Powell’s hammering home “powerful” had me recalling ECB President Jean-Claude Trichet’s “never precommit.” “The European Central Bank never pre-commits on interest rate moves.” “We are never precommitted as regards the future level or path of policy.” “We are never precommitted and we can increase rates whenever we judge appropriate to do that.”
Powell is struggling to reinforce flagging Federal Reserve credibility. Trichet was focused on establishing credibility for the unproven European Central Bank. The Chairman is directly signaling to the markets the Fed’s resolute commitment to maintain (for years to come) the most extreme monetary stimulus. Trichet was essentially signaling to market participants not to bet on a particular policy course. The FOMC is saying wager freely on an extended period of ultra-loose policies.
With zero rates and $120 billion monthly Treasury and MBS purchases, along with other measures, the Fed has completely succumbed to inflationism. In contrast, pre-Draghi ECB doctrine was founded on well-tested traditional central banking and sound money principles.
It’s as if the CBB has a weekly mandate to remind readers of the abnormality of so much that these days passes for normal. Why was Trichet so adamant against markets betting on the course of monetary policy? Because such activities would add an element of instability and risk compromising ECB credibility. It would increase leveraged speculation, in the process spurring an unstable monetary backdrop. Over time this would bolster asset price inflation and propagate Bubbles. And, importantly, speculative Bubble dynamics would pose increasing risks to system stability and monetary policy flexibility. Maintaining financial stability and central bank credibility were dependent on the central bank’s powerful commitment to sound money.
“Sound money” and “inflationism” are such critical fundamental concepts that are these days little more than archaic terminology from a bygone era. Over the years, rising securities prices evolved into the Federal Reserve’s primary mechanism for system stimulus and reflation. The Fed has reduced the cost of borrowing for leveraged speculation to about zero. It has committed to indefinitely injecting $120 billion monthly into highly speculative markets, while essentially promising to boost these purchases as necessary to support financial asset prices and marketplace liquidity. Importantly, the Fed continues to aggressively promote speculation and financial leveraging.
Bloomberg’s Mike Mckee: “…In terms of the balance sheet, are you concerned that your actions are more likely to produce asset price inflation than goods and services inflation? In other words, are you risking a bubble on Wall Street?
Chairman Powell: “Yeah, so of course we monitor financial conditions very carefully. These are not new questions. These were questions that were very much in the air a decade ago and more when the Fed first started doing QE. And I would say if you look at the long experience of… the ten-year, eight-month expansion, the longest in our recorded history, it included an awful lot of quantitative easing and low rates for seven years. And I would say it was notable for the lack of the emergence of some sort of a financial bubble, a housing bubble or some kind of a bubble - the popping of which could threaten the expansion. That didn’t happen. And frankly, it hasn’t really happened around the world since then. That doesn’t mean that it won’t happen, and so of course it’s something that we monitor carefully. After the financial crisis, we started a whole division of the Fed to focus on financial stability. We look at it through every perspective. The FOMC gets briefed on a quarterly basis. At the Board here we talk about it more or less on an ongoing basis. So, it is something we monitor. But I don’t know that the connection between asset purchases and financial stability is a particularly tight one. But again, we won’t be just assuming that. We’ll be checking carefully as we go. And by the way, the kinds of tools that we would use to address those sorts of things are not really monetary policy. It would be more tools that strengthen the financial system.”
What about the connection between asset purchases and market speculation? In the 1960s Alan Greenspan was said to have commented the Great Depression was a consequence of the Fed having repeatedly placed “Coins in the Fuse Box”.
There are contrasting points of view. According to Powell, we have experienced a period of over a decade of QE (new Fed policy doctrine) “notable for the lack of the emergence of some sort of a financial bubble.” “The connection between asset purchases and financial stability” is not “a particularly tight one.”
A counter argument holds that the Fed (along with the ECB, BOJ, PBOC, BOE and others) has for over a decade been inserting “Coins in the Fuse Box” to ensure the juice continues to flow freely into Credit, market and asset Bubbles. Excesses have been allowed to mount unchecked. System correction and adjustment mechanisms have been impeded. Financial and economic structural impairment has run long and deep. In short, it’s a backdrop with parallels to that which culminated in the 1929 Crash and Great Depression.
It’s been a slippery slope, accordant with the history of inflationism. Powell now resorts to double-digit wielding of “powerful” as the Fed attempts to communicate the essence of its new inflation-spurring regime.
My own view holds Fed credibility has already been irreparably diminished. When it comes to the Federal Reserve’s commitment to tighten monetary policy in the event of an upside inflation surprise, credibility has been lost. There is minimal credibility the Fed will ever respond to asset Bubble risks to financial stability. The Fed’s stated strategy of employing macro-prudential policies as first line defense against financial excess is unconvincing. And for now, these credibility voids have minimal impact. Markets see little inflation risk on the horizon, while speculative markets are more than fine with the Fed’s neglect of its financial stability mandate.
From day one, this new inflation framework lacks credibility. Markets don’t believe central banks have much control over some nebulous consumer price aggregate. There is little confidence that the Federal Reserve will miraculously orchestrate a price level just nicely above its 2% target.
So-called Fed “credibility” today rests instead on faith that the Fed (and global central bankers) will sustain elevated securities prices and market Bubbles. “Whatever it takes” central banking with open-ended balance sheets ensures abundant and uninterrupted marketplace liquidity. In this regard, a huge Coin was jammed in the Fuse Box in March and April.
I’m the first to admit the Fed/market nexus appears virtually miraculous. The Fed’s early and aggressive “insurance” stimulus spurred surging securities prices in the face of deep economic contraction and a spike in unemployment. And no reason to fret the old dynamic whereby rising loan losses and resulting tighter bank lending standards usher in an economic down-cycle. Not these days – not with markets having evolved to become the primary source of finance throughout the economy. With the Fed’s powerful market-based stimulus and attendant dramatic loosening of financial conditions ensuring a rapid “V” recovery, there’s no fear of the type of festering Credit problems that would have traditionally incited a problematic tightening of system Credit.
I have a few issues with this miracle. As noted above, this policy process promotes asset inflation, speculation and Bubbles, while forestalling important system correction and adjustment. In short, this deviant financial and policy apparatus abrogates crucial facets of Capitalism.
Bloomberg this week featured an article, “Why Liquidity Is a Simple Idea But Hard to Nail Down.” The always insightful Mohamed El-Erian penned an op-ed, “Are Stocks Losing Some Liquidity Momentum?”
In the latest weekly data, M2 “money” supply surged another $112 billion to a record $18.577 TN. M2 was up $3.069 TN in 28 weeks, or about 37% annualized. Not a mention of this data as the Fed agonizes over consumer price inflation slightly below target. Can marketplace liquidity be an issue when the system is in the throes of runaway M2 growth?
What is driving this historic monetary inflation? Clearly, Fed balance sheet growth is a primary factor. But I believe there’s another key component: speculative leveraging. The expansion of securities Credit creates new financial claims (“liquidity”) that circulate through the financial system and into the real economy.
September 18 – Reuters (Kate Duguid): “Investors are gearing up for the year's record-breaking pace of corporate bond issuance to continue in the coming week… The past week has seen roughly $42 billion of high-grade debt come to market in 39 deals… The breakneck pace of fresh issuance illustrates how the Fed's late March pledge to backstop credit markets and its policy of holding interest rates near zero have spurred borrowing… Companies had already issued $1.7 trillion in debt through the end of August…, compared with $944 billion in the same period last year.”
In the wake of the Fed’s March move to backstop corporate bonds, how much of this year’s record issuance has been purchased by speculators employing leverage? How much corporate Credit is these days being funneled into Wall Street structured finance (i.e. CDOs, CLOs and such), again incorporating leverage? How much leverage is being used to purchase shares in corporate bond ETFs? For that matter, how much new leverage is finding its way into mortgage securities – as the Fed backstops this key marketplace with $40 billion of monthly buying?
Finance evolves over time – and Federal Reserve policymaking has clearly had a profound impact on financial innovation and evolution. I argued the Fed, GSEs and Treasury momentously altered market risk perceptions for mortgage-related finance – the “Moneyness of Credit” – that was fundamental to mortgage finance Bubble inflation. A decade ago, I warned Bernanke’s move to use the securities markets for system reflation had unleashed the “Moneyness of Risk Assets” – the perception that Fed backing elevated stocks and corporate Credit to the status of perceived safe and liquid instruments.
Post-mortgage finance Bubble policy measures were instrumental in the phenomenal expansion of the ETF complex. It was no surprise then that ETF illiquidity was a key aspect of March’s market dislocation - or that the Fed would be compelled to provide a liquidity backstop for this illiquidity flash point.
The Fed’s move to bolster the markets and ETFs this past spring spurred a tsunami of ETF flows, especially into corporate Credit. Moreover, the Fed’s aggressive measures (“Coins”) in December 2018, September 2019 and March/April 2020 profoundly altered the perception of risk versus reward opportunity in trading options and other derivatives. In short, after creating an enticing market environment for using derivatives to speculate on the market’s upside, the Fed’s dramatic pandemic crisis response made buying call options a can’t lose proposition.
I suspect options trading over recent months has had a profound effect on market prices, trading dynamics and overall liquidity – and I suspect derivatives-related leverage has become a key source of monetary fuel throughout the system – the financial markets and in the real economy.
My view is the disregard for speculative leverage and resulting liquidity effects is the most dangerous flaw in contemporary central bank doctrine. When the Greenspan Fed moved to accommodate – and then underpinned - market-based finance, he unleashed a process that saw leveraged speculation take an increasingly prominent role in system liquidity creation. The LTCM crisis in 1998 foreshadowed the collapse of speculative leverage and financial crisis in 2008.
And for over a decade now the Fed has been putting “Coins in the Fuse Box” – adopting increasingly extreme measures specifically to quash de-risking/deleveraging dynamics. And with each new act of desperation – 2018, 2019 and 2020 – the Fed only stoked greater excess and speculative leverage.
I see the entire inflation-targeting doctrine as little more than a sham. This is not about CPI and inflation expectations. The Fed is trying to convince the marketplace it retains the power to sustain market and speculative Bubbles. And why not a more constructive market response to Wednesday’s statement and Powell press conference? Because markets at this point recognize Bubbles will be sustained only through an ongoing massive expansion of the Fed’s balance sheet – and Powell was somewhat timid with balance sheet details.
Moreover, when the Fed Chairman downplays financial stability risks, he does sow some market doubt he fully appreciates the degree of underlying market fragility. Will he be ready with another immediate multi-Trillion stimulus package in the event of a non-pandemic, non-economic free-fall financial market dislocation? And this gets to the Core Issue: Fed reflationary measures at this point stoke massive late-cycle speculative excess and leverage. This significantly exacerbates market fragility, ensuring the next major de-risking/deleveraging episode will require even greater Fed liquidity injections (central bank Credit inflation) and market support.
It’s reasonable to ask, “Where does it all end?” – with an equally reasonable answer, “with market dislocation and a crash”. All those Coins in the Fuse Box in 1929 contributed directly to the house collapsing in flames.
For now, Fed policies worsen inequality and social tension. The Fed is clearly cognizant of these issues. Powell hopes to get back to a 3.5% unemployment rate and strong job gains for blacks, Hispanics, other minorities, and the less fortunate more generally. But what a challenge it is to explain this new inflation-spurring regime in the context of how it will assist the common citizen.
Yahoo Finance's Brian Cheung: “So it seems like a lot of the new inflation framework is about shaping inflation expectations. But the average American who might be watching this might be confused as to why the Fed is overshooting inflation. So what’s your explanation to Main Street, to average people what the Fed is trying to do here? And what the outcome would be for those on Main Street?”
