Friday, July 26, 2019

Weekly Commentary: Fanning the Flames

The Federal Reserve abandoned “data dependent” - at least for next week’s FOMC meeting. December futures imply a 1.78% Fed funds rate, up six bps for the week but still 62 bps below today’s 2.40% effective rate. Unless the Federal Reserve has completely caved to the markets, the Committee statement and Chairman Powell’s press conference should emphasize its commitment to “data dependent” and the possibility of a second-half recovery in growth momentum. By the reaction to Draghi’s marginally less than super-duper dovishness, markets will not be overjoyed if the Fed attempts walking back its “an ounce of prevention…” “insurance” rate cut cycle.

For posterity, I’ll document the data backdrop heading into what is widely believed to be the beginning of a series of cuts. Second quarter GDP was reported at a stronger-than-expected 2.1% rate, down from Q1’s 3.1% but ahead of the 1.8% consensus forecast. Personal Consumption bounced back strongly, jumping to a 4.3% annual rate from Q1’s 0.9%. It’s worth noting there have been only four stronger quarters of Personal Consumption growth over the past 13 years.

Personal Income increased 5.4% annualized, down from Q1’s 6.1% - but strong nonetheless. Employee Compensation expanded 4.7% annualized. Receipts on Assets (Interest Income and Dividend Income) increased 9.0% annualized, more than reversing Q1’s 6.1% annualized contraction. Overall Disposable Income increased an annualized 4.9%, up from Q1’s 4.8% and Q4 ‘18’s 4.2%.

Government Spending jumped to a 5.0% annualized growth rate (Q1 2.9%), led by a 7.9% annualized expansion in federal government expenditures (strongest reading since Q2 ’09). With federal deficit spending near 4.5% of GDP, fiscal stimulus has become a powerful force in the real economy.

Dropping 5.2%, Exports were a drag on growth. Reversing Q1’s 6.2% growth rate, Gross Private Investment declined 5.5% annualized. Non-Residential Fixed Investment declined 0.6%, with Residential Investment down 1.5%.

At 2.3%, Q2’s GDP Price Index recovered strongly from Q1’s 1.1%. Q2 PCE (Personal Consumption Expenditures) rose to 2.3%, the strongest reading since Q1 ’18. Core PCE rose 1.8%, the largest price gain since Q1 18’s 2.1%. It’s worth mentioning Q2’s increase in Core PCE was above the 1.7% quarterly average going all the way back to 2004.

June Durable Goods Orders were up a stronger-than-expected 1.9% (estimates 0.7%), with the 1.9% rise in Non-Defense Capital Goods Orders way ahead of the 0.2% consensus forecast. Weekly Jobless Claims declined to the lowest level in eight weeks.  And let's not forget the 224,000 gain in June Non-Farm Payrolls.

And while the 50 reading for the Markit U.S. Manufacturing PMI missed the 51 estimate, Markit’s Services PMI was reported at 52.2 – besting estimates (51.8) and ahead of June’s 51.5.

Global manufacturing is weak, and the U.S. manufacturing sector has weakened. Google’s Q2 revenues were up 19% y-o-y to $38.94 billion. Microsoft saw revenues jump 12% y-o-y to $33.7 billion, while Facebook’s quarterly revenues surged 28% y-o-y to $16.89 billion. Combined, these three posted 18% y-o-y revenue growth. My point: the nature of economic output has changed momentously, and each year manufacturing accounts for a smaller piece of the greater U.S. economy.

The Fed made a mistake by pre-committing to next week's cut. Despite the obvious risks associated with weak global manufacturing, trade war frictions and China fragilities, U.S. financial conditions have been extraordinarily loose for months now. Investment-grade Credit default swap (CDS) prices dropped this week to the lowest level since the multi-year lows set in February 2018. Junk bond spreads narrowed this week to near November lows. Corporate debt issuance is running at record pace.

And, of course, stock prices have surged to all-time highs. The Semiconductors ended the week with a y-t-d gain of 38.0%. The Nasdaq100’s 2.3% advance this week pushed y-t-d gains to 26.7%. It will be some weeks before we have Fed Q2 Z.1 data, but Household Net Worth and Net Worth to GDP likely jumped to all-time highs. Equities and Total (equities and bonds) Securities as a percentage of GDP will both be near record levels.

July 25 – Wall Street Journal (Jessica Menton): “Investors are piling into safe-haven bonds at a record pace, a sign that caution remains despite stocks pushing toward records. Mutual funds and exchange-traded funds tracking bonds posted $12.1 billion of inflows for the week ended July 17, the 28th consecutive week of inflows. That brings the total so far this year to $254 billion, on pace for a record $455 billion on an annualized basis in 2019, according to a Bank of America Merrill Lynch analysis of EPFR Global data. That compares with $1.7 trillion in bond inflows over the past 10 years…”

The Fed is about to lower rates in the throes of manic securities markets activity. They will surely cite global risks and below-target inflation. FT: “Powell Seeks a Cure for the Disease of Low Inflation.” “Jay Powell this month stressed the Fed’s determination to fight the sluggish inflation numbers dogging the US economy, warning Congress that downbeat prices could lead to an ‘unhealthy dynamic’ of lower interest rates and less room to act in a downturn. ‘We’ve seen it in Japan. We’re now seeing it in Europe,’ Mr Powell said in his testimony. ‘And that’s why we think it’s so important that we defend our 2% inflation goal here in the United States and we’re committed to doing that’.”

The issue is not some “disease of low inflation.” There’s plenty of inflation, it’s just neither uniform nor necessarily in all the avenues central bankers prefer. There has been strong inflation in securities prices, with the term “hyperinflation” fitting for some global bond markets (i.e. Italy, Greece, Portugal, Spain, Slovenia, etc.). Global stock prices are locked in a powerful late-cycle (speculative) inflation dynamic. Global real estate markets remain in a strong inflationary environment, along with asset prices more generally. The price dynamic for high-end collectables is hyperinflationary.

The world has changed greatly in 30 years – the nature of economic output, economic structure, finance, monetary policy and “globalization”, to name broad categories that have profoundly altered inflation dynamics. Individual country inflation dynamics are no longer dominated by domestic Credit growth, financial conditions and monetary policy. Today, the impact of a central bank’s monetary stimulus works through various channels, perhaps stimulating asset prices, spending, imports and even investment – with a very unpredictable effect on an aggregate measure of consumer prices. As much as the Fed – and other central banks – rue the loss of influence over consumer prices, momentous changes in financial and economic structures ensure the system has been fundamentally and irreversibly altered.

With individual central banks having lost command over consumer price inflation, there has been gravitation to concerted global monetary stimulus. “If we all stimulate together, then we can spur a more systemic boost of inflation globally.” Such an approach is doomed to fail. There is today a strong inflationary bias in securities and asset prices. At the same time, the legacy from historic Chinese and EM booms is unprecedented overcapacity throughout manufacturing. The disinflationary dynamic in many goods markets ensures that monetary stimulus will spur powerful flows to speculative Bubbles with muted impact on aggregate consumer price indices. Finance will flow in force to – and exacerbate – areas with strong inflationary biases (i.e. assets markets).

