The Lowdown on the Slowdown

- "Real GDP growth appears to have dropped below its 2½%-3% long-term potential range last quarter, judging from the latest data on retail sales and foreign trade. We have cut our estimate for second-quarter growth from 3% to 2% (annual rate)."
- "This slowdown is occurring just ahead of the loss of growth support from fiscal stimulus and the inventory cycle that we have been anticipating would occur at midyear. With the various headwinds to private-sector growth (excess vacant housing, state and local budget stresses, lack of lending, reluctance to hire) still firmly in place, we reaffirm our view that real GDP will grow at only a 1½% rate during the second half of 2010, and we worry that eacceleration in 2011 will not occur as now projected."
- "Despite these growing downside risks, US authorities do not exhibit much urgency to apply more policy stimulus. For example, the FOMC made only brief reference to this possibility in he minutes of its June 22-23 meeting and that was heavily qualified. The data have been lmost uniformly weaker than expected since then. This may prompt Chairman Bernanke to express more concern at next week’s monetary policy hearings, though all indications are that stimulus is not being actively considered."
- "What could the FOMC do given that the funds rate is already at the zero bound? The most likely option is to resume asset purchases in some fashion. Treasuries would be more effective than MBS in lowering real longer-term interest rates, but Fed officials may resist in fear of charges of monetization. Raising the inflation objective is even more unlikely, though it could be quite effective."
- "For its part, Congress can and should extend unemployment benefits, provide more aid to state and local governments, and extend some of the tax cuts due to expire at yearend."
GoldmanSachs US Economics Analyst 20100716

Stress test: no stairway to heaven

- FI Strategizer: "Next week, many factors will be bond-friendly: macroeconomic data should come in on the soft side both in the EU and in US, while the message in Bernanke’s testimony should be cautious, in line with the recent FOMC Minutes. Only positive US 2Q earnings releases could support risky assets. In the EU, focus will be on the stress test results."
- EU banks stress test: "On 23 July, only consolidated results at country level will be published. Market reaction will depend on the disclosure and credibility of hypothesis and on the relative weakness of EU countries."
- EU Portfolio Strategy: "We increase holdings of Germany, which would benefit from a rise in market tensions. On the peripheral side, we did not make any major changes."
- Trade Idea: "Germany will issue the new Bund Jul42, which will be the longest 30Y on the eurozone curve. The coupon should be 3.25%. A first calculation suggests that the fair value of the new Bund Jul42 should be SW+14bp, 4bp more expensive than DSL Jan42."
- MM: "This week, ECB borrowing has fallen further by EUR 16bn, bringing excess liquidity to around EUR 115bn (a lower level than during the first months of this year). Banks tried to lengthen maturity, bidding more at the 1M LTRO and less at the 1W MRO."
- Supply Corner: "Next week, gross supply should be EUR 6/6.5bn, almost all coming from Germany with the new 30Y, Bund Jul42, and the rest from Ireland. Liquidity will come from France, with the redemption of BTAN-ei Jul25 (EUR 9.3bn). Greece will issue EUR 1.5bn of 13W T-bills."
- FX Strategizer: "Market perspectives may easily become much cloudier, as signs that the global economic cycle is cooling down have increased further. Risk lovers may easily find a less smooth road from now on."
- EUR: "As long as the mix of healthy US stock markets and poor US data releases persist, a EUR-USD rally up to 1.32-1.33 may be in the offing. Yet, we would not bet again on a sustained rise well beyond that area."
- JPY: "Risks of less "brilliant" global economic growth should offer the JPY an extended period of relative strength: USD-JPY is set to test 86.50 at least, locking EUR-JPY further in the 110/114 band."
- CHF: "We still warn to handle with care any EUR-CHF bounce, as global uncertainty will keep demand for the Swiss franc high, paving the way for a EUR-CHF retreat towards and below 1.30 in the medium term."
- GBP: "Next week, UK retail sales for June and the advance GDP for 2Q10 should come in firm enough, both to take cable above April’s highs at 1.5525 and to drag EUR-GBP again towards the edge of 0.83."
- Pacific Rim & CAD: "The three dollars should be handled with caution at present due to risk of large swings. USD-CAD will be also influenced by the BoC meeting outcome on Tuesday that has become a close call."
- Nordics: "The full break of 9.40 and 7.90 won’t be immediate, thus exposing both EUR-SEK and EUR-NOK to big swings ahead, but selling these two EUR crosses above 9.45 and 8.00 is still recommended."
Unicredit Curves & Crosses 20100716

