Yellen’s Congressional Testimony Should Be “Lively” (Small Firm Optimism? France? Italy?)

Federal Reserve Chair Janet Yellen will give testimony in the US Congress on Wednesday and Thursday. Dunstan Prial from Fox Business says it will be “lively.”

I assume that the questioning will be lively, not Yellen. Yellen will be her pleasant, monotone self.

Suppression of savers has been asked before of both Bernanke and Yellen. The response has been the response of “you have to break a few eggs to make an omelet.” Or victims of friendly fire.

Since 2007, real median household income has fallen despite all the intervention by The Fed. On the other hand, the S&P 500 has soared post intervention.


Yellen is likely to say the following: the employment market is strong (9.9% U-6 is strong?), but there are headwinds in China and Europe. So only 2 rate hikes this year.

I would like one Congressman to ask Yellen about the French experience with ECB rate policy. She will likely respond that France has structural economic problems that the ECB can’t fix. Just like the USA.


I would also ask her why small firm optimism is still below any prior to 2008 (self-employed workers still below pre-recession levels). She will answer “That is a structural problem.”


How about the meltdown of Italian banks? Why hasn’t Draghi’s low interest rate policies helped the Italian banks? Say it with me: its structural.


Then we have the US Treasury yield curve, at the lowest level (flattest) since January 2008 while credit risk indicators are rising.


And the global economy has $7 trillion in bonds with negative yields.


So what does all this mean, Chairman Yellen? Likely response: “We are going to have to raise interest rates.”


Uneasy Feeling: Treasury Yield Curve Flattens To Lowest Since Jan 2008

Between China and Europe, financial markets have an uneasy feeling.

The 10Y-2Y US Treasury Yield Curve has just fallen to its lowest level since January 2008.


Despite all the massive stimulus from The Federal Reserve.


And with the decline came the US bank stock prices.


Yes, financial markets have an unpeaceful, uneasy feeling about things. And like Jeffrey Lebowsky, I hate the f***ing Eagles.


Greece Is The Word! Here We Go Again — Greek Sovereign Yields And CDS Jump

Greece is the word!

The Greece 10 year sovereign yield and 5 yr CDS are on the rise again.

greeceisthe wof

Deutsche Bank and the MSCI Europe Banks Index are falling.


As credit risk is on the rise … again.


Greek GDP growth is declining. At least it is better than Russia’s and Ukraine’s GDP “growth.”


Compare Greece’s sovereign yield curve with the Euro Swaps Curve. OPA!!!!!


Greece is now singing “You’re the one that I want” to Mario Draghi, the ECB and IMF.


Opening Hell! European Banks Risk Explodes As Markets Shudder

Unlike Mr Rogers’ Neighborhood, Mr Draghi’s Neighborhood is not having a wonderful day.

American and European equity markets are getting slammed at opening bell.


And American and European debt markets (in this case, the 10 year sovereign yields) are tanking. Noticeably, credit-challenged nations like the PIGS (Portugal, Italy, Greece, Spain) all saw 10+ basis point jumps in their 10 year sovereign yields. The UK saw dump of over 10 basis points.


Credit risk monitors are not a pretty sight.


European banks are seeing a substantial rise in the credit default swap spreads.


Crude oil is once again below $30 as the Baltic Dry Index continues to remain near the bottom of the economic sea.


It is a sad day for Central Banks, particularly the ECB’s Mario Draghi. Here is the Fed’s Janet Yellen before she speaks to Congress.


Yellen’s Victory Lap? Asset Bubbles and Lower Wage Growth After 7 Years

The Associated Press headline blasted “President Barack Obama takes victory lap on economy.” But should Federal Reserve Chair Janet Yellen take a victory lap with him?

It has been over 7 years since President Obama was sworn in for his first term in office. And it has been over 7 years since The Federal Reserve went to zero interest rates and massive asset purchases (known as QE). And things are not so good that a victory lap is warranted.

First, average hourly wage growth YoY and real median household income are lower today than in 2007. The labor force participation rate continues to fall. Finally, the U-6 underemployment rate stands at 9.9%, still higher than the 8.4% in 2007.


All this after the massive fiscal stimulus from Congress and the monetary stimulus from The Fed. But we did get asset bubbles!


Yet the mortgage market is recovering at a shockingly low rate.


And the M1 Money Multiplier and M2 Money Velocity have plummeted like a paralyzed falcon.


The problem for any victory lap is that the economic recovery has been abysmal compared to previous recoveries from a recession. Look at the GDP growth during the Reagan Recovery (where is David Stockman, Reagan’s OMB chief) when we need him?)


True, the Great Recession was terrible. But the economy recovers after every recession anyway. This recovery is particularly lousy.

So, let’s not take any victory laps for $19 trillion in Federal debt and a slow recovery with asset bubbles.


Can we try some OLD economic thinking?

China Foreign-Exchange Reserves Drop as PBOC Supports Yuan (China’s Volatility Scowl)

China’s Central Bank (The People’s Bank of China) has intervened in the market once again and the result is a volatility scowl.

(Bloomberg) — China’s foreign-exchange reserves shrank to the smallest since 2012, indicating that the central bank sold dollars as the yuan’s retreat to a five-year low exacerbated depreciation pressure.

The world’s largest currency hoard decreased by $99.5 billion in January to $3.23 trillion, according to a People’s Bank of China statement released on Sunday. The contraction was less than a Bloomberg survey’s median estimate of a $120 billion drop. The stockpile slumped by more than half a trillion dollars in 2015, the first-ever annual decline.

