Friday, September 11, 2020

Weekly Commentary: State-Directed Credit Splurge

New data released Friday confirm ongoing historic Chinese Credit excess. Total Aggregate Financing increased (a ridiculous) $524 billion during August to $40.5 TN, doubling July’s growth and exceeding estimates by almost 40%. It was the strongest monthly gain since March’s record $759 billion. This pushed y-t-d (8-month) growth to $3.828 TN, up 45% from comparable 2019 ($2.650 TN) and 67% ahead of comparable 2018 ($2.297 TN) growth. It’s worth noting Aggregate Financing surged an incredible $2.960 TN over the past six months, 62% ahead of comparable 2019 ($1.823 TN). At 13.3%, year-over-year growth was the strongest in several years.

With 2020 GDP estimates in the 2.0 to 3.0% range, the divergence between Chinese Credit and economic output is unprecedented. That Credit growth has accelerated in the face of rapidly deteriorating economic prospects portends major troubles ahead. China’s “Terminal Phase” excess – including rapid acceleration of late-cycle loans of deteriorating quality – is unparalleled in terms of both degree and duration. Stoking a stock market mania while prolonging a historic apartment Bubble only exacerbates systemic fragility.

August New Bank Loans increased an above forecast $187 billion. This boosted y-t-d loan growth to $2.102 TN, 20% ahead of comparable 2019. Six-month growth ($1.481 TN) was 29% above comparable 2019. Bank Loans were up 13.0% over the past year, 27% in two years, and 84% over five years.

Consumer Loans rose $123 billion during August. Year-to-date growth of $755 billion was 4.7% ahead of comparable 2019. However, six-month Consumer Loan growth of $722 billion was 23% ahead of comparable 2019. Consumer Loans were up 14.5% year-over-year, 33% over two years, 58% in three and 135% over five years.

Corporate Bonds expanded $53 billion. This pushed year-to-date growth to $580 billion, up 80% from 2019 and 133% from comparable 2018 growth.

But the August winner of the Chinese Credit Sweepstakes goes to government finance. Government Bonds jumped $202 billion during the month to $6.362 TN, the largest monthly increase in a data series going back to 2017. At $837 billion, year-to-date growth was 59% ahead of comparable 2019. Government Bonds increased 18.7% over the past year, 38% in two and 66% over three years (5-yr data not available).

China’s M2 “money” supply expanded $166 billion in August, following July’s $139 billion contraction. This put year-to-date M2 growth at $2.200 TN, 38% ahead of comparable 2019 ($1.592 TN). M2 surged $2.947 TN, or 10.4%, over the past year. M2 rose 20% over two years, 30% in three, and 58% over five years – in one of history’s most spectacular monetary inflations.

The narrative surrounding Chinese economic recovery has turned decidedly positive. This week’s data confirmed a rapid recovery in Chinese exports and vehicle sales. Apartment sales have also rebounded. It would be impressive if not for the State-Directed Credit Splurge. I have no doubt that Beijing can orchestrate economic growth through a massive expansion of “money” and Credit. But this comes with increasing costs to system stability. I would argue late-cycle “Terminal Phase” excess inflicts especially heavy damage.

Over time, a prominent geopolitical element to the global Bubble developed - a dynamic that has turned acute late in this historic cycle. In this intensifying U.S./China cold war clash over global supremacy, a bursting Bubble would put one of these adversaries at serious disadvantage. It’s not clear this plays a role in Federal Reserve policymaking. It surely does in Beijing.

I have for years fretted China might resort to military conflict to divert attention from failing in its management of domestic economic and financial systems. Even if domestic issues don’t create impetus to confront nefarious foreign adversaries, a faltering global Bubble backdrop nonetheless ensures myriad grievances and frictions. Moreover, the longer the Chinese and global Bubbles inflate, the greater the risk that China’s economic, financial and military ascendancy gives rise to U.S./China hostilities. Taiwan has always seemed a logical flash point.

September 9 – Reuters (David Brunnstrom, Humeyra Pamuk and Ryan Woo): “Taiwan denounced China… over large-scale air and naval drills off its southwestern coast which it called a serious provocation and a threat to international air traffic. Yeh Kuo-hui, from Taiwan’s defence ministry’s operations and planning department, told a hastily-arranged news conference that China’s intentions could not be predicted. ‘We must make all preparations for war readiness,’ Yeh said…”

A China move to reclaim Taiwan territory - entangling Washington in a confrontation with Beijing - should no longer be considered wackoism. A Thursday afternoon Zerohedge headline asked a pertinent question: “What Possible Disruption Is Coming That Requires China To Start Massive Stockpiling Of All Possible Commodities?”

