Mish's Global Economic Trend Analysis

Fed Keeps Low-Rate Policy Intact; Treasury Yields Spike Anyway; Hissy Fit Over Fluff
European Car Sales Hit 20-Year Low; Don't Worry, Things Have Stabilized
Cash Squeeze in China, Interest Rate Swaps Rise Most in 22 Months; China's Credit Bubble About to Pop; Shadow Banking Crackdown

Fed Keeps Low-Rate Policy Intact; Treasury Yields Spike Anyway; Hissy Fit Over Fluff

Posted: 19 Jun 2013 02:01 PM PDT

Curve Watchers Anonymous has a close eye on treasury yields in the wake of essentially no news from Bernanke as to when the Fed might actually begin hiking rates.

A mere hint the Fed might slow its QE program was enough to send treasury yields and the US dollar higher and stocks lower.

Yield Curve 2013-06-19

click on chart for sharper image

Curve Watchers Anonymous notes the yield on the 10-year note is up 13 basis points from yesterday, and the 5-year note is up 17 basis points from yesterday.

Here are some charts Yields are off by a factor of 10. For example 5-year treasury yield is 1.27% not 12.27%. Note the selloff (rise in yield) the mid-day moment Bernanke opened his mouth.

$FVX - 5-Year Treasury Note

$TNX - 10-Year Treasury Note

$TYX - 30-Year Treasury Bond

These are significant selloff in this environment.

So what did the Fed say?

Nothing. At least nothing the market should not have expected.

Bloomberg reports Bernanke Says Fed on Course to End Asset Buying in Mid-2014.

Federal Reserve Chairman Ben S. Bernanke said the central bank may start reducing bond purchases later this year and end them in mid-2014 if the economy continues to improve as the central bank forecasts.

"If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the pace of purchases later this year," Bernanke said today in a press conference in Washington. "If the subsequent data remain broadly aligned with our current expectations for the economy, we will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year."

Bernanke stressed that the Fed has "no deterministic or fixed plan" to end asset purchases.

"If you draw the conclusion that I just said that our policies -- that our purchases will end in the middle of next year, you've drawn the wrong conclusion, because our purchases are tied to what happens in the economy," he said. "If the economy does not improve along the lines that we expect, we will provide additional support."

The Fed repeated that it will keep buying assets "until the outlook for the labor market has improved substantially."

Hissy Fit Over Fluff

Over that bit of nonsensical fluff (completely expected as well as frequently repeated fluff at that), the bond and stock markets threw a hissy fit.

This is further evidence the current markets are all about liquidity and speculation and nothing about fundamentals (in case you did not realize that already).

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

European Car Sales Hit 20-Year Low; Don't Worry, Things Have Stabilized

Posted: 19 Jun 2013 10:38 AM PDT

NPR reports European Car Sales Hit 20-Year Low For May.

Country by Country Details

Passenger car sales dropped by 5.9% from May 2012 in the 27-country European Union to 1.042 million units, the lowest level since May 1993
German car sales dropped 9.9% in May, Italy was down 8%, France down 10.4%, Spain down 2.6%
PSA Peugeot-Citroen, Renault, Ford, General Motors and Fiat all suffered double-digit declines in May
Volkswagen had a 2.8% drop in brand sales and 5.9 percent decline for the group. Sales of Mercedes brand were up 2.8% percent and BMW brand sales declined 8.1%.
Jaguar/Land Rover and Japan's Mazda resisted the crisis with a 9.8 percent and 30 percent increase in sales, respectively, but on much smaller volumes and a market share of just 1 percent. Korean automaker Hyundai saw sales rise 1.9 percent.

First Quarter GDP

GDP in the 17 country eurozone shrank by 0.2 percent in the first quarter of this year, the sixth such decline in a row
The wider 27-country EU has also seen its economy slide into recession, shrinking 0.1 percent in the first three months of 2013

Italy VAT Hike

"The head of Italy's association of foreign carmakers, Romano Valente, urged the government to resist raising the value-added tax on car sales. The tax is scheduled to increase to 22 percent from 21 percent in July. Officials have said it will raise 4 billion euros ($5.33 billion), but conservative lawmakers in the cross-party coalition are opposed, claiming it will hit sales of big-ticket items harder."

For Italy economic comments, please see Dumb and Dumber Tax Hikes in Italy; Grand Coalition Splintering; Another Italy Convulsion Coming Up

Signs of Stabilization?

My favorite comment comes from IHS Automotive analyst Carlos da Silva who sees the situation in Europe as stabilizing: "The situation remains tense. Yet, for the second month in a row the rate of decline is slowing down. This means that sales are stabilizing trend-wise."

Stabilizing? Really? With German sales plunging? And a VAT hike in Italy? With Spain in a Depression? With France imploding under Hollande?

