Page 2 of 3 CREDIT BUBBLE BULLETIN
Asia reflation moves to the wild side
Commentary and weekly watch by Doug Noland
U.K. 10-year gilt yields rose 7 bps to 3.81%, and German bund yields jumped 14
bps to 3.40%. The German DAX equities index surged 8.8% (up 3.5%). Japanese
10-year "JGB" yields added 2 bps to 1.315%. The Nikkei 225 rallied 1.2% (up
6.0%). Emerging debt markets were strong and equities were stronger. Brazil's
benchmark dollar bond yields dropped 16 bps to 5.80%. Brazil's Bovespa equities
index rallied 5.8% (up 38.7% y-t-d). The Mexican Bolsa surged 8.8% (up 15.0%
y-t-d). Mexico's 10-year $ yields declined 6 bps to 5.90%. Russia's RTS
equities index recovered 10.7% (up 46.4%). India's Sensex equities index
jumped 9.2% (up 52.8%). China's Shanghai Exchange inflated another 2.4%,
increasing 2009 gains to 75.2%.
Freddie Mac 30-year fixed mortgage rates declined 6 bps to 5.14% (down 112bps
y-o-y). Fifteen-year fixed rates fell 6 bps to 4.63% (down 115bps y-o-y).
One-year ARMs declined 6 bps to 4.76% (down 34bps y-o-y). Bankrate's survey of
jumbo mortgage borrowing costs had 30-yr fixed jumbo rates increased 9 bps to
6.46% (down 74bps y-o-y).
Federal Reserve Credit jumped $34.2bn last week to $2.012 TN. Fed Credit has
declined $235bn y-t-d, although it expanded $1.123 TN over the past 52 weeks
(126%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week
(ended 7/15) declined $4.6bn to $2.782 TN. "Custody holdings" have been
expanding at a 19.6% rate y-t-d, and were up $434bn over the past year, or
18.5%.
M2 (narrow) "money" supply was little changed at $8.349 TN (week of 7/6).
Narrow "money" has expanded at a 3.6% rate y-t-d and 8.9% over the past year.
For the week, Currency declined $1.2bn, while Demand & Checkable Deposits
added $2.3bn. Savings Deposits gained $13.4bn, while Small Denominated Deposits
declined $7.6bn. Retail Money Funds dropped $6.9bn.
Total Money Market Fund assets (from Invest Co Inst) dropped $21.0bn to $3.647
TN. Money fund assets have declined $183bn y-t-d, or 8.9% annualized. Money
funds expanded $149bn, or 4.2%, over the past year.
Total Commercial Paper outstanding sank another $39.7bn to $1.097 TN. CP has
declined $585bn y-t-d (65% annualized) and $653bn over the past year (37%).
Asset-backed CP fell $15.4bn to $441bn, with a 52-wk drop of $304bn (41%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $8.0bn y-o-y to $6.985 TN, the highest level since last
October. Reserves have now increased $168bn year-to-date.
Global Credit Market Watch
July 16 - Bloomberg (Lester Pimentel): "JPMorgan Chase & Co.'s EMBI+ index
rose to a record high as the prospects for a faster recovery in developing
economies boost demand for their bonds."
July 14 - Bloomberg (Matthew Leising): "The US Justice Department is
investigating the market for credit-default swaps, according to Markit Group
Ltd., the data provider majority-owned by Wall Street's largest banks."
Government Finance Bubble Watch
July 15 - Financial Times (Richard McGregor): "Beijing's foreign reserve
holdings have surged through the $2,000 billion mark, as money pours back into
China to take advantage of faster economic growth and rapidly inflating asset
prices.. The People's Bank of China ... announced ... that foreign reserves
reached $2,132bn ... The reserve build up in the second quarter was $177.9bn,
including a monthly record in May of $80.6bn. The quarterly figure far
outstrips China's trade surplus and inbound foreign direct investment ... proof
that the accumulation of funds inside the country is being driven by other
factors. 'China's foreign exchange reserve headache has returned,' said Stephen
Green, of Standard Chartered ... The latest figures also represent an abrupt
reversal of an emerging trend of the previous two quarters. Foreign reserves
increased by just $7.7bn in the first three months of the year, and $40.4bn in
the fourth quarter of 2008 ... Chen Xingdong, of BNP-Paribas ... calculated
that after taking account of the trade surplus, foreign investment and the
impact of changes in global currency valuations, about $70bn in hot money came
into China in the second quarter…"
July 13 - Bloomberg (Vincent Del Giudice): "The US budget deficit topped $1
trillion for the first nine months of the fiscal year and broke a monthly
record for June ... The excess of spending over revenue for June was $94.3
billion, the first deficit for that month since 1991 ... The June deficit
compares with a surplus of $33.5 billion in the same month a year earlier.
