Friday, May 11, 2018

Weekly Commentary: Disequilibrium

Much to the consternation of our allies, President Trump withdraws from the Iran nuclear deal. WTI crude adds another 1.5% (up 17% y-t-d) this week to the high since November 2014. Iran and Israel moved closer to direct military confrontation. With even 40% rates unable to staunch the bleeding, a stunned Argentine government warily negotiates an IMF bailout. Italy's far right and far left parties - both populist, anti-establishment, anti-euro and anti-immigration - begin negotiations to form a coalition government. Malaysians elect 92-year old Mahathir Mohamad, ending the 60-year reign of the Barisan Nasional party (including Mahathir as prime minister between 1981 and 2003).

Some astounding developments, but not enough these days to shake financial markets. Why fret a complex and increasingly unstable world, not with the timely return of Goldilocks. She's back… Headline U.S. April CPI was up 0.2% vs. expectations of 0.3%. Core CPI was up only 0.1% against expectations of 0.2%. April Import Prices were up 0.3% vs. estimates of 0.5%. Forget surging energy prices, rather quickly the rosy narrative shifts to peak inflation.

May 11 - Reuters (Howard Schneider): "St. Louis Federal Reserve Bank President James Bullard on Friday spelled out the case against any further interest rate increases, saying rates may already have reached a 'neutral' level that is no longer stimulating the economy… 'We should be opening the champagne here,' not raising interest rates with unemployment low and inflation in no seeming danger of accelerating, Bullard said… 'The economy is operating quite well right now.'"

I suggest the Fed and global central bankers hold back on carting out the bubbly. "Opening the champagne" is reminiscent of Citigroup CEO Chuck Prince's summer of 2007 "still dancing." Bullard focuses on traditional yield curve analysis. "I would say the yield curve inversion is getting close to crunch time." "The yield curve inversion would be a bearish signal for the US economy if that develops."

I would argue the yield curve has become an especially poor indicator for gauging the appropriateness of monetary policy or predicting imminent recession. "Whatever it takes" monetary management fundamentally altered the structure of global interest rates. Long-term bond prices now incorporate a significant premium based on the expectation for aggressive future rate cuts and bond purchase programs (QE). And the longer the artificially depressed interest rate structure fuels Bubble excess, the greater the long-term bond premium (lower yields) and the flatter the curve. Bubble Dynamics

Bullard proffered additional interesting analysis: "'This is an equilibrium process, not an inflationary one,' Bullard said, and 'it is not necessary to disrupt' it with higher interest rates."

"Equilibrium" with short-term rates between 1.5% and 1.75% - with the Fed having avoided actually tightening financial conditions? Equilibrium with annual Current Account Deficits approaching $500 billion? With the Dow up 18.5% over the past year and the Nasdaq Composite surging almost 21%? With historically low housing inventory and home price inflation significantly above after-tax borrowing costs - and accelerating? With the unemployment rate at 3.9% and businesses struggling to find qualified applicants? With Trillion dollar U.S. fiscal deficits in the offing? With the ECB and BOJ still monetizing debt in large quantities? With 10-year JGB yields at five bps and Italian yields at 1.87%? With still Trillions of negatively-yielding debt instruments globally? Equilibrium with most central banks around the world hesitating to tighten policy - with global monetary policy nowhere in the vicinity of a semblance of normality? Disequilibrium.

May 10 - Financial Times (Robin Wigglesworth): "The investor withdrawal from emerging markets accelerated over the past week, with equity funds suffering their worst outflows in nearly a year and bond funds losing money for a third week running - the longest streak of withdrawals since late 2016… EM equity funds had outflows of $1.6bn in the seven days to May 9, the first weekly outflow since February and the biggest since August 2017… Fixed-income funds focused on the developing world saw their outflows accelerate. Investors withdrew $2.1bn from EM bond funds, the third consecutive week of outflows and the worst one since February. EM debt funds have now suffered outflows of more than $4bn since mid-April."

A decade of ultra-easy monetary policies has ensured deep structural maladjustment. Importantly, "activist" policies have nurtured way too much "money" playing global risk assets. Indeed, global financial speculation has become one historic Crowded Trade. And too much "money" in the game alters market dynamics. The bastardized yield curve is one momentous manifestation. Serial market boom and bust dynamics is another.

The speed by which the EM boom has faltered offers a warning to all. After all, it was only weeks ago that EM prospects were viewed as exceptionally bullish. And with "money" flooding into "developing" markets, it was too easy to disregard structural vulnerabilities and mounting risks. As always, there was ample "hot money" originating from leveraged "carry trades," derivatives and the leveraged speculating community more generally. But these days, with the broad menu of available hot international ETF products, it has never been so easy for retail "money" to jump aboard the EM boom cycle. Jump they did, late definitely not better than never.

This long cycle's EM excesses have been unprecedented. A down-cycle is long overdue. Let's hope the downside can somehow avoid being proportional to this cycle's unprecedented excesses. Outflows have just begun.

