Themes for the week

China risk on/off trade - Why focus on China?

China is the epicenter for risk-on/off trading. The reserve requirements are increased and slowdown is expected. Inflation is announced and there is relive that prices are not rising too fast. There is the expectation that China, the world's third largest economy, is taking the place of the US as a global growth catalyst. China now has become the world's largest exporter ahead of Germany and is poised to become the second largest economy replacing Japan this year.

We know that China has been a great exporter. They have been able to grow by selling the rest of the world goods. This makes China dependent on growth elsewhere in the globe, but imports are also growing fast which is good for global growth. The trade balance this month actually declined because imports, YOY, were up 85% while exports only increased 21%. This is the third straight month of import increases. Some of this is an artifact of the Lunar New Year. Nevertheless, the jump in Japanese machine tool exports is suggestive of the gains in trade from higher China growth.

Focus on Chinese economic numbers is essential in the coming quarters.

Greece - Can it get their house in order?

So where is the plan? Sounds like the plan is to wait and see how much budget cutting is done and whether the debt can be financed later this Spring. The EU filled the void with the announcement of support, but the uncertainty doe snot end the problem. Hard to see say how low the EUR will go. The negative sentiment toward the dollar has now switched to the EUR.

The real issue is whether we are going to have another EU banking crisis. Large EU members do not care about Greece, bu they do care about the quality of their banks. A bank problem will change the focus of the ECB which will put further pressure on the EUR.

Treasury auction - Have investors had enough?

A new focus on auction numbers is essential in the coming months. The link between debt and interest rates has never been well founded, but we have never had the absolute level of government deficits before. The cover ratios and price ranges at auction have not been too bad, but every auction has created more anxiety given the competition for funds is so acute.

What is saving the US is the demand for safe risk-free assets. Treasuries are still viewed as a safe asset so there is strong demand from foreign sources. The domestic demand is also strong given the weak private credit demand, but both these sources seem to be sensitive to changes in the news environment.

The Fed - Following an exit strategy?

Can an exit strategy be followed in the mortgage market? Unlikely. There is no private demand at these spread levels. Can the CMBS ABS market be successful without Fed support. Again, unlikely. Can the balance sheet be reduced? The plans are being put in place but any near-term action does not seem likely without some better economic numbers. Watch the Fed action on mortgages in the next 30 days as a key clue.