Tuesday Oct. 25, 2016 - Bloomberg.com · €€Economics Oct. 25, 2016 4 Debt Negative-Yield Bond Total Up 2% in a Week, Still Down for Month By Phil Kuntz, Bloomberg News The market

Tuesday

Oct. 25, 2016

  Oct. 25, 2016

Consumer Confidence; Housing Prices; Fed's LockhartBy Ben Baris and Geoff King, Bloomberg Briefs Editors

What to Watch: Economists surveyed by Bloomberg forecast the Conference Board's to have declined to a level of 101.5 in October from a consumer confidence index

nine-year high of 104.1 in September, 10 a.m. Two housing indicators are released at 9 a.m. The FHFA's is expected to rise 0.4 percent in August from a House Price Indexmonth earlier, slightly lower than the 0.5 percent July gain. The S&P CoreLogic Case-Shiller is forecast to rise 5.00 percent year over 20-city composite house price indexyear in August, just below its 5.02 percent July reading.

Economics: ECB President gives a speech at the DIW economic Mario Draghiinstitute on stability, equity and monetary policy. The event starts at 11:30 a.m. in Berlin. Atlanta Fed President speaks to the Opportunity Finance Network on Dennis Lockhartcommunity development in Atlanta at 12 p.m.

Government: Philippines President will visit Japan through Oct. 27 Rodrigo Dutertefor talks with Prime Minister .Shinzo Abe

Companies: , , and Apple Inc. AT&T Inc. Fiat Chrysler Automobiles NV Havas SAare among companies posting results. Follow the blog for real-time coverage TOPLiveof Apple earnings on the Bloomberg terminal .here

Markets: and stocks rose with and European Asian U.S. equity index futures, buoyed by a generally upbeat corporate earnings season and signs industrial metals

of improvement in the world’s biggest economies. The yuan held near a six-year low and reached its weakest level on record in the offshore market, which began trading in 2010.

(All times local for New York.)    

Click to view a live version of this chart on the Bloomberg terminal.here

Quote of the Day

"One of the reasons we are underweight the U.S. is that it's hard to justify a premium valuation in an environment in which political risk is going to be heightened."  — Russ Koesterich, head of asset allocation,

at BlackRock, in an with Bloomberg interview

Briefs

Commentary in This Issue

The current level of the U.S. FinancialConditions Index is not enough to deter a December Fed rate , hikebarring an unexpected event, which could have a sharp and immediate impact: Michael McDonough.

Canada’s is drawing increasing debtconcern from an international banking community that says it threatens growth and financial stability: Maciej Onoszko.

There is broad support for the idea that the U.S. yield curve shouldflatten, research by U.S. rates strategists shows: Elizabeth Stanton.

St. Louis Fed President James said U.S. interest rates are Bullard

likely to stay very low for several years because of low productivity and investor demand for safe assets. Read more on the .terminal

What to Read

U.S. job growth is well above the break-even rate needed to maintain a healthy labor market and could slow down substantially in future without undermining the labor market, according to a San Francisco Fedpaper.

Q&A

Home Prices Expected to Continue to Rise in August

Inventory shortages pushed house prices to new cyclical highs this summer, resulting in a leveling off in home buying in the third quarter. Prospective buyers appear to be either hesitant to purchase at elevated prices, or they are unable to get contracts due to a lack of listings. While overall housing affordability remains at a high level, in certain regions such as the West, it has deteriorated considerably relative to the national average. Housing prices will continue to rise in the West, boosted by solid economic growth and attractive labor markets. Consensus expects a 0.1 percent increase in the national Home Price Index in August, which should push the annual pace up to 5.1 percent from 5 percent prior.

— Carl Riccadonna and Yelena Shulyatyeva, Bloomberg Intelligence Economists

  Economics 2  Oct. 25, 2016

Q&A

Political Risk 'Probably Underpriced' in Developed Markets: BlackRock's Koesterich

Value in health care, technology, emerging markets. Avoid utilities, consumer staples, bunds, JGBs.

