Friday, June 8, 2018

Weekly Commentary: Q1 2018 Z.1 Flow of Funds

The first-quarter 2018 Z.1 "flow of funds" report can be viewed in two ways. From one perspective, key conventional data are un-extraordinary. Household debt expanded at a 3.3% rate during the quarter, down from Q4's 4.6%. Home Mortgage borrowings slowed from 3.4% to 2.9%. Total Business debt grew at a 4.4% pace, unchanged from Q4 and down from Q1 '17's 6.1%. Financial sector borrowings were little changed, after expanding 1.6% during Q4. Bank lending was, as well, unremarkable.

From another perspective, extraordinary Credit growth runs unabated. Total System (non-financial, financial and foreign) Credit expanded at a (record) seasonally-adjusted and annualized rate (SAAR) of $3.513 TN during 2018's first quarter, compared to Q4's SAAR $1.411 TN and Q1 '17's SAAR $860 billion. This booming Credit expansion was fueled by an SAAR $2.519 TN increase of federal borrowings. Granted, this was partially a makeup from Q4's slight contraction in federal debt growth.

In nominal dollars, Total U.S. System Credit expanded a blazing $962 billion during Q1 to a record $69.717 TN (349% of GDP). Non-financial Debt (NFD) expanded a record (nominal) $874 billion, with one-year growth of $2.413 TN. One must return to booming 2007 for a larger ($2.508 TN) four quarter-period of Credit expansion. NFD ended Q1 at a record $49.831 TN, matching a record 250% of GDP. NFD expanded $4.086 TN over the past two years, the strongest expansion since '07/'08.

Outstanding Treasury Securities ended Q1 at a record $17.046 TN, increasing a nominal $615 billion during the quarter. Treasury Securities jumped $1.172 TN during the past four quarters and $1.669 TN over two years. Outstanding Treasury Securities has increased $10.995 TN, or 182%, since the end of 2007. Treasury debt-to-GDP ended Q1 at 85%, more than double 2007's 41%. It's worth adding that total Treasury and Agency Securities ended Q1 at a record $25.920 TN, or 130% of GDP.

Not coincidently, the historic securities boom also runs unabated. Total Debt Securities (TDS) expanded $789 billion during the quarter to a record $43.868 TN. TDS began 2000 at $15.606 TN and closed 2007 at $28.828 TN. TDS ended Q1 at a near-record 220% of GDP, up from 2007's 200%. Equities ended Q1 at $45.156 TN, or a near-record 226% of GDP. Equities-to-GDP posted cycle peaks at 181% in Q3 2007 and 202% in Q1 2000. Total (Debt and Equity) Securities ended Q1 at a record $89.024 TN, or 446% of GDP. For comparison, Total Securities were at 379% to end Q3 2007 and 359% at Q1 2000. When it comes to perceived wealth of U.S. securities markets, "Off the Charts," as they say.

The ballooning Household Balance Sheet continues to be a key Bubble metric. Total Household (and Non-Profits) Assets ended Q1 at a record $116.343 TN, gaining $1.072 TN during the quarter. Household Assets were up $7.169 TN in four quarters and $14.955 TN over two years. Q1 saw Real Estate assets increase $490 billion (up $1.868 TN y-o-y) and Financial Assets gain $511 billion (up $5.054 TN y-o-y). With perceived wealth inflating so rapidly, why would spending not be strong?

Household Liabilities increased $44 billion for the quarter ($538bn y-o-y) to $15.574 TN. Household Net Worth (Assets less Liabilities) surged $1.028 TN during Q1 - surpassing $100 TN ($100.77 TN) for the first time. Household Net Worth inflated $6.630 TN (7.0%) in four quarters and a stunning $13.959 TN (16.1%) the past two years. Household Net Worth-to-GDP, a key stat in Bubble Analysis, ended Q1 at a record 505% of GDP. For comparison, this ratio closed the seventies at 342%, the eighties at 378%, the nineties at 445% and 2007 at 459%. A bonus stat: Household Net Worth ended Q1 about 50% higher than the peak from Q2 2007 ($67.744 TN).

Such an historic inflation requires extraordinary monetary fuel. Today's monetary inflation is atypical and, candidly, rather convoluted. Commercial Banks ("Private Depository Institutions") expanded (financial assets) SAAR $1.139 TN during the quarter. But of this, SAAR $632 billion was an increase in Reserves at the Fed. Loans expanded SAAR $429 billion, down from Q4's $537 billion and the slowest growth in four quarters. To be sure, there's nothing conventional about this Bubble.

International flows have played a major role in the prolonged U.S. boom. Rest of World (ROW) holdings of U.S. financial assets increased SAAR $753 billion to a record $26.901 TN. This was up from Q3's $535 billion but below typical levels from recent years. After reducing holdings by SAAR $228 billion during Q4, ROW added to Treasuries by SAAR $302 billion in Q1. ROW increased Agency and GSE MBS by a notably large SAAR $130 billion. Also funneling liquidity into U.S. securities markets, ROW increased U.S. Corporate Equities SAAR $192 billion. ROW assets have expanded $13.152 TN since the end of 2008, or 96%. ROW holdings ended the nineties at $5.621 TN.

The Security Broker/Dealers expanded assets SAAR $225 billion to $3.273 TN (high since Q2 '09), although this growth was basically in "Miscellaneous Assets" (to a 14-quarter high $881bn). There was a big (SAAR $283bn) drop in Security Repo assets, with an even larger (SAAR $350bn) gain in Security Repo liabilities. Broker/Dealers expanded Treasury holdings SAAR $84 billion during the quarter.

