On a seasonally-adjusted and annualized basis, Household borrowings expanded $668 billion, up from Q1’s SAAR $323 billion, to a record $15.834 TN. Household mortgage debt expanded SAAR $330 billion, up from Q1’s SAAR $226 billion, to a record $10.440 TN. Total Business debt growth slowed to SAAR $680 billion, down from Q1’s booming $1.023 TN (strongest since Q1 ’16), to a record $15.744 TN. State & Local debt contracted SAAR $77 billion, after declining SAAR $36 billion during Q1, to $3.039 TN. Foreign U.S. borrowings expanded nominal $231 billion for the quarter (to $4.291 TN), the strongest foreign debt growth since Q1 ’17.
Considering recent “repo” market tumult, let’s take a deeper-than-usual dive into the Z.1 category, “Federal Funds and Securities Repurchase Agreements” (aka “repo”). “Repo” Liabilities jumped $239 billion (nominal) during the quarter, or 24% annualized. This pushed growth over the past three quarters to $710 billion, or 27% annualized. This was the largest nine-month growth since the first three quarters of 2006. At $4.280 TN, “repo” ended June at the highest level since Q3 2008.
It’s no coincidence that the $710 billion nine-month increase in “repo” corresponded with a spectacular 106 bps decline in 10-year Treasury yields. I’ll assume repo market ballooning continued into early-September, as yields dropped another 44 bps. The expansion of securities Credit (the “repo” market being a key component) generates new marketplace liquidity. Moreover, the concurrent expansion of “repo” Credit and system liquidity is in today’s highly speculative global environment powerfully self-reinforcing.
September 26 – Bloomberg (Vivien Lou Chen): “It may take as much as $500 billion in Treasury purchases by the Federal Reserve to fix all of the cracks exposed last week in the more than $2 trillion U.S. repo market. Estimates from analysts at TD Securities, Morgan Stanley, BMO Capital Markets and Pictet Wealth Management range from roughly $200 billion to half a trillion dollars. They’re not alone. Two former Fed officials said Thursday that the central bank might need to do $250 billion of outright Treasury purchases to prevent further pain in U.S. money markets. There’s a growing consensus that the central bank’s daily efforts to restore order in the short-term funding market are falling short of what’s needed: a much larger effort to build up a substantial buffer of bank reserves…”
As we’ve witnessed over the past two weeks, the unwind of securities Credit and the attendant contraction of liquidity turns immediately problematic. A Thursday afternoon Bloomberg headline (from the above article) resonated: “Repo-Market Cure May Take $500 Billion of Fed Treasuries Buying,” referring to Wall Street estimates of the scope of Fed intervention necessary to stabilize funding markets. I have posited a serious globalized de-risking/deleveraging episode would require multi-Trillion expansions of Federal Reserve and global central bank balance sheets.
“Brokers & Dealers” is the largest borrower by Z.1 category, with “repo” Liabilities up $92 billion during Q2 to $1.781 TN (high since Q3 ’13). Broker “repo” Liabilities surged $296 billion over three quarters, or 27% annualized.
As the second largest borrower, Rest of World (ROW) “repo” Liabilities increased $10 billion during the quarter to a record $1.102 TN. ROW “repo” Liabilities surged $254 billion over the past three quarters, or 40% annualized. ROW “repo” peaked at $857 billion during the previous cycle (Q1 ’08).
While not at the same level as the Wall Street firms or ROW, Real Estate Investment Trusts (REITs) have as well been notably aggressive “repo” borrowers. REIT “repo” Liabilities rose $30.3 billion during Q2 to a record $369 billion. REIT “repo” Liabilities were up $107 billion, or 41%, over the past year and $150 billion, or 69%, over two years. REIT “repo” Liabilities posted a previous cycle peak during Q2 2007 at $106 billion.
Money Market Funds (MMF) are a large holder of “repo” Assets (second only to Brokers & Dealers). MMF “repo” holdings jumped an eye-opening $153 billion during Q2 to a record $1.133 TN, with a gain over three quarters of $213 billion, or 23%. It’s worth noting MMF “repo” holdings peaked at $618 billion during Q4 2007 (having doubled over the preceding two years).
It’s also worth highlighting that the Fed’s balance sheet contracted $58 billion during the quarter to $4.140 TN. Some have been confounded by the lack of impact to system liquidity from the Fed somewhat drawing down its securities portfolio. But with securities Credit expanding by multiples of the decline in Fed Credit, marketplace liquidity has been dominated by securities speculating and leveraging. As I often repeat, contemporary finance works miraculously on the upside. Fear the downside. The Fed’s balance sheet expanded as much over past week as it contracted during the second quarter.
Bank (“Private Depository Institutions”) assets increased $203 billion during the quarter to a record $19.506 TN, this despite a $159 billion decline in “Reserves at Federal Reserve”. Bank Loans jumped $192 billion during the quarter, or 6.8% annualized, bouncing back strongly after Q1’s slight contraction (and ahead of Q2 ‘18’s $174bn). Bank Loans were up $550 billion, or 5.0%, year-over-year. Bank Mortgage Loans expanded $76 billion (5.5% annualized) during the quarter to a record $5.540 TN, the strongest expansion in two years.
Bank holdings of Debt Securities jumped $112 billion, or 10% annualized, to a record $4.505 TN (one-year gain of $320 billion, or 7.7%). Debt Securities holdings were below $3.0 TN going into the 2008 crisis. Bank Agency/GSE MBS holdings jumped a huge $82.2 billion during the quarter, the largest increased since Q1 ’12. Over the past three quarters, Banks boosted Agency Securities by $217 billion, or almost 10%, to a record $2.588 TN. Banks’ Agency Securities holdings are about double the level from the crisis. Bank Holdings of Treasuries rose $34 billion during Q2 to a record $771 billion, jumping $121 billion over three quarters. Treasury holdings were up 22% y-o-y. For comparison, Banks’ Corporate Bond holdings increased $25 billion y-o-y, or 3.9%, to $664 billion.
Broker/Dealer Assets jumped $132 billion during Q2, or 16% annualized, to $3.487 TN (high since Q2 ’13). This was a sharp reversal from Q1’s small ($4bn) contraction. Broker/Dealer Assets were up a notable $349 billion, or 11.1%, over the past year. "repo" Assets jumped $227 billion y-o-y, or 20.0%. Over this period, “repo” Liabilities surged $326 billion, or 22.4%, to $1.781 TN. This was the highest level of “repo” Liabilities going back to Q3 2013, a period that corresponded with a sharp upside reversal in market yields and contraction in “repo” securities Credit.
Total system Debt Securities increased nominal $304 billion during Q2 to a record $45.771 TN. This boosted the gain since the end of 2008 to $14.825 TN, or 48%. As a percentage of GDP, Debt Securities ended Q2 at 214% (record 223% Q1 ’13). Equities jumped $1.602 TN to $49.799 TN, ending Q2 slightly below Q3 ‘18’s all-time record ($50.419 TN). Equities ended Q2 at 233% of GDP (record Q3 ’18 243%). Total (Debt and Equities) Securities jumped $1.906 TN during Q2 ($7.51 TN during the first half) to a record $95.569 TN. Total Securities-to-GDP ended June at 448% (record Q3 ’18 458%). Previous cycle peaks were 379% during Q3 ’07 and 359% in Q1 ’00. Total Securities-to-GDP began the eighties at 44% and the nineties at 67%.
I view the “repo” market expansion as indicative of overall speculative leverage. The rapid growth of Bank and Broker/Dealer debt securities holdings is symptomatic of speculative excess and likely associated with derivative-related trading activities. To simplistically connect the dots, the expansion of “repo” securities Credit along with ballooning Bank and Broker/Dealer securities holdings generate the liquidity abundance and speculative impulses for a general inflation of securities market prices (debt and equities). The inflation of perceived wealth then feeds into the real economy through strong consumer and business spending.
Accordingly, the Household Balance Sheet remains a Bubble Analysis Focal Point. Total Household Assets increased $2.024 TN during the quarter to a record $129.671 TN, with a $7.358 TN gain during 2019’s first-half. And with Liabilities up $175 billion, Household Net Worth (Assets less Liabilities) jumped $1.949 TN during Q2 to a record $113.463 TN. Household Net Worth rose $7.177 TN during this year’s first-half, a record six-month advance. Net Worth rose to a record (matching Q4 ’17) 532% of GDP. For comparison, Household Net Worth-to-GDP posted cycle peaks of 492% during Q1 2007 and 446% to end Q1 2000. Net Worth-to-GDP began the eighties at 342% and the nineties at 378%.
Household Real Estate holdings increased $257 billion during the quarter, down from Q1’s $707 billion gain (strongest since Q4 ’05). Yet Real Estate jumped $1.692 TN over the past year to a record $32.676 TN (153% of GDP). Real Estate holdings posted a previous cycle peak of $26.466 TN (189% of GDP) during Q4 ’06.
Financial Assets are the unquestionable epicenter of this cycle’s Bubble. Household holdings of Financial Assets jumped $1.700 TN during Q2, after surging $4.544 TN in Q1. Financial Asset holdings ended Q2 at a record $90.689 TN, or 425% of GDP. Financial Assets-to-GDP ended Q3 2007 at 376% and Q1 2000 at 355%. Household Assets began the nineties at 267% of GDP.
Household Total Equities (Equities and Mutual Funds) holdings ended Q1 at record $27.427 TN, or 129% of GDP. The previous two cycles saw Household Equities peak at $14.930 TN (102% of GDP) during Q3 ’07 and $11.742 TN (117% of GDP) in Q1 ’00. Total Household Equities holdings began the nineties at 47% of GDP.
Rest of World (ROW) is key to Bubble Analysis as well, though with layers of ambiguity and complexity. ROW holdings of U.S. Financial Assets surged $843 billion during Q2 to a record $32.582 TN. Holdings were up $1.798 TN y-o-y, boosting ROW holdings-to-GDP to a record 153%. ROW holdings-to-GDP ended 2007 at 108% and 1999 at 74%. ROW holdings of U.S. Debt Securities increased $337 billion during Q2 to a record $11.906 TN. Debt Securities jumped $728 billion during the first half, with Treasury holdings rising $372 billion to a record $6.637 TN. ROW repo Liabilities jumped $187 billion, or 20%, during the first six months of 2019 to a record $1.102 TN.
Few see the Bubble, yet the Fed’s Z.1 report offers a compelling outline. This week saw “repo” market instability bumped from the headlines by instability at the White House. Markets reacted to whistleblower allegations and the opening of an impeachment inquiry in typical fashion: “The President under duress is more likely to strike a deal with China.” In comments Wednesday, the President was happy to play along: “They want to make a deal very badly... It could happen sooner than you think.” President Trump’s tough talk directed at China Tuesday at the U.N. didn’t leave one feeling the administration was softening up for an imminent deal.
And then came the Friday afternoon Bloomberg scoop (Jenny Leonard and Shawn Donnan): “Trump administration officials are discussing ways to limit U.S. investors’ portfolio flows into China in a move that would have repercussions for billions of dollars in investment pegged to major indexes, according to people familiar with the internal deliberations. The discussions are occurring as Washington and Beijing negotiate a potential truce in their trade war that’s rattled the world’s two biggest economies and investors for more than a year… A U.S. crackdown on capital flows would therefore expose a new pressure point in the economic dispute and cause disruption well beyond the hundreds of billions in tariffs the two sides have levied against each other.”
Markets would like to believe the administration is posturing ahead of the next round of trade talks. Bloomberg follow-up articles included comments from Wall Street analysts, including: “This is huge.” “Ludicrous.” “The news opens up a new front in the U.S.-China trade conflict.” “It’s another example of how every time people think this trade war is deescalating, it escalates again.” A Reuters article was on point: “…what would be a radical escalation of U.S.-China trade tensions.”
Chinese company listed ADRs were slammed in Friday U.S. trading. This creates Monday morning Chinese market and currency vulnerability. To this point, it’s been the Teflon President affixed to Teflon markets. But between “repo” market instability, Washington chaos, the risk of serious trade war escalation – in a world of heightened financial, economic and geopolitically instability – there is a scenario where the unraveling begins. Markets have to this point demonstrated astounding faith that the President will ultimately act in their best interest. As always, markets are a contest of greed and fear. One of the bad scenarios would be the markets fearing an administration resorting to a “scorched earth” gambit.
For the Week:
The S&P500 declined 1.0% (up 18.1% y-t-d), and the Dow slipped 0.4% (up 15.0%). The Utilities gained 1.3% (up 23.1%). The Banks dipped 0.6% (up 16.9%), and the Broker/Dealers dropped 2.6% (up 12.3%). The Transports fell 1.1% (up 12.8%). The S&P 400 Midcaps declined 1.1% (up 15.6%), and the small cap Russell 2000 dropped 2.5% (up 12.7%). The Nasdaq100 fell 1.8% (up 21.4%). The Semiconductors declined 1.3% (up 33.6%). The Biotechs sank 6.1% (down 0.4%). With bullion down $20, the HUI gold index dropped 3.5% (up 31.1%).
Three-month Treasury bill rates ended the week at 1.74%. Two-year government yields declined five bps to 1.63% (down 86bps y-t-d). Five-year T-note yields dipped four bps to 1.56% (down 95bps). Ten-year Treasury yields fell four bps to 1.68% (down 100bps). Long bond yields declined three bps to 2.13% (down 89bps). Benchmark Fannie Mae MBS yields slipped two bps to 2.62% (down 87bps).
Greek 10-year yields slipped a basis point to 1.32% (down 308bps y-t-d). Ten-year Portuguese yields dropped eight bps to 0.17% (down 156bps). Italian 10-year yields sank 10 bps to 0.82% (down 192bps). Spain's 10-year yields fell nine bps to 0.15% (down 127bps). German bund yields declined five bps to negative 0.57% (down 82bps). French yields fell six bps to negative 0.28% (down 99bps). The French to German 10-year bond spread narrowed one to 29 bps. U.K. 10-year gilt yields sank 13 bps to 0.50% (down 78bps). U.K.'s FTSE equities index rallied 1.1% (up 10.4% y-t-d).
Japan's Nikkei Equities Index declined 0.9% (up 9.3% y-t-d). Japanese 10-year "JGB" yields declined three bps to negative 0.24% (down 24bps y-t-d). France's CAC40 fell 0.9% (up 19.2%). The German DAX equities index dipped 0.7% (up 17.3%). Spain's IBEX 35 equities index was little changed (up 7.5%). Italy's FTSE MIB index declined 0.5% (up 20.2%). EM equities were mixed. Brazil's Bovespa index added 0.2% (up 15.5%), while Mexico's Bolsa slumped 1.6% (up 2.9%). South Korea's Kospi index dropped 2.0% (up 0.4%). India's Sensex equities index rose 2.1% (up 7.6%). China's Shanghai Exchange sank 2.5% (up 17.6%). Turkey's Borsa Istanbul National 100 index surged 4.9% (up 15.2%). Russia's MICEX equities index lost 1.4% (up 16.4%).
Investment-grade bond funds saw inflows of $1.067 billion, while junk bond funds posted outflows of $258 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates dropped nine bps to 3.64% (down 108bps y-o-y). Fifteen-year rates declined five bps to 3.16% (down 100bps). Five-year hybrid ARM rates sank 11 bps to 3.38% (down 59bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 12 bps to 4.04% (down 72bps).
Federal Reserve Credit last week surged $58.6bn to $3.809 TN. Over the past year, Fed Credit contracted $353bn, or 8.5%. Fed Credit inflated $998 billion, or 35%, over the past 359 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $8.3bn last week to $3.459 TN. "Custody holdings" gained $20.0bn y-o-y, or 0.6%.
M2 (narrow) "money" supply gained $10.4bn last week to a record $15.021 TN. "Narrow money" gained $786bn, or 5.5%, over the past year. For the week, Currency increased $2.4bn. Total Checkable Deposits fell $17.0bn, while Savings Deposits rose $18.9bn. Small Time Deposits were unchanged. Retail Money Funds added $6.0bn.
Total money market fund assets surged $40.5bn to $3.443 TN. Money Funds gained $559bn y-o-y, or 19.4%.
Total Commercial Paper increased $3.9bn to $1.097 TN. CP was up $15bn y-o-y, or 1.4%.
Currency Watch:
The U.S. dollar index gained 0.6% to 99.109 (up 3.0% y-t-d). For the week on the upside, the New Zealand dollar increased 0.6% and the Canadian dollar gained 0.1%. On the downside, the British pound declined 1.5%, the South African rand 1.3%, the Mexican peso 1.2%, the South Korean won 1.0%, the Swedish krona 0.8%, the euro 0.7%, the Singapore dollar 0.4%, the Japanese yen 0.3%, the Brazilian real 0.3% and the Norwegian krone 0.2%. The Chinese renminbi declined 0.44% versus the dollar this week (down 3.43% y-t-d).
Commodities Watch:
September 22 – Wall Street Journal (Summer Said, Benoit Faucon and Rory Jones): “The Saudi Arabian Oil Co. is in emergency talks with equipment makers and service providers, offering to pay premium rates for parts and repair work as it attempts a speedy recovery from missile attacks on its largest oil-processing facilities, Saudi officials and oil contractors said. It may take many months—rather than the maximum 10 weeks company executives have promised—to restore operations to full working order, they said.”
The Bloomberg Commodities Index declined 1.1% this week (up 1.8% y-t-d). Spot Gold fell 1.3% to $1,497 (up 16.7%). Silver lost 1.1% to $17.652 (up 13.6%). WTI crude sank $2.18 to $55.91 (up 23%). Gasoline fell 1.6% (up 25%), and Natural Gas sank 5.1% (down 18%). Copper slipped 0.3% (down 1%). Wheat gained 0.6% (down 3%). Corn increased 0.2% (down 1%).
Market Instability Watch:
September 27 – Bloomberg (Alex Harris): “The repo market has calmed down, but the Federal Reserve is gearing up its safeguards seemingly to prevent turmoil from resurfacing on Monday. Last week’s craziness was not the first time in recent memory that U.S. money markets have shown signs of stress. It’s tended to happen around quarter-end, most notably in late December. The third quarter ends Monday. So, for the past two days, the New York Fed has run $100 billion overnight repo operations -- bigger than the $75 billion daily liquidity injections that began early last week -- plus separate 14-day operations. Neither of Friday’s actions were fully subscribed and short-term lending rates are well below the peak seen last week, a sign order has been restored for now. But on Monday, that larger $100 billion size will be repeated and the overnight operation will run from 7:45 a.m. to 8 a.m. New York time, earlier than prior morning actions. Both signal the Fed is getting ready in case rates spike again.”
September 26 – Bloomberg (Brian Chappatta): “The repo market madness lives on for a ninth day. The Federal Reserve Bank of New York announced Wednesday that it would increase the size of its next overnight system repurchase agreement operation to a $100 billion maximum, from $75 billion previously, and also raise the limit on its 14-day term repo operation to $60 billion from $30 billion. Simply put, the bank wants to flood the funding market with enough cash to soak up all the securities that dealers submit and leave no doubt that the critical financial-system plumbing is in fine working order ahead of the end of the quarter.”
September 23 – Wall Street Journal (Daniel Kruger and Vipal Monga): “The tumult in the market for short-term cash loans highlights some analysts’ concerns about the Federal Reserve’s proposed replacement for the troubled London interbank offered rate. The secured overnight financing rate, known as SOFR, rose to a record 5.25% last week…, pulled higher by a jump in borrowing rates for overnight repurchase agreements, or repos… SOFR’s price is based on repo rates, so the spike in that market last Tuesday caused the new benchmark for variable-rate securities to jump almost 3 percentage points to its highest level on record.”
September 26 – Wall Street Journal (Maureen Farrell, Corrie Driebusch, Miriam Gottfried and Allison Prang): “The IPO market took another hit Thursday as Endeavor Group Holdings Inc. yanked its planned offering, and Peloton Interactive Inc. ’s shares skidded on their first day of trading. Endeavor became the second big casualty of the IPO market’s recent chill after WeWork’s parent company pulled its offering earlier this month. It is the second time Endeavor has hit the brakes on its IPO this year.”
September 27 – CNBC (Kate Rooney): “This has been a tough week for bitcoin. The world’s first and largest cryptocurrency plunged more than 20% over seven days, hitting a low of $7,757 Friday — its lowest level since June. Bitcoin futures meanwhile, were on pace for their worst week of the year.”
Trump Administration Watch:
September 26 – Associated Press (Lisa Mascaro, Mary Clare Jalonick and Julie Pace): “President Donald Trump pressed the leader of Ukraine to ‘look into’ Joe Biden, Trump’s potential 2020 reelection rival, as well as the president’s lingering grievances from the 2016 election, according to a rough transcript of a summer phone call that is now at the center of Democrats’ impeachment probe. Trump repeatedly prodded Volodymyr Zelenskiy, new president of the East European nation, to work with U.S. Attorney General William Barr and Rudy Giuliani, Trump’s personal lawyer. At one point in the July conversation, Trump said, ‘I would like for you to do us a favor.’”
September 27 – Bloomberg (Jenny Leonard and Shawn Donnan): “Trump administration officials are discussing ways to limit U.S. investors’ portfolio flows into China in a move that would have repercussions for billions of dollars in investment pegged to major indexes, according to people familiar with the internal deliberations. The discussions are occurring as Washington and Beijing negotiate a potential truce in their trade war that’s rattled the world’s two biggest economies and investors for more than a year. They also come as China is removing limits on foreign investment in its financial markets. A U.S. crackdown on capital flows would therefore expose a new pressure point in the economic dispute and cause disruption well beyond the hundreds of billions in tariffs the two sides have levied against each other.”
September 24 – Reuters (Jeff Mason and David Lawder): “U.S. President Donald Trump delivered a stinging rebuke to China’s trade practices… at the United Nations General Assembly, saying he would not accept a ‘bad deal’ in U.S.-China trade negotiations. Four days after deputy U.S. and Chinese negotiators held inconclusive talks in Washington, Trump’s remarks were anything but conciliatory and emphasized the need to correct structural economic abuses at the heart of the countries’ nearly 15-month trade war. He said Beijing had failed to keep promises it made when China joined the World Trade Organization in 2001 and was engaging in predatory practices that had cost millions of jobs in the United States and other countries. ‘Not only has China declined to adopt promised reforms, it has embraced an economic model dependent on massive market barriers, heavy state subsidies, currency manipulation, product dumping, forced technology transfers and the theft of intellectual property and also trade secrets on a grand scale,’ Trump said. ‘As far as America is concerned, those days are over.’”
September 25 – Wall Street Journal (Kate O’Keeffe in Washington and Jeremy Page): “Beijing is increasingly tapping private Chinese firms to acquire foreign technology for its military, according to officials and a new report, in a strategy that is prompting calls by leaders in Washington to retool U.S. national security policy. Chinese President Xi Jinping is pressing these companies to bid for defense contracts as part of a ‘military-civil fusion’ drive to upgrade an arms industry long dominated by a handful of inefficient state-run contractors and research institutes. The initiative… is alarming U.S. officials, who fear it is a central plank in Beijing’s attempt to build a world-class military capable of challenging the U.S. in Asia and beyond... ‘China’s obfuscation and elimination of barriers between the defense and civilian sectors has troubling implications for foreign as well as domestic Chinese firms,’ a senior U.S. administration official said…”
September 22 – CNBC (Nancy Hungerford): “As President Donald Trump puts pressure on Beijing to end unfair business practices, the Department of Justice has a warning for companies: Bolster your defenses. ‘More cases are being opened that implicate trade secret theft’ — and more of them point to China, said U.S. Deputy Assistant Attorney General Adam Hickey. Since 2012, more than 80% of economic espionage cases brought by the department’s National Security Division have implicated China. The frequency of cases has been rising in recent years, according to Hickey.”
September 24 – Reuters (Humeyra Pamuk and David Brunnstrom): “The United States led more than 30 countries in condemning what it called China’s ‘horrific campaign of repression’ against Muslims in Xinjiang at an event on the sidelines of the U.N. General Assembly that was denounced by China. In highlighting abuses against ethnic Uighurs and other Muslims in China, Deputy Secretary of State John Sullivan said… the United Nations and its member states had ‘a singular responsibility to speak up when survivor after survivor recounts the horrors of state repression.’”
September 22 – Reuters (Humeyra Pamuk): “The United States aims to avoid war with Iran and the additional troops ordered to be deployed in the Gulf region are for ‘deterrence and defense,’ U.S. Secretary of State Mike Pompeo said…”
September 22 – Bloomberg (Danielle Moran): “President Donald Trump reiterated his call for the Federal Reserve to lower interest rates to less than zero in a tweet on Sunday. ‘We should always be paying less interest than others!’ Trump tweeted, referring to the negative rates that have become commonplace in Europe and Asia. About $14.3 trillion of global debt yields at sub-zero rates, according to Bloomberg indexes. That’s down from a high of $17 trillion in late August.”
September 22 – Wall Street Journal (Andrew Ackerman): “Mortgage-finance companies Fannie Mae and Freddie Mac are expected to start keeping their earnings as early as this week, pausing a yearslong arrangement in which they handed nearly all of their profits to the Treasury Department. The move, in an expected agreement between the Trump administration and their federal regulator, would be an initial major step in allowing the companies to build up capital so they can operate as private companies again. Under the forthcoming agreement, the companies would be allowed to retain about a year’s worth of profits, or about $20 billion…”
Federal Reserve Watch:
September 24 – Wall Street Journal (Daniel Kruger and Sam Goldfarb): “Banks on Tuesday flooded the Federal Reserve Bank of New York with more than twice as much demand for new two-week loans than the central bank was offering, a sign that banks could need more cash than Fed officials had anticipated. In its latest effort to calm short-term lending markets, the Fed offered $30 billion of two-week cash loans and received $62 billion in demand from banks offering collateral in the form of Treasury and mortgage securities. In a second offering, the Fed received $80.2 billion of demand for $75 billion of shorter-term overnight loans.”
September 23 – Wall Street Journal (Michael S. Derby): “A swift response to market unrest by the Fed last week helped short-term interest-rate markets, Federal Reserve Bank of New York President John Williams said. Temporary injections of liquidity by the central bank ‘had the desired effect of reducing strains in markets, narrowing the dispersion of rates, and lowering secured and unsecured rates to more normal levels relative to other benchmarks,’ Mr. Williams said... Mr. Williams acknowledged the degree of strain seen in short-term markets was larger than expected, but the central bank was ready to respond. ‘We were prepared for such an event, acted quickly and appropriately, and our actions were successful,’ Mr. Williams said, adding that the mantra at the bank is to ‘quickly diagnose the problem, develop the right action plan, and execute that plan.’”
September 25 – Bloomberg (Rich Miller): “Recent turbulence in U.S. money markets has cast light on a big problem hidden at the root of the Federal Reserve’s conduct of monetary policy: It is targeting an increasingly irrelevant interest rate. Less than $100 billion changes hands each day in the federal funds market, the overnight interbank rate that the central bank targets. In contrast, considerably more than a trillion dollars are traded daily in the market for repurchase agreements, where financial institutions swap Treasury securities for cash. ‘Fed funds is a moribund market,’ said Mark Cabana, head of U.S. interest rates at Bank of America... ‘It does not really represent where banks are truly seeking to lend and borrow.’”
U.S. Bubble Watch:
September 26 – Associated Press (Mike Schneider): “The gap between the haves and have-nots in the United States grew last year to its highest level in more than 50 years of tracking income inequality, according to U.S. Census Bureau figures… Income inequality in the United States expanded from 2017 to 2018, with several heartland states among the leaders of the increase, even though several wealthy coastal states still had the most inequality overall… The nation’s Gini Index, which measures income inequality, has been rising steadily over the past five decades.”
September 25 – Reuters (Lucia Mutikani): “Sales of new U.S. single-family homes rebounded more than expected in August, the latest sign that the sluggish housing market was starting to get a lift from lower mortgage rates… The Commerce Department said new home sales increased 7.1% to a seasonally adjusted annual rate of 713,000 units last month, boosted by a surge in activity in the South and West. July’s sales pace was revised up to 666,000 units from the previously reported 635,000 units. It was the second time in three months that new homes sales jumped above 700,000.”
September 24 – CNBC (Diana Olick): “Home price gains have been shrinking since March 2018, but now signs point to reheating in the housing market. The much-watched S&P CoreLogic Case-Shiller U.S. National Home Price Index rose 3.2% annually in July, the same gain reported in June. Prices are still cooling in the largest cities, however. The 10-City Composite rose 1.6% annually, down from 1.9% in the previous month. The 20-City Composite posted a 2.0% annual gain, down from 2.2% in June. The hottest cities for home price appreciation were Phoenix, Las Vegas and Charlotte, North Carolina.”
September 25 – Bloomberg (Esha Dey, Drew Singer, Ryan Vlastelica, Kristine Owram and Mathieu Benhamou): “Unprofitable companies are raising money in initial public offerings at the fastest pace since the dot-com bubble when a revolution in the banking industry sparked a rush to risk. Peloton Interactive Inc.’s planned Nasdaq debut on Thursday extends this year’s run of IPOs by so-called unicorns—huge, money-losing firms like Uber Technologies Inc. and Pinterest Inc. The unprofitable members of the 2019 class of IPOs have already raised the most cash of any year since at least 2000… And there’s more to come: Another 107 companies filed in 2019 to go public, among them The We Co., parent to WeWork, the office-share operator awash in red ink… ‘It used to be an article of faith that you couldn’t go public until you turn a profit,’ said Rett Wallace, chief executive officer of Triton Research… ‘Not a path to profitability, a profit.’ The 2019 class of IPOs may turn out to be as risky as those dot-com companies that went bust at the turn of the century despite the exuberance surrounding them.”
September 27 – Financial Times (Richard Waters and Richard Henderson): “A series of IPO crashes, as investors turned their backs on some of Silicon Valley’s most prized companies, has prompted forecasts of a broader reset in valuations after the long tech boom. Endeavor Group, the Hollywood talent agency that has expanded rapidly into new areas of digital media, became the latest company to pull its initial public offering, after the fitness bike start-up Peloton tumbled to one of the worst first-day performances of the year on Thursday. Wall Street has also been spooked by the collapse of a planned IPO for office space rental company WeWork, which repeatedly slashed its mooted valuation after investors balked at its huge losses and corporate governance.”
September 26 – Bloomberg (John Tozzi): “The cost of family health coverage in the U.S. now tops $20,000, an annual survey of employers found, a record high that has pushed an increasing number of American workers into plans that cover less or cost more, or force them out of the insurance market entirely. ‘It’s as much as buying a basic economy car,’ said Drew Altman, chief executive officer of the Kaiser Family Foundation, ‘but buying it every year.’”
September 23 – Financial Times (Richard Henderson): “Executives across the US are shedding stock in their own companies at the fastest pace in two decades… Corporate insiders — typically chief executives, chief financial officers and board members — sold a combined $19bn of stock in their companies through to mid-September, according to… Smart Insider, a UK-based group. That puts them on track to hit about $26bn for the year, which would mark the most active year since 2000, when executives sold $37bn of stock amid the giddy highs of the dotcom bubble. That projected total for the year would also set a post-crisis high, eclipsing the $25bn of stock sold in 2017.”
September 22 – CNBC (Ari Levy): “Other years have had more tech IPOs than 2019, but there’s never been a year that’s minted so many big ones. After Datadog’s first-day pop on Thursday, the provider of analytics and monitoring tools became the fourth cloud software company to go public in 2019 and attain a market cap of at least $10 billion. Videoconferencing company Zoom, chat app Slack, and cybersecurity vendor Crowdstrike are the three others. The new crop brings to 16 the total number of cloud software companies in the 11-digit club. While 14 of those companies have gone public since the beginning of 2012, this is the first year with more than two that reached $10 billion in value.”
China Watch:
September 24 – Reuters (David Brunnstrom and David Lawder): “China’s top diplomat hit back at U.S. criticism of its trade and development model…, saying Beijing had no intention to ‘play the Game of Thrones on the world stage’ but warned Washington to respect its sovereignty, including in Hong Kong. Wang Yi, China’s foreign minister and state councilor, said Beijing would not bow to threats, including on trade, though he said he hoped a round of high-level trade talks next month would produce positive results.”
September 24 – Associated Press: “China urged President Donald Trump… to listen to developing countries and oppose bullying after the American leader criticized its trade status at the United Nations. A foreign ministry spokesman called on Trump to ‘meet China halfway’ in settling trade disputes. The two governments are locked in an escalating tariff war over complaints about Beijing’s trade surplus and technology ambitions. It threatens to tip the global economy into recession. Trump complained… that the World Trade Organization improperly gives China preferential treatment. He was referring to complaints China, the No. 2 global economy and biggest trader, is abusing the leeway given to developing countries to subsidize exports or delay opening markets.”
September 24 – Bloomberg: “China’s economy in the third quarter was the weakest it has been this year, according to the China Beige Book, with manufacturing, property and the services sectors all worsening, even as borrowing picked up. Manufacturing revenue, profits, volumes and sales prices fell by double-digit paces from the previous three months, although borrowing remained at its highest level, according to the quarterly report. ‘Retail and services stood out mostly for how incapable they were at picking up the slack,’ the report said… The current weakness in the economy is primarily due to manufacturing. While a drop in exports was a factor, most of the decline was due to ‘considerably slower sales price growth,’ according to the report… The services sector continued to underperform, with both revenue and profits dropping from the same period last year. Hiring also slowed, which means that ‘if manufacturing does have to shed a large number of jobs, services has shown no capacity to absorb them,’ the report said. There was a resurgence of borrowing in the period.”
September 24 – Financial Times (Don Weinland): “China’s $8.4tn shadow bankin industry has surged back to life this year, as regulators scale back deleveraging in an effort to spur economic growth. Financial regulators in China have for several years grappled to control the country’s massive shadow lending sector, which includes many forms of off-balance-sheet lending from banks, peer-to-peer lenders and credit extended by asset managers. The opaque industry has long been associated with financial risks, and became the target of a regulatory crackdown in 2018, part of a central government attempt to maintain financial stability. But following the onset of the trade dispute with the US and slowing economic growth, shadow lending has made an unprecedented return in the second and third quarters of 2019, according to China Beige Book International… Shadow lenders accounted for 39% of total lending in the third quarter of the year, and 45% in the second quarter, the highest percentage of shadow financing since at least 2013... As recently as the middle of last year, shadow lending had shrunk to just 21% of total loans. ‘For six months now the non-bank share of loans has been highest on record,’ according to the report, which surveyed more than 10,000 companies’ credit conditions this year. ‘The consensus view that China’s economy is currently credit-constrained should be discarded.’”
September 27 – Bloomberg: “A scrapped bond sale by a mining company in Qinghai this week is sharpening focus on debt risks in the Chinese province. Western Mining Group, controlled by the local government, pulled a 1 billion yuan ($140 million) bond sale on Thursday… Lack of demand was behind the cancellation, according to people familiar with the matter… The failed sale underscores weakening investor appetite for bonds from companies in the mineral-rich province in China’s northwest, after missed payments and debt restructuring at other firms in the region… ‘Negative headlines definitely have had ripple effect on other Qinghai firms,’ said Li Yunfei, a credit analyst with Pacific Securities Co.”
September 24 – Wall Street Journal (Chao Deng): “The head of China’s central bank said that the country’s interest rates were appropriate and that it wouldn’t aggressively ease monetary policy, even as other central banks lower borrowing rates in a bid to spur growth. People’s Bank of China Governor Yi Gang said… Beijing wouldn’t follow other countries in taking certain steps to expand credit, such as substantially cutting the required amount of reserves maintained by commercial banks or pushing interest rates below zero. He told reporters that the economy, despite recent signs of weakness, was still performing within expectations, while inflation was relatively mild. Mr. Yi emphasized instead the importance of preserving flexibility on policy options as the economy slows to its lowest rate of growth in nearly three decades. ‘We should cherish the space for normal monetary policy,’ Mr. Yi said, adding that while Beijing has room to take monetary and fiscal measures, it should continue with normal policy as along as possible.”
September 26 – Bloomberg (Jason Gale): “China’s pig herd has halved to 200 million head over the past year because of a deadly swine disease that may depress pork supplies for years, a Rabobank analyst said. The emergence of African swine fever in China in August 2018, and the subsequent deaths and culling of pigs, have wiped out 25% the country’s pork production, or about 13 million metric tons, which is ‘unprecedented,’ said Pan Chenjun, Rabobank’s Hong Kong-based senior animal proteins analyst…”
September 22 – Bloomberg (Lulu Yilun Chen): “The government of one of China’s top technology hubs is dispatching officials to 100 local corporations including e-commerce giant Alibaba Group Holding Ltd., the latest effort to exert greater influence over the country’s massive private sector. Hangzhou… is assigning government affairs representatives to facilitate communication and expedite projects, the city government said…”
September 26 – Reuters (Jessie Pang and Felix Tam): “Thousands of Hong Kong protesters rallied at the harbor side on Friday, chanting slogans accusing the police of brutality and setting the stage for a weekend of demonstrations leading up to the 70th anniversary of the People’s Republic of China.”
Central Banking Watch:
September 26 – Bloomberg (Ferdinando Giugliano): “It’s all kicking off at the European Central Bank.Sabine Lautenschlaeger, the executive board member from Germany, is to resign at the end of October, slightly more than two years before the end of her mandate. Her exact motives are unknown, but they add to a sense of chaos at the central bank barely a month before a crucial leadership change. Christine Lagarde, who’s taking over from Mario Draghi in November, will have a very tough job ensuring the ECB keeps running effectively. Lautenschlaeger has been a vocal opponent of the central bank’s recent decision to restart quantitative easing, as it tries to counter a slowdown and bring inflation back on target.”
September 23 – Bloomberg (Fergal O'Brien): “European Central Bank President Mario Draghi said the Governing Council should be open to ideas such as Modern Monetary Theory, while noting they’re closer to fiscal policy and should be directed by governments. Draghi was responding to a question from European lawmakers about helicopter money and the best ways to channel funds to the economy in a way that helps inequality. He mentioned MMT and a recent paper by former Federal Reserve Vice Chairman Stanley Fischer… which said central banks should put money ‘directly in the hands of public and private sector spenders.’ ‘These are objectively pretty new ideas,’ Draghi said. ‘They have not been discussed by the Governing Council. We should look at them, but they have not been tested.’”
September 26 – Reuters (Anthony Esposito): “For the second time in a row, Mexico’s central bank cut its key interest rate by 25 basis points to 7.75%, as it cited slowing inflation, widening slack in the economy, and expectations for a slight economic recovery.”
September 23 – Reuters (Leika Kihara): “Bank of Japan Governor Haruhiko Kuroda said… that if the central bank were to ease monetary policy further, it would aim at pushing down short- and medium-term interest rates without flattening the yield curve too much. Kuroda said the BOJ has no preset idea on whether to ramp up stimulus at its next rate review on Oct. 30-31, suggesting that the decision will depend on market moves and the economy’s resilience to overseas risks. But he said the central bank has become more eager to top up monetary support than before due to heightening risks such as the widening fallout from the U.S.-China trade conflict. ‘As risks regarding overseas economy are heightening, we need to be increasingly vigilant to the chance the overseas slowdown could affect Japan’s economy and inflation,’ Kuroda said…”
Brexit Watch:
September 25 – Reuters (Elizabeth Piper and William James): “Boris Johnson’s attorney-general said the British parliament was ‘dead’ in a defiant outburst after lawmakers were recalled following a Supreme Court ruling that the prime minister’s suspension of the assembly was unlawful. The comments by Geoffrey Cox… prompted outrage among Johnson’s opponents seeking to stop him taking Britain out of the EU without a deal. Britain faces an Oct. 31 departure deadline, but after three years of political crisis it remains unclear when, if or on what terms the it will leave the bloc it joined in 1973.”
September 27 – Financial Times (Judith Evans): “The £850m sale of a building that includes one of WeWork’s largest sites has collapsed, in a blow to a London property market wrestling with Brexit worries and the turmoil at the shared office company. A deal to sell Southbank Place near Waterloo station, which also includes the London headquarters of Royal Dutch Shell, to the Singaporean group Bright Ruby was called off on Friday, according to two people briefed on the situation. The collapse of the sale comes as WeWork battles with the fallout from its aborted initial public offering process and the departure of Adam Neumann, its chief executive.”
Europe Watch:
September 26 – Bloomberg (Zoe Schneeweiss): “For all the gloom hanging over the euro-area economy, demand for money was surprisingly solid last month. European Central Bank figures published Thursday showed M3 -- a broad measure of the money circulating in the economy -- expanded at the quickest pace since 2009, and loan growth to companies accelerated to 4.3% from 4.0%. That adds fuel to the arguments of the sizable minority in the ECB’s Governing Council who argued that President Mario Draghi’s stimulus package on Sept. 12 was too much too soon.”
September 23 – Bloomberg (Piotr Skolimowski): “Growth in the euro-area economy almost ground to a halt at the end of the third quarter amid evidence that the manufacturing slump is starting to spread into the services sector. A Purchasing Managers’ Index for the 19-nation region fell to 50.4 in September, missing estimates, down from 51.9 a month earlier and the weakest in more than six years… Markit showed. That suggests growth of just 0.1% in the third quarter and further deterioration in the coming months, it said.”
Asia Watch:
September 27 – Bloomberg (Denise Wee): “A growing pile of bad debt in Asia is luring more global investors. That’s the view of consulting firm Deloitte LLP, which estimates that nonperforming loans held by banks across Asia jumped 23% to $640 billion… China continues to dominate the region’s soured loans, with a total of $295 billion held by Asian banks, while India is the second largest at about $160 billion, according to Deloitte… The scale of China’s nonperforming loan market is ‘on par with even the busiest of European markets,’ with Deloitte estimating that 380 billion yuan ($53bn) of soured debt traded in the secondary market in 2018.”
September 24 – Reuters (Patturaja Murugaboopathy and Gaurav Dogra): “Asian countries are looking for catalysts beyond China to drive their economies as the Sino-U.S. trade war forces Chinese demand for their exports to shrink. Luring foreign companies to their shores, finding ways to boost domestic consumption and scouring for alternate export markets are part of that policy mix as China’s neighbors cope with flagging demand from the mainland, hitherto a large market for Asia in the regional supply chain. Thailand has unveiled a ‘relocation package’ comprising tax incentives and changes in laws to attract foreign firms.”
EM Watch:
September 25 – Bloomberg (Suvashree Ghosh): “Indian authorities are scrambling to suppress speculation about bank closures a day after the regulator imposed restrictions on a local lender, the latest indication of how jittery savers are amid a slowing economy and scandals in the financial system. ‘Reports appearing in some sections of social media about RBI closing down certain commercial banks are false,’ the Reserve Bank of India said in a terse Twitter message…”
September 22 – Reuters (Abhirup Roy): “India’s Altico Capital said… it was evaluating options to resolve its liquidity issues, following its recent default on an interest payment that was due earlier this month. Altico, backed by Clearwater Capital Partners and Abu Dhabi Investment Council, said it defaulted on the interest payment after a rating downgrade prompted several of its lenders to recall a substantial amount of debt causing it to face a liquidity squeeze.”
Japan Watch:
September 24 – Reuters (Tetsushi Kajimoto and Takahiko Wada): “A Bank of Japan board member said… the central bank would ease policy further without hesitation if momentum for hitting its 2% inflation target was lost, adding that she was concerned about mounting risks from overseas economies. ‘My recent concern is that, amid significant downside risks concerning overseas economies, negative effects would be exerted on prices,’ Takako Masai said… ‘I intend to continue to conduct monetary policy appropriately toward achieving the price stability target while considering all conceivable adverse and positive effects from every angle.’”
Global Bubble Watch:
September 25 – Associated Press (Seth Borenstein): “Earth is in more hot water than ever before, and so are we, an expert United Nations climate panel warned in a grim new report Wednesday. Sea levels are rising at an ever-faster rate as ice and snow shrink, and oceans are getting more acidic and losing oxygen, the Intergovernmental Panel on Climate Change said in a report… It warned that if steps aren’t taken to reduce emissions and slow global warming, seas will rise 3 feet by the end of the century, with many fewer fish, less snow and ice, stronger and wetter hurricanes and other, nastier weather systems. ‘The oceans and the icy parts of the world are in big trouble, and that means we’re all in big trouble, too,’ said one of the report’s lead authors, Michael Oppenheimer, professor of geosciences and international affairs at Princeton University. ‘The changes are accelerating.’”
September 23 – Financial Times (Leslie Hook and Camilla Hodgson): “French president Emmanuel Macron has urged world leaders to respond more urgently to climate change, as the New York climate summit opened with a dire warning from the UN secretary-general about the ‘apocalyptic’ impact a warming planet would have on humanity. Mr Macron said France would not pursue new trade negotiations with countries that were not following the Paris climate agreement, adding that doing so would be ‘deeply hypocritical’. António Guterres, UN secretary-general, earlier set the tone for the gathering when he told the assembled audience...: ‘Our warming earth is issuing a chilling cry: stop.’ ‘If we don’t urgently change our ways of life, we jeopardise life itself. My generation has failed in its responsibility to protect our planet. That must change.’”
September 24 – Financial Times (Toby Stubbington): “The level of government debt around the world has ballooned since the financial crisis, reaching levels never seen before during peacetime. A Deutsche Bank analysis shows the world’s major economies have debts on average of more than 70% of GDP, the highest level of the past 150 years except for a spike around the second world war… Unlike earlier eras, when governments typically ran surpluses during peacetime, the pressures of modern democracy and welfare systems have made persistent deficits the norm in many countries… ‘The problem in sustainably recreating such a scenario today is that the post-WWII era saw much higher levels of GDP growth due to favourable demographics, post-war reconstruction and high productivity growth,’ said Deutsche’s Jim Reid.”
September 22 – Reuters (Saikat Chatterjee): “Lending standards in the rapidly growing loan market are deteriorating and complex financial products that mask risks to banks have parallels with the run-up to the 2008 financial crisis, the Bank for International Settlements warned… The number of collateralized loan obligations (CLOs), a form of securitization which pools bank loans to companies, has ballooned in recent years as investors hunt for higher returns by buying into loans to lower-rated and riskier companies. Like the collateralized debt obligations (CDOs) that bundled U.S. sub-prime mortgages into complex products and were blamed for triggering the global financial crisis, CLOs also have complex structures that can mask underlying risks… The global outstanding CLO market is now estimated to stand at about $750 billion, while the CDO market in 2007 before the crisis came to $640 billion, the BIS said.”
September 23 – Wall Street Journal (Lucy Craymer and Jacob Bunge): “China is on a global meat-buying spree, pushing up beef, pork and poultry prices around the globe as the world’s most populous nation scrambles to fill a large void in its meat supply. Meat buyers for China are ramping up purchases after a swine disease hit hog farms… and reduced its pig herd—the world’s largest—by more than a third. Domestic pork prices have surged and China’s meat imports are swelling in response, straining global supplies and sending ripples across the global economy. In Brazil, poultry shipments to China have jumped 31% from a year ago and retail prices for chicken breasts, thighs and legs have increased roughly 16%. Shoppers in Europe are on average paying 5% more for pork, because more domestically produced meat is being sent to China. Lamb prices in Australian grocery stores have jumped 14%, while ground beef on shelves in New Zealand now fetches record prices.”
September 22 – Associated Press (Carlo Piovano and Gregory Katz): “Families stranded, honeymoons and vacations canceled, thousands of workers laid off: The sudden collapse of British tour company Thomas Cook and its network of airlines and hotels sowed chaos for hundreds of thousands of travelers and businesses around the world Monday. Brought down by a variety of factors, including crushing debts and online competition, the 178-year-old travel agency that helped pioneer the package tour ceased operating in the middle of the night. Its four airlines stopped carrying customers, and its 21,000 employees in 16 countries lost their jobs.”
Fixed-Income Bubble Watch:
September 27 – Bloomberg (Michael Gambale): “This month has seen a record number of bond sales by blue-chip companies, incentivized by low interest rates and supercharged investor demand to refinance debt. The market priced 127 deals, surpassing September 2017’s 110 offerings as the busiest month, based on Bloomberg records began going back 20 years. Total volume of $154.9 billion is still short of the $177 billion record set in May 2016. But with two days remaining in September, sales are poised to be the third-highest ever. The surge in supply came as a growing pile of bonds offer negative yields overseas, driving investors desperate for higher returns into the U.S. corporate credit market.”
September 23 – Bloomberg (Danielle Moran): “U.S. state and local governments are selling bonds at the fastest pace since the record-setting flood in December 2017, seizing on a slide in interest rates that has pushed their borrowing costs to the lowest in more than half a century. The volume of new debt sales in September is poised to rival or exceed the $38 billion that was issued in August, which was the busiest month since governments rushed to the market before President Donald Trump’s tax law pulled the subsidies from a key refinancing tactic. Governments have sold about $28 billion of long-term debt in September, a 33% increase from the same period a year ago, and more than $10 billion is already scheduled to be offered over the next week…”
September 24 – Reuters (Karen Pierog): “Local governments in the U.S. Midwest and Southeast regions face elevated exposure to climate change in the coming decades as rising temperatures pose a credit risk for their debt, Moody’s… said… The credit rating agency said heat stress could hurt agriculture, lower labor productivity, increase infrastructure costs, boost energy demand and impair public health. ‘If significant enough, now and over ensuing decades, these difficulties have the potential to lower revenue, increase expenses, impair assets and increase liabilities and debt, among other effects,’ Moody’s said…”
Leveraged Speculation Watch:
September 27 – Bloomberg (Lu Wang and Melissa Karsh): “The violent rotation from momentum stocks into value that had caught many investors off guard earlier this month turned out to be too short for hedge funds to adjust their playbooks. After enduring some of their worst bleeding in years, long-short hedge funds have since clawed back almost half of the drop as the rout in their favored stocks suddenly stopped. The group’s month-to-date losses, which bucked broad market gains, have now narrowed to 1% from as high as 1.75%... As performance improves, there are signs the smart money is dashing back into the old habit of chasing winners and dumping losers.”
Geopolitical Watch:
September 20 – Reuters: “Iran will pursue any aggressor, even if it carries out a limited attack, and seek to destroy it, the head of the elite Revolutionary Guards said…, after attacks on Saudi oil sites which Riyadh and U.S officials blamed on Tehran. Be careful, a limited aggression will not remain limited. ‘We will pursue any aggressor,’ the head of the Guards, Major General Hossein Salami, said… ‘We are after punishment and we will continue until the full destruction of any aggressor.’”
September 26 – Reuters (Tim Kelly): “China’s growing military might has replaced North Korean belligerence as the main security threat to Japan, Tokyo’s annual defense review indicated on Thursday, despite signs that Pyongyang could have nuclear-tipped ballistic missiles.”
The S&P500 declined 1.0% (up 18.1% y-t-d), and the Dow slipped 0.4% (up 15.0%). The Utilities gained 1.3% (up 23.1%). The Banks dipped 0.6% (up 16.9%), and the Broker/Dealers dropped 2.6% (up 12.3%). The Transports fell 1.1% (up 12.8%). The S&P 400 Midcaps declined 1.1% (up 15.6%), and the small cap Russell 2000 dropped 2.5% (up 12.7%). The Nasdaq100 fell 1.8% (up 21.4%). The Semiconductors declined 1.3% (up 33.6%). The Biotechs sank 6.1% (down 0.4%). With bullion down $20, the HUI gold index dropped 3.5% (up 31.1%).
Three-month Treasury bill rates ended the week at 1.74%. Two-year government yields declined five bps to 1.63% (down 86bps y-t-d). Five-year T-note yields dipped four bps to 1.56% (down 95bps). Ten-year Treasury yields fell four bps to 1.68% (down 100bps). Long bond yields declined three bps to 2.13% (down 89bps). Benchmark Fannie Mae MBS yields slipped two bps to 2.62% (down 87bps).
Greek 10-year yields slipped a basis point to 1.32% (down 308bps y-t-d). Ten-year Portuguese yields dropped eight bps to 0.17% (down 156bps). Italian 10-year yields sank 10 bps to 0.82% (down 192bps). Spain's 10-year yields fell nine bps to 0.15% (down 127bps). German bund yields declined five bps to negative 0.57% (down 82bps). French yields fell six bps to negative 0.28% (down 99bps). The French to German 10-year bond spread narrowed one to 29 bps. U.K. 10-year gilt yields sank 13 bps to 0.50% (down 78bps). U.K.'s FTSE equities index rallied 1.1% (up 10.4% y-t-d).
Japan's Nikkei Equities Index declined 0.9% (up 9.3% y-t-d). Japanese 10-year "JGB" yields declined three bps to negative 0.24% (down 24bps y-t-d). France's CAC40 fell 0.9% (up 19.2%). The German DAX equities index dipped 0.7% (up 17.3%). Spain's IBEX 35 equities index was little changed (up 7.5%). Italy's FTSE MIB index declined 0.5% (up 20.2%). EM equities were mixed. Brazil's Bovespa index added 0.2% (up 15.5%), while Mexico's Bolsa slumped 1.6% (up 2.9%). South Korea's Kospi index dropped 2.0% (up 0.4%). India's Sensex equities index rose 2.1% (up 7.6%). China's Shanghai Exchange sank 2.5% (up 17.6%). Turkey's Borsa Istanbul National 100 index surged 4.9% (up 15.2%). Russia's MICEX equities index lost 1.4% (up 16.4%).
Investment-grade bond funds saw inflows of $1.067 billion, while junk bond funds posted outflows of $258 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates dropped nine bps to 3.64% (down 108bps y-o-y). Fifteen-year rates declined five bps to 3.16% (down 100bps). Five-year hybrid ARM rates sank 11 bps to 3.38% (down 59bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 12 bps to 4.04% (down 72bps).
Federal Reserve Credit last week surged $58.6bn to $3.809 TN. Over the past year, Fed Credit contracted $353bn, or 8.5%. Fed Credit inflated $998 billion, or 35%, over the past 359 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $8.3bn last week to $3.459 TN. "Custody holdings" gained $20.0bn y-o-y, or 0.6%.
M2 (narrow) "money" supply gained $10.4bn last week to a record $15.021 TN. "Narrow money" gained $786bn, or 5.5%, over the past year. For the week, Currency increased $2.4bn. Total Checkable Deposits fell $17.0bn, while Savings Deposits rose $18.9bn. Small Time Deposits were unchanged. Retail Money Funds added $6.0bn.
Total money market fund assets surged $40.5bn to $3.443 TN. Money Funds gained $559bn y-o-y, or 19.4%.
Total Commercial Paper increased $3.9bn to $1.097 TN. CP was up $15bn y-o-y, or 1.4%.
Currency Watch:
The U.S. dollar index gained 0.6% to 99.109 (up 3.0% y-t-d). For the week on the upside, the New Zealand dollar increased 0.6% and the Canadian dollar gained 0.1%. On the downside, the British pound declined 1.5%, the South African rand 1.3%, the Mexican peso 1.2%, the South Korean won 1.0%, the Swedish krona 0.8%, the euro 0.7%, the Singapore dollar 0.4%, the Japanese yen 0.3%, the Brazilian real 0.3% and the Norwegian krone 0.2%. The Chinese renminbi declined 0.44% versus the dollar this week (down 3.43% y-t-d).
Commodities Watch:
September 22 – Wall Street Journal (Summer Said, Benoit Faucon and Rory Jones): “The Saudi Arabian Oil Co. is in emergency talks with equipment makers and service providers, offering to pay premium rates for parts and repair work as it attempts a speedy recovery from missile attacks on its largest oil-processing facilities, Saudi officials and oil contractors said. It may take many months—rather than the maximum 10 weeks company executives have promised—to restore operations to full working order, they said.”
The Bloomberg Commodities Index declined 1.1% this week (up 1.8% y-t-d). Spot Gold fell 1.3% to $1,497 (up 16.7%). Silver lost 1.1% to $17.652 (up 13.6%). WTI crude sank $2.18 to $55.91 (up 23%). Gasoline fell 1.6% (up 25%), and Natural Gas sank 5.1% (down 18%). Copper slipped 0.3% (down 1%). Wheat gained 0.6% (down 3%). Corn increased 0.2% (down 1%).
Market Instability Watch:
September 27 – Bloomberg (Alex Harris): “The repo market has calmed down, but the Federal Reserve is gearing up its safeguards seemingly to prevent turmoil from resurfacing on Monday. Last week’s craziness was not the first time in recent memory that U.S. money markets have shown signs of stress. It’s tended to happen around quarter-end, most notably in late December. The third quarter ends Monday. So, for the past two days, the New York Fed has run $100 billion overnight repo operations -- bigger than the $75 billion daily liquidity injections that began early last week -- plus separate 14-day operations. Neither of Friday’s actions were fully subscribed and short-term lending rates are well below the peak seen last week, a sign order has been restored for now. But on Monday, that larger $100 billion size will be repeated and the overnight operation will run from 7:45 a.m. to 8 a.m. New York time, earlier than prior morning actions. Both signal the Fed is getting ready in case rates spike again.”
September 26 – Bloomberg (Brian Chappatta): “The repo market madness lives on for a ninth day. The Federal Reserve Bank of New York announced Wednesday that it would increase the size of its next overnight system repurchase agreement operation to a $100 billion maximum, from $75 billion previously, and also raise the limit on its 14-day term repo operation to $60 billion from $30 billion. Simply put, the bank wants to flood the funding market with enough cash to soak up all the securities that dealers submit and leave no doubt that the critical financial-system plumbing is in fine working order ahead of the end of the quarter.”
September 23 – Wall Street Journal (Daniel Kruger and Vipal Monga): “The tumult in the market for short-term cash loans highlights some analysts’ concerns about the Federal Reserve’s proposed replacement for the troubled London interbank offered rate. The secured overnight financing rate, known as SOFR, rose to a record 5.25% last week…, pulled higher by a jump in borrowing rates for overnight repurchase agreements, or repos… SOFR’s price is based on repo rates, so the spike in that market last Tuesday caused the new benchmark for variable-rate securities to jump almost 3 percentage points to its highest level on record.”
September 26 – Wall Street Journal (Maureen Farrell, Corrie Driebusch, Miriam Gottfried and Allison Prang): “The IPO market took another hit Thursday as Endeavor Group Holdings Inc. yanked its planned offering, and Peloton Interactive Inc. ’s shares skidded on their first day of trading. Endeavor became the second big casualty of the IPO market’s recent chill after WeWork’s parent company pulled its offering earlier this month. It is the second time Endeavor has hit the brakes on its IPO this year.”
September 27 – CNBC (Kate Rooney): “This has been a tough week for bitcoin. The world’s first and largest cryptocurrency plunged more than 20% over seven days, hitting a low of $7,757 Friday — its lowest level since June. Bitcoin futures meanwhile, were on pace for their worst week of the year.”
Trump Administration Watch:
September 26 – Associated Press (Lisa Mascaro, Mary Clare Jalonick and Julie Pace): “President Donald Trump pressed the leader of Ukraine to ‘look into’ Joe Biden, Trump’s potential 2020 reelection rival, as well as the president’s lingering grievances from the 2016 election, according to a rough transcript of a summer phone call that is now at the center of Democrats’ impeachment probe. Trump repeatedly prodded Volodymyr Zelenskiy, new president of the East European nation, to work with U.S. Attorney General William Barr and Rudy Giuliani, Trump’s personal lawyer. At one point in the July conversation, Trump said, ‘I would like for you to do us a favor.’”
September 27 – Bloomberg (Jenny Leonard and Shawn Donnan): “Trump administration officials are discussing ways to limit U.S. investors’ portfolio flows into China in a move that would have repercussions for billions of dollars in investment pegged to major indexes, according to people familiar with the internal deliberations. The discussions are occurring as Washington and Beijing negotiate a potential truce in their trade war that’s rattled the world’s two biggest economies and investors for more than a year. They also come as China is removing limits on foreign investment in its financial markets. A U.S. crackdown on capital flows would therefore expose a new pressure point in the economic dispute and cause disruption well beyond the hundreds of billions in tariffs the two sides have levied against each other.”
September 24 – Reuters (Jeff Mason and David Lawder): “U.S. President Donald Trump delivered a stinging rebuke to China’s trade practices… at the United Nations General Assembly, saying he would not accept a ‘bad deal’ in U.S.-China trade negotiations. Four days after deputy U.S. and Chinese negotiators held inconclusive talks in Washington, Trump’s remarks were anything but conciliatory and emphasized the need to correct structural economic abuses at the heart of the countries’ nearly 15-month trade war. He said Beijing had failed to keep promises it made when China joined the World Trade Organization in 2001 and was engaging in predatory practices that had cost millions of jobs in the United States and other countries. ‘Not only has China declined to adopt promised reforms, it has embraced an economic model dependent on massive market barriers, heavy state subsidies, currency manipulation, product dumping, forced technology transfers and the theft of intellectual property and also trade secrets on a grand scale,’ Trump said. ‘As far as America is concerned, those days are over.’”
September 25 – Wall Street Journal (Kate O’Keeffe in Washington and Jeremy Page): “Beijing is increasingly tapping private Chinese firms to acquire foreign technology for its military, according to officials and a new report, in a strategy that is prompting calls by leaders in Washington to retool U.S. national security policy. Chinese President Xi Jinping is pressing these companies to bid for defense contracts as part of a ‘military-civil fusion’ drive to upgrade an arms industry long dominated by a handful of inefficient state-run contractors and research institutes. The initiative… is alarming U.S. officials, who fear it is a central plank in Beijing’s attempt to build a world-class military capable of challenging the U.S. in Asia and beyond... ‘China’s obfuscation and elimination of barriers between the defense and civilian sectors has troubling implications for foreign as well as domestic Chinese firms,’ a senior U.S. administration official said…”
September 22 – CNBC (Nancy Hungerford): “As President Donald Trump puts pressure on Beijing to end unfair business practices, the Department of Justice has a warning for companies: Bolster your defenses. ‘More cases are being opened that implicate trade secret theft’ — and more of them point to China, said U.S. Deputy Assistant Attorney General Adam Hickey. Since 2012, more than 80% of economic espionage cases brought by the department’s National Security Division have implicated China. The frequency of cases has been rising in recent years, according to Hickey.”
September 24 – Reuters (Humeyra Pamuk and David Brunnstrom): “The United States led more than 30 countries in condemning what it called China’s ‘horrific campaign of repression’ against Muslims in Xinjiang at an event on the sidelines of the U.N. General Assembly that was denounced by China. In highlighting abuses against ethnic Uighurs and other Muslims in China, Deputy Secretary of State John Sullivan said… the United Nations and its member states had ‘a singular responsibility to speak up when survivor after survivor recounts the horrors of state repression.’”
September 22 – Reuters (Humeyra Pamuk): “The United States aims to avoid war with Iran and the additional troops ordered to be deployed in the Gulf region are for ‘deterrence and defense,’ U.S. Secretary of State Mike Pompeo said…”
September 22 – Bloomberg (Danielle Moran): “President Donald Trump reiterated his call for the Federal Reserve to lower interest rates to less than zero in a tweet on Sunday. ‘We should always be paying less interest than others!’ Trump tweeted, referring to the negative rates that have become commonplace in Europe and Asia. About $14.3 trillion of global debt yields at sub-zero rates, according to Bloomberg indexes. That’s down from a high of $17 trillion in late August.”
September 22 – Wall Street Journal (Andrew Ackerman): “Mortgage-finance companies Fannie Mae and Freddie Mac are expected to start keeping their earnings as early as this week, pausing a yearslong arrangement in which they handed nearly all of their profits to the Treasury Department. The move, in an expected agreement between the Trump administration and their federal regulator, would be an initial major step in allowing the companies to build up capital so they can operate as private companies again. Under the forthcoming agreement, the companies would be allowed to retain about a year’s worth of profits, or about $20 billion…”
Federal Reserve Watch:
September 24 – Wall Street Journal (Daniel Kruger and Sam Goldfarb): “Banks on Tuesday flooded the Federal Reserve Bank of New York with more than twice as much demand for new two-week loans than the central bank was offering, a sign that banks could need more cash than Fed officials had anticipated. In its latest effort to calm short-term lending markets, the Fed offered $30 billion of two-week cash loans and received $62 billion in demand from banks offering collateral in the form of Treasury and mortgage securities. In a second offering, the Fed received $80.2 billion of demand for $75 billion of shorter-term overnight loans.”
September 23 – Wall Street Journal (Michael S. Derby): “A swift response to market unrest by the Fed last week helped short-term interest-rate markets, Federal Reserve Bank of New York President John Williams said. Temporary injections of liquidity by the central bank ‘had the desired effect of reducing strains in markets, narrowing the dispersion of rates, and lowering secured and unsecured rates to more normal levels relative to other benchmarks,’ Mr. Williams said... Mr. Williams acknowledged the degree of strain seen in short-term markets was larger than expected, but the central bank was ready to respond. ‘We were prepared for such an event, acted quickly and appropriately, and our actions were successful,’ Mr. Williams said, adding that the mantra at the bank is to ‘quickly diagnose the problem, develop the right action plan, and execute that plan.’”
September 25 – Bloomberg (Rich Miller): “Recent turbulence in U.S. money markets has cast light on a big problem hidden at the root of the Federal Reserve’s conduct of monetary policy: It is targeting an increasingly irrelevant interest rate. Less than $100 billion changes hands each day in the federal funds market, the overnight interbank rate that the central bank targets. In contrast, considerably more than a trillion dollars are traded daily in the market for repurchase agreements, where financial institutions swap Treasury securities for cash. ‘Fed funds is a moribund market,’ said Mark Cabana, head of U.S. interest rates at Bank of America... ‘It does not really represent where banks are truly seeking to lend and borrow.’”
U.S. Bubble Watch:
September 26 – Associated Press (Mike Schneider): “The gap between the haves and have-nots in the United States grew last year to its highest level in more than 50 years of tracking income inequality, according to U.S. Census Bureau figures… Income inequality in the United States expanded from 2017 to 2018, with several heartland states among the leaders of the increase, even though several wealthy coastal states still had the most inequality overall… The nation’s Gini Index, which measures income inequality, has been rising steadily over the past five decades.”
September 25 – Reuters (Lucia Mutikani): “Sales of new U.S. single-family homes rebounded more than expected in August, the latest sign that the sluggish housing market was starting to get a lift from lower mortgage rates… The Commerce Department said new home sales increased 7.1% to a seasonally adjusted annual rate of 713,000 units last month, boosted by a surge in activity in the South and West. July’s sales pace was revised up to 666,000 units from the previously reported 635,000 units. It was the second time in three months that new homes sales jumped above 700,000.”
September 24 – CNBC (Diana Olick): “Home price gains have been shrinking since March 2018, but now signs point to reheating in the housing market. The much-watched S&P CoreLogic Case-Shiller U.S. National Home Price Index rose 3.2% annually in July, the same gain reported in June. Prices are still cooling in the largest cities, however. The 10-City Composite rose 1.6% annually, down from 1.9% in the previous month. The 20-City Composite posted a 2.0% annual gain, down from 2.2% in June. The hottest cities for home price appreciation were Phoenix, Las Vegas and Charlotte, North Carolina.”
September 25 – Bloomberg (Esha Dey, Drew Singer, Ryan Vlastelica, Kristine Owram and Mathieu Benhamou): “Unprofitable companies are raising money in initial public offerings at the fastest pace since the dot-com bubble when a revolution in the banking industry sparked a rush to risk. Peloton Interactive Inc.’s planned Nasdaq debut on Thursday extends this year’s run of IPOs by so-called unicorns—huge, money-losing firms like Uber Technologies Inc. and Pinterest Inc. The unprofitable members of the 2019 class of IPOs have already raised the most cash of any year since at least 2000… And there’s more to come: Another 107 companies filed in 2019 to go public, among them The We Co., parent to WeWork, the office-share operator awash in red ink… ‘It used to be an article of faith that you couldn’t go public until you turn a profit,’ said Rett Wallace, chief executive officer of Triton Research… ‘Not a path to profitability, a profit.’ The 2019 class of IPOs may turn out to be as risky as those dot-com companies that went bust at the turn of the century despite the exuberance surrounding them.”
September 27 – Financial Times (Richard Waters and Richard Henderson): “A series of IPO crashes, as investors turned their backs on some of Silicon Valley’s most prized companies, has prompted forecasts of a broader reset in valuations after the long tech boom. Endeavor Group, the Hollywood talent agency that has expanded rapidly into new areas of digital media, became the latest company to pull its initial public offering, after the fitness bike start-up Peloton tumbled to one of the worst first-day performances of the year on Thursday. Wall Street has also been spooked by the collapse of a planned IPO for office space rental company WeWork, which repeatedly slashed its mooted valuation after investors balked at its huge losses and corporate governance.”
September 26 – Bloomberg (John Tozzi): “The cost of family health coverage in the U.S. now tops $20,000, an annual survey of employers found, a record high that has pushed an increasing number of American workers into plans that cover less or cost more, or force them out of the insurance market entirely. ‘It’s as much as buying a basic economy car,’ said Drew Altman, chief executive officer of the Kaiser Family Foundation, ‘but buying it every year.’”
September 23 – Financial Times (Richard Henderson): “Executives across the US are shedding stock in their own companies at the fastest pace in two decades… Corporate insiders — typically chief executives, chief financial officers and board members — sold a combined $19bn of stock in their companies through to mid-September, according to… Smart Insider, a UK-based group. That puts them on track to hit about $26bn for the year, which would mark the most active year since 2000, when executives sold $37bn of stock amid the giddy highs of the dotcom bubble. That projected total for the year would also set a post-crisis high, eclipsing the $25bn of stock sold in 2017.”
September 22 – CNBC (Ari Levy): “Other years have had more tech IPOs than 2019, but there’s never been a year that’s minted so many big ones. After Datadog’s first-day pop on Thursday, the provider of analytics and monitoring tools became the fourth cloud software company to go public in 2019 and attain a market cap of at least $10 billion. Videoconferencing company Zoom, chat app Slack, and cybersecurity vendor Crowdstrike are the three others. The new crop brings to 16 the total number of cloud software companies in the 11-digit club. While 14 of those companies have gone public since the beginning of 2012, this is the first year with more than two that reached $10 billion in value.”
China Watch:
September 24 – Reuters (David Brunnstrom and David Lawder): “China’s top diplomat hit back at U.S. criticism of its trade and development model…, saying Beijing had no intention to ‘play the Game of Thrones on the world stage’ but warned Washington to respect its sovereignty, including in Hong Kong. Wang Yi, China’s foreign minister and state councilor, said Beijing would not bow to threats, including on trade, though he said he hoped a round of high-level trade talks next month would produce positive results.”
September 24 – Associated Press: “China urged President Donald Trump… to listen to developing countries and oppose bullying after the American leader criticized its trade status at the United Nations. A foreign ministry spokesman called on Trump to ‘meet China halfway’ in settling trade disputes. The two governments are locked in an escalating tariff war over complaints about Beijing’s trade surplus and technology ambitions. It threatens to tip the global economy into recession. Trump complained… that the World Trade Organization improperly gives China preferential treatment. He was referring to complaints China, the No. 2 global economy and biggest trader, is abusing the leeway given to developing countries to subsidize exports or delay opening markets.”
September 24 – Bloomberg: “China’s economy in the third quarter was the weakest it has been this year, according to the China Beige Book, with manufacturing, property and the services sectors all worsening, even as borrowing picked up. Manufacturing revenue, profits, volumes and sales prices fell by double-digit paces from the previous three months, although borrowing remained at its highest level, according to the quarterly report. ‘Retail and services stood out mostly for how incapable they were at picking up the slack,’ the report said… The current weakness in the economy is primarily due to manufacturing. While a drop in exports was a factor, most of the decline was due to ‘considerably slower sales price growth,’ according to the report… The services sector continued to underperform, with both revenue and profits dropping from the same period last year. Hiring also slowed, which means that ‘if manufacturing does have to shed a large number of jobs, services has shown no capacity to absorb them,’ the report said. There was a resurgence of borrowing in the period.”
September 24 – Financial Times (Don Weinland): “China’s $8.4tn shadow bankin industry has surged back to life this year, as regulators scale back deleveraging in an effort to spur economic growth. Financial regulators in China have for several years grappled to control the country’s massive shadow lending sector, which includes many forms of off-balance-sheet lending from banks, peer-to-peer lenders and credit extended by asset managers. The opaque industry has long been associated with financial risks, and became the target of a regulatory crackdown in 2018, part of a central government attempt to maintain financial stability. But following the onset of the trade dispute with the US and slowing economic growth, shadow lending has made an unprecedented return in the second and third quarters of 2019, according to China Beige Book International… Shadow lenders accounted for 39% of total lending in the third quarter of the year, and 45% in the second quarter, the highest percentage of shadow financing since at least 2013... As recently as the middle of last year, shadow lending had shrunk to just 21% of total loans. ‘For six months now the non-bank share of loans has been highest on record,’ according to the report, which surveyed more than 10,000 companies’ credit conditions this year. ‘The consensus view that China’s economy is currently credit-constrained should be discarded.’”
September 27 – Bloomberg: “A scrapped bond sale by a mining company in Qinghai this week is sharpening focus on debt risks in the Chinese province. Western Mining Group, controlled by the local government, pulled a 1 billion yuan ($140 million) bond sale on Thursday… Lack of demand was behind the cancellation, according to people familiar with the matter… The failed sale underscores weakening investor appetite for bonds from companies in the mineral-rich province in China’s northwest, after missed payments and debt restructuring at other firms in the region… ‘Negative headlines definitely have had ripple effect on other Qinghai firms,’ said Li Yunfei, a credit analyst with Pacific Securities Co.”
September 24 – Wall Street Journal (Chao Deng): “The head of China’s central bank said that the country’s interest rates were appropriate and that it wouldn’t aggressively ease monetary policy, even as other central banks lower borrowing rates in a bid to spur growth. People’s Bank of China Governor Yi Gang said… Beijing wouldn’t follow other countries in taking certain steps to expand credit, such as substantially cutting the required amount of reserves maintained by commercial banks or pushing interest rates below zero. He told reporters that the economy, despite recent signs of weakness, was still performing within expectations, while inflation was relatively mild. Mr. Yi emphasized instead the importance of preserving flexibility on policy options as the economy slows to its lowest rate of growth in nearly three decades. ‘We should cherish the space for normal monetary policy,’ Mr. Yi said, adding that while Beijing has room to take monetary and fiscal measures, it should continue with normal policy as along as possible.”
September 26 – Bloomberg (Jason Gale): “China’s pig herd has halved to 200 million head over the past year because of a deadly swine disease that may depress pork supplies for years, a Rabobank analyst said. The emergence of African swine fever in China in August 2018, and the subsequent deaths and culling of pigs, have wiped out 25% the country’s pork production, or about 13 million metric tons, which is ‘unprecedented,’ said Pan Chenjun, Rabobank’s Hong Kong-based senior animal proteins analyst…”
September 22 – Bloomberg (Lulu Yilun Chen): “The government of one of China’s top technology hubs is dispatching officials to 100 local corporations including e-commerce giant Alibaba Group Holding Ltd., the latest effort to exert greater influence over the country’s massive private sector. Hangzhou… is assigning government affairs representatives to facilitate communication and expedite projects, the city government said…”
September 26 – Reuters (Jessie Pang and Felix Tam): “Thousands of Hong Kong protesters rallied at the harbor side on Friday, chanting slogans accusing the police of brutality and setting the stage for a weekend of demonstrations leading up to the 70th anniversary of the People’s Republic of China.”
Central Banking Watch:
September 26 – Bloomberg (Ferdinando Giugliano): “It’s all kicking off at the European Central Bank.Sabine Lautenschlaeger, the executive board member from Germany, is to resign at the end of October, slightly more than two years before the end of her mandate. Her exact motives are unknown, but they add to a sense of chaos at the central bank barely a month before a crucial leadership change. Christine Lagarde, who’s taking over from Mario Draghi in November, will have a very tough job ensuring the ECB keeps running effectively. Lautenschlaeger has been a vocal opponent of the central bank’s recent decision to restart quantitative easing, as it tries to counter a slowdown and bring inflation back on target.”
September 23 – Bloomberg (Fergal O'Brien): “European Central Bank President Mario Draghi said the Governing Council should be open to ideas such as Modern Monetary Theory, while noting they’re closer to fiscal policy and should be directed by governments. Draghi was responding to a question from European lawmakers about helicopter money and the best ways to channel funds to the economy in a way that helps inequality. He mentioned MMT and a recent paper by former Federal Reserve Vice Chairman Stanley Fischer… which said central banks should put money ‘directly in the hands of public and private sector spenders.’ ‘These are objectively pretty new ideas,’ Draghi said. ‘They have not been discussed by the Governing Council. We should look at them, but they have not been tested.’”
September 26 – Reuters (Anthony Esposito): “For the second time in a row, Mexico’s central bank cut its key interest rate by 25 basis points to 7.75%, as it cited slowing inflation, widening slack in the economy, and expectations for a slight economic recovery.”
September 23 – Reuters (Leika Kihara): “Bank of Japan Governor Haruhiko Kuroda said… that if the central bank were to ease monetary policy further, it would aim at pushing down short- and medium-term interest rates without flattening the yield curve too much. Kuroda said the BOJ has no preset idea on whether to ramp up stimulus at its next rate review on Oct. 30-31, suggesting that the decision will depend on market moves and the economy’s resilience to overseas risks. But he said the central bank has become more eager to top up monetary support than before due to heightening risks such as the widening fallout from the U.S.-China trade conflict. ‘As risks regarding overseas economy are heightening, we need to be increasingly vigilant to the chance the overseas slowdown could affect Japan’s economy and inflation,’ Kuroda said…”
Brexit Watch:
September 25 – Reuters (Elizabeth Piper and William James): “Boris Johnson’s attorney-general said the British parliament was ‘dead’ in a defiant outburst after lawmakers were recalled following a Supreme Court ruling that the prime minister’s suspension of the assembly was unlawful. The comments by Geoffrey Cox… prompted outrage among Johnson’s opponents seeking to stop him taking Britain out of the EU without a deal. Britain faces an Oct. 31 departure deadline, but after three years of political crisis it remains unclear when, if or on what terms the it will leave the bloc it joined in 1973.”
