S&P500 futures were trading up about 0.3% in early Friday overseas trading, boosted by a somewhat stronger-than-expected PBOC renminbi “fix.” The first “Bomb” hit at 8:02 am eastern: “China to Levy Retaliatory Tariffs on Another $75B of U.S. Goods.” 8:04: “China to Resume 25% Tariffs on U.S. Autos From Dec. 15.” 8:17: “China to Impose Extra 5% Tariff on Soy Beans From Sept. 1.” 8:24: “China: Imposes 5% Tariff on U.S. Crude Oil Imports From Sept. 1.”
S&P500 futures dropped as much as 26 points (0.9%) on Chinese retaliation, news that hit two hours before Chairman Powell’s widely anticipated 10:00 am speech to open the Fed’s Jackson Hole Economic Policy Symposium. Powell’s talk was generally considered “balanced” to somewhat more dovish than expected. Markets were relieved to see no reference to “mid-cycle adjustment,” with more attention to trade and global risks. By 10:37 am, the S&P500 was back in positive territory, having fully recovered earlier (China retaliation) losses.
Presidential Bomb drops at 10:57: “As usual, the Fed did NOTHING! It is incredible that they can ‘speak’ without knowing or asking what I am doing, which will be announced shortly. We have a very strong dollar and a very weak Fed. I will work ‘brilliantly’ with both, and the U.S. will do great...”
Followed up with a precision bunker buster: “...My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?”
Cluster Bomb inbound at 10:59: “Our Country has lost, stupidly, Trillions of Dollars with China over many years. They have stolen our Intellectual Property at a rate of Hundreds of Billions of Dollars a year, & they want to continue. I won’t let that happen! We don’t need China and, frankly, would be far....”
“....better off without them. The vast amounts of money made and stolen by China from the United States, year after year, for decades, will and must STOP. Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing..”
“....your companies HOME and making your products in the USA. I will be responding to China’s Tariffs this afternoon. This is a GREAT opportunity for the United States. Also, I am ordering all carriers, including Fed Ex, Amazon, UPS and the Post Office, to SEARCH FOR & REFUSE,....”
“....all deliveries of Fentanyl from China (or anywhere else!). Fentanyl kills 100,000 Americans a year. President Xi said this would stop - it didn’t. Our Economy, because of our gains in the last 2 1/2 years, is MUCH larger than that of China. We will keep it that way!”
Trading at 2,926 at 10:59 am, the S&P500 was down 1.8% to 2,874 just 11 minutes later (ending the session down 2.6% at 2,847). The tech-heavy Nasdaq100 dropped 2.6% in an hour. After trading at 1.66% in early overseas trading, 10-year Treasury yields were down to 1.52% by noon eastern (almost matching the low yield since 2016). The implied yield on December Fed funds futures dropped a quick eight bps to 1.55%. Gold was trading below $1,500 before the Bombs started falling. The shiny metal surged to $1,529 on Trump’s Cluster… (Bomb). Crude (WTI July contract) traded as high as $55.60 in pre-U.S. Friday trading, only to sink as low as $53.24. The yen rallied almost 1% to near the strongest level vs. the dollar since 2016. China’s offshore renminbi dropped 0.5% versus the dollar. The onshore renminbi traded to 7.0955, the low versus the dollar since March 2008.
Beyond the obvious major ramifications of an escalating China/U.S. trade war, expect intensifying debate regarding the mental stability of our Commander and Chief. The President’s, “My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?” is especially alarming. Any suggestion that Chairman Powell is an enemy of the people crosses the line.
Having a disagreement with Federal Reserve monetary management is one thing. The President villainizing the head of the Federal Reserve in the current environment only further undermines a critical institution at a time of troubling market, economic, social and geopolitical instability. And doing so right after Powell delivered a Jackson Hole speech widely viewed as balanced and positively received by the markets does not instill confidence in the President’s rationality. That Friday’s tweets followed by a couple days the bizarre exchange over Greenland and the cancellation of the President’s state visit to Denmark is further disconcerting. And it’s worth recalling that the President threatened China with new tariffs back on August 1st over the objections of his advisors.
And so much for “good friend.” I’ll assume affixing the “enemy” label to Xi Jinping denotes serious trade war escalation. The “We don’t need China and, frankly, would be far better off without them” is frighteningly delusional. Along with the majority of Americans, I have believed a tougher stance with China was overdue. Yet I’ve also voiced serious concerns that the President’s abrasive and condescending approach with Beijing stood a low probability of success – with not insignificant odds of dangerous fallout. A Friday afternoon Bloomberg headline resonated: “Much Tougher to Walk Back: Investors on Trump-Tweet Stock Rout.”
As promised, Friday evening the President retaliated against China’s retaliation:
August 23 – Bloomberg (Joshua Gallu): “President Donald Trump said he’s raising tariffs further on Chinese imports in response to Beijing’s retaliation earlier in the day, deepening the impasse over the two nations’ trade policies. Duties on $250 billion of imports already in effect will rise to 30% from 25% on Oct. 1, Trump said in a series of tweets Friday after U.S. markets closed. He also said that the remaining $300 billion in Chinese imports will be taxed at 15% instead of 10% starting Sept. 1. Friday’s events marked a dramatic escalation in tensions between the U.S. and China after months of failed talks to resolve their trade dispute. It’s unclear whether negotiators will follow through with a plan to meet in Washington next month as relations have continued to sour. “China should not have put new Tariffs on 75 BILLION DOLLARS of United States product (politically motivated!),” Trump said on Twitter.”
Friday’s caustic tone and sudden escalation brought into focus the possibility that this trade war has the clear potential to spiral precariously out of control. Will President Trump move forward with measures that would force U.S. companies to retreat from China? Might the Department of Treasury intervene in the currency markets? Could the U.S. further ratchet up sanctions on Chinese companies? What impact will this latest escalation have on already shaky Chinese financial stability? How much closer is China to using its huge trove of U.S. Treasuries to make a point?
And if the day hadn’t already generated bountiful historical subject matter… With an escalating trade war, talk of currency wars and intensifying geopolitical strife, it was an ominously befitting backdrop for Bank of England governor Mark Carney’s Jackson Hole speech, “The growing challenges for monetary policy in the current international monetary and financial system.”
August 23 – Bloomberg (Brian Swint): “Mark Carney laid out a radical proposal for an overhaul of the global financial system that would eventually replace the dollar as a reserve currency with a Libra-like virtual one. Just a few months before he steps down as Bank of England governor, Carney offered his vision for the international economy at a time of sweeping change. Trade wars and the threat of currency wars are hurting growth and upending multilateral cooperation, while central banks are trapped in a low interest-rate world as they struggle to revive inflation… His most striking point was that the dollar’s position as the world’s reserve currency must end, and that some form of global digital currency -- similar to Facebook Inc’s proposed Libra -- would be a better option. That would be preferable to allowing the dollar’s reserve status to be replaced by another national currency such as China’s renminbi.”
The hastened formation of an international non-dollar block of economies will surely be one of the momentous consequences of the U.S./China trade war. Countries including Russia, China, Turkey, Iran, Venezuela, North Korea and many others will eventually operate outside of the existing U.S.-dominated structure of trade arrangements, financial relations and payment systems, and sanction regimes. Not only do I expect the unfolding crisis to be of an international scope much beyond 2008. Today’s hostile environment is in stark contrast to the cooperation and coordination that previously ensured a concerted global crisis response. There are today incredibly high stakes tottering on the perception that a unified global central bank community retains the capacity to hold crisis dynamics at bay.
August 22 – Bloomberg (Craig Torres): “Harvard University economist Lawrence Summers warned central bankers that they are staring at ‘black hole monetary economics’ where small changes in interest rates and even more aggressive strategies do little to solve demand shortfalls. ‘Interest rates stuck at zero with no real prospect of escape -- is now the confident market expectation in Europe and Japan, with essentially zero or negative yields over a generation,’ Summers wrote on in a series of tweets… ‘The United States is only one recession away from joining them.’”
Federal Reserve policy is at a critical juncture. The efficacy of global monetary stimulus is at a critical juncture, as are the world’s financial, economic and geopolitical backdrops. The Fed’s Jackson Hole symposium has spurred a most important debate. Several regional Federal Reserve Bank Presidents provided comments notable both for insight and candor. For posterity, I’ve included excerpts from timely interviews conducted from Jackson Hole.
Esther George, President of the Federal Reserve Bank of Kansas City: “As I look at where the economy is, it’s not yet time – I’m not ready to begin to provide more accommodation to the economy without seeing an outlook that suggests the economy is getting weaker here.”
Bloomberg’s Michael McKee: “If you’re not ready to cut rates, are you happy with where rates are given that inflation is lower than anticipated? And would you be happy to leave them at this level for quite some time?”
George: “So I think that’s going to be a process of judging how the economy unfolds. I think where rates are right now – relative to the unemployment rate and inflation - suggests we’re at a sort of equilibrium right now. And I’d be happy to leave rates here – absent seeing some weakness or some strengthening or some kind of upside risk that would make me think rates should be somewhere else.”
McKee “Where would you put the neutral rate right now relative to where you are – are you tight? Are you loose? Accommodative? How do you see it?”
George: “I would judge policy to be at neutral or even accommodative with this last rate cut. If you think about where real interest rates are relative to the rate of inflation and where the Fed funds rate is, we’re operating close to zero with real rates. I can’t believe that that is tight in any sense for the economy right now.”
Eric Rosengren, President of the Federal Reserve Bank of Boston: “My own view [dissenting from the July 31st rate cut decision] was that we have to be careful not to ease too much when we don’t have significant problems. So the focus is not to do something that affects the exchange rate or something that necessarily takes care of the world economy. We’re supposed to focus on unemployment and inflation in the United States. So I think we’re at a pretty good spot right now. And there are costs to easing in times when you don’t need to ease.”
Bloomberg’s Kathleen Hays: “What’s the cost?”
Rosengren: “There are several costs. One is, one of the ways monetary policy works is that you cause people to buy houses and cars earlier than they otherwise would – “inter-temporal substitution”. You choose to make an investment now because interest rates, you think, are going to be temporarily low. And so you make expenditures you might not otherwise make. A second is, that when we lower interest rates we make the cost of debt lower. That means that both households and firms are more likely to be leveraged. And if they get leveraged right before we have more significant problems, they are actually in much worse shape. So we have to think about the financial stability characteristics, and by that it’s thinking of how much do we want households and firms to be leveraged going into whenever we actually do have a significant downturn.”
Rosengren “What I think has people really focused on whether we’re going to have a recession is a combination of volatility in the stock market: we obviously had a very big movement a week ago when we lost 800 points on the Dow – but in subsequent days we moved back up. And if you look at the long bond [yield], it is very low. It’s around 1.60%. One of the reasons for that is the global weakness. But the cure for global weakness is for countries around the world to expand with either fiscal or monetary policies in their own countries rather than just the United States to be doing the easing.”
CNBC’s Steve Liesman: “Let’s talk about where we are in terms of the economy. What is your outlook for the economy? What is your view of growth right now? Is it too slow?”
Patrick Harker, President of the Federal Reserve Bank of Philadelphia: “No. I think it’s exactly what we had anticipated – a year ago and even two years ago. We are going back to trend growth, roughly 2% growth.”
Liesman: “Where would you say policy is relative to that trend growth?”
Harker: “In December, I was not supportive of the increase. I was supportive of the decrease somewhat reluctantly this time around to get us back to where I think policy should be. We’re roughly where neutral is. It’s hard to know exactly where neutral is – but I think we’re roughly where neutral is right now. I think we should stay here for a while and see how things play out.”
Liesman: “You don’t see a case for further stimulus to the economy?”
Harker: “No. Not right now.”
Liesman: “Why not?”
Harker: “Because you look at the labor markets are strong, inflation is moving up slowly, the last CPI print was a good print. We’ll see how PCE comes in. There are negative headwinds to the economy. But right now I don’t think they call for any drastic action. I think we can take some time and see how things play out.”
Liesman: “Isn’t there an argument to take out an “insurance” cut for the type of potential negative effects?”
Harker: “I’ve heard that argument, but I’m not very sympathetic to the argument. Right now, given the volatility even of the policy itself, we don’t need to make that move right now. Nothing is moving dramatically in a negative direction. There is potential for it to do so. I think we need to keep our powder dry so that when that happens we have the policy space to move.”
