[Reuters] China won't accept U.S. trade 'blackmail': state media
[Reuters] China's Wang says response to U.S. trade measures necessary, legitimate
[BloombergQ] Pompeo Warns Russia, China Over Violating North Korea Sanctions
[BloombergQ] Turkey on Trump Blacklist as Sanctions Spell Trouble for Economy
[WSJ] Global Heat Wave Toasts Wheat and Prices Soar
Saturday, August 4, 2018
Friday, August 3, 2018
Weekly Commentary: "Periphery to Core Crisis Dynamics"
The renminbi traded at 6.8935 in early-Friday trading, with intensified selling pushing the Chinese currency to its lowest level (vs. the $) since May 26, 2017. The People's Bank of China (PBOC) was compelled to support their currency, imposing a 20% reserve requirement on foreign-exchange forward contracts (raising the cost of shorting the renminbi). The PBOC previously adopted this measure back during 2015 tumult, before removing it this past September.
The re-imposition of currency trading reserve requirements indicates heightened concern in Beijing. Officials likely viewed modest devaluation as a constructive counter to U.S. trade pressures. In no way, however, do they want to face disorderly trading and the risk of a full-fledged currency crisis.
The renminbi rallied 1% on the PBOC move, ending slightly positive for the day (but down for the eighth straight week). Trading strongly prior to the PBOC move, the dollar index reversed into negative territory. Many EM currencies moved sharply on the renminbi rally. The South African rand reversed course and posted a 1.2% gain. The Brazilian real also jumped 1%. Curiously, the Japanese yen gained about 0.5%.
Overnight S&P500 futures, having traded slightly negative, popped higher on the renminbi rally. But EM equities were the bigger beneficiary. Brazil Ibovespa index gained 2.3% Friday. It increasingly appears the fortunes of the renminbi and EM markets are tightly intertwined.
The unfolding trade war is turning more serious. Beyond Friday's currency move, China's Finance Ministry - in measures to "guard its interests" - announced plans for significantly broader retaliation tariffs on U.S. goods.
August 3 - CNBC (Michael Sheetz): "China is preparing to retaliate in the escalating trade war with tariffs on about $60 billion worth of U.S. goods. The import taxes would range in rates from 5% to 25%, China's Ministry of Commerce said… There are four lists of goods, one for each of the rates proposed. Many of the goods are agricultural-related, with others on various metals and chemicals. 'The implementation date of the taxation measures will be subject to the actions of the US, and China reserves the right to continue to introduce other countermeasures,' China's release said… 'Any unilateral threat or blackmail will only lead to intensification of conflicts and damage to the interests of all parties.'"
President Trump had already threatened to place tariffs on $200 billion of Chinese goods if Beijing moved to retaliate on earlier U.S. measures. Shortly after the Chinese retaliatory tariff announcement (and post-U.S. payrolls data), Larry Kudlow, Director of the National Economic Council, appeared on Bloomberg Television.
Bloomberg's Jonathan Ferro: "You've sat across the table with the Chinese many, many times. What is your opinion - your insight - into what is happening to the Chinese economy currently?"
Kudlow: "Well, I'm not an expert. I do try to follow it and it looks to me - you all may disagree - it looks to me like the China economy is declining in growth - it's weakening - almost across the board. And it looks like the People's Bank of China is trying to pump it up by adding high-powered money and new credit and so forth. The currency fall is partly [because] they've stopped defending the yuan. They think it's going to help offset the U.S. efforts to get rid of their unfair trading. Some of the currency fall, though, I think is just money leaving China because it's a lousy investment. And if that continues that will really damage the Chinese economy. If money leaves China - and the currency could be a leading indicator - they're going to be in a heap of trouble. And so I'm going to make the case that they are in a weak economic position - that's not a good place for them to be vis-à-vis the trade negotiations - first point. Second point, they better not underestimate President Trump's determination to follow through on our asks - IP theft is a no-go. Forced transfer of technology - no go. Non-reciprocal trading, on tariffs and non-tariff barriers. The President, he's a trade reformer. We've said many times: "no tariffs, no tariff barriers, no subsidies. We want to see trade reforms." China is not delivering. Their economy is weak; their currency is weak; people leaving the country. Don't underestimate President Trump's determination to follow through. I'm just telling you. I can't speak for the Communist Party in China. I can speak for our President. Do not underestimate his determination to change trading practices on a fair, reciprocal plane."
Ferro: "One thing you can definitely speak to, Larry, is the strategy of the President. It just seems to me the strategy of the administration at the moment is to exert maximum pain on the Chinese economy. Is that the direction of travel for you guys, Larry?"
Kudlow: "I would maybe rephrase it a bit. I think what we're saying is we are serious. And in trade, as you well know, your guests know, negotiations often include the use of tariffs. And the President has said time and time again that targeted tariffs are going to be part of the game plan with China - unless and until they begin to meet our requests, which so far they have not. In fact, in the recent month or so we've had hardly any conversations with them at all. There is some hint now that they may wish to talk, although I can't say that with certainty."
The Shanghai Composite sank another 4.6% this week, increasing y-t-d losses to 17.1%. Meanwhile, the S&P500 gained 0.6%, boosting the S&P500's 2018 return to 7.4%. As a large net importer, the U.S. is seemingly less economically sensitive to a trade war than the Chinese economy. U.S. equities have become immune to trade threats. Announcements that would have previously rattled stocks no longer carry much of a punch. As the market sees it, the administration may bluster, but they surely won't risk jeopardizing the great bull market - especially leading up to the midterms.
As Mr. Kudlow stated rather unequivocally, the administration believes it has a very strong hand to play, while China's hand is feeble - and turning only feebler. They have somewhat of a point. The U.S. economy is booming, and our securities markets remain resilient. Meanwhile, cracks in the Chinese Bubble seem to widen by the week. Beijing is feeling the heat. Yet I see important shortcomings in the administration's analysis.
First, I'll be surprised if hardball tactics work on Beijing. For one, the Chinese recognize Trump administration issues go way beyond unfair trade. Negotiations on trade are but the first salvo - so Beijing must be tough and show unflappable resolve. As they see it, give in now and they'll face an unrelenting Washington power play. Display weakness on trade and the Americans would be emboldened to confront Beijing on the South China Sea or Taiwan. Chinese leadership sees the U.S. as trying to contain China's ascent to their rightful place of global power, influence and prestige.
I also believe the Trump administration is overstating the strength of the hand it's playing. The U.S. economic boom has attained significant momentum. Animal spirits are running hot and there remains a potent inflationary bias throughout the asset markets. But I would argue that the U.S. is today much more exposed to a shift in the global financial backdrop than is appreciated in Washington or by the markets. In my view, the unfolding trade war with China poses a clear and present threat to global finance.
The U.S. boom is built on a foundation of loose finance. Finance has meaningfully tightened globally. I'll reiterate my view that the global Bubble has been pierced at the "periphery" - more specifically, within the emerging markets. There are now serious fissures in China's Bubble, a circumstance exacerbated both by EM fragilities and rising U.S. trade tensions.
In this incipient faltering global Bubble phase, instability at the "periphery" has so far engendered somewhat looser financial conditions in "core" markets. U.S. Treasury yields turned sharply lower following the May EM eruption, reversing what had the potential to evolve into tightened financial conditions. Lower market yields, along with looser conditions more generally, incited a rally and powerful short squeeze in U.S. equities.
A critical question going forward: How will evolving conditions at the global Bubble's "periphery" impact the "core"? Recently, some stabilization at the "periphery" has seen waning safe haven Treasury demand. Treasury yields were back above 3.0% this week, before Friday's rally saw yields decline to 2.95%.
Markets remain at this point comfortable that stress at the "periphery" will continue to bolster the "core." This has been, after all, the case in recent years. After beginning 2016 at 2.27%, China and EM instabilities were behind a drop in Treasury yields through mid-year (as low as 1.36%). After a relatively brief pullback early in the year, U.S. equities disregarded global issues as they rallied for much of 2016. Importantly, loose U.S. financial conditions only loosened further, as global Bubble vulnerabilities had the FOMC sitting on its hands for a year between their initial and second "baby step" rate increases.
There remains a prevalent market view that unfolding global instability will have the Fed winding down "normalization" long before rate increases turn restrictive for the booming U.S. economy and securities markets. Besides, any unfolding bout of global risk aversion would ensure booming international flows into U.S. dollar securities markets.
To be sure, extended periods of loose finance deeply alter market perceptions, dynamics and structure. Years of QE market liquidity backstops fundamentally changed the way market participants view risk. There is today little concern for trouble at the "periphery" gravitating to the "core." After all, the U.S. has been the primary beneficiary during repeated episodes of risk aversion and outflows from China, EM or even periphery Europe, for that matter.
Indeed, markets have been conditioned to view instability at the "periphery" as an opportunity. It's now been a decade since tumult afflicted the "core." Long forgotten is the traditional dynamic where risk aversion at the "periphery" commences a process of de-risking and de-leveraging - with expanding market illiquidity and contagion. This old market problem was seemingly nullified by activist central bankers.
Well, I believe the current backdrop creates extraordinary risk for a (surprising) reemergence of "Periphery to Core Crisis Dynamics". It's my view that massive global QE measures have for years been responsible for nipping de-risking/de-leveraging dynamics in the bud. The overabundance of cheap global finance ensured a surfeit of market liquidity that would readily accommodate incipient de-risking/de-leveraging at the "periphery." In short, a global "system" awash in "money" ensured de-leveraging dynamics never attained momentum. Contagion risk stopped being an issue - quite a boon for global leveraged speculation. Moreover, even the mildest "risk off" dynamic at the "periphery" would ensure waves of inbound liquidity for the "core." Latent fragilities at the "periphery" were kept under wraps, as global central bankers dragged their heels when contemplating the start of policy normalization.
An analyst on Bloomberg Television made the important point that global QE is today in the neighborhood of $25 billion monthly, down from $125 billion one year ago. Global QE will likely turn negative by year-end. This, I believe, significantly increases the likelihood of an unanticipated return of a destabilizing global contagion dynamic. Rather than instability at the "periphery" doing its usual handiwork to buoy Bubbles at the "core," de-risking/de-leveraging dynamics increasingly have the potential to attain sufficient momentum to negatively impact the "core."
The global liquidity backdrop is in the process of profound - if not yet obviously discernable - change. EM is increasingly vulnerable to a destabilizing bout of de-leveraging in a world of waning liquidity. Thus far, the faltering EM Bubble has incited flows to U.S. Bubble markets. However, an escalation of the unfolding EM crisis is at heightened risk of inciting a very problematic global de-leveraging - a "risk off" backdrop that would risk piercing vulnerable Bubbles even at the "core." The consensus bullish view - holding EM as a buying opportunity and the U.S. as the mighty pillar of growth and stability - could prove dangerously complacent.
I believe there are great latent fragilities associated with the "Periphery to Core Crisis Dynamic." Distorted markets have over years been conditioned to disregard such risk. I'll presume the administration is simply oblivious, believing it's deftly playing a hand of robust U.S. financial and economic systems. With such a competitive advantage, in their minds there's never been a better opportunity to play hardball and put Beijing in its place.
It's worth noting that 10-year Treasury yields declined four bps Friday. The Japanese yen (up 0.37%) also enjoyed a safe haven bid. Treasuries and the yen seemed to take a different view of developments than U.S. equities.
Friday afternoon Bloomberg headline: "Tit-For-Tat Becomes the Norm as U.S., China Dig In for Trade War." The odds are not small that this Game of Chicken goes unresolved for a while. Clearly, it would be uncharacteristic of President Trump to back down. At the same time, President Xi has shown zero tolerance for any sign of weakness. Increasingly, Beijing is being very publicly backed into a corner (Bloomberg headline: "U.S.'s Kudlow Trash Talks China Calling It 'Lousy Investment'"). Difficult to see China responding cordially.
"Trash Talking" China a few hours after the PBOC is compelled to intervene to bolster the flagging renminbi leaves me uncomfortable. There's a problematic scenario that doesn't seem all that improbable at this point: China faces increased financial instability, including capital flight and de-risking/de-leveraging. The PBOC becomes trapped in the dreadful EM dynamic of bolstering system liquidity in the face of mounting risk of a full-fledged currency crisis. Global markets fret the imposition of Chinese capital controls.
Meanwhile, China instability and trade fears see EM markets take another leg lower, with particular market concern for the highly levered Asian economies. De-risking/de-leveraging dynamics attain self-reinforcing momentum, as contagion effects engulf the global "periphery." Fears of global financial fragility and economic vulnerability see risk aversion begin to gravitate toward the "core." Fears of EM central bank and Chinese selling of U.S. Treasuries overwhelm safe haven buying, as de-risking/de-leveraging dynamics see a widening of Credit spreads and illiquidity begin to impact "core" fixed-income markets.
In such a problematic global scenario, I ponder whether Beijing might perceive it's playing with a relatively stronger hand than their U.S. adversary. Meanwhile, contagion effects would set their sights on the "periphery of the core." This just doesn't seem all that far-fetched.
It's worth noting that Italian yields jumped another 18 bps points this week to 2.93% (Greek yields up 25 bps). And while the Bank of Japan sought to comfort markets with "easy forever," the badly-distorted Japanese bond market is indicating instability. Mainly, it's a problematic market and geopolitical backdrop pointing increasingly to "Periphery to Core Crisis Dynamics." China, EM and the world are now just a disorderly collapse of the renminbi away from, in the words of Mr. Kudlow, "a heap of trouble."
For the Week:
The S&P500 gained 0.8% (up 6.2% y-t-d), while the Dow was little changed (up 3.0%). The Utilities rose 1.2% (up 0.9%). The Banks added 0.7% (up 3.4%), while the Broker/Dealers lost 1.7% (up 3.0%). The Transports jumped 1.3% (up 4.6%). The S&P 400 Midcaps rose 1.3% (up 5.2%), and the small cap Russell 2000 increased 0.6% (up 9.0%). The Nasdaq100 advanced 1.4% (up 15.6%). The Semiconductors gained 0.7% (up 10.3%). The Biotechs added 0.5% (up 19.8%). With bullion down $10, the HUI gold index slipped 0.6% (down 14.4%).
Three-month Treasury bill rates ended the week at 1.97%. Two-year government yields declined three bps to 2.64% (up 76bps y-t-d). Five-year T-note yields dipped three bps to 2.81% (up 61bps). Ten-year Treasury yields slipped one basis point to 2.95% (up 54bps). Long bond yields added a basis point to 3.09% (up 35bps). Benchmark Fannie Mae MBS yields declined two bps to 3.66% (up 71bps).
Greek 10-year yields jumped 25 bps to 4.06% (down 1bp y-t-d). Ten-year Portuguese yields rose six bps to 1.78% (down 16bps). Italian 10-year yields surged 18 bps to 2.93% (up 91bps). Spain's 10-year yields rose five bps to 1.42% (down 15bps). German bund yields were little changed at 0.41% (down 2bps). French yields rose four bps to 0.74% (down 5bps). The French to German 10-year bond spread widened four to 33 bps. U.K. 10-year gilt yields gained five bps to 1.33% (up 14bps). U.K.'s FTSE equities index declined 0.5% (down 0.4%).
Japan's Nikkei 225 equities index fell 0.8% (down 1.1% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.11% (up 6bps). France's CAC40 slipped 0.6% (up 3.1%). The German DAX equities index dropped 1.9% (down 2.3%). Spain's IBEX 35 equities index fell 1.3% (down 3.0%). Italy's FTSE MIB index sank 1.7% (down 1.2%). EM equities were mixed. Brazil's Bovespa index jumped 1.9% (up 6.5%), while Mexico's Bolsa declined 0.7% (down 0.1%). South Korea's Kospi index slipped 0.3% (down 7.3%). India’s Sensex equities index added 0.6% (up 10.3%). China’s Shanghai Exchange sank 4.6% (down 17.1%). Turkey's Borsa Istanbul National 100 index was little changed (down 17.1%). Russia's MICEX equities index added 0.2% (up 8.9%).
Investment-grade bond funds saw inflows of $1.211 billion, and junk bond funds had inflows of $37 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates rose six bps to 4.60% (up 67bps y-o-y). Fifteen-year rates jumped six bps to 4.08% (up 90bps). Five-year hybrid ARM rates gained six bps to 3.93% (up 78bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up five bps to 4.63% (up 58bps).
Federal Reserve Credit last week declined $16.8bn to $4.232 TN. Over the past year, Fed Credit contracted $194bn, or 4.4%. Fed Credit inflated $1.422 TN, or 51%, over the past 300 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $22.4bn last week to $3.434 TN. "Custody holdings" were up $101bn y-o-y, or 3.0%.
M2 (narrow) "money" supply added $7.8bn last week to a record $14.156 TN. "Narrow money" gained $518bn, or 3.8%, over the past year. For the week, Currency increased $1.8bn. Total Checkable Deposits slipped $2.0bn, while Savings Deposits gained $4.3bn. Small Time Deposits increased $2.1bn. Retail Money Funds gained $1.3bn.
Total money market fund assets increased $8.6bn to $2.851 TN. Money Funds gained $191bn y-o-y, or 7.2%.
Total Commercial Paper declined $1.4bn to $1.067 TN. CP gained $97bn y-o-y, or 10.0%.
Currency Watch:
August 3 - Financial Times (Gabriel Wildau): "China's central bank has raised the cost of betting on renminbi depreciation, a move intended to stabilise its currency following a sharp fall in recent weeks. The People's Bank of China late on Friday announced the re-imposition of a 20 per cent reserve requirement on banks that sell dollars to clients using currency forwards. Banks will pass the cost of this requirement on to their clients, raising the cost of betting on renminbi weakness. The decision late in Beijing on Friday sparked a rally in the offshore yuan, which trades at major hubs outside of mainland China."
The U.S. dollar index added 0.6% to 95.194 (up 3.3% y-t-d). For the week on the upside, the Canadian dollar increased 0.5%, the Mexican peso 0.4%, and the Brazilian real 0.1%. For the week on the downside, the South African rand declined 1.1%, the Swedish krona 1.0%, the South Korean won 0.9%, the Norwegian krone 0.8%, the British pound 0.8%, the euro 0.8%, the New Zealand dollar 0.7%, the Singapore dollar 0.3% and the Japanese yen 0.2%. The Chinese renminbi declined 0.20% versus the dollar this week (down 4.69% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index declined 0.6% (up 4.4% y-t-d). Spot Gold lost 0.8% to $1,214 (down 6.9%). Silver slipped 0.2% to $15.462 (down 9.8%). Crude declined 20 cents to $68.49 (up 13.4%). Gasoline dropped 4.5% (up 15%), while Natural Gas gained 2.6% (down 3%). Copper fell 1.4% (down 16%). Wheat surged 5.4% (up 36%). Corn gained 2.1% (up 10%).
Trump Administration Watch:
August 1 - Bloomberg (Bob Davis and Lingling Wei): "The U.S. turned up the heat… on China, with the Trump administration threatening to more than double proposed tariffs on imports while Congress passed a defense bill designed to restrict Beijing's economic and military activity. The moves come as Beijing and Washington have failed to ease an escalating trade dispute, prompting the administration to seek additional leverage. The administration, which has already affixed tariffs on billions of dollars in Chinese imports, said it would consider more than doubling proposed tariffs on a further $200 billion worth of Chinese goods to 25%, up from an original 10%. Meantime, the Senate approved a defense-policy bill that both tightens U.S. national-security reviews of Chinese corporate deals and revamps export controls over which U.S. technologies can be sent abroad."
August 1 - Bloomberg (Kathleen Hunter): "When it comes to coaxing China back to the trade negotiation table, the Trump administration is favoring the stick over the carrot. And China is tired of it… In a sign the standoff is reverberating in China, the Politburo signaled yesterday that policy makers will focus more on supporting economic growth and noted 'blackmailing and pressuring' will never work."
July 30 - Reuters (Lesley Wroughton and David Brunnstrom): "U.S. Secretary of State Mike Pompeo announced $113 million in new technology, energy and infrastructure initiatives in emerging Asia…, at a time when China is pouring billions of dollars in investments into the region."
August 1 - Wall Street Journal (Kate O'Keeffe and Siobhan Hughes): "Congress passed a defense-policy bill that some lawmakers say is tougher on China than any in history, as a bipartisan movement to confront Beijing gathers steam. The measure, an annual policy bill that authorizes $716 billion in total defense spending for the coming fiscal year, seeks to counter a range of Chinese government policies, including increased military activity in the South China Sea, the pursuit of cutting-edge U.S. technology and the spread of Communist Party propaganda at American institutions."
August 1 - Wall Street Journal (Josh Zumbrun and Daniel Kruger): "Rising federal budget deficits are boosting the U.S. Treasury's borrowing and could restrain a fast-growing economy as the cost of credit rises, too. The yield of 10-year Treasury notes climbed above 3% for the first time since June, as the Treasury Department announced it would increase auctions of U.S. debt by an additional $30 billion over the next three months… In all, the Treasury plans to borrow $329 billion from July through September-up $56 billion from the agency's April estimate-in addition to $440 billion in October through December. The figures are 63% higher than what the Treasury borrowed during the same six-month period last year."
July 29 - The Hill (Lloyd Green): "The economy hums while storm clouds darken the White House. Welcome to the final 100 days before the 2018 midterms. Even as the economy is experiencing is highest rate of growth since 2014, the electorate is angry. Donald Trump has taken command of center stage, and the public is not thrilled with what it sees. When Trump is underwater in Wisconsin, Michigan, and Minnesota, it is time for Republicans to worry. The question is how large a bite does Trump extract from Republican candidates this fall. Real Clear Politics puts the Democrats lead on the generic ballot at over 7 points, while FiveThirtyEight pegs the Democrats lead a tick higher. No, those numbers do not reflect a blue wave. But at the same time, they provide Republicans with little room for error, and even less reason for comfort."
July 29 - Reuters (Lindsay Dunsmuir): "U.S. Treasury Secretary Steven Mnuchin said… that he believes the quickening pace of growth in the nation's economy in the second quarter will persist for the next few years. 'I don't think this is a one- or two-year phenomenon. I think we definitely are in a period of four or five years of sustained 3% growth at least,' Mnuchin said…"
July 27 - Reuters (Tucker Higgins): "President Donald Trump told talk show host Sean Hannity that he could imagine the economy growing at 8 or 9% on Friday - just hours after the Bureau of Economic Analysis showed that the GDP rose 4.1% in the second quarter. The president said that the gains could come from cutting the nation's trade deficit 'in half.' 'If I cut it in half, right there we will pick up three or four points,' Trump said… 'We'd be at eight or nine' percent, he added."
August 2 - Bloomberg (Ryan Beene, John Lippert and Jennifer A. Dlouhy): "The Trump administration, taking aim at one of former President Barack Obama's signature environmental achievements, is proposing to suspend required increases in vehicle fuel economy after 2020 and unwind California's authority to limit tailpipe greenhouse gas emissions in the state. The Environmental Protection Agency and National Highway Traffic Safety Administration jointly proposed on Thursday to cap fuel economy requirements at a fleet average of 37 mpg starting in 2020. Under the Obama plan, the fleetwide fuel economy would have risen gradually to roughly 47 mpg by 2025"
Federal Reserve Watch:
August 1 - Bloomberg (Cragi Torres): "Federal Reserve officials left U.S. interest rates unchanged and stuck with a plan to gradually lift borrowing costs amid 'strong' growth that backs bets for a hike in September. Economic activity has been 'rising at a strong rate,' and unemployment 'has stayed low,' the Federal Open Market Committee said… 'Household spending and business fixed investment have grown strongly.' While leaving rates on hold as expected, the committee repeated guidance for 'further gradual increases' in its policy benchmark, lining up September's FOMC meeting for the third hike of the year."
U.S. Bubble Watch:
August 1 - Bloomberg (Liz Capo McCormick and Saleha Mohsin): "The U.S. Treasury Department will raise the amount of long-term debt it sells to $78 billion this quarter while launching a new two-month bill. It also will lean more heavily on maturities out to five years. In its quarterly refunding announcement on Wednesday, the Treasury boosted the auction sizes of coupon-bearing and floating-rate debt from $73 billion the previous quarter. It was the third consecutive quarterly increase, as President Donald Trump's fiscal policies widen the nation's budget deficit."
July 30 - Wall Street Journal (Sarah Krouse): "For the past century, a public pension was an ironclad promise. Whatever else happened, retired policemen and firefighters and teachers would be paid. That is no longer the case. Many cities and states can no longer afford the unsustainable retirement promises made to millions of public workers over many years. By one estimate they are short $4 trillion… Certain pension funds face the prospect of insolvency unless governments increase taxes, divert funds or persuade workers to relinquish money they are owed. It is increasingly likely that retirees, as well as new workers, will be forced to take deeper benefit cuts."
August 2 - CNBC (Fred Imbert): "Private payrolls in the U.S. increased by more than expected last month as companies get a boost from lower corporate taxes, ADP and Moody's Analytics said… Jobs in the U.S. increased by 219,000 in July, while economists… expected a gain of 185,000. July's job gains were the best since February, when 241,000 jobs were added. Jobs growth for the previous month was also revised up to 181,000 from 177,000. 'The job market is booming, impacted by the deficit-financed tax cuts and increases in government spending,' said Mark Zandi, chief economist of Moody's Analytics…"
July 31 - Wall Street Journal (Laura Kusisto): "Home-price gains held steady in May, as a lack of sale inventory helped prevent a meaningful slowdown in price growth despite rising mortgage rates and growing affordability challenges. The S&P CoreLogic Case-Shiller National Home Price Index, which measures average home prices in major metropolitan areas across the nation, rose 6.4% in May, identical to the year-over-year increase reported in April. An index of 10 cities gained 6.1% over the year, down from 6.4% the prior month. The 20-city index gained 6.5%, down from 6.7% the previous month."
August 1 - CNBC (Diana Olick): "The long list of housing headwinds is finally taking its toll on potential buyers. Housing demand fell 9.6% in June, compared with June 2017, according… Redfin. That is the largest decline since April 2016. Red-hot home prices, rising mortgage interest rates, very few listings at the entry level and a high rate of student loan debt have weighed on buyers for a while, but a strong economy and growing employment had mitigated those factors. Now, however, a market stalemate is developing as rates and prices continue to rise, further weakening affordability."
July 31 - Reuters (Lucia Mutikani): "U.S. consumer spending increased solidly in June as households spent more at restaurants and on accommodation, building a strong base for the economy heading into the third quarter, while inflation rose moderately… The Commerce Department said consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.4% last month. Data for May was revised up to show consumer spending advancing 0.5% instead of the previously reported 0.2% gain."
