[Bloomberg] U.S. Stocks Fluctuate on Data as Oil, Dollar Slump: Markets Wrap
[Bloomberg] Qatari Markets Rocked as Four Arab Nations Cut Diplomatic Ties
[Reuters] China services sector expands at fastest pace in four months in May: Caixin PMI
[Bloomberg] Draghi Seen Taking Slowest Possible Path Out of ECB Stimulus
[Bloomberg] Markets Face Three Big Geopolitical Risks This Week
[Bloomberg] IMF warns U.S. fiscal uncertainty, China's credit growth pose risk to Asia
[Bloomberg] The Fed Has Another Bond Market Conundrum
[Bloomberg] Alphabet Shares Follow in Amazon's Footsteps and Top $1,000
[Bloomberg] It's Smart to Worry About ETFs
[Bloomberg] Toronto Home Price Gains Slow as New Listings Surge 49% in May
[Bloomberg] John Paulson Is Struggling to Hold On to Client Money
[Reuters] China upset at Mattis' 'irresponsible remarks' on South China Sea
[CNBC] Saudi Arabia, Bahrain, UAE and Egypt cut diplomatic ties with Qatar
[WSJ] China’s Debt Crackdown Is Driving Borrowers Into Riskier Territory
[WSJ] ECB’s Path to Unwinding Easy Monetary Policies Proves Thorny
Sunday, June 4, 2017
Sunday's News Links
[Bloomberg] May's Journey to Zero Tolerance as Terror Dominates Election
[Bloomberg] Merkel's Chief of Staff Says EU to Join China, India on Climate
[NYT] Trump Plans to Shift Infrastructure Funding to Cities, States and Business
[WSJ] The Tech Sector Catches Fire
[WSJ] Chinese Companies Move Deeper Into Shadow Banking
[FT] Support grows in China for 1989 Tiananmen crackdown
[FT] US allies in Asia dismayed by ‘America First’
[Politico] America’s CEOs fall out of love with Trump
[Bloomberg] Merkel's Chief of Staff Says EU to Join China, India on Climate
[NYT] Trump Plans to Shift Infrastructure Funding to Cities, States and Business
[WSJ] The Tech Sector Catches Fire
[WSJ] Chinese Companies Move Deeper Into Shadow Banking
[FT] Support grows in China for 1989 Tiananmen crackdown
[FT] US allies in Asia dismayed by ‘America First’
[Politico] America’s CEOs fall out of love with Trump
Saturday, June 3, 2017
Saturday's News Links
[Reuters] Close aide to Brazil's leader Temer arrested in corruption inquiry
[Reuters] Banco Popular head tells staff to stay calm, source says ECB meet planned
[Reuters] As large cap gets larger, can the tech rally continue?
[CNBC] US oil production will keep growing even as drillers' costs rise, analysts say
[Reuters] China's broadcast regulator, tightening control of content, promotes 'core socialist values'
[Reuters] Mattis praises China's efforts on North Korea, dials up pressure on South China Sea
[NYT] Here’s How a Chinese Tech Firm Borrowed $2.1 Billion in a Hurry
[FT] One of Trump’s potential Fed picks is a huge fan of negative interest rates
[Reuters] Banco Popular head tells staff to stay calm, source says ECB meet planned
[Reuters] As large cap gets larger, can the tech rally continue?
[CNBC] US oil production will keep growing even as drillers' costs rise, analysts say
[Reuters] China's broadcast regulator, tightening control of content, promotes 'core socialist values'
[Reuters] Mattis praises China's efforts on North Korea, dials up pressure on South China Sea
[NYT] Here’s How a Chinese Tech Firm Borrowed $2.1 Billion in a Hurry
[FT] One of Trump’s potential Fed picks is a huge fan of negative interest rates
Friday, June 2, 2017
Weekly Commentary: Liquidity Trade
It’s not quite 1999 at this point, but it’s been moving in that direction. In about five months’ time, the Nasdaq 100 (NDX) has posted a gain of 20.5%. NDX stocks with greater than 50% y-t-d gains include Vertex Pharmaceuticals (74%), Activision (64%), Tesla (60%), JD.com (58%), Wynn Resorts (54%), CSX (53%), Autodesk (52%), Liberty Ventures (51%) and Lam Research (50%). Amazon’s 34% 2017 rise has increased market capitalization to $481bn (P/E 189). Apple’s 33% gain pushed its market cap to $806bn. Facebook has gained 33% y-t-d, Google 26%, and Netflix 32%.
There’s an interesting similarity to the 1999 backdrop: A Federal Reserve (and global central bank community) way too timid in implementing a “tightening cycle” despite bubbling asset markets. Fed funds began 1999 at 4.75%, after rates were slashed 75 bps late in 1998 in response to the Russia/LTCM financial crisis. Despite clearly overheated securities markets, rates ended 1999 at 5.5% - the same level they were for much of 1998. The Fed was content to let the speculative Bubble run, with memories of the previous year’s near financial meltdown clear in their minds. Moreover, Y2K uncertainties provided a convenient excuse to accommodate the raging Bubble.
There’s at least one huge difference to 1999. The 10-year Treasury yield began ‘99 at 4.65% and ended the year at 6.44%. Ten-year yields ended Friday’s session at 2.16%, down 29 bps so far in 2017 and near lows since the election. Astounding amounts of government debt have been issued globally since 1999. Radical central bank measures ensured prices of these securities inflated to unprecedented levels (even in the face of endless supply). Historically low yields are a global phenomenon. German bund yields closed the week at 27 bps and French yields closed at 71 bps. It’s worth noting some current 10-year sovereign debt yields: negative 27 bps in Switzerland, 31 bps in Finland, 40 bps in Sweden, 48 bps in Netherlands, 53 bps in Denmark, 54 bps in Austria and 64 bps in Belgium.
MSCI's all-country world stock index ended the week at a record high. Both the UK FTSE (up 5.7% y-t-d) and German DAX (up 11.7%) equities indices traded Friday at new highs. European equities have been powering higher. The French CAC 40 has gained 9.9% y-t-d, Spain’s IBEX 35 16.6%, and Italy’s MIB 8.8%.
June 2 – Bloomberg (Katherine Chiglinsky): “Mohamed El-Erian, Allianz SE’s chief economic adviser, said the rally in stocks and high-yield bonds is part of a ‘liquidity trade,’ based on optimism that central bank stimulus efforts and the accumulation of corporate profits will sustain market gains. ‘That is what you’re betting on,’ El-Erian said Friday in an interview on Bloomberg Television. ‘You’re not betting on the Trump rally anymore. You’re not betting on the reflation trade anymore.’”
The “Trump Trade” provided convenient cover for what has been for some time a strengthening speculative Liquidity Trade. The histrionic bond market reaction to the weaker payroll data was telling. The long-bond surged a full point, with yields dropping five bps to the lows since November. If the issue were a weakening economy, one was challenged to see it in the reaction within the risk markets. Investment-grade corporate debt (LQD) gained about 0.5% Friday to trade to the high since November. Even junk debt (HYG) posted a small gain to trade to an almost 18-month high. The NDX jumped 1.1% Friday, with the Nasdaq Composite up 1.0% - both to record highs. The Semiconductors gained 1.0% (near year-2000 highs), and the Morgan Stanley High Tech index rose almost 1% to an all-time high. The Biotechs rose 1.9% to a 2017 high (up 20% y-t-d).
It’s worth noting that gold gained 1% on Liquidity Trade Friday, increasing 2017 gains to a notable 11%. Crude’s 1.5% Friday decline (down 4.3% for the week) was not inconsistent with Liquidity Trade dynamics. Shale exploration and extraction are thriving on easy “money.” And when it comes to Liquidity analysis, Bitcoin has earned a place at the table. Bitcoin rose $160 this week to $2,430, boosting its y-t-d gain to a remarkable 155%.
A Friday ZeroHedge article asked the relevant question: “BoJ, ECB Balance Sheets Exceed the Fed’s For First Time Ever - What Happens Next?” The over $1.0 TN global QE injections during the first four months of the year argue for “Peak QE.” The ZeroHedge article includes a chart of the G3 (Fed, BOJ, ECB) balance sheet that correlates closely with U.S. stocks going back to 2009. It’s worth noting that G3 balance sheets will soon reach $14.0 TN, up from less than $6.0 TN in early-2009 (after initial crisis-period QE). “Now what?”, indeed. Near zero rates and unprecedented “money printing” have inflated asset price Bubbles around the globe. What happens when stimulus is removed? This is by now a conspicuous problem, though markets are confident that central bankers have no stomach for finding out how big of a problem. The Liquidity Trade is premised on global central bankers being trapped in ultra-easy “money” (including ongoing printing).
May 30 – Bloomberg (Jeanna Smialek and Matthew Boesler): “Federal Reserve Governor Lael Brainard said soft inflation could cause her to reassess the path forward for monetary policy should it linger, even as the global economic outlook brightens and U.S. growth looks poised to rebound. ‘If the soft inflation data persist, that would be concerning and, ultimately, could lead me to reassess the appropriate path of policy,’ Brainard said… ‘I see some tension between signs that the economy is in the neighborhood of full employment and indications that the tentative progress we had seen on inflation may be slowing,’ Brainard said. ‘If the tension between the progress on employment and the lack of progress on inflation persists, it may lead me to reassess the expected path of the federal funds rate in the future, although it is premature to make that call today.”
This is exactly the type of dovish diffidence that feeds market speculation. The Fed needs to find a backbone and move forward in the direction of normalization without reacting to the normal ebb and flow of securities markets, inflation data and economic performance. Moreover, central bankers should jettison this notion of no tolerance for recessions or bear markets – both precious Capitalistic system cleansing mechanisms. Clearly, central bankers have come to exert profound effects on securities and asset prices. Recent history has as well demonstrated that their capacity to manipulate an index of consumer prices is suspect at best. Prolonging ultra-easy money will surely exacerbate global overcapacity (i.e. additional Chinese capacity and U.S. shale investment).
Especially after Friday’s weaker-than-expected payroll data, the markets will question whether the Fed is about to flinch. Expectations are growing that the FOMC will pull back from an already incredibly cautious rate hike cycle – one that to this point has completely failed to “tighten” financial conditions. Indeed, conditions have further loosened.
I’ve read and listened to analyses warning against the Fed committing a major policy error by tightening into a weakening economy. Yet the Federal Reserve's mistake was waiting way too long to commence the normalization process. At this point, there is great risk in the Fed accommodating late-cycle excesses - including the global securities markets’ Liquidity Trade. Only a meaningful amount of pain will impact what has become a major inflationary/speculative psychology enveloping global securities markets. The Fed needs to bite the bullet and push rates higher.
Discussions continue regarding the Federal Reserve’s decision to shrink its balance sheet. Similar to rate discussions, the markets (for good reason) believe the Fed will refrain from measures that actually tighten financial conditions and impinge booming securities markets. If queried, most sophisticated market professionals would likely respond that they expect the next major change in the Fed’s holdings to be on the upside (another round of QE). Some Fed officials see selling assets as a positive measure that would help reduce excessive monetary accommodation. At this point, balance sheet discussions appear to be backfiring. Believing that the Fed will likely pause rate increases while reducing assets both slowly and very modestly, the markets now see potential Fed balance sheet operations as a bullish development that ensures no actual tightening of financial conditions for many months to come.
Next Thursday’s ECB meeting is widely expected to see a contentious debate regarding the process for winding down extraordinary QE and rate measures. Euro zone economies and inflation trends have bounced back. Ultra-loose financial conditions have worked their magic, although Draghi does not want any change in ECB stimulus to upset the Liquidity Trade. The Germans and others have long ago seen enough and seek to establish a timeline for winding down QE.
The markets assume Draghi will, once again, win the day. This week also saw happenings in China that embolden those believing that Beijing will also continue to win the day, month and year.
May 31 – Bloomberg: “The offshore yuan jumped the most in four months as funding costs surged amid speculation policy makers were supporting the currency in the wake of a surprise sovereign rating downgrade… ‘The sharp gain in the offshore yuan is partially due to the unwinding of short yuan positions because the high offshore yuan funding cost has made the currency too expensive to short,’ said Stephen Innes, senior Asia-Pacific currency trader at Oanda Corp… ‘Bears with short yuan positions would need to cut their exposure.’ The overnight yuan interbank rate in Hong Kong, known as Hibor, surged 15.7 percentage points on Wednesday to 21.08%, the highest since Jan. 6, while the offshore yuan’s overnight deposit rate jumped to 60%.”
May 31 – Bloomberg: “China is dishing out a tough lesson to currency traders and strategists alike: don’t bet against the yuan. The currency jumped its highest level in seven months offshore, extending Wednesday’s gain of 1.2%, despite analyst forecasts for declines this quarter. Surging interbank rates are squeezing bears by driving up the cost of short positions. The rally, which broke months of calm against the dollar, comes as a rebuke to Moody’s…, which downgraded China’s sovereign debt rating last week. The government has made its displeasure clear, calling the move ‘absolutely groundless.’”
On the back of the People’s Bank of China’s forceful interventions, the renminbi traded this week to the strongest level since November. Speculative markets have come to welcome heavy-handed Chinese intervention. The assumption is that Chinese officials are absolutely determined to hold bursting Bubble dynamics at bay.
China is not the only macro worry. Italian bank stocks were hit 4.3% this week. Talk of early elections also pressured Italian bonds. With yields rising 16 bps, the Italian to bund yield spread widened a notable 22 bps this week to a six-week high. It’s also worth mentioning the 4.3% fall in crude and the 9.4% drubbing in natural gas. And there’s the ongoing strength in the yen. The Japanese currency rose 0.8% this week (up 5.9% y-t-d) and has been notably resilient in the face of advancing equities and risk markets. I tend to believe that various macro risks continue to play a prevailing role in stubbornly low global bond yields, a backdrop that along with timid central bankers fuels dangerously speculative risk markets across the globe.
For the Week:
The S&P500 gained 1.0% (up 8.9% y-t-d), and the Dow added 0.6% (up 7.3%). The Utilities rose 1.7% (up 9.2%). The Banks fell 1.6% (down 2.6%), while the Broker/Dealers increased 0.4% (up 4.3%). The Transports rose 1.7% (up 3.2%). The S&P 400 Midcaps gained 1.4% (up 5.5%), and the small cap Russell 2000 jumped 1.7% (up 3.6%). The Nasdaq100 advanced 1.6% (up 20.9%), and the Morgan Stanley High Tech index jumped 2.0% (up 23.8%). The Semiconductors rose 1.7% (up 21.7%). The Biotechs surged 3.4% (up 20%). While bullion gained $12, the HUI gold index fell 1.6% (up 5.0%).
Three-month Treasury bill rates ended the week at 95 bps. Two-year government yields slipped a basis point to 1.29% (up 10bps y-t-d). Five-year T-note yields fell seven bps to 1.72% (down 21bps). Ten-year Treasury yields dropped nine bps to 2.16% (down 29bps). Long bond yields fell 10 bps to 2.81% (down 26bps).
Greek 10-year yields rose eight bps to 5.99% (down 103bps y-t-d). Ten-year Portuguese yields dropped 11 bps to 3.04% (down 71bps). Italian 10-year yields jumped 16 bps to 2.26% (up 45bps). Spain's 10-year yields increased three bps to 1.57% (up 19bps). German bund yields fell six bps to 0.27% (up 7bps). French yields declined five bps to 0.71% (up 3bps). The French to German 10-year bond spread widened one to 44 bps. U.K. 10-year gilt yields added three bps to 1.04% (down 20bps). U.K.'s FTSE equities index was unchanged (up 5.7%).
Japan's Nikkei 225 equities index surged 2.5% (up 5.6% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.055% (up 2bps). France's CAC40 was little changed (up 9.9%). The German DAX equities index jumped 1.8% (up 11.7%). Spain's IBEX 35 equities index was unchanged (up 16.6%). Italy's FTSE MIB index declined 1.3% (up 8.8%). EM equities were mixed. Brazil's Bovespa index dropped 2.5% (up 3.8%). Mexico's Bolsa declined 0.7% (up 8.1%). South Korea's Kospi added 0.7% (up 17%). India’s Sensex equities index gained 0.8% (up 17.5%). China’s Shanghai Exchange was little unchanged (unchanged). Turkey's Borsa Istanbul National 100 index rose 1.4% (up 26.5%). Russia's MICEX equities index sank 2.7% (down 15.7%).
Junk bond mutual funds saw inflows of $521 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates slipped a basis point to 3.94% (up 28bps y-o-y). Fifteen-year rates were unchanged at 3.19% (up 27bps). The five-year hybrid ARM rate rose four bps to 3.11% (up 23bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down four bps to a seven-month low 4.02% (up 26bps).
Federal Reserve Credit last week declined $13.7bn to $4.421 TN. Over the past year, Fed Credit declined $0.9bn. Fed Credit inflated $1.610 TN, or 57%, over the past 238 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $6.7bn last week to $3.238 TN. "Custody holdings" were up $8bn y-o-y, or 0.2%.
M2 (narrow) "money" supply last week jumped $37.7bn to a record $13.523 TN. "Narrow money" expanded $759bn, or 6.3%, over the past year. For the week, Currency increased $2.5bn. Total Checkable Deposits rose $17.7bn, and Savings Deposits gained $19.3bn. Small Time Deposits added $0.7bn. Retail Money Funds declined $2.1bn.
Total money market fund assets increased $5.0bn to $2.654 TN. Money Funds fell $80bn y-o-y (2.9%).
Total Commercial Paper gained $6.4bn to $994bn. CP declined $73bn y-o-y, or 6.8%.
Currency Watch:
The U.S. dollar index declined 0.7% to 96.72 (down 5.6% y-t-d). For the week on the upside, the New Zealand dollar increased 1.2%, the Swiss franc 1.1%, the euro 0.9%, the Japanese yen 0.8%, the Swedish krona 0.8%, the British pound 0.7%, the South African rand 0.5% and the Brazilian real 0.5%. For the week on the downside, the Mexican peso declined 0.9%, the Norwegian krone 0.5%, the Canadian dollar 0.3%, and the South Korean won 0.1%. The Chinese renminbi gained 0.67% versus the dollar this week (up 2.0% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index dropped 2.9% (down 6.1% y-t-d). Spot Gold gained 1.0% to $1,279 (up 11%). Silver rose 1.2% to $17.53 (up 9.7%). Crude dropped $2.14 to $47.66 (down 12%). Gasoline fell 4.0% (down 6%), and Natural Gas sank 9.4% (down 20%). Copper increased 0.3% (up 3%). Wheat declined 2.0% (up 5%). Corn slipped 0.4% (up 6%).
Trump Administration Watch:
May 27 – Reuters (John Irish and Crispian Balmer): “Under pressure from Group of Seven allies, U.S. President Donald Trump backed a pledge to fight protectionism on Saturday, but refused to endorse a global climate change accord… The summit of G7 wealthy nations pitted Trump against the leaders of Germany, France, Britain, Italy, Canada and Japan on several issues, with European diplomats frustrated at having to revisit questions they had hoped were long settled. However, diplomats stressed there was broad agreement on an array of foreign policy problems, including the renewal of a threat to slap further economic sanctions on Russia if its interference in neighboring Ukraine demanded it.”
May 30 – Bloomberg (Arne Delfs and Patrick Donahue): “President Donald Trump blasted Germany anew over trade and defense, ratcheting up a dispute with Chancellor Angela Merkel that risks getting personal and undermining a trans-Atlantic bond that is the bedrock of U.S.-European relations. Trump’s comments came in an early-morning tweet… issued just as Merkel hosted Indian Prime Minister Narendra Modi in Berlin… Modi suggested that India will adhere to the Paris climate accords, while Trump makes up his mind. ‘We have a MASSIVE trade deficit with Germany, plus they pay FAR LESS than they should on NATO & military,’ the U.S. president posted on Twitter. ‘This will change.’”
