Friday, November 6Hamish Risk | November 6, 2015
Aside from NFPs today, we would highlight two key themes as the week comes to a close. The BoE pivot away from the Fed and towards the ECB after they signalled that global economic concerns will likely mean rates won’t rise anytime soon, and where rates hikes are now being pushed out into 2017 by the market. This is uniformly bearish for GBP, that most analysts agree. The other key theme in markets, though more technically driven than macro driven, is the stunning move of swap spreads, especially in the last 24 hours. 10-year US swap spreads yesterday hit a record low of nearly -18bp before closing at -12bp. The exact reason for the sharp move is unclear but blame has been placed on high corporate issuance, balance sheet re-pricing into year-end given tighter regulatory pressure (on balance sheet USTs more expensive than swaps), and the poor liquidity which has the habit of exacerbating moves in many markets in today’s markets. We re-highlight a piece from BAML featured by us earlier in the week that provides some useful colour in this area. As for payrolls, as the week has progressed, the whisper has been for a slightly higher number. Goldman Sachs is one such example, and we feature their preview in our note today. Have a great weekend.
corporate issuance US rates BAML
1. The illiquidity trap in US rates
BAML global rates and currencies research team published a detailed piece of analysis earlier this week on how new corporate bond supply is impacting interest rates. Corporate supply traditionally has had little effect on interest rates, but in this report BAML demonstrate how it has had a dramatically different impact in 2015 versus prior years. What’s driving it? The reports author’s Ralph Axel and Adarsh Sinha think that the culprit is reduced liquidity within the rates market. Essentially, they see the same impacts as in the past, but amplified. It is important to note Treasury supply shows no such impact on rates, and BAML think this is because the Treasury supply calendar is well known in advance, while corporate supply is always a surprise. The key to illiquidity is that Axel and Sinha see big price or spread changes due to unforeseen shocks in supply or demand. For BAML clients, click on the below link to log in to mercury to read the full piece, search for: Liquid Insight: The illiquidity trap.
AUD RBA Amplifying Global FX
2. Low AUD crucial for RBA game-plan
Greg Gibbs from Amplifying Global FXhas a good take on AUD following the RBA Statement on Monetary Policy, where they significantly lowered their inflation outlook over the next year. Their growth outlook was little changed with weaker trading partner growth offset by a firmer outlook for non-resource sectors. According to Gibbs, this view relies on the AUD remaining low and suggests that the RBA would be more comfortable if the currency fell than rose; especially in light of recent falls in commodity prices. Moreover, the RBA might use its easing bias if the AUD were to rise much. To read the full report click on the below link to register for his commentary, which is still currently complimentary.
NFPs Goldman Sachs
3. NFP’s: Upside surprise
Goldman’s lifted their forecast for today’s NFPs to 190K from 175K yesterday, above a consensus of 182K, the upgrade is based on better than expected labor market data this week. The report’s author Chris Mischaikow, lays out four factors that argue for a strong report and just two for a weaker report, so there’s a strong bias for an upside surprise. These storng report factors would include service sector surveys, on-line job ads, weather and jobless claims.
ifo ISM Hunt Economics
4. ifo’s VW fake and ISM’s insipid strength
Andrew Hunt from Hunt Economics reckons markets are in a highly optimistic mood currently with much of the commentary wanting to talk up the more upbeat economic data by taking it at face value, without really looking under the hood. This month’s ifo report is case in point where the auto sector component was reported to be near an all time high. One an only assume that either VW respondents know something that Hunt doesn’t, they are smoking something (the emissions of which are also illegal), or most likely the ifo data was collected before the scandal broke, writes Hunt. If this is the case, then the next ifo reading may yet provide an unwelcome surprise to markets, he adds. Hunt also turns his attention to this week’s US ISM, where he has found that its correlation to actual outturns and its predictive power to be rather modest (although its relationship with financial market sentiment remains as strong as ever). And while the markets cheered the apparent increase in new orders relative to inventories embedded within the ISM data, Hunt argues that when looked at over any reasonable timespan, neither the new orders data nor the overall index level seem particularly inspiring at present. The above forms part of Hunt’s Global Weekly review published each Thursday. If you want to get access to the full report, contact Andrew Hunt directly by clicking on the below link.
Credit cycle UBS
5. When will the credit cycle end?
Matthew Mish from the UBS credit research team consistently produces some quality macro work on US credit markets. In this report he addresses the very often asked question from clients ‘’when will the credit cycle end?’’ The answer to that isn’t that easy to identify because there is no widely accepted definition. Indeed to find the answer, one has to first clarify what one is seeking to answer, he writes. According to the report some consider the end of the credit cycle to represent a material widening or re-pricing of credit risk, which is structural- not simply temporal, or which will unwind over time. Others argue the end of the credit cycle could be characterized by above average or peak levels of credit spreads and defaults. Mish gives on assessment of the end of the credit cycle under each scenario. Wish finds that the credit cycle will nearly end in 2016 using the first definition, but not based on the second one. UBS clients can log into Neo to read the full piece by clicking on the below link.
BoE GBP Deutsche Bank
6. Bonfire of the rate hikes
In the tradition of Guy Fawkes, Oliver Harvey’s appropriately titled piece on the BoE’s dovish turn and its implications for the pound captures the significance of yesterday’s Quarterly Inflation Report, and Mark Carney’s pivot away from the Fed towards the ECB. It has led to an abrupt change of forecast for DB, a long-term bull, with Harvey and his team now arguing that short-end rates are implying an GBPUSD cross below 1.50. Short-end rates are one of three key arguments Harvey makes to back his bearish forecast. Bottom line, current valuations are very unattractive, DB concludes. Furthermore, Harvey’s colleague, George Saravalos wrote a piece late last month that argued the pound was now the most expensive currency in the world on an average of REER, BEER and FEER valuation metrics. For DB clients, click on the link to log into the research site to read the full piece.