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INSIDE DEBT
PRODUCED BY REUTERS IN PARTNERSHIP WITH ICAP
Thursday, January 15, 2015
CHART OF THE DAY
U.S. MARKETS TODAY
U.S. producer prices
TODAY’S TOP STORY: U.S. producer prices in December recorded their
biggest fall in more than three years on tumbling energy costs while underlying inflation pressures were tame, a cautionary note for the Federal
Reserve as it ponders its next step on monetary policy.
For more please click here
Click on the chart for full-size image
TREASURIES: Thirty-year Treasury yield fell to record lows for a second
day after a surprise interest rate cut and dumping of a currency cap by
the Swiss central bank stoked demand for higher-yielding U.S. government debt.
 The 30-year bond was up 1-18/32 to yield 2.38 pct. The yield fell to a
record low of 2.375 pct, earlier on the day.
 Benchmark 10-year note rose 27/32, yielding 1.74 pct.
The Labor Department said its producer price index
for final demand declined 0.3 percent in December,
biggest fall in more than three years, after falling 0.2
percent in November.
TODAY’S TOP NEWS
 Cheaper oil tames U.S. producer inflation; jobless
claims up
 Global economic outlook is glum despite cheaper oil
 Swiss central bank stuns market with policy U-turn
 China c.bank tightens loan, deposit measures
 Consumers, foreign trade drove German 2014
growth of 1.5 percent
 Weidmann says ECB action subject to limits
 Falling euro, energy costs widen euro zone surplus
in November
ECON WATCH
FOR FRIDAY JANUARY 16
ET
05:00
05:00
05:00
05:00
08:30
08:30
08:30
08:30
08:30
09:15
09:15
10:00
Indicators
EZ
EZ
EZ
EZ
US
US
US
US
US
US
US
US
Inflation, final mm
Inflation, final yy
Infl ex food & energy mm
Infl ex food & energy yy
CPI mm, sa
CPI yy, nsa
Core CPI mm, sa
Core CPI yy, nsa
CPI Index, nsa
Industrial output mm
Manuf output mm
U Mich Sentiment Prelim
Unit Reuters Prior
pct
pct
pct
pct
pct
pct
pct
pct
ind
pct
pct
ind
-0.1
-0.2
0.4
0.8
-0.4
0.7
0.1
1.7
234.7
0.0
0.2
94.1
-0.2
-0.2
-0.1
0.7
-0.3
1.3
0.1
1.7
236.2
1.3
1.1
93.6
FOREX: The Swiss franc soared nearly 28 percent against the dollar after
Switzerland's central bank dumped a three-year-old cap on the franc's
value against the euro, sending shockwaves through currency markets
and pummeling traders who had bet against the franc.
 The dollar plummeted to 0.736 francs, its lowest since 2011, and was
last down 14.64 pct against the franc at 0.8694 francs.
 The euro plunged as much as 30 pct below the 1.20 cap to a record low
of 0.8500 francs per euro at one point before bouncing off its session
low, and was last down 15.92 pct against the franc at 1.01 francs.
 Against the dollar, the euro was last down 1.49 pct at $1.1613. It earlier
hit $1.1567, its lowest level against the greenback since November
2003.
 The dollar was down 0.84 pct against yen at 116.33 yen.
 The dollar index was last up 0.16 pct at 92.304.
CORPORATES: Corporate bond spreads widened as investors turned to
the safe haven U.S. treasuries amid global growth concerns and disappointing bank earnings.
 The CDX-IG.23 index widened by 1 bps to 73 bps.
 New issuers include The Valspar Corporation, Cades, Akbank T.A.S.
and Rabobank.
STOCKS: Stocks fell for a fifth straight day as bank results disappointed
and investors fretted over the potential impact of global economic weakness on U.S. earnings.
 With the day's decline, the S&P 500 closed below the 2,000 level for the
first time in about a month.
 The S&P financial sector dropped 1.27 pct. Bank of America lost 5.2 pct
and Citigroup shares fell 3.7 pct after reporting quarterly results.
 Credit Suisse was up 1.75 pct and Novartis jumped 3.88 pct.
 The Dow fell 102.11 points, or 0.59 pct, to 17,324.98, the S&P 500 lost
18.52 points, or 0.92 pct, to 1,992.75 and the Nasdaq dropped 68.50
points, or 1.48 pct, to 4,570.82.
C & E: Oil declined as an erratic dollar and expectations of weakening
demand dashed hopes that a strong rally Wednesday might have signaled a bottom to the seven-month price rout.
 Oil was down 4.64 pct at $46.25 per barrel. Gold was up 2.34 pct to
$1258.26 an ounce. Reuters-Jefferies index lost 1.28 pct to 220.97.
