Marc to Market

A Few Miscellaneous Thoughts

noreply@blogger.com (magonomics) — Thu, 23 Feb 2012 08:43:29 PST

The G20 meeting this weekend is shaping up to play an important role in addressing the European debt crisis. A senior conservative German member of parliament indicated that the German vote on Greek 2.0 is partly a function of the IMF`s involvement. In earlier euro zone packages the IMF was good for a third of the funds.

In Greek 2.0, the preliminary figures suggested a considerably smaller role. The may be pressure from a greater role for the IMF, but itself may be linked to greater contributions. While Japan and to a lesser extent China appears sympathetic, many other countries, including the US, do not seem prepared. Instead look for some push back on Europe's official sector to do more.

Two aspects seem particularly relevant. The first is to allow the EFSF and ESM (which is to be launched in July and had about €80 bln in paid up capital) to run concurrently. The EFSF has an estimated €250 bln of uncommitted capacity. The secondis to increase the funds available to the ESM, which German is opposed.

In this regard, the international community make take on the quasi-theological position of being more willing to help those that help themselves.

There is understandably much interest in next week's LTRO. It seems the risk is that it is anti-climactic. Rather than start something it marks the end.

Starting late last year, the major central banks have expanded their balance sheets and in other ways, expanded liquidity. The BOE, BOJ, and PBOC joined the ECB. The Federal Reserve is changing the composition of its balance sheet, but is not expanding it. The second LTRO next week ends this chapter.

Barring QE3 in the US, which we continue not to think is particularly likely, especially in H1, we don't expect additional easing in the coming months. That said, another cut in China's reserve requirements in Q2 may be the next move. In any event, the point is that at least this phase of monetary expansionis like nearly over.

Monday, which is typically a slow day, may be more interesting than usual. Two announcements from the ECB will attract attention. First is money supply. In the last report there was some evidence of a credit crunch. The key issue is whether the LTRO in December helpd stabilize the situation.

Among developed countries, the money multiplier has broken down. Growth in central bank balance sheets and high power money has not translated into greater money supply (M1, for example). This is a transmission mechanism that is still not properly functioning.

The ECB will also indicate how mch bonds were settled this week. Recall last week no bonds were settled. This has spurred talk that the SMP program is done.In sme ways, then Draghi has substituted the less controversial LTRO for the sovereign bond purchase program. Two weeks without buying bonds may drive home the point.

At the same time, perhaps it is like QE in the US. Just because te Fed is not presently engaged in long-term asset purchases doesn`t mean that it won`t or will a priori deny itself a tool, which it argues can be effectively deployed.

Monday the German parliament is to vote on Greek 2.0. The cost to Germany is greater than many appreciate. It turns out that Hypo Real Estate that was bailed out in 2008 and nationalizedin 2010 spun off its toxic asets, which included an estimated €6-8 bln in Greek bonds, to EMS Wertmanagement, a "bad bank", which wharehouses and later packages and sells those assets. Whether it is the federal German agency Soffin or EMS, the PSI is going to cost Germany more money that may have been realized.

Dollar Weakens, but Doesn't Break

noreply@blogger.com (Marc Chandler) — Thu, 23 Feb 2012 05:32:03 PST

The US dollar is sporting a soft profile, with the euro making marginal news high for the year. The single currency's push higher met offers just shy of $1.3350 level, which is thought to hold a large option barrier. Above there, offers are seen near $1.3375 and then $1.3435.

The main catalyst appears to have been better than expected economic data after yesterday's disappointing PMI data. For Germany it was the IFO report that showed a further recovery, with the expectations component rising to 102. For its part the expectations component rose to 102.3 from 100.9 and the current assessment rising to 117.5 from 116.3.

Yet at the same time, we would be remiss if we did not acknowledge that the euro has generally traded firmer since the Greek deal was struck. Meanwhile, the next LTRO is around the corner. The fact of a new liquidity push (BOJ, BOE, PBOC, ECB) appears to be reducing immediate tail risks and fanning demand for the euro, foreign currencies in general, equities and emerging markets.

The UK reported stronger mortgage applications and CBI trends survey and this is helping sterling stabilize after the dovish BOE minutes yesterday took a toll.

Brent oil is trading at record levels in sterling and is near a3 year high in euro. The economic and policy consequences are only now being turned to by investors. If anything, it coupled with the data showing that the contraction is not accelerating in Europe at the start of the year should reinforce ideas the ECB is on hold, after the LTRO.

Note in this regar that the EC did cut their 2012 GDP forecasts from their late 2011 guesses, but raised its inflation forecasts.

Lastly two other developments are noteworthy. First, the pending Labour Party leadership challenge Monday in Australiaappears to be preventing the Australian dollar from participating more fully in the advance against the US dollar.

Second, Spain will reportedly formally ask the EU to raise this year`s deficit target to 5% from the 4.4% goal. Recall that this follows last year`s overshoot.

Yahoo Finance: European Crisis - Next Stop Portugal

noreply@blogger.com (magonomics) — Wed, 22 Feb 2012 06:17:13 PST

Four Developments and Implications

noreply@blogger.com (Marc Chandler) — Thu, 23 Feb 2012 06:05:44 PST

Currency in Crisis

There have been four noteworthy developments today that will shape the investment environment.

First, HSBC flash PMI for China came in at 49.7 from the final January reading of 48.8. This will support those who expect a soft landing in China. Technology and consumer services led today's 1% advance in the Shanghai Composite, which now sits at its highest level since early December 2011. The soft landing scenario in China helps lift sentiment in the region.

Second, the minutes from the Bank of England meeting was a bit of a dovish surprise. There were two dissents to the decision to increase gilt purchases by GBP50 bln. Both Miles and Posen favored a larger purchase program. Sterling is clearly under-performing today, though gilts are outperforming.

Third, the flash PMI from Europe was uninspiring. The manufacturing showed a slight improvement to 49.0 from 48.8, but expectations were for a larger increase to 49.5. It remains below the boom/bust level of 50. Of note that orders appeared to fall at a slower pace. The service component actually worsened. It stands at 49.4 from 50.4 in January.

Germany's readings were particularly disappointing. The manufacturing survey was reported at 50.1 down from 50.9, while the consensus hoped for 50.9. The German service PMI came in at 52.6, off from 54.5 last time and below the consensus as well (54.5).

France's flash readings were more mixed. Its manufacturing surprised to the upside, popping back above 50 (50.2) from 48.5 last and expectation of 49 this time. The disappointment was with services. The 50.3 reading shows expansion, just barely. The January reading was 51.7 and the consensus expected improvement.

