Saturday, October 29, 2016

Weekly Commentary: Peak Monetary Stimulus

October 28 – Bloomberg (Eliza Ronalds-Hannon and Claire Boston): “After all central bankers have done since the financial crisis to prop up bond prices, it didn’t take much for them to send the global debt market reeling. Bonds worldwide have lost 2.9% in October, according to the Bloomberg Barclays Global Aggregate Index, which tracks everything from sovereign obligations to mortgage-backed debt to corporate borrowings. The last time the bond world was dealt such a blow was May 2013, when then-Federal Reserve Chairman Ben S. Bernanke signaled the central bank might slow its unprecedented bond buying.”

German bund yields surged 16 bps this week to 0.16% (high since May), with Bloomberg calling performance the “worst month since 2013.” French yields jumped 18 bps this week (to 0.46%), and UK gilt yields rose 17 bps (to 1.26%). Italian yields surged a notable 21 bps to a multi-month high 1.58%.

A cruel October has seen German 10-year yields surging 31bps, with yields up 58 bps in the UK, 31 bps in France, 40 bps in Italy, 33 bps in Spain and 30 bps in the Netherlands. Ten-year yields have surged 43 bps in Australia, 40 bps in New Zealand and 25 bps in South Korea.

Countering global bond markets, Chinese 10-year yields traded Monday at a record low 2.60%. There seems to be a robust safe haven dynamic at work. It’s worth noting that China’s one-year swap rate ended the week at an 18-month high 2.73%, with China’s version of the “TED” spread (interest-rate swaps versus government yields) also widening to 18-month highs.

Here at home, 10-year Treasury yields this week jumped 12 bps to 1.85%, the high since May. Long-bond yields rose 15 bps to 2.62%, with yields up 30 bps in four weeks.

And while sovereign bond investors are seeing a chunk of their great year disappear into thin air, the jump in yields at this point hasn’t caused significant general angst. During the October sell-off, corporate debt has outperformed sovereign, and there are even U.S. high yield indices that have generated small positive returns for the month. Corporate spreads generally remain narrow – not indicating worries of recession or market illiquidity.

October 27 – Wall Street Journal (Ben Eisen): “By some measures, October is already a record month for mergers and acquisitions. Qualcomm $39 billion deal to buy NXP Semiconductors helped push U.S. announced deal volume this month to $248.9 billion, according to… Dealogic. That tops the previous record of $240.2 billion from last July… It was assisted by last week’s record weekly U.S. volume of $177.4 billion.”

And while bond sales have slowed somewhat in October, global corporate bond issuance has already surpassed $2.0 TN. The Financial Times is calling it “the best year in a decade,” with issuance running 9% ahead of a very strong 2015. According to Bloomberg, this was the third-strongest week of corporate debt issuance this year.

At this point, there’s not a strong consensus view as to the factors behind the global backup in yields. Some see rising sovereign yields as an indication of central bank success: with inflation finally having turned the corner, there will be less pressure on central bankers to push aggressive stimulus. Others argue that central bankers are coming to accept that the rising risks of QE infinity and negative rates have overtaken diminishing stimulus benefits.

Importantly, there’s no imminent reduction in the approximately $2.0 TN annual QE that has been underpinning global securities and asset prices. It’s hard to believe it’s been almost three and one-half years since the Bernanke “taper tantrum.” With only one little baby-step rate increase to its Credit, rate normalization couldn’t possibly move at a more glacial pace.

There’s deep complacency in the U.S. regarding vulnerability to reduced monetary stimulus. The Fed wound down QE and implemented a rate increase without major market instability. I believe this was only possible because of the extraordinary monetary stimulus measures in play globally. “Whatever it takes” central banking, in particular from the ECB and BOJ, unleashed Trillions of liquidity (and currency devaluation) that certainly underpinned U.S. securities and asset markets. Prices of sovereign debt, including Treasuries, have traded at levels that assume global central banker support will last indefinitely. Markets have begun reassessing this assumption.