There’s actually a strong case to be made that further stimulating asset Bubbles at this stage of the cycle only exacerbates disinflationary dynamics at work in goods and (some) services. There is today in the U.S. and globally a proliferation of new companies and products. The flood of finance into new technologies and startups ensures an even greater supply of goods and services (with many tech, cloud and web-based products/services enjoying essentially unlimited supply). The extreme financing backdrop creates aggressive companies flush cash and under no pressure to achieve profitability. It’s great for consumers, but it’s also an unsustainable Bubble that creates escalating risk to a deteriorating financing environment.

Playing a dangerous game, the Fed is now moving from accommodating this Bubble to actively stimulating it – from pushing back against a tightening of financial conditions to pushing forward already extraordinarily loose conditions. I often think these days of Joseph Schumpeter’s “Creative Destruction.” Today’s policy and financing backdrops ensure an extraordinary amount of “creative” along with extraordinarily little “destruction.” The combination of bountiful new technologies, financial innovation, loose finance, speculative Bubbles, and an accommodative central bank is reminiscent of the “Roaring Twenties.” The Federal Reserve in the late-twenties became increasingly concerned with waning consumer prices and worsening global fragilities. The primary focus should have been speculative market Bubbles and egregious financial excess, more generally.

Why are central bankers so fixated on somewhat below-target (an arbitrary target at that) consumer price inflation? Sure, they fear expectations of deflationary conditions could be self-fulfilling. But it goes beyond that. The entire contemporary doctrine of tolerating Credit excess and asset inflation – even directly using both for post-Bubble reflation – rests upon the notion that the consequences of financial excess (i.e. debt and speculative Bubbles) can be remedied by inflating the general price level.

Excessive debt can always be reduced through inflation – merely inflated away. Excessive asset prices can be at least partially mitigated by inflating consumer prices and corporate earnings. Understandably, central bankers are terrified at the thought of markets losing confidence in their capacity to manage a steadily inflating consumer price index. A world where central bank reflationary measures are viewed as ineffective is a world with suddenly elevated fear of unsustainable debt levels and asset Bubbles. Deficits do Matter.

Maintaining the pretense of effectively orchestrating higher inflation has become paramount to contemporary central banking doctrine. Central bankers pay lip service to ever widening wealth disparities. They surely recognize their activist reflationary policy measures are a primary contributor. Loose monetary policy fuels robust asset inflation, much to the benefit of the wealthy. At the same time, average workers with bank deposits receive essentially no return on their savings. Worsening wealth disparities then only work to exacerbate the extreme dispersion of inflationary effects, with more “money” flowing into assets markets relative to the extra purchasing power available to drive aggregate consumer price inflation. Focused on below target CPI – while ignoring assets inflation and Bubbles – monetary stimulus only intensifies inequalities and attendant social and geopolitical tensions.

It’s somewhat difficult for me to believe the Fed will be reducing already low rates in the current market environment. Alan Greenspan weighed in.

July 24 – Bloomberg (Alister Bull): “Former Federal Reserve Chairman Alan Greenspan endorsed the idea that the U.S. central bank should be open to an insurance interest-rate cut, to counter risks to the economic outlook, even if the probability of the worst happening was relatively low. ‘Forecasting is very tricky. Certain forecast outcomes have far more negative affects than others,’ he told David Westin in an interview… ‘It pays to act to see if you could fend it off.’”

Whatever happened to William McChesney Martin’s, the job of the Fed is to “take away the punch bowl just as the party gets going.” Or even the imperative for the Federal Reserve to “lean against the wind.” Wednesday the Fed will be spiking the punch – again – for one of the longest parties ever. Instead of “leaning against the wind”, they’ll be Fanning the Flames.

For the Week:

The S&P500 rose 1.7% (up 20.7% y-t-d), while the Dow was little changed (up 16.6%). The Utilities declined 0.8% (up 13.8%). The Banks surged 4.0% (up 20.2%), and the Broker/Dealers gained 1.4% (up 16.6%). The Transports rose 1.6% (up 17.5%). The S&P 400 Midcaps jumped 2.4% (up 19.2%), and the small cap Russell 2000 gained 2.0% (up 17.1%). The Nasdaq100 advanced 2.3% (up 26.7%). The Semiconductors surged 4.6% (up 38.0%). The Biotechs declined 0.7% (up 9.8%). With bullion slipping $7, the HUI gold index fell 1.9% (up 28.9%).

Three-month Treasury bill rates ended the week at 2.07%. Two-year government yields gained three bps to 1.85% (down 64bps y-t-d). Five-year T-note yields rose three bps to 1.85% (down 66bps). Ten-year Treasury yields added two bps to 2.07% (down 61bps). Long bond yields increased a basis point to 2.59% (down 42bps). Benchmark Fannie Mae MBS yields rose three bps to 2.81% (down 68bps).

Greek 10-year yields fell nine bps to 2.05% (down 235bps y-t-d). Ten-year Portuguese yields declined two bps to 0.44% (down 128bps). Italian 10-year yields fell four bps to 1.57% (down 118bps). Spain's 10-year yields dipped two bps to 0.37% (down 104bps). German bund yields fell five bps to negative 0.38% (down 62bps). French yields declined five bps to negative 0.12% (down 83bps). The French to German 10-year bond spread was little changed at 26 bps. U.K. 10-year gilt yields dropped five bps to 0.69% (down 59bps). U.K.'s FTSE equities index increased 0.5% (up 12.2% y-t-d).

Japan's Nikkei Equities Index gained 0.9% (up 8.2% y-t-d). Japanese 10-year "JGB" yields declined two bps to negative 0.15% (down 15bps y-t-d). France's CAC40 rose 1.0% (up 18.6%). The German DAX equities index advanced 1.3% (up 17.6%). Spain's IBEX 35 equities index increased 0.6% (up 8.0%). Italy's FTSE MIB index gained 0.9% (up 19.2%). EM equities were mixed. Brazil's Bovespa index slipped 0.6% (up 13.0%), and Mexico's Bolsa dropped 2.2% (down 2.3%). South Korea's Kospi index fell 1.3% (up 1.2%). India's Sensex equities index lost 1.2% (up 5.0%). China's Shanghai Exchange gained 0.7% (up 18.1%). Turkey's Borsa Istanbul National 100 index rose 1.0% (up 12.7%). Russia's MICEX equities index increased 0.6% (up 14.6%).

Investment-grade bond funds saw inflows of $2.479 billion, and junk bond funds posted inflows of $1.305 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates declined six bps to 3.75% (down 79bps y-o-y). Fifteen-year rates fell five bps to 3.18% (down 84bps). Five-year hybrid ARM rates declined a basis point to 3.47% (down 40bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down nine bps to 4.04% (down 56bps).

Federal Reserve Credit last week declined $5.9bn to $3.768 TN. Over the past year, Fed Credit contracted $482bn, or 11.3%. Fed Credit inflated $957 billion, or 34%, over the past 350 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $4.6bn last week to $3.461 TN. "Custody holdings" gained $49bn y-o-y, or 1.4%.

