[Reuters] World stocks head higher on hopes of thawing trade tensions
[Reuters] Argentine peso opens 6.22 pct weaker, sets new record low -traders
[Reuters] Fed's Mester reiterates support for gradual U.S. rate increases
[CNBC] US should watch its debt pile before 'things get out of hand,' Fed's Mester says
[CNBC] Italy is poised for an anti-establishment leader
[Reuters] Breakingviews - Italy’s radical government will be an EU headache
[BloombergQ] ECB's Villeroy Sees Rate Hike Quarters, Not Years, After QE
[BloombergQ] Emerging Markets Watch Fed, Not ‘Decoupled’ After All
[Reuters] Rhetoric over U.S. exit from Iran deal rises amid threat of sanctions
[Reuters] Firebrand nationalist cleric Sadr leads Iraq election
[BloombergQ] What the Lira's Plight Says About Turkey's Economy: QuickTake
[WSJ] Fed’s Mester Says Improved Economic Outlook Supports More Rate Rises
[WSJ] Farmers Across High Plains Brace for Hard Times as Drought Bears Down
[WSJ] Wall Street Is Getting In On the House Flipping Game
[FT] Anbang: the downfall of China’s global dealmaker
[FT] Landmark bond sales hit by emerging markets downturn
Sunday, May 13, 2018
Sunday Evening Links
[France24] Italian populist parties 'agree on ruling programme'
[CNBC] Bulls have 'hammerlock' on oil market, OPIS' Tom Kloza isn't ruling out $100 a barrel
[Reuters] Chinese insurers turn shadow lenders for higher returns
[Reuters] In concession, Trump will help China's ZTE 'get back into business'
[CNBC] Bulls have 'hammerlock' on oil market, OPIS' Tom Kloza isn't ruling out $100 a barrel
[Reuters] Chinese insurers turn shadow lenders for higher returns
[Reuters] In concession, Trump will help China's ZTE 'get back into business'
Sunday's News Links
[CNBC] New deadline for NAFTA could make for an interesting week in markets
[CNBC] Iran sanctions will create a ‘disruption’ in the oil price and uncertainty for investments, ENI CEO warns
[BloombergQ] Italy's Populists in Marathon Talks as President Takes a Stand
[Reuters] Italy's nascent government has tough economic circles to square
[FT] Four challenges facing Italy’s new government
[FT] ETF sales hit by return of global market volatility
[FT] Landmark bond sales hit by emerging markets downturn
[CNBC] Iran sanctions will create a ‘disruption’ in the oil price and uncertainty for investments, ENI CEO warns
[BloombergQ] Italy's Populists in Marathon Talks as President Takes a Stand
[Reuters] Italy's nascent government has tough economic circles to square
[FT] Four challenges facing Italy’s new government
[FT] ETF sales hit by return of global market volatility
[FT] Landmark bond sales hit by emerging markets downturn
Saturday, May 12, 2018
Saturday's News Links
[Reuters] N.Y. Fed sees U.S. GDP growing at 2.97 percent in second quarter
[Reuters] 'Unauthorized transfers' siphon funds from Mexican banks: central bank
[BloombergQ] New Malaysian Leader Tightens Net Around Ousted Najib Over 1MDB
[Reuters] U.S. fighter jets intercept Russian bombers in international airspace off Alaska
[BloombergQ] In Iraq's Election, It's Hard to Avoid Iran's Presence
[NYT] These 95 Apartments Promised Affordable Rent in San Francisco. Then 6,580 People Applied.
[WSJ] Rising Dollar Pummels Emerging-Market Bonds, Cooling Off a Hot Sector
[WSJ] Trump Targets Foreign Auto Makers for Not Building Enough in U.S.
[WSJ] Trump’s Plan to Cut Drug Prices Leaves Industry Relieved
[Reuters] 'Unauthorized transfers' siphon funds from Mexican banks: central bank
[BloombergQ] New Malaysian Leader Tightens Net Around Ousted Najib Over 1MDB
[Reuters] U.S. fighter jets intercept Russian bombers in international airspace off Alaska
[BloombergQ] In Iraq's Election, It's Hard to Avoid Iran's Presence
[NYT] These 95 Apartments Promised Affordable Rent in San Francisco. Then 6,580 People Applied.
[WSJ] Rising Dollar Pummels Emerging-Market Bonds, Cooling Off a Hot Sector
[WSJ] Trump Targets Foreign Auto Makers for Not Building Enough in U.S.
[WSJ] Trump’s Plan to Cut Drug Prices Leaves Industry Relieved
Friday, May 11, 2018
Weekly Commentary: Disequilibrium
Much to the consternation of our allies, President Trump withdraws from the Iran nuclear deal. WTI crude adds another 1.5% (up 17% y-t-d) this week to the high since November 2014. Iran and Israel moved closer to direct military confrontation. With even 40% rates unable to staunch the bleeding, a stunned Argentine government warily negotiates an IMF bailout. Italy's far right and far left parties - both populist, anti-establishment, anti-euro and anti-immigration - begin negotiations to form a coalition government. Malaysians elect 92-year old Mahathir Mohamad, ending the 60-year reign of the Barisan Nasional party (including Mahathir as prime minister between 1981 and 2003).
Some astounding developments, but not enough these days to shake financial markets. Why fret a complex and increasingly unstable world, not with the timely return of Goldilocks. She's back… Headline U.S. April CPI was up 0.2% vs. expectations of 0.3%. Core CPI was up only 0.1% against expectations of 0.2%. April Import Prices were up 0.3% vs. estimates of 0.5%. Forget surging energy prices, rather quickly the rosy narrative shifts to peak inflation.
May 11 - Reuters (Howard Schneider): "St. Louis Federal Reserve Bank President James Bullard on Friday spelled out the case against any further interest rate increases, saying rates may already have reached a 'neutral' level that is no longer stimulating the economy… 'We should be opening the champagne here,' not raising interest rates with unemployment low and inflation in no seeming danger of accelerating, Bullard said… 'The economy is operating quite well right now.'"
I suggest the Fed and global central bankers hold back on carting out the bubbly. "Opening the champagne" is reminiscent of Citigroup CEO Chuck Prince's summer of 2007 "still dancing." Bullard focuses on traditional yield curve analysis. "I would say the yield curve inversion is getting close to crunch time." "The yield curve inversion would be a bearish signal for the US economy if that develops."
I would argue the yield curve has become an especially poor indicator for gauging the appropriateness of monetary policy or predicting imminent recession. "Whatever it takes" monetary management fundamentally altered the structure of global interest rates. Long-term bond prices now incorporate a significant premium based on the expectation for aggressive future rate cuts and bond purchase programs (QE). And the longer the artificially depressed interest rate structure fuels Bubble excess, the greater the long-term bond premium (lower yields) and the flatter the curve. Bubble Dynamics
Bullard proffered additional interesting analysis: "'This is an equilibrium process, not an inflationary one,' Bullard said, and 'it is not necessary to disrupt' it with higher interest rates."
"Equilibrium" with short-term rates between 1.5% and 1.75% - with the Fed having avoided actually tightening financial conditions? Equilibrium with annual Current Account Deficits approaching $500 billion? With the Dow up 18.5% over the past year and the Nasdaq Composite surging almost 21%? With historically low housing inventory and home price inflation significantly above after-tax borrowing costs - and accelerating? With the unemployment rate at 3.9% and businesses struggling to find qualified applicants? With Trillion dollar U.S. fiscal deficits in the offing? With the ECB and BOJ still monetizing debt in large quantities? With 10-year JGB yields at five bps and Italian yields at 1.87%? With still Trillions of negatively-yielding debt instruments globally? Equilibrium with most central banks around the world hesitating to tighten policy - with global monetary policy nowhere in the vicinity of a semblance of normality? Disequilibrium.
May 10 - Financial Times (Robin Wigglesworth): "The investor withdrawal from emerging markets accelerated over the past week, with equity funds suffering their worst outflows in nearly a year and bond funds losing money for a third week running - the longest streak of withdrawals since late 2016… EM equity funds had outflows of $1.6bn in the seven days to May 9, the first weekly outflow since February and the biggest since August 2017… Fixed-income funds focused on the developing world saw their outflows accelerate. Investors withdrew $2.1bn from EM bond funds, the third consecutive week of outflows and the worst one since February. EM debt funds have now suffered outflows of more than $4bn since mid-April."
A decade of ultra-easy monetary policies has ensured deep structural maladjustment. Importantly, "activist" policies have nurtured way too much "money" playing global risk assets. Indeed, global financial speculation has become one historic Crowded Trade. And too much "money" in the game alters market dynamics. The bastardized yield curve is one momentous manifestation. Serial market boom and bust dynamics is another.
The speed by which the EM boom has faltered offers a warning to all. After all, it was only weeks ago that EM prospects were viewed as exceptionally bullish. And with "money" flooding into "developing" markets, it was too easy to disregard structural vulnerabilities and mounting risks. As always, there was ample "hot money" originating from leveraged "carry trades," derivatives and the leveraged speculating community more generally. But these days, with the broad menu of available hot international ETF products, it has never been so easy for retail "money" to jump aboard the EM boom cycle. Jump they did, late definitely not better than never.
This long cycle's EM excesses have been unprecedented. A down-cycle is long overdue. Let's hope the downside can somehow avoid being proportional to this cycle's unprecedented excesses. Outflows have just begun.
May 8 - Financial Times (Benedict Mander and John Paul Rathbone): "Seventeen years ago, economic policies backed by the IMF brought Argentina to its knees. Five years later, then-president Néstor Kirchner severed IMF ties, swearing never again. This week, a run on the currency forced President Mauricio Macri to return to the international lender. On Tuesday, in a televised address to the nation, a sober-faced Mr Macri said assistance from the International Monetary Fund would help 'avoid a crisis like the ones we have faced before . . . [it] will allow us to strengthen our programme of growth and development'. It was a stunning reversal for the 59-year-old former businessman who came to power in December 2015 vowing to make Argentina a 'normal country', after 12 years of leftist rule…"
Argentina was not without its share of responsibility, yet unfettered global finance ran roughshod through Argentine financial and economic structure. At U.S. and IMF insistence, Argentina in the nineties adopted a U.S. dollar-based currency board system. This was to ensure that money supply growth did not exceed dollar reserve holdings, thereby containing inflation and, supposedly, ensuring financial stability. Inflation did collapse, but the Washington-dictated policy regime was a powerful magnet for global "hot money" flows. The currency board held narrow money supply growth in check, yet it did the very opposite for Credit. The onslaught of international inflows spurred massive government and corporate debt growth - too much of it denominated in dollars. The Argentine miracle economy boomed and became the poster child for enlightened "Washington Consensus" policymaking. It was all a Bubble Mirage. Conventional wisdom could not have been more detached from reality.
The Bubble inevitably faltered (2001/2002), and "hot money," as it does, raced for the exits. There were no buyers, no liquidity and meager real wealth to make good on all the debt that had been extended. It was a horrendous collapse and tragedy for the Argentine people, for which they're still suffering some 17 years later. Like many Bubbles before and since, it's amazing how long markets remain oblivious to financial imbalances and mounting structural impairment.
Brazil's 2001 crisis sealed the fate for their neighbor Argentina's flawed dollar currency board regime. Might the unfolding Argentine crisis this time push Brazil over the edge? It's worth noting that Brazil's sovereign CDS rose above 200 bps Wednesday for the first time in eight months. And while it doesn't compare to the Argentine peso's 5.8% drop (down 11.5% in 2-wks), Brazil's real fell 2.0% this week. The Brazilian real is down 4.0% over two weeks and 8.1% y-t-d. Brazil's local currency 10-year yields spiked Wednesday to a 2018-high 10.25% (closed the week at 10.0%).
Mexican local 10-year yields jumped to 7.75% Wednesday, just below multi-year highs, before ending the week at 7.58%. Mexico's peso traded to a 2018 low in Wednesday trading. Now down 5.1% y-t-d, the Indian rupee ended the week at 15-month lows. Hungary's local bond yields jumped 19 bps to an eight-month high 2.80%.
Turkey, another recent EM "darling," saw its currency drop another 2% this week, boosting its two-week decline to 6.3% and y-t-d losses to 12.0%. Turkey sovereign CDS rose another 13 bps this week to a 14-month high 238. Turkish government 10-year dollar-denominated yields jumped 14 bps to 6.66%, nearing the high going all the way back to 2009.
May 11 - Reuters (Ali Kucukgocmen and Behiye Selin Taner): "Turkish President Tayyip Erdogan called for lower interest rates on Friday and described them as the 'mother and father of all evil', triggering a fresh slide in the lira as investors worried about the central bank's ability to rein in high inflation… 'If my people say continue on this path in the elections, I say I will emerge with victory in the fight against this curse of interest rates,' Erdogan said in a speech to business people in Ankara…"
"Evil" is not possessed in too high interest rates - but rather in too much debt. And foreign-denominated debt, which Turkey has accumulated aplenty, can prove the "mother of all evil" when currency crisis devolves swiftly into a full-fledged financial panic. With the lira sinking and inflation surging, Turkey's central bank will likely have no alternative than to raise rates - perhaps aggressively - heading into June 24th snap elections. Lira 10-year bond yields spiked above 14% to an eight-year high in Wednesday trading.
May 9 - Financial Times (Gabriel Wildau): "China credit spreads hit their widest level in nearly two years this week following new regulations that undermined long-held assumptions about implicit guarantees on debt linked to local governments. Chinese localities have long used arm's length local government financing vehicles (LGFVs) to skirt restrictions on direct fiscal borrowing and to finance infrastructure, contributing to a surge in economy-wide debt since 2008. LGFVs are among the biggest borrowers in the local bond market. The spread between yields on 5-year Chinese government bonds and 5-year medium-term notes rated double A minus reached 3.6 percentage points on Monday and remained at that level on Tuesday… Six months ago the spread was only 2.51 points."
May 9 - Bloomberg (Lianting Tu and Carrie Hong): "The average yield on China's junk-rated dollar bonds rose above the 8% mark, fueling concerns of further gains amid a bulging issuance pipeline and the absence of a strong demand from mainland investors. Yields on dollar junk bonds from Chinese firms rose to the highest since April 2016, while those from the broader region yielded 7.4%... It took just 43 days for China's average yield to rise from 7% to 8%, after having taken more than four months for the move from 6% to 7%. BNP Paribas Asset Management expects credit spreads in the region to widen by a further 25-50 bps."
Turkey, China and others may hold crisis at bay for now. Argentina, an EM Bubble weak link, has rather precipitously succumbed. Even as the central bank (with a reasonable quantity of international reserve holdings) hiked interest rates to 40% and the Macri government sent a delegation to Washington to negotiate with the IMF, the currency plunge ran unabated. Argentina less than 11 months ago sold $2.75 billion 100-year bonds at a 7.9% yield.
May 11 - Financial Times (John Paul Rathbone): "A hundred years ago, at about the same time that the Titanic hit the iceberg, Argentina was among the 10 richest countries in the world. Today it ranks 87th. In all, it has defaulted on its debt eight times, suffered hyperinflation twice, and gone through 20 IMF-supported economic programmes in 60 years. The most brutal of these ended in 2001, triggering a $100bn default and crushing devaluation. The spectacular collapse left one in five Argentines unemployed, and with an understandable allergy to anything associated with the IMF. It also led to 12 years of populist rule. All this has made Mr Macri's subsequent quest for 'normality' harder still."
The S&P500 jumped 2.4% this week. EM instability worked to hold 10-year Treasury yields back from the 3.0% breakout level. Timely reports of less-than-expected inflation data didn't hurt either. The S&P500 bouncing off the 200-day moving average helped spur a bout of short covering - and short squeezes can take on lives of their own.
But, mainly, it was another week where U.S. markets were content to disregard myriad risks. And why not? A focus on risk can lead to untimely hedging and reductions in long exposures - and resulting underperformance. And underperforming active managers risk losing only more assets to the ballooning passive index ETF complex. In a world of too much "money" and Crowded Trades prevailing throughout the risk markets, it regresses into a dysfunctional game of disregarding risk and chasing performance. Buy and hold an equities index is, these days, pure genius.
This speculative dynamic, however, is coming home to roost in the emerging markets. At the same time, "developed" market outperformance spurs a rush to play - and talk of Goldilocks and dreams of new eras of permanent prosperity. Serious issues are in play at the "Periphery." It's an inopportune time for complacency at the "Core," let alone exuberance. That Bubble at the Periphery - it's been absolutely historic.
May 11 - Wall Street Journal (Chelsey Dulaney, Jon Sindreu and Saumya Vaishampayan): "The dollar's rise is squeezing bond markets in developing countries like Argentina, Indonesia and Turkey, gutting what had been a popular trade for investors seeking stronger returns. Countries in the developing world have been borrowing heavily, supported by upbeat expectations for global growth and a long period of low to negative interest rates that drove investors into emerging markets to get any sort of yield. Emerging markets added on $7.7 trillion in new debt last year, including bonds and other types of loans, with about $800 billion of that denominated in foreign currencies, according to data from the Institute of International Finance."
Some astounding developments, but not enough these days to shake financial markets. Why fret a complex and increasingly unstable world, not with the timely return of Goldilocks. She's back… Headline U.S. April CPI was up 0.2% vs. expectations of 0.3%. Core CPI was up only 0.1% against expectations of 0.2%. April Import Prices were up 0.3% vs. estimates of 0.5%. Forget surging energy prices, rather quickly the rosy narrative shifts to peak inflation.
May 11 - Reuters (Howard Schneider): "St. Louis Federal Reserve Bank President James Bullard on Friday spelled out the case against any further interest rate increases, saying rates may already have reached a 'neutral' level that is no longer stimulating the economy… 'We should be opening the champagne here,' not raising interest rates with unemployment low and inflation in no seeming danger of accelerating, Bullard said… 'The economy is operating quite well right now.'"
I suggest the Fed and global central bankers hold back on carting out the bubbly. "Opening the champagne" is reminiscent of Citigroup CEO Chuck Prince's summer of 2007 "still dancing." Bullard focuses on traditional yield curve analysis. "I would say the yield curve inversion is getting close to crunch time." "The yield curve inversion would be a bearish signal for the US economy if that develops."
I would argue the yield curve has become an especially poor indicator for gauging the appropriateness of monetary policy or predicting imminent recession. "Whatever it takes" monetary management fundamentally altered the structure of global interest rates. Long-term bond prices now incorporate a significant premium based on the expectation for aggressive future rate cuts and bond purchase programs (QE). And the longer the artificially depressed interest rate structure fuels Bubble excess, the greater the long-term bond premium (lower yields) and the flatter the curve. Bubble Dynamics
Bullard proffered additional interesting analysis: "'This is an equilibrium process, not an inflationary one,' Bullard said, and 'it is not necessary to disrupt' it with higher interest rates."
"Equilibrium" with short-term rates between 1.5% and 1.75% - with the Fed having avoided actually tightening financial conditions? Equilibrium with annual Current Account Deficits approaching $500 billion? With the Dow up 18.5% over the past year and the Nasdaq Composite surging almost 21%? With historically low housing inventory and home price inflation significantly above after-tax borrowing costs - and accelerating? With the unemployment rate at 3.9% and businesses struggling to find qualified applicants? With Trillion dollar U.S. fiscal deficits in the offing? With the ECB and BOJ still monetizing debt in large quantities? With 10-year JGB yields at five bps and Italian yields at 1.87%? With still Trillions of negatively-yielding debt instruments globally? Equilibrium with most central banks around the world hesitating to tighten policy - with global monetary policy nowhere in the vicinity of a semblance of normality? Disequilibrium.
May 10 - Financial Times (Robin Wigglesworth): "The investor withdrawal from emerging markets accelerated over the past week, with equity funds suffering their worst outflows in nearly a year and bond funds losing money for a third week running - the longest streak of withdrawals since late 2016… EM equity funds had outflows of $1.6bn in the seven days to May 9, the first weekly outflow since February and the biggest since August 2017… Fixed-income funds focused on the developing world saw their outflows accelerate. Investors withdrew $2.1bn from EM bond funds, the third consecutive week of outflows and the worst one since February. EM debt funds have now suffered outflows of more than $4bn since mid-April."
A decade of ultra-easy monetary policies has ensured deep structural maladjustment. Importantly, "activist" policies have nurtured way too much "money" playing global risk assets. Indeed, global financial speculation has become one historic Crowded Trade. And too much "money" in the game alters market dynamics. The bastardized yield curve is one momentous manifestation. Serial market boom and bust dynamics is another.
The speed by which the EM boom has faltered offers a warning to all. After all, it was only weeks ago that EM prospects were viewed as exceptionally bullish. And with "money" flooding into "developing" markets, it was too easy to disregard structural vulnerabilities and mounting risks. As always, there was ample "hot money" originating from leveraged "carry trades," derivatives and the leveraged speculating community more generally. But these days, with the broad menu of available hot international ETF products, it has never been so easy for retail "money" to jump aboard the EM boom cycle. Jump they did, late definitely not better than never.
This long cycle's EM excesses have been unprecedented. A down-cycle is long overdue. Let's hope the downside can somehow avoid being proportional to this cycle's unprecedented excesses. Outflows have just begun.
May 8 - Financial Times (Benedict Mander and John Paul Rathbone): "Seventeen years ago, economic policies backed by the IMF brought Argentina to its knees. Five years later, then-president Néstor Kirchner severed IMF ties, swearing never again. This week, a run on the currency forced President Mauricio Macri to return to the international lender. On Tuesday, in a televised address to the nation, a sober-faced Mr Macri said assistance from the International Monetary Fund would help 'avoid a crisis like the ones we have faced before . . . [it] will allow us to strengthen our programme of growth and development'. It was a stunning reversal for the 59-year-old former businessman who came to power in December 2015 vowing to make Argentina a 'normal country', after 12 years of leftist rule…"
Argentina was not without its share of responsibility, yet unfettered global finance ran roughshod through Argentine financial and economic structure. At U.S. and IMF insistence, Argentina in the nineties adopted a U.S. dollar-based currency board system. This was to ensure that money supply growth did not exceed dollar reserve holdings, thereby containing inflation and, supposedly, ensuring financial stability. Inflation did collapse, but the Washington-dictated policy regime was a powerful magnet for global "hot money" flows. The currency board held narrow money supply growth in check, yet it did the very opposite for Credit. The onslaught of international inflows spurred massive government and corporate debt growth - too much of it denominated in dollars. The Argentine miracle economy boomed and became the poster child for enlightened "Washington Consensus" policymaking. It was all a Bubble Mirage. Conventional wisdom could not have been more detached from reality.
The Bubble inevitably faltered (2001/2002), and "hot money," as it does, raced for the exits. There were no buyers, no liquidity and meager real wealth to make good on all the debt that had been extended. It was a horrendous collapse and tragedy for the Argentine people, for which they're still suffering some 17 years later. Like many Bubbles before and since, it's amazing how long markets remain oblivious to financial imbalances and mounting structural impairment.
Brazil's 2001 crisis sealed the fate for their neighbor Argentina's flawed dollar currency board regime. Might the unfolding Argentine crisis this time push Brazil over the edge? It's worth noting that Brazil's sovereign CDS rose above 200 bps Wednesday for the first time in eight months. And while it doesn't compare to the Argentine peso's 5.8% drop (down 11.5% in 2-wks), Brazil's real fell 2.0% this week. The Brazilian real is down 4.0% over two weeks and 8.1% y-t-d. Brazil's local currency 10-year yields spiked Wednesday to a 2018-high 10.25% (closed the week at 10.0%).
