September meeting accounts could ease some concerns from Tuesday's .... BTP's in particular are now at the highest yield
StreetStuff Daily October 6, 2016
BECAUSE: The way to get good ideas is to go through LOTS of ideas, and throw out the bad ones…
5 October 2016
Wed 10/5/2016 10:46 AM
September ISM NonManufacturing survey Stephen Stanley Chief Economist
The ISM non-manufacturing survey report makes it 3-for-3 so far this week in terms of the economic data rebounding in September after sub-par August readings. The composite gauge surged by almost 6 points to 57.1, the best reading in almost a year. The production and new orders components both bounced from the low 50s to around 60, while the employment measure jumped by 6½ points to 57.2 (also 11month highs in all 3 cases). Just to put today’s data into perspective, the composite and new orders, production, and employment components were all within about a point of the 2015 averages, which was also the case with the ISM manufacturing survey results released Monday. Also consistent with the manufacturing survey results, the ISM non-manufacturing survey findings on inventories suggest that the September strength may not be 100% sustainable. The inventories component jumped from 48.0 to 51.5, and respondents’ “inventory sentiment” skewed more in September toward stocks being too high (the latter index matched its highest level in a year). I would expect to see the ISM non-manufacturing gauge settle out a point or two lower than the September figure, but certainly closer to the September level than to the puzzlingly low August result. Finally, wage and price pressures continue to show up in the responses to this survey. The prices gauge inched up to 54.0 and has been above 50 since April. Labor dropped out of the commodities listed as up in price for the first time in over a year, but that list still outnumbered the down in price group by 12 to 5. There were 4 commodities reported in short th supply, and 3 of them were: “labor” (for a 12 month in a th row), “construction labor” (for a 6 straight month), and “temporary labor.” The wage number in Friday’s employment report will definitely be worth watching.
Final US durable goods orders increase Q3 GDP tracking to 2.7% …Following the final factory orders report for August our GDP tracking estimate rose one-tenth to 2.7% boosted by stronger inventories contribution and slightly stronger equipment investment. 5 October 2016
US August trade report increases our Q3 GDP tracker to 2.6%
5 October 2016
BMO Closing Comment | Nearing the Limit US Market Comments …The Fed released a working paper this week which attempts to explain the reasons U.S. economy has recently experienced persistently low real growth and interest rates. The authors use a general equilibrium model which incorporates demographic changes in the U.S. population, family composition, life expectancy, and labor market activity. The authors argue that demographic shifts can explain “essentially all of the permanent declines” in real growth and interest rates.
Figure 1: Waning Supply
US Rates at the Bell
October 5th, 2016 Recap & Discussion:
The report of ECB officials tentatively agreeing to a plan to taper asset purchases represents an implicit admission that such a large scale asset purchase program is limited in its length. The ECB has not come close to achieving its mandate of nearly (but below) 2% inflation, and while monetary policy can operate with a substantial lag, the bank would certainly prefer to engage in QE well into the future, but the side effects and practical issues render the program limited in size. The primary issue comes in finding enough suitable assets for the bank to purchase. Figure 1 shows the expected monthly ECB public sector purchases and the estimated gross and net issuance for several of the larger countries in the Eurozone.
Global Daily Macro Monitor | 6 Oct 2016
ECB: Mentions of core inflation and inflation expectations stagnating at low levels in the September meeting accounts could ease some concerns from Tuesday’s tapering leak. Germany: August manufacturing data could again show signs of weakness. We expect new orders to decline by 1.2%, and industrial production to post a small decrease of 0.2% m/m.
…Anyway, adding to today’s intrigue was an exclusive article being teed up for tomorrow’s Handelsblatt https://global.handelsblatt.com/ that says that the German Finance Ministry may unleash one form of helicopter money on Germany. Wolfgang Schauble is allegedly planning to cut taxes by €6.3bn to “stimulate domestic demand and counter international criticism that Germany’s export-oriented economy has contributed to a global trade imbalance…” This story, if true, will no doubt add fuel the growing sense among some in financial circles that with central banks near their monetary or LSAP limits, fiscal stimulus is the next page in the playbook. Such thoughts clearly rub the fur of deeply overbought, long duration safe haven bonds the wrong way … One last administrative note is that we’ve raised our L-T conviction level on the 2s10s steepener back up to a “3” after daily momentum crossed in favor of further steepening at today’s close. That momentum cross suggests that the corrective flattening has run its course so we’re back to a conviction level that we feel is about as high as we can go in the central bank-ruled rates world. Similar momentum turns upward can be seen in the German and UK 2s10s curves as well, adding to our comfort in dialing back up the conviction on the 2s10s steepener.” 05 Oct 2016
US Economics Flash Strong ISM rebound reduces slowdown concern Data ISM non-manufacturing jumped to 57.1 in September its highest level since October 2015. The increase was
larger than consensus forecasts for a bounce to 53.0 and Citi’s above consensus 54.1 following a sharp drop to 51.4 in August. The strength was broad based with new orders bouncing to 60.0 from 51.4 and business activity rising to 60.3 from 51.8. ISM non-manufacturing employment subcomponent popped to 57.2 after languishing around 50 for the last eight months. Citi’s View …The employment subcomponent surged after remaining low for much of the year. Rather than creating exceptional upside risk for Friday’s payrolls, we view this more as a reconciliation of the lackluster survey data with more positive hard labor market data (Figure 2). Overall, the strength in the ISM figures reinforces our call for robust payrolls growth on Friday. Figure 2. Employment subcomponent surged
05 Oct 2016
Global Equity Quarterly Still Tired Bulls
Equities Still The Yield Asset — Global equities trade on a dividend yield of 2.6%, well above global government bonds that yield just 0.5%. This high risk premium should offer equities some protection given any unexpected increase in bond yields.
