Financial Market Weekly

Transcription

1 Financial Market Weekly CHRISTOPHER S. RUPKEY, CFA MANAGING DIRECTOR CHIEF FINANCIAL ECONOMIST ECONOMIC RESEARCH OFFICE (NEW YORK) (212) JANUARY The Bank of Tokyo-Mitsubishi UFJ, Ltd. A member of MUFG, a global financial group BOND YIELDS KEEP FALLING AND SO DOES THE FEDERAL BUDGET DEFICIT Trillion dollar deficits gone with FY at $483.3 billion or 2.8% of The budget deficit - FY 12 $bln 1.89 keeps falling and the -1 Gray bars 6.8% recessions nominal FY 9-1 $1.41 tln economy (the turnover 1.% -1 of of dollars/activity each FY year) keeps rising so 4.1% -9 Aug Jan 9 President the deficit s burden on CBO estimates, % -7 FY14= $6bln 2.9% Obama takes the country and on its FY15= $469bln 2.6% office -6 FY16= $556bln 2.9% resources continues Reagan to fade. It should stay Out -4 FY83 Jan % -$154.9b this way for some time - FY even if interest rates FY 4 Receipts - FY % $3.2tln +8.9% and financing costs do 4.7% Outlays rise in coming years. $3.4tln +1.4% Deficit Reagan In Crunch time does not $483.3bln Jan $7.2b start until sometime after 225. In 225, the 8 million-odd Fiscal Year (12-mo ending December ) $487.4 bln baby boomers will be about 6 to 8 years of age and will need increasing amounts of government aid and services: retirement benefits and health care. The Federal budget deficit was released for December this week. The deficit was $483.3 billion in FY and is now running $487.4 billion in the twelve months ending December. In the first quarter of FY (Q4 ) Federal government outlays are running faster than they were in the prior year by rising 9.2% to $916.1 billion. Outlays rose just 1.4% in the full year FY to $3.5 trillion. 1

2 Much of the 9.2% pickup in spending is due to offsetting receipts being lower. The payments to the U.S. Treasury from the government sponsored enterprises, Fannie Mae and Freddie Mac, were less that they were a year ago. This explains about $3 billion of the $77.1 billion 9.2% rise in budget outlays in Q4 from Q4. There are timing differences quarter-to-quarter over the year, but it does look like some spending categories are up significantly. Medicare is up 12.1% and Medicaid is up 23.5% from year ago levels. The Commerce Department, Education, Environmental Protection, International Assistance and NASA grew double-digits the last year. There were some big declines though with state unemployment benefits down 46.3% or $6.4 billion to $7.4 billion in Q4. Food stamps fell 1.9% to $19.4 billion. Interest on the public debt is also down 5.8% to $118.5 billion in Q4. The new budget is about to be released for FY216 and the Office of Management and Budget (OMB) and the Congressional Budget Office (CBO) will be updating their forecasts and outlooks over the next few months. Both the CBO and OMB had forecasts last summer of 4% 1-yr bonds by 217 that would push up interest on the public debt with the deficit approaching $1 trillion again by 224, even if the size relative to still looks manageable. Federal Government Spending ($bln) Fiscal Fiscal Where to cut? 1 Qtr FY15 1 Qtr FY14 Year Year Full Year Q4 14-Q4 14 Q4 13-Q4 13 Changes % chg FY TOTAL BUDGET OUTLAYS ,4.199 Legislative Judicial Agriculture Food Stamps Child Nutrition Commerce Defense Military Personnel Operation Maintenance Procurement Research Development Military Construction Education Energy Health Human Services Medicare Medicaid States Grants Homeland Security Housing Urban Development Interior Justice Labor State Unemployment Benefits State Transportation FAA Federal Highway Admin Treasury TARP IRS Earned Income Credit Child Tax Credit Interest on Public Debt Veterans Affairs Corps of Engineers Other Defense Civil Programs Environmental Protection Exec. Office of President International Assistance NASA National Science Foundation Personnel Management Small Business Admin Social Security Admin Retirement Benefits Federal Disability Payments Other Independent Agencies CBO: ECONOMIC PROJECTIONS, INTEREST RATES AND BUDGET DEFICITS Real Unemployment day T-bills yr Govts Deficit $bln Deficit %