The Shanghai Composite dropped 2.8% this week, trading to the lows since July. China’s growth-oriented ChiNext Index sank 7.2%, trading Friday at two-month lows. The CSI Small & Midcap 700 dropped 4.7%. It appears Chinese stocks have reversed course – the downside following July’s speculative melt-up.

Oddly, European stocks were this week’s outperformers. On Brexit concerns currency weakness (pound down 3.6%), the UK’s FTSE Index surged 4.0%. Germany’s DAX jumped 2.8%, Italy’s MIB 2.2%, and France’s CAC40 1.4%.

Here in the U.S., technology stocks faced heavy selling pressure. The Nasdaq100 (NDX) sank 4.6%, with the Semiconductors down 3.5%. The S&P500 declined 2.5%. Curiously, Bank stocks fell 3.6%, with the Broker/Dealers sinking 4.1%.

At this point, corporate Credit remains resilient. Investment-grade corporate bond prices traded somewhat higher on the week, with junk bonds little changed. High-yield Credit default swap (CDS) prices actually declined this week. Investment-grade CDS increased a few basis points to one-month highs. Despite equity market weakness, the VIX traded down almost four to 26.87. NDX volatility (VXN) dropped to 35.27 from last Friday’s 41.74 close.

Markets are traditionally a reflection of the social mood. These days, they’re more a representation of the mood of central bankers. If our monetary authorities are nervous, markets are prone to exuberance. When a somber social mood strikes fear in the central bank community, markets can turn downright manic.

The disparity between ebullient markets and disheartened social mood grows by the week. It was a tough week for the social mood of Americans living on the West Coast – Oregonians in particular. In only four days, Oregon lost over a million acres to forest fires. There was terrible loss of life and property. Pristine nature up in flames.

Long before Portland protests and mayhem, Oregonians were known for their cordiality and tolerance. It was in my adult life, residing in numerous states, when I better appreciated that folks from Oregon were generally happy and nice people. I’ve thought a lot about why this might be the case. The state generally doesn’t suffer from huge wealth disparities. You can live a good life on an average worker’s wages.

For many of us, we’re more than content watching our beloved Oregon Ducks play football, strolling on the beach, and partaking in myriad recreational activities in the mountains. First, Covid-19 eradicated our football season. The Ducks and Ohio State Buckeyes were to go head-to-head at Autzen Stadium tomorrow. We’ve been managing through the despair, but at least we still have all our nature pursuits. Until Monday night.

I’ve been in love with the McKenzie River since I was a kid. When we decided to move our young son to Oregon, I initially thought of looking for property “up the McKenzie”. The hiking, biking, camping, fishing, rafting – the pristine river, spectacular waterfalls and awesome mountains. The Simple Things in Life. Peace and Tranquility. In our nightly family prayer, we thank God for “the beautiful lakes, rivers and waterfalls.”

Since Monday night, the “Holiday Farm Fire” has consumed almost 200,000 acres. The community is absolutely heartbroken. We lost something precious. Please know that climate change is real - and it is leaving increasingly deep scars on the environment and humanity.

For the Week:

The S&P500 dropped 2.5% (up 3.4% y-t-d), and the Dow fell 1.7% (down 3.1%). The Utilities slipped 0.5% (down 7.7%). The Banks dropped 3.6% (down 32.7%), and the Broker/Dealers sank 4.1% (down 2.4%). The Transports added 0.5% (up 3.5%). The S&P 400 Midcaps fell 2.3% (down 10.1%), and the small cap Russell 2000 dropped 2.5% (down 10.3%). The Nasdaq100 sank 4.6% (up 27.0%). The Semiconductors fell 3.5% (up 15.5%). The Biotechs declined 1.7% (up 1.7%). With bullion up $7, the HUI gold index added 0.5% (up 41.1%).

Three-month Treasury bill rates ended the week at 0.1075%. Two-year government yields declined two bps to 0.13% (down 144bps y-t-d). Five-year T-note yields fell five bps to 0.25% (down 144bps). Ten-year Treasury yields dropped five bps to 0.67% (down 125bps). Long bond yields fell six bps to 1.41% (down 98bps). Benchmark Fannie Mae MBS yields were unchanged at 1.36% (down 135bps).

Greek 10-year yields dipped two bps to 1.11% (down 32bps y-t-d). Ten-year Portuguese yields fell four bps to 0.33% (down 11bps). Italian 10-year yields declined three bps to 0.98% (down 43bps). Spain's 10-year yields fell four bps to 0.31% (down 16bps). German bund yields slipped a basis point to negative 0.48% (down 30bps). French yields declined two bps to negative 0.19% (down 31bps). The French to German 10-year bond spread narrowed one to 39 bps. U.K. 10-year gilt yields dropped eight bps to 0.18% (down 64bps). U.K.'s FTSE equities index surged 4.0% (down 20.0%).

