First Impressions

Labor Day Schedule

The JLN family of newsletters will be on holiday Monday, September 1, in honor of Labor Day in the U.S. We will be back on Tuesday with a fresh look at the week’s top fixed income, FX, index and metals market news.

Plenty of uncertainty out there these days. Economies are slowing down, but some central banks are finding it difficult to initiate additional stimulus. In Japan, monetary stimulus appears to be overpowered by tax hikes. In other words, there is no free lunch.

Next week culminates in the monthly employment report in the U.S. Will the baseline rate change? What about the lesser-discussed but still elevated U6, which adds in “marginally attached workers and those working part-time for economic reasons.” I will also be watching the labor participation rate, which has been chopping around generational lows for the past few months.

Have a nice holiday, but then tune back in. It could be an interesting fall.

Quote of the Day

The elevated consumption tax rate is putting heavy pressure on the Japanese economy

Takuji Aida, chief Japan economist of Société Générale, quoted in the WSJ story “Japan’s Tax Increase Puts Abenomics at Risk”

Lead Stories

Judge’s Ruling Could Affect Bondholders in Corporate Bankruptcies
STEPHEN J. LUBBEN – Dealbook – NY Times
A federal bankruptcy judge’s ruling in a closely watched corporate case seems to have made the distressed debt market a bit unhinged.

***DA: Everything you ever wanted to know about “make whole” call provisions.

U.S. Bonds Continue to Defy Bears
Min Zeng – WSJ
Government-bond yields touched new lows in the U.S. and Germany, as investors piled anew into ultrasafe debt amid growing concern about the pace of European growth. The gains underscore the dynamics that have made government bonds a surprise star performer this year—a winning streak many analysts now expect will continue.

Treasury Market Rally Is Stronger Than Every Economist Predicted
Wes Goodman and Mariko Ishikawa – Bloomberg
This year’s Treasury market rally has been stronger than every economist surveyed by Bloomberg News predicted.
Ten-year yields that slid to 2.32 percent yesterday were lower than the levels projected by all 66 economists surveyed for their Sept. 30 forecasts. Even as the Federal Reserve scales back the bond-purchase program it has used to support the U.S. economy, Treasuries are drawing demand as yields in Europe fall to records amid speculation the European Central Bank will increase its efforts to cut borrowing costs. Fighting in Ukraine is spurring investor appetite for the safest securities.

Japan’s Tax Increase Puts Abenomics at Risk
Takashi Nakamichi – WSJ
Prime Minister Shinzo Abe’s decision to raise taxes by some $80 billion is taking a greater toll than he expected, sending household spending sharply down and putting his “Abenomics” revival plan at risk. Consumer spending fell an inflation-adjusted 5.9% from a year earlier in July after logging a record drop in the April-June quarter, according to government data released Friday.

Bank Liquidity Rules Seen Cooling Demand for Bonds: Muni Credit
William Selway – Bloomberg
Regulatory changes aimed at heading off another financial crisis may curb purchases of municipal bonds by banks, potentially undermining demand from the biggest buyer in the $3.7 trillion market.
The Federal Reserve and the Federal Deposit Insurance Corp. will meet separately on Sept. 3 to consider measures laying out what easy-to-sell assets banks must keep on hand to weather a month-long credit squeeze. A draft of the rules excludes munis, according to a person familiar with the matter, which would give banks less incentive to own state and local debt.

Argentina’s Abnormal Default Still Hurts as Losses Swell
Camila Russo and Katia Porzecanski – Bloomberg
Argentina’s default last month may not have looked or felt like a typical sovereign debt debacle, but that doesn’t mean bondholders have escaped scot-free.
No developing nation’s bonds have lost more value this month than Argentina’s, according to a JPMorgan Chase & Co. index of dollar-denominated debt. The country’s benchmark bonds have slumped 15.81 cents to 79.76 cents on the dollar since a legal standoff with holdout creditors from a previous default blocked the distribution of an interest payment due by July 30.

Central Banks

Draghi dials R for Reform. Line is busy
Paul Carrel – Reuters
Two years ago, euro zone government leaders hung on Mario Draghi’s every word. Now the European Central Bank chief is struggling to get through to them. What has happened to ‘Super Mario’s’ mojo?

***DA: Add Mario’s mojo and Abenomics to the list of things that ain’t what they used to be.

How Draghi Seeking QE Trade-Off May Find Austerity Trap
Jeff Black and Ian Wishart – Bloomberg
Mario Draghi has made European political leaders an offer: You scratch my back and I’ll scratch yours. In turning up the rhetoric on his readiness to start quantitative easing, the European Central Bank president is also asking governments to open their own wallets.

***DA: Remember when I said there was no free lunch? The bill just came, and everyone is waiting for someone else to grab it.

Putting Draghi in his box, and getting him back out again
Paul Murphy – Financial Times
A week ago, Mario Draghi set euro policy-watchers all a-flutter, departing from his prepared remarks at Jackson Hole to issue a kind of blunt confession that he and his colleagues had run out of excuses for the ongoing depressed level of inflation across the eurozone, and that maybe some sort of reaction was required. Cue a quall of ECB QE speculation.