May 29 – Wall Street Journal (Richard Rubin): “The boldest ideas for changing the nation’s tax code are either dead or on political life support, as the Republican effort in Congress to reshape the tax system moves much more slowly than lawmakers and their allies in business had hoped. The clear winner, so far, is the status quo. Republicans, who control both chambers, are scouring the tax code, searching for ways to offset the deep rate cuts they desire. But their proposals for border adjustment—which would tax imports—and for ending the business interest deduction and making major changes to individual tax breaks for health and retirement have all hit resistance within the party. The only big revenue-raising provision with anything close to Republican consensus is repealing the deduction for state and local taxes, and that idea faces objections from blue-state lawmakers in the party. The GOP’s dreams have collided with interest-group lobbying and the tax system’s reality.”
China Bubble Watch:
May 28 – Financial Times (Leo Lewis, Tom Mitchell and Yuan Yang): “There are few things studied as closely by the Chinese Communist party as how to avoid the fate of its Soviet counterpart. In an internal meeting after he assumed power in 2012, President Xi Jinping said no one in the Soviet Union had been ‘man enough’ to stand up to Mikhail Gorbachev and glasnost. But for Mr Xi another historical event from the same era may warrant more immediate attention. It is just over 30 years since Japan began inflating a property and stock market bubble whose implosion ravaged public confidence, cowed corporations and scarred an economy for decades. China’s priority today is to avoid that fate. It is not a new concern for Beijing. In 2010, as China’s overall indebtedness was approaching 200% of gross domestic product, Mr Xi, then the country’s vice-president, asked scholars at the Central Party School to research the subject… A subsequent paper outlined some of the lessons of the Japanese bubble, including the need for Beijing to raise awareness of financial risks, safeguard ‘economic sovereignty’ and not give in to pressure to change its currency policy. Seven years on, China’s total debt is 250% of GDP and climbing, officials are trying to rein in sky-high real estate prices and the government is still grappling with the aftermath of a stock market bubble that burst in 2015.”
May 29 – Financial Times (Don Weinland and Gabriel Wildau): “A crackdown on China’s $9.4tn shadow banking business is hitting bank share prices and rattling bond markets. The country’s new top banking regulator has already taken several shots at stemming the rapid growth of off-balance-sheet lending at banks since taking control in February. The central bank has also tightened liquidity in the financial system, sparking angst earlier this year. A flurry of rules to discourage banks from using borrowed money to invest in bonds have been issued by the regulator. The sell-off that has followed has pushed bond yields to two-year highs and even led to a rarely seen inversion of the yield curve. The moves have also dented the share prices of Chinese banks — among the world’s largest by market capitalization… ‘It’s been very clear . . . that regulators want to stamp out some of this [shadow banking] activity,’ says the Asia head of a securities unit at a global bank. ‘During that time there’s been lots of inquiries from investors and some concern on what that will look like.’”
June 1 – Financial Times (Gabriel Wildau): “China’s currency headed for its biggest two-day gain against the dollar since January on Thursday afternoon, as the central bank apparently intervened to support the renminbi amid tepid market demand for the Chinese currency. Traders said that large state-owned banks sold dollars aggressively on Wednesday and Thursday. Such concerted trading is usually viewed as a sign that these institutions are acting on behalf of the central bank to prop up demand for the renminbi. The People’s Bank of China’s currency-trading arm last week announced a change to the way it sets renminbi’s daily fix, which is intended to guide trading in the spot market. The change granted the PBoC greater flexibility to push back against what it called ‘irrational expectations’ and guide the renminbi stronger, even when market forces are pushing the other way.”
May 31 – Bloomberg: “A private gauge of Chinese manufacturing fell back into contractionary territory in May, adding to recent evidence that the economy’s strong start to 2017 is leveling off. Caixin Media and Markit Economics manufacturing purchasing managers’ index fell to 49.6 from 50.3 in April, the lowest reading since June 2016 and below the 50.1 median estimate…”
May 29 – Bloomberg (Paul Panckhurst): “Snaking queues of thousands of prospective apartment buyers in Hong Kong signaled authorities have made no progress in cooling a red-hot property market, where prices are at records. People were lining up on Friday and over the weekend at Victoria Skye, a luxury project at the former airport site of Kai Tak, and at the Ocean Pride development by Cheung Kong Property Holdings Ltd. and MTR Corp. ‘Successive moves by the government in recent memory to cool the property market only resulted in it becoming crazier,’ The Standard newspaper said in an editorial… ‘The result is a sea of madness.’”
Europe Watch:
May 30 – Bloomberg (Stefania Spezzati and Blaise Robinson): “Italian markets shuddered at the emerging prospect of early elections. Investors dumped stocks and government debt after ruling Democratic Party leader Matteo Renzi signaled the possibility of a vote in September or October, more than six months ahead of schedule. That pushed the nation’s bond-yield spread over Germany to its highest in almost four weeks today, and the benchmark FTSE MIB stock index to its biggest two-day drop in more than five weeks on Monday, led by banks.”
May 29 – Bloomberg (Alessandro Speciale): “The euro area still needs expansive monetary stimulus to restore stable inflation even as its economy accelerates, European Central Bank President Mario Draghi said. ‘We remain firmly convinced that an extraordinary amount of monetary policy support, including through our forward guidance, is still necessary,’ Draghi told lawmakers… ‘Domestic cost pressures, notably from wages, are still insufficient to support a durable and self-sustaining convergence of inflation toward our medium-term objective.’”
May 31 – Reuters (Balazs Koranyi): “With the euro zone recovery gaining strength, inflation would continue to rise even if the European Central Bank reduced stimulus, Bundesbank President Jens Weidmann said… The comments suggest that Weidmann, a long-time critic of the ECB's exceptional stimulus, considers inflation self- sustaining, one of ECB President Mario Draghi's top criteria before the policy can be removed. ‘The strengthening of the economic recovery makes it increasingly likely that the rise in inflation we have seen since August 2016 is not just a flash in the pan, but that we would have higher inflation rates compared to previous years even under a reduced degree of monetary policy accommodation,’ Weidmann said.”
May 31 – Reuters (Balazs Koranyi and Francesco Canepa): “European Central Bank policymakers are set to take a more benign view of the economy when they meet on June 8 and will even discuss dropping some of their pledges to ramp up stimulus if needed, four sources with direct knowledge of the discussions told Reuters. With economic growth clearly shifting into higher gear, rate setters are ready to acknowledge the improvement by dropping a long-standing reference to downside risks in the bank's post-meeting opening statement, calling risks largely balanced... Growth indicators have been outperforming expectations all year. But they disagree on how quickly the ECB should change its policy stance, including its guidance, with countries on the currency bloc's periphery fearing that a sharp shift in its communication could induce self-defeating market turbulence, they added. ‘After the French election the political risk is clearly down and economic indicators are by and large positive, so it's time to acknowledge this,’ said one Governing Council member…”
June 1 – Bloomberg (Piotr Skolimowski and Alessandro Speciale): “The European Central Bank is starting to debate whether to reflect the euro area’s improving economic prospects in its policy guidance, Bundesbank President Jens Weidmann said. Speaking just hours before the ECB begins its self-imposed quiet period ahead of next week’s monetary policy meeting, Weidmann said the strengthening recovery makes it increasingly likely that the rise in the inflation rate isn’t ‘just a flash in the pan.’ Inflation would still accelerate more than in the previous years even if some of the stimulus were removed, he said, adding the ECB should consider the impact of its policies on bank profitability.”
May 30 – Wall Street Journal (Tom Fairless): “A Berlin-based law professor has filed a cease-and-desist request aimed at quickly ending Germany’s involvement in bond purchases by the European Central Bank, a surprise legal move that underlines mounting German anger over the ECB’s easy-money policies. The request for a legal injunction, sent to Germany’s top court, shows the lengths to which some Germans are prepared to go to derail a €2.3 trillion ($2.57 trillion) stimulus program they accuse of subsidizing southern European governments and hurting German savers, pensioners and smaller companies.”
There’s an interesting similarity to the 1999 backdrop: A Federal Reserve (and global central bank community) way too timid in implementing a “tightening cycle” despite bubbling asset markets. Fed funds began 1999 at 4.75%, after rates were slashed 75 bps late in 1998 in response to the Russia/LTCM financial crisis. Despite clearly overheated securities markets, rates ended 1999 at 5.5% - the same level they were for much of 1998. The Fed was content to let the speculative Bubble run, with memories of the previous year’s near financial meltdown clear in their minds. Moreover, Y2K uncertainties provided a convenient excuse to accommodate the raging Bubble.
There’s at least one huge difference to 1999. The 10-year Treasury yield began ‘99 at 4.65% and ended the year at 6.44%. Ten-year yields ended Friday’s session at 2.16%, down 29 bps so far in 2017 and near lows since the election. Astounding amounts of government debt have been issued globally since 1999. Radical central bank measures ensured prices of these securities inflated to unprecedented levels (even in the face of endless supply). Historically low yields are a global phenomenon. German bund yields closed the week at 27 bps and French yields closed at 71 bps. It’s worth noting some current 10-year sovereign debt yields: negative 27 bps in Switzerland, 31 bps in Finland, 40 bps in Sweden, 48 bps in Netherlands, 53 bps in Denmark, 54 bps in Austria and 64 bps in Belgium.
MSCI's all-country world stock index ended the week at a record high. Both the UK FTSE (up 5.7% y-t-d) and German DAX (up 11.7%) equities indices traded Friday at new highs. European equities have been powering higher. The French CAC 40 has gained 9.9% y-t-d, Spain’s IBEX 35 16.6%, and Italy’s MIB 8.8%.
June 2 – Bloomberg (Katherine Chiglinsky): “Mohamed El-Erian, Allianz SE’s chief economic adviser, said the rally in stocks and high-yield bonds is part of a ‘liquidity trade,’ based on optimism that central bank stimulus efforts and the accumulation of corporate profits will sustain market gains. ‘That is what you’re betting on,’ El-Erian said Friday in an interview on Bloomberg Television. ‘You’re not betting on the Trump rally anymore. You’re not betting on the reflation trade anymore.’”
The “Trump Trade” provided convenient cover for what has been for some time a strengthening speculative Liquidity Trade. The histrionic bond market reaction to the weaker payroll data was telling. The long-bond surged a full point, with yields dropping five bps to the lows since November. If the issue were a weakening economy, one was challenged to see it in the reaction within the risk markets. Investment-grade corporate debt (LQD) gained about 0.5% Friday to trade to the high since November. Even junk debt (HYG) posted a small gain to trade to an almost 18-month high. The NDX jumped 1.1% Friday, with the Nasdaq Composite up 1.0% - both to record highs. The Semiconductors gained 1.0% (near year-2000 highs), and the Morgan Stanley High Tech index rose almost 1% to an all-time high. The Biotechs rose 1.9% to a 2017 high (up 20% y-t-d).
It’s worth noting that gold gained 1% on Liquidity Trade Friday, increasing 2017 gains to a notable 11%. Crude’s 1.5% Friday decline (down 4.3% for the week) was not inconsistent with Liquidity Trade dynamics. Shale exploration and extraction are thriving on easy “money.” And when it comes to Liquidity analysis, Bitcoin has earned a place at the table. Bitcoin rose $160 this week to $2,430, boosting its y-t-d gain to a remarkable 155%.
A Friday ZeroHedge article asked the relevant question: “BoJ, ECB Balance Sheets Exceed the Fed’s For First Time Ever - What Happens Next?” The over $1.0 TN global QE injections during the first four months of the year argue for “Peak QE.” The ZeroHedge article includes a chart of the G3 (Fed, BOJ, ECB) balance sheet that correlates closely with U.S. stocks going back to 2009. It’s worth noting that G3 balance sheets will soon reach $14.0 TN, up from less than $6.0 TN in early-2009 (after initial crisis-period QE). “Now what?”, indeed. Near zero rates and unprecedented “money printing” have inflated asset price Bubbles around the globe. What happens when stimulus is removed? This is by now a conspicuous problem, though markets are confident that central bankers have no stomach for finding out how big of a problem. The Liquidity Trade is premised on global central bankers being trapped in ultra-easy “money” (including ongoing printing).
May 30 – Bloomberg (Jeanna Smialek and Matthew Boesler): “Federal Reserve Governor Lael Brainard said soft inflation could cause her to reassess the path forward for monetary policy should it linger, even as the global economic outlook brightens and U.S. growth looks poised to rebound. ‘If the soft inflation data persist, that would be concerning and, ultimately, could lead me to reassess the appropriate path of policy,’ Brainard said… ‘I see some tension between signs that the economy is in the neighborhood of full employment and indications that the tentative progress we had seen on inflation may be slowing,’ Brainard said. ‘If the tension between the progress on employment and the lack of progress on inflation persists, it may lead me to reassess the expected path of the federal funds rate in the future, although it is premature to make that call today.”
This is exactly the type of dovish diffidence that feeds market speculation. The Fed needs to find a backbone and move forward in the direction of normalization without reacting to the normal ebb and flow of securities markets, inflation data and economic performance. Moreover, central bankers should jettison this notion of no tolerance for recessions or bear markets – both precious Capitalistic system cleansing mechanisms. Clearly, central bankers have come to exert profound effects on securities and asset prices. Recent history has as well demonstrated that their capacity to manipulate an index of consumer prices is suspect at best. Prolonging ultra-easy money will surely exacerbate global overcapacity (i.e. additional Chinese capacity and U.S. shale investment).
Especially after Friday’s weaker-than-expected payroll data, the markets will question whether the Fed is about to flinch. Expectations are growing that the FOMC will pull back from an already incredibly cautious rate hike cycle – one that to this point has completely failed to “tighten” financial conditions. Indeed, conditions have further loosened.
I’ve read and listened to analyses warning against the Fed committing a major policy error by tightening into a weakening economy. Yet the Federal Reserve's mistake was waiting way too long to commence the normalization process. At this point, there is great risk in the Fed accommodating late-cycle excesses - including the global securities markets’ Liquidity Trade. Only a meaningful amount of pain will impact what has become a major inflationary/speculative psychology enveloping global securities markets. The Fed needs to bite the bullet and push rates higher.
Discussions continue regarding the Federal Reserve’s decision to shrink its balance sheet. Similar to rate discussions, the markets (for good reason) believe the Fed will refrain from measures that actually tighten financial conditions and impinge booming securities markets. If queried, most sophisticated market professionals would likely respond that they expect the next major change in the Fed’s holdings to be on the upside (another round of QE). Some Fed officials see selling assets as a positive measure that would help reduce excessive monetary accommodation. At this point, balance sheet discussions appear to be backfiring. Believing that the Fed will likely pause rate increases while reducing assets both slowly and very modestly, the markets now see potential Fed balance sheet operations as a bullish development that ensures no actual tightening of financial conditions for many months to come.
Next Thursday’s ECB meeting is widely expected to see a contentious debate regarding the process for winding down extraordinary QE and rate measures. Euro zone economies and inflation trends have bounced back. Ultra-loose financial conditions have worked their magic, although Draghi does not want any change in ECB stimulus to upset the Liquidity Trade. The Germans and others have long ago seen enough and seek to establish a timeline for winding down QE.
The markets assume Draghi will, once again, win the day. This week also saw happenings in China that embolden those believing that Beijing will also continue to win the day, month and year.
May 31 – Bloomberg: “The offshore yuan jumped the most in four months as funding costs surged amid speculation policy makers were supporting the currency in the wake of a surprise sovereign rating downgrade… ‘The sharp gain in the offshore yuan is partially due to the unwinding of short yuan positions because the high offshore yuan funding cost has made the currency too expensive to short,’ said Stephen Innes, senior Asia-Pacific currency trader at Oanda Corp… ‘Bears with short yuan positions would need to cut their exposure.’ The overnight yuan interbank rate in Hong Kong, known as Hibor, surged 15.7 percentage points on Wednesday to 21.08%, the highest since Jan. 6, while the offshore yuan’s overnight deposit rate jumped to 60%.”
May 31 – Bloomberg: “China is dishing out a tough lesson to currency traders and strategists alike: don’t bet against the yuan. The currency jumped its highest level in seven months offshore, extending Wednesday’s gain of 1.2%, despite analyst forecasts for declines this quarter. Surging interbank rates are squeezing bears by driving up the cost of short positions. The rally, which broke months of calm against the dollar, comes as a rebuke to Moody’s…, which downgraded China’s sovereign debt rating last week. The government has made its displeasure clear, calling the move ‘absolutely groundless.’”
On the back of the People’s Bank of China’s forceful interventions, the renminbi traded this week to the strongest level since November. Speculative markets have come to welcome heavy-handed Chinese intervention. The assumption is that Chinese officials are absolutely determined to hold bursting Bubble dynamics at bay.
China is not the only macro worry. Italian bank stocks were hit 4.3% this week. Talk of early elections also pressured Italian bonds. With yields rising 16 bps, the Italian to bund yield spread widened a notable 22 bps this week to a six-week high. It’s also worth mentioning the 4.3% fall in crude and the 9.4% drubbing in natural gas. And there’s the ongoing strength in the yen. The Japanese currency rose 0.8% this week (up 5.9% y-t-d) and has been notably resilient in the face of advancing equities and risk markets. I tend to believe that various macro risks continue to play a prevailing role in stubbornly low global bond yields, a backdrop that along with timid central bankers fuels dangerously speculative risk markets across the globe.
For the Week:
The S&P500 gained 1.0% (up 8.9% y-t-d), and the Dow added 0.6% (up 7.3%). The Utilities rose 1.7% (up 9.2%). The Banks fell 1.6% (down 2.6%), while the Broker/Dealers increased 0.4% (up 4.3%). The Transports rose 1.7% (up 3.2%). The S&P 400 Midcaps gained 1.4% (up 5.5%), and the small cap Russell 2000 jumped 1.7% (up 3.6%). The Nasdaq100 advanced 1.6% (up 20.9%), and the Morgan Stanley High Tech index jumped 2.0% (up 23.8%). The Semiconductors rose 1.7% (up 21.7%). The Biotechs surged 3.4% (up 20%). While bullion gained $12, the HUI gold index fell 1.6% (up 5.0%).
Three-month Treasury bill rates ended the week at 95 bps. Two-year government yields slipped a basis point to 1.29% (up 10bps y-t-d). Five-year T-note yields fell seven bps to 1.72% (down 21bps). Ten-year Treasury yields dropped nine bps to 2.16% (down 29bps). Long bond yields fell 10 bps to 2.81% (down 26bps).
Greek 10-year yields rose eight bps to 5.99% (down 103bps y-t-d). Ten-year Portuguese yields dropped 11 bps to 3.04% (down 71bps). Italian 10-year yields jumped 16 bps to 2.26% (up 45bps). Spain's 10-year yields increased three bps to 1.57% (up 19bps). German bund yields fell six bps to 0.27% (up 7bps). French yields declined five bps to 0.71% (up 3bps). The French to German 10-year bond spread widened one to 44 bps. U.K. 10-year gilt yields added three bps to 1.04% (down 20bps). U.K.'s FTSE equities index was unchanged (up 5.7%).
Japan's Nikkei 225 equities index surged 2.5% (up 5.6% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.055% (up 2bps). France's CAC40 was little changed (up 9.9%). The German DAX equities index jumped 1.8% (up 11.7%). Spain's IBEX 35 equities index was unchanged (up 16.6%). Italy's FTSE MIB index declined 1.3% (up 8.8%). EM equities were mixed. Brazil's Bovespa index dropped 2.5% (up 3.8%). Mexico's Bolsa declined 0.7% (up 8.1%). South Korea's Kospi added 0.7% (up 17%). India’s Sensex equities index gained 0.8% (up 17.5%). China’s Shanghai Exchange was little unchanged (unchanged). Turkey's Borsa Istanbul National 100 index rose 1.4% (up 26.5%). Russia's MICEX equities index sank 2.7% (down 15.7%).