Developed world political risk will linger and is "probably" underpriced.

BlackRock Global Allocation Fund has $43 billion in assets.

Interviewed by James Crombie, Bloomberg Briefs, on Oct. 21. Comments have been edited and condensed for clarity.

Russ Koesterich, head of asset allocation, BlackRock Global Allocation Fund

 Q: What's your U.S. election outlook?A: Looking at the polls today suggests that is likely to win, Hillary ClintonRepublicans are likely to maintain a narrow majority in the House that will be close to evenly divided. Polls may be misleading but we've had a much more consistent level of polling going into the U.S. election than we had going into the Brexit vote.

Q: How will fiscal policy change? Historically, there's little evidence that A:

you see an increase in fiscal spending in the first year of an administration. If, in theunlikely event that there is a Republican sweep, certainly I think there would be a propensity for tax cuts. In the event there's a Democratic sweep, there would be a push for infrastructure and other types of fiscal stimulus, probably coupled with some tax increases on the more affluent. In the base-case scenario — divided government — you've got to ask yourself, what is the middle ground that allows for a compromise on fiscal spending and on corporate tax reform? The politics makes it difficult to have a package of significant size and a packagethat we can expect in the near term.

Q: How will rates be impacted? If you have a Clinton presidency, I A:

think you're likely to see a continuation of current policy at the Fed. The Fed will, probably as early as December, continue their tightening campaign. If you have continuity at the Fed, then I think the dollar probably appreciates, though not nearly as quickly as it did back in 2014. 

Q: How do you trade this?A: Right now there is relative value in technology. We see some value in health care. Hospitals would theoretically stand to benefit if there is a continuation of the ACA, which is our base case. We still

think there are opportunities in corporate credit. Right now we are overweight both in our investment grade and high-yield positions in the U.S.

Q: Why technology?A: Tech is one of our largest overweights because we're finding business models within technology that are managing to grow their franchise even without a lot of economic growth.

Q: What do you avoid?A: We're underweight fixed income, particularly international sovereigns such as bunds and JGBs.

Q: What about equities?A: We're underweight other bond market proxies besides utilities. The one we're most underweight are consumer staples companies. We just think that these names have been bid up way too high as people have fled the bond market in search of safe yield. If the next source of volatility in the market is a growth shock, then staples are probably a reasonable place to hide. However, if you have a situation like what we've seen recently — where the source of volatility is not concern about growth but concern about rates and the Fed — then these may be avery poor place to hide because they tendto behave like bonds when rates go up.

Q: What about emerging markets? Relative to other opportunities in theA:

fixed income space, EM debt still looks reasonable and this has been one place that we've been marginally adding to the portfolio. We have been seeing on the equity side good value in Asia. On the fixed income side, we've been seeing some good value in Eastern Europe.

Q: Are you holding a lot of cash?A: We're about 10 percent cash. That is higher than it was three-to-four months ago but lower than it was last August. High cash levels aren't because people are overly bearish, they are just becomingthe necessary hedge in a world in which bonds are less likely to fulfill that role.

Q: What's the longer-term impact of this election?A: Political risk does linger. It may actuallyeven worsen because what this election has made very clear is we have a very divided country. The rise of populist sentiment, of nationalist sentiment, of anti-trade sentiment is evident not just in the U.S. but in most parts of the world. I think that is an ongoing risk and it probably is one that is underpriced. One of the reasons we are underweight theU.S. is that it's hard to justify a premium valuation in an environment in which political risk is going to be heightened. I also think it suggests that market volatilityis too low. We are seemingly in a period in which political risk in many developed countries is at least as acute as it is in some emerging market countries.

