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Global Market Wrap-Up - May 19, 2014

Monday, May 19, 2014
Mark Hanna

5 Themes for the Week

1) U.S. Treasury Rally May be Sending Red Light over Economy - Despite all the talk of a recovering economy the bond market is sending a different message. After holding over 2.60% for the better part of 6 months, 10 year Treasuries broke that level late last week causing confusion among the Wall Street bulls. The fact this is happening even as inflation measures (even the official government type which understate inflation) tick up, has people even more concerned... generally as inflation jumps so should yields.

Some believe that with the European Central Bank poised to take "unorthodox" measures as soon as the June meeting, U.S. Treasuries are simply moving ahead of a new round of monetary easing in Europe. Perhaps this is true, or perhaps the bond market - which is often called far smarter than the stock market - is recognizing this economy simply remains in a stagnant state.

2) China Home Prices Slow Ascent - China’s new-home prices rose in April in the fewest cities in a year and a half as developers offered discounts and the economy slowed, prompting the easing of property curbs in some places. Prices last month climbed in 44 of the 70 cities tracked by the government compared with 56 in March. That was the fewest metropolitan areas with price gains since October 2012 when increases were recorded in only 35 on a monthly basis. Prices in Beijing rose 0.1 percent from March, the slowest since September 2012, while Shanghai prices increased 0.3 percent, the smallest gain since November 2012.  

3) What Will Draghi Do? - Expectations have become hot and heavy that Mario Draghi will take some sort of action at the next ECB meeting in June. But what steps are on the table?

  • The majority of economists forecast a simultaneous cut in the benchmark rate, currently at 0.25 percent, and the deposit rate, which is at zero. That would make the ECB the first major central bank to charge banks for parking excess cash with it overnight.
  • A smaller percent of economists predict Draghi will suspend the absorption of liquidity created by crisis-era bond purchases, which would add about 170 billion euros ($233 billion) to the financial system.
  • An "asset purchase" program still seems unlikely with less than 10% of economists believing the ECB will go that route.

4) Will Narendra Modi's Win in India Bring in Reforms? - The Indian stock market has been among the best performers of the year as markets anticipated a victory by opposition candidate Narendra Modi. Not only that but his party was on track to win a majority in Parliament which would be the first time in three decades that a single party has captured an outright legislative majority. Modi hasn't detailed his economic plan, but in a country with a strong legacy of state economic control, his slogans for small government, private enterprise and reduced bureaucracy have excited pro-market economists and given Modi a right-of-center image. Economists and analysts expect Modi will try to rein in India's famed bureaucracy, and stimulate international trade and investment in other areas.

5) Wholesale Inflation Percolating in U.S.? - Last week the U.S. government reported a 0.6 percent increase in the producer price index which was the biggest since September 2012 and exceeded economist estimates. The April PPI increase followed a 0.5 percent gain the prior month. Wholesale food expenses increased 2.7 percent in April, the biggest jump since February 2011, led by an 8.4 percent surge in the costs of meats that was the biggest since 2003. Over the past 12 months, costs climbed 2.1 percent. Food prices surged by the most in three years.