US tax receipts are growing more slowly — even declining, sometimes — which could mean the debt limit gets reached sooner than expected. This poses a dilemma for analysts who want to be bullish, but also want the debt ceiling lifted.
In this guest post, Alex Bellefleur, global macro strategist at Pavilion Global Markets, writes that the Bank of Canada was prudent to loosen monetary policy in response to the decline in oil prices. Last week the Bank of Canada (BOC) surprised markets by cutting interest rates 25 basis points, leaving them at 0.75%. While some argue this move was unnecessary, we are of the view that the cut is needed as a pre-emptive manoeuvre to counter private sector deleveraging.
Whilst everyone was focused on the ECB on Thursday… … the Fed pulled this little snippet out of its bag: As part of the continuing program of operational testing of its policy tools, the Federal Reserve plans to conduct a series of eight consecutive seven-day term deposit operations through its Term Deposit Facility (TDF) beginning in October. Okay, the Fed has tested term deposits before, so it’s not that mind blowing an announcement in and of itself. The significance, if any, is that it’s subtle confirmation that both reverse repos and TDs will be used in the Fed’s unwind process. The maximum award has also been increased to $20bn.
Those looking for excess in financial markets have lots of examples to choose from, but a recent favourite has been the Spanish bond yield: it fell below that of the US three weeks ago, and has stayed there. QED, say the bears. Markets are massively mispriced under the spell of central banks, and Spain’s bond yield proves it. Not so fast. True, Spain is in a dire situation, with too much debt, insanely high unemployment, deflation and an economy which became no more competitive in the past year according to the World Economic Forum, which ranks it 35th, behind Indonesia, Iceland, Malaysia and Saudi Arabia. Yet, there are two big reasons why Spanish bonds should be beating the US. First, its government finances may be bad – but America’s are even worse. The annual deficit and both gross and net government debt are higher in the US, while Spain has a current account surplus, while the US continues to have twin deficits.
On Wednesday we wrote about the growing consensus among scholars and policymakers that unencumbered financial flows are bad, focusing on some recent research from the Bank for International Settlements. Now we want to draw your attention to a detailed historical account of the interwar and pre-crisis financial systems by Claudio Borio, Harold James, and Hyun Song Shin. Their aim is to explain which “global imbalances” mattered and which did not.
Markets: Asia-Pacific equities climbed to fresh six-year highs as investors continued to place geopolitical concerns on the back burner. The upward moves followed an overnight session that saw global equities rally, in part because sales of previously owned homes in the US rose to their highest since October. The S&P 500 touched a record intraday high but then pared gains, ending up 0.5 per cent at 1,983.5. Volatility, as measured by the CBOE Vix index, fell 6.8 per cent. Even Russia’s Micex snapped a six-day run of losses, gaining 1.6 per cent. (FT’s Global Markets Overview)
Markets: “Asian stocks rose, joining a global rebound as better U.S. earnings offset the downing of a passenger jet in Ukraine and Israel’s invasion of Gaza. Emerging-market currencies climbed while corn fell to the lowest since 2010. The MSCI Asia Pacific excluding Japan Index advanced 0.3 percent as of 11:44 a.m. in Hong Kong, with three stocks rising for every two that fell. Futures on the Standard & Poor’s 500 Index (SPX) were little changed after the U.S. gauge climbed from its biggest loss in three months. Indonesia’s currency added 0.4 percent versus the dollar before the result of presidential elections is announced. Corn slumped 1.3 percent on U.S. production. Natural gas slid 1.9 percent.” (Bloomberg)
Camp Alphaville reminder: Yes, the colour-code used to illustrate the full line-up of Camp AV speakers has relevance. No, I don’t know what it is. (Details here) Markets: Asia-Pacific markets were given a boost as manufacturing readings for the region’s two powerhouses, China and Japan, showed a return to growth this month. SBC’s “flash” purchasing managers’ index for China jumped from 49.4 in May to 50.8 in June, beating forecasts and ending a five-month streak of contraction. Markit’s PMI for Japan rose from 49.9 in May to 51.1 in June, its highest since March. (FT’s Global Markets Overview)
Bank of America Merrill Lynch strategist Michael Hartnett has offered a call to arms to thematic thinkers everywhere. Invoking Dr Seuss he, well, judge for yourself: In the next 40 years, the world will run out of oil. In the next 10 years, a laptop will communicate faster than a human brain. In the next 10 days, 112,000 people will retire in the US, Japan and Europe. Today, 56% of the world economy has zero interest rate policies. Tomorrow, there will be over 3.3 billion searches on Google. And in the next 10 seconds, the US national debt will rise by $322,000. Cyclical and secular trends are transforming at a fast and meaningful pace.
Markets: Asian markets were in a near-frozen state ahead of the US jobs report due to be released later on Friday, which influences the Federal Reserve’s thinking on monetary policy. A retreat from risk was apparent among some Asia tech stocks, however, which followed their US counterparts lower. Wall Street paused for breath after two successive record closing highs for the S&P 500. (FT’s Global Markets Overview)
Markets: Asian markets wilted after Janet Yellen stumbled in her first meeting as chairwoman of the US Federal Reserve after sending signals that appear to point to earlier rises in interest rates. Following an overnight brief plunge in US markets when Ms Yellen implied rates could rise six months after the Fed stops buying assets, Asian currencies and equity markets opened lower. (Financial Times)
Markets: Asian equity markets pulled back in response to more signals that the US economy slowed down last month. US equities were held back from reclaiming record highs after a survey of US homebuilder confidence saw its biggest monthly drop on record, blamed on snowstorms that hit the eastern seaboard. A reading of New York state manufacturing conditions also disappointed. (FT’s Global Markets Overview)
Markets: US and European markets might have paused for breath, but Asian markets continued to climb ahead of Janet Yellen’s first public appearance as US Federal Reserve chairwoman. Major indices in the region were positive, with Hong Kong’s Hang Seng leading in its third climb in four sessions. (FT’s Global Markets Overview)
Markets: Caution continued to reign across Asian equity markets after US stocks fell for a third straight session and as investors looked ahead to key events later in the week. In Japan, the Nikkei 225 average was 0.5 per cent lower following a 2.4 per cent fall in its first trading day of the year on Monday. In China, the Shanghai Composite was down 0.4 per cent, a fourth straight decline that placed the index at a six-month low. (Financial Times Global Markets Overview)