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Financial Markets: Headlines for August 17

August 18, 2011

EQ The Dow and S&P 500 closed up marginally after another choppy session; the S&P rose as much as 1.3% early in the day before cutting gains to 0.1% by the close (1193.89) amid mixed sector performance; a disappointing earnings report from Dell (DELL, -10.1%, $14.20) weighed on tech shares (-0.8%); S&P financials gained 0.5% led by US banks; European bourses ended mixed; the Stoxx 600 gained 0.2% but the Dax fell 0.8% and the FTSE -0.5%, led down by tech and financials as the Dell results weighed and investors digested the Franco-German proposal for a financial transaction tax

FI The US yield curve flattened further and the 2/30s narrowed 11bps to 337bps, back near last week’s 2011 low; the yield on the 30yr fell 10bps to 3.563% while the 2yr yield rose 1bp to 0.19%; Gilts surged as the BoE Minutes showed that the August vote was unanimous for steady rates and several members considered the case for more QE; the 10yr gilt yield fell 13bps to a new record low of 2.429%; the German 10yr cash yield fell 12bps to 2.20% and peripheral yields fell as well excluding Greece; the Italian 10yr yield moderated another 8bps to 4.913%, the lowest since early July

FX The SNB’s announcement early Wednesday disappointed versus investors’ expectations of stronger actions to curb the strength of the Swiss franc; USD/CHF fell 0.8% over a choppy session to 0.790; EUR/CHF fell 0.2% to 1.141; the Norwegian Krone outperformed on Wednesday versus major currencies; EUR/NOK fell 0.8% to 7.77, down 1.2% from a week ago; sterling rose broadly as well and recovered from immediate weakness related to the dovish BoE Minutes; Cable touched the highest level since May 3, up 1.0% on the session to 1.655

$ Fed’s Fisher (voter) is concerned that last week’s Fed move was seen as a “Bernanke put” to boost the stock market; the Fed should not act to protect the stock market and he believes his colleagues agree; "I believe what is restraining our economy is not monetary policy but fiscal misfeasance in Washington"; lawmakers “need to construct a modern, appropriate set of fiscal and regulatory levers and pulleys to better incentivize the private sector to channel money into productive use in expanding our economy and enriching our people"

$ Fed’s Plosser (voter) said he dissented at the August 9 FOMC meeting because “it was inappropriate policy at inappropriate time”; he personally believes rates will have to be raised well before mid-2013 and thought the FOMC’s description of the economy in the policy statement “was excessively negative”

$ US producer prices for finished goods rose at an above-consensus pace in July, up 0.2% versus +0.1% expected and -0.4% in June; the core ex-energy & food measure jumped 0.4%MoM versus +0.3% previously; energy prices fell 0.6% vs. -2.8% previously, but prices rose across food (steady at +0.6%), capital equipment (+0.4% vs. +0.3% previously), and consumer goods such as prescriptions, passenger cars, and tobacco

CHF The Swiss Finance Ministry that the SNB is independent and the SNB will decide on whether to introduce an exchange rate target; the FinMin would support measures that the SNB thinks appropriate to fight against the strong franc; measures such as capital controls would have to be decided by the government and SNB together; the Swiss government announced a CHF 2bn package to support 5 sectors of the economy – export, tourism, innovation, research and infrastructure; stricter capital requirements will be required on banks’ mortgage lending to try to prevent overheating

CHF The SNB “decided to expand again significantly the supply of liquidity to the Swiss franc money market” but did not adopt any sort of fx target; it will continue to repurchase outstanding SNB bills and to employ fx swaps, with the aim of expanding banks’ sight deposits at the SNB to CHF200bn from CHF120bn and put more downward pressure on money market rates

€ A bank used the ECB’s US dollar swap facility for the first time since February; the bank borrowed $500m in 1wk dollars at a fixed rate of 1.1%, highlighting higher dollar funding rates in the market and tighter interbank lending conditions

€ Portugal sold €1.2bn in 3- and 6-month bills, within the target range of €0.75-1.25bn but yields were little changed from recent sales; the 3-month sale drew a yield of 4.854%, down 11bps from the yield at the auction on August 3; the 6m sale drew a higher yield of 4.989%, up 3bps from the sale of July 20

€ German government spokesman Seibert said a financial transaction tax would be aimed at all 27 EU members; when asked about euro bonds in the longer term he said it will take a very long time to bring down debt, align fiscal policies and competitiveness

€ The Eurozone CPI was confirmed at 2.5%YoY down from 2.7% in June and the 2011 high of 2.8% recorded in April; the core CPI excluding energy, food, alcohol & tobacco fell unexpectedly to a 5-month low of 1.2%YoY from 1.6% previously; clothing prices fell 14% on the month in summer discounting, the largest monthly decline on record, which left clothing prices down 2.9% from a year ago vs. +1.0%YoY in June; there were also slight downward effects on the core annual rate from healthcare prices (1.4% vs. 1.5% in June) and communication (-1.6% vs. -1.2%)

£ BoE August MPC minutes: the MPC was unanimous in favour of holding Bank Rate steady at 0.5% at the August 3-4 meeting, as members Dale and Weale gave up their calls for a 25bps rate hike resulting in the first 9:0 vote on rates since May’10; Andrew Posen continued to call for a £50bn increase in asset purchases to £250bn; “news on the month had increased the downside risks” to inflation in the medium term; “some members considered whether there was a case for undertaking further asset purchases, but concluded the case was not yet strong enough, particularly because Bank Rate was now projected to be low for longer; other members continued to be concerned about the upside risks from the period of above-target inflation, but economic and financial market developments had weakened the case for removing stimulus

£ UK jobless claims jumped 37.1k in July versus an upwardly revised 31.3k in June (originally 24.5k), the largest gain since May’09; the claimant count rate rose to 4.9% from an upwardly revised 4.8% in June (originally 4.7%), back at the level of Feb’10; UK average earnings ex-bonuses rose at a slightly faster 3m annual pace of 2.2% in June versus 2.1% in May, in line with the 6m moving average, but below the 5yr average of 2.9%; the ILO-calculated unemployment rate rose to 7.9% in Q2 from 7.7% in the 3 months through May

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