COMMENTARY: CREDIT...increase in March. The headline gain was dominated by a dramatic, albeit not...
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Friday May 27, 2016 www.bloombergbriefs.com Due to a U.S. holiday, the next issue will publish Tuesday, May 31. Second Print of 1Q GDP; Yellen, Bernanke at Harvard BEN BARIS AND JAMES BATTY, BLOOMBERG BRIEF EDITORS WHAT TO WATCH: The is expected to have grown by 0.9 percent in U.S. economy the first quarter, slightly more than the 0.5 percent as initially estimated, 8:30 a.m. The report will also provide a preliminary look at first quarter . The final corporate profits print for the University of Michigan May is forecast to consumer sentiment survey show a small drop to 95.4 from 95.8 as first reported, 10 a.m. (see below chart). ECONOMICS: Gregory Mankiw, economics chairman and professor at Harvard University, will speak with Federal Reserve Chair as part of Radcliffe Day. Janet Yellen Former Fed Chair will share his personal reflections afterward. The Ben S. Bernanke program begins at 10:30 a.m. GOVERNMENT: Barack Obama becomes the first sitting U.S. president to set foot in Hiroshima since the U.S. dropped an atomic bomb on the Japanese city more than 70 years ago, and he will again call for the world to rid itself of nuclear weapons. MARKETS: Global equities held near a three-week high and the dollar rose versus most peers before a speech by the head of the Federal Reserve. (All times local for New York.) Click to view a live version of this chart on the Bloomberg terminal. here QUOTE OF THE DAY "Depending on the incoming data and the evolving risks, another rate increase may be appropriate fairly soon." — Fed Governor Jerome Powell, in the of a text speech given in Washington D.C. COMMENTARY IN THIS ISSUE Bill Gross seems ready for a painful campaign against company by bonds shorting them in preparation for a day of reckoning: Lisa Abramowicz. Durable goods rose sharply in orders April, but excluding an acceleration in aircraft orders, the production outlook improved much more modestly: Bloomberg Intelligence Economists. Wells Fargo's George Bory discusses the impact of the Fed's rate path on the bond market: and Tom Keene Michael McKee. St. Louis Fed President James Bullard said associated with disappointing risks Chinese economic growth aren’t going away and that such worries shouldn’t keep the U.S. central bank from pursuing the best monetary policy for the country. EQUITIES MONITOR COMMENTARY: CREDIT Improving Outlook, Income Gains May Support Job Growth The University of Michigan Consumer Sentiment Index broke its recent trend of modest but continued declines in the beginning of May. This was driven by more frequent income gains and an improved jobs outlook, with the largest gains recorded among lower-income and younger households. A better financial situation among these groups, affected most during the recession, could persuade some discouraged workers that it is now a good time to come back into the labor force and support employment growth. The consensus forecast anticipates the strength in sentiment to persist in the second half of May. The expected average reading of 95.4 would be just a touch lower than the preliminary survey's 95.8. — Carl Riccadonna and Yelena Shulyatyeva, Bloomberg Intelligence Economists Source: Bloomberg
Transcript of COMMENTARY: CREDIT...increase in March. The headline gain was dominated by a dramatic, albeit not...
Friday
May 27, 2016
www.bloombergbriefs.com
Due to a U.S. holiday, the next issue will publish Tuesday, May 31.
Second Print of 1Q GDP; Yellen, Bernanke at HarvardBEN BARIS AND JAMES BATTY, BLOOMBERG BRIEF EDITORS
WHAT TO WATCH: The is expected to have grown by 0.9 percent in U.S. economythe first quarter, slightly more than the 0.5 percent as initially estimated, 8:30 a.m. The report will also provide a preliminary look at first quarter . The final corporate profitsprint for the University of Michigan May is forecast to consumer sentiment surveyshow a small drop to 95.4 from 95.8 as first reported, 10 a.m. (see below chart).
ECONOMICS: Gregory Mankiw, economics chairman and professor at Harvard University, will speak with Federal Reserve Chair as part of Radcliffe Day. Janet YellenFormer Fed Chair will share his personal reflections afterward. The Ben S. Bernankeprogram begins at 10:30 a.m.
GOVERNMENT: Barack Obama becomes the first sitting U.S. president to set foot in Hiroshima since the U.S. dropped an atomic bomb on the Japanese city more than 70 years ago, and he will again call for the world to rid itself of nuclear weapons.
MARKETS: Global equities held near a three-week high and the dollar rose versus most peers before a speech by the head of the Federal Reserve.
(All times local for New York.)