Liesman: “How much concern do you have if rates remain too low for too long for the financial stability side of things?”
Harker: “That is the other factor that I have to weigh. I didn’t think the cut was appropriate necessarily, but I went along with it to get back to neutral. But I’m on hold right now. My forecast is just to hold where we are for one of the reasons is that. We run the risk of creating too much leverage in the economy.”
For the Week:
The S&P500 fell 1.4% (up 13.6% y-t-d), and the Dow declined 1.0% (up 9.9%). The Utilities added 0.2% (up 16.1%). The Banks dropped 2.2% (up 4.4%), and the Broker/Dealers slumped 0.9% (up 4.3%). The Transports fell 2.3% (up 6.2%). The S&P 400 Midcaps lost 2.0% (up 10.4%), and the small cap Russell 2000 dropped 2.3% (up 8.2%). The Nasdaq100 tumbled 1.8% (up 17.9%). The Semiconductors fell 2.2% (up 25.2%). The Biotechs sank 3.7% (up 4.0%). With bullion gaining $14, the HUI gold index surged 5.9% (up 40.9%).
Three-month Treasury bill rates ended the week at 1.91%. Two-year government yields rose six bps to 1.53% (down 96bps y-t-d). Five-year T-note yields were unchanged at 1.42% (down 109bps). Ten-year Treasury yields declined two bps to 1.54% (down 115bps). Long bond yields slipped one basis point to 2.03% (down 99bps). Benchmark Fannie Mae MBS yields rose three bps to 2.46% (down 103bps).
Greek 10-year yields slipped a basis point to 1.94% (down 246bps y-t-d). Ten-year Portuguese yields rose five bps to 0.16% (down 156bps). Italian 10-year yields dropped eight bps to 1.32% (down 143bps). Spain's 10-year yields gained six bps to 0.14% (down 128bps). German bund yields added one basis point to negative 0.68% (down 92bps). French yields rose four bps to negative 0.37% (down 108bps). The French to German 10-year bond spread widened three to 31 bps. U.K. 10-year gilt yields increased two bps to 0.48% (down 80bps). U.K.'s FTSE equities index slipped 0.3% (up 5.5% y-t-d).
Japan's Nikkei Equities Index rallied 1.4% (up 3.5% y-t-d). Japanese 10-year "JGB" yields were little changed at negative 0.23% (down 23bps y-t-d). France's CAC40 added 0.5% (up 12.6%). The German DAX equities index increased 0.4% (up 10.0%). Spain's IBEX 35 equities index slipped 0.2% (up 1.3%). Italy's FTSE MIB index recovered 0.7% (up 11.7%). EM equities were mostly higher. Brazil's Bovespa index fell 2.1% (up 7.3%), while Mexico's Bolsa rallied 1.3% (down 4.3%). South Korea's Kospi index gained 1.1% (down 4.5%). India's Sensex equities index dropped 1.7% (up 1.8%). China's Shanghai Exchange jumped 2.6% (up 16.2%). Turkey's Borsa Istanbul National 100 index recovered 1.5% (up 6.4%). Russia's MICEX equities index gained 1.7% (up 12.3%).
Investment-grade bond funds saw inflows of $2.048 billion, while junk bond funds posted outflows of $1.500 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates fell five bps to 3.55% (down 96bps y-o-y). Fifteen-year rates declined four bps to 3.03% (down 95bps). Five-year hybrid ARM rates slipped three bps to 3.32% (down 50bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down a basis point to 4.05% (down 51bps).
Federal Reserve Credit last week declined $17.2bn to $3.727 TN. Over the past year, Fed Credit contracted $463bn, or 11.0%. Fed Credit inflated $916 billion, or 33%, over the past 354 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $3.5bn last week to $3.471 TN. "Custody holdings" rose $41.5bn y-o-y, or 1.2%.
M2 (narrow) "money" supply gained $14.6bn last week to a record $14.955 TN. "Narrow money" gained $757bn, or 5.3%, over the past year. For the week, Currency increased $0.4bn. Total Checkable Deposits declined $10.6bn, while Savings Deposits rose $16.5bn. Small Time Deposits added $2.7bn. Retail Money Funds gained $5.5bn.
Total money market fund assets jumped $23.45bn to $3.378 TN. Money Funds gained $514bn y-o-y, or 17.9%.
Total Commercial Paper declined $4.5bn to $1.130 TN. CP was up $63bn y-o-y, or 5.9%.
Currency Watch:
August 22 – Financial Times (Eva Szalay): “Top Chinese bankers in London are warning of the drama that would follow any US attempt to weaken the dollar by intervening in renminbi markets — a move that would be seen by Beijing as a ‘political act’. The risks of such action have heightened since June, said analysts, after US president Donald Trump repeatedly took aim at China and Europe for ‘playing currency games’ as trade wars threatened to spill over into foreign exchange markets. The US Treasury officially branded China a currency manipulator this month after the Chinese central bank allowed the renminbi to fall below Rmb7 to the dollar… On Thursday the renminbi was trading at a fresh low of 7.0749.”
The U.S. dollar index declined 1.1% to 97.169 (up 1.0% y-t-d). For the week on the upside, the British pound increased 0.9%, the Japanese yen 0.9%, the Norwegian krone 0.8%, the Swedish krona 0.8%, the euro 0.5%, the Swiss franc 0.4%, the South African rand 0.4% and the South Korean won 0.1%. On the downside, the Brazilian real declined 2.8%, the Mexican peso 1.3%, the New Zealand dollar 0.4%, the Australian dollar 0.3%, the Singapore dollar 0.2% and the Canadian dollar 0.1%. The Chinese renminbi declined 0.74% versus the dollar this week (down 3.06% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index declined 0.9% this week (down 1.2% y-t-d). Spot Gold gained 0.9% to $1,527 (up 19.1%). Silver jumped 2.5% to $17.554 (up 13.0%). WTI crude fell 70 cents to $54.17 (up 19%). Gasoline slipped 0.8% (up 24%), and Natural Gas fell 2.2% (down 27%). Copper dropped 2.2% (down 4%). Wheat was little changed (down 5%). Corn sank 3.4% (down 2%).
Market Instability Watch:
August 17 – Reuters (Eliana Raszewski): “Argentina´s Treasury Minister Nicolas Dujovne has resigned, saying… he believed the government needed ‘significant renewal’ in its economic team amid a crisis which saw the peso plunge this week. Dujovne said in a letter to Argentine President Mauricio Macri that he had given his ‘all’ to the job, helped tame a significant deficit and trim public spending. ‘We have made mistakes as well, without a doubt, we never hesitate to recognize that and did all that was possible to correct them,’ he added.”
August 22 – Bloomberg (Selcuk Gokoluk): “Trading Argentine bonds has become a test of endurance as the prospect of a possible default triggers wild price swings and volume dries up. The Liquidity Assessment Scale of 1 to 100 (100 being the most liquid) slumped to 12 on Wednesday for the South American nation’s bonds from 68 just three weeks ago.”
August 20 – Reuters (Hugh Bronstein and Jorge Otaola): “Argentina’s promises to defend its beleaguered peso gained credibility on Tuesday after the central bank poured $112 million of its reserves into dollar auctions, helping to boost the currency about 0.5% a day after steep losses. In three interventions in the foreign exchange market, the bank acted in concert with statements from officials saying the government’s top priority was to stabilize the peso after it lost 18% of its value against the U.S. dollar last week.”
August 18 – Financial Times (Eva Szalay and Adam Samson): “For much of this year, foreign exchange traders were scanning their screens with some anxiety, worrying about a collapse in volatility that deprived them of moneymaking opportunities. Equity markets were whipsawing and bond yields tumbling — but currency markets were largely unmoved, forcing investors to pile into riskier, idiosyncratic themes… in order to turn a profit. Now something like normal service has been resumed. The threat of trade wars spilling over to currency markets spurred traders into action this month, as the dollar strengthened to more than Rmb7 and caused a broad sell-off in emerging market currencies, while also creating renewed demand for haven assets such as the Swiss franc and the Japanese yen. The Argentine peso, meanwhile, tanked due to an election shock amid the broader risk-off backdrop.”
August 21 – Associated Press (David McHugh and Paul Wiseman): “Imagine lending money to someone and having to pay for the privilege of doing so. Or being asked to invest and informed of how much money you’ll lose. Sounds absurd, but increasingly that’s the global bond market these days. A rising share of government and corporate bonds are trading at negative interest yields — a financial twilight zone that took hold after the financial crisis and has accelerated on fear that a fragile global economy will be further damaged by the U.S.-China trade war. On Wednesday, for the first time ever, the German government sold 30-year bonds at a negative interest rate. The bonds pay no coupon interest at all. Yet bidders at the auction were willing to pay more than the face value they would receive back when the bonds mature.”
August 21 – CNBC (Jeff Cox): “Government bonds aren’t the only instruments producing negative yields these days, with corporate debt recently passing the $1 trillion mark in a continuing sign of global financial displacement. Investors these days are facing huge amounts of fixed income instruments that carry no yield. Various estimates of sovereign debt in that category put the total in excess of $15 trillion… Negative-yielding corporate debt, though, is a relatively new thing, rising from just $20 billion in January to pass the $1 trillion mark recently, according to Jim Bianco, founder of Bianco Research.”
August 20 – Wall Street Journal (Gunjan Banerji): “Stock volatility has receded in recent days, and some investors have bet the tranquility will persist. Derivatives traders have increased positions that pay out if market swings dwindle and stocks continue to climb… Leveraged funds like hedge funds recently increased bearish wagers on futures linked to the VIX to the highest level since September, Commodity Futures Trading Commission data as of Aug. 13 show. There are almost five bearish contracts outstanding for every bullish one held by leveraged funds… A bearish bet on the VIX is akin to a bullish one on stocks, since the volatility gauge and S&P 500 tend to move in opposite directions.”
August 19 – Bloomberg (Gregor Stuart Hunter): “Hong Kong’s interbank interest rates will turn increasingly volatile as investors continue to yank cash from the city’s financial markets, according to Morgan Stanley. The Hong Kong dollar may test the weak end of its trading band with the greenback if the pace of outflows increases, Morgan Stanley strategists including Chun Him Cheung wrote… That would force the city’s de facto central bank to defend the peg, squeezing liquidity and triggering a spike in local borrowing costs, they wrote.”
August 19 – Bloomberg (Rachel Evans and Sarah Ponczek): “A volatile few months for global stock markets is taking its toll on exchange-traded funds. Almost $18 billion fled U.S.-listed equity ETFs during the past three weeks, the most since February, according to… Bloomberg Intelligence. Investors pulled more than $3.5 billion in the five days through Aug. 16, capping what was also the longest run of weekly withdrawals in six months.”
August 23 – Bloomberg (Tasos Vossos): “If you think credit markets in Europe couldn’t look more forbidding, think again. Just look at Switzerland. Companies there entered the $16 trillion labyrinth of global negative yielding debt back in 2015. With almost all high-grade corporate bonds in Swiss francs now offering below-zero yields, the nation offers a cautionary tale for the euro zone.”
Trump Administration Watch:
August 20 – Politico (Nancy Cook): “In public, President Donald Trump and top White House officials keep extolling the strength of the U.S. economy. In private, they’re increasingly worrying about a global economic slowdown triggering a U.S. recession — and weighing options to shore up the economy ahead of an election year. At a fundraising luncheon this week… acting White House chief of staff Mick Mulvaney acknowledged the risks to the GOP elite behind closed doors. If the U.S. were to face a recession, it would be ‘moderate and short,’ Mulvaney told roughly 50 donors… White House officials are discussing a broader package of measures than previously disclosed, including a cut of an additional percentage point or two to the corporate tax rate. That’s on top of a potential payroll tax cut, which the Obama administration had used to shore up the economy, and a move to index the capital gains rate to inflation, which potentially could be done through an executive order…”
August 21 – Associated Press (Kevin Freking and Josh Boak): “President Donald Trump acknowledged his aggressive China trade policies may mean economic pain for Americans but insisted they’re needed for more important long-term benefits. He contended he does not fear a recession but is nonetheless considering new tax cuts to promote growth. Asked if his trade war with China could tip the country into recession, he brushed off the idea as ‘irrelevant’ and said it was imperative to ‘take China on.’ ‘It’s about time, whether it’s good for our country or bad for our country short term,’ Trump said… Paraphrasing a reporter’s question, Trump said, ‘Your statement about, ‘Oh, will we fall into a recession for two months?’ OK? The fact is somebody had to take China on.’”