Wall Street off-balance sheet "Funding Corps" increased financial asset holdings by a notable SAAR $458 billion (second-largest increase since 2008) to $1.804 TN, the highest level since 2009. Funding Corp assets have surged nominal $418 billion in two years, or 27% (four-year growth of 47%). Reminiscent of 2006/07.

We know that corporations have been returning about $1.0 TN annually to shareholders (buybacks and dividends). What's more, corporations are now benefitting from a dramatic reduction in taxes. This was apparent in Q1 data. Non-financial Corporate Businesses paid taxes at SAAR $165 billion, down from Q1 '17's $278 billion. Corporate Checkable Deposits and Currency jumped another (nominal) $50 billion during the quarter to $1.193 TN. It is not obvious in the data what impact repatriation of overseas assets is having, but it could be influencing U.S. market liquidity (at the expense of foreign U.S. dollar securities liquidity).

Federal Tax Receipts were reported at SAAR $3.478 TN during Q1, down $110 billion, or 3.1%, from Q1 '17. Meanwhile, federal Expenditures increased $146bn, or 3.4%, to a record SAAR $4.388 TN. Federal Government Total (excluding contingent) Liabilities jumped nominal $492 billion during Q1 to a record $19.696 TN (99% of GDP). State and Local Government Liabilities expanded a notable $130 billion during Q1, explained by rapid growth in "Claims of Pension Fund or Sponsor."

A few miscellaneous categories are deserving of brief mention. Credit Unions expanded assets by nominal $61.5 billion, or 18% annualized, during the quarter to a record $1.404 TN. Open Market Paper surged nominal $82.6 billion, or 34% annualized, to $1.049 TN (almost seven-year high). Checkable Deposits & Currency jumped $137 billion, or 13% annualized - and surged $402 billion, or 10.2%, over the past year - to a record $4.352 TN. Time & Savings Deposits expanded $206 billion, or 7% annualized - and $363 billion, or 3.2%, in four quarters - to a record $11.899 TN. Awash in cash, the growth in outstanding Corporate Bonds slowed to $104 billion, or 3.2%, to $13.055 TN (up $627bn, or 5.0%, y-o-y). Led by an SAAR $159 billion increase in "World Equity Funds," ETF holdings expanded SAAR $250 billion during Q1 to a record $3.411 TN.

Bank Loans expanded SAAR $429 billion during Q1, about in line with the average over the past eight quarters. Keep in mind that this amounts to only 12% of Q1's SAAR $3.513 TN expansion of Total System Credit. Back in the four-year boom period 2004 through 2007, Bank Loans increased quarterly on average SAAR $670 billion. More than ever before, market-based finance dominates. And while everyone marvels at the wondrous U.S economy these days, I would warn of serious and mounting vulnerability to a market liquidity event.

Again this week, no end in sight for EM liquidity challenges. The South African rand dropped another 2.9%, the Mexican peso 1.7% and the Argentine peso 1.4%. Central banks were forced to aggressively hike rates in defense of dislocating currencies in Turkey and Brazil. The Turkish lira rallied 3.9%. Friday's wild 5.3% rise in Brazil's currency, erased earlier losses (two-year lows against the dollar) and saw the real muster a 1.5% gain for the week. Brazilian stocks sank 5.6% this week, with one-month losses of 14.4%.

Global market instability was not limited to EM. Italian 10-year yields surged 44 bps this week to 3.13%. Italian two-year yields jumped 66 bps to 1.67%. Italy's bank stocks were slammed 6.5% this week. Portuguese 10-year yields rose 18 bps to 2.06%, and Greece yields gained 18 bps to 4.65%. Up three bps to 1.47%, Spanish yields were relatively well-behaved.

The ECB signaled it will discuss a QE exit strategy at next week's meeting. For Italy, and to a lesser extend the Eurozone periphery, this is untimely news. Perhaps there is some recognition in the global central banking community that dollar strength now poses acute risk to the faltering EM Bubble. A more hawkish ECB and stronger euro takes some of the gas out of the appreciating dollar. It also risks taking more air out of the European bond Bubble. Even at the eurozone's "core", German 10-year yields rose six bps (to 45bps) this week and French yields jumped 11 bps (to 82bps). The ECB faces quite a dilemma.

Here at home, there's a speculative Bubble problem in U.S. equities. Reminiscent of Q1 2000, there is a heck of a short squeeze and derivative-related melt-up in the face of a deteriorating global backdrop. The S&P500 rose 1.6% and the Mid Caps jumped 2.2% this week, but these gains don't do justice to some of the pain being meted out on the short side. The retail sector (XRT) jumped 6.3% this week. The S&P Department Store index spiked 11.5%. With almost 39 million shares short, Tesla surged 26 points (8.9%) in five sessions. Other notable short squeezes included Five Below (41.7%), Endo Intl (21.8%), Under Armour (15.9%), Williams-Sonoma (13.5%), Twitter (12.4%), Macy's (12.2%), Wendy's (10.1%) and JD.Com (10.6%) - to name only a few. When the marketplace is transfixed by a short squeeze, little else matters.

An overheated economy and highly speculative equities market should weigh on the FOMC during Tuesday and Wednesday's meeting. And a potentially critical ECB gathering comes Thursday. Currency instability, fragile EM and European periphery and a Bubbling U.S. create quite a challenge for our global monetary commanders. Cracks in the global Bubble have markets betting central bankers don't have the guts to normalize.

And there's this weekend's Trump Tariff-focused G7 ("G6 plus the U.S.") meeting in Quebec, followed by Tuesday's Trump/Kim summit in Singapore. Prospects for a breakthrough with North Korea seem brighter than on the trade front. After Singapore, attention will turn to U.S. and Chinese trade negotiations. It's bound to get interesting.