October 28 – Reuters (Leika Kihara): “As his term winds down, Bank of Japan Governor Haruhiko Kuroda has retreated from both the radical policies and rhetoric of his early tenure, suggesting there will be no further monetary easing except in response to a big external shock. In a clear departure from his initial ‘shock and awe’ tactics to jolt the nation from its deflationary mindset, he has even taken to flagging what little change lies ahead, trying predictability where surprise has failed. This new approach will be on show next week, when the BOJ is set to keep policy unchanged despite an expected downgrade in forecasts that could show Kuroda won't hit his perpetually postponed 2% inflation target before his five-year term ends in April 2018. ‘The days of trying to radically heighten inflation expectations with shock action are over,’ said a source familiar with the BOJ's thinking. ‘No more regime change.’”

My view that “QE has failed” has seemed extreme – even outrageous to conventional analysts. Yet Japan is the epicenter of the Bernanke doctrine of radical experimental inflationism. Unshakable central banker “shock and awe” and “whatever it takes” were supposed to alter inflationary expectations throughout the economy, in the process boosting asset prices, investment, incomes, spending and – importantly – the general price level. Deflation, it was argued, was self-imposed.

It may have worked brilliantly in theory – it’s just not looking so bright in practice. An impervious Japanese CPI has continued to decline, while the central bank has pushed bond prices to ridiculous extremes by purchasing a third of outstanding government debt. Major risks associated with an out-of-control central bank balance sheet and asset Bubbles are not inconspicuous in Japan. There is today heightened pressure in Japanese policy circles to wind down this experiment before it’s too late. It will not go smoothly.

In the category “truth is stranger than fiction”, November 8th can’t arrive soon enough. Suddenly, it appears the markets may have some election risk to contemplate. And there will be no rest for the weary. The ECB meets one month later, on December 8th.

October 27 – Bloomberg (Jeff Black and Jill Ward): “European Central Bank officials signaled that they support extending asset buying beyond the earliest end-date of March, arguing that returning to a healthy level of inflation demands maintaining the pace as the economy heals. Speaking in London…, Irish central bank Governor Philip Lane said that the ‘broad narrative’ in the market about the ECB’s strategy on bond purchases is that it will continue until inflation is heading reliably toward the target of just under 2%. His comments echoed remarks by Executive Board member Benoit Coeure… and Spain’s Governor Luis Maria Linde… ‘March was always an intermediate staging post,’ said Lane. ‘The narrative of the euro area is that there’s been this moderate but sustained recovery, by and large driven by domestic factors, especially consumption. But inflation remains low compared to target and essentially that’s the assessment.’”

I’m not so sure Germany and fellow ECB hawks saw March as “always an intermediate staging post.” Draghi purposely avoided commencing the discussion of extending QE past March. What will likely be a heated debate will take place in December.

October 25 – Reuters (Gernot Heller): “There is a growing international consensus that monetary policy has reached the limits of its possibilities, German Finance Wolfgang Schaeuble told a group of government officials in Berlin… Schaeuble also said that he believed that there was an excess of liquidity and excess of indebtedness internationally.”

Over recent months, German public opinion has turned even more against QE. Bundesbank President Jens Weidmann has been opposed to QE from day one, and his skepticism has been shared by fellow German (ECB executive board member) Sabine Lautenschläger. A majority of Germans believe QE is hurting Deutsche Bank and the German banking system more generally. And there is growing frustration that the ECB is a mechanism for redistributing German wealth. The stakes for dismissing German concerns are growing.

Draghi has grown accustomed to playing dangerously. Front-running committee deliberations, he has signaled to the markets that QE will run past March. Comments and leaks from within the ECB have encouraged the markets to assume that aggressive stimulus will run uninterrupted for months to come. All this places great pressure on ECB hawks. And this is a group that has seen its concerns repeatedly rejected; a group that has surely become only more troubled by the course of Eurozone and global monetary policymaking. If they have much say in policy come December, markets will tantrum. I can imagine that Draghi’s pressure tactics must by this point be wearing really thin.

