G3 Recap 6-13-11

Main Items:

  • LCH raised margin requirements for Portuguese and Irish bonds
  • French banks have agreed in principle to roll over their Greek debt into new longer maturity paper – FT
  • S&P Cut Greece rating to CCC from B. Ratings update from JPM:

Overseas:

  • Chinese M2 rose just 15.1% YoY in May vs 15.5% exp and 15.3% prev. M1 rose 12.7% vs 13.7% exp and 12.9% prev. Both are at the lowest levels since late 2008/early 2009.

Commentary:

  • US Economic data surprise index have stopped surprising on the downside as much, as the pace of negative surprise has been unusually high. This has in turn driven a correction in Treasury yields:

    The question now is whether the bounce is sustainable. Several points suggest the answer is NO:
    1) Part of the reason for the bounce in the surprise series is that it is constructed to mean revert. In other words, the bounce is not because of better than expected data, but because of index construction methodology.
    2) The data hasn’t actually gotten better. Over the past 2 weeks, of the most important economic data, only the ISM Non-mfg series has printed above expectations.
    3) US growth expectations have not yet hit levels that are excessively pessimistic. The latest 2011 median growth expectations have continued to fall to 2.6%, but it is still above the 2.4% level that proceeded QE2. That is an important level to monitor given that the hurdles for QE3 are higher.
    4) Overseas data is not strong enough to offset domestic US weakness. EU data surprises have been trending downward for several months now, and that was before recent issues w/the periphery. (chart below) And the EM data has also been quite weak. (see 2nd pt below)

    This all suggests implementing call/receiver ladders or 1×2 type structures in US rates or even EU rates.

  • The tightening in EM money supply has been substantial over the past few months, and in several key countries, money supply growth are at levels not seen since the dark days post Lehman. For example, Chinese M2 and M1 are at levels last seen post Lehman:

    And real estate prices have reacted with the first negative YoY prints since early 2009:

    And a similar situation is occurring in Brazil:

    Bottom line is that global conditions for global growth over the next few months are weak. Expect more talk about EM soft or hard landings from the press, neither of which are conducive to the formation of ‘animal spirits.’

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3 thoughts on “G3 Recap 6-13-11

      1. Or, rather, the party central committee does:) Michael Pettis seems to think that the “push-on-gas” party is stronger there judging from his newsletters.

        Might well turn up to be quite a good trade, by the way. With proper caution, as the thing’ll probably blow up eventually and it’s hard to tell when.

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