G3 Recap 4-05-11

Main Items:

  • Bernanke: “Our expectation is that if anything inflation will be a little low relative to long-term normal levels.”
  • Fed minutes added a bit of bearish pressure on treasuries. A few key lines:
  • `ALMOST ALL’ FED OFFICIALS SAW NO NEED TO TAPER QE2 BUYING
  • SEVERAL ON FOMC SAID RISKS OF INFLATION HAD SHIFTED TO `UPSIDE’
  • A FEW ON FOMC SAID ECONOMY MAY WARRANT LESS STIMULUS THIS YEAR, A FEW OTHERS NOTED THAT EXCEPTIONAL POLICY ACCOMMODATION COULD BE APPROPRIATE BEYOND 2011

ISM Non-Manufacturing declined to 57.3 in March vs 59.5 expected and 59.7 previously

PBoC hiked the 1y deposit rate by 25bps to 3.25%

RBA kept rates unchanged as expected, saying that “The board judged that the current mildly restrictive stance of monetary policy remained appropriate in the view of the general macroeconomic outlook”

Investment banks are increasing RoE targets again. Barclay’s will try to hit a 13% RoE by 2013 by taking more risk. – FT

The Nasdaq 100 will have a special rebalancing on 4/29 that will see 9.6mm shares of Apple sold by indexers. (It is now 20% of the index but will be reduced to 12%) This represents roughly half an average day’s volume. Microsoft and Oracle will see big increases in index weights, from their current 3.3% to 8.4 and 6.7%, respectively, and will see indexers purchase the rough equivalent of 1.5 days of volume. Graphic from WSJ:

Overseas:

  • Italian PMI Services improved to 53.3 in March vs 52.2 expected and 53.1 previously
  • UK PMI Services jumped to 57.1 in March vs 52.6 expected and previously, although some of this was undoubtedly payback from weather effects in Dec/Jan. This is the strongest print since last Feb (which was weather driven) and before that 2007. GS noted that the UK composite PMI is now consistent with 4% real growth.
  • Australian Services PMI declined to 46.5 in March vs 48.7 previously
  • Eurozone Retail Sales declined -0.1% in Feb vs +0.1% expected. This takes the YoY rate to +0.1% vs 0.6% expected and 0.7% previously. This puts real retail sales at -2.3% YoY, the weakest level since 2009:

Commentary:

  • Siemens CFO said that growth will ‘cool down’ in the 2nd half of the year. Presumably he was referring only to Siemens, but the data is increasingly suggesting that the cool down will hit the entire Eurozone. Not only has M1 growth slowed sharply: (blue line is IP YoY)

    But data has been coming in increasingly below expectations recently: (EU surprise index in white, Bobl yields in orange)

    And model outputs suggest that, despite the ~100bps of hikes priced in over the next 12 months, Bund yields are too high:

    A final (but somewhat long) caveat is that the M1 data may be less reliable this time due to distortions from the ECB’s unlimited refi and Securities Market Programs. However, a detailed look at the ECB balance sheet data suggests that this is only a temporary distortion of the broader picture. First, we observe that the ECB defines M1 as the currency in circulation + overnight deposits. This means the money created by the ECB is unlikely to have been completely converted into M1. Even if we make the assumption that 100% of net liquidity created by the ECB gets converted to M1, however, the ECB’s share of M1 would be very low:

    Furthermore, net liquidity provided by the ECB has already retreated back close to levels prevailing prior to the crisis. This means that the net impact of the contraction of the ECB’s balance sheet is almost over. The chart below graphs reported M1 growth along with M1 growth adjusted for changes of the ECB balance sheet. (green line – assuming that 100% of the liquidity provided by the ECB gets converted to M1) As can be observed, money growth using this metric is better than the headline number, but the differential will mostly fade by year end.

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4 thoughts on “G3 Recap 4-05-11

  1. bit more info on eurozome IP contrasted vs (real) M1 and M3:

    http://www.moneymovesmarkets.com/journal/2011/3/25/eurozone-money-trends-weak-economic-risks-rising.html

    i guess the M1 deposits are not just with the ECB, but for the whole eurosystem … certainly folks in periphery countries have been moving their cash deposits to “safer” eur states (and indeed swiss). but with rates so low moving funds into bonds (or other asset classes) would be a drain on the banking system. indeed, the ECB includes government bonds under 2y of maturity in M3 figures. so real M3 being negative doesn’t bode well.

    guess we shall just have to see how hawkish trichet can be … though undeniably, inflation pressures not peaked yet.

  2. in the back of my mind i have this scenario where trichet talks very hawkish, delivers just less than expected, but FX market focuses on rhetoric, DXY takes a bruising, and after the initial knee-jerk reaction, all commodities shoots up following the inverse correlation to the USD … oh … and that creates even more inflation pressures .. take that mr trichet and thank you very mucho!

    1. I can see it too! I also have a nagging feeling that – given the price action we’ve seen the past week – maybe it’s already been priced in. I’m not sure what’s going to happen, but I’m glad I won’t be in suspense for much longer!

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