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INSIDE DEBT
PRODUCED BY REUTERS IN PARTNERSHIP WITH ICAP
Friday, November 21, 2014
CHART OF THE DAY
U.S. MARKETS TODAY
Canada inflation, central bank rate
TODAY’S TOP STORY: ECB President Mario Draghi threw the door wide
open for more drastic measures to prevent the euro zone from sliding into
deflation, promising to use whatever means necessary as China also
acted to boost its sagging economic growth. For more please click here
Click on the chart for full-size image
TREASURIES: Longer-dated Treasury yields fell in thin trading, in line
with declines in the eurozone after European Central Bank President
Mario Draghi said the central bank was prepared to do more to stimulate
the sluggish eurozone economy.
 U.S. government debt took a cue from European markets, where
Draghi's comments lifted euro zone debt and pushed yields on three
of the region's countries - Ireland, Italy, and Austria - to record lows.
 Benchmark 10-year notes were up 6/32 to yield 2.31 pct. 5-year notes
were up 2/32, yielding 1.61 pct.
 30-year bonds jumped 22/32, with a yield of 3.02 pct.
Year-on-year inflation rose to 2.4 pct. The core inflation rate rose to 2.3 pct. On a month-on-month basis,
consumer prices edged up 0.1 pct.
TODAY’S TOP NEWS
 Draghi throws ECB door open to money printing
 China cuts rates to spur growth, ease debt pressure
 Concerns about state of global economy have increased - UK's Osborne
 German tax revenues stay buoyant despite slowdown
 Japan PM seeks verdict on Abenomics in snap
election
 Canada annual inflation jumps to 2.4 pct in Oct
 Greece battles with EU/IMF lenders over projected
budget gap
 Italy October wage inflation plumbs record low, but
still above consumer prices
 UK public finances improve, remain far off-track
 U.S. muni bond funds post $590 mln in inflowsLipper
ECON WATCH
FOR MONDAY NOVEMBER 24
ET
08:30
09:45
09:45
10:30
Indicators
US
US
US
US
National Activity Index
Markit Comp Flash PMI
Markit Svcs PMI Flash
Dallas Fed Mfg Bus Idx*
Unit Reuters Prior
ind
ind
ind
ind
56.8
-
0.47
57.4
57.1
10.5
FOREX: The euro fell sharply after European Central Bank chief Mario
Draghi said inflation expectations were declining to levels that were very
low, keeping the door open for further monetary easing soon.
 The euro fell 1.18 pct to $1.2390 and dropped 1.58 pct against the
Japanese yen to 145.84 yen.
 The dollar fell 0.41 pct to 117.71 yen.
CORPORATES: Corporate bond spreads tightened after European Central Bank chief Mario Draghi announced asset purchases to stimulate the
euro zone economy.
 The CDX-IG.23 index tightened by 2 bps to 64 bps.
 "It isn't the size of the moves but the shock value of the direction that
is really lifting markets today," said Mark Luschini, chief investment
strategist at Janney Montgomery Scott in Philadelphia, which manages about $67 billion in assets. "This is a one-two punch for global
growth."
STOCKS: Stocks closed higher, with major indexes rising for a fifth
straight week after China's central bank cut its benchmark interest rate
and its euro zone peer announced asset purchases in efforts to boost
each region's economy.
 Autodesk jumped 6 pct, Ross Stores rose 7.3 pct.
 GameStop sank 13 pct.
 The Dow rose 88.81 points, or 0.5 pct, to 17,807.81, the S&P 500
gained 10.59 points, or 0.52 pct, to 2,063.34 and the Nasdaq added
11.10 points, or 0.24 pct, to 4,712.97.
 For the week, the Dow rose 1 pct, the S&P added 1.2 pct and the
Nasdaq rose 0.5 pct.
C & E: Gold climbed above $1,200 an ounce to its highest in three
weeks, helped by short-covering and after a surprise interest rate cut by
China fueled hopes that demand would rise in the world's biggest consumer of the metal.
 Gold rose 0.62 pct to $1200.84 an ounce.
 Oil rose 1.03 pct to $76.63 per barrel.
 Reuters-Jefferies index rose 0.36 pct to 269.76.
