Article / 11 February 2016 at 12:00 GMT

Daily Shot: Who is afraid of Janet Yellen? Team / Saxo Bank
  • The Federal Reserve is increasingly worried, but Yellen less dovish than hoped
  • Markets are questioning the Fed's credibility and see chances for negative rates 
  • HSBC has downgraded their US 2016 GDP forecast to 2.0% from 2.3%
  • The pressure on US HY bonds has been relentless
  • Deutsche Bank's market share fell below Danske Bank's
By Walter Kurtz*

We start with the United States where Janet Yellen's testimony suggests that the Fed is becoming more concerned about tight financial conditions, the RMB devaluation, and global economic uncertainty.
Strangely, Yellen left the door open for a March rate hike, disappointing those who expected her to take near-term hikes off the table. In that sense the testimony was not as dovish as some had hoped - in spite of the concerns expressed above.

The January 2018 Fed Funds futures now imply a rate of 62.5bp by the end of next year. That's only 25bp above the current level. 
Fed Funds futures separator
Here are a number of other economic/market developments in the US.

1. Options on Dec-2017 LIBOR futures are pricing in a rising probability of negative rates in the United States. The markets are questioning the Fed's credibility. 
LIBOR futures
By the way, here is the relative search frequency on Google for the term "negative rates" over time.
Google negative rates
2. As discussed before, the treasury curve continues to flatten. The 10y-2y spread is now around 100bp, the lowest in 8 years. This shows diminishing expectations for longer-term US economic growth.

Related to the above, betting against treasuries once again turned into a nightmare for some (speculative accounts were net short treasuries going into 2016). Here are the 10-year note futures. 
3. US federal corporate income tax receipts turned lower. Some suggest this is a sign of a recession. Perhaps. 

4. Are the ISM manufacturing and non-manufacturing indices showing the "wrong way" convergence (service sector activity following manufacturing lower)?

5. This next trend is one of several reasons that HSBC has downgraded their US 2016 GDP forecast to 2.0% from 2.3%. It shows new orders for non-IT equipment. 
Let's investigate US credit markets.

1. The pressure on US HY bonds has been relentless. Spreads continue to rise and weaker HY names (CCC and below) now yield over 21% on average.  
Note that some weak credits just need to get restructured. The longer they linger around, the more uncertainty remains in the market. Here is the yield on one of Chesapeake's short-term bonds.  
2. The BDC market has practically imploded. Ironically, now would be the best time to launch a BDC given tightening conditions in private credit markets.
3. US auto debt outstanding exceeded $1 trillion, generating record auto sales. Is the party over?
auto debt
4. It's not just the banks that are feeling the pressure. Here is CIT share price and CDS spread. The market is pricing in weak demand for credit and rising loan defaults. 
5. Related to the above, here is the default rate projection in the leveraged loan market (excluding TXU).
Leveraged loans have sold off over the past year (with tremendous fund outflows). Are the declines overdone? This could be an interesting opportunity.
Leveraged loans
Switching to US equity markets, we have a few developments to cover.

1. Investor sentiment is now the worst since 2009. This sure feels like a good contrarian indicator.
bad sentiment
2. But it's not all doom and gloom in the stock market. Here is Tesla and Cisco after hours. 
Tesla Cisco
Next let's look at a few developments in the Eurozone.

1. While still minuscule, the CDS-implied German probability of default rose together with Deutsche Bank's troubles. This is pricing in some probability of a major government bailout of DB and possibly other banks - putting fiscal pressures on German government. Again, the probability of this is extremely low, but the markets are obviously not ignoring it. 
CDS implied
By the way, Deutsche Bank's market cap is now below Danske Bank's (a major Danish bank). Amazing.  
Deutsche vs Danske
2. German government increasingly generates revenue by issuing bonds at negative rates (investors pay Germany to hold their money).  
Germany and negative rates
3. Wage growth in the Eurozone these days is all driven by Germany. 
EU wage growth is German wage growth separator
Finally, here is the Yale endowment's asset allocation over time. That "absolute return" bucket is mostly hedge fund investments.
Yale endowment
Turning to Food for Thought, we have 3 items this morning:

1. Average credit scores for US men and women by age.
credit scores
2. US Muslims' support for the 2016 presidential candidates. 
Who do US muslims vote for?
3. CEO compensation breakdown by industry.
CEO compensation
 — Edited by Clemens Bomsdorf

* Walter Kurtz is an alias

**This is an abridged version of the Daily Shot. To subscribe to the full version, link to the Daily Shot  and select the appropriate command. E-mail addresses are never shared with anyone.



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