Recap 4-10-12

Main Items:

  • The BOJ left policy unchanged, as expected, but the details were hawkish. The sentence on the inflation goal was also weakened. April statement: “the goal of overcoming deflation will be achieved both through efforts to strengthen the economy’s growth and support from financial sides”. March Statement: “the BoJ will aim to achieve the goal of 1% inflation.” Also, unlike last time, BoJ member Miyao did not propose additional easing measures. The BoJ Also announced that it will provide USD12bn of loans @ 6m Libor for up to 4 years against eligible collateral to promote growth. Consensus expectations are for additional QE at the 4/27 meeting
  • US NFIB Small Business Optimism declined to 92.5 in March vs 95 exp and 94.3 prev
  • The IIF (the Institute of International Finance, a global group representing the world’s biggest banks) today provided an outline for future sovereign debt write-downs to help eliminate some of the confusion that surrounded the Greek process. In particular the IIF is calling on other major Eurozone countries to adopt "CACs" (collective action clauses) that allow governments to enforce wide private-sector participation in restructurings.
  • Rick Santorum announced he is suspending his campaign
  • China’s Bo Xilai was stripped of his most powerful posts, and the authorities said his wife was being held in connection with the suspected murder of a British businessman.


  • China Trade Balance improved to 5.35bn in March vs -3bn exp and 31.5bn prev
  • EU Sentix Investor Confidence declined to -14.7 in April vs -9.1 exp and -8.2 prev
  • UK RICS House Price Balance improved to -10 in March vs -13 exp and prev
  • Swiss UE was stable at 3.1% in March as exp
  • Australia NAB Business Confidence improved to 3 in March from 1 prev

Upcoming Data:

  • This Week: China Money Supply Data
  • Wed: US Import Price Index, JapanMoney Supply, Australia Employment Data
  • Thurs: US Jobless Claims, PPI, French CPI, Chinese IP, Retail Sales, GDP


The chart below shows the average 10y EU sovereign debt spreads over bunds. It is now ~unchanged YTD, and has retraced ~60% of the peak to trough move over the past 3 weeks.

My guess is that the speed of this move took most participants (including yours truly) by surprise. The going assumption for much of the market has been that the 3y LTRO’s allowed EU banks to pre-fund their upcoming maturing debt and engage in positive carry. Theoretically, this would sharply reduce deleveraging pressure for “a while,” hopefully long enough for the sovereigns to improve their fiscal positions further. However, the “a while” assumption was always poorly defined, and it appears that recent fiscal problems in Spain & the slowdown in the cyclical data have shortened the schedule.

Fortunately, the various liquidity measures were able to increase the buffer between EU banks and sovereign funding conditions. Despite the moves in EU sovereign spreads, EU bank funding indicators all look much better. For example, the 3m EURUSD basis remains at -60bps, much better than the -160bp levels seen at the end of November. The Itraxx 5y Senior Financial CDS index has jumped as well, but is still 20bps lower than year end. And the 3m Euribor – German TBill basis is still at recent lows of 72bps.

With no Greece-like ‘cliff event’ in the near future, this actually suggests that asset prices could retrace from current levels. The reason is that the forced selling / deleveraging that was a hallmark of 2H2011 is not present this time, at least not from what I can see. And even with real money participation, short term moves of this magnitude often correct. The chart below shows the average sovereign spreads over bunds again, but with a 30 day moving average and a 15% envelopes around that. As the chart shows, historically violations outside the bands tend to be brief.

The S&P has been down every day for a week. It might be time to pull out the javelin catching equipment again.

Separately, the Bo Xilai news may have much deeper ramifications than what’s been reported so far. I think most Chinese believe and have come to accept the fact that there is corruption at the local and provincial levels of government. However, I think most believe that the central government is broadly corruption free, and staffed with capable policy makers. To some extent, this view has been facilitated by both the state run media, as well as the secrecy around central government politics. This general belief is reflected by the fact that many Chinese who felt wronged by local government officials go to Beijing to petition their woes.
Bo XiLai was a member of the Central Government Politburo, was seen as a likely candidate for the Politburo Standing Committee, and among the most powerful people in China. Against this backdrop, the murder charges against Bo XiLai’s wife is likely to come as a very severe shock to many Chinese. How this affects vox populi as growth continues to slow is difficult to say, as is the possible effects on reform & economic rebalancing efforts. It is possible that party leaders close ranks to present a façade of unity in response. Other the reformers may gain additional power. Articles from the major state-run media outlets are likely to be keenly watched in the coming days.