[Bloomberg] China's Zhou Warns on Rising Financial Risk in Blunt Article
[Reuters] Ousted Catalan leader calls for united front for independence
[Reuters] Unversed in debt details, Venezuelans desperate for any relief
[Reuters] China's central bank chief urges Beijing to promote equity, cut debt, eliminate 'zombie' companies
[Reuters] Trump heads to Japan with North Korea on his mind
[WSJ] Saudi Princes, Former Ministers Arrested in Apparent Power Consolidation
Saturday, November 4, 2017
Friday, November 3, 2017
Weekly Commentary: End of an Era
Of the diverse strains of inflation, asset inflation is by far the most dangerous. A bout of consumer price inflation would be generally recognized as problematic and rectified through a tightening of monetary conditions. On the other hand, asset price inflation is both celebrated and venerated. There is simply no constituency calling for a tightening of conditions to ward off the deleterious effects of rising asset prices, Bubbles and attendant economic maladjustment. And as we’ve witnessed, the bigger the Bubble the more powerful the constituencies that rationalize, justify and promote Bubble excess.
About one year ago, I was expecting a securities markets sell-off in the event of an unexpected Donald Trump win. A Trump presidency would create disruption, upheaval and major uncertainties – political, geopolitical, economic and social. Instead of a fall, the markets experienced a short squeeze and unwind of hedges. Over-liquefied markets and a powerful inflationary bias throughout global securities markets won the day – and the winning runs unabated.
We’ve come a long way since 1992 and James Carville’s “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.” New age central banking has pacified bond markets and eradicated the vigilantes. These days it’s the great equities bull market as all-powerful intimidator.
The President admitted his surprise in winning the election. I suspect he and his team were astounded by the post-election market rally. I’ve always held the view that prolonged bull markets foster a portentous concentration of power – not only in the financial markets but within the financial system more generally.
That was certainly the case during the “Roaring Twenties,” just as it was in the late-nineties and throughout the mortgage finance Bubble period. A big market decline would have provided the new President the opportunity to blame the Bubble while moving forward aggressively with his reform agenda. Instead, a rally ensured that Team Trump would be held captive to the financial markets. As his administration struggled, President Trump could at least point to record stock prices.
I was hoping for reform-minded Kevin Warsh or John Taylor at the helm of the Federal Reserve. But I’ve somewhat warmed up to establishment-favored Jerome Powell, not so much because he will pursue needed changes in monetary management – but because Mr. Powell is likely about the best we could have hoped for in the current market environment. Apparently, the President was close to reappointing market darling chair Yellen. And if Yellen wasn’t dovish enough for the markets, Bill Gross stated his preference for either Paul McCulley or Neel Kashkari. I have McCulley and Kashkari far down the list - just above Ben Bernanke but below Charles Evans and Mark Zuckerberg.
Powell is viewed as the logical choice for continuity and stability at the Fed. He has a diverse background in law, government, the markets (with Carlyle Group), regulation and monetary policy. Powell will be the first Fed chairman without an economics Ph.D. since Paul Volcker. In many ways, it is a much welcomed End of an Era.
Janet Yellen is a widely respected economist – and by all accounts has been an able administrator of the Federal Reserve system. It has been noted that she will be the first Fed chair whose term ended without the experience of a recession. More importantly, she is surely the first leader of our central bank to have enjoyed a full term of uninterrupted extremely loose policy and financial conditions.
I’ll rain on the parade of accolades: The Yellen Fed failed to tighten policy in the face of increasingly conspicuous Bubble excess. Worse even than unforgivable past episodes, the Fed badly missed its timing. Today’s backdrop ensures an easy start to what will be an extremely challenging job for chairman Powell.
I’ve read numerous articles and listened to various commentaries. Leave it to esteemed former Minneapolis Fed President Gary Stern to offer the keenest insight:
Bloomberg’s Tom Keene: “Ellen Zentner at Morgan Stanley writes a detailed note about what we would expect from chairman Powell. She mentions that there’s a mystery here over chairman Powell and core economics, including NAIRU [non-accelerating inflation rate of unemployment]… Does it matter that chairman Powell maybe has a little fuzzy knowledge of NAIRU like mere mortals like me?”
Former Minneapolis Fed President Gary Stern: “No. And, in fact, I might view that as an advantage. Because that framework is frayed at best, it seems to me given our economic performance over the past “X” years – and “X” is not a small number. So, I think some open-mindedness on that framework is a distinct positive. And I think it would be worthwhile for a fair amount of resources to be devoted to a pretty thorough review of some of the critical macroeconomic issues and frameworks of the day, because they have not all served policymakers well; they have not all served commentators well; they have not all served the Street well. And I think it would be a good idea to open some of that up.”
Bloomberg’s Mike McKee: “Do you think we’ve come to the end, maybe, of the Bernanke era of making policy in terms of setting an inflation target at 2% and aiming for that as sort of the reason – the way you conduct policy. Could we see some sort of change?”
Stern: “I think you certainly could. But I can’t read the new chair’s mind – so I don’t know where he stands on that 2% number. To me, that number’s always been sort of an arbitrary number. My nickel on it is that if you’re running a little below your inflation target that’s hardly a big problem. I would once again urge review and maybe modification of that particular target because it’s not clear to me that there’s great virtue in it. There may be a better way to formulate the inflation objective.”
And from the Wall Street Journal: “‘He is remarkably undogmatic,’ says Jeremy Stein, a Harvard University economics professor, Democrat and former Fed governor whose office was adjacent to Mr. Powell’s. ‘He listens more than he talks.’”
With the suggestion of an End of an Era, I’m thinking of 30 years of ideologies dominating the Federal Reserve system. Alan Greenspan was the free-market ideologue that championed market-based finance, only to morph into “The Maestro” cunningly intervening in and manipulating increasingly unstable financial markets. Dr. Bernanke was summoned to the Federal Reserve in 2002 on the back of his radical theories of post-Bubble reflation. The powers that be later embraced Bernanke as Greenspan’s successor. By 2006, it was clear that reflationary measures had created an only more formidable Bubble for “helicopter Ben” to pilot. Janet Yellen, the pleasantly dovish intellectual of all things employment economics, was to ensure continuity in the implementation of the Bernanke Doctrine of radical monetary inflationism.
As Mr. Stern suggested above, it’s now time for a “pretty thorough review of some of the critical macroeconomic issues and frameworks of the day.” Long Overdue. I don’t envy Mr. Powell. His predecessors have left him, in the words of candidate Trump, “one big, fat, ugly Bubble.” Markets are comfortable that Powell will stick with the program of occasional little, harmless baby-step rate increases. Policies that actually tighten financial conditions remain unacceptable indefinitely. And it goes without saying that markets will be ready to throw a tizzy fit if the new chairman dares to even hint of a departure from market-friendly policymaking.
Powell has been referred to as a “loyal ally” of Janet Yellen, which endears him to the markets. He is by all accounts deferential and hard-working. Yet Powell is not an ideologue. He does not champion a doctrine that would have him wedded to specific econometric models or theoretical constructs.
It’s hard for me to believe he has the mindset to fixate on CPI measures slightly below target, while disregarding the markets. The Fed’s slim notion of “price stability” needs broadened and modernized. And I’m hopeful a Powell Fed’s “risk management approach” will focus more on the risks of promoting excess rather than measures to dampen market volatility and incentivize risk-taking. In such a complex world of extraordinary financial and economic developments, it’s hard to believe Powell will get bogged down in a debate on mythical “neutral” and “natural” interest rates. Ditto NAIRU.
So, trying to be constructive here, it’s a start. He may not be the bold reformer so needed at the Federal Reserve, but I’m hoping he’ll capably begin pulling the Fed away from radical inflationism. If he has been a keen observer and good listener, it would be rational to begin the process of extricating the Fed from such a dominant position in the markets. It’s not as if the Bubble is inconspicuous.
Perhaps Jerome Powell is even the type of individual driven to cultivate a sound analytical framework and philosophy – determined to learn, understand and adapt. That would be such a refreshing change from the Era of ideologues.
As someone with significant market experience, he surely recognizes the risks associated with financial excess. He must appreciate the dangers associated with Bubbles and pandering to speculative markets.
A lot will remain unknown until Powell is tested. How quickly does he come to the markets’ defense? Does he quietly abandon Bernanke’s - “the Fed will push back against a tightening of financial conditions” - over-the-top market inducement?
While he has not dissented on an FOMC vote, from his diverse real world experience, does he believe the Fed has been too reluctant in returning to traditional monetary management? Will he be a proponent of QE or instead view it with a healthier skepticism than the ideologues? I have no illusions that the Fed is about to eliminate QE from its toolkit. My view holds that, come the next serious de-risking/de-leveraging episode, central bankers will see few alternatives than creating more “money.”
Yet the key issue is how quickly in a crisis does the Powell Fed come to the markets’ rescue. As a pragmatic non-ideologue, he may appreciate the risks of coming too soon. And I have a crazy thought: maybe Powell even believes in the value of market discipline. By design or, more likely, by default – it’s the right time to move away from academic economists.
Depending on the President’s other Fed nominations, it could be quite a diverse group at the FOMC. Markets are today worry-free, but could chairman Powell be relegated to herding cats? It’s already a divided group – with divisions going much beyond traditional “hawk” and “dove.” Indeed, there are starkly divergent views as to how the world works. For starters, do economies drive the markets – or is it the securities markets these days that govern economic development? To what extent should central banks be dictating financial market behavior? Under what circumstances should central banks employ aggressive monetary stimulus? To what extent has Fed stimulus fueled deficit spending and big government? Should central bankers have complete discretion to rapidly expand central bank Credit?
Lots of momentous questions that somehow seems to matter so little at this juncture. The focus on interest rate policy and deregulation misses the larger issue: The Federal Reserve is soon under the command of a conventional and non-ideological individual with a distinguished career in the public and private sectors. I so hope Mr. Powell proves to be the distinguished statesman this country desperately needs running our central bank.
For the Week:
The S&P500 added 0.3% (up 15.6% y-t-d), and the Dow increased 0.4% (up 19.1%). The Utilities gained 0.2% (up 13.4%). The Banks were little changed (up 11.3%), while the Broker/Dealers declined 1.3% (up 18.9%). The Transports fell 1.8% (up 7.9%). The S&P 400 Midcaps slipped 0.2% (up 10.6%), and the small cap Russell 2000 declined 0.9% (up 10.2%). The Nasdaq100 jumped another 1.3% (up 29.4%).The Semiconductors surged 2.9% (up 43.4%). The Biotechs rose 2.2% (up 26.8%). With bullion down $4, the HUI gold index slipped 0.5% (up 2.0%).
Three-month Treasury bill rates ended the week at 115 bps. Two-year government yields increased three bps to 1.62% (up 43bps y-t-d). Five-year T-note yields fell four bps to 1.99% (up 6bps). Ten-year Treasury yields dropped seven bps to 2.33% (down 11bps). Long bond yields sank 10 bps to 2.81% (down 25bps).
Greek 10-year yields sank 40 bps to 5.09% (down 93bps y-t-d). Ten-year Portuguese yields dropped 13 bps to 2.07% (down 168bps). Italian 10-year yields fell 16 bps to 1.79% (down 2bps). Spain's 10-year yields declined 11 bps to 1.47% (up 9bps). German bund yields dipped two bps to 0.36% (up 16bps). French yields declined four bps to 0.75% (up 7bps). The French to German 10-year bond spread narrowed three to 39 bps. U.K. 10-year gilt yields fell nine bps to 1.26% (up 3bps). U.K.'s FTSE equities gained 0.7% (up 5.8%).
We’ve come a long way since 1992 and James Carville’s “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.” New age central banking has pacified bond markets and eradicated the vigilantes. These days it’s the great equities bull market as all-powerful intimidator.
The President admitted his surprise in winning the election. I suspect he and his team were astounded by the post-election market rally. I’ve always held the view that prolonged bull markets foster a portentous concentration of power – not only in the financial markets but within the financial system more generally.
That was certainly the case during the “Roaring Twenties,” just as it was in the late-nineties and throughout the mortgage finance Bubble period. A big market decline would have provided the new President the opportunity to blame the Bubble while moving forward aggressively with his reform agenda. Instead, a rally ensured that Team Trump would be held captive to the financial markets. As his administration struggled, President Trump could at least point to record stock prices.
I was hoping for reform-minded Kevin Warsh or John Taylor at the helm of the Federal Reserve. But I’ve somewhat warmed up to establishment-favored Jerome Powell, not so much because he will pursue needed changes in monetary management – but because Mr. Powell is likely about the best we could have hoped for in the current market environment. Apparently, the President was close to reappointing market darling chair Yellen. And if Yellen wasn’t dovish enough for the markets, Bill Gross stated his preference for either Paul McCulley or Neel Kashkari. I have McCulley and Kashkari far down the list - just above Ben Bernanke but below Charles Evans and Mark Zuckerberg.
Powell is viewed as the logical choice for continuity and stability at the Fed. He has a diverse background in law, government, the markets (with Carlyle Group), regulation and monetary policy. Powell will be the first Fed chairman without an economics Ph.D. since Paul Volcker. In many ways, it is a much welcomed End of an Era.
Janet Yellen is a widely respected economist – and by all accounts has been an able administrator of the Federal Reserve system. It has been noted that she will be the first Fed chair whose term ended without the experience of a recession. More importantly, she is surely the first leader of our central bank to have enjoyed a full term of uninterrupted extremely loose policy and financial conditions.
I’ll rain on the parade of accolades: The Yellen Fed failed to tighten policy in the face of increasingly conspicuous Bubble excess. Worse even than unforgivable past episodes, the Fed badly missed its timing. Today’s backdrop ensures an easy start to what will be an extremely challenging job for chairman Powell.
I’ve read numerous articles and listened to various commentaries. Leave it to esteemed former Minneapolis Fed President Gary Stern to offer the keenest insight:
Bloomberg’s Tom Keene: “Ellen Zentner at Morgan Stanley writes a detailed note about what we would expect from chairman Powell. She mentions that there’s a mystery here over chairman Powell and core economics, including NAIRU [non-accelerating inflation rate of unemployment]… Does it matter that chairman Powell maybe has a little fuzzy knowledge of NAIRU like mere mortals like me?”
Former Minneapolis Fed President Gary Stern: “No. And, in fact, I might view that as an advantage. Because that framework is frayed at best, it seems to me given our economic performance over the past “X” years – and “X” is not a small number. So, I think some open-mindedness on that framework is a distinct positive. And I think it would be worthwhile for a fair amount of resources to be devoted to a pretty thorough review of some of the critical macroeconomic issues and frameworks of the day, because they have not all served policymakers well; they have not all served commentators well; they have not all served the Street well. And I think it would be a good idea to open some of that up.”
Bloomberg’s Mike McKee: “Do you think we’ve come to the end, maybe, of the Bernanke era of making policy in terms of setting an inflation target at 2% and aiming for that as sort of the reason – the way you conduct policy. Could we see some sort of change?”
Stern: “I think you certainly could. But I can’t read the new chair’s mind – so I don’t know where he stands on that 2% number. To me, that number’s always been sort of an arbitrary number. My nickel on it is that if you’re running a little below your inflation target that’s hardly a big problem. I would once again urge review and maybe modification of that particular target because it’s not clear to me that there’s great virtue in it. There may be a better way to formulate the inflation objective.”
And from the Wall Street Journal: “‘He is remarkably undogmatic,’ says Jeremy Stein, a Harvard University economics professor, Democrat and former Fed governor whose office was adjacent to Mr. Powell’s. ‘He listens more than he talks.’”
With the suggestion of an End of an Era, I’m thinking of 30 years of ideologies dominating the Federal Reserve system. Alan Greenspan was the free-market ideologue that championed market-based finance, only to morph into “The Maestro” cunningly intervening in and manipulating increasingly unstable financial markets. Dr. Bernanke was summoned to the Federal Reserve in 2002 on the back of his radical theories of post-Bubble reflation. The powers that be later embraced Bernanke as Greenspan’s successor. By 2006, it was clear that reflationary measures had created an only more formidable Bubble for “helicopter Ben” to pilot. Janet Yellen, the pleasantly dovish intellectual of all things employment economics, was to ensure continuity in the implementation of the Bernanke Doctrine of radical monetary inflationism.
As Mr. Stern suggested above, it’s now time for a “pretty thorough review of some of the critical macroeconomic issues and frameworks of the day.” Long Overdue. I don’t envy Mr. Powell. His predecessors have left him, in the words of candidate Trump, “one big, fat, ugly Bubble.” Markets are comfortable that Powell will stick with the program of occasional little, harmless baby-step rate increases. Policies that actually tighten financial conditions remain unacceptable indefinitely. And it goes without saying that markets will be ready to throw a tizzy fit if the new chairman dares to even hint of a departure from market-friendly policymaking.
Powell has been referred to as a “loyal ally” of Janet Yellen, which endears him to the markets. He is by all accounts deferential and hard-working. Yet Powell is not an ideologue. He does not champion a doctrine that would have him wedded to specific econometric models or theoretical constructs.
It’s hard for me to believe he has the mindset to fixate on CPI measures slightly below target, while disregarding the markets. The Fed’s slim notion of “price stability” needs broadened and modernized. And I’m hopeful a Powell Fed’s “risk management approach” will focus more on the risks of promoting excess rather than measures to dampen market volatility and incentivize risk-taking. In such a complex world of extraordinary financial and economic developments, it’s hard to believe Powell will get bogged down in a debate on mythical “neutral” and “natural” interest rates. Ditto NAIRU.
So, trying to be constructive here, it’s a start. He may not be the bold reformer so needed at the Federal Reserve, but I’m hoping he’ll capably begin pulling the Fed away from radical inflationism. If he has been a keen observer and good listener, it would be rational to begin the process of extricating the Fed from such a dominant position in the markets. It’s not as if the Bubble is inconspicuous.
Perhaps Jerome Powell is even the type of individual driven to cultivate a sound analytical framework and philosophy – determined to learn, understand and adapt. That would be such a refreshing change from the Era of ideologues.
As someone with significant market experience, he surely recognizes the risks associated with financial excess. He must appreciate the dangers associated with Bubbles and pandering to speculative markets.
A lot will remain unknown until Powell is tested. How quickly does he come to the markets’ defense? Does he quietly abandon Bernanke’s - “the Fed will push back against a tightening of financial conditions” - over-the-top market inducement?
While he has not dissented on an FOMC vote, from his diverse real world experience, does he believe the Fed has been too reluctant in returning to traditional monetary management? Will he be a proponent of QE or instead view it with a healthier skepticism than the ideologues? I have no illusions that the Fed is about to eliminate QE from its toolkit. My view holds that, come the next serious de-risking/de-leveraging episode, central bankers will see few alternatives than creating more “money.”
Yet the key issue is how quickly in a crisis does the Powell Fed come to the markets’ rescue. As a pragmatic non-ideologue, he may appreciate the risks of coming too soon. And I have a crazy thought: maybe Powell even believes in the value of market discipline. By design or, more likely, by default – it’s the right time to move away from academic economists.
Depending on the President’s other Fed nominations, it could be quite a diverse group at the FOMC. Markets are today worry-free, but could chairman Powell be relegated to herding cats? It’s already a divided group – with divisions going much beyond traditional “hawk” and “dove.” Indeed, there are starkly divergent views as to how the world works. For starters, do economies drive the markets – or is it the securities markets these days that govern economic development? To what extent should central banks be dictating financial market behavior? Under what circumstances should central banks employ aggressive monetary stimulus? To what extent has Fed stimulus fueled deficit spending and big government? Should central bankers have complete discretion to rapidly expand central bank Credit?
Lots of momentous questions that somehow seems to matter so little at this juncture. The focus on interest rate policy and deregulation misses the larger issue: The Federal Reserve is soon under the command of a conventional and non-ideological individual with a distinguished career in the public and private sectors. I so hope Mr. Powell proves to be the distinguished statesman this country desperately needs running our central bank.
For the Week:
The S&P500 added 0.3% (up 15.6% y-t-d), and the Dow increased 0.4% (up 19.1%). The Utilities gained 0.2% (up 13.4%). The Banks were little changed (up 11.3%), while the Broker/Dealers declined 1.3% (up 18.9%). The Transports fell 1.8% (up 7.9%). The S&P 400 Midcaps slipped 0.2% (up 10.6%), and the small cap Russell 2000 declined 0.9% (up 10.2%). The Nasdaq100 jumped another 1.3% (up 29.4%).The Semiconductors surged 2.9% (up 43.4%). The Biotechs rose 2.2% (up 26.8%). With bullion down $4, the HUI gold index slipped 0.5% (up 2.0%).
