Key Takeaway:
A poor U.S. jobs report sparked warning signals last week, pointing to the late stage of the economic cycle as the labor market struggles to uphold strength. The 38k jobs added to non-farm payrolls in May was the lowest NFP reading since September 2010. As a reminder, this comes on the back of the recent positive (bad) inflection in Y/Y growth of initial jobless claims. Interestingly, while financials CDS reaction in the U.S. was fairly muted, European financials CDS widened significantly, by 10 bps to 116 at the median. Additionally, the TED spread, which reflects counterparty risk, spiked by 4 bps to 40 last week. Finally, Chinese steel prices continued their bad omen for global growth, falling by -2.2% W/W to early-March levels, as the steam from China's reflationary credit push in 1Q runs out.
Current Ideas:
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 0 of 13 improved / 5 out of 13 worsened / 8 of 13 unchanged
• Intermediate-term(WoW): Positive / 7 of 13 improved / 4 out of 13 worsened / 2 of 13 unchanged
• Long-term(WoW): Negative / 2 of 13 improved / 2 out of 13 worsened / 9 of 13 unchanged
1. U.S. Financial CDS – Swaps tightened for 7 out of 13 domestic financial institutions. CDS reaction to Friday's jobs report was fairly muted with a median change of zero week over week.
Tightened the most WoW: WFC, JPM, COF
Widened the most WoW: AXP, HIG, MET
Tightened the most WoW: AIG, HIG, AXP
Widened the most MoM: ACE, AGO, XL
2. European Financial CDS – Interestingly, European financials swaps reacted to the poor U.S. jobs report more than U.S. financials swaps. CDS mostly widened in the region with the median swap widening by 10 bps to 116.
3. Asian Financial CDS – Last week, bank swaps were tighter in China, mostly flat in Japan, and wider in India.
4. Sovereign CDS – Sovereign swaps mostly widened over last week. Portuguese swaps widened the most, by 9 bps to 270.
5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. Turkish and Russian swaps led the way, tightening by -13 bps to 260 and by -14 bps to 248 respectively.
6. High Yield (YTM) Monitor – High Yield rates fell 5 bps last week, ending the week at 7.24% versus 7.29% the prior week.
7. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.0 points last week, ending at 1905.
8. TED Spread Monitor – The TED spread rose 4 basis points last week, ending the week at 40 bps this week versus last week’s print of 36 bps.
9. CRB Commodity Price Index – The CRB index rose 1.8%, ending the week at 189 versus 185 the prior week. As compared with the prior month, commodity prices have increased 4.9%. 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 was unchanged at 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 2.2% last week, or 50 yuan/ton, to 2267 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 amounts to 148.7 trillion RMB as of April 30, 2016 (data released 5/13/2016), which is up +15.8 trillion RMB or +11.9% year over year. Month-over-month, credit is up +656 billion RMB or +0.4%. Note: this data is only updated monthly.
15. 2-10 Spread – Last week the 2-10 spread tightened to 93 bps, -1 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 1 bps to 40 bps.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
