained 0.7% (down 35%).
US Fixed Income Bubble Watch
September 25 - Bloomberg (Sarika Gangar): "Sales of corporate bonds in the U.S. reached an all-time high this month, with phone companies Verizon Communications Inc. and Sprint Corp. leading offerings of $177.9 billion. Verizon issued $49 billion on Sept. 11 in the biggest corporate bond deal ever while ... Sprint raised $6.5 billion on Sept. 4 in the largest high-yield sale since 2008 ... Offerings broke the previous monthly record of $177.3 billion set in September 2012."
September 27 - Bloomberg (Michelle Kaske): "Wall Street securities firms are pulling back from the $3.7 trillion municipal market at the fastest pace since 1986, helping fuel the worst performance in U.S. local debt in more than a decade. Brokers and dealers held $19 billion of city and state debt as of June 30, the least since 2002 and a 39% drop from three months earlier ... The companies have unloaded further since July, even as municipal debt rebounded after the Fed unexpectedly refrained from reducing its monthly bond purchases ... The retrenchment can increase price swings and elevate the yield levels at which certain buyers will emerge, said Peter Hayes, head of munis at ... BlackRock Inc ... . 'When we do see market dislocation, it's probably going to be exacerbated because of the lack of liquidity,' Hayes said. 'It's going to take a bigger price adjustment or yield movement to attract the value buyer, and for the municipal market, that means the cross-over buyer.'"
September 26 - Bloomberg (Brian Chappatta): "Chicago and surrounding Cook County have the largest pension burdens among the 50 most-indebted U.S. local governments, according to Moody's ... The third-most-populous U.S. city's pension liabilities represent 678% of its revenue, a Moody's study ... shows. Cook County had the second-worst ratio at about 382%, while the Metropolitan Water Reclamation District of Greater Chicago had the sixth-highest burden at 323%. Moody's cut Chicago's bond rating three levels to A3, seventh-highest, in July and dropped Cook County a step to A1, fifth-best, in August, citing pension liabilities in both cases."
September 27 - Bloomberg (Christine Idzelis): "Private-equity firms are obtaining buyout loans at the fastest pace in six years with Blackstone Group LP expressing optimism for the industry as demand for debt with interest rates that rise with benchmarks fuels borrowings. 'You could raise around $20 billion given where markets are today,' Gerry Murray, head of JPMorgan Chase & Co.'s North America leveraged finance business, said ... The Federal Reserve's surprise decision last week to not reduce its stimulus 'gave a shot of adrenaline into the leveraged markets,' said Murray. Dell Inc., HJ Heinz Co. and other companies have either raised or are in the process of obtaining more than $66 billion in loans for leveraged buyouts in 2013, exceeding the $51 billion in all of last year ... Buyout financings peaked in 2007 at $189 billion."
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
