Higher Fixed Income Yields

November 10, 2010

The 10-year British gilt yield jumped another 11 basis points.  Comparable German bund and Japanese JGB yields are up six and two basis points, and so are Treasury future yields.  Irish 10-year yields advanced for a twelfth session in a row, bringing their premium versus bunds to nearly 580 basis points.  Irish yields were 171 bps lower at 6.55% just two weeks ago.  Portugal’s bond premium exceeds 440 basis points.  Fed QE2 is clearly not depressing long-term interest rates — not yet at least.  The result so far has been just the opposite.  Projected estimates for the Greek budget gap are being revised upward.

President Obama has reiterated to fellow G20 leaders that the United States can best promote global growth by doing whatever it takes to improve U.S. economic growth.

The dollar fell 0.7% against sterling.  The Bank of England’s quarterly Inflation Report is more hawkish than expected, predicting a near-term further rise of CPI inflation and continuing above-2% inflation well into next year.  The report still looks for sub-2% inflation by the end of the 2-year forecasting period but stresses the high degree of uncertainty surrounding that forecast.  Expectations of more Bank of England asset purchases at least in the near term are being dampened by the report, isolating the Fed even further.

The statement from G20 leaders meeting at the end of this week in Seoul is not expected to mention numerical current account targets or currency over- or under-valuations per se.  Foreign officials continue criticize the Fed’s planned stance.  Typical of these summits, the yuan is appreciating just beforehand with a surprising 0.5% gain against the dollar today to a new high for the move of 6.6346.  Usually, China’s currency strengthens before such meetings and tails off afterward.  Brazil’s Finance Minister, who coined the phrase currency war, said such are intensifying.  Canada’s central bank governor Carney said foreign exchange market strains and U.S. economic struggles constrain the scope for interest rate normalization elsewhere.

The dollar has also lost 0.5% against the Canadian dollar, 0.4% versus the New Zealand dollar, and 0.2% relative to the euro.  The dollar, however, rose by 0.5% against the yen and Swiss franc, another traditional carry trade-financing currency, and by 0.2% relative to the Australian dollar.

Japan’s Nikkei, up another 1.4% and nearer to 10K, has been helped by the ability of Japanese officials to keep their currency weaker than 80 per dollar.  South Korean stocks gained 1.1% overnight, but elsewhere in the Pacific Rim, stocks fell by 0.9% in Australia, Hong Kong and Sri Lanka, 0.7% in Singapore and China, 0.5% in Thailand and 0.3% in India.  In Europe, the Paris Cac shows a 0.6% loss, and both the German Dax and British Ftse are off 0.4%.

China’s trade surplus awkwardly widened 68% on month to a three-month high of $27.1 billion in October, but export growth (22.9% on year) and import growth of 25.3% were both less than anticipated.  China will be reported its PPI, CPI, retail sales, industrial production, business spending, and money and credit growth numbers tomorrow.

Australian consumer confidence was hit by this month’s central bank rate hike and dropped 5.3% from October’s level.  Australian mortgage loans increased 1.0% in September following no change in August, however.

New Zealand’s central bank released a new Financial Stability Report, claiming its banks to be in decent shape but complaining that upward pressure on the kiwi poses a problem.

Filipino exports were 46.1% greater than a year earlier in September, a bigger on-year gain than August’s advance of 36.6%.

Japanese consumer confidence fell to 40.9 in October, weakest since March and down from quarterly average readings of 42.3 in 3Q10 and 42.8 in 2Q10.

French industrial production rose only 0.1% in September after no change in August, but the 12-month rate of increase improved to 5.1% from 4.1% the month before.

Italian industrial production plunged 2.1% in September, the worst monthly change in a year and a half, slashing the on-year increase to 4.1% from 9.7%.  A 0.8% drop in German industrial production was reported this past Monday, so the three largest economies in Euroland each had lower industrial activity in the final month of the third quarter.

French consumer prices firmed 0.2% in October on a seasonally adjusted basis and were up a subdued 1.6% from a year earlier.  Most of that increase came from energy costs.  Core CPI remains at 0.8%.  French consumer confidence rose a point but remained weak at minus 34 in October compared to a long-term average reading of minus 19 in this index.

Swedish industrial orders and industrial production posted strong gains of 5.6% and 2.7% in September and also posted double-digit on-year advances that month.  The increases in the third quarter were respectively 1.1% and 2.2%.  Finnish industrial output increased 1.1% in September and 8.6% from a year earlier.

German wholesale prices slid 0.3% in October but posted a 7.7% increase from a year earlier.

Norwegian consumer prices firmed 0.1% on month and 2.0% on year in October, while Norway’s PPI went up by 0.5% on month and 18.0% on year.  Danish consumer prices edged down 0.1% in October and had a 2.5% on-year change.

U.S. and Canadian trade figures get released at 13:30 GMT today.  U.S. jobless insurance claims, import prices and federal budget figures are also scheduled today.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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