Posts Tagged ‘Dennis Lockhart’
“Hawks, Doves, Owls And Seagulls” – Summarizing The Fed’s Bird Nest
Wednesday, 22 May 2013 12:41
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With part two of today’s Fed-a-palooza due out shortly in the form of the May 1 FOMC meeting minutes, here is an informative recap of the current roster of assorted birds at the FOMC via Bank of America. Of course, since every decision always begins and ends with Ben, and soon his replacement Janet, all of below is largely meaningless.

Hawks, doves, owls and seagulls

Speeches by FOMC participants often get a fair bit of attention, and that has been particularly true of late. (Read more…) The markets are very sensitive to any hint that the Fed might scale back QE3 soon. Unfortunately, given the diversity of views on the FOMC, it is not always easy to separate the signal from the noise when Fed officials speak. The best advice is to listen to the voters (Table 1), especially the core members: Chairman Ben Bernanke, Vice Chair Janet Yellen and New York Fed President Bill Dudley (and vice chair of the FOMC).

While FOMC participants are typically split along a hawk/dove spectrum, in the current group there are several Fed officials with more nuanced views. For example, there are some arguably hawkish (or formerly hawkish) participants who nonetheless favor additional accommodation. Conversely, there are those who are typically thought of as doves yet who advocate scaling back QE more quickly. These conflicting cross-currents only add to the market’s confusion.

To understand most Fed officials’ policy preferences, it helps to step back and consider their philosophical bases — which for many goes back to their training in economics. Specifically, many of the divisions on the FOMC reflect differences between “freshwater” and “saltwater” schools of thought in economics — so named for the location of the US graduate schools (inland versus the coasts) where each has been most prevalent. In brief, freshwater economists emphasize market efficiency, rational expectations and policy ineffectiveness, while saltwater economists see market failures, multiple equilibria and a role for countercyclical
demand management.

Oceans apart

Some key differences between these two schools of thought as they relate to monetary policy are listed below:

  • Monetarists versus New Keynesians: The basic modeling framework for freshwater economists is often monetarist, where the key responsibility of a central bank is long-run price stability. Saltwater economists use a New Keynesian framework that suggests policy can help stabilize markets.
  • Inflation vs. unemployment: Freshwater economists see inflation as having a clear priority in the Fed’s dual mandate, and are skeptical that unemployment (or slack more generally) has much to do with inflation. Saltwater economists see reducing unemployment as its own objective in the short-run. Both sides agree that a central bank should credibly commit to a long-run nominal anchor, like an inflation target.
  • Structural vs. cyclical labor market factors: Freshwater economists tend to see a significant portion of current unemployment as structural; equivalently, they see underlying equilibrium unemployment rate as relatively high right now — and not amenable to monetary policy stimulus. Saltwater economists believe that the labor market suffers mostly from cyclically weak labor demand. Some have suggested that policy needs to be very easy to prevent persistent cyclical unemployment from becoming structural. They forecast the NAIRU (the unemployment rate consistent with steady inflation) to be relatively low (perhaps 5%); saltwater types think it is higher.
  • Transmission mechanisms. Monetarist channels of greater liquidity and credit creation are key for freshwater views; these are seen as currently ineffective in promoting growth but a risk for higher inflation. The New Keynesian view associated with a saltwater approach emphasizes low interest rates stimulating demand and higher asset values allowing for balance sheet repair and creating a wealth effect.
  • Inflation expectation risks: Freshwater adherents see inflation as determined by the pace of money printing and policy credibility; they worry that large central bank balance sheets risk rising inflation expectations. Saltwater economists counter that persistent low inflation and large output gaps risk inflation expectations deteriorating below long-run inflation targets.
  • Costs vs. benefits of QE: Freshwater economists are skeptical of any benefits from QE for real activity, and worry about the potential costs in terms of inflation and financial instability. Saltwater economists see unconventional policy as simply an extension of easing when at the zero lower bound; the way it should work is similar to “normal times.” Both sides are uncertain of the efficacy of continued QE, but saltwater economists tend to be more optimistic of its effectiveness.

From theory to practice

Freshwater programs are associated with universities such as Chicago, Minnesota and Rochester. Saltwater views are more common at institutions such as MIT, Princeton and Yale on the East Coast, and Berkeley on the West. A similar pattern is found at the regional Federal Reserve Banks: those on the coasts tend to  have saltwater orientations, while those inland skew more toward freshwater views. But in both cases, there are interesting exceptions that we discuss below.