July 29 - Wall Street Journal (Kelsey Gee): "Americans looking to land a first job or break into a dream career face their best odds of success in years. Employers say they are abandoning preferences for college degrees and specific skill sets to speed up hiring and broaden the pool of job candidates. Many companies added requirements to job postings after the recession, when millions were out of work and human-resources departments were stacked with résumés… 'Candidates have so many options today,' said Amy Glaser, senior vice president of Adecco Group, a staffing agency with about 10,000 company clients in search of employees. 'If a company requires a degree, two rounds of interviews and a test for hard skills, candidates can go down the street to another employer who will make them an offer that day.'"
July 31 - Wall Street Journal (Laura Kusisto): "The construction business is having trouble attracting young job seekers. The share of workers in the sector who are 24 years old or younger has declined in 48 states since the last housing boom in 2005, according to… Issi Romem, chief economist at construction data firm BuildZoom. Nationally, the share of young construction workers declined nearly 30% from 2005 through 2016… While there's no single reason why younger folks are losing interest in a job that is generally well-paid and doesn't require a college education, their indifference is exacerbating a labor shortage that has meant fewer homes being built and rising prices, possibly for years to come."
July 31 - Reuters (Richa Naidu and Martinne Geller): "With toilet roll and tissues swept up in an escalating international trade row, it's not just Procter & Gamble's Charmin that's going to get the squeeze. Higher prices in the wake of possible tariffs would exacerbate what is already mounting pressure on consumer product company profits from soaring costs from pulp, a main ingredient in tissues, diapers and sanitary towels. P&G, the purveyor of Charmin toilet paper, Bounty towels and Puffs tissues, said on Tuesday that it had recently begun notifying retailers of a 5% average price increase…"
July 29 - Reuters (Patrick McGroaty and Bob Tita): "Consumers are starting to see higher prices for recreational vehicles, soda, beer and other goods that now cost more to make as a result of recent tariffs on metals and parts. When costs rise, manufacturers generally must choose whether to absorb bigger bills for aluminum, steel and imported components, or pass the increases along to customers. In recent days many manufacturers, including Coca-Cola Co. and Polaris Industries Inc., have said they plan to raise prices. U.S. steel and aluminum prices are up 33% and 11%, respectively, since the start of the year…"
July 31 - CNBC (Tae Kim): "Morgan Stanley believes the dramatic drops in some high-flying technology stocks this month is further evidence the stock market will go lower. 'The weaker earnings beat from several Tech leaders and outright misses from Netflix and Facebook were simply additional support for our [defensive] call,' chief U.S. equity strategist Michael Wilson said… And the average investor could suffer even more this time, Wilson said. 'We think a coming correction will be biggest since February, although it could very well have more of a negative impact on the average portfolio if it is centered on Tech, Discretionary, and small caps,' the note said."
July 31 - Financial Times (John Plender): "If value investors have been on the rack in recent times, their experience has stemmed, at least in part, from inadequate exposure to Faang stocks - the fabled Facebook, Amazon, Apple, Netflix and Google/Alphabet. Since last Thursday's spectacular $120bn fall in Facebook's market capitalisation we have witnessed a great tech sell-off that may point to a watershed in the value versus passive investment saga. Yet by now, as in the tech bubble of the late 1990s, many value investors (who buy stocks that they think are undervalued) have thrown in the towel and bought into the Faangs. So is this a rerun of the dot.com story?"
July 30 - Wall Street Journal (Liz Hoffman): "In December 2008, with the financial world in a tailspin, Goldman Sachs… issued stock options to 350 of its top executives and board members. By the time they expire later this year, these options will have earned their owners-most of whom left Goldman years ago-at least $3 billion… The windfall shows how far Wall Street firms, or at least their stock prices, have come since the crisis. Goldman is less profitable than it was a decade ago, but its share price last year surpassed the previous high set in 2006. Shares of JPMorgan… continue to hit new heights."
August 1 - Bloomberg (Oshrat Carmiel and Jeremy Hill): "This has become a summer of discontent for those trying to sell their homes in New York City's leafy suburbs -- in no small part because of the Trump administration. In affluent enclaves in Westchester County, New Jersey and Connecticut, a federal cap on state and local property tax deductions has begun to bite hard. Longtime homeowners who dreamed of offloading their empty nests are finding their plans complicated by the tax bill, as would-be buyers hold back… The issue is especially acute in areas of Westchester, the county with the nation's highest-property taxes, where annual bills of $35,000, $50,000 and more are not uncommon."
China Watch:
August 2 - CNBC (Fred Imbert): "China is not taking the United States' latest tariff threat lightly and vows to hit back if the U.S. moves forward. 'China is fully prepared and will have to retaliate to defend the nation's dignity and the interests of the people, defend free trade and the multilateral system, and defend the common interests of all countries,' the Chinese Ministry of Commerce said in a statement… 'The carrot and stick tactic won't work.' The ministry's remarks came after President Donald Trump instructed U.S. Trade Representative Robert Lighthizer to consider raising proposed tariffs on $200 billion in Chinese goods to 25% from 10%."
August 1 - Financial Times (Gabriel Wildau): "China's leadership has signalled a shift towards supporting short-term economic growth following a nearly two-year battle against excessive debt, just as a trade war with the US also threatens the economy. Communist party leaders agreed at a politburo meeting to adjusted the official monetary policy stance from 'prudent and neutral' to merely 'prudent' - a clear move towards loosening. The politburo communiqué also cited 'maintaining steady and healthy economic growth' as the number one task. Some critics warn that the country is resorting to its old playbook of debt-fuelled spending to ease a slide in growth - an approach that could worsen the long-term risks that the deleveraging campaign had sought to tame. Tuesday's politburo's declaration follows a series of new growth-supporting measures announced over the past fortnight, from tax cuts and new infrastructure spending to central-bank cash injections and a softening of regulations designed to curb shadow banking."
July 31 - Wall Street Journal: "The bad economic numbers keep coming from China. Second-quarter GDP growth slowed to 6.7%, due in part to a record low increase in fixed-asset investment. On Tuesday the manufacturing purchasing managers' index, a leading indicator, hit a five-month low, and on Monday the yuan fell to a 13-month low against the U.S. dollar. Chinese stocks have lost one-fifth of their value since January and are near a two-year low. All these lows have caused some in Washington to conclude that Beijing is losing the trade war. With the grim statistics, the thinking goes, Chinese leaders will have to make concessions and cut a deal quickly."
August 1 - Bloomberg: "China's central bank has started actively encouraging banks to extend more credit by taking a softer stance on loan quotas, people familiar…said, as authorities ratchet up efforts to bolster a cooling economy. The People's Bank of China has delivered the message via so-called window guidance… The central bank hasn't provided specific targets, but it indicated a willingness to be more flexible on banks' government-imposed lending caps, the people said."
July 30 - Financial Times (Gabriel Wildau and Tom Mitchell): "Foreigners seeking 'strategic' stakes in listed Chinese companies could face broader national security reviews under new rules drafted by China's commerce ministry, a sign Beijing is preparing to hit back at western efforts to curb Chinese acquisitions of sensitive technologies. The proposed amendments to existing investment rules… expand the universe of foreign investments covered by China's formal national security review process."
August 2 - Bloomberg: "China is building a very 21st century empire-one where trade and debt lead the way, not armadas and boots on the ground. If President Xi Jinping's ambitions become a reality, Beijing will cement its position at the center of a new world economic order spanning more than half the globe. Already, China has extended its influence far beyond that of the Tang Dynasty's golden age more than a millennium ago. The most tangible manifestation of Xi's designs is the new Silk Road he first proposed in 2013. The enterprise morphed into the 'Belt and Road' initiative, a mix of foreign policy, economic strategy, and charm offensive that, nurtured by a torrent of Chinese money, is rebalancing global political and economic alliances. Xi calls the grand initiative 'a road for peace.' Other world powers such as Japan and the U.S. remain skeptical about its stated aims and even more worried about unspoken ones, especially those hinting at military expansion."
July 29 - Financial Times: "China's Belt and Road Initiative is commonly seen as a programme to fund and build infrastructure in some 78 countries around the globe. It is also Beijing's bid to reshape the world by offering an alternative developmental vision to the US-led world order. In the Chinese context, it is the linchpin of President Xi Jinping's grand design to create a 'community with a shared future for mankind'. As such, the Belt and Road (BRI) is officially intended to showcase an open, inclusive form of development which benefits all countries that participate. To criticise BRI, therefore, is to censure a rising China's proposition to the world. Yet there is growing evidence that the infrastructure projects are falling short of Beijing's ideals and stirring controversy in the countries they were intended to assist. Debt sustainability, governance flaws and general opacity are some of the main issues."
July 29 - Bloomberg (Chris Anstey and Narae Kim): "China used to rail against the outsize role of the U.S. dollar. But in a major turnaround, the world's second-biggest economy has started embracing the currency of its larger rival. Chinese companies and banks-and even the government-sold bonds denominated in dollars at a record pace last year, and underwriters expect that growth to continue for years. The roughly half-trillion-dollar market has two key attractions for China's borrowers. For some, it's an easier place to raise cash than at home… For others, dollars are simply easier to use to fund acquisitions and investments abroad. The upshot: There's a large and growing supply of dollar securities that offer exposure to Chinese companies for investors wary of diving into the country's increasingly accessible yuan-denominated domestic debt. The offshore bond market is also set to provide a stake in President Xi Jinping's 'Belt and Road' initiative (BRI)-a grand plan that envisions deepening trade and investment ties with countries across the Eurasian landmass and beyond. Bankers see the BRI as a key source of growth in Chinese dollar bonds."
August 1 - Bloomberg: "Recent optimism in China's debt market will soon be put to the test, with investors able to demand early repayment for as much as 544.7 billion yuan ($80bn) of debt by year-end. The amount of local bonds with put options that hit trigger points in the coming five months comes to almost 1.4 times the tally from January to July… While China's credit markets are still functioning relatively smoothly -- even as corporate defaults run at a record pace -- the worry is that a swathe of repayment demands from puttable bondholders may upset that equilibrium."
July 31 - Bloomberg: "Chinese investors flocked into money-market products at a rate outpacing equities and bonds last quarter, adding to what is already the biggest segment of the nation's mutual fund industry. Mutual funds investing in low-risk, short-term debt instruments grew 5.4% last quarter to 7.7 trillion yuan ($1.1 trillion), compared to the 3.7% increase in bond funds and a drop of 1.3% in equity funds…"
July 31 - New York Times (Chris Buckley): "China's top leader, Xi Jinping, seemed indomitable when lawmakers abolished a term limit on his power early this year. But months later, China has been struck by economic headwinds, a vaccine scandal and trade battles with Washington, emboldening critics in Beijing who are questioning Mr. Xi's sweeping control. Censorship and punishment have muted dissent in China since Mr. Xi came to power. So Xu Zhangrun, a law professor at Tsinghua University in Beijing, took a big risk last week when he delivered the fiercest denunciation yet from a Chinese academic of Mr. Xi's hard-line policies, revival of Communist orthodoxies and adulatory propaganda image. 'People nationwide, including the entire bureaucratic elite, feel once more lost in uncertainty about the direction of the country and about their own personal security, and the rising anxiety has spread into a degree of panic throughout society,' Professor Xu wrote…"
July 29 - Financial Times (Ben Bland): "Andy Chan, a young independence activist, and his Hong Kong National party's tiny band of supporters do not look - or sound - like a serious threat to the territorial integrity of an emerging superpower. So the recent proposal by the Beijing-appointed government in Hong Kong to ban his fledgling organisation on 'national security' grounds looks to some observers like a serious overreaction… But from Beijing's perspective, its intensifying squeeze on opposition groups in semi-autonomous Hong Kong - and its pushback against de facto independent Taiwan - is not only proportionate and justified, but essential. Communist party officials see Taiwan and Hong Kong's democratic values as a direct threat to Beijing's one-party rule - and to its new mission to promote the Chinese authoritarian model of development overseas."
EM Watch:
July 30 - Bloomberg (Natasha Doff): "Here's a reminder of emerging-market fragility as global financial conditions tighten: their dollar burdens are higher than ever and still rising. Credit issued to developing-economy borrowers excluding banks has surged to $3.7 trillion by the end of March, fueled by a 16 percent year-on-year rise in new debt supply, the Bank for International Settlements said on Monday. Close to $500 billion comes from China, by far the biggest single issuer, with African and Middle Eastern nations also rapidly increasing their borrowing. The latest numbers underscore the relentless boom in the dollar credit cycle, even as investors fret over rising borrowing costs and an upswing in the U.S. currency. The premium money managers demand to hold developing-economy dollar bonds over Treasuries rose to the widest since 2016 last month before easing in recent weeks."
August 1 - Reuters (Rodrigo Campos): "Trading in emerging market credit default swaps soared 79.3% to $468 billion in the second quarter of 2018 from $261 billion in the same quarter a year earlier… Trading in emerging market CDS dipped 4.1% from the previous quarter's $488 billion, according to a survey from EMTA, the emerging markets debt-trading and investment industry trade association. It was, however, the second highest quarterly volume in records going back to 2009…"
August 2 - Wall Street Journal (Christopher Whittall): "Turkey's embattled financial system needs foreign investors. Its plunging currency shows only the bravest are choosing to stick around. Turkey has one of the biggest piles of foreign-denominated debt in the developing world, much of which comes due in the next year, and a currency whose dramatic decline makes it ever more expensive to pay off. The lira has lost a quarter of its value this year against the dollar, and took another leg down Wednesday and Thursday after the Trump administration sanctioned two Turkish officials following Ankara's refusal to free an American pastor. Bond yields have exploded higher amid very high inflation and stocks have fallen."
July 30 - Financial Times (Steve Johnson and Chloe Cornish): "Turkish inflation figures released on Friday are likely to provide a reminder why investors were so stunned when the country's central bank left interest rates on hold last week. Economists predict that inflation accelerated to more than 16% in July, a reading that risks putting more pressure on a currency… And while Donald Trump's threat that the US will impose 'large sanctions' over Turkey's prosecution of an American pastor is a new headwind for the lira, investors and analysts say the currency's ailments are both longstanding and more fundamental."
July 29 - Financial Times (Kiran Stacey and Farhan Bokhari): "Pakistan is drawing up plans to seek its largest ever bailout from the IMF, with senior finance officials set to present the option to Imran Khan soon after he takes office. Any loan from the IMF, which officials believe is necessary to resolve the country's escalating foreign reserves crisis, would see the fund impose restrictions on public spending. Such limits would make it difficult for Pakistan's charismatic new leader to fulfil some of his election promises such as building an 'Islamic welfare state'."
August 1 - Reuters (Ori Lewis): "Imran Khan, Pakistan's former cricket captain and newly elected prime minister, is on a sticky wicket. His victory in last week's polls was secured in part on a pledge to ramp up spending on public services. Yet the coffers are empty and a balance of payments crisis looms. Instead of the 'Islamic welfare state' he hoped to create, his aides are forced to ponder the prospect of an IMF deal. Even that safety net may not be at hand. Mike Pompeo, US secretary of state, says Washington will oppose any bailout that pays off Chinese loans on grounds that this would be unfair to US taxpayers. For years, a dispute between China and the west has been simmering over the terms of development financing. Unfortunately for Mr Khan's new government, Pakistan is where it threatens to boil over."
Central Bank Watch:
August 2 - Financial Times (Gavin Jackson and Delphine Strauss): "The Bank of England raised interest rates to their highest level in almost a decade on Thursday, saying recent data vindicated policymakers' view that the first quarter slowdown in UK growth was temporary. Members of the Monetary Policy Committee voted unanimously for a 25 bps increase, taking the BoE's benchmark interest rate to 0.75%... The Bank of England is the third major central bank to meet this week, and has joined the US Federal Reserve in signalling further interest rate rises are on the way."
August 1 - Bloomberg (Ira Dugal): "India's Monetary Policy Committee decided to raise the benchmark interest rate by 25 bps…, while retaining a 'Neutral' monetary policy stance. The committee voted 5-1 to hike the repo rate from 6.25% to 6.5%."
Global Bubble Watch:
August 1 - Bloomberg (Dana El Baltaji): "It's been a slow July for emerging-market bond sales. Borrowers raised $118 billion this month from 981 issues, the least since July 2013… That's because yields for emerging-market debt climbed for six straight months, the longest streak since at least 1998…"
July 31 - Bloomberg (Chikako Mogi): "The day after Haruhiko Kuroda pledged to allow greater swings in Japan's giant bond market while pushing back against rapid increases, traders are putting him to the test. Moves in 10-year government debt futures were so extreme on Wednesday -- a drop of as much as 0.5%, the most in almost two years -- that they triggered an emergency margin call from the clearing house. In the cash market, the yield on benchmark securities rose 6 bps to an 18-month high of 0.12%."
July 30 - Bloomberg (Enda Curran and Alessandro Speciale): "Governments are stepping up just as central banks crawl away from crisis-era settings. While the shift is modest, it suggests more support for a global expansion buffered by trade tensions and bouts of market turbulence. Morgan Stanley estimates that the fiscal deficits in four of the world's biggest economies… will rise to 2.8% of gross domestic product in 2018 and 3% in 2019, from 2.5% last year. President Donald Trump's tax overhaul, the biggest since the Reagan era, helped push U.S. growth to 4.1% in the second quarter, the fastest since 2014. Trade foe China is using tax cuts and infrastructure spending to underpin demand. The European Central Bank estimates the euro region's fiscal stance will be 'mildly expansionary' this year."
July 31 - Bloomberg (Emily Cadman): "Australia's property slump deepened in July, with housing prices falling the most in almost seven years. National dwelling values dropped 0.6% last month -- the biggest fall since September 2011 -- as declines in Sydney and Melbourne accelerated, according to CoreLogic… Prices have now fallen for 10 straight months due to a combination of lending curbs, stretched affordability and reduced investor demand."
July 30 - Reuters (Wayne Cole): "Growth in Australian home loans for investment hit record lows in June as tighter lending standards and hikes in some mortgage rates sucked the life out of the buy-to-let sector, piling further pressure on house prices."
Europe Watch:
August 2 - Financial Times (Adam Samson): "Italian bonds sustained a fresh blow on Thursday, sparking the largest rise in yield since June, during a turbulent week for the global fixed income market. The country's benchmark 10-year bond yield was up 14.2 bps in recent trade to 2.939%. It was the biggest increase since June 21 and brought the yield to the highest level since June 11… On the shorter end of the curve, the two-year yield climbed as high as 1.023% from Wednesday's closing level of 0.783%."
July 31 - Reuters (Kevin Costelloe and Alessandro Speciale): "Italy's economic growth slowed to the weakest pace in almost two years, possibly spelling trouble for the populist government's costly projects. Gross domestic product expanded 0.2% in the three months through June, down from 0.3% in the first quarter…"
July 29 - Reuters (Madeline Chambers): "Support for German Chancellor Angela Merkel's conservative bloc, trying to move beyond a bitter dispute over migrant policy that threatened the coalition, has fallen to its lowest level since 2006, a poll showed on Sunday."
Japan Watch:
July 31 - Bloomberg (Enda Curran): "Bank of Japan Governor Haruhiko Kuroda's policy tweaks have either strengthened the long-running stimulus or mark a stealth 'baby step' toward normalizing policy. Or both? The BOJ on Tuesday made adjustments to two pillars of its policy that could be interpreted as steps toward normalization: It said it would let the 10-year yield rise just a bit higher, to 0.2% from 0.1%, and it cut in half the amount of bank reserves that would face its negative rate of minus 0.1%. On the other hand, it also introduced 'forward guidance,' pledging to keep short- and long-term rates at extremely low levels for an 'extended period of time,' though that's not dramatically different from its long-running pledge… to continue its stimulus program 'as long as it is necessary.'"
July 31 - Reuters (Jamie McGeever): "Not for the first time in the past 20 years, the challenges of global monetary policymaking have been laid bare by the Bank of Japan. By opting not to tighten policy…, as it had looked like it might, the BOJ highlighted how difficult it is for central banks to unwind extraordinary, crisis-era policy before the economy turns, no matter how much they may want to. It was another reminder that when it comes to extraordinary easing measures like QE and zero or negative interest rates, as The Eagles put it in 'Hotel California': 'You can check out any time you like, but you can never leave'."
Fixed Income Bubble Watch:
July 30 - Reuters: "The U.S. Treasury Department on Monday sold $51 billion in three-month debt at interest rate of 2.000 percent, the most it paid dealers and investors at a three-month bill auction in more than a decade…"
August 1 - Bloomberg (Cecile Gutscher and Yakob Peterseil): "Jim Schaeffer has found a glitch in his supply chain -- and reckons it could be an early warning sign that demand in the red-hot leveraged loan market is set to cool. The deputy chief investment officer at Aegon Asset Management was collecting loans to create his firm's next collateralized loan obligation. These are typically stored with a third party, which holds them on its books until there's enough to bundle into a transaction. Yet when Schaeffer called on his usual warehouse providers, they were not keen to take on more exposure. 'The market of warehouse providers is not as receptive,' said Schaeffer, who helps oversee $103 billion of fixed-income assets. 'That pause by warehouse providers is an indication that CLO demand could slow, which could impact the strong technical we have experienced.'"
Leveraged Speculator Watch:
August 2 - Financial Times (Megan Greene): "I was recently informed by the owner of an artificial intelligence fund that markets do not listen to economists any more. Rather than immediately dust off my CV and see what transferable skills I might have, I dug around for evidence of his claim and found there was something to it. A fundamental shift in market structure towards rules-based, passive investing over the past decade means a lot of trading is no longer based on fundamentals. But just because some markets do not pay attention to economists, it does not mean economists should not pay attention to these markets. On the contrary - this shift in market structure could well be a trigger for the next global downturn. The US Federal Reserve is concerned enough that 'Changing Market Structure and Implications for Monetary Policy' is the topic for this year's economic symposium in Jackson Hole."
The re-imposition of currency trading reserve requirements indicates heightened concern in Beijing. Officials likely viewed modest devaluation as a constructive counter to U.S. trade pressures. In no way, however, do they want to face disorderly trading and the risk of a full-fledged currency crisis.
The renminbi rallied 1% on the PBOC move, ending slightly positive for the day (but down for the eighth straight week). Trading strongly prior to the PBOC move, the dollar index reversed into negative territory. Many EM currencies moved sharply on the renminbi rally. The South African rand reversed course and posted a 1.2% gain. The Brazilian real also jumped 1%. Curiously, the Japanese yen gained about 0.5%.
Overnight S&P500 futures, having traded slightly negative, popped higher on the renminbi rally. But EM equities were the bigger beneficiary. Brazil Ibovespa index gained 2.3% Friday. It increasingly appears the fortunes of the renminbi and EM markets are tightly intertwined.
The unfolding trade war is turning more serious. Beyond Friday's currency move, China's Finance Ministry - in measures to "guard its interests" - announced plans for significantly broader retaliation tariffs on U.S. goods.
August 3 - CNBC (Michael Sheetz): "China is preparing to retaliate in the escalating trade war with tariffs on about $60 billion worth of U.S. goods. The import taxes would range in rates from 5% to 25%, China's Ministry of Commerce said… There are four lists of goods, one for each of the rates proposed. Many of the goods are agricultural-related, with others on various metals and chemicals. 'The implementation date of the taxation measures will be subject to the actions of the US, and China reserves the right to continue to introduce other countermeasures,' China's release said… 'Any unilateral threat or blackmail will only lead to intensification of conflicts and damage to the interests of all parties.'"
President Trump had already threatened to place tariffs on $200 billion of Chinese goods if Beijing moved to retaliate on earlier U.S. measures. Shortly after the Chinese retaliatory tariff announcement (and post-U.S. payrolls data), Larry Kudlow, Director of the National Economic Council, appeared on Bloomberg Television.
Bloomberg's Jonathan Ferro: "You've sat across the table with the Chinese many, many times. What is your opinion - your insight - into what is happening to the Chinese economy currently?"
Kudlow: "Well, I'm not an expert. I do try to follow it and it looks to me - you all may disagree - it looks to me like the China economy is declining in growth - it's weakening - almost across the board. And it looks like the People's Bank of China is trying to pump it up by adding high-powered money and new credit and so forth. The currency fall is partly [because] they've stopped defending the yuan. They think it's going to help offset the U.S. efforts to get rid of their unfair trading. Some of the currency fall, though, I think is just money leaving China because it's a lousy investment. And if that continues that will really damage the Chinese economy. If money leaves China - and the currency could be a leading indicator - they're going to be in a heap of trouble. And so I'm going to make the case that they are in a weak economic position - that's not a good place for them to be vis-à-vis the trade negotiations - first point. Second point, they better not underestimate President Trump's determination to follow through on our asks - IP theft is a no-go. Forced transfer of technology - no go. Non-reciprocal trading, on tariffs and non-tariff barriers. The President, he's a trade reformer. We've said many times: "no tariffs, no tariff barriers, no subsidies. We want to see trade reforms." China is not delivering. Their economy is weak; their currency is weak; people leaving the country. Don't underestimate President Trump's determination to follow through. I'm just telling you. I can't speak for the Communist Party in China. I can speak for our President. Do not underestimate his determination to change trading practices on a fair, reciprocal plane."
Ferro: "One thing you can definitely speak to, Larry, is the strategy of the President. It just seems to me the strategy of the administration at the moment is to exert maximum pain on the Chinese economy. Is that the direction of travel for you guys, Larry?"
Kudlow: "I would maybe rephrase it a bit. I think what we're saying is we are serious. And in trade, as you well know, your guests know, negotiations often include the use of tariffs. And the President has said time and time again that targeted tariffs are going to be part of the game plan with China - unless and until they begin to meet our requests, which so far they have not. In fact, in the recent month or so we've had hardly any conversations with them at all. There is some hint now that they may wish to talk, although I can't say that with certainty."
The Shanghai Composite sank another 4.6% this week, increasing y-t-d losses to 17.1%. Meanwhile, the S&P500 gained 0.6%, boosting the S&P500's 2018 return to 7.4%. As a large net importer, the U.S. is seemingly less economically sensitive to a trade war than the Chinese economy. U.S. equities have become immune to trade threats. Announcements that would have previously rattled stocks no longer carry much of a punch. As the market sees it, the administration may bluster, but they surely won't risk jeopardizing the great bull market - especially leading up to the midterms.
As Mr. Kudlow stated rather unequivocally, the administration believes it has a very strong hand to play, while China's hand is feeble - and turning only feebler. They have somewhat of a point. The U.S. economy is booming, and our securities markets remain resilient. Meanwhile, cracks in the Chinese Bubble seem to widen by the week. Beijing is feeling the heat. Yet I see important shortcomings in the administration's analysis.
