[CNBC] China said to call off trade talks as tariff war escalates: WSJ
[CNBC] Record high stocks face Fed rate hike, trade tensions in week ahead
[CNBC] Investors keep pouring money into bonds — and paying a big price for it
[Reuters] White House optimistic on China trade; no date for more talks
[BloombergQ] Italy Central Bank Urges Caution on Possible Deficit Hike
[Reuters] Lehman Brothers workers share memories 10 years after the fall
[Reuters] China says U.S. has 'no right' to interfere in Russia military cooperation
[WSJ] China Cancels Trade Talks With U.S. Amid Escalation in Tariff Threats
Saturday, September 22, 2018
Friday, September 21, 2018
Weekly Commentary: Q2 2018 Z.1 Flow of Funds
Non-Financial Debt (NFD) expanded at a seasonally-adjusted and annualized rate (SAAR) of $2.283 TN during the second quarter. While this was down from Q1's booming SAAR $3.681 TN, it nonetheless puts first-half Credit growth at an almost $3.0 TN pace. Annual NFD growth has exceeded $2.0 TN only one year in the past decade (2016's $2.739 TN). NFD expanded $2.509 TN in 2007, second lonely to 2004's record $2.910 TN.
NFD ended Q2 at a record $50.710 TN, up $2.674 TN over the past four quarters and $4.868 TN over two years. NFD has increased $15.65 TN, or 45%, since the end of 2008. NFD ended the quarter at 248% of GDP. This compares to 231% at the end of 2007 and 189% to end 1999. It's worth noting that Q2 y-o-y GDP growth of 5.4% was the strongest since Q2 2006.
The historic federal government borrowing binge runs unabated. Federal debt rose SAAR $1.186 TN during Q2, huge borrowings yet down from Q1's blistering SAAR $2.828 TN. For the quarter, Federal Expenditures were up 6.0% y-o-y, while Federal Receipts were down 2.0%. Over the past year, outstanding Treasury Securities increased $1.292 TN to a record $17.091 TN. Since the end of 2007, Treasuries have ballooned $11.040 TN, or 182%.
But let's not forget the government-sponsored enterprises (GSEs). Agency Securities expanded SAAR $236bn during Q2 to a record $8.962 TN. Over the past year, Agency Securities jumped $295 billion, with a two-year jump of $638 billion. This has been the strongest GSE growth in more than a decade. Combined Treasury and GSE Securities expanded to 128% of GDP (vs. 92% at the end of '07 and 80% in 2000).
Total Debt Securities expanded SAAR $1.579 TN during the quarter. Washington continues to completely dominate securities issuance. Federal government accounted for SAAR $1.186 TN, the GSEs SAAR $80 billion, and Agency/GSE-MBS SAAR $161 billion. With net corporate debt issuance grinding to a halt during the quarter, little wonder corporate Credit spreads remain compressed.
And while overall Bank Assets posted a marginal decline during the quarter, this was fully explained by the contraction of "Reserves at the Federal Reserve." Bank "Loans" expanded SAAR $504 billion, the strongest growth in a year. Security Broker/Dealer Assets expanded SAAR $199 billion, also the biggest gain since Q2 '17. The largest Broker/Dealer asset gains were in "Security Repurchase Agreements" (SAAR $88bn) and Treasury Securities (SAAR $133bn).
Total (home, commercial and farm) Mortgages expanded SAAR $557 billion during the quarter. First-half growth in Total Mortgages is running just below 2017's $576 billion pace, the strongest expansion since 2007. Commercial Mortgages expanded SAAR $201 billion, one of the strongest quarters since the crisis. The Fed's Z.1 report recently created a category "Loans," which combines mortgages, other bank loans and consumer credit. "Loans" expanded SAAR $1.028 TN during Q2. This was just below 2017's $1.041 billion increase, the strongest annual gain since 2007.
And while lending has recovered strongly since the crisis, the greatest inflation has been in the securities markets. Total Debt Securities (TDS) were up $2.111 TN over the past year to a record $43.982 TN. TDS ended the quarter at 215% of GDP, after beginning the nineties near 130%, ending 1999 at 157%, and closing out 2007 at 200%. Total Equities jumped $5.141 TN over the past four quarters to a record $48.414 TN. Total Equites ended the period at 237% of GDP, after ending the eighties at about 70%, the nineties at 193% and 2007 at 172%. Total (Debt and Equities) Securities jumped $7.251 TN over the past four quarters to a record $92.396 TN, or 453% of GDP. This compares to about 200% to begin the '90s, 350% to end 1999 and 373% to conclude 2007.
The rapidly inflating Household Balance Sheet remains fundamental to Bubble Analysis. Household Assets jumped another $2.323 TN during the quarter to a record $122.657 TN. Household Assets jumped $8.628 TN over the past four quarters (7.6%) and $17.076 TN over two years (16.2%). The one-year gain in Assets lags only 2013's $10.669 TN, while the two-year gain is unmatched. By asset category, Financial Assets jumped $1.697 TN during Q2, and Real Estate assets rose $559 billion. Financial Assets were up $6.468 TN over four quarters and $12.978 TN over two years. For comparison, Household Financial Assets rose $3.923 TN in Bubble year 1999. The pre-crisis record annual gain was 2004's $5.000 TN.
With Household Liabilities increasing $132 billion, Household Net Worth (assets less liabilities) surged another $2.191 TN during Q2 to a record $106.929 TN. Household Net Worth inflated $8.106 TN over the past four quarters and $16.035 TN in two years. It's extraordinary to see $2.0 TN quarterly growth in Net Worth over eight quarters. Comparing previous peak two-year periods, the 1998-99 period saw Net Worth jump $8.208 TN and the 2004-05 period $13.232 TN. "Uncharted waters," as they say.
Household Assets ended Q2 at a record 601% of GDP. Household Net Worth ended the quarter at a record 522% of GDP. For comparison, Net Worth-to-GDP ended the seventies at 342%, the ("decade of greed") eighties at 378%, Bubble Year 1999 at 447%, and Bubble Year 2007 at 473%. The ratio of Household Financial Assets-to-GDP ended Q2 at a record 430%. This compares to 363% in 1999 and 379% in 2007. It's worth adding that total Household Equities holdings (Equities and Mutual Funds) ended the quarter at 132% of GDP, up from cyclical peaks 117% during Q1 2000 and 103% in Q3 2007. Total Equities-to-GDP was at 33% to end 1985 and 47% to end the eighties. Equities-to-GDP dropped to a cyclical low 59% in 2002 and 53% in 2009. Equities to GDP averaged about 77% over the past 44 years.
International flows to U.S. asset markets continue to play an integral role in fueling the U.S. Bubble. Rest of World (ROW) holdings of U.S. Financial Assets rose SAAR $467 billion during Q2 to a record $27.480 TN. ROW holdings have surged $13.325 TN since the crisis, almost doubling the 2008 level. ROW holdings jumped $3.214 TN in just the past six quarters, extraordinary growth with parallels to the surge in ROW holdings in the manic 2006/07 period. ROW holdings began the 2000s at $5.640 TN, or 57% of GDP. ROW holdings ended Q2 2018 at 135% of GDP.
ROW holdings expanded $2.782 TN in 2017. Holdings increased only (nominal) $433 billion during 2018's first half. ROW U.S. Corporate Bond holdings declined during Q2, while Treasuries were little changed. I don't believe it is mere coincidence that ROW flows to U.S. securities markets ebbed as global financial conditions tightened. Recall that U.S. 10-year yields jumped to 3.13% mid-quarter, before reversing sharply on EM market tumult.
Ten-year Treasury yields closed Friday trading at 3.06%, the high since May 17th. Safe haven bids for Treasuries and the dollar have waned of late. For the most part, EM has somewhat stabilized. But the Fed will likely raise rates again next Wednesday, returning the markets' focus to U.S. rate prospects.
It's still early innings for EM travails. Liquidity tends to ebb and flow with greed and fear, as crisis conditions unfold over time. It's been quite a short squeeze backdrop in U.S. equities the past several months. This week saw some decent squeezes in global markets. The Argentine peso jumped almost 7% this week, with the South African rand up 4.3% and the Brazilian real gaining 3.1%. Brazil's Bovespa equities index surged 5.3% and Turkish stocks rallied 3.4%. The Shanghai Composite jumped 4.3%. Hong Kong's Hang Seng Financial index recovered 5.6%. Japan's TOPIX Bank Index surged 6.6%. European bank stocks rallied 4.1%. Italian stocks were up 3.1%, while Italian 10-year yields dropped 15 bps. Copper jumped 8.0%, and crude surged 2.6%.
Booming U.S. securities markets bolster the case for the Fed sticking with "normalization." This week's squeeze notwithstanding, higher U.S. rates boost the odds of another round of EM de-risking/de-leveraging - and a further tightening of global financial conditions. Such a backdrop would be conducive to tighter conditions at the "periphery" coming closer to penetrating the "core." The Q2 Z.1 report indicated waning international liquidity flows into U.S. securities markets.
NFD ended Q2 at a record $50.710 TN, up $2.674 TN over the past four quarters and $4.868 TN over two years. NFD has increased $15.65 TN, or 45%, since the end of 2008. NFD ended the quarter at 248% of GDP. This compares to 231% at the end of 2007 and 189% to end 1999. It's worth noting that Q2 y-o-y GDP growth of 5.4% was the strongest since Q2 2006.
The historic federal government borrowing binge runs unabated. Federal debt rose SAAR $1.186 TN during Q2, huge borrowings yet down from Q1's blistering SAAR $2.828 TN. For the quarter, Federal Expenditures were up 6.0% y-o-y, while Federal Receipts were down 2.0%. Over the past year, outstanding Treasury Securities increased $1.292 TN to a record $17.091 TN. Since the end of 2007, Treasuries have ballooned $11.040 TN, or 182%.
But let's not forget the government-sponsored enterprises (GSEs). Agency Securities expanded SAAR $236bn during Q2 to a record $8.962 TN. Over the past year, Agency Securities jumped $295 billion, with a two-year jump of $638 billion. This has been the strongest GSE growth in more than a decade. Combined Treasury and GSE Securities expanded to 128% of GDP (vs. 92% at the end of '07 and 80% in 2000).
Total Debt Securities expanded SAAR $1.579 TN during the quarter. Washington continues to completely dominate securities issuance. Federal government accounted for SAAR $1.186 TN, the GSEs SAAR $80 billion, and Agency/GSE-MBS SAAR $161 billion. With net corporate debt issuance grinding to a halt during the quarter, little wonder corporate Credit spreads remain compressed.
And while overall Bank Assets posted a marginal decline during the quarter, this was fully explained by the contraction of "Reserves at the Federal Reserve." Bank "Loans" expanded SAAR $504 billion, the strongest growth in a year. Security Broker/Dealer Assets expanded SAAR $199 billion, also the biggest gain since Q2 '17. The largest Broker/Dealer asset gains were in "Security Repurchase Agreements" (SAAR $88bn) and Treasury Securities (SAAR $133bn).
Total (home, commercial and farm) Mortgages expanded SAAR $557 billion during the quarter. First-half growth in Total Mortgages is running just below 2017's $576 billion pace, the strongest expansion since 2007. Commercial Mortgages expanded SAAR $201 billion, one of the strongest quarters since the crisis. The Fed's Z.1 report recently created a category "Loans," which combines mortgages, other bank loans and consumer credit. "Loans" expanded SAAR $1.028 TN during Q2. This was just below 2017's $1.041 billion increase, the strongest annual gain since 2007.
And while lending has recovered strongly since the crisis, the greatest inflation has been in the securities markets. Total Debt Securities (TDS) were up $2.111 TN over the past year to a record $43.982 TN. TDS ended the quarter at 215% of GDP, after beginning the nineties near 130%, ending 1999 at 157%, and closing out 2007 at 200%. Total Equities jumped $5.141 TN over the past four quarters to a record $48.414 TN. Total Equites ended the period at 237% of GDP, after ending the eighties at about 70%, the nineties at 193% and 2007 at 172%. Total (Debt and Equities) Securities jumped $7.251 TN over the past four quarters to a record $92.396 TN, or 453% of GDP. This compares to about 200% to begin the '90s, 350% to end 1999 and 373% to conclude 2007.
