Saturday, March 23, 2019

Saturday's News Links

[Reuters] Fed rate hike, rate cut both 'on the table': Bostic

[Reuters] Wall Street Week Ahead: Doubts increase that first quarter will be earnings low point

[Bloomberg] Weidmann Hits French Roadblock on Path to Replace Draghi at ECB

[Reuters] Italy endorses China's Belt and Road plan in first for a G7 nation

[Reuters] Hundreds of thousands march in London to demand new Brexit referendum

[Reuters] 'Yellow Vests' march in Paris as troops join police to prevent trouble

[WSJ] Twin Troubles Strike the Bond Market

Weekly Commentary: Doing Harm with Uber-Dovish

This week’s FOMC meeting will be debated for years – perhaps even decades. The Fed essentially pre-committed to no rate hike in 2019. The committee downgraded both its growth and inflation forecasts. Having all at once turned of little consequence, we can now dismiss the 3.8% unemployment rate and the strongest wage growth in a decade. Moreover, the Fed announced it would be scaling back and then winding down balance sheet “normalization” by September. This put an impressive exclamation point on a historic policy shift since the December 19th meeting. At least for me, it hearkened back to a Rick Santelli moment: “What’s the Fed afraid of?”

Markets came into the meeting fully anticipating a dovish Fed. Our central bank returned to the old playbook of beating expectations. In the process, the Federal Reserve doused an already flaming fixed-income marketplace with additional fuel.

After trading to 3.34% during November 8th trading, ten-year Treasury yields ended this week a full 90 bps lower at 2.44%, trading Friday at the lowest yields since December 2017. Yields were down 15 bps this week – 17 bps from Tuesday’s (pre-Fed day) close - and 28 bps so far in March. And with three-month T-bill rates at 2.40%, the three-month/10-year Treasury curve flattened to the narrowest spread since 2007 (briefly inverting Friday). Five-year Treasury yields ended the week inverted 16 bps to three-month T-bills – and two-year Treasuries were inverted about eight bps.

Collapsing sovereign yields were a global phenomenon. Japan’s 10-year JGB yields declined four bps Friday to negative eight bps (-0.08%), the lowest yields since September 2016. With Germany’s Markit Manufacturing index sinking to the lowest level since 2012 (44.7), bund yields dropped seven bps to negative 0.015% - also lows going back to September 2016. Swiss 10-year yields sank 12 bps this week to negative 0.45%. Two-year German yields closed out the week at negative 0.57%. UK 10-year yields dropped 20 bps (1.01%), Spain 12 bps (1.07%) and France 11 bps (0.35%).

The destabilizing impact of the Fed’s shift back to an Uber-Dovish posture was more conspicuous by week’s end. The S&P500 dropped 1.9% in Friday trading, with financial stocks coming under heavy pressure. In three sessions, the KBW Bank Index was slammed 8.2% and the Broker/Dealers (NYSE Arca) lost 5.6%.

It wasn’t only the banks’ shares under pressure. Bank Credit default swap (CDS) prices reversed sharply higher this week, with European bank debt in the spotlight. Deutsche Bank 5yr CDS surged 24 bps this week to 168 bps, the largest weekly gain since late-November. UniCredit CDS jumped 22 bps (150bps), Intesa Sanpaulo 21 bps (159bps) and Credit Suisse 16 bps (84bps). An index of European subordinated bank debt surged 31 bps this week (to 177bps), the largest weekly gain since October 2014. Pressure on European bank CDS spilled over into European corporates. After trading to one-year lows in Tuesday's session, a popular European high-yield CDS (iTraxx Crossover) reversed 22 bps higher in three sessions (to 281bps) – posting its worst week since mid-December.

Friday trading saw European CDS instability jump the Atlantic. Late-week losses saw most major U.S. bank CDS rise modestly for the week. After closing Tuesday near one-year lows, U.S. investment-grade corporate CDS jumped 10 bps in three sessions to end the week about 10 bps higher. This index suffered its largest weekly gain (higher protection costs) since the week of December 21 (reducing y-t-d decline to 20bps). The week saw junk bonds notably underperform. Sinking financial stocks, widening spreads and rising CDS prices fed into equities volatility. After ending last week at the lows (12.88) since early-October, the VIX popped to 16.48 (also the largest weekly gain since the week of December 21).

It’s now commonly accepted that the Federal Reserve erred in raising rates 25 bps in December. I hold the view that Chairman Powell had hoped to lower the “Fed put” strike price. The Fed was willing to disregard some market instability, hoping to begin the process of the markets standing on their own. The Fed just didn’t appreciate the degree of latent market fragility that had been accumulating over the years. I don’t fault them for trying.

In the name of promoting financial stability after a decade of extraordinary stimulus measures, it was prudent for the Fed to adhere to a course of gradual rate normalization even in the face of some market weakness. GDP expanded at a 3.4% rate in Q3 and slowed somewhat to 2.6% during Q4. After a decade-long expansion, periods of economic moderation should be expected (and welcomed).

Some analysts see this week’s dovish posture as part of a FOMC effort to rectify its December misdeeds. Markets now see about a 60% probability of a 2019 rate cut – with zero likelihood of a hike through January 2020. The Fed’s dot plot - still with one additional rate increase in 2020 – has lost all market credibility.

March 22 – Bloomberg (Matthew Boesler and Jeanna Smialek): “Federal Reserve policy makers have concluded that when in doubt, do no harm. Welcome to the new abnormal. Six months ago, U.S. central bankers thought they’d soon be returning to the days of on-target inflation, full employment and interest rates that, while lower than in decades past, would still need to rise into growth-restricting territory to keep things on track. But in a watershed moment, the Federal Reserve surprised investors… by slashing rate projections to show no hike this year. Officials signaled expectations for a slowdown in the economy… and they no longer expect inflation to rise above their 2% target. The move was a serious about-face. Since September 2017, they had signaled they would probably need to eventually raise rates above their estimate of the so-called neutral level for the economy… to slow the expansion and protect against the possibility of higher inflation. That was based on a longstanding view in the economics profession about how the economy works: If central bankers allow the unemployment rate to fall too far below its lowest sustainable level by keeping rates too low, then inflation will rise.”

There’s been a bevy of interesting analysis the past few days. The “New Abnormal” from the above Bloomberg article headline caught my attention. Responding to “New Normal” (Pimco) pontification, I titled an October 2009 CBB “The Newest Abnormal.” My argument almost a decade ago was that “activist” central banks were just doing what they had done repeatedly – only more aggressively: responding to bursting Bubbles with reflationary policymaking that would ensure the inflation of only bigger and more precarious Bubbles.

I didn’t back then believe it possible for central banks to orchestrate a successful inflation. I have great conviction in this analysis today. The popular notion of inflating out of debt problems is way too simplistic. Just inflate the general price level and reduce real debt burdens, as the thinking goes. The problem is that debt levels have expanded greatly, right along with securities and asset prices – and speculative excess. Aggregate measures of consumer prices, meanwhile, were left in the dust. The Great Credit Bubble has ballooned uncontrollably; asset price Bubbles have significantly worsened; and speculative Bubbles have become only more deeply embedded throughout global finance.

Bond markets were anything but oblivious to Bubble Dynamics back in 2007 - and have become only more keenly fixated here in 2019. I strongly argue that dysfunctional global markets are in a more precarious position today than in 2007, a view anything but diminished by this week’s developments. Wednesday’s statement and Powell press conference were viewed as confirming that the Fed is preparing to reinstitute aggressive policy stimulus.

With acute fragilities revealed in December, the Fed and global central bankers are on edge and scrambling. Markets see the Fed’s aggressive dovish push suggesting that the Fed – after December’s missteps – is now poised to err on the side of being early and aggressive with stimulus measures. In safe haven bond land, the Fed has evoked vivid images of monetary “shock and awe.”

Analysts are focusing on sovereign yields and an inverted Treasury curve as foreshadowing recession. I would counter with the view that bond markets appreciate global Bubble fragilities and are now pricing in the inevitability of rate cuts and new QE programs. Yield curves (at home and abroad) are more about market dynamics and prospective monetary policy than the real economy. As such, the strong correlations between safe haven and risk assets are no confounding mystery. Safe haven assets these days have no fear of “risk on.” After all, surging global risk markets only exacerbate systemic risk, ensuring more problematic Bubbles, central bankers operating with hair triggers, and the near certainty of aggressive future monetary stimulus.

Friday’s market instability had market participants searching for an explanation. Is there a significant development moving markets? Negative news coming from the China/U.S. trade front?

There could be something out there spooking the markets. Or perhaps the big story of the week was that Fed Uber-Dovishness pushed global bond markets and fixed-income derivatives toward dislocation. From the above Bloomberg article: “Federal Reserve policy makers have concluded that when in doubt, do no harm.” Maybe the Fed, trying too hard to compensate for December, is Doing Harm to market stability.

DoubleLine Capital’s Jeffrey Gundlach (from Reuters): “This U-Turn - on nothing fundamentally changing - is unprecedented. Three months ago, we were on ‘autopilot’ with the balance sheet - and now the bond market is priced for a rate cut this year. The reversal in their stance is stunning.”

Perhaps the disorderly drop in safe haven yields has led to a problematic widening of Credit spreads. The easy returns being made long higher-yielding Credit instruments versus a short in Treasuries have come to an abrupt conclusion. Could serious problems be unfolding in the derivatives markets, along with major losses for levered players caught on the wrong side of illiquid and rapidly moving markets. Is the Fed’s stunning “U-turn” market destabilizing – with great irony, fomenting “risk off” deleveraging?

What is the Federal Reserve’s reaction function? What factors will be driving policy decisions going forward? The Fed set rates at about zero (0 to 25bps) in January 2009 and left them unchanged for six years. The Fed then raised rates 25 bps in December 2015, 25 bps in December 2016 – and then cautiously increased rates six more times spaced over the next three years. The Fed’s balance sheet was roughly stable from Q4 2014 through Q4 2017 and has since been in gradual/predictable runoff for the past five quarters. For years now, Fed policy has been usually certain. Rate and balance sheet “normalization” were to proceed at an extraordinarily measured pace. No surprises. Bypassing a tightening of financial conditions, the “autopilot” Fed was conducive to aggressive market positioning/speculation (and leveraging).

An unusual era of monetary policy stability/predictability formally ended Wednesday. Balance sheet “normalization” is being brought to an early conclusion. Markets now assume the next rate move is lower. And with the Fed apparently turning its focus to persistently undershooting consumer price inflation, it is reasonable to assume it’s only a matter of time until the Fed resorts once again to QE. But when and at what quantity?

Especially as three years of rate “normalization” ends with Fed funds at only 2.25% to 2.50%, markets well-recognize there’s meager stimulus potential available in rate policy. Will the Fed even bother with rate cuts – or be compelled to move directly to QE? Suddenly, the future of monetary policy appears awfully murky.

Come the next serious stimulus push, it will be the Fed’s balance sheet called upon to do the heavy lifting. And, for those pondering a likely catalyst, I’d say look no further than a global market accident – omen December. As such, it now matters greatly that QE has evolved from an extreme policy response necessary to counter the “worst crisis since the Great Depression” - to a prominent tool in the Fed’s (and global central banking) toolkit readily available to counter risks of economic weakness and stock market instability.

Throw in the concept of late-cycle “Terminal Excess” – appreciating that policymakers, from Beijing to Tokyo to Frankfurt, London, Canberra, Toronto, Washington and beyond, are prolonging a most precarious cycle – and one can build a solid case for big trouble and big QE brewing. With this in mind, it’s not difficult to get quite concerned for the stability of global bond markets, along with securities, derivatives and asset markets more generally. And with markets unsettled, it probably didn't help to have the largest ever monthly federal deficit ($234bn), with the y-t-d deficit after five months ($544bn) running 40% ahead of fiscal 2018 - or that President Trump announced the nomination of Stephen Moore to the Federal Reserve.