Japan's Nikkei Equities Index increased 0.9% (down 1.1% y-t-d). Japanese 10-year "JGB" yields declined one basis point to 0.03% (up 4bps y-t-d). France's CAC40 gained 1.4% (down 15.8%). The German DAX equities index jumped 2.8% (down 0.3%). Spain's IBEX 35 equities index declined 0.7% (down 27.3%). Italy's FTSE MIB index rose 2.2% (down 15.7%). EM equities were mixed. Brazil's Bovespa index dropped 2.8% (down 14.9%), and Mexico's Bolsa slipped 0.3% (down 16.6%). South Korea's Kospi index gained 1.2% (up 9.1%). India's Sensex equities index rallied 1.3% (down 5.8%). China's Shanghai Exchange dropped 2.8% (up 6.9%). Turkey's Borsa Istanbul National 100 index rose 1.5% (down 3.6%). Russia's MICEX equities index declined 0.4% (down 4.4%).

Investment-grade bond funds saw inflows of $6.541 billion, while junk bond funds posted outflows of $769 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates dropped seven bps to a record low 2.86% (down 70bps y-o-y). Fifteen-year rates fell five bps to a record low 2.37% (down 72bps). Five-year hybrid ARM rates jumped 18 bps to 3.11% (down 25bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates slipping a basis point to 3.11% (down 121bps).

Federal Reserve Credit last week added $6.6bn to $6.968 TN. Over the past year, Fed Credit expanded $3.242 TN, or 87%. Fed Credit inflated $4.157 Trillion, or 148%, over the past 409 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week declined $2.8bn to $3.399 TN. "Custody holdings" were down $54bn, or 1.9%, y-o-y.

M2 (narrow) "money" supply surged $78.3bn last week to $18.464 TN, with an unprecedented 27-week gain of $2.957 TN. "Narrow money" surged $3.493 TN, or 23.3%, over the past year. For the week, Currency increased $3.3bn. Total Checkable Deposits jumped $41.4bn, and Savings Deposits rose $38.2bn. Small Time Deposits fell $6.9bn. Retail Money Funds added $1.7bn.

Total money market fund assets dropped $26.5bn to $4.468 TN. Total money funds surged $1.071 TN y-o-y, or 31.5%.

Total Commercial Paper gained $12.9bn to $1.010 TN. CP was down $106bn, or 9.5% year-over-year.

Currency Watch:

September 8 – Bloomberg (Srinivasan Sivabalan): “There is new evidence that the once-mighty dollar effect -- when markets traded everything in relation to the U.S. currency -- has faded. The 120-day rolling correlation between gold and a Bloomberg Barclays gauge of emerging-market dollar bonds has fallen below zero for the first time since July 2016. That means the two assets have stopped responding in similar ways to the gyrations in the dollar. For years, investors traded both gold and emerging-market bonds as dollar-denominated assets, taking the correlation coefficient between them to as high as 0.54 in February this year.”

For the week, the U.S. dollar index increased 0.3% to 93.271 (down 3.3% y-t-d). For the week on the upside, the Mexican peso increased 1.3%, the Swiss franc 0.5%, the South Korean won 0.2%, the Japanese yen 0.1%, and the euro 0.1%. For the week on the downside, the British pound declined 3.6%, the Norwegian krone 1.2%, the Canadian dollar 0.9%, the New Zealand dollar 0.8%, the South African rand 0.8%, the Swedish krona 0.4%, the Brazilian real 0.3%, and the Singapore dollar 0.2%. The Chinese renminbi increased 0.12% versus the dollar this week (up 1.88% y-t-d).

Commodities Watch:

September 10 – Bloomberg (Ainslie Chandler): “The La Nina weather system could roil global food production, sending prices higher, as potential droughts and floods bring upheaval to a suite of key agricultural commodities from Southeast Asia to South America. The highly anticipated phenomenon has officially formed, the U.S. Climate Prediction Center said Thursday, after the last significant La Nina event occurred in 2011. During that period, upheaval in commodity production led to steep increase in world food prices, with the United Nations’ Food & Agriculture World Food Price Index surging to a record in February 2011, up 37% from the end of 2009.”

The Bloomberg Commodities Index declined 1.2% (down 11.5% y-t-d). Spot Gold added 0.3% to $1,941 (up 27.8%). Silver increased 0.5% to $26.857 (up 50%). WTI crude sank $2.44 to $37.33 (down 39%). Gasoline dropped 7.0% (down 35%), and Natural Gas sank 12.3% (up 4%). Copper declined 0.7% (up 9%). Wheat fell 1.5% (down 3%). Corn jumped 2.9% (down 5%).