What 2Q Earnings Will Tell Us:… Ugh .. Quarter Past Wasn’t Bad

- "Corporate profits likely grew sequentially in the second quarter with both GDP and total hours worked growing about 3 ¼%. Late quarter weakness and strong 3Q consensus estimates should limit potential for positive guidance."
- "While we might be too pessimistic, our sitting 2Q estimate for S&P 500 operating EPS is just 2% above bottom-up consensus estimates. This is our least robust “beat forecast” of the past five quarters. We still see S&P 500 operating EPS 25% above a year ago and up about 7% in 2011."
- "Overall, macro concerns considered by anticipatory financial markets – some already evident in the very latest data – are unlikely to be fully reflected in the current views of company managements. The selloff in financial markets suggests lowered expectations both long-run and short-run, which could be helpful for markets."
Citigroup Portfolio Economics 20100715

Doubting deflation

- Macro viewpoint: Doubting deflation "While deflation, which we define as a YoY decline in prices, is a possibility, what is needed to trigger a policy response and more relevant to the broader economy is the prospect of a general and sustained deflation. General in that the decline in prices is widespread, and sustained in that these declines persist for a protracted
period of time. If the economy evolves roughly according to our expectations, the risk of a sustained price deflation remains unlikely."
- Fed watch: Avant le déluge "Next week’s semiannual testimony by Fed Chairman Bernanke should address a number of issues raised by the June FOMC minutes."
- The week ahead: Housing to remain weak "The housing market takes center stage next week: builder sentiment, housing starts and existing home sales are all released. With the homebuyer tax credit pulling sales forward into the spring, we expect the general tone of the data to be weak. While the data calendar is light, the Fed calendar heats up. Chairman
Bernanke heads to Capitol Hill to deliver his semi-annual monetary policy report to both houses of Congress. On Wednesday, he testifies before the Senate and on Thursday before the House."
Merrill Lynch US Economic Weekly 20100716

US Rate & MBS Strategy Weekly

- Treasuries decouple from risk assets: "Over the past six weeks treasury yields have declined sharply even as risk conditions improved, reflecting a growth slowdown even as tail risks recede."
- Neutral on Duration: "Lingering concerns around the Euro area and talk of unconventional easing should keep Treasuries rich to macro-fundamentals."
- QE Redux or QE Unwind: "Implications of the Fed’s gradual portfolio unwind."
- Primary Dealers are Becoming Less Active in Treasury Auctions: "Direct bidder
participation is on the rise. As customer flows through dealers decrease, primary dealers will demand higher yields at auctions to compensate for this increased uncertainty."
- Wait to go long 1y10y vol: "We recommend turning neutral to those that are currently long. We look to go long in the 95-100bp/annum area."
- Stay in up-in-coupon and Ginnie/Fannie MBS: "supply, convexity, investor demand, and carry remain favorable in higher coupons and Ginnies"
- Agency Debt: "We recommend extending from 2-yr to 3-yr bullets to pick up yield and return. 3-mo options look unattractive given high negative convexity."
- US Rate Strategy Model Portfolio: "The portfolio is up 1.0% month-to-date."
Citigroup US Rate MBS Strategy Weekly 20100716

Asia: the coal reality

- "When in June this year President Obama used the Gulf of Mexico oil spill to champion a “national mission” to wean the US off fossil fuels, taking it into a new era of clean, secure energy supplies, he acknowledged that the task was Herculean, but claimed that, if a country like China could commit itself to changing its energy habits, then so could his own. Citing the world’s fastestgrowing economy as a model for the global energy revolution may not, however, have been his smartest move. Set aside China’s pledges to curb its fossil fuel consumption and create a powerful economy based on renewable energy, and the reality remains that it will continue for many years to devour ‘dirty’ energy at a startling rate."
ABNAmro Energy Monthly July2010

The return of resource nationalism?

