Yield Curve

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Japanese 10Y Yield Drops To Record Low; 2s Sell Subzero After BOJ Indirectly Buys Record Foreign Stocks





While the rest of the world was preparing to celebrate Christmas, China was busy easing its economy into growth, and its stock market into low earth orbit, by lowering non-bank deposit reserve rates to zero as reported previously, while Japan was enjoying the consequences of the BOJ monetizing 100% of all gross JGB issuance, when overnight the Japanese Ministry of Finance not only sold $22 billion in 2 Year paper at a negative yield of -0.003%: the first time ever a government note (not bill) has sold at a negative yield, but the Japanese 10 Year yield dropped to 0.31%, declining below the previously all time low hit on April 2013 when the BOJ first announced its unprecedented QE program.

 
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US Yield Curve Collapses To 6.5 Year Lows





As yields across the Treasury complex continue to rise this week - amid desks complaining of no liquidity at all (and following yesterday's weak auction) - the yield curve (5s30s) has collapsed to 108bps, its flattest since June 2008. 2s30s continues to slide also (at 212bps) almost eerily perfectly tracking the plunge in the curve of the early 2000s...

 
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The Keynesian PhD Brigade Strikes Again: Sweden’s Riksbank Joins The ZIRP Mania





It is a tyranny of the PhDs. It is a group-think mania that has gone global. It’s also only a matter of time before the central bankers’ money printing spree takes down the very bubble-ridden financial system it has so recklessly spawned.

 
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Credit Doesn't Care What the FOMC Says: The "Recovery" That Never Was Is Over





The stock market takes off in holiday celebration of the FOMC being even less clear than it really has been in some time; perhaps going all the way back to Alan Greenspan’s intentional mush. Equity “investors” are happy that the Fed may be happy about the economy, even though there is nothing in actual markets (outside of stocks) to suggest that anything the Fed proclaims carries even the slightest validity. The recovery is over because it never was. The Fed is now kamikaze and stuck on this course, having painted itself into a smaller and smaller corner in which to operate. Their only hope is that their confidence turns into your confidence, but credit and funding markets are impenetrable at this moment to such utter nonsense. For many places, it is already “look out below.”

 

 
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Futures Rebound, Crude "Flash Smashes" Higher As Dollar Strengthens





After the worst week for stocks in years, and following a significantly oversold condition, it will hardly come as a surprise that the mean reversion algos (if only to the upside), as well as the markets themselves (derivative trading on the NYSE Euronext decided to break early this morning just to give some more comfort that excessive selling would not be tolerated)  are doing all they can to ramp equities around the globe, and futures in the US as high as possible on as little as possible volume. And sure enough, having traded with a modestly bullish bias overnight and rising back over 2000, the E-Mini has seen the now traditional low volume spike in the last few minutes, pushing it up over 15 points with the expectation being that the generic algo ramp in USDJPY ahead of the US open should allow futures to begin today's regular session solidly in the green, even if it is unclear if the modest rebound in the dollar and crude will sustain, or - like on every day in the past week - roll over quickly after the open. Also, we hope someone at Liberty 33 tells the 10Y that futures are soaring: at 2.13% the 10Y is pricing in nothing but bad economic news as far as the eye can see.

 
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Crude Drops, Yields Slump, Futures Tumble





Anyone who was hoping the market would rebound on last-minute news that the US government has gotten funding for another 9 months, will be disappointed this morning, when futures are finally starting to notice the relentless decline in crude, and with Brent down another 1% as of this writing following yet another cut in the forecast of Global oil demand by the IEA (the 4th in the last 5 months) and with Chinese industrial production also missing estimates (recall that the Chinese slow-motion hard landing has been said by many to be the primary catalyst for the crude collapse) which however pushed Chinese stocks higher on hopes of even more stimulus, the S&P is trading lower by some 14 points, the 10 Year is in the red zone at 2.12%, and the USDJPY is close to session lows. In short: Kevin Henry's "ETF" desk at the NY Fed will have its work cut out to generate one of the now traditional pre-weekend feel good, boost confidence stock market ramps.

 
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Frontrunning: December 10





  • New Normal headlines: Global stocks up on hopes of China policy easing (Reuters)
  • China inflation eases to five-year low (BBC)
  • U.S. Lawmakers Agree on $1.1 Trillion Spending Bill (WSJ)
  • U.S. Braced for Blowback as CIA Report Lays Bare Abuses (BBG)
  • CIA tortured, misled, U.S. report finds, drawing calls for action (Reuters)
  • CIA Made False Claims Torture Prevented Heathrow Attacks (BBG)
  • Oil Resumes Drop as Iran Sees $40 If There’s OPEC Discord (BBG)
  • OPEC Says 2015 Demand for Its Crude Will Be Weakest in 12 Years (BBG)
  • Greek yield curve inverted as politics raise default fears (Reuters)
 
