PIGS Facing The Fire (Again)! Portugal, Italy, Greece, Spain Seeing Surge In Sovereign Debt Yields

European PIGS must face the fire … again.

Once upon a time, European PIGS (Portugal, Italy, Greece and Spain) saw incredible spikes in their sovereign yields related to Greek credit default contagion. But the European Central Bank (ECB), World Bank (WB), International Money Fund (IMF) rose to the rescue.

But here we go again! Thanks to rising inflation, the ECB is threatening to remove the massive monetary stimulus. Sound familiar??

Here are the Eurozone 10-year sovereign yields as of this morning. Greece is up a whopping 27.4 basis points, Italy is up 11.7 BPS, Portugal is up 9.3 BPS and Spain is up 9.2 BPS. The core of the Eurozone, France and Germany, are up 4.3 and 3.0 BPS, respectively.

Germany has REAL 10Y Bunds yields of -4.7%.

Like the USA, the Eurozone Taylor Rule is much higher than the ECB’s Main Refinancing rate of 0%..

Here is ECB’s Christine Lagarde saying “What, me worry??”

Lagarde Pivots on ECB Rate Hikes as Switch in Guidance Seen Soon (US 10Y Yield Up 5BPS, Mortgage Rates To Follow)

Its the same all over the WESTERN world as sovereign yields are starting to rapidly rise.

(Bloomberg) — European Central Bank President Christine Lagarde is no longer ruling out an interest-rate hike this year, a pivot toward the tightening stance of global peers that officials privately see materializing with a shift in policy guidance as soon as next month. 

Investors brought forward bets on ECB action as the monetary chief delivered surprisingly hawkish comments citing unexpected record inflation data, contrasting with an earlier statement on Thursday that kept intact its formal view that price increases will ease. 

She spoke after policy makers agreed that it’s sensible no longer to exclude a rate move in 2022, and that bond buying could end in the third quarter, according to officials familiar with their thinking who asked not to be identified because such discussions are confidential. An ECB spokesman declined to comment. 

The result of Lagarde’s jaw boning?

US mortgage rates are rising in anticipation of the US following Largarde’s lead. Powell and the Gang continue to lag.

US New Home Sales Crash -14% YoY In December As Median Price Slows To +3.4% YoY (Mortgage Applications Decline As Mortgage Rates Increase)

US new home sales spiked in December by 11.9% from November, but were down 14% year-over-year.

But the median price of new home sales (YoY) declined to 3.4%.

The Midwest saw a surge in new home sales (+56%).

The MBA’s mortgage applications index shows declining purchase applications (-1.83%) and declining refinancing applications (-12.60%) as mortgage rates increased from 3.64% to 3.72% for the week of 01/21.

Now, mortgage purchase applications rose for the week of 01/21 if we used non-seasonally adjusted data.

The Market Has Never Plunged 10% This Fast To Start A Year (But We’ve Had Biden As President For A Year!)

The stock market has never started a year falling as quickly as it is now. 

The S&P 500 has dropped 11% — heading into correction territory — in the first 16 trading days of 2022 in its worst-ever start to a year, according to Bloomberg data that goes back over nine decades. 

The downturn comes as traders brace for the Federal Reserve to tighten monetary policy and a surge in U.S. Treasury yields weighs on the outlook for stocks. A host of technical signals also suggest that more volatility may be coming up ahead. 

S&P 500's 11% drop in first 16 days is worst of all years
  

“The Fed pulled the punchbowl, liquidity has evaporated, and the S&P and NDX broke below their 200dma for the first time since the Covid outbreak,” said Rich Ross, technical strategist at Evercore ISI. 

A bear market down to the 3,800 level is likely for the S&P 500, Ross said, given “the dramatic erosion of the technical backdrop, in conjunction with the highest inflation, tightest policy, and most uncertain political and geopolitical condition in years” — not to mention its historic rally since 2020.

The Shiller CAPE ratio is extremely high …. not surprising how much air The Fed pumped into the market tires.

But look at Europe too!

World’s New Supply Trackers Flash Caution Amid Omicron Worries (Add Ukraine-Russia Tensions To The Mix)

COVID and its omicron variant (as well as government reactions such as mask and vaccination mandates) are wreaking havoc on the global economy, but particularly in the USA where the Federal government dumped trillions of dollars in fiscal stimulus along with The Federal Reserve’s monetary stimulus into an economy not prepared for it. The result? INFLATION.