Mexican local 10-year yields jumped to 7.75% Wednesday, just below multi-year highs, before ending the week at 7.58%. Mexico's peso traded to a 2018 low in Wednesday trading. Now down 5.1% y-t-d, the Indian rupee ended the week at 15-month lows. Hungary's local bond yields jumped 19 bps to an eight-month high 2.80%.
Turkey, another recent EM "darling," saw its currency drop another 2% this week, boosting its two-week decline to 6.3% and y-t-d losses to 12.0%. Turkey sovereign CDS rose another 13 bps this week to a 14-month high 238. Turkish government 10-year dollar-denominated yields jumped 14 bps to 6.66%, nearing the high going all the way back to 2009.
May 11 - Reuters (Ali Kucukgocmen and Behiye Selin Taner): "Turkish President Tayyip Erdogan called for lower interest rates on Friday and described them as the 'mother and father of all evil', triggering a fresh slide in the lira as investors worried about the central bank's ability to rein in high inflation… 'If my people say continue on this path in the elections, I say I will emerge with victory in the fight against this curse of interest rates,' Erdogan said in a speech to business people in Ankara…"
"Evil" is not possessed in too high interest rates - but rather in too much debt. And foreign-denominated debt, which Turkey has accumulated aplenty, can prove the "mother of all evil" when currency crisis devolves swiftly into a full-fledged financial panic. With the lira sinking and inflation surging, Turkey's central bank will likely have no alternative than to raise rates - perhaps aggressively - heading into June 24th snap elections. Lira 10-year bond yields spiked above 14% to an eight-year high in Wednesday trading.
May 9 - Financial Times (Gabriel Wildau): "China credit spreads hit their widest level in nearly two years this week following new regulations that undermined long-held assumptions about implicit guarantees on debt linked to local governments. Chinese localities have long used arm's length local government financing vehicles (LGFVs) to skirt restrictions on direct fiscal borrowing and to finance infrastructure, contributing to a surge in economy-wide debt since 2008. LGFVs are among the biggest borrowers in the local bond market. The spread between yields on 5-year Chinese government bonds and 5-year medium-term notes rated double A minus reached 3.6 percentage points on Monday and remained at that level on Tuesday… Six months ago the spread was only 2.51 points."
May 9 - Bloomberg (Lianting Tu and Carrie Hong): "The average yield on China's junk-rated dollar bonds rose above the 8% mark, fueling concerns of further gains amid a bulging issuance pipeline and the absence of a strong demand from mainland investors. Yields on dollar junk bonds from Chinese firms rose to the highest since April 2016, while those from the broader region yielded 7.4%... It took just 43 days for China's average yield to rise from 7% to 8%, after having taken more than four months for the move from 6% to 7%. BNP Paribas Asset Management expects credit spreads in the region to widen by a further 25-50 bps."
Turkey, China and others may hold crisis at bay for now. Argentina, an EM Bubble weak link, has rather precipitously succumbed. Even as the central bank (with a reasonable quantity of international reserve holdings) hiked interest rates to 40% and the Macri government sent a delegation to Washington to negotiate with the IMF, the currency plunge ran unabated. Argentina less than 11 months ago sold $2.75 billion 100-year bonds at a 7.9% yield.
May 11 - Financial Times (John Paul Rathbone): "A hundred years ago, at about the same time that the Titanic hit the iceberg, Argentina was among the 10 richest countries in the world. Today it ranks 87th. In all, it has defaulted on its debt eight times, suffered hyperinflation twice, and gone through 20 IMF-supported economic programmes in 60 years. The most brutal of these ended in 2001, triggering a $100bn default and crushing devaluation. The spectacular collapse left one in five Argentines unemployed, and with an understandable allergy to anything associated with the IMF. It also led to 12 years of populist rule. All this has made Mr Macri's subsequent quest for 'normality' harder still."
The S&P500 jumped 2.4% this week. EM instability worked to hold 10-year Treasury yields back from the 3.0% breakout level. Timely reports of less-than-expected inflation data didn't hurt either. The S&P500 bouncing off the 200-day moving average helped spur a bout of short covering - and short squeezes can take on lives of their own.
But, mainly, it was another week where U.S. markets were content to disregard myriad risks. And why not? A focus on risk can lead to untimely hedging and reductions in long exposures - and resulting underperformance. And underperforming active managers risk losing only more assets to the ballooning passive index ETF complex. In a world of too much "money" and Crowded Trades prevailing throughout the risk markets, it regresses into a dysfunctional game of disregarding risk and chasing performance. Buy and hold an equities index is, these days, pure genius.
This speculative dynamic, however, is coming home to roost in the emerging markets. At the same time, "developed" market outperformance spurs a rush to play - and talk of Goldilocks and dreams of new eras of permanent prosperity. Serious issues are in play at the "Periphery." It's an inopportune time for complacency at the "Core," let alone exuberance. That Bubble at the Periphery - it's been absolutely historic.
May 11 - Wall Street Journal (Chelsey Dulaney, Jon Sindreu and Saumya Vaishampayan): "The dollar's rise is squeezing bond markets in developing countries like Argentina, Indonesia and Turkey, gutting what had been a popular trade for investors seeking stronger returns. Countries in the developing world have been borrowing heavily, supported by upbeat expectations for global growth and a long period of low to negative interest rates that drove investors into emerging markets to get any sort of yield. Emerging markets added on $7.7 trillion in new debt last year, including bonds and other types of loans, with about $800 billion of that denominated in foreign currencies, according to data from the Institute of International Finance."
For the Week:
The S&P500 rose 2.4% (up 2.4% y-t-d), and the Dow gained 2.3% (up 0.5%). The Utilities fell 2.1% (down 4.9%). The Banks surged 4.1% (up 3.9%), and the Broker/Dealers jumped 2.9% (up 10.8%). The Transports rose 3.3% (up 1.0%). The S&P 400 Midcaps gained 2.0% (up 2.0%), and the small cap Russell 2000 jumped 2.6% (up 4.6%). The Nasdaq100 advanced 2.7% (up 8.7%). The Semiconductors surged 4.1% (up 7.8%). The Biotechs jumped 4.0% (up 10.5%). With bullion gaining $3, the HUI gold index recovered 0.5% (down 5.2%).
Three-month Treasury bill rates ended the week at 1.86%. Two-year government yields added two bps to 2.54% (up 65bps y-t-d). Five-year T-note yields gained five bps 2.84% (up 63bps). Ten-year Treasury yields added two bps to 2.97% (up 57bps). Long bond yields slipped two bps to 3.10% (up 36bps). Benchmark Fannie Mae MBS yields increased two bps to 3.66% (up 66bps).
Greek 10-year yields fell 10 bps to 4.00% (down 7bps y-t-d). Ten-year Portuguese yields dipped three bps to 1.68% (down 26bps). Italian 10-year yields jumped eight bps to 1.87% (down 14bps). Spain's 10-year yields declined three bps to 1.27% (down 29bps). German bund yields gained two bps to 0.56% (up 13bps). French yields added less than a basis point to 0.79% (unchanged). The French to German 10-year bond spread declined one to 23 bps. U.K. 10-year gilt yields rose four bps to 1.44% (up 25bps). U.K.'s FTSE equities index jumped 2.1% (up 0.5%).
Japan's Nikkei 225 equities rose 1.3% (unchanged y-t-d). Japanese 10-year "JGB" yields were little changed at 0.047% (unchanged). France's CAC40 added 0.5% (up 4.3%). The German DAX equities index rose 1.3% (up 0.6%). Spain's IBEX 35 equities index jumped 1.7% (up 2.3%). Italy's FTSE MIB index declined 0.7% (up 10.6%). EM equities were mixed. Brazil's Bovespa index rallied 2.5% (up 11.5%), while Mexico's Bolsa slipped 0.6% (down 5.3%). South Korea's Kospi index gained 0.7% (up 0.4%). India’s Sensex equities index rose 1.8% (up 4.3%). China’s Shanghai Exchange jumped 2.3% (down 4.4%). Turkey's Borsa Istanbul National 100 index declined 0.7% (down 11.7%). Russia's MICEX equities surged 2.4% (up 11.2%).
Investment-grade bond funds saw inflows of $804 million, while junk bond funds posted outflows of $755 million (from Lipper).
Freddie Mac 30-year fixed mortgage rate were unchanged at 4.55% (up 50bps y-o-y). Fifteen-year rates slipped two bps to 4.01% (up 72bps). Five-year hybrid ARM rates jumped eight bps to 3.77% (up 63bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.71% (up 55bps).
Federal Reserve Credit last week declined $8.1bn to $4.318 TN. Over the past year, Fed Credit contracted $116bn, or 2.6%. Fed Credit inflated $1.507 TN, or 54%, over the past 288 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $10.9bn last week to a 13-week low $3.397 TN. "Custody holdings" were up $175bn y-o-y, or 5.4%.
M2 (narrow) "money" supply declined $8.2bn last week to $13.955 TN. "Narrow money" gained $480bn, or 3.6%, over the past year. For the week, Currency increased $1.2bn. Total Checkable Deposits gained $5.7bn, while savings Deposits fell $24.2bn. Small Time Deposits rose $3.6bn. Retail Money Funds added $5.6bn.
Total money market fund assets expanded $6.9bn to $2.807 TN. Money Funds gained $157bn y-o-y, or 5.9%.
Total Commercial Paper rose $6.2bn to $1.059 TN. CP gained $78bn y-o-y, or 7.9%.
Currency Watch:
May 10 - Bloomberg (Siddharth Verma): "Winds of change in currency markets threaten to blow global investment trends further off course -- but from the East as much as the West. While investors have been focused on a strengthening U.S. dollar and rising Treasury yields, a weaker Chinese yuan also threatens to heap pressure on emerging market assets that have already wiped out their gains for the year. That's because a pause in the yuan's appreciation path would challenge a clutch of developing economies by hitting their trade competitiveness against China, according to Morgan Stanley. 'RMB up and USD down is the best world in which you can live,' said Hans Redeker, the bank's… chief global currency strategist. 'You have it easier on exports and funding, all at the same time."
The U.S. dollar index was little changed at 92.537 (up 0.4% y-t-d). For the week on the upside, the Swedish krona increased 2.4%, the South African rand 2.0%, the Norwegian krone 0.7%, the South Korean won 0.7%, the Canadian dollar 0.4%, the British pound 0.1% and the Australian dollar 0.1%. For the week on the downside, the Brazilian real declined 2.0%, the Mexican peso 0.8%, the New Zealand dollar 0.7%, the Japanese yen 0.3%, the Singapore dollar 0.2%, and the euro 0.1%. The Chinese renminbi gained 0.45% versus the dollar this week (up 2.73% y-t-d).
Commodities Watch:
May 9 - Wall Street Journal (Benoit Faucon, Summer Said and Sarah McFarlane): "Washington's decision to reinstate Iranian sanctions is likely to slowly cut off a chunk of the world's crude supply-a shift that could redraw global supply lines and require Iran's big customers to find alternative sources. The Trump administration's move rattled oil markets, sending international crude up sharply after bouncing wildly in the lead-up to the decision. Midday in Europe, international crude was up 2.7% to $76.87 a barrel on London's Intercontinental Exchange, trading at its highest level in 3½ years."
The Goldman Sachs Commodities Index gained 0.1% (up 9.5% y-t-d). Spot Gold increased 0.2% to $1,318 (up 1.2%). Silver rose 1.4% to $16.752 (down 2.3%). Crude gained 98 cents to $70.70 (up 17%). Gasoline jumped 3.5% (up 22%), and Natural Gas rose 3.5% (down 5%). Copper increased 0.8% (down 6%). Wheat sank 5.2% (up 17%). Corn dropped 2.4% (up 13%).
Market Dislocation Watch:
May 8 - Bloomberg (Srinivasan Sivabalan): "The U.S. 10-year Treasury yield has retreated below the 3% mark, but the psychological damage it wrought by crossing that threshold hasn't eased. Since April 24, when the milestone was reached in intraday trading for the first time in five years, the risk-on rally in emerging markets has shown signs of faltering. While Treasury yields have stabilized, a selloff in foreign-currency bonds of developing nations has accelerated. The yield on the Bloomberg Barclays Emerging Markets Hard Currency Aggregate Index, which includes sovereign, quasi-sovereign and corporate bonds, has jumped 97 bps this year, compared with an increase of 54 bps in the 10-year Treasury yield. That has taken the gap between them to the highest level since January 2017."
May 10 - Bloomberg (Dani Burger): "Here's another sign the synchronized global growth story is on shaky ground: an investing strategy that outperforms in economic booms has suffered its biggest drop since the crisis-era heyday. A U.S. long-short value portfolio, an investing style typically deployed by quantitative funds, fell for 10 consecutive days through Wednesday, the longest losing run on record. That defies the market's prediction for a stellar trajectory for value stocks -- those priced cheaply relative to their assets -- amid record profit forecasts for Corporate America and continued expansion in Europe. If sustained, it's a troubling signal about the growth trajectory, and defies Wall Street projections at the start of the year."
May 10 - Bloomberg (Brian Chappatta): "The Treasury yield curve from 5 to 30 years flattened Thursday to the lowest level since August 2007, as a combination of weaker-than-expected U.S. inflation and solid demand for a record-sized bond auction bolstered investor confidence in owning long-dated securities. The gap was poised for its biggest one-day decline in more than a month, with the differential dropping through a previous intraday low from April to as little as 28.3 bps. The spread between 2 and 10 year Treasuries also narrowed in a bull flattening move."
Trump Administration Watch:
May 6 - New York Times (Keith Bradsher): "Senior Chinese and American officials concluded two days of negotiations on Friday with no deal and no date set for further talks, as the United States stepped up its demands for Chinese concessions to avert a potential trade war. The American negotiating team, which included Treasury Secretary Steven Mnuchin and the United States trade representative, Robert E. Lighthizer… did not release a statement. But a list of demands that the group took into the meeting called for reducing the United States' trade gap with China by $200 billion over the next two years and a halt on Chinese subsidies for advanced manufacturing sectors. The demands, which spread on Chinese social media and were confirmed by a person close to the negotiations, suggested that both sides hardened their positions this week despite the two days of talks."
May 8 - CNBC (Thomas Franck): "President Donald Trump's decision to pull the U.S. out of the Iran nuclear deal… could have widespread global implications ranging from the price of oil to the future of Tehran's nuclear ambitions. The U.S. withdrawal from the deal could stress already strained diplomatic relations with a number of key allies, including European Union leaders in Germany, France and the United Kingdom, all original parties in the 2015 accord. President Emmanuel Macron of France and British Foreign Secretary Boris Johnson have both implored Trump in recent days to stay in the landmark deal brokered under President Barack Obama. Macron later tweeted… his disappointment with Trump's decision to exit the deal, formally known as the Joint Comprehensive Plan of Action. 'France, Germany, and the UK regret the U.S. decision to leave the JCPOA,' Macron said… 'The nuclear non-proliferation regime is at stake.'"
May 9 - Bloomberg (Javier Blas): "The U.S. is giving its allies 180 days to extricate themselves from Iranian oil deals, making explicit its desire to start curbing the nation's crude exports quickly in a bid to go after Tehran's economic lifeline. The sanctions 'effectively' go into place immediately, U.S. Treasury Secretary Steven Mnuchin said... In a document accompanying the announcement, the Treasury Department gave an unequivocal 'Yes' to the question of 'Will the United States resume efforts to reduce Iran's crude oil sales?' It was a message harsher than some oil traders had expected."
May 9 - Financial Times (Sam Fleming, Shawn Donnan and Michael Peel): "Even as European leaders prepared their pleas for exemptions from US president Donald Trump's sanctions on Iran, advisers were warning of a deepening chill on multinationals' willingness to do business with the Islamic republic. The US has offered grace periods ranging from 90 to 180 days before imposing the new restrictions on companies' ability to conduct transactions with Iran. But Steven Mnuchin, the US Treasury secretary, warned after the president's statement that while licences and waivers could be applied for, America's objective is to impose 'maximum sanctions' on Iran. Andrew Peek, deputy assistant secretary for near eastern affairs, told reporters… that the Europeans had been responsive to previous US calls for sanctions on Iran, and he expected the same this time."
May 9 - New York Times (Jack Ewing and Stanley Reed): "European companies moved quickly to invest in Iran after it agreed in 2015 to mothball its nuclear weapons program in return for an end to economic sanctions. Automakers… linked up with Iranian partners to sell vehicles. Siemens of Germany struck a deal to deliver locomotives. Total of France began a project to explore offshore natural gas. Yet even before President Trump pulled out of the agreement with Iran, many companies had already tempered their expectations and limited their investment. Now their prospects look murkier as European leaders try to determine whether there is a path forward without the United States."
May 10 - CNBC (Jeff Cox): "Trade negotiations between U.S. and Chinese leaders are focused in part on getting China to buy more goods rather than getting it to ship less, Commerce Secretary Wilbur Ross said… Fresh from a high-level meeting in China between members of both nations, Ross said there was progress made but that barriers remain. 'The Chinese are very good at the rhetoric of free trade, but in fact they are probably the most protectionist country of the major countries,' he told Tyler Mathisen… Despite the criticism, he was at least pleased with China's willingness to listen and respond to U.S. concerns over a growing trade gap… 'It was the right level of people,' Ross said. 'There's a considerable gap between what they put on the table and what we feel we need. But that's OK, you sort of expect that at this stage in the game.'"
May 5 - Reuters (David Shepardson): "The White House… sharply criticized China's efforts to force foreign airlines to change how they refer to Taiwan, Hong Kong and Macau, labeling China's latest effort to police language describing the politically sensitive territories as 'Orwellian nonsense'. …The carriers were told to remove references on their websites or in other material that suggests Taiwan, Hong Kong and Macau are part of countries independent from China…"
Federal Reserve Watch:
May 7 - Bloomberg (Enda Curran and Carolina Millan): "The Federal Reserve's gradual push towards higher interest rates shouldn't be blamed for any roiling of emerging market economies, which are well placed to navigate the tightening of U.S. monetary policy, Fed Chairman Jerome Powell said. In a speech that argued U.S. decision-making isn't the major determinant of flows of capital into developing economies, Powell said the influence of the Fed on global financial conditions should not be overstated, despite it being blamed five years ago for the so-called taper tantrum."
May 6 - Bloomberg (Craig Torres): "One of the Federal Reserve's most senior officials and his incoming successor both said that overshooting the U.S. central bank's 2% inflation target for a time is nothing to worry about because the central bank has been below the goal for so long. 'I've said it many times: being a little above 2% after being below 2% for many, many years is not a problem," New York Fed President William Dudley said… That sentiment was echoed a short while later by John Williams, the current head of the Fed's San Francisco branch, who will replace Dudley next month."
U.S. Bubble Watch:
May 8 - CNBC (Annie Nova): "Americans are bracing for houses to get costlier. In a recent survey, 64% said they're anticipating an increase in property values during the next year, according to… Gallup. That's the highest share since the housing bubble in the mid-2000s, when 70% were predicting price levels to soar. Optimism levels vary depending on which pocket of the country you find yourself. Nearly 80% of Americans in the West forecast a pricier real estate market in the next year, compared with 64% in the South, 58% in the East and 56% in the Midwest."
May 9 - Bloomberg (Steve Matthews and Prashant Gopal): "Adam Blaylock was pretty sure he overpriced his Santa Clara, California, home by offering it in February for $1.48 million… But within a week, the 1,280-square-foot ranch-style house was in contract for $155,000 above asking. The $1.5 trillion tax overhaul President Donald Trump signed in December capped mortgage-interest deductions on loans up to $750,000, down from the prior limit of $1 million. It also set a $10,000 maximum for state and local tax deductions… Those provisions prompted one of the most powerful lobbying groups -- the National Association of Realtors -- to warn that home prices in some high-end markets would tank. So far though, those areas have proven to be resilient. There are 308 U.S. ZIP codes that have homes with median values in excess of $1 million -- more than 92% of them saw their median home prices increase in March from a year earlier… 'We are seeing the opposite of what was expected,' said Aaron Terrazas, senior economist at Zillow."
May 8 - Bloomberg (Shobhana Chandra): "U.S. job openings surged to a record in March, putting vacancies roughly on par with the number of unemployed workers, Labor Department data showed… Number of positions waiting to be filled rose by 472k to 6.55m (est. 6.1m) from upwardly revised 6.08m in Feb."
May 10 - Wall Street Journal (Ben Eisen and Akane Otani): "U.S. companies are buying back their shares at a record pace, providing fresh support during a rocky stretch for the stock market when many investors have rushed for the exits. S&P 500 companies that have reported earnings for the first three months of 2018 have bought $150 billion of their own stock in the first quarter… About 80% of S&P 500 components have reported so far. That is on pace for the biggest amount in any quarter, based on data going back to 1998. It has been fueled in part by a new tax law that is freeing up cash and encouraging companies to bring back money held abroad… S&P 500 firms are on pace to have returned almost $1 trillion to shareholders for the 12 months through March though dividends and buybacks."
May 9 - Wall Street Journal (Eric Morath, Heather Haddon and Jacob Bunge): "Higher input costs are pressuring U.S. companies to raise prices-a potential precursor to more consumer inflation-but shoppers are resisting their efforts to do so. Businesses are facing higher costs for everything from fuel and freight hauling to steel to accounting services. Input price increases have outstripped consumer price increases since late 2016, with some pipeline costs rising at two or three times the rate of consumer inflation… The challenge is particularly acute in the food industry."
May 9 - Wall Street Journal (Theo Francis and Jieqian Zhang): "Median pay reached $12.1 million for CEOs of the biggest U.S. companies in 2017, a new post-recession high, as profits and stock prices soared. Most S&P 500 CEOs received raises of 9.7% or better last year, according to a WSJ analysis of data from MyLogIQ… CEOs at pharmaceutical, media, technology and financial firms dominated the WSJ's pay ranking, taking 16 of the 25 top spots."
May 10 - Reuters (Lucia Mutikani): "U.S. consumer prices rebounded less than expected in April as rising costs for gasoline and rental accommodation were tempered by a moderation in healthcare prices, pointing to a steady buildup of inflation. [The]… Consumer Price Index rose 0.2% after slipping 0.1% in March. In the 12 months through April, the CPI increased 2.5%, the biggest gain since February 2017, after rising 2.4% March. Excluding the volatile food and energy components, the CPI edged up 0.1% after two straight monthly increases of 0.2%. The so-called core CPI rose 2.1% year-on-year in April…"
May 6 - Wall Street Journal (Jon Kamp and Joseph De Avila): "An improved national economy is easing pressure on state budgets. Budget officials from Utah to Connecticut are reporting better tax revenues and say their fiscal outlook has brightened, thanks to an expanding economy and job growth. The effects of the new federal tax law also increased revenue figures, but analysts caution that lift will be temporary for many states. 'Unlike last year, we're seeing broad-based strength,' said Matthew Knittel, who directs Pennsylvania's Independent Fiscal Office."
May 7 - Bloomberg (Joe Light): "Freddie Mac has quietly started extending credit to nonbanks that issue mortgages, a move it says will help the companies maintain access to a crucial stockpile of cash if their home loans go sour. But critics say the financing could create an unfair market advantage that allows preferred lenders to muscle out competitors. Fannie and Freddie Died But Were Reborn…"
China Watch:
May 6 - Reuters (Stella Qiu and Se Young Lee): "China's 'huge' trade imbalance with the United States is a structural and long-term problem and should be viewed with rationality, the Chinese central bank governor was quoted as saying by financial magazine Caixin."
May 10 - Bloomberg: "With corporate-debt defaults on the rise, China's securities regulator will probe bond funds to ensure that they have proper risk controls in place, according to people familiar with the matter. The China Securities Regulatory Commission's investigation will include whether individual firms' funds are shuffling high-risk bonds between them, said the people… One suspicion is mutual-fund companies may be motivated to beautify their holdings to avoid a mass withdrawal by investors, the people said."