 For EYE ON ASIA click here
 For MARKET SNAPSHOT click here
 For MARKET SNAPSHOT on Asia click here
 For NEXT UP click here
 For EYE ON LATAM click here
 For DEEP DIVE click here
INSIDE DEBT
November 21, 2014
MARKET SNAPSHOT as of 3:20 pm EST
REPURCHASE AGREEMENTS
G/C
MORTGAGE REPOS
O/N
0.120
O/N
0.140
2-Week
0.150
2-Week
0.160
1-Month
0.150
1-Month
0.210
3-Month
0.160
3-Month
0.240
AGENCY REPOS
i-REPOSM INDEX
O/N
0.120
10:00 AM
0.125
2-Week
0.170
3:00 PM
0.098
1-Month
0.170
3-Month
TREASURIES <5> <500>
BID
ASK
1-Mo Bill
0.040
0.035
3-Mo Bill
0.005
-0.005
6-Mo Bill
0.065
0.060
1-Year
0.120
0.115
2-Year
99.734 99.773
3-Year
99.773 99.813
5-Year
99.461 99.508
7-Year
99.813 99.859
10-Year 99.398 99.461
30-Year 99.516 99.578
YIELD CHANGE
0.041
0.000
0.005
-0.005
0.066
-0.004
0.122
-0.008
0.513
0.016
0.952
0.055
1.614
0.090
2.029
0.125
2.318
0.203
3.025
0.609
IR SWAPS <19901>
SPREAD
2-Year
19.75
23.75
3-Year
17.50
21.50
5-Year
11.00
15.00
7-Year
6.00
10.00
10-Year
10.00
14.00
30-Year
-5.25
-1.25
RATE
0.70
0.73
1.12
1.14
1.72
1.73
2.09
2.10
2.42
2.42
2.97
2.97
EQUITIES
DJIA
NASDAQ
S&P 500
O/N
1-Month
3-Month
6-Month
12-Month
BID
0.100
0.150
0.200
0.310
0.170
0.240
0.360
0.430
0.103
0.106
0.113
0.116
0.201
0.211
MATURITY
9/27/2017
11/26/2019
9/6/2024
11/15/2030
PRICE
CHANGE
76.7
80.4
1200.1
787.2
16.4
0.8
1.1
6.7
19.2
0.2
EURODOLLAR FUTURES
Dec-14
Mar-15
Sep-15
Mar-16
Sep-16
Mar-17
U.S. Interest rate swap—yield curve
CLOSE
CHANGE
99.765
99.735
99.440
99.735
98.475
98.970
0.003
-0.005
0.000
-0.005
0.015
0.010
PRICE
120.57
125.23
131.81
CHANGE
0.09
0.16
0.50
FUTURES
CBOT 5 yr
CBOT 10 yr
CBOT 30 yr
CURRENCIES
ASK
BID
EBS PRECIOUS METALS
Bid
Ask
SPOT GOLD 1201.46 1202.23
PALLADIUM 1223.49
1231
SILVER
16.48
16.53
ACTIVE FANNIE MAE AGENCIES
TERM COUPON
3-Year
1
5-Year
1.75
7-Year
10-Year
2.625
30-Year
6.625
96.81
10.60
11.09
NYMEX
BRENT
SPOT GOLD
PALLADIUM
SILVER
EURODOLLAR DEPOSITS & OIS STRIPS
(ASKED)
ASK
0.110
CHANGE
COMMODITIES
0.180
BID
0.090
INDEX
17815.81
4712.46
2063.84
Euro
1.2387
Sterling
1.5644
JP Yen
117.7200
Swiss Franc
0.97
Can Dollar
1.1240
Mexico
13.6025
FED FUNDS
Open 0.1000
High 0.2300
Low
0.0800
ASK
1.239
1.5648
117.7600
0.97
1.1244
13.6036
ACTIVE FREDDIE MAC AGENCIES
YIELD-SPREAD
8.5
5.5
23.75
20.75
34
7.5
31
4.5
YIELD
1.031
1.846
TERM
2.655
3.098
COUPON
MATURITY
3-Year
12/29/2014
5-Year
8/25/2016
7-Year
01/0/1900
10-Year
30-Year
6.25
1/13/2022
7/15/2032
Wrightson ICAP
Active MBS 15YR
CPN
FNMA
2.5
FHLMC
2.5
BID
101.2870
101.2500
ASK
101.2930
101.2500
YIELD
2.097
2.121
Active MBS 30YR
CPN
FNMA
2.5
FHLMC
2.5
GNMA
2.5
BID
96.2030
96.1200
98.0670
ASK
96.2070
96.1300
98.0730
YIELD
2.918
2.939
2.722
2
SM
YIELD-SPREAD
13.5
10.5
Chart of the Day
YIELD
3.158
INSIDE DEBT
November 21, 2014
TODAY’S TOP NEWS
Draghi throws ECB door open to money printing
China cuts rates to spur growth, ease debt pressure
European Central Bank President Mario Draghi threw the door
wide open for more drastic measures to prevent the euro zone
from sliding into deflation, promising to use whatever means
necessary as China also acted to boost its sagging economic
growth.
Painting a bleak picture of the state of the 18 countries in the
euro bloc, Draghi stressed that excessively low inflation had to
be raised quickly.
In a blunt message, he said there was now no sign of improvement in the months ahead and the ECB would pump more
money into the euro bloc if its current measures fell short.
We will do what we must to raise inflation and inflation expectations as fast as possible, he told an audience of bankers in
Frankfurt. Annual euro zone inflation was 0.4 percent in October, far short of the ECB's medium-term target of just below two
percent.