Coronavirus Watch:

September 9 – Reuters: “India reported record jumps in new coronavirus infections and deaths on Thursday, taking its tally of cases past 4.4 million… In the last 24 hours, 95,735 new infections were detected, with 1,172 deaths accounting for the highest single-day mortality figures in more than a month…”

Market Instability Watch:

September 5 – Wall Street Journal (Alexa Corse and Chad Day): “In a year of uncertainties, one thing seems certain: This November’s general election is shaping up to be one of the most complicated in U.S. history. States are racing to make changes to voting procedures in response to the coronavirus pandemic. Voters are expected to cast an unprecedented deluge of mail-in ballots. President Trump has questioned the integrity of widespread mail-in voting and the fairness of the electoral process—and whether he will accept the results. His Democratic rival, former Vice President Joe Biden, has accused Mr. Trump of trying to steal the election by alleging voting by mail invites fraud. Foreign governments such as Russia are again waging online disinformation campaigns to influence the outcome, according to U.S. intelligence agencies. Even after the vote, the outcome of the presidential election might not be known for days or weeks.”

September 8 – Wall Street Journal (Natalie Andrews): “Democrats appear to have a firm grasp on retaining the House while the Republican-controlled Senate remains up for grabs as the campaign hits the home stretch, with both sides expecting the results to be heavily influenced by how President Trump fares with voters buffeted by the coronavirus pandemic and protests over policing.”

September 6 – Bloomberg (Katherine Greifeld and Vildana Hajric): “Back in January, a bunch of chat-room denizens got it in their heads that they could rev up returns in a stock portfolio by corralling options dealers to their side. It’s starting to seem like they were on to something. While not new and a long way from risk-free, the strategy celebrated in the Reddit forum r/wallstreetbets is at least fairly simple. Spend some money on bullish calls on shares you own in hopes of forcing the sellers to purchase the same stock as a hedge. An ensuing feedback loop drives everything higher, or so the theory goes. Now, by happenstance or design, something like this appears to be happening on a grand scale in U.S. technology shares, dialing up a blistering rally -- and possibly worsening last week’s decline. Armies of mom-and-pop traders have piled into options with gusto. More recently SoftBank Group, the Japanese conglomerate, bought large positions in contracts tied to megacap tech shares.”

September 8 – CNBC (Ryan Browne and Jessica Bursztynsky): “Tesla shares rebounded in early trading Wednesday, recovering slightly from Tuesday’s steep losses after Elon Musk’s electric vehicle maker was left out of the S&P 500… Tesla shares were up about 7% in premarket trading Wednesday after closing down 21.06% a day earlier, making it the worst one-day loss on record.”

Global Bubble Watch:

September 9 – CNBC (Abigail Ng): “The cost of a U.S.-China ‘decoupling’ would be high, but that does not mean Beijing will not choose to create systems that are “mutually exclusive” from the rest of the world, an expert told CNBC this week. ‘There is a real danger of China and ... much of the rest of the world developing separate financial systems for things like payments of international debts and payments for trade,’ said Robert Daly, director of the Wilson Center’s Kissinger Institute on China and the United States. China could also develop different technological systems…”

September 8 – Bloomberg: “TikTok, WeChat and Huawei Technologies Co. are just the beginning. What comes next has the potential to reshape the global economy for decades to come. President Donald Trump’s moves to prevent some of China’s biggest companies from accessing the private data of Americans -- restrictions set to take effect this month -- are part of a broader effort to create ‘clean networks’ the Communist Party can’t touch. That initiative, involving everything from 5G networks to cloud services to undersea cables, is already impacting corporate deal-making and geopolitics, with both countries and companies pressured to pick sides.”

Trump Administration Watch:

September 7 – Associated Press (Andrew Taylor): “At least there won’t be a government shutdown. But as lawmakers straggle back to Washington for an abbreviated preelection session, hopes are dimming for another coronavirus relief bill — or much else. Talks between top Democrats and the Trump administration broke off last month and remain off track, with the bipartisan unity that drove almost $3 trillion in COVID-19 rescue legislation into law this spring replaced by toxic partisanship and a return to Washington dysfunction… Recent COVID-related conversations among key players have led to nothing.”

September 9 – Reuters (Doina Chiacu and Richard Cowan): “U.S. Senate leaders… held onto their radically different positions on what is needed to address the continuing fallout from the coronavirus pandemic, one day before a vote on a modest Republican bill that appeared destined for defeat. The Republican bill… would provide around $300 billion in new aid for schools, businesses, medical supplies and other coronavirus-related costs. It was drastically scaled down from a $1 trillion plan Republicans offered in July and far from the more than $3 trillion Democrats have been pushing. Democrats are expected to block the Republican bill from advancing…”

September 7 – CNBC (Emma Newburger and Amanda Macias): “The Trump administration is considering imposing export restrictions on Semiconductor Manufacturing International Corporation, China’s largest manufacturer of semiconductors… The Department of Defense is in discussions over whether SMIC should be added to the Commerce Department’s entity list, which essentially restricts those companies from receiving specific goods made in the United States. The U.S. entity list now includes more than 300 China-based companies.”