May 8 - Financial Times (Benedict Mander and John Paul Rathbone): "Seventeen years ago, economic policies backed by the IMF brought Argentina to its knees. Five years later, then-president NĂ©stor Kirchner severed IMF ties, swearing never again. This week, a run on the currency forced President Mauricio Macri to return to the international lender. On Tuesday, in a televised address to the nation, a sober-faced Mr Macri said assistance from the International Monetary Fund would help 'avoid a crisis like the ones we have faced before . . . [it] will allow us to strengthen our programme of growth and development'. It was a stunning reversal for the 59-year-old former businessman who came to power in December 2015 vowing to make Argentina a 'normal country', after 12 years of leftist rule…"

Argentina was not without its share of responsibility, yet unfettered global finance ran roughshod through Argentine financial and economic structure. At U.S. and IMF insistence, Argentina in the nineties adopted a U.S. dollar-based currency board system. This was to ensure that money supply growth did not exceed dollar reserve holdings, thereby containing inflation and, supposedly, ensuring financial stability. Inflation did collapse, but the Washington-dictated policy regime was a powerful magnet for global "hot money" flows. The currency board held narrow money supply growth in check, yet it did the very opposite for Credit. The onslaught of international inflows spurred massive government and corporate debt growth - too much of it denominated in dollars. The Argentine miracle economy boomed and became the poster child for enlightened "Washington Consensus" policymaking. It was all a Bubble Mirage. Conventional wisdom could not have been more detached from reality.

The Bubble inevitably faltered (2001/2002), and "hot money," as it does, raced for the exits. There were no buyers, no liquidity and meager real wealth to make good on all the debt that had been extended. It was a horrendous collapse and tragedy for the Argentine people, for which they're still suffering some 17 years later. Like many Bubbles before and since, it's amazing how long markets remain oblivious to financial imbalances and mounting structural impairment.

Brazil's 2001 crisis sealed the fate for their neighbor Argentina's flawed dollar currency board regime. Might the unfolding Argentine crisis this time push Brazil over the edge? It's worth noting that Brazil's sovereign CDS rose above 200 bps Wednesday for the first time in eight months. And while it doesn't compare to the Argentine peso's 5.8% drop (down 11.5% in 2-wks), Brazil's real fell 2.0% this week. The Brazilian real is down 4.0% over two weeks and 8.1% y-t-d. Brazil's local currency 10-year yields spiked Wednesday to a 2018-high 10.25% (closed the week at 10.0%).

Mexican local 10-year yields jumped to 7.75% Wednesday, just below multi-year highs, before ending the week at 7.58%. Mexico's peso traded to a 2018 low in Wednesday trading. Now down 5.1% y-t-d, the Indian rupee ended the week at 15-month lows. Hungary's local bond yields jumped 19 bps to an eight-month high 2.80%.

Turkey, another recent EM "darling," saw its currency drop another 2% this week, boosting its two-week decline to 6.3% and y-t-d losses to 12.0%. Turkey sovereign CDS rose another 13 bps this week to a 14-month high 238. Turkish government 10-year dollar-denominated yields jumped 14 bps to 6.66%, nearing the high going all the way back to 2009.

May 11 - Reuters (Ali Kucukgocmen and Behiye Selin Taner): "Turkish President Tayyip Erdogan called for lower interest rates on Friday and described them as the 'mother and father of all evil', triggering a fresh slide in the lira as investors worried about the central bank's ability to rein in high inflation… 'If my people say continue on this path in the elections, I say I will emerge with victory in the fight against this curse of interest rates,' Erdogan said in a speech to business people in Ankara…"

"Evil" is not possessed in too high interest rates - but rather in too much debt. And foreign-denominated debt, which Turkey has accumulated aplenty, can prove the "mother of all evil" when currency crisis devolves swiftly into a full-fledged financial panic. With the lira sinking and inflation surging, Turkey's central bank will likely have no alternative than to raise rates - perhaps aggressively - heading into June 24th snap elections. Lira 10-year bond yields spiked above 14% to an eight-year high in Wednesday trading.

May 9 - Financial Times (Gabriel Wildau): "China credit spreads hit their widest level in nearly two years this week following new regulations that undermined long-held assumptions about implicit guarantees on debt linked to local governments. Chinese localities have long used arm's length local government financing vehicles (LGFVs) to skirt restrictions on direct fiscal borrowing and to finance infrastructure, contributing to a surge in economy-wide debt since 2008. LGFVs are among the biggest borrowers in the local bond market. The spread between yields on 5-year Chinese government bonds and 5-year medium-term notes rated double A minus reached 3.6 percentage points on Monday and remained at that level on Tuesday… Six months ago the spread was only 2.51 points."

May 9 - Bloomberg (Lianting Tu and Carrie Hong): "The average yield on China's junk-rated dollar bonds rose above the 8% mark, fueling concerns of further gains amid a bulging issuance pipeline and the absence of a strong demand from mainland investors. Yields on dollar junk bonds from Chinese firms rose to the highest since April 2016, while those from the broader region yielded 7.4%... It took just 43 days for China's average yield to rise from 7% to 8%, after having taken more than four months for the move from 6% to 7%. BNP Paribas Asset Management expects credit spreads in the region to widen by a further 25-50 bps."

Turkey, China and others may hold crisis at bay for now. Argentina, an EM Bubble weak link, has rather precipitously succumbed. Even as the central bank (with a reasonable quantity of international reserve holdings) hiked interest rates to 40% and the Macri government sent a delegation to Washington to negotiate with the IMF, the currency plunge ran unabated. Argentina less than 11 months ago sold $2.75 billion 100-year bonds at a 7.9% yield.

