Saturday, February 9, 2019

Weekly Commentary: Delusional

February 8 – Bloomberg (Brian Chappatta): “Bond traders are dusting off their tried and true post-crisis playbook after the Federal Reserve’s pivot last month. What they don’t realize is that the game has most likely changed. In an unabashed reach for yield, investors suddenly can’t get enough of the riskiest debt, with the Bloomberg Barclays U.S. Corporate High Yield Bond Index posting a staggering 5.25% total return in the first five weeks of 2019, led by those securities rated in the CCC tier. In the largest CCC borrowing since September, Clear Channel Outdoor Holdings Inc. received orders this week of more than $5 billion for a $2.2 billion deal, allowing it to price its debt to yield 9.25%, compared with whisper talk of about 10%.”

A Friday headline from a separate Bloomberg article: “Corporate Bonds on Fire as Dovish Fed Soothes Investors,” with the opening sentence: “Fear is turning to exuberance in credit markets.” According to Lipper, corporate investment-grade funds enjoyed inflows of $2.668 billion last week, with high-yield funds receiving $3.859 billion. Bloomberg headline: “High-Yield Bond Funds See Biggest Inflow Since July 2016.” This follows the biggest high-yield inflows ($3.28bn) since December 2016 from two weeks ago.

There’s support for the argument that financial conditions have loosened significantly over recent weeks. Prices of corporate bond default protection have declined. After trading as high as 95 bps on December 24th, by Tuesday an index (Markit) of investment-grade credit default swap (CDS) prices had dropped all the way back to 64 (near October levels). Risk premiums have narrowed, especially for high-risk junk bonds. U.S. high-yield spreads (Bloomberg Barclays) traded as wide as 537 bps on (tumultuous) January 3rd. By this Wednesday, they were back down to 400 bps (still significantly above the 300bps from October 3rd).

Bank bond CDS prices have retreated. After spiking to 129 bps on January 3rd, Goldman Sachs CDS was back down to 82 bps on Tuesday (closed the week at 89). For perspective, GS CDS traded at 55 on the final day of July and 59 bps on October 3rd. After trading to 218 bps on January 3rd, Deutsche Bank CDS was back down to 167 bps by the end of January (ended Friday at 189bps)

February 8 – Reuter (Marc Jones): “Investors pumped record high volumes of cash into emerging markets shares and bonds in the past week, Bank of America Merrill Lynch (BAML) said on Friday amid expectations U.S. monetary policy could lead to a weaker U.S. dollar… Investors have piled into emerging market equities and bonds in recent months amid expectations that the U.S. Federal Reserve will not raise interest rates as quickly as previously expected or even no longer tighten its policy.”

February 7 – Reuter (Marc Jones): “A ‘wall of money’ is set to flood into emerging markets assets now the U.S. Federal Reserve has eased the risk of a sharp rise in global borrowing costs, the Institute of International Finance (IIF) said… The IIF, which closely tracks financing flows, said its high frequency indicators were picking up a “sharp spike” of inflows following last week’s confirmation of a change of tack from the U.S. central bank. ‘Recent events look likely to restart the ‘Wall of Money’ to Emerging Markets,’ IIF economists said in a report.”

Institute of International Finance estimates put January ETF inflows on a quarterly pace of about $50 billion, ‘already equal to strong EM inflows in 2017 and likely to go higher.’”

The MSCI Emerging Market equities index has gained 7.3% y-t-d. So far in 2019, dollar-denominated bond yields are down 828 bps in Venezuela, 36 bps in Indonesia, 34 bps in Ukraine, 33 bps in Saudi Arabia, 31 bps in Russia, 30 bps in Chile, 30 bps in Colombia, and 16 bps in Turkey. Local currency yields have sunk 91 bps in Lebanon, 77 bps in Philippines, 35 bps in Hungary, 35 bps in Mexico and 27 bps in Russia.

With “risk on” back on track, why then would “safe haven” bonds be attracting such keen interest? German 10-year bund yields sank eight bps this week to nine bps (0.09%), the low going back to October 2016. Two-year German yields were little changed at negative 0.58%. Ten-year Treasury yields declined five bps this week to 2.64%, only nine bps above the panic low yields from January 3rd. Japanese 10-year yields declined another basis point this week to negative three bps (negative 0.03%), only about a basis point above January 3rd lows. Swiss 10-year yields declined six bps this week to negative 0.33% - the low since October 2016.

So, who’s got this right – risk assets or the safe havens? Why can’t they both be “right” – or wrong? There is much discussion of a confused marketplace: extraordinary cross-currents leaving traders confounded. In search of an explanation, I’ll point to the consequences of Monetary Disorder.

It has now been a full decade of near zero interest rates globally. Trillions (estimates of around $16 TN) of new central bank “money” were injected into global securities markets. What’s more, global central banks have repeatedly intervened to buttress global markets - from 2008/09 crisis measures; to 2012’s “whatever it takes”; 2016’s “whatever it takes to support a faltering Chinese Bubble”; to last month’s Powell U-turn. The combination of a decade of artificially low rates, an unfathomable amount of new market liquidity and an unprecedented degree of central bank market support have fostered momentous market structural maladjustment. We’re living with the consequences.

It is certainly not easy to craft an explanation for today’s Aberrant Market Behavior. I would start by positing that a massive pool of speculative finance has accumulated over this protracted cycle. There is at the same time liquidity excess, excessive leverage and the proliferation of derivatives strategies (speculation and hedging). In short, there is trend-following and performance chasing finance like never before – keenly fixated on global monetary policies. Illiquidity lies in wait.

When this mercurial finance is flowing readily into inflating securities markets, the resulting conspicuous speculative excess pressures central bankers to move forward with “normalization” (Powell October 3rd). At the same time, this edifice of speculative finance is innately fragile.

Speculative markets reversing to the downside rather quickly unleash “Risk Off” dynamics. These days, de-risking/deleveraging abruptly alters a market’s liquidity profile. Not only is there the liquidation of holdings and the collapse of leverage, the resulting downward market pressure triggers risk aversion more generally for this imposing global pool of speculative finance. And as the ETF complex suffers outflows, the leveraged speculating community and derivatives industry move to shed risk ahead of a retail investor panic. And when a meaningful component of the marketplace seeks to hedge market risk, it’s difficult to envision who takes the other side of such a trade.

Meanwhile, major shifts in dynamic-hedging programs unfold throughout the derivative universe. When markets are running on the upside, derivative-related buying (i.e. hedging in-the-money call options written/sold) exacerbates already powerful trend-following flows. But when a speculative upside (i.e. “blow-off” or “melt-up”) market advance eventually reverses course, derivative-related buying swiftly transforms into destabilizing selling. For example, a quant model used for (dynamic) “delta hedging” exposures from derivatives previously written (i.e. call options) would halt aggressive buy programs - immediately becoming a seller into market weakness.

Meanwhile, sinking markets will see keen interest in buying downside derivative protection (i.e. puts) – both for speculation and hedging. The sellers of these derivatives will then dynamically hedge these instruments, which essentially require selling into declining markets. Using out-of-the-money put options as an example, the amount of selling required to protect the seller/writer of these instruments expands exponentially as market prices approach option strike prices. The point is, derivatives tend to play a significant role in promoting destabilizing upside market moves, dislocations that are then highly susceptible to reversals and destabilizing market breakdowns.