Three-month Treasury bill rates ended the week at 115 bps. Two-year government yields increased three bps to 1.62% (up 43bps y-t-d). Five-year T-note yields fell four bps to 1.99% (up 6bps). Ten-year Treasury yields dropped seven bps to 2.33% (down 11bps). Long bond yields sank 10 bps to 2.81% (down 25bps).
Greek 10-year yields sank 40 bps to 5.09% (down 93bps y-t-d). Ten-year Portuguese yields dropped 13 bps to 2.07% (down 168bps). Italian 10-year yields fell 16 bps to 1.79% (down 2bps). Spain's 10-year yields declined 11 bps to 1.47% (up 9bps). German bund yields dipped two bps to 0.36% (up 16bps). French yields declined four bps to 0.75% (up 7bps). The French to German 10-year bond spread narrowed three to 39 bps. U.K. 10-year gilt yields fell nine bps to 1.26% (up 3bps). U.K.'s FTSE equities gained 0.7% (up 5.8%).
Japan's Nikkei 225 equities index jumped 2.4% to a new 20-year high (up 17.9% y-t-d). Japanese 10-year "JGB" yields declined two bps to 0.05% (up 2bps). France's CAC40 added 0.4% (up 13.5%). The German DAX equities index jumped 2.0% (up 17.4%). Spain's IBEX 35 equities index gained 1.6% (up 10.8%). Italy's FTSE MIB index rose 1.5% (up 19.6%). For the most part, EM equities underperformed. Brazil's Bovespa index dropped 2.7% (up 22.7%), and Mexico's Bolsa fell 1.4% (up 6.3%). India’s Sensex equities index gained 1.6% (up 26.5%). China’s Shanghai Exchange fell 1.3% (up 8.6%). Turkey's Borsa Istanbul National 100 index surged 3.2% (up 42.4%). Russia's MICEX equities index increased 0.6% (down 6.8%).
Junk bond mutual funds saw inflows of $1.196 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates were unchanged at 3.94% (up 40bps y-o-y). Fifteen-year rates added two bps to 3.27% (up 43bps). Five-year hybrid ARM rates gained two bps to 3.23% (up 33bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.18% (up 44bps).
Federal Reserve Credit last week declined $6.8bn to $4.421 TN. Over the past year, Fed Credit increased $8.1bn. Fed Credit inflated $1.601 TN, or 57%, over the past 260 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $1.0bn last week to $3.366 TN. "Custody holdings" were up $245bn y-o-y, or 7.9%.
M2 (narrow) "money" supply last week gained $5.9bn to $13.746 TN. "Narrow money" expanded $672bn, or 5.1%, over the past year. For the week, Currency increased $2.6bn. Total Checkable Deposits jumped $28.8bn, while Savings Deposits fell $26.9bn. Small Time Deposits and Retail Money Funds were both little changed.
Total money market fund assets dropped $17.9bn to $2.730 TN. Money Funds rose $52bn y-o-y, or 2.0%.
Total Commercial Paper dropped $19.8bn to $1.048 TN. CP gained $140bn y-o-y, or 15.4%.
Currency Watch:
The U.S. dollar index was little changed at 94.94 (down 7.3% y-t-d). For the week on the upside, the South Korean won increased 1.5%, the New Zealand dollar 0.4% and the Canadian dollar 0.3%. For the week on the downside, the Brazilian real declined 2.4%, the South African rand 0.9%, the Swedish krona 0.7%, the British pound 0.4%, the Mexican peso 0.4%, the Australian dollar 0.4%, the Japanese yen 0.4%, the Norwegian krone 0.4%, and the Swiss franc 0.3%. The Chinese renminbi added 0.17% versus the dollar this week (up 4.61% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index jumped 2.1% (up 5.6% y-t-d). Spot Gold slipped 0.3% to $1,270 (up 10.2%). Silver rallied 0.5% to $16.834 (up 5.3%). Crude jumped $1.74 to $55.64 (up 3%). Gasoline gained 1.4% (up 7%), while Natural Gas was about unchanged (down 20%). Copper added 0.5% (up 24%). Wheat slipped 0.4% (up 4%). Corn was little changed (down 1%).
Trump Administration Watch:
October 31 – Politico (Danny Vinik): “No president has ever had a chance to rewrite the course of the Federal Reserve as completely, and as quickly, as President Donald Trump. When Trump picks a new head of the Federal Reserve—a move expected to happen on Thursday—it will be just the midpoint of his reshaping of the nation’s most important financial body. He’s likely to fill three more critical positions at the Fed: the vice chair, and two spots on the Fed Board of Governors. Combined with Governor Randy Quarles, who was confirmed by the Senate in October, Trump has a chance to nominate five of seven Fed governors by early next year. But just what Trump will do with that power remains unclear.”
Federal Reserve Watch:
November 1 – Bloomberg (Christopher Condon): “Federal Reserve officials reinforced expectations for a December interest-rate increase by subtly upgrading their assessment of the U.S. economy… ‘Economic activity has been rising at a solid rate despite hurricane-related disruptions,’ the Federal Open Market Committee said… following a two-day meeting… at which they left rates unchanged as expected. After its meeting in September the FOMC said the economy was expanding ‘moderately.’ Wednesday’s statement marked the first time since January 2015 that the committee used the word ‘solid’ to describe growth. The Fed repeated its assessment that while inflation may remain ‘somewhat below 2% in the near term,’ it’s expected to stabilize around the central bank’s 2% objective ‘over the medium term.’”
U.S. Bubble Watch:
November 2 – Bloomberg (Charles Stein): “Vanguard Group collected as much from U.S. investors in the first 10 months of 2017 as it did in all of 2016. The firm attracted $303 billion into its U.S. mutual funds and exchange-traded funds through October, matching last year’s record total… Vanguard collected almost $30 billion in October. The company, the biggest provider of mutual funds, is benefiting from a flood of money pouring into low-cost products that track indexes. In the 12 months ended Sept. 30, passive mutual funds and ETFs in the U.S. attracted a net $714 billion…, while active funds suffered outflows of $187 billion.”
October 30 – Reuters (Lucia Mutikani): “U.S. consumer spending recorded its biggest increase in more than eight years in September, likely as households in Texas and Florida replaced flood-damaged motor vehicles, but underlying inflation remained muted. Households, however, dipped into their savings to fund purchases last month, pushing savings to their lowest level since 2008. Against the backdrop of lackluster wage growth, the drop in savings suggests that September’s robust pace of consumer spending is probably unsustainable.”
October 30 – CNBC (Jeff Cox): “Americans are saving at the lowest pace in nearly 10 years, a sign of growing confidence as money pours into risk. The savings rate in September fell to 3.1%... That's the weakest level since December 2007… The August savings rate was 3.6%. As the downturn's effects back then ate into economic activity, consumers pushed their money into mattresses and reduced debt, which hit a historic peak of 13.2% of disposable income in the fourth quarter of 2007… Over the years, savings hit its peak of 11% in December 2012 and has been tailing lower since.”
October 31 – Bloomberg (Vince Golle): “America’s factories cranked it up in October, according to the latest regional manufacturing indexes. From Milwaukee to Dallas to New York state, measures improved to multi-year highs, reflecting robust orders growth as the global economy shows some promise. The MNI Chicago Business Barometer unexpectedly advanced to 66.2, exceeding all forecasts in a Bloomberg survey and marking the strongest reading since March 2011… Down south in the Lone Star State, manufacturing business activity was the firmest in more than 11 years… The Kansas City Fed’s measure advanced to the strongest reading since March 2011, while the New York Fed’s Empire State factory index climbed to the highest since September 2014.”
October 31 – Bloomberg (Agnel Philip): “Home-price gains in 20 U.S. cities accelerated in August amid tight inventories and steady economic growth, figures from S&P CoreLogic Case-Shiller showed… 20-city property values index rose 5.9% y/y (matching est.) after 5.8%. National price gauge increased 6.1% y/y, most since June 2014.”
October 31 – Bloomberg (Frederik Balfour): “U.S. consumer confidence rose more than expected in October to the highest in almost 17 years as Americans grew more confident about the economy and job market, according to… the …Conference Board. Confidence index rose to 125.9 (est. 121.5), highest since Dec. 2000, from 120.6 in Sept. Present conditions measure increased to 151.1, highest since 2001, from 146.9.”
October 30 – Bloomberg (Patrick Clark): “Here’s more evidence that the defining characteristic of the U.S. housing market is a shortage of inventory for sale: Homes are sitting on the market for the shortest time in 30 years, according to… the National Association of Realtors. The typical home spent just three weeks on the market… That was down from four weeks in the year ending June 2016 and 11 weeks in 2012… It was the shortest time since the NAR report began including data on how long homes spend on the market, in 1987… Forty-two percent of buyers paid at least the listing price, the highest share since the NAR survey started keeping track in 2007.”
October 29 – Wall Street Journal (Laura Kusisto and Christina Rexrode): “Despite rising home prices and a growing economy, U.S. homeowners’ mobility rate is stuck at a 30-year low… The median duration of owners in their homes in 2017 was 10 years… That matched last year’s duration, which, along with 2014, was the highest level since the NAR started tracking the data in 1985. Americans aren’t moving in part because inventory levels have fallen near multidecade lows and home prices have risen to records. Many homeowners are choosing to stay and renovate… The lack of inventory ‘is like not having enough oil in your car and your gears slowly come to a grind,’ said Sam Khater, deputy chief economist at data company CoreLogic.”
China Bubble Watch:
October 30 – Bloomberg (Justina Lee): “After a four-day bond selloff in China that shocked at least one market player, the government took action and stepped in. Chinese sovereign notes rose on Tuesday after the central bank boosted cash injections in the financial system and China Development Bank, a key so-called policy lender, downsized its debt issuance. A manufacturing gauge that signaled slower expansion also gave the bonds some much-needed support.”
October 29 – Bloomberg (Enda Curran and Chris Anstey): “It used to be that when America sneezed, the world caught a cold. This time around, it’s the risk of a sickly China that poses a bigger threat. The world’s second-largest economy is now trying to ward off the sniffles. While output is still growing at a pace that sees gross domestic product double every decade, the problem remains that much of that has been fueled by a massive buildup of credit. Total borrowing climbed to about 260% of the economy’s size by the end of 2016, up from 162% in 2008, and will hit close to 320% by 2021 according to Bloomberg Intelligence estimates. Economy-wide debt levels are on track to rank among ‘the highest in the world,’ according to Tom Orlik, BI’s Chief Asia Economist.”
October 29 – Bloomberg: “Investors in Chinese company bonds have so far avoided the brunt of a debt selloff that’s driven 10-year sovereign yields to the highest in three years. Their luck may be about to run out. Now that the Communist Party Congress is over, China’s bond holders may be about to get hit by ‘daggers falling from the sky,’ said Huachuang Securities Co., referring to aggressive deleveraging policies. Plus, accelerating inflation and the risk that China’s central bank may follow the Federal Reserve in raising borrowing costs are casting a shadow over the entire bond market. That all means that the situation that’s existed for most of 2017 -- sovereign yields rising, and corporate debt remaining relatively resilient -- is at risk of cracking. As appetite for bonds of any kind dwindles and authorities roll out measures that target higher-risk investments, company securities are in the line of fire.”
November 2 – Bloomberg (Eric Lam): “China’s deleveraging campaign has foreign investors flocking to the nation’s short-term bank debt. A sell-off in the country’s onshore bonds last month -- triggered by signs that policy makers are determined to rein in speculative borrowing -- encouraged offshore investors to home in on a particular slice of the market that might insulate them from turmoil. They’re called negotiable certificates of deposit, securities based on a deposit by one bank into another. Mainly issued by small and medium-sized lenders, they’re short-dated, so bear less credit risk. Overseas holdings of NCDs jumped nearly six-fold in the two months through September, vastly outpacing the 18% gain for the overall onshore bond market… And the debt may only get more appealing through year-end, with rates likely to rise thanks to seasonal dynamics.”
October 27 – Reuters (Jemima Kelly): “China is stepping up its oversight of cash loans offered through the internet amid growing concerns over rapid growth in the lightly regulated industry… Caixin… quoted Ji Zhihong of the central bank’s financial markets department as saying it has developed with other authorities a special regulation for controlling online financial risk. …Ji told a seminar the regulation has already achieved some success. Caixin also quoted Ji as saying China will improve regulations for all online financing businesses, and all financing activity should be subject to a basic level of oversight.”
October 31 – Wall Street Journal (Chao Deng and James T. Areddy): “A debt-laden port management company in northeast China defaulted on $150 million in bonds, as highly leveraged businesses get squeezed by Beijing’s campaign to weed out risks in the financial system. Dandong Port Group Co., controlled by a Chinese construction magnate with political ties in the U.S., told bondholders this week that it is unable to repay part of 1 billion yuan in bonds due Monday. A company statement cited ‘heavy interest-bearing debt burdens and high short-term payment pressure’ and said it is working with underwriters to repay the investors. The port, located at the mouth of the Yalu River on the border with North Korea, has expanded energetically in recent years…”
October 31 – Bloomberg (Frederik Balfour): “A luxury home in Hong Kong’s exclusive Peak neighborhood sold for HK$1.16 billion ($149 million), Wheelock Properties Ltd. said. The four-bedroom, 9,178 square foot (853 square meter) house boasts a swimming pool, elevator, garden and unobstructed views of Hong Kong and Victoria Harbour. The price per square foot was HK$126,813, the most paid for a unit in the development, Wheelock said.”
Central Banker Watch:
November 2 – Bloomberg (Lucy Meakin): “Bank of England policy makers raised interest rates for the first time in a decade, yet expressed concern for Britain’s Brexit-dented economy by indicating that another increase isn’t imminent. Led by Governor Mark Carney, the Monetary Policy Committee voted 7-2 on Thursday to increase the benchmark rate to 0.5% from 0.25%. The minutes of their meeting underscored worries that the economy is fragile as the 2019 split with the European Union nears.”
October 29 – Financial Times (Merryn Somerset Webb): “It has been a good week for billionaires. The UBS/PwC Billionaires Report 2017 claimed the combined wealth of the world’s 1,542 billionaires rose by almost a fifth last year to $6tn: more than double the UK’s gross domestic product. It has not been a particularly good week for governments. They have to deal with the fallout from rising wealth inequality, and that fallout is getting increasingly nasty. This kind of report does not do much for central bankers, either: the rise of the billionaires is as much about financial globalisation as it is easy money, but every time a report lands on their desks, central bankers must stop to think about the economic, social and political havoc their policies have caused over the past 10 years. The desperate attempt to avoid deflation via quantitative easing and record-low interest rates has had horrible side effects, and this observation is hardly controversial. The rich have become much richer; corporate wealth has become more concentrated; soaring house prices have created intergenerational strife; low yields have made all but the super-rich paranoid that they will be entirely unable to finance their futures.”
October 29 – Wall Street Journal (Lev Borodovsky): “Central bankers are slowly unwinding the stimulus that has helped support the epic postcrisis rally in financial markets. Inflation has been quiet throughout, but there are signs it may soon be heard from. Inflation has tiptoed higher in major economies, and there are signs in smaller nations that prices are beginning to get traction as well. Some analysts see the development as the natural next step following a global reflation that began in earnest in mid-2016… Time will tell. Wholesale inflation is percolating globally with parallel trends in Europe and Asia, a reflection of integrated supply chains.”
Global Bubble Watch:
October 30 – Financial Times (Miles Johnson): “The International Monetary Fund has warned that the increasing use of exotic financial products tied to equity volatility by investors such as pension funds is creating unknown risks that could result in a severe shock to financial markets. …Tobias Adrian, director of the Monetary and Capital Markets Department of the IMF, said an increasing appetite for yield was driving investors to look for ways to boost income through complex instruments. ‘The combination of low yields and low volatility facilitates the use of leverage by investors to increase returns, and we have seen rapid growth in some types of products that do this,’ he said… The IMF estimates that assets invested in volatility targeting strategies have risen to about $500bn, with this amount increasing by more than half over the past three years.”
October 29 – Wall Street Journal (Chris Dieterich, Ben Eisen and Akane Otani): “Markets around the globe are surging to records, reflecting growing optimism about the world economy and fueling an increasing eagerness by investors to step in and buy assets whenever prices dip. In the U.S. stock market, declines have grown shallower over the past two years and are snapping back sooner. The S&P 500 has gone 246 trading days without trading more than 3% below its record high, the longest streak ever for the index… The index hasn’t had a decline of 10% or more from a recent peak since February 2016. The steady buying in the U.S. has lately spread to Europe, Japan and even developing markets… On Friday, the Dow Jones Industrial Average rose 0.1% to 23434.19, near its record from Tuesday, its 54th of the year. Japan’s Nikkei gained 2.6% this past week to its highest level since 1996, and share indexes in the U.K. and Germany have hit records this month.”
November 1 – Bloomberg (Cecile Gutscher and Paul Cohen): “Ultra-low interest rates and an expansionary European Central Bank have stoked a borrowing spree that’s already eclipsed all of 2016, two months before the end of the year. Syndicated bond sales in Europe are set to reach 1.13 trillion euros ($1.3 trillion) Wednesday… Treasurers from across the globe have flocked to the region’s markets, where the ECB has suppressed yields with an asset purchase program that’s even swept up debt issued by companies beyond its own borders.”
November 2 – Bloomberg (Eric Lam): “Bitcoin surged past $7,000 for the first time, breaching another milestone less than one month after it tore through the $5,000 mark. The digital currency got new impetus this week after CME Group Inc., the world’s largest exchange owner, said it plans to introduce bitcoin futures by the end of the year, citing pent-up demand from clients. Skeptics including Themis Trading say the rally is evidence that the software-created asset is a bubble that should not be given regulatory cover.”
October 31 – Bloomberg (Nick Baker and Matthew Leising): “The allure of bitcoin was too much for CME Group Inc. The world’s largest exchange owner reversed course today and said it plans to introduce bitcoin futures by the end of the year, only a month after dismissing such a plan. The largest cryptocurrency, which has surged more than sixfold this year, climbed to a record high after the announcement.”
October 31 – Wall Street Journal (Dominique Fong and Esther Fung): “China’s controls on capital outflow are putting a chill on some global commercial real-estate markets. Since late 2016, policy makers in Beijing have been tightening restrictions on overseas investments and scrutinizing some of the country’s most ambitious deal makers, voicing concerns that deals in certain sectors were disguises for capital flight into havens. In August, China’s powerful State Council announced that property investments abroad were ‘restricted,’ along with deals in hotels, movie studios and sports teams…. At the recent Communist Party congress, where President Xi Jinping solidified his control, officials reiterated concerns about systemic risks stemming from ill-considered purchases abroad.”
November 1 – Bloomberg (Peter Vercoe and Matthew Burgess): “The housing boom that has seen Australian home prices more than double since the turn of the century is ‘officially over,’ after data showed prices now flatlining, UBS Group AG said. National house prices were unchanged in October from September, while annual growth has slowed to 7% from more than 10% as recently as July… ‘There is now a persistent and sharp slowdown unfolding,’ UBS economists led by George Tharenou said… ‘This suggests a tightening of financial conditions is unfolding, which we expect to weigh on consumption growth via a fading household-wealth effect.’”
Fixed Income Bubble Watch:
October 29 – Financial Times (Joe Rennison and Eric Platt): “Wall Street banks are having a strong year underwriting and selling riskier loans, with the volume so far this year already surpassing the whole of 2016. The increase in issuance of leveraged loans, lent to borrowers with sub-investment grade ratings, has been driven by companies renegotiating debt at lower interest rates. Those rates are more attractive partly because of the burgeoning demand for the asset class, as well as the low level of market rates more generally. Nine of the 10 largest lenders in the business — including Bank of America Merrill Lynch, JPMorgan Chase, Goldman Sachs and Barclays — have already surpassed 2016 activity…”
Europe Watch:
October 27 – Wall Street Journal (Tom Fairless): “The European Central Bank’s reluctance to quickly phase out its bond-buying program has reopened a rift at the top of the world’s second-most powerful central bank, pitting ECB President Mario Draghi against German Bundesbank head Jens Weidmann —just as discussions begin about whether the German will succeed the Italian… Mr. Weidmann, widely seen as a leading contender for the ECB’s top job, has publicly opposed many of the bank’s stimulus policies in recent years, notably its large-scale purchases of government bonds, known as quantitative easing or QE. Although he toned down his criticism in recent months, Mr. Weidmann changed tack this week, publicly opposing a decision to extend QE through September 2018.”
