Friday, October 19, 2018

Weekly Commentary: Moscovici and the National Team

From the perspective of monitoring an unfolding global crisis, things turned only more concerning this week. The Shanghai Composite declined to 2,450 in early Friday trading, the low since November 2014 - and down almost 26% y-t-d. Across the globe in Europe, Italian 10-year yields jumped to 3.80% in early-Friday trading, the high going back to January 2014. The spread between Italian and German 10-year sovereign yields surged to as high as 340bps, the widest spread since March 2013.

October 19 - Reuters (Samuel Shen, Andrew Galbraith and Noah Sin): "China's regulators lined up to rally market confidence on Friday with new rules, measures and words of comfort… Vice Premier Liu He, who oversees the economy and the financial sector, supplemented regulators' moves by saying the recent stock market slump 'provides good investment opportunity…' Earlier in the day, the securities regulator, central bank and banking and insurance regulator all pledged steps to bolster market sentiment… Friday's announcements were largely aimed at putting a floor under the tumbling stock market."

"With pressure mounting and anxiety setting in, China's stock markets are anticipating the comeback of the 'national team,'" read the opening sentence of an early-Friday morning article from Beijing-based business media group Caixin. Sure enough, the Shanghai Composite rallied 4.1% off morning lows to close the session up 2.6%. The ChiNext growth index surged 5.6% from its opening level to gain 3.7% for the day. Friday's afternoon rally, however, couldn't erase the week's losses. The Shanghai Composite ended this week down another 2.2%. ChiNext's Friday melt-up reduced the week's losses to 1.5%.

October 19 - Reuters (Massimiliano Di Giorgio): "European Economics Commissioner Pierre Moscovici said on Friday he wanted to reduce tensions with Italy over its 2019 budget, adding it was important to see how Rome responded to the Commission's objections to the fiscal plan. Speaking at a news conference after a two-day visit to Rome, Moscovici said Brussels shared Italy's declared goals of boosting growth and cutting debt, and reiterated that no decision had yet been taken over the budget. He said he wanted to 'reduce tensions and maintain a constructive dialogue' with Italian authorities…"

At least for a few hours, Commissioner Moscovici's comments quelled tensions in the Italian (and European) bond market. After trading as high as 3.80% early in Friday's session, yields then sank 32 bps to end the week at 3.48%. Italy's bank index rallied almost 5% off intraday lows to end the session down 0.4% - and the week down 2.9%. Italy's MIB equities index rallied 2.0% to end the day little changed (down 0.9% for the week).

It's worth noting that Spain's 10-year yields ended the week up six bps to 1.73%, trading this week to the highest yields since March 2017. Things were looking dicey early Friday, as Spanish yields jumped to 1.82%. This briefly pushed the Spanish to German sovereign yield spread to 140 bps, the wide since March 2017. Portuguese yields traded as high as 2.11% Friday morning, with the spread to bunds widening to 170 bps (widest since May). Portuguese yields ended the week at 2.01%.

European debt markets dodged a bullet. After trading down to about 39 bps early Friday, German bund yields ended the week four bps lower at 0.46%. Friday afternoon's bond rally pushed Italian yields down nine bps for the week to 3.47%. Portuguese yields ended the week two bps lower and French yields three bps lower. Moscovici saved the day, reversing what appeared to have the makings of a problematic de-leveraging episode and blowout in European periphery yield spreads.

October 17 - Bloomberg: "China's broadest measure of new credit jumped in September, exceeding all estimates, as officials changed the dataset to reflect surging bond issuance amid steps to encourage investment in infrastructure. Aggregate financing stood at 2.21 trillion yuan ($319bn) in September… That compares with an estimated 1.55 trillion yuan… The central bank revised the calculation for aggregate financing for a second time this year, adding in local government special bond issuance. That took the total in August to 1.93 trillion yuan, from 1.52 trillion yuan previously. New yuan loans stood at 1.38 trillion yuan, versus a projected 1.36 trillion yuan and 1.28 trillion yuan the previous month. Broad M2 money supply increased 8.3%, from 8.2% in August. China's policy makers have stepped up their efforts to increase credit supply…"

It is not only the Europeans galvanized to quash intensifying Crisis Dynamics. China's September Credit data was an eye-opener. "Aggregate financing" jumped to 2.210 TN RMB, or $319 billion, with system Credit continuing its ongoing double-digit annual expansion (10.6%). September growth was about 40% above estimates and a 45% jump from August (growth is typically stronger in September). This puts system Credit growth (excluding national government borrowings) for the first nine months of 2018 at $2.087 TN, down about 10% from comparable 2017. After a huge September, Q3 Credit growth ran slightly ahead of Q3 2017.

Chinese officials again adjusted the composition of aggregate financing data, which now includes local government bond issuance. According to Bloomberg (Chang Shu and Justin Jimenez) "netting out the new sub-component…, the figure comes in… lower than the consensus forecast." September saw enormous issuance of "special local government bonds" (apparently for infrastructure spending), more than offsetting the ongoing contraction of "shadow" lending. Barely positive for the month, net Corporate Bond Issuance slowed notably.

New bank loans came in at about $200bn, only somewhat above estimates. Year-to-date, new loans are running 18% above comparable 2017. Consumer (chiefly mortgage) borrowings remained quite strong, at $108bn in September. This puts y-t-d consumer borrowings 18.2% above comparable '17.

October 15 - Bloomberg (Chris Anstey): "China's moves to boost liquidity in an effort to safeguard economic growth are eroding the country's yield premium over the U.S., putting 'renewed pressure' on the yuan, according to Citigroup... 'Going by its latest policy moves, China has likely halted or even abandoned its financial-deleveraging program' amid the trade war with the U.S., Liu Li-Gang, chief China economist at Citigroup…, wrote... The People's Bank of China has pumped 3.4 trillion yuan ($492bn) into the banking system so far this year through regular open-market operations and cuts in lenders' required reserve ratios, Citigroup estimates."

Beijing these days faces a very serious dilemma managing system Credit. As has over the years become quite the pernicious habit, officials are responding to heightened Bubble Fragility by aggressively stimulating system Credit. They would surely favor the expansion of productive Credit, but increasingly it appears they'll take lending growth wherever they can get it. Portends trouble.

