First Impressions

Deflation, Disinflation, Low-flation, or None of the Above
Doug Ashburn – John Lothian News

The talk this morning is all about inflation, and whether Western economies are making any progress in achieving what some call a “Goldilocks economy” (not too cold; not too hot).

According to recent data, the eurozone is a smattering of low-flation in France and Germany and outright deflation in some of the periphery such as Spain. Industrial production is weak across the eurozone. The situation is bad enough that even Germany’s Bundesbank, perhaps the most hawkish central bank on the planet, is advocating stimulus measures.

On the flip side, this morning’s release of the U.S. April producer price index saw an upside surprise, 0.6 percent versus an expected 0.2 percent. Pundits can argue whether the PPI, which revamped its methodology a few months back to include services and construction, has predictive power on a month to month basis. But one thing is certain, at least last month anyway, the reading was inflationary.

Will it have staying power? I will have my preliminary answer tomorrow when the capacity utilization number is released. At 78 percent, it still stands below the lowest point in the 1990-91 recession, but well above the 2009 low of 67 percent. Until I see a rate above 80, I will be skeptical of sustainable PPI strength. Europe is another story, with stimulus apparently on the way.

Quote of the Day

“As fast as bond yields have been falling, so too has inflation, meaning that real yields have maintained their value.”

Tanguy Le Saout, Head of European Fixed Income, Pioneer Investments in the story, “Evaporating inflation may have taken pricy debt too far“.

Lead Stories

Derivatives Markets Growing Again, With Few New Protections
Despite slow economic growth in the United States and most of Europe still in or hovering around recession, global derivatives markets are 20 percent larger than in 2007. The Bank for International Settlements announced late last week that global derivatives markets is about $710 trillion. That is not a measurement of credit and market risks, but the figure merits attention from regulators and the public, which continues to suffer the ill effects from weakly managed derivatives portfolios in the global financial crisis. Higher volumes are a strong indication that derivatives players’ operational risk is rising.

***DA: On the bright side, the Titanic’s deck chairs look nice in their new arrangement.

Macro Horizons: An Utter Absence of Inflation in the Industrialized World
MoneyBeat – WSJ
The subject of disinflation is the focal point of Wednesday’s data, where we are being reminded of its nonexistence in the industrialized world and of the risk that it could morph into outright deflation.

***DA: I think the writer means the nonexistence on inflation. Whatever. The point is, after five years of so-called money creation, this is the best we can achieve. We may be in trouble.

Evaporating inflation may have taken pricy debt too far
The prospect of years of so-called ‘low-flation’ has become so ingrained in western financial markets this year that even a hint of creeping prices could deliver quite a shock.

***DA: April PPI came out at 0.6 percent, a notch above expectations. So there’s that.

US producer prices soar to highest in nearly 2 years
U.S. producer prices posted their largest increase in 1-1/2 years in April as the cost of food and trade services surged, hinting at some inflation pressures at the factory gate.

Carney Says U.K. Has Moved Closer to Needing BOE Rate Increase
Emma Charlton – Bloomberg
Mark Carney signaled Bank of England officials are prepared to wait until next year to raise interest rates as he acknowledged that the British economy is moving closer to the point of needing tighter policy.

Time for Draghi to open the sluice
Martin Wolf –
Mario Draghi, president of the European Central Bank, gave a clear indication last week that monetary easing would arrive in June. That would be welcome. It would also be vastly too late and, in all probability, too little. Mr Draghi saved the day in July 2012 when he announced that “within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And, believe me, it will be enough.” He needs to promise to do whatever it takes yet again, to eliminate excess capacity and raise inflation to 2 per cent. If he does not, crisis might yet return.

A Major Lift for Fannie and Freddie
The federal overseer of Fannie Mae and Freddie Mac on Tuesday announced a shift in policies intended to maintain the mortgage finance giants’ role in parts of the housing market, spur more home lending and aid distressed homeowners.

Pimco Outlook: Neutral Is the New Black
Paul Vigna – MoneyBeat – WSJ
That’s the one-word takeaway from the latest long-term view from the team over at Pimco, which this morning published a 2014 secular outlook that looks ahead over the next three to five years.

***DA: I thought orange was the new black. Does that mean orange is neutral? The Department of Homeland Security doesn’t think so.

Central Banks

Vacancies Pose Threat to the Fed
The Federal Reserve governor Jeremy C. Stein is chairman both of the internal committee that monitors financial markets for signs of trouble and of the committee that watches the way banks treat their customers. He is also the only remaining member of those committees.

