Credit Bubble Bulletin

Sunday, October 6, 2019

Saturday, October 5, 2019

Saturday's News links

[Reuters] As Fed policymakers comb data, few decisive signals on outlook

[Reuters] Spain's Sanchez says he will defend food sector against 'unacceptable' U.S. tariffs

[BBC] North Korea and US nuclear talks break down in less than a day

[Reuters] Hong Kong goes quiet as subway, shops close after night of violence

[Reuters] Erdogan says Turkey to launch military operation in northeast Syria

[WSJ] Boris Johnson’s Irish Border Plan Leaves Companies Fretting

Friday, October 4, 2019

Weekly Commentary: Resurrecting M2

This week’s disappointing ISM reports dominated business headlines: “US Manufacturing Survey Shows Worst Reading in a Decade.” “U.S. Factory Gauge Hits 10-Year Low as World Slowdown Widens.” “U.S. Manufacturers Experience Worst Month Since 2007-2009 Great Recession.” “ISM Services Index Hits Three-Year Low, Missing All Estimates.” “Services Survey Shows Economy is Weaker Than Expected Amid Slowdown Fears.”

A Google news search for recent “money supply” articles yields slim pickings: Apparently, China’s Xinhua news agency is now the go-to source for U.S. money supply insight: “U.S. Fed's M2 Money Stock Rises as Market Bets Another Rate Cut.” Other top results included, “Egypt's M2 Money Supply Rises 11.78% Year-On-Year in August,” and “Serbia's M3 Money Supply Grows 12.3% y/y in August.”

Not that many years ago economists and market analysts followed weekly money supply data with keen interest. Rapid monetary expansion was, after all, indicative of excessive Credit growth and attendant inflationary pressures. Slowing money growth would indicate a tightening of lending conditions or waning demand for Credit. The Federal Reserve and global central bankers duly monitored the monetary aggregates as an indication of the appropriateness of monetary policies. Indeed, money and Credit had been a prime focus since the establishment of central banks. Throughout its history, the Federal Reserve was expected to prudently manage the “money” supply to ensure stable prices.

M2 “money” supply surged $70.2 billion last week, the strongest advance since the week of January 11, 2016. Notable to be sure, but apparently not worthy of a headline or article. Moreover, M2 was up $262 billion in 10-weeks and $575 billion over 22 weeks. The Fed’s weekly H.6 “Money Stock and Debt Measures” report presented a 13-week seasonally-adjusted M2 growth rate of 8.5%.

Let’s focus on the extraordinary $575 billion M2 expansion over the past 22 weeks (that receives zero attention). This was the second strongest (22-week) monetary expansion in U.S. history, trailing only 2011’s “QE2” period (Fed expanded holdings by $600 billion) where M2 expanded as much as $616 billion over 22 weeks. M2 growth peaked at $530 billion (over 22 weeks) in February 2009 during the Federal Reserve’s inaugural QE operation.

Breaking down the recent $575 billion M2 expansion, Currency gained $44 billion and Total Demand Deposits rose $21 billion. Meanwhile, Savings Deposits at Commercial Banks surged $332 billion (Total Savings Deposits up $346bn), with Total Small Time Deposits rising $8 billion. Over this period, Retail Money Fund deposits (included in M2) jumped $103 billion.

The Fed some years back discontinued tabulating a broader “M3” aggregate. It does, however, report Institutional Money Fund deposits, previously a key component of M3. It’s certainly worth highlighting that Institutional Money Funds expanded $256 billion over the past 22 weeks, a 32% annualized growth rate. Combining M2 and Institutional Money Funds, growth in this aggregate reached $831 billion over the past 22 weeks (to $17.666 TN), a blistering 11.9% annualized growth rate.

In last week’s analysis of the Fed’s Q2 Z.1 report, I noted the strong pickup in Bank lending (Q2 6.8% annualized) along with the notable $710 billion nine-month surge in the “repo” market (Federal Funds and Securities Repurchase Agreements). It’s no coincidence that these developments corresponded with rapid growth in both commercial bank savings deposits and institutional money fund assets, along with the collapse in Treasury and corporate bond yields (surge in prices).

September 30 – Financial Times (Joe Rennison): “Companies around the world sold a record amount of bonds last month, taking advantage of low borrowing costs fueled by investors’ frenzied search for yield. September tends to be a busy period for the bond market… That trend was amplified this year by a global rally in government bonds in August which lowered interest costs for a host of companies looking to sell debt. A total of $434bn of corporate bonds were sold globally in September, according to… Dealogic. That sum… was about $5bn higher than the previous high of March 2017. ‘It’s very attractive for issuers coming into the market right now,’ said Monica Erickson, a portfolio manager at… DoubleLine.”

October 1 – Bloomberg (Finbarr Flynn and Hannah Benjamin): “Companies globally sold a record amount of bonds in September as investors hungry for yield poured into debt, betting that major central banks can keep the global economy out of a recession… September’s new U.S. investment-grade debt supply reached $158 billion, making it the third-largest month ever for issuance. It was a month for the record books: an unprecedented 130 issuers tapped debt capital markets after a frenzied start that made the first week the busiest market participants had seen in their careers.”

September 30 – The Bond Buyer (Aaron Weitzman): “Municipal bond volume continues to accelerate, closing out the month of September 39.1% higher and the quarter 17.8% higher than a year earlier, as issuers flocked to market with taxable deals. September volume rose to $35.38 billion of municipal bonds sold in 894 transactions…”

I have posited that a bond market “melt-up” was instrumental in what has been a period of extraordinary Monetary Disorder. A weakening global economic backdrop along with escalating trade war risks and fragile markets spurred a dovish U-turn by the Fed, ECB and global central banks generally. The global yield collapse was largely fueled by a combination of speculative excess and risk market hedging. Such strategies have focused on safe haven sovereign and investment-grade corporate debt as instruments that would see inflating prices in the event of a “risk off” backdrop and resulting central bank rates cuts and QE.

The surge in speculative leverage – exemplified by enormous “repo” market expansion – created a self-reinforcing surge in marketplace liquidity, of which a portion flowed into the “money” supply aggregates (notably through the expansion of commercial bank saving deposits and institutional money fund assets). Moreover, it’s my view that the abrupt September reversal of market yields and the prospect of end-of-quarter liquidity challenges spurred a reversal of some levered holdings that quickly manifested into a liquidity shortage and spike in overnight funding costs.

Federal Reserve Credit jumped $83.9 billion last week to $3.893 TN, the strongest weekly Fed balance sheet expansion since March 2009. This pushed four-week Federal Reserve liquidity operations to $170.5 billion – taking Fed Credit to the highest level since the week of April 17th.

I’ll assume at least some of this expansion will be reversed as quarter-end positioning normalizes in the marketplace (leverage reversed for reporting purposes is reestablished). Yet I view the eruption of acute repo market instability as an urgent signal of mounting financial market instability. The Fed seemingly agrees.

October 4 – Financial Times (Joe Rennison, Colby Smith and Brendan Greeley): “The Federal Reserve Bank of New York will extend its intervention in the repo market into November…, soothing concerns about a re-emergence of the cash crunch that sent short-term interest rates soaring in September. The New York Fed first stepped into the repo market… after the cost of borrowing money overnight quadrupled to 10% last month. It intensified its efforts heading into the end of September to ward off potential strain at the end of the third quarter… The markets arm of the US central bank announced that it would continue to inject $75bn in overnight loans into the repo market every day through to November 4. In addition, it would conduct a series of term-repo operations — loans ranging from six to 15 days — to maintain an additional $140bn in the market until early November. The announcement has helped ease traders’ concerns of a potential shortage of cash re-emerging when close to $140bn in existing two-week term repo loans rolls off next week.”

U.S. equities reversed higher after Friday’s “Goldilocks” jobs report. But the rally gained momentum on the New York Fed’s “repo” extension announcement. Late Friday afternoon, Cleveland Fed President Loretta Mester reiterated a comment made by her colleagues: “The Fed’s decision on reserve supplies isn’t about QE.” The problem is that Fed liquidity operations, and the resulting expansion in Fed Credit, is very much about backstopping the markets. Markets are not bothered by a “QE” or “overnight repo operation” label. Rather, the Fed’s aggressive measures further crystallize the market view the Fed (and global central bankers) has little tolerance for fledgling market instability. For good reason, markets expect central banks to respond with overwhelming force to any issue that risks unleashing latent Crisis Dynamics.

At 3.5%, the U.S. unemployment rate in September hit a 50-year low. Money supply is booming. It was the third-largest month ever for investment-grade debt issuance. The St. Louis Fed’s weekly forecast for Q3 GDP growth is up to 3.12%, which would be the strongest reading since Q3 ’18. With the tailwind of low mortgage rates, housing markets are gaining momentum. New Home Sales are running at the strongest pace since 2007. August Existing Home Sales were reported at the strongest pace since March 2018. Weekly mortgage purchase applications have recently been running about 10% above the year ago level. And at a 17.19 million annualized pace, auto sales held up solidly in September. The consumer is working, earning, borrowing and spending.

This week’s ISMs – manufacturing and non-manufacturing – both significantly missed estimates. Manufacturing is undoubtedly weak, with attention focused on the much larger non-manufacturing sector for indications of a broadening slowdown. At 52.6, the ISM Non-Manufacturing index is still expanding.

The implied yield on January Fed funds futures declined 10.5 bps this week to 1.47%, boosting the two-week drop to 16 bps. This implies market expectations for 36 bps of additional rate cuts by January. Markets are now pricing in a 73% probability of a cut at the Fed’s October 30th meeting (down from Thursday’s 85%). Two-year Treasury yields sank 23 bps this week to 1.41%. European bank stocks were slammed 4.7%. Bank stocks were down 3.0% in the U.S. and 2.7% in Japan.

I would tend to somewhat downplay current U.S. economic weakness. These are clearly abnormal times, but it would be atypical for such loose financial conditions not to support economic activity (for now). Global markets are a different story. Myriad co-dependent Bubbles appear more vulnerable by the week – while monetary stimulus and prospects for additional QE only exacerbate excesses along with fragilities. Trade negotiations remain a major wildcard. Increasingly, impeachment proceedings and rancid Washington pandemonium add a layer of complexity upon a highly complex backdrop. Taking it one week at a time, there’s palpable pressure on the administration to make some headway with the Chinese.

For the Week:

In a volatile week, the S&P500 slipped 0.3% (up 17.8% y-t-d), and the Dow declined 0.9% (up 13.9%). The Utilities added 0.2% (up 23.4%). The Banks dropped 3.0% (up 13.3%), and the Broker/Dealers sank 7.2% (up 4.2%). The Transports lost 3.0% (up 9.4%). The S&P 400 Midcaps fell 1.0% (up 14.5%), and the small cap Russell 2000 slumped 1.3% (up 11.3%). The Nasdaq100 advanced 0.9% (up 22.5%). The Semiconductors jumped 2.0% (up 36.3%). The Biotechs increased 0.4% (down 0.1%). With bullion gaining $8, the HUI gold index added 0.3% (up 31.6%).

Three-month Treasury bill rates ended the week at 1.66%. Two-year government yields sank 23 bps to 1.41% (down 108bps y-t-d). Five-year T-note yields dropped 22 bps to 1.35% (down 116bps). Ten-year Treasury yields fell 15 bps to 1.53% (down 116bps). Long bond yields declined 11 bps to 2.02% (down 100bps). Benchmark Fannie Mae MBS yields dropped 15 bps to 2.47% (down 103bps).

Greek 10-year yields added a basis point to 1.33% (down 306bps y-t-d). Ten-year Portuguese yields declined three bps to 0.14% (down 158bps). Italian 10-year yields increased one basis point to 0.83% (down 191bps). Spain's 10-year yields declined two bps to 0.13% (down 128bps). German bund yields fell another basis point to negative 0.59% (down 83bps). French yields were unchanged at negative 0.28% (down 99bps). The French to German 10-year bond spread widened one to 31 bps. U.K. 10-year gilt yields dropped six bps to 0.44% (down 83bps). U.K.'s FTSE equities index sank 3.6% (up 6.4% y-t-d).

Japan's Nikkei Equities Index fell 2.1% (up 7.0% y-t-d). Japanese 10-year "JGB" yields declined three bps to negative 0.21% (down 21bps y-t-d). France's CAC40 dropped 2.7% (up 16.0%). The German DAX equities index sank 3.0% (up 13.8%). Spain's IBEX 35 equities index slumped 2.4% (up 4.9%). Italy's FTSE MIB index fell 2.5% (up 17.2%). EM equities were mostly lower. Brazil's Bovespa index dropped 2.4% (up 12.7%), while Mexico's Bolsa gained 1.3% (up 4.3%). South Korea's Kospi index declined 1.4% (down 1.0%). India's Sensex equities index sank 3.0% (up 4.4%). China's Shanghai Exchange declined 0.9% (up 16.5%). Turkey's Borsa Istanbul National 100 index lost 1.6% (up 13.4%). Russia's MICEX equities index dropped 2.4% (up 13.6%).

Investment-grade bond funds saw inflows of $733 million, and junk bond funds posted inflows of $198 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates added a basis point to 3.65% (down 106bps y-o-y). Fifteen-year rates declined two bps to 3.14% (down 101bps). Five-year hybrid ARM rates were unchanged at 3.38% (down 63bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down six bps to 3.98% (down 89bps).

Federal Reserve Credit last week surged $83.9bn to $3.892 TN. Over the past year, Fed Credit contracted $253bn, or 6.1%. Fed Credit inflated $1.082 Trillion, or 38%, over the past 360 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $17.1bn last week to $3.441 TN. "Custody holdings" increased $5.3bn y-o-y, or 0.2%.