A few of the more obvious problems: 1) Especially with the crackdown on "shadow" finance, Beijing now pushes enormous quantities of risky late-cycle Credit into an already bloated and vulnerable banking system. 2) Stimulus measures are prolonging late-cycle excess throughout increasingly fragile mortgage and apartment Bubbles. 3) China risks stirring further consumer price inflation momentum. September's 2.5% y-o-y CPI rise was exceeded only one month going back to 2013. 4) The size and characteristics of China's runaway Credit expansion pose escalating risk to their already vulnerable currency.

October 14 - Reuters (Clare Jim): "China's property developers usually look forward to the months dubbed 'Golden September and Silver October' as the high season for new home sales. This year is proving to be different. Instead, they are feeling a chill and one major realtor has warned that 'winter' is coming as developers struggle to maintain sales momentum despite gimmicky promotions and discounts. After almost two years of local and central government measures to calm the red-hot market, more signs are emerging that the property sector, a major pillar of China's economic health, is finally slowing down… 'There's downward pressure on home prices especially in third and fourth-tier cities,' said Nomura chief China economist Ting Lu. 'They have been previously rising on stimulus policies for two to three years and now they have reached a peak.'"

October 16 - Financial Times (Tom Hancock): "A wave of protests by Chinese homeowners against falling property prices in several cities has raised fears of a downturn in the country's real estate market, adding to pressure on Beijing to stimulate the economy. Homeowners in Shanghai and other large cities took to the streets this month to demand refunds on their homes after property developers cut prices on new properties to stimulate sales. In Shanghai, dozens of angry homeowners descended on the sales office of a complex that offered 25% discounts to demand refunds, causing clashes that damaged the sales office, according to online reports that were quickly removed by censors. Similar protests have been reported in the large cities of Xiamen and Guiyang as well as several smaller cities."

Keep in mind that these are China's inaugural mortgage and housing Bubbles. Borrowers have never experienced a nationwide downturn. Neither have bankers; same for regulators. A housing bust would pose risk to social stability, not to mention the banking system and economy. Chinese officials over the years have tried about everything to rein in the Bubble. They were just never willing to inflict the degree of pain necessary to break inflationary psychology. They mistakenly cultivated the perception apartment prices only rise, and Beijing will always act to support the market. Now they face a gargantuan Bubble with limited options.

The easy bet is that Beijing will see few alternatives than to adopt only more aggressive reflationary measures (they "worked," after all, in the U.S. and elsewhere!). But will China enjoy the latitude to pull it off? There's a question well worth pondering: "Is China 'emerging' or 'developed'?" Emerging economies invariably lose the flexibility for aggressive Credit expansion and system reflation. Over recent months, we've watched Argentina hike rates to 60% and Turkey to 24%.  Other EM central banks raised rates more moderately, all measures to stem the risk of disorderly currency collapse.

Will China retain the flexibility to set low interest rates, to aggressively expand Credit along with adopting other reflationary measures? Or is China, the "King of EM," facing the prospect of a destabilizing currency crisis? A scenario where China is forced to hike rates to support the renminbi would be so destabilizing for its apartment Bubble and banking system that it's difficult to contemplate. That leaves international reserve holdings, capital controls and a rather pressing question: How much "hot money" (and leverage) has gravitated to China's high-yielding instruments?

When I ponder China's incredibly bloated banking sector, its historic apartment Bubble, its local government debt issues, massive future national government borrowings - and likely one of the most maladjusted economies ever - unfortunately I don't see a stable currency in China's future.

October 16 - Financial Times (Don Weinland): "China could be facing a 'debt iceberg with titanic credit risks' following a boom in infrastructure projects by local governments around the country, S&P Global has warned. Local governments may have accrued a debt pile hidden off their balance sheet as high as Rmb30tn to Rmb40tn ($4.3tn to $5.8tn) following 'rampant' growth in borrowings, the rating agency estimated. The mounting debt in so-called local government financing vehicles, or LGFVs, hit an 'alarming' 60% of China's gross domestic product at the end of last year and was expected to lead to increasing defaults at companies connected to regional authorities… Richard Langberg, an analyst at S&P, said there are Chinese cities with 'hundreds' of the local financing vehicles across the country. While defaults at a handful of smaller LGFVs could be handled by the financial sector, 'if they start to let the bigger ones go then we are getting into uncharted territory,' he said."

October 16 - Bloomberg: "The rout in Chinese equities is throwing the spotlight on $613 billion of shares pledged as collateral for loans. Loans extended to company founders and other major investors who pledged their shareholdings as collateral emerged as a popular financing channel in recent years. But given the losses in equities -- Shenzhen's stock benchmark is down 33% in 2018 -- there's a growing risk that brokerages will be forced to sell the shares, accelerating the downturn. At least 36 companies have seen pledged shares liquidated by brokerages since the start of June, more than triple the 10 in the first five months of the year… At least two firms announced after Monday's close that their shares were at risk of forced selling… 'There's a liquidity crisis in the stock market, and pledged shares are again starting to sound the alarm,' said Yang Hai, analyst at Kaiyuan Securities Co. 'If there are no real policies to cure the array of problems and ailments in our market, no one will be willing to take the risk.'"

Reports say a meeting is being arranged between President Trump and Chinese President Xi Jinping at the coming G20 meeting, tentatively for November 29th. Much could unfold by then. The mid-terms are now just two weeks from Tuesday. And it is especially challenging to look out six weeks and contemplate the status of global markets. "Risk off" has gained significant momentum around the globe.

With their stock market in a tailspin, one might expect the Chinese to be rather motivated to adopt conciliatory language and work toward progress on the trade front. Yet there's another scenario that is not as obvious - and certainly not comforting: Mr. Xi and Chinese leadership may feel they have been betrayed and mocked. They distrust the Trump administration, now recognizing their true objective is not trade as much as it is containing China's ascending financial, economic, technological, military and geopolitical power. They are livid that the administration would adopt such a belligerent approach and relish in China's financial distress. A new Cold War has commenced. It would be a zero-sum battle of rival superpowers.

The administration clearly believes they have the Chinese right where they want them. President Trump is quick to note the big decline in China's stock market. For a number of years now, I've feared a major consequence of a bursting Bubble would be the Chinese blaming "foreigners" (chiefly the U.S. and Japan) for their hardship. I just never imagined it would be so straightforward for Beijing to directly link a cause and effect.

