As the Fed is ever-so-gradually shifting toward a tightening posture, many have wondered what will Bernanke's actions mean for the bond curve. With various liquidity facilities set to expire this month, and the recent discount rate hike already having been priced in, there has so far not been a muted response by the bond market, although over the past few days we have seen an odd tendency, albeit minor, for curve tightening. We say odd, because as Morgan Stanley points out, the Fed's actions, coupled with an unwillingness to actually hike rates, should be one benefiting ongoing steepening. Then again, the problem with that logic is that at this point going steep is like buying Greek CDS today: it pretty much means sloppy hundreds, with very few greater fools left over (and without the opportunity to arb a naked-short position via another nearly busted GGB auction). The silver lining is that at least the government will not go after you with an arrest warrant: after all the government wants nothing else more than a vertical yield curve. A brief analysis by MS details the argument for why steepening makes all the sense in the current environment where the long-end is looking increasingly shaky courtesy of marginal liquidity contraction, all the while risk-flaring episodes such as those in Dubai and Greece will likely keep the short-end well bid for months, if not years, to come.
While clueless politicians and bankers have still not come up with decisions that could turn around the economy, Mr. Market may soon force them into action. Greece may dominate headlines these days, but this buys other equally distressed Eurozone economies time to fly under the radar. Market talks center around the PIIGS (Portugal, Ireland, Italy, Greece, Spain) these days. While they fill headlines there is one Eurozone country that may be a stealth ticking bomb: Austria.
It is well-documented by economists at SocGen and elsewhere, that the world has now entered a race to the currency bottom. Ongoing recent actions by the BOJ, ECB, SNB and all relevant central banks have made this a near certainty. Yet the biggest question mark is how the US will approach the imminent dollar devaluation (and with many trillions in debt overhang needing to be rolled over, the Fed has two options: accelerated inflation or dollar devaluation) - will it be a gradual process or rapid and unexpected. A paper by Darryl Robert Schoon analyzes the various forces at play when evaluating the probability of a dollar devaluation. "Capitalism cannot function unless its constantly compounding debt is serviced and/or paid down. Today, the US, the world’s largest debtor, can no longer pay what it owes except by rolling its debt forward and borrowing more, what the late economist Hyman Minsky called ponzi-financing, financing common in the final stages of mature capital systems...We are in what Stephen Roach, Chairman of Morgan Stanley Asia, calls the end-game, the resolution of past monetary excesses and imbalances, excesses and imbalances that reached never-before-seen heights in the last decade." Nothing too surprising for regulars, yet a good summary of the dilemma facing the monetary authority of the United States.
Risk on - short yen for euros, buy stocks. Rinse, repeat. EURJPY back to 1.000 correlation with the S&P. Algo signals working AOK.
The latest update in the ongoing GSE drama comes from Barney Frank who during a conference of black, Hispanic and Asian Realtors
in Washington said the following: “Please don’t think this is federally guaranteed, I don’t
think it is, I don’t think it should be, I don’t feel any
obligation to bail you out.” Well, that comes almost two year two late after the government already made all GSE lenders whole. Barner's posturing is merely in response to Republican efforts to account properly for GSE liabilities which, courtesy of their conservatorship status, are explicitly backed by the government. Of course, should the GSEs be put on the budget, the US debt/GDP, as pointed out previously on Zero Hedge, would surge by nearly 50%, from 90% to 140%. But Barney Frank, just like Peter Orzsag, is all about semantics.
My parents were lucky, because they started saving in earnest in the early 1980s, at the outset of what would become the biggest bull market of all times and, by the time the bull market came to an end in 2000, they were home and dry. In that 20 year period, a global equity portfolio generated an annualised real return of just over 13% in dollar terms, equivalent to a total inflation-adjusted return of about 850%! Unfortunately, not everyone has been that privileged. My generation has only been saving for the last decade or so, and we are still under water. $100 invested in April 2000 is worth about $77 today in real terms. I, together with hundreds of millions of other baby boomers across the world, am now chasing whatever returns I can find to ensure that my retirement can be enjoyed in relative comfort. But the force is not with us. The equity market continues to be a dangerous place and the value of our property has also fallen precipitously. - Niels Jensen, Absolute Return Partners
With economic optimism back over the U-3 data, which was "surprisingly" not impacted by mid-winter snow (but as Art Cashin says, a horrible number would have been seen as a buying catalyst due to the "non-recurring" nature of snow in February), many seem to have missed that real unemployment, or the BLS' U-6 series actually climbed by 0.3%, to 16.8% from 16.5% in January. Additionally, the Non-Seasonally Adjusted U-6 number was barely changed, and was flat at 17.9%, just a hair away from January's record 18%.
- Fannie, Freddie may ask banks to eat $21 billion of sour loans (Bloomberg)
- Tresuries tumble after snow posturing ends up being great strawman (Bloomberg)
- No snow issues here - striking greek workers shut down transport, try to storm parliament (Bloomberg)
- French debt coming under investor scrutiny (Reuters)
- Singapore's GIC becomes UBS' biggest shareholder (Bloomberg)
- Market forecast- confusing (Barron's)
- How much does the national debt matter? (Forbes)
Following the NFP report, the AUDJPY surges by 1.42 to 81.54, after almost breaking 80 yesterday. The carry trade is back with a vengeance. The status quo is happy to continue as nobody has read Seth Klarman's lessons.
Key highlights from the February report:
- Total Civilian labor force at 153,512, compared to 153,170 in January
- Actual unemployment: 14,871, compared to 14,837 in January
- The pool of available workers at 21,041, 239k increase from January's 20,802
- The Over 20 split of unemployed men/women was 10.0%/8.0%
- The labor force participation rate was 64.8%, compared to 64.7% in January
- Average hourly earnings increased by +0.1% compared to consensus estimate of +0.2%
- Total average hours worked in the private industry at 33.8, down from 33.9 in January; The low was in the Leisure and Hospitality services at 25.7, the high in Mining and Logging at 42.6
- Asian stock markets rise as optimism ahead US jobs report grows; Tokyo jumps 2 percent.
- Asian stocks rose, after U.S. jobless claims fell & on speculation Bank of Japan will expand easing measures.
- China plans to sell $29B of Yuan debt this year as part of stimulus.
- China sets 8% GDP goal for 2010.
- Fed Presidents say interest rates need to be low early in US recovery.
- Greece raised $6.85B in a bond sale, but looming debt auctions by EU countries could make it difficult for borrowing more.
- Japan says it won't comply with possible bluefin tuna export ban ahead of key int'l vote.
RANsquawk 5th March Morning Briefing - Nonfarm Payroll Special
Must Read: Seth Klarman On The True And False Lessons From The Financial Crisis, Blasts Government Market InterventionSubmitted by Tyler Durden on 03/04/2010 - 23:17
The government can always rescue the markets or interfere with contract law whenever it deems convenient with little or no apparent cost. (Investors believe this now and, worse still, the government believes it as well. We are probably doomed to a lasting legacy of government tampering with financial markets and the economy, which is likely to create the mother of all moral hazards. The government is blissfully unaware of the wisdom of Friedrich Hayek: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”) - Seth Klarman