The rapidly inflating Household Balance Sheet remains fundamental to Bubble Analysis. Household Assets jumped another $2.323 TN during the quarter to a record $122.657 TN. Household Assets jumped $8.628 TN over the past four quarters (7.6%) and $17.076 TN over two years (16.2%). The one-year gain in Assets lags only 2013's $10.669 TN, while the two-year gain is unmatched. By asset category, Financial Assets jumped $1.697 TN during Q2, and Real Estate assets rose $559 billion. Financial Assets were up $6.468 TN over four quarters and $12.978 TN over two years. For comparison, Household Financial Assets rose $3.923 TN in Bubble year 1999. The pre-crisis record annual gain was 2004's $5.000 TN.
With Household Liabilities increasing $132 billion, Household Net Worth (assets less liabilities) surged another $2.191 TN during Q2 to a record $106.929 TN. Household Net Worth inflated $8.106 TN over the past four quarters and $16.035 TN in two years. It's extraordinary to see $2.0 TN quarterly growth in Net Worth over eight quarters. Comparing previous peak two-year periods, the 1998-99 period saw Net Worth jump $8.208 TN and the 2004-05 period $13.232 TN. "Uncharted waters," as they say.
Household Assets ended Q2 at a record 601% of GDP. Household Net Worth ended the quarter at a record 522% of GDP. For comparison, Net Worth-to-GDP ended the seventies at 342%, the ("decade of greed") eighties at 378%, Bubble Year 1999 at 447%, and Bubble Year 2007 at 473%. The ratio of Household Financial Assets-to-GDP ended Q2 at a record 430%. This compares to 363% in 1999 and 379% in 2007. It's worth adding that total Household Equities holdings (Equities and Mutual Funds) ended the quarter at 132% of GDP, up from cyclical peaks 117% during Q1 2000 and 103% in Q3 2007. Total Equities-to-GDP was at 33% to end 1985 and 47% to end the eighties. Equities-to-GDP dropped to a cyclical low 59% in 2002 and 53% in 2009. Equities to GDP averaged about 77% over the past 44 years.
International flows to U.S. asset markets continue to play an integral role in fueling the U.S. Bubble. Rest of World (ROW) holdings of U.S. Financial Assets rose SAAR $467 billion during Q2 to a record $27.480 TN. ROW holdings have surged $13.325 TN since the crisis, almost doubling the 2008 level. ROW holdings jumped $3.214 TN in just the past six quarters, extraordinary growth with parallels to the surge in ROW holdings in the manic 2006/07 period. ROW holdings began the 2000s at $5.640 TN, or 57% of GDP. ROW holdings ended Q2 2018 at 135% of GDP.
ROW holdings expanded $2.782 TN in 2017. Holdings increased only (nominal) $433 billion during 2018's first half. ROW U.S. Corporate Bond holdings declined during Q2, while Treasuries were little changed. I don't believe it is mere coincidence that ROW flows to U.S. securities markets ebbed as global financial conditions tightened. Recall that U.S. 10-year yields jumped to 3.13% mid-quarter, before reversing sharply on EM market tumult.
Ten-year Treasury yields closed Friday trading at 3.06%, the high since May 17th. Safe haven bids for Treasuries and the dollar have waned of late. For the most part, EM has somewhat stabilized. But the Fed will likely raise rates again next Wednesday, returning the markets' focus to U.S. rate prospects.
It's still early innings for EM travails. Liquidity tends to ebb and flow with greed and fear, as crisis conditions unfold over time. It's been quite a short squeeze backdrop in U.S. equities the past several months. This week saw some decent squeezes in global markets. The Argentine peso jumped almost 7% this week, with the South African rand up 4.3% and the Brazilian real gaining 3.1%. Brazil's Bovespa equities index surged 5.3% and Turkish stocks rallied 3.4%. The Shanghai Composite jumped 4.3%. Hong Kong's Hang Seng Financial index recovered 5.6%. Japan's TOPIX Bank Index surged 6.6%. European bank stocks rallied 4.1%. Italian stocks were up 3.1%, while Italian 10-year yields dropped 15 bps. Copper jumped 8.0%, and crude surged 2.6%.
Booming U.S. securities markets bolster the case for the Fed sticking with "normalization." This week's squeeze notwithstanding, higher U.S. rates boost the odds of another round of EM de-risking/de-leveraging - and a further tightening of global financial conditions. Such a backdrop would be conducive to tighter conditions at the "periphery" coming closer to penetrating the "core." The Q2 Z.1 report indicated waning international liquidity flows into U.S. securities markets.
For the Week:
The S&P500 gained 0.8% (up 9.6% y-t-d), and the Dow jumped 2.3% (up 8.2%). The Utilities fell 1.5% (up 0.4%). The Banks rose 2.3% (up 3.1%), and the Broker/Dealers added 0.7% (up 3.4%). The Transports slipped 0.3% (up 8.7%). The S&P 400 Midcaps dipped 0.3% (up 7.4%), and the small cap Russell 2000 declined 0.5% (up 11.5%). The Nasdaq100 declined 0.2% (up 17.7%). The Semiconductors added 0.4% (up 10.4%). The Biotechs gained 1.3% (up 23.3%). With bullion up $6, the HUI gold index rallied 3.9% (down 25.7%).
Three-month Treasury bill rates ended the week at 2.12%. Two-year government yields increased two bps to 2.80% (up 92bps y-t-d). Five-year T-note yields rose four bps to 2.95% (up 74bps). Ten-year Treasury yields jumped seven bps to 3.06% (up 66bps). Long bond yields rose seven bps to 3.20% (up 46bps). Benchmark Fannie Mae MBS yields gained five bps to 3.82% (up 82bps).
Greek 10-year yields slipped two bps to 4.05% (down 3bps y-t-d). Ten-year Portuguese yields added a basis point to 1.87% (down 7bps). Italian 10-year yields dropped 15 bps to 2.83% (up 81bps). Spain's 10-year yields increased one basis point to 1.50% (down 7bps). German bund yields added a basis point to 0.46% (up 4bps). French yields increased one basis point to 0.78% (down 1bp). The French to German 10-year bond spread was unchanged at 32 bps. U.K. 10-year gilt yields rose two bps to 1.55% (up 36bps). U.K.'s FTSE equities index surged 2.5% (down 2.6%).
Japan's Nikkei 225 equities index jumped 3.4% (up 4.9% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.13% (up 9bps). France's CAC40 rose 2.6% (up 3.4%). The German DAX equities index jumped 2.5% (down 3.8%). Spain's IBEX 35 equities index gained 2.4% (down 4.5%). Italy's FTSE MIB index rallied 3.1% (down 1.4%). EM equities were mostly higher. Brazil's Bovespa index surged 5.3% (up 4.0%), while Mexico's Bolsa slipped 0.5% (unchanged). South Korea's Kospi index increased 0.9% (down 5.2%). India's Sensex equities index fell 3.3% (up 8.2%). China's Shanghai Exchange recovered 4.3% (down 15.4%). Turkey's Borsa Istanbul National 100 index jumped 3.4% (down 15%). Russia's MICEX equities index rose 2.8% (up 15%).
Investment-grade bond funds saw inflows of $1.017 billion, and junk bond funds had inflows of $967 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates gained five bps to 4.65% (up 66bps y-o-y). Fifteen-year rates rose five bps to 4.11% (up 67bps). Five-year hybrid ARM rates slipped a basis point to 3.92% (up 45bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rate up 17 bps to 4.83% (up 68bps).
Federal Reserve Credit last week increased $2.7bn to $4.173 TN. Over the past year, Fed Credit contracted $252bn, or 5.7%. Fed Credit inflated $1.362 TN, or 48%, over the past 307 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $4.3bn last week to $3.426 TN. "Custody holdings" were up $50bn y-o-y, or 1.5%.
M2 (narrow) "money" supply declined $15.7bn last week to $14.230 TN. "Narrow money" gained $523bn, or 3.8%, over the past year. For the week, Currency increased $2.4bn. Total Checkable Deposits sank $93bn, while Savings Deposits jumped $71.3bn. Small Time Deposits increased $3.1bn. Retail Money Funds were little changed.
Total money market fund assets declined $15.8bn to $2.866 TN. Money Funds gained $141bn y-o-y, or 5.2%.
Total Commercial Paper gained $7.3bn to $1.074 TN. CP gained $31bn y-o-y, or 2.9%.
Currency Watch:
September 18 - Reuters (Kevin Yao): "China will not stoop to competitive devaluation of its currency, Premier Li Keqiang stressed, hours after China hit back, with a softer punch than the one landed by the United States, in an escalating tariff war between the world's largest economies. Addressing a World Economic Forum event in the port city of Tianjin…, Li did not directly mention the trade conflict but said talk of Beijing deliberately weakening its currency was 'groundless.' 'One-way depreciation of the yuan brings more harm than benefits for China,' he said. 'China will never go down the road of relying on yuan depreciation to stimulate exports.' China will not do that to chase 'thin profits' and 'a few small bucks'."
The U.S. dollar index declined 0.7% to 94.22 (up 2.3% y-t-d). For the week on the upside, the South African rand increased 4.3%, the Brazilian real 3.1%, the Swedish krona 2.6%, the New Zealand dollar 2.1%, the Australian dollar 1.9%, the Norwegian krone 1.3%, the euro 1.1%, the Swiss franc 1.0%, the Canadian dollar 0.9%, the Singapore dollar 0.8%, the Mexican peso 0.3%, and the South Korean won 0.1%. For the week on the downside, the Japanese yen declined 0.5%. The Chinese renminbi increased 0.15% versus the dollar this week (down 5.11% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index gained 2.0% (up 7.1% y-t-d). Spot Gold recovered 0.5% to $1,199 (down 8.0%). Silver rallied 1.5% to $14.359 (down 16.2%). Crude jumped $1.79 to $70.78 (up 17%). Gasoline rose 2.4% (up 12%), and Natural Gas surged 7.6% (up 1%). Copper surged 8.0% (down 13%). Wheat gained 1.6% (up 22%). Corn rose 1.6% (2%).
Trump Administration Watch:
September 21 - Bloomberg (Mike Dorning, Jenny Leonard and Mark Niquette): "U.S. President Donald Trump continued to hit out at China days after announcing another round of tariffs, signaling the trade war won't end any time soon. 'It's time to take a stand on China,' Trump said in an interview… 'We have no choice. It's been a long time. They're hurting us.'"
September 18 - Financial Times (James Politi and Demetri Sevastopulo): "President Donald Trump's preference for aggressively confronting China on trade had been apparent ever since the collapse of high-level talks between Washington and Beijing in May. But Monday's decision to impose tariffs on $200bn of Chinese imports brought the hostilities with China to an entirely new level, leaving little room for any settlement. 'It is my duty to protect the interests of working men and women, farmers, ranchers, businesses, and our country… My administration will not remain idle when those interests are under attack.'"
September 17 - Bloomberg (Christopher Balding): "As the trade war between the U.S. and China drags on with new tariffs and no end in sight, we need to ask ourselves: What do they want? A fundamental objective for both is to become less reliant on the other. The trade war should thus be reframed as a conscious uncoupling. Behind the rhetoric from both sides lies a profound distrust. U.S. suspicion stems from two specific issues. China is increasingly seen as a national security threat that fails to play by the rules. The Trump administration's stance has spurred debate over whether it was a mistake to allow admittance of a highly protectionist Communist country to the World Trade Organization… For its part, the government of Xi Jinping is concerned about China's dependence on U.S. technology and finished manufactured products. The focus of its Made In China 2025 plan is to shift Chinese consumption of high-tech products away from foreign, specifically American, manufacturers and toward domestic companies."
September 18 - Financial Times (Gideon Rachman): "They don't call them trade wars for nothing. The latest round of tit-for-tat trade sanctions between the US and China is driven by the same emotions of fear and pride that lead real wars to break out. One country makes an aggressive move, so the other feels obliged to respond in kind. Both sides fear that if they back down, they will lose face in the eyes of the world and of their own people. The Trump administration's view is that China has been 'cheating' on trade for decades. But instead of responding to the first round of US tariffs, imposed in July, with concessions, the Chinese reacted with tariffs of their own. So now President Donald Trump is imposing further tariffs of 10% on an extra $200bn-worth of Chinese exports. Predictably, rather than backing down, the Chinese have promised to respond to this latest round of measures with more tariffs on American goods. Following the logic of escalation, Mr Trump has pledged that will trigger yet more US tariffs - possibly at a higher rate of 25% - covering essentially all Chinese exports to America. Both sides are willing to risk a trade war because they think they have a good chance of winning."