For most FOMC participants, the freshwater/saltwater divide mirrors the hawk/dove categorization — Chart 1 plots a fairly standard spectrum for the current FOMC participants. Thus, for example, the steady hawks have strong freshwater connections. The research records of Philadelphia’s Charles Plosser and Richmond’s Jeffrey Lacker belie the East Coast locations of their Banks. While Dallas’s Richard Fisher and Kansas City’s Esther George are not trained as economists, they hail from solidly freshwater Banks. The backgrounds and affiliations of each FOMC participant are listed in Table 2.

 

These four members have cast the majority of dissents in recent years (in addition to George’s predecessor at Kansas City, Thomas Hoenig, who also was a serial dissenter). They have been critical of QE since its first round, and have lately called for its early end, arguing the costs exceed the benefits. Of this group, only George is a voter this year, and we expect her to dissent at least until the Fed starts to taper QE3. As Chart 2 shows, a core group of hawks have been a persistent source of dissents during Bernanke’s time as chairman — nearly 60% of FOMC meetings have not been unanimous since he took the helm in 2006.

At the other end is the more dovish majority. This group includes Chairman Ben Bernanke, Vice Chair Janet Yellen, and New York Fed President Bill Dudley, as well as Boston Fed President Eric Rosengren. All are voting members this year. We expect the other Board members who are not trained as economists — Sarah Bloom Raskin, Elizabeth Duke, Jerome Powell and Daniel Tarullo — to vote with the majority, as all have indicated support for the current policy stance within the past few months. And while some in the market have speculated that Governor Jeremy Stein has a hawkish streak after his 7 February speech on “Overheating in Credit Markets,” we note that he characterized his discussion as “an extended hypothetical” and concluded that any potential losses are “confined” and a “relatively limited” source of systemic risk.

Neither fish nor fowl

Other Fed officials do not fit into this hawk/dove categorization quite so neatly. Atlanta’s Dennis Lockhart and Cleveland’s Sandra Pianalto are typically centrists who vote with the majority; lately Lockhart has been generally supportive of the current QE plan, while Pianalto has raised some concerns. Neither is a voting member this year, but Pianalto will be a voter in 2014.

The “owls”

Three Midwestern Fed bank presidents are less hawkish than their counterparts at Dallas or Kansas City, despite their freshwater training: Chicago’s Charles Evans, Minneapolis’s Narayana Kocherlakota, and St. Louis’s James Bullard. Both Evans and Bullard are voters this year, while Kocherlakota votes in 2014.

We consider them the “owls” in our classification, given their tendency to make model-based arguments around policy — and to have taken more dovish policy positions recently. All three have given their support to QE3 purchases, for example, and Evans and Kocherlakota both have enthusiastically promoted the use of  economic thresholds for forward guidance.

St. Louis’s James Bullard

Bullard is arguably the most traditionally hawkish of the owls, describing himself as the “north pole of inflation hawks” — despite regularly drawing on New Keynesian models in his research. He also has been the most vocal advocate of making small changes to the purchase pace for QE. In his most recent speech on 21 April, he said that QE “remains the best monetary policy option” in the current situation and recommended continuing at the current pace.

Note that Bullard is regarded as having been early in calling for QE2, although he also has been an opponent of forward guidance — so his track record as a barometer of where the rest of the FOMC may go has been mixed. Bullard has argued for beginning to taper QE3 as the unemployment rate gets close to 7% and  growth rises to around 3 ¼%. While he has seen these outcomes as possible by the end of this year, the March projections by the FOMC suggest most of his colleagues don’t expect to hit those criteria until later next year.

Minneapolis’s Narayana Kocherlakota

Kockerlakota has a relatively short history on the FOMC — he became President of the Minneapolis Fed in October 2009 and first voted in 2011 — but it has been
a colorful one. In 2011 he twice joined Fisher and Plosser in hawkish dissents: against introducing a calendar date for forward guidance in August, then against additional accommodation in the form of Operation Twist in September. However, in September 2012, Kocherlakota had a road-to-Damascus conversion. He completely changed his song, and called for the Fed to adopt a “liftoff plan”: keep rates low until the unemployment rate hits 5.5% — provided that inflation was no more than 25 basis points above target. Since then, he has said that more stimulus would be “desirable.”