August 20 – Reuters (Humeyra Pamuk and Andrea Shalal): “U.S. President Donald Trump said… he had to confront China over trade even if it caused short-term harm to the U.S. economy because Beijing had been cheating Washington for decades… ‘Somebody had to take China on,’ Trump told reporters… ‘This is something that had to be done. The only difference is I am doing it,’ he said. ‘China has been ripping this country off for 25 years, for longer than that and it’s about time whether it’s good for our country or bad for our country short term. Long term it’s imperative that somebody does this,’ he said.”
August 21 – Reuters (Jeff Mason): “U.S. President Donald Trump said… his life would be easier if he had not mounted a trade war with China but said ‘I am the chosen one’ to take on Beijing. Trump told reporters the United States would probably make a deal with China.”
August 22 – CNBC (Kevin Breuninger): “Top White House economic advisor Larry Kudlow said… that President Donald Trump could put forward a tax cut before the 2020 presidential election. ‘You very may well see a new rollout of additional middle-class tax relief and small-business tax relief,’ Kudlow said in an interview on Fox Business Network.”
August 16 – Financial Times (Aime Williams): “The Trump administration is pressing ahead with an $8bn sale of F-16 fighter jets to Taiwan as Washington signals its support for Taipei in the face of a growing threat from China…. The deal would see the sale of 66 jets to the self-governing territory, and comes as tension between China and the US is heightened by difficult trade negotiations. Beijing claims Taiwan as part of its territory and has threatened to invade if Taipei resists unification indefinitely. The US is committed to helping Taiwan defend itself under the Taiwan Relations Act, a law passed when Washington switched diplomatic recognition from Taiwan to China in 1971.”
August 19 – Reuters (Doina Chiacu and Lisa Lambert): “President Donald Trump said… the Federal Reserve should consider cutting interest rates by 1 percentage point and advocated ‘some quantitative easing’ as he continued his pressure campaign on the central bank. ‘The Fed Rate, over a fairly short period of time, should be reduced by at least 100 bps, with perhaps some quantitative easing as well,’ Trump said in a Twitter post in which he also lamented that the U.S. dollar is so strong that ‘it is sadly hurting other parts of the world.’”
August 21 – Reuters (Makini Brice): “President Donald Trump… continued to pressure the Federal Reserve and the central bank’s chairman to lower interest rates, saying its policies were hampering U.S. growth and reducing the country’s ability to compete economically. ‘Doing great with China and other Trade Deals. The only problem we have is Jay Powell and the Fed. He’s like a golfer who can’t putt, has no touch. Big U.S. growth if he does the right thing, BIG CUT - but don’t count on him!’ Trump wrote on Twitter.”
August 21 – Reuters (Nikolaj Skydsgaard): “Danes voiced shock and disbelief… at U.S. President Donald Trump’s cancellation of a visit to Denmark after his idea to buy Greenland was rebuffed, although Prime Minister Mette Frederiksen said she believed relations would not be affected. Trump’s proposal at first elicited incredulity and humor from politicians in Denmark, a NATO ally of the United States, with former premier Lars Lokke Rasmussen saying: ‘It must be an April Fool’s Day joke.’”
Federal Reserve Watch:
August 21 – Associated Press (Martin Crutsinger): “Federal Reserve officials were widely divided at their meeting last month when they decided to cut rates for the first time in a decade, with some arguing for a bigger rate cut while others insisted the Fed should not cut rates at all. The minutes of the July 30-31 discussions… show two officials believed the Fed should cut its benchmark policy rate by a half-percentage point, double the quarter-point reduction the central bank eventually agreed upon. On the other end, some Fed officials argued for no rate cut at all, believing that the economy was beginning to improve after a soft patch in the spring.”
August 18 – Wall Street Journal (Nick Timiraos): “Jerome Powell is entering the most perilous stage yet of his tenure as Federal Reserve chairman, fighting to keep the U.S. from recession while taking the blame from President Trump for skittish markets and a slowing economy. Mr. Trump’s unyielding criticism of the Fed has led people inside the central bank to feel like they are fighting to both buoy the U.S. economy and preserve the Fed’s independence from political interference…. The debate among his Fed colleagues is how much to move rates and when as well as how to best frame the decision, which will be scrutinized by markets and the White House.”
August 22 – CNBC (Maggie Fitzgerald): “Kansas City Fed President Esther George said the Federal Reserve may be partly responsible for the yield curve inversion. ‘I think the Fed still has a large balance sheet, and that could be putting some downward pressure on those longer-term rates,’ George told CNBC’s Steve Liesman from the Kansas City Fed’s economic policy symposium in Jackson Hole…”
August 22 – Reuters (Kanishka Singh, Makini Brice and Doina Chiacu): “Kansas City Federal Reserve Bank President Esther George said… that she would be happy to leave interest rates at current levels unless there are further signs the U.S. economy is changing direction. ‘We’re at a sort of equilibrium right now and I’d be happy to leave rates here absent seeing either some weakness or some strengthening, some kind of upside risk that would cause me to think rates should be somewhere else,’ George said… George said she thinks the U.S. labor market remains strong, consumers remain confident, inflation-adjusted rates are near zero and the U.S. economy is poised to expand. ‘My sense was we’ve added accommodation and it wasn’t required in my view,’ George told CNBC…”
August 19 – Reuters (Trevor Hunnicutt): “Boston Federal Reserve Bank President Eric Rosengren… signaled no willingness to support further interest rate cuts, saying that U.S. economic conditions are still good and that easing policy could encourage a worrying debt build-up. ‘It is a bigger risk to encourage people to take on too much more risk at this time,’ he said…, adding that doing so could worsen the next downturn and leave the Fed with little ammunition to encourage additional spending when it is needed. ‘Global conditions are weak. So I’m not saying there aren’t circumstances in which I would be willing to ease. I just want to see evidence that we are actually going into something that’s more of a slowdown.’”
August 22 – CNBC (Thomas Franck): “Philadelphia Fed President Patrick Harker said… that while he reluctantly supported the central bank’s rate cut in July, he doesn’t see the case for additional stimulus. ‘We’re roughly where neutral is. It’s hard to know exactly where neutral is, but I think we’re roughly where neutral is right now. And I think we should stay here for a while and see how things play out,’ Harker told CNBC’s Steve Liesman from the central bank’s annual symposium in Jackson Hole…”
August 23 – Reuters (Jason Lange and Kanishka Singh): “Federal Reserve policymakers will have a ‘robust debate’ about cutting U.S. interest rates by a half percentage point at their next policy meeting in September, St. Louis Federal Reserve Bank President James Bullard said... The Fed cut rates by a quarter point at its July policy review although the minutes of that meeting showed a couple of policymakers favored a 50 bps reduction.”
August 16 – Reuters (Trevor Hunnicutt): “One Federal Reserve policymaker who opposed the Fed’s recent rate cut is considering whether to support such a move now given risks that a U.S.-China trade war and global slowdown could derail the economy. ‘I could see scenarios where we hold rates steady. I could see scenarios where we move the rate down. I think we just have to take the time to really evaluate,’ the state of the economy, Cleveland Fed President Loretta Mester told Reuters…”
August 20 – Bloomberg (Matthew Boesler): “The U.S. economy doesn’t appear to be headed toward a recession, Federal Reserve Bank of San Francisco President Mary Daly said. ‘When I look at the data coming in, I see solid domestic momentum that points to a continued economic expansion,’ Daly wrote… ‘But considerable headwinds, like weaker global growth and trade uncertainties, have emerged -- and they’re contributing to this fear we see in the markets that a downturn is right around the corner,’ she said. ‘So one thing I’m looking closely at is whether the mood gets so out of sync with the data that the fear of recession becomes a self-fulfilling prophecy.’”
U.S. Bubble Watch:
August 21 – Wall Street Journal (Kate Davidson): “Federal deficits are projected to grow much more than expected over the next decade after a budget agreement struck last month, pushing government debt as a share of the economy closer to the highest level since World War II, the Congressional Budget Office said. The deal agreed upon by congressional leaders and the White House will add roughly $1.7 trillion to deficits between 2020 and 2029, assuming federal spending continues to rise by the rate of inflation beyond 2021. Much of that increase will be offset by lower-than-expected interest rates, which will reduce the cost of servicing the government’s swelling debt by $1.4 trillion over the next decade… In total, deficits are now expected to rise $809 billion more than the agency projected just a few months ago, bringing total deficits over the next decade to $12.2 trillion.”
August 21 – CNBC (Kevin Breuninger and Ylan Mui): “Federal deficits are expected to swell to higher levels over the next decade than previously expected, the nonpartisan Congressional Budget Office said… The U.S. budget deficit is expected to hit $960 billion in 2019, and average a whopping $1.2 trillion per year between 2020 and 2029, according to the CBO’s look ahead… The new deficit projection for 2019 rose $63 billion from the last report, which came out in May. The CBO says this is mainly because of the massive new budget deal, which passed both houses of Congress and was signed into law by Trump in early August. ‘The nation’s fiscal outlook is challenging,’ CBO Director Phillip Swagel said… ‘Federal debt, which is already high by historical standards, is on an unsustainable course.’”
August 22 – Reuters (Richard Leong): “U.S. manufacturing industries recorded their first month of contraction in almost a decade amid concern about whether the U.S.-China trade conflict would tip the economy into a recession, a private survey showed… IHS Markit said its ‘flash’ or preliminary measure on domestic factory activity fell to 49.9 in August, its lowest level since September 2009. This compared with a final reading of 50.4 the month before.”
August 19 – Wall Street Journal (John D. McKinnon and Brent Kendall): “A group of states is preparing to move forward with a joint antitrust investigation of big technology companies, according to people familiar…, adding another layer of scrutiny to an industry already under a federal spotlight. The effort involving state attorneys general is expected to be formally launched as soon as next month, the people said. It is likely to focus on whether a handful of dominant technology platforms use their marketplace powers to stifle competition. As part of the probe, the states are likely to issue civil investigative demands, similar to subpoenas, to tech companies and other businesses, the people said. The new investigation could dovetail with plans by the Justice Department…”
August 21 – Wall Street Journal (Jessica Menton): “U.S. corporations are repurchasing their own shares at the slowest pace in 18 months… Companies in the S&P 500 repurchased about $166 billion of their own stock in the second quarter, S&P Dow Jones Indices projects, down from $205.8 billion in the first quarter and $190.6 billion in the same period a year ago. That marks the lowest total since the fourth quarter of 2017 and the second consecutive quarter of contraction. What has alarmed some investors is that companies eased up on share repurchases even as volatility surged in the midst of a heightened trade dispute between Washington and Beijing.”
August 20 – Bloomberg (Noah Buhayar and Prashant Gopal): “Wealthy buyers are pulling back from some of the most expensive housing markets in the U.S… Toll Brothers Inc., the nation’s largest publicly traded luxury-home builder, said… that purchase agreements fell 3% from a year earlier, worse than a decline of less than 1% that was expected by a Bloomberg survey… The company’s orders in California, home to some of the priciest markets in the country, tumbled 36% from a year earlier.”
August 21 – Reuters (Richard Leong): “Mortgage rates are at a three-year low and housing price appreciation has cooled, but many Americans seeking to buy their first home are facing tough times. Why? There just aren’t enough homes for sale. Developers have struggled to build enough new homes, especially at entry-level prices, because of land and labor shortages and rising material costs. The supply tightness has been compounded by retirees ‘aging in place’ and Baby Boomers content to make additions to their current homes, rather than moving, analysts said. ‘The problem for first-time buyers is still supply,’ said Doug Duncan, chief economist at Fannie Mae…”
August 20 – Reuters (Pete Schroeder): “U.S. banking regulators… eased trading regulations for Wall Street banks, giving them one of their biggest wins under the Trump administration but drawing criticism from consumer activists who warned of potential risks to taxpayers. The Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) approved the revamped version of the so-called ‘Volcker Rule,’ which aims to ban lenders that accept U.S. taxpayer-insured deposits from engaging in proprietary trading… The new rule gives banks more leeway in terms of trading activity and simplifies how banks can tell if that trading is permitted by law.”