 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
January 15, 2015
MARKET SNAPSHOT as of 3:20 pm EST
TREASURIES <5> <500>
BID
ASK
1-Mo Bill
0.020
0.015
3-Mo Bill
0.030
0.020
6-Mo Bill
0.070
0.065
1-Year
0.155
0.145
2-Year
100.344 100.383
3-Year
100.359 100.398
5-Year
101.945 101.992
7-Year
103.930 103.977
10-Year 104.359 104.422
30-Year 112.695 112.758
REPURCHASE AGREEMENTS
G/C
MORTGAGE REPOS
O/N
0.220
O/N
0.250
2-Week
0.150
2-Week
0.180
1-Month
0.150
1-Month
0.180
3-Month
0.170
3-Month
0.220
AGENCY REPOS
i-REPOSM INDEX
O/N
0.230
10:00 AM
0.164
2-Week
0.160
3:00 PM
0.178
1-Month
0.160
3-Month
EQUITIES
YIELD CHANGE
0.02
-0.002
0.030
-0.005
0.071
-0.011
0.157
-0.017
0.448
0.117
0.754
0.258
1.219
0.512
1.527
0.695
1.765
0.852
2.401
1.547
RATE
0.66
0.69
0.94
0.97
1.34
1.36
1.60
1.62
1.86
1.87
2.30
2.31
U.S. Interest rate swap—yield curve
O/N
1-Month
3-Month
6-Month
12-Month
BID
-
ASK
0.130
0.180
0.250
0.430
0.190
0.300
0.370
0.550
0.114
0.114
0.216
0.124
0.124
-
0.226
MATURITY
9/27/2017
1/21/2020
9/6/2024
11/15/2030
-74.46
-55.95
-13.61
COMMODITIES
NYMEX
BRENT
SPOT GOLD
PALLADIUM
PRICE
CHANGE
46.6
47.7
1258.5
762.9
16.8
-1.9
-1.0
28.9
-10.1
0.0
EURODOLLAR FUTURES
CLOSE
CHANGE
99.748
99.740
99.535
99.175
98.815
98.525
0.000
0.005
0.035
0.070
0.095
0.105
PRICE
120.57
125.23
131.81
CHANGE
0.09
0.16
0.50
BID
1.1612
Sterling
1.5181
JP Yen
116.3500
Swiss Franc
0.87
Can Dollar
1.1972
Mexico
14.6444
ASK
1.1614
1.5184
116.3800
0.87
1.1978
14.6494
Jan-15
Mar-15
Sep-15
Mar-16
Sep-16
Mar-17
CBOT 5 yr
CBOT 10 yr
CBOT 30 yr
CURRENCIES
EBS PRECIOUS METALS
Bid
Ask
SPOT GOLD 1258.46 1259.23
PALLADIUM 1253.24 1260.75
SILVER
16.83
16.87
ACTIVE FANNIE MAE AGENCIES
TERM COUPON
3-Year
1
5-Year
1.625
7-Year
10-Year
2.625
30-Year
6.625
S&P 500
CHANGE
FUTURES
EURODOLLAR DEPOSITS & OVERNIGHT
INDEX SWAPS
ASK
0.140
NASDAQ
INDEX
17352.63
4583.38
1997.66
SILVER
IR SWAPS <19901>
SPREAD
2-Year
21.75
25.75
3-Year
19.50
23.50
5-Year
13.00
17.00
7-Year
7.75
11.75
10-Year
9.50
13.50
30-Year
-9.75
-5.75
0.190
BID
0.120
DJIA
FED FUNDS
Open 0.1300
High 0.2300
Low
0.0800
Euro
ACTIVE FREDDIE MAC AGENCIES
YIELD-SPREAD
-1.5
-4.5
16.75
13.75
31.75
28.75
8
5
YIELD
0.732
1.382
TERM COUPON
3-Year
5-Year
7-Year
10-Year
30-Year
6.25
2.081
2.48
MATURITY
7/15/2032
YIELD-SPREAD
13
10
Wrightson ICAPSM Chart of the Day
Active MBS 15YR
CPN
FNMA
2.5
FHLMC
2.5
BID
103.0600
103.0600
ASK
103.0700
103.0700
YIELD
1.816
1.813
Active MBS 30YR
CPN
FNMA
2.5
FHLMC
2.5
GNMA
2.5
BID
100.1060
99.2870
100.1810
ASK
100.1120
99.2930
100.1850
YIELD
2.452
2.505
2.420
2
YIELD
2.53
INSIDE DEBT
January 15, 2015
TODAY’S TOP NEWS
Cheaper oil tames U.S. producer inflation; jobless claims
up
Global economic outlook is glum despite cheaper oil - IMF
Producer prices in December recorded their biggest fall in more
than three years on tumbling energy costs while underlying inflation pressures were tame, a cautionary note for the Federal Reserve as it ponders its next step on monetary policy.
The Labor Department said its producer price index for final
demand declined 0.3 percent, the biggest drop since October
2011, after falling 0.2 percent in November.
