Friday, August 2, 2019

Weekly Commentary: Trump's China Tariff Tweets

Twenty-four hours that confounded - as well as clarified. Chairman Powell has, again, been widely criticized for his messaging. With the markets and President Trump breathing down his neck, he’s been in a no-win situation. Data have not supported commencing an aggressive easing cycle, while markets raced far ahead of the FOMC. Especially with dissention mounting within the Committee, Powell had to attempt a modest reset of market expectations. This wasn’t going to be uneventful.

July 31 – CNBC (Patti Domm): “Stocks cratered, the dollar hit a more than two-year high and bond yields ripped higher after Fed Chairman Jerome Powell suggested that policymakers were not embarking on a new cycle of rate cutting… ‘Let me be clear: What I said was it’s not the beginning of a long series of rate cuts… I didn’t say it’s just one or anything like that. When you think about rate-cutting cycles, they go on for a long time and the committee’s not seeing that. Not seeing us in that place. You would do that if you saw real economic weakness and you thought that the federal funds rate needed to be cut a lot. That’s not what we’re seeing.’”

Reuters’ Ann Saphir: “You called it a mid-cycle adjustment to policy and, I mean, what should we take this to mean? And what message do you mean to send with this move today about future rate moves?

Powell: “The sense of that… refers back to other times when the FOMC has cut rates in the middle of a cycle. And I’m contrasting it there with the beginning, for example, the beginning of a lengthy cutting cycle.”

Saphir: “So we’re not at the beginning of a lengthy cutting cycle?”

Powell: “That is not what we’re seeing now. That’s not our perspective now or outlook.”

Powell responding to a question from Bloomberg’s Mike McKee: “What we’ve been monitoring since the beginning of the year is effectively downside risks to that outlook. From weakening global growth, and we see that everywhere. Weak manufacturing, weak global growth now particularly in the European Union and China. In addition, we see trade policy developments, which at times have been disruptive and then have been less so. And also inflation running below target. So, we see those as threats to what is clearly a favorable outlook.”

Markets were less than thrilled to hear “what is clearly a favorable outlook.” Powell also stated, “overall the US economy has shown resilience”

Marketplace’s Nancy M. Genzer: “So when we have our next recession, the Fed will have less room. It will happen. The Fed will have less room to maneuver cutting interest rates since you’re cutting now, how big of a problem will that be? …You won’t be able to cut as much if rates are low, and you will have less ammo in that sense.”

Powell: “You’re assuming that we would never raise rates again, that once we’ve cut these rates they can never go back up again. As just as a matter of principle, I don’t think that’s right. In other long cycles, long US business cycles have sometimes involved this kind of event where the Fed will stop hiking. In fact, we’ll cut and then we’ll go back to hiking.”

It’s been a long time since a Federal Reserve Chairman spoke with such candor – and markets were utterly confounded. After fondly receiving “insurance cut” and “ounce of prevention...,” equities were immediately repulsed by the notion of “mid-cycle adjustment.” And how could Powell broach the subject of the Fed contemplating ever raising rates again? Does Powell not understand what the markets expect of him? Where is the clear message? What happened to the beloved “an ounce of prevention is worth a pound of cure?”

The problem is equities have been demanding a pound of prevention. The Fed is in uncharted waters on so many levels. To be sure, never have markets so determined financial conditions domestically as well as globally. This is a far cry from the old days when the Fed would subtly adjust overnight lending rates to, on the margin, influence bank lending. These days subtlety no longer suffices, as speculative global markets have come to demand a regular fix of policy “shock and awe.”

The course of monetary policy would be much clearer if only the FOMC could accomplish one accurate prediction (one good model!): Will risk markets be dominated by a “risk on” or “risk off” speculative dynamic? If “risk on” continues to dominate, the FOMC would not move forward with an aggressive easing cycle. “Risk off,” conversely, would put immediate and intense pressure on the Fed to drive rates lower (and expand its balance sheet). Enamored by the Fed’s newfound “insurance” approach, the equities market fully expects the Fed to completely disregard the “risk on” scenario. At least some members of the FOMC, apparently including the Chairman himself, are understandably uncomfortable with the markets commanding Fed policy.

The S&P500 dropped a quick 1.7% on Powell’s comments. The implied rate on December Fed funds futures rose a not earth-shaking 5.5 bps in Wednesday trading to 1.84% (anticipating another 30 bps of cuts by year-end). Equities were in a bit of a tantrum. Bonds – they remained cool as a cucumber. Interestingly, ten-year Treasury yields declined four basis points on Fed Wednesday to 2.02% - the low since December 2016. Long-bond yields declined six bps to 2.53%.

Equities may have been confounded by Powell, but some clarity was apparent in bond trading. Treasury yields are moving on factors outside of FOMC policy. And, clearly, global yields are fixated on something other than central bank policies. Additional clarity was created less than 24 hours later. Presidential tweets:

“Our representatives have just returned from China where they had constructive talks having to do with a future Trade Deal. We thought we had a deal with China three months ago, but sadly, China decided to re-negotiate the deal prior to signing. More recently, China agreed to...”

“ agricultural product from the U.S. in large quantities, but did not do so. Additionally, my friend President Xi said he would stop the sale of Fentanyl to the United States – this never happened, and many Americans continue to die! Trade talks are continuing, and...”

“...during the talks the U.S. will start, on September 1st, putting a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China into our Country. This does not include the 250 Billion Dollars already Tariffed at 25%...”

“...We look forward to continuing our positive dialogue with China on a comprehensive Trade Deal, and feel that the future between our two countries will be a very bright one!”

Markets were not buying Mr. Brightside. Stocks had rallied strongly Thursday pre-tweet. Having fully recovered from the Powell swoon, the S&P500 was trading within less than half a percent of all-time highs. Then the S&P sank a quick 2.1% (Nasdaq100 2.7%) on the Trump Tariff Tweets. Why such an emphatic reaction? Wasn’t the President simply replicating the strategy that had Mexican authorities responding feverishly to ensure the tariff threat didn’t become reality?

I view the markets’ responses to the President’s threat of additional Chinese tariffs as providing important analytical clarity. Let there be no doubt: Chinese developments have become the critical factor for global markets. And the issue is not the possibility of 10% tariffs on an additional $300 billion of Chinese imports. The critical issue is Chinese financial and economic fragilities, and the very real possibility that an escalating trade war pushes a vulnerable China over the edge.

Ten-year Treasury yields sank 12 bps Thursday to 1.87%. After the 5.5 bps Powell Wednesday afternoon increase, the implied rate for December Fed fund futures sank 17 bps to end the week at 1.665%. Ten-year Treasuries ended the week down 23 bps to 1.84%, the low going back to November 7, 2016 (when Fed funds were at 0.40%). Long-bond yields dropped 22 bps to 2.38%. From before Trump’s Tariff Tweets to Friday’s close, the safe haven Japanese yen gained 2.3% against the dollar (high vs. dollar since scary January 3rd). The Swiss franc rallied 1.6%. From Thursday’s lows, Gold surged $40 to the high going all the way back to May 2013.

August 2 – Reuters (Virginia Furness): “The 30-year German government bond yield turned negative for the first time ever on Friday, leaving the euro zone member’s entire yield curve in negative territory as investors scrambled for safer assets… An early rally in German government bonds which saw the yield on its 10-year note fall below -0.50 bps for the first time ever accelerated as trading wore on.”

