China’s Aggregate Financing (approximately system Credit growth less government borrowings) jumped 2.860 trillion yuan, or $427 billion – during the 31 days of March ($13.8bn/day or $5.0 TN annualized). This was 55% above estimates and a full 80% ahead of March 2018. A big March placed Q1 growth of Aggregate Financing at $1.224 TN – surely the strongest three-month Credit expansion in history. First quarter growth in Aggregate Financing was 40% above that from Q1 2018.
Over the past year, China's Aggregate Financing expanded $3.224 TN, the strongest y-o-y growth since December 2017. According to Bloomberg, the 10.7% growth rate (to $31.11 TN) for Aggregate Financing was the strongest since August 2018. The PBOC announced that Total Financial Institution (banks, brokers and insurance companies) assets ended 2018 at $43.8 TN.
March New (Financial Institution) Loans increased $254 billion, 35% above estimates. Growth for the month was 52% larger than the amount of loans extended in March 2018. For the first quarter, New Loans expanded a record $867 billion, about 20% ahead of Q1 2018, with six-month growth running 23% above the comparable year ago level. New Loans expanded 13.7% over the past year, the strongest y-o-y growth since June 2016. New Loans grew 28.2% over two years and 90% over five years.
China’s consumer lending boom runs unabated. Consumer Loans expanded $133 billion during March, a 55% increase compared to March 2018 lending. This put six-month growth in Consumer Loans at $521 billion. Consumer Loans expanded 17.6% over the past year, 41% in two years, 76% in three years and 139% in five years.
China’s M2 Money Supply expanded at an 8.6% pace during March, compared to estimates of 8.2% and up from February’s 8.0%. It was the strongest pace of M2 growth since February 2018’s 8.8%.
South China Morning Post headline: “China Issues Record New Loans in the First Quarter of 2019 as Beijing Battles Slowing Economy Amid Trade War.” Faltering markets and slowing growth put China at a competitive disadvantage in last year’s U.S. trade negotiations. With the Shanghai Composite up 28% in early-2019 and economic growth seemingly stabilized, Chinese officials are in a stronger position to hammer out a deal. But at what cost to financial and economic stability?
Beijing has become the poster child for Stop and Go stimulus measures. China employed massive stimulus measures a decade ago to counteract the effects of the global crisis. Officials have employed various measures over the years to restrain Credit and speculative excess, while attempting to suppress inflating apartment and real estate Bubbles. Timid tightening measures were unsuccessful - and the Bubble rages on. When China’s currency and markets faltered in late-2015/early-2016, Beijing backed away from tightening measures and was again compelled to aggressively engage the accelerator.
Credit boomed, “shadow banking” turned manic, China’s apartment Bubble gathered further momentum and the economy overheated. Aggregate Financing expanded $3.35 TN during 2017, followed by an at the time record month ($460bn) in January 2018. Beijing then finally moved decisively to rein in “shadow banking” and restrain Credit growth more generally. Credit growth slowed somewhat during 2018, as the clampdown on “shadow” lending hit small and medium-sized businesses. Bank lending accelerated later in the year, a boom notable for rapid growth in Consumer lending (largely financing apartment purchases). And, as noted above, Credit growth surged by a record amount during 2019’s first quarter.
China now has the largest banking system in the world and by far the greatest Credit expansion. The Fed’s dovish U-turn – along with a more dovish global central bank community - get Credit for resuscitating global markets. Don’t, however, underestimate the impact of booming Chinese Credit on global financial markets. The emerging markets recovery, in particular, is an upshot of the Chinese Credit surge. Booming Credit is viewed as ensuring another year of at least 6.0% Chinese GDP expansion, growth that reverberates throughout EM and the global economy more generally.
So, has Beijing made the decision to embrace Credit and financial excess in the name of sustaining Chinese growth and global influence? No more Stop, only Go? Will they now look the other way from record lending, highly speculative markets and reenergized housing Bubbles? Has the priority shifted to a global financial and economic arms race against its increasingly antagonistic U.S. rival?
Chinese officials surely recognize many of the risks associated with financial excess and asset Bubbles. I would not bet on the conclusion of Stop and Go. And don’t be surprised if Beijing begins the process of letting up on the accelerator, with perhaps more dramatic restraining efforts commencing after a trade deal is consummated. Has the PBOC already initiated the process?
April 12 – Bloomberg (Livia Yap): “The People’s Bank of China refrained from injecting cash into the financial system for a 17th consecutive day, the longest stretch this year. China’s overnight repurchase rate is on track for the biggest weekly advance in more than five years amid tight liquidity conditions.”
It’s worth noting that the Shanghai Composite declined 1.8% this week, with the CSI 500 down 2.7%. The growth stock ChiNext index sank 4.6%. Hong Kong’s Hang Seng Financials index fell 1.8%.
Despite this week’s pullback, Chinese equities markets are off to a roaring start to 2019. The view is that Beijing won’t risk the domestic and geopolitical consequences associated with a tightening of conditions. Globally, ebullient markets see a loose backdrop fueled by the combination of a resurgent Chinese Credit boom and dovish global central bankers. Rates and yields will remain low for as far as the eye can see, with economic recovery surely coming later in the year. In short, myriad risks associated with protracted Bubbles have trapped Beijing and global central bankers alike.
The resurgent global Bubble has me pondering Bubble Analysis. I often refer to the late-cycle “Terminal Phase” of excess, and how much damage that can be wrought by rapid growth of increasingly risky Credit. Dangerous asset Bubbles, resource misallocation, economic imbalances, structural maladjustment, inequitable wealth redistribution, etc. In China and globally, we’re deep into uncharted territory.
I had the good fortune to subscribe to the German economist Dr. Kurt Richebacher’s newsletter for years - and the honor of assisting with “The Richebacher Letter” between 1996 and 2001. I was blessed with a tremendous learning opportunity.
My analytical framework has drawn heavily from Dr. Richebacher’s analysis. This week, I thought about a particular comment he made regarding the “middle class” suffering disproportionately from inflation and Bubbles: The wealthy find various means of safeguarding their wealth from inflationary effects. The poor really don’t have much to protect. They don’t gain much from the boom, and later have little wealth to lose during the bust. It is the vast middle class, however, that is left greatly exposed. They – society’s bedrock - tend to accumulate relatively high debt levels throughout the boom, believing their wealth is rising and the future is bright. They perceive benefits from home and market inflation, with rising net worth encouraging overconsumption and over-borrowing. Meanwhile, inflation works insidiously on real incomes.
April 10 – Financial Times (Valentina Romei): “The middle classes in developed nations are under pressure from stagnant income growth, rising lifestyle costs and unstable jobs, and this risks fuelling political instability, a new report by the OECD has warned. The club of 36 rich nations said middle-income workers had seen their standard of living stagnate over the past decade, while higher-income households had continued to accumulate income and wealth. The costs of housing and education were rising faster than inflation and middle-income jobs faced an increasing threat from automation, the OECD said. The squeezing of middle incomes was fertile ground for political instability as it pushed voters towards anti-establishment and protectionist policies, according to Gabriela Ramos, OECD chief of staff.”
If Dr. Richebacher were alive today (he passed in 2007 at almost 90), he would draw a direct link between rising populism and central bank inflationism. Born in 1918, he lived through the horror of hyperinflation and its consequences. While he was appalled by the direction of economic analysis and policymaking, we would explain to me that he didn’t expect the world to experience another Great Depression. He had believed that global leaders learned from the Weimar hyperinflation, the Great Depression and WWII. His view changed after he saw the extent that policymakers were willing to Go to reflate the system following the “tech” Bubble collapse.
April 9 – Wall Street Journal (Heather Gillers): “Maine’s public pension fund earned double-digit returns in six of the past nine years. Yet the Maine Public Employees Retirement System is still $2.9 billion short of what it needs to afford all future benefits to all retirees. ‘If the market is doing better, where’s the money?’ said one of these retirees… The same pressures Maine faces are plaguing public retirement systems around the country. The pressures are coming from a slate of problems, and the longest bull market in U.S. history has failed to solve many of them. There is a simple reason why pensions are in such rough shape: The amount owed to retirees is accelerating faster than assets on hand to pay those future obligations. Liabilities of major U.S. public pensions are up 64% since 2007 while assets are up 30%...”
It was fundamental to Dr. Richebacher’s analysis that Bubbles destroy wealth. He spared no wrath when it came to central bankers believing wealth would be created through the aggressive expansion of “money” and Credit.
It should be frightening these days to see pension fund assets fall only further behind liabilities, despite a historic bull market and record stock values-to-GDP. When the Bubble bursts and Wealth Illusion dissipates, the true scope of economic wealth destruction will come into focus. Don’t expect the likes of Lyft, Uber, Pinterest – and scores of loss-making companies - to bail out our nation’s underfunded pension system. Positive earnings (and cash-flow) doesn’t matter much in today’s marketplace. It will matter tremendously in a post-Bubble landscape where real economic wealth will determine the benefits available to tens of millions of retirees.
At near record stock and bond prices, pensions appear much better funded than they are in reality. With stocks back near all-time highs, Total (equities and debt) Securities market value is approaching $100 TN, or 460% of GDP. This ratio was at 379% during cycle peak Q3 2007 and 359% for cycle peak Q1 2000.
This is an important reminder of a fundamental aspect of Bubble Analysis: Bubbles inflate underlying “fundamentals.” Bullish analysts argue that the market is not overvalued (“only” 16.6 times price-to-forward earnings) based on next year’s expected corporate profits. Yet forward earnings guidance is notoriously over-optimistic, while actual earnings are inflated by myriad Bubble-related factors (i.e. huge deficit spending; artificially low borrowing costs; share buybacks and financial engineering; revenues inflated by elevated Household Net Worth and loose borrowing conditions, etc.).
Such a precarious time in history. So much crazy talk has drowned out the reasonable. Deficits don’t matter, so why not a trillion or two for infrastructure? Our federal government posted a $691 billion deficit through the first six months of the fiscal year – running 15% above the year ago level. Yet no amount of supply will ever impact Treasury prices – period. A Federal Reserve governor nominee taking a shot at “growth phobiacs” within the Fed’s ‘temple of secrecy’, while saying growth can easily reach 3 to 4% (5% might be a “stretch”). Larry Kudlow saying the Fed might not raise rates again during his lifetime.
Little wonder highly speculative global markets have become obsessed with the plausible. Why can’t China’s boom continue for years - even decades - to come? Beijing has everything under control. Europe has structural issues, but that only ensures policy rates will remain negative indefinitely. Bund and JGB yields will be stuck near zero forever. The ECB and BOJ have everything under control. Bank of Japan assets can expand endlessly. Countries that can print their own currencies can’t go broke. And it’s only a matter of time until all central banks are purchasing stocks and corporate Credit.
Why can’t U.S. growth accelerate to 4%? High inflation is not and will not in the future be an issue. The Fed and global central banks are now coming to recognize that disinflation is everlasting. With the Fed ready to cut rates and support equities, there’s no reason the decade-long bull market has to end. Old rules for how economies, markets and finance function – the cyclical nature of so many things – no longer apply.
It’s easy these days to forget about December. Let’s simply disregard the powerful confirmation of the global Bubble thesis. The reality is that Bubbles are sustained only by ever increasing amounts of Credit. A mild slowdown in the Chinese Credit boom saw markets falter, confidence wane and a Bubble Economy succumb to self-reinforcing downside momentum. And when synchronized global market Bubbles began to deflate, it suddenly mattered tremendously that global QE liquidity injections were no longer running at $200 billion a month.
As we are witnessing again in early-2019, when “risk on” is inciting leveraged speculation markets create their own self-reinforcing liquidity. It is when “risk off” de-risking/deleveraging takes hold that illiquidity quickly reemerges as a serious issue. And I would argue that it is the inescapable predicament of speculative Bubbles that they create ever-increasing vulnerability to downside reversals, illiquidity, dislocation and panic.