First, I'll be surprised if hardball tactics work on Beijing. For one, the Chinese recognize Trump administration issues go way beyond unfair trade. Negotiations on trade are but the first salvo - so Beijing must be tough and show unflappable resolve. As they see it, give in now and they'll face an unrelenting Washington power play. Display weakness on trade and the Americans would be emboldened to confront Beijing on the South China Sea or Taiwan. Chinese leadership sees the U.S. as trying to contain China's ascent to their rightful place of global power, influence and prestige.
I also believe the Trump administration is overstating the strength of the hand it's playing. The U.S. economic boom has attained significant momentum. Animal spirits are running hot and there remains a potent inflationary bias throughout the asset markets. But I would argue that the U.S. is today much more exposed to a shift in the global financial backdrop than is appreciated in Washington or by the markets. In my view, the unfolding trade war with China poses a clear and present threat to global finance.
The U.S. boom is built on a foundation of loose finance. Finance has meaningfully tightened globally. I'll reiterate my view that the global Bubble has been pierced at the "periphery" - more specifically, within the emerging markets. There are now serious fissures in China's Bubble, a circumstance exacerbated both by EM fragilities and rising U.S. trade tensions.
In this incipient faltering global Bubble phase, instability at the "periphery" has so far engendered somewhat looser financial conditions in "core" markets. U.S. Treasury yields turned sharply lower following the May EM eruption, reversing what had the potential to evolve into tightened financial conditions. Lower market yields, along with looser conditions more generally, incited a rally and powerful short squeeze in U.S. equities.
A critical question going forward: How will evolving conditions at the global Bubble's "periphery" impact the "core"? Recently, some stabilization at the "periphery" has seen waning safe haven Treasury demand. Treasury yields were back above 3.0% this week, before Friday's rally saw yields decline to 2.95%.
Markets remain at this point comfortable that stress at the "periphery" will continue to bolster the "core." This has been, after all, the case in recent years. After beginning 2016 at 2.27%, China and EM instabilities were behind a drop in Treasury yields through mid-year (as low as 1.36%). After a relatively brief pullback early in the year, U.S. equities disregarded global issues as they rallied for much of 2016. Importantly, loose U.S. financial conditions only loosened further, as global Bubble vulnerabilities had the FOMC sitting on its hands for a year between their initial and second "baby step" rate increases.
There remains a prevalent market view that unfolding global instability will have the Fed winding down "normalization" long before rate increases turn restrictive for the booming U.S. economy and securities markets. Besides, any unfolding bout of global risk aversion would ensure booming international flows into U.S. dollar securities markets.
To be sure, extended periods of loose finance deeply alter market perceptions, dynamics and structure. Years of QE market liquidity backstops fundamentally changed the way market participants view risk. There is today little concern for trouble at the "periphery" gravitating to the "core." After all, the U.S. has been the primary beneficiary during repeated episodes of risk aversion and outflows from China, EM or even periphery Europe, for that matter.
Indeed, markets have been conditioned to view instability at the "periphery" as an opportunity. It's now been a decade since tumult afflicted the "core." Long forgotten is the traditional dynamic where risk aversion at the "periphery" commences a process of de-risking and de-leveraging - with expanding market illiquidity and contagion. This old market problem was seemingly nullified by activist central bankers.
Well, I believe the current backdrop creates extraordinary risk for a (surprising) reemergence of "Periphery to Core Crisis Dynamics". It's my view that massive global QE measures have for years been responsible for nipping de-risking/de-leveraging dynamics in the bud. The overabundance of cheap global finance ensured a surfeit of market liquidity that would readily accommodate incipient de-risking/de-leveraging at the "periphery." In short, a global "system" awash in "money" ensured de-leveraging dynamics never attained momentum. Contagion risk stopped being an issue - quite a boon for global leveraged speculation. Moreover, even the mildest "risk off" dynamic at the "periphery" would ensure waves of inbound liquidity for the "core." Latent fragilities at the "periphery" were kept under wraps, as global central bankers dragged their heels when contemplating the start of policy normalization.
An analyst on Bloomberg Television made the important point that global QE is today in the neighborhood of $25 billion monthly, down from $125 billion one year ago. Global QE will likely turn negative by year-end. This, I believe, significantly increases the likelihood of an unanticipated return of a destabilizing global contagion dynamic. Rather than instability at the "periphery" doing its usual handiwork to buoy Bubbles at the "core," de-risking/de-leveraging dynamics increasingly have the potential to attain sufficient momentum to negatively impact the "core."
The global liquidity backdrop is in the process of profound - if not yet obviously discernable - change. EM is increasingly vulnerable to a destabilizing bout of de-leveraging in a world of waning liquidity. Thus far, the faltering EM Bubble has incited flows to U.S. Bubble markets. However, an escalation of the unfolding EM crisis is at heightened risk of inciting a very problematic global de-leveraging - a "risk off" backdrop that would risk piercing vulnerable Bubbles even at the "core." The consensus bullish view - holding EM as a buying opportunity and the U.S. as the mighty pillar of growth and stability - could prove dangerously complacent.
I believe there are great latent fragilities associated with the "Periphery to Core Crisis Dynamic." Distorted markets have over years been conditioned to disregard such risk. I'll presume the administration is simply oblivious, believing it's deftly playing a hand of robust U.S. financial and economic systems. With such a competitive advantage, in their minds there's never been a better opportunity to play hardball and put Beijing in its place.
It's worth noting that 10-year Treasury yields declined four bps Friday. The Japanese yen (up 0.37%) also enjoyed a safe haven bid. Treasuries and the yen seemed to take a different view of developments than U.S. equities.
Friday afternoon Bloomberg headline: "Tit-For-Tat Becomes the Norm as U.S., China Dig In for Trade War." The odds are not small that this Game of Chicken goes unresolved for a while. Clearly, it would be uncharacteristic of President Trump to back down. At the same time, President Xi has shown zero tolerance for any sign of weakness. Increasingly, Beijing is being very publicly backed into a corner (Bloomberg headline: "U.S.'s Kudlow Trash Talks China Calling It 'Lousy Investment'"). Difficult to see China responding cordially.
"Trash Talking" China a few hours after the PBOC is compelled to intervene to bolster the flagging renminbi leaves me uncomfortable. There's a problematic scenario that doesn't seem all that improbable at this point: China faces increased financial instability, including capital flight and de-risking/de-leveraging. The PBOC becomes trapped in the dreadful EM dynamic of bolstering system liquidity in the face of mounting risk of a full-fledged currency crisis. Global markets fret the imposition of Chinese capital controls.
Meanwhile, China instability and trade fears see EM markets take another leg lower, with particular market concern for the highly levered Asian economies. De-risking/de-leveraging dynamics attain self-reinforcing momentum, as contagion effects engulf the global "periphery." Fears of global financial fragility and economic vulnerability see risk aversion begin to gravitate toward the "core." Fears of EM central bank and Chinese selling of U.S. Treasuries overwhelm safe haven buying, as de-risking/de-leveraging dynamics see a widening of Credit spreads and illiquidity begin to impact "core" fixed-income markets.
In such a problematic global scenario, I ponder whether Beijing might perceive it's playing with a relatively stronger hand than their U.S. adversary. Meanwhile, contagion effects would set their sights on the "periphery of the core." This just doesn't seem all that far-fetched.
It's worth noting that Italian yields jumped another 18 bps points this week to 2.93% (Greek yields up 25 bps). And while the Bank of Japan sought to comfort markets with "easy forever," the badly-distorted Japanese bond market is indicating instability. Mainly, it's a problematic market and geopolitical backdrop pointing increasingly to "Periphery to Core Crisis Dynamics." China, EM and the world are now just a disorderly collapse of the renminbi away from, in the words of Mr. Kudlow, "a heap of trouble."
For the Week:
The S&P500 gained 0.8% (up 6.2% y-t-d), while the Dow was little changed (up 3.0%). The Utilities rose 1.2% (up 0.9%). The Banks added 0.7% (up 3.4%), while the Broker/Dealers lost 1.7% (up 3.0%). The Transports jumped 1.3% (up 4.6%). The S&P 400 Midcaps rose 1.3% (up 5.2%), and the small cap Russell 2000 increased 0.6% (up 9.0%). The Nasdaq100 advanced 1.4% (up 15.6%). The Semiconductors gained 0.7% (up 10.3%). The Biotechs added 0.5% (up 19.8%). With bullion down $10, the HUI gold index slipped 0.6% (down 14.4%).
Three-month Treasury bill rates ended the week at 1.97%. Two-year government yields declined three bps to 2.64% (up 76bps y-t-d). Five-year T-note yields dipped three bps to 2.81% (up 61bps). Ten-year Treasury yields slipped one basis point to 2.95% (up 54bps). Long bond yields added a basis point to 3.09% (up 35bps). Benchmark Fannie Mae MBS yields declined two bps to 3.66% (up 71bps).
Greek 10-year yields jumped 25 bps to 4.06% (down 1bp y-t-d). Ten-year Portuguese yields rose six bps to 1.78% (down 16bps). Italian 10-year yields surged 18 bps to 2.93% (up 91bps). Spain's 10-year yields rose five bps to 1.42% (down 15bps). German bund yields were little changed at 0.41% (down 2bps). French yields rose four bps to 0.74% (down 5bps). The French to German 10-year bond spread widened four to 33 bps. U.K. 10-year gilt yields gained five bps to 1.33% (up 14bps). U.K.'s FTSE equities index declined 0.5% (down 0.4%).
Japan's Nikkei 225 equities index fell 0.8% (down 1.1% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.11% (up 6bps). France's CAC40 slipped 0.6% (up 3.1%). The German DAX equities index dropped 1.9% (down 2.3%). Spain's IBEX 35 equities index fell 1.3% (down 3.0%). Italy's FTSE MIB index sank 1.7% (down 1.2%). EM equities were mixed. Brazil's Bovespa index jumped 1.9% (up 6.5%), while Mexico's Bolsa declined 0.7% (down 0.1%). South Korea's Kospi index slipped 0.3% (down 7.3%). India’s Sensex equities index added 0.6% (up 10.3%). China’s Shanghai Exchange sank 4.6% (down 17.1%). Turkey's Borsa Istanbul National 100 index was little changed (down 17.1%). Russia's MICEX equities index added 0.2% (up 8.9%).
Investment-grade bond funds saw inflows of $1.211 billion, and junk bond funds had inflows of $37 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates rose six bps to 4.60% (up 67bps y-o-y). Fifteen-year rates jumped six bps to 4.08% (up 90bps). Five-year hybrid ARM rates gained six bps to 3.93% (up 78bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up five bps to 4.63% (up 58bps).
Federal Reserve Credit last week declined $16.8bn to $4.232 TN. Over the past year, Fed Credit contracted $194bn, or 4.4%. Fed Credit inflated $1.422 TN, or 51%, over the past 300 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $22.4bn last week to $3.434 TN. "Custody holdings" were up $101bn y-o-y, or 3.0%.
M2 (narrow) "money" supply added $7.8bn last week to a record $14.156 TN. "Narrow money" gained $518bn, or 3.8%, over the past year. For the week, Currency increased $1.8bn. Total Checkable Deposits slipped $2.0bn, while Savings Deposits gained $4.3bn. Small Time Deposits increased $2.1bn. Retail Money Funds gained $1.3bn.
Total money market fund assets increased $8.6bn to $2.851 TN. Money Funds gained $191bn y-o-y, or 7.2%.
Total Commercial Paper declined $1.4bn to $1.067 TN. CP gained $97bn y-o-y, or 10.0%.
Currency Watch:
August 3 - Financial Times (Gabriel Wildau): "China's central bank has raised the cost of betting on renminbi depreciation, a move intended to stabilise its currency following a sharp fall in recent weeks. The People's Bank of China late on Friday announced the re-imposition of a 20 per cent reserve requirement on banks that sell dollars to clients using currency forwards. Banks will pass the cost of this requirement on to their clients, raising the cost of betting on renminbi weakness. The decision late in Beijing on Friday sparked a rally in the offshore yuan, which trades at major hubs outside of mainland China."
The U.S. dollar index added 0.6% to 95.194 (up 3.3% y-t-d). For the week on the upside, the Canadian dollar increased 0.5%, the Mexican peso 0.4%, and the Brazilian real 0.1%. For the week on the downside, the South African rand declined 1.1%, the Swedish krona 1.0%, the South Korean won 0.9%, the Norwegian krone 0.8%, the British pound 0.8%, the euro 0.8%, the New Zealand dollar 0.7%, the Singapore dollar 0.3% and the Japanese yen 0.2%. The Chinese renminbi declined 0.20% versus the dollar this week (down 4.69% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index declined 0.6% (up 4.4% y-t-d). Spot Gold lost 0.8% to $1,214 (down 6.9%). Silver slipped 0.2% to $15.462 (down 9.8%). Crude declined 20 cents to $68.49 (up 13.4%). Gasoline dropped 4.5% (up 15%), while Natural Gas gained 2.6% (down 3%). Copper fell 1.4% (down 16%). Wheat surged 5.4% (up 36%). Corn gained 2.1% (up 10%).
Trump Administration Watch:
August 1 - Bloomberg (Bob Davis and Lingling Wei): "The U.S. turned up the heat… on China, with the Trump administration threatening to more than double proposed tariffs on imports while Congress passed a defense bill designed to restrict Beijing's economic and military activity. The moves come as Beijing and Washington have failed to ease an escalating trade dispute, prompting the administration to seek additional leverage. The administration, which has already affixed tariffs on billions of dollars in Chinese imports, said it would consider more than doubling proposed tariffs on a further $200 billion worth of Chinese goods to 25%, up from an original 10%. Meantime, the Senate approved a defense-policy bill that both tightens U.S. national-security reviews of Chinese corporate deals and revamps export controls over which U.S. technologies can be sent abroad."
August 1 - Bloomberg (Kathleen Hunter): "When it comes to coaxing China back to the trade negotiation table, the Trump administration is favoring the stick over the carrot. And China is tired of it… In a sign the standoff is reverberating in China, the Politburo signaled yesterday that policy makers will focus more on supporting economic growth and noted 'blackmailing and pressuring' will never work."
July 30 - Reuters (Lesley Wroughton and David Brunnstrom): "U.S. Secretary of State Mike Pompeo announced $113 million in new technology, energy and infrastructure initiatives in emerging Asia…, at a time when China is pouring billions of dollars in investments into the region."
August 1 - Wall Street Journal (Kate O'Keeffe and Siobhan Hughes): "Congress passed a defense-policy bill that some lawmakers say is tougher on China than any in history, as a bipartisan movement to confront Beijing gathers steam. The measure, an annual policy bill that authorizes $716 billion in total defense spending for the coming fiscal year, seeks to counter a range of Chinese government policies, including increased military activity in the South China Sea, the pursuit of cutting-edge U.S. technology and the spread of Communist Party propaganda at American institutions."
August 1 - Wall Street Journal (Josh Zumbrun and Daniel Kruger): "Rising federal budget deficits are boosting the U.S. Treasury's borrowing and could restrain a fast-growing economy as the cost of credit rises, too. The yield of 10-year Treasury notes climbed above 3% for the first time since June, as the Treasury Department announced it would increase auctions of U.S. debt by an additional $30 billion over the next three months… In all, the Treasury plans to borrow $329 billion from July through September-up $56 billion from the agency's April estimate-in addition to $440 billion in October through December. The figures are 63% higher than what the Treasury borrowed during the same six-month period last year."
July 29 - The Hill (Lloyd Green): "The economy hums while storm clouds darken the White House. Welcome to the final 100 days before the 2018 midterms. Even as the economy is experiencing is highest rate of growth since 2014, the electorate is angry. Donald Trump has taken command of center stage, and the public is not thrilled with what it sees. When Trump is underwater in Wisconsin, Michigan, and Minnesota, it is time for Republicans to worry. The question is how large a bite does Trump extract from Republican candidates this fall. Real Clear Politics puts the Democrats lead on the generic ballot at over 7 points, while FiveThirtyEight pegs the Democrats lead a tick higher. No, those numbers do not reflect a blue wave. But at the same time, they provide Republicans with little room for error, and even less reason for comfort."
July 29 - Reuters (Lindsay Dunsmuir): "U.S. Treasury Secretary Steven Mnuchin said… that he believes the quickening pace of growth in the nation's economy in the second quarter will persist for the next few years. 'I don't think this is a one- or two-year phenomenon. I think we definitely are in a period of four or five years of sustained 3% growth at least,' Mnuchin said…"
July 27 - Reuters (Tucker Higgins): "President Donald Trump told talk show host Sean Hannity that he could imagine the economy growing at 8 or 9% on Friday - just hours after the Bureau of Economic Analysis showed that the GDP rose 4.1% in the second quarter. The president said that the gains could come from cutting the nation's trade deficit 'in half.' 'If I cut it in half, right there we will pick up three or four points,' Trump said… 'We'd be at eight or nine' percent, he added."
August 2 - Bloomberg (Ryan Beene, John Lippert and Jennifer A. Dlouhy): "The Trump administration, taking aim at one of former President Barack Obama's signature environmental achievements, is proposing to suspend required increases in vehicle fuel economy after 2020 and unwind California's authority to limit tailpipe greenhouse gas emissions in the state. The Environmental Protection Agency and National Highway Traffic Safety Administration jointly proposed on Thursday to cap fuel economy requirements at a fleet average of 37 mpg starting in 2020. Under the Obama plan, the fleetwide fuel economy would have risen gradually to roughly 47 mpg by 2025"
Federal Reserve Watch:
August 1 - Bloomberg (Cragi Torres): "Federal Reserve officials left U.S. interest rates unchanged and stuck with a plan to gradually lift borrowing costs amid 'strong' growth that backs bets for a hike in September. Economic activity has been 'rising at a strong rate,' and unemployment 'has stayed low,' the Federal Open Market Committee said… 'Household spending and business fixed investment have grown strongly.' While leaving rates on hold as expected, the committee repeated guidance for 'further gradual increases' in its policy benchmark, lining up September's FOMC meeting for the third hike of the year."
U.S. Bubble Watch:
August 1 - Bloomberg (Liz Capo McCormick and Saleha Mohsin): "The U.S. Treasury Department will raise the amount of long-term debt it sells to $78 billion this quarter while launching a new two-month bill. It also will lean more heavily on maturities out to five years. In its quarterly refunding announcement on Wednesday, the Treasury boosted the auction sizes of coupon-bearing and floating-rate debt from $73 billion the previous quarter. It was the third consecutive quarterly increase, as President Donald Trump's fiscal policies widen the nation's budget deficit."
July 30 - Wall Street Journal (Sarah Krouse): "For the past century, a public pension was an ironclad promise. Whatever else happened, retired policemen and firefighters and teachers would be paid. That is no longer the case. Many cities and states can no longer afford the unsustainable retirement promises made to millions of public workers over many years. By one estimate they are short $4 trillion… Certain pension funds face the prospect of insolvency unless governments increase taxes, divert funds or persuade workers to relinquish money they are owed. It is increasingly likely that retirees, as well as new workers, will be forced to take deeper benefit cuts."
August 2 - CNBC (Fred Imbert): "Private payrolls in the U.S. increased by more than expected last month as companies get a boost from lower corporate taxes, ADP and Moody's Analytics said… Jobs in the U.S. increased by 219,000 in July, while economists… expected a gain of 185,000. July's job gains were the best since February, when 241,000 jobs were added. Jobs growth for the previous month was also revised up to 181,000 from 177,000. 'The job market is booming, impacted by the deficit-financed tax cuts and increases in government spending,' said Mark Zandi, chief economist of Moody's Analytics…"
July 31 - Wall Street Journal (Laura Kusisto): "Home-price gains held steady in May, as a lack of sale inventory helped prevent a meaningful slowdown in price growth despite rising mortgage rates and growing affordability challenges. The S&P CoreLogic Case-Shiller National Home Price Index, which measures average home prices in major metropolitan areas across the nation, rose 6.4% in May, identical to the year-over-year increase reported in April. An index of 10 cities gained 6.1% over the year, down from 6.4% the prior month. The 20-city index gained 6.5%, down from 6.7% the previous month."
August 1 - CNBC (Diana Olick): "The long list of housing headwinds is finally taking its toll on potential buyers. Housing demand fell 9.6% in June, compared with June 2017, according… Redfin. That is the largest decline since April 2016. Red-hot home prices, rising mortgage interest rates, very few listings at the entry level and a high rate of student loan debt have weighed on buyers for a while, but a strong economy and growing employment had mitigated those factors. Now, however, a market stalemate is developing as rates and prices continue to rise, further weakening affordability."
July 31 - Reuters (Lucia Mutikani): "U.S. consumer spending increased solidly in June as households spent more at restaurants and on accommodation, building a strong base for the economy heading into the third quarter, while inflation rose moderately… The Commerce Department said consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.4% last month. Data for May was revised up to show consumer spending advancing 0.5% instead of the previously reported 0.2% gain."
July 29 - Wall Street Journal (Kelsey Gee): "Americans looking to land a first job or break into a dream career face their best odds of success in years. Employers say they are abandoning preferences for college degrees and specific skill sets to speed up hiring and broaden the pool of job candidates. Many companies added requirements to job postings after the recession, when millions were out of work and human-resources departments were stacked with résumés… 'Candidates have so many options today,' said Amy Glaser, senior vice president of Adecco Group, a staffing agency with about 10,000 company clients in search of employees. 'If a company requires a degree, two rounds of interviews and a test for hard skills, candidates can go down the street to another employer who will make them an offer that day.'"
July 31 - Wall Street Journal (Laura Kusisto): "The construction business is having trouble attracting young job seekers. The share of workers in the sector who are 24 years old or younger has declined in 48 states since the last housing boom in 2005, according to… Issi Romem, chief economist at construction data firm BuildZoom. Nationally, the share of young construction workers declined nearly 30% from 2005 through 2016… While there's no single reason why younger folks are losing interest in a job that is generally well-paid and doesn't require a college education, their indifference is exacerbating a labor shortage that has meant fewer homes being built and rising prices, possibly for years to come."
July 31 - Reuters (Richa Naidu and Martinne Geller): "With toilet roll and tissues swept up in an escalating international trade row, it's not just Procter & Gamble's Charmin that's going to get the squeeze. Higher prices in the wake of possible tariffs would exacerbate what is already mounting pressure on consumer product company profits from soaring costs from pulp, a main ingredient in tissues, diapers and sanitary towels. P&G, the purveyor of Charmin toilet paper, Bounty towels and Puffs tissues, said on Tuesday that it had recently begun notifying retailers of a 5% average price increase…"
July 29 - Reuters (Patrick McGroaty and Bob Tita): "Consumers are starting to see higher prices for recreational vehicles, soda, beer and other goods that now cost more to make as a result of recent tariffs on metals and parts. When costs rise, manufacturers generally must choose whether to absorb bigger bills for aluminum, steel and imported components, or pass the increases along to customers. In recent days many manufacturers, including Coca-Cola Co. and Polaris Industries Inc., have said they plan to raise prices. U.S. steel and aluminum prices are up 33% and 11%, respectively, since the start of the year…"
July 31 - CNBC (Tae Kim): "Morgan Stanley believes the dramatic drops in some high-flying technology stocks this month is further evidence the stock market will go lower. 'The weaker earnings beat from several Tech leaders and outright misses from Netflix and Facebook were simply additional support for our [defensive] call,' chief U.S. equity strategist Michael Wilson said… And the average investor could suffer even more this time, Wilson said. 'We think a coming correction will be biggest since February, although it could very well have more of a negative impact on the average portfolio if it is centered on Tech, Discretionary, and small caps,' the note said."
July 31 - Financial Times (John Plender): "If value investors have been on the rack in recent times, their experience has stemmed, at least in part, from inadequate exposure to Faang stocks - the fabled Facebook, Amazon, Apple, Netflix and Google/Alphabet. Since last Thursday's spectacular $120bn fall in Facebook's market capitalisation we have witnessed a great tech sell-off that may point to a watershed in the value versus passive investment saga. Yet by now, as in the tech bubble of the late 1990s, many value investors (who buy stocks that they think are undervalued) have thrown in the towel and bought into the Faangs. So is this a rerun of the dot.com story?"
July 30 - Wall Street Journal (Liz Hoffman): "In December 2008, with the financial world in a tailspin, Goldman Sachs… issued stock options to 350 of its top executives and board members. By the time they expire later this year, these options will have earned their owners-most of whom left Goldman years ago-at least $3 billion… The windfall shows how far Wall Street firms, or at least their stock prices, have come since the crisis. Goldman is less profitable than it was a decade ago, but its share price last year surpassed the previous high set in 2006. Shares of JPMorgan… continue to hit new heights."
August 1 - Bloomberg (Oshrat Carmiel and Jeremy Hill): "This has become a summer of discontent for those trying to sell their homes in New York City's leafy suburbs -- in no small part because of the Trump administration. In affluent enclaves in Westchester County, New Jersey and Connecticut, a federal cap on state and local property tax deductions has begun to bite hard. Longtime homeowners who dreamed of offloading their empty nests are finding their plans complicated by the tax bill, as would-be buyers hold back… The issue is especially acute in areas of Westchester, the county with the nation's highest-property taxes, where annual bills of $35,000, $50,000 and more are not uncommon."
China Watch:
August 2 - CNBC (Fred Imbert): "China is not taking the United States' latest tariff threat lightly and vows to hit back if the U.S. moves forward. 'China is fully prepared and will have to retaliate to defend the nation's dignity and the interests of the people, defend free trade and the multilateral system, and defend the common interests of all countries,' the Chinese Ministry of Commerce said in a statement… 'The carrot and stick tactic won't work.' The ministry's remarks came after President Donald Trump instructed U.S. Trade Representative Robert Lighthizer to consider raising proposed tariffs on $200 billion in Chinese goods to 25% from 10%."
August 1 - Financial Times (Gabriel Wildau): "China's leadership has signalled a shift towards supporting short-term economic growth following a nearly two-year battle against excessive debt, just as a trade war with the US also threatens the economy. Communist party leaders agreed at a politburo meeting to adjusted the official monetary policy stance from 'prudent and neutral' to merely 'prudent' - a clear move towards loosening. The politburo communiqué also cited 'maintaining steady and healthy economic growth' as the number one task. Some critics warn that the country is resorting to its old playbook of debt-fuelled spending to ease a slide in growth - an approach that could worsen the long-term risks that the deleveraging campaign had sought to tame. Tuesday's politburo's declaration follows a series of new growth-supporting measures announced over the past fortnight, from tax cuts and new infrastructure spending to central-bank cash injections and a softening of regulations designed to curb shadow banking."
July 31 - Wall Street Journal: "The bad economic numbers keep coming from China. Second-quarter GDP growth slowed to 6.7%, due in part to a record low increase in fixed-asset investment. On Tuesday the manufacturing purchasing managers' index, a leading indicator, hit a five-month low, and on Monday the yuan fell to a 13-month low against the U.S. dollar. Chinese stocks have lost one-fifth of their value since January and are near a two-year low. All these lows have caused some in Washington to conclude that Beijing is losing the trade war. With the grim statistics, the thinking goes, Chinese leaders will have to make concessions and cut a deal quickly."
