Sunday, March 31, 2019

Monday's News Links

[Reuters] Shares surge on China's factory rebound, trade optimism

[Reuters] Oil prices push higher as supply worries drive gains

[Reuters] U.S. retail sales unexpectedly fall in February

[AP] Survey: US manufacturing activity increased in March

[CNBC] China’s factory activity unexpectedly grows in March, a private survey shows

[Reuters] China's factory activity picks up slightly, but Asia broadly weak

[Bloomberg] Analysts Downgrade China's Stocks at Fastest Clip Since 2011

[Reuters] Euro zone factory activity contracts faster in March: PMI

[Reuters] Germany's manufacturing recession worsens: PMI

[AP] Eurozone economy gets double dose of bad news

[Reuters] Italy's budget deficit and debt to rise in 2019, 2020, OECD says

[Bloomberg] Draghi Points to Persisting Risks in Justifying Massive Stimulus

[WSJ] Fed’s Kashkari Says It Isn’t Time to Cut Rates

[WSJ] A Buyer’s Market? Hopes Rise With Falling Rates, More Homes for Sale

[WSJ] This Time Probably Isn’t Different for Fannie, Freddie

[WSJ] Gasoline Prices Creep Toward $3 a Gallon

[WSJ] China’s Entrepreneurs Are Left High and Dry Despite a Flood of Credit

[FT] BoJ’s dominance over ETFs raises concern on distorting influence

[FT] Investments in bond-based ETFs head for $1tn landmark

Sunday Evening Links

[Bloomberg] Stocks Gain, Yen Dips as China Eases Growth Worry: Markets Wrap

[Reuters] Bond yield curveball stalls global stocks rally

[Reuters] Japan big manufacturers' morale worsens in first-quarter: BOJ tankan

[Reuters] Erdogan appears to concede Istanbul defeat after Ankara loss

[FT] China’s Belt and Road property boom cools off

[FT] Australian Property Slide Spreads on Lending Crackdown, Election

Saturday, March 30, 2019

Sunday's News Links

[Reuters] Fed policymakers do not want rate cuts, not even the doves

[Reuters] China March factory activity grows for first time in four months, but exports weak

[Reuters] UK's May risks "total collapse" of government in Brexit impasse - Sunday Times

[Reuters] China's services activity quickens in March: official PMI

[Bloomberg] The Bond Market Shuddered. Now We Find Out If That Was Justified

[Reuters] Trump cuts aid to Central American countries as migrant crisis deepens

[Reuters] Turks vote in local elections which could see Erdogan lose in big cities

[Reuters] Taiwan condemns Beijing after Chinese jets cross maritime line

[WSJ] ‘Fear of Missing Out’ Pushes Investors Toward Stocks

[WSJ] Debt Investors at a Crossroads as Fed Pivots

[WSJ] Global Deal-Making Gets Off to a Slow Start in 2019

Saturday's News Links

[Reuters] All Brexit options are on the table -UK Conservatives chair

[Reuters] U.S. investors seek comfort in flood of data

[Reuters] Exclusive: More than 1 million acres of U.S. cropland ravaged by floods

[Bloomberg] Brexit Descends Into Name-Calling, as Germany Derides U.K. Elite

[Bloomberg] Global Bond-Market Investors Are Getting Really Nervous

[Reuters] Exclusive: Trump eyeing stepped-up Venezuela sanctions for foreign companies - Bolton

[NYT] Lyft’s Shares Jump in Trading Debut, Cementing Rise of the Gig Economy

[WSJ] The 2019 IPO Frenzy Is Different From 1999. Really.

Friday, March 29, 2019

Weekly Commentary: Everything Rally

From the global Bubble perspective, it was one extraordinary quarter worthy of chronicling in some detail. The “Everything Rally,” indeed. Markets turned even more highly synchronized – across the globe and across asset classes. As the quarter progressed, it seemingly regressed into a contest of speculative excess between so-called “safe haven” sovereign debt and the Bubbling risk markets. It didn’t really matter – just buy (and lever) whatever central bankers want the marketplace to buy (and lever): financial assets.

March 29 – Bloomberg (Cameron Crise): “While the total return of the S&P 500 is going to end this month roughly 2% below its closing level in September, a 60/40 portfolio of equities and Treasuries is ending March at all-time highs. Even a broader multi-asset portfolio using an aggregate bond index rather than simply govvies is closer to its high watermark than stocks. Similar to equities, balanced portfolios have enjoyed a stunning quarterly return. The broad balanced portfolio mentioned above returned nearly 8%, its best since 2011.”

According to Bloomberg (Decile Gutscher and Eddie van der Walt), it was the best FIRST quarter for the S&P500 since 1998 (strongest individual quarter since Q3 2009); for WTI crude since 2002; for U.S. high-yield Credit since 2003; for emerging market dollar bonds since 2012; and for U.S. investment-grade Credit since 1995. According to the Wall Street Journal (Akane Otani), it was the first quarter that all 11 S&P500 sectors posted gains since 2014.

March 29 – Financial Times (Peter Wells, Michael Hunter and Alice Woodhouse): “Driven mostly by Wall Street, global stocks ruled off on their largest quarterly advance since 2010. The climb over the past three months was sealed on Friday on hopes for progress in US-China trade talks that resumed in Beijing, while a rally in sovereign bonds eased. The FTSE All World index has risen 11.4% so far in 2019, its biggest quarterly increase since the September quarter of 2010.”

The S&P500 returned 13.6% for the quarter, a stunning reversal from Q4 - yet almost blasé compared to gains in “high beta”. The Nasdaq100 returned 16.6%. The Nasdaq Industrials rose 15.8%, the Nasdaq Computer Index 18.7%, and the Nasdaq Telecom Index 18.3%. The Semiconductors jumped 20.8%, and the Biotechs rose 21.5%. And let’s not forget Unicorn Fever. Money-losing Lyft now with a market-cap of $22.5 billion. Up north in Canada, equities were up 12.4% for the “best first quarter in 19 years.”

The broader U.S. market gave back some early-period outperformance but posted a big quarter all the same. The S&P400 Midcaps jumped 14.0% and the small cap Russell 2000 rose 14.2%. The average stock (Value Line Arithmetic) gained 14.3% during the quarter. The Bloomberg REITs index rose 15.8%, and the Philadelphia Oil Services Sector Index jumped 17.5%. The Goldman Sachs Most Short Index gained 18.5%.

What conventional analysts fancy as “Goldilocks,” I view as acute Monetary Disorder and resulting distorted and dysfunctional markets. For a decade now, coordinated rate and QE policy has nurtured a globalized liquidity and speculation market dynamic. Securities markets have come to be dominated by an unprecedented global pool of speculative, trend-following and performance-chasing finance. The extraordinary central bank-orchestrated market backdrop has over years incentivized the disregard of risk, in the process spurring the move to ETF and passive management – along with a proliferation of leverage and derivatives strategies.

The end of the quarter witnessed the first inverted Treasury yield curve (10-year vs. 3-month) since 2007. Ten-year Treasury yields sank 28 bps to close the quarter at 2.40% vs. three-month T-bills ending March at 2.34% (down 7bps y-t-d). The quarter saw two-year Treasury yields drop 23 bps (2.26%), five-year yields 28 bps (2.23%), and 30-year yields 20 bps (2.81%). Benchmark GSE-MBS yields sank a notable 39 bps to 3.11%. Five-year Treasury yields dropped an amazing 28 bps in March alone (10-year down 31bps). German 10-year bund yields dropped 31 bps during the quarter to negative 0.07% - the low since September 2016. Japan’s 10-year government yields fell another eight bps to negative 0.08%. Swiss 10-year yields dropped 13 bps to negative 44 bps.

March 28 – Financial Times (Robert Smith): “The amount of government debt with negative yields rose back above the $10tn mark this week, as central banks abandoned plans to tighten monetary policy. The idea of investing in bonds where you are guaranteed to lose money — if you hold them to maturity — has always seemed paradoxical. But it begins to make sense in a world where you are sure to lose even more money if you stick the cash in a bank. Parking your money in German government bonds, for example, is also safer than trying to stuff millions of euros under your mattress. More puzzling, however, is the negative-yielding corporate bond, a phenomenon that turns the idea of credit risk on its head. Here investors, in effect, pay for the privilege of lending to companies.”

Economic concerns supposedly pressuring sovereign yields much lower apparently didn’t trouble the corporate Credit sector. After starting the year at 88 bps, investment-grade CDS ended March at a six-month low 56 bps. The LQD investment-grade corporate bond ETF returned 6.18% for the quarter, closing March at a 14-month high. According to Bloomberg, BBB’s (lowest-rated investment-grade) 5.82% gain was the strongest quarterly return since Q3 2009. U.S. high-yield returned 7.04%, the strongest start to a year since 2003. The JNK high-yield bond EFT returned 8.11%, ending the quarter at a six-month high.

The quarter began with Chairman Powell’s dramatic January 4th dovish “U-Turn.” After raising rates and holding to cautious rate and balance sheet normalization at the December 19th FOMC meeting (in the face of market instability), such efforts were abruptly abandoned. The Fed will soon be winding down the reduction in its holdings, while markets now assume the next rate move(s) will be lower.

It was my view that Chairman Powell was hoping to distance his central bank from the marketplace preoccupation with the “Fed put” market backstop. The Fed’s about face delivered the exact opposite impact. Global markets have become thoroughly convinced that the Fed and global central banking community are as determined as ever to do whatever it takes to safeguard elevated international markets. Moreover, markets have become emboldened by the view that December instability impressed upon central bankers that a prompt wielding of all available powers will be necessary to avert market dislocation and panic.

As such, if markets lead economies and central bankers are to respond immediately to market instability, doesn’t that mean safe haven bonds should rally on the prospect of additional monetary stimulus while risk assets can be bought on the likelihood of ongoing loose “money” and meager economic risk? The Central Bank Everything Rally.

The Draghi ECB, fresh from the December conclusion of its latest QE program, also reversed course - indefinitely postponing any movement away from negative policy rates while reinstituting stimulus measures (Targeted LTRO/long-term refinancing operation). Even the Bank of Japan, cemented to zero rates and balance sheet expansion ($5TN and counting!), suggested it was willing to further ratchet up stimulus. Putting an exclamation mark on the extraordinary global shift, the FOMC came out of their March 20th meeting ready to exceed dovish market expectations – booming markets notwithstanding. Message Received.

The dovish turn from the Fed, ECB and BOJ flung the gates of dovishness wide open: The Bank of England, the Reserve Bank of New Zealand, the Swiss National Bank, etc. The tightening cycle in Asia came to rapid conclusion, with central banks in Taiwan, Philippines, and Indonesia (at the minimum) postponing rate increases.

But it wasn’t only central bankers hard at work. Posting an all-time shortfall in February, the fiscal 2019 U.S. federal deficit after five months ($544bn) ran 40% above the year ago level. But this is surely small potatoes compared to the shift in China, where Beijing has largely abandoned its deleveraging efforts in favor of fiscal and monetary stimulus. After an all-time record January, it was most likely a record quarter of Chinese Credit growth - monetary stimulus that spurred stock market gains while nursing sickly Chinese financial and economic Bubbles.

The Stimulus Arms Race accompanied intense Chinese/U.S. trade negotiations, in the process emboldening the bullish market view of a Chinese and U.S.-led global recovery. "My market gains are bigger than yours."  With both sides needing a deal, markets had no qualms with stretched out negotiations.

The Shanghai Composite surged 23.9%. China’s CSI Midcap 200 jumped 33.5%, with the CSI Smallcap 500 up 33.1%. The growth stock ChiNext index surged 35.4%. Underperforming the broader market rally (as financial stocks did globally), the Hang Seng China Financial Index rose 14.2%. Up 33.7%, the Shenzhen Composite Index led global market returns.

Gains for major Asian equities indices included India’s 7.2%, Philippines’ 6.1%, South Korea’s 4.9%, Thailand’s 4.8%, Singapore’s 4.7% and Indonesia’s 4.4%.

Losing 1.9% during the final week of the quarter, Japan’s Nikkei posted a 6.0% Q1 gain. Hong Kong’s Hang Seng index jumped 12.4%, and Taiwan’s TAIEX rose 9.4%. Stocks jumped 9.5% in Australia and 11.7% in New Zealand.

The MSCI Emerging Markets ETF (EEM) gained 9.9%, more than reversing Q4’s 7.6% loss. Gains for Latin American equities indices included Colombia’s 19.8%, Argentina’s 10.5%, Brazil’s 8.6%, Peru’s 9.0% and Mexico’s 3.9%. Eastern Europe equities joined the party as well. Major indices were up 12.1% in Russia, 9.0% in Romania, 8.9% in Czech Republic, 6.5% in Hungary, 5.4% in Russia and 3.4% in Poland.

It was a big quarter for European equities, with the Euro Stoxx 50 jumping 11.7%. Italy’s MIB gained 16.2% (Italian banks up 12.9%), France’s CAC40 13.1%, Switzerland’s MKT 12.4%, Sweden’s Stockholm 30 10.3%, Portugal’s PSI 11.2%, Germany’s DAX 9.2% and Spain’s IBEX 35 8.2%. Major equities indices were up 17.6% in Greece, 14.1% in Denmark, 12.8% in Belgium, 12.5% in Netherlands, 12.0% in Ireland, 10.8% in Iceland, 10.5% in Austria, 8.5% in Finland and 7.3% in Norway. UK’s FTSE100 rose 8.0%.

Especially as the quarter was coming to an end, the conflicting messages being delivered by the safe havens and risk markets somewhat began to weigh on market sentiment. Increasingly, collapsing sovereign yields were raising concerns. U.S. bank stocks were hammered 8.2% in three sessions only two weeks prior to quarter-end, reducing Q1 gains to 9.1%. Portending a global economy in some serious trouble?