For the Week:

In a wild week, the S&P500 declined 0.8% (up 11.7% y-t-d), and the Dow fell 1.3% (up 9.3%). The Utilities added 0.4% (up 11.1%). The Banks sank 8.3% (up 7.0%), and the Broker/Dealers fell 5.3% (up 4.9%). The Transports dropped 2.5% (up 9.6%). The S&P 400 Midcaps lost 2.2% (up 11.5%), and the small cap Russell 2000 dropped 3.1% (up 11.7%). The Nasdaq100 increased 0.3% (up 15.7%). The Semiconductors gained 0.6% (up 21.2%). The Biotechs sank 3.8% (up 17.3%). While bullion gained $11, the HUI gold index fell 1.9% (up 7.8%).

Three-month Treasury bill rates ended the week at 2.40%. Two-year government yields dropped 12 bps to 2.32% (down 17bps y-t-d). Five-year T-note yields fell 15 bps to 2.24% (down 27bps). Ten-year Treasury yields dropped 15 bps to 2.44% (down 24bps). Long bond yields fell 14 bps to 2.87% (down 14bps). Benchmark Fannie Mae MBS yields sank 22 bps to 3.10% (down 40bps).

March 21 – Financial Times (Joe Rennison): “The primary measure of the US yield curve watched by the Federal Reserve has fallen to its lowest level since 2007, after a policy shift by the central bank has raised fears over the outlook for the US economy. Benchmark 10-year Treasury yields sank to 2.52% on Thursday and short-dated, three-month yields marched higher to 2.47%. It means the difference between the two interest rates now stands at just 5 bps, sinking below the previous low of 15 bps hit in January to notch its lowest level since 2007.”

Greek 10-year yields slipped three bps to 3.75% (down 60bps y-t-d). Ten-year Portuguese yields declined five bps to 1.26% (down 45bps). Italian 10-year yields fell five bps to 2.45% (down 29bps). Spain's 10-year yields dropped 12 bps to 1.07% (down 34bps). German bund yields sank 10 bps to negative 0.015% (down 25bps). French yields dropped 11 bps to 0.35% (down 36bps). The French to German 10-year bond spread narrowed one to about 37 bps. U.K. 10-year gilt yields sank 20 bps to 1.01% (down 26bps). U.K.'s FTSE equities index slipped 0.3% (up 7.1% y-t-d).

Japan's Nikkei 225 equities index added 0.8% (up 8.1% y-t-d). Japanese 10-year "JGB" yields dropped four bps to negative 0.07% (down 7bps y-t-d). France's CAC40 dropped 2.5% (up 11.4%). The German DAX equities index fell 2.8% (up 7.6%). Spain's IBEX 35 equities index declined 1.5% (up 7.7%). Italy's FTSE MIB index added 0.2% (up 15.0%). EM equities were mixed. Brazil's Bovespa index sank 5.4% (up 6.7%), while Mexico's Bolsa added 0.2% (up 1.6%). South Korea's Kospi index increased 0.5% (up 7.1%). India's Sensex equities index gained 0.4% (up 5.8%). China's volatile Shanghai Exchange jumped 2.7% (up 24.5%). Turkey's Borsa Istanbul National 100 index sank 3.4% (up 9.4%). Russia's MICEX equities index increased 0.6% (up 5.7%).

Investment-grade bond funds saw inflows of $5.135 billion, and junk bond funds posted inflows of $1.796 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates declined three bps to a 13-month low 4.28% (down 17bps y-o-y). Fifteen-year rates fell five bps to 3.71% (down 20bps). Five-year hybrid ARM rates were unchanged at 3.84% (up 16bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to a one-year low 4.28% (down 32bps).

Federal Reserve Credit last week declined $3.5bn to $3.928 TN. Over the past year, Fed Credit contracted $433bn, or 9.9%. Fed Credit inflated $1.117 TN, or 40%, over the past 332 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $7.2bn last week to $3.479 TN. "Custody holdings" gained $39.3bn y-o-y, or 1.1%.

M2 (narrow) "money" supply rose $9.1bn last week to $14.500 TN. "Narrow money" gained $578bn, or 4.1%, over the past year. For the week, Currency slipped $0.5bn. Total Checkable Deposits dropped $37.5bn, while Savings Deposits jumped $37.5bn. Small Time Deposits added $2.1bn. Retail Money Funds rose $9.1bn.

Total money market fund assets sank $47.2bn to $3.065 TN. Money Funds rose $240bn y-o-y, or 8.5%.

Total Commercial Paper surged $20.9bn to $1.083 TN. CP expanded $17.3bn y-o-y, or 1.6%.

Currency Watch:

March 18 – Financial Times (Siddarth Shrikanth): “Hong Kong has spent nearly $1bn so far in March defending the local currency’s peg to the US dollar, which has come under pressure after a rise in US interest rates in 2018 and amid an increase in money flows into China’s stock market. The Hong Kong Monetary Authority (HKMA) intervened… on Monday, selling $256m and buying HK$2.01bn, the third time this month that the de facto central bank has stepped in to support the Hong Kong dollar. This leaves its aggregate balance, which represents the level of interbank liquidity, at HK$68.9bn.”

March 19 – Financial Times (Peter Wells): “If you thought the equity market looked calm at the moment, it can’t hold a candle to foreign exchange, where levels of volatility are hovering around their lowest levels since 2014. Diminished expectations for US interest rate rises this year have helped drive measures of equity market volatility lower in recent months, subsequently propping up stocks, and also pushed down currency market volatility. That trend has been further reinforced thanks to the European Central Bank, which is set to keep interest rates lower for longer in a bid to rev up economic growth in the bloc…”

The U.S. dollar index was little changed at 96.651 (up 0.5% y-t-d). For the week on the upside, the Japanese yen increased 1.4%, the Swiss franc 0.9%, the South Korean won 0.6%, the Mexican peso 0.6%, the New Zealand dollar 0.5% and the Singapore dollar 0.1%. For the week on the downside, the Brazilian real declined 2.4%, the Canadian dollar 0.7%, the South African rand 0.7%, the British pound 0.6%, the Swedish krona 0.5%, the Norwegian krone 0.3% and the euro 0.2%. The Offshore Chinese renminbi slipped 0.07% versus the dollar this week (up 2.39% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index added 0.4% (up 16% y-t-d). Spot Gold gained 0.9% to $1,314 (up 2.4%). Silver recovered 0.5% to $15.407 (down 0.9%). Crude added 52 cents to $59.04 (up 30%). Gasoline jumped 3.7% (up 48%), while Natural Gas fell 1.5% (down 6%). Copper dropped 2.2% (up 8%). Wheat increased 0.8% (down 7%). Corn gained 1.3% (up 1%).

Trump Administration Watch:

March 19 – Bloomberg (Jenny Leonard, Saleha Mohsin and Jennifer Jacobs): “Some U.S. negotiators are concerned that China is pushing back against American demands in trade talks, according to people familiar with the negotiations… Chinese officials have shifted their stance because after agreeing to changes to their intellectual-property policies, they haven’t received assurances from the Trump administration that tariffs imposed on their exports would be lifted… Beijing has also stepped back from its initial promises over data protection of pharmaceuticals, didn’t offer details on plans to improve patent linkages, and refused to give ground on data-service issues, one person familiar with the U.S.’s views said. Beijing is trying to bring in wording that would ensure rules in the trade agreement have to comply with Chinese laws, the person added.”

March 19 – Wall Street Journal (Bob Davis): “Negotiators for the U.S. and China have scheduled a new round of high-level trade talks in Beijing and Washington, aiming to close a deal by late April to end the yearlong dispute between the world’s two largest economies. U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin plan to fly to Beijing next week to meet with Chinese Vice Premier Liu He… The following week, a Chinese delegation led by Mr. Liu is expected to continue talks in Washington… People tracking the negotiations said the talks appear to be in their final stages, following a rocky patch after Chinese leaders were unnerved by President Trump’s decision to abruptly break off nuclear-disarmament talks with North Korean leader Kim Jong Un in February.”

March 20 – Bloomberg (Jennifer Jacobs and Andrew Mayeda): “President …Trump said he’ll keep tariffs on China until he’s sure Beijing is complying with any trade deal, refuting expectations that the two nations will agree to roll back duties as part of a lasting truce to their trade war. ‘We’re not talking about removing them, we’re talking about leaving them for a substantial period of time, because we have to make sure that if we do the deal with China that China lives by the deal,’ Trump told reporters… ‘They’ve had a lot of problems living by certain deals.’ The president’s comments dim hopes that round-the-clock trade negotiations between the world’s two biggest economies could lead to them removing the roughly $360 billion in tariffs they’ve imposed on each other’s imports. Beijing has pushed the Trump administration to remove tariffs as part of any deal.”

March 20 – CNN (Haley Byrd): “President Donald Trump placed more pressure on the stalled trade talks with the European Union…, threatening tariffs on European automobiles if no deal is reached. ‘The European Union has been very tough on the United States for many years,’ Trump told reporters…, saying the auto tariffs were under review. ‘We're looking at something to combat it.’ Trump received a report from the Commerce Department last month with the findings of an investigation into whether imports of automobiles and auto parts could qualify for tariffs as a national security threat… Trump has until the middle of May to choose a course of action. On Wednesday, Trump said his decision would hinge on how talks with the EU proceed. He has long threatened to impose hefty tariffs on European autos and auto parts.”

March 18 – Wall Street Journal (Michelle Hackman and Josh Mitchell): “The White House is calling on Congress to cap how much graduate students and parents of undergraduates can borrow in federal student loans, a proposal it said is aimed at curbing rising college costs. White House officials publicized the proposal as part of a broader set of ideas it is urging Congress to adopt as lawmakers undertake a rewrite of the Higher Education Act, a 1965 law that governs student loans. The law hasn’t been reauthorized since 2008, and Democrats and Republicans agree it is due for an overhaul given the growth of online and other nontraditional degree programs. The package of proposals… focuses primarily on the cost of college and workforce training.”

Federal Reserve Watch:

March 21 – Bloomberg (Sarah Ponczek, Vildana Hajric and Reade Pickert): “Conventional wisdom held it would be difficult for the Federal Reserve to deliver a second dovish surprise in as many meetings. It was wrong, and the equity market didn’t quite know what to make of it. Stocks initially erased losses on the prospect of rates not rising for the foreseeable future. Then the rebound faltered and equities closed slightly lower. It’s partly a reflection of how far they’d rallied on the first dovish turn, nearly 20% so far this year. And it raised the question of what it’s going to take to reclaim September highs, if not a decidedly accommodative Fed.”

March 20 – Bloomberg (Robert Burgess): “The Federal Reserve managed to exceed expectations on Wednesday by scaling back its projected interest-rate increases this year to zero and saying it would stop shrinking its balance sheet assets in September. Before the announcement, the markets were generally expecting the central bank to keep one rate hike on the table and allow its balance sheet to contract through the end of the year – so it’s no surprise that stocks rose from their lows of the day and bonds soared. But the big questions are, why so dovish and at what cost?”

U.S. Bubble Watch:

March 22 – MarketWatch (Steve Goldstein): “The IHS Markit flash purchasing managers index for manufacturing in March fell to a 21-month low, while the services PMI weakened to a two-month low. The flash manufacturing PMI fell to 52.5 from 53 in February, while the services PMI fell to 54.8 from 56.”

March 22 – Reuters (Jason Lange): “U.S. home sales surged in February to their highest level in 11 months, a sign that a pause in interest rate hikes by the Federal Reserve was starting to boost the U.S. economy. The National Association of Realtors said on Friday existing home sales jumped 11.8% to a seasonally adjusted annual rate of 5.51 million units last month… ‘(It’s) quite a powerful recovery that’s taking place,’ said Lawrence Yun, chief economist with the National Association of Realtors.”

March 17 – Financial Times (Rana Foroohar): “Hyman Minsky would have had a field day with last week’s US inflation numbers. One of the key points in the late, great economist’s Financial Instability Hypothesis was that there are two kinds of prices — prices for goods and services, and asset prices. Inflation in the two areas should, as a result, differ. And indeed they have, quite markedly. The latest Consumer Price Index figures show that almost all core inflation, which was weaker than expected, was in rent or the owner’s equivalent of rent (up 0.3%). Core goods inflation, meanwhile, was down 0.2%. Very simply, this means that the housing market is once again completely out of sync with the rest of the economy. A decade on from the subprime bubble, housing… is the only major component of the CPI with a national inflation rate that is consistently above the overall number.”