Junk bond mutual funds saw inflows of $521 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates slipped a basis point to 3.94% (up 28bps y-o-y). Fifteen-year rates were unchanged at 3.19% (up 27bps). The five-year hybrid ARM rate rose four bps to 3.11% (up 23bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down four bps to a seven-month low 4.02% (up 26bps).
Federal Reserve Credit last week declined $13.7bn to $4.421 TN. Over the past year, Fed Credit declined $0.9bn. Fed Credit inflated $1.610 TN, or 57%, over the past 238 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $6.7bn last week to $3.238 TN. "Custody holdings" were up $8bn y-o-y, or 0.2%.
M2 (narrow) "money" supply last week jumped $37.7bn to a record $13.523 TN. "Narrow money" expanded $759bn, or 6.3%, over the past year. For the week, Currency increased $2.5bn. Total Checkable Deposits rose $17.7bn, and Savings Deposits gained $19.3bn. Small Time Deposits added $0.7bn. Retail Money Funds declined $2.1bn.
Total money market fund assets increased $5.0bn to $2.654 TN. Money Funds fell $80bn y-o-y (2.9%).
Total Commercial Paper gained $6.4bn to $994bn. CP declined $73bn y-o-y, or 6.8%.
Currency Watch:
The U.S. dollar index declined 0.7% to 96.72 (down 5.6% y-t-d). For the week on the upside, the New Zealand dollar increased 1.2%, the Swiss franc 1.1%, the euro 0.9%, the Japanese yen 0.8%, the Swedish krona 0.8%, the British pound 0.7%, the South African rand 0.5% and the Brazilian real 0.5%. For the week on the downside, the Mexican peso declined 0.9%, the Norwegian krone 0.5%, the Canadian dollar 0.3%, and the South Korean won 0.1%. The Chinese renminbi gained 0.67% versus the dollar this week (up 2.0% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index dropped 2.9% (down 6.1% y-t-d). Spot Gold gained 1.0% to $1,279 (up 11%). Silver rose 1.2% to $17.53 (up 9.7%). Crude dropped $2.14 to $47.66 (down 12%). Gasoline fell 4.0% (down 6%), and Natural Gas sank 9.4% (down 20%). Copper increased 0.3% (up 3%). Wheat declined 2.0% (up 5%). Corn slipped 0.4% (up 6%).
Trump Administration Watch:
May 27 – Reuters (John Irish and Crispian Balmer): “Under pressure from Group of Seven allies, U.S. President Donald Trump backed a pledge to fight protectionism on Saturday, but refused to endorse a global climate change accord… The summit of G7 wealthy nations pitted Trump against the leaders of Germany, France, Britain, Italy, Canada and Japan on several issues, with European diplomats frustrated at having to revisit questions they had hoped were long settled. However, diplomats stressed there was broad agreement on an array of foreign policy problems, including the renewal of a threat to slap further economic sanctions on Russia if its interference in neighboring Ukraine demanded it.”
May 30 – Bloomberg (Arne Delfs and Patrick Donahue): “President Donald Trump blasted Germany anew over trade and defense, ratcheting up a dispute with Chancellor Angela Merkel that risks getting personal and undermining a trans-Atlantic bond that is the bedrock of U.S.-European relations. Trump’s comments came in an early-morning tweet… issued just as Merkel hosted Indian Prime Minister Narendra Modi in Berlin… Modi suggested that India will adhere to the Paris climate accords, while Trump makes up his mind. ‘We have a MASSIVE trade deficit with Germany, plus they pay FAR LESS than they should on NATO & military,’ the U.S. president posted on Twitter. ‘This will change.’”
May 29 – Wall Street Journal (Richard Rubin): “The boldest ideas for changing the nation’s tax code are either dead or on political life support, as the Republican effort in Congress to reshape the tax system moves much more slowly than lawmakers and their allies in business had hoped. The clear winner, so far, is the status quo. Republicans, who control both chambers, are scouring the tax code, searching for ways to offset the deep rate cuts they desire. But their proposals for border adjustment—which would tax imports—and for ending the business interest deduction and making major changes to individual tax breaks for health and retirement have all hit resistance within the party. The only big revenue-raising provision with anything close to Republican consensus is repealing the deduction for state and local taxes, and that idea faces objections from blue-state lawmakers in the party. The GOP’s dreams have collided with interest-group lobbying and the tax system’s reality.”
China Bubble Watch:
May 28 – Financial Times (Leo Lewis, Tom Mitchell and Yuan Yang): “There are few things studied as closely by the Chinese Communist party as how to avoid the fate of its Soviet counterpart. In an internal meeting after he assumed power in 2012, President Xi Jinping said no one in the Soviet Union had been ‘man enough’ to stand up to Mikhail Gorbachev and glasnost. But for Mr Xi another historical event from the same era may warrant more immediate attention. It is just over 30 years since Japan began inflating a property and stock market bubble whose implosion ravaged public confidence, cowed corporations and scarred an economy for decades. China’s priority today is to avoid that fate. It is not a new concern for Beijing. In 2010, as China’s overall indebtedness was approaching 200% of gross domestic product, Mr Xi, then the country’s vice-president, asked scholars at the Central Party School to research the subject… A subsequent paper outlined some of the lessons of the Japanese bubble, including the need for Beijing to raise awareness of financial risks, safeguard ‘economic sovereignty’ and not give in to pressure to change its currency policy. Seven years on, China’s total debt is 250% of GDP and climbing, officials are trying to rein in sky-high real estate prices and the government is still grappling with the aftermath of a stock market bubble that burst in 2015.”
May 29 – Financial Times (Don Weinland and Gabriel Wildau): “A crackdown on China’s $9.4tn shadow banking business is hitting bank share prices and rattling bond markets. The country’s new top banking regulator has already taken several shots at stemming the rapid growth of off-balance-sheet lending at banks since taking control in February. The central bank has also tightened liquidity in the financial system, sparking angst earlier this year. A flurry of rules to discourage banks from using borrowed money to invest in bonds have been issued by the regulator. The sell-off that has followed has pushed bond yields to two-year highs and even led to a rarely seen inversion of the yield curve. The moves have also dented the share prices of Chinese banks — among the world’s largest by market capitalization… ‘It’s been very clear . . . that regulators want to stamp out some of this [shadow banking] activity,’ says the Asia head of a securities unit at a global bank. ‘During that time there’s been lots of inquiries from investors and some concern on what that will look like.’”
June 1 – Financial Times (Gabriel Wildau): “China’s currency headed for its biggest two-day gain against the dollar since January on Thursday afternoon, as the central bank apparently intervened to support the renminbi amid tepid market demand for the Chinese currency. Traders said that large state-owned banks sold dollars aggressively on Wednesday and Thursday. Such concerted trading is usually viewed as a sign that these institutions are acting on behalf of the central bank to prop up demand for the renminbi. The People’s Bank of China’s currency-trading arm last week announced a change to the way it sets renminbi’s daily fix, which is intended to guide trading in the spot market. The change granted the PBoC greater flexibility to push back against what it called ‘irrational expectations’ and guide the renminbi stronger, even when market forces are pushing the other way.”
May 31 – Bloomberg: “A private gauge of Chinese manufacturing fell back into contractionary territory in May, adding to recent evidence that the economy’s strong start to 2017 is leveling off. Caixin Media and Markit Economics manufacturing purchasing managers’ index fell to 49.6 from 50.3 in April, the lowest reading since June 2016 and below the 50.1 median estimate…”
May 29 – Bloomberg (Paul Panckhurst): “Snaking queues of thousands of prospective apartment buyers in Hong Kong signaled authorities have made no progress in cooling a red-hot property market, where prices are at records. People were lining up on Friday and over the weekend at Victoria Skye, a luxury project at the former airport site of Kai Tak, and at the Ocean Pride development by Cheung Kong Property Holdings Ltd. and MTR Corp. ‘Successive moves by the government in recent memory to cool the property market only resulted in it becoming crazier,’ The Standard newspaper said in an editorial… ‘The result is a sea of madness.’”
Europe Watch:
May 30 – Bloomberg (Stefania Spezzati and Blaise Robinson): “Italian markets shuddered at the emerging prospect of early elections. Investors dumped stocks and government debt after ruling Democratic Party leader Matteo Renzi signaled the possibility of a vote in September or October, more than six months ahead of schedule. That pushed the nation’s bond-yield spread over Germany to its highest in almost four weeks today, and the benchmark FTSE MIB stock index to its biggest two-day drop in more than five weeks on Monday, led by banks.”
May 29 – Bloomberg (Alessandro Speciale): “The euro area still needs expansive monetary stimulus to restore stable inflation even as its economy accelerates, European Central Bank President Mario Draghi said. ‘We remain firmly convinced that an extraordinary amount of monetary policy support, including through our forward guidance, is still necessary,’ Draghi told lawmakers… ‘Domestic cost pressures, notably from wages, are still insufficient to support a durable and self-sustaining convergence of inflation toward our medium-term objective.’”
May 31 – Reuters (Balazs Koranyi): “With the euro zone recovery gaining strength, inflation would continue to rise even if the European Central Bank reduced stimulus, Bundesbank President Jens Weidmann said… The comments suggest that Weidmann, a long-time critic of the ECB's exceptional stimulus, considers inflation self- sustaining, one of ECB President Mario Draghi's top criteria before the policy can be removed. ‘The strengthening of the economic recovery makes it increasingly likely that the rise in inflation we have seen since August 2016 is not just a flash in the pan, but that we would have higher inflation rates compared to previous years even under a reduced degree of monetary policy accommodation,’ Weidmann said.”
May 31 – Reuters (Balazs Koranyi and Francesco Canepa): “European Central Bank policymakers are set to take a more benign view of the economy when they meet on June 8 and will even discuss dropping some of their pledges to ramp up stimulus if needed, four sources with direct knowledge of the discussions told Reuters. With economic growth clearly shifting into higher gear, rate setters are ready to acknowledge the improvement by dropping a long-standing reference to downside risks in the bank's post-meeting opening statement, calling risks largely balanced... Growth indicators have been outperforming expectations all year. But they disagree on how quickly the ECB should change its policy stance, including its guidance, with countries on the currency bloc's periphery fearing that a sharp shift in its communication could induce self-defeating market turbulence, they added. ‘After the French election the political risk is clearly down and economic indicators are by and large positive, so it's time to acknowledge this,’ said one Governing Council member…”
June 1 – Bloomberg (Piotr Skolimowski and Alessandro Speciale): “The European Central Bank is starting to debate whether to reflect the euro area’s improving economic prospects in its policy guidance, Bundesbank President Jens Weidmann said. Speaking just hours before the ECB begins its self-imposed quiet period ahead of next week’s monetary policy meeting, Weidmann said the strengthening recovery makes it increasingly likely that the rise in the inflation rate isn’t ‘just a flash in the pan.’ Inflation would still accelerate more than in the previous years even if some of the stimulus were removed, he said, adding the ECB should consider the impact of its policies on bank profitability.”
May 30 – Wall Street Journal (Tom Fairless): “A Berlin-based law professor has filed a cease-and-desist request aimed at quickly ending Germany’s involvement in bond purchases by the European Central Bank, a surprise legal move that underlines mounting German anger over the ECB’s easy-money policies. The request for a legal injunction, sent to Germany’s top court, shows the lengths to which some Germans are prepared to go to derail a €2.3 trillion ($2.57 trillion) stimulus program they accuse of subsidizing southern European governments and hurting German savers, pensioners and smaller companies.”
Brexit Watch:
May 31 – Reuters (Guy Faulconbridge and Paul Sandle): “Prime Minister Theresa May could lose control of parliament in Britain's June 8 election, according to a projection by polling company YouGov, raising the prospect of political turmoil just as formal Brexit talks begin. The YouGov model suggested May would lose 20 seats and her 17-seat working majority in the 650-seat British parliament, though other models show May winning a big majority of as much as 142 seats and a Kantar poll showed her lead widening. If the YouGov model turns out to be accurate, May would be well short of the 326 seats needed to form a government tasked with the complicated talks…”
June 1 – Reuters (Guy Faulconbridge and Kylie MacLellan): “British Prime Minister Theresa May's gamble on a snap election was under question on Thursday after a YouGov opinion poll showed her Conservative Party's lead had fallen to a fresh low of 3 percentage points just a week before voting begins. A failure to win the June 8 election with a large majority would weaken May just as formal Brexit talks are due to begin while the loss of her majority in parliament would pitch British politics into turmoil. In the strongest signal yet that the election is much closer than previously thought, May's lead has collapsed from 24 points since she surprised both rivals and financial markets on April 18 by calling the election…”
Global Bubble Watch:
May 31 – Bloomberg (Emily Cadman): “Australian house prices fell in May for the first time in 17 months, in an early sign lending restrictions are starting to damp demand. Home values in Australia’s state and territory capitals fell 1.1% last month from April… Still, prices across the combined capitals were 8.3% higher than a year ago. The monthly decline comes after regulators tightened lending curbs amid fears of a housing bubble, and the nation’s banks raised interest rates -- especially for interest-only loans which are popular with property investors seeking to take advantage of tax breaks.”
May 29 – CNBC (Arjun Kharpal): “Nearly $4 billion has been wiped off of the value of bitcoin in the past four days after a correction that has seen the cryptocurrency's price fall almost 19% from its recent record high. On May 24, bitcoin hit an all-time high of $2.791.69. But on Monday, the digital currency was trading at an intra-day high of $2,267.73, marking a more than $520 drop or 18.7% decline since the record high…”
Federal Reserve Watch:
May 31 – Reuters (Jonathan Spicer): “The Federal Reserve sent a strong signal… that it will raise interest rates this month and soon begin shedding some of its $4.5 trillion in bond holdings, despite some weak recent U.S. inflation readings. Fed Governor Jerome Powell, an influential policymaker and among the last to speak publicly before a mid-June policy meeting, said the U.S. economy was ‘healthy’ and the central bank should continue to edge toward a more normal footing after nearly a decade of crisis-era stimulus.”
May 30 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials are set to raise short-term interest rates at their meeting in two weeks but could defer the following expected rate move in September if Congress roils markets by delaying action on raising the federal government’s debt ceiling. The possibility that Congress and the White House might have trouble reaching agreement in September to raise the federal debt limit and approve government funding for the year beginning Oct. 1 has surfaced as a new source of uncertainty in recent weeks. Since raising rates in March, many officials have said they probably would want to lift rates twice more, likely in June and September. After that, some officials have said they might pause rate increases to start the process of slowly shrinking the Fed’s $4.5 trillion portfolio of bonds and other assets at year-end before resuming rate increases in 2018.”
May 30 – Bloomberg (Jeanna Smialek and Matthew Boesler): “Federal Reserve Governor Lael Brainard said soft inflation could cause her to reassess the path forward for monetary policy should it linger, even as the global economic outlook brightens and U.S. growth looks poised to rebound. ‘If the soft inflation data persist, that would be concerning and, ultimately, could lead me to reassess the appropriate path of policy,’ Brainard said… She said her baseline expectation is that ‘it likely will be appropriate soon to adjust the federal funds rate’ and start shrinking the balance sheet.”
May 29 – Bloomberg (Alessandro Speciale): “Federal Reserve Bank of San Francisco President John Williams sees a ‘much smaller’ Fed balance sheet in about five years, at the end of an unwinding process that could start with a ‘baby step’ later this year. ‘How big will the balance sheet be five years from now, when this has all happened?’ Williams said… ‘That is something we haven’t decided on. It will be much smaller than today.’ Policy makers are coalescing around a plan for gradually reducing the central bank’s $4.5 trillion in assets with a predictable process aimed at minimizing market reactions.”
May 31 – Reuters (Piotr Skolimowski and Alessandro Speciale): “San Francisco Federal Reserve Bank President John C. Williams said… he sees a total of three interest rate increases for this year as his baseline scenario, but views four hikes as also being appropriate if the U.S. economy gets an unexpected boost. ‘There is potential for upside occurrences in the economy. One big question mark is if there is big fiscal stimulus or other changes in the outlook that we see the economy is doing better than we thought,’ said Williams…”
U.S. Bubble Watch:
May 29 – Financial Times (Dambisa Moyo): “Virtually every class of US debt — sovereign, corporate, unsecured household/personal, auto loans and student debt — is at record highs. Americans now owe $1tn in credit card debt, and a roughly equivalent amount of student loans and auto-loans which, like the subprime mortgage quality that set off the 2008 financial crisis, are of largely low credit quality (and therefore high risk). US companies have added $7.8tn of debt since 2010 and their ability to cover interest payments is at its weakest since 2008… With total public and private debt obligations estimated at 350% of gross domestic product, the US Congressional Budget Office has recently described the path of US debt (and deficits) as almost doubling over the next 30 years. But this is not just a US phenomenon. Globally, the picture is similarly precarious, with debt stubbornly high in Europe, rising in Asia and surging across broader emerging markets. A decade on from the beginning of the financial crisis, the world has the makings of a fresh debt crisis.”
May 30 – Bloomberg (Dani Burger): “Investment managers are doubling down on the hottest stocks of 2017 -- and it’s paying off. Funds tracked by Bank of America Corp. own the highest percentage of technology stocks on record compared to their benchmark. It’s a sector that’s carried U.S. stocks to new highs, leading the S&P 500 Index with a nearly 20% gain in 2017. And it’s giving active managers a boost they haven’t seen in more than two years.”
May 29 – Financial Times (Ben McLannahan): “Big banks are throttling back from the $1.2tn US car loan market, fearing that consumers have taken on more debt than they can handle. Lenders piled into the sector in the years after the financial crisis, as low defaults and an improving economy encouraged them to focus on a market that performed relatively well as mortgages soured. Total loans across the industry rose to $1.17tn at the end of the first quarter… up almost 70% from a trough in 2010. But data released last week by the Federal Deposit Insurance Corporation showed the first sequential drop in car loans outstanding at commercial banks in at least six years.”
May 30 – CNBC (Lauren Thomas): “U.S. home prices rose slightly less than what was anticipated for the month of March, according to new data from the S&P/Case-Shiller U.S. National Home Price Index. But the gains were enough to reach a 33-month high, climbing at the strongest rate in nearly three years. This, as inventory of homes for sale remains ‘unusually low,’ the group said. The national home price index increased 5.8% in March… Meanwhile, the widely tracked 20-city home price index rose 5.9% from a year ago in March, the most since July 2014. The latest data… shows that home prices continued their impressive rise, across the country, over the past 12 months. Home prices had hit a record in September, and the pace of growth accelerated ever since then.”
May 31 – Bloomberg (Elizabeth Campbell): “Illinois leaders will blow past a deadline that will leave the state careening toward the third straight year without a budget. The Illinois House isn’t voting on a budget on Wednesday, which means the gridlock-prone government won’t pass a spending plan by midnight. That means approving a budget -- a usually routine task that has eluded the state for 700 days -- will become even more difficult because a three-fifths majority will be required… ‘We are probably approaching that point of impaired ability to function at basic level,’ said John Humphrey, the Chicago-based head of credit research for Gurtin Municipal Bond Management…”
May 31 – Reuters (Lucia Mutikani): “Contracts to buy previously owned U.S. homes fell for a second straight month in April amid a supply squeeze, but the housing market recovery remains supported by a strong labor market. The National Association of Realtors said… its Pending Home Sales Index, based on contracts signed last month, dropped 1.3% to 109.8… Coming on the heels of recent data showing a drop in home building and sales of both new and previously owned homes, the decrease in contracts suggests a moderation in housing activity.”