Why have risk markets rallied so strongly to begin 2019? Because the Powell U-Turn incited a reversal of short positions and the unwind of bearish hedges and speculations. Derivative-related (“dynamic”) selling – that had been rapidly gaining momentum – reversed course and became aggressive buying. Market momentum then incited buying from the enormous trend-following/performance chasing Crowd. Who can afford to miss a rally? Certainly not the global leveraged speculating community, with many at risk of losing assets, incomes and businesses.

Why have safe haven assets performed so well in the face of surging equities and corporate debt? Because current Market Structure is inherently unstable and increasingly prone to an accident. Today’s buyers of Treasuries, bunds and JGBs are less concerned with January/Q1 equities and junk bond returns, keenly focused instead on acute global market instabilities and the inevitability of a systemic market liquidity event. I would further argue that this dysfunctional market dynamic recalls the destabilizing rally in Treasuries and agency securities in 2007 and well into 2008. This market anomaly stoked end-of-cycle speculative Bubble excess and exacerbated systemic fragilities.

When risk markets advance, news and analysis invariably focus on the positives – an expanding U.S. economy, prospects of a trade deal with China, buoyant profits, a backdrop of ongoing exciting technological advancements, perpetual low interest rates, endless loose financial conditions, etc. With markets advancing, mounting risks are easily disregarded. “Deficits don’t matter.” Debt concerns are archaic. Market Structure is a nothing burger. Best to ignore escalating social, political and geopolitical risks. The unfolding clash between the U.S. and the rising China superpower – it’s nothing. An increasingly fragmented and combative world – ditto.

As we saw in December, sinking markets direct attention to an expanding list of troubling developments. Years of inflating securities prices seemed to demonstrate that so many of the old worries were unjustified – none really mattered. The problem is that many do matter – and some tremendously. The current extraordinary backdrop has all the makings for a decisive bearish turn in market sentiment that would create a problematic feedback loop within the real economy – domestically and globally.

I’ll highlight an issue that has come to be easily dismissed - yet matters tremendously. Zero rates and QE were a policy experiment. The consensus view holds that the great success of this monetary exercise ensures that QE is now a permanent fixture in the central banking “tool kit”. The original premise of this experiment rested on the supposition that a temporary boost of liquidity would stimulate higher risk market prices and risk-taking, with resulting wealth effects that would loosen financial conditions while stimulating investment, spending and income growth throughout the real economy. The expectation was that a shot of stimulus would return the real economy back to its long-term trajectory.

History teaches us that monetary inflations are rarely temporary. Travel down that road and it’s nearly impossible to get off. Dr. Bernanke, the Federal Reserve and global central bankers never contemplated what a decade of unending monetary stimulus would do to Market and Financial Structure. Most – in policy circles and the marketplace - believe beyond a doubt that monetary stimulus was hugely successful in resuscitating economic growth dynamics.

But it’s on the financial side where consequences and repercussions have been fatefully neglected. It’s in the financial world where a decade of QE, zero rates and central bank market backstops imparted momentous structural change: the colossal ETF complex, the passive “investing” craze, quantitative strategies, algorithmic and high-frequency trading, a proliferation of derivative trading, leveraging and trend-following speculation on a global basis – to list only the most obvious. Along the way, aggressive monetary stimulus had much greater inflationary effects on risk markets than upon real economies. This ensured a continuation of aggressive stimulus - and only deeper market Bubble maladjustment.

For a month now, markets have celebrated the view that Chairman Powell (and global central bankers more generally) will not be attempting to “normalize” monetary policy: No Fed-induced tightening of financial conditions, along with no fretting the new Chairman’s commitment to the “Fed put.” Lost in all of this is recognition that a decade of experimental monetary stimulus has failed. Global finance is much more fragile today than prior to the 2008 crisis – the global economy more imbalanced and vulnerable. Monetary management will continue to destabilize.

Never has it been so easy to speculate – equities and corporate Credit alike. Never has corporate Credit availability – and financial conditions more generally – been governed by an interplay between the ETF complex, derivatives strategies and a distressed global leveraged speculating community. The Powell U-Turn unleashed another round of speculative excess. Right in the face of faltering global growth, I would argue this bout of speculation is especially precarious. And when the current “risk on” gives way to reality, maladjusted Market Structure will ensure liquidity issues on a scale beyond December.

“This is deflation, the amazing lurch toward recession despite QE...,” read the opening sentence of a friendly email I received last week. Yet I remember all the talk of deflation after the 1987 stock market crash. It became even louder in 1990 – then again in ‘97/’98. Deflation was the big worry with the bursting of the “tech” Bubble and then with corporate debt problems in 2002. And global central bankers have been fighting deflation now for a decade since “the worst crisis since the Great Depression.”

For a long time now, I’ve argued that Bubbles are the overarching risk. The “scourge of deflation” was not the ghastly plight to vanquish with interminable “whatever it takes.” Rather, deflation is a fateful consequence of bursting Bubbles – Bubbles inflated in the process of central bankers fighting so-called “deflationary forces.” Now, after thirty years of unending global Credit growth, activist central banking and egregious financial speculation, Bubble risk has never been so great: “The amazing lurch toward recession” and financial dislocation specifically because of a failed experiment in QE and inflationist monetary management.

But I’ll conclude with Market Structure. Global markets have turned even more synchronized during this upside convulsion. This increases already highly elevated risk come the next downturn. And I wouldn’t expect much in the way of diversification benefits from Treasuries, bunds and JGBs. It’s worth mentioning that Italian 10-year yields were up 31 bps in two weeks (spreads to bunds widening 41 bps!). With Italian and European economic prospects darkening by the week, European corporate debt came under some pressure this week. Germany’s DAX equities index fell 2.4%, and Japan’s Nikkei dropped 2.2%. And one could almost see fissures start to appear in EM currencies, equities and bonds. Eastern European currencies were notably weak, while the South African rand, Brazilian real and Argentine peso were all down about 2%.


For the Week:

The S&P500 was little changed (up 8.0% y-t-d), while the Dow added 0.2% (up 7.6%). The Utilities jumped 2.2% (up 5.4%). The Banks slipped 0.2% (up 12.5%), and the Broker/Dealers declined 0.5% (up 9.1%). The Transports added 0.5% (up 11.0%). The S&P 400 Midcaps increased 0.6% (up 11.4%), and the small cap Russell 2000 added 0.3% (up 11.7%). The Nasdaq100 gained 0.5% (up 9.2%). The Semiconductors rose 1.2% (up 12.7%). The Biotechs dropped 2.5% (up 13.4%). With bullion dipping $3, the HUI gold index slipped 0.2% (up 5.2%).

Three-month Treasury bill rates ended the week at 2.36%. Two-year government yields declined four bps to 2.47% (down 2bps y-t-d). Five-year T-note yields dropped six bps to 2.45% (down 7bps). Ten-year Treasury yields fell five bps to 2.64% (down 5bps). Long bond yields declined five bps to 2.98% (down 3bps). Benchmark Fannie Mae MBS yields fell seven bps to 3.40% (down 9bps).

Greek 10-year yields rose 10 bps to 4.00% (down 34bps y-t-d). Ten-year Portuguese yields added a basis point to 1.65% (down 45bps). Italian 10-year yields surged 21 bps to 2.96% (22bps). Spain's 10-year yields increased one basis point to 1.23% (down 18bps). German bund yields sank eight bps to 0.09% (down 15bps). French yields declined three bps to 0.54% (down 17bps). The French to German 10-year bond spread widened five to 45 bps. U.K. 10-year gilt yields dropped 10 bps to 1.15% (down 13bps). U.K.'s FTSE equities index increased 0.7% (up 5.1% y-t-d).