May 10 - Bloomberg (Carrie Hong and Narae Kim): "The anxiety sweeping through credit markets is becoming self-reinforcing, say underwriters. The chain of events goes like this: in a weak market backdrop skittish Chinese junk bond issuers ask banks to guarantee bigger slices of debt sales to make sure the deal goes OK; the underwriters then try to get rid of those bonds in the secondary market immediately; prices drop. That, in turn, makes it harder for other deals to come to market. 'We're seeing a tendency that some underwriters are taking more bonds than their balance sheet can hold given what they have committed to get into the deal,' said Sebastian Ha, head of the debt syndicate at Bank of China… This leaves them with little choice but to sell the bonds the next day and this practice is 'somewhat distorting' the market, Ha said."
May 9 - Financial Times (Edward White): "Fitch has issued a warning over the increasing integration of Hong Kong's banking environment with China's financial system. The ratings agency has downgraded its view on the operating environment for Hong Kong's banks due to what it says is the 'growing influence of the links between [Hong Kong] and mainland China'. 'China's governance standards … are substantially lower than Hong Kong's,' Fitch said… It cut its assessment of the operating environment for Hong Kong's banks to ''a'/stable' from ''a+'/negative.' Fitch expected both Hong Kong banks to 'increasingly finance mainland customers' activities in China' and Chinese banks to 'leverage their considerably larger resources and customer bases to pursue growth in Hong Kong'."
May 9 - Reuters (Stella Qiu and Kevin Yao): "China's producer inflation picked up for the first time in seven months in April, bolstered by surging commodities prices and suggesting its industrial demand remains resilient even as trade tensions ratchet up with the United States… The producer price index (PPI) rose 3.4% in April from a year ago, accelerating from a 17-month low of 3.1% in March… The consumer price index (CPI) rose 1.8% from a year earlier, just below expectations and slowing from March's 2.1%."
Central Bank Watch:
May 10 - Bloomberg (Jill Ward): "Mark Carney said the Bank of England still intends to deliver 'modest' tightening after an unexpected economic slowdown derailed an interest-rate hike that investors had anticipated as soon as this month. The BOE governor spoke after officials kept the key interest rate at 0.5%, citing the first-quarter slump, and said inflation will weaken faster than previously thought. While his comments keep the prospect of tighter policy alive, investors sold the pound and reduced their bets on a hike this year. 'We think the momentum in the economy is going to reassert… The Monetary Policy Committee judges that an ongoing, modest tightening of monetary policy over the forecast period will be appropriate to return inflation sustainably to its target.'"
May 7 - Bloomberg: "Central banks across the globe lack the tools to boost inflation, according to Raghuram Rajan. The former Reserve Bank of India Governor was speaking to Bloomberg at the Hoover Institute Conference in Stanford, California. 'We are in a new world,' he said adding, earlier the fight for central banks was against high inflation. 'Unfortunately, we have the opposite problem now that inflation in many cases is a little too low. The central banks want to boost inflation but we don't have the tools that allow us to do that in a reliable way.'"
Europe Watch:
May 11 - Bloomberg (Lorenzo Totaro): "Populists may be coming soon to power in Italy with ideas including a flat tax for all that could blow a hole in the country's finances if they are ever implemented. The various promises, which also cover a lower retirement age and a guaranteed income for the poor, would probably provide a short-term growth boost. Still, they risk heaping additional fiscal burden on an economy already crippled with debt… Italy's economy is forecast to grow 1.5% this year, making it the worst performer in the 19-nation euro area. Unemployment constantly around 11% is above euro-area average, while the nation's debt burden at over 130% of its output is the region's second-highest after Greece."
May 10 - Bloomberg (John Follain): "Italy's populist leaders took strides toward forming the next administration at a meeting in Rome Thursday, including on the issue of who should be prime minister. Luigi Di Maio of the anti-establishment Five Star Movement and Matteo Salvini of the anti-immigrant League reported 'significant steps forward on the make-up of the executive and of the premier' in their first-ever joint statement. They asked President Sergio Mattarella to give them until Monday to complete their plans. If the two euroskeptic parties can pull off an agreement to take control of Europe's fourth-biggest economy they would become a major obstacle to efforts to strengthen the European Union."
May 10 - Reuters (Crispian Balmer and Gavin Jones): "The anti-establishment 5-Star Movement and far-right League have made 'significant steps' towards forming a government, the two parties said… as Italy looked to end nine weeks of political deadlock. The two groups, which are hostile to European Union budget restrictions and have made electoral pledges that would cost billions of euros to implement, entered into negotiations… just as a swift return to the polls looked inevitable. 'Significant steps forward have been made on the composition of the government and on the (nomination) of a prime minister,' a joint statement said…"
Fixed Income Bubble Watch:
May 10 - Bloomberg (Chitra Somayaji): "'This is still an incredibly good time to access' the market for capital and investment-grade financing, John Waldron, co-head of investment banking at Goldman Sachs, said in an interview with Ed Hammond that aired on Bloomberg TV."
May 6 - Bloomberg (Alexandra Harris): "A struggle that will dictate the future of financial markets is brewing. Long beleaguered Libor is fighting to preserve its status as the premier global benchmark for dollar-based assets just as questions pile up over the credibility of its presumptive heir. It's a clash with few equals in financial history. In one corner, the much maligned set of London-based rates that, even after being tainted by rigging scandals, still underpin more than $370 trillion of instruments across various currencies. In the other, a potential successor, conceived over the past four years by the Federal Reserve Bank of New York and the Fed Board of Governors, as well as a who's who of Wall Street titans, from JPMorgan… and Goldman Sachs… to BlackRock Inc. Replacing the London interbank offered rate 'would be the most profound development in financial markets' for years to come, said Ward McCarthy, chief financial economist at Jefferies… But 'there are more than $300 trillion of financial assets tied to Libor, and if you're going to transition from that to something else, that's $300 trillion of potholes that are potentially coming.'"
May 9 - Bloomberg (Shelly Hagan): "Corporate America partied like never before on cheap money over the past decade, and now comes the hangover. Companies will need to refinance an estimated $4 trillion of bonds over the next five years, about two-thirds of all their outstanding debt, according to Wells Fargo Securities. This has investors concerned because rising rates means it will cost more to pay for unprecedented amounts of borrowing, which could push balance sheets toward a tipping point. And on top of that, many see the economy slowing down at the same time the rollovers are peaking."
EM Bubble Watch:
May 10 - Financial Times (Gillian Tett): "A year ago, Argentina was the darling of global investors. So much so that, when it issued a pioneering 100-year bond with a yield of just 7.9%, investors gobbled it up, ignoring the fact that the country has defaulted eight times in the past 200 years. Whoops! This week President Mauricio Macri asked the IMF for help, after the peso tumbled to record lows. And that century bond? After rising to 105% of its face value late last year, it is now trading nearer to 85%. This is deeply painful for the Macri government - and for long-suffering Argentine voters who hoped that 'gradualist' reforms could deliver an exit from years of economic turmoil, indebtedness and decline. But there is a silver lining too, at least for the wider world: Argentina's turmoil could offer a timely wake-up call about the bigger challenges in 2018."
May 10 - Bloomberg (Shuli Ren): "Calling early elections is always a gamble, no matter how strong an incumbent's hold. The 92-year-old Mahathir Mohamad stunned the world by defeating his former protege, Prime Minister Najib Razak, in Wednesday's landmark Malaysian vote, dealing another blow to complacent emerging-market investors who are licking their wounds from Argentina to Turkey. As recently as two weeks ago, global investors saw Malaysia as the best growth story among emerging Southeast Asian markets, in large part because of Najib's 'stability rules' and his close ties with China. Park that thesis. To make sure foreign (hot) money doesn't just flee, Bank Negara Malaysia declared special post-election holidays for the rest of the week, shutting the onshore money, bond and stock markets. Investors were caught off-guard elsewhere. In Turkey, even though political risk has been mounting steadily since November, they didn't price in their concern until this month. The Turkish lira is now down 11.5% on the year…"
May 6 - Reuters (Marc Jones and Karin Strohecker): "A resurgent dollar and higher borrowing costs are smashing through Argentina and Turkey's currencies like a wrecking ball and raising the likelihood more broadly that emerging markets' three-year long interest rate cutting cycle is at an end. Emerging markets came into the year flying, riding on the back of a healthy global economy and rising commodity prices alongside tame inflation and a weak dollar. It looked more than likely that a wave of rate cuts would keep rolling, allowing a bond rally to continue. From Brazil and Russia to Armenia and Zambia, developing countries, big and small, have been on a rate cutting spree. With hundreds of rate cuts since Jan. 2015, the average emerging market borrowing cost fell under 6% earlier this year from over 7% at the time."
Geopolitical Watch:
May 9 - Reuters (Dan Williams and Angus McDowall): "Israel said it attacked nearly all of Iran's military infrastructure in Syria… after Iranian forces fired rockets at Israeli-held territory for the first time in the most extensive military exchange ever between the two adversaries. It was the heaviest Israeli barrage in Syria since the 2011 start of the civil war in which Iranians, allied Shi'ite Muslim militias and Russian troops have deployed in support of President Bashar al-Assad. The confrontation came two days after the United States announced its withdrawal, with Israel's urging, from a nuclear accord with Iran."
May 5 - BBC: "The US Navy has said it will re-establish its Second Fleet, as Russia becomes more assertive. Chief of Naval Operations Adm John Richardson said the fleet, disbanded in 2011, would oversee forces on the US East Coast and North Atlantic. He said the National Defense Strategy, published earlier this year, made it clear that the era of great power competition had returned. The strategy makes countering Russia and China a priority. The fleet, which was disbanded for cost-saving and structural reasons, will be based in its previous home - Norfolk, Virginia."
May 10 - Bloomberg (Arne Delfs and Gregory Viscusi): "German Chancellor Angela Merkel said Europe can no longer count on the U.S. for military protection and must 'take its destiny into its own hands.' Merkel's comments… reprise a theme she first sounded last year in response to U.S. President Donald Trump's 'America First' foreign policy, and his hectoring of European NATO allies for allegedly spending too little on defense. It's her latest retort to Trump… 'It's no longer the case that the United States will simply just protect us,' Merkel said to applause… 'Rather, Europe needs to take its fate into its own hands. That's the task for the future.'"
The S&P500 rose 2.4% (up 2.4% y-t-d), and the Dow gained 2.3% (up 0.5%). The Utilities fell 2.1% (down 4.9%). The Banks surged 4.1% (up 3.9%), and the Broker/Dealers jumped 2.9% (up 10.8%). The Transports rose 3.3% (up 1.0%). The S&P 400 Midcaps gained 2.0% (up 2.0%), and the small cap Russell 2000 jumped 2.6% (up 4.6%). The Nasdaq100 advanced 2.7% (up 8.7%). The Semiconductors surged 4.1% (up 7.8%). The Biotechs jumped 4.0% (up 10.5%). With bullion gaining $3, the HUI gold index recovered 0.5% (down 5.2%).
Three-month Treasury bill rates ended the week at 1.86%. Two-year government yields added two bps to 2.54% (up 65bps y-t-d). Five-year T-note yields gained five bps 2.84% (up 63bps). Ten-year Treasury yields added two bps to 2.97% (up 57bps). Long bond yields slipped two bps to 3.10% (up 36bps). Benchmark Fannie Mae MBS yields increased two bps to 3.66% (up 66bps).
Greek 10-year yields fell 10 bps to 4.00% (down 7bps y-t-d). Ten-year Portuguese yields dipped three bps to 1.68% (down 26bps). Italian 10-year yields jumped eight bps to 1.87% (down 14bps). Spain's 10-year yields declined three bps to 1.27% (down 29bps). German bund yields gained two bps to 0.56% (up 13bps). French yields added less than a basis point to 0.79% (unchanged). The French to German 10-year bond spread declined one to 23 bps. U.K. 10-year gilt yields rose four bps to 1.44% (up 25bps). U.K.'s FTSE equities index jumped 2.1% (up 0.5%).
Japan's Nikkei 225 equities rose 1.3% (unchanged y-t-d). Japanese 10-year "JGB" yields were little changed at 0.047% (unchanged). France's CAC40 added 0.5% (up 4.3%). The German DAX equities index rose 1.3% (up 0.6%). Spain's IBEX 35 equities index jumped 1.7% (up 2.3%). Italy's FTSE MIB index declined 0.7% (up 10.6%). EM equities were mixed. Brazil's Bovespa index rallied 2.5% (up 11.5%), while Mexico's Bolsa slipped 0.6% (down 5.3%). South Korea's Kospi index gained 0.7% (up 0.4%). India’s Sensex equities index rose 1.8% (up 4.3%). China’s Shanghai Exchange jumped 2.3% (down 4.4%). Turkey's Borsa Istanbul National 100 index declined 0.7% (down 11.7%). Russia's MICEX equities surged 2.4% (up 11.2%).
Investment-grade bond funds saw inflows of $804 million, while junk bond funds posted outflows of $755 million (from Lipper).
Freddie Mac 30-year fixed mortgage rate were unchanged at 4.55% (up 50bps y-o-y). Fifteen-year rates slipped two bps to 4.01% (up 72bps). Five-year hybrid ARM rates jumped eight bps to 3.77% (up 63bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.71% (up 55bps).
Federal Reserve Credit last week declined $8.1bn to $4.318 TN. Over the past year, Fed Credit contracted $116bn, or 2.6%. Fed Credit inflated $1.507 TN, or 54%, over the past 288 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $10.9bn last week to a 13-week low $3.397 TN. "Custody holdings" were up $175bn y-o-y, or 5.4%.
M2 (narrow) "money" supply declined $8.2bn last week to $13.955 TN. "Narrow money" gained $480bn, or 3.6%, over the past year. For the week, Currency increased $1.2bn. Total Checkable Deposits gained $5.7bn, while savings Deposits fell $24.2bn. Small Time Deposits rose $3.6bn. Retail Money Funds added $5.6bn.
Total money market fund assets expanded $6.9bn to $2.807 TN. Money Funds gained $157bn y-o-y, or 5.9%.
Total Commercial Paper rose $6.2bn to $1.059 TN. CP gained $78bn y-o-y, or 7.9%.
Currency Watch:
May 10 - Bloomberg (Siddharth Verma): "Winds of change in currency markets threaten to blow global investment trends further off course -- but from the East as much as the West. While investors have been focused on a strengthening U.S. dollar and rising Treasury yields, a weaker Chinese yuan also threatens to heap pressure on emerging market assets that have already wiped out their gains for the year. That's because a pause in the yuan's appreciation path would challenge a clutch of developing economies by hitting their trade competitiveness against China, according to Morgan Stanley. 'RMB up and USD down is the best world in which you can live,' said Hans Redeker, the bank's… chief global currency strategist. 'You have it easier on exports and funding, all at the same time."
The U.S. dollar index was little changed at 92.537 (up 0.4% y-t-d). For the week on the upside, the Swedish krona increased 2.4%, the South African rand 2.0%, the Norwegian krone 0.7%, the South Korean won 0.7%, the Canadian dollar 0.4%, the British pound 0.1% and the Australian dollar 0.1%. For the week on the downside, the Brazilian real declined 2.0%, the Mexican peso 0.8%, the New Zealand dollar 0.7%, the Japanese yen 0.3%, the Singapore dollar 0.2%, and the euro 0.1%. The Chinese renminbi gained 0.45% versus the dollar this week (up 2.73% y-t-d).
Commodities Watch:
May 9 - Wall Street Journal (Benoit Faucon, Summer Said and Sarah McFarlane): "Washington's decision to reinstate Iranian sanctions is likely to slowly cut off a chunk of the world's crude supply-a shift that could redraw global supply lines and require Iran's big customers to find alternative sources. The Trump administration's move rattled oil markets, sending international crude up sharply after bouncing wildly in the lead-up to the decision. Midday in Europe, international crude was up 2.7% to $76.87 a barrel on London's Intercontinental Exchange, trading at its highest level in 3½ years."
The Goldman Sachs Commodities Index gained 0.1% (up 9.5% y-t-d). Spot Gold increased 0.2% to $1,318 (up 1.2%). Silver rose 1.4% to $16.752 (down 2.3%). Crude gained 98 cents to $70.70 (up 17%). Gasoline jumped 3.5% (up 22%), and Natural Gas rose 3.5% (down 5%). Copper increased 0.8% (down 6%). Wheat sank 5.2% (up 17%). Corn dropped 2.4% (up 13%).
Market Dislocation Watch:
May 8 - Bloomberg (Srinivasan Sivabalan): "The U.S. 10-year Treasury yield has retreated below the 3% mark, but the psychological damage it wrought by crossing that threshold hasn't eased. Since April 24, when the milestone was reached in intraday trading for the first time in five years, the risk-on rally in emerging markets has shown signs of faltering. While Treasury yields have stabilized, a selloff in foreign-currency bonds of developing nations has accelerated. The yield on the Bloomberg Barclays Emerging Markets Hard Currency Aggregate Index, which includes sovereign, quasi-sovereign and corporate bonds, has jumped 97 bps this year, compared with an increase of 54 bps in the 10-year Treasury yield. That has taken the gap between them to the highest level since January 2017."
May 10 - Bloomberg (Dani Burger): "Here's another sign the synchronized global growth story is on shaky ground: an investing strategy that outperforms in economic booms has suffered its biggest drop since the crisis-era heyday. A U.S. long-short value portfolio, an investing style typically deployed by quantitative funds, fell for 10 consecutive days through Wednesday, the longest losing run on record. That defies the market's prediction for a stellar trajectory for value stocks -- those priced cheaply relative to their assets -- amid record profit forecasts for Corporate America and continued expansion in Europe. If sustained, it's a troubling signal about the growth trajectory, and defies Wall Street projections at the start of the year."
May 10 - Bloomberg (Brian Chappatta): "The Treasury yield curve from 5 to 30 years flattened Thursday to the lowest level since August 2007, as a combination of weaker-than-expected U.S. inflation and solid demand for a record-sized bond auction bolstered investor confidence in owning long-dated securities. The gap was poised for its biggest one-day decline in more than a month, with the differential dropping through a previous intraday low from April to as little as 28.3 bps. The spread between 2 and 10 year Treasuries also narrowed in a bull flattening move."
Trump Administration Watch:
May 6 - New York Times (Keith Bradsher): "Senior Chinese and American officials concluded two days of negotiations on Friday with no deal and no date set for further talks, as the United States stepped up its demands for Chinese concessions to avert a potential trade war. The American negotiating team, which included Treasury Secretary Steven Mnuchin and the United States trade representative, Robert E. Lighthizer… did not release a statement. But a list of demands that the group took into the meeting called for reducing the United States' trade gap with China by $200 billion over the next two years and a halt on Chinese subsidies for advanced manufacturing sectors. The demands, which spread on Chinese social media and were confirmed by a person close to the negotiations, suggested that both sides hardened their positions this week despite the two days of talks."
May 8 - CNBC (Thomas Franck): "President Donald Trump's decision to pull the U.S. out of the Iran nuclear deal… could have widespread global implications ranging from the price of oil to the future of Tehran's nuclear ambitions. The U.S. withdrawal from the deal could stress already strained diplomatic relations with a number of key allies, including European Union leaders in Germany, France and the United Kingdom, all original parties in the 2015 accord. President Emmanuel Macron of France and British Foreign Secretary Boris Johnson have both implored Trump in recent days to stay in the landmark deal brokered under President Barack Obama. Macron later tweeted… his disappointment with Trump's decision to exit the deal, formally known as the Joint Comprehensive Plan of Action. 'France, Germany, and the UK regret the U.S. decision to leave the JCPOA,' Macron said… 'The nuclear non-proliferation regime is at stake.'"
May 9 - Bloomberg (Javier Blas): "The U.S. is giving its allies 180 days to extricate themselves from Iranian oil deals, making explicit its desire to start curbing the nation's crude exports quickly in a bid to go after Tehran's economic lifeline. The sanctions 'effectively' go into place immediately, U.S. Treasury Secretary Steven Mnuchin said... In a document accompanying the announcement, the Treasury Department gave an unequivocal 'Yes' to the question of 'Will the United States resume efforts to reduce Iran's crude oil sales?' It was a message harsher than some oil traders had expected."
May 9 - Financial Times (Sam Fleming, Shawn Donnan and Michael Peel): "Even as European leaders prepared their pleas for exemptions from US president Donald Trump's sanctions on Iran, advisers were warning of a deepening chill on multinationals' willingness to do business with the Islamic republic. The US has offered grace periods ranging from 90 to 180 days before imposing the new restrictions on companies' ability to conduct transactions with Iran. But Steven Mnuchin, the US Treasury secretary, warned after the president's statement that while licences and waivers could be applied for, America's objective is to impose 'maximum sanctions' on Iran. Andrew Peek, deputy assistant secretary for near eastern affairs, told reporters… that the Europeans had been responsive to previous US calls for sanctions on Iran, and he expected the same this time."
May 9 - New York Times (Jack Ewing and Stanley Reed): "European companies moved quickly to invest in Iran after it agreed in 2015 to mothball its nuclear weapons program in return for an end to economic sanctions. Automakers… linked up with Iranian partners to sell vehicles. Siemens of Germany struck a deal to deliver locomotives. Total of France began a project to explore offshore natural gas. Yet even before President Trump pulled out of the agreement with Iran, many companies had already tempered their expectations and limited their investment. Now their prospects look murkier as European leaders try to determine whether there is a path forward without the United States."
May 10 - CNBC (Jeff Cox): "Trade negotiations between U.S. and Chinese leaders are focused in part on getting China to buy more goods rather than getting it to ship less, Commerce Secretary Wilbur Ross said… Fresh from a high-level meeting in China between members of both nations, Ross said there was progress made but that barriers remain. 'The Chinese are very good at the rhetoric of free trade, but in fact they are probably the most protectionist country of the major countries,' he told Tyler Mathisen… Despite the criticism, he was at least pleased with China's willingness to listen and respond to U.S. concerns over a growing trade gap… 'It was the right level of people,' Ross said. 'There's a considerable gap between what they put on the table and what we feel we need. But that's OK, you sort of expect that at this stage in the game.'"
May 5 - Reuters (David Shepardson): "The White House… sharply criticized China's efforts to force foreign airlines to change how they refer to Taiwan, Hong Kong and Macau, labeling China's latest effort to police language describing the politically sensitive territories as 'Orwellian nonsense'. …The carriers were told to remove references on their websites or in other material that suggests Taiwan, Hong Kong and Macau are part of countries independent from China…"
Federal Reserve Watch:
May 7 - Bloomberg (Enda Curran and Carolina Millan): "The Federal Reserve's gradual push towards higher interest rates shouldn't be blamed for any roiling of emerging market economies, which are well placed to navigate the tightening of U.S. monetary policy, Fed Chairman Jerome Powell said. In a speech that argued U.S. decision-making isn't the major determinant of flows of capital into developing economies, Powell said the influence of the Fed on global financial conditions should not be overstated, despite it being blamed five years ago for the so-called taper tantrum."
May 6 - Bloomberg (Craig Torres): "One of the Federal Reserve's most senior officials and his incoming successor both said that overshooting the U.S. central bank's 2% inflation target for a time is nothing to worry about because the central bank has been below the goal for so long. 'I've said it many times: being a little above 2% after being below 2% for many, many years is not a problem," New York Fed President William Dudley said… That sentiment was echoed a short while later by John Williams, the current head of the Fed's San Francisco branch, who will replace Dudley next month."
