The average earnings index rose to 2.7% from 2.3% in the previous period. The unemployment rate held steady at 5.5%. The labour market report can be found here.
The Monetary Policy Committee (MPC) official bank rate votes remained unchanged at 0-0-9. The minutes of the monetary policy meeting of the Bank of England in May can be found here.
Wednesday, June 17, 2015
Tuesday, June 16, 2015
RBA monetary policy minutes
The Reserve Bank of Australia`s (RBA) monetary policy meeting minutes can be found here.
Monday, June 15, 2015
Monetary dialogue with Mario Draghi
The video feed for Mario Draghi`s speech before the European Parliament`s Monetary Affairs Committee can be viewed here.
Monday, June 8, 2015
Problems with the Volcker Rule
After the 07/08 financial crisis, many believe that the reintroduction of the Volcker rule would have prevented such a catastrophe. Alan S Binder, the former vice-chair of the Federal Reserve (FED) wrote about the practical problems surrounding the Volcker Rule in his book, "After the Music Stopped."
1. How do regulators distinguish between proprietary trading for the bank`s own account and market making on behalf of clients?
(Answer: With great difficulty.)
2. How can they tell hedging from gambling?
(Answer: Only by knowing the entire portfolio.)
3. If proprietary trading is chased out of heavily supervised commercial banks, where will it go? To less-well supervised investment banks? To totally unsupervised hedge funds? Would that make the financial system safer?
(Answer: It is not obvious.)
4. What if a giant nonbank investment house with a huge trading book was on the verge of failure?
(Answer: Only by knowing the entire portfolio.)
3. If proprietary trading is chased out of heavily supervised commercial banks, where will it go? To less-well supervised investment banks? To totally unsupervised hedge funds? Would that make the financial system safer?
(Answer: It is not obvious.)
4. What if a giant nonbank investment house with a huge trading book was on the verge of failure?
(Answer: That doesn`t sound too appealing.)
Sunday, June 7, 2015
All about spreads
A spread is the difference between the bid and ask price of an asset. To explore further, let`s take a take an example from the US debt market. For example, in 2011 AT&T issued a new 10-year bond at a rate of 4.45%. Since the yield on 10-year US Treasury at that period was 3.34%, the spread was 1.11% or 111 basis points. The difference in the US Treasury yield and the corporate bond is due to the perception of risk associated with the instrument. AT&T was a true blue-chip company, but even so it could not match the US Treasury in terms of risk. US Treasury notes are deemed risk free.
If I were to issue bonds, I`m quite certain the rate would be higher than 4.45% as market participants would view me as someone who is less reputable in terms of paying back my loan compared to AT&T.
How do we quantify spreads? If the holder of a corporate bond has a 20% probability of losing 10% of her money each year, the risk spread on that bond is 20% of 10%, or 2%.
Excessive spread can be detrimental to the economy and there are three main steps in terms of reducing wide spreads:
1) The government takes steps to reduce the perception of risk either in the overall economy or by holding specific securities. The former can be achieved by improving the macroeconomic picture while the latter via mitigating the foreclosure problem.
2) The government can guarantee debts so private investors do not bear the credit risk.
3) The government can buy up securities that are perceived as risky thus bringing up the price and yields down.
If I were to issue bonds, I`m quite certain the rate would be higher than 4.45% as market participants would view me as someone who is less reputable in terms of paying back my loan compared to AT&T.
How do we quantify spreads? If the holder of a corporate bond has a 20% probability of losing 10% of her money each year, the risk spread on that bond is 20% of 10%, or 2%.
Excessive spread can be detrimental to the economy and there are three main steps in terms of reducing wide spreads:
1) The government takes steps to reduce the perception of risk either in the overall economy or by holding specific securities. The former can be achieved by improving the macroeconomic picture while the latter via mitigating the foreclosure problem.
2) The government can guarantee debts so private investors do not bear the credit risk.
3) The government can buy up securities that are perceived as risky thus bringing up the price and yields down.
Saturday, June 6, 2015
Economic updates this week
Friday
The US non-farm employment change showed an increase of 280 thousand jobs in May. Only 221 thousand jobs in contrast were created in April. The unemployment rate however increased slightly to 5.5%, up from 5.4% recorded in the previous period. The employment report can be found here.
Thursday
Australia`s retail sales was static, and the report can be found here. The trade balance was a deficit of 3.98 billion, up from a deficit of 1.23 billion in April. This is the worst deficit since the GFC. The trade balance report can be found here.
Wednesday
Australia`s economy grew by 0.9%, the GDP report can be found here.
In the UK, the services industry grew at a slower pace. The services PMI was 56.5 in May, down from April`s 59.5. The PMI report can be found here.
Minimum bid rate remained at 0.05% in Europe. Head over here for the ECB press conference.
The US trade balance deficit reduced slightly to 40.9 billion. The trade report cane be found here.
