The S&P500 gained 1.0% (up 20.0% y-t-d), and the Dow rose 1.6% (up 16.7%). The Utilities were unchanged (up 18.8%). The Banks surged 7.8% (up 18.8%), and the Broker/Dealers jumped 5.2% (up 17.0%). The Transports rose 5.0% (up 17.9%). The S&P 400 Midcaps gained 2.7% (up 18.0%), and the small cap Russell 2000 surged 4.8% (up 17.0%). The Nasdaq100 added 0.5% (up 24.7%). The Semiconductors gained 2.4% (up 30.0%). The Biotechs jumped 3.7% (up 5.0%). With bullion declining $18, the HUI gold index dropped 5.9% (up 27.1%).
Three-month Treasury bill rates ended the week at 1.915%. Two-year government yields jumped 26 bps to 1.80% (down 69bps y-t-d). Five-year T-note yields surged 32 bps to 1.75% (down 76bps). Ten-year Treasury yields rose 34 bps to 1.90% (down 79bps). Long bond yields jumped 35 bps to 2.37% (down 64bps). Benchmark Fannie Mae MBS yields surged 46 bps to 2.83% (down 66bps).
Greek 10-year yields slipped a basis point to 1.56% (down 283bps y-t-d). Ten-year Portuguese yields jumped 13 bps to 0.32% (down 140bps). Italian 10-year yields were little changed at 0.88% (down 186bps). Spain's 10-year yields rose 13 bps to 0.30% (down 111bps). German bund yields jumped 19 bps to negative 0.45% (down 69bps). French yields rose 17 bps to negative 0.17% (down 88bps). The French to German 10-year bond spread narrowed two to 28 bps. U.K. 10-year gilt yields surged 26 bps to 0.76% (down 52bps). U.K.'s FTSE equities index gained 1.2% (up 9.5% y-t-d).
Japan's Nikkei Equities Index jumped 3.7% (up 9.9% y-t-d). Japanese 10-year "JGB" yields jumped eight bps to negative 0.15% (down 16bps y-t-d). France's CAC40 gained 0.9% (up 19.5%). The German DAX equities index advanced 2.3% (up 18.1%). Spain's IBEX 35 equities index rose 1.6% (up 7.0%). Italy's FTSE MIB index increased 1.1% (up 21.1%). EM equities were mostly higher. Brazil's Bovespa index added 0.5% (up 13.7%), and Mexico's Bolsa increased 0.3% (up 2.9%). South Korea's Kospi index rose 2.0% (up 0.4%). India's Sensex equities index gained 1.1% (up 3.7%). China's Shanghai Exchange increased 1.1% (up 21.5%). Turkey's Borsa Istanbul National 100 index surged 4.6% (up 13.4%). Russia's MICEX equities index slipped 0.2% (up 17.8%).
Investment-grade bond funds saw inflows of $5.559 billion, and junk bond funds posted inflows of $1.865 billion (from Lipper).
Investment-grade bond funds saw inflows of $5.559 billion, and junk bond funds posted inflows of $1.865 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates gained seven bps to 3.56% (down 104bps y-o-y). Fifteen-year rates rose nine bps to 3.09% (down 97bps). Five-year hybrid ARM rates increased six bps to 3.36% (down 57bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up 11 bps to 4.32% (down 35bps).
Federal Reserve Credit last week increased $4.6bn to $3.727 TN. Over the past year, Fed Credit contracted $444bn, or 10.6%. Fed Credit inflated $916 billion, or 33%, over the past 357 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt recovered $2.1bn last week to $3.453 TN. "Custody holdings" gained $31.3bn y-o-y, or 0.9%.
M2 (narrow) "money" supply jumped $40.6bn last week to $14.999 TN. "Narrow money" gained $762bn, or 5.4%, over the past year. For the week, Currency increased $1.5bn. Total Checkable Deposits surged $46.9bn, while Savings Deposits declined $11.7bn. Small Time Deposits slipped $1.0bn. Retail Money Funds rose $4.8bn.
Total money market fund assets rose $16.8bn to $3.397 TN. Money Funds gained $534bn y-o-y, or 18.6%.
Total Commercial Paper declined $8.1bn to $1.116 TN. CP was up $49bn y-o-y, or 4.6%.
Currency Watch:
The U.S. dollar index was little changed at 98.257 (up 2.2% y-t-d). For the week on the upside, the British pound increased 1.8%, the South African rand 1.6%, the Mexican peso 0.7%, the Singapore dollar 0.6%, the South Korean won 0.5%, the Australian dollar 0.5%, the euro 0.4%, and the Swedish krona 0.4%. On the downside, the Japanese yen declined 1.1%, the Canadian dollar 0.9%, the New Zealand dollar 0.7%, the Brazilian real 0.7%, the Swiss franc 0.3% and the Norwegian krone 0.1%. The Chinese renminbi increased 0.52% versus the dollar this week (down 2.84% y-t-d).
Commodities Watch:
September 8 – Bloomberg (Ranjeetha Pakiam): “China has added almost 100 tons of gold to its reserves since it resumed buying in December, with the consistent run of accumulation coming amid a rally in prices and the drag of the trade war with Washington. The People’s Bank of China raised bullion holdings to 62.45 million ounces in August from 62.26 million a month earlier… In tonnage terms, August’s inflow was 5.91 tons, following the addition of about 94 tons in the previous eight months.”
September 8 – CNBC (Huileng Tan): “Veteran investor Mark Mobius is bullish on gold as central banks around the world cut interest rates. ‘Physical gold is the way to go, in my view, because of the incredible increase in money supply,’ said Mobius… ‘All the central banks are trying to get interest rates down, they are pumping money into the system. Then, you have all of the cryptocurrencies coming in, so nobody really knows how much currency is out there,’ he told CNBC’s ‘Street Signs’…”
The Bloomberg Commodities Index declined 1.3% this week (up 17.3% y-t-d). Spot Gold retreated 1.2% to $1,489 (up 16.1%). Silver fell 3.0% to $17.569 (up 13%). WTI crude dropped $1.67 to $54.85 (up 21%). Gasoline fell 1.3% (up 17%), while Natural Gas surged 4.7% (down 11%). Copper rallied 2.5% (up 3%). Wheat surged 4.3% (down 4%). Corn jumped 3.7% (down 2%).
Market Instability Watch:
September 13 – Financial Times (Peter Wells): “Treasuries chalked up their worst week — and small-caps their best — since 2016 as investors extended a sweeping rotation away from the momentum plays and bonds that had been favoured over summer. The yield on the benchmark 10-year note surged 34 bps since last Friday to a six-week high of 1.90%, the largest weekly rise since mid-November 2016. An iShares exchange traded fund tracking US Treasuries fell 2.1% over the past five sessions, putting it its worst weekly performance also since that same November week nearly three years ago. The yield on the 10-year Treasury rose for an eighth consecutive session, the longest streak since March 2017.”
September 13 – Bloomberg (Vivien Lou Chen): “Treasuries extended their September tumble, sending the benchmark 10-year yield to its highest level since early August… Bonds fell after August retail sales and the September University of Michigan consumer sentiment index increased more than forecast, buoying confidence in the economic expansion. Yields across the curve rose, with the 10-year climbing more than 12 basis points to 1.90%, up from a three-year low of 1.43% early this month. The spread between 2-year and 10-year yields, considered a recession indicator when it inverts, as it did in August for the first time since 2007, widened back above 9 bps.”
September 11 – Bloomberg (John Gittelsohn): “The balance of power has shifted in the $8 trillion stock-fund industry. Assets in mutual funds and exchange-traded funds tracking U.S. equity indexes surpassed those run by stock-pickers for the first time last month, according to… Morningstar Inc. August fund flows helped lift assets in index-tracking U.S. equity funds to $4.271 trillion, compared with $4.246 trillion run by stock-pickers… Investors added $88.9 billion to passive U.S. stock funds while pulling $124.1 billion from active managers this year through August…”
September 11 – Bloomberg (John Gittelsohn): “It’s official: inexpensive index funds and ETFs have finally eclipsed old-fashioned stock pickers. Passive investing styles have been gaining ground on actively managed funds for decades. But in August the investment industry reached one of the biggest milestones in its modern history, as assets in U.S. index-based equity mutual funds and ETFs topped those in active stock funds for the first time. Stock picking isn’t dead. But the development marks the official end of money managers’ position as the guiding force in the American stock market -- and the seemingly inexorable rise of low-cost index-driven investing. If, as expected, the shift keeps gathering momentum, the implications will be enormous for the industry pros, financial markets and ordinary investors everywhere.”
September 10 – Bloomberg (Luke Kawa): “Go long the dollar, Treasuries and defensive stocks. Sell metals and the pound. It was an investing playbook that worked virtually all year -- until suddenly it didn’t. For a second straight day, 2019’s biggest winners across assets are getting hammered as investors reassessed expectations for global economic growth. The Treasury market set the tone, with a 10-month rally grinding to a halt Friday after data on the American consumer and labor market signaled a recession is far from imminent.”
September 10 – Wall Street Journal (Ryan Dezember): “A popular wager in the energy markets is backfiring. Hedge funds and other money managers in August built up a big bet that natural gas prices would decline—their most bearish position in the futures market in over a decade—only to have prices shoot up 25%. Prices usually weaken when summer subsides since there is less demand to generate electricity for air conditioners.”
September 11 – Reuters (Eliana Raszewski): “Argentina’s central bank… announced further currency controls in an effort to tame speculation and stem a spiraling debt crisis in Latin America’s third largest economy. The new measure requires anyone purchasing foreign currency to present a sworn oath promising to wait at least five days before using it to purchase bonds.”
September 10 – Wall Street Journal (Ira Iosebashvili): “Currencies around the world are tumbling to multiyear lows, bruising investors’ portfolios and fanning the flames of a global trade war. The Chinese yuan recently hit its lowest level in more than a decade against the dollar, the euro dropped to a fresh two-year low last week and the British pound is at depths it hasn’t consistently plumbed since the 1980s. Some emerging-market currencies such as the Colombian peso have fallen to their lowest prices on record against the dollar, while Argentina has recently introduced capital controls after its peso plunged in August. Out of 41 currencies tracked by The Wall Street Journal, only nine are up against the dollar in 2019. ‘People are becoming more concerned about currencies because currencies are becoming more dangerous,’ said Kit Juckes, global strategist at Société Générale.”
September 10 – Financial Times (Steve Johnson): “Rarely has the choice facing the emerging market investor been so stark. Bonds are so richly priced that around 30% of the entire universe of euro-denominated EM debt, with a face value of about €115bn, now trades with a negative yield… That has never happened before. What is more, not all of this negatively yielding debt consists of short-maturity bonds issued by the EU sovereigns of eastern and central Europe, which are usually considered ‘safe’ by fixed income investors. The bundle includes Polish government debt at a maturity as far out as 2026, along with bonds from Indonesia, China and South Korea.”
September 11 – Reuters (Richard Leong): “U.S. money market fund assets have hit their highest level since October 2009, as investors piled more cash into these low-risk products despite a lessening of concerns about U.S.-China trade tensions… Assets of money funds, which are seen as being nearly as safe as bank accounts, climbed by $24.57 billion to $3.355 trillion in the week ended Sept. 10…”
Trump Administration Watch:
September 12 – CNBC (Jacob Pramuk): “President Donald Trump signaled… that he would consider an interim trade deal with China, even though he would not prefer it. The president told reporters he would like to ink a full agreement with the world’s second largest economy. However, he left the door open to striking a limited deal with Beijing. ‘If we’re going to do the deal, let’s get it done,’ he told reporters… ‘A lot of people are talking about it, I see a lot of analysts are saying an interim deal — meaning we’ll do pieces of it, the easy ones first. But there’s no easy or hard. There’s a deal or there’s not a deal. But it’s something we would consider, I guess.’”
September 11 – CNBC (Riya Bhattacharjee and Chris Eudaily): “President Donald Trump… tweeted that he will delay increasing tariffs on $250 billion worth of Chinese goods from Oct. 1 to Oct. 15 as a ‘gesture of good will’ to China. Trump said the postponement came ‘at the request of the Vice Premier of China, Liu He, and due to the fact that the People’s Republic of China will be celebrating their 70th Anniversary.’ The tariffs were set to increase to 30% from 25% on the goods. He is set to be in Washington for talks in early October.”
