Potential Secondary Effects of QE

- The QE Effect on Spreads: "The dramatic rise of Treasuries as a percentage of total US Fixed income will slow because of QE Treasury purchases – but it would take a larger program to reverse the growth."
- Indirect Duration Shorts: "Paying in 5y5y and 2s-10s steepeners are the best ways to express a short duration position without explicitly being short. We favor the 2s-10s steepener given the positive carry."
- Duration Supply, Issuance and Fed Purchases: "The supply of duration in the belly is estimated to be $600 billion less in 2010 compared to 2009. We estimate that the Treasury will issue slightly less than $2 trillion in 2011."
- Think 10s will lead 30s?: "Buy low strike 10y receivers and sell low strike 2y and 30y receivers to express the view that 10s will lead 30s in any large rally."
- It's Time to Buy the MBS Basis: "We recommend buying Fannie 4.5s versus paying on 5 yr swaps DV01 neutral; money managers and banks should support MBS at current valuations."
- Agency Debt: "Rolldown returns rule. We recommend that clients swap 8/2017 Treasuries and buy 2/2017 off-the-run agency bullets."
- US Rate Strategy Model Portfolio: "The portfolio is up 0.7% month-to-date."

Is All the Good News for Bonds in the Price?

- Overview: "Lower yields have not yet deterred investors from buying bonds; however, the pace of buying seems to be slowing. We look to fade the rally in Bunds."
- "We retain our medium-term short US versus Europe recommendation despite the latest wave of pessimism over the US outlook."
- US Rates Strategy: "The rising amount of Treasuries as a percentage of total US fixed income will slow because of QE Treasury purchases."
- "We expect that a return of significant convexity hedging in the US rates markets will take several years."
- Euro Rates Strategy: "Recent curve flattening dynamics have focused on 2s-10s segments, leaving 10s-30s curves looking historically steep. The Bund curve is a possible exception. We examine the outlook for different curve segments in a prolonged period of policy status quo."
- Sterling Rates Strategy: "We expect gilts and swap spreads to benefit from ongoing above consensus improvements in the UK fiscal situation."
- Global Inflation Strategy: "We continue to find BTPei rich versus OATei. We also suggest it is too early to fade the flattening of the 10s30s euro break-even inflation curve. The 20yr sector of the UK real yield curve offers good value."
- Index-linked Index Projections: "We project a large duration extension in the US ILSI at the end of August. Projected duration changes should also be supportive of UK linkers."
- APAC Rates Strategy: "The current 10-yr JGB yield reached our target of 0.9%. However, we expect the bull trend to last until the end of this month."
- "We recommend long 10yr CGS as the RBA is likely to be on hold for an extended period."
- Month-end Index Projections: "Small projected increase in the EGBI but changes should be supportive of Germany and Italy."
- Flow Analysis: "Signs that buyers of fixed income are becoming more circumspect."

Richard Koo: Global economic slowdown grows more pronounced

- "Signs of a slowdown in the global economy have become more prominent over the last two weeks. The deceleration in economic activity was reflected in the US jobs report and new unemployment claims, European industrial output, and Japanese consumer confidence. It was also reported on Monday that Japan’s inflation-adjusted GDP grew only 0.4% y-y in the Apr–Jun quarter, confirming that the recent slowdown actually began this spring."
- "This string of weak data led to a further correction in equities and pushed bond prices higher (and yields lower). Strong demand for government debt was underlined by yields of substantially less than 3% for the 10-year Treasury note and less than 1% for the 10-year Japanese government bond."
- "In Ireland and some other countries in the eurozone, meanwhile, marked economic weakness fanned concerns about the future, leading investors to sell bonds and send interest rates higher."
- "In the currency markets, the narrowing yield differential between Japan and other nations prompted further buying of the yen, which set a new post-Lehman high of 84.72 against the US dollar."

Nomura Flash Report 20100817

No place to hide when rates are (near) zero

- "EM markets have benefited from the sustained bull-flattening in US Treasuries and calm global equities and commodity prices. This suggests investors have adjusted their view on global growth down, but have not made ‘recession’ their baseline scenario. Flows to EM have been sticky, underscoring a point we have made before: that low core market rates are a powerful floor for asset prices where there is no structural fault line, ie, in a large part of EM. We are not advocating a break of the range, but note that there is still room for selective receivers, constructive credit views and RV."

