Friday, April 27, 2018

Weekly Commentary: Conventional Wisdom

Conventional Wisdom is so often proved wrong. Thinking back over my career, it's amazing how many times what is believed true without a doubt in the markets turns out completely erroneous. There's no mystery behind this phenomenon. Responsibility lies foremost in flawed analytical frameworks. Fundamentally, bull market psychology rests on the basic premise that underlying fundamentals are sound - economic growth, earnings, inflation dynamics, new technologies, global trade, etc. No need to look further or dig any deeper.

When securities markets are strong (inflating), it's taken as a given that the financial system is robust. The problem, however, is that the underlying finance fueling the recent bull market has been patently unsound - and has been so for three decades of recurring boom and bust cycles.

A wise person said that it's not true that we don't learn from history. It's that our learning is dominated by recent history. It becomes too easy to ignore everything beyond the past few years. Over a relatively short time horizon, the previous bust cycle becomes ancient history. What matters for the markets - especially as the cycle evolves to the speculative phase - is the here and now. It's assumed that everyone acquired understanding and insight from the crisis experience - especially policymakers. They'll ensure there is no repeat; they have the tools and have amassed experience and comfort employing them. The previous crisis was a "100-year flood." Good not to have to ponder a recurrence for a few generations.

Conventional Wisdom will look especially foolish when this protracted cycle comes to its fateful conclusion. Not only was the mortgage finance Bubble not the proverbial "100-year flood," it set the stage for historic global government finance Bubble excesses. The real once-in-a-lifetime crisis lies in wait. Not only do we not learn from our mistakes, we instead seem to go out of our way to create bigger ones. This time much Bigger. This predicament was on full display this week.

April 26 - CNBC (Jeff Cox): "The $21 trillion debt the U.S. has amassed on its balance sheet isn't weighing on the minds of credit rating agencies. Moody's and Fitch in recent days have reaffirmed the nation's top-notch credit standing, reasoning that even with the massive pile of IOUs, the nation has sufficient resources to keep its standing. 'The affirmation of the US' Aaa rating reflects the US' exceptional economic strength, the very high strength of its institutions and its very low exposure to credit-related shocks given the unique and central roles of the US dollar and US Treasury bond market in the global financial system,' Moody's analysts said in a report…"

I tended to cut the rating agencies some slack after the mortgage finance Bubble collapse. Clearly, their models were deeply flawed, and they allowed financial interests to sway their judgement and outlook (during a lavish boom, who doesn't?) In general, it becomes quite a challenge to accurately assess underlying Credit quality while the system is in the throes of such an extended self-reinforcing Credit boom. Clearly, the Credit rating agencies hold some responsibility for what in hindsight was atrocious ratings blunders throughout the mortgage universe. Yet when compared to Fed policies, the GSEs and Wall Street finance, the ratings companies were in the crisis causing minor leagues.

I'll assume that the rating agencies received the message loud and clear: Don't mess with the Uncle Sam's "AAA." If the U.S. Credit standing is today "top notch," then we've reached the point of an incredibly extended Credit cycle where top notch basically means nothing. Our government is amassing debt and obligations it will not repay. There's the $21 TN of rapidly expanding debt, along with tens of Trillions of future entitlements. And let's not forget the government-sponsored enterprises. The GSEs ended 2017 with a record $8.857 TN of securities outstanding (record assets of $6.826 TN, along with a record $2.125 TN of guaranteed MBS).

April 25 - Financial Times (Alistair Gray): "From the spotted bronze pumpkin in the valet court to the light sculpture above the marble concierge desk, few expenses have been spared at Sky Residences. Residents of the glistening 71-storey tower in Manhattan's Hell's Kitchen have access to a basketball court, a private art collection and a billiards lounge. The luxury lifestyle does not come cheap: one-bedroom apartments are on the rental market for as much as $6,500 a month. High-earning New York professionals who live in the building take the rents in their stride, though they may be surprised to discover who financed it. Last summer, Freddie Mac, the home loans guarantor propped up by US taxpayers a decade ago after the subprime housing crisis, backed by a $550m loan to the building's owners - Moinian Group, among New York's largest private landlords, and SL Green Realty… It was the latest in a series of deals to support top-end commercial property developments by Freddie Mac and its counterpart Fannie Mae… By the end of last year the pair had a financial interest in almost $500bn of commercial mortgages, equivalent to 38% of the total outstanding across the US. That compares with almost $200bn, or 25% of the market, a decade ago."

Did we learn nothing? GSE Securities ended 2008 at a then record $8.167 TN. Remember all the talk of GSE reform - and possibly even winding down the (insolvent) behemoth agencies? Not going to happen. Outstanding GSE Securities did decline to $7.560 TN by the end 2012. Then a funny thing happened along the path of reformation: GSE Securities expanded $238 billion in 2013, $150 billion in 2014, $221 billion in 2015, $352 billion in 2016 and another $337 billion in 2017. It adds up to GSE growth of about $1.3 TN in five years, as the GSEs once again become willing boom-time instigators. It's worth adding that Fannie Mae increased "Total MBS and Other Guarantees" by about $23.5 billion during the first two months of 2018, with Freddie Mac's up $16.4 billion in three months.