German bund yields ended the week down 12 bps to a record low negative 0.50%, with French yields sinking 12 bps to negative 0.24%. Spanish (0.25%) and Portuguese (0.29%) yields dropped to record lows. Swiss 10-year yields closed the week at a record low negative 0.89%. Record low 10-year yields were also negative in Denmark (-0.45%), Netherlands (-0.39%), Austria (-0.28%), Finland (-0.25%), Sweden (-0.21%), Slovakia (-0.18%), Belgium (-0.17%) and Slovenia (-0.03%). Bloomberg’s tally of negative-yielding debt ended the week at a record high $13.988 TN.

There were analysts quick to suggest it was no coincidence that Trump’s China Tariff Tweet followed closely on the heels of the snub from Chairman Powell. The President could dismember two fowl with one stone: ratchet up pressure on Chinese trade negotiators, while signaling to Powell that there’s an easy way and a hard way that will end at the same destination: monetary policy will now be dictated from the Oval Office.

I’ll repeat the same view that I’ve posited since early in the administration. The President is playing a dangerous game with the Chinese. And I can confidently predict for years to come the Fed will be castigated for not more aggressively adopting monetary stimulus. Yet, if not for the dovish U-turn, all the talk of an “insurance cut” and the resulting risk market rally, I doubt the President tweets Thursday on additional Chinese tariffs. Tariffs, deficits, speculative Bubbles and the like: The Fed and Central Banks as Enablers.

August 2 – Politico (Adam Behsudi and Ben White): “President Donald Trump’s decision this week to ratchet up the trade war with Beijing by slapping more tariffs on Chinese goods came after aides thought they had talked him out of it weeks ago, according to two people close to the discussions. But the president’s annoyance with China finally boiled over this week after Treasury Secretary Stephen Mnuchin and U.S. Trade Representative Robert Lighthizer returned from trade talks in Shanghai and reported that Chinese officials offered no new proposals for ending an impasse that’s persisted since May… Trump’s Twitter announcement… drew a quick reaction from China on Friday… ‘China will not accept any form of pressure, intimidation or deception,’ Chinese Foreign Ministry spokesperson Hua Chunying said… China‘s Ministry of Commerce released a statement that said Beijing would impose countermeasures. ‘The U.S. has to bear all the consequences,’ the statement said. ‘China believes there will be no winners of this trade war and does not want to fight. But we are not afraid to fight and will fight if necessary.’”

The administration is hellbent on cornering the wounded animal. China’s historic financial and economic Bubbles are in trouble. Beijing has been working intensively to stabilize its money market and corporate lending markets. More generally, China’s overheated Credit system has become deranged. Financial conditions have recently tightened dramatically for small banks and financial institutions, while real estate finance remains in a runaway speculative Bubble blow-off. System Credit is on track to approach a record $4.0 TN this year, as Credit quality rapidly deteriorates.

July 28 – Financial Times (Don Weinland): “China’s biggest bank has stepped in to become the largest shareholder of a troubled Hong Kong-listed lender, the latest sign that the state is increasing its financial support for struggling banks across the country. Industrial and Commercial Bank of China said… that one of its subsidiaries would invest up to Rmb3bn ($436m) in Bank of Jinzhou, taking a stake of about 10.82%. Investors have grown concerned over the health of the Chinese banking system in recent weeks following the government takeover of Baoshang Bank, the first such incident in nearly two decades.”

July 29 – Bloomberg: “Chinese authorities, which shocked the market with a regional bank seizure in May, adopted a different approach for helping another troubled lender -- a sign regulators are treading carefully as they try to resolve the sector’s problems. Three Chinese state-owned financial heavyweights, including Industrial & Commercial Bank of China Ltd., agreed to buy at least 17% of… Bank of Jinzhou Co. on Sunday. The acquisition by ICBC comes at about a 40% discount to the last closing price of the northeastern Liaoning-based lender, whose stock has been halted since April and which saw its dollar bonds tumble last week amid reports of liquidity strains. The move underscores regulators’ efforts to restore confidence in smaller lenders, a key source of credit to small and medium-sized companies, while reducing the moral hazard of a government backstop that makes all investors whole.”

ICBC’s stock immediately dropped 2% on news of its stake in troubled Bank of Jinzhou. Understandably, Beijing was compelled to quickly and decisively “resolve” the Bank of Jinzhou issue; to quash a panic beginning to catch fire in the “small” bank sector. But festering bad loan and capital adequacy issues will limit the degree to which the major Chinese banks can absorb problems from thousands of smaller institutions.

President Trump sees the opportunity to use China’s weakened economy to extract trade concessions. As it drifts closer to a systemic crisis of confidence, Chinese finance is the more pressing issue. Remember how such circumstances tend to unfold: very slowly then suddenly quite quickly.

Beijing is blaming the U.S. for Hong Kong unrest. China moved forward with military drills in the Taiwan Strait after the U.S. agreed to sell $2 billion of military hardware to Taiwan. The U.S. has assumed an increasingly aggressive posture to counter the Chinese military in the South China Sea. There is the Huawei issue, along with the U.S.’s use of unilateral economic sanctions (i.e. Iran, Venezuela). On numerous fronts, China believes the Trump administration is determined to inhibit China’s advancement and infringe upon its sovereignty.

If they believed a trade deal would resolve the U.S. administration’s chief concerns, Beijing would likely be more willing to compromise. But at this point I take them at their word: “China will not accept any form of pressure, intimidation or deception.” There is a clear and present risk of problematic escalation.

The offshore renminbi dropped 1.37% this week to 6.976 (vs. dollar), just below the lowest level (6.9805) versus the dollar since November 2018 (and near January ‘17’s multiyear low 6.9895). The onshore renminbi declined 0.88% this week to 6.9405, the low against the dollar since last November. Expect to hear more discussion of ramifications of a renminbi break of the key psychological 7.0 level. How much speculative leverage has accumulated in Chinese Credit? Global finance has never been as vulnerable to a systemic “risk off” market dislocation.

Thursday afternoon from Bloomberg (Harkiran Dhillon): “Oil plunged almost 8% for the steepest one-day drop in more than four years after U.S. President Donald Trump escalated the trade war with China…” Elsewhere, Copper dropped a quick 3.5% to a two-year low. Iron Ore fell 7.4%, Palladium 7.9%, Zinc 4.0%, Lead 3.0%, Tin 2.0% and Aluminum 1.6%. In the soft commodities, cotton sank 7.0% post Trump tweet. Soybeans dropped 3.7% for the week and Corn fell 3.5%.

Global market operators will this weekend ponder a few pressing questions: Does President Trump appreciate he risks opening a Pandora’s Box of “risk off” global market dynamics? And will unsettled markets compel him to back off his tariff threat? He’s not willing to gamble his reelection on China tariffs, is he? Two months back I titled a CBB, “So Much for the Trump Put.” Markets were in a forgiving mood. A subservient Mexico convinced the markets it was a “no harm no foul” successful Presidential ploy. Markets now must regret Mexico having rolled over so easily. China is no subservient rollover.

China is instead the vulnerable marginal global source of Credit and economic growth. Beijing has been working diligently to stabilize their fragile financial and economic systems. It no doubt presents the administration an irresistible opportunity to partake in barefaced hardball. But at this point pushing China closer to the crisis point basically unleashes global “risk off,” with myriad repercussions.