The US non-farm employment change showed an increase of 280 thousand jobs in May. Only 221 thousand jobs in contrast were created in April. The unemployment rate however increased slightly to 5.5%, up from 5.4% recorded in the previous period. The employment report can be found here.
Thursday
Australia`s retail sales was static, and the report can be found here. The trade balance was a deficit of 3.98 billion, up from a deficit of 1.23 billion in April. This is the worst deficit since the GFC. The trade balance report can be found here.
Wednesday
Australia`s economy grew by 0.9%, the GDP report can be found here.
In the UK, the services industry grew at a slower pace. The services PMI was 56.5 in May, down from April`s 59.5. The PMI report can be found here.
Minimum bid rate remained at 0.05% in Europe. Head over here for the ECB press conference.
The US trade balance deficit reduced slightly to 40.9 billion. The trade report cane be found here.
Tuesday, June 2, 2015
Chinese PMI in May meets expectations
The official purchasing managers index (PMI) for May was at a level of 50.2, in line with what economists were expecting.
Australia`s Treasury: Sydney is in a housing bubble
Treasury Secretary John Fraser used the term "unequivocally" regarding a housing bubble in Sydney. He was particularly worried about the historically low interest rates which are fueling people to speculate in houses. Bloomberg has a good write up on this.
In terms of building approvals, May declined by 4.4% compared to a gain of 2.9% in the previous month.
In terms of building approvals, May declined by 4.4% compared to a gain of 2.9% in the previous month.
HSBC final manufacturing PMI in May: First contraction of the year
The manufacturing industry continued to deteriorate in May and the weaker demand overseas is said to be the main factor of this. The HSBC manufacturing PMI was 49.2. Although this is a tiny rise from April`s 48.9, it is still below the crucial 50.0 level.
Monday, June 1, 2015
Recommended books on financial history
The former Federal Reserve (FED) chair, Ben Benarnke did a PhD on the great recession. I always believe it`s good for those in finance to know about financial crises and to understand what went wrong so I`ve come up with a list of recommended books.
From the Federal Reserve`s perspective: After the music stopped by Alan S Binder
One of the best books on the 07/08 crisis. Alan S Binder, the former vice-chair of the FED has a way of getting even non finance junkies addicted to his writing. Simply brilliant.
From the Treasury`s perspective: Stress Test by Timothy Geithner
The Treasury has a slightly different jurisdiction compared to the FED and the author is the only person who has served both the FED and later as the Treasury Secretary. Direct and not a book on defending policies.
From the FDIC`s (Federal Deposit Insurance Corporation) perspective: Bull by the Horns by Sheila Bair
Sheila Bair was mentioned in Alan S Binder`s book and it was refreshing to know that she had views that were in contrary to the Treasury and FED.
How Wall Street saw it: The Big Short by Michael Lewis
Michael Lewis writes on how a few elite traders noticed something was wrong from as early as 2005 and how they made their move to profit from it by buying credit-default swaps (CDS).
How London saw it: Reckless The Rise and Fall of the City by Philip Augar
An inside view on how London was holding up to the crisis.
Other European countries: Boomerang by Michael Lewis
The effects of cheap credit and how it caused Iceland`s financial industry to collapse. Briefly touches on Ireland, Greece and Germany.
Central banks: The Alchemists by Neil Irwin
The author talks about the first central bank, which was in Sweden back in the 1600s right up to the present day central banking system. The second half of the book focuses on the actions taken by the FED, Bank of England (BoE) and the European Central Bank (ECB).
From the Federal Reserve`s perspective: After the music stopped by Alan S Binder
One of the best books on the 07/08 crisis. Alan S Binder, the former vice-chair of the FED has a way of getting even non finance junkies addicted to his writing. Simply brilliant.
From the Treasury`s perspective: Stress Test by Timothy Geithner
The Treasury has a slightly different jurisdiction compared to the FED and the author is the only person who has served both the FED and later as the Treasury Secretary. Direct and not a book on defending policies.
From the FDIC`s (Federal Deposit Insurance Corporation) perspective: Bull by the Horns by Sheila Bair
Sheila Bair was mentioned in Alan S Binder`s book and it was refreshing to know that she had views that were in contrary to the Treasury and FED.
How Wall Street saw it: The Big Short by Michael Lewis
Michael Lewis writes on how a few elite traders noticed something was wrong from as early as 2005 and how they made their move to profit from it by buying credit-default swaps (CDS).
How London saw it: Reckless The Rise and Fall of the City by Philip Augar
An inside view on how London was holding up to the crisis.
Other European countries: Boomerang by Michael Lewis
The effects of cheap credit and how it caused Iceland`s financial industry to collapse. Briefly touches on Ireland, Greece and Germany.
Central banks: The Alchemists by Neil Irwin
The author talks about the first central bank, which was in Sweden back in the 1600s right up to the present day central banking system. The second half of the book focuses on the actions taken by the FED, Bank of England (BoE) and the European Central Bank (ECB).
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