The Crazy World Of Libor, Swaps And Treasury Yield Curves (Fire? or Ice Axe Cometh?)

Financial markets are experiencing “The Crazy World of Libor, Swaps and Treasury Yield Curves.” 

In other words, all three curves have a downward sloping section, all at different times, but all short-term (less than 6 year maturities).

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What uncertainties are in financial markets and the unlying economies, you may ask? How about trade (e.g., US and China trade flows), Brexit, China’s recession, Japan’s ongoing stagnation (despite negative interest rates), Italy and Germany’s slipping into darkness, not to mention uncerainty about The Fed’s path for balance sheet unwind.

The Fed’s balance sheet is a particular concern since the 10-year Treasury Note yield began to rise when the unwind began, but rates have gone DOWN when the unwind got serious in 2018. Or is Fed Chair Jerome Powell really “The Iceman”?”

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Here is a photo of Fed Chair Jerome Powell weiliding his “ice axe.”

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Storm Ahead? Baltic Dry (Shipping) Index Founders In Rough Trade Sea

The Baltic Dry Index seems to be signalling declining shipping costs … or foundering trade between the US and China.

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The Baltic Dry Index is a composite of the Capesize, Panamax and Supramax Timecharter Averages. It is reported around the world as a proxy for dry bulk shipping stocks as well as a general shipping market bellwether.

Yes, the BDI is measuring some distress for China Imports YoY in USD.

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No, that isn’t the SS Minnow foundering.

TPP-Founders

Mambo Italiano! Italy Falls Into Recession (Again) as Output Shrank More Than Forecast (Italian Bank Assets Plummet, ECB Ineffective)

It is the continuing mambo of Italy falling into recession.

(Bloomberg) —  Italy fell into recession at the end of 2018, capping a year of political turmoil, higher borrowing costs and fiscal tensions that took their toll on the economy.

Output contracted 0.2 percent in the three months through December, following a 0.1 percent fall in the previous quarter, statistics agency Istat said Thursday in Rome. The year-end shrinkage was greater than expected. 

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The data “reflect a marked worsening of the industrial sector’s performance, and of a negative contribution of agriculture,” Istat said in releasing the data. It said services’ activity “stagnated.”

Premier Giuseppe Conte said Wednesday that he expected the fourth-quarter shrinkage, speaking in Milan a day before the official announcement.

Investors have been warily watching Italian economic performance following weeks of negotiations with the European Union over the government’s budget that pushed up bond yields. The latest round of bad news is likely to test market confidence in the government’s expansive program for 2019.

The fourth-quarter contraction was greater than a median estimate in a Bloomberg survey of 28 analysts that called for a quarterly shrinkage of 0.1 percent. The economy expanded 0.1 from the same quarter of 2017, while the full-year growth totalled 0.8 percent on a work-day-adjusted basis. 

The December unemployment rate fell to 10.3 percent, Istat said earlier in the day.

In addition to output declining (resulting in a real GDP QoQ reading of -0.20%), total assets of Italian banks have been plummeting. On the bright side, bank nonperforming loan rates are falling (but are still quite high at 14.4%).

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All this despite the ECB’s Main Refinancing Operations Annoucement Rate of … 0%.

Italy’s sovereign yield curve remains steeply upward sloping with short rates negative (courtesy of the ECB). 10Y SR CDS for Italy is 242.8 (elevated risk).

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Italy shows the limits of central bank zero-interest rate policies. Perhaps ECB head Mario Draghi should sing “Mambo Italiano” instead of distorting economies and asset prices.

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Existing Home Sales Plunge 10.25% In December As Global Economy Is Slips Into Darkness

And no, that was not a seasonal effect. Existing home sales declined 6.4% MoM in December, the largest decline since November 2015.

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And on a YoY basis, existing home sales plunge 10.25%.

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US existing homes are very expensive compared to household income and the surge in mortgage rates during 2018 made housing ever less affordable.

The median price for existing home sales shows a seasonal pattern with June typically being the highest for the calendar year and January being the lowest.

Let’s see how Euro Zone and Japan slipping into darkness impacts the US econony and housing market.

phillip

 

US Treasury Yield, Swaps And 1-Month LIBOR Curves Remain Kinked (All Day And All The Night)

Global uncertainites abound. And with them, the US TReasury yield curve, the US Dollar Swaps curve, and the 1-month LIBOR curves are all kinked.

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These curves are kinked all day and all the night.

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Bubble Trouble? Household Net Worth Rising Faster Than GDP (Debt Bubbles In Canada, Australia And China)

The Federal Reserve’s zero interest rate policy (ZIRP) and quantitative easing (QE) helped to rebuild US household net worth. But it was rebuilt with asset bubbles that invariably burst.

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And courtesy of Kevin Smith at Crescat Capitalm here is a chart of asset bubbles and household/corporate debt as percentage of GDP. The most vulnerable? Canada, China and Australia.

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Canada, Australia and China represent 3 of the lowest 5 countries in terms of % of stocks with negative annua free cash flows.

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Shrimp on the barbie, mate?

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Bye Bye Theresa? Britain’s PM May Loses Brexit Vote By 432 To 202 (Disturbance In The Force)

I detect a disturbance in The Force after Great Britain’s Therese May lost the Brexit vote by a whopping 432-202.

The USD Dollar Swap curve is now even more kinked  and the GBPUSD forward curve looks like it hit a wall.

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It is almost as if the Brexit “fears’ have gone away.

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Is this Bye Bye Theresa?

Meanwhile, Nigel Farage and UKIP are singing “What’s the matter with UK Socialists?”

Why Interest Rates Are Not Likely To Rise Much In The Near Future (Ford Cutting Thousands Of European Jobs, China Car Sales Plunge 13% YoY, Etc.)

Since early November 2018 when the 10-year Tteasury note yield hit 3.24%, both the Treasury yield and 30 year mortgage rate (MBA) have plunged.

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Partly to blame is the slowing economies around the globe, particularly in Europe (check out Ford’s announcement of job cuts in Europe: Ford Motor Co. will shed thousands of jobs at its European operations as part of a bid to return the business to profitability with a broad restructuring that could include shuttering factories).

And then there is that 13% YoY decline in China Passenger Car Sales.

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So, despite global zero-interest policies (except for the US), global economies are slowing.

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It is difficult to push US interest rates higher when the global economy is slowing down.

To be sure, there are a whole host of wild cards that could send interest rates rising again: 1) US-China trade agreement, 2) ending the US government shutdown, 3) resolution of the neverending BREXIT issue, 4) France and Germany’s struggles to raise energy prices (Paris Accord?), etc.

The implied probability of a Fed rate hike in this global environment is pretty low.

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And both the US Treasury actives curve and Dollar Swap curve remain kinked.

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Will The Fed emulate Frank Booth from “Blue Velvet” and provide more oxygen to markets?

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