Still Buying Dips — Citi strategists forecast a 10% gain in global equities to end-2017. With only 3.5/18 factors from Bear Market Checklist flashing sell, we would buy into the next dip. EPS Prospects Improving — Slightly accelerating global economy along with higher commodity prices and a weaker US$ should improve global EPS growth from 2% in 2016 to 7% in 2017. Regions — We remain Overweight EM, where valuations are attractive and EPS momentum stabilising. We cut Japan to Underweight and raise Europe ex UK to Neutral. Global Sectors — We have a mild cyclical tilt. Amongst cyclicals we favour IT, Energy and Financials, which we upgrade to Overweight. Amongst defensives we favour Telecoms.
05 Oct 2016
5 October 2016
US EIA Petroleum Statistics
US Independent E&P's: Survey Results : Investors More Optimistic On Oil Prices and E&P valuation
US oil stockpiles drawing robustly even after Hermine impact As Brent prices have pushed above $50 this week in the wake of a (not yet finalized) OPEC deal (also see Energy Weekly), US crude stockpiles continued their seasonally stronger drawdown, even after storm effects have subsided. Crude inventories fell 3-m bbls to 499.7-m bbls (against Bloomberg survey expectations of a 1.1-m bbl build), a fifth week of consecutive stock draws and down from an all-time high of 543-m bbls in April. This was as refinery runs continued to drop as fall maintenance deepens, offset by imports staying low, which could be signaling tighter global balances. September has seen US crude stocks fall 11-m bbls, against the typical seasonal pattern of a slight build. This is even as US shale production remains resilient. And total crude and product stockpiles have been coming off their end-August peak of 2.1 billion barrels to now 2.075 billion barrels. Meanwhile, Hurricane Matthew could make landfall in Florida, disrupt PADD I oil imports and fuel deliveries, and potentially dampen demand.
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Bottom Line: Our latest survey of investor expectations provides some useful insights. It could be a post OPEC bounce or stronger recent global PMI's but investors see shoulder season (February) oil prices in the low $50’s/bbl, far above this year’s February lows. Mid cycle oil expectations are stable at around $60/bbl. Investors believe the E&P stocks are discounting $58/bbl. This is a lower embedded price than what we encounter when marketing, likely reflecting optimism about shale productivity. The detailed answers to the survey are shown inside – we pick out the following: OPEC: The Survey respondents gave just under a 60 percent chance of an OPEC deal. Yet the majority still felt OPEC volumes would be around 33-33.5mbd – either reflecting a lack of compliance or perhaps some additional volumes from Libya, Iraq, Iran, and/or Nigeria.
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US Production Flat: Most investors believe the oil price to keep US production flat is around $45/bbl. An oil price of around $60/bbl would be required to generate 500kbd of overall US crude oil growth (with shale compensating for conventional declines). In most of our global supply-demand scenarios, there is a year when US production growth may need to be hotter than 500kbd, once global inventories have normalized and due to accelerating decline in non-OPEC ex-US. We note 2017 is a slightly better year for non-OPEC ex-US due to the timing of legacy-project startups, e.g. Kashagan. Shale Inflation: The outlook for US shale production rests on the interplay between industry cashflows (oil price), well productivity, cost inflation and animal spirits (outspend/equity). As the industry starts to get back to work, most participants felt cost reflation would be about 10% (manageable). Cost per lateral foot has fallen around 25-50% depending on the basin with industry executives suggesting around 55% of the cost savings are structural, 45% are cyclical (on average). Shale typically follows the rule that 4x the F&D cost = the breakeven oil price. With development costs at $10/bbl in some plays, 10% inflation would add only $4/bbl to breakevens.
Deutsche Bank 06 October 2016
Early Morning Reid
Macro Strategy … Back to that US non-manufacturing ISM reading for September now. It printed at 57.1 which, was not only well ahead of where the market consensus was pegged (53.0), but also up a bumper 5.7pts from August. It put the reading at the highest since October 2015 and the monthly jump was the most on record with data for the series going back to 1997. The details of the report were equally positive. New orders jumped to 60.0 from 51.4, business activity jumped to 60.3 from 51.8, new export orders surged to 56.5 from 46.5 and employment rose to 57.2 from 50.7. Bond yields were immediately higher following the data. 10y Treasury yields were up as much as 4bps in a short space of time to touch an intraday high of 1.728% which is only a couple of basis points shy of the pre-Brexit levels, however that move was pared back a bit into the close with the 10y finishing the day just shy of 2bps higher at 1.703%. Still, that's a near 17bps move higher in yield since the recent lows at the end of last month. European bond yields were already up on the ECB story but the data just accelerated the sell off further. 10y
Bund yields ended up moving 5bps higher to -0.008% and are now up nearly 12bps this week alone. The peripherals were also 6-7bps higher yesterday and 10y BTP's in particular are now at the highest yield (1.358%) since June. The move higher in rates unsurprisingly weighed on rate sensitive sectors of the equity market like REITS and utilities with European equities closing lower as a result. The Stoxx 600 finished -0.55% for its first down day since September 26th. Those sectors in the US were also under pressure but the losses were more than offset by a rally in financials while energy names were also given a boost following a +2.34% bounce for WTI on the back of an unexpected decline in US stockpiles last week. The S&P 500 finished +0.43% at the closing bell. Elsewhere, credit markets also traded with a generally positive tone. In FX the US Dollar initially rallied post-data but pared gains into the close to finish flat, while Gold (-0.13%) fell for the seventh successive session. 05 October 2016
US Daily Economic Notes Keeping a close eye on jobless claims …As illustrated in Figure 1, the four-week moving average on jobless claims troughed at 287k in February 2006 and remained fairly range bound until May 2007. However, in the fall of that year, claims began to rise at a fairly rapid pace. For example, the four-week moving average of initial claims increased by a little over 15% from their intra-year low of 302k in May to nearly 350k by the end of December 2007. In fact, economic output peaked in December 2007, and recession began in the following month. On the basis of this precedent, we would become more concerned about an economic downturn if the four-week moving average on initial claims were to increase by 15% - 20% from the current low to around 310k. At present, claims show no signs of trending higher. However, they moved up sharply in 2007 in just six months. Stay tuned
Figure 1: A 15% - 20% increase in claims would meaningfully raise the risk of Recession
Japan FX Insights Comprehensive assessment on JPY: (6) UST 2-year yield
During this process there will be temporary rebounds in USD/JPY mainly due to unwinding of short positions. The first phase is when equities, which tend to lead the economy, react positively to Fed easing and rebound ahead of the economy bottoming. The second phase is when the economy is recovering and expectations are that the Fed is close to entering a cycle of rate hikes.