3 JOBLESS CLAIMS BACK ABOVE K FULL EMPLOYMENT LINE Unemployment claims jumped back above K in the January 1 week to 316K. This should be the highest not seasonally adjusted cold winter layoffs week, and with 528K claims filed it is nearly as high as last year s 534K. We aren t sure why that would be, the economy is much better than a year ago; it might have something to do with a big swing state like California. We aren t expecting this indicator to tell us when the labor market has healed, as it has healed already. But the sideways movement continues and makes us wonder if the payroll jobs numbers might slow somewhat Initial jobless claims below K means the labor market is at full employment Nov 1 Hurricane Sandy Govt Good shutdown Friday Calif. holiday computers 5.6% Dec unemployment rate Continuing unemployment claims move sideways like last Winter s Unemployment rates 3 s First-time claims Jan 1 316K Jan 3 297K Dec K Dec 2 281K I II III IV I 212 Apr K II III IV I II III IV I II III IV Payroll jobs left axis Private payrolls Dec +24K Nov +345K Oct +255K Jan 3, million M A M J J A S O N D J F M A M J J A S O N D J TREASURY YIELD CURVE FLATTENS: FED LIFTOFF, OIL, EUROPE, GREECE The yield curve between 2-yrs and 1-yrs was +135 bps on Friday versus +139 bps last week. The 1.86% 1-yr intraday yield low from October 15 was made the day retail sales fell.3%. The 1.86% level broke on Wednesday when retail sales fell.9%. The new yield low was made on Thursday during 31-Dec Q1 Q2 Q3 Q4 Q Yr Bond Yr Note Yr Note Yr Note month Libor Federal Fund Rate s/1s spread the Swiss franc turmoil which reinforced the U.S. as a safe haven perhaps. Maybe some of the Europe news gets cleared out soon: January 22 ECB meeting, and January 25 Greek election. 2yr/1yr Treasury curve flattens further on crude oil and Greece 22 Sep 17 bps FOMC 21 higher rates Sep 9 1-yr close above 2.% SEP Oct 8 Fed minutes Global slowdown risk Oct 7 IMF Oct 29 growth FOMC risk hawkish FOMC minutes Nov 25 new 2-yr Nov 28 OPEC oil Dec K jobs Jan 6 Oil under $ Next Supply: Th1-22TBA 2s/5s/7s Jan Dec 31 bps OCT NOV DEC JAN A Treasuries Held in Custody for Foreign Central Banks at the Fed $bln, changes Aug +4.5 Sep +5. Oct -62. Nov +9.8 Dec -2. Jan S O N D J 212 Russia Ukraine? F M A M J J A S O N D J Jan 14 Outstanding $2.962 tln -62. F M A M J J A S O N D J 3

