Friday, January 6, 2017

Weekly Commentary: Just the Facts

For the Week:

The S&P500 gained 1.7% (up 18.5% y-o-y), and the Dow rose 1.0% (up 22.1%). The Utilities added 0.3% (up 13.5%). The Banks gained 1.1% (up 39.7%), and the Broker/Dealers surged 4.4% (up 32.9%). The Transports increased 0.7% (up 31.1%). The S&P 400 Midcaps rose 1.3% (up 28.6%), and the small cap Russell 2000 added 0.7% (up 30.7%). The Nasdaq100 jumped 2.9% (up 17.2%), and the Morgan Stanley High Tech index surged 3.4% (up 25.6%). The Semiconductors added 0.2% (up 51.3%). The Biotechs surged 6.8% (down 4.4%). With bullion jumping $21, the HUI gold index rose 7.8% (up 65.8%).

Three-month Treasury bill rates ended the week at 51 bps. Two-year government yields added two bps to 1.21% (up 28bps y-o-y). Five-year T-note yields slipped a basis point to 1.92% (up 36bps). Ten-year Treasury yields declined two bps to 2.42% (up 30bps). Long bond yields fell six bps to 3.01% (up 8bps).

Greek 10-year yields dropped 24 bps to 6.78% (down 165bps y-o-y). Ten-year Portuguese yields surged 31 bps to a 10-month high 4.05% (up 146bps). Italian 10-year yields jumped 15 bps to 1.96% (up 43bps). Spain's 10-year yields rose 16 bps to 1.54% (down 16bps). German bund yields gained nine bps to 0.30% (down 21bps). French yields jumped 15 bps to 0.83% (down 5bps). The French to German 10-year bond spread widened seven to an almost two-year high 53 bps. U.K. 10-year gilt yields rose 15 bps to 1.38% (down 39bps). U.K.'s FTSE equities index added 0.9% to another record high.

Japan's Nikkei 225 equities index jumped 1.8%. Japanese 10-year "JGB" yields increased two bps to 0.06% (down 15bps y-o-y). The German DAX equities index rose 1.0%. Spain's IBEX 35 equities index jumped 1.8%. Italy's FTSE MIB index surged 2.4%. EM equities were mostly higher. Brazil's Bovespa index rose 2.4%. Mexico's Bolsa gained 0.9%. South Korea's Kospi advanced 1.1%. India’s Sensex equities index increased 0.5%. China’s Shanghai Exchange jumped 1.6%. Turkey's Borsa Istanbul National 100 index declined 1.3%. Russia's MICEX equities slipped 0.8%.

Junk bond mutual funds saw inflows of $734 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates dropped 12 bps to 4.20% (up 23bps y-o-y). Fifteen-year rates declined 11 bps to 3.44% (up 18bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down nine bps to 4.28% (up 20bps).

Federal Reserve Credit last week declined $12.8bn to $4.414 TN. Over the past year, Fed Credit contracted $32.8bn (down 0.7%). Fed Credit inflated $1.604 TN, or 57%, over the past 217 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $2.1bn last week to $3.182 TN. "Custody holdings" were down $130bn y-o-y, or 3.9%.

M2 (narrow) "money" supply last week jumped $24.3bn to $13.260 TN. "Narrow money" expanded $938bn, or 7.6%, over the past year. For the week, Currency declined $0.7bn. Total Checkable Deposits jumped $28.6bn, while Savings Deposits were little changed. Small Time Deposits slipped $0.7bn. Retail Money Funds declined $3.3bn.

Total money market fund assets declined $10.0bn to $2.718 TN. Money Funds declined $16.6bn y-o-y (0.6%).

Total Commercial Paper dropped $36.5bn to $950bn. CP declined $132bn y-o-y, or 12.5%.

Currency Watch:

The U.S. dollar index slipped 0.2% to 102.2 (up 3.9% y-o-y). For the week on the upside, the Canadian dollar increased 1.5%, the Australian dollar 1.3%, the South Korean won 1.2%, the Brazilian real 0.9%, the Singapore dollar 0.5%, the Swedish krona 0.5%, the New Zealand dollar 0.4%, the euro 0.1% and the Swiss franc 0.1%. For the week on the downside, the Mexican peso declined 2.3%, the British pound 0.4%, the South African rand 0.1% and the Japanese yen 0.1%. In unusually volatile trading, the Chinese yuan increased 0.3% versus the dollar (down 5.3% y-o-y).