In the 12 months through December, prices at the factory gate
increased 1.1 percent, the smallest gain since November 2013,
after rising 1.4 percent in November.
A broader measure of underlying producer inflation pressures
that excludes food, energy and trade services edged up 0.1
percent after being flat in November.
In a second report, the Labor Department said initial claims for
state unemployment benefits rose by 19,000 to a seasonally
adjusted 316,000 for the week ended Jan. 10.
Separately, the Philadelphia Federal Reserve Bank said its business activity index fell to 6.3, the lowest since February 2014,
from 24.3 in December.
Meanwhile, the New York Fed's Empire State general business
conditions index rose in January to 9.95 from December's revised -1.23 reading, which was its first negative mark since
January 2013.
A sharp drop in oil prices and a stronger U.S. economy probably
won't be enough to brighten the outlook for global growth this
year, the head of the International Monetary Fund warned.
IMF Managing Director Christine Lagarde said that while
cheaper oil would help the world's consumers, the United States
would likely be the only major economy to buck a trend of weakness in investment and consumption.
In a speech that previewed IMF global growth forecasts due
next week, Lagarde wondered aloud if plunging oil prices and
U.S. growth should make the IMF more upbeat.
The answer is most likely 'No', she said before rattling off a
laundry list of the world's economic sore spots.
The euro zone and Japan risk suffering a long period of weak
growth and dangerously low inflation, with the specter of a
nightmarish deflationary spiral of falling prices and wages already looming over Europe, she said.
At the same time, the IMF also sees growth slowing in emerging
markets, led by a slowdown in China.
While softer U.S. data from December has pushed investors to
bet the Federal Reserve will wait longer, perhaps until October,
to raise interest rates, Lagarde said the expected monetary policy tightening could lead to more volatile swings in financial markets, particularly in poorer countries where banks and firms
have borrowed more in dollars in recent years.
Swiss central bank stuns market with policy U-turn
China c.bank tightens loan, deposit measures
The Swiss National Bank shocked financial markets by scrapping a three-year-old cap on the franc, sending the safe-haven
currency soaring against the euro and stocks plunging amid
fears for the export-reliant Swiss economy.
Only days ago, SNB officials had described the 1.20 francs per
euro cap, introduced in 2011 at the height of the euro zone crisis
to prevent the strong currency leading to deflation and a recession, as the cornerstone of the bank's monetary policy.
Today's SNB action is a tsunami; for the export industry and for
tourism, and finally for the entire country, said Nick Hayek, chief
executive of Swiss watch firm Swatch.
SNB Chairman Thomas Jordan denied at a news conference
that the move amounted to a panic reaction, saying the cap had
been scrapped because it was unsustainable.
If you decide to exit such a policy, you have to take the markets
by surprise, Jordan said.
China's central bank is adjusting the way it measures bank deposits and loans, in a bid to increase supervision of cash in the
banking system at a time shadow bank activity has seen a resurgence.
According to a transcript of an official briefing to domestic media
seen by Reuters, the PBOC will include deposits by non-deposit
-taking institutions made in accounts at banks deposit-taking
institutions in calculations of deposits, and will include lending
by deposit-taking institutions to non-deposit-taking institutions in
loan calculations.
Meanwhile, cautious Chinese banks lent 697.3 billion yuan in
December, central bank data showed. Economists polled by
Reuters had expected lending to be little changed from the previous month at 852.7 billion yuan.
The central bank said in a statement that it will maintain appropriate liquidity and steady credit growth in 2015, making targeted policy changes and making monetary conditions not too
tight or too loose.
Consumers, foreign trade drove German 2014 growth of 1.5
percent
Weidmann says ECB action subject to limits
Consumers and foreign trade fuelled a 1.5 percent expansion in
the German economy in 2014, its best performance in three
years, which will prop up the euro zone reading but masks
weakness in the final three quarters of the year.
Private consumption contributed 0.6 percentage points to
growth last year, preliminary data from the Federal Statistics
Office showed, as record high employment, rising wages and
moderate inflation boosted household spending.
Foreign trade added 0.4 percentage points despite persistent
sluggishness in Europe, its top export market, and wars in
Ukraine and the Middle East.
Investment in machinery and equipment also underpinned
growth for the first time in three years while construction provided support after stagnating in 2013. But economists pointed
out that the German economy had not fared as well throughout
2014 as the full-year data for gross domestic product (GDP)
growth suggested.
The head of Germany's central bank said that an EU court opinion, which has been seen as paving the way for fresh money
printing, also showed the European Central Bank was subject to
legal limits on its actions.
Jens Weidmann, the president of Germany's influential Bundesbank, however, said the opinion also showed that there are legal limits on the ECB, warning against the loosening of EU
budget rules. In a speech to business executives, Weidmann,
who also sits on the ECB's Governing Council, made clear that
his critical position towards fresh money printing by the European Central Bank had not changed.