October 29 – Wall Street Journal (Giovanni Legorano): “When European Central Bank President Mario Draghi embarked on a policy of buying government bonds, it was an especially welcome lifeline for Italy, then reeling from soaring interest rates and trapped in the country’s worst economic crisis since the war. Now, as the central bank unwinds the stimulus program known as quantitative easing 2½ years later, Italy is an important test case for the long-term success of Mr. Draghi’s policy. Years of cheap money and a robust recovery elsewhere in Europe is nudging Italy to its fastest economic growth in seven years. But while thriving on stimulus, Italy has failed to take big steps on changes such as cutting red tape and reducing the cost of labor.”
Japan Watch:
November 1 – Bloomberg (Isabel Reynolds and Emi Nobuhiro): “Prime Minister Shinzo Abe praised the Bank of Japan’s efforts to reach its inflation target, but stopped short of saying whether he’d reappoint Governor Haruhiko Kuroda to lead the central bank when his term expires next year. …Abe said ‘the slate is completely blank’ on his choice for governor. ‘We haven’t yet reached the 2% price stability target, but we expect the Bank of Japan to continue to make efforts to achieve it,’ he said… Kuroda is the top contender by a wide margin to lead the Bank of Japan again when his five-year term comes to an end in April…”
Emerging Market Watch:
November 1 – Wall Street Journal (Julie Wernau and Ana Rivas): “Venezuela has sunk into a deep recession as it grapples with the collapse of oil prices and the effects of years of economic mismanagement. Many analysts expect the country to default on its debt… Here’s a look at the state of Venezuela’s economy and finances. Venezuela has the world’s highest inflation, estimated by the International Monetary Fund to reach 653% this year. The country has been ravaged by shortages of food and medicine, and months of protests that cost more than 120 lives. As Mr. Maduro has consolidated power, the opposition has been weakened and divided.”
Leveraged Speculation Watch:
November 2 – Bloomberg (Dani Burger): “By some measures, equity quantitative funds should be thriving. But they’re not. Their fundamental counterparts are having a banner year. Stock correlations are at all time lows and clearer market trends are breathing life back into the momentum trade, a strategy among equity quants that bets the winners will keep winning. As those shares chart increasingly independent paths from the losers, equity fund managers are recording their strongest performance in five years… Yet for market-neutral quants who take advantage of patterns and dislocations, this year has been anything but a standout. Only 30% of those managers are beating their benchmark…”
Geopolitical Watch:
October 30 – Reuters (David Brunnstrom and Matt Spetalnick): “China’s ambassador to Washington said… U.S. President Donald Trump’s state visit to Beijing next week was a historic opportunity to boost cooperation between the world’s two largest economies, but warned against attempts to ‘contain’ Beijing. Cui Tiankai also stressed the urgency of efforts to find a negotiated solution to the crisis over North Korea’s nuclear and missile programs and warned of a ‘more dangerous’ situation if tensions between the United States and Pyongyang continued.”
October 31 – Reuters (Greg Torode and Ben Blanchard): “China has quietly undertaken more construction and reclamation in the South China Sea, recent satellite images show, and is likely to more powerfully reassert its claims over the waterway soon, regional diplomats and military officers say. With global attention focused on North Korea and Beijing engrossed in its Party Congress, tensions in the South China Sea have slipped from the headlines in recent months. But with none of the underlying disputes resolved and new images reviewed by Reuters showing China continuing to develop facilities on North and Tree islands in the contested Paracel islands, experts say the vital trade route remains a global flashpoint.”
October 30 – CNBC (Anmar Frangoul): “The amount of carbon dioxide in the atmosphere reached its highest level in 800,000 years in 2016, the World Meteorological Organization (WMO) said… Carbon dioxide levels ‘surged’ at record breaking speeds last year, with globally averaged concentrations of CO2 hitting 403.3 parts per million in 2016 compared to 400 parts per million in 2015…”
Freddie Mac 30-year fixed mortgage rates were unchanged at 3.94% (up 40bps y-o-y). Fifteen-year rates added two bps to 3.27% (up 43bps). Five-year hybrid ARM rates gained two bps to 3.23% (up 33bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.18% (up 44bps).
Federal Reserve Credit last week declined $6.8bn to $4.421 TN. Over the past year, Fed Credit increased $8.1bn. Fed Credit inflated $1.601 TN, or 57%, over the past 260 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $1.0bn last week to $3.366 TN. "Custody holdings" were up $245bn y-o-y, or 7.9%.
M2 (narrow) "money" supply last week gained $5.9bn to $13.746 TN. "Narrow money" expanded $672bn, or 5.1%, over the past year. For the week, Currency increased $2.6bn. Total Checkable Deposits jumped $28.8bn, while Savings Deposits fell $26.9bn. Small Time Deposits and Retail Money Funds were both little changed.
Total money market fund assets dropped $17.9bn to $2.730 TN. Money Funds rose $52bn y-o-y, or 2.0%.
Total Commercial Paper dropped $19.8bn to $1.048 TN. CP gained $140bn y-o-y, or 15.4%.
Currency Watch:
The U.S. dollar index was little changed at 94.94 (down 7.3% y-t-d). For the week on the upside, the South Korean won increased 1.5%, the New Zealand dollar 0.4% and the Canadian dollar 0.3%. For the week on the downside, the Brazilian real declined 2.4%, the South African rand 0.9%, the Swedish krona 0.7%, the British pound 0.4%, the Mexican peso 0.4%, the Australian dollar 0.4%, the Japanese yen 0.4%, the Norwegian krone 0.4%, and the Swiss franc 0.3%. The Chinese renminbi added 0.17% versus the dollar this week (up 4.61% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index jumped 2.1% (up 5.6% y-t-d). Spot Gold slipped 0.3% to $1,270 (up 10.2%). Silver rallied 0.5% to $16.834 (up 5.3%). Crude jumped $1.74 to $55.64 (up 3%). Gasoline gained 1.4% (up 7%), while Natural Gas was about unchanged (down 20%). Copper added 0.5% (up 24%). Wheat slipped 0.4% (up 4%). Corn was little changed (down 1%).
Trump Administration Watch:
October 31 – Politico (Danny Vinik): “No president has ever had a chance to rewrite the course of the Federal Reserve as completely, and as quickly, as President Donald Trump. When Trump picks a new head of the Federal Reserve—a move expected to happen on Thursday—it will be just the midpoint of his reshaping of the nation’s most important financial body. He’s likely to fill three more critical positions at the Fed: the vice chair, and two spots on the Fed Board of Governors. Combined with Governor Randy Quarles, who was confirmed by the Senate in October, Trump has a chance to nominate five of seven Fed governors by early next year. But just what Trump will do with that power remains unclear.”
Federal Reserve Watch:
November 1 – Bloomberg (Christopher Condon): “Federal Reserve officials reinforced expectations for a December interest-rate increase by subtly upgrading their assessment of the U.S. economy… ‘Economic activity has been rising at a solid rate despite hurricane-related disruptions,’ the Federal Open Market Committee said… following a two-day meeting… at which they left rates unchanged as expected. After its meeting in September the FOMC said the economy was expanding ‘moderately.’ Wednesday’s statement marked the first time since January 2015 that the committee used the word ‘solid’ to describe growth. The Fed repeated its assessment that while inflation may remain ‘somewhat below 2% in the near term,’ it’s expected to stabilize around the central bank’s 2% objective ‘over the medium term.’”
U.S. Bubble Watch:
November 2 – Bloomberg (Charles Stein): “Vanguard Group collected as much from U.S. investors in the first 10 months of 2017 as it did in all of 2016. The firm attracted $303 billion into its U.S. mutual funds and exchange-traded funds through October, matching last year’s record total… Vanguard collected almost $30 billion in October. The company, the biggest provider of mutual funds, is benefiting from a flood of money pouring into low-cost products that track indexes. In the 12 months ended Sept. 30, passive mutual funds and ETFs in the U.S. attracted a net $714 billion…, while active funds suffered outflows of $187 billion.”
October 30 – Reuters (Lucia Mutikani): “U.S. consumer spending recorded its biggest increase in more than eight years in September, likely as households in Texas and Florida replaced flood-damaged motor vehicles, but underlying inflation remained muted. Households, however, dipped into their savings to fund purchases last month, pushing savings to their lowest level since 2008. Against the backdrop of lackluster wage growth, the drop in savings suggests that September’s robust pace of consumer spending is probably unsustainable.”
October 30 – CNBC (Jeff Cox): “Americans are saving at the lowest pace in nearly 10 years, a sign of growing confidence as money pours into risk. The savings rate in September fell to 3.1%... That's the weakest level since December 2007… The August savings rate was 3.6%. As the downturn's effects back then ate into economic activity, consumers pushed their money into mattresses and reduced debt, which hit a historic peak of 13.2% of disposable income in the fourth quarter of 2007… Over the years, savings hit its peak of 11% in December 2012 and has been tailing lower since.”
October 31 – Bloomberg (Vince Golle): “America’s factories cranked it up in October, according to the latest regional manufacturing indexes. From Milwaukee to Dallas to New York state, measures improved to multi-year highs, reflecting robust orders growth as the global economy shows some promise. The MNI Chicago Business Barometer unexpectedly advanced to 66.2, exceeding all forecasts in a Bloomberg survey and marking the strongest reading since March 2011… Down south in the Lone Star State, manufacturing business activity was the firmest in more than 11 years… The Kansas City Fed’s measure advanced to the strongest reading since March 2011, while the New York Fed’s Empire State factory index climbed to the highest since September 2014.”
October 31 – Bloomberg (Agnel Philip): “Home-price gains in 20 U.S. cities accelerated in August amid tight inventories and steady economic growth, figures from S&P CoreLogic Case-Shiller showed… 20-city property values index rose 5.9% y/y (matching est.) after 5.8%. National price gauge increased 6.1% y/y, most since June 2014.”
October 31 – Bloomberg (Frederik Balfour): “U.S. consumer confidence rose more than expected in October to the highest in almost 17 years as Americans grew more confident about the economy and job market, according to… the …Conference Board. Confidence index rose to 125.9 (est. 121.5), highest since Dec. 2000, from 120.6 in Sept. Present conditions measure increased to 151.1, highest since 2001, from 146.9.”
October 30 – Bloomberg (Patrick Clark): “Here’s more evidence that the defining characteristic of the U.S. housing market is a shortage of inventory for sale: Homes are sitting on the market for the shortest time in 30 years, according to… the National Association of Realtors. The typical home spent just three weeks on the market… That was down from four weeks in the year ending June 2016 and 11 weeks in 2012… It was the shortest time since the NAR report began including data on how long homes spend on the market, in 1987… Forty-two percent of buyers paid at least the listing price, the highest share since the NAR survey started keeping track in 2007.”
October 29 – Wall Street Journal (Laura Kusisto and Christina Rexrode): “Despite rising home prices and a growing economy, U.S. homeowners’ mobility rate is stuck at a 30-year low… The median duration of owners in their homes in 2017 was 10 years… That matched last year’s duration, which, along with 2014, was the highest level since the NAR started tracking the data in 1985. Americans aren’t moving in part because inventory levels have fallen near multidecade lows and home prices have risen to records. Many homeowners are choosing to stay and renovate… The lack of inventory ‘is like not having enough oil in your car and your gears slowly come to a grind,’ said Sam Khater, deputy chief economist at data company CoreLogic.”
China Bubble Watch:
October 30 – Bloomberg (Justina Lee): “After a four-day bond selloff in China that shocked at least one market player, the government took action and stepped in. Chinese sovereign notes rose on Tuesday after the central bank boosted cash injections in the financial system and China Development Bank, a key so-called policy lender, downsized its debt issuance. A manufacturing gauge that signaled slower expansion also gave the bonds some much-needed support.”
October 29 – Bloomberg (Enda Curran and Chris Anstey): “It used to be that when America sneezed, the world caught a cold. This time around, it’s the risk of a sickly China that poses a bigger threat. The world’s second-largest economy is now trying to ward off the sniffles. While output is still growing at a pace that sees gross domestic product double every decade, the problem remains that much of that has been fueled by a massive buildup of credit. Total borrowing climbed to about 260% of the economy’s size by the end of 2016, up from 162% in 2008, and will hit close to 320% by 2021 according to Bloomberg Intelligence estimates. Economy-wide debt levels are on track to rank among ‘the highest in the world,’ according to Tom Orlik, BI’s Chief Asia Economist.”
October 29 – Bloomberg: “Investors in Chinese company bonds have so far avoided the brunt of a debt selloff that’s driven 10-year sovereign yields to the highest in three years. Their luck may be about to run out. Now that the Communist Party Congress is over, China’s bond holders may be about to get hit by ‘daggers falling from the sky,’ said Huachuang Securities Co., referring to aggressive deleveraging policies. Plus, accelerating inflation and the risk that China’s central bank may follow the Federal Reserve in raising borrowing costs are casting a shadow over the entire bond market. That all means that the situation that’s existed for most of 2017 -- sovereign yields rising, and corporate debt remaining relatively resilient -- is at risk of cracking. As appetite for bonds of any kind dwindles and authorities roll out measures that target higher-risk investments, company securities are in the line of fire.”
November 2 – Bloomberg (Eric Lam): “China’s deleveraging campaign has foreign investors flocking to the nation’s short-term bank debt. A sell-off in the country’s onshore bonds last month -- triggered by signs that policy makers are determined to rein in speculative borrowing -- encouraged offshore investors to home in on a particular slice of the market that might insulate them from turmoil. They’re called negotiable certificates of deposit, securities based on a deposit by one bank into another. Mainly issued by small and medium-sized lenders, they’re short-dated, so bear less credit risk. Overseas holdings of NCDs jumped nearly six-fold in the two months through September, vastly outpacing the 18% gain for the overall onshore bond market… And the debt may only get more appealing through year-end, with rates likely to rise thanks to seasonal dynamics.”
October 27 – Reuters (Jemima Kelly): “China is stepping up its oversight of cash loans offered through the internet amid growing concerns over rapid growth in the lightly regulated industry… Caixin… quoted Ji Zhihong of the central bank’s financial markets department as saying it has developed with other authorities a special regulation for controlling online financial risk. …Ji told a seminar the regulation has already achieved some success. Caixin also quoted Ji as saying China will improve regulations for all online financing businesses, and all financing activity should be subject to a basic level of oversight.”
October 31 – Wall Street Journal (Chao Deng and James T. Areddy): “A debt-laden port management company in northeast China defaulted on $150 million in bonds, as highly leveraged businesses get squeezed by Beijing’s campaign to weed out risks in the financial system. Dandong Port Group Co., controlled by a Chinese construction magnate with political ties in the U.S., told bondholders this week that it is unable to repay part of 1 billion yuan in bonds due Monday. A company statement cited ‘heavy interest-bearing debt burdens and high short-term payment pressure’ and said it is working with underwriters to repay the investors. The port, located at the mouth of the Yalu River on the border with North Korea, has expanded energetically in recent years…”
October 31 – Bloomberg (Frederik Balfour): “A luxury home in Hong Kong’s exclusive Peak neighborhood sold for HK$1.16 billion ($149 million), Wheelock Properties Ltd. said. The four-bedroom, 9,178 square foot (853 square meter) house boasts a swimming pool, elevator, garden and unobstructed views of Hong Kong and Victoria Harbour. The price per square foot was HK$126,813, the most paid for a unit in the development, Wheelock said.”
Central Banker Watch:
November 2 – Bloomberg (Lucy Meakin): “Bank of England policy makers raised interest rates for the first time in a decade, yet expressed concern for Britain’s Brexit-dented economy by indicating that another increase isn’t imminent. Led by Governor Mark Carney, the Monetary Policy Committee voted 7-2 on Thursday to increase the benchmark rate to 0.5% from 0.25%. The minutes of their meeting underscored worries that the economy is fragile as the 2019 split with the European Union nears.”
October 29 – Financial Times (Merryn Somerset Webb): “It has been a good week for billionaires. The UBS/PwC Billionaires Report 2017 claimed the combined wealth of the world’s 1,542 billionaires rose by almost a fifth last year to $6tn: more than double the UK’s gross domestic product. It has not been a particularly good week for governments. They have to deal with the fallout from rising wealth inequality, and that fallout is getting increasingly nasty. This kind of report does not do much for central bankers, either: the rise of the billionaires is as much about financial globalisation as it is easy money, but every time a report lands on their desks, central bankers must stop to think about the economic, social and political havoc their policies have caused over the past 10 years. The desperate attempt to avoid deflation via quantitative easing and record-low interest rates has had horrible side effects, and this observation is hardly controversial. The rich have become much richer; corporate wealth has become more concentrated; soaring house prices have created intergenerational strife; low yields have made all but the super-rich paranoid that they will be entirely unable to finance their futures.”
October 29 – Wall Street Journal (Lev Borodovsky): “Central bankers are slowly unwinding the stimulus that has helped support the epic postcrisis rally in financial markets. Inflation has been quiet throughout, but there are signs it may soon be heard from. Inflation has tiptoed higher in major economies, and there are signs in smaller nations that prices are beginning to get traction as well. Some analysts see the development as the natural next step following a global reflation that began in earnest in mid-2016… Time will tell. Wholesale inflation is percolating globally with parallel trends in Europe and Asia, a reflection of integrated supply chains.”
Global Bubble Watch:
October 30 – Financial Times (Miles Johnson): “The International Monetary Fund has warned that the increasing use of exotic financial products tied to equity volatility by investors such as pension funds is creating unknown risks that could result in a severe shock to financial markets. …Tobias Adrian, director of the Monetary and Capital Markets Department of the IMF, said an increasing appetite for yield was driving investors to look for ways to boost income through complex instruments. ‘The combination of low yields and low volatility facilitates the use of leverage by investors to increase returns, and we have seen rapid growth in some types of products that do this,’ he said… The IMF estimates that assets invested in volatility targeting strategies have risen to about $500bn, with this amount increasing by more than half over the past three years.”
October 29 – Wall Street Journal (Chris Dieterich, Ben Eisen and Akane Otani): “Markets around the globe are surging to records, reflecting growing optimism about the world economy and fueling an increasing eagerness by investors to step in and buy assets whenever prices dip. In the U.S. stock market, declines have grown shallower over the past two years and are snapping back sooner. The S&P 500 has gone 246 trading days without trading more than 3% below its record high, the longest streak ever for the index… The index hasn’t had a decline of 10% or more from a recent peak since February 2016. The steady buying in the U.S. has lately spread to Europe, Japan and even developing markets… On Friday, the Dow Jones Industrial Average rose 0.1% to 23434.19, near its record from Tuesday, its 54th of the year. Japan’s Nikkei gained 2.6% this past week to its highest level since 1996, and share indexes in the U.K. and Germany have hit records this month.”
November 1 – Bloomberg (Cecile Gutscher and Paul Cohen): “Ultra-low interest rates and an expansionary European Central Bank have stoked a borrowing spree that’s already eclipsed all of 2016, two months before the end of the year. Syndicated bond sales in Europe are set to reach 1.13 trillion euros ($1.3 trillion) Wednesday… Treasurers from across the globe have flocked to the region’s markets, where the ECB has suppressed yields with an asset purchase program that’s even swept up debt issued by companies beyond its own borders.”
November 2 – Bloomberg (Eric Lam): “Bitcoin surged past $7,000 for the first time, breaching another milestone less than one month after it tore through the $5,000 mark. The digital currency got new impetus this week after CME Group Inc., the world’s largest exchange owner, said it plans to introduce bitcoin futures by the end of the year, citing pent-up demand from clients. Skeptics including Themis Trading say the rally is evidence that the software-created asset is a bubble that should not be given regulatory cover.”
October 31 – Bloomberg (Nick Baker and Matthew Leising): “The allure of bitcoin was too much for CME Group Inc. The world’s largest exchange owner reversed course today and said it plans to introduce bitcoin futures by the end of the year, only a month after dismissing such a plan. The largest cryptocurrency, which has surged more than sixfold this year, climbed to a record high after the announcement.”