Click to view a live version of this chart on the Bloomberg terminal.here
QUOTE OF THE DAY
"Depending on the incoming data and the evolving risks, another rate increase may be appropriate fairly soon."
— Fed Governor Jerome Powell, in the of a text
speech given in Washington D.C.
COMMENTARY IN THIS ISSUE
Bill Gross seems ready for a painful campaign against company by bondsshorting them in preparation for a day of reckoning: Lisa Abramowicz. Durable goods rose sharply in ordersApril, but excluding an acceleration in aircraft orders, the production outlook improved much more modestly: Bloomberg Intelligence Economists. Wells Fargo's George Bory discusses the impact of the Fed's rate path on the bondmarket: andTom Keene Michael McKee.
St. Louis Fed President James Bullardsaid associated with disappointing risksChinese economic growth aren’t going away and that such worries shouldn’t keep the U.S. central bank from pursuing the best monetary policy for the country.
EQUITIES MONITOR
COMMENTARY: CREDIT LISA ABRAMOWICZ, BLOOMBERG GADFLY COLUMNIST
Improving Outlook, Income Gains May Support Job Growth
The University of Michigan Consumer Sentiment Index broke its recent trend of modest but continued declines in the beginning of May. This was driven by more frequent income gains and an improved jobs outlook, with the largest gains recorded among lower-income and younger households. A better financial situation among these groups, affected most during the recession, could persuade some discouraged workers that it is now a good time to come back into the labor force and support employment growth. The consensus forecast anticipates the strength in sentiment to persist in the second half of May. The expected average reading of 95.4 would be just a touch lower than the preliminary survey's 95.8.
— Carl Riccadonna and Yelena Shulyatyeva, Bloomberg Intelligence EconomistsSource: Bloomberg
May 27, 2016 Bloomberg Brief Economics 2
COMMENTARY: CREDIT LISA ABRAMOWICZ, BLOOMBERG GADFLY COLUMNIST
Bill Gross Should Be Wary of Being King of Credit PainMany investors have hated corporate
credit over the past few years. Some have tried to wager against it.
But many of those unlucky souls have, in trader parlance, gotten their faces ripped off. After all, this market just can't stop rallying, with the exception of a few hiccups here and there.
And yet here comes Bill Gross, the legendary billionaire bond trader, who seems ready to join their painful campaign against company bonds by shorting them in preparation for a day of reckoning.
"I’m an investor that ultimately does believe in the system, but believes that the system itself is at risk,” Gross, who manages the $1.3 billion Janus Global Unconstrained Bond Fund, said in an interview with Bloomberg's Erik Schatzker. There will be a day of reckoning in the near future, Gross indicated, as central bank policies run out of steam and fall on their heads, leaving credit debris in its wake.
Gross said he's trying to work himself up to short-sell credit in response to his general negative view as well as clients' requests. But he acknowledged, "It comes at a cost, because instead of realizing carry, the spread and the yield, you pay for it."
In other words, it's expensive to maintain short positions, since all those regular coupon and interest payments work against you.
It's a good thing that there are still investors trying to take the other side of this relentless market. That ostensibly creates some balance. But it's an easier trade to get wrong than right.
This market is so easy to dislike, particularly the riskiest slices of it. Since 2008, U.S. high-yield and investment-grade bonds have gained an average 8.6 percent a year, Bank of America Merrill Lynch index data show. Yields have
shrunk to 4.1 percent on average for dollar-denominated debt, compared with an average 6.1 percent over the past two decades.
All the while, the amount of such debt has more than doubled since the end of 2008 to $6.7 trillion, with investors at times lending rather indiscriminately. Those elements tend to create a story with a sad ending.
And indeed, the market certainly seems fragile. But that's not enough to make a bearish investor rich.
A short-seller would have to time a downturn perfectly and choose the correct tool to bet against the market. Last year, when high-yield bonds experienced their worst rout since 2008, an index of credit-default swaps turned out to be a highly problematic hedge that actually indicated a credit gain in value at times while everything else fell.
And of course, investors have to choose what kind of downturn they're expecting. Will it be an all-encompassing systemic seizure that'll be the world's next Big Short? Many hedge funds have dreamed
of that day, but it would take some catalyst to create such a scenario, which is all but impossible to predict.
Perhaps the next rout will just manifest as this rolling wave of weakness that's washed over different industries, from energy to retail companies, pummeling specific bonds before moving on to the next spot. In that case, using a broad index to bet against credit won't be particularly fulfilling.
And then, of course, there's the room full of 800-pound gorillas pushing investors toward riskier credit. These gorillas are the Federal Reserve, the European Central Bank and the Bank of Japan, which have pumped enough money into the financial system to mute a lot of the pain that otherwise would've surfaced by now.