Commodities Watch:

January 4 – Bloomberg (Alfred Cang): “Chinese investors traded a record volume of commodity futures last year as speculators poured in and out of the market on bets that shortages are looming. Combined aggregate trading volume on the Shanghai Futures Exchange, Dalian Commodity Exchange and Zhengzhou Commodity Exchange jumped 27% from 2015 levels to 4.1 billion contracts, according to… the China Futures Association. Turnover across the bourses rose 30% to a record 177.4 trillion yuan ($25.5 trillion)…”

The Goldman Sachs Commodities Index declined 0.2% (up 34.6% y-o-y). Spot Gold jumped 1.8% to $1,173 (up 6.2%). Silver surged 3.3% to $16.52 (up 18.6%). Crude slipped 13 cents to $53.70 (up 62%). Gasoline declined 2.7% (up 45%), and Natural Gas dropped 12.8% (up 32%). Copper gained 1.5% (up 26%). Wheat jumped 3.7% (down 12%). Corn gained 1.7% (unchanged).

Trump Administration Watch:

January 5 – Bloomberg (Andrew Mayeda): “The makeup of President-elect Donald Trump’s trade team suggests he wasn’t joking when he promised voters to shake things up. On the campaign trail, Trump portrayed an America that has been shortchanged by bad trade deals and unscrupulous trading partners, leading to the hollowing out of the nation’s manufacturing sector. He promised to label China a currency manipulator and renegotiate the North American Free Trade Agreement with Canada and Mexico. Since the election, Trump has taken aim at individual companies, warning General Motors Co. this week that it could face a ‘big border tax’ if it doesn’t shift production to the U.S. from Mexico. And the track records of his top trade officials signal that his administration will take aggressive steps to boost exports… ‘It’s clear this wasn’t just campaign rhetoric. The team that the President-elect has put in place was at the core of advising him during the campaign and has a clear playbook of what it wants to implement,’ said Mark Wu, an assistant professor at Harvard Law School who worked in the office of the U.S. trade representative under George W. Bush. ‘They’ve been pretty straightforward about their view of the status quo, which is that it undermines American economic interests.’”

January 3 – New York Times (Binyamin Appelbaum): “President-elect Donald J. Trump… named as his chief trade negotiator a Washington lawyer who has long advocated protectionist policies, the latest sign that Mr. Trump intends to fulfill his campaign promise to get tough with China, Mexico and other trading partners. Mr. Trump also renewed his episodic campaign to persuade American companies to expand domestic manufacturing, criticizing General Motors via Twitter on Tuesday... The choice of Robert Lighthizer (pronounced LIGHT-hi-zer) to be the United States’ trade representative nearly completes Mr. Trump’s selection of top economic advisers and, taken together with the president-elect’s running commentary on Twitter, underscores Mr. Trump’s focus on making things in America.”

January 4 – Reuters (Sarah N. Lynch): “With his selection of deal-making attorney Walter ‘Jay’ Clayton to head the U.S. Securities and Exchange Commission, President-elect Donald Trump is signaling that the agency will try to reduce regulations that critics see as burdensome or hindering corporate growth. Trump announced… that he intends to nominate Clayton, a partner in the New York office of law firm Sullivan & Cromwell, to lead the agency that polices and regulates Wall Street. Clayton specializes in public and private mergers and acquisitions and capital-raising efforts, and notably worked on the initial public offering of Alibaba Group Holding Company.”

January 6 – Financial Times (Shawn Donnan): “Senior Chinese officials have warned the US that Beijing is ready to retaliate if Donald Trump’s incoming administration imposes new tariffs, highlighting the risk of a destructive trade war between the world’s two largest economies. Penny Pritzker, the outgoing US commerce secretary, said… that Chinese officials had informed their US counterparts in a meeting after November’s election that they would be forced to respond to trade measures taken by the new administration. ‘The Chinese leadership said to me ‘If you guys put an import duty on us we are going to do it on you’,’ Ms Pritzker said. ‘And then they said ‘That will be bad for both of us’.’”

