First Impressions

Higher Rates? Bring it On!
Doug Ashburn – John Lothian News

I confess – I had to smack the side of my monitor this morning as I thought it was going crazy on me. According to the Jaime Carauna, head of the Bank for International Settlements (BIS), a rise in interest rates is what the world needs to support global growth. Then I read the fine print. He said “in the long term.” Unfortunately we do not have policy makers that look beyond the short term or, more precisely, beyond the next election cycle.

Mr. Carauna’s speech, which was delivered Wednesday at Harvard University, must have unsettled the neo-Keynesians, including former treasury secretary and current Harvard professor Larry Summers. In it, he claims that the fiscal and monetary stimuli and, specifically, the depressed interest rates in the U.S., have and will continue to be ineffective in a balance-sheet recession such as we have experienced over the past several years. He says aggregate demand cannot be stoked by lower rates if a previous debt overhang is still being liquidated. He further explains that the low rates have “trapped resources in inefficient companies.”

In other words, we must channel our inner Schumpeter and bring on a little creative destruction. Or take a page from the Austrian School bible and acknowledge that a credit bubble must end in a credit liquidation. The long term health of the economy depends on it.

Quote of the Day

“Monetary policy should stay on course towards normalization, avoiding the risk of financial dominance, [for example] of being unduly influenced by financial market jitters. ”

Jaime Caruana, Bank for International Settlements in the story, “Rise in Interest Rates Will Aid Global Economic Growth, Says Caruana”.

Lead Stories

Rise in Interest Rates Will Aid Global Economic Growth, Says Caruana
Paul Hannon – The Wall Street Journal
Higher interest rates would aid global economic growth over the longer term and help to prevent the spread of financial instability, the head of the Bank for International Settlements said, in what he described as a challenge to the “prevailing paradigm.”

***DA: To call that a “challenge to the prevailing paradigm” is quite the understatement.

Derivatives Rules Softened in Victory for Banks
Matthew Leising – Bloomberg
In a victory for banks, global financial regulators revised rules governing how much money must be set aside to cover losses by swaps traders, backing away from guidelines that firms warned would destabilize the $693 trillion derivatives market.
The Basel Committee on Banking Supervision’s final rule, released today, would require swaps dealers to hold less cash to protect against defaults than did a proposal published last year.

Federal Reserve Officials Feared Sending the Wrong Message on Rates
Victoria McGrane – The Wall Street Journal
Federal Reserve officials were concerned at their latest policy meeting they might unintentionally signal they had grown more eager to raise interest rates—a worry that was well-founded.
Some officials fretted their individual projections for short-term interest rates could be misleading, according to minutes from the Fed’s March 18-19 session, which were released Wednesday after the usual three-week lag.

***DA: Is it “the wrong message” or “the right message delivered at the wrong time?”

Pimco’s Gross Cuts U.S. Government Debt as Treasuries Dropped
Susanne Walker – Bloomberg
Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., decreased its holdings of Treasuries in March as comments by Federal Reserve Chair Janet Yellen sent shorter-term U.S. securities tumbling.
The proportion of U.S. government-related debt in the $232 billion Total Return Fund (PTTRX) was cut to 41 percent, the company’s website showed yesterday, from 43 percent in February.

***DA: Selling on strength; selling on weakness.

Jamie Dimon says Fed stimulus exit will be easy
Stephen Gandel – Forbes
Jamie Dimon, the CEO of America’s biggest bank, says it’s time to stop worrying about the Fed. After all, he’s not worried.
In his annual letter to shareholders, which was released on Wednesday afternoon, the CEO of JPMorgan Chase (JPM) said there is “little question” that the Federal Reserve’s signature stimulus program boosted the economy and hastened the recovery. What’s more, he says the Fed’s exit from QE, which is expected to happen this year, isn’t likely to reverse that.