Powell: “That’s a very important question, and I actually spoke about that in my Jackson Hole remarks... It’s not intuitive to people. It is intuitive that high inflation is a bad thing. It’s less intuitive that inflation can be too low. And the way I would explain it is that inflation that’s too low will mean that interest rates are lower. There’s an expectation of future inflation that’s built into every interest rate, right? And to the extent inflation gets lower and lower and lower, interest rates get lower and lower. And then the Fed will have less room to cut rates to support the economy. And this isn’t some idle…, academic theory. This is what’s happening all over the world. If you look at many, many large jurisdictions around the world, you are seeing that phenomenon. So, we want inflation to be -- we want it to be 2%. And we want it to average 2%. So, if inflation averages 2%, the public will expect that and that’ll be what's built into interest rates. And that’s all we want. So we’re not looking to have high inflation. We just want inflation to average 2%. And that means that you know, in a downturn, these days what happens is inflation, as has happened now, it moves down well below 2%. And that means, as we’ve said before, that we would like to see and we will conduct policies so that inflation moves for some time moderately above 2%. So, these won’t be large overshoots and they won’t be permanent. But to help anchor inflation expectations at 2%. So yes, it’s a challenging concept for a lot of people, but nonetheless, the economic importance of it is large. And you know, those are the people we’re serving. And you know, we serve them best if we can actually achieve average 2% inflation we believe. And that’s why we changed our framework.”
What a tangled web they’ve woven. Year-over-year headline CPI inflation has averaged 1.7% over the past five years (1.9% during the past four). Year-over-year CPI was up 2.3% in February, before pandemic forces pushed it as low as 0.1% in May. It was already back up to 1.3% in August. Is all the Hullabaloo really about consumer inflation fractionally below target? And will this be viewed as reasonable by the average American?
In the wake of the Fed’s March move to backstop corporate bonds, how much of this year’s record issuance has been purchased by speculators employing leverage? How much corporate Credit is these days being funneled into Wall Street structured finance (i.e. CDOs, CLOs and such), again incorporating leverage? How much leverage is being used to purchase shares in corporate bond ETFs? For that matter, how much new leverage is finding its way into mortgage securities – as the Fed backstops this key marketplace with $40 billion of monthly buying?
Finance evolves over time – and Federal Reserve policymaking has clearly had a profound impact on financial innovation and evolution. I argued the Fed, GSEs and Treasury momentously altered market risk perceptions for mortgage-related finance – the “Moneyness of Credit” – that was fundamental to mortgage finance Bubble inflation. A decade ago, I warned Bernanke’s move to use the securities markets for system reflation had unleashed the “Moneyness of Risk Assets” – the perception that Fed backing elevated stocks and corporate Credit to the status of perceived safe and liquid instruments.
Post-mortgage finance Bubble policy measures were instrumental in the phenomenal expansion of the ETF complex. It was no surprise then that ETF illiquidity was a key aspect of March’s market dislocation - or that the Fed would be compelled to provide a liquidity backstop for this illiquidity flash point.
The Fed’s move to bolster the markets and ETFs this past spring spurred a tsunami of ETF flows, especially into corporate Credit. Moreover, the Fed’s aggressive measures (“Coins”) in December 2018, September 2019 and March/April 2020 profoundly altered the perception of risk versus reward opportunity in trading options and other derivatives. In short, after creating an enticing market environment for using derivatives to speculate on the market’s upside, the Fed’s dramatic pandemic crisis response made buying call options a can’t lose proposition.
I suspect options trading over recent months has had a profound effect on market prices, trading dynamics and overall liquidity – and I suspect derivatives-related leverage has become a key source of monetary fuel throughout the system – the financial markets and in the real economy.
My view is the disregard for speculative leverage and resulting liquidity effects is the most dangerous flaw in contemporary central bank doctrine. When the Greenspan Fed moved to accommodate – and then underpinned - market-based finance, he unleashed a process that saw leveraged speculation take an increasingly prominent role in system liquidity creation. The LTCM crisis in 1998 foreshadowed the collapse of speculative leverage and financial crisis in 2008.
And for over a decade now the Fed has been putting “Coins in the Fuse Box” – adopting increasingly extreme measures specifically to quash de-risking/deleveraging dynamics. And with each new act of desperation – 2018, 2019 and 2020 – the Fed only stoked greater excess and speculative leverage.
I see the entire inflation-targeting doctrine as little more than a sham. This is not about CPI and inflation expectations. The Fed is trying to convince the marketplace it retains the power to sustain market and speculative Bubbles. And why not a more constructive market response to Wednesday’s statement and Powell press conference? Because markets at this point recognize Bubbles will be sustained only through an ongoing massive expansion of the Fed’s balance sheet – and Powell was somewhat timid with balance sheet details.
Moreover, when the Fed Chairman downplays financial stability risks, he does sow some market doubt he fully appreciates the degree of underlying market fragility. Will he be ready with another immediate multi-Trillion stimulus package in the event of a non-pandemic, non-economic free-fall financial market dislocation? And this gets to the Core Issue: Fed reflationary measures at this point stoke massive late-cycle speculative excess and leverage. This significantly exacerbates market fragility, ensuring the next major de-risking/deleveraging episode will require even greater Fed liquidity injections (central bank Credit inflation) and market support.
It’s reasonable to ask, “Where does it all end?” – with an equally reasonable answer, “with market dislocation and a crash”. All those Coins in the Fuse Box in 1929 contributed directly to the house collapsing in flames.
For now, Fed policies worsen inequality and social tension. The Fed is clearly cognizant of these issues. Powell hopes to get back to a 3.5% unemployment rate and strong job gains for blacks, Hispanics, other minorities, and the less fortunate more generally. But what a challenge it is to explain this new inflation-spurring regime in the context of how it will assist the common citizen.
Yahoo Finance's Brian Cheung: “So it seems like a lot of the new inflation framework is about shaping inflation expectations. But the average American who might be watching this might be confused as to why the Fed is overshooting inflation. So what’s your explanation to Main Street, to average people what the Fed is trying to do here? And what the outcome would be for those on Main Street?”
Powell: “That’s a very important question, and I actually spoke about that in my Jackson Hole remarks... It’s not intuitive to people. It is intuitive that high inflation is a bad thing. It’s less intuitive that inflation can be too low. And the way I would explain it is that inflation that’s too low will mean that interest rates are lower. There’s an expectation of future inflation that’s built into every interest rate, right? And to the extent inflation gets lower and lower and lower, interest rates get lower and lower. And then the Fed will have less room to cut rates to support the economy. And this isn’t some idle…, academic theory. This is what’s happening all over the world. If you look at many, many large jurisdictions around the world, you are seeing that phenomenon. So, we want inflation to be -- we want it to be 2%. And we want it to average 2%. So, if inflation averages 2%, the public will expect that and that’ll be what's built into interest rates. And that’s all we want. So we’re not looking to have high inflation. We just want inflation to average 2%. And that means that you know, in a downturn, these days what happens is inflation, as has happened now, it moves down well below 2%. And that means, as we’ve said before, that we would like to see and we will conduct policies so that inflation moves for some time moderately above 2%. So, these won’t be large overshoots and they won’t be permanent. But to help anchor inflation expectations at 2%. So yes, it’s a challenging concept for a lot of people, but nonetheless, the economic importance of it is large. And you know, those are the people we’re serving. And you know, we serve them best if we can actually achieve average 2% inflation we believe. And that’s why we changed our framework.”
What a tangled web they’ve woven. Year-over-year headline CPI inflation has averaged 1.7% over the past five years (1.9% during the past four). Year-over-year CPI was up 2.3% in February, before pandemic forces pushed it as low as 0.1% in May. It was already back up to 1.3% in August. Is all the Hullabaloo really about consumer inflation fractionally below target? And will this be viewed as reasonable by the average American?
For the Week:
The S&P500 slipped 0.6% (up 2.7% y-t-d), while the Dow was little changed (down 3.1%). The Transports gained 1.3% (up 4.9%), while the Utilities declined 0.8% (down 8.5%). The Banks were about unchanged (down 32.7%), while the Broker/Dealers increased 0.6% (down 1.9%). The S&P 400 Midcaps increased 0.6% (down 9.6%), and the small cap Russell 2000 jumped 2.6% (down 7.9%). The Nasdaq100 fell 1.4% (up 25.2%). The Semiconductors gained 1.2% (up 16.8%). The Biotechs surged 4.2% (up 5.9%). With bullion gaining $10, the HUI gold index added 0.4% (up 41.7%).
Three-month Treasury bill rates ended the week at 0.08%. Two-year government yields added a basis point to 0.14% (down 143bps y-t-d). Five-year T-note yields rose three bps to 0.28% (down 141bps). Ten-year Treasury yields gained three bps to 0.70% (down 122bps). Long bond yields gained four bps to 1.45% (down 94bps). Benchmark Fannie Mae MBS yields jumped nine bps to 1.44% (down 127bps).
Greek 10-year yields fell four bps to 1.07% (down 36bps y-t-d). Ten-year Portuguese yields declined three bps to 0.30% (down 14bps). Italian 10-year yields dipped two bps to 0.96% (down 45bps). Spain's 10-year yields declined two bps to 0.29% (down 18bps). German bund yields were little changed at negative 0.485% (down 30bps). French yields fell three bps to negative 0.22% (down 34bps). The French to German 10-year bond spread narrowed three to about 26 bps. U.K. 10-year gilt yields were unchanged at 0.18% (down 64bps). U.K.'s FTSE equities index declined 0.4% (down 20.4%).
Japan's Nikkei Equities Index slipped 0.2% (down 1.3% y-t-d). Japanese 10-year "JGB" yields declined one basis point to 0.02% (up 3bps y-t-d). France's CAC40 fell 1.1% (down 16.7%). The German DAX equities index declined 0.7% (down 1.0%). Spain's IBEX 35 equities index slipped 0.2% (down 27.4%). Italy's FTSE MIB index fell 1.5% (down 16.9%). EM equities were mixed. Brazil's Bovespa index was little changed (down 15.0%), while Mexico's Bolsa declined 0.9% (down 17.3%). South Korea's Kospi index increased 0.7% (up 9.8%). India's Sensex equities index was unchanged (down 5.8%). China's Shanghai Exchange rallied 2.4% (up 9.4%). Turkey's Borsa Istanbul National 100 index gained 0.8% (down 2.8%). Russia's MICEX equities index jumped 1.4% (down 3.1%).
Investment-grade bond funds saw inflows of $5.168 billion, and junk bond funds posted positive flows of $526 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates added a basis point to 2.87% (down 86bps y-o-y). Fifteen-year rates declined two bps to a record low 2.35% (down 86bps). Five-year hybrid ARM rates sank 15 bps to 2.96% (down 53bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down seven bps to 3.04% (down 112bps).
Federal Reserve Credit last week jumped $23.2bn to $6.991 TN. Over the past year, Fed Credit expanded $3.241 TN, or 86%. Fed Credit inflated $4.181 Trillion, or 149%, over the past 410 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week rose $8.1bn to $3.407 TN. "Custody holdings" were down $60.2bn, or 1.7%, y-o-y.
M2 (narrow) "money" supply surged $112.2bn last week to a record $18.577 TN, with an unprecedented 28-week gain of $3.069 TN. "Narrow money" surged $3.595 TN, or 24%, over the past year. For the week, Currency increased $1.2bn. Total Checkable Deposits declined $12.4bn, while Savings Deposits jumped $139bn. Small Time Deposits fell $5.7bn. Retail Money Funds declined $9.9bn.
Total money market fund assets dropped $51.9bn to $4.416 TN. Total money funds surged $1.014 TN y-o-y, or 30%.
Total Commercial Paper dropped $26.0bn to $984bn. CP was down $110bn, or 10.1% year-over-year.
Currency Watch:
September 15 – Bloomberg (Katherine Burton and Erik Schatzker): “The dollar’s decades-long position as the global reserve currency is in jeopardy because of steps the U.S. has taken to support its economy during the Covid-19 pandemic, according to Ray Dalio… While equities and gold benefited from the trillions of dollars in fiscal spending and monetary injections, those efforts are debasing the currency and have raised the possibility that the U.S. will go too far in testing the limits of government stimulus, Dalio said… ‘There is so much debt production and debt monetization,’ Dalio said.”
