October 30 – Financial Times (Brendan Greeley and Colby Smith): “The Federal Reserve cut US interest rates by 25 bps for the third time this year but signalled that it has finished easing monetary policy for the time being, pending clearer economic data. The US central bank… said that uncertainty on the economic outlook justified its latest cut but chairman Jay Powell said that a preliminary US-China trade deal and lower risk of a no-deal Brexit had the potential to increase business confidence… After a two-day meeting in Washington, the Fed’s rate-setting committee made two significant changes to the language of its monetary policy statement. It said it would ‘assess the appropriate path’ for rates instead of saying it would ‘act as appropriate to sustain the expansion’… ‘This is a hawkish cut,’ said Peter Tchir, the head of macro strategy at Academy Securities.”
With a “hawkish” rate cut and stronger-than-expected October job growth, one might have expected some pressure on bond prices. Ten-year Treasury yields did rise (3bps) to 1.85% on the release of the Fed statement, only to reverse sharply lower during Chairman Powell’s press conference - to end the session at 1.77%. Yields then dropped eight bps Thursday and rose only two bps on better payrolls data - to close the week down nine bps to 1.71%.
Modest adjustments to the FOMC’s policy statement could be interpreted as leaning “hawkish.” An hour-long discussion with the Fed Chair was decidedly “dovish.” Powell made it clear the bar to raise rates in the foreseeable future is being set at a height that would challenge the world’s leading pole vaulters.
Somehow, “inflation” was spoken 53 times during the course of an hour, testament to the degree contemporary policy doctrine has hopelessly diverged from reality.
From the Chairman’s prepared statement: “Inflation continues to run below our symmetric 2% objective. Over the 12 months through August, total PCE inflation was 1.4% and core inflation was 1.8%… We are mindful that continued below-target inflation could lead to an unwelcome downward slide in long-term inflation expectations.”
Question (New York Times’ Jeanna Smialek): “You’ve previously sort of compared this rate cutting cycle to the insurance cuts in the '90s, and in both of those instances, the Greenspan Fed took those cuts back after a while. They raised rates again fairly quickly. And, I guess I’m just curious what the onus is for doing that in this cycle. What would make you guys decide it’s appropriate to raise interest rates again?”
Powell: “…The reason why we raised interest rates is because, generally, is because we see inflation as moving up or in danger of moving up significantly, and we really don’t see that now… So, we really don’t see that risk, and inflation expectations have also kind of moved down and sideways both surveys and market based over the course of this, of really the recent months. And… we think that inflation expectations are very important in driving actual inflation, and we’re strongly committed to achieving our 2% inflation objective on a symmetric basis. We think it’s essential that we do that. So, we’re not thinking about raising rates right now.”
Question (The Wall Street Journal’s Nick Timiraos). “You described the recent slide, Chair Powell, in inflation expectations as unwelcome. You said that inflation expectations are very important. What, if anything, would the Committee be prepared to do to address this slide in inflation expectations if it continued?”
Powell: “As I mentioned, we do think that inflation expectations are, they’re quite essential, quite central in our framework of how we think about inflation. We need them to be anchored in a level, at a level that’s consistent with our symmetric 2% inflation goal. And, we think that we need to conduct policy in a way that supports that outcome… We’re also, as part of our review, looking at potential innovations, changes to the way we think about things, changes to the framework, that would lead us, that would be more supportive of achieving inflation on… a symmetric 2% basis over time… We’re in the middle of thinking about ways that we can make that symmetric 2% inflation objective more credible by achieving symmetric 2% inflation. And, it comes down to using your policy tools to achieve 2% inflation, and that is the thing that must happen for credibility in this area.”
Responding to a question from Fox Business’s Edward Lawrence on the possibility of rate hikes next year in the event that some current uncertainties are “cleared up,” the Chairman stated: “You come back to the question of raising rates, so that’s really about inflation, and you know, we haven’t yet, we’ve just touched 2% core inflation to pick one measure.”
And Powell’s response to the risk of “Japanification” posed by Japanese journalist Naoatsu Aoyama: “…There are significant disinflationary pressures around the world. …We don’t think we’re exempt from those pressures, and we are, therefore, strongly committed to having inflation expectations anchored at the level that is consistent with the symmetric 2% inflation objective. That’s what we’re committed to, and we’ll use our tools to achieve. So, we take the risk very seriously… The risk is that what we’ve seen is other economies getting on a disinflationary path, but it’s been very hard for them to get off. Once inflation expectations start sliding down, inflation moves down… …We think that the right thing to do is to do what we can now to hold and really move inflation expectations up…”
Music to the Markets. If markets maintain high confidence in one specific outcome, it would be that the trend of global disinflationary pressures continues (and likely worsens). At this point, everything points to the Fed and global central bankers fixating on consumer-based inflation, leaving the likelihood of any tightening of monetary policies over the short- and intermediate- term as remote. At the same time, markets see the probability of central banks being disappointed by below-target inflation rates as high. Further aggressive monetary stimulus is anticipated. And with global policy rates already extremely low, this ensures the future will see even greater reliance on QE. And, clearly, central bankers are determined to ignore excesses. The chorus: Music to the Markets.
And if Powell suggesting the prevailing focus on pushing inflation higher wasn’t specific enough, the downgrading of the financial stability (mentioned only six times) mandate was surprisingly direct.
Question (Market News’ Jean Yung): “I wanted to ask about financial stability risk. Recently, the IMF and some other global policy makers have been expressing concerns over the high level of risk in corporate debt. So, as rates get lower in the U.S. and around the world, are you more worried about financial stability reach for yield?
Chairman Powell: “So, we monitor financial stability risks very carefully all of the time. It’s what we do since the financial crisis… Currently, we don’t see large imbalances. This long expansion is notable for the lack of large financial imbalances like the ones we’ve seen certainly before the crisis happened. So, we have a four-part framework, I’ll quickly mention. The first is leverage in the financial system which is low by historical standards. The second is funding risk which is the risk of runnable funding, and that risk is also quite low for banks but also for the nonbanking financial sector. If you look at asset prices, we see some high asset prices, but not broadly across a range. We don’t see bubbles in that kind of thing. And, that leaves the fourth which is leverage in the nonfinancial sector and that’s households and businesses. So, with households, again, we don’t see leverage. We see them actually getting in very good shape financially in the aggregate. Obviously, plenty of households are not in great shape financially, but in the aggregate, the household sector’s in a very good place. That leaves businesses which is where the issue has been. Leverage among corporations and other forms of business, private businesses, is historically high. We’ve been monitoring it carefully and taking appropriate steps. That’s what I would say, but it’s corporate debt is one part of a larger part of our framework, and it is something that we’re paying quite a bit of attention to, and it’s been part of the last couple of shared national credit exams, and we’ve been monitoring it carefully and taking appropriate action.”
“This long expansion is notable for the lack of large financial imbalances…” “Leverage in the financial system… is low by historical standards…” “…Funding risk which is the risk of runnable funding, and that risk is also quite low…” “We don’t see bubbles…” As for the household sector, “we don’t see leverage”; “very good shape financially”; and “in a very good place.” “That leaves businesses which is where the issue has been.”
Sound analysis would today have central bankers downplaying consumer price inflation, while elevating financial stability as the overarching priority. It’s Music to the Markets that the Fed apparently sees no stability risk on the horizon that would pressure the Fed into pulling back on monetary stimulus. This is a momentously misguided.
The mortgage finance Bubble period was dominated by the rapid expansion of household mortgage debt. There were huge excesses involved in both the financial sector’s intermediation of mortgage risk and with speculative leverage. Today’s “notable… lack of large financial imbalances” completely ignores federal government debt said this week to have reached $23 TN, up from about $9.5 TN to end 2008. Moreover, there’s overwhelming analytical support for the view that today’s global sovereign debt markets are history’s greatest episode of asset inflation, distorted markets and speculative price Bubbles.
We’re now a decade into the “global government finance Bubble.” Fundamental excesses have unfolded in sovereign debt and central bank Credit. When Chairman Powell states, “That leaves businesses…”, he is using a conventional analytical framework that ignores the government sector and the central bank. Both have employed unprecedented leverage during this cycle, a massive Credit expansion that continues to support the purported soundness of the household and financial sectors. In contrast to the previous Bubble, the nucleus of the current Credit boom is money-like instruments (i.e. Treasuries and central bank Credit) that have been issued in outrageous quantities without the need for risk intermediation through the financial sector.
From a conventional “financial stability” standpoint, this Credit cycle may appear virtually pristine. Yet Credit Bubbles survive only with unrelenting debt growth. Today’s mirage of “financial stability” depends on ongoing massive federal deficits coupled with aggressive monetary stimulus.
A further rebuttal to Powell’s sanguine commentary on leverage and funding risks is appropriate. Is not recent “repo” market upheaval testament both to problematic leverage and funding issues? And have we already forgotten acute market fragilities unmasked less than a year ago?
It’s clear that speculative securities leverage is a huge facet of the current Bubble, much of it domiciled in “offshore financial centers” and securities funding markets (and derivatives) internationally. Moreover, I’ve used the concept “moneyness of risk assets” (expanding the previous cycle’s “moneyness of Credit”) as an overarching facet of the “global government finance Bubble.” Dr. Bernanke unleashed central bank inflationary activism to instill the perception of liquidity and safety upon risky financial instruments (equities, corporate Credit, derivatives, etc.), in the process empowering Wall Street opportunism and innovation. The Fed – and global central bankers more generally – are deluding themselves when they downplay the risk of a crisis of confidence and resulting run on the ETF complex and other perceived safe and liquid instruments and strategies (including “repos”!).
And while on the subject of runs…
November 1 – Bloomberg: “It started with an unverified rumor from an obscure social media account: Yichuan Rural Commercial Bank was insolvent. Within hours of the post on Tuesday, more than 1,000 worried customers had lined up to withdraw their money. By Wednesday, a run on the bank had prompted local authorities to arrange more than 30 billion yuan ($4.3bn) of liquidity injections. As branch staff sought to restore confidence, they displayed stacks of cash to convince depositors that there was enough to go around. While the panic appeared to subside on Friday, the episode marked the latest test of faith in more than 2,000 rural Chinese lenders that collectively control $5 trillion of assets. Confidence in their financial strength has dwindled since May, when the government seized a bank for the first time since 1998 and imposed losses on some of its creditors.”
Meanwhile…
October 29 – Bloomberg: “A Chinese company’s bond default is causing market concern that trouble may spread to other firms in the province. Shandong-based steelmaker Xiwang Group Co.’s failure to repay 1 billion yuan ($142 million) of bonds last week, saw investors dump neighboring firms’ notes on contagion fears as companies in this province are well known for providing guarantees for each other’s debt. China Hongqiao Group Ltd.’s dollar bond due 2023 and Shandong Sanxing Group Co.’s 2021 dollar bond have both dropped to their lowest levels after Xiwang’s default… ‘Xiwang’s default onshore has raised concerns that other privately owned enterprises in Shandong, particularly those from the same locality, may have been associated with the firm,’ said Wu Qiong, executive director at BOC International Holdings…”
And a curious development…
October 30 – Bloomberg: “A sell-off in China’s sovereign notes is weighing on its corporate bond market. The yield spread between the country’s top-rated three-year corporate bonds over government securities of the same tenor widened this week to its highest in four months… That’s after the 10-year sovereign bond yield rose to the highest in five months. It’s also hit sales of new company bonds, with the most amount of cancellations this month since June.”