May 11 - Financial Times (John Paul Rathbone): "A hundred years ago, at about the same time that the Titanic hit the iceberg, Argentina was among the 10 richest countries in the world. Today it ranks 87th. In all, it has defaulted on its debt eight times, suffered hyperinflation twice, and gone through 20 IMF-supported economic programmes in 60 years. The most brutal of these ended in 2001, triggering a $100bn default and crushing devaluation. The spectacular collapse left one in five Argentines unemployed, and with an understandable allergy to anything associated with the IMF. It also led to 12 years of populist rule. All this has made Mr Macri's subsequent quest for 'normality' harder still."

The S&P500 jumped 2.4% this week. EM instability worked to hold 10-year Treasury yields back from the 3.0% breakout level. Timely reports of less-than-expected inflation data didn't hurt either. The S&P500 bouncing off the 200-day moving average helped spur a bout of short covering - and short squeezes can take on lives of their own.

But, mainly, it was another week where U.S. markets were content to disregard myriad risks. And why not? A focus on risk can lead to untimely hedging and reductions in long exposures - and resulting underperformance. And underperforming active managers risk losing only more assets to the ballooning passive index ETF complex. In a world of too much "money" and Crowded Trades prevailing throughout the risk markets, it regresses into a dysfunctional game of disregarding risk and chasing performance. Buy and hold an equities index is, these days, pure genius.

This speculative dynamic, however, is coming home to roost in the emerging markets. At the same time, "developed" market outperformance spurs a rush to play - and talk of Goldilocks and dreams of new eras of permanent prosperity. Serious issues are in play at the "Periphery." It's an inopportune time for complacency at the "Core," let alone exuberance. That Bubble at the Periphery - it's been absolutely historic.

May 11 - Wall Street Journal (Chelsey Dulaney, Jon Sindreu and Saumya Vaishampayan): "The dollar's rise is squeezing bond markets in developing countries like Argentina, Indonesia and Turkey, gutting what had been a popular trade for investors seeking stronger returns. Countries in the developing world have been borrowing heavily, supported by upbeat expectations for global growth and a long period of low to negative interest rates that drove investors into emerging markets to get any sort of yield. Emerging markets added on $7.7 trillion in new debt last year, including bonds and other types of loans, with about $800 billion of that denominated in foreign currencies, according to data from the Institute of International Finance."

For the Week:

The S&P500 rose 2.4% (up 2.4% y-t-d), and the Dow gained 2.3% (up 0.5%). The Utilities fell 2.1% (down 4.9%). The Banks surged 4.1% (up 3.9%), and the Broker/Dealers jumped 2.9% (up 10.8%). The Transports rose 3.3% (up 1.0%). The S&P 400 Midcaps gained 2.0% (up 2.0%), and the small cap Russell 2000 jumped 2.6% (up 4.6%). The Nasdaq100 advanced 2.7% (up 8.7%). The Semiconductors surged 4.1% (up 7.8%). The Biotechs jumped 4.0% (up 10.5%). With bullion gaining $3, the HUI gold index recovered 0.5% (down 5.2%).

Three-month Treasury bill rates ended the week at 1.86%. Two-year government yields added two bps to 2.54% (up 65bps y-t-d). Five-year T-note yields gained five bps 2.84% (up 63bps). Ten-year Treasury yields added two bps to 2.97% (up 57bps). Long bond yields slipped two bps to 3.10% (up 36bps). Benchmark Fannie Mae MBS yields increased two bps to 3.66% (up 66bps).

Greek 10-year yields fell 10 bps to 4.00% (down 7bps y-t-d). Ten-year Portuguese yields dipped three bps to 1.68% (down 26bps). Italian 10-year yields jumped eight bps to 1.87% (down 14bps). Spain's 10-year yields declined three bps to 1.27% (down 29bps). German bund yields gained two bps to 0.56% (up 13bps). French yields added less than a basis point to 0.79% (unchanged). The French to German 10-year bond spread declined one to 23 bps. U.K. 10-year gilt yields rose four bps to 1.44% (up 25bps). U.K.'s FTSE equities index jumped 2.1% (up 0.5%).

Japan's Nikkei 225 equities rose 1.3% (unchanged y-t-d). Japanese 10-year "JGB" yields were little changed at 0.047% (unchanged). France's CAC40 added 0.5% (up 4.3%). The German DAX equities index rose 1.3% (up 0.6%). Spain's IBEX 35 equities index jumped 1.7% (up 2.3%). Italy's FTSE MIB index declined 0.7% (up 10.6%). EM equities were mixed. Brazil's Bovespa index rallied 2.5% (up 11.5%), while Mexico's Bolsa slipped 0.6% (down 5.3%). South Korea's Kospi index gained 0.7% (up 0.4%). India’s Sensex equities index rose 1.8% (up 4.3%). China’s Shanghai Exchange jumped 2.3% (down 4.4%). Turkey's Borsa Istanbul National 100 index declined 0.7% (down 11.7%). Russia's MICEX equities surged 2.4% (up 11.2%).

Investment-grade bond funds saw inflows of $804 million, while junk bond funds posted outflows of $755 million (from Lipper).

Freddie Mac 30-year fixed mortgage rate were unchanged at 4.55% (up 50bps y-o-y). Fifteen-year rates slipped two bps to 4.01% (up 72bps). Five-year hybrid ARM rates jumped eight bps to 3.77% (up 63bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.71% (up 55bps).