Where are the weakest links in the event of a deteriorating China situation? Asian currencies were under pressure this week. Australia’s dollar fell 1.6%. On the margin, weak European economies are particularly vulnerable. Germany’s DAX dropped 4.4% this week, and France’s CAC40 sank 4.5%.

The Hang Seng China Financials index sank 4.8% this week. European bank stocks (STOXX 600) dropped 5.7%. And corroborating the view of a highly intertwined global financial Bubble, U.S. bank stocks fell a noteworthy 5.0%.

I would be remiss for not further highlighting gold’s $22 weekly rise to multi-year highs. China doesn’t have the quantity of U.S. imports to match the Trump Tariffs. But they have ample powerful levers to pull. With my view that China is confronting serious financial and economic crisis, I ponder how an aggravated Beijing might react. When the forces of crisis can no longer be held at bay, might they calculate they would weather a global crisis in relatively better standing than their archrival? Could they interject Taiwan into the equation? There is ample justification for gold’s run up – experimental activist monetary policy, a world of debt, a historic global securities Bubble, and a troubling geopolitical backdrop.

For the Week:

The S&P500 dropped 3.1% (up 17.0% y-t-d), and the Dow fell 2.6% (up 13.5%). The Utilities added 0.5% (up 14.4%). The Banks sank 5.0% (up 14.2%), and the Broker/Dealers fell 4.5% (up 11.4%). The Transports tumbled 3.7% (up 13.1%). The S&P 400 Midcaps slumped 3.5% (up 15.1%), and the small cap Russell 2000 dropped 2.9% (up 13.7%). The Nasdaq100 fell 4.0% (up 21.5%). The Semiconductors sank 6.6% (up 28.8%). The Biotechs slipped 0.4% (up 9.3%). With bullion jumping $22, the HUI gold index added 0.8% (up 29.9%).

Three-month Treasury bill rates ended the week at 2.00%. Two-year government yields fell 14 bps to 1.71% (down 78bps y-t-d). Five-year T-note yields dropped 19 bps to 1.66% (down 85bps). Ten-year Treasury yields sank 22 bps to 1.85% (down 84bps). Long bond yields dropped 21 bps to 2.38% (down 63bps). Benchmark Fannie Mae MBS yields fell 21 bps to 2.60% (down 89bps).

Greek 10-year yields dipped two bps to 2.03% (down 237bps y-t-d). Ten-year Portuguese yields sank 15 bps to 0.29% (down 143bps). Italian 10-year yields declined three bps to 1.54% (down 120bps). Spain's 10-year yields fell 13 bps to 0.25% (down 117bps). German bund yields dropped 12 bps to negative 0.495% (down 74bps). French yields fell 12 bps to negative 0.24% (down 95bps). The French to German 10-year bond spread was little changed at 26 bps. U.K. 10-year gilt yields sank 14 bps to 0.55% (down 73bps). U.K.'s FTSE equities index lost 1.9% (up 10.1% y-t-d).

Japan's Nikkei Equities Index slumped 2.6% (up 5.4% y-t-d). Japanese 10-year "JGB" yields declined two bps to negative 0.16% (down 17bps y-t-d). France's CAC40 sank 4.5% (up 13.3%). The German DAX equities index lost 4.4% (up 12.4%). Spain's IBEX 35 equities index tumbled 3.6% (up 4.2%). Italy's FTSE MIB index dropped 3.6% (up 14.9%). EM equities were lower. Brazil's Bovespa index was little changed (up 12.8%), while Mexico's Bolsa declined 1.7% (down 4.0%). South Korea's Kospi index dropped 3.3% (down 2.1%). India's Sensex equities index fell 2.0% (up 2.9%). China's Shanghai Exchange declined 2.6% (up 15.0%). Turkey's Borsa Istanbul National 100 index sank 3.1% (up 9.2%). Russia's MICEX equities index declined 1.5% (up 12.9%).

Investment-grade bond funds saw outflows of $62 million, and junk bond funds posted outflows of $115 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates were unchanged at 3.75% (down 85bps y-o-y). Fifteen-year added two bps to 3.20% (down 88bps). Five-year hybrid ARM rates slipped a basis point to 3.46% (down 47bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.04% (down 56bps).

Federal Reserve Credit last week declined $16.0bn to $3.752 TN. Over the past year, Fed Credit contracted $481bn, or 11.4%. Fed Credit inflated $941 billion, or 33%, over the past 351 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $1.9bn last week to $3.463 TN. "Custody holdings" gained $28.7bn y-o-y, or 0.8%.

M2 (narrow) "money" supply surged $54.5bn last week to a record $14.882 TN. "Narrow money" gained $733bn, or 5.2%, over the past year. For the week, Currency increased $2.7bn. Total Checkable Deposits jumped $28.8bn, and Savings Deposits rose $17.0bn. Small Time Deposits slipped $2.5bn. Retail Money Funds gained $8.5bn.

Total money market fund assets declined $5.5bn to $3.279 TN. Money Funds gained $433bn y-o-y, or 15.2%.

Total Commercial Paper added $1.2bn to $1.153 TN. CP was up $86bn y-o-y, or 8.0%.

Currency Watch:

July 28 – Reuters (Cate Cadell and Kevin Yao): “China will pursue the diversification of its foreign exchange reserves in a steady, prudent way, the country’s foreign exchange regulator said on Sunday as it for the first time released some broad data on its reserve holdings.”

July 29 – Wall Street Journal (Paul J. Davies): “The Swiss central bank appears to have taken its most significant steps to weaken the Swiss franc in two years, after looming rate cuts from U.S. and European central banks put upward pressure on the currency. The Swiss National Bank began selling francs into the market last week, a move that was reflected in an uptick in the so-called sight deposits that lenders use to hold reserves at the central bank.”

The U.S. dollar index was little changed at 98.096 (up 2.0% y-t-d). For the week on the upside, the Japanese yen increased 2.0% and the Swiss franc gained 1.1%. On the downside, the South African rand declined 3.3%, the Brazilian real 2.9%, the Norwegian krone 2.2%, the British pound 1.8%, the Australian dollar 1.6%, the New Zealand dollar 1.5%, the Swedish krona 1.4%, the Mexican peso 1.3%, the South Korean won 1.1%, the Singapore dollar 0.6%, the Canadian dollar 0.3%, and the euro 0.2%. The Chinese renminbi declined 0.88% versus the dollar this week (down 0.89% y-t-d).

Commodities Watch:

July 31 – Reuters (Peter Hobson): “Global gold demand rose 8% in the first half of this year to the highest since 2016, driven by central bank buying and a flood of investment into gold-backed exchange traded funds (ETFs), the World Gold Council said… Retail investors however were put off buying bars and coins by a rapidly rising gold price, the WGC said… The price rally to six-year highs above $1,400 an ounce in June also saw gold holders cash in metal for profit, causing a boom in recycling that raised global supply by 6%, the WGC said. The world's appetite for gold was 2,182 tonnes over January-June, up from 2,021 tonnes in the same period of 2018…”

The Bloomberg Commodities Index declined 1.9% this week (up 0.3% y-t-d). Spot Gold jumped 1.5% to $1,441 (up 12.3%). Silver declined 0.8% to $16.27 (up 4.7%). WTI crude declined 54 cents to $55.66 (up 23%). Gasoline sank 5.0% (up 35%), and Natural Gas fell 2.0% (down 28%). Copper dropped 4.2% (down 2%). Wheat declined 1.1% (down 3%). Corn tumbled 3.5% (up 9%).