September 18 - New York Times (Jim Tankersley and Alan Rappeport): "The Trump administration seems confident that consumers will not feel pain from its escalating trade war with China. 'Because it's spread over thousands and thousands of products, nobody's going to actually notice it at the end of the day,' Commerce Secretary Wilbur Ross told CNBC… But a pain-free trade war with China is nearly impossible. For American consumers, prices have already risen on some products that the administration targeted for tariffs this year - most notably, washing machines, which were subjected to steep tariffs in January."
September 18 - CNBC (Matthew J. Belvedere): "Commerce Secretary Wilbur Ross said… that new U.S. tariffs on China are aimed at modifying Beijing's behavior and leveling the playing field for American companies competing there. Ross appeared on CNBC the morning after the administration announced that President Donald Trump will impose 10% tariffs on $200 billion worth of Chinese imports, with those duties rising to 25% at the end of the year… Ross said… regarding the expected move, that China is 'out of bullets' to retaliate because its imports to the U.S. are nearly four times larger than the U.S. exports to China."
September 17 - CNBC (Kate Rooney): "Top White House Economic Advisor Larry Kudlow said while the administration needs to be tougher on spending, growth from recent tax cuts should fix the issue. 'If you grow rapidly you're going to have lesser deficits. Growth solves a lot of problems,' Kudlow said at the Economic Club of New York… 'The gap is principally spending too much.' Thanks to an uptick in gross domestic product, or GDP, after tax cuts, Kudlow said the U.S. has 'just about paid for two thirds of the total tax cuts.'"
September 17 - Reuters (Chris Prentice and David Lawder): "A top economic adviser to President Donald Trump said… he expects U.S. budget deficits of about 4% to 5% of the country's economic output for the next one to two years, adding that there would likely be an effort in 2019 to cut spending on entitlement programs. 'We have to be tougher on spending,' White House economic adviser Larry Kudlow said…, adding that government spending was the reason for the wider budget deficits, not the Republican-led tax cuts activated this year."
September 16 - New York Times (Alexandra Stevenson, Kate Kelly and Keith Bradsher): "When President Bill Clinton deliberated whether he should loosen trade barriers against China, Wall Street helped plead Beijing's case. When Presidents George W. Bush and Barack Obama talked tough about labeling China as a currency manipulator, Wall Street urged restraint - and both presidents backed down. Today, China is hoping that Wall Street will once again use its political heft to soothe tempers in Washington. But as President Trump ratchets up the trade war with Beijing, Wall Street's words are falling on deaf ears. Senior Wall Street executives met in Beijing on Sunday with current and former Chinese officials and bankers at a hastily organized session to find ways to strengthen financial ties between the United States and China."
September 19 - The Hill (Niv Elis): "Weeks before the midterm elections, conservatives in the House are gaining little traction on fiscal issues as Congress passed one spending bill after another in bipartisan votes. It's a significant shift from the last few years, when the House Freedom Caucus often threw a wrench into appropriations plans with demands to cut mandatory spending and advance other conservative priorities. 'It's a little bit frustrating right now,' said Rep. Mark Walker, the chairman of the Republican Study Committee (RSC), the largest GOP caucus in the House."
Federal Reserve Watch:
September 21 - Reuters (Howard Schneider): "Unemployment near a 20-year low screams at the U.S. Federal Reserve to raise interest rates or risk a too-hot economy. The bond market, not far from a state that typically precedes a recession, says not so fast. The decision of which to heed looms large when the Fed's interest-rate setters meet next week. Which path they follow will begin to define whether Chairman Jerome Powell engineers a sustained, recession-free era of full employment, or spoils the party with interest rate increases that prove too much for the economy to swallow. New Fed staff research and Powell's own remarks seem to put more weight on the risks of super-tight labor markets, which could mean a shift up in the Fed's rate outlook and a tougher tone in its rhetoric."
September 19 - CNBC (Jeff Cox): "When the Federal Reserve gathers next week, markets likely will be looking past a widely expected rate hike and toward the direction the central bank will chart ahead. A quarter-point increase in the Fed's benchmark funds rate is already baked in the cake. That will take the funds target to 2% to 2.25%, where it last was more than 10 years ago. The mystery for investors will be how officials view the future, particularly at a time when they've been making public statements that seem to indicate a difference of opinion over how aggressive policy needs to be as the economy ignites."
September 19 - Reuters (Steve Holland and Howard Schneider): "U.S. President Donald Trump intends to nominate former Federal Reserve economist Nellie Liang to the U.S. central bank's board of governors, the White House said… Earlier, two White House officials speaking on condition of anonymity told Reuters that Liang has a strong background on financial and monetary stability, including crisis response, and is considered a good fit for the Fed board."
U.S. Bubble Watch:
September 18 - Nextgov (Frank Konkel): "The federal government is primed to spend as much as $300 billion in the final quarter of fiscal 2018 as agencies rush to obligate money appropriated by Congress before Sept. 30 or return it to the Treasury Department. The spending spree is the product of the omnibus budget agreement signed six months late in March coupled with funding increases of $80 billion for defense and $63 billion for civilian agencies. The shortened time frame left procurement officials scrambling to find ways to spend the money. Through August, defense and civilian agencies obligated some $300 billion in contracts. But to spend all the money appropriated to them by Congress, they may have to obligate well over $200 billion more in the final quarter of fiscal 2018… 'It is not impossible for this to happen, but it is unprecedented for that high of a percentage to be obligated to contracts for a fiscal quarter,' David Berteau, president of the Professional Services Council, told Nextgov. 'You'd have to spend almost 50% of the yearly total in three months.'"
September 18 - Bloomberg (Shobhana Chandra): "President Donald Trump's decision to impose tariffs on an additional $200 billion of imports from China drags the biggest part of the U.S. economy into the thick of the trade war, threatening to deliver a more direct hit to growth. The 10% tariffs… affect everyday items including food, furniture, and clothing, making grocery shopping and holiday gifts potentially pricier. That broadens the trade fallout more directly into the realm of household spending, which accounts for about 70% of the U.S. economy."
September 20 - Reuters (Rishika Chatterjee and Nivedita Balu): "Walmart Inc said that it may hike prices of products if the Trump administration imposes a tariff on Chinese imports, according to a letter the company wrote to U.S. Trade Representative Robert Lighthizer… Walmart, the world's largest retailer, in its letter said the tariff would impact prices of everything from food products to beverages and personal care items."
September 18 - Wall Street Journal (Te-Ping Chen and Eric Morath): "U.S. employers are boosting benefits-including bonuses and vacation time-at a faster pace than salaries, a move that gives them more flexibility to dial back that compensation if the economy turns sour. The cost of benefits for private-sector employers rose 3% in June from a year earlier, while the cost of wages and salaries advanced 2.7%... The benefit gain was driven by a nearly 12% increase in bonuses and other forms of supplemental pay. Paid leave, including vacation time, rose 4% in June from a year earlier… 'Bonuses and supplemental pay speak to labor market conditions, and workers are in a good spot to get a little more,' said Ryan Sutton, a district president for staffing agency Robert Half. 'Companies are still reluctant to move base wages up too much. It's a lot harder to take that away than bonuses.'"
September 18 - CNBC (Thomas Franck): "Former White House economic advisor Gary Cohn said President Donald Trump will work with Congress to pass a massive debt-fueled infrastructure bill if Democrats take control of the House of Representatives in November. 'If the Democrats win the House I will be shocked if the first thing they don't do is infrastructure,' Cohn said… 'I think they'll do a trillion dollars, trillion and a half dollars of infrastructure, and the president will sign it.' 'Another trillion dollars of debt, here we come,' he added. A perennial issue for Washington lawmakers, the national debt is expected to rise to $28.7 trillion from $15.7 trillion over the next decade, according to the Congressional Budget Office."
September 13 - Bloomberg (Rachel Evans and Carolina Wilson): "If you work in exchange-traded funds, memories of 2008 aren't all doom and gloom. Lehman Brothers' collapse in September of that year ushered in a new era for ETFs. And they've been on a roll ever since. Assets in the low-cost portfolios that trade like stocks and typically track an index have swelled to $5 trillion globally, up from less than $700 billion before the financial crisis. Meanwhile, the number of funds has more than doubled as they gradually account for bigger and bigger pieces of the equity, bond and commodity markets. Although they started trading in the U.S. in 1993, the financial crisis marked a turning point for ETFs. Banks were forced to shed large inventories to bolster their balance sheets. And retail investors who'd lost their shirts went looking for ways to diversify their risk. ETFs offered both a solution."
September 19 - CNBC (Jeff Cox): "The 'Great Bull' market that came after the financial crisis is dead due to slowing economic growth, rising interest rates and too much debt, according to a Bank of America Merrill Lynch analysis. In its place will be one that features lower returns, the bulk of which will be concentrated in assets that suffered during the recovery, Michael Hartnett, BofAML's chief investment strategist, said: 'The Great Bull Dead: end of excess liquidity = end of excess returns,' Hartnett said. The liquidity reference is to central banks that have pumped in $12 trillion worth in various easing programs that have seen 713 interest rate cuts around the world…"
September 17 - Reuters (Anna Irrera and Svea Herbst-Bayliss): "Gary Cohn, the former economic adviser to U.S. President Donald Trump, gave a ringing endorsement of Wall Street bankers on Monday, arguing that borrowers were just as responsible for the 2007-2009 financial crisis as lenders and ridiculing rules intended to make the system stronger in its aftermath. In a wide-ranging conversation at an event hosted by Reuters Breakingviews…, Cohn's comments mostly tracked the sentiment of Wall Street bankers and other wealthy Americans who have felt unfairly maligned for the mortgage market's collapse and the economic downturn that ensued… Defending his fellow bankers, who are often blamed for causing and worsening the crisis, Cohn said borrowers played a hand in their financial disasters as well. 'Who broke the law? I just want to know who you think broke the law,' said Cohn. 'Was the waitress in Las Vegas who had six houses leveraged at 100% with no income, was she reckless and stupid? Or was the banker reckless and stupid?'"
September 19 - Bloomberg (Riley Griffin): "As U.S. household debt rises and wages stagnate, millions of Americans are thinking about tapping into home equity to keep up with day-to-day expenses. Twenty-four million homeowners believe borrowing against home equity is an acceptable way to cover regular bills, according to a Bankrate.com report… Cash-strapped millennials, low earners and the less educated were most likely to think home equity offered an appropriate solution to ordinary bills. 'Regular household bills should be funded by a regular household income, not home equity,' said Greg McBride, chief financial analyst at Bankrate.com. 'Wage growth has been elusive, but rising household expenses have not. And now home equity is being seen as a lifeline for those who are strapped for money with little wiggle room.'"
September 17 - Reuters (Laila Kearney): "While U.S. states' financial health has strengthened in 2018 compared with last year, fewer than half have enough financial reserves to weather the first year of a moderate recession, according to an S&P Global Ratings report… Only 20 states have the reserves needed to operate for the first year of an economic downturn without having to slash budgets or raise taxes, S&P said. 'In their fight against recessions, budget reserves are what states send to the frontline,' the report said. 'They are an internal source of immediate liquidity and can provide transitional funding to agencies before budget cuts take effect.' States face worse revenue shortfalls in the next recession compared with the Great Recession, S&P said. That is because states rely more heavily on personal income taxes as a percentage of general fund revenues now than a decade ago, with the taxes currently contributing a combined 55% to the funds compared with 49% in 2008, S&P said."
September 20 - Financial Times (Diana Olick): "After three years of soaring home prices, the heat is coming off the U.S. housing market. Home sellers are slashing prices at the highest rate in at least eight years, especially in the West, where the price gains were hottest. In the four weeks ended Sept. 16, more than one-quarter of the homes listed for sale had a price drop, according to Redfin, a real estate brokerage. That is the highest level since the company began tracking the metric in 2010. Redfin defines a price drop as a reduction in the list price of more than 1% and less than 50%."
September 17 - Wall Street Journal (Paul J. Davies): "People in the Carolinas are about to rediscover the difference between the damage a storm causes and what is covered by insurance. Hurricane Florence weakened considerably as it moved over the U.S. coast over the weekend, lessening its speed and causing much less wind damage than had been feared earlier last week. However, heavy rain and severe flooding have arrived, bringing tragedy in their wake. The problem is that while wind damage is well covered by insurers and reinsurers, flood damage is absent from most homeowner policies and is typically an optional cover in commercial policies."