For years, I argued that the thinly capitalized GSEs were destined for failure. It's not clear what I should be arguing these days. Their position is even more precarious, but no one could care less. The GSEs have become only bigger and have essentially no capital buffer - remitting earnings to their guardian, the U.S. Treasury. I suggest the ratings agencies ponder the trajectory of U.S. deficits in the event of a financial crisis and economic downturn. On top of exploding traditional deficits, taxpayers (more accurately, future generations) will be on the hook (again) for what will surely be massive recurring losses at the government-sponsored enterprises. A yield spike and the party marathon is over.

But why give one scintilla of attention to the GSEs when Amazon is reporting quarterly revenues of $51 billion, up 43% from comparable 2017. Net Income of $1.629 billion compares to Q1 17's $724 million. Facebook's $11.966 billion Q1 revenues were up 49%. Google saw revenues surge 26% y-o-y to $31.146 billion. Even Microsoft saw revenues jump 16%, to $26.819 billion.

If big tech revenue growth is not clear enough indication of a boom, I'm not sure where else to point. Indeed, it's reached multiples of the late-nineties technology Arms Race. This degree of growth concurrent with three-month T-bills at only 1.75% indicates finance remains much too loose. And while mortgage borrowing costs have been rising modestly, housing data confirm that rates remain artificially low for this key economic sector as well. I would argue excesses at the upper-end of housing markets nationally exceed those from the mortgage financial Bubble period.

April 25 - Bloomberg (Vince Golle): "The U.S. housing market's storyline for the last several years has been one of steady demand and limited supply, pushing prices ever higher. Now, a new chapter has opened up for the industry and its customers: soaring costs for building materials. Reports on Tuesday underscored both resilient purchase activity and accelerating home prices. The S&P CoreLogic Case-Shiller index showed property values in 20 major U.S. cities climbed 6.8% in February, the biggest year-over-year gain since June 2014. Government data revealed a faster-than-projected rate of new-home sales in March and huge upward revisions to the prior two months. Inventories of previously owned homes are plumbing the lowest levels in at least 19 years, a key reason why resilient demand by itself has fueled price appreciation that's extending to the new-homes market. Now, with the costs of lumber and other building materials soaring together, buyers are unlikely to see any relief for some time."

April 24 - Bloomberg (Katia Dmitrieva): "Sales of previously owned U.S. homes rose to a four-month high as buyers, fueled by a solid job market and tax cuts, quickly snapped up the limited number of available properties, National Association of Realtors data showed… Inventory of available properties fell 7.2% y/y to 1.67m, lowest for March in data back to 1999…"

Early in the mortgage finance Bubble, Conventional Wisdom held that home prices were supported by the limited availability of buildable lots across much of the country. Few anticipated the building boom that was to unfold over subsequent years. It just took the homebuilders some time to get situated. By 2003, housing starts exceeded two million units, the strongest level since the seventies.

I was reminded of this dynamic with last week's release of stronger-than-expect March Housing Starts and Permits data. Building Permits were at the highest level since July 2007, with Starts near the high going back to 2007. And then there was this week's reports on Transactions, Prices and Inventories. Case-Shiller had y-o-y price gains up 6.8% vs. estimates of 6.35%. After stabilizing somewhat in 2017, home price gains have accelerated.

February New Home Sales, at 694,000 (annualized), crushed estimates of 630,000. There was also a significant upward revision to January sales. New Home Sales are running at about the highest level since 2007. March Existing Home Sales (5.60 million annualized) were somewhat above estimates, also near highs since 2007. While up for the month (and somewhat above recent historic lows), the 1.67 million available inventory was down 7.2% y-o-y. At 3.6 months, meager home inventories are below levels from the mortgage finance Bubble era. Weekly mortgage purchase applications were 11% above the year ago level.

Ten-year Treasury yields traded to 3.03% in Wednesday trading, before settling back down to end the week little changed at 2.96%. During Wednesday's session, benchmark MBS yields rose to 3.74%, at that point up eight bps for the week to the highest yield since July 2011. Conventional Wisdom holds that higher mortgage borrowing costs will temper home buying. At least at this point, I'm skeptical. Home price inflation continues to run significantly above after-tax mortgage borrowing costs - and is accelerating. There is likely decent pent-up home purchase demand - and a surge of increasingly anxious buyers cannot be ruled out.

The narrative over recent years - really, since the financial crisis - has been that inflation is no longer an issue. From the standpoint of monetary policy and, accordingly, for financial markets, inflation has been thoroughly suppressed: global overcapacity and wage stagnation have from a secular standpoint quashed inflationary pressures. It would seem time for Conventional Wisdom to start wising up.

I tend to believe that so-called "globalization" has been misunderstood from a global inflation perspective. Conventional thinking has it that the globalization of manufacturing, trade and finance will permanently contain inflationary pressures. But in the U.S. and elsewhere, there is a populist backlash against the loss of manufacturing and higher paying jobs to cheap imports. The rise of tariffs, protectionism and fair trade sentiments would seem to mark an important juncture for "globalization's" headlock on inflation.