September 10 – Reuters (Khanh Vu and James Pearson): “The United States’ top diplomat… urged Southeast Asian countries to stand up to maritime bullying by China and to reassess business deals with its state firms, adding to heated exchanges between two powers jostling for influence… ‘Today, I say keep going. Don’t just speak up but act,’ Pompeo said. ‘Reconsider business dealings with the very state-owned enterprises that bully ASEAN coastal states in the South China Sea. Don’t let the Chinese Communist Party walk over us and our people.’”

September 8 – Reuters (Joyce Lee and Hyunjoo Jin): “Samsung Electronics’ display unit and LG Display Co Ltd are expected to stop supplying panels for premium smartphones to Huawei Technologies due to U.S. restrictions, South Korean online media Chosun Biz reported…”

September 8 – Reuters (David Lawder): “U.S. Customs and Border Protection officials have prepared orders to block imports of cotton and tomato products from China’s western region of Xinjiang over accusations of forced labor, though a formal announcement has been delayed. A Trump administration announcement… has been put off until later this week because of ‘scheduling issues,’ an agency spokesman said.”

September 9 – Reuters (David Brunnstrom, Humeyra Pamuk and Ryan Woo): “The United States has revoked visas for more than 1,000 Chinese nationals under a presidential measure denying entry to students and researchers deemed security risks…, a move China called a violation of human rights. The acting head of the U.S. Department of Homeland Security, Chad Wolf, said earlier that Washington was blocking visas ‘for certain Chinese graduate students and researchers with ties to China’s military fusion strategy to prevent them from stealing and otherwise appropriating sensitive research.’”

Federal Reserve Watch:

September 10 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials forged an agreement last month on a new framework governing how they will conduct policy over the long run. In preparing for a September meeting, they are debating how exactly to implement this strategy for an economy recovering from a severe and unusual downturn. Central bank officials are likely at coming meetings to provide more specific guidance about what conditions would justify continued low interest rates… They could also clarify that their purchases of Treasury and mortgage-backed securities, initiated in March with the stated goal of repairing market functioning, are being maintained now to support a faster economic recovery.”

September 8 – Bloomberg (Catarina Saraiva): “The Federal Reserve’s Main Street Lending Program, aimed at supporting small to mid-size businesses through the coronavirus pandemic, has mostly made loans in the millions of dollars, according data disclosed by the central bank… Of the 118 loans bought by the Fed’s program through the end of August, only 11 were under $1 million. Only one, at $265,000 was close to the $250,000 minimum loan size.”

U.S. Bubble Watch:

September 8 – The Hill (Niv Elis): “The federal budget deficit hit an unprecedented $3 trillion in August, with another month to go before the end of the fiscal year, according to estimates from the Congressional Budget Office (CBO). That figure amounts to $1.9 trillion more than the same period last year, and more than double the largest yearlong deficit on record… The U.S. has thus far thrown $6 trillion in relief spending at the coronavirus crisis, only half of which was covered by tax revenues and other receipts.”

September 7 – Financial Times (Robert Armstrong): “US banks are increasingly worried about being repaid on loans secured against commercial property, as offices, malls and hotels continue to stand empty. The darkening outlook of banks is laid bare by disclosures on so-called criticised loans, which are flashing warning signals about a borrower’s ability to pay. Among the 10 banks with the largest increases, criticised loans rose by 62% in aggregate in the second quarter, but criticised commercial real estate loans rose by 144%, to $26bn… The banks with the largest total increases include JPMorgan Chase, Bank of America and Wells Fargo… Criticised loans at those banks are now equivalent to 9, 13, and 25% of tier one equity capital — the core measure of a bank’s financial strength — respectively, according to S&P Market Intelligence.”

September 9 – Wall Street Journal (Andrew Ackerman): “Climate change poses a major risk to the stability of the U.S. financial system and requires aggressive action from Washington policy makers, according to a report from an advisory panel to the top U.S. commodities regulator… ‘As we’ve seen in the past few weeks alone, extreme weather events continue to sweep the nation from the severe wildfires of the West to the devastating Midwest derecho and damaging Gulf Coast hurricanes,’ said Rostin Behnam, a Democratic CFTC commissioner… ‘This trend—which is increasingly becoming our new normal—will likely continue to worsen in frequency and intensity as a result of a changing climate.’”