But global supply chains are nearing a turning point that’s set to help determine whether logistics headwinds abate soon or keep restraining the global economy and prop up inflation well into 2022, according to several new barometers of the strains.

Just a week before the start of Lunar New Year, the holiday celebrated in China and across Asia that coincides with a peak shipping season, economists from Wall Street to the U.S. central bank are unveiling a string of models in the hope of detecting the first signs of relief in global commerce. 

From Europe to the U.S. and China, production and transportation have stayed bogged down in the early days of 2022 by labor and parts shortages, in part because of the fast-spreading omicron variant.

Among the big unknowns: whether solid demand from consumers and businesses will start to loosen up, allowing economies to finally see some easing in supply bottlenecks. Fresh indicators from the private and official sectors are in high demand because there’s still much uncertainty in industries overlooked by mainstream economics before the pandemic.

Once the realm of trade and industrial organization experts, supply chains “have shifted to center stage as a critical driver of sky-high inflation and a stumbling block to the recovery,” Bloomberg Chief Economist Tom Orlik said. “The profusion of new indices and trackers won’t unblock the arteries of the global economy any quicker. They should give policy makers and investors a better idea of how fast — or slowly — we are getting back to normal.”

The Bloomberg Economics Index

Bloomberg Economics’ latest supply constraint index for the U.S. shows that shortages have trended modestly lower for six months. Even so, strains remain elevated, and the wave of worker absenteeism is adding to the problems at the start of 2022.

Port traffic tracked by Bloomberg shows container congestion continues to rankle the U.S. supply chain from Charleston, South Carolina, to the West Coast. The tally of ships queuing for the neighboring gateways of Los Angeles and Long Beach, California, continued to extend into Mexican waters, totaling 111 vessels late Sunday, nearly double the amount in July.

Source: Bloomberg, IHS Markit, Genscape

Note: Data counts the total number of container ships combined in port and in offshore anchorage area.

Kuehne+Nagel’s Disruption Indicator

Kuehne+Nagel International AG last week launched its Seaexplorer disruption indicator, which the Swiss logistics company says aims to measure the efficiency of container shipping globally. It shows current disruptions at nine hot spots is hovering near “one of highest levels ever recorded,” with 80% of the problems happening at North American ports.

Seaexplorer disruption indicator as of Jan 20, 2022

Flexport’s Guages

Another freight forwarder, San Francisco-based Flexport Inc., last year developed its Post-Covid Indicator to try to pinpoint the shift by American consumers back to purchasing more services and away from pandemic-fueled goods. The latest reading released Jan. 14 “indicates the preference for goods will likely remain elevated during the first quarter of 2022.”

Flexport has a new Logistics Pressure Matrix with a heat map showing demand and logistics trends, and much of those numbers are still flashing yellow or red. Flexport supply chain economist Chris Rogers said in a recent online post that similar grids for Asia and European markets will be part of the research.

The Federal Reserve’s Stress Monitor

Adding their stamp to the burgeoning genre of supply stress indicators were three Ph.D. economists from the Federal Reserve Bank of New York, with the launch its Global Supply Chain Pressure Index. Rolled out earlier this month, it shows that the difficulties, “while still historically high, have peaked and might start to moderate somewhat going forward.” The New York Fed said it plans a follow-up report to quantify the impact of shocks on producer and consumer price inflation.

Morgan Stanley’s Index 

Less than a week later came the Morgan Stanley Supply Chain Index. It lined up with the Fed’s view that frictions have probably peaked, though some of improvement ahead will come from a slowdown in the demand for goods. 

“Supply disruptions remain a constraint to global trade recovery, but as firms continue to make capacity adjustments to address them, capacity expansion could mitigate these,” Morgan Stanley economists wrote in a report Jan. 12.

Citigroup’s Tool

Citigroup Inc. last week released research that was less optimistic yet complementary to the New York Fed’s work, which Citi said doesn’t factor the role of surging demand as a contributor to the supply disruptions. Sponsored Content The Collaboration Disconnect Atlassian

Co-written by Citi’s global chief economist Nathan Sheets, a former U.S. Treasury undersecretary for international affairs, the bank’s analysis “gives a more complete, and intuitive, picture of the current situation.” While strains may ease in coming months, Citi said, “these supply-chain pressures are likely to be present through the end of 2022 and, probably, into 2023 as well.”