January 6 - Los Angeles Times (Ralph Jennings): “Taiwanese President Tsai Ing-wen, who rattled mainland China by phoning President-elect Donald Trump last month, leaves Saturday for a trip to the United States and Central America that will be closely watched for any further breaches in the delicate diplomatic protocol with Beijing. The journey is seen as a chance for Tsai to prop up relations in a region that has historically been friendly to Taiwan but faces pressure from the mainland. Because her government is not formally recognized by the United States, Tsai will only make ‘transit stops’ of about a day apiece in Houston on Saturday and in San Francisco at the end of the nine-day trip.”

China Bubble Watch:

January 2 – Bloomberg: “China’s factories and services both closed out 2016 on relatively robust notes that signal growth is strong enough for policy makers to keep pushing for economic reforms in 2017. The manufacturing purchasing managers index stabilized near a post-2012 high in December, edging down to 51.4 from 51.7 the prior month. The non-manufacturing PMI slipped to 54.5 from a two-year high of 54.7 in November… A gauge of factory input prices surged to a five-year high of 69.6.”

January 4 – Bloomberg: “The People’s Bank of China faces a reckoning after revving its credit engine for years. Three conditions suggest traditional financing and shadow banking are due to cool: Restrictions on property markets are poised to start weighing on mortgage issuance; bond market turbulence has spurred widespread cancellation of new corporate issues; and banks face more curbs on selling wealth-management products amid a regulatory tightening. With economic expansion on pace to meet the government’s objective and inflation pressure rising, leaders are signaling tighter monetary policy as they seek to reduce risks. The PBOC also cut language from its last quarterly statement saying it would reduce lending costs. ‘China’s credit engine is running out of gas,’ said Frederic Neumann, co-head of Asian economic research at HSBC… ‘Regulatory tightening, higher interest rates and a liquidity squeeze will likely weigh on credit growth in coming months.’”

January 1 – Wall Street Journal (Rachel Rosenthal): “At the top of regulators’ agenda in China for 2017 is a campaign to wean the nation’s sprawling financial system off of cheap borrowing and rising credit levels. Years of easy money have helped fuel growth, but also have sparked a worrisome surge in asset prices and other financial risks. The latest target is the $9 trillion bond market, where the central bank has been gradually tamping down short-term credit to discourage the kind of borrowing many financial institutions use to make risky investments… As much as $833 billion may have left China in 2016 through November, estimates French investment bank Natixis, compared with an outflow of $742 billion in all of 2015… The trouble is that the easy money is funding a huge tangle of investments by banks, insurers, brokers and speculators in everything from real estate and troubled infrastructure projects to corporate bonds and soybean-meal futures. Any tightening can threaten the debt-saddled corporate sector and potentially sow turmoil in unexpected places.”

January 3 – Wall Street Journal (Lingling Wei): “The large pile of foreign debt owed by Chinese companies, from state-owned banks to airlines, is giving added impetus to Beijing’s efforts to keep the yuan from falling too steeply against the rallying dollar. The yuan dropped by 4% over the past three months, as the dollar recently hit a 14-year high against 16 currencies. The faster-than-expected depreciation is causing more businesses and individuals to try to get out of yuan, further pressuring the currency… Chinese companies with large amounts of dollar debts represent another motivation for stepped-up controls, economists and officials say… Though the People’s Bank of China doesn’t give detailed breakdowns of Chinese companies’ foreign debt, more than half of it is in U.S. dollars… Chinese businesses’ foreign borrowings increased by $47.7 billion—a 4% rise—to $1.2 trillion in the third quarter of 2016 from the second quarter, official data show. State banks, traditionally big users of external funding to help replenish their capital base, accounted for 38% of the jump.”