Beijing came to the markets’ and economy’s defense, once again. China’s problems – certainly including a historic speculative mania in apartments - are in the process of growing only more acute. China total 2019 Credit growth approaching $4.0 TN is clearly plausible. End of cycle craziness.
The Fed came to the markets’ defense, once again. This ensures only greater speculative excess and more acute market and economic vulnerability – that markets view as ensuring lower rates and a resumption of QE. Moreover, moves by China, the Fed and the global central bank community only exacerbate what has become a highly synchronized global speculative market Bubble.
Lurking fragility is not that difficult to discern, at least not in the eyes of safe haven debt markets. And sinking sovereign yields – as they did in 2007 – sure work to distract risk markets from troubling fundamental developments. Stop and Go turns rather perilous late in the cycle. Speculative Dynamics intensify – both “risk on” and “risk off.” Beijing and the Fed (and global central banks) were compelled to avert downturns before they gathered momentum. But that only ensured highly energized “blow off” speculative dynamics and more intensely inflating Bubbles.
The next serious bout of “risk off” will be problematic. Another dovish U-turn will not suffice. A significant de-risking/deleveraging event in highly synchronized global markets will only be (temporarily) countered with QE. And with the markets’ current ebullient mood, there’s no room for worry: of course central bankers will oblige with more liquidity injections. They basically signaled as much.
Timing is a major issue. Especially as speculative Bubbles turn acutely unstable, any delay with central bank liquidity injections will boost the odds things get out of hand. Central bankers, surely in awe of how briskly intense speculative excess has returned, may be hesitant to immediately accommodate. Heck, the way things are going, it may not be long before they question the wisdom of their dovish U-turn. I have a difficult time believing Chairman Powell – and at least some members of the FOMC – have discarded Financial Stability concerns.
The way things are setting up – intense political pressure, the election cycle and such – they will likely be reluctant to return to rate normalization. Yet the crazier things get in the markets the more cautious they will approach coming to a quick rescue. The Perils of Stop and Go.
For the Week:
The S&P500 increased 0.5% (up 16.0% y-t-d), while the Dow was little changed (up 13.2%). The Utilities added 0.2% (up 10.6%). The Banks rose 1.9% (up 16.0%), and the Broker/Dealers gained 1.4% (up 13.9%). The Transports rose 1.7% (up 19.0%). The S&P 400 Midcaps gained 0.8% (up 18.2%), and the small cap Russell 2000 added 0.1% (up 17.5%). The Nasdaq100 advanced 0.7% (up 20.5%). The Semiconductors gained 1.3% (up 29.6%). The Biotechs dropped 4.4% (up 19.2%). With bullion down $1.40, the HUI gold index fell 1.7% (up 4.8%).
Three-month Treasury bill rates ended the week at 2.38%. Two-year government yields rose five bps to 2.39% (down 10bps y-t-d). Five-year T-note yields gained seven bps to 2.38% (down 13bps). Ten-year Treasury yields rose seven bps to 2.57% (down 12bps). Long bond yields rose seven bps to 2.98% (down 4bps). Benchmark Fannie Mae MBS yields jumped 11 bps to 3.28% (down 22bps).
Greek 10-year yields sank 25 bps to 3.28% (down 111bps y-t-d). Ten-year Portuguese yields fell nine bps to 1.17% (down 55bps). Italian 10-year yields rose six bps to 2.54% (down 20bps). Spain's 10-year yields fell six bps to 1.05% (down 37bps). German bund yields gained five bps to 0.06% (down 19bps). French yields rose four bps to 0.40% (down 31bps). The French to German 10-year bond spread narrowed one to 34 bps. U.K. 10-year gilt yields jumped 10 bps to 1.21% (down 6bps). U.K.'s FTSE equities index was little changed (up 10.5% y-t-d).
Japan's Nikkei 225 equities index added 0.3% (up 9.3% y-t-d). Japanese 10-year "JGB" yields declined three bps to negative 0.06% (down 6bps y-t-d). France's CAC40 increased 0.5% (up 16.3%). The German DAX equities index was about unchanged (up 13.6%). Spain's IBEX 35 equities index declined 0.4% (up 10.9%). Italy's FTSE MIB index rose 0.5% (up 19.3%). EM equities were mixed. Brazil's Bovespa index sank 4.4% (up 2.0%), and Mexico's Bolsa declined 0.7% (up 7.3%). South Korea's Kospi index gained 1.1% (up 9.4%). India's Sensex equities index dipped 0.2% (up 7.5%). China's Shanghai Exchange fell 1.8% (up 27.9%). Turkey's Borsa Istanbul National 100 index dropped 2.8% (up 5.2%). Russia's MICEX equities index gained 0.7% (up 8.0%).
Investment-grade bond funds saw inflows of $3.469 billion, and junk bond funds posted inflows of $655 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates rose four bps to 4.12% (down 30bps y-o-y). Fifteen-year rates gained four bps to 3.60% (down 27bps). Five-year hybrid ARM rates jumped 14 bps to 3.80% (up 19bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down five bps to 4.25% (down 26bps).
Federal Reserve Credit last week declined $12.0bn to $3.897 TN. Over the past year, Fed Credit contracted $445bn, or 10.3%. Fed Credit inflated $1.086 TN, or 39%, over the past 336 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $11.5bn last week to $3.471 TN. "Custody holdings" gained $21.0bn y-o-y, or 0.6%.
M2 (narrow) "money" supply jumped $36.5bn last week to a record $14.558 TN. "Narrow money" rose $600bn, or 4.3%, over the past year. For the week, Currency increased $2.7bn. Total Checkable Deposits declined $5.6bn, while Savings Deposits jumped $29.8bn. Small Time Deposits added $2.0bn. Retail Money Funds gained $7.6bn.
Total money market fund assets declined $8.9bn to $3.098 TN. Money Funds gained $273bn y-o-y, or 9.7%.
Total Commercial Paper dropped $13.7bn to $1.072 TN. CP gained $13.7bn y-o-y, or 1.3%.
Currency Watch:
April 11 – Financial Times (Laura Pitel and Adam Samson): “Turkey’s foreign currency reserves fell in the first week of April, resuming a slide that spooked investors in the run-up to last month’s local elections. Weekly… data released by the country’s central bank showed that net international reserves dipped to TL157bn ($27.9bn) as of April 5…”
The U.S. dollar index declined 0.6% to 96.849 (up 0.7% y-t-d). For the week on the upside, the Mexican peso increased 1.7%, the Norwegian krone 1.4%, the Australian dollar 1.0%, the South African rand 0.9%, the euro 0.7%, the New Zealand dollar 0.5%, the Canadian dollar 0.5%, the Swedish krona 0.4%, the British pound 0.3% and the Singapore dollar 0.2%. For the week on the downside, the South Korean won declined 0.3%, the Japanese yen 0.3%, the Swiss franc 0.2% and the Brazilian real 0.2%. The Chinese renminbi gained 0.20% versus the dollar this week (up 2.61% y-t-d).
Commodities Watch:
April 7 – Bloomberg (Ranjeetha Pakiam): “China’s on a bullion-buying spree as Asia’s top economy expanded its gold reserves for a fourth straight month, adding to investors’ optimism that central banks from around the world will press on with a drive to build up holdings. Prices advanced back toward $1,300 an ounce. The People’s Bank of China raised reserves to 60.62 million ounces in March from 60.26 million a month earlier…”
The Bloomberg Commodities Index added 0.4% this week (up 7.4% y-t-d). Spot Gold was little changed at $1,290 (up 0.6%). Silver declined 0.8% to $14.963 (down 3.7%). Crude rose another 81 cents to $63.89 (up 41%). Gasoline jumped 3.5% (up 54%), while Natural Gas slipped 0.2% (down 10%). Copper gained 1.8% (up 12%). Wheat increased 0.2% (down 7%). Corn gained 1.9% (down 2%).
Market Instability Watch:
April 11 – Financial Times (Robin Wigglesworth): “Recent abrupt gyrations in financial markets could be the ‘tip of the iceberg’, according to a top International Monetary Fund official. Since the financial crisis, stricter regulations and commercial pressures have forced many banks to pare back or close their once-vast proprietary and market-marking desks. The latter have become more like independent high-speed traders, which are now some of the biggest intermediaries on global markets… Tobias Adrian, director of the IMF’s monetary and capital markets department, said that while banks were safer as a result, the implications for market ‘liquidity’ …were worrying. ‘There are no red flags at the moment, but obviously we haven’t seen a recession since the whole market-making system has morphed into this new system… We don’t quite know how that would play out if there’s a major adjustment.’”
April 10 – Financial Times (Steve Johnson): “The seemingly inexorable rise of passive, index-driven investment could have ‘destabilising effects’ on emerging markets in the event of a sudden dash for the exits, the IMF has warned. Passive investment has increased sharply in EMs, with the volume of assets benchmarked against EM bond indices quadrupling to $800bn in the past 10 years…, while another $1.9tn tracks MSCI’s EM equity indices. About 70% of global investors’ country allocation decisions are believed to be influenced by benchmark weightings. But during the past two major sell-offs affecting EMs — the taper tantrum of 2013 and last year’s repeat — the money of index-tracking investors was much less ‘sticky’ than that of other investors, the Washington-based body said in its semi-annual Global Financial Stability Report.”
Trump Administration Watch:
April 10 – Reuters (David Lawder and Pete Schroeder): “U.S. Treasury Secretary Steven Mnuchin said… that U.S.-China trade talks continue to make progress and the two sides have basically settled on a mechanism to police any agreement, including new enforcement offices. Mnuchin… said that a call with Chinese Vice Premier Liu He on Tuesday night was productive and discussions would be resumed on Thursday.”
April 8 – Reuters (Chris Prentice): “U.S. officials are ‘not satisfied yet’ about all the issues standing in the way of a deal to end the U.S.-China trade war but made progress in talks with China last week, a top White House official said… ‘We’re making progress on a range of things, and there’s some stuff where we’re not satisfied yet,’ Clete Willems, a top White House trade official, told Reuters…”
April 9 – CNBC (Steve Liesman): “A lot of market commentary sees tariffs and the trade war as temporary events. A U.S.-China trade deal, the thinking goes, will sound the ‘all clear’ signal for markets and the economy. But there are indications that we may be in for a longer, more protracted set of trade battles: a Forever Trade War that could last the balance of the Trump administration.”
April 9 – Bloomberg (Shawn Donnan): “President Donald Trump is sending a clear message to the economic policy makers gathering in Washington for the IMF and World Bank’s spring meetings: My trade wars aren’t finished yet and a weakening global economy will just have to deal with it. With his latest threat to impose tariffs on $11 billion in imports from the European Union -- from helicopters to Roquefort cheese -- the U.S. president offered a vivid reminder that, even as he moves toward a deal with China to end their tariff wars, he has other relationships he’s eager to rewrite.”
April 9 – Reuters (Susan Heavey): “U.S. President Donald Trump said… the United States would impose tariffs on $11 billion of products from the European Union, a day after U.S. trade officials proposed a list of EU products to target as part of an ongoing aircraft dispute. ‘The World Trade Organization finds that the European Union subsidies to Airbus has adversely impacted the United States, which will now put Tariffs on $11 Billion of EU products! The EU has taken advantage of the U.S. on trade for many years. It will soon stop!’ Trump said in a post on Twitter.”
April 7 – Reuters (Dave Graham and David Ljunggren): “More than six months after the United States, Mexico and Canada agreed a new deal to govern more than $1 trillion in regional trade, the chances of the countries ratifying the pact this year are receding. The three countries struck the United States-Mexico-Canada agreement (USMCA) on Sept. 30, ending a year of difficult negotiations… But the deal has not ended trade tensions in North America. If ratification is delayed much longer, it could become hostage to electoral politics.”