M2 (narrow) "money" supply surged $70.2bn last week to a record $15.092 TN. "Narrow money" gained $840bn, or 5.9%, over the past year. For the week, Currency increased $2.4bn. Total Checkable Deposits rose $22.3bn, and Savings Deposits jumped $41.5bn. Small Time Deposits dipped $3.4bn. Retail Money Funds gained $7.4bn.

Total money market fund assets jumped $20.2bn to $3.463 TN. Money Funds gained $597bn y-o-y, or 20.8%.

Total Commercial Paper declined $4.7bn to $1.093 TN. CP was down $7.6bn y-o-y, or 0.7%.

Currency Watch:

The U.S. dollar index slipped 0.3% to 98.84 (up 2.8% y-t-d). For the week on the upside, the Brazilian real increased 2.6%, the Japanese yen 0.9%, the Mexican peso 0.9%, the South African rand 0.5%, the New Zealand dollar 0.4%, the euro 0.4%, the British pound 0.3%, the South Korean won 0.3%, the Singapore dollar 0.2% and the Australian dollar 0.1%. On the downside, the Canadian dollar declined 0.5%, the Swiss franc 0.5%, the Swedish krona 0.5% and the Norwegian krone 0.2%. The Chinese renminbi declined 0.36% versus the dollar this week (down 3.77% y-t-d).

Commodities Watch:

September 29 – Reuters (Matt Spetalnick and Timothy Gardner): “Saudi Arabia’s crown prince warned… that oil prices could spike to ‘unimaginably high numbers’ if the world doesn’t come together to deter Iran, but said he preferred a political solution to a military one… ‘If the world does not take a strong and firm action to deter Iran, we will see further escalations that will threaten world interests,” Prince Mohammed, known as MbS, said… ‘Oil supplies will be disrupted and oil prices will jump to unimaginably high numbers that we haven’t seen in our lifetimes.’”

The Bloomberg Commodities Index declined 0.5% this week (up 1.2% y-t-d). Spot Gold rallied 0.5% to $1,505 (up 17.3%). Silver slipped 0.2% to $17.625 (up 13.4%). WTI crude fell $3.10 to $52.81 (up 16%). Gasoline sank 4.7% (up 19%), and Natural Gas dropped 2.2% (down 20%). Copper lost 1.3% (down 3%). Wheat increased 0.7% (down 3%). Corn jumped 3.6% (up 3%).

Market Instability Watch:

October 1 – Reuters (Kate Duguid): “The New York Federal Reserve… awarded $54.85 billion to primary dealers at an operation of overnight repurchase agreements in an effort to maintain the federal funds rate within its target range of 1.75%-2.00%. Tuesday’s amount was smaller than the $63.5 billion in overnight repos the regional central bank awarded on Monday…”

October 2 – Bloomberg (Emily Barrett): “Last month’s surge in overnight funding rates arose from a perfect storm. Other squalls may arise before year-end... Some of the catalysts that whipped markets up last month will be back, according to Thomas Simons, money market economist at Jefferies. Another $381 billion of Treasury auctions are on the calendar for the fourth quarter -- though that’s smaller than the flurry of auctions that fueled repo turmoil in mid-September. Treasury cash balances will continue to rise, and more corporate taxes will be paid. Add to this a couple of long weekends, which can stir volatility. Then there are wild cards: the U.K.’s Oct. 31 deadline to leave the European Union and the risk of other geopolitical strife.”

September 30 – Bloomberg (Masaki Kondo, Kazumi Miura, and Emily Barrett): “Bond traders just had an inkling of what it could be like when central banks and pension funds aren’t there to support them. Japan’s bond futures tumbled by the most since 2016, triggering margin calls for investors, after the country’s worst 10-year debt auction in three years. Japanese government bond yields climbed and the curve steepened, while the sell-off also spilled into Treasuries and European debt even as euro-area data showed inflation remains lackluster. Behind the sudden collapse in JGBs lies the prospect that the Bank of Japan may slash bond purchases in October, and an announcement that the Government Pension Investment Fund is pivoting toward buying more foreign debt.”

September 30 – Bloomberg (Brandon Kochkodin): “Negative interest rates have quite literally broken one of the pillars of modern finance. As economists and central bankers weigh the pros and cons of sub-zero rates and their impact on the world, traders have been contending with a rather more mundane, but fundamental issue: How to price risk on trillions of dollars of financial instruments like interest-rate swaps when their complex mathematical models simply don’t work with negative numbers. Out are certain variations of the Black-Scholes model, the framework that allowed derivatives to flourish in the past four decades. In are a hodgepodge of approximations and workarounds, including one dating to the 19th century.”

Trump Administration Watch:

September 30 – Bloomberg (Shawn Donnan, Jenny Leonard and Saleha Mohsin): “The Trump administration has issued a partial -- and qualified -- denial to the revelation that it is discussing imposing limits on U.S. investments in Chinese companies and financial markets as China vowed to continue opening its markets to foreign investment. Bloomberg… reported that Larry Kudlow… was leading deliberations inside the White House over what some hawks have labeled a potential ‘financial decoupling’ of the world’s two largest economies. The options discussed have included forcing a delisting of Chinese companies from U.S. exchanges, imposing limits on investments in Chinese markets by U.S. government pension funds and putting caps on the value of Chinese companies included in indexes managed by U.S. firms…”

September 30 – Bloomberg (Shawn Donnan): “News that the White House is considering broadening its trade war with China into a financial flow war and discussing controls on capital coursing between the U.S. and China shook financial markets on Friday. So it is worth pointing out the context. What unnerved markets about the internal deliberations… was that they seemed like an extreme departure from the U.S.’s longstanding free-market orthodoxy. U.S. officials have for decades advocated opening financial markets around the world to capital. That the discussion is even taking place, therefore, is eye-popping for many in the world of international finance. Yet the Trump administration’s deliberations are not happening in isolation. Some of the loudest backers of the tariffs… imposed also advocate capital controls aimed at both managing what they see as damaging currency imbalances and limiting China’s access to America’s financial might.”

October 2 – Reuters (Tim Hepher, Philip Blenkinsop and David Lawder): “The United States… said it would slap 10% tariffs on European-made Airbus planes and 25% duties on French wine, Scotch and Irish whiskies, and cheese from across the continent as punishment for illegal EU aircraft subsidies. The announcement came after the World Trade Organization gave Washington a green light to impose tariffs on $7.5 billion worth of EU goods annually in the long-running case, a move that threatens to ignite a tit-for-tat transatlantic trade war.”

October 3 – Associated Press (Lorne Cook and Barry Hatton): “The European Union warned… it will retaliate against the U.S. decision to slap tariffs on a range of the bloc’s exports - from cheese to wine - that could cause job losses in Europe and price increases for Americans. The Trump administration’s decision to put new import taxes on EU goods worth $7.5 billion opened a new chapter in the global trade wars that are heightening fears of a global recession. The latest tariffs target large aircraft but also many typical European products such as olives, whiskey, wine, cheese and yogurt. They will take effect Oct. 18 and amount to a 10% tax on EU aircraft and steep 25% rate on everything else.”

October 1 – Reuters (Susan Heavey and Jason Lange): “U.S. President Donald Trump once again lashed out at the Federal Reserve…, this time in the wake of weak data on the manufacturing sector, saying the central bank has kept interest rates ‘too high’ and that a strong dollar is hurting U.S. factories. ‘As I predicted, Jay Powell and the Federal Reserve have allowed the Dollar to get so strong, especially relative to ALL other currencies, that our manufacturers are being negatively affected. Fed Rate too high. They are their own worst enemies, they don’t have a clue. Pathetic!’ Trump wrote.”

Federal Reserve Watch:

September 30 – Financial Times (Brendan Greeley, Laura Noonan, Joe Rennison, Robert Armstrong and Colby Smith): “The Federal Reserve is looking at whether regulation played a role in the sudden rise in short-term interest rates that rocked markets last month, when the largest US banks, despite being flush with cash reserves, did not lend them out overnight as expected. The central bank has indicated that it is focused on the concentration of reserves among a few banks and said it will consider the question at its next monetary policy meeting on October 29-30. According to policymakers, traders and bank executives, that concentration contributed to the rise in two ways. Larger banks have to meet higher regulatory standards for cash, particularly for same-day liquidity that only reserves can provide. And larger banks have different strategies for their own reserve holdings, which may not include lending them out overnight.”

September 29 – Bloomberg (Rich Miller): “They say it’s better to eat organic. But when it comes to the Federal Reserve’s balance sheet, Wall Street is hungering for a lot more. Financial analysts argue that the Fed needs to buy anywhere from about $200 billion to a half a trillion dollars in Treasury securities to bulk up its balance sheet and reduce the risk of money-market turmoil. Such a massive operation would seemingly be far bigger than the ‘organic’ balance sheet growth that many Fed policy makers are currently talking about. It would also be sure to draw comparisons to the quantitative easing programs that the central bank employed during the financial crisis and which President Donald Trump has spoken of approvingly.”

October 1 – Reuters (Balazs Koranyi and Francesco Canepa): “The Federal Reserve has set monetary policy to where it can deliver on its 2% inflation goal and there is scope to raise rates slightly over the next few years if the economy continues to grow, Chicago Fed President Charles Evans said…”

October 3 – Reuters (Jesus Aguado): “The U.S. Federal Reserve continues to enjoy ‘a reasonable amount of independence’ and is focused on its mandate despite criticism of its policy moves by U.S. President Donald Trump, Chicago Federal Reserve Bank President Charles Evans said… ‘People get to criticize you ... (but) what we need to do is to keep our head down and pay attention to our mandated objective’ of employment and inflation, Evans told a conference in Madrid.”

U.S. Bubble Watch:

October 1 – Wall Street Journal (Amara Omeokwe, Paul Hannon and Austen Hufford): “U.S. factory activity contracted for the second straight month in September and hit a 10-year low, triggering fresh concerns about the economy and a broad stock-market decline. The U.S. manufacturing readings were among several data points released Tuesday pointing towards the global impact of the U.S.-China trade war, as trade flows are set to grow this year at the weakest pace since the financial crisis, with rising tariffs and cooling growth. The Institute for Supply Management reported its manufacturing index fell to 47.8 in September, the lowest level since June 2009, from 49.1 the prior month.”

October 3 – Bloomberg (Reade Pickert): “America’s service industries joined manufacturing in taking a big step back last month, fueling concerns that the global slowdown and trade war are weighing more on the broader economy…. The Institute for Supply Management’s non-manufacturing index dropped 3.8 points to 52.6 in September, the lowest since August 2016 and well below the most pessimistic forecast…Growth in orders and business activity slowed abruptly, while the employment gauge registered its weakest print in more than five years.”

September 30 – Bloomberg (Caleb Mutua and Molly Smith): “The great deleveraging that was supposed to sweep over corporate America is dead. Or, at least, on hold. Blue-chip companies have begun to ramp up borrowing again as central banks globally flood economies with money. Liabilities have reached their highest level relative to income since 2009, according to Morgan Stanley’s analysis of second-quarter data. The number of companies selling investment-grade debt this month through Thursday has surged 63% from the same period last year… Around 40% of investment-grade companies now have obligations that are more consistent with junk ratings, according to Morgan Stanley.”

September 28 – Bloomberg (Jenny Leonard, Shawn Donnan, and Saleha Mohsin): “A U.S. Treasury official said there are no current plans to stop Chinese companies from listing on U.S. exchanges, a day after a report that the Trump administration is discussing ways to limit U.S. investors’ portfolio flows into China. ‘The administration is not contemplating blocking Chinese companies from listing shares on U.S. stock exchanges at this time,’ Treasury spokeswoman Monica Crowley said…”

September 28 – Bloomberg (Crystal Tse and Michael Hytha): “WeWork, Peloton, Endeavor, Poshmark and more just got the message: It’s not a great time to go public. Disappointing initial public offerings and unsettled economic conditions could shut down many IPOs for the rest of the year -- and maybe well into 2020, when the next batch of marquee IPO candidates like Airbnb could meet an even gloomier market and geopolitical environment. The Hollywood agency Endeavor Group Holdings Inc. shelved its IPO… Poshmark Inc., an online resale marketplace for second-hand clothing, is expected to postpone its IPO into next year. Also in flux are a range of stock offerings from e-commerce companies and cybersecurity firms Palantir Technologies Inc., Postmates Inc., and McAfee Inc.”

September 29 – Wall Street Journal (Peter Grant and Keiko Morris): “Turmoil at WeWork is causing the shared-office-space company to all but stop signing new leases, a fresh blow to New York City’s already softening commercial real-estate market. Since We Co. Chief Executive Adam Neumann stepped down…, the company has reversed its rapid growth strategy, looking to slow its expansion, shed head count and assets, and move closer to profitability. That new approach initially included a decision to forgo signing any new leases…”

September 30 – Wall Street Journal (Eliot Brown): “For years, WeWork’s parent company was defined by big spending as it relentlessly pursued rapid growth. Now, in the aftermath of a botched initial public offering attempt and the ouster of co-founder and chief executive Adam Neumann, it is facing a different reality: It needs to stop bleeding cash. On Monday, We Co. said it would file a request with the Securities and Exchange Commission to withdraw its IPO proposal… To cut costs, the company’s new co-CEOs, Sebastian Gunningham and Artie Minson, are planning thousands of job cuts, putting extraneous businesses up for sale and purging some luxuries from the previous CEO, such as a G650ER jet purchased for more than $60 million last year…”

September 29 – Wall Street Journal (Christopher M. Matthews and Rebecca Elliott): “The American shale boom is slowing as innovation plateaus—and just when shale’s importance in global markets has reached new highs following an attack on the heart of Saudi Arabia’s oil infrastructure. U.S. oil production increased by less than 1% during the first six months of the year…, down from nearly 7% growth over the same period last year. Unlike several years ago, when shale production fell due to a global price collapse, the slowdown this year is driven partly by core operational issues, including wells producing less than expected after being drilled too close to one another, and sweet spots running out sooner than anticipated.”