The weakness in services is noteworthy as it more likely reflects weakness in domestic demand, while manufacturing could be partly a function of weaker foreign demand. The ECB interest rates are on hold, as it continues to focus on liquidity and the upcoming 3-year lending. While the euro zone economies do not appear to be accelerating to the downside, as looked to be the case after poor performance at the end of last year, the combination of austerity, de-leveraging and tighter credit conditions still indicates the economic risks are to the downside.

Fourth, turning your attention to Greece, Fitch weighed in and cut the sovereign rating to C from CCC. This can hardly be considered surprising, but that the verdict was delivered before the PSI and cannot be helpful for the general risk appetite. While the Greek government prepares for the PSI, many in the market expect that Greece will have to invoke the collective action clauses and that this will prove too much for ISDA and that a credit event may still be declared, which would signal the triggering of credit-default swaps. This is something European officials wanted to avoid.

Yen Moves

noreply@blogger.com (Marc Chandler) — Wed, 22 Feb 2012 06:02:11 PST

While European drama continues to command attention, the yen has quietly depreciated and is now at its lowest level against the US dollar since last July and is at four month lows against the euro.

There are several factors that appear at work. Today's push lower corresponds to talk of strong Japanese demand for Thai baht related to insurance payouts from last year's floods. The yen has declined about 8.5% against the baht since mid-January.

The unexpected increase in the BOJ's asset purchases (QE) announced on Feb 14 helped accelerate the yen's slide that had already begun. We suggested that BOJ intervention should be considered not when the yen is strengthening, when the officials would have to fight the market, but instead intervene when the yen was already falling and officials would have the wind at their back. In some ways the QE did precisely that.

We have noted that thus far this year, foreigners had been buying few Japanese assets, while Japanese investors had stepped up their purchases of foreign assets. In fact, the MOF data shows that Japanese money managers bought more foreign debt instruments in the first six weeks of the year than since at least 2005.

There are three key relationships for investors with yen exposure presently. First, as the BOJ governor noted last year, the dollar-yen rate is correlated with 2-year interest rate differentials. The differential was widening since the start of the month and extended by the BOJ's QE decision. The differential now stands just below 20 bp, the highest since last August. The 60-day correlation conducted on the level of the yen and the level of the rate differential now stands at -0.79.

Second, is the relationship between the yen and oil. Here we ran the correlations on the percentage change in oil and the percentage change in the yen. There statistically insignificant inverse relationship over the past 60 days (-0.06). The correlation on the level of oil and yen shows a -0.35 While more important still pales by comparison to the 2-year differential.

Third is the relationship between the yen and the Nikkei. Correlations on percentage change basis is not very fruitful. For both 30-and 60 days, the correlation is slightly inverse. However, what investors seem to be queuing off of is not the percentage change but the level. The level of the yen and the level of the Nikkei are inversely correlated 0.81 over the last 30 days and -0.43 over the past 60 days. When yen weakness is associated with Nikkei strength.

What has happened since the BOJ's surprise expansion of QE is that the Nikkei and the 2-year interest rate differential has become positively correlated after being inversely correlated in the last few months of 2011. Widening interest rate differential, weighs on the yen and underpins the Nikkei, where many international fund mangers appear underweight.

Great Graphic: Church of Baseball

noreply@blogger.com (magonomics) — Wed, 22 Feb 2012 05:35:14 PST

Now that spring training is offically underway I thought it was time for another great graphic on baseball.

Now we all learned from Bull Durham that there should constitutional amendment outlawing astroturf and the designated hitter (though I am not sure how such an amendment would impact the Blue Jays).

But if the wisdom of Crash Davis isn't enough for you here is another reason why the National League is better: They are more efficient.

In 2011 the average American League team payed over $1,197,954 per win (total payroll/regular season wins) while the average National League team payed $1,096,742. So the American League was paying over 9% more than the National League per win.

Now if you take individual teams out of it, the National league was still more efficient. With two more teams it is not surprising the National League had a higher total payroll ($1.417 bln) than the American League ($1.368 bln). It is also not surprising that the National League had more regular season wins (1,290 than the American League (1,138). But the average cost per win for the American League was still over 9% higher than the National League ($1,202,832 vs. $1,098,712). Here is a graph that breaks it down by team:

Greek Default Risks Remain

noreply@blogger.com (Marc Chandler) — Thu, 23 Feb 2012 06:06:54 PST

Currency in Crisis

European officials moved the proverbial can down the road, but not very far and there are bound to be unintended, though foreseeable consequences, of the new deal.

The next immediate focus is on the private sector involvement (PSI) and the debt swap. Essentially, the IIF, representing the banks, accepted a 53.5% haircut on notional value and what appears to be about a 74% haircut on a net present value basis. It is not clear how much the IIF really represents the private sector.

Reuters reports that the IIF's 32 members had "at least 44 bln euros in residual [Greek] holdings." This is about a quarter of the 200 bln euros of Greek bonds believed to be in private hands. This includes the 18 bln euros of debt that is governed by English law and where some hedge funds at thought to be making a stand.

The aid package assumes a 95% participation rate in the PSI, which seems unlikely. Greece will seek to retro-actively insert collective action clauses into existing bond contracts. This risks undermining the veneer of voluntarism that ISDA appears to be claiming prevents the triggering of credit default swaps.

As the PSI gets underway, the rating agencies are likely to place Greece in "default" or "selective default" status and while this in itself will not trigger the CDS chain reaction, it may prove sufficient to trigger default clauses in other kinds of securities, including the nearly $100 bln of derivatives in Greece (according to BIS figures).

It is also not clear how much the Greek package builds a firewall to prevent contagion. Spanish bill auctions went of without a hitch today and Spanish and Italian bonds remain somewhat firmer on the day (10-year benchmark yields are off 2-3 bp), but Portugal, arguably the next most vulnerable peripheral country, is seeing the 10-year yield rise and the 11 bp increase in the CDS is leading the region today.

Another potential obstacle is the need for country approval of the agreement. This may be more contentious than a rubber stamp. While this is may the case in the creditor nations as whole, it may be particularly true for Germany.

Note that although Merkel's popularity appeared to be rising her party lost numerous state elections last year, she dealt a stunning defeat in recent days when her candidate to replace the German president refused her offer. Her beleaguered coalition partner the FDP, joined forces with the opposition Social Democrats and Greens supporting Joachim Gauck, who Merkel previously rejected.

The official creditors won the battle. Greece will be given the money so that they can service their debts. They will have an EC task force embedded into Greece to push for compliance and the escrow-like account ensures a priority to debt servicing. However, in the long game, it is not so clear. A Greek 3.0 package cannot be ruled out.