China’s 10-year sovereign yields rose three bps this week to 3.27%, trading earlier in the week at the high (3.33%) since May. With bank failures and corporate defaults poised to significantly escalate going forward, a major expansion of China central government debt should be expected. I continue to ponder the amount of leverage that has accumulated in relatively high-yielding Chinese Credit instruments (government, corporate and financial). A “phase 1” trade deal and associated truce have reduced the odds of trade war escalation becoming a near-term catalyst for upheaval and crisis. At the same time, the risk of acute financial and economic instability in China remains highly elevated.
I suspect China happenings put some downward pressure on global yields this week. And lower yields continue to support equities and corporate Credit markets. One could look at various negative developments (i.e. China, impeachment proceedings, Brexit, global unrest, etc.) and question the rationality for the risk markets’ vision of nothing but blue skies ahead. It’s not entirely irrational. Trouble in China ensures additional Beijing stimulus, along with heightened disinflationary risks that will keep the Fed, PBOC, ECB, BOJ and others pushing monetary stimulus. Impeachment risk? Doesn’t that virtually guarantee President Trump will strike a deal with the Chinese, while avoiding policies, comments and tweets that might upset the applecart?
October 31 – Bloomberg (Margaret Collins): “President Donald Trump resumed his attacks on the Federal Reserve and its Chairman Jerome Powell, a day after it cut interest rates for the third time this year. ‘People are VERY disappointed in Jay Powell and the Federal Reserve,’ Trump tweeted… ‘The Fed has called it wrong from the beginning, too fast, too slow.’”
With the Fed having cut rates three times in three months, while expanding its balance sheet by $239 billion in seven weeks, one would think the President might back off.
November 1 – Wall Street Journal (Michael S. Derby): “The Federal Reserve Bank of New York added $104.583 billion in temporary liquidity to financial markets Friday, when it also added permanent reserves to expand its balance sheet. The Fed’s intervention came in two parts. One was through repurchase agreements that expire Monday, in which the Fed took in $73.133 billion in securities; the other was a 13-day repo operation that took in $31.45 billion. The Fed also bought $7.501 billion in Treasury bills.”
Concluding his prepared comments, Chairman Powell addressed operations to expand Federal Reserve Credit through the purchase of T-bills (to expand bank reserves): “These actions are purely technical measures to support the effective implementation of monetary policy as we continue to learn about the appropriate level of reserves. They do not represent a change in the stance of monetary policy. In particular, our Treasury bill purchases should not be confused with the large-scale asset purchase programs that we deployed after the financial crisis. In those programs, we purchased longer-term securities to put downward pressure on longer- term interest rates and ease broader financial conditions. In contrast, increasing the supply of reserves by purchasing Treasury bills only alters the mix of short-term assets held by the public and should not materially affect demand and supply for longer-term securities or financial conditions more broadly.”
That the Fed would move to expand its balance sheet by hundreds of billions with the stock market at record highs, financial conditions loose, and the economy in expansion, clearly conveys, once again, that the Federal Reserve has no tolerance for market adjustment or correction. Why do we need a multi-trillion “repo” market, anyways? Is it compatible with a financial stability mandate that the Fed openly nurtures speculative leveraging? Silly me: with consumer prices slightly below target – and the U.S. economy “in a good place” – no need to be concerned with egregious speculative leverage at the heart of the financial system. Nothing but Music to the Markets.
For the Week:
The S&P500 gained 1.5% (up 22.3% y-t-d), and the Dow rose 1.4% (up 17.2%). The Utilities slipped 0.3% (up 21.7%). The Banks increased 1.0% (up 23.3%), and the Broker/Dealers jumped 2.4% (up 13.3%). The Transports fell 1.1% (up 17.1%). The S&P 400 Midcaps rose 1.2% (up 19.3%), and the small cap Russell 2000 jumped 2.0% (up 17.9%). The Nasdaq100 advanced 1.6% (up 28.9%). The Semiconductors jumped 3.0% (up 46.3%). The Biotechs surged 3.0% (up 7.3%). With bullion jumping $14, the HUI gold index rose 2.3% (up 36.3%).
Three-month Treasury bill rates ended the week at 1.4875%. Two-year government yields dropped seven bps to 1.55% (down 94bps y-t-d). Five-year T-note yields fell eight bps to 1.54% (down 97bps). Ten-year Treasury yields dropped nine bps to 1.71% (down 97bps). Long bond yields fell 10 bps to 2.19% (down 83bps). Benchmark Fannie Mae MBS yields sank 15 bps to 2.63% (down 87bps).
Greek 10-year yields declined two bps to 1.18% (down 322bps y-t-d). Ten-year Portuguese yields slipped two bps to 0.20% (down 152bps). Italian 10-year yields rose four bps to 0.99% (down 175bps). Spain's 10-year yields were unchanged at 0.27% (down 114bps). German bund yields dipped two bps to negative 0.38% (down 62bps). French yields declined one basis point to negative 0.07% (down 78bps). The French to German 10-year bond spread widened one to 31 bps. U.K. 10-year gilt yields declined two bps to 0.66% (down 61bps). U.K.'s FTSE equities index slipped 0.3% (up 8.5% y-t-d).
Japan's Nikkei Equities Index added 0.2% (up 14.2% y-t-d). Japanese 10-year "JGB" yields dropped four bps to negative 0.18% (down 18bps y-t-d). France's CAC40 increased 0.7% (up 21.8%). The German DAX equities index gained 0.5% (up 22.7%). Spain's IBEX 35 equities index fell 1.1% (up 9.2%). Italy's FTSE MIB index rose 1.4% (up 25.2%). EM equities were mostly higher. Brazil's Bovespa index gained 0.8% (up 18.9%), and Mexico's Bolsa increased 1.0% (up 5.2%). South Korea's Kospi index added 0.6% (up 2.9%). India's Sensex equities index surged 2.8% (up 11.4%). China's Shanghai Exchange was little changed (up 18.6%). Turkey's Borsa Istanbul National 100 index fell 1.7% (up 7.9%). Russia's MICEX equities index jumped 2.0% (up 23.7%).
Investment-grade bond funds saw inflows of $2.324 billion, and junk bond funds posted inflows of $940 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates increased three bps to 3.78% (down 105bps y-o-y). Fifteen-year rates added one basis point to 3.19% (down 104bps). Five-year hybrid ARM rates rose three bps to 3.43% (down 61bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates unchanged at 4.11% (down 72bps).
Federal Reserve Credit last week jumped $32.7bn to $3.966 TN. Over the past year, Fed Credit contracted $155bn, or 3.8%. Fed Credit inflated $1.155 Trillion, or 41%, over the past 364 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $2.2bn last week to $3.422 TN. "Custody holdings" rose $7.2bn y-o-y, or 0.2%.
M2 (narrow) "money" supply surged $43.1bn last week to a record $15.204 TN. "Narrow money" gained $944bn, or 6.6%, over the past year. For the week, Currency increased $0.7bn. Total Checkable Deposits surged $108.5bn, while Savings Deposits sank $123.5bn. Small Time Deposits slipped $1.7bn. Retail Money Funds gained $8.7bn.
Total money market fund assets jumped $27.3bn to $3.513 TN. Money Funds gained $641bn y-o-y, or 22.3%.
Total Commercial Paper surged $25.2bn to $1.113 TN. CP was up $26bn, or 2.4% year-over-year.
Currency Watch:
The U.S. dollar index declined 0.7% to 97.121 (up 1.0% y-t-d). For the week on the upside, the Swedish krona increased 1.3%, the Norwegian krone 1.2%, the New Zealand dollar 1.2%, the Australian dollar 1.2%, the British pound 0.9%, the Swiss franc 0.9%, the euro 0.8%, the South Korean won 0.6%, the Japanese yen 0.4%, the Singapore dollar 0.4%, and the Brazilian real 0.3%. On the downside, the South African rand declined 2.7%, the Canadian dollar 0.6% and the Mexican peso 0.3%. The Chinese renminbi increased 0.40% versus the dollar this week (down 2.25% y-t-d).
Commodities Watch:
October 30 – Reuters (Jennifer Hiller): “In the shale field that helped launch the U.S. natural gas boom a decade ago, Chesapeake Energy Corp this month set aside its last drilling rig. The problem for the once No. 2 U.S. gas producer was not a lack of gas, but too much of it. A long, steady increase in U.S. gas production – much of it a byproduct of the shale oil boom – has prices for the fuel heading toward a 25-year low, with output outpacing U.S. consumption and expected to hit 91.6 billion cubic feet, up 10% over last year… Producers have sought to turn much of the U.S. surplus to liquefied natural gas (LNG) and export it. But even with rising sales in Asia and Europe, global LNG prices have tumbled this year as new export plants opened.”¬
The Bloomberg Commodities Index rose 1.4% this week (up 4.7% y-t-d). Spot Gold gained 0.7% to $1,514 (up 18.1%). Silver was little changed at $18.052 (up 16.2%). WTI crude declined 46 cents to $56.20 (up 24%). Gasoline fell 1.0% (up 25%), while Natural Gas surged 10.4% (down 8%). Copper declined 0.8% (up 1%). Wheat slipped 0.3% (up 3%). Corn added 0.6% (up 4%).
Market Instability Watch:
October 28 – Financial Times (Benedict Mander and Colby Smith): “Investors breathed a sigh of relief at Alberto Fernández’s narrower-than-expected victory in Argentina’s presidential elections, but were anxious for more clarity over the leftist leader’s first moves when he takes power on December 10. While financial markets took heart that Mr Fernández failed to win a majority in congress, restraining his ability to push through controversial laws, the precise direction that his economic policy will take remains unclear given his refusal to unveil a cabinet… With reserves falling by almost $4bn in the week before the elections… restoring confidence with investors is crucial, said Diana Amoa, a fixed income portfolio manager at JPMorgan… ‘One way to do that is to appoint a more credible cabinet and show a willingness to engage debt holders and the IMF,’ she added.”
Trump Administration Watch:
October 29 – Reuters (Heather Timmons and Hallie Gu): “U.S. President Donald Trump’s demand that Beijing commit to big purchases of American farm products has become a major sticking point in talks to end the Sino-U.S. trade war, according to several people briefed on the negotiations. Trump has said publicly that China could buy as much as $50 billion of U.S. farm products, more than double the annual amount it did the year before the trade war started. U.S. officials continue to push for that in talks, while Beijing is balking at committing to a large figure and a specific time frame. Chinese buyers would like the discretion to buy based on market conditions. ‘China does not want to buy a lot of products that people here don’t need or to buy something at a time when it is not in demand,’ an official from a Chinese state-owned company explained.”
October 30 – Bloomberg (Justin Sink, Shawn Donnan, and Jenny Leonard): “President Donald Trump’s plan to ink the first installment of a trade accord with Xi Jinping next month was thrown into question… after Chile canceled an upcoming summit where the two leaders planned to meet. The cancellation… appeared to catch the White House off guard. But the administration insisted that it would continue to press to finalize the ‘phase one’ agreement in coming weeks.”
November 1 – The Hill (Niv Elis): “The federal government's outstanding public debt has surpassed $23 trillion for the first time in history, according to… the Treasury Department… Growing budget deficits have added to the nation’s debt at a speedy rate since President Trump took office. The debt has grown some 16% since Trump's inauguration, when it stood at $19.9 trillion. It passed $22 trillion for the first time just 10 months ago.”