September 15 – Reuters: “China’s central bank on Wednesday lifted its official yuan midpoint the most in five months to the strongest level since May 2019, following a sharp rally in the spot market a day earlier.”
September 16 – Bloomberg (Tian Chen): “China’s policy makers are in no rush to rein in a rapid advance in the yuan, as traders push the currency toward its largest quarterly rally on record. The yuan has strengthened 4.5% since the end of June to 6.7566 per dollar, set for the biggest ever quarterly gain in Bloomberg data going back to 1981.”
For the week, the U.S. dollar index declined 0.4% to 92.926 (down 3.7% y-t-d). For the week on the upside, the South African rand increased 2.5%, the South Korean won 2.3%, the Japanese yen 1.5%, the New Zealand dollar 1.4%, the British pound 1.0%, the Mexican peso 0.7%, the Singapore dollar 0.6%, the Swedish krona 0.1% and the Australian dollar 0.1%. For the week on the downside, the Brazilian real declined 1.3%, the Norwegian krone 0.6%, the Swiss franc 0.3%, the Canadian dollar 0.2%, and the euro 0.1%. The Chinese renminbi increased 0.96% versus the dollar this week (up 2.87% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index gained 2.0% (down 9.8% y-t-d). Spot Gold added 0.5% to $1,951 (up 28.5%). Silver gained 1.0% to $27.129 (up 51.4%). WTI crude surged $3.78 to $41.11 (down 33%). Gasoline jumped 12.9% (down 27%), while Natural Gas sank 9.7% (down 6.4%). Copper rose 2.5% (up 11.4%). Wheat jumped 6.1% (up 3%). Corn gained 2.7% (down 2%).
Coronavirus Watch:
September 17 – Forbes (Tommy Beer): “Nearly half of all Americans, including a majority of Republicans, say they definitely or probably would not get the Covid-19 vaccine if it were available today, according to a new poll, the latest sign of fear and uncertainty as President Trump promises a fast vaccine and his own health officials warn it could take many more months for one to be ready… The new national survey by Pew Research Center, conducted Sept. 8-13 among 10,093 U.S. adults…, finds Americans’ intent to get a coronavirus vaccine has diminished significantly across all major political and demographic groups.”
September 17 – NPR (Marisa Penaloza): “The World Health Organization warned… weekly coronavirus case numbers are rising in Europe at a higher rate than during the pandemic's peak in March. At a virtual news conference, Dr. Hans Kluge, regional director of WHO in Europe, warned, ‘We do have a very serious situation unfolding before us.’ ‘Weekly cases have exceeded those reported when the pandemic first peaked in Europe in March," he said. ‘Last week, the region's weekly tally exceeded 300,000 patients.’”
September 17 – Reuters (Holly Ellyatt): “A dramatic rise in new coronavirus cases in Europe has been characterized as a ‘wake up call’ by the World Health Organisation’s top official in Europe. ‘We have a very serious situation unfolding before us,’ WHO’s regional director for Europe, Hans Kluge, said… ‘Weekly cases have now exceeded those reported when the pandemic first peaked in Europe in March.’ He said that, last week, the region’s weekly tally exceeded 300,000 patients. ‘More than half of European countries have reported a greater-than-10% increase in cases in the past two weeks. Of those, seven countries have seen newly reported cases increase more than two-fold in the same period,’ he added.”
September 15 – Reuters (Lisa Shumaker): “The World Health Organization reported a record one-day increase in global coronavirus cases on Sunday, with the total rising by 307,930 in 24 hours. The biggest increases were from India, the United States and Brazil…”
Market Instability Watch:
September 15 – Bloomberg (Ksenia Galouchko): “U.S. technology stocks are the world’s most crowded trade, say fund managers overseeing $601 billion, fueling fears about a bubble that could burst the market rally. Investors surveyed by Bank of America Corp. have never been so unanimous in their conviction on the most popular asset class, with 80% of participants citing long U.S. tech, up from 59% in August. Among the market’s biggest tail risks, concerns about a tech bubble jumped to be ranked behind only a resurgence in Covid-19.”
September 15 – Reuters (Herbert Lash): “Too many investors have piled into U.S. technology stocks, making the sector the most ‘crowded trade’ of all time and difficult to unwind, while a tech bubble is the biggest risk after an expected second wave from the COVID-19 pandemic, a BofA Securities survey of fund managers said… Institutional investors are ‘rotating’ into cyclical stocks and not ‘chasing’ momentum since the rally from March lows, while a majority now say there’s a new bull market compared to one-quarter in May, the survey found.”
September 13 – Wall Street Journal (Gregory Zuckerman and Gunjan Banerji): “Investors are trading stock options and chasing fast-rising shares at record rates, activity that’s expected to jolt markets through the coming election. A surge in options trading targeted at giant tech stocks by both small and large investors is magnifying the market’s ups and downs. Investors are also simply buying shares that are going up, a strategy that can create its own wild swings in the market. ‘It’s really exploded to a level I haven’t seen,’ said Brent Kochuba, founder of data firm SpotGamma, which tracks derivatives positioning.”
September 14 – Bloomberg (Claire Ballentine): “As the crowd of day traders rushed to buy the dip, a triple-leveraged ETF that tracks the Nasdaq 100 notched its best streak of inflows on record. The $7.8 billion ProShares UltraPro QQQ (TQQQ) exchange-traded fund attracted more than $1.5 billion in the past eight days, the most for such a span since it began trading in 2010…”
September 14 – Reuters (Marc Jones): “There is growing ‘daylight’ between stock markets and other risky financial market asset classes and the reality of a global economy sapped by COVID-19, the Bank for International Settlements said in its quarterly report… ‘Based on a broad set of indicators, it is hard not to see a certain amount of daylight between risky asset prices and economic prospects,’ Claudio Borio, Head of the BIS Monetary and Economic Department, said. ‘We don't really know exactly how the tensions are going to be resolved. There is quite a lot of uncertainty about how the virus will evolve and that will have big implications for financial markets and policy in general,’ Borio added.”
Global Bubble Watch:
September 17 – Financial Times (Leslie Hook): “The worst wildfires in US history, Arctic sea ice trending towards a historic low, simultaneous hurricanes in the Atlantic Ocean and the hottest summer in the northern hemisphere since records began: scientists say this year’s sequence of natural disasters and record temperatures have exceeded their worst fears. ‘We were speculating 40 years ago about things that might happen, and I don’t think that any of us expected that in our lifetimes, we would see these things unfolding,’ said Chris Rapley, a 73-year-old professor of climate science at University College London. ‘It has become a real problem of today, rather than a predicted problem of tomorrow.’”
September 15 – Reuters (Sujata Rao): “Global M&A volumes are approaching $2 trillion for 2020, with technology making up almost a fifth of the total after mammoth deals such as SoftBank’s $40 billion sale of chipmaker Arm. Dealmaking has stepped up a gear in September… Others are coming thick and fast… Such waves are characteristic after downturns, but Refinitiv data shows 2020’s $1.97 trillion total of deals announced so far exceeds $1.26 trillion and $1.6 trillion during the same period in 2009 and 2010 respectively, after the 2008 financial crisis.”
September 13 – Financial Times (Joe Rennison): “The onset of coronavirus — and the drastic policy response from central banks — has produced an army of companies limping along in the twilight between the living and the dead. A decade of low interest rates had already sustained a rising number of companies that were able to borrow cheaply and amble on with operating profits that fell short of the interest needed to pay their lenders. Now, the bond binge that followed the depths of the Covid-19 crisis in March has accelerated that trend, giving rise to a new generation of these so-called corporate zombies. At the end of last year, 13% of companies in the Leuthold 3000 Universe index — akin to the Russell 3000 index of US companies — had staggered along for at least three years with a repayments shortfall, up from 8% at the end of 2008.”
September 14 – Bloomberg (Catherine Bosley): “Policy makers are facing the most economically challenging part of the Covid-19 crisis in avoiding the creation of ‘zombie’ companies, according to the Bank for International Settlements. Ultra-easy monetary and fiscal support is helping companies avoid a liquidity crunch after the pandemic closed down businesses and demand collapsed. But that stance bears risks longer-term, said Claudio Borio, head of the Basel-based institution’s Monetary and Economic Department. ‘There’s a delicate balance to be struck between on the one hand withdrawing it too early, which will obliviously have short-term costs in terms of economic activity, and withdrawing it too late, which will mean that it will not favor necessary structural adjustments,’ he said…”
September 15 – Reuters (Florence Tan, Roslan Khasawneh, Noah Browning and Laila Kearney): “Major oil industry producers and traders are forecasting a bleak future for worldwide fuel demand, due to the coronavirus pandemic’s ongoing assault on the global economy… ‘The outlook appears even more fragile ... the path ahead is treacherous amid surging COVID-19 cases in many parts of the world,’ the International Energy Agency warned in its monthly report…”
Trump Administration Watch:
September 16 – CNBC (Jacob Pramuk): “President Donald Trump urged Republicans… to embrace a larger coronavirus stimulus package, and a top White House aide showed more optimism about striking a deal with Democrats. In a tweet, the president told GOP lawmakers to ‘go for the much higher numbers’ in legislation designed to boost an economy and health-care system struggling under the weight of the pandemic. Many Republicans have embraced limited relief — or backed no new spending at all — as the major parties struggle to break a stalemate over a fifth relief bill.”
September 14 – CNBC (Thomas Franck): “Treasury Secretary Steven Mnuchin told CNBC… lawmakers should not allow fears over the size of the nation’s deficit or the Federal Reserve’s balance sheet to delay additional Covid-19 relief. Mnuchin, who with White House chief of staff Mark Meadows has led the administration’s Covid-19 relief negotiations, said the economic crisis warrants extraordinary stimulus from Congress and the Fed. ‘Now is not the time to worry about shrinking the deficit or shrinking the Fed balance sheet,’ Mnuchin told CNBC… ‘There was a time when the Fed was shrinking the balance sheet and coming back to normal. The good news is that gave them a lot of room to increase the balance sheet, which they did.’”
September 15 – Bloomberg (Bryce Baschuk): “The World Trade Organization’s ruling that the U.S. violated international regulations by imposing tariffs on more than $234 billion of Chinese exports failed to dissuade Washington of its ‘America First’ trade policy and will do little to alter the current trade environment. U.S. Trade Representative Robert Lighthizer said the WTO report… ‘confirmed’ President Donald Trump’s aggressive foreign policy that has sought to dismantle multilateral organizations like the Geneva-based trade body.”
Federal Reserve Watch:
September 17 – Bloomberg (Editorial Board): “Federal Reserve Chairman Jerome Powell has made his first policy announcement since unveiling the central bank’s new monetary strategy in August. Financial markets have plenty of questions about the plan, but Powell… provided no further answers, except to keep saying it would be ‘very powerful.’ That’s certainly questionable — but the fault isn’t Powell’s. With interest rates close to zero, there’s only so much the Fed can do, and only so much the chairman can do to pretend otherwise. The new strategy aims, in effect, to convince investors that the central bank will hold interest rates at zero for longer than it would have under the old approach, allowing inflation to rise above its long-term 2% target, even with the economy at full employment and following years of steady expansion.”
September 16 – Reuters (David Randall): “One key investor takeaway from Federal Reserve Chair Jerome Powell’s press conference…: This central bank is not going to break a sweat fretting about future asset bubbles. The Fed launched unprecedented support when the coronavirus pandemic hit the United States earlier this year, slashing interest rates and unleashing asset purchases which has pushed bond yields to lows and sent equity prices to record highs. Still, Powell said the decade-long U.S. economic expansion, which ran prior to the pandemic hitting growth, had included both quantitative easing and low interest rates but was ‘notable for the lack of the emergence of some sort of a financial bubble.’ ‘I don’t know that the connection between asset purchases and financial stability is a particular tight one,’ Powell said…”
September 16 – Financial Times (James Politi and Colby Smith): “The Federal Reserve has often said it would keep monetary policy loose for years to come in response to the coronavirus pandemic. On Wednesday, it tried to flesh out what that would mean in practice — and received mixed reviews. The US central bank said interest rates would not rise in the world’s largest economy until it reaches full employment and inflation hits 2% and remains on track to ‘moderately exceed’ that target ‘for some time’. The guidance reflected the Fed’s announcement last month of a new long-term monetary policy that abandoned pre-emptive rate rises to stymie inflation, and was touted by Jay Powell, Fed chair, as an additional step to boost the economic recovery from the coronavirus shock. ‘I would say this very strong, very powerful guidance shows both our confidence and our determination,’ he told reporters… ‘It shows our confidence that we can reach this goal and our determination to do so.’”