Greece Deal, but No Closure

noreply@blogger.com (Marc Chandler) — Thu, 23 Feb 2012 06:50:57 PST

Currency in Crisis

A Greek deal has emerged from the marathon meeting of European finance ministers, but it is far from clear that it ends even this chapter of the saga. Attention will turn to the participation in the PSI. The agreement struck appears to be more onerous than initially anticipated, with a 53.5% loss of notional value rather than the 50% previously agreed and well above the 22% envisioned initially and lower coupons on the new bonds.

Part of the deal also includes reduction in the interest rate on the previous international assistance and there is not reason why those lower rates should not apply to Ireland (which is seeking relief on promissory notes used to recapitalize its banks) and Portugal. Perhaps most importantly, the package does not give confidence that this solves Greece's problems, even if PSI is acceptable and Greece actually does implement the agreements.

The agreement stands on two legs--austerity and debt restructuring. The clear and present risk is that these measures prolong the economic downturn and that another aid program is needed in 1-2 years. In addition, the economic demands on Greece have undermined its political stability.

In effect, Germany's controversial proposal for a EU Commissioner and making debt servicing the top priority born fruit in the form of a European Commission task force being embedded in Greece in an "enhanced and permanent presence on the ground" to improve the workings of Greece's bureaucracy. An escrow-like account is also being established that prioritizes Greece's solvency (ability to service its debt) over the other demands on the government's budget.

Of the 130 bln euro aid package, the vast majority (roughly 85%) is being used to bail out lenders not bail out Greece. Specifically, 30 bln euro is for the cash component of the PSI, 35 bln euro is to fund the government's purchase of bonds held as collateral by the ECB. Another 40 bln is to recapitalize Greek banks, on top of the 10 bln earmarked from Greek 1.0 that has not been used.

Another 6 bln euros is need to payoff the accrued interest on the bonds to be swapped. EU officials have admitted they under-estimated the challenge presented by the weak administrative capacity and weak political unity in Greece. Not only do they appear to be risking repeating this mistake, but also of bleeding the patient they hope to save by pursuing the pound of flesh in the name of the creditors.

The euro initially moved higher when the deal was announced, but the $1.33, the upper end of the well worn range proved sufficient and the single currency has been pushed lower. Support is seen near $1.3180 and a convincing break could see another cent decline. European shares have come off, with financials and industrials the weakest sectors in the Dow Jones Stoxx 600. European bonds are narrowly mixed, though of note, Spain and Italian bonds are firmer and the former's bill sale was well received.

Great Graphic: Smart Meters in Europe

noreply@blogger.com (magonomics) — Mon, 20 Feb 2012 17:46:15 PST

Here are two great graphics from Green Tech Media on smart meters in Europe. You can see in the first graphic that Italy is clearly leading the way in terms of implemented smart meter hot spots. This is not surprising when you see the second graphic, which illustrates that Italy has a very strong regulatory push for smart metering.

Markets Like What They See and Hear

noreply@blogger.com (Marc Chandler) — Mon, 20 Feb 2012 04:12:54 PST

The combination of a 50 bp cut in China's required reserve ratios and anticipation that the European finance ministers sign off on the second aid package for Greece has lifted equity markets and most of the non-US dollar currencies.

The MSCI Asia-Pacific Index rose 0.8%. Hong Kong's Hang Seng Index was the lone exception in Asia, slipping 0.3%. Higher than expected inflation (6.1% vs consensus of 5.8%) may have played a role, but losses were widespread, led by oil and gas (-2.2% consumer services (-1.9%) and technology (-1.85). European bourses are higher with the Dow Jones Stoxx 600 up 0.8% near midday in London. Basic materials, industrials and financials are leading the advance.

US and Canadian markets are closed, but the key event today is the European finance ministers' meeting. There are still a number of issues that need to be worked out, including the mechanisms for surveillance of the implementation. Talk continues about the establishment of an escrow-like account. In addition, the interest rate on the EU/IMF aid may be further cut. It had begun near 5% and had been cut last year to 4%. Another cut, especially if retroactively applied could further reduce projected debt/GDP ratios.

Oil prices are rising as news that Iran will halt crude exports to France and the UK. Combined they absorb about 3% of Iranian's oil sales. European crude and product inventories are estimated at 120-days of consumption.

The euro has been range bound for several weeks. Last week it tested the bottom end of the range in the $1.2980-$1.3000 and it largely held. By the rule of alternation, it is now poised to test the upper end of the range, seen in the $1.3300-20 area.

Sterling has also recovered smartly off last week's low near $1.5645. The $1.5930 area marks the last high, but the more important cap is seen around $1.60.

The yen is consolidating last week's sharp losses, following the BOJ's unexpected JPY10 trillion in new JGB purchases announced on Feb 14. The dollar moved to almost JPY80 (~JPY79.90) in early Asia, the highest level since mid-July last year, before consolidation set in during the European session, as broader based dollar selling proved too much.

Separately, Japan reportd a semwhat larger than expected trade deficit for January. The deficit of JPY1.475 trilion compares with a surplus of JPY479 bln in January 2011. The shift reflects several forces. First, the increased energy imports (mostly oil and gas) in the post-earthquake/tsunami environment, is playing a role. The softening demand in Europe an Asia (exports are off 7.7% an 13.7% respectively n a year-over-year basis) is also evident. The decline in exports to Asia may be a bit exaggerated by the Lunar New Year falling in January rather than Febraury.

Implications of Weekend Developments

noreply@blogger.com (Marc Chandler) — Thu, 23 Feb 2012 06:52:30 PST

Currency in Crisis

There are two sets of important developments over the weekend that will influence the global capital markets. The first is in China and the second in Europe.

China

China cut reserve requirements and Foxxconn, the Taiwan-based outsource company with extensive assembly work in China, announced an immediate 16%-25% wage increase. In Europe, Greece’s cabinet took the necessary steps that will likely pave the way for the Eurogroup of European finance ministers to press ahead with a second aid package.

Speculation about an easing of Chinese monetary conditions has ebbed and flowed since required reserves were cut at the end of last November, the first easing in three years. Nevertheless, the 50 bp cut in reserve requirements to 20.5% announced on February 18th will catch the market by surprise. This is especially true in the aftermath of the recent report that showed China’s increase in consumer prices rose a stronger than expected 4.5% in the year through January (vs 4.1% in December).

The cut in required reserves will boost bank lending capacity by CNY350-CNY450 bln ($55.5-$63.5 bln). Changing reserve requirements is part of the macro-prudential policies that the People’s Bank of China has developed as a liquidity management tool, rather than direct stimulus. However, there is a signaling function as well.

The official action and rhetoric will reinforce the belief in the market that the cycle has turned and officials are more concerned about engineering a soft landing to the economy. This would seem supportive of Chinese shares, where the Shanghai Composite as under-performed in recent years and is still more than 22% off of last year’s peak even with this year’s advance (~7.1%).

