Month: July 2014

“More of the same,” should summarize today’s FOMC statement. There will be no press conference or refresh of the ‘dot plot’ economic projections. The Fed is expected to continue to taper by $10 billion with confirmation that the “growth meme” is playing out just as they projected (especially after today’s GDP print). Goldman believes the focus will be on the jobs ‘dashboard’ and recent inflation data enables the dovish Fed to argue recent moves were noise and stay easier for longer. The downside risk (for markets) may be that Fed hawks will likely have little luck in altering the way forward guidance is employed by the Fed (and chatter over a Fisher dissent is possible).

 

RanSquawk’s FOMC PREVIEW

• Fed expected to taper by USD 10bln again, taking monthly bond buys down to USD 25bln from USD 35bln
• Yet again, all focus on rate pathway and projections for the first Fed Fund Rate (FFR) hike by Fed officials
• There will be no press conference from Fed Chair Yellen or release of Summary of Economic Projections alongside the decision

TAPERING: The latest announcement from the Fed which coincides with a slew of key economic data such as an initial estimate of growth in the Q2 and the monthly jobs report release by the BLS is expected to result in the Federal Reserve members agreeing on another USD 10bln taper. Likelihood of a larger USD 15bln taper are rather small, as this would almost inevitably risk resulting in a repeat of the “taper tantrum” price action observed last year.

RATES: The accompanying statement is likely to be tweaked to emphasise not only the pickup in growth, but also the subdued and contained nature of inflation expectations. At the same time, members of the Federal Reserve board will continue to actively look at various price measures including wage inflation and debate on the best method for raising rates. As such, despite a potentially more upbeat statement, Fed hawks will likely have little luck in altering the way forward guidance is employed by the Fed, with Fed Fund Rate futures pricing in the first rate hike in June 2015. There is however a risk as noted by analysts at JP Morgan that changing description of unemployment from “elevated” to “somewhat elevated” would allow for a more gradual pivot toward recognising progress toward full employment mandate and therefore could pose a risk to current projected rates path. No one on the FOMC is expected to dissent this time although there is an outside chance that Fisher could, after recently saying that waiting a “considerable time” for the first rate hike implies too long a wait.

MARKET REACTIONS: Given the expectation of a more upbeat picture on the employment situation, there is a risk that that the decision could be interpreted as slightly more hawkish as the Fed move nearer to full employment. At Yellen’s semi-annual testimony, the Fed chair suggested rates could rise sooner than is currently priced in if the employment situation improves and hence there is a risk of USD strength, downside in Treasuries, steepening of the Eurodollars curve, and downside in equity prices. Conversely if the FOMC continue to state that unemployment remains elevated, then the statement will likely be viewed as more dovish and could weigh on the USD. It is worth noting that due to the close proximity of this decision to the release of US GDP and Nonfarm Payrolls that any market reaction could be relatively muted.

 

Goldman expects very little change to the FOMC statement.

The FOMC might choose to upgrade the language on growth in economic activity somewhat, and it might also strengthen the language on labor market indicators a touch in recognition of the strong June employment report.

 

For the most part, however, recent data have supported the characterization of current conditions in the June statement. In particular, the softer June CPI print likely reinforced the Committee’s decision to downplay the firmer inflation prints seen from March to May, and weak housing starts and new home sales reports have likely reinforced concern about the housing sector.

But suggest the focus will be on the jobs dashboard:

 

Credit Suisse is a little more hawkish:

The easing should end with the Fed’s final QE3 purchases in October. And if current economic and price trends continue, we expect the Fed to adhere to its forward guidance and reduce the degree of policy accommodation.

 

An adjustment in accommodation probably still is far from imminent, but we now expect the Fed’s first interest rate hike to come in Q3 2015 rather than our earlier expectation of Q4 2015.

 

In its June 18 policy statement, the FOMC “reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate,” and it will probably do the same on July 30. In fact, we look for few changes in language from the FOMC today.

 

Assuming continued recovery in the labor market, and modest, though building, price pressures, the Fed will be forced to change its message in the months ahead, explaining that an “appropriate” degree of policy accommodation may well become a “lessened” degree of accommodation.

via Zero Hedge http://ift.tt/1xA8pbp Tyler Durden

“More of the same,” should summarize today’s FOMC statement. There will be no press conference or refresh of the ‘dot plot’ economic projections. The Fed is expected to continue to taper by $10 billion with confirmation that the “growth meme” is playing out just as they projected (especially after today’s GDP print). Goldman believes the focus will be on the jobs ‘dashboard’ and recent inflation data enables the dovish Fed to argue recent moves were noise and stay easier for longer. The downside risk (for markets) may be that Fed hawks will likely have little luck in altering the way forward guidance is employed by the Fed (and chatter over a Fisher dissent is possible).