Fledgling “risk off” turned more apparent this week. Notably, the broader U.S. equities market came under pressure. Having outperformed over recent months, the now Crowded Trades in the mid- and small-caps saw price drops of 1.8% and 2.5%. In general, the beloved high dividend and low volatility stocks – colossal Crowded Trades – also badly lagged the market. The REITS (VNQ) dropped another 3.6% this week, having declined 13% from August highs to trade to the lowest level since April. The homebuilders (XHB) declined to the low since March. It’s worth noting that Ford this week also traded to lows going back to March.

Abnormal has been around so long now we’ve grown accustomed. Fifteen-year mortgage rates at 2.78%. ARMs available at 2.75%. And I’m hearing automobile advertisements even more outrageous than 2007. “Lease Kia two for $222 a month.” How much future demand has been pulled forward by history’s lowest interest rates – and accompanying loose Credit.

QE is not disappearing any day soon. Yet there’s a decent argument that we’re at Peak Monetary Stimulus. The Fed is preparing for a hike in December. The Kuroda BOJ has lost its appetite for surprising markets with added stimulus. And I suspect the ECB is just over a month away from a contentious discussion of how to taper QE starting after March 2017. Market liquidity may not be a pressing concern today, but it will be in the not too distant future.


For the Week:

The S&P500 declined 0.7% (up 4.0% y-t-d), while the Dow was little changed (up 4.2%). The Utilities gained 1.0% (up 12.7%). The Banks rose 1.2% (up 2.0%), while the Broker/Dealers declined 1.6% (down 4.0%). The Transports were about unchanged (up 6.8%). The broader market was under pressure. The S&P 400 Midcaps fell 1.8% (up 7.2%), and the small cap Russell 2000 sank 2.5% (up 4.6%). The Nasdaq100 declined 1.0% (up 4.6%), while the Morgan Stanley High Tech index gained 0.8% (up 10.9%). The Semiconductors increased 0.5% (up 23.4%). The Biotechs sank 3.1% (down 22.3%). Though bullion gained $9, the HUI gold index dropped 4.1% (up 86%).

Three-month Treasury bill rates ended the week at 28 bps. Two-year government yields added three bps to 0.85% (down 20bps y-t-d). Five-year T-note yields rose eight bps to 1.32% (down 43bps). Ten-year Treasury yields jumped 12 bps to 1.85% (down 40bps). Long bond yields surged 14 bps to 2.62% (down 40bps).

Greek 10-year yields declined seven bps to 8.21% (up 89bps y-t-d). Ten-year Portuguese yields jumped 15 bps to 3.31% (up 79bps). Italian 10-year yields surged 21 bps to 1.58% (down one bp). Spain's 10-year yields rose 12 bps to 1.23% (down 54bps). German bund yields jumped 16 bps to 0.16% (down 46bps). French yields gained 18 bps to 0.46% (down 53bps). The French to German 10-year bond spread widened two to 30 bps. U.K. 10-year gilt yields rose 17bps to 1.26% (down 70bps). U.K.'s FTSE equities index slipped 0.3% (up 12.1%).

Japan's Nikkei 225 equities index rallied 1.6% (down 8.2% y-t-d). Japanese 10-year "JGB" yields inched up a basis point to negative 0.06% (down 32bps y-t-d). The German DAX equities index was little changed (down 0.4%). Spain's IBEX 35 equities index rose 1.1% (down 3.6%). Italy's FTSE MIB index gained 0.9% (down 19.1%). EM equities were mixed. Brazil's Bovespa index added 0.3% (up 48%). Mexico's Bolsa fell 0.8% (up 11.7%). South Korea's Kospi declined 0.7% (up 3.0%). India’s Sensex equities slipped 0.5% (up 7.0%). China’s Shanghai Exchange added 0.4% (down 12.3%). Turkey's Borsa Istanbul National 100 index dipped 0.6% (up 9.2%). Russia's MICEX equities index gained 1.2% (up 12.5%).

Junk bond mutual funds saw outflows of $48 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates fell five bps last week to 3.47% (down 29bps y-o-y). Fifteen-year rates slipped a basis point to 2.78% (down 20bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up four bps to 3.67% (down 17bps).