September 20 - Wall Street Journal (Katherine Clarke): "Entertainers Beyoncé and Jay-Z and billionaire hedge-fund executive Ken Griffin have something in common: They are among a small but growing number of ultraluxury home buyers who are borrowing tens of millions of dollars for home purchases. The trend bucks the tradition of the ultrawealthy paying cash for their super-pricey homes. Mortgage experts attribute the shift toward so-called 'superjumbo loans' over the past couple of years to rising real-estate prices across the country and the historically low interest rate environment, which encourages wealthy buyers to borrow against their real estate to free up cash to invest elsewhere."
China Watch:
September 18 - Reuters (Kevin Yao): "Maintaining China's steady growth is increasingly difficult amid significant changes in the external environment, but China will not resort to massive stimulus, Premier Li Keqiang said… China has ample policy tools to cope with difficulties and challenges, and it will keep macro-economic policies steady, Li said in a speech at the World Economic Forum in Tianjin."
September 18 - CNBC (Tae Kim): "China said it will institute new tariffs on U.S. goods worth $60 billion on Sept. 24, according to a Reuters report. The media outlet said the Asian country's tariff rate on a list of 5,207 U.S. products will range between 5% and 10%."
September 18 - Financial Times (Tom Mitchell and Gabriel Wildau): "When Donald Trump declared on Monday that he would impose punitive tariffs on about half of all Chinese exports to the US, it was a moment that President Xi Jinping had long believed would never come. For two years after Mr Trump emerged as a force to be reckoned in the 2016 US presidential campaign, Mr Xi and his lieutenants clung to precedent for comfort. While American presidential candidates routinely bashed China on the campaign trail, once in the White House they played down differences with their geopolitical rival. As Mr Xi said at his first meeting with Mr Trump in the spring of 2017: 'We have a thousand reasons to get US-China relations right, and not one reason to spoil them.' Mr Xi's administration began to appreciate this year that Mr Trump intended to practise as president what he had preached as a candidate."
September 16 - Reuters (Michael Martina, Ryan Woo, Christian Shepherd and Susan Heavey): "China will not be content to only play defense in an escalating trade war with the United States, a widely read Chinese tabloid warned… The Global Times, which is published by the ruling Communist Party's People's Daily, wrote in an editorial: 'It is nothing new for the U.S. to try to escalate tensions so as to exploit more gains at the negotiating table.' 'We are looking forward to a more beautiful counter-attack and will keep increasing the pain felt by the U.S.,' the… column said. Besides retaliating with tariffs, China could also restrict export of goods, raw materials and components core to U.S. manufacturing supply chains, former finance minister Lou Jiwei told a Beijing forum…"
September 18 - CNBC (Patti Domm): "China's holdings of U.S. Treasury bills, notes and bonds dropped to a six month low of $1.171 trillion in July, from $1.178 trillion in June. The data is closely watched, since dumping Treasury securities is viewed as one way China could retaliate against the U.S. in an ongoing trade dispute… China is the biggest holder of U.S. Treasurys, followed by Japan. Japan's holdings rose to $1.04 trillion from $1.03 trillion in June… Strategists say China is much more likely to retaliate against U.S. tariffs by slapping its own tariffs on American goods… Some market pros believe China would use its currency as a weapon before it would dump Treasurys."
September 18 - Reuters (Jamie McGeever): "One of the foundations upon which the economic and financial relationship between the United States and China over the past 15 years has been built is the assumption that Beijing won't sell its vast holdings of U.S. Treasuries. The financial damage to both countries, and the potential fallout beyond the monetary effect, would be so profound that it simply wouldn't happen, so the theory goes. Disregarding this would be the economic superpower equivalent of the Cold War's 'mutually assured destruction' doctrine. But with trade tensions between the two countries escalating dramatically, it may no longer be a total long shot. It's a scenario being contemplated now more than at any point in recent years…"
September 19 - Financial Times (Jamie Powell): "Name the following Chinese company: It boasts an enterprise value of $145bn. In the first half of the year it generated $44bn of revenues and $4.5bn of profits, paying out half in dividends. It has $98bn of debt, $44bn of it due within the next twelve months. The answer is China Evergrande, a real estate kraken with tentacles stretching across China. It does all things property including development, investment, management and construction, along with a host of smaller ventures in technology, finance and healthcare. That reach makes some of the numbers mind boggling, particularly when it comes to the company's debt. For instance, it paid $4.2bn of interest over the first six months of 2018... In part that's because Evergrande pays a lot to borrow: its average financing cost of 8.3% is the highest of peers, which pay an average 5.9% interest rate…"
September 20 - Bloomberg: "China's government plans to outlaw foreign TV shows in prime time and to limit imported content in fast-growing streaming platforms. The rules released Sept. 20 extend restrictions that have for years narrowed access to non-Chinese programming to curb what officials have characterized as negative influences on viewers. The National Radio and Television Administration proposal will also limit air time for foreign content and cap the participation of talent from outside the country."
EM Watch:
September 19 - Reuters (Walter Bianchi and Scott Squires): "Argentina's gross domestic product contracted 4.2% in the second quarter of 2018 from the same period last year and 3.9% from the prior quarter… Sky-high interest rates have shut off growth in the recession-hit country while failing to bolster its beleaguered peso currency, which has slumped more than 52% against the dollar so far this year."
September 20 - Financial Times (Laura Pitel and Jonathan Wheatley): "Turkey's finance minister has slashed the country's economic growth targets and promised to cut public spending by nearly $10bn as the country tries to rebuild shattered market confidence and find a way out of a currency crisis. Investors welcomed the decision by Berat Albayrak, who was put in charge of the economy two months ago by his father-in-law, President Recep Tayyip Erdogan, to reduce growth projections to 3.8% in 2018 and 2.3% in 2019. The previous target was 5.5% for both years. But some were sceptical about the credibility of a proposal to reduce the budget deficit to 1.9% of gross domestic product this year and 1.8%in 2019. They voiced disappointment, too, over the absence of a strategy to support Turkish banks, which face mounting bad loans."
September 17 - Bloomberg (Asli Kandemir, Taylan Bilgic, Ercan Ersoy and Kerim Karakaya): "The Turkish government will unveil measures to help banks tackle the expected pile-up of bad loans resulting from the lira's plunge and soaring interest rates, according to people with knowledge of the matter. The plan will seek to mitigate the need for capital injections and propose transferring non-performing loans to a state-designated entity… Lenders have been struggling to deal with a rising number of restructurings after the lira dropped 40% against the dollar this year…"
September 19 - Financial Times (Laura Pitel and Funja Guler): "Little more than a year ago, the head of the Turkish construction company Sur Yapi was opening a glitzy new shopping centre in the western city of Bursa, thanking a crowd of local dignitaries assembled on its immaculate plaza. But Turkey's economic turmoil has turned that celebratory mood into a memory as shopping malls, once a symbol of the country's economic boom, find themselves at the sharp end of a currency crisis. Sur Yapi recently faced a tenants' revolt in the Bursa mall as a group of shops pulled down their shutters in protest at the growing burden of rents that were indexed to the euro… Thousands of companies, including Sur Yapi, took advantage of foreign currency loans to fund their investments, but are now grappling with the fallout from a slide in the Turkish lira."
September 20 - Bloomberg (Aashika Suresh): "It's little wonder that debt defaults by key Indian shadow bank Infrastructure Leasing & Financial Services Ltd. have shocked credit traders: not only are nonpayments rare in the country, but the conglomerate is a major player in the market.IL&FS's outstanding debentures and commercial paper accounted for 1% and 2%, respectively, of India's domestic corporate debt market as of March 31, according to Moody's… The liquidity problems at IL&FS are raising concern about broader fallout among Indian lenders, already struggling to clean up more than $210 billion of stressed debt on their balance sheets. And the group's complex corporate structure makes problems worse -- it has 169 subsidiaries, associates and joint ventures."
September 21 - Financial Times (Chloe Cornish): "The cost of insurance on Lebanese sovereign bonds has soared in recent weeks, reflecting concerns about the sustainability of the country's debt burden as its economy slows and faces a potential cash crunch. Like many emerging markets, rising global interest rates are swelling Lebanon's external financing costs as the economy's growth rate slows to 1.3% this year. The country has the world's third highest debt-to-GDP ratio at 150%, a legacy of borrowing from public markets to rebuild after its devastating civil war."
Central Bank Watch:
September 18 - Wall Street Journal (Tom Fairless): "The race to succeed Mario Draghi as European Central Bank president presents Germany with a stark choice: Back the country's own candidate, a foe of Mr. Draghi's 2.5-trillion-euro bond-buying program, or concede that once-unorthodox monetary tools are here to stay. Germany's central bank, long a powerful voice in the global fight against inflation, has grown out of sync in the postfinancial crisis era of stagnant prices and wages, with its greatly expanded role for central banks and outside-the-box policies. 'Perhaps the sands have shifted,' said Stefan Gerlach, former deputy governor of Ireland's central bank. 'Having been on the wrong side of history, at least as it appears now, has not helped the Germans.' Now, with the jockeying among European capitals already under way, Berlin must decide in the coming months whether to endorse Jens Weidmann, president of Germany's central bank, who has likened printing money to the devil and testified against Mr. Draghi's crisis-era bond program in a German court."
September 17 - CNBC (Eustance Huang): "Borrowing costs remain too low today and it's 'hurting our savers,' said Allianz CEO Oliver Bäte. 'European money is too cheap and that leads to misallocation of assets,' Bäte told CNBC's Nancy Hungerford… 'We still have a lot of mismanagement in the central bank side.' Bäte said schemes such as the European Central Bank's 'ultra-loose' monetary policy - which has been in place since the global financial crisis of 2008 - will 'just make money cheaper for over indebted governments.' He said it was not helping the economy, and just makes it easier for people to borrow money."
Europe Watch:
September 21 - Financial Times (Laura Hughes and George Parker): "A defiant Theresa May on Friday accused EU leaders of failing to show "respect" to Britain and threw down the gauntlet to Brussels to shift its position or risk a breakdown in Brexit negotiations and a no deal exit. In a statement delivered in Downing Street in front of two union flags, Mrs May said Britain stood ready to leave the EU without a deal and admitted Brexit negotiations had run into the sand. 'We are at an impasse… It is not acceptable to simply reject the other side's proposals without a detailed explanation and counter-proposals. I will not overturn the result of the referendum nor will I break up my country.'"
Global Bubble Watch:
September 16 - Reuters (Andrea Shalal): "Governments cannot completely prevent a repeat of events like the 2008 global financial crisis even though regulations have been tightened since the collapse of Lehman Brothers a decade ago, Germany's top central banker told Bild newspaper. Bundesbank President Jen Weidmann said German banks were not only victims of the 2008 financial crisis, but many institutions had also taken on more risk than they could ultimately carry. Regulations had been tightened since then, but it would be 'an illusion' to think that governments could completely avert such crises, he said."
September 20 - Bloomberg (William Horobin): "The global economy is shrouded in 'high uncertainty' as the outlook for emerging markets deteriorates sharply and trade tensions intensify, the Organization for Economic Cooperation and Development said. The gloomy analysis has pushed the Paris-based institution to cut its global growth forecasts for this year and next with particularly sharp revisions for Turkey, Argentina, South Africa and Brazil. Since its last economic forecasts in May, the OECD said differences between economies have widened, confidence has fallen, and business surveys across the world point to a slowdown. 'Global growth is hitting a plateau,' its chief economist, Laurence Boone, said…"
September 18 - Reuters (Gayatri Suroyo): "Confidence among Asian companies slumped to the weakest in almost three years in the third quarter as businesses feared blowback from a worsening global trade war, a Thomson Reuters/INSEAD survey showed. Representing the six-month outlook of 104 firms, the… Asian Business Sentiment Index fell to 58 for the July-September quarter, its lowest since the fourth quarter of 2015, from 74 three months before."
September 18 - Reuters (Jacob Gronholt-Pedersen and Teis Jensen): "Danske Bank's chief executive Thomas Borgen resigned on Wednesday after an investigation revealed payments totaling 200 billion euros ($234bn) through its small Estonian branch, many of which the bank said were suspicious. The Danish bank detailed compliance and control failings amid growing calls for a European Union crackdown on financial crime after a series of money laundering scandals which have attracted the attention of U.S. authorities."
