Today's Tidbits

Worries
From Dow Jones: “What’s really keeping investors awake at night is the dread of a self-perpetuating cycle. The weaker the markets in the U.S. are, the greater the fear that Asian investors will turn their backs on U.S. assets, leaving the country to wallow in its record current account deficit with all its ramifications for the dollar and future investment. This fear has at its heart the suspicion that the U.S. has lost its place at the forefront of the world economy, not to mention its financial markets. U.S. growth, which officials expect to struggle toward its potential growth rate this year of 3%, is less than half the rates seen in Asia. Japanese gross domestic product, powered by both domestic demand and exports, last quarter overtook the U.S. And the euro zone, once considered hamstrung by its own restrictive monetary and fiscal policy conditions, is now a solid rival.”
From Reuters: “There is little reason to fear a wholesale pullout by China out of U.S. government bonds, former Federal Reserve Chairman Alan Greenspan said on Tuesday. While expressing concerns about China's runaway growth rate and what he described as overvalued stocks, Greenspan played down the prospect that Chinese authorities would sell Treasuries in earnest, forcing a sharp spike in U.S. interest rates. Asked at a commercial real estate conference if investors should be worried about this oft-cited concern, Greenspan said: "I wouldn't be, no." Still, Greenspan said the reason such a withdrawal was unlikely was that China would not have anyone to sell the securities to, hardly the sort of comfort jittery bond investors were seeking…Greenspan reinforced the nervousness, saying that a global liquidity boom which he traced back to the end of the Cold War would not go on forever. "Enjoy it while it lasts," he told the audience…. Greenspan reiterated his prediction that China's latest growth spurt had come too far, too fast. "We cannot continue this rate of growth in China and the Third World. This cannot continue indefinitely," Greenspan said in a speech. "Some of these price/earnings ratios are discounting nirvana."

End of an Unusual Era?
From NY Fed President Geithner: “We’ve been through this really remarkable period in markets globally where you had this pretty unique, unusual constellation of low forward interest rates, very low risk premia, very low term premia, very low credit spreads, and very low realized and expected volatility across a whole range of asset prices,…”
From Bloomberg: “Former Federal Reserve Chairman Alan Greenspan said low long-term interest rates may not last, bringing an end to a global boom in financial liquidity.
``It's liquidity that is driving the world,'' Greenspan said to a conference in Mexico City. ``It will continue to be strong as long as real long-term interest rates stay low. This is not a permanent feature. It's an intermediate-term period in world economic history that has never occurred before.''

China and U.S. Protectionism
From Dow Jones: “The Bush administration, in a decision sure to fire up critics on Capitol Hill, has again declined to name China or any other trade partner guilty of currency manipulation…“Although the renminbi is undervalued and market sentiment
clearly favors appreciation, Treasury concluded that China did not meet the technical requirements for designation,” Treasury said.”
From Morgan Stanley: “As expected Senators Baucus, Grassley, Schumer and Graham unveiled their bill on FX today. It does not specifically name China but rather establishes a framework to deal with FX issues…The legislation requires Treasury to develop a new biannual report that identifies two categories of currencies (1) fundamentally misaligned currencies based on objective criteria (2) misaligned due to clear policy actions by the relevant governments. A lack of progress in resolving the misalignment would trigger consequences: After 180 days, the US would forbid Federal procurement of goods and services from that country, forbid Overseas Private Investment Corporation investment or financing for projects in that country, and oppose multilateral bank financing for projects in that country.….The bill would likely come to a floor vote in the fall… the Senators made clear that they expect the bill to pass. Schumer stated that the bill is expected to pass House and Senate with veto-proof majority. Sen Baucus noted that it would be very difficult for Pres Bush to veto this bill as it is WTO compliant.”
From Dow Jones: “Rising inflation and a surprisingly strong rally by Chinese
stocks has Beijing planning a further tightening of the monetary screws by another notch to drain excess cash from the economy. State Council, China’s Cabinet, in a meeting Wednesday called for an appropriate tightening of monetary policy and efforts to reduce excess liquidity. It also said in a statement posted on a government Web site that it would curb rapid growth in the country’s trade surplus and prevent a rebound in fixed-asset investment growth. Traders and economists don’t expect an interest rate hike this
week, but they see it happening this year and they’re bracing for another rise in banks’ reserve requirement ratio at any time.”