Additional cuts in required reserves are likely at the pace of about one a quarter over the next six months. However, officials are in a bit of a policy scissors. The financial and economic need to ease policy is increasing faster than price pressures giving policy makers scope to cut interest rates.

The last easing cycle began when inflation was 2.5%. In January as we noted it stood at 4.5%. Yet there is cause for action. A report in the Chinese Securities Journal has led many to conclude that Chinese consumption of electricity fell in January for the first time since at least 2002, suggesting a weakening economy.

Money supply (M1) fell sharply in January as the downtrend seen for two years now accelerates. Chinese officials have used a wide range of instruments to cool off housing market, from requiring high down payments, imposing higher mortgage rates and purchase restrictions. This effort is yielding rewards. Homes sales are declining and prices have begun falling as well.

Some private sector survey data suggest house prices fell through much of H2 11. Official data now show house prices in the city of Guangzhou have fallen for four consecutive months through January. House prices in Beijing. Shanghai and Shenzhen also fell in January.

As these conflicting impulses make it difficult for Chinese officials to calibrate monetary policy, international investors will see the required reserve reduction as yet another official action that is pumping up global liquidity. The Bank of Japan surprised investors on February 14th by expanding its JGB purchases by JPY10 trillion.

This followed the Bank of England’s announcement of GBP50 bln extension of its gilt purchase program. Meanwhile, the LTRO at month end is likely to see the ECB’s balance sheet increase by another 450-550 bln euros. For its part, the Federal Reserve continues to implement Operation Twist, pushed out its signals for a rate hike into late 2014, and continues to indicate willingness to do more if required.

The 16%-25% hike in wages at Foxxconn to about $400 a month (before overtime) is also noteworthy. This follows more intense scrutiny of working conditions at several assemblers of electronic goods. At the same time, it is part of a large force that we continue to underscore: The cumulative combination of Chinese inflation, real appreciation of the yuan, and rising wages is changing the competitive landscape.

In terms of unit labor costs, proximity to the end users, skilled workforce and effective tax rates (as opposed to tax schedules) there continues to be much to recommend the United States. Businesses seem to recognize this. The US is one of the few G10 countries who report an increase in manufacturing jobs over the past two years.

Greece

The Greek cabinet approved the latest set of austerity measures. The game of brinkmanship now turns back to the European finance ministers. They are not done yet. The focus shifts from pledges to implementation and how enhanced surveillance can be established and the agreement enforced.

The bond swap with the private sector, the PSI, cannot go forward until the EFSF is authorized to payout 30 bln euros. The participation in the PSI is another hurdle that much be overcome. Even with the retro-fitting of collective action clauses, some participants are believed to have a blocking position in a number of particular issues, some of which may be under foreign law (which are believed to account for as much as 20% of the outstanding sovereign bonds in private hands). These bonds have outperformed recently.

The tentative time frame for the PSI is now March 8-11, which is particularly tight given that the March 10 and 11 is the weekend, though as world has come to appreciate, even Greek politicians work on Saturday and Sunday.

Reports suggest privately German Chancellor Merkel did not share the position that Finance Minister Schaueble has taken vis a vis Greece and he appears to be more tempered in recent remarks, even as he pressed Greece to accept Germany’s (technical) help. Schaeuble also recognized that austerity was not sufficient and more economic stimulus is needed.

It was Merkel’s party’s floor leader who held out the carrot to Schaeuble’s stick. Kauder hinted the possibility of a “Marshall-like Plan” for Greece. Kauder also pointed to 15 bln euros that Greece could draw upon that has been unused in recent years (2007-2013 budgets) targeted to economic development.

Yet the damage of the brinkmanship strategy is increasingly evident. While it may have been dysfunctional before, the risk is that it is broken. The theft from the National Gallery and the museum of Olympia speaks to the damage to social cohesion and the failure of the state.

The political elite are losing support and this is reflected in the polls that show growing support for numerous small parties ahead of the election, likely still in April. The polls warns of the need for a coalition government, which the challenges require strong leadership.

In the crisis in the early 2000s, Argentina saw a peak-to-trough fall of 20% in GDP. During the financial crisis in 2008, Latvia saw a decline in GDP of 24%. A former World Bank official warned that Greece is looking at a 25-30% collapse of GDP.

Talk of a Greek exit (“Grexit”) remains far premature. Everyone seems to have an opinion of what Greece should do, but in reality only two sets of opinions count: the Greek people and euro zone heads of state. The latest polls show 65% to 76% of Greece want in the club. Political leaders in Greece seem even more committed EMU.

European officials do not yet seem prepared to accept the risks associated with a disorderly default in Greece and they understand that any hard default could become disorderly. With the economies already either contracting or stagnating and financial systems vulnerable, European officials are willing to extend its treatment of Greece’s solvency problem as essentially a liquidity issue.

Austrian Finance Minister Maria Fektor appeared to speak for many when she noted that a Greek exit would not solve Greece’s problems. Among other things, it would retain a large debt in euros that be harder to repay in devalued drachma, could be as much as 50-70%, according to some projections.

Schaeuble noted Europe is in a better position to deal with Greece now than two years ago. It will be in an even better place two years from now, when the financial system and economy is stronger, and when Greece is running a primary budget surplus.

Thus, the euro zone finance ministers will seek to enact stronger mechanisms to ensure implementation. The key decisions will be made at the March 1-2 heads of state summit and it still appears that a second package for Greece the most likely outcome.

The consequences of the ECB’s bond swap and the treatment of the national central bank Greek bond holdings (estimated at about 12 bln euros) also remain open questions for investors. There may be unintended consequences of the ECB’s retroactive seniority in Greece’s case as it serves as potentially precedent for treatment of the other sovereign bonds it has purchased.

This leaves the euro continuing to remain confined to the recent range of roughly $1.2980-$1.3000 on the downside and $1.3300-20 on the upside. On a break of this range we recognize the risk upside risk limited to the $1.34-$1.36 area, but see the downside as significantly larger with a $1.20 mid-year target.

We note that in recent weeks, the premium for euro puts (benchmark 3-month 25-delta) over euro calls has grown sharply. It appeared that some operators bought euro calls to “play” for the euro bounce rather than necessarily exit underlying core positions.

The rising premium for euro puts appears to reflect a selling of the calls as volatility has been trending lower. This warns that the market is still heavily positioned for a resumption of the euro’s decline. The rise in net short speculative positions at the IMM in the week through February 14th is consistent with this narrative.