Market Instability Watch:

August 1 – Bloomberg (Samuel Potter): “On the day Jerome Powell attempted to moderate market expectations for further easing, the world’s stockpile of negative-yielding bonds notched another remarkable record. The Federal Reserve’s rate cut helped swell the total of all debt with sub-zero yields to more than $14 trillion for the first time. The market value of the Bloomberg Barclays Global Negative Yielding Debt Index closed at $14.1 trillion on Wednesday, after the biggest one-day jump in a month… The value of bonds yielding less than zero now makes up more than a quarter of the entire investment-grade market… They comprise 25.68% of the Bloomberg Barclays Global Aggregate Index, a gauge which includes government, corporate and securitized debt. That’s a whisker away from the record 25.99% posted in 2016.”

July 31 – Financial Times (Harry Dempsey): “Central banks purchased a record $15.7bn of gold in the first six months of the year in an effort to diversify their reserves away from the US dollar as global trade tensions continue to simmer. Data released by the World Gold Council… showed central banks, led by Poland, China and Russia, bought 374 tonnes of gold — the largest acquisition of the precious metal on record by public institutions in the first half of a year. Central banks accounted for nearly one-sixth of total gold demand in the period. The pattern advances on last year’s activity in which central banks hoovered up more gold than at any time since the end of the gold standard (where a country could link the value of its currency to the precious metal) in 1971.”

August 1 – Bloomberg (Sofia Horta e Costa): “Hong Kong stocks are having their worst run since early 2016 on increasing signs the local economy is under pressure. The MSCI Hong Kong Index fell 1.2% at the close, its seventh session of losses. Companies related to office and residential property, as well as shopping malls, were among the biggest decliners.”

Trump Administration Watch:

July 30 – Reuters (Brenda Goh, David Stanway, Andrea Shalal): “U.S. and Chinese negotiators ended a brief round of trade talks on Wednesday with little sign of progress and agreed to meet again in September, prolonging an uneasy truce in a year-long trade war between the world’s two largest economies. The talks were the first face-to-face meetings since U.S. President Donald Trump and Chinese President Xi Jinping met in June and agreed to get negotiators back together to try to find a way out of the dispute. The White House and China’s Commerce Ministry each described the meetings in Shanghai as constructive, but neither announced any agreements or goodwill gestures that might have cleared the path to more substantive future talks.”¬¬

July 31 – Wall Street Journal (Chao Deng): “Plodding progress in trade negotiations between the U.S. and China this week is partly the result of a new tactic from Beijing, which increasingly thinks waiting may produce a more-favorable agreement. U.S. and Chinese trade negotiators held four hours of talks Wednesday, after a dinner the night before, and then wrapped up their first face-to-face meeting since negotiations foundered more than two months ago. Both sides described the talks as constructive and said the next round will be held in September.”

July 30 – Financial Times (Lucy Hornby and James Politi): “Donald Trump said there were ‘no signs’ that China was moving ahead with promised purchases of US farm goods, adding to a barrage of mutual criticism as a new round of trade talks began in Shanghai. ‘That is the problem with China, they just don’t come through,’ Mr Trump wrote in a tweet… ‘My team is negotiating with them now, but they always change the deal in the end to their benefit.’”

July 30 – Bloomberg (Terrence Dopp and Justin Sink): “President Donald Trump lashed out at China for what he said is its unwillingness to buy American agricultural products and said it continues to ‘rip off’ the U.S., just as the two nations resumed negotiations in Shanghai following a three-month breakup. ‘China is doing very badly, worst year in 27 -- was supposed to start buying our agricultural product now -- no signs that they are doing so,’ Trump said…”

July 30 – Reuters (Susan Heavey and Alexandra Alper): “U.S. President Donald Trump… warned China against waiting out his first term to finalize any trade deal, saying if he wins re-election in the November 2020 U.S. presidential contest, the outcome will be worse for China. As a new round of U.S.-China trade negotiations got underway in Shanghai, Trump said on Twitter: ‘The problem with them waiting ... is that if & when I win, the deal that they get will be much tougher than what we are negotiating now ... or no deal at all.’ Trump said China appeared to be backing off on a pledge to buy U.S. agricultural products, which U.S. officials have said could be a goodwill gesture and part of any final pact here.”

August 1 – Reuters (Cate Cadell and Patpicha Tanakasempipat): “U.S. Secretary of State Mike Pompeo… criticized China’s actions in Asia after meeting his Chinese counterpart for the first time this year amid political tension between the two countries. Pompeo spoke out against Chinese ‘coercion’ of Southeast Asian neighbors in disputes over the South China Sea and its dam-building on the Mekong River. His comments highlighted the U.S. divide with China at a meeting in Bangkok of the Association of Southeast Asian Nations (ASEAN).”

July 31 – CNBC (Tucker Higgins and Fred Imbert): “President Donald Trump said Federal Reserve Chairman Jerome Powell ‘let us down’ on Wednesday hours after the Fed lowered its benchmark rate by a quarter point… ‘What the Market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China, The European Union and other countries around the world,’ Trump wrote in a series of posts on Twitter. ‘As usual, Powell let us down, but at least he is ending quantitative tightening, which shouldn’t have started in the first place - no inflation,’ Trump wrote. ‘We are winning anyway, but I am certainly not getting much help from the Federal Reserve!’”

July 29 – Reuters (Susan Heavey and Jason Lange): “U.S. President Donald Trump on Monday urged the Federal Reserve to go beyond making a ‘small rate cut’ this week, raising pressure on the central bank to lower borrowing costs by more than Wall Street expects. In a series of tweets ahead of the Fed’s meeting…, Trump reiterated his criticism of independent U.S. monetary policymakers… ‘The E.U. and China will further lower interest rates and pump money into their systems, making it much easier for their manufacturers to sell product. In the meantime, and with very low inflation, our Fed does nothing - and probably will do very little by comparison. Too bad!’ he wrote on Twitter. ‘The Fed has made all of the wrong moves. A small rate cut is not enough, but we will win anyway!’ he added.”

July 30 – Reuters (Andrea Shalal, Susan Heavey and Jonas Ekblom): “U.S. Vice President Mike Pence… said that a new U.S.-Mexico-Canada trade deal needs to be approved without delay, but Democrats and organized labor said certain provisions must first be improved. Pence told reporters he was hopeful that the U.S. House of Representatives, which is controlled by Democrats, would pass the agreement this fall.”

July 27 – Associated Press (Angela Charlton): “France is pushing ahead with a landmark tax on tech companies like Google and Facebook despite U.S. President Donald Trump’s threats of retaliatory tariffs on French wine. That’s rattling French vintners, who sold 1.6 billion euros ($1.78bn) worth of wine last year to American consumers. But neither Trump nor French President Emmanuel Macron appears ready to back down. After Trump slammed the ‘foolishness’ of the tax in a tweet… and promised reciprocal action…”

July 26 – Reuters (Pete Schroeder): “President Donald Trump’s administration faces a growing list of hurdles that could scuttle its ambitions to remove U.S. mortgage giants Fannie Mae and Freddie Mac from their government lifeline. Fannie and Freddie have been in conservatorship since they were bailed out during the 2008 financial crisis. In March, the administration said it was devising a plan to put them back on their feet, raising market hopes that the pair might seek a jumbo initial public offering as early as next year. But as the Federal Housing Finance Agency (FHFA) and the U.S. Treasury begin to dig into the details, reality is starting to bite. From securing a federal guarantee to extricating the Treasury from its holdings, there is too much to do before the 2020 presidential election, analysts and housing experts said.”