August 1 - Bloomberg: "China's central bank has started actively encouraging banks to extend more credit by taking a softer stance on loan quotas, people familiar…said, as authorities ratchet up efforts to bolster a cooling economy. The People's Bank of China has delivered the message via so-called window guidance… The central bank hasn't provided specific targets, but it indicated a willingness to be more flexible on banks' government-imposed lending caps, the people said."
July 30 - Financial Times (Gabriel Wildau and Tom Mitchell): "Foreigners seeking 'strategic' stakes in listed Chinese companies could face broader national security reviews under new rules drafted by China's commerce ministry, a sign Beijing is preparing to hit back at western efforts to curb Chinese acquisitions of sensitive technologies. The proposed amendments to existing investment rules… expand the universe of foreign investments covered by China's formal national security review process."
August 2 - Bloomberg: "China is building a very 21st century empire-one where trade and debt lead the way, not armadas and boots on the ground. If President Xi Jinping's ambitions become a reality, Beijing will cement its position at the center of a new world economic order spanning more than half the globe. Already, China has extended its influence far beyond that of the Tang Dynasty's golden age more than a millennium ago. The most tangible manifestation of Xi's designs is the new Silk Road he first proposed in 2013. The enterprise morphed into the 'Belt and Road' initiative, a mix of foreign policy, economic strategy, and charm offensive that, nurtured by a torrent of Chinese money, is rebalancing global political and economic alliances. Xi calls the grand initiative 'a road for peace.' Other world powers such as Japan and the U.S. remain skeptical about its stated aims and even more worried about unspoken ones, especially those hinting at military expansion."
July 29 - Financial Times: "China's Belt and Road Initiative is commonly seen as a programme to fund and build infrastructure in some 78 countries around the globe. It is also Beijing's bid to reshape the world by offering an alternative developmental vision to the US-led world order. In the Chinese context, it is the linchpin of President Xi Jinping's grand design to create a 'community with a shared future for mankind'. As such, the Belt and Road (BRI) is officially intended to showcase an open, inclusive form of development which benefits all countries that participate. To criticise BRI, therefore, is to censure a rising China's proposition to the world. Yet there is growing evidence that the infrastructure projects are falling short of Beijing's ideals and stirring controversy in the countries they were intended to assist. Debt sustainability, governance flaws and general opacity are some of the main issues."
July 29 - Bloomberg (Chris Anstey and Narae Kim): "China used to rail against the outsize role of the U.S. dollar. But in a major turnaround, the world's second-biggest economy has started embracing the currency of its larger rival. Chinese companies and banks-and even the government-sold bonds denominated in dollars at a record pace last year, and underwriters expect that growth to continue for years. The roughly half-trillion-dollar market has two key attractions for China's borrowers. For some, it's an easier place to raise cash than at home… For others, dollars are simply easier to use to fund acquisitions and investments abroad. The upshot: There's a large and growing supply of dollar securities that offer exposure to Chinese companies for investors wary of diving into the country's increasingly accessible yuan-denominated domestic debt. The offshore bond market is also set to provide a stake in President Xi Jinping's 'Belt and Road' initiative (BRI)-a grand plan that envisions deepening trade and investment ties with countries across the Eurasian landmass and beyond. Bankers see the BRI as a key source of growth in Chinese dollar bonds."
August 1 - Bloomberg: "Recent optimism in China's debt market will soon be put to the test, with investors able to demand early repayment for as much as 544.7 billion yuan ($80bn) of debt by year-end. The amount of local bonds with put options that hit trigger points in the coming five months comes to almost 1.4 times the tally from January to July… While China's credit markets are still functioning relatively smoothly -- even as corporate defaults run at a record pace -- the worry is that a swathe of repayment demands from puttable bondholders may upset that equilibrium."
July 31 - Bloomberg: "Chinese investors flocked into money-market products at a rate outpacing equities and bonds last quarter, adding to what is already the biggest segment of the nation's mutual fund industry. Mutual funds investing in low-risk, short-term debt instruments grew 5.4% last quarter to 7.7 trillion yuan ($1.1 trillion), compared to the 3.7% increase in bond funds and a drop of 1.3% in equity funds…"
July 31 - New York Times (Chris Buckley): "China's top leader, Xi Jinping, seemed indomitable when lawmakers abolished a term limit on his power early this year. But months later, China has been struck by economic headwinds, a vaccine scandal and trade battles with Washington, emboldening critics in Beijing who are questioning Mr. Xi's sweeping control. Censorship and punishment have muted dissent in China since Mr. Xi came to power. So Xu Zhangrun, a law professor at Tsinghua University in Beijing, took a big risk last week when he delivered the fiercest denunciation yet from a Chinese academic of Mr. Xi's hard-line policies, revival of Communist orthodoxies and adulatory propaganda image. 'People nationwide, including the entire bureaucratic elite, feel once more lost in uncertainty about the direction of the country and about their own personal security, and the rising anxiety has spread into a degree of panic throughout society,' Professor Xu wrote…"
July 29 - Financial Times (Ben Bland): "Andy Chan, a young independence activist, and his Hong Kong National party's tiny band of supporters do not look - or sound - like a serious threat to the territorial integrity of an emerging superpower. So the recent proposal by the Beijing-appointed government in Hong Kong to ban his fledgling organisation on 'national security' grounds looks to some observers like a serious overreaction… But from Beijing's perspective, its intensifying squeeze on opposition groups in semi-autonomous Hong Kong - and its pushback against de facto independent Taiwan - is not only proportionate and justified, but essential. Communist party officials see Taiwan and Hong Kong's democratic values as a direct threat to Beijing's one-party rule - and to its new mission to promote the Chinese authoritarian model of development overseas."
EM Watch:
July 30 - Bloomberg (Natasha Doff): "Here's a reminder of emerging-market fragility as global financial conditions tighten: their dollar burdens are higher than ever and still rising. Credit issued to developing-economy borrowers excluding banks has surged to $3.7 trillion by the end of March, fueled by a 16 percent year-on-year rise in new debt supply, the Bank for International Settlements said on Monday. Close to $500 billion comes from China, by far the biggest single issuer, with African and Middle Eastern nations also rapidly increasing their borrowing. The latest numbers underscore the relentless boom in the dollar credit cycle, even as investors fret over rising borrowing costs and an upswing in the U.S. currency. The premium money managers demand to hold developing-economy dollar bonds over Treasuries rose to the widest since 2016 last month before easing in recent weeks."
August 1 - Reuters (Rodrigo Campos): "Trading in emerging market credit default swaps soared 79.3% to $468 billion in the second quarter of 2018 from $261 billion in the same quarter a year earlier… Trading in emerging market CDS dipped 4.1% from the previous quarter's $488 billion, according to a survey from EMTA, the emerging markets debt-trading and investment industry trade association. It was, however, the second highest quarterly volume in records going back to 2009…"
August 2 - Wall Street Journal (Christopher Whittall): "Turkey's embattled financial system needs foreign investors. Its plunging currency shows only the bravest are choosing to stick around. Turkey has one of the biggest piles of foreign-denominated debt in the developing world, much of which comes due in the next year, and a currency whose dramatic decline makes it ever more expensive to pay off. The lira has lost a quarter of its value this year against the dollar, and took another leg down Wednesday and Thursday after the Trump administration sanctioned two Turkish officials following Ankara's refusal to free an American pastor. Bond yields have exploded higher amid very high inflation and stocks have fallen."
July 30 - Financial Times (Steve Johnson and Chloe Cornish): "Turkish inflation figures released on Friday are likely to provide a reminder why investors were so stunned when the country's central bank left interest rates on hold last week. Economists predict that inflation accelerated to more than 16% in July, a reading that risks putting more pressure on a currency… And while Donald Trump's threat that the US will impose 'large sanctions' over Turkey's prosecution of an American pastor is a new headwind for the lira, investors and analysts say the currency's ailments are both longstanding and more fundamental."
July 29 - Financial Times (Kiran Stacey and Farhan Bokhari): "Pakistan is drawing up plans to seek its largest ever bailout from the IMF, with senior finance officials set to present the option to Imran Khan soon after he takes office. Any loan from the IMF, which officials believe is necessary to resolve the country's escalating foreign reserves crisis, would see the fund impose restrictions on public spending. Such limits would make it difficult for Pakistan's charismatic new leader to fulfil some of his election promises such as building an 'Islamic welfare state'."
August 1 - Reuters (Ori Lewis): "Imran Khan, Pakistan's former cricket captain and newly elected prime minister, is on a sticky wicket. His victory in last week's polls was secured in part on a pledge to ramp up spending on public services. Yet the coffers are empty and a balance of payments crisis looms. Instead of the 'Islamic welfare state' he hoped to create, his aides are forced to ponder the prospect of an IMF deal. Even that safety net may not be at hand. Mike Pompeo, US secretary of state, says Washington will oppose any bailout that pays off Chinese loans on grounds that this would be unfair to US taxpayers. For years, a dispute between China and the west has been simmering over the terms of development financing. Unfortunately for Mr Khan's new government, Pakistan is where it threatens to boil over."
Central Bank Watch:
August 2 - Financial Times (Gavin Jackson and Delphine Strauss): "The Bank of England raised interest rates to their highest level in almost a decade on Thursday, saying recent data vindicated policymakers' view that the first quarter slowdown in UK growth was temporary. Members of the Monetary Policy Committee voted unanimously for a 25 bps increase, taking the BoE's benchmark interest rate to 0.75%... The Bank of England is the third major central bank to meet this week, and has joined the US Federal Reserve in signalling further interest rate rises are on the way."
August 1 - Bloomberg (Ira Dugal): "India's Monetary Policy Committee decided to raise the benchmark interest rate by 25 bps…, while retaining a 'Neutral' monetary policy stance. The committee voted 5-1 to hike the repo rate from 6.25% to 6.5%."
Global Bubble Watch:
August 1 - Bloomberg (Dana El Baltaji): "It's been a slow July for emerging-market bond sales. Borrowers raised $118 billion this month from 981 issues, the least since July 2013… That's because yields for emerging-market debt climbed for six straight months, the longest streak since at least 1998…"
July 31 - Bloomberg (Chikako Mogi): "The day after Haruhiko Kuroda pledged to allow greater swings in Japan's giant bond market while pushing back against rapid increases, traders are putting him to the test. Moves in 10-year government debt futures were so extreme on Wednesday -- a drop of as much as 0.5%, the most in almost two years -- that they triggered an emergency margin call from the clearing house. In the cash market, the yield on benchmark securities rose 6 bps to an 18-month high of 0.12%."
July 30 - Bloomberg (Enda Curran and Alessandro Speciale): "Governments are stepping up just as central banks crawl away from crisis-era settings. While the shift is modest, it suggests more support for a global expansion buffered by trade tensions and bouts of market turbulence. Morgan Stanley estimates that the fiscal deficits in four of the world's biggest economies… will rise to 2.8% of gross domestic product in 2018 and 3% in 2019, from 2.5% last year. President Donald Trump's tax overhaul, the biggest since the Reagan era, helped push U.S. growth to 4.1% in the second quarter, the fastest since 2014. Trade foe China is using tax cuts and infrastructure spending to underpin demand. The European Central Bank estimates the euro region's fiscal stance will be 'mildly expansionary' this year."
July 31 - Bloomberg (Emily Cadman): "Australia's property slump deepened in July, with housing prices falling the most in almost seven years. National dwelling values dropped 0.6% last month -- the biggest fall since September 2011 -- as declines in Sydney and Melbourne accelerated, according to CoreLogic… Prices have now fallen for 10 straight months due to a combination of lending curbs, stretched affordability and reduced investor demand."
July 30 - Reuters (Wayne Cole): "Growth in Australian home loans for investment hit record lows in June as tighter lending standards and hikes in some mortgage rates sucked the life out of the buy-to-let sector, piling further pressure on house prices."
Europe Watch:
August 2 - Financial Times (Adam Samson): "Italian bonds sustained a fresh blow on Thursday, sparking the largest rise in yield since June, during a turbulent week for the global fixed income market. The country's benchmark 10-year bond yield was up 14.2 bps in recent trade to 2.939%. It was the biggest increase since June 21 and brought the yield to the highest level since June 11… On the shorter end of the curve, the two-year yield climbed as high as 1.023% from Wednesday's closing level of 0.783%."
July 31 - Reuters (Kevin Costelloe and Alessandro Speciale): "Italy's economic growth slowed to the weakest pace in almost two years, possibly spelling trouble for the populist government's costly projects. Gross domestic product expanded 0.2% in the three months through June, down from 0.3% in the first quarter…"
July 29 - Reuters (Madeline Chambers): "Support for German Chancellor Angela Merkel's conservative bloc, trying to move beyond a bitter dispute over migrant policy that threatened the coalition, has fallen to its lowest level since 2006, a poll showed on Sunday."
Japan Watch:
July 31 - Bloomberg (Enda Curran): "Bank of Japan Governor Haruhiko Kuroda's policy tweaks have either strengthened the long-running stimulus or mark a stealth 'baby step' toward normalizing policy. Or both? The BOJ on Tuesday made adjustments to two pillars of its policy that could be interpreted as steps toward normalization: It said it would let the 10-year yield rise just a bit higher, to 0.2% from 0.1%, and it cut in half the amount of bank reserves that would face its negative rate of minus 0.1%. On the other hand, it also introduced 'forward guidance,' pledging to keep short- and long-term rates at extremely low levels for an 'extended period of time,' though that's not dramatically different from its long-running pledge… to continue its stimulus program 'as long as it is necessary.'"
July 31 - Reuters (Jamie McGeever): "Not for the first time in the past 20 years, the challenges of global monetary policymaking have been laid bare by the Bank of Japan. By opting not to tighten policy…, as it had looked like it might, the BOJ highlighted how difficult it is for central banks to unwind extraordinary, crisis-era policy before the economy turns, no matter how much they may want to. It was another reminder that when it comes to extraordinary easing measures like QE and zero or negative interest rates, as The Eagles put it in 'Hotel California': 'You can check out any time you like, but you can never leave'."
Fixed Income Bubble Watch:
July 30 - Reuters: "The U.S. Treasury Department on Monday sold $51 billion in three-month debt at interest rate of 2.000 percent, the most it paid dealers and investors at a three-month bill auction in more than a decade…"
August 1 - Bloomberg (Cecile Gutscher and Yakob Peterseil): "Jim Schaeffer has found a glitch in his supply chain -- and reckons it could be an early warning sign that demand in the red-hot leveraged loan market is set to cool. The deputy chief investment officer at Aegon Asset Management was collecting loans to create his firm's next collateralized loan obligation. These are typically stored with a third party, which holds them on its books until there's enough to bundle into a transaction. Yet when Schaeffer called on his usual warehouse providers, they were not keen to take on more exposure. 'The market of warehouse providers is not as receptive,' said Schaeffer, who helps oversee $103 billion of fixed-income assets. 'That pause by warehouse providers is an indication that CLO demand could slow, which could impact the strong technical we have experienced.'"
Leveraged Speculator Watch:
August 2 - Financial Times (Megan Greene): "I was recently informed by the owner of an artificial intelligence fund that markets do not listen to economists any more. Rather than immediately dust off my CV and see what transferable skills I might have, I dug around for evidence of his claim and found there was something to it. A fundamental shift in market structure towards rules-based, passive investing over the past decade means a lot of trading is no longer based on fundamentals. But just because some markets do not pay attention to economists, it does not mean economists should not pay attention to these markets. On the contrary - this shift in market structure could well be a trigger for the next global downturn. The US Federal Reserve is concerned enough that 'Changing Market Structure and Implications for Monetary Policy' is the topic for this year's economic symposium in Jackson Hole."
Geopolitical Watch:
July 29 - Reuters (Matthew Mpoke Bigg): "Iran's currency hit a new record low on Sunday, dropping past 100,000 rials to the U.S. dollar as Iranians brace for Aug. 7 when Washington is due to reimpose a first lot of economic sanctions."
August 1 - Reuters (Ori Lewis): "Israel would deploy its military if Iran were to try to block the Bab al-Mandeb strait that links the Red Sea to the Gulf of Aden, Prime Minister Benjamin Netanyahu said…"
August 2 - Financial Times (Guy Chazan): "An idea that was once unthinkable is, in the age of Trump, now beginning to seem like a sensible policy option. Should Germany acquire a nuclear bomb? The answer is yes, according to Christian Hacke, one of the country's most distinguished political scientists. In an article for Die Welt am Sonntag in July, he said Germany was, 'for the first time since 1949, without a US nuclear umbrella'. He added: 'In an extreme crisis [we] are defenceless! In the worst-case scenario, Germany can only rely on itself.' Many in Berlin dismissed the piece as silly season nonsense. But the anxiety it reflected is real enough. US President Donald Trump's furious attacks on Germany have sown panic in Berlin, calling into question alliances and allegiances that once seemed inviolable, and forcing a rethink of security arrangements that have underpinned Germany's world view for more than 60 years."
July 29 - Reuters (Matthew Mpoke Bigg): "Iran's currency hit a new record low on Sunday, dropping past 100,000 rials to the U.S. dollar as Iranians brace for Aug. 7 when Washington is due to reimpose a first lot of economic sanctions."
August 1 - Reuters (Ori Lewis): "Israel would deploy its military if Iran were to try to block the Bab al-Mandeb strait that links the Red Sea to the Gulf of Aden, Prime Minister Benjamin Netanyahu said…"
August 2 - Financial Times (Guy Chazan): "An idea that was once unthinkable is, in the age of Trump, now beginning to seem like a sensible policy option. Should Germany acquire a nuclear bomb? The answer is yes, according to Christian Hacke, one of the country's most distinguished political scientists. In an article for Die Welt am Sonntag in July, he said Germany was, 'for the first time since 1949, without a US nuclear umbrella'. He added: 'In an extreme crisis [we] are defenceless! In the worst-case scenario, Germany can only rely on itself.' Many in Berlin dismissed the piece as silly season nonsense. But the anxiety it reflected is real enough. US President Donald Trump's furious attacks on Germany have sown panic in Berlin, calling into question alliances and allegiances that once seemed inviolable, and forcing a rethink of security arrangements that have underpinned Germany's world view for more than 60 years."
Friday Afternoon Links
[Reuters] Wall Street gains as upbeat earnings trump trade jitters
[Reuters] Yields slide on rising U.S.-China trade tension
[Reuters] Speculative U.S. 5-year, 10-year T-note net shorts hit record highs -CFTC
[CNBC] There is 'zero' engagement between US and China as trade tensions escalate, official says
[BloombergQ] U.S.'s Kudlow Trash Talks China Calling It ‘Lousy Investment’
[BloombergQ] How U.S. Companies Are Coping With Inflation and Scarce Labor
[Reuters] China tariffs on LNG, oil aim at U.S. energy dominance agenda
[CNBC] Trump trade war will add $3,000 to price of some popular pickup trucks, minivans, Toyota says
[BloombergQ] Italy Starts Budget Talks as Investors Send Warning to Conte
[Reuters] Yields slide on rising U.S.-China trade tension
[Reuters] Speculative U.S. 5-year, 10-year T-note net shorts hit record highs -CFTC
[CNBC] There is 'zero' engagement between US and China as trade tensions escalate, official says
[BloombergQ] U.S.'s Kudlow Trash Talks China Calling It ‘Lousy Investment’
[BloombergQ] How U.S. Companies Are Coping With Inflation and Scarce Labor
[Reuters] China tariffs on LNG, oil aim at U.S. energy dominance agenda
[CNBC] Trump trade war will add $3,000 to price of some popular pickup trucks, minivans, Toyota says
[BloombergQ] Italy Starts Budget Talks as Investors Send Warning to Conte
Thursday, August 2, 2018
Friday's News Links
[Reuters] Trade worries keep lid on stocks, Italian bonds sell off on government tensions
[Reuters] U.S. job growth slows in July, unemployment rate dips
[Reuters] China unveils retaliatory tariffs on $60 billion of U.S. goods in latest salvo
[BloombergQ] China Steps In to Support Yuan By Boosting Cost to Short
[BloombergQ] U.S. Farmland Values Hit a Record Despite Trade Fears
[Reuters] Chicago is exploring feasibility of pension financing -CFO
[Reuters] China's Unipec suspends US oil imports as trade spat intensifies
[BloombergQ] Turkish Markets Catch a Break on Slower-Than-Forecast Inflation
[WSJ] Trump’s Narrow Window for Trade Wins in China
[WSJ] Turkey Needs Foreign Funds as Short-Term Debt Looms
[WSJ] Selloff of Italian Debt Highlights Concerns Over Politics, Banks
[FT] China tries to restrain bearish bets on renminbi
[FT] China services growth softens further in July
[Reuters] U.S. job growth slows in July, unemployment rate dips
[Reuters] China unveils retaliatory tariffs on $60 billion of U.S. goods in latest salvo
[BloombergQ] China Steps In to Support Yuan By Boosting Cost to Short
[BloombergQ] U.S. Farmland Values Hit a Record Despite Trade Fears
[Reuters] Chicago is exploring feasibility of pension financing -CFO
[Reuters] China's Unipec suspends US oil imports as trade spat intensifies
[BloombergQ] Turkish Markets Catch a Break on Slower-Than-Forecast Inflation
[WSJ] Trump’s Narrow Window for Trade Wins in China
[WSJ] Turkey Needs Foreign Funds as Short-Term Debt Looms
[WSJ] Selloff of Italian Debt Highlights Concerns Over Politics, Banks
[FT] China tries to restrain bearish bets on renminbi
[FT] China services growth softens further in July
Thursday Afternoon Links
[Reuters] S&P 500 ends higher, driven by Apple, tech
[Reuters] China stands its ground after Trump amps up tariff threats
[CNBC] The Trump administration is headed for a gigantic debt headache
[CNBC] Goldman says U.S. may base tariff decisions on whether China's currency keeps falling
[Reuters] Argentine monthly industrial output makes sharpest drop since 2002
[BloombergQ] Vancouver Suffers Its Worst July for Home Sales Since 2000
[FT] Trump zeroes in on China after trade truce with Europe
[FT] Central bankers teeter on a tightrope towards normalisation
[FT] US tech faces big risks from Trump’s China trade war
[BloombergSub] Hawkish Fed, Weak Yuan Signal More Trouble Ahead for Emerging Markets
[Reuters] China stands its ground after Trump amps up tariff threats
[CNBC] The Trump administration is headed for a gigantic debt headache
[CNBC] Goldman says U.S. may base tariff decisions on whether China's currency keeps falling
[Reuters] Argentine monthly industrial output makes sharpest drop since 2002
[BloombergQ] Vancouver Suffers Its Worst July for Home Sales Since 2000
[FT] Trump zeroes in on China after trade truce with Europe
[FT] Central bankers teeter on a tightrope towards normalisation
[FT] US tech faces big risks from Trump’s China trade war
[BloombergSub] Hawkish Fed, Weak Yuan Signal More Trouble Ahead for Emerging Markets
Wednesday, August 1, 2018
Thursday's News Links
[BloombergQ] Stocks Slump as Trade Fears Return; Dollar Climbs: Markets Wrap
[Reuters] Trade tensions roil emerging stocks, U.S. sanctions hit Turkey
[Reuters] Italy's markets hurt by political worries, Poste Italiane
[Reuters] JGB yields brush 1-1/2-year high before easing, 10-yr sale awaited
[CNBC] China says it must retaliate against tariffs 'to defend the nation's dignity'
[BloombergQ] China Says It’s Ready to Retaliate on Latest U.S. Tariff Threat
[Reuters] China urges U.S. to 'calm down' in trade dispute, says its tactics will not work
[Reuters] Bank of England raises rates above crisis lows, signals no rush for next hike
[BloombergQ] U.S. Proposes Easing Auto Mileage Rules, California's Authority
[BloombergQ] China’s Empire Of Money Is Reshaping Global Trade
[WSJ] U.S. Pressures China With Punitive Trade, Defense Measures
[WSJ] Treasury Yield Tops 3% Again
[FT] How Germany became Donald Trump’s European punchbag
[FT] Passive investing is storing up trouble
[FT] Italian bonds face heaviest rise in yield since June
[Reuters] Trade tensions roil emerging stocks, U.S. sanctions hit Turkey
[Reuters] Italy's markets hurt by political worries, Poste Italiane
[Reuters] JGB yields brush 1-1/2-year high before easing, 10-yr sale awaited
[CNBC] China says it must retaliate against tariffs 'to defend the nation's dignity'
[BloombergQ] China Says It’s Ready to Retaliate on Latest U.S. Tariff Threat
[Reuters] China urges U.S. to 'calm down' in trade dispute, says its tactics will not work
[Reuters] Bank of England raises rates above crisis lows, signals no rush for next hike
[BloombergQ] U.S. Proposes Easing Auto Mileage Rules, California's Authority
[BloombergQ] China’s Empire Of Money Is Reshaping Global Trade
[WSJ] U.S. Pressures China With Punitive Trade, Defense Measures
[WSJ] Treasury Yield Tops 3% Again
[FT] How Germany became Donald Trump’s European punchbag
[FT] Passive investing is storing up trouble
[FT] Italian bonds face heaviest rise in yield since June
Wednesday Evening Links
[BloombergQ] Stocks Mixed, Treasuries Decline as Fed Stands Pat: Markets Wrap
[BloombergQ] Fed Leaves Key Rate Unchanged With Economy at ‘Strong Rate’
[Reuters] Trump administration confirms plan to raise China import tariff to 25 percent
[Reuters] Fed's plan to raise rates appears intact despite Trump criticism
[CNBC] Here's what changed in the new Fed statement
[Reuters] Emerging market CDS trading value jumps in Q2 -EMTA
[Reuters] Israel warns Iran of military response if it closed key Red Sea strait
[NYT] Chinese Goods May Face 25% Tariffs, Not 10%, as Trump’s Anger Grows
[WSJ] U.S. Considers 25% Tariffs on $200 Billion in Chinese Imports
[WSJ] Treasury Plans to Boost Borrowing as Trillion-Dollar Deficits Loom
[FT] Fed keeps course for September rate increase
[FT] Pakistan puts a spotlight on China’s opaque loans
[BloombergQ] Fed Leaves Key Rate Unchanged With Economy at ‘Strong Rate’
[Reuters] Trump administration confirms plan to raise China import tariff to 25 percent
[Reuters] Fed's plan to raise rates appears intact despite Trump criticism
[CNBC] Here's what changed in the new Fed statement
[Reuters] Emerging market CDS trading value jumps in Q2 -EMTA
[Reuters] Israel warns Iran of military response if it closed key Red Sea strait
[NYT] Chinese Goods May Face 25% Tariffs, Not 10%, as Trump’s Anger Grows
[WSJ] U.S. Considers 25% Tariffs on $200 Billion in Chinese Imports
[WSJ] Treasury Plans to Boost Borrowing as Trillion-Dollar Deficits Loom
[FT] Fed keeps course for September rate increase
[FT] Pakistan puts a spotlight on China’s opaque loans
Tuesday, July 31, 2018
Wednesday's News Links
[BloombergQ] Treasuries Drop Before Fed; Trade Weighs on Stocks: Markets Wrap
[CNBC] US 10-year Treasury yield hits 3% for first time since June after strong payrolls data
[Reuters] U.S. yields rise as government ratchets up borrowing
[CNBC] ISM manufacturing index hits 58.1 in July; construction spending down 1.1% in June
[CNBC] Private payrolls boom in July, increasing by 219,000 vs 185,000 estimate: ADP
[CNBC] Housing demand sees biggest drop in more than 2 years
[BloombergQ] U.S. Considers Higher Tariffs on $200 Billion in Chinese Imports
[Reuters] China vows retaliation if Trump slaps 25 percent tariff on $200 billion of Chinese imports
[BloombergQ] New Tariffs Loom as China Decries ‘Blackmail’
[BloombergQ] Volatility Is Back in Japan's Bonds as Traders Confront Kuroda
[BloombergQ] Double Down or Stealth Taper: BOJ Watchers Debate Kuroda's Move
[Reuters] Asian factories slow as China-U.S. trade conflict intensifies
[BloombergQ] Chinese Investors Flee Into Money Market Funds From Stocks
[BloombergQ] Australia House Prices Fall the Most in 7 Years
[BloombergQ] Hedge Fund's Humans Are Kicking Some Algo Behind
[BloombergQ] India Monetary Policy: MPC Hikes Rates For Second Straight Time
[WSJ] Trump Advisers Urge Raising Additional China Tariffs to 25%
[WSJ] China Won’t Be a Trade Pushover
[WSJ] Federal Reserve Likely to Keep Rates Steady
[WSJ] U.S. Defense Bill Seeks to Counter China
[FT] Japanese bond market jolted as traders test BoJ resolve
[FT] China shift to easing threatens to derail debt-cutting efforts
[FT] Stakes are high for passive funds after Faang sell-off
[FT] China manufacturing gauge softens to 8-month low
[FT] Tech tumbles test conviction trades of hedge funds
[CNBC] US 10-year Treasury yield hits 3% for first time since June after strong payrolls data
[Reuters] U.S. yields rise as government ratchets up borrowing
[CNBC] ISM manufacturing index hits 58.1 in July; construction spending down 1.1% in June
[CNBC] Private payrolls boom in July, increasing by 219,000 vs 185,000 estimate: ADP
[CNBC] Housing demand sees biggest drop in more than 2 years
[BloombergQ] U.S. Considers Higher Tariffs on $200 Billion in Chinese Imports
[Reuters] China vows retaliation if Trump slaps 25 percent tariff on $200 billion of Chinese imports
[BloombergQ] New Tariffs Loom as China Decries ‘Blackmail’
[BloombergQ] Volatility Is Back in Japan's Bonds as Traders Confront Kuroda
[BloombergQ] Double Down or Stealth Taper: BOJ Watchers Debate Kuroda's Move
[Reuters] Asian factories slow as China-U.S. trade conflict intensifies
[BloombergQ] Chinese Investors Flee Into Money Market Funds From Stocks
[BloombergQ] Australia House Prices Fall the Most in 7 Years
[BloombergQ] Hedge Fund's Humans Are Kicking Some Algo Behind
[BloombergQ] India Monetary Policy: MPC Hikes Rates For Second Straight Time
[WSJ] Trump Advisers Urge Raising Additional China Tariffs to 25%
[WSJ] China Won’t Be a Trade Pushover
[WSJ] Federal Reserve Likely to Keep Rates Steady
[WSJ] U.S. Defense Bill Seeks to Counter China
[FT] Japanese bond market jolted as traders test BoJ resolve
[FT] China shift to easing threatens to derail debt-cutting efforts
[FT] Stakes are high for passive funds after Faang sell-off
[FT] China manufacturing gauge softens to 8-month low
[FT] Tech tumbles test conviction trades of hedge funds
Tuesday Evening Links
[BloombergQ] Asia Stocks Rise, Japanese Bond Yields Head Higher: Markets Wrap
[Bloomberg/StraitsTimes] US plans higher tariffs on US$200 billion in Chinese imports
[Reuters] Industrials, tech lead Wall Street gains on renewed trade hopes
[CNBC] As the Fed meets, the specter of pressure from Trump and the market looms
[CNBC] Fed seen keeping interest rates on hold Wednesday, but there's a hot debate about where it could end hiking
[Reuters] U.S. retail sector rebound boosts workers' wages, executive bonuses
[NYT] As China’s Woes Mount, Xi Jinping Faces Rare Rebuke at Home
[FT] There are limits to the Bank of Japan’s defence of low rates
[Bloomberg/StraitsTimes] US plans higher tariffs on US$200 billion in Chinese imports
[Reuters] Industrials, tech lead Wall Street gains on renewed trade hopes
[CNBC] As the Fed meets, the specter of pressure from Trump and the market looms
[CNBC] Fed seen keeping interest rates on hold Wednesday, but there's a hot debate about where it could end hiking
[Reuters] U.S. retail sector rebound boosts workers' wages, executive bonuses
[NYT] As China’s Woes Mount, Xi Jinping Faces Rare Rebuke at Home
[FT] There are limits to the Bank of Japan’s defence of low rates
Monday, July 30, 2018
Tuesday's News Links
[BloombergQ] U.S. Stocks Climb Before Apple; Bonds Rise: Markets Wrap
[CNBC] US and China reportedly seeking to restart talks to avert trade war
[Reuters] U.S. consumer spending increases solidly in June
[Reuters] BOJ seeks to make its ammunition last longer as options dwindle
[BloombergQ] Here's What Market Watchers Are Saying About BOJ Policy Tweaks
[BloombergQ] Treasury Sees Second-Half U.S. Borrowing at Most Since 2008
[Reuters] Fed set to hold rates steady, remain on track for more hikes
[Reuters] Pulp problems: Why shoppers may pay more for tissues, toilet paper
[BloombergQ] China Factory Gauge Falls on Tighter Credit, Trade War Risks
[Reuters] China's July manufacturing growth slows on trade dispute, softer domestic demand
[BloombergQ] China Politburo Signals Greater Focus on Growth Amid Trade Spat
[Reuters] Major central banks all just prisoners of their own device: McGeever
[CNBC] Morgan Stanley: The biggest sell-off since February is coming and it's going to hit the average investor hard
[BloombergQ] Euro-Area Economy Gets Higher Inflation But Weaker Growth
[BloombergQ] Italian Economic Growth Slows to Weakest in Almost Two Years
[Reuters] Australian home investors in full retreat as prices fall
[WSJ] Home Price Gains Held Steady in May
[WSJ] Chinese Economy Starts to Feel Tariff Impact
[WSJ] Young People Don’t Want Construction Jobs. That’s a Problem for the Housing Market.