Federal Reserve Credit last week declined $8.1bn to $4.318 TN. Over the past year, Fed Credit contracted $116bn, or 2.6%. Fed Credit inflated $1.507 TN, or 54%, over the past 288 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $10.9bn last week to a 13-week low $3.397 TN. "Custody holdings" were up $175bn y-o-y, or 5.4%.

M2 (narrow) "money" supply declined $8.2bn last week to $13.955 TN. "Narrow money" gained $480bn, or 3.6%, over the past year. For the week, Currency increased $1.2bn. Total Checkable Deposits gained $5.7bn, while savings Deposits fell $24.2bn. Small Time Deposits rose $3.6bn. Retail Money Funds added $5.6bn.

Total money market fund assets expanded $6.9bn to $2.807 TN. Money Funds gained $157bn y-o-y, or 5.9%.

Total Commercial Paper rose $6.2bn to $1.059 TN. CP gained $78bn y-o-y, or 7.9%.

Currency Watch:

May 10 - Bloomberg (Siddharth Verma): "Winds of change in currency markets threaten to blow global investment trends further off course -- but from the East as much as the West. While investors have been focused on a strengthening U.S. dollar and rising Treasury yields, a weaker Chinese yuan also threatens to heap pressure on emerging market assets that have already wiped out their gains for the year. That's because a pause in the yuan's appreciation path would challenge a clutch of developing economies by hitting their trade competitiveness against China, according to Morgan Stanley. 'RMB up and USD down is the best world in which you can live,' said Hans Redeker, the bank's… chief global currency strategist. 'You have it easier on exports and funding, all at the same time."

The U.S. dollar index was little changed at 92.537 (up 0.4% y-t-d). For the week on the upside, the Swedish krona increased 2.4%, the South African rand 2.0%, the Norwegian krone 0.7%, the South Korean won 0.7%, the Canadian dollar 0.4%, the British pound 0.1% and the Australian dollar 0.1%. For the week on the downside, the Brazilian real declined 2.0%, the Mexican peso 0.8%, the New Zealand dollar 0.7%, the Japanese yen 0.3%, the Singapore dollar 0.2%, and the euro 0.1%. The Chinese renminbi gained 0.45% versus the dollar this week (up 2.73% y-t-d).

Commodities Watch:

May 9 - Wall Street Journal (Benoit Faucon, Summer Said and Sarah McFarlane): "Washington's decision to reinstate Iranian sanctions is likely to slowly cut off a chunk of the world's crude supply-a shift that could redraw global supply lines and require Iran's big customers to find alternative sources. The Trump administration's move rattled oil markets, sending international crude up sharply after bouncing wildly in the lead-up to the decision. Midday in Europe, international crude was up 2.7% to $76.87 a barrel on London's Intercontinental Exchange, trading at its highest level in 3½ years."

The Goldman Sachs Commodities Index gained 0.1% (up 9.5% y-t-d). Spot Gold increased 0.2% to $1,318 (up 1.2%). Silver rose 1.4% to $16.752 (down 2.3%). Crude gained 98 cents to $70.70 (up 17%). Gasoline jumped 3.5% (up 22%), and Natural Gas rose 3.5% (down 5%). Copper increased 0.8% (down 6%). Wheat sank 5.2% (up 17%). Corn dropped 2.4% (up 13%).

Market Dislocation Watch:

May 8 - Bloomberg (Srinivasan Sivabalan): "The U.S. 10-year Treasury yield has retreated below the 3% mark, but the psychological damage it wrought by crossing that threshold hasn't eased. Since April 24, when the milestone was reached in intraday trading for the first time in five years, the risk-on rally in emerging markets has shown signs of faltering. While Treasury yields have stabilized, a selloff in foreign-currency bonds of developing nations has accelerated. The yield on the Bloomberg Barclays Emerging Markets Hard Currency Aggregate Index, which includes sovereign, quasi-sovereign and corporate bonds, has jumped 97 bps this year, compared with an increase of 54 bps in the 10-year Treasury yield. That has taken the gap between them to the highest level since January 2017."

May 10 - Bloomberg (Dani Burger): "Here's another sign the synchronized global growth story is on shaky ground: an investing strategy that outperforms in economic booms has suffered its biggest drop since the crisis-era heyday. A U.S. long-short value portfolio, an investing style typically deployed by quantitative funds, fell for 10 consecutive days through Wednesday, the longest losing run on record. That defies the market's prediction for a stellar trajectory for value stocks -- those priced cheaply relative to their assets -- amid record profit forecasts for Corporate America and continued expansion in Europe. If sustained, it's a troubling signal about the growth trajectory, and defies Wall Street projections at the start of the year."

May 10 - Bloomberg (Brian Chappatta): "The Treasury yield curve from 5 to 30 years flattened Thursday to the lowest level since August 2007, as a combination of weaker-than-expected U.S. inflation and solid demand for a record-sized bond auction bolstered investor confidence in owning long-dated securities. The gap was poised for its biggest one-day decline in more than a month, with the differential dropping through a previous intraday low from April to as little as 28.3 bps. The spread between 2 and 10 year Treasuries also narrowed in a bull flattening move."