June 8 - Reuters (Ben Blanchard and Denis Pinchuk): "Chinese President Xi Jinping gave visiting Russian President Vladimir Putin China's first friendship medal on Friday, calling him his best friend, underscoring the close ties between the two despite deep reservations many Western nations have of Putin. Meeting in Beijing's Great Hall of the People, Xi lauded their relationship. 'No matter what fluctuations there are in the international situation, China and Russia have always firmly taken the development of relations as a priority,' Xi told Putin at the start of their formal talks."

For the Week:

The S&P500 gained 1.6% (up 3.9% y-t-d), and the Dow jumped 2.8% (up 2.4%). The Utilities fell 3.0% (down 8.3%). The Banks rallied 2.3% (up 3.1%), and the Broker/Dealers rose 1.7% (up 11.3%). The Transports added 0.4% (up 3.1%).The S&P 400 Midcaps jumped 2.2% (up 5.3%), and the small cap Russell 2000 rose 1.5% (up 8.9%). The Nasdaq100 advanced 1.0% (up 11.8%). The Semiconductors were little changed (up 12.7%). The Biotechs added 0.5% (up 14.7%). While bullion gained $6, the HUI gold index slipped 0.2% (down 7.0%).

Three-month Treasury bill rates ended the week at 1.87%. Two-year government yields added three bps to 2.50% (up 61bps y-t-d). Five-year T-note yields gained four bps to 2.78% (up 58bps). Ten-year Treasury yields rose four bps to 2.95% (up 54bps). Long bond yields gained four bps to 3.09% (up 35bps). Benchmark Fannie Mae MBS yields jumped eight bps to 3.70% (up 70bps).

Greek 10-year yields rose 18 bps to 4.65% (up 57bps y-t-d). Ten-year Portuguese yields jumped 18 bps to 2.06% (up 11bps). Italian 10-year yields surged 44 bps to 3.13% (up 112bps). Spain's 10-year yields increased three bps to 1.47% (down 10bps). German bund yields gained six bps to 0.45% (up 2bps). French yields rose 11 bps to 0.82% (up 3bps). The French to German 10-year bond spread widened five to 37 bps. U.K. 10-year gilt yields jumped 11 bps to 1.39% (up 20bps). U.K.'s FTSE equities index slipped 0.3% (down 0.1%).

Japan's Nikkei 225 equities index rallied 2.4% (down 0.3% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.05% (unchanged). France's CAC40 slipped 0.3% (up 2.6%). The German DAX equities index increased 0.3% (down 1.2%). Spain's IBEX 35 equities index gained 1.2% (down 3.0%). Italy's FTSE MIB index dropped 3.4% (down 2.3%). EM equities were mixed. Brazil's Bovespa index sank 5.6% (down 4.5%), while Mexico's Bolsa recovered 2.1% (down 6.9%). South Korea's Kospi index gained 0.5% (down 0.6%). India’s Sensex equities index added 0.6% (up 4.1%). China’s Shanghai Exchange slipped another 0.3% (down 7.3%). Turkey's Borsa Istanbul National 100 index fell 3.3% (down 16.9%). Russia's MICEX equities declined 1.2% (up 7.5%).

Investment-grade bond funds saw inflows of $1.325 billion, while junk bond funds suffered outflows of $2.240 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates declined two bps to 4.54% (up 65bps y-o-y). Fifteen-year rates fell five bps to 4.01% (up 85bps). Five-year hybrid ARM rates dropped six bps to 3.74% (up 63bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up six bps to 4.62% (up 63bps).

Federal Reserve Credit last week declined $10.2bn to $4.279 TN. Over the past year, Fed Credit contracted $144bn, or 3.2%. Fed Credit inflated $1.468 TN, or 52%, over the past 292 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $3.9bn last week to $3.398 TN. "Custody holdings" were up $140bn y-o-y, or 4.3%.

M2 (narrow) "money" supply expanded $32.9bn last week to a record $14.066 TN. "Narrow money" gained $546bn, or 4.0%, over the past year. For the week, Currency increased $1.0bn. Total Checkable Deposits gained $5.0bn, and savings Deposits jumped $25.3bn. Small Time Deposits added $3.4bn. Retail Money Funds dipped $1.8bn.

Total money market fund assets surged $37.5bn to $2.878 TN. Money Funds gained $219bn y-o-y, or 8.2%.

Total Commercial Paper dropped $9.9bn to $1.098 TN. CP gained $101bn y-o-y, or 10.1%.

Currency Watch:

The U.S. dollar index slipped 0.7% to 93.535 (up 1.5% y-t-d). For the week on the upside, the Norwegian krone increased 1.9%, the Brazilian real 1.5%, the Swedish krona 1.2%, the euro 0.9%, the New Zealand dollar 0.7%, the British pound 0.4%, the Australian dollar 0.4%, the Singapore dollar 0.3%, the Swiss franc 0.3%, and the Canadian dollar 0.2%. For the week on the downside, the South African rand declined 2.9%, the Mexican peso 1.7% and the South Korean won 0.1%. The Chinese renminbi increased 0.21% versus the dollar this week (up 1.56% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index slipped 0.2% (up 7.6% y-t-d). Spot Gold recovered 0.4% to $1,299 (down 0.3%). Silver gained 1.8% to $16.741 (down 2.4%). Crude slipped seven cents to $65.74 (up 9%). Gasoline declined 1.3% (up 18%), and Natural Gas fell 2.4% (down 2%). Copper surged 6.5% (unchanged). Wheat declined 0.6% (up 22%). Corn fell 3.5% (up 8%).

