15.03.29 Daily Note

The signs of the risk off are seen in everywhere. US economic indicators are deteriorating rapidly, signaling weaker growth rate this year due to sluggish domestic consumption as repo market shows significantly odd signs recording the highest level of failure of settlement since 2008. When FOMC suggested dovish step for policy rate, we or many market participants recognized that as an agreement of G20 in Shanghai. Right after G20 meeting, PBOC reduced required reserve ratio, RRR, and this was somewhat surprising as market had woes about possibility of RRR hike rather than cut in light of covering capital outflow. But, if there was an agreement about weak US dollar, as FOMC led depreciation, PBOC had to move renminbi toward appreciation rather than additional devalue. When US dollar turn strong a little bit last week, however, PBOC raised CNY fixing rate in line with that. This proved that there wasn’t the agreement, but China wanted renminbi to be weaker although the pressure of strengthening US dollar decreased. Albeit HSBC noted currency war ended for now, we don’t think so. China is set to start. And as you know, continuing global currency war means worse equilibrium, not optimal equilibrium in global economy.

On the other hand, how about Euro area? Many argue Draghi hopes to end weakening Euro as he does not signal additional rate cut for now. But we should consider asset purchasement, especially Euro corporate bonds of investment grade. This policy must lead offshore companies to issue their bonds in Euro area rather than own country. And then this should cause weakening Euro in contrary of current market recognization. However, we face the bigger problem now. We saw depreciation of GBP in line with terror in Belgium last week. Yes, it is the risk named as BREXIT ahead of only 3 months. Unless BREXIT is realized, many countries in EU could start to pursue special status like United Kingdom. This means systematic risk in Euro area. Risk off caused by EU could lead strong US dollar.

In these environments, US dollar could be stronger rather than weaker despite US Fed turns dovish. This reaction could cause weak oil price as well. Deflation fear is not faded.

So then, why US Fed turns dovish surprisingly? They want weak US dollar and strong oil price and these mean reflationary policy. But, why? I think they realize strong US dollar could not spur domestic consumption any more. So they should adopt opposite strategy so called currency war. Domestic consumption started to deteriorate from start of this year and labor market seems to be weak in line with sluggish sentiment in nonmanufacturing sector seen in sharply falling ISM employment index and mid- and small corporations’. Furthermore, ahead of earnings season for 1^st quarter, we should throw out hopes. Market forecast of earnings are too high. We should prepare crush in stock markets as soon as possible.

We should add duration in main developed countries especially United States. I prefer United Kingdom for higher yield than Euro area as well. Yield curve seems not clear. With the relative value analysis, short belly of butterfly in 5s10s30s tenor of government bonds, but when treasury market restart bull movement, 10 year treasury could be outperformed. I am somewhat cautious to overweight corporate bonds even though ECB will start to purchase soon. Next step risk off could be led by financial sectors, so I think slightly underweight position in credit bonds despite some corporate bonds provide attractive spreads and yields. In FX, I recommend short USD/JPY and GBP/USD. I want to short EUR against USD as well, but this strategy is not priority.

U.S. October Personal Income and Spending suggest Solid Real-term Indicators

Although these were lower than market expectations, these real-term indicators suggest solid growth persists...!

Odd one is that personal savings rate improved to 5.6% from 5.3%, revised from 4.8%. The rate was the highest since fiscal cliff of 2013...as income improved, but spending was slow. However, ahead of Thanksgiving holiday people should have been motivated to save money temporarily. We have seen same movement in previous years. On the other hand, people may prepare post-FED's fund rate hike. If these two factors were significant, higher saving rate would be unwound soon...!

Personal Income & Outlays (%)	Oct	Sep	Aug	Y/Y	2014	2013	2012
Personal Income	0.4	0.2	0.4	4.6	4.4	1.1	5.0
Wages & Salaries	0.6	0.0	0.4	4.9	5.1	2.7	4.5
Disposable Personal Income	0.4	0.2	0.4	4.1	4.2	-0.1	5.1
Personal Consumption Expenditures	0.1	0.1	0.3	2.9	4.2	3.1	3.4
Personal Saving Rate	5.6	5.3	5.2	4.5 (Oct. '14)	4.8	4.8	7.6
PCE Chain Price Index	0.1	-0.1	-0.0	0.2	1.4	1.4	1.9
Less Food & Energy	0.0	0.2	0.1	1.3	1.5	1.5	1.9
Real Disposable Income	0.4	0.3	0.4	3.9	2.7	-1.4	3.1
Real Personal Consumption Expenditures	0.1	0.1	0.3	2.7	2.7	1.7	1.5

U.S. Durable Goods Orders Hint Better 4Q growth than Worries

Durable goods orders started the third quarter strongly, jumping up 3.0%/m (0.5% y/y) in October against an expectation of a 1.5% m/m increase. And the 1.2% m/m decline initially reported for orders in September was revised up to a 0.8% m/m drop.