September 18 - Bloomberg (Satyajit Das): "Markets have served a timely reminder of the latent risk from derivatives - the wild beasts of finance. Ten years after the collapse of Lehman Brothers… a private trader and one of Norway's richest men suffered 114 million euros ($132.6 million) of losses on energy-futures positions traded on Nasdaq. The default ate through around two-thirds of Nasdaq's mutual default fund, using up several layers of protection. Members of the clearing house must now make substantial cash contributions to rebuild that cushion. Given derivative-market and counterparty credit risk of $13 trillion, the losses were relatively small and the risk was contained. Yet the event nonetheless raises concerns about the system's ability to withstand defaults by one or more major market participants, for which losses could potentially be much greater."
September 17 - Bloomberg (Jeanna Smialek, Shobhana Chandra and Enda Curran): "Workers in the world's richest countries are getting their biggest pay bump in a decade, a step toward solving a labor market puzzle that's unnerving central bankers. As shrinking unemployment in the U.S., Japan and euro zone finally forces companies to lift wages to retain and attract staff, JPMorgan... reckons pay growth in advanced economies hit 2.5% in the second quarter, the most since the eve of 2009's worldwide recession. The bank predicts wages will accelerate to near 3% next year."
September 20 - Bloomberg (Shawna Kwan): "There's expensive, and then there's Hong Kong property expensive. A four-bedroom house in the exclusive Peak neighborhood has hit the market for an eye-watering HK$3.5 billion ($446 million), which would make it the most expensive home sold in the city, if not the world. Villa Les Cedres, a 188-year-old, 14-bedroom mansion in the south of France, was last year listed for 350 million euros ($409 million). Don't expect a palatial estate though. The modestly-sized house at 24 Middle Gap Road sits on 16,330 square-feet of land, or just over a third of an acre, and comes with a swimming pool, parking for two cars and some dated 1990s decor."
Fixed Income Bubble Watch:
September 21 - Bloomberg (Brian Chappatta): "Bond investors often say that 'No one wants to be a forced seller.' And that makes perfect sense: If you need to sell during a rout, no matter the price, you're going to take a big hit. But it should be equally as scary to be a forced buyer. Increasingly, that's what happening in the U.S. high-yield corporate bond market. With ample cash and little new supply to purchase, investors have pushed the average spread on junk debt down to just 3.15 percentage points, close to the narrowest since 2007... As recently as 2016, that gap was more than twice as wide."
Three-month Treasury bill rates ended the week at 2.12%. Two-year government yields increased two bps to 2.80% (up 92bps y-t-d). Five-year T-note yields rose four bps to 2.95% (up 74bps). Ten-year Treasury yields jumped seven bps to 3.06% (up 66bps). Long bond yields rose seven bps to 3.20% (up 46bps). Benchmark Fannie Mae MBS yields gained five bps to 3.82% (up 82bps).
Greek 10-year yields slipped two bps to 4.05% (down 3bps y-t-d). Ten-year Portuguese yields added a basis point to 1.87% (down 7bps). Italian 10-year yields dropped 15 bps to 2.83% (up 81bps). Spain's 10-year yields increased one basis point to 1.50% (down 7bps). German bund yields added a basis point to 0.46% (up 4bps). French yields increased one basis point to 0.78% (down 1bp). The French to German 10-year bond spread was unchanged at 32 bps. U.K. 10-year gilt yields rose two bps to 1.55% (up 36bps). U.K.'s FTSE equities index surged 2.5% (down 2.6%).
Japan's Nikkei 225 equities index jumped 3.4% (up 4.9% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.13% (up 9bps). France's CAC40 rose 2.6% (up 3.4%). The German DAX equities index jumped 2.5% (down 3.8%). Spain's IBEX 35 equities index gained 2.4% (down 4.5%). Italy's FTSE MIB index rallied 3.1% (down 1.4%). EM equities were mostly higher. Brazil's Bovespa index surged 5.3% (up 4.0%), while Mexico's Bolsa slipped 0.5% (unchanged). South Korea's Kospi index increased 0.9% (down 5.2%). India's Sensex equities index fell 3.3% (up 8.2%). China's Shanghai Exchange recovered 4.3% (down 15.4%). Turkey's Borsa Istanbul National 100 index jumped 3.4% (down 15%). Russia's MICEX equities index rose 2.8% (up 15%).
Investment-grade bond funds saw inflows of $1.017 billion, and junk bond funds had inflows of $967 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates gained five bps to 4.65% (up 66bps y-o-y). Fifteen-year rates rose five bps to 4.11% (up 67bps). Five-year hybrid ARM rates slipped a basis point to 3.92% (up 45bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rate up 17 bps to 4.83% (up 68bps).
Federal Reserve Credit last week increased $2.7bn to $4.173 TN. Over the past year, Fed Credit contracted $252bn, or 5.7%. Fed Credit inflated $1.362 TN, or 48%, over the past 307 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $4.3bn last week to $3.426 TN. "Custody holdings" were up $50bn y-o-y, or 1.5%.
M2 (narrow) "money" supply declined $15.7bn last week to $14.230 TN. "Narrow money" gained $523bn, or 3.8%, over the past year. For the week, Currency increased $2.4bn. Total Checkable Deposits sank $93bn, while Savings Deposits jumped $71.3bn. Small Time Deposits increased $3.1bn. Retail Money Funds were little changed.
Total money market fund assets declined $15.8bn to $2.866 TN. Money Funds gained $141bn y-o-y, or 5.2%.
Total Commercial Paper gained $7.3bn to $1.074 TN. CP gained $31bn y-o-y, or 2.9%.
Currency Watch:
September 18 - Reuters (Kevin Yao): "China will not stoop to competitive devaluation of its currency, Premier Li Keqiang stressed, hours after China hit back, with a softer punch than the one landed by the United States, in an escalating tariff war between the world's largest economies. Addressing a World Economic Forum event in the port city of Tianjin…, Li did not directly mention the trade conflict but said talk of Beijing deliberately weakening its currency was 'groundless.' 'One-way depreciation of the yuan brings more harm than benefits for China,' he said. 'China will never go down the road of relying on yuan depreciation to stimulate exports.' China will not do that to chase 'thin profits' and 'a few small bucks'."
The U.S. dollar index declined 0.7% to 94.22 (up 2.3% y-t-d). For the week on the upside, the South African rand increased 4.3%, the Brazilian real 3.1%, the Swedish krona 2.6%, the New Zealand dollar 2.1%, the Australian dollar 1.9%, the Norwegian krone 1.3%, the euro 1.1%, the Swiss franc 1.0%, the Canadian dollar 0.9%, the Singapore dollar 0.8%, the Mexican peso 0.3%, and the South Korean won 0.1%. For the week on the downside, the Japanese yen declined 0.5%. The Chinese renminbi increased 0.15% versus the dollar this week (down 5.11% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index gained 2.0% (up 7.1% y-t-d). Spot Gold recovered 0.5% to $1,199 (down 8.0%). Silver rallied 1.5% to $14.359 (down 16.2%). Crude jumped $1.79 to $70.78 (up 17%). Gasoline rose 2.4% (up 12%), and Natural Gas surged 7.6% (up 1%). Copper surged 8.0% (down 13%). Wheat gained 1.6% (up 22%). Corn rose 1.6% (2%).
Trump Administration Watch:
September 21 - Bloomberg (Mike Dorning, Jenny Leonard and Mark Niquette): "U.S. President Donald Trump continued to hit out at China days after announcing another round of tariffs, signaling the trade war won't end any time soon. 'It's time to take a stand on China,' Trump said in an interview… 'We have no choice. It's been a long time. They're hurting us.'"
September 18 - Financial Times (James Politi and Demetri Sevastopulo): "President Donald Trump's preference for aggressively confronting China on trade had been apparent ever since the collapse of high-level talks between Washington and Beijing in May. But Monday's decision to impose tariffs on $200bn of Chinese imports brought the hostilities with China to an entirely new level, leaving little room for any settlement. 'It is my duty to protect the interests of working men and women, farmers, ranchers, businesses, and our country… My administration will not remain idle when those interests are under attack.'"
September 17 - Bloomberg (Christopher Balding): "As the trade war between the U.S. and China drags on with new tariffs and no end in sight, we need to ask ourselves: What do they want? A fundamental objective for both is to become less reliant on the other. The trade war should thus be reframed as a conscious uncoupling. Behind the rhetoric from both sides lies a profound distrust. U.S. suspicion stems from two specific issues. China is increasingly seen as a national security threat that fails to play by the rules. The Trump administration's stance has spurred debate over whether it was a mistake to allow admittance of a highly protectionist Communist country to the World Trade Organization… For its part, the government of Xi Jinping is concerned about China's dependence on U.S. technology and finished manufactured products. The focus of its Made In China 2025 plan is to shift Chinese consumption of high-tech products away from foreign, specifically American, manufacturers and toward domestic companies."
September 18 - Financial Times (Gideon Rachman): "They don't call them trade wars for nothing. The latest round of tit-for-tat trade sanctions between the US and China is driven by the same emotions of fear and pride that lead real wars to break out. One country makes an aggressive move, so the other feels obliged to respond in kind. Both sides fear that if they back down, they will lose face in the eyes of the world and of their own people. The Trump administration's view is that China has been 'cheating' on trade for decades. But instead of responding to the first round of US tariffs, imposed in July, with concessions, the Chinese reacted with tariffs of their own. So now President Donald Trump is imposing further tariffs of 10% on an extra $200bn-worth of Chinese exports. Predictably, rather than backing down, the Chinese have promised to respond to this latest round of measures with more tariffs on American goods. Following the logic of escalation, Mr Trump has pledged that will trigger yet more US tariffs - possibly at a higher rate of 25% - covering essentially all Chinese exports to America. Both sides are willing to risk a trade war because they think they have a good chance of winning."
September 18 - New York Times (Jim Tankersley and Alan Rappeport): "The Trump administration seems confident that consumers will not feel pain from its escalating trade war with China. 'Because it's spread over thousands and thousands of products, nobody's going to actually notice it at the end of the day,' Commerce Secretary Wilbur Ross told CNBC… But a pain-free trade war with China is nearly impossible. For American consumers, prices have already risen on some products that the administration targeted for tariffs this year - most notably, washing machines, which were subjected to steep tariffs in January."
September 18 - CNBC (Matthew J. Belvedere): "Commerce Secretary Wilbur Ross said… that new U.S. tariffs on China are aimed at modifying Beijing's behavior and leveling the playing field for American companies competing there. Ross appeared on CNBC the morning after the administration announced that President Donald Trump will impose 10% tariffs on $200 billion worth of Chinese imports, with those duties rising to 25% at the end of the year… Ross said… regarding the expected move, that China is 'out of bullets' to retaliate because its imports to the U.S. are nearly four times larger than the U.S. exports to China."
September 17 - CNBC (Kate Rooney): "Top White House Economic Advisor Larry Kudlow said while the administration needs to be tougher on spending, growth from recent tax cuts should fix the issue. 'If you grow rapidly you're going to have lesser deficits. Growth solves a lot of problems,' Kudlow said at the Economic Club of New York… 'The gap is principally spending too much.' Thanks to an uptick in gross domestic product, or GDP, after tax cuts, Kudlow said the U.S. has 'just about paid for two thirds of the total tax cuts.'"
September 17 - Reuters (Chris Prentice and David Lawder): "A top economic adviser to President Donald Trump said… he expects U.S. budget deficits of about 4% to 5% of the country's economic output for the next one to two years, adding that there would likely be an effort in 2019 to cut spending on entitlement programs. 'We have to be tougher on spending,' White House economic adviser Larry Kudlow said…, adding that government spending was the reason for the wider budget deficits, not the Republican-led tax cuts activated this year."
September 16 - New York Times (Alexandra Stevenson, Kate Kelly and Keith Bradsher): "When President Bill Clinton deliberated whether he should loosen trade barriers against China, Wall Street helped plead Beijing's case. When Presidents George W. Bush and Barack Obama talked tough about labeling China as a currency manipulator, Wall Street urged restraint - and both presidents backed down. Today, China is hoping that Wall Street will once again use its political heft to soothe tempers in Washington. But as President Trump ratchets up the trade war with Beijing, Wall Street's words are falling on deaf ears. Senior Wall Street executives met in Beijing on Sunday with current and former Chinese officials and bankers at a hastily organized session to find ways to strengthen financial ties between the United States and China."