April 9 – New York Times (Ruchir Sharma): “From Day 1 in the Oval Office, President Trump has shown a unique obsession with the financial markets, tweeting that high stock prices proved he was making America great again. But a new chapter opened in October, when the markets dropped sharply, and Mr. Trump began making critical presidential decisions with an eye to pushing stock prices back up. As soon as the markets turned downward, Mr. Trump softened his hard line on Chinese trade practices, trying to quiet market fears that his tariff threats against Beijing would start a global trade war. Then he started attacking the United States Federal Reserve, saying its interest rate policies were undermining stock prices, and followed with rants about firing the chairman of the Fed, Jerome Powell. And last week, Axios quoted a source who had spoken to Mr. Trump as saying that the president had delayed his threat to close the Mexico border out of concern over how the markets would react.”
April 5 – Financial Times (Sam Fleming): “Donald Trump stoked fears that the Federal Reserve’s independence is under threat as he stepped up his demands for easier monetary policy a day after advocating the appointment of a second political loyalist to the central bank. The president told reporters… the Fed should embark on ‘quantitative easing’ instead of continuing to pare its holdings of bonds bought during its crisis-era stimulus programme, saying it would turn the economy into ‘a rocket ship’. The comments, which he made despite strong jobs data, came amid barrage of criticism from economists over Mr Trump’s decision to propose Herman Cain, a former Republican presidential contender and vocal backer of the president, to be a governor of the Fed’s powerful board. “
April 9 – Reuters (Ann Saphir and Trevor Hunnicutt): “A political feud over President Donald Trump’s picks for the U.S. Federal Reserve Board broke into an open brawl… even before the nominations of Herman Cain… and Stephen Moore… have been formally submitted to the Senate. Cain and Moore, both overt loyalists to the president, in recent days have waged unprecedented public campaigns for the Fed jobs, with both eagerly endorsing Trump’s economic policies and Moore pledging to ‘accommodate’ those policies once he is at the Fed. The central bank’s leadership prides itself on its nonpartisan stewardship over the world’s biggest economy, and views political independence as key to its ability to carry out monetary policy effectively.”
April 7 – Wall Street Journal (Kate Davidson): “One of the big unknowns for U.S. economic growth heading into the presidential election year needs to be sorted out by lawmakers in the coming months: the path for government spending. Lawmakers agreed to cap spending in 2011 as part of a bruising fight over raising the debt limit, but they have struck three separate deals since then—in 2013, 2015 and 2018—to ease those caps and increase spending. The latest two-year deal, which boosted funding nearly $300 billion above the caps, expires in October. If Congress doesn’t reach another deal by then, the spending limits known as the sequester would kick back in, reducing discretionary spending by $125 billion, or 10%, from 2019 levels.”
Federal Reserve Watch:
April 10 – CNBC (Hugh Son): “American savers have lost $500 billion to $600 billion in interest payments on bank accounts and money market funds thanks to the Federal Reserve’s post-financial crisis policies, according to Wells Fargo analyst Mike Mayo. Mayo included the statistic in a research note about the congressional hearing… called ‘Holding Megabanks Accountable: A Review of Global Systemically Important Banks 10 Years After the Financial Crisis.’ Lawmakers are likely to grill bank CEOs on lending, compensation and regulation, he wrote… ‘Savers are still paying due to the financial crisis,’ said Mayo. ‘It’s absolutely a wealth transfer from prudent savers to the borrowers and risk takers.’”
April 11 – Bloomberg (Brendan Murray): “Stephen Moore, a proposed nominee for the Federal Reserve, said he’s planning to challenge the belief inside the U.S. central bank that growth causes inflation and will try to demystify monetary policy so it’s not conducted within a ‘temple of secrecy.’ ‘I’m going to come with the idea -- challenge one fundamental idea that I think is endemic at the Fed, which I think is completely wrong, which is that growth causes inflation. Growth does not cause inflation,’ he said… ‘I’ll say that again: Growth does not cause inflation. We know that. When you have more output of goods and services, prices fall… And I think the Fed has been afraid of growth -- there’s ‘growth-phobiacs’ over there and I think they’re wrong.’”
April 10 – Financial Times (Peter Wells): “Having recently instituted a policy U-turn earlier this year, perhaps investors shouldn’t be so surprised at the Federal Reserve’s desire to signal that it’s not all one-way traffic when it comes to interest rates. The minutes from the Fed’s March meeting show policymakers are keeping their options open for the next move in rates, which may come as a greater surprise to pockets of the market that expected the US central bank would be forced to ease policy this year. In the space of six months, market expectations have swung to now attach a roughly 62% chance to a 25 bps rate cut by the end of 2019 from a forecast for three rate rises.”
April 10 – CNBC (Jeff Cox): “Federal Reserve officials at their most recent meeting left room for the possibility of interest rate increases before the end of the year, should economic conditions improve, according to minutes from the session… The central bank’s Federal Open Market Committee voted unanimously to not raise its benchmark rate at the March 19-20 gathering, and simultaneously indicated that it didn’t see a likelihood for any hikes through 2019… ‘Several participants noted that their views of the appropriate range for the federal funds rate could shift in either direction based on incoming data and other developments… Some participants indicated that if the economy evolved as they currently expected, with economic growth above its longer-run trend rate, they would likely judge it appropriate to raise the target range for the federal funds rate modestly later this year.’”
April 9 – Wall Street Journal (David Harrison): “Federal Reserve vice chairman Richard Clarida said… that the central bank’s review of its monetary policy will look at new ways to deal with low inflation as well as novel approaches to stimulate a weak economy and to communicate with the public. The Fed kicked off its review this year after officials realized interest rates are likely to remain lower than in the past, even in periods of economic growth. Since lower rates could limit the central bank’s ability to boost a slumping economy, officials are looking for new ways to respond to downturns. ‘The economy is constantly evolving, bringing with it new policy challenges,’ Mr. Clarida said… ‘So it makes sense for us to remain open-minded as we assess current practices.’”
April 8 – CNBC (Jeff Cox): “The Federal Reserve is rebutting President Donald Trump’s assertion that tightening monetary policy is hurting the economy. In a paper published Friday, the St. Louis Fed said the central bank’s move to reduce the level of bonds on its balance sheet — ‘quantitative tightening’ as it has become known — will not have any noticeable negative impact on growth. That runs directly counter to Trump’s assertion the same day that the policy normalization process has ‘really slowed us down.’ ‘It is true that removing unusual monetary accommodation will likely result in less real activity and lower prices than otherwise, but the ongoing shrinkage of the Fed’s balance sheet was not responsible for bearish asset markets in 2018, nor is it likely to significantly retard activity going forward,’ Fed economist Christopher J. Neely wrote.”
April 6 – New York Times (Neil Irwin): “Politicians have had strong opinions on what the Federal Reserve should and shouldn’t do throughout its 105-year history. They have pushed for lower interest rates and easier money, or for this or that policy on bank regulation or consumer protection. They have summoned Fed leaders to the White House or Congress to persuade and cajole. In that sense, there is nothing new in President Trump’s aggressive approach to the Fed. This week, he called for lower interest rates and new quantitative easing, and he signaled an intention to appoint two vocal supporters, Stephen Moore and Herman Cain, to the board of governors. What makes Mr. Trump’s approach to the Fed so unusual is that he has repeatedly, publicly undermined a Fed chief he appointed (Jerome Powell), and, if successful, he would put two officials with a background in partisan politics in the inner sanctum of Fed policymaking.”
U.S. Bubble Watch:
April 10 – Associated Press (Josh Boak): “The federal government reported a $146.9 billion deficit in March, causing annual debt to rise 15% for the first half of the budget year compared to the same period in 2018. …The fiscal year deficit has so far totaled $691 billion, up from nearly $600 billion in 2018. The Treasury Department expects that the deficit will exceed $1 trillion when the fiscal year ends in September. Tax receipts are running slightly higher than a year ago as more Americans are working and paying taxes. But the tax cuts signed into law by President Donald Trump in 2017 have meant that the $10 billion increase in receipts has failed to keep pace with a roughly $100 billion increase in government expenditures.”
April 11 – Reuters (Susan Cornwell): “U.S. House Speaker Nancy Pelosi said… that she would meet Republican President Donald Trump soon to talk about a plan to rebuild the country’s infrastructure that she thinks should be worth at least $1 trillion, and maybe $2 trillion. ‘Has to be at least $1 trillion, I’d like it to be closer to $2 trillion,’ Pelosi… said to reporters… She declined to say how such an amount could be paid for, saying that was ‘to be discussed.’”
April 10 – Reuters (Lucia Mutikani): “U.S. consumer prices increased by the most in 14 months in March, but the underlying inflation trend remained benign against the backdrop of slowing domestic and global economic growth… [The] Consumer Price Index rose 0.4%, boosted by increases in the costs of food, gasoline and rents… In the 12 months through March, the CPI increased 1.9%... In the 12 months through March, the core CPI increased 2.0%, the smallest advance since February 2018.”
April 11 – Reuters (Lucia Mutikani): “U.S. producer prices increased by the most in five months in March, but underlying wholesale inflation was tame. The… producer price index for final demand rose 0.6% last month, lifted by a surge in the cost of gasoline… In the 12 months through March, the PPI rose 2.2% after advancing 1.9% in February.”
April 8 – Reuters (Richard Leong): “U.S. consumer sentiment for buying a home rose to its strongest in nine months as a result of a sturdy jobs market and a decline in mortgage rates…, according to… Fannie Mae… The federal mortgage agency said its home purchase sentiment index increased by 5.5 points to 89.8 points, its highest since last June. Notably, Fannie Mae’s latest data showed the net share of consumers surveyed in March who said it is a good time to sell a home jumped 13 points to 43%.”
April 9 – Wall Street Journal (Laura Kusisto): “House flipping is back to nearly the same level it was around the 2006 peak of the housing boom, when it became a symbol of the rampant speculation that soared before the bubble burst. But a new analysis from CoreLogic Inc. suggests most of the current flips are less risky than those more than a decade ago… Some 10.6% of homes sold in the U.S. in the fourth quarter of 2018 were flips, defined as having been owned for less than two years… That is near the level of the first quarter of 2006, when 11.3% of homes sold were flips, and the highest fourth-quarter level in the two decades since CoreLogic started tracking the data.”
April 8 – Wall Street Journal (Rebecca Elliott): “Shale companies from Texas to North Dakota have been managing their wells to maximize short-term oil production. That has long-term consequences for the future of the American energy boom. By front-loading the wells to boost early oil output, many companies have been able to accelerate growth. But these newer wells peter out more quickly, so companies have to drill new ones sooner to sustain their production. In effect, frackers have jumped on a treadmill and ratcheted up the speed, becoming ever more dependent on new capital to keep oil production humming, even as Wall Street is becoming more skeptical of funding the industry… Though most shale companies have yet to consistently generate more cash than they spend, their rapid expansion has turned the U.S. into the world’s largest oil producer. That growth has begun to slow, however.”
April 9 – CNBC (Lauren Thomas): “Clothing retailers, consumer electronics companies and home furnishing businesses will need to close more stores across the U.S. as e-commerce sales proliferate, according to UBS. …The investment firm said ‘store rationalization needs to accelerate meaningfully as online penetration continues to rise.’ Assuming online sales’ share of total retail sales in the U.S. grows to 25% by 2026, from 16% today, roughly 75,000 more retail doors, excluding restaurants, need to close, analysts Jay Sole and Michael Lasser said. That means for every 1% increase in online penetration, roughly 8,000 to 8,500 stores need to close.”