March 18 – CNBC (Hugh Son): “J.P. Morgan Chase CEO Jamie Dimon said that the U.S. economy has essentially been split into those benefiting from thriving corporations and those who are left behind. ‘I don’t want to be a tone deaf CEO; while the company is doing fine, it is absolutely obvious that a big chunk of [people] have been left behind,’ Dimon said. ‘40% of Americans make less than $15 an hour. 40% of Americans can’t afford a $400 bill, whether it’s medical or fixing their car. 15% of Americans make minimum wages, 70,000 die from opioids’ annually. ‘If you travel around to most neighborhoods where companies live, they’re doing fine,’ Dimon said. ‘So we’ve kind of bifurcated the economy.’”

March 17 – Wall Street Journal (Theo Francis): “The strong U.S. economy has created millions of jobs and pushed up wages for many Americans. It also helped many big-company CEOs secure another raise and total compensation worth $1 million a month. Median compensation for 132 chief executives of S&P 500 companies reached $12.4 million in 2018, up from $11.7 million for the same group in 2017… The gains were driven by robust corporate profits and strong stock market returns for much of the year.”

March 21 – Wall Street Journal (Ben Eisen and Laura Kusisto): “High-end home buyers are turning cautious, a blow to banks that refocused their mortgage businesses around wealthy borrowers in the years after the financial crisis. Originations for jumbo mortgages, which are loans too big to be sold to Fannie Mae and Freddie Mac , dropped 12% last year by dollar volume, outpacing the 7% decline in mortgages that meet the standards for Fannie and Freddie’s government backing. The $281 billion in jumbo originations was off 27% from its postcrisis peak two years earlier…”

China Watch:

March 20 – South China Morning Post (Guo Rui): “A group of heavyweight Chinese economists sat down with Japanese counterparts in Beijing on Tuesday to discuss whether China can avoid its own ‘lost decades’, as the government looks to negotiate a deal to end the US-China trade war. Japan engaged in a lengthy trade dispute with the United States in the 1980s, with a series of deals over currency and market access blamed in some quarters for the decades of economic stagnation that followed. It is known that many in Beijing are worried that a bad trade deal with the US could result in China following a similar trajectory, with currency exchange rate and market access high on the list of demands of Washington’s negotiators.”

March 16 – Wall Street Journal (Lingling Wei): “China’s spending spree during the global financial crisis helped pull the world economy out of recession. This time, Beijing’s stimulus might not pack the same punch. China’s leadership is adopting what some traders dub a ‘cocktail approach’ to arresting its economic slowdown. Its remedies include a mix of greater deficit spending, tax cuts and easier credit. In a national address…, Premier Li Keqiang announced the government will cut taxes and fees for businesses by a total of 2 trillion yuan ($298bn), or 2% of China’s $13 trillion economy. That includes reductions in value-added taxes… and required corporate contributions to pensions…. Mr. Li also announced big-ticket spending initiatives, including an investment of 800 billion yuan in railway construction and 1.8 trillion yuan to build roads and waterway transportation.”

March 17 – Bloomberg (Christopher Balding): “China’s banks may have a flood of bad loans waiting in the wings. Not that you’d know it from looking at official levels for 2018, which suggest the problem was broadly contained. The reality is that newly soured debt was coming through the front door as fast as banks could shovel it out the back. Authorities worked hard to restrain financial-system leverage in 2018. Outstanding credit increased a relatively modest 10%... The government accomplished this primarily by tightening restrictions on shadow banking and moving that lending into the formal banking system, which recorded a 13% jump in new loans last year. To make way for that increase, and with new deposits falling 1% last year, banks sold a lot of nonperforming debt to asset management companies. Sales to AMCs and other disposals totaled almost 1.8 trillion yuan ($268bn), according to… Jason Bedford, executive director of Asian financials research at UBS…”

March 19 – Financial Times (Gabriel Wildau and Yizhen Jia): “Listed Chinese banks will need to raise about $260bn in fresh capital over the next three years as regulations force shadow-bank loans back on to balance sheets and global rules on systemically important groups impose extra requirements on the largest lenders. A recent lending surge by Chinese banks in response to monetary stimulus designed to support China’s slowing economy is also adding to the banks’ capital needs, by accelerating the expansion of their balance sheets. China’s bank regulator has forcefully implemented the global Basel III rules on bank capital adequacy as it seeks to fortify lenders against financial risks from a decade of rapid debt growth, which is now leading to record defaults.”

March 20 – Bloomberg: “China’s banks are setting fundraising records in a rush to strengthen their balance sheets. Firms have used equity and debt offerings to raise $48 billion this year, the most for a first quarter… The flurry of issuance has had banks reach deep into the fundraising toolbox -- especially bonds that count as capital. That includes the first-ever perpetual sold domestically by a Chinese lender as well as rarely-used convertible bonds and dollar-denominated debt… ‘Banks have been asked to increase their lending to the private sector,’ said Alicia Garcia Herrero, chief Asia Pacific economist at Natixis SA in Hong Kong. ‘They need to increase their loan book, and to that end, their capital. All of this is to keep growth afloat.’”

March 20 – CNBC (Weizhen Tan): “An economic slowdown and extremely tight credit conditions pushed corporate debt to a record high in China last year, according to experts. Defaults for Chinese corporate bonds — issued in both U.S. dollars and the Chinese yuan — soared last year… Yuan-denominated debt rose to an ‘unprecedented’ 119.6 billion yuan ($17.8bn) — four times more than 2017, according to… Singapore bank DBS. …Nomura’s estimates… were even higher, putting the size of defaults in onshore bonds — or yuan-denominated bonds — at 159.6 billion yuan ($23.8bn) last year. That number is roughly four times more than its 2017 estimate. Offshore corporate dollar bonds, or U.S. dollar-denominated debt…, followed the same trend. Nomura said the amount of such debt rose to $7 billion in 2018, from none the year before.”

March 19 – Reuters (Choonsik Yoo): “Confidence among Asian companies held near three-year lows in the first quarter as a U.S.-China trade dispute dragged on, pulling down a global economy that is already on a downward path, a Thomson Reuters/INSEAD survey found. The Thomson Reuters/INSEAD Asian Business Sentiment Index tracking firms’ six-month outlook was flat in the March quarter from the previous quarter’s 63, compared with a near three-year low of 58 set in the September quarter.”

March 20 – Bloomberg (David Tweed and Enda Curran): “Hong Kong’s chief executive cautioned that the Asian financial hub continued to face the risk of collateral damage from the China-U.S. trade war, saying the tensions were one reason why she’s joined the ranks of those tracking President Donald Trump’s tweets. ‘Last night, he was shouting to the media that things were good,’ Carrie Lam said of Trump… ‘I certainly want to see this trade discussion leading to some positive outcome. But I don’t think the problem will go away just like that. We will probably be seeing more tension in other areas.’”

Central Bank Watch:

March 17 – Bloomberg (Piotr Skolimowski): “The European Central Bank is approaching the point where it needs to decide whether if negative interest rates are more problem than solution. Since officials pushed back plans to tighten policy, warnings have increased that the potency of a key instrument used to rekindle growth in the 19-nation bloc is diminishing the longer it remains in place. France’s Francois Villeroy de Galhau… is loudest in voicing concern that sub-zero rates may prevent stimulus from reaching the economy because they’re hurting bank profitability. The argument isn’t unique to Europe. Banks in Japan are urging policy makers to watch that negative interest rates aren’t causing side effects, and officials at the Federal Reserve… argue it could cause problems for the U.S. financial system.”

March 21 – Wall Street Journal (Brian Blackstone): “Abrupt changes in the policies of the world’s largest central banks have rippled through smaller economies, leaving them with the prospect of low and even negative interest rates for years to come despite having mostly healthy economies. The danger is that these easy-money policies could fuel destabilizing bubbles in real estate and other asset markets. They may also leave banks with little ammunition to respond to the next economic downturn. Economies like Switzerland’s, whose central bank signaled no change in its negative-rate policies for years to come, are small compared with the U.S. and eurozone. Still, they are home to major global banks and companies that are sensitive to exchange rates and financial conditions. With financial markets so interconnected, problems in small countries can quickly spread to larger ones.”

Brexit Watch:

March 19 – Financial Times (George Parker, Laura Hughes and Sebastian Payne): “Theresa May’s cabinet has split over whether the UK should request a long delay to Brexit if MPs continue to block the prime minister’s exit deal. Eight Eurosceptic ministers said in tetchy exchanges during a meeting of Mrs May’s cabinet… that any extension of the Article 50 exit process should last no longer than June 30… These ministers added that Britain should be prepared to leave the EU at that point — without a deal if necessary. But Europhile ministers — including chancellor Philip Hammond — argued the prospect of a longer delay to Brexit was needed to keep pressure on Eurosceptic Conservative MPs to finally back Mrs May’s deal.”

March 19 – Financial Times (Gillian Tett): “Another week, another round of baffling Brexit political farce. But if you want a different perspective on these dramas, ponder a topic that (almost) no British politician ever bothers to discuss: the state of London’s gigantic derivatives market after leaving the EU. For while this topic is arcane, it matters deeply — not just because derivatives have financial stability implications, but also because the issue is sparking some extraordinary behind-the-scenes battles, now with transatlantic consequences. The issue at stake revolves around the clearing of derivatives trades. In recent years, the London Clearing House has dominated the swaps and futures sector, regularly clearing more than $3tn of trades each day, of which a quarter are euro-denominated and almost half in dollars.”

Europe Watch:

March 18 – Bloomberg (Carolynn Look): “The slowdown in Europe’s largest economy is unlikely to have enjoyed a long-awaited turnaround at the start of 2019 as German industry continued to stumble. ‘The basic cyclical trend of the German economy remained subdued after the turn of theyear. This was mainly due to the continuing slowdown in industrial momentum,’ the Bundesbank said… ‘Greater catch-up effects in the country’s auto industry ‘are no longer expected for the current quarter.’”

March 17 – Reuters (Tom Sims and John O’Donnell): “Deutsche Bank and Commerzbank confirmed… they were in talks about a merger, prompting labour union concerns about possible job losses and questions from analysts about the merits of a combination. Germany’s two largest banks issued short statements after separate meetings of their management boards, …indicating a quickening of pace in the merger process, although both also warned that a deal was far from certain.”

March 19 – Financial Times (Michael Peel, Lucy Hornby and Rachel Sanderson): “The last time EU leaders held strategy talks on China was just after the Tiananmen Square massacre in 1989. The 12 heads of state and government imposed sanctions including an arms embargo over what they called the ‘brutal repression’ by the Chinese government. Almost 30 years later, the European Council will use a summit this week to focus once more on China — and decide whether it is time to get tough again. Mounting concerns over Chinese industrial policy, cyber security and trade wars have all combined to put Beijing firmly back on the European agenda. To some in Brussels and member state capitals, this week’s discussion is the EU’s belated awakening to the new sway of China — and to an uncomfortable truth that it has failed to register the full implications of its ascendancy.”

March 19 – Reuters (Leigh Thomas and Yann Le Guernigou): “The French economy should grow about 1.4% this year, Finance Minister Bruno Le Maire said…, revising down the forecast of 1.7% growth in this year’s budget. Le Maire told the Senate’s law and economic affairs commissions that the yellow vest anti-government unrest had in the short-term trimmed 0.2 percentage points off growth in 2018 and 2019.”

March 18 – Financial Times (Joseph Nasr): “German Chancellor Angela Merkel said… she hoped inflation in the euro zone would soon reach the target set by the European Central Bank so the central bank can start raising interest rates. ‘I believe or I hope - we have almost reached the 2% inflation rate - that the ECB can change its policy,’ Merkel said during a town hall meeting… Her comments were in response to complaints from a participant that savers and pension funds were suffering from the record-low interest rates set by the European Central Bank.”