 

RanSquawk’s FOMC PREVIEW

• Fed expected to taper by USD 10bln again, taking monthly bond buys down to USD 25bln from USD 35bln
• Yet again, all focus on rate pathway and projections for the first Fed Fund Rate (FFR) hike by Fed officials
• There will be no press conference from Fed Chair Yellen or release of Summary of Economic Projections alongside the decision

TAPERING: The latest announcement from the Fed which coincides with a slew of key economic data such as an initial estimate of growth in the Q2 and the monthly jobs report release by the BLS is expected to result in the Federal Reserve members agreeing on another USD 10bln taper. Likelihood of a larger USD 15bln taper are rather small, as this would almost inevitably risk resulting in a repeat of the “taper tantrum” price action observed last year.

RATES: The accompanying statement is likely to be tweaked to emphasise not only the pickup in growth, but also the subdued and contained nature of inflation expectations. At the same time, members of the Federal Reserve board will continue to actively look at various price measures including wage inflation and debate on the best method for raising rates. As such, despite a potentially more upbeat statement, Fed hawks will likely have little luck in altering the way forward guidance is employed by the Fed, with Fed Fund Rate futures pricing in the first rate hike in June 2015. There is however a risk as noted by analysts at JP Morgan that changing description of unemployment from “elevated” to “somewhat elevated” would allow for a more gradual pivot toward recognising progress toward full employment mandate and therefore could pose a risk to current projected rates path. No one on the FOMC is expected to dissent this time although there is an outside chance that Fisher could, after recently saying that waiting a “considerable time” for the first rate hike implies too long a wait.

MARKET REACTIONS: Given the expectation of a more upbeat picture on the employment situation, there is a risk that that the decision could be interpreted as slightly more hawkish as the Fed move nearer to full employment. At Yellen’s semi-annual testimony, the Fed chair suggested rates could rise sooner than is currently priced in if the employment situation improves and hence there is a risk of USD strength, downside in Treasuries, steepening of the Eurodollars curve, and downside in equity prices. Conversely if the FOMC continue to state that unemployment remains elevated, then the statement will likely be viewed as more dovish and could weigh on the USD. It is worth noting that due to the close proximity of this decision to the release of US GDP and Nonfarm Payrolls that any market reaction could be relatively muted.

 

Goldman expects very little change to the FOMC statement.

The FOMC might choose to upgrade the language on growth in economic activity somewhat, and it might also strengthen the language on labor market indicators a touch in recognition of the strong June employment report.

 

For the most part, however, recent data have supported the characterization of current conditions in the June statement. In particular, the softer June CPI print likely reinforced the Committee’s decision to downplay the firmer inflation prints seen from March to May, and weak housing starts and new home sales reports have likely reinforced concern about the housing sector.

But suggest the focus will be on the jobs dashboard:

 

Credit Suisse is a little more hawkish:

The easing should end with the Fed’s final QE3 purchases in October. And if current economic and price trends continue, we expect the Fed to adhere to its forward guidance and reduce the degree of policy accommodation.

 

An adjustment in accommodation probably still is far from imminent, but we now expect the Fed’s first interest rate hike to come in Q3 2015 rather than our earlier expectation of Q4 2015.

 

In its June 18 policy statement, the FOMC “reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate,” and it will probably do the same on July 30. In fact, we look for few changes in language from the FOMC today.

 

Assuming continued recovery in the labor market, and modest, though building, price pressures, the Fed will be forced to change its message in the months ahead, explaining that an “appropriate” degree of policy accommodation may well become a “lessened” degree of accommodation.

via Zero Hedge http://ift.tt/1xA8pbp Tyler Durden

Treasury yields are surging across the complex with the long-end steepening notably. Today’s 10.5bps jump in 10Y yields is the biggest percentage shift since early November 2013… and a significant tail in the 7Y auction just made things worse.

The long-end is suffering most…

 

But the selling is across the complex…

 

It is unclear how much of today’s bond sell-off was a factor in the just concluded 7 Year Treasury offering, but what is clear is that unlike yesterday’s strong 5 Year issuance, today’s auction was disappointing, starting with the High Yield of 2.25%, the highest since April’s 2.32% and tailing the 2.24% When Issued by 1 bp. And while the Bid to Cover was a slight improvement from last month’s 2.435 rising to 2.581, it was the internals where we saw a flight of Direct bidders, who only took down 15.2% of the auction. This was the lowest allotment since July 2012. The offset: a pick up by Indirects from 40.6% to 47.4% while Dealers ended up with 37.4% of the auction.

Regardless of the auction one thing is clear, the shorting of bonds today will continue until the squeeze, as has been the case for all of 2014, returns.

via Zero Hedge http://ift.tt/1xA8nAp Tyler Durden

If Venezuela is the case study of a country in the late stages of transition into a socialist utopia, then France is the clear runner up. The most recent case in point, aside from the already sliding French economy, whose recent contraction can be best seen be deteriorating PMI data…

… which hints at the dreaded “triple dip” recession, nowhere is the economic collapse in France more evident than in its housing market which as even Bloomberg admits, citing industry participants, is now “in total meltdown.“

The reason? The belief of the socialist president that a few economists know better than the overall market, especially when the sanctity of the “fairness doctrine” and the greater good is to be upheld at all costs. To wit: “French President Francois Hollande’s government may have made a housing slump worse, pushing the construction market to its lowest in more than 15 years. Housing starts fell 19 percent in the second quarter from a year earlier, and permits — a gauge of future construction — dropped 13 percent, the French Housing Ministry said yesterday.“

The reason: a law that was passed this year that seeks to make housing more affordable by capping rents in expensive neighborhoods. To protect home buyers, the law also boosted the number of documents that must be provided by sellers, leading to a decline in home sales and longer transaction times.