I view the yield backdrop as confirmation of underlying fragilities in global finance – in the acute vulnerability of global Bubbles – stocks, bonds, EM, China Credit, European banks, derivatives, the ETF complex, and global speculative finance more generally. While risk market participants fixate on capturing unbridled short-terms speculative returns, the safe havens see the inevitability of market dislocation, bursting Bubbles and ever more central bank monetary stimulus.

And it wasn’t as if global fragilities receded completely during Q1. The Turkish lira sank almost 6.0% in two late-quarter sessions (March 21/22), with dislocation seeing overnight swap rates spike to 1,000%. Ten-year Turkish government bond yields surged about 300 bps in a week to 18.5%. Turkey CDS jumped 150 bps to 480 bps, heading back towards last summer’s panic highs (560bps). With rapidly dissipating international reserves and huge dollar debt obligations, Turkey is extremely vulnerable. Municipal elections Sunday.

A surge in EM flows gave Turkey’s (and others’) Bubble(s) a new lease on life. But as Turkey sinks so swiftly back into crisis mode, worries begin to seep into some quarters of the marketplace that fragilities and contagion risk may be Lying in Wait just beneath the surface of booming markets. The sovereign rally gathered further momentum, while the risk markets saw lower yields and eager central bankers as ensuring favorable conditions. Yet the more egregious the Everything Rally’s speculative run, the more problematic the inevitable reversal. It should be an interesting second quarter and rest of the year.

For the Week:

The S&P500 gained 1.2% (up 13.1% y-t-d), and the Dow rose 1.7% (up 11.2%). The Utilities slipped 0.5% (up 10.5%). The Banks rallied 2.0% (up 9.1%), and the Broker/Dealers recovered 1.6% (up 6.6%). The Transports jumped 3.5% (up 13.5%). The S&P 400 Midcaps rose 2.2% (up 14.0%), and the small cap Russell 2000 gained 2.2% (up 14.2%). The Nasdaq100 increased 0.7% (up 16.6%). The Semiconductors declined 0.4% (up 20.8%). The Biotechs surged 3.6% (up 21.5%). With bullion dropping $21, the HUI gold index fell 1.8% (up 5.8%).

Three-month Treasury bill rates ended the week at 2.34%. Two-year government yields fell six bps to 2.26% (down 23bps y-t-d). Five-year T-note yields slipped a basis point to 2.23% (down 28bps). Ten-year Treasury yields declined four bps to 2.41% (down 28bps). Long bond yields fell six bps to 2.81% (down 20bps). Benchmark Fannie Mae MBS yields added a basis point to 3.11% (down 39bps).

Greek 10-year yields declined four bps to 3.73% (down 67bps y-t-d). Ten-year Portuguese yields slipped a basis point to 1.25% (down 47bps). Italian 10-year yields rose four bps to 2.49% (down 25bps). Spain's 10-year yields increased two bps to 1.10% (down 32bps). German bund yields dropped six bps to negative 0.07% (down 31bps). French yields fell four bps to 0.32% (down 39bps). The French to German 10-year bond spread widened two bps to 39 bps. U.K. 10-year gilt yields declined one basis point to 1.00% (down 28bps). U.K.'s FTSE equities index rose 1.0% (up 8.2% y-t-d).

Japan's Nikkei 225 equities index declined 1.9% (up 6.0% y-t-d). Japanese 10-year "JGB" yields declined one basis point to negative 0.08% (down 8bps y-t-d). France's CAC40 rose 1.5% (up 13.1%). The German DAX equities index rallied 1.4% (up 9.2%). Spain's IBEX 35 equities index increased 0.4% (up 8.2%). Italy's FTSE MIB index gained 1.0% (up 16.2%). EM equities were mixed. Brazil's Bovespa index rose 1.8% (up 4.8%), and Mexico's Bolsa gained 2.3% (up 3.9%). South Korea's Kospi index fell 2.1% (up 4.9%). India's Sensex equities index increased 1.3% (up 7.2%). China's Shanghai Exchange slipped 0.4% (up 23.9%). Turkey's Borsa Istanbul National 100 index sank 6.1% (up 2.8%). Russia's MICEX equities index added 0.2% (up 5.4%).

Investment-grade bond funds saw inflows of $2.754 billion, and junk bond funds posted inflows of $590 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates sank 22 bps to a 14-month low 4.06% (down 38bps y-o-y). Fifteen-year rates fell 14 bps to 3.57% (down 33bps). Five-year hybrid ARM rates declined nine bps to 3.75% (up 9bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 13 bps to a 14-month low 4.16% (down 33bps).

Federal Reserve Credit last week declined $6.9bn to $3.921 TN. Over the past year, Fed Credit contracted $436bn, or 10.0%. Fed Credit inflated $1.111 TN, or 40%, over the past 334 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $9.3bn last week to $3.470 TN. "Custody holdings" gained $25.9bn y-o-y, or 0.8%.

M2 (narrow) "money" supply declined $11.2bn last week to $14.489 TN. "Narrow money" gained $573bn, or 4.1%, over the past year. For the week, Currency increased $1.2bn. Total Checkable Deposits dropped $40.1bn, while Savings Deposits jumped $22.7bn. Small Time Deposits gained $3.8bn. Retail Money Funds added $1.3bn.

Total money market fund assets jumped $36.5bn to $3.101 TN. Money Funds rose $243bn y-o-y, or 8.5%.

Total Commercial Paper slipped $3.7bn to $1.079 TN. CP expanded $17.4bn y-o-y, or 1.6%.

Currency Watch:

The U.S. dollar index gained 0.7% to 97.284 (up 1.1% y-t-d). For the week on the upside, the Canadian dollar increased 0.6% and the Australian dollar 0.2%. For the week on the downside, the Mexican peso declined 1.7%, the British pound 1.3%, the New Zealand dollar 1.1%, the Japanese yen 0.9%, the Norwegian krone 0.8%, the euro 0.7%, the South Korean won 0.4%, the Brazilian real 0.4%, the Singapore dollar 0.2%, the Swiss franc 0.2%, and the Swedish krona 0.1%. The Chinese renminbi increased 0.09% versus the dollar this week (up 2.48% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index increased 0.8% this week (up 5.3% y-t-d). Spot Gold fell 1.6% to $1,292 (up 0.8%). Silver dropped 1.9% to $15.11 (down 2.8%). Crude gained $1.10 to $60.14 (up 32%). Gasoline fell 2.3% (up 42%), and Natural Gas sank 3.8% (down 10%). Copper jumped 3.3% (up 12%). Wheat declined 1.8% (down 9%). Corn sank 4.6% (down 5%).

Market Instability Watch:

March 26 – Bloomberg (Stephen Spratt, Edward Bolingbroke, and Liz McCormick): “The Federal Reserve’s surprise policy shift last week shook markets, but, even still, the intensity of the ensuing drop in U.S. bond yields has puzzled many observers. A massive wave of hedging in the swaps market helps explain the scale of the eye-catching move. Treasuries rallied after the Fed signaled it was done raising interest rates for the moment, driving yields on 10-year notes down to levels last seen in 2017. That forced two sets of traders -- those who had bought mortgage bonds and those who had bet markets would remain calm -- to turn to derivatives markets to tweak their portfolios or stanch their losses. They snapped up positions in interest-rate swaps, pushing Treasury yields down even more.”

March 27 – Bloomberg (Sid Verma): “Whether you call it ‘Japanification,’ a dash for safety or a bet on the Fed’s new normal, bond bulls are charging into some of the most notorious corners of developed debt markets. As benchmark Treasury yields trade at December 2017 lows and those on German bunds sink deeper into negative territory, century bonds riddled with interest-rate risk are suddenly one of the market’s biggest outperformers. And the market value of the world’s investment-grade and high-yield bonds has jumped by almost $1.6 trillion to $55 trillion in the past three weeks, with the index racing toward record highs…”

March 25 – Bloomberg (Cecile Gutscher): “The stockpile of global bonds with below-zero yields just hit $10 trillion -- intensifying the conundrum for investors hungry for returns while fretting the brewing economic slowdown. A Bloomberg index tracking negative-yielding debt has reached the highest level since September 2017 as 10-year bunds trade in negative territory and the U.S. yield curve flashes recession warnings.”

March 24 – Bloomberg (Ruth Carson and Stephen Spratt): “Wherever you look in developed markets, sovereign bond yields are at their lowest levels in years as traders ratchet up bets that major central banks will be easing. Yields in Australia and New Zealand dropped to record lows after a closely-watched part of the U.S. curve inverted on Friday as investors wager that the Federal Reserve will need to cut rates. Trading volumes in Treasury futures were double the norm during Asian trading, while Japan’s 10-year yields fell to the lowest since 2016.”

March 27 – Financial Times (Adam Samson and Laura Pitel): “The cost to borrow Turkish liras overnight more than tripled to above 1,000% on Wednesday in a sign of how money markets have seized up after an apparent bid to stymie foreign short sellers. The offshore overnight swap rate, the cost to investors of exchanging foreign currency for lira over a set period, soared to 1,200%, after hitting 325%, the highest level since 2001, in the previous session. It was 22.6% at the end of last week, Refinitiv data show. The rising cost highlights what some analysts say is an attempt by Turkey’s government to arrest a decline in the lira, after the currency on Friday faced its heaviest plunge since the economic crisis during the summer of 2018.”

March 27 – Bloomberg (Cagan Koc and Firat Kozok): “Some foreign banks were unable to close lira swaps on Tuesday because they couldn’t find a Turkish counterparty to provide a sufficient amount of the currency, a senior official in Turkey said. The country’s central bank had to extend operating hours during which foreign lenders can wire money to Turkey to allow them more time, but some lenders were still unable to close their positions… Those foreign lenders that made a bet on a swift depreciation in the currency are now paying a price after precautions taken by the nation’s banking regulator and the central bank…”

March 27 – Bloomberg (Constantine Courcoulas and Cagan Koc): “Investors dumped Turkish bonds and stocks on Wednesday after the nation orchestrated a currency crunch to prevent the lira from sliding days before an election that will test support for President Recep Tayyip Erdogan’s rule. The cost of borrowing liras overnight on the offshore swap market soared past 1,000% at one point on Wednesday because local banks are under pressure not to provide liquidity to foreign fund managers who want to bet against the lira. A government official said the measures are temporary.”

March 27 – Bloomberg (John Ainger): “Germany’s bond market just flashed another warning sign that Europe’s biggest economy is going the way of Japan. Ten-year bond yields dropped below those of the Asian nation’s for the first time since 2016 after European Central Bank President Mario Draghi said risks for the euro area remain tilted to the downside. A wave of risk-off sentiment is spreading through global markets, adding to a rally in German bonds this year amid a deteriorating outlook for the euro area.”

March 27 – Financial Times (Claire Jones and Adam Samson): “Germany has sold 10-year debt with a negative yield for the first time since the autumn of 2016, amid fears of a worsening global economic outlook… Demand is so high for haven assets that Berlin on Wednesday sold €2.4bn in 10-year paper with an average yield of minus 0.05%, according to the German Finance Agency. The agency said it received 2.6 times more bids for the debt than it accepted.”

Trump Administration Watch:

March 29 – Bloomberg (Christopher Condon): “President Donald Trump ratcheted up his pressure on the Federal Reserve, saying that if the central bank had ‘not mistakenly raised interest rates,’ the U.S. gross domestic product would be higher and markets ‘would be in a better place.’ The president’s comment, in a Twitter post on Friday afternoon, was yet another shot across the bow of Fed Chairman Jerome Powell… ‘Had the Fed not mistakenly raised interest rates, especially since there is very little inflation, and had they not done the ridiculously timed quantitative tightening, the 3.0% GDP, & Stock Market, would have both been much higher & World Markets would be in a better place!’ the president said… Earlier Friday, White House chief economic adviser Larry Kudlow called on the Fed to ‘immediately’ cut interest rates by a half percentage point, escalating the Trump administration’s fight with the central bank and challenging its independence.”

March 27 – Bloomberg: “Even as the U.S. and China near a deal on trade, the Trump administration is becoming increasingly assertive in challenging Beijing on its geopolitical red lines. Since Sunday alone, the U.S. has sailed a warship through the Taiwan Strait, released a report criticizing travel restrictions in Tibet and hosted Uighur exiles at the State Department. The moves -- all of them defying China’s warnings against meddling in what it views as its internal affairs -- came ahead the arrival of Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer in Beijing for trade talks. All three visits by U.S. trade delegations since President Donald Trump and Chinese counterpart Xi Jinping declared their Dec. 1 tariff truce have been presaged by U.S. naval patrols through territory claimed by Beijing.”

March 27 – Reuters (Steve Holland and Lesley Wroughton): “U.S. President Donald Trump… called on Russia to pull its troops from Venezuela and said that ‘all options’ were open to make that happen. The arrival of two Russian air force planes outside Caracas on Saturday believed to be carrying nearly 100 Russian special forces and cybersecurity personnel has escalated the political crisis in Venezuela. Russia and China have backed President Nicolas Maduro, while the United States and most other Western countries support opposition leader Juan Guaido. In January, Guaido invoked the constitution to assume Venezuela’s interim presidency, arguing that Maduro’s 2018 re-election was illegitimate. ‘Russia has to get out,’ Trump told reporters in the Oval Office, where he met with Guaido’s wife, Fabiana Rosales.”