Japan's Nikkei 225 equities index dropped 2.2% (up 1.6% y-t-d). Japanese 10-year "JGB" yields declined two bps to negative 0.03% (down 3bps y-t-d). France's CAC40 declined 1.1% (up 4.9%). The German DAX equities index dropped 2.4% (up 3.3%). Spain's IBEX 35 equities index fell 1.8% (up 3.7%). Italy's FTSE MIB index declined 1.1% (up 5.6%). EM equities were mostly lower. Brazil's Bovespa index sank 2.6% (up 8.5%), and Mexico's Bolsa declined 1.3% (up 3.7%). South Korea's Kospi index fell 1.2% (up 6.7%). India's Sensex equities index added 0.2% (up 1.3%). China's Shanghai Exchange was closed for holiday (up 5.0%). Turkey's Borsa Istanbul National 100 index dipped 0.5% (up 12.3%). Russia's MICEX equities index declined 0.7% (up 6.1%).

Investment-grade bond funds saw inflows of $2.668 billion, and junk bond funds posted inflows of $3.859 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates declined five bps to 4.41% (up 9bps y-o-y). Fifteen-year rates fell five bps to 3.84% (up 7bps). Five-year hybrid ARM rates dropped five bps to 3.91% (up 34bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down a basis point to 4.41% (down 18bps).

Federal Reserve Credit last week declined $14.5bn to $3.986 TN. Over the past year, Fed Credit contracted $393bn, or 9.0%. Fed Credit inflated $1.176 TN, or 42%, over the past 326 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $12.9bn last week to a 15-week high $3.427 TN. "Custody holdings" rose $39.4bn y-o-y, or 1.2%.

M2 (narrow) "money" supply jumped $54.3bn last week to $14.512 TN. "Narrow money" gained $662bn, or 4.8%, over the past year. For the week, Currency increased $2.5bn. Total Checkable Deposits declined $3.2bn, while Savings Deposits surged $50.3bn. Small Time Deposits rose $4.2bn. Retail Money Funds were little changed.

Total money market fund assets jumped $25.1bn to $3.063 TN. Money Funds gained $237bn y-o-y, or 8.4%.

Total Commercial Paper fell $21.5bn to $1.057 TN. CP declined $72.8bn y-o-y, or 6.4%.

Currency Watch:

The U.S. dollar index gained 1.1% to 96.637 (up 0.5% y-t-d). For the week on the upside, the Mexican peso increased 0.2%. For the week on the downside, the Swedish krona declined 2.4%, the New Zealand dollar 2.3%, the Norwegian krone 2.3%, the Australian dollar 2.3%, the South African dollar 2.2%, the Brazilian real 2.0%, the Canadian dollar 1.3%, the euro 1.2%, the British pound 1.0%, the Swiss franc 0.5%, the Singapore dollar 0.5%, the South Korean won 0.3%, and the Japanese yen 0.2%. The Offshore Chinese renminbi declined 0.42% versus the dollar this week (up 1.27% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index declined 1.3% (up 9.0% y-t-d). Spot Gold slipped 0.2% to $1,315 (up 2.5%). Silver declined 0.8% to $15.809 (up 1.7%). Crude dropped $2.54 to $52.72 (up 16%). Gasoline added 0.7% (up 11%), while Natural Gas dropped 5.5% (down 12%). Copper gained 1.4% (up 7%). Wheat fell 1.3% (up 3%). Corn declined 1.1% (unchanged).

Market Dislocation Watch:

February 5 – Bloomberg (Cecile Gutscher): “Prayers for a sudden return to dovish monetary policies have been answered, and now investors are living with the aftermath: a world awash with $8.6 trillion in negative-yielding debt. That’s one reason money managers are wading once more into the fringes of fixed-income markets across the globe. Consider the action over the past week: Past defaulter Ecuador managed to sell $1 billion in new bonds even as the government is in talks for International Monetary Fund financing. Crisis-prone Greece received blockbuster orders for its 2.5 billion-euro ($2.9bn) sale. And the decidedly frontier republic of Uzbekistan… is meeting investors for a debut international offering… Meanwhile, U.S. high-yield is in the throes of a rebound, as traders bet easier monetary policy will prolong the business cycle. Lower-rated borrowers are in vogue after the asset class posted the biggest monthly gain in seven years.”

February 4 – Financial Times (Peter Wells): “Volatility in the US equity market has retreated to its lowest level since early October as a pledge from the Federal Reserve to be patient with potential future interest rate rises and flexible with its balance sheet policy have soothed markets. The decline means the gauge has now retraced most of the spike from the December quarter… The Cboe’s volatility index, or Vix, was down 1.9% at a reading of 15.83, which was its first time trading below 16 since December 3. At today’s session low of 15.78, the Vix reached its lowest since October 9.”

February 4 – Financial Times (Robin Wigglesworth): “Markets tend to veer between two extremes: fear and greed. But right now, the dominant emotion appears to be confusion. This may seem strange. After all, global equities have just notched up their best month in more than three years, as the panic that gripped investors in December has dissipated. The bond market has also clawed back most of the losses it suffered last year, helped by the US Federal Reserve’s abrupt decision to pause interest rate increases and willingness to re-examine how quickly it will sell its bond holdings. And yet, many investors admit a gnawing and growing unease. Where once there was certainty — whether bearish or bullish — there is now mostly doubt and indecision. As one top hedge fund manager says: ‘No one has a view, and everyone is positioned accordingly.’”

February 3 – Wall Street Journal (Akane Otani): “U.S. stocks and bonds are rallying together, an atypical pattern that some investors worry suggests the January rebound in equities is fated to run up against a painful reversal. Major indexes have started off the year on an upbeat note, closing out their best January since the 1980s… Yet yields on both shorter- and longer-term government debt have continued a monthslong slide, a development that has historically signified growing pessimism about the outlook for the U.S. economy. The yield on the benchmark 10-year Treasury note, used as a reference for everything from mortgage rates to student loans, has fallen for three consecutive months. That marks its longest streak of monthly declines since the summer of 2015…”

February 7 – Bloomberg (Alexandra Harris): “One of the world’s most important borrowing benchmarks staged its biggest one-day decline in a decade on Thursday. The three-month London interbank offered rate for dollars sank 4.063 bps to 2.697%, the largest one-day slide since May 2009. The move may reflect a benchmark that’s making up ground following a repricing of short-end Treasuries and associated instruments in the wake of the Federal Reserve’s dovish pivot in recent weeks.”

February 4 – Financial Times (Richard Henderson and Robin Wigglesworth): “Computer-driven investment funds whose activity is based on the level of market volatility are forecast to buy tens of billions of dollars of US stocks, according to analysts, as the strong start to the year lures them back into the equity market. Funds that target a specific level of market movement automatically change their exposure according to the ebb and flow of financial turbulence. Last year’s turmoil caused many to dump equities… However, with the benchmark S&P 500 recording its best January since 1987, these ‘volatility control’ strategies are buying once again. Deutsche Bank estimates that funds following these strategies have already bought $45bn of US stocks in January. A further $45bn of buying could come in the next three months as long as markets remain calm, according to the bank.”

