Week In Review September 25-30

The week is ending with the pendulum swinging back in favor of risk reduction. The catalysts for the deterioration in risk is as difficult to specify as they were for the risk rally earlier in the week. Despite the toing and froing of austerity ideas and Greek sovereign debt solution suggestions, the market remains in a defined range as dealers execute month and quarter end-demand requirements. The manic price movements are similar to 2008 making the market fearful of a repeat performance.

Policy makers are doing everything possible to stay ahead of the curve. The Fed has implemented “Operation Twist”. Although they are not providing any new liquidity, their objective is to keep rates low. Ben and his crew still have the ammo to implement QE3 down the road if need be. Europe is in the process of ratifying the June and July amendments to the EFSF program. However, once achieved, their problems will not end there. The market anticipates a line up for a hand-out.

Next week we get a slew of data and Central Bank rate announcements (BoJ, RBA, ECB and BoE). It will be Trichet’s last chaired meeting. It’s anticipated that he will exit on a dovish footing. The market is eying the weekend release of China’s PMI to set next week’s tone.

Below are some of the highlights of the week:

EUROPE

• G20 and IMF: Meetings brought no significant relief for European sovereign markets. Policymakers signaled that they will wait for the ratification of the EFSF’s enhancement before they start negotiations on specific plans to boost the capacity of the program or further write downs of Greek debt.
• EU: Chief Executive Regling of the EFSF said that the facility may not be allowed to borrow from the ECB under the EU treaty, which forbids the ECB from financing governments directly.
• FR: CB governor Noyer denied reports of plans to recapitalize five of its largest banks.
• GER: Ifo survey fell less than expected, slipping to 107.5 from 108.7, better than the 106.5 consensus forecasted, but at the weakest levels in two-years. Future expectations eased to 98 from 100, better than the 97.3 consensus. The headline print points to a rapidly worsening outlook in line with the weak flash PMI’s. The decline is driven by manufacturing and construction.
• GR: Parliament voted and passed a controversial property tax imposed by the austerity package negotiated with European officials.
• EU: Slovenian parliament ratifies the latest amendments to the EFSF agreements.
• EU: It’s reported that the ECB may discuss rate cuts, new 12-month LTRO’s, and restarting purchases of covered bonds at next week’s meeting (6 October).
• EU: CNBC reported that EU is discussing plans to leverage up the EFSF through a special purpose vehicle (SPV). It would issue bonds. The proceeds would be used to purchase peripheral European, Spanish and Italian debt, as opposed to the EFSF borrowing directly from the ECB. It would help to stabilize euro area credit and risk sentiment in general.
• UK: CBI reported sales fell to -15 this month from -14 previously. Continued weakness in the economy could prompt the BoE MPC to embark on new QE next month.
• EU: Finland’s parliament approves EFSF amendments.
• Financial Times: Reported that EU Policy makers are split over the terms of Greece’s second bailout, with about 7 members arguing for greater private sector write-downs.
• Reuters: Stated that the EIB had not been approached to take part in any bailout involving the EFSF and it has no intention of becoming involved in any such scheme.
• ITL: Business confidence deteriorated more than expected this month to 94.5 from 98.6. Weak growth is expected to keep fiscal consolidation plans under pressure.
• SE: Consumer confidence fell -10 points this month to -5.8, the lowest level in 21-months. One year expectations also weakened considerably.
• NOR: Their Financial Supervisory Authority recommended lowering the loan-to-value ratio from 90% to 85% of the property’s market value. Objective is to reduce household debt burden.
• EC: Refuted reports that the Euro area nations are pushing for Greek bondholders to accept larger write downs.
• GER: Germany passes EFSF legislation with large majority (523 vs. 85). Merkel’s political position strengthens.
• ITL: Italy successfully auctioned €9b in bonds (3 to 11-yr). Their continued ability to place paper in the market is critical to avoiding a severe worsening in the systemic environment.
• EU: Euro-zone confidence fell more than expected in September with consumer, industry and services sentiment all deteriorating and supports the recent soft PMI’s prints. It raises more concerns about the impact of recent financial market turmoil.
• SE: Swedish retail sales fell -0.3%, m/m, in August. Market expected a flat reading and consistent with the sharp drop in consumer confidence. Dealers are pricing the Riksbank to keep rates on hold.
• NOK: Norwegian retails sales surprised strong, rising +1.3%, m/m vs. +0.7%. Annual retails sales growth improved to +7.6%, y/y, from -1.2%.
• UK: Data on gilt holdings show that foreign investors sold £0.75b in August (first time since March). It would suggest that market expects the resumption of asset purchasing in the UK and look forward to a BoE announcement next week.
• UK: Net consumer credit and mortgage approvals gained last month, but remain weak.
• CHF: Swiss Sept KoF Leading Indicator 1.21 vs 1.61 pvs, 1.35 exp.
• GER: Bundestag not willing to leverage EFSF – EconMin Roesler
• Ger: German August Retail Sales -2.9% m/m, lowest since May 2007
• EUR: Euro-Zone August Unemployment unchanged at +10.0%, as expected.