Draghi's comments received a warm reception from Italian finance minister Pier Carlo Padoan, who said ECB action was
welcome to revive economic growth in the euro zone. The ECB
said it had started buying asset-backed securities. Along with
purchases of covered bonds, a secure form of debt often
backed by property, it is trying to encourage banks to lend and
revive the economy. Bundesbank President Jens Weidmann,
speaking shortly after Draghi at the same event, avoided talking
about the issue entirely.
China cut interest rates unexpectedly, stepping up efforts to
support the world's second-biggest economy as it heads towards its slowest expansion in nearly a quarter of a century,
saddled under a mountain of debt.
But the central bank, keen to show it was not back-tracking on
economic reforms, twinned the move with a slight liberalisation
of the rates banks pay to borrowers in a bid to ensure millions of
savers do not see their incomes hit.
The People's Bank of China (PBOC) said it was cutting oneyear benchmark lending rates by 40 basis points to 5.6 percent.
It lowered one-year benchmark deposit rates by 25 basis points
to 2.75 percent. The changes take effect from Saturday.
While the move acknowledged the risks to growth and marks a
stepped-up effort to ensure the economy stays on track even as
it is expected to slow to a 24-year low of 7.4 percent this year,
the central bank took pains to signal that it was not simply moving towards a looser monetary stance.
For one-year deposits, banks may now pay depositors 1.2 times
the benchmark level, up from 1.1 times previously. It also
scrapped limits on interest rates for long-term deposits of five
years, and simplified its system of benchmark rates for loans.
German tax revenues stay buoyant despite slowdown
German tax revenues rose by 3.1 percent in October year-onyear to 40.3 billion euros, despite recent economic weakness,
and were up 3.0 percent to 469.2 billion for the first 10 months,
the Finance Ministry said in its monthly report.
The German government expects the state and federal tax
revenues to accelerate in the final two months of 2014, lifting
the full year total by 3.5 percent to 590.3 billion euros.
The Finance Ministry added that the federal tax take rose by 3.3
percent in October while state tax income rose by 3.2 percent.
European Union tax income, however, was down 3.7 percent.
Income tax revenue was up 6.5 percent in October compared to
a year ago and 6.2 percent in the first 10 months of the year boosted by rising pay levels and an increase in the number of
people employed. The economy added an average of 6,000
jobs per month in the July to October quarter, it said.
The Finance Ministry said gross domestic product (GDP) growth
is on target to meet the government's 1.2 percent goal, while it
expects a slight acceleration in exports in the final two months
of the year.
Concerns about state of global economy have increased UK's Osborne
Stagnation in the euro zone, recession in Japan and geopolitical
crises have increased concerns about the state of the global
economy, British finance minister George Osborne said.
Osborne said economic performance in the euro zone was a
cause of real worry and concern, particularly in Britain whose
main export markets are in the bloc. There is definitely more
concern around about the state of the global economy than
there was a few months ago, you see that not just when you talk
about Europe, he told an audience of business leaders in London. Speaking at the same event as Osborne, Italian Economy
Minister Pier Carlo Padoan said he was confident that monetary
policy was being used to do whatever it can in the euro area to
support the recovery and move the inflation rate towards its target. Osborne said there had been a marked improvement in
financial and credit conditions in Britain but more needed to be
done, particularly for small and medium-sized businesses.
Europe as a whole was still too dependent on bank credit as
source of finance for businesses, he said.
Canada annual inflation jumps to 2.4 pct in Oct
Canada's annual inflation rate jumped last month as prices for
shelter and food rose, putting pressure on the Bank of Canada's
stance that interest rates will remain low for some time.
Year-on-year inflation rose to 2.4 percent in October, Statistics
Canada data showed on Friday. That was the highest level
since June, surpassing economists' expectations for a slight rise
to 2.1 percent from September's 2.0 percent.
The core inflation rate rose to 2.3 percent, also topping forecasts. The figures sent the Canadian dollar to a three-week high
against the greenback.
Prices in all of the major components of the consumer price
index rose, with the cost of shelter up 2.8 percent in the last
year, pushed higher by a 20.1 percent jump in natural gas
prices. Food prices rose 2.8 percent.
On a month-on-month basis, consumer prices edged up 0.1
percent and core prices rose 0.3 percent. The annual rate was
ahead of the central bank's forecast for 2.2 percent CPI increase in the fourth quarter.
Japan PM seeks verdict on Abenomics in snap election
Prime Minister Shinzo Abe dissolved parliament's lower house
for a snap election on Dec. 14, seeking a fresh mandate for his
struggling Abenomics revival strategy just two years after he
returned to power promising that Japan is Back.
