DAVID MCWILLIAMS GLOBAL MACRO 360°
4/27/2015
Daily Note – The Big Short?
•
•
•
•
•
•
The Premiership and the bond market
Thoughts on recent moves in European bonds
The Big Short?
Eurozone: German confidence accelerates
United States: Durable goods rebound
The Week ahead: FOMC to the fore
DAVID MCWILLIAMS - GLOBAL MACRO 360°
DAVID MCWILLIAMS - GLOBAL MACRO 360°
DAILY NOTE –THE BIG SHORT?
Good morning.
Hope you had a good weekend. Thank God the awful Premiership will be over soon and those
of us who like the game of football as it could be played will not have to suffer this over-hyped,
tribal dross for a least a few months in the summer.
The Premiership with its top five clubs and then twenty of “also-rans” reminds me of the
Eurozone bond market. At the top there are the core markets, which are always winners and
then there are the peripheral markets – the Aston Villas of sovereign bonds that tend to jostle
for position under the top tier.
Sometimes there is convergence – as there is in mid-season in the Premiership when the
weaker teams notch up a few victories and the results suggest that there might be a
breakthrough from the peripherals – but then by the end of the season normality is restored
with a wobble, a sell-off or a change of sentiment and the top dogs head back to the top of the
table.
Last week, we saw normality restored in bond markets as we saw a sell off across the developed
world, with UK – The Tottenham Hotspur of bonds markets - underperforming (like Spurs) its
peers in other major developed countries.
The commentariat suggested this was on the back of slightly hawkish MPC minutes (see last
Wednesday note for more). The MPC delivered the message that the risk-free forward curve
was too flat. Over the course of the day, yields rose by around 15bp across the curve and
expectations for the first hike were brought forward from September 2016 to June 2016.
The more fundamental reason for the UK to sell off should, in my view, be the risk of a wobble
in Sterling when the Left and Lefter coalition of Labour and the SNP come to power, in a
country with a massive current account deficit, low productivity and non-existent investment!
In the Eurozone, as a result of the ECB’s sovereign QE, sovereign yield curves across EMU
countries with the exception of Greece have move materially lower since the beginning of the
year, with a focus on the tightening of the spreads between core and peripheral bond markets.
Page 1
DAVID MCWILLIAMS - GLOBAL MACRO 360°
Figure 1 Sovereign bond yields change over the last month
Germany
France
Italy
Spain
Portugal
Ireland
2 Year
-0.04%
-0.05%
-0.12%
-0.10%
-0.05%
-0.18%
5 Year
-0.04%
-0.08%
-0.02%
-0.01%
-0.11%
-0.05%
7 Year
-0.04%
-0.09%
0.03%
0.03%
-0.11%
-0.04%
10 Year
-0.07%
-0.09%
0.10%
0.09%
0.18%
-0.06%
30 Year
-0.06%
-0.06%
0.16%
0.18%
0.28%
0.02%
However this trend has begun to change in recent weeks. The first signs of peripheral curve
steepening (longer dated bond yields in the peripherals moving higher) and divergence with
core yields took place in late March.
Until then, in spite of no visible signs of an end to the impasse between the Greek government
and its official creditors, there was little sign of contagion in peripheral spreads.
However, over the last few weeks the sell-off in peripheral bond markets owes more to
contagion from the on-going Greek situation. And even after last week’s strong rally in
peripheral markets, 30-year yields in Italy and Spain are still on average close to 25bp higher
on the month, around 15bp higher at the 10-year sector, and a few basis points lower at the 2year sector.
In recent weeks the bond market has been beset by technical factors - increased number of
issuances, the market was positioned heavily long ahead of QE, and thin liquidity – and of
course the small re-pricing of credit risk due to concerns about a new Greek default and a
consequent Grexit.
The biggest question is the one of the big short. Bond markets have never been so expensive,
when is it all going to blow and do you have the appetite for the “big short”?
What would happen for example if the German economy were to take off, underpinned by a
lower exchange rate and historically low rates, low unemployment, wage rises and a property
boom!