Dimon Sees Profits Rising $6 Billion as Interest Rates Normalize
Hugh Son – Bloomberg
JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said the bank’s annual profits may rise by $6 billion with short-term interest rates of 3 percent to 4 percent and 10-year Treasuries yielding about 5 percent.

***DA: Nothing but smooth sailing.

UBS Lowers U.S. Credit to Underweight Saying Good Days Are Gone
Charles Mead – Bloomberg
UBS AG credit strategists changed their recommendation for U.S. corporate bonds to a “small underweight” as a rise in benchmark borrowing costs threatens to erode returns.
Investors should avoid interest-rate sensitive securities even after longer-maturity debt outperformed the broader market in the first three months of 2014, strategists led by Matthew Mish wrote in a report dated yesterday with a heading “The good ole’ days are gone.”

***DA: “The good ol’ days weren’t always good, and tomorrow ain’t as bad as it seems.” -Billy Joel

China Rate Swaps Fall as Exports Drop, PBOC Operations Add Funds
Kyoungwha Kim – Bloomberg
China’s interest-rate swaps fell to a two-week low as an unexpected drop in exports fueled expectations for stimulus and the central bank’s open-market operations added funds for the first time since January.
Shipments slid 6.6 percent from a year earlier in March, compared with the median estimate for a 4.8 percent increase in a Bloomberg survey of economists. Imports tumbled 11.3 percent, the most in 13 months.

Goldman Says China Junk Debt Not Paying Enough for Default Risk
David Yong – Bloomberg
Investors in high-yield bonds from China, the majority of which come from the real estate industry, aren’t being paid enough for assuming the risk of economic slowdown and defaults, Goldman Sachs Group Inc. said.

***DA: One could argue, though, that if central banks will again backstop the next systemic crisis, those writing default insurance are being paid too much.

Abe Rewrites Rules to Rouse Japan With Governance Revamp
Tom Redmond, Anna Kitanaka and Yuko Takeo – Bloomberg
As his nation’s economic revival wanes, Shinzo Abe is trying to turn around Japan Inc.
Abe’s Liberal Democratic Party is plotting sweeping changes to rules for how companies are overseen, aimed at boosting profits and markets. Change has come slowly in a nation where firms produce the second-lowest return on equity among developed markets, have the fewest independent directors and no enforceable corporate-governance code.

Federal Reserve’s Interest Rates Revision Could Make Mutual Funds Riskier To Invest
The Mutual Funds have always been a rather dependable financial instrument to invest. However, the latest revision of the Interest Rates could mean trouble for the investors.
The largest buyers of the U.S. corporate bonds may not continue investing their money in the same, when Federal Reserve eventually raises interest rates. This is because a very large corpus of funds has gotten within Mutual Funds. In fact, Mutual funds have bought about half of the company bonds that have been added to the U.S. market since 2008.

Central Banks

Central Banks See What They Want in Ignoring Deflation
Rich Miller and Simon Kennedy – Bloomberg
Federal Reserve Chair Janet Yellen and her international counterparts are suffering from a case of what psychologists call confirmation bias: They keep insisting inflation will accelerate even as it continues to ebb.
That’s the diagnosis of Ethan Harris, co-head of global economics research at Bank of America Corp. in New York. He says central bankers are seeing what they want to see by blaming subpar inflation in their countries on temporary, partly home-grown forces.

Draghi Seen Easing Policy by June as ECB Readies Rate Cut
Alessandro Speciale and Andre Tartar – Bloomberg
Mario Draghi will probably take action within two months against the threat of deflation, economists said.
Almost two-thirds of respondents in the Bloomberg Monthly Survey predicted the European Central Bank president will ease policy by June. Of those economists, just under half said he may implement multiple measures ranging from interest-rate cuts to asset purchases and long-term loans.