Trump Administration Watch:

February 4 – Reuters (Susan Heavey): “White House economic adviser Kevin Hassett… said it remained to be seen how much progress has been made in U.S.-China trade talks but that U.S. President Donald Trump still hoped to make a deal by the March 1 deadline. ‘Exactly how much progress we made last week and how much progress we’ll make when Secretary (Steven) Mnuchin and Ambassador (Robert) Lighthizer head off to China is something ... we’re still waiting to see,’ Hassett, chairman of the White House Council of Economic Advisers, told CNBC…”

February 5 – Bloomberg (Jenny Leonard): “President Donald Trump in his State of the Union address said a trade deal with China will have to address not only what he called the chronic U.S. trade deficit but also changes in Chinese policies to protect American workers and businesses. ‘I have great respect for President Xi, and we are now working on a new trade deal with China,’ he said… ‘But it must include real, structural change to end unfair trade practices, reduce our chronic trade deficit, and protect American jobs.’”

February 4 – Bloomberg (Shawn Donnan and Jenny Leonard): “One of Donald Trump’s most persistent economic promises has been to rewrite the U.S. relationship with China. Yet as he approaches a potential deal, some of the very hawks who have cheered on the president’s trade war already fear he may end up falling short. With less than a month before a March 1 deadline for either a deal or an increase in U.S. tariffs, hardliners inside and outside the administration fret Trump is being outplayed by Chinese President Xi Jinping and seduced by what they see as empty promises. After Trump hosted Chinese Vice Premier Liu He… last week, one administration official privately likened the direction of negotiations to the president’s caving to Democrats in the shutdown battle over funding for a border wall. Another person close to the talks said Trump appeared determined to turn a pile of crumbs offered by China into what at best might turn out to be a slice of bread.”

February 6 – CNBC (Jeff Cox): “Treasury Secretary Steven Mnuchin expressed confidence… in the progress of trade talks with China and said he and a U.S. delegation are heading to China next week with the intent to make a deal before a March deadline. ‘We are committed to continue these talks,’ Mnuchin said on CNBC’s ‘Squawk Box.’ ‘We’re putting in an enormous amount of effort to hit this deadline and get a deal. That’s our objective.’ Mnuchin said the administration had ‘very productive meetings’ with Chinese Vice Premier Liu He. The White House has set a March 2 deadline to iron out myriad issues with Chinese over trade.”

February 6 – Bloomberg (Elena Mazneva): “President Donald Trump underscored his desire to reduce the trade gap with China in his State of the Union speech…, yet the deficit is on track to balloon again this year as a solid economy boosts American demand for imports. The total U.S. deficit in goods with China jumped by $37.6 billion, or 10.9%, in the first 11 months of 2018 compared with a year earlier… That brought the year-to-date U.S. trade gap with the world’s second-largest economy to $382.3 billion -- more than five times the next-largest deficit, with Mexico…”

February 4 – Reuters (Howard Schneider): “U.S. President Donald Trump and Fed Chairman Jerome Powell dined at the White House on Monday in their first meeting after months in which Trump lambasted the central bank for raising interest rates… The dinner, which included Treasury Secretary Steven Mnuchin and Vice chair Richard Clarida, follows a Fed meeting last week at which the central bank said, in fact, that further rate hikes were on hold for now - a step Powell and others said was based on recent economic developments, not the president’s public tirades against the Fed.”

February 6 – NPR (Jim Zarroli): “President Trump has nominated Treasury Department official David Malpass, a vocal critic of the World Bank, to head the international financial institution. Malpass, 62, is a conservative with longstanding ties to Trump. He once worked as chief economist at investment bank Bear Stearns… He also served in the Ronald Reagan and George H.W. Bush administrations. At Treasury, Malpass is currently involved in tense trade negotiations with China. If approved by the countries that control the World Bank's governing board, which is considered likely, Malpass would replace Jim Yong Kim… Treasury Secretary Steven Mnuchin and the president's daughter, Ivanka Trump, led the search for Kim's successor and recommended Malpass.”

February 7 – Bloomberg (Lynnley Browning): “President Donald Trump said he would consider changes to a controversial cap on the federal deduction for state and local taxes, one of the most divisive provisions of the 2017 Republican tax overhaul. Trump told regional newspaper reporters in… that he’s ‘open to talking about’ revisions to the so-called SALT cap, which limits to $10,000 the amount of state and local levies, including property taxes, that taxpayers can deduct each year on their federal returns. ‘There are some people from New York who have been speaking to me about doing something about that, about changing things. It’s been severe on them,’ he said.”

Federal Reserve Watch:

February 4 – Wall Street Journal (Michael S. Derby): “The Federal Reserve never played the negative interest rate card in response to the financial crisis, but new research claims the economy probably would have recovered faster if it had. A San Francisco Fed report… says allowing the benchmark federal-funds rate ‘to drop below zero may have reduced the depth of the recession and enabled the economy to return more quickly to its full potential.’ The report’s authors add that negative rates ‘may have allowed inflation to rise faster toward the Fed’s 2% target.’ …With a negative interest rate, depositors must pay to keep money at their bank.”

February 4 – Reuters (Ann Saphir): “The Federal Reserve’s new wait-and-see approach to monetary policy is suitable for now, Cleveland Fed President Loretta Mester said…, but the central bank may need to raise interest rates a bit further if the economy does as well as she expects. The Fed last week left its target range for short-term interest rates unchanged at between 2.25% and 2.5%, and in what was widely viewed as a dovish shift said it would be ‘patient’ in making any further adjustments to borrowing costs… ‘If the economy performs along the lines that I’ve outlined as most likely, the fed funds rate may need to move a bit higher than current levels,’ she said…”

February 3 – Reuters (Ann Saphir): “The Federal Reserve’s decision to stop raising interest rates puts a ‘fundamentally healthy’ U.S. economy on track to further growth, Minneapolis Federal Reserve Bank President Neel Kashkari suggested… ‘I think we still have room to run in the U.S. economy,’ Kashkari said at a town hall at a church in Long Lake, Minnesota. ‘The U.S. economy is fundamentally healthy,’ he added.’

U.S. Bubble Watch:

February 7 – Financial Times (Gillian Tett): “Last week, Beth Hammack, a senior Goldman Sachs banker who chairs a US government advisory group known as the Treasury Bond Advisory Committee, dispatched a letter to Steven Mnuchin, Treasury secretary, with a bombshell at the bottom. According to TBAC calculations, America will need to sell an eye-popping $12tn of bonds in the coming decade, sharply more than it did in the past 10 years. This will ‘pose a unique challenge for the Treasury’, Ms Hammack warned, even ‘without factoring in the possibility of a recession’. In plain English, the Wall Street luminaries on the committee were asking who on earth — or in global finance — will buy this looming mountain of Treasuries? The question is highly timely, if not ironic, given that Mr Mnuchin is heading to Beijing for yet another round of US-China trade talks. In recent decades China has been a reliable source of demand for American debt, as the country amassed vast defensive foreign exchange reserves and its export boom left it with dollars to invest.”

February 4 – Reuters (Lucia Mutikani): “New orders for U.S.-made goods unexpectedly fell in November amid sharp declines in demand for machinery and electrical equipment, government data showed on Monday, suggesting a slowdown in manufacturing as 2018 ended.”