M2 (narrow) "money" supply slipped $5.4bn last week to $14.827 TN. "Narrow money" gained $678bn, or 4.8%, over the past year. For the week, Currency increased $2.8bn. Total Checkable Deposits jumped $22.9bn, Savings Deposits dropped $32.2bn. Small Time Deposits slipped $1.7bn. Retail Money Funds gained $2.7bn.

Total money market fund assets jumped $22.3bn to $3.284 TN. Money Funds gained $433bn y-o-y, or 15.2%.

Total Commercial Paper rose $10.9bn to $1.151 TN. CP was up $83bn y-o-y, or 7.8%.

Currency Watch:

July 26 – Bloomberg (Alfred Liu and Kari Lindberg): “Hong Kong has appointed a veteran central banker as the next chief executive of its monetary authority, signaling continuity remains the priority as the city faces ongoing political turmoil. While the social unrest over the government’s botched extradition bill won’t be Eddie Yue’s responsibility, …maintaining the territory’s reputation for financial stability will be. He will face risks ranging from a resurgent property market to intermittent sniping against the city’s currency peg to the dollar… The dollar peg has been the bedrock of Hong Kong’s status as a financial hub, a fact that will bear repeating amid the street demonstrations and violence that has marked the past couple of months.”

The U.S. dollar index gained 0.9% to 98.01 (up 1.9% y-t-d). For the week on the downside, the South African rand declined 2.5%, the New Zealand dollar 1.9%, the Australian dollar 1.9%, the Norwegian krone 1.7%, the Swedish krona 1.3%, the Swiss franc 1.1%, the British pound 0.9%, the Japanese yen 0.9%, the South Korean won 0.9%, the euro 0.8%, the Canadian dollar 0.8%, the Brazilian real 0.8%, the Singapore dollar 0.7% and the Mexican peso 0.1%. The Chinese renminbi increased 0.04% versus the dollar this week (down 0.01% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index fell 0.8% this week (up 2.3% y-t-d). Spot Gold declined 0.5% to $1,419 (up 10.6%). Silver gained 1.2% to $16.397 (up 5.5%). WTI crude increased 57 cents to $56.20 (up 24%). Gasoline rallied 1.8% (up 42%), while Natural Gas dropped 3.6% (down 26%). Copper fell 2.5% (up 2%). Wheat declined 1.3% (down 1%). Corn dropped 2.6% (up 13%).

Market Instability Watch:

July 24 – Bloomberg (Mark Gilbert): “Bank of England Governor Mark Carney says investment funds that promise to allow customers to withdraw their money on a daily basis are ‘built on a lie.’ The chief investment officer of Europe’s biggest independent asset manager agrees with him. ‘There is no point denying we are faced with a looming liquidity mismatch problem,’ says Pascal Blanque, who oversees more than 1.4 trillion euros ($1.6 trillion) as the CIO of Amundi SA. As I wrote earlier this month, market liquidity can melt away faster than a dropped ice-cream in a heatwave. That prospect is one of ‘various things keeping me awake at night,’ Blanque told me earlier this week.”

July 23 – Bloomberg (Anchalee Worrachate and Liz McCormick): “Major economies around the globe all seem to covet a weaker currency as risks to growth mount. That makes engineering a lower dollar, euro or other heavyweight all the harder. President Donald Trump has repeatedly badgered the Federal Reserve to cut rates and complained that the U.S. dollar is too strong. But he’s got competition. It might not mention the exchange rate explicitly, but the European Central Bank is poised to loosen policy, weighing on the common currency. Bank of Japan Governor Haruhiko Kuroda said the bank will ‘persistently continue with powerful monetary easing’ to boost inflation. In China, the central bank looks set to step up stimulus to revive growth. Thanks to synchronized monetary easing, any simultaneous moves to weaken currencies might cancel each other out -- making beggar-thy-name policies a waste of time.”

July 25 – Bloomberg (Masaki Kondo and Ruth Carson): “Carry trade investors should raise a farewell glass to Mario Draghi. While the European Central Bank President wasn’t dovish enough at Thursday’s meeting for rates traders, his setting the stage to lower interest rates deeper into negative territory in September means it will be even cheaper to borrow the euro and use it as a funding currency. Against its traditional rival the yen, the difference between three-month forward implied yields -- a gauge of borrowing costs -- stood at minus 23 bps Wednesday, down from a high of plus 4 bps in December. With the Bank of Japan expected to stay on the easing sidelines for now -- it meets next week -- the spread is seen likely to widen even further.”

July 23 – Wall Street Journal (Ira Iosebashvili and Sam Goldfarb): “Stocks and government bonds aren’t the only assets getting a boost from an expected wave of central bank stimulus. Investors are piling into everything from haven currencies and gold to asset-backed securities, betting they will benefit from central banks’ attempts to sustain a decadelong economic expansion. The rush to get ahead of the expected policy shift has spurred some unexpected—and in some cases unwelcome—moves in asset prices.”

July 23 – Bloomberg (Ksenia Galouchko and Manus Cranny): “UBS Group AG’s chief executive officer is sounding the alarm on fresh monetary easing just as European policy makers appear poised to deliver another helping to stimulus-hungry markets. ‘I’d be very, very careful about growing further the balance sheet of central banks,’ Sergio Ermotti said in a Bloomberg TV interview…, ahead of the European Central Bank’s policy decision this week. ‘We are at a risk of creating an asset bubble.’”

July 22 – Wall Street Journal (Matt Wirz): “One of the fastest-growing sources of investors in U.S. bonds is Taiwan. Yield-hungry insurers plowed $3 billion into Taipei-based exchange-traded funds that buy U.S. fixed income in the last two weeks of June, according to… Bank of America... The surge boosted U.S. fixed-income assets under management in the ETFs by 16% to $22.5 billion. U.S.-focused bond ETFs in Taiwan have quintupled in size since June 2018…”

Trump Administration Watch:

July 24 – Reuters (Makini Brice and Susan Heavey): “Top U.S. and Chinese negotiators will meet face-to-face next week for the first time since Presidents Donald Trump and Xi Jinping agreed to revive talks to end their year-long trade war. U.S. Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer will meet with Chinese Vice Premier Liu He for talks in Shanghai starting on July 30…”

July 24 – Bloomberg (Jenny Leonard, Shawn Donnan, and Jeff Black): “The differences on substance are vast and the mistrust between the two sides high. Yet one of the biggest questions hanging over U.S.-China trade talks as negotiators prepare for the resumption of face-to-face talks in Shanghai next week is over the new prominence of an old China trade hand. After spending most of the past year in the relative shadows of the talks, Chinese Commerce Minister Zhong Shan has joined two conference calls with U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin in recent weeks and is expected to be at the table when the two sides start meeting in Shanghai… Zhong was not an unknown quantity for the U.S. with officials including Lighthizer having dealt with him multiple times at international summits over the past two years in his role as China’s trade minister… Zhong has a reputation as a tough negotiator and is seen by some on the U.S. side as a hard-liner who could make discussions even more hostile than they have been already.”