October 2 – CNBC (Diana Olick): “After a rough month for mortgage rates, borrowers saw a sign of hope and pounced: A small dip in the 30-year fixed rate lit a fire under refinances. That pushed total mortgage application volume up 8% for the week, according to the Mortgage Bankers Association’s seasonally adjusted index… Mortgage applications to purchase a home rose just 1% for the week but were 10% higher annually.”

October 1 – Wall Street Journal (Ben Eisen and Adrienne Roberts): “Walk into an auto dealership these days and you might walk out with a seven-year car loan. That means monthly payments that last well past when the brake pads give out and potentially beyond when the car gets traded in for a new one. About a third of auto loans for new vehicles taken in the first half of 2019 had terms of longer than six years, according to… Experian PLC. A decade ago, that number was less than 10%. Car loans that are increasingly stretched out are a pronounced sign that some American middle class buyers can’t afford a middle-class lifestyle.”

October 2 – Bloomberg (Oshrat Carmiel): “Resale prices for Manhattan apartments tumbled the most in seven years, pushed down by buyer demands for discounts in a market swamped with choices. Previously owned condos and co-ops sold for a median of $915,000 in the third quarter, down 8% from a year earlier, appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate reported. It was the first decline in the past 10 quarters and the biggest since the third quarter of 2012. ‘It’s just more signs that the sellers are capitulating,’ Jonathan Miller, president of Miller Samuel, said… ‘The market is going through what could be called a reset.’”

September 30 – Reuters (Sanjana Shivdas): “The U.S. office vacancy rate rose marginally to 16.8% in the third quarter from a year earlier, according to real estate research firm Reis Inc. Of the 79 metropolitan areas covered by Reis, 29 showed a rise in vacancies in the quarter.”

September 29 – Reuters (Richa Naidu and Aishwarya Venugopal): “Fast-fashion retailer Forever 21 filed for bankruptcy late on Sunday, joining a growing list of brick-and-mortar companies that have seen sales hit by the rise of competition from online sellers like Amazon.com Inc and the changing fashion trends dictated by millennial shoppers.”

China Watch:

September 30 – CNBC (Evelyn Cheng): “Chinese President Xi Jinping said… in a speech commemorating the 70th anniversary of the Chinese Communist Party’s rule that no force could sway China’s development. ‘There is no force that can shake the foundation of this great nation,’ Xi said… ‘No force can stop the Chinese people and the Chinese nation forging ahead.’ Xi did not specifically mention any other country by name, and emphasized that China would pursue peaceful development. ‘Long live the great Communist Party of China. And long live the great Chinese People!’ Xi concluded his speech…”

September 29 – Associated Press: “China’s top trade negotiator will lead an upcoming 13th round of talks aimed at resolving a trade war with the United States… Vice Premier Liu He will travel to Washington for the negotiations, Vice Commerce Minister Wang Shouwen said… ‘The two sides should find a solution through equal dialogue in accordance with the principle of mutual respect, equality and mutual benefit,’ Wang said…”

September 30 – Bloomberg (Ben Bartenstein): “The U.S.-China trade war is getting ‘considerably worse’ and comments at the United Nations General Assembly suggest no end in sight, according to Ian Bremmer, …president of Eurasia Group. Chinese officials will be patient, hoping to maintain the status quo while making no serious attempts at a breakthrough deal until after the 2020 U.S. election, Bremmer wrote… He said China’s Foreign Minister Wang Yi’s combative tone suggests a much deeper divide between the world’s two largest economies than six months ago. ‘The two sides are digging in and it’s gotten considerably worse in the past weeks,’ Bremmer said.”

September 29 – Reuters (Stella Qiu and Ryan Woo): “China’s factory activity unexpectedly expanded at the fastest pace in 19 months in September as plants ramped up production and new orders rose, …suggesting a modest recovery in the manufacturing sector from 50.4 in August, marking the second straight month of expansion.”

September 30 – Wall Street Journal (Shen Hong): “China is snapping up stakes in private companies at a record rate… The investments mark a reversal after decades in which state-owned enterprises have shrunk in importance, as reflected in measures such as their share of the workforce or asset ownership. Since China’s public-sector companies are typically less efficient or innovative than their private rivals, the shopping spree could lead to a fresh drag on growth. Private enterprises are in a weaker position because they have comparatively poorer access to cheap bank loans and other types of financing, and have also been squeezed by Beijing’s moves to reduce pollution and overproduction… In total, state-backed buyers bought 47 stakes in listed private companies from January through June, according to Fitch…. That compares with 52 deals in all of 2018.”

September 30 – Wall Street Journal (Nathaniel Taplin): “Deng Xiaoping, who launched China’s economic reforms, famously said that it was fine for some people to get rich first. As long as everyone got rich eventually, it was a price worth paying for the communist leader. That narrative, call it the original Chinese dream, was borne out for a long time. China’s opening to the world generated many millionaires and billionaires but also remade China overall into an upper-middle-income society. There are increasing signs, however, that those Chinese who haven’t yet gotten rich will face a far harder time doing so in the future. Following steep falls in the early 2010s, inequality is rising again while real income growth has flatlined… Two subtle changes in China’s economy tell the story. Following a long fall from 2008 to 2015, China’s Gini Coefficient, a measure of income inequality, has begun rising sharply again. Second, since 2016 housing prices have mostly grown much faster than incomes, the opposite of the situation from 2011 to 2015.”

October 2 – New York Times (Alexandra Stevenson): “Forty years after China began its near-miraculous run as the world’s most powerful economic growth engine, its people are experiencing something new and unsettling: a feeling that the best times may be behind them. The Chinese economy is slowing, and the cost of living is rising. The trade war with the United States shows no sign of ending. Wage growth is sluggish. More young people are chasing fewer job prospects. Chinese consumers, who have become more cautious over the past year, are now staging a broad retreat. They are buying fewer cars, smartphones and appliances. They are going to the movies less and taking fewer trips abroad. They would rather stick their money in the bank. For China’s young people, who have never experienced a prolonged slump in their lives, the shift is especially stark.”

October 1 – Reuters (Michael Martina): “China’s military… showed off new equipment at a parade in central Beijing to mark 70 years since the founding of the People’s Republic, including hypersonic-glide missiles that experts say could be difficult for the United States to counter… As expected, China unveiled new unmanned aerial vehicles (UAVs) and showcased its advancing intercontinental and hypersonic missiles, designed to attack the aircraft carriers and bases that undergird U.S. military strength in Asia. A state television announcer called the missile arsenal a ‘force for realizing the dream of a strong nation and strong military.’”

September 29 – Bloomberg (Shirley Zhao): “China is reeling out a string of patriotic films as the Communist Party prepares to celebrate 70 years in power amid challenges to its authority from the unrest in Hong Kong and an economy weakened by the trade war. At least three movies featuring the accomplishments of ordinary Chinese opened in mainland theaters Monday, the eve of the 70th anniversary of the founding of the People’s Republic of China.”

October 2 – Reuters (Clare Jim and Felix Tam): “Hong Kong’s government is expected to discuss sweeping emergency laws… that would include banning face masks at protests, two sources told Reuters, as the Chinese-ruled territory grapples with an escalating cycle of violence. Authorities have already loosened guidelines on the use of force by police…”

September 29 – New York Times (Peter S. Goodman and Austin Ramzy): “In a part of the world familiar with conflict, dislocation and ruthless ideological extremism, Hong Kong has long beckoned as an oasis of stability. It has prospered on the strength of its proximity to mainland China — close enough to be a base for investors capitalizing on China’s development, and still beyond reach of the authoritarian hand of the Chinese Communist Party. It has served as a bridge between two rival powers nursing mutual suspicions, the United States and China. It is Chinese territory yet governed by a legal system inherited from the West, and intertwined with the global financial system. But now Hong Kong’s status as neutral ground between mainland China and the outside world is being threatened by a pair of momentous confrontations.”

September 29 – Reuters (Echo Wang and Joshua Franklin): “Nasdaq Inc is cracking down on initial public offerings (IPOs) of small Chinese companies by tightening restrictions and slowing down their approval, according to regulatory filings, corporate executives and investment bankers. Nasdaq’s attempt to limit these stock market flotations comes as a growing number of them end up raising most of the capital in their IPO from Chinese sources, rather than from U.S. investors.”

Central Banking Watch:

September 30 – Reuters (Swati Pandey): “Australia’s central bank cut interest rates for the third time this year… in a bid to stimulate a sluggish economy and signaled it was prepared to do more if needed, knocking the local dollar to a one-month low… The Reserve Bank of Australia’s (RBA) quarter-point cut took the cash rate to an all-time low of just 0.75%, leaving little room for more reductions and raising the possibility of unconventional policy easing.”

September 29 – Financial Times (Lionel Barber and Claire Jones): “From his corner office on the 40th floor of the European Central Bank’s gleaming twin tower headquarters in Frankfurt, Mario Draghi sums up how the ECB has been transformed during his presidency. ‘[The building] embodies our values,’ says the 72-year-old Italian, with a touch of pride. ‘Transparency and independence.’ Under Mr Draghi, the ECB has come of age. Alongside the Federal Reserve and the Bank of England, it has developed a formidable arsenal, injecting trillions of euros of stimulus into the eurozone economy… Mr Draghi… has won standing ovations at Brussels summits. In May, President Emmanuel Macron awarded him France’s Commandeur de la Légion d’Honneur, praising him as the heir of Jean Monnet and Robert Schuman, the European project’s founding fathers. Yet for all Mr Draghi’s panache, the region’s economy remains fragile. And there is a growing feeling that his central bank has shouldered too much of the burden and can no longer be the only game in town.”

October 1 – Bloomberg (Piotr Skolimowski and Boris Groendahl): “Bundesbank President Jens Weidmann switched the focus of his opposition against European Central Bank stimulus to Mario Draghi himself, suggesting the president should be more open to different points of view. Responding to Draghi’s recent warning that discord among ECB officials could undermine the effectiveness of monetary policy, the German central-bank chief said an ‘intensive discussion’ about far-reaching measures such as bond-buying is not only normal, but ‘absolutely necessary.’ ‘The Austrian philosopher Karl Popper once stated that only a critical discourse could give us the maturity to consider an idea from many different perspectives and to judge it correctly… United in diversity’ is more than the motto of the European Union, which for some may seem abstract. It’s also the concrete mission to approach each other and bring people together.’”

Europe Watch:

October 3 - Bloomberg (Piotr Skolimowski): “The euro-area economy stagnated at the end of the third quarter, held back by an industrial recession and a sharper-than-expected slowdown in services. While the slump still remains broadly centered on manufacturing, the measure for services dropped last month to the lowest since January after being revised down from an initial estimate. If that’s a sign that the weakness is spreading, it’s a worrying development for the euro-area economy. A separate report showed U.K. services unexpectedly shrank, posting the weakest index reading since the Brexit referendum in 2016.”

October 3 - Bloomberg (Fergal O'Brien): “Germany’s economic woes are becoming more pronounced, with a sharp slowdown in services suggesting the pain from its industrial crisis is spreading. While the weakness is still largely centered on manufacturing, a downward revision to services in September adds to the negative news coming from Europe’s largest economy. IHS Markit said the figures mean a technical recession ‘now looks to be all but confirmed.’”

EM Watch:

September 30 – Bloomberg (Rahul Satija): “Mounting debt failures in India have been catching rating companies off guard, underscoring continued challenges a year after the landmark failure of shadow bank IL&FS increased scrutiny of the industry. Defaults at companies including Dewan Housing Finance Corp., Cox & Kings Ltd. and Altico Capital India Ltd. have occurred even as their long-term ratings indicated very low to moderate risk of non-payment. ‘Raters have not been able to detect stress in time,’ said Ashutosh Khajuria, chief financial officer at Federal Bank Ltd. ‘Cutting credit profiles after the defaults is no rocket science.’”

October 2 – Reuters (Nupur Anand): “Private-sector lender Yes Bank’s Chief Executive Officer Ravneet Gill assured investors on Thursday that the bank remains on solid financial footing, sending its stock as much as 25% higher. His remarks come after the stock plunged nearly 23% on Tuesday as fraud allegations against a housing finance company that Yes Bank has exposure to, spooked investors.”

September 30 – Reuters (Davide Barbuscia): “…Fitch downgraded Saudi Arabia's credit rating to A from A+…, citing rising geopolitical and military tensions in the Gulf following an attack on its oil facilities and a deterioration of the kingdom’s fiscal position. The Saudi finance ministry said it was disappointed by the ‘swift’ downgrade and urged Fitch to reconsider it, arguing the move did not reflect the kingdom's response to the Sept. 14 attack or its capacity to handle adversity.”

Japan Watch:

September 30 – Bloomberg (Chikako Mogi): “The Bank of Japan signaled potential deep cuts in bond purchases in October, taking what could be its biggest step yet to steepen the yield curve. The central bank slashed the purchase ranges for four major maturities, indicating it may even stop buying debt of more than 25 years… It sought to anchor yields from the one-to-three year zone by raising purchases in a regular operation earlier in the day and lifting the purchase band for the sector in October. Governor Haruhiko Kuroda has repeatedly expressed concern about an excessive flattening of the yield curve… A more aggressive stance on cuts to buying has taken hold as it became clearer that reducing purchases needn’t immediately lead to strengthening of the yen.”

September 30 – Reuters (Tetsushi Kajimoto): “Japan rolled out a twice-delayed increase in the sales tax to 10% from 8% on Tuesday, a move that is seen as critical for fixing the country’s tattered finances but that could tip the economy into recession by dampening consumer sentiment.”