In our view, Kocherlakota is the owl most likely to change his feathers and become more hawkish again. However, we would not expect that to happen while inflation is running (well) below the Fed’s long-run 2% objective. If the outlook for PCE inflation one- to two-years ahead were running above 2.25% or so, we would then expect him to revert to a hawkish stance. But as of now, that looks rather unlikely for next year, when he is once again a voter.

Chicago’s Charles Evans

Evans has been the most avidly and consistently dovish of the owls, supporting aggressive Fed easing as a voter in 2009 and 2011 — and dissenting twice, in November and December 2011, in favor of additional policy accommodation. In late 2011, Evans developed and refined what would ultimately become the threshold approach to forward guidance that the FOMC as a whole adopted in December 2012. Evans’s advocacy for this approach was cited by Kocherlakota as a strong influence over Kocherlakota’s own thinking.

Evans is a voter again this year. In his most recent public remarks on 20 May, he sounded more optimistic about the outlook for growth and employment, although he said he would like to see at least a few more months of data before thinking about tapering. Evans also repeated his condition of several months of greater than 200,000 in monthly payroll growth as a marker for a “substantial” improvement in the labor market. He observed that the Fed is missing on both its employment and inflation objectives, and said the Fed needed more time to assess the effects of policy. He also noted that it was important that policy makers did not become complacent given the still powerful headwinds facing the economy. On net, we interpret Evans’s remarks as suggesting the earliest he would support tapering would be early fall, and mid-year slowdown would reset the clock.

The “seagulls”

Whereas the owls are dovish-sounding FOMC participants who have hawkish (freshwater) backgrounds or inclinations, the “seagulls” are saltwater doves who have flown far from shore and are starting to sound more hawkish. While some might put Stein or the latest remarks by Evans in this category, we currently see one main member of this group: San Francisco Fed President John Williams.

San Francisco’s John Williams

Before becoming the president of the San Francisco Fed, Williams worked as a staff economist at the Board of Governors in Washington DC and at the San Francisco Bank. Much of his research has been in a New Keynesian framework. And he has been relatively dovish in his speeches since becoming president in 2011. Lately, however, he has been talking about a possible early end to QE3.

In his most recent speech on 16 May, Williams discussed the progress made since QE3 began, noting that the labor market has “improved considerably” but not yet “substantial improvement” — that will take “further gains.” However, he went on to say that “assuming my economic forecast holds true” and “appreciable improvement” occurs in “various labor market indicators” in “coming months,” then the Fed “could reduce somewhat” the purchase pace “perhaps as early as this summer.” “If all goes as hoped,” the Fed could then conclude QE3 “sometime late this year,” according to Williams.

There are a lot of conditionals in those statements, and they require a lot of things to go right. In effect, Williams has outlined more of a “best case” than a “base case” for tapering and ultimately concluding QE3. He has had a similarly optimistic outlook for the past few months, while acknowledging many of the downside risks that have kept his more dovish colleagues cautious and less willing to advocate for a quick end to QE3. That, in our view, makes his current views less representative of the FOMC majority. Given the markets typically view the San Francisco Fed as particularly dovish, he also may be trying to create a more balanced impression and avoid being labeled an über-dove. Most importantly, however, he is not a voter again until 2015.

Birds of a feather

A number of current FOMC participants do not fit so easily into a simple hawk/dove division. While it is still possible to broadly characterize the 19 Fed officials at the FOMC meetings along such a spectrum (as we have done in Chart 1), that can increase the risk that the views of certain members are misconstrued as giving greater insight into the likely policy choices of the Committee than is warranted. As we noted at the outset, most attention should be given to the core of the Committee: Chairman Bernanke, Vice Chair Yellen and New York Fed President Dudley. In addition, it pays to focus mostly on the FOMC voting members — and the current group skews dovish, in our view. Fade the hawks, but also be cautious about interpreting the owls and seagulls — they sometimes fly far from the majority.