Japan Watch:
May 29 – Bloomberg (Keiko Ujikane): “Japan’s jobless rate remained at the lowest in more than two decades last month, and retail sales rose from March, climbing for a fourth month. Retail sales rose 1.4% from March, and were up 3.2% compared to April last year. The unemployment rate for April was 2.8%, the same as the forecast.”
May 30 – Bloomberg (Keiko Ujikane): “Japan’s industrial output rebounded in April, hitting the highest level since 2008, as overseas demand continued to support the nation’s economic recovery. Industrial production increased 4.0% (forecast +4.2%) in April from March, when it fell 1.9%.”
May 31 – Reuters (Leika Kihara): “Bank of Japan board member Yutaka Harada said… he expected inflation to accelerate as the country's jobless rate approached 2%. ‘Inflation accelerates sharply when the jobless rate approaches 2%. Japan's jobless rate has already fallen to 2.8%. If this trend continues and the jobless rate falls further, there's no doubt prices will rise,’ Harada said…”
EM Watch:
May 29 – Bloomberg (Natasha Doff): “Investors reaping handsome returns on emerging-market currencies this year might do well to heed a warning once made by Harvard economist Jeffrey Frankel, who likened carry trading to ‘picking up pennies in front of a steam roller.’ Economic theory -- and history -- suggest the strategy of borrowing where interest rates are low to invest in high-yielding currencies is prone to the risk of a sharp reversal when too many investors pile into the trade. Strategists at Bank of America Merrill Lynch warned last week that sentiment on emerging-market currencies is already reaching ‘exuberant levels.’ Saxo Bank A/S’s chief currency strategist says now is the time to take profits. Investors from BlackRock Inc. to Man Group Plc have poured money into emerging-market currencies this year to profit from interest as high as 12% compared with rates close to zero in the U.S. and European Union. The strategy has produced an average return of 7.5% since the beginning of the year…”
Geopolitical Watch:
June 2 – Bloomberg (Jennifer A Dlouhy): “The response to President Donald Trump’s announcement he was exiting the Paris climate accord and wanted to renegotiate on his terms was immediate: The leaders of France, Germany and Italy said no. On Wall Street, corporate executives pilloried the businessman president. Goldman Sachs’ CEO tweeted for the first time, calling the move a setback for the world. Tesla Inc.’s Elon Musk and Bob Iger of Walt Disney Co. quit a White House advisory council in protest. Even the mayor of Pittsburgh -- a city Trump highlighted as a beneficiary of his decision to turn his back on the global pact -- vowed to abide by the Paris agreement. Trump’s decision leaves him more alienated than ever, isolated on the world stage and increasingly embattled at home.”
May 31 – Reuters (Guy Faulconbridge and Paul Sandle): “Prime Minister Theresa May could lose control of parliament in Britain's June 8 election, according to a projection by polling company YouGov, raising the prospect of political turmoil just as formal Brexit talks begin. The YouGov model suggested May would lose 20 seats and her 17-seat working majority in the 650-seat British parliament, though other models show May winning a big majority of as much as 142 seats and a Kantar poll showed her lead widening. If the YouGov model turns out to be accurate, May would be well short of the 326 seats needed to form a government tasked with the complicated talks…”
June 1 – Reuters (Guy Faulconbridge and Kylie MacLellan): “British Prime Minister Theresa May's gamble on a snap election was under question on Thursday after a YouGov opinion poll showed her Conservative Party's lead had fallen to a fresh low of 3 percentage points just a week before voting begins. A failure to win the June 8 election with a large majority would weaken May just as formal Brexit talks are due to begin while the loss of her majority in parliament would pitch British politics into turmoil. In the strongest signal yet that the election is much closer than previously thought, May's lead has collapsed from 24 points since she surprised both rivals and financial markets on April 18 by calling the election…”
Global Bubble Watch:
May 31 – Bloomberg (Emily Cadman): “Australian house prices fell in May for the first time in 17 months, in an early sign lending restrictions are starting to damp demand. Home values in Australia’s state and territory capitals fell 1.1% last month from April… Still, prices across the combined capitals were 8.3% higher than a year ago. The monthly decline comes after regulators tightened lending curbs amid fears of a housing bubble, and the nation’s banks raised interest rates -- especially for interest-only loans which are popular with property investors seeking to take advantage of tax breaks.”
May 29 – CNBC (Arjun Kharpal): “Nearly $4 billion has been wiped off of the value of bitcoin in the past four days after a correction that has seen the cryptocurrency's price fall almost 19% from its recent record high. On May 24, bitcoin hit an all-time high of $2.791.69. But on Monday, the digital currency was trading at an intra-day high of $2,267.73, marking a more than $520 drop or 18.7% decline since the record high…”
Federal Reserve Watch:
May 31 – Reuters (Jonathan Spicer): “The Federal Reserve sent a strong signal… that it will raise interest rates this month and soon begin shedding some of its $4.5 trillion in bond holdings, despite some weak recent U.S. inflation readings. Fed Governor Jerome Powell, an influential policymaker and among the last to speak publicly before a mid-June policy meeting, said the U.S. economy was ‘healthy’ and the central bank should continue to edge toward a more normal footing after nearly a decade of crisis-era stimulus.”
May 30 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials are set to raise short-term interest rates at their meeting in two weeks but could defer the following expected rate move in September if Congress roils markets by delaying action on raising the federal government’s debt ceiling. The possibility that Congress and the White House might have trouble reaching agreement in September to raise the federal debt limit and approve government funding for the year beginning Oct. 1 has surfaced as a new source of uncertainty in recent weeks. Since raising rates in March, many officials have said they probably would want to lift rates twice more, likely in June and September. After that, some officials have said they might pause rate increases to start the process of slowly shrinking the Fed’s $4.5 trillion portfolio of bonds and other assets at year-end before resuming rate increases in 2018.”
May 30 – Bloomberg (Jeanna Smialek and Matthew Boesler): “Federal Reserve Governor Lael Brainard said soft inflation could cause her to reassess the path forward for monetary policy should it linger, even as the global economic outlook brightens and U.S. growth looks poised to rebound. ‘If the soft inflation data persist, that would be concerning and, ultimately, could lead me to reassess the appropriate path of policy,’ Brainard said… She said her baseline expectation is that ‘it likely will be appropriate soon to adjust the federal funds rate’ and start shrinking the balance sheet.”
May 29 – Bloomberg (Alessandro Speciale): “Federal Reserve Bank of San Francisco President John Williams sees a ‘much smaller’ Fed balance sheet in about five years, at the end of an unwinding process that could start with a ‘baby step’ later this year. ‘How big will the balance sheet be five years from now, when this has all happened?’ Williams said… ‘That is something we haven’t decided on. It will be much smaller than today.’ Policy makers are coalescing around a plan for gradually reducing the central bank’s $4.5 trillion in assets with a predictable process aimed at minimizing market reactions.”
May 31 – Reuters (Piotr Skolimowski and Alessandro Speciale): “San Francisco Federal Reserve Bank President John C. Williams said… he sees a total of three interest rate increases for this year as his baseline scenario, but views four hikes as also being appropriate if the U.S. economy gets an unexpected boost. ‘There is potential for upside occurrences in the economy. One big question mark is if there is big fiscal stimulus or other changes in the outlook that we see the economy is doing better than we thought,’ said Williams…”
U.S. Bubble Watch:
May 29 – Financial Times (Dambisa Moyo): “Virtually every class of US debt — sovereign, corporate, unsecured household/personal, auto loans and student debt — is at record highs. Americans now owe $1tn in credit card debt, and a roughly equivalent amount of student loans and auto-loans which, like the subprime mortgage quality that set off the 2008 financial crisis, are of largely low credit quality (and therefore high risk). US companies have added $7.8tn of debt since 2010 and their ability to cover interest payments is at its weakest since 2008… With total public and private debt obligations estimated at 350% of gross domestic product, the US Congressional Budget Office has recently described the path of US debt (and deficits) as almost doubling over the next 30 years. But this is not just a US phenomenon. Globally, the picture is similarly precarious, with debt stubbornly high in Europe, rising in Asia and surging across broader emerging markets. A decade on from the beginning of the financial crisis, the world has the makings of a fresh debt crisis.”
May 30 – Bloomberg (Dani Burger): “Investment managers are doubling down on the hottest stocks of 2017 -- and it’s paying off. Funds tracked by Bank of America Corp. own the highest percentage of technology stocks on record compared to their benchmark. It’s a sector that’s carried U.S. stocks to new highs, leading the S&P 500 Index with a nearly 20% gain in 2017. And it’s giving active managers a boost they haven’t seen in more than two years.”
May 29 – Financial Times (Ben McLannahan): “Big banks are throttling back from the $1.2tn US car loan market, fearing that consumers have taken on more debt than they can handle. Lenders piled into the sector in the years after the financial crisis, as low defaults and an improving economy encouraged them to focus on a market that performed relatively well as mortgages soured. Total loans across the industry rose to $1.17tn at the end of the first quarter… up almost 70% from a trough in 2010. But data released last week by the Federal Deposit Insurance Corporation showed the first sequential drop in car loans outstanding at commercial banks in at least six years.”
May 30 – CNBC (Lauren Thomas): “U.S. home prices rose slightly less than what was anticipated for the month of March, according to new data from the S&P/Case-Shiller U.S. National Home Price Index. But the gains were enough to reach a 33-month high, climbing at the strongest rate in nearly three years. This, as inventory of homes for sale remains ‘unusually low,’ the group said. The national home price index increased 5.8% in March… Meanwhile, the widely tracked 20-city home price index rose 5.9% from a year ago in March, the most since July 2014. The latest data… shows that home prices continued their impressive rise, across the country, over the past 12 months. Home prices had hit a record in September, and the pace of growth accelerated ever since then.”
May 31 – Bloomberg (Elizabeth Campbell): “Illinois leaders will blow past a deadline that will leave the state careening toward the third straight year without a budget. The Illinois House isn’t voting on a budget on Wednesday, which means the gridlock-prone government won’t pass a spending plan by midnight. That means approving a budget -- a usually routine task that has eluded the state for 700 days -- will become even more difficult because a three-fifths majority will be required… ‘We are probably approaching that point of impaired ability to function at basic level,’ said John Humphrey, the Chicago-based head of credit research for Gurtin Municipal Bond Management…”
May 31 – Reuters (Lucia Mutikani): “Contracts to buy previously owned U.S. homes fell for a second straight month in April amid a supply squeeze, but the housing market recovery remains supported by a strong labor market. The National Association of Realtors said… its Pending Home Sales Index, based on contracts signed last month, dropped 1.3% to 109.8… Coming on the heels of recent data showing a drop in home building and sales of both new and previously owned homes, the decrease in contracts suggests a moderation in housing activity.”
Japan Watch:
May 29 – Bloomberg (Keiko Ujikane): “Japan’s jobless rate remained at the lowest in more than two decades last month, and retail sales rose from March, climbing for a fourth month. Retail sales rose 1.4% from March, and were up 3.2% compared to April last year. The unemployment rate for April was 2.8%, the same as the forecast.”
May 30 – Bloomberg (Keiko Ujikane): “Japan’s industrial output rebounded in April, hitting the highest level since 2008, as overseas demand continued to support the nation’s economic recovery. Industrial production increased 4.0% (forecast +4.2%) in April from March, when it fell 1.9%.”
May 31 – Reuters (Leika Kihara): “Bank of Japan board member Yutaka Harada said… he expected inflation to accelerate as the country's jobless rate approached 2%. ‘Inflation accelerates sharply when the jobless rate approaches 2%. Japan's jobless rate has already fallen to 2.8%. If this trend continues and the jobless rate falls further, there's no doubt prices will rise,’ Harada said…”
EM Watch:
May 29 – Bloomberg (Natasha Doff): “Investors reaping handsome returns on emerging-market currencies this year might do well to heed a warning once made by Harvard economist Jeffrey Frankel, who likened carry trading to ‘picking up pennies in front of a steam roller.’ Economic theory -- and history -- suggest the strategy of borrowing where interest rates are low to invest in high-yielding currencies is prone to the risk of a sharp reversal when too many investors pile into the trade. Strategists at Bank of America Merrill Lynch warned last week that sentiment on emerging-market currencies is already reaching ‘exuberant levels.’ Saxo Bank A/S’s chief currency strategist says now is the time to take profits. Investors from BlackRock Inc. to Man Group Plc have poured money into emerging-market currencies this year to profit from interest as high as 12% compared with rates close to zero in the U.S. and European Union. The strategy has produced an average return of 7.5% since the beginning of the year…”
Geopolitical Watch:
June 2 – Bloomberg (Jennifer A Dlouhy): “The response to President Donald Trump’s announcement he was exiting the Paris climate accord and wanted to renegotiate on his terms was immediate: The leaders of France, Germany and Italy said no. On Wall Street, corporate executives pilloried the businessman president. Goldman Sachs’ CEO tweeted for the first time, calling the move a setback for the world. Tesla Inc.’s Elon Musk and Bob Iger of Walt Disney Co. quit a White House advisory council in protest. Even the mayor of Pittsburgh -- a city Trump highlighted as a beneficiary of his decision to turn his back on the global pact -- vowed to abide by the Paris agreement. Trump’s decision leaves him more alienated than ever, isolated on the world stage and increasingly embattled at home.”
Friday Evening Links
[Bloomberg] Stocks Rise to Records, Treasuries Surge Amid Jobs: Markets Wrap
[Bloomberg] Central Bank Cash Flood Swells Bond Danger
[Bloomberg] Economist Goodfriend Is One of Trump's Finalists for Fed Governor
[CNBC] Weak May jobs growth raises doubts about how much Fed can raise interest rates this year
[Bloomberg] Trump Reviewing Whether to Block Comey Testimony to Senate
[FT] Billionaire Anbang boss Wu Xiaohui barred from leaving China
[Bloomberg] Central Bank Cash Flood Swells Bond Danger
[Bloomberg] Economist Goodfriend Is One of Trump's Finalists for Fed Governor
[CNBC] Weak May jobs growth raises doubts about how much Fed can raise interest rates this year
[Bloomberg] Trump Reviewing Whether to Block Comey Testimony to Senate
[FT] Billionaire Anbang boss Wu Xiaohui barred from leaving China
Thursday, June 1, 2017
Friday's News Links
[Reuters] Slow U.S. jobs growth takes shine off dollar, stocks hold all-time highs
[Reuters] Oil slides as U.S. climate withdrawal compounds glut concerns
[Bloomberg] Slower Hiring, Lower Unemployment Offer Mixed U.S. Labor Signs
[Bloomberg] Wider U.S. Trade Gap May Signal Drag on Second-Quarter Growth
[Bloomberg] Trump’s Paris Exit Leaves Him Isolated From C-Suites to Capitals
[Bloomberg] Yuan's Forecasters Getting It Wrong as China Jolts Markets
[Bloomberg] Puerto Rican Exodus Is Speeding the Island’s Economic Collapse
[Reuters] Fretting over savings, Mrs Watanabe turns to bitcoin
[NYT] Trump Talks Tough on Trade, but His Team Is Treading Lightly
[WSJ] Fed Focuses on Job Gains as Economy Sends Mixed Messages
[WSJ] China Steps Up Support for Its Currency
[WSJ] Anbang, After a Whirlwind of Western Deals, Has Been Benched by China
[FT] China worries temper emerging markets optimism
[Reuters] Oil slides as U.S. climate withdrawal compounds glut concerns
[Bloomberg] Slower Hiring, Lower Unemployment Offer Mixed U.S. Labor Signs
[Bloomberg] Wider U.S. Trade Gap May Signal Drag on Second-Quarter Growth
[Bloomberg] Trump’s Paris Exit Leaves Him Isolated From C-Suites to Capitals
[Bloomberg] Yuan's Forecasters Getting It Wrong as China Jolts Markets
[Bloomberg] Puerto Rican Exodus Is Speeding the Island’s Economic Collapse
[Reuters] Fretting over savings, Mrs Watanabe turns to bitcoin
[NYT] Trump Talks Tough on Trade, but His Team Is Treading Lightly
[WSJ] Fed Focuses on Job Gains as Economy Sends Mixed Messages
[WSJ] China Steps Up Support for Its Currency
[WSJ] Anbang, After a Whirlwind of Western Deals, Has Been Benched by China
[FT] China worries temper emerging markets optimism
Thursday Evening Links
[Reuters] Wall Street hits record highs as economy seen accelerating
[Bloomberg] Here’s What the Fed Will Be Watching for in the Jobs Report
[Bloomberg] S&P, Moody's Downgrade Illinois to Near Junk, Lowest Ever for a U.S. State
[Reuters] Trump says U.S. to quit Paris climate pact; allies voice dismay
[Bloomberg] Here’s What the Fed Will Be Watching for in the Jobs Report
[Bloomberg] S&P, Moody's Downgrade Illinois to Near Junk, Lowest Ever for a U.S. State
[Reuters] Trump says U.S. to quit Paris climate pact; allies voice dismay
Wednesday, May 31, 2017
Thursday's News Links
[Bloomberg] Stocks in Upbeat Mood as Oil Steadies, Havens Slip: Markets Wrap
[CNBC] Private payrolls add 253K in May vs. 185K est.: ADP
[Bloomberg] China's Caixin PMI Falls Below 50 for First Time Since June 2016
[Bloomberg] Weidmann Says ECB Is Starting to Debate Changing Guidance
[Reuters] Fed's Williams bullish on U.S. economy, sees total three rate hikes this year
[Reuters] Powell says Fed marching on despite sagging U.S. inflation
[Bloomberg] Australia Home Prices Fall in May as Lending Curbs Start to Bite
[CNBC] China's new cybersecurity law takes effect today, and many are confused
[Reuters] BOJ's Harada: Inflation to accelerate as jobless rate nears 2 pct
[Reuters] PM May's lead falls to 3 percentage points, YouGov poll shows a week before UK election
[Bloomberg] Here Are the Theories Why China May Be Supercharging the Yuan
[Reuters] 'Axis of love': Saudi-Russia detente heralds new oil order
[Bloomberg View] Is China Headed for a Recession?
[WSJ] China’s Debt Problem Moves Back to the Future
[FT] China central bank intervention pushes renminbi to 6-month high
[CNBC] Private payrolls add 253K in May vs. 185K est.: ADP
[Bloomberg] China's Caixin PMI Falls Below 50 for First Time Since June 2016
[Bloomberg] Weidmann Says ECB Is Starting to Debate Changing Guidance
[Reuters] Fed's Williams bullish on U.S. economy, sees total three rate hikes this year
[Reuters] Powell says Fed marching on despite sagging U.S. inflation
[Bloomberg] Australia Home Prices Fall in May as Lending Curbs Start to Bite
[CNBC] China's new cybersecurity law takes effect today, and many are confused
[Reuters] BOJ's Harada: Inflation to accelerate as jobless rate nears 2 pct
[Reuters] PM May's lead falls to 3 percentage points, YouGov poll shows a week before UK election
[Bloomberg] Here Are the Theories Why China May Be Supercharging the Yuan
[Reuters] 'Axis of love': Saudi-Russia detente heralds new oil order
[Bloomberg View] Is China Headed for a Recession?