So Gross is not wrong in his distrust of this market. But the deck is stacked against him because this rally has proven capable of chugging along despite its repulsive characteristics.
This column does not necessarily reflect the
opinion of Bloomberg LP and its owners.
Higher and Higher
May 27, 2016 Bloomberg Brief Economics 3
CAPITAL GOODS CARL RICCADONNA, RICHARD YAMARONE & YELENA SHULYATYEVA, BLOOMBERG ECONOMISTS
May 27, 2016 Bloomberg Brief Economics 4
CAPITAL GOODS CARL RICCADONNA, RICHARD YAMARONE & YELENA SHULYATYEVA, BLOOMBERG ECONOMISTS
U.S. Durables Orders Are Tame Beneath Aircraft SurgeU.S. durable goods orders rose sharply
in April, but excluding a dramatic acceleration in aircraft orders, the production outlook improved much more modestly. While factory-sector demand remains tepid, there are signs of gradual firming — perhaps in part due slight weakening in the trade-weighted dollar since the start of the year.
Any improvement may be short-lived, however, as the dollar may resume its climb if the Fed follows through on plans to keep raising interest rates. While consumers and housing are contributing to a firmer growth outlook into midyear, manufacturing remains on precarious footing.
New orders for durable goods rose 3.4 percent in April, following a 1.9 percent increase in March. The headline gain was dominated by a dramatic, albeit not unusual, surge in civilian aircraft orders, which rose 109.1 percent. Durable goods are notoriously volatile, in large part due to the transportation subcomponent. Excluding this, orders rose 0.4 percent. Outside of the transportation sector, factory demand remains slack.
The shipments data started the second quarter on a positive note. Core
Read the full analysis with additional live charts on the Bloomberg terminal . here
shipments advanced 0.3 percent in April. This is good news for overall economic growth this quarter, as core shipments are an input to the business investment component of the quarterly GDP report. That is particularly the case after non-residential fixed investment fell 5.9 percent in the first quarter.
Policy makers are unlikely to view this report as substantial corroborating evidence for the case to increase interest rates in the next few months. Instead, it will serve as a stark reminder of the material and sustained fallout from significant currency appreciation from mid-2014 through the end of 2015.
DATA & EVENTS
Durables Shipments vs. ISM Production
May 27, 2016 Bloomberg Brief Economics 5
DATA & EVENTS
TIME COUNTRY EVENT SURVEY PRIOR
8:30 Brazil Federal Debt Total — 2887b
8:30 U.S. GDP Annualized QoQ 0.90% 0.50%
8:30 U.S. Personal Consumption 2.10% 1.90%
8:30 U.S. GDP Price Index 0.70% 0.70%
8:30 U.S. Core PCE QoQ 2.10% 2.10%
9:00 Mexico Unemployment Rate SA 4.16% 4.19%
9:00 Mexico Unemployment Rate NSA 4.10% 3.74%
10:00 U.S. U. of Mich. Sentiment 95.4 95.8
10:00 U.S. U. of Mich. Current Conditions — 108.6
10:00 U.S. U. of Mich. Expectations — 87.5
10:00 U.S. U. of Mich. 1 Yr Inflation — 2.50%
10:00 U.S. U. of Mich. 5-10 Yr Inflation — 2.60%Source: Bloomberg. Surveys updated at 4:15 a.m. New York time.
CALENDAR
Click on the to see the full range of economists' forecasts on the terminal. highlighted releases
OVERNIGHT
A gauge of U.K. consumer for the first time since confidence rose
January but remained below zero as the upcoming referendum on European
membership weighed on Union sentiment. It rose to minus 1 this month from minus 3 in April, GfK said in a report published today. A measure of the economic outlook increased from the weakest reading in almost three years, rising to minus 13 from minus 14. Consumer spending is the strongest pillar of the economic recovery and any evidence that the June 23 Brexit vote is eroding confidence may provide further fuel for the campaign to stay in the EU.
Japanese Prime Minister Shinzo Abeis getting closer to a potential announcement on delaying an increase
after his warning at a in the sales taxGroup of Seven leaders meeting that the global economy faces significant risk of another crisis. Abe said he’ll make a decision before an upper-house election this summer on whether to go ahead with a planned hike in the levy next April to 10 percent, from 8 percent. He had previously said the matter would be decided at an appropriate time and that it would be postponed only if there was a shock on the scale of a major earthquake or a corporate collapse like that of
. An increase in the Lehman Brotherslevy in 2014 pushed Japan into a recession.
