Financial Market Weekly

Transcription

1 Financial Market Weekly CHRISTOPHER S. RUPKEY, CFA MANAGING DIRECTOR CHIEF FINANCIAL ECONOMIST ECONOMIC RESEARCH OFFICE (NEW YORK) () 78-7 JULY The Bank of Tokyo-Mitsubishi UFJ, Ltd. A member of MUFG, a global financial group THERE IS SOME INFLATION, IF YOU LOOK WHERE TO FIND IT The wants to be confident that inflation will move up to its.% target in the next few years before they raise interest rates the first time. But there is some inflation out there already, if you know where to look for it. officials are exaggerating the risks that low inflation poses for the economy. Current inflation levels however you measure it do not pose risks to 7 % % to % funds Shaded areas represent recessions-everything else are the good times Lone bps hike to.7% to.% funds CPI services ex-energy inflation seems near-normal % to.% funds businesses or consumers; low inflation is not a reason to delay moving short-term interest rates up to.7% neutral starting right now. Inflation will move up over time once the economy hits full employment, that s one economic law that won t need to be repealed. Inflation is low now,.% for PCE in May,.% for CPI in June, but this is because gasoline prices fell November, December, January, so by the February report in, CPI will rise almost percentage points as the $ crude oil price effect washes out of the data. There is not no inflation looking at CPI.% Jun Inflation Year-to year % PCE. May core. CPI. June core.8 services prices ex-energy shown in the graph above. It was.% in June similar to prior periods when the started tightening, we mean started normalizing rates. The tightening that slows growth does not occur until the funds rate moves higher than neutral/normal (.7) in every cycle. 7 Financial Market Weekly July

2 There is quite a difference between PCE and CPI inflation where the core prices are. and.8 percent, respectively. Headline CPI inflation may rise above.% next February, but PCE inflation will not. One key reason for this is the difference in the accounting for medical care services prices. Technically, CPI just counts consumers outof-pocket medical care expenditures. PCE has a broader definition of medical care services including Medicare payments. PCE Medical care services are.% in May, and CPI Medical care services are higher at.%. There has always been a differential between the two, but now Obamacare may have something to do with it, doing what in part it was designed to do-rein in medical care costs. Because of the broader definition, PCE medical care services are a huge 9% share of core PCE inflation, where the % PCE Medical services 's preferred measure of inflation PCE sees less inflation because it accounts for medical services prices differently than CPI CPI Medical services ACA Obama Affordable Care Act lowers annual increases Medicare pays Medical Care Services Inflation PCE (left-scale) CPI (right-scale).% May November Recession Over First Hike from % Last Hike to. Average annual PCE inflation right-scale Last Cut to. June 9 Recession Over USA AA+ Financial Market Turbulence -yr Treasury yields Quarterly average yields like Blue Chip Survey forecasts black-lined below Taper tantrum share in core CPI is just 7.%. Core PCE inflation is running.% versus.8% for core CPI and a major reason is that Medical care services are running slower and have a bigger weight in PCE that keeps this inflation measure low relative CPI inflation and to the s.% target. The markets may fear Yellen will delay liftoff because inflation is low, but a leaked economic staff forecast shows the funds rate moving steadily higher over the next several years even with inflation remaining below.%. Our conclusion is that we expect the to raise rates in September and that the inflation outlook will not be an impediment to rates change. Q -yr.8% Q.% Q.%.% Jun Financial Market Weekly July

3 JOBLESS CLAIMS, BETTER, LOWER THAN ANY TIME IN RECORDED HISTORY The title above used to be slightly exaggerated. But this week it is true. Totally. Unemployment claims fell K to K in the July 8 week. The lowest in four decades: since November, 97. What were you doing in 97? We don t know what to say here-almost speechless. Every other since the 7s had a restrictive monetary policy, sky-high interest rates, with current employment market conditions this good. With first-time jobless claims this low. The under Yellen has not begun lifting rates from rock-bottom lows. A zero rates policy that continues to erode the net worth of savers in the economy who have worked their entire lives and stored their savings in the bank. Initial jobless claims below K means the labor market is at full employment Nov Hurricane Sandy Govt Good shutdown Friday Calif. holiday computers.% Jun unemployment rate Continuing unemployment claims moving to new lows s Unemployment rates K s First-time claims Jul 8 K Jul 8K Jul 9K Jun 7 8K I II III IV I Apr 7 K II III IV I II III IV I II III IV Payroll left axis Private payrolls Jun +K May +K Apr +89K July,.7 million S O N D J F M A M J J A S O N D J F M A M J J TREASURY CURVE STEEPENS ON SELL-OFF IN THE LONG END:.% -YRS The yield curve between -yrs and -yrs was +8 bps on Friday versus +8 bps last week. Flattening trend this week starting Monday, partly on shifting expectations of an earlier liftoff. St. Louis President Bullard said Monday September odds are better than %. Corporate supply was an issue as well. But -Jun Q Q Q Q Q -Yr Bond Yr Note Yr Note Yr Note month Libor eral Fund Rate s/s spread 7 9 -yr yields were still lower this week, closing at.% on Friday. No press conference at next week s meeting just the press statement with market wanting to see if balance of risks are now neutral. 9 bps 8 7 yr/yr Treasury curve flattens a little on September liftoff talk May Bunds above.% Jun Bunds above.7% Treasuries Held in Custody for Foreign Central Banks at the $bln, changes Mar -9. Apr +. May +.9 Jun +. Jul -8.7 Jul Outstanding $.98 tln Apr 9 meets Jul Bullard says Sept Sep hike now Next Supply: Th7-TBA s/s/7s Jul 8- $9bln vs $9bln Russia Ukraine? MAR APR MAY JUN JUL -7 F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J Financial Market Weekly July