An Asahi newspaper poll published on Friday showed Abe's
support fell to 39 percent - the lowest since he took office in
December 2012 - and just a bit more than the 40 percent who
do not back him. Still, 37 percent said they would vote for Abe's
Liberal Democratic Party in proportional representation districts,
compared with 13 percent who planned to vote for the main
opposition Democratic Party of Japan. Thirty percent were undecided. Separately, a key adviser to Abe said the economic
policies are working well but the blow to the economy from an
April sales tax hike has been bigger than expected.
3
INSIDE DEBT
November 21, 2014
TODAY’S TOP NEWS
(continued)
Greece battles with EU/IMF lenders over projected budget
gap
UK public finances improve in Oct, remain far off-track
Britain's public finances improved slightly in October but finance
minister George Osborne is still unlikely to meet his budget
goals before next year's general election.
The Office for National Statistics said public sector net borrowing, excluding state-run banks, totaled 7.706 billion pounds
($12.1 billion) in October, down 2.4 percent from a year earlier.
Economists had expected borrowing of 7.9 billion pounds.
Friday's shortfall was a bit narrower than expected but economists said Osborne's target looks almost impossible to hit. Osborne said in March he aimed to slim the budget deficit by more
than 10 percent over the following 12 months, helped by Britain's fast-recovering economy.
From April through October, public sector net borrowing excluding banks was 64.1 billion pounds, 6.1 percent higher than in
2013.
Receipts from income tax and national insurance contributions
rose 1.5 percent in October and were only 0.6 percent higher in
the first seven months of the financial year.
The government has blamed the extra borrowing so far this year
on irregular tax receipts in 2013 and expects the differences to
even out.
Osborne is due to present a half-yearly budget update on Dec.
3 which will probably include higher borrowing forecasts, leaving
little scope to offer sweeteners to voters.
Greece's government pushed ahead with plans for a nearbalanced budget next year, ignoring objections from its EU/IMF
lenders who say Athens is set to miss its deficit forecast.
Athens and its foreign lenders have been at loggerheads over
the projected deficit for next year, with the lenders arguing
Greece will miss the 0.2 percent target because of a new payback plan for austerity-hit Greeks who owe money to the state.
The Greek government, however, stuck to the forecast in its
updated 2015 budget plan that was submitted to parliament
without the approval of the lenders, marking its first nearbalanced budget in over three decades.
It also predicted the budget deficit for this year would be larger
than previously estimated, standing at 1.3 percent from 0.8 percent forecast in the October draft budget. Athens also lowered
its target for a primary surplus this year to 1.8 percent from 2
percent previously and slightly raised the target for next year to
3 percent from 2.9 percent. Athens has struck an increasingly
defiant tone as it haggles with the EUIMF inspectors on what is
expected to be the final review under its 240 billion euro bailout.
Italy October wage inflation plumbs record low, but still
above consumer prices
Italian annual wage inflation slowed in October to 1.0 percent,
the lowest reading since the statistical series was introduced in
1982, data showed, but it was still well above consumer price
inflation.
Wage inflation edged down from readings of 1.1 percent in each
of the previous three months, national statistics office ISTAT
reported. On a month-on-month basis, wages in October were
up 0.1 percent after being flat for the previous three months.
Annual wage inflation remained well above the consumer price
inflation rate in October, which stood at just 0.2 percent, based
on Italy's EU-harmonized index. Italy's recession-bound economy is teetering dangerously close to deflation.
In the January-October period, wages were up 1.2 percent compared with the first ten months of 2013, ISTAT said.
U.S. muni bond funds post $590 mln in inflows-Lipper
U.S. municipal bond funds reported $590 million of net inflows
in the week ended Nov. 19, compared with $649 million in inflows in the previous week, according to data released by Lipper.
The four-week moving average remained positive at $340.3
million, said Lipper, a unit of Thomson Reuters.
High-yield muni bond funds reported inflows of $171.8 million,
up from $127.5 million in the previous week.
NEXT UP
Japan inflation seen easing, boding ill for BOJ target
EU investment plan to take shape next week
Japan's annual core consumer inflation probably eased for a
third straight month in October reflecting falling oil prices, a
Reuters poll showed, likely keeping the Bank of Japan under
pressure to act again in order to achieve its inflation target.
Highlighting the pain from April's sales tax hike that helped
tipped the economy into recession, factory output probably
slipped in October and household spending continued to slide,
the poll showed.A Reuters poll of about 20 economists showed
the core consumer price index likely rose 2.9 percent year-onyear in October, slowing for a third consecutive month.
Stripping out the effects of April's tax hike, consumer inflation
was estimated at 0.9 percent, less than half of the central bank's
2 percent target, a level which investors see as virtually impossible to meet.
Analysts remain skeptical about the BOJ's view that a tighter
labor market and improving output gap will accelerate inflation to
2 percent around the fiscal year from April 2015. BOJ Governor
Haruhiko Kuroda said on Nov. 19 inflation could slow below 1
percent due to falling oil and commodity prices, altering his earlier view that it would stay above 1 percent.
Jean-Claude Juncker will unveil a much anticipated 300-billioneuro investment plan on Wednesday that is meant to trigger
economic growth in the European Union.