U.S. Bubble Watch:
May 8 - CNBC (Annie Nova): "Americans are bracing for houses to get costlier. In a recent survey, 64% said they're anticipating an increase in property values during the next year, according to… Gallup. That's the highest share since the housing bubble in the mid-2000s, when 70% were predicting price levels to soar. Optimism levels vary depending on which pocket of the country you find yourself. Nearly 80% of Americans in the West forecast a pricier real estate market in the next year, compared with 64% in the South, 58% in the East and 56% in the Midwest."
May 9 - Bloomberg (Steve Matthews and Prashant Gopal): "Adam Blaylock was pretty sure he overpriced his Santa Clara, California, home by offering it in February for $1.48 million… But within a week, the 1,280-square-foot ranch-style house was in contract for $155,000 above asking. The $1.5 trillion tax overhaul President Donald Trump signed in December capped mortgage-interest deductions on loans up to $750,000, down from the prior limit of $1 million. It also set a $10,000 maximum for state and local tax deductions… Those provisions prompted one of the most powerful lobbying groups -- the National Association of Realtors -- to warn that home prices in some high-end markets would tank. So far though, those areas have proven to be resilient. There are 308 U.S. ZIP codes that have homes with median values in excess of $1 million -- more than 92% of them saw their median home prices increase in March from a year earlier… 'We are seeing the opposite of what was expected,' said Aaron Terrazas, senior economist at Zillow."
May 8 - Bloomberg (Shobhana Chandra): "U.S. job openings surged to a record in March, putting vacancies roughly on par with the number of unemployed workers, Labor Department data showed… Number of positions waiting to be filled rose by 472k to 6.55m (est. 6.1m) from upwardly revised 6.08m in Feb."
May 10 - Wall Street Journal (Ben Eisen and Akane Otani): "U.S. companies are buying back their shares at a record pace, providing fresh support during a rocky stretch for the stock market when many investors have rushed for the exits. S&P 500 companies that have reported earnings for the first three months of 2018 have bought $150 billion of their own stock in the first quarter… About 80% of S&P 500 components have reported so far. That is on pace for the biggest amount in any quarter, based on data going back to 1998. It has been fueled in part by a new tax law that is freeing up cash and encouraging companies to bring back money held abroad… S&P 500 firms are on pace to have returned almost $1 trillion to shareholders for the 12 months through March though dividends and buybacks."
May 9 - Wall Street Journal (Eric Morath, Heather Haddon and Jacob Bunge): "Higher input costs are pressuring U.S. companies to raise prices-a potential precursor to more consumer inflation-but shoppers are resisting their efforts to do so. Businesses are facing higher costs for everything from fuel and freight hauling to steel to accounting services. Input price increases have outstripped consumer price increases since late 2016, with some pipeline costs rising at two or three times the rate of consumer inflation… The challenge is particularly acute in the food industry."
May 9 - Wall Street Journal (Theo Francis and Jieqian Zhang): "Median pay reached $12.1 million for CEOs of the biggest U.S. companies in 2017, a new post-recession high, as profits and stock prices soared. Most S&P 500 CEOs received raises of 9.7% or better last year, according to a WSJ analysis of data from MyLogIQ… CEOs at pharmaceutical, media, technology and financial firms dominated the WSJ's pay ranking, taking 16 of the 25 top spots."
May 10 - Reuters (Lucia Mutikani): "U.S. consumer prices rebounded less than expected in April as rising costs for gasoline and rental accommodation were tempered by a moderation in healthcare prices, pointing to a steady buildup of inflation. [The]… Consumer Price Index rose 0.2% after slipping 0.1% in March. In the 12 months through April, the CPI increased 2.5%, the biggest gain since February 2017, after rising 2.4% March. Excluding the volatile food and energy components, the CPI edged up 0.1% after two straight monthly increases of 0.2%. The so-called core CPI rose 2.1% year-on-year in April…"
May 6 - Wall Street Journal (Jon Kamp and Joseph De Avila): "An improved national economy is easing pressure on state budgets. Budget officials from Utah to Connecticut are reporting better tax revenues and say their fiscal outlook has brightened, thanks to an expanding economy and job growth. The effects of the new federal tax law also increased revenue figures, but analysts caution that lift will be temporary for many states. 'Unlike last year, we're seeing broad-based strength,' said Matthew Knittel, who directs Pennsylvania's Independent Fiscal Office."
May 7 - Bloomberg (Joe Light): "Freddie Mac has quietly started extending credit to nonbanks that issue mortgages, a move it says will help the companies maintain access to a crucial stockpile of cash if their home loans go sour. But critics say the financing could create an unfair market advantage that allows preferred lenders to muscle out competitors. Fannie and Freddie Died But Were Reborn…"
China Watch:
May 6 - Reuters (Stella Qiu and Se Young Lee): "China's 'huge' trade imbalance with the United States is a structural and long-term problem and should be viewed with rationality, the Chinese central bank governor was quoted as saying by financial magazine Caixin."
May 10 - Bloomberg: "With corporate-debt defaults on the rise, China's securities regulator will probe bond funds to ensure that they have proper risk controls in place, according to people familiar with the matter. The China Securities Regulatory Commission's investigation will include whether individual firms' funds are shuffling high-risk bonds between them, said the people… One suspicion is mutual-fund companies may be motivated to beautify their holdings to avoid a mass withdrawal by investors, the people said."
May 10 - Bloomberg (Carrie Hong and Narae Kim): "The anxiety sweeping through credit markets is becoming self-reinforcing, say underwriters. The chain of events goes like this: in a weak market backdrop skittish Chinese junk bond issuers ask banks to guarantee bigger slices of debt sales to make sure the deal goes OK; the underwriters then try to get rid of those bonds in the secondary market immediately; prices drop. That, in turn, makes it harder for other deals to come to market. 'We're seeing a tendency that some underwriters are taking more bonds than their balance sheet can hold given what they have committed to get into the deal,' said Sebastian Ha, head of the debt syndicate at Bank of China… This leaves them with little choice but to sell the bonds the next day and this practice is 'somewhat distorting' the market, Ha said."
May 9 - Financial Times (Edward White): "Fitch has issued a warning over the increasing integration of Hong Kong's banking environment with China's financial system. The ratings agency has downgraded its view on the operating environment for Hong Kong's banks due to what it says is the 'growing influence of the links between [Hong Kong] and mainland China'. 'China's governance standards … are substantially lower than Hong Kong's,' Fitch said… It cut its assessment of the operating environment for Hong Kong's banks to ''a'/stable' from ''a+'/negative.' Fitch expected both Hong Kong banks to 'increasingly finance mainland customers' activities in China' and Chinese banks to 'leverage their considerably larger resources and customer bases to pursue growth in Hong Kong'."
May 9 - Reuters (Stella Qiu and Kevin Yao): "China's producer inflation picked up for the first time in seven months in April, bolstered by surging commodities prices and suggesting its industrial demand remains resilient even as trade tensions ratchet up with the United States… The producer price index (PPI) rose 3.4% in April from a year ago, accelerating from a 17-month low of 3.1% in March… The consumer price index (CPI) rose 1.8% from a year earlier, just below expectations and slowing from March's 2.1%."
Central Bank Watch:
May 10 - Bloomberg (Jill Ward): "Mark Carney said the Bank of England still intends to deliver 'modest' tightening after an unexpected economic slowdown derailed an interest-rate hike that investors had anticipated as soon as this month. The BOE governor spoke after officials kept the key interest rate at 0.5%, citing the first-quarter slump, and said inflation will weaken faster than previously thought. While his comments keep the prospect of tighter policy alive, investors sold the pound and reduced their bets on a hike this year. 'We think the momentum in the economy is going to reassert… The Monetary Policy Committee judges that an ongoing, modest tightening of monetary policy over the forecast period will be appropriate to return inflation sustainably to its target.'"
May 7 - Bloomberg: "Central banks across the globe lack the tools to boost inflation, according to Raghuram Rajan. The former Reserve Bank of India Governor was speaking to Bloomberg at the Hoover Institute Conference in Stanford, California. 'We are in a new world,' he said adding, earlier the fight for central banks was against high inflation. 'Unfortunately, we have the opposite problem now that inflation in many cases is a little too low. The central banks want to boost inflation but we don't have the tools that allow us to do that in a reliable way.'"
Europe Watch:
May 11 - Bloomberg (Lorenzo Totaro): "Populists may be coming soon to power in Italy with ideas including a flat tax for all that could blow a hole in the country's finances if they are ever implemented. The various promises, which also cover a lower retirement age and a guaranteed income for the poor, would probably provide a short-term growth boost. Still, they risk heaping additional fiscal burden on an economy already crippled with debt… Italy's economy is forecast to grow 1.5% this year, making it the worst performer in the 19-nation euro area. Unemployment constantly around 11% is above euro-area average, while the nation's debt burden at over 130% of its output is the region's second-highest after Greece."
May 10 - Bloomberg (John Follain): "Italy's populist leaders took strides toward forming the next administration at a meeting in Rome Thursday, including on the issue of who should be prime minister. Luigi Di Maio of the anti-establishment Five Star Movement and Matteo Salvini of the anti-immigrant League reported 'significant steps forward on the make-up of the executive and of the premier' in their first-ever joint statement. They asked President Sergio Mattarella to give them until Monday to complete their plans. If the two euroskeptic parties can pull off an agreement to take control of Europe's fourth-biggest economy they would become a major obstacle to efforts to strengthen the European Union."
May 10 - Reuters (Crispian Balmer and Gavin Jones): "The anti-establishment 5-Star Movement and far-right League have made 'significant steps' towards forming a government, the two parties said… as Italy looked to end nine weeks of political deadlock. The two groups, which are hostile to European Union budget restrictions and have made electoral pledges that would cost billions of euros to implement, entered into negotiations… just as a swift return to the polls looked inevitable. 'Significant steps forward have been made on the composition of the government and on the (nomination) of a prime minister,' a joint statement said…"
Fixed Income Bubble Watch:
May 10 - Bloomberg (Chitra Somayaji): "'This is still an incredibly good time to access' the market for capital and investment-grade financing, John Waldron, co-head of investment banking at Goldman Sachs, said in an interview with Ed Hammond that aired on Bloomberg TV."
May 6 - Bloomberg (Alexandra Harris): "A struggle that will dictate the future of financial markets is brewing. Long beleaguered Libor is fighting to preserve its status as the premier global benchmark for dollar-based assets just as questions pile up over the credibility of its presumptive heir. It's a clash with few equals in financial history. In one corner, the much maligned set of London-based rates that, even after being tainted by rigging scandals, still underpin more than $370 trillion of instruments across various currencies. In the other, a potential successor, conceived over the past four years by the Federal Reserve Bank of New York and the Fed Board of Governors, as well as a who's who of Wall Street titans, from JPMorgan… and Goldman Sachs… to BlackRock Inc. Replacing the London interbank offered rate 'would be the most profound development in financial markets' for years to come, said Ward McCarthy, chief financial economist at Jefferies… But 'there are more than $300 trillion of financial assets tied to Libor, and if you're going to transition from that to something else, that's $300 trillion of potholes that are potentially coming.'"
May 9 - Bloomberg (Shelly Hagan): "Corporate America partied like never before on cheap money over the past decade, and now comes the hangover. Companies will need to refinance an estimated $4 trillion of bonds over the next five years, about two-thirds of all their outstanding debt, according to Wells Fargo Securities. This has investors concerned because rising rates means it will cost more to pay for unprecedented amounts of borrowing, which could push balance sheets toward a tipping point. And on top of that, many see the economy slowing down at the same time the rollovers are peaking."
EM Bubble Watch:
May 10 - Financial Times (Gillian Tett): "A year ago, Argentina was the darling of global investors. So much so that, when it issued a pioneering 100-year bond with a yield of just 7.9%, investors gobbled it up, ignoring the fact that the country has defaulted eight times in the past 200 years. Whoops! This week President Mauricio Macri asked the IMF for help, after the peso tumbled to record lows. And that century bond? After rising to 105% of its face value late last year, it is now trading nearer to 85%. This is deeply painful for the Macri government - and for long-suffering Argentine voters who hoped that 'gradualist' reforms could deliver an exit from years of economic turmoil, indebtedness and decline. But there is a silver lining too, at least for the wider world: Argentina's turmoil could offer a timely wake-up call about the bigger challenges in 2018."
May 10 - Bloomberg (Shuli Ren): "Calling early elections is always a gamble, no matter how strong an incumbent's hold. The 92-year-old Mahathir Mohamad stunned the world by defeating his former protege, Prime Minister Najib Razak, in Wednesday's landmark Malaysian vote, dealing another blow to complacent emerging-market investors who are licking their wounds from Argentina to Turkey. As recently as two weeks ago, global investors saw Malaysia as the best growth story among emerging Southeast Asian markets, in large part because of Najib's 'stability rules' and his close ties with China. Park that thesis. To make sure foreign (hot) money doesn't just flee, Bank Negara Malaysia declared special post-election holidays for the rest of the week, shutting the onshore money, bond and stock markets. Investors were caught off-guard elsewhere. In Turkey, even though political risk has been mounting steadily since November, they didn't price in their concern until this month. The Turkish lira is now down 11.5% on the year…"
May 6 - Reuters (Marc Jones and Karin Strohecker): "A resurgent dollar and higher borrowing costs are smashing through Argentina and Turkey's currencies like a wrecking ball and raising the likelihood more broadly that emerging markets' three-year long interest rate cutting cycle is at an end. Emerging markets came into the year flying, riding on the back of a healthy global economy and rising commodity prices alongside tame inflation and a weak dollar. It looked more than likely that a wave of rate cuts would keep rolling, allowing a bond rally to continue. From Brazil and Russia to Armenia and Zambia, developing countries, big and small, have been on a rate cutting spree. With hundreds of rate cuts since Jan. 2015, the average emerging market borrowing cost fell under 6% earlier this year from over 7% at the time."
Geopolitical Watch:
May 9 - Reuters (Dan Williams and Angus McDowall): "Israel said it attacked nearly all of Iran's military infrastructure in Syria… after Iranian forces fired rockets at Israeli-held territory for the first time in the most extensive military exchange ever between the two adversaries. It was the heaviest Israeli barrage in Syria since the 2011 start of the civil war in which Iranians, allied Shi'ite Muslim militias and Russian troops have deployed in support of President Bashar al-Assad. The confrontation came two days after the United States announced its withdrawal, with Israel's urging, from a nuclear accord with Iran."
May 5 - BBC: "The US Navy has said it will re-establish its Second Fleet, as Russia becomes more assertive. Chief of Naval Operations Adm John Richardson said the fleet, disbanded in 2011, would oversee forces on the US East Coast and North Atlantic. He said the National Defense Strategy, published earlier this year, made it clear that the era of great power competition had returned. The strategy makes countering Russia and China a priority. The fleet, which was disbanded for cost-saving and structural reasons, will be based in its previous home - Norfolk, Virginia."
May 10 - Bloomberg (Arne Delfs and Gregory Viscusi): "German Chancellor Angela Merkel said Europe can no longer count on the U.S. for military protection and must 'take its destiny into its own hands.' Merkel's comments… reprise a theme she first sounded last year in response to U.S. President Donald Trump's 'America First' foreign policy, and his hectoring of European NATO allies for allegedly spending too little on defense. It's her latest retort to Trump… 'It's no longer the case that the United States will simply just protect us,' Merkel said to applause… 'Rather, Europe needs to take its fate into its own hands. That's the task for the future.'"
Thursday, May 10, 2018
Friday's News Links
[BloombergQ] Global Stocks Mixed as Rates in Focus; Oil Steady: Markets Wrap
[Reuters] Oil near multi-year highs as Iran sanctions tighten supply outlook
[Axios] What Trump will — and won't — say on drug prices
[Reuters] St. Louis Fed's Bullard says rates already near neutral, no more raises needed
[BloombergQ] Italian Populists Bring Promises With Hefty Price Tags
[BloombergQ] Italy Finally Falls to the Forces of Populism
[Reuters] China April new loans rise but shadow lending shrinks
[Reuters] Iran says Syria has every right to defend itself against Israel: TV
[NYT] With Jail Sentences and Corporate Flameouts, China Is Tackling its Debt
[NYT] What Keeps Xi Jinping Awake at Night
[WSJ] Fall of Malaysia’s Ruling Party, After Six Decades in Power, Shakes Vital U.S. Ally
[FT] Why the shrug from markets as populists take power in Italy?
[FT] Turkey’s banks present hurdle for Erdogan recovery
[FT] Time to wipe out the absurd credit default swap market
[Reuters] Oil near multi-year highs as Iran sanctions tighten supply outlook
[Axios] What Trump will — and won't — say on drug prices
[Reuters] St. Louis Fed's Bullard says rates already near neutral, no more raises needed
[BloombergQ] Italian Populists Bring Promises With Hefty Price Tags
[BloombergQ] Italy Finally Falls to the Forces of Populism
[Reuters] China April new loans rise but shadow lending shrinks
[Reuters] Iran says Syria has every right to defend itself against Israel: TV
[NYT] With Jail Sentences and Corporate Flameouts, China Is Tackling its Debt
[NYT] What Keeps Xi Jinping Awake at Night
[WSJ] Fall of Malaysia’s Ruling Party, After Six Decades in Power, Shakes Vital U.S. Ally
[FT] Why the shrug from markets as populists take power in Italy?
[FT] Turkey’s banks present hurdle for Erdogan recovery
[FT] Time to wipe out the absurd credit default swap market
Thursday Afternoon Links
[BloombergQ] Stocks Jump as Dollar Tumbles on Tame Inflation: Markets Wrap
[Reuters] Mexico says time running out for quick NAFTA deal, Canada upbeat
[BloombergQ] That Big Hedge-Fund Short Squeeze in Treasuries Is No Sure Thing
[BloombergQ] U.S. Posts Record Monthly Budget Surplus as Economy Picks Up
[CNBC] Iran-Israel strikes show risk of Middle East war is growing after US exit from nuclear deal
[WSJ] Ignore Headline Inflation at Your Peril
[WSJ] Why Americans Aren’t Feeling Wage Gains
[WSJ] U.S. Raises Pressure on Iran With Sanctions on Currency Exchange
[Reuters] Mexico says time running out for quick NAFTA deal, Canada upbeat
[BloombergQ] That Big Hedge-Fund Short Squeeze in Treasuries Is No Sure Thing
[BloombergQ] U.S. Posts Record Monthly Budget Surplus as Economy Picks Up
[CNBC] Iran-Israel strikes show risk of Middle East war is growing after US exit from nuclear deal
[WSJ] Ignore Headline Inflation at Your Peril
[WSJ] Why Americans Aren’t Feeling Wage Gains
[WSJ] U.S. Raises Pressure on Iran With Sanctions on Currency Exchange
Wednesday, May 9, 2018
Thursday's News Links
[BloombergQ] Dollar Drops as Treasuries Rise; Pound Hit by BOE: Markets Wrap
[Reuters] Oil heads for biggest weekly rise in a month as Iran sanctions loom
[Reuters] U.S. consumer prices rebound modestly in April
[Reuters] U.S. weekly jobless claims hover near 48-year low
[BloombergQ] Carney Says Modest BOE Rate Hikes Needed Even as Inflation Cools
[CNBC] Commerce Secretary Ross: We're trying to get China to buy more US goods, 'considerable gap' remains
[CNBC] This is the best day — and time — to list your home for sale
[Reuters] Italy's League and 5-Star make 'significant steps' towards government deal
[Reuters] China April producer inflation picks up for first time in seven months
[BloombergQ] Dollar-Plagued World Now Has Another Currency to Worry About
[France24] Trump’s Iran deal exit forces EU to confront US ‘economic policeman of the world’
[Bloomberg/JapanTimes] Europe can no longer count on U.S. military umbrella: Merkel
[CNBC] Trump Iran sanctions just gave Saudi Arabia and Russia more clout in the oil market, so watch for higher prices
[BloombergQ] Malaysia, Turkey and the U.S. Underline Political Risk
[CNBC] After shocking election result, Malaysia may be headed for market volatility, economic change
[Reuters] Iran targets Israeli positions across Syrian frontier, Israel pounds Syria
[WSJ] Company Costs Are Rising, but Getting Shoppers to Pay More Is Hard
[WSJ] Record Buybacks Help Steady Wobbly Market
[FT] Argentina’s plea for IMF help is a reminder of global fragility
[FT] US turns economic might on its allies over Iran
[FT] Fitch sounds warning on HK banking system’s integration with China
[Reuters] Oil heads for biggest weekly rise in a month as Iran sanctions loom
[Reuters] U.S. consumer prices rebound modestly in April
[Reuters] U.S. weekly jobless claims hover near 48-year low
[BloombergQ] Carney Says Modest BOE Rate Hikes Needed Even as Inflation Cools
[CNBC] Commerce Secretary Ross: We're trying to get China to buy more US goods, 'considerable gap' remains
[CNBC] This is the best day — and time — to list your home for sale
[Reuters] Italy's League and 5-Star make 'significant steps' towards government deal
[Reuters] China April producer inflation picks up for first time in seven months
[BloombergQ] Dollar-Plagued World Now Has Another Currency to Worry About
[France24] Trump’s Iran deal exit forces EU to confront US ‘economic policeman of the world’
[Bloomberg/JapanTimes] Europe can no longer count on U.S. military umbrella: Merkel
[CNBC] Trump Iran sanctions just gave Saudi Arabia and Russia more clout in the oil market, so watch for higher prices
[BloombergQ] Malaysia, Turkey and the U.S. Underline Political Risk
[CNBC] After shocking election result, Malaysia may be headed for market volatility, economic change
[Reuters] Iran targets Israeli positions across Syrian frontier, Israel pounds Syria
[WSJ] Company Costs Are Rising, but Getting Shoppers to Pay More Is Hard
[WSJ] Record Buybacks Help Steady Wobbly Market
[FT] Argentina’s plea for IMF help is a reminder of global fragility
[FT] US turns economic might on its allies over Iran
[FT] Fitch sounds warning on HK banking system’s integration with China
Wednesday Evening Links
[Reuters] Wall Street surges on higher oil after U.S. quits Iran deal
[BloombergQ] Here's What Oil at $70 Means for the World Economy
[Reuters] Italy's 5-Star, League head for anti-system coalition after nine-week stalemate
[Reuters] Iranian forces in Syria shell Israeli army bases on Golan: Israel
[FT] China credit spreads near 2-year highs on default worries
[BloombergQ] Here's What Oil at $70 Means for the World Economy
[Reuters] Italy's 5-Star, League head for anti-system coalition after nine-week stalemate
[Reuters] Iranian forces in Syria shell Israeli army bases on Golan: Israel
[FT] China credit spreads near 2-year highs on default worries
Tuesday, May 8, 2018
Wednesday's News Links
[BloombergQ] Oil Jumps, Treasury Yield Hits 3% as Dollar Stalls: Markets Wrap
[MarketWatch] 10-year Treasury yields jumps back above 3% as $25 billion auction looms
[Reuters] U.S. producer prices rise slightly after recent solid gains
[BloombergQ] U.S. Seeks to Quickly Curb Iran Oil After Scrapping Deal
[BloombergQ] Million-Dollar Home Values Gain Even as Tax Deductions Shrink
[BloombergQ] Fed Returns to Center Stage for Asia as U.S. Bond Yields Near 3%
[BloombergQ] China Junk Bonds May See More Losses After Yields Jump to 8%
[Reuters] Syrian state media says Israel attacked just after U.S. quit Iran deal
[NYT] European Companies Rushed to Invest in Iran. What Now?