October 2 – Reuters (Tetsushi Kajimoto): “A Bank of Japan board member with a casting vote on policy decisions said the central bank must consider ‘preventive steps’ against economic risks, a sign its nine-member board may be tilting toward further easing as global pressures intensify. …Yukitoshi Funo - who has consistently voted with the majority of the nine-member board and holds a neutral stance - stressed the BOJ’s resolve to act without hesitation if economic hazards increase.”

Global Bubble Watch:

October 3 – Bloomberg Businessweek (Davide Scigliuzzo, Kelsey Butler, and Sally Bakewell): “Private equity managers won the financial crisis. A decade since the world economy almost came apart, big banks are more heavily regulated and scrutinized. Hedge funds… have mostly lost their flair. But the firms once known as leveraged buyout shops are thriving. Almost everything that’s happened since 2008 has tilted in their favor. Low interest rates to finance deals? Check. A friendly political climate? Check. A long line of clients? Check. The PE industry, which runs funds that can invest outside public markets, has trillions of dollars in assets under management. In a world where bonds are paying next to nothing… many big investors are desperate for the higher returns PE managers seem to be able to squeeze from the markets. The business has made billionaires out of many of its founders. Funds have snapped up businesses from pet stores to doctors’ practices to newspapers. PE firms may also be deep into real estate, loans to businesses, and startup investments—but the heart of their craft is using debt to acquire companies and sell them later.”

September 30 – Reuters (Noel Randewich): “Major U.S. fund managers have tens of billion of dollars at stake in some of the most popular Chinese stocks on Wall Street, exposing them to potential losses should the White House move to delist Chinese firms from U.S. exchanges. White House trade adviser Peter Navarro… dismissed reports that the Trump administration was considering delisting Chinese companies from U.S. stock exchanges as ‘fake news’…”

September 30 – Bloomberg (Katrina Nicholas, Matt Turner and Lucca de Paoli): “The risk of a property bubble in the euro zone surged last year as ultra-low interest rates helped drive up house prices. Munich is now the city most vulnerable to a property bubble, according to UBS Group AG’s annual Real Estate Bubble Index. Frankfurt and Paris are increasingly in danger of prices becoming unsustainable, even as some of the priciest cities around the world cool... For the first time in four years, London is no longer regarded as dangerously overvalued.”

Fixed-Income Bubble Watch:

October 1 – Bloomberg (Amanda Albright): “An economically struggling U.S. territory. A government-run electricity provider facing potential insolvency. A debate among public officials about whether debts are too burdensome to pay. That’s the situation in the U.S. Virgin Islands, where the power agency is contending with a financial squeeze that echoes what happened in Puerto Rico in the run up to that government’s record-setting bankruptcy. The uncertainty led Moody’s… on Sept. 23 to downgrade the most senior Virgin Islands Water and Power Authority bonds to eight steps below investment grade, indicating a high likelihood of default.”

Leveraged Speculation Watch:

October 2 – Bloomberg (Lisa Lee): “It’s a marriage between two of Wall Street’s hottest products. Collateralized loan obligations -- typically chock-full of broadly-syndicated debt -- are increasingly being stuffed with private loans made to highly leveraged medium-sized companies with limited access to bank financing. Known as middle-market CLOs, the asset class has ballooned to $57 billion, from just $20 billion six years ago. Five new entrants this year… suggest issuance is only set to increase. The frenzied growth is another example of how banks, insurance companies and pension funds continue to reach for higher-paying securities in the face of almost $15 trillion of negative-yielding debt around the world. Middle-market CLOs can offer premiums of as much as 200 bps versus their garden-variety peers, in part due to the reduced liquidity that comes with direct lending…”

Geopolitical Watch:

October 2 – Reuters (Vladimir Soldatkin, Dmitry Zhdannikov and Olesya Astakhova): “Washington’s use of the dollar as a political tool is backfiring as more and more countries are reducing their holdings of the greenback and switching to other currencies in trade contracts, Russian President Vladimir Putin said… Putin also said the U.S. was ‘rudely intervening’ in European affairs by objecting to the construction of the Nord Stream gas pipeline.”

October 1 – Reuters (Joyce Lee and Chang-Ran Kim): “North Korea fired what may have been a submarine-launched ballistic missile from off its east coast…, a day after it announced the resumption of talks with the United States on ending its nuclear program. If confirmed, it would be the most provocative test by North Korea since it started the talks with the United States in 2018.”

October 3 – Wall Street Journal (Gordon Lubold and Nancy A. Youssef): “U.S. officials are increasingly concerned that Turkey soon will mount a major incursion into northern Syria and trigger a clash with Kurdish fighters, an action that would likely prompt the Trump administration to remove American forces from Syria to avoid the conflict. Because a U.S. pullout would essentially end the fight against Islamic State there, it could set back ongoing efforts to undercut the group… Both Turkey and the Kurds are allies of the U.S. but are longtime enemies of one another.”

October 2 – Reuters (Ahmed Rasheed and Ahmed Aboulenein): “Iraqi Prime Minister Adel Abdul Mahdi… declared a curfew in Baghdad until further notice after at least seven people were killed and more than 400 were injured during two days of nationwide anti-government protests. Curfews were imposed earlier in three southern cities while elite counter-terrorism troops opened fire on protesters trying to storm Baghdad airport and deployed to the southern city of Nassiriya after gunfights broke out between protesters and security forces…”

Friday Afternoon Links

[Reuters] Wall St. rallies in wake of payrolls report

[Reuters] Trump sees 'very good chance' of China trade deal, says no link to Biden probe request

[Reuters] Fed's Powell repeats U.S. economy "in a good place"

[Reuters] With economic signals mixed, Fed policymakers still divided

[AP] US unemployment rate hits a 50-year low even as hiring slows

[Reuters] Teenager shot as violence flares hours after Hong Kong imposes emergency powers

[Bloomberg] Fed to Keep Pumping Liquidity Into Repo Market Through October

[Bloomberg] Tail Risks Grow Fatter as Impeachment Collides With Trade Talks

Thursday, October 3, 2019

Friday's News Links

[Reuters] Wall Street higher on modest job growth in September

[Reuters] Oil edges higher but on track for big weekly loss

[CNBC] US created 136,000 jobs in September, vs 145,000 expected

[CNBC] Trade gap widens more than expected to $54.9 billion

[Reuters] 'Sahm Rule' enters Fed lexicon as fast, real-time recession flag

[Reuters] UK PM Johnson will ask for Brexit extension if no deal by Oct. 19 - court documents

[AP] India’s central bank cuts interest rate, downgrades outlook

[AP] German machinery orders plummet, adding to recession fears

[Reuters] Hong Kong brings back colonial-era emergency powers to quell violence

[Bloomberg] U.S. Trade Gap With China Narrows as Exports Hit Five-Month High

[Bloomberg] Bond Markets’ Tea Leaves Send Sobering Signal: Trouble Is Ahead

[Bloomberg] Clarida Says Economy in Good Place, Fed to Talk Balance Sheet

[Bloomberg] Hawkish Former ECB Officials Lambast Draghi’s Monetary Policy

[Bloomberg] Shale Jobs Are Drying Up in the Permian Basin

[WSJ] Fed’s Richard Clarida Says Officials Will Do What It Takes to Sustain Growth

[FT] Former central bankers attack ECB’s monetary policy

Thursday Evening Links

[Reuters] Wall Street gains as dour services data raises rate-cut expectations

[Reuters] Fed's Mester: Running a 'hot' economy risks faster automation

[Reuters] New York sues big U.S. student loan servicer for abusing borrowers

[Reuters] Death toll climbs, unrest spreads in Iraq in days of protests

[Bloomberg] Bets on Two More Fed Cuts in 2019 Return as Economic Woe Spreads

Wednesday, October 2, 2019

Thursday's News Links

[CNBC] Stocks turn positive, making back earlier losses as rate-cut expectations increase

[Reuters] Oil slips further below $58 as economic gloom weighs

[CNBC] Services reading shows economy is weaker than expected amid slowdown fears

[Reuters] U.S. factory orders dip in August; core capital goods revised down

[Reuters] U.S. widens trade war with tariffs on European planes, cheese, whisky to punish subsidies

[AP] EU vows to hit back over US tariffs as businesses count cost

[Reuters] Fed still has 'reasonable amount of independence': Evans

[Reuters] EU deeply skeptical that latest UK plan could yield Brexit deal

[Reuters] BOJ's Funo warns of intensifying global risks, signals readiness to respond

[Reuters] India's Yes Bank 'very stable', CEO Gill says after stock slide

[Reuters] Hong Kong protesters go on rampage to denounce police shooting of student

[Bloomberg] Euro-Area Economy Stalls as Manufacturing Pain Starts to Spread

[Bloomberg] German Recession Risk Rises as Economic Pain Spreads to Services

[Bloomberg] India Shadow Banking Crisis May Return to Haunt Stock Market

[WSJ] Repo Crunch Gives Ammo to Banks on Regulation, but Not Much

[WSJ] U.S. Officials Are Worried About Turkey Foray Into Syria

[FT] Brace for a sequel to last year’s rocky final quarter

Wednesday Evening Links

[Reuters] Wall Street tumbles as trade war threatens U.S. economy

[Reuters] Gold climbs over 1% as weak U.S. data feeds economic fears

[Reuters] Dollar slides vs yen, euro as U.S. stocks, Treasury yields decline

[Reuters] Exclusive: In Saudi Arabia, criticism of Crown Prince grows after attack

[Reuters] North Korea fires ballistic missile, possibly from submarine, days before talks

[Reuters] Gunfights rage in southern Iraq, protests spread nationwide

[Bloomberg] Repo Watchers Worry More Trouble Brewing in Fourth Quarter

[Bloomberg] Manhattan Resale Home Prices Drop Most Since 2011

[NYT] China’s Spenders Are Saving. That’s a Problem for Everyone.

Tuesday, October 1, 2019

Wednesday's News Links

[Reuters] Stocks fall to lowest in a month after U.S. manufacturing shock sparks growth worries

[Reuters] Gold rises as global growth worries boost safe-haven appeal

[Reuters] Oil steadies amid fall in U.S. inventories, weak economic data

[Reuters] U.S. private payrolls growth slows in September: ADP

[CNBC] September private payrolls report shows the pace of hiring is slowing

[CNBC] Weekly mortgage refinance applications rebound 14% on tiny rate dip

[CNBC] The stock market comeback is another ‘failure’ as chart analysts grow worried

[CNBC] Manhattan real estate prices take the biggest tumble since the financial crisis

[Reuters] Trump blasts Fed after manufacturing data stokes fears of sharp slowdown

[Reuters] UK PM Johnson, urging compromise, makes final offer to break Brexit deadlock

[Reuters] Russia's Putin says global confidence in dollar is falling

[Reuters] Hong Kong mops up, braces for fresh protests after National Day violence

[Reuters] N.Korea's suspected submarine missile 'pushes the envelope'

[Bloomberg] CLOs Stuffed Full of Private Debt to Risky Companies Are Booming

[Bloomberg] Glum Data Spurs Worst October Start Since 2014 for Europe Stocks

[Bloomberg] Dalio Outlines Possible Trump Path to Limit Capital to China

[Bloomberg] Weidmann Hits Back at Draghi Bid to Silence ECB’s QE Debate

[WSJ] The Seven-Year Auto Loan: America’s Middle Class Can’t Afford Its Cars

[FT] Weidmann warns he will oppose expanded ECB bond buying

Monday, September 30, 2019

Tuesday's News Links

[Reuters] Wall Street drops sharply as manufacturing contracts again

[Reuters] Oil prices rebound on lower output from U.S., Russia, OPEC

[CNBC] US manufacturing survey shows worst reading in a decade

[Reuters] N.Y. Fed awards $54.85 billion in overnight repos

[Reuters] Fed can keep rates on hold for now, raise them later: Evans

[Reuters] Major U.S. investors have billions at risk in Chinese stocks

[Reuters] U.S. office vacancy rate rises marginally in third quarter - Reis

[Reuters] Japan proceeds with twice-delayed sales tax hike as growth sputters

[CNBC] China’s Xi: ‘No force can stop the Chinese people and the Chinese nation’

[Reuters] China showcases fearsome new missiles to counter U.S. at military parade

[Reuters] Australia central bank cuts rates to all-time low, signals may need more

[Reuters] Australia home prices jump most in 2-1/2 years but home approvals sink ahead of RBA decision

[Reuters] Hong Kong police shoot teen protester as violence escalates

[Bloomberg] World Economy Signals Mounting Crisis in Manufacturing

[Bloomberg] Wall Street Fears ‘Hard Rollover’ of Risks After September Calm

[Bloomberg] Bonds Get a Taste of What Happens When Central Banks Step Back

[Bloomberg] Credit Raters Keep Missing Big Indian Company Defaults

[Bloomberg] There’s a New Muni-Debt Crisis Brewing in Another U.S. Territory

[WSJ] Global Trade Set for Weakest Year Since Crisis

[WSJ] New York City Apartment Prices Hit Four-Year Low

[WSJ] Beijing Takes Stakes in Private Firms to Keep Them Afloat

[FT] Companies issued record amount of debt in September

[FT] Fed wrestles with role of regulation in repo squeeze

Monday Evening Links

[Reuters] Stocks inch higher as investors downplay escalating trade war

[Reuters] Oil falls, Brent posts biggest quarterly drop this year on demand fears

[CNBC] Don’t expect calm markets in October, historically a month for wild swings

[Reuters] U.S. dollar share of global currency reserves at lowest since 2013: IMF data

[Reuters] Saudi crown prince warns of escalation with Iran

[Reuters] Fitch cuts Saudi credit rating citing "risk of further attacks"

[FT] US repo market pressure eases after Fed interventions

Sunday, September 29, 2019

Monday's News Links

[Reuters] Shares steady as investors shrug off U.S. delisting threat

[Reuters] Oil down more than 1% on trade war jitters and Chinese data

[Reuters] China Sept factory activity surprises, expands fastest in 19 mths-Caixin PMI

[CNBC] Beijing warns Washington in response to possible US investment restrictions

[Reuters] Chinese companies rethink U.S. IPOs after Trump's delisting threat

[Reuters] Fashion retailer Forever 21 files for bankruptcy

[Reuters] Hong Kong police expect 'violent attack' on sensitive Chinese anniversary

[Bloomberg] Once-Shunned Capital Controls Surface in U.S.-China Trade War

[NYT] The New York Fed Chief Is Facing His Biggest Test. Here’s His Response.