The aggressive U.S. stance with trade comes, not coincidently, with an aggressive posture toward fiscal policy. It's the type of policy mix one might expect at the trough of the economic cycle. But nearing the 10-year anniversary of crisis onset? It may have taken longer than normal, but when it comes to inflation prospects we're witnessing a plethora of typical late-cycle characteristics and developments.

April 27 - Bloomberg (Sho Chandra): "U.S. employment costs increased more than forecast in the first quarter as worker pay and benefits accelerated, according to Labor Department data… Employment cost index rose 0.8% q/q (est. 0.7%); after 0.6% gain. Wages and salaries advanced 0.9% q/q; benefits costs climbed 0.7%. Total compensation, which includes wages and benefits, climbed 2.7% over past 12 months, strongest since 3Q 2008, after 2.6% gain. Private-sector wages and salaries advanced 2.9% y/y, also the largest since 3Q 2008, after rising 2.8%."

There is mounting evidence that wage growth has attained sustainable momentum. This dynamic should work over time to broaden inflationary pressures. Rising compensation comes as energy prices gain momentum, while import prices more generally risk surprising to the upside. Moreover, I believe housing has begun to demonstrate an increasingly vigorous inflationary bias. With notable gains in construction and sales transactions, rising prices and inflating home equity, the surprise going forward could be a meaningful jump in mortgage borrowings.

If a few pieces fall into place, before you know it we'll have settled into an inflationary backdrop that looks a lot more normal than this deflated "r star" the Fed and economics community have been enchanted with over recent years. Conventional Wisdom that additional years of Fed accommodation will be required to sustain a 2.0% inflation target falls flat on its face. From my perspective, there are reasonable scenarios where a so-called "neutral" Fed funds rate of 4%, 5%, or perhaps even 6%, no longer seem unthinkable.

The other side of the story: there's a serious global Bubble that risks bursting in spectacular fashion: Fragility in China, economic stagnation in Europe and vulnerabilities throughout EM. I'll assume global fragilities go a long way in explaining 3% Treasury yields in the face of percolating U.S. inflationary pressures.

Conventional Wisdom holds that a flat yield curve indicates elevated recession risk. Some on the FOMC have cited the flatting curve as justification for proceeding cautiously with rate normalization. I would counter that 10-year Treasury yields remain low specifically because of global Bubble risk. The bond market discerns the likelihood that the Fed will at some point reverse course, moving to slash rates and redeploy bond purchases (QE). There is, as well, ongoing QE from the European Central Bank and Bank of Japan. Global bonds were supported this week from dovish indications from both central banks.

Developed bond markets were also likely supported by instability that seems to have afflicted EM currencies. The resurgent U.S. dollar came at the expense of the Polish zloty (down 2.1%), the Chilean peso (down 2.0%), the Hungarian forint (down 1.9%), the South African rand (down 1.8%), the Czech koruna (down 1.7%), the Argentine peso (down 1.7%), and the Colombian peso (down 1.6%). EM bonds were under additional pressure this week.

The dollar short and EM long are two prominent Crowded Trades. That both are currently moving against the Crowd adds credence to the incipient global de-risking/de-leveraging thesis. Unfolding pressure on global "carry trade" leverage? And it was another wild week in big tech. The Nasdaq100 traded as high as 6,721 during Monday trading, dropped as low as 6,427 by Wednesday, opened Friday trading at 6,750 before ending the week at 6,656. The VIX almost made it back to 20 Wednesday, before closing the week at 15.41.

I don't see a VIX with a 15-handle doing justice to current stock market risk. Wednesday, in particular, had that unsettling dynamic of concurrent pressure on equities, Treasuries, corporate Credit and EM. On the other hand, if risk markets somehow turn quiescent, I would expect the bond market's focus to rather swiftly shift back to supply and mounting inflation risk.

For the Week:

The S&P500 was unchanged (down 0.1% y-t-d), while the Dow slipped 0.6% (down 1.7%). The Utilities jumped 2.7% (down 2.3%). The Banks gained 0.9% (up 1.5%), while the Broker/Dealers fell 1.5% (up 9.1%). The Transports slipped 0.3% (down 0.6%). The S&P 400 Midcaps declined 0.4% (down 0.4%), and the small cap Russell 2000 slipped 0.5% (up 1.3%). The Nasdaq100 dipped 0.2% (up 4.1%). The Semiconductors fell 1.0% (up 0.4%). The Biotechs declined 0.2% (up 7.9%). With bullion down $12, the HUI gold index dropped 1.2% (down 5.3%).

Three-month Treasury bill rates ended the week at 1.77%. Two-year government yields rose three bps to 2.48% (up 60bps y-t-d). Five-year T-note yields were unchanged at 2.80% (up 59bps). Ten-year Treasury yields were unchanged at 2.96% (up 55bps). Long bond yields declined two bps to 3.13% (up 38bps). Benchmark Fannie Mae MBS yields dipped one basis point to 3.65% (up 65bps).