March 25 – Wall Street Journal (Nick Timiraos and Kate Davidson): “Former Trump campaign adviser Stephen Moore, the president’s latest pick for a Federal Reserve Board seat, said the central bank’s recent policy pivot shows that he was right to criticize its December interest-rate increase. Shortly after that rate increase, Mr. Moore delivered a scathing assessment of Fed Chairman Jerome Powell in a December interview with The Wall Street Journal, calling him ‘totally incompetent’ and saying he should resign. Mr. Moore said in a Journal interview Monday that the Fed’s rate increase was a mistake but that he could have chosen his words about Mr. Powell more carefully.”

March 25 – Financial Times (James Politi): “Greg Mankiw, a respected Republican economist, did not mince words when he posted his reaction to Donald Trump’s latest anti-establishment gambit — his nomination of Stephen Moore, a conservative economic analyst, for a seat on the Federal Reserve board. ‘Steve is an amiable guy, but he does not have the intellectual gravitas for this important job,’ wrote Mr Mankiw, the Harvard University professor and former chair of George W Bush’s council of economic advisers… ‘Mr Moore should not be confirmed.’ Just three months ago, Mr Mankiw had written a scathing review of Trumponomics, a book co-authored by Mr Moore, classifying it as a work of ‘rah-rah’ partisanship that ignored economic evidence. ‘In their view, the world is simple, and the opposition is just wrong, wrong, wrong,’ he said.”

March 27 – Reuters (Trevor Hunnicutt and Ann Saphir): “President Donald Trump’s expected nominee for the Federal Reserve Board of Governors, Stephen Moore, said the U.S. central bank should immediately cut interest rates by half a percentage point, according to an interview with the New York Times… Moore, a conservative economic commentator and a fellow at the Heritage Foundation, told the Times he is not a ‘sycophant for Trump’ or ‘a dove’ on monetary policy, a reference to Fed officials who favor an easier policy that supports economic growth.”

Federal Reserve Watch:

March 28 – Bloomberg (Matthew Boesler and Steve Matthews): “U.S. central bankers said the economy is still on track for solid growth this year despite concerns in financial markets that it was heading for trouble. Federal Reserve Bank of New York President John Williams, one of the U.S. central bank’s top policy makers, downplayed fears of recession risks being signaled by bond markets. James Bullard, president of the St. Louis Fed, later said he expected second-quarter growth to rebound after a sluggish start to the year, and that calls for a rate cut were ‘premature.’ For Williams -- vice chairman of the Fed’s rate-setting Federal Open Market Committee -- the ‘most likely case’ is for U.S. growth of 2% with the economy continuing to add jobs. ‘So, I still see the probability of a recession this year or next year as being not elevated relative to any year,’ he said…”

March 26 – Reuters (Noah Sin): “U.S. Federal Reserve policymakers will look at the scale of the slowdown in the Chinese and European economies to determine any possible impact on Fed policy, Charlie Evans, president of the Chicago Fed, said in Hong Kong… ‘It depends a lot on how large the slowdown would be in China, and how big the headwinds would be from European deceleration as well,’ he said…”

March 25 – Reuters (David Milliken and Marc Jones): “One interest rate hike this year ‘at most’ still makes sense given strong U.S. economic conditions, a Federal Reserve official said…, despite risks that keep him in ‘wait-and-see mode’ for now. Strong economic growth and a positive outlook could still keep a rate hike on the table this year and another in 2020, Federal Reserve Bank of Philadelphia President Patrick Harker said…. He also said the Fed will not be making ‘any drastic change in the near future’ to the kinds of bonds it keeps on its $4 trillion balance sheet.”

U.S. Bubble Watch:

March 27 – Reuters (Lucia Mutikani): “The U.S. current account deficit increased more than expected in the fourth quarter amid declining exports, pushing the overall shortfall in 2018 to its highest level in 10 years, and U.S. companies repatriated a record amount of foreign earnings last year following the Republican tax overhaul. …The current account deficit… rose 6.1% to $134.4 billion. The quarterly current account gap was the largest since the fourth quarter of 2008… The deficit increased 8.8% in 2018 to $488.5 billion, the highest level since 2008. For all of 2018, the current account deficit averaged 2.4% of GDP, the biggest share since 2012, from 2.3% in 2017.”

March 29 – Reuters: “Sales of new U.S. single-family homes increased to an 11-month high in February and sales for January were revised higher, suggesting that lower mortgage rates were starting to lift the struggling housing market. …New home sales rose 4.9% to a seasonally adjusted annual rate of 667,000 units last month, the highest level since March 2018. January’s sales pace was revised up to 636,000 units from the previously reported 607,000 units… New home sales in the South, which accounts for the bulk of transactions, rose 1.8% in February to their highest level since July 2007… At February’s sales pace it would take 6.1 months to clear the supply of houses on the market, down from 6.5 months in January.”

March 27 – Reuters (Lucia Mutikani): “The U.S. trade deficit dropped more than expected in January likely as China boosted purchases of soybeans, leading to a rebound in exports after three straight monthly declines. The Commerce Department said on Wednesday the trade deficit declined 14.6%, the largest decline since March 2018, to $51.1 billion also as softening domestic demand and lower oil prices curbed the import bill.”

March 25 – Wall Street Journal (Ben Eisen): “The federal agency that insures mortgages for first-time home buyers is tightening its standards, concerned it is allowing too many risky loans to be extended. The Federal Housing Administration told lenders this month it would begin flagging more loans as high risk. Those mortgages, many of which are extended to borrowers with low credit scores and high loan payments relative to their incomes, will now go through a more rigorous manual underwriting process… The FHA’s decision to tighten underwriting standards could mean fewer first-time home buyers are able to get mortgages. Roughly 40,000 to 50,000 loans a year likely would be affected, or about 4% to 5% of the FHA-insured mortgages originated annually in recent years…”

March 25 – Wall Street Journal (Eliot Brown): “Ride-hailing company Lyft Inc. is leading a parade of Silicon Valley companies to Wall Street that display an unusual quality with parallels to companies going public in the dot-com era: lots of red ink. With its initial public offering expected this week, Lyft will serve as one of the biggest tests ever of investors’ appetite for money-losing companies. Lyft posted last year a loss of $911 million, more than any other U.S. startup lost in the 12 months preceding its IPO… Lyft’s loss, in the sixth year since the company’s founding, could soon be eclipsed by 10-year-old Uber Technologies Inc., which has been losing more than $800 million a quarter. Uber plans to go public later this year. Many other highly funded startups with a propensity for heavy spending similar to Lyft and Uber are considering listing as they age.”

March 27 – Financial Times (Joe Rennison): “Homeowners across the US are rushing to take advantage of lower borrowing costs by refinancing their mortgages, helping in the process to fuel the sharp rally in government bonds. Applications to refinance home loans rose about 12% in volume last week from the previous week… This means investors that own the debt expecting to be paid a certain coupon for a certain period of time could soon find the loans fully paid off. To guard against that possibility, some big money managers are buying Treasuries and interest rate swaps in an attempt to offset, at least partially, the lost income from the mortgages.”

March 26 – CNBC (Diana Olick): “Home prices are rising, but the gains are shrinking, since fewer buyers are able to afford the homes available for sale. Nationally, prices rose 4.3% annually in January, down from the 4.6% gain in December, according to the S&P CoreLogic Case-Shiller price index. The 10-city composite rose 3.2%, down from 3.7% in the previous month. The 20-city composite gained 3.6% year over year, down from 4.1% in December. The last time it advanced this slowly was April 2015. ‘In 16 of the 20 cities tracked, price gains were smaller in January 2019 than in January 2018,’ said David Blitzer, managing director… at S&P Dow Jones Indices. ‘Only Phoenix saw any appreciable acceleration. Some cities where prices surged in 2017-2018 now face much smaller increases.’”

March 27 – Wall Street Journal (Laura Kusisto): “The exurbs, the engine of the American housing market, are back. A decade ago, the sight of new homes under construction in Maricopa, an enclave of tidy cul-de-sacs 35 miles from downtown Phoenix, was almost unimaginable. Four in five homeowners were underwater, with their outstanding mortgages worth more than their properties… Neighbors felt compelled to cut the hedges and clean up garbage at empty houses. Last year, Maricopa issued permits for nearly 1,000 new homes. In the depths of the housing downturn, in 2010, it issued just 110. Across the country, the housing market overall has slowed. But in the regions just beyond the affluent suburbs, new home building and sales are showing signs of life.”

March 26 – CNBC (Robert Ferris): “U.S. auto sales are falling as vehicle prices climb, indicating that buyers at the lower end are getting squeezed out of the new car market… First-quarter auto sales are expected to drop by nearly 2.5% from a year earlier, to 4 million units, according to J.D. Power and LMC Automotive. Retail sales, which exclude sales to rental car companies and other commercial businesses, are expected to drop by about 5% to 2.9 million units. It’s the first time first-quarter retail sales are projected to fall short of 3 million units in six years…”

March 26 – Bloomberg (Ben Steverman): “The bad news is that almost half of Americans approaching retirement have nothing saved in a 401(k) or other individual account. The good news is that the new estimate, from the U.S. Government Accountability Office, is slightly better than a few years earlier. Of those 55 and older, 48% had nothing put away in a 401(k)-style defined contribution plan or an individual retirement account, according to a GAO estimate for 2016… That’s an improvement from the 52% without retirement money in 2013.”

March 26 – Reuters (Ann Saphir): “Federal Reserve policymakers need to be vigilant that muted inflation does not become ingrained in their expectations, but the U.S. central bank’s patient approach to monetary policy should allow inflation to reassert itself, San Francisco Federal Reserve Bank President Mary Daly said…”

March 27 – Financial Times (Robin Wigglesworth, Richard Henderson and Shannon Bond): “The New York Stock Exchange zealously enforces its dress code for the trading floor, even insisting that beards, moustaches and sideburns be kept ‘neatly trimmed’. But for one day last week the floor looked more like a Bruce Springsteen convention, with traders decked out in stonewashed jeans and denim jackets… It is also a reminder of the fierce battles that are being waged in US markets between exchanges for prestigious listings, bankers for the fees initial public offerings bring, and among big technology companies hustling to sell shares before markets turn turbulent again. A fear of missing out is one that haunts many executives, according to Craig Coben, vice-chairman of global capital markets at Bank of America Merrill Lynch. ‘When the IPO window opens you usually want to be one of the first ones out,’ he said. ‘That is especially true now, given that the outlook is pretty uncertain. There’s still a fear that we might have another market correction.’”

March 26 – Wall Street Journal (Konrad Putzier): “Private real-estate fund managers, sitting on record amounts of cash, are finding it increasingly difficult to spend all that money within the deadlines they promised investors. Funds with fixed lifespans generally promise investors they will spend the money they commit within three to five years. But as of last June, closed-end real-estate vehicles launched in 2013 and 2014 still held $24.8 billion in dry powder…, according to research and data firm Preqin Ltd. The problem is likely to get worse. The total amount of dry powder held by closed-end private property funds increased to a record $333 billion this month, up from $134 billion at the end of 2012… In a 2018 survey, 68% of real-estate fund managers told Preqin that it was more difficult to find attractive investments than it had been a year before.”

China Watch:

March 27 – Reuters (Kevin Yao and Yawen Chen): “China will cut ‘real interest rate levels’ and lower financing costs for companies, Premier Li Keqiang said on Thursday in a speech at the annual Boao forum held in the southern island of Hainan.”

March 26 – Reuters (Stella Qiu, Ryan Woo and Min Zhang): “China’s industrial firms posted their worst slump in profits since late 2011 in the first two months of this year…, as increasing strains on the economy in the face of slowing demand at home and abroad took a toll on businesses… Profits notched up by China’s industrial firms in January-February slumped 14.0% year-on-year to 708.01 billion yuan ($105.50bn)… It marked the biggest contraction since Reuters began keeping records in October 2011.”

March 26 – Bloomberg: “China’s economy showed ‘an unmistakable first-quarter recovery’ after a weak end to 2018, though the level of new borrowing casts doubt on the sustainability of the rebound, according to the China Beige Book. ‘The recovery extends across both sectors and geographies, with every major sector and each one of our regions showing better revenue results than Q4,’ CBB International said… ‘Yet this rally didn’t appear out of nowhere, and there are at least three compelling reasons to doubt its staying power: credit, credit, and credit.’”

March 24 – Bloomberg: “China has embraced the idea of defaults imposing some discipline on debtors in its bond market. And some of the most troubled debtors are local governments’ financing vehicles. So an LGFV default has long seemed on the cards. But it just isn’t happening. Moody’s… thought the first one might come in 2017. Almost two years later, there have been some close calls -- including with a late payment by a unit owned by Qinghai province on a dollar bond last month that caused ripples through the investment community -- but no default. What it suggests is China’s leadership isn’t prepared for a borrower with a regional authority’s imprimatur to renege on its principal, triggering higher borrowing costs across a swathe of the world’s third-largest bond market.”

March 25 - Bloomberg (Shuli Ren): “China’s most prominent development bank has been noticeably low-profile lately. For the last decade, the 16 trillion yuan ($2.39 trillion) China Development Bank, and its less-muscular cousins Agricultural Development Bank of China Ltd. and Export-Import Bank of China, were on the forefront of every major stimulus push. In 2008, CDB financed the 4 trillion yuan spending pledge by the Ministry of Finance, its former controlling shareholder. The bank shifted its focus to the monetary side after 2015, disseminating 3.5 trillion yuan of helicopter money for the central bank via shantytown developments. At this year’s National People’s Congress, though, policy banks seemed to be getting sidelined. There was hardly any mention of them; instead, the heavy stimulus lifting will be financed by special-purpose municipal bonds.”