    



 
Frontrunning: April 11
Thursday, 11 April 2013 06:38
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  • Obama to report to his bosses today: Obama Meets With Blankfein, Dimon and Moynihan Today (BBG)
  • 2007 is here all over again: Seeking Relief, Banks Shift Risk to Murkier Corners (NYT)
  • Kuroda Calls BOJ Inflation Target ‘Flexible’ (WSJ)
  • Lagarde warns over three-speed world (FT)
  • N. (Read more…) Korea’s Retro Propaganda Calls U.S. Boiled Pumpkin (BBG)
  • Luxembourg To Ease Bank Secrecy Rule, Share Data In 2015 (BBG)
  • Bank of Korea Keeps Policy Steady (WSJ)
  • BOE Stimulus Dilemma Persists as Inflation Seen Higher (BBG)
  • EU Sounds Alarm on Spain (WSJ)
  • Qatar gives Egypt $3bn aid package (FT)
  • RBNZ Says Deposit Insurance May Increase Risk of Bank Failure (BBG)
  • Plosser Calls for Reducing QE Pace Citing Gains in Labor Market (BBG)
  • Obama budget aims to kick start deficit-reduction talks (Reuters)

 

Overnight Media Digest

WSJ

* Luxembourg has shifted its banking policy, saying it would exchange information with the rest of the European Union about EU holders of bank accounts in the country, another step in Europe’s crackdown on tax evasion.

* The European Union proposed an expansion of the bloc’s powers to protect companies in Europe against unfair competition from abroad, a sign of an increasingly combative stance seen aimed at checking China’s rising export power.

* Some of the biggest banks and investment firms on Wall Street were among those that received minutes of the Federal Reserve’s latest policy meeting 19 hours before the market-sensitive document was released.

* JPMorgan Chase & Co’s Chief Executive James Dimon, renewed his apologies to shareholders for last year’s multibillion-dollar trading fiasco, and an investor that has pushed for corporate-governance changes at large financial firms said it would focus this proxy season on changing the bank’s board.

* U.S. President Barack Obama took a political gamble Wednesday by proposing to curb the growth of Social Security and Medicare, hopeful that the concessions would draw rank-and-file Senate Republicans into a budget deal that has so far proven elusive.

* Changes in Cyprus’s bailout made last month to win approval from its parliament increased the rescue’s price tag to 23 billion euros ($30.1 billion) through the end of 2016 from an originally estimated 17 billion euros, according to draft documents prepared by the European Commission and the European Central Bank and reviewed by The Wall Street Journal.

* Deutsche Telekom AG sweetened its offer for U.S. wireless carrier MetroPCS Communications Inc, hoping to save a merger that shareholders had threatened to reject.

* Microsoft Corp is developing a new lineup of its Surface tablets, including a 7-inch version expected to go into mass production later this year, said people familiar with the company’s plans.

* Federal law-enforcement authorities have reversed course and revived an insider-trading probe into how media companies transmit government data to investors, according to people familiar with the matter.

 

FT

Overview The European Union’s largest tax haven-Luxembourg has agreed to start easing its bank secrecy rules from 2015, amid growing international pressure to tackle tax evasion.

Cyprus has agreed to sell excess gold reserves to raise around 400 million euros and help finance its part of its bailout, in a move rattling precious metal markets as investors fear it could set a precedent for other troubled eurozone countries.

IMF Managing Director Christine Lagarde warned of a three-speed global economy, with the world dividing into three groups – some countries doing well, some on the mend and some still in trouble.

A boardroom rift with executives could see Mehmet Dalman, the chairman brought in to clean up ENRC, quit the FTSE 100 miner.

Trafigura raised $500 million through its perpetual bond, as the world’s second-largest independent metals trader after Glencore taps into new sources of funding. Some of the biggest shareholders in Marks and Spencer are seeking greater clarity on Chief Executive Marc Bolland’s strategy to stem the chronic decline in sales at the high street retailer. Goldman Sachs fended off a shareholder proposal that would lead to stripping Chief Executive Lloyd Blankfein of his chairmanship, by offering concessions to a shareholder activist group.

 

NYT

* The Federal Reserve alerted bank officials on Tuesday that policy makers were considering a shift on when to begin easing back on stimulus efforts, a day before the news was released publicly, but it insisted there was no evidence traders on Wall Street had benefited from what was called an error.

* Deutsche Telekom AG sweetened a bid by its T-Mobile USA unit for MetroPCS Communications Inc on Wednesday, after running into fierce resistance from shareholders of the target company.