July 23 – Bloomberg (Steven T. Dennis and Erik Wasson): “President Donald Trump has once again shoved aside past Republican orthodoxy on debt and spending as he announced a budget deal with House Speaker Nancy Pelosi that likely ushers in a return to trillion-dollar deficits. Trump once said he would eliminate the $22 trillion federal debt, but the annual budget deficit is on track to top $1 trillion a year -- swollen by bipartisan spending increases and his tax cuts -- with no real expectation of a change in trajectory any time soon. The deal, which still must clear Congress, ends the automatic budget cuts enacted as a result of a showdown over the debt limit in 2011, when the new Republican majority in the House held federal borrowing authority hostage until President Barack Obama agreed to a spending straitjacket.”

July 23 – CNBC (Jennifer Elias): “Only Big Tech could bring together Bill Barr and Elizabeth Warren. Republicans and Democrats alike are doubling down on their criticism of Big Tech after U.S. Attorney General William Barr announced late Tuesday that the Department of Justice will open a broad antitrust review of big tech companies. He didn’t name names, but shares of Amazon, Alphabet and Facebook traded lower on the news.”

July 23 – Reuters (Philip Blenkinsop): “The European Union will retaliate with extra duties on 35 billion euros ($39.1bn) worth of U.S. goods if Washington imposes punitive tariffs on EU cars, the bloc’s trade chief said… ‘We will not accept any managed trade, quotas or voluntary export restraints and, if there were to be tariffs, we would have a rebalancing list,’ European Trade Commissioner Cecilia Malmstrom told a committee of the European Parliament.”

July 22 – Politico (John Bresnahan and Burgess Everett): “President Donald Trump may have to hand out some new nicknames — for himself — after endorsing a bipartisan budget deal with Congress: ‘Trillion Dollar Trump?’ ‘Deficit Don?’ With a new bipartisan budget deal that does nothing to cut federal spending, Trump is on track for another $1 trillion deficit this year. And there’s no reason to believe the following fiscal year will be any different, with ballooning deficits from higher spending, the 2017 tax cuts — Trump's signature legislative achievement, which slashed revenue — and none of the entitlement reforms long preached by Republican leaders on Capitol Hill.”

July 22 – Bloomberg (Peggy Collins): “President Donald Trump pushed the Federal Reserve to cut interest rates as policy makers ready for their decision this month on whether to do so. ‘Very inexpensive, in fact productive, to move now,’ Trump tweeted... ‘The Fed raised & tightened far too much & too fast.’”

Federal Reserve Watch:

July 19 – Bloomberg (Christopher Condon): “Federal Reserve Bank of Boston President Eric Rosengren said he doesn’t believe the U.S. economy needs an interest-rate cut, given the positive data that’s rolled in since mid-June. ‘The economy’s doing actually quite well,’ Rosengren said… ‘We’re not really having an economic slowdown.’”

July 22 – Bloomberg (Alister Bull): “Judy Shelton, who President Donald Trump has said he plans to nominate to the Federal Reserve Board in Washington, backs a half percentage-point rate cut when the central bank meets next week and said she would have pushed for a sooner move. ‘I would have voted for a 50-basis point cut at the June meeting,’ she told the Washington Post. ‘I do think global conditions and the clear monetary paths being signaled by other central banks are a factor in considering how much our own Federal Reserve might choose to lower on July 31.’”

U.S. Bubble Watch:

July 26 – Bloomberg (Katia Dmitrieva): “U.S. economic growth slowed in the second quarter by less than forecast as consumer spending topped estimates… Gross domestic product expanded at a 2.1% annualized rate… That follows an unrevised 3.1% advance in first quarter… Consumer spending, the biggest part of the economy, increased 4.3%, while government spending climbed 5% and offered the biggest boost in a decade.”

July 25 – Reuters (Lucia Mutikani): “The U.S. trade deficit jumped to a five-month high in May as imports of goods increased… The… trade deficit surged 8.4% to $55.5 billion. Data for April was revised higher to show the trade gap widening to $51.2 billion instead of the previously reported $50.8 billion. Economists… had forecast the trade gap widening to $54.0 billion… The goods trade deficit with China, a focus of President Donald Trump’s “America First” agenda, increased 12.2% to $30.2 billion, with imports rising 12.8%.”

July 24 – Reuters (Lucia Mutikani): “Sales of new U.S. single-family homes rebounded sharply in June, but sales for the prior three months were revised down, indicating that the housing market continued to tread water despite lower mortgage rates and a strong labor market. …New home sales rebounded 7.0% to a seasonally adjusted annual rate of 646,000 units last month. May’s sales pace was revised down to 604,000 units from the previously reported 626,000 units.”

July 25 – Reuters (Lucia Mutikani): “New orders for key U.S.-made capital goods surged in June, but will probably not change expectations that business investment contracted further in the second quarter and contributed to holding back the economy. …Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, jumped 1.9% last month. Orders in June increased across the board, with demand for machinery increasing by the most in nearly 1-1/2 years.”

July 25 – Reuters (Lucia Mutikani): “The number of Americans filing applications for unemployment benefits fell to a three-month low last week, pointing to sustained labor market strength even as the economy appears to be losing momentum.”

July 25 – Bloomberg (Prashant Gopal): “The U.S. homeownership rate fell to the lowest level in more than a year as rising prices and a tight supply of starter homes put buying out of reach for many renters. The share of Americans who own their homes was 64.1% in the second quarter, the lowest since the third quarter of 2017... It was the second straight decrease, down from 64.2% in the previous three months and 64.3% a year earlier.”

July 21 – New York Times (Alan Rappeport): “Growing distrust between the United States and China has slowed the once steady flow of Chinese cash into America, with Chinese investment plummeting by nearly 90% since President Trump took office. The falloff, which is being felt broadly across the economy, stems from tougher regulatory scrutiny in the United States and a less hospitable climate toward Chinese investment, as well as Beijing’s tightened limits on foreign spending. It is affecting a range of industries including Silicon Valley start-ups, the Manhattan real estate market and state governments that spent years wooing Chinese investment, underscoring how the world’s two largest economies are beginning to decouple after years of increasing integration. ‘The fact that the foreign direct investment has fallen so sharply is symbolic of how badly the economic relationship between the United States and China has deteriorated,’ said Eswar Prasad, former head of the International Monetary Fund’s China division. ‘The U.S. doesn’t trust the Chinese, and China doesn’t trust the U.S.’”

July 23 – Wall Street Journal (Laura Kusisto, Will Parker and Abigail Summerville): “U.S. home sales slumped in June as home prices for major West Coast cities declined for the first time since 2012, ending the spring selling season with a thud. Real-estate agents said lower asking prices could eventually attract more buyers, but home values in the Bay Area, Los Angeles and Seattle have roughly doubled over the past seven years. That means prices may have to retreat further before buyers do more than look… ‘Prices have dropped in Silicon Valley and sellers just aren’t used to the concept that [prices] can go down,’ said Ken DeLeon, founder of DeLeon Realty in Palo Alto, Calif. ‘There’s just this malaise buyers had of, ‘I feel like it’s gonna drop further.’”