Trump Administration Watch:

May 6 - New York Times (Keith Bradsher): "Senior Chinese and American officials concluded two days of negotiations on Friday with no deal and no date set for further talks, as the United States stepped up its demands for Chinese concessions to avert a potential trade war. The American negotiating team, which included Treasury Secretary Steven Mnuchin and the United States trade representative, Robert E. Lighthizer… did not release a statement. But a list of demands that the group took into the meeting called for reducing the United States' trade gap with China by $200 billion over the next two years and a halt on Chinese subsidies for advanced manufacturing sectors. The demands, which spread on Chinese social media and were confirmed by a person close to the negotiations, suggested that both sides hardened their positions this week despite the two days of talks."

May 8 - CNBC (Thomas Franck): "President Donald Trump's decision to pull the U.S. out of the Iran nuclear deal… could have widespread global implications ranging from the price of oil to the future of Tehran's nuclear ambitions. The U.S. withdrawal from the deal could stress already strained diplomatic relations with a number of key allies, including European Union leaders in Germany, France and the United Kingdom, all original parties in the 2015 accord. President Emmanuel Macron of France and British Foreign Secretary Boris Johnson have both implored Trump in recent days to stay in the landmark deal brokered under President Barack Obama. Macron later tweeted… his disappointment with Trump's decision to exit the deal, formally known as the Joint Comprehensive Plan of Action. 'France, Germany, and the UK regret the U.S. decision to leave the JCPOA,' Macron said… 'The nuclear non-proliferation regime is at stake.'"

May 9 - Bloomberg (Javier Blas): "The U.S. is giving its allies 180 days to extricate themselves from Iranian oil deals, making explicit its desire to start curbing the nation's crude exports quickly in a bid to go after Tehran's economic lifeline. The sanctions 'effectively' go into place immediately, U.S. Treasury Secretary Steven Mnuchin said... In a document accompanying the announcement, the Treasury Department gave an unequivocal 'Yes' to the question of 'Will the United States resume efforts to reduce Iran's crude oil sales?' It was a message harsher than some oil traders had expected."

May 9 - Financial Times (Sam Fleming, Shawn Donnan and Michael Peel): "Even as European leaders prepared their pleas for exemptions from US president Donald Trump's sanctions on Iran, advisers were warning of a deepening chill on multinationals' willingness to do business with the Islamic republic. The US has offered grace periods ranging from 90 to 180 days before imposing the new restrictions on companies' ability to conduct transactions with Iran. But Steven Mnuchin, the US Treasury secretary, warned after the president's statement that while licences and waivers could be applied for, America's objective is to impose 'maximum sanctions' on Iran. Andrew Peek, deputy assistant secretary for near eastern affairs, told reporters… that the Europeans had been responsive to previous US calls for sanctions on Iran, and he expected the same this time."

May 9 - New York Times (Jack Ewing and Stanley Reed): "European companies moved quickly to invest in Iran after it agreed in 2015 to mothball its nuclear weapons program in return for an end to economic sanctions. Automakers… linked up with Iranian partners to sell vehicles. Siemens of Germany struck a deal to deliver locomotives. Total of France began a project to explore offshore natural gas. Yet even before President Trump pulled out of the agreement with Iran, many companies had already tempered their expectations and limited their investment. Now their prospects look murkier as European leaders try to determine whether there is a path forward without the United States."

May 10 - CNBC (Jeff Cox): "Trade negotiations between U.S. and Chinese leaders are focused in part on getting China to buy more goods rather than getting it to ship less, Commerce Secretary Wilbur Ross said… Fresh from a high-level meeting in China between members of both nations, Ross said there was progress made but that barriers remain. 'The Chinese are very good at the rhetoric of free trade, but in fact they are probably the most protectionist country of the major countries,' he told Tyler Mathisen… Despite the criticism, he was at least pleased with China's willingness to listen and respond to U.S. concerns over a growing trade gap… 'It was the right level of people,' Ross said. 'There's a considerable gap between what they put on the table and what we feel we need. But that's OK, you sort of expect that at this stage in the game.'"

May 5 - Reuters (David Shepardson): "The White House… sharply criticized China's efforts to force foreign airlines to change how they refer to Taiwan, Hong Kong and Macau, labeling China's latest effort to police language describing the politically sensitive territories as 'Orwellian nonsense'. …The carriers were told to remove references on their websites or in other material that suggests Taiwan, Hong Kong and Macau are part of countries independent from China…"

Federal Reserve Watch:

May 7 - Bloomberg (Enda Curran and Carolina Millan): "The Federal Reserve's gradual push towards higher interest rates shouldn't be blamed for any roiling of emerging market economies, which are well placed to navigate the tightening of U.S. monetary policy, Fed Chairman Jerome Powell said. In a speech that argued U.S. decision-making isn't the major determinant of flows of capital into developing economies, Powell said the influence of the Fed on global financial conditions should not be overstated, despite it being blamed five years ago for the so-called taper tantrum."

May 6 - Bloomberg (Craig Torres): "One of the Federal Reserve's most senior officials and his incoming successor both said that overshooting the U.S. central bank's 2% inflation target for a time is nothing to worry about because the central bank has been below the goal for so long. 'I've said it many times: being a little above 2% after being below 2% for many, many years is not a problem," New York Fed President William Dudley said… That sentiment was echoed a short while later by John Williams, the current head of the Fed's San Francisco branch, who will replace Dudley next month."