[NYT] Hong Kong’s Status as Neutral Ground at Risk as China Asserts Power

[WSJ] Fed Adds $63.5 Billion to Financial System in Repo Transaction

[WSJ] ‘Why Were They Surprised?’ Repo Market Turmoil Tests New York Fed Chief

[WSJ] Stimulus, Inequality and the Chinese Dream

[WSJ] WeWork Needs Cash as Botched IPO Scuttles Planned Infusion

[WSJ] Hong Kong Protesters Taunt Beijing in Bid to Spoil Communist China’s Birthday

[FT] Interview: Mario Draghi declares victory in battle over the euro

Sunday Evening Links

[Reuters] Exclusive: Nasdaq cracks down on IPOs of small Chinese companies

[CNBC] Constricting investments into Chinese companies could hit the US as hard as it hits China

[Reuters] Street fires burn in Hong Kong amid running battles between protesters and police

[Bloomberg] Stocks Drop in Asia as Trade Tensions Heat Up: Markets Wrap

[Bloomberg] Fed Backs Organic Balance Sheet Rise, Wall Street Wants Whopper

[Bloomberg] Xi Military Parade to Showcase China Missiles Spooking the U.S.

[Bloomberg] China Screens Patriotic Films to Whip Up Nationalistic Fervor

[WSJ] Shale Boom Is Slowing Just When the World Needs Oil Most

Sunday's News Links

[Reuters] China urges 'calm and rational' resolution to U.S.-Sino trade war

[AP] China to send its top trade negotiator to US for talks

[Reuters] Citing climate risk, investors bet against mortgage market

[Reuters] Street fires burn in Hong Kong amid running battles between protesters and police

[Bloomberg] U.S. Treasury Says No Plans to Block Chinese Listings ‘at This Time’

[WSJ] Virtually No One Will Lease to WeWork. That’s a Drag on NYC’s Office Market.

[FT] Entrenched uncertainty is a global problem

Saturday, September 28, 2019

Saturday's News Links

[Reuters] U.S. Treasury says no plans to block Chinese listings 'at this time': Bloomberg

[CNBC] US pulling investment from China would be an ‘unmitigated disaster,’ says Yale’s Stephen Roach

[Reuters] Spillover: world economies' next big headache

[Reuters] Moment of truth coming for Brexit with time running out, EU and Britain say

[Reuters] Hong Kong police fire tear gas, water cannon to halt protest as China National Day nears

[Bloomberg] IPO Collapse Threatens 2020 Class of Unicorn Hopefuls

Friday, September 27, 2019

Weekly Commentary: Q2 2019 Z.1 and Repos

Non-Financial Debt (NFD) expanded $408 billion during Q1 to a record $53.015 TN. This was down from Q1’s $765 billion expansion. On a seasonally-adjusted and annualized (SAAR) basis, Q2 NFD growth slowed to $1.652 TN from Q1’s booming $3.061 TN. The slowdown was chiefly explained by the timing of federal government borrowings. Federal debt expanded SAAR $1.751 TN during Q1 and then slowed markedly to $382 billion during Q2. Averaging the two quarters, NFD expanded SAAR $2.360 TN. This compares to 2018’s annual $2.274 TN growth in NFD, the strongest annual Credit expansion since 2007’s $2.518 TN. As a percentage of GDP, NFD slipped to 248% from 249% during the quarter. NFD ended 1999 at 183% of GDP and 2007 at 226%.

On a seasonally-adjusted and annualized basis, Household borrowings expanded $668 billion, up from Q1’s SAAR $323 billion, to a record $15.834 TN. Household mortgage debt expanded SAAR $330 billion, up from Q1’s SAAR $226 billion, to a record $10.440 TN. Total Business debt growth slowed to SAAR $680 billion, down from Q1’s booming $1.023 TN (strongest since Q1 ’16), to a record $15.744 TN. State & Local debt contracted SAAR $77 billion, after declining SAAR $36 billion during Q1, to $3.039 TN. Foreign U.S. borrowings expanded nominal $231 billion for the quarter (to $4.291 TN), the strongest foreign debt growth since Q1 ’17.

Considering recent “repo” market tumult, let’s take a deeper-than-usual dive into the Z.1 category, “Federal Funds and Securities Repurchase Agreements” (aka “repo”). “Repo” Liabilities jumped $239 billion (nominal) during the quarter, or 24% annualized. This pushed growth over the past three quarters to $710 billion, or 27% annualized. This was the largest nine-month growth since the first three quarters of 2006. At $4.280 TN, “repo” ended June at the highest level since Q3 2008.

It’s no coincidence that the $710 billion nine-month increase in “repo” corresponded with a spectacular 106 bps decline in 10-year Treasury yields. I’ll assume repo market ballooning continued into early-September, as yields dropped another 44 bps. The expansion of securities Credit (the “repo” market being a key component) generates new marketplace liquidity. Moreover, the concurrent expansion of “repo” Credit and system liquidity is in today’s highly speculative global environment powerfully self-reinforcing.

September 26 – Bloomberg (Vivien Lou Chen): “It may take as much as $500 billion in Treasury purchases by the Federal Reserve to fix all of the cracks exposed last week in the more than $2 trillion U.S. repo market. Estimates from analysts at TD Securities, Morgan Stanley, BMO Capital Markets and Pictet Wealth Management range from roughly $200 billion to half a trillion dollars. They’re not alone. Two former Fed officials said Thursday that the central bank might need to do $250 billion of outright Treasury purchases to prevent further pain in U.S. money markets. There’s a growing consensus that the central bank’s daily efforts to restore order in the short-term funding market are falling short of what’s needed: a much larger effort to build up a substantial buffer of bank reserves…”

As we’ve witnessed over the past two weeks, the unwind of securities Credit and the attendant contraction of liquidity turns immediately problematic. A Thursday afternoon Bloomberg headline (from the above article) resonated: “Repo-Market Cure May Take $500 Billion of Fed Treasuries Buying,” referring to Wall Street estimates of the scope of Fed intervention necessary to stabilize funding markets. I have posited a serious globalized de-risking/deleveraging episode would require multi-Trillion expansions of Federal Reserve and global central bank balance sheets.

“Brokers & Dealers” is the largest borrower by Z.1 category, with “repo” Liabilities up $92 billion during Q2 to $1.781 TN (high since Q3 ’13). Broker “repo” Liabilities surged $296 billion over three quarters, or 27% annualized.

As the second largest borrower, Rest of World (ROW) “repo” Liabilities increased $10 billion during the quarter to a record $1.102 TN. ROW “repo” Liabilities surged $254 billion over the past three quarters, or 40% annualized. ROW “repo” peaked at $857 billion during the previous cycle (Q1 ’08).

While not at the same level as the Wall Street firms or ROW, Real Estate Investment Trusts (REITs) have as well been notably aggressive “repo” borrowers. REIT “repo” Liabilities rose $30.3 billion during Q2 to a record $369 billion. REIT “repo” Liabilities were up $107 billion, or 41%, over the past year and $150 billion, or 69%, over two years. REIT “repo” Liabilities posted a previous cycle peak during Q2 2007 at $106 billion.

Money Market Funds (MMF) are a large holder of “repo” Assets (second only to Brokers & Dealers). MMF “repo” holdings jumped an eye-opening $153 billion during Q2 to a record $1.133 TN, with a gain over three quarters of $213 billion, or 23%. It’s worth noting MMF “repo” holdings peaked at $618 billion during Q4 2007 (having doubled over the preceding two years).

It’s also worth highlighting that the Fed’s balance sheet contracted $58 billion during the quarter to $4.140 TN. Some have been confounded by the lack of impact to system liquidity from the Fed somewhat drawing down its securities portfolio. But with securities Credit expanding by multiples of the decline in Fed Credit, marketplace liquidity has been dominated by securities speculating and leveraging. As I often repeat, contemporary finance works miraculously on the upside. Fear the downside. The Fed’s balance sheet expanded as much over past week as it contracted during the second quarter.

Bank (“Private Depository Institutions”) assets increased $203 billion during the quarter to a record $19.506 TN, this despite a $159 billion decline in “Reserves at Federal Reserve”. Bank Loans jumped $192 billion during the quarter, or 6.8% annualized, bouncing back strongly after Q1’s slight contraction (and ahead of Q2 ‘18’s $174bn). Bank Loans were up $550 billion, or 5.0%, year-over-year. Bank Mortgage Loans expanded $76 billion (5.5% annualized) during the quarter to a record $5.540 TN, the strongest expansion in two years.

Bank holdings of Debt Securities jumped $112 billion, or 10% annualized, to a record $4.505 TN (one-year gain of $320 billion, or 7.7%). Debt Securities holdings were below $3.0 TN going into the 2008 crisis. Bank Agency/GSE MBS holdings jumped a huge $82.2 billion during the quarter, the largest increased since Q1 ’12. Over the past three quarters, Banks boosted Agency Securities by $217 billion, or almost 10%, to a record $2.588 TN. Banks’ Agency Securities holdings are about double the level from the crisis. Bank Holdings of Treasuries rose $34 billion during Q2 to a record $771 billion, jumping $121 billion over three quarters. Treasury holdings were up 22% y-o-y. For comparison, Banks’ Corporate Bond holdings increased $25 billion y-o-y, or 3.9%, to $664 billion.

Broker/Dealer Assets jumped $132 billion during Q2, or 16% annualized, to $3.487 TN (high since Q2 ’13). This was a sharp reversal from Q1’s small ($4bn) contraction. Broker/Dealer Assets were up a notable $349 billion, or 11.1%, over the past year. "repo" Assets jumped $227 billion y-o-y, or 20.0%. Over this period, “repo” Liabilities surged $326 billion, or 22.4%, to $1.781 TN. This was the highest level of “repo” Liabilities going back to Q3 2013, a period that corresponded with a sharp upside reversal in market yields and contraction in “repo” securities Credit.

Total system Debt Securities increased nominal $304 billion during Q2 to a record $45.771 TN. This boosted the gain since the end of 2008 to $14.825 TN, or 48%. As a percentage of GDP, Debt Securities ended Q2 at 214% (record 223% Q1 ’13). Equities jumped $1.602 TN to $49.799 TN, ending Q2 slightly below Q3 ‘18’s all-time record ($50.419 TN). Equities ended Q2 at 233% of GDP (record Q3 ’18 243%). Total (Debt and Equities) Securities jumped $1.906 TN during Q2 ($7.51 TN during the first half) to a record $95.569 TN. Total Securities-to-GDP ended June at 448% (record Q3 ’18 458%). Previous cycle peaks were 379% during Q3 ’07 and 359% in Q1 ’00. Total Securities-to-GDP began the eighties at 44% and the nineties at 67%.

I view the “repo” market expansion as indicative of overall speculative leverage. The rapid growth of Bank and Broker/Dealer debt securities holdings is symptomatic of speculative excess and likely associated with derivative-related trading activities. To simplistically connect the dots, the expansion of “repo” securities Credit along with ballooning Bank and Broker/Dealer securities holdings generate the liquidity abundance and speculative impulses for a general inflation of securities market prices (debt and equities). The inflation of perceived wealth then feeds into the real economy through strong consumer and business spending.

Accordingly, the Household Balance Sheet remains a Bubble Analysis Focal Point. Total Household Assets increased $2.024 TN during the quarter to a record $129.671 TN, with a $7.358 TN gain during 2019’s first-half. And with Liabilities up $175 billion, Household Net Worth (Assets less Liabilities) jumped $1.949 TN during Q2 to a record $113.463 TN. Household Net Worth rose $7.177 TN during this year’s first-half, a record six-month advance. Net Worth rose to a record (matching Q4 ’17) 532% of GDP. For comparison, Household Net Worth-to-GDP posted cycle peaks of 492% during Q1 2007 and 446% to end Q1 2000. Net Worth-to-GDP began the eighties at 342% and the nineties at 378%.

Household Real Estate holdings increased $257 billion during the quarter, down from Q1’s $707 billion gain (strongest since Q4 ’05). Yet Real Estate jumped $1.692 TN over the past year to a record $32.676 TN (153% of GDP). Real Estate holdings posted a previous cycle peak of $26.466 TN (189% of GDP) during Q4 ’06.

Financial Assets are the unquestionable epicenter of this cycle’s Bubble. Household holdings of Financial Assets jumped $1.700 TN during Q2, after surging $4.544 TN in Q1. Financial Asset holdings ended Q2 at a record $90.689 TN, or 425% of GDP. Financial Assets-to-GDP ended Q3 2007 at 376% and Q1 2000 at 355%. Household Assets began the nineties at 267% of GDP.

Household Total Equities (Equities and Mutual Funds) holdings ended Q1 at record $27.427 TN, or 129% of GDP. The previous two cycles saw Household Equities peak at $14.930 TN (102% of GDP) during Q3 ’07 and $11.742 TN (117% of GDP) in Q1 ’00. Total Household Equities holdings began the nineties at 47% of GDP.

Rest of World (ROW) is key to Bubble Analysis as well, though with layers of ambiguity and complexity. ROW holdings of U.S. Financial Assets surged $843 billion during Q2 to a record $32.582 TN. Holdings were up $1.798 TN y-o-y, boosting ROW holdings-to-GDP to a record 153%. ROW holdings-to-GDP ended 2007 at 108% and 1999 at 74%. ROW holdings of U.S. Debt Securities increased $337 billion during Q2 to a record $11.906 TN. Debt Securities jumped $728 billion during the first half, with Treasury holdings rising $372 billion to a record $6.637 TN. ROW repo Liabilities jumped $187 billion, or 20%, during the first six months of 2019 to a record $1.102 TN.