March 27 – Wall Street Journal (Stella Yifan Xie): “The world’s biggest money-market fund, overseen by China’s Ant Financial Services Group, drew 114 million new investors last year despite regulatory pressure to shrink. Ant’s asset-management arm… said 588 million users of Alipay, Ant’s highly popular mobile-payments network, had parked cash in its flagship Tianhong Yu’e Bao fund at the end of 2018. That means more than a third of China’s population is now invested in the fund, whose assets under management totaled 1.13 trillion yuan ($168.26bn) at the end of last year.”

March 26 – Bloomberg: “Hui Ka Yan, China’s second-richest man and chairman of one of the nation’s biggest residential developers, has a funding challenge on his hands. China Evergrande Group has debt maturing in 12 months or less that exceeds its cash by 114 billion yuan ($17bn)… The gap is partly the result of a drop in its cash buffer in the second half of 2018.”

Central Bank Watch:

March 27 – Reuters (Francesco Canepa and Balazs Koranyi): “The European Central Bank could further delay an interest rate hike and may look at measures to mitigate the side-effects of negative interest rates, ECB President Mario Draghi said…, warning that risks to growth were on the rise… ‘Just as we did at our March meeting, we would ensure that monetary policy continues to accompany the economy by adjusting our rate forward guidance to reflect the new inflation outlook,’ Draghi told a conference… ‘If necessary, we need to reflect on possible measures that can preserve the favorable implications of negative rates for the economy, while mitigating the side effects, if any… That said, low bank profitability is not an inevitable consequence of negative rates.’”

March 26 – Bloomberg (Tracy Withers): “New Zealand’s central bank joined the global shift away from higher interest rates, saying its next move is more likely to be a cut and sending the kiwi dollar tumbling by the most in seven weeks. ‘Given the weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of our next OCR move is down,’ Governor Adrian Orr said… after leaving the official cash rate at 1.75%. ‘Core consumer price inflation remains below our 2% target mid-point, necessitating continued supportive monetary policy.’”

March 26 – Reuters (Dhara Ranasinghe, Jennifer Ablan, Virginia Furness): “‘Whatever it takes’ is a daunting legacy for any departing central bank chief to bequeath a successor and leaves world markets anxious about what is to come after Mario Draghi leaves the European Central Bank later this year. Draghi’s 2012 pledge to save the euro won the confidence of financial markets and arrested the currency bloc’s debt crisis. Investors admired his willingness to break new policy ground — maneuvering past internal and external opposition — and clear communication of the ECB’s thinking. With growth and inflation flagging again, and the ECB’s policy arsenal depleted, whoever succeeds him may need to be similarly bold. Growing questions about the orthodoxies of economic policy — including monetary policy models — could present an additional test.”

March 27 – Bloomberg (William Horobin and Catherine Bosley): “The European Central Bank is hoping the economic situation will improve through 2019, but has the necessary tools to react if it worsens, Governing Council member Francois Villeroy de Galhau said… ‘We are continuing to follow the economic situation very closely, and without any doubt we have the tools and margins for maneuver that are sufficiently powerful to act as much as necessary,’ Villeroy said…”

March 22 – Bloomberg (William Horobin and Craig Stirling): “Jens Weidmann may struggle to pass the test that France’s finance minister is setting for prospective successors to European Central Bank President Mario Draghi. In a rare foray on the matter this week, Bruno Le Maire lavished praise on the Italian incumbent for quantitative easing, and suggested France would want someone with similar ‘courage’ as a replacement…. ‘Draghi’s term has changed deeply the approach to conducting monetary policy in the euro zone,’ said Bruno Cavalier, economist at Oddo BHF. ‘The only candidate who would represent a break from that is Weidmann.’”

Brexit Watch:

March 24 – Financial Times (Wolfgang Münchau): “Forecasting Brexit is still the same old mug’s game it always was. But the probability of a no-deal Brexit has risen dramatically since last week’s summit of European leaders. That scenario can be avoided, for now, if Theresa May were to be ousted as prime minister. The EU would always accept a request for a further delay in such a situation. But it would still insist Britain organise European Parliament elections on May 23 — the UK cannot be allowed to undermine the legitimacy of the European Parliament while it is negotiating its way out. And a new leader would face the same problems in finding a way out of the current impasse. The EU will not renegotiate Mrs May’s withdrawal agreement.”

Europe Watch:

March 24 – Reuters (Joseph Nasr): “The risk of Britain leaving the European Union without a deal is the biggest risk facing the slowing euro zone economy in the short term, Finnish central bank chief Olli Rehn told Germany’s Die Welt newspaper… ‘In the short term Brexit is surely the biggest threat,’ said Rehn, who sits on the European Central Bank’s rate-setting Governing Council. ‘Financial markets seem to be too relaxed and appear to underestimate the risk.’ He said the ECB had made arrangements with the Bank of England to blunt turbulence in the case of a disorderly Brexit.”

March 28 – Financial Times (Valentina Romei): “Lending to eurozone businesses gathered speed in February, the largest increase in the annual rate in more than two years, but remained weak in peripheral member states… In February, adjusted lending growth to non-financial companies rose 3.7% compared with the same month last year, picking up the pace since the previous month’s 3.4%...”

EM Watch:

March 25 – Financial Times (Laura Pitel and Katie Martin): “Turkish authorities have turned up the heat on western institutions with a critical view of the country’s economic policies, but the prospects of an investment backlash mean that probes into US bank JPMorgan Chase are unlikely to lead to a real clampdown, say analysts. Over the weekend, Turkey’s capital markets board and the country’s banking supervisor launched parallel investigations into the… investment bank, responding to what they described as ‘misleading’ and ‘manipulative’ advice from the bank to sell the lira. President Recep Tayyip Erdogan threatened a ‘very heavy price’ for foreign groups ‘trying to provoke us’.”

March 28 – Financial Times (Laura Pitel and Adam Samson): “Turkey has burnt through around a third of its foreign reserves this month in an effort to prop up the faltering lira ahead of local elections this weekend, spooking investors and sending the currency sliding on Thursday… When converted into dollars, the fall in the first three weeks of March was roughly $10bn, or 29%, leaving the reserves at about $24.7bn…”

March 28 – Reuters (Tuvan Gumrukcu and Ece Toksabay): “President Tayyip Erdogan said on Thursday he was ‘in charge of Turkey’s economy’ as he piled pressure on the central bank to cut interest rates despite double-digit inflation and a tumbling lira… The Turkish currency dived 5% against the dollar on Thursday after banks started providing lira liquidity to the London market again following several days of authorities withholding liquidity to support the currency. The renewed selling pressure stems from concerns about Turkey’s balance of payments, its ability to service its foreign debt, and repeated calls by Erdogan, who has described himself as an ‘enemy of interest rates’, for cheaper credit.”

March 27 – Bloomberg (Kerim Karakaya, Cagan Koc and Asli Kandemir): “The last time Turks went to the polls, the country’s paramount leader for the past 16 years vowed to tighten his grip on the economy. With another national campaign — this time for municipal offices — nearing its climax, he’s rolling out the same playbook. In the past eight months, President Recep Tayyip Erdogan’s government has imposed price controls, forced lenders to keep credit flowing and banned the use of dollars in most contracts. Most recently, he trained his invective on a familiar target: foreign bankers, with the promise of an investigation into… JPMorgan… for predicting a decline in the lira.”

March 26 – Reuters (Jorge Otaola and Cassandra Garrison): “Argentina’s peso currency weakened 1.34% to an all-time low close of 42.65 per dollar on Tuesday, as concerns about high inflation and political uncertainty ahead of the October presidential election dented confidence in the economy.”

March 27 – Bloomberg (Raymond Colitt and Simone Preissler Iglesias): “Three months into Brazilian President Jair Bolsonaro’s term, voters, investors and some supporters are starting to doubt if he can deliver on pledges to kick-start the economy and crack down on crime. At times, his government even looks like it could fall apart. The 64-year-old former Army captain has plummeted in opinion polls and antagonized key allies, while his cabinet is plagued by intrigue and infighting. Meanwhile, support for a pension overhaul looks more uncertain than ever, raising the risk of further debt increases and sovereign credit rating downgrades.”

Global Bubble Watch:

March 25 – Financial Times (Leslie Hook): “Global carbon dioxide emissions rose to their highest levels last year after a surge in energy demand stoked by a strong economy and extreme weather, according to the world’s energy watchdog. The… International Energy Agency said energy demand rose 2.3% last year — its fastest rate since 2010 — and that the growth was met mainly by fossil fuels. That pushed global emissions of carbon dioxide to a record high of 33bn tonnes in 2018, up 1.7% from the previous year. Fatih Birol, the head of the IEA, said the rise in energy demand was ‘exceptional’ and a ‘surprise for many’, moving the world further away from its climate goals.”

Japan Watch:

March 25 – Reuters (Leika Kihara): “Bank of Japan policymakers debated the feasibility of ramping up monetary stimulus at their rate review this month as heightening overseas risks weighed on the country’s fragile economy, a summary of opinions of the meeting showed on Tuesday.”

Fixed-Income Bubble Watch:

March 25 - Bloomberg (Finbarr Flynn): “Leveraged loans are suffering a ‘slow bleed’ and are the weakest link in U.S. credit markets, says UBS Group AG, adding to an expanding list of warnings. ‘We are growing more concerned over the deterioration in loan fundamentals, which is broad-based and appears less related to trade and more to fading cyclical momentum and a hangover from an M&A-driven debt boom,’ UBS credit strategists led by Matthew Mish wrote…”

March 26 – Wall Street Journal (Gunjan Banerji): “Illinois and its biggest city kick off hundreds of millions of dollars in borrowings this week, a test of investors’ willingness to lend to stressed governments prone to spending more money than they bring in. The state launched borrowings with about a $440 million bond deal on Tuesday, followed by a roughly $730 million sale by Chicago… Analysts expect what could be billions more especially from the state, as it puts together funds to do everything from paying retirees’ pensions to launching capital projects.”

Leveraged Speculator Watch:

March 25 – Financial Times (Robin Wigglesworth): “In 1988, Revolution Books, a tatty Communist bookstore near New York’s Union Square, got some strange new upstairs neighbours: a bunch of geeky programmers trying to crack the code to financial markets. In the early days, the embryonic hedge fund founded by David Shaw, a former computer science professor at Columbia University, was a ramshackle start-up. Exposed pipes and extension cords meant that tripping on a cable could take out its entire trading system. Yet today DE Shaw is one of the hedge fund industry’s biggest players, managing over $50bn of assets.”

March 27 – Bloomberg: “Three months after news first emerged of a hedge fund blowup that threatens to saddle Citigroup Inc. with millions of dollars in losses, details of the fund’s implosion are becoming clearer. GF Securities Co. said… its GTEC Pandion Multi-Strategy Fund SP lost $139 million in 2018 primarily on foreign exchange trades, leaving it with negative capital. As the fund’s losses spiraled last year, it faced margin calls from Citigroup, its prime broker… Pandion’s losses stemmed mainly from trades in the Turkish Lira…”

Geopolitical Watch:

March 28 – Reuters (Tom Balmforth and Maxim Rodionov): “Russia said on Thursday it had sent ‘specialists’ to Venezuela under a military cooperation deal but said they posed no threat to regional stability, brushing aside a call from U.S. President Donald Trump to remove all military personnel from the country.”

March 26 – AFP: “Secretary of State Mike Pompeo warned Russia Monday the United States will not ‘stand idly by’ as Moscow inserts military personnel into Venezuela to support the regime of President Nicolas Maduro. In a phone call with Foreign Minister Sergei Lavrov, Pompeo denounced the growing Russian military reinforcements as prolonging the political crisis in the South American country. Pompeo told Lavrov ‘the United States and regional countries will not stand idly by as Russia exacerbates tensions in Venezuela,’… ‘The continued insertion of Russian military personnel to support the illegitimate regime of Nicolas Maduro in Venezuela risks prolonging the suffering of the Venezuelan people who overwhelmingly support interim President Juan Guaido,’ he said.”

March 24 – Reuters (Idrees Ali): “The United States sent Navy and Coast Guard ships through the Taiwan Strait on Sunday, the U.S. military said, as part of an increase in the frequency of movement through the strategic waterway despite opposition from China. The voyage risks raising tensions with China further but will likely be viewed by self-ruled Taiwan as a sign of support from Washington amid growing friction between Taipei and Beijing.”

March 23 – Reuters (Giselda Vagnoni): “Italy endorsed China’s ambitious ‘Belt and Road’ infrastructure plan on Saturday, becoming the first major Western power to back the initiative to help revive the struggling Italian economy. Saturday’s signing ceremony was the highlight of a three-day trip to Italy by Chinese President Xi Jinping, with the two nations boosting their ties at a time when the United States is locked in a trade war with China. The rapprochement has angered Washington and alarmed some European Union allies, who fear it could see Beijing gain access to sensitive technologies and critical transport hubs.”