September 27 – Financial Times (Judith Evans): “The £850m sale of a building that includes one of WeWork’s largest sites has collapsed, in a blow to a London property market wrestling with Brexit worries and the turmoil at the shared office company. A deal to sell Southbank Place near Waterloo station, which also includes the London headquarters of Royal Dutch Shell, to the Singaporean group Bright Ruby was called off on Friday, according to two people briefed on the situation. The collapse of the sale comes as WeWork battles with the fallout from its aborted initial public offering process and the departure of Adam Neumann, its chief executive.”
Europe Watch:
September 26 – Bloomberg (Zoe Schneeweiss): “For all the gloom hanging over the euro-area economy, demand for money was surprisingly solid last month. European Central Bank figures published Thursday showed M3 -- a broad measure of the money circulating in the economy -- expanded at the quickest pace since 2009, and loan growth to companies accelerated to 4.3% from 4.0%. That adds fuel to the arguments of the sizable minority in the ECB’s Governing Council who argued that President Mario Draghi’s stimulus package on Sept. 12 was too much too soon.”
September 23 – Bloomberg (Piotr Skolimowski): “Growth in the euro-area economy almost ground to a halt at the end of the third quarter amid evidence that the manufacturing slump is starting to spread into the services sector. A Purchasing Managers’ Index for the 19-nation region fell to 50.4 in September, missing estimates, down from 51.9 a month earlier and the weakest in more than six years… Markit showed. That suggests growth of just 0.1% in the third quarter and further deterioration in the coming months, it said.”
Asia Watch:
September 27 – Bloomberg (Denise Wee): “A growing pile of bad debt in Asia is luring more global investors. That’s the view of consulting firm Deloitte LLP, which estimates that nonperforming loans held by banks across Asia jumped 23% to $640 billion… China continues to dominate the region’s soured loans, with a total of $295 billion held by Asian banks, while India is the second largest at about $160 billion, according to Deloitte… The scale of China’s nonperforming loan market is ‘on par with even the busiest of European markets,’ with Deloitte estimating that 380 billion yuan ($53bn) of soured debt traded in the secondary market in 2018.”
September 24 – Reuters (Patturaja Murugaboopathy and Gaurav Dogra): “Asian countries are looking for catalysts beyond China to drive their economies as the Sino-U.S. trade war forces Chinese demand for their exports to shrink. Luring foreign companies to their shores, finding ways to boost domestic consumption and scouring for alternate export markets are part of that policy mix as China’s neighbors cope with flagging demand from the mainland, hitherto a large market for Asia in the regional supply chain. Thailand has unveiled a ‘relocation package’ comprising tax incentives and changes in laws to attract foreign firms.”
EM Watch:
September 25 – Bloomberg (Suvashree Ghosh): “Indian authorities are scrambling to suppress speculation about bank closures a day after the regulator imposed restrictions on a local lender, the latest indication of how jittery savers are amid a slowing economy and scandals in the financial system. ‘Reports appearing in some sections of social media about RBI closing down certain commercial banks are false,’ the Reserve Bank of India said in a terse Twitter message…”
September 22 – Reuters (Abhirup Roy): “India’s Altico Capital said… it was evaluating options to resolve its liquidity issues, following its recent default on an interest payment that was due earlier this month. Altico, backed by Clearwater Capital Partners and Abu Dhabi Investment Council, said it defaulted on the interest payment after a rating downgrade prompted several of its lenders to recall a substantial amount of debt causing it to face a liquidity squeeze.”
Japan Watch:
September 24 – Reuters (Tetsushi Kajimoto and Takahiko Wada): “A Bank of Japan board member said… the central bank would ease policy further without hesitation if momentum for hitting its 2% inflation target was lost, adding that she was concerned about mounting risks from overseas economies. ‘My recent concern is that, amid significant downside risks concerning overseas economies, negative effects would be exerted on prices,’ Takako Masai said… ‘I intend to continue to conduct monetary policy appropriately toward achieving the price stability target while considering all conceivable adverse and positive effects from every angle.’”
Global Bubble Watch:
September 25 – Associated Press (Seth Borenstein): “Earth is in more hot water than ever before, and so are we, an expert United Nations climate panel warned in a grim new report Wednesday. Sea levels are rising at an ever-faster rate as ice and snow shrink, and oceans are getting more acidic and losing oxygen, the Intergovernmental Panel on Climate Change said in a report… It warned that if steps aren’t taken to reduce emissions and slow global warming, seas will rise 3 feet by the end of the century, with many fewer fish, less snow and ice, stronger and wetter hurricanes and other, nastier weather systems. ‘The oceans and the icy parts of the world are in big trouble, and that means we’re all in big trouble, too,’ said one of the report’s lead authors, Michael Oppenheimer, professor of geosciences and international affairs at Princeton University. ‘The changes are accelerating.’”
September 23 – Financial Times (Leslie Hook and Camilla Hodgson): “French president Emmanuel Macron has urged world leaders to respond more urgently to climate change, as the New York climate summit opened with a dire warning from the UN secretary-general about the ‘apocalyptic’ impact a warming planet would have on humanity. Mr Macron said France would not pursue new trade negotiations with countries that were not following the Paris climate agreement, adding that doing so would be ‘deeply hypocritical’. António Guterres, UN secretary-general, earlier set the tone for the gathering when he told the assembled audience...: ‘Our warming earth is issuing a chilling cry: stop.’ ‘If we don’t urgently change our ways of life, we jeopardise life itself. My generation has failed in its responsibility to protect our planet. That must change.’”
September 24 – Financial Times (Toby Stubbington): “The level of government debt around the world has ballooned since the financial crisis, reaching levels never seen before during peacetime. A Deutsche Bank analysis shows the world’s major economies have debts on average of more than 70% of GDP, the highest level of the past 150 years except for a spike around the second world war… Unlike earlier eras, when governments typically ran surpluses during peacetime, the pressures of modern democracy and welfare systems have made persistent deficits the norm in many countries… ‘The problem in sustainably recreating such a scenario today is that the post-WWII era saw much higher levels of GDP growth due to favourable demographics, post-war reconstruction and high productivity growth,’ said Deutsche’s Jim Reid.”
September 22 – Reuters (Saikat Chatterjee): “Lending standards in the rapidly growing loan market are deteriorating and complex financial products that mask risks to banks have parallels with the run-up to the 2008 financial crisis, the Bank for International Settlements warned… The number of collateralized loan obligations (CLOs), a form of securitization which pools bank loans to companies, has ballooned in recent years as investors hunt for higher returns by buying into loans to lower-rated and riskier companies. Like the collateralized debt obligations (CDOs) that bundled U.S. sub-prime mortgages into complex products and were blamed for triggering the global financial crisis, CLOs also have complex structures that can mask underlying risks… The global outstanding CLO market is now estimated to stand at about $750 billion, while the CDO market in 2007 before the crisis came to $640 billion, the BIS said.”
September 23 – Wall Street Journal (Lucy Craymer and Jacob Bunge): “China is on a global meat-buying spree, pushing up beef, pork and poultry prices around the globe as the world’s most populous nation scrambles to fill a large void in its meat supply. Meat buyers for China are ramping up purchases after a swine disease hit hog farms… and reduced its pig herd—the world’s largest—by more than a third. Domestic pork prices have surged and China’s meat imports are swelling in response, straining global supplies and sending ripples across the global economy. In Brazil, poultry shipments to China have jumped 31% from a year ago and retail prices for chicken breasts, thighs and legs have increased roughly 16%. Shoppers in Europe are on average paying 5% more for pork, because more domestically produced meat is being sent to China. Lamb prices in Australian grocery stores have jumped 14%, while ground beef on shelves in New Zealand now fetches record prices.”
September 22 – Associated Press (Carlo Piovano and Gregory Katz): “Families stranded, honeymoons and vacations canceled, thousands of workers laid off: The sudden collapse of British tour company Thomas Cook and its network of airlines and hotels sowed chaos for hundreds of thousands of travelers and businesses around the world Monday. Brought down by a variety of factors, including crushing debts and online competition, the 178-year-old travel agency that helped pioneer the package tour ceased operating in the middle of the night. Its four airlines stopped carrying customers, and its 21,000 employees in 16 countries lost their jobs.”
Fixed-Income Bubble Watch:
September 27 – Bloomberg (Michael Gambale): “This month has seen a record number of bond sales by blue-chip companies, incentivized by low interest rates and supercharged investor demand to refinance debt. The market priced 127 deals, surpassing September 2017’s 110 offerings as the busiest month, based on Bloomberg records began going back 20 years. Total volume of $154.9 billion is still short of the $177 billion record set in May 2016. But with two days remaining in September, sales are poised to be the third-highest ever. The surge in supply came as a growing pile of bonds offer negative yields overseas, driving investors desperate for higher returns into the U.S. corporate credit market.”
September 23 – Bloomberg (Danielle Moran): “U.S. state and local governments are selling bonds at the fastest pace since the record-setting flood in December 2017, seizing on a slide in interest rates that has pushed their borrowing costs to the lowest in more than half a century. The volume of new debt sales in September is poised to rival or exceed the $38 billion that was issued in August, which was the busiest month since governments rushed to the market before President Donald Trump’s tax law pulled the subsidies from a key refinancing tactic. Governments have sold about $28 billion of long-term debt in September, a 33% increase from the same period a year ago, and more than $10 billion is already scheduled to be offered over the next week…”
September 24 – Reuters (Karen Pierog): “Local governments in the U.S. Midwest and Southeast regions face elevated exposure to climate change in the coming decades as rising temperatures pose a credit risk for their debt, Moody’s… said… The credit rating agency said heat stress could hurt agriculture, lower labor productivity, increase infrastructure costs, boost energy demand and impair public health. ‘If significant enough, now and over ensuing decades, these difficulties have the potential to lower revenue, increase expenses, impair assets and increase liabilities and debt, among other effects,’ Moody’s said…”
Leveraged Speculation Watch:
September 27 – Bloomberg (Lu Wang and Melissa Karsh): “The violent rotation from momentum stocks into value that had caught many investors off guard earlier this month turned out to be too short for hedge funds to adjust their playbooks. After enduring some of their worst bleeding in years, long-short hedge funds have since clawed back almost half of the drop as the rout in their favored stocks suddenly stopped. The group’s month-to-date losses, which bucked broad market gains, have now narrowed to 1% from as high as 1.75%... As performance improves, there are signs the smart money is dashing back into the old habit of chasing winners and dumping losers.”
Geopolitical Watch:
September 20 – Reuters: “Iran will pursue any aggressor, even if it carries out a limited attack, and seek to destroy it, the head of the elite Revolutionary Guards said…, after attacks on Saudi oil sites which Riyadh and U.S officials blamed on Tehran. Be careful, a limited aggression will not remain limited. ‘We will pursue any aggressor,’ the head of the Guards, Major General Hossein Salami, said… ‘We are after punishment and we will continue until the full destruction of any aggressor.’”
September 26 – Reuters (Tim Kelly): “China’s growing military might has replaced North Korean belligerence as the main security threat to Japan, Tokyo’s annual defense review indicated on Thursday, despite signs that Pyongyang could have nuclear-tipped ballistic missiles.”
