Recap 12-1-11

Main Items:

  • Draghi’s speech today hinted at additional ECB action.
  • 3m USD Libor dropped to 0.527% from 0.529%, the first fall since 7/25
  • US ISM Mfg improved to 52.7 vs 51.8 exp and 50.8 prev
  • Initial Jobless Claims increased to 402k last week vs 390k exp and 393k prev


  • France’s Sarkozy Thurs night will outline proposals for treaty changes, Merkel will do the same Fri, and next week we will hear from the new PMs in Italy and Spain. -FT
  • SocGen steps up moves to cut dollar funding needs – Société Générale SA is halting its aircraft- and ship-financing activities and also will stop funding leveraged buyouts in the U.S. and Asia – WSJ
  • Italian Mfg PMI increased to 44 in Nov vs 42.8 exp and 43.3 prev
  • UK Mfg PMI stable at 47.6 in Nov vs 47 exp and 47.4 prev
  • Switzerland Mfg PMI declined to 44.8 vs 46.6 exp and 46.9 prev
  • Sweden Mfg PMI declined to 47.6 vs 49 exp and 49.8 prev
  • Norway Mfg PMI declined to 48.6 vs 50.2 exp and prev


  • China Mfg PMI declined to 49 in Nov vs 49.8 exp and 50.4 prev. The HSBC measure declined to 47.7 vs 51 prev.
  • South Korea Mfg PMI declined to 47.1 in Nov vs 48 prev
  • Australia Mfg PMI increased to 47.8 in Nov vs 47.4 prev
  • Brazil is cutting its IOF tax to 0 for foreign investment in stocks


Highlights from Draghi’s speech:

  • Dysfunctional government bond markets in several euro area countries hamper the single monetary policy because the way this policy is transmitted to the real economy depends also on the conditions of the bond markets in the various countries. An impaired transmission mechanism for monetary policy has a damaging impact on the availability and price of credit to firms and households.
  • I am confident the new surveillance framework will restore confidence over time. I am also quite sure that countries overall are on the right track. But a credible signal is needed to give ultimate assurance over the short term.
  • What I believe our economic and monetary union needs is a new fiscal compact – a fundamental restatement of the fiscal rules together with the mutual fiscal commitments that euro area governments have made.
  • Other elements might follow, but the sequencing matters. And it is first and foremost important to get a commonly shared fiscal compact right.

Separately, note that the 3m EUR Libor-OIS spread hit a new high today:

And the analog chart of copper vs S&P also doesn’t suggest a bottom until Jan:

Another negative: the Citi US economic surprise index is near multiyear highs. As can be seen in the chart below, historically such occurrences have presaged equity market selloffs. There is also the scary similarity to 1H 2008:

6 thoughts on “Recap 12-1-11

  1. True, it is being driven by a reduction in the OIS rate, but also important is the fact that 3m Euribor is not falling in conjunction. As both are unsecured measures for the cost of bank lending, the major difference is the term premium that banks put on lending to each other between the overnight rate and for 3 months. As a result, the widening spread suggests a worsening of EU banks’ unwillingness to lend to each other for longer than a day.

    You’re right that OIS does not reflect ECB expectations per se, since the ECB has effectively lost control of the OIS rate given how much it has increased its balance sheet. But it is also arguable that it is the best measure left…

  2. LIBOR-OIS is not a term premium, it’s a measure of perceived bank credit risk. This is because LIBOR (as you noted) is an unsecured lending rate, whereas OIS is has very little/zero credit risk because it is a swap with zero value at initiation. When repo markets aren’t acting up, the OIS is designed to reflect the geometric average of the expected overnight policy rate over the (in this case 3-month) duration of the swap. Any policy rate changes over that term should also be reflected in the 3m LIBOR rate. Therefore, when the former is subtracted from the latter, what remainds is the credit risk premium.

    LIBOR is effectively bounded on the downside by the rate at which banks can borrow at that term from the ECB (I don’t have visibility on how this is being calculated currently), which is why it is not following OIS (which is tracking GC – which is trading very special rather than the overnight lending rate).

    Been a while since I looked at this, so let me know if I missed something.

  3. Good point. Got caught staring at a tree in the forest.

    Howver, I would still argue that this is not a particularly reliable indicator given the mess in European repo markets. Maybe just looking at the LIBOR-refi rate would be more instructive..

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