Greek 10-year yields dropped 12 bps to 3.90% (down 17bps y-t-d). Ten-year Portuguese yields were unchanged at 1.65% (down 29bps). Italian 10-year yields fell four bps to 1.74% (down 28bps). Spain's 10-year yields declined two bps to 1.26% (down 31bps). German bund yields slipped two bps to 0.57% (up 14bps). French yields declined two bps to 0.80% (up 1bp). The French to German 10-year bond spread was unchanged at 23 bps. U.K. 10-year gilt yields declined three bps to 1.45% (up 26bps). U.K.'s FTSE equities index jumped 1.8% (down 2.4%).

Japan's Nikkei 225 equities index gained 1.4% (down 1.3% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.055% (up 1bp). France's CAC40 rose 1.3% (up 3.2%). The German DAX equities index increased 0.3% (down 2.6%). Spain's IBEX 35 equities index gained 0.4% (down 1.2%). Italy's FTSE MIB index added 0.4% (up 9.5%). EM equities were mixed. Brazil's Bovespa index rose 1.0% (up 13.1%), while Mexico's Bolsa slipped 0.3% (down 2.2%). South Korea's Kospi index gained 0.6% (up 1.0%). India’s Sensex equities index jumped 1.6% (up 2.7%). China’s Shanghai Exchange gained 0.3% (down 6.8%). Turkey's Borsa Istanbul National 100 index fell 3.0% (down 6.7%). Russia's MICEX equities rallied 3.1% (up 9.1%).

Investment-grade bond funds saw inflows of $2.01 billion, while junk bond funds posted outflows of $2.489 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates jumped 11 bps to 4.58% (up 55bps y-o-y). Fifteen-year rates rose eight bps to 4.02% (up 75bps). Five-year hybrid ARM rates gained seven bps to 3.74% (up 62bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates surging 21 bps to 4.73% (up 59bps).

Federal Reserve Credit last week declined $5.1bn to $4.343 TN. Over the past year, Fed Credit contracted $96bn, or 2.2%. Fed Credit inflated $1.533 TN, or 55%, over the past 286 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $25.3bn last week to $3.412 TN. "Custody holdings" were up $201bn y-o-y, or 6.3%.

M2 (narrow) "money" supply rose $10.0bn last week to $13.947 TN. "Narrow money" gained $508bn, or 3.8%, over the past year. For the week, Currency increased $3.3bn. Total Checkable Deposits fell $11bn, while savings Deposits gained $11.8bn. Small Time Deposits increased $3.1bn. Retail Money Funds added $2.7bn.

Total money market fund assets slipped $1.3bn to $2.792 TN. Money Funds gained $150bn y-o-y, or 5.7%.

Total Commercial Paper declined $8.4bn to $1.056 TN. CP gained $76bn y-o-y, or 7.8%.

Currency Watch:

The U.S. dollar index jumped 1.4% to 91.542 (down 0.6% y-t-d). For the week on the downside, the Swedish krona declined 2.5%, the South African rand 1.8%, the Norwegian krone 1.7%, the New Zealand dollar 1.7%, the British pound 1.6%, the Swiss franc 1.3%, the euro 1.3%, the Brazilian real 1.3%, the Japanese yen 1.3%, the Australian dollar 1.2%, the South Korean won 0.9%, the Singapore dollar 0.6%, the Canadian dollar 0.5% and the Mexican peso 0.5%. The Chinese renminbi declined 0.57% versus the dollar this week (up 2.75% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index was little changed (up 6.9% y-t-d). Spot Gold declined 0.9% to $1,323 (up 1.6%). Silver sank 3.9% to $16.497 (down 3.8%). Crude slipped 30 cents to $68.10 (up 13%). Gasoline gained 1.5% (up 18%), and Natural Gas rose 1.4% (down 0.6%). Copper fell 2.7% (down 7%). Wheat jumped 4.5% (up 17%). Corn rose 3.4% (up 14%).

Market Dislocation Watch:

April 27 - Wall Street Journal (Asjylyn Loder): "Investors are dumping U.S. stock funds at one of the fastest paces in a decade as rising market turbulence erodes confidence in the nine-year-old bull market. U.S. equity mutual funds and exchange-traded funds recorded $2.4 billion in outflows for the week ended April 18… That followed $41 billion in outflows from these funds in February-the biggest monthly exodus since January 2008… Overall, investors have yanked $67 billion out of these stock funds since the start of February. That rush for the exits marked a sharp reversal from January, when investors poured $10.8 billion into U.S. equity funds, helping propel major indexes to records."

April 22 - Wall Street Journal (Gunjan Banerji): "Investors are starting to wonder if Wall Street's fear gauge is broken. The Cboe Volatility Index tracks how much investors pay for options they often use as insurance against future stock-market declines. Known as the VIX, it typically rises as stocks fall or vice versa, reflecting shifting demand for options used to hedge investments. Playing the VIX has become a cottage industry in recent years, with billions of dollars flowing into investment products aimed at hedging or exploiting volatility trends. This past Wednesday morning, futures contracts that track the VIX spiked despite little movement in U.S. stock futures. The 12% rise within 30 minutes set off alarm bells on trading floors-it was the biggest such move going back to 2010, according to data from Macro Risk Advisors…"

April 25 - Bloomberg (Katherine Greifeld): "Two of the world's most crowded trades are headed south at precisely the same time, resulting in a double-dose of pain for global fund managers. Shares of the FAANG-BAT complex -- which includes U.S. tech giants Facebook, Amazon, Apple, Netflix, and Google parent Alphabet, as well as China's Baidu, Alibaba and Tencent -- have lost more than $200 billion in market value since late last week. Money managers in a Bank of America survey earlier this month labeled being long the companies the most crowded bet in markets. Meanwhile, the dollar resumed its best run since 2016 Wednesday. That's after hedge funds and other large speculators amassed the biggest net-short position in more than five years, Commodity Futures Trading Commission data show."