August 1 – Wall Street Journal (Ben Eisen): “The Trump administration is moving to restrict mortgage refinancings in which borrowers withdraw cash, the latest effort to curb the federal government’s exposure to potential defaults. The Federal Housing Administration, an arm of the Department of Housing and Urban Development that insures loans for mostly first-time buyers, announced… it will limit cash-out refinancings in its program. Borrowers will be able to pull cash out only when the new loan amounts to 80% of the value of the home or less, down from 85%. The policy change, expected to take effect in September, follows a sharp rise in the use of cash-out refinancings over the past several years. Officials believe this has added risk to the $1.3 trillion government mortgage program.”

Federal Reserve Watch:

August 1 – Financial Times (James Politi and Colby Smith): “After weeks of market pressure and internal debate, Jay Powell, the Federal Reserve chairman, pulled the trigger on the US central bank’s first interest rate since the financial crisis. That was the easy part. While Wednesday’s announcement of a 25 bps cut was in line with market expectations, the press conference that followed showed how challenging Mr Powell will find guiding investors on what happens next. When the Fed chairman said that the move was a ‘mid-cycle adjustment in policy’ — not the start of a full-blown easing cycle, which would imply multiple and possibly deep rate cuts — investors were spooked. ‘The press conference muddied the waters,’ said Julia Coronado, an economist at MacroPolicy Perspectives. ‘Even if the Fed’s own thinking hasn’t changed much, and the bar is still very low for another rate cut, the lack of clarity on the motivation and the baseline thinking and the triggers for action leave markets more confused.’ Mr Powell’s unwillingness to commit to deeper monetary easing with great force represented a contrast to the consistently dovish messages sent by Fed officials in the weeks leading up to the Fed meeting, in a series of speeches, congressional testimony, and media appearances.”

July 31 – Bloomberg (Rich Miller and Christopher Condon): “Federal Reserve Chairman Jerome Powell hearkened back to the central bank’s 1990’s policy successes by suggesting he can sustain the record long U.S. economic expansion with just a modest reduction in interest rates. Speaking to reporters after the Fed cut rates for the first time since 2008, Powell left open the possibility of further moves but said he didn’t see Wednesday’s action as the start of an extended easing cycle. ‘We’re thinking of it as essentially in the nature of a mid-cycle adjustment to policy,’ he said. A divided Fed lowered rates by a quarter percentage point, as had been widely expected. Powell’s remark raised comparisons to 1995-96 and 1998, when Alan Greenspan headed the Fed.”

July 30 – Bloomberg Opinion (Bill Dudley): “The U.S. Federal Reserve is poised to make a monumental move: At its policy-making meeting this week, it will cut interest rates for the first time in more than 10 years. Many see this as just the first step in a new stimulus policy aimed at supporting a fragile economy. I’m not so sure. I think there’s a good chance the Fed won’t be cutting further anytime soon. Some think this week’s cut in the federal funds rate could be as large as half a percentage point. I don’t agree. There’s no consensus for such an aggressive move on the policy-making Federal Open Market Committee, and the most recent data show the economy gaining momentum. Also, it might compromise the Fed’s independence, creating the impression that the central bank was caving to President Donald Trump’s insistent calls for deeper cuts. Even a quarter-point cut -- which is what I expect -- entails significant risks. What if, in hindsight, it proves to have been a mistake?”

July 30 – Bloomberg (Jeff Kearns): “The Federal Reserve’s preferred measure of underlying U.S. inflation showed signs of rebounding back toward the central bank’s target in June just before a widely anticipated interest-rate cut spurred partly by weak price gains. The core personal consumption expenditures price gauge, which excludes food and energy, climbed 0.2% from the prior month and 1.6% from a year earlier…”

August 1 – CNBC (Maggie Fitzgerald): “After one more interest rate cut, the Federal Reserve will be finished cutting rates, according to Goldman Sachs. The firm gives an 80% probability of another rate cut this year to wrap up the Fed’s easing cycle. ‘[Powell’s] language we see as consistent with our expectation that easing will end with a second 25bp cut,’ Goldman chief economist Jan Hatzius said in a note to clients following Wednesday’s FOMC meeting.”

August 1 – CNBC (Michael Bloom): “Major Wall Street economists were largely in agreement that the Federal Reserve would cut rates by a quarter point heading into this week’s policy meeting. But after a confusing news conference by Fed Chairman Jerome Powell, their forecasts for future policy are now all over the place. The Fed… cut its key interest rate by a quarter-point for the first time since 2008. But then Powell declared it was just a ‘midcycle adjustment,’ causing the stock market to drop and rates to firm. ‘If the Chair could not pull the Committee to 50bp today or even a strongly dovish tilt, we see it as unlikely that he can pull them to cuts in subsequent meetings,’ UBS economist Seth Carpenter said. ‘Further cuts possible but not likely.’”

U.S. Bubble Watch:

July 29 – Wall Street Journal (Kate Davidson): “Borrowing by the federal government is set to top $1 trillion for the second year in a row as higher spending outpaces revenue growth and concern about budget deficits wanes in Washington and on Wall Street. The Treasury Department said… it expects to issue $814 billion in net marketable debt in the second half of this calendar year, bringing total debt issuance to $1.23 trillion in 2019. That would represent a slight decline from borrowing in 2018, when the Treasury issued $1.34 trillion in debt—more than twice as much as the $546 billion it issued in 2017.”

July 29 – Associated Press (Martin Crutsinger): “The Treasury Department said… it expects to borrow $433 billion in the current July-September quarter. That would be the largest quarterly borrowing total since early 2018, as the government replenishes its cash reserves following the expected resolution over raising the debt limit. Treasury said the $433 billion in borrowing it expects this quarter… would be the largest quarterly total since it borrowed $488 billion in the January-March quarter of 2018. Market borrowing for this budget year is projected to total $1.27 trillion, a 6.5% increase from the $1.195 trillion borrowed in the 2018 budget year.”

August 2 – Bloomberg (Katia Dmitrieva): “America’s merchandise trade deficit with China widened slightly in June to a five-month high, government figures showed Friday, a day after President Donald Trump threatened to ratchet up tariffs on a slew of additional imports from the Asian nation. The gap stood at a seasonally adjusted $30.2 billion after $30.1 billion a month earlier… The value of American exports to China declined more than imports. The overall U.S. shortfall in goods and services trade narrowed by less than forecast, to $55.2 billion in June.”

July 30 – CNBC (Diana Olick): “Home prices moved higher, and while the gains were shrinking in May on a national level, some markets are seeing stronger price appreciation yet again. Nationally, home prices rose 3.4% annually in May, down from the 3.5% annual gain in April, according to the S&P CoreLogic Case-Shiller home price indices. The 10-city price composite rose 2.2%, down from 2.3% the month before. The 20-city composite showed a 2.4% annual gain, down from 2.5% in April. ‘Nationally, year-over-year home price gains were lower in May than in April, but not dramatically so and a broad-based moderation continued,’ said Philip Murphy, managing director and global head of index governance at S&P Dow Jones Indices, in a release. Other more recent indexes have shown price gains growing.”

