First Impressions

Yellen in Chicago
by Doug Ashburn
Federal Reserve Chair Janet Yellen came to Chicago yesterday to address the 2014 National Interagency Community Reinvestment Conference. She also toured a high-tech manufacturing lab at Daley College that prepares students for tech sector jobs. Quite frankly, she looked more like a local politician at a ribbon-cutting than a central banker.

Perhaps that was the point. Her speech was more about Fed policy’s effect on the middle class, the long-term unemployed and the American Dream. In her speech, Yellen said the central bank is “trying to help families afford things they need so that greater spending can drive job creation and even more spending, thereby strengthening the recovery.”

While this is only my personal observation, the effects seem a bit misguided. The stock market has been on a terrific run, firms are flush with cash, and home prices are inching forward. The way I read her speech, monetary stimulus starts at the top and is expected to trickle its way down to the general public.

Now where have I heard that before?

Quote of the Day

“The work had suggested that the UK banking sector would be resilient to direct losses caused by the impact of moderate increases in long-term interest rates. But there was significant uncertainty around potential amplification effects operating through the wider financial system.”

Financial Conduct Authority report in the story, “Investors ‘too relaxed’ about rising interest rates, Bank of England warns”.

Lead Stories

Inflation. Deflation. Disinflation. The Threat to Europe? Lowflation
Simon Kennedy – Bloomberg
For all the fears of a Japan-style era of deflation, a more likely threat for Europe is what International Monetary Fund officials are calling lowflation.
A sustained period of ultra-low, albeit rising, inflation still has the potential to destroy output, hurt hiring and revive memories of the recent fiscal crisis by hammering the ability of governments to repay debts.

***DA: After the crises, central banks opted to tear off the band-aid slowly rather than accept the sharp pain all at once. It will be a drag on growth for decades just as the Japanese banking losses have taken 20+ years to absorb.

Investors ‘too relaxed’ about rising interest rates, Bank of England warns
Phillip Inman – The Guardian
Major investors could face huge losses if they continue to be complacent about the impact of rising interest rates on their riskier trades, the Bank of England’s financial policy committee has warned.

***DA: And the alternative is???

China Burns Speculators as $5.5 Billion Lost on Yuan Bets
Ye Xie and Kyoungwha Kim – Bloomberg
China is succeeding in making its currency less predictable. Investors are paying the price. Clients of U.S. commercial banks have lost about $2 billion this year on $332 billion of options betting the yuan would appreciate, while Chinese companies lost $3.5 billion on $150 billion wagered on a benchmark forwards contract, according to data compiled by Morgan Stanley and the Depository Trust & Clearing Corp. in Washington.

***DA: Well somebody was on the other side of the trade, right?

Why Interest Rates Are Down Despite the Taper
David Hanson and Matt Koppenheffer – The Motley Fool
Much of the thesis for the market’s reaction to the moves of the Fed recently has been based on the idea that once the Fed’s quantitative easing program begins tapering off, the historically low interest rates that have created the current interest rate environment will begin to rise. But is that actually what history predicts would happen?

***DA: History schmistory. We are sailing in uncharted waters here.

Balls Rise at Pimco Shows Gross’s Push for Bond Returns
Anchalee Worrachate – Bloomberg
The road Andrew Balls took from journalist to one of Bill Gross’s new top deputies — all by the age of 40 — went through Oxford and Harvard, with a stop at Stanley Fischer. He’s likely to become one of the public faces of Pacific Investment Management Co., so there are some things to know about him.

***DA: There is a new (deputy) sheriff in town, and his name is Balls. Andrew Balls.

Citigroup Fails Federal Reserve’s Stress Test for 2nd Time in 3 Years
Michael Corkery – The New York Times
The Federal Reserve dealt an embarrassing blow to Citigroup on Wednesday, attacking the bank’s financial projections for its sprawling operations and denying the bank’s plan to increase dividends and repurchase stock.

***DA: A bank that cannot pass this stress test in today’s environment has problems.

Gross Joins Bond Investors in North Las Vegas Crosshairs
James Nash and Brian Chappatta – Bloomberg
Nevada lawmakers are studying the unprecedented step of penalizing bondholders as North Las Vegas, the state’s fourth-largest city, faces insolvency.

***DA: Bondholders should be given a casino in exchange for a claim on soon-to-be non-performing loans. It would be a better gamble. They would be on the right side of the table, anyway.

JPMorgan to Invest in Junk Bonds for New Reinsurer
Dan Reichl and Zachary Tracer – Bloomberg
JPMorgan Chase & Co. (JPM) will manage funds for a Bermuda-based reinsurer that raised $1.13 billion in capital, concentrating the investments in junk bonds.
JPMorgan’s Highbridge Principal Strategies LLC will oversee the assets for Watford Re Ltd., the reinsurer said yesterday in a statement.

Lowflation No Bar to Linker Sales as Germany Plans 2030 Bond
Lucy Meakin and David Goodman – Bloomberg
Germany is planning to auction its longest-maturity inflation-linked bonds to date, a sign that the slowest pace of consumer-price increases in the euro region for more than four years isn’t deterring investors.

***DA: I first heard the term “lowflation” a week ago and I am already sick of it.

Riskiest Bank Bonds Lose in March in Europe as Market Swells
John Glover – Bloomberg
Investors in the riskiest bank debt in Europe were stung by losses in March as the fledgling market more than doubled in size.