- "Australia’s mining tax tornado has raised a number of questions about the
direction of mining regimes worldwide, the possible return of resource nationalism and the power of the mining giants to respond to sovereign risk. These risks put enormous stress on the success or failure of mineral exploration and development, not least because the profitability of any given present or planned mining operation is affected but also because credit facilities in the first instance will be that much harder to obtain. Australia’s recent mining tax fiasco is a case in point."
ABNAmro Metals Monthly July2010

The shifting focus of fixed income investors

- Overview: "With the relationship between risk assets and fixed income weakening, we take a cautious stance on duration risk and return to neutral. - "We continue to favour owning euro government bonds over US Treasuries and UK Gilts."
- "We expect 2s10s curves to retain a strong directionality and re-steepen on higher yields. We note the recent breakdown in directionality in 10s30s in the US and Europe but do not expect this pattern to persist."
- US Rates Strategy: "We examine the reasons behind the Treasury market’s seeming lack of response to the rally in risk assets."
- Euro Rates Strategy: "Yield curves continue to display significant directionality. Conditional 2s-10s bearish steepeners offer a low-cost vehicle for positioning for a reversal of the recent bullish flattening dynamic."
- EMU spreads: "Investors in European bonds have been extending duration in recent weeks. With fundamentals taking a back seat as risk appetite recovers relative cash flow holds the key to explaining recent demand."
- Sterling Rates Strategy: "We examine the challenges facing investors from the fiscal headwinds to growth and the risk of “sticky” inflation. We think the steepness in the mid-part of the curve provides the solution."
- APAC Rates Strategy: "Pay JPY 2yr fwd 3yr against 5yr fwd 5yr. Long AUD/USD
bills/Libor basis in the >5yr sector. Buy NZGB Dec-17s, pay maturity matched swap."
- Global Inflation Strategy: "The prominence of cyclical concerns has made break-evens (BE) more directional. In the UK, the shift to CPI from RPI pension indexation does not deter us from our long front-end BEs view. We also find 10yr IL gilts cheap on an ASW basis, whereas euro linkers are relatively rich."
- USD and EUR flow analysis: "Investors in European bonds do not seem to be afraid to increase positions and extend duration. In EMU spreads, differentiation on the basis of fundamentals appears to have taken a back seat. In the US, we saw good buying of 10yr Treasuries and receiving of 2yr swaps."
Citigroup International Interest Rate Strategist 20100715

Will central banks soon be faced with a conflict of objectives?

- "Central banks (in the United States, the United Kingdom and the euro zone) have to maintain expansionary monetary policies because the economies are still weak, because the financial situation of some economic agents (households, banks in some countries) is still poor, and to make it easier to finance fiscal deficits."
- "Other central banks (Switzerland) are trying to prevent an appreciation of their currency. Liquidity will therefore remain very abundant, and the holders of liquidity (banks, other investors) will probably be tempted to use it to buy more profitable assets in the future."
- "We believe that:
• this will not include assets whose prices are weakened by the anaemic growth in OECD countries (equities, corporate bonds, commodities);
• it may include emerging-country assets, but these assets are not very attractive in periods of high risk aversion;
• more probably, we will see (can already see?) a property price bubble arising, as real estate returns are currently attractive in many countries, given that real estate is perceived as a hedge against future inflation, even in the long term."
- "Central banks may therefore be faced with a conflict of objectives, i.e. between the need to shore up economies, banks and countries, and the renewed appearance of property price bubbles."
Natixis Flash Economics 358 20100713