The Chinese Bubble is again at the precipice. The last comparable episode, back in late-2015/early-2016, unfolded in a different global backdrop. China implemented additional stimulus measures, while the ECB and BOJ boosted QE and the Fed postponed "normalization". For the most part, rates were near zero globally and bond yields were declining. Pricing pressures were still leaning disinflationary. Global risk markets were neither as inflated nor as fragile as now.

That crisis episode saw the PBOC employ $100s of billions of reserves to stabilize the Chinese currency, in a global backdrop approaching $2.0 TN of annualized central bank liquidity injections. Back then, China was facing a relatively stronger economy and a booming apartment Bubble inclined for "Terminal Phase" excess.

The Chinese have considerably less flexibility today. The burst EM Bubble poses major financial and economic risks for a much more fragile Chinese system. At about $3.0 TN, China's international reserves are down a (mere) trillion from 2014 highs. And pushing more Credit, investment and speculation into Chinese housing at this "Terminal Phase" is a perilous proposition.

For too long China needed to rein in Credit growth. They made an attempt. Not surprisingly, the results have been unsatisfying. The risk of Bubble implosion has now incited yet another round of stimulus measures. But Bubble risk is indomitable, risk that expands parabolically during the "Terminal Phase." I believe there are a number of important factors - domestic and international, economic and financial - working against Beijing's current stabilization efforts. Chinese officials might be at the cusp of finally losing control. The Trump administration provides a most convenient scapegoat.

For the Week:

The S&P500 was about unchanged (up 3.5% y-t-d), and the Dow recovered 0.4% (up 2.9%). The Utilities surged 3.0% (up 3.2%). The Banks declined 0.7% (down 6.5%), while the Broker/Dealers gained 0.9% (down 1.0%). The Transports slipped 0.5% (down 1.6%). The S&P 400 Midcaps were unchanged (down 1.5%), while the small cap Russell 2000 slipped 0.3% (up 0.4%). The Nasdaq100 declined 0.7% (up 11.1%). The Semiconductors fell 2.2% (down 2.2%). The Biotechs dipped 0.6% (up 15.7%). With bullion rising $9, the HUI gold index gained 1.5% (down 19.1%).

Three-month Treasury bill rates ended the week at 2.26%. Two-year government yields gained five bps to 2.91% (up 102bps y-t-d). Five-year T-note yields rose three bps to 3.05% (up 84bps). Ten-year Treasury yields added three bps to 3.19% (up 79bps). Long bond yields rose four bps to 3.38% (up 64bps). Benchmark Fannie Mae MBS yields gained five bps to 4.01% (up 101bps).

Greek 10-year yields declined five bps to 4.33% (up 26bps y-t-d). Ten-year Portuguese yields slipped two bps to 2.02% (up 8bps). Italian 10-year yields fell nine bps to 3.48% (up 147bps). Spain's 10-year yields rose six bps to 1.74% (up 17bps). German bund yields fell four bps to 0.46% (up 3bps). French yields declined three bps to 0.84% (up 5bps). The French to German 10-year bond spread widened a basis point to 38 bps. U.K. 10-year gilt yields fell six bps to 1.58% (up 39bps). U.K.'s FTSE equities index recovered 0.8% (down 8.3%).

Japan's Nikkei 225 equities index declined 0.7% (down 1.0% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.15% (up 10bps). France's CAC40 slipped 0.2% (down 4.3%). The German DAX equities index increased 0.3% (down 10.6%). Spain's IBEX 35 equities index was little changed (down 11.5%). Italy's FTSE MIB index declined 0.9% (down 12.7%). EM equities were mixed. Brazil's Bovespa index gained another 1.6% (up 10.2%), while Mexico's Bolsa was unchanged (down 3.9%). South Korea's Kospi index slipped 0.3% (down 12.6%). India's Sensex equities index fell 1.2% (up 0.8%). China's Shanghai Exchange dropped 2.2% (down 22.9%). Turkey's Borsa Istanbul National 100 index slipped 0.2% (down 16.4%). Russia's MICEX equities index fell 2.4% (up 11.1%).

Investment-grade bond funds saw outflows of $54 million, while junk bond funds saw inflows of $447 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates declined five bps to 4.85% (up 97bps y-o-y). Fifteen-year rates slipped three bps to 4.26% (up 107bps). Five-year hybrid ARM rates increased three bps to 4.10% (up 93bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down four bps to 4.84% (up 73bps).

Federal Reserve Credit last week increased $2.2bn to $4.139 TN. Over the past year, Fed Credit contracted $278bn, or 6.6%. Fed Credit inflated $1.328 TN, or 47%, over the past 311 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $11.0bn last week to $3.433 TN. "Custody holdings" were up $71bn y-o-y, or 2.0%.

M2 (narrow) "money" supply dropped $33.2bn last week to $14.237 TN. "Narrow money" gained $473bn, or 3.4%, over the past year. For the week, Currency was little changed. Total Checkable Deposits rose $16bn, while Savings Deposits sank $58.4bn. Small Time Deposits added $1.7bn. Retail Money Funds gained $4.1bn.

Total money market fund assets declined $14.9bn to $2.873 TN. Money Funds gained $129bn y-o-y, or 4.7%.

Total Commercial Paper dropped $19.5bn to $1.083 TN. CP gained $21bn y-o-y, or 2.0%.

Currency Watch:

October 18 - Bloomberg: "Positions for foreign-exchange purchases on the Chinese central bank's balance sheet last month fell the most since January 2017, reflecting faster capital outflows and more intense official intervention as the yuan weakened. The stockpile shrank 119.4 billion yuan ($17.2bn) to 21.4 trillion yuan… The yuan depreciated more than 8% in the six months through September, and hit its lowest since January 2017 on Thursday after the U.S. Treasury stopped short of naming China a currency manipulator in a report overnight."

October 16 - Bloomberg (Eric Lam): "The drop in the dollar's share of global central-bank reserves in the latest reading was probably influenced by the Trump administration's moves against Russia, according to Goldman Sachs… The Central Bank of Russia probably sold about $85 billion of its $150 billion of U.S. assets during the second quarter after America imposed sanctions… in April, said Zach Pandl, co-head of global FX and emerging-market strategy… President Donald Trump has emphasized the use of unilateral tariff hikes and sanctions in international diplomacy, affecting countries from China to Iran. While the second-quarter shift may end up being a blip, it does showcase risks to the degree of dominance that the greenback continues to command in global reserves stemming from sanctions, the Goldman analysis suggests."