April 7 – Reuters (Jarrett Renshaw and Stephanie Kelly): “The March floods that punished the U.S. Midwest have trapped barrels of ethanol in the country’s interior, causing shortages of the biofuel and helping to boost gasoline prices in the western United States. The historic floods have dealt a series of blows to large swaths of an ethanol industry that was already struggling with high inventories and sluggish domestic demand growth. The ethanol shortages are one factor pushing gasoline prices in Southern California, including Los Angeles, to the highest in the country, and they could top $4 a gallon for the first time since 2014…”
April 7 – Bloomberg (Adam Tempkin): “Consumer credit scores have been artificially inflated over the past decade and are masking the real danger the riskiest borrowers pose to hundreds of billions of dollars of debt. That’s the alarm bell being rung by analysts and economists at both Goldman Sachs.... and Moody’s… who say the steady rise of credit scores as the economy expanded over the past decade has led to ‘grade inflation.’ This means debtors are riskier than their scores indicate because the metrics don’t account for the robust economy, skewing perception of borrowers’ ability to pay bills on time. When a slowdown comes, there could be a much bigger fallout than expected for lenders and investors. There are around 15 million more consumers with credit scores above 740 today than there were in 2006, and about 15 million fewer consumers with scores below 660, according to Moody’s.”
April 8 – Reuters (Trevor Hunnicutt): “U.S. consumers expect stable inflation over the next year even as they anticipate higher wages and gas prices, Federal Reserve Bank of New York data showed… The survey showed one-year ahead inflation expectations were unchanged at 2.8% last month, while a three-year inflation figure ticked up 0.1 percentage point to 2.9%. People forecast earnings to rise 2.6% over the coming year, the largest figure since September. They also see gas prices rising 4.7%, the most since June. U.S. crude oil prices have shot up 40% this year.”
April 10 – Wall Street Journal (Maureen Farrell): “Uber Technologies Inc. is aiming for a valuation in its impending initial public offering of as much as $100 billion, below previous expectations, after ride-hailing competitor Lyft Inc. stumbled in its early days of trading as a public company. Uber recently provided documentation to holders of its convertible notes that sets a potential price range of $48 to $55 a share… That would equate to an aggregate valuation of between $90 billion and $100 billion, including the roughly $10 billion Uber expects to raise in the offering.”
April 10 – Financial Times (Kate Youde): “Sales of apartments in Manhattan were down 11% in the first quarter of this year, according to residential real estate broker Stribling & Associates. Reporting on the market slowdown, which came amid a flurry of new developments, the FT suggested the city’s new mansion tax — which introduces a one-time levy on purchases of apartments in New York City that sell for at least $1m — could slow the market further.”
China Watch:
April 7 – Reuters (Chen Aizhu, Coco Li, Chen Yawen and Samuel Shen): “China will step up its policy of targeted cuts to banks’ required reserve ratios to encourage financing for small and medium-sized businesses that play a key role in economic growth. Beijing has been urging banks to continue lending to struggling businesses, especially smaller private concerns that account for more than half the country’s economic growth and most of its jobs. …The State Council said China will also accelerate initial public offerings for small and medium-sized enterprises (SMEs).”
April 11 – Bloomberg: “China’s consumer prices surged on the back of temporary food supply factors, while factory inflation provided further evidence of a nascent economic recovery. Consumer inflation accelerated to 2.3% in March from a year earlier, up from 1.5% in February and posting the biggest jump in more than a year. The surge was mostly led by rising vegetable and pork prices, which drove the CPI up by more than half a percentage point…”
April 9 – Bloomberg: “China’s property market is showing signs of green shoots again with home sales posting a robust recovery in March. After contracting in the first two months of 2019… the project sales of nine major developers rose 20% in March from a year earlier. Aiding the recovery has been stimulus from Beijing, which has helped stabilize the economy and re-ignite home buyers’ enthusiasm. Economists expect the central bank will cut reserve requirements at least three more times this year to funnel cash into a slowing economy. Additional so-called stealth easing measures that make it easier to buy property in China have also improved sentiment.”
April 9 – Bloomberg (Will Davies): “Bragging rights to Hong Kong, for now. The city’s equity market has overtaken Japan to be the world’s third largest in value, behind only the U.S. and mainland China, courtesy of a rebound in Hong Kong stocks… Hong Kong’s market cap was $5.78 trillion as of Tuesday, compared with $5.76 trillion for Japan…”
April 10 – Bloomberg: “Pressure is building for China’s bondholders to forgo their right to be repaid early as more companies show signs of strain amid a record amount of puttable debt this year. Pang Da Automobile Trade Co., a Chinese car dealer, sought to delay a put date on a bond for the second time in February. Jewelry maker Harbin Churin Group Jointstock Co. couldn’t make a put option payment that came due late February, while Guangdong Homa Appliances Co. extended an early payment date by a month… Such cases are adding to concerns that the wave of early note redemptions will spur more defaults in China and keep credit stress elevated. A record 1.1 trillion yuan ($164bn) of bonds have put options exercisable from now until the end of 2019…”
April 9 – New York Times (Cao Li): “China is planning new steps that could put a stop to making Bitcoin there, a move that could cut off one of the world’s largest sources of the popular but unstable cryptocurrency. The National Development and Reform Commission, China’s top economic planning body, this week added cryptocurrency mining to a list of about 450 industries that it proposes to eliminate. If the move is approved, local governments in China will be prohibited from supporting makers of Bitcoin and other digital currencies through subsidies or other benefits.”
Central Bank Watch:
April 9 – Financial Times (Valentina Romei): “It was with some fanfare last month that the European Central Bank announced a third phase of its special lending programme, seeking to pep up growth across the eurozone. A new round of low-cost loans from the central bank is designed to provide the biggest commercial banks with ‘stable and dependable funding in times of market uncertainty’, spurring them to write new loans to households and companies across the continent. But the programme, known as targeted longer-term refinancing operations (TLTRO, pronounced ‘tiltrow’), has failed to stir steady lending through its two iterations to date. The ECB’s latest lending survey… showed that despite rock-bottom interest rates, the appetite for debt across the eurozone was fading, with the percentage of banks reporting an increase in demand for loans to businesses in the previous quarter dropping to zero, from 9% at the end of last year. Net loan demand actually shrank in Spain and Italy.”
Brexit Watch:
April 11 – Reuters (Elizabeth Piper, Gabriela Baczynska and Philip Blenkinsop): “European Union leaders gave Britain six more months to leave the bloc, more than Prime Minister Theresa May says she needs but less than many in the bloc wanted, thanks to fierce resistance from France.”
Europe Watch:
April 9 – Financial Times (Valentina Romei): “Demand for loans among eurozone businesses was flat since the beginning of 2019 despite record-low interest rates, increasing pressure on the European Central Bank to take further action to bolster the bloc’s economy. Data from the ECB… indicated the expansion in loan requests that began in mid-2015 had ended, with the percentage of banks reporting an increase in demand for loans to businesses in the previous quarter falling to 0%. This was down from 9% at the end of last year and double digit percentages over most of the previous three years…”
April 9 – Bloomberg (Lorenzo Totaro and Chiara Albanese): “The Italian government confirmed its gloomy outlook for the economy…, following a day of arguments, accusations and finger-pointing between the warring sides of the country’s populist coalition. After a meeting in Rome, the Cabinet cut its target for growth this year to just 0.2%. That figure, down from 1% previously, includes the estimated impact of measures the government has already agreed on to implement to help the economy. Expansion this year would be 0.1% without the steps.”
April 8 – Financial Times (Nikou Asgari): “Italian government bonds are not for the fainthearted, with the past year having provided some ugly lurches lower on outbreaks of political nerves. One reason for that, suggests UniCredit strategist Chiara Cremonesi, may be the relatively high concentration of foreign nonbank holders of the debt… Foreign investors account for 30% of the total amount of outstanding Italian debt, Ms Cremonesi calculates — an unremarkable share. Within that, though, just over half is in the hands of private investors such as asset managers, hedge funds, pension funds and insurance companies. ‘Traditionally, [these investors] are the most active sellers in times of market stress,’ she said. ‘This is different from the core and semi-core countries in the [euro area], where the proportion of foreign private investors is lower and the proportion of foreign officials [central banks] is higher.’”
EM Watch:
April 8 – Wall Street Journal (Ira Iosebashvili): “A cautious shift from the world’s central banks is sending investors hunting for big paydays in emerging-market currencies, despite concerns that global growth may continue to slow. Many are employing a strategy known as the carry trade, where an investor borrows in a low-yielding currency to roll the funds into a higher-yielding emerging-market asset, such as local bonds, and pockets the difference. Emerging markets are popular targets for carry traders because they often offer yields that are much higher than those found in developed countries. For example, Turkey’s 3-month deposit rate… stood at 28% on Friday, while Russia’s was at 7.9%... An investor borrowing in dollars and buying Turkish assets hopes to collect a yield of more than 25% over three months, without accounting for moves in the underlying currencies and transaction costs.”
April 8 – Bloomberg (Selcan Hacaoglu and Firat Kozok): “President Recep Tayyip Erdogan intensified his push for a rerun of last month’s election in Turkey’s biggest city, fueling concerns that an authoritarian streak in government is deepening and rattling investors in the Middle East’s leading economy. He’s embarked on a U-turn since appearing last week to accept the ballot-box defeats handed to his ruling party in Ankara… and… Istanbul… On Monday, the president, who since last year has ruled Turkey with sweeping executive powers, alleged ‘widespread irregularities’ and ‘organized’ fraud in Istanbul, and all but told the High Election Board to hold a new poll to pick a mayor for the city.”
April 7 – Bloomberg (Ercan Ersoy and Fercan Yalinkilic): “Turkish companies are struggling to get off the hamster wheel of debt as foreign borrowings run near record highs. The reason: a plunge in the lira that has driven up the cost of their obligations in dollars and euros. Banks are being left to carry the burden amid a surge in demand from some of the country’s industrial giants to restructure their liabilities -- on top of a jump in bad loans. Lenders are also pulling back on providing new credit as the financial system comes under increasing pressure from the recession and an inflation rate of almost 20%. While the lira has recovered from the all-time low it hit in August, the currency is still down by a third against the dollar since the beginning of 2018. The result is that Turkey Inc.’s debt amounts to 40% of gross domestic product, exceeding ratios in Eastern Europe’s 10 biggest emerging markets and that of South Africa, which together averaged 22%...”
April 8 – Financial Times (Richard Henderson): “Selling activity of Argentina’s dollar-denominated sovereign debt has nudged the yield on the three-year government bond to a new high, intensifying the country’s borrowing pressures. Yield on the three-year bond due in April 2021 climbed 46.5 bps to 12.188%, a new high point for the debt… Yields on the 10-year dollar denominated government bond climbed 21 bps to 10.214% on Monday…”
April 7 – Bloomberg (Anurag Joshi and Ronojoy Mazumdar): “India’s cash crunch is taking its toll on the health of companies and risks inflicting further financial damage, after the credit profile of local firms deteriorated at the fastest pace in six years. There were two issuer rating downgrades for every upgrade in the first three months of 2019, the worst ratio for any first quarter since at least 2013… Lower ratings force borrowers to pay more for money in debt markets. The Reserve Bank of India on Thursday cut interest rates for a second time this year, citing economic headwinds.”
Global Bubble Watch:
April 9 – CNBC (Fred Imbert): “The International Monetary Fund again reduced its global economic growth forecast for 2019…, citing risks like increasing trade tensions and tighter monetary policy by the Federal Reserve. The fund said it expects the world economy to grow by 3.3% this year. That’s down from its previous outlook of 3.5%, which was also a downgrade. The IMF added that it expects the economy to expand by 3.6% in 2020, however… ‘The balance of risks remains skewed to the downside,’ the IMF said. ‘Failure to resolve differences and a resulting increase in tariff barriers above and beyond what is incorporated into the forecast would lead to higher costs of imported intermediate and capital goods and higher final goods prices for consumers.’”