February 4 – Reuters (Jason Lange): “Demand for loans weakened among U.S. businesses and households in the last three months of 2018 while banks tightened lending standards for commercial real estate, according to a survey of bank officers that gave worrisome signs for the economic outlook. The U.S. Federal Reserve… released its quarterly survey of senior loan officers. The survey also showed banks had kept standards for commercial and industrial lending ‘basically unchanged’ in the quarter but had tightened standards for credit card borrowing.”

February 5 – Reuters (Jason Lange): “A sharp drop in demand for U.S. auto and credit card loans could point to a troubling answer to a question vexing economists in recent weeks: Are consumers poised to pull back despite surging job growth? A partial shutdown of America’s federal government… interrupted the flow of official data on U.S. retail spending data that economists and policymakers use to gauge the gusto of U.S. consumers, whose spending accounts for roughly two-thirds of U.S. economic output. Other economic indicators have pointed to sharp drops in consumer sentiment in December and January as concerns about the global economy rocked financial markets.”

February 5 – Reuters (Lucia Mutikani): “U.S. services sector activity slowed to a six-month low in January as businesses worried about the impact of a partial shutdown of the federal government on the economy… The ISM said its non-manufacturing activity index dropped 1.3 points to a reading of 56.7 last month. That was the lowest reading since July and marked two straight monthly declines.”

February 4 – Wall Street Journal (Adrienne Roberts): “Car dealers are beginning 2019 with a heavier inventory of unsold vehicles on their lots... There were 3.95 million vehicles on dealership lots at the end of January, a 4% increase from December and up nearly 3% from the prior-year January, according to… WardsAuto. While January is typically a slower month for new-vehicle sales, analysts say the rising stock levels are becoming problematic because car companies will start this year with more unsold inventory than they had three years ago when U.S. auto sales peaked at 17.55 million for the year. Industry forecasters… predict sales this year will fall well below that figure, dropping to under 17 million vehicles for the first time since 2014.”

February 7 – Wall Street Journal (Jesse Newman and Jacob Bunge): “A wave of bankruptcies is sweeping the U.S. Farm Belt as trade disputes add pain to the low commodity prices that have been grinding down American farmers for years. Throughout much of the Midwest, U.S. farmers are filing for chapter 12 bankruptcy protection at levels not seen for at least a decade… Bankruptcies in three regions covering major farm states last year rose to the highest level in at least 10 years. The Seventh Circuit Court of Appeals, which includes Illinois, Indiana and Wisconsin, had double the bankruptcies in 2018 compared with 2008. In the Eighth Circuit, which includes states from North Dakota to Arkansas, bankruptcies swelled 96%. The 10th Circuit, which covers Kansas and other states, last year had 59% more bankruptcies than a decade earlier.”

February 5 – CNBC (Diana Olick): “After ending 2018 in a serious slump, demand for housing is suddenly soaring again, thanks to a drop in mortgage rates that could be temporary. Still, spring has sprung early, as buyers hope to get a quick deal before rates turn higher again. The average rate on the 30-year fixed mortgage rose throughout much of 2018, hitting a recent peak in November at just more than 5%. Rates had been in the 3% range throughout 2016 and 2017, which helped produce the run-up in home prices.”

February 3 – Wall Street Journal (Ruth Simon): “An Alabama welding-supply company is delaying purchases of new gas cylinders. A men’s clothing store in Louisiana has trimmed fall orders for suits and high-end sportswear. An information-technology consulting firm in California is holding back on planned hiring. After a banner year, many small businesses are becoming more cautious about their investment and hiring plans… Economic confidence among small firms, which edged downward for much of 2018, in January reached its lowest level since President Trump’s election, according to a monthly survey of 765 small firms for The Wall Street Journal by Vistage Worldwide… The survey showed 14% of firms expect the economy to improve this year, while 36% expect it to get worse. For the first time since the 2016 election, small firms were more pessimistic about their own financial prospects than they were a year earlier…”

February 5 – Politico (Ben White): “The prospect of 70% tax rates for multimillionaires and special levies on the super-rich draw howls about creeping socialism and warnings of economic disaster in much of Washington. But polling suggests that when it comes to soaking the rich, the American public is increasingly on board. Surveys are showing overwhelming support for raising taxes on top earners, including a new POLITICO/Morning Consult poll… that found 76% of registered voters believe the wealthiest Americans should pay more in taxes. A recent Fox News survey showed that 70% of Americans favor raising taxes on those earning over $10 million — including 54% of Republicans. The numbers suggest the political ground upon which the 2020 presidential campaign will be fought is shifting in dramatic ways, reflecting the rise in inequality in the United States and growing concerns in the electorate about the fairness of the American system.”

February 3 – Financial Times (Robin Wigglesworth): “When the dotcom bubble burst, Chuck Doyle smelt an opportunity — arranging loans for companies shunned by big banks and too small to tap the bond market. It proved very fertile ground. His company, …Business Capital, says it has since helped hundreds of smaller companies raise money to keep afloat, finance their inventory or expand. But Mr Doyle… says conditions in the non-bank, non-bond ‘private debt’ market have never been more frenzied. ‘We’ve been through a few cycles, but this one is crazy,’ he says. ‘We’ve seen unbelievably explosive growth. We’ve seen deals that banks wouldn’t have done even before the financial crisis.’ The post-crisis explosion of the US corporate bond market, and more recently the leveraged loans industry, have hogged the attention of analysts, investors and regulators. But it is arguably the underbelly of the American debt market that has seen most change in recent years. ‘It’s a wild west space, where everyone competes for every deal,’ says Oleg Melentyev, head of high-yield credit strategy at Bank of America Merrill Lynch. ‘The whole thing has exploded in size, and everyone is getting into it.’”

February 4 – Associated Press (Tom Krisher): “In the world of autonomous vehicles, Pittsburgh and Silicon Valley are bustling hubs of development and testing. But ask those involved in self-driving vehicles when we might actually see them carrying passengers in every city, and you’ll get an almost universal answer: Not anytime soon. An optimistic assessment is 10 years. Many others say decades as researchers try to conquer a number of obstacles. The vehicles themselves will debut in limited, well-mapped areas within cities and spread outward.”

February 4 – CNBC (Liz Moyer): “Senate liberals are proposing legislation that would prevent companies from buying back their own shares unless they first pay workers at least $15 an hour and offer paid time off and health benefits. Senate Democratic leader Charles Schumer… and Sen. Bernie Sanders… outlined their plan in a New York Times op-ed... The proposal would slap ‘preconditions’ on a company’s ability to buy its own shares. ‘Our legislation would set minimum requirements for corporate investment in workers and the long-term strength of the company as a precondition for a corporation entering into a share buyback plan. The goal is to curtail the overreliance on buybacks while also incentivizing the productive investment of corporate capital,’ they wrote. Last year, more than $1 trillion in buybacks were announced by large companies after a corporate tax cut pushed through Washington in late 2017 left companies with a lot of extra cash to spend.”

February 7 – Wall Street Journal (Akane Otani and Michael Wursthorn): “The yearslong expansion in U.S. corporate profits may be coming to an end sooner than investors expected, a warning sign for the nearly decadelong bull market. More than 30 companies in the S&P 500, including Netflix Inc., Delta Air Lines Inc. and Estée Lauder Cos., have offered first-quarter earnings forecasts that fell short of analysts’ estimates…, citing deteriorating outlooks for the global economy as well as uncertainty around trade policy. The flurry of tepid forecasts has put companies in the broad stock-market index on track to report a 1.4% decline in profits in the first quarter from a year earlier—a marked deterioration from September when earnings for the period were projected to grow by about 7%.”