The U.S. dollar index added 0.5% to 95.713 (up 3.9% y-t-d). For the week on the upside, the Brazilian real increased 1.8%, the New Zealand dollar 1.3%, the South African rand 0.7% and the Australian dollar 0.1%. For the week on the downside, the Mexican peso declined 2.2%, the Canadian dollar 0.6%, the British pound 0.6%, the Norwegian krone 0.6%, the euro 0.4%, the Swedish krona 0.3%, the Japanese yen 0.3% and the South Korean won 0.1%. The Chinese renminbi declined 0.10% versus the dollar this week (down 6.09% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index declined 0.9% (up 7.3% y-t-d). Spot Gold gained 0.7% to $1,227 (down 5.8%). Silver was little changed at $14.65 (down 14.6%). Crude dropped $2.39 to $69.12 (up 14%). Gasoline fell 1.7% (up 7%), while Natural Gas jumped 3.3% (up 10%). Copper declined 1.2% (down 16%). Wheat dipped 0.5% (up 21%). Corn fell 1.8% (up 5%).

Market Dislocation Watch:

October 18 - Financial Times (Mehreen Khan): "Brussels responded to Italy's rule-busting budget plan in record time and it packs a punch. It took the European Commission just over 48 hours to formally warn Rome that its spending plans for 2019 represented a break with previous budget promises on a scale that was 'unprecedented in the history of the Stability and Growth Pact'. The letter was hand-delivered… to finance minister Giovanni Tria after a meeting in Rome on Thursday. The commission's rebuke is the first formal warning in a process that could end up with Italy facing financial punishment - from Brussels and the markets - if Rome's populists don't back down. Matteo Salvini and Luigi Di Maio's coalition has until noon on Monday to reply."

October 17 - Bloomberg (Katherine Greifeld): "There's never been a more profitable time for U.S. investors to ditch Treasuries and go abroad. By now, everyone knows Treasuries have been a lousy bet. But because of a quirk in the way currency markets work, there's even less reason for investors to park their money in U.S. government bonds. Those with dollars to spare can lock in historically high returns in Europe and Japan, even though yields in the two markets are among the lowest in the developed world. In fact, dollar investors are getting paid more than ever to enter a trade that takes the currency risk out of their euro-based returns. As a result, they can earn what amounts to 3.8% a year from ultra low-yielding 10-year German bunds… Aside from Italy, hedged U.S. investors would have done better putting their money into the bonds of any developed nation this year rather than Treasuries."

October 18 - Reuters (Richard Leong): "Several measures of U.S. short-term borrowing costs rose sharply on Thursday, suggesting money markets may see more volatility as the Federal Reserve signals interest rates have further to climb in a robust economy. The sudden jump in the benchmark London interbank offered rate, or LIBOR, and a price drop in a futures contract connected to it caught many market participants by surprise. 'What a mess at the front end of the rates market today,' said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott… 'It may be related to the plumbing in financial markets that is not readily apparent.'"

October 14 - Financial Times (Chris Flood): "New business growth has slowed markedly for most of the leading providers of exchange traded funds this year even before the sell-off across global equity markets gathered pace last week. Net inflows for BlackRock have fallen by half to $85.8bn in the first nine months of 2018, compared with the same period last year… New ETF business growth for Vanguard… has dropped by about a third to $68bn. State Street, the third largest ETF manager, is on track for another disappointing year after a lacklustre showing in 2017, which was only saved by a stampede by investors into US equities in the fourth quarter."

October 18 - CNBC (Thomas Franck): "Goldman Sachs CEO David Solomon said… he believes part of October's steep stock sell-off was the result of programmatic trading. 'There's no question when you look at last week, some of the selling is the result of programmatic selling because as volatility goes up, some of these algorithms force people to sell,' Solomon told CNBC's Wilfred Frost. 'Market structure can, at times, contribute to volatility and one of the things that we're spending a bunch of time thinking about at the firm is how changes in market structure over the course of the last 10 years will affect market activity.'"

Trump Administration Watch:

October 12 - Wall Street Journal (Michael C. Bender, Gordon Lubold, Kate O'Keeffe and Jeremy Page): "The Trump administration is moving deliberately to counter what the White House views as years of unbridled Chinese aggression, taking aim at military, political and economic targets in Beijing and signaling a new and potentially much colder era in U.S.-China relations. In the first 18 months of the administration, ties between the world's two biggest powers were defined by negotiations over how to restrain North Korea and ways to rebalance trade. Those high-profile endeavors masked White House preparations for a more hard-nosed stance with Beijing… Interviews with senior White House officials and others in government make clear that recent volleys in what appears a new Cold War aren't the exception to President Trump's China policy. They are exactly what the administration wants…"

October 15 - Bloomberg (Jennifer Epstein): "President Donald Trump threatened to impose another round of tariffs on China and warned that Chinese meddling in U.S. politics is a 'bigger problem' than Russian involvement in the 2016 election. Asked in an interview with CBS's '60 Minutes' whether he wants to push China's economy into a depression, Trump said 'no' before comparing the country's stock-market losses since the tariffs first launched to those in 1929, the start of the Great Depression in the U.S."

October 18 - CNBC (Fred Imbert): "Larry Kudlow, the director of the National Economic Council, went after China… for digging in its heels in trade talks with the U.S. 'They are unfair traders. They are illegal traders. They have stolen our intellectual property,' Kudlow said at the Detroit Economic Club… 'China has not responded positively to any of our asks.' 'America has the greatest technology in the world; it is the backbone of our economy,' he said. 'China can't seem to do that, so they steal it. We can't allow that.'"

October 17 - New York Times (Alan Rappeport and Keith Bradsher): "Fresh off securing trade agreements with South Korea, Canada and Mexico, President Trump is embarking on a new plan: refashioning the Trans-Pacific Partnership to his liking through a flurry of bilateral trade deals. Mr. Trump, who pulled the United States out of the trade pact with 11 other countries that he has called a 'rape of our country,' is now looking to forge deeper trade ties with several of the nations in the alliance, as well as the European Union and the United Kingdom. But while the Trans-Pacific Partnership was aimed at encouraging China to make the extensive economic and structural overhauls that would someday win it a place in the trade pact, Mr. Trump views these new bilateral agreements as a way to contain Beijing's growing economic, geopolitical and territorial ambitions."