***DA: The CFTC has only two commissioners right now, so quit complaining.

Central bank divergence will hit pound
Jamie Chisholm –
Last week Mario Draghi had his say and the market now reckons the European Central Bank is likely to ease policy next month. On Wednesday it is Mr Carney’s turn. But when the Bank of England governor delivers his second-quarter inflation report and news conference the focus will be on how soon he may have to tighten.

***DA: If the pound is going to get hit, lets make it quick. I am headed to london for a conference in three weeks.

BOE Cunliffe: New Rules Not Designed To Resurrect Failed Banks
Jason Douglas and Paul Hannon – MoneyBeat – WSJ
New rules for recapitalizing failing banks are aimed at ensuring vital financial services keep functioning smoothly and are not designed to “resurrect” poorly-run firms, a senior Bank of England official said Tuesday.

The BOE’s Difficulties Start With the First Hike
Alen Mattich – MoneyBeat – WSJ
With each new data release the U.K. tiptoes ever closer to becoming the first major economy to tighten policy. The question is, what happens then?


Credit Suisse chief FX spot dealer and 5 others leave bank
At least six foreign exchange employees at Credit Suisse in London and New York, including head of FX spot trading in London Danny Wise, have left the Swiss bank in a cost-cutting drive, a source familiar with the matter said on Wednesday.

Peak Bitcoin or peak hedge fund?
Izabella Kaminska | FT Alphaville
Tim Hartford directs us to a nice piece by John Cassidy in the New Yorker this week wondering why it is that hedge funds can still get away with making a killing when their performance is so underwhelming these days. It is, in his opinion, a bit of a mystery.

***DA: An easy question to ask after a blistering year in the stock market. After a meltdown? Not so much.

Bitcoin’s Media Sparkle Fades
Alen Mattich – MoneyBeat – WSJ
Is the world losing interest in bitcoin? Prices have certainly dropped considerably. Bitcoin now trades at around $435 against a peak of just under $1150 hit in early December of 2013, according to Coindesk data. Bitcoin traded at less than $200 just a month before that peak.

BitBeat: The Emerging Venture-Capitalist Vision for Bitcoin
MoneyBeat – WSJ
When payment processor Bitpay announced the biggest-ever funding round for a bitcoin company earlier Tuesday it was was Richard Branson’s presence in the investment group that drew the most attention.

Indexes & Index Products

LSE kicking tires of Russell Indexes
Bernardo Mariano – Futures
The London Stock Exchange (LSE) is currently in discussions to purchase Seattle-based Russell Investments in order to expand in U.S. stock indices. The exchange stated that any deal would be partly funded by a rights issue, Reuters reported.
ICAP Global Derivatives Limited is the first non-U.S. domiciled platform to receive CFTC approval to perform as a swap execution facility (SEF).

US institutions see long-term appeal in ETFs
Philip Georgiadis – Financial News
US institutional investors are broadening their use of exchange-traded funds and are beginning to view them as long-term strategic investment opportunities, a new report shows.

Whack-a-mole fund managers can’t beat index funds
George Sisti – MarketWatch
Proponents of active management claim that gifted managers can identify stocks that will rise in price and shun those that will decline.
They can sell stocks in advance of any serious market decline and re-enter the market before the rebound, thereby outperforming their benchmark index. Let’s look at a recent report that debunks these claims.


The Case for Buying Gold
Frank Holmes – The Wall Street Journal
Gold is an alternative investment with a different risk-reward profile than traditional financial assets, and can be a good addition to a diversified portfolio. Owning some gold should be considered when making risk-management plans.

Gold Miners Fail to Launch
Tom Aspray – Forbes
In the face of booming stock prices and declining yields, there has been little interest in gold or the gold mining stocks. As I mentioned in April’s Should You Invest in This Unloved Sector? The Philadelphia Gold & Silver Index (XAU) shows a seasonal tendency to form a short-term low in early May.

The Secret World of Bullion Banking: Who Sets Gold Prices?
The financial sector has never been known for its transparency or forthrightness. In fact, it’s probably the single most mysterious industry there is. Bullion banking is so shrouded in secrecy that even most bankers don’t understand it. Recently, bullion bankers have come under fire for allegedly dishonestly fixing gold and silver prices. Whether or not the allegations are true, the ongoing investigation into bullion banking has led to some surprising discoveries about the industry. The question raised by the investigation is whether or not some bullion bankers are playing by the rules.

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