Friday Evening Links

[Reuters] Trade hopes spark Wall Street rally; S&P set for best quarter since 2009

[Reuters] No-deal Brexit fears rise as parliament sinks May's deal

[Bloomberg] Trump Scolds the Fed Over ‘Mistakenly Raised Interest Rates’

[CNBC] White House advisor Larry Kudlow says Fed should ‘immediately’ cut rates

[Reuters] White House wants Fed to reverse on policy -Kudlow

[Reuters] Fed's Quarles: More rate hikes likely needed 'at some point' given outlook

[Bloomberg] The ECB's Power Struggle Will All End in Tiers

[Reuters] White House warns Russia over troops in Venezuela, threatens sanctions

Thursday, March 28, 2019

Friday's News Links

[Reuters] Global stocks rise on trade optimism, set for best quarter since 2012

[BBC] MPs reject May's EU withdrawal agreement

[Reuters] Oil prices set for biggest first-quarter gain since 2009 on U.S. sanctions, OPEC cuts

[Reuters] New home sales rise to 11-month high in February

[Reuters] U.S. consumer spending barely rises in January

[Reuters] U.S., China hold 'constructive' trade talks in Beijing

[Reuters] Brexit at a crossroads: May puts her deal to 'last chance' vote in parliament

[CNBC] London house prices suffer their biggest drop in 10 years as Brexit fears bite

[Bloomberg] Supercycle in U.S. Debt Helps to Curb Treasury Borrowing Costs

[Reuters] U.S. bringing 'maximum pressure' on Venezuela: sanctions official

[Reuters] Erdogan fights to hold Turkey's cities in bitter election battle

[WSJ] How Tech Unicorns Are Raking In Cash but Losing Big Money

[WSJ] The 4% Mortgage Is Back

[WSJ] Stephen Moore’s Unusual Route to the Fed as a Political Warrior

Thursday Evening Links

[Reuters] Wall Street ends up as yields, trade optimism rise

[CNBC] Mortgage rates see biggest weekly drop in a decade

[Yahoo] Turkey burns through a third of foreign reserves as lira plummets 5%

[Reuters] Kudlow says U.S. could lift some tariffs on China as part of trade deal

[AP] Top economists give Trump’s Fed pick Moore a rocky reception

[Bloomberg] John Williams Downplays Recession Fears, Stresses Flexible Fed Policy

[Bloomberg] Wall Street's ‘Fear Gauge’ Defies Growth Panic Flashed in Bonds

[Reuters] Turkey finance minister says share and bond markets expected to normalise in coming days

[Bloomberg] Global Investors May Spur Change in China’s $13 Trillion Debt Market

[Reuters] Lyft valued at $24.3 billion in first ride-hailing IPO

[Reuters] Venezuela bars Guaido from holding public office for 15 years

Wednesday, March 27, 2019

Thursday's News Links

[AP] Global shares mixed as US, China set to resume trade talks

[Reuters] Bond yields on the canvas, Turkey's lira on the ropes

[Reuters] Oil falls as Trump calls on OPEC to boost output

[Reuters] U.S. fourth-quarter GDP revised down; profits weak

[Reuters] Exclusive: China makes unprecedented proposals on tech transfer, trade challenges remain - U.S. officials

[Reuters] China will cut real interest rate levels, lower financing costs: Premier Li

[Bloomberg] Trump's Warships Test China’s Red Lines as Trade Talks Grind On

[Reuters] May's offer to quit fails to break Britain's Brexit stalemate

[UK Guardian] Turmoil in Turkey's financial markets after currency crackdown

[Bloomberg] Wall Street Sees Hurdles for Trump's ‘Vague’ Fannie-Freddie Plan

[Reuters] Erdogan says Turkey must cut interest rates to fight inflation

[Reuters] Russia says it sent 'specialists' to Venezuela, rebuffs Trump

[FT] What’s behind the big bond rally?

[FT] Turkey burns through foreign reserves to shore up lira

[FT] February lending to eurozone businesses picks up

Wednesday Evening Links

[Reuters] Wall Street bogged down by growth worries, falling yields

[CNBC] US 10-year Treasury yield touches new 14-month low as yield curve continues to flatten

[Reuters] U.S. current account deficit hits 10-year high; firms bring back more foreign profits

[BBC] Brexit: Theresa May vows to stand down if deal is passed

[Reuters] Fed's George says wait-and-see approach needed for policy

[CNBC] Homebuyers face far fewer bidding wars as the housing market cools off

[Bloomberg] Investors Scramble for Liras as Turkish Swap Rates Touch 1,000%

[Bloomberg] It’s Erdogan Against the Markets After JPMorgan Watershed

[Bloomberg] German Bund Yields Drop Below Japan for First Time Since 2016

[Bloomberg] Villeroy Says ECB Is Ready If the Euro-Area Downturn Worsens

[Reuters] Trump tells Russia to get its troops out of Venezuela

[WSJ] Fed Officials Push Back on Market’s Rate-Cut Belief

[WSJ] Ten-Year Yield Drops Below 2.4%, Hitting Fresh Lows

[WSJ] Turkish Markets in Turmoil as Key Elections Loom

[FT] A leveraged loan bust will hurt less than subprime mortgages

[FT] Investors in EM currencies walk a tightrope between risk and return

Tuesday, March 26, 2019

Wednesday's News Links

[Reuters] Wall Street flat as global growth fears persist

[Ahval] Turkish lira swap rates jump to 600 percent

[Reuters] U.S. trade deficit narrows sharply as exports rebound

[Reuters] Trump Fed nominee Moore says central bank should cut rates: NYT

[Bloomberg] Here's Why U.S. Bond Yields Plunged So Much Over the Past Week

[Bloomberg] China’s First Quarter Recovery Is Unmistakable, Beige Book Says

[Reuters] China's industrial profits shrink most since late 2011

[Bloomberg] A $17 Billion Funding Hole Looms for Developer Evergrande

[Bloomberg] New Zealand Joins Dovish Shift as Governor Puts Rate Cut in Play

[AP] European Central Bank ready to act if trouble hits economy

[Reuters] ECB can delay rate hike again, mitigate negative rates if needed: Draghi

[Bloomberg] After Only 86 Days, Brazil's Bolsonaro Is Already in Trouble

[WSJ] Tax Changes Hit Overseas Profits of Some U.S. Companies

[WSJ] ECB’s Draghi Hints at Drawbacks of Negative Rates

[WSJ] A Decade After the Housing Bust, the Exurbs Are Back

[WSJ] Cash-Strapped Illinois, Chicago Seek Billions From Investors

[WSJ] More Than a Third of China Is Now Invested in One Giant Mutual Fund

[FT] Crackdown on short selling roils Turkish money markets

[FT] US mortgage refinancing rush sends Treasuries higher

[FT] Wall Street readies for IPO boom as ‘unicorns’ stampede to market

[FT] The path to reform looks as rocky as ever for emerging economies

[FT] Germany sells Bunds at negative yield for first time since 2016

Tuesday Evening Links

[Reuters] Wall Street ends up, financials break five-day losing streak

[Reuters] Argentina's peso hit by political uncertainty, plumbs new lows

[Reuters] Fed is falling short on inflation goal, U.S. central banker warns

[Bloomberg] Almost Half of Older Americans Have Zero in Retirement Savings

[WSJ] Real-Estate Funds Have a Problem: Too Much Cash

[FT] DE Shaw: inside Manhattan’s ‘Silicon Valley’ hedge fund

Monday, March 25, 2019

Tuesday's News Links

[Reuters] Wall Street moves higher on tech, financials boost

[Reuters] U.S. housing starts fall on weak single-family homebuilding

[CNBC] Home prices in January see smallest gain in nearly 4 years: S&P Case-Shiller

[CNBC] US auto sales are falling, and cars are more expensive than ever

[CNBC] Bond market says not only is a recession coming, but the Fed will cut interest rates to stop it

[Reuters] China, Europe slowdown's scale to determine impact on Fed policy: Evans

[AP] UK government defiant as Parliament takes control of Brexit

[Reuters] Life after ECB's 'Super Mario' unnerves global investors

[Reuters] Global strain stirs BOJ debate of more easing in March

[Bloomberg] The Muscle That Backed China's Stimulus Is Quaking

[Bloomberg] Leveraged Loans Are the Weakest Link in U.S. Credit, UBS Says

[WSJ] Lyft Leading Wave of Startups That Will Make Debuts With Giant Losses

[WSJ] Stephen Moore Says Fed’s Pivot Validates Criticism of Interest-Rate Increases

[FT] Turkey props up lira after accusing JPMorgan of ‘provocation’

[FT] Global carbon dioxide emissions hit record high

Monday Evening Links

[Reuters] Wall Street falls on global growth worries

[Reuters] Fed rate cut seen nearer as yield curves invert

[Reuters] France to seal deals with China but challenge on Belt and Road project

[Bloomberg] The $10 Trillion Pool of Negative Debt Is a Late-Cycle Reckoning

[AFP] US will not 'stand idly' on Russian role in Venezuela: Pompeo

Sunday, March 24, 2019

Monday's News Links

[Reuters] Positive German data tempers equity selloff, safe havens in demand

[Reuters] Oil prices fall as markets brace for potential U.S. recession

[Reuters] No-deal Brexit increasingly likely - EU officials

[Reuters] Fed's Evans says good time to pause and be cautious

[Reuters] Fed's Harker still sees one rate hike 'at most' this year

[Bloomberg] One by One, Global Bond Markets Are Flashing the Same Warning

[Bloomberg] El-Erian: There’s Danger in Misreading the Inverted Yield Curve

[Bloomberg] Is the Recession Red Flag Waving at Emerging Markets?

[Bloomberg] China Local Government Debt - The Bomb That Doesn't Explode

[Reuters] U.S. Navy, Coast Guard ships pass through strategic Taiwan Strait

[WSJ] Thinning Liquidity in Key Futures Market Worries Traders

[WSJ] FHA Clamps Down on Risky Government-Backed Mortgages

[FT] Donald Trump’s Fed nominee faces broad backlash

[FT] Brexit is part of a wider European struggle

Sunday Evening Links

[Reuters] Yen strengthens, shares skid on U.S. recession fears

[Reuters] Brexit up in the air as May pushes divorce deal for third time

[Reuters] Markets seem to underestimate threat of Brexit - ECB's Rehn

[Reuters] Russian air force planes land in Venezuela carrying troops: reports

Sunday's News Links

[Reuters] U.S.'s Lighthizer, Mnuchin to travel to China for trade talks: White House

[Reuters] Brexit up in the air as May faces possible plot, parliament tries to grab control

[Reuters] British PM May facing plot from minister to oust her: Sunday Times reporter

[Bloomberg] Turkey Probes JPMorgan After Lira's Worst Drop Since 2018 Crash

[FT] A no-deal Brexit remains highly likely

Friday, March 22, 2019

Weekly Commentary: Doing Harm with Uber-Dovish

This week’s FOMC meeting will be debated for years – perhaps even decades. The Fed essentially pre-committed to no rate hike in 2019. The committee downgraded both its growth and inflation forecasts. Having all at once turned of little consequence, we can now dismiss the 3.8% unemployment rate and the strongest wage growth in a decade. Moreover, the Fed announced it would be scaling back and then winding down balance sheet “normalization” by September. This put an impressive exclamation mark on a historic policy shift since the December 19th meeting. At least for me, it hearkened back to a Rick Santelli moment: “What’s the Fed afraid of?”

Markets came into the meeting fully anticipating a dovish Fed. Our central bank returned to the old playbook of beating expectations. In the process, the Federal Reserve doused an already flaming fixed-income marketplace with additional fuel.

After trading to 3.34% during November 8th trading, ten-year Treasury yields ended this week a full 90 bps lower at 2.44%, trading Friday at the lowest yields since December 2017. Yields were down 15 bps this week – 17 bps from Tuesday’s (pre-Fed day) close - and 28 bps so far in March. And with three-month T-bill rates at 2.40%, the three-month/10-year Treasury curve flattened to the narrowest spread since 2007 (briefly inverting Friday). Five-year Treasury yields ended the week inverted 16 bps to three-month T-bills – and two-year Treasuries were inverted about eight bps.

Collapsing sovereign yields were a global phenomenon. Japan’s 10-year JGB yields declined four bps Friday to negative eight bps (-0.08%), the lowest yields since September 2016. With Germany’s Markit Manufacturing index sinking to the lowest level since 2012 (44.7), bund yields dropped seven bps to negative 0.015% - also lows going back to September 2016. Swiss 10-year yields sank 12 bps this week to negative 0.45%. Two-year German yields closed out the week at negative 0.57%. UK 10-year yields dropped 20 bps (1.01%), Spain 12 bps (1.07%) and France 11 bps (0.35%).

The destabilizing impact of the Fed’s shift back to an Uber-Dovish posture was more conspicuous by week’s end. The S&P500 dropped 1.9% in Friday trading, with financial stocks coming under heavy pressure. In three sessions, the KBW Bank Index was slammed 8.2% and the Broker/Dealers (NYSE Arca) lost 5.6%.

It wasn’t only the banks’ shares under pressure. Bank Credit default swap (CDS) prices reversed sharply higher this week, with European bank debt in the spotlight. Deutsche Bank 5yr CDS surged 24 bps this week to 168 bps, the largest weekly gain since late-November. UniCredit CDS jumped 22 bps (150bps), Intesa Sanpaulo 21 bps (159bps) and Credit Suisse 16 bps (84bps). An index of European subordinated bank debt surged 31 bps this week (to 177bps), the largest weekly gain since October 2014. Pressure on European bank CDS spilled over into European corporates. After trading to one-year lows in Tuesday's session, a popular European high-yield CDS (iTraxx Crossover) reversed 22 bps higher in three sessions (to 281bps) – posting its worst week since mid-December.

Friday trading saw European CDS instability jump the Atlantic. Late-week losses saw most major U.S. bank CDS rise modestly for the week. After closing Tuesday near one-year lows, U.S. investment-grade corporate CDS jumped 10 bps in three sessions to end the week about 10 bps higher. This index suffered its largest weekly gain (higher protection costs) since the week of December 21 (reducing y-t-d decline to 20bps). The week saw junk bonds notably underperform. Sinking financial stocks, widening spreads and rising CDS prices fed into equities volatility. After ending last week at the lows (12.88) since early-October, the VIX popped to 16.48 (also the largest weekly gain since the week of December 21).

It’s now commonly accepted that the Federal Reserve erred in raising rates 25 bps in December. I hold the view that Chairman Powell had hoped to lower the “Fed put” strike price. The Fed was willing to disregard some market instability, hoping to begin the process of the markets standing on their own. The Fed just didn’t appreciate the degree of latent market fragility that had been accumulating over the years. I don’t fault them for trying.