Some correlation remains alive between the 2y UST yield and USD/JPY
06 October 2016
06 October 2016
During 2006-12, observers could largely assess the USD/JPY trend by looking at the 2y UST yield. This logic asserted that while the focus should normally be correlation between USD/JPY and 2y JGB and UST yield spread, looking at the 2y UST yield was enough because the 2y JGB yield was extremely low and not changing much during this period. The 2y yield factors in expectations for economic activity and monetary policy a year later and serves as a proxy indicator for the economic cycle. Observers relied on 2y UST yields as a leading indicator for the USD/JPY trend. However, historical data show that just moderate correlation existed between these two values with a time lag.
Figure 2: 2y UST yield and USD/JPY after Abe market
Japan FX Insights Comprehensive assessment on JPY: (4) BoJ paradox Few cases of sustained depreciation of the yen due to BoJ easing other than the Abe market Investor interest in Japan's monetary policy has been unusually strong since the start of the Abe market and new-dimension easing by the Kuroda-led BoJ. We think the BoJ's unfolding of an unbelievably massive sail (monetary easing) amid tailwinds from the US economic expansion led to accelerated progress by the boat (USD/JPY and stock prices). However, it is not an exaggeration to say that the Abe market has been the only case of sustained JPY depreciation due to BoJ easing. We estimate a JPY depreciation effect if the BoJ alone steadily eases during a neutral phase in domestic and overseas fundamentals. However, the main pattern for actual cycles is easing by the BoJ to address JPY appreciation and an adverse cycle of stock decline that accompanies weaker economic conditions.
Wednesday, October 05, 2016 @ 9:29 AM 06 October 2016
Data Watch
Japan FX Insights Comprehensive assessment on JPY: (5) Fed policy
The Trade Deficit in Goods and Services Came in at $40.7 Billion in August
Current USD/JPY cycle is reacting to US rate cycle, despite some distortions
Implications: The trade deficit came in slightly larger than the consensus expected for August as imports increased faster than exports, but the good news is that they both rose. In the past three months, exports are up $6.5 billion, the largest three-month rise since late 2011. Overall, we take the recent rise in exports as a bullish sign of a revival in US trade with the rest of the world. Services imports rose by $1.5 billion with the majority of the increase coming from charges for the use of intellectual property, probably due to the rights fees to broadcast the Olympic games. So far, there has been no effect of Brexit on trade. Both imports and exports rose with the UK in August, remain roughly in-line with levels
We believe that the US economy and monetary policy are the key determinants of the USD/JPY market. This is illustrated in Figure 1. The USD/JPY tends to fall sharply when the Fed embarks on monetary easing after confirming a downturn in the US economy. Even after the US economy starts to pick up, the Fed will continue easing for a while and the USD/JPY will continue to trend down.
seen in the year before the vote, and exports to the UK are up 5.3% in the past year. We believe Brexit will continue to prove to be a positive for the UK, and will eventually give the UK the flexibility to make better trade agreements with the U.S., Mexico, and Canada, which could serve to increase global trade. Another ongoing factor affecting trade with the rest of the world is the trend decline in US oil imports. Although petroleum imports rose in August, they are still down 12.5% from a year ago, and have been a large contributor to slow trade growth. Back in 2005 US petroleum and petroleum product imports were eleven times exports. In August, these imports were 1.7 times exports. This is also why oil prices have not spiked back to old highs even though the Middle East is in turmoil. The US has become an important global petroleum producer, bringing a stabilizing effect to the world. In other news this morning, the ADP report said private payrolls were up 154,000 in September. Plugging these figures into our models suggests nonfarm payrolls will be up 175,000 to 200,000 for the month. We will finalize our forecast tomorrow after we receive the initial claims number. On the autos front, automakers reported selling cars and light trucks at a 17.8 million annual rate in September, up 4.5% from August, but down 1.6% in the past year. No sign of a recession for US consumers.
