Payden & Rygel: Weekly Market Update
Weekly Market Update

Week ending May 17, 2013

A weekly newsletter providing a synopsis of the latest market and economic news and releases and a recap of the securities markets. Find commentary for a wide range of sectors: US and European equities, US Treasury, corporate, mortgage, municipal and high-yield bonds, global bonds and currencies, and emerging-market bonds.

  Friday* Last Week Dec. 31
2012
1 Yr Ago
Dow Jones Ind. Avg. 15,286 15,118 13,104 12,442
S&P 500 1,660 1,634 1,426 1,305
Nasdaq 100 3,483 3,437 3,020 2,814
The Russell 2000 993 975 849 754
DJ STOXX Europe 309 305 280 242
Nikkei Index 15,138 14,608 10,395 8,877
MSCI EM Index 407 405 401 350
Fed Funds Target 0-0.25% 0-0.25% 0-0.25% 0-0.25%
2-Year U.S. Treasury Yield 0.24% 0.24% 0.25% 0.30%
10-Year U.S. Treasury Yield 1.91% 1.90% 1.76% 1.70%
U.S.$ / Euro 1.28 1.30 1.32 1.27
U.S.$ / British Pound 1.52 1.54 1.63 1.58
Yen / U.S.$ 102.95 101.62 86.75 79.28
Gold ($/oz) $1,360.10 $1,448.20 $1,675.35 $1,574.27
Oil $95.83 $96.04 $91.82 $92.56
*Levels as of 8:00 a.m. PT


Year to Date (12/31/12 -5/17/13)
Dow Jones Industrial Avg 16.65%  
S&P 500 16.63%  
NASDAQ 15.34%  
Russell 2000 16.88%  
MSCI World Index 12.67%  
DJ STOXX Europe 600 (euro) 10.40%  
MSCI EM Index 1.40%  
Year to Date (12/31/12 -5/16/13)
90 Day T-Bill 0.05%  
2-Year Treasury 0.16%  
10-Year Treasury 0.27%  
ML High Yield Index 5.31%  
JP Morgan EMBI Global Diversified 0.06%  
JP Morgan Global Hedged 0.90%  

 


Date Report Survey Actual Prior Details
5/13 (US) Advance Retail Salesq -0.30% 0.10% -0.40% Retail sales beat expectations this month, even as gasoline sales fell. Core retail sales (ex. Autos and gas) printed positive (0.6% MoM), suggesting Q2 consumption has gotten off to a strong start
5/14 (SW) SW CPI - CPIF (YoY) 0.80% 0.50% 0.90% See below
  (EC) Euro-Zone Ind. Prod. wda (YoY) -2% -1.70% -3.10% Despite yet another month of annual contraction, March industrial production increased from February levels by 1% MoM
5/15 (UK) Claimant Count Rate 4.60% 4.50% 4.60% Unemployment in the UK fell from 7.9% to 7.8% (in line with the claimant count), on lower participation rather than improving fundamentals. Average weekly earnings are the lowest on record, at 0.8% in the past three months
  (EC) Euro-Zone GDP s.a. (YoY) -0.90% -1% -0.90% Headline growth across the euro area was dragged down by worse than expected output numbers in Germany (0.1% QoQ) and France (-0.2% QoQ)
  (JN) GDP Annualized 2.70% 3.50% 0.20% Economic growth ticked up in Japan in Q1, led by strong consumer spending and a resurgence of exports. However, weak investment suggests that corporate Japan has not yet found solid footing
5/16 (EC) Euro-Zone CPI (YoY) 1.20% 1.20% 1.20% See below
  (US) Consumer Price Index (YoY) 1.30% 1.10% 1.50% See below
  (US) Housing Starts MOM% -6.40% -16.50% 7% The large decline came as a result of the highly volatile multi-family category (-38.6%). Over the past 12 months, total housing starts are up 13.1%
5/17 (CA) Consumer Price Index YoY 0.60% 0.40% 1% See below
  (US) Leading Indicators 0.20% 0.60% -0.10% Increases in building permits complemented positive contributions from interest rate spreads and equity market indices to drive the leading indicators above expectations

 



Plenty of worries still cloud the global macroeconomic outlook, but inflation is not one of them. Some investors did worry that inflation, like a thief in the night, would erode coupon income. But data released this week confirmed the trend: unprecedented global central bank bond buying programs have not sparked inflation.

Instead, low inflation on a global basis remains a key macro theme. Global inflation has been the dog that did not bark.*

The story differs by country, but here's the general lay of the land through the April data reports. The Canadian headline consumer price index (CPI) rose just 0.4% year-over-year—the lowest in 3.5 years. In the US, headline CPI rose just 1.1%, also a three-year low. In the euro zone, a headline CPI reading of just 1.2% is, by now you've guessed it, a three-year low. In Japan, the headline CPI is still in deflationary territory, at -0.5% year-over-year.

