Friday, January 20, 2017

Weekly Commentary: Just the Facts

My sincere apologies. I'll be back with a complete CBB next week. doug

For the Week:

The S&P500 was little changed (up 1.5% y-t-d), while the Dow slipped 0.3% (up 0.3%). The Utilities increased 0.2% (down 0.3%). The Banks dropped 2.8% (down 1.4%), and the Broker/Dealers fell 1.5% (up 2.4%). The Transports added 0.5% (up 2.2%). The S&P 400 Midcaps declined 0.7% (up 0.9%), and the small cap Russell 2000 fell 1.5% (down 0.4%). The Nasdaq100 (up 4.1%) and Morgan Stanley High Tech indices were little changed (up 4.4%). The Semiconductors added 0.6% (up 2.6%). The Biotechs fell 2.3% (up 3.3%). With bullion up $13, the HUI gold index gained 1.7% (up 11.1%).

Three-month Treasury bill rates ended the week at 50 bps. Two-year government yields were unchanged at 1.19% (unchanged y-t-d). Five-year T-note yields rose four bps to 1.94% (up one basis point). Ten-year Treasury yields gained seven bps to 2.47% (up 3bps). Long bond yields rose six bps to 3.05% (down 2bps).

Greek 10-year yields rose seven bps to 6.96% (down 6bps y-t-d). Ten-year Portuguese yields declined nine bps to 3.82% (up 7bps). Italian 10-year yields jumped 11 bps to 2.01% (up 20bps). Spain's 10-year yields increased six bps to 1.49% (up 11bps). German bund yields rose eight bps to 0.42% (up 22bps). French yields jumped nine bps to 0.90% (up 22bps). The French to German 10-year bond spread widened one to 48 bps. U.K. 10-year gilt yields gained seven bps to 1.43% (up 20bps). U.K.'s FTSE equities index fell 1.9% (up 0.8%).

Japan's Nikkei 225 equities index slipped 0.8% (up 0.1% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.05% (up one basis point). The German DAX equities index was unchanged (up 1.3%). Spain's IBEX 35 equities index dropped 1.4% (up 0.3%). Italy's FTSE MIB index slipped 0.2% (up 1.3%). EM equities were mixed. Brazil's Bovespa index gained 1.4% (up 7.1%). Mexico's Bolsa added 0.3% (up 1.5%). South Korea's Kospi declined 0.5% (up 1.9%). India’s Sensex equities index fell 0.7% (up 1.5%). China’s Shanghai Exchange increased 0.3% (up 0.6%). Turkey's Borsa Istanbul National 100 index jumped 1.9% (up 6.3%). Russia's MICEX equities index fell 1.6% (down 3.3%).

Junk bond mutual funds saw inflows of $887 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates slipped three bps to 4.09% (up 28bps y-o-y). Fifteen-year rates were unchanged at 3.37% (up 27bps). The five-year hybrid ARM rate declined two bps to 3.21% (up 30 bps).

Federal Reserve Credit last week dipped $0.4bn to $4.413 TN. Over the past year, Fed Credit contracted $42.9bn (down 1.0%). Fed Credit inflated $1.602 TN, or 57%, over the past 219 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $11.9bn last week to $3.170 TN. "Custody holdings" were down $96.2bn y-o-y, or 2.9%.

M2 (narrow) "money" supply last week jumped $39.1bn to a record $13.307 TN. "Narrow money" expanded $906bn, or 7.3%, over the past year. For the week, Currency increased $4.1bn. Total Checkable Deposits surged $51.5bn, while Savings Deposits declined $16.8bn. Small Time Deposits were little changed. Retail Money Funds were about unchanged.

Total money market fund assets sank $24.8bn to $2.666 TN. Money Funds declined $77bn y-o-y (2.8%).

Total Commercial Paper expanded $7.9bn to $967bn. CP declined $85bn y-o-y, or 8.1%.

Currency Watch:

January 17 – CNBC (Patti Domm): “President-elect Donald Trump's shock comment that the dollar is too strong suggests the U.S. is about to declare as dead a two-decade policy of publicly favoring a strong currency. ‘There's no question that the Trump administration would not want a strong dollar. A strong dollar does nothing good for whatever Trump is basically trying to do,’ said David Woo, Bank of America Merrill Lynch's head of global rates and foreign exchange research. ‘Yes, the U.S. fundamental story is bullish for the U.S. dollar, but the problem here is they actually don't want a strong dollar. I think it's going to go up. However, it's going to be a much more volatile climb.’ Trump's remarks also took a shot at one of the most crowded trades on the planet — long wagers on the dollar.”

January 19 – Bloomberg (Michelle Jamrisko and Saleha Mohsin): “Treasury Secretary nominee Steven Mnuchin said a strong dollar is important over the long term, noting that it’s currently ‘very, very strong,’ and that avoiding U.S. default on the debt would be a top priority if he’s confirmed. Mnuchin also defended his personal record as a founder of OneWest Bank amid the housing crisis, and pushed for tax reform as a key way to lift economic growth as promised by President-elect Donald Trump.”

January 17 – Bloomberg (Samuel Potter and Natasha Doff): “Politics dominated global markets as the dollar weakened after the president-elect called the U.S. currency ‘too strong’ and the pound rallied on British Prime Minister Theresa May’s plans to leave the European Union. Bonds advanced with gold. The greenback fell against most peers after Donald Trump told the Wall Street Journal its value is too high in part because China holds down its own currency. Sterling posted its biggest rally against the dollar since the global financial crisis and the Bloomberg Commodity Index rose to the highest since July.”