September 15 – Reuters (David Morgan, Ann Saphir and Jonnelle Marte): “Judy Shelton, U.S. President Donald Trump’s controversial pick to serve on the Federal Reserve’s interest-rate-setting panel, does not currently have the votes to win confirmation in the U.S. Senate, Republican Senator John Thune said… ‘We’re still working it,’ Thune told reporters… ‘She’s a priority for the White House. It’s the Federal Reserve. It’s important. So, obviously, we want to get it done. But we’re not going to bring it up until we have the votes to confirm her.’”
U.S. Bubble Watch:
September 17 – Reuters (Lucia Mutikani): “The number of Americans filing new claims for unemployment benefits fell less than expected last week and applications for the prior period were revised up, suggesting the labor market recovery had shifted into low gear amid fading fiscal stimulus. The weekly jobless claims report… also showed nearly 30 million people were on unemployment benefits at the end of August.”
September 16 – CNBC (Anjali Sundaram): “Yelp… released its latest Economic Impact Report, revealing business closures across the U.S. are increasing as a result of the coronavirus pandemic’s economic toll. As of Aug, 31, 163,735 businesses have indicated on Yelp that they have closed. That’s down from the 180,000 that closed at the very beginning of the pandemic. However, it actually shows a 23% increase in the number of closures since mid-July. In addition to monitoring closed businesses, Yelp also takes into account the businesses whose closures have become permanent. That number has steadily increased throughout the past six months, now reaching 97,966, representing 60% of closed businesses that won’t be reopening.”
September 16 – Reuters (Lucia Mutikani): “U.S. consumer spending slowed in August, with a key retail sales gauge unexpectedly declining, as extended unemployment benefits were cut for millions of Americans, offering more evidence that the economic recovery from the COVID-19 recession was faltering… Retail sales excluding automobiles, gasoline, building materials and food services dipped 0.1% last month after a downwardly revised 0.9% increase in July. These so-called core retail sales, which correspond most closely with the consumer spending component of gross domestic product, were previously reported to have advanced 1.4% in July.”
September 15 – Bloomberg (Katia Dmitrieva): “Over the past decade, during an economic expansion that benefited most Americans, the richest made out the best. The top 5% of households -- those making $451,122 on average last year -- have seen their inflation-adjusted incomes jump 28% since 2009, according to… the Census Bureau… The gain -- which helped push inequality to the widest in decades -- compares with a mere 11% rise for the bottom 20%, whose income rose to about $15,290 from roughly $13,800 a decade ago. Those in the middle groups -- who made between $40,600 and $111,100 last year -- saw their incomes rise between 16% to 18%...”
September 14 – Bloomberg (Catarina Saraiva): “The U.S. economic recovery is wildly uneven. More than 13 million Americans are unemployed. At the same time, many others have been able to work from home and some are actually richer -- thanks to a surging stock market and housing boom. This conflict has been dubbed the ‘K-shaped’ recovery. And it’s exacerbating racial, wealth, social and gender disparities, according to Peter Atwater, an adjunct lecturer at William and Mary, a university in Virginia, who has popularized the term.”
September 15 – Reuters (Imani Moise and David Henry): “Executives at the top U.S. banks warned investors this week that 2020 revenue will be lower than expected due to weak loan demand and an uptick in repayments during the coronavirus pandemic. Bank of America… said it found little appetite for new loans when it surveyed its corporate clients twice this year. ‘Most of them are saying, ‘We don’t need money,’’ CEO Brian Moynihan said… ‘We tended not to believe them, honestly.’”
September 16 – Bloomberg (Nicholas Comfort): “Job losses at banks this year are on course to be the deepest in half a decade. After a pause during lockdown, lenders from Citigroup Inc. to HSBC… have restarted cuts, taking gross losses announced this year to a combined 63,785 jobs, according to a Bloomberg analysis of filings. That puts the industry on track to exceed the almost 80,000 disclosed last year, the biggest retrenchment since 2015.”
September 17 – New York Times (Stacy Cowley): “In March, when the Boston restaurateur Garrett Harker and his partners shut down their seven restaurants after Massachusetts issued lockdown orders, Mr. Harker assumed the closures would be painful but temporary. Six months later, three of Mr. Harker’s restaurants… remain shuttered. Mr. Harker and his landlord for those three restaurants are in a standoff: He can’t afford to pay the six-figure arrears he has accrued while his restaurants remain shut, and the landlord, he said, has refused to grant a deferral or discount. We’re probably going to lose money for another year to a year and a half,’ Mr. Harker said. ‘It doesn’t work financially to reopen without a new lease.’ Similar sagas are playing out nationwide, as Main Street businesses — especially music clubs, gyms, restaurants, bars and others that were forced to close by the coronavirus pandemic — try to figure out how, or if, they can dig out of debt.”
September 17 – Wall Street Journal (Katherine Riley): “Six months after coronavirus lockdown orders closed workplaces across the country, most offices in the U.S. are still quiet. Data from Brivo, a company that provides access-control systems for workplaces, shows that ‘unlocks’ at offices—when someone uses their credentials to enter an office—in late August were down 51% from the end of February. By comparison, visits to manufacturing and warehouse locations, where fewer jobs can be done remotely, remained down by a third.”
September 15 – Financial Times (Derek Brower): “North American shale producers far outspent their revenue in the second quarter despite making deep spending cuts to survive the worst oil price crash in decades. Operators idled rigs, sacked workers and even stopped producing oil as the coronavirus pandemic hit global energy demand and sent US crude prices below zero in April — but it was all ‘too little, too late’, analysts at the Institute for Energy Economics and Financial Analysis said.. The 34 shale oil and gas producers in the IEEFA study spent $3.3bn more on drilling and other projects during the second quarter than they earned by selling oil and gas, the sector’s worst performance in years…”
September 16 – Reuters (C. Nivedita and Joshua Franklin): “Snowflake Inc’s shares more than doubled in their New York Stock Exchange debut…, a day after the Warren Buffett-backed data warehouse company raised more than $3 billion in the largest U.S. listing of the year thus far. Snowflake’s spectacular market debut reflects the hearty appetite for new stocks, as low interest rates drive investors into equities. The market overlooked Snowflake’s losses, focusing on the prospects of its software business of data sharing on cloud systems…”
Fixed Income Watch:
September 16 – Wall Street Journal (Orla McCaffrey): “People are taking out lots of mortgages. The Fed is gobbling them up. Low mortgage rates have spurred a boom in home refinancing, which in turn has spurred a boom in the issuance of mortgage-backed securities. The value of single-family mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac totaled almost $322 billion in August, a new monthly record, according to… Inside Mortgage Finance. Still, the surging supply of mortgage-backed securities hasn’t dampened investors’ demand for them. Yields for the securities have held relatively steady in recent months and even declined slightly, a sign of investors’ continued demand. Much of the demand for mortgage securities comes from the Federal Reserve itself, which said in March it would purchase an essentially unlimited amount of mortgage bonds…”
September 15 – Bloomberg (Danielle Moran): “State and local governments haven’t sold this many taxable bonds in a decade. The sellers have issued $92 billion in debt subject to federal income taxes so far this year… That’s almost a third of all the long-term municipal bonds sold in 2020 and is the most since 2010, when the Build America Bond program sunset at the end of that year. ‘I’m astonished at the pace of taxable municipal bond sales,’ said Kathleen McNamara, a senior municipal strategist at UBS’s wealth management arm.”
September 15 – Bloomberg (Christopher Maloney): “Almost twice the percentage of Ginnie Mae borrowers have demanded forbearance compared to conventional ones, according to a Mortgage Bankers Association report… Mortgages in forbearance have dropped to just over 7% of the overall universe, the lowest since April. However, Ginnie Mae has a higher share of those - 9.1% versus 4.6% for conventional mortgages backed by Fannie Mae and Freddie Mac…”
September 16 – Financial Times (Joe Rennison): “Private equity groups including TPG and Apax Partners are taking advantage of blockbuster demand for corporate debt by loading companies they own with fresh loans and using the cash to award themselves a bumper payday. So-called dividend recapitalisations have become a feature of the loan market in recent weeks, ringing alarm bells since they come on top of already high leverage and weak investor protections and against a backdrop of economic uncertainty. So far in September, almost 24% of money raised in the US loan market has been used to fund dividends to private equity owners, up from an average of less than 4% over the past two years. That would be the highest proportion since the beginning of 2015, according to… S&P Global Market Intelligence.”
September 14 – Bloomberg (Martin Z Braun): “Even as America’s states and cities brace for hundreds of billions of dollars tax collections to disappear, the two biggest credit-rating companies have been slow to downgrade municipal debt amid increasing risk for the $3.9 trillion market. Since the pandemic raced through the U.S., S&P Global Ratings Inc. and Moody’s… have downgraded about 1% of the municipal borrowers they rate, even as sports stadiums close, college towns and dormitories are emptied after some campuses canceled in-person classes, and the steep drop in travel batters airports and tourism-driven cities. Halfway through September, Moody’s has cut the ratings of about 125 of the approximately 12,000 public finance entities it tracks, 90 fewer than the second and third quarters of 2018…”
China Watch:
September 15 – Reuters (Gabriel Crossley): “China’s foreign ministry said… U.S. import bans on some products from China’s Xinjiang region were sabotaging global supply chains. The Trump administration moved on Monday to block U.S. imports of cotton, apparel and other products from five entities in western China’s Xinjiang region.”
September 14 – Reuters (Gabriel Crossley and Kevin Yao): “China’s industrial output accelerated the most in eight months in August, while retail sales grew for the first time this year… An annual decline in fixed-asset investment over January-August also moderated thanks to expanded stimulus from Beijing, but authorities remain wary about the outlook given heightened external risks, including from intensifying Sino-U.S. tensions… Retail sales also beat analysts’ forecast with a 0.5% rise on-year, snapping a seven-month downturn and bettering expectations for zero growth… Auto sales rose 11.8% in August year-on-year while sales of telecoms products jumped 25.1%...”
September 13 – Reuters (Lusha Zhang, Roxanne Liu and Ryan Woo): “New home prices in China rose at a slightly faster monthly pace in August, as consumer demand showed signs of picking up in a boost to an economy recovering from the coronavirus crisis. Average new home prices in 70 major cities climbed 0.6% in August from a month earlier, a touch better than a 0.5% increase in July… On an annual basis, home prices rose 4.8% in August, matching July’s pace.”
September 16 – Reuters (Alun John): “Investment between the United States and China tumbled to a nine-year low in the first half of 2020, hit by bilateral tensions that could see more Chinese companies come under pressure to divest U.S. operations, a research report said. Investment, both direct investment by companies and venture capital flows, between the two countries fell 16.2% to $10.9 billion in January-June from the same period a year earlier - also hurt by the coronavirus pandemic, according to… Rhodium Group. That’s a far cry from half-yearly totals of nearly $40 billion seen in 2016 and 2017.”
September 16 – Reuters: “China’s ruling Communist Party is demanding a show of greater loyalty from the sprawling private sector as the world’s second-largest economy grapples with growing external risks, from open U.S. hostility to the coronavirus pandemic. In recent years, the party has sought to tighten its grip on private businesses, by taking stakes in non-state enterprises or installing officials in large firms… Citing rising risks and diversified values and interests among entrepreneurs, the party issued guidelines late on Tuesday advising private firms how to position themselves politically.”