U.S. Bubble Watch:

May 8 - CNBC (Annie Nova): "Americans are bracing for houses to get costlier. In a recent survey, 64% said they're anticipating an increase in property values during the next year, according to… Gallup. That's the highest share since the housing bubble in the mid-2000s, when 70% were predicting price levels to soar. Optimism levels vary depending on which pocket of the country you find yourself. Nearly 80% of Americans in the West forecast a pricier real estate market in the next year, compared with 64% in the South, 58% in the East and 56% in the Midwest."

May 9 - Bloomberg (Steve Matthews and Prashant Gopal): "Adam Blaylock was pretty sure he overpriced his Santa Clara, California, home by offering it in February for $1.48 million… But within a week, the 1,280-square-foot ranch-style house was in contract for $155,000 above asking. The $1.5 trillion tax overhaul President Donald Trump signed in December capped mortgage-interest deductions on loans up to $750,000, down from the prior limit of $1 million. It also set a $10,000 maximum for state and local tax deductions… Those provisions prompted one of the most powerful lobbying groups -- the National Association of Realtors -- to warn that home prices in some high-end markets would tank. So far though, those areas have proven to be resilient. There are 308 U.S. ZIP codes that have homes with median values in excess of $1 million -- more than 92% of them saw their median home prices increase in March from a year earlier… 'We are seeing the opposite of what was expected,' said Aaron Terrazas, senior economist at Zillow."

May 8 - Bloomberg (Shobhana Chandra): "U.S. job openings surged to a record in March, putting vacancies roughly on par with the number of unemployed workers, Labor Department data showed… Number of positions waiting to be filled rose by 472k to 6.55m (est. 6.1m) from upwardly revised 6.08m in Feb."

May 10 - Wall Street Journal (Ben Eisen and Akane Otani): "U.S. companies are buying back their shares at a record pace, providing fresh support during a rocky stretch for the stock market when many investors have rushed for the exits. S&P 500 companies that have reported earnings for the first three months of 2018 have bought $150 billion of their own stock in the first quarter… About 80% of S&P 500 components have reported so far. That is on pace for the biggest amount in any quarter, based on data going back to 1998. It has been fueled in part by a new tax law that is freeing up cash and encouraging companies to bring back money held abroad… S&P 500 firms are on pace to have returned almost $1 trillion to shareholders for the 12 months through March though dividends and buybacks."

May 9 - Wall Street Journal (Eric Morath, Heather Haddon and Jacob Bunge): "Higher input costs are pressuring U.S. companies to raise prices-a potential precursor to more consumer inflation-but shoppers are resisting their efforts to do so. Businesses are facing higher costs for everything from fuel and freight hauling to steel to accounting services. Input price increases have outstripped consumer price increases since late 2016, with some pipeline costs rising at two or three times the rate of consumer inflation… The challenge is particularly acute in the food industry."

May 9 - Wall Street Journal (Theo Francis and Jieqian Zhang): "Median pay reached $12.1 million for CEOs of the biggest U.S. companies in 2017, a new post-recession high, as profits and stock prices soared. Most S&P 500 CEOs received raises of 9.7% or better last year, according to a WSJ analysis of data from MyLogIQ… CEOs at pharmaceutical, media, technology and financial firms dominated the WSJ's pay ranking, taking 16 of the 25 top spots."

May 10 - Reuters (Lucia Mutikani): "U.S. consumer prices rebounded less than expected in April as rising costs for gasoline and rental accommodation were tempered by a moderation in healthcare prices, pointing to a steady buildup of inflation. [The]… Consumer Price Index rose 0.2% after slipping 0.1% in March. In the 12 months through April, the CPI increased 2.5%, the biggest gain since February 2017, after rising 2.4% March. Excluding the volatile food and energy components, the CPI edged up 0.1% after two straight monthly increases of 0.2%. The so-called core CPI rose 2.1% year-on-year in April…"

May 6 - Wall Street Journal (Jon Kamp and Joseph De Avila): "An improved national economy is easing pressure on state budgets. Budget officials from Utah to Connecticut are reporting better tax revenues and say their fiscal outlook has brightened, thanks to an expanding economy and job growth. The effects of the new federal tax law also increased revenue figures, but analysts caution that lift will be temporary for many states. 'Unlike last year, we're seeing broad-based strength,' said Matthew Knittel, who directs Pennsylvania's Independent Fiscal Office."

May 7 - Bloomberg (Joe Light): "Freddie Mac has quietly started extending credit to nonbanks that issue mortgages, a move it says will help the companies maintain access to a crucial stockpile of cash if their home loans go sour. But critics say the financing could create an unfair market advantage that allows preferred lenders to muscle out competitors. Fannie and Freddie Died But Were Reborn…"

China Watch:

May 6 - Reuters (Stella Qiu and Se Young Lee): "China's 'huge' trade imbalance with the United States is a structural and long-term problem and should be viewed with rationality, the Chinese central bank governor was quoted as saying by financial magazine Caixin."

May 10 - Bloomberg: "With corporate-debt defaults on the rise, China's securities regulator will probe bond funds to ensure that they have proper risk controls in place, according to people familiar with the matter. The China Securities Regulatory Commission's investigation will include whether individual firms' funds are shuffling high-risk bonds between them, said the people… One suspicion is mutual-fund companies may be motivated to beautify their holdings to avoid a mass withdrawal by investors, the people said."