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China's Stock Market Whiplash Extends As Greece, Crude Slump More





Now that China is on the same boat as the rest of the world, and its stock market is a direct reflection of hopes for constant liquidity injections by the central banks, nothing could be better for stocks than bad news, which is precisely what it got. After the biggest crash in the Shanghai Composite in 5 years, what China got just the bad economic update it needed, when it reported a PPI of PPI (-2.7%, Exp. -2.4%), the 33rd consecutive decline and a  CPI (1.4%, Exp. 1.6%), lowest since November 2009, when the big banks’ RRR rate stood at 15.5% vs. current 20%. And so hope of yet more PBOC interventions to halt China's deflation promptly reversed SHCOMP losses of over 4% on the session (at which point it was just shy of correction territory from recent highs hit just this week), and stocks surged to close up almost 3%, erasing half of yesterday's losses. This spike came despite reports Chinese regulators may limit brokerages' interbank borrowing.

 
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Greek Bond Curve Inverts As Stocks Crater





Amid the collapse of the global carry trade, no nation on earth has benefited more (and is now suffering more) from the dash-for-trash, buy-the-pig-sty trade than Greek stocks and bonds. Combining carry unwinds with uncertainty over snap Presidential elections (which could usher in a left-wing anti-EU party into power) and a 'technical-only' extension of its handouts from Troika and Greek capital markets are in freefalll. The Athens Stock Index is down over 11% on the day, destroying 3 weeks of gains; the Greek 3Y bond price has collapsed (as the carry-traders pile out through small doors) inverting the yield curve - never a good sign.

 
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What The Fed's Shift From "Considerable Period" To "Patient" Means





In the 2003-2004 playbook, “considerable period” gave way to “patient” as a signal that the hikes were drawing closer, and it is interesting that the words “patient” or “patience” have shown up quite frequently in recent Fed speeches. The problem with a simple shift to “patience” without any qualifications on December 17 is that back in 2004 this shift occurred just 4½ months before the first hike, and some market participants might therefore take it to mean a hike before June.

 
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Promises, Over-Reach, And Mistaken Remedies





The investment game is becoming more suspect and dangerous as asset price levels continue to ignore economic weakness and the lack of necessary political reform.  Instead, many investors (not just in the EU) have become conditioned like B.F. Skinner rats to bid up financial risk assets whenever a central banker makes a promise about accommodation or further stimulus; this even occurs when data disappoints, because investors expect ‘the promise’ to soon follow. Fear of missing the upside and underperforming peers and benchmarks is what makes this reflexivity work.  This is actually a sad state of affairs and an ever-more dangerous and epic game of chicken.  This conditional response pattern is unsustainable.  Indebtedness and market speculation continue to soar.  In the end, printing is a not a solution, but a source of long-term harm to markets and national economies.

 
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About That 2100 S&P Target For 2015, Goldman Was Only Kidding, Now Sees Even More Ridiculous Multiple Expansion





It was just one short month ago when, on the back of the soaring dollar (which has since soared even more), as well as "diminished global GDP growth and lower crude prices", Goldman's David Kostin cut his EPS for 2015 and 2016 from $125 and $132 to $122 and $131. Then, it was just two short weeks ago, the same David Kostin said "we expect the P/E will contract and the index will slip during the second-half of 2015 as the Fed takes its first step in the long-awaited tightening cycle. Our S&P 500 year-end 2015 target of 2100 implies a modest 5-10% P/E multiple compression to 16.0x our top-down 2016 EPS estimate or 14.6x bottom-up consensus earnings estimates." And then, with the S&P now about 20 points away from Goldman's 2015 year end target (and just 120 points from the government-backed hedge fund's 2016 year end target!), the very same David Kostin admits that he was only kidding and that the S&P may in fact rise to a whopping 2300 in the coming year...

 
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Treasury Yield Curve Flattens Dramatically, Below Lehman Levels





The reaction to today's blockbuster noise-ridden jobs data is muted in stocks but bonds are sending some complicated and uncomfortable signals. 2Y yields are 6-7bps higher and 30Y yield are now unchanged (havingbeen 4-5bps higher) as the market prices in short-term Fed action and the implicit medium-term economic weakness expected. This 6-7bps flattening of the 2s30s curve has crushed the spread to 234bps - below levels seen as Lehman failed and near Summer 2012's cycle lows. But we are sure 2015 will be the year that rates rise... right?

 
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B-Dud Explains The Fed’s Economic Coup (Or Why Every Asset Price Influencing Monetary Policy Transmission Is Now Manipulated)





The Fed can do only do two concrete things to influence these income and credit sources of spending - both of which are unsustainable, dangerous and an assault on free market capitalism’s capacity to generate growth and wealth. It can induce households to consume a higher fraction of current income by radically suppressing interest rates on liquid savings. And it can inject reserves into the financial system to induce higher levels of credit creation. But the passage of time soon catches up with both of these parlor tricks.

 
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