Current Best Ideas:
All eyes on the Fed this week as the FOMC will host its next meeting Tues/Wed. Expectations are for a continuation in the taper, shaving another $10 billion from monthly purchases. On the one hand, the labor market data seems sufficiently strong to warrant further tapering. On the other hand, the housing data is showing continued signs of cooling off. If the Fed wanted to slow the rate of tapering, it's possible they could use housing as their foil.
One notable callout this week is commodity prices, which jumped almost 2% last week. We generally regard CRB price levels as a marginal tax on the consumer, slowing growth 3-6 months in the future when it rises and vice versa.
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 1 of 12 improved / 4 out of 12 worsened / 7 of 12 unchanged
• Intermediate-term(WoW): Positive / 5 of 12 improved / 2 out of 12 worsened / 5 of 12 unchanged
• Long-term(WoW): Negative / 3 of 12 improved / 4 out of 12 worsened / 5 of 12 unchanged
1. U.S. Financial CDS - Swaps widened for 18 out of 27 domestic financial institutions. The large cap US banks were all wider w/w, though only by an average of 3 bps.
Tightened the most WoW: TRV, ACE, CB
Widened the most WoW: WFC, RDN, GS
Tightened the most WoW: GS, MS, C
Widened the most/ tightened the least MoM: WFC, HIG, RDN
2. European Financial CDS - Greek bank swaps continued to dive last week, falling an average of 70 bps on the week and dropping by an average of 116 bps on the month. Outside of Greece, European banks swaps were tighter by ~2 bps w/w and 16 bps m/m.
3. Asian Financial CDS - Chinese bank swaps were wider on the week by an average of 6 bps. Japanese and Indian bank swaps were mixed and little changed.
4. Sovereign CDS – Sovereign swaps tightened across the board last week with the sole exception of the US. Irish sovereign swaps tightened by -13.5% (-6 bps to 41 ). Meanwhile, US sovereign swaps widened by 1 bps to 17.
5. High Yield (YTM) Monitor – High Yield rates fell 4.6 bps last week, ending the week at 5.37% versus 5.41% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 3.0 points last week, ending at 1878.
7. TED Spread Monitor – The TED spread rose 0.2 basis points last week, ending the week at 19.9 bps this week versus last week’s print of 19.66 bps.
8. CRB Commodity Price Index – The CRB index rose 1.9%, ending the week at 310 versus 304 the prior week. As compared with the prior month, commodity prices have increased 0.9% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
9. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 1 bps to 20 bps.
10. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 2 basis points last week, ending the week at 2.60% versus last week’s print of 2.58%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.
11. Chinese Steel – Steel prices in China fell 1.0% last week, or 33 yuan/ton, to 3177 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.
12. 2-10 Spread – Last week the 2-10 spread tightened to 215 bps, -3 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.9% upside to TRADE resistance and 1.2% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT