It's all about rates this largely newsless morning, which have continued their march wider all night, and moments ago rose to 2.873% - a fresh 2 year wide and meaning that neither Gross, nor the bond market, is nowhere near tweeted out. As DB confirms, US treasuries are front and center of mind at the moment.... the 10yr UST yield is up another 4bp at a fresh two year high of 2.87% in Tokyo trading, adding to last week’s 20bp selloff. As it currently stands, 10yr yields are up by more than 120bp from the YTD lows in early May and more than 80bp higher since Bernanke’s now infamous JEC testimony. We should also note that the recent US rates selloff has been accompanied by a rapid steepening in the rate curve. Indeed, the 2s/10s curve is at a 2 year high of 250bp and the 2s/30s and 2s/5s are also at close to their highest level in two years.
Ironically, not helping matters is the eventual rumored Hilsenrath piece, which did come out only not on Friday and not to say what the market had wanted. In the piece released on Sunday afternoon, Hilsenrath argues that the departure of Bernanke from the Fed will probably result in a more fractious central bank. Ms. Yellen has a “clearly staked out position within the Fed as a strong advocate for easymoney policies” while Mr. Summers “has a reputation as a tough-minded and at times aggressive debater”. Either might push harder to advance his or her own positions, and face more pushback from other Fed officials in return. The WSJ warned that this may make the Fed’s forward guidance appear unreliable if the new Fed leader appears to lack broad support inside the Fed. The WSJ contrasts this against Bernanke’s leadership style saying that as the Fed prepared to launch another bond-buying program last year, Bernanke called colleagues at home and on weekends in an effort to develop consensus support around his policy.
And with the Bank of America short-term technical indicator pointing to a 3%+ jump in yields (and the 30 Year Fixed FHA Wells APR at 6.14%) the last thing the bond market now needs is a headless chicken Fed, and a loss of confidence in central planning. Which is precisely what it may get.
Overnight news bulletin from BBG:
- Treasuries continue decline, with 10Y yields rising to 2.873%, highest snce July 2009; 5Y and 7Y notes lead decline as market waits for FOMC minutes Wednesday and possible clues on tapering of asset purchases.
- Regulations aimed at reducing the risk of another financial crisis are starting to upend the repo market, which shrank to $4.6t daily outstanding last month from a peak of $7.02t in 1Q 2008, according to Fed data
- EUR gained against most of its major counterparts after the Bundesbank said in its monthly report that the ECB’s pledge to keep borrowing costs low doesn’t rule out higher interest rates to curb inflation
- The Confederation of British Industry raised its forecasts for U.K. economic growth this year and next as business and consumer confidence strengthens and credit conditions improve
- Almost two-thirds of U.K. financial services firms have boosted salaries to retain employees before the introduction of European Union limits on bonuses, according to a survey
- Japan’s exports jumped by the most since 2010 in July, aiding Prime Minister Shinzo Abe’s efforts to drive an economic recovery even as rising energy costs boosted the trade deficit
- Egypt’s defense chief said the military won’t permit the destruction of the state as the death toll from violence in recent days climbed to almost 900
- Sovereign yields higher across the board. EU peripheral spreads mostly wider, Portugal and Ireland are exceptions, Euro Stoxx Banks index gains. Nikkei gains 0.8% as JPY falls, approaching 98 level. European stocks fall, led by the FTSE. U.S. equity index-future s higher. WTI crude and copper ease, gold little changed
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Market recap from RanSquawk:
Heading into the North American open, stocks in Europe are seen lower across the board, with Bunds also trading lower, in tandem with USTs as market participants remained firmly focused on the Fed which is also due to release the minutes from the most recent meeting this week. Of note, the latest article by the prolific Fed watcher Hilsenrath suggested that there is a risk that the Fed’s forward guidance may appear unreliable if the new leader appears to lack broad support. Higher rates encouraged further rate differential flows which supported USD/JPY, which edged back into positive territory and looks set to make a test on the 50DMA line at 98.33.
In terms of EU related commentary, a member of Merkel’s CDU party, Fuchs, said that Greece may need to be given more time, but will probably not need another haircut. More importantly, Germany's Bundesbank said that it expects German economy to return to normal, steady growth rates in H2, adding that a rate hike is possible if inflation pressure emerges. Hawkish tone saw the 1y/1y EONIA forward rate advance back into positive territory, with EUR also bid across the board. Going forward, there is little in terms of scheduled macroeconomic releases, but the NY Fed will conduct its latest Outright Purchase op.
PBOC governor Zhou said to continue to implement prudent monetary policy in H2 2013 . Zhou also stated they are to fine tune monetary policy if needed but big adjustments are unlikely and that they are making plans to relax controls on deposit rates. Zhou further added that overall liquidity is ample in China.
Japanese Trade Balance (JPY)(Jul) M/M -1024.0bln vs. Exp. -773.5bln (Prev. -180.8bln, Rev. -182.3bln) - The trade deficit was the third largest for any month, also marking 13th straight month of expansion for the first time since 1979.