Central Banks

In Chicago, Fed chair touts central bank’s economic push
Gail MarksJarvis – Chicago Tribune
In a very different speech than those heavy on economic theory, new Federal Reserve Chair Janet Yellen used a stage in Chicago on Monday to sympathize with people struggling to find jobs and vowed to continue “extraordinary” actions to give Americans hope and bring them back to work.

BOE Sees Potential Stability Risks From Sharp Rate Increases
Emma Charlton – Bloomberg
Bank of England officials said any sharp increase in interest rates poses financial stability risks and it is difficult to assess the impact of such developments.

ECB’s Draghi won’t discuss monetary policy ahead of Thursday
European Central Bank President Mario Draghi said on Tuesday he would not discuss monetary policy ahead of the bank’s governing council meeting on Thursday.

India leaves key interest rate unchanged at 8%
India’s central bank on Tuesday left its benchmark interest rate unchanged at 8 percent in a widely anticipated move.
If inflation continues on its intended path, further policy tightening is not anticipated in the near term, the Reserve Bank of India said in a statement.

What’s wrong with the Fed?
The Economist
LET’S put a slightly finer point on the argument in the previous post. The Fed technically has a three-part mandate: “maximum employment, stable prices, and moderate long-term interest rates”. In January of 2012, the Fed basically defined what it thought its real mandate is as: 2% annual inflation (as measured by the price index for personal consumption expenditures) and as close to maximum employment (which it is free to define for itself) as it can get.

***DA: And a rising stock market.


Diverging Fortunes Hit Asian Currencies
Anjani Trivedi – The Wall Street Journal
The fortunes of Asia’s currencies diverged in the past quarter as China’s yuan fell the furthest since 2005, when its peg to the U.S. dollar was scrapped, while India’s rupee and Indonesia’s rupiah registered their best gains in years.

EBS launches app for spot FX market
EBS, Icap’s market-leading electronic FX business, announces today that it is launching ‘Watch EBS’, a new mobile application that gives customers an up-to-date overview of the global spot FX market.

***JL: This is not to be confused with the new EBS Watch, a wearable technology that reads your sweat level to produce trading signals.

Erdogan Sows Seeds of Lira Weakness on Gulen Vow: Turkey Credit
Alaa Shahine and Selcuk Gokoluk – Bloomberg
Turkish Prime Minister Recep Tayyip Erdogan risks upending the lira’s best run in more than a year.
Erdogan’s victory in the March 30 local election spurred the lira to a three-month high yesterday, helping it post a quarterly gain for the first time since 2012.

***DA: Another crisis abated (for now).

Bitcoin’s Swings Hurt Viability as Currency, Fed Economist Says
Aki Ito – Bloomberg
The value of the digital currency Bitcoin has fluctuated “violently,” making it less useful as a form of payment compared with more stable currencies such as the U.S. dollar, according to a Federal Reserve (FDTR) economist.

New IRS Virtual Currency Rules Help Bitcoin’s Legitimacy
Denis Kleinfeld – MoneyNews
Virtual currencies like bitcoin suffer from many legal unknowns, but tax is no longer one of them.
Settling the classification of some type of property or transaction for tax purposes has the curious consequence of giving a semblance of legitimacy to an otherwise questionable situation.

Indexes & Index Products

IG Index Migrates to FioranoMQ to Scale Financial Transactions
Business Wire (via MarketWatch)
Fiorano Software, a leader in enterprise integration middleware solutions, announced that FioranoMQ has been deployed at IG Index, the UK’s number one financial spread betting and Forex services provider. Real-time enablement of multiple internal processes, reduced latencies, the addition of new business functionality and improvements in deployment efficiency to multiple environments, among others are only some of the realized benefits of moving to FioranoMQ.


Why gold bears are watching US payrolls
Sri Jegarajah – CNBC
Gold’s slide is set to deepen this week to below $1,270 an ounce if Friday’s closely watched U.S. jobs report signals improving labor market growth, CNBC’s latest survey of traders and strategists has found.

ACE launches Gold hedge contract
Business Standard
Exchanges are finding gold hedge contracts to penetrate in what has been a territory of Multi Commodity exchange (MCX). First agri centric exchange National Commodities (NCDEX) launched it and now Ace Derivatives and Commodity Exchange, a Kotak Mahindra Group anchored commodity exchange in India, today announced that it has commenced trading in gold hedge futures contract. ACE’s contract is slightly modified version with import duty being considered for calculating local gold price which was not there in NCDEX contract.

Gold eases towards 7-week low as U.S. data lifts stocks
Jan Harvey – Reuters
Gold fell on Tuesday after firm U.S. economic data lifted Wall Street stocks, easing back towards the seven-week low it hit in early trade after comments defending easy-money policies from Federal Reserve Chair Janet Yellen hurt the dollar.

Gold: More Than A Real Store Of Value – Recent Evidence
Julian Van Erlach – Seeking Alpha
I often like Barry Ritholtz’s thinking. A March 28, 2014 article in Bloomberg on the long term real price of gold however, needs re-framing in a global context. Since Roy Jastram published his deservedly esteemed “The Golden Constant”, gold has been viewed as a (constant) store of real value. A wealth of statistics presented by Jastram seemed to show this.

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