October 31 – Wall Street Journal (Dominique Fong and Esther Fung): “China’s controls on capital outflow are putting a chill on some global commercial real-estate markets. Since late 2016, policy makers in Beijing have been tightening restrictions on overseas investments and scrutinizing some of the country’s most ambitious deal makers, voicing concerns that deals in certain sectors were disguises for capital flight into havens. In August, China’s powerful State Council announced that property investments abroad were ‘restricted,’ along with deals in hotels, movie studios and sports teams…. At the recent Communist Party congress, where President Xi Jinping solidified his control, officials reiterated concerns about systemic risks stemming from ill-considered purchases abroad.”
November 1 – Bloomberg (Peter Vercoe and Matthew Burgess): “The housing boom that has seen Australian home prices more than double since the turn of the century is ‘officially over,’ after data showed prices now flatlining, UBS Group AG said. National house prices were unchanged in October from September, while annual growth has slowed to 7% from more than 10% as recently as July… ‘There is now a persistent and sharp slowdown unfolding,’ UBS economists led by George Tharenou said… ‘This suggests a tightening of financial conditions is unfolding, which we expect to weigh on consumption growth via a fading household-wealth effect.’”
Fixed Income Bubble Watch:
October 29 – Financial Times (Joe Rennison and Eric Platt): “Wall Street banks are having a strong year underwriting and selling riskier loans, with the volume so far this year already surpassing the whole of 2016. The increase in issuance of leveraged loans, lent to borrowers with sub-investment grade ratings, has been driven by companies renegotiating debt at lower interest rates. Those rates are more attractive partly because of the burgeoning demand for the asset class, as well as the low level of market rates more generally. Nine of the 10 largest lenders in the business — including Bank of America Merrill Lynch, JPMorgan Chase, Goldman Sachs and Barclays — have already surpassed 2016 activity…”
Europe Watch:
October 27 – Wall Street Journal (Tom Fairless): “The European Central Bank’s reluctance to quickly phase out its bond-buying program has reopened a rift at the top of the world’s second-most powerful central bank, pitting ECB President Mario Draghi against German Bundesbank head Jens Weidmann —just as discussions begin about whether the German will succeed the Italian… Mr. Weidmann, widely seen as a leading contender for the ECB’s top job, has publicly opposed many of the bank’s stimulus policies in recent years, notably its large-scale purchases of government bonds, known as quantitative easing or QE. Although he toned down his criticism in recent months, Mr. Weidmann changed tack this week, publicly opposing a decision to extend QE through September 2018.”
October 29 – Wall Street Journal (Giovanni Legorano): “When European Central Bank President Mario Draghi embarked on a policy of buying government bonds, it was an especially welcome lifeline for Italy, then reeling from soaring interest rates and trapped in the country’s worst economic crisis since the war. Now, as the central bank unwinds the stimulus program known as quantitative easing 2½ years later, Italy is an important test case for the long-term success of Mr. Draghi’s policy. Years of cheap money and a robust recovery elsewhere in Europe is nudging Italy to its fastest economic growth in seven years. But while thriving on stimulus, Italy has failed to take big steps on changes such as cutting red tape and reducing the cost of labor.”
Japan Watch:
November 1 – Bloomberg (Isabel Reynolds and Emi Nobuhiro): “Prime Minister Shinzo Abe praised the Bank of Japan’s efforts to reach its inflation target, but stopped short of saying whether he’d reappoint Governor Haruhiko Kuroda to lead the central bank when his term expires next year. …Abe said ‘the slate is completely blank’ on his choice for governor. ‘We haven’t yet reached the 2% price stability target, but we expect the Bank of Japan to continue to make efforts to achieve it,’ he said… Kuroda is the top contender by a wide margin to lead the Bank of Japan again when his five-year term comes to an end in April…”
Emerging Market Watch:
November 1 – Wall Street Journal (Julie Wernau and Ana Rivas): “Venezuela has sunk into a deep recession as it grapples with the collapse of oil prices and the effects of years of economic mismanagement. Many analysts expect the country to default on its debt… Here’s a look at the state of Venezuela’s economy and finances. Venezuela has the world’s highest inflation, estimated by the International Monetary Fund to reach 653% this year. The country has been ravaged by shortages of food and medicine, and months of protests that cost more than 120 lives. As Mr. Maduro has consolidated power, the opposition has been weakened and divided.”
Leveraged Speculation Watch:
November 2 – Bloomberg (Dani Burger): “By some measures, equity quantitative funds should be thriving. But they’re not. Their fundamental counterparts are having a banner year. Stock correlations are at all time lows and clearer market trends are breathing life back into the momentum trade, a strategy among equity quants that bets the winners will keep winning. As those shares chart increasingly independent paths from the losers, equity fund managers are recording their strongest performance in five years… Yet for market-neutral quants who take advantage of patterns and dislocations, this year has been anything but a standout. Only 30% of those managers are beating their benchmark…”
Geopolitical Watch:
October 30 – Reuters (David Brunnstrom and Matt Spetalnick): “China’s ambassador to Washington said… U.S. President Donald Trump’s state visit to Beijing next week was a historic opportunity to boost cooperation between the world’s two largest economies, but warned against attempts to ‘contain’ Beijing. Cui Tiankai also stressed the urgency of efforts to find a negotiated solution to the crisis over North Korea’s nuclear and missile programs and warned of a ‘more dangerous’ situation if tensions between the United States and Pyongyang continued.”
October 31 – Reuters (Greg Torode and Ben Blanchard): “China has quietly undertaken more construction and reclamation in the South China Sea, recent satellite images show, and is likely to more powerfully reassert its claims over the waterway soon, regional diplomats and military officers say. With global attention focused on North Korea and Beijing engrossed in its Party Congress, tensions in the South China Sea have slipped from the headlines in recent months. But with none of the underlying disputes resolved and new images reviewed by Reuters showing China continuing to develop facilities on North and Tree islands in the contested Paracel islands, experts say the vital trade route remains a global flashpoint.”
October 30 – CNBC (Anmar Frangoul): “The amount of carbon dioxide in the atmosphere reached its highest level in 800,000 years in 2016, the World Meteorological Organization (WMO) said… Carbon dioxide levels ‘surged’ at record breaking speeds last year, with globally averaged concentrations of CO2 hitting 403.3 parts per million in 2016 compared to 400 parts per million in 2015…”
Friday Evening News Links
[Reuters] World stocks gain on Apple lift, dollar strengthens on data
[Bloomberg] Venezuela Cut Deeper Into Junk by Fitch
[Bloomberg] U.S. Credit Markets Are More Sane Than the Frenzy Suggests
[CNBC] It's begun: Fed's unwinding of its epic balance sheet officially showing up in the data
[WSJ] Broadcom Plans Unsolicited Bid for Qualcomm
[Bloomberg] Venezuela Cut Deeper Into Junk by Fitch
[Bloomberg] U.S. Credit Markets Are More Sane Than the Frenzy Suggests
[CNBC] It's begun: Fed's unwinding of its epic balance sheet officially showing up in the data
[WSJ] Broadcom Plans Unsolicited Bid for Qualcomm
Thursday, November 2, 2017
Friday's News Links
[Bloomberg] Dollar Falls, Treasuries Rise on Payrolls Report: Markets Wrap
[Reuters] Oil near two-year highs as tightening market woos buyers
[Bloomberg] U.S. Trade Deficit Widens as Import Gain Barely Exceeds Exports
[Bloomberg] U.S. Adds 261,000 Jobs as Hurricane Effect Reverses; Pay Stalls
[Bloomberg] GOP's United Front on Tax Cut Plans Masks Underlying Divisions
[Bloomberg] The State of International Central Banking With Powell Era Coming
[Bloomberg] PBOC Moves to Steady Money Supply After Sovereign Bond Tumble
[Reuters] China's HNA sells short-dated bond at "scary" high yield
[Bloomberg] What's Next for China Markets Now Xi Jinping's Party Is Over
[Bloomberg] U.S. Supersonic Bombers Conduct Exercise Over Korean Peninsula
[WSJ] House GOP Tax Plan Sticks With Big Corporate Cuts
[WSJ] Mr. Ordinary: Who Is Jerome Powell, Trump’s Federal Reserve Pick?
[FT] Liquidity: the real challenge facing Jay Powell at the Fed
[Reuters] Oil near two-year highs as tightening market woos buyers
[Bloomberg] U.S. Trade Deficit Widens as Import Gain Barely Exceeds Exports
[Bloomberg] U.S. Adds 261,000 Jobs as Hurricane Effect Reverses; Pay Stalls
[Bloomberg] GOP's United Front on Tax Cut Plans Masks Underlying Divisions
[Bloomberg] The State of International Central Banking With Powell Era Coming
[Bloomberg] PBOC Moves to Steady Money Supply After Sovereign Bond Tumble
[Reuters] China's HNA sells short-dated bond at "scary" high yield
[Bloomberg] What's Next for China Markets Now Xi Jinping's Party Is Over
[Bloomberg] U.S. Supersonic Bombers Conduct Exercise Over Korean Peninsula
[WSJ] House GOP Tax Plan Sticks With Big Corporate Cuts
[WSJ] Mr. Ordinary: Who Is Jerome Powell, Trump’s Federal Reserve Pick?
[FT] Liquidity: the real challenge facing Jay Powell at the Fed
Thursday Evening Links
[Bloomberg] U.S. Stocks Mixed, Dollar Lower on Tax Plan Detail: Markets Wrap
[Bloomberg] Venezuela Will Seek to Restructure Its Debt
[Bloomberg] Powell Pledges to Pursue Fed's Employment, Inflation Goals
[Bloomberg] Trump Considered Keeping Yellen at Fed, Until Mnuchin Spoke Up
[Bloomberg] Here Are the Big Tax Changes House Republicans Are Proposing
[Bloomberg] House Tax Bill Has Major Changes for Businesses, Individuals
[Bloomberg] Republicans Seek Major Tax Changes as Opposition Begins to Form
[Reuters] Fed's Powell rose to top of Trump's list as safe, business-savvy choice
[CNBC] Here's how the GOP wants to overhaul the tax system
[Bloomberg] Home Prices Rose in 92% of U.S. Metro Areas in Third Quarter
[Bloomberg] Even a Momentum Trade Comeback Can't Save Quants From a Disappointing Year
[Reuters] Trump will tell Asia that world 'running out of time' on North Korea: White House
[WSJ] Inside Trump’s Search for a Fed Leader
[Bloomberg] Venezuela Will Seek to Restructure Its Debt
[Bloomberg] Powell Pledges to Pursue Fed's Employment, Inflation Goals
[Bloomberg] Trump Considered Keeping Yellen at Fed, Until Mnuchin Spoke Up
[Bloomberg] Here Are the Big Tax Changes House Republicans Are Proposing
[Bloomberg] House Tax Bill Has Major Changes for Businesses, Individuals
[Bloomberg] Republicans Seek Major Tax Changes as Opposition Begins to Form
[Reuters] Fed's Powell rose to top of Trump's list as safe, business-savvy choice
[CNBC] Here's how the GOP wants to overhaul the tax system
[Bloomberg] Home Prices Rose in 92% of U.S. Metro Areas in Third Quarter
[Bloomberg] Even a Momentum Trade Comeback Can't Save Quants From a Disappointing Year
[Reuters] Trump will tell Asia that world 'running out of time' on North Korea: White House
[WSJ] Inside Trump’s Search for a Fed Leader
Wednesday, November 1, 2017
Thursday's News Links
[Bloomberg] U.S. Stocks, Dollar Retreat on Tax Plan Details: Markets Wrap
[Bloomberg] House Tax Bill Has Sweeping Changes for Businesses, Individuals
[Bloomberg] Trump Taps Powell for Fed to Oversee Economy Fraught With Risks
[Bloomberg] Powell, Once an Also-Ran, Set to Chair Trump’s Bank-Friendly Fed
[Bloomberg] U.S. Productivity Rises by Most in Three Years as Output Jumps
[Reuters] U.S. jobless claims fall to near 44-1/2-year low
[Bloomberg] Corporate Tax Cut to Be Phased Out After a Decade
[Bloomberg] BOE Raises Interest Rate for First Time in More Than Decade
[Bloomberg] Bitcoin Surges Past $7,000 to Extend Record Rally
[Axios] The biggest problem in the GOP tax plan
[Bloomberg] Foreigners Have New Strategy in China's Fragile Bond Market
[FT] Powell as Fed pick may not be the non-event it seems
[FT] Falling junk bond spreads trigger sense of foreboding
[FT] Tsunami of easy money makes it impossible to judge value
[Reuters] Supreme Leader Khamenei says U.S. is Iran's 'number one enemy'
[Bloomberg] House Tax Bill Has Sweeping Changes for Businesses, Individuals
[Bloomberg] Trump Taps Powell for Fed to Oversee Economy Fraught With Risks
[Bloomberg] Powell, Once an Also-Ran, Set to Chair Trump’s Bank-Friendly Fed
[Bloomberg] U.S. Productivity Rises by Most in Three Years as Output Jumps
[Reuters] U.S. jobless claims fall to near 44-1/2-year low
[Bloomberg] Corporate Tax Cut to Be Phased Out After a Decade
[Bloomberg] BOE Raises Interest Rate for First Time in More Than Decade
[Bloomberg] Bitcoin Surges Past $7,000 to Extend Record Rally
[Axios] The biggest problem in the GOP tax plan
[Bloomberg] Foreigners Have New Strategy in China's Fragile Bond Market
[FT] Powell as Fed pick may not be the non-event it seems
[FT] Falling junk bond spreads trigger sense of foreboding
[FT] Tsunami of easy money makes it impossible to judge value
[Reuters] Supreme Leader Khamenei says U.S. is Iran's 'number one enemy'
Wednesday Evening Links
[Bloomberg] Asia Stocks Face Mixed Start as Dollar Climbs: Markets Wrap
[Bloomberg] Powell to Be Trump's Nominee for Fed Chair Replacing Yellen: WSJ
[Bloomberg] Here’s What You Need to Know About Powell’s Fed Chair Selection
[Bloomberg] Jerome Powell’s Views on U.S. Monetary Policy in His Own Words
[WSJ] Trump to Tap Jerome Powell as Next Fed Chairman
[Bloomberg] U.S. Stocks Pare Gains on Tax Details; Bonds Rise: Markets Wrap
[Bloomberg] Fed Signals December Hike On Track a Day Before Trump Announces Next Chair
[Bloomberg] What Wall Street Is Saying About the Delayed Tax Bill Rollout
[ABC] House tax plan lowers caps on 401(k), cuts state and local deductions
[Bloomberg] ECB Largesse Helps Bond Sales Eclipse 2016 With Two Months to Go
[Bloomberg] Canadian Junk Bond Sales Are Headed for a Record
[Bloomberg] Powell to Be Trump's Nominee for Fed Chair Replacing Yellen: WSJ
[Bloomberg] Here’s What You Need to Know About Powell’s Fed Chair Selection
[Bloomberg] Jerome Powell’s Views on U.S. Monetary Policy in His Own Words
[WSJ] Trump to Tap Jerome Powell as Next Fed Chairman
[Bloomberg] U.S. Stocks Pare Gains on Tax Details; Bonds Rise: Markets Wrap
[Bloomberg] Fed Signals December Hike On Track a Day Before Trump Announces Next Chair
[Bloomberg] What Wall Street Is Saying About the Delayed Tax Bill Rollout
[ABC] House tax plan lowers caps on 401(k), cuts state and local deductions
[Bloomberg] ECB Largesse Helps Bond Sales Eclipse 2016 With Two Months to Go
[Bloomberg] Canadian Junk Bond Sales Are Headed for a Record
Tuesday, October 31, 2017
Wednesday's News Links
[Bloomberg] Stocks Gain as Metals Surge; Crude Extends Rally: Markets Wrap
[Bloomberg] U.S. Oil Rises to 10-Month High as Stockpiles Seen Dropping
[Bloomberg] U.S. Companies Add Most Workers in Seven Months, ADP Data Show
[Bloomberg] Fed Chair Drama Steals Spotlight From FOMC: Decision Day Guide
[Reuters] Fed set to hold rates steady ahead of Trump's leadership decision
[CNBC] The House GOP will delay releasing its tax bill until Thursday
[Bloomberg] GOP Braces for ‘All Hell’ to Break Loose When Tax Bill Finally Drops
[Bloomberg] Treasury Maintains Long-Term Debt Sales, Sees Rise in 2018
[CNBC] Caixin China manufacturing PMI is 51.0 for October, meeting expectations
[Bloomberg] Australia's Housing Boom Is ‘Officially Over,’ UBS Says
[Bloomberg] This Four-Bedroom Home in Hong Kong Just Sold for $149 Million
[WSJ] Fed Likely on Hold, but Could Give Clues on Possible December Rate Rise
[WSJ] Chinese Property Shopping Spree Fades as Beijing Hits the Brakes
[WSJ] China’s Dandong Port Group Defaults on $150 Million in Bonds
[Bloomberg] U.S. Oil Rises to 10-Month High as Stockpiles Seen Dropping
[Bloomberg] U.S. Companies Add Most Workers in Seven Months, ADP Data Show
[Bloomberg] Fed Chair Drama Steals Spotlight From FOMC: Decision Day Guide
[Reuters] Fed set to hold rates steady ahead of Trump's leadership decision
[CNBC] The House GOP will delay releasing its tax bill until Thursday
[Bloomberg] GOP Braces for ‘All Hell’ to Break Loose When Tax Bill Finally Drops
[Bloomberg] Treasury Maintains Long-Term Debt Sales, Sees Rise in 2018
[CNBC] Caixin China manufacturing PMI is 51.0 for October, meeting expectations
[Bloomberg] Australia's Housing Boom Is ‘Officially Over,’ UBS Says
[Bloomberg] This Four-Bedroom Home in Hong Kong Just Sold for $149 Million
[WSJ] Fed Likely on Hold, but Could Give Clues on Possible December Rate Rise
[WSJ] Chinese Property Shopping Spree Fades as Beijing Hits the Brakes
[WSJ] China’s Dandong Port Group Defaults on $150 Million in Bonds
Tuesday Evening Links
[Bloomberg] Japan Stocks Point Higher as Kiwi Soars on Jobs: Markets Wrap
[Bloomberg] U.S. Consumer Confidence Just Hit Its Highest Level in Almost 17 Years
[Bloomberg] U.S. Manufacturing Is Powering Up, Regional Report Cards Show
[Bloomberg] Bitcoin Surges After World's Biggest Exchange Announces Plans for Futures
[WSJ] House Tax Plan to Delay Estate-Tax Repeal, Set Corporate Rate at 20%
[Bloomberg] U.S. Consumer Confidence Just Hit Its Highest Level in Almost 17 Years
[Bloomberg] U.S. Manufacturing Is Powering Up, Regional Report Cards Show
[Bloomberg] Bitcoin Surges After World's Biggest Exchange Announces Plans for Futures
[WSJ] House Tax Plan to Delay Estate-Tax Repeal, Set Corporate Rate at 20%
Monday, October 30, 2017
Tuesday's News Links
[Bloomberg] Stocks Extend Gains; Euro Drops as Inflation Slows: Markets Wrap
[Bloomberg] Home-Price Gains in 20 U.S. Cities Showed Acceleration in August
[Bloomberg] U.S. Employment Costs Pick Up on Faster Wage Gains at Factories
[Politico] Trump’s unusual chance to stack the Fed
[Bloomberg] BOJ Keeps Stimulus Unchanged as It Trims Inflation Outlook
[Bloomberg] China Factory PMI Falls From Five-Year High on Pollution Cleanup
[Bloomberg] China Takes Action After Bond Market Sell-off With One-Two Punch
[Bloomberg] Another China Company Defaults on Bond Payment as Borrowing Costs Jump
[Bloomberg] You Wanna See Something Really Scary? Try These Market Charts
[Reuters] Beijing seen poised for fresh South China Sea assertiveness
[NYT] Thanks to Wall St., There May Be Too Many Restaurants
[FT] IMF warns volatility products loom as next big market shock
[WSJ] China’s Dangerous Return to One-Man Reign
[Bloomberg] Home-Price Gains in 20 U.S. Cities Showed Acceleration in August
[Bloomberg] U.S. Employment Costs Pick Up on Faster Wage Gains at Factories
[Politico] Trump’s unusual chance to stack the Fed
[Bloomberg] BOJ Keeps Stimulus Unchanged as It Trims Inflation Outlook
[Bloomberg] China Factory PMI Falls From Five-Year High on Pollution Cleanup
[Bloomberg] China Takes Action After Bond Market Sell-off With One-Two Punch
[Bloomberg] Another China Company Defaults on Bond Payment as Borrowing Costs Jump
[Bloomberg] You Wanna See Something Really Scary? Try These Market Charts
[Reuters] Beijing seen poised for fresh South China Sea assertiveness
[NYT] Thanks to Wall St., There May Be Too Many Restaurants
[FT] IMF warns volatility products loom as next big market shock
[WSJ] China’s Dangerous Return to One-Man Reign
Monday Evening Links
[Bloomberg] U.S. Stocks Fall, Dollar Slumps as Treasuries Gain: Markets Wrap
[Bloomberg] House to Consider Five-Year Phase-in for Corporate Tax Cut
[Reuters] Trump likely to pick Fed's Powell to lead central bank: source
[CNBC] There are plenty of things that might be in this tax bill that could give the market indigestion
[CNBC] Savings rate hits lowest since financial crisis as Americans take on more risk
[Bloomberg] Homes Are Getting Snapped Up at the Fastest Pace in 30 Years
[Reuters] U.S. consumer spending grows at fastest pace since 2009, savings drop
[Bloomberg] Bitcoin's Market Cap Surges Past $100 Billion
[Reuters] China warns against attempts to contain Beijing before Trump visit
[NYT] Trump Is Expected to Name Jerome Powell as Next Fed Chairman
[WSJ] Bets on the Next Fed Chair: A History of Speculation Gone Wrong
[WSJ] ECB Decision Reopens Divide Atop Central Bank
[Bloomberg] House to Consider Five-Year Phase-in for Corporate Tax Cut
[Reuters] Trump likely to pick Fed's Powell to lead central bank: source
[CNBC] There are plenty of things that might be in this tax bill that could give the market indigestion
[CNBC] Savings rate hits lowest since financial crisis as Americans take on more risk
[Bloomberg] Homes Are Getting Snapped Up at the Fastest Pace in 30 Years
[Reuters] U.S. consumer spending grows at fastest pace since 2009, savings drop
[Bloomberg] Bitcoin's Market Cap Surges Past $100 Billion
[Reuters] China warns against attempts to contain Beijing before Trump visit
[NYT] Trump Is Expected to Name Jerome Powell as Next Fed Chairman
[WSJ] Bets on the Next Fed Chair: A History of Speculation Gone Wrong
[WSJ] ECB Decision Reopens Divide Atop Central Bank
Sunday, October 29, 2017
Monday's News Links
[Bloomberg] U.S. Stocks Fall From Records as Dollar Weakens: Markets Wrap
[Bloomberg] China Bond Selloff Spreads to Stocks as Deleveraging Risks Mount
[Bloomberg] U.S. Consumer Spending Rises Most Since 2009 on Car Buying
[Politico] State of the Fed
[Bloomberg] Trump’s Big Fed Chair Reveal: This Week in Washington
[Bloomberg] Biggest Stock Collapse in World History Has No End in Sight
[MarketWatch] Why stock-market bulls should be wary of rising tide of earnings shenanigans
[Bloomberg] Analysts See Deleveraging Concerns Behind China's Equity Selloff
[Reuters] China central bank boosting oversight of loans offered on the internet - media
[Reuters] As China's home prices cool, some property companies seek to reduce risks
[CNBC] Carbon dioxide in atmosphere hits highest level in 800,000 years, study says
[NYT] In Choice of Fed Chairman, Trump Downgrades Deregulation
[WSJ] Inflation: The Slumbering Giant Begins to Stir
[WSJ] Italy Faces Challenge of Living Without ECB Alchemy
[FT] Powell leading in Trump’s Fed chair reality-TV spectacle
[FT] Spain faces test of authority in Catalonia under direct rule
[FT] Wall Street banks rake in bumper fees from leveraged loans
[Bloomberg] China Bond Selloff Spreads to Stocks as Deleveraging Risks Mount
[Bloomberg] U.S. Consumer Spending Rises Most Since 2009 on Car Buying
[Politico] State of the Fed
[Bloomberg] Trump’s Big Fed Chair Reveal: This Week in Washington
[Bloomberg] Biggest Stock Collapse in World History Has No End in Sight
[MarketWatch] Why stock-market bulls should be wary of rising tide of earnings shenanigans
[Bloomberg] Analysts See Deleveraging Concerns Behind China's Equity Selloff
[Reuters] China central bank boosting oversight of loans offered on the internet - media
[Reuters] As China's home prices cool, some property companies seek to reduce risks
[CNBC] Carbon dioxide in atmosphere hits highest level in 800,000 years, study says
[NYT] In Choice of Fed Chairman, Trump Downgrades Deregulation
[WSJ] Inflation: The Slumbering Giant Begins to Stir
[WSJ] Italy Faces Challenge of Living Without ECB Alchemy
[FT] Powell leading in Trump’s Fed chair reality-TV spectacle
[FT] Spain faces test of authority in Catalonia under direct rule
[FT] Wall Street banks rake in bumper fees from leveraged loans
Sunday's News Links
[Reuters] Hundreds of thousands march for unified Spain, poll shows depths of division
[NYT] Spain Is a Collection of Glued Regions. Or Maybe Not So Glued.