September 10 – Reuters (Ann Saphir): “Wildfires across the U.S. West are among the sparks from climate change that could ignite a U.S. financial crisis by damaging home values, state tourism and local government budgets, an advisory panel to a U.S. markets regulator found. Those effects could set off a cascade of events including defaults and market disruptions, undermining the U.S. economy and sparking a crisis.”

September 8 – Wall Street Journal (Jim Carlton): “Powerful windstorms in California are creating more dangerous conditions as firefighters work to contain wildfires that have already blackened a record 2.3 million acres. Red-flag warnings for high fire conditions were posted across the state, as a forecast for strong winds through Wednesday put pressure on 14,000 firefighters battling 25 major blazes that have killed at least eight people and destroyed more than 3,400 structures.”

September 11 – Reuters (Lucia Mutikani): “U.S. consumer prices increased solidly in August… The… consumer price index rose 0.4% last month. The CPI advanced 0.6% in June and July after declining in the prior three months as business closures to slow the spread of the coronavirus depressed demand. In the 12 months through August, the CPI increased 1.3% after gaining 1.0% in July.”

September 10 – CNBC (Jeff Cox): “Weekly jobless claims were worse than expected last week amid a plodding climb for the U.S. labor market from the damage inflicted by the coronavirus pandemic. The Labor Department… reported 884,000 first-time filings for unemployment insurance, compared with 850,000 expected… The total was unchanged from the previous week. Continuing claims from those filing for at least two weeks rose from the previous week, hitting 13.385 million, an increase of 93,000 from last week’s report…”

September 9 – Reuters (Lucia Mutikani): “U.S. job openings increased further in July, though more workers quit their jobs in the retail as well as professional and business services industries likely because of fears of exposure to COVID-19 and problems with childcare… ‘The labor market recovery will be measured in years, not months,’ said Chris Rupkey, chief economist at MUFG…”

September 10 – Bloomberg (John Gittelsohn): “Mortgage rates in the U.S. dropped to another record low, adding fuel to a housing market that’s been a key source of strength for the pandemic economy. The average for a 30-year, fixed loan was 2.86%, down from 2.93% last week and the lowest in almost 50 years of data-keeping by Freddie Mac.”

September 8 – Reuters (Liz Hampton): “Oilfield job losses from the COVID-19 pandemic topped 100,000 in the United States in August, according to… trade group Petroleum Equipment & Services Association (PESA), even though some idled drilling projects have resumed. There was 121,000 oilfield jobs lost in the last 12 months…, with employment in the U.S. sector at its lowest level since March 2017. The bulk of those job losses, 103,420, have come since the pandemic began, the report said.”

September 10 – CNBC (Robert Frank): “The number of empty rental apartments in Manhattan nearly tripled compared with last year, as more New Yorkers fled the city and prices declined. There were more than 15,000 empty rental apartments in Manhattan in August, up from 5,600 a year ago, according to… Douglas Elliman and Miller Samuel. The inventory of empty units is the largest ever recorded since data started being collected 14 years ago… Analysts say the rental market is the best barometer of overall strength in Manhattan’s real estate market, since rentals account for 75% of apartments and that market reacts more quickly to demand changing than the sales market.”

September 10 – Reuters (Herbert Lash): “New York is facing a glut of workspace as fear of COVID-19 has reduced the daily usage of office buildings to almost nothing, a devastating sign for a city already reeling from the highest unemployment rate among the largest U.S. cities… Just 8% of employees have returned to Manhattan offices as of mid-August, the Partnership for New York City, a non-profit of nearly 300 chief executives, found in a survey of major city employers.”

Fixed Income Watch:

September 11 – Bloomberg (Liz Capo McCormick and Alex Tanzi): “The U.S. government is paying less as it borrows more, one reason investors appear more comfortable than Congress about funding another leg of stimulus. Interest payments in the federal budget declined about 10% in the first 11 months of this fiscal year, when America was running up its biggest deficit since World War II. Over the next few years, servicing the national debt will be cheaper than any time in the past half-century when measured against the size of the economy, according to the Congressional Budget Office.”

September 10 – Bloomberg (Paula Seligson and Marianna Aragao): “Yield-hungry investors are increasingly piling into junk bonds, and there’s more up for sale than ever before. An index of U.S. speculative-grade securities is yielding 5.56% -- a full percentage point below the 10-year average, but still a handsome alternative to more than $13 trillion of bonds that carry negative yields. Junk-rated issuers are capitalizing on the historically low borrowing costs, selling more than $300 billion of the debt this year for the first time since 2013. Another $30 billion would make 2020 the busiest year ever…”

September 8 – Bloomberg (Emily Barrett and Katherine Greifeld): “A $750 billion industry still struggling to bounce back from the last crisis is cracking under the Federal Reserve’s lower-for-longer mantra on U.S. interest rates. Prime money-market funds -- a long-time favorite for anyone seeking a cash-like investment with a little extra yield -- are facing an existential challenge, just four years after a regulatory overhaul to restore confidence in the wake of the global financial crisis. Assets in these vehicles dropped 20% in just six weeks earlier this year, spurring talk of new reforms. But some of the industry’s leaders are opting for another solution: Shutting them down.”