February 3 – Wall Street Journal (Theo Francis and Richard Rubin): “With earnings season in full swing, investors are starting to learn which companies were overly optimistic about their tax cuts. Casino chain Las Vegas Sands Corp. has already taken a $727 million hit to its fourth-quarter profit, after a corporate tax regulation proposed in November made the 2017 tax overhaul less favorable than the company expected. International Business Machines Corp. said the same provision reduced its profit by $1.9 billion in the fourth quarter. As more companies report year-end results in coming weeks, investors can expect more dents in more bottom lines... ‘There’s so many provisions still left to be decided, determined, defined that can swing numbers pretty significantly,’ said Barbara Young, a Marriott International Inc. tax executive speaking on behalf of the Tax Executives Institute…”

February 4 – Wall Street Journal (Laura Kusisto, Arian Campo-Flores and Jimmy Vielkind): “A growing list of public officials in high-tax states are expressing alarm that big earners are bolting to low-tax states as new data suggests some home buyers are moving in response to the year-old change in the federal tax law. New York Gov. Andrew Cuomo became the latest… when he blamed a $2.3 billion state shortfall on the new federal tax law that he said is driving people to leave the state. …Mr. Cuomo said the 2017 law capping a deduction for state and local taxes at $10,000 is the reason for the deficiency. He specifically mentioned Florida as an attractive option for New Yorkers who are unhappy with the change in the tax law Preliminary data show a jump in Florida home purchases by buyers from high-tax states. Home values in lower-tax areas have been rising faster than those in places where limiting the ability to deduct high state and local taxes eroded some of the savings from the federal tax reduction…”

February 2 – Wall Street Journal (AnnaMaria Andriotis): “One generation of Americans owed $86 billion in student loan debt at last count. Its members are all 60 years old or more. Many of these seniors took out loans to help pay for their children’s college tuition and are still paying them off. Others took out student loans for themselves in the wake of the last recession, as they went back to school to boost their own employment prospects. On average, student loan borrowers in their 60s owed $33,800 in 2017, up 44% from 2010… Total student loan debt rose 161% for people aged 60 and older from 2010 to 2017—the biggest increase for any age group… Some are having funds garnished from their Social Security checks. The federal government… garnished the Social Security benefits, tax refunds or other federal payments of more than 40,000 people aged 65 and older in fiscal year 2015 because they defaulted… That’s up 362% from a decade prior, according to the latest data from the Government Accountability Office.”

February 4 – New York Times (Eduardo Porter): “It’s hard to miss the dogged technological ambition pervading this sprawling desert metropolis. There’s Intel’s $7 billion, seven-nanometer chip plant going up in Chandler. In Scottsdale, Axon, the maker of the Taser, is hungrily snatching talent from Silicon Valley as it embraces automation to keep up with growing demand. Start-ups in fields as varied as autonomous drones and blockchain are flocking to the area… Arizona State University is furiously churning out engineers. And yet for all its success in drawing and nurturing firms on the technological frontier, Phoenix cannot escape the uncomfortable pattern taking shape across the American economy: Despite all its shiny new high-tech businesses, the vast majority of new jobs are in workaday service industries, like health care, hospitality, retail and building services, where pay is mediocre.”

February 7 – Bloomberg (Alex Tanzi): “A decade after the recession, more than one in 11 mortgaged properties in the U.S. is considered ‘seriously underwater,’ according to the year-end home equity report by ATTOM Data Solutions. This dreaded classification applies when 25% or greater is owed than the home’s market value… More than five million U.S. properties fit the bill. In 27 zip codes, with a minimum of 2,500 mortgaged properties in each, more than half are ‘seriously underwater.’ At the end of 2018, the most ‘seriously underwater’ zip code was Trenton’s 08611 -- in New Jersey’s capital – where 70.3% of mortgaged homes were valued at $100 or less for every $125 owed. The St. Louis zip code 63137 follows at 64.8%. Zip codes 60426 in Harvey, Illinois (62.3%); 38106 in Memphis, Tennessee (60.5%) and 61104 in Rockford, Illinois (59.6%) round out the worst five. Additionally, the cities of Chicago, Cleveland, Atlantic City, Detroit and Virginia Beach show pockets of severely distressed mortgaged housing stock.”

China Watch:

February 3 – CNBC (Weizhen Tan): “Chinese authorities’ efforts to revive their country’s slowing economy have been ‘ineffective,’ and it needs to do more, J.P. Morgan Private Bank’s head of investment strategy for Asia said… ‘I still think they need to do more. I don’t think they’ve done enough yet. So far the measures they’ve taken have been fairly, fairly ineffective, they haven’t really produced the rebound in economic growth, and they haven’t really produced the rebound in confidence either,’ J.P. Morgan’s Alex Wolf told CNBC… ‘In recent years, China has engaged in extensive stimulus to keep its economy churning, Wolf said. But now, high debt levels and a change in the political landscape are pressuring Beijing to take smaller steps, he added. China’s banks extended a record 12.65 trillion yuan ($1.88 trillion) in loans in 2016 as the government encouraged credit-fueled stimulus to meet its economic growth target. The credit explosion stoked worries about financial risks from a rapid build-up in debt, which authorities have pledged to contain.”

February 5 – Financial Times (Lucy Hornby): “For economists who see ominous patterns in the world of numbers, one figure — 18 — is giving pause for thought. Last year, China, the world’s second-largest economy, accounted for 18% of the global economy — just like Japan on the cusp of a decade of stagnation, and just like the Soviet Union shortly before it collapsed. Like China today, these two nations were viewed as strategic rivals by Washington. In 1995, US newspapers were full of the industrial exploits of Japanese conglomerates. A decade earlier, the Soviet Union… was caught up in an arms race with the US. In reality, in each case, both the Japanese and Soviet economies were struggling. ‘The USSR and Japan were the two cases where everyone thought they would overtake the US,’ says Michael Pettis, professor of finance at Peking University’s Guanghua School of Management. ‘Every time you saw such rapid growth, there’s always been a significant reversal.’”

February 6 – Financial Times (Kathrin Hille): “China has started pulling mainland-based Taiwanese businesspeople and students into ‘brainstorming’ sessions on the future of the de facto independent nation, as President Xi Jinping seeks to show progress in moving towards unification. During the past month, officials from China’s Taiwan Affairs Office, which sets and implements Taiwan policy, have invited members of the Association of Taiwan Investment Enterprises on the Mainland to ‘study sessions’ and ‘discussion forums’ on Mr Xi’s latest Taiwan policy lines… Taiwanese students in Guangzhou and Chengdu said local authorities had organised meetings with Chinese student associations to discuss how Taiwan should be ruled after unification. And in Taipei, the Labour party, a splinter group with links on the mainland that advocates unification with China, held a forum debating Mr Xi’s policy proposals.”