Misc

From Bloomberg: “U.S. 10-year Treasuries surged the most since February after yields at a five-year high convinced speculators that rising borrowing costs will curb the economy and inflation. The rally, which follows the longest streak of weekly declines since 2005, pushed yields back below the Federal Reserve's 5.25 percent target rate for overnight loans between banks. Ten-year yields exceeded the Fed's benchmark yesterday for the first time in a year.”
From Dow Jones: “Treasury prices continued to strengthen early Wednesday afternoon as buyers stepped in to snatch up bonds after yields hit fresh highs earlier in the day. With longer maturity Treasury prices holding higher into the afternoon, George Goncalves, chief Treasury, TIPS and agency strategist at Morgan Stanley in New York, called the gains “the beginning steps of consolidating after a dramatic move.”… The dollar remained up across the board, having moved little from its opening levels despite the release of better than expected retail and business inventory data earlier in the session. The greenback continued to track with Treasury yields and showed little lasting reaction
to the U.S. Treasury’s semi-annual forex report and a currency bill that did not single out China, as many had expected….U.S. stocks rallied…Crude oil futures climbed above $66 a barrel Wednesday, extending their gains after the Energy Information Administration reported an unexpected drop in U.S. refinery utilization and said gasoline stockpiles failed to increase last week. It was the second straight week in which utilization fell, indicating refiners continue to have trouble bringing on line recently shuttered units. The July crude contract on the New York Mercantile Exchange rallied $1.13…”
[As of 4pm, 2y Treasury yield is down 1.7bp to 5.08%, 10y down 8.6bp to 5.21%. Dow closing up 187 points at 13,482. Dollar index closing at 83.03.]

From Bloomberg: “Bill Gross, manager of the world's biggest bond fund, raised his holdings of cash-equivalent securities to the highest since February while retaining his
forecast for the Federal Reserve to lower interest rates.”

From Goldman Sachs: “The Beige Book was broadly consistent with other measures of the economy: (1) manufacturing is recovering, (2) services are quite strong, (3) the housing sector remains weak and (4) consumer spending decent. In short, there was little information to change market perceptions of the current state of the economy. Wage and price pressures across the regions remained relatively muted. Despite noting higher energy and commodity prices, the report did not seem overly concerned about price pressures.”

From American Banker: “The industry’s decade of free deposit insurance will end Friday, when the Federal Deposit Insurance Corp. begins charging [again]…”
From Bloomberg: “China's retail sales unexpectedly accelerated at the fastest pace in three years, buoyed by rising incomes and a stock market that's doubled this year. Sales rose 15.9 percent from a year earlier…”
From JP Morgan: “China’s retail sales boomed in May, consistent with the view that the economy continues to grow at a double-digit pace. Energy prices are regulated in China and so consumers are not subject to this headwind, at least not in real time. Food prices have surged, however, at an 11% annual rate over the past six months. Food accounts for 1/3 of the CPI basket, so this represents a subtraction of 3.4% points from real income growth.”


From Dow Jones: “Investment bankers and analysts are keenly watching the global rise in interest rates, but said that they don’t expect it to derail deal-making or IPO activity anytime soon…Falling equity markets generally make it harder for bankers to sell initial public offerings…”

From JP Morgan: “Business inventories rose 0.4% in April, providing an early indication that stockpiling will make a solid contribution to 2Q growth.”

From UBS: “The mortgage applications purchase index rose 7.2% the week of June 8th, while the refi index was up 5.6%. We sense a "J-Curve" effect at work here as borrowers rushed through a closing (rate) exit?” [30-year fixed mortgage rates rose 26bp over the last week.]

From Bloomberg: “Chevron Corp., the second-largest U.S. oil company, won't resume drilling at the $3 billion Jack prospect in the Gulf of Mexico until late this year or early 2008 because of a shortage of rigs….There are only 33 drillships and other vessels that can drill in waters as deep as those above the largest reserves of oil in the Gulf of Mexico…Another 48 are under construction.”

From UBS: “Swap spreads made a massive 3.5bps round trip today, finishing about 1bp narrower…Agencies traded in line to swaps for the most part, ending the day 0.5-1bp tighter. Mortgages were all over the place early in the day, but finished 1-2 ticks wider to swaps, and unchanged to treasuries.”