The MorningSnapshot- 09/17

The MorningSnapshot
September 17, 2012

Morning Commentary
Sentiment is negative this morning, with European stocks declining from a 15-month high, U.S. equity futures pointing lower, and Asian stocks little changed as concern of a deepening economic slowdown in China overshadowed optimism resulting from the Fed’s third round of easing. U.S. Treasuries were steady overnight after yields on the long-end of the curve surged last week amid concern QE3 may spur inflation; the 5yr breakeven is at its highest level since July 2008 and 10s at the highest since April 2011.

QE3: Bernanke Expands The Fed’s Holdings of Long-Term Securities
The Fed said it would expand its holdings of long-term securities with open-ended asset purchases of $40B in MBS each month as Bernanke seeks to boost economic growth and reduce unemployment. “If the outlook for the labor market does not improve substantially, the committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases and employ its other policy tools as appropriate,” the Federal Open Market Committee said yesterday in a statement at the end of a two-day meeting in Washington. As almost everyone had anticipated, the FOMC said it would likely hold the federal funds rate near zero “at least through mid-2015.”

S&P Downgrades Ignored (Again)
When Standard and Poor decided to strip America of her AAA debt rating, the risk markets’ reaction was muted to say the least. When S&P cut the rating for France in January, along with eight of its euro-region neighbors, it said policy makers were failing to stem Europe’s debt crisis and the refinancing costs for certain countries may remain elevated. However, French President Francois Hollande has seen the cost of servicing his nation’s debt fall since taking office in May. Yields on 10yr French bonds fell to a record-low 2.002% on Aug. 3, from 3.08% at the time of the downgrade. The drop is greater than the fall in the German 10yr bund yield, which fell 52bps to as low as 1.25% Aug. 3, and yields on Treasuries, which fell less than -40bps during the same period. By almost any measure, France is more creditworthy borrower eight months after losing their AAA rating with S&P. Price/yield action on French debt shows investors have determined the analysis done by ratings firms on the world’s largest nations to be irrelevant.

Today’s Economic Data Lineup (EST)
8:30 am: Empire State Manufacturing, Sept. est. -2 (prior -5.85)
11:00 am: Fed to purchase $4.5b-$5.5b notes due 11/15/2020-8/15/2022
11:00 am: Fed to sell $7b-$8b in notes 12/31/2014-5/31/2015
11:30 am: U.S. to sell 3-mo, 6-mo bills

North America

  • The Federal Reserve Bank of New York’s general economic index fell to -10.41, the lowest level since April 2009, from -5.85 in August; the median forecast of 53 economists called for a reading of -2.
  • Striking Chicago school-teachers left the city’s students at home for going on a second week after rejecting a new contract; Mayor Rahm Emanuel has promised to head to the courtroom to force teachers back into the classroom.


  • Quiet, relative the rest of the world.


  • Exports from Singapore fell more than economists had estimated in August as shipments of electronics dropped and companies sold fewer goods to Europe. Non-oil domestic exports fell -10.6% Y/Y, after a revised +5.7% increase in July; the median estimate in a Bloomberg News survey was for a -4% drop.
  • India’s central bank unexpectedly reduced the amount of deposits lenders must set aside as reserves (the cash reserve ratio) in an attempt to revive growth even as it kept interest rates unchanged to damp inflation. The cash reserve ratio was cut 25bps to 4.5%, effective September 22, adding nearly 170B rupees ($3.1B) in liquidity to the banking system.
  • Sales at South Korean department stores took a dive, declining the most since 2005 in August as Europe’s debt crisis weighed on consumer sentiment and as a large national holiday fell later in the year than usual. Outlays at the three biggest chains declined -6.9% Y/Y in August after a -1.3% drop in July. Discount store sales fell -3.3% last month.
  • Amid the U.S. Fed’s third round of quantitative easing that risks fueling existing asset bubbles, Hong Kong is widening its efforts to cool home prices that have gained nearly 90% since early 2009. The Hong Kong Monetary Authority will limit the maximum term on all new mortgages to 30 years, and mortgage payments for investment properties cannot exceed 40% of the buyers’ monthly incomes, from the current 40%. The Hang Seng Property Index rallied 11% over six-days on optimism the Fed’s QE3 program would fuel inflows into the city, which tracks U.S. monetary policy because of a currency peg to the dollar.

“Be kind whenever possible. It is always possible.”
-Dalai Lama
Taylor Anderson
Business Analyst
Clearing House

T 312 634 8902
F 312 930 3187
C 312 618 8339

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