October 17 - Wall Street Journal (Kate Davidson): "President Trump reiterated his complaints that the Federal Reserve is raising short-term interest rates too fast, calling the U.S. central bank 'my biggest threat.' 'It's independent so I don't speak to him, but I'm not happy with what he's doing, because it's going too fast," Mr. Trump said in an interview with the Fox Business Network, referring to Fed Chairman Jerome Powell, whom he nominated last year. 'You looked at the last inflation numbers, they're very low,' he said while arguing for a slower increase in interest rates."

October 17 - Reuters (Jonathan Spicer): "White House economic advisor Larry Kudlow said… that U.S. President Trump was not demanding a policy change at the Federal Reserve after Trump heaped more criticism on the Fed on Tuesday, calling rising U.S. interest rates his 'biggest threat.' In what has emerged as a pattern recently, the administration official sought the day after Trump's comments to tamp down the unusual presidential criticism of the U.S. central bank, saying that Trump actually largely agreed with the Fed. 'He is not interfering with their independence,' Kudlow said…"

October 14 - Reuters (Arshad Mohammed): "White House economic adviser Larry Kudlow… played down the U.S. stock market drop as a normal correction and said President Donald Trump had some concern the Federal Reserve may be raising interest rates too fast but respected its independence. 'I think the background is very positive for the stock market and I think, as I said, corrections come and go and people should ... stay very calm over these things, they are quite normal,' Kudlow told the 'Fox News Sunday with Chris Wallace' program…"

Federal Reserve Watch:

October 17 - Bloomberg (Christopher Condon): "Federal Reserve officials stepped deeper into a debate over how high to push interest rates, as a majority favored an eventual and temporary move above the level they deem neutral for the economy in the long run. The clearest summary of policy makers' views, unusually, appeared not in the minutes to the Sept. 25-26 policy meeting… but in the accompanying notes to officials' most recent economic projections. 'A substantial majority of participants expected that the year-end 2020 and 2021 federal funds rate would be above their estimates of the longer-run rate,' according to the document."

October 17 - Reuters (Jason Lange and Pete Schroeder): "Federal Reserve policymakers are largely united on the need to raise borrowing costs further, minutes from their most recent policy meeting show, despite U.S. President Donald Trump's view that interest rate hikes have already gone too far. Every Fed policymaker backed the central bank's September decision to raise the target policy rate to between 2% and 2.25%... Participants in the Fed's rate-setting committee also 'generally anticipated that further gradual increases' in short-term borrowing costs 'would most likely be consistent' with the kind of continued economic expansion, labor market strength, and firm inflation that most of them are anticipating…"

October 18 - Reuters (Jonathan Spicer): "The Federal Reserve should continue with its gradual rate hikes but must be prepared to slow the tightening if U.S. productivity breaks out of a several-year lull, as it may be poised to do, an influential Fed governor said… Randal Quarles, who rarely discusses monetary policy, painted a somewhat more optimistic picture than his colleagues on the economy's longer-term capacity, and said he favored a bit more dovish path than most others at the U.S. central bank."

October 17 - Wall Street Journal (Alan S. Blinder): "When comedian Steve Martin spoke about 'wild and crazy guys,' I'm pretty sure he was not referring to members of the Federal Open Market Committee. In fact, no one-to my knowledge-has ever called FOMC members 'wild' or 'crazy.' Until now. On Oct. 10 President Trump announced, 'I think the Fed has gone crazy.' The president's rant was based on his belief that 'the Fed is making a mistake. They are so tight.' Of course the Federal Reserve makes mistakes. What institution doesn't? Maybe it is making one now, though I don't think so. But can any sensible person call current monetary policy 'tight'? The unemployment rate stands at 3.7%, the lowest in almost 50 years. Under such circumstances, most economists would predict that inflation, which is now around the Fed's 2% target, should be rising."

October 18 - Reuters (Jennifer Ablan): "Goldman Sachs economists… said the firm remained 'comfortable' with its call for five more interest rate hikes - two more than priced in financial markets - through the end of 2019. In a note to clients, Goldman said it feels the Federal Reserve needs to generate a significant tightening in financial conditions to slow the economy to its potential growth pace sooner rather than later, and 'that this will require delivering significantly more hikes than priced in the curve.'"

October 17 - Bloomberg (Brian Chappatta): "Federal Reserve officials have finally caught on to the leveraged-loan boom. In minutes of the Federal Open Market Committee's September meeting, policy makers made explicit for the first time that they're watching for any hint of risks to financial stability stemming from the more than $1 trillion market for U.S. leveraged loans. They're late to pile on. There's been no shortage of warnings from fixed-income traders and credit analysts who track investor protections."

U.S. Bubble Watch:

October 15 - CNBC (Jacob Pramuk): "The U.S. federal budget deficit rose in fiscal 2018 to the highest level in six years as spending climbed… The deficit jumped to $779 billion, $113 billion or 17% higher than the previous fiscal period… It was larger than any year since 2012, when it topped $1 trillion. The budget shortfall rose to 3.9% of U.S. gross domestic product… Federal revenue rose only slightly, by $14 billion after Republicans chopped tax rates for corporations and most individuals. Outlays climbed by $127 billion, or 3.2%. A spike in defense spending, as well as increases for Medicaid, Social Security and disaster relief, contributed to the increase."

October 16 - CNBC (Jeff Cox): "Job openings hit a record in August, indicating companies could face more inflationary pressures ahead with a tight labor market. The vacancies level hit 7.14 million for the month, according to the Job Openings and Labor Turnover Survey, a report Federal Reserve officials watch closely… The total number of hires also reached a record of 5.78 million. Openings dwarfed the total level of workers looking for jobs, which stood at 6.23 million for that month and fell to 5.96 million in September…"

October 17 - Reuters (Aishwarya Venugopal): "Holiday hiring of more than 700,000 workers by U.S. retailers would be the largest since 2014, according to a report by a global outplacement firm, underscoring a robust economy that has seen consumer confidence at its highest in nearly two decades. Retailers have said they would add 704,000 jobs in total to their rosters ahead of the important holiday shopping season…"

October 16 - Wall Street Journal (Eliot Brown and Greg Bensinger): "As international backlash grows over Saudi Arabia's alleged involvement in the possible murder of a journalist, Silicon Valley faces a potentially unsettling fact: The kingdom is now the largest single funding source for U.S. startups. Crown Prince Mohammed bin Salman has directed at least $11 billion of Saudi money into U.S. startups since mid-2016, either directly or through SoftBank Group Corp.'s $92 billion tech-focused Vision Fund, to which the Saudis committed $45 billion… The total invested by the kingdom so far in U.S. startups is far bigger than the total raised by any single venture-capital fund. Some of tech's most prominent young companies have welcomed Saudi money, including Uber Technologies Inc., office-sharing company WeWork Cos. and augmented-reality device maker Magic Leap Inc."