Market Dislocation Watch:

June 4 - Bloomberg (Tracy Alloway and Samuel Potter): "What do Toys 'R' Us bonds, the populist threat to the European Union, and Turkish external debt have in common? All were tolerated by market players until, quite suddenly, they weren't. Investors seem increasingly prone to flee assets at the first hint of trouble, fueling concern more cracks are appearing in global markets that have been papered over for years by easy money. That climate saw cash simply herded into any investment with a respectable yield. The swift reaction to a twist in Italy's political drama last week looks like the latest sign. 'The binary 'all-in/all-out' behavior, which up until now was relegated to the fringes of the financial markets, has gone mainstream,' Peter Atwater, president of Financial Insyghts, said of the market's rapid repricing of Italian default risk. 'Investors are becoming increasingly manic,' he wrote in a note."

June 4 - Financial Times (Martin Arnold and Judith Evans): "A clear lesson from last week's sharp sell-off in Italian bond markets: the 'doom loop' that creates a direct link between eurozone countries and their banking systems is still a powerful force. Within hours of Sergio Mattarella, Italy's president, causing political palpitations in Rome by blocking the appointment of a Eurosceptic economy minister by populist parties, investors were scurrying to check which banks were most exposed to Italian sovereign bonds."

June 5 - Bloomberg (Dani Burger): "Here's one to file under the market's memory-loss. The volatility complex -- the selling or shorting of options tied to U.S. stocks -- is back with a vengeance, shrugging off February's vol-mageddon in its wake. Hedge funds hold the most number of short positions on the Cboe Volatility Index since late January -- before the record spike in the gauge that wiped out over $5 trillion in global stocks and jolted investors from their complacent slumber. Meanwhile, money managers are back to selling products linked to equity price swings en masse, either to speculate conditions will remain subdued or hedge underlying exposures."

June 6 - Financial Times (Chloe Cornish): "Investors have pulled nearly $11bn out of European equity exchange traded funds in the past three months, with financials bearing the brunt of withdrawals. During May, more than $3.7bn worth of investment left Europe equity ETFs on a net basis… It marks the most money flowing out of European companies' shares via tracker funds since data-gathering began in 2008…"

Trump Administration Watch:

June 7 - Wall Street Journal (Emre Peker in Brussels, Paul Vieira and Bojan Pancevski): "U.S. allies Canada, Japan and the European Union are banding together to increase pressure on Washington following the Trump administration's metals tariffs as they head to a meeting of Group of Seven industrialized countries in Quebec… With trade likely to dominate the agenda of the summit, the U.S. tariff move has driven a wedge between the U.S. and the other six nations, say leaders and officials, and has dashed hopes that the group would focus on a coordinated response to another longstanding trade issue: the global steel glut driven by Chinese production. 'Tariffs imposed last week by President Trump on EU and Canada have increased significantly tensions before the meeting,' a senior EU official said, adding that a breakthrough to ease trade tensions was unlikely. 'We have extremely low expectations.'"

June 6 - Wall Street Journal (Jacob Bunge, Heather Haddon and Benjamin Parkin): "U.S. farmers, already losing sales to China, are facing new threats to sales in other big overseas markets as trade tensions spread globally. Mexico this week imposed tariffs on major U.S. exports such as cheese and pork, while Canada and the European Union are considering tariffs on imports of U.S. food and farm goods from corn to orange juice to peanut butter, in response to the U.S. placing tariffs last week on steel and aluminum imports from those countries. In addition, analysts say, China could target other crops and products after Trump administration officials last week outlined potential tariffs on $50 billion worth of Chinese goods. The rapid-fire exchange of tariffs and trade threats leaves U.S. farmers and agricultural groups fearing tougher sells in their most important overseas markets…"

June 4 - Financial Times (Tom Mitchell): "The world's two largest economies remained on track to commence a $100bn trade war as early as this month, after a third round of China-US trade negotiations ended in Beijing on Sunday without a breakthrough. Last week US president Donald Trump said he would move to implement previously threatened tariffs on $50bn worth of Chinese industrial exports 'shortly' after June 15, which Beijing has promised to reciprocate."

June 5 - New York Times (Ana Swanson and Jim Tankersley): "Mexico hit back at the United States on Tuesday, imposing tariffs on around $3 billion worth of American pork, steel, cheese and other goods in response to the Trump administration's steel and aluminum levies, further straining relations between the two countries as they struggle to rewrite the North American Free Trade Agreement. The tariffs, which were announced last week, came into effect as the Trump administration threw yet another complication into the fractious Nafta talks."

June 6 - CNBC (Philip Blenkinsop): "The European Union expects to hit U.S. imports with additional duties from July, ratcheting up a transatlantic trade conflict after Washington imposed its own tariffs on incoming EU steel and aluminum. EU members have given broad support to a European Commission plan to set 25% duties on up to 2.8 billion euros ($3.3bn) of U.S. exports in response to what is sees as illegal U.S. action. EU exports that are now subject to U.S. tariffs are worth 6.4 billion euros."

June 8 - Reuters (Andrea Shalal): "German Economy Minister Peter Altmaier called on Friday for Europe to remain unified in the face of rising trade tensions with the United States, saying it was unclear how a summit of the Group of Seven rich nations would end. 'We have a serious situation, not just since last night or this morning, but rather the entire last few weeks,' Altmaier told broadcaster ZDF."