April 24 - Financial Times (Robin Wigglesworth): "The increasing concentration of buying and selling of US stocks in the final 30 minutes of the day has some investors calling for a shorter trading period to help limit the market's growing operational risk. A seismic shift towards exchange traded funds and other index-tracking investment vehicles has heightened the importance of the last half-hour of the US trading day, from 3.30 to 4pm, when these passive funds typically conduct most of their activity… That has prompted traditional active managers to conduct more of their trading during this window to benefit from greater market 'liquidity'. 'This dynamic is a pretty big story,' said Bob Minicus, head of global equity trading at Fidelity. 'We view the close as an opportunity. As more volumes migrate towards the close, we will follow it.'"

April 22 - Wall Street Journal (Gunjan Banerji and Sam Goldfarb): "Investors are having a tougher time trading in a number of financial markets, a development that is weakening their ability to raise cash or to protect against big stock declines. The capacity to get in or out of an investment, known as liquidity, was rarely tested during the long stretch when stocks and bonds rallied with little volatility. Now as inflation concerns, trade anxiety and tension in Syria roil markets, investors notice it is getting harder to trade as easily."

Trump Administration Watch:

April 26 - Reuters (Roberta Rampton and Susan Heavey): "U.S. President Donald Trump's top economic adviser Larry Kudlow said… he hoped upcoming trade talks with China would yield progress but that resolving U.S. complaints would be 'a long process.' Trump is preparing to send a delegation to China to try to head off a trade war. He has threatened a new round of $100 billion in tariffs on Chinese products that could target cellphones, computers and other consumer goods."

April 27 - Reuters (Koh Gui Qing): "The U.S. government may start scrutinizing informal partnerships between American and Chinese companies in the field of artificial intelligence, threatening practices that have long been considered garden variety development work for technology companies, sources familiar with the discussions said. So far, U.S. government reviews for national security and other concerns have been limited to investment deals and corporate takeovers. This possible new expansion of the mandate - which would serve as a stop-gap measure until Congress imposes tighter restrictions on Chinese investments - is being pushed by members of Congress, and those in U.S. President Donald Trump's administration who worry about theft of intellectual property and technology transfer to China…"

April 25 - Reuters (Karen Freifeld and Eric Auchard): "U.S. prosecutors in New York have been investigating whether Chinese tech company Huawei violated U.S. sanctions in relation to Iran, according to sources familiar with the situation. Since at least 2016, U.S. authorities have been probing Huawei's alleged shipping of U.S.-origin products to Iran and other countries in violation of U.S. export and sanctions laws… News of the Justice Department probe follows a series of U.S. actions aimed at stopping or reducing access by Huawei and Chinese smartphone maker ZTE Corp to the U.S. economy amid allegations the companies could be using their technology to spy on Americans."

April 22 - Financial Times (Gavyn Davies): "A familiar dispute has erupted between Republican and Democrat macro-economists in the US about the causes of the permanently high budget deficits and public debt ratios shown in new CBO projections for the medium term. The Republican economists blame excessive entitlement programmes, while the Democrats blame abnormally low taxation following the Trump budget. No surprises there: the non-partisan truth is that both spending and taxation have to be adjusted in hugely unpopular directions if the debt ratio is to be stabilised. The political discipline to do this has been absent since the Clinton era. In the absence of early policy changes, economists on both sides believe that America is facing a looming debt 'crisis'. The Republicans say this could hit 'like an earthquake as short-term bondholders attempt to escape fiscal carnage'. The Democrats agree that 'a debt crisis is coming; none of that is in dispute'. "

April 24 - CNBC (Sarah O'Brien): "The number of homeowners who will benefit from the mortgage tax break is expected to plummet this year by more than half, according to a congressional report… About 13.8 million taxpayers will be able to claim the mortgage-interest deduction in 2018, down from more 32.3 million in 2017… That's about a 57% drop."

Federal Reserve Watch:

April 24 - CNBC (Jeff Cox): "The market is finally coming around to the idea that the Federal Reserve this year will be raising interest rates a total of four times. Though some big forecasting firms on Wall Street for months have been predicting a more aggressive Fed, traders thus far had been anticipating three moves this year… However, the fed funds futures market Monday morning gave almost a 50% probability that the central bank would move one more time in December. The CME's FedWatch tool, which has been a reliable gauge of the Federal Open Market Committee's actions, assigned a 48.2% chance in early trade."