September 19 - The Hill (Niv Elis): "Weeks before the midterm elections, conservatives in the House are gaining little traction on fiscal issues as Congress passed one spending bill after another in bipartisan votes. It's a significant shift from the last few years, when the House Freedom Caucus often threw a wrench into appropriations plans with demands to cut mandatory spending and advance other conservative priorities. 'It's a little bit frustrating right now,' said Rep. Mark Walker, the chairman of the Republican Study Committee (RSC), the largest GOP caucus in the House."
Federal Reserve Watch:
September 21 - Reuters (Howard Schneider): "Unemployment near a 20-year low screams at the U.S. Federal Reserve to raise interest rates or risk a too-hot economy. The bond market, not far from a state that typically precedes a recession, says not so fast. The decision of which to heed looms large when the Fed's interest-rate setters meet next week. Which path they follow will begin to define whether Chairman Jerome Powell engineers a sustained, recession-free era of full employment, or spoils the party with interest rate increases that prove too much for the economy to swallow. New Fed staff research and Powell's own remarks seem to put more weight on the risks of super-tight labor markets, which could mean a shift up in the Fed's rate outlook and a tougher tone in its rhetoric."
September 19 - CNBC (Jeff Cox): "When the Federal Reserve gathers next week, markets likely will be looking past a widely expected rate hike and toward the direction the central bank will chart ahead. A quarter-point increase in the Fed's benchmark funds rate is already baked in the cake. That will take the funds target to 2% to 2.25%, where it last was more than 10 years ago. The mystery for investors will be how officials view the future, particularly at a time when they've been making public statements that seem to indicate a difference of opinion over how aggressive policy needs to be as the economy ignites."
September 19 - Reuters (Steve Holland and Howard Schneider): "U.S. President Donald Trump intends to nominate former Federal Reserve economist Nellie Liang to the U.S. central bank's board of governors, the White House said… Earlier, two White House officials speaking on condition of anonymity told Reuters that Liang has a strong background on financial and monetary stability, including crisis response, and is considered a good fit for the Fed board."
U.S. Bubble Watch:
September 18 - Nextgov (Frank Konkel): "The federal government is primed to spend as much as $300 billion in the final quarter of fiscal 2018 as agencies rush to obligate money appropriated by Congress before Sept. 30 or return it to the Treasury Department. The spending spree is the product of the omnibus budget agreement signed six months late in March coupled with funding increases of $80 billion for defense and $63 billion for civilian agencies. The shortened time frame left procurement officials scrambling to find ways to spend the money. Through August, defense and civilian agencies obligated some $300 billion in contracts. But to spend all the money appropriated to them by Congress, they may have to obligate well over $200 billion more in the final quarter of fiscal 2018… 'It is not impossible for this to happen, but it is unprecedented for that high of a percentage to be obligated to contracts for a fiscal quarter,' David Berteau, president of the Professional Services Council, told Nextgov. 'You'd have to spend almost 50% of the yearly total in three months.'"
September 18 - Bloomberg (Shobhana Chandra): "President Donald Trump's decision to impose tariffs on an additional $200 billion of imports from China drags the biggest part of the U.S. economy into the thick of the trade war, threatening to deliver a more direct hit to growth. The 10% tariffs… affect everyday items including food, furniture, and clothing, making grocery shopping and holiday gifts potentially pricier. That broadens the trade fallout more directly into the realm of household spending, which accounts for about 70% of the U.S. economy."
September 20 - Reuters (Rishika Chatterjee and Nivedita Balu): "Walmart Inc said that it may hike prices of products if the Trump administration imposes a tariff on Chinese imports, according to a letter the company wrote to U.S. Trade Representative Robert Lighthizer… Walmart, the world's largest retailer, in its letter said the tariff would impact prices of everything from food products to beverages and personal care items."
September 18 - Wall Street Journal (Te-Ping Chen and Eric Morath): "U.S. employers are boosting benefits-including bonuses and vacation time-at a faster pace than salaries, a move that gives them more flexibility to dial back that compensation if the economy turns sour. The cost of benefits for private-sector employers rose 3% in June from a year earlier, while the cost of wages and salaries advanced 2.7%... The benefit gain was driven by a nearly 12% increase in bonuses and other forms of supplemental pay. Paid leave, including vacation time, rose 4% in June from a year earlier… 'Bonuses and supplemental pay speak to labor market conditions, and workers are in a good spot to get a little more,' said Ryan Sutton, a district president for staffing agency Robert Half. 'Companies are still reluctant to move base wages up too much. It's a lot harder to take that away than bonuses.'"
September 18 - CNBC (Thomas Franck): "Former White House economic advisor Gary Cohn said President Donald Trump will work with Congress to pass a massive debt-fueled infrastructure bill if Democrats take control of the House of Representatives in November. 'If the Democrats win the House I will be shocked if the first thing they don't do is infrastructure,' Cohn said… 'I think they'll do a trillion dollars, trillion and a half dollars of infrastructure, and the president will sign it.' 'Another trillion dollars of debt, here we come,' he added. A perennial issue for Washington lawmakers, the national debt is expected to rise to $28.7 trillion from $15.7 trillion over the next decade, according to the Congressional Budget Office."
September 13 - Bloomberg (Rachel Evans and Carolina Wilson): "If you work in exchange-traded funds, memories of 2008 aren't all doom and gloom. Lehman Brothers' collapse in September of that year ushered in a new era for ETFs. And they've been on a roll ever since. Assets in the low-cost portfolios that trade like stocks and typically track an index have swelled to $5 trillion globally, up from less than $700 billion before the financial crisis. Meanwhile, the number of funds has more than doubled as they gradually account for bigger and bigger pieces of the equity, bond and commodity markets. Although they started trading in the U.S. in 1993, the financial crisis marked a turning point for ETFs. Banks were forced to shed large inventories to bolster their balance sheets. And retail investors who'd lost their shirts went looking for ways to diversify their risk. ETFs offered both a solution."
September 19 - CNBC (Jeff Cox): "The 'Great Bull' market that came after the financial crisis is dead due to slowing economic growth, rising interest rates and too much debt, according to a Bank of America Merrill Lynch analysis. In its place will be one that features lower returns, the bulk of which will be concentrated in assets that suffered during the recovery, Michael Hartnett, BofAML's chief investment strategist, said: 'The Great Bull Dead: end of excess liquidity = end of excess returns,' Hartnett said. The liquidity reference is to central banks that have pumped in $12 trillion worth in various easing programs that have seen 713 interest rate cuts around the world…"
September 17 - Reuters (Anna Irrera and Svea Herbst-Bayliss): "Gary Cohn, the former economic adviser to U.S. President Donald Trump, gave a ringing endorsement of Wall Street bankers on Monday, arguing that borrowers were just as responsible for the 2007-2009 financial crisis as lenders and ridiculing rules intended to make the system stronger in its aftermath. In a wide-ranging conversation at an event hosted by Reuters Breakingviews…, Cohn's comments mostly tracked the sentiment of Wall Street bankers and other wealthy Americans who have felt unfairly maligned for the mortgage market's collapse and the economic downturn that ensued… Defending his fellow bankers, who are often blamed for causing and worsening the crisis, Cohn said borrowers played a hand in their financial disasters as well. 'Who broke the law? I just want to know who you think broke the law,' said Cohn. 'Was the waitress in Las Vegas who had six houses leveraged at 100% with no income, was she reckless and stupid? Or was the banker reckless and stupid?'"
September 19 - Bloomberg (Riley Griffin): "As U.S. household debt rises and wages stagnate, millions of Americans are thinking about tapping into home equity to keep up with day-to-day expenses. Twenty-four million homeowners believe borrowing against home equity is an acceptable way to cover regular bills, according to a Bankrate.com report… Cash-strapped millennials, low earners and the less educated were most likely to think home equity offered an appropriate solution to ordinary bills. 'Regular household bills should be funded by a regular household income, not home equity,' said Greg McBride, chief financial analyst at Bankrate.com. 'Wage growth has been elusive, but rising household expenses have not. And now home equity is being seen as a lifeline for those who are strapped for money with little wiggle room.'"
September 17 - Reuters (Laila Kearney): "While U.S. states' financial health has strengthened in 2018 compared with last year, fewer than half have enough financial reserves to weather the first year of a moderate recession, according to an S&P Global Ratings report… Only 20 states have the reserves needed to operate for the first year of an economic downturn without having to slash budgets or raise taxes, S&P said. 'In their fight against recessions, budget reserves are what states send to the frontline,' the report said. 'They are an internal source of immediate liquidity and can provide transitional funding to agencies before budget cuts take effect.' States face worse revenue shortfalls in the next recession compared with the Great Recession, S&P said. That is because states rely more heavily on personal income taxes as a percentage of general fund revenues now than a decade ago, with the taxes currently contributing a combined 55% to the funds compared with 49% in 2008, S&P said."
September 20 - Financial Times (Diana Olick): "After three years of soaring home prices, the heat is coming off the U.S. housing market. Home sellers are slashing prices at the highest rate in at least eight years, especially in the West, where the price gains were hottest. In the four weeks ended Sept. 16, more than one-quarter of the homes listed for sale had a price drop, according to Redfin, a real estate brokerage. That is the highest level since the company began tracking the metric in 2010. Redfin defines a price drop as a reduction in the list price of more than 1% and less than 50%."
September 17 - Wall Street Journal (Paul J. Davies): "People in the Carolinas are about to rediscover the difference between the damage a storm causes and what is covered by insurance. Hurricane Florence weakened considerably as it moved over the U.S. coast over the weekend, lessening its speed and causing much less wind damage than had been feared earlier last week. However, heavy rain and severe flooding have arrived, bringing tragedy in their wake. The problem is that while wind damage is well covered by insurers and reinsurers, flood damage is absent from most homeowner policies and is typically an optional cover in commercial policies."
September 20 - Wall Street Journal (Katherine Clarke): "Entertainers Beyoncé and Jay-Z and billionaire hedge-fund executive Ken Griffin have something in common: They are among a small but growing number of ultraluxury home buyers who are borrowing tens of millions of dollars for home purchases. The trend bucks the tradition of the ultrawealthy paying cash for their super-pricey homes. Mortgage experts attribute the shift toward so-called 'superjumbo loans' over the past couple of years to rising real-estate prices across the country and the historically low interest rate environment, which encourages wealthy buyers to borrow against their real estate to free up cash to invest elsewhere."
China Watch:
September 18 - Reuters (Kevin Yao): "Maintaining China's steady growth is increasingly difficult amid significant changes in the external environment, but China will not resort to massive stimulus, Premier Li Keqiang said… China has ample policy tools to cope with difficulties and challenges, and it will keep macro-economic policies steady, Li said in a speech at the World Economic Forum in Tianjin."
September 18 - CNBC (Tae Kim): "China said it will institute new tariffs on U.S. goods worth $60 billion on Sept. 24, according to a Reuters report. The media outlet said the Asian country's tariff rate on a list of 5,207 U.S. products will range between 5% and 10%."
September 18 - Financial Times (Tom Mitchell and Gabriel Wildau): "When Donald Trump declared on Monday that he would impose punitive tariffs on about half of all Chinese exports to the US, it was a moment that President Xi Jinping had long believed would never come. For two years after Mr Trump emerged as a force to be reckoned in the 2016 US presidential campaign, Mr Xi and his lieutenants clung to precedent for comfort. While American presidential candidates routinely bashed China on the campaign trail, once in the White House they played down differences with their geopolitical rival. As Mr Xi said at his first meeting with Mr Trump in the spring of 2017: 'We have a thousand reasons to get US-China relations right, and not one reason to spoil them.' Mr Xi's administration began to appreciate this year that Mr Trump intended to practise as president what he had preached as a candidate."
September 16 - Reuters (Michael Martina, Ryan Woo, Christian Shepherd and Susan Heavey): "China will not be content to only play defense in an escalating trade war with the United States, a widely read Chinese tabloid warned… The Global Times, which is published by the ruling Communist Party's People's Daily, wrote in an editorial: 'It is nothing new for the U.S. to try to escalate tensions so as to exploit more gains at the negotiating table.' 'We are looking forward to a more beautiful counter-attack and will keep increasing the pain felt by the U.S.,' the… column said. Besides retaliating with tariffs, China could also restrict export of goods, raw materials and components core to U.S. manufacturing supply chains, former finance minister Lou Jiwei told a Beijing forum…"
September 18 - CNBC (Patti Domm): "China's holdings of U.S. Treasury bills, notes and bonds dropped to a six month low of $1.171 trillion in July, from $1.178 trillion in June. The data is closely watched, since dumping Treasury securities is viewed as one way China could retaliate against the U.S. in an ongoing trade dispute… China is the biggest holder of U.S. Treasurys, followed by Japan. Japan's holdings rose to $1.04 trillion from $1.03 trillion in June… Strategists say China is much more likely to retaliate against U.S. tariffs by slapping its own tariffs on American goods… Some market pros believe China would use its currency as a weapon before it would dump Treasurys."
