Global Economic Headlines (13/3/18)

• Fed’s George opines on balance sheet unwind speed-up; not too far-fetched
• Hedge funds resume liquidating bullish oil positions
• New York Fed survey shows that US inflation expectations rise
• UK Chancellor of the Exchequer Hammond to give brighter outlook for UK’s “Brexit”-bound economy

Top Two Stories

Fed’s George opines on balance sheet unwind speed-up; not too far-fetched
Kansas City Fed President Esther George in a speech last week suggested dissatisfaction with the pace at which the US central bank is reducing its balance sheet. It is easy to dismiss these comments coming from a non-voting member this year and a “hawk”. However, they are important at a time when a consensus seems to be building between the “hawks” and “doves” toward steering market expectations toward a potential faster pace of tightening. The Fed made a conscious decision to focus on the fed funds target range and allow balance sheet run-off to progress on autopilot. So, it is interesting that we have the first glimpse of dissatisfaction with the pace at which the balance sheet is being reduced. George is at the hawkish end of the spectrum but is a reliable “hawk” who sees the “very slow pace of our balance sheet normalisation” as “contributing to a build-up of various financial imbalances”. While George stuck to the current Fed script on the need to continue with gradual normalisation of interest rates, her focus on financial imbalances suggests she would favour a faster reduction in the Fed’s balance sheet.
These are early days, but her comments could be an indication of where the risks are with regards to policy normalisation, that could see an increase in the pace of rate-hikes complemented with a faster run-off of the Fed’s balance sheet.

Hedge funds resume liquidating bullish oil positions
Hedge funds have resumed liquidating their bullish long positions in crude oil and refined fuels amid more signs that the earlier rally in prices has fizzled out. Hedge funds and other money managers cut their combined net long position in the six most important futures and options contracts linked to petroleum prices by 50 million barrels in the week to March 6. The reduction largely reversed an increase of 68 million barrels the previous week, according to position records published by regulators and exchanges
Portfolio managers have now reduced their net long position in petroleum in five of the last six weeks by a total of 245 million barrels since January 23.

Bond Market

US Treasuries
Increased supply did not quell demand for 3-year and 10-year Treasury notes auctioned on Monday, a positive sign for the heavy issuance expected in the year ahead. Monday’s auctions saw the $28bn 3-year note sold at slightly lower-than-expected yield of 2.436%, suggesting steady demand from investors. The high yield at the $21bn 10-year note reopening was 1 basis point below the expected number.

Eurozone Bonds
Supply is likely to be a factor for Eurozone bonds this week, as it surges to close on €30bn from the slight €6bn taken down last week. The Netherlands and Italy start the proceedings this morning, the former with its new July 2028 DSL, to be sold via Dutch Direct Auction, the latter with its mid-month BTP auctions. Germany then arrives with a €1.5bn tap of its August 2048 Bund tomorrow, preceding Spanish and French auctions on Thursday. Late on Friday, Portugal announced taps for Wednesday, worth €1.0bn-€1.25bn in total of the October 2028 and February 2045 maturities. This may actually bring a little relief for the long-end, however, as it should preclude the possibility of a new 30-year syndicated deal. Redemptions feature as Germany pays out €13bn of principals on a maturing 2-year Schatz on Friday, and Austria pays out €1.4bn of coupons on Thursday.

Britain’s Chancellor of the Exchequer Philip Hammond said at the weekend that he might be able to relax his grip on public spending at the end of this year, but he stuck to his plan to cut the country’s high debt levels. Britain’s budget deficit has probably fallen to about 2% of annual economic output in the current financial year, which would be its lowest since 2002 and way down from the 10% it reached in 2010, when many government departments began cutting spending sharply. “There is light at the end of the tunnel because what we are about to see is debt starting to fall after it’s been growing for 17 continuous years,” Hammond told BBC television ahead of a half-yearly update on the public finances on Tuesday. Faced with uncertainty about what leaving the European Union will mean for the world’s sixth-biggest economy and frustration among voters who have coped with eight years of austerity, Hammond has already pushed back a target of wiping out the deficit into the mid-2020s.

Other Bonds
According to the Bank for International Settlements (BIS), Chinese banks have significantly stepped up their lending activities in recent years to rank now as the sixth-largest international creditor group. The BIS, an umbrella body for global central banks, said in its latest report that Chinese banks had cross-border financial assets worth about $2 trillion as of the third quarter of 2017. As Chinese banks lend abroad largely in US dollars, in absolute terms this makes them the third-largest provider of the US currency to the international banking system. But while highlighting the role of Chinese banks as an important source of credit globally, the BIS also warned on borrowers’ reliance on a “common lender”, noting this had exacerbated past Asian financial crises. This refers to a situation in which several countries borrow from just a few big international banks, raising the risk that losses in one country encourage the banks to withdraw from other borrower countries as well.

Key Economic Indicators of the Day
Time (GMT) Country Release Period Merrion Market Last
9.00 Italy Unemployment Rate Qtr 4 11.0% 11.0% 11.2%
10.00 US NFIB Small Business Optimism February 107.2 107.1 106.9
11.00 Ireland Manufacturing Output January -2.5% (Y) -3.0% 3.4% (Y)
12.30 US Consumer Prices February 2.2% (Y) 2.2% 2.1% (Y)
12.30 US “Core” CPI February 1.8% (Y) 1.8% 1.8% (Y)
12.30 US Real Average Weekly Earnings February 0.4% (Y) 0.4% 0.4% (Y)
12.30 US Real Average Hourly Earnings February 0.8% (Y) 0.8% 0.8% (Y)
23.50 Japan “Core” Machinery Orders January 5.5% 5.2% -11.9%
23.50 Japan Bank of Japan Policy Minutes Jan 22-23

Key Economic Speeches/Events of the Day
Time (GMT) Country Event
8.00 EU Ecofin meeting in Brussels
12.30 UK Chancellor of the Exchequer Philip Hammond delivers Spring statement to
UK parliament on updated fiscal forecasts
14.30 Canada Bank of Canada Governor Stephen Poloz speaks in Ontario

Today’s Debt Auctions/Buybacks/Announcements
Time (GMT) Country Auction
9.30 Spain Spain sells 91-day and 266-day T-bills
10.00 Netherlands Netherlands sells up to €6bn of new July 2028 DSL
10.00 Italy Italy sells up to €8.75bn in total of a new 1.45%, May 2025 BTP as well as
tapping the existing 0.2%, October 2020; 2.45%, September 2033 and 2.70%,
2047 bonds
10.00 Malta Malta sells 91-day and 182-day T-bills
10.15 Switzerland Switzerland sells 91-day T-bills
10.30 Eurozone ECB main refinancing operation result
15.30 US Treasury sells 4-week T-bills
17.00 US Treasury sells $13bn of re-opened 30-year bonds

Alan McQuaid (13/3/18)