ECB Greek Bond Swap

noreply@blogger.com (Marc Chandler) — Thu, 23 Feb 2012 06:53:02 PST

Currency in Crisis

News that the ECB will swap its Greek bond holdings to avoid being subject to collective action clauses that the Greek government is expected to seek parliamentary approval for early next week has stopped the euro's recovery in its tracks. The euro reached a high of just below $1.32 before the next broke, extending the rally that began yesterday off the $1.2975 low. Initial support now is pegged near $1.3100.

The euro is still showing resilience and remains up on the day. However, the European markets are closing and the US markets are closed on Monday, which could be contributing to the mute market response.

The ECB appears to have agreed to swap its Greek bonds (~50 bln euros, ~$65 bln) for identical new bonds that would be exempt from CACs. The CACs may be invoked if not enough private sectors "volunteer" to participate in the haircut which now looks to be around 70% on a net present value basis.

The ECB's move seems strange. Greece is not going to benefit from reduced debt if the ECB would have swapped the bonds at cost rather than nominal value. The Bundsbank's Weidmann objected to the swap on the grounds that other Greek bondholders may sue on grounds of preferential treatment, according to Der Spiegel.

The status of the national central banks, who bought Greek bonds previously for its investment account, is not clear. The ECB appears to be deciding if they should be subject to the PSI. The national central banks hold an estimated 20 bln euros of Greek bonds. A haircut on par with the PSI would see projections of Greece's debt to GDP slip toward 120% from the 129% currently projected for 2020.

Press reports suggesting that such a haircut could force some central banks to be recapitalized is most likely an exaggeration. Generally speaking, the revaluation of other holdings such as German and French bonds and gold, could blunt the impact from a Greek haircut.

The risk is that after consideration, investors will not like what the ECB has done. It raises questions about the value of other bonds that the ECB has bought. Private sector investors in those sovereign bonds have effectively been diluted. This is the first move by Draghi that has investors scratching their heads.

Great Graphic: Europe GDP Explained

noreply@blogger.com (magonomics) — Fri, 17 Feb 2012 07:31:00 PST

Following up from last week's post on US Metropolitan GDP here is a great graphic on the GDP of European countries, comparing the GDP of each country to various things of equal value from the United States. (To see it better click on the image and zoom)

Rome Returns

noreply@blogger.com (Marc Chandler) — Fri, 17 Feb 2012 07:09:33 PST

Audrey Hepburn in Roman Holiday

There has been a watershed in Europe even if the debt crisis remains unresolved. Since Monti became the technocrat prime minister of Italy an important change taken place. Simply put, Italy has taken significant steps away from the abyss.

Part of the rise of Italy under Monti is a function of how far it had slipped under Berlusconi. Another aspect of Italy's improvement is a function of the Monti's fellow countryman Draghi, who at the helm of the ECB has reversed Trichet's tightening and accelerated the expansion of the ECB's balance sheet with 3-year funding.

There is another development that has benefited Italy. The Financial Times captured this last week when it reported a "growing opinion that economic fundamentals in Italy are better than in Spain." Indeed, Italy's star has risen as Spain's star has dimmed, but also as the domestic challenges Sarkozy face, take him a bit out of play, so to speak.

Yet Monti deserves some credit a well. His reform agenda combines austerity in the form of tax increases and spending cuts with pro-growth measures. His labor reform efforts need parliamentary approval, ideally by the end of next month to solidify his success.

Monti has carved out a position in European high politics that is unique. Sarkozy and Merkel may have their own reasons for trying to use Monti to further their own agendas, but Monti has his own. He may be the only senior official in Europe to be able to criticize Germany and France for their own fiscal lapses and dilution of the enforcement provisions of the Stability and Growth Pact.

The markets have rewarded Italy. Since Monti's arrival the 10-year yield has fallen from the 7% threshold to around 5.5%. This is yield area that prevailed in late Q3 11 before the flare up in pressures that led to Berlucsoni's departure. The 5-year CDS has fallen from 575 bp to about almost 400 bp.

The premium Italy pays over Spain has fallen considerably. At the peak it was near 200 bp. Today it is about 30. The cost of insuring Italy is only now marginally more than Spain (20 bp). The gap was over 100 bp at the end of last year.

The premium Italy pays over Germany has narrowed considerably as well. This is due almost exclusively to the decline in Italian yields.

After Monti took office we suggested that in order for him to help restore confidence Monti would have to sacrifice some sacred cows. Fostering entrepeneurialism and profit-seeking behavior instead of rewarding rent seeker would antagonize entrenched interests. We suggested that taxing the largest property owner in Italy was not only equitable but economically necessary.

Monti has moved in this direction. This week he has indicated to the European Commission his intention to submit such a bill to parliament. He is proposing taxing the Church's property used for commercial purposes. Moreover, the commercial purposes are broadly understood to be not just "exclusive" but "prevalent" as well. A municipal government association in Italy estimates the tax can raise 650 mln to 2.6 bln euros annually.

To be sure, the progress Italy is making can be reversed. Monti is an unelected prime minister. His term will end in a year. He may be enjoying a bit of a honeymoon. Domestic opposition has been quietly biding its time, but as elections draw near there is no reason to expect this to persist.

In addition, the economic slump is likely to bite more. The economic slump deepened in H2 11, with Q3 contracting 0.2% and Q4 contracting 0.7%. The consensus expects the economy to contract in the first two quarters of this year.

The relatively low level of household debt in Italy, the informal economy and the Italian-specific generational transfer (e.g. adult children living with parents) may help blunt some of the macro economic impact.

Italy also remains sensitive to external developments, including the outcome of Greek negotiations and the French election. The next LTRO, with the Italian central bank accepting a wider range of collateral, should continue to bode well for not only sovereign auctions but bank funding as well. Smaller and medium sized institutions are thought to be likely to benefit as well.

If, as some one said, Weber should be credited with helping to save the euro, by resigning and making way for Draghi, then Berlusconi should also be so honored for making room for Monti.

(Not Very) Freaky Friday

noreply@blogger.com (Marc Chandler) — Fri, 17 Feb 2012 06:14:42 PST

There are a couple of noteworthy developments today, but the major currencies are confined to fairly narrow ranges in mostly unremarkable price action.

German Prseident Wulff resigned amid a scandal. He is the second president to resign in two years. It is said to be a blow to Merkel, who has been seeing her support grow even after her party lost almost every state contest last year. The immediate effect is that the Chancellor has to cancel/postpone trip to see Monti. Nevertheless, the fact that the trip was planned--a bilateral discussion--lends credence to the view of presented here of the high-level emergence of Italy's Monti as a check/balance on Germany as Sarkozy's political future is not certain.