4 FEDERAL RESERVE POLICY Selected assets and liabilities Sep The meets July 8-9 to consider its monetary policy. The labor market isn t quite where Chair Yellen wants it to be before liftoff so this meeting does not appear to be a live one. Unemployment is.% and she perhaps wants to see.%, the difference not being all that great one wouldn t think. Sometimes policy looks like it is spoofing the markets-setting a goal, achieving the goal, not taking action and lifting rates, then setting a new goal. Policymakers are trying to tell the public that raising rates will not be tightening, will not slow the economy or delay creation, that policy will still be extremely stimulative. But the public isn t buying this, thinking instead any rate hike even from zero is something that has the potential to slow growth and H.. statistical release 8** billions, Wednesday data -Jul -Jul 8-Jul -Jul pre-leh Factors adding reserves U.S. Treasury securities eral agency debt securities Mortgage-backed securities Primary credit (Discount Window)..... Term auction credit (TAF auctions)..... Asset-backed TALF.... Maiden Lane (Bear) Maiden Lane II (AIG)..... Maiden Lane III (AIG)..... Central bank liquidity swaps eral Reserve Assets month Libor % Factors draining reserves Currency in circulation Term Deposit Facility..... Treasury supplemental bill auctions..... Reserve Balances (Net Liquidity) Treasuries within days Treasuries to 9 days Treasuries 9 days to year Treasuries over -yr to years Treasuries over -yrs to years Treasuries over -years **September, 8 is pre-lehman bankruptcy of 9--8 risk a new recession. The s failure to raise rates since December 8 has led to this state of affairs-conditioned the public to think the worst about the economy seven long years after the economy s worst days are over. FOMC Press Releases We are hopeful that the September -7 meeting will be liftoff time. The bond market, the trend in yields, is nearly frozen waiting to Key Word Funds rate Statement patient Mar. it can be patient in removing its policy accommodation unwelcome fall in inflation diminished and now almost equals a rise of inflation measured May. policy accommodation can be removed at a pace that is likely to be measured risks to price stability goal have moved into balance measured Jun. With underlying inflation still expected to be relatively low, FOMC believes policy accommodation can be removed at a pace that is likely to be measured see if it will actually happen. Been burned before. If every meeting is a live one as Yellen has said, we aren t sure if they need to change the language in the press release a meeting ahead anymore to give the market a heads up. In Greenspan s last liftoff in June, the press statement language evolved from March, Get Ready, May, Get Set, June, Go. Staff June funds rate forecast-fourth quarter averages Staff -yr yields (June ) MUFG Staff -yr yields (July ) na na On Friday, there was a leak of c**nfidential information from the June meeting. The economic staff forecasts were put online accidentally. Oops. These documents were so s**cret they were not due to be released until the year. The interesting thing is that they see the funds rate averaging.% in Q which means, given the current daily effective funds rate is.%, that the economic staff is assuming a September liftoff. They also chime in with the Chair s view, really we have Bernanke to thank for this, that rates will move up only bps by Q to.%. Greenspan moved rates up bps per year over - and was later criticized, still to this day, for going too slowly. Our forecast assumes the will tire of normalizing rates at this slow every-other-meeting pace later on in. Incredibly, the staff doesn t see a.% funds rate until Q. Economics textbooks still say rates need to be at normal.7% levels when the economy is at full employment: full employment that even Yellen concedes is.% ( staff says.)-three-tenths away. That is, we think this is the last goal post, although some third-tier labor market data has made her uncertain about where the economy is in the business cycle, things like the Participation Rate, the Quits Rate in the Jolts data, and involuntary part-time employment. Stay tuned. We await the Committee s latest thoughts on liftoff at pm EDT Wednesday, July 9. Financial Market Weekly July