EM Watch:

March 18 – Financial Times (Colby Smith): “And once again, investors are bullish on emerging markets. With the Fed on pause and trade tensions between the US and China ebbing, investors have been quick to forget the crises that hobbled emerging markets last year. But with investor sentiment shifting closer to ‘exuberance,’ as one strategist puts it, and sources for further upside waning, the tide could soon turn against those who have been over-eager… After a trying 2018, investors have poured billions into hard currency emerging market debt since January, with ten consecutive weeks of positive inflows, according to EPFR Global.”

March 21 – Reuters (Marcelo Rochabrun): “Brazil prosecutors on Thursday alleged that detained former president Michel Temer was the leader of a ‘criminal organization’ that diverted 1.8 billion reais ($471.62 million) in funds as part of a scheme related to the construction of a nuclear plant complex. Temer was arrested on Thursday morning in Sao Paulo.”

Global Bubble Watch:

March 18 – Bloomberg (William Horobin): “The people of the world’s richest economies are anxious about everything from money and taxes, to healthcare to pensions -- and they’ve little faith in their governments to do anything about it. According to a survey of 22,000 people in 21 OECD countries, there’s a ‘clear sense of dissatisfaction and injustice’ in advanced economies. A majority believe they wouldn’t easily access benefits if needed, less than 20% say they get a fair share given the taxes they pay, and in many countries most people feel governments ignore their views. The OECD said the exercise in ‘listening to people’ has produced ‘deeply worrying’ results.”

March 20 – CNBC (Kate Rooney): “Corporate giants doing business abroad are painting a dreary picture of the world’s economy. With an ongoing trade war between the U.S. and China, Brexit uncertainty weighing on Europe and the U.K., and new weakness out of Japan, some business leaders say it’s harder than ever to rake in profits. This week, top executives at FedEx, BMW, UBS and others described bleak global business conditions while discussing quarterly results. Fitch Ratings also ‘aggressively’ cut its forecast for the year. The head of UBS was among the latest to blame the world’s backdrop for weaker-than-expected results.”

March 20 – CNBC (Kate Rooney): “A top executive at FedEx is flagging serious concerns in the global economy. The multinational package delivery service reported declining international revenue as a result of unfavorable exchange rates and the negative effects of trade battles. ‘Slowing international macroeconomic conditions and weaker global trade growth trends continue, as seen in the year-over-year decline in our FedEx Express international revenue,’ Alan B. Graf, Jr., FedEx Corp. executive vice president and chief financial officer, said…”

March 19 – Bloomberg (Michael Heath): “The apartment market in Australia’s largest city is ‘quite soft’ due to a sharp rise in supply that’s increased risks to financial stability, a senior central bank official said. Sydney added more than 80,000 apartments in the past few years, increasing the city’s housing stock by about 5%... In Melbourne and Brisbane, which also saw substantial construction, apartment prices have so far held up, she said. ‘Our main concern with this from a financial stability perspective is the potential for this large influx of supply to exacerbate declines in housing prices and so adversely impact households’ and developers’ financial positions,’ Bullock said… ‘Currently, the risks here appear to be elevated but contained.’”

March 19 – Reuters (Fergal Smith): “Canada said… it would issue nearly 20% more bonds in the coming fiscal year to help the Liberal government fund its spending programs, ahead of an October election. The federal budget… projected the deficit would widen to C$19.8 billion ($14.86bn) in 2019-20 from a forecast C$14.9 billion for the current fiscal year ending March 31.”

Japan Watch:

March 17 – Bloomberg (Daniel Moss): “Haruhiko Kuroda is miles from where he wants to be. About 200 miles. That's the distance from Tokyo to Nagoya, where the Bank of Japan governor gave a very upbeat speech last year. Some interpreted those remarks as laying the groundwork for a shift from the ultra-accommodation that's been the central bank's trademark. In terms of monetary policy, Nagoya might as well be on another continent. That's how much the outlook for interest rates, globally, has shifted. Talk of normalization, however gradual, is now passe. If anything, the question among observers has become when and how the BOJ will ease further.”

March 19 – Reuters (Leika Kihara): “Bank of Japan policymakers disagreed on how quickly the central bank should ramp up monetary stimulus, minutes of their January rate review showed…, as heightening overseas risks threatened to derail the country’s fragile economic recovery. While most members agreed it was appropriate to maintain the BOJ’s current stimulus program, one of them said the central bank must stress its readiness to take ‘quick, flexible and bold’ action including additional easing, the minutes showed.”

March 17 – Reuters (Tetsushi Kajimoto): “Japan’s exports fell for a third month in February in a sign of growing strain on the trade-reliant economy, suggesting the central bank might be forced to offer more stimulus eventually… Slowing global growth, the Sino-U.S. trade war and complications over Britain’s exit from the European Union have already forced many policymakers to shift to an easing stance over recent months.”

March 19 – Reuters (Tetsushi Kajimoto and Izumi Nakagawa): “Confidence among Japanese manufacturers hit its weakest in two-and-a-half years in March, a Reuters poll showed… The monthly poll, which tracks the Bank of Japan’s (BOJ) closely watched tankan quarterly survey, found confidence fell for a fifth straight month while sentiment in the service sector held steady…”

March 20 – Reuters (Leika Kihara): “Japanese Prime Minister Shinzo Abe said… he sees the central bank’s inflation target as a means to achieve the more important goal of reviving the economy, in a sign that firing up inflation may no longer be a priority for the government. The premier’s comments followed those from Finance Minister Taro Aso, who warned the Bank of Japan last week against insisting on hitting its price goal. Abe defended the BOJ for missing its 2% inflation target, telling parliament that the government gives a passing grade to its policies for boosting jobs and economic growth.”

Fixed-Income Bubble Watch:

March 21 – Bloomberg (Christopher DeReza): “The influx of investor cash into U.S. corporate-bond funds accelerated, helping to keep the market on track for its biggest quarterly gain in three years. Investors added $5.14 billion to investment-grade funds in the week ended March 20, the biggest net increase since March 2017, Lipper data show. That followed a $3.29 billion inflow the previous week and marked the eighth straight week of gains with investors pouring $21 billion of cash into the funds.”

March 15 – Reuters (Gertrude Chavez-Dreyfuss): “Foreign investors sold U.S. Treasury bonds and notes for a third straight month in January…, a trend that has been in place for several years. They sold $11.99 billion in Treasuries in January, compared with a record $77.35 billion the previous month… Selling was mainly from foreign official accounts.”

March 18 – Bloomberg (Russell Ward): “When returns on safe assets are low, investors look for riskier places to put their money. In Japan, where yields have been near zero for some traders’ entire careers, an increasingly popular investment is bundled U.S. corporate loans known as CLOs, or collateralized loan obligations. Some observers have drawn parallels to the collateralized debt obligations, or CDOs, that helped turn packaged U.S. mortgages into bombs that laid waste to global financial markets in 2008. Japanese regulators have drafted a rule that could limit their risk… Japanese banks have been buying CLOs and other securities abroad because the central bank’s ultra-easy monetary policy has made it extremely difficult to profit from domestic bonds and loans. They hold at least 10% of the $750 billion global market for CLOs…”

Leveraged Speculator Watch:

March 22 – Financial Times (Chris Flood): “New hedge fund launches have sunk to their lowest level since the start of the century as untried managers struggled to attract capital in 2018, a year of widespread disappointment for investors in the asset class. Hedge fund portfolios run by institutional investors delivered average returns of just 1.6% in the first 11 months of 2018, well below expectations of 7.2%, according to a survey of 425 respondents by Deutsche Bank. Just 13% of the investors surveyed achieved their expected performance target… Just 561 new hedge funds were launched in 2018, the lowest number since 2000, according to HFR…”

Geopolitical Watch:

March 16 – Reuters (Sanjeev Miglani and Drazen Jorgic): “The sparring between India and Pakistan last month threatened to spiral out of control and only interventions by U.S. officials, including National Security Advisor John Bolton, headed off a bigger conflict, five sources familiar with the events said. At one stage, India threatened to fire at least six missiles at Pakistan, and Islamabad said it would respond with its own missile strikes ‘three times over’, according to Western diplomats and government sources…”

March 19 – Reuters (Ben Blanchard): “Pakistan Foreign Minister Shah Mahmood Qureshi told his Chinese counterpart… of the ‘rapidly deteriorating situation’ and rights violations in Indian Kashmir, and called for India to look again at its policies there. India launched an air strike on a militant camp inside Pakistan last month following an attack on an Indian paramilitary convoy in disputed Kashmir. The Feb. 14 attack that killed at least 40 paramilitary police was the deadliest in Kashmir’s 30-year-long insurgency, escalating tension between the neighbors, and the subsequent air strike had heightened fears that nuclear-armed India and Pakistan could slide into a fourth war.”

March 19 – Reuters (Philip Pullella): “High-level U.S.-Russian talks on how to defuse Venezuela’s crisis ended… with the two sides still at odds over the legitimacy of President Nicolas Maduro. Russia has said Maduro remains the country’s only legitimate leader whereas the United States and many other Western countries back Juan Guaido, head of the opposition-controlled National Assembly who invoked a constitutional provision in January to assume an interim presidency.”

March 20 – Reuters (Yimou Lee and Twinnie Siu): “China urged the United States… not to allow Taiwan President Tsai Ing-wen to stop over in Hawaii next week when she makes a tour of the island’s diplomatic allies in the Pacific, adding another irritant to Beijing-Washington ties.”

Thursday, March 21, 2019

Thursday Evening Links

[Reuters] Wall St. gains as tech boost offsets bank losses after Fed stance

[CNBC] 10-year Treasury yield falls to 14-month low, signaling possible trouble with economy

[CNBC] Trump wants China to ‘double or triple’ its offer to buy US goods in trade negotiations, sources say

[Reuters] Beneath Fed's positive spin, an embrace of a tepid future

[Reuters] The Fed is prodding Americans to buy more on credit

[Reuters] DoubleLine's Jeffrey Gundlach calls Fed's 'reversal' on rates 'stunning'

[Reuters] U.S. labor market solid; manufacturing sector slowing

[USAT] 'It looked like an ocean': Severe Midwest flooding could last all spring

[CNBC] Mortgage rates just tanked thanks to the Fed – and they could go even lower

[Reuters] Brazil prosecutors say ex-President Temer led 'criminal organization'

[Bloomberg] Revenge of the Doves: How the Fed Mainstream Joined Two Outliers

[Bloomberg] JPMorgan's Kolanovic Says Bad Liquidity Is Behind Stock Chaos

[Bloomberg] Manhattan Homes Are Taking the Longest to Sell in Seven Years

[Bloomberg] Half the World Worries About Italy Getting Into Bed With China

[WSJ] The Bond Market’s Blind Faith in a Do-Nothing Fed

[FT] Treasury yield curve narrows to lowest since 2007

Thursday's News Links

[Reuters] Global stocks wilt as Fed shift sparks stampede into bonds

[Reuters] Treasuries - U.S. yields pare fall after jobless claims, Philly Fed data

[Reuters] Gold near 3-week peak on dovish Fed; palladium at record high

[Reuters] German 10-year yield hurtles towards 0 pct as Fed signals rate-hike halt

[Reuters] Dollar flattened in rush to wager on Fed rate reversal

[Reuters] Inside the Fed's balance sheet in four charts

[AP] UK’s May asks a wary EU to delay Brexit until June 30

[Bloomberg] This Might Be the Dollar Disaster Bears Have Waited For

[CNN] Trump eyes auto tariffs in EU standoff

[Bloomberg] Hong Kong Chief Warns of Collateral Damage Risk From Trade War

[Bloomberg] Chinese Banks' Record Fundraising Signals Industry Jitters

[Reuters] China urges U.S. to block Taiwan leader's Hawaii stop-over

[WSJ] Feldstein: The Debt Crisis Is Coming Soon

[WSJ] A Central Banking Domino Effect Is in Motion

[WSJ] Jumbo Mortgages Are Slowing Down, Testing Banks’ Postcrisis Playbook

[FT] Sovereign debt rallies after Fed confirms dovish turn

[FT] European foreign policy: a new realism on China

[FT] The shift away from Libor could threaten stability

Wednesday, March 20, 2019

Wednesday Evening Links

[Reuters] Banks stifle Wall Street rally following dovish Fed statement

[CNBC] 10-year Treasury yield dives to the lowest in a year after Fed says no more rates hikes