A few sore thumbs do stick out—these countries have run slightly higher inflation. In the developed world, the UK: in the emerging markets world, Turkey, South Africa, India, and Ghana. For the UK, a 2.8% year-over-year increase points to persistent higher inflation compared to the BoE's target. In Turkey, headline inflation printed above 6% on a year-over-year basis—but even this is down from double digit levels a year ago.

But, on the whole, the softening in energy and commodity prices portends a soft inflation picture ahead. Further, for the "underlying" inflation trend, we prefer to look at core inflation measures. Here's how core measures stack up for the nations and regions of the G-7:

  • US Core CPI: +1.7% Year over Year (YoY)
  • UK HICP excluding energy, food, and alcohol/tobacco: +2.3% YoY
  • Europe HICP excluding energy, food, and alcohol/tobacco: +1.1% YoY
  • Japan Core CPI: -0.8% YoY
  • Canada Core CPI: +0.5% YoY

So, despite record monetary stimulus, inflation around the developed world remains moderate. This is consistent with our long-held view, but for many analysts and investors the puzzle remains: "how can central banks pump up the money supply and inflation not follow..?"

We have addressed that puzzle in several places, including a recent Point of View article on the "myth of the money multiplier". Here again we argue that central bank balance sheet increases provide liquidity, but do not necessarily increase the broad supply of money and credit. For example, a measure of broad money supply growth in the US (including "shadow credit") fell -3.4% in 2012. In Europe, M3 money supply grew just 2.6% last year and M4 in the UK fell -2.9%.

Would prices be even lower had central banks not intervened? This is likely: without central banks providing emergency liquidity, asset prices would have declined further as banks and non-banks sold assets in search of liquidity. Reigniting the credit boom has proved far more difficult to engineer.

Finally, the less talked about issue is a structural one. In short, supply side factors include aging populations in the developed world (e.g., Japan, where saving trumps spending) and better productivity and technological gains (would you trade your smartphone of today for a mobile phone from 2003 at 2003 prices?). Indeed, we see the last 20 years or so of global developed world CPI data to be reflective of this trend toward better, cheaper consumer goods in global CPI—the "Great Moderation" in consumer prices.

Bottom line: Despite constant chatter about inflation from gold bugs, inflationistas, and bond bears, it is the lack of inflation that needs more careful analysis. For now, the soft inflation readings provide some comfort to fixed income investors worldwide and more room for central banks to remain aggressive.

*The "dog that did not bark" is a reference to Arthur Conan Doyle's Sherlock Holmes story entitled "Silver Blaze". In it, Holmes uses the absence of a dog's bark as a clue to the perpetrator of a crime. The thinking: the lack of signal tells you something important. In the story, the perpetrator must have been familiar to the dog. The IMF also published a recent report on inflation with the same title.

 



Treasury Bonds

The US Treasury market rallied modestly from the Monday open into the Thursday NY close (10-years richened 2 basis points from 1.89% to 1.87% and the curve flattened marginally). While more regional economic data printed softer than expected this week, all eyes will be on the upcoming Chicago and ISM reports.

Looking forward to next week, the FED will conduct four buyback operations, Bernanke will testify to the Joint Economic Committee in Washington and we will get a first glimpse of the April FOMC meeting minutes.

Large-Cap Equities

The stock market rallied for the fourth consecutive week despite a slew of disappointing economic data releases and Fed chatter of tapering the current easy monetary policy. Equities set new all-time highs intra-week on the persistent year-long positive risk sentiment. The S&P 500 index closed the week up approximately 1.5%, while the NASDAQ Composite and Dow Jones Industrial Average indices climbed 1.3%. Small-cap stocks outperformed large-cap stocks. In terms of style, large-cap value stocks outperformed large-cap growth stocks. The best performing sectors were financials and industrials, while the worst performing sectors were telecom and utilities.

In fund flow news, Lipper reported that U.S. based equity mutual funds took in $3.1 billion for the week which was the 19th consecutive week of inflows. In earnings news, Cisco System topped analysts' 3rd quarter earnings estimate after reporting 51 cents per share versus 49 cents per share. The company also topped revenue and gross margins estimates as the company attributed the strong quarter to improved demand in their data center and wireless divisions. Shares of CSCO jumped over 12% on the positive news.

Corporate Bonds

Investment grade primary issuance continued its torrid pace with over $20 billion tapping the new issue space. There were also a slew of economic releases this week prompting investors to reassess the recent "risk-on" environment. By mid-week, risk markets generally ignored the fragile economic proclamations and continued to put money to work. Notable deals this week included Merck ($6.5 billion) and Morgan Stanley ($2 billion).