Separately, European Commission Vice President Jyrki
Katainen said the European Commission may use a flexible
interpretation of EU fiscal rules when it makes a final judgment
on Italy's 2015 budget in March.
3
INSIDE DEBT
January 15, 2015
TODAY’S TOP NEWS
(continued)
Falling euro, energy costs widen euro zone surplus in November
BOJ keeps upbeat view on most regions of Japan
The Bank of Japan maintained its upbeat economic assessment
for eight of Japan's nine regions in a quarterly report, signaling
that the country is on track to emerge from recession without
additional monetary easing.
In the report issued at a meeting of BOJ branch managers, all of
the regions, including one that cut its assessment, said their
economies are recovering with households spending more as
the pain from a sales tax hike in April last year subsides.
Department store sales during the holiday shopping season
exceeded year-before levels. Overseas tourists are also buying
huge amounts of goods, Hidehiko Sogano, head of the BOJ's
branch in Hokkaido, northernmost Japan, told a news conference.
Meanwhile, Japan's core machinery orders rose less than expected in November. The 1.3 percent increase in core orders
lagged a 5.0 percent rise forecast by economists in a Reuters
poll. It followed a 6.4 percent decline in October.
A slight increase in exports and lower imports helped the euro
zone widen its trade surplus in November, helped by a weaker
euro and oil prices that are cushioning the impact of a dramatic
drop in sales to Russia.
Unadjusted for seasonal swings, exports to the rest of the world
rose 1 percent and imports fell 2 percent, swelling the bloc's
trade surplus to 20 billion euros versus 16.5 billion euros in November 2013, the EU's statistics office Eurostat said.
Economists polled by Reuters expected a surplus of 19.6 billion
euros. Adjusted for seasonal changes, exports rose 0.2 percent
compared to October 2013. Imports were flat.
Germany, Spain and Italy all increased their exports in the first
10 months of 2014, selling more manufactured goods.
The deficit in energy trade after 10 months of 2014 was 237.7
billion euros compared to 267.7 billion euros in 2013. For the
period, the cost of energy imports dropped 11 percent, a greater
margin than the bloc's falling energy exports.
France leaves tax-free savings account rate unchanged
Rosengren would delay U.S. rate hike until inflation evident
France will keep the interest rate on the hugely popular Livret A
tax-free savings accounts unchanged at 1 percent on February
1, the French finance ministry said.
The ministry said it had made an exemption to the rules for calculating the interest rate on the accounts, which would otherwise have fallen to only 0.25 percent. The rate was last cut on
Aug. 1, from 1.25 percent.
Earlier, Bank of France governor Christian Noyer had recommended cutting the rate to 0.75 percent.
The central bank's rate recommendation is based mainly on
recent inflation trends. Inflation excluding tobacco prices stood
at only 0.1 percent in December, the lowest level in five years.
Separately, Finance Minister Michel Sapin told Reuters that
France cut state spending in 2014 meaning it likely met its public deficit target, with Paris hoping this will boost its chances to
avoid EU budget sanctions. Preliminary finance ministry figures
published showed state spending dropped by 3.3 billion euros in
2014 compared to 2013, excluding debt and pension costs.
Boston Fed President Eric Rosengren said he lacks confidence
that inflation will soon rise, and he wants to see more evidence
of a rebound in wages and prices before the Federal Reserve
hikes interest rates, according to the Wall Street Journal.
In an interview with the newspaper, Rosengren, a dovish U.S.
central banker who does not vote on policy this year, said If we
don't see any evidence in wage and price data for a year, then
I'd wait a year before I'd be doing something.
Rosengren was quoted as saying he was not particularly confident inflation was moving back toward the Fed's 2-percent target, from about 1.5 percent now, citing some market-based
price measures.
My expectation is that if we continually undershoot we won't
raise rates as quickly as we would have ... if we don’t start seeing wages and prices moving in the direction that we expect, he
said. That is the implication of patience.
NEXT UP
June U.S. rate hike likely despite low inflation- economists
ECB will almost certainly conduct QE in Jan or March
The Federal Reserve will raise U.S. interest rates in the second
quarter as a strengthening economy trumps concerns about low
inflation that has been driven down even further by a collapse in
world oil prices, according to a Reuters poll.
Nearly two-thirds of the 82 economists in the poll said the U.S.
central bank would increase its short-term interest rate to at
least 0.25 percent by mid-2015. Most expected this to happen at
the Fed's June policy meeting rather than April.
The survey forecast growth averaging 3.2 percent this year and
2.8 percent in 2016. When economists were polled in December, they saw growth averaging 3.0 percent this year.
The survey forecast inflation to average 0.9 percent this year,
compared with 1.4 percent in the December poll. The core CPI
is projected to average 1.8 percent this year and 2.1 percent in
2016. But some economists say still-tepid wage growth, even as
job growth accelerates, could see the Fed delay. The median
forecast for the federal funds rate was 0.625 percent in the third
quarter, representing a mid-point between 0.50 and 0.75 percent. It is currently between 0.0 and 0.25 percent. That midpoint then rises to 1.125 percent by the first quarter of 2016,
little changed from the December survey.