[CNBC] Dollar slammed by dovish Fed; pound remains weak

[Bloomberg] Banks Sink the Most in 2 Months, Bearing the Brunt of Fed's Dovish Turn

[Reuters] U.S. oil prices rise above $60 per barrel on tightening supply

[Reuters] Fed sees no rate hikes in 2019, sets end to asset runoff

[CNBC] Here’s what changed in the new Fed statement

[CNBC] Trump says China tariffs could stay in place for a ‘substantial period of time’ as trade deal develops

[Bloomberg] Trump Says Tariffs Will Stay Until China Complies With Deal

[Bloomberg] El-Erian: Why the Fed Solidified Its Policy U-Turn

[Bloomberg] Fed Gives Markets What They Want, Not Deserve

[CNBC] A growing list of companies from FedEx to BMW are warning about the world economy

[Reuters] Levi Strauss valued at $6.6 billion as IPO prices above target

[AP] Survey: Top CEOs report weaker economic outlook for 1Q

[Reuters] 'Golden cross' for stocks doesn't always glitter

[Reuters] France threatens to reject May's Brexit delay request

[WSJ] Fed Keeps Interest Rates Unchanged; Signals No More Increases Likely This Year

[WSJ] Trump Says Tariffs on Chinese Goods Will Stay for ‘Substantial Period of Time’

[WSJ] The Fed Plays It Safe

[FT] Fed’s caution surprises government bond market

[FT] A ‘very, very’ patient Fed: What analysts are saying

Wednesday's News Links

[Reuters] Longest stocks rally of the year stumbles ahead of Fed

[Reuters] Treasuries -Yields drop with Fed meeting results imminent

[Reuters] Fed's balance sheet plan, economic outlook under microscope

[CNBC] The market could be setting itself up for a letdown from Wednesday’s Fed decision

[AP] Crutsinger: Fed is likely to stay ‘patient’ and project fewer rate hikes

[Reuters] U.S. mortgage requests hit two-month high as borrowing costs fall

[SCMP] China Seeks to Avoid Fate of Japan in US Trade War Deal

[Wharton] U.S. Debt: Is It the Calm Before the Storm?

[Reuters] Abe describes BOJ's inflation goal as means to spur growth

[Reuters] BOJ policymakers disagree on next policy move as risks mount

[Reuters] Japan factory mood hits weakest since 2016 as trade rifts bite: Reuters Tankan

[Reuters] Asian business sentiment lingers near three-year low as trade war drags: Thomson Reuters/INSEAD

[CNBC] Chinese companies are defaulting on their debts at an ‘unprecedented’ level

[CNBC] FedEx just warned the whole globe is slowing

[NYT] What You Need to Know About Wednesday’s Fed Meeting

[WSJ] Five Things to Watch at the Fed’s March Meeting

[WSJ] Investors Fret Over Fed Rate Path Amid Mixed Data

Tuesday, March 19, 2019

Tuesday Evening Links

[Reuters] Wall Street gives up gains on news of troubled trade talks

[CNBC] Trade talks are in final stages, but there is still fear China may walk back concessions: Reports

[Bloomberg] Some U.S. Officials See China Walking Back Trade Pledges

[Reuters] US-China plan new trade talks for deal by end of April: WSJ

[Reuters] Q&A: Federal Reserve likely to disappoint policy doves - Weeden strategist

[Reuters] French finance minister cuts 2019 growth forecast to 1.4 percent

[Reuters] Canada sees 20 percent jump in bond issuance as deficit climbs

[Bloomberg] Sydney Apartments Pose Financial Stability Risks, RBA Says

[Reuters] U.S.-Russia talks on Venezuela stall over role of Maduro

[WSJ] U.S., China Plan New Trade Talks in Hopes for Deal by End of April

[FT] China banks face huge capital hole as stimulus spurs lending

[FT] FX market volatility at its lowest level since 2014

[FT] Tett: A transatlantic front opens in the Brexit battle over derivatives

Tuesday's News Links

[Reuters] Wall Street higher as Fed expected to hold fire

[Bloomberg] These Risky U.S. Loans Are Adored by Japanese Investors

[Bloomberg] Australian Housing Slide Deepens as RBA Worries About Consumers

[Bloomberg] The World’s Richest Countries Are Full of Anxious, Alienated People

[Reuters] Pakistan tells China of 'deteriorating situation' in Indian Kashmir

[WSJ] Fed Faces Crucial Decision on Mix of Treasurys in Its Portfolio

[WSJ] Trump Administration Proposes Borrowing Limits for Some Student Loans

[WSJ] Bitcoin Is in the Dumps, Spreading Gloom Over Crypto World

[FT] May warns UK faces ‘crisis’ following Bercow ruling

[FT] Hong Kong spends almost $1bn in March to defend currency

Monday, March 18, 2019

Saturday, March 16, 2019

Saturday's News Links

[Reuters] Foreigners sell U.S. Treasuries for 3rd month in January -data

[Reuters] Wall Street weekahead: U.S. funds focus on media stocks, banks to find value as mid-caps rally

[CNBC] Europe turns its concerns to China’s growing clout as Xi visits

[Reuters] Fresh clashes as France's yellow vests seek new momentum

[WSJ] As China Faces Slowdown, Stimulus Will Have Smaller Global Reach

[FT] Grounding a global fleet: Boeing faces its greatest challenge

[FT] Active investors are depressed, but not depressed enough

Weekly Commentary: No One Knows How Monetary Policy Works

My interest was piqued by a Friday Bloomberg article (Ben Holland), “The Era of Cheap Money Shows No One Knows How Monetary Policy Works.” “Monetary policy is supposed to work like this: cut interest rates, and you’ll encourage businesses and households to borrow, invest and spend. It’s not really playing out that way. In the cheap-money era, now into its second decade in most of the developed world (and third in Japan), there’s been plenty of borrowing. But it’s been governments doing it.”

I remember when the Fed didn’t even announce changes in rate policy. Our central bank would adjust interest rates by measured bank reserve additions/subtractions that would impact the interbank lending market. Seventies inflation forced Paul Volcker to push short-term interest-rates as high as 20% in early-1980 to squeeze inflation out of the system.

Federal Reserve policymaking changed profoundly under the authority of Alan Greenspan. Policy rates had already dropped down to 6.75% by the time Greenspan took charge in August 1987. Ending 1979 at 13.3%, y-o-y CPI inflation had dropped below 2% by the end of 1986. Treasury bond yields were as high as 13.8% in May 1984. But by August 1986 – yields were down to 6.9% - having dropped almost 700 bps in 27 months.

Lower market yields and economic recovery were absolute boon for equities. The S&P500 returned 22.6% in 1983, 5.2% in 1984, 31.5% in 1985, 22% in 1986 – and another 41.5% for 1987 through August 25th. Markets had evolved into a speculative bubble.

One could pinpointing the start of the great Credit Bubble back with the 70’s inflation. For my purposes, I date its inception at the 1987 stock market crash. At the time, many were drawing parallels between the 1987 and 1929 market crashes – including dire warnings of deflation risk – warnings that have continued off and on for more than three decades.

The Greenspan Fed made a bold post-crash pronouncement: “The Federal Reserve, consistent with its responsibilities as the Nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.” In hindsight, this was the beginning of central banking losing control.

The S&P500 returned 16.6% in 1988 and 31.7% in 1989 - the crash quickly forgotten. Not forgotten was the assurance that the Fed would be there as a market liquidity backdrop. GDP expanded at a blistering 7% pace in Q4 1987 – expanding 5.1% for the year. GDP accelerated to 6.9% in 1988. Instead of deflation and depression, the late-eighties saw one heck of a boom. As silly as it sounds these days, the eighties used to be called the “decade of greed.”

The decade’s sinking rates, collapsing bond yields, booming securities markets and the Fed’s liquidity assurances all contributed to what evolved into a three-decade proliferation of non-bank financial intermediation – money market funds, bond funds, repurchase agreements, asset-backed securities, mortgage-backed securities, junk bonds, corporate credit, the government-sponsored enterprises and derivatives (to name the most obvious).

Eighties’ (especially late-decade) excess came back to haunt the financial system and economy in 1990/91. The Savings and Loan fiasco had morphed from a few billion dollars issue to a several hundred billion serious problem. And following the collapse of real estate bubbles on both coasts, the U.S. banking system was left severely impaired. And similar to the period after the ’87 crash, there were more dire warnings of deflation and depression.

Following up on his post-crash promise to keep markets liquid, Alan Greenspan took another giant policy leap - orchestrating a steep yield curve. By dropping short-term rates to an at the time incredible 3% - banks could borrow fed funds and invest in government debt yielding 8% - magically replenishing depleted capital.

This maneuver empowered the rebuilding of banking system capital outside of deficit-busting Washington bailouts. Importantly, this was also a godsend for the nascent hedge fund community that was overjoyed to borrow at 3% and leverage in higher-yielding credit instruments – confident that the Fed would be there to backstop system liquidity in the event of trouble. Ditto for Wall Street derivatives and prop-trading desks.

They surely didn’t realize it at the time, but our central bank had begun sliding down a most slippery slope: The Fed had created unprecedented incentives for leveraged speculation. And there was so much resulting demand for debt securities to lever that a shortage developed. Wall Street securitization and derivatives machines went into overdrive to meet demand. By 1993, debt markets had evolved into a dangerous speculative bubble.

On February 4th 1994, the Fed took a so-called baby-step, raising rates 25 bps to 3.25%. After beginning February at 5.6%, 10-year Treasury yields quickly traded to 6% after the rate increase – and were up to 7.5% in May and 8.0% by November. The wheels almost came off, as the leveraged speculators were forced to deleverage. To the great long-term benefit of leveraged speculation, it would be the last time in decades that the Fed would move forcefully to tighten financial conditions.

The Fed conveniently looked the other way in 1994 as GSE holdings surged an (at the time) unprecedented $150 billion, their buying accommodating hedge fund and Wall Street firm liquidations. The GSEs stealthily operating as quasi-central banks worked so well that they boosted buying to $305 billion during tumultuous 1998 and another $317 billion in 1999. I doubt we’ll ever have an answer: Did the Greenspan Fed simply not appreciate of the effects of this massive GSE credit creation – or did they clandestinely support it?

The Federal Reserve certainly promoted the Mexican bailout, an aggressive policy maneuver that stoked the Asian Tiger bubbles (devastating collapses coming in 1997). Then in the fall of 1998 – with the simultaneous collapses of Russia and the hedge fund Long-Term Capital Management (LTCM) bringing the global financial system to the precipice – the Fed helped orchestrate a bailout of LTCM. In the dozen years since Volcker, the Greenspan Fed had made incredible strides in “activist” policymaking. In 1987, the early-nineties, 1995 and again in 1998, the Fed was content to use new tools and assume new power in the name of fighting deflation and depression risks. Speculative finance turned more powerful at every turn.

With Wall Street finance booming, GSE liquidity bubbling and Greenspan market backstopping, extraordinary tailwinds saw Nasdaq almost double in 1999. I thought the Bubble burst in 2000/2001, and I believe the Fed did as well. Then Federal Reserve and Washington establishment panicked with the U.S. corporate debt market in 2002 at the brink of serious dislocation. The prevailing theoretical expert on reflationary policymaking, Dr. Ben Bernanke, joined the Federal Reserve Board of Governors in 2002 - and replaced Greenspan in February 2006.

Greenspan had profoundly changed central banking. Bernanke, with his radical monetary views including the “government printing press” and “helicopter money,” took things to a whole new level. Greenspan was happy to manipulate rates, yield curves, market perceptions and incentives for leveraged speculation - all in the name of developing a powerful new monetary transmission mechanism. Dr. Bernanke was ready to add aggressive use of the Fed’s balance sheet to Greenspan’s toolkit. But in 2002, 3% short rates and just Bernanke’s talk of where the Fed was headed were sufficient to initiate a mortgage finance Bubble (that would see mortgage Credit more than double in six years).