EM Bubble Watch:

June 7 - Financial Times (Orla McCaffrey): "Investors have taken the gloves off against the Brazilian real in retaliation for rising political uncertainty, driving it to two-year lows of about R$3.94 against the dollar. The next threshold for the currency is R$4.00 as local weakness combines with external pressure from expected further rate tightening by the US Federal Reserve. The sell-off was sparked by the government's intervention in diesel prices to placate striking truckers- a throwback to the country's blighted history of price controls and a bad sign for efforts to undertake much-needed fiscal reforms. The central bank has twice intervened by selling US dollar swaps, effectively a bet against the greenback in favour of the real. Since last Friday, the stock of outstanding swaps has increased 13.5% and since end-April by 44.5%."

June 5 - Bloomberg (Colleen Goko and Thembisile Augustine Dzonzi): "The rand weakened, yields on benchmark bonds rose and retail and banking stocks fell as a report showed that South Africa's economy shrank the most in nine years in the first quarter, casting a pall over President Cyril Ramaphosa's promise to boost growth. Ramaphosa, who replaced Jacob Zuma in February, has pledged measures to fuel the economy, boost employment and attract investment after four years in which output never managed to expand more than 2% annually. But the latest data show he has a mountain to climb: gross domestic product contracted an annualized 2.2% in the first quarter of the year compared with the prior three months."

June 6 - Reuters (Dave Graham and Frank Jack Daniel): "The front-runner to win the Mexican presidency, Andres Manuel Lopez Obrador, would aim to bring 'fresh blood' to the central bank's board as members' terms expire if he wins election on July 1, one of his top economic advisers said. Carlos Urzua, the leftist Lopez Obrador's pick for finance minister, said it was important to bring new perspectives onto the board of the Bank of Mexico, while rejecting the idea of altering the central bank's focus on price stability."

U.S. Bubble Watch:

June 4 - Financial Times (Jeff Cox): "Money is pouring into the U.S. economy and in turn helping provide support for the otherwise struggling stock market. If current conditions persist, corporations are likely this year to inject more than $2.5 trillion into what UBS strategists term 'flow' - the combination of share buybacks, dividends, and mergers and acquisitions activity. The development comes as companies find themselves awash in cash, thanks primarily to years of stashing away profits plus the benefits of a $1.5 trillion tax break this year that slashed corporate rates and encouraged firms to bring back money idling overseas."

June 8 - Bloomberg (Craig Torres): "U.S. economic growth could face a challenging slowdown as the Trump Administration's powerful fiscal stimulus fades after two years, according to former Federal Reserve Chairman Ben Bernanke. Bernanke said the $1.5 trillion in personal and corporate tax cuts and a $300 billion increase in federal spending signed by President Donald Trump 'makes the Fed's job more difficult all around' because it's coming at a time of very low U.S. unemployment. 'What you are getting is a stimulus at the very wrong moment,' Bernanke said… 'The economy is already at full employment.'"

June 6 - CNBC (Jeff Cox): "The jobs market has reached what should be some kind of inflection point: there are now more openings than there are workers. April marked the second month in a row this historic event has occurred, and the gap is growing. According to the monthly Job Openings and Labor Turnover Survey…, there were just shy of 6.7 million open positions in April... That represented an increase of 65,000 from March and is a record. The number of vacancies is pulling well ahead of the number the Bureau of Labor Statistics counts as unemployed. This year is the first time the level of the unemployed exceeded the jobs available since the BLS started tracking JOLTS numbers in 2000."

June 5 - Reuters (Lucia Mutikani): "U.S. services sector activity accelerated in May, pointing to robust economic growth in the second quarter, but trade tariffs and a shortage of workers posed a threat to the outlook. Other data… showed job openings rising to a record high in April, far outpacing hiring."

June 3 - Bloomberg (Sally Bakewell and Erik Schatzker): "The need to deploy cash is forcing fund managers to accept terms they wouldn't otherwise like in the new issues market, particularly in the lowest ranks of investment grade, KKR's Jamie Weinstein says… For investment funds to keep cash balances down they have to keep buying new issues and that's where they get squeezed. There's been a 'big explosion' in the BBB market, which 'might be" the seeds of a debt crisis.'"

June 8 - CNBC (Diana Olick): "Fast-rising home prices may be a roadblock for buyers, but they are putting some homeowners on Easy Street. As home prices rise, so does the percentage of home equity for those owners with a mortgage. Home equity jumped 13.3% in the first quarter of this year compared from a year earlier, according to CoreLogic. For the average borrower, that translates to $16,300 in additional home equity gained during the year, or a collective $1.01 trillion. That is the biggest gain in four years."

June 5 - Wall Street Journal (Ryan Dezember): "The good news for home builders and house hunters is that lumber prices have sold off since hitting an all-time high in mid May. The bad news: wood prices are still up 67% over the past year, adding thousands of dollars to the cost of each new house. The historic run-up in lumber prices-attributable to a trade dispute with Canada, wildfires and limited rail capacity-comes as U.S. home builders are already struggling to meet demand amid shortages in buildable lots and labor… Meanwhile plywood prices have risen 43% over the last year… 'We've never seen anything like this,' said Deb Maples, risk management consultant at… INTL FCStone Financial Inc. 'It's been unprecedented.'"