U.S. Bubble Watch:

April 24 - CNBC (Diana Olick): "The critical shortage of homes for sale continues to drive home prices higher nationwide. Values jumped 6.3% nationally in February compared with a year earlier, according the S&P CoreLogic Case-Shiller Home Price Index. That is a wider gain than January's 6.1% annual jump. Home prices nationally were 6.7% higher than their peak in July 2006… Prices are increasing more sharply in the nation's largest metropolitan markets. The largest 10 cities saw an annual increase of 6.5% compared with 6% in February. The largest 20 cities saw 6.8% gains, up from 6.4% in January. Local leaders continue to be Seattle (+12.7%), Las Vegas (+ 11.6%) and San Francisco (+10.1%). Thirteen of the top 20 cities saw bigger annual price increases in February than in January."

April 26 - Bloomberg (Prashant Gopal and Matthew Boesler): "The U.S. homeowner vacancy rate dropped to 1.5% in the first quarter, the lowest level since 2001, a sign that houses aren't going to waste amid a residential supply crunch. The rate was down from 1.7% a year earlier and 1.6% in the fourth quarter, the U.S. Census Bureau said… The vacancy rate is the proportion of the non-vacation-home inventory that is vacant and for sale. The declining vacancy rate only adds to concerns about record low housing supplies…"

April 25 - CNBC (Evelyn Cheng): "Several companies, including chipmaker Nvidia and toymaker Hasbro, are reporting how a shortage of truck drivers is affecting their business. 'Trucking is right now … experiencing a severe crisis,' Robert Csongor, vice president and general manager of automotive at Nvidia, said… 'There's a shortage of trucking drivers driven by the Amazon age.' Trucks account for more than 70% of all tonnage moved in the U.S… A shortage of drivers has persisted for years due primarily to an aging workforce and poor compensation for the long hours away from home coupled with increasing demand led by Amazon, according to industry experts."

April 26 - Wall Street Journal (Liyan Qi): "The U.S. threat of investment restrictions is already damping the enthusiasm of Chinese businesses, with some canceling or slowing plans to invest in the American market, China's Commerce Ministry said. Ministry spokesman Gao Feng… said Beijing is prepared to respond if the U.S. goes ahead with the plan. 'We are sticking to our bottom-line thinking and are prepared to take action,' he told reporters… Rising uncertainty about the possible U.S. restrictions has already led some Chinese firms to reconsider their investment plans there, Mr. Gao said."

April 26 - Bloomberg (Keith Naughton): "Ford Motor Co. is cleaving an additional $11.5 billion from spending plans and dropping several sedans, including the Fusion and Taurus, from its lineup to more quickly reach an elusive profit target. The automaker is almost doubling a cost-cutting goal to $25.5 billion by 2022… By not investing in next generations of any car for North America except the Mustang, the company now anticipates it'll reach an 8% profit margin by 2020, two years ahead of schedule."

China Watch:

April 22 - Bloomberg: "Investors who pushed up Chinese bank shares last week on news of lower reserve requirements may have been celebrating too soon. The subtext to Tuesday's move is an effort to prepare the banks for a painful new phase in China's campaign to reduce financial-sector risks, as regulators free up deposit rates and accelerate their crackdown on the nation's $16 trillion shadow banking sector. 'China is gearing up to crack a hard nut with deleveraging and financial reforms, and the central bank is offering some coordinated policies to ensure it will be a smooth transition,' said Xia Le, chief Asia economist at Banco Bilbao Vizcaya Argentaria SA in Hong Kong."

April 24 - Financial Times (Gabriel Wildau): "Chinese banks have embarked on a new round of capital raising, prompted by regulations on shadow banking that are forcing lenders to bring shadow loans back on to their balance sheets. Pressure on banks to boost capital is a key element of Beijing's broader effort to contain financial risks from the country's extraordinary debt growth over the past decade. For most of the past decade, banks' dominance of China's financial system has waned as non-bank lenders and capital markets expanded. But the new rules forbid banks from packaging off-balance-sheet loans into 'wealth management products' that combine high yields with an implicit guarantee against default. That has spurred a revival of traditional bank lending. The resulting swell in bank balance sheets is boosting lenders' need for capital to comply with Chinese regulators' aggressive implementation of global Basel III capital adequacy rules."

April 24 - Bloomberg: "The next front in China's crackdown on debt is the one closest to home. On the back of a boom in property prices, household borrowing has been climbing for 10 years straight, at a pace that rivals any such run-up in major economies. At $6.7 trillion, and a record 50% of gross domestic product, private debt is now approaching developed-world levels and crimping consumer spending power. Take Huang Panpan, a 33-year-old public-relations executive from Beijing. Last year, he took the plunge on a 2.9-million-yuan ($460,000) mortgage on a 385-square-foot home and now faces monthly loan payments of about half of his take-home salary."

April 21 - Wall Street Journal (Josh Chin): "Chinese President Xi Jinping outlined an updated vision for China's future as an internet and technology power, pledging more state support for sectors caught in the crosshairs of a trade fight with the U.S. Speaking at a two-day conclave on cyberspace that ended Saturday, Mr. Xi called on officials, enterprises and researchers to redouble already extensive national efforts to achieve breakthroughs in 'core technologies' like semiconductors-an area where China still lags behind the U.S. The development of new information technologies 'presents the Chinese people with an opportunity you rarely see in a thousand years,' Mr. Xi said, according to an account of his speech… 'We must keenly seize the historic opportunity.'"