July 29 – CNBC (Jeff Cox): “U.S. companies are on pace to break another record for share repurchases in 2019, using a combination of cash and debt to push the total to close to $1 trillion. For the first time since the financial crisis, companies have given back more to shareholders than they are making in cash net of capital expenditures and interest payments, or free cash flow, according to Goldman Sachs... The level of buybacks to free cash flow hit 104% for the 12 months ending in the first quarter of 2019, the first time that number has topped 100% during the economic recovery that started in 2009. In 2017, the level was 82%. Goldman projects buybacks for S&P 500 companies to total $940 billion, a 13% increase over the previous year and a new high for a number that has continued to increase through much of the post-financial crisis period. Total buyback executions among all companies this year were up 26% through mid-July.”

July 31 – (Bradley Keoun): “U.S. jobs growth rose faster than expected in July, according to… Automatic Data Processing. Private employers added 156,000 jobs during the month, ADP said, exceeding economists' average forecast for a gain of 150,000. The month also marked an increase from the 102,000 jobs added in June.”

July 27 – Wall Street Journal (Christina Rexrode): “Alex Ruiz, 29 years old, and his wife, Stephanie Johnson, have steady jobs, are setting aside money for retirement and are slowly paying down their student debt. Yet buying a house seems out of reach for at least another decade. Home values in Asheville, N.C., where they live, are up some 70% over the past seven years. Their student-loan payments and rising rent have made it difficult to save for a down payment, and the houses that go on the market get snapped up right away… For generations, the wealth of U.S. households was built on the foundation of homeownership. That is changing. Homeownership rates for younger Americans have fallen sharply over the last decade. The median age of a home buyer is 46, the oldest since the National Association of Realtors began keeping records in 1981.”

July 31 – CNBC (Emmie Martin): “Young people are struggling to pay off their student loans. And for many, that means delaying other financial goals. Nearly half of current undergraduates with student loans plan to put off buying a home because of their student debt, a new survey from real estate site Clever found. Just over 40% of these students say they’ll have to delay saving for retirement as well. In its 2019 Home Affordability Report, home co-investment company Unison found similar results: 83% of non-homeowners said student debt is the reason they can’t afford to buy a home right now. Generally, they’re delaying buying a house by around seven years as a result… In fact, homeownership rates drop by 1.5 percentage points for every $1,000 increase in student debt, a 2017 study by the Federal Reserve found.”

China Watch:

July 31 – Financial Times (Christian Shepherd and Tom Hancock): “Beijing has hit back at Donald Trump, saying it is ‘meaningless’ for Washington to try to pressure Beijing during trade talks, a day after the US president accused China of not negotiating in good faith. A Chinese foreign ministry spokeswoman made the comments after trade talks between US trade representative Robert Lighthizer, Treasury secretary Steven Mnuchin and their Chinese counterpart, vice-premier Liu He, finished after half a day of meetings in Shanghai on Wednesday, a US official said.”

July 31 – Associated Press: “China’s factory activity contracted in July for a third month amid a tariff war with Washington and weak domestic demand. A monthly index… stood at 49.7 on a 100-point scale. That was up 0.3 points from the previous month but still below the 50-point mark that shows activity contracting.”

July 30 – Reuters (Lusha Zhang): “China’s services sector activity grew at a slower pace in July…, heaping pressure on Beijing which is counting on the sector to help weather a sharp hit to its manufacturers and the economy from the Sino-U.S. trade war. The official non-manufacturing Purchasing Managers’ Index (PMI) fell to 53.7 from 54.2 in June, but stayed well above the 50-point mark that separates growth from contraction.”

July 30 – Bloomberg: “For anyone checking the health of China’s economy, corporate earnings are providing the latest bad news. Of the more than 1,600 firms to give first-half guidance, 40% have predicted a drop in earnings from a year earlier… That’s the most since 2016 in terms of companies reporting smaller profits, deeper losses or swings into loss… The warnings indicate pain is spreading across the economy after domestic output expanded at the slowest pace on record in the second quarter.”

July 30 – Financial Times (Don Weinland): “An accounting scandal rocking corporate China is drawing comparisons with the collapse of US firm Arthur Andersen as dozens of Chinese companies are forced to halt public listing work. Ruihua Certified Public Accountants, one of China’s largest accounting firms, was investigated by the country’s securities regulator early this month after a listed company it audited was found to have inflated profits by about Rmb12bn ($1.74bn) over four years. The probe has caused an unprecedented disruption in fundraising activities for Chinese companies, with more than 50 Ruihua clients halting initial public offerings and private capital raising, according to state media. The China Securities Regulatory Commission has suspended IPO approvals for at least 20 Ruihua clients. Several listings on China’s new Star Market board have also been delayed.”

July 30 – Bloomberg: “China is blocking dozens of initial public offerings, intensifying a crackdown on suspect disclosures and alleged fraud that’s seen as essential to deepening its equity market. The China Securities Regulatory Commission suspended the IPO reviews of 33 companies that hired a scandal-hit accountant... ‘This is the biggest block of IPO suspensions I have seen so far,’ said Zhong Wentang, who has covered China’s financial sector for seven years, first as an accountant and now as partner in the compliance department of Shanghai-based Infaith Consulting. ‘That speaks volumes about CSRC’s determination to tighten regulations.’”

July 30 – Reuters (Cheng Leng and Sumeet Chatterjee): “China is sharpening its scrutiny of small banks’ shareholders amid fears that loans from the lenders to big investors could prove a weak point in the country’s financial system, jolted by the state’s weekend rescue of one lender and recent takeover of another. While nominally small, China’s numerous small city commercial banks risk having outsized significance because of their close ties to the rest of the banking system as well as with bigger shareholders, many of whom are giant companies.”

August 1 – Bloomberg: “China sent the toughest message in recent years that it’s clamping down on property financing, as policymakers try to keep a lid on house prices. The central bank late Wednesday urged banks to ‘reasonably’ control lending to the property sector, and said it will step up supervision of already highly leveraged developers. It urged banks to redirect funds to industries at the forefront of economic reform efforts. The move follows an array of subtle restrictions on almost every financing avenue for developers to ensure they don’t overpay for land and spark a property bubble. Officials have asked banks not to cut mortgage rates, and told underwriters not to help developers sell bonds onshore. Rules on overseas debt sales have been tightened, while trusts, an important shadow-banking channel, have also been told to rein in property lending. Earlier this week, the Communist Party’s top ruling body toughened its policy tone on the housing market, vowing not to use the property sector as a short-term measure to stimulate the economy, and reiterated its stance that housing is for ‘habitation, not for speculation.’”

August 1 – Bloomberg: “At least eight smaller Chinese banks had their credit ratings cut this week, a sign that the funding strain faced by the sector is far from over since the government’s seizure of a troubled lender in May. Shandong Yuncheng Rural Commercial Bank Co. and Changchun Development Rural Commercial Bank Co. were among the banks downgraded further into junk territory by local rating companies, which most of them cited deteriorating asset quality as reasons for the cuts. Investors have become increasingly cautious about smaller Chinese lenders after the government’s unexpected seizure of Baoshang Bank Co. in May.”

July 30 – Bloomberg: “Jason Bedford might be the only person on Earth who reads every line of every financial statement issued by nearly 250 Chinese banks. His conclusion after completing the ritual for the umpteenth time: the industry needs capital, and lots of it. The… UBS Group AG analyst, whose star is rising after he issued early warnings about the troubles roiling China’s smaller banks, says the lenders he covers now face a potential capital shortfall of 2.4 trillion yuan ($349bn). His tally of assets at a broader universe of Chinese lenders in ‘distress’ is 9.2 trillion yuan, or about 4% of the commercial banking system and nearly 10% of gross domestic product.”