At a Glance

Favorite city: Sydney. Best beaches, great views, perfect weatherFavorite music: Bad 80’s one-hit-wondersBest recent vacation: Dana Point, CABest investment advice: Figure out in what type of company you’re going to thriveIf you weren't doing this, where would you be working? CIAPerson living/dead to dine with: Oscar Wilde. Would be great dinner party banter

Federal Reserve

  Economics 3  Oct. 25, 2016

 Federal Reserve

Fed Watching Financial Conditions With Wary EyeBy Michael McDonough, Bloomberg Intelligence Economist  China’s unexpected currency devaluation on Aug. 10, 2015 helped push back the Federal Reserve’s first interest rate hike in almost a decade to December from September. The specter of this event is likely looming in the minds of Fed policy makers ahead of the Nov. 8 U.S. presidential election, which takes place less than a week after the central bank’s next scheduled meeting.

China’s currency devaluation, the U.K.’sBrexit vote and the Greek debt crisis all have something in common: they led to a sharp deterioration in U.S. financial conditions. A tightening in financial conditions acts as a de facto hike by the Fed, making it more difficult and expensive for companies to raise capital. The current level of the U.S. Financial Conditions Index at minus 0.14 is not enough to deter a Fed rate hike, barring an unexpected event, which could have a sharp and immediate impact. For example, last year’s weakness in China’s economy coupled with the devaluation of

 Click to view a live version of this chart on the Bloomberg terminal.here

the yuan caused U.S. financial conditions to drop to minus 1.40 on Aug. 24 from 0.27 on Aug. 10. This was enough to delay the Fed from hiking.

With inflation edging higher and continued labor market strength, the Fed

remains on track for a December rate hike. But unexpected events that sharply reduce financial conditions could see that data pushed back.

Read the Macro Musings column on the terminal at .NI ECOMUSINGS <GO>

Debt

Financial Conditions Continue to Support December Fed Hike

  Economics 4  Oct. 25, 2016

 Debt

Negative-Yield Bond Total Up 2% in a Week, Still Down for MonthBy Phil Kuntz, Bloomberg NewsThe market value of the world’s negative-yielding bonds rose last week after falling in the previous two and now totals $10.6 trillion.

Despite the 2 percent increase, the amount of debt certain to lose money if held to maturity remains on track for its biggest monthly decline since December, when it shrank 14 percent. As of Oct. 21, the sum had decreased 11 percent since Sept. 30, data compiled by Bloomberg show.

The unprecedented climb of the total market value of negative-yielding sovereign, government-related, corporate and securitized debt in the Bloomberg

Barclays Global Aggregate Indexpeaked at $12.2 trillion in June, up from just $3.3 billion in July 2014. The benchmark of debt prices was little changed last week.

Japan, where policy makers have been trying to coax yields up since mid-September, remains ground sub-zero, accounting for 50 percent the world’s total. About 44 percent comes from Western Europe. Germany, France, the Netherlands, Spain, Belgium and Italy are the continent’s top five.

Less than a tenth of the world’s negative-yielding debt was issued by businesses, through corporate bonds and securitized debt.    

These totals include both new negative-yielding issues and bonds with prices that rose enough to push their yields into the money-losing zone. The Bloomberg Barclays Global Aggregate Index has a market capitalization of $47 trillion and includes investment-grade debt from 24 developed- and emerging-economy markets.

The benchmark gauge does not include maturities of less than a year, which tend to have lower yields, so the value of many short-term less-than-zero bonds aren’t counted here. The totals are based on market values, which include accrued interest.

— With assistance from Aansh Mehta and

Neelima Vattikonda.

Research Round-up

Less of Less Than Zero

Worldwide debt with negative yields has fallen this month

Where Does It All Come From?