4 FEDERAL RESERVE POLICY The Fed meets January to consider its monetary policy. The Fed said they could be patient at the December meeting when it comes to hiking rates. The unemployment rate was higher at 5.8% then, but now the unemployment rate is 5.6%. Where was the unemployment rate the last two times they raised rates after recessions? Unemployment was 6.6% after the recession, and 5.6% after the 1 recession. It looks like it is time to raise rates. The market does not think it is time. Market yields keep falling and are well under where the Fed forecasts rates will be in the next few years. Market yields are dropping on falling crude oil prices, which signals deflation to some investors, and events over in Europe perhaps. We aren t sure whether the forward curve for short-term rates will influence the Fed, although it won t be making new forecasts until the March meeting. When they do hike rates the first time we assume they will raise rates steadily by 25 bps at every other meeting. With 8 meetings per year this is bps of rate hikes annually. The median of the December Fed forecasts said the Fed funds rate Selected Fed assets and liabilities Sep 1 Fed H.4.1 statistical release 8** billions, Wednesday data 14-Jan 7-Jan 31-Dec 24-Dec pre-leh Factors adding reserves U.S. Treasury securities Federal 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 Federal Reserve Assets month Libor % Factors draining reserves Currency in circulation Term Deposit Facility..... Treasury supplemental bill auctions..... Reserve Balances (Net Liquidity) Treasuries within 15 days Treasuries 16 to 9 days Treasuries 91 days to 1 year Treasuries over 1-yr to 5 years Treasuries over 5-yrs to 1 years Treasuries over 1-years **September 1, 8 is pre-lehman bankruptcy of Data-dependent is not relevant when rate hikes 5 months away Fed funds rate 1.25 at end of means liftoff in March, and 25 bps every other meeting, June, Sep, Dec Dec FOMC forecasts to % end of 2.625% end of % end of Eurodollar futures Eurodollar futures.69% % % % % Long run would be 1.25% in December which means they need to hike at the March meeting to get the funds rate in place by year-end. A majority 13 out of 17 members see the Fed funds rate at 1% or higher by the end of, and this would require a June meeting start date. The economy is stronger than they expected when these forecasts were made and the data suggest a January rate hike is appropriate. Policymakers are too cautious or perhaps fearful of making a mistake, but the mistake they are making in their caution is telegraphing to the markets how serious they think a first rate hike is. Federal Reserve s of years past did not think the first rate hike was taking away the punch bowl; it was not a move that was going to slow the economy. Short-term rates remain stimulative for the economy until they rise to neutral which the Fed thinks is around 3.75%. It is hard to make the case for zero interest rates 6 years after the recession ended. The economy is either at full employment or close enough for the Federal Reserve to start the process of normalization %

5 CORPORATE BONDS: PEMEX, VALEANT, JOHN DEERE, ECOLAB, AIG Corporate bond offerings were $32.6 billion in the January 16 week versus $27.8 billion in the January 9 week. On Thursday, Valspar Corp. sold $ million 1s/3s. It priced $ million 3.3% 1-yrs (m-w +25bp) at 155 bps (Baa2/BBB). The coatings and specialty chemical products company will use the proceeds for general corporate purposes including repaying part of its commercial paper borrowings and $ million 5.1% notes due in August. Corporate bonds (1-yr Industrials rated A2) were 91 bps above 1-yr Treasuries on Friday versus 89 bps last Friday. Weekly Corporate Issuance USFIIVST<Index> ($Bln) Spread: A2-Rated 1-Yr Industrials Sep bln versus 1-Yr Treasuries (BPS) 16 Mar bln BPS SPREAD: BAA-RATED CORPORATES TO 3-YR GOVTS Sep 8 LEH MER AIG credit freeze Aug8 265 bps OND J FMAMJ J ASOND J FMAMJ J ASOND J FMAMJ J ASONDJ Shaded areas recessions Recession Dec 7 Jun bps in December (4.74% vs 2.83%) TREASURY MARKET OUTLOOK RECENT TREND IN 1-YR GOVERNMENT NOTES (N.Y. CLOSING) Oct 1-238pts Oct 29 Fed slack not significant Oct pts Nov K jobs Nov 25 Week s 1-YR Oct % 2.2 Retail Good 5-yr Range sales auction -.3% (1.86 HIGH % 2.1 intraday) Nov 28 Dec 12, 212 Fed QE3 Govts 6.5% unemployment trigger for rate hike 1-yr closes 1.7% EXPECTED 1-YR 2-3 WEEK 2.4 TRADING RANGE Dec % to 2.3% Friday, January 16, briefly, CPI -.4%, deflation for a second month, following Swiss franc rally Thursday OPEC no cut Dec 12 Oil points Dec 29 Greece Jan 6 Crude breaks $ Jan 5 Greek exit talk LOW % Monday, January 12, start of the week lows SEP 26 3 OCT NOV DEC Jan 15 Swiss franc turmoil JAN

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 $16.7 billion (USD), as of March 31,, 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 258 trillion (JPY) or $2.5 trillion (USD) as of March 31,. MUFG Americas Holdings Corporation, the financial holding company and MUFG Union Bank, N.A., have corporate headquarters in New York City. 6