September 11 – CNBC (Jeff Cox and John Melloy): “President Donald Trump… continued his verbal assault on the Federal Reserve, which he blames for slowing the economy, tweeting that the central bank should cut interest rates to zero or even set negative interest rates. The president also called Fed officials ‘boneheads’ in the tweet. ‘The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term,’ he said… The president also made a new suggestion not seen in some of his past attacks on the Fed, saying that the country should refinance its debt load. The U.S. has $22.5 trillion in debt, $16.7 trillion of which is held by the public… That debt load has grown $2.6 trillion, or 13% under Trump, due in part to the 2017 tax cut that the president shepherded through Congress. Taxpayers have shelled out $538.6 billion in interest costs in the 2019 fiscal year, easily a record. The idea for ‘refinancing’ federal debt is without any modern precedent.”
September 11 – Bloomberg (Christopher Condon): “President Donald Trump triggered a swift and skeptical reaction with his demand… for the Federal Reserve to lower interest rates ‘to zero, or less,’ as part of a plan to reduce the financing costs of U.S. government debt. ‘This is a recipe for disaster,’ said Roberto Perli, a former Fed economist and partner at Cornerstone Macro. ‘If a central bank starts financing debt spending without constraints, interest rates will end up being anything but moderate. Just look at Zimbabwe.’ … “The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt,’ Trump tweeted. ‘Interest cost could be brought way down, while at the same time substantially lengthening the term.’”
September 6 – Associated Press (Kevin Freking): “White House economic adviser Larry Kudlow compared trade talks with China… to the U.S. standoff with Russia during the Cold War. In other words, negotiations could continue for a long time… Kudlow discounted the notion that next year’s election increases the urgency for President Donald Trump to conclude the trade war. ‘The stakes are so high, we have to get it right, and if that takes a decade, so be it,’ he said. Kudlow emphasized that it took the United States decades to get the results it wanted with Russia. He noted that he worked in the Reagan administration: ‘I remember President Reagan waging a similar fight against the Soviet Union.’”
September 9 – Bloomberg (Mike Dorning): “The U.S. Agriculture Department’s top trade official called Chinese President Xi Jinping a ‘communist zealot,’ as he warned farmers the Asian leader is a tough adversary in negotiations. Ted McKinney, the department’s undersecretary for trade, offered the provocative characterization of the Chinese leader… at a sensitive time in U.S.-China relations… ‘Let me just tell you what: Mr. Xi Jinping is a communist zealot. He sees himself very much in the spirit of Mao Zedong,’ McKinney said… to 380 farmers the group gathered in Washington to lobby the government.”
September 13 – Reuters (Richard Cowan): “The Trump administration plans to unveil a tax cut plan in mid-2020, a top White House adviser said…, saying it would be targeted to giving significant relief to the middle class. …White House economic adviser Larry Kudlow offered no details on what he has termed “Tax Cuts 2.0,” a plan the administration intends to put forward as President Donald Trump pursues his bid for a second White House term. ‘We will gather together the best ideas from the Hill (Congress), the administration and outside folks to provide a significant new round of middle class tax relief,’ Kudlow said, adding, ‘This is not a recession measure at all.’”
September 10 – Financial Times (Robert Armstrong): “Trump administration officials plans’ for pushing Fannie Mae and Freddie Mac towards private ownership… faced sharp criticism from Democratic senators, who argued the reforms would make mortgages more costly. Steven Mnuchin, the US Treasury secretary; Mark Calabria, director of the Federal Housing Finance Agency; and Ben Carson, housing and urban development secretary, said the two government-backed mortgage guarantors were more leveraged than before the crisis and that Congress needed to act… ‘When I look at a $3tn institution levered up 1,000 to one, it keeps me up at night,’ Mr Calabria said during a hearing before the Senate banking committee.”
September 10 – Reuters (Pete Schroeder): “The Trump administration will pursue the reform of mortgage giants Fannie Mae and Freddie Mac, the guarantors of over half the nation’s mortgages, if Congress fails to act, officials told Congress… In testimony before the U.S. Senate Banking Committee, U.S. Treasury Secretary Steven Mnuchin, Housing and Urban Development Secretary Ben Carson, and Federal Housing Finance Agency Director Mark Calabria defended a plan to release Fannie and Freddie from government control more than a decade after they were bailed out during the 2008 financial crisis… ‘If we do nothing, this is going to end very badly,’ said Calabria, who warned Fannie and Freddie are undercapitalized and overly reliant on government backing to weather any downturn.”
September 12 – Reuters (Andrea Shalal): “U.S. Treasury Secretary Steven Mnuchin… said the United States will issue 50-year bonds if there is ‘proper demand,’ a moved aimed at ‘derisking’ the government’s $22 trillion of debt and locking in low interest rates.”
September 13 – Bloomberg (Erik Wasson and Christopher Condon): “White House Economic Adviser Larry Kudlow criticized Europe’s low and negative interest rates, contradicting his boss, President Donald Trump, who earlier in the week tweeted that the U.S. Federal Reserve should pursue a similar approach by bringing down rates ‘to ZERO, or less.’ Kudlow told reporters… ‘The Europe story -- all this super easy money, zero and negative rates. You know, if it was going to work it would have worked. And it’s not worked.’”
Federal Reserve Watch:
September 11 – Reuters (Lindsay Dunsmuir, Ann Saphir, Jonnelle Marte, Howard Schneider and Jason Lange): “U.S. President Donald Trump’s push for low interest rates reached a new pitch…, when he demanded the Federal Reserve take the extraordinary step of sending them below zero. Outside of Washington, D.C., Fed policymakers often face the opposite complaint. Interest rates are too low already, Americans tell Fed officials when they speak at Rotary Clubs and chambers of commerce around the country. Savers, and particularly those near retirement age, are not getting enough return from their savings accounts or fixed investments. The negative rates Trump is pushing, already in place in some parts of Europe and in Japan, would effectively charge people who save their money, and reward those able and willing to borrow. They were so unpopular in Japan that they became a hot topic on talk shows and tabloids, which highlighted consumers buying safes to stash their cash at home instead of with banks.”
September 6 – Financial Times (Brendan Greeley): “In Zurich on Friday, Jay Powell, chairman of the Federal Reserve, repeated his mantra from this summer that the Fed will continue to ‘act as appropriate to sustain the expansion.’ …But after that, he got technical. Talking about the challenges of easing in a potential downturn when policy rates are already close to zero — something he has called the ‘pre-eminent monetary policy challenge of our time’ — he offered one specific strategy: make-up inflation. When a central bank undershoots its inflation target, Mr Powell explained, it can promise to the public that it will overshoot in the future. As it makes up for lost inflation, the bank would also be making up for lost growth. ‘If the public understands and acts up on that, we limit the damage from the recession,’ he said. ‘It’s a great idea.’”
September 10 – Bloomberg (Sridhar Natarajan): “James Gorman has a note of caution for the Federal Reserve in the midst of its interest-rate reductions. ‘The problem with cutting is it’s one of the few tools you’ve got,’ Morgan Stanley’s chief executive officer said…, adding that he supports the reductions made so far. ‘So if you give it away too easily, what do you have if we have a real problem?’”
U.S. Bubble Watch:
September 12 – Associated Press (Martin Crutsinger): “The U.S. government’s budget deficit increased by $169 billion to $1.07 trillion in the first 11 months of this budget year as spending grew faster than tax collections. The… deficit with just one month left in the budget year is up 18.8% over the same period a year ago. Budget experts project a surplus for September, which would push the total 2019 deficit down slightly below the $1 trillion mark. The Congressional Budget Office is forecasting a deficit this year of $960 billion, compared to a 2018 deficit of $779 billion.”
September 12 – Reuters (Lindsay Dunsmuir): “The U.S. government posted a $200 billion budget deficit in August, bringing the fiscal year-to-date deficit past $1 trillion… Federal spending in August was $428 billion, down 1% from the same month in 2018, while receipts were $228 billion, an increase of 4% compared with August 2018. The deficit for the fiscal year to date was $1.067 trillion, compared with $898 billion in the comparable period the year earlier.”
September 10 – Wall Street Journal (Janet Adamy and Paul Overberg): “American incomes remained essentially flat in 2018 after three straight years of growth, according to Census Bureau figures… Median household income was $63,179 in 2018, an uptick of 0.9% that census officials said isn’t statistically significant from the prior year based on figures adjusted for inflation. The poverty rate in 2018 was 11.8%, a decrease of a half percentage point from 2017, marking the fourth consecutive annual decline in the national poverty rate. It was the first time the official poverty rate fell significantly below its level at the start of the recession in 2007.”
September 12 – Reuters (Lucia Mutikani): “U.S. underlying consumer prices increased solidly in August, leading to the largest annual gain in a year, but rising inflation is unlikely to deter the Federal Reserve from cutting interest rates again next week… The… consumer price index excluding the volatile food and energy components gained 0.3% for a third straight month. The so-called core CPI was boosted by a surge in healthcare costs and increases in prices for airline tickets, recreation and used cars and trucks. In the 12 months through August, the core CPI increased 2.4%, the most since July 2018, after climbing 2.2% in July.”
September 13 – Wall Street Journal (Harriet Torry): “Spending on vehicles drove strong retail sales in August, suggesting American shoppers continue to support the economy… Retail sales… climbed a seasonally adjusted 0.4% in August from a month earlier… The robust report beat economists’ expectations and came on the heels of stronger spending in July than initially estimated, a 0.8% rise. The data provide reassurance that household spending remains an economic bulwark against signs of a global slowdown, though perhaps not enough to prevent some softening in U.S. growth in the third quarter.”
September 10 – Bloomberg (William Edwards): “Optimism among U.S. small-business owners fell in August to the lowest level in five months, with the outlook for the economy and sales slumping amid escalating trade tensions and recession fears. The decline of 1.6 points to 103.1 in the National Federation of Independent Business’s index resulted from weaker expectations for businesses and sales…”
September 11 – CNBC (Diana Olick): “Total mortgage application volume rose 2% last week compared with the previous week… Volume was 69% higher than the same week one year ago… Mortgage applications to purchase a home increased 5% for the week and were 9% higher than the same week one year ago.”
September 13 – CNBC (Diana Olick): “The average rate on the 30-year fixed is now 20 bps higher than it was on Monday and 36 bps higher than its last low on Sept. 4… That is the biggest short-term jump since the week following the election of President Donald Trump… ‘The big risk here is that the overall rate rally — the one that began in November 2018 -- has run its course,’ said Matthew Graham, chief operating officer at Mortgage News Daily.”
September 10 – Reuters (David Randall): “Corporate America appears to be rushing to get the most out of the decade-long bull market in stocks and bonds before a possible recession and election-year stock market volatility slam the IPO and credit windows shut. Approximately 70 companies have registered with the U.S. Securities and Exchange Commission to go public…, while $72 billion in investment-grade corporate debt – a figure nearly as large as the total issuance in August - was issued last week, according to… Dealogic.”
September 10 – Associated Press (Matt O’Brien): “Big tech companies have long rebuffed attempts by the U.S. federal government to scrutinize or scale back their market power. Now they face a scrappy new coalition as well: prosecutors from nearly all 50 states. In a rare show of bipartisan force, attorneys general from 48 states along with Puerto Rico and the District of Columbia are investigating whether Google’s huge online search and advertising business is engaging in monopolistic behavior. The Texas-led antitrust investigation of Google… follows a separate multistate investigation of Facebook’s market dominance that was revealed Friday.”
September 10 – Reuters (Lindsay Dunsmuir and Howard Schneider): “The share of Americans without health insurance rose for the first time in a decade last year and U.S. household income hardly budged, according to a government report… that laid bare issues that could be central to the U.S. presidential election next year. …About 27.5 million residents, or 8.5% of people, did not have health insurance in 2018, an increase of almost 2 million from the year before when 7.9% of people lacked coverage, the Census Bureau said.”
September 9 – Bloomberg (Katherine Chiglinsky, Molly Smith, and David Caleb Mutua): “U.S. corporate pensions felt the pain of low bond yields in August. The retirement funds for U.S. corporations had just 82% of the money they expect to need over time for pensioners as of August, down four percentage points from July, according to… consulting firm Mercer… The steep drop stemmed from long-term bond yields plunging to record lows, which effectively increases the current value of companies’ future obligations… When companies have more than about 80% of the funding they expect to need for pensions, they tend to cut their investments in riskier assets like stocks and increase safer holdings like bonds to lock in gains and reduce risk.”