The UK offered the data surprise of the week with a 0.9% rise in January retail sales. The consensus had forecast a 0.4% contraction. This follows a 0.6% increase in December and speaks to the resilience of the UK consumer in the face of the poor macro environment of austerity and falling real incomes. The drop in the deflator to a 2-year low points to discounts and easing price pressures.

The strength may be a function of early Olympic sales. Sales at "other stores" rose 5.9% in January. This was fueled by sportswear and sporting equipment. Sterling has built on on yesterday's recovery seen in North America. It needs to hold above $1.58 to keep the momentum intact for another run at $1.60.

The yen is the weakest G10 currency this week, following the BOJ's unexpected JPY10 trillion extension of its Japanese government bond purchase program. It is off about 1.8% this week. The yen is also the weakest currency of the year thus far off 2.7%. This suggests it may not be simply QE weighing on the yen. One of the factors may be a shifting pattern among stock and bond flows.

The weekly Ministry of Finance data shows Japanese investors are buying an average of JPY592 bln a week of foreign stocks and bonds this year, a marked increase from the JPY264 bln weekly average during the same year ago period. At the same time, foreign investors have slowed their purchases of Japanese bonds and stocks to a weekly average of JPY142 bln compared with JPY223 bln average in the year ago period. The exchanges reports that foreign investors have bought $7.6 bln of Japanese shares this year, which represents a 40% decline year-over-year.

Flows into many of the other Asian equity markets has been notable after foreign investors took profits at the end of 2011. Inflows into South Korean equities, already $8.2 bln this year, is 6.2x more than during the year ago period. India has seen foreign investors purchase $4.4 bln of equities, 3.6x more than a year ago. Taiwan reports only a 1.5x increase, but that is still almost $3.3 bln. The MSCI Asia-Pacific Index has risen for 9 consecutive weeks now and is up about 11% this year, a third better than the S&P 500 and DJ Stoxx 500.

Great Graphic: Tracking How a World Guzzles Water

noreply@blogger.com (magonomics) — Thu, 16 Feb 2012 13:43:20 PST

Here is another great graphic from Business Idea Research on world water use.

Monday Euro Group Yes, but March 1-2 Summit more Important

noreply@blogger.com (Marc Chandler) — Thu, 23 Feb 2012 06:53:22 PST

Currency in Crisis

The Euro group of European finance ministers will meet on Monday. There are to important decisions for it to make. First is whether to approve the private sector involvement initiative. The second is to decide to recommend the second aid package. However, many key issues will remain and it may not be until the heads of state summit March 1-2 before there is a greater understanding of what is really going to happen.

The euro's recovery in North America today reinforces the sense that the single currency remains range bound. The lower end of the range was frayed by the brief dip below the $1.2980-$1.3000 area. On the upside, $1.3150 may offer initial resistance now, with the $1.3200-50 offering a tougher ceiling.

There is talk, even at this late date, about modifying the PSI to generate greater savings for Greece. Yet this is probably a dead end. At this juncture the real issue is participation and whether there can be a greater inducement to participate rather than a punishment for refusal and still be regarded as voluntary (ie, not triggering CDS).

The Troika now projects the Greek debt/GDP ratio as 129% in 2020 rather than 120%, which was thought to be the litmus test on sustainability, though as we noted it is farcical when the Stability and Growth Pact calls for 60% and there is no theoretical grounds or apparently historical grounds to support such claim. Nevertheless, in for a penny in for a pound. If 120% is pulled out of the air, changing it to 129% should not require any greater suspension of belief.

The role of the ECB and national central banks is still not clear either. The ECB was thought to be willing to sell its Greek bond holdings at cost, to the Greek government, funded by the EFSF, thereby forgoing profits. However a German paper is reporting that the ECB may swap its bonds for new bonds from the Greek government at face value. This seems confused.

There would be no savings for Greece. It would not remove Greek bonds from the ECB's balance sheet. It would only help prevent the ECB from getting involved with the collective action clauses that might be retroactively inserted into government bond contracts.

The national central banks are different story, though the German paper suggests they too may swap their Greek bond holdings. Unlike the ECB which bought the Greek bonds for monetary policy purposes, the national central banks had purchased Greek bonds as an investment.

The German newspaper story notwithstanding, France appears to be leading a move to have the national central banks participate in the PSI, or in some other way, take partial loss on their Greek bond investments. Recall that the national central banks have revaluation account and the losses suffered on Greek bond holdings (thought to be around 15 bln euros) can be more than offset by the revaluation of other assets, like German and French bonds, and gold.

There is bound to be a fallout from how the central banks deal with their Greek bond holdings. For example, if the ECB forgoes profiting on Greek bonds, then other countries, like Ireland, will seek some modification from the ECB on promissory notes used to nationalize the banks. Irish officials have already indicated they are thinking along these lines. There may also be a rating impact on the countries whose sovereign bonds the ECB holds, depending on the resolution.

There is still the issue of an acceptable mechanism for monitoring the implementation of the accord in Greece. There may more discussion at Monday's Euro group meeting, but no resolution is likely.

Ahead of the March summit, the participation at the LTRO at the end of the month is significant. Some in Germany, Finland and the Netherlands appear to be feeling more confident about a hard default in Greece can be absorbed and the greater the liquidity cushion the more confident they may be.

China and Europe: Where to Look for Support

noreply@blogger.com (Marc Chandler) — Thu, 23 Feb 2012 06:53:52 PST

Currency in Crisis

China President Hu Jintao was very polite in pubic comments as the 14th Sino-EU summit began yesterday. He made pleasant remarks about China's willingness to support Europe. The foreign exchange market initially bought euros on the headlines, but alas the twists and turns of the Greek saga exert the stronger pull. Still, it seems that many observers misunderstand what is happening.

China has about $3.2 trillion in reserves. It is one of the few countries that do not reveal the currency composition for its reserves. Economists assumes that around 25% of the reserves are invested in euro denominated instruments. That means that China holds roughly $800 bln of European bonds. For numerous reasons it seems unlikely that it is about to increase its holdings of peripheral bonds and to the extent it buys core bonds, like German bunds, it aggravates the pressure by widening the intra-European spreads.

The ever colorful Dennis Gartman advised as the crisis just was emerging to buy things that hurt when you drop on your foot. China appears to be taking this advice. It has little interest in expanding its holdings of paper. It wants real assets.

Many may not appreciate the extent to which the combination of cheap credit and "bargain" pricing is encouraging Chinese companies and funds to buy assets in Europe. Here is just a short list of some recent transactions.