Japan’s consumer prices dropped for a second month as central bank Governor
struggles to spur Haruhiko Kurodainflation with record asset purchases and negative interest rates. Consumer prices excluding fresh food fell 0.3
in April from a year earlier, after percentdropping by the same amount in March, according to a statistics bureau report today. Economists in a Bloomberg survey forecast a decline of 0.4 percent.
Europe
Asia
MARKET INDICATORS
Americans Are Trimming Back on Luxurious Lifestyles
Sales of luxury goods will expand 2 percent at best this year, excluding currency swings, according to estimates by Bain & Co. The U.S. is this year’s problem child with a combination of weak tourist spending and uneven local demand, meaning sales of designer dresses and other expensive stuff could fall. Japan is booming, helped by Chinese tourists’ yen for buying luxury in that country.
— Thomas Mulier and Andrew Roberts, Bloomberg News
May 27, 2016 Bloomberg Brief Economics 6
MARKET INDICATORS
SURVEILLANCE WITH KEENE & MCKEE
Source: Bloomberg. Updated 5:20 a.m. New York time.
May 27, 2016 Bloomberg Brief Economics 7
Bloomberg Brief: Economics
SURVEILLANCE WITH KEENE & MCKEE
Wells Fargo Head of Credit Strategy George
speaks with Bloomberg's Tom Keene and Bory
Michael McKee about the impact of the Federal
Reserve's interest-rate path on the bond market.
Q: Do bonds move in lockstep with Fed rates?A: Actually corporate bonds will typically track pretty closely with Treasury moves. So if Treasury yields are going higher, bond prices are falling, investment-grade corporate bonds will typically move pretty close. They may lag a little so the spread between the two might tighten. But on the high-yield side, you tend to get a little bit more kind of diversification so that there's a more meaningful lag between, say, high yield and Treasuries. And that is typically because a yield is going to be more connected to say equities and growth than say investment grade.
With the Fed creeping toward the potential for a rate hike, we're starting to see the flow through of that on the corporate bond side. Investment-grade prices have dropped pretty meaningfully. So for the last week or so high yields held up a little bit better. But we are starting to see some downward pressure on prices as bond yields go up.
Q: At what maturity? That's the question for the Fed as they raise
rates. So many people want into U.S.markets that it seems like the long enddoesn't move very much.
A: Yes. And I think the read through there is how effective is the Fed policy. The long end has repriced modestly. You've seen 10-year yields come up 10, 15 basis points. And the the long end has come up a little bit, about the same, and corporate bond yields have kind of tracked incrementally higher. But the front end is moving faster. So the curve itself is flattening. And that typically is not a great signal for growth in the future. A flatter curve usually implies some degree of slowdown as the cost of borrowing at the front end goes up, kind of tightens up monetary policy, and then that ultimately starts to flow through to the real economy.
And that is one of our big concerns. Corporate America has been a huge beneficiary over the last couple of years of the monetary policy backdrop. The push lower of rates has forced investors to creep out along the curve and really encouraged corporate America to borrow considerable amounts of money. So any reversal of that trend as yields start to creep a bit higher and the curve flattens starts to create a headwind to what is right now a relatively virtuous cycle.
Q: What do you expect CFOs will do? Do they try to get out in front of Fed normalization? Do they try to game thesystem?
I think there is a little bit of gaming the A:system. You've seen a pretty significant uptick in issuance in the first quarter of this year. This month alone is on a track for almost $200 billion of gross new
issuance in the dollar product corporate bond market. So I think there is a little bit of preemptive funding that is going on. But there is plenty in the pipeline as well. Companies are making strategic long-term decisions to buy each other, to consolidate industries, to pay out significant amounts of money to equity holders. With that comes some meaningful financing requirements.
And that is one of the concerns is that if that virtuous cycle starts to breakdown, the borrowing needs of the corporate sector remains pretty high. There is about $8.5 trillion of debt outstanding in the corporate sector overall. That money needs to be refinanced and/or paid back as we move through time. And that creates very meaningful borrowing requirements. You can only get so far ahead before you run into some issues.
Q: How do you allocate within corporate bonds?A: You look for stability of cash flow. There are plenty of companies out there that have good core stable earnings. We look at the telecom sector as a perfect example. It's in a pretty good spot. It did a lot of consolidation a few years ago. It is generating very predictable cash flows. The financial sector from a bondholder's perspective is also doing pretty well. We've had a bit of a run up in bond stocks recently. But they are heavily regulated. They are very capitalized. There is a lot of liquidity on the balance sheet.
This interview has been edited and condensed.
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