October 28 – Reuters (Lindsay Dunsmuir): “The U.S. Treasury said… it expects to borrow $29 billion less during the fourth quarter than previously estimated. The department… expects to issue $352 billion through credit markets during the October-December period, assuming an end-December cash balance of $410 billion. Treasury also expects to issue $389 billion in net marketable debt in the January-March 2020 period. In the third quarter of this year, Treasury borrowed $440 billion through credit markets.”
October 30 – Reuters (David Brunnstrom): “U.S. Secretary of State Mike Pompeo… stepped up recent U.S. rhetoric targeting China’s ruling Communist Party, saying Beijing was focused on international domination and needed to be confronted. Pompeo made the remarks even as the Trump administration said it still expected to sign the first phase of deal to end a damaging trade war with China next month… ‘They are reaching for and using methods that have created challenges for the United States and for the world and we collectively, all of us, need to confront these challenges ... head on,’ Pompeo said…”
October 28 – CNBC (Lauren Hirsch): “The U.S. will consider extending certain tariff exclusions on $34 billion of imports from China as the two nations work toward a trade agreement, the Office of the U.S. Trade Representative said… Nearly 1,000 products were exempted from the July 2018 tariff, and those exclusions are set to expire on Dec. 28.”
October 29 – Bloomberg (Kelsey Butler): “U.S. Treasury Secretary Steven Mnuchin is open to loosening financial crisis-era regulations that have stiffened liquidity rules for big banks to relieve possible cash crunches in short-term funding markets. Mnuchin said… he had spoken to Jamie Dimon, chief executive of JPMorgan Chase & Co., and other banks about how to avoid liquidity problems. ‘The banks have raised an issue around intra-day liquidity, and that is something that makes sense for regulators to look at,’ Mnuchin said…”
October 28 – Wall Street Journal (Andrew Ackerman): “Fannie Mae’s and Freddie Mac’s federal regulator took new steps to privatize the mortgage-finance companies on Monday, telling the firms to help lay the groundwork for their own transitions out of an 11-year government conservatorship. In new policy goals, the Federal Housing Finance Agency for the first time released formal objectives calling for Fannie’s and Freddie’s return to the private sector. The companies have been in government conservatorship since the 2008 financial crisis.”
Federal Reserve Watch:
October 30 – New York Times (Jeanna Smialek): “The Federal Reserve cut interest rates Wednesday for the third time this year as slowing business investment, ongoing trade tensions and global weakness continued to weigh on the American economy. But the Fed signaled that it will pause and assess incoming data before it considers lowering borrowing costs again. Fed Chair Jerome H. Powell said that while ‘there’s plenty of risk left,’ some of it has subsided, pointing to the potential for a limited trade deal between the United States and China and a negotiated exit for Britain from the European Union. ‘Overall, we see the economy as having been resilient to the winds that have been blowing this year,’ he said. Wednesday’s decision to cut rates for a third time was made ‘to help keep the U.S. economy strong in the face of global developments and to provide some insurance against ongoing risks.’”
October 30 – Bloomberg (Jesse Hamilton and Emily Barrett): “Federal Reserve Chairman Jerome Powell said the central bank has been looking at long-term options to improve market liquidity, including ‘intraday’ measures, after short-term markets suffered an alarming funding squeeze last month. The Fed is considering technical adjustments to head off a repeat of the September crunch, Powell said… He said he doesn’t think the agency will consider changes to Wall Street’s capital or liquidity rules. ‘It used to be a common thing for banks to have intraday liquidity from the Fed, what we called daylight overdrafts,’ Powell said. ‘That’s something we can look at, and there are some technical things we can look at that would perhaps make the liquidity that we have -- which we think is ample -- in the financial system move more freely.’”
October 29 – Wall Street Journal (Michael S. Derby): “The New York Fed added both permanent and temporary liquidity to financial markets ahead of this week’s rate-setting central bank meeting and before the end of the month, which can bring volatility to short-term markets as banks sort out their respective financing needs. The permanent addition happened by way of central bank buying of Treasury bills aimed at expanding the central bank’s balance sheet of just under $4 trillion. The Fed bought $7.501 billion in short-term government securities. Eligible banks offered $24.105 in Treasury bills. That’s less than the $35.755 billion offered in a similar Fed operation Friday and the $44.218 billion offered Oct. 23. On the temporary front, the Fed injected $104.483 billion in short-term liquidity to financial markets Tuesday.”
U.S. Bubble Watch:
October 28 – Bloomberg (Claire Boston and Elizabeth Rembert): “Jamie Dimon has been quick to trumpet the strength of U.S. consumers. Federal Reserve chief Jay Powell calls them a bright spot that is countering weakness in the manufacturing sector. But there are signs that U.S. households are starting to feel stretched, possibly making it harder for them to continue propping up the economy. The evidence is showing up on the debt side. Serious delinquencies on credit cards and auto debt have been creeping up in recent quarters. That’s pushed some banks to set aside more money to cover bad loans and tighten lending standards for credit cards and other consumer loans.”
October 29 – Bloomberg (William Edwards): “Contract signings to purchase previously owned U.S. homes posted the largest annual increase in four years, signaling lower mortgage rates are reviving interest from buyers. The National Association of Realtors’ Index of pending home sales increased 6.3% in September from a year earlier on an unadjusted basis, the biggest gain since August 2015… On a monthly adjusted basis, contracts rose 1.5%, exceeding the median forecast… of 0.9%. The result indicates the housing market is regaining traction after a separate report showed contract closings fell 2.2% in September.”
October 29 – Bloomberg (Kelsey Butler): “Home prices in 20 U.S. cities declined in August from the prior month for the first time in a year, reflecting moderation in some once-hot real estate markets. The S&P CoreLogic Case-Shiller index of property values fell 0.2% during the month, compared with estimates for a 0.1% decline, after no change in July… Prices increased 2% from August 2018, matching the year-over-year gain in the prior month but slightly below the median estimate… Nationally, annual home prices were up 3.2% after a 3.1% increase in July.”
October 29 – Bloomberg (Reade Pickert): “Three years after Donald Trump campaigned for president pledging a factory renaissance, the opposite appears to be happening. Manufacturing made up 11% of gross domestic product in the second quarter, the smallest share in data going back to 1947 and down from 11.1% in the prior period… The latest number compares with 13.4% for real estate, 12.8% for professional and business services and 12.3% for governments…”
October 28 – Wall Street Journal (Ben Eisen and Laura Kusisto): “The mortgage market turned red hot over the summer, posting its biggest three months since the financial crisis. Lenders extended $700 billion of home loans in the July-to-September quarter, the most in 14 years, according to… Inside Mortgage Finance. Mortgage originations for the full year are on pace to hit their highest level since 2006, the peak of the last housing boom. Falling interest rates spurred homeowners to trade higher-rate mortgages for lower-rate ones to save on monthly payments. Refinancings kept mortgage lenders busy, though home sales haven’t recovered as much as economists expected.”
October 28 – Wall Street Journal (Michael Wursthorn): “Exchange-traded funds have swelled into a $4 trillion juggernaut over the past quarter of a century, but many asset managers say the industry is entering a new phase of competition and oversaturation that threatens to squeeze out smaller funds. More than 90 funds have closed this year through early October, following a record 139 closures last year. Meanwhile, launches of new exchange-traded products… peaked in 2011 and have remained relatively flat since dipping from that level… The tepid pace of development could be just the beginning of a bigger shakeout across the industry, as more than half of the roughly 2,100 exchange-traded products listed in the U.S. have less than $100 million in assets, according to David Perlman, an ETF strategist at UBS.”
October 28 – Bloomberg (Heather Perlberg and Melissa Karsh): “KKR & Co. has gathered more than $2 billion to invest in fast-growing technology companies as it further expands beyond the mega-deals that made its reputation. The firm is raising its second fund dedicated to growth-equity investments in technology, media and telecommunications… The fund… is about triple the size of the debut vehicle: the KKR Next Generation Technology Growth Fund raised $714 million in 2016.”
October 29 – Bloomberg (Christopher Maloney and Adam Tempkin): “The payday-loan business was in decline. Regulators were circling, storefronts were vanishing and investors were abandoning the industry’s biggest companies en masse. And yet today, just a few years later, many of the same subprime lenders that specialized in the debt are promoting an almost equally onerous type of credit. It’s called the online installment loan, a form of debt with much longer maturities but often the same sort of crippling, triple-digit interest rates. If the payday loan’s target audience is the nation’s poor, then the installment loan is geared to all those working-class Americans who have seen their wages stagnate and unpaid bills pile up… In just a span of five years, online installment loans have gone from being a relatively niche offering to a red-hot industry. Non-prime borrowers now collectively owe about $50 billion on installment products…”
October 29 – Bloomberg (Edvard Pettersson): “It’s meant to be one of the crown jewels of downtown Los Angeles’ urban renaissance but now it’s in limbo -- plagued by lawsuits from subcontractors, and victim of an ongoing trade dispute between China and the U.S. and a Beijing crackdown on credit and capital flight. Construction has largely stalled at the three towers of Oceanwide Plaza across from Staples Center where the NBA’s Lakers and Clippers and the NHL’s Kings play their home games… The developer, Beijing-based Oceanwide Holdings Co., offered few details on the future of the $1 billion-plus project -- other than to insist that it has financing and work is continuing. The lawsuits by unpaid subcontractors, on the other hand, give a glimpse of the developer’s struggle to come up with needed money to finish the project.”
October 30 – Wall Street Journal (Matt Wirz and Juliet Chung): “The Kincade Fire blazing north of San Francisco is wreaking havoc thousands of miles away: on Wall Street. Investors in PG&E Corp. stocks and bonds lost about $4.1 billion in the four trading days after the blaze in Sonoma County, Calif., started… The stock has dropped 25% since the fire began, cutting the utility’s market capitalization to $3.25 billion on Wednesday from a high of $37 billion in 2017. PG&E bond prices have fallen as much as 12.5%... The swings in PG&E securities are complicating hedge funds’ efforts to profit from what some are describing as the first major bankruptcy induced by climate change.”
October 29 – New York Times (Peter Eavis and Ivan Penn): “California’s Pacific Gas & Electric problem isn’t going away. The giant utility has been in bankruptcy for months, and it is not clear who will end up controlling it. This uncertainty has extended into the wildfire season, exposing not just the shortcomings in PG&E’s fire-prevention efforts but also the threat that fire liabilities still pose to the company’s viability. No surprise, then, that state officials are getting restless and looking for bolder ways forward. Gov. Gavin Newsom has declared that his office would ‘love’ to see Warren E. Buffett’s holding company, Berkshire Hathaway, make a bid for PG&E… But any idea must go through the federal bankruptcy court where two camps of investors — one aligned with wildfire victims seeking damages from PG&E, and another with management — have submitted plans to reorganize the company. PG&E, facing an estimated $30 billion or more in liabilities, mainly from fires in 2017 and 2018, sought bankruptcy protection in January.”
China Watch:
November 1 – CNBC (Yun Li): “China said Friday that it has reached a consensus with the U.S. in principle after a phone call among high-level trade negotiators this week. The Chinese Ministry of Commerce said Vice Premier Liu He had a phone call with U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin on Friday. It said the two sides conducted ‘serious and constructive’ discussions on ‘core’ trade points and talked about arrangements for the next round of talks.”