* Goldman Sachs reached a deal with the CtW Investment Group, an organization that advises union pension funds, to halt a vote on a proposal to split the roles of chairman and chief executive. The proposal, which was sent to Goldman in January, is being withdrawn.

* U.S. federal agents secretly photographed a former senior KPMG executive accepting a cash payment in exchange for secret information about the companies he audited, according to a person with direct knowledge of the case.

* Under President Obama’s budget proposal, deductions for tax breaks like mortgage interest and contributions to charities would be capped at a maximum rate of 28 percent.

* Global growth is likely to remain tepid this year and central banks should keep their easy monetary policies in place, the head of the International Monetary Fund said on Wednesday.

* On Wednesday, the research firm IDC reported that worldwide PC shipments declined 13.9 percent during the first three months of the year compared with the same period a year earlier.

 

Canada

THE GLOBE AND MAIL

* The Parti Québécois is setting aside its many long-standing differences with Ottawa in a bid to help collect billions of dollars in taxes hidden offshore.

Quebec Premier Pauline Marois said she supports “without any reservation” the federal government’s effort to obtain a list of those who allegedly use offshore accounts to avoid paying income taxes – and is working out a way to team up with Ottawa if and when it launches legal action.

* Passport Canada, the agency that issues passports to Canadians, is projecting a quarter of its work force could be cut as it rolls out new chip-embedded, 10-year travel documents.

Reports in the business section:

* Barrick Gold Corp has suspended construction in Chile on its massive Pascua-Lama gold and silver project, responding to a court order that further delays work on a mine already a year behind schedule and billions of dollars over budget.

* Suncor Energy Inc spilled roughly 225 barrels of a renewable diesel product at a West Coast terminal Saturday, with a small amount of fuel reaching the waters of Burrard Inlet.

The facility is near Port Moody, British Columbia, and most of the fuel spilled on the ground, Suncor spokeswoman Sneh

NATIONAL POST

* A co-founder of iconic Canadian rock band Bachman-Turner Overdrive had a sexual relationship with a girl between the age of 11 and 14, a British Columbia (B.C.) judge was told this week.

FINANCIAL POST

* If the Obama administration rejects the Keystone XL pipeline, it would be a significant thorn in Canadian-U.S. relations, Alberta’s premier said. Premier Alison Redford was in Washington for her fourth trip to lobby on behalf of a pipeline that Canada sees as critical to its economic well-being.

* The political will is high to conclude a free trade deal between Canada and the European Union, even if negotiations to resolve outstanding issues are taking longer than expected, Maurizio Cellini, the head of the economic and trade section of the EU’s delegation in Canada, said.

 

China

CHINA SECURITIES JOURNAL

- Guangzhou, the capital and largest city of the Guangdong province in the south of China, will raise the minimum downpayment on second home purchases to 70 percent of the value from 60 percent if house prices rise over 2 percent in April, unnamed sources told the newspaper.

- The Ministry of Science and Technology and the Health and Family Planning Commission set up a science research project on Wednesday to prevent H7N9, also known as bird flu, infecting human beings, and expect to develop a preventive vaccine for it in seven months.

SHANGHAI SECURITIES NEWS

- The willingness among Shanghai residents to buy a car dropped 12.4 percent last quarter due to surging prices for a Shanghai licence plate, according to a report released by a local university on Wednesday.

- Shanghai will start a carbon-trading trial before the end of June as part of efforts to reduce energy intensity and emissions and hence, regulations for the trading on the Shanghai Environment and Energy Exchange will be issued within this year, according to Shanghai Development and Reform Commission.

- At a price of more than 3.7 billion yuan ($594 million), a land parcel in Tangzhen in the Pudong New Area became the most expensive residential plot sold in Shanghai in over two years on Wednesday.

CHINA DAILY

- Senior health officials in Shanghai on Wednesday denied media reports that the city might have delayed reporting the outbreak of the previously lesser-known H7N9 bird flu to the national health authorities.

