New yield forecast Greece still putting a lid on German yields

Greek woes still keep a lid on German yields despite increasing risk appetite and a better outlook for indicators in coming quarters.Short rates have range traded over the past month and the 2Y-10Y curve has remained unchanged. Going forward, we expect the curve to flatten.The first ECB rate hike will probably occur in Q1 2011, though the market is not discounting the first hike till Q3 11.We expect the Danish central bank to deliver another CD rate cut within the next month.The US recovery is leading the eurozone so the Fed will act before the ECB. We expect a first US hike in November 2010.Yields should rise on both sides of the Atlantic in 2010.Next yield forecast due 14 May 2010

Fitch Downgrades Greece to 'BBB-'; Outlook Negative (thats a shocker, downgrade the credit just before the default)

Fitch Downgrades Greece to 'BBB-'; Outlook Negative   
09 Apr 2010 10:28 AM (EDT)

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Fitch Ratings-London-09 April 2010: Fitch Ratings has today downgraded Greece's Long-term foreign and local currency Issuer Default Ratings to 'BBB-' from 'BBB+'. The Outlook is Negative. The agency has simultaneously affirmed Greece's Country Ceiling at 'AAA' and the Short-term foreign currency IDR at 'F2'.

The downgrade reflects the intensification of fiscal challenges in response to more adverse prospects for economic growth and increased interest costs. It also reflects ongoing uncertainties about the government's financing strategy in the context of increased capital market volatility.

The sharp rise in interest rates faced by the government this year, in combination with a deterioration in the outlook for economic growth, will make it harder for the government to achieve its fiscal targets of reducing the deficit to 8.7% of GDP this year and ensuring that public debt peaks at just over 120% of GDP in 2010 and 2011. Pressures on the banking system underline the adverse spill-over from sovereign risk concerns on the wider economy, while contingent liabilities from the banking sector will increase as the government provides banks with increased guaranteed funding.

Fitch recognises some early indications of improvements in fiscal outturns and the strength of the government's commitment to fiscal consolidation measures, which have been supported by Greece's euro area peer governments. However, given that the credibility of the fiscal consolidation effort will only be established by sustained deficit reduction over a prolonged period of time, it is vital that the Greek authorities import credibility from external institutions, underpinned by a credible commitment of financial support. The agency reiterates the lack of clarity regarding the mechanism for timely external financial support may have hindered Greece's access to market finance at affordable cost and hence further undermined confidence in the capacity of the government to meet its fiscal targets. While Fitch judges that external financial support is likely to be forthcoming, greater clarity on back-stop financial support in the form of an explicit IMF programme is likely to be required to shore up market confidence in the face of still substantial near-term financing needs.

The Negative Outlook reflects substantial uncertainties remaining over the prospects for sustained fiscal consolidation over the medium term.

Applicable criteria, 'Sovereign Rating Methodology', dated 16 October 2009, are available on www.fitchratings.com.

Contact: Chris Pryce, London, Tel/email: + 44 20 7417 4342/chris.pryce@fitchratings.com; Paul Rawkins, +44 20 7417 4239/paul.rawkins@fitchratings.com

Media Relations: Julian Dennison, London, Tel: +44 020 7682 7480, Email: julian.dennison@fitchratings.com; Peter Fitzpatrick, London, Tel: + 44 (0)20 7417 4364, Email: peter.fitzpatrick@fitchratings.com.

INTERNATIONAL NEWS WRAP; Euro zone inflation; Eurozone growth outlook; Greece plans to sell a global bond in dollars in late April or early May

         Euro zone inflation was much higher than expected in March; Inflation in the 16-country area was 1.5 percent year-on-year, the highest since December 2008, after 0.9 percent in February; the 1.5% compares w/expectations of a 1.1% increase.  Reuters 

         Eurozone unemployment inline - The euro zone's 10 percent jobless rate in February was the highest since August 1998 and in line with market expectations.  Reuters

         German jobs #s surprise on upside - The number of people registered as unemployed dropped by 31,000 in March to 3.568 million, defying expectations for an increase by 10,000 (DJ)  

         Eurozone – new S&P report on the region's eco growth outlook; S&P views the overall recovery in member countries as still fragile, which calls into question the single currency zone's growth model, as detailed in the article "The Eurozone's Two Growth Models Collide," 

         ECB lends banks less than forecast; The European Central Bank will lend banks less than economists forecast in its final offer of unlimited funds over six months.  Sixty two banks bid for 17.9 billion euros ($24.1 billion).  Economists forecast that it would lend 60 billion euros – Bloomberg 

Developed economies are yet to start the process of reducing non-financial leverage:

As we noted Wednesday (It’s Simple: Too Much Debt), borrowers have three options:

1. Pay down the debt. This means increasing saving rates (typically by spending cuts).

2. Swap the debt. Find someone else to bear (or share) the burden.

3. Default on the debt. This could be overt or covert (some form of currency debauchment).

The focus now is on public sector debt: Public sector debt is rising (although, on average, below the levels seen after World War

2) and budget deficits are very large.
It may be unusually difficult to restore fiscal policy to sustainable levels:

First, the private sector is also highly indebted in many economies: This means that aggregate nonfinancial sector leverage is very high. We don’t know of any examples of a country reducing leverage from a starting point as high as it is now in many developed economies, without serious crisis, default or inflation.

Second, as far as we can tell, it is unusual for very high leverage to be as widespread as it is now: The highly leveraged economies include many major western
economies. The closest precedent was after World War

2, but aggregate leverage then was lower than now. Prevalence matters: To increase national saving, an individual country can depress domestic (and import) demand and depreciate the currency to boost exports. But with so many major economies affected, simultaneous currency depreciation is difficult. Moreover, if countries synchronize their domestic weaknessm the result could be global double-dip.