Few see the Bubble, yet the Fed’s Z.1 report offers a compelling outline. This week saw “repo” market instability bumped from the headlines by instability at the White House. Markets reacted to whistleblower allegations and the opening of an impeachment inquiry in typical fashion: “The President under duress is more likely to strike a deal with China.” In comments Wednesday, the President was happy to play along: “They want to make a deal very badly... It could happen sooner than you think.” President Trump’s tough talk directed at China Tuesday at the U.N. didn’t leave one feeling the administration was softening up for an imminent deal.

And then came the Friday afternoon Bloomberg scoop (Jenny Leonard and Shawn Donnan): “Trump administration officials are discussing ways to limit U.S. investors’ portfolio flows into China in a move that would have repercussions for billions of dollars in investment pegged to major indexes, according to people familiar with the internal deliberations. The discussions are occurring as Washington and Beijing negotiate a potential truce in their trade war that’s rattled the world’s two biggest economies and investors for more than a year… A U.S. crackdown on capital flows would therefore expose a new pressure point in the economic dispute and cause disruption well beyond the hundreds of billions in tariffs the two sides have levied against each other.”

Markets would like to believe the administration is posturing ahead of the next round of trade talks. Bloomberg follow-up articles included comments from Wall Street analysts, including: “This is huge.” “Ludicrous.” “The news opens up a new front in the U.S.-China trade conflict.” “It’s another example of how every time people think this trade war is deescalating, it escalates again.” A Reuters article was on point: “…what would be a radical escalation of U.S.-China trade tensions.”

Chinese company listed ADRs were slammed in Friday U.S. trading. This creates Monday morning Chinese market and currency vulnerability. To this point, it’s been the Teflon President affixed to Teflon markets. But between “repo” market instability, Washington chaos, the risk of serious trade war escalation – in a world of heightened financial, economic and geopolitically instability – there is a scenario where the unraveling begins. Markets have to this point demonstrated astounding faith that the President will ultimately act in their best interest. As always, markets are a contest of greed and fear. One of the bad scenarios would be the markets fearing an administration resorting to a “scorched earth” gambit.

For the Week:

The S&P500 declined 1.0% (up 18.1% y-t-d), and the Dow slipped 0.4% (up 15.0%). The Utilities gained 1.3% (up 23.1%). The Banks dipped 0.6% (up 16.9%), and the Broker/Dealers dropped 2.6% (up 12.3%). The Transports fell 1.1% (up 12.8%). The S&P 400 Midcaps declined 1.1% (up 15.6%), and the small cap Russell 2000 dropped 2.5% (up 12.7%). The Nasdaq100 fell 1.8% (up 21.4%). The Semiconductors declined 1.3% (up 33.6%). The Biotechs sank 6.1% (down 0.4%). With bullion down $20, the HUI gold index dropped 3.5% (up 31.1%).

Three-month Treasury bill rates ended the week at 1.74%. Two-year government yields declined five bps to 1.63% (down 86bps y-t-d). Five-year T-note yields dipped four bps to 1.56% (down 95bps). Ten-year Treasury yields fell four bps to 1.68% (down 100bps). Long bond yields declined three bps to 2.13% (down 89bps). Benchmark Fannie Mae MBS yields slipped two bps to 2.62% (down 87bps).

Greek 10-year yields slipped a basis point to 1.32% (down 308bps y-t-d). Ten-year Portuguese yields dropped eight bps to 0.17% (down 156bps). Italian 10-year yields sank 10 bps to 0.82% (down 192bps). Spain's 10-year yields fell nine bps to 0.15% (down 127bps). German bund yields declined five bps to negative 0.57% (down 82bps). French yields fell six bps to negative 0.28% (down 99bps). The French to German 10-year bond spread narrowed one to 29 bps. U.K. 10-year gilt yields sank 13 bps to 0.50% (down 78bps). U.K.'s FTSE equities index rallied 1.1% (up 10.4% y-t-d).

Japan's Nikkei Equities Index declined 0.9% (up 9.3% y-t-d). Japanese 10-year "JGB" yields declined three bps to negative 0.24% (down 24bps y-t-d). France's CAC40 fell 0.9% (up 19.2%). The German DAX equities index dipped 0.7% (up 17.3%). Spain's IBEX 35 equities index was little changed (up 7.5%). Italy's FTSE MIB index declined 0.5% (up 20.2%). EM equities were mixed. Brazil's Bovespa index added 0.2% (up 15.5%), while Mexico's Bolsa slumped 1.6% (up 2.9%). South Korea's Kospi index dropped 2.0% (up 0.4%). India's Sensex equities index rose 2.1% (up 7.6%). China's Shanghai Exchange sank 2.5% (up 17.6%). Turkey's Borsa Istanbul National 100 index surged 4.9% (up 15.2%). Russia's MICEX equities index lost 1.4% (up 16.4%).

Investment-grade bond funds saw inflows of $1.067 billion, while junk bond funds posted outflows of $258 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates dropped nine bps to 3.64% (down 108bps y-o-y). Fifteen-year rates declined five bps to 3.16% (down 100bps). Five-year hybrid ARM rates sank 11 bps to 3.38% (down 59bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 12 bps to 4.04% (down 72bps).

Federal Reserve Credit last week surged $58.6bn to $3.809 TN. Over the past year, Fed Credit contracted $353bn, or 8.5%. Fed Credit inflated $998 billion, or 35%, over the past 359 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $8.3bn last week to $3.459 TN. "Custody holdings" gained $20.0bn y-o-y, or 0.6%.

M2 (narrow) "money" supply gained $10.4bn last week to a record $15.021 TN. "Narrow money" gained $786bn, or 5.5%, over the past year. For the week, Currency increased $2.4bn. Total Checkable Deposits fell $17.0bn, while Savings Deposits rose $18.9bn. Small Time Deposits were unchanged. Retail Money Funds added $6.0bn.

Total money market fund assets surged $40.5bn to $3.443 TN. Money Funds gained $559bn y-o-y, or 19.4%.

Total Commercial Paper increased $3.9bn to $1.097 TN. CP was up $15bn y-o-y, or 1.4%.

Currency Watch:

The U.S. dollar index gained 0.6% to 99.109 (up 3.0% y-t-d). For the week on the upside, the New Zealand dollar increased 0.6% and the Canadian dollar gained 0.1%. On the downside, the British pound declined 1.5%, the South African rand 1.3%, the Mexican peso 1.2%, the South Korean won 1.0%, the Swedish krona 0.8%, the euro 0.7%, the Singapore dollar 0.4%, the Japanese yen 0.3%, the Brazilian real 0.3% and the Norwegian krone 0.2%. The Chinese renminbi declined 0.44% versus the dollar this week (down 3.43% y-t-d).

Commodities Watch:

September 22 – Wall Street Journal (Summer Said, Benoit Faucon and Rory Jones): “The Saudi Arabian Oil Co. is in emergency talks with equipment makers and service providers, offering to pay premium rates for parts and repair work as it attempts a speedy recovery from missile attacks on its largest oil-processing facilities, Saudi officials and oil contractors said. It may take many months—rather than the maximum 10 weeks company executives have promised—to restore operations to full working order, they said.”

The Bloomberg Commodities Index declined 1.1% this week (up 1.8% y-t-d). Spot Gold fell 1.3% to $1,497 (up 16.7%). Silver lost 1.1% to $17.652 (up 13.6%). WTI crude sank $2.18 to $55.91 (up 23%). Gasoline fell 1.6% (up 25%), and Natural Gas sank 5.1% (down 18%). Copper slipped 0.3% (down 1%). Wheat gained 0.6% (down 3%). Corn increased 0.2% (down 1%).

Market Instability Watch:

September 27 – Bloomberg (Alex Harris): “The repo market has calmed down, but the Federal Reserve is gearing up its safeguards seemingly to prevent turmoil from resurfacing on Monday. Last week’s craziness was not the first time in recent memory that U.S. money markets have shown signs of stress. It’s tended to happen around quarter-end, most notably in late December. The third quarter ends Monday. So, for the past two days, the New York Fed has run $100 billion overnight repo operations -- bigger than the $75 billion daily liquidity injections that began early last week -- plus separate 14-day operations. Neither of Friday’s actions were fully subscribed and short-term lending rates are well below the peak seen last week, a sign order has been restored for now. But on Monday, that larger $100 billion size will be repeated and the overnight operation will run from 7:45 a.m. to 8 a.m. New York time, earlier than prior morning actions. Both signal the Fed is getting ready in case rates spike again.”

September 26 – Bloomberg (Brian Chappatta): “The repo market madness lives on for a ninth day. The Federal Reserve Bank of New York announced Wednesday that it would increase the size of its next overnight system repurchase agreement operation to a $100 billion maximum, from $75 billion previously, and also raise the limit on its 14-day term repo operation to $60 billion from $30 billion. Simply put, the bank wants to flood the funding market with enough cash to soak up all the securities that dealers submit and leave no doubt that the critical financial-system plumbing is in fine working order ahead of the end of the quarter.”

September 23 – Wall Street Journal (Daniel Kruger and Vipal Monga): “The tumult in the market for short-term cash loans highlights some analysts’ concerns about the Federal Reserve’s proposed replacement for the troubled London interbank offered rate. The secured overnight financing rate, known as SOFR, rose to a record 5.25% last week…, pulled higher by a jump in borrowing rates for overnight repurchase agreements, or repos… SOFR’s price is based on repo rates, so the spike in that market last Tuesday caused the new benchmark for variable-rate securities to jump almost 3 percentage points to its highest level on record.”

September 26 – Wall Street Journal (Maureen Farrell, Corrie Driebusch, Miriam Gottfried and Allison Prang): “The IPO market took another hit Thursday as Endeavor Group Holdings Inc. yanked its planned offering, and Peloton Interactive Inc. ’s shares skidded on their first day of trading. Endeavor became the second big casualty of the IPO market’s recent chill after WeWork’s parent company pulled its offering earlier this month. It is the second time Endeavor has hit the brakes on its IPO this year.”

September 27 – CNBC (Kate Rooney): “This has been a tough week for bitcoin. The world’s first and largest cryptocurrency plunged more than 20% over seven days, hitting a low of $7,757 Friday — its lowest level since June. Bitcoin futures meanwhile, were on pace for their worst week of the year.”

Trump Administration Watch:

September 26 – Associated Press (Lisa Mascaro, Mary Clare Jalonick and Julie Pace): “President Donald Trump pressed the leader of Ukraine to ‘look into’ Joe Biden, Trump’s potential 2020 reelection rival, as well as the president’s lingering grievances from the 2016 election, according to a rough transcript of a summer phone call that is now at the center of Democrats’ impeachment probe. Trump repeatedly prodded Volodymyr Zelenskiy, new president of the East European nation, to work with U.S. Attorney General William Barr and Rudy Giuliani, Trump’s personal lawyer. At one point in the July conversation, Trump said, ‘I would like for you to do us a favor.’”

September 27 – Bloomberg (Jenny Leonard and Shawn Donnan): “Trump administration officials are discussing ways to limit U.S. investors’ portfolio flows into China in a move that would have repercussions for billions of dollars in investment pegged to major indexes, according to people familiar with the internal deliberations. The discussions are occurring as Washington and Beijing negotiate a potential truce in their trade war that’s rattled the world’s two biggest economies and investors for more than a year. They also come as China is removing limits on foreign investment in its financial markets. A U.S. crackdown on capital flows would therefore expose a new pressure point in the economic dispute and cause disruption well beyond the hundreds of billions in tariffs the two sides have levied against each other.”

September 24 – Reuters (Jeff Mason and David Lawder): “U.S. President Donald Trump delivered a stinging rebuke to China’s trade practices… at the United Nations General Assembly, saying he would not accept a ‘bad deal’ in U.S.-China trade negotiations. Four days after deputy U.S. and Chinese negotiators held inconclusive talks in Washington, Trump’s remarks were anything but conciliatory and emphasized the need to correct structural economic abuses at the heart of the countries’ nearly 15-month trade war. He said Beijing had failed to keep promises it made when China joined the World Trade Organization in 2001 and was engaging in predatory practices that had cost millions of jobs in the United States and other countries. ‘Not only has China declined to adopt promised reforms, it has embraced an economic model dependent on massive market barriers, heavy state subsidies, currency manipulation, product dumping, forced technology transfers and the theft of intellectual property and also trade secrets on a grand scale,’ Trump said. ‘As far as America is concerned, those days are over.’”

September 25 – Wall Street Journal (Kate O’Keeffe in Washington and Jeremy Page): “Beijing is increasingly tapping private Chinese firms to acquire foreign technology for its military, according to officials and a new report, in a strategy that is prompting calls by leaders in Washington to retool U.S. national security policy. Chinese President Xi Jinping is pressing these companies to bid for defense contracts as part of a ‘military-civil fusion’ drive to upgrade an arms industry long dominated by a handful of inefficient state-run contractors and research institutes. The initiative… is alarming U.S. officials, who fear it is a central plank in Beijing’s attempt to build a world-class military capable of challenging the U.S. in Asia and beyond... ‘China’s obfuscation and elimination of barriers between the defense and civilian sectors has troubling implications for foreign as well as domestic Chinese firms,’ a senior U.S. administration official said…”

September 22 – CNBC (Nancy Hungerford): “As President Donald Trump puts pressure on Beijing to end unfair business practices, the Department of Justice has a warning for companies: Bolster your defenses. ‘More cases are being opened that implicate trade secret theft’ — and more of them point to China, said U.S. Deputy Assistant Attorney General Adam Hickey. Since 2012, more than 80% of economic espionage cases brought by the department’s National Security Division have implicated China. The frequency of cases has been rising in recent years, according to Hickey.”