Central Bank Watch:
September 12 – Bloomberg (Simon Kennedy and Samuel Dodge): “Global central bankers are discovering that monetary policies they once viewed as unconventional and temporary are now proving to be conventional and long-lasting. Forced to think outside the box by the 2008 financial crisis and then again this year by the coronavirus pandemic, the Federal Reserve, European Central Bank and most of their international counterparts have become more aggressive and innovative than ever in defending their economies from recession and the threat of deflation. Recent months witnessed a return not just of policies first used on a widescale basis following the collapse of Lehman Brothers Holdings Inc., such as quantitative easing, but the adoption of even more esoteric ones.”
September 16 – Reuters (Marc Jones): “Emerging market central banks could risk their reputations, sovereign credit ratings and even full-blown economic crises if their bond buying is pursued beyond the coronavirus crisis, S&P Global said… Top S&P analysts said… that although there was no indication that investors had lost faith in the central banks of India, Indonesia or the Philippines, risks would rise if post-pandemic sovereign debt purchases looked likely. ‘Pushed too far... the programmes may impair the ability of central banks to respond to future crises, with rating implications for the respective sovereigns,’ the report said.”
September 16 – Reuters (Sam Holmes and Jacqueline Wong): “The Bank of Japan will monitor not just inflation trends but job growth in guiding policy, its governor Haruhiko Kuroda said, signalling the BOJ’s readiness to ramp up stimulus if job losses from the coronavirus crisis heighten the risk of deflation.”
EM Watch:
September 15 – Bloomberg (Kartik Goyal, Hooyeon Kim and Livia Yap): “Bond investors in three of Asia’s biggest emerging markets are starting to push back against record increases in government borrowing, an ominous sign for policy makers trying to revive economic growth with fiscal stimulus. In India, dwindling appetite for sovereign bonds drove yields to their biggest increase in more than two years last month while Indonesia’s latest bond auction drew the fewest bids since April. Rates in South Korea have surged to the highest level in five months. As governments globally sell sovereign bonds faster than central banks can buy them, the warning signs from Mumbai to Seoul underscore the challenge to markets everywhere from ever-increasing debt.”
September 14 – Reuters (Karen Lema): “The coronavirus pandemic will cause economic output in ‘developing Asia’ to shrink for the first time in nearly six decades in 2020 before it bounces back next year, the Asian Development Bank said… ‘Developing Asia’, which groups 45 countries in Asia-Pacific, is expected to contract 0.7% this year…, forecasting the first negative quarterly figure since 1962. The ADB’s previous forecast in June had reckoned on 0.1% growth. For 2021, the region is forecast to recover and grow 6.8%, still below pre-COVID-19 predictions, the ADB said…”
September 16 – Bloomberg (Divya Patil and Anil Poonia): “The health of India’s shadow banks remained resilient in August, suggesting that record stimulus steps by the nation’s authorities are helping the crisis-hit sector ride out the pandemic. Premiums on non-bank lenders’ bonds narrowed to a two-year low… Three other indicators compiled by Bloomberg, covering areas including liquidity and share performance, stayed steady from the previous month, with two at levels indicating strength. India’s non-bank lending sector was hit by a crisis in 2018 when a large financier unexpectedly defaulted, and the nation now needs it to stay healthy in order to prevent gross domestic product from shrinking further.”
September 15 – Bloomberg (Archana Chaudhary and Siddhartha Singh): “India plans to introduce a new law banning trade in cryptocurrencies, placing it out of step with other Asian economies which have chosen to regulate the fledgling market. The bill is expected to be discussed shortly by the federal cabinet before it is sent to parliament… The federal government will encourage blockchain, the technology underlying cryptocurrencies, but is not keen on cryptocurrency trading…”
September 14 – Wall Street Journal (David Gauthier-Villars and Caitlin Ostroff): “Turks are piling into gold, long their favorite investment, as the country’s financial system unravels. When the Grand Bazaar in Istanbul, one of the world’s oldest marketplaces and a major gold-trading hub, reopened its doors in early June following coronavirus-related shutdowns, long queues formed in front of gold outlets and jewelers as telephone orders poured in from all over the country, according to traders and salesmen. ‘I’ve been at the Bazaar for 20 years and I had never experienced that,’ said Ozgur Anik, general manager of Ozak Precious Metals AS. ‘When gold prices are at record high, people normally sell their gold. This time, they kept buying more.’”
Europe Watch:
September 16 – Reuters (Riham Alkousaa): “European car registrations dropped in July and August but not as steeply as in previous months…, pointing to a slow recovery in Europe’s auto sector that was hit hard by the coronavirus crisis. In July, new car registrations dropped by 3.7% year-on-year to 1,281,740 vehicles in the European Union, Britain and the European Free Trade Association (EFTA) countries…”
Japan Watch:
September 16 – Associated Press (Mari Yamaguchi): “Japan’s Parliament elected Yoshihide Suga as prime minister…, replacing long-serving leader Shinzo Abe with his right-hand man. Suga bowed deeply several times when the results were announced, as fellow governing party lawmakers applauded in parliament’s more powerful lower house. He was also confirmed in the upper house. Suga, who was chief Cabinet secretary and the top government spokesman under Abe, selected a Cabinet with a mix of fresh faces and current or former ministers, a lineup that suggests a continuation of Abe’s influence while reflecting Suga’s pledge of administrative reforms.”
September 12 – Reuters (Leika Kihara and Antoni Slodkowski): “Japan’s Chief Cabinet Secretary Yoshihide Suga, who is set to become prime minister this week, said… there was no limit to the amount of bonds the government can issue to support an economy hit by the coronavirus pandemic.”
September 15 – Reuters (Daniel Leussink): “Japan’s manufacturers remained pessimistic for the 14th straight month in September, and though the gloom eased somewhat the broad results of the Reuters Tankan survey pointed to a painfully slow recovery for the coronavirus-stricken economy… The Reuters Tankan sentiment index for manufacturers inched up to minus 29 in September from minus 33 in the previous month, still deeply pessimistic even though it marked the least gloomiest level in six months.”
September 14 – Wall Street Journal (Peter Landers): “Yoshiyuki Kasai, longtime boss of Japan’s biggest bullet-train line, says he thinks Tokyo’s alliance with the U.S. comes first and China needs to hear that message. If Beijing doesn’t like it, he says, tough luck. Hiroaki Nakanishi, head of Japan’s most powerful business federation, says he thinks that attitude is self-defeating. After all its work to build ties with China, Tokyo should play nice where it can, he says. The clashing views of two top executives, each a political heavyweight, suggest the challenge for Japan’s next prime minister in navigating the tensions between the U.S. and China.”
Leveraged Speculation Watch:
September 15 – Bloomberg (Katherine Burton): “Ray Dalio is having a very bad year. So very bad, in fact, that the billionaire risks losing his coveted title as king of hedge funds. Dalio’s $148 billion Bridgewater Associates has run up hefty losses this year, even as rivals have minted money in the topsy-turvy markets. The damage as of August: an 18.6% drop in the flagship Pure Alpha II fund. Those losses, the worst in a decade, top a sprawling list of troubles that has plunged Bridgewater into a round of crisis management, according to more than 25 people with knowledge of the firm’s inner workings.”
Geopolitical Watch:
September 18 – Financial Times (Kathrin Hille and Christian Shepherd): “China sharply escalated tensions in the Taiwan Strait on Friday, approaching Taiwan with multiple jets at three different locations just as the country’s president was about to receive a senior US government official. The incursions raise further concern that Taiwan has become a flashpoint for intensifying US-China rivalry. Taiwan’s ministry of defence said the People’s Liberation Army Air Force crossed the Taiwan Strait median line and entered the country’s air defence buffer zone with two H-6 bombers and 16 fighters. Taiwan’s air force ‘scrambled fighters and deployed [its] air defence missile system to monitor the activities’, the ministry said.”
September 16 – Reuters: “Chinese military drills off Taiwan’s southwest coast last week were a ‘necessary action’ to protect China’s sovereignty, Beijing said…, after Taiwan complained the large-scale air and naval exercises were a serious provocation. China, which claims democratic Taiwan as its own, has stepped up military activities near the island, in what Taiwan views as intimidation to force it to accept Chinese rule.”
September 16 – Financial Times (Demetri Sevastopulo and Kathrin Hille): “The Trump administration plans to sell billions of dollars of weapons to Taiwan to help the country defend itself amid concerns that China could use military force against it. The deal would be worth $7bn… That would make it the second biggest package of weapons provided to Taiwan by the US following an $8bn arms deal agreed last year. Donald Trump has taken an increasingly tough stance against China, from its human rights abuses in Xinjiang and a clamp down on pro-democracy protests in Hong Kong to military activity in the South China Sea.”
September 15 – Financial Times (James Kynge, Kathrin Hille, Christian Shepherd and Amy Kazmin): “China’s southern and eastern reaches are ringed with anxiety, raising fears of conflict sparked by miscalculation or even by design. The potential flashpoints are familiar: Taiwan; disputed islands in the South China and East China Seas; and India’s Himalayan border. What is unusual is that tensions have risen in unison and some commentators have warned that there are risks of military flare-ups potentially involving the US. ‘Since China and the United States are nuclear powers, the risk of a direct war between the two countries is still very small, but small-scale military conflicts do happen,’ said Yan Xuetong at Tsinghua University, one of China’s most influential academics.”
September 15 – Bloomberg (Sudhi Ranjan Sen): “India’s defense minister told parliament… the current border tensions with neighbor China were serious and the result of Beijing’s violations of boundary agreements. Rajnath Singh told lawmakers the situation was tense ‘both in terms of troops involved and number of friction points’ but India wanted to pursue dialog for a peaceful resolution of the conflict that has been simmering since May.”
The S&P500 slipped 0.6% (up 2.7% y-t-d), while the Dow was little changed (down 3.1%). The Transports gained 1.3% (up 4.9%), while the Utilities declined 0.8% (down 8.5%). The Banks were about unchanged (down 32.7%), while the Broker/Dealers increased 0.6% (down 1.9%). The S&P 400 Midcaps increased 0.6% (down 9.6%), and the small cap Russell 2000 jumped 2.6% (down 7.9%). The Nasdaq100 fell 1.4% (up 25.2%). The Semiconductors gained 1.2% (up 16.8%). The Biotechs surged 4.2% (up 5.9%). With bullion gaining $10, the HUI gold index added 0.4% (up 41.7%).
Three-month Treasury bill rates ended the week at 0.08%. Two-year government yields added a basis point to 0.14% (down 143bps y-t-d). Five-year T-note yields rose three bps to 0.28% (down 141bps). Ten-year Treasury yields gained three bps to 0.70% (down 122bps). Long bond yields gained four bps to 1.45% (down 94bps). Benchmark Fannie Mae MBS yields jumped nine bps to 1.44% (down 127bps).
Greek 10-year yields fell four bps to 1.07% (down 36bps y-t-d). Ten-year Portuguese yields declined three bps to 0.30% (down 14bps). Italian 10-year yields dipped two bps to 0.96% (down 45bps). Spain's 10-year yields declined two bps to 0.29% (down 18bps). German bund yields were little changed at negative 0.485% (down 30bps). French yields fell three bps to negative 0.22% (down 34bps). The French to German 10-year bond spread narrowed three to about 26 bps. U.K. 10-year gilt yields were unchanged at 0.18% (down 64bps). U.K.'s FTSE equities index declined 0.4% (down 20.4%).
Japan's Nikkei Equities Index slipped 0.2% (down 1.3% y-t-d). Japanese 10-year "JGB" yields declined one basis point to 0.02% (up 3bps y-t-d). France's CAC40 fell 1.1% (down 16.7%). The German DAX equities index declined 0.7% (down 1.0%). Spain's IBEX 35 equities index slipped 0.2% (down 27.4%). Italy's FTSE MIB index fell 1.5% (down 16.9%). EM equities were mixed. Brazil's Bovespa index was little changed (down 15.0%), while Mexico's Bolsa declined 0.9% (down 17.3%). South Korea's Kospi index increased 0.7% (up 9.8%). India's Sensex equities index was unchanged (down 5.8%). China's Shanghai Exchange rallied 2.4% (up 9.4%). Turkey's Borsa Istanbul National 100 index gained 0.8% (down 2.8%). Russia's MICEX equities index jumped 1.4% (down 3.1%).