January 4 – Bloomberg: “China has studied possible scenarios for the yuan and capital outflows this year and is preparing contingency plans, according to people familiar with the matter… The authorities have used stress tests, models and field research, said the people who asked not to be identified… Financial regulators have already encouraged some state-owned enterprises to sell foreign currency and may order them to temporarily convert some holdings into yuan under the current account if necessary, they added… The reported plans come amid increasing pressure on the yuan from a resurgent dollar, rising capital outflows and concern that U.S. President-elect Donald Trump may make good on his threats to take punitive measures on China’s exports. Policy makers in Beijing have recently taken a slew of measures to tighten control of the currency market, including placing higher scrutiny on citizens’ conversion quotas and stricter requirements for banks reporting cross-border transactions.”

January 6 – Wall Street Journal (Saumya Vaishampayan): “China continued to squeeze the global market for the yuan Friday, sending the cost of borrowing the currency in overseas markets soaring to a near-record high. Investors and analysts say the nosebleed rates are likely to continue as China’s central bank battles to keep the country’s currency from weakening too far and fast. The rate that banks charge each other in Hong Kong’s overnight lending market for the yuan jumped to 61.3% on Friday--the highest in a year and the second-highest level on record. That rate was 38.3% on Thursday, and has remained above 10% since Dec. 30.”

January 1 – Financial Times (Tom Mitchell): “Chinese residents hoping to cash out of the renminbi will face a great wall of paperwork on Tuesday in a test of confidence for the currency as the annual quota for individuals’ foreign exchange purchases resets. With individuals in China allowed to purchase up to $50,000 worth of foreign exchange each calendar year, observers will be watching for signs of a rush to use up their limit as banks reopen after the new year holiday. The incentive to buy dollars is strong after the US Federal Reserve’s December rate rise — and the fiscal and economic policies of US president-elect Donald Trump are only expected to accelerate the renminbi’s two-year decline against the greenback.”

January 2 – Bloomberg: “At risk of capital flight, China marked the new year with extra requirements for citizens converting yuan into foreign currencies. The State Administration of Foreign Exchange, the currency regulator, said in a statement Dec. 31 that it wanted to close loopholes exploited for purposes such as money laundering and illegally channeling money into overseas property. While the regulator left unchanged quotas of $50,000 of foreign currency per person a year, citizens faced extra disclosure requirements from Jan. 1.”

January 1 – CNBC (Nyshka Chandran): “First Britain, then the United States. Now, could China be facing a populist backlash of its own? A growing anti-establishment movement will test the nation's leadership ahead of the 19th Party Congress in late 2017, set to be one of the year's biggest political events… President Xi Jinping is widely expected to be given a second term but his ability to manage rising socio-economic pressures will be a major theme in the lead-up to the Congress, Nicholas Consonery, senior Asia-Pacific director at FTI Consulting, told CNBC… Cynicism with Beijing's economy-first policies has created a new political movement known as the New Left, or neo-Maoism, that supports the egalitarian ideas preached by dictator Mao Zedong.”

Italy Watch:

January 1 – Reuters (Paul Carrel): “The head of Germany's Ifo economic institute believes Italians will eventually want to quit the euro currency area if their standard of living does not improve, he told German daily Tagesspiegel. ‘The standard of living in Italy is at the same level as in 2000. If that does not change, the Italians will at some stage say: ‘We don't want this euro zone any more',’ Ifo chief Clemens Fuest told the newspaper. He also said that if Germany's parliament were to approve a European rescue programme for Italy, it would impose on German taxpayers risks ‘the size of which it does not know and cannot control.’”

Europe Watch:

January 4 – Bloomberg (Carolynn Look): “The euro-area economy finished 2016 with the strongest momentum in more than 5 1/2 years, bolstering the region as it heads into a year of political uncertainty. A composite Purchasing Managers’ Index climbed to 54.4 in December from 53.9 in November, IHS Markit said… That’s the highest in 67 months and above a Dec. 15 estimate.”

January 6 – Financial Tribune: “Euro-area economic confidence jumped to the highest since 2011 at the end of last year after the European Central Bank extended its stimulus and the recovery in the 19-nation region showed further signs of strengthening. An index of executive and consumer sentiment increased to 107.8 in December from a revised 106.6 in November… That’s the strongest reading since March 2011 and compares with a forecast of 106.8 in a Bloomberg survey.”