In the name of promoting financial stability after a decade of extraordinary stimulus measures, it was prudent for the Fed to adhere to a course of gradual rate normalization even in the face of some market weakness. GDP expanded at a 3.4% rate in Q3 and slowed somewhat to 2.6% during Q4. After a decade-long expansion, periods of economic moderation should be expected (and welcomed).

Some analysts see this week’s dovish posture as part of a FOMC effort to rectify its December misdeeds. Markets now see about a 60% probability of a 2019 rate cut – with zero likelihood of a hike through January 2020. The Fed’s dot plot - still with one additional rate increase in 2020 – has lost all market credibility.

March 22 – Bloomberg (Matthew Boesler and Jeanna Smialek): “Federal Reserve policy makers have concluded that when in doubt, do no harm. Welcome to the new abnormal. Six months ago, U.S. central bankers thought they’d soon be returning to the days of on-target inflation, full employment and interest rates that, while lower than in decades past, would still need to rise into growth-restricting territory to keep things on track. But in a watershed moment, the Federal Reserve surprised investors… by slashing rate projections to show no hike this year. Officials signaled expectations for a slowdown in the economy… and they no longer expect inflation to rise above their 2% target. The move was a serious about-face. Since September 2017, they had signaled they would probably need to eventually raise rates above their estimate of the so-called neutral level for the economy… to slow the expansion and protect against the possibility of higher inflation. That was based on a longstanding view in the economics profession about how the economy works: If central bankers allow the unemployment rate to fall too far below its lowest sustainable level by keeping rates too low, then inflation will rise.”

There’s been a bevy of interesting analysis the past few days. The “New Abnormal” from the above Bloomberg article headline caught my attention. Responding to “New Normal” (Pimco) pontification, I titled an October 2009 CBB “The Newest Abnormal.” My argument almost a decade ago was that “activist” central banks were just doing what they had done repeatedly – only more aggressively: responding to bursting Bubbles with reflationary policymaking that would ensure the inflation of only bigger and more precarious Bubbles.

I didn’t back then believe it possible for central banks to orchestrate a successful inflation. I have great conviction in this analysis today. The popular notion of inflating out of debt problems is way too simplistic. Just inflate the general price level and reduce real debt burdens, as the thinking goes. The problem is that debt levels have expanded greatly, right along with securities and asset prices – and speculative excess. Aggregate measures of consumer prices, meanwhile, were left in the dust. The Great Credit Bubble has ballooned uncontrollably; asset price Bubbles have significantly worsened; and speculative Bubbles have become only more deeply embedded throughout global finance.

Bond markets were anything but oblivious to Bubble Dynamics back in 2007 - and have become only more keenly fixated here in 2019. I strongly argue that dysfunctional global markets are in a more precarious position today than in 2007, a view anything but diminished by this week’s developments. Wednesday’s statement and Powell press conference were viewed as confirming that the Fed is preparing to reinstitute aggressive policy stimulus.

With acute fragilities revealed in December, the Fed and global central bankers are on edge and scrambling. Markets see the Fed’s aggressive dovish push suggesting that the Fed – after December’s missteps – is now poised to err on the side of being early and aggressive with stimulus measures. In safe haven bond land, the Fed has evoked vivid images of monetary “shock and awe.”

Analysts are focusing on sovereign yields and an inverted Treasury curve as foreshadowing recession. I would counter with the view that bond markets appreciate global Bubble fragilities and are now pricing in the inevitability of rate cuts and new QE programs. Yield curves (at home and abroad) are more about market dynamics and prospective monetary policy than the real economy. As such, the strong correlations between safe haven and risk assets are no confounding mystery. Safe haven assets these days have no fear of “risk on.” After all, surging global risk markets only exacerbate systemic risk, ensuring more problematic Bubbles, central bankers operating with hair triggers, and the near certainty of aggressive future monetary stimulus.

Friday’s market instability had market participants searching for an explanation. Is there a significant development moving markets? Negative news coming from the China/U.S. trade front?

There could be something out there spooking the markets. Or perhaps the big story of the week was that Fed Uber-Dovishness pushed global bond markets and fixed-income derivatives toward dislocation. From the above Bloomberg article: “Federal Reserve policy makers have concluded that when in doubt, do no harm.” Maybe the Fed, trying too hard to compensate for December, is Doing Harm to market stability.

DoubleLine Capital’s Jeffrey Gundlach (from Reuters): “This U-Turn - on nothing fundamentally changing - is unprecedented. Three months ago, we were on ‘autopilot’ with the balance sheet - and now the bond market is priced for a rate cut this year. The reversal in their stance is stunning.”

Perhaps the disorderly drop in safe haven yields has led to a problematic widening of Credit spreads. The easy returns being made long higher-yielding Credit instruments versus a short in Treasuries have come to an abrupt conclusion. Could serious problems be unfolding in the derivatives markets, along with major losses for levered players caught on the wrong side of illiquid and rapidly moving markets. Is the Fed’s stunning “U-turn” market destabilizing – with great irony, fomenting “risk off” deleveraging?

What is the Federal Reserve’s reaction function? What factors will be driving policy decisions going forward? The Fed set rates at about zero (0 to 25bps) in January 2009 and left them unchanged for six years. The Fed then raised rates 25 bps in December 2015, 25 bps in December 2016 – and then cautiously increased rates six more times spaced over the next three years. The Fed’s balance sheet was roughly stable from Q4 2014 through Q4 2017 and has since been in gradual/predictable runoff for the past five quarters. For years now, Fed policy has been usually certain. Rate and balance sheet “normalization” were to proceed at an extraordinarily measured pace. No surprises. Bypassing a tightening of financial conditions, the “autopilot” Fed was conducive to aggressive market positioning/speculation (and leveraging).

An unusual era of monetary policy stability/predictability formally ended Wednesday. Balance sheet “normalization” is being brought to an early conclusion. Markets now assume the next rate move is lower. And with the Fed apparently turning its focus to persistently undershooting consumer price inflation, it is reasonable to assume it’s only a matter of time until the Fed resorts once again to QE. But when and at what quantity?

Especially as three years of rate “normalization” ends with Fed funds at only 2.25% to 2.50%, markets well-recognize there’s meager stimulus potential available in rate policy. Will the Fed even bother with rate cuts – or be compelled to move directly to QE? Suddenly, the future of monetary policy appears awfully murky.

Come the next serious stimulus push, it will be the Fed’s balance sheet called upon to do the heavy lifting. And, for those pondering a likely catalyst, I’d say look no further than a global market accident – omen December. As such, it now matters greatly that QE has evolved from an extreme policy response necessary to counter the “worst crisis since the Great Depression” - to a prominent tool in the Fed’s (and global central banking) toolkit readily available to counter risks of economic weakness and stock market instability.

Throw in the concept of late-cycle “Terminal Excess” – appreciating that policymakers, from Beijing to Tokyo to Frankfurt, London, Canberra, Toronto, Washington and beyond, are prolonging a most precarious cycle – and one can build a solid case for big trouble and big QE brewing. With this in mind, it’s not difficult to get quite concerned for the stability of global bond markets, along with securities, derivatives and asset markets more generally. And with markets unsettled, it probably didn't help to have the largest ever monthly federal deficit ($234bn), with the y-t-d deficit after five months ($544bn) running 40% ahead of fiscal 2018 - or that President Trump announced the nomination of Stephen Moore to the Federal Reserve.

For the Week:

In a wild week, the S&P500 declined 0.8% (up 11.7% y-t-d), and the Dow fell 1.3% (up 9.3%). The Utilities added 0.4% (up 11.1%). The Banks sank 8.3% (up 7.0%), and the Broker/Dealers fell 5.3% (up 4.9%). The Transports dropped 2.5% (up 9.6%). The S&P 400 Midcaps lost 2.2% (up 11.5%), and the small cap Russell 2000 dropped 3.1% (up 11.7%). The Nasdaq100 increased 0.3% (up 15.7%). The Semiconductors gained 0.6% (up 21.2%). The Biotechs sank 3.8% (up 17.3%). While bullion gained $11, the HUI gold index fell 1.9% (up 7.8%).

Three-month Treasury bill rates ended the week at 2.40%. Two-year government yields dropped 12 bps to 2.32% (down 17bps y-t-d). Five-year T-note yields fell 15 bps to 2.24% (down 27bps). Ten-year Treasury yields dropped 15 bps to 2.44% (down 24bps). Long bond yields fell 14 bps to 2.87% (down 14bps). Benchmark Fannie Mae MBS yields sank 22 bps to 3.10% (down 40bps).

March 21 – Financial Times (Joe Rennison): “The primary measure of the US yield curve watched by the Federal Reserve has fallen to its lowest level since 2007, after a policy shift by the central bank has raised fears over the outlook for the US economy. Benchmark 10-year Treasury yields sank to 2.52% on Thursday and short-dated, three-month yields marched higher to 2.47%. It means the difference between the two interest rates now stands at just 5 bps, sinking below the previous low of 15 bps hit in January to notch its lowest level since 2007.”

Greek 10-year yields slipped three bps to 3.75% (down 60bps y-t-d). Ten-year Portuguese yields declined five bps to 1.26% (down 45bps). Italian 10-year yields fell five bps to 2.45% (down 29bps). Spain's 10-year yields dropped 12 bps to 1.07% (down 34bps). German bund yields sank 10 bps to negative 0.015% (down 25bps). French yields dropped 11 bps to 0.35% (down 36bps). The French to German 10-year bond spread narrowed one to about 37 bps. U.K. 10-year gilt yields sank 20 bps to 1.01% (down 26bps). U.K.'s FTSE equities index slipped 0.3% (up 7.1% y-t-d).

Japan's Nikkei 225 equities index added 0.8% (up 8.1% y-t-d). Japanese 10-year "JGB" yields dropped four bps to negative 0.07% (down 7bps y-t-d). France's CAC40 dropped 2.5% (up 11.4%). The German DAX equities index fell 2.8% (up 7.6%). Spain's IBEX 35 equities index declined 1.5% (up 7.7%). Italy's FTSE MIB index added 0.2% (up 15.0%). EM equities were mixed. Brazil's Bovespa index sank 5.4% (up 6.7%), while Mexico's Bolsa added 0.2% (up 1.6%). South Korea's Kospi index increased 0.5% (up 7.1%). India's Sensex equities index gained 0.4% (up 5.8%). China's volatile Shanghai Exchange jumped 2.7% (up 24.5%). Turkey's Borsa Istanbul National 100 index sank 3.4% (up 9.4%). Russia's MICEX equities index increased 0.6% (up 5.7%).

Investment-grade bond funds saw inflows of $5.135 billion, and junk bond funds posted inflows of $1.796 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates declined three bps to a 13-month low 4.28% (down 17bps y-o-y). Fifteen-year rates fell five bps to 3.71% (down 20bps). Five-year hybrid ARM rates were unchanged at 3.84% (up 16bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to a one-year low 4.28% (down 32bps).

Federal Reserve Credit last week declined $3.5bn to $3.928 TN. Over the past year, Fed Credit contracted $433bn, or 9.9%. Fed Credit inflated $1.117 TN, or 40%, over the past 332 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $7.2bn last week to $3.479 TN. "Custody holdings" gained $39.3bn y-o-y, or 1.1%.

M2 (narrow) "money" supply rose $9.1bn last week to $14.500 TN. "Narrow money" gained $578bn, or 4.1%, over the past year. For the week, Currency slipped $0.5bn. Total Checkable Deposits dropped $37.5bn, while Savings Deposits jumped $37.5bn. Small Time Deposits added $2.1bn. Retail Money Funds rose $9.1bn.

Total money market fund assets sank $47.2bn to $3.065 TN. Money Funds rose $240bn y-o-y, or 8.5%.

Total Commercial Paper surged $20.9bn to $1.083 TN. CP expanded $17.3bn y-o-y, or 1.6%.

Currency Watch:

March 18 – Financial Times (Siddarth Shrikanth): “Hong Kong has spent nearly $1bn so far in March defending the local currency’s peg to the US dollar, which has come under pressure after a rise in US interest rates in 2018 and amid an increase in money flows into China’s stock market. The Hong Kong Monetary Authority (HKMA) intervened… on Monday, selling $256m and buying HK$2.01bn, the third time this month that the de facto central bank has stepped in to support the Hong Kong dollar. This leaves its aggregate balance, which represents the level of interbank liquidity, at HK$68.9bn.”

March 19 – Financial Times (Peter Wells): “If you thought the equity market looked calm at the moment, it can’t hold a candle to foreign exchange, where levels of volatility are hovering around their lowest levels since 2014. Diminished expectations for US interest rate rises this year have helped drive measures of equity market volatility lower in recent months, subsequently propping up stocks, and also pushed down currency market volatility. That trend has been further reinforced thanks to the European Central Bank, which is set to keep interest rates lower for longer in a bid to rev up economic growth in the bloc…”

The U.S. dollar index was little changed at 96.651 (up 0.5% y-t-d). For the week on the upside, the Japanese yen increased 1.4%, the Swiss franc 0.9%, the South Korean won 0.6%, the Mexican peso 0.6%, the New Zealand dollar 0.5% and the Singapore dollar 0.1%. For the week on the downside, the Brazilian real declined 2.4%, the Canadian dollar 0.7%, the South African rand 0.7%, the British pound 0.6%, the Swedish krona 0.5%, the Norwegian krone 0.3% and the euro 0.2%. The Offshore Chinese renminbi slipped 0.07% versus the dollar this week (up 2.39% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index added 0.4% (up 16% y-t-d). Spot Gold gained 0.9% to $1,314 (up 2.4%). Silver recovered 0.5% to $15.407 (down 0.9%). Crude added 52 cents to $59.04 (up 30%). Gasoline jumped 3.7% (up 48%), while Natural Gas fell 1.5% (down 6%). Copper dropped 2.2% (up 8%). Wheat increased 0.8% (down 7%). Corn gained 1.3% (up 1%).