July 20 – CNBC (Emma Newburger): “In the past year, torrential rains have dumped water on U.S. farmlands, destroying acreage and delaying crops from getting planted on time. Now, farmers face another hurdle: a stifling heat wave that’s spreading across the United States and is expected to be the worst in the farm regions, including Oklahoma, Kansas, Nebraska, Missouri, Iowa and Illinois. ‘Every time we think we catch a break, it’s just another issue we have to solve,’ Adam Jones, a 28-year-old organic farmer from Illinois, told CNBC. ‘It seems like it never stops.’ ‘This year, there are farmers who are the first in their family for three generations to not grow crops on their fields,’ he continued.”

China Watch:

July 24 – Financial Times (Shirley Yu): “Steve Bannon, the former adviser to Donald Trump, calls the US-China trade war a fight to prevent Beijing from becoming a ‘global hegemonic power’. China’s fourth most powerful leader Wang Yang, matches this rhetoric, calling it the ‘grand game of the century’ in a closed-door meeting with Taiwan delegates. The goal of the trade war is to glorify neither liberal trade, nor the liberal global order, but American hegemony. China’s rise makes the strategic conflict destined to happen. The optimal strategy for Beijing would be delay, to avoid global economic calamity and to give China much-needed time to build alternative global manufacturing supply chains, strengthen trading routes through Eurasia and the Pacific, and upgrade its technological collaboration with Europe.”

July 23 – South China Morning Post (Daniel Ren): “China’s corporate borrowers, especially non-state companies, are missing a record number of bond payments, as business conditions worsened amid the slowest economic growth pace in three decades, while a year-long trade war with the US crimped the biggest market for many exporters. Thirty private businesses missed their repayment obligations on 89 issues valued at a combined 60 billion yuan (US$8.7bn) so far this year, an increase of 150% from the same period in 2018… That’s more than the state-owned enterprises that missed eight bonds valued at 10 billion yuan, and topping last year’s 126 defaults worth 11.4 billion yuan. ‘The reality on the ground is that thousands of private companies are facing difficulties in sustaining their business growth this year, because of declining sales and narrower profit margins,’ said Eric Han, a senior manager with business advisory firm Shanghai Suolei. ‘Business morale appears to be low among entrepreneurs who are reluctant to invest in business expansion.’”

July 25 – Bloomberg: “Bank of Jinzhou Co. said it is in talks to introduce strategic investors after a report that China’s financial regulators are seeking to resolve its liquidity problems pushed down the lender’s dollar-denominated debt. Officials including those from the People’s Bank of China and China Banking and Insurance Regulatory Commission recently held a meeting with financial institutions in Bank of Jinzhou’s home province of Liaoning to discuss measures to resolve the lender’s liquidity issues… ‘Currently, Bank of Jinzhou’s business operations are normal overall,’ the bank said… ‘Recently, the bank’s board of directors and some major shareholders have been in talks with several institutions that wish to and have the ability to become strategic investors.’ …Bank of Jinzhou’s Hong Kong-listed shares have been suspended since April after it failed to disclose its 2018 financial statements… Bank of Jinzhou was set up in 1997 in the northeastern province of Liaoning. It had total assets of $113 billion and total deposits of $53 billion in June 2018…”

July 22 – Bloomberg: “Two months after China shocked investors with the first government seizure of a bank in two decades, market confidence in the nation’s smaller lenders has yet to fully recover. That may be just what the country needs. When it took control of Baoshang Bank Co. on May 24 and imposed losses on some creditors, China’s government upended the long-held assumption that it would always provide banks with a 100% backstop. The result has been a wholesale repricing of risk for all but the largest Chinese lenders, a development that analysts say was long overdue in a country rife with moral hazard. While the upheaval has underscored the fragility of some smaller banks and adds to short-term headwinds buffeting the economy, it may ultimately put China’s $40 trillion banking system on a more sustainable path by forcing markets to differentiate between weak and strong lenders.”

July 23 – Reuters (Shu Zhang): “China’s campaign to boost loans to small firms was supposed to support the economy during its biggest slowdown in decades, but banks’ reluctance to lend has left exporters and manufacturers in its southern industrial belt struggling to pay the bills. Despite prodding from Beijing, several bankers have told Reuters they have little appetite to lend to smaller companies due to the uncertain economic outlook, the U.S.-China trade war and a years-long drive to purge risks from the financial system. That has chilled credit flows to private sector firms, undermining stimulus measures that were designed to cushion the impact of slowing demand.”

July 23 – Reuters (Stella Qiu and Kevin Yao): “China’s central bank governor Yi Gang said the country’s current interest rate level is appropriate, the financial magazine Caixin reported… Yi said… that whether the People’s Bank of China (PBOC) follows the Federal Reserve in cutting interest rates will depend on China’s own economic conditions. ‘Overall, our current interest rate level is appropriate,’ Yi said. ‘Cutting interest rate will mainly deal with the danger of deflation, but price changes in China remain moderate.’”

July 24 – Bloomberg (Enda Curran): “Call it awkward timing. Just as U.S. and Chinese officials signal their first return to the negotiating table since trade talks collapsed in May, defense hawks in Beijing accused the U.S. of undermining global stability. A coincidence perhaps, but the sharp rhetoric is a vivid example of how fragile relations have become between the world’s two biggest economies. China made its accusation in a new defense paper which blamed the U.S. for provoking competition among major countries. That was a notable departure from the conciliatory language used in the previous report, which focused on efforts to improve military-to-military cooperation.”

July 24 – Reuters (Michael Martina): “China warned… it was ready for war if there was any move toward Taiwan’s independence, accusing the United States of undermining global stability and denouncing its arms sales to the self-ruled island.”

July 23 – Reuters (Catherine Cadell): “China said… that U.S. officials were behind violent chaos in Hong Kong and warned against interference, following a series of protests in the city, including bloody clashes on the weekend. ‘We can see that U.S. officials are even behind such incidents,’ said Chinese Foreign Ministry spokeswoman Hua Chunying…”

July 24 – Financial Times (Christian Shepherd, Kathrin Hille and Primrose Riordan): “China's defence ministry has said the People’s Liberation Army can legally intervene to help Hong Kong to ‘maintain social order’ if requested to do so by the territory’s government, as the Asian financial centre enters its third month of protests. The rare warning from China’s military comes as Beijing released its first general white paper on defence in four years in which it placed a new emphasis on safeguarding national political security and social stability.”

July 23 – Financial Times (Aime Williams, David Sheppard and Xinning Liu): “Beijing vowed to resist US ‘bullying’ after Washington said it would impose sanctions on one of China’s largest state-backed oil traders, punishing it for transporting Iranian crude in defiance of American restrictions. The Trump administration said… it was targeting the Chinese company Zhuhai Zhenrong as part of its ‘maximum pressure’ campaign against Iran by sanctioning the business for a ‘significant transaction’ in Iranian crude. Zhuhai Zhenrong… will be barred from engaging in foreign exchange, banking or property transactions under US jurisdiction, as will its chief executive, Youmin Li. China’s foreign ministry responded angrily…, saying: ‘We oppose the bullying and sanctions by the US of China’s enterprises and individuals based on US’s domestic laws. We strongly condemn and firmly oppose sanctions on related Chinese companies by the US.’”