The U.S. dollar index slipped 0.4% to 100.74 (down 1.6% y-t-d). For the week on the upside, the British pound increased 1.6%, the Brazilian real 1.4%, the Norwegian krone 1.1%, the Australian dollar 0.7%, the Swiss franc 0.7%, the euro 0.6%, the New Zealand dollar 0.6%, the South Korean won 0.5%, the Swedish krona 0.4% and the Singapore dollar 0.1%. For the week on the downside, the Canadian dollar declined 1.6%, the South African rand 0.6% and the Mexican peso 0.5%. The Chinese yuan increased 0.4% versus the dollar (up 1.0% y-t-d).

Commodities Watch:

January 20 – Bloomberg (Susanne Barton): “Gold bulls wagering the bullion rally has more room to run may have history on their side with the arrival of a new U.S. president. A look at recent presidential transitions supports optimism among traders over the metal’s prospects. Gold has averaged gains of almost 15% in years marking the inauguration of a new president since the 1970s, advancing in five of those seven years. In contrast, the S&P 500 index of equities declined in four of those years for an average loss over the period of 0.9%.”

The Goldman Sachs Commodities Index was little changed (up 0.2% y-t-d). Spot Gold gained 1.1% to $1,211 (up 5.1%). Silver rose 1.2% to $17.03 (up 6.6%). Crude gained 85 cents to $53.22 (down 1.1%). Gasoline dropped 2.8% (down 6.3%), and Natural Gas sank 6.3% (down 14.3%). Copper dropped 2.4% (up 4.7%). Wheat added 0.5% (up 5.0%). Corn jumped 3.1% (up 5.0%).

Trump Administration Watch:

January 20 – Wall Street Journal (Gerald F. Seib): “Donald J. Trump took the oath of office as president at noon Friday, having at last been embraced by the bipartisan Washington establishment gathered around him on the steps of the Capitol. Two minutes later, he went on the attack against that same establishment. In an inaugural address unlike any in recent memory, he indicted the political system he now leads. He also signaled that he will be an entirely new kind of president—and the closest thing to a political independent in the White House since Dwight Eisenhower. ‘For too long, a small group in our nation’s capital has reaped the rewards of government while the people have borne the cost,’ he declared. Lest anyone wonder about his view of the politicians gathered around, he declared: ‘The establishment protected itself, but not the citizens of our country.’ That, he said, will change immediately. The harsh words seemed directed nearly as much at his own Republican Party…”

January 20 – Bloomberg (Margaret Talev): “Donald Trump began his presidency with a combative, populist address aimed squarely at his aggrieved supporters, making little effort to reach beyond his political base or reassure foreign leaders. His inaugural speech on Friday painted an ominous portrait of the nation at the cusp of his administration: a place of violent ‘American carnage’ where ‘rusted-out factories’ are ‘scattered like tombstones’ and the middle class’s wealth is ‘ripped from their homes.’ His predecessor, Barack Obama, sat steps away. Trump promised an unapologetic nationalism that would protect U.S. jobs and a foreign policy that would eradicate Islamic terrorism and put the country’s interests ahead of all others.”

January 14 – Reuters (David Brunnstrom and Matt Spetalnick): “The incoming U.S. administration’s tough talk against China has set the stage for showdowns on everything from security to trade and cyberspace, but contradictory signals are sowing uncertainty over how far President-elect Donald Trump is prepared to go in confronting Beijing. Highlighting the contested South China Sea as a potential flashpoint, Trump’s Secretary of State nominee Rex Tillerson threw out an explosive challenge to Beijing on Wednesday by calling for it be denied access to artificial islands it is building in the strategic waterway. A Trump transition adviser told Reuters that Tillerson, Trump’s pick to be America's top diplomat, did not mean to suggest the new administration would impose a naval blockade, which would risk armed confrontation with China, something the new administration was not seeking. But another official authorized to speak on behalf of the transition team pushed back on that view, saying Tillerson ‘did not misspeak’ when he said China should be barred from its man-made islands.”

January 18 – Financial Times (Shawn Donnan): “The billionaire businessman set to oversee trade policy for Donald Trump has hit back at Chinese leader Xi Jinping and his bid to become the leading advocate for globalisation, calling China the ‘most protectionist’ major economy in the world. The criticism by Wilbur Ross, made at his confirmation hearing to become Mr Trump’s commerce secretary, is the latest in an escalating torrent from the president-elect and his closest economic advisers against Beijing which has already sparked concerns of a US-China trade war. ‘They talk much more about free trade than they actually practise,’ Mr Ross told the Senate commerce committee… ‘China is the most protectionist country of very large countries.’”

January 18 – Bloomberg (Andrew Mayeda): “Billionaire Wilbur Ross, nominated by Donald Trump to serve as Commerce secretary, called China the most protectionist of the world’s major economies and vowed to level the playing field with the Chinese on trade, especially in reducing overcapacity in its steel industry. ‘China is the most protectionist country of very large countries,’ Ross said in testimony… ‘They have both very high tariff barriers and very high non-tariff trade barriers. So they talk much more about free trade than they actually practice.’ Ross, 79, also said the Trump administration will quickly move to redefine relations with Mexico and Canada under the North American Free Trade Agreement.”