October 31 – Bloomberg (Shawn Donnan, Jenny Leonard and Steven Yang): “Chinese officials are casting doubts about reaching a comprehensive long-term trade deal with the U.S. even as the two sides get close to signing a ‘phase one’ agreement. In private conversations with visitors to Beijing and other interlocutors in recent weeks, Chinese officials have warned they won’t budge on the thorniest issues, according to people familiar with the matter. They remain concerned about President Donald Trump’s impulsive nature and the risk he may back out of even the limited deal both sides say they want to sign in the coming weeks.”
October 29 – Associated Press: “China… accused the U.S. of ‘economic bullying behavior’ after U.S. regulators cited security threats in proposing to cut off funding for Chinese equipment in U.S. telecommunications networks. China would ‘resolutely oppose the U.S. abusing state power to suppress specific Chinese enterprises with unwarranted charges in the absence of any evidence,’ Foreign Ministry spokesman Geng Shuang told reporters… ‘The economic bullying behavior of the U.S. is a denial of the market economy principle that the U.S. has always advertised,’ Geng said… ‘We would like to urge the U.S. once again to stop abusing the concept of national security,’ Geng said.”
October 29 – Reuters (Michelle Nichols): “China’s U.N. Ambassador Zhang Jun warned… that U.S. criticism at the world body of Beijing’s policy in remote Xinjiang was not ‘helpful’ for negotiations between the two countries on a trade deal. The United States, Britain and 21 other states pushed China on Tuesday at the U.N. to stop detaining ethnic Uighurs and other Muslims, a move that was countered by Beijing and some 53 countries jointly defending its “remarkable” rights record. ‘The trade talks are going on and we are seeing progress,’ Zhang told reporters. ‘I do not think its helpful for having a good solution to the issue of trade talks.’”
October 28 – Bloomberg: “China’s room to ease monetary policy to aid the slowing economy is being limited further by price rises due the ongoing swine fever epidemic, economists said. Analysts… warned that surging consumer inflation has become a major constraint on the People’s Bank of China, and the likelihood for major monetary easing in the coming months has declined. That’s despite increasing evidence that economic growth will drop below 6% next year. ‘With surging pork prices, continued spill-over effects to other food prices, and the risk of a wage-price spiral, we believe the PBOC may become more reluctant to deliver any high-profile monetary easing in the coming quarters,’ Lu Ting, chief China economist at Nomura…”
October 31 – Bloomberg: “China’s ruling Communist Party warned that internal and external risks were increasing after wrapping up its most important meeting of the year. The party ‘holds high the great banner of socialism’ in the face of ‘a more complicated situation with risks and challenges significantly increasing at home and abroad,’ according to a communique… The party’s 200-plus-member Central Committee also discussed ways to improve the market-based economic system as well as the legal system in Hong Kong ‘for safeguarding national security.’ … “The communique confirms that the Xi administration’s outlook is one of increasing domestic and global risks, and therefore the solution is to double down on the party’s absolute control,’ said Jude Blanchette, Freeman Chair of China Studies at the Center for Strategic and International Studies.”
October 30 – Reuters (Gabriel Crossley and Ryan Woo): “Factory activity in China shrank for the sixth straight month in October and by more than expected, while service sector growth eased as firms grapple with the weakest economic growth in nearly 30 years… The Purchasing Managers’ Index (PMI) fell to 49.3 in October, China’s National Bureau of Statistics said on Thursday, versus 49.8 in September.”
October 30 – Reuters (Cheng Leng and Ryan Woo): “China’s anti-corruption watchdog said… it is investigating the former chairman of a rural bank for suspected corruption, and the central bank promised to take ‘forceful’ measures to preserve financial order after depositors rushed to withdraw their savings. Fears of poor management, risky lending practices and high levels of hidden debt at China’s thousands of small and rural banks have spurred regulators to tighten scrutiny this year. Financial strains have increased as economic growth slows to near 30-year lows.”
October 29 – Bloomberg: “A wall of maturing debt will soon add more strain to China’s sovereign-bond market, already under pressure from a global sell-off and rising inflation. More than 2 trillion yuan ($283bn) of local-government notes will mature in 2020… -- a record and 58% more than this year’s level. This means fresh debt to refinance the borrowing could start hitting the market shortly. A report Tuesday said the southern province of Guangdong may sell notes as early as November.”
October 28 – Bloomberg: “Investors seized the chance to take part in China’s largest convertible bond sale, showing just how coveted the equity-like securities have become. Shanghai Pudong Development Bank Co.’s 50 billion yuan ($7.1bn) deal was about 330 times oversubscribed… With about half of the offering first allocated to existing shareholders, that means new investors placed 7.8 trillion yuan worth of orders for the remaining supply. For context, that money could buy Brazil’s entire equity market with some change to spare.”
October 30 – Bloomberg: “The regulator in China’s financial center has ordered Shanghai’s more than 40 peer-to-peer lenders to exit the business, people familiar with the matter said, the latest blow to an online industry that’s shrunk by half this year. Some of the nation’s biggest platforms including Ping An-backed Lufax and Dianrong.com have been told in recent meetings with Shanghai’s financial services bureau to stop issuing new products and to wind down existing peer-to-peer lending services, the people said… The development indicates China’s determination to overhaul an industry that had more than $150 billion of loans outstanding and upwards of 50 million investors at its peak, but was plagued by fraud and defaults.”
October 29 – Bloomberg (Kevin Hamlin): “Determined to start his own business, but reluctant to ask family or friends for money, Zhang Peng turned to online lender Jiebei for 30,000 yuan ($4,260) to open a shop selling nuts. Interest on the one-year loan was 18%, and Zhang struggled with the payments at first. But it got him started. Now, two years later and still aged only 22, he owns a Mercedes and plans to open a second store in his hometown… Leveraging the massive online population and advanced e-commerce ecosystem, an upstart fintech industry has sprung up in China. A plethora of new platforms offer ways for entrepreneurs and households to get credit… Online giant Alibaba Group only set up MYBank in 2015, but it’s already provided micro loans worth more than 2 trillion yuan to some 16 million small businesses. It offers non-collateral credit via a model known as ‘3-1-0’: 3 minutes to apply, 1 second to approve, 0 humans involved.”
October 31 – Reuters (Noah Sin and Twinnie Siu): “Hong Kong slid into recession for the first time in a decade in the third quarter, weighed down by increasingly violent anti-government protests and the protracted U.S.-China trade war… The city’s economy shrank 3.2% in July-September from the preceding period, contracting for a second straight quarter and meeting the technical definition of a recession…”
Central Banking Watch:
October 28 – Bloomberg (Piotr Skolimowski, Arne Delfs, and Yuko Takeo): “Mario Draghi made one last plea for euro-zone fiscal support as he signed off from the European Central Bank presidency in a ceremony attended by the leaders of the bloc’s biggest economies… ‘We need a euro-area fiscal capacity of adequate size and design: large enough to stabilize the monetary union, but designed not to create excessive moral hazard,’ Draghi said. ‘National policies cannot always guarantee the right fiscal stance for the euro area as a whole.’”
October 30 – Bloomberg (Paul Gordon, Piotr Skolimowski, and Craig Stirling): “One of Christine Lagarde’s most important tools for stimulating inflation might be falling out of favor even before she gets to wield it as European Central Bank president. Doubts over negative interest rates are beginning to surface among policy makers on the continent where they first appeared half a decade ago. A growing contingent of officials at the ECB in Frankfurt are starting to wonder if they cause more harm than good, and Sweden’s Riksbank seems desperate to be rid of them altogether.”
October 31 – Bloomberg (Jeannette Neumann): “Luis de Guindos joined the growing number of European Central Bank officials warning about the negative side effects of an ultra-expansionary monetary policy. The vice president of the ECB also said policy makers alone can’t shield the euro-area economy from disruptive trade conflicts or the uncertainty generated by the U.K.’s impending exit from the bloc… ‘We’ve begun to notice that the collateral effects of this policy, of this monetary policy, are increasingly significant,’ Guindos told a group… That’s one reason why monetary policy ‘can’t be the only response to the economic slowdown’ in the euro area.”
October 26 – Reuters (Francesco Canepa): “Christine Lagarde will ensure European Central Bank policymakers climb down from their ‘ivory tower’ and face the political realities of the euro zone, the ECB’s vice president, Luis de Guindos, said…”
Brexit Watch:
October 30 – Reuters (Elizabeth Piper): “The phoney war is over. After months of rehearsing his election strategy, British Prime Minister Boris Johnson is poised to run a high-risk campaign designed to exploit divisions over Brexit despite his public appeals for national unity. Ahead of the Dec. 12 vote, he will focus on portraying his new Brexit deal with the European Union as a victory for a leader who many said would be unable to win concessions from Brussels and would instead leave without an agreement. Central to the election campaign will be the message that only Johnson can finish the job of leaving the EU, two sources close to the campaign said.”
EM Watch:
October 27 – Reuters (Cassandra Garrison): “Argentina’s former president Cristina Fernandez de Kirchner, a rockstar politician adored by the poor but feared by big business and investors, is back, although as vice president this time. The South American country’s leader for eight years until 2015, ‘Cristina’, as she is known to fans, returns to the Casa Rosada palace after she and senior running mate Alberto Fernandez scored a decisive victory in Sunday’s election. The return of the fiery Fernandez de Kirchner is a major twist in Argentine politics, turning Latin America’s third-largest economy abruptly back towards the left after four years under conservative leader Mauricio Macri.”
October 28 – Reuters (Jorge Otaola and Walter Bianchi): “Argentina central bank president Guido Sandleris pledged…to do everything possible to protect the bank’s international reserves, as the South American country transitions to a new leftist government amid swirling economic crisis. Sandleris said… the central bank will hold meetings with the team of President-elect Alberto Fernandez, who defeated incumbent Mauricio Macri in Sunday’s presidential election… In the early hours of Monday, the central bank announced it would tighten a restriction on dollar purchasing to $200 per month for individuals, down from $10,000 a month…”
Japan Watch:
October 30 – Reuters (Tetsushi Kajimoto): “Japan’s industrial output rebounded in September to log its fastest gain in four months, offering some relief to manufacturers amid a slowdown in global demand and rising pressure on the country’s exports from the U.S.-China trade war.”
Global Bubble Watch:
October 29 – Financial Times (Tommy Stubbington): “Cash has flowed out of the eurozone at an unprecedented pace for most of the past five years, thanks in large part to the European Central Bank’s bond-buying programme. With the central bank restarting quantitative easing this week after a 10-month absence from markets, investors are wondering whether the flood is set to resume. From March 2015 to December last year, the ECB snapped up nearly €2.6tn of debt. Investors who sold their bonds under the QE programme often chose to spend the proceeds on assets overseas. Fund managers largely balked at vanishingly low bond yields in the eurozone and chose to chase higher returns elsewhere, resulting in steady outflows that washed up in everything from the US bond market to high-end real estate. ‘Eurozone investors were buying foreign assets in massive quantities,’ said Stefano Di Domizio, head of fixed income at Absolute Strategy Research. ‘They didn’t want to compete with the ECB in chasing yields lower.’”