- Exports (Jul) Y/Y 12.2% vs. Exp. 12.8% (Prev. 7.4%); Imports (Jul) Y/Y 19.6% vs. Exp. 16.0% (Prev. 11.8%) EU & UK Headlines
Germany's Bundesbank says expects German economy to return to normal, steady growth rates in H2, rate hike possible if inflation pressure emerges.
- ECB forward guidance not an "unconditional commitment", monetary policy still dependent on medium-term inflation outlook.
- German inflation likely to ease somewhat over next few months.
A member of Merkel’s CDU party, Fuchs, said that Greece may need to be given more time, but will probably not need another haircut.
NE/GE 10s seen wider by 2bps or 6%, with reports over the weekend by the Dutch press noting that Moody's may cut the Netherlands's credit rating if state debt doesn't come down within next 3 to 4 years Spanish bad bank loans ratio reached an all-time high of 11.61% in June, following 11.21% in May.
WSJ's Hilsenrath writes: "Test for Federal Reserve's Next Chief: Quelling Dissent"
An already divided Fed could become more fractious when Mr. Bernanke departs, with important implications for the central bank, markets and the economy. The two leading contenders to succeed Mr. Bernanke, Lawrence Summers and Janet Yellen, tend to have strong views. Ms. Yellen has a clearly staked out position within the Fed as a strong advocate for easy-money policies. Mr. Summers has a reputation as a tough-minded and at times aggressive debater. Either might push harder to advance his or her own positions, and face more pushback from other officials in return, making the Fed a feistier place.
Lower Bunds failed to encourage demand for riskier assets, as market participants continued to fret over the potential implications that higher rates will have on economic recovery on both sides of the pond. Telecoms and financials led the move lower, with credit spreads also marginally wider as a result.
Germany's Bundesbank said that it expects German economy to return to normal, steady growth rates in H2, adding that a rate hike is possible if inflation pressure emerges. Hawkish tone saw the 1y/1y EONIA forward rate advance back into positive territory, with EUR also bid across the board.
GBP trade-weighted index (TWI) rose to its highest level in 7-months, supported by the yet more positive macroeconomic commentary regarding the economic recovery in the UK. This time by the CBI, who has raised its forecast for UK economic growth this year to 1.2% double the pace predicted by Chancellor in his March Budget - as the business lobbying group cited mounting confidence across the British economy.
Goldman Sachs raised its 3-month price forecast for Brent crude to USD 110/bbl and raised its 6-month Brent forecast to USD 108/bbl. Goldman Sachs further added that Brent oil may reach USD 115/bbl in the very near term.
The son of the Supreme Guide of the Muslim Brotherhood, Mohamed Badie, has been killed in violence in Egypt, according to the political arm of the Muslim Brotherhood.
- There were also reports that around 38 Muslim Brotherhood died on Sunday during a riot at an Egyptian prison in an attempt to escape, whilst the government also reported that 79 people died and 549 wounded during political violence on Saturday.
- There were also comments from Army chief Al-Seesi that the forces won't allow the destruction of Egypt and are ready to confront the violence.
UN chemical weapons experts arrived in Syria yesterday and will start work today to investigate the possible use of chemical weapons in the country’s civil war.
Crude oil flows resumed through a pipeline running from Iraq's Kirkuk oil fields to the Mediterranean port of Ceyhan in Turkey, according to Iraqi officials.
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Macro perspective from SocGen:
Major currency pairs should not change much today with the erratic price action of last week leaving participants in a quandary over the next move. EUR/USD risk reversals caught up to the downside with spot but then turned higher on Friday after spot squeezed back over 1.3350 despite a run-up to 2.80% for US 10y yield. The advance PMIs for August are due on Wednesday and are forecast to confirm the better numbers for July but this will have to be measured against the FOMC minutes before EUR bulls are tempted by another stab at 1.3400. The fact that IMM long USD positions have been whittled back a bit over the past week suggests that the scope of downside in EUR/USD may be limited short-term, unless the minutes strike a more hawkish tone.
The FOMC minutes and the central bankers' gathering in Jackson Hole this week will hopefully give more clues on the likelihood of Fed tapering in September, but without fresh hints the bond market might steady itself after the mauling of last week. The speech by BoE deputy governor Bean in Wyoming means sterling markets will be on the lookout for a dovish response after short sterling brought forward the first rate hike to 2015
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Finally, the usual coda from DB's Jim Reid
US treasuries are front and centre of mind at the moment. As we go to print this morning the 10yr UST yield is up another 4bp at a fresh two year high of 2.87% in Tokyo trading, adding to last week’s 20bp selloff. As it currently stands, 10yr yields are up by more than 120bp from the YTD lows in early May and more than 80bp higher since Bernanke’s now infamous JEC testimony. We should also note that the recent US rates selloff has been accompanied by a rapid steepening in the rate curve. Indeed, the 2s/10s curve is at a 2 year high of 250bp and the 2s/30s and 2s/5s are also at close to their highest level in two years.