October 17 - Bloomberg (Riley Griffin, Suborna Panja and Kristina D'Alessio): "While Wall Street and U.S. President Donald Trump tout news of a booming stock market and low unemployment, college students may be quick to roll their eyes. The improved economy has yet to mean higher wages for graduates already struggling to pay down massive debt… Federal student loans are the only consumer debt segment with continuous cumulative growth since the Great Recession. As the costs of tuition and borrowing continue to rise, the result is a widening default crisis… Student loans have seen almost 157% in cumulative growth over the last 11 years. By comparison, auto loan debt has grown 52% while mortgage and credit-card debt actually fell by about 1%... All told, there's a whopping $1.5 trillion in student loans out there (through the second quarter of 2018)…"

October 16 - Wall Street Journal (Laura Kusisto): "More than three-quarters of Americans now view renting as more affordable than owning a home, the latest sign that rising mortgage rates and higher home prices will continue to pressure home sales. Some 78% of people now say that renting is more affordable than owning, according to survey data to be released… by… Freddie Mac . That is up 11 percentage points from only six months ago. The survey also indicates that demand for for-sale housing could remain soft in the coming months. Some 58% of renters now say they don't currently have plans to buy a home-up from 54% in February…"

October 18 - Bloomberg (Katia Dmitrieva): "It looks like U.S. apartment and condominium builders are reacting to rising costs and a supply glut the same way: slowing down. Multifamily housing permits -- - those for buildings with two or more units -- dropped last month to the lowest level since March 2016, government figures showed Wednesday. That follows signs of an oversupply of apartments in some U.S. markets, but higher costs are also having an impact. 'The biggest issue is construction cost and within that, labor costs. Because of that, some deals just don't pencil out,' Jeanette Rice, Americas head of multifamily research at brokerage CBRE Group Inc., said…"

October 16 - CNET (Marrian Zhou): "Uber's initial public offering may be worth well over a hundred billion. The ride-hailing company has received proposals from Wall Street banks that value the company at as much as $120 billion in an IPO, according to The Wall Street Journal, which said the offering could take place early next year."

October 15 - CNBC (Lauren Hirsch): "Sears Holdings filed for bankruptcy protection early Monday after years of staying afloat through financial maneuvering and relying on billions of CEO Eddie Lampert's own money. Lampert, who has served as CEO for the past five years, will step down from that post… but remain chairman. The 125-year-old retailer, once the nation's largest, said… it was appointing Mohsin Meghji, managing partner of M-III Partners, as its chief restructuring officer. As part of the bankruptcy, Sears will shutter 142 stores toward the end of the year."

China Watch:

October 18 - Reuters (Kevin Yao and Elias Glenn): "China's economic growth cooled to its weakest quarterly pace since the global financial crisis… The economy grew 6.5% in the third quarter from a year earlier, below an expected 6.6% rate, and slower than 6.7% in the second quarter… It marked the weakest year-on-year quarterly gross domestic product growth since the first quarter of 2009 at the height of the global financial crisis."

October 18 - Bloomberg: "There's nothing like margin calls to make a bad stock-market selloff even worse. It's a risk at the top of investors' minds in China after the nation's $3 trillion equity rout deepened on Thursday, driving the Shanghai Composite Index to a nearly four-year low. With more than $600 billion of Chinese shares pledged as collateral for loans, or about 11% of the country's market capitalization, the worry is that falling stock prices will trigger a downward spiral of forced selling. The country's top financial regulators sought to reassure investors on Friday that they're able to keep risks under control. But some stocks are more vulnerable than others. At least 144 Chinese companies have more than half their shares pledged…"

October 18 - Bloomberg: "China's top financial officials moved to shore up confidence in the country's tumbling stock market, marshaling a rare show of coordinated verbal support as the government tries to prevent a $3 trillion equity rout from infecting the world's second-largest economy. The reassuring words from leaders of China's central bank, securities watchdog, and banking and insurance regulator -- including promises of financial support for local businesses -- followed a bout of investor panic this week that sent the Shanghai Composite Index to a four-year low."

October 18 - Bloomberg: "In China's manufacturing heartland around the Pearl River Delta, Donald Trump's 10% tariffs are causing little concern. The 25% duties that loom next year are another matter. Ben Yang, a furniture maker producing contemporary designs out of his facility in Dongguan -- about 30 miles from Hong Kong -- says that if those higher charges materialize from January as planned, the U.S. share of exports from his Sunrise Furniture Co. could plunge from 90% to less than a third. 'Our major rival is Vietnam and 10 percent tariffs aren't enough to make the difference,' said Yang, 48, who supplies retailers including Rooms To Go Inc. But 25% tariffs are a worry. There will definitely be a short-term impact; Americans may have to accept higher prices.'"

October 17 - Financial Times (Lucy Hornby): "China's private entrepreneurs are shifting away from investments in favour of paying down dollar debt and keeping cash at hand to brace for an economic downturn exacerbated by the Trump administration's trade tariffs… Clients in China 'are concerned about the ongoing slowdown in the economy', 'pessimistic about the outlook for the yuan' and 'pessimistic that an increase in US tariffs from 10% to 25% in January can be averted', Mansoor Mohi-uddin, NatWest Markets' head of forex strategy, wrote after a visit to Beijing last week. Mr Mohi-uddin added that private exporters would focus their cash on repaying dollar debt, as China's loosening policy and the US Federal Reserve's tightening contributed to a weaker renminbi. Data from Refinitiv show that China's private groups are pulling back from issuing fresh dollar debt…"

October 16 - South China Morning Post (Orange Wang): "China's local governments may have accumulated 40 trillion yuan (US$6 trillion) worth of 'hidden debts' that are not reflected in official figures, which is 'a debt iceberg with titanic credit risks' to the world's second biggest economy, S&P Global Ratings said… If all that off-the-books debt - mostly borrowed by local government financing vehicles, known as LGFVs - were included in China's debt figures, the ratio of all government debt to GDP could have reached 'an alarming level' of 60% in 2017, the ratings agency said… According to official figures released by the Chinese Ministry of Finance, local governments had combined outstanding debts of 17.7 trillion yuan (US$2.5 trillion) at the end of August, although Beijing has admitted the existence of 'hidden debts' and attempted to curb unauthorised borrowing by local authorities."