Page 2
DAVID MCWILLIAMS - GLOBAL MACRO 360°
Eurozone: German business confidence accelerates
Table 1 Eurozone economic data
Event
Country
Period
Survey
Actual
Prior
Revised
PPI MoM
SP
Mar
--
0.50%
0.20%
--
PPI YoY
SP
Mar
--
-1.20%
-1.60%
--
IFO Business Climate
GE
Apr
108.4
108.6
107.9
--
IFO Current Assessment
GE
Apr
112.4
113.9
112
112.1
IFO Expectations
GE
Apr
104.5
103.5
103.9
--
The Ifo index rose to a level of 108.6 in April after 107.9, broadly in line with expectations. The
assessment of current conditions increased to 113.9 after 112.1, while business expectations
eased to 103.5 after 103.9.
At the sector level, confidence improved across the sectors covered with the exception of retail
sales. The decline in confidence in the retail sector, however, comes after a very strong increase
since the end of last year.
Figure 2 German IFO business confidence
Page 3
DAVID MCWILLIAMS - GLOBAL MACRO 360°
United States: Durable goods rebound in March
Table 2 United States economic data
Event
Period
Survey
Actual
Prior
Revised
Durable Goods Orders
Mar
0.60%
4.00%
-1.40%
--
Durables Ex Transportation
Mar
0.30%
-0.20%
-0.40%
-1.30%
Cap Goods Orders Nondef Ex Air
Mar
0.30%
-0.50%
-1.40%
-2.20%
Cap Goods Ship Nondef Ex Air
Mar
0.30%
-0.40%
0.20%
0.10%
Headline durable goods orders rose 4.0% (vs. consensus +0.6%), reflecting strength in both
civilian and defence aircraft orders.
Durable manufacturing inventories rose at a below-trend 0.1% pace.
The Week ahead: FOMC to the fore
In the week ahead, the big event is the FOMC and musings on the likely path of US rates.
Page 4
DAVID MCWILLIAMS - GLOBAL MACRO 360°
Table 3 Key data in the week ahead
Date Time
Event
Country
Period
Survey
Actual
Prior
04/28/2015 14:00
S&P/CS 20 City MoM SA
US
Feb
0.70%
--
0.87%
04/28/2015 14:00
S&P/CS Composite-20 YoY
US
Feb
4.70%
--
4.56%
04/28/2015 15:00
Consumer Confidence Index
US
Apr
102.5
--
101.3
04/29/2015 09:00
M3 Money Supply YoY
EC
Mar
4.30%
--
4.00%
04/29/2015 09:00
M3 3-month average
EC
Mar
4.10%
--
3.80%
04/29/2015 13:30
GDP Annualized QoQ
US
1Q A
1.00%
--
2.20%
04/29/2015 13:30
Personal Consumption
US
1Q A
1.70%
--
4.40%
04/29/2015 13:30
GDP Price Index
US
1Q A
0.50%
--
0.10%
04/29/2015 15:00
Pending Home Sales MoM
US
Mar
1.20%
--
3.10%
04/29/2015 19:00
FOMC Rate Decision (Upper Bound)
US
Apr-29
0.25%
--
0.25%
04/29/2015 19:00
FOMC Rate Decision (Lower Bound)
US
Apr-29
0.00%
--
0.00%
04/30/2015 13:30
Initial Jobless Claims
US
Apr-25
290K
--
295K
04/30/2015 13:30
Continuing Claims
US
Apr-18
2283K
--
2325K
05/01/2015 15:00
ISM Manufacturing
US
Apr
52
--
51.5
05/01/2015 15:00
ISM Prices Paid
US
Apr
42
--
39
05/01/2015 15:00
U. of Mich. Sentiment
US
Apr F
96
--
95.9
The most important event this week will be the release of the January FOMC statement on
Wednesday at 2PM. Other key releases include the first estimate of Q1 GDP on Wednesday,
personal income and Chicago PMI on Thursday, and the ISM manufacturing report on Friday.
Federal Reserve Governor Tarullo will speak on Thursday and San Francisco Fed President
Williams will speak on Friday.
Disclaimer The statements, opinions and analyses presented in the articles, newsletters, and other materials appearing on this website are provided as general
information and for educational purposes. Opinions, estimates and probabilities expressed herein constitute the judgment of the author as of the date indicated
and are subject to change without notice. Nothing contained in this website is intended to be, nor shall it be construed as, investment advice, nor is it to be relied
upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or
other appropriate tax or financial professional to determine the suitability of any investment. David McWilliams shall not be responsible or have any liability
for investment decisions based upon, or the results obtained from, the information provided.
Page 5