April 21 - Reuters (Adam Jourdan): "China must strengthen its grip on the internet to ensure broader social and economic goals are met, state news agency Xinhua reported… citing comments from President Xi Jinping, underlining a hardening attitude towards online content. Under Xi's rule China has increasingly tightened its grip on the internet, concerned about losing influence and control over a younger generation who are driving a diverse and vibrant online culture from livestreaming to blogs. 'Without web security there's no national security, there's no economic and social stability, and it's difficult to ensure the interests of the broader masses,' Xinhua cited Xi as saying."

Central Bank Watch:

April 22 - Financial Times (Claire Jones and Delphine Strauss): "Mario Draghi, European Central Bank president, acknowledged a 'moderation' in the pace of the eurozone recovery, but signalled no change in monetary policy. Speaking… after a meeting of the ECB's governing council that kept in place the bank's promise to maintain its asset purchase programme at least until the end of September, Mr Draghi said there had been 'a loss of momentum that is pretty broad based across countries and all sectors'. But he added that his overall assessment was one of 'caution tempered by an unchanged confidence" of moving towards the ECB's inflation target of just below 2%."

Fixed Income Bubble Watch:

April 26 - Bloomberg (Liz McCormick and Saleha Mohsin): "The U.S. government's need for new financing, rising in part from tax cuts and increased spending under President Donald Trump, has Wall Street predicting the Treasury will ramp up borrowing yet again next week. Treasury officials are set to announce this quarter's funding plans on May 2, and bond dealers expect another across-the-board boost to auction sizes… The nation's fiscal overseers may have little choice, with deficits projected to surpass $1 trillion by 2020. The deterioration in federal finances, which is putting the U.S. debt profile on track to resemble Italy's, is becoming more glaring ahead of crucial midterm elections in November. American taxpayers are already bearing the cost, as swelling issuance has helped drive yields on some maturities to the highest in a decade. Government debt sales will more than double this year, to a net $1.44 trillion by JPMorgan Chase & Co.'s estimate…"

April 25 - Bloomberg (Liz McCormick and Alex Harris): "With all the focus on the 10-year Treasury yield breaching 3%, investors may be missing the most important movement afoot in the world's biggest debt market. It's the spike higher in U.S. short-term rates that's really flashing a warning signal for companies, share prices and consumers, according to Peter Tchir at Academy Securities Inc. The surge in two-year yields to the highest since 2008, is 'the scariest chart for investors,' said the firm's head of macro strategy. One-year bill rates are also the highest in almost a decade. 'The 10-year yield might attract all the attention but higher short-term yields are more problematic, ' Tchir wrote… 'Consumers who want to purchase large items are faced with higher costs. Investors can allocate to less risky bonds and out of dividend stocks and still get some yield.'"

April 25 - Bloomberg (Adam Tempkin and Brian W Smith): "A huge swath of the corporate bond market is looking increasingly vulnerable. Bonds with the lowest investment grade have been a market darling over the past decade, ballooning in size as low global interest rates drew fund managers seeking higher returns. But as borrowing costs climb to a four-year high just as investors begin to anticipate a downturn in the global economy, some analysts are starting to sound the alarm. 'We're late in the credit cycle, and trying to figure out when everything turns,' said Erin Lyons, a senior credit strategist at… CreditSights Inc. 'Some of these may eventually be downgraded.' Notes in the lowest rungs above high-yield junk -- in the BBB group from S&P Global Ratings or the Baa bucket from Moody's… -- total about $3 trillion…"

Global Bubble Watch:

April 25 - Bloomberg (Joanna Ossinger): "The fear over 10-year U.S. Treasury yields breaking through 3% has been a long time coming, according to Societe Generale SA. 'Interest rates are already doing damage, people just haven't noticed,' Andrew Lapthorne, the firm's global head of quantitative strategy, said… 'Leverage in the U.S. is grotesque for this stage of the cycle. At the moment you've got peak leverage at peak prices. It's not like you have to dig deep to find a problem.' The number-one conversation Societe Generale's having with clients right now is about the correlation between bonds and equities. But risks to corporate balance sheets is a bigger problem at the moment, particularly in the U.S. and China."

April 24 - CNBC (Patti Domm): "Rising costs and rising interest rates make for a bad brew for stocks. The 10-year Treasury yield rose to 3% Tuesday for the first time in four years. The psychologically important number sent ripples across financial markets because rising interest rates are a sea change for consumers and companies that have lived with ultra-low borrowing costs for the past decade. Along with interest rates, other costs are rising for companies, with the potential to bite into profits and dampen earnings growth. This earnings season, with double-digit growth, was expected to pump up stock prices and take investors' minds off trade wars and geopolitical concerns. But strong earnings may have opened the door to a new concern - commodities and labor costs are going up along with interest rates."