With Europe's economy barely growing and disenchanted voters turning increasingly to anti-EU radicals, the European Commission president pledged the money in July and promised to
act when he took office three weeks ago.
The European Parliament confirmed on Friday that Juncker
would present the plan to it in Strasbourg but as EU officials
prepared a for weekend of negotiation on both that and separate budget issues, it remained unclear how much hard cash the
Union would invest.
Sources have said the plan may involve just 20-30 billion euros
going to a vehicle supervised by the European Investment
Bank. Intended to soak up any losses, this could attract 10 to 15
times as much in private funding for infrastructure projects.
As the European Central Bank signals a will to pump money
into the economy, such a limited injection of new public cash some of which may already have been earmarked for investment - could disappoint investors hoping for more stimulus.
4
INSIDE DEBT
November 21, 2014
EYE ON ASIA
POLL & PREVIEW
EVENTS
Singapore industrial output seen expanding in October
For Nov 24
INDIA
 Trade balance RBI for Q3: Prior -34.60 bln
 C/A balance for Q3: Expected –10.50 bln, Prior –7.80 bln
Singapore's manufacturing output is expected to have bounced
slightly in October, according to a Reuters poll, after a survey of
manufacturers showed that factory activity expanded at the fastest pace in 3-1/2 years.
The median forecast in a Reuters poll showed that industrial
production expanded 2.3 percent in October from the previous
month on a seasonally adjusted basis. The poll of 12 economists also predicted that manufacturing output rose 1.0 percent
in October from a year ago. In a welcome sign for manufacturing output, the Singapore Institute of Purchasing & Materials
Management's Purchasing Managers' index rose to 51.9 in October
SINGAPORE
 Consumer price index (yy) for October: Expected 0.60 pct
Prior 0.60 pct
POLL & PREVIEW
(continued)
Indonesia to review tax treaties in drive to double revenue
Indonesia will review its tax treaties with dozens of countries
and may suspend those it concludes are being abused for tax
avoidance, as the government looks to significantly boost revenue, the finance minister said. More than half of Indonesia's
estimated 60 million tax payers are considered tax evaders,
while only 12 percent of companies pay taxes, Finance Minister
Bambang Brodjonegoro said.
India monitors foreign flows into debt funds, may tighten
rules
Worried by potentially destabilising hot money flows, India's
central bank could take action if foreign investors pour excessive amounts into mutual funds to bypass limits on ownership of
government debt, according to a senior policymaker.
Foreign institutional investors have almost reached their $25
billion limit on direct holdings of government debt, but have begun raising their exposure by investing through debt-focused
domestic mutual funds.
"This is a way of working around the rule," the policymaker told
Reuters. "If the flows become quite high into g-secs
(government bonds), then we may have to take some action
with SEBI," he added.
Long "to do" list for India's Modi as clock ticks on reform
Indian Prime Minister Narendra Modi has a long list of progrowth measures to implement over the next four months, but
time may have already run out to breathe enough life into the
economy to meet the tough 2014/15 fiscal deficit target without
cuts.
Modi's election victory in May unleashed a rush of money from
foreign portfolios betting the reformist prime minister would drive
a quick recovery. That has yet to materialise, with both factory
utilisation and capital spending low. Parliament convenes on
Monday for a month-long session in which the government is
confident of passing legislation to allow more foreign investment
in the insurance industry, despite hostile opposition parties.
Malaysia's Oct inflation at 2.8 pct y/y, below expectations
Malaysia's inflation, measured by the consumer price index,
rose 2.8 percent in October from a year earlier, data from the
Statistics Department showed.
MARKET SNAPSHOT as of 3:20 pm EST
GOVERNMENT BOND BENCHMARKS
5-Year
Bid
Yield
Australia
99.857
2.781
Japan
100.397 0.117
China
102.251 3.477
Hong Kong 100.950 1.293
Singapore 100.600 1.496
10-Year
Bid
Yield
95.748 3.279
100.375 0.460
103.750 3.671
100.500 1.913
105.900 2.321
INTEREST RATE SWAPS
5-Year
Bid
Ask
3.115
3.175
AUD
JPY
0.23
0.29
CNY
HKD
1.59
1.67
<SWAPS>
10-Year
Bid
Ask
3.6425 3.7025
0.59
0.65
3.79
3.99
2.21
2.29
1.565
1.62
TWD
INR
KRW
SGD
2.2125
1.675
2.2525
1.69
6.84
2.48
2.38
FORWARDS 3 months <FORWARDS>
ASIA FUTURES
7.14
2.52
2.4
Close
Change
Bid
Ask
SGX Nikkei 225
17410.00
40.00
JPY
-13.88
-13.68
SGX MSCI Taiwan
341.80
7800.00
377.90
2.50
205.00
1.60
AUD
NZD
HKD
-58.1
-70.5
-2.5
-57.6
-70
0.5
8524.50
473.90
36.50
2.08
SGD
THB
2.5
12.9
3
13.3
SGX FTSE China
SGX MSCI Singapore
SGX CNX Nifty
SGX AC ASIA P xJP
DEPOSITS 3 months
<DEPOS>
Bid
-0.05
4.7
2.85
3.7
0.25
0.3125
JPY
CNY
AUD
NZD
HKD
SGD
5
NDF’s 3 months
Bid
<NDFS>
Ask
CNY
0.0218
0.0238
TWD
KRW
INR
-0.05
1117.4
62.901
-0.031
1118.4
62.971
MYR
3.3049
3.3079
PHP
IDR
45.16
12320
45.2
12350
INSIDE DEBT
November 21, 2014
EYE ON LATAM
LATAM TOP STORIES
LATAM MARKETS TODAY
Mexico cuts 2014 growth forecast after surprisingly weak
3rd qtr
TREASURIES
Mexican 30-Year
Mexico's finance ministry cut its 2014 growth forecast after the
economy grew unexpectedly slowly in the third quarter in a
modest recovery that is now also threatened by rising social
unrest.