April 10 – Reuters (Pete Schroeder): “Risks to the global financial system have grown over the past six months and could increase with a messy British exit from the European Union or an escalation of U.S.-China trade tensions, the International Monetary Fund said… ‘After years of economic expansion, global growth is slowing, sparking concerns about a deeper downturn,’ Tobias Adrian,
head of the IMF’s monetary and capital markets department, said at a briefing…”
April 11 – CNBC (Jeff Cox): “Nonbank lending, an industry that played a central role in the financial crisis, has been expanding rapidly and is still posing risks should credit conditions deteriorate. Often called “shadow banking” — a term the industry does not embrace — these institutions helped fuel the crisis by providing lending to underqualified borrowers and by financing some of the exotic investment instruments that collapsed when subprime mortgages fell apart. In the years since the crisis, global shadow banks have seen their assets grow to $52 trillion, a 75% jump from the level in 2010, the year after the crisis ended. The asset level is through 2017, according to bond ratings agency DBRS, citing data from the Financial Stability Board. The U.S. still makes up the biggest part of the sector with 29% or $15 trillion in assets, though its share of the global pie has fallen. China has seen particularly strong growth, with its $8 trillion in assets good for 16% of the total share.”
April 10 – Financial Times (Chris Giles): “High corporate debt is present across nearly three quarters of the global economy, threatening to amplify any economic downturn and put financial stability in peril, the IMF said… The fund said that the world should be able to deal with a moderate economic slowdown without a financial crisis, but companies’ borrowing levels made it vulnerable to anything more serious. Countries representing 70% of global GDP have elevated levels of corporate debt, according to new research by the fund… Levels of borrowing are continuing to rise even as profitability is falling, the fund said, highlighting the US and China, the world’s two largest economies, as particularly vulnerable.”
April 7 – Bloomberg (Nisha Gopalan): “China’s sovereign wealth fund was set up in 2007 to much fanfare. It was supposed to be a vehicle that helped invest the country’s massive pile of foreign-exchange reserves abroad through big-ticket deals. For about a decade, it did just that. At the height of the financial crisis, China Investment Corp. sank $5.6 billion into Morgan Stanley to steady the struggling bank, a stake that eventually rose to 10%... Now CIC — the world’s second-biggest sovereign wealth fund, with almost $1 trillion in assets — seems to have gone small-time. The fund hasn't received any new money for offshore investing since 2012, when it was given $50 billion on top of its initial $200 billion starter kit. It’s gone from being on investment bankers’ speed dials to near irrelevance overseas.”
April 8 – Wall Street Journal (John Thornhill): “The whole world and his dog condemn the evils of financial short-termism, most often with much reason. But another phenomenon is becoming increasingly unnerving: excessive long-termism. We worry when companies squeeze too much juice out of their existing assets damaging their long-term health. But we should focus, too, on a growing cohort of companies that constantly postpone the juice-extraction process, promising to switch on the monetisation machine at some point in the fathomless future. That is worth thinking about as a herd of unicorns gallops towards the public markets in the US and elsewhere. These private companies are all looking to raise billions of dollars in a series of initial public offerings by selling shares to stock market investors. The likes of Lyft, Uber, Slack, Pinterest, and Airbnb are all impressive businesses in almost every respect save one: they do not make much, if any, money.”
Japan Watch:
April 10 – Bloomberg (Isabel Reynolds and Emi Nobuhiro): “A former adviser to George Soros known for his criticism of Bank of Japan Governor Haruhiko Kuroda says Japan’s reflationary policy amounts to Modern Monetary Theory and will prove to be a big mistake. The comments from Takeshi Fujimaki come just days after Prime Minister Shinzo Abe, Finance Minister Taro Aso and Kuroda all denied that Japan is experimenting with the theory… ‘MMT is ‘ridiculous’ and ‘voodoo economics,’ Fujimaki, a lawmaker with the small opposition Japan Innovation Party, said…, adding that it was ‘absolutely no different’ from what Japan is doing. Fujimaki said that Japan’s current policy trajectory would eventually lead to a financial collapse, proving the theory wrong.”
Fixed-Income Bubble Watch:
April 10 – Bloomberg (Javier Blas): “When Amin Nasser met investors at the palatial St. Regis hotel in midtown Manhattan last week, the chief executive officer of the world’s biggest oil company had one clear message: we’re in a league of our own. After a bruising two years of being buffeted by delays to an initial public offering, investor skepticism over the valuation and profound change within Saudi Arabia, the CEO was here to set Wall Street straight: ‘Saudi Aramco is no ordinary oil company,’ the… petroleum engineer told his audience… A week later, it’s clear the bankers believed him. Aramco sold $12 billion of bonds yesterday in what was one of the most oversubscribed offerings in history. In an incredibly rare turn, demand was so high that the company was able to borrow at a lower yield than its sovereign parent.”
Leveraged Speculator Watch:
April 7 – Financial Times (Laurence Fletcher): “Renaissance Technologies, one of the world’s most influential and secretive hedge fund firms, has sharply cut back its use of strategies that bet on patterns in futures markets, a big sign of such strategies’ waning popularity. US-based Renaissance, founded by former cold war codebreaker Jim Simons and with about $60bn in assets, reduced its use of such strategies in its Renaissance Institutional Diversified Alpha (RIDA) fund… The move comes after a long period in which hedge funds’ time-honoured strategy of following market trends has struggled to replicate past returns in markets dominated by central bank stimulus.”
Geopolitical Watch:
April 9 – Bloomberg (Ditas B Lopez): “The U.S. sent a fighter-jet-carrying warship to join drills near the disputed Scarborough Shoal for the first time, sending a pointed message to China as tensions simmer over territorial claims in the region. The USS Wasp… joined the annual Exercise Balikatan with the Philippines this month. A ship matching the USS Wasp’s description was spotted in waters ‘near the Scarborough Shoal,’ a feature occupied by China since a tense standoff in seven years ago, the Philippines’ ABS-CBN News reported…”
April 10 – Reuters (Joyce Lee): “North Korean leader Kim Jong Un said his country needs to deliver a ‘telling blow’ to those imposing sanctions by ensuring its economy is more self-reliant, state media Korean Central News Agency (KCNA) said…”
April 8 – Reuters (Lesley Wroughton and Parisa Hafezi): “President Donald Trump said… he would name Iran’s elite Islamic Revolutionary Guard Corps a terrorist organization, in an unprecedented step that drew Iranian condemnation and raised concerns about retaliatory attacks on U.S. forces. The action by Trump, who has taken a hard line toward Iran by withdrawing from the 2015 Iran nuclear deal and re-imposing broad economic sanctions, marks the first time the United States has formally labeled another nation’s military a terrorist group.”
April 9 – Reuters (Bozorgmehr Sharafedin): “An Iranian Revolutionary Guard commander warned the U.S. Navy to keep its warships at a distance from Revolutionary Guards speed boats in Gulf waters, a day after the United States designated the Guards as a terrorist organization. ‘Mr Trump, tell your warships not to pass near the Revolutionary Guards boats,’ ISNA news agency reported a tweet from Mohsen Rezaei as saying.”
April 9 – Reuters (Ahmed Elumami): “Eastern forces and troops loyal to the Tripoli government battled on the outskirts of Libya’s capital on Wednesday as thousands of residents fled from the fighting. The Libyan National Army (LNA) forces of eastern commander Khalifa Haftar held positions in the suburbs about 7 miles south of the center. Steel containers and pickups with mounted machine-guns blocked their way into the city.”
The S&P500 increased 0.5% (up 16.0% y-t-d), while the Dow was little changed (up 13.2%). The Utilities added 0.2% (up 10.6%). The Banks rose 1.9% (up 16.0%), and the Broker/Dealers gained 1.4% (up 13.9%). The Transports rose 1.7% (up 19.0%). The S&P 400 Midcaps gained 0.8% (up 18.2%), and the small cap Russell 2000 added 0.1% (up 17.5%). The Nasdaq100 advanced 0.7% (up 20.5%). The Semiconductors gained 1.3% (up 29.6%). The Biotechs dropped 4.4% (up 19.2%). With bullion down $1.40, the HUI gold index fell 1.7% (up 4.8%).
Three-month Treasury bill rates ended the week at 2.38%. Two-year government yields rose five bps to 2.39% (down 10bps y-t-d). Five-year T-note yields gained seven bps to 2.38% (down 13bps). Ten-year Treasury yields rose seven bps to 2.57% (down 12bps). Long bond yields rose seven bps to 2.98% (down 4bps). Benchmark Fannie Mae MBS yields jumped 11 bps to 3.28% (down 22bps).
Greek 10-year yields sank 25 bps to 3.28% (down 111bps y-t-d). Ten-year Portuguese yields fell nine bps to 1.17% (down 55bps). Italian 10-year yields rose six bps to 2.54% (down 20bps). Spain's 10-year yields fell six bps to 1.05% (down 37bps). German bund yields gained five bps to 0.06% (down 19bps). French yields rose four bps to 0.40% (down 31bps). The French to German 10-year bond spread narrowed one to 34 bps. U.K. 10-year gilt yields jumped 10 bps to 1.21% (down 6bps). U.K.'s FTSE equities index was little changed (up 10.5% y-t-d).
Japan's Nikkei 225 equities index added 0.3% (up 9.3% y-t-d). Japanese 10-year "JGB" yields declined three bps to negative 0.06% (down 6bps y-t-d). France's CAC40 increased 0.5% (up 16.3%). The German DAX equities index was about unchanged (up 13.6%). Spain's IBEX 35 equities index declined 0.4% (up 10.9%). Italy's FTSE MIB index rose 0.5% (up 19.3%). EM equities were mixed. Brazil's Bovespa index sank 4.4% (up 2.0%), and Mexico's Bolsa declined 0.7% (up 7.3%). South Korea's Kospi index gained 1.1% (up 9.4%). India's Sensex equities index dipped 0.2% (up 7.5%). China's Shanghai Exchange fell 1.8% (up 27.9%). Turkey's Borsa Istanbul National 100 index dropped 2.8% (up 5.2%). Russia's MICEX equities index gained 0.7% (up 8.0%).
Investment-grade bond funds saw inflows of $3.469 billion, and junk bond funds posted inflows of $655 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates rose four bps to 4.12% (down 30bps y-o-y). Fifteen-year rates gained four bps to 3.60% (down 27bps). Five-year hybrid ARM rates jumped 14 bps to 3.80% (up 19bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down five bps to 4.25% (down 26bps).
Federal Reserve Credit last week declined $12.0bn to $3.897 TN. Over the past year, Fed Credit contracted $445bn, or 10.3%. Fed Credit inflated $1.086 TN, or 39%, over the past 336 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $11.5bn last week to $3.471 TN. "Custody holdings" gained $21.0bn y-o-y, or 0.6%.
M2 (narrow) "money" supply jumped $36.5bn last week to a record $14.558 TN. "Narrow money" rose $600bn, or 4.3%, over the past year. For the week, Currency increased $2.7bn. Total Checkable Deposits declined $5.6bn, while Savings Deposits jumped $29.8bn. Small Time Deposits added $2.0bn. Retail Money Funds gained $7.6bn.
Total money market fund assets declined $8.9bn to $3.098 TN. Money Funds gained $273bn y-o-y, or 9.7%.
Total Commercial Paper dropped $13.7bn to $1.072 TN. CP gained $13.7bn y-o-y, or 1.3%.
Currency Watch:
April 11 – Financial Times (Laura Pitel and Adam Samson): “Turkey’s foreign currency reserves fell in the first week of April, resuming a slide that spooked investors in the run-up to last month’s local elections. Weekly… data released by the country’s central bank showed that net international reserves dipped to TL157bn ($27.9bn) as of April 5…”
The U.S. dollar index declined 0.6% to 96.849 (up 0.7% y-t-d). For the week on the upside, the Mexican peso increased 1.7%, the Norwegian krone 1.4%, the Australian dollar 1.0%, the South African rand 0.9%, the euro 0.7%, the New Zealand dollar 0.5%, the Canadian dollar 0.5%, the Swedish krona 0.4%, the British pound 0.3% and the Singapore dollar 0.2%. For the week on the downside, the South Korean won declined 0.3%, the Japanese yen 0.3%, the Swiss franc 0.2% and the Brazilian real 0.2%. The Chinese renminbi gained 0.20% versus the dollar this week (up 2.61% y-t-d).