[WSJ] China’s Debt Problem Moves Back to the Future
[FT] China central bank intervention pushes renminbi to 6-month high
Wednesday Evening Links
[Bloomberg] Asian Stocks Face Mixed Start; Crude Oil Rebounds: Markets Wrap
[Reuters] Wall Street falls as bank stocks skid, oil dips
[Bloomberg] Fed Survey Shows Modest Growth With Tight Labor and Tame Prices
[Reuters] U.S. pending home sales fall; housing market recovery intact
[Bloomberg] JPMorgan Trading Revenue on Pace to Drop 15% This Quarter
[Bloomberg] China Teaches Yuan Bears Tough Lesson as Currency Surges Anew
[Reuters] Euro zone inflation would rise even if ECB support was reduced - Weidmann
[Reuters] Wall Street falls as bank stocks skid, oil dips
[Bloomberg] Fed Survey Shows Modest Growth With Tight Labor and Tame Prices
[Reuters] U.S. pending home sales fall; housing market recovery intact
[Bloomberg] JPMorgan Trading Revenue on Pace to Drop 15% This Quarter
[Bloomberg] China Teaches Yuan Bears Tough Lesson as Currency Surges Anew
[Reuters] Euro zone inflation would rise even if ECB support was reduced - Weidmann
Tuesday, May 30, 2017
Wednesday's News Links
[Bloomberg] Stocks Gain as Data Back ECB Stimulus; Oil Slumps: Markets Wrap
[Bloomberg] Yuan Surges in Hong Kong as Traders See PBOC Squeezing Bears
[Bloomberg] Euro-Area Inflation Slows More Than Forecast Before ECB Meeting
[Bloomberg] China Manufacturing Gauge Exceeds Estimates as Growth Holds Up
[Reuters] Special Report: 'Ghost collateral' haunts loans across China's banking system
[Bloomberg] Japan's Industrial Production Hits Highest Level Since 2008
[Reuters] British PM May could lose majority in June 8 election: YouGov projection
[CNBC] Election shock? Why you now need to sit up and take note of UK politics
[Bloomberg] Trump Plans to Exit Paris Climate Deal, White House Official Tells AP
[Bloomberg] Illinois Budget Crisis Is About to Get Even Harder to Resolve
[Bloomberg] This Is What the Demise of Oil Looks Like
[CNBC] Here's how long it will take young people to afford to buy a home nationwide
[NYT] Despite Weak Inflation, Fed Is Likely to Raise Interest Rates in June
[WSJ] Doubts Cloud Fed’s Rate Increase Plans Beyond June
[WSJ] Injunction Request Aims to Stop German Role in ECB’s Bond Buying
[Bloomberg] Yuan Surges in Hong Kong as Traders See PBOC Squeezing Bears
[Bloomberg] Euro-Area Inflation Slows More Than Forecast Before ECB Meeting
[Bloomberg] China Manufacturing Gauge Exceeds Estimates as Growth Holds Up
[Reuters] Special Report: 'Ghost collateral' haunts loans across China's banking system
[Bloomberg] Japan's Industrial Production Hits Highest Level Since 2008
[Reuters] British PM May could lose majority in June 8 election: YouGov projection
[CNBC] Election shock? Why you now need to sit up and take note of UK politics
[Bloomberg] Trump Plans to Exit Paris Climate Deal, White House Official Tells AP
[Bloomberg] Illinois Budget Crisis Is About to Get Even Harder to Resolve
[Bloomberg] This Is What the Demise of Oil Looks Like
[CNBC] Here's how long it will take young people to afford to buy a home nationwide
[NYT] Despite Weak Inflation, Fed Is Likely to Raise Interest Rates in June
[WSJ] Doubts Cloud Fed’s Rate Increase Plans Beyond June
[WSJ] Injunction Request Aims to Stop German Role in ECB’s Bond Buying
Monday, May 29, 2017
Tuesday's News Links
[Bloomberg] U.S. Stocks Slip From Records as Commodities Slump: Markets Wrap
[Bloomberg] U.S. Consumer Spending Signals Second-Quarter Rebound On Track
[CNBC] US home prices climb 5.8 percent in March: S&P CoreLogic Case-Shiller
[Bloomberg] Rise in Home Prices in 20 U.S. Cities Reflects Lean Inventory
[Bloomberg] Italy Hatching Snap Elections Drives Traders to Seek Cover
[Reuters] Exclusive: ECB to discuss closing door to extra stimulus next week - sources
[Bloomberg] Trump Blasts Germany Again as Merkel Talks Up Indian Relations
[Bloomberg] History Says Emerging-Market Carry Trade Could End in Tears
[WSJ] Fed Officials Likely to Raise Rates in June, Finalize Plans to Reduce Portfolio
[WSJ] GOP’s Proposed Tax Changes Are No Match for Status Quo
[FT] China’s shadow banking crackdown shakes markets
[FT] Talk of early Italian election hits Milan equities
[FT] Debt pile-up in US car market sparks subprime fear
[FT] Global debt woes are building up to a tidal wave
[WSJ] Rural America is the New 'Inner City"
[FT] US banks pull back from $1.2tn car loans market
[WSJ] China Huishan Faces Corporate-Governance Meltdown
[Bloomberg] U.S. Consumer Spending Signals Second-Quarter Rebound On Track
[CNBC] US home prices climb 5.8 percent in March: S&P CoreLogic Case-Shiller
[Bloomberg] Rise in Home Prices in 20 U.S. Cities Reflects Lean Inventory
[Bloomberg] Italy Hatching Snap Elections Drives Traders to Seek Cover
[Reuters] Exclusive: ECB to discuss closing door to extra stimulus next week - sources
[Bloomberg] Trump Blasts Germany Again as Merkel Talks Up Indian Relations
[Bloomberg] History Says Emerging-Market Carry Trade Could End in Tears
[WSJ] Fed Officials Likely to Raise Rates in June, Finalize Plans to Reduce Portfolio
[WSJ] GOP’s Proposed Tax Changes Are No Match for Status Quo
[FT] China’s shadow banking crackdown shakes markets
[FT] Talk of early Italian election hits Milan equities
[FT] Debt pile-up in US car market sparks subprime fear
[FT] Global debt woes are building up to a tidal wave
[WSJ] Rural America is the New 'Inner City"
[FT] US banks pull back from $1.2tn car loans market
[WSJ] China Huishan Faces Corporate-Governance Meltdown
Sunday, May 28, 2017
Monday's News Links
[Bloomberg] Stocks Meander, Pound Rises in Holiday-Hit Trading: Markets Wrap
[Bloomberg] Draghi Says Euro Area Still Needs Extraordinary ECB Support
[Reuters] Italian bank worries leak into second week
[Bloomberg] Fed's Williams Sees 'Much Smaller' Balance Sheet in Five Years
[Bloomberg] Fed's Williams Sees Gradual Policy Tightening of Three Hikes
[Bloomberg] Hong Kong's Throngs of Thousands Defy Bid to Cool Housing Market
[CNBC] Bitcoin correction sees nearly $4 billion wiped off value of the cryptocurrency as price falls 19%
[Bloomberg] Draghi Says Euro Area Still Needs Extraordinary ECB Support
[Reuters] Italian bank worries leak into second week
[Bloomberg] Fed's Williams Sees 'Much Smaller' Balance Sheet in Five Years
[Bloomberg] Fed's Williams Sees Gradual Policy Tightening of Three Hikes
[Bloomberg] Hong Kong's Throngs of Thousands Defy Bid to Cool Housing Market
[CNBC] Bitcoin correction sees nearly $4 billion wiped off value of the cryptocurrency as price falls 19%
Saturday, May 27, 2017
Friday, May 26, 2017
Weekly Commentary: Moody's Downgrades China
Marie Diron, Moody’s associate managing director, Sovereign Risk Group, commenting Wednesday on Moody’s Chinese downgrade (Bloomberg Television): “It is likely to be a very medium-term and gradual erosion of credit metrics and we are looking at the policies that the government is implementing. The authorities have recognized the risks that come with high leverage and have a very broad agenda of structural reforms and we take that into account to the point that we think leverage will increase more slowly than it has in the past. But still these measures will not be enough to really reverse the increase in leverage.”
I’ve always felt the rating agencies got somewhat of a bum rap after the mortgage finance Bubble collapse. Sure, their ratings methodologies were flawed. In hindsight, Trillions of so-called “AAA” MBS were anything but pristine Credits. And, again looking back, it does appear a case of incompetence - if not worse. Yet reality at the time was one of home prices that had been inflating for years with a corresponding long spell of low delinquencies and minimal loan losses, along with GDP and incomes seemingly on a steady upward trajectory. The GSEs had come to dominate mortgage finance, while the Fed had market yields well under control. Washington surely wouldn’t allow a housing crisis, which ensured that markets were absolutely enamored with anything mortgage related. So the mortgage market enjoyed bountiful liquidity conditions, and it was just difficult for anyone – including the ratings firms – to see what might upset the apple cart.
The ratings agencies were basically oblivious to the key issue of deepening structural maladjustment throughout the mortgage finance Bubble period. They were inattentive to what a major de-leveraging episode could unleash. But so were the Federal Reserve, Wall Street and the world. Analysis and models did not incorporate latent (financial and economic) fragilities that had compounded from years of rapid credit growth and asset inflation. These days there’s a similar inability to comprehend the myriad global risks associated with the runaway Chinese Bubble.
The Moody’s downgrade spurred a bevy of articles this week examining China’s debt issues (i.e. “Total outstanding credit climbed to about 260% of GDP by the end of 2016, up from 160% in 2008”; “$9 trillion local bond market”; “debt has been increasing lately by an amount equal to about 15% of the country’s output each year”). Interestingly, I saw no mention that Chinese debt growth this year will likely approach $3.5 TN. Not only will this exceed U.S. 2017 debt growth, it will significantly surpass even peak annual U.S. debt expansion from the mortgage finance Bubble period.
May 23 – New York Times (Keith Bradsher): “China has gone on a spending spree, borrowing money to build cities, create manufacturing giants and nurture financial markets — money that has helped drive the economic powerhouse in recent years. But the debt-fueled binge now threatens to sap the energy of the world’s second-largest economy. With its economy maturing, China has to pile on ever more debt to keep its growth going, at a pace that could prove unsustainable. And the money is increasingly flowing through opaque channels that operate outside the regulated banking system, leaving China vulnerable to blowups. A major credit agency sounded the alarm on Wednesday, saying the steady buildup of debt would erode China’s financial strength in the years ahead… China’s debt has been increasing lately by an amount equal to about 15% of the country’s output each year, to keep the economy growing from 6.5% to 7%.”
The world has never witnessed such a Credit expansion. Moody’s noted the Chinese economy’s ongoing dependency on stimulus measures. I would argue that the key issue has evolved into China’s systemic addiction to ever-increasing expansions of “money” and Credit. The almost singular focus on debt to GDP ratios understates Chinese fragilities. In short, they succumbed to the debt trap: massive ongoing expansion of Credit - or bust. How sound is this Credit? How stable is the Chinese financial sector? And, perhaps most pressing, how vulnerable is their currency?
May 24 – New York Times (Keith Bradsher): “Moody’s… downgraded its rating of China’s sovereign debt one notch on Wednesday, citing concerns over growing debt in the country, which has the world’s second-largest economy. In recent years, as China’s stunning economic performance of past decades has become difficult to sustain, the country has used debt to fuel growth… When it comes to pumping money into a financial system, China has made the Federal Reserve in the United States and the European Central Bank look almost lackadaisical. It has expanded its broadly measured money supply by more than the rest of the world combined since the global financial crisis. Now it has 70% more money sloshing around its economy than the United States does, even though the American economy is bigger… China has accumulated its towering debt remarkably quickly. Goldman Sachs looked last year at how fast debt had accumulated relative to the size of the economy in 55 countries since 1960. It found that by the end of 2015, China was already in the top 2% of all credit expansions — and its debt shot up even higher last year. All of the other large expansions occurred in very small economies, some of which essentially lost control of their finances.”
Moody’s report focused on the risk of further leveraging. This is clearly an issue. Corporate debt is at very high levels ($18 TN, or 170% of GDP) and corporations (many with earnings and cash-flow issues) continue to pile on additional borrowings. Much of this debt is “non-productive,” as companies borrow to meet rising debt service and to plug expanding cash-flow deficits. Even more alarming, the bloated financial sector continues to balloon, issuing risky loans while creating new deposit “money”. From the NYT (Keith Bradsher) article above, China “has 70% more money sloshing around its economy than the United States.” Even more than “leverage,” China’s Wild West Risk-Intermediation Mayhem has created momentous systemic risk. Much of the risky “Terminal Phase” debt growth – financing inflated apartment values, uneconomic enterprises, economic maladjustment and chicanery – is being transformed into perceived safe and liquid “money” and money-like financial instruments.
The bulls were quick to downplay the importance of Moody’s action, stating both that China has minimal dependence on external financing and that the country still enjoys $3.0 TN of international reserve assets. I would view the issue differently. Yes, China has an extraordinarily large international reserve cushion, though holdings have declined $1.0 TN from June 2014. Most importantly, this large hoard has allowed authorities to prolong the Bubble and delay the type of harsh measures required to rein in Credit, speculation and now deeply imbedded boom-time psychology. Chinese savers are accumulating wealth they'd never dreamed of, backed by an economy with serious deficiencies and a financial sector of dubious standing.
Moody’s and others – certainly including Wall Street generally - handle China with kid gloves. Chinese authorities have backed away from needed reforms. The late-2015/early-2016 scare forced Beijing to effectively impose capital controls. Rather than promoting open and effective market-based mechanisms, the game has turned to only more zealous interventions: stabilize financial markets and promote rapid Credit growth necessary to sustain 6-7% GDP expansion, while cajoling and controlling to limit the capacity of all this Chinese “money” to flow out of the country.
Chinese authorities have also been pressing Chinese corporations and financial institutions to borrow in overseas markets. This kills two birds... China can offload some high-risk, late-cycle Credit to international investors, while also attracting needed financial inflows. The problem is that foreign investors fear capital control measures and don’t trust the renminbi. So much of this borrowing is done in dollar-denominated debt. And this large issuance of dollar-denominated debt only exacerbates systemic vulnerability to an abrupt renminbi devaluation.
May 24 – Reuters (Adam Jourdan and Samuel Shen): “The decision by Moody's… to downgrade China's credit rating is ‘illogical’ and overstates the levels of government debt, a commerce ministry researcher said in an editorial in the official People's Daily newspaper… Mei Xinyu, a researcher at China's Ministry of Commerce, wrote in a front page editorial of the paper's overseas edition the downgrade… overstated China's reliance on stimulus and the country's debt levels. Moody's downgraded China's credit ratings… for the first time in nearly 30 years, saying it expects the financial strength of the economy will erode in coming years as growth slows and debt continues to rise. China's Finance Ministry said… the downgrade overestimated the risks to the economy and was based on ‘inappropriate methodology’. China's state planner said debt risks were generally controllable.”
I’ve closely monitored China for years now. I recall reading some years back how Chinese officials had studied and learned from the Japanese Bubble experience. I’ve been waiting patiently for China to wrestle control of a precarious Credit Bubble. They have instead repeatedly taken tepid steps to curb various sectoral excesses – real estate, local government debt, stock market, corporate debt and, of late, shadow banking and insurance. Attempts to tamp down excess in one spot have only ensured it pops out elsewhere. The gravest policy misstep has been their failure to take a more systemic approach to Credit growth and asset inflation.
Basically, whenever tightening policies began to bite, Beijing would in short-order reverse course and stimulate. After a while, Chinese tightening measures lacked credibility. Moreover, the greater the inflation of Credit, financial institutions and perceived wealth, the more confident the Chinese population (including investors in real estate and financial assets, bankers, and corporate CEOs) became that Beijing would never tolerate a bust. Beijing these days essentially backs local government debt, the big state banks, corporate debt and apartment prices, not to mention $22 TN of “money” (M2) and trillions more of money-like “wealth management products” and such. The scope of Beijing’s contingent liabilities is unparalleled.
The Moody’s executive stated that “It is likely to be a very medium-term and gradual erosion of credit metrics.” The Credit “metric” that matters most is my hypothetical chart of systemic risk that turned parabolic with the rapid acceleration of Credit of rapidly deteriorating quality. This “Terminal Phase” Dynamic unfolds during a period of momentous structural maladjustment, with government policies invariably exacerbating already deep structural impairment. It’s worth recalling that the Japanese enjoyed incredible economic growth and restructuring for more than three decades before blowing up their Credit system during the final four years of the boom. The Chinese situation is much more precarious.
I found myself this week thinking back to Dallas Fed President Robert McTeer’s 2001 comment, “Let's all hold hands and buy an SUV.” It was at the time a rather ridiculous central banker prescription for recovery from recession. Things, however, turned only more outrageous the following year, with the arrival of the Bernanke Doctrine at the Federal Reserve (and central banking more generally). Since then policy floodgates have been thrown wide open. What passes these days for reasonable policy would have been unimaginable fifteen years ago.
I’ve always felt the rating agencies got somewhat of a bum rap after the mortgage finance Bubble collapse. Sure, their ratings methodologies were flawed. In hindsight, Trillions of so-called “AAA” MBS were anything but pristine Credits. And, again looking back, it does appear a case of incompetence - if not worse. Yet reality at the time was one of home prices that had been inflating for years with a corresponding long spell of low delinquencies and minimal loan losses, along with GDP and incomes seemingly on a steady upward trajectory. The GSEs had come to dominate mortgage finance, while the Fed had market yields well under control. Washington surely wouldn’t allow a housing crisis, which ensured that markets were absolutely enamored with anything mortgage related. So the mortgage market enjoyed bountiful liquidity conditions, and it was just difficult for anyone – including the ratings firms – to see what might upset the apple cart.
The ratings agencies were basically oblivious to the key issue of deepening structural maladjustment throughout the mortgage finance Bubble period. They were inattentive to what a major de-leveraging episode could unleash. But so were the Federal Reserve, Wall Street and the world. Analysis and models did not incorporate latent (financial and economic) fragilities that had compounded from years of rapid credit growth and asset inflation. These days there’s a similar inability to comprehend the myriad global risks associated with the runaway Chinese Bubble.
The Moody’s downgrade spurred a bevy of articles this week examining China’s debt issues (i.e. “Total outstanding credit climbed to about 260% of GDP by the end of 2016, up from 160% in 2008”; “$9 trillion local bond market”; “debt has been increasing lately by an amount equal to about 15% of the country’s output each year”). Interestingly, I saw no mention that Chinese debt growth this year will likely approach $3.5 TN. Not only will this exceed U.S. 2017 debt growth, it will significantly surpass even peak annual U.S. debt expansion from the mortgage finance Bubble period.
May 23 – New York Times (Keith Bradsher): “China has gone on a spending spree, borrowing money to build cities, create manufacturing giants and nurture financial markets — money that has helped drive the economic powerhouse in recent years. But the debt-fueled binge now threatens to sap the energy of the world’s second-largest economy. With its economy maturing, China has to pile on ever more debt to keep its growth going, at a pace that could prove unsustainable. And the money is increasingly flowing through opaque channels that operate outside the regulated banking system, leaving China vulnerable to blowups. A major credit agency sounded the alarm on Wednesday, saying the steady buildup of debt would erode China’s financial strength in the years ahead… China’s debt has been increasing lately by an amount equal to about 15% of the country’s output each year, to keep the economy growing from 6.5% to 7%.”
The world has never witnessed such a Credit expansion. Moody’s noted the Chinese economy’s ongoing dependency on stimulus measures. I would argue that the key issue has evolved into China’s systemic addiction to ever-increasing expansions of “money” and Credit. The almost singular focus on debt to GDP ratios understates Chinese fragilities. In short, they succumbed to the debt trap: massive ongoing expansion of Credit - or bust. How sound is this Credit? How stable is the Chinese financial sector? And, perhaps most pressing, how vulnerable is their currency?
May 24 – New York Times (Keith Bradsher): “Moody’s… downgraded its rating of China’s sovereign debt one notch on Wednesday, citing concerns over growing debt in the country, which has the world’s second-largest economy. In recent years, as China’s stunning economic performance of past decades has become difficult to sustain, the country has used debt to fuel growth… When it comes to pumping money into a financial system, China has made the Federal Reserve in the United States and the European Central Bank look almost lackadaisical. It has expanded its broadly measured money supply by more than the rest of the world combined since the global financial crisis. Now it has 70% more money sloshing around its economy than the United States does, even though the American economy is bigger… China has accumulated its towering debt remarkably quickly. Goldman Sachs looked last year at how fast debt had accumulated relative to the size of the economy in 55 countries since 1960. It found that by the end of 2015, China was already in the top 2% of all credit expansions — and its debt shot up even higher last year. All of the other large expansions occurred in very small economies, some of which essentially lost control of their finances.”