Excluding orders in the transportation sector, orders rose a more modest, but still larger-than-expected, 0.5% m/m in October (-2.4% y/y) following an upwardly revised 0.1% m/m decline in September.

Especially encouraging was the performance of core capital goods orders (capital goods orders excluding defense and aircraft) in October. They rose 1.3% m/m (0.4% y/y) with the initially reported 0.1% m/m decline in September revised up to a 0.4% m/m increase.

With the September revision and October jump, core capital goods orders in October stood more than 6% at an annual rate above the 3Q average, auguring for some further improvement in business capital spending in the fourth quarter.

However, the strength in orders has yet to be reflected in actual shipments of capital goods. Core capital goods shipments (a real-time proxy for capex) slipped 0.4% m/m in October (-0.5% y/y) but after an upwardly revised 0.7% m/m rise in September.

Durable Goods	Oct	Sep	Aug	Oct Y/Y	2014	2013	2012
New Orders (SA, %)	2.99	-0.82	-2.94	0.51	6.8	2.2	6.3
Transportation	8.04	-2.24	-6.88	6.53	6.1	6.5	16.6
Total Excluding Transportation	0.53	-0.11	-0.85	-2.37	7.2	0.1	2.0
Nondefense Capital Goods	13.23	-6.05	-4.62	3.8	6.6	2.8	10.8
Excluding Aircraft	1.32	0.39	-1.45	0.36	6.3	-1.0	7.6
Shipments	-1.02	0.24	-0.50	0.09	4.8	2.0	6.3
Inventories	-0.2	-0.6	-0.2	0.7	6.1	2.4	3.8
Unfilled Orders	0.3	-0.5	-0.3	-2.1	11.4	6.4	7.5

Investment Strategies with Charts Analysis

1. Duration : Short especially in long-end tenor

UST 10Y yield will soar from underpinned level soon likely...

UST 30Y yield seems also as well... its longer trend line persists...

German Bund 30Y yield seems somewhat uncertain, however turning long-term moving average line suggests it's the time to push higher...!

2. Yield Curve : Steepener as sure

UST 5s30s spread shows MACD divergence and its lag span is underpinned on longer-term moving average line suggesting timing to spread widening...!

UST 10s30s spread seems similar...!

3. Spread : Long UST 10Y vs. Short UKT 10Y

4. TIPS Breakeven : Keep upward trend after short-term adjustment

But, it seems somewhat odd because USD index (DXY) and oil price are likely turning around as showing below...

5. FX & WTI : Weak JPY and KRW versus Strong EUR and WTI

USD Index (DXY) seems to turn around soon, maybe today, as MACD diverged and Cloud in Ichimoku turned...

USD weakness is unlikely caused by JPY... JPY seems to be weaker than now...

KRW will be depreciated as well...

EUR seems to lead weak USD... EUR chart shows MACD divergence and turning Cloud in Ichimoku chart..! We may see hawkish stance of ECB...

Strong EUR will be in line with strong oil price...!

Revision of U.S. 3Q GDP from 1.5% to 2.1% as effect of inventories declines

Even though DB research argues growth rate in 4Q would be less than 2% especially with worries about increased inventories and declined consumption, investment in both of corporate sector and housing market seems very solid suggesting ongoing improvement of U.S. economy.

Chained 2009 $ (%, AR)	Q3'15 (Second Estimate)	Q3'15 (Advance Estimate)	Q2'15	Q1'15	Q3 Y/Y	2014	2013	2012
Gross Domestic Product	2.1	1.5	3.9	0.6	2.2	2.4	1.5	2.2
Inventory Effect	-0.6	-1.4	0.0	0.9	0.1	0.0	0.1	0.1
Final Sales	2.7	3.0	3.9	-0.2	2.1	2.4	1.4	2.1
Foreign Trade Effect	-0.2	-0.0	0.2	-1.9	-0.7	-0.1	0.2	0.2
Domestic Final Sales	2.9	2.9	3.7	1.7	2.8	2.8	1.2	1.9
Demand Components
Personal Consumption Expenditures	3.0	3.2	3.6	1.7	3.2	2.7	1.7	1.5
Business Fixed Investment	2.4	2.1	4.1	1.6	2.2	6.2	3.0	9.0
Residential Investment	7.3	6.1	9.4	10.1	8.2	1.8	9.5	13.5
Government Spending	1.7	1.7	2.6	-0.1	0.7	-0.6	-2.9	-1.9
Chain-Type Price Index
GDP	1.3	1.2	2.1	0.1	0.9	1.6	1.6	1.8
Personal Consumption Expenditures	1.3	1.2	2.2	-1.9	0.3	1.4	1.4	1.8
Less Food/Energy	1.3	1.3	1.9	1.0	1.3	1.5	1.5	1.9

U.S. TIPS Breakeven Strategy : Opportunity for Q1 2016

Last week, while UST 10 year rate remained previous week's level, TIPS breakeven rate soared by 8bps following TIPS rate plunged alone. This seems somewhat significant because this was in line with weak oil price. For now, US 10 year breakeven rate is higher than 1.6%.

It maybe because market participants start to draw next year's picture about the inflation.
Unless there are additional weakening pressure for oil price below current 40 dollar per a barrel, CPI could rise very fast with a base effect.

Bloomberg consensus suggests 1.7% for average CPI yoy growth in 1Q next year and this implies about average 0.11% growth rate of each month. This number is not seem high. With underpinned oil price, we may see the upside surprise in this period.

Especially in light of benefit for the spark from base effect, CPI yoy in January 2016 maybe the highest level in 1st half next year. Bloomber consensus implies 1.9% nearby 2%...!! This number will be released in next month, February, so we have opportunity on TIPS breakeven from December this year to February next year particularly.

We have to buy TIPS and sell conventional UST (in 10 year tenor) during this period when breakeven become weaker than fair level...!

U.S. Tight Swap Spread means Market Liquidity Tightening

Via Goldman Sachs, recent historical low spread of U.S. interest rate swap has been caused by tight funding issue in banks rather than hedging demand by corporate credit issuers. This is in line with underperformer of CMBS or corporate bonds due to limited balance sheet in banks.

These conditions do not seem to be unwound by end of this year at least...
This aspect suggests the timing to buy credit bonds or increase duration should be later than the end of this year...!!

U.S. CPI rose after two months of decline...in line with expectation

The Consumer Price Index increased 0.2% during October (0.2% y/y) and countered declines during the prior two months. Prices excluding food & energy increased 0.2% (1.9% y/y) for the second straight month. A 0.2% increase in both total and core prices were expected by market participants.

This picture is different from last two indicators, imports price and PPI in October.
Consumer price continue to increase despite downward pressure of those two. This seems meaningful in light of demand side pressure.

Consumer Price Index, All Urban Consumers (%)	Oct	Sep	Aug	Oct Y/Y	2014	2013	2012
Total	0.2	-0.2	-0.1	0.2	1.6	1.5	2.1
Total less Food & Energy	0.2	0.2	0.1	1.9	1.7	1.8	2.1
Goods less Food & Energy	-0.1	0.0	-0.1	-0.7	-0.3	-0.0	1.3
Services less Energy	0.3	0.3	0.1	2.8	2.5	2.4	2.4
Food	0.1	0.4	0.2	1.6	2.4	1.4	2.6
Energy	0.3	-4.7	-2.0	-17.1	-0.3	-0.7	0.9

U.S. IG Corporate Bond Issuance, 1 bil. is Equal To 1.4 bil., almost 140% of Treasury Bonds Issuance

So, recent burden of investment grade corporate bond seems to push the overall U.S. bond yields higher...

Amount Outstanding

Technical Analysis : Chart says its time to fly for oil price...!

Lag spans on inflection points in both daily and weekly chart...!
Moreover in weekly candle chart, lag span is underpinned by the line drawn with two troughs at that time.
These signal the bear market in oil will finish up soon...!!

Commodities price reached its record low since 2000s

In line with deteriorated Chinese industrial activities, lowering Baltic Dry index, over-capacity for oil supply and strong US dollar particularly, commodities price has plunged to its lowest level since 2000s.

Nevertheless, global bond yields do not reflect this movement lowering upcoming inflationary pressure contrary to the case of last a few years. Rather, in U.S. and Germany, the yield spread especially 5s30s has widened further or stable despite increasing expectation for rate hike.