Federal Reserve Credit last week declined $4.6bn to $4.430 TN. Over the past year, Fed Credit contracted $28.3bn (0.6%). Fed Credit inflated $1.619 TN, or 58%, over the past 207 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $2.8bn last week to $3.125 TN. "Custody holdings" were down $167bn y-o-y, or 5.1%.

M2 (narrow) "money" supply last week fell $9.3bn to $13.115 TN. "Narrow money" expanded $956bn, or 7.9%, over the past year. For the week, Currency increased $2.7bn. Total Checkable Deposits dropped $76.2bn, while Savings Deposits jumped $68.5bn. Small Time Deposits were little changed. Retail Money Funds declined $3.9bn.

Total money market fund assets expanded $16.1bn to $2.651 TN. Money Funds declined $66bn y-o-y (2.4%).

Total Commercial Paper declined $2.2bn to $903bn. CP declined $153bn y-o-y, or 14.5%.

Currency Watch:

The U.S. dollar index slipped 0.3% to 98.34 (down 0.4% y-t-d). For the week on the upside, the South African rand increased 1.1%, the euro 0.9% and the Swiss franc 0.6%. For the week on the downside, the Mexican peso declined 2.1%, the Brazilian real 1.4%, the Swedish krona 1.1%, the Japanese yen 0.9%, the British pound 0.4%, the Canadian dollar 0.5%, the Norwegian krone 0.2% and the Australian dollar 0.1%. The Chinese yuan declined 0.2% versus the dollar (down 4.4% y-t-d).

Commodities Watch:

October 24 – Bloomberg (Ranjeetha Pakiam): “Further weakness in China’s currency and investors’ concerns over the outlook for the nation’s property market may spur gold demand in Asia’s top economy, according to Goldman Sachs… ‘The potential drivers of increased Chinese physical buying include purchasing gold as a way to hedge for potential currency depreciation in the face of capital controls,’ analysts including Jeffrey Currie and Max Layton, wrote… Bullion consumption in China may also rise ‘as a way of diversifying away from the property market,’ they said.”

The Goldman Sachs Commodities Index declined 1.5% (up 18.7% y-t-d). Spot Gold added 0.7% to $1,275 (up 20%). Silver gained 1.3% to $17.76 (up 29%). Crude dropped $2.19 to $48.66 (up 31%). Gasoline fell 4.1% (up 16%), and Natural Gas sank 7.0% (up 19%). Copper surged 5.2% (up 3%). Wheat declined 1.4% (down 13%). Corn gained 0.7% (down 1%).

China Bubble Watch:

October 24 – Bloomberg (David Biller): “Earlier this year, Mr. and Mrs. Cai, a couple from Shanghai, decided to end their marriage. The rationale wasn’t irreconcilable differences; rather, it was a property market bubble. The pair, who operate a clothing shop, wanted to buy an apartment for 3.6 million yuan ($532,583), adding to three places they already own. But the local government had begun, among other bubble-fighting measures, to limit purchases by existing property holders. So in February, the couple divorced. ‘Why would we worry about divorce? We’ve been married for so long,’ said Cai, the husband… ‘If we don’t buy this apartment, we’ll miss the chance to get rich.’ China’s rising property prices this year have been inspiring such desperate measures, as frenzied buyers are seeking to act before further regulatory curbs are imposed.”

October 25 – Financial Times (Yuan Yang): “China is introducing a slew of new restrictions on property-related lending, as the central government takes the lead in efforts to head off a housing bubble. Property developers are facing curbs on their ability to raise financing by issuing debt or equity, after two government regulators were instructed to step in, it has emerged. The China Securities Regulatory Commission and the National Development and Reform Commission — China’s economic planner — have been instructed by high-level officials to restrict developers’ issuances in the Hong Kong stock market, in the Hong Kong bond market and in the Chinese interbank bond market… The news comes less than a week after the Shanghai Stock Exchange froze all bond issuances by property developers.”