Schaeuble Sees Draghi’s Instruments for Growth Exhausted
Caroline Connan, Brian Parkin and Mark Deen – Bloomberg
The European Central Bank has run out of ways to help the euro area, putting the burden on governments to spur growth without running excessive deficits, German Finance Minister Wolfgang Schaeuble said.
In an interview with Bloomberg Television at the Medef business leaders’ conference near Paris, Schaeuble said he agrees “100 percent” with ECB President Mario Draghi’s appeals for governments in the 18-country currency union to complement monetary policy with “structural reforms” to boost competitiveness and overcome the legacy of Europe’s debt crisis.

ECB’s Nowotny Sees Weaker Growth in Euro Zone This Year
European Central Bank Governing Council member Ewald Nowotny said Thursday night that he is worried about the economic situation in the euro zone, stressing that growth this year will underperform previous expectations. Speaking at a dinner for journalists in this alpine resort town, Mr. Nowotny, who also heads Austria’s National Bank, said that he expected a considerable take up at the ECB’s targeted, longer-term refinancing operation, which is due to be launched in mid-September.

Dutch Banks Steer Funds Away From ECB
Maarten van Tartwijk – WSJ
Dutch banks are steering large amounts of cash away from the European Central Bank in response to the ECB’s move to adopt negative rates on bank deposits, but they aren’t using the money to boost lending and growth.


Goldman Sachs Says Euro to Sink to Parity by the End of 2017
Goldman Sachs Group Inc. reduced its forecasts for the euro, saying the recent slump against the dollar is the beginning of a long-term trend that will result in parity by the end of 2017.
The three-month estimate was cut to $1.29 from $1.35 and the six-month forecast to $1.25 from $1.34, Robin Brooks, the New York-based chief currency strategist, wrote in a research note today. That’s one of the most bearish views among banks surveyed by Bloomberg, with the median forecast of $1.31 by the end of the year and $1.30 by the end of the first quarter.

***DA: Bold call, but he has three years to be proven wrong. I happen to agree with him.

History made as euro-zone overnight borrowing costs turn negative
The euro overnight index average, or Eonia — a measure of borrowing costs in the euro zone calculated by the European Central Bank — turned negative for the first time ever on Thursday, fixing at minus 0.004%, according to news reports.

Yen at 120 Seen Needed by UBS Wary of Weimar-Japan Redux
The new chief investment officer for Japan at UBS AG’s wealth management division likens the nation to a man with $1.2 million in debt who is spending all his $53,000 salary and still borrowing $40,000 a year.

The renminbi’s global success
Want China Times
New figures from Swift RMB tracker show that renminbi payments through London have increased by 123% in just one year. The latest statistics reflect the first fruits of the Chinese government policy, embraced by policy makers and officials in Britain, to promote the growth of the renminbi as an international currency.

Hal Finney, Bitcoin Pioneer, Dies at 58 From ALS
Paul Vigna – MoneyBeat – WSJ
Hal Finney, a well-known cryptography expert and the first person to work with Satoshi Nakamoto on the digital currency bitcoin, passed away on Thursday in Scottsdale, Ariz. He was 58.

Indexes & Index Products

Vanguard stokes ETF price war in Europe
Chris Flood – Financial Times
Vanguard has stoked the price war in Europe among passive fund providers. It has instituted a further round of fee cuts on a broad range of index mutual funds and exchange traded funds, as well as its entire family of LifeStrategy funds.

Huge spike in China-related derivative and ETF volumes
Aaron Woolner –
China-related futures, warrants and exchange-traded funds (ETFs) have all seen a massive spike in volumes over the past two months, which market participants say is driven by investors positioning their portfolios ahead of the opening of the Shanghai-Hong Kong stock connect in October, as well as a general increasingly positive view of the China economy.

U.S.-based stock funds attract $6.1 bln over week – Lipper
Investors in U.S.-based funds poured $6.1 billion into stock funds in the week ended Aug. 27, data from Thomson Reuters’ Lipper service showed on Thursday.


Developing countries’ appetite supports gold
Business Day
Tension between Russia and Ukraine as well as escalating violence in the Middle East have helped support the price of gold this week as it is often regarded as an insurance against financial and political risk. There are also signs of support from developing countries.

Unchanging Value Of Gold: The Big Myth
Joseph T. Salerno, Ludwing von Mises Institute
According to mainstream economics textbooks, one of the primary functions of money is to measure the value of goods and services exchanged on the market. A typical statement of this view is given by Frederic Mishkin in his textbook on money and banking. “Money is used to measure value in the economy,” he claims. “We measure the value of goods and services in terms of money, just as we measure weight in terms of pounds and distance in terms of miles.”

The harsh reality behind the glamour of gold
The Guardian
Small-scale gold production can be a dangerous industry. Margaret Rooke looks at one of the newest product categories to become Fairtrade certified

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