November 1 – Bloomberg (Pei Yi Mak, Blake Schmidt, Venus Feng, Yoojung Lee, Steven Crabill, Peter Eichenbaum, Andrew Heathcote and Tom Metcalf.): “Mukesh Ambani’s late father, who started the family’s business empire with $100, used to tell his son that he didn’t know what it was like to be poor. For the Ambanis, whose palatial home towers over Mumbai and is one of the world’s most expensive private residences, that has never been truer. They are Asia’s richest family, with a $50 billion fortune. The region’s 20 wealthiest clans are now worth more than $450 billion combined, underscoring how the world’s economic growth engine is minting fortunes on an unprecedented scale.”
October 26 – UK Guardian (Simon Tisdall): “A spate of large-scale street protests around the world, from Chile and Hong Kong to Lebanon and Barcelona, is fuelling a search for common denominators and collective causes. Are we entering a new age of global revolution? …Each country’s protests differ in detail. But recent upheavals do appear to share one key factor: youth. In most cases, younger people are at the forefront of calls for change…. There are more young people than ever before. About 41% of the global population of 7.7 billion is aged 24 or under. In Africa, 41% is under 15. In Asia and Latin America (where 65% of the world’s people live), it’s 25%.”
October 28 – Financial Times (Valentina Romei): “Global foreign direct investment contracted sharply in the first half of this year as trade tensions between the US, Europe and China weighed on the world economy. The flows fell by a fifth in the first six months of 2019 compared with the second half of the previous year, to $572bn, according to… the OECD. The drop was particularly concentrated in the second quarter, when flows contracted by 42%. FDI flows into the US dropped by more than a quarter from the latter half of 2018 to the first half of 2019, to $151bn, while flows into the EU dropped by 62% to $107bn. By contrast, flows to China increased by 5% to $82bn. FDI flows from China to the US peaked at $16bn in the second half of 2016 and have since fallen to less than $1.2bn as Chinese companies invest less and sell off some of their holdings, the OECD said.”
October 28 – Bloomberg (Zoe Schneeweiss and William Horobin): “In the first half of 2019, global foreign-direct-investment flows decreased by 20% compared with the second half of 2018, with a sharp drop in the second quarter, according to OECD data. Quarterly flows can be volatile -- often affected by a few very large transactions. …The latest decline continues the slowdown following the post-crisis peak in 2015 and can be partly attributed to ‘uncertainties regarding trade tensions and prospects for future economic growth.’”
Fixed-Income Bubble Watch:
October 29 – Bloomberg (Kelsey Butler): “A competitive underwriting environment, falling credit quality and low interest rates will pressure a $100 billion corner of the private debt market in the coming year, according to a new Fitch Ratings report. Business development companies will continue to face challenges heading into 2020 as execution risk is elevated for those looking to boost leverage at a time when deal structure and terms are softer, analysts led by Chelsea Richardson said… ‘Terms continue to weaken in the middle market and that is really driving the negative sector outlook,’ Richardson said…”
October 28 – Bloomberg (Lisa Lee and Sally Bakewell): “A group of about ten lenders agreed to provide a $1.6 billion loan for an insurance brokerage owned by private equity firm Kelso & Co LP. Wall Street banks that companies typically turn to for such debt had little hand in it. The lending list includes KKR & Co., Goldman Sachs Group Inc.’s merchant banking unit, Golub Capital, Oak Hill Capital Partners and Apollo Global Management… The unitranche loan… is one of the largest provided by direct lenders, the people said… Direct lenders, which bypass a syndication process where banks arrange leveraged loans for issuers and sell them on to institutional investors, typically finance small and medium-sized businesses. But as they amass larger pools of capital, they are increasingly doing bigger deals…”
Geopolitical Watch:
October 30 – CNBC (Eustance Huang): “The U.S. dollar has been the world’s major reserve currency for decades, but that status could come under threat as ‘very powerful countries’ seek to undermine its importance, warned Anne Korin, from the Institute for the Analysis of Global Security. ‘Major movers’ such as China, Russia and the European Union have a strong ‘motivation to de-dollarize,’ said Korin, co-director at the energy and security think tank… ‘We don’t know what’s going to come next, but what we do know is that the current situation is unsustainable,’ Korin said. ‘You have a growing club of countries — very powerful countries.’”
October 28 – Reuters (Ahmed Aboulenein): “Tens of thousands of Iraqis protested in Baghdad’s central Tahrir Square on Tuesday for a fifth day, angered by reports of security forces killing demonstrators in the city of Kerbala and the prime minister’s refusal to call early elections.”
October 29 – Bloomberg (Dana Khraiche): “Calls are mounting for Lebanon to impose formal restrictions on the movement of money to defend the country’s dollar peg and prevent a run on the banks when they open their doors on Friday after two weeks of nationwide protests. The closures have led to a backlog in dollar demand from importers and other businesses while speculation swirls about the measures lenders will need to take to avert financial collapse… In a sign of crumbling confidence, banks have been getting calls from clients asking to move their money abroad while others are working at a frantic pace to transfer funds to Swiss accounts as soon as lenders resume operations, local and foreign bankers said.”
October 29 – Reuters (Karin Strohecker and Tom Arnold): “Lebanon’s sovereign dollar bonds suffered one of their worst days on record on Tuesday after Prime Minister Saad al-Hariri resigned, fanning uncertainty about how the country will emerge from its most dire economic crisis in nearly 30 years. In a televised address to the nation, Hariri declared he had reached a ‘dead end’ in trying to resolve almost two weeks of widespread unrest. The address came after a mob loyal to Shi’ite Muslim groups Hezbollah and Amal attacked and destroyed a protest camp set up by anti-government demonstrators in Beirut.”
October 30 – Bloomberg: “A sell-off in China’s sovereign notes is weighing on its corporate bond market. The yield spread between the country’s top-rated three-year corporate bonds over government securities of the same tenor widened this week to its highest in four months… That’s after the 10-year sovereign bond yield rose to the highest in five months. It’s also hit sales of new company bonds, with the most amount of cancellations this month since June.”
China’s 10-year sovereign yields rose three bps this week to 3.27%, trading earlier in the week at the high (3.33%) since May. With bank failures and corporate defaults poised to significantly escalate going forward, a major expansion of China central government debt should be expected. I continue to ponder the amount of leverage that has accumulated in relatively high-yielding Chinese Credit instruments (government, corporate and financial). A “phase 1” trade deal and associated truce have reduced the odds of trade war escalation becoming a near-term catalyst for upheaval and crisis. At the same time, the risk of acute financial and economic instability in China remains highly elevated.
I suspect China happenings put some downward pressure on global yields this week. And lower yields continue to support equities and corporate Credit markets. One could look at various negative developments (i.e. China, impeachment proceedings, Brexit, global unrest, etc.) and question the rationality for the risk markets’ vision of nothing but blue skies ahead. It’s not entirely irrational. Trouble in China ensures additional Beijing stimulus, along with heightened disinflationary risks that will keep the Fed, PBOC, ECB, BOJ and others pushing monetary stimulus. Impeachment risk? Doesn’t that virtually guarantee President Trump will strike a deal with the Chinese, while avoiding policies, comments and tweets that might upset the applecart?
October 31 – Bloomberg (Margaret Collins): “President Donald Trump resumed his attacks on the Federal Reserve and its Chairman Jerome Powell, a day after it cut interest rates for the third time this year. ‘People are VERY disappointed in Jay Powell and the Federal Reserve,’ Trump tweeted… ‘The Fed has called it wrong from the beginning, too fast, too slow.’”
With the Fed having cut rates three times in three months, while expanding its balance sheet by $239 billion in seven weeks, one would think the President might back off.
November 1 – Wall Street Journal (Michael S. Derby): “The Federal Reserve Bank of New York added $104.583 billion in temporary liquidity to financial markets Friday, when it also added permanent reserves to expand its balance sheet. The Fed’s intervention came in two parts. One was through repurchase agreements that expire Monday, in which the Fed took in $73.133 billion in securities; the other was a 13-day repo operation that took in $31.45 billion. The Fed also bought $7.501 billion in Treasury bills.”
Concluding his prepared comments, Chairman Powell addressed operations to expand Federal Reserve Credit through the purchase of T-bills (to expand bank reserves): “These actions are purely technical measures to support the effective implementation of monetary policy as we continue to learn about the appropriate level of reserves. They do not represent a change in the stance of monetary policy. In particular, our Treasury bill purchases should not be confused with the large-scale asset purchase programs that we deployed after the financial crisis. In those programs, we purchased longer-term securities to put downward pressure on longer- term interest rates and ease broader financial conditions. In contrast, increasing the supply of reserves by purchasing Treasury bills only alters the mix of short-term assets held by the public and should not materially affect demand and supply for longer-term securities or financial conditions more broadly.”
That the Fed would move to expand its balance sheet by hundreds of billions with the stock market at record highs, financial conditions loose, and the economy in expansion, clearly conveys, once again, that the Federal Reserve has no tolerance for market adjustment or correction. Why do we need a multi-trillion “repo” market, anyways? Is it compatible with a financial stability mandate that the Fed openly nurtures speculative leveraging? Silly me: with consumer prices slightly below target – and the U.S. economy “in a good place” – no need to be concerned with egregious speculative leverage at the heart of the financial system. Nothing but Music to the Markets.
For the Week:
The S&P500 gained 1.5% (up 22.3% y-t-d), and the Dow rose 1.4% (up 17.2%). The Utilities slipped 0.3% (up 21.7%). The Banks increased 1.0% (up 23.3%), and the Broker/Dealers jumped 2.4% (up 13.3%). The Transports fell 1.1% (up 17.1%). The S&P 400 Midcaps rose 1.2% (up 19.3%), and the small cap Russell 2000 jumped 2.0% (up 17.9%). The Nasdaq100 advanced 1.6% (up 28.9%). The Semiconductors jumped 3.0% (up 46.3%). The Biotechs surged 3.0% (up 7.3%). With bullion jumping $14, the HUI gold index rose 2.3% (up 36.3%).
Three-month Treasury bill rates ended the week at 1.4875%. Two-year government yields dropped seven bps to 1.55% (down 94bps y-t-d). Five-year T-note yields fell eight bps to 1.54% (down 97bps). Ten-year Treasury yields dropped nine bps to 1.71% (down 97bps). Long bond yields fell 10 bps to 2.19% (down 83bps). Benchmark Fannie Mae MBS yields sank 15 bps to 2.63% (down 87bps).
Greek 10-year yields declined two bps to 1.18% (down 322bps y-t-d). Ten-year Portuguese yields slipped two bps to 0.20% (down 152bps). Italian 10-year yields rose four bps to 0.99% (down 175bps). Spain's 10-year yields were unchanged at 0.27% (down 114bps). German bund yields dipped two bps to negative 0.38% (down 62bps). French yields declined one basis point to negative 0.07% (down 78bps). The French to German 10-year bond spread widened one to 31 bps. U.K. 10-year gilt yields declined two bps to 0.66% (down 61bps). U.K.'s FTSE equities index slipped 0.3% (up 8.5% y-t-d).