Investment grade corporate spreads continued to tighten modestly. Spreads tightened despite talk of the Fed "tapering" QE earlier than anticipated, probably because none of the three Fed presidents who have called for pulling back on purchases is a voter this year. Barclays Credit Index Option-Adjusted Spread (OAS) finished the week at +121, one basis point tighter. Financials tightened by one (banks -1, insurance -1); industrials tightened by one (basic materials -1, capital goods -0, telecom -2, consumer cyclical -1, consumer non-cyclical -1, energy -2); and utilities remained unchanged.

Mortgage-Backed Securities

Mortgages went on a rollercoaster ride as sentiment shifted from bullish to bearish on stronger equities and hawkish Federal Reserve speak. Market participants were on edge after digesting a slew of media write-ups suggesting the Federal Reserve might be close to tapering their quantitative easing campaign. Despite soft economic data mid-week, prices fell and spreads widened for lower coupon mortgages that are more sensitive to Fed stimulus and interest rates. As expected with the rate backup, higher coupons outperformed and Ginnie Mae mortgages lagged conventionals. Weak performance in agency mortgages spilled over to the commercial mortgage market as new deals struggled to close without a few basis points of widening in offered spread. New issue public transactions range between 80 basis points and 85 basis points for 10-year class AAA-rated class securities. Legacy commercial deals also lagged Treasuries and swaps with a three-to-five widening versus comparable intermediate swaps. The benchmark CMBS deal representing the legacy 2007 vintage market, GSMS 07-GG10 A4, closed at 122 basis points from a post-crisis low of 117 basis points.

For the week, the thirty-year current coupon spread versus the ten-year Treasury gapped out to 74 basis points from 66 basis points. According to Freddie Mac, the thirty-year primary mortgage rate edged higher to 3.51% from 3.42%.

Asset-Backed Securities

The new issue auto segment was fully represented this week with Ford auto loan, Nissan auto lease, Hyundai auto dealer floor plan, United subprime auto, and even a Macquarie Australian auto deal. All of the deals priced at or inside of initial price guidance, with continued strong demand for subordinated classes. Secondary trades were firm to tighter on the week.

The credit card segment was also well represented with WFN retail and Chase bank cards printing deals, and Citibank looking for 5-year reverse inquiry. Chase credit card performance continues to shine as year-over-year charge-offs fell to 3.49% from 4.19% and 90+ day delinquencies fell to 0.84% from 1.18%. The Chase credit card master trust continues to shrink down to $46 billion after reaching a peak of $92 billion in 2009. This simply reflects cheaper funding alternatives for the banks, and continued consumer reluctance to go "Into Darkness" and adding revolving debt. We will see if this trend continues at this weekend's box office.

Municipal Bonds

With a slight uptick in supply, the muni market remained range-bound, under a variety of influences none of which was strong enough to push valuation decisively in any one direction. Generally, munis followed Treasuries up and down the scales, though still remained in the richer territory. Additional supply, and increases in redemptions and maturities supported the demand side of the market with most new issues well received by investors. The end of the week was colored by some disappointing economic data, which cooled the equity and corporate credit rally and snapped the month long Treasury losing streak. The data suggested that the economy may not be on as a strong a footing as originally estimated, which may translate into retail investors coming back into the muni space after an extended absence.

High-Yield Bonds

The high-yield market took a pause this week and gave back some of its recent gains as rates moved higher and spreads widened. The Merrill Lynch BB/B high-yield index was down 0.52% on the week and is now up 4.47% year-to-date. Negative fund flows and a heavy new issue calendar weighed on the market with lower-coupon longer-duration bonds being the most vulnerable to selling pressure. AMG reported an outflow of $403 million after four straight weeks of inflows which totaled $2.026 billion. This week's outflow was driven by high-yield ETFs, which had outflows of $478 million, while actively managed funds had inflows of $75 million. Year-to-date flows for high-yield ETFs are now a negative $217 million, and actively managed funds' total for the year is a positive $2.8 billion.

The high-yield market began to show signs of fatigue late last week as over $11 billion of new-issues were priced. Investors used the weakness in newly issued bonds to push back on pricing this week, so deals that came this week were priced in the middle-to-wide end of price talk. Even with some concessions on pricing, the higher quality, lower coupon deals were mostly unchanged when freed to trade, and lower quality, higher coupon deals moved higher on the break. Against this backdrop over $14 billion in new issue was priced which was the second busiest week of the year.

The largest deal of the week was a $2.6 billion Ba3/BB- two-tranche issuance from DISH DBS Corp. The provider of direct satellite subscription television services was securing financing to help fund its attempt to acquire Sprint Nextel Corp. After some negotiating between investors and the issuer over price talk and call protection, the company successfully priced $1.25 billion of 4-year notes and $1.35 billion of 10-year notes. The 4-year notes yielded 5%, a spread of 439 basis points, while the 10-year notes yielded 6.25%, a spread of 431 basis points. Both tranches moved up slightly when freed to trade. After the heavy issuance of the past two weeks, the forward calendar is very light as we head into what is expected to be a quiet week ahead of the long Memorial Day weekend.