The European Central Bank will almost certainly embark on a
sovereign bond purchase program, and possibly announce one
as soon as next week, according to economists in a Reuters
poll.
There is now a 90 percent chance the ECB conducts quantitative easing (QE), the poll of more than 50 economists taken this
week showed. Through most of 2014, forecasters consistently
gave only an even chance, at most.
Economists gave a median 70 percent likelihood an announcement would come as early as next week while all but one respondent said the ECB will act in March if not this month.
Inflation is likely to average 0.2 percent in 2015, followed by 1.2
percent next year, while growth will also stay muted and rise
just 0.3 percent in the first and second quarters.
For the full year the economy is seen expanding 0.8 percent.
Germany is forecast to expand 0.3 percent in the first quarter
and average 1.4 percent this year. In France, growth is expected to average 0.8 percent in 2015 and 1.3 percent next
year. Italy is projected to grow 0.4 percent this year, the first rise
since 2011. Spain is predicted to grow 1.9 percent in 2015.
4
INSIDE DEBT
January 15, 2015
EYE ON ASIA
POLL & PREVIEW
EVENTS
India makes surprise early rate cut, more expected
SINGAPORE
 Non-oil exports (mm) for Dec: Expected -1.7 pct Prior 2.9 pct
 Non-oil exports (yy) for Dec: Expected -2.3 pct Prior 1.6 pct
The Reserve Bank of India surprised markets with a 25 basis
point reduction in interest rates and signaled it could cut further.
The RBI cut the repo rate - its key lending rate - to 7.75 percent
from 8.0 percent.
As a result, the reverse repo rate also moved down by 25 basis
points to 6.75 percent.
Meanwhile, India's trade deficit narrowed by 44 percent from the
previous month to $9.43 billion, its lowest since February 2014.
The cost of oil imports, at $9.94 billion, fell 15 percent from November.
Separately, The RBI's quarterly survey on inflation showed
households expect a much lower rate of consumer inflation.
The survey showed households expected consumer inflation of
8.9 percent in the October-December quarter in the year ahead
period, down sharply from 16 percent in the previous quarter.
For the three-month period, the median showed households
expecting inflation at 8.3 percent, down from 14.6 percent in the
previous quarter.
For Jan16
POLL & PREVIEW
(continued)
Indonesia's c.bank holds rates, sees inflation cooling
Indonesia's central bank held its benchmark interest rate
steady, showing confidence that the country's inflation rate will
cool back to a normal level after a spike late last year.
Bank Indonesia (BI), at the year's first policy meeting, kept its
policy rate at 7.75 percent, and also held other rates steady.
All but one of 15 analysts in a Reuters poll predicted BI would
hold the benchmark, with the other seeing a 25 basis point hike
after the annual inflation rate hit 8.36 percent in December.
Between June and November 2013, BI raised the benchmark
rate by 175 basis points to combat inflation, bolster the fragile
rupiah and contain the then-widening current account deficit.
That deficit narrowed in 2014 to about 3 percent of gross domestic product. On Thursday, BI official said the outlook for
2015 is for a deficit of 3 percent, rather than the 2.8 percent
seen in September last year.
Bank of Korea holds rates, talks up outlook, talks down
need for cuts
South Korea's central bank held monetary policy steady and
sharply cut this year's economic growth and inflation forecasts.
The BOK's monetary policy committee left its base rate unchanged at 2.00 percent in a unanimous vote.
The BOK trimmed this year's economic growth and inflation
forecasts by a half of a percentage point each seen at 0.4 percent on a sequential basis from an expected 1.0 percent.
BOK governor added that average quarterly growth this year
would pick up to around 1.0 percent from 0.7 percent in 2014.
Twenty-seven out of the 34 analysts surveyed by Reuters had
forecast the Bank of Korea would hold the rate steady on Thursday.
Taiwan Dec export orders to slow, but 2014 set for record
Orders for Taiwan's exports in December likely grew 1.6 percent from a year earlier, a Reuters poll showed, far slower than
November's 6 percent gain.
For 2014, Taiwan is on track to post a record annual amount in
export orders. In the first 11 months of last year, export orders
totaled $428.59 billion.
Taiwan's export orders are a leading indicator of demand for
Asia's exports and for hi-tech gadgets, and typically lead actual
exports by two to three months.