May 10 - Bloomberg (Carrie Hong and Narae Kim): "The anxiety sweeping through credit markets is becoming self-reinforcing, say underwriters. The chain of events goes like this: in a weak market backdrop skittish Chinese junk bond issuers ask banks to guarantee bigger slices of debt sales to make sure the deal goes OK; the underwriters then try to get rid of those bonds in the secondary market immediately; prices drop. That, in turn, makes it harder for other deals to come to market. 'We're seeing a tendency that some underwriters are taking more bonds than their balance sheet can hold given what they have committed to get into the deal,' said Sebastian Ha, head of the debt syndicate at Bank of China… This leaves them with little choice but to sell the bonds the next day and this practice is 'somewhat distorting' the market, Ha said."

May 9 - Financial Times (Edward White): "Fitch has issued a warning over the increasing integration of Hong Kong's banking environment with China's financial system. The ratings agency has downgraded its view on the operating environment for Hong Kong's banks due to what it says is the 'growing influence of the links between [Hong Kong] and mainland China'. 'China's governance standards … are substantially lower than Hong Kong's,' Fitch said… It cut its assessment of the operating environment for Hong Kong's banks to ''a'/stable' from ''a+'/negative.' Fitch expected both Hong Kong banks to 'increasingly finance mainland customers' activities in China' and Chinese banks to 'leverage their considerably larger resources and customer bases to pursue growth in Hong Kong'."

May 9 - Reuters (Stella Qiu and Kevin Yao): "China's producer inflation picked up for the first time in seven months in April, bolstered by surging commodities prices and suggesting its industrial demand remains resilient even as trade tensions ratchet up with the United States… The producer price index (PPI) rose 3.4% in April from a year ago, accelerating from a 17-month low of 3.1% in March… The consumer price index (CPI) rose 1.8% from a year earlier, just below expectations and slowing from March's 2.1%."

Central Bank Watch:

May 10 - Bloomberg (Jill Ward): "Mark Carney said the Bank of England still intends to deliver 'modest' tightening after an unexpected economic slowdown derailed an interest-rate hike that investors had anticipated as soon as this month. The BOE governor spoke after officials kept the key interest rate at 0.5%, citing the first-quarter slump, and said inflation will weaken faster than previously thought. While his comments keep the prospect of tighter policy alive, investors sold the pound and reduced their bets on a hike this year. 'We think the momentum in the economy is going to reassert… The Monetary Policy Committee judges that an ongoing, modest tightening of monetary policy over the forecast period will be appropriate to return inflation sustainably to its target.'"

May 7 - Bloomberg: "Central banks across the globe lack the tools to boost inflation, according to Raghuram Rajan. The former Reserve Bank of India Governor was speaking to Bloomberg at the Hoover Institute Conference in Stanford, California. 'We are in a new world,' he said adding, earlier the fight for central banks was against high inflation. 'Unfortunately, we have the opposite problem now that inflation in many cases is a little too low. The central banks want to boost inflation but we don't have the tools that allow us to do that in a reliable way.'"

Europe Watch:

May 11 - Bloomberg (Lorenzo Totaro): "Populists may be coming soon to power in Italy with ideas including a flat tax for all that could blow a hole in the country's finances if they are ever implemented. The various promises, which also cover a lower retirement age and a guaranteed income for the poor, would probably provide a short-term growth boost. Still, they risk heaping additional fiscal burden on an economy already crippled with debt… Italy's economy is forecast to grow 1.5% this year, making it the worst performer in the 19-nation euro area. Unemployment constantly around 11% is above euro-area average, while the nation's debt burden at over 130% of its output is the region's second-highest after Greece."

May 10 - Bloomberg (John Follain): "Italy's populist leaders took strides toward forming the next administration at a meeting in Rome Thursday, including on the issue of who should be prime minister. Luigi Di Maio of the anti-establishment Five Star Movement and Matteo Salvini of the anti-immigrant League reported 'significant steps forward on the make-up of the executive and of the premier' in their first-ever joint statement. They asked President Sergio Mattarella to give them until Monday to complete their plans. If the two euroskeptic parties can pull off an agreement to take control of Europe's fourth-biggest economy they would become a major obstacle to efforts to strengthen the European Union."

May 10 - Reuters (Crispian Balmer and Gavin Jones): "The anti-establishment 5-Star Movement and far-right League have made 'significant steps' towards forming a government, the two parties said… as Italy looked to end nine weeks of political deadlock. The two groups, which are hostile to European Union budget restrictions and have made electoral pledges that would cost billions of euros to implement, entered into negotiations… just as a swift return to the polls looked inevitable. 'Significant steps forward have been made on the composition of the government and on the (nomination) of a prime minister,' a joint statement said…"

Fixed Income Bubble Watch:

May 10 - Bloomberg (Chitra Somayaji): "'This is still an incredibly good time to access' the market for capital and investment-grade financing, John Waldron, co-head of investment banking at Goldman Sachs, said in an interview with Ed Hammond that aired on Bloomberg TV."