September 24 – Reuters (Humeyra Pamuk and David Brunnstrom): “The United States led more than 30 countries in condemning what it called China’s ‘horrific campaign of repression’ against Muslims in Xinjiang at an event on the sidelines of the U.N. General Assembly that was denounced by China. In highlighting abuses against ethnic Uighurs and other Muslims in China, Deputy Secretary of State John Sullivan said… the United Nations and its member states had ‘a singular responsibility to speak up when survivor after survivor recounts the horrors of state repression.’”

September 22 – Reuters (Humeyra Pamuk): “The United States aims to avoid war with Iran and the additional troops ordered to be deployed in the Gulf region are for ‘deterrence and defense,’ U.S. Secretary of State Mike Pompeo said…”

September 22 – Bloomberg (Danielle Moran): “President Donald Trump reiterated his call for the Federal Reserve to lower interest rates to less than zero in a tweet on Sunday. ‘We should always be paying less interest than others!’ Trump tweeted, referring to the negative rates that have become commonplace in Europe and Asia. About $14.3 trillion of global debt yields at sub-zero rates, according to Bloomberg indexes. That’s down from a high of $17 trillion in late August.”

September 22 – Wall Street Journal (Andrew Ackerman): “Mortgage-finance companies Fannie Mae and Freddie Mac are expected to start keeping their earnings as early as this week, pausing a yearslong arrangement in which they handed nearly all of their profits to the Treasury Department. The move, in an expected agreement between the Trump administration and their federal regulator, would be an initial major step in allowing the companies to build up capital so they can operate as private companies again. Under the forthcoming agreement, the companies would be allowed to retain about a year’s worth of profits, or about $20 billion…”

Federal Reserve Watch:

September 24 – Wall Street Journal (Daniel Kruger and Sam Goldfarb): “Banks on Tuesday flooded the Federal Reserve Bank of New York with more than twice as much demand for new two-week loans than the central bank was offering, a sign that banks could need more cash than Fed officials had anticipated. In its latest effort to calm short-term lending markets, the Fed offered $30 billion of two-week cash loans and received $62 billion in demand from banks offering collateral in the form of Treasury and mortgage securities. In a second offering, the Fed received $80.2 billion of demand for $75 billion of shorter-term overnight loans.”

September 23 – Wall Street Journal (Michael S. Derby): “A swift response to market unrest by the Fed last week helped short-term interest-rate markets, Federal Reserve Bank of New York President John Williams said. Temporary injections of liquidity by the central bank ‘had the desired effect of reducing strains in markets, narrowing the dispersion of rates, and lowering secured and unsecured rates to more normal levels relative to other benchmarks,’ Mr. Williams said... Mr. Williams acknowledged the degree of strain seen in short-term markets was larger than expected, but the central bank was ready to respond. ‘We were prepared for such an event, acted quickly and appropriately, and our actions were successful,’ Mr. Williams said, adding that the mantra at the bank is to ‘quickly diagnose the problem, develop the right action plan, and execute that plan.’”

September 25 – Bloomberg (Rich Miller): “Recent turbulence in U.S. money markets has cast light on a big problem hidden at the root of the Federal Reserve’s conduct of monetary policy: It is targeting an increasingly irrelevant interest rate. Less than $100 billion changes hands each day in the federal funds market, the overnight interbank rate that the central bank targets. In contrast, considerably more than a trillion dollars are traded daily in the market for repurchase agreements, where financial institutions swap Treasury securities for cash. ‘Fed funds is a moribund market,’ said Mark Cabana, head of U.S. interest rates at Bank of America... ‘It does not really represent where banks are truly seeking to lend and borrow.’”

U.S. Bubble Watch:

September 26 – Associated Press (Mike Schneider): “The gap between the haves and have-nots in the United States grew last year to its highest level in more than 50 years of tracking income inequality, according to U.S. Census Bureau figures… Income inequality in the United States expanded from 2017 to 2018, with several heartland states among the leaders of the increase, even though several wealthy coastal states still had the most inequality overall… The nation’s Gini Index, which measures income inequality, has been rising steadily over the past five decades.”

September 25 – Reuters (Lucia Mutikani): “Sales of new U.S. single-family homes rebounded more than expected in August, the latest sign that the sluggish housing market was starting to get a lift from lower mortgage rates… The Commerce Department said new home sales increased 7.1% to a seasonally adjusted annual rate of 713,000 units last month, boosted by a surge in activity in the South and West. July’s sales pace was revised up to 666,000 units from the previously reported 635,000 units. It was the second time in three months that new homes sales jumped above 700,000.”

September 24 – CNBC (Diana Olick): “Home price gains have been shrinking since March 2018, but now signs point to reheating in the housing market. The much-watched S&P CoreLogic Case-Shiller U.S. National Home Price Index rose 3.2% annually in July, the same gain reported in June. Prices are still cooling in the largest cities, however. The 10-City Composite rose 1.6% annually, down from 1.9% in the previous month. The 20-City Composite posted a 2.0% annual gain, down from 2.2% in June. The hottest cities for home price appreciation were Phoenix, Las Vegas and Charlotte, North Carolina.”

September 25 – Bloomberg (Esha Dey, Drew Singer, Ryan Vlastelica, Kristine Owram and Mathieu Benhamou): “Unprofitable companies are raising money in initial public offerings at the fastest pace since the dot-com bubble when a revolution in the banking industry sparked a rush to risk. Peloton Interactive Inc.’s planned Nasdaq debut on Thursday extends this year’s run of IPOs by so-called unicorns—huge, money-losing firms like Uber Technologies Inc. and Pinterest Inc. The unprofitable members of the 2019 class of IPOs have already raised the most cash of any year since at least 2000… And there’s more to come: Another 107 companies filed in 2019 to go public, among them The We Co., parent to WeWork, the office-share operator awash in red ink… ‘It used to be an article of faith that you couldn’t go public until you turn a profit,’ said Rett Wallace, chief executive officer of Triton Research… ‘Not a path to profitability, a profit.’ The 2019 class of IPOs may turn out to be as risky as those dot-com companies that went bust at the turn of the century despite the exuberance surrounding them.”

September 27 – Financial Times (Richard Waters and Richard Henderson): “A series of IPO crashes, as investors turned their backs on some of Silicon Valley’s most prized companies, has prompted forecasts of a broader reset in valuations after the long tech boom. Endeavor Group, the Hollywood talent agency that has expanded rapidly into new areas of digital media, became the latest company to pull its initial public offering, after the fitness bike start-up Peloton tumbled to one of the worst first-day performances of the year on Thursday. Wall Street has also been spooked by the collapse of a planned IPO for office space rental company WeWork, which repeatedly slashed its mooted valuation after investors balked at its huge losses and corporate governance.”

September 26 – Bloomberg (John Tozzi): “The cost of family health coverage in the U.S. now tops $20,000, an annual survey of employers found, a record high that has pushed an increasing number of American workers into plans that cover less or cost more, or force them out of the insurance market entirely. ‘It’s as much as buying a basic economy car,’ said Drew Altman, chief executive officer of the Kaiser Family Foundation, ‘but buying it every year.’”

September 23 – Financial Times (Richard Henderson): “Executives across the US are shedding stock in their own companies at the fastest pace in two decades… Corporate insiders — typically chief executives, chief financial officers and board members — sold a combined $19bn of stock in their companies through to mid-September, according to… Smart Insider, a UK-based group. That puts them on track to hit about $26bn for the year, which would mark the most active year since 2000, when executives sold $37bn of stock amid the giddy highs of the dotcom bubble. That projected total for the year would also set a post-crisis high, eclipsing the $25bn of stock sold in 2017.”

September 22 – CNBC (Ari Levy): “Other years have had more tech IPOs than 2019, but there’s never been a year that’s minted so many big ones. After Datadog’s first-day pop on Thursday, the provider of analytics and monitoring tools became the fourth cloud software company to go public in 2019 and attain a market cap of at least $10 billion. Videoconferencing company Zoom, chat app Slack, and cybersecurity vendor Crowdstrike are the three others. The new crop brings to 16 the total number of cloud software companies in the 11-digit club. While 14 of those companies have gone public since the beginning of 2012, this is the first year with more than two that reached $10 billion in value.”

China Watch:

September 24 – Reuters (David Brunnstrom and David Lawder): “China’s top diplomat hit back at U.S. criticism of its trade and development model…, saying Beijing had no intention to ‘play the Game of Thrones on the world stage’ but warned Washington to respect its sovereignty, including in Hong Kong. Wang Yi, China’s foreign minister and state councilor, said Beijing would not bow to threats, including on trade, though he said he hoped a round of high-level trade talks next month would produce positive results.”

September 24 – Associated Press: “China urged President Donald Trump… to listen to developing countries and oppose bullying after the American leader criticized its trade status at the United Nations. A foreign ministry spokesman called on Trump to ‘meet China halfway’ in settling trade disputes. The two governments are locked in an escalating tariff war over complaints about Beijing’s trade surplus and technology ambitions. It threatens to tip the global economy into recession. Trump complained… that the World Trade Organization improperly gives China preferential treatment. He was referring to complaints China, the No. 2 global economy and biggest trader, is abusing the leeway given to developing countries to subsidize exports or delay opening markets.”

September 24 – Bloomberg: “China’s economy in the third quarter was the weakest it has been this year, according to the China Beige Book, with manufacturing, property and the services sectors all worsening, even as borrowing picked up. Manufacturing revenue, profits, volumes and sales prices fell by double-digit paces from the previous three months, although borrowing remained at its highest level, according to the quarterly report. ‘Retail and services stood out mostly for how incapable they were at picking up the slack,’ the report said… The current weakness in the economy is primarily due to manufacturing. While a drop in exports was a factor, most of the decline was due to ‘considerably slower sales price growth,’ according to the report… The services sector continued to underperform, with both revenue and profits dropping from the same period last year. Hiring also slowed, which means that ‘if manufacturing does have to shed a large number of jobs, services has shown no capacity to absorb them,’ the report said. There was a resurgence of borrowing in the period.”

September 24 – Financial Times (Don Weinland): “China’s $8.4tn shadow bankin industry has surged back to life this year, as regulators scale back deleveraging in an effort to spur economic growth. Financial regulators in China have for several years grappled to control the country’s massive shadow lending sector, which includes many forms of off-balance-sheet lending from banks, peer-to-peer lenders and credit extended by asset managers. The opaque industry has long been associated with financial risks, and became the target of a regulatory crackdown in 2018, part of a central government attempt to maintain financial stability. But following the onset of the trade dispute with the US and slowing economic growth, shadow lending has made an unprecedented return in the second and third quarters of 2019, according to China Beige Book International… Shadow lenders accounted for 39% of total lending in the third quarter of the year, and 45% in the second quarter, the highest percentage of shadow financing since at least 2013... As recently as the middle of last year, shadow lending had shrunk to just 21% of total loans. ‘For six months now the non-bank share of loans has been highest on record,’ according to the report, which surveyed more than 10,000 companies’ credit conditions this year. ‘The consensus view that China’s economy is currently credit-constrained should be discarded.’”

September 27 – Bloomberg: “A scrapped bond sale by a mining company in Qinghai this week is sharpening focus on debt risks in the Chinese province. Western Mining Group, controlled by the local government, pulled a 1 billion yuan ($140 million) bond sale on Thursday… Lack of demand was behind the cancellation, according to people familiar with the matter… The failed sale underscores weakening investor appetite for bonds from companies in the mineral-rich province in China’s northwest, after missed payments and debt restructuring at other firms in the region… ‘Negative headlines definitely have had ripple effect on other Qinghai firms,’ said Li Yunfei, a credit analyst with Pacific Securities Co.”

September 24 – Wall Street Journal (Chao Deng): “The head of China’s central bank said that the country’s interest rates were appropriate and that it wouldn’t aggressively ease monetary policy, even as other central banks lower borrowing rates in a bid to spur growth. People’s Bank of China Governor Yi Gang said… Beijing wouldn’t follow other countries in taking certain steps to expand credit, such as substantially cutting the required amount of reserves maintained by commercial banks or pushing interest rates below zero. He told reporters that the economy, despite recent signs of weakness, was still performing within expectations, while inflation was relatively mild. Mr. Yi emphasized instead the importance of preserving flexibility on policy options as the economy slows to its lowest rate of growth in nearly three decades. ‘We should cherish the space for normal monetary policy,’ Mr. Yi said, adding that while Beijing has room to take monetary and fiscal measures, it should continue with normal policy as along as possible.”

September 26 – Bloomberg (Jason Gale): “China’s pig herd has halved to 200 million head over the past year because of a deadly swine disease that may depress pork supplies for years, a Rabobank analyst said. The emergence of African swine fever in China in August 2018, and the subsequent deaths and culling of pigs, have wiped out 25% the country’s pork production, or about 13 million metric tons, which is ‘unprecedented,’ said Pan Chenjun, Rabobank’s Hong Kong-based senior animal proteins analyst…”

September 22 – Bloomberg (Lulu Yilun Chen): “The government of one of China’s top technology hubs is dispatching officials to 100 local corporations including e-commerce giant Alibaba Group Holding Ltd., the latest effort to exert greater influence over the country’s massive private sector. Hangzhou… is assigning government affairs representatives to facilitate communication and expedite projects, the city government said…”

September 26 – Reuters (Jessie Pang and Felix Tam): “Thousands of Hong Kong protesters rallied at the harbor side on Friday, chanting slogans accusing the police of brutality and setting the stage for a weekend of demonstrations leading up to the 70th anniversary of the People’s Republic of China.”

