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Five Things You Need to Know: The Whole Enchilada, "Good" News, Let the Yuan Rise, The Gr-r-reat Wall!, Can You Hear Me Now?

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What you need to know (and what it means)!

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Minyanville's Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. The Whole Enchilada

What can it possibly mean when the 2-year note, the 5-year, the 10-year and the 30-year all trade below the Fed funds rate? We're not talking about a 5/10 inversion, or 2/10 inversion. We're talking the whole enchilada, baby. Holy chipotle, Benór Bernanke, now what?

  • The Fed funds rate is presently at 5.25%. Meanwhile, the entire yield curve is now trading below the Fed funds rate.
    - 2-year: 5.17%
    - 5-year: 5.12%
    - 10-year: 5.15%
    - 30-year: 5.19%
  • According to stats from Merrill's David Rosenberg, this has only happened four times in the past 25 years:
    - March 2000, August 1998, January 1989, January 1982.
  • In each instance, the next six months saw a significant rally in bonds, a widening of corporate spreads, an average 6% decline in commodity prices and underperformance by small cap stocks.
  • As Professor Bennet Sedacca noted last week, the 10s inverted to Fed funds is essentially the market betting on recession.
  • As well, on the Buzz & Banter last week, Prof. Sedacca added that the FOMC focus on lagging core inflation data is chief among reasons the Fed tends to overshoot on Fed funds rate.
  • Labor costs (which rose more than expected in last week's employment report) tend to pick up late in the cycle.

2. From Japan: More "Good" News

By "good" news, we mean news that comes in better-expected, therefore raising further the probabilities that the Bank of Japan will formally end their quantitative easing this week.

  • Core private-sector machinery orders fell a seasonally adjusted 2.1 pct in May from April, the Japanese Cabinet Office said.
  • The market had expected a decline of 5.5 pct, according to the results of a survey by the Nihon Keizai Shimbun, XFN-Asia reported.
  • These orders are widely viewed as a leading indicator of corporate capital spending.
  • In addition to the "good" news, the Bank of Japan received clear backing from the ruling Liberal Democratic Party on plans to formally end the current zero interest rate policy with its first rate hike in six years.
  • "The zero interest rate policy is the one that should be conducted in emergencies, and not under normal circumstances," Tsutomu Takebe, the LDP secretary general, told a forum broadcast by the NHK public television, according to XFN-Asia.
  • The BoJ meets for two days later this week with a policy announcement expected on Friday.

3. Let the Yuan Rise. Ok.

China's trade surplus widened to a record $14.5 billion in June, according to Bloomberg.

  • According to a Bloomberg survey of economists, expectations were for a $12.8 bln surplus, so the surge to $14 bln, compared to $13 bln in May, was considerably higher than expected.
  • The surplus has caused a buildup in China's reserves of foreign currency, which have doubled in the past two years through March.
  • China's central bank in April raised rates and last month ordered banks to set aside more reserves in attempt to curb China's investment boom.
  • Expect calls, again, for China to allow the yuan to rise further against the dollar from economists and the US Treasury.
  • Expect China, again, to say ok and then not really do anything until they need to.
  • And note the common thread in the first three Five Things: reduced global liquidity.

4. The Gr-r-reat Wall!

Speaking of China, Kellog's, the worlds largest cereal maker, has ambitions to target China's potentially booming market, according to the BBC.

  • Kellogg's plans to double sales in Asia to $400m by 2009 or 2010 and plans to acquire a local Chinese food firm.
  • The Chinese tend to reject cold breakfast cereals, however, so the Kellogg's brands we are familiar with in the West will likely require a face lift of sorts.
  • Minyanville has learned* that the following targeted Chinese cereal brands are in the works:
  • Rice Krispie Szechuan Duck
  • Shredded Frosted Mini-Beef with Garlic Sauce
  • Hot and Sour Raisin Bran
  • General Tso's Corn Pops
  • Leggo My Eggo Drop Soup

* By "Minyanville has learned" we mean, literally, totally made up by us.

5. FBI Plans Massive New Wiretapping Push

According to Cnet News.com, the FBI has drafted sweeping legislation that would require Internet service providers to create wiretapping hubs for police surveillance and force makers of networking gear to build in backdoors for eavesdropping.

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