October 16 - Bloomberg: "Chinese consumer inflation accelerated for a fourth month in September, with food prices jumping by the most since February, while the rise in households' non-food costs slowed. The consumer price index rose 2.5% from a year earlier… That was the same as forecast… and faster than the 2.3% report in August. The producer price index climbed 3.6%, compared with a 3.5% estimate and a 4.1% gain the previous month. There has been increasing concern about the effect of rising prices in China since the summer, with floods and animal disease forcing food prices up as rents in major cities rise."

October 18 - Reuters (Yawen Chen and Kevin Yao): "Growth in China's real estate investment eased in September and home sales fell for the first time since April, as developers dialed back expansion plans amid economic uncertainties and as additional curbs on speculative investment kicked in… Growth in real estate investment, which mainly focuses on residential but also includes commercial and office space, rose 8.9% in September from a year earlier, compared with a 9.2% rise in August…"

October 18 - Bloomberg: "China may be in an easing mode to combat slower growth, but financing conditions aren't improving for lower rated firms and they face a 'chilly winter' ahead, according to China Securities Co. Government liquidity injections haven't found its way to weaker firms as investors are still risk averse amid record defaults, said Huang Ling, managing director of China Securities, the top corporate bond underwriter in China since 2015… 'People can't buy enough of AAA bonds but it has been a tough sale for their AA peers this year,' said Huang. 'As a result of market preference, we see a higher proportion of issuance from firms rated AA+ and above, and weaker companies have to tap into all funding options to survive.'"

October 18 - Bloomberg (Carrie Hong and Denise Wee): "A Chinese solar firm has missed a debt deadline, adding to signs of strain in an industry grappling with overcapacity and tariffs. China Singyes Solar Technologies Holdings Ltd. failed to make a payment on $160 million of bonds due on Oct. 17…"

October 13 - Reuters (James Pomfret and Greg Torode): "As Hong Kong's government hews closer to Beijing, officials are taking a tough line on perceived national security threats, even deploying an elite police unit for political monitoring and surveillance - a sharp escalation in rhetoric and action. In just the last few months, the special administrative region has banned the Hong Kong National Party, which espouses separation from China, and barred some activists from standing in local elections. The Education Bureau sent all secondary schools in the Special Administrative Region letters on Sept 24 saying they must prohibit 'the penetration' of the National Party or risk prosecution."

EM Watch:

October 15 - Wall Street Journal (Saumya Vaishampayan and Josh Zumbrun): "Emerging markets worried about their falling currencies and investors rushing to the exits are raising interest rates and keeping a lid on spending, even though doing so is likely to hurt their long-term prospects. Central banks in developing countries including Indonesia and the Philippines have raised their official borrowing costs multiple times this year to keep up with rising rates in the U.S. Economic growth has already slowed in the Philippines from earlier in 2018. While the Indonesian economy grew at the fastest pace in more than four years in the latest quarter, the worry is that higher rates there could start to drag. Countries are making these trade-offs for fear the turmoil that has gripped emerging markets such as Turkey and Argentina could spread more broadly."

Central Bank Watch:

October 13 - Bloomberg (Jessica Shankleman and Alessandro Speciale): "Bank of England Governor Mark Carney warned against the 'weaponization' of assets in the global financial system as central bank chiefs fretted about the impact of a trade war. Speaking at the Group of 30 conference…, Carney stressed the need for investment flows to remain open, alluding to previous warnings that U.S. protectionism affects the real economy through direct channels like reduced trade flows, disrupted supply chains and higher import costs. The use of secondary sanctions in the U.S. can effectively force European firms to stop doing business with third-country parties... 'From the United Kingdom's perspective -- as the second-largest asset management home -- the commitment to openness, an open resilient platform, there's no weaponization of finance,' he told delegates."

Italy Watch:

October 18 - Bloomberg (Viktoria Dendrinou and John Follain): "European Union leaders voiced concerns over Italy's spending plans, putting pressure on the populist government in Rome to rethink its budget and avert a potential standoff with Brussels…. With Italian bond yields close to a four-year high, the prospects for the country's public finances have become a prime focus in the bloc. Prime Minister Mark Rutte said… he expressed Dutch 'concerns regarding Italy's budget plans for 2019' to his Italian counterpart Giuseppe Conte in a bilateral meeting ahead of the summit. Following that discussion, Conte said he wouldn't accept 'prejudices' regarding the Italian budget."

October 17 - Reuters (Francesco Guarascio): "Italian Prime Minister Giuseppe Conte said… he believed there was no room for changing the Italian draft budget for 2019, which the European Union worries would breach the bloc's fiscal rules and increase Italy's debt. 'We have prepared (the budget) very carefully. Therefore I think there is no room for change,' Conte told reporters on arriving to talks with his fellow EU leaders in Brussels."

Europe Watch:

October 15 - Reuters (Joseph Nasr): "German Chancellor Angela Merkel vowed… to restore trust in her government after her conservative allies suffered heavy losses in a regional election, which their far-right foes hailed as 'an earthquake' that would rock the ruling coalition. The Christian Social Union (CSU), the sister party of Merkel's own Christian Democrats (CDU), slumped to its worst result in almost 70 years in Sunday's election in Bavaria. The chancellor's other coalition partner, the centre-left Social Democrats (SPD), saw its support halved."

October 15 - Financial Times (Jim Brunsden): "Donald Tusk, the president of the European Council has warned that a no-deal Brexit 'is more likely than ever before', after negotiators hit an impasse over the weekend, but he urged 'every effort' to salvage the talks. In a letter to EU leaders ahead of a summit meeting in Brussels this week, Mr Tusk said recent negotiations with the UK have 'proven to be more complicated than some may have expected.' 'We should nevertheless remain hopeful and determined, as there is goodwill to continue these talks on both sides'."