May 6 - Bloomberg (Alexandra Harris): "A struggle that will dictate the future of financial markets is brewing. Long beleaguered Libor is fighting to preserve its status as the premier global benchmark for dollar-based assets just as questions pile up over the credibility of its presumptive heir. It's a clash with few equals in financial history. In one corner, the much maligned set of London-based rates that, even after being tainted by rigging scandals, still underpin more than $370 trillion of instruments across various currencies. In the other, a potential successor, conceived over the past four years by the Federal Reserve Bank of New York and the Fed Board of Governors, as well as a who's who of Wall Street titans, from JPMorgan… and Goldman Sachs… to BlackRock Inc. Replacing the London interbank offered rate 'would be the most profound development in financial markets' for years to come, said Ward McCarthy, chief financial economist at Jefferies… But 'there are more than $300 trillion of financial assets tied to Libor, and if you're going to transition from that to something else, that's $300 trillion of potholes that are potentially coming.'"

May 9 - Bloomberg (Shelly Hagan): "Corporate America partied like never before on cheap money over the past decade, and now comes the hangover. Companies will need to refinance an estimated $4 trillion of bonds over the next five years, about two-thirds of all their outstanding debt, according to Wells Fargo Securities. This has investors concerned because rising rates means it will cost more to pay for unprecedented amounts of borrowing, which could push balance sheets toward a tipping point. And on top of that, many see the economy slowing down at the same time the rollovers are peaking."

EM Bubble Watch:

May 10 - Financial Times (Gillian Tett): "A year ago, Argentina was the darling of global investors. So much so that, when it issued a pioneering 100-year bond with a yield of just 7.9%, investors gobbled it up, ignoring the fact that the country has defaulted eight times in the past 200 years. Whoops! This week President Mauricio Macri asked the IMF for help, after the peso tumbled to record lows. And that century bond? After rising to 105% of its face value late last year, it is now trading nearer to 85%. This is deeply painful for the Macri government - and for long-suffering Argentine voters who hoped that 'gradualist' reforms could deliver an exit from years of economic turmoil, indebtedness and decline. But there is a silver lining too, at least for the wider world: Argentina's turmoil could offer a timely wake-up call about the bigger challenges in 2018."

May 10 - Bloomberg (Shuli Ren): "Calling early elections is always a gamble, no matter how strong an incumbent's hold. The 92-year-old Mahathir Mohamad stunned the world by defeating his former protege, Prime Minister Najib Razak, in Wednesday's landmark Malaysian vote, dealing another blow to complacent emerging-market investors who are licking their wounds from Argentina to Turkey. As recently as two weeks ago, global investors saw Malaysia as the best growth story among emerging Southeast Asian markets, in large part because of Najib's 'stability rules' and his close ties with China. Park that thesis. To make sure foreign (hot) money doesn't just flee, Bank Negara Malaysia declared special post-election holidays for the rest of the week, shutting the onshore money, bond and stock markets. Investors were caught off-guard elsewhere. In Turkey, even though political risk has been mounting steadily since November, they didn't price in their concern until this month. The Turkish lira is now down 11.5% on the year…"

May 6 - Reuters (Marc Jones and Karin Strohecker): "A resurgent dollar and higher borrowing costs are smashing through Argentina and Turkey's currencies like a wrecking ball and raising the likelihood more broadly that emerging markets' three-year long interest rate cutting cycle is at an end. Emerging markets came into the year flying, riding on the back of a healthy global economy and rising commodity prices alongside tame inflation and a weak dollar. It looked more than likely that a wave of rate cuts would keep rolling, allowing a bond rally to continue. From Brazil and Russia to Armenia and Zambia, developing countries, big and small, have been on a rate cutting spree. With hundreds of rate cuts since Jan. 2015, the average emerging market borrowing cost fell under 6% earlier this year from over 7% at the time."

Geopolitical Watch:

May 9 - Reuters (Dan Williams and Angus McDowall): "Israel said it attacked nearly all of Iran's military infrastructure in Syria… after Iranian forces fired rockets at Israeli-held territory for the first time in the most extensive military exchange ever between the two adversaries. It was the heaviest Israeli barrage in Syria since the 2011 start of the civil war in which Iranians, allied Shi'ite Muslim militias and Russian troops have deployed in support of President Bashar al-Assad. The confrontation came two days after the United States announced its withdrawal, with Israel's urging, from a nuclear accord with Iran."

May 5 - BBC: "The US Navy has said it will re-establish its Second Fleet, as Russia becomes more assertive. Chief of Naval Operations Adm John Richardson said the fleet, disbanded in 2011, would oversee forces on the US East Coast and North Atlantic. He said the National Defense Strategy, published earlier this year, made it clear that the era of great power competition had returned. The strategy makes countering Russia and China a priority. The fleet, which was disbanded for cost-saving and structural reasons, will be based in its previous home - Norfolk, Virginia."

May 10 - Bloomberg (Arne Delfs and Gregory Viscusi): "German Chancellor Angela Merkel said Europe can no longer count on the U.S. for military protection and must 'take its destiny into its own hands.' Merkel's comments… reprise a theme she first sounded last year in response to U.S. President Donald Trump's 'America First' foreign policy, and his hectoring of European NATO allies for allegedly spending too little on defense. It's her latest retort to Trump… 'It's no longer the case that the United States will simply just protect us,' Merkel said to applause… 'Rather, Europe needs to take its fate into its own hands. That's the task for the future.'"