August 21 – Reuters (Richard Leong): “U.S. homeowners filed the most applications to refinance their current mortgages in over three years as 30-year borrowing costs slipped to their lowest levels since late 2016, the Mortgage Bankers Association said… Overall mortgage activity, however, declined because of a pullback in loan requests for home purchases…”
August 21 – Wall Street Journal (Ben Eisen): “The risky mortgage is making a comeback. More than a decade after home loans triggered the worst financial crisis in a generation, the strict lending requirements put in place during its aftermath are starting to erode. Home buyers with low credit scores or high debt levels as well as those lacking traditional employment are finding it easier to get credit. The loans have been rebranded. Largely gone are the monikers subprime and Alt-A, a type of mortgage that earned the nickname ‘liar loan’… Now they are called non-qualified, or non-QM, because they don’t comply with postcrisis standards set by the Consumer Financial Protection Bureau… Borrowers took out $45 billion of these unconventional loans in 2018, the most in a decade, and origination is on track to rise again in 2019, according to Inside Mortgage Finance…”
August 19 – Bloomberg (Sydney Price): “Apartments in Manhattan’s Financial District aren’t exactly trading like blue chips on the nearby New York Stock Exchange. Whether in converted Art Deco office buildings or new glass towers, units are spending more time on the market and often selling below asking prices. After a spurt of construction aimed at foreign buyers, whose numbers are dwindling, and finance workers, who have seen many of their jobs move uptown, the area is plagued by oversupply. ‘There was so much new development in that neighborhood and I think that many of the people who wanted to buy there did,’ said Steven Gottlieb, a broker at Warburg Realty. ‘I don’t know that there is such a huge a demand for that neighborhood anymore.’”
August 20 – Wall Street Journal (Katherine Clarke): “Once listed for $1 billion, a 157-acre parcel of land in Beverly Hills known as the Mountain has sold at a foreclosure auction to its lender for just $100,000. An entity linked to the Mark Hughes Trust, a trust established to manage the assets of the late Herbalife founder Mark Hughes, won the property… at a trustee’s sale… The $100,000 price was far less than the roughly $200 million in debt the lenders had alleged was outstanding on the property. No other bidders showed up to the auction…”
China Watch:
August 20 – CNBC (Arjun Kharpal): “The U.S. government’s decision to add more of Huawei’s affiliates to a blacklist is ‘unjust’ and ‘politically motivated’ and will not help the country advance its technological leadership, the Chinese telecommunications giant said… U.S. Commerce Secretary Wilbur Ross announced Monday that it was extending by another 90 days a temporary reprieve for Huawei to continue doing business with American companies… However, the Bureau of Industry and Security also added another 46 Huawei affiliates onto the blacklist. ‘These actions violate the basic principles of free market competition. They are in no one’s interests, including U.S. companies,’ Huawei said…”
August 21 – Bloomberg: “China vowed retaliation against a proposed $8 billion U.S. sale of advanced fighter jets to Taiwan, threatening to impose sanctions on American firms participating in such a deal. ‘China will take all necessary measures to defend its own interests, including imposing sanctions on the U.S. companies involved in the arm sales,’ Chinese Foreign Ministry spokesman Geng Shuang said… ‘They constitute severe interference in China’s internal affairs and undermine China’s sovereignty and security interests.’”
August 17 – Wall Street Journal (Grace Zhu): “China’s central bank… unveiled a long-awaited reform to its interest-rate mechanism, a move aimed at reducing financing costs for businesses struggling with a cooling economy. The People’s Bank of China said… that it would replace existing benchmark interest rates with the Loan Prime Rate, which is based on real-world bank lending prices, as a reference for banks in pricing new loans. The move… will better reflect real market lending rates and enable lenders to quickly respond to the central bank’s easing policies.”
August 22 – Bloomberg: “Qinghai Provincial Investment Group Co. has again missed a coupon payment on a dollar bond, a sign that a local government-led debt restructuring has yet to ease finances at the Chinese state-backed aluminum producer. The company has yet to wire funds to pay a coupon due Thursday on a $300 million 2020 note, according to a person familiar with the matter. It is in talks with financial institutions for funds to make a delayed payment…”
August 20 – Bloomberg (Iain Marlow and Sheryl Tian Tong Lee): “For all the tumult Hong Kong has seen since pro-democracy protests erupted in early June, the countdown to a crucial anniversary for China on Oct. 1 makes the next six weeks particularly sensitive. The 70th anniversary of the People’s Republic of China, the name used by Communist Party leaders after they forced Chiang Kai-shek’s regime to retreat to Taiwan, will feature a military parade through Beijing personally inspected by President Xi Jinping. That has raised some fears that Xi will seek to get Hong Kong under control by then to avoid any violence that steals headlines.”
August 18 – Reuters (Stephen Tan): “Protest-battered Hong Kong should also brace itself for an ‘economic typhoon’ caused by the U.S.-China trade war and recent political unrest in the city, Financial Secretary Paul Chan wrote… The warning from the city’s top budget official came after Hong Kong last week slashed its 2019 growth forecast to as little as zero, down from a previous range of 2% to 3%. The government also adopted a $2.4 billion spending package to try to buoy the economy -- a move that Chan likened to the food stockpiles that households gather to gird themselves against a typhoon.”
August 22 – Bloomberg (Cathy Chan): “Most Hong Kong retailers have seen sales drop more than 50% in August, according to the city’s Retail Management Association, as the ongoing political protests take a toll on business and the economy. The association has urged landlords in the city to halve rents for six months to help tenants overcome difficult times, and has called on the government to provide relief measures to retailers…”
August 18 – Bloomberg (Cindy Wang and Chinmei Sung): “As Hong Kong’s unrest continues, some in the city are looking to the less expensive rents, leafy green streets and relative political shelter of neighboring Taiwan as a safe haven. The number of people moving to Taiwan from Hong Kong has risen rapidly -- up 28% over first seven months of 2019 compared to a year earlier -- fueled in recent months by anti-government protests that have swept the former British colony amid fear its autonomy from Beijing is being eroded.”
Central Banking Watch:
August 20 – Financial Times (Brendan Greeley): “The world’s monetary policymakers arrive in Jackson Hole, Wyoming, …for their annual summer gathering with two problems on their minds. One they have known about for a while: despite dropping policy rates — in some cases below zero — central banks in developed economies still cannot meet their inflation targets. The other problem is new: the uncertainty of open-ended trade negotiations is beginning to weigh on growth, even in America. Central bankers are becoming increasingly uncertain about their tools, but may have to use them soon anyway. ‘I would say this is the probably the most interesting environment for central bankers since the crisis,’ says Raghuram Rajan, a former governor of the Reserve Bank of India…”
August 22 – Reuters (Balazs Koranyi): “A combination of measures may be needed to prop up the euro zone economy, as recent indicators paint an even bleaker picture of the outlook, European Central Bank policymakers said at their July meeting, the accounts of the meeting showed… ‘The view was expressed that the various options should be seen as a package; i.e., a combination of instruments with significant complementarities and synergies,’ the ECB said. ‘Experience has showed that a package - such as the combination of rate cuts and asset purchases - was more effective than a sequence of selective actions,’ it said.”
August 22 – Bloomberg (Jana Randow and Kristie Pladson): “Germany’s central bank doesn’t see a need for fiscal stimulus at this time, even though it expects the economy to shrink again this quarter, according to two people familiar with the Bundesbank’s stance.”
Brexit Watch:
August 22 – Reuters (Kanishka Singh, Makini Brice and Doina Chiacu): “French President Emmanuel Macron… told Britain’s Prime Minister Boris Johnson there was not enough time in the month ahead to negotiate a new Brexit Withdrawal Agreement. German Chancellor Angela Merkel on Wednesday challenged Britain to come up with alternatives to the Irish border backstop within 30 days — a challenge which Johnson readily accepted. ‘What Chancellor Merkel said yesterday, and which is in line with the substance of our talks, is that we need visibility in 30 days,’ Macron told reporters… ‘Nobody is going to wait until Oct. 31 without trying to find a good solution.’”
August 20 – Reuters (Guy Faulconbridge and Gabriela Baczynska): “The European Union… rebuffed Prime Minister Boris Johnson’s demand that it reopen the Brexit divorce deal, saying Britain had failed to propose any realistic alternative to an agreed insurance policy for the Irish border… In his opening bid to the EU ahead of meetings with French President Emmanuel Macron and German Chancellor Angela Merkel, Johnson wrote a four-page letter to European Council President Donald Tusk asking to ax the Irish border ‘backstop’.”
August 21 – Reuters (Klaus Lauer): “German Chancellor Angela Merkel said she would discuss how to make sure Britain’s divorce from the European Union is as smooth as possible when she holds talks… with British Prime Minister Boris Johnson. ‘Today I will talk with the British Prime Minister, who is visiting me, about how we can get the most friction-free British exit from the European Union possible as we must fight for our economic growth,’ said Merkel…”
Asia Watch:
August 22 – Reuters (Hyonhee Shin, Josh Smith and Kiyoshi Takenaka): “South Korea said… it will scrap an intelligence-sharing pact with Japan, drawing a swift protest from Tokyo and deepening a decades-old row over history that has hit trade and undercut security cooperation over North Korea.”
August 19 – Bloomberg (Subhadip Sircar): “More than two decades since the Asia debt crisis gripped the region, global consulting firm McKinsey & Co. is warning that signs of a rerun are ‘ominous.’ Increased indebtedness, stresses in repaying borrowing, lender vulnerabilities and shadow banking practices are some of the concerns cited by McKinsey in an August report. Whether building pressures are ‘enough to trigger a new crisis remains to be seen’ but governments and businesses need to monitor potential causes, authors Joydeep Sengupta and Archana Seshadrinathan wrote.”
Europe Watch:
August 20 – Wall Street Journal (Marcus Walker): “Italy’s government collapsed, triggering a power struggle between the country’s right-wing nationalists and rival parties, along with deepening Europe's political upheaval as the Continent struggles with immigration and slowing economic growth. Prime Minister Giuseppe Conte resigned on Tuesday after Matteo Salvini, a rising force from Europe’s insurgent far-right, withdrew his support for the government. Mr. Salvini, whose anti-immigrant League is leading in public-opinion polls, is pushing for snap elections. Mr. Salvini’s opponents maneuvered to avoid a fresh vote, with some leaders of the antiestablishment 5 Star Movement, which has been governing alongside the League, saying they were open to exploring a deal with the center-left Democratic Party to form a new coalition.”
August 20 – Reuters (Giselda Vagnoni): “The leader of Italy’s far-right League party, Matteo Salvini, said… that a budget worth 50 billion euros ($55bn) will be needed for 2020 to bring about a ‘shock’ fiscal stimulus. Salvini pulled the plug on the League’s coalition government with the anti-establishment 5-Star Movement earlier this month, starting a potential countdown to elections which could complicate the nation’s preparations for the 2020 budget.”
August 18 – Bloomberg (John Ainger and Dirk Gojny): “Less than a decade ago, investors could barely be compensated enough to hold the bonds of Spain and Portugal for fear the nations could be severed from the European Union. Now, they are a hair’s breadth away from having to pay for the privilege. An unprecedented surge in sovereign debt across the world has driven 10-year yields in the Iberian nations to record lows just shy of 0%. With about $16 trillion of global debt now paying negative rates, investors are snapping up positive yields wherever they can find them -- even if that means getting into some of the euro area’s riskier markets… ‘I am afraid all curves are going to zero and all rates are going to zero,’ said James Athey, senior investment manager at Aberdeen Standard Investments... ‘It would be an incredibly concerning signal.’”
August 18 – Reuters (Michael Nienaber): “Germany has the fiscal strength to counter any future economic crisis ‘with full force’, Finance Minister Olaf Scholz said…, suggesting Berlin could make available up to 50 billion euros ($55bn) of extra spending.”
August 21 – Bloomberg (Piotr Skolimowski): “Germany needs a law that bans banks from passing negative interest rates on to retail clients, Bavaria’s Prime Minister Markus Soeder told Bild newspaper… The call comes just weeks before a European Central Bank meeting at which policy makers are expected to cut their deposit rate further below zero, extending a period of negative rates that has already lasted for more than half a decade. Banks in countries including Germany and France have complained the policy is eroding profitability, but the ECB argues rates need to stay low to boost inflation and support the flagging economy.”