January 5 – Reuters (Madeline Chambers and Michael Nienaber): “German economists called on the European Central Bank… to raise interest rates after euro zone consumer prices rose faster than expected in December. Inflation in the 19 countries sharing the euro increased an annual 1.1% last month, …stirring a fear of inflation among German that goes back to the 1920s… To fight off deflation, the central bank has cut interest rates to zero and pumped more than a trillion euros into the economy through a bond-buying program. ‘It is time for a normalization (of monetary policy),’ Stefan Bielmeier, the chief economist at DZ Bank, told the newspaper Bild. ‘Now a change in interest rates is doable.’”

January 5 – Bloomberg (Carolynn Look): “Mario Draghi’s German problem has come back to haunt him. In a week that revealed a jump in inflation in Europe’s largest economy, commentators are lining up to urge the European Central Bank president to end his ultra-loose monetary policy. From the allegation that savers face devastation to Bild newspaper’s call to ‘Raise rates now!’ Draghi is once again facing the wrath of Germans fretting that the guardian of price stability will let them down. ‘The debate is going to get louder, particularly in Germany where people are bred to fear inflation,’ said Stefan Kipar, an economist at BayernLB…”

January 6 – Bloomberg (John Geddie): “Should France ditch the single currency under a president Le Pen, redenominating nearly 2 trillion euros of government bonds in ‘new francs’ could be legally straightforward, but hundreds of billions of corporate debt would be left in limbo. The crux of the issue is that the sovereign debt is subject to French laws that could be changed by the government to prevent a currency switch triggering a default, while a large chunk of the 1 trillion euros ($1.1 trillion) of bonds issued by major French companies are governed by foreign legislation.”

Fixed-Income Bubble Watch:

January 4 – Bloomberg (Anchalee Worrachate): “If you thought you had already read the gloomiest possible prognosis for bonds, wait until you read this one. Paul Schmelzing, a PhD candidate at Harvard University and a visiting scholar at the Bank of England, said if the latest bond market bubble bursts, it will be worse than in 1994 when global government bonds suffered the biggest annual loss on record. ‘Looking back over eight centuries of data, I find that the 2016 bull market was indeed one of the largest ever recorded,’ wrote Schmelzing in an article posted on Bank Underground, which is a blog run by Bank of England staff. ‘History suggests this reversal will be driven by inflation fundamentals, and leave investors worse off than the 1994 ‘bond massacre’’.”

Global Bubble Watch:

January 4 – Reuters (Dion Rabouin): “Global debt levels rose to more than 325% of the world's gross domestic product last year as government debt rose sharply, a report from the Institute for International Finance showed… The IIF's report found that global debt had risen more than $11 trillion in the first nine months of 2016 to more than $217 trillion. The report also found that general government debt accounted for nearly half of the total increase. Emerging market debt rose substantially, as government bond and syndicated loan issuance in 2016 grew to almost three times its 2015 level. China accounted for the lion's share of the new debt, providing $710 million of the total $855 billion in new issuance during the year, the IIF reported.”

January 4 – Financial Times (Joe Rennison and Eric Platt): “Wall Street’s debt engine has begun 2017 in record form… After this week’s record start for debt sales, activity remained brisk on Wednesday with dollar deals completed by car companies Ford and Toyota and banking groups Lloyds, Bank of Montreal and Citigroup… That followed 11 companies and banks selling $19.9bn of debt in the US on Tuesday as global financial markets reopened after the new year holiday. It marked the strongest start to a year on record, according to… Dealogic. Global issuance totalled $21.2bn, also a record.”

January 2 – Bloomberg (Anchalee Worrachate and Anooja Debnath): “Governments of the world’s leading economies have about $7.7 trillion of debt maturing in 2017, with most facing higher borrowing costs as a three-decade bull market for bonds shows signs of running out of steam. The amount of sovereign bills, notes and bonds coming due for the Group-of-Seven nations plus Brazil, Russia, India and China will climb more than 8% from approximately $7 trillion in 2016… The first substantial increase since Bloomberg started collating the data in 2012 is led by China, where $588 billion of expected redemptions represents a 132% jump from 2016.”