Spending last month surged 37% to $309.7 billion and revenue fell 17% to $215.4
billion…"
July 14 - Bloomberg (Norihiko Kosaka): "Japanese Prime Minister Taro Aso ... is
relying on pork-barrel spending to win voters who have turned cold on his
ruling Liberal Democratic Party. Included in Aso's record 15.4-trillion yen
($167bn) stimulus package are 12.4 billion yen to get rid of fishing gear
dumped by foreign boats and 400 million yen for cutting down trees to keep
'beasts and birds' out of towns ... The money flow is unraveling the work of
former Prime Minister Junichiro Koizumi, who set goals to contain the world's
largest debt burden and cut spending by as much as 3% on public-works
projects."
July 15 - Bloomberg (Shinhye Kang): "South Korea's plan to spend $84 billion in
the next five years on improving energy efficiency may boost growth in Asia's
fourth-largest economy by 4% annually…"
July 13 - Bloomberg (Valerie Rota): "Mexico's fiscal accounts may be heading
toward 'unsustainable deficits' as a decline in oil production cuts government
revenue, according to Morgan Stanley. Mexico may need to curb spending growth
to keep the deficit in check ... analysts Luis Arcentales and Daniel Volberg
wrote…"
July 16 - Bloomberg (Oliver Suess): "Mohamed El-Erian, chief executive officer
of Pimco ... said governments in industrialized countries will face a 'massive
challenge' due to the increase in spending to fight the financial crisis.
'While in the short term it makes total sense to increase deficits to react to
the crisis, governments in industrialized countries are going to face a massive
challenge as these are not long-term policies ... It's not easy to exit this
transition. It takes a long time.'"
Currency Watch
July 13 - Bloomberg (Keiko Ujikane and Kyoko Shimodoi): "Japan's opposition
party, leading in polls ahead of next month's election, said the nation should
consider shifting its $1 trillion of foreign reserves away from the dollar and
buying International Monetary Fund bonds. 'In the medium to long term, we need
to do what we can to avoid the risk of currency losses or economic turbulence
that could result if the dollar were to swing,' Masaharu Nakagawa, the shadow
finance minister in the Democratic Party of Japan, said ... 'Many countries are
starting to diversify their reserves.' Japanese investors are the biggest
foreign holders of Treasuries after China with $685.9 billion of the securities
in April…"
July 14 - Financial Times (Abeer Allam): "Tim Geithner, US treasury secretary,
sought to assure Gulf nations on Tuesday about their holdings of treasury bills
when he told Saudi business leaders that his country "has a special
responsibility to play" in defending the value of the dollar."
The dollar index declined 0.9% this week to 79.52. For the week on the upside,
the Canadian dollar increased 4.2%, the Brazilian real 3.5%, the Australian
dollar 3.0%, the New Zealand dollar 2.7%, the South African rand 2.7%, the
Mexican peso 2.6%, the Norwegian krone 2.1%, the South Korean won 1.8%, the
Swedish krona 1.4%, the Euro 1.2%, and the Swiss franc 0.9%. On the downside,
the Japanese yen declined 1.8%.
Commodities Watch
Gold ended the week up 2.7% to $937.40 (up 6.3% y-t-d). Silver rallied 5.7% to
$13.37 (up 18.4% y-t-d). August Crude jumped $3.49 to $63.38 (up 42% y-t-d).
August Gasoline rose 6.7% (up 66% y-t-d), and August Natural Gas surged 8.1%
(down 35% y-t-d). September Copper jumped 9.6% (up 72% y-t-d). September Wheat
rose 4.4% (down 11% y-t-d), while August Corn slipped 1.8% (down 21% y-t-d).
The CRB index rallied 4.9% (up 6.8% y-t-d). The Goldman Sachs Commodities Index
(GSCI) surged 6.3% (up 23.2% y-t-d).
China Reflation Watch
July 16 - Bloomberg: "China's gross domestic product grew 7.9% in the second
quarter as the nation became the first of the major economies to rebound from
the global recession."
July 16 - Bloomberg (Tommy Stubbington and Andrew MacAskill): "China's economic
growth pace still can't create enough jobs to meet the needs of the migrant
workers who leave the country's rural areas every year to seek employment, said
the statistics bureau's spokesman Li Xiaochao. 'We're still facing great
pressure in generating jobs,' Li said…"
July 13 - Bloomberg: "China's June fiscal revenue rose 19.6% from a year
earlier, while spending climbed 21.5%... Fiscal revenue has improved since May
along with the economy, the ministry…"
July 16 - China Knowledge: "China's total fixed asset investment surged 33.5%
year on year to RMB 9.13 trillion (US$1.34 trillion) in the first half of this
year, according to... the National Bureau of Statistics..."
July 17 - Bloomberg: "China's crude steel production, the largest in the world,
rose to a record in the first half as the nation's $586 billion stimulus
package spurred demand from builders and carmakers. Output gained 1.2% to 266.6
million metric tons…"
July 16 - Financial Times (Lindsay Whipp in Tokyo and Patti Waldmeir): "China
has overtaken Japan to become the world's second biggest stock market by
capitalisation as investors pile into the fast-growing economy. China's listed
companies had a market capitalisation of $3,210bn ... compared with Japan's
$3,200bn…"
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