January 20 – Reuters (David Brunnstrom): “The new U.S. administration of President Donald Trump said on Friday its trade strategy to protect American jobs would start with withdrawal from the 12-nation Trans-Pacific Partnership (TPP) trade pact. A White House statement issued soon after Trump's inauguration said the United States would also ‘crack down on those nations that violate trade agreements and harm American workers in the process.’ The statement said Trump was committed to renegotiating another trade deal, the North American Free Trade Agreement (NAFTA), which was signed in 1994 by the United States, Canada and Mexico. ‘For too long, Americans have been forced to accept trade deals that put the interests of insiders and the Washington elite over the hard-working men and women of this country,’ it said.”

January 17 – Financial Times (Sam Fleming and Shawn Donnan): “Donald Trump has threatened to overturn two decades of US economic policy by questioning the strong value of the dollar, raising fears that his presidency could set off a new round of currency wars between the world’s major economies. On Monday the president-elect appeared to break from the longstanding ‘strong dollar’ policy of successive administrations, declaring that the currency was too high and that this was preventing US companies from competing with Chinese counterparts. ‘It’s killing us,’ he said in an interview with the Wall Street Journal. Speaking in Switzerland after Mr Trump’s comments, Anthony Scaramucci, a leading figure in the transition team, said the administration would need to take heed of the problems of a buoyant currency.”

January 19 – Wall Street Journal (Aaron Back): “Steven Mnuchin backed away in his confirmation hearing Thursday from some of the more extreme policies suggested by president-elect Donald Trump. But the nominee for Treasury secretary also was vague on major areas of economic and financial policy. He said Mr. Trump doesn't in fact favor a blanket border tax on all imports, instead saying there should be some kind of penalty for companies that move jobs abroad, but Mr. Mnuchin didn’t elaborate. Mr. Mnuchin said he supports in principle the so-called Volcker rule, which bars banks with federally insured deposits from engaging in proprietary trading. But he also approvingly cited a recent Federal Reserve study that found the rule has damaged liquidity in corporate bond markets. He didn’t explain how he would mitigate this impact while keeping the rule in place.”

January 19 – Bloomberg (Saleha Mohsin, Michelle Jamrisko, and Austin Weinstein): “U.S. Treasury Secretary nominee Steven Mnuchin said during his Senate confirmation hearing he’s willing to label China as a currency manipulator if warranted, after President-elect Donald Trump backed away from his pledge to do so immediately. Mnuchin said ‘I would’ when asked by Senator Robert Casey… whether he would recommend naming the Asian country a manipulator if it deserved that label. Trump had already softened his stance on China’s currency policy, saying in an interview this month with the Wall Street Journal that he wouldn’t name the country a manipulator on his first day in office, as previously promised.”

January 19 – Bloomberg (Jesse Hamilton): “Steven Mnuchin indicated he might not give Wall Street everything it wants as Treasury Secretary, saying at his confirmation hearing Thursday that he supports the controversial Volcker Rule and that there might be merit in bringing back some version of the Glass-Steagall Act. Donald Trump’s nominee for Treasury said the Volcker Rule limits on banks’ speculative investments make sense because ‘the concept of proprietary trading does not belong’ in lenders that have a government backstop through deposit insurance. Mnuchin said he opposes reinstating Glass-Steagall, a law Congress repealed almost two decades ago that required a strict firewall between commercial and investment banking. But he conceded that a ‘21st century Glass-Steagall’ is something that policy makers should consider.”

January 16 – Financial Times (Henry Mance, Shawn Donnan and James Shotter): “Donald Trump has taken his strongest swipe yet at the EU, labelling it ‘a vehicle for Germany’ and predicting that other countries will follow Britain in leaving the bloc. The president-elect also warned that his trust for Angela Merkel ‘may not last long at all’, ranking the German chancellor alongside Vladimir Putin as a potentially problematic ally.”

January 17 – Reuters (Edward Taylor and Andreas Rinke): “U.S President-elect Donald Trump warned German car companies he would impose a border tax of 35% on vehicles imported to the U.S. market, a plan that drew sharp rebukes from Berlin and hit the automakers' shares. In an interview with German newspaper Bild, …Trump criticized German carmakers such as BMW, Daimler and Volkswagen for failing to produce more cars on U.S. soil. ‘If you want to build cars in the world, then I wish you all the best. You can build cars for the United States, but for every car that comes to the USA, you will pay 35% tax,’ Trump said… ‘I would tell BMW that if you are building a factory in Mexico and plan to sell cars to the USA, without a 35% tax, then you can forget that,’ Trump said.”

January 15 – Reuters (William James): “U.S. President-elect Donald Trump said that Brexit would turn out to be a great thing and other countries would follow Britain out of the European Union but promised to strike a swift bilateral trade deal with the United Kingdom. Speaking in an interview with The Times of London newspaper…, Trump described himself as a big fan of Britain and endorsed last year's vote to leave the European Union. ‘I think Brexit is going to end up being a great thing,’ Trump said. ‘I’ll tell you, the fact that your pound sterling has gone down? Great. Because business is unbelievable in a lot of parts in the UK.’”

January 20 – Wall Street Journal (AnnaMaria Andriotis): “Less than an hour after Donald Trump became U.S. president, the new administration said it was suspending a recent move to lower charges for borrowers on a risky mortgage backed by the government. The step is the first sign of what is likely to be a changing landscape for housing finance under the new administration. Republicans have long been wary of the government’s role as the major backer of mortgages being originated in the U.S. since the housing bust, arguing too much risk has shifted from the private markets to taxpayers.”