[WSJ] Trump’s Iran Sanctions Put Oil Buyers in a Bind
[WSJ] U.S. Pullout From Iran Pact Widens Mideast Gulf
[WSJ] How Much Do CEOs Make?
[FT] Argentines shocked by IMF loan request
[FT] Bond trading: technology finally disrupts a $50tn market
[MarketWatch] 10-year Treasury yields jumps back above 3% as $25 billion auction looms
[Reuters] U.S. producer prices rise slightly after recent solid gains
[BloombergQ] U.S. Seeks to Quickly Curb Iran Oil After Scrapping Deal
[BloombergQ] Million-Dollar Home Values Gain Even as Tax Deductions Shrink
[BloombergQ] Fed Returns to Center Stage for Asia as U.S. Bond Yields Near 3%
[BloombergQ] China Junk Bonds May See More Losses After Yields Jump to 8%
[Reuters] Syrian state media says Israel attacked just after U.S. quit Iran deal
[NYT] European Companies Rushed to Invest in Iran. What Now?
[WSJ] Trump’s Iran Sanctions Put Oil Buyers in a Bind
[WSJ] U.S. Pullout From Iran Pact Widens Mideast Gulf
[WSJ] How Much Do CEOs Make?
[FT] Argentines shocked by IMF loan request
[FT] Bond trading: technology finally disrupts a $50tn market
Tuesday Evening Links
[Reuters] Wall Street erases losses after Trump quits Iran deal
[Reuters] Trump abandons 'defective' Iran nuclear deal, to revive sanctions
[CNBC] Here's why it's a big deal for the US to leave the Iran nuclear pact
[Reuters] Fed debates new vocabulary as it shifts away from loose policies
[Reuters] Argentina seeks financing deal with IMF to address peso volatility
[BloombergQ] U.S. Job Openings at Record, Almost Matching Unemployed Workers
[Reuters] Xi tells Trump China and U.S. should properly resolve trade disputes
[Reuters] Trump abandons 'defective' Iran nuclear deal, to revive sanctions
[CNBC] Here's why it's a big deal for the US to leave the Iran nuclear pact
[Reuters] Fed debates new vocabulary as it shifts away from loose policies
[Reuters] Argentina seeks financing deal with IMF to address peso volatility
[BloombergQ] U.S. Job Openings at Record, Almost Matching Unemployed Workers
[Reuters] Xi tells Trump China and U.S. should properly resolve trade disputes
Monday, May 7, 2018
Tuesday's News Links
[BloombergQ] Dollar Advances, Oil Declines Before Iran Decision: Markets Wrap
[Reuters] Italian bond yields hit six-week high on election jitters
[CNBC] Trump may leave the Iran nuclear deal Tuesday. Here's what comes next
[BloombergQ] Powell Says Emerging Markets Equipped to Navigate Turbulence
[CNBC] Homeowners are bullish on prices, while buyers may find there's no inventory
[CNBC] China says last month's trade surplus with the US was nearly $7 billion more than March's surplus
[Reuters] Fed officials say price pressures rising but no need to shift rate path
[Reuters] China April exports jump 12.9 percent, imports up 21.5 percent, beat forecasts
[Reuters] Exclusive: China ramps up checks on U.S. pork imports in potentially costly slowdown
[BloombergQ] Dimon Says Prepare for 4% Yields, Potential Volatility Rise
[CNBC] Flow of funds into alternatives starts to dry up
[BloombergQ] Chinese Missiles Are Transforming Balance of Power in the Skies
[NYT] Unswayed by Allies, Trump Is Expected to Leave Iran Deal, Diplomats Say
[WSJ] Pension Funds Still Making Promises They Probably Can’t Keep
[WSJ] Cord-Cutting Pain Spreads to High-Yield Bond Market
[FT] ‘Brutal’: EM currencies face worst quarter since 2015
[FT] US credit boom: red flag or investable asset?
[FT] Powell: Emerging markets braced for policy tightening
[Reuters] Italian bond yields hit six-week high on election jitters
[CNBC] Trump may leave the Iran nuclear deal Tuesday. Here's what comes next
[BloombergQ] Powell Says Emerging Markets Equipped to Navigate Turbulence
[CNBC] Homeowners are bullish on prices, while buyers may find there's no inventory
[CNBC] China says last month's trade surplus with the US was nearly $7 billion more than March's surplus
[Reuters] Fed officials say price pressures rising but no need to shift rate path
[Reuters] China April exports jump 12.9 percent, imports up 21.5 percent, beat forecasts
[Reuters] Exclusive: China ramps up checks on U.S. pork imports in potentially costly slowdown
[BloombergQ] Dimon Says Prepare for 4% Yields, Potential Volatility Rise
[CNBC] Flow of funds into alternatives starts to dry up
[BloombergQ] Chinese Missiles Are Transforming Balance of Power in the Skies
[NYT] Unswayed by Allies, Trump Is Expected to Leave Iran Deal, Diplomats Say
[WSJ] Pension Funds Still Making Promises They Probably Can’t Keep
[WSJ] Cord-Cutting Pain Spreads to High-Yield Bond Market
[FT] ‘Brutal’: EM currencies face worst quarter since 2015
[FT] US credit boom: red flag or investable asset?
[FT] Powell: Emerging markets braced for policy tightening
Monday Evening Links
[Reuters] Apple leads Wall Street higher; energy rally fades
[Reuters] U.S. oil surges past $70, dollar hits fresh 2018 high
[CNBC] Trump says he'll announce Iran nuclear deal decision on Tuesday, sending oil prices lower
[Reuters] White House says China trade talks to resume in Washington next week
[CNBC] Housing confidence hits record high as home prices skyrocket
[SCMP] White House threatens Beijing with ‘consequences’ for ‘militarising South China Sea’ after missiles were reportedly installed on islands
[WSJ] Iran Resists U.S. Demands Before Trump’s Decision on Nuclear Pact
[Reuters] U.S. oil surges past $70, dollar hits fresh 2018 high
[CNBC] Trump says he'll announce Iran nuclear deal decision on Tuesday, sending oil prices lower
[Reuters] White House says China trade talks to resume in Washington next week
[CNBC] Housing confidence hits record high as home prices skyrocket
[SCMP] White House threatens Beijing with ‘consequences’ for ‘militarising South China Sea’ after missiles were reportedly installed on islands
[WSJ] Iran Resists U.S. Demands Before Trump’s Decision on Nuclear Pact
Sunday, May 6, 2018
Monday's News Links
[BloombergQ] Dollar Advances With Stocks; Oil Extends Gain: Markets Wrap
[Reuters] U.S. oil cracks $70, dollar heads towards 2018 high
[Reuters] NAFTA talks enter critical week with U.S. still pushing hard line
[Reuters] Dollar surge bringing emerging market rate cut cycle to a halt
[Bloomberg] China's trade imbalance with U.S. a long-term problem, says central bank governor: Caixin
[BloombergQ] Libor Refuses to Die, Setting Up $370 Trillion Benchmark Battle
[BloombergQ] Fed's Williams, Dudley Stress Soft Ceiling on Inflation Goal
[BloombergQ] ECB Warns on Trade Tensions as Euro-Zone Economy Falters
[BloombergQ] Central Banks Lack Tools To Boost Inflation, Raghuram Rajan Says
[BloombergQ] China Is Quietly Setting Global Standards
[NYT] As Putin Begins 4th Term, Inauguration Highlights His Vast Power
[WSJ] Unemployment Plunge Raises Stakes in Fed’s Goldilocks Conundrum
[WSJ] State Budgets Get Lift From Economy, Tax Bill
[WSJ] Turkey Faces an Intensifying Storm
[FT] Long lending boom will be a test of ‘shadow’ finance
[Reuters] U.S. oil cracks $70, dollar heads towards 2018 high
[Reuters] NAFTA talks enter critical week with U.S. still pushing hard line
[Reuters] Dollar surge bringing emerging market rate cut cycle to a halt
[Bloomberg] China's trade imbalance with U.S. a long-term problem, says central bank governor: Caixin
[BloombergQ] Libor Refuses to Die, Setting Up $370 Trillion Benchmark Battle
[BloombergQ] Fed's Williams, Dudley Stress Soft Ceiling on Inflation Goal
[BloombergQ] ECB Warns on Trade Tensions as Euro-Zone Economy Falters
[BloombergQ] Central Banks Lack Tools To Boost Inflation, Raghuram Rajan Says
[BloombergQ] China Is Quietly Setting Global Standards
[NYT] As Putin Begins 4th Term, Inauguration Highlights His Vast Power
[WSJ] Unemployment Plunge Raises Stakes in Fed’s Goldilocks Conundrum
[WSJ] State Budgets Get Lift From Economy, Tax Bill
[WSJ] Turkey Faces an Intensifying Storm
[FT] Long lending boom will be a test of ‘shadow’ finance
Sunday's News Links
[CNBC] Asian shares poised for positive start after strong gains on Wall Street
[NYT/CNBC] US-China trade talks end with strong demands, but few signs of a deal
[Reuters] Fed's Quarles says paying 'a lot' of attention to spread of machine learning in finance
[CNN] Iran warns US abandoning nuclear deal would be 'historic mistake'
[WSJ] Stocks and Bonds Are Going Nowhere Fast, Stranding Investors
[FT] Emerging market investors braced for turbulence
[FT] Living Marxism: the Chinese Communist party reasserts control
[NYT/CNBC] US-China trade talks end with strong demands, but few signs of a deal
[Reuters] Fed's Quarles says paying 'a lot' of attention to spread of machine learning in finance
[CNN] Iran warns US abandoning nuclear deal would be 'historic mistake'
[WSJ] Stocks and Bonds Are Going Nowhere Fast, Stranding Investors
[FT] Emerging market investors braced for turbulence
[FT] Living Marxism: the Chinese Communist party reasserts control
Saturday, May 5, 2018
Saturday's News Links
[CNBC] Trump will meet with China trade delegation Saturday as they return from tough talks
[CNBC] Buying back stocks is a 'horrible' thing for banks to do: Analyst Dick Bove
[Reuters] U.S. condemns China for 'Orwellian nonsense' over airline websites
[BBC] US Navy resurrects Second Fleet in Atlantic to counter Russia
[WSJ] Analysis: Falling Unemployment Could Pressure Fed to Move Faster on Rates
[WSJ] Saudis Move to Push Oil Prices Higher, in Break From Past Policy
[FT] Dollar resurgence has emerging market investors sweating
[CNBC] Buying back stocks is a 'horrible' thing for banks to do: Analyst Dick Bove
[Reuters] U.S. condemns China for 'Orwellian nonsense' over airline websites
[BBC] US Navy resurrects Second Fleet in Atlantic to counter Russia
[WSJ] Analysis: Falling Unemployment Could Pressure Fed to Move Faster on Rates
[WSJ] Saudis Move to Push Oil Prices Higher, in Break From Past Policy
[FT] Dollar resurgence has emerging market investors sweating
Friday, May 4, 2018
Weekly Commentary: Old Roach Motel
One hundred and six months. The current expansion, having emerged in the aftermath of the collapse of the mortgage finance Bubble, is now the second-longest on record (lagging only the 120-month 1990's Bubble period). The unemployment rate dropped to 3.9% last month, the lowest level since the 3.8% print in April 2000. Corporate earnings are at unprecedented levels and stock prices only somewhat below records. Home prices in most markets are at all-time highs. U.S. GDP is forecast to expand 2.8% this year, just below 2015's (2.9%) 12-year high.
We should be leery of prolonged expansions. The longer a boom, the greater the opportunity for deep-rooted structural impairment. Back in 2013, I proposed the concept of "Government Finance Quasi-Capitalism." This was updating previously updated Hyman Minsky analysis. Minsky's "Stages of Development of Capitalist Finance" seems especially relevant these days:
Minsky: "In both Keynes and Schumpeter the in-place financial structure is a central determinant of the behaviour of a capitalist economy. But among the players in financial markets are entrepreneurial profit-seekers who innovate. As a result these markets evolve in response to profit opportunities which emerge as the productive apparatus changes. The evolutionary properties of market economies are evident in the changing structure of financial institutions as well as in the productive structure… To understand the short-term dynamics of business cycles and the longer-term evolution of economies it is necessary to understand the financing relations that rule, and how the profit-seeking activities of businessmen, bankers and portfolio managers lead to the evolution of financial structures."
Minsky saw the evolution of capitalist finance as having developed in four stages: Commercial Capitalism, Finance Capitalism, Managerial Capitalism and Money Manager Capitalism. "These stages are related to what is financed and who does the proximate financing - the structure of relations among businesses, households, the government and finance." (CBB 12/28/2001 "Financial Arbitrage Capitalism")
Late in his life, Minsky was increasingly concerned with the transmutation of Money Manager Capitalism: "The emergence of return and capital-gains-oriented block of managed money resulted in financial markets once again being a major influence in determining the performance of the economy… Unlike the earlier epoch of finance capitalism, the emphasis was not upon the capital development of the economy but rather upon the quick turn of the speculator, upon trading profits… A peculiar regime emerged in which the main business in the financial markets became far removed from the financing of the capital development of the country. Furthermore, the main purpose of those who controlled corporations was no longer making profits from production and trade but rather to assure that the liabilities of the corporations were fully priced in the financial market..."
Proffering "Financial Arbitrage Capitalism," I first updated Minsky's analysis back in 2001. Noting Minsky's "financial structure is a central determinant of the behavior of a capitalist economy," I had become convinced that a fundamentally new power center had evolved within the financial system.
With the activist Greenspan Federal Reserve pegging short-rates and guaranteeing market liquidity, a new regime of enterprising financial speculation was unleashed. At the same time, Washington's GSE's had become powerful market operators with the capacity to issue seemingly endless quantities of "AAA" securities, while providing central bank-like ("buyers of first and last resort") market liquidity backstops.
"Wall Street Alchemy" was transforming risky loans into money-like marketable securities ("Moneyness of Credit"). These securities provided the fuel for aggressive leveraging by the hedge fund community and Wall Street proprietary trading desks. This sophisticated Financial Structure profoundly bolstered Credit Availability and growth, while also fueling pernicious asset inflation, stoking over-consumption and, over time, fundamentally altering the nature of investment, resource allocation and Economic Structure.
Financial Arbitrage Capitalism proved a powerful if relatively transitory Stage of Capitalistic Development. The mortgage finance Bubble collapse ushered in the latest phase of government and central bank control over Financial Structure and Capitalistic Development.
It's now been almost a decade of unprecedented monetary and fiscal stimulus - ten years of central bank command over the financial markets. Over time, markets became progressively less attentive to risk, including business cycle cyclicality, financial excess and instability. Bear markets and recessions had been prohibited. Basically, no amount of excess was concerning. And, importantly, the magical concoction of extremely low rates and extremely big deficit spending would ensure a corporate profits bonanza as far as the eye can see.
May 2 - Bloomberg (Shannon D. Harrington and Erik Schatzker): "Greg Lippmann, who helped design the trade against subprime mortgages that became known as the Big Short, says the next financial tremors will come from corporate debt. The former Deutsche Bank AG trader who now oversees about $3 billion at his LibreMax Capital LLC said… that corporate debt and equities will face the biggest pain when the next downturn comes. Investments linked to consumer debt, unlike the last crisis, will be relatively safe because companies have been the ones gorging the most on the ultra cheap interest rates during the past decade. 'If the first quarter's volatility is a harbinger of something bigger, I think that you're going to see a lot more trouble in the corporate market and the equity market than the structured products market,' Lippmann said on the sidelines of the Milken Institute Global Conference… 'The consumer is in much better shape than corporates. Consumers are less levered than they were pre-crisis. Corporates are more levered than they were pre-crisis, and I think structured products are not going to be the epicenter.'"
I also doubt that structured products will be at the epicenter of the next crisis. Subprime, mortgage Credit, and Wall Street Alchemy were the nexus for Financial Arbitrage Capitalism period excess. Government Finance Quasi Capitalism fundamentally altered the prevailing Financial Structure financing what is now one of the U.S. history's longest expansions.
Financial Arbitrage Capitalism altered perceptions, market behavior and Financial Structure in one (critical) segment of the marketplace. In particular, it incentivized leveraged speculation by the hedge fund community and Wall Street trading desks. This had profound ramifications for consumer Credit availability and borrowing. The overall surge in system Credit growth imparted structural effects throughout the financial markets and economy. Latent fragilities emerged with the collapse of mortgage Credit growth.
Notably, though with some obvious exceptions, corporate balance sheets were not in terrible shape when crisis hit. After all, years of historic mortgage Credit growth had funneled cash to corporate America, as well as to the U.S. Treasury. Washington was well-positioned in 2008 for a robust crisis response.
Fannie and Freddie were nationalized, with zero impact on the perceived creditworthiness of Treasury obligations. The Fed immediately slashed rates to zero. This incited a refinancing boom, significantly reducing household debt service costs. Large quantities of previously higher risk mortgages were refinanced into top-rated GSE securities, many surely making their way onto the Fed's ballooning balance sheet. Especially with the failure of Lehman and AIG, structured finance was generally in disarray. But the limited number of operators in this space made the situation manageable for the Federal Reserve and Treasury. There were only limited issues with money market funds, and for the most part the U.S. mutual fund complex was outside the worst of the fray.
I would argue that the current Government Finance Quasi Capitalism stage has created much deeper and problematic financial and economic structural maladjustment. As has been said, "Capitalism without failure is like heaven without hell." A decade of aggressive policy activism worked its magic.
The old notion of one-decision stocks morphed into One-Decision Markets: Just buy and hold - your favorite equities or Credit index. Analysis Not Required. Central bankers will ensure the trajectory of stock prices remains up. The Fed's commitment to liquid and continuous markets has never been as rock solid. There will be no panic selling of stocks, and no destabilizing spike in market yields. And with rates at or near zero, there has never been such powerful incentives to buy risk assets (stocks, corporate Credit, EM, etc.). The perception of liquidity and safety ("Moneyness of Risk Assets") ensured a wall of liquidity would inundate funds holding equities, corporate bonds and EM securities. Amazingly, ETF assets grew almost 10-fold since 2008, in one of history's most spectacular speculative financial flow episodes.
May 3 - Financial Times (Joe Rennison and Ben McLannahan): "An important shift in how companies finance themselves has reached a milestone. The leveraged loan market has officially become a $1tn asset class and is catching up fast with US high yield or junk bonds. Since 2010, the leveraged loan market has doubled in size from $500bn while US high yield has expanded $250bn to $1.1tn, according to Bank of America Merrill Lynch. The growth in loans reflects a post-financial crisis shift away from being a 'private bank-loan model to a thriving syndicated market with hundreds of participants' that has coincided with retail money flowing into the market, says the bank. Money has continued to pour into loan funds, where interest rates are floating and adjust higher as the Federal Reserve tightens policy. That kind of demand has helped fund and drive a record era for merger and acquisitions. 'A higher proportion of capital raised today goes towards LBOs [leveraged buyouts] and acquisitions than was the case in 2010,' says BofA, noting how half of money raised since 2016 has reflected M&A, up from a level of 30 to 40% at the beginning of the cycle."
Indicative of the altered Financial Structure, Government Finance Quasi Capitalism ensured a more than doubling of the leveraged loan market (since 2010) to $1.1 TN. "Retail money flowing into the market." Indeed, the proliferation of ETF products has ensured the flow of retail money in abundance to all corners of the risk markets - corporate Credit and equities in particular. Indirectly perhaps, but retail flows are these days helping fuel record M&A. And let's not forget the "short vol" funds and other complex derivatives strategies. And especially during periods of dollar weakness, performance chasing flows have deluged EM. It's been heavenly, or at least financial nirvana. And the massive "retail" flows into global risk assets remain oblivious to now rapidly mounting risks.
Going back centuries, the "money market" has traditionally been at the financial crisis epicenter. From traditional bank runs to the 2008 run on Lehman's repurchase agreements, it's the panic liquidation of previously perceived safe and liquid instruments that can instantly spark illiquidity and crisis. Money has special attributes to be coveted and safeguarded. To purposely bestow the perception of moneyness upon risk assets - across asset classes on a global basis - is one of the great transgressions in the history of central bank monetary management.
I would add that the proliferation of tantalizing new technologies makes this cycle all the more perilous. Massive prolonged speculative financial flows throughout a period of alluring technological innovation ensures malinvestment and deep structural impairment. Historical revisionism paints the 1920's as the "golden age of Capitalism," brought to a catastrophic conclusion by the Fed's negligent post-crash failure to inflate the money supply. In reality, it was a historic period of misperceptions - misperceptions as to the capabilities of Federal Reserve, Wall Street, financial innovation and technological advancement. It all came home to roost.
The "Roaring Twenties" episode was a confluence of colossal financial flows and historic technological development that ensured epic structural maladjustment and attendant latent fragilities. Unappreciated, especially late in the cycle, was the harsh reality that the finance fueling the boom was increasingly unsound, unstable and unsustainable. When speculative flows inevitably reversed, everything came tumbling down - everywhere.
Few companies have benefitted from Government Finance Quasi Capitalism as much as Amazon.com. For years, markets afforded Amazon virtually free money. The company would readily borrow billions, invest aggressively and not worry a lick about profitability. With current market capitalization of $767 billion, things have worked out fantastically for the company, their employees and shareholders. It's worked out pretty well for consumers as well, but at the expense of traditional retailers across the country.
My issue is not with Amazon.com, but with today's thousands of wannabes. Just raise "capital" and spend as aggressively as possible. Profitability and cash-flows are a concern for some day out in the future. What matters is a clever idea, growth, market share and dominance the quicker the better. It's a financial, market and business backdrop that has fostered an Arm's Race Mentality - online retail and services, the cloud, AI and quantum computing, blockchain, 5G, cybersecurity, Internet of Things, electric automobiles, battery technologies and alternative energy, autonomous vehicles, biotech and pharmaceuticals, automation and robotics, nanotechnology, and on and on.
It's somewhat reminiscent of 1999, but on such a grander scale that the two periods are hardly comparable. The late-twenties is more pertinent: the proliferation of exciting technologies and innovation; lavishly over-liquefied securities markets; faith in policymakers and a general disregard for risk. In 1929, there was essentially no recognition of downside risk. A long boom had convinced about everyone that financial and economic underpinnings were sound. Similar to today, little attention was paid to the soundness of the finance underpinning the boom.
During the mortgage finance Bubble period, there was some recognition of how the system was "privatizing profits and socializing losses." And that's exactly how it played out during the crisis, with expensive bailouts, massive deficit spending and crazy central bank monetization. I would expect the next crisis to have disparate and more problematic dynamics.
At this point, an abrupt reversal of "retail" flows from the risk markets will pose a potentially greater systemic challenge than the previous crisis of confidence in structured finance. Not only have retail flows come to play a major financing role throughout corporate America, I would expect the sophisticated leveraged speculating community to move quickly to get ahead of ("front-run") outflows as they begin to materialize. Moreover, there are these gargantuan derivatives markets that are expected to function as an insurance marketplace. Rather quickly, liquidity will become a serious systemic issue across the securities and derivatives markets. Financial conditions might tighten dramatically almost overnight, abruptly interrupting plans for tens of thousands of negative cash-flow enterprises across the country - big and small. That's when Financial and Economic Structure will matter mightily.
A decade of Government Finance Quasi Capitalism has deeply engrained the view that enlightened central bankers and spendthrift governments have together tamed the business cycle. Bear markets and recessions were conveniently removed from the calculus. It's accepted as gospel that myriad risks have been fundamentally downgraded. In reality, the socialism of finance has annulled the capacity of markets to self-adjust and correct. Pressure just keeps building.