Moody’s report focused on the risk of further leveraging. This is clearly an issue. Corporate debt is at very high levels ($18 TN, or 170% of GDP) and corporations (many with earnings and cash-flow issues) continue to pile on additional borrowings. Much of this debt is “non-productive,” as companies borrow to meet rising debt service and to plug expanding cash-flow deficits. Even more alarming, the bloated financial sector continues to balloon, issuing risky loans while creating new deposit “money”. From the NYT (Keith Bradsher) article above, China “has 70% more money sloshing around its economy than the United States.” Even more than “leverage,” China’s Wild West Risk-Intermediation Mayhem has created momentous systemic risk. Much of the risky “Terminal Phase” debt growth – financing inflated apartment values, uneconomic enterprises, economic maladjustment and chicanery – is being transformed into perceived safe and liquid “money” and money-like financial instruments.
The bulls were quick to downplay the importance of Moody’s action, stating both that China has minimal dependence on external financing and that the country still enjoys $3.0 TN of international reserve assets. I would view the issue differently. Yes, China has an extraordinarily large international reserve cushion, though holdings have declined $1.0 TN from June 2014. Most importantly, this large hoard has allowed authorities to prolong the Bubble and delay the type of harsh measures required to rein in Credit, speculation and now deeply imbedded boom-time psychology. Chinese savers are accumulating wealth they'd never dreamed of, backed by an economy with serious deficiencies and a financial sector of dubious standing.
Moody’s and others – certainly including Wall Street generally - handle China with kid gloves. Chinese authorities have backed away from needed reforms. The late-2015/early-2016 scare forced Beijing to effectively impose capital controls. Rather than promoting open and effective market-based mechanisms, the game has turned to only more zealous interventions: stabilize financial markets and promote rapid Credit growth necessary to sustain 6-7% GDP expansion, while cajoling and controlling to limit the capacity of all this Chinese “money” to flow out of the country.
Chinese authorities have also been pressing Chinese corporations and financial institutions to borrow in overseas markets. This kills two birds... China can offload some high-risk, late-cycle Credit to international investors, while also attracting needed financial inflows. The problem is that foreign investors fear capital control measures and don’t trust the renminbi. So much of this borrowing is done in dollar-denominated debt. And this large issuance of dollar-denominated debt only exacerbates systemic vulnerability to an abrupt renminbi devaluation.
May 24 – Reuters (Adam Jourdan and Samuel Shen): “The decision by Moody's… to downgrade China's credit rating is ‘illogical’ and overstates the levels of government debt, a commerce ministry researcher said in an editorial in the official People's Daily newspaper… Mei Xinyu, a researcher at China's Ministry of Commerce, wrote in a front page editorial of the paper's overseas edition the downgrade… overstated China's reliance on stimulus and the country's debt levels. Moody's downgraded China's credit ratings… for the first time in nearly 30 years, saying it expects the financial strength of the economy will erode in coming years as growth slows and debt continues to rise. China's Finance Ministry said… the downgrade overestimated the risks to the economy and was based on ‘inappropriate methodology’. China's state planner said debt risks were generally controllable.”
I’ve closely monitored China for years now. I recall reading some years back how Chinese officials had studied and learned from the Japanese Bubble experience. I’ve been waiting patiently for China to wrestle control of a precarious Credit Bubble. They have instead repeatedly taken tepid steps to curb various sectoral excesses – real estate, local government debt, stock market, corporate debt and, of late, shadow banking and insurance. Attempts to tamp down excess in one spot have only ensured it pops out elsewhere. The gravest policy misstep has been their failure to take a more systemic approach to Credit growth and asset inflation.
Basically, whenever tightening policies began to bite, Beijing would in short-order reverse course and stimulate. After a while, Chinese tightening measures lacked credibility. Moreover, the greater the inflation of Credit, financial institutions and perceived wealth, the more confident the Chinese population (including investors in real estate and financial assets, bankers, and corporate CEOs) became that Beijing would never tolerate a bust. Beijing these days essentially backs local government debt, the big state banks, corporate debt and apartment prices, not to mention $22 TN of “money” (M2) and trillions more of money-like “wealth management products” and such. The scope of Beijing’s contingent liabilities is unparalleled.
The Moody’s executive stated that “It is likely to be a very medium-term and gradual erosion of credit metrics.” The Credit “metric” that matters most is my hypothetical chart of systemic risk that turned parabolic with the rapid acceleration of Credit of rapidly deteriorating quality. This “Terminal Phase” Dynamic unfolds during a period of momentous structural maladjustment, with government policies invariably exacerbating already deep structural impairment. It’s worth recalling that the Japanese enjoyed incredible economic growth and restructuring for more than three decades before blowing up their Credit system during the final four years of the boom. The Chinese situation is much more precarious.
I found myself this week thinking back to Dallas Fed President Robert McTeer’s 2001 comment, “Let's all hold hands and buy an SUV.” It was at the time a rather ridiculous central banker prescription for recovery from recession. Things, however, turned only more outrageous the following year, with the arrival of the Bernanke Doctrine at the Federal Reserve (and central banking more generally). Since then policy floodgates have been thrown wide open. What passes these days for reasonable policy would have been unimaginable fifteen years ago.
Chinese authorities apparently believe they can grow out of debt and structural issues. No matter what, they can always stimulate. And no need to dig holes and then refill them. Just tear down old apartments and structures and fabricate glossy tall new ones. Throw “money” at any problem, always plenty freely available. And there’s always endless new enterprises and technologies to support. Lend money around the world so buyers can afford to buy Chinese products. The quantity of debt doesn’t really matter all that much; just keep growing.
May 21 – Bloomberg (Alfred Liu, Moxy Ying, and Enda Curran): “In 1997, the Asian financial crisis touched off a six-year property bust in Hong Kong that shaved more than two-thirds off prices and saddled the city with a stagnant economy and deflation. As Hong Kong gets ready to celebrate the 20th anniversary of its handover to China, which happened just as Asia’s crisis began to unfold, that pain seems all but forgotten. Prices are at all-time highs. Mortgage borrowing is booming. Developers are bidding up the cost of land to records. People young and old are lining up to buy newly built apartments. In short, the kind of fervor that preceded the last bust is back. That’s got experts fretting about the potential fallout should the city of about 7.4 million people experience another crash. By several measures, Hong Kong looks more vulnerable this time around.”
The global government finance Bubble has “gone to unimaginable extremes - and then doubled.” And there are various elements of previous Bubbles that have coalesced into something that somehow masks inherent fragilities and the risk of devastating collapse. I think back to the commercial real estate Bubbles, junk bonds and LBOs from the late-eighties. Bond market leverage (“government carry trade”) and derivatives (mortgage IOs and POs) from the early-nineties. There was Mexico, SE Asia and EM from the mid-nineties. Russia and LTCM fiascos later in the decade. The “tech” and corporate debt Bubbles, followed by the great mortgage finance Bubble. Individually, we’ve seen these kinds of things before, and we know they end badly. But as one gigantic, comprehensive, almost all-inclusive Bubble garnering the attention and support from policymakers around the world, it’s different enough this time that risks are dismissed or downplayed. Greed trumps fear.
I look around the world and see an unprecedented Bubble in Chinese Credit and investment. EM more generally has borrowed enormous amounts of debt, much of it in dollars and foreign currencies. European securities markets have inflated into historic Bubbles. Bond markets around the global are mispriced like never before. Almost everything providing a yield – from commercial real estate to corporate debt to dividend stocks – trades today at inflated values. Especially considering the Trillions that have been issued – and Trillions more in the offing – Treasury prices are detached from market pricing mechanisms.
The Trillions of central bank “money” that has spurred a historic Bubble in “risk free” securities has worked similar magic on risk assets, notably corporate Credit, equities and EM debt. The reckless abandon that took derivatives markets by storm during the mortgage finance Bubble period has gone to even greater extremes, this time on a global basis. Everywhere, it seems market perceptions are more detached than ever from reality. I continue to see confirmation that China is a major global Bubble weak link.
May 26 – Bloomberg (Chris Anstey and Enda Curran): “Chalk up another win for the visible hand in China’s markets over the principle of the private sector determining prices. A move by authorities to smooth out daily changes in the yuan’s fixing versus the dollar, taken on its own, suggests a shift away from any eventual float of the currency. The news comes in a week when officials were suspected of having intervened in the stock market to limit damage to sentiment after Moody’s… downgraded China’s sovereign credit rating. Both developments underscore the importance the Communist Party leadership places on specific outcomes, rather than the embrace of free markets that Western nations once pressed on China. President Xi Jinping has every interest in avoiding turmoil in the currency and equity markets this year as he oversees a critical reshuffle of top officials. While relatively minor, the change ‘is surely a negative step for financial openness,’ said George Magnus, an associate at Oxford University’s China Centre and former adviser at UBS Group AG. It’s ‘another step by Xi Jinping and the leadership to exert control where the deference to market forces was making at least limited headway.’”
May 25 – Wall Street Journal (Lingling Wei and Saumya Vaishampayan): “China’s central bank is effectively anchoring the yuan to the dollar, a policy twist that has helped stabilize the currency in a year of political transition and market jitters about China’s economic management. The yuan weakened more than 6% against the dollar in 2016; this year, it is up roughly 1%, and the expectation that the currency will fluctuate—a gauge known as implied volatility—is around its lowest in nearly two years.”
After a brief bout of selling in Chinese and Asian equities, there was little market reaction to the Moody’s downgrade. Perhaps telling, Chinese authorities revalued the renminbi higher both Thursday and Friday, with the Chinese currency gaining a notable 0.43% for the week. With my belief that China’s currency may prove their system’s weak link, I find it intriguing that officials would be compelled to move immediately to manipulate its value higher. I believe Beijing prefers a weaker currency to support its massive export sector and to stoke moderately higher inflation. And while their currency policy may be somewhat posturing to the new U.S. administration, I suspect they are more fearful of an unwind of foreign-financed leveraged “carry trades” that have accumulated in higher-yielding Chinese Credit. In the past I’ve referred to the Chinese renminbi as a “currency peg on steroids.” There’s never been an EM currency with the potential for such massive outflows from domestic savers and international speculators alike.
May 26 – Bloomberg: “For ever yuan that the People’s Bank of China injects into the nation’s financial system, it’s up to the banks to decide how far they stretch it in the form of loans to the economy. Right now, they’re working overtime. China’s money multiplier -- the ratio between the broadest measure of money in use, M2, and base money created by the central bank -- has climbed to the highest on records that date to 1997, data compiled by Bloomberg show. Each yuan of base money is being turned into more than 5 in the real economy. The turbocharged multiplier is helping compensate for the drainage of cash caused by Chinese savers and companies venturing abroad. It’s also helping economic growth…”
For the Week:
The S&P500 jumped 1.4% (up 7.9% y-t-d), and the Dow rose 1.3% (up 6.7%). The Utilities surged 2.4% (up 8.6%). The Banks gained 0.9% (down 1.0%), and the Broker/Dealers rose 1.5% (up 4.0%). The Transports surged 3.3% (up 1.5%). The S&P 400 Midcaps added 0.9% (up 4.0%), and the small cap Russell 2000 gained 1.1% (up 1.9%). The Nasdaq100 advanced 2.4% (up 19.0%), and the Morgan Stanley High Tech index jumped 2.2% (up 21.4%). The Semiconductors rose 2.3% (up 19.7%). The Biotechs declined 1.1% (up 16.0%). Though bullion gained $11, the HUI gold index fell 1.2% (up 6.8%).
Three-month Treasury bill rates ended the week at 91 bps. Two-year government yields added two bps to 1.30% (up 11bps y-t-d). Five-year T-note yields rose one basis point to 1.79% (down 14bps). Ten-year Treasury yields added one basis point to 2.25% (down 20bps). Long bond yields increased two bps to 2.91% (down 15bps).
Greek 10-year yields jumped 29 bps to 5.91% (down 111bps y-t-d). Ten-year Portuguese yields declined four bps to 3.14% (down 60bps). Italian 10-year yields fell four bps to 2.10% (up 29bps). Spain's 10-year yields declined four bps to 1.54% (up 16bps). German bund yields fell four bps to 0.33% (up 13bps). French yields dropped five bps to 0.76% (up 8bps). The French to German 10-year bond spread narrowed one to 43 bps. U.K. 10-year gilt yields dropped eight bps to 1.01% (down 22bps). U.K.'s FTSE equities index gained 1.0% (up 5.7%).
Japan's Nikkei 225 equities index added 0.5% (up 3.0% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.04% (unchanged). France's CAC40 increased 0.2% (up 9.8%). The German DAX equities index slipped 0.3% (up 9.8%). Spain's IBEX 35 equities index rose 0.6% (up 16.6%). Italy's FTSE MIB index fell 1.7% (up 10.3%). EM equities were mostly higher. Brazil's Bovespa index recovered 2.3% (up 6.4%). Mexico's Bolsa gained 1.2% (up 8.8%). South Korea's Kospi jumped 2.9% (up 16.2%). India’s Sensex equities index rose 1.8% (up 16.5%). China’s Shanghai Exchange increased 0.6% (up 0.2%). Turkey's Borsa Istanbul National 100 index surged 2.5% (up 24.8%). Russia's MICEX equities index fell 1.4% (down 13.4%).
Junk bond mutual funds saw outflows of $568 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates dropped seven bps to 3.95% (up 37bps y-o-y). Fifteen-year rates fell eight bps to 3.19% (up 36bps). The five-year hybrid ARM rate declined six bps to 3.07% (up 23bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.06% (up 31bps).
Federal Reserve Credit last week declined $4.5bn to $4.435 TN. Over the past year, Fed Credit gained $3.3bn (up 0.1%). Fed Credit inflated $1.624 TN, or 58%, over the past 237 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $10.0bn last week to $3.244 TN. "Custody holdings" were up $26.1bn y-o-y, or 0.8%.
M2 (narrow) "money" supply last week rose $25.2bn to a record $13.485 TN. "Narrow money" expanded $750bn, or 5.9%, over the past year. For the week, Currency increased $2.6bn. Total Checkable Deposits surged $50.7bn, while Savings Deposits fell $26.1bn. Small Time Deposits added $2bn. Retail Money Funds fell $4.0bn.
Total money market fund assets gained $3.7bn to $2.649 TN. Money Funds fell $85bn y-o-y (3.1%).
Total Commercial Paper increased $0.7bn to $987bn. CP declined $92bn y-o-y, or 8.5%.
Currency Watch:
The U.S. dollar index recovered 0.3% to 97.44 (down 4.8% y-t-d). For the week on the upside, the South African rand increased 2.7%, the New Zealand dollar 2.0%, the Mexican peso 1.1%, the South Korean won 0.6%, the Canadian dollar 0.5%, the Swedish krona 0.5%, and the Singapore dollar 0.3%. For the week on the downside, the British pound declined 1.8%, the euro 0.2%, the Brazilian real 0.2%, the Australian dollar 0.2%, the Swiss franc 0.1%, and the Japanese yen 0.1%. The Chinese renminbi gained 0.43% versus the dollar this week (up 1.31% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index increased 0.4% (down 3.3% y-t-d). Spot Gold added 0.9% to $1,267 (up 9.9%). Silver jumped 2.8% to $17.32 (up 8.4%). Crude fell 63 cents to $49.80 (down 8%). Gasoline slipped 0.5% (down 2%), while Natural Gas gained 1.8% (down 12%). Copper fell 0.9% (up 2%). Wheat increased 0.7% (up 7%). Corn added 0.5% (up 6%).
Trump Administration Watch:
May 25 – Bloomberg (Laura Litvan): “Senate Republicans are weighing a two-step process to replace Obamacare that would postpone a repeal until 2020, as they seek to draft a more modest version than a House plan that nonpartisan analysts said would undermine some insurance markets. Republicans -- in the early stages of private talks on the Senate plan -- say they may first take action to stabilize premium costs in Obamacare’s insurance-purchasing exchanges in 2018 and 2019. Major insurers have said they will leave the individual market in vast regions of states including North Dakota, Iowa and Missouri.”
May 26 – New York Times (Jennifer Steinhaurer and Robert Pear): “Shortly after President Trump took office, Senator Mitch McConnell of Kentucky, the majority leader, met privately with his colleagues to discuss the Republican agenda. Repealing the Affordable Care Act was at the top, he said. But replacing it would be really hard. Mr. McConnell was right. The many meetings Republicans held to discuss a Senate health care bill have exposed deep fissures within the party that are almost as large as the differences between Republicans and Democrats. Elements of a bill that passed the House this month have divided Republicans. Mr. McConnell faces an increasingly onerous math problem. He can afford to lose only two Republicans if he is to get a bill through the Senate, and that would require the help of Vice President Mike Pence, who would have to cast the tiebreaking vote. But at least three senators in the party are diametrically opposed to the views of at least another three, so the path to agreement is narrow.”
May 23 – Bloomberg (Erik Wasson, Steven T. Dennis, and John McCormick): “President Donald Trump made an impassioned plea for support from minority voters during his election campaign by asking them, ‘What do you have to lose?’ On Tuesday, they got an answer, as did many of the rural, poor and working-class voters who propelled him into office. In his fiscal 2018 budget proposal, Trump asked Congress for $3.6 trillion in spending cuts that would mean steep reductions in food stamps, Medicaid health insurance payments, disability benefits, low-income housing assistance and block grants that fund meals-on-wheels for the elderly. The plan found little favor in Congress, even among Republican lawmakers from districts and states that gave Trump wide margins in the November election, and it had Democrats talking about a deal on spending that would exclude the White House. The administration was undeterred.”
May 22 – Politico (Rachael Bade and Josh Dawsey): “Paul Ryan and the White House are barreling toward a tax reform show-down — a faceoff that’s becoming all but inevitable as the speaker continues selling a tax plan rejected by Trump officials. At issue is a controversial pillar of the House GOP tax plan that effectively hikes taxes on imports. Top administration officials from Treasury Secretary Steven Mnuchin to chief economic adviser Gary Cohn have warned the speaker that they’re not exactly fans of the so-called border adjustment tax — hoping Ryan would take a hint and change direction. But the Wisconsin Republican is refusing to back off, arguing in recent days that it’s ‘the smart way to go.’”
China Bubble Watch:
May 23 – Bloomberg: “Moody’s… cut its rating on China’s debt for the first time since 1989, challenging the view that the nation’s leadership will be able to rein in leverage while maintaining the pace of economic growth. Stocks and the yuan slipped in early trading after Moody’s reduced the rating to A1 from Aa3… Moody’s cited the likelihood of a ‘material rise’ in economy-wide debt and the burden that will place on the state’s finances, while also changing the outlook to stable from negative. It’s ‘absolutely groundless’ for Moody’s to argue that local government financing vehicles and state-owned enterprise debt will swell the government’s contingent liabilities, according to… the Ministry of Finance. The ratings company has underestimated the capability of the government to deepen reform and boost demand, the ministry said… Total outstanding credit climbed to about 260% of GDP by the end of 2016, up from 160% in 2008…”
May 22 – Wall Street Journal (Shen Hong): “China’s $1.7 trillion government-bond market is turning ever weirder. In a fresh sign of the nerves among investors caused by Beijing’s campaign this spring to make Chinese markets less risky, the yield on seven-year government bonds rose to 3.79% on Monday, above the yield on both five-year and 10-year bonds. The highly unusual move means that China’s government-bond yield curve now resembles a triangle, with the seven-year yield at its highest since October 2014… The shift comes less than two weeks after the government-bond yield curve became inverted for the first time on record…”
May 21 – Bloomberg (Alfred Liu, Moxy Ying, and Enda Curran): “In 1997, the Asian financial crisis touched off a six-year property bust in Hong Kong that shaved more than two-thirds off prices and saddled the city with a stagnant economy and deflation. As Hong Kong gets ready to celebrate the 20th anniversary of its handover to China, which happened just as Asia’s crisis began to unfold, that pain seems all but forgotten. Prices are at all-time highs. Mortgage borrowing is booming. Developers are bidding up the cost of land to records. People young and old are lining up to buy newly built apartments. In short, the kind of fervor that preceded the last bust is back. That’s got experts fretting about the potential fallout should the city of about 7.4 million people experience another crash. By several measures, Hong Kong looks more vulnerable this time around.”