July 22 – Reuters (Catherine Cadell): “Remarks by U.S. officials on China’s role in the South China Sea are slanderous, its foreign ministry said…, after the United States voiced concern over reports of Chinese interference with oil and gas activities in the disputed waters. China’s claims in the South China Sea, through which about $5 trillion in shipborne trade passes each year, are contested, all or in part, by Brunei, Malaysia, the Philippines, Taiwan and Vietnam. On Saturday, the U.S. State Department said China’s repeated provocative actions aimed at the offshore oil and gas development of other claimant states threatened regional energy security and undermined the free and open Indo-Pacific energy market.”

July 20 – Financial Times (Louise Lucas): “From Xiamen to Shanghai mass graveyards of dirty bikes, all twisted frames and busted axles and handlebars, have become an unwanted emblem for hundreds of Chinese start-ups that once thrived on the back of easy money, hard graft and a light regulatory touch. When the idea took hold in 2015, the bike rental companies’ promise to attract China’s booming middle class pulled in billions of dollars from investors even if they often charged cyclists very little or in some cases nothing to use their services. Some, such as Mobike and Ofo, quickly expanded abroad. However, both have subsequently slashed their overseas presence. Ofo’s founder, Dai Wei, warned that it was teetering on the brink of bankruptcy, Wukong and Bluegogo have already folded. They have now come to symbolise much of what has gone wrong across a swath of Chinese tech companies, especially those built around the idea of the sharing economy. The companies in trouble range from food delivery and shopping websites to transport apps.”

July 26 – New York Times (Keith Bradsher): “China has too many factories making too many goods. Thanks to its punishing trade war with the United States, its biggest overseas customer isn’t buying like before. So China is seeking new customers. They could prove to be a hard sell. China this week formally restarted its efforts to create a free-trade zone across the Asia-Pacific region, with an unlikely goal of striking a deal by November. If successful, the pact could eventually open markets from Australia to India. Beijing is also trying to keep alive long-shot, three-way talks that would lower trade barriers among China, Japan and South Korea. More broadly, it is unilaterally reducing its own tariffs on a broad range of goods from all over the world, even as it puts higher retaliatory tariffs on American-made goods. At stake is the health of the Chinese economy.”

July 22 – Wall Street Journal (Mike Bird): “Western investors have spent years hankering for China to open its financial markets to outside investment. Now, Beijing is offering broader access to some of the country’s most risky and politically sensitive assets, which the vast majority of would-be buyers would be wise to avoid entirely. Over the weekend, the Chinese State Council’s Financial Stability and Development Committee announced that controls on cross-border investment in interbank bonds and the wealth-management arms of Chinese commercial banks would be loosened.”

July 22 – Wall Street Journal (Chun Han Wong and Eva Dou): “China’s state media aired images from the aftermath of Hong Kong’s latest antigovernment protests, a change in tack that appears aimed at fanning public anger against the demonstrations, as Beijing signaled support for a stronger crackdown by authorities in the city. After Hong Kong protesters on Sunday defaced a Chinese central government office in the city, Foreign Ministry spokesman Geng Shuang said local authorities should use ‘all necessary measures to…safeguard the rule of law in Hong Kong and punish criminals’…”

July 24 – Bloomberg (Shawna Kwan and Natalie Lung): “Like many Hong Kong residents, Candy Kwok is anxious. And it’s not just because she fears the government might use more force against her and other protesters who’ve flooded the financial hub’s streets in recent weeks. As a single mom, Kwok worries about her 12-year-old daughter’s future in a city where home prices have surged 170% in a decade and the wealth gap keeps widening. She thinks living standards are dropping and that migrants from mainland China are siphoning resources from long-time residents. Her concerns underscore the challenges facing Hong Kong's government and its backers in Beijing as they try to quell the former British colony's worst political crisis since the 1997 handover.”

Central Banking Watch:

July 25 – Financial Times (Claire Jones): “Mario Draghi has paved the way for a fresh package of monetary stimulus to boost the ailing eurozone economy before he departs in October, signalling the European Central Bank will cut rates and embark on a fresh round of asset purchases. The ECB president said… that officials at the eurozone’s central bank would look into a range of stimulus options — including rate cuts, a commitment to keep policy exceptionally loose for years to come and another quantitative easing package — to counter fears that the bank would persistently undershoot its inflation target of just under 2%. ‘A considerable mass of inflation expectations are moving towards [a belief that there will be] lower inflation,’ said Mr Draghi. ‘We don’t like it and therefore we are determined to act.’”

July 25 – Wall Street Journal (Tom Fairless): “The European Central Bank signaled… that it is preparing to cut short-term interest rates for the first time since 2016 and restart a giant bond-buying program, in a significant policy shift that aims to insulate the wobbling eurozone economy from global headwinds ranging from trade tensions to Brexit. The move underscores the ECB’s activism under its departing President Mario Draghi, whose aggressive stimulus policies recently caught the attention of President Trump. Mr. Trump attacked Mr. Draghi in a series of tweets last month, complaining that the Italian official had weakened the euro at the expense of U.S. firms, but later suggested he might like to hire Mr. Draghi for the Federal Reserve. The ECB’s decisions over the coming weeks will be felt long after Mr. Draghi steps down in October.”

July 21 – Wall Street Journal (Brian Blackstone): “Central banks world-wide are poised to unleash some of the most aggressive monetary stimulus since the financial crisis a decade ago. But the circumstances are different now, with policies aimed more at breathing life into decade-old expansions rather than at averting an economic collapse. And it is unclear whether the central bankers’ depleted tools will be adequate. ‘We see the economy as being in a good place and we’re committed to using our tools to keep it there,’ Federal Reserve Chairman Jerome Powell told Congress July 10…”

July 23 – Bloomberg (Rene Vollgraaff, Craig Torres, and Tracy Withers): “Struggling to hit their targets for inflation, central banks around the world are debating whether they need to alter what they’re aiming for. From the Federal Reserve to the European Central Bank, officials are studying their current strategies and whether they need to be changed to revive inflation as it keeps undershooting the levels deemed to represent price stability.”

July 24 – Reuters (Swati Pandey): “Australia’s top central banker flagged low interest rates for an ‘extended period’ …Thursday, driving bond yields to record lows, in a dovish signal that analysts say marks a major shift in the bank’s approach to guiding market expectations. The Reserve Bank of Australia (RBA) has reduced interest rates twice since June to an all-time low 1% to revive growth and inflation. Financial markets are pricing in a real chance of a third cut before Christmas.”

July 26 – Reuters (Andrey Ostroukh): “The Russian central bank trimmed its key interest rate to 7.25% on Friday, as expected, and said more cuts were likely later this year amid slowing inflation.”

Brexit Watch:

July 23 – Reuters (William James and Kylie MacLellan): “Boris Johnson promised in his first speech as prime minister to lead Britain out of the European Union on Oct. 31 with ‘no ifs or buts’ and warned that if the bloc refused to negotiate then there would be a no-deal Brexit. Johnson, who has been hailed by U.S. President Donald Trump as Britain’s Trump, is sending the strongest message yet to the EU that he will be taking a distinctly tougher approach to negotiating a revision of the Brexit divorce deal.”

