This Week in Corporate Finance (07/06/12)

Seeing the job report released on Friday, made me think of the old Chevy Chase opening to “Weekend Update” on Saturday Night Live, “Our top story tonight: Generalissimo Francisco Franco is still dead”. Even with all the news of the past three weeks, we are basically in the same place we were on June 15^th.

The major news of the week here in the US, was the Employment report which reconfirmed our ongoing scenario of positive but weak employment growth, with positive but lackluster economic growth. The US economy added a subpar +80K jobs in June with the Unemployment Rate holding steady at 8.2%. On the bright side, this was the twenty-eighth consecutive month of job creation. The quandary is that this rate of job creation does not equate to anything other than running-in-place. We need to see job creation around +300K/month to truly start driving down the unemployment rate, while at the same time boosting our GDP back up into the +3% neighborhood. Unfortunately, there is nothing on the foreseeable horizon that would cause one to believe that is about to occur.

From two weeks ago, US Treasuries have rallied.  The 2-year note is down 3bps to 27bps; the 5-year note is down 11bps to 64bps; the 10-year note is down 12bps to 1.55%; and the 30-year bond is down 10bps to 2.66%. As stated earlier, this is almost exactly the same shaped yield curve we had on Friday June 15^th.

It’s also been quite an interesting two weeks in the ROW (Rest-of-the-World). Last Friday, with the Spanish 10-year note flirting around seven percent and the Italian 10-year dancing north of 6.25%, European Union leaders announced a framework for additional support for the weaker nations of the EU. The market reacted with a massive hopium-induced rally. Stock markets soared and bond yields fell. Unfortunately, with the benefit of a little time and a bit of sobriety, the market realized that reality hadn’t noticeably changed at all, and the outlook for Europe continues to look rather bleak.

Since June 18^th, the Spanish 10-year note has traded in a range of 6.15% (post-announcement low) to 7.285% (an all-time high) and traded as high as 7.036% on Friday. Anything higher than seven percent is considered in the “danger zone” (I always hear Kenny Logins whenever anyone mentions that term). The Italian 10-year note has floated in a range of 5.59% to 6.34%, finishing the week at 6.03%.

Germany continues to be a harbor for safety. This week, the 30-year Bund yield dropped -15bps to 2.18%, the 10-year Bund fell -15bps to 1.33% and the 2-year Bund made history this week with its yield actually going negative and trading as low as -1.8bps. It is just incredible (and a little scary) that investors are willing to lock-in a guaranteed loss in order to protect themselves from an even greater potential loss. France is also seen as a rather safe place to park money. Their 10-year note improved by -31bps, to close the week at 2.38%.

Quietly, Greece and Portugal have continued to improve slowly, or at least not get materially worse. The Greek 10-year note fell -16bps this week to 25.67%; this is its lowest level since mid-May. The Portuguese 10-year note yield was actually up +5bps this week to 10.21%, but given that it was as high as 18.29% back in late January, a ten-handle looks rather benign.

The other big news this week was Central Bankers lowering interest rates. In China, the People’s Bank of China announced its second interest rate reduction in a month, lowering their benchmark rate by -31bps to 6.00%, its lowest level since February 2011. China had started a tightening cycle back in October of 2010 which ended last month.

The European Central Bank (ECB) also lowered interest rates this week. The ECB lowered its benchmark rate by -25bps to an all-time low of 75bps. Even during the height of the financial crisis back in early 2009, the ECB didn’t go lower than 1.00%. It’s amazing to remember that the ECB actually RAISED interest rates twice last year to 1.50% before quickly unwinding them by year’s end.

With the recent ECB easing, the Euro is currently trading at twenty-five month low of $1.2266. The five-year low for the Euro is $1.19 reached back in June 2010.

This week, the Commercial Paper (CP) market suffered its biggest contraction since the week of December 1, 2010, shrinking by -$35.7 billion to $972.5 billion outstanding. The CP market had been growing since the start of the year until stalling out in late-May. After rising to $1.029 trillion outstanding in the week of May 30^th (the highest level since September 2011), the market has struggled to stay north of $1 trillion.

Oil continues to be a bit volatile. Since April 23^rd, oil has traded between $105.68/b and a thirty-four month low of $78.28/b reached on June 28^th. It has since bounced up from there and is currently trading at $84.24/b.

In addition to everything else that is going on, the LIBOR scandal continues to unfold on both sides of the Atlantic and we continue to wait-and-see if there will be any new changes to the way the SEC regulates the $2.5 trillion Money-Market Funds market.

On the near horizon, the market will continue to try to interpret the economic tea-leaves to divine what, if anything, the Fed may announce at their upcoming two-day FOMC meeting on July 31^st and August 1^st.

Stay tuned.