Investment-grade bond funds saw inflows of $5.168 billion, and junk bond funds posted positive flows of $526 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates added a basis point to 2.87% (down 86bps y-o-y). Fifteen-year rates declined two bps to a record low 2.35% (down 86bps). Five-year hybrid ARM rates sank 15 bps to 2.96% (down 53bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down seven bps to 3.04% (down 112bps).
Federal Reserve Credit last week jumped $23.2bn to $6.991 TN. Over the past year, Fed Credit expanded $3.241 TN, or 86%. Fed Credit inflated $4.181 Trillion, or 149%, over the past 410 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week rose $8.1bn to $3.407 TN. "Custody holdings" were down $60.2bn, or 1.7%, y-o-y.
M2 (narrow) "money" supply surged $112.2bn last week to a record $18.577 TN, with an unprecedented 28-week gain of $3.069 TN. "Narrow money" surged $3.595 TN, or 24%, over the past year. For the week, Currency increased $1.2bn. Total Checkable Deposits declined $12.4bn, while Savings Deposits jumped $139bn. Small Time Deposits fell $5.7bn. Retail Money Funds declined $9.9bn.
Total money market fund assets dropped $51.9bn to $4.416 TN. Total money funds surged $1.014 TN y-o-y, or 30%.
Total Commercial Paper dropped $26.0bn to $984bn. CP was down $110bn, or 10.1% year-over-year.
Currency Watch:
September 15 – Bloomberg (Katherine Burton and Erik Schatzker): “The dollar’s decades-long position as the global reserve currency is in jeopardy because of steps the U.S. has taken to support its economy during the Covid-19 pandemic, according to Ray Dalio… While equities and gold benefited from the trillions of dollars in fiscal spending and monetary injections, those efforts are debasing the currency and have raised the possibility that the U.S. will go too far in testing the limits of government stimulus, Dalio said… ‘There is so much debt production and debt monetization,’ Dalio said.”
September 15 – Reuters: “China’s central bank on Wednesday lifted its official yuan midpoint the most in five months to the strongest level since May 2019, following a sharp rally in the spot market a day earlier.”
September 16 – Bloomberg (Tian Chen): “China’s policy makers are in no rush to rein in a rapid advance in the yuan, as traders push the currency toward its largest quarterly rally on record. The yuan has strengthened 4.5% since the end of June to 6.7566 per dollar, set for the biggest ever quarterly gain in Bloomberg data going back to 1981.”
For the week, the U.S. dollar index declined 0.4% to 92.926 (down 3.7% y-t-d). For the week on the upside, the South African rand increased 2.5%, the South Korean won 2.3%, the Japanese yen 1.5%, the New Zealand dollar 1.4%, the British pound 1.0%, the Mexican peso 0.7%, the Singapore dollar 0.6%, the Swedish krona 0.1% and the Australian dollar 0.1%. For the week on the downside, the Brazilian real declined 1.3%, the Norwegian krone 0.6%, the Swiss franc 0.3%, the Canadian dollar 0.2%, and the euro 0.1%. The Chinese renminbi increased 0.96% versus the dollar this week (up 2.87% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index gained 2.0% (down 9.8% y-t-d). Spot Gold added 0.5% to $1,951 (up 28.5%). Silver gained 1.0% to $27.129 (up 51.4%). WTI crude surged $3.78 to $41.11 (down 33%). Gasoline jumped 12.9% (down 27%), while Natural Gas sank 9.7% (down 6.4%). Copper rose 2.5% (up 11.4%). Wheat jumped 6.1% (up 3%). Corn gained 2.7% (down 2%).
Coronavirus Watch:
September 17 – Forbes (Tommy Beer): “Nearly half of all Americans, including a majority of Republicans, say they definitely or probably would not get the Covid-19 vaccine if it were available today, according to a new poll, the latest sign of fear and uncertainty as President Trump promises a fast vaccine and his own health officials warn it could take many more months for one to be ready… The new national survey by Pew Research Center, conducted Sept. 8-13 among 10,093 U.S. adults…, finds Americans’ intent to get a coronavirus vaccine has diminished significantly across all major political and demographic groups.”
September 17 – NPR (Marisa Penaloza): “The World Health Organization warned… weekly coronavirus case numbers are rising in Europe at a higher rate than during the pandemic's peak in March. At a virtual news conference, Dr. Hans Kluge, regional director of WHO in Europe, warned, ‘We do have a very serious situation unfolding before us.’ ‘Weekly cases have exceeded those reported when the pandemic first peaked in Europe in March," he said. ‘Last week, the region's weekly tally exceeded 300,000 patients.’”
September 17 – Reuters (Holly Ellyatt): “A dramatic rise in new coronavirus cases in Europe has been characterized as a ‘wake up call’ by the World Health Organisation’s top official in Europe. ‘We have a very serious situation unfolding before us,’ WHO’s regional director for Europe, Hans Kluge, said… ‘Weekly cases have now exceeded those reported when the pandemic first peaked in Europe in March.’ He said that, last week, the region’s weekly tally exceeded 300,000 patients. ‘More than half of European countries have reported a greater-than-10% increase in cases in the past two weeks. Of those, seven countries have seen newly reported cases increase more than two-fold in the same period,’ he added.”
September 15 – Reuters (Lisa Shumaker): “The World Health Organization reported a record one-day increase in global coronavirus cases on Sunday, with the total rising by 307,930 in 24 hours. The biggest increases were from India, the United States and Brazil…”
Market Instability Watch:
September 15 – Bloomberg (Ksenia Galouchko): “U.S. technology stocks are the world’s most crowded trade, say fund managers overseeing $601 billion, fueling fears about a bubble that could burst the market rally. Investors surveyed by Bank of America Corp. have never been so unanimous in their conviction on the most popular asset class, with 80% of participants citing long U.S. tech, up from 59% in August. Among the market’s biggest tail risks, concerns about a tech bubble jumped to be ranked behind only a resurgence in Covid-19.”
September 15 – Reuters (Herbert Lash): “Too many investors have piled into U.S. technology stocks, making the sector the most ‘crowded trade’ of all time and difficult to unwind, while a tech bubble is the biggest risk after an expected second wave from the COVID-19 pandemic, a BofA Securities survey of fund managers said… Institutional investors are ‘rotating’ into cyclical stocks and not ‘chasing’ momentum since the rally from March lows, while a majority now say there’s a new bull market compared to one-quarter in May, the survey found.”
September 13 – Wall Street Journal (Gregory Zuckerman and Gunjan Banerji): “Investors are trading stock options and chasing fast-rising shares at record rates, activity that’s expected to jolt markets through the coming election. A surge in options trading targeted at giant tech stocks by both small and large investors is magnifying the market’s ups and downs. Investors are also simply buying shares that are going up, a strategy that can create its own wild swings in the market. ‘It’s really exploded to a level I haven’t seen,’ said Brent Kochuba, founder of data firm SpotGamma, which tracks derivatives positioning.”
September 14 – Bloomberg (Claire Ballentine): “As the crowd of day traders rushed to buy the dip, a triple-leveraged ETF that tracks the Nasdaq 100 notched its best streak of inflows on record. The $7.8 billion ProShares UltraPro QQQ (TQQQ) exchange-traded fund attracted more than $1.5 billion in the past eight days, the most for such a span since it began trading in 2010…”
September 14 – Reuters (Marc Jones): “There is growing ‘daylight’ between stock markets and other risky financial market asset classes and the reality of a global economy sapped by COVID-19, the Bank for International Settlements said in its quarterly report… ‘Based on a broad set of indicators, it is hard not to see a certain amount of daylight between risky asset prices and economic prospects,’ Claudio Borio, Head of the BIS Monetary and Economic Department, said. ‘We don't really know exactly how the tensions are going to be resolved. There is quite a lot of uncertainty about how the virus will evolve and that will have big implications for financial markets and policy in general,’ Borio added.”
Global Bubble Watch:
September 17 – Financial Times (Leslie Hook): “The worst wildfires in US history, Arctic sea ice trending towards a historic low, simultaneous hurricanes in the Atlantic Ocean and the hottest summer in the northern hemisphere since records began: scientists say this year’s sequence of natural disasters and record temperatures have exceeded their worst fears. ‘We were speculating 40 years ago about things that might happen, and I don’t think that any of us expected that in our lifetimes, we would see these things unfolding,’ said Chris Rapley, a 73-year-old professor of climate science at University College London. ‘It has become a real problem of today, rather than a predicted problem of tomorrow.’”
September 15 – Reuters (Sujata Rao): “Global M&A volumes are approaching $2 trillion for 2020, with technology making up almost a fifth of the total after mammoth deals such as SoftBank’s $40 billion sale of chipmaker Arm. Dealmaking has stepped up a gear in September… Others are coming thick and fast… Such waves are characteristic after downturns, but Refinitiv data shows 2020’s $1.97 trillion total of deals announced so far exceeds $1.26 trillion and $1.6 trillion during the same period in 2009 and 2010 respectively, after the 2008 financial crisis.”
September 13 – Financial Times (Joe Rennison): “The onset of coronavirus — and the drastic policy response from central banks — has produced an army of companies limping along in the twilight between the living and the dead. A decade of low interest rates had already sustained a rising number of companies that were able to borrow cheaply and amble on with operating profits that fell short of the interest needed to pay their lenders. Now, the bond binge that followed the depths of the Covid-19 crisis in March has accelerated that trend, giving rise to a new generation of these so-called corporate zombies. At the end of last year, 13% of companies in the Leuthold 3000 Universe index — akin to the Russell 3000 index of US companies — had staggered along for at least three years with a repayments shortfall, up from 8% at the end of 2008.”
September 14 – Bloomberg (Catherine Bosley): “Policy makers are facing the most economically challenging part of the Covid-19 crisis in avoiding the creation of ‘zombie’ companies, according to the Bank for International Settlements. Ultra-easy monetary and fiscal support is helping companies avoid a liquidity crunch after the pandemic closed down businesses and demand collapsed. But that stance bears risks longer-term, said Claudio Borio, head of the Basel-based institution’s Monetary and Economic Department. ‘There’s a delicate balance to be struck between on the one hand withdrawing it too early, which will obliviously have short-term costs in terms of economic activity, and withdrawing it too late, which will mean that it will not favor necessary structural adjustments,’ he said…”
September 15 – Reuters (Florence Tan, Roslan Khasawneh, Noah Browning and Laila Kearney): “Major oil industry producers and traders are forecasting a bleak future for worldwide fuel demand, due to the coronavirus pandemic’s ongoing assault on the global economy… ‘The outlook appears even more fragile ... the path ahead is treacherous amid surging COVID-19 cases in many parts of the world,’ the International Energy Agency warned in its monthly report…”
Trump Administration Watch:
September 16 – CNBC (Jacob Pramuk): “President Donald Trump urged Republicans… to embrace a larger coronavirus stimulus package, and a top White House aide showed more optimism about striking a deal with Democrats. In a tweet, the president told GOP lawmakers to ‘go for the much higher numbers’ in legislation designed to boost an economy and health-care system struggling under the weight of the pandemic. Many Republicans have embraced limited relief — or backed no new spending at all — as the major parties struggle to break a stalemate over a fifth relief bill.”
September 14 – CNBC (Thomas Franck): “Treasury Secretary Steven Mnuchin told CNBC… lawmakers should not allow fears over the size of the nation’s deficit or the Federal Reserve’s balance sheet to delay additional Covid-19 relief. Mnuchin, who with White House chief of staff Mark Meadows has led the administration’s Covid-19 relief negotiations, said the economic crisis warrants extraordinary stimulus from Congress and the Fed. ‘Now is not the time to worry about shrinking the deficit or shrinking the Fed balance sheet,’ Mnuchin told CNBC… ‘There was a time when the Fed was shrinking the balance sheet and coming back to normal. The good news is that gave them a lot of room to increase the balance sheet, which they did.’”