5 CORPORATES: HARLEY-DAVIDSON, UNITEDHEALTH GROUP, SYNCHRONY Corporate bond offerings were $. billion in the July week versus $9. billion in the July 7 week. On Wednesday, Intel sold $7 billion s/7s/s/s. It priced $. billion.7% -yrs (m-w +bp) at bps (A/A+). The computer chipmaker company will use the proceeds to help fund the takeover of Altera. Corporate bonds (-yr Industrials rated A) were bps above -yr Treasuries on Friday versus 9 bps last Friday. Weekly Corporate Issuance USFIIVST<Index> ($Bln) Spread: A-Rated -Yr Industrials versus -Yr Treasuries (BPS) BPS SPREAD: BAA-RATED CORPORATES TO -YR GOVTS Sep 8 LEH MER AIG credit freeze Aug8 bps J F M A M J J A S O N D J F M A M J J 7 Shaded areas recessions Recession Dec 7 Jun bps in June (.% vs.%) TREASURY MARKET OUTLOOK EXPECTED -YR - WEEK TRADING RANGE.% to.% Week s Range HIGH 98-8.% -YR Friday, July, quiet end to week, most of rally was Thursday with Dow industrials down 9 points LOW 97-9.% Tuesday, July, talk early Intel to sell $ billion corporate bonds that would not be swapped MAR RECENT TREND IN -YR GOVERNMENT NOTES (N.Y. CLOSING) Apr K 7 APR Apr technical selling long-end Greece? Apr 9 meets 7 MAY Michigan sentiment 9.9 to 88. Jun 8K Jun Bunds above.7% Dec, QE Govts.% unemployment trigger for rate hike -yr closes.7% 8 9 JUN Jul K 9 JUL Jul 9 New Greek Proposal Financial Market Weekly July

6 Analyst Certification The views expressed in this report accurately reflect the personal views of Christopher S. Rupkey, the primary analyst responsible for this report, about the subject securities or issuers referred to herein, and no part of such analyst's compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed herein. The information herein is provided for information purposes only, and is not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. Neither this nor any other communication prepared by The Bank of Tokyo-Mitsubishi UFJ, Ltd. (collectively with its various offices and affiliates, "BTMU") or should be construed as investment advice, a recommendation to enter into a particular transaction or pursue a particular strategy, or any statement as to the likelihood that a particular transaction or strategy will be effective in light of your business objectives or operations. Before entering into any particular transaction, you are advised to obtain such independent financial, legal, accounting and other advice as may be appropriate under the circumstances. In any event, any decision to enter into a transaction will be yours alone, not based on information prepared or provided by BTMU. BTMU hereby disclaims any responsibility to you concerning the characterization or identification of terms, conditions, and legal or accounting or other issues or risks that may arise in connection with any particular transaction or business strategy. While BTMU believes that any relevant factual statements herein and any assumptions on which information herein are based, are in each case accurate, BTMU makes no representation or warranty regarding such accuracy and shall not be responsible for any inaccuracy in such statements or assumptions. Note that BTMU may have issued, and may in the future issue, other reports that are inconsistent with or that reach conclusions different from the information set forth herein. Such other reports, if any, reflect the different assumptions, views and/or analytical methods of the analysts who prepared them, and BTMU is under no obligation to ensure that such other reports are brought to your attention. Copyright Bank of Tokyo-Mitsubishi UFJ All Rights Reserved The articles and opinions in this publication are for general information only, are subject to change, and are not intended to provide specific investment, legal, tax or other advice or recommendations. The information contained herein reflects the thoughts and opinions of the noted authors only, and such information does not necessarily reflect the thoughts and opinions of MUFG or its management team. We are not offering or soliciting any transaction based on this information. We suggest that you consult your attorney, accountant or tax or financial advisor with regard to your situation. Although information has been obtained from sources we believe to be reliable, neither the authors nor MUFG guarantee its accuracy, and such information may be incomplete or condensed. Neither the authors nor MUFG shall be liable for any typographical errors or incorrect data obtained from reliable sources or factual information. About MUFG Union Bank and MUFG Americas Holdings Corporation MUFG Union Bank, N.A., is a full-service bank with offices across the United States. We provide a wide spectrum of corporate, commercial, retail banking and wealth management solutions to meet the needs of customers. The bank also offers an extensive portfolio of value-added solutions for customers, including investment banking, personal trust, capital markets, global treasury management, transaction banking and other services. With assets of $.7 billion (USD), as of March,, the bank has strong capital reserves, credit ratings and capital ratios relative to peer banks. MUFG Union Bank is a proud member of the Mitsubishi UFJ Financial Group (NYSE: MTU), one of the world s largest financial organizations with total assets of approximately 8 trillion (JPY) or $. trillion (USD) as of March,. MUFG Americas Holdings Corporation, the financial holding company and MUFG Union Bank, N.A., have corporate headquarters in New York City. Financial Market Weekly July