China Bubble Watch:

January 20 – Reuters (Kevin Yao and Elias Glenn): “China's economy grew a faster-than-expected 6.8% in the fourth quarter, boosted by higher government spending and record bank lending, giving it a tailwind heading into what is expected to be a turbulent year. But Beijing's decision to prioritize its official growth target could exact a high price, as policymakers grapple with financial risks created by an explosive growth in debt. China's debt to GDP ratio rose to 277% at the end of 2016 from 254% the previous year, with an increasing share of new credit being used to pay debt servicing costs, UBS analysts said…”

January 17 – Bloomberg: “Volatility in Chinese shares waned amid speculated state efforts to ensure market stability during President Xi Jinping’s appearance at the World Economic Forum in Davos. The Shanghai Composite Index added 0.1% at the close, with 10-day volatility at the lowest level since September. State-owned investors bought shares to steady the market on Monday, while some funds were guided on Tuesday not to sell holdings with big weightings in benchmark indexes, people familiar with the matter said…”

January 17 – Wall Street Journal (Shen Hong): “The turmoil at a Chinese midsized brokerage firm that exacerbated China’s recent bond-market rout also highlighted a little-regulated practice that companies have used to borrow hundreds of billions of dollars and move risky assets temporarily off their books. Called ‘dai chi’ in Chinese—literally, holding something on someone’s behalf—the trading practice resembles a short-term loan backed by bonds, and it has boomed as China’s bond market rallied during the past three years… Typically, sellers pledge to buy the bonds back after terms ranging from a few days to a few months, paying interest on the value of the securities as well as an added fee, the people said. The trade lets the buyer lock in a higher price, while the seller hopes that by the time it buys the bonds back, market prices will have appreciated even further. The risk is that ‘dai chi’ agreements tend to be informal and often don’t leave a paper trail. Several of the executives familiar with the practice said they have conducted the transactions over instant messaging services like China’s QQ, labeling them with the code ‘DC.’ These transactions also, by one estimate, may easily top $1 trillion in value. The practice is just one of the many unexpected risks that have sprouted up in China’s long credit boom.”

January 19 – Bloomberg: “A default storm is brewing for China’s lower-rated corporate bonds with a record amount maturing just as borrowing costs surge. Regulators are curbing leverage, pushing up the cost of capital and adding to challenges for weaker borrowers, according to China Citic Bank… On Jan. 16 alone, two companies missed payments. About 29 notes defaulted last year, up from seven in 2015. ‘Bond issuers are facing huge redemption pressure,’ said Meng Xiangjuan, an analyst at Shenwan Hongyuan Group… ‘Investors should watch out for risks.’ About 211 billion yuan ($31bn) of company notes rated AA or lower, often considered junk in the onshore market, will mature in 2017, up from 155 billion yuan last year... Bond issuance in December by Chinese firms plunged to 205 billion yuan less than the amount of notes they had to repay that month, the lowest on record…”

January 18 – Bloomberg: “China’s benchmark money-market rate jumped the most in two years, with record central bank cash injections being overwhelmed by demand before the Lunar New Year holidays. The People’s Bank of China put in a net 410 billion yuan ($60bn) through open-market operations on Wednesday, the biggest daily addition since Bloomberg began compiling the data in 2004. That brings the total injections so far this week to 845 billion yuan. The interbank seven-day repurchase rate jumped 35 bps, the most since December 2014, to 2.76%...”

January 18 – CNBC (Evelyn Cheng): “If trade frictions increase between the U.S. and China that could have significant fallout for China as it struggles with debt, and weigh on the global economy. President-elect Donald Trump has threatened to take a tougher stance — including imposing tariffs and labeling China a currency manipulator. Meanwhile, with China's Communist Party congress set to meet this fall, the country's ‘leadership cannot afford to be perceived as weak,’ said David Cui, head of China equity strategy at Bank of America Merrill Lynch. ‘That's why the market has grossly underestimated trade frictions,’ Cui said… China was the biggest source of goods imported to the U.S. in 2015… If the U.S. trade deficit — $367 billion in 2015 — with China is cut by a third, Cui estimates the Asian giant's GDP growth could be hurt by 1 to 2%.”

January 18 – Reuters (Samuel Shen and John Ruwitch): “China's efforts to support its currency and cool its hot property market are encouraging more Chinese companies, including many state firms, to take on extra cost and risk by raising foreign-currency bonds in Hong Kong and other offshore locations. Despite the yuan's nearly 7% slump against the dollar in 2016, Chinese companies including state-owned Bank of China raised a record $111 billion in offshore dollar bonds, according to… Dealogic, up from $88 billion in 2015… The list includes issuers who need dollars to pay for overseas acquisitions and deals but are unable to use their yuan after China tightened its grip on capital outflows last year to support the currency.”

January 17 – Bloomberg: “China home prices increased last month in the fewest cities since January last year, signaling property curbs to deflate a potential housing bubble are taking effect. New-home prices, excluding government-subsidized housing, gained last month in 46 of the 70 cities tracked by the government, compared with 55 in November… Prices dropped in four cities… They were unchanged in 20 cities.”

January 15 – Reuters (Winni Zhou and John Ruwitch): “China should stop intervening in the foreign exchange market, devalue the yuan and let it float freely to restore stability, a senior researcher at a government-backed think tank said. Xiao Lisheng, a finance expert with the Chinese Academy of Social Sciences, made the remarks… in the official China Securities Journal amid a growing debate among the country's economists on whether authorities should let the closely-managed currency trade more freely. The yuan lost 6.6% against the dollar last year, the biggest annual loss since 1994. ‘The more the government delays the release of depreciation pressure, the greater the impact and destructive power of the release of depreciation pressure will be,’ Xiao wrote. The authorities should ‘let the yuan exchange rate have a one-off adjustment to realize a free float’ of the currency, he said.”