Commodities Watch:
April 7 – Bloomberg (Ranjeetha Pakiam): “China’s on a bullion-buying spree as Asia’s top economy expanded its gold reserves for a fourth straight month, adding to investors’ optimism that central banks from around the world will press on with a drive to build up holdings. Prices advanced back toward $1,300 an ounce. The People’s Bank of China raised reserves to 60.62 million ounces in March from 60.26 million a month earlier…”
The Bloomberg Commodities Index added 0.4% this week (up 7.4% y-t-d). Spot Gold was little changed at $1,290 (up 0.6%). Silver declined 0.8% to $14.963 (down 3.7%). Crude rose another 81 cents to $63.89 (up 41%). Gasoline jumped 3.5% (up 54%), while Natural Gas slipped 0.2% (down 10%). Copper gained 1.8% (up 12%). Wheat increased 0.2% (down 7%). Corn gained 1.9% (down 2%).
Market Instability Watch:
April 11 – Financial Times (Robin Wigglesworth): “Recent abrupt gyrations in financial markets could be the ‘tip of the iceberg’, according to a top International Monetary Fund official. Since the financial crisis, stricter regulations and commercial pressures have forced many banks to pare back or close their once-vast proprietary and market-marking desks. The latter have become more like independent high-speed traders, which are now some of the biggest intermediaries on global markets… Tobias Adrian, director of the IMF’s monetary and capital markets department, said that while banks were safer as a result, the implications for market ‘liquidity’ …were worrying. ‘There are no red flags at the moment, but obviously we haven’t seen a recession since the whole market-making system has morphed into this new system… We don’t quite know how that would play out if there’s a major adjustment.’”
April 10 – Financial Times (Steve Johnson): “The seemingly inexorable rise of passive, index-driven investment could have ‘destabilising effects’ on emerging markets in the event of a sudden dash for the exits, the IMF has warned. Passive investment has increased sharply in EMs, with the volume of assets benchmarked against EM bond indices quadrupling to $800bn in the past 10 years…, while another $1.9tn tracks MSCI’s EM equity indices. About 70% of global investors’ country allocation decisions are believed to be influenced by benchmark weightings. But during the past two major sell-offs affecting EMs — the taper tantrum of 2013 and last year’s repeat — the money of index-tracking investors was much less ‘sticky’ than that of other investors, the Washington-based body said in its semi-annual Global Financial Stability Report.”
Trump Administration Watch:
April 10 – Reuters (David Lawder and Pete Schroeder): “U.S. Treasury Secretary Steven Mnuchin said… that U.S.-China trade talks continue to make progress and the two sides have basically settled on a mechanism to police any agreement, including new enforcement offices. Mnuchin… said that a call with Chinese Vice Premier Liu He on Tuesday night was productive and discussions would be resumed on Thursday.”
April 8 – Reuters (Chris Prentice): “U.S. officials are ‘not satisfied yet’ about all the issues standing in the way of a deal to end the U.S.-China trade war but made progress in talks with China last week, a top White House official said… ‘We’re making progress on a range of things, and there’s some stuff where we’re not satisfied yet,’ Clete Willems, a top White House trade official, told Reuters…”
April 9 – CNBC (Steve Liesman): “A lot of market commentary sees tariffs and the trade war as temporary events. A U.S.-China trade deal, the thinking goes, will sound the ‘all clear’ signal for markets and the economy. But there are indications that we may be in for a longer, more protracted set of trade battles: a Forever Trade War that could last the balance of the Trump administration.”
April 9 – Bloomberg (Shawn Donnan): “President Donald Trump is sending a clear message to the economic policy makers gathering in Washington for the IMF and World Bank’s spring meetings: My trade wars aren’t finished yet and a weakening global economy will just have to deal with it. With his latest threat to impose tariffs on $11 billion in imports from the European Union -- from helicopters to Roquefort cheese -- the U.S. president offered a vivid reminder that, even as he moves toward a deal with China to end their tariff wars, he has other relationships he’s eager to rewrite.”
April 9 – Reuters (Susan Heavey): “U.S. President Donald Trump said… the United States would impose tariffs on $11 billion of products from the European Union, a day after U.S. trade officials proposed a list of EU products to target as part of an ongoing aircraft dispute. ‘The World Trade Organization finds that the European Union subsidies to Airbus has adversely impacted the United States, which will now put Tariffs on $11 Billion of EU products! The EU has taken advantage of the U.S. on trade for many years. It will soon stop!’ Trump said in a post on Twitter.”
April 7 – Reuters (Dave Graham and David Ljunggren): “More than six months after the United States, Mexico and Canada agreed a new deal to govern more than $1 trillion in regional trade, the chances of the countries ratifying the pact this year are receding. The three countries struck the United States-Mexico-Canada agreement (USMCA) on Sept. 30, ending a year of difficult negotiations… But the deal has not ended trade tensions in North America. If ratification is delayed much longer, it could become hostage to electoral politics.”
April 9 – New York Times (Ruchir Sharma): “From Day 1 in the Oval Office, President Trump has shown a unique obsession with the financial markets, tweeting that high stock prices proved he was making America great again. But a new chapter opened in October, when the markets dropped sharply, and Mr. Trump began making critical presidential decisions with an eye to pushing stock prices back up. As soon as the markets turned downward, Mr. Trump softened his hard line on Chinese trade practices, trying to quiet market fears that his tariff threats against Beijing would start a global trade war. Then he started attacking the United States Federal Reserve, saying its interest rate policies were undermining stock prices, and followed with rants about firing the chairman of the Fed, Jerome Powell. And last week, Axios quoted a source who had spoken to Mr. Trump as saying that the president had delayed his threat to close the Mexico border out of concern over how the markets would react.”
April 5 – Financial Times (Sam Fleming): “Donald Trump stoked fears that the Federal Reserve’s independence is under threat as he stepped up his demands for easier monetary policy a day after advocating the appointment of a second political loyalist to the central bank. The president told reporters… the Fed should embark on ‘quantitative easing’ instead of continuing to pare its holdings of bonds bought during its crisis-era stimulus programme, saying it would turn the economy into ‘a rocket ship’. The comments, which he made despite strong jobs data, came amid barrage of criticism from economists over Mr Trump’s decision to propose Herman Cain, a former Republican presidential contender and vocal backer of the president, to be a governor of the Fed’s powerful board. “
April 9 – Reuters (Ann Saphir and Trevor Hunnicutt): “A political feud over President Donald Trump’s picks for the U.S. Federal Reserve Board broke into an open brawl… even before the nominations of Herman Cain… and Stephen Moore… have been formally submitted to the Senate. Cain and Moore, both overt loyalists to the president, in recent days have waged unprecedented public campaigns for the Fed jobs, with both eagerly endorsing Trump’s economic policies and Moore pledging to ‘accommodate’ those policies once he is at the Fed. The central bank’s leadership prides itself on its nonpartisan stewardship over the world’s biggest economy, and views political independence as key to its ability to carry out monetary policy effectively.”
April 7 – Wall Street Journal (Kate Davidson): “One of the big unknowns for U.S. economic growth heading into the presidential election year needs to be sorted out by lawmakers in the coming months: the path for government spending. Lawmakers agreed to cap spending in 2011 as part of a bruising fight over raising the debt limit, but they have struck three separate deals since then—in 2013, 2015 and 2018—to ease those caps and increase spending. The latest two-year deal, which boosted funding nearly $300 billion above the caps, expires in October. If Congress doesn’t reach another deal by then, the spending limits known as the sequester would kick back in, reducing discretionary spending by $125 billion, or 10%, from 2019 levels.”
Federal Reserve Watch:
April 10 – CNBC (Hugh Son): “American savers have lost $500 billion to $600 billion in interest payments on bank accounts and money market funds thanks to the Federal Reserve’s post-financial crisis policies, according to Wells Fargo analyst Mike Mayo. Mayo included the statistic in a research note about the congressional hearing… called ‘Holding Megabanks Accountable: A Review of Global Systemically Important Banks 10 Years After the Financial Crisis.’ Lawmakers are likely to grill bank CEOs on lending, compensation and regulation, he wrote… ‘Savers are still paying due to the financial crisis,’ said Mayo. ‘It’s absolutely a wealth transfer from prudent savers to the borrowers and risk takers.’”
April 11 – Bloomberg (Brendan Murray): “Stephen Moore, a proposed nominee for the Federal Reserve, said he’s planning to challenge the belief inside the U.S. central bank that growth causes inflation and will try to demystify monetary policy so it’s not conducted within a ‘temple of secrecy.’ ‘I’m going to come with the idea -- challenge one fundamental idea that I think is endemic at the Fed, which I think is completely wrong, which is that growth causes inflation. Growth does not cause inflation,’ he said… ‘I’ll say that again: Growth does not cause inflation. We know that. When you have more output of goods and services, prices fall… And I think the Fed has been afraid of growth -- there’s ‘growth-phobiacs’ over there and I think they’re wrong.’”
April 10 – Financial Times (Peter Wells): “Having recently instituted a policy U-turn earlier this year, perhaps investors shouldn’t be so surprised at the Federal Reserve’s desire to signal that it’s not all one-way traffic when it comes to interest rates. The minutes from the Fed’s March meeting show policymakers are keeping their options open for the next move in rates, which may come as a greater surprise to pockets of the market that expected the US central bank would be forced to ease policy this year. In the space of six months, market expectations have swung to now attach a roughly 62% chance to a 25 bps rate cut by the end of 2019 from a forecast for three rate rises.”
April 10 – CNBC (Jeff Cox): “Federal Reserve officials at their most recent meeting left room for the possibility of interest rate increases before the end of the year, should economic conditions improve, according to minutes from the session… The central bank’s Federal Open Market Committee voted unanimously to not raise its benchmark rate at the March 19-20 gathering, and simultaneously indicated that it didn’t see a likelihood for any hikes through 2019… ‘Several participants noted that their views of the appropriate range for the federal funds rate could shift in either direction based on incoming data and other developments… Some participants indicated that if the economy evolved as they currently expected, with economic growth above its longer-run trend rate, they would likely judge it appropriate to raise the target range for the federal funds rate modestly later this year.’”
April 9 – Wall Street Journal (David Harrison): “Federal Reserve vice chairman Richard Clarida said… that the central bank’s review of its monetary policy will look at new ways to deal with low inflation as well as novel approaches to stimulate a weak economy and to communicate with the public. The Fed kicked off its review this year after officials realized interest rates are likely to remain lower than in the past, even in periods of economic growth. Since lower rates could limit the central bank’s ability to boost a slumping economy, officials are looking for new ways to respond to downturns. ‘The economy is constantly evolving, bringing with it new policy challenges,’ Mr. Clarida said… ‘So it makes sense for us to remain open-minded as we assess current practices.’”
April 8 – CNBC (Jeff Cox): “The Federal Reserve is rebutting President Donald Trump’s assertion that tightening monetary policy is hurting the economy. In a paper published Friday, the St. Louis Fed said the central bank’s move to reduce the level of bonds on its balance sheet — ‘quantitative tightening’ as it has become known — will not have any noticeable negative impact on growth. That runs directly counter to Trump’s assertion the same day that the policy normalization process has ‘really slowed us down.’ ‘It is true that removing unusual monetary accommodation will likely result in less real activity and lower prices than otherwise, but the ongoing shrinkage of the Fed’s balance sheet was not responsible for bearish asset markets in 2018, nor is it likely to significantly retard activity going forward,’ Fed economist Christopher J. Neely wrote.”
April 6 – New York Times (Neil Irwin): “Politicians have had strong opinions on what the Federal Reserve should and shouldn’t do throughout its 105-year history. They have pushed for lower interest rates and easier money, or for this or that policy on bank regulation or consumer protection. They have summoned Fed leaders to the White House or Congress to persuade and cajole. In that sense, there is nothing new in President Trump’s aggressive approach to the Fed. This week, he called for lower interest rates and new quantitative easing, and he signaled an intention to appoint two vocal supporters, Stephen Moore and Herman Cain, to the board of governors. What makes Mr. Trump’s approach to the Fed so unusual is that he has repeatedly, publicly undermined a Fed chief he appointed (Jerome Powell), and, if successful, he would put two officials with a background in partisan politics in the inner sanctum of Fed policymaking.”