Japan's Nikkei Equities Index added 0.2% (up 14.2% y-t-d). Japanese 10-year "JGB" yields dropped four bps to negative 0.18% (down 18bps y-t-d). France's CAC40 increased 0.7% (up 21.8%). The German DAX equities index gained 0.5% (up 22.7%). Spain's IBEX 35 equities index fell 1.1% (up 9.2%). Italy's FTSE MIB index rose 1.4% (up 25.2%). EM equities were mostly higher. Brazil's Bovespa index gained 0.8% (up 18.9%), and Mexico's Bolsa increased 1.0% (up 5.2%). South Korea's Kospi index added 0.6% (up 2.9%). India's Sensex equities index surged 2.8% (up 11.4%). China's Shanghai Exchange was little changed (up 18.6%). Turkey's Borsa Istanbul National 100 index fell 1.7% (up 7.9%). Russia's MICEX equities index jumped 2.0% (up 23.7%).
Investment-grade bond funds saw inflows of $2.324 billion, and junk bond funds posted inflows of $940 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates increased three bps to 3.78% (down 105bps y-o-y). Fifteen-year rates added one basis point to 3.19% (down 104bps). Five-year hybrid ARM rates rose three bps to 3.43% (down 61bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates unchanged at 4.11% (down 72bps).
Federal Reserve Credit last week jumped $32.7bn to $3.966 TN. Over the past year, Fed Credit contracted $155bn, or 3.8%. Fed Credit inflated $1.155 Trillion, or 41%, over the past 364 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $2.2bn last week to $3.422 TN. "Custody holdings" rose $7.2bn y-o-y, or 0.2%.
M2 (narrow) "money" supply surged $43.1bn last week to a record $15.204 TN. "Narrow money" gained $944bn, or 6.6%, over the past year. For the week, Currency increased $0.7bn. Total Checkable Deposits surged $108.5bn, while Savings Deposits sank $123.5bn. Small Time Deposits slipped $1.7bn. Retail Money Funds gained $8.7bn.
Total money market fund assets jumped $27.3bn to $3.513 TN. Money Funds gained $641bn y-o-y, or 22.3%.
Total Commercial Paper surged $25.2bn to $1.113 TN. CP was up $26bn, or 2.4% year-over-year.
Currency Watch:
The U.S. dollar index declined 0.7% to 97.121 (up 1.0% y-t-d). For the week on the upside, the Swedish krona increased 1.3%, the Norwegian krone 1.2%, the New Zealand dollar 1.2%, the Australian dollar 1.2%, the British pound 0.9%, the Swiss franc 0.9%, the euro 0.8%, the South Korean won 0.6%, the Japanese yen 0.4%, the Singapore dollar 0.4%, and the Brazilian real 0.3%. On the downside, the South African rand declined 2.7%, the Canadian dollar 0.6% and the Mexican peso 0.3%. The Chinese renminbi increased 0.40% versus the dollar this week (down 2.25% y-t-d).
Commodities Watch:
October 30 – Reuters (Jennifer Hiller): “In the shale field that helped launch the U.S. natural gas boom a decade ago, Chesapeake Energy Corp this month set aside its last drilling rig. The problem for the once No. 2 U.S. gas producer was not a lack of gas, but too much of it. A long, steady increase in U.S. gas production – much of it a byproduct of the shale oil boom – has prices for the fuel heading toward a 25-year low, with output outpacing U.S. consumption and expected to hit 91.6 billion cubic feet, up 10% over last year… Producers have sought to turn much of the U.S. surplus to liquefied natural gas (LNG) and export it. But even with rising sales in Asia and Europe, global LNG prices have tumbled this year as new export plants opened.”¬
The Bloomberg Commodities Index rose 1.4% this week (up 4.7% y-t-d). Spot Gold gained 0.7% to $1,514 (up 18.1%). Silver was little changed at $18.052 (up 16.2%). WTI crude declined 46 cents to $56.20 (up 24%). Gasoline fell 1.0% (up 25%), while Natural Gas surged 10.4% (down 8%). Copper declined 0.8% (up 1%). Wheat slipped 0.3% (up 3%). Corn added 0.6% (up 4%).
Market Instability Watch:
October 28 – Financial Times (Benedict Mander and Colby Smith): “Investors breathed a sigh of relief at Alberto Fernández’s narrower-than-expected victory in Argentina’s presidential elections, but were anxious for more clarity over the leftist leader’s first moves when he takes power on December 10. While financial markets took heart that Mr Fernández failed to win a majority in congress, restraining his ability to push through controversial laws, the precise direction that his economic policy will take remains unclear given his refusal to unveil a cabinet… With reserves falling by almost $4bn in the week before the elections… restoring confidence with investors is crucial, said Diana Amoa, a fixed income portfolio manager at JPMorgan… ‘One way to do that is to appoint a more credible cabinet and show a willingness to engage debt holders and the IMF,’ she added.”
Trump Administration Watch:
October 29 – Reuters (Heather Timmons and Hallie Gu): “U.S. President Donald Trump’s demand that Beijing commit to big purchases of American farm products has become a major sticking point in talks to end the Sino-U.S. trade war, according to several people briefed on the negotiations. Trump has said publicly that China could buy as much as $50 billion of U.S. farm products, more than double the annual amount it did the year before the trade war started. U.S. officials continue to push for that in talks, while Beijing is balking at committing to a large figure and a specific time frame. Chinese buyers would like the discretion to buy based on market conditions. ‘China does not want to buy a lot of products that people here don’t need or to buy something at a time when it is not in demand,’ an official from a Chinese state-owned company explained.”
October 30 – Bloomberg (Justin Sink, Shawn Donnan, and Jenny Leonard): “President Donald Trump’s plan to ink the first installment of a trade accord with Xi Jinping next month was thrown into question… after Chile canceled an upcoming summit where the two leaders planned to meet. The cancellation… appeared to catch the White House off guard. But the administration insisted that it would continue to press to finalize the ‘phase one’ agreement in coming weeks.”
November 1 – The Hill (Niv Elis): “The federal government's outstanding public debt has surpassed $23 trillion for the first time in history, according to… the Treasury Department… Growing budget deficits have added to the nation’s debt at a speedy rate since President Trump took office. The debt has grown some 16% since Trump's inauguration, when it stood at $19.9 trillion. It passed $22 trillion for the first time just 10 months ago.”
October 28 – Reuters (Lindsay Dunsmuir): “The U.S. Treasury said… it expects to borrow $29 billion less during the fourth quarter than previously estimated. The department… expects to issue $352 billion through credit markets during the October-December period, assuming an end-December cash balance of $410 billion. Treasury also expects to issue $389 billion in net marketable debt in the January-March 2020 period. In the third quarter of this year, Treasury borrowed $440 billion through credit markets.”
October 30 – Reuters (David Brunnstrom): “U.S. Secretary of State Mike Pompeo… stepped up recent U.S. rhetoric targeting China’s ruling Communist Party, saying Beijing was focused on international domination and needed to be confronted. Pompeo made the remarks even as the Trump administration said it still expected to sign the first phase of deal to end a damaging trade war with China next month… ‘They are reaching for and using methods that have created challenges for the United States and for the world and we collectively, all of us, need to confront these challenges ... head on,’ Pompeo said…”
October 28 – CNBC (Lauren Hirsch): “The U.S. will consider extending certain tariff exclusions on $34 billion of imports from China as the two nations work toward a trade agreement, the Office of the U.S. Trade Representative said… Nearly 1,000 products were exempted from the July 2018 tariff, and those exclusions are set to expire on Dec. 28.”
October 29 – Bloomberg (Kelsey Butler): “U.S. Treasury Secretary Steven Mnuchin is open to loosening financial crisis-era regulations that have stiffened liquidity rules for big banks to relieve possible cash crunches in short-term funding markets. Mnuchin said… he had spoken to Jamie Dimon, chief executive of JPMorgan Chase & Co., and other banks about how to avoid liquidity problems. ‘The banks have raised an issue around intra-day liquidity, and that is something that makes sense for regulators to look at,’ Mnuchin said…”
October 28 – Wall Street Journal (Andrew Ackerman): “Fannie Mae’s and Freddie Mac’s federal regulator took new steps to privatize the mortgage-finance companies on Monday, telling the firms to help lay the groundwork for their own transitions out of an 11-year government conservatorship. In new policy goals, the Federal Housing Finance Agency for the first time released formal objectives calling for Fannie’s and Freddie’s return to the private sector. The companies have been in government conservatorship since the 2008 financial crisis.”
Federal Reserve Watch:
October 30 – New York Times (Jeanna Smialek): “The Federal Reserve cut interest rates Wednesday for the third time this year as slowing business investment, ongoing trade tensions and global weakness continued to weigh on the American economy. But the Fed signaled that it will pause and assess incoming data before it considers lowering borrowing costs again. Fed Chair Jerome H. Powell said that while ‘there’s plenty of risk left,’ some of it has subsided, pointing to the potential for a limited trade deal between the United States and China and a negotiated exit for Britain from the European Union. ‘Overall, we see the economy as having been resilient to the winds that have been blowing this year,’ he said. Wednesday’s decision to cut rates for a third time was made ‘to help keep the U.S. economy strong in the face of global developments and to provide some insurance against ongoing risks.’”
October 30 – Bloomberg (Jesse Hamilton and Emily Barrett): “Federal Reserve Chairman Jerome Powell said the central bank has been looking at long-term options to improve market liquidity, including ‘intraday’ measures, after short-term markets suffered an alarming funding squeeze last month. The Fed is considering technical adjustments to head off a repeat of the September crunch, Powell said… He said he doesn’t think the agency will consider changes to Wall Street’s capital or liquidity rules. ‘It used to be a common thing for banks to have intraday liquidity from the Fed, what we called daylight overdrafts,’ Powell said. ‘That’s something we can look at, and there are some technical things we can look at that would perhaps make the liquidity that we have -- which we think is ample -- in the financial system move more freely.’”
October 29 – Wall Street Journal (Michael S. Derby): “The New York Fed added both permanent and temporary liquidity to financial markets ahead of this week’s rate-setting central bank meeting and before the end of the month, which can bring volatility to short-term markets as banks sort out their respective financing needs. The permanent addition happened by way of central bank buying of Treasury bills aimed at expanding the central bank’s balance sheet of just under $4 trillion. The Fed bought $7.501 billion in short-term government securities. Eligible banks offered $24.105 in Treasury bills. That’s less than the $35.755 billion offered in a similar Fed operation Friday and the $44.218 billion offered Oct. 23. On the temporary front, the Fed injected $104.483 billion in short-term liquidity to financial markets Tuesday.”
U.S. Bubble Watch:
October 28 – Bloomberg (Claire Boston and Elizabeth Rembert): “Jamie Dimon has been quick to trumpet the strength of U.S. consumers. Federal Reserve chief Jay Powell calls them a bright spot that is countering weakness in the manufacturing sector. But there are signs that U.S. households are starting to feel stretched, possibly making it harder for them to continue propping up the economy. The evidence is showing up on the debt side. Serious delinquencies on credit cards and auto debt have been creeping up in recent quarters. That’s pushed some banks to set aside more money to cover bad loans and tighten lending standards for credit cards and other consumer loans.”
October 29 – Bloomberg (William Edwards): “Contract signings to purchase previously owned U.S. homes posted the largest annual increase in four years, signaling lower mortgage rates are reviving interest from buyers. The National Association of Realtors’ Index of pending home sales increased 6.3% in September from a year earlier on an unadjusted basis, the biggest gain since August 2015… On a monthly adjusted basis, contracts rose 1.5%, exceeding the median forecast… of 0.9%. The result indicates the housing market is regaining traction after a separate report showed contract closings fell 2.2% in September.”