Brexit Watch:

January 17 – Reuters (Kylie MacLellan and William James): “Britain will quit the EU single market when it leaves the European Union, Prime Minister Theresa May said on Tuesday in a decisive speech that set a course for a clean break with the world's largest trading bloc. Setting out a vision that could determine Britain's future for generations and the shape of the EU itself, May answered criticism that she has been coy about her strategy with a 12-point plan for what has been dubbed a ‘hard Brexit’. May promised to seek the greatest possible access to European markets but said Britain would aim to establish its own free trade deals with countries far beyond Europe, and impose limits on immigration from the continent.”

Europe Watch:

January 16 – Financial Times: “Donald Trump’s latest verbal assault on Germany, Nato and the EU is forcing the continent’s politicians to consider a challenge they hoped never to confront: dealing with the first US president since the war to champion European disintegration. Weeks of wait-and-see thinking in Europe’s diplomatic capitals were blown away on Monday with a gust of plain-speaking rhetoric disparaging the pillars of the transatlantic relationship, and one of Washington’s closest traditional allies. While Angela Merkel’s government tried to turn down the political temperature after Mr Trump’s interviews with The Times and Bild, it was impossible to contain the anger in Berlin at their chancellor being mentioned in the same breath as Vladimir Putin of Russia, let alone being blamed for co-opting the EU and accelerating its destruction with her refugee policy. Frank-Walter Steinmeier, Germany’s foreign minister, said Mr Trump’s comments were met with ‘astonishment’, adding that he heard first-hand the ‘concern’ of Jens Stoltenberg, the Nato secretary-general. Norbert Röttgen, chairman of the Bundestag’s foreign affairs committee, told the Financial Times that Mr Trump’s remarks showed ‘the west’s political unity doesn’t play any role for him’.”

January 16 – Financial Times (Stefan Wagstyl): “Donald Trump’s latest sweeping criticism of Germany, the EU and Nato came under attack in Berlin on Monday even as Angela Merkel’s government tried to turn down the political temperature. Norbert Röttgen, chairman of the Bundestag’s foreign affairs committee, told the Financial Times that Mr Trump’s remarks showed ‘the west’s political unity doesn’t play any role for him’. Mr Röttgen said he had previously hoped that Mr Trump would soften the approach he had taken during the election campaign once he was on the verge of taking office. ‘But he hasn’t changed at all. He says what he said on the campaign trail . . . The fact that he regards Nato as obsolete and that it doesn’t bother him if the EU is split shows he doesn’t care about the west’s unity.’”

January 16 – Washington Post (Michael Birnbaum): “European leaders grappled with the jolting reality of President-elect Donald Trump’s skepticism of the European Union on Monday, saying they might have to stand without the United States at their side during the Trump presidency. The possibility of an unprecedented breach in transatlantic relations came after Trump — who embraced anti-E.U. insurgents during his campaign and following his victory — said in weekend remarks that the 28-nation European Union was bound for a breakup and that he was indifferent to its fate. He also said NATO’s current configuration is ‘obsolete,’ even as he professed commitment to Europe’s defense. Trump’s attitudes have raised alarm bells across Europe, which is facing a wave of elections this year in which anti-immigrant, Euroskeptic leaders could gain power.”

January 19 – Bloomberg (Piotr Skolimowski): “Mario Draghi called on Germany to be calm as the European Central Bank keeps pumping stimulus into the euro area, saying rising inflation will eventually bring higher interest rates for savers. ‘As the recovery will firm up, rates will go up as well,’ the ECB president told reporters… after the Governing Council reaffirmed its intention to keep its bond-buying program going until at least the end of the year. Asked about German criticism of the strategy, he said ‘the honest answer would be: Just be patient.’ German Finance Minister Wolfgang Schaeuble earlier responded to the ECB’s decision by saying his government will face ‘political problems’ explaining the policy to the public. A surge in headline inflation last month in his country, Europe’s largest economy, sparked a media outcry and calls for the central bank to pull back on its stimulus. ‘I trust the ECB will always do the right thing,’ Schaeuble said... He also warned that Draghi’s loose monetary policy encourages leaders to delay the structural economic reforms the region needs, saying ‘you give the political leaders some way to go around.’”

January 19 – Bloomberg (Alessandro Speciale): “The European Central Bank left its quantitative-easing program unchanged as policy makers wait to see if a pickup in inflation will be sustained. The Governing Council reaffirmed its December decision that asset purchases will be reduced to 60 billion euros ($64bn) a month from April, from 80 billion euros currently. Policy makers also kept the main refinancing rate at zero and the deposit rate at minus 0.4%... The first policy decision of 2017 comes six weeks after Draghi declared the threat of deflation to be almost vanquished.”

January 19 – Bloomberg (Rainer Buergin, Birgit Jennen, and Patrick Donahue): “German Finance Minister Wolfgang Schaeuble said he wouldn’t support a new Greek bailout if the International Monetary Fund declines to join the current program, saying Germany is sticking to its ground rules for the country’s financial lifeline. ‘The Greek program is based from the very beginning in 2010 on the participation of the IMF,’ Schaeuble said… He said that if the IMF refuses to join, it will be a sign the Greeks aren’t sticking to their commitments and ‘the program will be ended because the precondition of the program, the basis, is destroyed.’”