Barclays Emerging Markets Weekly 20100819

Near-term woes to be followed by long-term improvement in fundamentals

- "In this week’s Oil Insights, we revisit the near- and long-term prospects for the seismic sub-sector. Since the Gulf of Mexico Oil Spill began, both PGS and CGG Veritas have lost over a third of their market cap, underperforming the rest of the sector by 20%. While the market is correct to be concerned by the near-term woes of the seismic operators, we look beyond 2010 and see light at the end of the tunnel, expecting material improvement in both the level of multi-client spend as well as the supply/demand dynamics in the contract market. As a result, we believe that the seismic market is likely to show the greatest incremental improvement of any sub-sector within oil services over the next 12-18 months. We reiterate our Buy on PGS, with the view that it offers the best leverage to this more favourable longer-term trend."
- New capacity and Gulf spill continue to depress market "We expect that 2010 will end up being the most significant year of new vessel supply in recent history, with a 30% y-o-y net increase in streamer count. In a period of relatively stable demand, it is no surprise that contract margins have been depressed and are likely to continue to remain low until at least end-2010, a situation further exacerbated by the Gulf spill."
- But we expect supply/demand to improve in 2011+ "Beyond 2010, the supply growth impacting the contract market should begin to slow dramatically. Over the course of 2011-12, the current plans of seismic companies imply at most a 5% pa increase in the new streamer count. Hence, 2011 is likely to see the seismic contract market driven far more by demand than supply, suggesting the potential for margin improvement."
- Multi-client sales delayed but not disappeared "Multi-client sales have always been very volatile and difficult to predict. But given the number of licensing rounds that are open today and expected in coming months, we take the view that it is difficult for the level of multi-client late sales to become materially worse from here and that a gradual improvement is more than likely."

Nomura Oil Insights 20100816

AUD: Seeing Green

- AUD: Seeing Green "National elections typically have little effect on the AUD, but a high probability of a hung parliament and a potentially important role for minority parties in the government have raised the level of uncertainty about this Saturday’s election. We discuss the potential implications for the AUD."
- EMEA FX: Picking your location carefully "EMEA currencies are being supported by inflows to local bond markets, but we feel that this support will be more selective in the future."
- VND: Vietnam weakens the dong to support growth "The State Bank of Vietnam weakened its currency against a backdrop of easing inflation. We expect a balance of payments surplus, allowing the build-up of FX reserves."
- MYR: A positive, albeit modest, step to improve FX spot convertibility "We expect USD/MYR to drift towards 3.05 in 12m, driven by the government’s divestment plans and the potential FTSE upgrade."

Barclays FX Weekly Brief 20100819

Yes we can

- "We are again being asked whether, and for how long, Europe can continue to grow if the US is slowing. It’s a familiar question, albeit very different from the one that we were being asked until relatively recently, in which Europe was supposed to be the cause of whatever slowdown was going on rather than the victim of someone else’s. Never mind – it’s instructive that both concerns involve doubts about the recovery."
- "The starting point for the current concern is that the second quarter was the strongest in the recovery so far in the euro area and the UK with growth running at an annualised rate of 4% or more. Remarkably, it ran at more than twice that rate in Germany. Meanwhile, it was the weakest in the recovery so far in the US with, on our estimates, growth running at about half the rate seen in the euro area and the UK and about a quarter of the rate seen in Germany."
- "So, where do we go from here? Our analysis suggests that US slowdowns needn’t be associated with any change in European growth, but US recessions typically are. Trade exposures matter, but are not overwhelming. The higher correlations and larger multipliers are associated with financial shocks and common shocks. That is what causes US recessions and also what leads them to be associated with something similar elsewhere."
- "From our perspective, the key issue is to assess what sort of slowdown it is that the US seems to be experiencing. For now, it looks like the sort of slowdown that needn’t be associated with a large change in European growth. The multiplier could be closer to zero than one. It doesn’t help that other economies such as China also appear to be slowing and neither does it help that stock markets have been volatile. Those are the downside risks."
- "The upside risks have more to do with domestic demand. There is no breakdown of the second quarter numbers yet, but domestic demand is likely to have made a large contribution. For now, monetary policy remains exceptionally accommodating and sentiment and cash flow remain strong in some of the larger European economies. We continue to expect them to grow steadily over the coming year."

CreditSuisse European Economics 20100818

Brazil’s China connection

- "Brazil, with its big exposure to commodities, would not be as insulated from a slowdown in Chinese growth as many seem to think."
- The Fed: from credit easing to quantitative easing "By growing its Treasury holdings, the Fed’s policy is set to resemble conventional QE."
- United States:The Fed introduces a new target "The aim is to stem any deterioration in expectations for growth and inflation."
- Europe: Weak credit growth but not too bad "Credit conditions in the second half of 2010 have tightened less than feared."
- Japan: Possible temporary fall in industrial production "It would be the first in six quarters, driven by a modest correction in inventories."
- EEMEA: Wheat a minute "Recent global wheat price increases will have an effect via several channels."
- India: The liquidity outlook and its implications "An insufficient rise in foreign assets could add to downside risks to growth."
- Brazil: How vulnerable is Brazil to China? "More than many people think. We explain why."
- Bahrain: Slowly recovering "The recovery and a net creditor position support a more positive outlook."
- Norway: Not ready for a rate hike yet "We expect the Norges Bank to hike rates next in December."