The Keil Institute’s Flows Tracker

In Germany, the Kiel Institute for the World Economy updates twice a month its Trade Indicator, which looks at flows across the U.S., China and Europe. Its latest reading Jan. 20 shows that along the key trading route between Europe and Asia, there are 15% fewer goods moving than there would be under normal times. The last time the gap was that large was in mid-2020, when many economies were reeling from initial lockdowns, Kiel said.

More recently, “the omicron outbreak in China and the Chinese government’s containment attempts through hard lockdowns and plant closures are likely to have a negative impact on Europe in the spring,” says Vincent Stamer, head of the Kiel Trade Indicator, said in a post last week. “This is also supported by the fact that the amount of global goods stuck on container ships recently increased again.”

Baltic Dry Index

The Baltic Dry shipping cost index indicates that costs for shipping materials such as iron ore have decline to where it started under Biden, despite West Texas Crude Oil spot prices begin considerably higher thanks to Biden’s anti-fossil fuel policies.

So as the world comes out of Omicron (and whatever COVID variant rises to take its place), we should see a normalization in the supply chain. And with Intel building a new chip factory in New Albany Ohio (aka, outskirts of Columbus). the supply chain woes will eventually subside.

Then again, there is always the Russia-Ukraine tension that may erupt into a disaster. I suggest that President Biden sent Hunter Biden to Moscow to negotiate on behalf of The Ukraine.

Ain’t it funky now. The US’s new ambassador to Russia?

The Nervous 19! Nineteen European Nations Have Negative 2Y Sovereign Yields (Only One Rate Increase Expected In 2022, ECB’s Stiff Monetary Policy)

Let’s see how The Federal Reserve is going to compete with other central banks when 19 European nations have negative 2-year sovereign yields. Call them the “Nervous 19.” Note that France has the lowest 2Y yield of the big 3 (France -0.664%, Germany -0.593% and Italy -0.092%).

True, The Fed’s reaction to COVID shutdowns was more extreme than the ECB’s reaction.

The ECB’s main refinancing rate is 0% and The Fed’s target rate is 0.25%.

Unlike the US with its 4 expected rate increases, the Eurozone is pricing in only 1 rate increase for 2022 … in October.

The ECB’s monetary policy is as stiff as French President Emmanuel Macron.

German Inflation Rises To 5.3% As 10Y Sovereign Yield ALMOST Rises To 0% (France Inflation 2.7% With 10Y Sov Yield At +0.25%)

The world has become a wild and wacky place since COVID was unleashed on an unsuspecting population. Since the massive spending spree by The Federal government in the USA coupled with extraordinary monetary stimulus from The Federal Reserve, US inflation has shot up to 6.8% YoY.

German is also having an inflation moment. With their CPI YoY running at 5.3%, faster than the anticipated 5.1%.

At least the German 10-year sovereign yield is ALMOST back to 0%.

France, on the other hand, is seeing inflation rising to 2.70% YoY.

While the French 10Y sovereign yield rose to 0.2531%.

France’s Macron certainly likes to have his photo taken as if he wants to go 10 rounds with UK’s Tyson Fury.

Turkish Lira Freefall Accelerates Despite Central Bank Intervention (Turkey’s 10Y Yield At 21.50%, Very Venezuela-Like With Inflation At 21.31%)

Turkey (the nation, not the bird) is now the Venezuela of Europe/Middle East, where insane government policies are destroying both nations.

(Dow Jones) — Turkey’s central bank intervened to arrest the plunge in the country’s currency, which lost as much as 8% of its value against the dollar on Friday in an ongoing crisis that is straining the country’s financial system.

The crash followed another decision by the central bank on Thursday to cut interest rates under pressure from President Recep Tayyip Erdogan, who favors lower rates as a part of a vision to grow the Turkish economy. Mainstream economists have urged the government to raise interest rates to control Turkey’s rising inflation, which reached more than 21% last month, according to official statistics.

The ongoing plunge is putting increasing pressure on ordinary Turks who have seen their savings evaporate, and adding to pressure on the banking system which has high levels of foreign-currency-denominated loans to repay within the next 12 months.