September 11 – New York Times (Conor Dougherty and Luis Ferré-Sadurní): “California lawmakers approved a statewide rent cap… covering millions of tenants, the biggest step yet in a surge of initiatives to address an affordable-housing crunch nationwide. The bill limits annual rent increases to 5% after inflation and offers new barriers to eviction… Gov. Gavin Newsom, a Democrat who has made tenant protection a priority in his first year in office, led negotiations to strengthen the legislation… The measure, affecting an estimated eight million residents of rental homes and apartments, was heavily pushed by tenants’ groups. In an indication of how dire housing problems have become, it also garnered the support of the California Business Roundtable…”
China Watch:
September 12 – Wall Street Journal (Lingling Wei, Chao Deng and Josh Zumbrun): “China is looking to narrow the scope of its negotiations with the U.S. to only trade matters, seeking to put thornier national-security issues on a separate track in a bid to break deadlocked talks with the U.S. Chinese officials hope such an approach would help both sides resolve some immediate issues and offer a path out of the impasse… The move is the latest in a series of steps officials in Washington and Beijing are taking to ease trade tensions ahead of high-level negotiations in October.”
September 13 – Reuters (Andrew Galbraith): “China will exempt some agricultural products from additional tariffs on U.S. goods, including pork and soybeans, China’s official Xinhua News Agency…, in the latest sign of easing Sino-U.S. tensions before a new round of talks aimed at curbing a bruising trade war.”
September 11 – Reuters: “China’s banks extended more new yuan loans in August as policymakers ratcheted up support for the slowing economy, and further policy easing is expected in the coming weeks as the Sino-U.S. trade war takes a bigger toll on the economy. Chinese regulators have been trying to boost bank lending and lower financing costs for more than a year, especially for smaller and private companies… Chinese banks extended 1.21 trillion yuan ($170bn) in new loans in August, up from July and exceeding analyst expectations… Analysts… had predicted new yuan loans would rise to 1.2 trillion yuan in August, up from 1.06 trillion yuan the previous month and compared with 1.28 trillion yuan a year earlier. Household loans, mostly mortgages, rose to 653.8 billion yuan in August from 511.2 billion yuan in July, while corporate loans climbed to 651.3 billion yuan from 297.4 billion yuan… Outstanding yuan loans grew 12.4% from a year earlier - in line with expectations but slower than July’s 12.6%... Growth of outstanding total social financing (TSF), a broad measure of credit and liquidity in the economy, rose 10.7% in August from a year earlier…”
September 9 – Kyodo: “Chinese President Xi Jinping voiced distrust of U.S. President Donald Trump during his meeting with the Japanese Prime Minister Shinzo Abe in June amid the U.S.-China trade dispute, a source close to the matter said… ‘I can't believe what President Trump says’ concerning trade negotiations, Xi was quoted as telling Abe during a meeting on the fringe of the Group of 20 summit in Osaka. Although Abe told Xi that Trump trusts the Chinese president, Xi continued to air his grievances about his U.S. counterpart, the diplomatic source told Kyodo News.”
September 8 – Associated Press (Joe McDonald): “China’s trade with the United States is falling as the two sides prepare for negotiations with no signs of progress toward ending a tariff war… Imports of American goods tumbled 22% in August from a year earlier to $10.3 billion… Exports to the United States, China’s biggest market, sank 16% to $44.4 billion.”
September 8 – Wall Street Journal (Liyan Qi): “China’s imports fell for a fourth straight month in August as a drop-off in exports to the U.S. steepened, the most recent economic warning signs during a prolonged trade spat with the U.S. that has Beijing turning toward stimulus measures. Chinese imports of everything from raw materials to high-tech products dropped 5.6% in August compared with a year earlier…”
September 9 – Bloomberg (Yawen Chen and Se Young Lee): “China’s factory-gate prices shrank at the sharpest pace in three years in August, falling deeper into deflationary territory and reinforcing the urgency for Beijing to step up economic stimulus as the trade war with the United States intensifies… China’s producer price index (PPI) dropped 0.8% from a year earlier in August, widening from a 0.3% decline seen in July and the worst year-on-year contraction since August 2016…”
September 9 – Financial Times (Alice Woodhouse): “Chinese factory gate prices declined for a second month in August as the manufacturing sector remained under pressure, while consumer price growth hovered at an 18-month high as pork prices surged. Factory gate prices dipped 0.8% year on year in August…, the sharpest fall in three years… Chinese manufacturers are struggling amid ongoing US-China trade tensions. Separately, consumer prices rose 2.8% year on year in August…”
September 10 – New York Times (Alexandra Stevenson and Raymond Zhong): “Things that keep China’s top leaders up at night: a stalling economy, a bruising trade war and, increasingly, pigs. Specifically, a shortage of pigs, which is fast becoming a national crisis. The price of pork has been rising for months, and it is now nearly 50% higher than it was a year ago… Consumers are frustrated, and officials are quietly expressing alarm as they fight the outbreak of a disease that is devastating the country’s pig population and causing the shortage.”
September 10 – Bloomberg: “Chinese authorities have launched a crackdown on the use of credit card in property transactions, the 21st Century Herald reports… Regulators is cracking down on the use of credit card to pay deed taxes or for other payment to property developers and agents…”
September 8 – Bloomberg (Shawna Kwan): “Hong Kong’s protests aren’t just about freedom and democracy. Widening inequality has long contributed to tension in the city, and nothing exemplifies the divide between the haves and have-nots better than the sky-high cost of residential property. Developers, mostly owned by local billionaire families, wield great market power, controlling industries including utilities and mobile phone carriers… Hong Kong’s real estate has for years been ranked the world’s least affordable. For example, a one-bedroom unit in Tuen Mun in the New Territories -- about an hour by subway way from Central, the main business district -- costs the same as a two-bedroom apartment on New York’s upmarket Upper East Side. Prices have risen by 48% over the past five years.”
Central Banking Watch:
September 13 – Financial Times (Martin Arnold): “Mario Draghi’s decision to restart the European Central Bank’s economic stimulus efforts has attracted fierce criticism and opened deep divisions in the institution's top ranks. Thursday’s announcement that the central bank would cut interest rates further into negative territory and restart its €2.6tn quantitative easing programme of bond-buying was greeted with outrage by those who argue that the measures penalised prudent savers while fuelling potential asset bubbles in housing, stock markets and bonds. One German tabloid accused Mr Draghi of being ‘Count Draghila’ who ‘sucks our bank accounts empty’. And, more significantly for the future of the bloc’s policymaking, there was resistance within the ECB governing council itself. As many as nine of the 25 members of the council — the ECB’s main rate-setting body — spoke out against the package… Mr Draghi told reporters there was ‘a clear majority’ in favour of the package. He added that ‘an ample degree of monetary accommodation’ was necessary for ‘the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term’.”
September 12 – Bloomberg (Jana Randow): “European Central Bank governors representing the core of the euro-area economy resisted President Mario Draghi’s ultimately successful bid to restart quantitative easing, according to officials with knowledge of the matter. The unprecedented revolt took place during a fractious meeting where Bank of France Governor Francois Villeroy de Galhau joined more traditional hawks including his Dutch colleague Klaas Knot and Bundesbank President Jens Weidmann in pressing against an immediate resumption of bond purchases, the people said.”
September 11 – Reuters (Balazs Koranyi and Francesco Canepa): “European Central Bank chief Mario Draghi pledged indefinite stimulus… to revive an ailing euro zone economy, tying the hands of his successor for years to come and sparking an immediate conflict with U.S. President Donald Trump. As Draghi’s eight-year mandate nears its close, the ECB cut rates deeper into negative territory and promised bond purchases with no end-date to push borrowing costs even lower… The bigger-than-expected stimulus will increase pressure on the U.S. Federal Reserve and Bank of Japan to ease policy next week to support a world economy increasingly characterized by low growth and protectionist threats to free trade.”
September 12 – Wall Street Journal (Paul J. Davies): “The European Central Bank launched a fresh wave of loose-money policies… to jolt its stubbornly low inflation rate. But many suspect its primary target was something else: the euro. The central bank cut interest rates and revived a bond-buying program at President Mario Draghi ’s penultimate meeting… While the ECB doesn’t target specific levels for the euro, the exchange rate has become a policy focus because of fears that currency strength squashes inflation. ‘This [focus on the euro] is more true than it’s ever been,’ said Seema Shah, chief strategist at Principal Global Investors . ‘Interest rates are so low that any further cut is not going to have much of an impact and runs the risk of making things worse. So why bother? Simply to target the euro.’”
September 12 – Bloomberg (Yuko Takeo and Piotr Skolimowski): “The European Central Bank cut interest rates further below zero and revived bond purchases after President Mario Draghi overcame critics of his stimulus policies to make a final run at reflating the euro-area economy. The ECB reduced the deposit rate to minus 0.5% from minus 0.4%, and said it’ll buy debt from Nov. 1 at a pace of 20 billion euros ($22bn) a month for as long as necessary to hit its inflation goal. ‘We have headroom to keep going on for some time at this rhythm,’ Draghi, whose eight-year term ends next month, said… ‘We still think the probability of recession for the euro area is small, but it’s gone up.’”
September 10 – Reuters (Howard Schneider, Leika Kihara and Balazs Koranyi): “The last time major central banks shifted gears together, it was a cooperative move to keep the financial crisis of a decade ago from becoming a full-bore, worldwide depression. Now, a new round of global ratecutting risks taking on a competitive edge as policymakers try to stay ahead of rising trade tensions, a volatile investment climate, and a shift in the political mood from shared support for globalization to a more zero-sum battle over a slower-growing world economy. It’s a situation that has created deep internal divisions at the European Central Bank, the Bank of Japan and the U.S. Federal Reserve as officials debate how to confront a global slowdown with limited room to cut interest rates, and with elected officials pursuing policies that may be doing harm, at least in the short run.”
September 9 – Bloomberg (Mark Gongloff): “Central bankers were once magical beings with seemingly limitless powers. Paul Volcker slew stagflation. Alan Greenspan ruled for nearly 20 years. Ben Bernanke prevented a second Great Depression. Today’s central bankers are pale shadows. Federal Reserve Chairman Jerome Powell is constantly bullied by his boss. Worse, he and his counterparts in Europe face a weakening global economy armed with the equivalent of one of those guns that unfurls a flag with the word ‘Bang!’ on it. But they must pull the trigger again and again, even if there’s a strong chance it either won’t help or will do actual harm, writes Mohamed El-Erian. Markets demand they act and throw terrifying tantrums if they don’t. Similar pressure comes from politicians — the same politicians who do nothing to support growth, when they’re not actively hurting it.”
September 9 – Financial Times (Richard Koo): “The fear of ‘Japanisation’ has, once again, prompted monetary authorities on both sides of the Atlantic to consider additional monetary easing — but for all the wrong reasons. The extended periods of slow growth and low inflation seen in Japan since 1990 and in the west since 2008 are caused by the disappearance of borrowers, not by the lack of lenders. Monetary policy, which controls the availability of financing, does not work well when there is no appetite for debt. The Japanese demand for borrowing disappeared after the bursting of its bubble in 1990. During the process, commercial real estate prices fell almost 90% nationwide, falling back to the levels of 1973, destroying the financial health of all those who borrowed to purchase property and those who used it as collateral for borrowing. With pre-1990 liabilities still on the books but no assets to show for them, millions of borrowers started to pay down debt to remove their debt overhang... It was a journey that took nearly two decades to complete.”
Brexit Watch:
September 9 – Reuters (William James and Kylie MacLellan): “Prime Minister Boris Johnson said… he would not request an extension to Brexit, hours after a law came into force demanding that he delay Britain’s departure from the European Union until 2020 unless he can strike a divorce deal… ‘This government will press on with negotiating a deal, while preparing to leave without one,” Johnson told parliament… ‘I will go to that crucial summit on October the 17th and no matter how many devices this parliament invents to tie my hands, I will strive to get an agreement in the national interest... This government will not delay Brexit any further.”
September 11 – Reuters (Paul Sandle): “The British government’s plans for a no-deal Brexit warn of severe disruption to cross-Channel routes, affecting the supply of medicines and certain types of fresh foods, and say that protests and counter-protests will take place across the country, accompanied by a possible rise in public disorder. The ‘Operation Yellowhammer’ worst-case assumptions published on Wednesday were prepared on Aug. 2…”
September 11 – Reuters (Michael Holden and Guy Faulconbridge): “Prime Minister Boris Johnson’s suspension of the British parliament was unlawful, a court ruled…, prompting immediate calls for lawmakers to return to work as the government and parliament battle over the future of Brexit.”
September 7 – Reuters (James Davey): “The British Labour Party’s second most powerful man has warned of a possible ban on financial services companies awarding bonuses under a future Labour government… John McDonnell, Labour’s finance spokesman, said… he was putting the City of London on notice that it was time to end bonuses voluntarily or face draconian curbs. ‘If it continues and the City hasn’t learnt its lesson, we will take action, I’ll give them that warning now,’ he told the FT. ‘People are offended by bonuses,’ he said, calling them ‘a reflection of the grotesque levels of inequality’.”
Europe Watch:
September 10 – Reuters (Paul Carrel): “German Chancellor Angela Merkel said… her government was sticking to its balanced budget policy, tempering expectations for fiscal stimulus in Europe’s largest economy. ‘As a federal government, we take seriously the responsibility for a solid budget policy,’ Merkel told an event organized by the German taxpayers’ federation. ‘And I can assure you that we are sticking to the goal of a balanced budget.’”
September 10 – Financial Times (Guy Chazan): “Germany would deploy ‘many, many billions’ of euros to counteract an economic crisis in Europe, Olaf Scholz, the German finance minister, pledged…, saying that years of fiscal prudence and budget surpluses had helped prepare the country to act. Speaking at the start of a Bundestag debate on the 2020 budget, Mr Scholz said that thanks to its prudent management of Germany’s public finances, the government had ‘laid the foundations for us to be able to act in a difficult economic situation’. ‘It is absolutely crucial — if an economic crisis actually breaks out in Germany and Europe — that thanks to our sound finances we will be able to counter it with many, many billions… That is real Keynesianism, that is an active anti-crisis policy.’”
EM Watch:
September 12 – Bloomberg (Cagan Koc): “Turkey’s central bank signaled it’s set to slow the pace of monetary easing after delivering another interest-rate cut that exceeded forecasts as it navigates the conflicting demands of the presidency and markets. Governor Murat Uysal reduced the key rate to 16.5% from 19.75%... The Monetary Policy Committee said inflation is likely to end the year below its earlier forecasts but suggested less scope for deeper easing.”
September 11 – Financial Times (Benjamin Parkin): “Indian businesses typically enter September full of optimism about the spending boost that celebrations including Navratri and Diwali will bring as the country embarks on its biggest annual festive season. But this year, car manufacturers, suppliers and dealers are facing the festivities with something closer to dread. India’s vehicle market, until recently projected to be on track to become the world’s third largest, is facing its worst crisis since records began more than two decades ago. Car sales in August fell 41% from a year earlier…, extending a dismal run in which sales have fallen more than 20% each month since April. ‘We have never seen a crisis as painful as this one,’ said Puneet Gupta, an automotive analyst at IHS Markit. ‘When the market is flat we see people getting worried. This time it’s minus 40%, which is unimaginable . . . We are moving backwards rather than moving forwards.’”
September 7 – Bloomberg (Rahul Satija and P R Sanjai): “A prolonged shadow-banking crisis and hurdles in bankruptcy rules are set to keep India atop the world’s worst bad-debt pile, even as Italy, which held the title previously, quickens the clean-up of its lenders. Moody’s… to Credit Suisse Group AG. warned that more loans may sour in the Asian nation’s banking system. More than 2.4% of total loans in India’s banking system may be under stress on top of the 9.6% bad debt ratio as of June, the highest among major economies, Credit Suisse estimates shows. Italy, on the other hand, has nearly halved its ratio to 8.5% in the last three years.”
Japan Watch:
September 8 – Bloomberg (Toru Fujioka, Takashi Nakamichi and Takako Taniguchi): “Japanese regulators are surveying the nation’s financial firms to determine their exposure to foreign assets including risky credit products as the global economy slows… The Bank of Japan and Financial Services Agency want to get a fuller picture of domestic banks’ and insurers’ investments in collateralized loan obligations and leveraged loans to assess how they would fare if the borrowers run into difficulties… The inspection comes as some investors and analysts fret that years of low interest rates have led to overheated credit markets, with packages of leveraged loans known as CLOs under particular scrutiny. Big Japanese investors including large banks and other financial companies are thought to have snapped up the CLOs as negative rates eat into their returns.”
September 8 – Financial Times (Robin Harding and Leo Lewis): “For more than a hundred years, the Shimane Bank has been the economic heart of its remote Japanese prefecture, financing local companies through the vicissitudes of war, earthquake and rapid economic growth. But last Friday, it all fell apart, highlighting an often-forgotten financial stability risk that could affect not just Japan but the entire global economy. After years of ultra-low interest rates had slashed its loan income, Shimane Bank announced a sudden blow-up in the securities portfolio it had turned to instead... In order to return to profit, Shimane Bank plans to ramp up higher-margin lending to ‘medium risk’ companies... But in a prefecture where the population is already 25% below its peak, and projected to fall another 15% by 2045, good credit risks are hard to come by.”
Global Bubble Watch:
September 8 – Financial Times (Robin Wigglesworth): “The global bull run that started in 1985 is now one of the most intense in the debt market’s 700-year history, comparable with a deleveraging and economic growth spurt that followed the Napoleonic wars. Despite longstanding predictions of the end of the bond bull market that started after former Federal Reserve chair Paul Volcker quashed inflation in the 1980s, government debt has kept rallying this year, taking the average annual fall in yields to 17.4 bps… over the past 34 years. That puts it on the cusp of surpassing the 1873-1909 bull run in length, and makes it the strongest decline in long-term interest rates since 1817-1854, when bond yields declined by 22 bps a year, according to… Paul Schmelzing, a visiting scholar at the Bank of England. The only other stronger periods of declines since Italian city-states first began issuing bonds in the 12th century were under the reign of Louis XIV, Venice’s 14th and 15th century heyday and during the stability that followed the Peace of Cateau-Cambrésis in 1559.”
September 8 – Wall Street Journal (Vipal Monga): “Global interest rates are low and may head lower, driven by slowing economies and the U.S.-China trade war. A less appreciated reason for lower rates is a mountain of debt built up during the past decade. Debt owed by governments, businesses and households around the globe is up nearly 50% since before the financial crisis to $246.6 trillion at the beginning of March… The borrowing helped pull economies out of the nasty recession, but left them with high debt burdens that make it harder for policy makers to raise rates. It also makes consumers and businesses more likely to pull back from spending money on new goods if economic conditions weaken.”
Fixed-Income Bubble Watch:
September 10 – Bloomberg (Michael Gambale): “Investors like long-term debt and companies are increasingly happy to sell it to them. Giving buyers a chance to lock in returns as rates fall, prudent borrowers are grabbing an opportunity to kick debt maturities down the road. In the U.S. investment-grade bond market, there have been 40 tranches launched already this week, of which 22 have a maturity of 10-years or more. Of last week’s 90 tranches sold, 52 had maturities of 10-years or greater. Longer-dated paper accounted for $40.6b (54%) of last week’s $74.9b barrage of new debt. This is an abnormally large amount of longer-dated issuance.”
September 12 – Bloomberg (Christopher DeReza): “Credit investors have pushed cash into U.S. high-grade funds at the third fastest rate ever. Net inflows hit $5.6 billion for the week ended Sept. 11, data from Refinitiv’s Lipper show, the most since April when funds received $5.9 billion… The biggest single weekly inflow was seen in October 2014, when investors added $6.9 billion.”
September 9 – Associated Press: “Moody's… downgraded Ford's credit rating to junk status, citing expectations that the automaker will be weighed by weak earnings and cash generation as it pursues a costly restructuring plan. Ford responded by saying that its underlying business is strong and its balance sheet is solid.”
September 9 – Reuters (Katanga Johnson): “The head of the top U.S. markets regulator… issued a warning over market risks including rising corporate debt, a U.K. withdrawal from the European Union, and the transition away from a key lending rate. Jay Clayton, chairman of the Securities and Exchange Commission (SEC), told an audience… he continued to be concerned over corporate debt growth, which he said had been fostered by a decade of accommodative monetary policies. In the United States, outstanding corporate debt stands at almost $10 trillion, almost 50% of GDP, he said. ‘Those are numbers that should attract our attention,” said Clayton.”
September 9 – Reuters (Richard Leong): “Moody’s… believes the U.S. Treasury Department’s proposal to bring Fannie Mae and Freddie Mac out of conservatorship raises their credit risk as it would shrink their role in U.S. housing market. The Treasury said… the government should draw up a plan to begin recapitalizing the mortgage finance agencies, while calling on Congress to act on comprehensive housing reform. ‘If implemented, proposals to reform the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, would be credit negative for the companies’ creditors,’ the rating agency said…”
Leveraged Speculation Watch:
September 12 – Bloomberg (Lu Wang, Melissa Karsh and Sonali Basak): “Equity hedge funds are paying dearly for their devotion to industries like software and distaste for energy and commodity stocks. Wrong-way moves in positions they’ve crowded into, both long and short, could raise survival risk for some managers, one firm says. ‘This unexpected, profit-sapping dislocation has definitely hurt the majority of clients,’ said Mark Connors, global head of risk advisory at Credit Suisse. ‘Some managers may not make it through the month.’ … According to Morgan Stanley’s prime brokerage unit, the violent moves in the past two weeks climaxed Monday with a hedge-fund alpha gauge the firm devised, plotting returns in popular longs versus those in favorite shorts, notching its second-worst showing of the year.”
September 10 – Bloomberg (Elizabeth Dexheimer): “Hedge funds and other investors in Fannie Mae and Freddie Mac got more mixed messages from the Trump administration Tuesday, adding to the whipsaw trading sessions that have dazed shareholders in recent days. Treasury Secretary Steven Mnuchin… made clear that he plans to end a controversial policy that requires the mortgage giants to send virtually all their earnings to the government. That was the good news for investors. But Mnuchin also said he opposes any ‘simple’ recap and release -- a move hedge funds have long lobbied for that would consist of building up Fannie and Freddie’s capital buffers and then freeing them from federal control.”
September 13 – Financial Times (Laurence Fletcher): “Robert Citrone’s Discovery Capital Management and Guillaume Fonkenell’s Pharo Management were among the big-name hedge funds that suffered losses during last month’s tumble in emerging markets. Worries about the US-China trade war and the health of the global economy, as well as a debt crisis in Argentina triggered by President Mauricio Macri’s shock primary election defeat, helped drive a sharp sell-off in EM assets during August as investors ran for cover.”
September 11 – Bloomberg (Sabrina Willmer): “Blackstone Group Inc. has raised $20.5 billion for its largest real estate fund ever… The amount gathered is more than the $15.8 billion raised by the 2015 pool. Institutions including public pension plans and insurance companies are putting more money into property assets to protect against inflation and diversify their holdings beyond stocks and bonds.”
Geopolitical Watch:
September 8 – Reuters (Francois Murphy): “The U.N. nuclear watchdog told Iran… there is no time to waste in answering its questions, which diplomats say include how traces of uranium were found at a site that was not declared to the agency. It also said Iran was starting to follow through on its pledge last week to further breach its 2015 nuclear deal with world powers, this time installing more advanced centrifuges and moving toward enriching uranium with them, which the deal bans.”
September 7 – Reuters (Parisa Hafezi): “Iran said… it was now capable of raising uranium enrichment past the 20% level and had launched advanced centrifuge machines in further breaches of commitments to limit its nuclear activity under a 2015 deal with world powers.”
September 13 – Reuters (Idrees Ali and Ben Blanchard): “A U.S. Navy destroyer sailed near islands claimed by China in the South China Sea…, the U.S. military said, a move likely to anger Beijing. The busy waterway is one of a growing number of flashpoints in the U.S.-Chinese relationship, which include an escalating trade war, American sanctions on China’s military and U.S. relations with Taiwan. Commander Reann Mommsen… told Reuters that the destroyer Wayne E. Meyer challenged territorial claims in the operation, including what she described as excessive Chinese claims around the Paracel Islands, which are also claimed by Taiwan and Vietnam.”
September 11 – Financial Times (Demetri Sevastopulo): “The Pentagon is compiling a list of companies with ties to the Chinese military as part of a stepped-up Trump administration effort to stop Beijing from obtaining sensitive technologies and protect US defence supply chains. The US defence department is trying to identify Chinese companies and organisations with direct and indirect relationships with the People’s Liberation Army to help reduce the chances of US weapons supply chains being compromised… The Pentagon has become increasingly concerned about supply chains, seeking ways to tackle critical gaps in the US industrial base and prevent infiltration by adversaries. The focus has intensified under the Trump administration, which in 2017 named China a ‘revisionist’ power in its first national security strategy.”
September 9 – Reuters (Thomas Escritt): “Comparing the struggle of Hong Kong’s pro-democracy protesters to the role of Berlin during the Cold War, activist Joshua Wong told an audience in the German capital that his city was now a bulwark between the free world and the ‘dictatorship of China’… ‘If we are in a new Cold War, Hong Kong is the new Berlin,’ he said in a reception space a stone’s throw from the Berlin Wall on the roof of the Reichstag building, which for decades occupied the no-man’s land between Communist East Berlin and the city’s capitalist western half.”
September 8 – Reuters (Brenda Goh): “Hong Kong is an inseparable part of China and any form of secessionism ‘will be crushed’, state media said…, a day after demonstrators rallied at the U.S. consulate to ask for help in bringing democracy to city. The China Daily newspaper said Sunday’s rally in Hong Kong was proof that foreign forces were behind the protests… and warned that demonstrators should ‘stop trying the patience of the central government’. Chinese officials have accused foreign forces of trying to hurt Beijing by creating chaos in Hong Kong over a hugely unpopular extradition bill that would have allowed suspects to be tried in Communist Party-controlled courts.”
Federal Reserve Credit last week increased $4.6bn to $3.727 TN. Over the past year, Fed Credit contracted $444bn, or 10.6%. Fed Credit inflated $916 billion, or 33%, over the past 357 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt recovered $2.1bn last week to $3.453 TN. "Custody holdings" gained $31.3bn y-o-y, or 0.9%.
M2 (narrow) "money" supply jumped $40.6bn last week to $14.999 TN. "Narrow money" gained $762bn, or 5.4%, over the past year. For the week, Currency increased $1.5bn. Total Checkable Deposits surged $46.9bn, while Savings Deposits declined $11.7bn. Small Time Deposits slipped $1.0bn. Retail Money Funds rose $4.8bn.
Total money market fund assets rose $16.8bn to $3.397 TN. Money Funds gained $534bn y-o-y, or 18.6%.
Total Commercial Paper declined $8.1bn to $1.116 TN. CP was up $49bn y-o-y, or 4.6%.
Currency Watch:
The U.S. dollar index was little changed at 98.257 (up 2.2% y-t-d). For the week on the upside, the British pound increased 1.8%, the South African rand 1.6%, the Mexican peso 0.7%, the Singapore dollar 0.6%, the South Korean won 0.5%, the Australian dollar 0.5%, the euro 0.4%, and the Swedish krona 0.4%. On the downside, the Japanese yen declined 1.1%, the Canadian dollar 0.9%, the New Zealand dollar 0.7%, the Brazilian real 0.7%, the Swiss franc 0.3% and the Norwegian krone 0.1%. The Chinese renminbi increased 0.52% versus the dollar this week (down 2.84% y-t-d).
Commodities Watch:
September 8 – Bloomberg (Ranjeetha Pakiam): “China has added almost 100 tons of gold to its reserves since it resumed buying in December, with the consistent run of accumulation coming amid a rally in prices and the drag of the trade war with Washington. The People’s Bank of China raised bullion holdings to 62.45 million ounces in August from 62.26 million a month earlier… In tonnage terms, August’s inflow was 5.91 tons, following the addition of about 94 tons in the previous eight months.”
September 8 – CNBC (Huileng Tan): “Veteran investor Mark Mobius is bullish on gold as central banks around the world cut interest rates. ‘Physical gold is the way to go, in my view, because of the incredible increase in money supply,’ said Mobius… ‘All the central banks are trying to get interest rates down, they are pumping money into the system. Then, you have all of the cryptocurrencies coming in, so nobody really knows how much currency is out there,’ he told CNBC’s ‘Street Signs’…”
The Bloomberg Commodities Index declined 1.3% this week (up 17.3% y-t-d). Spot Gold retreated 1.2% to $1,489 (up 16.1%). Silver fell 3.0% to $17.569 (up 13%). WTI crude dropped $1.67 to $54.85 (up 21%). Gasoline fell 1.3% (up 17%), while Natural Gas surged 4.7% (down 11%). Copper rallied 2.5% (up 3%). Wheat surged 4.3% (down 4%). Corn jumped 3.7% (down 2%).
Market Instability Watch:
September 13 – Financial Times (Peter Wells): “Treasuries chalked up their worst week — and small-caps their best — since 2016 as investors extended a sweeping rotation away from the momentum plays and bonds that had been favoured over summer. The yield on the benchmark 10-year note surged 34 bps since last Friday to a six-week high of 1.90%, the largest weekly rise since mid-November 2016. An iShares exchange traded fund tracking US Treasuries fell 2.1% over the past five sessions, putting it its worst weekly performance also since that same November week nearly three years ago. The yield on the 10-year Treasury rose for an eighth consecutive session, the longest streak since March 2017.”
September 13 – Bloomberg (Vivien Lou Chen): “Treasuries extended their September tumble, sending the benchmark 10-year yield to its highest level since early August… Bonds fell after August retail sales and the September University of Michigan consumer sentiment index increased more than forecast, buoying confidence in the economic expansion. Yields across the curve rose, with the 10-year climbing more than 12 basis points to 1.90%, up from a three-year low of 1.43% early this month. The spread between 2-year and 10-year yields, considered a recession indicator when it inverts, as it did in August for the first time since 2007, widened back above 9 bps.”
September 11 – Bloomberg (John Gittelsohn): “The balance of power has shifted in the $8 trillion stock-fund industry. Assets in mutual funds and exchange-traded funds tracking U.S. equity indexes surpassed those run by stock-pickers for the first time last month, according to… Morningstar Inc. August fund flows helped lift assets in index-tracking U.S. equity funds to $4.271 trillion, compared with $4.246 trillion run by stock-pickers… Investors added $88.9 billion to passive U.S. stock funds while pulling $124.1 billion from active managers this year through August…”
September 11 – Bloomberg (John Gittelsohn): “It’s official: inexpensive index funds and ETFs have finally eclipsed old-fashioned stock pickers. Passive investing styles have been gaining ground on actively managed funds for decades. But in August the investment industry reached one of the biggest milestones in its modern history, as assets in U.S. index-based equity mutual funds and ETFs topped those in active stock funds for the first time. Stock picking isn’t dead. But the development marks the official end of money managers’ position as the guiding force in the American stock market -- and the seemingly inexorable rise of low-cost index-driven investing. If, as expected, the shift keeps gathering momentum, the implications will be enormous for the industry pros, financial markets and ordinary investors everywhere.”
September 10 – Bloomberg (Luke Kawa): “Go long the dollar, Treasuries and defensive stocks. Sell metals and the pound. It was an investing playbook that worked virtually all year -- until suddenly it didn’t. For a second straight day, 2019’s biggest winners across assets are getting hammered as investors reassessed expectations for global economic growth. The Treasury market set the tone, with a 10-month rally grinding to a halt Friday after data on the American consumer and labor market signaled a recession is far from imminent.”
September 10 – Wall Street Journal (Ryan Dezember): “A popular wager in the energy markets is backfiring. Hedge funds and other money managers in August built up a big bet that natural gas prices would decline—their most bearish position in the futures market in over a decade—only to have prices shoot up 25%. Prices usually weaken when summer subsides since there is less demand to generate electricity for air conditioners.”
September 11 – Reuters (Eliana Raszewski): “Argentina’s central bank… announced further currency controls in an effort to tame speculation and stem a spiraling debt crisis in Latin America’s third largest economy. The new measure requires anyone purchasing foreign currency to present a sworn oath promising to wait at least five days before using it to purchase bonds.”
September 10 – Wall Street Journal (Ira Iosebashvili): “Currencies around the world are tumbling to multiyear lows, bruising investors’ portfolios and fanning the flames of a global trade war. The Chinese yuan recently hit its lowest level in more than a decade against the dollar, the euro dropped to a fresh two-year low last week and the British pound is at depths it hasn’t consistently plumbed since the 1980s. Some emerging-market currencies such as the Colombian peso have fallen to their lowest prices on record against the dollar, while Argentina has recently introduced capital controls after its peso plunged in August. Out of 41 currencies tracked by The Wall Street Journal, only nine are up against the dollar in 2019. ‘People are becoming more concerned about currencies because currencies are becoming more dangerous,’ said Kit Juckes, global strategist at Société Générale.”
September 10 – Financial Times (Steve Johnson): “Rarely has the choice facing the emerging market investor been so stark. Bonds are so richly priced that around 30% of the entire universe of euro-denominated EM debt, with a face value of about €115bn, now trades with a negative yield… That has never happened before. What is more, not all of this negatively yielding debt consists of short-maturity bonds issued by the EU sovereigns of eastern and central Europe, which are usually considered ‘safe’ by fixed income investors. The bundle includes Polish government debt at a maturity as far out as 2026, along with bonds from Indonesia, China and South Korea.”
September 11 – Reuters (Richard Leong): “U.S. money market fund assets have hit their highest level since October 2009, as investors piled more cash into these low-risk products despite a lessening of concerns about U.S.-China trade tensions… Assets of money funds, which are seen as being nearly as safe as bank accounts, climbed by $24.57 billion to $3.355 trillion in the week ended Sept. 10…”
Trump Administration Watch:
September 12 – CNBC (Jacob Pramuk): “President Donald Trump signaled… that he would consider an interim trade deal with China, even though he would not prefer it. The president told reporters he would like to ink a full agreement with the world’s second largest economy. However, he left the door open to striking a limited deal with Beijing. ‘If we’re going to do the deal, let’s get it done,’ he told reporters… ‘A lot of people are talking about it, I see a lot of analysts are saying an interim deal — meaning we’ll do pieces of it, the easy ones first. But there’s no easy or hard. There’s a deal or there’s not a deal. But it’s something we would consider, I guess.’”
September 11 – CNBC (Riya Bhattacharjee and Chris Eudaily): “President Donald Trump… tweeted that he will delay increasing tariffs on $250 billion worth of Chinese goods from Oct. 1 to Oct. 15 as a ‘gesture of good will’ to China. Trump said the postponement came ‘at the request of the Vice Premier of China, Liu He, and due to the fact that the People’s Republic of China will be celebrating their 70th Anniversary.’ The tariffs were set to increase to 30% from 25% on the goods. He is set to be in Washington for talks in early October.”
September 11 – CNBC (Jeff Cox and John Melloy): “President Donald Trump… continued his verbal assault on the Federal Reserve, which he blames for slowing the economy, tweeting that the central bank should cut interest rates to zero or even set negative interest rates. The president also called Fed officials ‘boneheads’ in the tweet. ‘The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term,’ he said… The president also made a new suggestion not seen in some of his past attacks on the Fed, saying that the country should refinance its debt load. The U.S. has $22.5 trillion in debt, $16.7 trillion of which is held by the public… That debt load has grown $2.6 trillion, or 13% under Trump, due in part to the 2017 tax cut that the president shepherded through Congress. Taxpayers have shelled out $538.6 billion in interest costs in the 2019 fiscal year, easily a record. The idea for ‘refinancing’ federal debt is without any modern precedent.”
September 11 – Bloomberg (Christopher Condon): “President Donald Trump triggered a swift and skeptical reaction with his demand… for the Federal Reserve to lower interest rates ‘to zero, or less,’ as part of a plan to reduce the financing costs of U.S. government debt. ‘This is a recipe for disaster,’ said Roberto Perli, a former Fed economist and partner at Cornerstone Macro. ‘If a central bank starts financing debt spending without constraints, interest rates will end up being anything but moderate. Just look at Zimbabwe.’ … “The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt,’ Trump tweeted. ‘Interest cost could be brought way down, while at the same time substantially lengthening the term.’”
September 6 – Associated Press (Kevin Freking): “White House economic adviser Larry Kudlow compared trade talks with China… to the U.S. standoff with Russia during the Cold War. In other words, negotiations could continue for a long time… Kudlow discounted the notion that next year’s election increases the urgency for President Donald Trump to conclude the trade war. ‘The stakes are so high, we have to get it right, and if that takes a decade, so be it,’ he said. Kudlow emphasized that it took the United States decades to get the results it wanted with Russia. He noted that he worked in the Reagan administration: ‘I remember President Reagan waging a similar fight against the Soviet Union.’”
September 9 – Bloomberg (Mike Dorning): “The U.S. Agriculture Department’s top trade official called Chinese President Xi Jinping a ‘communist zealot,’ as he warned farmers the Asian leader is a tough adversary in negotiations. Ted McKinney, the department’s undersecretary for trade, offered the provocative characterization of the Chinese leader… at a sensitive time in U.S.-China relations… ‘Let me just tell you what: Mr. Xi Jinping is a communist zealot. He sees himself very much in the spirit of Mao Zedong,’ McKinney said… to 380 farmers the group gathered in Washington to lobby the government.”
September 13 – Reuters (Richard Cowan): “The Trump administration plans to unveil a tax cut plan in mid-2020, a top White House adviser said…, saying it would be targeted to giving significant relief to the middle class. …White House economic adviser Larry Kudlow offered no details on what he has termed “Tax Cuts 2.0,” a plan the administration intends to put forward as President Donald Trump pursues his bid for a second White House term. ‘We will gather together the best ideas from the Hill (Congress), the administration and outside folks to provide a significant new round of middle class tax relief,’ Kudlow said, adding, ‘This is not a recession measure at all.’”
September 10 – Financial Times (Robert Armstrong): “Trump administration officials plans’ for pushing Fannie Mae and Freddie Mac towards private ownership… faced sharp criticism from Democratic senators, who argued the reforms would make mortgages more costly. Steven Mnuchin, the US Treasury secretary; Mark Calabria, director of the Federal Housing Finance Agency; and Ben Carson, housing and urban development secretary, said the two government-backed mortgage guarantors were more leveraged than before the crisis and that Congress needed to act… ‘When I look at a $3tn institution levered up 1,000 to one, it keeps me up at night,’ Mr Calabria said during a hearing before the Senate banking committee.”
September 10 – Reuters (Pete Schroeder): “The Trump administration will pursue the reform of mortgage giants Fannie Mae and Freddie Mac, the guarantors of over half the nation’s mortgages, if Congress fails to act, officials told Congress… In testimony before the U.S. Senate Banking Committee, U.S. Treasury Secretary Steven Mnuchin, Housing and Urban Development Secretary Ben Carson, and Federal Housing Finance Agency Director Mark Calabria defended a plan to release Fannie and Freddie from government control more than a decade after they were bailed out during the 2008 financial crisis… ‘If we do nothing, this is going to end very badly,’ said Calabria, who warned Fannie and Freddie are undercapitalized and overly reliant on government backing to weather any downturn.”
September 12 – Reuters (Andrea Shalal): “U.S. Treasury Secretary Steven Mnuchin… said the United States will issue 50-year bonds if there is ‘proper demand,’ a moved aimed at ‘derisking’ the government’s $22 trillion of debt and locking in low interest rates.”
September 13 – Bloomberg (Erik Wasson and Christopher Condon): “White House Economic Adviser Larry Kudlow criticized Europe’s low and negative interest rates, contradicting his boss, President Donald Trump, who earlier in the week tweeted that the U.S. Federal Reserve should pursue a similar approach by bringing down rates ‘to ZERO, or less.’ Kudlow told reporters… ‘The Europe story -- all this super easy money, zero and negative rates. You know, if it was going to work it would have worked. And it’s not worked.’”
Federal Reserve Watch:
September 11 – Reuters (Lindsay Dunsmuir, Ann Saphir, Jonnelle Marte, Howard Schneider and Jason Lange): “U.S. President Donald Trump’s push for low interest rates reached a new pitch…, when he demanded the Federal Reserve take the extraordinary step of sending them below zero. Outside of Washington, D.C., Fed policymakers often face the opposite complaint. Interest rates are too low already, Americans tell Fed officials when they speak at Rotary Clubs and chambers of commerce around the country. Savers, and particularly those near retirement age, are not getting enough return from their savings accounts or fixed investments. The negative rates Trump is pushing, already in place in some parts of Europe and in Japan, would effectively charge people who save their money, and reward those able and willing to borrow. They were so unpopular in Japan that they became a hot topic on talk shows and tabloids, which highlighted consumers buying safes to stash their cash at home instead of with banks.”
September 6 – Financial Times (Brendan Greeley): “In Zurich on Friday, Jay Powell, chairman of the Federal Reserve, repeated his mantra from this summer that the Fed will continue to ‘act as appropriate to sustain the expansion.’ …But after that, he got technical. Talking about the challenges of easing in a potential downturn when policy rates are already close to zero — something he has called the ‘pre-eminent monetary policy challenge of our time’ — he offered one specific strategy: make-up inflation. When a central bank undershoots its inflation target, Mr Powell explained, it can promise to the public that it will overshoot in the future. As it makes up for lost inflation, the bank would also be making up for lost growth. ‘If the public understands and acts up on that, we limit the damage from the recession,’ he said. ‘It’s a great idea.’”
September 10 – Bloomberg (Sridhar Natarajan): “James Gorman has a note of caution for the Federal Reserve in the midst of its interest-rate reductions. ‘The problem with cutting is it’s one of the few tools you’ve got,’ Morgan Stanley’s chief executive officer said…, adding that he supports the reductions made so far. ‘So if you give it away too easily, what do you have if we have a real problem?’”
U.S. Bubble Watch:
September 12 – Associated Press (Martin Crutsinger): “The U.S. government’s budget deficit increased by $169 billion to $1.07 trillion in the first 11 months of this budget year as spending grew faster than tax collections. The… deficit with just one month left in the budget year is up 18.8% over the same period a year ago. Budget experts project a surplus for September, which would push the total 2019 deficit down slightly below the $1 trillion mark. The Congressional Budget Office is forecasting a deficit this year of $960 billion, compared to a 2018 deficit of $779 billion.”
September 12 – Reuters (Lindsay Dunsmuir): “The U.S. government posted a $200 billion budget deficit in August, bringing the fiscal year-to-date deficit past $1 trillion… Federal spending in August was $428 billion, down 1% from the same month in 2018, while receipts were $228 billion, an increase of 4% compared with August 2018. The deficit for the fiscal year to date was $1.067 trillion, compared with $898 billion in the comparable period the year earlier.”
September 10 – Wall Street Journal (Janet Adamy and Paul Overberg): “American incomes remained essentially flat in 2018 after three straight years of growth, according to Census Bureau figures… Median household income was $63,179 in 2018, an uptick of 0.9% that census officials said isn’t statistically significant from the prior year based on figures adjusted for inflation. The poverty rate in 2018 was 11.8%, a decrease of a half percentage point from 2017, marking the fourth consecutive annual decline in the national poverty rate. It was the first time the official poverty rate fell significantly below its level at the start of the recession in 2007.”
September 12 – Reuters (Lucia Mutikani): “U.S. underlying consumer prices increased solidly in August, leading to the largest annual gain in a year, but rising inflation is unlikely to deter the Federal Reserve from cutting interest rates again next week… The… consumer price index excluding the volatile food and energy components gained 0.3% for a third straight month. The so-called core CPI was boosted by a surge in healthcare costs and increases in prices for airline tickets, recreation and used cars and trucks. In the 12 months through August, the core CPI increased 2.4%, the most since July 2018, after climbing 2.2% in July.”
September 13 – Wall Street Journal (Harriet Torry): “Spending on vehicles drove strong retail sales in August, suggesting American shoppers continue to support the economy… Retail sales… climbed a seasonally adjusted 0.4% in August from a month earlier… The robust report beat economists’ expectations and came on the heels of stronger spending in July than initially estimated, a 0.8% rise. The data provide reassurance that household spending remains an economic bulwark against signs of a global slowdown, though perhaps not enough to prevent some softening in U.S. growth in the third quarter.”
September 10 – Bloomberg (William Edwards): “Optimism among U.S. small-business owners fell in August to the lowest level in five months, with the outlook for the economy and sales slumping amid escalating trade tensions and recession fears. The decline of 1.6 points to 103.1 in the National Federation of Independent Business’s index resulted from weaker expectations for businesses and sales…”
September 11 – CNBC (Diana Olick): “Total mortgage application volume rose 2% last week compared with the previous week… Volume was 69% higher than the same week one year ago… Mortgage applications to purchase a home increased 5% for the week and were 9% higher than the same week one year ago.”
September 13 – CNBC (Diana Olick): “The average rate on the 30-year fixed is now 20 bps higher than it was on Monday and 36 bps higher than its last low on Sept. 4… That is the biggest short-term jump since the week following the election of President Donald Trump… ‘The big risk here is that the overall rate rally — the one that began in November 2018 -- has run its course,’ said Matthew Graham, chief operating officer at Mortgage News Daily.”
September 10 – Reuters (David Randall): “Corporate America appears to be rushing to get the most out of the decade-long bull market in stocks and bonds before a possible recession and election-year stock market volatility slam the IPO and credit windows shut. Approximately 70 companies have registered with the U.S. Securities and Exchange Commission to go public…, while $72 billion in investment-grade corporate debt – a figure nearly as large as the total issuance in August - was issued last week, according to… Dealogic.”
September 10 – Associated Press (Matt O’Brien): “Big tech companies have long rebuffed attempts by the U.S. federal government to scrutinize or scale back their market power. Now they face a scrappy new coalition as well: prosecutors from nearly all 50 states. In a rare show of bipartisan force, attorneys general from 48 states along with Puerto Rico and the District of Columbia are investigating whether Google’s huge online search and advertising business is engaging in monopolistic behavior. The Texas-led antitrust investigation of Google… follows a separate multistate investigation of Facebook’s market dominance that was revealed Friday.”
September 10 – Reuters (Lindsay Dunsmuir and Howard Schneider): “The share of Americans without health insurance rose for the first time in a decade last year and U.S. household income hardly budged, according to a government report… that laid bare issues that could be central to the U.S. presidential election next year. …About 27.5 million residents, or 8.5% of people, did not have health insurance in 2018, an increase of almost 2 million from the year before when 7.9% of people lacked coverage, the Census Bureau said.”
September 9 – Bloomberg (Katherine Chiglinsky, Molly Smith, and David Caleb Mutua): “U.S. corporate pensions felt the pain of low bond yields in August. The retirement funds for U.S. corporations had just 82% of the money they expect to need over time for pensioners as of August, down four percentage points from July, according to… consulting firm Mercer… The steep drop stemmed from long-term bond yields plunging to record lows, which effectively increases the current value of companies’ future obligations… When companies have more than about 80% of the funding they expect to need for pensions, they tend to cut their investments in riskier assets like stocks and increase safer holdings like bonds to lock in gains and reduce risk.”
September 11 – New York Times (Conor Dougherty and Luis Ferré-Sadurní): “California lawmakers approved a statewide rent cap… covering millions of tenants, the biggest step yet in a surge of initiatives to address an affordable-housing crunch nationwide. The bill limits annual rent increases to 5% after inflation and offers new barriers to eviction… Gov. Gavin Newsom, a Democrat who has made tenant protection a priority in his first year in office, led negotiations to strengthen the legislation… The measure, affecting an estimated eight million residents of rental homes and apartments, was heavily pushed by tenants’ groups. In an indication of how dire housing problems have become, it also garnered the support of the California Business Roundtable…”
China Watch:
September 12 – Wall Street Journal (Lingling Wei, Chao Deng and Josh Zumbrun): “China is looking to narrow the scope of its negotiations with the U.S. to only trade matters, seeking to put thornier national-security issues on a separate track in a bid to break deadlocked talks with the U.S. Chinese officials hope such an approach would help both sides resolve some immediate issues and offer a path out of the impasse… The move is the latest in a series of steps officials in Washington and Beijing are taking to ease trade tensions ahead of high-level negotiations in October.”
September 13 – Reuters (Andrew Galbraith): “China will exempt some agricultural products from additional tariffs on U.S. goods, including pork and soybeans, China’s official Xinhua News Agency…, in the latest sign of easing Sino-U.S. tensions before a new round of talks aimed at curbing a bruising trade war.”