Policy makers fighting to hold up the weakening yuan amid slower economic growth, plunging stocks and increasing outflows have been burning through the reserves. The draw-down has continued since the central bank’s surprise devaluation of the currency in August, when the stockpile tumbled $94 billion, a monthly record before December’s unprecedented $108 billion decline.

“While the remaining reserves represent a substantial war chest, the rapid pace of depletion in recent months is simply unsustainable,” said Rajiv Biswas, Asia-Pacific chief economist at IHS Global Insight in Singapore. “Domestic private investors and global currency traders see a one-way bet against the currency. This has resulted in large-scale private capital outflows since early 2015 as expectations mount that the PBOC will eventually be forced to capitulate once its reserves are sufficiently depleted.”

Outflows Rise

Capital outflows increased to $158.7 billion in December, the most since September and were $1 trillion last year, according to estimates from Bloomberg Intelligence. That’s more than seven times the amount of cash that left in 2014.

The PBOC has stepped up efforts to stem the exodus, warning speculators that they will be punished. It intervened in the Hong Kong market last month after the yuan’s offshore exchange rate sank to a record 2.9 percent discount to the onshore rate. Apart from selling dollars, the monetary authority also gave guidance to some Chinese lenders in the city to suspend yuan lending to curb short selling, a move that contributed to the overnight interbank lending rate surging to an all-time high of 66.8 percent on Jan. 12.

Yuan Outlook

The median estimate in a Bloomberg survey is for the yuan to drop to 6.76 a dollar by the end of this year, with Rabobank Group the most pessimistic with a 7.53 prediction. The currency has declined 1.24 percent so far this year, closing at 6.5755 in Shanghai on Friday. Chinese financial markets are shut for the Lunar New Year holiday.

China’s top economic planner said that the objective for this year is for an expansion in the range of 6.5 percent to 7 percent. The 6.9 percent growth in 2015 was the slowest in 25 years. Exports probably declined for the seventh straight month in January, according to the median estimate in a Bloomberg survey before data due Feb. 15. China increased its gold hoard in January, raising its holdings to 57.18 million ounces at it looks to diversify its foreign-exchange stockpile.

“The smaller decline in the reserves suggests that some capital outflow restrictions imposed in January worked, ” Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong, wrote in a note on Sunday, adding that he estimates the drop in February will be “much smaller.”

Here is a short history of the Renminbi (or Yuan) and China’s Monthly Foreign Exchange Reserves.


As Central Banks continues their intervention into financial markets, its as if they can’t say no to more and more intervention. As The Fed’s Janet Yellen sings “I’m Just A Girl Who Can’t Say No” to Central Bank intervention.

How is this Central Bank intervention impacting volatility smiles? Volatility smiles are implied volatility patterns that arise in pricing financial options. In particular for a given expiration, options whose strike price differs substantially from the underlying asset’s price command higher prices (and thus implied volatilities) than what is suggested by standard option pricing models. These options are said to be either deep in-the-money or out-the-money. Graphing implied volatilities against strike prices for a given expiry yields a skewed “smile” instead of the expected flat surface. The pattern differs across various markets

For the Euro, we see a typical volatility smile.


For the Yen, we see a typical volatility smile.


For the Renminbi (or Yuan, pronounced “you-en”), we see a contorted smile. In fact, the USD/CNY volatility smile is more like a scowl.


Yes, it is a volatility scowl for the USD/CNY.


Wall Street Pulls Back From Mortgage Market That Fed Made Boring (Regulation Didn’t Help Either)

Bloomberg — Matt Scully — The U.S. Federal Reserve is squeezing a good deal of the profit out of mortgage bond trading, and Wall Street banks are increasingly heading for the exits.

Barclays Plc cut 20 jobs in its U.S. government-backed mortgage bond business in January as part of a broader bank reorganization that is cutting 1,200 jobs, according to a person with knowledge of the matter. Deutsche Bank AG and Societe Generale SA have also scaled back in the market in recent weeks, people with knowledge of those moves said.

As the Federal Reserve has vacuumed up nearly a third of the government mortgage bonds in the market as part of its quantitative easing program since early 2009, average daily trading volume has plunged by more than 40 percent. Unlike other investors, the central bank rarely trades its mortgage bonds.

“What incentive do banks have to stay in the business in a largely price-controlled market?” said Danielle DiMartino Booth, a former policy adviser at the Dallas Fed. Eric Kollig, a Federal Reserve spokesman, declined to comment.

True, The Fed’s repression of the short-rates on the yield curve and attempts to manipulate the longer-term rates has made the world of agency mortgage-backed securities … boring.

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But the same can be said as to why big banks remain in the mortgage market at all. Heavy regulation from the Consumer Financial Protection Bureau (CFPB) and rate repression/manipulation from The Federal Reserve makes mortgage lending problematic.

Indeed, large banks are shedding their residential lending.


But seeing investment banking firms shedding agency MBS is just the other shoes falling.

Take a Fannie Mae 3.5% coupon RMBS. Its yield is highly correlated by the US Treasury 10 year yield. And yields are plunging.


As is the duration (weighted-average life) of the Fannie Mae RMBS.


As we approach (perhaps) the lower-bound on longer-term interest and mortgage rates, this could cause a lack of appetite for lenders and investors.


If the 30 year mortgage rate and the 10 year Treasury yield have bottomed out, there is no where to go but up.

We now live in a plain vanilla mortgage and mortgage-backed securities world. Boring!!!