EM Watch:
August 21 – Bloomberg (Rahul Satija and Suvashree Ghosh): “India is stamping out shadow financiers at the fastest pace in recent years, in the latest blow to a beleaguered sector battling a prolonged funding crunch due to rising wariness toward it in the nation’s credit markets. The central bank canceled registrations of 1,851 non-bank finance companies in the year ended March 31, more than 8 times those in the previous year… The number of lenders dropped to about 9,700, the lowest in at least a decade, as a result. Firms may be failing to secure the minimum funds needed to operate due to the cash crunch.”
Global Bubble Watch:
August 21 – Financial Times (Tommy Stubbington): “The cost of servicing the debt of developed countries has sunk to its lowest level for more than four decades, piling pressure on governments to borrow and spend more in order to jump-start the flagging global economy. Advanced economies will spend just 1.77% of their combined GDP on debt interest this year according to the OECD — the lowest since 1975, and down from a peak of 3.9% in the mid-1990s. This sharp decline comes despite the huge debt piles accumulated by many countries since the financial crisis. The debt-to-GDP ratio across advanced economies has risen from 45% in 2001 to 76% this year, according to the IMF.”
Japan Watch:
August 18 – Reuters (Daniel Leussink and Tetsushi Kajimoto): “Japan’s exports slipped for an eighth month in July, while manufacturers’ confidence turned negative for the first time in over six years as China-bound sales slumped again in a fresh sign the Sino-U.S. trade war could tip the economy into recession… Exports in July fell 1.6% from a year earlier…, dragged down by China-bound shipments of car parts and semiconductor production equipment.”
Fixed-Income Bubble Watch:
August 20 – Wall Street Journal (Daniel Kruger and Sam Goldfarb): “Debt investors are shying away from junk bonds with lower credit ratings, as concerns about the economic outlook ripple through financial markets. The amount of extra yield, or spread, that investors demand to hold triple-C rated bonds—among the lowest-rated on the scale—has increased to around 8 percentage points over higher-rated double-B bonds, according to ICE BofAML data. That is the widest since November 2016. For companies with investment-grade bond ratings, sales of new debt have continued apace throughout the sharp summer rally in U.S. Treasury prices… But issuance of high-yield debt has begun to slow, analysts said, in what could be a harbinger of additional pain for a sector widely perceived to be in constant need of financing and vulnerable to a downturn.”
August 19 – Bloomberg (Jeannine Amodeo and Davide Scigliuzzo): “Three leveraged loan sales languishing in the U.S. market for weeks have been pulled amid a flight to quality from investors worried about relentless fund outflows, rising trade tensions, volatile oil prices and a potential recession. The three deals in question -- for Golden Hippo, Glass Mountain Pipeline Holdings LLC and Chief Power Finance LLC -- were launched back in June and early July and commitment deadlines ranged from one to six weeks ago… All three deals, which total around $700 million, have been pulled…”
Leveraged Speculation Watch:
August 21 – Bloomberg (Joanna Ossinger): “Equity hedge funds are enjoying their strongest performance since 2009 -- with the S&P 500 index up 16% this year -- but Goldman Sachs Group Inc. warns that crowding is a risk. Funds have benefited from both a rising stock market and successful stock selection, strategists including Ben Snider and David Kostin wrote… They’ve also concentrated their holdings into a reduced number of industries, such as health care, and into single names, particularly Amazon.com. Inc. When rallies peak, too much professional money can try to get out of the same stocks simultaneously and exaggerate declines.”
August 22 – Financial Times (Lindsay Fortado): “Investors pulled around $56bn from hedge funds in the first seven months of this year, the worst start for fundraising since 2016 despite the best stretch of performance in a decade for the struggling industry. Only 37% of hedge funds have had net inflows so far this year, according to… eVestment… Redemptions totalled $8.4bn in July alone, though the rebound in returns meant the industry’s total assets under management ticked up to $3.3tn.”
August 22 – Bloomberg (Oliver Telling): “Hedge funds have already bled 50% more money this year than in all of 2018, as the industry struggles to win back investors fed up with high fees and poor performance. Investors yanked $8.4 billion in July, bringing net outflows this year to $55.9 billion, according to… eVestment… That’s up from $37.2 billion for all of last year.”
Geopolitical Watch:
August 19 – Associated Press (Kelvin Chan and Yanan Wang): “China lashed out at Taiwan… over its offer of political asylum to participants in Hong Kong's pro-democracy protest movement, a day after hundreds of thousands of people marched peacefully in the latest massive demonstration in the Chinese territory. The government of Taiwan, a self-ruled island that China considers its own territory, strongly supports the protests, and Hong Kong students in Taiwan held events over the weekend expressing their backing. Taiwan's president made the asylum offer last month… Taiwan lacks a formal legal mechanism for assessing and granting asylum requests, although it has granted residency to several vocal opponents of the Chinese government. On Monday, Ma Xiaoguang, spokesman for the Chinese Cabinet's Taiwan Affairs Office, said Taiwan's offer would ‘cover up the crimes of a small group of violent militants’ and encourage their ‘audacity in harming Hong Kong and turn Taiwan into a ‘heaven for ducking the law.’”
August 20 – Reuters (Tim Kelly): “The commandant of the U.S. Marine Corps said… any crack in alliances in Asia that helped counter threats from North Korea and China were a worry as a spat between Japan and South Korea threatened to spill over into intelligence sharing. ‘We should all be concerned when any part of an alliance has some challenges,’ General David Berger said… ‘Each country has information that the other will need. I am optimistic it will get worked out.’”
August 18 – Bloomberg (Cindy Wang and Chinmei Sung): “A decade of ‘delayed and unpredictable funding’ for the U.S. military’s budget has seen America lose its primacy in the Western Pacific, giving the edge to an increasingly sophisticated China, a Sydney-based think tank warned. China’s ‘growing arsenal of accurate long-range missiles poses a major threat to almost all American, allied and partner bases, airstrips, ports and military installations in the Western Pacific,’ the University of Sydney’s United States Studies Centre said in a report… ‘As these facilities could be rendered useless by precision strikes in the opening hours of a conflict, the PLA missile threat challenges America’s ability to freely operate its forces from forward locations throughout the region,’ it said…”
August 20 – Reuters (Chris Gallagher, Linda Sieg, and Josh Smith): “Japan has upgraded its estimate of North Korea’s nuclear weapons capability in an upcoming annual Defence White Paper, saying it seems Pyongyang has achieved the miniaturization of warheads, the Yomiuri newspaper said… That compares with the assessment in last year’s report in which the government said it was possible North Korea had achieved miniaturization… The report… will maintain the assessment that North Korea’s military activities pose a ‘serious and imminent threat’, the Yomiuri said.”
August 17 – Reuters (Fayaz Bukhari): “Indian authorities reimposed restrictions on movement in parts of Kashmir’s biggest city, Srinagar, on Sunday after overnight clashes between residents and police in which dozens were injured, two senior officials and eyewitnesses said.”
August 19 – Wall Street Journal (Bill Spindle): “The Ladakh region of northern India is one of the world’s highest, driest inhabited places. For centuries, meltwater from winter snows in the Himalayan mountains sustained the tiny villages dotting this remote land. Now, like many other places in India, parts of Ladakh are running short of water… Water crises are unfolding all across India, a product of population growth, modernization, climate change, mismanagement and the breakdown of traditional systems of distributing resources. India is running out of water in more places, in more different ways, putting more people at risk, than perhaps any other country. Nearly all of India’s biggest cities, including New Delhi, the nation’s capital, are rapidly depleting their groundwater reserves…”
Investment-grade bond funds saw inflows of $2.048 billion, while junk bond funds posted outflows of $1.500 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates fell five bps to 3.55% (down 96bps y-o-y). Fifteen-year rates declined four bps to 3.03% (down 95bps). Five-year hybrid ARM rates slipped three bps to 3.32% (down 50bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down a basis point to 4.05% (down 51bps).
Federal Reserve Credit last week declined $17.2bn to $3.727 TN. Over the past year, Fed Credit contracted $463bn, or 11.0%. Fed Credit inflated $916 billion, or 33%, over the past 354 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $3.5bn last week to $3.471 TN. "Custody holdings" rose $41.5bn y-o-y, or 1.2%.
M2 (narrow) "money" supply gained $14.6bn last week to a record $14.955 TN. "Narrow money" gained $757bn, or 5.3%, over the past year. For the week, Currency increased $0.4bn. Total Checkable Deposits declined $10.6bn, while Savings Deposits rose $16.5bn. Small Time Deposits added $2.7bn. Retail Money Funds gained $5.5bn.
Total money market fund assets jumped $23.45bn to $3.378 TN. Money Funds gained $514bn y-o-y, or 17.9%.
Total Commercial Paper declined $4.5bn to $1.130 TN. CP was up $63bn y-o-y, or 5.9%.
Currency Watch:
August 22 – Financial Times (Eva Szalay): “Top Chinese bankers in London are warning of the drama that would follow any US attempt to weaken the dollar by intervening in renminbi markets — a move that would be seen by Beijing as a ‘political act’. The risks of such action have heightened since June, said analysts, after US president Donald Trump repeatedly took aim at China and Europe for ‘playing currency games’ as trade wars threatened to spill over into foreign exchange markets. The US Treasury officially branded China a currency manipulator this month after the Chinese central bank allowed the renminbi to fall below Rmb7 to the dollar… On Thursday the renminbi was trading at a fresh low of 7.0749.”
The U.S. dollar index declined 1.1% to 97.169 (up 1.0% y-t-d). For the week on the upside, the British pound increased 0.9%, the Japanese yen 0.9%, the Norwegian krone 0.8%, the Swedish krona 0.8%, the euro 0.5%, the Swiss franc 0.4%, the South African rand 0.4% and the South Korean won 0.1%. On the downside, the Brazilian real declined 2.8%, the Mexican peso 1.3%, the New Zealand dollar 0.4%, the Australian dollar 0.3%, the Singapore dollar 0.2% and the Canadian dollar 0.1%. The Chinese renminbi declined 0.74% versus the dollar this week (down 3.06% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index declined 0.9% this week (down 1.2% y-t-d). Spot Gold gained 0.9% to $1,527 (up 19.1%). Silver jumped 2.5% to $17.554 (up 13.0%). WTI crude fell 70 cents to $54.17 (up 19%). Gasoline slipped 0.8% (up 24%), and Natural Gas fell 2.2% (down 27%). Copper dropped 2.2% (down 4%). Wheat was little changed (down 5%). Corn sank 3.4% (down 2%).
Market Instability Watch:
August 17 – Reuters (Eliana Raszewski): “Argentina´s Treasury Minister Nicolas Dujovne has resigned, saying… he believed the government needed ‘significant renewal’ in its economic team amid a crisis which saw the peso plunge this week. Dujovne said in a letter to Argentine President Mauricio Macri that he had given his ‘all’ to the job, helped tame a significant deficit and trim public spending. ‘We have made mistakes as well, without a doubt, we never hesitate to recognize that and did all that was possible to correct them,’ he added.”
August 22 – Bloomberg (Selcuk Gokoluk): “Trading Argentine bonds has become a test of endurance as the prospect of a possible default triggers wild price swings and volume dries up. The Liquidity Assessment Scale of 1 to 100 (100 being the most liquid) slumped to 12 on Wednesday for the South American nation’s bonds from 68 just three weeks ago.”
August 20 – Reuters (Hugh Bronstein and Jorge Otaola): “Argentina’s promises to defend its beleaguered peso gained credibility on Tuesday after the central bank poured $112 million of its reserves into dollar auctions, helping to boost the currency about 0.5% a day after steep losses. In three interventions in the foreign exchange market, the bank acted in concert with statements from officials saying the government’s top priority was to stabilize the peso after it lost 18% of its value against the U.S. dollar last week.”