October 26 – Wall Street Journal (Anjani Trivedi): “Attempts to cut down China’s debt problems aren’t working, so Beijing is casting a wider net. Whether it works or not, the move adds to the sense that monetary tightening is in the air. In a document sent out this month and widely published Wednesday, China’s central bank tightened the noose once again on banks use of wealth-management products—investment vehicles sold to customers that are typically stashed off-balance sheet to avoid banks’ breaching regulatory capital limits. The latest rules appear to be a more all-encompassing attempt to follow up on previous, ineffectual directives to curb such shadow lending. The latest iteration forces banks to include these WMPs in calculations of banks ‘broad credit,’ which will force them to set aside more capital against these assets.”

October 26 – Reuters (Chen Yang): “China's central bank will take into account off-balance sheet financing at commercial banks to assess their overall financial health, three sources with direct knowledge of the matter said… The People's Bank of China will make the change to its so-called Macro Prudential Assessment (MPA) risk-tool to broaden its regulatory oversight to include wealth management products often sold by banks and not counted on their balance sheets… The move marks another step in the PBOC's efforts to control rising leverage in the nation's financial system and underscored worries among analysts that unsustainable credit could hit an already slowing economy hard.”

October 25 – Bloomberg (Jeff Black and Carolynn Look): “China’s overnight money rate climbed to the highest level in 18 months, fueled by capital outflows as the yuan weakened to a six-year low. The one-day repurchase rate, a gauge of interbank funding availability, jumped 17 bps, the most since February, to 2.41%... ‘Yuan depreciation-fueled outflows are causing a shortfall in base money supply and tightening liquidity,’ said Liu Dongliang, a senior analyst at China Merchants Bank… ‘This will add pressure to institutions which are highly leveraged in bond investments, if the tightness continues.’ …Liquidity in China’s interbank market has been hard hit by the currency’s accelerated decline. A net $44.7 billion worth of yuan payments left the nation last month… That’s the most since the government started publishing the figures in 2010, and compares with August’s outflow of $27.7 billion. Goldman Sachs… warned Friday that China’s currency outflows have risen to $500 billion this year.”

Europe Watch:

October 26 – Reuters (Francesco Canepa and Frank Siebelt): “The European Central Bank is nearly certain to continue buying bonds beyond its March target and to relax its constraints on the purchases to ensure it finds enough paper to buy, central bank sources have told Reuters. The moves will come in an attempt to bolster what is being heralded as the start of an economic recovery in the euro zone. ECB policymakers are due to decide in December on the future shape and duration of their 80 billion euros (£71.58 billion) monthly quantitative easing (QE) scheme, based on new growth and inflation forecasts.”

October 27 – Reuters (Balazs Koranyi): “The effectiveness of the European Central Bank's ultra-loose monetary policy may decline over time while side effects could increase, a key policymaker argued… ‘The longer the measures are in place, the less effective they may become,’ ECB board member Yves Mersch said… ‘The fact that additional lending in the euro area is losing momentum and that German banks are saying that the negative deposit facility rate is constraining lending volumes warrants attention… We must be vigilant that this development does not spread to other euro area countries.’”

October 27 – Bloomberg (George Georgiopoulos): “The ECB will decide in December on the mechanism of prolonging its quantitative easing asset purchase program, European Central Bank policymaker Ewald Nowotny said… ‘There will be two decisions. It's not as dramatic as they sound. One of course is to prolong, to what extent, for what duration,’ Nowotny, a member of the Governing Council of the European Central Bank, said… The second, he said, was what assets to purchase. ‘... Do we have enough assets to buy, and this is a point of discussion that we are just now underway,’ Nowotny said.”

October 24 – Reuters (Jonathan Cable): “Business activity in the euro zone has expanded at the fastest pace this year so far in October, as a buoyant Germany offset the impact from firms raising prices at the sharpest rate in more than five years, a survey showed… IHS Markit's euro zone flash composite Purchasing Managers' Index… jumped to 53.7 from September's 52.6.”