Central Banking Watch:

September 26 – Bloomberg (Ferdinando Giugliano): “It’s all kicking off at the European Central Bank.Sabine Lautenschlaeger, the executive board member from Germany, is to resign at the end of October, slightly more than two years before the end of her mandate. Her exact motives are unknown, but they add to a sense of chaos at the central bank barely a month before a crucial leadership change. Christine Lagarde, who’s taking over from Mario Draghi in November, will have a very tough job ensuring the ECB keeps running effectively. Lautenschlaeger has been a vocal opponent of the central bank’s recent decision to restart quantitative easing, as it tries to counter a slowdown and bring inflation back on target.”

September 23 – Bloomberg (Fergal O'Brien): “European Central Bank President Mario Draghi said the Governing Council should be open to ideas such as Modern Monetary Theory, while noting they’re closer to fiscal policy and should be directed by governments. Draghi was responding to a question from European lawmakers about helicopter money and the best ways to channel funds to the economy in a way that helps inequality. He mentioned MMT and a recent paper by former Federal Reserve Vice Chairman Stanley Fischer… which said central banks should put money ‘directly in the hands of public and private sector spenders.’ ‘These are objectively pretty new ideas,’ Draghi said. ‘They have not been discussed by the Governing Council. We should look at them, but they have not been tested.’”

September 26 – Reuters (Anthony Esposito): “For the second time in a row, Mexico’s central bank cut its key interest rate by 25 basis points to 7.75%, as it cited slowing inflation, widening slack in the economy, and expectations for a slight economic recovery.”

September 23 – Reuters (Leika Kihara): “Bank of Japan Governor Haruhiko Kuroda said… that if the central bank were to ease monetary policy further, it would aim at pushing down short- and medium-term interest rates without flattening the yield curve too much. Kuroda said the BOJ has no preset idea on whether to ramp up stimulus at its next rate review on Oct. 30-31, suggesting that the decision will depend on market moves and the economy’s resilience to overseas risks. But he said the central bank has become more eager to top up monetary support than before due to heightening risks such as the widening fallout from the U.S.-China trade conflict. ‘As risks regarding overseas economy are heightening, we need to be increasingly vigilant to the chance the overseas slowdown could affect Japan’s economy and inflation,’ Kuroda said…”

Brexit Watch:

September 25 – Reuters (Elizabeth Piper and William James): “Boris Johnson’s attorney-general said the British parliament was ‘dead’ in a defiant outburst after lawmakers were recalled following a Supreme Court ruling that the prime minister’s suspension of the assembly was unlawful. The comments by Geoffrey Cox… prompted outrage among Johnson’s opponents seeking to stop him taking Britain out of the EU without a deal. Britain faces an Oct. 31 departure deadline, but after three years of political crisis it remains unclear when, if or on what terms the it will leave the bloc it joined in 1973.”

September 27 – Financial Times (Judith Evans): “The £850m sale of a building that includes one of WeWork’s largest sites has collapsed, in a blow to a London property market wrestling with Brexit worries and the turmoil at the shared office company. A deal to sell Southbank Place near Waterloo station, which also includes the London headquarters of Royal Dutch Shell, to the Singaporean group Bright Ruby was called off on Friday, according to two people briefed on the situation. The collapse of the sale comes as WeWork battles with the fallout from its aborted initial public offering process and the departure of Adam Neumann, its chief executive.”

Europe Watch:

September 26 – Bloomberg (Zoe Schneeweiss): “For all the gloom hanging over the euro-area economy, demand for money was surprisingly solid last month. European Central Bank figures published Thursday showed M3 -- a broad measure of the money circulating in the economy -- expanded at the quickest pace since 2009, and loan growth to companies accelerated to 4.3% from 4.0%. That adds fuel to the arguments of the sizable minority in the ECB’s Governing Council who argued that President Mario Draghi’s stimulus package on Sept. 12 was too much too soon.”

September 23 – Bloomberg (Piotr Skolimowski): “Growth in the euro-area economy almost ground to a halt at the end of the third quarter amid evidence that the manufacturing slump is starting to spread into the services sector. A Purchasing Managers’ Index for the 19-nation region fell to 50.4 in September, missing estimates, down from 51.9 a month earlier and the weakest in more than six years… Markit showed. That suggests growth of just 0.1% in the third quarter and further deterioration in the coming months, it said.”

Asia Watch:

September 27 – Bloomberg (Denise Wee): “A growing pile of bad debt in Asia is luring more global investors. That’s the view of consulting firm Deloitte LLP, which estimates that nonperforming loans held by banks across Asia jumped 23% to $640 billion… China continues to dominate the region’s soured loans, with a total of $295 billion held by Asian banks, while India is the second largest at about $160 billion, according to Deloitte… The scale of China’s nonperforming loan market is ‘on par with even the busiest of European markets,’ with Deloitte estimating that 380 billion yuan ($53bn) of soured debt traded in the secondary market in 2018.”

September 24 – Reuters (Patturaja Murugaboopathy and Gaurav Dogra): “Asian countries are looking for catalysts beyond China to drive their economies as the Sino-U.S. trade war forces Chinese demand for their exports to shrink. Luring foreign companies to their shores, finding ways to boost domestic consumption and scouring for alternate export markets are part of that policy mix as China’s neighbors cope with flagging demand from the mainland, hitherto a large market for Asia in the regional supply chain. Thailand has unveiled a ‘relocation package’ comprising tax incentives and changes in laws to attract foreign firms.”

EM Watch:

September 25 – Bloomberg (Suvashree Ghosh): “Indian authorities are scrambling to suppress speculation about bank closures a day after the regulator imposed restrictions on a local lender, the latest indication of how jittery savers are amid a slowing economy and scandals in the financial system. ‘Reports appearing in some sections of social media about RBI closing down certain commercial banks are false,’ the Reserve Bank of India said in a terse Twitter message…”

September 22 – Reuters (Abhirup Roy): “India’s Altico Capital said… it was evaluating options to resolve its liquidity issues, following its recent default on an interest payment that was due earlier this month. Altico, backed by Clearwater Capital Partners and Abu Dhabi Investment Council, said it defaulted on the interest payment after a rating downgrade prompted several of its lenders to recall a substantial amount of debt causing it to face a liquidity squeeze.”

Japan Watch:

September 24 – Reuters (Tetsushi Kajimoto and Takahiko Wada): “A Bank of Japan board member said… the central bank would ease policy further without hesitation if momentum for hitting its 2% inflation target was lost, adding that she was concerned about mounting risks from overseas economies. ‘My recent concern is that, amid significant downside risks concerning overseas economies, negative effects would be exerted on prices,’ Takako Masai said… ‘I intend to continue to conduct monetary policy appropriately toward achieving the price stability target while considering all conceivable adverse and positive effects from every angle.’”

Global Bubble Watch:

September 25 – Associated Press (Seth Borenstein): “Earth is in more hot water than ever before, and so are we, an expert United Nations climate panel warned in a grim new report Wednesday. Sea levels are rising at an ever-faster rate as ice and snow shrink, and oceans are getting more acidic and losing oxygen, the Intergovernmental Panel on Climate Change said in a report… It warned that if steps aren’t taken to reduce emissions and slow global warming, seas will rise 3 feet by the end of the century, with many fewer fish, less snow and ice, stronger and wetter hurricanes and other, nastier weather systems. ‘The oceans and the icy parts of the world are in big trouble, and that means we’re all in big trouble, too,’ said one of the report’s lead authors, Michael Oppenheimer, professor of geosciences and international affairs at Princeton University. ‘The changes are accelerating.’”

September 23 – Financial Times (Leslie Hook and Camilla Hodgson): “French president Emmanuel Macron has urged world leaders to respond more urgently to climate change, as the New York climate summit opened with a dire warning from the UN secretary-general about the ‘apocalyptic’ impact a warming planet would have on humanity. Mr Macron said France would not pursue new trade negotiations with countries that were not following the Paris climate agreement, adding that doing so would be ‘deeply hypocritical’. António Guterres, UN secretary-general, earlier set the tone for the gathering when he told the assembled audience...: ‘Our warming earth is issuing a chilling cry: stop.’ ‘If we don’t urgently change our ways of life, we jeopardise life itself. My generation has failed in its responsibility to protect our planet. That must change.’”

September 24 – Financial Times (Toby Stubbington): “The level of government debt around the world has ballooned since the financial crisis, reaching levels never seen before during peacetime. A Deutsche Bank analysis shows the world’s major economies have debts on average of more than 70% of GDP, the highest level of the past 150 years except for a spike around the second world war… Unlike earlier eras, when governments typically ran surpluses during peacetime, the pressures of modern democracy and welfare systems have made persistent deficits the norm in many countries… ‘The problem in sustainably recreating such a scenario today is that the post-WWII era saw much higher levels of GDP growth due to favourable demographics, post-war reconstruction and high productivity growth,’ said Deutsche’s Jim Reid.”

September 22 – Reuters (Saikat Chatterjee): “Lending standards in the rapidly growing loan market are deteriorating and complex financial products that mask risks to banks have parallels with the run-up to the 2008 financial crisis, the Bank for International Settlements warned… The number of collateralized loan obligations (CLOs), a form of securitization which pools bank loans to companies, has ballooned in recent years as investors hunt for higher returns by buying into loans to lower-rated and riskier companies. Like the collateralized debt obligations (CDOs) that bundled U.S. sub-prime mortgages into complex products and were blamed for triggering the global financial crisis, CLOs also have complex structures that can mask underlying risks… The global outstanding CLO market is now estimated to stand at about $750 billion, while the CDO market in 2007 before the crisis came to $640 billion, the BIS said.”

September 23 – Wall Street Journal (Lucy Craymer and Jacob Bunge): “China is on a global meat-buying spree, pushing up beef, pork and poultry prices around the globe as the world’s most populous nation scrambles to fill a large void in its meat supply. Meat buyers for China are ramping up purchases after a swine disease hit hog farms… and reduced its pig herd—the world’s largest—by more than a third. Domestic pork prices have surged and China’s meat imports are swelling in response, straining global supplies and sending ripples across the global economy. In Brazil, poultry shipments to China have jumped 31% from a year ago and retail prices for chicken breasts, thighs and legs have increased roughly 16%. Shoppers in Europe are on average paying 5% more for pork, because more domestically produced meat is being sent to China. Lamb prices in Australian grocery stores have jumped 14%, while ground beef on shelves in New Zealand now fetches record prices.”

September 22 – Associated Press (Carlo Piovano and Gregory Katz): “Families stranded, honeymoons and vacations canceled, thousands of workers laid off: The sudden collapse of British tour company Thomas Cook and its network of airlines and hotels sowed chaos for hundreds of thousands of travelers and businesses around the world Monday. Brought down by a variety of factors, including crushing debts and online competition, the 178-year-old travel agency that helped pioneer the package tour ceased operating in the middle of the night. Its four airlines stopped carrying customers, and its 21,000 employees in 16 countries lost their jobs.”

Fixed-Income Bubble Watch:

September 27 – Bloomberg (Michael Gambale): “This month has seen a record number of bond sales by blue-chip companies, incentivized by low interest rates and supercharged investor demand to refinance debt. The market priced 127 deals, surpassing September 2017’s 110 offerings as the busiest month, based on Bloomberg records began going back 20 years. Total volume of $154.9 billion is still short of the $177 billion record set in May 2016. But with two days remaining in September, sales are poised to be the third-highest ever. The surge in supply came as a growing pile of bonds offer negative yields overseas, driving investors desperate for higher returns into the U.S. corporate credit market.”

September 23 – Bloomberg (Danielle Moran): “U.S. state and local governments are selling bonds at the fastest pace since the record-setting flood in December 2017, seizing on a slide in interest rates that has pushed their borrowing costs to the lowest in more than half a century. The volume of new debt sales in September is poised to rival or exceed the $38 billion that was issued in August, which was the busiest month since governments rushed to the market before President Donald Trump’s tax law pulled the subsidies from a key refinancing tactic. Governments have sold about $28 billion of long-term debt in September, a 33% increase from the same period a year ago, and more than $10 billion is already scheduled to be offered over the next week…”

September 24 – Reuters (Karen Pierog): “Local governments in the U.S. Midwest and Southeast regions face elevated exposure to climate change in the coming decades as rising temperatures pose a credit risk for their debt, Moody’s… said… The credit rating agency said heat stress could hurt agriculture, lower labor productivity, increase infrastructure costs, boost energy demand and impair public health. ‘If significant enough, now and over ensuing decades, these difficulties have the potential to lower revenue, increase expenses, impair assets and increase liabilities and debt, among other effects,’ Moody’s said…”

Leveraged Speculation Watch:

September 27 – Bloomberg (Lu Wang and Melissa Karsh): “The violent rotation from momentum stocks into value that had caught many investors off guard earlier this month turned out to be too short for hedge funds to adjust their playbooks. After enduring some of their worst bleeding in years, long-short hedge funds have since clawed back almost half of the drop as the rout in their favored stocks suddenly stopped. The group’s month-to-date losses, which bucked broad market gains, have now narrowed to 1% from as high as 1.75%... As performance improves, there are signs the smart money is dashing back into the old habit of chasing winners and dumping losers.”

Geopolitical Watch:

September 20 – Reuters: “Iran will pursue any aggressor, even if it carries out a limited attack, and seek to destroy it, the head of the elite Revolutionary Guards said…, after attacks on Saudi oil sites which Riyadh and U.S officials blamed on Tehran. Be careful, a limited aggression will not remain limited. ‘We will pursue any aggressor,’ the head of the Guards, Major General Hossein Salami, said… ‘We are after punishment and we will continue until the full destruction of any aggressor.’”

September 26 – Reuters (Tim Kelly): “China’s growing military might has replaced North Korean belligerence as the main security threat to Japan, Tokyo’s annual defense review indicated on Thursday, despite signs that Pyongyang could have nuclear-tipped ballistic missiles.”

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