One Minute Macro Update
US: Markets are mixed this morning. Muni ETF rallied on Friday on news of the extension of the BABs program. The BABs program that expired in 2010, which originally permitted a 35% subsidy on state and local government-issued taxable munis, would now allow a 32% subsidy this year and 31% in 2012 under this new proposal. WSJ reported that due to Republican Party resistance, a more moderate 28% subsidy would create a political compromise. The Treasury department reported that interest expense is expected to rise to 3.1% of GDP in 2016, a threefold increase that is likely to raise borrowing costs.
Europe: Sovereigns wider on slew of headlines regarding political hurdles and bailout inadequacies. The German press reports that the European Stability Mechanism (ESM), the replacement for the EFSF, will need a two-thirds majority vote for it to be passed in the country, increasing the difficulty of passage. Moreover, the plan looks to be less comprehensive than expected in its ability to buy sovereign debt, with a size of €500 and a capital stock of €100bn. Italy’s bond auction resulted in the sale of €3.5bn 4Y at 3.77% v 3.67% prior and €1.68bn 29Y at 5.51% v 4.80% prior.
Asia: China’s trade surplus narrowed to $6.5 v $11.3bn E. Both exports and imports beat consensus coming in at 37.7% YoY v 22.5%E and 51.0% YoY v 51.0%E, respectively. The release is positive news for 2011, after the more modest results late last year. Today will see the release of China’s CPI for January with consensus at an increase of 5.3% YoY, but with numerous reports pegging it at 4.9%. China will also release its January PPI estimated at an increase of 6.2%. Reports coming out of China that PBOC 1Y key rates can tolerate a 50bps increase. Japanese Economic Minister confirmed the absence of growth in 4Q10 and does not currently expect to engage in any further stimulus. Japanese real chained GDP came in at -0.3% QoQ v -0.5%E.
From Brian Yelvington at Knight Capital
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