July 25 – Bloomberg (Robert Hutton, Nikos Chrysoloras, and Kitty Donaldson): “The EU rejected Boris Johnson’s demand that the Irish border backstop should be scrapped after the U.K. prime minister stressed his ‘absolute commitment’ to leaving the bloc on Oct. 31. Johnson, who hopes Brussels will rethink its refusal to renegotiate the Brexit deal struck by Theresa May, was also told that is impossible. EU Chief Negotiator Michel Barnier rejected as ‘unacceptable’ Boris Johnson’s demand that the Irish border backstop should be scrapped as the price for an exit deal…”

July 24 – Bloomberg (Alex Morales, Joe Mayes, and Kitty Donaldson): “Boris Johnson executed a brutal clear-out of more than half of his predecessor’s top team, installing supporters in key roles as the new prime minister signaled his intent to deliver Brexit in 98 days. Eighteen of the 29 ministers who sat in Theresa May’s cabinet on Wednesday morning were out of their jobs by the evening, including May herself.”

Asia Watch:

July 25 – Wall Street Journal (Timothy W. Martin): “A trade feud between Japan and South Korea, two of the world’s leading tech producers, has prompted groups representing Silicon Valley giants to warn an escalation could wreak long-term damage across an already-buckling global supply chain. Having been hit by disrupted U.S.-China relations, American trade groups… have written to Japan and South Korea, emphasizing that the global supply chain relies on efficient delivery of components, chemicals and materials. The two nations produce semiconductors and displays that are indispensable for services and gadgets made by the likes of Apple Inc., Inc., and Microsoft Corp.”

Europe Watch:

July 24 – Reuters (Jonathan Cable): “Euro zone business growth was much weaker than expected this month, hurt by a deepening contraction in manufacturing, and forward-looking indicators in surveys… suggest conditions will get worse next month. IHS Markit’s Flash Composite Purchasing Managers’ Index (PMI), considered a good guide to economic health, dropped to 51.5 this month from a final June reading of 52.2…”

July 25 – Financial Times (Adam Samson): “German factory executives have reported that industry conditions are in ‘free fall’, according to a survey… The Ifo Institute’s manufacturing business climate index slumped to minus 4.3 in July from positive 1.3 the previous month. The reading was the lowest in more than nine years… The broader Ifo sentiment gauge, which also covers Germany’s services sector, declined as well, hitting the lowest level since 2013. ‘In manufacturing, the business climate indicator is in freefall,’ said Clemens Fuest, president of the Ifo Institute… ‘No improvement is expected in the short term, as businesses are looking ahead to the next six months with more pessimism.’”

July 25 – Bloomberg (Patrick Donahue, Matthew Miller, and Arne Delfs): “German Finance Minister Olaf Scholz brushed off warning signals for Europe’s largest economy, saying the government has no concrete plans to spur economic growth. The German Social Democrat… said resolving ‘man-made’ crises such as trade tensions and a potentially hard Brexit would help boost growth rates as early as the end of this year. ‘We are not in a situation that makes it necessary or wise to act as if we were in a crisis, we are not,’ Scholz said…”

Asia Watch:

July 21 – Reuters (Choonsik Yoo): “South Korea’s exports for the first 20 days of this month fell a sharp 13.6% from a year earlier…, led by poor semiconductor shipments and underscoring continued weakness in global demand. Semiconductor products, which make up for about one-fifth of the country’s total exports, suffered a 30.2% drop in overseas shipments…”

Japan Watch:

July 19 – Reuters (Trevor Hunnicutt): “Bank of Japan Governor Haruhiko Kuroda… denounced an economic philosophy that encourages the use of government spending as a primary policy tool to boost employment. Speaking on a panel at an academic conference in New York, Kuroda said he disagrees with Modern Monetary Theory (MMT).”

July 25 – Bloomberg (Taiga Uranaka and Yuki Hagiwara): “Japanese banks have spent more than three years trying to flee negative interest rates at home by ramping up lending abroad. Now their escape routes are closing. Declining global rates are buffeting the country’s three largest lenders as they prepare to post fiscal first-quarter results next week. And with central banks around the world now in monetary easing mode, financial firms are growing concerned that the Bank of Japan may loosen policy further.”July 26 – Reuters (Andrey Ostroukh): “The Russian central bank trimmed its key interest rate to 7.25% on Friday, as expected, and said more cuts were likely later this year amid slowing inflation.”

EM Watch:

July 25 – Bloomberg (Cagan Koc): “Turkey’s new central banker delivered the biggest interest-rate cut in at least 17 years, putting President Recep Tayyip Erdogan’s unconventional policy goals into practice less than three weeks after getting the job. The monetary policy makers led by Murat Uysal slashed the benchmark borrowing rate by 425 bps to 19.75% on Thursday, exceeding all but one of the 34 analyst forecasts. It was the first cut since 2016 and the biggest since a shift to inflation targeting in 2002.”

July 24 – Bloomberg (Anirban Nag and Ronojoy Mazumdar): “India was until recently the fastest-growing major economy in the world, clocking annual rates of 7% or more and sparking predictions that it would soon overtake the likes of the U.K. and Germany. Now it looks like that rapid pace may have been overstated. An academic paper by a former chief economic adviser to Prime Minister Narendra Modi estimates annual growth averaged closer to 4.5% a year in the fiscal years from 2011-12 through 2016-17, and says recent changes to the way gross domestic product is measured are problematic.”

July 21 – Bloomberg (Siddhartha Singh, Anirban Nag, and Unni Krishnan): “India is attempting to prevent any repeat of last year’s shadow banking crisis after detecting ‘signs of fragility’ in some of the 50 housing finance and other non-bank lenders it is monitoring, according to central bank Governor Shaktikanta Das. The Reserve Bank of India is working closely with the country’s lenders to prevent the collapse of another large systemically important non-bank finance company, Das said in one of his first media interviews since becoming governor in December. ‘It is our endeavor that there is no contagion,’ Das said.”

July 23 – Bloomberg (Dhwani Pandya and Rahul Satija): “The liquidity crunch facing property firms and their lenders in India may deepen after the National Housing Bank restricted certain mortgage-payment plans that developers typically use to push sales… The removal of that funding avenue will likely impact apartment sales and in turn, the loan books of already troubled shadow lenders that have been increasing their exposure to the real-estate sector.”

Global Bubble Watch:

July 24 – Bloomberg (Susanne Barton, Sydney Maki and Selcuk Gokoluk): “As dovish central banks stoke negative yields throughout developed nations, it’s become more tempting for yield-hungry investors to borrow U.S. dollars and euros to buy riskier emerging-market currencies. Purchasing such assets with dollars is generating the best returns since May 2018, according to a Bloomberg index that tracks so-called carry-trade returns from eight developing markets funded by greenback short positions. One example of what’s been working: Argentine peso bets using dollars are reaping about a 15% gain this year, and this jumps to 20% with euros. Expect investors to keep scouring this space. JPMorgan… says central-bank easing in the U.S. and Europe may prompt investors to do even more of these trades.”

July 24 – Bloomberg (Enda Curran and Rich Miller): “The world’s central banks are in danger of storing up problems for later by taking action to ensure the economic expansion stays on track. In cutting already low interest rates to bolster a sagging global economy, monetary policy makers risk fueling asset bubbles that may eventually burst and propping up zombie companies that could keep dragging down growth. They’re also encouraging a dangerous build-up in leverage in a world where total debt is already approaching $250 trillion. Fed rate cuts ‘will incite undesired risk taking by borrowers and deepen the eventual next recession,’ Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA LLC, said…”

July 23 – Reuters (Dave Sherwood): “Global trade expanded by just 0.5% in the first quarter of 2019, marking the slowest year-on-year pace of growth since 2012 amid signs a more significant slowdown is possible, International Monetary Fund officials said…”

July 23 – Bloomberg (Steven Arons, Nicholas Comfort, and Matthew Miller): “Just a few weeks into Deutsche Bank AG’s biggest restructuring yet, the complications are already starting. Germany’s largest lender… posted the worst second-quarter trading result of the big Wall Street banks. The bottom line was below expectations after a 3.4 billion-euro ($3.8bn) restructuring charge. …Finance chief James von Moltke signaled that some turnaround targets may be harder to reach should central banks start to lower interest rates again. ‘It does represent a revenue pressure for us and all of the banks if rates from here go down further,’ von Moltke said. That ‘is a significant risk to us.’”

July 21 – Bloomberg (Tim Culpan): “If you hold shares in New York-listed Alibaba Group Holding Ltd., you don’t own a stake in a Chinese internet powerhouse. What you have are the American depositary receipts of a Cayman Islands company that has a contract with the Chinese firm. In fact, the country’s largest search and e-commerce provider is ultimately controlled by Alibaba Partnership, a collection of 38 people, most of whom hold senior positions in the company… This business structure, called a variable-interest entity, became common among Chinese companies because Beijing restricts foreign investment in certain sectors, such as the internet. It also enables firms to raise money abroad and lets early investors get their funds out of the country.”

Fixed-Income Bubble Watch:

July 25 – Bloomberg (Brian Smith): “PepsiCo brought the richest high-grade corporate bond deal of 2019 and investors couldn’t get enough, with indications of interest growing to three times the $2 billion deal size. This is the latest example of how incredibly attractive the U.S. debt capital markets have become for potential corporate issuers. PepsiCo and American Express combined to price $3.5 billion, bringing weekly ex-EM volume to $26.5 billion, well beyond projections of $20 billion.”

Leveraged Speculation Watch:

July 21 – Financial Times (Ortenca Aliaj and Robin Wigglesworth): “Bridgewater’s flagship fund suffered one of its worst first-half performances in two decades this year after being wrong-footed by rebounding markets. The $150bn hedge fund group founded by Ray Dalio saw its Pure Alpha fund, which tries to surf macroeconomic trends, lose 4.9% in the six months to June as global equity and bond markets bounced on hopes of looser monetary policy. The FTSE All-World equity index was up 15% by the end of June, while the broadest global bond market gauge was up 6%. The average ‘macro’ hedge fund gained 5.2% in the period, according to… HFR.”

Geopolitical Watch:

July 24 – Reuters (Babak Dehghanpisheh and Nafisa Eltahir): “The top military adviser to Iran’s Supreme Leader Ayatollah Ali Khamenei said… that Tehran would not negotiate with the United States under any circumstances, an apparent hardening of its position as the Gulf tanker crisis escalates.”

July 19 – Reuters (Alaa Swilam, Marwa Rashad and Idrees Ali): “Saudi Arabia’s King Salman approved hosting U.S. forces in the country to boost regional security and stability, the state news agency (SPA) reported…”

July 20 – Financial Times (James Blitz, Najmeh Bozorgmehr, and Simeon Kerr): “The UK has warned Iran that it risks taking a ‘dangerous path’ after the Islamic republic seized a British-flagged tanker in the Strait of Hormuz and said Britain’s response would be ‘considered and robust’. On Saturday, Iran posted a video of Revolutionary Guards descending from a helicopter and taking over the Stena Impero as it passed through the vital waterway on Friday, sharply escalating tension in the Islamic republic’s stand-off with the west. The seizure of the tanker was in retaliation for Britain’s decision to impound an Iranian tanker off the coast of Gibraltar earlier this month…”

July 22 – Reuters (Andrew Osborn and Joyce Lee): “Russia carried out what it said was its first long-range joint air patrol in the Asia-Pacific region with China…, a mission that triggered hundreds of warning shots, according to South Korean officials, and a strong protest from Japan. The flight by two Russian Tu-95 strategic bombers and two Chinese H-6 bombers, backed up by a Russian A-50 early warning plane and its Chinese counterpart, a KJ-2000, marks a notable ramping-up of military cooperation between Beijing and Moscow.”

July 24 – Reuters (Swati Pandey): “China expressed ‘deep concerns’ …over a U.S. Navy warship sailing through the Taiwan Strait, a day after Beijing warned that it was ready for war if Taiwan moved toward independence. Taiwan is among a growing number of flashpoints in the U.S.-China relationship, which include a trade war, U.S. sanctions and China’s increasingly muscular military posture in the South China Sea… A Chinese Foreign Ministry spokeswoman… said China had ‘expressed deep concerns to the U.S. side’ over its latest action in the strait separating China from Taiwan. ‘The Taiwan question is the most sensitive and important issue between China and the U.S.,’ spokeswoman Hua Chunying told a regular press briefing.”

July 23 – Newsweek (David Brennan): “Taiwan's foreign minister has come out in support of pro-democracy protesters in Hong Kong as unrest in the territory continues following weekend protests marred by violence. In a tweet sent Monday, Joseph Wu said it was time for Hong Kong residents to be granted universal suffrage and full control over choosing their representatives. Wu's message of support for pro-democracy activists in Hong Kong came amid perhaps the most intense resistance against Communist Party rule from Beijing since control of the semi-autonomous territory was passed from British to Chinese rule in 1997.”

July 24 – Reuters (Hyonhee Shin and Joyce Lee): “North Korea test-fired two new short-range ballistic missiles on Thursday, South Korean officials said, its first missile test since its leader, Kim Jong Un, and U.S. President Donald Trump agreed to revive denuclearisation talks last month… Firing a ballistic missile would be a violation of U.N. Security Council resolutions that ban the North from the use of such technology.”

July 22 – Reuters (Ece Toksabay and Tuvan Gumrukcu): “Turkey would retaliate against what it called an unacceptable threat of U.S. sanctions over Ankara’s purchase of Russian S-400 missile defenses, its foreign minister said…, adding he thinks President Donald Trump wants to avoid such measures.”

July 24 – Reuters (Tuvan Gumrukcu): “Turkish Foreign Minister Mevlut Cavusoglu said… that new U.S. proposals for a safe zone in northern Syria fall short and Turkey was running out of patience as Washington appears to be stalling in efforts to seal an agreement.”

July 22 – Reuters (Catherine Cadell): “More than half of Venezuela’s 23 states lost power on Monday, according to Reuters witnesses and reports on social media, a blackout the government blamed on an ‘electromagnetic attack.’”