Some have noted that the selloff has been exacerbated by the lower summer liquidity but it’s also fair to say that markets have been on tenterhooks. On Friday it seemed that all it took was a tweet from PIMCO’s Bill Gross for 10yr UST yields to gap cross the 2.85% mark on their way to an intraday high of 2.863%. Gross tweeted that “(without) central bank (check) writing we only have ourselves (to sell to)”. From the intraday peak, there was a bit of a rally into the close with market talk of an imminent Hilsenrath/WSJ article (supposedly about the Fed’s worry over increasing rates) driving rates off the day’s wides, closing at 2.825%.
It will be interesting to see whether the selloff in USD rates, combined with the increase in oil prices (which are up 23% since April lows and 16% in the YTD), combine to impact the economic data in the coming months. As we wrote last week the tapering story has caused some notable damage to markets even if risk assets have recovered from the June lows and overall volatility remains subdued. Indeed the S&P500 recorded its seventh loss in ten days, as its outperformance versus the Stoxx600 continues to narrow (S&P500 +16% YTD vs Stoxx600 +10%). Similarly, EM assets continue to come under pressure with the Mexican 10yr yield now higher than the June peak of 6.18%, matching the widening of Brazil’s CDS (+8bp) which is again approaching June highs. We are seeing a continuation of the EM weakness theme this morning with Asia’s IG credit index 7bp wider and Indonesia’s stock index down 3.5%.
For the record, DB’s rates view is that the market is implicitly discounting a very strong pickup in growth and that it is vulnerable to any signs that growth doesn’t accelerate. DB’s strategists Francis Yared and Dominic Konstam think yield curves are very steep suggesting a challenge to central bank guidance credibility is at a tipping point. Either the data really are strong and the central banks lose credibility soon or the markets have overstretched themselves, allowing for a partial recovery in lower rates. Francis and Dominic reckon the latter.
Following the market talk on Friday, the WSJ/Hilsenrath did eventually publish an article, out early this morning. The article’s tone will probably add further weight to treasury markets. Hilsenrath argues that the departure of Bernanke from the Fed will probably result in a more fractious central bank. Ms. Yellen has a “clearly staked out position within the Fed as a strong advocate for easymoney policies” while Mr. Summers “has a reputation as a tough-minded and at times aggressive debater”. Either might push harder to advance his or her own positions, and face more pushback from other Fed officials in return. The WSJ warned that this may make the Fed’s forward guidance appear unreliable if the new Fed leader appears to lack broad support inside the Fed. The WSJ contrasts this against Bernanke’s leadership style saying that as the Fed prepared to launch another bond-buying program last year, Bernanke called colleagues at home and on weekends in an effort to develop consensus support around his policy.
Outside of rates, it appears that the violence in Egypt has continued following a brief pause over the weekend. On Sunday, the Egyptian government acknowledged that its security forces had killed 36 Islamists in its custody, as the country’s military leaders and Islamists vowed to keep up their fight (New York Times). The Egyptian Defense Minister said in an address yesterday on state television that the military “will not remain silent before the destruction of the country and the people, and the torching of the nation” (Bloomberg).
Turning briefly to Asian markets; equities began the overnight session trading lower but have pared losses led by energy and mining stocks. The rally in Brent (+0.73%), copper (+0.79%), nickel (+1.87%) and gold prices (+0.76%) is supporting natural resources stocks across the region. As we type, the Hang Seng is trading at -0.15% while the Nikkei outperforms at +0.25%. The benchmark Asian and Australian IG credit indices are 7bp and 2bp wider this morning. USDJPY saw a brief drop following the release of Japan’s trade data for July which showed a larger than expected trade deficit of JPT1.02trn (vs JPY773bn expected). The result was driven by a 20% yoy increase in imports (vs 16% expected) and smaller than anticipated increase in exports (12.2%yoy vs 12.8% expected). The AUDUSD (+0.3%) has broken through the 0.92 level ahead of tomorrow’s RBA minutes.
Turning to the week ahead, global flash PMIs for August are the highlight in an otherwise quiet week for data. Given the back up in US rates, the Kansas City Fed’s Jackson Hole Symposium (beginning Thursday) will be closely watched despite only 3 of 7 members of the Fed board of governors in attendance: Vice Chair Janet Yellen, Jeremy Stein and Jerome Powell. As widely reported, Bernanke will not be attending the Symposium due to a “personal scheduling conflict. The last time a Fed chairman didn’t address the conference was in 1988, when Alan Greenspan didn’t speak. According to the Wall Street Journal, Bank of England Governor Mark Carney, European Central Bank President Mario Draghi and many members of the Fed’s policy-setting committee are also not attending. The latest FOMC minutes, released on Wednesday, may shed light on the possibility of a September taper. Important US data releases include existing home sales (Wednesday), jobless claims (Thursday) and new homes sales (Fri).
In Europe, the focus will be on the Eurozone’s flash PMI on Thursday. Other data include Spanish trade (Thursday) and Germany’s trade report/Q2 GDP details and Eurozone consumer confidence on Friday. In the UK, the Q2 GDP report is due on Friday.