Of course, it didn’t take long for the government to realize its mistake and to scramble to adjust the rules, but “the damage is done, threatening France’s anemic recovery that’s already lagging behind those of the U.K. and Germany.”

Enter the soundbites: “Construction is in total meltdown,” said Dominique Barbet, an economist at BNP Paribas in Paris. “It’s difficult to see how the new housing law is not to blame.”

Barbet says the drop in home building lopped 0.4 points off France’s gross domestic product growth last year and cut the pace of expansion by a third in the first quarter. Expenditure in the sector was at its lowest level ever as a portion of total real GDP in the first quarter at 4.7 percent, down from 6.3 percent in the first three months of 2007, he estimates.

Sales of new-build homes fell 5 percent in the first quarter from a year earlier and are down by about a third compared with their level in 2007, according to Credit Agricole.

It’s not just the government to blame, though: central planning, which has made the rich richer beyond their wildest dreams has pushed prices near all-time highs in the Paris are, making real estate inaccessible to all but the richest, and leading a crunch in new construction and the associated spending. This is further impacted by the country’s record jobless claims, which in turn is leading to a plunge in sales and profits at building material and electrical equipment makers including Cie. de Saint-Gobain SA, Lafarge SA, Vicat SA, Schneider Electric SE, Legrand SA and Rexel SA.

Enter more soundbites: “Current figures are worrying and will be disastrous if nothing is done; clients of the building sector are sounding the alarm bell,” Pierre-Andre de Chalendar, chief executive officer of Saint-Gobain, said this month. “It’s as though everything is being done to discourage investment in housing.”

Alternatively, it is as if everything is done by a socialist government to boost the economy. The outcome almost without fail is the same. Alain Dinin, chairman of property company Nexity (NXI), concurs.

“The French residential real estate market has been in a particularly tough situation,” he told investors after last week posting a drop in first-half revenue. “A host of complex regulations have been introduced and, most importantly, buyer sentiment has suffered. All those factors have combined to slow the already historically-low rate of new homes entering the market.”

The direct threat of this housing collapse is that the country’s already lowered GDP forecast may end up sliding to 0%, if not negative:

Reduced home construction is threatening Hollande’s goal of increasing GDP by 1 percent this year. The International Monetary Fund slashed its 2014 French growth forecast to 0.7 percent this month from 1 percent previously. The IMF expects expansions of 1.9 percent in Germany and 3.2 percent in the U.K., as well as growth of 1.2 percent in Spain.

 

Hollande, who has been trying to revive an economy that has barely grown in two years, is grappling with a record 3.3 million jobless claims and an approval rating that’s at the lowest level ever for any French president.

 

Construction has the advantage of being an industry that’s easy to revive and lifts the broader economy by leading to the hiring of less-skilled workers and spurring private investment, economists say.

 

“A recovery in construction would help the rebound but it won’t happen without government initiative,” said Ludovic Subran, chief economist at Euler Hermes in Paris. Building is “a sector where the impact on growth and employment is felt immediately.”

Sadly, the underlying problem is one which even China has figured out has no solution, and where a housing sector saddled with insurmountable debt has only one short-term “fix” – even more debt to boost sales for another quarter or two, while kicking the can of the inevitable collapse a little further, assuring that the plunge, when it comes, will be worse than anything experienced.

In France, it is no different, and the “solution” is to do more of what has not worked:

State-controlled financial institution Caisse des Depots is starting talks with public and private investors to raise funds to build several tens of thousands homes in the greater Paris region, where the lack of available land and a rising population has boosted housing prices.

 

“If we invest public money and funds from the Caisse, we must lure private investors,” Caisse des Depots CEO Pierre-Rene Lemas said in a July 6 interview. “Some talks are starting with a view to conclude by the end of the year.” Sylvia Pinel, who replaced former housing minister Cecile Duflot in April, has also introduced measures to revive the construction market, and cut some rules to reduce construction costs.

At the end of the day, the only thing left is what has so far prevented the world from imploding since the Lehman collapse on the back of trillions in central bank liquidity: preserving public confidence at all costs.

“What is important for France is to reassure people, to reassure everyone who wants to invest and to restore confidence,” Lafarge CEO Bruno Lafont said in an interview with Bloomberg Television last week, calling for simpler rules, lower construction costs, and incentives for institutional investors to invest more in housing.

But, as Bloomberg summarizes it best: “It may be too little too late.“

via Zero Hedge http://ift.tt/1ttDeke Tyler Durden