August 1 – Bloomberg: “Chinese regulators have introduced a new step to ease funding strains in the local money market after troubles at the country’s smaller lenders prompted traders to reassess counterparty risks. Starting Aug. 22, the National Interbank Funding Center and the Shanghai Clearing House will jointly provide interbank triparty bond repo clearing services, acting as independent intermediaries to facilitate bond repurchases between parties.”

July 29 – Reuters (Hallie Gu and Shivani Singh): “China’s pig herd could halve by the end of 2019 from a year earlier as an epidemic of African swine fever sweeps through the world’s top pork producer, analysts at Dutch bank Rabobank forecast… The bank said China’s herd, by far the world’s biggest, was already estimated to have shrunk by 40% from a year ago, well above official estimates which have ranged from 15% to 26%. The forecast comes amid industry speculation that the decline has been much worse than confirmed by agriculture officials…”

August 1 – Bloomberg: “China ordered television channels to not broadcast shows that are ‘too entertaining,’ -- such as costume dramas -- in the months leading up to the 70th anniversary of the founding of the People’s Republic. Instead, the country’s TV regulator provided a list of 86 programs that channels can broadcast ahead of the Oct. 1 anniversary date, which marks the founding of the modern Chinese state by the Communist Party. The recommended shows focus on patriotic themes, such as the rise of the Chinese nation, its growing affluence and power, and the stories of national heroes…”

Central Banking Watch:

July 29 – Reuters (Leika Kihara and Tetsushi Kajimoto): “The Bank of Japan held off on expanding stimulus… but committed to doing so ‘without hesitation’ if a global slowdown jeopardizes the country’s economic recovery. Growing fallout from the U.S.-China trade war has prompted major central banks to signal more easing and put pressure on the BOJ, which has far less policy ammunition left to deal with a significant downturn. BOJ Governor Haruhiko Kuroda said the central bank strengthened its commitment to act pre-emptively against risks to the economy, as protectionist policies and trade tensions were delaying an expected rebound in global growth.”

July 31 – Reuters (Jamie McGeever): “Brazil’s central bank cut its benchmark interest rate to a new low of 6.00% on Wednesday, an aggressive first move in a widely anticipated easing cycle to inject life into a moribund economy and prevent inflation from slipping too far below target. The reduction from 6.50% was the central bank’s first rate cut since March 2018…”

Brexit Watch:

July 29 – Wall Street Journal (Max Colchester): “Prime Minister Boris Johnson refuses to hold face-to-face meetings with European Union leaders unless they agree to change key aspects to Britain’s divorce deal with the bloc, something the other 27 member states have rejected, a stance that jolted the British currency. Mr. Johnson’s statement was the opening salvo in what is likely to be a tense few months between the two sides over the terms of Britain’s divorce with the bloc, due to take place on Oct. 31. The prime minister’s position—and the possibility it could spark a chaotic split with the EU along with a fresh U.K. election—sent the pound down 1.3% to its lowest level against the euro since September 2017. His stance that ‘no deal’ was Britain’s default position fed fears over the economic hit the country faces if it leaves the EU without a pact to smooth the split.”

July 27 – Reuters (William James): “British Prime Minister Boris Johnson cautioned the European Union… that the ‘anti-democratic’ Irish backstop must be ditched if they were to strike a Brexit divorce deal… His biggest demand is that the most hotly-contested element of the Brexit divorce agreement, the Irish border backstop, be struck out of the Withdrawal Agreement, a demand that has angered Ireland and perturbed other EU capitals. ‘If we get rid of the backstop, whole and entire, then we are making a lot of progress,’ Johnson said…”

Asia Watch:

August 2 – Reuters (Makiko Yamazaki and Ju-min Park): “South Korea fired back at Japan over a deepening trade dispute on Friday, pledging it would not be ‘defeated again’ by its neighbor, laying bare decades-old animosity at the root of a row over fast-track export status. During a rare live television broadcast of his cabinet meeting, President Moon Jae-in threatened countermeasures after Japan’s cabinet approved the removal of South Korea’s fast-track export status from Aug. 28.”

July 31 – Reuters (Hyonhee Shin): “South Korea called… for Japan to allow more time for diplomacy as talks on their most serious dispute in years failed to make progress, a day before Japan could remove South Korea from its list of favored trade partners. South Korea warned that if Japan were to drop it from its so-called white list of countries that enjoy minimum trade restrictions, there could be sweeping repercussions, including damage to bilateral security cooperation. Relations between Japan and South Korea, plagued by bitterness over Japan’s 1910-1945 occupation of the Korean peninsula, are arguably at their lowest since they normalized ties in 1965.”

Europe Watch:

July 31 – Bloomberg (Karin Matussek): “Germany’s top judges again seem troubled by the European Central Bank’s 2.6 trillion-euro ($2.9 trillion) asset purchase program, openly saying the plan’s ‘collateral damage’ harms regular people. The Federal Constitutional Court judges in Karlsruhe asked highly critical questions about the program during two days of hearings this week. Several times the jurists mentioned how low interest rates caused by the ECB policy harms savers or raise real estate and rent prices. ‘We’re wondering if the ECB shouldn’t take these effects into account when making its decision and to also communicate how it does that,’ court President Andreas Vosskuhle said. ‘We’re not talking about a few euros. This is about people’s livelihood.’”

July 30 – Reuters (Michael Nienaber): “German annual inflation slowed unexpectedly in July to hit the lowest level since November 2016… German consumer prices, harmonised to make them comparable with inflation data from other European Union countries, rose by 1.1% year-on-year after an increase of 1.5% in the previous month…”

Japan Watch:

July 30 – Financial Times (Henny Sender): “Dutch insurer Aegon recently decided to pull out of its joint venture in Japan after concluding it was impossible to earn enough on investments in the country to support it. Meanwhile, the heads of Japan’s big three lenders MUFG, Mizuho and Sumitomo Mitsui regularly cite the gap between what they pay out on deposits and what they can earn on loans in explaining their struggle to turn a profit. And a few weeks ago a band of pensioners demonstrated in Tokyo over their inability to earn a return on their savings. The country’s big pension funds, including GPIF and Japan Postal Savings, face a similar dilemma. All are reactions to the Bank of Japan’s unconventional policies — on Tuesday the central bank left its main interest rate unchanged at minus 0.1%, kept its pace of government bond-buying at ¥$80tn ($736bn) a year and maintained a cap on 10-year bond yields at roughly zero. The BoJ also intervenes in the country’s equity market, via exchange traded funds, and in real estate investment trusts.”

July 28 – Bloomberg (Min Jeong Lee and Masaki Kondo): “As the world sinks into an era of ever-lower interest rates and a chasm of negative-yielding bonds, Japan’s experience offers investors an invaluable precedent. It’s two decades since the nation pioneered zero rates and more than six years into central bank chief Haruhiko Kuroda’s record stimulus. The money managers who’ve witnessed it all provide unique insights into strategies to survive such a regime. One legacy of Japan’s ultra-low interest-rate regime is that it has spurred massive investment into overseas assets. But even more telling is the extremes that Japanese investors have gone to in the hunt for yield. They’ve pushed deeper into stocks and real estate, amassed bonds from Europe’s periphery to emerging markets, and loaded up on opaque securities that bundle together hundreds of loans.”