 

Fly On The Wall 7:00 Am Market Snapshot

ANALYST RESEARCH

Upgrades

Adobe (ADBE) upgraded to Neutral from Sell at Goldman
Boyd Gaming (BYD) upgraded to Overweight from Equal Weight at Morgan Stanley
LabCorp (LH) upgraded to Neutral from Sell at Goldman
Lam Research (LRCX) upgraded to Outperform from Neutral at Cowen
Provident New York (PNBY) upgraded to Outperform from Market Perform at Keefe Bruyette
Sterling Bancorp (STL) upgraded to Outperform from Market Perform at Keefe Bruyette

Downgrades

Family Dollar (FDO) downgraded to Neutral from Buy at Goldman
Fortinet (FTNT) downgraded to Equal Weight from Overweight at Morgan Stanley
Fortinet (FTNT) downgraded to Hold from Buy at Needham
Fortinet (FTNT) downgraded to Market Perform from Outperform at Wells Fargo
Fortinet (FTNT) downgraded to Neutral from Buy at BofA/Merrill
Mettler-Toledo (MTD) downgraded to Neutral from Buy at Goldman
Microsoft (MSFT) downgraded to Neutral from Buy at Nomura
Microsoft (MSFT) downgraded to Sell from Neutral at Goldman

Initiations

Adobe (ADBE) initiated with an Overweight at Evercore
Brown Shoe (BWS) initiated with a Buy at Brean Capital
General Growth (GGP) initiated with an Outperform at BMO Capital
Kraft Foods (KRFT) initiated with a Market Perform at Wells Fargo
Macerich (MAC) initiated with a Market Perform at BMO Capital
Mondelez (MDLZ) initiated with an Outperform at Wells Fargo
Simon Property (SPG) initiated with a Market Perform at BMO Capital
SourceFire (FIRE) initiated with a Market Perform at JMP Securities
Xerox (XRX) initiated with an Overweight at Piper Jaffray

HOT STOCKS

Protective Life (PL) to acquire MONY (AXAHY) and reinsure certain policies of MLOA for $1.06B
Blackstone (BX), KKR (KKR) in group that bid $65 per share for Life Technologies (LIFE), DJ reports
Deutsche Telekom (DTEGY) submitted best, final offer to MetroPCS (PCS). MetroPCS postponed shareholder meeting to consider revised proposal
Crest Financial filed proxy statement to oppose Sprint, Clearwire (S, CLWR) merger
Fitch affirmed Regency Centers (REG) at ‘BBB’, outlook stable
SEC said won’t pursue enforcement action against Netflix (NFLX) CEO Hastings
Barrick Gold (ABX) to suspend construction on Chilean side of Pascua-Lama
Roche (RHHBY) reaffirmed 2013 targets, expects to increase dividend
Netflix (NFLX) said it may use Facebook (FB), Twitter to disclose material information

EARNINGS

Companies that missed consensus earnings expectations include:
Apogee Enterprises (APOG), Fortinet (FTNT)

Companies that matched consensus earnings expectations include:
Pier 1 Imports (PIR), Bed Bath & Beyond (BBBY), Ruby Tuesday (RT)

NEWSPAPERS/WEBSITES

  • Major buyout firms have been unloading a record amount of shares in companies they have taken public. Bain Capital, KKR (KKR) Apollo Global (APO) and other private-equity firms sold $20.5B of stock through 50 follow-on offerings during the first three months of 2013. That’s twice as many deals as in the year-earlier period and the highest quarterly pace on record, according to Dealogic, the Wall Street Journal reports
  • The PC business is at a crossroads, and Microsoft (MS) is developing a new lineup of its Surface tablets, including a 7-inch version expected to go into mass production later this year, sources say, the Wall Street Journal reports
  • The Bank of Japan’s massive stimulus to pull the economy out of two decades of malaise has altered the outlook for Japanese assets, according to a Reuters snap poll of analysts conducted after the central bank shocked markets with its radical shift in policy, Reuters reports
  • The Fed should start cutting back on purchases of housing bonds as soon as its next meeting, said Dallas Fed President Richard Fisher, hours after Atlanta Fed President Dennis Lockhart said talk of trimming the central bank’s bond buys was “premature,” Reuters reports
  • Economists are lowering forecasts for how much Treasury yields will rise this year as the U.S.economy shows signs of slowing. U.S. 10-year yields will be 2.25 percent by Dec. 31, based on the average forecast among banks and securities companies surveyed by Bloomberg News