Americas

• US: “New”-Home Sales release fell for a fourth consecutive month (-2.35% to +295K). It recorded the biggest drop in prices in two years with median prices declining -7.7%, y/y, to +$209k.
• US: Home prices rose in July, driven by seasonal demand. This was the fourth consecutive monthly increase registered by the S&P’s Case-Shiller index (+0.9%, m/m).
• US: CB’s consumer confidence again provided a print on the soft side this month (45.4), extending the prior months plummeting number, but did beat market expectations (46). Consumers continue to worry about future income.
• CAD: BoC Senior Deputy Governor Macklem said policy interest rates “can be reasonably expected to remain below normal for some time to come”.
• US: Durable good orders decreased by -0.1% from the prior month to $201.7b. The market had been expecting a +0.2% rise in orders. The drop followed a +4.1% total orders jump in July and are up a stellar +10% from a year ago.
• US: Weekly initial claims fell -37k from the previous week, to +391k. Claim’s moving average remains elevated at +417k.
• US: Flash GDP print showed that growth was revised to +1.3% from a previous +1% print.
• US: NAR seasonally adjusted index for pending sales of existing homes decreased -1.2% to 88.6.
• US: Michigan consumer index rises (60.4 vs. 55.8) in September from the lowest level since November 2008 as pessimism about the economy eased.
• CAD: CAD Economy grew GDP +0.3%, m/m, in July, +2.3% y/y.

ASIA

• CNY: China seems to have ruled out buying debt of troubled European countries, but could be interested if Europe issues euro bonds.
• CNY: During the IMF meetings, PBoC governor Zhou stated that China would not halt the rise of the CNY as it did during the 2008 crisis, when it had feared that a stronger CNY would further cut into exports. It suggests that they will continue the normalization of the currency’s value.
• SGD: Industrial output surged +21.7%, y/y in August, much greater than the +11.2% expected increase and led by a +157%, y/y jump in Pharmaceuticals.
• PHP: The trade deficit rose to +USD750m in July from +USD376m and pushed the 12-month rolling deficit to +$6.7b (3% of GDP). BSP monetary policy has turned neutral and FX policy increasingly cautious.
• Asia: Central Banks continue to intervene to smooth Asian currency crosses.
• KRW: The manufacturing business survey was flat at 86 for October while the non-manufacturing survey bounced up slightly to 86 from 83 in September. Market expects the BoK rate policy to remain on hold.
• KRW: Korea’s current account surplus fell to a seven-month low of +$401m in August from a downwardly revised +$3.8b. Export numbers are being blamed. BoK will not like KRW appreciation.
• TW: Taiwan’s central bank (CBC) kept policy rates unchanged at +1.875% as widely expected. Usual concerns over Europe and US cited as the reason.
• NZD: Fitch and S&P’s downgrades New Zealand to AA and outlook stable.
• CNY: HSBC China PMI was unchanged at 49.9 in September, better than the flash estimate of 49.4.
• JPY: Japan monthly data confirmed the authorities did not intervene in the FX market. Finance Minister Azumi said they will stay vigilant on speculation activity in the yen and would not rule out any countermeasures. BoJ is expected to ease policy next week.
• KRW: Korea’s IP rose less than expected +4.8%, y/y in August vs. +6.1%. Look for the BoK to want to keep the won soft.

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