S&P REVISES USA CREDIT RATING OUTLOOK TO STABLE FROM NEGATIVE

REUTERS/Brendan McDermid

Credit rating agency Standard & Poor's has revised up its outlook for the USA's credit rating to stable from negative.

In 2011, S&P stripped the USA of its AAA credit rating and put it on negative outlook.

The credit rating agency also raised the outlook for the Federal Reserve and the Federal Reserve Bank of New York's ratings to stable from negative.

S&P 500 futures and the dollar are jumping on the news.

Below is the full text from the S&P release.

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TORONTO (Standard & Poor's) June 10, 2013—Standard & Poor's Ratings Services today affirmed its 'AA+' long-term and 'A-1+' short-term unsolicited sovereign credit ratings on the United States of America. The outlook on the long-term rating is revised to stable from negative.

Our sovereign credit ratings on the U.S. primarily reflect our view of the strengths of the U.S. economy and monetary system, as well as the U.S. dollar's status as the world's key reserve currency. The ratings also take into account the high level of U.S. external indebtedness; our view of the effectiveness, stability, and predictability of U.S. policymaking and political institutions; and the U.S. fiscal performance.

The U.S. has a high-income economy, with GDP per capita of more than $49,000 in 2012. We expect the trend rate of real per capita GDP growth to run slightly above 1%. Furthermore, we see the U.S. economy as highly diversified and market-oriented, with an adaptable and resilient economic structure, all of which contribute to strong sovereign credit quality.

We believe that the U.S. monetary authorities have both the strong ability and willingness to support sustainable economic growth and to attenuate major economic or financial shocks. As a result, we expect the U.S. dollar to retain its long-established position as the world's leading reserve currency (which contributes to the country's high external indebtedness). We believe the Federal Reserve System has strong control over dollar liquidity conditions given the free-floating U.S. exchange rate regime and as demonstrated by the Fed's timely and effective actions to lessen the impact of major shocks since the Great Recession of 2008/2009. Since 1991, the Fed has kept inflation (measured by CPI) in the 0%-5% range. In addition, the U.S. monetary transmission mechanism benefits from the unparalleled depth of the country's capital markets and the diversification of its financial system, in our opinion.

We view U.S. governmental institutions (including the administration and congress) and policymaking as generally strong, although the ability of elected officials to address the country's medium-term fiscal challenges has decreased in the past decade due to what we consider to be increased partisanship and fundamentally opposing views by the two main political parties on the optimal size of government. Views also differ on the preferred mix between expenditure and revenue measures in the quest to return the federal budget toward a more balanced position. Recent examples of impasses reached on fiscal policy include the failure of the 2010 National Commission on Fiscal Responsibility and Reform to obtain a qualified majority of its members in favor of its fiscal consolidation plan and the inability of the Joint Select Committee on Deficit Reduction to reach an agreement to specify specific fiscal measures to avoid indiscriminate cuts set down by the Budget Control Act of 2011 (BCA11).

That said, we see tentative improvements on two fronts. On the political side, Republicans and Democrats did reach a deal to smooth the year-end-2012 "fiscal cliff", and this deal did result in some fiscal tightening beyond that envisaged in BCA11, by allowing previous tax cuts to expire on high-income earners. The BCA11 also has engendered a fiscal adjustment, albeit in a blunt manner. Although we expect some political posturing to coincide with raising the government's debt ceiling, which now appears likely to occur near the Sept. 30 fiscal year-end, we assume with our outlook revision that the debate will not result in a sudden unplanned contraction in current spending--which could be disruptive--let alone debt service.

Aside from tax hikes and expenditure cuts, stronger-than-expected private-sector contributions to economic growth, combined with increased remittances to the government by the government-sponsored enterprises Fannie Mae and Freddie Mac (reflecting some recovery in the housing market), have led the Congressional Budget Office (CBO), last month, to revise down its estimates for future government deficits. Combining CBO's projections with our own somewhat more cautious economic forecast and our expectations for the state-and-local sector, and adding non-deficit contributions to government borrowing requirements (such as student loans) leads us to expect the U.S. general government deficit plus non-deficit borrowing requirements to fall to about 6% of GDP this year (down from 7%, in 2012) and to just less than 4% in 2015. We now see net general government debt as a share of GDP staying broadly stable for the next few years at around 84%, which, if it occurs, would allow policymakers some additional time to take steps to address pent-up age-related spending pressures.

The stable outlook indicates our appraisal that some of the downside risks to our 'AA+' rating on the U.S. have receded to the point that the likelihood that we will lower the rating in the near term is less than one in three. We do not see material risks to our favorable view of the flexibility and efficacy of U.S. monetary policy. We believe the U.S. economic performance will match or exceed its peers' in the coming years. We forecast that the external position of the U.S. on a flow basis will not deteriorate.