MARKET SNAPSHOT as of 3:20 pm EST
GOVERNMENT BOND BENCHMARKS
5-Year
Bid
Yield
Australia
111.172 2.225
Japan
100.407 0.017
China
100.303 3.458
Hong Kong 101.030 1.109
Singapore 101.200 1.361
10-Year
Bid
Yield
106.155 2.563
100.454 0.253
104.541 3.570
102.550 1.569
109.000 1.969
INTEREST RATE SWAPS
<SWAPS>
5-Year
10-Year
Bid
Ask
Bid
Ask
AUD
2.6375 2.6975 2.9625 3.0225
JPY
0.195
0.255 0.4325 0.4925
CNY
3.91
4.11
HKD
1.39
1.47
1.83
1.91
TWD
1.56
1.62
INR
KRW
SGD
2.045
1.67
2.085
1.695
6.54
2.235
2.165
FORWARDS 3 months <FORWARDS>
ASIA FUTURES
6.84
2.275
2.18
Close
Change
SGX Nikkei 225
16910.00
-230.00
JPY
Bid
-10.44
-9.94
SGX MSCI Taiwan
339.80
11635.00
373.00
2.50
-20.00
-1.00
AUD
NZD
HKD
-54.45
-67.76
1
-53.95
-67.36
4
8537.50
472.06
73.00
3.10
SGD
THB
13
14
14
14.5
SGX FTSE China
SGX MSCI Singapore
SGX CNX Nifty
SGX AC ASIA P xJP
DEPOSITS 3 months
<DEPOS>
Bid
-0.05
4.95
2.8
3.7
0.25
0.5625
JPY
CNY
AUD
NZD
HKD
SGD
5
Ask
NDF’s 3 months
<NDFS>
Ask
Bid
CNY
0.0475 0.0525
TWD
KRW
INR
-0.05
1086.8
62.72
-0.03
1087.9
62.79
MYR
3.605
3.608
PHP
IDR
44.69
12825
44.73
12855
INSIDE DEBT
January 15, 2015
EYE ON LATAM
LATAM TOP STORIES
LATAM MARKETS TODAY
Brazil economic activity picks up in November but remains
weak
TREASURIES
Mexican10-Year
Brazil's economic activity rose slightly in November after a surprise drop in the previous month, with the mild recovery still
pointing to a lackluster fourth quarter, central bank data
showed.
The IBC-Br economic activity index rose 0.04 percent from October in seasonally adjusted terms, above the median estimate
for a 0.20 percent drop.
The bank revised the index for October to a 0.12 percent drop
from a slide of 0.26 percent.
A sharp drop in business and consumer confidence during the
presidency of leftist Dilma Rousseff has dented investment and
dragged down the once-booming Brazilian economy.
Peru's economy grows at weakest pace since 2009 in Nov
Peru's economy grew 0.31 percent in November from the same
month a year earlier, the slowest monthly expansion in more
than five years and well below market expectations, data from
state statistics agency Inei showed.
Analysts polled by Reuters had forecast 1.55 percent growth in
November.
The economy surged 7.97 percent in November 2013.
After slowing to 0.34 percent year-on-year in June, growth
picked up to 2.7 percent in September before slowing again in
October.
In all of 2014, gross domestic product likely rose by about half
of 2013's 5.8 percent.
The economy grew 2.5 percent in the first 11 months of 2014
and 2.9 percent in the 12 months through November, Inei said.
During a mining boom in the past decade, annual growth rates
tended to top 6 percent.
Growth in November was led by retail, construction, agriculture
and services, which expanded 3.78, 3.68, 5.32 and 6.23 percent
respectively.
Yield
5.58
Price
5 /32
Mexican 5-Year
4.86
14 /32
Brazilian10-Year
12.16
140 /32
Brazilian 5-Year
12.28
76 /32
Argentine 2-Year
9.00
26 /32
Chilean 5-Year
-0.49
30 /32
Colombian 5-Year
5.70
8 /32
Peru 30-Year
6.71
-1 /32
Venezuela PDVSA 30 year
18.07
-13 /36
Venezuela PDVSA 10 year
37.05
-94 /34
EQUITY
MSCI Latin American Index
Close
2614.48
Pct Change
-0.56
Brazil's Bovespa Index
48026.31
0.8
Mexico's IPC Index
40998.77
0.04
Chile's IPSA Index
3729.39
-0.53
Fallabella
3820.00
-1.93
Cencousud
1351.10
-1.27
Petrobras
9.34
6.86
Grupo Mexico
38.99
1.25
CURRENCIES
Last
Pct Change
Brazilian Real
2.641
Mexican Peso
14.6587
1.22
Chile Peso
625.02
-0.05
2410
-0.62
3.0005
0.13
Columbian Peso
Peru Sol
LATAM TOP STORIES
0.96
(continued)
Latin America 2015 outlook darkens as commodities sink
WTO rules against Argentina in import restrictions case
Latin America has embarked on a painfully long period of
greater austerity, and lower commodity prices and economic
growth will barely pick up speed this year, a Reuters poll found.
With nose-diving oil and metal prices weighing on government
finances and jeopardizing investments, economists in the quarterly poll chopped 2015 growth forecasts again for the region's
seven largest countries, from Mexico to Argentina.