August 18 – Financial Times (Eva Szalay and Adam Samson): “For much of this year, foreign exchange traders were scanning their screens with some anxiety, worrying about a collapse in volatility that deprived them of moneymaking opportunities. Equity markets were whipsawing and bond yields tumbling — but currency markets were largely unmoved, forcing investors to pile into riskier, idiosyncratic themes… in order to turn a profit. Now something like normal service has been resumed. The threat of trade wars spilling over to currency markets spurred traders into action this month, as the dollar strengthened to more than Rmb7 and caused a broad sell-off in emerging market currencies, while also creating renewed demand for haven assets such as the Swiss franc and the Japanese yen. The Argentine peso, meanwhile, tanked due to an election shock amid the broader risk-off backdrop.”
August 21 – Associated Press (David McHugh and Paul Wiseman): “Imagine lending money to someone and having to pay for the privilege of doing so. Or being asked to invest and informed of how much money you’ll lose. Sounds absurd, but increasingly that’s the global bond market these days. A rising share of government and corporate bonds are trading at negative interest yields — a financial twilight zone that took hold after the financial crisis and has accelerated on fear that a fragile global economy will be further damaged by the U.S.-China trade war. On Wednesday, for the first time ever, the German government sold 30-year bonds at a negative interest rate. The bonds pay no coupon interest at all. Yet bidders at the auction were willing to pay more than the face value they would receive back when the bonds mature.”
August 21 – CNBC (Jeff Cox): “Government bonds aren’t the only instruments producing negative yields these days, with corporate debt recently passing the $1 trillion mark in a continuing sign of global financial displacement. Investors these days are facing huge amounts of fixed income instruments that carry no yield. Various estimates of sovereign debt in that category put the total in excess of $15 trillion… Negative-yielding corporate debt, though, is a relatively new thing, rising from just $20 billion in January to pass the $1 trillion mark recently, according to Jim Bianco, founder of Bianco Research.”
August 20 – Wall Street Journal (Gunjan Banerji): “Stock volatility has receded in recent days, and some investors have bet the tranquility will persist. Derivatives traders have increased positions that pay out if market swings dwindle and stocks continue to climb… Leveraged funds like hedge funds recently increased bearish wagers on futures linked to the VIX to the highest level since September, Commodity Futures Trading Commission data as of Aug. 13 show. There are almost five bearish contracts outstanding for every bullish one held by leveraged funds… A bearish bet on the VIX is akin to a bullish one on stocks, since the volatility gauge and S&P 500 tend to move in opposite directions.”
August 19 – Bloomberg (Gregor Stuart Hunter): “Hong Kong’s interbank interest rates will turn increasingly volatile as investors continue to yank cash from the city’s financial markets, according to Morgan Stanley. The Hong Kong dollar may test the weak end of its trading band with the greenback if the pace of outflows increases, Morgan Stanley strategists including Chun Him Cheung wrote… That would force the city’s de facto central bank to defend the peg, squeezing liquidity and triggering a spike in local borrowing costs, they wrote.”
August 19 – Bloomberg (Rachel Evans and Sarah Ponczek): “A volatile few months for global stock markets is taking its toll on exchange-traded funds. Almost $18 billion fled U.S.-listed equity ETFs during the past three weeks, the most since February, according to… Bloomberg Intelligence. Investors pulled more than $3.5 billion in the five days through Aug. 16, capping what was also the longest run of weekly withdrawals in six months.”
August 23 – Bloomberg (Tasos Vossos): “If you think credit markets in Europe couldn’t look more forbidding, think again. Just look at Switzerland. Companies there entered the $16 trillion labyrinth of global negative yielding debt back in 2015. With almost all high-grade corporate bonds in Swiss francs now offering below-zero yields, the nation offers a cautionary tale for the euro zone.”
Trump Administration Watch:
August 20 – Politico (Nancy Cook): “In public, President Donald Trump and top White House officials keep extolling the strength of the U.S. economy. In private, they’re increasingly worrying about a global economic slowdown triggering a U.S. recession — and weighing options to shore up the economy ahead of an election year. At a fundraising luncheon this week… acting White House chief of staff Mick Mulvaney acknowledged the risks to the GOP elite behind closed doors. If the U.S. were to face a recession, it would be ‘moderate and short,’ Mulvaney told roughly 50 donors… White House officials are discussing a broader package of measures than previously disclosed, including a cut of an additional percentage point or two to the corporate tax rate. That’s on top of a potential payroll tax cut, which the Obama administration had used to shore up the economy, and a move to index the capital gains rate to inflation, which potentially could be done through an executive order…”
August 21 – Associated Press (Kevin Freking and Josh Boak): “President Donald Trump acknowledged his aggressive China trade policies may mean economic pain for Americans but insisted they’re needed for more important long-term benefits. He contended he does not fear a recession but is nonetheless considering new tax cuts to promote growth. Asked if his trade war with China could tip the country into recession, he brushed off the idea as ‘irrelevant’ and said it was imperative to ‘take China on.’ ‘It’s about time, whether it’s good for our country or bad for our country short term,’ Trump said… Paraphrasing a reporter’s question, Trump said, ‘Your statement about, ‘Oh, will we fall into a recession for two months?’ OK? The fact is somebody had to take China on.’”
August 20 – Reuters (Humeyra Pamuk and Andrea Shalal): “U.S. President Donald Trump said… he had to confront China over trade even if it caused short-term harm to the U.S. economy because Beijing had been cheating Washington for decades… ‘Somebody had to take China on,’ Trump told reporters… ‘This is something that had to be done. The only difference is I am doing it,’ he said. ‘China has been ripping this country off for 25 years, for longer than that and it’s about time whether it’s good for our country or bad for our country short term. Long term it’s imperative that somebody does this,’ he said.”
August 21 – Reuters (Jeff Mason): “U.S. President Donald Trump said… his life would be easier if he had not mounted a trade war with China but said ‘I am the chosen one’ to take on Beijing. Trump told reporters the United States would probably make a deal with China.”
August 22 – CNBC (Kevin Breuninger): “Top White House economic advisor Larry Kudlow said… that President Donald Trump could put forward a tax cut before the 2020 presidential election. ‘You very may well see a new rollout of additional middle-class tax relief and small-business tax relief,’ Kudlow said in an interview on Fox Business Network.”
August 16 – Financial Times (Aime Williams): “The Trump administration is pressing ahead with an $8bn sale of F-16 fighter jets to Taiwan as Washington signals its support for Taipei in the face of a growing threat from China…. The deal would see the sale of 66 jets to the self-governing territory, and comes as tension between China and the US is heightened by difficult trade negotiations. Beijing claims Taiwan as part of its territory and has threatened to invade if Taipei resists unification indefinitely. The US is committed to helping Taiwan defend itself under the Taiwan Relations Act, a law passed when Washington switched diplomatic recognition from Taiwan to China in 1971.”
August 19 – Reuters (Doina Chiacu and Lisa Lambert): “President Donald Trump said… the Federal Reserve should consider cutting interest rates by 1 percentage point and advocated ‘some quantitative easing’ as he continued his pressure campaign on the central bank. ‘The Fed Rate, over a fairly short period of time, should be reduced by at least 100 bps, with perhaps some quantitative easing as well,’ Trump said in a Twitter post in which he also lamented that the U.S. dollar is so strong that ‘it is sadly hurting other parts of the world.’”
August 21 – Reuters (Makini Brice): “President Donald Trump… continued to pressure the Federal Reserve and the central bank’s chairman to lower interest rates, saying its policies were hampering U.S. growth and reducing the country’s ability to compete economically. ‘Doing great with China and other Trade Deals. The only problem we have is Jay Powell and the Fed. He’s like a golfer who can’t putt, has no touch. Big U.S. growth if he does the right thing, BIG CUT - but don’t count on him!’ Trump wrote on Twitter.”
August 21 – Reuters (Nikolaj Skydsgaard): “Danes voiced shock and disbelief… at U.S. President Donald Trump’s cancellation of a visit to Denmark after his idea to buy Greenland was rebuffed, although Prime Minister Mette Frederiksen said she believed relations would not be affected. Trump’s proposal at first elicited incredulity and humor from politicians in Denmark, a NATO ally of the United States, with former premier Lars Lokke Rasmussen saying: ‘It must be an April Fool’s Day joke.’”
Federal Reserve Watch:
August 21 – Associated Press (Martin Crutsinger): “Federal Reserve officials were widely divided at their meeting last month when they decided to cut rates for the first time in a decade, with some arguing for a bigger rate cut while others insisted the Fed should not cut rates at all. The minutes of the July 30-31 discussions… show two officials believed the Fed should cut its benchmark policy rate by a half-percentage point, double the quarter-point reduction the central bank eventually agreed upon. On the other end, some Fed officials argued for no rate cut at all, believing that the economy was beginning to improve after a soft patch in the spring.”
August 18 – Wall Street Journal (Nick Timiraos): “Jerome Powell is entering the most perilous stage yet of his tenure as Federal Reserve chairman, fighting to keep the U.S. from recession while taking the blame from President Trump for skittish markets and a slowing economy. Mr. Trump’s unyielding criticism of the Fed has led people inside the central bank to feel like they are fighting to both buoy the U.S. economy and preserve the Fed’s independence from political interference…. The debate among his Fed colleagues is how much to move rates and when as well as how to best frame the decision, which will be scrutinized by markets and the White House.”
August 22 – CNBC (Maggie Fitzgerald): “Kansas City Fed President Esther George said the Federal Reserve may be partly responsible for the yield curve inversion. ‘I think the Fed still has a large balance sheet, and that could be putting some downward pressure on those longer-term rates,’ George told CNBC’s Steve Liesman from the Kansas City Fed’s economic policy symposium in Jackson Hole…”
August 22 – Reuters (Kanishka Singh, Makini Brice and Doina Chiacu): “Kansas City Federal Reserve Bank President Esther George said… that she would be happy to leave interest rates at current levels unless there are further signs the U.S. economy is changing direction. ‘We’re at a sort of equilibrium right now and I’d be happy to leave rates here absent seeing either some weakness or some strengthening, some kind of upside risk that would cause me to think rates should be somewhere else,’ George said… George said she thinks the U.S. labor market remains strong, consumers remain confident, inflation-adjusted rates are near zero and the U.S. economy is poised to expand. ‘My sense was we’ve added accommodation and it wasn’t required in my view,’ George told CNBC…”
August 19 – Reuters (Trevor Hunnicutt): “Boston Federal Reserve Bank President Eric Rosengren… signaled no willingness to support further interest rate cuts, saying that U.S. economic conditions are still good and that easing policy could encourage a worrying debt build-up. ‘It is a bigger risk to encourage people to take on too much more risk at this time,’ he said…, adding that doing so could worsen the next downturn and leave the Fed with little ammunition to encourage additional spending when it is needed. ‘Global conditions are weak. So I’m not saying there aren’t circumstances in which I would be willing to ease. I just want to see evidence that we are actually going into something that’s more of a slowdown.’”
August 22 – CNBC (Thomas Franck): “Philadelphia Fed President Patrick Harker said… that while he reluctantly supported the central bank’s rate cut in July, he doesn’t see the case for additional stimulus. ‘We’re roughly where neutral is. It’s hard to know exactly where neutral is, but I think we’re roughly where neutral is right now. And I think we should stay here for a while and see how things play out,’ Harker told CNBC’s Steve Liesman from the central bank’s annual symposium in Jackson Hole…”
August 23 – Reuters (Jason Lange and Kanishka Singh): “Federal Reserve policymakers will have a ‘robust debate’ about cutting U.S. interest rates by a half percentage point at their next policy meeting in September, St. Louis Federal Reserve Bank President James Bullard said... The Fed cut rates by a quarter point at its July policy review although the minutes of that meeting showed a couple of policymakers favored a 50 bps reduction.”
August 16 – Reuters (Trevor Hunnicutt): “One Federal Reserve policymaker who opposed the Fed’s recent rate cut is considering whether to support such a move now given risks that a U.S.-China trade war and global slowdown could derail the economy. ‘I could see scenarios where we hold rates steady. I could see scenarios where we move the rate down. I think we just have to take the time to really evaluate,’ the state of the economy, Cleveland Fed President Loretta Mester told Reuters…”
August 20 – Bloomberg (Matthew Boesler): “The U.S. economy doesn’t appear to be headed toward a recession, Federal Reserve Bank of San Francisco President Mary Daly said. ‘When I look at the data coming in, I see solid domestic momentum that points to a continued economic expansion,’ Daly wrote… ‘But considerable headwinds, like weaker global growth and trade uncertainties, have emerged -- and they’re contributing to this fear we see in the markets that a downturn is right around the corner,’ she said. ‘So one thing I’m looking closely at is whether the mood gets so out of sync with the data that the fear of recession becomes a self-fulfilling prophecy.’”