September 11 – Reuters: “China’s banks extended more new yuan loans in August as policymakers ratcheted up support for the slowing economy, and further policy easing is expected in the coming weeks as the Sino-U.S. trade war takes a bigger toll on the economy. Chinese regulators have been trying to boost bank lending and lower financing costs for more than a year, especially for smaller and private companies… Chinese banks extended 1.21 trillion yuan ($170bn) in new loans in August, up from July and exceeding analyst expectations… Analysts… had predicted new yuan loans would rise to 1.2 trillion yuan in August, up from 1.06 trillion yuan the previous month and compared with 1.28 trillion yuan a year earlier. Household loans, mostly mortgages, rose to 653.8 billion yuan in August from 511.2 billion yuan in July, while corporate loans climbed to 651.3 billion yuan from 297.4 billion yuan… Outstanding yuan loans grew 12.4% from a year earlier - in line with expectations but slower than July’s 12.6%... Growth of outstanding total social financing (TSF), a broad measure of credit and liquidity in the economy, rose 10.7% in August from a year earlier…”
September 9 – Kyodo: “Chinese President Xi Jinping voiced distrust of U.S. President Donald Trump during his meeting with the Japanese Prime Minister Shinzo Abe in June amid the U.S.-China trade dispute, a source close to the matter said… ‘I can't believe what President Trump says’ concerning trade negotiations, Xi was quoted as telling Abe during a meeting on the fringe of the Group of 20 summit in Osaka. Although Abe told Xi that Trump trusts the Chinese president, Xi continued to air his grievances about his U.S. counterpart, the diplomatic source told Kyodo News.”
September 8 – Associated Press (Joe McDonald): “China’s trade with the United States is falling as the two sides prepare for negotiations with no signs of progress toward ending a tariff war… Imports of American goods tumbled 22% in August from a year earlier to $10.3 billion… Exports to the United States, China’s biggest market, sank 16% to $44.4 billion.”
September 8 – Wall Street Journal (Liyan Qi): “China’s imports fell for a fourth straight month in August as a drop-off in exports to the U.S. steepened, the most recent economic warning signs during a prolonged trade spat with the U.S. that has Beijing turning toward stimulus measures. Chinese imports of everything from raw materials to high-tech products dropped 5.6% in August compared with a year earlier…”
September 9 – Bloomberg (Yawen Chen and Se Young Lee): “China’s factory-gate prices shrank at the sharpest pace in three years in August, falling deeper into deflationary territory and reinforcing the urgency for Beijing to step up economic stimulus as the trade war with the United States intensifies… China’s producer price index (PPI) dropped 0.8% from a year earlier in August, widening from a 0.3% decline seen in July and the worst year-on-year contraction since August 2016…”
September 9 – Financial Times (Alice Woodhouse): “Chinese factory gate prices declined for a second month in August as the manufacturing sector remained under pressure, while consumer price growth hovered at an 18-month high as pork prices surged. Factory gate prices dipped 0.8% year on year in August…, the sharpest fall in three years… Chinese manufacturers are struggling amid ongoing US-China trade tensions. Separately, consumer prices rose 2.8% year on year in August…”
September 10 – New York Times (Alexandra Stevenson and Raymond Zhong): “Things that keep China’s top leaders up at night: a stalling economy, a bruising trade war and, increasingly, pigs. Specifically, a shortage of pigs, which is fast becoming a national crisis. The price of pork has been rising for months, and it is now nearly 50% higher than it was a year ago… Consumers are frustrated, and officials are quietly expressing alarm as they fight the outbreak of a disease that is devastating the country’s pig population and causing the shortage.”
September 10 – Bloomberg: “Chinese authorities have launched a crackdown on the use of credit card in property transactions, the 21st Century Herald reports… Regulators is cracking down on the use of credit card to pay deed taxes or for other payment to property developers and agents…”
September 8 – Bloomberg (Shawna Kwan): “Hong Kong’s protests aren’t just about freedom and democracy. Widening inequality has long contributed to tension in the city, and nothing exemplifies the divide between the haves and have-nots better than the sky-high cost of residential property. Developers, mostly owned by local billionaire families, wield great market power, controlling industries including utilities and mobile phone carriers… Hong Kong’s real estate has for years been ranked the world’s least affordable. For example, a one-bedroom unit in Tuen Mun in the New Territories -- about an hour by subway way from Central, the main business district -- costs the same as a two-bedroom apartment on New York’s upmarket Upper East Side. Prices have risen by 48% over the past five years.”
Central Banking Watch:
September 13 – Financial Times (Martin Arnold): “Mario Draghi’s decision to restart the European Central Bank’s economic stimulus efforts has attracted fierce criticism and opened deep divisions in the institution's top ranks. Thursday’s announcement that the central bank would cut interest rates further into negative territory and restart its €2.6tn quantitative easing programme of bond-buying was greeted with outrage by those who argue that the measures penalised prudent savers while fuelling potential asset bubbles in housing, stock markets and bonds. One German tabloid accused Mr Draghi of being ‘Count Draghila’ who ‘sucks our bank accounts empty’. And, more significantly for the future of the bloc’s policymaking, there was resistance within the ECB governing council itself. As many as nine of the 25 members of the council — the ECB’s main rate-setting body — spoke out against the package… Mr Draghi told reporters there was ‘a clear majority’ in favour of the package. He added that ‘an ample degree of monetary accommodation’ was necessary for ‘the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term’.”
September 12 – Bloomberg (Jana Randow): “European Central Bank governors representing the core of the euro-area economy resisted President Mario Draghi’s ultimately successful bid to restart quantitative easing, according to officials with knowledge of the matter. The unprecedented revolt took place during a fractious meeting where Bank of France Governor Francois Villeroy de Galhau joined more traditional hawks including his Dutch colleague Klaas Knot and Bundesbank President Jens Weidmann in pressing against an immediate resumption of bond purchases, the people said.”
September 11 – Reuters (Balazs Koranyi and Francesco Canepa): “European Central Bank chief Mario Draghi pledged indefinite stimulus… to revive an ailing euro zone economy, tying the hands of his successor for years to come and sparking an immediate conflict with U.S. President Donald Trump. As Draghi’s eight-year mandate nears its close, the ECB cut rates deeper into negative territory and promised bond purchases with no end-date to push borrowing costs even lower… The bigger-than-expected stimulus will increase pressure on the U.S. Federal Reserve and Bank of Japan to ease policy next week to support a world economy increasingly characterized by low growth and protectionist threats to free trade.”
September 12 – Wall Street Journal (Paul J. Davies): “The European Central Bank launched a fresh wave of loose-money policies… to jolt its stubbornly low inflation rate. But many suspect its primary target was something else: the euro. The central bank cut interest rates and revived a bond-buying program at President Mario Draghi ’s penultimate meeting… While the ECB doesn’t target specific levels for the euro, the exchange rate has become a policy focus because of fears that currency strength squashes inflation. ‘This [focus on the euro] is more true than it’s ever been,’ said Seema Shah, chief strategist at Principal Global Investors . ‘Interest rates are so low that any further cut is not going to have much of an impact and runs the risk of making things worse. So why bother? Simply to target the euro.’”
September 12 – Bloomberg (Yuko Takeo and Piotr Skolimowski): “The European Central Bank cut interest rates further below zero and revived bond purchases after President Mario Draghi overcame critics of his stimulus policies to make a final run at reflating the euro-area economy. The ECB reduced the deposit rate to minus 0.5% from minus 0.4%, and said it’ll buy debt from Nov. 1 at a pace of 20 billion euros ($22bn) a month for as long as necessary to hit its inflation goal. ‘We have headroom to keep going on for some time at this rhythm,’ Draghi, whose eight-year term ends next month, said… ‘We still think the probability of recession for the euro area is small, but it’s gone up.’”
September 10 – Reuters (Howard Schneider, Leika Kihara and Balazs Koranyi): “The last time major central banks shifted gears together, it was a cooperative move to keep the financial crisis of a decade ago from becoming a full-bore, worldwide depression. Now, a new round of global ratecutting risks taking on a competitive edge as policymakers try to stay ahead of rising trade tensions, a volatile investment climate, and a shift in the political mood from shared support for globalization to a more zero-sum battle over a slower-growing world economy. It’s a situation that has created deep internal divisions at the European Central Bank, the Bank of Japan and the U.S. Federal Reserve as officials debate how to confront a global slowdown with limited room to cut interest rates, and with elected officials pursuing policies that may be doing harm, at least in the short run.”
September 9 – Bloomberg (Mark Gongloff): “Central bankers were once magical beings with seemingly limitless powers. Paul Volcker slew stagflation. Alan Greenspan ruled for nearly 20 years. Ben Bernanke prevented a second Great Depression. Today’s central bankers are pale shadows. Federal Reserve Chairman Jerome Powell is constantly bullied by his boss. Worse, he and his counterparts in Europe face a weakening global economy armed with the equivalent of one of those guns that unfurls a flag with the word ‘Bang!’ on it. But they must pull the trigger again and again, even if there’s a strong chance it either won’t help or will do actual harm, writes Mohamed El-Erian. Markets demand they act and throw terrifying tantrums if they don’t. Similar pressure comes from politicians — the same politicians who do nothing to support growth, when they’re not actively hurting it.”
September 9 – Financial Times (Richard Koo): “The fear of ‘Japanisation’ has, once again, prompted monetary authorities on both sides of the Atlantic to consider additional monetary easing — but for all the wrong reasons. The extended periods of slow growth and low inflation seen in Japan since 1990 and in the west since 2008 are caused by the disappearance of borrowers, not by the lack of lenders. Monetary policy, which controls the availability of financing, does not work well when there is no appetite for debt. The Japanese demand for borrowing disappeared after the bursting of its bubble in 1990. During the process, commercial real estate prices fell almost 90% nationwide, falling back to the levels of 1973, destroying the financial health of all those who borrowed to purchase property and those who used it as collateral for borrowing. With pre-1990 liabilities still on the books but no assets to show for them, millions of borrowers started to pay down debt to remove their debt overhang... It was a journey that took nearly two decades to complete.”
Brexit Watch:
September 9 – Reuters (William James and Kylie MacLellan): “Prime Minister Boris Johnson said… he would not request an extension to Brexit, hours after a law came into force demanding that he delay Britain’s departure from the European Union until 2020 unless he can strike a divorce deal… ‘This government will press on with negotiating a deal, while preparing to leave without one,” Johnson told parliament… ‘I will go to that crucial summit on October the 17th and no matter how many devices this parliament invents to tie my hands, I will strive to get an agreement in the national interest... This government will not delay Brexit any further.”
September 11 – Reuters (Paul Sandle): “The British government’s plans for a no-deal Brexit warn of severe disruption to cross-Channel routes, affecting the supply of medicines and certain types of fresh foods, and say that protests and counter-protests will take place across the country, accompanied by a possible rise in public disorder. The ‘Operation Yellowhammer’ worst-case assumptions published on Wednesday were prepared on Aug. 2…”
September 11 – Reuters (Michael Holden and Guy Faulconbridge): “Prime Minister Boris Johnson’s suspension of the British parliament was unlawful, a court ruled…, prompting immediate calls for lawmakers to return to work as the government and parliament battle over the future of Brexit.”
September 7 – Reuters (James Davey): “The British Labour Party’s second most powerful man has warned of a possible ban on financial services companies awarding bonuses under a future Labour government… John McDonnell, Labour’s finance spokesman, said… he was putting the City of London on notice that it was time to end bonuses voluntarily or face draconian curbs. ‘If it continues and the City hasn’t learnt its lesson, we will take action, I’ll give them that warning now,’ he told the FT. ‘People are offended by bonuses,’ he said, calling them ‘a reflection of the grotesque levels of inequality’.”
Europe Watch:
September 10 – Reuters (Paul Carrel): “German Chancellor Angela Merkel said… her government was sticking to its balanced budget policy, tempering expectations for fiscal stimulus in Europe’s largest economy. ‘As a federal government, we take seriously the responsibility for a solid budget policy,’ Merkel told an event organized by the German taxpayers’ federation. ‘And I can assure you that we are sticking to the goal of a balanced budget.’”
September 10 – Financial Times (Guy Chazan): “Germany would deploy ‘many, many billions’ of euros to counteract an economic crisis in Europe, Olaf Scholz, the German finance minister, pledged…, saying that years of fiscal prudence and budget surpluses had helped prepare the country to act. Speaking at the start of a Bundestag debate on the 2020 budget, Mr Scholz said that thanks to its prudent management of Germany’s public finances, the government had ‘laid the foundations for us to be able to act in a difficult economic situation’. ‘It is absolutely crucial — if an economic crisis actually breaks out in Germany and Europe — that thanks to our sound finances we will be able to counter it with many, many billions… That is real Keynesianism, that is an active anti-crisis policy.’”