We believe that our current 'AA+' rating already factors in a lesser ability of U.S. elected officials to react swiftly and effectively to public finance pressures over the longer term in comparison with officials of some more highly rated sovereigns and we expect repeated divisive debates over raising the debt ceiling. We expect these debates, however, to conclude without provoking a sharp discontinuous cut in current expenditure or in debt service. 

We see some risks that the recent improved fiscal performance, due in part to cyclical and to one-off factors, could lead to complacency. A deliberate relaxation of fiscal policy without countervailing measures to address the nation's longer-term fiscal challenges could place renewed downward pressure on the rating.

TELECONFERENCE INFORMATION

Please join Standard & Poor's on Monday, June 10, 2013, at 11 a.m. Eastern Daylight Time for a live webcast and Q&A on Standard & Poor's affirmation of its 'AA+' rating on the United States government and its revision of the rating outlook to stable.

Register for the complementary webcast here: 

http://ratings-events.standardandpoors.com/content/Webcast

You may submit your questions for the presenters in real time via the Webcast interface. For more information on this topic, please visit www.spratings.com/usrating.

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SOCGEN: 'Are We Facing A Bond Crash? Not Yet, But...'

Sam Ro | Jun. 10, 2013, 5:47 AM | 1,370 | Societe Generale

Recent moves in the US and Japanese bond markets have some people worried if interest rates are doomed to surge.

The consensus certainly seems to think so.

Goldman Sachs' Francesco Garzarelli has warned clients that the bond sell is "for real" with 10-year Treasury yields likely to head to 2.5% later this year.

In a note to clients this morning, Societe Generale's Patrick Legland reminds clients that their analysts expect the 10-year Treasury surging to 2.75% by the end of the year.

Legland communicated this in a note titled "Are We Facing A Bond Crash? Not Yet, But..."

In the note, he discuss the risk of a disorderly bond market sell-off. Here's the "but" explained:

More volatility: a worrying sign
The recent rise in bond volatility is clearly a worrying sign, but we are still far from the volatility peaks which occurred in the past five years following the Lehman debacle and the euro sovereign debt crisis. However, the sharp rise in Japanese yields reminds us that there is still an anomaly that should be corrected in the next few years. The key question remains whether the BoJ will succeed in its policy and be able to maintain rates at low levels medium term. If not, then the bond bubble could burst rapidly, with dire consequences for financial markets. The evolution of bond volatility in Japan and the US should therefore be watched closely for any signs of panic. For the moment, we do not see indications of an imminent bond crash, but volatility will remain high until we understand better how the Fed exit will be implemented.

So, the risk of a bond crash is not imminent, but certainly on the table.

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Did Anyone Predict The Economic Bust AND The Boom?

There’s been a big brouhaha in recent weeks over who actually predicted the financial crisis and whether it matters.  I think maybe we’re asking the wrong question though.  The reason is simple – we’re being biased towards one narrow part of the business cycle.

One thing you’ll find among those who claim to have predicted the crisis is that a lot of them are perennial bears.  I often cite Wynne Godley for predicting the financial crisis in the USA and the Euro crisis, but Godley was famously bearish throughout his life.  And that tends to be the case with many of the economists who “predicted” the crisis.  You find that many of them were bearish for years or even decades before the crisis and then when the storm hit they were lauded for their forecasting capabilities.  A classic case is someone like Peter Schiff who seems to always be negative about something in the USA so when something finally goes wrong he tends to have his hands in some part of the “forecasted” disaster.  It’s the old “stopped clock” thing…

Now, I should add that the main reason I love Godley’s predictions is because he clearly explained WHY the crisis would occur.  That is, he understood, at an operational level, why something was wrong with the US economy and the Euro system.  He wasn’t just screaming fire in a crowded theater for 20 years straight.  He was explaining precisely why there was a high risk of fire in the first place and showing us precisely why the theater was so dangerous.  Most of the predictors of the crisis were just towing the party line or saying the same thing they’d been saying for a long time (like, debt is unstable, government is bad, the Fed is a ponzi scheme, etc).  But maybe we focus on one part of the business cycle too much.  After all, a great trader doesn’t make money just because he makes a great prediction in one direction.  He must also be smart enough to know when the odds have changed and now favor cashing out.  So maybe the better question is, who predicted the crisis AND the ensuing recovery?  In other words, who predicted the entire cycle instead of just the part that gets all the media attention?  Isn’t that a better display of real skill in forecasting?