Almost all negative-yielding debt comes from Japan and Western Europe

Sovereign Rules

More than 90 percent of the world's negative-yielding debt was issued by governments

  Economics 5  Oct. 25, 2016

Research Round-up

Widespread Support for UST Curve FlatteningBy Elizabeth Stanton, Bloomberg First WordThere is broad support for the idea that the U.S. yield curve should flatten, for various reasons, weekly research by U.S. rates strategists shows. Read more Street analysis on the yield curve on the Bloomberg terminal at .NI RESROUNDUP <GO>

5s30s has steepened, “as investors have reassessed the outlook for global term premia”; however, that’s unlikely to materialize as “there has not yet been a real rethink of the Fed’s thought process”

Also, the ECB’s reiterated commitment to asset purchases and Trump’s decline in presidential election polls lower the tail risk of an increase in long-end term premia

The curve is “a touch too steep,” but wait for a better opportunity to initiate flatteners

Carry trades are benefiting from investor reluctance to extend duration, low volatility and Fed dovishness; wide cross-currency basis versus the USD has created “historic ‘reverse’ carry trade opportunities”

Barclays (Rajiv Setia)

BNP (Shahid Ladha, Daniel Tangho)

Recent curve steepening “was more about central banks than worries about incipient inflation”

Steepening in recent history isn’t consistent with discounting higher actual inflation or inflation expectations

There’s little reason for pricing paradigm to change “until the central banks provide the catalyst”

Recommended trades include selling midcurve gamma on 3y1y rates as a carry trade, “until the data and central bank cycles offer near-term impetus for steepening”

Correlations “have loosened” between global long-end rate curves from high correlation in September that developed “because of a broad bear steepening

Deutsche Bank (Dominic Konstam)

Nomura (George Goncalves)

concern hinged on potential policy changes from the BOJ”

Realized beta between U.S. and U.K. 10s30s “has been steadily declining”; suggests “it would be difficult for U.K. rates alone to drag U.S. rates significantly higher in a selloff”

Term premiums should “edge higher” because the Fed and BOJ have discussed overshooting their inflation targets; also, TIC data show that “foreigners continue to shun Treasuries”

However, any selloff “is likely to be contained” to 1.95-2 percent 10Y

Supportive factors include: slow Fed pace and low terminal rate, maturing cycle for corporate profit margins, low inflation expectations, improved 10-year yield pick-up versus JGB curve

Societe Generale (Subadra Rajappa, Bruno Braizinha, Shakeeb Hulikatti)

Data & Events

  Economics 6  Oct. 25, 2016

Data & Events

TIME COUNTRY EVENT SURVEY PRIOR

8:30 Brazil Current Account Balance -$1600m -$579m

8:30 Brazil Foreign Direct Investment $6500m $7208m

9:00 U.S. FHFA House Price Index MoM 0.40% 0.50%

9:00 U.S. S&P CoreLogic CS US HPI MoM SA — 0.41%

9:00 U.S. S&P CoreLogic CS 20-City NSA Index — 190.91

9:00 U.S. S&P CoreLogic CS 20-City MoM SA 0.10% -0.01%

9:00 U.S. S&P CoreLogic CS 20-City YoY NSA 5.00% 5.02%

9:00 U.S. S&P CoreLogic CS US HPI NSA Index — 183.57

9:00 U.S. S&P CoreLogic CS US HPI YoY NSA — 5.10%

9:00 Mexico Retail Sales MoM -0.01% 0.40%

9:00 Mexico Retail Sales YoY 5.80% 7.90%

10:00 U.S. Consumer Confidence Index 101.5 104.1

10:00 U.S. Richmond Fed Manufact. Index -4 -8

10:00 U.S. IBD/TIPP Economic Optimism 47.5 46.7

21:45 China Westpac-MNI Consumer Sentiment — 115.2Source: Bloomberg. Surveys updated at 5:15 a.m. in New York.

Calendar

Click on the to see the full range of economists' forecasts on the terminal.   highlighted releases

Overnight

German rose business sentiment to the highest level in more than two years in October, signaling renewed growth momentum in Europe’s largest economy. The Munich-based

’s business climate index Ifo instituteclimbed to 110.5 from 109.5 in September. That’s the highest level since April 2014 and compares with a median estimate in a Bloomberg survey of economists of 109.6. The report is adding to signs that Germany’s economy is overcoming a temporary slowdown.