Fixed-Income Bubble Watch:

January 18 – Bloomberg (Austin Weinstein and Andrea Wong): “China’s holdings of U.S. Treasuries declined in November for a sixth straight month, as the world’s second-largest economy uses its foreign-exchange reserves to support the yuan. Japan’s holdings also dropped but the country kept its spot as America’s largest foreign creditor. A monthly Treasury Department report… showed China held $1.05 trillion in U.S. government bonds, notes and bills in November, a drop of $66.4 billion from the prior month that was the steepest since December 2011. Japan’s portfolio decreased for fourth consecutive month, falling by $23.3 billion to $1.11 trillion…”

January 19 – CNBC (Evelyn Cheng): “China is selling U.S. Treasurys at a record pace, indicating continued pressure to support the yuan and keep money from leaving the country. In continuous selling over the six months through November, China sold $194.66 billion of Treasurys and over the previous 12 months, sold $215.11 billion. Both figures are records… The People's Bank of China ‘is intervening in this particular case for a very specific reason, that they want to mitigate the downside pressure on the RMB [Chinese yuan] coming from capital flows,’ said Benn Steil, senior fellow and director of international economics at the Council on Foreign Relations…”

January 19 – Wall Street Journal (AnnaMaria Andriotis): “Bonds backed by certain risky single-family mortgages topped $1 trillion for the first time in November, crossing that threshold amid rising warnings for one corner of the housing market. These mortgages are insured by the Federal Housing Administration and typically go to borrowers with small down payments and lower credit scores. Banks have pulled back from issuing those loans and from packaging them into bonds sold to investors. The result: In the first three quarters of 2016, banks accounted for 9% of mortgage dollars originated by the FHA’s top 50 lenders, versus 62% for all of 2010… Nonbank lenders accounted for 80% of mortgage bonds backed by single-family FHA loans in July 2016, versus 9% the same month in 2010… Ginnie Mae head Ted Tozer… has said nonbank lenders may lack the financial wherewithal to withstand future stress in housing… ‘This is the biggest shift in mortgage lending since the savings-and-loans debacle in the 1980s,’ Mr. Tozer said…”

January 17 – Reuters (Karen Freifeld): “Deutsche Bank finalized a $7.2 billion settlement with the U.S. Department of Justice over its sale of toxic mortgage securities in the run-up to the 2008 financial crisis, the government agency said… Deutsche's agreement represents the largest resolution for the conduct of a single entity in misleading investors in residential mortgage-backed securities… The settlement was higher than the $7 billion paid by Citigroup to federal and state authorities in 2014. ‘Deutsche Bank did not merely mislead investors: it contributed directly to an international financial crisis,’ Attorney General Loretta Lynch said…”

Global Bubble Watch:

January 19 – New York Times (Alexandria Stevenson): “For the investors and market-movers at the annual World Economic Forum here, a threat lurks. At cocktail parties where the Champagne flows, financiers have expressed bewilderment over the rise of populist groups that are feeding a backlash against globalization. In the halls of the Davos Congress Center, where many of the meetings this week are taking place, investors have tried to make sense of the political upheaval. The world order has been upended. As the United States retreats from the promise of free trade, China is taking up the mantle. The stark shift leaves investors trying to assess the new risk and opportunities in the global economy. ‘This is the first time there is absolutely no consensus,’ said William F. Browder, a co-founder of Hermitage Capital Management who has been coming to Davos for 21 years. ‘Everyone is looking into the abyss.’”

January 16 – Reuters (Ben Hirschler): “Just eight individuals, all men, own as much wealth as the poorest half of the world's population, Oxfam said... As decision makers and many of the super-rich gather for this week's World Economic Forum (WEF) annual meeting in Davos, the charity's report suggests the wealth gap is wider than ever, with new data for China and India indicating that the poorest half of the world owns less than previously estimated.”

U.S. Bubble Watch:

January 17 – CNBC (Evelyn Cheng): “Financial stocks led market declines Tuesday as Treasury yields fell and traders grew anxious about government policy ahead of Friday's inauguration. The SPDR S&P Bank ETF (KBE) fell nearly 3.4% in its worst day since June 27, 2016. Financials declined nearly 2.3% as the greatest laggard in the S&P 500... ‘I think financials are way, way ahead of themselves,’ said Jeremy Klein, chief market strategist at FBN Securities. The sector is up more than 17% since the election as the top performer in the S&P 500.”

January 18 – Bloomberg (Andrew Mayeda): “The cost of living in the U.S. climbed for a fifth month on the back of shelter and fuel prices, pushing inflation closer to the Federal Reserve’s goal. The consumer-price index rose 0.3% in December, matching the median projection of economists, after a 0.2% gain the previous month… Prices were up 2.1% from a year earlier, the most since June 2014.”

January 19 – Reuters (Lucia Mutikani): “U.S. homebuilding rebounded more than expected in December as a strengthening economy boosts demand for rental housing. Other data… showed the number of Americans filing for unemployment benefits unexpectedly falling last week to a near 43-year low… Housing starts jumped 11.3% to a seasonally adjusted annual rate of 1.23 million units last month…”

January 19 – Bloomberg (Austin Weinstein): “American consumers this month were the most upbeat about the economy than at any time in almost 15 years, according to Bloomberg Consumer Comfort Index… Monthly consumer expectations index climbed to 56 in January, the strongest reading since March 2002, from 53.5…”

January 18 – Reuters (Patrick Rucker and Sarah N. Lynch): “Early optimism among business lobbyists and executives that Donald Trump's election heralded better days has slowly given way to uncertainty as the president-elect fires off mixed and sometimes confusing messages on healthcare, taxes and trade. An initial euphoria in the business world fueled a powerful post-election stock rally. Some of that has frayed as questions arise over the nuts and bolts of Trump's campaign promises, although many in the business community said they remained optimistic. Doubts deepened over the weekend as Trump declared he would replace President Barack Obama's signature healthcare plan known as Obamacare with ‘insurance for everybody’ - a goal far beyond Republican designs - and criticized a key component of a plan in Congress to overhaul corporate taxes. In a later interview, he appeared to adjust both stances, possibly adding to the confusion. ‘It is fair to say that since the election, there has been mounting uncertainty about exactly what the specific policies are likely to be with regard to tax reform and replacing Obamacare,’ a financial industry official said.”