In some cases depreciation may not even be an option: The countries on the European periphery are effectively only semi-sovereign states. They don’t control their own currency or their own interest rates, and they don’t have recourse to a printing press.

Full report ======= here

Banks Quick Comment: Negative Impact of So-called Moratorium Limited

Impact on our views: We maintain our view that credit costs have peaked and are starting to decline, despite the publication on Monday of data showing a rather large number of applications to restructure loans by SMEs.

What's new: On Monday the banks published data regarding the implementation of measures to ensure smooth provision of finance to the SME sector. At first glance, the data appears to show that the banks are taking a proactive stance and that requests for restructuring are quite high. However, the data must be interpreted carefully. In fact, from the data it is impossible to ascertain the level of incremental requests that have been made due to the implementation of the law. Full Report --- HERE

Americas Equity Morning Summary 02.15.10

Companies Featured
AMAT.O, APD.N, BWLD.O, CRM.N, EVVV.O, GILD.O, GPS.N, JCP.N,
JWN.N, PNRA.O, PX.N, RHT.N, STR.N, ZION.O

Commodities/Commodity Market Report-

Energy prices increased last week, as did most commodities, as risk aversion eased slightly. Oil
led the pack, despite a bearish US DOE report which showed crude, gasoline and distillate
inventories registering weaker-than-expected. Base metals reversed the past couple of weeks’
weakness following a more upbeat mood in equity markets and benign Chinese inflation data.
Precious metals last week recovered from recent weakness after the dollar lost some ground
against the euro ahead of a meeting of Eurozone finance ministers, although concerns over
sovereign risk in the region may continue to support the US currency. Agriculturalprices finished
higher, following the general commodity rally on reduced risk aversion.

US Economics/A European Slowdown Would Only Nick the US

The European sovereign debt crisis may net to slower European growth. Rising risk premiums on
the region’s sovereign debt, constraints on its banks, and fiscal tightening will weigh on growth in
peripheral economies and may spill into the core countries. A weaker euro will be an offset. We
estimate that a one-percentage-point slowdown in European growth might shave 0.2% from that
in the US. Three channels matter: exports, earnings and financial linkages. Europe accounts for
about 29% of our exports, 8% of S&P revenues, and 4.6% of US banks’ totals assets. Contagion
spreading from the European banking system is the biggest tail risk. If the crisis spills over into
broader risk aversion and a drying up of liquidity — the functional equivalent of the US subprime
crisis — the consequences could be more dire.

STEP Commentary/Changes to the Growth STEP

We are adding a 4% position in Express Scripts ($86.43), Ricky Goldwasser’s top pick in her
recently launched coverage of the Healthcare Services group and also one of five top global
picks highlighted by Morgan Stanley's healthcare analysts around the world. Express Scripts
looks well positioned to benefit from the shift to generics from branded drugs over the next five
years, increased exposure to specialty drugs, and meaningful earnings accretion from the NetRx
acquisition, and Ricky sees earnings more than doubling over the next three years. We are
removing the portfolio’s 4% position in Amgen ($56.48). There is no change to Steve Harr’s OW
rating on Amgen, but for the purposes of the Growth STEP, we prefer to move to the sidelines
and shift the portfolio’s position into what we view as a more robust growth story.

Economics Calendar

02/17: Housing Starts (January), forecast: 540,000
02/17: Industrial Production / Capacity Utilization (January), forecast: + 1.1 % / 72.9%
02/18: Producer Price Index/ Core (January), forecast: +0.8 % / +0.1%
02/18: Leading Indicators (January), forecast: +0.3 %

FULL REPORT HERE
02/19: Consumer Price Index/ Core (January), forecast: +0.3 % / +0.1%


M O R G A N S T A N L E Y R E S E A R C H
N O R T H A M E R I C A

US Budget Deficits: Slightly Larger, Still Unsustainable [Goldman Sachs Research]

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Image by Getty Images via Daylife

We now expect the US budget deficit to rise to $1.64 trillion (11.2% of GDP) in fiscal year (FY) 2010 and to total $10.8 trillion (trn) over the next ten years. This profile is modestly above our early October forecast and well above the administration’s figures.

Even so, near-term risks lie to the side of a bigger deficit. Tax receipts have started the year in a deep hole and could continue to fall short. And if the economy struggles as the current dose of fiscal stimulus wears off, as we expect, then policymakers are apt to adopt more stimulus than we have assumed.

While such a response would be quite sensible at this point in the cycle, restraint must be the order of the day as soon as the private sector is strong enough to drive growth on its own, as the long-term federal fiscal trend is unsustainable. By FY 2020, we expect the debt/GDP ratio to approach 90%, from 53% last September.

The magnitude of this imbalance is indicated by our profile for the primary budget deficit, which excludes net interest and never falls below 2% of GDP. Achieving a primary balance, which in most circumstances would lead to stability in the debt-to-GDP ratio, would require budget cuts of nearly $300bn per year in current dollars. Fortunately, the Treasury’s current program of debt issuance is more than sufficient to finance the deficits we envision over the next five years.

In a week of mostly stronger-than-expected data, the standout was the 0.3-point drop in the unemployment rate in January, to 9.7%. Although this came in the face of yet another drop in nonfarm payrolls and still-sticky jobless claims, we have adjusted our path for the unemployment down and now see a peak of 10½% in early 2011, against 10¾% previously. However, we continue to expect no interest-rate hikes from the Fed in 2010 and, more likely than not, in 2011 as well.

READ MORE RESEARCH

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