Key Takeaway:
There were three notables in the latest week. First, retailers collapsed due to weak consumption. As per our retail team, every department store aside from JCP put up its worst comp since 2009. The migration to online alone is not the culprit here; rather, there has been a recent, rapid and material decline in consumer spending. Second, Chinese steel prices fell 9.6% in the latest week, continuing the unwind of the mid-Februrary to mid-April artificial reflation trade. Third, US employment trends showed further signs of emergent weakness with a third consecutive week of rising initial jobless claims coming on the heels of a weaker-than-expected April NFP report.
In spite of these factors, investors seem to be ebullient, ignoring both the risks of slowing consumer spending and weakening employment. Last week, most of the risk measures we track were positive, especially U.S. financial CDS, which tightened significantly by -4 bps to 90. Additionally, global measures of counterparty risk tightened week over week. The TED spread tightened by -7 bps to 36, the Euribor-OIS spread tightened by -1 bps to 8, and the CDOR-OIS spread tightened by -2 bps to 41.
Our heatmap below is more positive than negative across all durations.
Current Ideas:
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 4 of 13 improved / 3 out of 13 worsened / 6 of 13 unchanged
• Intermediate-term(WoW): Positive / 5 of 13 improved / 4 out of 13 worsened / 4 of 13 unchanged
• Long-term(WoW): Positive / 3 of 13 improved / 2 out of 13 worsened / 8 of 13 unchanged
1. U.S. Financial CDS – Although poor retail earnings last week should have inflamed investor concerns, swaps tightened for 12 out of 13 domestic financial institutions; the median swap came in by -4 bps to 90.
Tightened the most WoW: JPM, AXP, C
Widened the most WoW: COF, AON, UNM
Tightened the most WoW: PRU, MET, BAC
Widened the most MoM: HIG, AIG, WFC
2. European Financial CDS – Financials swaps in Europe also defied poor data last week. While GDP was revised lower and Industrial production came in lower than expected, bank CDS mostly tightened in Europe last week.
3. Asian Financial CDS – In Asia last week, Chinese bank CDS mostly tightened, Japanese bank CDS were mixed, and Indian bank CDS all widened.
4. Sovereign CDS – Sovereign swaps mostly tightened over last week. Portugal, however, was an outlier, widening by 8 bps to 261.
5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week, led by Brazil, whose swaps tightened by -12 bps to 329.
6. High Yield (YTM) Monitor – High Yield rates fell 6 bps last week, ending the week at 7.40% versus 7.46% the prior week.
7. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 1.0 point last week, ending at 1891.
8. TED Spread Monitor – The TED spread fell 7 basis points last week, ending the week at 36 bps this week versus last week’s print of 43 bps.
9. CRB Commodity Price Index – The CRB index rose 1.5%, ending the week at 183 versus 180 the prior week. As compared with the prior month, commodity prices have increased 5.1%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
10. 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 8 bps.
11. Chinese Interbank Rate (Shifon Index) – The Shifon Index was unchanged last week at 2.00%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.
12. Chinese Steel – Steel prices in China fell 9.6% last week, or 281 yuan/ton, to 2634 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.
13. Chinese Non-Performing Loans – Chinese non-performing loans amount to 1,392 billion Yuan as of March 31, 2016, which is up +41.7% year over year. Given the growing focus on China's debt growth and the potential fallout, we've decided to begin tracking loan quality. Note: this data is only updated quarterly.
14. Chinese Credit Outstanding – Chinese credit outstanding amount to 148.7 trillion RMB as of April 30, 2016, which is up +11.9% year over year. Note: this data is only updated monthly.
15. 2-10 Spread – Last week the 2-10 spread tightened to 95 bps, -9 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
16. CDOR-OIS Spread – The CDOR-OIS spread is the Canadian equivalent of the Euribor-OIS spread. It is the difference between the Canadian interbank lending rate and overnight indexed swaps, and it measures bank counterparty risk in Canada. The CDOR-OIS spread tightened by 2 bps to 41 bps.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