What do these signal?

Bond bears do not fear commodities price drop any more...?

If then, they convict real-term economic activities could accelerate with low price as a positive engine for consumption. In fact, this story is old fashioned. But, recent upward movement in U.S. wage growth signals change of economic environments. Moreover, some economists including New Keynsian and Neo-Fisherian expect positive change of economic dynamics as FED starts rate hike at least. At the same time, plunged commodities price may be not caused by likelihood of global deflation risk.

This is why bond market barely react on the terror in Paris today...
We should prepare additional surge in global bond yields...

Broken Philips Curve and Terror in Paris last night

See below charts. (Click to enlarge)

U.S. labor market has been improved since 2010 and its pace is vey solid until now. But, we had not expected Fed's fund rate hike with low nominal indicators including CPI and other earnings or sales data. Unless the price is key factor, the wage, nominal indicator, would be under the pressure to upside. If then, normalization of monetary policy from extremely outlied current conditions.

(Mean while there are other main factors in subdued wage growth. One is labor market slack and anothe one is low productivity, although Richard Fisher said he couldn't believe productivity index reflected real condition. But, these two conditions show somewhat improvement recently.)

Indeed, I think the nominal is the key factor, because this only should decide whether current economic condition is deflation or not - disinflation or reflation.

And there was tragedic terror in Paris last night and it seems done by IS.

Is this like 9.11 terror in U.S. on economic side? Unlikely yet.

This terrible event seems to lead fast action against IS meaning conflicts in mid-East rather than real economic activities contraction in major countries. The issue with Russia only seemed very weak to cause volatility of oil price.

While oil price tried to break 40 dollar per a barrel last night, this tragedy could underpin the price with even upside potential. And rather, with this, the real economy could be pushed higher...I expect. Of course, there will be risk-aversion movement in short-term lowering major government bond yields...

Euro zone 3Q GDP : lower than expectation a little bit, but growth details are better

EMU shows year-over-year GDP in a ramp up in growth to 1.6% in Q3 from 1.5% in Q2 and 1.2% in Q1. This is in line with maket expectation or a littlel bit lower. So, some news headlines said this number was disappointed.

But, its growth details was better than woes.

1) Germany : Domestic final consumption had been the main driver behind Q3 growth, supported by a solid labour market - employment rose by 0.8% y/y in Q3 - and sustained increase in wages that are boosting households' disposable income. Meanwhile, net trade contribution had been negative.

2) France : Looking through the inter-quarter volatility, the GDP data indicate that France's growth remains moderate, but nonetheless fragile. However, it is gradually rebalancing thanks to improving momentum in investment. Positive industrial production carryover, and well-oriented business and consumer surveys suggest growth momentum will continue in the next few quarters.

...But, the problem is effects from the terror in Paris...

3) Italy : Final domestic demand contributed positively while the contribution from net trade was negative.

U.S. retail sales : shows stable growth while previous month data recorded somewhat slow...

Overall retail sales including food services & drinking places in October edged 0.1% higher (1.8% y/y) following no change during the prior two months. September was revised from +0.1%. A 0.3% rise had been expected.

It seems somewhat slow than recent momentum, but its growth pace is stable with 1.8% y/y. Moreover core-retail sales grew 3.2% from a year earlier.

Bond market yield samewhat tumbled as retail sales data was disappointed, but I understand this is technical movement at most.

On the other hand, I really concern whether the effect of terror in Paris impacts on risk aversion deeply or not...

Retail Spending (%)	Oct	Sep	Aug	Oct Y/Y	2014	2013	2012
Total Retail Sales & Food Services	0.1	-0.0	0.0	1.8	3.9	3.7	5.0
Excluding Autos	0.2	-0.4	-0.1	0.8	3.1	2.7	4.1
Non-Auto Less Gasoline, Building Supplies & Food Services	0.2	0.1	0.2	3.2	3.3	2.7	3.6
Retail Sales	-0.0	0.0	-0.0	1.1	3.7	3.8	4.9
Motor Vehicle & Parts	-0.5	1.4	0.3	6.0	7.5	8.3	9.0
Retail Less Autos	0.2	-0.4	-0.1	-0.2	2.6	2.6	3.9
Gasoline Stations	-0.9	-4.0	-2.2	-20.0	-2.7	-0.7	4.3
Food Service & Drinking Places Sales