January 17 – Reuters (Tom Anderson): “President-elect Donald Trump has said he will preserve Social Security, though if he and Congress do nothing to fix the funding, the financial reckoning will be huge — as much as $11.4 trillion down the road. The last time Congress changed Social Security in a significant way with a series of benefit cuts and payroll tax increases was in 1983 under President Ronald Reagan. Back then, the federal government needed to fill a funding gap of about 1% of taxable workers' wages. By the time Social Security's trust funds are projected to run out in the early 2030s, the federal government will have to plug a hole of more than 3%, according to estimates by Charles Blahous, a senior research fellow at George Mason University's Mercatus Center. ‘Just to keep the system afloat from year to year at that point they would have to inflict near-term pain over three times as severe as was the case in 1983,’ Blahous said.”

Federal Reserve Watch:

January 17 – Wall Street Journal (Jon Hilsenrath): “An epoch of exceptional monetary stimulus is drawing to a close. Central banks have exhausted themselves in their efforts to spur economic growth with low—even negative—short-term interest rates and bond-purchase programs meant to drive financial-asset prices higher. Now, a range of forces—including political blowback, whiffs of inflation, stirrings of fiscal stimulus, receding unemployment and worries that the policies themselves may backfire—are pressing them to push short-term interest rates no lower. The Federal Reserve is the first mover in this shift. It has nudged up short-term interest rates in two quarter-percentage-point increments in a little more than a year and penciled in three more moves in 2017. If all goes according to plan, its benchmark interest rate will rest at 1.375% by year-end, a level not seen in the U.S. since before Lehman Brothers collapsed in September 2008.”

January 18 – Financial Times (Sam Fleming): “Having taken two tentative steps towards more normal levels of interest rates, Federal Reserve policymakers are preparing to debate an even more fraught undertaking: paring back the vast holdings of securities they amassed when battling the financial crisis. A series of Fed speakers have sent up trial balloons in recent days talking of the possibility of reducing the size of the central bank’s $4.5tn balance sheet. Patrick Harker, Philadelphia Fed chief, suggested the topic would become central once short-term interest rates hit 1% — something the Fed is on course to achieve this year if its current forecasts are borne out. Lael Brainard, a normally ultra-dovish member of the board of governors, suggested… that a big fiscal stimulus by the Donald Trump administration could bring forward the day when the Fed starts trimming its balance sheet. “

January 18 – New York Times (Neil Irwin): “Janet L. Yellen… made it clear Wednesday that she believes that the American economy is pretty much back on track. And that, in turn, sets the stage for a potential conflict with the incoming Trump administration in the months and years ahead. Congress assigns the Fed two goals: seek maximum employment and maintain stable prices. Ms. Yellen, in a speech in San Francisco, rather explicitly made clear that the nation isn’t far from attaining those goals. ‘Now, it’s fair to say, the economy is near maximum employment, and inflation is moving toward our goal,’ she said. The unemployment rate, 4.7%, is back near where it was before the 2008 recession. And ‘although inflation has been running below our 2% objective for quite some time, we have seen it start inching back toward 2% last year.’”

January 18 – Bloomberg (Craig Torres): “Federal Reserve Chair Janet Yellen said the U.S. economy is ‘close’ to the central bank’s objectives of full employment and stable prices and she’s confident it will continue to improve. ‘It is fair to say the economy is near maximum employment and inflation is moving toward our goal,’ Yellen told the Commonwealth Club… While ‘it makes sense to gradually reduce the level of monetary policy support,’ the timing of the next interest-rate increase ‘will depend on how the economy actually evolves over coming months,’ she said.”

Central Bank Watch:

January 16 – Wall Street Journal (Richard Barley): “With central bankers veering into uncharted policy waters since the financial crisis, vacuuming up trillions of dollars in securities and pushing interest rates to zero and beyond, it is perhaps no surprise to see them drawing political attention. But investors should watch for any further deterioration in relations between politicians and central bankers; monetary policy is at a critical juncture. The biggest political events of 2016—Donald Trump’s U.S. election victory and the U.K.’s vote to leave the European Union—both raised questions around central-bank policy and independence. Mr. Trump said in May he would likely replace Federal Reserve Chairwoman Janet Yellen, and Republican lawmakers are reviving an effort to subject the Fed’s decisions to greater scrutiny.”

Leveraged Speculator Watch:

January 20 – Financial Times (Lindsay Fortado): “The hedge fund industry has surpassed $3tn in assets for the first time, despite investors redeeming $70bn during 2016 as they soured on high fees and some managers’ average returns, according to Hedge Fund Research. Redemptions slowed in the fourth quarter as investors pulled $18.7bn, less than the $28.2bn redeemed in the third quarter. The largest funds, which manage more than $5bn, were hit the hardest by redemptions as investors opted instead for funds with less than $250m. But those losses were mitigated by strengthening performance. HFR’s industry benchmark, which encompasses all strategies, gained 5.5% last year, the highest in three years.”