[NYT] Stuck in Place, U.S. Homeowners Hunker Down as Housing Supply Stays Tight
[WSJ] Why Are Markets Rising Everywhere? Investors Can’t Stop Buying Every Dip
[FT] Sand castles on Jersey Shore: property boom defies US flood risk
[NYT] Spain Is a Collection of Glued Regions. Or Maybe Not So Glued.
[NYT] Stuck in Place, U.S. Homeowners Hunker Down as Housing Supply Stays Tight
[WSJ] Why Are Markets Rising Everywhere? Investors Can’t Stop Buying Every Dip
[FT] Sand castles on Jersey Shore: property boom defies US flood risk
Saturday, October 28, 2017
Saturday's News Links
[BBC] Catalan ex-leader Carles Puigdemont vows to resist takeover
[Reuters] Kuroda looks favored to get second term as Bank of Japan chief: Nikkei
[Reuters] Catalan police call for neutrality as Spain exerts control
[Reuters] Mattis, in Seoul, says U.S. can't accept nuclear North Korea
[CNBC] North Korea accuses US of 'criminal moves' as three Navy carriers operate in Asian waters
[FT] Billionaire boom is a sign that rates need to rise
[Reuters] Kuroda looks favored to get second term as Bank of Japan chief: Nikkei
[Reuters] Catalan police call for neutrality as Spain exerts control
[Reuters] Mattis, in Seoul, says U.S. can't accept nuclear North Korea
[CNBC] North Korea accuses US of 'criminal moves' as three Navy carriers operate in Asian waters
[FT] Billionaire boom is a sign that rates need to rise
Friday, October 27, 2017
Weekly Commentary: Must Stop Digging
Amazon, Google, Microsoft, Intel and Draghi all handily beat expectations. Booming technology earnings confirm the degree to which Bubble Dynamics have become entrenched within the real economy. Draghi confirms that central bankers remain petrified by the thought of piercing Bubbles.
There is a prevailing view that Bubbles reflect asset price gains beyond what is justified by fundamental factors. I counter with the argument that the inflation of underlying fundamentals – revenues, earnings, cash-flow, margins, etc. – is a paramount facet of Bubble Dynamics (How abruptly did the trajectory of earnings reverse course in 2001 and 2009?).
With extremely low rates, loose corporate Credit Availability, large deficit spending, inflating asset prices and a glut of “money” sloshing about, there is bountiful fodder for spending and corporate profits. And with technology one of the more beguiling avenues to employ the cash-flow bonanza – and tech start-ups, the cloud, AI, Internet of Things, robotics, cybersecurity, etc. white-hot right now – the Gargantuan Technology Oligopoly today luxuriates at the Bubble Core.
By this time, expanding global technology capacity is a straightforward endeavor, while the industry for now enjoys booming demand and outsized margins. This confluence of extraordinary attributes provides “tech” the latitude to operate as a powerful black hole absorbing global purchasing power (throughout economies as well as financial markets). As such, it has been a case of the greater the scope of the Bubble, the more supply of “tech” available to weigh on overall goods and services pricing pressures. Central bankers continue to misconstrue this dynamic, instead perceiving irrepressible disinflationary forces that they are compelled to counter (with year after year after year of flagrant monetary stimulus).
The Nasdaq Composite’s 24.5% y-t-d gain has provided a fantastic windfall to fortunate investors as well as tens of thousands of extremely fortunate employees. This financial godsend will exacerbate wealth disparities along with housing inflation in select localities. Yet there will be little boost to reported wages (capital gains instead) and negligible impact on the overall CPI index. Is CPI these days even a relevant gauge of inflationary pressures or monetary instability?
As for Mario Draghi’s practice of beating market expectations, he is the present-day Alan Greenspan – the savvy operator that over the years has grown too comfortable wielding power over global markets (not to mention over central bankers at home and abroad). Headline from the Financial Times: “Draghi Pulls Off Dovish Trick with His QE ‘Downsize’ - ECB President Determined Not to Repeat Mistake of Premature Tightening.”
The ECB – right along with central bankers around the globe – has replayed the fateful mistake of delaying for (way) too long the removal of monetary stimulus. Draghi refused to set a date to end the ECB’s “money” printing operations, ensuring at least several hundred billion of additional stimulus in 2018. And with the commitment to hold rates at the current negative level until well past the end of QE, a most inert “normalization” process will not even commence until well into 2019. Apparently, short rates likely won’t make it much past 1% for several years. Draghi’s central bank will continue to purchase large quantities of corporate debt next year. Moreover, with open-ended QE and assurances that operations could at any point be expanded, spoiled markets take great comfort that their beloved liquidity backstop is as unyielding as ever.
October 26 – Bloomberg (Alessandro Speciale and Mark Deen): “The European Central Bank should have decided on an end date for its asset-purchase program rather than retaining the option to extend it after September 2018, Bundesbank President Jens Weidmann said. ‘From my point of view, a clear end of net purchases would have been appropriate,’ Weidmann said in a speech… ‘The development of domestic price pressures shown in projections is in line with a trajectory that will take us toward our definition of price stability.’ Weidmann’s critique comes one day after the Governing Council extended quantitative easing until September at a monthly pace of 30 billion euros ($35bn), leaving the door open for further buying after that if needed. The Bundesbank president was among a handful of policy makers who didn’t support the decision, according to Germany’s Boersen-Zeitung.”
German stocks gained 1.7% this week, while French equities jumped 2.3%. German (38bps) and French (79bps) yields declined seven basis points to seven-week lows. Portuguese bond yields dropped 11 bps to a 30-month low 2.19%. Dropping nine bps, Italian 10-year yields traded back below 2%. And in a sign of these strange times, even Catalonia chaos couldn’t keep Spanish yields from declining eight bps to 1.58% (83bps below Treasuries!). Yet Draghi has company when it comes to assuring markets that central bank liquidity backstops are here to stay.
October 20 – Financial Times (Sam Fleming): “Janet Yellen… has warned that there is an ‘uncomfortably high’ risk that the central bank will have to deploy crisis-era stimulus tools again — even in the case of a less severe downturn than the Great Recession. Her comments come as President Donald Trump considers a sharp change of direction at the Fed which could see him install new leadership that is much more dubious about the Fed’s use of quantitative easing. Ms Yellen said in a speech that the US economy had made ‘great strides’ but that policymakers may be unable to lift short-term rates very far as the recovery proceeds. This could leave the Fed once again leaning on quantitative easing and forward guidance on the future rate outlook when the economy hits a downturn, she suggested… ‘Does this mean that it will take another Great Recession for our unconventional tools to be used again? Not necessarily. Recent studies suggest that the neutral level of the federal funds rate appears to be much lower than it was in previous decades,’ Ms Yellen said. ‘The bottom line is that we must recognise that our unconventional tools might have to be used again. If we are indeed living in a low-neutral-rate world, a significantly less severe economic downturn than the Great Recession might be sufficient to drive short-term interest rates back to their effective lower bound.’”
Apparently, there is an “uncomfortably high risk” that QE will be employed “in the case of a less severe downturn” because “policymakers may be unable to lift short-term rates very far as the recovery proceeds.” Does anyone believe that the Yellen Fed is less than comfortable with the prospect of restarting QE?
Q3 marked the second consecutive quarter of 3% U.S. growth; consumer confidence is the highest in years; stock markets are booming with record prices and “money” flooding into ETFs; debt issuance remains on record pace; leveraged lending and M&A are booming; a strong inflationary bias persists in housing; and the unemployment rate is down to 4.2%, lowest in 16 years. Why not begin a real normalization of monetary policy? Because some measures of core consumer price inflation remain slightly below 2.0%?
It has become increasingly apparent that central bankers recognize their predicament and have chosen not to risk piercing Bubbles. I suspect Draghi, Yellen and Kuroda (and others) fear the consequences of a destabilizing jump in global bond yields. I too fear the amount of leverage and range of distortions that have accumulated over the past nine years. The inescapable adjustment after such a prolonged boom will be quite difficult. Yet the analysis gets back to the “First Law of Holes:” Must Stop Digging. At this late (historic) Bubble stage, systemic risk is piling up exponentially.
October 24 – Financial Times (Robin Wigglesworth): “Inflows into exchange-traded bond funds have surged past last year’s record with several months to spare, as the seismic migration towards passive investing broadens out beyond the equity market. ETFs that track fixed-income benchmarks have attracted nearly $130bn so far this year, comfortably surpassing the record-breaking 2016, when almost $117bn gushed into bond ETFs… Bloomberg data puts this year’s inflows at more than $140bn. ‘It’s been a year of robust flows,’ said Steve Laipply, head of fixed income strategy at BlackRock’s iShares ETF business… ‘There has been accelerating institutional investor adoption of these products’… ETF providers such as Vanguard, State Street and BlackRock have rapidly grown their franchises, with BlackRock revealing in its latest quarterly earnings that it is currently taking in about $1.5bn a day.”
October 22 – Wall Street Journal (Christopher Whittall): “Investors hungry for returns are piling back into securities once tarnished by the financial crisis. Complex structured investments developed a bad reputation during the credit crunch. Ten years later, investors seeking yield are overcoming their skepticism and buying into securities that rely on financial engineering to juice returns. Volumes of CLOs, or collateralized loan obligations, hit a record $247 billion in the first nine months of the year… Fueled by a wave of refinancings and nearly $100 billion in new deals, that far outpaces their recent full-year high of $151 billion in 2014 and the precrisis peak of $136 billion in 2006. The CLO boom is the latest sign of the ferocious hunt for yield permeating markets. Stellar performance over the past year has made CLOs increasingly hard to ignore for investors like insurance companies and pension funds.”
October 20 – Financial Times (Gillian Tett): “A decade ago, whenever I chatted to anyone at Switzerland’s Bank for International Settlements, I felt like I was hobnobbing with dissidents. The reason? Back then, most western central bankers and finance ministers were convinced that the global economy was in good shape: inflation was low, growth was steady, corporate and consumer optimism was high. In fact, the data seemed so benign that economists had labelled the first decade of the 21st century the ‘great moderation’. Not the BIS. Starting in 2003, officials at… institution, which aims to ‘promote global monetary and financial stability through international co-operation’, started to warn that the world economy was plagued by excessive levels of debt. This made the system dangerously distorted; so went the off-the-record murmurs from men such as William White… and Claudio Borio... Most central bankers dismissed these warnings — some even tried to silence the BIS… Earlier this month I travelled to Washington for an International Monetary Fund and World Bank meeting. There was a cheery mood in the air, just as there was in 2006… But now, just as before, those BIS dissidents are muttering in the wings. At the IMF gala, Borio (still at the BIS) told me that the pesky matter of debt has not disappeared. On the contrary, since the 2008 credit crisis, it has risen sharply: the level of global debt to gross domestic product is now 40% — yes, 40% — higher than it was in 2008. The world has responded to a crisis caused by excess leverage by piling on more, not less, debt.”
There are aspects of the current global Bubble that are reminiscent of pre-2008 crisis – though the amount of debt these days is larger, price distortions greater and misperceptions more perilous. Then: “Washington will not allow a housing bust.” Now: Global central bankers will not allow market dislocation. Unprecedented market distortions – including Trillions of mispriced “AAA” debt securities – back in 2008 look pee-wee when compared to today’s fiasco in perceived money-like instruments (fixed-income as well as equities)
At the same time, today’s “tech” party is more 1999 – just so much more expansive. Loose “money” coupled with government/central bank backstops have nurtured another epic sector mania – replete with more dangerous regional economic and housing Bubbles. Today’s EM backdrop has uncomfortable characteristics reminiscent of 1996, with the current “hot money” onslaught compounding already acute financial, economic, social and geopolitical fragilities from Asia to Eastern Europe to Latin America.
And there are elements of fixed-income excess that recall all the way back to 1993. The proliferation of leveraged derivatives strategies cultivates latent fragility. Meanwhile, the scope of flows into fixed-income ETFs at this late stage of the cycle is astonishing – yet, as they say, “par for the course.” It’s consistent with the flood of funds into passive U.S. equities indices and the emerging markets; the near-panic buying of European and U.S. corporate debt – the tsunami of “money” inundating virtually all risk assets via the ballooning ETF complex.
What most sets today’s Granddaddy of All Bubbles apart? Historic excess and distortion throughout the securities and derivatives markets – and asset markets more generally – on an unprecedented synchronized, systemic global scale. It’s become myriad powerful booms all packed into one killer Bubble unlike the world has ever experienced. History will not be kind to central banker fixation on arbitrary 2% annual CPI targets. Nasdaq inflated 2.2% in Friday’s session – the Nasdaq100 2.9%!
For the Week:
The S&P500 added 0.2% (up 15.3% y-t-d), and the Dow increased 0.5% (up 18.6%). The Utilities added 0.3% (up 13.2%). The Banks rose 1.0% (up 11.4%), and the Broker/Dealers increased 0.4% (up 20.4%). The Transports slipped 0.4% (up 9.8%). The S&P 400 Midcaps gained 0.3% (up 10.8%), while the small cap Russell 2000 was little changed (up 11.1%). The Nasdaq100 jumped 1.7% (up 27.8%). The Semiconductors surged 2.6% (up 39.4%). The Biotechs dropped 3.0% (up 33.9%). Bullion declined $7, while the HUI gold index was slammed 5.3% (up 2.6%).
Three-month Treasury bill rates ended the week at 107 bps. Two-year government yields added a basis point to 1.59% (up 40bps y-t-d). Five-year T-note yields added one basis point to 2.03% (up 10bps). Ten-year Treasury yields gained two bps to 2.41% (down 4bps). Long bond yields rose two bps to 2.92% (down 15bps).
Greek 10-year yields were little changed at 5.49% (down 153bps y-t-d). Ten-year Portuguese yields dropped 11 bps to 2.19% (down 155bps). Italian 10-year yields fell nine bps to 1.95% (up 14bps). Spain's 10-year yields declined nine bps to 1.59% (up 21bps). German bund yields fell seven bps to 0.38% (up 18bps). French yields declined seven bps to 0.79% (up 11bps). The French to German 10-year bond spread was little changed at 41 bps. U.K. 10-year gilt yields gained two bps to 1.35% (up 11bps). U.K.'s FTSE equities slipped 0.2% (up 5.1%).
Japan's Nikkei 225 equities index surged 2.6% to a 20-year high (up 15.1% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.07% (up 3bps). France's CAC40 jumped 2.3% (up 13%). The German DAX equities index rose 1.7% (up 15.1%). Spain's IBEX 35 equities index slipped 0.2% (up 9.0%). Italy's FTSE MIB index gained 1.4% (up 17.8%). EM equities were mixed. Brazil's Bovespa index declined 0.5% (up 26.1%), and Mexico's Bolsa fell 1.6% (up 7.8%). India’s Sensex equities index jumped 2.4% (up 24.5%). China’s Shanghai Exchange gained 1.1% (up 10.1%). Turkey's Borsa Istanbul National 100 index declined 0.6% (up 38.1%). Russia's MICEX equities index was little changed (down 7.3%).