October 29 – Bloomberg (Kelsey Butler): “Home prices in 20 U.S. cities declined in August from the prior month for the first time in a year, reflecting moderation in some once-hot real estate markets. The S&P CoreLogic Case-Shiller index of property values fell 0.2% during the month, compared with estimates for a 0.1% decline, after no change in July… Prices increased 2% from August 2018, matching the year-over-year gain in the prior month but slightly below the median estimate… Nationally, annual home prices were up 3.2% after a 3.1% increase in July.”
October 29 – Bloomberg (Reade Pickert): “Three years after Donald Trump campaigned for president pledging a factory renaissance, the opposite appears to be happening. Manufacturing made up 11% of gross domestic product in the second quarter, the smallest share in data going back to 1947 and down from 11.1% in the prior period… The latest number compares with 13.4% for real estate, 12.8% for professional and business services and 12.3% for governments…”
October 28 – Wall Street Journal (Ben Eisen and Laura Kusisto): “The mortgage market turned red hot over the summer, posting its biggest three months since the financial crisis. Lenders extended $700 billion of home loans in the July-to-September quarter, the most in 14 years, according to… Inside Mortgage Finance. Mortgage originations for the full year are on pace to hit their highest level since 2006, the peak of the last housing boom. Falling interest rates spurred homeowners to trade higher-rate mortgages for lower-rate ones to save on monthly payments. Refinancings kept mortgage lenders busy, though home sales haven’t recovered as much as economists expected.”
October 28 – Wall Street Journal (Michael Wursthorn): “Exchange-traded funds have swelled into a $4 trillion juggernaut over the past quarter of a century, but many asset managers say the industry is entering a new phase of competition and oversaturation that threatens to squeeze out smaller funds. More than 90 funds have closed this year through early October, following a record 139 closures last year. Meanwhile, launches of new exchange-traded products… peaked in 2011 and have remained relatively flat since dipping from that level… The tepid pace of development could be just the beginning of a bigger shakeout across the industry, as more than half of the roughly 2,100 exchange-traded products listed in the U.S. have less than $100 million in assets, according to David Perlman, an ETF strategist at UBS.”
October 28 – Bloomberg (Heather Perlberg and Melissa Karsh): “KKR & Co. has gathered more than $2 billion to invest in fast-growing technology companies as it further expands beyond the mega-deals that made its reputation. The firm is raising its second fund dedicated to growth-equity investments in technology, media and telecommunications… The fund… is about triple the size of the debut vehicle: the KKR Next Generation Technology Growth Fund raised $714 million in 2016.”
October 29 – Bloomberg (Christopher Maloney and Adam Tempkin): “The payday-loan business was in decline. Regulators were circling, storefronts were vanishing and investors were abandoning the industry’s biggest companies en masse. And yet today, just a few years later, many of the same subprime lenders that specialized in the debt are promoting an almost equally onerous type of credit. It’s called the online installment loan, a form of debt with much longer maturities but often the same sort of crippling, triple-digit interest rates. If the payday loan’s target audience is the nation’s poor, then the installment loan is geared to all those working-class Americans who have seen their wages stagnate and unpaid bills pile up… In just a span of five years, online installment loans have gone from being a relatively niche offering to a red-hot industry. Non-prime borrowers now collectively owe about $50 billion on installment products…”
October 29 – Bloomberg (Edvard Pettersson): “It’s meant to be one of the crown jewels of downtown Los Angeles’ urban renaissance but now it’s in limbo -- plagued by lawsuits from subcontractors, and victim of an ongoing trade dispute between China and the U.S. and a Beijing crackdown on credit and capital flight. Construction has largely stalled at the three towers of Oceanwide Plaza across from Staples Center where the NBA’s Lakers and Clippers and the NHL’s Kings play their home games… The developer, Beijing-based Oceanwide Holdings Co., offered few details on the future of the $1 billion-plus project -- other than to insist that it has financing and work is continuing. The lawsuits by unpaid subcontractors, on the other hand, give a glimpse of the developer’s struggle to come up with needed money to finish the project.”
October 30 – Wall Street Journal (Matt Wirz and Juliet Chung): “The Kincade Fire blazing north of San Francisco is wreaking havoc thousands of miles away: on Wall Street. Investors in PG&E Corp. stocks and bonds lost about $4.1 billion in the four trading days after the blaze in Sonoma County, Calif., started… The stock has dropped 25% since the fire began, cutting the utility’s market capitalization to $3.25 billion on Wednesday from a high of $37 billion in 2017. PG&E bond prices have fallen as much as 12.5%... The swings in PG&E securities are complicating hedge funds’ efforts to profit from what some are describing as the first major bankruptcy induced by climate change.”
October 29 – New York Times (Peter Eavis and Ivan Penn): “California’s Pacific Gas & Electric problem isn’t going away. The giant utility has been in bankruptcy for months, and it is not clear who will end up controlling it. This uncertainty has extended into the wildfire season, exposing not just the shortcomings in PG&E’s fire-prevention efforts but also the threat that fire liabilities still pose to the company’s viability. No surprise, then, that state officials are getting restless and looking for bolder ways forward. Gov. Gavin Newsom has declared that his office would ‘love’ to see Warren E. Buffett’s holding company, Berkshire Hathaway, make a bid for PG&E… But any idea must go through the federal bankruptcy court where two camps of investors — one aligned with wildfire victims seeking damages from PG&E, and another with management — have submitted plans to reorganize the company. PG&E, facing an estimated $30 billion or more in liabilities, mainly from fires in 2017 and 2018, sought bankruptcy protection in January.”
China Watch:
November 1 – CNBC (Yun Li): “China said Friday that it has reached a consensus with the U.S. in principle after a phone call among high-level trade negotiators this week. The Chinese Ministry of Commerce said Vice Premier Liu He had a phone call with U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin on Friday. It said the two sides conducted ‘serious and constructive’ discussions on ‘core’ trade points and talked about arrangements for the next round of talks.”
October 31 – Bloomberg (Shawn Donnan, Jenny Leonard and Steven Yang): “Chinese officials are casting doubts about reaching a comprehensive long-term trade deal with the U.S. even as the two sides get close to signing a ‘phase one’ agreement. In private conversations with visitors to Beijing and other interlocutors in recent weeks, Chinese officials have warned they won’t budge on the thorniest issues, according to people familiar with the matter. They remain concerned about President Donald Trump’s impulsive nature and the risk he may back out of even the limited deal both sides say they want to sign in the coming weeks.”
October 29 – Associated Press: “China… accused the U.S. of ‘economic bullying behavior’ after U.S. regulators cited security threats in proposing to cut off funding for Chinese equipment in U.S. telecommunications networks. China would ‘resolutely oppose the U.S. abusing state power to suppress specific Chinese enterprises with unwarranted charges in the absence of any evidence,’ Foreign Ministry spokesman Geng Shuang told reporters… ‘The economic bullying behavior of the U.S. is a denial of the market economy principle that the U.S. has always advertised,’ Geng said… ‘We would like to urge the U.S. once again to stop abusing the concept of national security,’ Geng said.”
October 29 – Reuters (Michelle Nichols): “China’s U.N. Ambassador Zhang Jun warned… that U.S. criticism at the world body of Beijing’s policy in remote Xinjiang was not ‘helpful’ for negotiations between the two countries on a trade deal. The United States, Britain and 21 other states pushed China on Tuesday at the U.N. to stop detaining ethnic Uighurs and other Muslims, a move that was countered by Beijing and some 53 countries jointly defending its “remarkable” rights record. ‘The trade talks are going on and we are seeing progress,’ Zhang told reporters. ‘I do not think its helpful for having a good solution to the issue of trade talks.’”
October 28 – Bloomberg: “China’s room to ease monetary policy to aid the slowing economy is being limited further by price rises due the ongoing swine fever epidemic, economists said. Analysts… warned that surging consumer inflation has become a major constraint on the People’s Bank of China, and the likelihood for major monetary easing in the coming months has declined. That’s despite increasing evidence that economic growth will drop below 6% next year. ‘With surging pork prices, continued spill-over effects to other food prices, and the risk of a wage-price spiral, we believe the PBOC may become more reluctant to deliver any high-profile monetary easing in the coming quarters,’ Lu Ting, chief China economist at Nomura…”
October 31 – Bloomberg: “China’s ruling Communist Party warned that internal and external risks were increasing after wrapping up its most important meeting of the year. The party ‘holds high the great banner of socialism’ in the face of ‘a more complicated situation with risks and challenges significantly increasing at home and abroad,’ according to a communique… The party’s 200-plus-member Central Committee also discussed ways to improve the market-based economic system as well as the legal system in Hong Kong ‘for safeguarding national security.’ … “The communique confirms that the Xi administration’s outlook is one of increasing domestic and global risks, and therefore the solution is to double down on the party’s absolute control,’ said Jude Blanchette, Freeman Chair of China Studies at the Center for Strategic and International Studies.”
October 30 – Reuters (Gabriel Crossley and Ryan Woo): “Factory activity in China shrank for the sixth straight month in October and by more than expected, while service sector growth eased as firms grapple with the weakest economic growth in nearly 30 years… The Purchasing Managers’ Index (PMI) fell to 49.3 in October, China’s National Bureau of Statistics said on Thursday, versus 49.8 in September.”
October 30 – Reuters (Cheng Leng and Ryan Woo): “China’s anti-corruption watchdog said… it is investigating the former chairman of a rural bank for suspected corruption, and the central bank promised to take ‘forceful’ measures to preserve financial order after depositors rushed to withdraw their savings. Fears of poor management, risky lending practices and high levels of hidden debt at China’s thousands of small and rural banks have spurred regulators to tighten scrutiny this year. Financial strains have increased as economic growth slows to near 30-year lows.”
October 29 – Bloomberg: “A wall of maturing debt will soon add more strain to China’s sovereign-bond market, already under pressure from a global sell-off and rising inflation. More than 2 trillion yuan ($283bn) of local-government notes will mature in 2020… -- a record and 58% more than this year’s level. This means fresh debt to refinance the borrowing could start hitting the market shortly. A report Tuesday said the southern province of Guangdong may sell notes as early as November.”
October 28 – Bloomberg: “Investors seized the chance to take part in China’s largest convertible bond sale, showing just how coveted the equity-like securities have become. Shanghai Pudong Development Bank Co.’s 50 billion yuan ($7.1bn) deal was about 330 times oversubscribed… With about half of the offering first allocated to existing shareholders, that means new investors placed 7.8 trillion yuan worth of orders for the remaining supply. For context, that money could buy Brazil’s entire equity market with some change to spare.”
October 30 – Bloomberg: “The regulator in China’s financial center has ordered Shanghai’s more than 40 peer-to-peer lenders to exit the business, people familiar with the matter said, the latest blow to an online industry that’s shrunk by half this year. Some of the nation’s biggest platforms including Ping An-backed Lufax and Dianrong.com have been told in recent meetings with Shanghai’s financial services bureau to stop issuing new products and to wind down existing peer-to-peer lending services, the people said… The development indicates China’s determination to overhaul an industry that had more than $150 billion of loans outstanding and upwards of 50 million investors at its peak, but was plagued by fraud and defaults.”