Wednesday, October 05, 2016 @ 11:45 AM
Data Watch The ISM Non-Manufacturing Index Rose to 57.1 in September Implications: The economy is accelerating as it enters the fall. On the heels of Monday's report showing a return to growth for factories, today's report on the service sector was booming, with the ISM nonmanufacturing index showing the largest single month increase in the nearly twenty-year history of the report. The September reading of 57.1 is also the highest reading of 2016, and an 80th consecutive month of expansion. The rise from the service sector was broadbased, with fourteen of the eighteen industries reporting expansion, while just four – led by mining – reported contraction. Mirroring the headline index, both the new orders and business activity indexes surged in September. This bodes well for the coming months, as companies move to fill the new orders. The employment index also jumped in September, rising 6.5 points to 57.2, the highest reading in 2016. While employment has been a weak spot in the manufacturing sector, the much larger service sector has shown continued expansion, in-line with the 200,000+ monthly nonfarm jobs growth seen over the past year. And while the pace of jobs growth may slow modestly as the labor market tightens, employment gains look set to put continued downward pressure on the unemployment rate. No matter how you cut it, the labor market looks very close
to the Fed's "full employment" target. On the inflation front, the prices paid index moved higher to 54.0 in September from a reading of 51.8 in August. Rising costs for coffee, chicken, and dairy more than offset declining prices for beef and butter. As a whole, today's ISM report shows a November rate hike would be justified, though the "non-political" Fed is likely to avoid making a move so close to the election. Barring a large surprise to the downside in employment or inflation data, neither of which looks likely, December should finally see the next step in making monetary policy slightly less loose.
05 Oct 2016
USA: ISM Non-Manufacturing Rebounds Sharply; Factory Orders Edge Up BOTTOM LINE: The non-manufacturing ISM index registered its largest month over month increase on record, rebounding from a sharp decline in August. Factory orders edged up in August, in line with the durable goods report. We revised up our Q3 GDP tracking estimate by one tenth to +2.8% (qoq ar). 05 Oct 2016
US Daily: Updated Thoughts on the Presidential Election (Phillips)
The presidential race remains competitive, but Sec. Clinton has regained a more solid lead in national polling, and state polls suggest she holds an even larger lead in the states most likely to provide her with her 270th electoral vote. Looking back at the patterns following previous presidential debates, we find that the benefit in polling the “winner” often experiences typically fades after two weeks; however, the effect on election expectations tends to last longer. Turnout remains a key source of uncertainty, but, while poll-based data suggest a small advantage for Mr. Trump in this regard, hard
data on voter registration and early voting suggest few unusual patterns A few recent sharp moves in implied election probabilities suggest that US equities would rise on a Clinton win, as would the Mexican Peso and perhaps the Canadian dollar. However, we find no consistent patterns in interest rates or other currencies.
Lyngen Closing Call, October 5
weighted SMR came in at 99.8% -- down just slightly from 99.9% in the prior week. What’s most relevant here is that the market’s relatively flat – pointing to no obvious pain-trade. JPM showed a similar skew, with 18% long and 25% short, while the majority were neutral at 57%. Active accounts in the survey were more evenly split at 20% long, 20% short, and 60% flat. This points to the need for a fundamental trigger to break the range vs. simply a momentum driven trade.
Challenger Layoffs vs. NFP MoM Change 3-month MA, Challenger (right scale) reversed
…TACTICAL BIAS: Treasuries were weaker on Wednesday in a move that found fundamental backing from the data – most notably the ISM jobs component. Little was taken away from ADP, if for no other reason than the figure printed close enough to expectations to be dismissed. The bearish price action that has been in place since last Friday remains well entrenched and we see little reason to suggest the move has fully run its course. With 1.75% 10s and 2.50% 30s well within range, we’re open to a test of these targets before the BLS data, but expect it would be short-lived. In fact, even without the relevance of the jobs report to Q4 monetary policy expectations, we’d still anticipate a period of consolidation at the top of the yield range before a more significant selloff could occur. We’ve been impressed with the ability of the range to hold in recent months – even if it’s been to our chagrin as we’ve argued it’s due for a break. So we’ll lean on the relevance of NFP and what that implies for the Fed. …We’ve been focused a great deal on the range in 10s and 30s, but the selloff in the front-end of the curve has been more dramatic in the context of the range-trading thesis. In 2s we’ve seen a challenge of the 85 bp yieldpeak – although it appears to be holding, at least on the first attempt at a break. We’re frankly a bit less impressed by the weakness in the front-end as it’s primarily a function of policy expectations and the grinding progression toward the assumed December rate-hike. Nonetheless, momentum in 2s remains decidedly in favor of higher yields and we’re less concerned that further front-end weakness will necessitate a range-break further out the curve. In terms of positions, this week’s Stone & McCarthy measure, one of our long-time favorite gauges, showed a slightly shorter bias, but from a broader perspective that market is still very neutral. Specifically, the duration-
OCTOBER 5, 2016
Treasury Market Commentary
Daily Commentary, 10/5 Follow-though selling in Europe in response to the Bloomberg report on ECB QE tapering ("ECB Said to Build Taper Consensus as QE Decision Time Nears") that hit the tape shortly before the London close Tuesday and a much stronger
nonmanufacturing ISM that more than reversed substantial slowing last month sent Treasury yields to further moderate losses of several bp across the curve. Risks priced of a December Fed rate hike continued moving higher, but only very slowly and reluctantly notwithstanding incoming data that so far overall would seem to be clearing a low bar set by the FOMC, as ill-advised as market pricing suggests such an approach to near-term policy is in light of medium-term downside risks. The move higher in the market's pricing of near-term U.S. Fed policy risks – as small as it's been so far to a 64% chance of a hike this year in fed funds futures now compared to 62% Tuesday, 60% Monday, and 58% on Friday – is now again being coupled with a return of some of the global central bank questions that animated the abrupt global bear steepening move in the first half of September. If investors were hoping for quick pushback from ECB officials to the Bloomberg story, there hasn't been any yet. The 4 bp gaps higher in the 10-year and 30-year Bund yields in the last 20 minutes of London trading Tuesday were extended by another 5 bp by the 10year to -0.01% and 7 bp by the 30-year to 0.59% Wednesday, backups that outperformed larger losses in peripheral yields. There was also a decent bear steepening in Japan overnight, as our desk observed a growing sense among investors that the shape of the JGB yield curve on September 20 ahead of the announcement of the BoJ policy framework shift on September 21 is the shape the BoJ would like to sustain. What the market figured the BoJ wants, the BoJ got at least for now, with a 4 bp backup in the 30year JGB yield leaving it the same level, 0.50%, it closed at on September 20. … At 3:00, benchmark nominal Treasury yields were 2.5 to 3 bp higher, with the entire move confined to a gap in response to the 10:00 nonmanufacturing ISM release and nothing much happening before or after 10:00. The 2-year yield rose 2.5 bp to 0.84%, 3-year 3 bp to 0.97%, 5-year 3 bp to 1.26%, 7-year 3 bp to 1.54%, 10-year 3 bp to 1.72%, and 30-year 3 bp to 2.44%. Our desk saw shifts to more dovish trade after ADP, buying in the belly and curve steepeners, but that reversed in response to the ISM before a very quiet afternoon. Post-ISM market pressure was notable in fast money paying in swaps in the belly of the curve, as hedge funds look to add to set short positions. The Fed is part of that, but a larger focus seemed to be investors looking for the 10 -15 bp of rate cuts that Europe is pricing in over the next couple of years to come out.