Trump Administration Watch:

March 19 – Bloomberg (Jenny Leonard, Saleha Mohsin and Jennifer Jacobs): “Some U.S. negotiators are concerned that China is pushing back against American demands in trade talks, according to people familiar with the negotiations… Chinese officials have shifted their stance because after agreeing to changes to their intellectual-property policies, they haven’t received assurances from the Trump administration that tariffs imposed on their exports would be lifted… Beijing has also stepped back from its initial promises over data protection of pharmaceuticals, didn’t offer details on plans to improve patent linkages, and refused to give ground on data-service issues, one person familiar with the U.S.’s views said. Beijing is trying to bring in wording that would ensure rules in the trade agreement have to comply with Chinese laws, the person added.”

March 19 – Wall Street Journal (Bob Davis): “Negotiators for the U.S. and China have scheduled a new round of high-level trade talks in Beijing and Washington, aiming to close a deal by late April to end the yearlong dispute between the world’s two largest economies. U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin plan to fly to Beijing next week to meet with Chinese Vice Premier Liu He… The following week, a Chinese delegation led by Mr. Liu is expected to continue talks in Washington… People tracking the negotiations said the talks appear to be in their final stages, following a rocky patch after Chinese leaders were unnerved by President Trump’s decision to abruptly break off nuclear-disarmament talks with North Korean leader Kim Jong Un in February.”

March 20 – Bloomberg (Jennifer Jacobs and Andrew Mayeda): “President …Trump said he’ll keep tariffs on China until he’s sure Beijing is complying with any trade deal, refuting expectations that the two nations will agree to roll back duties as part of a lasting truce to their trade war. ‘We’re not talking about removing them, we’re talking about leaving them for a substantial period of time, because we have to make sure that if we do the deal with China that China lives by the deal,’ Trump told reporters… ‘They’ve had a lot of problems living by certain deals.’ The president’s comments dim hopes that round-the-clock trade negotiations between the world’s two biggest economies could lead to them removing the roughly $360 billion in tariffs they’ve imposed on each other’s imports. Beijing has pushed the Trump administration to remove tariffs as part of any deal.”

March 20 – CNN (Haley Byrd): “President Donald Trump placed more pressure on the stalled trade talks with the European Union…, threatening tariffs on European automobiles if no deal is reached. ‘The European Union has been very tough on the United States for many years,’ Trump told reporters…, saying the auto tariffs were under review. ‘We're looking at something to combat it.’ Trump received a report from the Commerce Department last month with the findings of an investigation into whether imports of automobiles and auto parts could qualify for tariffs as a national security threat… Trump has until the middle of May to choose a course of action. On Wednesday, Trump said his decision would hinge on how talks with the EU proceed. He has long threatened to impose hefty tariffs on European autos and auto parts.”

March 18 – Wall Street Journal (Michelle Hackman and Josh Mitchell): “The White House is calling on Congress to cap how much graduate students and parents of undergraduates can borrow in federal student loans, a proposal it said is aimed at curbing rising college costs. White House officials publicized the proposal as part of a broader set of ideas it is urging Congress to adopt as lawmakers undertake a rewrite of the Higher Education Act, a 1965 law that governs student loans. The law hasn’t been reauthorized since 2008, and Democrats and Republicans agree it is due for an overhaul given the growth of online and other nontraditional degree programs. The package of proposals… focuses primarily on the cost of college and workforce training.”

Federal Reserve Watch:

March 21 – Bloomberg (Sarah Ponczek, Vildana Hajric and Reade Pickert): “Conventional wisdom held it would be difficult for the Federal Reserve to deliver a second dovish surprise in as many meetings. It was wrong, and the equity market didn’t quite know what to make of it. Stocks initially erased losses on the prospect of rates not rising for the foreseeable future. Then the rebound faltered and equities closed slightly lower. It’s partly a reflection of how far they’d rallied on the first dovish turn, nearly 20% so far this year. And it raised the question of what it’s going to take to reclaim September highs, if not a decidedly accommodative Fed.”

March 20 – Bloomberg (Robert Burgess): “The Federal Reserve managed to exceed expectations on Wednesday by scaling back its projected interest-rate increases this year to zero and saying it would stop shrinking its balance sheet assets in September. Before the announcement, the markets were generally expecting the central bank to keep one rate hike on the table and allow its balance sheet to contract through the end of the year – so it’s no surprise that stocks rose from their lows of the day and bonds soared. But the big questions are, why so dovish and at what cost?”

U.S. Bubble Watch:

March 22 – MarketWatch (Steve Goldstein): “The IHS Markit flash purchasing managers index for manufacturing in March fell to a 21-month low, while the services PMI weakened to a two-month low. The flash manufacturing PMI fell to 52.5 from 53 in February, while the services PMI fell to 54.8 from 56.”

March 22 – Reuters (Jason Lange): “U.S. home sales surged in February to their highest level in 11 months, a sign that a pause in interest rate hikes by the Federal Reserve was starting to boost the U.S. economy. The National Association of Realtors said on Friday existing home sales jumped 11.8% to a seasonally adjusted annual rate of 5.51 million units last month… ‘(It’s) quite a powerful recovery that’s taking place,’ said Lawrence Yun, chief economist with the National Association of Realtors.”

March 17 – Financial Times (Rana Foroohar): “Hyman Minsky would have had a field day with last week’s US inflation numbers. One of the key points in the late, great economist’s Financial Instability Hypothesis was that there are two kinds of prices — prices for goods and services, and asset prices. Inflation in the two areas should, as a result, differ. And indeed they have, quite markedly. The latest Consumer Price Index figures show that almost all core inflation, which was weaker than expected, was in rent or the owner’s equivalent of rent (up 0.3%). Core goods inflation, meanwhile, was down 0.2%. Very simply, this means that the housing market is once again completely out of sync with the rest of the economy. A decade on from the subprime bubble, housing… is the only major component of the CPI with a national inflation rate that is consistently above the overall number.”

March 18 – CNBC (Hugh Son): “J.P. Morgan Chase CEO Jamie Dimon said that the U.S. economy has essentially been split into those benefiting from thriving corporations and those who are left behind. ‘I don’t want to be a tone deaf CEO; while the company is doing fine, it is absolutely obvious that a big chunk of [people] have been left behind,’ Dimon said. ‘40% of Americans make less than $15 an hour. 40% of Americans can’t afford a $400 bill, whether it’s medical or fixing their car. 15% of Americans make minimum wages, 70,000 die from opioids’ annually. ‘If you travel around to most neighborhoods where companies live, they’re doing fine,’ Dimon said. ‘So we’ve kind of bifurcated the economy.’”

March 17 – Wall Street Journal (Theo Francis): “The strong U.S. economy has created millions of jobs and pushed up wages for many Americans. It also helped many big-company CEOs secure another raise and total compensation worth $1 million a month. Median compensation for 132 chief executives of S&P 500 companies reached $12.4 million in 2018, up from $11.7 million for the same group in 2017… The gains were driven by robust corporate profits and strong stock market returns for much of the year.”

March 21 – Wall Street Journal (Ben Eisen and Laura Kusisto): “High-end home buyers are turning cautious, a blow to banks that refocused their mortgage businesses around wealthy borrowers in the years after the financial crisis. Originations for jumbo mortgages, which are loans too big to be sold to Fannie Mae and Freddie Mac , dropped 12% last year by dollar volume, outpacing the 7% decline in mortgages that meet the standards for Fannie and Freddie’s government backing. The $281 billion in jumbo originations was off 27% from its postcrisis peak two years earlier…”

China Watch:

March 20 – South China Morning Post (Guo Rui): “A group of heavyweight Chinese economists sat down with Japanese counterparts in Beijing on Tuesday to discuss whether China can avoid its own ‘lost decades’, as the government looks to negotiate a deal to end the US-China trade war. Japan engaged in a lengthy trade dispute with the United States in the 1980s, with a series of deals over currency and market access blamed in some quarters for the decades of economic stagnation that followed. It is known that many in Beijing are worried that a bad trade deal with the US could result in China following a similar trajectory, with currency exchange rate and market access high on the list of demands of Washington’s negotiators.”

March 16 – Wall Street Journal (Lingling Wei): “China’s spending spree during the global financial crisis helped pull the world economy out of recession. This time, Beijing’s stimulus might not pack the same punch. China’s leadership is adopting what some traders dub a ‘cocktail approach’ to arresting its economic slowdown. Its remedies include a mix of greater deficit spending, tax cuts and easier credit. In a national address…, Premier Li Keqiang announced the government will cut taxes and fees for businesses by a total of 2 trillion yuan ($298bn), or 2% of China’s $13 trillion economy. That includes reductions in value-added taxes… and required corporate contributions to pensions…. Mr. Li also announced big-ticket spending initiatives, including an investment of 800 billion yuan in railway construction and 1.8 trillion yuan to build roads and waterway transportation.”

March 17 – Bloomberg (Christopher Balding): “China’s banks may have a flood of bad loans waiting in the wings. Not that you’d know it from looking at official levels for 2018, which suggest the problem was broadly contained. The reality is that newly soured debt was coming through the front door as fast as banks could shovel it out the back. Authorities worked hard to restrain financial-system leverage in 2018. Outstanding credit increased a relatively modest 10%... The government accomplished this primarily by tightening restrictions on shadow banking and moving that lending into the formal banking system, which recorded a 13% jump in new loans last year. To make way for that increase, and with new deposits falling 1% last year, banks sold a lot of nonperforming debt to asset management companies. Sales to AMCs and other disposals totaled almost 1.8 trillion yuan ($268bn), according to… Jason Bedford, executive director of Asian financials research at UBS…”

March 19 – Financial Times (Gabriel Wildau and Yizhen Jia): “Listed Chinese banks will need to raise about $260bn in fresh capital over the next three years as regulations force shadow-bank loans back on to balance sheets and global rules on systemically important groups impose extra requirements on the largest lenders. A recent lending surge by Chinese banks in response to monetary stimulus designed to support China’s slowing economy is also adding to the banks’ capital needs, by accelerating the expansion of their balance sheets. China’s bank regulator has forcefully implemented the global Basel III rules on bank capital adequacy as it seeks to fortify lenders against financial risks from a decade of rapid debt growth, which is now leading to record defaults.”

March 20 – Bloomberg: “China’s banks are setting fundraising records in a rush to strengthen their balance sheets. Firms have used equity and debt offerings to raise $48 billion this year, the most for a first quarter… The flurry of issuance has had banks reach deep into the fundraising toolbox -- especially bonds that count as capital. That includes the first-ever perpetual sold domestically by a Chinese lender as well as rarely-used convertible bonds and dollar-denominated debt… ‘Banks have been asked to increase their lending to the private sector,’ said Alicia Garcia Herrero, chief Asia Pacific economist at Natixis SA in Hong Kong. ‘They need to increase their loan book, and to that end, their capital. All of this is to keep growth afloat.’”

March 20 – CNBC (Weizhen Tan): “An economic slowdown and extremely tight credit conditions pushed corporate debt to a record high in China last year, according to experts. Defaults for Chinese corporate bonds — issued in both U.S. dollars and the Chinese yuan — soared last year… Yuan-denominated debt rose to an ‘unprecedented’ 119.6 billion yuan ($17.8bn) — four times more than 2017, according to… Singapore bank DBS. …Nomura’s estimates… were even higher, putting the size of defaults in onshore bonds — or yuan-denominated bonds — at 159.6 billion yuan ($23.8bn) last year. That number is roughly four times more than its 2017 estimate. Offshore corporate dollar bonds, or U.S. dollar-denominated debt…, followed the same trend. Nomura said the amount of such debt rose to $7 billion in 2018, from none the year before.”

March 19 – Reuters (Choonsik Yoo): “Confidence among Asian companies held near three-year lows in the first quarter as a U.S.-China trade dispute dragged on, pulling down a global economy that is already on a downward path, a Thomson Reuters/INSEAD survey found. The Thomson Reuters/INSEAD Asian Business Sentiment Index tracking firms’ six-month outlook was flat in the March quarter from the previous quarter’s 63, compared with a near three-year low of 58 set in the September quarter.”

March 20 – Bloomberg (David Tweed and Enda Curran): “Hong Kong’s chief executive cautioned that the Asian financial hub continued to face the risk of collateral damage from the China-U.S. trade war, saying the tensions were one reason why she’s joined the ranks of those tracking President Donald Trump’s tweets. ‘Last night, he was shouting to the media that things were good,’ Carrie Lam said of Trump… ‘I certainly want to see this trade discussion leading to some positive outcome. But I don’t think the problem will go away just like that. We will probably be seeing more tension in other areas.’”

Central Bank Watch:

March 17 – Bloomberg (Piotr Skolimowski): “The European Central Bank is approaching the point where it needs to decide whether if negative interest rates are more problem than solution. Since officials pushed back plans to tighten policy, warnings have increased that the potency of a key instrument used to rekindle growth in the 19-nation bloc is diminishing the longer it remains in place. France’s Francois Villeroy de Galhau… is loudest in voicing concern that sub-zero rates may prevent stimulus from reaching the economy because they’re hurting bank profitability. The argument isn’t unique to Europe. Banks in Japan are urging policy makers to watch that negative interest rates aren’t causing side effects, and officials at the Federal Reserve… argue it could cause problems for the U.S. financial system.”