September 18 - Reuters (Jamie McGeever): "One of the foundations upon which the economic and financial relationship between the United States and China over the past 15 years has been built is the assumption that Beijing won't sell its vast holdings of U.S. Treasuries. The financial damage to both countries, and the potential fallout beyond the monetary effect, would be so profound that it simply wouldn't happen, so the theory goes. Disregarding this would be the economic superpower equivalent of the Cold War's 'mutually assured destruction' doctrine. But with trade tensions between the two countries escalating dramatically, it may no longer be a total long shot. It's a scenario being contemplated now more than at any point in recent years…"
September 19 - Financial Times (Jamie Powell): "Name the following Chinese company: It boasts an enterprise value of $145bn. In the first half of the year it generated $44bn of revenues and $4.5bn of profits, paying out half in dividends. It has $98bn of debt, $44bn of it due within the next twelve months. The answer is China Evergrande, a real estate kraken with tentacles stretching across China. It does all things property including development, investment, management and construction, along with a host of smaller ventures in technology, finance and healthcare. That reach makes some of the numbers mind boggling, particularly when it comes to the company's debt. For instance, it paid $4.2bn of interest over the first six months of 2018... In part that's because Evergrande pays a lot to borrow: its average financing cost of 8.3% is the highest of peers, which pay an average 5.9% interest rate…"
September 20 - Bloomberg: "China's government plans to outlaw foreign TV shows in prime time and to limit imported content in fast-growing streaming platforms. The rules released Sept. 20 extend restrictions that have for years narrowed access to non-Chinese programming to curb what officials have characterized as negative influences on viewers. The National Radio and Television Administration proposal will also limit air time for foreign content and cap the participation of talent from outside the country."
EM Watch:
September 19 - Reuters (Walter Bianchi and Scott Squires): "Argentina's gross domestic product contracted 4.2% in the second quarter of 2018 from the same period last year and 3.9% from the prior quarter… Sky-high interest rates have shut off growth in the recession-hit country while failing to bolster its beleaguered peso currency, which has slumped more than 52% against the dollar so far this year."
September 20 - Financial Times (Laura Pitel and Jonathan Wheatley): "Turkey's finance minister has slashed the country's economic growth targets and promised to cut public spending by nearly $10bn as the country tries to rebuild shattered market confidence and find a way out of a currency crisis. Investors welcomed the decision by Berat Albayrak, who was put in charge of the economy two months ago by his father-in-law, President Recep Tayyip Erdogan, to reduce growth projections to 3.8% in 2018 and 2.3% in 2019. The previous target was 5.5% for both years. But some were sceptical about the credibility of a proposal to reduce the budget deficit to 1.9% of gross domestic product this year and 1.8%in 2019. They voiced disappointment, too, over the absence of a strategy to support Turkish banks, which face mounting bad loans."
September 17 - Bloomberg (Asli Kandemir, Taylan Bilgic, Ercan Ersoy and Kerim Karakaya): "The Turkish government will unveil measures to help banks tackle the expected pile-up of bad loans resulting from the lira's plunge and soaring interest rates, according to people with knowledge of the matter. The plan will seek to mitigate the need for capital injections and propose transferring non-performing loans to a state-designated entity… Lenders have been struggling to deal with a rising number of restructurings after the lira dropped 40% against the dollar this year…"
September 19 - Financial Times (Laura Pitel and Funja Guler): "Little more than a year ago, the head of the Turkish construction company Sur Yapi was opening a glitzy new shopping centre in the western city of Bursa, thanking a crowd of local dignitaries assembled on its immaculate plaza. But Turkey's economic turmoil has turned that celebratory mood into a memory as shopping malls, once a symbol of the country's economic boom, find themselves at the sharp end of a currency crisis. Sur Yapi recently faced a tenants' revolt in the Bursa mall as a group of shops pulled down their shutters in protest at the growing burden of rents that were indexed to the euro… Thousands of companies, including Sur Yapi, took advantage of foreign currency loans to fund their investments, but are now grappling with the fallout from a slide in the Turkish lira."
September 20 - Bloomberg (Aashika Suresh): "It's little wonder that debt defaults by key Indian shadow bank Infrastructure Leasing & Financial Services Ltd. have shocked credit traders: not only are nonpayments rare in the country, but the conglomerate is a major player in the market.IL&FS's outstanding debentures and commercial paper accounted for 1% and 2%, respectively, of India's domestic corporate debt market as of March 31, according to Moody's… The liquidity problems at IL&FS are raising concern about broader fallout among Indian lenders, already struggling to clean up more than $210 billion of stressed debt on their balance sheets. And the group's complex corporate structure makes problems worse -- it has 169 subsidiaries, associates and joint ventures."
September 21 - Financial Times (Chloe Cornish): "The cost of insurance on Lebanese sovereign bonds has soared in recent weeks, reflecting concerns about the sustainability of the country's debt burden as its economy slows and faces a potential cash crunch. Like many emerging markets, rising global interest rates are swelling Lebanon's external financing costs as the economy's growth rate slows to 1.3% this year. The country has the world's third highest debt-to-GDP ratio at 150%, a legacy of borrowing from public markets to rebuild after its devastating civil war."
Central Bank Watch:
September 18 - Wall Street Journal (Tom Fairless): "The race to succeed Mario Draghi as European Central Bank president presents Germany with a stark choice: Back the country's own candidate, a foe of Mr. Draghi's 2.5-trillion-euro bond-buying program, or concede that once-unorthodox monetary tools are here to stay. Germany's central bank, long a powerful voice in the global fight against inflation, has grown out of sync in the postfinancial crisis era of stagnant prices and wages, with its greatly expanded role for central banks and outside-the-box policies. 'Perhaps the sands have shifted,' said Stefan Gerlach, former deputy governor of Ireland's central bank. 'Having been on the wrong side of history, at least as it appears now, has not helped the Germans.' Now, with the jockeying among European capitals already under way, Berlin must decide in the coming months whether to endorse Jens Weidmann, president of Germany's central bank, who has likened printing money to the devil and testified against Mr. Draghi's crisis-era bond program in a German court."
September 17 - CNBC (Eustance Huang): "Borrowing costs remain too low today and it's 'hurting our savers,' said Allianz CEO Oliver Bäte. 'European money is too cheap and that leads to misallocation of assets,' Bäte told CNBC's Nancy Hungerford… 'We still have a lot of mismanagement in the central bank side.' Bäte said schemes such as the European Central Bank's 'ultra-loose' monetary policy - which has been in place since the global financial crisis of 2008 - will 'just make money cheaper for over indebted governments.' He said it was not helping the economy, and just makes it easier for people to borrow money."
Europe Watch:
September 21 - Financial Times (Laura Hughes and George Parker): "A defiant Theresa May on Friday accused EU leaders of failing to show "respect" to Britain and threw down the gauntlet to Brussels to shift its position or risk a breakdown in Brexit negotiations and a no deal exit. In a statement delivered in Downing Street in front of two union flags, Mrs May said Britain stood ready to leave the EU without a deal and admitted Brexit negotiations had run into the sand. 'We are at an impasse… It is not acceptable to simply reject the other side's proposals without a detailed explanation and counter-proposals. I will not overturn the result of the referendum nor will I break up my country.'"
Global Bubble Watch:
September 16 - Reuters (Andrea Shalal): "Governments cannot completely prevent a repeat of events like the 2008 global financial crisis even though regulations have been tightened since the collapse of Lehman Brothers a decade ago, Germany's top central banker told Bild newspaper. Bundesbank President Jen Weidmann said German banks were not only victims of the 2008 financial crisis, but many institutions had also taken on more risk than they could ultimately carry. Regulations had been tightened since then, but it would be 'an illusion' to think that governments could completely avert such crises, he said."
September 20 - Bloomberg (William Horobin): "The global economy is shrouded in 'high uncertainty' as the outlook for emerging markets deteriorates sharply and trade tensions intensify, the Organization for Economic Cooperation and Development said. The gloomy analysis has pushed the Paris-based institution to cut its global growth forecasts for this year and next with particularly sharp revisions for Turkey, Argentina, South Africa and Brazil. Since its last economic forecasts in May, the OECD said differences between economies have widened, confidence has fallen, and business surveys across the world point to a slowdown. 'Global growth is hitting a plateau,' its chief economist, Laurence Boone, said…"
September 18 - Reuters (Gayatri Suroyo): "Confidence among Asian companies slumped to the weakest in almost three years in the third quarter as businesses feared blowback from a worsening global trade war, a Thomson Reuters/INSEAD survey showed. Representing the six-month outlook of 104 firms, the… Asian Business Sentiment Index fell to 58 for the July-September quarter, its lowest since the fourth quarter of 2015, from 74 three months before."
September 18 - Reuters (Jacob Gronholt-Pedersen and Teis Jensen): "Danske Bank's chief executive Thomas Borgen resigned on Wednesday after an investigation revealed payments totaling 200 billion euros ($234bn) through its small Estonian branch, many of which the bank said were suspicious. The Danish bank detailed compliance and control failings amid growing calls for a European Union crackdown on financial crime after a series of money laundering scandals which have attracted the attention of U.S. authorities."
September 18 - Bloomberg (Satyajit Das): "Markets have served a timely reminder of the latent risk from derivatives - the wild beasts of finance. Ten years after the collapse of Lehman Brothers… a private trader and one of Norway's richest men suffered 114 million euros ($132.6 million) of losses on energy-futures positions traded on Nasdaq. The default ate through around two-thirds of Nasdaq's mutual default fund, using up several layers of protection. Members of the clearing house must now make substantial cash contributions to rebuild that cushion. Given derivative-market and counterparty credit risk of $13 trillion, the losses were relatively small and the risk was contained. Yet the event nonetheless raises concerns about the system's ability to withstand defaults by one or more major market participants, for which losses could potentially be much greater."
September 17 - Bloomberg (Jeanna Smialek, Shobhana Chandra and Enda Curran): "Workers in the world's richest countries are getting their biggest pay bump in a decade, a step toward solving a labor market puzzle that's unnerving central bankers. As shrinking unemployment in the U.S., Japan and euro zone finally forces companies to lift wages to retain and attract staff, JPMorgan... reckons pay growth in advanced economies hit 2.5% in the second quarter, the most since the eve of 2009's worldwide recession. The bank predicts wages will accelerate to near 3% next year."
September 20 - Bloomberg (Shawna Kwan): "There's expensive, and then there's Hong Kong property expensive. A four-bedroom house in the exclusive Peak neighborhood has hit the market for an eye-watering HK$3.5 billion ($446 million), which would make it the most expensive home sold in the city, if not the world. Villa Les Cedres, a 188-year-old, 14-bedroom mansion in the south of France, was last year listed for 350 million euros ($409 million). Don't expect a palatial estate though. The modestly-sized house at 24 Middle Gap Road sits on 16,330 square-feet of land, or just over a third of an acre, and comes with a swimming pool, parking for two cars and some dated 1990s decor."
Fixed Income Bubble Watch:
September 21 - Bloomberg (Brian Chappatta): "Bond investors often say that 'No one wants to be a forced seller.' And that makes perfect sense: If you need to sell during a rout, no matter the price, you're going to take a big hit. But it should be equally as scary to be a forced buyer. Increasingly, that's what happening in the U.S. high-yield corporate bond market. With ample cash and little new supply to purchase, investors have pushed the average spread on junk debt down to just 3.15 percentage points, close to the narrowest since 2007... As recently as 2016, that gap was more than twice as wide."
