Not a lot of market moving items of late
25/03/09 21:35
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Interestingly, and troublingly the 10-year TIP bond spread rose further to 1.36% - its highest level since early February. A further modest rise would see it at its highest level since September last year.
Not a lot of market moving items of late, but some as a matter of interest
PBOC Governor Zhou yesterday called for a new international currency to replace the role of the US dollar as reserve currency. Zhou argued that the crisis "calls for creative reform of the existing international monetary system towards an international reserve currency with a stable value, rule-based issuance and manageable supply, so as to achieve the objective of safeguarding global economic and financial stability." Presumably Zhou wishes there was some other abundant reserve asset that China could buy other than the US dollar. The problem with Zhou's suggestion however is that major countries would not find it appealing to issue in another currency due to exchange rate risk as government expenses and tax revenue are denominated in the local currency. Accordingly, the supply of assets in such a new reserve currency would remain thin. The market has correctly interpreted Zhou's comments as a reflection that China desires to buy less Treasuries and whether China likes it or not the only way to do that is to intervene less in the FX markets. Accordingly, the market is now pricing in some CNY appreciation over the next 12 months. It is a futile proposition and has warranted attention only because of the source. One only has to look at the complexities arising in Eurozone to realize it is a proposterous suggestion. This news that makes the papers today will be used to wrap fish and chips tomorrow.
Interestingly, and troublingly the 10-year TIP bond spread rose further to 1.36% - its highest level since early February. A further modest rise would see it at its highest level since September last year.
Not a lot of market moving items of late, but some as a matter of interest
PBOC Governor Zhou yesterday called for a new international currency to replace the role of the US dollar as reserve currency. Zhou argued that the crisis "calls for creative reform of the existing international monetary system towards an international reserve currency with a stable value, rule-based issuance and manageable supply, so as to achieve the objective of safeguarding global economic and financial stability." Presumably Zhou wishes there was some other abundant reserve asset that China could buy other than the US dollar. The problem with Zhou's suggestion however is that major countries would not find it appealing to issue in another currency due to exchange rate risk as government expenses and tax revenue are denominated in the local currency. Accordingly, the supply of assets in such a new reserve currency would remain thin. The market has correctly interpreted Zhou's comments as a reflection that China desires to buy less Treasuries and whether China likes it or not the only way to do that is to intervene less in the FX markets. Accordingly, the market is now pricing in some CNY appreciation over the next 12 months. It is a futile proposition and has warranted attention only because of the source. One only has to look at the complexities arising in Eurozone to realize it is a proposterous suggestion. This news that makes the papers today will be used to wrap fish and chips tomorrow.
The Fed has revealed that Treasury bond purchases begin today. Purchases for today will be for maturities from February 2016 through to Feb 2019. Starting April 1, the Fed will issue tentative Treasury purchases schedule every two weeks. It is likely that the impact of Fed purchases of bonds is priced in for now.
Treasury Secretary Geithner has argued for a new resolution authority to be able to wind down institutions like AIG. He also said that all institutions and markets that pose systemic risk must be subject to strong oversight and constraints on risk taking. We anticipate this to be the norm going forward, which will tighten money available that would be needed drive equity prices even close to previous highs (unlikely to happen for a very long time).
Finally, and most interestingly, there is division among Fed officials on the risks of deflation/inflation. Fed's Bullard said that QE was needed to avoid Japan style deflation, but we know it's almost too late for that. Meanwhile, Hoenig warned that the odds of deflation are fairly remote and that he was more concerned about inflation. He is concerned about the expansion of the Fed balance sheet and the Fed's exit strategy. Hoenig gets to vote again in 2010, so he might come in handy when support is needed to drain liquidity. The take home from this is that reasonable people with expertise are legitimately concerned about the inflationary impact of the Fed's policies (pumping money into the market). Accordingly, there is a legitimate risk of the US dollar continuing to weaken should Fed credibility on its ability to drain liquidity in the future get questioned.
Eurozone services and composite PMIs beat expectations, though previous French and German numbers had hinted at a possible surprise. The services PMI was 40.1 versus consensus 39.1 and 39.2 previously and composite PMI was 37.6 versus consensus 36.2 and 36.2 previously. The PMIs, though, remain in very contractionary territory and UBS economists think that the Q1 figures still suggest that Q1 GDP could be worse than the -1.5% q/q in Q4 of last year. While the data points to a possible trough in leading indicators, a sustained rally in these figures is necessary before recovery can be considered. In other news, the ECB's Liikanen said the ECB may broaden its current arsenal of non-standard measures, particularly if the recession deepens, and that there was still room to move on key policy rates. While risk sentiment has potential to improve further, which could remain supportive to the EUR, we are cautious ahead of the ECB's next meeting as the ECB could apply a more aggressive stance on monetary policy. In the current environment, it is tough to fundamentally guage what will cause the next shift in currency trends. In the meantime, we need to flow with the USD negative story and risk appetite, although unlikely sustainable.
UK, In figures released yesterday, headline inflation came in at 3.2%, well above consensus estimates of 2.6% and forcing the BoE to write an explanatory letter. Pass through inflation has been cited as one of the key reasons behind the surprise jump, but in the letter BoE governor Mervyn King maintained his view that containing deflation would be the Bank's main priority. The decline in utility prices up ahead is anticipated to force down annualized CPI by a full point. The accompanying RPI release was more reflective of the BoE"s concerns. Although not in negative territory and well above expectations of 0.7%y/y, the flat reading was the lowest in 49 years and underlines the BoE's view that asset purchases to pursue quantitative easing remains necessary. The upside surprise gave a boost to sterling as investors anticipate future policy will be pursued with less aggression as most negatives are priced in. Nevertheless the central bank would need to be mindful of stagflation concerns and Governor King noted that sterling's falls would not lead to inflation problems up ahead. There appears to be no change in the BoE's outlook on its asset purchase program in the short term, and we continue to see sterling recover from oversold levels, especially against the EUR. Thus you may want to sell EUR/GBP back into the larger range, but wait for a rally since the move has already been initiated (ref spot .9210)
Source: UBS, Bloomberg, Chris Lori CTA