U.S. Bubble Watch:
April 10 – Associated Press (Josh Boak): “The federal government reported a $146.9 billion deficit in March, causing annual debt to rise 15% for the first half of the budget year compared to the same period in 2018. …The fiscal year deficit has so far totaled $691 billion, up from nearly $600 billion in 2018. The Treasury Department expects that the deficit will exceed $1 trillion when the fiscal year ends in September. Tax receipts are running slightly higher than a year ago as more Americans are working and paying taxes. But the tax cuts signed into law by President Donald Trump in 2017 have meant that the $10 billion increase in receipts has failed to keep pace with a roughly $100 billion increase in government expenditures.”
April 11 – Reuters (Susan Cornwell): “U.S. House Speaker Nancy Pelosi said… that she would meet Republican President Donald Trump soon to talk about a plan to rebuild the country’s infrastructure that she thinks should be worth at least $1 trillion, and maybe $2 trillion. ‘Has to be at least $1 trillion, I’d like it to be closer to $2 trillion,’ Pelosi… said to reporters… She declined to say how such an amount could be paid for, saying that was ‘to be discussed.’”
April 10 – Reuters (Lucia Mutikani): “U.S. consumer prices increased by the most in 14 months in March, but the underlying inflation trend remained benign against the backdrop of slowing domestic and global economic growth… [The] Consumer Price Index rose 0.4%, boosted by increases in the costs of food, gasoline and rents… In the 12 months through March, the CPI increased 1.9%... In the 12 months through March, the core CPI increased 2.0%, the smallest advance since February 2018.”
April 11 – Reuters (Lucia Mutikani): “U.S. producer prices increased by the most in five months in March, but underlying wholesale inflation was tame. The… producer price index for final demand rose 0.6% last month, lifted by a surge in the cost of gasoline… In the 12 months through March, the PPI rose 2.2% after advancing 1.9% in February.”
April 8 – Reuters (Richard Leong): “U.S. consumer sentiment for buying a home rose to its strongest in nine months as a result of a sturdy jobs market and a decline in mortgage rates…, according to… Fannie Mae… The federal mortgage agency said its home purchase sentiment index increased by 5.5 points to 89.8 points, its highest since last June. Notably, Fannie Mae’s latest data showed the net share of consumers surveyed in March who said it is a good time to sell a home jumped 13 points to 43%.”
April 9 – Wall Street Journal (Laura Kusisto): “House flipping is back to nearly the same level it was around the 2006 peak of the housing boom, when it became a symbol of the rampant speculation that soared before the bubble burst. But a new analysis from CoreLogic Inc. suggests most of the current flips are less risky than those more than a decade ago… Some 10.6% of homes sold in the U.S. in the fourth quarter of 2018 were flips, defined as having been owned for less than two years… That is near the level of the first quarter of 2006, when 11.3% of homes sold were flips, and the highest fourth-quarter level in the two decades since CoreLogic started tracking the data.”
April 8 – Wall Street Journal (Rebecca Elliott): “Shale companies from Texas to North Dakota have been managing their wells to maximize short-term oil production. That has long-term consequences for the future of the American energy boom. By front-loading the wells to boost early oil output, many companies have been able to accelerate growth. But these newer wells peter out more quickly, so companies have to drill new ones sooner to sustain their production. In effect, frackers have jumped on a treadmill and ratcheted up the speed, becoming ever more dependent on new capital to keep oil production humming, even as Wall Street is becoming more skeptical of funding the industry… Though most shale companies have yet to consistently generate more cash than they spend, their rapid expansion has turned the U.S. into the world’s largest oil producer. That growth has begun to slow, however.”
April 9 – CNBC (Lauren Thomas): “Clothing retailers, consumer electronics companies and home furnishing businesses will need to close more stores across the U.S. as e-commerce sales proliferate, according to UBS. …The investment firm said ‘store rationalization needs to accelerate meaningfully as online penetration continues to rise.’ Assuming online sales’ share of total retail sales in the U.S. grows to 25% by 2026, from 16% today, roughly 75,000 more retail doors, excluding restaurants, need to close, analysts Jay Sole and Michael Lasser said. That means for every 1% increase in online penetration, roughly 8,000 to 8,500 stores need to close.”
April 7 – Reuters (Jarrett Renshaw and Stephanie Kelly): “The March floods that punished the U.S. Midwest have trapped barrels of ethanol in the country’s interior, causing shortages of the biofuel and helping to boost gasoline prices in the western United States. The historic floods have dealt a series of blows to large swaths of an ethanol industry that was already struggling with high inventories and sluggish domestic demand growth. The ethanol shortages are one factor pushing gasoline prices in Southern California, including Los Angeles, to the highest in the country, and they could top $4 a gallon for the first time since 2014…”
April 7 – Bloomberg (Adam Tempkin): “Consumer credit scores have been artificially inflated over the past decade and are masking the real danger the riskiest borrowers pose to hundreds of billions of dollars of debt. That’s the alarm bell being rung by analysts and economists at both Goldman Sachs.... and Moody’s… who say the steady rise of credit scores as the economy expanded over the past decade has led to ‘grade inflation.’ This means debtors are riskier than their scores indicate because the metrics don’t account for the robust economy, skewing perception of borrowers’ ability to pay bills on time. When a slowdown comes, there could be a much bigger fallout than expected for lenders and investors. There are around 15 million more consumers with credit scores above 740 today than there were in 2006, and about 15 million fewer consumers with scores below 660, according to Moody’s.”
April 8 – Reuters (Trevor Hunnicutt): “U.S. consumers expect stable inflation over the next year even as they anticipate higher wages and gas prices, Federal Reserve Bank of New York data showed… The survey showed one-year ahead inflation expectations were unchanged at 2.8% last month, while a three-year inflation figure ticked up 0.1 percentage point to 2.9%. People forecast earnings to rise 2.6% over the coming year, the largest figure since September. They also see gas prices rising 4.7%, the most since June. U.S. crude oil prices have shot up 40% this year.”
April 10 – Wall Street Journal (Maureen Farrell): “Uber Technologies Inc. is aiming for a valuation in its impending initial public offering of as much as $100 billion, below previous expectations, after ride-hailing competitor Lyft Inc. stumbled in its early days of trading as a public company. Uber recently provided documentation to holders of its convertible notes that sets a potential price range of $48 to $55 a share… That would equate to an aggregate valuation of between $90 billion and $100 billion, including the roughly $10 billion Uber expects to raise in the offering.”
April 10 – Financial Times (Kate Youde): “Sales of apartments in Manhattan were down 11% in the first quarter of this year, according to residential real estate broker Stribling & Associates. Reporting on the market slowdown, which came amid a flurry of new developments, the FT suggested the city’s new mansion tax — which introduces a one-time levy on purchases of apartments in New York City that sell for at least $1m — could slow the market further.”
China Watch:
April 7 – Reuters (Chen Aizhu, Coco Li, Chen Yawen and Samuel Shen): “China will step up its policy of targeted cuts to banks’ required reserve ratios to encourage financing for small and medium-sized businesses that play a key role in economic growth. Beijing has been urging banks to continue lending to struggling businesses, especially smaller private concerns that account for more than half the country’s economic growth and most of its jobs. …The State Council said China will also accelerate initial public offerings for small and medium-sized enterprises (SMEs).”
April 11 – Bloomberg: “China’s consumer prices surged on the back of temporary food supply factors, while factory inflation provided further evidence of a nascent economic recovery. Consumer inflation accelerated to 2.3% in March from a year earlier, up from 1.5% in February and posting the biggest jump in more than a year. The surge was mostly led by rising vegetable and pork prices, which drove the CPI up by more than half a percentage point…”
April 9 – Bloomberg: “China’s property market is showing signs of green shoots again with home sales posting a robust recovery in March. After contracting in the first two months of 2019… the project sales of nine major developers rose 20% in March from a year earlier. Aiding the recovery has been stimulus from Beijing, which has helped stabilize the economy and re-ignite home buyers’ enthusiasm. Economists expect the central bank will cut reserve requirements at least three more times this year to funnel cash into a slowing economy. Additional so-called stealth easing measures that make it easier to buy property in China have also improved sentiment.”
April 9 – Bloomberg (Will Davies): “Bragging rights to Hong Kong, for now. The city’s equity market has overtaken Japan to be the world’s third largest in value, behind only the U.S. and mainland China, courtesy of a rebound in Hong Kong stocks… Hong Kong’s market cap was $5.78 trillion as of Tuesday, compared with $5.76 trillion for Japan…”
April 10 – Bloomberg: “Pressure is building for China’s bondholders to forgo their right to be repaid early as more companies show signs of strain amid a record amount of puttable debt this year. Pang Da Automobile Trade Co., a Chinese car dealer, sought to delay a put date on a bond for the second time in February. Jewelry maker Harbin Churin Group Jointstock Co. couldn’t make a put option payment that came due late February, while Guangdong Homa Appliances Co. extended an early payment date by a month… Such cases are adding to concerns that the wave of early note redemptions will spur more defaults in China and keep credit stress elevated. A record 1.1 trillion yuan ($164bn) of bonds have put options exercisable from now until the end of 2019…”
April 9 – New York Times (Cao Li): “China is planning new steps that could put a stop to making Bitcoin there, a move that could cut off one of the world’s largest sources of the popular but unstable cryptocurrency. The National Development and Reform Commission, China’s top economic planning body, this week added cryptocurrency mining to a list of about 450 industries that it proposes to eliminate. If the move is approved, local governments in China will be prohibited from supporting makers of Bitcoin and other digital currencies through subsidies or other benefits.”
Central Bank Watch:
April 9 – Financial Times (Valentina Romei): “It was with some fanfare last month that the European Central Bank announced a third phase of its special lending programme, seeking to pep up growth across the eurozone. A new round of low-cost loans from the central bank is designed to provide the biggest commercial banks with ‘stable and dependable funding in times of market uncertainty’, spurring them to write new loans to households and companies across the continent. But the programme, known as targeted longer-term refinancing operations (TLTRO, pronounced ‘tiltrow’), has failed to stir steady lending through its two iterations to date. The ECB’s latest lending survey… showed that despite rock-bottom interest rates, the appetite for debt across the eurozone was fading, with the percentage of banks reporting an increase in demand for loans to businesses in the previous quarter dropping to zero, from 9% at the end of last year. Net loan demand actually shrank in Spain and Italy.”
Brexit Watch:
April 11 – Reuters (Elizabeth Piper, Gabriela Baczynska and Philip Blenkinsop): “European Union leaders gave Britain six more months to leave the bloc, more than Prime Minister Theresa May says she needs but less than many in the bloc wanted, thanks to fierce resistance from France.”
Europe Watch:
April 9 – Financial Times (Valentina Romei): “Demand for loans among eurozone businesses was flat since the beginning of 2019 despite record-low interest rates, increasing pressure on the European Central Bank to take further action to bolster the bloc’s economy. Data from the ECB… indicated the expansion in loan requests that began in mid-2015 had ended, with the percentage of banks reporting an increase in demand for loans to businesses in the previous quarter falling to 0%. This was down from 9% at the end of last year and double digit percentages over most of the previous three years…”
April 9 – Bloomberg (Lorenzo Totaro and Chiara Albanese): “The Italian government confirmed its gloomy outlook for the economy…, following a day of arguments, accusations and finger-pointing between the warring sides of the country’s populist coalition. After a meeting in Rome, the Cabinet cut its target for growth this year to just 0.2%. That figure, down from 1% previously, includes the estimated impact of measures the government has already agreed on to implement to help the economy. Expansion this year would be 0.1% without the steps.”