The upshot has been highly unstable Bubble flows - into the securities markets, intermediated through perceived safe and liquid investment vehicles into business enterprises on increasingly fragile footing - on an unprecedented scale. On a global basis (again with parallels to the 1920's), Bubble dynamics have ensured that financial and real resources have for years been poorly allocated, with maladjustment and imbalances now greatly in excess of those prior to the 2008 crisis.
I have posited that the February blowup of "short vol" marked a critical juncture for the global Bubble - the initial round of market instability that would set in motion de-risking and de-leveraging dynamics and waning global liquidity. I'll suggest that global markets have commenced round two. The dollar index jumped another 1.1% this week, as stress intensifies in the emerging markets. The Argentine peso sank 6.1% this week, as Argentina's central bank hiked rates 675 bps (to 40%) to support its collapsing currency. The Turkish lira dropped 4.5% to a record low, as 10-year yields surged to almost 14%. The Mexican peso dropped 3.4%, the Polish zloty 2.4% and the Brazilian real 2.0%. Stocks were down 4.7% in Argentina, 4.7% in Turkey, 3.8% in Brazil and 2.7% in Mexico.
EM stress somewhat supported Treasuries and safe haven sovereign debt more generally this week. Weak EM likely spurred some unwind of global "carry trade" leverage, with negative ramifications for EM currencies, equities and bonds - and global liquidity more generally. There also appeared to be an unwind of long EM/short "developed" trading dynamic, which might help explain this week's rally in European equities (that spilled over into U.S. equities Friday). If nothing else, EM is illuminating how abruptly speculative flows tend to reverse course - and the newfound proclivity for Crowded Trades to Morph into Liquidity Traps. The Old Roach Motel.
For the Week:
The S&P500 slipped 0.2% (down 0.4% y-t-d), and the Dow dipped 0.2% (down 1.8%). The Utilities declined 0.6% (down 2.8%). The Banks fell 1.7% (down 0.2%), and the Broker/Dealers dropped 1.3% (up 7.7%). The Transports lost 1.7% (down 2.3%). The S&P 400 Midcaps added 0.3% (down 0.2%), and the small cap Russell 2000 gained 0.6% (down 2.0%). The Nasdaq100 jumped 1.7% (up 5.8%). The Semiconductors surged 3.1% (up 3.5%). The Biotechs fell 1.6% (up 6.2%). With bullion down $8, the HUI gold index slipped 0.4% (down 5.7%).
Three-month Treasury bill rates ended the week at 1.79%. Two-year government yields added a basis point to 2.50% (up 61bps y-t-d). Five-year T-note yields slipped two bps 2.79% (up 58bps). Ten-year Treasury yields declined one basis point to 2.95% (up 54bps). Long bond yields were unchanged at 3.12% (up 38bps). Benchmark Fannie Mae MBS yields dipped one basis point to 3.64% (up 65bps).
Greek 10-year yields jumped 20 bps to 4.10% (up 3bps y-t-d). Ten-year Portuguese yields rose five bps to 1.71% (down 24bps). Italian 10-year yields gained six bps to 1.80% (down 22bps). Spain's 10-year yields rose four bps to 1.30% (down 27bps). German bund yields declined three bps to 0.54% (up 12bps). French yields slipped one basis point to 0.78% (unchanged). The French to German 10-year bond spread widened two to 24 bps. U.K. 10-year gilt yields fell five bps to 1.40% (up 21bps). U.K.'s FTSE equities index gained 0.9% (down 1.6%).
Japan's Nikkei 225 equities was little changed (down 1.3% y-t-d). Japanese 10-year "JGB" yields declined one basis point to 0.045% (unchanged). France's CAC40 increased 0.6% (up 3.8%). The German DAX equities index jumped 1.9% (down 0.8%). Spain's IBEX 35 equities index rose 1.8% (up 0.6%). Italy's FTSE MIB index surged 1.7% (up 11.4%). EM equities were mostly under pressure. Brazil's Bovespa index sank 3.8% (up 8.8%), and Mexico's Bolsa fell 2.7% (down 4.8%). South Korea's Kospi index declined 1.2% (down 0.2%). India’s Sensex equities index slipped 0.2% (up 2.5%). China’s Shanghai Exchange recovered 0.3% (down 6.5%). Turkey's Borsa Istanbul National 100 index fell 4.7% (down 11.0%). Russia's MICEX equities declined 0.5% (up 8.5%).
Investment-grade bond funds saw inflows of $997 million, and junk bond funds posted inflows of $526 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates declined three bps to 4.55% (up 53bps y-o-y). Fifteen-year rates added a basis point to 4.03% (up 76bps). Five-year hybrid ARM rates fell five bps to 3.69% (up 56bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.71% (up 57bps).
Federal Reserve Credit last week dropped $17.7bn to $4.326 TN. Over the past year, Fed Credit contracted $106.1bn, or 2.4%. Fed Credit inflated $1.515 TN, or 54%, over the past 287 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $4.2bn last week to a 10-week low $3.408 TN. "Custody holdings" were up $192bn y-o-y, or 6.0%.
M2 (narrow) "money" supply expanded $16.1bn last week to a record $13.964 TN. "Narrow money" gained $524bn, or 3.9%, over the past year. For the week, Currency increased $3.4bn. Total Checkable Deposits jumped $25.0bn, while savings Deposits fell $17.7bn. Small Time Deposits gained $3.2bn. Retail Money Funds added $2.3bn.
Total money market fund assets rose $7.6bn to $2.800 TN. Money Funds gained $156bn y-o-y, or 5.9%.
Total Commercial Paper declined $3.3bn to $1.053 TN. CP gained $61bn y-o-y, or 6.1%.
Currency Watch:
The U.S. dollar index rose 1.1% to 92.566 (up 0.5% y-t-d). For the week on the downside, the Mexican peso declined 3.4%, the Brazilian real 2.0%, the British pound 1.8%, the Swedish krona 1.7%, the euro 1.4%, the South African rand 1.4%, the Norwegian krone 1.2%, the Swiss franc 1.2%, the New Zealand dollar 0.9%, the Singapore dollar 0.8%, the Australian dollar 0.6%, the Canadian dollar 0.1%, the Japanese yen 0.1% and the South Korean won 0.1%. The Chinese renminbi declined 0.48% versus the dollar this week (up 2.26% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index gained 1.3% (up 8.4% y-t-d). Spot Gold slipped 0.6% to $1,315 (up 0.9%). Silver was little changed at $16.519 (down 3.7%). Crude jumped $1.62 to $69.72 (up 15%). Gasoline slipped 0.6% (up 18%), and Natural Gas dropped 2.2% (down 8%). Copper increased 0.5% (down 7%). Wheat surged 5.6% (up 23%). Corn gained 1.9% (up 16%).
Market Dislocation Watch:
We should be leery of prolonged expansions. The longer a boom, the greater the opportunity for deep-rooted structural impairment. Back in 2013, I proposed the concept of "Government Finance Quasi-Capitalism." This was updating previously updated Hyman Minsky analysis. Minsky's "Stages of Development of Capitalist Finance" seems especially relevant these days:
Minsky: "In both Keynes and Schumpeter the in-place financial structure is a central determinant of the behaviour of a capitalist economy. But among the players in financial markets are entrepreneurial profit-seekers who innovate. As a result these markets evolve in response to profit opportunities which emerge as the productive apparatus changes. The evolutionary properties of market economies are evident in the changing structure of financial institutions as well as in the productive structure… To understand the short-term dynamics of business cycles and the longer-term evolution of economies it is necessary to understand the financing relations that rule, and how the profit-seeking activities of businessmen, bankers and portfolio managers lead to the evolution of financial structures."
Minsky saw the evolution of capitalist finance as having developed in four stages: Commercial Capitalism, Finance Capitalism, Managerial Capitalism and Money Manager Capitalism. "These stages are related to what is financed and who does the proximate financing - the structure of relations among businesses, households, the government and finance." (CBB 12/28/2001 "Financial Arbitrage Capitalism")
Late in his life, Minsky was increasingly concerned with the transmutation of Money Manager Capitalism: "The emergence of return and capital-gains-oriented block of managed money resulted in financial markets once again being a major influence in determining the performance of the economy… Unlike the earlier epoch of finance capitalism, the emphasis was not upon the capital development of the economy but rather upon the quick turn of the speculator, upon trading profits… A peculiar regime emerged in which the main business in the financial markets became far removed from the financing of the capital development of the country. Furthermore, the main purpose of those who controlled corporations was no longer making profits from production and trade but rather to assure that the liabilities of the corporations were fully priced in the financial market..."
Proffering "Financial Arbitrage Capitalism," I first updated Minsky's analysis back in 2001. Noting Minsky's "financial structure is a central determinant of the behavior of a capitalist economy," I had become convinced that a fundamentally new power center had evolved within the financial system.
With the activist Greenspan Federal Reserve pegging short-rates and guaranteeing market liquidity, a new regime of enterprising financial speculation was unleashed. At the same time, Washington's GSE's had become powerful market operators with the capacity to issue seemingly endless quantities of "AAA" securities, while providing central bank-like ("buyers of first and last resort") market liquidity backstops.
"Wall Street Alchemy" was transforming risky loans into money-like marketable securities ("Moneyness of Credit"). These securities provided the fuel for aggressive leveraging by the hedge fund community and Wall Street proprietary trading desks. This sophisticated Financial Structure profoundly bolstered Credit Availability and growth, while also fueling pernicious asset inflation, stoking over-consumption and, over time, fundamentally altering the nature of investment, resource allocation and Economic Structure.
Financial Arbitrage Capitalism proved a powerful if relatively transitory Stage of Capitalistic Development. The mortgage finance Bubble collapse ushered in the latest phase of government and central bank control over Financial Structure and Capitalistic Development.
It's now been almost a decade of unprecedented monetary and fiscal stimulus - ten years of central bank command over the financial markets. Over time, markets became progressively less attentive to risk, including business cycle cyclicality, financial excess and instability. Bear markets and recessions had been prohibited. Basically, no amount of excess was concerning. And, importantly, the magical concoction of extremely low rates and extremely big deficit spending would ensure a corporate profits bonanza as far as the eye can see.
May 2 - Bloomberg (Shannon D. Harrington and Erik Schatzker): "Greg Lippmann, who helped design the trade against subprime mortgages that became known as the Big Short, says the next financial tremors will come from corporate debt. The former Deutsche Bank AG trader who now oversees about $3 billion at his LibreMax Capital LLC said… that corporate debt and equities will face the biggest pain when the next downturn comes. Investments linked to consumer debt, unlike the last crisis, will be relatively safe because companies have been the ones gorging the most on the ultra cheap interest rates during the past decade. 'If the first quarter's volatility is a harbinger of something bigger, I think that you're going to see a lot more trouble in the corporate market and the equity market than the structured products market,' Lippmann said on the sidelines of the Milken Institute Global Conference… 'The consumer is in much better shape than corporates. Consumers are less levered than they were pre-crisis. Corporates are more levered than they were pre-crisis, and I think structured products are not going to be the epicenter.'"
I also doubt that structured products will be at the epicenter of the next crisis. Subprime, mortgage Credit, and Wall Street Alchemy were the nexus for Financial Arbitrage Capitalism period excess. Government Finance Quasi Capitalism fundamentally altered the prevailing Financial Structure financing what is now one of the U.S. history's longest expansions.
Financial Arbitrage Capitalism altered perceptions, market behavior and Financial Structure in one (critical) segment of the marketplace. In particular, it incentivized leveraged speculation by the hedge fund community and Wall Street trading desks. This had profound ramifications for consumer Credit availability and borrowing. The overall surge in system Credit growth imparted structural effects throughout the financial markets and economy. Latent fragilities emerged with the collapse of mortgage Credit growth.
Notably, though with some obvious exceptions, corporate balance sheets were not in terrible shape when crisis hit. After all, years of historic mortgage Credit growth had funneled cash to corporate America, as well as to the U.S. Treasury. Washington was well-positioned in 2008 for a robust crisis response.
Fannie and Freddie were nationalized, with zero impact on the perceived creditworthiness of Treasury obligations. The Fed immediately slashed rates to zero. This incited a refinancing boom, significantly reducing household debt service costs. Large quantities of previously higher risk mortgages were refinanced into top-rated GSE securities, many surely making their way onto the Fed's ballooning balance sheet. Especially with the failure of Lehman and AIG, structured finance was generally in disarray. But the limited number of operators in this space made the situation manageable for the Federal Reserve and Treasury. There were only limited issues with money market funds, and for the most part the U.S. mutual fund complex was outside the worst of the fray.
I would argue that the current Government Finance Quasi Capitalism stage has created much deeper and problematic financial and economic structural maladjustment. As has been said, "Capitalism without failure is like heaven without hell." A decade of aggressive policy activism worked its magic.
The old notion of one-decision stocks morphed into One-Decision Markets: Just buy and hold - your favorite equities or Credit index. Analysis Not Required. Central bankers will ensure the trajectory of stock prices remains up. The Fed's commitment to liquid and continuous markets has never been as rock solid. There will be no panic selling of stocks, and no destabilizing spike in market yields. And with rates at or near zero, there has never been such powerful incentives to buy risk assets (stocks, corporate Credit, EM, etc.). The perception of liquidity and safety ("Moneyness of Risk Assets") ensured a wall of liquidity would inundate funds holding equities, corporate bonds and EM securities. Amazingly, ETF assets grew almost 10-fold since 2008, in one of history's most spectacular speculative financial flow episodes.
May 3 - Financial Times (Joe Rennison and Ben McLannahan): "An important shift in how companies finance themselves has reached a milestone. The leveraged loan market has officially become a $1tn asset class and is catching up fast with US high yield or junk bonds. Since 2010, the leveraged loan market has doubled in size from $500bn while US high yield has expanded $250bn to $1.1tn, according to Bank of America Merrill Lynch. The growth in loans reflects a post-financial crisis shift away from being a 'private bank-loan model to a thriving syndicated market with hundreds of participants' that has coincided with retail money flowing into the market, says the bank. Money has continued to pour into loan funds, where interest rates are floating and adjust higher as the Federal Reserve tightens policy. That kind of demand has helped fund and drive a record era for merger and acquisitions. 'A higher proportion of capital raised today goes towards LBOs [leveraged buyouts] and acquisitions than was the case in 2010,' says BofA, noting how half of money raised since 2016 has reflected M&A, up from a level of 30 to 40% at the beginning of the cycle."
Indicative of the altered Financial Structure, Government Finance Quasi Capitalism ensured a more than doubling of the leveraged loan market (since 2010) to $1.1 TN. "Retail money flowing into the market." Indeed, the proliferation of ETF products has ensured the flow of retail money in abundance to all corners of the risk markets - corporate Credit and equities in particular. Indirectly perhaps, but retail flows are these days helping fuel record M&A. And let's not forget the "short vol" funds and other complex derivatives strategies. And especially during periods of dollar weakness, performance chasing flows have deluged EM. It's been heavenly, or at least financial nirvana. And the massive "retail" flows into global risk assets remain oblivious to now rapidly mounting risks.
Going back centuries, the "money market" has traditionally been at the financial crisis epicenter. From traditional bank runs to the 2008 run on Lehman's repurchase agreements, it's the panic liquidation of previously perceived safe and liquid instruments that can instantly spark illiquidity and crisis. Money has special attributes to be coveted and safeguarded. To purposely bestow the perception of moneyness upon risk assets - across asset classes on a global basis - is one of the great transgressions in the history of central bank monetary management.
I would add that the proliferation of tantalizing new technologies makes this cycle all the more perilous. Massive prolonged speculative financial flows throughout a period of alluring technological innovation ensures malinvestment and deep structural impairment. Historical revisionism paints the 1920's as the "golden age of Capitalism," brought to a catastrophic conclusion by the Fed's negligent post-crash failure to inflate the money supply. In reality, it was a historic period of misperceptions - misperceptions as to the capabilities of Federal Reserve, Wall Street, financial innovation and technological advancement. It all came home to roost.
The "Roaring Twenties" episode was a confluence of colossal financial flows and historic technological development that ensured epic structural maladjustment and attendant latent fragilities. Unappreciated, especially late in the cycle, was the harsh reality that the finance fueling the boom was increasingly unsound, unstable and unsustainable. When speculative flows inevitably reversed, everything came tumbling down - everywhere.
Few companies have benefitted from Government Finance Quasi Capitalism as much as Amazon.com. For years, markets afforded Amazon virtually free money. The company would readily borrow billions, invest aggressively and not worry a lick about profitability. With current market capitalization of $767 billion, things have worked out fantastically for the company, their employees and shareholders. It's worked out pretty well for consumers as well, but at the expense of traditional retailers across the country.
My issue is not with Amazon.com, but with today's thousands of wannabes. Just raise "capital" and spend as aggressively as possible. Profitability and cash-flows are a concern for some day out in the future. What matters is a clever idea, growth, market share and dominance the quicker the better. It's a financial, market and business backdrop that has fostered an Arm's Race Mentality - online retail and services, the cloud, AI and quantum computing, blockchain, 5G, cybersecurity, Internet of Things, electric automobiles, battery technologies and alternative energy, autonomous vehicles, biotech and pharmaceuticals, automation and robotics, nanotechnology, and on and on.
It's somewhat reminiscent of 1999, but on such a grander scale that the two periods are hardly comparable. The late-twenties is more pertinent: the proliferation of exciting technologies and innovation; lavishly over-liquefied securities markets; faith in policymakers and a general disregard for risk. In 1929, there was essentially no recognition of downside risk. A long boom had convinced about everyone that financial and economic underpinnings were sound. Similar to today, little attention was paid to the soundness of the finance underpinning the boom.
During the mortgage finance Bubble period, there was some recognition of how the system was "privatizing profits and socializing losses." And that's exactly how it played out during the crisis, with expensive bailouts, massive deficit spending and crazy central bank monetization. I would expect the next crisis to have disparate and more problematic dynamics.
At this point, an abrupt reversal of "retail" flows from the risk markets will pose a potentially greater systemic challenge than the previous crisis of confidence in structured finance. Not only have retail flows come to play a major financing role throughout corporate America, I would expect the sophisticated leveraged speculating community to move quickly to get ahead of ("front-run") outflows as they begin to materialize. Moreover, there are these gargantuan derivatives markets that are expected to function as an insurance marketplace. Rather quickly, liquidity will become a serious systemic issue across the securities and derivatives markets. Financial conditions might tighten dramatically almost overnight, abruptly interrupting plans for tens of thousands of negative cash-flow enterprises across the country - big and small. That's when Financial and Economic Structure will matter mightily.
A decade of Government Finance Quasi Capitalism has deeply engrained the view that enlightened central bankers and spendthrift governments have together tamed the business cycle. Bear markets and recessions were conveniently removed from the calculus. It's accepted as gospel that myriad risks have been fundamentally downgraded. In reality, the socialism of finance has annulled the capacity of markets to self-adjust and correct. Pressure just keeps building.
The upshot has been highly unstable Bubble flows - into the securities markets, intermediated through perceived safe and liquid investment vehicles into business enterprises on increasingly fragile footing - on an unprecedented scale. On a global basis (again with parallels to the 1920's), Bubble dynamics have ensured that financial and real resources have for years been poorly allocated, with maladjustment and imbalances now greatly in excess of those prior to the 2008 crisis.
I have posited that the February blowup of "short vol" marked a critical juncture for the global Bubble - the initial round of market instability that would set in motion de-risking and de-leveraging dynamics and waning global liquidity. I'll suggest that global markets have commenced round two. The dollar index jumped another 1.1% this week, as stress intensifies in the emerging markets. The Argentine peso sank 6.1% this week, as Argentina's central bank hiked rates 675 bps (to 40%) to support its collapsing currency. The Turkish lira dropped 4.5% to a record low, as 10-year yields surged to almost 14%. The Mexican peso dropped 3.4%, the Polish zloty 2.4% and the Brazilian real 2.0%. Stocks were down 4.7% in Argentina, 4.7% in Turkey, 3.8% in Brazil and 2.7% in Mexico.
EM stress somewhat supported Treasuries and safe haven sovereign debt more generally this week. Weak EM likely spurred some unwind of global "carry trade" leverage, with negative ramifications for EM currencies, equities and bonds - and global liquidity more generally. There also appeared to be an unwind of long EM/short "developed" trading dynamic, which might help explain this week's rally in European equities (that spilled over into U.S. equities Friday). If nothing else, EM is illuminating how abruptly speculative flows tend to reverse course - and the newfound proclivity for Crowded Trades to Morph into Liquidity Traps. The Old Roach Motel.
For the Week:
The S&P500 slipped 0.2% (down 0.4% y-t-d), and the Dow dipped 0.2% (down 1.8%). The Utilities declined 0.6% (down 2.8%). The Banks fell 1.7% (down 0.2%), and the Broker/Dealers dropped 1.3% (up 7.7%). The Transports lost 1.7% (down 2.3%). The S&P 400 Midcaps added 0.3% (down 0.2%), and the small cap Russell 2000 gained 0.6% (down 2.0%). The Nasdaq100 jumped 1.7% (up 5.8%). The Semiconductors surged 3.1% (up 3.5%). The Biotechs fell 1.6% (up 6.2%). With bullion down $8, the HUI gold index slipped 0.4% (down 5.7%).
Three-month Treasury bill rates ended the week at 1.79%. Two-year government yields added a basis point to 2.50% (up 61bps y-t-d). Five-year T-note yields slipped two bps 2.79% (up 58bps). Ten-year Treasury yields declined one basis point to 2.95% (up 54bps). Long bond yields were unchanged at 3.12% (up 38bps). Benchmark Fannie Mae MBS yields dipped one basis point to 3.64% (up 65bps).
Greek 10-year yields jumped 20 bps to 4.10% (up 3bps y-t-d). Ten-year Portuguese yields rose five bps to 1.71% (down 24bps). Italian 10-year yields gained six bps to 1.80% (down 22bps). Spain's 10-year yields rose four bps to 1.30% (down 27bps). German bund yields declined three bps to 0.54% (up 12bps). French yields slipped one basis point to 0.78% (unchanged). The French to German 10-year bond spread widened two to 24 bps. U.K. 10-year gilt yields fell five bps to 1.40% (up 21bps). U.K.'s FTSE equities index gained 0.9% (down 1.6%).
Japan's Nikkei 225 equities was little changed (down 1.3% y-t-d). Japanese 10-year "JGB" yields declined one basis point to 0.045% (unchanged). France's CAC40 increased 0.6% (up 3.8%). The German DAX equities index jumped 1.9% (down 0.8%). Spain's IBEX 35 equities index rose 1.8% (up 0.6%). Italy's FTSE MIB index surged 1.7% (up 11.4%). EM equities were mostly under pressure. Brazil's Bovespa index sank 3.8% (up 8.8%), and Mexico's Bolsa fell 2.7% (down 4.8%). South Korea's Kospi index declined 1.2% (down 0.2%). India’s Sensex equities index slipped 0.2% (up 2.5%). China’s Shanghai Exchange recovered 0.3% (down 6.5%). Turkey's Borsa Istanbul National 100 index fell 4.7% (down 11.0%). Russia's MICEX equities declined 0.5% (up 8.5%).
Investment-grade bond funds saw inflows of $997 million, and junk bond funds posted inflows of $526 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates declined three bps to 4.55% (up 53bps y-o-y). Fifteen-year rates added a basis point to 4.03% (up 76bps). Five-year hybrid ARM rates fell five bps to 3.69% (up 56bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.71% (up 57bps).
Federal Reserve Credit last week dropped $17.7bn to $4.326 TN. Over the past year, Fed Credit contracted $106.1bn, or 2.4%. Fed Credit inflated $1.515 TN, or 54%, over the past 287 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $4.2bn last week to a 10-week low $3.408 TN. "Custody holdings" were up $192bn y-o-y, or 6.0%.