Japan Watch:

April 27 - Bloomberg (Toru Fujioka and Masahiro Hidaka): "Governor Haruhiko Kuroda began his new term at the Bank of Japan much as he did the first one -- emphasizing his commitment to hitting 2% inflation. The BOJ left its policy settings intact, vowing to push ahead with stimulus even as other major central banks move further toward policy normalization, though at a moderating pace amid signs of slowing economic growth. Still there was a twist -- not uncommon in Kuroda's tenure -- as the BOJ's policy statement omitted mention of the projected time frame for hitting his longstanding 2% target."

EM Bubble Watch:

April 27 - Financial Times (Benedict Mander, Jessica Dye and Pan Kwan Yuk): "Argentina's central bank sharply raised its benchmark interest rate from 27.25% to 30.25% on Friday, in a muscular move aimed at propping up its ailing currency from sliding further against the US dollar. The surprise 300 bps rise comes amid a sharp drop in the value of the Argentine peso. The currency has shed nearly a third of its value against the dollar over the past year, dropping over 10% in the past four months alone."

April 26 - Financial Times (Michael Mackenzie): "The US dollar is attracting buyers after a long period of decline as higher bond yields finally shift the needle in favour of the reserve currency. The dollar index - a basket of major rivals dominated by the euro - is now clearly above its 100-day moving average for the first time this year, and emerging market currencies are also receiving a drubbing. The Bloomberg index of eight EM high-yield carry currencies has slid into negative territory for the year with a decline of 3% so far in April. The index - which includes Brazil, India, Mexico, Indonesia, South Africa, Hungary, Turkey and Poland - has now fallen nearly 5% from its January peak as US bond yields have climbed."

April 26 - New York Times (Clifford Krauss): "As President Trump moves to recast trade and border relations with Mexico, American oil companies are worried that the prospective winner of Mexico's presidential election will play his own nationalist card. The leading candidate, Andrés Manuel López Obrador, wants to reverse policies that have tied a knot between Mexico and the United States in recent years in energy production and consumption. And he has promised to make sure that oil never falls 'back into the hands of foreigners.' In addition to threatening refinery profits in the United States, his proposals could slow oil production in Texas and impede deepwater drilling in the Gulf of Mexico by international oil giants like Exxon Mobil and Chevron. They would also jeopardize the United States' energy trade surplus with Mexico, which reached roughly $15 billion last year."

April 25 - Bloomberg (Selcan Hacaoglu and Onur Ant): "Turkey's central bank raised interest rates for the first time this year, lending support to the lira as it seeks to contain inflation in the weeks leading up to early presidential elections in June. Policy makers increased the late liquidity window, the rate it uses to set bank funding costs, by 75 bps to 13.50%... The lira, which has fallen against all major currencies this year, strengthened 1%... Turkey is struggling to tame inflation after the weakening lira pushed price growth as high as 13% last year."

Geopolitical Watch:

April 26 - New York Times (Jochen Bittner): "To claim we are living through a new Cold War is both an understatement and a category mistake. The 20th-century face-off between the Communist East and the Capitalist West was, ideology aside, about two superpowers trying to contain each other. The global conflict of today is far less static. What we are witnessing instead is a new Great Game, a collision of great powers that are trying to roll back one another's spheres of influence. Unlike the Great Game of the 19th century between the British and the Russian Empire that culminated in the fight for dominance over Afghanistan, today's Great Game is global, more complex and much more dangerous. Call it the Game of Threes. It involves three prime players, Russia, China and the West, which are competing in three ways: geographically, intellectually and economically. And there are three places where the different claims to power clash: Syria, Ukraine and the Pacific. Many of the defining conflicts of our time can be defined through some combination of those three sets."

April 25 - Reuters (Ben Blanchard and Jess Macy Yu): "A series of Chinese drills near Taiwan were designed to send a clear message to the island and China will take further steps if Taiwan independence forces persist in doing as they please, Beijing said on Wednesday, as Taiwan denounced threats of force. Over the past year or so, China has ramped up military drills around democratic Taiwan, including flying bombers and other military aircraft around the self-ruled island. Last week China drilled in the sensitive Taiwan Strait. China claims Taiwan as its sacred territory, and its hostility towards the island has grown since the 2016 election as president of Tsai Ing-wen from the pro-independence Democratic Progressive Party."

April 24 - Reuters (Brenda Goh): "China has conducted live combat drills in the East China Sea…, the latest in a series of air and sea military exercises it has conducted over the past 10 days. Xinhua said a Chinese aircraft formation, which included the Liaoning carrier and J-15 planes, conducted anti-aircraft and anti-submarine warfare training where they intercepted 'enemy' jets, fired anti-air missiles from ships surrounding the carrier and dodged 'enemy' submarines."

Friday Evening Links

[Reuters] Wall Street flat as earnings offset inflation jitters

[Bloomberg] FANG Stocks Save the Week

[Bloomberg] Europe and the U.S. Teeter on the Brink of a Trade War

[Bloomberg] World's Central Banks Just Can't Quit on Currency Intervention

[Reuters] Despite warmth, Merkel and Trump still differ on trade and NATO

[Reuters] Trump says 'Iran will not be doing nuclear weapons'