OCTOBER 6, 2016
Global FX Strategy
FX Morning … What consensus thinks about JPY: The consensus is USD-bearish positioned and a strong believer in Japan staying trapped within an environment of its excess savings keeping the JGB yield curve depressed. The flat yield curve keeps bank profitability low, suggesting banks reducing their balance sheet risks as much as possible. Within this scenario, commercial banks fail to transform base money into broad money. In short, the money multiplier fails to develop the desired effect. While base money rises strongly, broad money supply growth has disappointed. This scenario suggests JPY staying permanently under appreciation pressure resulting from the declining money multiplier reducing effective JPY supply, which is typical for an economy with falling monetary velocity.
What we think about JPY: We disagree with the consensus view and instead we see JPY coming under sustained selling pressure. The beauty of our position is there is a ‘wall for worry’ and, in this respect, we are reminded of last November, when our call for JPY strength met an equally reluctant market. Then it was Japanese accounts running record currency-unhedged foreign asset positions. Now it the international investor community running near record JPY long positions. Liquidation potential driving JPY lower is substantial.
OCTOBER 5, 2016
U.S. Economics
Trade Balance … Incorporating these results we now see net exports adding 0.5pp to Q3 GDP growth instead of 0.65pp, with real exports expected to be up 8.7% instead of 7.2% and real imports 3.3% instead of 1.5%. Details of capital goods imports and exports were about as expected, and we still see equipment investment falling 2.5% in Q3 and overall business investment rising 2.5% with a boost from a rebound in oil and gas drilling. We now see Q3 GDP growth tracking at 3.1% instead of 3.3%.
OCTOBER 6, 2016
Midcap Banks
C&I Lenders Could Feel the Pain; CRE Less So? Concerns over the sharp drop in C&I lending in the quarter are valid, with the slower growth driving several EPS cuts ahead of 3Q. However, CRE loan growth remains strong and credit spreads appear to be widening. In the quarter, SIVB could surprise to the upside on better credit quality. Slower C&I loan growth driving lower EPS estimates in 3Q and 2017: We are cutting our 3Q16 and 2017 EPS estimates at 10 and 16 banks, respectively, largely on lower C&I balances. As we flagged last week, industrywide C&I loan growth is at the lowest level since 3Q10, with average balances actually down 0.1% Q/Q through Sept 21. Not all the banks are affected equally, however – the largest impact is to those banks with a greater concentration of C&I loans (BOKF, CMA, KEY, and ZION are among those where we are trimming EPS). The bigger question, however, is whether this slowdown in C&I loan growth continues into 4Q or even 2017. We assume that loan growth improves modestly, reflecting mediocre but still positive economic activity (our economist is calling for 1.5% real GDP growth in 2017), but given this quarter's surprisingly weak commercial growth, our confidence in a sharp rebound in C&I loan growth is low. On the positive side, other loan growth is holding up quite well, including CRE:
3 Things the European Investment Grade Fixed Income Team Talked About Last Week Posted on October 4, 2016 by David Greene
1. Spain – Politics to the Fore Again 2. The Italian Job – Referendum Date Set : 3. Bond Supply for Q4 2016 – More Demand than Supply :
Debt management agencies usually follow a typical pattern when setting their issuance calendar for a year. The idea is to front-load issuance into the first 6 months of the year (when there is good demand for bonds), then reduce issuance over the summer period (when investors are on vacation) before resuming bond selling from September to November. Hopefully, if all goes to plan, a sovereign’s funding needs will have been completed by the end of November, avoiding the need to do large-scale issuance in December. Therefore, Q4 issuance patterns are generally lighter than in earlier quarters in the year. The advent of the European Central Bank’s (ECB) Quantitative Easing programme has brought another dimension to the demand/supply equation. Although the ECB tend to scale back their bond buying in August (to take account of the vacation period), the scale of purchases remains pretty constant throughout the rest of the year. In our opinion, the combined picture of reduced bond issuance with continual ECB buying could set the tone for a strong end to the year for European sovereign bonds. According to calculations by Deutsche Bank, gross issuance of Euro-area bonds in Q4 will amount to €149.3bn, which sounds like quite a lot. However, take into account that many sovereign bonds also mature in Q4, and the actual net issuance figure falls to a very low €7.4bn. Then factor in the ECB’s bond buying programme, which is set to buy €185.4bn in that period and you can see just how much demand exceeds supply for sovereign bonds in Q4 2016. What’s also interesting is that this excess demand picture occurs in every sovereign state in Europe, with some obvious bigger beneficiaries than others (See table below). All other things being equal, it’s hard to see bond yields rising much against this backdrop.