Mexican gross domestic product expanded 0.5 percent in the
third quarter from the second, the national statistics agency
said, slowing from a downwardly revised 0.9 percent growth in
the April-to-June period.
The finance ministry said it now saw the economy growing between 2.1 and 2.6 percent in 2014, down from its previous 2.7
percent forecast. The revision is in line with analysts' projections
for 2.3 percent growth this year.
Pena Nieto has passed a series of economic reforms in the past
two years, including opening up the state-run energy sector, but
the laws could take years to boost the economy, and now weak
growth and the political crisis have drawn attention away from
his reform agenda. The economy grew 2.2 percent in the third
quarter from the same period of 2013.
A separate report showed the economy contracted for the second month in a row in September. Mexico's monthly economic
activity index fell 0.1 percent compared with August.
Banker to be named Brazil finance minister, papers say
Brazilian President Dilma Rousseff will name respected banker
Joaquim Levy as her new finance minister, three leading newspapers reported, signaling a shift toward more market-friendly
policies that could breathe life into a stagnant economy.
Levy's appointment was reported by Valor Economico, Folha de
S.Paulo and Estado de S.Paulo, who cited unnamed sources.
Reuters was not immediately able to confirm the decision, and a
statement from Rousseff's office said the names of new ministers would not be announced on Friday.
Levy, head of the asset management arm of Brazil's second
largest private bank Bradesco SA and a former government
treasury secretary, emerged as a candidate for the job Thursday after Bradesco's chief executive reportedly turned it down.
The University of Chicago-trained economist is a proven fiscal
hawk who helped Brazil obtain its investment grade rating while
he was treasury chief between 2003 and 2006 by checking
spending and overhauling its debt structure.
Many investors hope Levy will be able to pull off a similar coup
this time, if his appointment is confirmed. They say hefty budget
cuts are necessary to restore confidence in an economy stuck
in its fourth year of stagnant growth.
Yield
6.75
Price
27 /32
Mexican10-Year
5.85
24 /32
Brazilian10-Year
12.41
542 /32
Brazilian 5-Year
12.38
201 /32
Chilean 30-Year
1.01
22 /32
Chilean 10-Year
0.38
-1 /32
Colombian 10-Year
6.55
-18 /32
Colombian 5-Year
5.40
4 /32
Venezuela PDVSA 20 year
15.01
120 /35
Venezuela PDVSA 10 year
21.96
93 /34
EQUITY
MSCI Latin American Index
Close
3137.04
Pct Change
4.48
Brazil's Bovespa Index
56084.04
5.02
Mexico's IPC Index
44633.28
0.96
Chile's IPSA Index
3988.04
0.3
Vale
20.22
6.93
Banco do Brasil
29.83
8.32
Bradesco
41.00
7.61
Petrobras
14.30
11.89
CURRENCIES
Last
Pct Change
Brazilian Real
2.5152
-2.2
Mexican Peso
13.6187
-0.22
Chile Peso
594.4
-0.87
Columbian Peso
2145
-0.53
2.9115
-0.39
Peru Sol
LATAM TOP STORIES
(continued)
what he called an "out-of-consensus base case scenario." However, downside risks for macroeconomic indicators and earnings remain relevant, he added.
"From an equity strategy perspective, we are counterconsensus constructive on the second-term policy environment
of the Rousseff government, and we continue to believe Brazil
is a relatively 'easy' fiscal and monetary policy stabilization
case," the note said.
Argentina says Sept economic activity down 0.2 pct yr/yr
Argentina's economic activity index fell 0.2 percent in September versus the same month last year, and rose 0.2 percent
compared with previous month, the government said.