Eastern European Equities

Stocks in Eastern Europe were down -1.6% during the week.

The flash gross domestic product (GDP) releases for the first quarter of the year have so far been mixed: the recession deepened in the Czech Republic, while Hungary exited recession and recorded the strongest quarter in the region. Romania also grew more strongly than expected. The Czech Republic´s GDP surprised to the downside, falling by -0.8% quarter to quarter (q/q) in Q1 13 compared to -0.2% in Q4 12. Year-over-year (y/y), GDP was down by -1.9% in Q1, compared to -1.7% in Q4 of last year. Hungary's real GDP increased by 0.7% q/q due to a sharp improvement in construction and IP, while the y/y GDP decline eased to -0.9% from -2.7%. Romania's real GDP was up +0.5% q/q compared to 0.4% q/q in Q4 12 and GDP growth accelerated considerably to 2.1% y/y from 1.1% y/y in Q4 12.

Global Bonds and Currencies

Major non-US sovereign bond markets were slightly firmer in the past week as financial markets were cautious following the deteriorating economic data out of Europe, US and China. The sentiment was undermined by the lower than expected level of Zew Survey and GDP in Germany and the euro area as a whole. Ten-year Bund yields were about 4 basis points lower on the week as the Bunds were supported by the negative data from Europe which showed that the currency bloc struggling to emerge from recession. UK Gilt yields were almost unchanged on the week as Bank of England revised its growth forecasts upwards in the quarterly inflation report for the next three years.

Peripheral euro area sovereign bond spreads over Bunds were tighter as an upgrade of Greece's credit rating by Fitch and successful government bond auctions by Italy and Spain helped the tone improve.

In currency markets, the US dollar strengthened against most of the other major crosses as figures showed that the US budget deficit was falling faster than expected and the Federal Reserve signaled that the bond purchases could be reduced sooner than expected. EUR ended lower against the US dollar following the increasing concerns over the health of the region. The yen continued to weaken against the US dollar as the strong economic data out of Japan supported the continuation of Bank of Japan's aggressive bond-buying program. AUD and NZD both came under pressure following the less than expected industrial output growth in China and the falling commodity prices.

Emerging-Market Bonds

Emerging market dollar-pay debt spreads widened this week.

Russia's central bank left key policy rates unchanged, as expected, as it weighed weak growth and elevated inflation. Banco Central de Chile also met expectations by keeping its policy rate steady at 5%. Officials there are facing strong domestic consumption and low unemployment but soft manufacturing output. Indonesian officials held the reference rate at 5.75%, as the country faces balanced inflation and growth dynamics.

Turkish monetary authorities chose to cut rates by 50 basis points, easing the policy rate to 4.5% and lowering the overnight borrowing and lending rates to 3.5% and 6.5%, respectively. In conjunction with the move, the central bank raised reserve requirements and increased the reserve option coefficient, to stem excess liquidity. Moody's upgraded Turkey's credit rating to Baa3, from Ba1, giving the country its second investment grade rating. Moody's cited Turkey's long term structural and institutional improvements along with lower debt ratios in their decision.

Parliamentary elections were held in Pakistan, with the incumbent Pakistan People's Party losing by a larger than expected margin. The Pakistan Muslim League – Nawaz was the beneficiary of the voting results, as it pushed a populist agenda and ambitious economic reforms.



Date Report Consensus Last
5/21 (UK) CPI (YoY) 2.60% 2.80%
  (UK) Core CPI YOY 2.30% 2.40%
  (JN) BOJ Target Rate -- --
5/22 (UK) Bank of England Minutes -- --
  (UK) Retail Sales Ex Auto Fuel(YoY) 1.80% 0.40%
  (UK) Retail Sales w/Auto Fuel (YoY) 2% -0.50%
  (CA) Retail Sales Less Autos MoM 0.10% 0.70%
  (US) Existing Home Sales MoM 1.30% -0.60%
  (US) Fed Releases Minutes from Apr 30 - May 1 FOMC Meeting -- --
5/23 (EC) PMI Composite 47.2 46.9
  (UK) GDP (YoY) 0.60% 0.60%
  (US) New Home Sales 425,000 417,000
  (US) New Home Sales MoM 1.90% 1.50%
5/24 (US) Durable Goods Orders 1.60% -5.70%
  (US) Durables Ex Transportation 0.50% -1.40%
  (US) Cap Goods Orders Nondef Ex Air 0.50% 0.20%
  (US) Cap Goods Ship Nondef Ex Air -- 0.20%



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