SYNDICATE

Chimerix (CMRX) 7.32M share IPO priced at $14.00
Chuy’s (CHUY) plans to sell 3M shares of common stock for holders
Fifth Street Finance (FSC) files to sell 13.5M shares of common stock
InspireMD (NSPR) 12.5M share Secondary priced at $2.00
Performant Financial (PFMT) files to sell 6M shares for holders
Realogy (RLGY) 35M share Secondary priced at $44.00
Synergy Pharmaceuticals (SGYP) 16.375M share Secondary priced at $5.50

 

Quick video recap of European news via dpa-AFX

    



 
Overnight Sentiment: Driftless
Wednesday, 03 April 2013 05:54
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The driftless overnight sessions are back. After the Nikkei soared by 3% following several days of declines, and the Shanghai Composite continued its downward ways despite Non-Manufacturing PMI prints for March which rose both per official and HSBC MarkIt data, Europe was unsure which way to go, especially with the EURUSD once more probing the 1.28 support level. The USDJPY was no help, and even with the BOJ meeting at which new governor Kuroda is finally expected to do something instead of only talking about it, imminent, has hardly seen the Yen budge and provide the expected carry-funding boost to global risk. In terms of newsflow there was little of it: European CPI in March printed at 1. (Read more…)7%, above expectations of 1.6%, but below February’s 1.8% rise in inflation. UK continued telegraphing the inevitability of Mark Carney’s imminent QE, with construction PMI the latest indicator missing, at 47.2, below expectations of 48.0 (above 46.8 last).

In Cyprus news, the International Monetary Fund said it will contribute 1 billion euros over three years to the €10 billion bailout for Cyprus. Lagarde said she expected the IMF board to approve the funds in early May. “A staff team of the International Monetary Fund has reached staff level agreement with the Cypriot authorities on an economic program that will be supported by the IMF jointly with the European Union and the European Central Bank,” Lagarde said. “A combined financing package of 10 billion euros is designed to help Cyprus cover its financing needs, including to service debt obligations, while it implements the policies needed to restore the health of the economy and regain access to capital market financing,” she said.

Concurrently, Cyprus’s central bank unfroze 10% of deposits over €100,000 at Bank of Cyprus PCL to allow business and individuals access to some of their savings, moving to gradually ease controls put in place to stem capital flight during the island’s banking crisis. It is unclear how much of this money depositors actually have access to in light of the ongoing capital controls and cash withdrawal limitations.

Elsewhere, Spanish Prime Minister Mariano Rajoy on Wednesday called for Europe to implement growth policies to balance its austerity drive and for countries with room for fiscal manoeuvre to increase public spending. “Europe is the only region in the world in recession. To overcome this situation we need three things: every country needs to do its homework, we need more (European) integration and we need growth policies,” Rajoy said in a televised speech to leaders of his People’s Party. “That’s why countries which can afford it should spend more.” Rajoy also said the Spanish economy would clearly grow in 2014 while 2013 would remain tough.

Surely Europe will get right on it.

SocGen lists the main macro events to be on the lookout for today:

The apathy towards the gyrations in periphery spreads over bunds, 2y bono spreads tightened 20bp yesterday, is a testament to investors’ lack of conviction and desire not to be exposed long or short before policy makers announce their decision and the next set of US employment data are released. A weaker non-manufacturing services ISM from the US is a risk today but a comparison of historical trends between manufacturing and non-manufacturing indices shows no striking co-movement at least where negative surprises are concerned. With the exception perhaps of June 2012, declines in the manufacturing ISM of 3.5pts and 5.9pts respectively in July and May 2011 did not translate into major setbacks for the services ISM equivalent. This does not tell us how the market will set up for Thursday, but we guess that investors will not be inclined to nail their colours to the ISM or ADP mast until the suspense of the Kuroda and Draghi press conferences are behind us. Providing a hint of what the BoJ might announce, Kuroda said recently that he will consider combining monthly asset purchases and an asset purchase fund, as well as buying debt with longer maturities. Break-even inflation in Japan rose some 60bp on a 6y horizon between December and March but has started to flat line since the middle of last month when Kuroda was appointed. Although the government has now raised the economic outlook for the last three months in succession, the latest quarterly Tankan survey showed lingering pessimism and planned cutbacks in investment, with USD/JPY averaging 85.0 through FY 2013. Can the BoJ lead companies to expect higher USD/JPY? What does the Kuroda BoJ put up against the $85bn per month of Fed purchases? The bank’s current asset purchase target is ‘only’ Y101trn by end-2013.