M2 (narrow) "money" supply expanded $16.1bn last week to a record $13.964 TN. "Narrow money" gained $524bn, or 3.9%, over the past year. For the week, Currency increased $3.4bn. Total Checkable Deposits jumped $25.0bn, while savings Deposits fell $17.7bn. Small Time Deposits gained $3.2bn. Retail Money Funds added $2.3bn.
Total money market fund assets rose $7.6bn to $2.800 TN. Money Funds gained $156bn y-o-y, or 5.9%.
Total Commercial Paper declined $3.3bn to $1.053 TN. CP gained $61bn y-o-y, or 6.1%.
Currency Watch:
The U.S. dollar index rose 1.1% to 92.566 (up 0.5% y-t-d). For the week on the downside, the Mexican peso declined 3.4%, the Brazilian real 2.0%, the British pound 1.8%, the Swedish krona 1.7%, the euro 1.4%, the South African rand 1.4%, the Norwegian krone 1.2%, the Swiss franc 1.2%, the New Zealand dollar 0.9%, the Singapore dollar 0.8%, the Australian dollar 0.6%, the Canadian dollar 0.1%, the Japanese yen 0.1% and the South Korean won 0.1%. The Chinese renminbi declined 0.48% versus the dollar this week (up 2.26% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index gained 1.3% (up 8.4% y-t-d). Spot Gold slipped 0.6% to $1,315 (up 0.9%). Silver was little changed at $16.519 (down 3.7%). Crude jumped $1.62 to $69.72 (up 15%). Gasoline slipped 0.6% (up 18%), and Natural Gas dropped 2.2% (down 8%). Copper increased 0.5% (down 7%). Wheat surged 5.6% (up 23%). Corn gained 1.9% (up 16%).
Market Dislocation Watch:
May 3 - Reuters (Marc Jones): "Stress levels rose in emerging markets on Thursday as Argentina's peso and Turkey's lira slumped to record lows in what looked like classic currency attacks and shares fell for a third day. The pressure was widespread against the backdrop of a rising dollar and global borrowing rates and after more unpredictable behaviour on metal export tariffs from U.S. President Donald Trump's administration towards Brazil overnight. It combined to push MSCI's 24-country emerging market stocks index towards a three-month low though tensions were highest in foreign exchange markets."
Trump Administration Watch:
May 2 - Wall Street Journal (John D. McKinnon): "The Trump administration is considering executive action that would restrict some Chinese companies' ability to sell telecommunications equipment in the U.S., based on national-security concerns, said several people familiar with the matter. The move, if it happens, would represent a significant escalation of a growing feud between the U.S. and China over tech and telecommunications. The affected firms likely would include Huawei Technologies Co. and ZTE Corp. , two of the world's leading telecommunications equipment makers. They have found themselves increasingly in an international crossfire. Pentagon officials said this week that they are moving to halt the sale of phones made by the two companies on U.S. military bases around the world."
May 3 - Bloomberg: "Donald Trump's attempt to stem China's technological advance could already be backfiring. His counterpart, President Xi Jinping, has responded to tech-focused pressure from Washington, including a ban on a leading Chinese telecoms company buying American parts, by vowing to pour even more resources into research and achieve home-grown breakthroughs. He urged China last week to 'cast aside illusions' it could rely on others for help. As Trump's team continue talks in Beijing Friday armed with complaints about China's industrial strategy and trade surplus, the hosts said their technological advancement goal isn't on the table. The mix of Trump's tariff threats and the realization that the U.S. wants to stunt its Made in China 2025 development plan -- aimed at dominating industries from transport to robotics -- complicates prospects for detente."
April 30 - New York Times (Ana Swanson and Keith Bradsher): "It sounds like something out of a science fiction movie: In April, China is said to have tested an invisibility cloak that would allow ordinary fighter jets to suddenly vanish from radar screens. This advancement, which could prove to be a critical intelligence breakthrough, is one that American officials fear China may have gained in part from a Chinese researcher who roused suspicions while working on a similar technology at a Duke University laboratory in 2008. The researcher, who was investigated by the F.B.I. but never charged with a crime, ultimately returned to China, became a billionaire and opened a thriving research institute that worked on some projects related to those he studied at Duke. The Trump administration, concerned about China's growing technological prowess, is considering strict measures to block Chinese citizens from performing sensitive research at American universities and research institutes over fears they may be acquiring intellectual secrets… The White House is discussing whether to limit the access of Chinese citizens to the United States, including restricting certain types of visas available to them and greatly expanding rules pertaining to Chinese researchers who work on projects with military or intelligence value at American companies and universities."
May 1 - New York Times (Thomas L. Friedman): "With the arrival in Beijing this week of America's top trade negotiators, you might think that the U.S. and China are about to enter high-level talks to avoid a trade war and that this is a story for the business pages. Think again. This is one for the history books. Five days of meetings in Beijing with Chinese, U.S. and European government officials and business leaders made it crystal clear to me that what's going on right now is nothing less than a struggle to redefine the rules governing the economic and power relations of the world's oldest and newest superpowers - America and China. This is not a trade tiff. 'This is a defining moment for U.S.-China relations,' said Ruan Zongze, executive vice president of the Chinese Foreign Ministry's research institute. 'This is about a lot more than trade and tariffs. This is about the future.'"
May 2 - Financial Times (Yukon Huang): "A high-level US negotiating team will arrive in Beijing later this week to talk about trade and technology wars. These discussions are not really about trade. America has been running trade deficits for forty years, long before China even became a major trading nation. As many experts have noted, America's trade deficits are driven largely by its low savings rates and this has little to do with China. The team's reported request for China to cut its bilateral deficit with the US by $100bn is illogical conceptually and in its practicality. This economic war is more about protecting America's technological edge."
May 1 - Wall Street Journal (William Mauldin and Ben Eisen): "The Trump administration has set the stage for weeks of heightened tension between the U.S. and its trading partners as administration officials race to meet self-imposed deadlines to complete a series of high-stakes negotiations with China, Mexico, Canada and Europe. A U.S. trade delegation left… for China hoping to glean trade concessions from Beijing, while earlier in the day U.S. Trade Representative Robert Lighthizer confirmed, after months of wrangling with Mexico and Canada, a mid-May deadline for the renegotiation of the North American Free Trade Agreement. And the administration set a new June 1 deadline to come to an agreement with European officials on steel and aluminum tariffs. The developments position May as a crucial month for President Donald Trump to fulfill a campaign promise to rewrite the rules of trade, with the aim of reducing U.S. deficits and protecting American workers."
April 30 - Bloomberg (Saleha Mohsin and Randall Woods): "U.S. Treasury Secretary Steven Mnuchin said he's unconcerned about the bond market's ability to absorb rising government debt after his department said it borrowed a record amount for the first quarter. 'It's a very large, robust market -- it's the most liquid market in the world, and there is a lot of supply," he said… 'But I think the market can easily handle it.' Earlier on Monday the Treasury said net borrowing totaled $488 billion from January through March, a record for that period and about $47 billion more than it had previously estimated…"
April 29 - New York Times (Jack Ewing and Ana Swanson): "A few weeks ago, it felt as if a trade war pitting the United States against allies like Australia, Canada and the European Union was over before it even began. The Trump administration dispensed so many temporary exemptions to steel and aluminum tariffs that many countries figured the threats were just political theater. But with only days left before the exemptions expire and punitive tariffs take effect, it's dawning on foreign leaders that decades of warm relations with the United States carry little weight with a president dismissive of diplomatic norms and hostile toward the ground rules of international trade. What began as a way to protect American steel and aluminum jobs has since become a cudgel that the Trump administration is using to extract concessions in other areas, including car exports to Europe or negotiations to revise the North American Free Trade Agreement with Mexico and Canada."
May 1 - New York Times (Jack Ewing): "American allies did not bother to conceal their annoyance… with the Trump administration's last-minute decision to delay punitive aluminum and steel tariffs by a month, in their view leaving a sword of Damocles hanging over the global economy. In Europe, the reprieve was seen not as an act of conciliation or generosity but instead as another 30 days of precarious limbo that will disrupt supply networks and undermine what has been an unusually strong period of growth. European leaders, normally circumspect, are openly irritated that President Trump's protectionist assault is aimed at them despite decades of military alliance and shared values."
April 28 - Reuters (Amanda Becker and Lucia Mutikani): "U.S. President Donald Trump on Saturday threatened to shut down the federal government in September if Congress did not provide more funding to build a wall on the border with Mexico. 'That wall has started, we have 1.6 billion (dollars),' Trump said at a campaign rally… 'We come up again on September 28th and if we don't get border security we will have no choice, we will close down the country because we need border security.'"
April 28 - Reuters (Lesley Wroughton and Ori Lewis): "The United States is deeply concerned by Iran's 'destabilizing and malign activities', new Secretary of State Mike Pompeo said after meeting Israeli Prime Minister Benjamin Netanyahu… The former CIA director was speaking on a flying visit to the region, where he had earlier in the day met with Saudi King Salman in Riyadh and stressed the need for unity among Gulf allies as Washington aims to muster support for new sanctions against Iran to curb its missile program."
May 3 - Bloomberg (Shobhana Chandra): "The U.S.-China trade deficit has gotten even wider. President Donald Trump says that's the wrong direction, which is why he's dispatched a posse of high-level officials to Beijing in hopes of hammering out a better deal. The merchandise trade gap with China widened by 16% to $91.1 billion in the first three months of the year… China is America's biggest trading partner so far this year, compared with the first quarter of 2017, when Canada held the top spot."
Federal Reserve Watch:
May 2 - Financial Times (Sam Fleming): "The Federal Reserve signalled it is getting more confident in the inflation outlook as it prepares for further increases in short-term interest rates in the coming months. The US central bank said that price growth has moved close to its target and is likely to stay there in the medium term as it held short-term rates unchanged at 1.5 to 1.75%. Policymakers dropped language in previous post-meeting statements that said they were closely monitoring inflation. 'Inflation on a 12-month basis is expected to run near the Committee's symmetric 2% objective over the medium term,' officials said, adding that the risks to the outlook were 'roughly balanced'. The central bank on Wednesday said it still expected growth to continue at a moderate pace and labour market conditions to remain 'strong'."
U.S. Bubble Watch:
May 2 - CNBC (Diana Olick): "Home prices have been rising steadily since the recession, but the gains are suddenly accelerating as spring demand heats up in an already highly lean and competitive market. Prices surged 7% higher in March compared with a year ago, according to CoreLogic. That is the biggest gain since May 2014. All 50 states saw home values increase, and prices are now higher than they were at the peak of the last housing boom, although that does not account for inflation. 'High demand and limited supply have pushed home prices above where they were in early 2006,' said Frank Nothaft, chief economist at CoreLogic. 'New construction still lags historically normal levels, keeping upward pressure on prices.'"
April 30 - Bloomberg (Katia Dmitrieva): "U.S. consumer spending picked up in March while the Federal Reserve's preferred inflation gauge hit the central bank's 2% target for the first time in a year, reinforcing the outlook for further interest-rate hikes. Purchases rose 0.4% from the prior month, matching estimates, after being little changed in February… The price gauge linked to consumption rose 2% from a year earlier after 1.7% in February; excluding food and energy, which officials see as a better gauge of underlying trends, it was up 1.9%."
May 2 - CNN Money (Matt Egan): "Mysteriously low inflation padded Corporate America's bottom line for years. Now soaring commodity prices and steadily rising wages threaten to ding record profits. Major companies including Caterpillar (CAT), Halliburton and Harley-Davidson warned in recent weeks of rising costs for everything from steel and crude oil to trucking. President Trump's steel and aluminum tariffs are adding to the pricing headaches. America's factories have been grappling with inflation this year. Prices for manufacturers have increased for five straight months to the highest since 2011, according to the Institute for Supply Management. Labor shortages and transportation delays are even making it harder for some factories to deliver their products on time. 'We expect steel and other commodity costs to be a headwind all year,' Bradley Halverson, Caterpillar's chief financial officer, told analysts…"
April 30 - Wall Street Journal (David Harrison and Shayndi Raice): "Jobs at the paper mills and safe manufacturers on this stretch of the Great Miami River mostly dried up by the early 2000s, leaving behind closed factories and an abandoned downtown. Today, a spruced-up waterfront, loft apartments and help-wanted signs give the appearance of economic renewal. All that's missing are workers-and that has prompted a novel experiment. Relocate to Hamilton and the city promises $5,000 to help pay student loans. Pack up for Grant County, Ind., and claim $5,000 toward buying a home. Settle in North Platte, Neb., and the chamber of commerce will hold a ceremony in your honor to present an even bigger check. In this new phase of the U.S. economy, one marked by a shortage of workers rather than jobs, civic leaders in Hamilton and elsewhere are asking themselves: Why not pay people to move here?"
May 1 - Reuters (Max Bower): "The size of fund financing loans is increasing along with banks' exposure to the US$400bn market as managers raise ever-larger funds, but the wall of cash pouring into the sector is also encouraging smaller debt funds to leverage portfolios to maintain returns. Up to 50 banks are now competing to offer subscription lines of up to €2bn to support multi-billion dollar private equity funds, but fund financing specialists are also seeing rising demand for Net Asset Value (NAV) lines from smaller debt funds, including direct lenders, CLOs and real estate funds. Fund financing is one of the fastest growing areas of the syndicated loan market…"
May 2 - Financial Times (Joe Rennison and Ben McLannahan): "Lenders in America's $1.2tn car-loan market are extending terms for as long as eight years, meaning they face a greater risk of defaults and meagre recovery values. Banks and non-banks have entered the market in recent years, looking to increase exposure to a sector that was resilient during the financial crisis. But analysts fear that many have relaxed terms for borrowers too much, particularly in the subprime segment, where losses have historically been much greater. Also, monthly repayments for borrowers have hit an all-time high… The average term on new car loans stood at 67 months - or five and a half years - at the end of 2017, according to… the Federal Reserve Bank of New York, having steadily risen since 2008."
May 3 - Bloomberg (Suzanne Woolley): "American retirees are healthier and wealthier than ever. But wiser? A new report throws a little doubt on that notion. Money manager United Income analyzed data from sources, including the Federal Reserve Board, the U.S. Bureau of Labor Statistics, the Census Bureau, the Internal Revenue Service, and the Centers for Disease Control, to examine the changing the lives of American retirees. One of every six retirees in the U.S. is a millionaire (if you include the value of their homes), according to the new report. Their average wealth has risen more than 100% since 1989, to $752,000, and the share of those who are millionaires has doubled."
April 30 - CNBC (Thomas Franck): "Goldman Sachs' David Solomon said the bank now employs thousands of engineers in its effort to stay on the cutting edge of financial technology. Keeping up in modern finance 'requires a lot of investment,' said Solomon, president and next in line to be CEO at the firm… Companies such as Goldman need to answer questions like 'how to hold on to your legacy businesses but create an environment that's conducive' to innovation, he added. The chief operating officer added that Goldman Sachs has hired about 9,000 engineers to help ensure that the bank keeps up with peers in the age of modern banking. For a company with just over 36,000 employees, the bank's influx of computer engineers now represents approximately 25% of its entire workforce."
April 30 - Reuters (Amanda Becker): "Republican U.S. Senator Marco Rubio… told the Economist magazine there is 'no evidence whatsoever' the law significantly helped American workers. 'There is still a lot of thinking on the right that if big corporations are happy, they're going to take the money they're saving and reinvest it in American workers,' Rubio said… 'In fact, they bought back shares, a few gave out bonuses; there's no evidence whatsoever that the money's been massively poured back into the American worker.'"
China Watch:
April 30 - New York Times (Keith Bradsher): "China will refuse to discuss President Trump's two toughest trade demands when American negotiators arrive in Beijing this week, people involved in Chinese policymaking say, potentially forcing Washington to escalate the dispute or back down. The Chinese government is publicly calling for flexibility on both sides. But senior Beijing officials do not plan to discuss the Trump administration's two biggest demands: a mandatory $100 billion cut in America's $375 billion annual trade deficit with China and curbs on Beijing's $300 billion plan to bankroll the country's industrial upgrade into advanced technologies such as artificial intelligence, semiconductors, electric cars and commercial aircraft. The reason: Beijing feels its economy has become big enough and resilient enough to stand up to the United States."
May 3 - Bloomberg (Saleha Mohsin and Andrew Mayeda): "Chinese finance officials had high expectations entering the first major meeting with new American counterparts last summer. President Donald Trump had feted Chinese President Xi Jinping at his Mar-a-Lago resort a few months earlier, suggesting the two nations would enjoy warmer ties than his campaign-trail attacks had implied. Those hopes were dashed by Trump's Treasury Secretary Steven Mnuchin and Commerce Secretary Wilbur Ross nearly as soon as the July 19 talks began. Mnuchin told his visitors that he wouldn't sign a traditional joint statement to end the meeting. Nor would there be a joint news conference, a ritual moment relished by the Chinese. Ross, a longstanding China hawk, proceeded to lecture the foreign delegation. The meeting ended in confusion, accelerating a downward spiral in economic ties with China."
Central Bank Watch:
May 3 - Wall Street Journal (Ryan Dube and Julie Wernau): "Argentina's central bank unexpectedly raised interest rates for the third time in eight days Friday in an attempt to prop up its faltering currency, as the country finds itself once again battling a financial crisis. The central bank raised its main interest rate by 6.75 percentage points, following increases of 3 percentage points on Thursday and last Friday. The moves helped stabilize the peso Friday, but with a policy rate now at 40%, the prospects for economic growth are more uncertain."
Global Bubble Watch:
April 30 - Financial Times (Eric Platt and Arash Massoudi): "The feverish tide of takeover activity accelerated on Monday as companies confirmed more than $120bn of tie-ups, including transformational deals in the telecoms, energy and retail industries on both sides of the Atlantic. A total of a dozen transactions greater than $100m in value were announced over the 24-hour period, adding to the record clip of dealmaking in 2018, which now sits at $1.7tn, beating the pace of pre-financial crisis highs, according to Dealogic. Financial and legal advisers said the rapid rate of mergers and acquisitions is likely to continue, as companies feel emboldened by global economic growth, high stock prices and the continued availability of cheap borrowing."
April 30 - Financial Times (Robin Wigglesworth): "Investors are starting to see a pattern in the bond-equity relationship that could have profound and worrying implications for their portfolios. The rare combination of equity and bond prices falling at the same time has become more frequent of late. Since 2000 there have only been 57 trading days where the S&P 500 lost 0.5% or more and the 30-year US Treasury bond yield also rose 3 bps or more, according to Morgan Stanley. But there were a handful of such days in just the last month. While US stocks have regained their footing in April and inflation data out on Monday calmed the bond market, both the S&P 500 and Bloomberg Barclays Aggregate, a popular bond index, lost more than 1% in the first quarter - only the fourth time this has occurred in the past three decades."
April 29 - Financial Times (Amin Rajan): "'The paradox of liquidity is that it disappears as soon as one is in serious need of it,' says Pascal Blanqué in The Economic and Financial Order. He pulls no punches when reviewing the weakness of modern portfolio theory, the guiding star of investors. The theory holds that liquidity - the ability to execute sizeable securities transactions rapidly, at low cost and with limited effect on prices - will always be there. Reality shows otherwise. Because not all asset classes are readily exchangeable at a given time, Mr Blanqué, the chief investment officer of Amundi Asset Management, proposes a refinement: putting liquidity at the heart of asset allocation. His analysis is timely as markets have turned cyclical again. Concern centres on a shift in bond markets on both sides of the Atlantic."
May 3 - Bloomberg (Natalie Wong and Erik Hertzberg): "Toronto home sales are off to the worst start in nine years, as tougher rules for mortgage qualifications and rising interest rates continue to push buyers out of the market. Sales fell for four straight months on a seasonally adjusted basis, with the fewest transactions to start a year since the 2009 recession…"
Fixed Income Bubble Watch:
April 30 - Wall Street Journal (Daniel Kruger): "Foreign investors' appetite this year for U.S. debt hasn't grown at the same pace as the government's borrowing needs, which some analysts worry could push bond yields higher and eventually threaten to slow economic growth. Investors in a broad category known as 'indirect bidders,' which includes both mutual funds and foreign investors, have been winning the smallest percentage of the bonds they've bid for since 2011… The average percentage of the auctions won by this group fell for the first time since 2012, a decline some analysts attribute to both lower demand from investors outside the U.S. and their recent tendency to post less-aggressive bids. The behavior of these bidders is crucial for the ability of the U.S. to fund itself, at a time when the budget deficit is forecast to surpass $1 trillion by 2020 and remain above that level for the foreseeable future. Foreign investors currently hold about 43% of U.S. government debt, the lowest since November 2016…"
May 3 - Bloomberg (Yakob Peterseil and Cecile Gutscher): "The leveraged loan market just achieved something it hasn't been able to do since 2008 -- moved within $100 billion of the U.S. high-yield bond market. Fueled by demand from collateralized loan obligations and retail investors eager for protection against rising interest rates, the amount of leveraged loans outstanding has doubled since 2010 to more than $1 trillion, according to… Bank of America Merrill Lynch that cites S&P Global Market Intelligence data. There's around $1.1 trillion parked in high-yield bonds, which have increased by less than a quarter in the same period. 'While the syndicated loan market has been around since the turn of the century, its popularity has seen an unparalleled surge in this credit cycle,' BAML strategists Neha Khoda and Oleg Melentyev wrote…"
EM Bubble Watch:
May 2 - Reuters (Marc Jones): "The recent run up in the dollar and global borrowing costs has led to the first monthly outflow of foreign money from poorer 'emerging' economies since 2016, estimates compiled by the Institute of International Finance show. A new IIF report said the rising pressure from the dollar and bond yields has exhumed 'the ghost of tantrums past' and caused a $0.5 billion outflow when combining figures from EM stocks funds and bond funds."
May 3 - Bloomberg (Carolina Millan and Patrick Gillespie): "Argentina hiked interest rates for the second time in less than a week to stem the peso's sharp decline, a tactic that many investors say will again bring only temporary relief. The central bank raised its key interest rate to 33.25%... The peso has fallen more than 5% since Friday, when the bank raised borrowing costs by the same amount at a surprise meeting."
May 3 - Bloomberg (Eric Martin): "Mexico's debt rose to the riskiest in almost a year after leftist presidential front-runner Andres Manuel Lopez Obrador widened his lead ahead of the July 1 vote. The cost to protect Mexico's bonds against default for five years has jumped by more than a fifth since mid-January after Lopez Obrador opened up a lead of almost 20 points over his closest rival, Ricardo Anaya... The cost jumped to 1.21 percentage point on Thursday. A close at that level would be the highest since last May, when investors balked at President Donald Trump's threat to quit the North American Free Trade Agreement."
Geopolitical Watch:
May 3 - Reuters (Steve Holland and Arshad Mohammed): "U.S. President Donald Trump has all but decided to withdraw from the 2015 Iran nuclear accord by May 12 but exactly how he will do so remains unclear, two White House officials and a source familiar with the administration's internal debate said… There is a chance Trump might choose to keep the United States in the international pact under which Iran agreed to curb its nuclear program in return for sanctions relief, in part because of 'alliance maintenance' with France and to save face for French President Emmanuel Macron… A decision by Trump to end U.S. sanctions relief would all but sink the agreement and could trigger a backlash by Iran, which could resume its nuclear arms program or 'punish' U.S. allies in Syria, Iraq, Yemen and Lebanon, diplomats said."
