Recap 2014-09-30


I noted last week that the low inflation breakeven prints are unusual and is likely to elicit some sort of response by the Fed. It’s worth nothing that historically, 5y inflation swap prints below 2% have coincided with either falling or stable 5y nominal yields. That makes sense because arguably in the near term, the Fed can only control the real rate. As a result, when inflation expectations are low, the market tends to anticipate a Fed that can be more accommodative, which means a lower real rate. That is not always the case of course, (like in mid 2011 when the ECB was hiking) but was the tendency, as the chart below highlights. (5y swap rates in orange, 5y inflation in green, 5y real yields in white. Historical instances of 5y inflation breaking below 2.0% highlighted) Anyway, the point is, we may see a pullback in US real yields here… which could be quite a surprise to USD bulls.

Via @ukarlewitz:

Further evidence of EU banks being over levered:


  • EU CPI declined to 0.3% as exp vs 0.4% prev. The Core measure unexpected declined to 0.7% vs 0.9% exp and prev on the back of weaker services inflation
  • EU Employment was stable in Aug at 11.5%
  • UK GfK Consumer Confidence declined to -1 vs +1 prev
  • UK House Prices declined -0.2% MoM in Sept vs +0.5% exp. This take the YoY measure down to 9.4% vs 10.4% exp and 11.0% prev
  • German Unemployment rose by 12k in Sept vs -2k exp.
  • Italy CPI was stable at -0.2% YoY vs -0.1% exp
  • Chicago PMI declined to 60.5 vs 62 exp and 64.3 prev
  • US Consumer Confidence declined to 86 vs 92.4 exp and 93.4
  • S&P Case-Shiller declined 0.5% in July vs 0% exp. The index is up 6.8% YoY.
  • Canada GDP was flat in July vs +0.3% exp and prev
  • Japan Jobless Rate dropped to 3.5% vs 3.8% exp and prev
  • NZ Business Confidence declined to 13.4 vs 24.4 prev
  • NZ Building Permits was flat in Aug as exp
  • The PBoC, jointly with China’s banking regulator, released an ‘opinion’ this afternoon, to support sluggish property market. The most important policy change is that the central bank relaxed the criteria for ‘first-time home buyer’.
  • US set to exceed Saudi Arabia within the next 1-2 months to become the world’s largest liquid petroleum producer. FT


  • Tue: Japan Mfg PMI, AU Retail Sales
  • Wed: EU PMI, US ADP, ISM, Australia New Home Sales, Building Approvals, Trade Balance
  • Thu: ECB, US Jobless Claims, Australia Service PMI, China Non-Mfg PMI, Japan Service PMI
  • Fri: EU Services PMI, UK Services PMI, US Employment, Service PMI, ISM Non-Mfg
  • Mon: RBA,
  • Tue: CanadaBuilding Permits

2 thoughts on “Recap 2014-09-30

  1. Hello Sir,

    First of all, thanks for keeping this useful blog up to date. I have recently discovered it and I now follow it regularly.

    As regards the inflation breakevens, I agree that the Fed wouldn’t tighten if inflation expectations are low. However, since the TIPS are priced off the headline CPI, wouldn’t this be just a blip due to the weak oil prices?


  2. Hi Ben – The carry on the principal of TIPS is driven by CPI, but that is based on the past. The price of TIPS bond reflect an expected inflation component when compared to the yield of a similar maturity nominal treasury.

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