- U Michigan Confidence declined to 63.8 in July vs 72.2 exp and 71.5 prev.
- US CPI was unchanged at 3.6% YoY in June as expected. The Core measure rose to 1.6% YoY as expected vs 1.5% prev.
- Empire Manufacturing improved to -3.76 in Jul vs +5 exp and -7.79 prev.
- The EU Bank Stress test results:
- 5 fail in Spain, 2 in Greece, 1 in Austria. 1 German Landesbank refused to participate, so we can assume they failed horribly.
- 16 banks just passed, with a core tier 1 ratio of less than 6%:
- 7 in Spain, 2 each in Greece, Germany and Portugal, and 1 in Italy, Cyprus and Slovenia.
- Another 18 are below 7%.
- Note that the German bank could refuse to participate because Bafin allowed it to. As a result, the accuracy of the results is dependent upon how rigorously the various EU banking regulatory agencies vetted the numbers.
- The data from the sample of 90 banks (Dec. 2010) shows the aggregate exposure-at-default (EAD) Greek sovereign debt outstanding at EUR98.2 bn. Sixty-seven percent of Greek sovereign debt (and 69% of the much smaller Greek interbank position) is in fact held by domestic banks (about 20% refers to loans which are mostly guaranteed by sovereign). The aggregate EAD exposure is EUR52.7 bn for Ireland (61% held domestically) and EUR43.2 bn (63% held domestically) for Portugal. (pg 28)
- Scenario Definitions: Greece debt has haircuts of <30%, Portugal ~20%, Ireland ~20%. (pg 10)
- Final point: I didn’t see anything that shows haircuts to corporate periphery debt. This is partially because it is difficult to ascertain the ultimate country. Is a Greek bank owned by Soc Gen Greek or French? In any case, it is probably safe to assume that a Greek sovereign default will trigger Greek corporate defaults, a consequence (among many others) that is not included in the stress test.
- Funding stresses are building again. The 3m forward, futures implied Libor-OIS spread is at the highs for the year and looks set to break higher: (Ironically on the same day WSJ runs an article about Libor losing relevance)
1m T-Bill yields are still 0 or negative, so the stress is clearly coming from Europe. Periphery CDS were all sharply higher today, and the stress tests did not come close to alleviating contagion fears. If you haven’t already, it’s time to buckle down.
- On the US debt ceiling:
1) It appears that the Republican’s plan is to force a sharp fiscal tightening through the next election cycle. Given the current low levels of US growth, this is likely to push the US into a recession, and allow the Republicans to win more seats in congress and potentially the presidency in 2012.
2) Republicans are not ‘conservatives.’ The balance of cuts vs tax increases on the table is something in the range of 75:25, or higher. A vast majority of US voters as well as economists also favor higher taxes. Bernanke also specifically advised against a sharp fiscal tightening. That Republicans continue to hold out against tax increases suggest that the party does not represent conservative or American interests.
3) Given that this is essentially a party line vote, we can only hope that independent US voters can see through this charade in 2012. A single party in control of both the presidency and legislature has historically NOT been conducive to good policy making, but the alternative now looks worse. A side benefit is that it could potentially convince independent minded Republicans to vote independently. What a thought!