I suggest the slide in Germany and France is going to catch nearly every economist off guard with its intensity. A VAT hike in Italy will be icing on the depression cake.

At least one can make a claim about pent-up demand in Europe. One cannot say the same thing in the US.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Cash Squeeze in China, Interest Rate Swaps Rise Most in 22 Months; China's Credit Bubble About to Pop; Shadow Banking Crackdown

Posted: 18 Jun 2013 11:56 PM PDT

Bloomberg reports China Swaps Surge as Cash Squeeze Sees Demand Wane at Debt Sale.

China's one-year interest-rate swap rose by the most in 22 months as the central bank refrained from adding funds to the financial system to ease a cash squeeze, causing demand to fall at a government debt auction.

"The cash shortage may get even worse before the quarter-end because banks will have to hoard cash to meet loan-to-deposit ratio requirements," said Chen Qi, a strategist at UBS Securities Co. in Shanghai. "The central bank probably won't come out to intervene unless there is a sharp decline in economic growth and large capital outflows."

"The market is disappointed by the lack of reverse repos from the PBOC," said Frances Cheung, a strategist at Credit Agricole CIB in Hong Kong. "The liquidity squeeze stems from less inflows and policy makers' own policy to crack down on shadow banking, so the PBOC may be reluctant to use short-term tools to help."

Fitch Ratings said in a statement yesterday that the cash shortage reflects the move to reduce shadow banking, a measure that will ultimately slow economic growth.

Capital Flight

The statement by Chen Qi "The central bank probably won't come out to intervene unless there is a sharp decline in economic growth and large capital outflows" is interesting.

Qi's statement comes fresh on the heels of an article by Ambrose Evans-Pritchard a few days ago entitled China braces for capital flight and debt stress as Fed tightens.

A front-page editorial on Friday in China Securities Journal - an arm of the regulatory authorities - warned that capital inflows have slowed sharply and may have begun to reverse as investors grow wary of emerging markets. "China will face large-scale capital outflows if there is an exit from quantitative easing and the dollar strengthens." it wrote.

The journal said foreign exodus from Chinese equity funds were the highest since early 2008 in the week up to June 5, and the withdrawal Hong Kong funds were the most in a decade.

It also warned that total credit in Chinese financial system may have reached 221pc of GDP, jumping almost eightfold over the last decade. Companies will have to fork out $1 trillion in interest payments alone this year. "Chinese corporate debt burdens are much higher than those of other economies and much of the liquidity is being used to repay debt and not to finance output," it said.

There have been signs of serious stress in China's interbank lending markets, with short-term SHIBOR rates spiking violently. Bank Everbright missed an interbank payment last week in a technical default.

"Liquidity conditions have tightened severely due to the crackdown on shadow banking activities," said Zhiwei Zhang from Nomura.

China's Credit Bubble About to Pop

In a followup post, Ambrose Evans-Pritchard writes Fitch says China credit bubble unprecedented in modern world history

China's shadow banking system is out of control and under mounting stress as borrowers struggle to roll over short-term debts, Fitch Ratings has warned.

"The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation," said Charlene Chu, the agency's senior director in Beijing.

"There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signalling," she told The Daily Telegraph.

Bank Everbright defaulted on an interbank loan 10 days ago amid wild spikes in short-term "Shibor" borrowing rates, a sign that liquidity has suddenly dried up. "Typically stress starts in the periphery and moves to the core, and that is what we are already seeing with defaults in trust products," she said.

Fitch warned that wealth products worth $2 trillion of lending are in reality a "hidden second balance sheet" for banks, allowing them to circumvent loan curbs and dodge efforts by regulators to halt the excesses.

This niche is the epicentre of risk. Half the loans must be rolled over every three months, and another 25pc in less than six months. This has echoes of Northern Rock, Lehman Brothers and others that came to grief in the West on short-term liabilities when the wholesale capital markets froze.

Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis. "They have replicated the entire US commercial banking system in five years," she said.

The China Securities Journal said total credit in China's financial system may be as high as 221pc of GDP, jumping almost eightfold over the last decade, and warned that companies will have to fork out $1 trillion in interest payments alone this year. "Chinese corporate debt burdens are much higher than those of other economies. Much of the liquidity is being used to repay debt and not to finance output," it said.

Shadow Banking Crackdown

This shadow banking crackdown is a good thing. The longer it is put off the more violent the reaction when it does happen.

Yet, the crackdown was put off so long already, severe ramifications on growth are already baked in the cake.

In turn, the slowdown in China will hit the commodity exporting countries (Australia, Brazil, Canada) quite hard.

For my recent take on Brazil, please see Brazilian Currency Touches Four-Year Low Prompting Intervention; Currency Intervention Madness Displayed in Chart Form

For more on the huge impending slowdown in China please see

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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