1. A China state fund agreed to buy for 387 mln euros a 25% stake in Portugal's national electric grid.

2. China's largest construction equipment maker bought a German family owned engineering firm for 360 mln euros.

3. China's sovereign wealth fund bought a stake in the UK's Thames Water.

4. China's Three Gorges bought a 21.3% stake for 2.2 bln euros in a Portuguese energy company.

5. A Chinese company bought a 25% stake in the Ferretti Group, an indebted Italian yacht manufacturer.

6. China's National Chemical Corp bought a stake in Norway's Elkem for $2.2 bln.

7. Manganse Bronze makes London's famous black taxis. It is owned by Geely, the Shanghai-based car manufacturer than owns Volvo

8. China's sovereign wealth fund has the third largest stake in Songbird Estates which owns the Canary Wharf Group.

9. Chinese banks have bought or leased 28k meters (300k square feet) of office space in the financial district in London.

To be clear, China is not invading Europe. Last year, its direct investment in Europe as about $4.3 bln, almost double the 2010 figure. However, it terms of stock,only about 3.5% of China's foreign direct investment is in Europe.

China's current five year plan calls for direct investment outflows to grow at an annualized rate of 17%, so that in 2015, its stock of foreign direct investment will be a little more than $560 bln. China's shopping plans and financial wherewithal finds a Europe that wants to sell assets. The privatization programs are an integral part of the recovery plan for the periphery.

Yet there is political resistance too. The conservative Heritage Foundation found that last year almost $33 bln in deals were blocked by officials in the target country, including Bright Food Group's attempt to by France's Yoplait. China's Ministry of Finance estimates that some $60 bln in deals were approved.

In a similar way that the US triangulated, using China to help check the Soviet Union, so to is China using Europe to triangulate the US. Europe offers China a way to, at last partially diversify away from the US dollar. Europe is also a important buyer of China's goods, allowing it to diversify away from the largest consumer market in the world (the US).

One important political concession that China is seeking is for Europe to classify it as a market economy. The current designation of as a non-market economy makes it easier for European companies to seek redress against Chinese trade practices. Yet China is likely to find what other great powers including the US, have found. It is difficult to translate financial prowess into political leverage.

Thursday's Musings

noreply@blogger.com (Marc Chandler) — Thu, 23 Feb 2012 06:54:34 PST

Currency in Crisis

The euro has seen its recent losses extended as the news stream from Europe is poor, even though Spanish and French bond auctions were well received. Concerns about the dragging out of the Greek negotiations undermines the euro which has now fallen about 2.5% since Feb 9 and has traded below $1.30 for the first time since January 25.

It has retraced about half of the short-covering rally off of the $1.2625 low on January 13th. A break of the $1.2970 could spark another quick cent decline. Yet the very short-term technical indicators suggest the likelihood of a bounce in the North American morning that may prove a better selling opportunity. Resistance is seen near $1.3050.

The Greek tragedy is spinning into a farce. Greece has proposed new 325 mln euro in savings, signed assurances and the Troika has apparently completed its sustainability report and yet a deal is not in hand. The newest obstacle, but in some ways, always present, is that the creditor nations are concerned about implementation.

Indeed, the hold up presently is that the creditor nations are looking to tighten up the surveillance through specific mechanisms, apparently to be finalized. The take away from these developments are two-fold. First, a growing number of officials from the creditor nations are growing more confident that a hard default by Greece can be absorb. This coupled with the next LTRO pending may embolden their demands.

Second, the injury and insult will leave its own scars even while steps are being taken to increase integration and coordination. Italy's Monti, who is emerging as an important voice, tempering Germany, while Sarkozy has consistently been outmaneuvered by Merkel and now is basing his re-election on part on his good relations with Germany, illustrates this larger point. He attributed some responsibility of the crisis to the softening for the fiscal rules by previous German and French governments themselves.

Ironically, Germany, Finland and the Netherlands now appear to prefer to wait for after elections to make new commitments, while previously a technocrat government was thought to be essential for a resolution. The next key date is Monday when the euro zone finance ministers are to meet.

Elsewhere in Europe, note that Sweden's Riksbank cut rates 25 bp to 1.50%. It cut the 2012 GDP forecast in half to 0.7% from 1.3%. There were two dissents who wanted a larger cut, but the statement suggests the bar is high for another cut. The central bank expects the 1.5% repo rate to be the average until 2013.

The larger than expected decline in January inflation (-0.9% vs -0.5% consensus) has been taken aboard, but it appears that growth variables are more important than inflation data if the odds future cut are to increase. The krona is slightly weaker than the euro, but it continues to trade like a high beta euro--moving in the same direction but more so.

Australia reported better than expected jobs data and this reduces the chances of an RBA cut next month after disappointing the market earlier this month by not cutting. Job growth was more than 4x more than the consensus had forecast at 46.3k. Full time jobs rose by 12.3k, which alone beat consensus. Still the bulk of the jobs created were part-time. For its part, the Australian dollar is trading softer and we note that its correlation with the US stock market is considerably higher than the euro's and is more stable. The 60-day rolling correlation (on percent change) is just below 0.88, while the euro's correlation with the S&P 500 is just above 0.62.

Finally turning to the US, the most interesting data today is not the PPI (which will likely show easing pressures) or the weekly initial jobless claims (where the 4 week average is at a new cyclical low). Rather it is the housing start and permits data. Multi-family units has been one of the few less dim elements, but single family permits have increased for three consecutive months. Something does seem incongruous as the market overall remains difficult, but home builders are becoming somewhat more optimistic, according to recent surveys and home builder shares have rallied strongly in recent weeks.

CNBC: Greek Drama and the Euro

noreply@blogger.com (magonomics) — Wed, 15 Feb 2012 17:07:48 PST

Letting it Ride on LTRO

noreply@blogger.com (Marc Chandler) — Thu, 23 Feb 2012 06:54:40 PST

Currency in Crisis

It appeared that the brinkmanship tactics had pushed Greece over the edge on Feb 12 as Athens was set ablaze in protest. Now it appears that the European finance ministers are slipping over the edge. Strong doubts remain, and are being expressed, about whether a second aid package is throwing good money after bad.

Papademos has failed to deliver. As former ECB vice president, he was expected to deliver two things: new austerity and implementation. He has, after much fanfare, agreed to the new austerity demands. The rub, according to the creditor nations, is the commitment.

Domestic considerations are blunting the international priorities. When this seemed to be the case in Italy late last year, Germany's Merkel reportedly helped push Berlusconi out. However, it seems more difficult to repeat. It seems European officials would prefer to extend Papademos's term. Samaras has no incentive to agree to postpone elections that he would likely win. Nor can European officials bar Samaras, yet his apparent reservations and desire to modify/renegotiate the agreements cannot but undermine confidence in a government he would lead.