So the more important question here might not be who predicted the bust, but who ALSO predicted the boom afterwards?  Okay, “boom” might be a bit of an overstatement, but there’s certainly been at least some recovery.  There’s definitely been a huge recovery in most assets, but I know we can debate the strength of the recovery.  Anyhow, is there anyone who was extremely bearish heading into the downturn who was also prescient enough to predict that the world wasn’t ending and that we might actually be on the verge of a big turnaround when things looked so terrible in 2009/10?

Honestly, I can’t think of anyone off the top of my head who did this so I wanted to throw it out there to you guys.  Did anyone predict the bust AND the boom?

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A Complete Look At China's Latest Disappointing Data In One Chart (FXI, EWH)

Chinese data disappointed markets again in May. Here's a quick round-up:

Business Insider

The key takeaways:

The latest data shows that domestic demand remains weak and economic growth is likely to be sluggish in the second quarter. The export number reflected the "effectiveness of the government's new measures targeting disguised arbitrage flows," according to Societe Generale's Wei Yao. Is also showed weakening demand from other Asian economies. Import data shows "limited improvement" in domestic demand.The credit data still shows "fairly accommodative monetary conditions," according to Yao, but she thinks May signals the beginning of a tightening trend. We previously wrote of the spark in Shibor and the liquidity squeeze last week, Yao warns that this wasn't just because of the Dragon Boat Festival, and that it also suggests a decline in capital inflows. "We expect this liquidity problem to persist and negatively affect economic growth as well as the yuan in H2."Fixed asset investment growth slowed for the fourth straight month.Retail sales were the only real "positive" data, since easing inflation means retail sales grew at "the fastest pace in five months. The manufacturing sector continues to show "softness" and the employment sub-index in the official PMI has been below 50 for thirteen straight months. A reading below 50 indicates contraction.

Bottomline: Most economic indicators missed expectations. The latest data continues "to paint a picture of soft domestic demand and general growth deceleration," according to Yao.

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The Hottest Stock Markets In The World

Sam Ro | Jun. 8, 2013, 1:30 PM | 3,869 | The Nigerian Stock Exchange

The BRIC stock markets (Brazil, Russia, India, and China) have had a rough year. Only, India is in the black, but it's barely above breakeven.

Indeed, this year has been great for the developed markets like Japan and the U.S.

But a couple of the frontier markets have stolen the show.

"These so-called “emerging markets of the future” have enjoyed strong growth from low base effects, abundant natural and human resources, the availability of easy gains from market reforms and injections of technology into relatively low-wage economies," said emerging markets expert Mark Mobius this week.

Here's a roundup of the year-to-date returns of the major world markets via Bespoke Investment Group:

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Chinese Lending Slows As Concerns Of A Credit Crisis Loom (FXI, EWH)

The latest lending data out of China missed expectations.

New outstanding loans fell to 667 billion yuan, from 793 billion yuan in April. This was also short expectations of 815 billion yuan.

Outstanding loans were up 14.5% in May, down from 14.9% in April.

Total social financing (TSF) — financing available to the economy from the financial sector — fell to 1.190 trillion yuan, down from 1.747 trillion yuan in April. This was shy of expectations for 1.6 trillion yuan. TSF eased to 22.1% in May, from 22.3% the previous month. 

Meanwhile, M2, a broad measure of money supply, was up 15.8% in May, down from 16.1% in April.

"These lower than expected credit data will likely trigger market concerns about monetary tightening when economic momentum stays weak," wrote Bank of America's Ting Lu. 

"However, after going through the data details, we believe that the seemingly disappointing headline new loan and TSF data reflect that those arbitrage activities were being squeezed by tougher regulatory rules, which is actually good for the health of China’s financial system."

Concerns of a Chinese credit crisis

Total Social Financing is a Chinese measure of credit growth that includes — outstanding bank loans, trust and entrusted loans, bankers’ acceptance, and corporate bonds.

In their annual Article IV review of the Chinese economy published late last month, the IMF warned about the growth in total social financing. 

"The rapid growth in total social financing—a broad measure of credit—raises concerns about the quality of investment and its impact on repayment capacity, especially since a fast-growing share of credit is flowing through less-well supervised parts of the financial system."

BAML

The main bear argument on China now is that it is taking more and more credit growth, to deliver less and less economic growth.

The People's Bank of China's 2013 financial stability report also warned of the "perils of bad loans." The bad loan balance was at 1.07 trillion yuan at the end of 2012. Defaulted loans of commercial banks was up 46% from the start of the year to 528.1 billion yuan. And analysts warn that companies' ability to repay loans is declining.

We also saw a liquidity squeeze last week, ahead of the Dragon boat festival.

Of course some argue that with the state backing banks and companies, a crisis is unlikely. But this has raised concerns about long-term growth and the health of China's financial system.

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