Peanut Butter Jelly TimeIt’s Peanut Butter Nervous Time!

Global bond rates dropped to their lowest levels of the year Wednesday, as central bankers signaled their determination to jolt the world’s largest economies out of their malaise…The yield on the 10-year U.S. Treasury dropped to as low as 2.523%, its lowest level in more than six months…In the U.S., despite rock-bottom interest rates, housing activity remains relatively depressed, companies have yet to pick up hiring and inflation has remained worryingly low.”  Bonds have done pretty well so far this year, surprising basically everybody, as investors seek “safe places to put cash as they fret about the flagging U.S. economy.”  That makes this seem even worse: Pimco “recorded net outflows of ($30.0 billion) between January and March 2014.”  Meanwhile, the market has David Tepper shakin’ in his boots (alt): “on Wednesday he struck a cautious note, worried about slow U.S. growth and the risk of a global economy that will worsen unless the European Central Bank takes aggressive action (which actually looks somewhat likely)…’The market is kind of dangerous right now.’…’I think it’s nervous time.’”  Journalists don’t seem to agree with Mr. Tepper: “Oh, sure there’s the selloff in biotech and tech stocks, and there’s the geopolitical threats of an unraveling in Ukraine.  But in general, those things just aren’t getting much of a pulse out of the market…the market is boring.”  Meanwhile, “U.S. homebuilder sentiment slipped unexpectedly in May to its lowest in a year with a darkening view of the current sales environment for single-family homes outweighing a modest pickup in expectations for activity in the next six months…builders have consistently raised concerns about stiff credit conditions for buyers and tight supply of building lots and labor.  In May, they said financial insecurity among potential buyers was a culprit.”  Meanwhile, Trulia takes a closer look at the housing market and finds that among the most expensive cities, “the housing stock is growing slowly, even though these are the places where it would be most profitable to build.  That’s because these cities tend to have geographical constraints that prevent further sprawl, and have adopted zoning codes that make it difficult to add more housing by building density.”  This is pretty much what’s happening in London as well: “tight planning rules and a shortage of land mean that relatively little new housing is being built, even as a booming economy and spectacular population growth create lots of demand for it…As a result, in London, though prices are 25% above the 2008 peak, construction is still about 20% below it…That suggests that unless there is more construction, prices in London and the south east will continue to climb, at least as long as interest rates stay low, the population keeps growing and there isn’t another financial crisis.”  Also, here’s one important difference between the auto and housing markets: “Both of these markets have had some favourable underlying demand-side pressures building in the last few years…Yet access to car loans has been relatively less constrained than access to single-family mortgages.”  Meanwhile, the property bubble in China is really confusing, but here’s what you should know: 1) “Overall credit has grown from about 120 percent to 190 percent of GDP in just the past five years,” 2) “Local incomes can’t support rents or down payments for [sleek inner-city digs].  Instead, wealthy Chinese are buying up multiple properties as investments, while simultaneously investing in the shadow banks that finance this property-building to begin with,” 3) As the property bust starts to settle in, the government is gonna let the system crumble a little, 4) But they won’t let it completely collapse,  5) Even if real estate investment drops significantly in China, global GDP will only take a minor hit (says the IMF),  and 6) But there are two groups that will likely feel a bigger impact: countries exporting raw materials to China, and Europe, where a devalued yuan could lead to deflation (although you could make the same argument for United States I think?).  All of this is especially confusing for Bank of America: “A spokesman for Bank of America said that the don’t-worry view is from the bank’s macroeconomic team while the do-worry view is from the corporate-strategy team.  ‘These two have been known to take different views,’ the spokesman said.  ‘It’s our effort to give a 360- (degree) view.’”

Mario Draghi Better Get His Game Face On

“A crucial new piece of information now makes it virtually certain that the ECB will act in June.  The case for waiting…was that a burgeoning recovery would gradually start to counter disinflationary forces by eroding excess capacity…But today’s report from Eurostat shows that growth in the first quarter of 2014 was sluggish…Output across the 18-country zone rose by only 0.2%, much lower than the 0.4% expected by the markets which was roughly the central projection made by the ECB in its previous forecasts.”  Here’s 5 things you should know about economic growth in the Eurozone: 1) The recovery is fragmented; unequal, 2) Low inflation, even outright deflation, isn’t the end of the world, 3) Growth in the UK and the Eastern fringe (Hungary and Poland) looks pretty good, 4) The ECB basically has no excuse not to pull on its monetary levers, and 5) What levers?  The ECB seems somewhat interested in doing some QE type stuff, but they basically don’t have a market for bonds backed by the credit of a singular Eurozone entity.  This is why most people expect the ECB (alt) to 1) boost lending to small and medium sized businesses (SMEs) in the Eurozone by charging banks to keep money at the ECB, combined with another long-term refinancing operation (LTRO) which would basically be a bunch of cheap money for Eurozone banks to lend out and create SME-loans-backed securities, and 2) purchase these SME-backed securities à la Quantitative Easing.  

Global: BlackRock Signals Bond Trading Shake-Up (Alt)

As the bond market dries up thanks to financial regulation (e.g. higher capital requirements and no proprietary trading), BlackRock is swooping in for the kill:  “The alliance with Tradeweb’s trading network of dealers means that users of BlackRock’s Aladdin risk management system will be able to access a broad number of interest rate markets, including US Treasury bonds, European, Japanese and Australian government bonds, US mortgage and agency debt along with interest rate swaps.”


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