[FT] BoJ defies global move to roll back crisis-era stimulus
[FT] Turkey nears ‘pariah’ status after holding rates
[CNBC] US and China reportedly seeking to restart talks to avert trade war
[Reuters] U.S. consumer spending increases solidly in June
[Reuters] BOJ seeks to make its ammunition last longer as options dwindle
[BloombergQ] Here's What Market Watchers Are Saying About BOJ Policy Tweaks
[BloombergQ] Treasury Sees Second-Half U.S. Borrowing at Most Since 2008
[Reuters] Fed set to hold rates steady, remain on track for more hikes
[Reuters] Pulp problems: Why shoppers may pay more for tissues, toilet paper
[BloombergQ] China Factory Gauge Falls on Tighter Credit, Trade War Risks
[Reuters] China's July manufacturing growth slows on trade dispute, softer domestic demand
[BloombergQ] China Politburo Signals Greater Focus on Growth Amid Trade Spat
[Reuters] Major central banks all just prisoners of their own device: McGeever
[CNBC] Morgan Stanley: The biggest sell-off since February is coming and it's going to hit the average investor hard
[BloombergQ] Euro-Area Economy Gets Higher Inflation But Weaker Growth
[BloombergQ] Italian Economic Growth Slows to Weakest in Almost Two Years
[Reuters] Australian home investors in full retreat as prices fall
[WSJ] Home Price Gains Held Steady in May
[WSJ] Chinese Economy Starts to Feel Tariff Impact
[WSJ] Young People Don’t Want Construction Jobs. That’s a Problem for the Housing Market.
[FT] BoJ defies global move to roll back crisis-era stimulus
[FT] Turkey nears ‘pariah’ status after holding rates
Monday Evening Links
[CNBC] Asian shares set to open slightly lower after US tech drops; Bank of Japan ahead
[BloombergQ] Tech Rout Slams Stocks as Oil Gains, Dollar Slips: Markets Wrap
[Reuters] Euro zone bond yields rise after Italian auction, BOJ moves into focus
[CNBC] Oil prices rise back above $70 a barrel
[Reuters] U.S. pays highest rate on 3-month bills in over a decade
[Reuters] Wary of China's rise, Pompeo announces U.S. initiatives in emerging Asia
[Reuters] Why is Saudi halting oil shipments through the Red Sea?
[WSJ] The Pension Hole for U.S. Cities and States Is the Size of Japan’s Economy
[WSJ] Goldman Partners’ Haul on Crisis-Era Options: $3 Billion
[BloombergQ] Tech Rout Slams Stocks as Oil Gains, Dollar Slips: Markets Wrap
[Reuters] Euro zone bond yields rise after Italian auction, BOJ moves into focus
[CNBC] Oil prices rise back above $70 a barrel
[Reuters] U.S. pays highest rate on 3-month bills in over a decade
[Reuters] Wary of China's rise, Pompeo announces U.S. initiatives in emerging Asia
[Reuters] Why is Saudi halting oil shipments through the Red Sea?
[WSJ] The Pension Hole for U.S. Cities and States Is the Size of Japan’s Economy
[WSJ] Goldman Partners’ Haul on Crisis-Era Options: $3 Billion
Sunday, July 29, 2018
Monday's News Links
[BloombergQ] `Tired' Nasdaq Leads Stock Slump as Oil Rallies: Markets Wrap
[BloombergQ] Global Bond Yields Climb as Anxious Investors Await BOJ Review
[Reuters] U.S. pending home sales unexpectedly rise in June
[BloombergQ] Powell to Duck Trump Jabs and Let Economy Justify Fed Rate Pause
[BloombergQ] What Economists Still Don’t Get About the 2008 Crisis
[BloombergQ] The BOJ's Stock Market Distortions Are Coming Under New Scrutiny
[Reuters] Japan retail sales pick up in positive sign for spending
[BloombergQ] Emerging Market Dollar-Credit Binge Extends to $3.7 Trillion
[BloombergQ] Fiscal Policy Dials Up as Era of Easy Money Draws to a Close
[WSJ] Employers Eager to Hire Try a New Policy: ‘No Experience Necessary’
[FT] Japan government bond yields climb as BoJ reviews policy
[FT] China plans tighter controls on foreign stakebuilding
[FT] Regional lenders: China’s most dangerous banks
[BloombergSub] Mnuchin to Wield Power Over Yield Curve With Fresh Supply Boost
[BloombergSub] The $500 Billion Market the World Never Thought It Would See
[BloombergQ] Global Bond Yields Climb as Anxious Investors Await BOJ Review
[Reuters] U.S. pending home sales unexpectedly rise in June
[BloombergQ] Powell to Duck Trump Jabs and Let Economy Justify Fed Rate Pause
[BloombergQ] What Economists Still Don’t Get About the 2008 Crisis
[BloombergQ] The BOJ's Stock Market Distortions Are Coming Under New Scrutiny
[Reuters] Japan retail sales pick up in positive sign for spending
[BloombergQ] Emerging Market Dollar-Credit Binge Extends to $3.7 Trillion
[BloombergQ] Fiscal Policy Dials Up as Era of Easy Money Draws to a Close
[WSJ] Employers Eager to Hire Try a New Policy: ‘No Experience Necessary’
[FT] Japan government bond yields climb as BoJ reviews policy
[FT] China plans tighter controls on foreign stakebuilding
[FT] Regional lenders: China’s most dangerous banks
[BloombergSub] Mnuchin to Wield Power Over Yield Curve With Fresh Supply Boost
[BloombergSub] The $500 Billion Market the World Never Thought It Would See
Sunday Evening Links
[BloombergQ] Asia Stocks Point to Lower Start; Yen Steadies: Markets Wrap
[Reuters] U.S. Treasury's Mnuchin says he sees at least 3 percent growth for next 4-5 years
[Politico] House GOP campaign chairman sees no government shutdown
[The Hill] Buckle your seatbelts for 100 days of political drama before midterms
[FT] Pakistan plans to seek up to $12bn IMF bailout
[FT] Hong Kong and Taiwan on the frontline as Xi chases ‘China dream’
[Reuters] U.S. Treasury's Mnuchin says he sees at least 3 percent growth for next 4-5 years
[Politico] House GOP campaign chairman sees no government shutdown
[The Hill] Buckle your seatbelts for 100 days of political drama before midterms
[FT] Pakistan plans to seek up to $12bn IMF bailout
[FT] Hong Kong and Taiwan on the frontline as Xi chases ‘China dream’
Sunday's News Links
[Reuters] Trump threatens U.S. government shutdown over immigration
[Reuters] Global auto powers plotting response to Trump auto tariff threats
[Reuters] Euro referendum not part of Italian government plans: deputy PM
[Reuters] Merkel's conservatives hit 12-year low in German poll
[Reuters] Iran currency extends record fall as U.S. sanctions loom
[WSJ] Soda, Motorcycle Prices Rise as Tariffs Hit Home for Consumers
[WSJ] Fed Looks for Goldilocks Path as Jobless Rate Drops
[FT] China’s Belt and Road Initiative is falling short
[Reuters] Global auto powers plotting response to Trump auto tariff threats
[Reuters] Euro referendum not part of Italian government plans: deputy PM
[Reuters] Merkel's conservatives hit 12-year low in German poll
[Reuters] Iran currency extends record fall as U.S. sanctions loom
[WSJ] Soda, Motorcycle Prices Rise as Tariffs Hit Home for Consumers
[WSJ] Fed Looks for Goldilocks Path as Jobless Rate Drops
[FT] China’s Belt and Road Initiative is falling short
Saturday, July 28, 2018
Saturday's News Links
[BloombergQ] U.S. GDP Report Clears Path for Two More Fed Rate Hikes
[CNBC] Trump suggests economy could grow at 8 or 9 percent if he cuts the trade deficit
[Reuters] Turkey, U.S. relations can be saved, presidential spokesman says
[Reuters] Italy's interior minister says EU trying to 'swindle' Britain: Sunday Times
[Reuters] Pakistan's Imran Khan faces tough test in looming economic crisis
[Spiegel] How the European Commission President Won Over Trump
[Spiegel] A Surveillance State Unlike Any the World Has Ever Seen
[CNBC] Trump suggests economy could grow at 8 or 9 percent if he cuts the trade deficit
[Reuters] Turkey, U.S. relations can be saved, presidential spokesman says
[Reuters] Italy's interior minister says EU trying to 'swindle' Britain: Sunday Times
[Reuters] Pakistan's Imran Khan faces tough test in looming economic crisis
[Spiegel] How the European Commission President Won Over Trump
[Spiegel] A Surveillance State Unlike Any the World Has Ever Seen
Friday, July 27, 2018
Weekly Commentary: Latent Fragilities
I have a rather simple Bubble definition: "A self-reinforcing but inevitably unsustainable inflation." Most Bubble discussions center on the deflating rather than the inflating phase. A focus of my analysis is the progressively powerful dynamics that fuel Bubble excess, along with attendant distortions and maladjustment - and how they sow seeds of their own destruction.
The ongoing "global government finance Bubble" is unique in history. Rarely has market intervention and manipulation been so widely championed. Never have governments and central banks on a concerted basis inflated government debt and central bank Credit. And almost a full decade since the crisis, the massive inflation of "money"-like government obligations runs unabated - across the continents.
The IMF calculated first quarter real global GDP growth at 3.64%, near the strongest expansion since 2011. U.S. Q2 GDP of 4.1% was the strongest since Q3 2014. There have been only eight stronger quarters of U.S. growth over the past 18 years.
Extreme and protracted (fiscal and monetary) policy stimulus has indeed stimulated real economy expansion. Given sufficient scope and duration, stimulus will invariably fuel spending and investment. Unfortunately, the artificial boom is also not without myriad negative consequences. Is the boom sustainable? Have we today reached the point where economic growth is self-supporting? Or, instead, is the global boom vulnerable to the curtailment of aggressive stimulus measures? Has global government stimulus promoted a return to stability? Or has an almost decade of unprecedented measures only exacerbated Latent Fragilities?
It was yet another week that seemed to support the Acute Latent Fragility Thesis.
July 22 - Financial Times (Gabriel Wildau and James Kynge): "China's central bank injected Rmb502bn ($74bn) into its banking system on Monday to help fortify a weakening domestic economy against the impact of an escalating trade war with the US and growing friction with Washington over its falling currency. The injection was the most emphatic move in a series of recent indications that Beijing is moving to ease monetary policy… Raising the risk that the US-China trade war could turn into a currency war, Mr Trump has accused Beijing of manipulating the renminbi, which last Friday reached its lowest point for a year against the US dollar. It has fallen 5% since the start of last month."
Despite GDP growth in the neighborhood of 6.0%, booming household borrowings, an unrelenting apartment Bubble and an ongoing Credit boom, China has once again been compelled to resort to aggressive stimulus in an attempt to hold its tottering Bubble upright. The Chinese economy's vulnerability to a U.S. trade war is generally offered as the impetus behind recently announced measures. Perhaps exposure to the faltering EM Bubble is also a pressing concern in Beijing.
July 22 - Wall Street Journal (Jeremy Page and Saeed Shah): "Pakistan's first metro, the Orange Line, was meant to be an early triumph in China's quest to supplant U.S. influence here and redraw the world's geopolitical map. Financed and built by Chinese state-run companies, the soon-to-be-finished overhead railway through Lahore is among the first projects in China's $62 billion plan for Pakistan. Beijing hoped the $2 billion air-conditioned metro, sweeping past crumbling relics of Mughal and British imperial rule, would help make Pakistan a showcase for its global infrastructure-building spree. Instead, it has become emblematic of the troubles that are throwing China's modern-day Silk Road initiative off course. Three years into China's program here, Pakistan is heading for a debt crisis, caused in part by a surge in Chinese loans and imports for projects like the Orange Line, which Pakistani officials say will require public subsidies to operate."
A few decades back it was Japanese Bubble Finance spreading its tentacles across the world. This week saw Japanese 10-year yields almost reach 11 bps, near the high going back to January 2016. It took two Bank of Japan (BOJ) interventions - offers to buy unlimited JGBs - to push yields back below 10 bps by Friday. There is considerable market focus on next week's BOJ policy meeting, along with heightened concerns in Japan for the sustainability of the BOJ's policy course. Holding "market" yields indefinitely at zero promotes distortions and imbalances. Various reports have the BOJ contemplating adjusting this policy. The bank may also adjust an ETF purchase program viewed as distorting the Japanese equities market.
Sharing a similar experience to central bankers around the globe, the BOJ has seen the impact of its inflationary policies much more in booming securities markets rather than in (stagnant) aggregate price levels in the real economy. Despite a massive expansion of central bank Credit, Japanese core consumer price inflation is expected this year to be about half the bank's 2.0% policy target. Increasingly, the 1% difference in CPI must seem secondary to risks mounting in the financial markets.
July 26 - Bloomberg (Masaki Kondo and Chikafumi Hodo): "For all the speculation over possible Bank of Japan policy tweaks next week, the most important change for global bond markets may already be underway. While market watchers disagree about whether the BOJ will adjust its target of keeping 10-year yields around zero percent, its steady reduction in purchases of longer-maturity debt and more expensive overseas hedging costs mean Japanese funds are already contemplating bringing more money back home. The BOJ's steps to buy fewer bonds has seen the annual increase in its debt holdings slow to 44.1 trillion yen ($398bn) versus its guidance of 80 trillion yen. Last quarter the reductions were entirely focused on so-called super-long bonds, which are the most attractive to insurers. What happens next in the world's second-largest bond market has the potential to cascade globally given Japanese investors hold $2.4 trillion of overseas debt."
It's a big number: $2.4 TN. BOJ policy has nurtured great Latent Fragilities. For one, policy measures have incentivized Japanese institutions and investors to comb the world for positive yields (Bubble fuel). Moreover, there is surely a large yen "carry trade" component, as financial speculators essentially borrow free in yen to leverage in higher-yield global instruments. The dollar/yen bottomed in late March, not coincidently about the same time U.S. and global (developed) equities put in trading bottoms. After trading as low as 104.74, a weaker yen saw the dollar/yen rally to trade last week at 112.88. Having reversed course, the dollar/yen closed Friday at 111.05.
I would argue that the ECB has also nurtured great Latent Fragilities. The ECB Thursday confirmed that policy rates would remain near zero at least through the summer of 2019. "What are they afraid of?" German two-year yields ended the week at negative 0.61%, the French two-year at negative 0.44%, and Spanish yields at negative 0.33%. Even Portugal enjoys negative borrowing costs out to two-year maturities (-0.23%). The German government is paid to borrow out to five years (-0.17%). To be sure, European debt instruments have inflated into one of history's most distorted Bubble markets. I'll assume Mario Draghi is not oblivious.
Italian 10-year yields jumped 15 bps this week to a four-week high 2.74%. Draghi was again questioned about Target2 balances during the ECB's post-meeting press conference. It's a critical issue that garners surprisingly little attention, perhaps because it is deftly deflected by the head of the ECB. Besides, it was a 2012 worry that proved short-lived.
Journalist: "How do you rate the risk in this [Target2] system, especially for the Bundesbank and compared to the Italy National Bank, for example?"
ECB President Mario Draghi: "First of all, let me make a general point. Target2 is a payment system, as such it doesn't generate instability. It's the way a monetary union settles its payments, and it's devised to make sure the money flows unencumbered across countries, individual sectors, companies - all economic agents. So that's the first thing we should always keep in mind.
The second thing is how to interpret recent numbers which show an increased number of Target liabilities in certain countries. Well, this is again a question that was asked several times in the past. Most of the movement in Target2 liabilities depends on our own asset purchase program - and depends on how and where - especially where - the balances of the purchases of bonds are settled. About 50% of the institutions… that sell bonds to the national central banks are not in the euro area and settle their account with one or two core countries where the financial centers reside. So, in this sense, you see that the accounting settlement of the balances do depend on where the settlement is made. It has nothing to do with capital flows from one country or another. Keep in mind that 80% of the institutions - banks namely - that sell bonds to the national central banks do not reside in the country where the purchaser's national central bank resides. A lot of inter-country payments and flows do not say anything very specific about the overall situation.
But going back to the recent movements in the liabilities in certain countries, you see that first of all they are not unprecedented - this is not the first time. We've seen movements as large and even larger in the past. Second…, they are of second order with respect to the massive movements produced by our own purchase program. So, the bottom line is the system works very well. The people who want to cap it, collateralize, limit - I mean, the truth is that they don't like the euro. They don't like the monetary union. Because the only way a monetary union can work is if they have an efficient payment system - which is what Target2 is. And I think it is just too early to understand exactly what part of the liabilities do reflect political uncertainty."
Italy's Target2 liabilities rose $16.3 billion during June to a record $481 billion, with a two-month gain of almost $55 billion. It's worth noting that Italy's liabilities surged from about zero in mid-2011 to $289 billion at the height of the European crisis back in August 2012. The ECB's "whatever it takes" stabilization program saw these liabilities shrink to $130 billion by July 2014. They've been basically heading south ever since.
Clearly, there is a lack of confidence in Italy's future status in the monetary union. And, at this point, it is not clear what might reverse the steady outflows from Italian financial institutions and assets. I don't completely disagree with Mr. Draghi's assertion that ECB policy is having a significant influence on Target2 balances. When Eurozone central banks buy Italian debt securities in the marketplace, the sellers are choosing to hold (or dispose of) these balances in other countries - thus creating a Bank of Italy liability to eurozone central banks (largely the Bundesbank). Why is this not a major festering problem? Germany's Target2 assets rose $20 billion in June to a record $976 billion - having now more than doubled since December 2014.
That Germany will soon have accumulated an astounding $1.0 TN of Target2 assets implies acute Latent Fragility in the euro region. This was never supposed to happen. These balances reflect mounting imbalances plugged by free-flowing central bank "money." ECB sovereign debt purchases have so compressed interest-rate differentials that there is today insufficient incentive to hold Italian and other "periphery" debt. But a market adjustment toward more realistic Credit spreads risks bursting Bubbles and blowing up debt markets. The entire European monetary integration experiment hangs in the balance.
So, the ECB is forced to stick with negative interest rates and "money" printing operations, as countries such as Italy accumulate liabilities that they will never service - leaving the German people to fret receivables that will never settle. Draghi's assertion that the payment system "works very well" is at best misleading. With imbalances growing bigger by the month, the semblance of a well-functioning payment system depends on monetary policy remaining extraordinarily loose. Stated differently, Acute Financial Fragilities are held at bay only so long as "money" remains free and created in abundance.
I believe we've reached the stage where a meaningful tightening of finance in Europe risks both acute bond market instability and even the entire euro experiment. For those believing this is hyperbole, allow me to phrase this differently: Italy and other "periphery" nations are one financial crisis away from demanding an alternative monetary regime.
A reasonable question: Why then is the euro not under more pressure? Well, Japan is only a meaningful tightening of financial conditions away from major bond market and financial system issues. The yen is a big wildcard. China is only a meaningful tightening away from major financial and economic issues. The renminbi is a big wildcard. The emerging markets are already suffering the effects of a tightening of financial conditions. Many EM currencies are in trouble.
Why is the euro not weaker against king dollar? Because the dollar is fundamentally an unsound currency - in a world of competing unsound currencies.
July 24 - Wall Street Journal (Josh Zumbrun): "The U.S. remained by far the largest driver of global current-account imbalances in 2017, running the world's largest deficit and adopting policies-mainly a shift toward much larger fiscal deficits-that are likely to increase its imbalances in coming years. The U.S. ran a $466 billion current-account deficit, meaning the nation imported far more than it exported. The U.S. has become an increasingly large driver of global deficits, accounting for 43% of all global deficits last year, up from 39% in 2016, according to the International Monetary Fund's annual assessment of the state of global imbalances. Washington's shift toward major deficit spending will move the U.S. trade deficit 'further from the level justified by medium term fundamentals and desirable policies,' the IMF said."