October 26 – Bloomberg (Jeff Black and Carolynn Look): “Mario Draghi used his second appearance in Berlin in a month to drive home his message that a three-decade slide in long-term interest rates can only be properly arrested with the help of governments. The ‘type of actions we need, if we want interest rates at higher levels, are those that can raise the natural rate,’ the European Central Bank president said… ‘And this requires a focus on policies that can address the root causes of excess saving over investment -- in other words, fiscal and structural policies.”

October 24 – Bloomberg (Alessandro Speciale and Carolynn Look): “Anti-establishment parties are gaining ground in the heart of the European Union, and they may pose a bigger challenge to the region’s economy than any of those that have drawn support in the periphery over the past years. While populists in Spain or Italy are revolting against restrictive fiscal policies and a weakening of social safety nets, the backlash in France and Germany focuses on monetary union itself. Parties openly advocating a break from the euro are building momentum ahead of a year of election across the region and politicians skeptical about EU integration are already twisting policy decisions.”

Fixed-Income Bubble Watch:

October 24 – Bloomberg (Brian Chappatta and Anchalee Worrachate): “The hottest craze in fixed income is at risk of overheating. A headlong rush into higher-yielding, long-term bonds in recent years has created one of the most crowded trades in financial markets. Investors seeking relief from central banks’ zero-interest-rate policies have poured into government debt due in a decade or more, swelling the amount worldwide by a record $733 billion this year. It’s more than doubled since 2009 to about $6 trillion… Now money managers overseeing more than $1 trillion say the case for owning longer maturities -- stellar performers for most of 2016 -- is crumbling. There’s mounting evidence that inflation is starting to stir, just as some central banks hint that higher long-term interest rates may be the key to boosting growth. That’s troubling because a key bond-market metric known as duration has reached historic levels, and the higher that gauge goes, the steeper the losses will be when rates rise.”

October 26 – Bloomberg (John Gittelsohn): “Bad times lie ahead for bondholders as rising inflation and resurging deficits conspire to drive up interest rates, according to Jeffrey Gundlach. ‘We’re in the eye of a hurricane for the next three to four years,’ Gundlach, chief executive officer of DoubleLine Capital, said… ‘Come 2018, 2019 and 2020, look out!’”

Global Bubble Watch:

October 24 – Wall Street Journal (Julie Steinberg and Kane Wu): “As the West sank into recession in 2008, Chinese tycoon Chen Feng decided it was time to stretch his wings. Mr. Chen’s conglomerate, HNA Group, already had a collection of domestic assets that spanned hotel chains, supermarkets, shipping firms and Hainan Airlines, the country’s biggest privately held airline. The next place to go, Mr. Chen told a local business magazine… Mr. Chen is part of an aggressive new generation of Chinese deal makers. Not only are they buying up foreign assets at the fastest pace in history—Chinese companies’ announced overseas acquisitions have hit a record $199 billion so far this year—they are also snagging bigger deals in increasingly high-profile areas like movies, airplanes and hotels.”

October 26 – Bloomberg (Matt Scully): “Deutsche Bank AG is reviewing whether it misstated the value of derivatives in its interest-rate trading business, and is sharing its findings with U.S. authorities, according to people with knowledge of the situation. The bank is looking at valuations on a type of derivative known as zero-coupon inflation swaps… After finding valuations that diverged from internal models, it began questioning traders, the people said.”

October 26 – Financial Times (Caroline Binham and Martin Arnold): “The Bank of England has asked large British lenders to detail their current exposure to Deutsche Bank and some of the biggest Italian banks, including Monte dei Paschi, amid mounting market jitters over the health of Europe’s financial sector. The request was made in recent weeks by the BoE’s Prudential Regulation Authority as investors sold off Deutsche and Monte dei Paschi…”

October 23 – CNBC (Javier E. David): “Despite the chill winds of a softening luxury real estate market and political uncertainty across the globe, it's still a buyer's market for the ultra-wealthy, a recent survey suggests. In partnership with the YouGov Affluent Perspective, Luxury Portfolio International surveyed the top echelon of consumers across 12 countries, finding that the majority of those consumers were ‘cautious but optimistic’ in the face of an uncertain and often turbulent world economy… Research from Credit Suisse showed that there are more than 123,000 individuals in this category, a whopping 53% jump in just five years.”