China Watch:

September 6 – CNBC (Ryan Browne): “China has lashed out at the U.S. government over potential export restrictions on SMIC, the country’s biggest chipmaker… On Monday, Chinese Foreign Ministry spokesman Zhao Lijian accused Washington of ‘blatant hegemony,’ adding that Beijing was ‘firmly opposed’ to such actions.”

September 9 – Reuters (Cate Cadell): “China’s foreign ministry, when asked about reports that the United States may ban some imports from China’s Xinjiang region over alleged human rights violations, said this is a pretext to oppress Chinese customers and incite instability. The U.S. has no right or qualification to intervene, foreign ministry spokesman Zhao Lijian said…”

September 6 – Reuters (Gabriel Crossley): “China’s exports rose for the third consecutive month in August, eclipsing an extended fall in imports… Exports in August rose a solid 9.5% from a year earlier…, marking the strongest gain since March 2019. The figure also beat analysts’ expectations for 7.1% growth and compared with a 7.2% increase in July. Imports however slumped 2.1%... China’s trade surplus with the United States widened to $34.24 billion in August from $32.46 billion in July.”

September 8 – Wall Street Journal (Jonathan Cheng): “China’s car sales grew at their fastest rate in more than two years in August, driven by heavy discounts and new-model debuts… Retail passenger-car sales in the country increased by 8.9% last month from a year earlier to 1.7 million vehicles, the China Passenger Car Association said…, marking the strongest rate of growth since May 2018.”

Central Bank Watch:

September 6 – Reuters (Simon Johnson and Julie Gordon): “The U.S. Federal Reserve’s landmark shift to a more tolerant stance on inflation will be a drag on the dollar for years and will raise hard questions about the role of central banking, challenging policymakers from Frankfurt to Tokyo. On the face of it, the Fed’s policy tweak… appears tailored to giving the U.S. economy a shot in the arm. A shift to average inflation targeting lets the Fed overshoot its target after downturns, indicating that rate hikes will come later… But this creates two headaches for global central banks. Such a reinterpretation of the Fed’s mandate could be seen as a foray into social policy, a vital precedent for others as they reexamine their own roles after years of unconventional moves that already impact wealth and income distribution. The second, more immediate concern will be the dollar's weakness, which hurts exporters from Europe to Asia.”

EM Watch:

September 8 – Bloomberg (Lilian Karunungan): “Emerging markets were given a fresh set of growth forecasts from Fitch Ratings this week, further underscoring how the coronavirus pandemic is splitting developing nations up between opportunities and risks. Fitch raised its economic growth forecast for China, while cutting predictions for South Africa and India. Other examples of the divergence among developing nations can be seen across a wide spectrum of economic and market metrics, including projections for government debt levels, returns for bond investors, and the proportion of the population infected.”

September 10 – Bloomberg (Abhishek Vishnoi): “A crash in Indonesian stocks is evoking memories of market meltdowns in Southeast Asia in the depth of the March swoon. Regional shares slipped on Thursday after Jakarta’s surprise return to a lockdown sent Indonesian stocks 5% lower before triggering a brief trading halt.”

Europe Watch:

September 6 – Reuters (Guy Faulconbridge, Elizabeth Piper, William James): “The European Union told Britain… that there would be no trade deal if it tried to tinker with the Brexit divorce treaty, raising the prospect of a tumultuous end-of-year finale to the saga. In yet another twist to the four-year saga since Britain voted to quit the EU, Prime Minister Boris Johnson’s government was reported to be planning new legislation to override parts of the Brexit Withdrawal Agreement it signed in January. That could jeopardize the whole treaty and create frictions in British-ruled Northern Ireland…”

September 7 – Financial Times (Martin Arnold): “German industrial production rose by less than economists had expected in July, fuelling concerns about whether the nascent recovery in the eurozone’s pandemic-stricken economy is running out of steam. The 1.2% month-on-month rise in German industrial output in July… was the third consecutive month of growth. But it undershot economists’ consensus expectations for a 4.8% increase…”

Japan Watch:

September 8 – Reuters (Leika Kihara, Chris Gallagher and Kaori Kaneko): “Yoshihide Suga, on course to become Japan’s next prime minister, said he would maintain incumbent premier Shinzo Abe’s policy prioritizing economic growth over efforts to fix the country’s tattered finances. Suga, Japan’s chief cabinet secretary, also said he would continue to focus on revitalizing regional economies, which he described as among key pillars of ‘Abenomics’.”