EM Watch:
September 12 – Bloomberg (Cagan Koc): “Turkey’s central bank signaled it’s set to slow the pace of monetary easing after delivering another interest-rate cut that exceeded forecasts as it navigates the conflicting demands of the presidency and markets. Governor Murat Uysal reduced the key rate to 16.5% from 19.75%... The Monetary Policy Committee said inflation is likely to end the year below its earlier forecasts but suggested less scope for deeper easing.”
September 11 – Financial Times (Benjamin Parkin): “Indian businesses typically enter September full of optimism about the spending boost that celebrations including Navratri and Diwali will bring as the country embarks on its biggest annual festive season. But this year, car manufacturers, suppliers and dealers are facing the festivities with something closer to dread. India’s vehicle market, until recently projected to be on track to become the world’s third largest, is facing its worst crisis since records began more than two decades ago. Car sales in August fell 41% from a year earlier…, extending a dismal run in which sales have fallen more than 20% each month since April. ‘We have never seen a crisis as painful as this one,’ said Puneet Gupta, an automotive analyst at IHS Markit. ‘When the market is flat we see people getting worried. This time it’s minus 40%, which is unimaginable . . . We are moving backwards rather than moving forwards.’”
September 7 – Bloomberg (Rahul Satija and P R Sanjai): “A prolonged shadow-banking crisis and hurdles in bankruptcy rules are set to keep India atop the world’s worst bad-debt pile, even as Italy, which held the title previously, quickens the clean-up of its lenders. Moody’s… to Credit Suisse Group AG. warned that more loans may sour in the Asian nation’s banking system. More than 2.4% of total loans in India’s banking system may be under stress on top of the 9.6% bad debt ratio as of June, the highest among major economies, Credit Suisse estimates shows. Italy, on the other hand, has nearly halved its ratio to 8.5% in the last three years.”
Japan Watch:
September 8 – Bloomberg (Toru Fujioka, Takashi Nakamichi and Takako Taniguchi): “Japanese regulators are surveying the nation’s financial firms to determine their exposure to foreign assets including risky credit products as the global economy slows… The Bank of Japan and Financial Services Agency want to get a fuller picture of domestic banks’ and insurers’ investments in collateralized loan obligations and leveraged loans to assess how they would fare if the borrowers run into difficulties… The inspection comes as some investors and analysts fret that years of low interest rates have led to overheated credit markets, with packages of leveraged loans known as CLOs under particular scrutiny. Big Japanese investors including large banks and other financial companies are thought to have snapped up the CLOs as negative rates eat into their returns.”
September 8 – Financial Times (Robin Harding and Leo Lewis): “For more than a hundred years, the Shimane Bank has been the economic heart of its remote Japanese prefecture, financing local companies through the vicissitudes of war, earthquake and rapid economic growth. But last Friday, it all fell apart, highlighting an often-forgotten financial stability risk that could affect not just Japan but the entire global economy. After years of ultra-low interest rates had slashed its loan income, Shimane Bank announced a sudden blow-up in the securities portfolio it had turned to instead... In order to return to profit, Shimane Bank plans to ramp up higher-margin lending to ‘medium risk’ companies... But in a prefecture where the population is already 25% below its peak, and projected to fall another 15% by 2045, good credit risks are hard to come by.”
Global Bubble Watch:
September 8 – Financial Times (Robin Wigglesworth): “The global bull run that started in 1985 is now one of the most intense in the debt market’s 700-year history, comparable with a deleveraging and economic growth spurt that followed the Napoleonic wars. Despite longstanding predictions of the end of the bond bull market that started after former Federal Reserve chair Paul Volcker quashed inflation in the 1980s, government debt has kept rallying this year, taking the average annual fall in yields to 17.4 bps… over the past 34 years. That puts it on the cusp of surpassing the 1873-1909 bull run in length, and makes it the strongest decline in long-term interest rates since 1817-1854, when bond yields declined by 22 bps a year, according to… Paul Schmelzing, a visiting scholar at the Bank of England. The only other stronger periods of declines since Italian city-states first began issuing bonds in the 12th century were under the reign of Louis XIV, Venice’s 14th and 15th century heyday and during the stability that followed the Peace of Cateau-Cambrésis in 1559.”
September 8 – Wall Street Journal (Vipal Monga): “Global interest rates are low and may head lower, driven by slowing economies and the U.S.-China trade war. A less appreciated reason for lower rates is a mountain of debt built up during the past decade. Debt owed by governments, businesses and households around the globe is up nearly 50% since before the financial crisis to $246.6 trillion at the beginning of March… The borrowing helped pull economies out of the nasty recession, but left them with high debt burdens that make it harder for policy makers to raise rates. It also makes consumers and businesses more likely to pull back from spending money on new goods if economic conditions weaken.”
Fixed-Income Bubble Watch:
September 10 – Bloomberg (Michael Gambale): “Investors like long-term debt and companies are increasingly happy to sell it to them. Giving buyers a chance to lock in returns as rates fall, prudent borrowers are grabbing an opportunity to kick debt maturities down the road. In the U.S. investment-grade bond market, there have been 40 tranches launched already this week, of which 22 have a maturity of 10-years or more. Of last week’s 90 tranches sold, 52 had maturities of 10-years or greater. Longer-dated paper accounted for $40.6b (54%) of last week’s $74.9b barrage of new debt. This is an abnormally large amount of longer-dated issuance.”
September 12 – Bloomberg (Christopher DeReza): “Credit investors have pushed cash into U.S. high-grade funds at the third fastest rate ever. Net inflows hit $5.6 billion for the week ended Sept. 11, data from Refinitiv’s Lipper show, the most since April when funds received $5.9 billion… The biggest single weekly inflow was seen in October 2014, when investors added $6.9 billion.”
September 9 – Associated Press: “Moody's… downgraded Ford's credit rating to junk status, citing expectations that the automaker will be weighed by weak earnings and cash generation as it pursues a costly restructuring plan. Ford responded by saying that its underlying business is strong and its balance sheet is solid.”
September 9 – Reuters (Katanga Johnson): “The head of the top U.S. markets regulator… issued a warning over market risks including rising corporate debt, a U.K. withdrawal from the European Union, and the transition away from a key lending rate. Jay Clayton, chairman of the Securities and Exchange Commission (SEC), told an audience… he continued to be concerned over corporate debt growth, which he said had been fostered by a decade of accommodative monetary policies. In the United States, outstanding corporate debt stands at almost $10 trillion, almost 50% of GDP, he said. ‘Those are numbers that should attract our attention,” said Clayton.”
September 9 – Reuters (Richard Leong): “Moody’s… believes the U.S. Treasury Department’s proposal to bring Fannie Mae and Freddie Mac out of conservatorship raises their credit risk as it would shrink their role in U.S. housing market. The Treasury said… the government should draw up a plan to begin recapitalizing the mortgage finance agencies, while calling on Congress to act on comprehensive housing reform. ‘If implemented, proposals to reform the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, would be credit negative for the companies’ creditors,’ the rating agency said…”
Leveraged Speculation Watch:
September 12 – Bloomberg (Lu Wang, Melissa Karsh and Sonali Basak): “Equity hedge funds are paying dearly for their devotion to industries like software and distaste for energy and commodity stocks. Wrong-way moves in positions they’ve crowded into, both long and short, could raise survival risk for some managers, one firm says. ‘This unexpected, profit-sapping dislocation has definitely hurt the majority of clients,’ said Mark Connors, global head of risk advisory at Credit Suisse. ‘Some managers may not make it through the month.’ … According to Morgan Stanley’s prime brokerage unit, the violent moves in the past two weeks climaxed Monday with a hedge-fund alpha gauge the firm devised, plotting returns in popular longs versus those in favorite shorts, notching its second-worst showing of the year.”
September 10 – Bloomberg (Elizabeth Dexheimer): “Hedge funds and other investors in Fannie Mae and Freddie Mac got more mixed messages from the Trump administration Tuesday, adding to the whipsaw trading sessions that have dazed shareholders in recent days. Treasury Secretary Steven Mnuchin… made clear that he plans to end a controversial policy that requires the mortgage giants to send virtually all their earnings to the government. That was the good news for investors. But Mnuchin also said he opposes any ‘simple’ recap and release -- a move hedge funds have long lobbied for that would consist of building up Fannie and Freddie’s capital buffers and then freeing them from federal control.”
September 13 – Financial Times (Laurence Fletcher): “Robert Citrone’s Discovery Capital Management and Guillaume Fonkenell’s Pharo Management were among the big-name hedge funds that suffered losses during last month’s tumble in emerging markets. Worries about the US-China trade war and the health of the global economy, as well as a debt crisis in Argentina triggered by President Mauricio Macri’s shock primary election defeat, helped drive a sharp sell-off in EM assets during August as investors ran for cover.”
September 11 – Bloomberg (Sabrina Willmer): “Blackstone Group Inc. has raised $20.5 billion for its largest real estate fund ever… The amount gathered is more than the $15.8 billion raised by the 2015 pool. Institutions including public pension plans and insurance companies are putting more money into property assets to protect against inflation and diversify their holdings beyond stocks and bonds.”
Geopolitical Watch:
September 8 – Reuters (Francois Murphy): “The U.N. nuclear watchdog told Iran… there is no time to waste in answering its questions, which diplomats say include how traces of uranium were found at a site that was not declared to the agency. It also said Iran was starting to follow through on its pledge last week to further breach its 2015 nuclear deal with world powers, this time installing more advanced centrifuges and moving toward enriching uranium with them, which the deal bans.”
September 7 – Reuters (Parisa Hafezi): “Iran said… it was now capable of raising uranium enrichment past the 20% level and had launched advanced centrifuge machines in further breaches of commitments to limit its nuclear activity under a 2015 deal with world powers.”
September 13 – Reuters (Idrees Ali and Ben Blanchard): “A U.S. Navy destroyer sailed near islands claimed by China in the South China Sea…, the U.S. military said, a move likely to anger Beijing. The busy waterway is one of a growing number of flashpoints in the U.S.-Chinese relationship, which include an escalating trade war, American sanctions on China’s military and U.S. relations with Taiwan. Commander Reann Mommsen… told Reuters that the destroyer Wayne E. Meyer challenged territorial claims in the operation, including what she described as excessive Chinese claims around the Paracel Islands, which are also claimed by Taiwan and Vietnam.”
September 11 – Financial Times (Demetri Sevastopulo): “The Pentagon is compiling a list of companies with ties to the Chinese military as part of a stepped-up Trump administration effort to stop Beijing from obtaining sensitive technologies and protect US defence supply chains. The US defence department is trying to identify Chinese companies and organisations with direct and indirect relationships with the People’s Liberation Army to help reduce the chances of US weapons supply chains being compromised… The Pentagon has become increasingly concerned about supply chains, seeking ways to tackle critical gaps in the US industrial base and prevent infiltration by adversaries. The focus has intensified under the Trump administration, which in 2017 named China a ‘revisionist’ power in its first national security strategy.”
September 9 – Reuters (Thomas Escritt): “Comparing the struggle of Hong Kong’s pro-democracy protesters to the role of Berlin during the Cold War, activist Joshua Wong told an audience in the German capital that his city was now a bulwark between the free world and the ‘dictatorship of China’… ‘If we are in a new Cold War, Hong Kong is the new Berlin,’ he said in a reception space a stone’s throw from the Berlin Wall on the roof of the Reichstag building, which for decades occupied the no-man’s land between Communist East Berlin and the city’s capitalist western half.”
September 8 – Reuters (Brenda Goh): “Hong Kong is an inseparable part of China and any form of secessionism ‘will be crushed’, state media said…, a day after demonstrators rallied at the U.S. consulate to ask for help in bringing democracy to city. The China Daily newspaper said Sunday’s rally in Hong Kong was proof that foreign forces were behind the protests… and warned that demonstrators should ‘stop trying the patience of the central government’. Chinese officials have accused foreign forces of trying to hurt Beijing by creating chaos in Hong Kong over a hugely unpopular extradition bill that would have allowed suspects to be tried in Communist Party-controlled courts.”
September 10 – Reuters (Kelsey Johnson, Fabian Hamacher and Michael Martina): “Canada has sailed a warship through the sensitive Taiwan Strait, the Canadian government said, three months after a similar operation and amid strained ties between Beijing and Ottawa.”