U.S. Bubble Watch:

October 24 – Reuters (Caroline Humer and Toni Clarke): “The average premium for benchmark 2017 Obamacare insurance plans sold on Healthcare.gov rose 25% compared with 2016…, the biggest increase since the insurance first went on sale in 2013 for the following year. The average monthly premium for the benchmark plan is rising to $302 from $242 in 2016…”

October 24 – New York Times (Landon Thomas Jr.): “European and Asian investors have been rushing into the United States bond market, spurred by a global glut of savings that has reached record levels. Running from near-zero interest rates at home, foreign buyers are piling into the booming market for corporate bonds, including high-grade debt securities… and riskier fare churned out by energy and telecommunications companies. A growing number of economists are concerned that this flood of money may inflate the value of these securities well beyond what they are worth, potentially leading to a market bubble that eventually bursts.”

October 26 – Wall Street Journal (Annamaria Andriotis): “For auto lenders, there is trouble on the used-car lot. Several large companies have warned that prices of used vehicles are likely to weaken, potentially leading to higher losses on loans on which cars are the collateral. That, combined with looser terms for loans and the growth of loans going to subprime borrowers, is sounding a warning for the long credit boom that has spurred auto sales. Auto-loan balances topped $1 trillion for the first time ever this year.”

October 27 – Bloomberg (Oshrat Carmiel): “Home prices in New York’s Hamptons fell the most in almost three years as buyers in the beachfront towns sought out less-expensive properties and shunned the middle of the market, priced from $1 million to $5 million. Homes in the area, a second-home mecca favored by Wall Street executives, sold for a median of $825,000 in the third quarter, down 13% from a year earlier…”

Federal Reserve Watch:

October 24 – Wall Street Journal (Kate Davidson and Jon Hilsenrath): “Federal Reserve officials, wary of raising short-term interest rates amid the uncertainty surrounding the U.S. presidential election, are likely to stand pat at their November policy meeting and remain focused on lifting them in December. Their challenge will be deciding how strongly to signal their expectation of a move at their last scheduled meeting of the year, Dec. 13-14. Market expectations suggest officials may not need to fire strong new warning shots: Traders in futures markets already place a 74% probability on a Fed rate increase by then.”

Japan Watch:

October 24 – Bloomberg (Keiko Ujikane): “Japan’s consumer prices fell for a seventh straight month and household spending slumped again in September, underscoring the challenges Prime Minister Shinzo Abe and Bank of Japan Governor Haruhiko Kuroda face in trying to revive the world’s third-largest economy… Consumer prices excluding fresh food, the BOJ’s primary gauge of inflation, dropped 0.5% in September from a year earlier. Household spending fell 2.1% from a year earlier…”

October 26 – Reuters (Leika Kihara and Yoshifumi Takemoto): “Years of heavy money printing by the Bank of Japan has made the bond market dysfunctional and fiscal policy heavily dependent on cheap money offered by the bank, a former BOJ deputy governor said, warning against expanding monetary stimulus further. Toshiro Mutoh, who retains strong influence among policymakers, also said it would be hard for Japan to intervene in the currency market to stem yen gains… Having gobbled up a third of the Japanese government bond (JGB) market, the BOJ is also nearing the limit of its massive asset-buying program.”

October 27 – Reuters (Leika Kihara): “Bank of Japan Governor Haruhiko Kuroda said… the central bank would not try to push down super-long government bond yields - even if they rise further - because it is focused on controlling the yield curve for out to 10 years. Kuroda told parliament he saw no immediate need to change the minus 0.1% short-term interest rate target and the 10-year government bond yield target of around zero percent, suggesting that the BOJ will hold off on easing policy at next week's rate review. Kuroda also rejected the idea of buying foreign-currency denominated bonds…”

October 23 – Bloomberg (Connor Cislo): “Japanese exports fell for a 12th consecutive month in September, rounding out a rough year for manufacturers struggling with a stronger yen and soft global demand… Overseas shipments dropped 6.9% in September from a year earlier…”