Finally, the full overnight recap comes as usual from Deutsche’s Jim Reid:

Sometimes first and last days of a month and/or quarters can exhibit strange trading tendencies and yesterday felt like one of those days. Europe was particularly strong with the DAX, CAC, FTSE MIB and IBEX up 1.91%, 1.98%, 1.41% and 1.65% respectively. 10 year Italian and Spanish yields also fell 14bp and 12bp respectively. This was all in spite of worrying signs from the manufacturing PMIs for March where Italy (44.5 vs 45.3 expected) and Spain disappointed (44.2 vs 46.2). The UK (48.3 vs 48.7) also disappointed with the core Euro-zone numbers coming in broadly in line with expectation which had been pushed down due to the disappointing flash readings 10 or so days ago. France remained weak (44.0 vs 43.9) and Germany (49.0 vs 48.9) dipped back below 50 but is the only one of the four major Eurozone economies to be above the start of the year levels for this PMI series.

Back to yesterday and equity markets recorded solid gains on both sides of the Atlantic. The S&P 500 (+0.52%) closed at a new record high of 1570.25. US dataflow was decent with US factory orders (+3.0% v +2.9%) rising above expectations with the highest in print in five months. Orders for autos and aircraft boosted the February number which perhaps helped offset some concerns following Monday’s disappointing ISM manufacturing. Elsewhere the IBD/TIPP Economic Optimism index (46.2 v 45.5) also printed above market consensus. Besides economic data the Fedspeak yesterday was also dovish signaling further support for continuation of asset purchases. In particular, Atlanta Fed’s Dennis Lockhart noted that a slowing of Fed asset purchases potentially as late as early 2014 maybe needed to support the labour market.

On the micro front, reports that AT&T and Verizon may jointly bid for Vodafone Group Plc also helped lift equity market performance on both sides of the  pond. Credit markets followed suit with spreads tighter across the board yesterday led by a sharp outperformance in European Financials. The European Financial Snr and Sub indices rallied 10bp and 15bp, respectively. As we showed last week, financials were trading at all times wides vs Crossover on a ratio basis just before Easter so any period of calm will likely favour them at the moment.

Elsewhere in credit we saw the European iTraxx Main, Xover and the CDX IG closing -5bp, -17bp and -2.5bp tighter on the day. FINRA Trace data showed that dealers were net sellers of cash bonds yesterday. Turning to Asia, the escalating tensions between North and South Korea continue to dominate market headlines overnight. The KRW dropped to a sixmonth low against the Greenback after the latest news that South Korean workers were refused access to an industrial park (Gaeseong zone) jointly run between the two countries for the first time since 2009. Demand for South Korean assets has taken a backseat ever since North Korea’s ‘state of declaration’ over the weekend and its decision to restart the Yongbyon nuclear site, which was shut down by the February 2007 disarmament accord. Korea’s 5-year sovereign CDS has come off its recent wides but still about 5bp wider on the week. Geopolitical tensions aside the latest non-manufacturing PMI data from China was better, coming at 55.6 in March from 54.5 in February.

Japanese equities are taking the lead as far as overnight markets are concerned with the Nikkei up strongly ahead of Bank of Japan meeting headlines.

Meanwhile its also worth mentioning that Gold had its largest drop in six weeks yesterday, down by 1.5% to test its February $1570/oz lows. Back to European news flow, according to Slovenian central bank head and ECB governing council member Marko Kranjec, savers have not been pulling out deposits from Slovenian banks. “The way the situation in Cyprus was being solved did not influence the confidence of our depositors” added Kranjec. According to Reuters Slovenian banks reportedly have around EUR7bn of bad loans, equivalent to 20% of GDP.

Looking forward we have an interesting ECB meeting coming up tomorrow and the market is starting to ponder what Draghi may say at his usual press conference. All eyes will be on his economic outlook but also more importantly on his thoughts on Cyprus and/or any mention of other unconventional policy options. Given how disappointing the data has been, markets are hoping for something from Draghi tomorrow.

Ahead of Payrolls Friday, the ADP employment report and the ISM manufacturing data in the US are today’s notable releases. In Europe we will get Eurozone CPI estimates for the month of March. In terms of the Fed Bullard and Williams will speak at some point later this evening.