September 15 – Bloomberg (Bryce Baschuk): “The World Trade Organization’s ruling that the U.S. violated international regulations by imposing tariffs on more than $234 billion of Chinese exports failed to dissuade Washington of its ‘America First’ trade policy and will do little to alter the current trade environment. U.S. Trade Representative Robert Lighthizer said the WTO report… ‘confirmed’ President Donald Trump’s aggressive foreign policy that has sought to dismantle multilateral organizations like the Geneva-based trade body.”
Federal Reserve Watch:
September 17 – Bloomberg (Editorial Board): “Federal Reserve Chairman Jerome Powell has made his first policy announcement since unveiling the central bank’s new monetary strategy in August. Financial markets have plenty of questions about the plan, but Powell… provided no further answers, except to keep saying it would be ‘very powerful.’ That’s certainly questionable — but the fault isn’t Powell’s. With interest rates close to zero, there’s only so much the Fed can do, and only so much the chairman can do to pretend otherwise. The new strategy aims, in effect, to convince investors that the central bank will hold interest rates at zero for longer than it would have under the old approach, allowing inflation to rise above its long-term 2% target, even with the economy at full employment and following years of steady expansion.”
September 16 – Reuters (David Randall): “One key investor takeaway from Federal Reserve Chair Jerome Powell’s press conference…: This central bank is not going to break a sweat fretting about future asset bubbles. The Fed launched unprecedented support when the coronavirus pandemic hit the United States earlier this year, slashing interest rates and unleashing asset purchases which has pushed bond yields to lows and sent equity prices to record highs. Still, Powell said the decade-long U.S. economic expansion, which ran prior to the pandemic hitting growth, had included both quantitative easing and low interest rates but was ‘notable for the lack of the emergence of some sort of a financial bubble.’ ‘I don’t know that the connection between asset purchases and financial stability is a particular tight one,’ Powell said…”
September 16 – Financial Times (James Politi and Colby Smith): “The Federal Reserve has often said it would keep monetary policy loose for years to come in response to the coronavirus pandemic. On Wednesday, it tried to flesh out what that would mean in practice — and received mixed reviews. The US central bank said interest rates would not rise in the world’s largest economy until it reaches full employment and inflation hits 2% and remains on track to ‘moderately exceed’ that target ‘for some time’. The guidance reflected the Fed’s announcement last month of a new long-term monetary policy that abandoned pre-emptive rate rises to stymie inflation, and was touted by Jay Powell, Fed chair, as an additional step to boost the economic recovery from the coronavirus shock. ‘I would say this very strong, very powerful guidance shows both our confidence and our determination,’ he told reporters… ‘It shows our confidence that we can reach this goal and our determination to do so.’”
September 15 – Reuters (David Morgan, Ann Saphir and Jonnelle Marte): “Judy Shelton, U.S. President Donald Trump’s controversial pick to serve on the Federal Reserve’s interest-rate-setting panel, does not currently have the votes to win confirmation in the U.S. Senate, Republican Senator John Thune said… ‘We’re still working it,’ Thune told reporters… ‘She’s a priority for the White House. It’s the Federal Reserve. It’s important. So, obviously, we want to get it done. But we’re not going to bring it up until we have the votes to confirm her.’”
U.S. Bubble Watch:
September 17 – Reuters (Lucia Mutikani): “The number of Americans filing new claims for unemployment benefits fell less than expected last week and applications for the prior period were revised up, suggesting the labor market recovery had shifted into low gear amid fading fiscal stimulus. The weekly jobless claims report… also showed nearly 30 million people were on unemployment benefits at the end of August.”
September 16 – CNBC (Anjali Sundaram): “Yelp… released its latest Economic Impact Report, revealing business closures across the U.S. are increasing as a result of the coronavirus pandemic’s economic toll. As of Aug, 31, 163,735 businesses have indicated on Yelp that they have closed. That’s down from the 180,000 that closed at the very beginning of the pandemic. However, it actually shows a 23% increase in the number of closures since mid-July. In addition to monitoring closed businesses, Yelp also takes into account the businesses whose closures have become permanent. That number has steadily increased throughout the past six months, now reaching 97,966, representing 60% of closed businesses that won’t be reopening.”
September 16 – Reuters (Lucia Mutikani): “U.S. consumer spending slowed in August, with a key retail sales gauge unexpectedly declining, as extended unemployment benefits were cut for millions of Americans, offering more evidence that the economic recovery from the COVID-19 recession was faltering… Retail sales excluding automobiles, gasoline, building materials and food services dipped 0.1% last month after a downwardly revised 0.9% increase in July. These so-called core retail sales, which correspond most closely with the consumer spending component of gross domestic product, were previously reported to have advanced 1.4% in July.”
September 15 – Bloomberg (Katia Dmitrieva): “Over the past decade, during an economic expansion that benefited most Americans, the richest made out the best. The top 5% of households -- those making $451,122 on average last year -- have seen their inflation-adjusted incomes jump 28% since 2009, according to… the Census Bureau… The gain -- which helped push inequality to the widest in decades -- compares with a mere 11% rise for the bottom 20%, whose income rose to about $15,290 from roughly $13,800 a decade ago. Those in the middle groups -- who made between $40,600 and $111,100 last year -- saw their incomes rise between 16% to 18%...”
September 14 – Bloomberg (Catarina Saraiva): “The U.S. economic recovery is wildly uneven. More than 13 million Americans are unemployed. At the same time, many others have been able to work from home and some are actually richer -- thanks to a surging stock market and housing boom. This conflict has been dubbed the ‘K-shaped’ recovery. And it’s exacerbating racial, wealth, social and gender disparities, according to Peter Atwater, an adjunct lecturer at William and Mary, a university in Virginia, who has popularized the term.”
September 15 – Reuters (Imani Moise and David Henry): “Executives at the top U.S. banks warned investors this week that 2020 revenue will be lower than expected due to weak loan demand and an uptick in repayments during the coronavirus pandemic. Bank of America… said it found little appetite for new loans when it surveyed its corporate clients twice this year. ‘Most of them are saying, ‘We don’t need money,’’ CEO Brian Moynihan said… ‘We tended not to believe them, honestly.’”
September 16 – Bloomberg (Nicholas Comfort): “Job losses at banks this year are on course to be the deepest in half a decade. After a pause during lockdown, lenders from Citigroup Inc. to HSBC… have restarted cuts, taking gross losses announced this year to a combined 63,785 jobs, according to a Bloomberg analysis of filings. That puts the industry on track to exceed the almost 80,000 disclosed last year, the biggest retrenchment since 2015.”
September 17 – New York Times (Stacy Cowley): “In March, when the Boston restaurateur Garrett Harker and his partners shut down their seven restaurants after Massachusetts issued lockdown orders, Mr. Harker assumed the closures would be painful but temporary. Six months later, three of Mr. Harker’s restaurants… remain shuttered. Mr. Harker and his landlord for those three restaurants are in a standoff: He can’t afford to pay the six-figure arrears he has accrued while his restaurants remain shut, and the landlord, he said, has refused to grant a deferral or discount. We’re probably going to lose money for another year to a year and a half,’ Mr. Harker said. ‘It doesn’t work financially to reopen without a new lease.’ Similar sagas are playing out nationwide, as Main Street businesses — especially music clubs, gyms, restaurants, bars and others that were forced to close by the coronavirus pandemic — try to figure out how, or if, they can dig out of debt.”
September 17 – Wall Street Journal (Katherine Riley): “Six months after coronavirus lockdown orders closed workplaces across the country, most offices in the U.S. are still quiet. Data from Brivo, a company that provides access-control systems for workplaces, shows that ‘unlocks’ at offices—when someone uses their credentials to enter an office—in late August were down 51% from the end of February. By comparison, visits to manufacturing and warehouse locations, where fewer jobs can be done remotely, remained down by a third.”
September 15 – Financial Times (Derek Brower): “North American shale producers far outspent their revenue in the second quarter despite making deep spending cuts to survive the worst oil price crash in decades. Operators idled rigs, sacked workers and even stopped producing oil as the coronavirus pandemic hit global energy demand and sent US crude prices below zero in April — but it was all ‘too little, too late’, analysts at the Institute for Energy Economics and Financial Analysis said.. The 34 shale oil and gas producers in the IEEFA study spent $3.3bn more on drilling and other projects during the second quarter than they earned by selling oil and gas, the sector’s worst performance in years…”
September 16 – Reuters (C. Nivedita and Joshua Franklin): “Snowflake Inc’s shares more than doubled in their New York Stock Exchange debut…, a day after the Warren Buffett-backed data warehouse company raised more than $3 billion in the largest U.S. listing of the year thus far. Snowflake’s spectacular market debut reflects the hearty appetite for new stocks, as low interest rates drive investors into equities. The market overlooked Snowflake’s losses, focusing on the prospects of its software business of data sharing on cloud systems…”
Fixed Income Watch:
September 16 – Wall Street Journal (Orla McCaffrey): “People are taking out lots of mortgages. The Fed is gobbling them up. Low mortgage rates have spurred a boom in home refinancing, which in turn has spurred a boom in the issuance of mortgage-backed securities. The value of single-family mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac totaled almost $322 billion in August, a new monthly record, according to… Inside Mortgage Finance. Still, the surging supply of mortgage-backed securities hasn’t dampened investors’ demand for them. Yields for the securities have held relatively steady in recent months and even declined slightly, a sign of investors’ continued demand. Much of the demand for mortgage securities comes from the Federal Reserve itself, which said in March it would purchase an essentially unlimited amount of mortgage bonds…”
September 15 – Bloomberg (Danielle Moran): “State and local governments haven’t sold this many taxable bonds in a decade. The sellers have issued $92 billion in debt subject to federal income taxes so far this year… That’s almost a third of all the long-term municipal bonds sold in 2020 and is the most since 2010, when the Build America Bond program sunset at the end of that year. ‘I’m astonished at the pace of taxable municipal bond sales,’ said Kathleen McNamara, a senior municipal strategist at UBS’s wealth management arm.”
September 15 – Bloomberg (Christopher Maloney): “Almost twice the percentage of Ginnie Mae borrowers have demanded forbearance compared to conventional ones, according to a Mortgage Bankers Association report… Mortgages in forbearance have dropped to just over 7% of the overall universe, the lowest since April. However, Ginnie Mae has a higher share of those - 9.1% versus 4.6% for conventional mortgages backed by Fannie Mae and Freddie Mac…”
September 16 – Financial Times (Joe Rennison): “Private equity groups including TPG and Apax Partners are taking advantage of blockbuster demand for corporate debt by loading companies they own with fresh loans and using the cash to award themselves a bumper payday. So-called dividend recapitalisations have become a feature of the loan market in recent weeks, ringing alarm bells since they come on top of already high leverage and weak investor protections and against a backdrop of economic uncertainty. So far in September, almost 24% of money raised in the US loan market has been used to fund dividends to private equity owners, up from an average of less than 4% over the past two years. That would be the highest proportion since the beginning of 2015, according to… S&P Global Market Intelligence.”
September 14 – Bloomberg (Martin Z Braun): “Even as America’s states and cities brace for hundreds of billions of dollars tax collections to disappear, the two biggest credit-rating companies have been slow to downgrade municipal debt amid increasing risk for the $3.9 trillion market. Since the pandemic raced through the U.S., S&P Global Ratings Inc. and Moody’s… have downgraded about 1% of the municipal borrowers they rate, even as sports stadiums close, college towns and dormitories are emptied after some campuses canceled in-person classes, and the steep drop in travel batters airports and tourism-driven cities. Halfway through September, Moody’s has cut the ratings of about 125 of the approximately 12,000 public finance entities it tracks, 90 fewer than the second and third quarters of 2018…”
China Watch:
September 15 – Reuters (Gabriel Crossley): “China’s foreign ministry said… U.S. import bans on some products from China’s Xinjiang region were sabotaging global supply chains. The Trump administration moved on Monday to block U.S. imports of cotton, apparel and other products from five entities in western China’s Xinjiang region.”