In this environment, creditor nations seem to be making a bet on the LTRO that will provide banks with another large liquidity cushion. It will increase their ability to deal with a shock emanating from Greece, if necessary. Ironically, that may mean that the larger the take down at the Feb 29th LTRO, the more likely European officials will be emboldened vis a vis Greece.

There is plenty of room for policy error. The reasons to fear a Lehman-like event still seem compelling. European officials suggest the problem is the lack of implementation of reform and growth measures in Greece. No doubt there is an element of truth with that assessment.

The problem is that it is incomplete. Part of the problem is that the program is working. Greek unit labor costs are falling. Demand is evaporating. The contraction is deeper than expected and despite optimistic forecasts of growth as soon as 2013, the risks are all on the downside.

The Troika are in Portugal to review their progress. They will likely praise Portugal's efforts. However, it may still miss its debt/GDP targets because of the denominator.

At the end of last year, with little fanfare the IMF cut its expected Spanish output by 5% for 2013. It has been slow to cut Portuguese growth forecasts, but it may have to. Over the past decades, the Spanish and Portuguese GDP are about 98% correlated.

The IMF has noted that if Portugal's GDP disappoints, its debt is not sustainable. This is despite the better debt dynamics than Greece and the greater willingness to adopt structural reforms. While we know that failure in Greece's case is not working, it is not clear that success (in implementation) will yield more fruitful results for investors.

Nor will an exit by Greece solve the underlying problems in the euro zone. Greece is a symptom of the problem but not the cause. The problem is structural. The crisis has interrupted the recycling of the North's surplus to the South in the euro area, though previously European officials assured themselves that imbalances within the euro zone are not significant. If Greece (and other peripheral countries) have an over-valued currency, then surely Germany has an undervalued currency.

Just like there are policies that can duplicate the effect of a devaluation--such as a large increase in the VAT, for example, and a large reduction in cost of labor (including employment taxes)--which appears to be the Troika's agenda, there are policies that can duplicate the effect of an appreciation. With or without Greece in the euro zone, Germany does not seem prepared to take such action.

Europe Still Dominates (the headines)

noreply@blogger.com (Marc Chandler) — Thu, 23 Feb 2012 06:54:45 PST

Currency in Crisis

The vagaries of Europe's debt crisis continues to be the most important driver of the short-term price action in the foreign exchange market. Indications that Greek New Democracy leader Samaras would sign a letter of commitment to the aid agreement helped the euro stabilize after the sell-off in response to the postponement of the Eurogroup meeting all the Greek elements weren't in place. However, it is clear that his rhetoric has been such that the key creditor nations in the euro zone remain skeptical.

The euro is trading inside yesterday's range. In broader terms it remains confined to a $1.30-$1.33 trading range. Market positioning meets anxiety about the debt crisis.

In terms of the debt crisis, there are numerous moving parts and incongruous--such as the PSI seems to have to be completed before the second aid package can be approved, but it requires funds from the second aid package to complete. Huh? The faltering confidence in Greece is occurring at the same time and, perhaps, because, (some) European officials, like Germany's Schaeuble, argue that Europe is less vulnerable to a Greek default. Others continue to fear a "Lehman-like" event--a highly disruptive financial shock.

There is not going to be any meaningful closure in the days ahead. Moreover, it seems that even if Greece jumps through all the hoops and makes all the concessions, that we won't be here again. The necessary economic contraction makes the still high debt level (120% in 2020 as a target) unsustainable in any kind of meaningful way. This is the lesson that Portugal may teach. It is likely to continue to received high marks for implementation but the weaker growth profile makes its debt unsustainable.

The Q4 GDP reports were mixed. France surprised by not contracting (+0.2% quarter-over-quarter). Italy and Netherlands surprised on the downside. Both reported a contraction of 0.7%, compared with expectations of -0.5/-0.3 respectively.

The key question remains where is aggregate demand going to come from. In Germany, we know. It has an under-valued currency. There is little doubt that it would be stronger if it weren't for monetary union. 40% its GDP or so will be exporter.

Turning to the US, there is a slew of economic data. The TIC data is among the least important. It will show details of US portfolio flows for December. Instead, look for the market to focus more on the data showing that the economic strength from Q4 (yes look for a strong upward revision) has carried over into Q1. This will be the January industrial production data and Empire Mfg for February. Note that the inventory to sales ratio is low and this suggests the build up inventories in Q4 won't have to be a drag on Q1 12.

This is important too for the other event today and that is the publication of the FOMC minutes. It will be scrutinized for insight into the prospects for QE3. The economic data will give the doves little ammunition to advance their position. If Bernanke is looking for an opportunity, it does not exist currently.

Economic Valentines

noreply@blogger.com (magonomics) — Tue, 14 Feb 2012 12:17:57 PST

Happy Valentines Day Marc to Market Readers! Here are a few Economics Valentines for you:

You can find more on the here on the Freakonomics website.

Bloomberg Radio: Greece and the Euro

noreply@blogger.com (magonomics) — Thu, 23 Feb 2012 06:54:59 PST

Currency in Crisis

Here is an interview I did yesterday for Bloomberg Radio on Greece and the Euro.

Quick Thoughts on US Data

noreply@blogger.com (Marc Chandler) — Tue, 14 Feb 2012 07:34:52 PST

Business inventory data reinforces the note yesterday warning of sharp upward revision to Q4 US GDP. We already knew that factory inventories (+0.1%) and wholesale inventories (1.0%). The new info today is retail inventories (+2%).

Sales rose 0.7% on the month and that laves the inventory/sales ratio as the lowest since in nearly a year (march 2011). This means that the build up of inventories in Q4 will not need to be shed in Q1. This should encourage some optimism that the US may maintain some of the upside momentum seen at the end of last year.

US retail sales data seemed somewhat disappointing, but the details were better than the optics. The headline rose 0.4% a bit lower than expected but better than the revised 0.1% rise in December. Excluding autos, sales rose 0.7%, which was a touch better than expected.

The core retail sales, which excludes autos, gasoline, and building materials, and is used for GDP calculations rose 0.7%, more than offsetting the 0.4% decline in December. January makes up for December weakness, but the underlying trend does not impress.

Still economic data out in the next few days is likely to confirm the firmer tone of overall economy. Industrial production figures on Wednesday are expected to show a healthy 0.7% increase and capacity utilization is likely to reach its highest point since July 2008.

Empire and Philly Fed surveys (Wed and Friday) are expected to show the economy gained additional momentum in February. The inflation gauges should see producer price ease on a year-over-year comparison to its lowest level since last January.

Consumer prices may see the headline rate ease (2.8% vs 3.0%), but the core rate is likely to be sticky at 2.2%. This performance on CPI whereby headline softens but core stays firm may be a feature the period ahead.