October 29 – Bloomberg (Kevin Hamlin): “Determined to start his own business, but reluctant to ask family or friends for money, Zhang Peng turned to online lender Jiebei for 30,000 yuan ($4,260) to open a shop selling nuts. Interest on the one-year loan was 18%, and Zhang struggled with the payments at first. But it got him started. Now, two years later and still aged only 22, he owns a Mercedes and plans to open a second store in his hometown… Leveraging the massive online population and advanced e-commerce ecosystem, an upstart fintech industry has sprung up in China. A plethora of new platforms offer ways for entrepreneurs and households to get credit… Online giant Alibaba Group only set up MYBank in 2015, but it’s already provided micro loans worth more than 2 trillion yuan to some 16 million small businesses. It offers non-collateral credit via a model known as ‘3-1-0’: 3 minutes to apply, 1 second to approve, 0 humans involved.”
October 31 – Reuters (Noah Sin and Twinnie Siu): “Hong Kong slid into recession for the first time in a decade in the third quarter, weighed down by increasingly violent anti-government protests and the protracted U.S.-China trade war… The city’s economy shrank 3.2% in July-September from the preceding period, contracting for a second straight quarter and meeting the technical definition of a recession…”
Central Banking Watch:
October 28 – Bloomberg (Piotr Skolimowski, Arne Delfs, and Yuko Takeo): “Mario Draghi made one last plea for euro-zone fiscal support as he signed off from the European Central Bank presidency in a ceremony attended by the leaders of the bloc’s biggest economies… ‘We need a euro-area fiscal capacity of adequate size and design: large enough to stabilize the monetary union, but designed not to create excessive moral hazard,’ Draghi said. ‘National policies cannot always guarantee the right fiscal stance for the euro area as a whole.’”
October 30 – Bloomberg (Paul Gordon, Piotr Skolimowski, and Craig Stirling): “One of Christine Lagarde’s most important tools for stimulating inflation might be falling out of favor even before she gets to wield it as European Central Bank president. Doubts over negative interest rates are beginning to surface among policy makers on the continent where they first appeared half a decade ago. A growing contingent of officials at the ECB in Frankfurt are starting to wonder if they cause more harm than good, and Sweden’s Riksbank seems desperate to be rid of them altogether.”
October 31 – Bloomberg (Jeannette Neumann): “Luis de Guindos joined the growing number of European Central Bank officials warning about the negative side effects of an ultra-expansionary monetary policy. The vice president of the ECB also said policy makers alone can’t shield the euro-area economy from disruptive trade conflicts or the uncertainty generated by the U.K.’s impending exit from the bloc… ‘We’ve begun to notice that the collateral effects of this policy, of this monetary policy, are increasingly significant,’ Guindos told a group… That’s one reason why monetary policy ‘can’t be the only response to the economic slowdown’ in the euro area.”
October 26 – Reuters (Francesco Canepa): “Christine Lagarde will ensure European Central Bank policymakers climb down from their ‘ivory tower’ and face the political realities of the euro zone, the ECB’s vice president, Luis de Guindos, said…”
Brexit Watch:
October 30 – Reuters (Elizabeth Piper): “The phoney war is over. After months of rehearsing his election strategy, British Prime Minister Boris Johnson is poised to run a high-risk campaign designed to exploit divisions over Brexit despite his public appeals for national unity. Ahead of the Dec. 12 vote, he will focus on portraying his new Brexit deal with the European Union as a victory for a leader who many said would be unable to win concessions from Brussels and would instead leave without an agreement. Central to the election campaign will be the message that only Johnson can finish the job of leaving the EU, two sources close to the campaign said.”
EM Watch:
October 27 – Reuters (Cassandra Garrison): “Argentina’s former president Cristina Fernandez de Kirchner, a rockstar politician adored by the poor but feared by big business and investors, is back, although as vice president this time. The South American country’s leader for eight years until 2015, ‘Cristina’, as she is known to fans, returns to the Casa Rosada palace after she and senior running mate Alberto Fernandez scored a decisive victory in Sunday’s election. The return of the fiery Fernandez de Kirchner is a major twist in Argentine politics, turning Latin America’s third-largest economy abruptly back towards the left after four years under conservative leader Mauricio Macri.”
October 28 – Reuters (Jorge Otaola and Walter Bianchi): “Argentina central bank president Guido Sandleris pledged…to do everything possible to protect the bank’s international reserves, as the South American country transitions to a new leftist government amid swirling economic crisis. Sandleris said… the central bank will hold meetings with the team of President-elect Alberto Fernandez, who defeated incumbent Mauricio Macri in Sunday’s presidential election… In the early hours of Monday, the central bank announced it would tighten a restriction on dollar purchasing to $200 per month for individuals, down from $10,000 a month…”
Japan Watch:
October 30 – Reuters (Tetsushi Kajimoto): “Japan’s industrial output rebounded in September to log its fastest gain in four months, offering some relief to manufacturers amid a slowdown in global demand and rising pressure on the country’s exports from the U.S.-China trade war.”
Global Bubble Watch:
October 29 – Financial Times (Tommy Stubbington): “Cash has flowed out of the eurozone at an unprecedented pace for most of the past five years, thanks in large part to the European Central Bank’s bond-buying programme. With the central bank restarting quantitative easing this week after a 10-month absence from markets, investors are wondering whether the flood is set to resume. From March 2015 to December last year, the ECB snapped up nearly €2.6tn of debt. Investors who sold their bonds under the QE programme often chose to spend the proceeds on assets overseas. Fund managers largely balked at vanishingly low bond yields in the eurozone and chose to chase higher returns elsewhere, resulting in steady outflows that washed up in everything from the US bond market to high-end real estate. ‘Eurozone investors were buying foreign assets in massive quantities,’ said Stefano Di Domizio, head of fixed income at Absolute Strategy Research. ‘They didn’t want to compete with the ECB in chasing yields lower.’”
November 1 – Bloomberg (Pei Yi Mak, Blake Schmidt, Venus Feng, Yoojung Lee, Steven Crabill, Peter Eichenbaum, Andrew Heathcote and Tom Metcalf.): “Mukesh Ambani’s late father, who started the family’s business empire with $100, used to tell his son that he didn’t know what it was like to be poor. For the Ambanis, whose palatial home towers over Mumbai and is one of the world’s most expensive private residences, that has never been truer. They are Asia’s richest family, with a $50 billion fortune. The region’s 20 wealthiest clans are now worth more than $450 billion combined, underscoring how the world’s economic growth engine is minting fortunes on an unprecedented scale.”
October 26 – UK Guardian (Simon Tisdall): “A spate of large-scale street protests around the world, from Chile and Hong Kong to Lebanon and Barcelona, is fuelling a search for common denominators and collective causes. Are we entering a new age of global revolution? …Each country’s protests differ in detail. But recent upheavals do appear to share one key factor: youth. In most cases, younger people are at the forefront of calls for change…. There are more young people than ever before. About 41% of the global population of 7.7 billion is aged 24 or under. In Africa, 41% is under 15. In Asia and Latin America (where 65% of the world’s people live), it’s 25%.”
October 28 – Financial Times (Valentina Romei): “Global foreign direct investment contracted sharply in the first half of this year as trade tensions between the US, Europe and China weighed on the world economy. The flows fell by a fifth in the first six months of 2019 compared with the second half of the previous year, to $572bn, according to… the OECD. The drop was particularly concentrated in the second quarter, when flows contracted by 42%. FDI flows into the US dropped by more than a quarter from the latter half of 2018 to the first half of 2019, to $151bn, while flows into the EU dropped by 62% to $107bn. By contrast, flows to China increased by 5% to $82bn. FDI flows from China to the US peaked at $16bn in the second half of 2016 and have since fallen to less than $1.2bn as Chinese companies invest less and sell off some of their holdings, the OECD said.”
October 28 – Bloomberg (Zoe Schneeweiss and William Horobin): “In the first half of 2019, global foreign-direct-investment flows decreased by 20% compared with the second half of 2018, with a sharp drop in the second quarter, according to OECD data. Quarterly flows can be volatile -- often affected by a few very large transactions. …The latest decline continues the slowdown following the post-crisis peak in 2015 and can be partly attributed to ‘uncertainties regarding trade tensions and prospects for future economic growth.’”
Fixed-Income Bubble Watch:
October 29 – Bloomberg (Kelsey Butler): “A competitive underwriting environment, falling credit quality and low interest rates will pressure a $100 billion corner of the private debt market in the coming year, according to a new Fitch Ratings report. Business development companies will continue to face challenges heading into 2020 as execution risk is elevated for those looking to boost leverage at a time when deal structure and terms are softer, analysts led by Chelsea Richardson said… ‘Terms continue to weaken in the middle market and that is really driving the negative sector outlook,’ Richardson said…”
October 28 – Bloomberg (Lisa Lee and Sally Bakewell): “A group of about ten lenders agreed to provide a $1.6 billion loan for an insurance brokerage owned by private equity firm Kelso & Co LP. Wall Street banks that companies typically turn to for such debt had little hand in it. The lending list includes KKR & Co., Goldman Sachs Group Inc.’s merchant banking unit, Golub Capital, Oak Hill Capital Partners and Apollo Global Management… The unitranche loan… is one of the largest provided by direct lenders, the people said… Direct lenders, which bypass a syndication process where banks arrange leveraged loans for issuers and sell them on to institutional investors, typically finance small and medium-sized businesses. But as they amass larger pools of capital, they are increasingly doing bigger deals…”
Geopolitical Watch:
October 30 – CNBC (Eustance Huang): “The U.S. dollar has been the world’s major reserve currency for decades, but that status could come under threat as ‘very powerful countries’ seek to undermine its importance, warned Anne Korin, from the Institute for the Analysis of Global Security. ‘Major movers’ such as China, Russia and the European Union have a strong ‘motivation to de-dollarize,’ said Korin, co-director at the energy and security think tank… ‘We don’t know what’s going to come next, but what we do know is that the current situation is unsustainable,’ Korin said. ‘You have a growing club of countries — very powerful countries.’”
October 28 – Reuters (Ahmed Aboulenein): “Tens of thousands of Iraqis protested in Baghdad’s central Tahrir Square on Tuesday for a fifth day, angered by reports of security forces killing demonstrators in the city of Kerbala and the prime minister’s refusal to call early elections.”
October 29 – Bloomberg (Dana Khraiche): “Calls are mounting for Lebanon to impose formal restrictions on the movement of money to defend the country’s dollar peg and prevent a run on the banks when they open their doors on Friday after two weeks of nationwide protests. The closures have led to a backlog in dollar demand from importers and other businesses while speculation swirls about the measures lenders will need to take to avert financial collapse… In a sign of crumbling confidence, banks have been getting calls from clients asking to move their money abroad while others are working at a frantic pace to transfer funds to Swiss accounts as soon as lenders resume operations, local and foreign bankers said.”
October 29 – Reuters (Karin Strohecker and Tom Arnold): “Lebanon’s sovereign dollar bonds suffered one of their worst days on record on Tuesday after Prime Minister Saad al-Hariri resigned, fanning uncertainty about how the country will emerge from its most dire economic crisis in nearly 30 years. In a televised address to the nation, Hariri declared he had reached a ‘dead end’ in trying to resolve almost two weeks of widespread unrest. The address came after a mob loyal to Shi’ite Muslim groups Hezbollah and Amal attacked and destroyed a protest camp set up by anti-government demonstrators in Beirut.”