I would argue that the U.S., as well, is only a meaningful tightening of financial conditions away from serious issues. Inflated U.S. securities markets have been on the receiving end of huge international flows, much a direct consequence of QE (i.e. ECB and BOJ) and rampant Credit growth (China and EM). It would appear that U.S. residential and commercial real estate markets are already feeling the effects of waning international flows.
In the eyes of complacent markets, vulnerabilities - China, Japan, EM, Eurozone, UK, etc. - ensure the coterie of global central bankers remain trapped in aggressive stimulus. Yet there appears increasing recognition within the central bank community that further delays in the start of "normalization" come with mounting risks. That they have all in concert for far too long delayed getting the process started ensures great Latent Fragilities.
The Dow jumped 1.6% this week, the Banks 2.4% and the Transports 2.0%. The S&P500 added 0.6%, its fourth straight weekly gain. But the week saw (Crowded Long) declines of 16.7% in Facebook, 21.4% in Twitter, 9.5% in Electronic Arts and 8.2% for Intel. The broader market underperformed. Interestingly, the Goldman Sachs Most Short index dropped 3.1%. Rather abruptly, there are indications of nervousness and vulnerability below the market's surface.
The historic mistake was to believe that aggressive monetary policy would reduce systemic Fragilities. Stimulation of economies and animal spirits, no doubt, but at the cost of mounting latent instability. It's the six-year anniversary of "whatever it takes;" approaching the 10-year anniversary of the financial crisis; and going on ten years since China's massive stimulus. This week provided further evidence of trapped central banks.
EM rallied again this week, reducing the safe haven Treasury bid. Two-year Treasury yields jumped eight bps this week to 2.67%. The ten-year is again knocking on the door of 3.0% yields. I have little doubt that a surprising spike in Treasury yields would expose Latent Fragilities. The same question applies to Treasuries as it does to fixed-income markets around the globe: How much speculative leverage has accumulated over the past decade? Keep in mind it's the speculation and leverage that typically dooms a Bubble. Indeed, the interaction of leverage and depreciating asset values becomes a critical factor in why Bubbles are unsustainable.
First it was the February blow-up of the "short vol" trade. Then instability engulfed the emerging currencies, debt and equities markets, followed by a destabilizing spike in Italian yields. The Chinese renminbi sinks a quick 5%. This week saw further weakness in the Chinese currency, along with hints of instability in Japanese and Italian bonds. Importantly, Beijing stimulus measures come with atypical currency vulnerability.
All in all, the Latent Fragility case is coming together. Financial conditions are tightening, and myriad Bubbles are showing the strain. And while the VIX traded below 12 this week (closing Friday at 13.03), my hunch would be that liquidity in the volatility markets has quietly receded. The next VIX spike could get interesting.
For the Week:
The S&P500 added 0.6% (up 5.4% y-t-d), and the Dow rose 1.6% (up 3.0%). The Utilities increased 0.6% (down 0.3%). The Banks jumped 2.4% (up 2.6%), while the Broker/Dealers slipped 0.5% (up 4.9%). The Transports rose 2.0% (up 3.2%). The S&P 400 Midcaps fell 1.2% (up 3.9%), and the small cap Russell 2000 dropped 2.0% (up 8.3%). The Nasdaq100 declined 0.7% (up 14.1%). The Semiconductors gained 1.0% (up 9.5%). The Biotechs lost 1.5% (up 19.3%). With bullion down $9, the HUI gold index sank 3.7% (down 13.9%).
Three-month Treasury bill rates ended the week at 1.94%. Two-year government yields jumped eight bps to 2.67% (up 79bps y-t-d). Five-year T-note yields rose eight bps to 2.84% (up 63bps). Ten-year Treasury yields gained six bps to 2.96% (up 55bps). Long bond yields rose six bps to 3.08% (up 34bps). Benchmark Fannie Mae MBS yields gained seven bps to 3.68% (up 68bps).
Greek 10-year yields slipped four bps to 3.81% (down 26bps y-t-d). Ten-year Portuguese yields fell six bps to 1.73% (down 22bps). Italian 10-year yields jumped 15 bps to 2.74% (up 73bps). Spain's 10-year yields rose six bps to 1.38% (down 19bps). German bund yields added three bps to 0.40% (down 2bps). French yields increased two bps to 0.70% (down 8bps). The French to German 10-year bond spread narrowed one to 30 bps. U.K. 10-year gilt yields rose five bps to 1.28% (up 9bps). U.K.'s FTSE equities index added 0.3% (up 0.3%).
Japan's Nikkei 225 equities index was little changed (down 0.2% y-t-d). Japanese 10-year "JGB" yields jumped seven bps to 0.10% (up 6bps). France's CAC40 rallied 2.1% (up 3.7%). The German DAX equities index jumped 2.4% (down 0.4%). Spain's IBEX 35 equities index rose 1.5% (down 1.8%). Italy's FTSE MIB index increased 0.7% (up 0.5%). EM equities were mixed. Brazil's Bovespa index gained 1.6% (up 4.5%), and Mexico's Bolsa advanced 1.5% (up 0.6%). South Korea's Kospi index added 0.3% (down 7.0%). India’s Sensex equities index rose 2.3% (up 9.3%). China’s Shanghai Exchange rallied 1.6% (down 13.1%). Turkey's Borsa Istanbul National 100 index gained 1.6% (down 17.1%). Russia's MICEX equities index rose 2.0% (up 8.7%).
Investment-grade bond funds saw inflows of $1.986 billion, while junk bond funds had outflows of $548 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates gained two bps to 4.54% (up 62bps y-o-y). Fifteen-year rates added two bps to 4.02% (up 82bps). Five-year hybrid ARM rates were unchanged at 3.87% (up 69bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up four bps to 4.58% (up 47bps).
Federal Reserve Credit last week declined $7.0bn to $4.249 TN. Over the past year, Fed Credit contracted $186bn, or 4.2%. Fed Credit inflated $1.438 TN, or 51%, over the past 299 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $4.1bn last week to $3.412 TN. "Custody holdings" were up $86.5bn y-o-y, or 2.6%.
M2 (narrow) "money" supply jumped $20.0bn last week to a record $14.148 TN. "Narrow money" gained $521bn, or 3.8%, over the past year. For the week, Currency increased $3.7bn. Total Checkable Deposits slipped $1.5bn, while Savings Deposits rose $10.7bn. Small Time Deposits increased $2.3bn. Retail Money Funds gained $4.9bn.
Total money market fund assets slipped $3.0bn to $2.843 TN. Money Funds gained $203bn y-o-y, or 7.7%.
Total Commercial Paper rose $5.9bn to $1.068 TN. CP gained $91bn y-o-y, or 9.3%.
Currency Watch:
The U.S. dollar index added 0.2% to 94.669 (up 2.8% y-t-d). For the week on the upside, the Mexican peso increased 2.1%, the South African rand 1.8%, the Brazilian real 1.5%, the South Korean won 1.4%, the Canadian dollar 0.7%, the Japanese yen 0.3%, the Swedish krona 0.1% and the Singapore dollar 0.1%. For the week on the downside, the euro declined 0.6%, the New Zealand dollar 0.3%, the British pound 0.2%, the Swiss franc 0.2%, the Australian dollar 0.2% and the Norwegian krone 0.1%. The Chinese renminbi declined 0.64% versus the dollar this week (down 4.5% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index rallied 1.5% (up 5.0% y-t-d). Spot Gold declined 0.7% to $1,223 (down 6.1%). Silver slipped 0.4% to $15.493 (down 9.6%). Crude recovered 43 cents to $68.69 (up 14%). Gasoline rallied 4.5% (up 20%), and Natural Gas gained 0.9% (down 5.8%). Copper jumped 1.7% (down 15%). Wheat rose 2.8% (up 24%). Corn gained 2.0% (up 7%).
Trump Administration Watch:
July 25 - Wall Street Journal (Valentina Pop, Vivian Salama and Bob Davis): "President Donald Trump and European Commission President Jean-Claude Juncker turned down the heat on a trade dispute between two of the world's largest economic powers, suggesting… they would hold off on further tariffs while they talk through their differences. Speaking in a joint news conference…, the two leaders agreed to begin discussions on eliminating the tariffs and subsidies that hamper trade across the Atlantic, and to resolve the steel and aluminum tariffs the Trump administration had imposed this year as well as the retaliatory tariffs the European Union imposed in response."
July 26 - Financial Times (Edward Luce): "It was Wednesday so Europe went from being a 'foe' of America to a 'great friend'. Next Monday might be different. Perhaps Europe will still be in Donald Trump's good books. The only person who can say for sure is Mr Trump. Even he probably has little idea. But my hunch is that the ceasefire he struck with Jean-Claude Juncker, president of the European Commission, will hold… Europe has won a reprieve. The portents for China have commensurately darkened. They were already dimming before Mr Trump's latest rabbit trick. His squeeze on China is now likely to be backed by the Europeans and the US business community. Both have long advocated combined western pressure on China to put foreign investors on a level playing field. Both share deep concern about China's systemic technology transfer."
July 24 - CNBC (Jeff Cox): "President Donald Trump cranked up the rhetoric on tariffs on Tuesday, saying they are a good bargaining tool in his quest to get better trade agreements. In a morning tweet, the president dug in on his position in the global trade war, declaring 'Tariffs are the greatest!' 'Tariffs are the greatest! Either a country which has treated the United States unfairly on Trade negotiates a fair deal, or it gets hit with Tariffs. It's as simple as that - and everybody's talking! Remember, we are the 'piggy bank' that's being robbed. All will be Great!'"
July 25 - Reuters: "U.S. President Donald Trump accused China… of targeting American farmers in a vicious way and using them as leverage to get concessions from him on trade. 'China is targeting our farmers, who they know I love & respect, as a way of getting me to continue allowing them to take advantage of the U.S. They are being vicious in what will be their failed attempt. We were being nice - until now!' Trump wrote…"
July 26 - CNBC (Berkeley Lovelace Jr.): "Treasury Secretary Steven Mnuchin told CNBC… he's 'closely monitoring' the weakening in the Chinese currency. 'What I've said over the last week [is] we are obviously closely monitoring the Chinese rmb and the weakening in that market," Mnuchin said… He said the administration is looking at other currencies as well. 'The long-term strength of the dollar is important. It's the result of a very strong U.S. economy,' Mnuchin continued. 'But we will closely monitor, as we do in the Treasury, currency manipulation across lots of different markets. And make sure people don't use currency for unfair trade advantages.'"
July 21 - Wall Street Journal (Jeffrey T. Lewis): "U.S. Treasury Secretary Steven Mnuchin said he 'wouldn't minimize' the possibility that the U.S. will impose tariffs on all $500 billion worth of goods that the U.S. imports from China, amplifying a threat President Donald Trump made… earlier in the week… Mr. Mnuchin stressed that the administration's goal is to achieve a 'more balanced' trade relationship with China, by getting the Asian country to open its economy and permitting U.S. exports there to increase."
July 21 - Wall Street Journal (Jamie Tarabay): "The goal of China's influence operations around the world is to replace the United States as the world's leading superpower, the CIA's Michael Collins said Friday. Speaking at the Aspen Security Forum during a session on the rise of China, Collins, the deputy assistant director of the CIA's East Asia Mission Center, said Chinese President Xi Jinping and his regime are waging a 'cold war' against the US. 'By their own terms and what Xi enunciates I would argue by definition what they're waging against us is fundamentally a cold war, a cold war not like we saw during the Cold War, but a cold war by definition. A country that exploits all avenues of power licit and illicit, public and private, economic and military, to undermine the standing of your rival relative to your own standing without resorting to conflict. The Chinese do not want conflict,' Collins said."
Federal Reserve Watch:
July 25 - Bloomberg (Rich Miller): "When Alan Greenspan ruled the Federal Reserve, investors became convinced the central bank could be counted on to prevent a stock market collapse -- the so-called Greenspan put. Now, Chairman Jerome Powell is under pressure to adopt what would amount to a put of his own, except this time it would be tied to the bond market. Some Fed regional bank presidents want the central bank to be cautious in raising interest rates to prevent short-term Treasury yields from rising above long-term ones -- providing a kind of comfort that Greenspan gave equity investors… While sounding sympathetic to their worries, Powell doesn't seem inclined to go along with the idea of running monetary policy to avoid flipping the curve."
U.S. Bubble Watch:
July 26 - New York Times (Jim Tankersley): "The amount of corporate taxes collected by the federal government has plunged to historically low levels in the first six months of the year, pushing up the federal budget deficit much faster than economists had predicted. The reason is President Trump's tax cuts. The law introduced a standard corporate rate of 21%, down from a high of 35%, and allowed companies to immediately deduct many new investments…The Office of Management and Budget said this month that it had revised its forecasts from earlier this year to account for nearly $1 trillion of additional debt over the next decade - on average, almost $100 billion more a year in deficits."
July 26 - Financial Times (John Authers): "When Richard Fuld, the chief executive of Lehman Brothers, received the news in 2008 that no one would ride to the rescue of his failing bank, he is reported to have said: 'So I'm the schmuck?' Almost a decade later, Lehman is still the only US investment bank that was allowed to fail. Its peers have been restored to health with risks removed. Mr Fuld appears to be the ultimate 'schmuck' of the financial crisis. But that judgment may be premature… While risk no longer sits in the banking system, it has not vanished. It grows ever clearer that risk has been moved, primarily to the pension system. This means that the long-term dangers in the financial system have become more insidious: easier to ignore but ultimately even more dangerous."
July 24 - Bloomberg (Shobhana Chandra): "Sales of previously owned U.S. homes unexpectedly fell in June, indicating a shortage of affordable listings and rising prices continue to limit demand… Contract closings fell 0.6% m/m to a 5.38m annual rate (est. 5.44m), a third straight decline, after a revised 5.41m (prev. 5.43m). Median sales price increased 5.2% y/y to a record $276,900. Inventory of available properties rose 0.5% y/y to 1.95m for first increase since mid-2015."
July 24 - Wall Street Journal (Esther Fung): "Chinese real-estate investors, facing pressure from Beijing, are reversing a yearslong buying spree in the U.S. where they often paid record prices for marquee properties like New York's Waldorf Astoria hotel. Chinese insurers, conglomerates, and other investors have turned net sellers of U.S. commercial real estate for the first time in a decade. They have spent tens of billions of dollars to acquire hotels, office buildings, and vast swaths of empty land to build residential towers. But Chinese investors sold $1.29 billion worth of U.S. commercial real estate in the second quarter, while purchasing only $126.2 million of property, according to… Real Capital Analytics. This marked the first time that these investors were net sellers for a quarter since 2008."
July 24 - CNBC (Diana Olick): "Southern California home sales hit the brakes in June, falling to the lowest reading for the month in four years. Sales of both new and existing houses and condominiums dropped 11.8% year over year, as prices shot up to a record high, according to CoreLogic. The report covers Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties. Sales fell 1.1% compared with May… The weakness was especially apparent in sales of newly built homes, which were 47% below the June average. Part of that is that builders are putting up fewer homes, so there is simply less to sell."
July 22 - Reuters (Jonathan Spicer): "By almost every measure, the U.S. economy is booming. But a look behind the headlines of roaring job growth and consumer spending reveals how the boom continues in large part by the poorer half of Americans fleecing their savings and piling up debt. A Reuters analysis of U.S. household data shows that the bottom 60% of income-earners have accounted for most of the rise in spending over the past two years even as the their finances worsened - a break with a decades-old trend where the top 40% had primarily fueled consumption growth."
July 22 - Wall Street Journal (Jacob Bunge): "Meat is piling up in U.S. cold-storage warehouses, fueled by a surge in supplies and trade disputes that are eroding demand. Federal data… are expected to show a record level of beef, pork, poultry and turkey being stockpiled in U.S. facilities, rising above 2.5 billion pounds… U.S. consumers' appetite for meat is growing, but not fast enough to keep up with record production of hogs and chickens. That leaves the U.S. meat industry increasingly reliant on exports, but Mexico and China-among the largest foreign buyers of U.S. meat-have both set tariffs on U.S. pork products…"
China Watch:
July 24 - Financial Times (Gabriel Wildau): "China has announced a mix of tax cuts and infrastructure spending citing 'uncertainty', as it ramps up efforts to stimulate demand and counteract a weakening economy. The move… came the same day as an injection of $74bn into the banking system by the People's Bank of China through its Medium-term Lending Facility - the central bank's largest ever, single-day cash injection using that tool. The fiscal measures provide growing evidence that policymakers are concerned about how the trade war with the US will exacerbate a domestic slowdown… The PBoC has already cut the required reserve ratio (RRR) for some banks three times this year in a bid to boost the money supply. Unveiling the measures, the State Council cited external 'uncertainty'…"
July 26 - Bloomberg (Siddharth Verma and Luke Kawa): "The Beijing 'put' is back. China's bid to boost policy stimulus to barricade its domestic economy from the brewing trade war is breathing life into risk assets battered by liquidity and geopolitical angst. Among the winners: Asian junk bonds, the besieged industrial-metals complex and emerging-market stocks. The MSCI Emerging Market Index is heading toward its first monthly gain since the melt-up euphoria of January… 'The largest surprise is that the meeting did not mention deleveraging and financial risk control, a centerpiece in China's economy policy since late 2017,' Credit Suisse Group AG strategists led by Vincent Chan wrote… 'They will be favorable to sectors sensitive to investment demand, like industrials and materials.'"
July 22 - Financial Times (Gabriel Wildau and Yizhen Jia): "A wave of defaults is sweeping across China's Rmb1.3tn ($190bn) peer-to-peer lending industry, causing investors to withdraw funds and platforms to collapse, the latest casualties of Beijing's broader crackdown on debt and financial risk. About 150 online lending platforms have suffered 'problems' since the beginning of June this year, compared with 217 such cases in all of 2017, according to Online Lending House, a research group… The group defines 'problems' as investors being unable to withdraw money, police investigating a platform, or owners running away. In the wealthy city of Hangzhou, local officials converted two sporting stadiums into makeshift welcome centres where various district-level petition bureaus - the traditional channel for Chinese citizens to file miscellaneous grievances - could receive complaints from P2P investors."
July 22 - Bloomberg: "China's regulators took a softer stance than expected as they tightened rules around the $15 trillion asset management industry, underscoring the balancing act between deleveraging the financial system and slowing an economy already facing challenges. The People's Bank of China released guidelines… aimed at asset management products, soon after the banking and securities regulators published their own rules on specific wealth products. The regulations, aimed at shrinking China's sprawling shadow-banking system, were less severe than industry participants and observers had feared, a recognition by policy makers of economic strains that have emerged in recent months."
July 26 - Bloomberg: "China said the changes U.S. airlines have agreed to make on how they refer to Taiwan is incomplete with the carriers seeking two more weeks to fully implement the requirement. American Airlines Group Inc., Delta Air Lines Inc., United Continental Holdings Inc. and Hawaiian Holdings Inc. are the last four foreign airlines out of 44 that didn't fully comply with an order to reflect the island as part of China… The deadline was yesterday. The regulator didn't say what changes the airlines promised were incomplete."
July 26 - Bloomberg (Amogelang Mbatha and Pauline Bax): "BRICS nations must reject protectionism 'outright' and promote trade and investment liberalization, Chinese President Xi Jinping said. 'We must work together at the UN, G20 and World Trade Organization to safeguard a rule-based multilateral trading regime,' Xi said at the BRICS summit… The session was also attended by the leaders of Brazil, Russia, India and South Africa."
July 24 - Bloomberg: "China's record-pacing defaults this year have exposed more than just which borrowers took on too much debt. It's also putting a spotlight on the nation's sluggish credit raters. Any investor relying on domestic Chinese rating firms would have been ill served with Wintime Energy Co., which had not a single rating downgrade before it this month descended into China's biggest default of 2018. It's one of several examples where debt raters have failed to telegraph deteriorating credit quality this year. The problem: until the past few years, China didn't let any company default… Now, without clear guidelines on which firms still have implicit guarantees, ratings companies are operating in a tricky new environment."
EM Watch:
July 24 - Bloomberg (Onur Ant): "Turkey's central bank stunned investors by keeping interest rates unchanged, defying market expectations and heeding President Recep Tayyip Erdogan's demands to refrain from raising borrowing costs. Stocks, bonds and the lira plunged.In its first policy decision since Erdogan won re-election with sweeping new powers, the bank held its one-week repo rate at 17.75%, a full percentage point less than the median estimate… 'This decision essentially confirms the markets' worst fears about the central bank's independence and the future course of economic policies in Turkey,' said Inan Demir, an economist at Nomura International…"
July 24 - Reuters (Iuri Dantas and Christian Plumb): "Brazil's leftist Workers Party would use part of the country's $380 billion in currency reserves to finance an infrastructure development fund if victorious in October presidential elections, a party official said… Marcio Pochmann, an adviser to former President Luiz Inacio Lula da Silva and a coordinator of his planned run for a third term, said roughly 10% of the reserves would be destined for the fund and supplemented by other sources such as loans from state banks Banco do Brasil and Caixa Economica Federal as well as borrowing in the form of debentures."
July 24 - Bloomberg (Andrew Rosati): "Venezuela's inflation will skyrocket to 1 million percent by the end of the year as the government continues to print money to cover a growing budget hole, the International Monetary Fund predicted… The crisis is comparable to that of Germany in 1923 or Zimbabwe in the late 2000s, said Alejandro Werner, head of the IMF's Western Hemisphere department… 'The collapse in economic activity, hyperinflation, and increasing deterioration in the provision of public goods as well as shortages of food at subsidized prices have resulted in large migration flows, which will lead to intensifying spillover effects on neighboring countries,' Werner wrote…"
July 25 - Reuters (Brian Ellsworth): "Venezuela will remove five zeroes from the bolivar currency rather than the three zeroes originally planned, President Nicolas Maduro said…, in an effort to keep up with inflation projected to reach 1 million percent this year. The OPEC nation's economy has been steadily collapsing since the 2014 crash of oil prices left it unable to maintain its socialist economic system…"
Central Bank Watch:
July 22 - Nikkei Asian Review (Moyura Baba): "The Bank of Japan is in a bind created by its prolonged ultra-easy monetary policy and will try to find a solution to the problem during a policy board meeting at the end of July. Prices in Japan have yet to reach the 2% inflation rate targeted by the central bank's easing of credit. While the adverse effects of the policy on financial institutions cannot be ignored, the yen could appreciate if the BOJ adjusts interest rates… Many are worried about the seemingly endless monetary easing. Financial markets pay keen attention these days when BOJ policymakers use the word 'cumulative.' Yukitoshi Funo, a member of the BOJ's policy board, mentioned it at a news conference in June to describe the ramifications of the policy on the earnings of financial institutions. Another member, Takako Masai, also used the word when she referred to the government bond market at a July news conference."
July 25 - Reuters (Leika Kihara): "The Bank of Japan will next week consider changes to its massive stimulus program to make it more sustainable, such as allowing greater swings in interest rates and widening its stock-buying selection, people familiar with its thinking said. The changes, although small, would be the first since 2016 and the latest sign Governor Haruhiko Kuroda is gradually walking away from his radical stimulus program deployed five years ago to shock the public out of a sticky deflationary mindset."
Global Bubble Watch:
July 22 - Reuters (David Lawder and Daniel Flynn): "Global finance leaders called on Sunday for stepped-up dialogue to prevent trade and geopolitical tensions from hurting growth, but ended a two-day G20 meeting with little consensus on how to resolve multiple disputes over U.S. tariff actions. The finance ministers and central bank governors from the world's 20 largest economies warned that growth, while still strong, was becoming less synchronized and downside risks over the short- and medium-term had increased."
July 23 - Financial Times (Roger Blitz): "China's weakening renminbi represents a new risk for a number of Asian currencies that had managed to escape much of the recent rout in emerging markets until now. The Korean won, the Taiwanese dollar and the Singapore dollar are among the vulnerable parts of EM in recent weeks, representing a new chapter in this year's currency weakness versus the US dollar. The dollar's strength has been the main driver of the 2018 EM weakness with the likes of Argentina, Turkey and South Africa particularly vulnerable given their current account deficits. In contrast, those EM countries with surpluses were sheltered."
July 26 - Bloomberg (Alex Barinka): "Don't expect a technology M&A resurgence until Donald Trump's escalating trade war with China cools off. Qualcomm Inc.'s $44 billion takeover of NXP Semiconductors NV -- a two-year-old deal that got trapped in the escalating tariff spat -- is dead. The transaction had been anointed by regulators globally, except in China. The Chinese agencies responsible for vetting mergers had even signed off on it… but final authorization was never given by the government. Technology companies, especially semiconductor makers and other hardware businesses, had been waiting for the Qualcomm-NXP deal to close before deciding whether to embark on their own acquisitions, according to industry advisers."
July 22 - New York Times (Emily Flitter): "In the maze of subsidiaries that make up Goldman Sachs Group, two in London have nearly identical names: Goldman Sachs International and Goldman Sachs International Bank. Both trade financial instruments known as derivatives with hedge funds, insurers, governments and other clients. United States regulators, however, get detailed information only about the derivatives traded by Goldman Sachs International. Thanks to a loophole in laws enacted in response to the financial crisis, trades by Goldman Sachs International Bank don't have to be reported. A decade after a financial crisis fueled in part by a tangled web of derivatives, regulators still have an incomplete picture of who holds what in this $600 trillion market. 'It's a global market, so you really have to have a global set of data,' said Werner Bijkerk, the former head of research at the International Organization of Securities Commissions, an umbrella group for regulators around the world overseeing derivatives markets. 'You can start running 'stress tests' and see where the weaknesses are. With this kind of patchwork, you will never be able to see that.'"
July 21 - Reuters (Scott Squires): "Japanese Finance Minister Taro Aso said on Saturday he expressed concerns at the G20 finance leaders' meeting that monetary policy normalization at advanced economies could accelerate capital outflows from China and emerging market economies."
July 22 - Financial Times (Jennifer Thompson): "Global assets under management are on track to hit the $80tn mark this year, with China and Latin America the fastest-growing regions for investment managers. Assets were $48.2tn on the eve of the financial crisis having grown at a compound annual rate of 12% in the preceding years, according to Boston Consulting Group. The rate fell to 4% between 2007 and 2016 but is now back at the pre-crisis pace. The main drivers are record net inflows to asset managers amid a bull market for both bonds and equities... The market growing at the fastest rate is China, with assets increasing 22% between 2016 and 2017 to $4.2tn."