Wow. Turkey’s 10-year sovereign yield rose 42 BPS today to 21.590%. Turkey is looking like the Venezuela of Europe and the Middle East.

The Turkish sovereign curve in their home currency is humped.

But the Turkish yield curve (in US Dollars) looks more like the US Treasury actives curve.

The Turkish Lira is crashing against the US Dollar.

Meanwhile, the Central Bank of Turkey is cutting their repo rate as inflation soars. WTF???

I love this ZeroHedge headline: “Turkey Halts All Stock Trading As Currency Disintegrates, Central Bank Powerless To Halt Collapse.” Yes, it would help if Turkey’s Central Bank was RAISING rates rather than cutting them in order to stem the tide of inflation. It is like Turkey’s Central Bank is steering their ship of state INTO an F5 tornado.

Then again, US Fed chair Powell seems to be taking his time in cooling US inflation by … doing nothing.

Here is Turkish President Erdogan meeting with Venezuelan President Nicholas Maduro. “Together we can destroy both economies!”

Powell Says Foreign Buyers Distorting Yield-Curve Readings (Gold Rises On Powell Head Fake As US Dollar Declines)

Like John Belushi from The Blues Brothers, Fed Chair Jerome Powell is saying that the markets lackluster response in terms of bond yields to his “hawkish” announcement yesterday “isn’t his fault.”

(Bloomberg) Federal Reserve boss Jerome Powell appears unperturbed by the fact that longer-term bond yields remain low even as officials lay the ground work for tighter policy and inflation is ticking higher.

While the drop in longer-term rates may be viewed by some as indicative of where so-called terminal rates for U.S. policy might ultimately lie, Powell on Wednesday emphasized the impact of ultra-low yields in places like Japan and Germany in helping to keep them anchored. 

“A lot of things go into the long rates and the place I would start is just look at global sovereign yields around the world,” Powell said at a news conference following the Fed’s final scheduled policy meeting for the year, which saw officials ramp up the pace of stimulus withdrawal and boost predictions for rate hikes in 2022. The Fed Chair noted that rates on Japanese and German government bonds are “so much lower” than those on Treasuries and that with currency hedging taken into account American debt provides investors with a higher yield. “I’m not troubled by where the long bond is,” he said. 

This stands as something of a contrast to the view expressed back in 2005 by one of Powell’s predecessors. Back then, Fed chief Alan Greenspan described a decline in long-term bond yields even in the face of six policy rate increases as a “conundrum.” 

Or it could be that no one REALLY believes that Central Banks will ever cut interest rates, despite surging inflation.

The US Treasury 10-year yield dropped 7 basis points overnight and remains just south of 1.50%. The Eurozone remains below 1% (with Germany at -0.358% and France at -0.009% at the 10-year mark). Japan is at 0.039%. This is what Powell means by low global rates keeping US long-term rates down.

The 10-year Treasury term premium (measured before Powell’s head fake on raising rates) has returned to pre-Biden levels.

Meanwhile, global equities futures are up across the board (well, except for Mexico).

Gold rose on Powell’s “Tomorrow” talk while the US Dollar fell.

The Fed could have raised their target rate if they were REALLY interested in cooling inflation. The Taylor Rule remains at 14.94% while The Fed is stalled at 0.25%. Even if you don’t like the Taylor Rule, it still highlights how ridiculous Fed Stimulypto is.

Well, we do have a government-propelled economic recovery, but at a cost of declining REAL wages thanks to the highest inflation rate in 40 years.

Transitory? US Export Prices Soar By 18% YoY (Exporting Inflation To The World!)

I wonder if Biden’s Press Secretary Jen Psaki will argue that inflation is transitory … again?

Well, the US is exporting inflation to our trading partners. US Export Prices by end use rose 18% YoY.

Of course, with the Biden Administration shutting down energy pipeline and drilling, it is not surprising.

Then we have the advance retail sales numbers for October. Growing at 16.3% YoY with massive monetary stimulus still in play.

Then we have Federal Reserve Bank of St. Louis President James Bullard saying that the central bank should speed up its reduction of monetary stimulus in response to a surge in U.S. inflation.

You mean like what Mankiw’s specification of the Taylor Rule model suggests??