January 4 – Reuters (Marc Jones): “Moody's is likely to make key rating calls on Britain, China and South Africa among others this year as rising political risk and debt levels push the number of countries on a downgrade warning back to a record high. From Europe's Brexit strains and looming elections to the battles of China, South Africa and Brazil to re-orientate their economies, not to mention Donald Trump's first months as U.S. president, the rating agency faces a daunting list of decisions. ‘A quarter of the sovereigns are on a negative outlook, which is the highest proportion we've had since 2012,’ the peak of the euro crisis, Alastair Wilson, Moody's managing director of sovereign risk told Reuters…”

January 2 – Wall Street Journal (Jon Sindreu): “For markets, the era of the central bank may be starting to draw to a close. In 2017, tightening monetary policy and brighter economic fundamentals could ease markets from the grip of the central banks whose policy in recent years has dominated trading in bonds, shares and other assets. That shift portends big changes for investors, who already are repositioning in anticipation. A long period of ultralow interest rates and central-bank asset buying has boosted the prices of bonds and safe stocks. Now investors expect economic performance to catch up as a key driver, not least as they predict stimulus will stop expanding.”

January 2 – Bloomberg (Emily Cadman): “Australian house values increased at the fastest pace in seven years in 2016, as record-low interest rates helped fuel demand for property despite warnings such price increases may be unsustainable. The average dwelling value in the nation’s eight state and mainland territory capitals rose 10.9% last year, compared to 7.8% in 2015, data from CoreLogic… showed.”

U.S. Bubble Watch:

January 6 – Bloomberg (Sho Chandra): “After six straight years of annual job gains topping 2 million, America’s labor market is as tight as ever, and it’s entering the next phase: an enduring pickup in wages. Average hourly earnings jumped by 2.9% in the 12 months through December, the most since the last recession ended in June 2009… Workers in almost every category, from mining and construction to retail and education, saw paychecks rise from November. The 4.7% jobless rate remains close to a nine-year low, even with a tick up last month.”

January 3 – Bloomberg (Michelle Jamrisko): “American manufacturing expanded in December at the fastest pace in two years, reflecting firmer output and the biggest pickup in orders growth since August 2009. The Institute for Supply Management said… that its index increased to 54.7, the fourth straight advance, from 53.2 a month earlier. The median forecast in a Bloomberg survey called for 53.8… The ISM’s measure of orders surged 7.2 points, while its gauge of prices paid for materials climbed to the highest level since June 2011.”

January 6 – Bloomberg (Patricia Laya): “The U.S. trade deficit widened to a nine-month high in November as exports fell and companies and governments imported the most since August 2015. The gap grew by 6.8% to $45.2 billion from a revised $42.4 billion in the prior month…”

January 4 – Reuters (Bernie Woodall): “U.S. auto sales rose 0.4% in 2016 and set an annual record high of 17.465 million vehicles, from 17.396 million in 2015… WardsAuto, which provides economic data for analysis by the U.S. government, said December auto sales rose 3% to 1.68 million vehicles, for a seasonally adjusted annualized rate of 18.29 million vehicles…”

January 4 – Reuters (Richard Leong and Dan Burns): “The interest rate banks charge each other to borrow dollars for three months rose above 1% on Wednesday for the first time since May 2009 as global rates extended their climb on expectations of accelerating growth and inflation. The London interbank offered rate, or Libor, for three-month dollars was fixed at 1.00511%, the highest level since 1.00688% on May 1, 2009…”

January 4 – Reuters (Olivia Oran): “Big U.S. banks are set on getting Congress this year to loosen or eliminate the Volcker rule against using depositors' funds for speculative bets on the bank's own account, a test case of whether Wall Street can flex its muscle in Washington again. In interviews over the past several weeks, half a dozen industry lobbyists said they began meeting with legislative staff after the U.S. election in November to discuss matters including a rollback of Volcker, part of the Dodd-Frank financial reform that Congress enacted after the financial crisis and bank bailouts. Lobbyists said they plan to present evidence to congressional leaders that the Volcker rule is actually bad for companies, investors and the U.S. economy.”