HSBC sees improved Brazil risk, reward as Rousseff adjusts policies
Peru's economy grows 1.76 pct in 3rd qtr, underscoring
slowdown
Strategists at HSBC Securities are recommending investors
take on additional risk in Brazil, where equity markets sank
about 30 percent from this year's peaks, on signs that President
Dilma Rousseff will undertake gradual, more market-friendly
policy adjustments ahead of her second term.
In a client note distributed late on Thursday, a team of HSBC
strategists led by Ben Laidler said the balance between risk and
reward in Brazil's stock market improved after a recent sell-off
and signals that Rousseff might fine-tune some of the economic
policies she enacted in her first term.
Laidler estimates that the MSCI Brazil equity index could rise as
much as 16 percent, up from a prior 6 percent gain forecast, in
Peru's economy grew 1.76 percent in the third quarter compared with the same period last year, the government said, underscoring the sharp slowdown in the Andean nation's economy
caused by tumbling mineral exports.
The July-September growth figure mirrored the 1.72 percent
expansion recorded in the previous quarter and was far below
the 5.2 percent registered in the third quarter of 2013.
6
INSIDE DEBT
November 21, 2014
DEEP DIVE Commentary and Analysis
Fed inflation goal and the 'coming years' mirage
was concerned to convey in the language of the post-meeting
statement that any decision regarding the timing of the first increase in the federal funds target range would be datadependent,” Stephen Lewis, Chief Economist at ADM Investor
Services in London, wrote in a note to clients.
Any ideas as to how they get to a place where they might hike?
“One member,” unnamed but possibly Minneapolis Fed President and dove Narayana Kocherlakota, made noises about
stronger forward guidance to undergird the inflation target, according to the minutes.
Why exactly that would work when all the rest hasn’t is left up to
us, imagination-dependent, as it were.
None of this is to say that the U.S. is Japan, trapped by a declining population in a recessionary and deflationary future.
One can only imagine what our economy would look like if we
had a similar attitude to immigration as does Japan.
But it is reasonable to ask if there are forces at work, probably
global and quite possibly featuring the debt load, which make
the current suite of policy tools ill-suited to the tasks on which
they are being used.
Monetary policy, in other words, is easy to enact, unlike fiscal
policy.
By James Saft
The Federal Reserve’s 2 percent inflation objective feels more
and more like an aspiration or, maybe, like steadily rising middle
-class wages, a nostalgic anachronism.
Policy-makers noted in the minutes from their October meeting
that inflation not only continues to run below the Fed's longerrun goal but that some markets show investors demanding less
inflation insurance as time passes.
Yet the Fed chooses to reassure us with the following statements:
“Many participants observed the committee should remain attentive to evidence of a possible downward shift in longer-term inflation expectations. Some of them noted that if such an outcome occurred, it would be even more worrisome if growth faltered.”
Well, yes, growth faltering, as it seems to be doing elsewhere in
the world, and may do in the U.S., would make that whole inflation issue a bit more sticky.
But it gets better, because the Fed has not just a goal in mind,
but a time frame. Check this out:
“Participants anticipated that inflation would be held down over
the near term by the decline in energy prices and other factors,
but would move towards the Committee’s 2 percent goal in coming years.”
In “coming years”. Lots of things may come to pass in “coming
years”. Jet packs and the Cubs winning the World Series, to
name just two.
So I’ll give the Fed credit and agree that yes, we will some day
return to normal inflation. What seems a lot less clear is when,
and through what mechanism, exactly.
After all, a minority of FOMC participants, what the Fed calls “a
few,” were warning that inflation might stay below the objective
for “quite some time,” another delightfully vague and contractually meaningless time frame.
And note that the Fed was meeting before the release of the
latest Thomson Reuters/University of Michigan survey which
showed consumers have the lowest long-term (five-to-10-year)
inflation expectations since the tail end of the recession in
March 2009, at 2.6 percent this month, down 0.2 percentage
point in a month.
Now let’s put this in a bit of context. This is not simply the result
of falling energy prices, and thus likely to come out in the wash
in coming years. Inflation as the Fed best measures it has been
below target for two and a half years and is only 1.4 percent.
(James Saft is a Reuters columnist. The opinions expressed are
his own. At the time of publication he did not own any direct
investments in securities mentioned in this article. He may be
an owner indirectly as an investor in a fund.)
INVESTMENT FOCUS-Russian assets remain dangerous
but not untouchable
By Sujata Rao and Sam Wilkin
Sanctions-hit Russian assets, weighed further by this year's
collapse in energy prices and subsequent rouble slide, remain
dangerous territory for many global investors but they are not
seen as untouchable and some are scouting opportunities.
Effectively an investor pariah since the March annexation of
Ukraine's Crimea led to Western sanctions on several companies and individuals, Russian bonds, stocks and currency have
performed worse this year than most other markets, these
graphics show:
PERSISTENCE IS A VIRTUE UNTIL IT ISN’T
And remember too that we’ve had six years of extraordinary
monetary policy, the vast majority of which is still in place subsequent to the taper of bond buying. While many are called out,
rightly, for warning that QE would cause inflation which never
came, the fact that so little did persist raises uncomfortable
questions.