Geopolitical Watch:

January 15 – Reuters (Christian Shepherd): “China will ‘take off the gloves’ and take strong action if U.S. President-elect Donald Trump continues to provoke Beijing over Taiwan once he assumes office, two leading state-run newspapers said… In an interview with the Wall Street Journal…, Trump said the ‘One China’ policy was up for negotiation. China's foreign ministry, in response, said ‘One China’ was the foundation of China-U.S. ties and was non-negotiable. Trump broke with decades of precedent last month by taking a congratulatory telephone call from Taiwan President Tsai Ing-wen, angering Beijing, which sees Taiwan as part of China. ‘If Trump is determined to use this gambit in taking office, a period of fierce, damaging interactions will be unavoidable, as Beijing will have no choice but to take off the gloves,’ the… China Daily said.”

January 18 – Reuters (Ben Blanchard and J.R. Wu): “The United States should not allow a delegation from Taiwan to attend U.S. President-elect Donald Trump's inauguration, China's Foreign Ministry said…, raising a new bone of contention in Beijing's relations with the incoming government. Trump broke with decades of precedent last month by taking a congratulatory telephone call from Taiwan President Tsai Ing-wen… A Taiwan delegation, led by former premier and ex-ruling party leader Yu Shyi-kun, and including a Taiwan national security adviser and some lawmakers, will attend Friday's inauguration, Taiwan's Foreign Ministry said this week. It is typical for Taiwan to send a delegation to U.S. presidential inaugurations.”

January 16 – New York Times (Steven Erlanger): “The Germans are angry. The Chinese are downright furious. Leaders of NATO are nervous, while their counterparts at the European Union are alarmed. Just days before he is sworn into office, President-elect Donald J. Trump has again focused his penchant for unpredictable disruption on the rest of the world. His remarks in a string of discursive and sometimes contradictory interviews have escalated tensions with China while also infuriating allies and institutions critical to America’s traditional leadership of the West. No one knows where exactly he is headed… For now. And that he is an enthusiastic cheerleader of Brexit and an unaffiliated Britain. For now. Mr. Trump’s unpredictability is perhaps his most predictable characteristic. The world is accustomed to his provocative Twitter messages, but is less clear about whether his remarks represent meaningful new policy guidelines, personal judgments or passing whims.”

January 17 – Washington Post (Simon Denyer): “American companies don’t feel welcome in China any more. And while Chinese President Xi Jinping defended globalization at the World Economic Forum in Davos, U.S. companies say his government is not practicing what he preached. An annual survey of business conditions by the American Chamber of Commerce, or AmCham, in China found that 4 out 5 companies feel less welcome in China than before.”

January 18 – Financial Times (Pilita Clark): “The world has passed another global-warming milestone, according to new figures showing that temperatures rose to their hottest on record for the third year in a row in 2016. Global surface temperatures were nearly 1C warmer in 2016 than the mid-20th century average said scientists from Nasa and the National Oceanic and Atmospheric Administration in the US.”

January 19 – Bloomberg (Olga Kharif): “U.S. companies and government agencies suffered a record 1,093 data breaches last year, a 40% increase from 2015, according to the Identity Theft Resource Center. Headline-grabbing hacks… are increasing despite regulatory scrutiny and more aggressive cyber-security spending. Worldwide spending on security-related hardware, software and services rose to $73.7 billion in 2016 from $68.2 billion a year earlier… And that number is expected to approach $90 billion in 2018.”

Friday Evening Links

[Bloomberg] Trump’s Presidency Opens With Combative ‘America First’ Appeal

[Bloomberg] Inaugural Pomp Mixes With Whiff of Tear Gas on Day of Transition

[Reuters] Wall Street ends higher as Trump takes office

[Bloomberg] Haven Assets in Demand as Forceful Trump Sworn In: Markets Wrap

[Reuters] Trump trade strategy starts with quitting Asia pact: White House

[Reuters] Germany must prepare for 'rough ride' under Trump: Vice Chancellor

[Washington Post] Donald Trump is sworn in as president, vows to end ‘American carnage’

[CNBC] One thing about Trump's inaugural address surprised Carl Icahn

[WSJ] Donald Trump Sworn In as 45th President, Aims Sharp Rhetoric at Washington Establishment

[WSJ] Donald Trump Indicts Political System, Remains the Outsider

[WSJ] Trump Administration Suspends Insurance Cut for Risky Mortgages

[FT] America’s divisions on vivid display on streets of Capitol

Friday's News Links

[Bloomberg] Stocks Pare Gains, Treasury Losses Ease on Trump: Markets Wrap

[Bloomberg] Trump Takes Reins of Nation as Divisions Deprive Him of a Honeymoon

[Reuters] Executive actions ready to go as Trump prepares to take office

[Reuters] China GDP beats expectations but debt risks loom

[Bloomberg] China’s Yuan Outflows Plummet, Showing Capital Controls Pay Off

[Bloomberg] A Default Storm Is Brewing Over China Junk Bonds

[Bloomberg] Bullion Bulls Have History on Their Side as Trump Takes Helm

[Bloomberg] VVIX and VIX Go Opposite Ways for a Second Straight Week: Chart

[Bloomberg] Draghi’s Role in Elite Finance Group Comes Under EU Scrutiny

[Bloomberg] Schaeuble, Lagarde Seek to Bridge Greek Gap Amid Talks Deadlock

[Bloomberg] Ex-BOE’s King Raps Central Banks for Losing Focus, Humility

[WSJ] Donald Trump’s Presidency: A Look at His Proposed Policy Shifts

[FT] Trump’s vigorous and unexpected impact on markets — in charts