January 5 – Financial Times (Adam Samson): “Only one in five mutual fund managers that invest in shares of large US companies beat their benchmark last year — half of the rate notched up in 2015. The decline underscored the struggles for active managers amid increasing competition from passive funds. Just 19% of large-cap mutual fund managers notched returns that exceeded that of their benchmark in 2016, compared with 41% in the previous year, according to data compiled by BofA Merrill Lynch.”

January 4 – Bloomberg (Oshrat Carmiel): “Manhattan resale home prices tumbled by the most in more than four years, a sign that sellers are lowering their expectations in a slowing market where buyers have the option to walk away. The median price of previously owned condominiums and co-ops fell 6.3% in the fourth quarter from a year earlier to $900,000, according to… appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. It was the first annual decline since the beginning of 2015, and the biggest since the third quarter of 2012, when resale prices dropped 8.1%.”

January 2 – Wall Street Journal (Timothy W. Martin): “Herbert Whitehouse was one of the first in the U.S. to suggest workers use a 401(k). His hope in 1981 was that the retirement-savings plan would supplement a company pension that guaranteed payouts for life. Thirty-five years later, the former Johnson & Johnson human-resources executive has misgivings about what he helped start. What Mr. Whitehouse and other proponents didn’t anticipate was that the tax-deferred savings tool would largely replace pensions as big employers looked for ways to cut expenses. Just 13% of all private-sector workers have a traditional pension, compared with 38% in 1979.”

Federal Reserve Watch:

January 6 – Wall Street Journal (Michael S. Derby and Shayndi Raice): “Several Federal Reserve officials, in their first public comments since raising short-term interest rates last month, signaled Friday they still favor lifting them higher this year. The Fed in December lifted its benchmark federal-funds rate to a range between 0.50% and 0.75% and penciled in three quarter-percentage-point increases in 2017. Two of the central-bank speakers Friday suggested that more than three moves could be coming. Cleveland Fed President Loretta Mester said… she has a steeper forecast for rate rises because she is expecting faster economic growth and higher inflation than many of her colleagues. The Richmond Fed’s Jeffrey Lacker didn’t lay out how far he wants to go with rates, but said they ‘may need to increase more briskly than markets appear to expect, depending on developments as the year unfolds.’”

January 4 – Reuters (Jason Lange and Lindsay Dunsmuir): “Almost all Federal Reserve policymakers thought the economy could grow more quickly because of fiscal stimulus under the Trump administration and many were eyeing faster interest rate increases, minutes from the central bank's December meeting showed. The minutes… showed how broadly views within the Fed are shifting in response to President-elect Donald Trump's promises of tax cuts, infrastructure spending and deregulation. Policymakers were clear that the outlook for those policies remained uncertain, but they could, if implemented, stoke higher inflation which would lead the central bank to raise borrowing costs more aggressively.”

January 4 – Bloomberg (Christopher Condon and Craig Torres): “Federal Reserve officials focused on the impact of potential fiscal stimulus during their December policy meeting, with many starting to worry that the central bank might eventually be forced to quicken the pace of interest-rate increases to head off higher inflation. Almost all the participants ‘indicated that the upside risks to their forecasts for economic growth had increased as a result of prospects for more expansionary fiscal policies in coming years,’ read the minutes of the Dec. 13-14 meeting… Despite growing attention to the risks of increased government spending and tax cuts spurring faster growth than currently forecast, most on the committee reiterated that a ‘gradual’ pace of rate hikes over the coming years would likely remain appropriate.”

January 4 - Wall Street Journal (Harriet Torry): “Congressional Republicans… revived bills to subject the Federal Reserve’s monetary policy decisions to greater public scrutiny, proposals that didn’t get far in recent years but could face brighter prospects under the incoming Trump administration. Fed officials meet several times a year to decide what to do with short-term interest rates and how to influence them… The ‘Audit the Fed’ measures would require the Government Accountability Office to examine those decisions. The Fed’s financial statements are already audited, and the GAO can examine most other Fed operations, but Congress has long exempted monetary policy decisions from such scrutiny.”