U.S. Bubble Watch:
August 21 – Wall Street Journal (Kate Davidson): “Federal deficits are projected to grow much more than expected over the next decade after a budget agreement struck last month, pushing government debt as a share of the economy closer to the highest level since World War II, the Congressional Budget Office said. The deal agreed upon by congressional leaders and the White House will add roughly $1.7 trillion to deficits between 2020 and 2029, assuming federal spending continues to rise by the rate of inflation beyond 2021. Much of that increase will be offset by lower-than-expected interest rates, which will reduce the cost of servicing the government’s swelling debt by $1.4 trillion over the next decade… In total, deficits are now expected to rise $809 billion more than the agency projected just a few months ago, bringing total deficits over the next decade to $12.2 trillion.”
August 21 – CNBC (Kevin Breuninger and Ylan Mui): “Federal deficits are expected to swell to higher levels over the next decade than previously expected, the nonpartisan Congressional Budget Office said… The U.S. budget deficit is expected to hit $960 billion in 2019, and average a whopping $1.2 trillion per year between 2020 and 2029, according to the CBO’s look ahead… The new deficit projection for 2019 rose $63 billion from the last report, which came out in May. The CBO says this is mainly because of the massive new budget deal, which passed both houses of Congress and was signed into law by Trump in early August. ‘The nation’s fiscal outlook is challenging,’ CBO Director Phillip Swagel said… ‘Federal debt, which is already high by historical standards, is on an unsustainable course.’”
August 22 – Reuters (Richard Leong): “U.S. manufacturing industries recorded their first month of contraction in almost a decade amid concern about whether the U.S.-China trade conflict would tip the economy into a recession, a private survey showed… IHS Markit said its ‘flash’ or preliminary measure on domestic factory activity fell to 49.9 in August, its lowest level since September 2009. This compared with a final reading of 50.4 the month before.”
August 19 – Wall Street Journal (John D. McKinnon and Brent Kendall): “A group of states is preparing to move forward with a joint antitrust investigation of big technology companies, according to people familiar…, adding another layer of scrutiny to an industry already under a federal spotlight. The effort involving state attorneys general is expected to be formally launched as soon as next month, the people said. It is likely to focus on whether a handful of dominant technology platforms use their marketplace powers to stifle competition. As part of the probe, the states are likely to issue civil investigative demands, similar to subpoenas, to tech companies and other businesses, the people said. The new investigation could dovetail with plans by the Justice Department…”
August 21 – Wall Street Journal (Jessica Menton): “U.S. corporations are repurchasing their own shares at the slowest pace in 18 months… Companies in the S&P 500 repurchased about $166 billion of their own stock in the second quarter, S&P Dow Jones Indices projects, down from $205.8 billion in the first quarter and $190.6 billion in the same period a year ago. That marks the lowest total since the fourth quarter of 2017 and the second consecutive quarter of contraction. What has alarmed some investors is that companies eased up on share repurchases even as volatility surged in the midst of a heightened trade dispute between Washington and Beijing.”
August 20 – Bloomberg (Noah Buhayar and Prashant Gopal): “Wealthy buyers are pulling back from some of the most expensive housing markets in the U.S… Toll Brothers Inc., the nation’s largest publicly traded luxury-home builder, said… that purchase agreements fell 3% from a year earlier, worse than a decline of less than 1% that was expected by a Bloomberg survey… The company’s orders in California, home to some of the priciest markets in the country, tumbled 36% from a year earlier.”
August 21 – Reuters (Richard Leong): “Mortgage rates are at a three-year low and housing price appreciation has cooled, but many Americans seeking to buy their first home are facing tough times. Why? There just aren’t enough homes for sale. Developers have struggled to build enough new homes, especially at entry-level prices, because of land and labor shortages and rising material costs. The supply tightness has been compounded by retirees ‘aging in place’ and Baby Boomers content to make additions to their current homes, rather than moving, analysts said. ‘The problem for first-time buyers is still supply,’ said Doug Duncan, chief economist at Fannie Mae…”
August 20 – Reuters (Pete Schroeder): “U.S. banking regulators… eased trading regulations for Wall Street banks, giving them one of their biggest wins under the Trump administration but drawing criticism from consumer activists who warned of potential risks to taxpayers. The Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) approved the revamped version of the so-called ‘Volcker Rule,’ which aims to ban lenders that accept U.S. taxpayer-insured deposits from engaging in proprietary trading… The new rule gives banks more leeway in terms of trading activity and simplifies how banks can tell if that trading is permitted by law.”
August 21 – Reuters (Richard Leong): “U.S. homeowners filed the most applications to refinance their current mortgages in over three years as 30-year borrowing costs slipped to their lowest levels since late 2016, the Mortgage Bankers Association said… Overall mortgage activity, however, declined because of a pullback in loan requests for home purchases…”
August 21 – Wall Street Journal (Ben Eisen): “The risky mortgage is making a comeback. More than a decade after home loans triggered the worst financial crisis in a generation, the strict lending requirements put in place during its aftermath are starting to erode. Home buyers with low credit scores or high debt levels as well as those lacking traditional employment are finding it easier to get credit. The loans have been rebranded. Largely gone are the monikers subprime and Alt-A, a type of mortgage that earned the nickname ‘liar loan’… Now they are called non-qualified, or non-QM, because they don’t comply with postcrisis standards set by the Consumer Financial Protection Bureau… Borrowers took out $45 billion of these unconventional loans in 2018, the most in a decade, and origination is on track to rise again in 2019, according to Inside Mortgage Finance…”
August 19 – Bloomberg (Sydney Price): “Apartments in Manhattan’s Financial District aren’t exactly trading like blue chips on the nearby New York Stock Exchange. Whether in converted Art Deco office buildings or new glass towers, units are spending more time on the market and often selling below asking prices. After a spurt of construction aimed at foreign buyers, whose numbers are dwindling, and finance workers, who have seen many of their jobs move uptown, the area is plagued by oversupply. ‘There was so much new development in that neighborhood and I think that many of the people who wanted to buy there did,’ said Steven Gottlieb, a broker at Warburg Realty. ‘I don’t know that there is such a huge a demand for that neighborhood anymore.’”
August 20 – Wall Street Journal (Katherine Clarke): “Once listed for $1 billion, a 157-acre parcel of land in Beverly Hills known as the Mountain has sold at a foreclosure auction to its lender for just $100,000. An entity linked to the Mark Hughes Trust, a trust established to manage the assets of the late Herbalife founder Mark Hughes, won the property… at a trustee’s sale… The $100,000 price was far less than the roughly $200 million in debt the lenders had alleged was outstanding on the property. No other bidders showed up to the auction…”
China Watch:
August 20 – CNBC (Arjun Kharpal): “The U.S. government’s decision to add more of Huawei’s affiliates to a blacklist is ‘unjust’ and ‘politically motivated’ and will not help the country advance its technological leadership, the Chinese telecommunications giant said… U.S. Commerce Secretary Wilbur Ross announced Monday that it was extending by another 90 days a temporary reprieve for Huawei to continue doing business with American companies… However, the Bureau of Industry and Security also added another 46 Huawei affiliates onto the blacklist. ‘These actions violate the basic principles of free market competition. They are in no one’s interests, including U.S. companies,’ Huawei said…”
August 21 – Bloomberg: “China vowed retaliation against a proposed $8 billion U.S. sale of advanced fighter jets to Taiwan, threatening to impose sanctions on American firms participating in such a deal. ‘China will take all necessary measures to defend its own interests, including imposing sanctions on the U.S. companies involved in the arm sales,’ Chinese Foreign Ministry spokesman Geng Shuang said… ‘They constitute severe interference in China’s internal affairs and undermine China’s sovereignty and security interests.’”
August 17 – Wall Street Journal (Grace Zhu): “China’s central bank… unveiled a long-awaited reform to its interest-rate mechanism, a move aimed at reducing financing costs for businesses struggling with a cooling economy. The People’s Bank of China said… that it would replace existing benchmark interest rates with the Loan Prime Rate, which is based on real-world bank lending prices, as a reference for banks in pricing new loans. The move… will better reflect real market lending rates and enable lenders to quickly respond to the central bank’s easing policies.”
August 22 – Bloomberg: “Qinghai Provincial Investment Group Co. has again missed a coupon payment on a dollar bond, a sign that a local government-led debt restructuring has yet to ease finances at the Chinese state-backed aluminum producer. The company has yet to wire funds to pay a coupon due Thursday on a $300 million 2020 note, according to a person familiar with the matter. It is in talks with financial institutions for funds to make a delayed payment…”
August 20 – Bloomberg (Iain Marlow and Sheryl Tian Tong Lee): “For all the tumult Hong Kong has seen since pro-democracy protests erupted in early June, the countdown to a crucial anniversary for China on Oct. 1 makes the next six weeks particularly sensitive. The 70th anniversary of the People’s Republic of China, the name used by Communist Party leaders after they forced Chiang Kai-shek’s regime to retreat to Taiwan, will feature a military parade through Beijing personally inspected by President Xi Jinping. That has raised some fears that Xi will seek to get Hong Kong under control by then to avoid any violence that steals headlines.”
August 18 – Reuters (Stephen Tan): “Protest-battered Hong Kong should also brace itself for an ‘economic typhoon’ caused by the U.S.-China trade war and recent political unrest in the city, Financial Secretary Paul Chan wrote… The warning from the city’s top budget official came after Hong Kong last week slashed its 2019 growth forecast to as little as zero, down from a previous range of 2% to 3%. The government also adopted a $2.4 billion spending package to try to buoy the economy -- a move that Chan likened to the food stockpiles that households gather to gird themselves against a typhoon.”
August 22 – Bloomberg (Cathy Chan): “Most Hong Kong retailers have seen sales drop more than 50% in August, according to the city’s Retail Management Association, as the ongoing political protests take a toll on business and the economy. The association has urged landlords in the city to halve rents for six months to help tenants overcome difficult times, and has called on the government to provide relief measures to retailers…”
August 18 – Bloomberg (Cindy Wang and Chinmei Sung): “As Hong Kong’s unrest continues, some in the city are looking to the less expensive rents, leafy green streets and relative political shelter of neighboring Taiwan as a safe haven. The number of people moving to Taiwan from Hong Kong has risen rapidly -- up 28% over first seven months of 2019 compared to a year earlier -- fueled in recent months by anti-government protests that have swept the former British colony amid fear its autonomy from Beijing is being eroded.”
Central Banking Watch:
August 20 – Financial Times (Brendan Greeley): “The world’s monetary policymakers arrive in Jackson Hole, Wyoming, …for their annual summer gathering with two problems on their minds. One they have known about for a while: despite dropping policy rates — in some cases below zero — central banks in developed economies still cannot meet their inflation targets. The other problem is new: the uncertainty of open-ended trade negotiations is beginning to weigh on growth, even in America. Central bankers are becoming increasingly uncertain about their tools, but may have to use them soon anyway. ‘I would say this is the probably the most interesting environment for central bankers since the crisis,’ says Raghuram Rajan, a former governor of the Reserve Bank of India…”
August 22 – Reuters (Balazs Koranyi): “A combination of measures may be needed to prop up the euro zone economy, as recent indicators paint an even bleaker picture of the outlook, European Central Bank policymakers said at their July meeting, the accounts of the meeting showed… ‘The view was expressed that the various options should be seen as a package; i.e., a combination of instruments with significant complementarities and synergies,’ the ECB said. ‘Experience has showed that a package - such as the combination of rate cuts and asset purchases - was more effective than a sequence of selective actions,’ it said.”
August 22 – Bloomberg (Jana Randow and Kristie Pladson): “Germany’s central bank doesn’t see a need for fiscal stimulus at this time, even though it expects the economy to shrink again this quarter, according to two people familiar with the Bundesbank’s stance.”