March 21 – Wall Street Journal (Brian Blackstone): “Abrupt changes in the policies of the world’s largest central banks have rippled through smaller economies, leaving them with the prospect of low and even negative interest rates for years to come despite having mostly healthy economies. The danger is that these easy-money policies could fuel destabilizing bubbles in real estate and other asset markets. They may also leave banks with little ammunition to respond to the next economic downturn. Economies like Switzerland’s, whose central bank signaled no change in its negative-rate policies for years to come, are small compared with the U.S. and eurozone. Still, they are home to major global banks and companies that are sensitive to exchange rates and financial conditions. With financial markets so interconnected, problems in small countries can quickly spread to larger ones.”

Brexit Watch:

March 19 – Financial Times (George Parker, Laura Hughes and Sebastian Payne): “Theresa May’s cabinet has split over whether the UK should request a long delay to Brexit if MPs continue to block the prime minister’s exit deal. Eight Eurosceptic ministers said in tetchy exchanges during a meeting of Mrs May’s cabinet… that any extension of the Article 50 exit process should last no longer than June 30… These ministers added that Britain should be prepared to leave the EU at that point — without a deal if necessary. But Europhile ministers — including chancellor Philip Hammond — argued the prospect of a longer delay to Brexit was needed to keep pressure on Eurosceptic Conservative MPs to finally back Mrs May’s deal.”

March 19 – Financial Times (Gillian Tett): “Another week, another round of baffling Brexit political farce. But if you want a different perspective on these dramas, ponder a topic that (almost) no British politician ever bothers to discuss: the state of London’s gigantic derivatives market after leaving the EU. For while this topic is arcane, it matters deeply — not just because derivatives have financial stability implications, but also because the issue is sparking some extraordinary behind-the-scenes battles, now with transatlantic consequences. The issue at stake revolves around the clearing of derivatives trades. In recent years, the London Clearing House has dominated the swaps and futures sector, regularly clearing more than $3tn of trades each day, of which a quarter are euro-denominated and almost half in dollars.”

Europe Watch:

March 18 – Bloomberg (Carolynn Look): “The slowdown in Europe’s largest economy is unlikely to have enjoyed a long-awaited turnaround at the start of 2019 as German industry continued to stumble. ‘The basic cyclical trend of the German economy remained subdued after the turn of theyear. This was mainly due to the continuing slowdown in industrial momentum,’ the Bundesbank said… ‘Greater catch-up effects in the country’s auto industry ‘are no longer expected for the current quarter.’”

March 17 – Reuters (Tom Sims and John O’Donnell): “Deutsche Bank and Commerzbank confirmed… they were in talks about a merger, prompting labour union concerns about possible job losses and questions from analysts about the merits of a combination. Germany’s two largest banks issued short statements after separate meetings of their management boards, …indicating a quickening of pace in the merger process, although both also warned that a deal was far from certain.”

March 19 – Financial Times (Michael Peel, Lucy Hornby and Rachel Sanderson): “The last time EU leaders held strategy talks on China was just after the Tiananmen Square massacre in 1989. The 12 heads of state and government imposed sanctions including an arms embargo over what they called the ‘brutal repression’ by the Chinese government. Almost 30 years later, the European Council will use a summit this week to focus once more on China — and decide whether it is time to get tough again. Mounting concerns over Chinese industrial policy, cyber security and trade wars have all combined to put Beijing firmly back on the European agenda. To some in Brussels and member state capitals, this week’s discussion is the EU’s belated awakening to the new sway of China — and to an uncomfortable truth that it has failed to register the full implications of its ascendancy.”

March 19 – Reuters (Leigh Thomas and Yann Le Guernigou): “The French economy should grow about 1.4% this year, Finance Minister Bruno Le Maire said…, revising down the forecast of 1.7% growth in this year’s budget. Le Maire told the Senate’s law and economic affairs commissions that the yellow vest anti-government unrest had in the short-term trimmed 0.2 percentage points off growth in 2018 and 2019.”

March 18 – Financial Times (Joseph Nasr): “German Chancellor Angela Merkel said… she hoped inflation in the euro zone would soon reach the target set by the European Central Bank so the central bank can start raising interest rates. ‘I believe or I hope - we have almost reached the 2% inflation rate - that the ECB can change its policy,’ Merkel said during a town hall meeting… Her comments were in response to complaints from a participant that savers and pension funds were suffering from the record-low interest rates set by the European Central Bank.”

EM Watch:

March 18 – Financial Times (Colby Smith): “And once again, investors are bullish on emerging markets. With the Fed on pause and trade tensions between the US and China ebbing, investors have been quick to forget the crises that hobbled emerging markets last year. But with investor sentiment shifting closer to ‘exuberance,’ as one strategist puts it, and sources for further upside waning, the tide could soon turn against those who have been over-eager… After a trying 2018, investors have poured billions into hard currency emerging market debt since January, with ten consecutive weeks of positive inflows, according to EPFR Global.”

March 21 – Reuters (Marcelo Rochabrun): “Brazil prosecutors on Thursday alleged that detained former president Michel Temer was the leader of a ‘criminal organization’ that diverted 1.8 billion reais ($471.62 million) in funds as part of a scheme related to the construction of a nuclear plant complex. Temer was arrested on Thursday morning in Sao Paulo.”

Global Bubble Watch:

March 18 – Bloomberg (William Horobin): “The people of the world’s richest economies are anxious about everything from money and taxes, to healthcare to pensions -- and they’ve little faith in their governments to do anything about it. According to a survey of 22,000 people in 21 OECD countries, there’s a ‘clear sense of dissatisfaction and injustice’ in advanced economies. A majority believe they wouldn’t easily access benefits if needed, less than 20% say they get a fair share given the taxes they pay, and in many countries most people feel governments ignore their views. The OECD said the exercise in ‘listening to people’ has produced ‘deeply worrying’ results.”

March 20 – CNBC (Kate Rooney): “Corporate giants doing business abroad are painting a dreary picture of the world’s economy. With an ongoing trade war between the U.S. and China, Brexit uncertainty weighing on Europe and the U.K., and new weakness out of Japan, some business leaders say it’s harder than ever to rake in profits. This week, top executives at FedEx, BMW, UBS and others described bleak global business conditions while discussing quarterly results. Fitch Ratings also ‘aggressively’ cut its forecast for the year. The head of UBS was among the latest to blame the world’s backdrop for weaker-than-expected results.”

March 20 – CNBC (Kate Rooney): “A top executive at FedEx is flagging serious concerns in the global economy. The multinational package delivery service reported declining international revenue as a result of unfavorable exchange rates and the negative effects of trade battles. ‘Slowing international macroeconomic conditions and weaker global trade growth trends continue, as seen in the year-over-year decline in our FedEx Express international revenue,’ Alan B. Graf, Jr., FedEx Corp. executive vice president and chief financial officer, said…”

March 19 – Bloomberg (Michael Heath): “The apartment market in Australia’s largest city is ‘quite soft’ due to a sharp rise in supply that’s increased risks to financial stability, a senior central bank official said. Sydney added more than 80,000 apartments in the past few years, increasing the city’s housing stock by about 5%... In Melbourne and Brisbane, which also saw substantial construction, apartment prices have so far held up, she said. ‘Our main concern with this from a financial stability perspective is the potential for this large influx of supply to exacerbate declines in housing prices and so adversely impact households’ and developers’ financial positions,’ Bullock said… ‘Currently, the risks here appear to be elevated but contained.’”

March 19 – Reuters (Fergal Smith): “Canada said… it would issue nearly 20% more bonds in the coming fiscal year to help the Liberal government fund its spending programs, ahead of an October election. The federal budget… projected the deficit would widen to C$19.8 billion ($14.86bn) in 2019-20 from a forecast C$14.9 billion for the current fiscal year ending March 31.”

Japan Watch:

March 17 – Bloomberg (Daniel Moss): “Haruhiko Kuroda is miles from where he wants to be. About 200 miles. That's the distance from Tokyo to Nagoya, where the Bank of Japan governor gave a very upbeat speech last year. Some interpreted those remarks as laying the groundwork for a shift from the ultra-accommodation that's been the central bank's trademark. In terms of monetary policy, Nagoya might as well be on another continent. That's how much the outlook for interest rates, globally, has shifted. Talk of normalization, however gradual, is now passe. If anything, the question among observers has become when and how the BOJ will ease further.”

March 19 – Reuters (Leika Kihara): “Bank of Japan policymakers disagreed on how quickly the central bank should ramp up monetary stimulus, minutes of their January rate review showed…, as heightening overseas risks threatened to derail the country’s fragile economic recovery. While most members agreed it was appropriate to maintain the BOJ’s current stimulus program, one of them said the central bank must stress its readiness to take ‘quick, flexible and bold’ action including additional easing, the minutes showed.”

March 17 – Reuters (Tetsushi Kajimoto): “Japan’s exports fell for a third month in February in a sign of growing strain on the trade-reliant economy, suggesting the central bank might be forced to offer more stimulus eventually… Slowing global growth, the Sino-U.S. trade war and complications over Britain’s exit from the European Union have already forced many policymakers to shift to an easing stance over recent months.”

March 19 – Reuters (Tetsushi Kajimoto and Izumi Nakagawa): “Confidence among Japanese manufacturers hit its weakest in two-and-a-half years in March, a Reuters poll showed… The monthly poll, which tracks the Bank of Japan’s (BOJ) closely watched tankan quarterly survey, found confidence fell for a fifth straight month while sentiment in the service sector held steady…”

March 20 – Reuters (Leika Kihara): “Japanese Prime Minister Shinzo Abe said… he sees the central bank’s inflation target as a means to achieve the more important goal of reviving the economy, in a sign that firing up inflation may no longer be a priority for the government. The premier’s comments followed those from Finance Minister Taro Aso, who warned the Bank of Japan last week against insisting on hitting its price goal. Abe defended the BOJ for missing its 2% inflation target, telling parliament that the government gives a passing grade to its policies for boosting jobs and economic growth.”

Fixed-Income Bubble Watch:

March 21 – Bloomberg (Christopher DeReza): “The influx of investor cash into U.S. corporate-bond funds accelerated, helping to keep the market on track for its biggest quarterly gain in three years. Investors added $5.14 billion to investment-grade funds in the week ended March 20, the biggest net increase since March 2017, Lipper data show. That followed a $3.29 billion inflow the previous week and marked the eighth straight week of gains with investors pouring $21 billion of cash into the funds.”

March 15 – Reuters (Gertrude Chavez-Dreyfuss): “Foreign investors sold U.S. Treasury bonds and notes for a third straight month in January…, a trend that has been in place for several years. They sold $11.99 billion in Treasuries in January, compared with a record $77.35 billion the previous month… Selling was mainly from foreign official accounts.”

March 18 – Bloomberg (Russell Ward): “When returns on safe assets are low, investors look for riskier places to put their money. In Japan, where yields have been near zero for some traders’ entire careers, an increasingly popular investment is bundled U.S. corporate loans known as CLOs, or collateralized loan obligations. Some observers have drawn parallels to the collateralized debt obligations, or CDOs, that helped turn packaged U.S. mortgages into bombs that laid waste to global financial markets in 2008. Japanese regulators have drafted a rule that could limit their risk… Japanese banks have been buying CLOs and other securities abroad because the central bank’s ultra-easy monetary policy has made it extremely difficult to profit from domestic bonds and loans. They hold at least 10% of the $750 billion global market for CLOs…”

Leveraged Speculator Watch:

March 22 – Financial Times (Chris Flood): “New hedge fund launches have sunk to their lowest level since the start of the century as untried managers struggled to attract capital in 2018, a year of widespread disappointment for investors in the asset class. Hedge fund portfolios run by institutional investors delivered average returns of just 1.6% in the first 11 months of 2018, well below expectations of 7.2%, according to a survey of 425 respondents by Deutsche Bank. Just 13% of the investors surveyed achieved their expected performance target… Just 561 new hedge funds were launched in 2018, the lowest number since 2000, according to HFR…”

Geopolitical Watch:

March 16 – Reuters (Sanjeev Miglani and Drazen Jorgic): “The sparring between India and Pakistan last month threatened to spiral out of control and only interventions by U.S. officials, including National Security Advisor John Bolton, headed off a bigger conflict, five sources familiar with the events said. At one stage, India threatened to fire at least six missiles at Pakistan, and Islamabad said it would respond with its own missile strikes ‘three times over’, according to Western diplomats and government sources…”

March 19 – Reuters (Ben Blanchard): “Pakistan Foreign Minister Shah Mahmood Qureshi told his Chinese counterpart… of the ‘rapidly deteriorating situation’ and rights violations in Indian Kashmir, and called for India to look again at its policies there. India launched an air strike on a militant camp inside Pakistan last month following an attack on an Indian paramilitary convoy in disputed Kashmir. The Feb. 14 attack that killed at least 40 paramilitary police was the deadliest in Kashmir’s 30-year-long insurgency, escalating tension between the neighbors, and the subsequent air strike had heightened fears that nuclear-armed India and Pakistan could slide into a fourth war.”

March 19 – Reuters (Philip Pullella): “High-level U.S.-Russian talks on how to defuse Venezuela’s crisis ended… with the two sides still at odds over the legitimacy of President Nicolas Maduro. Russia has said Maduro remains the country’s only legitimate leader whereas the United States and many other Western countries back Juan Guaido, head of the opposition-controlled National Assembly who invoked a constitutional provision in January to assume an interim presidency.”

March 20 – Reuters (Yimou Lee and Twinnie Siu): “China urged the United States… not to allow Taiwan President Tsai Ing-wen to stop over in Hawaii next week when she makes a tour of the island’s diplomatic allies in the Pacific, adding another irritant to Beijing-Washington ties.”