Brazil is now expected to grow a meager 0.5 percent in 2015,
down from an estimate of 1.1 percent in the prior survey.
Mexico will probably expand by 3.4 percent, compared to 3.7
percent in the last poll, while oil producer Venezuela will probably contract 2.0 percent, according to the poll.
Growth would probably improve somewhat in 2016, but would
still fall short of the region's potential Brazil, the region's largest
economy, is expected to grow just 1.8 percent.
The free-fall in commodity prices since mid-2014 has dealt a
direct blow to Latin America. Iron ore and copper are top exports for Brazil and Chile, while oil, which touched the lowest in
almost six years on Wednesday, accounts for more than 50
percent of Colombia's exports.
The World Trade Organization rejected Argentina's bid to overturn a ruling in favor of the United States, European Union and
Japan against the South American country's licensing rules
used to restrict imports.
The WTO's appellate body recommended Argentina fix its trade
rules after it upheld an earlier WTO panel report that Argentina's
import licensing requirement and other import restrictions
breach international trade rules.
Faced with a struggling economy, Argentina's government has
limited imports in a bid to shield local industries and bolster its
trade surplus. In 2012, the country imposed a system requiring
prior approval of nearly every purchase from abroad, sparking
the WTO case.
The U.S. National Association of Manufacturers said Argentina
should quickly scrap its burdensome import requirements and
the administration said it would continue to make sure trading
partners played fair.
6
INSIDE DEBT
January 15, 2015
DEEP DIVE Commentary and Analysis
SNB remains neutral, surrenders
the rest of the world.
While this undermines central bank credibility as a whole, the
line many will argue is between the big boys, like the ECB and
Fed, and smaller fry like the SNB and Bank of England. Will the
SNB’s climbdown lessen the value of Draghi’s “whatever it
takes” pledge Not so far, on the evidence, but bears watching.
The deflation angle is interesting here too. Obviously a much
stronger currency will have a downward impact on inflation.
This was part of the original justification for the peg, as well as
protecting industry and tourism. Generally, the forces of deflation globally look to have the upper hand now.
All of this heightens the potential for further dovish behavior
from central banks a big-bang QE from the ECB if it can make it
happen politically and a further backing away from hikes by the
Fed.
It is shaping up to be quite a week for tail risk, and potentially
quite a year.
By James Saft
The Swiss National Bank’s surrender to markets argues that
next week’s Greek election and European Central Bank meeting
will bring much danger and volatility.
The SNB’s abrupt climb-down from its vow to cap the value of
the Swiss franc against the euro indicates a real, blood-cooling
fear it could be swamped if either big event goes badly.
It also is a lesson in the limits of the powers of central banks,
both in their fight against deflation and in battles with markets.
This may influence their credibility outside Switzerland, and not
for the better.
Three years after vowing to defend, in unlimited amounts if
need be, a floor of 1.2 francs to the euro, the SNB on Thursday
allowed the pair to float, touching off a 30 percent appreciation
in the franc which settled to a gain of about 15 percent for the
day.
Despite only this week calling the peg the cornerstone of its
policy, the SNB stepped back, in the process making brave
noises about the impact on the economy and the threat of deflation.
Even better, the SNB, while abandoning the peg and prompting
that 15 percent one-day surge in the franc, also cut interest
rates by another half percentage point, to -0.75 percent.
This was done, in the SNB’s words, “to ensure that the discontinuation of the minimum exchange rate does not lead to an
inappropriate tightening of monetary conditions.” That is like
shooting a man in the belly and putting a Band-Aid on his elbow
so he doesn’t bleed too much.
There is no surprise that this is happening just before the ECB
is set to meet on Jan. 22, when it is expected to announce an
expanded program of quantitative easing which, if successful,
will weaken the euro.
Just three days later Greece goes to the polls, an election which
may well return a government whose policies over its debts risk
a fracture with the rest of the euro zone.
Steven Englander, foreign exchange strategist at Citigroup,
thinks the move may have been in anticipation of capital flows
into Switzerland around the two events.
“They may be seeing signs already that these are ramping up.
Otherwise the incentive would have been to wait and see
whether events transpired as negatively as they feared,” Englander wrote in a note to clients.
It is unlikely we think that the ECB has tipped off the SNB in any
formal way, but it is possible that they inferred from informal
conversations which way the wind was blowing.
(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.)
Copper's plunge bad omen for world economy or just an
interesting sideshow?
By Josephine Mason
The price of copper, the metal often regarded as a benchmark
of global industrial demand, has taken an 8-percent dive this
week to its lowest levels in 5 12 years - and in doing so ignited
an argument about whether an already punch-drunk world
economy is about to suffer another sharp blow.
On one side of the debate are some investors who believe the
plunge in the price of the metal known as Dr. Copper is reflecting new and ominous signs about the health of China's economy. On the other are traders and economists who see it as
simply a schism of little relevance to the fate of global growth.