All of this non-inflation is happening with job growth actually in
quite peppy territory. Unemployment is only 5.8 percent for the
first time in six years and the economy keeps creating 200,000plus jobs per month.
So how exactly the Fed will manage to raise rates “in coming
years,” presuming we won’t see a hike in December, remains
unclear. Not only did the minutes show sensitivity to low inflation, but also to the rather minor turmoil seen recently in financial markets. If that scares them, just wait until risk investors
actually think we might see a hike within a current bonus cycle.
So, as it has been for a while, the Fed will play for time.
“In light of uncertainties over the inflation outlook, the FOMC
Click on the charts for full-size image
That, to many, seems justified, given the risk of more sanctions
that could lead to fresh market falls, economic recession and
even corporate debt defaults. But some fund managers attending Reuters' Global Investment Outlook Summit this week also
see opportunities, regardless of political risk.
They note Russian share prices measured against future earnings are among the world's cheapest, and one-year government
bond yields of 10 percent.
Such valuations are "compelling", Anne Richards, CIO of Aber-
7
INSIDE DEBT
November 21, 2014
DEEP DIVE Commentary and Analysis
(continued)
deen Asset Management told the summit in London.
"We are more likely buyers than sellers," Richards said.
Richards acknowledged risks to the Russian trade but said investors needed to look closely at companies' business models
to gauge whether they would survive the political crisis
"People still wash their clothes and need washing powder, people still wash their hair and need shampoo, people still drink
beer. There are lots of things people will still do regardless of
whether Russia invades Ukraine," she added.
Bulls will note that returns on Russian stocks and bonds since
2000 far exceed those in most other markets, as the following
graphics show:
move in the underlying emerging bond index.
"We still like Russia believe it or not," Greg Peters, who helps
manage over $534 billion at Prudential Fixed Income told the
summit in New York. "They have very little external debt, and
you really have to see the current account crater in a way that's
hard to foresee."
"It's going to be volatile for sure, but I still think it's money good,
and we still like it."
Rouble debt is a more risky proposition but 10 percent yields
may prove tempting, especially if the currency stabilises after its
free-float earlier this month.
Asset manager Lombard Odier for instance is overweight Russia in a fundamental-focus benchmark, based on criteria such
as debt levels, balance sheet strength and political stability.
"It's time to do math on Russian fundamentals and think less on
geo-politics," Lombard Odier global fixed income strategist Salman Ahmed said. "Almost everything is in the price."
To be sure there are many who will balk at buying into such a
volatile market, which remains driven by geo-politics rather than
valuations or fundamentals. Hedge fund star Michael Hintze of
CQS, for instance, branded Russia an investment "black hole".
But index-tracking funds must remain invested in Russia, which
comprises around 5 percent of MSCI's emerging equity index
and nearly 10 percent of debt benchmarks run by JPMorgan.
Given sanctions affect only some new securities, existing Russian bonds and stocks continue in passive portfolios.
Northern Trust for instance holds Russian assets in passive
funds, Wayne Bowers, the asset manager's Europe and Asia
CIO said, though he said the state of the economy would make
him cautious about actively adding exposure.
The biggest deterrent, especially for more conservative managers, is the prospect of a deeper crisis that leads to more sanctions, potentially trapping them in a free-falling market.
George King, portfolio strategist at RBC Wealth Management
said the mid-year bounce had led clients to question if another
rebound could be in the offing should political noise abate.
"We have had people ask us about it....is it time to play for a
positive bounce in Russia?" he said. "Our answer is: it's a very
dangerous game to play."
Click on the charts for full-size image
And even sceptics reckon Moscow will not want to escalate the
Ukraine crisis further. So risk/reward on rouble assets is "more
balanced than three months ago", according to Andrew Wilson,
Europe CIO for Goldman Sachs Asset Management.
There is also the danger of missing out on any recovery - Russia's dollar-denominated equity index jumped 40 percent between March and July when some calm returned to Ukraine.
Wilson said he was cautious about adding to Russian positions
but he is currently neutral, meaning his fund's holdings equal
Russia's weight in debt and equity indexes.
Bond investors will point to Russia's public debt levels of 10
percent of annual economic output - among the world's lowest
and hundreds of billions of dollars in reserves as a reason why
current bombed-out valuations make no sense.
Russia pays a far higher yield premium over U.S. Treasuries on
its dollar bonds than Brazil or Turkey whose credit ratings are
lower and debt levels much higher. Its debt spreads have blown
out 1.7 percentage points this year, more than five times the
INSIDE DEBT is produced by Reuters in partnership with ICAP.
Edited and compiled by Bijoy Koyitty and Shibesh Mehrotra in Bangalore.
For questions or comments about this report, email us at:
inside.debt@thomsonreuters.com
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