Europe Watch:
July 22 - Bloomberg (Kevin Costelloe): "Italy's coalition government is heading for an internal struggle over spending, with outspoken Deputy Premier Matteo Salvini ready to flout European Union budget rules while the finance minister urges caution. 'Italians voted for us to be better off, to go into retirement at the right age, to pay lower taxes compared with today's craziness,' Salvini told reporters… He said he'd prefer to keep within EU deficit restrictions, but 'if we have to go above those limits for the good of the Italians, that won't be a problem for us.'"
July 24 - Financial Times (Kate Allen): "Foreign investors shed record volumes of Italian debt in May as a sharp sell-off hit the country's bond market… Italy's governing coalition is set to bring forward a contentious budget this autumn, which some investors fear could threaten the country's fiscal outlook. Earlier this month the new government said it would not take any further measures to cut its deficit this year and warned of a possible downgrade to growth forecasts. The country's bond yields have settled back from the highs they hit at the peak of the sell-off in late May… Two-year Italian debt is yielding about 0.7%, having been in negative territory until mid-May, while 10-year paper is yielding around 2.7%, up from 1.9% before the sell-off."
Japan Watch:
July 22 - Bloomberg (Masaki Kondo and Chikafumi Hodo): "A dramatic day for Japan's debt market saw yields surge on media reports of possible changes to the nation's ultra-loose monetary policy, spurring the central bank to offer to buy an unlimited amount of bonds. The yield on 10-year government securities soared as much as six basis points to 0.09%, its biggest increase in almost two years, pulling the yen higher and weighing on stocks. While the yield came down after the purchase offer by the Bank of Japan, it then bounced back to just one basis point below the day's high."
Fixed Income Bubble Watch:
July 23 - Wall Street journal (Daniel Kruger and Megumi Fujikawa): "Government bond prices world-wide tumbled Monday, roiled by reports that central banks could be on the verge of taking another step back from the easy-money policies that have characterized the postcrisis period. News reports that the Bank of Japan might consider changing its interest-rate targets helped push the yield on the 10-year Japanese government bond as high as 0.09%... from 0.03% late Friday. While that rate and other government bond yields are still generally low, it was the largest one-day move higher for the Japanese bonds in nearly two years. Many investors worry that the end of ultra-low interest rates and other monetary stimulus will remove a critical support that's lifted markets since the financial crisis."
July 22 - Wall Street Journal (Riva Gold and Christopher Whittall): "Many bonds around the globe are becoming harder to trade, prompting some investors to shift to other markets and raising concerns about a broad decline in liquidity. The median gap between the price at which traders offer to buy and sell, a proxy for the ability to move in and out of markets quickly, has widened this year across European corporate debt and emerging-market government and corporate bonds, according to… MarketAxess. Trading in some derivatives has picked up as traders pull back from bond markets they view as increasingly unruly and expensive."
July 26 - Wall Street Journal (Michael Wursthorn and Daniel Kruger): "Investors are fleeing U.S. stocks at a rapid clip as ongoing market volatility and trade tensions push them to seek safety among less risky assets such as U.S. Treasurys. More than $20 billion was pulled from long-term mutual funds and exchange-traded funds focused on U.S. stocks in June, capping the third-worst first half for equity flows over the past 10 years… The trend doesn't appear to be slowing: Investors redeemed more than $11.6 billion from domestic stock funds in the three weeks ended July 18, according to the Investment Company Institute."
July 24 - CNBC (Jeff Cox): "Investors hunting for yield no longer have to look very far. After a decade in which short-term cash and equivalents earned next to nothing, that part of the market has now begun to pick up and offer legitimate returns for those looking for safety in an uncertain environment. In particular, the three-month Treasury bill's yield crossed 2% recently, the first time that has happened in more than a decade. The move has come as the Federal Reserve has continued to boost short-term rates and as the economy continues to show signs of picking up, inflation takes root and investors look for safety amid stock market volatility."
July 24 - Financial Times (Alexandra Scaggs): "Protections for lenders to junk-rated companies have been the weakest on record this year, according to… Moody's, which could hamper recovery rates if a downturn prompts a string of bankruptcies or defaults. The erosion of strength in leveraged-loan covenants, meant to protect lenders' collateral, has been fuelled by rising demand for floating-rate securities such as loans… The vast majority of leveraged loans - roughly 80%, said Moody's - issued in the first quarter were considered to be 'covenant-lite'. These are loans that do not have maintenance covenants requiring borrowers to uphold certain financial standards, such as maximum levels of indebtedness."
Leveraged Speculator Watch:
July 25 - Financial Times (Robin Wigglesworth and Lindsay Fortado): "Investor inflows to computer-powered 'quantitative' hedge funds have halved this year to the most sluggish pace since 2009, after a spate of poor performance from many of the industry's biggest players. So-called 'quants' use a wide array of approaches, from taking advantage of tiny arbitrage opportunities in stock markets to surfing trends in commodity prices. But they all use powerful computers and complex algorithms to implement automated trading strategies. The success of many big quant funds, coupled with a rising belief that the future of investing will be far more machine-driven, has led to billions gushing into the industry in recent years, and many traditional asset managers to adopt some of its techniques. However, many prominent quants have suffered torrid performance this year… Overall, quant equity hedge funds have dropped 1% this year, and quant 'macro' funds have lost more than 4%, according to HFR."
July 25 - Wall Street Journal (Mengqi Sun): "Wall Street money managers are having problems hanging onto insurance companies as customers. American International Group Inc. and MetLife Inc. pulled more than $700 million from hedge funds in the first quarter of 2018… That followed billions of dollars in withdrawals over the previous two years. Net hedge-fund outflows from all U.S insurers amounted to $8.7 billion in 2016 and 2017, according to… A.M. Best Co. Total insurance-industry assets held by hedge funds were $16.4 billion at the"
Geopolitical Watch:
July 22 - CNBC (Everett Rosenfeld and Kevin Breuninger): "President Donald Trump threatened his Iranian counterpart in a Sunday night Twitter post: To Iranian President Rouhani: 'NEVER, EVER THREATEN THE UNITED STATES AGAIN OR YOU WILL SUFFER CONSEQUENCES THE LIKES OF WHICH FEW THROUGHOUT HISTORY HAVE EVER SUFFERED BEFORE. WE ARE NO LONGER A COUNTRY THAT WILL STAND FOR YOUR DEMENTED WORDS OF VIOLENCE & DEATH. BE CAUTIOUS!' Trump's tweet followed Iranian President Hassan Rouhani cautioning the American leader on Sunday about pursuing hostile policies against Tehran, saying: 'War with Iran is the mother of all wars.' 'You are not in a position to incite the Iranian nation against Iran's security and interests,' the Iranian leader said, in an apparent reference to reports of efforts by Washington to destabilize Iran's Islamic government."
July 25 - Financial Times (Najmeh Bozorgmehr): "A top Iranian commander has warned Donald Trump that the Islamic republic's forces 'are close to you in places you cannot think of' as Tehran ramps up its war of words with the US. The comments by Major General Qassem Soleimani, who commands the Quds, the overseas wing of the elite Revolutionary Guards, imply that Iran is prepared to use its troops and proxies outside the Islamic republic to fight the US. 'Mr Trump, the gambler! I tell you that we are close to you in places you cannot think of. We are a nation of martyrdom . . . We have gone through difficult times,' Gen Soleimani said in a speech… 'Come on! We are waiting for you. We are the men of this field . . . You may start this war but it will be us who decide how to end it.'"
July 24 - Bloomberg (Anthony DiPaola): "The war of words between U.S. President Donald Trump and his counterpart in Iran over oil exports and sanctions is shining a spotlight on the narrow, twisting conduit for about 30% of the world's seaborne-traded crude. The Middle East's biggest oil exporters rely on the Strait of Hormuz, the passage linking the Persian Gulf with global waterways, for the vast majority of their crude shipments -- some 17.5 million barrels a day. Should a regional conflict block that bottleneck, three of the largest Gulf Arab crude producers have pipeline networks that would potentially enable them to export as much as 4.1 million barrels via alternative outlets… Even so, this amount of oil, if sent by pipeline, would be less than a quarter of the total that typically sails on tankers through Hormuz."
The ongoing "global government finance Bubble" is unique in history. Rarely has market intervention and manipulation been so widely championed. Never have governments and central banks on a concerted basis inflated government debt and central bank Credit. And almost a full decade since the crisis, the massive inflation of "money"-like government obligations runs unabated - across the continents.
The IMF calculated first quarter real global GDP growth at 3.64%, near the strongest expansion since 2011. U.S. Q2 GDP of 4.1% was the strongest since Q3 2014. There have been only eight stronger quarters of U.S. growth over the past 18 years.
Extreme and protracted (fiscal and monetary) policy stimulus has indeed stimulated real economy expansion. Given sufficient scope and duration, stimulus will invariably fuel spending and investment. Unfortunately, the artificial boom is also not without myriad negative consequences. Is the boom sustainable? Have we today reached the point where economic growth is self-supporting? Or, instead, is the global boom vulnerable to the curtailment of aggressive stimulus measures? Has global government stimulus promoted a return to stability? Or has an almost decade of unprecedented measures only exacerbated Latent Fragilities?
It was yet another week that seemed to support the Acute Latent Fragility Thesis.
July 22 - Financial Times (Gabriel Wildau and James Kynge): "China's central bank injected Rmb502bn ($74bn) into its banking system on Monday to help fortify a weakening domestic economy against the impact of an escalating trade war with the US and growing friction with Washington over its falling currency. The injection was the most emphatic move in a series of recent indications that Beijing is moving to ease monetary policy… Raising the risk that the US-China trade war could turn into a currency war, Mr Trump has accused Beijing of manipulating the renminbi, which last Friday reached its lowest point for a year against the US dollar. It has fallen 5% since the start of last month."
Despite GDP growth in the neighborhood of 6.0%, booming household borrowings, an unrelenting apartment Bubble and an ongoing Credit boom, China has once again been compelled to resort to aggressive stimulus in an attempt to hold its tottering Bubble upright. The Chinese economy's vulnerability to a U.S. trade war is generally offered as the impetus behind recently announced measures. Perhaps exposure to the faltering EM Bubble is also a pressing concern in Beijing.
July 22 - Wall Street Journal (Jeremy Page and Saeed Shah): "Pakistan's first metro, the Orange Line, was meant to be an early triumph in China's quest to supplant U.S. influence here and redraw the world's geopolitical map. Financed and built by Chinese state-run companies, the soon-to-be-finished overhead railway through Lahore is among the first projects in China's $62 billion plan for Pakistan. Beijing hoped the $2 billion air-conditioned metro, sweeping past crumbling relics of Mughal and British imperial rule, would help make Pakistan a showcase for its global infrastructure-building spree. Instead, it has become emblematic of the troubles that are throwing China's modern-day Silk Road initiative off course. Three years into China's program here, Pakistan is heading for a debt crisis, caused in part by a surge in Chinese loans and imports for projects like the Orange Line, which Pakistani officials say will require public subsidies to operate."
A few decades back it was Japanese Bubble Finance spreading its tentacles across the world. This week saw Japanese 10-year yields almost reach 11 bps, near the high going back to January 2016. It took two Bank of Japan (BOJ) interventions - offers to buy unlimited JGBs - to push yields back below 10 bps by Friday. There is considerable market focus on next week's BOJ policy meeting, along with heightened concerns in Japan for the sustainability of the BOJ's policy course. Holding "market" yields indefinitely at zero promotes distortions and imbalances. Various reports have the BOJ contemplating adjusting this policy. The bank may also adjust an ETF purchase program viewed as distorting the Japanese equities market.
Sharing a similar experience to central bankers around the globe, the BOJ has seen the impact of its inflationary policies much more in booming securities markets rather than in (stagnant) aggregate price levels in the real economy. Despite a massive expansion of central bank Credit, Japanese core consumer price inflation is expected this year to be about half the bank's 2.0% policy target. Increasingly, the 1% difference in CPI must seem secondary to risks mounting in the financial markets.
July 26 - Bloomberg (Masaki Kondo and Chikafumi Hodo): "For all the speculation over possible Bank of Japan policy tweaks next week, the most important change for global bond markets may already be underway. While market watchers disagree about whether the BOJ will adjust its target of keeping 10-year yields around zero percent, its steady reduction in purchases of longer-maturity debt and more expensive overseas hedging costs mean Japanese funds are already contemplating bringing more money back home. The BOJ's steps to buy fewer bonds has seen the annual increase in its debt holdings slow to 44.1 trillion yen ($398bn) versus its guidance of 80 trillion yen. Last quarter the reductions were entirely focused on so-called super-long bonds, which are the most attractive to insurers. What happens next in the world's second-largest bond market has the potential to cascade globally given Japanese investors hold $2.4 trillion of overseas debt."
It's a big number: $2.4 TN. BOJ policy has nurtured great Latent Fragilities. For one, policy measures have incentivized Japanese institutions and investors to comb the world for positive yields (Bubble fuel). Moreover, there is surely a large yen "carry trade" component, as financial speculators essentially borrow free in yen to leverage in higher-yield global instruments. The dollar/yen bottomed in late March, not coincidently about the same time U.S. and global (developed) equities put in trading bottoms. After trading as low as 104.74, a weaker yen saw the dollar/yen rally to trade last week at 112.88. Having reversed course, the dollar/yen closed Friday at 111.05.
I would argue that the ECB has also nurtured great Latent Fragilities. The ECB Thursday confirmed that policy rates would remain near zero at least through the summer of 2019. "What are they afraid of?" German two-year yields ended the week at negative 0.61%, the French two-year at negative 0.44%, and Spanish yields at negative 0.33%. Even Portugal enjoys negative borrowing costs out to two-year maturities (-0.23%). The German government is paid to borrow out to five years (-0.17%). To be sure, European debt instruments have inflated into one of history's most distorted Bubble markets. I'll assume Mario Draghi is not oblivious.
Italian 10-year yields jumped 15 bps this week to a four-week high 2.74%. Draghi was again questioned about Target2 balances during the ECB's post-meeting press conference. It's a critical issue that garners surprisingly little attention, perhaps because it is deftly deflected by the head of the ECB. Besides, it was a 2012 worry that proved short-lived.
Journalist: "How do you rate the risk in this [Target2] system, especially for the Bundesbank and compared to the Italy National Bank, for example?"
ECB President Mario Draghi: "First of all, let me make a general point. Target2 is a payment system, as such it doesn't generate instability. It's the way a monetary union settles its payments, and it's devised to make sure the money flows unencumbered across countries, individual sectors, companies - all economic agents. So that's the first thing we should always keep in mind.
The second thing is how to interpret recent numbers which show an increased number of Target liabilities in certain countries. Well, this is again a question that was asked several times in the past. Most of the movement in Target2 liabilities depends on our own asset purchase program - and depends on how and where - especially where - the balances of the purchases of bonds are settled. About 50% of the institutions… that sell bonds to the national central banks are not in the euro area and settle their account with one or two core countries where the financial centers reside. So, in this sense, you see that the accounting settlement of the balances do depend on where the settlement is made. It has nothing to do with capital flows from one country or another. Keep in mind that 80% of the institutions - banks namely - that sell bonds to the national central banks do not reside in the country where the purchaser's national central bank resides. A lot of inter-country payments and flows do not say anything very specific about the overall situation.
But going back to the recent movements in the liabilities in certain countries, you see that first of all they are not unprecedented - this is not the first time. We've seen movements as large and even larger in the past. Second…, they are of second order with respect to the massive movements produced by our own purchase program. So, the bottom line is the system works very well. The people who want to cap it, collateralize, limit - I mean, the truth is that they don't like the euro. They don't like the monetary union. Because the only way a monetary union can work is if they have an efficient payment system - which is what Target2 is. And I think it is just too early to understand exactly what part of the liabilities do reflect political uncertainty."
Italy's Target2 liabilities rose $16.3 billion during June to a record $481 billion, with a two-month gain of almost $55 billion. It's worth noting that Italy's liabilities surged from about zero in mid-2011 to $289 billion at the height of the European crisis back in August 2012. The ECB's "whatever it takes" stabilization program saw these liabilities shrink to $130 billion by July 2014. They've been basically heading south ever since.
Clearly, there is a lack of confidence in Italy's future status in the monetary union. And, at this point, it is not clear what might reverse the steady outflows from Italian financial institutions and assets. I don't completely disagree with Mr. Draghi's assertion that ECB policy is having a significant influence on Target2 balances. When Eurozone central banks buy Italian debt securities in the marketplace, the sellers are choosing to hold (or dispose of) these balances in other countries - thus creating a Bank of Italy liability to eurozone central banks (largely the Bundesbank). Why is this not a major festering problem? Germany's Target2 assets rose $20 billion in June to a record $976 billion - having now more than doubled since December 2014.
That Germany will soon have accumulated an astounding $1.0 TN of Target2 assets implies acute Latent Fragility in the euro region. This was never supposed to happen. These balances reflect mounting imbalances plugged by free-flowing central bank "money." ECB sovereign debt purchases have so compressed interest-rate differentials that there is today insufficient incentive to hold Italian and other "periphery" debt. But a market adjustment toward more realistic Credit spreads risks bursting Bubbles and blowing up debt markets. The entire European monetary integration experiment hangs in the balance.
So, the ECB is forced to stick with negative interest rates and "money" printing operations, as countries such as Italy accumulate liabilities that they will never service - leaving the German people to fret receivables that will never settle. Draghi's assertion that the payment system "works very well" is at best misleading. With imbalances growing bigger by the month, the semblance of a well-functioning payment system depends on monetary policy remaining extraordinarily loose. Stated differently, Acute Financial Fragilities are held at bay only so long as "money" remains free and created in abundance.
I believe we've reached the stage where a meaningful tightening of finance in Europe risks both acute bond market instability and even the entire euro experiment. For those believing this is hyperbole, allow me to phrase this differently: Italy and other "periphery" nations are one financial crisis away from demanding an alternative monetary regime.
A reasonable question: Why then is the euro not under more pressure? Well, Japan is only a meaningful tightening of financial conditions away from major bond market and financial system issues. The yen is a big wildcard. China is only a meaningful tightening away from major financial and economic issues. The renminbi is a big wildcard. The emerging markets are already suffering the effects of a tightening of financial conditions. Many EM currencies are in trouble.
Why is the euro not weaker against king dollar? Because the dollar is fundamentally an unsound currency - in a world of competing unsound currencies.
July 24 - Wall Street Journal (Josh Zumbrun): "The U.S. remained by far the largest driver of global current-account imbalances in 2017, running the world's largest deficit and adopting policies-mainly a shift toward much larger fiscal deficits-that are likely to increase its imbalances in coming years. The U.S. ran a $466 billion current-account deficit, meaning the nation imported far more than it exported. The U.S. has become an increasingly large driver of global deficits, accounting for 43% of all global deficits last year, up from 39% in 2016, according to the International Monetary Fund's annual assessment of the state of global imbalances. Washington's shift toward major deficit spending will move the U.S. trade deficit 'further from the level justified by medium term fundamentals and desirable policies,' the IMF said."
I would argue that the U.S., as well, is only a meaningful tightening of financial conditions away from serious issues. Inflated U.S. securities markets have been on the receiving end of huge international flows, much a direct consequence of QE (i.e. ECB and BOJ) and rampant Credit growth (China and EM). It would appear that U.S. residential and commercial real estate markets are already feeling the effects of waning international flows.
In the eyes of complacent markets, vulnerabilities - China, Japan, EM, Eurozone, UK, etc. - ensure the coterie of global central bankers remain trapped in aggressive stimulus. Yet there appears increasing recognition within the central bank community that further delays in the start of "normalization" come with mounting risks. That they have all in concert for far too long delayed getting the process started ensures great Latent Fragilities.
The Dow jumped 1.6% this week, the Banks 2.4% and the Transports 2.0%. The S&P500 added 0.6%, its fourth straight weekly gain. But the week saw (Crowded Long) declines of 16.7% in Facebook, 21.4% in Twitter, 9.5% in Electronic Arts and 8.2% for Intel. The broader market underperformed. Interestingly, the Goldman Sachs Most Short index dropped 3.1%. Rather abruptly, there are indications of nervousness and vulnerability below the market's surface.
The historic mistake was to believe that aggressive monetary policy would reduce systemic Fragilities. Stimulation of economies and animal spirits, no doubt, but at the cost of mounting latent instability. It's the six-year anniversary of "whatever it takes;" approaching the 10-year anniversary of the financial crisis; and going on ten years since China's massive stimulus. This week provided further evidence of trapped central banks.
EM rallied again this week, reducing the safe haven Treasury bid. Two-year Treasury yields jumped eight bps this week to 2.67%. The ten-year is again knocking on the door of 3.0% yields. I have little doubt that a surprising spike in Treasury yields would expose Latent Fragilities. The same question applies to Treasuries as it does to fixed-income markets around the globe: How much speculative leverage has accumulated over the past decade? Keep in mind it's the speculation and leverage that typically dooms a Bubble. Indeed, the interaction of leverage and depreciating asset values becomes a critical factor in why Bubbles are unsustainable.
First it was the February blow-up of the "short vol" trade. Then instability engulfed the emerging currencies, debt and equities markets, followed by a destabilizing spike in Italian yields. The Chinese renminbi sinks a quick 5%. This week saw further weakness in the Chinese currency, along with hints of instability in Japanese and Italian bonds. Importantly, Beijing stimulus measures come with atypical currency vulnerability.
All in all, the Latent Fragility case is coming together. Financial conditions are tightening, and myriad Bubbles are showing the strain. And while the VIX traded below 12 this week (closing Friday at 13.03), my hunch would be that liquidity in the volatility markets has quietly receded. The next VIX spike could get interesting.
For the Week:
The S&P500 added 0.6% (up 5.4% y-t-d), and the Dow rose 1.6% (up 3.0%). The Utilities increased 0.6% (down 0.3%). The Banks jumped 2.4% (up 2.6%), while the Broker/Dealers slipped 0.5% (up 4.9%). The Transports rose 2.0% (up 3.2%). The S&P 400 Midcaps fell 1.2% (up 3.9%), and the small cap Russell 2000 dropped 2.0% (up 8.3%). The Nasdaq100 declined 0.7% (up 14.1%). The Semiconductors gained 1.0% (up 9.5%). The Biotechs lost 1.5% (up 19.3%). With bullion down $9, the HUI gold index sank 3.7% (down 13.9%).
Three-month Treasury bill rates ended the week at 1.94%. Two-year government yields jumped eight bps to 2.67% (up 79bps y-t-d). Five-year T-note yields rose eight bps to 2.84% (up 63bps). Ten-year Treasury yields gained six bps to 2.96% (up 55bps). Long bond yields rose six bps to 3.08% (up 34bps). Benchmark Fannie Mae MBS yields gained seven bps to 3.68% (up 68bps).
Greek 10-year yields slipped four bps to 3.81% (down 26bps y-t-d). Ten-year Portuguese yields fell six bps to 1.73% (down 22bps). Italian 10-year yields jumped 15 bps to 2.74% (up 73bps). Spain's 10-year yields rose six bps to 1.38% (down 19bps). German bund yields added three bps to 0.40% (down 2bps). French yields increased two bps to 0.70% (down 8bps). The French to German 10-year bond spread narrowed one to 30 bps. U.K. 10-year gilt yields rose five bps to 1.28% (up 9bps). U.K.'s FTSE equities index added 0.3% (up 0.3%).
Japan's Nikkei 225 equities index was little changed (down 0.2% y-t-d). Japanese 10-year "JGB" yields jumped seven bps to 0.10% (up 6bps). France's CAC40 rallied 2.1% (up 3.7%). The German DAX equities index jumped 2.4% (down 0.4%). Spain's IBEX 35 equities index rose 1.5% (down 1.8%). Italy's FTSE MIB index increased 0.7% (up 0.5%). EM equities were mixed. Brazil's Bovespa index gained 1.6% (up 4.5%), and Mexico's Bolsa advanced 1.5% (up 0.6%). South Korea's Kospi index added 0.3% (down 7.0%). India’s Sensex equities index rose 2.3% (up 9.3%). China’s Shanghai Exchange rallied 1.6% (down 13.1%). Turkey's Borsa Istanbul National 100 index gained 1.6% (down 17.1%). Russia's MICEX equities index rose 2.0% (up 8.7%).
Investment-grade bond funds saw inflows of $1.986 billion, while junk bond funds had outflows of $548 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates gained two bps to 4.54% (up 62bps y-o-y). Fifteen-year rates added two bps to 4.02% (up 82bps). Five-year hybrid ARM rates were unchanged at 3.87% (up 69bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up four bps to 4.58% (up 47bps).
Federal Reserve Credit last week declined $7.0bn to $4.249 TN. Over the past year, Fed Credit contracted $186bn, or 4.2%. Fed Credit inflated $1.438 TN, or 51%, over the past 299 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $4.1bn last week to $3.412 TN. "Custody holdings" were up $86.5bn y-o-y, or 2.6%.
M2 (narrow) "money" supply jumped $20.0bn last week to a record $14.148 TN. "Narrow money" gained $521bn, or 3.8%, over the past year. For the week, Currency increased $3.7bn. Total Checkable Deposits slipped $1.5bn, while Savings Deposits rose $10.7bn. Small Time Deposits increased $2.3bn. Retail Money Funds gained $4.9bn.
Total money market fund assets slipped $3.0bn to $2.843 TN. Money Funds gained $203bn y-o-y, or 7.7%.
Total Commercial Paper rose $5.9bn to $1.068 TN. CP gained $91bn y-o-y, or 9.3%.
Currency Watch:
The U.S. dollar index added 0.2% to 94.669 (up 2.8% y-t-d). For the week on the upside, the Mexican peso increased 2.1%, the South African rand 1.8%, the Brazilian real 1.5%, the South Korean won 1.4%, the Canadian dollar 0.7%, the Japanese yen 0.3%, the Swedish krona 0.1% and the Singapore dollar 0.1%. For the week on the downside, the euro declined 0.6%, the New Zealand dollar 0.3%, the British pound 0.2%, the Swiss franc 0.2%, the Australian dollar 0.2% and the Norwegian krone 0.1%. The Chinese renminbi declined 0.64% versus the dollar this week (down 4.5% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index rallied 1.5% (up 5.0% y-t-d). Spot Gold declined 0.7% to $1,223 (down 6.1%). Silver slipped 0.4% to $15.493 (down 9.6%). Crude recovered 43 cents to $68.69 (up 14%). Gasoline rallied 4.5% (up 20%), and Natural Gas gained 0.9% (down 5.8%). Copper jumped 1.7% (down 15%). Wheat rose 2.8% (up 24%). Corn gained 2.0% (up 7%).
