Equity Markets – markets in Europe are higher this morning as ECB President Draghi appears to be signaling that easing could be coming as he expects inflationary pressures to ease in 2013.  This is likely as much in response to recent political events as real expectations of what’s going on in the economy there but there continues to be signs of further weakening after the UK released Q1 GDP numbers which showed a 2^nd consecutive quarter of negative GDP growth (recession).  The pressure continues to build on Germany as they are quickly becoming the lone voice proclaiming that austerity will be the savior of the EMU which is of course easier for them to do as their economy easily outperforms the rest of those in the EMU which in turn makes their calls for austerity elsewhere ring somewhat hollow. 

Markets in Asia were mixed overnight after Chinese Premier Wen pledged to maintain steady growth but this failed to rally the rest of the markets as they’ve heard this before and concerns are growing that there will be no significant policy changes prior to the new government being selected in the Fall.

Here in the states, earnings continue to come in better than anticipated although the ultimate impact on employment levels remains in question as the housing market continues to struggle despite modestly better numbers out yesterday on new home sales.  The likely increase in the numbers of repossessed properties finding their way onto the market from the banking system continues to weigh on the market in general along with questions about what the ultimate resolution to the GSEs (Fannie and Freddie) will be.  The banking system here remains a pin ball knocked back and forth between events in the EMU and regulatory questions here.  Until a clear path asserts itself for the banks it is difficult to see a clear path to a stronger recovery in the US economy as the potential catalyst for stronger growth (cheap natural gas) continues to go wanting for a coherent energy policy out of DC which is now in full-on campaign mode.  Today, I expect early trading to wane as we move through the morning toward the FOMC rate announcement due out at 1230 and then the Bernanke “presser” at 1415.  While no change in rate outlook is anticipated the market clearly wants to hear what the Chairman has to say about monetary stimulus in the form of additional QE going forward.  The odds are that we will get more of the same “unemployment remains too high”…”the recovery remains fragile and uneven”…with the ultimate outcome being that he FOMC remains “on watch” for signs that additional stimulus could be necessary without committing to anything in particular.

Economic Releases – yesterday’s heavy home sales tilted data was somewhat mixed with the Case/Shiller data coming in modestly disappointing but the new home sales data better than expected in units (SAAR) with last months’ upward revision (an annualized 40,000 unit revision).  Today we’ll get durable and capital goods order and shipment data for March but all eyes (and ears) will be on the press conference for the Fed Chairman following the release of the short term rate decision scheduled for 1230.

Events – FOMC rate decision out today at 1230

Earnings – another big day on the calendar for S&P 500 earnings with almost 10% of the index reporting (47 companies scheduled).  The NASDAQ is indicated higher this morning after AAPL posted a 22.7% earnings surprise based on better sell-through numbers than expected for iPhone and iPad sending the stock back over $600 in afterhours trading and setting the stage for today’s trading, at least in the morning session.  So far this earnings season, profits have outpaced estimates in 82% of announcing companies…the highest rate since Q1 2010.

 

News

·         UK economic GDP for Q1 was -0.2% marking the 2^nd consecutive quarterly decline in GDP and thus an “official” recession…this is the first “double-dip” recession for the UK since the 1970s.  The expectation had been for +0.1%.  The news of recession will be ammunition for those in parliament who want to criticize PM Cameron for his austerity moves that have to date provided support for gilts and sterling.  Of course the stronger sterling relative to the euro isn’t helping exports with many EMU countries continuing to show weak economic growth.

·         European banks could be back on ECB-sponsored life support soon as none of the EMU banks have sold debt since the end of Q1 as spreads have widened significantly amid renewed concerns about the fiscal viability of Spain and Italy.  The LTRO program which has been on hold since February, may be needed once again if the banking system finds itself in need of capital…regardless, the situation continues to be one of tighter lending to the public as banks will horde capital and raise lending standards as fears of another crisis rise.  This is just one more link in the potential “death spiral” chain…austerity shrinks the economy, banks won’t lend as they fear rising defaults due to higher unemployment, tax receipts fall as unemployment rises, more austerity is needed…repeat

·         ECB President Draghi is now calling for inflation to moderate in 2013…this is a significant change in stance from the 4^th of April when he announced concerns about “upside risks” to the inflation numbers…clearly the ECB is seeing weakness in economic growth continuing to manifest itself across the continent as well as in key Asian markets.  This could be interpreted as the ECB moving toward more of an “easing” mode on short term rates, which at 1% are 50 bps higher than the UK and 75 bps higher than the US.

·         Credit Suisse reported a 96% profit decline in Q1 after booking a CHF 1.55 billion charge for increased market value of its own debt…it’s the crazy mark-to-market accounting for liabilities…your credit improves and it reduces your earnings, your credit worsens and it improves your earnings…the market paid little attention as the stock is virtually unchanged in trading.

·         The FOMC continues to struggle with “rules-based” decision making vs. flexibility necessary when exogenous shocks to the system occur…good luck with that

·         French presidential candidate Hollande has taken aim at “Merkozy” as he’s using the current situation on the continent in seemingly all countries other than Germany to criticize the austerity policies proposed by Merkel and backed by Sarkozy as he argues against austerity, free markets and limitless competition…if this becomes the new rallying cry as politicians across the continent pander to the populace then the euro is going to get crushed.

Credit Markets

·         Bids for German 30-yr bund issuance fell short of the €3 billion target as investors declined to take the duration risk implied by a 2 ½% coupon with so much uncertainty about what’s next for the EMU.  A 100 basis point rise in rates to 3.5% would result in a roughly 22.4% loss in the face value of this paper.

·         S&P raised Ford to BBB-, the first time the company has moved beyond the below investment grade rating since 2005 and marks a significant milestone in the tenure of Alan Mullally

·         The question has been asked but is the answer “it’s over already”…as even northern European governments begin to push back against the German diktat of austerity to cure the EMU of its ills (see the French election results and the collapse of the Netherlands coalition)…the feeling of many is that we’re now on the downhill side of this argument and the Germans have effectively pushed it too far.

Sovereign CDS – spreads are tighter this morning as the periphery could benefit from this move against austerity…if the ECB ends up opening the spigot to monetize debt around the region it’s either the beginning of the end for the EMU and the euro or else Germany is going to have to end up funding a lot of deficit spending around the region…either way, it was destined to end badly.

US Corporate Credit – The high yield CDS index led the way yesterday, tighter by 11 basis points to +616…meanwhile the leveraged loan index was tighter by 7 bps (+320) while the investment grade index tightened by 1bp to +100.

Energy Markets – WTI is outperforming this morning and that has the spread vs. Brent back below $15/barrel…today we get the Department of Energy numbers on week crude and distillate supplies.

·         Expectations are that crude inventories rose 2.8 mm barrels last week after risking 3.9 mm barrels in the prior week… the API data from yesterday after the close actually showed crude inventories lower on the week by almost 1 mm barrels after rising 3.4 mm barrels the previous week.  These numbers are out at 1030 and are worth watching.

Futures –  with WTI up this morning and natural gas little changed the energy equivalence ratio is widening back toward 7x.