South Korea’s economy grew slightly more than forecast in the three months through Sept. 30, supported by a property market boom, while exports and consumption were disappointing.

expanded Gross domestic product 0.7 percent in the third quarter from the previous three months, when it gained 0.8 percent. A Bloomberg survey median estimate was for a 0.6 percent increase.The economy expanded 2.7 percent from a year earlier, according to data released today by the central bank. The biggest contributor to growth was construction investment, which added 0.6 percentage point to expansion from previous quarter; net exports shaved 0.6 percentage point off GDP. Director General BOK Chung

said the central bank’s 2.7 Kyu-il percent forecast for 2016 GDP can be achieved so long as the economy doesn’t contract quarter-on-quarter in the last three months of the year.  

Japan’s government maintained its for October, economic assessment

saying the economy is in “a moderate recovery, while weakness can be seen recently,” according to a report released today by the Cabinet Office.

Europe

Asia

Market Indicators

Election Looms Large Over S&P 500 3Q Earnings Season

U.S. companies are increasingly tempering their outlook by referring to November’s presidential election, according to Savita Subramanian, chief U.S. equity strategist at Bank of America Corp.'s Merrill Lynch unit. Thirty-three of the S&P 500 Index’s first 114 companies to post third-quarter results referred to the election on conference calls, according to data compiled by Merrill and cited yesterday in a note. A total of 85 companies mentioned the election in the third quarter of 2012, up from 32 four years earlier.

— David Wilson, Bloomberg News

  Economics 7  Oct. 25, 2016

Market Indicators

Source: Bloomberg. Updated at 5:20 a.m. New York time.

  Economics 8  Oct. 25, 2016

Canada

  Economics 9  Oct. 25, 2016

Bloomberg Brief: Economics

Canada

Highest Household Debt in G7 Becoming Canada 'Straitjacket'By Maciej Onoszko, Bloomberg NewsCanada’s debt, swelled by a decade-long housing boom to almost triple the size of its economy, is drawing increasing concern from an international banking community that says it threatens growth and financial stability.

The combined debt of Canadian governments, companies and householdsreached $4.4 trillion in the first quarter, or 288 percent of gross domestic product, exceeding the same gauge for the U.S., the U.K. and Italy, according to the Bank for International Settlements.

While Canada boasts the lowest government debt load among Group-of-Seven countries, household debt is the highest of its peers, the Basel, Switzerland-based BIS said last month in its quarterly report. In September, Statistics Canada reported household liabilities rose to 100.5 percent of GDP, exceeding the size of its economy for the first time.

Canada was the only developed country showing early signs of stress in its domestic banking system amid “unusually high” credit growth relative to GDP, the BIS said.

“This debt overhang represents one thing and one thing only: a pervasive constraint on Canada’s economic growth potential,” David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates Inc. said by phone from Toronto. “When you get to levels on total

 debt that makes even the Italians blush, you know you’re in a straitjacket.”

The economy continues to struggle to find growth drivers in the wake of an oil-price slump with exports consistently disappointing and business investment limping. Figures released last week showed retail sales fell 0.1 percent in August, the third monthly decline, and the inflation rate trailed forecasts at 1.3 percent. The weak data comes after the Bank of Canada cut its growth forecast on Oct. 19 to 1.1 percent for this year from a previous 1.3 percent forecast, and to 2 percent in 2017, from 2.2 percent.

That isn’t stopping foreign investors from loading up on Canadian bonds. Net

purchases by international investors reached C$9 billion in August, taking the year-to-date number to C$73.6 billion, thelargest net inflow for the period since 2010.

Investors are attracted to the sovereign’stop-notch credit rating among all three major rating companies and its positive yields at a time when many other countries are charging investors to hold their debt.

Canadian federal bonds returned 7.3 percent in U.S. dollar terms this year, compared with 8.7 percent for sovereign bonds globally and 4.3 percent for U.S. Treasuries, according to data compiled by Bloomberg.

Read the full story on the .terminal

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Canadians Up to Ears in Debt