June 7 - Wall Street Journal (Orla McCaffrey): "Twitter Inc. said… it plans to sell at least $1 billion in bonds that convert to equity, joining a rush of tech companies taking advantage of soaring share prices to issue convertible debt. The move comes as Twitter shares have surged to three-year highs after S&P Dow Jones Indices said the company would be added to the S&P 500… Twitter's move is the latest in a recent series of publicly traded technology companies issuing convertible bonds-debt that grants investors the right to exchange the securities for equity once a company's stock hits a certain price. Nearly half of convertible-bond issuers in the U.S. this year have been tech companies, with offerings totaling over $11 billion…"

June 6 - Wall Street Journal (Doug Cameron and Alison Sider): "Jet-fuel prices have surged more than 50% over the past year, pushing carriers to raise fares and Delta Air Lines Inc. to cut its profit expectations. Delta… said… it could take six to 12 months to recoup the extra fuel costs via pricier tickets. Fuel is again the single-largest expense for most airlines, accounting for about a quarter of operating costs. The recent run-up in prices echoes the jump seen from 2009 to 2011, which first spawned stand-alone surcharges on many international flights."

June 5 - Wall Street Journal (David Harrison): "The Social Security program's costs will exceed its income this year for the first time since 1982, forcing the program to dip into its nearly $3 trillion trust fund to cover benefits. This is three years sooner than expected a year ago…, according to the latest annual report the trustees of Social Security and Medicare released… The trust fund will be depleted in 2034 and Social Security will no longer be able to pay its full scheduled benefits unless Congress takes action to shore up the program's finances… The report also said that Medicare's hospital insurance fund would be depleted in 2026, three years earlier than anticipated in last year's report."

June 6 - CNBC (Stephanie Landsman): "David Stockman is intensifying his bear case. President Ronald Reagan's Office of Management and Budget director blames a bull market that's getting longer in the tooth - paired with headwinds ranging from President Donald Trump's leadership to fiscal policy decisions to questionable earnings. 'I call this a daredevil market. It's all risk and very little reward in the path ahead,' Stockman said… 'This market is just way, way over-priced for reality.'"

China Watch:

June 4 - Bloomberg (Boris Cerni): "China's banks, scrambling to adjust to the government's deleveraging campaign, are likely to add to pressures on the corporate bond market as they shed more of their massive note holdings and de-risk their balance sheets. Further payment problems are likely in a market that has already seen at least 14 corporate bond defaults this year, according to Logan Wright, …director at research firm Rhodium Group LLC. As well as cutting their own holdings, Chinese banks have pulled back from lending to other firms that use the funds to buy bonds, exacerbating the pressure on the market."

June 8 - Bloomberg (Gregor Hunter and Narae Kim): "China's efforts to connect the world's third-biggest bond market with the international financial system are hitting dual headwinds -- a climb in global borrowing costs, and the country's own campaign to reduce financial leverage. The dynamics have contributed to defaults by 12 bond issuers in 2018 through June 4, after 18 for the whole of 2017, according to Fitch... Firms from JPMorgan… to Fidelity International are warning to prepare for more. But with about 8.2 trillion yuan ($1.3 trillion) of domestic corporate and local-government securities due to mature in the coming 12 months, it's an open question whether China is prepared to let chips fall where they may. Authorities started shifting away from the old model of implicit guarantees for practically all debt securities in 2014, allowing defaults for the first time."

June 7 - Financial Times (Don Weinland): "When other acquisitive Chinese groups were insisting they were not an arm of the state, China Energy Reserve and Chemicals Group was making the opposite case: trying to convince bankers and investors it belonged to the government. But the company's recent default on a payment for a $350m bond, and its withdrawal from a $5.2bn property deal earlier in the year, was a sign that its state backing was not as strong as advertised. The matter is sensitive for investors in Chinese bonds. The presumption of state backing - the so-called implicit guarantee- for debt issued by government owned groups lets the companies borrow at dramatically reduced cost. The state guarantee is rarely spelt out in bond documents and must be taken as an article of faith - a crucial market matter given Chinese state-backed groups issued $315bn of debt in 2017…"

June 3 - Reuters (Stella Qiu and Ryan Woo): "China's debt crackdown is a key risk to the country's economic growth and will have significant knock-on effects for the global economy, particularly emerging markets with high commodity dependence or close Chinese trade links, Fitch Ratings said. Beijing's campaign to put a lid on debt could also lead to a sharp slowdown in business investment…, forecasting that growth in the world's second-biggest economy would slow to around 4.5% over the medium term."June 4 - Bloomberg: "China's banks, scrambling to adjust to the government's deleveraging campaign, are likely to add to pressures on the corporate bond market as they shed more of their massive note holdings and de-risk their balance sheets. Further payment problems are likely in a market that has already seen at least 14 corporate bond defaults this year… As well as cutting their own holdings, Chinese banks have pulled back from lending to other firms that use the funds to buy bonds, exacerbating the pressure on the market… Strains have already spread from high-yield trust products to corporate bonds this year as China's campaign against its $10 trillion shadow banking industry has choked off refinancing for the weaker borrowers."

June 4 - Financial Times (Don Weinland): "Debt collectors in China are harnessing new technologies such as artificial intelligence in a bid to collect on an estimated Rmb1.3tn ($200bn) debt bubble that has formed in the country's peer-to-peer lending industry. Thousands of online businesses connecting private lenders to people in need of cash sprang up across the country over the past five years, but a spate of scandals has put these lenders in the crosshairs of regulators. Many P2P lenders have been shut down since mid-2017 as lending controls have been implemented and licences required."

