G3 Recap 10-29-10

Main Items:

  • US 3Q GDP data came in as expected. 3Q GDP rose 2.0%, up from 1.7% previously. Inventories contributed 1.4%, Personal Consumption grew 2.6%, up from 2.2%. Wage growth remained weak, as the Employment Cost index came in at 0.4%, even as the price index increased 2.3%. Trade again sharply impacted the headline, subtracting 2.0% from growth, although lower than Q2.
  • Chicago PMI improved to 60.6 in Oct vs 58.0 expected and 64.3 previously.


  • EU CPI rose 1.9% YoY vs 1.8% expected and previously.
  • UK GfK consumer confidence improved to -19 in Oct vs -22 expected
  • The Hong Kong Monetary Authority was forced to tap its Yuan swap arrangement with the People’s Bank of China after demand for trade settlement using the currency exceeded expectations. The Authority plans to draw 10 billion Yuan ($1.5 billion) through the arrangement, out of the annual maximum of 200 billion Yuan. Banks which don’t have any renminbi and need to satisfy immediate customer trade transactions may turn to the HKMA, according to a central bank statement. So people are trying to get more RMB… no surprise there! Barclay’s reports that RMB deposits currently total 19.5bn in HK, so the 1.5bn figure doesn’t represent a crazy jump, although it may well increase in the coming months.
  • Japanese CPI dropped to -1.1% YoY in Sept. This measure has now been negative for 18 months, and basically unchanged for 6.


  • G4 10s30s curves are diverging:

    In particular, the US, UK and Japanese bond markets are pricing in additional CB action, while in Europe, markets are pricing in stimulus removal. German 10s30s haven’t been this flat since 2008, and was at this level in the last cycle in 2005, when global growth was much more robust:

    An additional explanation may be that LDI flows have been increasing, but this does not hold water given that the EU curve is flattening against the rest of the G4 curves even in shorter tenors.
    This is the first instance in recent memory where Europe is leading the US.
    In a world where most CB’s are projected to keep policy unchanged for the indefinite future, the primary mechanism for stimulus shifts to relative FX levels. This is a game which the EU is destined to lose because of the ECB’s mandate, which does not include anything about growth. This suggests that EU financial conditions will get relatively tighter until its currency gets strong enough have a significant negative impact on growth, which would then have a negative impact on inflation. In other words, the ECB appears to be likely to maintain policy levels much tighter than the rest of the G4 for a long time, with negative implications for EU growth.

  • The PE bubble is starting to get big again. Blackstone reports that they’re having a hard time finding value, even though funding costs are so cheap. NYP, WSJ
  • The Big Picture blog noted that, since August, S&P returns on days the Fed bought treasuries has been substantially better than on days it did not. This chart cherry picked the start date to coincide with the bottom of the market, but the difference in returns suggest that it is unlikely this pattern is due to spurious correlation.


5 thoughts on “G3 Recap 10-29-10

  1. insofar as the safest AAA *liquid* govt 30y assets goes, can’t really beat the bund but they still trade libor+ …

    also, looking at the 10-30Y ASW box, looks like LDI not going on as those tend to mostly be on swap curve … my guess is that that there is an ongoing cross border/markets asset allocation program going on from real money guys

  2. well confidence on the long end of the euro curve implies confidence on both the ECB and Germany’s inflation and fiscal credentials so nothing they should be doin! i would guess as well that the fx risk has been hedge through the forwards market. for market commentators and spread traders it does widen out the core vs peripheral spreads which could be misinterpreted as sovereign credit stress.

    i cant figure out however why the swissy keeps gettin bashed with so much uncertainty of macro events this week whilst gold being supported. maybe this week will be a real let down for anyone wanting some vol or clarity for positioning going into Q1 next year.

    incidentally … look at graph of gold priced in CHF going back to 1975 …

    1. Thanks for the post Bert!

      Gold’s definitely its own bubble. Re: EURCHF, It was trading several Std Dev cheap vs PPP @ 1.3. I tried to pick some up in June actually, but was too early. So I’m guessing that valuation is probably a big driver. It is also a pretty popular trade, as I’m sure you know.
      IP differentials are suggesting that this can continue. I’m a bit tied up today, but I’ll try to post on it tomorrow.

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