- Do you need any money? Extending Quantitative Easing “to help support the economic recovery”. "The Fed addressed market expectations of reinvesting principal paydowns in the Treasury market in today’s statement. Yesterday, we highlighted that the failure to do so could result in shrinkage of the portfolio of around 15%, an implicit tightening the Fed now acknowledges it does not intend to allow. Notably, the NY Fed clarified the location of those purchases in the 2 to 10 year curve - precisely where the strongest rally in the Treasury curve has occurred since the end of June. That suggests much of today’s action was anticipated though clearly not all as the belly of the curve (5 and 10 years) outperformed today declining in yield by around 8 and 7 basis points respectively."
- Yields – the magic 4%. "In the euro credit market, flows have historically been dictated more by spread-based investors. However, in recent years, there has been a growing participation from investors that focus on yield: retail investors, insurance companies, and institutional investors managing absolute return funds. To meet return targets, investors will need to extend in duration, buy lower-rated cyclicals, or dip into BBs. We highlight bonds in the European space which are yielding over 4%."
- BIS3: Some reprieve, with US banks OK on capital/liquidity. "BIS3: US Banks OK given softer standards, longer timeline. Proposed changes to BIS capital and liquidity standards have been a key source of uncertainty for Global Banks. Original proposals were vague but harsh, particularly as it related to liquidity requirements and timeline. BIS has now pushed back implementation dates for key items and softened some effects including deductions from Tier-1 Common, netting of derivatives, and liquidity requirements. We believe, US firms appear well armored in terms of capital/liquidity, with JPM strongest on relevant metrics. See tables on pg 3 for impact of key BIS3 capital/liquidity standards on US brokers/money center banks."
- FOMC: Shift back into neutral. "Fed announces reinvestment plan. In an effort to “help support the economic recovery,” the Federal Open Market Committee (FOMC) announced plans to maintain the current size of its balance sheet by reinvesting the principal payments from its mortgage portfolio into longer-term Treasuries. This action is best thought of a return to a neutral stance for policy, in which mortgage runoffs are not passively tightening policy — rather than the first step toward an inevitable restart of outright asset purchases. The outlook for growth and inflation would need to deteriorate materially for the Fed to move to actively expanding their balance sheet further, in our view."
- Productivity declines for the first time since 2008. "Hours jump as output slows. Nonfarm business sector productivity fell an annualized 0.9% in the second quarter as output advanced 2.6% while employee hours jumped 3.6%. Employee hours have now increased for three consecutive quarters and the second quarter increase in labor input is the largest since 2006. The recent surge in hours worked suggests that the backdrop for employment is improving as employers have exhausted the current staff. The median of analysts’ expectations was for a productivity gain of 0.1%. Productivity growth in the first quarter was revised from a preliminary increase of 2.8% to 3.9%. The upward revision is due to an increase in output as hours worked was unchanged. Over the past four quarters, productivity increased 3.9%. For the four quarters ended 2009Q2, productivity increased 2.5%."
- China: Trade surplus widened on slower imports in July. "Bottom Line: China’s trade growth is softening in 2H. China’s export growth softened to 38.1% YoY in July from 43.9% in June, mainly on a higher comparison base. The reading was stronger than expected, suggesting external demand had held up well. On the other hand, import growth declined sharply, on a rapid fall of YoY growth in import prices and sequential slowdown of the Chinese
economy. As a result, trade surplus widened significantly in July from June."
- Yields – the magic 4%. "In the euro credit market, flows have historically been dictated more by spread-based investors. However, in recent years, there has been a growing participation from investors that focus on yield: retail investors, insurance companies, and institutional investors managing absolute return funds. To meet return targets, investors will need to extend in duration, buy lower-rated cyclicals, or dip into BBs. We highlight bonds in the European space which are yielding over 4%."
- BIS3: Some reprieve, with US banks OK on capital/liquidity. "BIS3: US Banks OK given softer standards, longer timeline. Proposed changes to BIS capital and liquidity standards have been a key source of uncertainty for Global Banks. Original proposals were vague but harsh, particularly as it related to liquidity requirements and timeline. BIS has now pushed back implementation dates for key items and softened some effects including deductions from Tier-1 Common, netting of derivatives, and liquidity requirements. We believe, US firms appear well armored in terms of capital/liquidity, with JPM strongest on relevant metrics. See tables on pg 3 for impact of key BIS3 capital/liquidity standards on US brokers/money center banks."
- FOMC: Shift back into neutral. "Fed announces reinvestment plan. In an effort to “help support the economic recovery,” the Federal Open Market Committee (FOMC) announced plans to maintain the current size of its balance sheet by reinvesting the principal payments from its mortgage portfolio into longer-term Treasuries. This action is best thought of a return to a neutral stance for policy, in which mortgage runoffs are not passively tightening policy — rather than the first step toward an inevitable restart of outright asset purchases. The outlook for growth and inflation would need to deteriorate materially for the Fed to move to actively expanding their balance sheet further, in our view."
- Productivity declines for the first time since 2008. "Hours jump as output slows. Nonfarm business sector productivity fell an annualized 0.9% in the second quarter as output advanced 2.6% while employee hours jumped 3.6%. Employee hours have now increased for three consecutive quarters and the second quarter increase in labor input is the largest since 2006. The recent surge in hours worked suggests that the backdrop for employment is improving as employers have exhausted the current staff. The median of analysts’ expectations was for a productivity gain of 0.1%. Productivity growth in the first quarter was revised from a preliminary increase of 2.8% to 3.9%. The upward revision is due to an increase in output as hours worked was unchanged. Over the past four quarters, productivity increased 3.9%. For the four quarters ended 2009Q2, productivity increased 2.5%."
- China: Trade surplus widened on slower imports in July. "Bottom Line: China’s trade growth is softening in 2H. China’s export growth softened to 38.1% YoY in July from 43.9% in June, mainly on a higher comparison base. The reading was stronger than expected, suggesting external demand had held up well. On the other hand, import growth declined sharply, on a rapid fall of YoY growth in import prices and sequential slowdown of the Chinese
economy. As a result, trade surplus widened significantly in July from June."
Merrill Lynch Situation Room 20100810
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