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Financial Markets: Headlines for July 29

July 29, 2011

EQ US equities rose early in the session following some better-than-expected US economic figures that may have soothed worst fears about a deeper slowdown in growth, but the Dow and S&P reversed gains and ended lower for a fourth consecutive session as there remained no compromise on a debt ceiling/deficit reduction plan and Speaker Boehner pushed ahead with his bill in the House; the S&P 500 fell 0.3% to 1300.67, the lowest since 28 June; Stoxx 600 stabilized after 3 days of losses

$ The CBOE Vix volatility index rose further above 20, up 0.76pts to 23.74, the highest since mid-March

FI Treasuries advanced and the yield on the US 10yr fell back 3bps to 2.946%, down 7bps from a week ago and -17bps from a month ago, although yields on 1m and 6m T-bills climbed higher; the US/UK 10yr yield spread remained narrow, at 2bps vs. 16bps a week ago; gilts and bunds rose on Thursday in safe-haven bids after Italy sold €8bn in bonds but at much higher yields; the German 10yr cash yield fell 2bps to a new 2011 low of 2.631% while the Italian rose 6bps to 5.802%; Italian and Spanish 10yr bond yields rose further over Germany while the Irish and Portuguese spreads narrowed over bunds

FX The US dollar index rose during the European session but then pulled back to end flat on the day at 74.1; USD/JPY fell 0.3% to 77.76 as the yen rallied across the board, but USD/JPY remained above Wednesday’s intraday low of 77.57; the euro fell 0.3% versus the dollar to 1.431 and lost 0.3% versus the franc to 1.148

OIL WTI Sep’11 crude ended flat on the session at $97.44bbl, marginally below the 50-day moving average of $98.07bbl

$ The US sold $29bn in 7yr notes at a high yield of 2.280%, down from 2.430% at the previous auction on June 29; the bid/cover ratio at 2.63 was little changed from 2.62 in June but below the 10-auction average of 2.82; indirect bidders bought 39.6% vs. 32.2% previously

€ Italy sold €2.7bn in 10yr bonds at a yield of 5.77% vs. 4.94% at the auction on June 28, the highest since February 2000; the €3.5bn 3yr sale had a yield of 4.8% the highest since July 2008 – Reuters

$ The Obama administration will brief the public no earlier than after today’s market close on the federal government’s payment priorities if the debt ceiling is not raised by August 2 and the US exhausts borrowing authority; there are reports that the Treasury’s policy will be to prioritize interest payments to bond holders – Bloomberg

$ Fed’s Lacker (non-voter) is happy with the current level of monetary stimulus; more stimulus at this juncture could raise inflation to undesirably high levels and would do little to spur real growth; he expects inflation to average close to 2% over the coming year; on the debt situation, "We might need to reevaluate discount window haircuts on Treasury securities if it was warranted"

$ San Francisco Fed’s Williams (non-voter) said the Fed has no “magic wand” to pull the economy out of a crisis caused by a US government default; growth in H1 was held back by transitory factors, but there are still persistent, deep constraints on growth from the housing market, tight credit conditions, and weaker household spending

$ The Fed outlined criteria for acceptance of a bank or savings association as a counterparty in the Fed’s reverse repos; institutions must have reserve balances of no less than $10bn as of March 31 2011 and be a consistent investor in the tri-party repo market in transactions collateralized by US government debt, agency debt, and agency MBS securities

€ Greek FinMin Venizelos on the private sector investor bond swaps: "Discussions started very encouragingly, we want the scheme to be implemented fast and the duration of its implementation to be as brief as possible"

€ Italian Economy Minister Grilli: crisis resolution is on a positive path but “we need to make efforts to ensure crisis instruments work and explain them to markets"; he hopes expanded powers of the EFSF will be in place by the end of the year

€ French FinMin Baroin said that French banks and insurance companies will propose to their boards that they participate in the Greek bond swap with the totality of their exposure maturing before 2020 – about €15bn

€ ECB’s Mersch: "The combination of dynamic economic growth, accompanied by accelerated inflation in emerging markets bears the risk that imported inflation will come to play a larger role in domestic price levels in the industrialised world"

$ US initial jobless claims were lower at 398k in the week to 23 July versus an upwardly revised 422k in the week prior (originally 418k); this was the lowest level of claims since April 2 and surprised versus consensus at 415k; the 4-week moving average moderated for a 4th consecutive week, down at 414k versus 425k at the start of June

$ US pending home sales rose 2.4%MoM in June versus +8.2% in May, surprising positively versus consensus of -2.0%

€ ECB’s Bank Lending survey: Eurozone banks continued to slightly tighten on net their credit standards for lending in Q2 versus Q1; in Q3 banks expect to slightly increase the net tightening of standards for loans to companies, while tightening of household lending standards is expected to be little changed; prospects for loan demand remain generally subdued

€ Eurozone EC industrial confidence fell 2.4pts to 1.1 in July, disappointing versus consensus at 1.6 to reach the lowest level since October (+0.8); sub-indices weakened across the board and the measure of July production fell to the lowest since Mar’10; the consumer confidence measure was revised up marginally to -11.2 from the preliminary estimate of -11.4, but remained below the 6-month moving average (-10.5)

€ German unemployment declined for a 25th consecutive month, down 11k in July versus -8k in June; the unemployment rate held steady at 7.0%, the lowest in the post-reunification period

€ Italian hourly wages rose 0.1%MoM in June versus a flat pace in May; the annual pace remained subdued at 1.8%, below the series’ average of 2.7% recorded since 2006

£ UK CBI reported retail sales fell to -5 in July versus -2 in June, disappointing versus the median market forecast of +2 as consumer spending remained constrained by falling real incomes; the 3-month moving average fell to +3.7, the lowest since Jul’10; the balance measuring sales for the time of year dropped to -33 from -19, the lowest since May’09

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