• Home/
• Fixed Income

David Fuller and Eoin Treacy's Comment of the Day
Category - Fixed Income

ECB's Draghi Sees Vigorous Pickup in Core Euro-Area Inflation

This article by Paul Gordon for Bloomberg may be of interest to subscribers. Here is a section:

Mario Draghi said he sees a “relatively vigorous” pickup in underlying euro-area inflation, signaling
that the European Central Bank is well on track to raise interest rates late next year.

In testimony to the European Parliament, the ECB president said while headline consumer-price growth will only average around 1.7 percent a year through 2020, still below the goal of just under 2 percent, that stable outlook “conceals a slowing contribution from the non-core components” such as energy and food prices.

“Underlying inflation is expected to increase further over the coming months as the tightening labor market is pushing up wage growth,” he said in Brussels on Monday. “Domestic price pressures are strengthening and broadening.”

The euro jumped half a cent on the remark, reaching the highest level since June. It traded at $1.1800 at 3:16 p.m. Frankfurt time. Bunds extended losses and the Stoxx 600 index fell to a session low.

The ECB will end its bond-buying program in December and expects to keep interest rates at record lows at least through the summer of 2019. Policy makers have acknowledged market expectations for a hike around the final quarter of next year.



Read entire article

Dollar Tumbles to Lowest Level Since July as Euro Surges

This article by Robert Fullem for Bloomberg may be of interest to subscribers. Here is a section:

The market views a 25 basis point Fed rate hike next week as a near certainty, based on fed fund futures. Contracts on Thursday showed more than 45 basis points of total tightening by the end of 2018. Focus is increasingly shifting to the outlook for next year, with investors moving closer to the central bank’s projected path of three rate hikes for 2019.

That won’t be enough to prop up the greenback, according to Noelle Corum, an Atlanta-based portfolio manager in Invesco Ltd.’s fixed-income group. As global growth improves and market participants start to speculate about policy changes from the European Central Bank and Bank of Japan, the dollar’s support from Fed hikes and trade tensions will wear off, she said.

“Going into year-end, we would expect fundamentals will begin to drive markets again, and this will drive the dollar weaker,’’ said Corum, whose group manages $235 billion. She forecasts the greenback will depreciate to $1.20 per euro and weaken to 104 yen per dollar by year-end.



Read entire article

The End of the Incessant U.S. Big?

This article by Kevin Muir at East West Bank may be of interest to subscribers. Here is a section:

According to Bloomberg’s Brian Chappatta, Friday was the last day U.S. corporations could deduct pension contributions at the 2017 corporate tax rate of 35 percent and will now only be eligible for the new 21 percent rate.

There has been considerable debate amongst the fixed-income community regarding the amount of curve flattening that has been the direct result of corporations accelerating their pension contributions. In fact, Brian’s article is named, “The Yield Curve’s Day of Reckoning is Overblown”and is mostly a rebuke of the idea that this factor has been the driving force to the recent flattening.

I don’t agree with all of Brian’s conclusions - but hey - that’s what makes a market!

The U.S. has been flattening at a vicious pace, while most other major bond market curves have been treading water.



Read entire article

Email of the day on Venezuela on the Med:

There is an increasing number of commentators in Italy that have drawn to the conclusion that the current government (still supported by a vast majority of Italians, ~60% according to latest polls) is determined to leave the Euro area and the EU. I am now convinced about this too.

Since there is no legally viable way of achieving this, the path to be followed will be that of an "accident" on the financial markets: the delivery of the promises of universal income and lower taxation, will push the fiscal deficit to "breaking point", while the ECB (unelected enemy of the people #1) will start withdrawing the bond buying program. 

With the spread uncontrollably high and seized credit (banks are also notorious enemies of the people), the only solution left (so the people will be told) will be the reintroduction of the Lira, overnight. The country will default and withdraw from international markets. Most activities nationalised. 

The motivation for doing this for those currently in power is clear: seizing unrestrained power (forget ideology, or patriotic instincts... those are facades). A country with universal income (assuming that functions) ceases to be a democracy anyway. The sponsor for all this comes from the East.

Interesting (Venezuelan) times ahead. 

The conclusion: don't touch Italian domestic names, not even with a barge pole from far away. 



Read entire article

HNA's Missed Payments Show Deutsche Bank Exit Won't Be Enough

This article from Bloomberg News may be of interest to subscribers. Here is a section:

Despite HNA Group Co. having sold more than $17 billion in assets this year, one of its units still missed payments on a $44 million loan this week, illustrating how the once-acquisitive Chinese conglomerate will need to unload more properties and shares to overcome its liquidity challenges.