July 31 – Reuters (Leika Kihara): “Bank of Japan Deputy Governor Masayoshi Amamiya said the central bank could widen the band at which it allows long-term interest rates to move around its target, signaling its readiness to accept further falls in bond yields if driven by market forces. The BOJ currently allows 10-year government bond yields to move roughly 40 bps around its 0% target, essentially setting a -0.2% floor on long-term rates. But global economic uncertainties and expectations of prolonged ultra-loose policies by major central banks have pushed down bond yields across the world including in Japan, where 10-year bond yields have slid near the floor.”

EM Watch:

July 29 – Bloomberg (Nacha Cattan and Eric Martin): “Mexico’s interest rates are too high for a slowing economy, President Andres Manuel Lopez Obrador said…, though he added that he respects the central bank’s freedom to set them independently. ‘The Bank of Mexico is watching over inflation. That’s not bad,’ Lopez Obrador told Bloomberg… ‘But it’s important to lower rates to kickstart the economy.’”

Global Bubble Watch:

July 31 – Reuters (Jonathan Cable and Marius Zaharia): “Factory activity contracted across Asia and Europe in July, fuelling worries a prolonged U.S.-China trade war and an economic slowdown could tilt the world toward recession, which central banks would have to fight with depleted ammunition. Manufacturing activity in the euro zone fell at its steepest rate since late 2012 last month as demand sank, a survey compiled by IHS Markit showed… Forward-looking indicators… suggest manufacturing won’t rebound anytime soon and is likely to embolden policymakers at the European Central Bank… Earlier figures from Germany, Europe’s largest economy, showed a recession among its manufacturers deepened. France and much of the rest of the euro zone also faltered.”

August 1 – Wall Street Journal (Katy Stech Ferek): “The flow of investment money between China and the U.S. continued to decline in the first half of 2019 as trade tensions took their toll… The value of foreign direct investment and venture-capital deals between the two countries fell to $13 billion during the first six months of the year, a decline of 18% compared with the previous six-month period… Investment is down 49% from the first half of 2018. The $13 billion figure marks the lowest value since 2014, a sign of investor anxiety over stalled trade negotiations, tougher U.S. scrutiny of foreign deals and the Trump administration’s restrictions on telecom giant Huawei Technologies Co., the report says.”

July 29 – Bloomberg (Randy Thanthong-Knight): “In a year when record heat is scorching Europe and the heaviest rain in decades has inundated parts of the U.S. Midwest, the Asia Pacific region is suffering from its own maelstrom of extreme weather. Drought, and floods in some areas, have devastated the livelihoods of thousands of people, and damaged crops in an area that produces most of the world’s palm oil, natural rubber and rice, and more than a third of its sugar. While parts of China endured the most rain in almost 60 years, water levels on the Mekong, one of Asia’s largest river systems, have fallen to among the lowest ever, and areas of southern India are battling relentless drought.”

July 28 – Financial Times (Tom Hancock and Wang Xueqiao): “China’s shrinking car market is hitting foreign manufacturing groups hard, with some companies operating at a fraction of their potential output, sparking fears a number will be forced to quit the world’s biggest market. Ford and Peugeot owner PSA have suffered the most, with their factories running well below full capacity at historic lows because of plunging sales… Ford’s plants in China operated at 11% of their potential output in the first half of the year, according to a Financial Times analysis… Ford’s China sales fell 27% year on year in the first half.”

July 30 – CNBC (Yen Nee Lee): “While investors look for clues about the health of the global economy, a research and analytics unit under S&P Global said a ‘hidden’ segment of debtors is flashing early signs of trouble. Those borrowers are small companies that are not rated by S&P Global Ratings, according to… S&P Global Market Intelligence… Generally, though, many entities without an S&P credit rating are small companies that are likely to be the first victims in an economic downturn, said Michelle Cheong, director and global product development lead for credit solutions data at S&P Global Market Intelligence. That group is ‘very much a hidden, under the radar’ segment, Cheong told CNBC… ‘The unrated entities are like the canary in the mine. They are the ones that usually start to default first — before you see trouble happening among the rated entities — because they are the weaker link,’ she added.”

Fixed-Income Bubble Watch:

July 29 – Wall Street Journal (Ben Eisen): “The mortgage market had one of its most significant quarters since the financial crisis as falling rates prompted a flurry of refinancing and an uptick in purchases. The 30-year mortgage rate unexpectedly dropped to below 4% in May and has remained near its lowest level in three years, opening a window for borrowers… Lenders made $565 billion of mortgage loans in the second quarter, the most in more than two years. At that pace, originations could exceed $2 trillion for only the third year since the financial crisis, according to Inside Mortgage Finance.”

Geopolitical Watch:

July 28 – Reuters: “China’s military is holding exercises this week in waters near Taiwan, China’s maritime safety agency said days after Beijing reiterated it was ready to fight if there was any move towards independence for the self-ruled island.”

July 30 – Reuters (Se Young Lee, Ryan Woo, Stella Qiu and Yimou Lee): “China will stop issuing individual travel permits for Taiwan to people in 47 mainland cities from Aug. 1, its culture and tourism ministry said on Wednesday, citing the state of ties with the self-ruled island, but gave no details.”

July 31 – Reuters (James Pomfret and Greg Torode): “As Hong Kong’s political crisis simmers amidst heated protests, China’s People’s Liberation Army in Hong Kong released a video showing footage of ‘anti-riot’ exercises and its top brass warned violence is ‘absolutely impermissible’. The three-minute video posted on the Hong Kong garrison’s official Weibo social media account… included footage of troops firing guns and rockets, and of light tanks, attack helicopters and missile launchers.”

July 31 – Reuters (Cate Cadell): “China’s top diplomat… warned outside countries not to amplify disputes in the South China Sea, where recent Chinese maneuvering in the energy-rich waters has rattled regional states and drawn condemnation from the United States.”

July 30 – Bloomberg: “China said recent violence in Hong Kong protests was the ‘creation of the U.S.,’ for the first time laying direct blame on Washington as their dispute over the unrest escalates. Chinese Foreign Ministry spokeswoman Hua Chunying made the remark… in response to comments by U.S. Secretary of State Michael Pompeo. The top American diplomat had said Monday that he hoped ‘the Chinese will do the right thing’ in managing the protests in Hong Kong. ‘It’s clear that Mr. Pompeo has put himself in the wrong position and still regards himself as the head of the CIA,’ Hua said…”

July 30 – Reuters (Josh Smith and Hyonhee Shin): “North Korea fired two short-range ballistic missiles early on Wednesday, the South Korean military said, only days after it launched two similar missiles intended to pressure South Korea and the United States to stop upcoming military drills.”

Friday Afternoon Links

[Reuters] Wall Street sinks to one-month low on trade, growth fears

[Reuters] Treasuries - U.S. 10-year yields post biggest weekly drop in seven years

[Reuters] Trump says China has to do a lot to turn things around in trade talks

[Politico] Trump's frustration with China boils over

[Reuters] China's new U.N. envoy says Beijing ready to fight U.S. on trade

[Reuters] EU governments pick Bulgaria's Georgieva as European candidate to lead IMF

[NYT] China Wants to Hit Back at Trump. Its Own Economy Stands in the Way.

[FT] Donald Trump’s gamble weaves monetary policy into trade war

[FT] US-China trade tensions hit global markets

[FT] Hong Kong: what next for China’s halfway house?