The global government finance Bubble has “gone to unimaginable extremes - and then doubled.” And there are various elements of previous Bubbles that have coalesced into something that somehow masks inherent fragilities and the risk of devastating collapse. I think back to the commercial real estate Bubbles, junk bonds and LBOs from the late-eighties. Bond market leverage (“government carry trade”) and derivatives (mortgage IOs and POs) from the early-nineties. There was Mexico, SE Asia and EM from the mid-nineties. Russia and LTCM fiascos later in the decade. The “tech” and corporate debt Bubbles, followed by the great mortgage finance Bubble. Individually, we’ve seen these kinds of things before, and we know they end badly. But as one gigantic, comprehensive, almost all-inclusive Bubble garnering the attention and support from policymakers around the world, it’s different enough this time that risks are dismissed or downplayed. Greed trumps fear.
I look around the world and see an unprecedented Bubble in Chinese Credit and investment. EM more generally has borrowed enormous amounts of debt, much of it in dollars and foreign currencies. European securities markets have inflated into historic Bubbles. Bond markets around the global are mispriced like never before. Almost everything providing a yield – from commercial real estate to corporate debt to dividend stocks – trades today at inflated values. Especially considering the Trillions that have been issued – and Trillions more in the offing – Treasury prices are detached from market pricing mechanisms.
The Trillions of central bank “money” that has spurred a historic Bubble in “risk free” securities has worked similar magic on risk assets, notably corporate Credit, equities and EM debt. The reckless abandon that took derivatives markets by storm during the mortgage finance Bubble period has gone to even greater extremes, this time on a global basis. Everywhere, it seems market perceptions are more detached than ever from reality. I continue to see confirmation that China is a major global Bubble weak link.
May 26 – Bloomberg (Chris Anstey and Enda Curran): “Chalk up another win for the visible hand in China’s markets over the principle of the private sector determining prices. A move by authorities to smooth out daily changes in the yuan’s fixing versus the dollar, taken on its own, suggests a shift away from any eventual float of the currency. The news comes in a week when officials were suspected of having intervened in the stock market to limit damage to sentiment after Moody’s… downgraded China’s sovereign credit rating. Both developments underscore the importance the Communist Party leadership places on specific outcomes, rather than the embrace of free markets that Western nations once pressed on China. President Xi Jinping has every interest in avoiding turmoil in the currency and equity markets this year as he oversees a critical reshuffle of top officials. While relatively minor, the change ‘is surely a negative step for financial openness,’ said George Magnus, an associate at Oxford University’s China Centre and former adviser at UBS Group AG. It’s ‘another step by Xi Jinping and the leadership to exert control where the deference to market forces was making at least limited headway.’”
May 25 – Wall Street Journal (Lingling Wei and Saumya Vaishampayan): “China’s central bank is effectively anchoring the yuan to the dollar, a policy twist that has helped stabilize the currency in a year of political transition and market jitters about China’s economic management. The yuan weakened more than 6% against the dollar in 2016; this year, it is up roughly 1%, and the expectation that the currency will fluctuate—a gauge known as implied volatility—is around its lowest in nearly two years.”
After a brief bout of selling in Chinese and Asian equities, there was little market reaction to the Moody’s downgrade. Perhaps telling, Chinese authorities revalued the renminbi higher both Thursday and Friday, with the Chinese currency gaining a notable 0.43% for the week. With my belief that China’s currency may prove their system’s weak link, I find it intriguing that officials would be compelled to move immediately to manipulate its value higher. I believe Beijing prefers a weaker currency to support its massive export sector and to stoke moderately higher inflation. And while their currency policy may be somewhat posturing to the new U.S. administration, I suspect they are more fearful of an unwind of foreign-financed leveraged “carry trades” that have accumulated in higher-yielding Chinese Credit. In the past I’ve referred to the Chinese renminbi as a “currency peg on steroids.” There’s never been an EM currency with the potential for such massive outflows from domestic savers and international speculators alike.
May 26 – Bloomberg: “For ever yuan that the People’s Bank of China injects into the nation’s financial system, it’s up to the banks to decide how far they stretch it in the form of loans to the economy. Right now, they’re working overtime. China’s money multiplier -- the ratio between the broadest measure of money in use, M2, and base money created by the central bank -- has climbed to the highest on records that date to 1997, data compiled by Bloomberg show. Each yuan of base money is being turned into more than 5 in the real economy. The turbocharged multiplier is helping compensate for the drainage of cash caused by Chinese savers and companies venturing abroad. It’s also helping economic growth…”
For the Week:
The S&P500 jumped 1.4% (up 7.9% y-t-d), and the Dow rose 1.3% (up 6.7%). The Utilities surged 2.4% (up 8.6%). The Banks gained 0.9% (down 1.0%), and the Broker/Dealers rose 1.5% (up 4.0%). The Transports surged 3.3% (up 1.5%). The S&P 400 Midcaps added 0.9% (up 4.0%), and the small cap Russell 2000 gained 1.1% (up 1.9%). The Nasdaq100 advanced 2.4% (up 19.0%), and the Morgan Stanley High Tech index jumped 2.2% (up 21.4%). The Semiconductors rose 2.3% (up 19.7%). The Biotechs declined 1.1% (up 16.0%). Though bullion gained $11, the HUI gold index fell 1.2% (up 6.8%).
Three-month Treasury bill rates ended the week at 91 bps. Two-year government yields added two bps to 1.30% (up 11bps y-t-d). Five-year T-note yields rose one basis point to 1.79% (down 14bps). Ten-year Treasury yields added one basis point to 2.25% (down 20bps). Long bond yields increased two bps to 2.91% (down 15bps).
Greek 10-year yields jumped 29 bps to 5.91% (down 111bps y-t-d). Ten-year Portuguese yields declined four bps to 3.14% (down 60bps). Italian 10-year yields fell four bps to 2.10% (up 29bps). Spain's 10-year yields declined four bps to 1.54% (up 16bps). German bund yields fell four bps to 0.33% (up 13bps). French yields dropped five bps to 0.76% (up 8bps). The French to German 10-year bond spread narrowed one to 43 bps. U.K. 10-year gilt yields dropped eight bps to 1.01% (down 22bps). U.K.'s FTSE equities index gained 1.0% (up 5.7%).
Japan's Nikkei 225 equities index added 0.5% (up 3.0% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.04% (unchanged). France's CAC40 increased 0.2% (up 9.8%). The German DAX equities index slipped 0.3% (up 9.8%). Spain's IBEX 35 equities index rose 0.6% (up 16.6%). Italy's FTSE MIB index fell 1.7% (up 10.3%). EM equities were mostly higher. Brazil's Bovespa index recovered 2.3% (up 6.4%). Mexico's Bolsa gained 1.2% (up 8.8%). South Korea's Kospi jumped 2.9% (up 16.2%). India’s Sensex equities index rose 1.8% (up 16.5%). China’s Shanghai Exchange increased 0.6% (up 0.2%). Turkey's Borsa Istanbul National 100 index surged 2.5% (up 24.8%). Russia's MICEX equities index fell 1.4% (down 13.4%).
Junk bond mutual funds saw outflows of $568 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates dropped seven bps to 3.95% (up 37bps y-o-y). Fifteen-year rates fell eight bps to 3.19% (up 36bps). The five-year hybrid ARM rate declined six bps to 3.07% (up 23bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.06% (up 31bps).
Federal Reserve Credit last week declined $4.5bn to $4.435 TN. Over the past year, Fed Credit gained $3.3bn (up 0.1%). Fed Credit inflated $1.624 TN, or 58%, over the past 237 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $10.0bn last week to $3.244 TN. "Custody holdings" were up $26.1bn y-o-y, or 0.8%.
M2 (narrow) "money" supply last week rose $25.2bn to a record $13.485 TN. "Narrow money" expanded $750bn, or 5.9%, over the past year. For the week, Currency increased $2.6bn. Total Checkable Deposits surged $50.7bn, while Savings Deposits fell $26.1bn. Small Time Deposits added $2bn. Retail Money Funds fell $4.0bn.
Total money market fund assets gained $3.7bn to $2.649 TN. Money Funds fell $85bn y-o-y (3.1%).
Total Commercial Paper increased $0.7bn to $987bn. CP declined $92bn y-o-y, or 8.5%.
Currency Watch:
The U.S. dollar index recovered 0.3% to 97.44 (down 4.8% y-t-d). For the week on the upside, the South African rand increased 2.7%, the New Zealand dollar 2.0%, the Mexican peso 1.1%, the South Korean won 0.6%, the Canadian dollar 0.5%, the Swedish krona 0.5%, and the Singapore dollar 0.3%. For the week on the downside, the British pound declined 1.8%, the euro 0.2%, the Brazilian real 0.2%, the Australian dollar 0.2%, the Swiss franc 0.1%, and the Japanese yen 0.1%. The Chinese renminbi gained 0.43% versus the dollar this week (up 1.31% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index increased 0.4% (down 3.3% y-t-d). Spot Gold added 0.9% to $1,267 (up 9.9%). Silver jumped 2.8% to $17.32 (up 8.4%). Crude fell 63 cents to $49.80 (down 8%). Gasoline slipped 0.5% (down 2%), while Natural Gas gained 1.8% (down 12%). Copper fell 0.9% (up 2%). Wheat increased 0.7% (up 7%). Corn added 0.5% (up 6%).
Trump Administration Watch:
May 25 – Bloomberg (Laura Litvan): “Senate Republicans are weighing a two-step process to replace Obamacare that would postpone a repeal until 2020, as they seek to draft a more modest version than a House plan that nonpartisan analysts said would undermine some insurance markets. Republicans -- in the early stages of private talks on the Senate plan -- say they may first take action to stabilize premium costs in Obamacare’s insurance-purchasing exchanges in 2018 and 2019. Major insurers have said they will leave the individual market in vast regions of states including North Dakota, Iowa and Missouri.”
May 26 – New York Times (Jennifer Steinhaurer and Robert Pear): “Shortly after President Trump took office, Senator Mitch McConnell of Kentucky, the majority leader, met privately with his colleagues to discuss the Republican agenda. Repealing the Affordable Care Act was at the top, he said. But replacing it would be really hard. Mr. McConnell was right. The many meetings Republicans held to discuss a Senate health care bill have exposed deep fissures within the party that are almost as large as the differences between Republicans and Democrats. Elements of a bill that passed the House this month have divided Republicans. Mr. McConnell faces an increasingly onerous math problem. He can afford to lose only two Republicans if he is to get a bill through the Senate, and that would require the help of Vice President Mike Pence, who would have to cast the tiebreaking vote. But at least three senators in the party are diametrically opposed to the views of at least another three, so the path to agreement is narrow.”
May 23 – Bloomberg (Erik Wasson, Steven T. Dennis, and John McCormick): “President Donald Trump made an impassioned plea for support from minority voters during his election campaign by asking them, ‘What do you have to lose?’ On Tuesday, they got an answer, as did many of the rural, poor and working-class voters who propelled him into office. In his fiscal 2018 budget proposal, Trump asked Congress for $3.6 trillion in spending cuts that would mean steep reductions in food stamps, Medicaid health insurance payments, disability benefits, low-income housing assistance and block grants that fund meals-on-wheels for the elderly. The plan found little favor in Congress, even among Republican lawmakers from districts and states that gave Trump wide margins in the November election, and it had Democrats talking about a deal on spending that would exclude the White House. The administration was undeterred.”
May 22 – Politico (Rachael Bade and Josh Dawsey): “Paul Ryan and the White House are barreling toward a tax reform show-down — a faceoff that’s becoming all but inevitable as the speaker continues selling a tax plan rejected by Trump officials. At issue is a controversial pillar of the House GOP tax plan that effectively hikes taxes on imports. Top administration officials from Treasury Secretary Steven Mnuchin to chief economic adviser Gary Cohn have warned the speaker that they’re not exactly fans of the so-called border adjustment tax — hoping Ryan would take a hint and change direction. But the Wisconsin Republican is refusing to back off, arguing in recent days that it’s ‘the smart way to go.’”
China Bubble Watch:
May 23 – Bloomberg: “Moody’s… cut its rating on China’s debt for the first time since 1989, challenging the view that the nation’s leadership will be able to rein in leverage while maintaining the pace of economic growth. Stocks and the yuan slipped in early trading after Moody’s reduced the rating to A1 from Aa3… Moody’s cited the likelihood of a ‘material rise’ in economy-wide debt and the burden that will place on the state’s finances, while also changing the outlook to stable from negative. It’s ‘absolutely groundless’ for Moody’s to argue that local government financing vehicles and state-owned enterprise debt will swell the government’s contingent liabilities, according to… the Ministry of Finance. The ratings company has underestimated the capability of the government to deepen reform and boost demand, the ministry said… Total outstanding credit climbed to about 260% of GDP by the end of 2016, up from 160% in 2008…”
May 22 – Wall Street Journal (Shen Hong): “China’s $1.7 trillion government-bond market is turning ever weirder. In a fresh sign of the nerves among investors caused by Beijing’s campaign this spring to make Chinese markets less risky, the yield on seven-year government bonds rose to 3.79% on Monday, above the yield on both five-year and 10-year bonds. The highly unusual move means that China’s government-bond yield curve now resembles a triangle, with the seven-year yield at its highest since October 2014… The shift comes less than two weeks after the government-bond yield curve became inverted for the first time on record…”
May 24 – Bloomberg: “China’s first credit rating downgrade by Moody’s… since 1989 couldn’t have come at a worse time for the nation’s companies, which have never been more reliant on the overseas bond market for funding. While Chinese companies’ foreign-currency debt is only a fraction of the $9 trillion local bond market, China Inc. is on pace for record dollar bond sales this year after the authorities’ crackdown on financial leverage drove up borrowing costs at home. Overseas borrowing has also been part of the government’s strategy to encourage capital inflows in a bid to ease the depreciation pressure on the yuan.”
May 24 – Bloomberg: “Hong Kong saw its debt rating cut by Moody’s… hours after China’s downgrade, highlighting potential risks from a tightening economic integration. The former British colony has seen not only its property and stock markets increasingly entwined with the world’s second-largest economy, but its government as well. Moody’s cut the rating on local- and foreign-currency issuances to Aa2 from Aa1… That’s the territory’s first cut in ranking by Moody’s since the throes of the Asian financial crisis in 1998… ‘Credit trends in China will continue to have a significant impact on Hong Kong’s credit profile due to close and tightening economic, financial and political linkages with the mainland,’ Moody’s said… Closer financial ties ‘risk introducing more direct contagion channels between China’s and Hong Kong’s financial markets.’”
Europe Watch:
May 23 – Bloomberg (Alessandro Speciale and Piotr Skolimowski): “Mario Draghi’s right-hand man and left-hand man may have some differences to sort out. Peter Praet and Benoit Coeure, arguably the two most influential members of the European Central Bank after the president, have struck contrasting tones about how to communicate the institution’s intentions. Both are wary of how markets will react to the ECB’s first step toward unwinding stimulus, but while Praet advocates caution and maintaining the easing bias enshrined in current guidance, Coeure has warned that moving too slowly could eventually lead to a bigger shock.”
May 22 – Bloomberg (Viktoria Dendrinou, Corina Ruhe, and Joao Lima): “Euro-area finance ministers gathering in Brussels… failed to break an impasse on debt relief for Greece, delaying the completion of the country’s bailout review and the disbursement of fresh loans needed to repay obligations in July. After nearly eight hours of talks and multiple draft compromises, Athens and its creditors couldn’t reach an accord that would ease Greece’s debt and that would convince the International Monetary Fund to agree to help finance the country’s bailout. ‘The Eurogroup held an in-depth discussion on the sustainability of Greece’s public debt but did not reach an overall agreement,’ said Jeroen Dijsselbloem, the Dutch finance minister who presides over meetings with his euro-area counterparts. Work will continue in the coming weeks…”
May 24 – Bloomberg (Jana Randow, Alessandro Speciale, and Piotr Skolimowski): “Mario Draghi is leading a push to stamp out any speculation that the European Central Bank might raise interest rates before it ends quantitative easing. …The ECB president reaffirmed the ‘logic’ of the current sequencing, arguing that the unwarranted side effects of negative rates are likely to be less of a problem than those potentially produced by asset purchases. Along with his deputy Vitor Constancio and Executive Board member Peter Praet, he urged investors waiting for a signal on the path of policy normalization to be patient, signaling that June might not be the time for big decisions.”
May 23 – Bloomberg (Piotr Skolimowski and Alessandro Speciale): “The German economy is firing on all cylinders, and a surge in sentiment suggests it has staying power. Business confidence rose to the highest since 1991 this month, while manufacturers saw the fastest growth in six years amid a surge in orders. Consumer spending, investment and exports all contributed to growth in the first quarter, helping the economy to expand 0.6%, its strongest performance in a year.”
Brexit Watch:
May 22 – Bloomberg (Joe Mayes): “European Union ministers finalized their Brexit negotiating position a day after the U.K. threatened to quit talks on its departure unless the bloc drops its demands for a divorce payment as high as 100 billion euros ($112bn). Governments of the 27 remaining nations approved their mandate for the EU’s chief negotiator Michel Barnier at a two-hour meeting in Brussels. The size of Britain’s exit bill, and which types of negotiations can begin before it is determined, has been a source of debate for weeks and will prove an early test of the ability of both sides to find common ground. Even a 1 billion pound settlement would be ‘a lot of money,’ Brexit Secretary David Davis said…”
Global Bubble Watch:
May 23 – Bloomberg (Lisa Pham): “Just as China embarks on a massive Silk Road development funding initiative, a survey of business practices suggests corruption in Asia is only getting worse, adding potential potholes to new deals. Despite anti-graft initiatives under way from China to India, the survey by EY -- formerly known as Ernst & Young -- found that ‘ethical standards are not improving.’ Some 63% of respondents said that bribery or corrupt practices ‘happen widely’ in their country, up from 60% in 2015. And 35% cited bribery as ‘common practice’ to win contracts in their industry or sector, up from 31% in the 2015 survey.”
May 22 – Reuters (A. Ananthalakshmi and Mai Nguyen): “Japan and other members of the Trans-Pacific Partnership agreed… to pursue their trade deal without the United States as the Trump administration's ‘America First’ policy created tension at a meeting of Asia-Pacific countries. Turmoil over global trade negotiations was laid bare at a meeting of the Asia-Pacific Economic Cooperation (APEC) forum, which failed to agree on its usual joint statement after U.S. opposition to wording on fighting protectionism. The meeting in Hanoi, Vietnam, was the biggest trade gathering since U.S. President Donald Trump upended the old order, arguing that multilateral free-trade agreements were costing American jobs and that he wanted to cut new deals.”