Junk bond mutual funds saw inflows of $123 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates rose six bps to a 14-week high 3.94% (up 47bps y-o-y). Fifteen-year rates gained six bps to 3.25% (up 47bps). Five-year hybrid ARM rates added four bps to 3.21% (up 37bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up nine bps to a 15-week high 4.20% (up 53bps).
Federal Reserve Credit last week declined $5.0bn to $4.428 TN. Over the past year, Fed Credit slipped $2.4bn. Fed Credit inflated $1.608 TN, or 57%, over the past 259 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt slipped $0.3bn last week to $3.365 TN. "Custody holdings" were up $240bn y-o-y, or 7.7%.
M2 (narrow) "money" supply last week declined $20.8bn to $13.727 TN. "Narrow money" expanded $666bn, or 5.1%, over the past year. For the week, Currency increased $2.4bn. Total Checkable Deposits fell $17.6bn, and Savings Deposits declined $5.6bn. Small Time Deposits were unchanged. Retail Money Funds were little changed.
Total money market fund assets added $3.6bn to $2.748 TN. Money Funds rose $97bn y-o-y, or 3.6%.
Total Commercial Paper gained $5.5bn to $1.067 TN. CP gained $164bn y-o-y, or 18.2%.
Currency Watch:
The U.S. dollar index gained 1.3% to 94.916 (down 7.3% y-t-d). For the week on the upside, the South Korean won increased 0.1%. For the week on the downside, the South African rand declined 3.3%, the Swedish krona 2.5%, the Norwegian krone 2.0%, the Australian dollar 1.8%, the euro 1.5%, the Canadian dollar 1.4%, the Swiss franc 1.4%, the Brazilian real 1.3%, the New Zealand dollar 1.2%, the Mexican peso 0.7%, the British pound 0.5%, the Singapore dollar 0.3% and the Japanese yen 0.1%. The Chinese renminbi decline 0.45% versus the dollar this week (up 4.43% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index jumped 2.4% (up 3.4% y-t-d). Spot Gold slipped 0.5% to $1,274 (up 10.6%). Silver lost 1.9% to $16.752 (up 4.8%). Crude rose $2.06 to $53.90 (unchanged). Gasoline surged 5.4% (up 6%), and Natural Gas rose 1.7% (down 21%). Copper dropped 2.0% (up 24%). Wheat increased 0.3% (up 5%). Corn gained 1.2% (down 1%).
Trump Administration Watch:
October 26 – Bloomberg (Maria Tadeo, Esteban Duarte, and Rodrigo Orihuela): “President Donald Trump stoked the sense of drama surrounding his choice for the next Fed chairman Friday as he tweeted out a video teasing an announcement he said would come next week. The president is leaning toward appointing Federal Reserve Governor Jerome Powell to be the next chairman of the Fed, according to three people familiar with the matter. ‘People are anxiously awaiting my decision as to who the next head of the Fed will be,’ Trump said in short Instagram video he sent to his 41 million Twitter followers. ‘It will be a person who hopefully will do a fantastic job. And I have somebody very specific in mind.’”
October 26 – CNBC (Jeff Cox): “The race to see who will lead the Federal Reserve in 2018 and beyond is becoming a process of elimination, with two and perhaps three candidates remaining. President Donald Trump apparently has solidified his thinking and is now choosing between Fed Governor Jerome ‘Jay’ Powell and Stanford economist John Taylor. However, several twists have been interjected into the equation. ‘Trump changes his mind about it everyday,’… The site speculated that current Chair Janet Yellen remains in the mix because Trump is worried that removing her might disrupt the hardy stock market rally that has taken place since his election.”
October 26 – Associated Press (Marcy Gordon): “President Donald Trump and Republicans were at odds on Wednesday over changing the 401(k) retirement program to help finance tax cuts, with the president insisting the middle-class favorite will remain untouched and lawmakers open to revisions. Rep. Kevin Brady, the chairman of the House’s tax-writing panel, wouldn’t rule out changes to the program used by 55 million U.S. workers who hold some $5 trillion in their 401(k) accounts, a system that has become a touchstone of retirement security for the middle class. Earlier this week, Trump promised the program would be left alone, and appeared to bolster that pledge Wednesday, saying he moved swiftly to end speculation that the tax-deferred program may be changed because it’s vital for working Americans. But he went on to muddy the waters…”
October 25 – Wall Street Journal (Michael C. Bender and Kristina Peterson): “The fault lines within the Republican Party cracked further on Tuesday as feuding between President Donald Trump and senators intensified within the U.S. Capitol, and anti-establishment activists claimed political momentum outside of it. Arizona Sen. Jeff Flake, in a speech where he announced he wouldn’t seek re-election, sharply criticized Mr. Trump, declaring himself unwilling to follow the lead of a president whose behavior in office is ‘not normal’ and ‘dangerous to a democracy.’”
Federal Reserve Watch:
October 24 – New York Times (Binyamin Appelbaum): “The two men that President Trump is considering as replacements for Chairwoman Janet L. Yellen of the Federal Reserve have sharply different views on monetary policy, offering a stark test of Mr. Trump’s economic priorities. The choice pits a status quo candidate, a current Fed governor, Jerome H. Powell, against a Stanford University economics professor, John B. Taylor, who is celebrated by many conservative Republicans for his insistence that the economy would produce stronger growth if the Fed would just get out of the way. Mr. Trump said last week that he also might nominate Ms. Yellen, whom he said he liked ‘a lot,’ to a second term. He said Monday that a decision is ‘very, very close.’ At a meeting with Senate Republicans on Tuesday, Mr. Trump conducted an informal poll, asking for a show of hands in support of Mr. Powell and Mr. Taylor.”
U.S. Bubble Watch:
October 25 – Bloomberg (Sho Chandra): “U.S. purchases of new homes unexpectedly surged in September to the highest level in a decade as activity accelerated in the South after hurricanes Harvey and Irma… Single-family home sales rose 18.9% m/m to 667k annualized pace (est. 554k), the strongest since October 2007. Purchases in U.S. South surged 25.8% m/m to 405k rate, fastest since July 2007… Supply of homes at current sales rate dropped to 5 months from 6 months; 279,000 new houses were on market at end of September.”
October 22 – Financial Times (Gregory Meyer and Joe Rennison): “Intense price swings in cryptocurrencies are luring the highest-volume traders on Wall Street as they search for relief from the low volatility blanketing finAncial markets. Proprietary trading firms, which bet their own capital in markets from stocks to futures, are wading into bitcoin, ethereum and other cryptocurrencies better known as a playground for small speculators and a haven for money-laundering. DRW of Chicago, one of the world’s largest proprietary trading companies, has led the charge.”
There is a prevailing view that Bubbles reflect asset price gains beyond what is justified by fundamental factors. I counter with the argument that the inflation of underlying fundamentals – revenues, earnings, cash-flow, margins, etc. – is a paramount facet of Bubble Dynamics (How abruptly did the trajectory of earnings reverse course in 2001 and 2009?).
With extremely low rates, loose corporate Credit Availability, large deficit spending, inflating asset prices and a glut of “money” sloshing about, there is bountiful fodder for spending and corporate profits. And with technology one of the more beguiling avenues to employ the cash-flow bonanza – and tech start-ups, the cloud, AI, Internet of Things, robotics, cybersecurity, etc. white-hot right now – the Gargantuan Technology Oligopoly today luxuriates at the Bubble Core.
By this time, expanding global technology capacity is a straightforward endeavor, while the industry for now enjoys booming demand and outsized margins. This confluence of extraordinary attributes provides “tech” the latitude to operate as a powerful black hole absorbing global purchasing power (throughout economies as well as financial markets). As such, it has been a case of the greater the scope of the Bubble, the more supply of “tech” available to weigh on overall goods and services pricing pressures. Central bankers continue to misconstrue this dynamic, instead perceiving irrepressible disinflationary forces that they are compelled to counter (with year after year after year of flagrant monetary stimulus).
The Nasdaq Composite’s 24.5% y-t-d gain has provided a fantastic windfall to fortunate investors as well as tens of thousands of extremely fortunate employees. This financial godsend will exacerbate wealth disparities along with housing inflation in select localities. Yet there will be little boost to reported wages (capital gains instead) and negligible impact on the overall CPI index. Is CPI these days even a relevant gauge of inflationary pressures or monetary instability?
As for Mario Draghi’s practice of beating market expectations, he is the present-day Alan Greenspan – the savvy operator that over the years has grown too comfortable wielding power over global markets (not to mention over central bankers at home and abroad). Headline from the Financial Times: “Draghi Pulls Off Dovish Trick with His QE ‘Downsize’ - ECB President Determined Not to Repeat Mistake of Premature Tightening.”
The ECB – right along with central bankers around the globe – has replayed the fateful mistake of delaying for (way) too long the removal of monetary stimulus. Draghi refused to set a date to end the ECB’s “money” printing operations, ensuring at least several hundred billion of additional stimulus in 2018. And with the commitment to hold rates at the current negative level until well past the end of QE, a most inert “normalization” process will not even commence until well into 2019. Apparently, short rates likely won’t make it much past 1% for several years. Draghi’s central bank will continue to purchase large quantities of corporate debt next year. Moreover, with open-ended QE and assurances that operations could at any point be expanded, spoiled markets take great comfort that their beloved liquidity backstop is as unyielding as ever.
October 26 – Bloomberg (Alessandro Speciale and Mark Deen): “The European Central Bank should have decided on an end date for its asset-purchase program rather than retaining the option to extend it after September 2018, Bundesbank President Jens Weidmann said. ‘From my point of view, a clear end of net purchases would have been appropriate,’ Weidmann said in a speech… ‘The development of domestic price pressures shown in projections is in line with a trajectory that will take us toward our definition of price stability.’ Weidmann’s critique comes one day after the Governing Council extended quantitative easing until September at a monthly pace of 30 billion euros ($35bn), leaving the door open for further buying after that if needed. The Bundesbank president was among a handful of policy makers who didn’t support the decision, according to Germany’s Boersen-Zeitung.”
German stocks gained 1.7% this week, while French equities jumped 2.3%. German (38bps) and French (79bps) yields declined seven basis points to seven-week lows. Portuguese bond yields dropped 11 bps to a 30-month low 2.19%. Dropping nine bps, Italian 10-year yields traded back below 2%. And in a sign of these strange times, even Catalonia chaos couldn’t keep Spanish yields from declining eight bps to 1.58% (83bps below Treasuries!). Yet Draghi has company when it comes to assuring markets that central bank liquidity backstops are here to stay.
October 20 – Financial Times (Sam Fleming): “Janet Yellen… has warned that there is an ‘uncomfortably high’ risk that the central bank will have to deploy crisis-era stimulus tools again — even in the case of a less severe downturn than the Great Recession. Her comments come as President Donald Trump considers a sharp change of direction at the Fed which could see him install new leadership that is much more dubious about the Fed’s use of quantitative easing. Ms Yellen said in a speech that the US economy had made ‘great strides’ but that policymakers may be unable to lift short-term rates very far as the recovery proceeds. This could leave the Fed once again leaning on quantitative easing and forward guidance on the future rate outlook when the economy hits a downturn, she suggested… ‘Does this mean that it will take another Great Recession for our unconventional tools to be used again? Not necessarily. Recent studies suggest that the neutral level of the federal funds rate appears to be much lower than it was in previous decades,’ Ms Yellen said. ‘The bottom line is that we must recognise that our unconventional tools might have to be used again. If we are indeed living in a low-neutral-rate world, a significantly less severe economic downturn than the Great Recession might be sufficient to drive short-term interest rates back to their effective lower bound.’”
Apparently, there is an “uncomfortably high risk” that QE will be employed “in the case of a less severe downturn” because “policymakers may be unable to lift short-term rates very far as the recovery proceeds.” Does anyone believe that the Yellen Fed is less than comfortable with the prospect of restarting QE?
Q3 marked the second consecutive quarter of 3% U.S. growth; consumer confidence is the highest in years; stock markets are booming with record prices and “money” flooding into ETFs; debt issuance remains on record pace; leveraged lending and M&A are booming; a strong inflationary bias persists in housing; and the unemployment rate is down to 4.2%, lowest in 16 years. Why not begin a real normalization of monetary policy? Because some measures of core consumer price inflation remain slightly below 2.0%?
It has become increasingly apparent that central bankers recognize their predicament and have chosen not to risk piercing Bubbles. I suspect Draghi, Yellen and Kuroda (and others) fear the consequences of a destabilizing jump in global bond yields. I too fear the amount of leverage and range of distortions that have accumulated over the past nine years. The inescapable adjustment after such a prolonged boom will be quite difficult. Yet the analysis gets back to the “First Law of Holes:” Must Stop Digging. At this late (historic) Bubble stage, systemic risk is piling up exponentially.
October 24 – Financial Times (Robin Wigglesworth): “Inflows into exchange-traded bond funds have surged past last year’s record with several months to spare, as the seismic migration towards passive investing broadens out beyond the equity market. ETFs that track fixed-income benchmarks have attracted nearly $130bn so far this year, comfortably surpassing the record-breaking 2016, when almost $117bn gushed into bond ETFs… Bloomberg data puts this year’s inflows at more than $140bn. ‘It’s been a year of robust flows,’ said Steve Laipply, head of fixed income strategy at BlackRock’s iShares ETF business… ‘There has been accelerating institutional investor adoption of these products’… ETF providers such as Vanguard, State Street and BlackRock have rapidly grown their franchises, with BlackRock revealing in its latest quarterly earnings that it is currently taking in about $1.5bn a day.”
October 22 – Wall Street Journal (Christopher Whittall): “Investors hungry for returns are piling back into securities once tarnished by the financial crisis. Complex structured investments developed a bad reputation during the credit crunch. Ten years later, investors seeking yield are overcoming their skepticism and buying into securities that rely on financial engineering to juice returns. Volumes of CLOs, or collateralized loan obligations, hit a record $247 billion in the first nine months of the year… Fueled by a wave of refinancings and nearly $100 billion in new deals, that far outpaces their recent full-year high of $151 billion in 2014 and the precrisis peak of $136 billion in 2006. The CLO boom is the latest sign of the ferocious hunt for yield permeating markets. Stellar performance over the past year has made CLOs increasingly hard to ignore for investors like insurance companies and pension funds.”
October 20 – Financial Times (Gillian Tett): “A decade ago, whenever I chatted to anyone at Switzerland’s Bank for International Settlements, I felt like I was hobnobbing with dissidents. The reason? Back then, most western central bankers and finance ministers were convinced that the global economy was in good shape: inflation was low, growth was steady, corporate and consumer optimism was high. In fact, the data seemed so benign that economists had labelled the first decade of the 21st century the ‘great moderation’. Not the BIS. Starting in 2003, officials at… institution, which aims to ‘promote global monetary and financial stability through international co-operation’, started to warn that the world economy was plagued by excessive levels of debt. This made the system dangerously distorted; so went the off-the-record murmurs from men such as William White… and Claudio Borio... Most central bankers dismissed these warnings — some even tried to silence the BIS… Earlier this month I travelled to Washington for an International Monetary Fund and World Bank meeting. There was a cheery mood in the air, just as there was in 2006… But now, just as before, those BIS dissidents are muttering in the wings. At the IMF gala, Borio (still at the BIS) told me that the pesky matter of debt has not disappeared. On the contrary, since the 2008 credit crisis, it has risen sharply: the level of global debt to gross domestic product is now 40% — yes, 40% — higher than it was in 2008. The world has responded to a crisis caused by excess leverage by piling on more, not less, debt.”
There are aspects of the current global Bubble that are reminiscent of pre-2008 crisis – though the amount of debt these days is larger, price distortions greater and misperceptions more perilous. Then: “Washington will not allow a housing bust.” Now: Global central bankers will not allow market dislocation. Unprecedented market distortions – including Trillions of mispriced “AAA” debt securities – back in 2008 look pee-wee when compared to today’s fiasco in perceived money-like instruments (fixed-income as well as equities)
At the same time, today’s “tech” party is more 1999 – just so much more expansive. Loose “money” coupled with government/central bank backstops have nurtured another epic sector mania – replete with more dangerous regional economic and housing Bubbles. Today’s EM backdrop has uncomfortable characteristics reminiscent of 1996, with the current “hot money” onslaught compounding already acute financial, economic, social and geopolitical fragilities from Asia to Eastern Europe to Latin America.
And there are elements of fixed-income excess that recall all the way back to 1993. The proliferation of leveraged derivatives strategies cultivates latent fragility. Meanwhile, the scope of flows into fixed-income ETFs at this late stage of the cycle is astonishing – yet, as they say, “par for the course.” It’s consistent with the flood of funds into passive U.S. equities indices and the emerging markets; the near-panic buying of European and U.S. corporate debt – the tsunami of “money” inundating virtually all risk assets via the ballooning ETF complex.
What most sets today’s Granddaddy of All Bubbles apart? Historic excess and distortion throughout the securities and derivatives markets – and asset markets more generally – on an unprecedented synchronized, systemic global scale. It’s become myriad powerful booms all packed into one killer Bubble unlike the world has ever experienced. History will not be kind to central banker fixation on arbitrary 2% annual CPI targets. Nasdaq inflated 2.2% in Friday’s session – the Nasdaq100 2.9%!
For the Week:
The S&P500 added 0.2% (up 15.3% y-t-d), and the Dow increased 0.5% (up 18.6%). The Utilities added 0.3% (up 13.2%). The Banks rose 1.0% (up 11.4%), and the Broker/Dealers increased 0.4% (up 20.4%). The Transports slipped 0.4% (up 9.8%). The S&P 400 Midcaps gained 0.3% (up 10.8%), while the small cap Russell 2000 was little changed (up 11.1%). The Nasdaq100 jumped 1.7% (up 27.8%). The Semiconductors surged 2.6% (up 39.4%). The Biotechs dropped 3.0% (up 33.9%). Bullion declined $7, while the HUI gold index was slammed 5.3% (up 2.6%).
Three-month Treasury bill rates ended the week at 107 bps. Two-year government yields added a basis point to 1.59% (up 40bps y-t-d). Five-year T-note yields added one basis point to 2.03% (up 10bps). Ten-year Treasury yields gained two bps to 2.41% (down 4bps). Long bond yields rose two bps to 2.92% (down 15bps).
Greek 10-year yields were little changed at 5.49% (down 153bps y-t-d). Ten-year Portuguese yields dropped 11 bps to 2.19% (down 155bps). Italian 10-year yields fell nine bps to 1.95% (up 14bps). Spain's 10-year yields declined nine bps to 1.59% (up 21bps). German bund yields fell seven bps to 0.38% (up 18bps). French yields declined seven bps to 0.79% (up 11bps). The French to German 10-year bond spread was little changed at 41 bps. U.K. 10-year gilt yields gained two bps to 1.35% (up 11bps). U.K.'s FTSE equities slipped 0.2% (up 5.1%).
Japan's Nikkei 225 equities index surged 2.6% to a 20-year high (up 15.1% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.07% (up 3bps). France's CAC40 jumped 2.3% (up 13%). The German DAX equities index rose 1.7% (up 15.1%). Spain's IBEX 35 equities index slipped 0.2% (up 9.0%). Italy's FTSE MIB index gained 1.4% (up 17.8%). EM equities were mixed. Brazil's Bovespa index declined 0.5% (up 26.1%), and Mexico's Bolsa fell 1.6% (up 7.8%). India’s Sensex equities index jumped 2.4% (up 24.5%). China’s Shanghai Exchange gained 1.1% (up 10.1%). Turkey's Borsa Istanbul National 100 index declined 0.6% (up 38.1%). Russia's MICEX equities index was little changed (down 7.3%).
Junk bond mutual funds saw inflows of $123 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates rose six bps to a 14-week high 3.94% (up 47bps y-o-y). Fifteen-year rates gained six bps to 3.25% (up 47bps). Five-year hybrid ARM rates added four bps to 3.21% (up 37bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up nine bps to a 15-week high 4.20% (up 53bps).
Federal Reserve Credit last week declined $5.0bn to $4.428 TN. Over the past year, Fed Credit slipped $2.4bn. Fed Credit inflated $1.608 TN, or 57%, over the past 259 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt slipped $0.3bn last week to $3.365 TN. "Custody holdings" were up $240bn y-o-y, or 7.7%.