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30s – Support: 2.56%, 2.77%. Resistance: 2.20%2.175%, 2.00%, ~1.90%, 1.0%. Daily momentum is bearish
Attachments/Charts: • US ISM employment (blended) vs. NFP • US 5s Daily
RBS Markets Closing Notes October 5th, 2016
US 5s Daily – Broke Trendline Support and Testing the Pre-Brexit High
Recap and Comments: …The positive relationship between Ism employment and monthly NFP (chart) may present upside risks to NFP and keep longs under pressure and bulls on the sidelines through the US employment data … But as the dust settles on the economic data, we will likely still be left with an US economy that has been at best inconsistent, an FOMC that sees risks of being cautious greatly outweighed by the risk of acting too soon, and a looming US election. Together, that may leave investors more willing to jump back into bullish trades at higher yield levels should they emerge through the Friday employment figures, not unlike the re-deployment of cash in our markets that followed the BoJ and the FOMC decisions earlier this month. Current trades (changes in bold): • Direction: Long 7s from pre-BoJ/Fed at 1.50%. Target 1.25%, stop on close over 1.58%, ~6.5bps/3m carry/roll. • Curvature: Long 10s on 5s10s30s cash fly at 27bps, target -36bps, stop on close over 25bps. Carry small negative (~0.5bps/1m). • Inflation: Took profit on Friday at 1.6022% after breaching our 1.60% take profit level. Will seek reentry as still bullish long term. Support and Resistance Levels (Strong in BOLD): • 2s – Support: 0.934%, 1.00%, 1.10%. Resistance: 0.72%, 0.67%, 0.62%, *0.495%*, *0.46%*. Daily momentum is bearish. • 5s – Support: 1.26%, 1.43%, 1.53%. Resistance: 1.02%, *0.90%*, *0.64%*. Daily momentum is bearish. • 10s – Support: 1.753%, 1.87%-1.90%, 2.002.02%. Resistance: 1.52%, 1.45%, 1.318%, 1.15%, 1.08%. Daily momentum is bearish.
ISM Employment Blend* vs. NFP growth exCensus, 3mma
6 October 2016
Convexity in the UK How many ways to get what you want? Convexity is valuable. But how valuable is it? And can it be captured? We show that the value of convexity is not trivial, but neither it is game-changing. In the UK convexity appears to be over-priced. That is, investors who extend on the yield curve drop more yield than they are compensated for in likely additional returns from the convexity they pick up. We go on to show that capturing value from convexity is a difficult game. An illustration using weekly PV01 rebalancing emphasises that returns are reduced by carry and relatively lower volatility in the long end, which reduced the value of convexity that can be captured in the sector.
that will continue to underpin yields talk of a December rate hike, and the dollar.
OCTOBER 6, 2016
FIXED INCOME DAILY ECB ACCOUNTS, 30Y GILT, OAT AND SPGB AUCTIONS Market Update
… USD/JPY looks, to my uneducated eyes, to have broken the 2016 downtrend. Mind you, this is the 9th spike higher in that downtrend, and the previous six were all followed by a pretty sharp slip, mostly on the back of adverse real yield moves. Today could well see a pause and bears (the majority) will probably sell into it. We'll test whether this is just the 7th of a longer series of failed bounces or a clear break. My bias is to think it's the latter but either way, we'll probably know by the weekend. This time, can USD/JPY's spike turn into something big?
“Policy shift ends Goldilocks rally” we warned in our quarterly Fixed Income Portfolio Strategy report on Monday – where we moved to a small short duration for the first time in more than a year. Limits on the effectiveness of monetary policy were already central to our mid-year FI Outlook ‘That’s all folks’, where we warned about “more defensive directional views after summer”. Bonds have been under heavy pressure over the past couple of days, after some anonymous ECB sources planted the ‘tapering’ debate in the market, Fed speakers pushed the idea of an imminent hike a step higher and the ISM Services strongly surprised to the upside.
OCTOBER 6, 2016
FX DAILY MR HAMILTON HEADS FOR BROADWAY With US labour market data tomorrow, it feels like a day where markets could pause. In the wake of discussion about the ECB tapering its bond market purchases, today's account of last month's ECB ,meeting will take on added importance (at 12:30 BST) and at the very least, set the tone for EUR/USD. 1.1130 and 1.1280 are the current vicelike range-restrainers. Relative real and nominal yields suggest we ‘ought' to be testing the lower end of that range, but if tapering were confirmed that could be a gamechanger. Long EUR/GBP helps position for the possibility of a break higher and EUR/JPY too, is threatening to break higher. The US ADP survey didn't pont to an exciting NFP outcome, but it often doesn't. The non-manufacturing ISM data on the other hand, were unambiguously strong and a simple regression points to 2.3% Q3 growth and a 5% growth rate in September, setting up a strong start to Q4. That doesn't tell me much about what the data will really do but it does support the notion that the economy is trundling along at a steady pace rather than losing momentum. And while that growth rate underwhelms almost everyone, it does grind the unemployment rate down. Tomorrow's wage data will be significant. As for today, it's just jobless claims and G20. Nothing to push bond and FX market directly, but if the Asian equity rally carries over into Europe and the US,
5 October 2016
Global Rates Strategy October is looking spooky for USTs Tactically, we turn neutral on curve and duration ahead of labor market report, money-market reform deadline and elections. We like being long 30year BEIs What does the rise in German bund yields mean for USTs? On Tuesday, US yields started to move higher on the back of taper concerns in Europe. While tapering is not part of our views, we have highlighted that euro-area core yields look too low relative to fundamentals and markets are excessively dovish. As such a potential back up in EUR yields may push USTs up by 20bps at
most. We have discussed this and related views in three recent notes: Euro-area yields: Too low any way you cut it , Can a bond sell-off derail markets and What could cause a US bond market sell-off?