I believe the Fed willfully used mortgage Credit and home price inflation to reflate system Credit. There were certainly vocal Wall Street analysts egging them on. This was a momentous error in analysis and judgement – with only bigger mistakes to come. The bursting of this Bubble in 2008 unleashed Bernanke and global central bankers’ experiment with directly inflating markets with central bank liquidity. The Bernanke Fed and others moved deliberately to force savers out of safety and into inflating risk markets. Low rates and central bank purchases unleashed governments to issue debt like never before.

Draghi’s 2012 “whatever it takes” battle cry ensured that increasingly speculative markets would envision “QE infinity” and decades of loose finance. Bernanke the next year further emboldened speculative market psychology with his proclamation that the Fed was ready to “push back against a tightening of financial conditions.” When markets faltered on China worries in early-2016, the "investment" community came to believe central banks and governments everywhere had adopted “whatever it takes” – certainly including Beijing (powerful monetary and fiscal stimulus), Europe (unprecedented ECB QE), Japan (unprecedented QE) and the Fed (postponement of policy normalization).

Global markets went to parabolic speculative excess. From February 2016 lows to 2018 highs, the Nasdaq Composite surged 93% and the small cap Russell 2000 jumped 85%. Over this period, the S&P500 gained 62%, Japan’s Nikkei 63% and Germany’s DAX 57%.

And while the notion that “deficits don’t matter” had been gaining adherents since QE commenced in 2008, by late-2016 it had essentially regressed to The Crowd convinced “deficits will never matter.” The election of Donald Trump ushered in a replay of “guns and butter” – tax cuts (huge cuts for corporations) and a boost of military spending to go with a steady upswing in entitlement spending. Infrastructure spending, why not?

What unfolded was a complete breakdown in discipline - in central banking, in Washington borrowing and spending, and throughout highly speculative markets. And I do believe the new Fed Chairman had hopes of normalizing Fed policymaking, letting the markets begin stand on their own, and commencing the long-delayed process of system normalization. Pressure – markets and otherwise – became too much to bear. Fed U-Turn, January 4, 2019 – immediately transmitted globally.

So, returning to the Bloomberg article in the opening paragraph: No one has a clue how monetary policy works anymore – transmission mechanisms, financial and economic system reactions and long-term consequences. The world is in completely uncharted territory.

We saw in December how abruptly markets can turn illiquid and approach dislocation. And we have witnessed beginning in January just how quickly speculation can be resuscitated and excess reignited. Those that believed central bankers would quickly cave have been emboldened – as have the believers that Beijing has things well under control with as many levers to pull as needed.

The Bank of Japan doubled its balance sheet to $5 TN in four years – with no end in sight. The ECB wound down its $2.6 TN QE program in December, and just last week announced that it would begin implementing additional stimulus measures. Understandably, markets believe Fed balance sheet “normalization” will end soon – with “balloonization” commencing at any point the markets demand it.

March 12 – CNBC (Yun Li): “After a stellar rebound, Jeffrey Gundlach still thinks stocks are in a bear market. ‘The stock market was and still is in a bear market,’ the founder and chief executive officer of Doubleline Capital said… He also said stocks could go negative again in 2019.”

I struggle somewhat with the traditional “bear” and “bull” market terminology in the current backdrop. It looked like a “bear” in December, while the market has performed rather bullishly in the initial months of 2019. But I still believe the global Bubble was pierced in 2018. But we’re dealing with a unique – I would suggest deviant – global market structure. There’s this massive pool of speculative, trend-following finance. Hedge funds, ETFs and such. There is, as well, a colossal derivatives complex – for speculating, leveraging and hedging. When markets begin turning risk averse, De-Risking/Deleveraging Dynamics can quickly push increasingly illiquid markets to the breaking-point.

But this structure also creates the potential for destabilizing short squeezes and the unwind of hedges to spark powerful rallies. And these rallies can in short order entice the mammoth pool of trend-following finance to jump aboard. Who these days can afford to miss a rally?

I would furthermore argue that more than ever before, the Financial Sphere is driving the Real Economy Sphere. As we’ve seen over the past couple of months, risk market rallies can spur a rather dramatic loosening of financial conditions. There has been a recovery in household perceived wealth and an attendant resurgence in consumer confidence and spending.

The bulls see Goldilocks as far as the eye can see. Sure nice to have the once-in-a-lifetime crisis out of the way back in 2008. And good to have this cycle’s correction wrapped up in December. Central banks got our backs. “Deficits don’t matter,” and recessions and crisis are things of the past. An election year coming up is good. China has too much to lose not to keep their boom going.

At least from the perspective of my analytical framework – things continue to follow the worst-case scenario. What started with Greenspan, expanded dramatically with Bernanke, spread globally through the entire central bank community, further escalated by Draghi’s “whatever it takes” and Kuroda’s “it takes everything”, to yet further emboldened by Powell’s U-Turn and the accompanying flock of dovish central banks worldwide.

The heart of the issue is that monetary policy has come to chiefly function through a massive global infrastructure of speculative finance. Over the past three decades, things evolved from monetary policy operating subtly to encourage/discourage bank lending at the margin - to central banks expressly working to ensure that Trillions of levered holdings and perhaps tens of Trillions of speculative positions don’t face risk aversion and liquidation.

Speculative finance became the marginal source of liquidity for markets and economies generally. This all appears almost magical when the markets are rising, but in reality it's a highly unstable situation. We’re at the stage of the cycle where there is an incredible excess of finance that is speculative in character, while speculative market psychology ("animal spirits") has become deeply emboldened. The upshot is a bipolar world: too much risk-embracing finance chasing inflating markets, ensuring excessively loose financial conditions; or, when risk aversion hits, intense de-risking/deleveraging quickly leading to illiquidity, faltering markets and an abrupt tightening of financial conditions. There’s little middle-ground.

The entire notion of some so-called “neutral rate” is delusional. With markets so highly speculative and market-based finance dictating financial conditions, what policy rate would today equate with stable markets and economic conditions? Good luck with that.

It’s similar to the issue faced in 2007, although today’s global backdrop has closer parallels to 1929. Speculative finance and asset Bubbles run amok, while economic prospects dim. And nowhere are such dynamics more at play than in China.

March 14 – Financial Times (Hudson Lockett): “The cost of new housing in China's major cities rose more quickly in February… Prices for new housing across 70 large cities rose 10.4% year on year in January… That marked the equal-quickest gain in 21 months. Every city saw average home prices rise compared to a year ago except Xiamen, where they stood unchanged… The latest reading marks a nine-month run of quickening price gains across major cities. That is good news for top officials gathering in Beijing this week for the National People's Congress, as China’s property sector is estimated to account for 15% of the country's gross domestic product, or closer to 30% if related industries are included.”

March 10 – Bloomberg: “China’s credit growth slowed in February after a seasonal surge the previous month, with the net development in the first two months of the year signaling continued recovery in credit supply. Aggregate financing was 703 billion yuan ($105bn) in February…, compared with an estimated 1.3 trillion yuan in a Bloomberg survey. Broad M2 money supply gained 8.0%, matching its slowest-ever expansion… Financial institutions offered 885.8 billion yuan of new loans in February, versus a projected 950 billion yuan.”

Combining a booming January and a less-than-expected February, China Aggregate Financing increased $794 billion – 25% greater than the comparable 2018 expansion. Total Aggregate Financing jumped $3.025 TN over the past year (10.1%), with growth down somewhat from the comparable year ago period. And while “shadow bank” instruments continue to stagnate, bank loans grow like gangbusters.

China New Loans were up $2.46 TN over the past year, or 13.4%. Over the past three months, New Loans expanded $773 billion, or 15.5% annualized. Consumer Loans actually suffered a small contraction in February (after a record January), the first decline since February 2016. For the past year, Consumer Loans expanded $1.06 TN, or 17.1%. Consumer Loans expanded 42% over two years, 77% over three years and 139% in five years. What a Bubble.


For the Week:

The S&P500 surged 2.9% (up 12.6% y-t-d), and the Dow rose 1.6% (up 10.8%). The Utilities gained 1.8% (up 10.7%). The Banks jumped 2.6% (up 16.6%), and the Broker/Dealers rose 3.1% (up 10.7%). The Transports increased 1.9% (up 12.4%). The S&P 400 Midcaps rose 1.9% (up 14.0%), and the small cap Russell 2000 gained 2.1% (up 15.2%). The Nasdaq100 jumped 4.2% (up 15.4%). The Semiconductors surged 5.6% (up 20.5%). The Biotechs jumped 5.9% (up 21.9%). While bullion increasing $4, the HUI gold index declined 0.4% (up 5.5%).

Three-month Treasury bill rates ended the week at 2.39%. Two-year government yields declined three bps to 2.44% (down 5bps y-t-d). Five-year T-note yields fell four bps to 2.40% (down 12bps). Ten-year Treasury yields slipped four bps to 2.59% (down 10bps). Long bond yields fell six bps to 3.01% (unchanged). Benchmark Fannie Mae MBS yields dropped six bps to 3.32% (down 18bps).

Greek 10-year yields increased three bps to 3.79% (down 56bps y-t-d). Ten-year Portuguese yields declined four bps to 1.31% (down 40bps). Italian 10-year yields slipped one basis point to 2.50% (down 25bps). Spain's 10-year yields jumped 14 bps to 1.19% (down 23bps). German bund yields added two bps to 0.08% (down 16bps). French yields rose five bps to 0.46% (down 25bps). The French to German 10-year bond spread widened three to 38 bps. U.K. 10-year gilt yields increased two bps to 1.21% (down 7bps). U.K.'s FTSE equities index jumped 1.7% (up 7.4% y-t-d).

Japan's Nikkei 225 equities index rose 2.0% (up 7.2% y-t-d). Japanese 10-year "JGB" yields were unchanged at negative 0.03% (down 4bps y-t-d). France's CAC40 surged 3.3% (up 14.3%). The German DAX equities index jumped 2.0% (up 10.7%). Spain's IBEX 35 equities index rose 2.3% (up 9.4%). Italy's FTSE MIB index gained 2.7% (up 14.9%). EM equities traded higher. Brazil's Bovespa index surged 4.0% (up 12.8%), and Mexico's Bolsa gained 1.5% (up 1.4%). South Korea's Kospi index rose 1.8% (up 6.6%). India's Sensex equities index surged 3.7% (up 5.4%). China's volatile Shanghai Exchange gained 1.7% (up 21.2%). Turkey's Borsa Istanbul National 100 index rose 1.7% (up 13.2%). Russia's MICEX equities index was about unchanged (up 5.0%).

Investment-grade bond funds saw inflows of $3.295 billion, and junk bond funds posted inflows of $1.040 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates sank 10 bps to a 13-month low 4.35% (down 13bps y-o-y). Fifteen-year rates fell seven bps to 3.76% (down 14bps). Five-year hybrid ARM rates declined three bps to 3.84% (up 17bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 10 bps to a one-year low 4.30% (down 27bps).

Federal Reserve Credit last week increased $2.5bn to $3.932 TN. Over the past year, Fed Credit contracted $428bn, or 9.8%. Fed Credit inflated $1.121 TN, or 40%, over the past 331 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $6.2bn last week to $3.472 TN. "Custody holdings" gained $20bn y-o-y, or 0.6%.

M2 (narrow) "money" supply added $11.0bn last week to $14.490 TN. "Narrow money" gained $585bn, or 4.2%, over the past year. For the week, Currency increased $2.7bn. Total Checkable Deposits jumped $31.5bn, while Savings Deposits fell $28.9bn. Small Time Deposits gained $4.2bn. Retail Money Funds added $1.5bn.

Total money market fund assets were little changed at $3.112 TN. Money Funds rose $292bn y-o-y, or 10.3%.

Total Commercial Paper declined $5.4bn to $1.062 TN. CP declined $19bn y-o-y, or 1.8%.
Currency Watch:

March 12 – Bloomberg (Richard Frost, Benjamin Purvis and Tian Chen): “Hong Kong’s de facto central bank intervened to defend the local currency’s peg against the dollar for the second time in days. The Hong Kong Monetary Authority bought HK$3.925 billion ($500 million) of local currency…, after the Hong Kong dollar fell to the weak end of its HK$7.75-HK$7.85 trading band. It also purchased $192 million worth at the end of last week… The move will reduce the aggregate balance, a measure of interbank liquidity, to HK$70.9 billion on March 14.”