September 10 – Reuters (Leika Kihara): “Japanese companies plan to make the deepest cut in capital expenditure in more than a decade this year as the coronavirus pandemic hits profits, a government survey showed, underscoring the broadening economic impact of the health crisis… ‘Companies have little choice but to slash spending when their profit outlook is so gloomy,’ said Takeshi Minami, chief economist at Norinchukin Research Institute. ‘Japan could see more companies cut spending and jobs toward the year-end, which means it will take quite a long time for the economy to return to pre-pandemic levels,’ he said.”

Leveraged Speculation Watch:

September 11 – Bloomberg (Crystal Tse): “It’s the hot ticket on Wall Street, a symbol that you’ve arrived or can at least persuade investors that you’re on your way: the blank-check company. Few corners of American finance capture the giddiness of today’s stock market quite like the mad rush into these vehicles, formally known as special purpose acquisition companies, or SPACs… Big-name dealmakers, small-name money managers, tech entrepreneurs, even Paul Ryan, the former speaker of the House and former Trump economic adviser Gary Cohn: all want to raise millions or even billions of dollars via SPACs, which offer nothing more than a promise that they’ll find actual, money-making businesses to buy later. This year, no fewer than 91 SPACs have raised more than $35 billion, approaching half the total raised by SPACs on U.S. exchanges in all previous years.”

September 8 – CNBC (Fred Imbert): “The stock market is in a mania fueled by the Federal Reserve and investor speculation that will end badly in coming years, longtime hedge fund manager Stanley Druckenmiller told CNBC… ‘Everybody loves a party ... but, inevitably, after a big party there’s a hangover,’ the billionaire CEO of the Duquesne Family Office said… ‘Right now, we’re in an absolute raging mania. We’ve got commentators encouraging companies to do stock splits. Companies then go up 50%, 30%, 40% on stock splits. That brings no value, but the stocks go up.’”

Geopolitical Watch:

September 10 – Financial Times (Kathrin Hille): “Taiwan sounded the alarm over China conducting large-scale joint air and naval exercises inside its air defence buffer zone, a move Taipei denounced as a ‘severe provocation’ and a threat to regional peace and stability. At a rare press conference…, Taiwan’s defence ministry said almost two dozen Chinese military aircraft and seven naval ships had operated between 7am and noon on Wednesday and Thursday in an area between Pratas, a Taiwan-controlled atoll in the South China Sea, and Taiwan’s south-western coast. The drill confirms concerns in Taipei that the People’s Liberation Army would ratchet up military pressure closer to Taiwan’s borders… A Taiwanese former senior military officer said the Chinese move was the most serious threat to Taiwan’s security since 1996…”

September 8 – CNBC (Huileng Tan): “Taiwan has been building closer relationships with the U.S. recently, raising the ire of China. The development comes as Taipei distances itself from China ahead of the U.S. presidential election and as China steps up military activity around the island. On Aug. 31, State Department Assistant Secretary David Stilwell said Washington and Taipei will establish a new bilateral economic dialogue… After the announcement, Taiwanese President Tsai Ing-wen said that bilateral relations ‘are getting stronger by the day.’”

September 6 – Reuters: “China will hold further military exercises from Monday along its northeast and eastern coast, the government said, the latest in a series of unusual back-to-back drills against a backdrop of rising regional tension. The first set of exercises will take place in the Bohai Sea, off the northeastern port of Qinhuangdao, on Monday, the Maritime Safety Administration said. The second set, including live-fire exercises, will be held in the southern part of the Yellow Sea on Tuesday and Wednesday off the city of Lianyungang…”

September 5 – Associated Press (Aljaz Hussain): “As a monthslong military standoff between India and China along their disputed mountain border protracts, experts warn that the nuclear-armed countries — which already have engaged in their bloodiest clash in decades — could unintentionally slide into war. For 45 years, a series of agreements, written and unwritten, maintained an uneasy truce along the border on the eastern edge of the Himalayan region of Kashmir. But moves and clashes over the past few months have made the situation unpredictable, raising the risk that a miscalculation from either side could have serious consequences that resonate beyond the cold-desert region.”

September 8 – Reuters (Sanjeev Miglani and Yew Lun Tian): “India and China have accused each other of firing in the air during a new confrontation on their border in the western Himalayas, in a further escalation of military tension between the nuclear-armed nations. Hundreds of troops are in eyeball-to-eyeball proximity along the remote border, which erupted in a clash in June that killed 20 Indian soldiers in hand-to-hand fighting.”