Tactically neutral on duration and curve due to uncertainty Given the near-term improvement in the US data, upcoming money market reform deadline and US elections in November, we think it is better to take a tactically neutral stance on duration and curve. Looking ahead, our Evidence Lab team expects higher than consensus payroll outcome, which is bearish for intermediate yields and argues for a flatter curve. But, we have the money market reform deadline on October 14th as well as US elections in November. The latter events are likely to deliver increased uncertainty. We also have longend UST auctions next week and 30-year TIPS reopening this month. The uncertainty combined with long-end supply argues for a steeper curve. With these near-term events, we prefer to be neutral on USTs. On a longer-term basis, we continue to like 30-year TIPS outright and prefer 5s/30s nominal/real curve flatteners. Low implied vols offer an opportunity Following the lead of BoJ meeting in September, US implied vols have declined quite significantly while the US financial and inflation outlook has improved. In particular, if the US data continues to remain firm, intermediate UST yields look susceptible to a move higher. We think buying 3m5y ATM + 25bp payer is an attractive way to position for more uncertainty and higher intermediate rates. Enough concession is priced in 30-year TIPS, Long 30y BEIs We discuss the nuances of upside August core CPI surprise. We find that the upside surprise could have been predicted via the PPI healthcare data. Separately, our tactical breakeven model suggests being long breakevens. In our review of 30year TIPS supply, we find that the issue is attractive on real yields, breakevens and versus 10s. Given our view that reopening size will only be $5bn and our expectation of 0.09y index extension, we recommend being long 30-year breakevens outright or versus 10s ahead of month-end. Tactically, we find 10s30s breakeven steepeners to be an attractive trade going into the month-end TIPS index extension. …Current
events: ECB taper question?
…While ECB tapering is not part of our views, we have highlighted that euroarea core yields look too low relative to fundamentals and markets are excessively dovish (Please see Euro-area yields: Too low any way you cut it). As such a potential back up in EUR yields may push USTs up by 20bps at most. We dicuss this further in two related notes: Can a bond sell-off derail markets and What could cause a US bond market sell-off? It is notable that the underlying HICP inflation excluding food and energy still remains at 0.9% Y/Y, which is well below the ECB's inflation objective. Nevertheless the contents of the article will increase the focus on the length of the ECB's QE programme and comments by Draghi on this topic on 8 October will be watched closely for any signals in this regard.
Over time, with the experience of US taper tantrum, we have seen that such backup in 10-year rates is not sustainable if it is not supported by fundamentals. With this development in sight, we bring the focus back to the other near-term drivers of the US bond market. This includes monetary policy reaction function as laid out in the September FOMC meeting, September non-farm payroll report, moneymarket reform deadline (October 14) and US elections (November 8th). …Market
action speaks louder than FOMC
words The September FOMC statement read near-term hawkish but was dovish on pace. 30-year TIPS rallied by almost 15bp around the September FOMC meeting date. Figure 2 shows the move in 30-year real rates pre and post September FOMC. That is a 3-4% return in bond TIPS in one day! Beyond the market reaction, the Fed Chair Yellen's press conference offered additional clues about the Fed's current reaction function.
Figure 2: A large rally in 30-year TIPS indicates that the market was setup for a more hawkish Fed in September
5 October 2016
Global Macro Strategy ECB's Taper Tantrum or Just Another False Alert? Worries of potential tapering of asset purchases by the ECB are pushing global yields higher. Is this a correction of a regime shift? The correction of a mis-pricing? Maybe. A regime change? Unlikely. Yields in major bond markets have moved up by about 10bps in less than a week on the back of two main developments. First, US data has picked up from a very weak August set, a recovery our Big Data framework signalled early on and one which is likely to persist through September's prints. Second, following news reports that the ECB may be discussing ways
to taper their asset purchases, European bonds have come under selling pressure. Neither development signals a regime shift towards structurally higher government bond yields. Yet, the EUR bond market sell-off should not be dismissed either. It is driven by a substantial market mispricing we have highlighted. EUR yields are too low anyway you cut it The macro environment of low inflationand low trend growth justifies subdued long-term yields. In the case of the Euroarea, low yields are exacerbated by a wide output gap and a large-scale compression in term premia due to the ECB's bond purchases. But even if we account for all this in a rigorous fashion, Euro-area yields appear to be 70bps too low. This mis-pricing is likely driven by a combination of three factors: a) expectations of additional significant easing, b) residual riskaversion among Euro-area investors and c) scarcity issues resulting from the modalities of the ECB purchase programme. Therefore, in the near term, ECB communication will be a key catalyst on whether this mis-pricing persists or unwinds. ECB U-turn is unlikely. Still, the risk-reward for EUR bonds can be asymmetric. Our economists do not expect a U-turn from the ECB; economic conditions require the extension of policy accommodation. Having said that, one has to keep in mind the starting point and the asymmetries it creates. At this low level of European yields, the ECB needs to do a lot more to keep the curve this flat. Inversely, even if the ECB delivers less accommodation than anticipated (and market expectations are high), the curve can steepen further. We intend to discuss the ECB's options in upcoming notes. A return to fair EUR yields would see a 20bps spillover into the US In our estimates, a full back-up of core EUR yields towards fair value, would push 10y US yields up by a total of 20bps approximately. In all fairness, we would think that a full swing back to fair value is probably at the high end of likely outcomes for EUR yields. That said, it is fair to say that, amid recovering US growth and inflation data, a "less-dovish than expected" ECB could give global bond markets a further shake. Equity market impact to set the ceiling for bond yields. As discussed in Big Macro 04, low yields have been the predominant driver of high equity valuations amid slow earnings growth. For now, the bond shock has been better digested than the one from early September. This is because it has been in part driven by better growth data (and lower fears for a US recession), a Fed hike for December that is as priced as it could be given current macro uncertainties, and higher external yields (which, in turn, has prevented a broad dollar rally). In that sense, deep equity damage, in response to the higher yields will also signal the end of the bond sell-off. The next big signpost will be the upcoming payrolls report and after that, potential statements from ECB officials during the IMF weekend meetings. Where are Markets Likely to Settle? By end-of-year we expect bund yields to equilibrate at around 0.15%. UST yields are unlikely to end up much higher from current levels. A narrower US/EA rate gap will likely support the EUR towards 1.16. We would view dips in dividend-rich equity sectors as a buying opportunity. Lastly the rush into EM assets is likely to moderate significantly following a shift in European yields into positive levels.