M2 (narrow) "money" supply last week declined $20.8bn to $13.727 TN. "Narrow money" expanded $666bn, or 5.1%, over the past year. For the week, Currency increased $2.4bn. Total Checkable Deposits fell $17.6bn, and Savings Deposits declined $5.6bn. Small Time Deposits were unchanged. Retail Money Funds were little changed.
Total money market fund assets added $3.6bn to $2.748 TN. Money Funds rose $97bn y-o-y, or 3.6%.
Total Commercial Paper gained $5.5bn to $1.067 TN. CP gained $164bn y-o-y, or 18.2%.
Currency Watch:
The U.S. dollar index gained 1.3% to 94.916 (down 7.3% y-t-d). For the week on the upside, the South Korean won increased 0.1%. For the week on the downside, the South African rand declined 3.3%, the Swedish krona 2.5%, the Norwegian krone 2.0%, the Australian dollar 1.8%, the euro 1.5%, the Canadian dollar 1.4%, the Swiss franc 1.4%, the Brazilian real 1.3%, the New Zealand dollar 1.2%, the Mexican peso 0.7%, the British pound 0.5%, the Singapore dollar 0.3% and the Japanese yen 0.1%. The Chinese renminbi decline 0.45% versus the dollar this week (up 4.43% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index jumped 2.4% (up 3.4% y-t-d). Spot Gold slipped 0.5% to $1,274 (up 10.6%). Silver lost 1.9% to $16.752 (up 4.8%). Crude rose $2.06 to $53.90 (unchanged). Gasoline surged 5.4% (up 6%), and Natural Gas rose 1.7% (down 21%). Copper dropped 2.0% (up 24%). Wheat increased 0.3% (up 5%). Corn gained 1.2% (down 1%).
Trump Administration Watch:
October 26 – Bloomberg (Maria Tadeo, Esteban Duarte, and Rodrigo Orihuela): “President Donald Trump stoked the sense of drama surrounding his choice for the next Fed chairman Friday as he tweeted out a video teasing an announcement he said would come next week. The president is leaning toward appointing Federal Reserve Governor Jerome Powell to be the next chairman of the Fed, according to three people familiar with the matter. ‘People are anxiously awaiting my decision as to who the next head of the Fed will be,’ Trump said in short Instagram video he sent to his 41 million Twitter followers. ‘It will be a person who hopefully will do a fantastic job. And I have somebody very specific in mind.’”
October 26 – CNBC (Jeff Cox): “The race to see who will lead the Federal Reserve in 2018 and beyond is becoming a process of elimination, with two and perhaps three candidates remaining. President Donald Trump apparently has solidified his thinking and is now choosing between Fed Governor Jerome ‘Jay’ Powell and Stanford economist John Taylor. However, several twists have been interjected into the equation. ‘Trump changes his mind about it everyday,’… The site speculated that current Chair Janet Yellen remains in the mix because Trump is worried that removing her might disrupt the hardy stock market rally that has taken place since his election.”
October 26 – Associated Press (Marcy Gordon): “President Donald Trump and Republicans were at odds on Wednesday over changing the 401(k) retirement program to help finance tax cuts, with the president insisting the middle-class favorite will remain untouched and lawmakers open to revisions. Rep. Kevin Brady, the chairman of the House’s tax-writing panel, wouldn’t rule out changes to the program used by 55 million U.S. workers who hold some $5 trillion in their 401(k) accounts, a system that has become a touchstone of retirement security for the middle class. Earlier this week, Trump promised the program would be left alone, and appeared to bolster that pledge Wednesday, saying he moved swiftly to end speculation that the tax-deferred program may be changed because it’s vital for working Americans. But he went on to muddy the waters…”
October 25 – Wall Street Journal (Michael C. Bender and Kristina Peterson): “The fault lines within the Republican Party cracked further on Tuesday as feuding between President Donald Trump and senators intensified within the U.S. Capitol, and anti-establishment activists claimed political momentum outside of it. Arizona Sen. Jeff Flake, in a speech where he announced he wouldn’t seek re-election, sharply criticized Mr. Trump, declaring himself unwilling to follow the lead of a president whose behavior in office is ‘not normal’ and ‘dangerous to a democracy.’”
Federal Reserve Watch:
October 24 – New York Times (Binyamin Appelbaum): “The two men that President Trump is considering as replacements for Chairwoman Janet L. Yellen of the Federal Reserve have sharply different views on monetary policy, offering a stark test of Mr. Trump’s economic priorities. The choice pits a status quo candidate, a current Fed governor, Jerome H. Powell, against a Stanford University economics professor, John B. Taylor, who is celebrated by many conservative Republicans for his insistence that the economy would produce stronger growth if the Fed would just get out of the way. Mr. Trump said last week that he also might nominate Ms. Yellen, whom he said he liked ‘a lot,’ to a second term. He said Monday that a decision is ‘very, very close.’ At a meeting with Senate Republicans on Tuesday, Mr. Trump conducted an informal poll, asking for a show of hands in support of Mr. Powell and Mr. Taylor.”
U.S. Bubble Watch:
October 25 – Bloomberg (Sho Chandra): “U.S. purchases of new homes unexpectedly surged in September to the highest level in a decade as activity accelerated in the South after hurricanes Harvey and Irma… Single-family home sales rose 18.9% m/m to 667k annualized pace (est. 554k), the strongest since October 2007. Purchases in U.S. South surged 25.8% m/m to 405k rate, fastest since July 2007… Supply of homes at current sales rate dropped to 5 months from 6 months; 279,000 new houses were on market at end of September.”
October 22 – Financial Times (Gregory Meyer and Joe Rennison): “Intense price swings in cryptocurrencies are luring the highest-volume traders on Wall Street as they search for relief from the low volatility blanketing finAncial markets. Proprietary trading firms, which bet their own capital in markets from stocks to futures, are wading into bitcoin, ethereum and other cryptocurrencies better known as a playground for small speculators and a haven for money-laundering. DRW of Chicago, one of the world’s largest proprietary trading companies, has led the charge.”
China Bubble Watch:
October 23 – Financial Times (Gideon Rachman): “The Communist party congress in Beijing is a milestone. As the Xi Jinping era enters its second term, China’s challenge to the west is becoming more overt. There is a growing official confidence in Beijing — verging on arrogance — that China is on the rise, while the west is in decline. The Chinese challenge to the west is taking place on three fronts: ideological, economic and geopolitical. In the realm of ideas, the Communist party leadership is increasingly strident in repudiating western liberalism. President Xi and his colleagues argue that one-party rule works well for China — and should extend long into the future. There is more discussion of the idea that a ‘China model’ can be pushed in the rest of the world — as an alternative to America’s promotion of democracy. Just as the financial crisis of 2008 damaged the credibility of western economic ideas in China, so the election of Donald Trump and the fracturing of the EU have made it easier for China’s leaders to scorn western political practices.”
October 24 – Bloomberg: “Whether or not Chinese President Xi Jinping signals a successor Wednesday, he’s amassed enough power to effectively rule for decades. The Communist Party approved a sweeping charter revision at the end of its twice-a-decade congress Tuesday that elevates Xi to a status alongside the nation’s most vaunted political figures. The document put Xi’s contributions on par with those of Mao Zedong and Deng Xiaoping and also declared him the party’s ‘core’ leader indefinitely.”
October 24 – Bloomberg (Ting Shi and Keith Zhai): “Chinese President Xi Jinping unveiled a new leadership line-up that didn’t include a clear potential heir, breaking with a quarter-century-old succession system and raising the chances that he might seek to stay in office beyond 2022.”
October 25 – Wall Street Journal (Jeremy Page and Chun Han Wong): “The future of 1.4 billion people, the world’s second-largest economy and an emerging military juggernaut now lies largely in the hands of just one man: China’s President Xi Jinping. In unveiling a new top leadership lineup without a potential successor to Mr. Xi…, the Communist Party edged closer to resurrecting one-man rule, four decades after the death of Chairman Mao. The parade of the seven-man Politburo Standing Committee onto a red-carpeted podium in Beijing’s Great Hall of the People was the climax of a twice-a-decade process that placed Mr. Xi on a par with Mao in the party constitution and positioned him as pre-eminent leader even beyond his second five-year term… Mr. Xi is calculating that strongman rule will make it easier to add China to the ranks of rich, global powers and to project Chinese power globally.”
October 23 – Financial Times (Gideon Rachman): “The Communist party congress in Beijing is a milestone. As the Xi Jinping era enters its second term, China’s challenge to the west is becoming more overt. There is a growing official confidence in Beijing — verging on arrogance — that China is on the rise, while the west is in decline. The Chinese challenge to the west is taking place on three fronts: ideological, economic and geopolitical. In the realm of ideas, the Communist party leadership is increasingly strident in repudiating western liberalism. President Xi and his colleagues argue that one-party rule works well for China — and should extend long into the future. There is more discussion of the idea that a ‘China model’ can be pushed in the rest of the world — as an alternative to America’s promotion of democracy. Just as the financial crisis of 2008 damaged the credibility of western economic ideas in China, so the election of Donald Trump and the fracturing of the EU have made it easier for China’s leaders to scorn western political practices.”
October 24 – Bloomberg: “Whether or not Chinese President Xi Jinping signals a successor Wednesday, he’s amassed enough power to effectively rule for decades. The Communist Party approved a sweeping charter revision at the end of its twice-a-decade congress Tuesday that elevates Xi to a status alongside the nation’s most vaunted political figures. The document put Xi’s contributions on par with those of Mao Zedong and Deng Xiaoping and also declared him the party’s ‘core’ leader indefinitely.”
October 24 – Bloomberg (Ting Shi and Keith Zhai): “Chinese President Xi Jinping unveiled a new leadership line-up that didn’t include a clear potential heir, breaking with a quarter-century-old succession system and raising the chances that he might seek to stay in office beyond 2022.”
October 25 – Wall Street Journal (Jeremy Page and Chun Han Wong): “The future of 1.4 billion people, the world’s second-largest economy and an emerging military juggernaut now lies largely in the hands of just one man: China’s President Xi Jinping. In unveiling a new top leadership lineup without a potential successor to Mr. Xi…, the Communist Party edged closer to resurrecting one-man rule, four decades after the death of Chairman Mao. The parade of the seven-man Politburo Standing Committee onto a red-carpeted podium in Beijing’s Great Hall of the People was the climax of a twice-a-decade process that placed Mr. Xi on a par with Mao in the party constitution and positioned him as pre-eminent leader even beyond his second five-year term… Mr. Xi is calculating that strongman rule will make it easier to add China to the ranks of rich, global powers and to project Chinese power globally.”
October 24 – CNBC (Sri Jegarajah): “China is looking to make a major move against the dollar's global dominance, and it may come as early as this year. The new strategy is to enlist the energy markets' help: Beijing may introduce a new way to price oil in coming months — but unlike the contracts based on the U.S. dollar that currently dominate global markets, this benchmark would use China's own currency. If there's widespread adoption, as the Chinese hope, then that will mark a step toward challenging the greenback's status as the world's most powerful currency. China is the world's top oil importer, and so Beijing sees it as only logical that its own currency should price the global economy's most important commodity. But beyond that, moving away from the dollar is a strategic priority for countries like China and Russia. Both aim to ultimately reduce their dependency on the greenback, limiting their exposure to U.S. currency risk and the politics of American sanctions regimes.”
October 22 – Financial Times (Gabriel Wildau and Tom Mitchell): “When Zhou Xiaochuan last week used the phrase ‘Minsky moment’ to warn against complacency during the current period of unexpectedly strong Chinese growth, it was not the first time the central bank chief had highlighted risks from excessive debt and speculative investment. But Mr Zhou, governor of the People’s Bank of China, would surely have known that the colourful phrase — redolent of the 2008 financial crisis, which resurrected the reputation of the US economist Hyman Minsky — would grab headlines. Mr Zhou’s statements about Chinese economics and policy have become increasingly candid in recent weeks, and central bank watchers say it is no accident. At the same meeting where he warned of Minsky-ite risks, Mr Zhou, 69, confirmed that he would retire ‘soon’ after serving since 2002… As rumours swirl about his possible successor, observers say Mr Zhou’s increasing bluntness reflects a final appeal directed towards Communist party elites to continue financial reforms that he has advocated but that have suffered setbacks over the past year.”
October 22 – Bloomberg: “China home prices rose in the fewest cities since January 2016, adding to signs of a property slowdown as curbs on buyers bite. New-home prices, excluding government-subsidized housing, in September rose in 44 of 70 cities tracked by the government, compared with 46 in August… Prices fell in 18 cities from the previous month and were unchanged in eight… President Xi Jinping renewed a yearlong call that homes are built ‘to be inhabited’ and not for speculation in his speech at the twice-a-decade Party Congress, inking the language in one of the nation’s top policy frameworks.”
October 26 – Bloomberg (Katia Porzecanski): “Hedge fund manager Kyle Bass, who has been betting against the yuan and warning of a collapse in China’s banking system, said the nation will one day come to regret handing Xi Jinping more power than any leader in decades. ‘Today Xi is celebrated in media reports, but when future historians look back, he will be blamed for recklessly building the Chinese economy on a foundation of sand,’ Bass… said… ‘Xi desperately seeks credibility, but true developed economies do not impose severe capital controls or move short-term rates hundreds of basis points overnight in attempts to manipulate their own currency.’ …‘Recklessly growing a banking system in pursuit of global economic growth and respect will cause severe financial instability in the years to come… The dangerous $40 trillion credit experiment with Chinese characteristics will run its course.’”
Central Banker Watch:
October 25 – Financial Times (Claire Jones): “When Mario Draghi evaluated the market reaction to the European Central Bank’s policy announcement on Thursday — its most important of the year — he allowed himself a wry smile. The ECB had just said that its bond buying spree in 2018 was likely to be less than half the size of that spent on quantitative easing this year. And yet the euro had fallen, stock markets were up. That investors bought the line that this was no ‘taper’ but merely a ‘downsize’ of eurozone QE says much about how far the region’s recovery has come over the past 12 months. The ECB’s communication was also ‘pretty effective’, Mr Draghi crowed, in the sense that most analysts had correctly predicted the ECB would promise to buy €30bn in bonds a month from January until September. But it was not just that. In the detail and in his post-meeting remarks, the ECB was more dovish than its watchers had forecast. The message to investors was clear. Under Mr Draghi’s watch, the bank would not make the same mistake it did in 2008 — and again in 2011 — when it raised interest rates, only to find itself having to reverse course, after the collapse of Lehman Brothers in the first instance and then during the region’s sovereign debt crisis. The central bank still reserved the right to boost QE…”
October 24 – Financial Times (Claire Jones): “The European Central Bank is gearing up for its most important meeting of the year, as senior officials gather to decide the fate of the €2.1tn asset purchase scheme that many credit with breathing life into the eurozone recovery. At issue is whether the ECB will declare this week that the economy has recovered sufficiently for quantitative easing to end next year… On one side of Thursday’s debate is Mario Draghi, the ECB’s president, who would like to preserve room for manoeuvre. On the other are more hawkish policymakers, notably from Germany, who have long been uncomfortable with the bank’s ultraloose monetary policy and are keen for the ECB finally to bring the curtain down on QE. The hawks accept that the ECB’s governing council cannot completely rule out buying more bonds. ‘We know that you cannot lock the door,’ said one person familiar with its deliberations. ‘But there are many on the council who want the message to be communicated that the door is nowhere near as open as it once was.’”
October 24 – Wall Street Journal (Christopher Whittall): “In the spring of 2016, traders at Germany’s central bank sat down with investment bank advisers in Frankfurt to discuss a once unthinkable project: how to build a multibillion-euro corporate-debt fund. Fast forward 18 months and the European Central Bank has changed the face of the euro corporate-debt market, having bought almost €120 billion ($141bn) of these securities. Financing costs for companies have fallen to the point where junk-rated firms can borrow at similar yields to U.S. government debt, prompting concerns it is fueling a bubble… ‘When the ECB steps back, it increases vulnerability in the market,’ said Hans Lorenzen, head of European credit strategy at Citigroup…”
October 24 – Financial Times (Dan McCrum): “Canada today, Europe tomorrow, then Japan, the US and England in quick succession. An eight-day parade of central bank meetings will signal the direction for monetary policy. Rather than a return to normal, another lap near zero seems a more likely outcome. The Bank of Canada, after increasing interest rates twice in quick succession, to 1%, has shifted tone. Governor Stephen Poloz recently said ‘we will continue to feel our way cautiously as we get closer to home’. Market expectations have slipped, with prices implying a less than 50/50 chance of another rise this year. Mario Draghi’s European Central Bank has reached the point when announcing a reduction in the €60bn of bonds purchased each month is inevitable. Yet the noise has been about calibration, leading to some new market jargon. Instead of a US-style ‘taper’, expect a European ‘scaling’ of purchases. Leaving its options open, while announcing say nine months of buying at a reduced level, would suggest normality remains a distant prospect.”
October 23 – Wall Street Journal (David Harrison and Harriet Torry): “Leaders of the world’s largest central banks indicated that weak inflation in advanced economies could prolong the postcrisis era of easy money policies. Despite a broad-based improvement in the global economy, wages and consumer prices remain stubbornly low, making central bankers wary of removing their stimulus measures too quickly, they told a Group of 30 banking conference… Their concerns contrasted with the generally upbeat tone that prevailed during last week’s fall meetings of the International Monetary Fund and World Bank, and they suggest that there is still work to do to get the world’s economy on track nearly a decade after the onset of the global financial crisis.”
Global Bubble Watch:
October 24 – Financial Times (Michael Mackenzie): “The endless debate over valuation metrics that have accompanied the storming bull run in stocks misses a much bigger point about investing in 2017. Thanks to the outsized role of central banks, it is the credit markets that run the show. If you want clues on when the bull run in equities is entering the red zone, keep your eyes on the corporate debt market. Before central banks’ quantitative easing policies engineered the current cycle of financial suppression, credit markets had already established their bona fides as an early warning system for investors. When equities peaked in October 2007, the credit market had already begun turning lower. A decade on, the risk premium, or additional yield, offered by corporate bonds over that of a US government bond is at its narrowest since 2007… The big lesson digested by investors since the financial crisis is that you need to own yield, and the money gushing into bond funds remains immense. About $241bn flowed into US high grade bond funds and exchange traded funds in the first nine months of the year, according to Bank of America Merrill Lynch estimates. That’s a whopping 34% higher than 2012’s full-year record of $180bn, the bank says. This high tide of money means companies can keep selling debt — running at a record $1.4tn pace this year in the US — at very low interest rates. The resulting higher leverage in the system helps explain why the equity market keeps updating the record books with alacrity.”
October 24 – CNBC (Fred Imbert): “As stocks have climbed to record levels this year, investors are neglecting one very important aspect of financial markets, according to analysts at Bank of America Merrill Lynch. That aspect is the existence of risk, said Nikolay Angeloff, equity-linked analyst… ‘The market seems to currently imply there is no way a shock can happen,’ he said. ‘We have now recorded 334 days without a 5% or more pullback, the fourth longest period since 1928,’ Angeloff said. ‘If it continues at this pace, it will be the least volatile October in history and third least volatile month ever.’”
Europe Watch:
October 26 – Bloomberg (Maria Tadeo, Esteban Duarte, and Rodrigo Orihuela): “Catalonia is headed for a dramatic confrontation with Spain after the insurgent region’s parliament voted to declare independence and the government in Madrid gained the power to oust its separatist leadership. The resolution approved by lawmakers in Barcelona said the establishment of Europe’s newest sovereign country had been set in motion. The portion of the text submitted to a vote included measures to ask all nations and institutions to recognize the Catalan Republic.”
October 24 – Wall Street Journal (Jeannette Neumann and Giovanni Legorano): “Spanish Prime Minister Mariano Rajoy asked lawmakers to grant him unprecedented power to remove the leaders of Catalonia and temporarily control the region from Madrid, a forceful move aimed at bringing the separatist movement to heel. Mr. Rajoy on Saturday said Spain’s central government ministries would administer the region’s agencies until new elections are called, a shake-up meant to quell Catalan leaders’ insurrection.”