Central Bank Watch:

February 7 – Financial Times (Chris Giles): “The Bank of England has become the latest central bank to perform a dovish U-turn after signalling that UK interest rates would remain on hold following concerns that the economy was stumbling ahead of Britain leaving the EU. Mark Carney, BoE governor, …said Brexit uncertainty and a weakening global economy had forced the central bank to forecast the slowest rate of growth since the financial crisis in 2009, with falling business investment and consumers showing greater caution. The BoE has retreated from previous plans for multiple interest rate rises, updating forecasts to reveal a one in four chance of a recession in the next six months even in the event of a smooth Brexit process.”

February 5 – Bloomberg (Carolynn Look and Piotr Skolimowski): “European Central Bank officials see no urgent need to offer new long-term loans to banks and aren’t certain to do so at their next policy meeting in March, according to people familiar with the matter. Officials aren’t yet convinced about the necessity for more liquidity and are nervous that an offering could fuel perceptions that they’re helping out particular lenders, said the people…”

February 4 – Bloomberg (Craig Stirling): “In the race to succeed Mario Draghi as European Central Bank president, Germany’s one-time favorite could yet stage a comeback. Bundesbank President Jens Weidmann… may make up lost ground after a double boost in recent days. First, Germany’s government last week decided, after apparent hesitation, not to propose a replacement for ECB Chief Economist Peter Praet, pointedly keeping alive Weidmann’s candidacy. Then Italy’s finance minister, Giovanni Tria, confirmed a thawing in his country’s longstanding opposition to the Bundesbanker when he told Die Welt that he’s ‘open’ to the prospect -- and ‘unbiased.’”

Brexit Watch:

February 7 – Reuters (William Schomberg and David Milliken): “The Bank of England said Britain faced its weakest economic growth in 10 years in 2019, blaming mounting Brexit uncertainty and the global slowdown, but it stuck to its message that interest rates will rise if a Brexit deal is done… ‘The fog of Brexit is causing short term volatility in the economic data, and more fundamentally, it is creating a series of tensions in the economy, tensions for business,’ BoE Governor Mark Carney said… after the Bank’s policymakers voted unanimously to keep rates at 0.75% as expected.”

February 6 – Reuters (Gabriela Baczynska and Alastair Macdonald): “The European Union will make no new offer on Brexit and those who promoted Britain’s exit without any understanding of how to deliver it deserve a ‘special place in hell’, European Council President Donald Tusk said… But as Tusk’s pointedly blunt language showed, frustration runs deep among European leaders over the British parliament’s rejection of the divorce deal and May’s demands that the EU now give up on key principles or face disruption in just 50 days.”

February 4 – Reuters (Andreas Rinke): “German Chancellor Angela Merkel… offered a way to break the deadlock over the United Kingdom’s exit from the European Union, calling for a ‘creative’ compromise to allay concerns over the future of Irish border arrangements.”

EM Watch:

February 6 – Bloomberg (Anirban Nag, Rahul Satija, and Vrishti Beniwal): “India’s new central bank chief delivered an unexpected interest rate cut, providing Prime Minister Narendra Modi with the kind of stimulus he needs to stoke economic growth in an election year. In a sharp reversal from October, when the Reserve Bank of India took rate cuts off the table, Governor Shaktikanta Das -- who took office in December -- opened the door to more policy easing and brought growth back into the Monetary Policy Committee’s focus. That was a departure from his predecessor Urjit Patel, whose singular aim was to meet the RBI’s 4% inflation mandate.”

Global Bubble Watch:

February 3 – Wall Street Journal (Mike Bird): “Data released… showed that the J.P. Morgan Global Manufacturing Purchasing Managers’ Index dropped to 50.7 in January. A reading above 50 indicates growth, but the index is signaling its weakest expansion in 2½ years. The new exports portion of the index was even weaker, dropping from 49.6 in December to 49.4 last month, the lowest since May 2016. The index, which is compiled from surveys of thousands of purchasing executives around the world, has been a reliable predictor of real global trade volumes which are published weeks or months after the fact.”

February 6 – Financial Times (Peter Campbell, Patrick McGee and Patti Waldmeir): “Three of the world’s largest automakers added to the industry’s gloom… by warning that 2019 is looking increasingly bleak, with little hope of an end to a Chinese slowdown or the changing customer tastes that are forcing costly overhauls to their model lines. The pessimistic outlook for the year ahead from Toyota, General Motors and Daimler — which together account for one in five vehicles sold globally — was accompanied by reports of dismal results for the year just concluded, with all three announcing a fall in profits.”

February 6 – Bloomberg (Elena Mazneva): “After two years of bumper profits, the steel industry is entering a slowdown. ArcelorMittal, as well as smaller European producers like Salzgitter AG and Voestalpine AG, are sounding the alarm about weakening conditions, particularly in China. The country, which uses about half of the world’s steel, is now expected to see a drop in demand, the first contraction since 2015. Demand in the U.S. and Europe will grow at a slower pace this year, ArcelorMittal said.”

February 3 – New York Times (David Streitfeld and Don Clark): “Don’t look now: Storm clouds are gathering over tech. Chinese consumers have pulled back their spending, blowing a $9 billion hole in Apple’s recent quarterly revenue. China was again a culprit when Nvidia warned last month that its revenue would come in 20% below expectations, though the graphics chip maker also blamed slack demand from Bitcoin miners and cloud data centers. Intel… cited intensifying ‘trade and macro concerns’ for financial results in January that did not meet expectations. And Samsung… said sales plunged 10% in the fourth quarter because of weakening demand for its memory chips from data centers and smartphones. China, smartphones, Bitcoin and cloud computing have been among the major drivers of the long tech boom, which in turn has powered the global economy for the last decade. The ingredient common to all of these sectors is computer chips, which form the brains of devices and whose ubiquity means they provide early signals about changes in supply and demand.”

February 4 – Bloomberg (Michael Heath): “Australian retail sales suffered the biggest drop in 12 months and imports slumped by the most in almost seven years, raising doubts about the resilience of household spending. Sales fell 0.4% in December, compared with estimates for an unchanged reading… Imports dropped 6% in the month, the worst result since February 2012. A private report… also showed a gauge of services -- a key component of the Australian economy -- plunged in January. The economy is confronting a sharp downturn in property prices that is threatening to hit consumers’ confidence through the so-called wealth effect -- even if losses on house prices so far are only on paper.”

February 3 – CNBC (Arjun Kharpal): “Two internets could emerge in the next five years — one led by China and one led by the United States — a top venture capitalist has predicted, adding to a growing chorus of voices suggesting such a development could take place. The concept has been dubbed the ‘splinternet,’ and it refers to a future in which the internet is fragmented, governed by separate regulations and run by different services. A unified definition is still unclear, but one suggestion is that the future could see Chinese and American apps and services each dominate half of the internet. That concept was the topic of much discussion at the World Economic Forum in Davos, Switzerland, last month.”

February 6 – Wall Street Journal (Timothy Puko): “The past five years have been the hottest in modern records, federal scientists said…, the latest in a series of warnings as House Democrats promise to combat climate change. Last year was the fourth-warmest year since 1880, according to the report by the National Aeronautics and Space Administration and the National Oceanic and Atmospheric Administration… The record was set in 2016, followed by 2017 and 2015—with 2014 following 2018 as No. 5 among the hottest years on record.”