For money managers handling billions of dollars of clients'
cash, the sell-off that has pushed copper into bear territory is a
turning point, reinforcing fears of a prolonged downward spiral concerns already fueled by the collapse in the price of crude oil.
The Chinese economy's strength has been one of the few engines driving the global economy since the financial crisis.
They don't call it Dr. Copper for nothing, said Jeffrey Gundlach,
co-founder of DoubleLine Capital, which oversees $64 billion in
assets under management. The drop in copper simultaneous
with the collapse in crude oil can only be interpreted as an indication of slowing global growth.
To Daniel Alpert, founding managing partner of investment
banking firm Westwood Capital LLC, the plunge in the price of
oil, and now copper, is a clearer sign of inadequate global demand rather than a sudden leap in supply. The imbalances
have been there through and after the Great Recession, but
have been masked to some extent by central bank megaeasing. The mask has been removed and the markets are reacting accordingly,” he said.
Not so fast, say many copper traders and analysts, who have
been closely tracking copper's long, slow grind lower over the
past two years as Beijing has reined in credit and taken measures to prevent its housing market from going from a boom to a
bust.
While copper's fortunes have largely tracked those of China for
the past decade, this week's meltdown appears more rooted in
a conflation of bearish factors a flight by Chinese hedge funds
from commodities; fears about oil-related contagion; and a sea-
WHOSE OX GETS GORED
Arguably this is helpful to the ECB, though how it plays out remains to be seen. While Swiss euro buying was a support to
euro zone government bonds, so will be a weaker euro. As well,
the ECB, as markets hope it demonstrates next week, can be
far more effective and forceful in supporting its own bond markets than can the SNB through a back-door route.
The important thing to remember is that the SNB for three years
was offering the world an escape hatch out of the euro just apply, in unlimited size, and we’ll give you francs at a pre-agreed
minimum.
That is a 'picking up nickels in front of a steamroller' strategy,
and though the SNB and Switzerland have gotten some benefit
out of it, the major risk is that should things go very badly for the
euro project, or ECB QE, or both, they see the peg broken only
after piling up many billions more euros.
Beyond pointing out the heightened event risk next week, the
SNB's move may have interesting longer-term implications for
7
INSIDE DEBT
January 15, 2015
DEEP DIVE Commentary and Analysis
(continued)
sonal dip in demand ahead of the Chinese Lunar New Year.
The plunge was driven by investor panic rather than the sudden
deterioration in fundamentals and, as such, it could be swiftly
reversed, said Capital Economics chief global economist Julian
Jessop.
To be sure, the pace and size of the sell-off shocked traders as
prices dived more than $500 per tonne in early Asian trading a
day ago. While a downgrade in the World Bank's global economic growth forecasts contributed to the bearish mood, traders
said the selling had been overdone.
growth in the Chinese economy. Last week, Beijing introduced
new rebates on export taxes for some copper products, measures aimed at easing domestic oversupply that has developed
as demand slowed and capacity expanded.
Yet while demand growth in China is slowing, it's coming from
record highs. The Chinese economy is still expected to grow at
a 7-percent clip this year - much slower than the double-digit
growth rates of a few years ago as it transitions away from an
investment-led and export-driven growth model to a more balanced economy with the domestic consumer playing a bigger
role.
Traders saw little sign that the exit of Chinese speculative cash
was a harbinger of a deeper exodus or of a seismic shift in demand or supply, though they did say it reflected the increasing
influence of Chinese funds.
Chinese funds displayed their power. They can smash the market, said INTL FCStone analyst Ed Meir in New York.
Last March, hefty selling by secretive funds in the country triggered a three-day drop in prices, rattling traders, but the episode did not have a long-lasting impact on the market.
The first quarter is often weak as fabricators buy less copper
ahead of the week-long Chinese New Year holiday, which this
year is in late February.
The sky hasn't fallen in, said Leon Westgate, base metals
strategist at Standard Bank.
The key will be whether prices hold around here. That will be a
better indicator than today's knee-jerk reaction, he said.
LEADING OR LAGGING
Widely used across the industrial economy for everything from
electrical wiring to plumbing, copper's reputation as a bellwether
for the world economy is well-earned, but in more recent years it
has become most heavily swayed by China alone.
Feeding the country's construction industry, China accounts for
about 40 percent of the world's consumption. Prices surged
from $3,000 per tonne a decade ago to a peak of $10,000 in
2011.
On Wednesday they fell over 5 percent to close at $5,353 a
tonne, slicing through key support levels and unleashing a wave
of computer-generated sale orders. The sell-off spooked financial markets, with U.S. stocks falling as much as 2 percent and
shares in copper miners like Glencore and Freeport-McMoRan
Inc suffering declines of 9-11 percent.
To be sure, some of the weakness in copper stems from slowing
INSIDE DEBT is produced by Reuters in partnership with ICAP.
Edited and compiled by Shashwat Sharma and Midhun Raj in Bengaluru.
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