April 8 – Financial Times (Nikou Asgari): “Italian government bonds are not for the fainthearted, with the past year having provided some ugly lurches lower on outbreaks of political nerves. One reason for that, suggests UniCredit strategist Chiara Cremonesi, may be the relatively high concentration of foreign nonbank holders of the debt… Foreign investors account for 30% of the total amount of outstanding Italian debt, Ms Cremonesi calculates — an unremarkable share. Within that, though, just over half is in the hands of private investors such as asset managers, hedge funds, pension funds and insurance companies. ‘Traditionally, [these investors] are the most active sellers in times of market stress,’ she said. ‘This is different from the core and semi-core countries in the [euro area], where the proportion of foreign private investors is lower and the proportion of foreign officials [central banks] is higher.’”
EM Watch:
April 8 – Wall Street Journal (Ira Iosebashvili): “A cautious shift from the world’s central banks is sending investors hunting for big paydays in emerging-market currencies, despite concerns that global growth may continue to slow. Many are employing a strategy known as the carry trade, where an investor borrows in a low-yielding currency to roll the funds into a higher-yielding emerging-market asset, such as local bonds, and pockets the difference. Emerging markets are popular targets for carry traders because they often offer yields that are much higher than those found in developed countries. For example, Turkey’s 3-month deposit rate… stood at 28% on Friday, while Russia’s was at 7.9%... An investor borrowing in dollars and buying Turkish assets hopes to collect a yield of more than 25% over three months, without accounting for moves in the underlying currencies and transaction costs.”
April 8 – Bloomberg (Selcan Hacaoglu and Firat Kozok): “President Recep Tayyip Erdogan intensified his push for a rerun of last month’s election in Turkey’s biggest city, fueling concerns that an authoritarian streak in government is deepening and rattling investors in the Middle East’s leading economy. He’s embarked on a U-turn since appearing last week to accept the ballot-box defeats handed to his ruling party in Ankara… and… Istanbul… On Monday, the president, who since last year has ruled Turkey with sweeping executive powers, alleged ‘widespread irregularities’ and ‘organized’ fraud in Istanbul, and all but told the High Election Board to hold a new poll to pick a mayor for the city.”
April 7 – Bloomberg (Ercan Ersoy and Fercan Yalinkilic): “Turkish companies are struggling to get off the hamster wheel of debt as foreign borrowings run near record highs. The reason: a plunge in the lira that has driven up the cost of their obligations in dollars and euros. Banks are being left to carry the burden amid a surge in demand from some of the country’s industrial giants to restructure their liabilities -- on top of a jump in bad loans. Lenders are also pulling back on providing new credit as the financial system comes under increasing pressure from the recession and an inflation rate of almost 20%. While the lira has recovered from the all-time low it hit in August, the currency is still down by a third against the dollar since the beginning of 2018. The result is that Turkey Inc.’s debt amounts to 40% of gross domestic product, exceeding ratios in Eastern Europe’s 10 biggest emerging markets and that of South Africa, which together averaged 22%...”
April 8 – Financial Times (Richard Henderson): “Selling activity of Argentina’s dollar-denominated sovereign debt has nudged the yield on the three-year government bond to a new high, intensifying the country’s borrowing pressures. Yield on the three-year bond due in April 2021 climbed 46.5 bps to 12.188%, a new high point for the debt… Yields on the 10-year dollar denominated government bond climbed 21 bps to 10.214% on Monday…”
April 7 – Bloomberg (Anurag Joshi and Ronojoy Mazumdar): “India’s cash crunch is taking its toll on the health of companies and risks inflicting further financial damage, after the credit profile of local firms deteriorated at the fastest pace in six years. There were two issuer rating downgrades for every upgrade in the first three months of 2019, the worst ratio for any first quarter since at least 2013… Lower ratings force borrowers to pay more for money in debt markets. The Reserve Bank of India on Thursday cut interest rates for a second time this year, citing economic headwinds.”
Global Bubble Watch:
April 9 – CNBC (Fred Imbert): “The International Monetary Fund again reduced its global economic growth forecast for 2019…, citing risks like increasing trade tensions and tighter monetary policy by the Federal Reserve. The fund said it expects the world economy to grow by 3.3% this year. That’s down from its previous outlook of 3.5%, which was also a downgrade. The IMF added that it expects the economy to expand by 3.6% in 2020, however… ‘The balance of risks remains skewed to the downside,’ the IMF said. ‘Failure to resolve differences and a resulting increase in tariff barriers above and beyond what is incorporated into the forecast would lead to higher costs of imported intermediate and capital goods and higher final goods prices for consumers.’”
April 10 – Reuters (Pete Schroeder): “Risks to the global financial system have grown over the past six months and could increase with a messy British exit from the European Union or an escalation of U.S.-China trade tensions, the International Monetary Fund said… ‘After years of economic expansion, global growth is slowing, sparking concerns about a deeper downturn,’ Tobias Adrian,
head of the IMF’s monetary and capital markets department, said at a briefing…”
April 11 – CNBC (Jeff Cox): “Nonbank lending, an industry that played a central role in the financial crisis, has been expanding rapidly and is still posing risks should credit conditions deteriorate. Often called “shadow banking” — a term the industry does not embrace — these institutions helped fuel the crisis by providing lending to underqualified borrowers and by financing some of the exotic investment instruments that collapsed when subprime mortgages fell apart. In the years since the crisis, global shadow banks have seen their assets grow to $52 trillion, a 75% jump from the level in 2010, the year after the crisis ended. The asset level is through 2017, according to bond ratings agency DBRS, citing data from the Financial Stability Board. The U.S. still makes up the biggest part of the sector with 29% or $15 trillion in assets, though its share of the global pie has fallen. China has seen particularly strong growth, with its $8 trillion in assets good for 16% of the total share.”
April 10 – Financial Times (Chris Giles): “High corporate debt is present across nearly three quarters of the global economy, threatening to amplify any economic downturn and put financial stability in peril, the IMF said… The fund said that the world should be able to deal with a moderate economic slowdown without a financial crisis, but companies’ borrowing levels made it vulnerable to anything more serious. Countries representing 70% of global GDP have elevated levels of corporate debt, according to new research by the fund… Levels of borrowing are continuing to rise even as profitability is falling, the fund said, highlighting the US and China, the world’s two largest economies, as particularly vulnerable.”
April 7 – Bloomberg (Nisha Gopalan): “China’s sovereign wealth fund was set up in 2007 to much fanfare. It was supposed to be a vehicle that helped invest the country’s massive pile of foreign-exchange reserves abroad through big-ticket deals. For about a decade, it did just that. At the height of the financial crisis, China Investment Corp. sank $5.6 billion into Morgan Stanley to steady the struggling bank, a stake that eventually rose to 10%... Now CIC — the world’s second-biggest sovereign wealth fund, with almost $1 trillion in assets — seems to have gone small-time. The fund hasn't received any new money for offshore investing since 2012, when it was given $50 billion on top of its initial $200 billion starter kit. It’s gone from being on investment bankers’ speed dials to near irrelevance overseas.”
April 8 – Wall Street Journal (John Thornhill): “The whole world and his dog condemn the evils of financial short-termism, most often with much reason. But another phenomenon is becoming increasingly unnerving: excessive long-termism. We worry when companies squeeze too much juice out of their existing assets damaging their long-term health. But we should focus, too, on a growing cohort of companies that constantly postpone the juice-extraction process, promising to switch on the monetisation machine at some point in the fathomless future. That is worth thinking about as a herd of unicorns gallops towards the public markets in the US and elsewhere. These private companies are all looking to raise billions of dollars in a series of initial public offerings by selling shares to stock market investors. The likes of Lyft, Uber, Slack, Pinterest, and Airbnb are all impressive businesses in almost every respect save one: they do not make much, if any, money.”
Japan Watch:
April 10 – Bloomberg (Isabel Reynolds and Emi Nobuhiro): “A former adviser to George Soros known for his criticism of Bank of Japan Governor Haruhiko Kuroda says Japan’s reflationary policy amounts to Modern Monetary Theory and will prove to be a big mistake. The comments from Takeshi Fujimaki come just days after Prime Minister Shinzo Abe, Finance Minister Taro Aso and Kuroda all denied that Japan is experimenting with the theory… ‘MMT is ‘ridiculous’ and ‘voodoo economics,’ Fujimaki, a lawmaker with the small opposition Japan Innovation Party, said…, adding that it was ‘absolutely no different’ from what Japan is doing. Fujimaki said that Japan’s current policy trajectory would eventually lead to a financial collapse, proving the theory wrong.”
Fixed-Income Bubble Watch:
April 10 – Bloomberg (Javier Blas): “When Amin Nasser met investors at the palatial St. Regis hotel in midtown Manhattan last week, the chief executive officer of the world’s biggest oil company had one clear message: we’re in a league of our own. After a bruising two years of being buffeted by delays to an initial public offering, investor skepticism over the valuation and profound change within Saudi Arabia, the CEO was here to set Wall Street straight: ‘Saudi Aramco is no ordinary oil company,’ the… petroleum engineer told his audience… A week later, it’s clear the bankers believed him. Aramco sold $12 billion of bonds yesterday in what was one of the most oversubscribed offerings in history. In an incredibly rare turn, demand was so high that the company was able to borrow at a lower yield than its sovereign parent.”
Leveraged Speculator Watch:
April 7 – Financial Times (Laurence Fletcher): “Renaissance Technologies, one of the world’s most influential and secretive hedge fund firms, has sharply cut back its use of strategies that bet on patterns in futures markets, a big sign of such strategies’ waning popularity. US-based Renaissance, founded by former cold war codebreaker Jim Simons and with about $60bn in assets, reduced its use of such strategies in its Renaissance Institutional Diversified Alpha (RIDA) fund… The move comes after a long period in which hedge funds’ time-honoured strategy of following market trends has struggled to replicate past returns in markets dominated by central bank stimulus.”
Geopolitical Watch:
April 9 – Bloomberg (Ditas B Lopez): “The U.S. sent a fighter-jet-carrying warship to join drills near the disputed Scarborough Shoal for the first time, sending a pointed message to China as tensions simmer over territorial claims in the region. The USS Wasp… joined the annual Exercise Balikatan with the Philippines this month. A ship matching the USS Wasp’s description was spotted in waters ‘near the Scarborough Shoal,’ a feature occupied by China since a tense standoff in seven years ago, the Philippines’ ABS-CBN News reported…”
April 10 – Reuters (Joyce Lee): “North Korean leader Kim Jong Un said his country needs to deliver a ‘telling blow’ to those imposing sanctions by ensuring its economy is more self-reliant, state media Korean Central News Agency (KCNA) said…”
April 8 – Reuters (Lesley Wroughton and Parisa Hafezi): “President Donald Trump said… he would name Iran’s elite Islamic Revolutionary Guard Corps a terrorist organization, in an unprecedented step that drew Iranian condemnation and raised concerns about retaliatory attacks on U.S. forces. The action by Trump, who has taken a hard line toward Iran by withdrawing from the 2015 Iran nuclear deal and re-imposing broad economic sanctions, marks the first time the United States has formally labeled another nation’s military a terrorist group.”
April 9 – Reuters (Bozorgmehr Sharafedin): “An Iranian Revolutionary Guard commander warned the U.S. Navy to keep its warships at a distance from Revolutionary Guards speed boats in Gulf waters, a day after the United States designated the Guards as a terrorist organization. ‘Mr Trump, tell your warships not to pass near the Revolutionary Guards boats,’ ISNA news agency reported a tweet from Mohsen Rezaei as saying.”
April 9 – Reuters (Ahmed Elumami): “Eastern forces and troops loyal to the Tripoli government battled on the outskirts of Libya’s capital on Wednesday as thousands of residents fled from the fighting. The Libyan National Army (LNA) forces of eastern commander Khalifa Haftar held positions in the suburbs about 7 miles south of the center. Steel containers and pickups with mounted machine-guns blocked their way into the city.”