September 14 – Reuters (Gabriel Crossley and Kevin Yao): “China’s industrial output accelerated the most in eight months in August, while retail sales grew for the first time this year… An annual decline in fixed-asset investment over January-August also moderated thanks to expanded stimulus from Beijing, but authorities remain wary about the outlook given heightened external risks, including from intensifying Sino-U.S. tensions… Retail sales also beat analysts’ forecast with a 0.5% rise on-year, snapping a seven-month downturn and bettering expectations for zero growth… Auto sales rose 11.8% in August year-on-year while sales of telecoms products jumped 25.1%...”
September 13 – Reuters (Lusha Zhang, Roxanne Liu and Ryan Woo): “New home prices in China rose at a slightly faster monthly pace in August, as consumer demand showed signs of picking up in a boost to an economy recovering from the coronavirus crisis. Average new home prices in 70 major cities climbed 0.6% in August from a month earlier, a touch better than a 0.5% increase in July… On an annual basis, home prices rose 4.8% in August, matching July’s pace.”
September 16 – Reuters (Alun John): “Investment between the United States and China tumbled to a nine-year low in the first half of 2020, hit by bilateral tensions that could see more Chinese companies come under pressure to divest U.S. operations, a research report said. Investment, both direct investment by companies and venture capital flows, between the two countries fell 16.2% to $10.9 billion in January-June from the same period a year earlier - also hurt by the coronavirus pandemic, according to… Rhodium Group. That’s a far cry from half-yearly totals of nearly $40 billion seen in 2016 and 2017.”
September 16 – Reuters: “China’s ruling Communist Party is demanding a show of greater loyalty from the sprawling private sector as the world’s second-largest economy grapples with growing external risks, from open U.S. hostility to the coronavirus pandemic. In recent years, the party has sought to tighten its grip on private businesses, by taking stakes in non-state enterprises or installing officials in large firms… Citing rising risks and diversified values and interests among entrepreneurs, the party issued guidelines late on Tuesday advising private firms how to position themselves politically.”
Central Bank Watch:
September 12 – Bloomberg (Simon Kennedy and Samuel Dodge): “Global central bankers are discovering that monetary policies they once viewed as unconventional and temporary are now proving to be conventional and long-lasting. Forced to think outside the box by the 2008 financial crisis and then again this year by the coronavirus pandemic, the Federal Reserve, European Central Bank and most of their international counterparts have become more aggressive and innovative than ever in defending their economies from recession and the threat of deflation. Recent months witnessed a return not just of policies first used on a widescale basis following the collapse of Lehman Brothers Holdings Inc., such as quantitative easing, but the adoption of even more esoteric ones.”
September 16 – Reuters (Marc Jones): “Emerging market central banks could risk their reputations, sovereign credit ratings and even full-blown economic crises if their bond buying is pursued beyond the coronavirus crisis, S&P Global said… Top S&P analysts said… that although there was no indication that investors had lost faith in the central banks of India, Indonesia or the Philippines, risks would rise if post-pandemic sovereign debt purchases looked likely. ‘Pushed too far... the programmes may impair the ability of central banks to respond to future crises, with rating implications for the respective sovereigns,’ the report said.”
September 16 – Reuters (Sam Holmes and Jacqueline Wong): “The Bank of Japan will monitor not just inflation trends but job growth in guiding policy, its governor Haruhiko Kuroda said, signalling the BOJ’s readiness to ramp up stimulus if job losses from the coronavirus crisis heighten the risk of deflation.”
EM Watch:
September 15 – Bloomberg (Kartik Goyal, Hooyeon Kim and Livia Yap): “Bond investors in three of Asia’s biggest emerging markets are starting to push back against record increases in government borrowing, an ominous sign for policy makers trying to revive economic growth with fiscal stimulus. In India, dwindling appetite for sovereign bonds drove yields to their biggest increase in more than two years last month while Indonesia’s latest bond auction drew the fewest bids since April. Rates in South Korea have surged to the highest level in five months. As governments globally sell sovereign bonds faster than central banks can buy them, the warning signs from Mumbai to Seoul underscore the challenge to markets everywhere from ever-increasing debt.”
September 14 – Reuters (Karen Lema): “The coronavirus pandemic will cause economic output in ‘developing Asia’ to shrink for the first time in nearly six decades in 2020 before it bounces back next year, the Asian Development Bank said… ‘Developing Asia’, which groups 45 countries in Asia-Pacific, is expected to contract 0.7% this year…, forecasting the first negative quarterly figure since 1962. The ADB’s previous forecast in June had reckoned on 0.1% growth. For 2021, the region is forecast to recover and grow 6.8%, still below pre-COVID-19 predictions, the ADB said…”
September 16 – Bloomberg (Divya Patil and Anil Poonia): “The health of India’s shadow banks remained resilient in August, suggesting that record stimulus steps by the nation’s authorities are helping the crisis-hit sector ride out the pandemic. Premiums on non-bank lenders’ bonds narrowed to a two-year low… Three other indicators compiled by Bloomberg, covering areas including liquidity and share performance, stayed steady from the previous month, with two at levels indicating strength. India’s non-bank lending sector was hit by a crisis in 2018 when a large financier unexpectedly defaulted, and the nation now needs it to stay healthy in order to prevent gross domestic product from shrinking further.”
September 15 – Bloomberg (Archana Chaudhary and Siddhartha Singh): “India plans to introduce a new law banning trade in cryptocurrencies, placing it out of step with other Asian economies which have chosen to regulate the fledgling market. The bill is expected to be discussed shortly by the federal cabinet before it is sent to parliament… The federal government will encourage blockchain, the technology underlying cryptocurrencies, but is not keen on cryptocurrency trading…”
September 14 – Wall Street Journal (David Gauthier-Villars and Caitlin Ostroff): “Turks are piling into gold, long their favorite investment, as the country’s financial system unravels. When the Grand Bazaar in Istanbul, one of the world’s oldest marketplaces and a major gold-trading hub, reopened its doors in early June following coronavirus-related shutdowns, long queues formed in front of gold outlets and jewelers as telephone orders poured in from all over the country, according to traders and salesmen. ‘I’ve been at the Bazaar for 20 years and I had never experienced that,’ said Ozgur Anik, general manager of Ozak Precious Metals AS. ‘When gold prices are at record high, people normally sell their gold. This time, they kept buying more.’”
Europe Watch:
September 16 – Reuters (Riham Alkousaa): “European car registrations dropped in July and August but not as steeply as in previous months…, pointing to a slow recovery in Europe’s auto sector that was hit hard by the coronavirus crisis. In July, new car registrations dropped by 3.7% year-on-year to 1,281,740 vehicles in the European Union, Britain and the European Free Trade Association (EFTA) countries…”
Japan Watch:
September 16 – Associated Press (Mari Yamaguchi): “Japan’s Parliament elected Yoshihide Suga as prime minister…, replacing long-serving leader Shinzo Abe with his right-hand man. Suga bowed deeply several times when the results were announced, as fellow governing party lawmakers applauded in parliament’s more powerful lower house. He was also confirmed in the upper house. Suga, who was chief Cabinet secretary and the top government spokesman under Abe, selected a Cabinet with a mix of fresh faces and current or former ministers, a lineup that suggests a continuation of Abe’s influence while reflecting Suga’s pledge of administrative reforms.”
September 12 – Reuters (Leika Kihara and Antoni Slodkowski): “Japan’s Chief Cabinet Secretary Yoshihide Suga, who is set to become prime minister this week, said… there was no limit to the amount of bonds the government can issue to support an economy hit by the coronavirus pandemic.”
September 15 – Reuters (Daniel Leussink): “Japan’s manufacturers remained pessimistic for the 14th straight month in September, and though the gloom eased somewhat the broad results of the Reuters Tankan survey pointed to a painfully slow recovery for the coronavirus-stricken economy… The Reuters Tankan sentiment index for manufacturers inched up to minus 29 in September from minus 33 in the previous month, still deeply pessimistic even though it marked the least gloomiest level in six months.”
September 14 – Wall Street Journal (Peter Landers): “Yoshiyuki Kasai, longtime boss of Japan’s biggest bullet-train line, says he thinks Tokyo’s alliance with the U.S. comes first and China needs to hear that message. If Beijing doesn’t like it, he says, tough luck. Hiroaki Nakanishi, head of Japan’s most powerful business federation, says he thinks that attitude is self-defeating. After all its work to build ties with China, Tokyo should play nice where it can, he says. The clashing views of two top executives, each a political heavyweight, suggest the challenge for Japan’s next prime minister in navigating the tensions between the U.S. and China.”
Leveraged Speculation Watch:
September 15 – Bloomberg (Katherine Burton): “Ray Dalio is having a very bad year. So very bad, in fact, that the billionaire risks losing his coveted title as king of hedge funds. Dalio’s $148 billion Bridgewater Associates has run up hefty losses this year, even as rivals have minted money in the topsy-turvy markets. The damage as of August: an 18.6% drop in the flagship Pure Alpha II fund. Those losses, the worst in a decade, top a sprawling list of troubles that has plunged Bridgewater into a round of crisis management, according to more than 25 people with knowledge of the firm’s inner workings.”
Geopolitical Watch:
September 18 – Financial Times (Kathrin Hille and Christian Shepherd): “China sharply escalated tensions in the Taiwan Strait on Friday, approaching Taiwan with multiple jets at three different locations just as the country’s president was about to receive a senior US government official. The incursions raise further concern that Taiwan has become a flashpoint for intensifying US-China rivalry. Taiwan’s ministry of defence said the People’s Liberation Army Air Force crossed the Taiwan Strait median line and entered the country’s air defence buffer zone with two H-6 bombers and 16 fighters. Taiwan’s air force ‘scrambled fighters and deployed [its] air defence missile system to monitor the activities’, the ministry said.”
September 16 – Reuters: “Chinese military drills off Taiwan’s southwest coast last week were a ‘necessary action’ to protect China’s sovereignty, Beijing said…, after Taiwan complained the large-scale air and naval exercises were a serious provocation. China, which claims democratic Taiwan as its own, has stepped up military activities near the island, in what Taiwan views as intimidation to force it to accept Chinese rule.”
September 16 – Financial Times (Demetri Sevastopulo and Kathrin Hille): “The Trump administration plans to sell billions of dollars of weapons to Taiwan to help the country defend itself amid concerns that China could use military force against it. The deal would be worth $7bn… That would make it the second biggest package of weapons provided to Taiwan by the US following an $8bn arms deal agreed last year. Donald Trump has taken an increasingly tough stance against China, from its human rights abuses in Xinjiang and a clamp down on pro-democracy protests in Hong Kong to military activity in the South China Sea.”
September 15 – Financial Times (James Kynge, Kathrin Hille, Christian Shepherd and Amy Kazmin): “China’s southern and eastern reaches are ringed with anxiety, raising fears of conflict sparked by miscalculation or even by design. The potential flashpoints are familiar: Taiwan; disputed islands in the South China and East China Seas; and India’s Himalayan border. What is unusual is that tensions have risen in unison and some commentators have warned that there are risks of military flare-ups potentially involving the US. ‘Since China and the United States are nuclear powers, the risk of a direct war between the two countries is still very small, but small-scale military conflicts do happen,’ said Yan Xuetong at Tsinghua University, one of China’s most influential academics.”
September 15 – Bloomberg (Sudhi Ranjan Sen): “India’s defense minister told parliament… the current border tensions with neighbor China were serious and the result of Beijing’s violations of boundary agreements. Rajnath Singh told lawmakers the situation was tense ‘both in terms of troops involved and number of friction points’ but India wanted to pursue dialog for a peaceful resolution of the conflict that has been simmering since May.”