Central Bank Watch:

June 6 - Bloomberg (Crispian Balmer and Angelo Amante): "Mario Draghi is on the verge of a watershed moment in the European Central Bank's efforts to leave behind its crisis-fighting monetary policy. Chief Economist Peter Praet… signaled the bank's first formal round of talks on when to stop buying bonds is imminent. That would start the process of bringing down the curtain on stimulus efforts that have resulted in almost 2.5 trillion euros ($2.9 trillion) of bond purchases since 2015. While Draghi… could still delay a public announcement until July, Praet's comments sent bonds lower and pushed the euro to its strongest level in two weeks, as investors prepared for the conclusion of emergency stimulus and a potential shift toward higher interest rates in 2019. 'The bottom line is that this is the end,' said Nick Kounis, head of macro and financial markets research at ABN Amro Bank NV... 'This is a signal that the ECB judges that the inflation conditions to wind down net asset purchases have been met.'"

June 6 - Reuters (Michelle Martin and Reinhard Becker): "Expectations that the European Central Bank will wind down its bond-buying programme by the end of this year are plausible, the head of Germany's central bank said… 'For some time now, financial market participants have been expecting that the asset purchases will end before 2018 is out,' Jens Weidmann told a conference in Berlin… 'As things stand, I find these market expectations plausible,' he said, adding that this would be the first step towards normalising monetary policy.'"

Global Bubble Watch:

June 4 - Wall Street Journal (Richard Barley): "If last year in markets was all about strong returns, this year is about rising risks: a brewing trade war, renewed political turmoil and concerns about growth. The difference is that central-bank policy that helped insulate markets from risk is changing. Investors are increasingly looking after themselves. Last week's wild swings in Italian bonds are just the latest in a series of shocks that have made 2017's smooth market ride a distant memory. Surging Treasury yields, equity-market volatility and trouble in Argentina and Turkey are all part of the same picture. These have been episodes where the moves in financial-market prices have become news themselves-something that hardly happened at all in 2017, and a sign of their sheer scale. In financial jargon, risk premia are being repriced."

June 6 - Wall Street Journal (Paul VieiraRachel Pannett and Dominique Fong): "Crowds swept into the Beijing Exhibition Center on a recent morning for a real-estate expo that drew thousands of people interested in foreign property. That kind of surging interest has created a flood of capital that is washing over cities throughout the globe, distorting home prices, irritating local residents-and defying almost every attempt to restrain it. In Vancouver, Chinese home buyers snapped up properties so fast in 2016 that prices escalated at a rate of 30% a month compared with a year earlier. Officials imposed a 15% foreign-buyers tax, and Chinese buyers turned to Toronto… The hot pursuit of places to park money abroad by Chinese investors drove an estimated $100 billion in property purchases outside China in 2016, according to, a Chinese real-estate website. The buying frenzy, which grew from $5 billion in 2010, helped swell prices for housing and commercial real estate in cities on the Pacific Rim and beyond."

June 6 - Financial Times (Shawn Donnan): "Rising trade tensions are dragging down long-term cross-border investment by companies around the world, UN figures showed… Global foreign direct investment fell by 23% in 2017 and is expected to grow only modestly, if at all, this year… Threatening this year's picture are the growing prospects of a trade war between the US and China and the EU. The US last week imposed steel and aluminium tariffs on the EU, Canada and Mexico. It is due to release lists of tariffs and investment restrictions against China by the end of this month and is also threatening to impose import taxes on the $190bn of cars brought into the US from overseas annually."

Europe Watch:

June 5 - Reuters (Steve Scherer and Gavin Jones): "Italy's new prime minister promised… to bring radical change to the country, including more generous welfare and a crackdown on immigration, as the two party bosses who hold the keys to his anti-establishment government nodded their approval. Prime Minister Giuseppe Conte addressed the Senate, flanked by the leaders of two formerly fringe parties that shoved aside mainstream groups at an election in March to form a coalition with little-known law expert Conte as its head."

June 5 - AFP (Ana Swanson and Jim Tankersley): "Italy's incoming prime minister used his maiden policy speech to demand a review of sanctions against Russia, in a departure from the stance of his European allies. Giuseppe Conte also called for an 'obligatory' redistribution of asylum seekers around the EU. His government, made up of a coalition of far-right and Eurosceptic parties, was sworn in last Friday after almost three months of political turmoil that alarmed European officials and spooked financial markets. Conte, a lawyer with little political and no governmental experience, was nominated by the far-right League leader, Matteo Salvini, and the head of the anti-establishment Five Star Movement (M5S), Luigi di Maio - both of whom are now his deputy prime ministers. In his first speech to lawmakers since being sworn in, Conte reaffirmed several of the coalition's key manifesto themes, including a tough line on migrants, rejection of economic austerity and conciliatory gestures towards Moscow."

June 4 - Financial Times (Kate Allen, Claire Jones and Rachel Sanderson): "The ECB has come under fire from Italy's new populist government after revealing that it scaled back the proportion of Italian sovereign bonds it bought as part of its economic stimulus programme during Rome's political turmoil last month. The central bank purchased a net €3.6bn of Italian government debt under its long-running programme in May… Although this is higher than the amount it bought in some recent months, such as March and January, it was smaller as an overall proportion of its net purchases."

June 2 - Reuters (Jesús Aguado and Ingrid Melander): "Nationalists regained control of Catalonia's government on Saturday and immediately pledged to seek independence for the wealthy region, posing a swift challenge to new Spanish Prime Minister Pedro Sanchez who took office on the same day. The new Catalan cabinet was sworn in after months of tensions with the central government, ending Madrid's seven-month direct rule of the region, imposed by Sanchez's predecessor after separatists declared independence."

June 3 - Bloomberg (Boris Cerni): "Nationalists won Slovenia's general elections, setting another euro-area nation on course for political deadlock as rival parties united in condemnation of their anti-refugee rhetoric and vowed to block them from government. Former Prime Minister Janez Jansa followed the tactics that led anti-immigrant populists to victory in three of Slovenia's neighbors -- Italy, Austria and Hungary -- challenging the European Union's mainstream."