Brexit Watch:
August 22 – Reuters (Kanishka Singh, Makini Brice and Doina Chiacu): “French President Emmanuel Macron… told Britain’s Prime Minister Boris Johnson there was not enough time in the month ahead to negotiate a new Brexit Withdrawal Agreement. German Chancellor Angela Merkel on Wednesday challenged Britain to come up with alternatives to the Irish border backstop within 30 days — a challenge which Johnson readily accepted. ‘What Chancellor Merkel said yesterday, and which is in line with the substance of our talks, is that we need visibility in 30 days,’ Macron told reporters… ‘Nobody is going to wait until Oct. 31 without trying to find a good solution.’”
August 20 – Reuters (Guy Faulconbridge and Gabriela Baczynska): “The European Union… rebuffed Prime Minister Boris Johnson’s demand that it reopen the Brexit divorce deal, saying Britain had failed to propose any realistic alternative to an agreed insurance policy for the Irish border… In his opening bid to the EU ahead of meetings with French President Emmanuel Macron and German Chancellor Angela Merkel, Johnson wrote a four-page letter to European Council President Donald Tusk asking to ax the Irish border ‘backstop’.”
August 21 – Reuters (Klaus Lauer): “German Chancellor Angela Merkel said she would discuss how to make sure Britain’s divorce from the European Union is as smooth as possible when she holds talks… with British Prime Minister Boris Johnson. ‘Today I will talk with the British Prime Minister, who is visiting me, about how we can get the most friction-free British exit from the European Union possible as we must fight for our economic growth,’ said Merkel…”
Asia Watch:
August 22 – Reuters (Hyonhee Shin, Josh Smith and Kiyoshi Takenaka): “South Korea said… it will scrap an intelligence-sharing pact with Japan, drawing a swift protest from Tokyo and deepening a decades-old row over history that has hit trade and undercut security cooperation over North Korea.”
August 19 – Bloomberg (Subhadip Sircar): “More than two decades since the Asia debt crisis gripped the region, global consulting firm McKinsey & Co. is warning that signs of a rerun are ‘ominous.’ Increased indebtedness, stresses in repaying borrowing, lender vulnerabilities and shadow banking practices are some of the concerns cited by McKinsey in an August report. Whether building pressures are ‘enough to trigger a new crisis remains to be seen’ but governments and businesses need to monitor potential causes, authors Joydeep Sengupta and Archana Seshadrinathan wrote.”
Europe Watch:
August 20 – Wall Street Journal (Marcus Walker): “Italy’s government collapsed, triggering a power struggle between the country’s right-wing nationalists and rival parties, along with deepening Europe's political upheaval as the Continent struggles with immigration and slowing economic growth. Prime Minister Giuseppe Conte resigned on Tuesday after Matteo Salvini, a rising force from Europe’s insurgent far-right, withdrew his support for the government. Mr. Salvini, whose anti-immigrant League is leading in public-opinion polls, is pushing for snap elections. Mr. Salvini’s opponents maneuvered to avoid a fresh vote, with some leaders of the antiestablishment 5 Star Movement, which has been governing alongside the League, saying they were open to exploring a deal with the center-left Democratic Party to form a new coalition.”
August 20 – Reuters (Giselda Vagnoni): “The leader of Italy’s far-right League party, Matteo Salvini, said… that a budget worth 50 billion euros ($55bn) will be needed for 2020 to bring about a ‘shock’ fiscal stimulus. Salvini pulled the plug on the League’s coalition government with the anti-establishment 5-Star Movement earlier this month, starting a potential countdown to elections which could complicate the nation’s preparations for the 2020 budget.”
August 18 – Bloomberg (John Ainger and Dirk Gojny): “Less than a decade ago, investors could barely be compensated enough to hold the bonds of Spain and Portugal for fear the nations could be severed from the European Union. Now, they are a hair’s breadth away from having to pay for the privilege. An unprecedented surge in sovereign debt across the world has driven 10-year yields in the Iberian nations to record lows just shy of 0%. With about $16 trillion of global debt now paying negative rates, investors are snapping up positive yields wherever they can find them -- even if that means getting into some of the euro area’s riskier markets… ‘I am afraid all curves are going to zero and all rates are going to zero,’ said James Athey, senior investment manager at Aberdeen Standard Investments... ‘It would be an incredibly concerning signal.’”
August 18 – Reuters (Michael Nienaber): “Germany has the fiscal strength to counter any future economic crisis ‘with full force’, Finance Minister Olaf Scholz said…, suggesting Berlin could make available up to 50 billion euros ($55bn) of extra spending.”
August 21 – Bloomberg (Piotr Skolimowski): “Germany needs a law that bans banks from passing negative interest rates on to retail clients, Bavaria’s Prime Minister Markus Soeder told Bild newspaper… The call comes just weeks before a European Central Bank meeting at which policy makers are expected to cut their deposit rate further below zero, extending a period of negative rates that has already lasted for more than half a decade. Banks in countries including Germany and France have complained the policy is eroding profitability, but the ECB argues rates need to stay low to boost inflation and support the flagging economy.”
EM Watch:
August 21 – Bloomberg (Rahul Satija and Suvashree Ghosh): “India is stamping out shadow financiers at the fastest pace in recent years, in the latest blow to a beleaguered sector battling a prolonged funding crunch due to rising wariness toward it in the nation’s credit markets. The central bank canceled registrations of 1,851 non-bank finance companies in the year ended March 31, more than 8 times those in the previous year… The number of lenders dropped to about 9,700, the lowest in at least a decade, as a result. Firms may be failing to secure the minimum funds needed to operate due to the cash crunch.”
Global Bubble Watch:
August 21 – Financial Times (Tommy Stubbington): “The cost of servicing the debt of developed countries has sunk to its lowest level for more than four decades, piling pressure on governments to borrow and spend more in order to jump-start the flagging global economy. Advanced economies will spend just 1.77% of their combined GDP on debt interest this year according to the OECD — the lowest since 1975, and down from a peak of 3.9% in the mid-1990s. This sharp decline comes despite the huge debt piles accumulated by many countries since the financial crisis. The debt-to-GDP ratio across advanced economies has risen from 45% in 2001 to 76% this year, according to the IMF.”
Japan Watch:
August 18 – Reuters (Daniel Leussink and Tetsushi Kajimoto): “Japan’s exports slipped for an eighth month in July, while manufacturers’ confidence turned negative for the first time in over six years as China-bound sales slumped again in a fresh sign the Sino-U.S. trade war could tip the economy into recession… Exports in July fell 1.6% from a year earlier…, dragged down by China-bound shipments of car parts and semiconductor production equipment.”
Fixed-Income Bubble Watch:
August 20 – Wall Street Journal (Daniel Kruger and Sam Goldfarb): “Debt investors are shying away from junk bonds with lower credit ratings, as concerns about the economic outlook ripple through financial markets. The amount of extra yield, or spread, that investors demand to hold triple-C rated bonds—among the lowest-rated on the scale—has increased to around 8 percentage points over higher-rated double-B bonds, according to ICE BofAML data. That is the widest since November 2016. For companies with investment-grade bond ratings, sales of new debt have continued apace throughout the sharp summer rally in U.S. Treasury prices… But issuance of high-yield debt has begun to slow, analysts said, in what could be a harbinger of additional pain for a sector widely perceived to be in constant need of financing and vulnerable to a downturn.”
August 19 – Bloomberg (Jeannine Amodeo and Davide Scigliuzzo): “Three leveraged loan sales languishing in the U.S. market for weeks have been pulled amid a flight to quality from investors worried about relentless fund outflows, rising trade tensions, volatile oil prices and a potential recession. The three deals in question -- for Golden Hippo, Glass Mountain Pipeline Holdings LLC and Chief Power Finance LLC -- were launched back in June and early July and commitment deadlines ranged from one to six weeks ago… All three deals, which total around $700 million, have been pulled…”
Leveraged Speculation Watch:
August 21 – Bloomberg (Joanna Ossinger): “Equity hedge funds are enjoying their strongest performance since 2009 -- with the S&P 500 index up 16% this year -- but Goldman Sachs Group Inc. warns that crowding is a risk. Funds have benefited from both a rising stock market and successful stock selection, strategists including Ben Snider and David Kostin wrote… They’ve also concentrated their holdings into a reduced number of industries, such as health care, and into single names, particularly Amazon.com. Inc. When rallies peak, too much professional money can try to get out of the same stocks simultaneously and exaggerate declines.”
August 22 – Financial Times (Lindsay Fortado): “Investors pulled around $56bn from hedge funds in the first seven months of this year, the worst start for fundraising since 2016 despite the best stretch of performance in a decade for the struggling industry. Only 37% of hedge funds have had net inflows so far this year, according to… eVestment… Redemptions totalled $8.4bn in July alone, though the rebound in returns meant the industry’s total assets under management ticked up to $3.3tn.”
August 22 – Bloomberg (Oliver Telling): “Hedge funds have already bled 50% more money this year than in all of 2018, as the industry struggles to win back investors fed up with high fees and poor performance. Investors yanked $8.4 billion in July, bringing net outflows this year to $55.9 billion, according to… eVestment… That’s up from $37.2 billion for all of last year.”
Geopolitical Watch:
August 19 – Associated Press (Kelvin Chan and Yanan Wang): “China lashed out at Taiwan… over its offer of political asylum to participants in Hong Kong's pro-democracy protest movement, a day after hundreds of thousands of people marched peacefully in the latest massive demonstration in the Chinese territory. The government of Taiwan, a self-ruled island that China considers its own territory, strongly supports the protests, and Hong Kong students in Taiwan held events over the weekend expressing their backing. Taiwan's president made the asylum offer last month… Taiwan lacks a formal legal mechanism for assessing and granting asylum requests, although it has granted residency to several vocal opponents of the Chinese government. On Monday, Ma Xiaoguang, spokesman for the Chinese Cabinet's Taiwan Affairs Office, said Taiwan's offer would ‘cover up the crimes of a small group of violent militants’ and encourage their ‘audacity in harming Hong Kong and turn Taiwan into a ‘heaven for ducking the law.’”
August 20 – Reuters (Tim Kelly): “The commandant of the U.S. Marine Corps said… any crack in alliances in Asia that helped counter threats from North Korea and China were a worry as a spat between Japan and South Korea threatened to spill over into intelligence sharing. ‘We should all be concerned when any part of an alliance has some challenges,’ General David Berger said… ‘Each country has information that the other will need. I am optimistic it will get worked out.’”
August 18 – Bloomberg (Cindy Wang and Chinmei Sung): “A decade of ‘delayed and unpredictable funding’ for the U.S. military’s budget has seen America lose its primacy in the Western Pacific, giving the edge to an increasingly sophisticated China, a Sydney-based think tank warned. China’s ‘growing arsenal of accurate long-range missiles poses a major threat to almost all American, allied and partner bases, airstrips, ports and military installations in the Western Pacific,’ the University of Sydney’s United States Studies Centre said in a report… ‘As these facilities could be rendered useless by precision strikes in the opening hours of a conflict, the PLA missile threat challenges America’s ability to freely operate its forces from forward locations throughout the region,’ it said…”
August 20 – Reuters (Chris Gallagher, Linda Sieg, and Josh Smith): “Japan has upgraded its estimate of North Korea’s nuclear weapons capability in an upcoming annual Defence White Paper, saying it seems Pyongyang has achieved the miniaturization of warheads, the Yomiuri newspaper said… That compares with the assessment in last year’s report in which the government said it was possible North Korea had achieved miniaturization… The report… will maintain the assessment that North Korea’s military activities pose a ‘serious and imminent threat’, the Yomiuri said.”
August 17 – Reuters (Fayaz Bukhari): “Indian authorities reimposed restrictions on movement in parts of Kashmir’s biggest city, Srinagar, on Sunday after overnight clashes between residents and police in which dozens were injured, two senior officials and eyewitnesses said.”
August 19 – Wall Street Journal (Bill Spindle): “The Ladakh region of northern India is one of the world’s highest, driest inhabited places. For centuries, meltwater from winter snows in the Himalayan mountains sustained the tiny villages dotting this remote land. Now, like many other places in India, parts of Ladakh are running short of water… Water crises are unfolding all across India, a product of population growth, modernization, climate change, mismanagement and the breakdown of traditional systems of distributing resources. India is running out of water in more places, in more different ways, putting more people at risk, than perhaps any other country. Nearly all of India’s biggest cities, including New Delhi, the nation’s capital, are rapidly depleting their groundwater reserves…”