The U.S. dollar index declined 0.7% to 96.595 (up 0.4% y-t-d). For the week on the upside, the Norwegian krone increased 2.8%, the Swedish krona 2.2%, the British pound 2.1%, the Mexican peso 1.5%, the Brazilian real 1.4%, the euro 0.8%, the New Zealand dollar 0.6%, the Swiss franc 0.6%, the Canadian dollar 0.6%, the Australian dollar 0.6%, the Singapore dollar 0.4%, and the South African rand 0.3%. For the week on the downside, the Japanese yen declined 0.3% and the South Korean won 0.1%. The Offshore Chinese renminbi increased 0.11% versus the dollar this week (up 2.45% y-t-d).

Commodities Watch:

March 12 – Financial Times (Henry Sanderson): “China’s push to boost its gold holdings could see the country challenge Russia as the most aggressive buyer of the precious metal this year. The country’s central bank, the People’s Bank of China, has bought about 32 tonnes of gold in the past three months. If it keeps purchasing at that rate, China would surpass Russia and Kazakhstan, leading buyers in 2018 which have tapered their acquisitions recently. China is the world’s biggest gold producer but its gold reserves, at just under $80bn, make up a fraction of its total foreign exchange reserves of more than $3tn… That 3% share, for example, compares with 19% for Russia.”

The Goldman Sachs Commodities Index jumped 2.5% (up 15.5% y-t-d). Spot Gold added 0.3% to $1,302 (up 1.6%). Silver slipped 0.2% to $15.324 (down 1.4%). Crude jumped $2.45 to $58.52 (up 29%). Gasoline rose 3.1% (up 43%), while Natural Gas dropped 2.4% (down 5%). Copper increased 0.4% (up 11%). Wheat surged 5.2% (down 8%). Corn increased 0.7% (down 1%).

Trump Administration Watch:

March 11 – Bloomberg (Katia Dmitrieva): “President Donald Trump’s newest budget forecasts the U.S. fiscal deficit surpassing $1 trillion this year and staying above that level until 2022. The fiscal 2020 proposal sees the deficit expanding to $1.1 trillion for 2019 and 2020, when Trump will run for re-election. The shortfall is seen narrowing slightly to $1.07 trillion in 2012 and $1.05 trillion in 2022…”

March 13 – Associated Press (Kevin Freking): “President Donald Trump… dangled the prospect of walking away from a new trade deal with China if it’s not to his liking, just as he cut short his summit with North Korea’s Kim Jong Un… Trump spoke on the state of negotiations with China shortly before meeting with Republican senators on trade issues. He spoke optimistically of the U.S. and China being able to reach an agreement, declaring that ‘China has not been doing well. We’ve been doing unbelievably well.’”

March 12 – Financial Times (James Politi): “US President Donald Trump’s trade chief has warned that negotiations to end the tariff war with China were at risk of failing, saying ‘major, major issues’ needed to be resolved before an agreement was reached, and he could not ‘predict success at this point’. Speaking before the Senate finance committee…, Robert Lighthizer, the US trade representative, said that talks with Beijing had intensified and probably entered their ‘final weeks’, as the two countries haggle over structural reforms and enforcement provisions. But Mr Lighthizer indicated that a deal could not be taken for granted. ‘We’re either going to have a good result or we’re going to have a bad result before too long, but I’m not setting a specific timeframe and it’s not up to me,’ Mr Lighthizer said. ‘I’ll work as hard as I can, and the president will tell me when the time is up, or the Chinese will,’ he added.”

March 13 – Bloomberg (Jennifer Epstein): “Gary Cohn, the former head of President Donald Trump’s National Economic Council, said the U.S. is ‘desperate right now’ for a trade pact with China as negotiators from both countries seek to reach a deal. ‘The president needs a win,’ Cohn said… Cohn’s comments stand in contrast to statements from Trump that he’s in no rush for an agreement and is prepared to walk away from negotiations.”

March 11 – Associated Press (Lisa Mascaro): “President Donald Trump proposed a record $4.7 trillion budget…, pushing the federal deficit past $1 trillion but counting on optimistic growth, accounting shuffles and steep domestic cuts to bring future spending into balance in 15 years. Reviving his border wall fight with Congress, Trump wants more than $8 billion for the barrier with Mexico, and he’s also asking for a big boost in military spending. That’s alongside steep cuts in health care and economic support programs for the poor that Democrats — and even some Republicans — will oppose. Trump called his plan a bold next step for a nation experiencing ‘an economic miracle.’ House Speaker Nancy Pelosi called his cuts ‘cruel and shortsighted ... a roadmap to a sicker, weaker America.’”

March 10 – Reuters (Roberta Rampton): “President Donald Trump will propose in his fiscal 2020 budget on Monday that the U.S. Congress cut non-defense spending by 5% while boosting spending on the military, veterans’ healthcare and border security, the White House budget office said…”

March 12 – Wall Street Journal (Jeremy Page, Kate O’Keeffe and Rob Taylor): “A new front has opened in the battle between the U.S. and China over control of global networks that deliver the internet. This one is beneath the ocean. While the U.S. wages a high-profile campaign to exclude China’s Huawei Technologies Co. from next-generation mobile networks over fears of espionage, the company is embedding itself into undersea cable networks that ferry nearly all of the world’s internet data. About 380 active submarine cables—bundles of fiber-optic lines that travel oceans on the seabed—carry about 95% of intercontinental voice and data traffic, making them critical for the economies and national security of most countries. Current and former security officials in the U.S. and allied governments now worry that these cables are increasingly vulnerable to espionage or attack and say the involvement of Huawei potentially enhances China’s capabilities.”

March 8 – Wall Street Journal (Andrew Ackerman): “What was supposed to be Volcker 2.0—a more industry-friendly version of postcrisis Wall Street trading restrictions—could be replaced with a third try by regulators. Faced with industry ire over a proposal released last year, Trump-appointed financial regulators are leaning toward redoing it… The Volcker rule limits banks’ ability to make trading bets with their own money, a practice known as proprietary trading. No final decisions have been made to scrap the May 2018 proposal and to start anew on the rule, the people said. Still, staffers at banking regulators were preparing to make recommendations to senior policy makers in the coming days or weeks.”

Federal Reserve Watch:

March 10 – Reuters (Howard Schneider): “Federal Reserve Chairman Jerome Powell said… the U.S. central bank does ‘not feel any hurry’ to change the level of interest rates again as it watches how a slowing global economy affects local conditions in the United States. Rates are currently ‘appropriate,’ Powell said in a wide-ranging interview with CBS’s 60 Minutes news show in which he called the current rate level ‘appropriate’ and ‘roughly neutral,’ meaning it is neither stimulating or curbing the economy.”

U.S. Bubble Watch:

March 10 – Associated Press (Andrew Taylor): “The federal budget deficit is ballooning on President Donald Trump’s watch and few in Washington seem to care. And even if they did, the political dynamics that enabled bipartisan deficit-cutting deals decades ago has disappeared, replaced by bitter partisanship and chronic dysfunction. That’s the reality that will greet Trump’s latest budget… Like previous spending blueprints, Trump’s plan for the 2020 budget year will propose cuts to many domestic programs favored by lawmakers in both parties but leave alone politically popular retirement programs such as Medicare and Social Security… It’s put deficit hawks in a gloomy mood. ‘The president doesn’t care. The leadership of the Democratic Party doesn’t care,’ said former Sen. Judd Gregg, R-N.H. ‘And social media is in stampede mode.’”

March 14 – Reuters (Lucia Mutikani): “U.S. import prices increased by the most in nine months in February, but the trend remained weak, with prices declining for a third straight month on an annual basis. …Import prices rose 0.6% last month, the biggest gain since May, boosted by increases in the costs of fuels and consumer goods…”

March 13 – Reuters (Lucia Mutikani): “New orders for key U.S.-made capital goods rose by the most in six months in January and shipments increased, pointing to strong business spending on equipment at the start of the year. …Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, rebounded 0.8%, the biggest gain since July.”¬

March 13 – Reuters (Lucia Mutikani): “U.S. construction spending surged in January, with investment in public projects rising to a more than eight-year high, which could boost economic growth estimates for the first quarter. …Construction spending jumped 1.3%, the largest increase since last April, after a revised 0.8% drop in December.”

March 11 – Bloomberg (Matthew Boesler): “U.S. households in February reduced their expectations for inflation to the lowest level in 18 months, according to a Federal Reserve Bank of New York survey of consumer expectations. The median respondent to the New York Fed’s monthly study reported an expected inflation rate of 2.8% in three years’ time, down from 3% the month before…”

March 10 – Wall Street Journal (Michael Wursthorn): “Investors are snapping up shares of companies with weak earnings, a sign many have shaken off last year’s jitters and are ready to re-embrace riskier stocks in pursuit of outsize gains. Through the first two months of 2019, shares of companies with low earnings stability over the past 10 years have climbed more than those with steadier profits, according to… Bank of America Merrill Lynch. Top performers include communications, energy and utility stocks… many of which have more than doubled in value since Jan. 1 to push major indexes within striking distance of their records. Investors’ willingness to plow into riskier stocks that have less stable earnings recovered after the Federal Reserve’s recent pause on raising rates and growing optimism about U.S.-China trade negotiations, analysts said.”

March 12 – CNBC (Yun Li): “The so-called bond king Jeffrey Gundlach is not shy when it come to rebuking the increasingly popular theory backed by progressives — the Modern Monetary Theory. ‘MMT is a crackpot idea... sounds good for a first grader,’ the founder and chief executive officer of Doubleline Capital said in an investor webcast… He said the theory is ‘complete nonsense’ being used to justify a socialist program. The notion behind MMT is that as long as the Federal Reserve can keep interest rates low without sparking inflation, the national debt and budget deficit won’t be an issue.”

China Watch:

March 14 – Bloomberg (Jenny Leonard, Jennifer Jacobs and Jeffrey Black): “A meeting between President Donald Trump and President Xi Jinping to sign an agreement to end their trade war won’t occur this month and is more likely to happen in April at the earliest, three people familiar with the matter said. Despite claims of progress in talks by both sides, a hoped-for summit at Trump’s Mar-a-Lago resort will now take place at the end of April if it happens at all…”

March 13 – Financial Times (Gabriel Wildau): “China’s banking regulator issued new guidelines… designed to encourage banks to increase loans to small businesses, as Beijing seeks to remedy financing bottlenecks in order to promote growth amid an economic slowdown. Economists have blamed a scarcity of financing for small, privately owned businesses for a recent slowdown in economic growth. Such groups have suffered disproportionately from a campaign to curb financial risk, which sharply reduced off-balance-sheet lending on which private groups relied. But banks have been wary of lending to smaller companies because default rates are higher on average.”

March 11 – Reuters (Brenda Goh): “China may increase its tolerance for non-performing loans at small companies in order to help spur their growth, the state-backed Securities Times newspaper quoted a senior official from the banking regulator as saying…”

March 10 – Reuters (Yifan Qiu, Pei Li and Ryan Woo): “China’s factory-gate inflation in February stayed flat from a month earlier, while gains in consumer prices slipped to the lowest level in more than a year as muted price pressures point to lacklustre demand in the world’s second-largest economy. The inflation data is the latest indication of slowing demand in China, as factory surveys also point to dwindling export orders amid a protracted U.S.-Sino trade war.”

March 13 – Reuters (Lusha Zhang and Stella Qiu): “Growth in China’s industrial output fell to a 17-year low in the first two months of the year, pointing to further weakness in the world’s second-biggest economy… Industrial output rose 5.3% in January-February…, less than expected and the slowest pace since early 2002.”