Japan Watch:

January 4 – Reuters (Stanley White): “Activity in Japan's services sector expanded in December at the fastest pace in 11 months, …in a sign that economic growth could pick up due to gains in consumer spending. The Markit/Nikkei Japan Services Purchasing Managers Index (PMI) rose to a seasonally adjusted 52.3 in December from 51.8 in November.”

EM Watch:

January 6 – Bloomberg (Miguel Gutierrez and Adriana Barrera): “Mexico's central bank sold dollars in Mexico and New York on Thursday to fight off the peso's nose dive to record lows amid fears U.S. President-elect Donald Trump's protectionist policies could further hammer Latin America's second-biggest economy. The central bank sold at least $1 billion in U.S. currency in morning trade, four traders told Reuters…”

January 2 – Bloomberg (Jeanette Rodrigues and P R Sanjai): “A private gauge indicates that India’s manufacturing sector will shrink for the first time in a year as Prime Minister Narendra Modi’s unprecedented clampdown on cash hurts demand. The Nikkei India Manufacturing Purchasing Managers’ Index was at 49.6 in December, …the lowest since December 2015.”

Leveraged Speculator Watch:

January 5 – Financial Times (Dan McCrum): “Amid the tweets and bonfire of expertise last year, did you notice the worldwide boom in asset prices? For instance, a non-exhaustive list of ways an investor might have increased their wealth by more than a tenth in 2016 includes: crude oil; the major stock market indices for the US, UK, Brazil and Russia; Emerging market equities as a whole; pretty much any high yielding corporate bond market; sugar, silver and copper; even gilts, debt of the UK government. Yet the premium part of the asset management industry, cosseting its sharpest minds in the most luxurious offices, had another dismal year. The average investor in a hedge fund, according to… HFR, saw their money grow a mere 2.5% last year, only slightly more than investors handed over in fees, of roughly $65bn. The immediate question might be how so many hedge fund managers failed to do better.”

January 5 – Bloomberg (Nishant Kumar): “Crispin Odey’s main hedge fund slumped 49.5% in 2016, its worst annual decline since it began trading in 1992, according to an investor letter. The billionaire, who last month complained that ‘mindless’ passive investing was driving out active fund managers, saw his bearish bets against stocks suffer amid a surge in equities.”

January 6 – Financial Times (Eric Platt and Joe Rennison): “The amount of money making bets that US Treasuries will fall in value climbed to a new record high over the last week in a wager that faster US economic growth and higher inflation will weigh further on government bond prices. So-called ‘non-commercial’ speculative positions selling the 10-year Treasury futures contract have been rising since the US presidential election and hit 816,156 contracts in the week to January 3, outnumbering long positions by 344,931 — a record level…”

Geopolitical Watch:

December 31 – Reuters (Ben Blanchard): “China will never allow anyone to ‘make a great fuss’ about its territorial sovereignty and maritime rights, President Xi Jinping said in his New Year's address, while China's top official in charge of Taiwan ties warned of risk ahead in 2017. China's increasingly assertive moves to push its territorial claims in the disputed South China Sea, including building artificial islands, has unnerved its neighbors. ‘We adhere to peaceful development, and resolutely safeguard our territorial sovereignty and maritime rights and interests,’ Xi said… ‘Chinese people will never allow anyone to get away with making a great fuss about it,’ he said…”

January 5 – Bloomberg: “Chinese state media warned U.S. President-elect Donald Trump that he’ll be met with ‘big sticks’ if he tries to ignite a trade war or further strain ties. ‘There are flowers around the gate of China’s Ministry of Commerce, but there are also big sticks hidden inside the door -- they both await Americans,’ the Communist Party’s Global Times newspaper wrote… The article was published in response to Trump picking Robert Lighthizer, a former trade official in the Ronald Reagan administration who has criticized Beijing’s trade practices, as U.S. trade representative.”

Friday Evening Links

[Bloomberg] U.S. Stocks Set Record, Dollar Gains on Jobs Data: Markets Wrap

[Bloomberg] Americans See Enduring Wage Gains as Labor Market Tightens

[WSJ] Fed Officials Say More Rate Rises Coming

[FT] China warns US of retaliation if Trump imposes tariffs

[FT] Bearish bets against US Treasuries climb to new record