China Banks: The myth and reality of banks' trust products in China

- Bank trust product market size: "We estimate the outstanding trust product market to be slightly over Rmb3T as of June 10, split evenly between loan-related products and other products in other financial assets. Gross new sales were Rmb2.9T in 1H10 vs. Rmb1.7T in all of 2009. Trust loan sales are estimated at Rmb1.3T in 1H10. The balance, however, may
decline as many products will mature during the year. The net increase in trust loans is also less than Rmb1.3T."
- What is the market worried about? "Loan-related trust products effectively represent credit in the system, and hence aggregate credit growth in 1H 10 would be 13.5% hoh (vs. 11.6% hoh stated); the CBRC recently asked banks to suspend sales of trust loan products to ensure adherence to loan quotas. This has given rise to the following concerns. (1) Will a lack of liquidity result in accelerating NPL formation? (2) While these products are not contractually guaranteed, do banks have an implicit obligation, similar to structured products sold in HK/Singapore? (3) What is the implication for banks’ earnings?"
- Addressing market concerns: "(1) Liquidity: The cessation of trust product sales is likely to boost sales of banks’ own WM products or deposits, which still mean ample system liquidity. However, a lower flow of credit may add challenges to system credit quality, although we believe they are very manageable. (2) Defacto guarantees: Unlike structured products sold in HK/Singapore that resulted in claim liabilities, loan-related trust products
have generally been low-risk loans, are collateralized, and/or third-party guaranteed (see pages 5-8), and importantly do not involve derivatives. Historically these loan-related trust products had exceptional track record on asset quality. (3) Revenues: Banks will likely lose some fees partially offset through deposit spreads (200-300bp fee vs. 150bp deposit spread recouped)."
- Background on trust products: "In existence since late 2002, trust products typically target the mass affluent segments (ticket size of Rmb100,000+) seeking yield enhancements. Most of these products (some 10,000 bank trust products have been sold in last five years, 6,000 of which were trust loan products) are low-risk, low yield, with relatively short maturities (typically six months). Collateralized, often third-party-guaranteed, these products
have delivered robust asset quality with no single case of known credit losses. We believe banks are aware of reputational risks and hence have adopted strict credit controls; this is not a channel for risky asset disposal."
- Our sector stance remains positive: "While regulatory measures, effectively designed to reduce cyclicality (through coverage build-up, higher capital requirements, and controlling credit flow), somewhat reduced near-term earnings visibility slightly, earnings changes are likely to be modest. Sector valuations are not only attractive, but appear to be affected by “rolling worries” on asset quality, which we see as premature. Our top stock picks are BOC-H, BoCom-H and Citic-H."
JPMorgan China Banks 20100716

2Q 2010 earnings season analysis: Past, Present, and Future

- "We expect 2Q earnings will positively surprise relative to consensus expectations. However, investors are more worried about the trajectory of US economic growth in 2H 2010 and the possibility of a double dip recession in 2011. Our S&P 500 EPS forecasts of $78 in 2010 and $93 in 2011 imply 4% negative revision potential to consensus estimates."
GoldmanSachs US Equity Views 20100716

Emerging Markets Briefer

- FX: PLN and CZK rebound
• "With market concerns shifting slightly from Europe to the US, the downtrend in EUR/USD seems to have been halted for now, which has given some support to the EUR-sensitive EM currencies over the past month. Most notable have been the rebounds in PLN, CZK and HUF and we think that especially PLN and CZK could see further gains. On the negative side have been the USD-sensitive currencies like MXN, KZT, EGP, INR and ILS. It is also notable that the Asian currencies have not performed especially well despite continued talk about Chinese revaluation."
- Stock markets: Chinese stocks continue to underperform
• "The past month has been relatively good for the EM stock markets. A notable exception is the Chinese stock market that continues to slide on concerns about how sharp the expected slowdown in the Chinese economy will be."
DenDanske Emerging Markets Briefer 20100716


Double-Dip Days - Project Syndicate
More powerful than you think - Free Exchange
Cities and the Offshoring of Work - The Atlantic
It is time to face down the threat of deflation - Financial Times
Is the SEC Settlement Really a Win for Goldman? - Naked Capitalism
Beijing starts gating, locking migrant villages - Associated Press
China Starts Looking Beyond Its Era of Breakneck Growth - Wall Street Journal
Republicans don't give a damn about the deficit - Guardian
Why Ricardian Equivalence Is Nonsense - Credit Writedowns
Deficits of Mass Destruction - The Nation
Companies pile up cash but remain hesitant to add jobs - Washington Post
Did Wall Street get rich while starving poor people? - Here and Now
Baltic dries up - Economist
Shanghai port container throughput up 19% in 1H - People's Daily
Signs of Risky Lending Emerge - Wall Street Journal
Bank mortgage securities desks in hiring spree - Financial Times
Economy suffers from a shortage of safe assets - Financial Times
Europe vs. U.S.: The Post-Recession Productivity Divide - Real Time Economics
How to Tell a Nation Is at Risk - New York Times
The folly of common currencies - Asia Times
Goldman's Grand Delusions Finally Hit Reality - Bloomberg
Skating closer to deflation - Los Angeles Times
IMF and EU suspend talks with Hungary - Reuters
Bangladesh, With Low Pay, Moves In on China - New York Times