October 17 - Reuters (Gabriela Baczynska and Daphne Psaledakis): "British Prime Minister Theresa May assured EU leaders in Brussels… that she can still reach a Brexit deal, avoiding a showdown over stalled talks as Brussels stepped up planning for a failure of negotiations… But three days after talks stalled over the Irish border "backstop", thwarting hopes of a deal at the summit, May arrived determined to stress that an accord was still on the cards."

Global Bubble Watch:

October 15 - Bloomberg (Stefania Spezzati and Sonali Basak): "The world is still full of risks for the banking industry, despite reforms put in place since the financial crisis 10 years ago. That was the main subject of discussions this weekend in Bali, where bankers gathered for the annual meeting of the Institute of International Finance. From market turmoil and trade tensions to rising leverage and the implications of Italy's rule-busting budget, challenges abound -- and, bosses said, banks need to do more to protect themselves. 'The recurring theme is that finance has been strengthened, but not quite fixed,' Fabrizio Saccomanni, chairman of UniCredit SpA and a former deputy governor of the Bank of Italy, said on one of the panels. While a lot has been done to strengthen banks' balance sheets, 'the global factors of crisis are not really under control.'"

October 15 - Reuters (Tom Miles): "Global foreign direct investment (FDI) fell by 41% to $470 billion in the first six months of this year, the lowest since 2005, preliminary figures from the United Nations trade and development agency UNCTAD showed… President Donald Trump's U.S. tax reforms were the main cause of the slump, which followed a 23% fall in 2017, as American firms repatriated a net $217 billion from foreign affiliates, UNCTAD investment chief James Zhan said. 'The investment flows are more policy-driven and less economic cycle-driven,' Zhan told a news conference… 'Overall the picture is gloomy and the prospect is not so optimistic.'"

October 18 - Wall Street Journal (Saabira Chaudhuri): "Two of the world's largest consumer-goods companies, Unilever PLC and Nestlé SA, reported stronger sales as a wave of inflation in many markets emboldened them to raise prices. The new pricing power gives a boost of confidence to the entire industry, which has struggled in recent years with fierce competition and rapidly changing consumer tastes."

October 16 - Wall Street Journal (Edward White and Christian Pfrang): "In July 2017 an analyst at Wells Fargo described Taiwan's booming foreign currency bonds as a 'match made in heaven', representing a 'meeting of the minds for issuers, investors and regulators'. Fifteen months later and those regulators, spooked by currency risks linked to the now $177bn market, will snap shut a loophole that enabled a splurge of purchases by the country's insurance companies over the past five years. 'It is a major blow,' one Taiwan banking executive involved in the previously blossoming bond deals said of the looming regulation. 'The market will become smaller.'"

Fixed Income Bubble Watch:

October 16 - CNBC (Patti Domm): "China trimmed its holdings of U.S. Treasurys in August by about $6 billion, to the lowest level since June 2017. China's holdings of Treasury bills, notes and bonds fell to $1.165 trillion, from $1.171 trillion in July, according to U.S. Treasury data. It is the third month of decline, and well below the recent high of $1.2 trillion a year earlier."

Leveraged Speculation Watch:

October 19 - New York Times (Matt Phillips): "A financial assembly line that went haywire a decade ago and contributed to an economic crisis is gearing up again on Wall Street. Back then, one of the products the banks churned out - bondlike investments based on thousands of mortgages - proved far riskier than most had understood when it turned out that the borrowers couldn't pay. The banking system froze, a financial panic ensued, and the country experienced its worst recession in decades. This time around, a similar kind of investment, called C.L.O.s, are at the heart of the boom. And that's not the only parallel: The loans are being made to risky borrowers, lending standards are dropping fast, and regulators are easing the rules."

Geopolitics Watch:

October 16 - Bloomberg (Bryce Baschuk): "U.S. and Chinese officials clashed in Geneva on Tuesday as the world's two largest economies disagreed over how to reform the global trading system. Deputy U.S. Trade Representative Dennis Shea said the World Trade Organization must confront China's trade abuses while rethinking its preferential rights as a developing nation. Chinese Ambassador Zhang Xiangchen countered that 'no one can be singled out' and that Beijing will not back any effort to undermine the WTO's basic principles. The dispute illustrates the difficulty China and the U.S. face in overcoming escalating tensions that have prompted Washington to impose tariffs on Chinese imports totaling $250 billion and similar retaliatory actions from Beijing…. 'Adequately responding to the challenges of non-market economies is nothing less than an existential matter for this institution,' Shea said… in comments delivered at the WTO."

October 14 - Reuters (Andrew Torchia and Arshad Mohammed): "Saudi Arabia on Sunday warned against threats to punish it over last week's disappearance of journalist Jamal Khashoggi, as European leaders piled on pressure and two more U.S. executives scrapped plans to attend a Saudi investor conference."

October 16 - Financial Times (Henny Sender): "A glance at the foreign-exchange markets suggests that the US dollar looks as powerful and dominant as ever. However, taking a much longer-term view suggests that this impregnable position - and the economic heft that comes with it - will come under assault. One consequence of the America First policies of US President Donald Trump will be to create a bipolar financial world, with China at one end and the US at the other. That will mean smaller financial flows between the two, and a much more robust effort from Beijing to eventually challenge the dollar's status as the world's reserve currency. That, in turn, potentially has implications for everything from the status of US Treasury securities as the safest assets in the world to how oil is priced. 'The Trump administration's 'America First' policy will encourage a long-term move away from the US dollar,' according to Christopher Wood of CLSA, the arm of Beijing-based Citic Securities, pointing to 'the growing American practice of using the dollar as a weapon via the implementation of sanctions and the like.'"

Friday Evening Links

[BloombergQ] Stocks Edge Lower as Treasuries, Greenback Fall: Markets Wrap

[Reuters] Euro, pound rally on Brexit concession; global stocks dip

[Reuters] Fed's Kaplan sees two-three more rate hikes to hit 'neutral' level

[FT] Moody’s pushes Italy’s credit rating closer to junk

[FT] Real estate loans by small banks stir fears