Trump Administration Watch:
July 25 - Wall Street Journal (Valentina Pop, Vivian Salama and Bob Davis): "President Donald Trump and European Commission President Jean-Claude Juncker turned down the heat on a trade dispute between two of the world's largest economic powers, suggesting… they would hold off on further tariffs while they talk through their differences. Speaking in a joint news conference…, the two leaders agreed to begin discussions on eliminating the tariffs and subsidies that hamper trade across the Atlantic, and to resolve the steel and aluminum tariffs the Trump administration had imposed this year as well as the retaliatory tariffs the European Union imposed in response."
July 26 - Financial Times (Edward Luce): "It was Wednesday so Europe went from being a 'foe' of America to a 'great friend'. Next Monday might be different. Perhaps Europe will still be in Donald Trump's good books. The only person who can say for sure is Mr Trump. Even he probably has little idea. But my hunch is that the ceasefire he struck with Jean-Claude Juncker, president of the European Commission, will hold… Europe has won a reprieve. The portents for China have commensurately darkened. They were already dimming before Mr Trump's latest rabbit trick. His squeeze on China is now likely to be backed by the Europeans and the US business community. Both have long advocated combined western pressure on China to put foreign investors on a level playing field. Both share deep concern about China's systemic technology transfer."
July 24 - CNBC (Jeff Cox): "President Donald Trump cranked up the rhetoric on tariffs on Tuesday, saying they are a good bargaining tool in his quest to get better trade agreements. In a morning tweet, the president dug in on his position in the global trade war, declaring 'Tariffs are the greatest!' 'Tariffs are the greatest! Either a country which has treated the United States unfairly on Trade negotiates a fair deal, or it gets hit with Tariffs. It's as simple as that - and everybody's talking! Remember, we are the 'piggy bank' that's being robbed. All will be Great!'"
July 25 - Reuters: "U.S. President Donald Trump accused China… of targeting American farmers in a vicious way and using them as leverage to get concessions from him on trade. 'China is targeting our farmers, who they know I love & respect, as a way of getting me to continue allowing them to take advantage of the U.S. They are being vicious in what will be their failed attempt. We were being nice - until now!' Trump wrote…"
July 26 - CNBC (Berkeley Lovelace Jr.): "Treasury Secretary Steven Mnuchin told CNBC… he's 'closely monitoring' the weakening in the Chinese currency. 'What I've said over the last week [is] we are obviously closely monitoring the Chinese rmb and the weakening in that market," Mnuchin said… He said the administration is looking at other currencies as well. 'The long-term strength of the dollar is important. It's the result of a very strong U.S. economy,' Mnuchin continued. 'But we will closely monitor, as we do in the Treasury, currency manipulation across lots of different markets. And make sure people don't use currency for unfair trade advantages.'"
July 21 - Wall Street Journal (Jeffrey T. Lewis): "U.S. Treasury Secretary Steven Mnuchin said he 'wouldn't minimize' the possibility that the U.S. will impose tariffs on all $500 billion worth of goods that the U.S. imports from China, amplifying a threat President Donald Trump made… earlier in the week… Mr. Mnuchin stressed that the administration's goal is to achieve a 'more balanced' trade relationship with China, by getting the Asian country to open its economy and permitting U.S. exports there to increase."
July 21 - Wall Street Journal (Jamie Tarabay): "The goal of China's influence operations around the world is to replace the United States as the world's leading superpower, the CIA's Michael Collins said Friday. Speaking at the Aspen Security Forum during a session on the rise of China, Collins, the deputy assistant director of the CIA's East Asia Mission Center, said Chinese President Xi Jinping and his regime are waging a 'cold war' against the US. 'By their own terms and what Xi enunciates I would argue by definition what they're waging against us is fundamentally a cold war, a cold war not like we saw during the Cold War, but a cold war by definition. A country that exploits all avenues of power licit and illicit, public and private, economic and military, to undermine the standing of your rival relative to your own standing without resorting to conflict. The Chinese do not want conflict,' Collins said."
Federal Reserve Watch:
July 25 - Bloomberg (Rich Miller): "When Alan Greenspan ruled the Federal Reserve, investors became convinced the central bank could be counted on to prevent a stock market collapse -- the so-called Greenspan put. Now, Chairman Jerome Powell is under pressure to adopt what would amount to a put of his own, except this time it would be tied to the bond market. Some Fed regional bank presidents want the central bank to be cautious in raising interest rates to prevent short-term Treasury yields from rising above long-term ones -- providing a kind of comfort that Greenspan gave equity investors… While sounding sympathetic to their worries, Powell doesn't seem inclined to go along with the idea of running monetary policy to avoid flipping the curve."
U.S. Bubble Watch:
July 26 - New York Times (Jim Tankersley): "The amount of corporate taxes collected by the federal government has plunged to historically low levels in the first six months of the year, pushing up the federal budget deficit much faster than economists had predicted. The reason is President Trump's tax cuts. The law introduced a standard corporate rate of 21%, down from a high of 35%, and allowed companies to immediately deduct many new investments…The Office of Management and Budget said this month that it had revised its forecasts from earlier this year to account for nearly $1 trillion of additional debt over the next decade - on average, almost $100 billion more a year in deficits."
July 26 - Financial Times (John Authers): "When Richard Fuld, the chief executive of Lehman Brothers, received the news in 2008 that no one would ride to the rescue of his failing bank, he is reported to have said: 'So I'm the schmuck?' Almost a decade later, Lehman is still the only US investment bank that was allowed to fail. Its peers have been restored to health with risks removed. Mr Fuld appears to be the ultimate 'schmuck' of the financial crisis. But that judgment may be premature… While risk no longer sits in the banking system, it has not vanished. It grows ever clearer that risk has been moved, primarily to the pension system. This means that the long-term dangers in the financial system have become more insidious: easier to ignore but ultimately even more dangerous."
July 24 - Bloomberg (Shobhana Chandra): "Sales of previously owned U.S. homes unexpectedly fell in June, indicating a shortage of affordable listings and rising prices continue to limit demand… Contract closings fell 0.6% m/m to a 5.38m annual rate (est. 5.44m), a third straight decline, after a revised 5.41m (prev. 5.43m). Median sales price increased 5.2% y/y to a record $276,900. Inventory of available properties rose 0.5% y/y to 1.95m for first increase since mid-2015."
July 24 - Wall Street Journal (Esther Fung): "Chinese real-estate investors, facing pressure from Beijing, are reversing a yearslong buying spree in the U.S. where they often paid record prices for marquee properties like New York's Waldorf Astoria hotel. Chinese insurers, conglomerates, and other investors have turned net sellers of U.S. commercial real estate for the first time in a decade. They have spent tens of billions of dollars to acquire hotels, office buildings, and vast swaths of empty land to build residential towers. But Chinese investors sold $1.29 billion worth of U.S. commercial real estate in the second quarter, while purchasing only $126.2 million of property, according to… Real Capital Analytics. This marked the first time that these investors were net sellers for a quarter since 2008."
July 24 - CNBC (Diana Olick): "Southern California home sales hit the brakes in June, falling to the lowest reading for the month in four years. Sales of both new and existing houses and condominiums dropped 11.8% year over year, as prices shot up to a record high, according to CoreLogic. The report covers Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties. Sales fell 1.1% compared with May… The weakness was especially apparent in sales of newly built homes, which were 47% below the June average. Part of that is that builders are putting up fewer homes, so there is simply less to sell."
July 22 - Reuters (Jonathan Spicer): "By almost every measure, the U.S. economy is booming. But a look behind the headlines of roaring job growth and consumer spending reveals how the boom continues in large part by the poorer half of Americans fleecing their savings and piling up debt. A Reuters analysis of U.S. household data shows that the bottom 60% of income-earners have accounted for most of the rise in spending over the past two years even as the their finances worsened - a break with a decades-old trend where the top 40% had primarily fueled consumption growth."
July 22 - Wall Street Journal (Jacob Bunge): "Meat is piling up in U.S. cold-storage warehouses, fueled by a surge in supplies and trade disputes that are eroding demand. Federal data… are expected to show a record level of beef, pork, poultry and turkey being stockpiled in U.S. facilities, rising above 2.5 billion pounds… U.S. consumers' appetite for meat is growing, but not fast enough to keep up with record production of hogs and chickens. That leaves the U.S. meat industry increasingly reliant on exports, but Mexico and China-among the largest foreign buyers of U.S. meat-have both set tariffs on U.S. pork products…"
China Watch:
July 24 - Financial Times (Gabriel Wildau): "China has announced a mix of tax cuts and infrastructure spending citing 'uncertainty', as it ramps up efforts to stimulate demand and counteract a weakening economy. The move… came the same day as an injection of $74bn into the banking system by the People's Bank of China through its Medium-term Lending Facility - the central bank's largest ever, single-day cash injection using that tool. The fiscal measures provide growing evidence that policymakers are concerned about how the trade war with the US will exacerbate a domestic slowdown… The PBoC has already cut the required reserve ratio (RRR) for some banks three times this year in a bid to boost the money supply. Unveiling the measures, the State Council cited external 'uncertainty'…"
July 26 - Bloomberg (Siddharth Verma and Luke Kawa): "The Beijing 'put' is back. China's bid to boost policy stimulus to barricade its domestic economy from the brewing trade war is breathing life into risk assets battered by liquidity and geopolitical angst. Among the winners: Asian junk bonds, the besieged industrial-metals complex and emerging-market stocks. The MSCI Emerging Market Index is heading toward its first monthly gain since the melt-up euphoria of January… 'The largest surprise is that the meeting did not mention deleveraging and financial risk control, a centerpiece in China's economy policy since late 2017,' Credit Suisse Group AG strategists led by Vincent Chan wrote… 'They will be favorable to sectors sensitive to investment demand, like industrials and materials.'"
July 22 - Financial Times (Gabriel Wildau and Yizhen Jia): "A wave of defaults is sweeping across China's Rmb1.3tn ($190bn) peer-to-peer lending industry, causing investors to withdraw funds and platforms to collapse, the latest casualties of Beijing's broader crackdown on debt and financial risk. About 150 online lending platforms have suffered 'problems' since the beginning of June this year, compared with 217 such cases in all of 2017, according to Online Lending House, a research group… The group defines 'problems' as investors being unable to withdraw money, police investigating a platform, or owners running away. In the wealthy city of Hangzhou, local officials converted two sporting stadiums into makeshift welcome centres where various district-level petition bureaus - the traditional channel for Chinese citizens to file miscellaneous grievances - could receive complaints from P2P investors."
July 22 - Bloomberg: "China's regulators took a softer stance than expected as they tightened rules around the $15 trillion asset management industry, underscoring the balancing act between deleveraging the financial system and slowing an economy already facing challenges. The People's Bank of China released guidelines… aimed at asset management products, soon after the banking and securities regulators published their own rules on specific wealth products. The regulations, aimed at shrinking China's sprawling shadow-banking system, were less severe than industry participants and observers had feared, a recognition by policy makers of economic strains that have emerged in recent months."
July 26 - Bloomberg: "China said the changes U.S. airlines have agreed to make on how they refer to Taiwan is incomplete with the carriers seeking two more weeks to fully implement the requirement. American Airlines Group Inc., Delta Air Lines Inc., United Continental Holdings Inc. and Hawaiian Holdings Inc. are the last four foreign airlines out of 44 that didn't fully comply with an order to reflect the island as part of China… The deadline was yesterday. The regulator didn't say what changes the airlines promised were incomplete."
July 26 - Bloomberg (Amogelang Mbatha and Pauline Bax): "BRICS nations must reject protectionism 'outright' and promote trade and investment liberalization, Chinese President Xi Jinping said. 'We must work together at the UN, G20 and World Trade Organization to safeguard a rule-based multilateral trading regime,' Xi said at the BRICS summit… The session was also attended by the leaders of Brazil, Russia, India and South Africa."
July 24 - Bloomberg: "China's record-pacing defaults this year have exposed more than just which borrowers took on too much debt. It's also putting a spotlight on the nation's sluggish credit raters. Any investor relying on domestic Chinese rating firms would have been ill served with Wintime Energy Co., which had not a single rating downgrade before it this month descended into China's biggest default of 2018. It's one of several examples where debt raters have failed to telegraph deteriorating credit quality this year. The problem: until the past few years, China didn't let any company default… Now, without clear guidelines on which firms still have implicit guarantees, ratings companies are operating in a tricky new environment."
EM Watch:
July 24 - Bloomberg (Onur Ant): "Turkey's central bank stunned investors by keeping interest rates unchanged, defying market expectations and heeding President Recep Tayyip Erdogan's demands to refrain from raising borrowing costs. Stocks, bonds and the lira plunged.In its first policy decision since Erdogan won re-election with sweeping new powers, the bank held its one-week repo rate at 17.75%, a full percentage point less than the median estimate… 'This decision essentially confirms the markets' worst fears about the central bank's independence and the future course of economic policies in Turkey,' said Inan Demir, an economist at Nomura International…"
July 24 - Reuters (Iuri Dantas and Christian Plumb): "Brazil's leftist Workers Party would use part of the country's $380 billion in currency reserves to finance an infrastructure development fund if victorious in October presidential elections, a party official said… Marcio Pochmann, an adviser to former President Luiz Inacio Lula da Silva and a coordinator of his planned run for a third term, said roughly 10% of the reserves would be destined for the fund and supplemented by other sources such as loans from state banks Banco do Brasil and Caixa Economica Federal as well as borrowing in the form of debentures."
July 24 - Bloomberg (Andrew Rosati): "Venezuela's inflation will skyrocket to 1 million percent by the end of the year as the government continues to print money to cover a growing budget hole, the International Monetary Fund predicted… The crisis is comparable to that of Germany in 1923 or Zimbabwe in the late 2000s, said Alejandro Werner, head of the IMF's Western Hemisphere department… 'The collapse in economic activity, hyperinflation, and increasing deterioration in the provision of public goods as well as shortages of food at subsidized prices have resulted in large migration flows, which will lead to intensifying spillover effects on neighboring countries,' Werner wrote…"
July 25 - Reuters (Brian Ellsworth): "Venezuela will remove five zeroes from the bolivar currency rather than the three zeroes originally planned, President Nicolas Maduro said…, in an effort to keep up with inflation projected to reach 1 million percent this year. The OPEC nation's economy has been steadily collapsing since the 2014 crash of oil prices left it unable to maintain its socialist economic system…"
Central Bank Watch:
July 22 - Nikkei Asian Review (Moyura Baba): "The Bank of Japan is in a bind created by its prolonged ultra-easy monetary policy and will try to find a solution to the problem during a policy board meeting at the end of July. Prices in Japan have yet to reach the 2% inflation rate targeted by the central bank's easing of credit. While the adverse effects of the policy on financial institutions cannot be ignored, the yen could appreciate if the BOJ adjusts interest rates… Many are worried about the seemingly endless monetary easing. Financial markets pay keen attention these days when BOJ policymakers use the word 'cumulative.' Yukitoshi Funo, a member of the BOJ's policy board, mentioned it at a news conference in June to describe the ramifications of the policy on the earnings of financial institutions. Another member, Takako Masai, also used the word when she referred to the government bond market at a July news conference."
July 25 - Reuters (Leika Kihara): "The Bank of Japan will next week consider changes to its massive stimulus program to make it more sustainable, such as allowing greater swings in interest rates and widening its stock-buying selection, people familiar with its thinking said. The changes, although small, would be the first since 2016 and the latest sign Governor Haruhiko Kuroda is gradually walking away from his radical stimulus program deployed five years ago to shock the public out of a sticky deflationary mindset."
Global Bubble Watch:
July 22 - Reuters (David Lawder and Daniel Flynn): "Global finance leaders called on Sunday for stepped-up dialogue to prevent trade and geopolitical tensions from hurting growth, but ended a two-day G20 meeting with little consensus on how to resolve multiple disputes over U.S. tariff actions. The finance ministers and central bank governors from the world's 20 largest economies warned that growth, while still strong, was becoming less synchronized and downside risks over the short- and medium-term had increased."
July 23 - Financial Times (Roger Blitz): "China's weakening renminbi represents a new risk for a number of Asian currencies that had managed to escape much of the recent rout in emerging markets until now. The Korean won, the Taiwanese dollar and the Singapore dollar are among the vulnerable parts of EM in recent weeks, representing a new chapter in this year's currency weakness versus the US dollar. The dollar's strength has been the main driver of the 2018 EM weakness with the likes of Argentina, Turkey and South Africa particularly vulnerable given their current account deficits. In contrast, those EM countries with surpluses were sheltered."
July 26 - Bloomberg (Alex Barinka): "Don't expect a technology M&A resurgence until Donald Trump's escalating trade war with China cools off. Qualcomm Inc.'s $44 billion takeover of NXP Semiconductors NV -- a two-year-old deal that got trapped in the escalating tariff spat -- is dead. The transaction had been anointed by regulators globally, except in China. The Chinese agencies responsible for vetting mergers had even signed off on it… but final authorization was never given by the government. Technology companies, especially semiconductor makers and other hardware businesses, had been waiting for the Qualcomm-NXP deal to close before deciding whether to embark on their own acquisitions, according to industry advisers."
July 22 - New York Times (Emily Flitter): "In the maze of subsidiaries that make up Goldman Sachs Group, two in London have nearly identical names: Goldman Sachs International and Goldman Sachs International Bank. Both trade financial instruments known as derivatives with hedge funds, insurers, governments and other clients. United States regulators, however, get detailed information only about the derivatives traded by Goldman Sachs International. Thanks to a loophole in laws enacted in response to the financial crisis, trades by Goldman Sachs International Bank don't have to be reported. A decade after a financial crisis fueled in part by a tangled web of derivatives, regulators still have an incomplete picture of who holds what in this $600 trillion market. 'It's a global market, so you really have to have a global set of data,' said Werner Bijkerk, the former head of research at the International Organization of Securities Commissions, an umbrella group for regulators around the world overseeing derivatives markets. 'You can start running 'stress tests' and see where the weaknesses are. With this kind of patchwork, you will never be able to see that.'"
July 21 - Reuters (Scott Squires): "Japanese Finance Minister Taro Aso said on Saturday he expressed concerns at the G20 finance leaders' meeting that monetary policy normalization at advanced economies could accelerate capital outflows from China and emerging market economies."
July 22 - Financial Times (Jennifer Thompson): "Global assets under management are on track to hit the $80tn mark this year, with China and Latin America the fastest-growing regions for investment managers. Assets were $48.2tn on the eve of the financial crisis having grown at a compound annual rate of 12% in the preceding years, according to Boston Consulting Group. The rate fell to 4% between 2007 and 2016 but is now back at the pre-crisis pace. The main drivers are record net inflows to asset managers amid a bull market for both bonds and equities... The market growing at the fastest rate is China, with assets increasing 22% between 2016 and 2017 to $4.2tn."
Europe Watch:
July 22 - Bloomberg (Kevin Costelloe): "Italy's coalition government is heading for an internal struggle over spending, with outspoken Deputy Premier Matteo Salvini ready to flout European Union budget rules while the finance minister urges caution. 'Italians voted for us to be better off, to go into retirement at the right age, to pay lower taxes compared with today's craziness,' Salvini told reporters… He said he'd prefer to keep within EU deficit restrictions, but 'if we have to go above those limits for the good of the Italians, that won't be a problem for us.'"
July 24 - Financial Times (Kate Allen): "Foreign investors shed record volumes of Italian debt in May as a sharp sell-off hit the country's bond market… Italy's governing coalition is set to bring forward a contentious budget this autumn, which some investors fear could threaten the country's fiscal outlook. Earlier this month the new government said it would not take any further measures to cut its deficit this year and warned of a possible downgrade to growth forecasts. The country's bond yields have settled back from the highs they hit at the peak of the sell-off in late May… Two-year Italian debt is yielding about 0.7%, having been in negative territory until mid-May, while 10-year paper is yielding around 2.7%, up from 1.9% before the sell-off."
Japan Watch:
July 22 - Bloomberg (Masaki Kondo and Chikafumi Hodo): "A dramatic day for Japan's debt market saw yields surge on media reports of possible changes to the nation's ultra-loose monetary policy, spurring the central bank to offer to buy an unlimited amount of bonds. The yield on 10-year government securities soared as much as six basis points to 0.09%, its biggest increase in almost two years, pulling the yen higher and weighing on stocks. While the yield came down after the purchase offer by the Bank of Japan, it then bounced back to just one basis point below the day's high."
Fixed Income Bubble Watch:
July 23 - Wall Street journal (Daniel Kruger and Megumi Fujikawa): "Government bond prices world-wide tumbled Monday, roiled by reports that central banks could be on the verge of taking another step back from the easy-money policies that have characterized the postcrisis period. News reports that the Bank of Japan might consider changing its interest-rate targets helped push the yield on the 10-year Japanese government bond as high as 0.09%... from 0.03% late Friday. While that rate and other government bond yields are still generally low, it was the largest one-day move higher for the Japanese bonds in nearly two years. Many investors worry that the end of ultra-low interest rates and other monetary stimulus will remove a critical support that's lifted markets since the financial crisis."
July 22 - Wall Street Journal (Riva Gold and Christopher Whittall): "Many bonds around the globe are becoming harder to trade, prompting some investors to shift to other markets and raising concerns about a broad decline in liquidity. The median gap between the price at which traders offer to buy and sell, a proxy for the ability to move in and out of markets quickly, has widened this year across European corporate debt and emerging-market government and corporate bonds, according to… MarketAxess. Trading in some derivatives has picked up as traders pull back from bond markets they view as increasingly unruly and expensive."
July 26 - Wall Street Journal (Michael Wursthorn and Daniel Kruger): "Investors are fleeing U.S. stocks at a rapid clip as ongoing market volatility and trade tensions push them to seek safety among less risky assets such as U.S. Treasurys. More than $20 billion was pulled from long-term mutual funds and exchange-traded funds focused on U.S. stocks in June, capping the third-worst first half for equity flows over the past 10 years… The trend doesn't appear to be slowing: Investors redeemed more than $11.6 billion from domestic stock funds in the three weeks ended July 18, according to the Investment Company Institute."
July 24 - CNBC (Jeff Cox): "Investors hunting for yield no longer have to look very far. After a decade in which short-term cash and equivalents earned next to nothing, that part of the market has now begun to pick up and offer legitimate returns for those looking for safety in an uncertain environment. In particular, the three-month Treasury bill's yield crossed 2% recently, the first time that has happened in more than a decade. The move has come as the Federal Reserve has continued to boost short-term rates and as the economy continues to show signs of picking up, inflation takes root and investors look for safety amid stock market volatility."
July 24 - Financial Times (Alexandra Scaggs): "Protections for lenders to junk-rated companies have been the weakest on record this year, according to… Moody's, which could hamper recovery rates if a downturn prompts a string of bankruptcies or defaults. The erosion of strength in leveraged-loan covenants, meant to protect lenders' collateral, has been fuelled by rising demand for floating-rate securities such as loans… The vast majority of leveraged loans - roughly 80%, said Moody's - issued in the first quarter were considered to be 'covenant-lite'. These are loans that do not have maintenance covenants requiring borrowers to uphold certain financial standards, such as maximum levels of indebtedness."
Leveraged Speculator Watch:
July 25 - Financial Times (Robin Wigglesworth and Lindsay Fortado): "Investor inflows to computer-powered 'quantitative' hedge funds have halved this year to the most sluggish pace since 2009, after a spate of poor performance from many of the industry's biggest players. So-called 'quants' use a wide array of approaches, from taking advantage of tiny arbitrage opportunities in stock markets to surfing trends in commodity prices. But they all use powerful computers and complex algorithms to implement automated trading strategies. The success of many big quant funds, coupled with a rising belief that the future of investing will be far more machine-driven, has led to billions gushing into the industry in recent years, and many traditional asset managers to adopt some of its techniques. However, many prominent quants have suffered torrid performance this year… Overall, quant equity hedge funds have dropped 1% this year, and quant 'macro' funds have lost more than 4%, according to HFR."
July 25 - Wall Street Journal (Mengqi Sun): "Wall Street money managers are having problems hanging onto insurance companies as customers. American International Group Inc. and MetLife Inc. pulled more than $700 million from hedge funds in the first quarter of 2018… That followed billions of dollars in withdrawals over the previous two years. Net hedge-fund outflows from all U.S insurers amounted to $8.7 billion in 2016 and 2017, according to… A.M. Best Co. Total insurance-industry assets held by hedge funds were $16.4 billion at the"
Geopolitical Watch:
July 22 - CNBC (Everett Rosenfeld and Kevin Breuninger): "President Donald Trump threatened his Iranian counterpart in a Sunday night Twitter post: To Iranian President Rouhani: 'NEVER, EVER THREATEN THE UNITED STATES AGAIN OR YOU WILL SUFFER CONSEQUENCES THE LIKES OF WHICH FEW THROUGHOUT HISTORY HAVE EVER SUFFERED BEFORE. WE ARE NO LONGER A COUNTRY THAT WILL STAND FOR YOUR DEMENTED WORDS OF VIOLENCE & DEATH. BE CAUTIOUS!' Trump's tweet followed Iranian President Hassan Rouhani cautioning the American leader on Sunday about pursuing hostile policies against Tehran, saying: 'War with Iran is the mother of all wars.' 'You are not in a position to incite the Iranian nation against Iran's security and interests,' the Iranian leader said, in an apparent reference to reports of efforts by Washington to destabilize Iran's Islamic government."
July 25 - Financial Times (Najmeh Bozorgmehr): "A top Iranian commander has warned Donald Trump that the Islamic republic's forces 'are close to you in places you cannot think of' as Tehran ramps up its war of words with the US. The comments by Major General Qassem Soleimani, who commands the Quds, the overseas wing of the elite Revolutionary Guards, imply that Iran is prepared to use its troops and proxies outside the Islamic republic to fight the US. 'Mr Trump, the gambler! I tell you that we are close to you in places you cannot think of. We are a nation of martyrdom . . . We have gone through difficult times,' Gen Soleimani said in a speech… 'Come on! We are waiting for you. We are the men of this field . . . You may start this war but it will be us who decide how to end it.'"
July 24 - Bloomberg (Anthony DiPaola): "The war of words between U.S. President Donald Trump and his counterpart in Iran over oil exports and sanctions is shining a spotlight on the narrow, twisting conduit for about 30% of the world's seaborne-traded crude. The Middle East's biggest oil exporters rely on the Strait of Hormuz, the passage linking the Persian Gulf with global waterways, for the vast majority of their crude shipments -- some 17.5 million barrels a day. Should a regional conflict block that bottleneck, three of the largest Gulf Arab crude producers have pipeline networks that would potentially enable them to export as much as 4.1 million barrels via alternative outlets… Even so, this amount of oil, if sent by pipeline, would be less than a quarter of the total that typically sails on tankers through Hormuz."
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