May 3 - Reuters (Parisa Hafezi): "Iran's foreign minister said… U.S. demands to change its 2015 nuclear agreement with world powers were unacceptable as a deadline set by President Donald Trump for Europeans to 'fix' the deal loomed. Trump has warned that unless European allies rectify the 'terrible flaws' in the international accord by May 12, he will refuse to extend U.S. sanctions relief for the oil-producing Islamic Republic."
April 28 - Reuters (Polina Devitt): "Russia, Turkey and Iran need to help Syria's government clear its country of terrorists, Russian Foreign Minister Sergei Lavrov said… He was speaking at a meeting in Moscow with his counterparts from Turkey and Iran."
May 2 - CNBC (Amanda Macias): "China has quietly installed anti-ship cruise missiles and surface-to-air missile systems on three of its fortified outposts west of the Philippines in the South China Sea, a move that allows Beijing to further project its power in the hotly disputed waters… Intelligence assessments say the missile platforms were moved to the outposts in the Spratly Islands within the past 30 days, according to sources… The placement of the defensive weapons also comes on the heels of China's recent South China Sea installation of military jamming equipment, which disrupts communications and radar systems. By all accounts, the new coastal defense systems represent a significant addition to Beijing's military portfolio in one of the most contested regions in the world."
Trump Administration Watch:
May 2 - Wall Street Journal (John D. McKinnon): "The Trump administration is considering executive action that would restrict some Chinese companies' ability to sell telecommunications equipment in the U.S., based on national-security concerns, said several people familiar with the matter. The move, if it happens, would represent a significant escalation of a growing feud between the U.S. and China over tech and telecommunications. The affected firms likely would include Huawei Technologies Co. and ZTE Corp. , two of the world's leading telecommunications equipment makers. They have found themselves increasingly in an international crossfire. Pentagon officials said this week that they are moving to halt the sale of phones made by the two companies on U.S. military bases around the world."
May 3 - Bloomberg: "Donald Trump's attempt to stem China's technological advance could already be backfiring. His counterpart, President Xi Jinping, has responded to tech-focused pressure from Washington, including a ban on a leading Chinese telecoms company buying American parts, by vowing to pour even more resources into research and achieve home-grown breakthroughs. He urged China last week to 'cast aside illusions' it could rely on others for help. As Trump's team continue talks in Beijing Friday armed with complaints about China's industrial strategy and trade surplus, the hosts said their technological advancement goal isn't on the table. The mix of Trump's tariff threats and the realization that the U.S. wants to stunt its Made in China 2025 development plan -- aimed at dominating industries from transport to robotics -- complicates prospects for detente."
April 30 - New York Times (Ana Swanson and Keith Bradsher): "It sounds like something out of a science fiction movie: In April, China is said to have tested an invisibility cloak that would allow ordinary fighter jets to suddenly vanish from radar screens. This advancement, which could prove to be a critical intelligence breakthrough, is one that American officials fear China may have gained in part from a Chinese researcher who roused suspicions while working on a similar technology at a Duke University laboratory in 2008. The researcher, who was investigated by the F.B.I. but never charged with a crime, ultimately returned to China, became a billionaire and opened a thriving research institute that worked on some projects related to those he studied at Duke. The Trump administration, concerned about China's growing technological prowess, is considering strict measures to block Chinese citizens from performing sensitive research at American universities and research institutes over fears they may be acquiring intellectual secrets… The White House is discussing whether to limit the access of Chinese citizens to the United States, including restricting certain types of visas available to them and greatly expanding rules pertaining to Chinese researchers who work on projects with military or intelligence value at American companies and universities."
May 1 - New York Times (Thomas L. Friedman): "With the arrival in Beijing this week of America's top trade negotiators, you might think that the U.S. and China are about to enter high-level talks to avoid a trade war and that this is a story for the business pages. Think again. This is one for the history books. Five days of meetings in Beijing with Chinese, U.S. and European government officials and business leaders made it crystal clear to me that what's going on right now is nothing less than a struggle to redefine the rules governing the economic and power relations of the world's oldest and newest superpowers - America and China. This is not a trade tiff. 'This is a defining moment for U.S.-China relations,' said Ruan Zongze, executive vice president of the Chinese Foreign Ministry's research institute. 'This is about a lot more than trade and tariffs. This is about the future.'"
May 2 - Financial Times (Yukon Huang): "A high-level US negotiating team will arrive in Beijing later this week to talk about trade and technology wars. These discussions are not really about trade. America has been running trade deficits for forty years, long before China even became a major trading nation. As many experts have noted, America's trade deficits are driven largely by its low savings rates and this has little to do with China. The team's reported request for China to cut its bilateral deficit with the US by $100bn is illogical conceptually and in its practicality. This economic war is more about protecting America's technological edge."
May 1 - Wall Street Journal (William Mauldin and Ben Eisen): "The Trump administration has set the stage for weeks of heightened tension between the U.S. and its trading partners as administration officials race to meet self-imposed deadlines to complete a series of high-stakes negotiations with China, Mexico, Canada and Europe. A U.S. trade delegation left… for China hoping to glean trade concessions from Beijing, while earlier in the day U.S. Trade Representative Robert Lighthizer confirmed, after months of wrangling with Mexico and Canada, a mid-May deadline for the renegotiation of the North American Free Trade Agreement. And the administration set a new June 1 deadline to come to an agreement with European officials on steel and aluminum tariffs. The developments position May as a crucial month for President Donald Trump to fulfill a campaign promise to rewrite the rules of trade, with the aim of reducing U.S. deficits and protecting American workers."
April 30 - Bloomberg (Saleha Mohsin and Randall Woods): "U.S. Treasury Secretary Steven Mnuchin said he's unconcerned about the bond market's ability to absorb rising government debt after his department said it borrowed a record amount for the first quarter. 'It's a very large, robust market -- it's the most liquid market in the world, and there is a lot of supply," he said… 'But I think the market can easily handle it.' Earlier on Monday the Treasury said net borrowing totaled $488 billion from January through March, a record for that period and about $47 billion more than it had previously estimated…"
April 29 - New York Times (Jack Ewing and Ana Swanson): "A few weeks ago, it felt as if a trade war pitting the United States against allies like Australia, Canada and the European Union was over before it even began. The Trump administration dispensed so many temporary exemptions to steel and aluminum tariffs that many countries figured the threats were just political theater. But with only days left before the exemptions expire and punitive tariffs take effect, it's dawning on foreign leaders that decades of warm relations with the United States carry little weight with a president dismissive of diplomatic norms and hostile toward the ground rules of international trade. What began as a way to protect American steel and aluminum jobs has since become a cudgel that the Trump administration is using to extract concessions in other areas, including car exports to Europe or negotiations to revise the North American Free Trade Agreement with Mexico and Canada."
May 1 - New York Times (Jack Ewing): "American allies did not bother to conceal their annoyance… with the Trump administration's last-minute decision to delay punitive aluminum and steel tariffs by a month, in their view leaving a sword of Damocles hanging over the global economy. In Europe, the reprieve was seen not as an act of conciliation or generosity but instead as another 30 days of precarious limbo that will disrupt supply networks and undermine what has been an unusually strong period of growth. European leaders, normally circumspect, are openly irritated that President Trump's protectionist assault is aimed at them despite decades of military alliance and shared values."
April 28 - Reuters (Amanda Becker and Lucia Mutikani): "U.S. President Donald Trump on Saturday threatened to shut down the federal government in September if Congress did not provide more funding to build a wall on the border with Mexico. 'That wall has started, we have 1.6 billion (dollars),' Trump said at a campaign rally… 'We come up again on September 28th and if we don't get border security we will have no choice, we will close down the country because we need border security.'"
April 28 - Reuters (Lesley Wroughton and Ori Lewis): "The United States is deeply concerned by Iran's 'destabilizing and malign activities', new Secretary of State Mike Pompeo said after meeting Israeli Prime Minister Benjamin Netanyahu… The former CIA director was speaking on a flying visit to the region, where he had earlier in the day met with Saudi King Salman in Riyadh and stressed the need for unity among Gulf allies as Washington aims to muster support for new sanctions against Iran to curb its missile program."
May 3 - Bloomberg (Shobhana Chandra): "The U.S.-China trade deficit has gotten even wider. President Donald Trump says that's the wrong direction, which is why he's dispatched a posse of high-level officials to Beijing in hopes of hammering out a better deal. The merchandise trade gap with China widened by 16% to $91.1 billion in the first three months of the year… China is America's biggest trading partner so far this year, compared with the first quarter of 2017, when Canada held the top spot."
Federal Reserve Watch:
May 2 - Financial Times (Sam Fleming): "The Federal Reserve signalled it is getting more confident in the inflation outlook as it prepares for further increases in short-term interest rates in the coming months. The US central bank said that price growth has moved close to its target and is likely to stay there in the medium term as it held short-term rates unchanged at 1.5 to 1.75%. Policymakers dropped language in previous post-meeting statements that said they were closely monitoring inflation. 'Inflation on a 12-month basis is expected to run near the Committee's symmetric 2% objective over the medium term,' officials said, adding that the risks to the outlook were 'roughly balanced'. The central bank on Wednesday said it still expected growth to continue at a moderate pace and labour market conditions to remain 'strong'."
U.S. Bubble Watch:
May 2 - CNBC (Diana Olick): "Home prices have been rising steadily since the recession, but the gains are suddenly accelerating as spring demand heats up in an already highly lean and competitive market. Prices surged 7% higher in March compared with a year ago, according to CoreLogic. That is the biggest gain since May 2014. All 50 states saw home values increase, and prices are now higher than they were at the peak of the last housing boom, although that does not account for inflation. 'High demand and limited supply have pushed home prices above where they were in early 2006,' said Frank Nothaft, chief economist at CoreLogic. 'New construction still lags historically normal levels, keeping upward pressure on prices.'"
April 30 - Bloomberg (Katia Dmitrieva): "U.S. consumer spending picked up in March while the Federal Reserve's preferred inflation gauge hit the central bank's 2% target for the first time in a year, reinforcing the outlook for further interest-rate hikes. Purchases rose 0.4% from the prior month, matching estimates, after being little changed in February… The price gauge linked to consumption rose 2% from a year earlier after 1.7% in February; excluding food and energy, which officials see as a better gauge of underlying trends, it was up 1.9%."
May 2 - CNN Money (Matt Egan): "Mysteriously low inflation padded Corporate America's bottom line for years. Now soaring commodity prices and steadily rising wages threaten to ding record profits. Major companies including Caterpillar (CAT), Halliburton and Harley-Davidson warned in recent weeks of rising costs for everything from steel and crude oil to trucking. President Trump's steel and aluminum tariffs are adding to the pricing headaches. America's factories have been grappling with inflation this year. Prices for manufacturers have increased for five straight months to the highest since 2011, according to the Institute for Supply Management. Labor shortages and transportation delays are even making it harder for some factories to deliver their products on time. 'We expect steel and other commodity costs to be a headwind all year,' Bradley Halverson, Caterpillar's chief financial officer, told analysts…"
April 30 - Wall Street Journal (David Harrison and Shayndi Raice): "Jobs at the paper mills and safe manufacturers on this stretch of the Great Miami River mostly dried up by the early 2000s, leaving behind closed factories and an abandoned downtown. Today, a spruced-up waterfront, loft apartments and help-wanted signs give the appearance of economic renewal. All that's missing are workers-and that has prompted a novel experiment. Relocate to Hamilton and the city promises $5,000 to help pay student loans. Pack up for Grant County, Ind., and claim $5,000 toward buying a home. Settle in North Platte, Neb., and the chamber of commerce will hold a ceremony in your honor to present an even bigger check. In this new phase of the U.S. economy, one marked by a shortage of workers rather than jobs, civic leaders in Hamilton and elsewhere are asking themselves: Why not pay people to move here?"
May 1 - Reuters (Max Bower): "The size of fund financing loans is increasing along with banks' exposure to the US$400bn market as managers raise ever-larger funds, but the wall of cash pouring into the sector is also encouraging smaller debt funds to leverage portfolios to maintain returns. Up to 50 banks are now competing to offer subscription lines of up to €2bn to support multi-billion dollar private equity funds, but fund financing specialists are also seeing rising demand for Net Asset Value (NAV) lines from smaller debt funds, including direct lenders, CLOs and real estate funds. Fund financing is one of the fastest growing areas of the syndicated loan market…"
May 2 - Financial Times (Joe Rennison and Ben McLannahan): "Lenders in America's $1.2tn car-loan market are extending terms for as long as eight years, meaning they face a greater risk of defaults and meagre recovery values. Banks and non-banks have entered the market in recent years, looking to increase exposure to a sector that was resilient during the financial crisis. But analysts fear that many have relaxed terms for borrowers too much, particularly in the subprime segment, where losses have historically been much greater. Also, monthly repayments for borrowers have hit an all-time high… The average term on new car loans stood at 67 months - or five and a half years - at the end of 2017, according to… the Federal Reserve Bank of New York, having steadily risen since 2008."
May 3 - Bloomberg (Suzanne Woolley): "American retirees are healthier and wealthier than ever. But wiser? A new report throws a little doubt on that notion. Money manager United Income analyzed data from sources, including the Federal Reserve Board, the U.S. Bureau of Labor Statistics, the Census Bureau, the Internal Revenue Service, and the Centers for Disease Control, to examine the changing the lives of American retirees. One of every six retirees in the U.S. is a millionaire (if you include the value of their homes), according to the new report. Their average wealth has risen more than 100% since 1989, to $752,000, and the share of those who are millionaires has doubled."
April 30 - CNBC (Thomas Franck): "Goldman Sachs' David Solomon said the bank now employs thousands of engineers in its effort to stay on the cutting edge of financial technology. Keeping up in modern finance 'requires a lot of investment,' said Solomon, president and next in line to be CEO at the firm… Companies such as Goldman need to answer questions like 'how to hold on to your legacy businesses but create an environment that's conducive' to innovation, he added. The chief operating officer added that Goldman Sachs has hired about 9,000 engineers to help ensure that the bank keeps up with peers in the age of modern banking. For a company with just over 36,000 employees, the bank's influx of computer engineers now represents approximately 25% of its entire workforce."
April 30 - Reuters (Amanda Becker): "Republican U.S. Senator Marco Rubio… told the Economist magazine there is 'no evidence whatsoever' the law significantly helped American workers. 'There is still a lot of thinking on the right that if big corporations are happy, they're going to take the money they're saving and reinvest it in American workers,' Rubio said… 'In fact, they bought back shares, a few gave out bonuses; there's no evidence whatsoever that the money's been massively poured back into the American worker.'"
China Watch:
April 30 - New York Times (Keith Bradsher): "China will refuse to discuss President Trump's two toughest trade demands when American negotiators arrive in Beijing this week, people involved in Chinese policymaking say, potentially forcing Washington to escalate the dispute or back down. The Chinese government is publicly calling for flexibility on both sides. But senior Beijing officials do not plan to discuss the Trump administration's two biggest demands: a mandatory $100 billion cut in America's $375 billion annual trade deficit with China and curbs on Beijing's $300 billion plan to bankroll the country's industrial upgrade into advanced technologies such as artificial intelligence, semiconductors, electric cars and commercial aircraft. The reason: Beijing feels its economy has become big enough and resilient enough to stand up to the United States."
May 3 - Bloomberg (Saleha Mohsin and Andrew Mayeda): "Chinese finance officials had high expectations entering the first major meeting with new American counterparts last summer. President Donald Trump had feted Chinese President Xi Jinping at his Mar-a-Lago resort a few months earlier, suggesting the two nations would enjoy warmer ties than his campaign-trail attacks had implied. Those hopes were dashed by Trump's Treasury Secretary Steven Mnuchin and Commerce Secretary Wilbur Ross nearly as soon as the July 19 talks began. Mnuchin told his visitors that he wouldn't sign a traditional joint statement to end the meeting. Nor would there be a joint news conference, a ritual moment relished by the Chinese. Ross, a longstanding China hawk, proceeded to lecture the foreign delegation. The meeting ended in confusion, accelerating a downward spiral in economic ties with China."
Central Bank Watch:
May 3 - Wall Street Journal (Ryan Dube and Julie Wernau): "Argentina's central bank unexpectedly raised interest rates for the third time in eight days Friday in an attempt to prop up its faltering currency, as the country finds itself once again battling a financial crisis. The central bank raised its main interest rate by 6.75 percentage points, following increases of 3 percentage points on Thursday and last Friday. The moves helped stabilize the peso Friday, but with a policy rate now at 40%, the prospects for economic growth are more uncertain."
Global Bubble Watch:
April 30 - Financial Times (Eric Platt and Arash Massoudi): "The feverish tide of takeover activity accelerated on Monday as companies confirmed more than $120bn of tie-ups, including transformational deals in the telecoms, energy and retail industries on both sides of the Atlantic. A total of a dozen transactions greater than $100m in value were announced over the 24-hour period, adding to the record clip of dealmaking in 2018, which now sits at $1.7tn, beating the pace of pre-financial crisis highs, according to Dealogic. Financial and legal advisers said the rapid rate of mergers and acquisitions is likely to continue, as companies feel emboldened by global economic growth, high stock prices and the continued availability of cheap borrowing."
April 30 - Financial Times (Robin Wigglesworth): "Investors are starting to see a pattern in the bond-equity relationship that could have profound and worrying implications for their portfolios. The rare combination of equity and bond prices falling at the same time has become more frequent of late. Since 2000 there have only been 57 trading days where the S&P 500 lost 0.5% or more and the 30-year US Treasury bond yield also rose 3 bps or more, according to Morgan Stanley. But there were a handful of such days in just the last month. While US stocks have regained their footing in April and inflation data out on Monday calmed the bond market, both the S&P 500 and Bloomberg Barclays Aggregate, a popular bond index, lost more than 1% in the first quarter - only the fourth time this has occurred in the past three decades."
April 29 - Financial Times (Amin Rajan): "'The paradox of liquidity is that it disappears as soon as one is in serious need of it,' says Pascal Blanqué in The Economic and Financial Order. He pulls no punches when reviewing the weakness of modern portfolio theory, the guiding star of investors. The theory holds that liquidity - the ability to execute sizeable securities transactions rapidly, at low cost and with limited effect on prices - will always be there. Reality shows otherwise. Because not all asset classes are readily exchangeable at a given time, Mr Blanqué, the chief investment officer of Amundi Asset Management, proposes a refinement: putting liquidity at the heart of asset allocation. His analysis is timely as markets have turned cyclical again. Concern centres on a shift in bond markets on both sides of the Atlantic."
May 3 - Bloomberg (Natalie Wong and Erik Hertzberg): "Toronto home sales are off to the worst start in nine years, as tougher rules for mortgage qualifications and rising interest rates continue to push buyers out of the market. Sales fell for four straight months on a seasonally adjusted basis, with the fewest transactions to start a year since the 2009 recession…"
Fixed Income Bubble Watch:
April 30 - Wall Street Journal (Daniel Kruger): "Foreign investors' appetite this year for U.S. debt hasn't grown at the same pace as the government's borrowing needs, which some analysts worry could push bond yields higher and eventually threaten to slow economic growth. Investors in a broad category known as 'indirect bidders,' which includes both mutual funds and foreign investors, have been winning the smallest percentage of the bonds they've bid for since 2011… The average percentage of the auctions won by this group fell for the first time since 2012, a decline some analysts attribute to both lower demand from investors outside the U.S. and their recent tendency to post less-aggressive bids. The behavior of these bidders is crucial for the ability of the U.S. to fund itself, at a time when the budget deficit is forecast to surpass $1 trillion by 2020 and remain above that level for the foreseeable future. Foreign investors currently hold about 43% of U.S. government debt, the lowest since November 2016…"
May 3 - Bloomberg (Yakob Peterseil and Cecile Gutscher): "The leveraged loan market just achieved something it hasn't been able to do since 2008 -- moved within $100 billion of the U.S. high-yield bond market. Fueled by demand from collateralized loan obligations and retail investors eager for protection against rising interest rates, the amount of leveraged loans outstanding has doubled since 2010 to more than $1 trillion, according to… Bank of America Merrill Lynch that cites S&P Global Market Intelligence data. There's around $1.1 trillion parked in high-yield bonds, which have increased by less than a quarter in the same period. 'While the syndicated loan market has been around since the turn of the century, its popularity has seen an unparalleled surge in this credit cycle,' BAML strategists Neha Khoda and Oleg Melentyev wrote…"
EM Bubble Watch:
May 2 - Reuters (Marc Jones): "The recent run up in the dollar and global borrowing costs has led to the first monthly outflow of foreign money from poorer 'emerging' economies since 2016, estimates compiled by the Institute of International Finance show. A new IIF report said the rising pressure from the dollar and bond yields has exhumed 'the ghost of tantrums past' and caused a $0.5 billion outflow when combining figures from EM stocks funds and bond funds."
May 3 - Bloomberg (Carolina Millan and Patrick Gillespie): "Argentina hiked interest rates for the second time in less than a week to stem the peso's sharp decline, a tactic that many investors say will again bring only temporary relief. The central bank raised its key interest rate to 33.25%... The peso has fallen more than 5% since Friday, when the bank raised borrowing costs by the same amount at a surprise meeting."
May 3 - Bloomberg (Eric Martin): "Mexico's debt rose to the riskiest in almost a year after leftist presidential front-runner Andres Manuel Lopez Obrador widened his lead ahead of the July 1 vote. The cost to protect Mexico's bonds against default for five years has jumped by more than a fifth since mid-January after Lopez Obrador opened up a lead of almost 20 points over his closest rival, Ricardo Anaya... The cost jumped to 1.21 percentage point on Thursday. A close at that level would be the highest since last May, when investors balked at President Donald Trump's threat to quit the North American Free Trade Agreement."
Geopolitical Watch:
May 3 - Reuters (Steve Holland and Arshad Mohammed): "U.S. President Donald Trump has all but decided to withdraw from the 2015 Iran nuclear accord by May 12 but exactly how he will do so remains unclear, two White House officials and a source familiar with the administration's internal debate said… There is a chance Trump might choose to keep the United States in the international pact under which Iran agreed to curb its nuclear program in return for sanctions relief, in part because of 'alliance maintenance' with France and to save face for French President Emmanuel Macron… A decision by Trump to end U.S. sanctions relief would all but sink the agreement and could trigger a backlash by Iran, which could resume its nuclear arms program or 'punish' U.S. allies in Syria, Iraq, Yemen and Lebanon, diplomats said."
May 3 - Reuters (Parisa Hafezi): "Iran's foreign minister said… U.S. demands to change its 2015 nuclear agreement with world powers were unacceptable as a deadline set by President Donald Trump for Europeans to 'fix' the deal loomed. Trump has warned that unless European allies rectify the 'terrible flaws' in the international accord by May 12, he will refuse to extend U.S. sanctions relief for the oil-producing Islamic Republic."
April 28 - Reuters (Polina Devitt): "Russia, Turkey and Iran need to help Syria's government clear its country of terrorists, Russian Foreign Minister Sergei Lavrov said… He was speaking at a meeting in Moscow with his counterparts from Turkey and Iran."
May 2 - CNBC (Amanda Macias): "China has quietly installed anti-ship cruise missiles and surface-to-air missile systems on three of its fortified outposts west of the Philippines in the South China Sea, a move that allows Beijing to further project its power in the hotly disputed waters… Intelligence assessments say the missile platforms were moved to the outposts in the Spratly Islands within the past 30 days, according to sources… The placement of the defensive weapons also comes on the heels of China's recent South China Sea installation of military jamming equipment, which disrupts communications and radar systems. By all accounts, the new coastal defense systems represent a significant addition to Beijing's military portfolio in one of the most contested regions in the world."
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