Signs abound that the selloff will continue: It’s planning to get out of Deutsche Bank AG, seeking a buyer for its container-leasing Seaco business, surrendering eight floors of office space in Hong Kong and selling stakes in various Chinese units, people familiar with the matter have said since last week. What’s more, HNA is said to be dangling billions of dollars in real estate in the U.S., London and China to prospective buyers.

All in all, the company that was once at the forefront of China’s massive global buying binge has more than $17 billion in further asset sales planned, according to a tally by Bloomberg, as HNA tries to shrink back to its aviation roots. But as the missed payments show, there’s plenty of turbulence lying ahead for the conglomerate, which is saddled with one of the biggest piles debt in corporate China.



Read entire article

Financial panic and credit disruptions in the 2007-09 crisis

This article by Ben Bernanke for the Brookings Institute may be of interest to subscribers. Here is a section: 

Although the Balance Sheet factors do not forecast the acute phase of the economic downturn in my setup, that does not mean they were irrelevant. Of course, the bursting of the housing bubble was the spark that ignited the panic in the first place. Moreover, much other evidence (by Mian and Sufi and others) is consistent with the view that household deleveraging contributed both to the initial downturn in spending and to the slowness of the recovery. It may well be that household balance sheets evolve too slowly and smoothly for their effects to be fully accounted for in the type of analysis used in my paper, which tends to emphasize shorter-term fluctuations. But my results do suggest that, in the absence of the panic, the declines in employment, consumption and output in the early stages of the Great Recession would have been significantly less severe.

The panic of 2008 differed from the Great Depression of the 1930s in that the runs on the financial system during the recent episode were on wholesale funding, and occurred electronically, while in the 1930s retail depositors lined up in the streets.  But the overall effect was the same:  A loss of confidence in credit providers caused the supply of credit to plummet, the external finance premium to spike, and the real economy to contract rapidly.  Macroeconomic analysis and forecasting needs to take into account how disruptions to credit markets, in ordinary recessions as well as in financial panics, can damage the real economy.



Read entire article

Ray Dalio Spells Out America's Worst Nightmare

This article by Brian Chappatta for Bloomberg may be of interest to subscribers. Here is a section: 

“We have to sell a lot of Treasury bonds, and we as Americans won’t be able to buy all those Treasury bonds,” Dalio said. That means foreign investors will have to step up. And they probably would, as long as the dollar remains strong.

Otherwise, Treasury’s dollar-denominated interest payments to buyers in China, Europe and Japan will be worth less and less.

But, to Dalio, that’s not going to happen. “The Federal Reserve at that point will have to print more money to make up for the deficit, have to monetize more and that’ll cause a depreciation in the value of the dollar,” he said. Pressed by interviewer Erik Schatzker, he said “you easily could have a 30 percent depreciation in the dollar through that period of time.” For context, the Bloomberg Dollar Spot Index fell 8.5 percent in 2017, and that was considered massive.

It all leads up to this critique of how the U.S. has gone on a borrowing binge in recent years. Remember, the $15.3 trillion Treasury market was the $4.9 trillion Treasury market a decade ago.

“We have the privileged position of being able to borrow in our own currency because we have the world's leading reserve currency. We are risking that by our finances — in other words, borrowing too much.”



Read entire article

Email of the day on the credit, monetary and economic growth cycles

The Credit Cycle diagram from Moody's that you had in the long-term video presentation on Friday was very interesting. Is it possible to post it?



Read entire article

Wage Growth is breaking out



Read entire article

Honey, I shrunk the stock market

This report from Navallier Calculated Investing is a promotional piece but it contains a number of interesting charts and statistics relating to share buybacks. Here is a section:  

Apple had completed $200 billion in share buy-backs since 2012. Apple’s cash hoard is so monstrous that six out of the 10 biggest share buy-backs in U.S. history were done by Apple. The $200 billion they’ve bought since 2012 is enough cash to buy all of Verizon, Coca-Cola, or Boeing. Chew on that for a minute.

Now, contemplate this: U.S. companies announced $201.3 billion in stock buybacks and cash takeovers in May 2018 alone. That’s a record monthly amount. Apple represents nearly half of that! Apple recently said it would buy back $100 billion more of its own stock. They didn’t specify when or how long that would take, but that’s about 10% of the market cap, currently at $1 trillion, the first trillion-dollar stock.

The buy-back announcements keep coming:
Broadcom (AVGO) pledged a $12 billion buy-back.
Micron (MU) pledged a $10 billion buy-back.
Facebook (FB) pledged a $9 billion buy-back.
T-Mobile (TMUS) pledged a $7.5 billion buy-back.
Qualcomm (QCOM) just upped the ante on their previous announcement to buy back $8.8 billion. On July 25th, 2018 QCOM said they would buy back $30 billion, more than 30% of the float!



Read entire article