Fixed Income Bubble Watch:
May 23 – Financial Times (Eric Platt): “A month after the International Monetary Fund sounded the alarm over a debt binge by US companies, investors are expressing confidence in the sector and have been eager buyers of tens of billions of new bond offerings… Monica Erickson, a portfolio manager with asset manager DoubleLine Capital, says for many investors ‘leverage is less of a concern with earnings growth’. Outstanding US corporate debt has swelled more than 275% over the past two decades to $8.5tn, with credit ratings broadly deteriorating over that period. In 1996, roughly two-thirds of groups rated by S&P Global held an investment-grade rating. That has fallen to less than 45% today…”
Federal Reserve Watch:
May 25 – Bloomberg (Jeanna Smialek and Christopher Condon): “Most Federal Reserve officials judged ‘it would soon be appropriate’ to tighten monetary policy again and backed a plan that would gradually shrink their $4.5 trillion balance sheet. ‘Most participants judged that if economic information came in about in line with their expectations it would soon be appropriate for the committee to take another step in removing some policy accommodation,’ according to minutes from the Federal Open Market Committee’s May 2-3 gathering… The statement points toward a hike as soon as the Fed’s meeting in mid-June, though FOMC voters added the caveat that ‘it would be prudent’ to wait for evidence that a recent slowdown in economic activity had been transitory.”
May 21 – Wall Street Journal (Katy Burne): “Federal Reserve officials grappling with the legacy of expansive stimulus would find it difficult to return to the central bank’s precrisis role on the sidelines of financial markets, analysts and central-bank watchers say. A long list of programs adopted to help foster economic growth, along with changes in money markets and bank regulation, have vastly expanded the Fed’s balance sheet and its involvement in markets. The Fed’s assets now total $4.5 trillion, up from less than $1 trillion a decade ago. Since 2013 the central bank has become one of the largest traders with U.S. taxable money-market funds… Many analysts and investors worry that significantly rolling back the Fed’s expansion… risks disrupting markets and the economy at a time when growth remains tepid. It would also reduce the connections the institution has built with a diverse set of Wall Street firms, beyond the group of banks it dealt with before the crisis. The Fed has become ‘like an octopus,’ said Jeffrey Cleveland, chief economist at Payden & Rygel… ‘Once you get the power and you are influencing all these markets, do you really want to retreat from all that?’”
U.S. Bubble Watch:
May 24 – Bloomberg: “Hong Kong saw its debt rating cut by Moody’s… hours after China’s downgrade, highlighting potential risks from a tightening economic integration. The former British colony has seen not only its property and stock markets increasingly entwined with the world’s second-largest economy, but its government as well. Moody’s cut the rating on local- and foreign-currency issuances to Aa2 from Aa1… That’s the territory’s first cut in ranking by Moody’s since the throes of the Asian financial crisis in 1998… ‘Credit trends in China will continue to have a significant impact on Hong Kong’s credit profile due to close and tightening economic, financial and political linkages with the mainland,’ Moody’s said… Closer financial ties ‘risk introducing more direct contagion channels between China’s and Hong Kong’s financial markets.’”
Europe Watch:
May 23 – Bloomberg (Alessandro Speciale and Piotr Skolimowski): “Mario Draghi’s right-hand man and left-hand man may have some differences to sort out. Peter Praet and Benoit Coeure, arguably the two most influential members of the European Central Bank after the president, have struck contrasting tones about how to communicate the institution’s intentions. Both are wary of how markets will react to the ECB’s first step toward unwinding stimulus, but while Praet advocates caution and maintaining the easing bias enshrined in current guidance, Coeure has warned that moving too slowly could eventually lead to a bigger shock.”
May 22 – Bloomberg (Viktoria Dendrinou, Corina Ruhe, and Joao Lima): “Euro-area finance ministers gathering in Brussels… failed to break an impasse on debt relief for Greece, delaying the completion of the country’s bailout review and the disbursement of fresh loans needed to repay obligations in July. After nearly eight hours of talks and multiple draft compromises, Athens and its creditors couldn’t reach an accord that would ease Greece’s debt and that would convince the International Monetary Fund to agree to help finance the country’s bailout. ‘The Eurogroup held an in-depth discussion on the sustainability of Greece’s public debt but did not reach an overall agreement,’ said Jeroen Dijsselbloem, the Dutch finance minister who presides over meetings with his euro-area counterparts. Work will continue in the coming weeks…”
May 24 – Bloomberg (Jana Randow, Alessandro Speciale, and Piotr Skolimowski): “Mario Draghi is leading a push to stamp out any speculation that the European Central Bank might raise interest rates before it ends quantitative easing. …The ECB president reaffirmed the ‘logic’ of the current sequencing, arguing that the unwarranted side effects of negative rates are likely to be less of a problem than those potentially produced by asset purchases. Along with his deputy Vitor Constancio and Executive Board member Peter Praet, he urged investors waiting for a signal on the path of policy normalization to be patient, signaling that June might not be the time for big decisions.”
May 23 – Bloomberg (Piotr Skolimowski and Alessandro Speciale): “The German economy is firing on all cylinders, and a surge in sentiment suggests it has staying power. Business confidence rose to the highest since 1991 this month, while manufacturers saw the fastest growth in six years amid a surge in orders. Consumer spending, investment and exports all contributed to growth in the first quarter, helping the economy to expand 0.6%, its strongest performance in a year.”
Brexit Watch:
May 22 – Bloomberg (Joe Mayes): “European Union ministers finalized their Brexit negotiating position a day after the U.K. threatened to quit talks on its departure unless the bloc drops its demands for a divorce payment as high as 100 billion euros ($112bn). Governments of the 27 remaining nations approved their mandate for the EU’s chief negotiator Michel Barnier at a two-hour meeting in Brussels. The size of Britain’s exit bill, and which types of negotiations can begin before it is determined, has been a source of debate for weeks and will prove an early test of the ability of both sides to find common ground. Even a 1 billion pound settlement would be ‘a lot of money,’ Brexit Secretary David Davis said…”
Global Bubble Watch:
May 23 – Bloomberg (Lisa Pham): “Just as China embarks on a massive Silk Road development funding initiative, a survey of business practices suggests corruption in Asia is only getting worse, adding potential potholes to new deals. Despite anti-graft initiatives under way from China to India, the survey by EY -- formerly known as Ernst & Young -- found that ‘ethical standards are not improving.’ Some 63% of respondents said that bribery or corrupt practices ‘happen widely’ in their country, up from 60% in 2015. And 35% cited bribery as ‘common practice’ to win contracts in their industry or sector, up from 31% in the 2015 survey.”
May 22 – Reuters (A. Ananthalakshmi and Mai Nguyen): “Japan and other members of the Trans-Pacific Partnership agreed… to pursue their trade deal without the United States as the Trump administration's ‘America First’ policy created tension at a meeting of Asia-Pacific countries. Turmoil over global trade negotiations was laid bare at a meeting of the Asia-Pacific Economic Cooperation (APEC) forum, which failed to agree on its usual joint statement after U.S. opposition to wording on fighting protectionism. The meeting in Hanoi, Vietnam, was the biggest trade gathering since U.S. President Donald Trump upended the old order, arguing that multilateral free-trade agreements were costing American jobs and that he wanted to cut new deals.”
Fixed Income Bubble Watch:
May 23 – Financial Times (Eric Platt): “A month after the International Monetary Fund sounded the alarm over a debt binge by US companies, investors are expressing confidence in the sector and have been eager buyers of tens of billions of new bond offerings… Monica Erickson, a portfolio manager with asset manager DoubleLine Capital, says for many investors ‘leverage is less of a concern with earnings growth’. Outstanding US corporate debt has swelled more than 275% over the past two decades to $8.5tn, with credit ratings broadly deteriorating over that period. In 1996, roughly two-thirds of groups rated by S&P Global held an investment-grade rating. That has fallen to less than 45% today…”
Federal Reserve Watch:
May 25 – Bloomberg (Jeanna Smialek and Christopher Condon): “Most Federal Reserve officials judged ‘it would soon be appropriate’ to tighten monetary policy again and backed a plan that would gradually shrink their $4.5 trillion balance sheet. ‘Most participants judged that if economic information came in about in line with their expectations it would soon be appropriate for the committee to take another step in removing some policy accommodation,’ according to minutes from the Federal Open Market Committee’s May 2-3 gathering… The statement points toward a hike as soon as the Fed’s meeting in mid-June, though FOMC voters added the caveat that ‘it would be prudent’ to wait for evidence that a recent slowdown in economic activity had been transitory.”
May 21 – Wall Street Journal (Katy Burne): “Federal Reserve officials grappling with the legacy of expansive stimulus would find it difficult to return to the central bank’s precrisis role on the sidelines of financial markets, analysts and central-bank watchers say. A long list of programs adopted to help foster economic growth, along with changes in money markets and bank regulation, have vastly expanded the Fed’s balance sheet and its involvement in markets. The Fed’s assets now total $4.5 trillion, up from less than $1 trillion a decade ago. Since 2013 the central bank has become one of the largest traders with U.S. taxable money-market funds… Many analysts and investors worry that significantly rolling back the Fed’s expansion… risks disrupting markets and the economy at a time when growth remains tepid. It would also reduce the connections the institution has built with a diverse set of Wall Street firms, beyond the group of banks it dealt with before the crisis. The Fed has become ‘like an octopus,’ said Jeffrey Cleveland, chief economist at Payden & Rygel… ‘Once you get the power and you are influencing all these markets, do you really want to retreat from all that?’”
U.S. Bubble Watch:
May 24 – Bloomberg (Prashant Gopal): “Home prices in the U.S. increased 6% in the first quarter from a year earlier as competition heated up for a scarcity of listings. Prices rose 1.4% on a seasonally adjusted basis from the previous three months… In March, prices climbed 0.6% from February, matching the average estimate… Job growth is firing up demand for real estate, pushing buyers into bidding wars for the tight supply of homes on the market. There were 1.83 million previously owned homes available for sale at the end of March, down 6.6% from a year earlier…”
Japan Watch:
May 23 – Reuters (Stanley White): “Former Federal Reserve Chairman Ben Bernanke said… the Bank of Japan may need to coordinate a new fiscal spending plan with the government, allowing for inflation to accelerate above its 2% target without worsening the debt burden. Making a temporary commitment to allow inflation to overshoot would help keep the ratio of debt to gross domestic product stable, and is different from directly underwriting fiscal spending, Bernanke said. Bernanke also said the BOJ's current policy framework may be reaching its limits because short- and long-term interest rates are near zero, but the need for more easing cannot be ruled out. ‘The direct approach...would be for the BOJ to commit to a temporary overshoot of its inflation target sufficient to avoid any increase in the debt-to-GDP ratio,’ Bernanke said. ‘This commitment amounts to a monetary financing of the fiscal program without relying on exotic concepts like helicopter drops.’”
May 23 – Reuters (Stanley White): “Bank of Japan Governor Haruhiko Kuroda said… that uncertainty about the natural rate of interest - the level of interest rates that neither stimulates nor constrains growth - is making it difficult for central bankers to steer policy. Kuroda, who spoke at a seminar hosted by the BOJ, said the natural rate of interest has been falling globally, which has led central banks to adopt unconventional economic policies.”
EM Watch:
May 22 – Reuters (Silvio Cascione and Anthony Boadle): “Brazilian President Michel Temer, facing growing calls for his resignation over a corruption scandal, said he would not step down even if he was formally indicted by the Supreme Court. ‘I will not resign. Oust me if you want, but if I stepped down, I would be admitting guilt,’ Temer told Folha de S.Paulo, Brazil's biggest newspaper… Brazilians who have become inured to a massive, three-year corruption investigation were shocked last week by the disclosure of a recording that appeared to show Temer condoning the payment of hush money to a jailed lawmaker.”
May 25 – Reuters (Alonso Soto and Anthony Boadle): “Protesters demanding the resignation of Brazilian President Michel Temer staged running battles with police and set fire to a ministry building in Brasilia on Wednesday, prompting the scandal-hit leader to order the army onto the streets. Police unleashed volleys of tear gas, stun grenades and rubber bullets to halt tens of thousands of protesters as they marched towards Congress to call for Temer's ouster and an end to his austerity program.”
May 25 – Bloomberg (Tim Padgett): “In U.S. history, entire cities and states have been branded corrupt: Think Richard J. Daley’s Chicago or Huey Long’s Louisiana. But amid even the worst federal scandals, Watergate included, the country has never been nationally profiled as crooked—a venal society from coast to coast, from dogcatcher to commander-in-chief. Brazil feels that way right now, largely the result of a bribery scandal of Amazonian proportions known in Portuguese as Lava Jato, or Operation Car Wash, believed to be the largest corruption case in modern history… And it could force the resignation of Brazilian President Michel Temer, who’s been fingered repeatedly in recent weeks for allegedly orchestrating and receiving millions of dollars in bribes.”
May 23 – Wall Street Journal (Carolyn Cui): “S&P Global Ratings delivered more bad news to Brazil, warning… that it may cut the country’s sovereign debt rating because of its troubled political situation. S&P said questions surrounding the president’s political future could stall efforts to enact fiscal and economic reforms. Reports surfaced last week that President Michel Temer is embroiled in corruption allegations. He has denied the allegations. The credit rating firm placed Brazil’s long-term foreign and local currency sovereign credit ratings on its negative credit-watch list, which indicates that Brazil could be downgraded in the next three months.”
May 22 – Bloomberg (Ahmed Feteha and Tarek El-Tablawy): “Egyptian stocks fell the most in the world on Monday after the central bank unexpectedly raised interest rates to contain surging prices… The Monetary Policy Committee raised the benchmark overnight deposit rate by 200 bps, or two percentage points, to 16.75%...”
May 23 – Financial Times (Jeevan Vasagar and Alice Woodhouse): “Shares in Noble Group endured a turbulent day, as the crisis-hit Asian commodities trader tried to reassure about its future by saying it was still in talks with potential major investors. The Singapore-listed company’s stock fell as much as 27% on Wednesday, before closing down 8% at S$0.385. Noble, which has been searching for a new investor for more than a year, said in a statement: ‘The company has previously announced it is in talks with various potential strategic parties, and has informed the market that no assurance can be given that any discussion will result in a transaction. Such discussions are ongoing.’”
Geopolitical Watch:
May 23 – Reuters (Stanley White): “Former Federal Reserve Chairman Ben Bernanke said… the Bank of Japan may need to coordinate a new fiscal spending plan with the government, allowing for inflation to accelerate above its 2% target without worsening the debt burden. Making a temporary commitment to allow inflation to overshoot would help keep the ratio of debt to gross domestic product stable, and is different from directly underwriting fiscal spending, Bernanke said. Bernanke also said the BOJ's current policy framework may be reaching its limits because short- and long-term interest rates are near zero, but the need for more easing cannot be ruled out. ‘The direct approach...would be for the BOJ to commit to a temporary overshoot of its inflation target sufficient to avoid any increase in the debt-to-GDP ratio,’ Bernanke said. ‘This commitment amounts to a monetary financing of the fiscal program without relying on exotic concepts like helicopter drops.’”
May 23 – Reuters (Stanley White): “Bank of Japan Governor Haruhiko Kuroda said… that uncertainty about the natural rate of interest - the level of interest rates that neither stimulates nor constrains growth - is making it difficult for central bankers to steer policy. Kuroda, who spoke at a seminar hosted by the BOJ, said the natural rate of interest has been falling globally, which has led central banks to adopt unconventional economic policies.”
EM Watch:
May 22 – Reuters (Silvio Cascione and Anthony Boadle): “Brazilian President Michel Temer, facing growing calls for his resignation over a corruption scandal, said he would not step down even if he was formally indicted by the Supreme Court. ‘I will not resign. Oust me if you want, but if I stepped down, I would be admitting guilt,’ Temer told Folha de S.Paulo, Brazil's biggest newspaper… Brazilians who have become inured to a massive, three-year corruption investigation were shocked last week by the disclosure of a recording that appeared to show Temer condoning the payment of hush money to a jailed lawmaker.”
May 25 – Reuters (Alonso Soto and Anthony Boadle): “Protesters demanding the resignation of Brazilian President Michel Temer staged running battles with police and set fire to a ministry building in Brasilia on Wednesday, prompting the scandal-hit leader to order the army onto the streets. Police unleashed volleys of tear gas, stun grenades and rubber bullets to halt tens of thousands of protesters as they marched towards Congress to call for Temer's ouster and an end to his austerity program.”
May 25 – Bloomberg (Tim Padgett): “In U.S. history, entire cities and states have been branded corrupt: Think Richard J. Daley’s Chicago or Huey Long’s Louisiana. But amid even the worst federal scandals, Watergate included, the country has never been nationally profiled as crooked—a venal society from coast to coast, from dogcatcher to commander-in-chief. Brazil feels that way right now, largely the result of a bribery scandal of Amazonian proportions known in Portuguese as Lava Jato, or Operation Car Wash, believed to be the largest corruption case in modern history… And it could force the resignation of Brazilian President Michel Temer, who’s been fingered repeatedly in recent weeks for allegedly orchestrating and receiving millions of dollars in bribes.”
May 23 – Wall Street Journal (Carolyn Cui): “S&P Global Ratings delivered more bad news to Brazil, warning… that it may cut the country’s sovereign debt rating because of its troubled political situation. S&P said questions surrounding the president’s political future could stall efforts to enact fiscal and economic reforms. Reports surfaced last week that President Michel Temer is embroiled in corruption allegations. He has denied the allegations. The credit rating firm placed Brazil’s long-term foreign and local currency sovereign credit ratings on its negative credit-watch list, which indicates that Brazil could be downgraded in the next three months.”
May 22 – Bloomberg (Ahmed Feteha and Tarek El-Tablawy): “Egyptian stocks fell the most in the world on Monday after the central bank unexpectedly raised interest rates to contain surging prices… The Monetary Policy Committee raised the benchmark overnight deposit rate by 200 bps, or two percentage points, to 16.75%...”
May 23 – Financial Times (Jeevan Vasagar and Alice Woodhouse): “Shares in Noble Group endured a turbulent day, as the crisis-hit Asian commodities trader tried to reassure about its future by saying it was still in talks with potential major investors. The Singapore-listed company’s stock fell as much as 27% on Wednesday, before closing down 8% at S$0.385. Noble, which has been searching for a new investor for more than a year, said in a statement: ‘The company has previously announced it is in talks with various potential strategic parties, and has informed the market that no assurance can be given that any discussion will result in a transaction. Such discussions are ongoing.’”
Geopolitical Watch:
May 23 – Reuters (Phil Stewart and Idrees Ali): “North Korea, if left unchecked, is on an ‘inevitable’ path to obtaining a nuclear-armed missile capable of striking the United States, Defense Intelligence Agency Director Lieutenant General Vincent Stewart told a Senate hearing… The remarks are the latest indication of mounting U.S. concern about Pyongyang's advancing missile and nuclear weapons programs, which the North says are needed for self-defense.”
May 25 – Bloomberg: “China’s government warned a U.S. warship to leave waters around a reef it claims in the South China Sea, saying the vessel was trespassing on its territory and undermining security in the region. The U.S. warship entered waters adjacent to the Spratly islands, an area where China has ‘indisputable sovereignty,’ defense ministry spokesman Ren Guoqiang said… China ‘identified, tracked, verified and warned off the ship.’ The so-called freedom of navigation operation in the South China Sea was the first under President Donald Trump.”
May 25 – Bloomberg: “China’s government warned a U.S. warship to leave waters around a reef it claims in the South China Sea, saying the vessel was trespassing on its territory and undermining security in the region. The U.S. warship entered waters adjacent to the Spratly islands, an area where China has ‘indisputable sovereignty,’ defense ministry spokesman Ren Guoqiang said… China ‘identified, tracked, verified and warned off the ship.’ The so-called freedom of navigation operation in the South China Sea was the first under President Donald Trump.”
Subscribe to:
Posts (Atom)