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Financial Markets: Headlines for September 16

September 16, 2011

EQ European equities rose further after the ECB announced cooperation with other major central banks on provision of longer-term USD funding for banks starting in Q4, easing fears about a more intense funding crunch for European banks; Euro Stoxx 600 gained 2.0% led by a surge in financials (+4.1%) and the bourses of Germany, France, Italy, Spain and Portugal rallied more than 3%; in the US the S&P 500 rose for a 4th day, up 1.7% to close at a 2-week high of 1209.11 although economic figures on jobless claims and September manufacturing activity disappointed versus consensus forecasts

FI USTs fell sharply as the central bank liquidity support announcements spurred flows into riskier assets on Thursday; the yield curve steepened at the 2/10s to 189bps from 180 on Wednesday and 179 a week ago; the Dec’11 Bund future fell 88 ticks to 135.99 and PIIGS government debt rose further at the short end; the Italian 2yr yield fell 9bps to 4.38%; the Greek 2yr yield declined further from Tuesday’s record high, down over 1000bps but still at 52%; iTraxx W. European sovereign CDS index fell 15bps to 328, the lowest in a week; the EUR/USD 3m CCY basis swap rose to -81.9bps from -98.4bps, back at the levels of late August

FX The euro rose broadly as the central bank action boosted confidence about crisis-fighting capacity for the moment, up 0.9% versus the dollar to 1.388 and up 1.0% versus the yen at 106.5 by the US close; USD/JPY ended flat at 76.62 but the dollar fell broadly versus other major currencies as some safe-haven liquidity positions were unwound; the Dec’11 gold contract fell to the lowest level since August 26, down 1.8% to $1791.7oz

$ The ECB will conduct longer-term USD liquidity tenders in coordination with the Fed, BoJ, BoE, and SNB for the first time since May’10; the 3-month USD repurchase operations will be conducted at a fixed-rate for the full amount demanded, and will be held on Oct. 12, Nov. 8, and Dec. 7, thus covering the year-end; the BoJ, BoE, and SNB will also conduct 3-month USD funding operations in Q4; President Trichet said “the globally co-ordinated decision…on US dollar liquidity-providing operations is a clear illustration of our very close cooperation at the global level"

€ ECB’s Noyer said European banks must adjust their “activity in dollars” because US money market funds have changed their business model and are “withdrawing from Europe”; the ECB’s new long-term USD funding provides time for banks to make these adjustments

€ German Chancellor Merkel came out again against euro bonds, at least in the short term: movements toward a “sustainable stability union” can only occur through a “controlled, step by step process…Eurobonds are absolutely wrong. In order to bring about common interest rates, you need similar competitiveness levels, similar budget situations. You don’t get them by collectivising debts"

€ EU Economic Commissioner Rehn expects to have serious discussion about Greek reforms at the Eurogroup meeting on Friday; he expects the more flexible EFSF to be ratified by all states by end-September

€ ECB’s Mersch is “quite confident” that crisis prevention mechanisms agreed upon in July will be implemented in less than 3 weeks; he said euro bonds could be imagined among countries with AAA ratings

€ ECB’s Nowotny expressed deep concern about the slow process of approving the expanded EFSF at the national level; “we don’t have all the time in the world. At stake is a programme of envisaged payments [to Greece]. If this programme cannot be fulfilled it can cause significant problems"

£ UK BoE MPC member Weale: growth prospects have worsened in the last few weeks and the risk of a recession has increased since July, but the UK still has inflation issues; he would vote for more QE if inflation were set to significantly undershoot the 2% target

$ The US CPI slowed to +0.4%MoM in August from +0.5% in July, but came in above the median forecast of +0.2%; the core CPI rose at a steady pace of +0.2% as increases were broad across categories; vehicle prices continued to increase, up 0.2% vs. +0.1% in July and apparel prices jumped another 1.1%, up by over 1% in each month since May; the 3m annual core rate eased to 2.9% from 3.1% in July but was up sharply versus a year ago (1.1%)

$ US initial claims for jobless benefits rose 11k to 428k in the week to September 10, disappointing versus consensus of 411k; the Labor Department said there was no discernible effect from Hurricane Irene; the level of claims above 400k continue to signal a weak pace of hiring; the 4wk moving average rose for a fourth consecutive week (to 420k) and was the highest since mid-July (422k)

$ US NY Empire manufacturing PMI fell further to -8.8 in September from -7.7 in August and disappointed versus the median forecast of -4.0; the 3m average of -6.8 was the lowest since Jun’09 (-11.1) at the end of the recession

$ US Philly Fed manufacturing PMI rose to -17.5 in September, cutting into the 34pt decline posted in August when sentiment was depressed by the debt ceiling debate and market turmoil; the new orders balance remained in contraction territory as well but rose to -11.3 from -26.8 previously, however the shipments balance fell to -22.8 from -13.9; the employment balance bounced to +5.8 from -5.2 previously

$ US industrial production rose 0.2%MoM in August vs. +0.9% in July and surprised to the upside of the consensus forecast of a flat reading; manufacturing output continued to rise, up 0.5% in August vs. +0.6% in July, despite negative signals from the August manufacturing surveys; motor vehicle output rose 1.7% vs. +4.5% in July, and ex-vehicle production rose 0.4%, up for a 4th consecutive month

€ Eurozone CPI was confirmed at 2.5%YoY as expected, unchanged versus July but below the Q2 average of 2.7%; the core measure also held steady versus July at 1.2%YoY, below the Q2 average of 1.6%

€ Eurozone employment rose 0.3%QoQ in Q2 and the Q1 figure was revised up to +0.1% (originally flat); a steady pace of employment growth was posted in Germany (+0.4%) and France (+0.3%); Italian employment rose 0.3% versus a flat reading in Q1; Spanish employment rose 0.4% which was the first increase since Q1’08

£ UK BoE Inflation Attitudes: inflation expectations for the next 12 months jumped to 4.2%YoY in the August survey from 3.9% in May, the highest in 3 yrs; households’ judgment of the current inflation rate was 4.8%, the highest since Nov’08

£ UK retail sales fell 0.2%MoM in August although the decline was slightly smaller than expected by the consensus forecast (-0.3%); the July gain was unrevised at +0.2%; sales ex-auto fuel fell 0.1% vs. +0.2% previously; non-food store sales were down 0.6%YoY in the 3 months to August, the worst performance since Jun’09, highlighting depressed consumer confidence and falling real earnings

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