EM Watch:

October 26 – Bloomberg (Matthew Hill, Elena Popina and Natasha Doff): “Mozambique’s Eurobonds slumped to a record for a second day after the government hired advisers to negotiate a restructuring that at least one adviser said could involve write downs for investors… The $727 million security has fallen 22 cents on the dollar to 59 cents…”

October 24 – Bloomberg (David Biller): “Economists reduced their growth forecast for Brazil next year to its lowest level in two months, underscoring how Latin America’s largest nation is struggling to emerge from recession. Gross domestic product will expand 1.23% in 2017, according to a central bank survey of economists…”

Leveraged Speculator Watch:

October 27 – Bloomberg (Dakin Campbell): “A team of Citigroup Inc. derivatives traders generated about $300 million of revenue this year, thriving from serving companies and investors trying to anticipate central bank decisions, according to people with direct knowledge of the matter. The windfall was produced by the bank’s U.S. dollar interest-rate swaps desk…”

Geopolitical Watch:

October 21 – New York Times (Nicole Perlroth): “Major websites were inaccessible to people across wide swaths of the United States on Friday after a company that manages crucial parts of the internet’s infrastructure said it was under attack. Users reported sporadic problems reaching several websites, including Twitter, Netflix, Spotify, Airbnb, Reddit, Etsy, SoundCloud and The New York Times. The company, Dyn, whose servers monitor and reroute internet traffic, said it began experiencing what security experts called a distributed denial-of-service attack just after 7 a.m… And in a troubling development, the attack appears to have relied on hundreds of thousands of internet-connected devices like cameras, baby monitors and home routers that have been infected… with software that allows hackers to command them to flood a target with overwhelming traffic.”

October 26 – Reuters (Robin Emmott and Phil Stewart): “Britain said… it will send fighter jets to Romania next year and the United States promised troops, tanks and artillery to Poland in NATO's biggest military build-up on Russia's borders since the Cold War. Germany, Canada and other NATO allies also pledged forces at a defense ministers meeting in Brussels on the same day two Russian warships armed with cruise missiles entered the Baltic Sea between Sweden and Denmark, underscoring East-West tensions… NATO Secretary-General Jens Stoltenberg said the troop contributions to a new 4,000-strong force in the Baltics and eastern Europe were a measured response to what the alliance believes are some 330,000 Russian troops stationed on Russia's western flank near Moscow.”

October 25 – Wall Street Journal (Thomas Grove): “Russian authorities have stepped up nuclear-war survival measures amid a showdown with Washington, dusting off Soviet-era civil-defense plans and upgrading bomb shelters in the biggest cities. At the Kremlin’s Ministry of Emergency Situations, the Cold War is back. The country recently held its biggest civil defense drills since the collapse of the U.S.S.R., with what officials said were 40 million people rehearsing a response to chemical and nuclear threats. Videos of emergency workers deployed in hazmat suits or checking the ventilation in bomb shelters were prominently aired on television when the four days of drills were held across the country. Students tried on gas masks and placed dummies on stretchers in school auditoriums.”

October 27 – Reuters (Michael Martina and Benjamin Kang Lim): “China's Communist Party gave President Xi Jinping the title of ‘core’ leader on Thursday, putting him on par with past strongmen like Mao Zedong and Deng Xiaoping, but it signaled his power would not be absolute. A lengthy communique released by the party following a four-day, closed-door meeting of senior officials in Beijing stressed maintaining the importance of collective leadership. The collective leadership system ‘must always be followed and should not be violated by any organization or individual under any circumstance or for any reason’, it said.”

October 26 – Reuters (Ben Blanchard): “China will carry out military drills in the South China Sea all day on Thursday, the country's maritime safety administration said…, ordering all other shipping to stay away. China routinely holds drills in the disputed waterway, and the latest exercises come less than a week after a U.S. navy destroyer sailed near the Paracel Islands, prompting a warning from Chinese warships to leave the area.”