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Financial Markets: Headlines for Novemb er 16

November 16, 2011

EQ US equity indices recovered from early losses and closed higher, while Euro area bourses remained under pressure; conditions in most Euro area bond markets deteriorated further on Tuesday, although Italian PM-designate Monti said he would meet with the President today and could announce his cabinet; US retail sales and the Empire manufacturing PMI rose and surprised versus consensus, while Fed’s Evans and Williams sounded dovish and supportive of more easing; the S&P 500 gained 0.5% to 1257.81 led by technology (+1.3%) and industrials (+0.6%); the CBOE Vix volatility index stabilized at 31.22 but remained above the 100dma of 30.67; Euro Stoxx 50 lost 1.5% as financials (-3.1%) led broad declines

FI Treasuries pared gains to again end little changed over the session and the curve flattened marginally; the yield on the 10yr fell 1bp to 2.046%; the German 10yr cash yield ended flat at 1.777%, but 10yr yield spreads of “non-programme” Euro area countries widened, led by Italy; the Italian 10yr yield soared 38bps to 7.052%; the French yield jumped 26bps to 3.661% which pushed the spread vs. Germany to a new euro-era high of 190bps; the Belgian 10yr rose 31bps to 4.850%; EUR/USD CCY basis swap curve indicated rising funding costs, with the 3m at -118bps vs. -111 previously, a level last seen in Dec’08

FX The euro fell versus most major currencies while the dollar and yen recorded broad gains; EUR fell another 0.7% vs. USD to 1.353 and lost 0.2% vs. GBP to 0.855; Cable declined 0.5% to 1.582 ahead of BoE publication of the Inflation Report and a press conference with Gov. King; the dollar index rose 0.6% to 77.92; despite tepid risk sentiment and sovereign concerns, the Dec’11 gold contract ended flat on the session at $1782oz, down 0.3% from a week ago and well off the record high of $1923 reached in early-September

$ Fed’s Evans retained an aggressively dovish tone: he expects the policy rate to stay “low for longer than mid-2013”; "to the extent that we are not making adequate progress in closing that gap in the time frame that we should, then I think additional asset purchases could further firm our commitment to accommodative policy"; more MBS purchases are a possibility; again called for the Fed to commit to low rates until the unemployment rate hits 7%, as long as inflation stays below 3%

$ Fed’s Williams (voter in 2012) sounded dovish as well and said more stimulus could be needed if growth stays moderate, unemployment high and inflation low; he would want to see more data confirming that inflation will come down and stay low before adding more stimulus; accommodation could be in the form of bond purchases or forward guidance; he supports publication of a Fed “roadmap” for policy

$ Fed’s Bullard (non-voter) said the real economy would have to deteriorate further to justify more monetary accommodation; he does not support Fed’s Evans position about tying the policy rate to the unemployment rate and said it could pull monetary policy “off course for a generation”

$ Fed’s Fisher (voter) said “too-big-to-fail banks are too-dangerous-to-permit”; he favors “an international accord that would break up these institutions into more manageable size”

$ US advance retail sales were up 0.5%MoM in October vs. +1.1% in September and exceeded the consensus forecast of +0.3%; sales were faster in October in 7 of 13 categories; electronics posted the biggest jump (+3.7% vs. -0.3% in Sep) which may reflect iPhone sales; core retail sales ex-autos & gas jumped 0.7% vs. +0.5% previously, the 10th consecutive gain and the strongest since March

$ US producer prices fell 0.3%MoM in October versus the median forecast of -0.1% and +0.8% in September; prices declined across major categories of energy (-1.4%), capital equipment (-0.1%), and consumer goods (-0.4%); ex-energy & food prices were steady for the first time since Nov’10; on an annual basis producer price growth moderated to 5.9%, the slowest since March

$ US NY Empire manufacturing PMI indicated slight optimism about general business conditions and rose to +0.61 in November from -8.48 in October, recording the first positive reading since May (11.9); other indices were mixed; the shipments balance rose to 9.4 from 5.3, but the new orders balance indicated contraction at -2.1 vs. +0.2 previously; inventories contracted for a 5th month; employment balance fell to -3.7 from +3.4

$ US business inventories were flat in September and the August gain was revised down to +0.4% (originally +0.5%); the result disappointed versus the consensus forecast (+0.1%) for a 4th consecutive month

€ Spain sold €3.16bn in 12- and 18-month bills, less than maximum target of €3.5bn; the yield on the 12m was up sharply at 5.022% versus 3.608% at the 18Oct auction; bid/cover was lower at 2.13 vs. 2.30 previously; Greece sold €1.3bn in 3-month bills at 4.63%, up just 2bps the previous similar auction on 18Oct; the bid/cover ratio was steady at 2.86

€ Italian PM-designate Monti will meet with President Napolitano today to present the results of his work to build a cabinet; he said the “framework is now clearly delineated"

€ The European Commission reiterated that Greece must provide written confirmation that it is committed to reforms to bring down its debt – Reuters

€ French FinMin Baroin: the ECB has an important role in addressing the Eurozone crisis; France can meet its 2012 budget target even if growth is only 0.5%

€ The European Parliament approved draft legislation on banning naked short-selling of CDS, stocks and bonds; national governments must vote for formal adoption

€ Eurozone GDP rose at a steady pace of 0.2%QoQ in Q3, in line with the consensus forecast, but there were pockets of greater weakness; German growth accelerated to 0.5% from 0.3%; French GDP rose 0.4% in Q3 but the Q2 figure was revised down to -0.1% from a flat pace reported originally; Spanish & Belgian GDP were flat in Q3; Netherlands -0.3%; Portugal -0.4%; Italy and Greece were not yet available

€ French non-farm payrolls stagnated in Q3 after rising for six consecutive quarters

€ German ZEW economic sentiment fell to -55.2 in November from -48.3 in October and was the lowest since Oct’08 in the month after Lehman’s collapse; the current situation measure fell less-than-expected to 34.2 in November from 38.4 previously and was the lowest since Jul’10

£ The UK CPI fell to 5.0%YoY in October, below consensus of 5.1% and 5.2% in September; strongest downward pressures came from lower food costs, airfares, and petrol; the core rate advanced to 3.4% from 3.3% and was the highest since April (+3.7%); in his letter to the Chancellor, Gov. King said, “the Committee’s best collective judgement is that inflation will fall back sharply in the next six months or so, and continue falling thereafter to around target by the end of next year”


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