5 October 2016
UBS Evidence Lab Macro US Economy: September Bounce To Continue September US economic data have come in above expectations so far. Should we expect more? UBS Evidence Lab Macro estimates are driven from big data Our real-time data suggests September US economic data will continue its bounce-back from August. We expect above-consensus payrolls, in addition to improvements in retail sales and private construction. Together with better ISM manufacturing and auto SAAR, we see the bounceback as broad-based, with the potential for driving above-consensus outcome for Q3 final private domestic demand (+3.2% vs Atlanta Fed GDPNow +2.1%).
October 5, 2016
Economics Group Interest Rate Weekly None Come to Pass: When Trend Becomes Cycle What happens when decision makers employ the expected long-run trend as the basis for a short-run forecast? There is complacency that the job is done and no need to change–not smart in an evolving economy. Trend Growth Despite an Up/Down History
Inflation: Heading to Success Despite the Evidence … Moreover, as illustrated in the bottom graph, the FOMC has consistently overestimated the pace of inflation in 2016. Therefore, caution is advised when incorporating the PCE deflator forecast into decision making. Even now, although we anticipate that inflation will rise toward the FOMC’s 2 percent target, the path will be slow and arduous. Assume the Ideal Outcome in an Imperfect World For investors, decisions must be made in an imperfect world with periods of high/low volatility and changing risk/reward calculations. In contrast, the pattern of central bank outlooks is often a linear path, as illustrated by the dot plot provided by the FOMC. While these linear projections are certainly reasonable given the communication constraints at the FOMC, the projections must be viewed as trend projections within the constraint of the expected linear economic projections. However, we invest within economic and credit cycles and the trend does not serve us well as a guideline for the cyclical behavior of markets.
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October 5, 2016
Equity Research October Strategy Playbook Our Technical, Fundamental And Quantitative Review Of Stocks •
Macro: Spellbound by Politics and Policy (pp. 3-5): U.S. stocks were flat in September with the on-again, offagain struggle in predicting near term moves at the Federal Reserve combined with disappointing economic data and daily distractions from the upcoming election. While the Fed affirmed a policy hold is likely until the end of the year, adding a leg of support to equity market valuations in the near term, investors should take caution not to get too comfortable. We expect a contentious
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election and challenging earnings season will keep most of us on our toes in the month ahead. October is historically one of the more volatile months for stocks (second only to April) and we expect this one to be no different. Technicals: Everybody Hates Stocks – Uptrend Intact (pp. 6-8). The S&P 500 tested and successfully confirmed support at former resistance. Momentum has recently slowed, but suggests nothing more than a very modest correction is underway in the S&P 500. Sentiment remains supportive of stocks as mid-August exuberance has been depleted and investors are still shunning stocks. Fund outflows continued to accumulate for equities, as year-to-date outflows totaled $126.6B through September, compared to bond inflows of $79.3B in 2016. Actively managed funds have recorded 29 straight weeks of outflows. Fundamentals: Failure to Launch? (pp. 9-13). The election may offer plenty of distraction for investors, but the upcoming earnings season could prove rather important for stocks as well. Unfortunately, analyst hopes for a green shoot from the earnings stream have been dashed a bit over recent months. Indeed, Q3 EPS is expected to drop 1.0% YoY, down from the expectation for a 2.3% gain just 3 months ago. The forward 12 month earnings outlook is still rather rosy, however. The consensus currently forecasts 10.1% EPS growth over the next 12 months. With leading economic indicators now growing a mere 1.1% YoY, it is difficult to see where this “hockey stick” growth will come from outside of the commodity space. We forecast more benign, 5% growth in EPS in the coming 12 months. Quantitative Analytics: Buyer Beware – Value and Low Volatility are Both Highly Dependent on a Rate Call (pp. 14-15). Given outperformance so far this year, value and low volatility strategies dominate the bulk of our inbound questions on style as of late, and we caution investors that both styles are now rather tied to the fate of interest rates. Value is heavily skewed to financials, and may provide tactical opportunities surrounding a rate hike by year-end, but could struggle from a problematic longer term earnings outlook. Meanwhile, a call on minimum variance is inherently a call to add to an already elevated premium on yield stocks – a risky strategy unless one believes longer term rates will rally strongly in the coming months. Utilities and staples make up just under half of the top quintile of S&P 500 stocks ranked by realized volatility. We continue to prefer quality over other style buckets, as performance is relatively agnostic to a call on benchmark rates, and tied more closely to the business cycle. Sectors and Industries: Favoring to Late Cycle, Disfavoring Rate Sensitivity (pp. 16-28). We are making no changes to our recommended sector and industry allocation this month. Our positions reflect our anticipation of improving earnings for late stage commodity sensitive sectors while defensive domestic groups experience a relative slowdown in growth.
Technicals: Break Out Confirmed with Test of Support at Former Resistance S&P 500 Index
S&P 500 Index Long-Term