March 13 – Reuters (Yawen Chen, Min Zhang and Kevin Yao): “China’s property investment accelerated in the first two months of the year driven by strong demand in its hinterland and defying a decline in sales, government curbs in bigger markets and a broader economic slowdown… It rose 11.6% in January-February from a year earlier, up from the 9.5% growth reported for the 2018 full year…”

March 11 – Bloomberg (Anjani Trivedi): “Investors are at it again, sorting through the heap of China’s credit data. Last month’s aggregate social-financing numbers… show the flow of new credit in (and around) the financial system fell 41% in February from a year earlier. Retail loans posted their largest monthly drop on record. Companies continued to struggle with working-capital financing; bonds were the main channel of funding. Looking for signals of economic recovery in such noisy data is a fool’s errand. Just a month earlier, the same figure surged 51%. The total stock of debt across the system remains 205.6 trillion yuan ($30.6 trillion) and is still growing at 10%, just below the average in previous years.”

March 12 – Reuters (Yawen Chen and Ryan Woo): “Staring at an array of floor plans in a showroom packed with models of apartment blocks set to go up in the northwestern city of Yanan, the young couple was faced with a tough decision. Even as housing prices in places like Beijing and Shanghai have shown signs of cooling, they remain red hot in many small cities like Yanan, putting pressure on prospective buyers… Easy credit policies and official intervention in property markets are fuelling those price surges, raising fears that local governments may be creating the sorts of housing bubbles and debt burdens that Beijing has vowed to crack down on.”

Central Bank Watch:

March 13 – Bloomberg (Enda Curran and Toru Fujioka): “Central bankers searching for options to fight the next downturn should look to Japan, where policy makers are gathering for a regular review of the world’s most epic monetary stimulus program. The Bank of Japan’s two-decade journey from zero interest rates to massive asset purchases, negative rates and yield-curve control demonstrates a combination of tools that can be used to sustain stimulus -- along with the huge damage that piles up when it drags on too long. As global economic growth wanes, Europe doles out a fresh round of easing and the U.S., Canada, Britain and Australia put rate hikes on hold, economists are asking what more can be done with scant room to lower borrowing costs and already swollen balance sheets. ‘Whether central banks like it or not, there is little choice than to venture further with ‘creative’ new strategies to reflate inflation expectations,’ said Ben Emons, managing director of global macro strategy at Medley Global Advisors…”

Brexit Watch:

March 14 – Bloomberg (Tim Ross): “U.K. Prime Minister Theresa May enjoyed a rare good day in Parliament, fighting off her opponents and winning the endorsement of British politicians to seek to delay Brexit day. The result on Thursday means her Brexit plan -- which has twice been rejected by huge majorities in the House of Commons - is still in play. The House of Commons voted 412 to 202 to support May’s motion, which as well as calling for a delay also reveals May’s strategy for getting her unpopular deal approved. She is offering members of Parliament a choice between backing her deal and delivering Brexit with a short delay, or risk being trapped in a long extension with terms set by the bloc.”

Europe Watch:

March 11 – Reuters (Abhinav Ramnarayan): “Euro zone bond yields dipped on Monday after German industrial production fell in January, adding weight to market bets on a slowing European economy and the European Central Bank’s dovish policy stance. Industrial output data showed that Europe’s largest economy is still suffering from trade frictions and unease about Brexit after narrowly avoiding recession last year. ‘We have had a lot of sentiment indicators pointing to this, but industrial production is hard data and it is really cementing the impression that the European economy is slowing down,’ Mizuho rates strategist Antoine Bouvet said.”

March 14 – Financial Times (Davide Ghiglione, Rachel Sanderson and James Kynge): “Italy is considering borrowing from China-led Asian Infrastructure Investment Bank as part of plans to become the first G7 country to endorse Beijing’s contentious Belt and Road global investment programme. The two countries are planning to ‘explore all opportunities for co-operation’ in Italy and ‘third countries’, according to the five-page draft accord… The wide-ranging agreement would span areas including politics, transport, logistics and infrastructure projects.”

EM Watch:

March 12 – Financial Times (Paul Callan, Bassem Bendary and Yohann Sequeira): “The developing world could be heading towards a new debt crisis. Public debt in emerging markets now averages 50% of gross domestic product, the highest level since the 1980s. More than 80% of developing countries have increased their public debt in the past five years. The number of developing countries whose public debt level is rated as ‘unsustainable’ or ‘high-risk’ is now 32, more than double the number in 2013. Most of the media’s attention has focused on Chinese loans that add to developing country debts. But China is not the only lender contributing to the looming crisis: the majority of new loans to at-risk, low-income and lower-middle-income countries have come from other sources, including other countries and multilateral institutions such as the World Bank and regional development banks.”

March 11 – Financial Times (Laura Pitel): “Turkey’s president Recep Tayyip Erdogan is confronting his first recession in a decade as he prepares for local elections that will test his party’s grip on the country’s largest cities. Growth contracted by 2.4% in last year’s fourth quarter compared with the previous quarter, when it fell 1.6%... As a result, Turkey’s economy grew at 2.6% for the whole of last year, from 7.4% in 2017. The last time Turkey faced a recession… under Mr Erdogan’s watch was in 2008 and 2009 in the wake of the US subprime mortgage crisis.”

March 11 – Financial Times (Colby Smith): “The inevitable has arrived: Turkey is in recession. For the first time in a decade… By all accounts, it was just a matter of time. Since last summer's currency crisis, which saw the lira lose 40% of its value until its central bank finally heeded to economic orthodoxy in September and raised interest rates, Turkey's economy has rebalanced, and hard… GDP has since shrunk 3% year-over-year, with seasonally adjusted GDP decreasing by 2.4% on a quarterly basis, the slowest since the global financial crisis.”

Global Bubble Watch:

March 13 – CNBC (Jeff Cox): “Global debt has jumped since the financial crisis, though one ratings agency thinks that it poses significantly less danger than the last time around. Corporate, government and household indebtedness rose to $178 trillion as of June 2018, a 50% increase from a decade ago, according to figures S&P Global Ratings… The expansion was especially acute at the government level, which stood at $62.4 trillion, or 77% higher than it did before the public borrowing binge began. ‘Global debt is certainly higher and riskier today than it was a decade ago, with households, corporates, and governments all ramping up indebtedness,’ S&P Global Ratings credit analyst Terry Chan said… ‘Although another credit downturn may be inevitable, we don’t believe it will be as bad as the 2008-2009 global financial crisis.’”

March 11 – Bloomberg (Fergal O'Brien): “The global economy’s sharp loss of speed through 2018 has left the pace of expansion the weakest since the global financial crisis a decade ago, according to Bloomberg Economics. Its new GDP tracker puts world growth at 2.1% on a quarter-on-quarter annualized basis, down from about 4% in the middle of last year. While there’s a chance that the economy may find a foothold and arrest the slowdown, ‘the risk is that downward momentum will be self-sustaining,’ say economists Dan Hanson and Tom Orlik.

March 13 – Bloomberg (Adam Haigh): “Last October, the world’s stock of negative-yielding debt had tumbled by more than half from its record high as investors adjusted to the end of super-loose monetary policy. Now it’s soaring again after the dovish pivots around the world. The Bloomberg Barclays Global Aggregate Negative-Yielding Debt Index has increased in value by well over $3 trillion since its low five months back, to $9.3 trillion… That’s still below the all-time record of $12.2 trillion in June 2016.”

March 10 – Wall Street Journal (Avantika Chilkoti): “Investors have driven the eurozone’s most closely followed government bond yield close to negative territory for the first time since 2016, underscoring the increasingly bleak outlook for the European economy. Germany’s 10-year government bonds, known as bunds, yielded as little as 0.04% on Friday, a microscopic return for investors and the lowest level since October 2016 when the region was still emerging from a protracted sovereign-debt crisis… The European Central Bank slashed its growth forecasts for this year to 1.1% from 1.7% and all but ruled out raising its benchmark interest rate, currently negative, before the start of next decade at the earliest.”

March 14 – Bloomberg (Erik Hertzberg): “Canadian home values fell last year for the first time in three decades amid falling prices in some of the country’s priciest markets, even as debt burdens increased. The value of residential real estate in Canada held by households dropped C$30 billion ($22.5bn) in the fourth quarter to C$5.10 trillion… The 0.6% decline is the first decrease in country-wide home values in data going back to 1990.”

March 10 – Reuters (Roberta Rampton): “The boom in Australian home prices and building over the past decade or so was primarily driven by lower real interest rates, while strong migration tended to lift rents, according to a study paper from the country’s central bank… At their peak, prices in Sydney more than doubled between 2008 and 2017, but have since fallen back by around 10%.”

Fixed-Income Bubble Watch:

March 11 – Bloomberg (Luke Kawa): “That sound you’ve been hearing is U.S. credit investors breathing a large sigh of relief. The sum of all fears among those buying investment-grade and high-yield debt has sunk to its lowest level since 2014, according to Bank of America’s March survey of fund managers -- even as the Federal Reserve Bank of Dallas warns about poor liquidity and the Bank for International Settlements frets about damaging downgrades. ‘The most notable change in our fresh survey of U.S. credit investors is that most concerns have declined notably from December and January,’ write analysts led by Hans Mikkelsen…”

Leveraged Speculator Watch:

March 12 – Bloomberg (Justina Lee): “When it comes to slicing and dicing equities based on their factors, the strategy beloved by quants is exhibiting symptoms of sickness. The challenge is diagnosing how serious it is. This month, Neuberger Berman will become the latest big name to close a fund based on factor investing, which uses characteristics like quality and value to bet which stocks will outperform over time. The decision follows a similar move by Columbia Threadneedle in December. It’s anecdotal, sure, but it’s adding up to an increasingly gloomy picture across the industry and re-energizing a debate about the effectiveness of such strategies. One of the most popular factors, momentum, has extended a miserable 2018 into this year. Value, another key style, has gone nowhere.”

Geopolitical Watch:

March 12 – CNBC (Tom DiChristopher): “The United States will continue to do whatever it takes to rid Venezuela of disputed leader Nicolas Maduro, Secretary of State Mike Pompeo told CNBC... ‘As the president said, every option is on the table to deliver to the Venezuelan people the democracy they deserve. And then ultimately we’ll build back an economy where they can again have the wealth that they have under their own feet,’ Pompeo said…, referring to Venezuela’s vast oil reserves.”

March 12 – Reuters (Vivian Sequera and Deisy Buitrago): “Venezuela ordered American diplomats on Tuesday to leave within 72 hours after President Nicolas Maduro accused U.S. counterpart Donald Trump of cyber ‘sabotage’ that plunged the South American country into its worst blackout on record.”

March 14 – Reuters (Joyce Lee and David Brunnstrom): “North Korea is considering suspending talks with the United States and may rethink a freeze on missile and nuclear tests unless Washington makes concessions, a senior diplomat said on Friday, according to news reports from the North’s capital… North Korean Vice Foreign Minister Choe Son Hui blamed top U.S. officials for the breakdown of last month’s summit between Kim and U.S. President Donald Trump in Hanoi… ‘We have no intention to yield to the U.S. demands (at the Hanoi summit) in any form, nor are we willing to engage in negotiations of this kind,’ TASS quoted Choe… ‘I want to make it clear that the gangster-like stand of the U.S. will eventually put the situation in danger…’”

March 12 – Wall Street Journal (Gordon Lubold and Dustin Volz): “The Navy and its industry partners are ‘under cyber siege’ by Chinese hackers and others who have stolen national security secrets in recent years, exploiting critical weaknesses that threaten the U.S.’s standing as the world’s top military power, an internal Navy review concluded. The assessment… depicts a branch of the armed forces under relentless cyberattack by foreign adversaries and struggling in its response to the scale and sophistication of the problem. Drawing from extensive research and interviews with senior officials across the Trump administration, the tone of the review is urgent and at times dire, offering a rare, unfiltered look at the military’s cybersecurity liabilities.”

March 13 – Bloomberg (Nick Wadhams): “Secretary of State Michael Pompeo said China was in a ‘league of its own’ as a human-rights violator over a campaign that’s put hundreds of thousands of Uighurs and other Muslims in reeducation camps, an unusually blunt U.S. critique of the country’s abuses. Presenting the State Department’s annual report on global human rights practices, Pompeo said… that China had interred more than 1 million Uighurs, ethnic Kazakhs and other Muslims in camps ‘designed to erase their religious and ethnic identities.’”