Overnight economic data 27 June 2011 (Monday)

US Treasury prices rise on Friday as market sentiment remains fragile
Durable goods orders in the US rise more than expected in May
US economy expands by 1.9% in Q1, according to the third and final GDP report
Too-big-to-fail banks need to add extra capital under new Basel terms
We recommend risk-averse investors take profits on Eurobonds issued by Bank of Moscow

US Treasury prices, except 30Y bonds, rose on Friday, despite economic data being broadly positive as concerns over the Greek debt situation persisted and Moody’s statement that it might downgrade the ratings of 16 Italian banks (Moody’s is concerned about the Italian banks’ profitability prospects, funding costs, money-losing operations in the domestic market and the deterioration in Italy’s sovereign credit profile). It is worth noting that Italian banks have little exposure to Greece and other peripheral Eurozone debts, and have successfully raised more than EUR 10.5 bn in fresh equity capital in a series of capital increases so far this year, according to the Wall Street Journal. On economic data, US durables good orders rose more than expected in May, while the third and final Q1 GDP report turned out as expected. This week, market participants will closely watch whether parliamentarians in Greece pass the austerity measures required to access additional funding from the European Union and the International Monetary Fund. US President Barack Obama will also meet with Senate leaders from both the Republican and the Democratic parties to revive talks on the US budget and deficit. The US political parties are at an impasse on the issue of raising the nation’s USD 14.3 trn debt ceiling and if they fail to do so in July, it could cost the USA its triple-A credit rating.

US Treasury 2Y notes rose 0.75/32 to yield 0.331% (versus 0.344% on Thursday), while 5Y notes were up 12.75/32 to yield 1.374% (1.458%). 10Y notes rose 13.25/32 to yield 2.864% (2.913%). 30Y bonds were down 8.5/32, yielding 4.184’% (4.169%). For the week, 2Y, 5Y, 10Y and 30Y yields declined by about 5 basis points (bp), 16 bp, 9 bp and 3 bp respectively. The 2–10 yield curve flattened by about 5 bp to 253 bp. The VIX volatility index closed at 21.10 compared to 19.29 on Thursday. August crude oil futures rose USD 0.14 to USD 91.16. Spot gold fell USD 18.75 to USD 1,502.65 a troy ounce, while COMEX gold for August delivery was down USD 19.60 to USD 1,500.90 a troy ounce.

The US Commerce Department reported that orders for durable goods had risen 1.9% month-on-month (MoM) in May, higher than the 1.5% increase expected by the market. April’s numbers were revised to show a 2.7% decrease versus a 3.6% decline reported earlier. Excluding the volatile transportation segment (which grew 5.8% MoM), orders rose 0.6% MoM in May (0.9% expected) following a 0.4% decrease in April (revised from –1.5% reported previously). Non-defense capital goods excluding aircraft rose by 1.4% MoM in May. The increase in May’s durable goods orders was fairly broad-based, with orders for machinery, computers, electrical equipment and communications equipment rising.

The US Commerce Department reported that the US economy grew at a rate of 1.9% quarter-on-quarter (annualized), matching the market’s expectation and marginally higher than the 1.8% previously forecast in last month’s report. The revision mainly reflects a smaller trade deficit and a bigger increase in inventories than previously reported. The personal consumption core price index, the Fed’s preferred price gauge, rose in Q1 at an annual pace of 1.6% compared to the 1.4% increase estimated earlier. Personal consumption rose 2.2%, matching market expectations and was same as the previous estimate. Friday’s report was the third and final report for Q1 GDP.

The Basel Committee on Banking Supervision stated that large international banks would need to have additional capital of between 1% and 2.5% of risk-weighted assets, as regulators attempt to reduce the impact of another financial crisis. The extra capital is in addition to the minimum 7% Tier 1 capital that banks must have, and it must be met by building up their core reserves and not by issuing contingent capital instruments. The new requirements will be introduced with other measures from January 2016 through January 2019.

The JP Morgan EMBI Global Diversified Index closed at 567.08 compared to 566.87 on Thursday. The JP Morgan EMBIGD sovereign spread widened by about 6 bp to 311 bp.

We changed our recommendation on Eurobonds issued by Bank of Moscow to HOLD on Friday and recommend that risk-averse investors take profits/sell and exit their positions. We erred on the conservative side and view this as a precautionary call as Bank of Moscow was reported to have incurred significant bad debt due to related-party lending to its previous management. The unconfirmed RUB 150 bn potential bad debt is so large that, if true, it could wipe out 100% Bank of Moscow shareholders’ equity of RUB 117 bn reported as at 30 September 2010.

Today, the US Commerce Department will announce May personal income and personal spending data (+0.4%MoM and +0.1% MoM expected).