Bank of England Holds Key Rate at 0.5%
Chad Bray – The New York Times
The Bank of England on Thursday left a key interest rate unchanged at a record low, as Britain’s economy continues to recover and inflation continues to decline.
Britain’s central bank said it would keep its benchmark interest rate at 0.5 percent, where it has been since March 2009. The bank also left unchanged a stimulus program of holding 375 billion pounds, or almost $630 billion, in government bonds that it has purchased over the past five years.

Deutsche Bank employee was suspended over Singapore central bank communication -source
A Deutsche Bank employee responsible for its foreign exchange business with central banks was suspended because the bank identified potentially inappropriate communication with the Monetary Authority of Singapore, a source familiar with the matter said on Thursday.

New China Central Bank Chief Economist Pushes Liberalization Plan
Bob Davis and Lingling Wei – The Wall Street Journal
The Chinese central bank’s new chief economist is pushing a plan to liberalize the country’s financial system within three years, according to economists briefed on the plan, as the country looks for reforms to sustain growth.

Deutsche Bank Economist to Join China’s Central Bank
Neil Gough – The New York Times
Deutsche Bank’s chief China economist is taking up a new role at China’s central bank.
Jun Ma, a 13-year veteran of the German bank who is also its head of China and Hong Kong strategy, is leaving to become the chief economist in the research bureau at the People’s Bank of China, according to an internal Deutsche Bank memo seen by DealBook.


Swedish Deflation Shock Delivers Blow to Ingves on Prices
Johan Carlstrom – Bloomberg
Riksbank Governor Stefan Ingves’s pledge that Sweden will avoid a deflationary spiral was overshadowed by a report today revealing that prices sank twice as much as policy makers had estimated.
Consumer prices dropped 0.6 percent in March from a year earlier, the most since November 2009, Stockholm-based Statistics Sweden said today. The krona plunged as much as 1 percent to 9.0668 after the numbers were published.

Carry Trades Restore Profits as Volatility Plummets: Currencies
Andrea Wong – Bloomberg
The drop in currency volatility to the lowest levels since 2007 is proving a boon to traders able to exploit differences in global interest rates.
A UBS AG index that tracks returns in carry trades in the foreign-exchange market has jumped 3.7 percent this year, trouncing what investors could get from stocks or bonds. A JPMorgan Chase & Co. measure of anticipated price swings in currencies plunged 20 percent in the same period to the least since the start of the global financial crisis.

Sentiment on emerging Asian currencies improves – Reuters Poll
Jongwoo Cheon – Reuters
Sentiment on emerging Asian currencies improved in the last two weeks on easing views of an early rate hike by the Federal Reserve while the outlook for the Indonesian rupiah firmed, a Reuters poll showed on Thursday.

Indexes & Index Products

UBS inks Bloomberg index pact
Sarah Krouse and Michelle Price – Financial News
UBS is shifting the management of its commodity indices to data giant Bloomberg, the latest example that large investment banks are reassessing their involvement in an area that has suffered a string of reputational blows.

Fed’s report sends indexes soaring
AP (via Portland Press Herald)
Once again, it was the Federal Reserve to the rescue for the stock market.
Major U.S. indexes rose broadly Wednesday, helped by a report out of the nation’s central bank that showed Fed policymakers want to be absolutely certain the U.S. economy had recovered before starting to raise interest rates.


The Bears Are Getting Tired, Boosting Gold Prices In 2014
ETF Daily News
Senior analyst Jim Wyckoff confirmed with MarketWatch that gold is indeed “getting a boost from some safe-haven buying interest and by solid losses in the U.S. dollar index. The Russia-Ukraine matter is back on the front burner of the marketplace Tuesday.”

Silver Outshines Gold at Start of Year
Arpan Mukherjee – The Wall Street Journal
The popularity of silver is on the rise with investments in the metal outpacing it’s more illustrious peer gold during the first three months of 2014.
Investments in silver exchange-traded products sharply rose with net purchases worth $354 million in the first three months of the year and the metal “one of the few commodity ETPs” to see inflows every month of the first quarter, London-based ETF Securities said in a statement.

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