Nomura Global Weekly Economic Monitor 20100813

Speculative investors add to EUR shorts, reduce JPY longs

- "The latest IMM data covers the week August 10-17."
- "With risk aversion taking hold of financial markets again, speculative investors shunned positions in pro-cyclical currencies, seeking the defensive characteristics of the US dollar. Thus, US dollar shorts were reduced and long positions were added versus the euro, reflecting the collapse in EUR/USD following the downbeat FOMC statement."
- "USD/JPY breached below 85 during the period covered by the data. Nevertheless, speculative investors trimmed their yen longs somewhat, perhaps seeing the downside in USD/JPY as being curbed by intervention risk with Japanese policymakers seeming increasingly worried about the recent yen strength."
- "The Canadian economy is highly exposed in the event of a US slowdown and recent US economic underperformance coupled with abating risk appetite may therefore explain the sharp reduction in Canadian dollar long positions. Somewhat surprisingly, however, speculative investors added to long positions in the Australian dollar."

DenDanske IMM Positioning 20100823

What BEA revisions mean for Fed

- "The Q2 real GDP data published this past July 30 came with a major revision of historical data by the Bureau of Economic Analysis (BEA)."
- "The economic analysts of the world were left slack-jawed by the disappearance of $100 billion from U.S. GDP for 2010Q1. Consumption alone was revised down $134 billion. As a result, instead of being in expansion territory, it turns out consumption is actually only midway up the recovery curve."
- "The labour market must begin creating enough private-sector jobs to bring down the unemployment rate. Otherwise, the Federal Reserve will not be able to tolerate the situation, as it would ultimately constitute a disinflationary environment."
- "On a more positive note, the level of labour productivity in the United States seems to have hit a wall in the short term. For the first time since the start of the recession, the composition of GDP growth has been geared towards employment rather than productivity."
- "This said, as the level of resource utilization in the economy has been pegged back, this implicitly modifies the impact of past monetary easing by the Federal Reserve."
- "If the unemployment rate does not begin to trend down, the Fed will have no choice but to step in once again."

NBC Weekly Economic Letter 20100820

The combination that is weakening the US economy to a dangerous extent: Household insolvency and companies’ quest for huge profits

- "In the aftermath of the crisis, many US households are insolvent; overall, households continue to deleverage, and their demand is therefore weak."
- "At the same time, companies are seeking to generate huge profits, hence the downward pressure on wages and the drive to increase productivity. This is weakening employment and wage incomes at the worst possible time, since household demand is already sluggish, and it is generating profits that exceed the investment requirements (which have been reduced by the sluggishness of household demand). These profits are being hoarded."
- "This perverse dynamics is self-sustaining: the weakness of the economy worsens the labour market and maintains the problem of household solvency; against a backdrop of sluggish growth, the only way for companies to meet their profit targets is to distort income sharing at the expense of wage earners. A stimulus via wages - even though it is very unlikely - would be the only method to pull out of this trap, which resembles that seen in Japan in the late 1990s."

Natixis Flash Economics 398 20100818

Germany: Increase in capacity utilisation drives up producer prices

- "Germany’s manufacturing industry was heavily burdened by the recession. The capacity utilisation rate declined by 17 pp within two years, the largest drop since this data has been collected. However, it recovered just as rapidly: within one year the capacity utilisation rate rose by 11 pp, an extraordinary development as well. As a result, producer prices will also rise considerably, at least temporarily."

DeutscheBank Talking Point 20100819

US: deeper slowdown, but no recession

- "We revise our forecast to reflect a deeper slowdown than previously expected. GDP growth is now anticipated to dip below trend in the coming three quarters."
- "Payrolls will be averaging below 100k for H2. The decline in the unemployment rate will stall and should not resume its gradual fall before 2011."
- "The manufacturing ISM is expected to decline faster than suggested by our fundamental analysis. We expect it to reach 50 by year-end."
- "The risk of outright recession is limited. Our main scenario is that the economy will resume above-trend growth during 2011, but the risk of a more prolonged slowdown has increased."
- "The change in the growth outlook increases the likelihood of further Fed QE, as the central bank will find it hard to accept high and stable unemployment. We postpone Fed hikes to 2012."

DenDanske Research 20100820