October 24 – Reuters (Renee Maltezou): “Outgoing German Finance Minister Wolfgang Schaeuble urged debt-wracked Greece to stop blaming others for its financial woes and stick to a reform agenda instead of relying on debt relief. Schaeuble, a leading advocate of Greece’s tough austerity programs and one of Germany’s most powerful politicians, was elected speaker of its lower house of parliament… ‘When you ask others for loans, you cannot insult them for granting the loans. It doesn’t make sense. Greece’s problems are Greece’s problems,’ the conservative Christian Democrat said in an interview aired in Greece…”
Brexit Watch:
October 22 – Reuters (Alastair Macdonald): “Theresa May looked ‘despondent’, with deep rings under her eyes, EU chief executive Jean-Claude Juncker told aides after dining with the British prime minister last week… The report by a Frankfurter Allgemeine Zeitung correspondent whose leaked account of a Juncker-May dinner in April caused upset in London, said Juncker thought her ‘marked’ by battles over Brexit with her own Conservative ministers as she asked for EU help to create more room for maneuver at home.”
Japan Watch:
October 22 – Bloomberg (Isabel Reynolds): “Prime Minister Shinzo Abe’s gamble on an early election may have just won him a chance to lead Japan through 2021. Abe… saw his ruling coalition retain its two-thirds majority in the 465-member lower house in an election on Sunday. That boosts his chances at winning another term next year as head of his Liberal Democratic Party… The landslide win -- helped along by a disparate and weak opposition -- paves the way for more ultra-easy monetary policy that has boosted stocks to the highest level in two decades and helped Asia’s second-biggest economy expand for six straight quarters. Yet pressure is also growing for Abe to tackle Japan’s swollen debt, increase stagnant wages and overhaul the labor market to replenish a rapidly aging workforce.”
Emerging Market Watch:
October 24 – Bloomberg (Ben Bartenstein): “John-Paul Smith won’t give up on his bearish bet against developing nations. The founder of research firm Ecstrat Ltd., renowned for his early warning of Russia’s equity-market plunge in 1998 while at Morgan Stanley, is finding plenty of places to direct his pessimism. Among his latest concerns: authoritarian regimes in China and Russia as well as governments in Thailand, Turkey and the Philippines shifting in that direction. Smith’s caution runs counter to recent history, in which the world’s autocratic nations have rewarded bond traders with larger returns than democratic countries. While that may be true in the early stages of a regime, he says an authoritarian rule eventually hurts productivity with the value of debt and equity assets taking a hit. ‘I’m struggling to identify any attractive bets for emerging markets under authoritarian regimes,’ Smith said… ‘The notion that both sovereign and corporate governance throughout the world will gradually converge towards some supposed liberal norm is now well and truly dead.’”
October 26 – Bloomberg (Colleen Goko, Neo Khanyile, and Thembisile Dzonzi): “The rand and South African bonds extended declines as foreign investors dumped the country’s notes in the wake of government forecasts for higher public debt and wider budget deficits in the next three years. Stocks rose to a record as gains for rand hedges offset drops for banks and retailers. The nation’s currency extended its longest losing streak in a month, while the yield on benchmark 10-year notes rose to the highest in 16 months.”
Leveraged Speculation Watch:
October 23 – Financial Times (Robin Wigglesworth): “Two Sigma has vaulted over the $50bn assets under management mark to put it on a par with Renaissance Technologies as the biggest global quantitative hedge fund, as investors continue to pile into computer-powered investment strategies. The… hedge fund set up in 2001 by computer scientist David Siegel and mathematician John Overdeck has been growing rapidly in recent years. Two Sigma managed about $6bn in 2011, but jumped past the $50bn mark earlier this month… That puts it roughly level with Renaissance Technologies… and more than DE Shaw’s $45bn… Investor demand for algorithmic investing has exploded in recent years, even as the rest of the hedge fund industry has struggled with poor performance and outflows. Morgan Stanley recently estimated that various quant strategies, ranging from cheap next-generation exchange traded funds to pricey sophisticated hedge fund vehicles, have grown at 15% annually over the past six years, and now control about $1.5tn.”
Geopolitical Watch:
October 25 – Reuters (David Alexander, David Brunnstrom and Idrees Ali): “The recent warning from North Korea’s foreign minister of a possible atmospheric nuclear test over the Pacific Ocean should be taken literally, a senior North Korean official told CNN… ‘The foreign minister is very well aware of the intentions of our supreme leader, so I think you should take his words literally,’ Ri Yong Pil, a senior diplomat in North Korea’s Foreign Ministry, told CNN.”
October 21 – Reuters (Jim Finkle): “The U.S government issued a rare public warning that sophisticated hackers are targeting energy and industrial firms, the latest sign that cyber attacks present an increasing threat to the power industry and other public infrastructure. The Department of Homeland Security and Federal Bureau of Investigation warned in a report… that the nuclear, energy, aviation, water and critical manufacturing industries have been targeted along with government entities in attacks dating back to at least May.”
October 21 – Reuters (Dirimcan Barut and Tulay Karadeniz): “Turkish President Tayyip Erdogan showed no retreat from a diplomatic row with the United States…, castigating Washington for what he said an ‘undemocratic’ indictment against his security detail. His comments may further dash hopes of a quick resolution to an on-going diplomatic crisis between the NATO allies. Both Ankara and Washington have cut back issuing visas to each other’s citizens as ties have worsened.”
October 24 – Reuters (Maher Chmaytelli): “Iraqi Prime Minister Haider al-Abadi defended the role of an Iranian-backed paramilitary force at a meeting with U.S. Secretary of State Rex Tillerson… Tillerson arrived… hours after the Iraqi government rejected his call to send home the Popular Mobilisation, an Iran-backed force that helped defeat Islamic State and capture the Kurdish-held city of Kirkuk. In his opening remarks at the meeting with Tillerson, Abadi said Popular Mobilisation ‘is part of the Iraqi institutions,’ rejecting accusations that it is acting as an Iranian proxy.”
October 22 – Financial Times (Gabriel Wildau and Tom Mitchell): “When Zhou Xiaochuan last week used the phrase ‘Minsky moment’ to warn against complacency during the current period of unexpectedly strong Chinese growth, it was not the first time the central bank chief had highlighted risks from excessive debt and speculative investment. But Mr Zhou, governor of the People’s Bank of China, would surely have known that the colourful phrase — redolent of the 2008 financial crisis, which resurrected the reputation of the US economist Hyman Minsky — would grab headlines. Mr Zhou’s statements about Chinese economics and policy have become increasingly candid in recent weeks, and central bank watchers say it is no accident. At the same meeting where he warned of Minsky-ite risks, Mr Zhou, 69, confirmed that he would retire ‘soon’ after serving since 2002… As rumours swirl about his possible successor, observers say Mr Zhou’s increasing bluntness reflects a final appeal directed towards Communist party elites to continue financial reforms that he has advocated but that have suffered setbacks over the past year.”
October 22 – Bloomberg: “China home prices rose in the fewest cities since January 2016, adding to signs of a property slowdown as curbs on buyers bite. New-home prices, excluding government-subsidized housing, in September rose in 44 of 70 cities tracked by the government, compared with 46 in August… Prices fell in 18 cities from the previous month and were unchanged in eight… President Xi Jinping renewed a yearlong call that homes are built ‘to be inhabited’ and not for speculation in his speech at the twice-a-decade Party Congress, inking the language in one of the nation’s top policy frameworks.”
October 26 – Bloomberg (Katia Porzecanski): “Hedge fund manager Kyle Bass, who has been betting against the yuan and warning of a collapse in China’s banking system, said the nation will one day come to regret handing Xi Jinping more power than any leader in decades. ‘Today Xi is celebrated in media reports, but when future historians look back, he will be blamed for recklessly building the Chinese economy on a foundation of sand,’ Bass… said… ‘Xi desperately seeks credibility, but true developed economies do not impose severe capital controls or move short-term rates hundreds of basis points overnight in attempts to manipulate their own currency.’ …‘Recklessly growing a banking system in pursuit of global economic growth and respect will cause severe financial instability in the years to come… The dangerous $40 trillion credit experiment with Chinese characteristics will run its course.’”
Central Banker Watch:
October 25 – Financial Times (Claire Jones): “When Mario Draghi evaluated the market reaction to the European Central Bank’s policy announcement on Thursday — its most important of the year — he allowed himself a wry smile. The ECB had just said that its bond buying spree in 2018 was likely to be less than half the size of that spent on quantitative easing this year. And yet the euro had fallen, stock markets were up. That investors bought the line that this was no ‘taper’ but merely a ‘downsize’ of eurozone QE says much about how far the region’s recovery has come over the past 12 months. The ECB’s communication was also ‘pretty effective’, Mr Draghi crowed, in the sense that most analysts had correctly predicted the ECB would promise to buy €30bn in bonds a month from January until September. But it was not just that. In the detail and in his post-meeting remarks, the ECB was more dovish than its watchers had forecast. The message to investors was clear. Under Mr Draghi’s watch, the bank would not make the same mistake it did in 2008 — and again in 2011 — when it raised interest rates, only to find itself having to reverse course, after the collapse of Lehman Brothers in the first instance and then during the region’s sovereign debt crisis. The central bank still reserved the right to boost QE…”
October 24 – Financial Times (Claire Jones): “The European Central Bank is gearing up for its most important meeting of the year, as senior officials gather to decide the fate of the €2.1tn asset purchase scheme that many credit with breathing life into the eurozone recovery. At issue is whether the ECB will declare this week that the economy has recovered sufficiently for quantitative easing to end next year… On one side of Thursday’s debate is Mario Draghi, the ECB’s president, who would like to preserve room for manoeuvre. On the other are more hawkish policymakers, notably from Germany, who have long been uncomfortable with the bank’s ultraloose monetary policy and are keen for the ECB finally to bring the curtain down on QE. The hawks accept that the ECB’s governing council cannot completely rule out buying more bonds. ‘We know that you cannot lock the door,’ said one person familiar with its deliberations. ‘But there are many on the council who want the message to be communicated that the door is nowhere near as open as it once was.’”
October 24 – Wall Street Journal (Christopher Whittall): “In the spring of 2016, traders at Germany’s central bank sat down with investment bank advisers in Frankfurt to discuss a once unthinkable project: how to build a multibillion-euro corporate-debt fund. Fast forward 18 months and the European Central Bank has changed the face of the euro corporate-debt market, having bought almost €120 billion ($141bn) of these securities. Financing costs for companies have fallen to the point where junk-rated firms can borrow at similar yields to U.S. government debt, prompting concerns it is fueling a bubble… ‘When the ECB steps back, it increases vulnerability in the market,’ said Hans Lorenzen, head of European credit strategy at Citigroup…”
October 24 – Financial Times (Dan McCrum): “Canada today, Europe tomorrow, then Japan, the US and England in quick succession. An eight-day parade of central bank meetings will signal the direction for monetary policy. Rather than a return to normal, another lap near zero seems a more likely outcome. The Bank of Canada, after increasing interest rates twice in quick succession, to 1%, has shifted tone. Governor Stephen Poloz recently said ‘we will continue to feel our way cautiously as we get closer to home’. Market expectations have slipped, with prices implying a less than 50/50 chance of another rise this year. Mario Draghi’s European Central Bank has reached the point when announcing a reduction in the €60bn of bonds purchased each month is inevitable. Yet the noise has been about calibration, leading to some new market jargon. Instead of a US-style ‘taper’, expect a European ‘scaling’ of purchases. Leaving its options open, while announcing say nine months of buying at a reduced level, would suggest normality remains a distant prospect.”
October 23 – Wall Street Journal (David Harrison and Harriet Torry): “Leaders of the world’s largest central banks indicated that weak inflation in advanced economies could prolong the postcrisis era of easy money policies. Despite a broad-based improvement in the global economy, wages and consumer prices remain stubbornly low, making central bankers wary of removing their stimulus measures too quickly, they told a Group of 30 banking conference… Their concerns contrasted with the generally upbeat tone that prevailed during last week’s fall meetings of the International Monetary Fund and World Bank, and they suggest that there is still work to do to get the world’s economy on track nearly a decade after the onset of the global financial crisis.”
Global Bubble Watch:
October 24 – Financial Times (Michael Mackenzie): “The endless debate over valuation metrics that have accompanied the storming bull run in stocks misses a much bigger point about investing in 2017. Thanks to the outsized role of central banks, it is the credit markets that run the show. If you want clues on when the bull run in equities is entering the red zone, keep your eyes on the corporate debt market. Before central banks’ quantitative easing policies engineered the current cycle of financial suppression, credit markets had already established their bona fides as an early warning system for investors. When equities peaked in October 2007, the credit market had already begun turning lower. A decade on, the risk premium, or additional yield, offered by corporate bonds over that of a US government bond is at its narrowest since 2007… The big lesson digested by investors since the financial crisis is that you need to own yield, and the money gushing into bond funds remains immense. About $241bn flowed into US high grade bond funds and exchange traded funds in the first nine months of the year, according to Bank of America Merrill Lynch estimates. That’s a whopping 34% higher than 2012’s full-year record of $180bn, the bank says. This high tide of money means companies can keep selling debt — running at a record $1.4tn pace this year in the US — at very low interest rates. The resulting higher leverage in the system helps explain why the equity market keeps updating the record books with alacrity.”
October 24 – CNBC (Fred Imbert): “As stocks have climbed to record levels this year, investors are neglecting one very important aspect of financial markets, according to analysts at Bank of America Merrill Lynch. That aspect is the existence of risk, said Nikolay Angeloff, equity-linked analyst… ‘The market seems to currently imply there is no way a shock can happen,’ he said. ‘We have now recorded 334 days without a 5% or more pullback, the fourth longest period since 1928,’ Angeloff said. ‘If it continues at this pace, it will be the least volatile October in history and third least volatile month ever.’”
Europe Watch:
October 26 – Bloomberg (Maria Tadeo, Esteban Duarte, and Rodrigo Orihuela): “Catalonia is headed for a dramatic confrontation with Spain after the insurgent region’s parliament voted to declare independence and the government in Madrid gained the power to oust its separatist leadership. The resolution approved by lawmakers in Barcelona said the establishment of Europe’s newest sovereign country had been set in motion. The portion of the text submitted to a vote included measures to ask all nations and institutions to recognize the Catalan Republic.”
October 24 – Wall Street Journal (Jeannette Neumann and Giovanni Legorano): “Spanish Prime Minister Mariano Rajoy asked lawmakers to grant him unprecedented power to remove the leaders of Catalonia and temporarily control the region from Madrid, a forceful move aimed at bringing the separatist movement to heel. Mr. Rajoy on Saturday said Spain’s central government ministries would administer the region’s agencies until new elections are called, a shake-up meant to quell Catalan leaders’ insurrection.”
October 24 – Reuters (Renee Maltezou): “Outgoing German Finance Minister Wolfgang Schaeuble urged debt-wracked Greece to stop blaming others for its financial woes and stick to a reform agenda instead of relying on debt relief. Schaeuble, a leading advocate of Greece’s tough austerity programs and one of Germany’s most powerful politicians, was elected speaker of its lower house of parliament… ‘When you ask others for loans, you cannot insult them for granting the loans. It doesn’t make sense. Greece’s problems are Greece’s problems,’ the conservative Christian Democrat said in an interview aired in Greece…”
Brexit Watch:
October 22 – Reuters (Alastair Macdonald): “Theresa May looked ‘despondent’, with deep rings under her eyes, EU chief executive Jean-Claude Juncker told aides after dining with the British prime minister last week… The report by a Frankfurter Allgemeine Zeitung correspondent whose leaked account of a Juncker-May dinner in April caused upset in London, said Juncker thought her ‘marked’ by battles over Brexit with her own Conservative ministers as she asked for EU help to create more room for maneuver at home.”
Japan Watch:
October 22 – Bloomberg (Isabel Reynolds): “Prime Minister Shinzo Abe’s gamble on an early election may have just won him a chance to lead Japan through 2021. Abe… saw his ruling coalition retain its two-thirds majority in the 465-member lower house in an election on Sunday. That boosts his chances at winning another term next year as head of his Liberal Democratic Party… The landslide win -- helped along by a disparate and weak opposition -- paves the way for more ultra-easy monetary policy that has boosted stocks to the highest level in two decades and helped Asia’s second-biggest economy expand for six straight quarters. Yet pressure is also growing for Abe to tackle Japan’s swollen debt, increase stagnant wages and overhaul the labor market to replenish a rapidly aging workforce.”
Emerging Market Watch:
October 24 – Bloomberg (Ben Bartenstein): “John-Paul Smith won’t give up on his bearish bet against developing nations. The founder of research firm Ecstrat Ltd., renowned for his early warning of Russia’s equity-market plunge in 1998 while at Morgan Stanley, is finding plenty of places to direct his pessimism. Among his latest concerns: authoritarian regimes in China and Russia as well as governments in Thailand, Turkey and the Philippines shifting in that direction. Smith’s caution runs counter to recent history, in which the world’s autocratic nations have rewarded bond traders with larger returns than democratic countries. While that may be true in the early stages of a regime, he says an authoritarian rule eventually hurts productivity with the value of debt and equity assets taking a hit. ‘I’m struggling to identify any attractive bets for emerging markets under authoritarian regimes,’ Smith said… ‘The notion that both sovereign and corporate governance throughout the world will gradually converge towards some supposed liberal norm is now well and truly dead.’”
October 26 – Bloomberg (Colleen Goko, Neo Khanyile, and Thembisile Dzonzi): “The rand and South African bonds extended declines as foreign investors dumped the country’s notes in the wake of government forecasts for higher public debt and wider budget deficits in the next three years. Stocks rose to a record as gains for rand hedges offset drops for banks and retailers. The nation’s currency extended its longest losing streak in a month, while the yield on benchmark 10-year notes rose to the highest in 16 months.”
Leveraged Speculation Watch:
October 23 – Financial Times (Robin Wigglesworth): “Two Sigma has vaulted over the $50bn assets under management mark to put it on a par with Renaissance Technologies as the biggest global quantitative hedge fund, as investors continue to pile into computer-powered investment strategies. The… hedge fund set up in 2001 by computer scientist David Siegel and mathematician John Overdeck has been growing rapidly in recent years. Two Sigma managed about $6bn in 2011, but jumped past the $50bn mark earlier this month… That puts it roughly level with Renaissance Technologies… and more than DE Shaw’s $45bn… Investor demand for algorithmic investing has exploded in recent years, even as the rest of the hedge fund industry has struggled with poor performance and outflows. Morgan Stanley recently estimated that various quant strategies, ranging from cheap next-generation exchange traded funds to pricey sophisticated hedge fund vehicles, have grown at 15% annually over the past six years, and now control about $1.5tn.”
Geopolitical Watch:
October 25 – Reuters (David Alexander, David Brunnstrom and Idrees Ali): “The recent warning from North Korea’s foreign minister of a possible atmospheric nuclear test over the Pacific Ocean should be taken literally, a senior North Korean official told CNN… ‘The foreign minister is very well aware of the intentions of our supreme leader, so I think you should take his words literally,’ Ri Yong Pil, a senior diplomat in North Korea’s Foreign Ministry, told CNN.”
October 21 – Reuters (Jim Finkle): “The U.S government issued a rare public warning that sophisticated hackers are targeting energy and industrial firms, the latest sign that cyber attacks present an increasing threat to the power industry and other public infrastructure. The Department of Homeland Security and Federal Bureau of Investigation warned in a report… that the nuclear, energy, aviation, water and critical manufacturing industries have been targeted along with government entities in attacks dating back to at least May.”
October 21 – Reuters (Dirimcan Barut and Tulay Karadeniz): “Turkish President Tayyip Erdogan showed no retreat from a diplomatic row with the United States…, castigating Washington for what he said an ‘undemocratic’ indictment against his security detail. His comments may further dash hopes of a quick resolution to an on-going diplomatic crisis between the NATO allies. Both Ankara and Washington have cut back issuing visas to each other’s citizens as ties have worsened.”
October 24 – Reuters (Maher Chmaytelli): “Iraqi Prime Minister Haider al-Abadi defended the role of an Iranian-backed paramilitary force at a meeting with U.S. Secretary of State Rex Tillerson… Tillerson arrived… hours after the Iraqi government rejected his call to send home the Popular Mobilisation, an Iran-backed force that helped defeat Islamic State and capture the Kurdish-held city of Kirkuk. In his opening remarks at the meeting with Tillerson, Abadi said Popular Mobilisation ‘is part of the Iraqi institutions,’ rejecting accusations that it is acting as an Iranian proxy.”
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