G3 Recap 12-10-10

Main Items:

  • U Michigan Confidence improved to 74.2 vs 72.5 expected and 71.6 previously.
  • US Import Price Index rose 3.7% YoY in Nov vs 2.8% expected and 3.6% previously. This was driven by a 4.1% jump in oil prices, industrial supplies, and food and beverages.
  • US Trade balance improved to -39bn vs -44bn expected and previously.
  • Home-mortgage rates have surged to their highest level in six months, yanked higher by the recent sudden rise in Treasury yields, making refinancings less attractive and potentially hurting the Fed’s efforts to maintain low rates – WSJ.
  • Nonfinancial companies in the US were sitting on $1.93T in cash and liquid assets at the end of Sept; this is up from $1.8T as of the end of June. Cash now accounts for 7.4% of assets ā€“ the highest since ā€™59. WSJ
  • Goldman Sachs’ activities in the credit insurance market in 2007 have come under attack from a US senator after e-mails showed a senior trader urged colleagues to "kill" some investors’ positions – FT.

Overseas:

  • PBoC hiked RRR by 50bps 18.5%, the 3rd time in 5 weeks.
  • Chinese M2 growth accelerated to 19.5% YoY vs 19.1% expected and 19.3% previously.
  • Chinese Trade balance declined to 22.9bn in Nov vs 21 bn expected and 27bn previously. Strong growth in exports were offset by even stronger growth in Imports.
  • UK PPI Output Core was unchanged at 3.3% YoY in Nov vs 3.5% previously.

Commentary:

  • Another ugly day for treasuries as the market continues to search for the new range. Still hard to call where this move will end, but one possible clue is that the 2yr yields have been essentially unchanged for 2 days. This suggests that the front end is now supported by strong expectations for Fed policy. Given that treasury yields are almost completely driven by long term OIS, the cap in 2y treasury yields can put a ceiling on both 5 and 10 year yields as well. In particular, we note that both the 2s5s as well as 2s10s curves are roughly 20bps and 10bps away from the all time steepness levels hit in 1Q. If 5s and 10s cheapen to those levels, (2.20 and 3.45, respectively) they are probably pretty good levels to buy for a correction into 1Q.

  • The rise in yields again put some pressure on gold today, but it appears the beta is wearing off. It is also heartening to see equities stage a strong gain despite the rise in yields. Combined with the fact that we are probably not too far away from yield highs, we should get a bit more bullish in these positions.
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