Fixed Income Bubble Watch:

June 6 - Bloomberg (Sid Verma and Cecile Gutscher): "Students of history will find two parallels to today's credit market -- and neither will provide much comfort. According to a key valuation metric, investors are headed for the kind of bullishness on high-yield bonds that's been seen just twice before: during the halcyon days of 1997's tech bubble before the Asia crash, and on the eve of the global financial crisis a decade later. The ratio between U.S. junk-bond yields and their high-grade counterparts has reached levels that 'hearken back to the high risk appetite days of October 1997 and June 2007,' CreditSights Inc. strategists Glenn Reynolds and Kevin Chun Wrote…"

June 5 - Bloomberg (Vivian Li): "Risky loans are coming to the U.S. with fewer protections for investors just as rising interest rates make it more costly for leveraged companies to pay off debt… Leveraged loans, issued by companies with a below-investment grade debt rating, often have covenants to protect lenders, such as a limit to the borrower's long-term debt to total assets ratio, or the debt service to free cash flow ratio. So-called 'cov-lite' loans have fewer restrictions."

June 1 - Bloomberg (Claire Boston): "Commercial mortgage bonds are getting stuffed with the lowest-quality loans since the financial crisis by one measure, according to Moody's…, a warning sign that the $517 billion market may be headed for harder times. The securities are backed by as many interest-only mortgages as they were in late 2006 and early 2007… Those loans are riskier because borrowers don't pay any principal early in the debt's life. When that period expires, the property owners are on the hook for much higher payments. The percentage of interest-only loans in a commercial mortgage bond is an 'important bellwether' for the industry, according to Moody's analysts, because the loans are more likely to default and to bring bigger losses to lenders when they do."

Leveraged Speculator Watch:

June 5 - Bloomberg (Josh Friedman): "Bridgewater Associates, the hedge fund firm led by billionaire Ray Dalio, told clients it's bearish on almost all financial assets, the website ZeroHedge reported… '2019 is setting up to be a dangerous year, as the fiscal stimulus rolls off while the impact of the Fed's tightening will be peaking,' the hedge fund giant said in a recent note written by Co-Chief Investment Officer Greg Jensen… Bridgewater, the world's largest hedge fund firm, manages about $160 billion."

June 6 - CNBC (Michael Sheetz): "Investors betting against Tesla lost more than $1 billion Wednesday as the company's shares rallied the most in over two years… Tesla stock closed Wednesday up 9.7% at $319.50 per share, meaning investors who sold the stock short lost a collective $1.07 billion in a single day, estimates S3. Tesla bears have lost nearly $5 billion in mark-to-market losses since 2016, S3's head of predictive analytics Ihor Dusaniwsky told CNBC."

Geopolitical Watch:

June 7 - CNBC (Holly Ellyatt): "A fear of mutual destruction should stop global powers from attacking each other and prompting World War III, Russian President Vladimir Putin said Thursday during a public phone-in. 'The understanding that a third world war could be the end of civilization should restrain us from taking extreme steps on the international arena that are highly dangerous for modern civilization,' Putin said during his annual question and answer session with Russian citizens. 'The threat of mutual destruction has always restrained participants of the international arena, prevented leading military powers from making hasty moves, and compelled participants to respect each other,' he added."

June 4 - Reuters (Phil Stewart and Idrees Ali): "The United States is considering sending a warship through the Taiwan Strait, U.S. officials say, in a move that could provoke a sharp reaction from Beijing at a time when Sino-U.S. ties are under pressure from trade disputes and the North Korean nuclear crisis. A U.S. warship passage, should it happen, could be seen in Taiwan as a fresh sign of support by President Donald Trump after a series of Chinese military drills around the self-ruled island."

June 3 - Bloomberg (Rosalind Mathieson and Keith Zhai): "Even as defense ministers and military chiefs meeting in Singapore called out China for parking missiles on outposts in the disputed South China Sea, a bigger potential China-related hot spot looms. Concern about Taiwan -- and recent sparring between Beijing and Washington over the democratically run island -- percolated discussions at the annual IISS Shangri-La Dialogue… U.S. Secretary of Defense James Mattis warned China against disrupting the 'status quo' on Taiwan, as Beijing steps up air-and-sea maneuvers nearby and accelerates efforts to isolate Taipei."

June 2 - Reuters (Greg Torode and Idrees Ali): "The United States is considering intensified naval patrols in the South China Sea in a bid to challenge China's growing militarization of the waterway, actions that could further raise the stakes in one of the world's most volatile areas. The Pentagon is weighing a more assertive program of so-called freedom-of-navigation operations close to Chinese installations on disputed reefs, two U.S. officials and Western and Asian diplomats close to discussions said."

June 6 - Reuters (Ben Blanchard): "No military ship or aircraft can scare China away from its resolve to protect its territory, China's Foreign Ministry said… after two U.S. Air Force B-52 bombers were reported to have flown near disputed islands in the South China Sea… The United States was willing to work with China on a 'results-oriented' relationship, but its actions in the South China Sea were coercive and the Pentagon would 'compete vigorously' if needed, U.S. Defense Secretary Jim Mattis said…"

June 3 - Reuters (Christian Shepherd and Ben Blanchard): "The United States urged China to make a full public account of a crackdown on student-led pro-democracy protests in and around Beijing's Tiananmen Square in 1989 as tens of thousands in Hong Kong held a candlelight vigil for the victims. The Chinese government sent tanks to quell the June 4, 1989 protests, and has never released a death toll… The Tiananmen crackdown is a taboo subject in China…"