Europe Watch:

February 7 – Reuters (Francesco Guarascio): “The European Commission sharply cut… its forecasts for euro zone economic growth this year and next because it expects the bloc’s largest countries to be held back by global trade tensions and an array of domestic challenges. The Commission said euro zone growth will slow to 1.3% this year from 1.9% in 2018, before rebounding in 2020 to 1.6%. The new estimates are far less optimistic than those released in November, when Brussels expected the euro zone to grow 1.9% this year…”

February 7 – Reuters (John Irish and Crispian Balmer): “France recalled its ambassador to Italy…, a remarkable diplomatic split between neighbors and European Union allies, after what it described as ‘repeated, baseless’ attacks by Italian political leaders against France. The rupture, the first withdrawal of a French envoy to Rome since World War Two, was announced by the foreign ministry. Diplomats said Paris acted after a series of insults from Italy, capped by Deputy Prime Minister Luigi di Maio’s decision this week to meet with members of France’s ‘yellow vest’ movement… ‘France has been, for several months, the target of repeated, baseless attacks and outrageous statements,’ the foreign ministry said… ‘Having disagreements is one thing, but manipulating the relationship for electoral aims is another.’”

February 5 – Reuters (Bate Felix): “Italy’s Deputy Prime Minister Luigi Di Maio said he met leaders of France’s ‘yellow vest’ anti-government movement…, an encounter likely to further test already strained bilateral relations. Di Maio, who also leads the populist, anti-establishment 5-Star party, said he had stopped over in France and met ‘yellow vests’ leader Christophe Chalencon and candidates on the grassroots movement’s list for European Parliament elections in May. ‘The winds of change have crossed the Alps’, Di Maio said…”

February 5 – Financial Times (Adam Samson): “Italy’s services sector slumped back into contraction as 2019 got under way, according to a new survey that suggests the country’s late 2018 economic downturn may have bled into the near year. The IHS Markit purchasing managers’ index, compiled based on a survey of business executives, slipped to 49.7 in January from 50.5 the previous month.”

February 7 – CNBC (Holly Ellyatt): “With its immense debt pile and potential budget blowout, Italy is a risk first and foremost to itself, Valdis Dombrovskis, a vice president at the European Commission told CNBC. ‘Fragility in Italy’s economy needs to be addressed,’ Dombrovski told CNBC’s Willem Marx… ‘Given the high level of Italy’s public debt, and Italy has the highest debt-to-GDP (gross domestic product) ratio in the EU after Greece, it’s important that Italy puts its debt-to-GDP ratio on a downwards trajectory. And this is something which we have (been) consistently emphasizing and we think that this is important,’ he said. Italy’s debt pile of 2.3 trillion euros ($2.6 trillion) is ‘first and foremost (it’s) a risk factor for Italy itself, but one that needs to be addressed,’ he added.”

February 6 – Associated Press: “German factory orders were down 1.6% in December compared with the previous month… — a worse-than-expected performance that adds to worries about slowing growth in Europe’s biggest economy. Economists had expected a 0.3% increase.”

February 3 – Reuters (Thomas Escritt): “Germany faces a 25 billion euro ($29bn) budget shortfall by 2023, unless it tightens spending, as tax revenues are set to fall and public sector wages are on the rise, Bild newspaper reported, citing an internal government document. The prospect of budget deficits would represent a dramatic deterioration in the finances of Europe’s biggest economy, which reported a 11.2 billion euro budget surplus last year.”

Fixed-Income Bubble Watch:

February 4 – Reuters (Jessica DiNapoli, Kate Duguid and Joshua Franklin): “Many U.S. companies that gorged on cheap debt with forgiving terms over the last decade now find themselves shackled by it, spending much of their earnings paying off lenders rather than investing in their businesses or hiring. As small firms, which together account for half of U.S. employment, begin to feel the squeeze, this could have a chilling effect on hiring, wages and consumption… The number of companies struggling with their debt obligations is hovering near record highs. Some 17% of publicly-traded U.S. companies had trouble making debt interest payments at the end of last year, up from less than 10% in 2010 and off from a high of over 20% in 2016, according to the Institute of International Finance…”

February 6 – Bloomberg (Brian Smith and Natalya Doris): “Demand for corporate bonds reached the highest level of the year this week as the Federal Reserve-fueled rally pushed into the riskiest corners of the high-grade market. Investors put in the most orders of the year for investment-grade bonds on Tuesday. Bids for Verizon… debt topped out at eight times the size of the deal, while Jersey Central Power & Light’s sale was six-fold oversubscribed. That followed the narrowing on Monday of new issue concessions… to the tightest this year.”

February 7 – Bloomberg (Molly Smith): “Clear Channel… sold $2.235 billion of bonds in the largest triple-C rated deal since September, the latest sign that the U.S. junk-bond market has been roused from its sleep. The bond sale, rated Caa1 by Moody’s… is the largest in the lowest junk ratings tier since Intelsat SA borrowed $2.25 billion through a subsidiary in September. High-yield debt has already proven to be one of the best-performing asset classes in fixed income this year, led by CCC rated bonds that have so far returned just over 6%...”

Geopolitical Watch:

February 2 – Reuters (Vladimir Soldatkin): “Russia has suspended the Cold War-era Intermediate-range Nuclear Forces Treaty, President Vladimir Putin said on Saturday, after the United States announced it would withdraw from the arms control pact, accusing Moscow of violations. Moscow’s relations with the West are strained over issues including Russia’s annexation of Crimea from Ukraine, allegations of meddling in the U.S. presidential election and being behind a nerve agent attack in Britain.”

February 3 – Reuters (Brian Ellsworth): “U.S. President Donald Trump said military intervention in Venezuela was ‘an option’ as Western nations boost pressure on socialist leader Nicolas Maduro to step down, while the troubled OPEC nation’s ally Russia warned against ‘destructive meddling.’ The United States, Canada and several Latin American countries have disavowed Maduro over his disputed re-election last year and recognized self-proclaimed President Juan Guaido as the country’s rightful leader. Trump said U.S. military intervention was under consideration in an interview with CBS aired on Sunday. ‘Certainly, it’s something that’s on the - it’s an option,’ Trump said…”

February 2 – Reuters (Ana Isabel Martinez and Angus Berwick): “Venezuelan President Nicolas Maduro proposed early parliamentary elections…, seeking to shore up his crumbling rule after a senior general defected to the opposition and tens of thousands thronged the streets in protest at his government. As domestic and international pressure on Maduro to step down mounts, a senior air force general disavowed him in a video that circulated earlier on Saturday, expressing his allegiance to parliament head and self-proclaimed interim president Juan Guaido.”

February 7 – Reuters: “Amid tensions between the United States and China, a group of Republican U.S. senators asked House of Representatives Speaker Nancy Pelosi to invite Taiwanese President Tsai Ing-Wen to address a joint meeting of the U.S. Congress, an invitation that would anger Beijing… The senators, including Cory Gardner, Marco Rubio, Tom Cotton, John Cornyn and Ted Cruz, released their letter to Pelosi…, ahead of a March 1 deadline for Washington and Beijing to reach a trade deal. Relations between China and Washington have been tense in recent months. Many U.S. lawmakers have been critical of Chinese business practices and accused its government of espionage and human rights abuses.”

February 5 – Reuters (Bozorgmehr Sharafedin and Jeffrey Heller): “Iran warned Israel… of a ‘firm and appropriate’ response if it continued attacking targets in Syria, where Tehran has backed President Bashar al-Assad and his forces in their nearly eight-year war against rebels and militants. Without responding directly, Israeli Prime Minister Benjamin Netanyahu nevertheless said it was important to block Iranian influence in Syria.”