September 21 - Bloomberg (Misyrlena Egkolfopoulou and Sally Bakewell): "Money managers, eager for assets whose yields rise as the Federal Reserve hikes rates, snatched up some of the year's biggest leveraged loan offerings this week. Some caution that investors may be buying at the wrong time… Retail investors have poured cash into funds that buy loans, with $282 million of inflows into mutual funds and exchange traded funds in the week ended Sept. 12, the 10th straight week of money coming in, according to Lipper data. Pension funds have also been big buyers of credit products Broadly…"
September 18 - Wall Street Journal (Sam Goldfarb and Soma Biswas): "One of the largest-ever sales of speculative-grade debt was completed with ease on Tuesday, a sign of the favorable environment for U.S. borrowers at a time of robust economic growth and strong demand from investors. The $13.5 billion sale-which a Blackstone Group LP-led investor group is using to acquire a 55% stake in a Thomson Reuters Corp. data business called Refinitiv-comprised $9.25 billion of loans and $4.25 billion of secured and unsecured bonds, with different pieces denominated in U.S. dollars and euros."
September 18 - Wall Street Journal (Sam Goldfarb and Soma Biswas): "One of the largest-ever sales of speculative-grade debt was completed with ease on Tuesday, a sign of the favorable environment for U.S. borrowers at a time of robust economic growth and strong demand from investors. The $13.5 billion sale-which a Blackstone Group LP-led investor group is using to acquire a 55% stake in a Thomson Reuters Corp. data business called Refinitiv-comprised $9.25 billion of loans and $4.25 billion of secured and unsecured bonds, with different pieces denominated in U.S. dollars and euros."
Thursday, September 20, 2018
Friday's News Links
[Reuters] Receding trade fears help stocks hit six-month high
[CNBC] Sterling slides to session low as PM May says UK and EU 'at an impasse'
[Reuters] Expect volume spike on sector reshuffle, quadruple witching
[Reuters] Fed's Powell between a rock and hard place: Ignore the yield curve or tight job market?
[Reuters] Japan uneasy over Trump pressure on auto as summit, trade talks loom
[Reuters] Walmart warns Trump tariffs may force price hikes: letter
[CNBC] JPMorgan: An economic cold war may be coming
[BloombergQ] Why Panic Gripped Indian Markets Today
[BloombergQ] Defaulted India Shadow Bank Is Major Player in Local Debt Market
[BloombergQ] Four-Bedroom Home Goes on Sale in Hong Kong for $446 Million
[BloombergQ] China Plans to Outlaw Foreign TV Shows in Prime Time
[Reuters] Iran puts on 'show of strength' military exercise in Gulf
[FT] Defiant May throws down gauntlet to EU over Brexit
[FT] Reality of painful tariffs point to long-term test for China
[FT] CDS market signals risk of a cash crunch looming for Lebanon
[CNBC] Sterling slides to session low as PM May says UK and EU 'at an impasse'
[Reuters] Expect volume spike on sector reshuffle, quadruple witching
[Reuters] Fed's Powell between a rock and hard place: Ignore the yield curve or tight job market?
[Reuters] Japan uneasy over Trump pressure on auto as summit, trade talks loom
[Reuters] Walmart warns Trump tariffs may force price hikes: letter
[CNBC] JPMorgan: An economic cold war may be coming
[BloombergQ] Why Panic Gripped Indian Markets Today
[BloombergQ] Defaulted India Shadow Bank Is Major Player in Local Debt Market
[BloombergQ] Four-Bedroom Home Goes on Sale in Hong Kong for $446 Million
[BloombergQ] China Plans to Outlaw Foreign TV Shows in Prime Time
[Reuters] Iran puts on 'show of strength' military exercise in Gulf
[FT] Defiant May throws down gauntlet to EU over Brexit
[FT] Reality of painful tariffs point to long-term test for China
[FT] CDS market signals risk of a cash crunch looming for Lebanon
Thursday Evening Links
[Reuters] Wall Street rises, Dow hits new high
[BloombergQ] U.S. Household Wealth Hit Record $106.9 Trillion Last Quarter
[Reuters] NAFTA talks grind on, Canada quells talk of U.S. quota on autos
[CNBC] Home sellers slash prices, especially in California
[CNBC] Bove: There's a global currency crisis unfolding that's sure to catch up to the US
[Reuters] U.S. sanctions China for buying Russia war planes, missiles
[WSJ] There Have Never Been So Many Bonds That Are Almost Junk
[WSJ] What Beyoncé and These Billionaires Have in Common: Massive Mortgages
[WSJ] Growing Opposition Threatens Completion of Last U.S. Nuclear Plant
[WSJ] Latin America Is the Murder Capital of the World
[BloombergQ] U.S. Household Wealth Hit Record $106.9 Trillion Last Quarter
[Reuters] NAFTA talks grind on, Canada quells talk of U.S. quota on autos
[CNBC] Home sellers slash prices, especially in California
[CNBC] Bove: There's a global currency crisis unfolding that's sure to catch up to the US
[Reuters] U.S. sanctions China for buying Russia war planes, missiles
[WSJ] There Have Never Been So Many Bonds That Are Almost Junk
[WSJ] What Beyoncé and These Billionaires Have in Common: Massive Mortgages
[WSJ] Growing Opposition Threatens Completion of Last U.S. Nuclear Plant
[WSJ] Latin America Is the Murder Capital of the World
Wednesday, September 19, 2018
Thursday's News Links
[BloombergQ] Stocks Push Higher as Yields Climb, Dollar Falls: Markets Wrap
[Reuters] Dollar near 7-week low as markets look past trade woes, pound eyes EU summit
[Reuters] U.S. existing home sales unchanged in August
[Reuters] U.S. weekly jobless claims fall as labor market strength continues
[Reuters] China urges U.S. to show sincerity, correct behavior in trade actions
[BloombergQ] The Fight to Protect the Fed From Trump’s Rate-Hike Barbs
[BloombergQ] Trump's Early Trade-War Advantage May Be Slipping by the Day
[Reuters] Forecasters unanimous: U.S.-China trade war bad for economy - Reuters poll
[BloombergQ] Emerging Markets, Trade Put a Cloud on Global Economy, OECD Says
[CNBC] DoubleLine's Gundlach warns US Treasury yields are headed higher
[WSJ] ‘Safety’ Stocks Fuel Market Rally
[FT] Turkey unveils plan to fight currency crisis
[FT] The panic over liquidity exacerbated the crisis
[FT] Evergrande: debt behemoth
[Reuters] Dollar near 7-week low as markets look past trade woes, pound eyes EU summit
[Reuters] U.S. existing home sales unchanged in August
[Reuters] U.S. weekly jobless claims fall as labor market strength continues
[Reuters] China urges U.S. to show sincerity, correct behavior in trade actions
[BloombergQ] The Fight to Protect the Fed From Trump’s Rate-Hike Barbs
[BloombergQ] Trump's Early Trade-War Advantage May Be Slipping by the Day
[Reuters] Forecasters unanimous: U.S.-China trade war bad for economy - Reuters poll
[BloombergQ] Emerging Markets, Trade Put a Cloud on Global Economy, OECD Says
[CNBC] DoubleLine's Gundlach warns US Treasury yields are headed higher
[WSJ] ‘Safety’ Stocks Fuel Market Rally
[FT] Turkey unveils plan to fight currency crisis
[FT] The panic over liquidity exacerbated the crisis
[FT] Evergrande: debt behemoth
Wednesday Evening Links
[Reuters] Banks lift S&P, Dow; Nasdaq weighed by Microsoft
[Reuters] Trump intends to nominate ex-Fed economist Liang for Fed board seat: White House
[Reuters] Argentina's GDP shrinks 4.2 pct in 2nd quarter
[CNBC] The 'Great Bull' market is 'dead,' and here's what's next, Bank of America predicts
[The Hill] Conservatives left frustrated as Congress passes big spending bills
[Reuters] Canada's Trudeau urges some U.S. flexibility in NAFTA talks
[Reuters] Merkel coalition slides into 'permanent crisis mode' with spy row
[FT] Turkey’s shopping centres at sharp end of currency crisis
[FT] How the biggest private equity firms became the new banks
[Reuters] Trump intends to nominate ex-Fed economist Liang for Fed board seat: White House
[Reuters] Argentina's GDP shrinks 4.2 pct in 2nd quarter
[CNBC] The 'Great Bull' market is 'dead,' and here's what's next, Bank of America predicts
[The Hill] Conservatives left frustrated as Congress passes big spending bills
[Reuters] Canada's Trudeau urges some U.S. flexibility in NAFTA talks
[Reuters] Merkel coalition slides into 'permanent crisis mode' with spy row
[FT] Turkey’s shopping centres at sharp end of currency crisis
[FT] How the biggest private equity firms became the new banks
Tuesday, September 18, 2018
Wednesday's News Links
[Reuters] Rise in Treasury yields weighs on Wall St.
[Reuters] World stocks bat aside trade war fears, rally for second day
[Reuters] Dollar near seven-week lows as investors look for fresh drivers
[Reuters] U.S. housing starts rise on jump in multi-family construction
[CNBC] The Federal Reserve has some big decisions to make starting next week
[Reuters] China says won't weaken currency to boost exports, as U.S. tariffs mount
[Reuters] Danske Bank boss quits over $234 billion money laundering scandal
[CNBC] Weekly mortgage applications rise 1.6% as interest rates hit a 7-year high
[BloombergQ] Cash-Strapped Americans Are Leveraging Their Homes to Pay the Bills
[Reuters] Asian firms' confidence sinks to near three-year low on trade war fears: Thomson Reuters/INSEAD poll
[Reuters] Maintaining China's steady growth increasingly difficult: Premier Li
[CNBC] China will 'emerge stronger' from tariff war, Beijing newspaper says
[BloombergQ] A Chinese Company Reshaping the World Leaves a Troubled Trail
[FT] Recep Tayyip Erdogan’s financial and strategic dilemmas
[FT] The great debate over passive investing and its economic impact
[Reuters] World stocks bat aside trade war fears, rally for second day
[Reuters] Dollar near seven-week lows as investors look for fresh drivers
[Reuters] U.S. housing starts rise on jump in multi-family construction
[CNBC] The Federal Reserve has some big decisions to make starting next week
[Reuters] China says won't weaken currency to boost exports, as U.S. tariffs mount
[Reuters] Danske Bank boss quits over $234 billion money laundering scandal
[CNBC] Weekly mortgage applications rise 1.6% as interest rates hit a 7-year high
[BloombergQ] Cash-Strapped Americans Are Leveraging Their Homes to Pay the Bills
[Reuters] Asian firms' confidence sinks to near three-year low on trade war fears: Thomson Reuters/INSEAD poll
[Reuters] Maintaining China's steady growth increasingly difficult: Premier Li
[CNBC] China will 'emerge stronger' from tariff war, Beijing newspaper says
[BloombergQ] A Chinese Company Reshaping the World Leaves a Troubled Trail
[FT] Recep Tayyip Erdogan’s financial and strategic dilemmas
[FT] The great debate over passive investing and its economic impact
Tuesday Evening Links
[Reuters] Wall Street rises as blow from new tariffs less than feared
[MarketWatch] 10-year Treasury note yield extends climb above 3%
[Reuters] As trade war escalates, China's US Treasury holdings back in focus: McGeever
[Reuters] China's US Treasury holdings just fell to six-month low amid escalating trade war
[Nextgov] ‘Unprecedented’ Government Spending Spree Picks Up Speed
[CNBC] 'Another trillion in debt, here we come': Cohn sees Trump working with Democrats on infrastructure
[NYT] Consumers Will Increasingly Feel Pain From Trump’s Trade War. Here’s Why.
[WSJ] ECB Succession Race Tests German Faith in Bundesbank Model
[WSJ] Benefit Gains Exceed Wage Growth, New Labor Data Show
[WSJ] Giant Debt Offer Shows Appetite for Low-Rated Companies
[FT] China prepares to dig in its heels in face of US tariff pressure
[FT] White House hawks ratchet up trade hostilities with China
[BloombergSub] China Cuts U.S. Treasury Holdings as Trade War Starts Heating Up
[MarketWatch] 10-year Treasury note yield extends climb above 3%
[Reuters] As trade war escalates, China's US Treasury holdings back in focus: McGeever
[Reuters] China's US Treasury holdings just fell to six-month low amid escalating trade war
[Nextgov] ‘Unprecedented’ Government Spending Spree Picks Up Speed
[CNBC] 'Another trillion in debt, here we come': Cohn sees Trump working with Democrats on infrastructure
[NYT] Consumers Will Increasingly Feel Pain From Trump’s Trade War. Here’s Why.
[WSJ] ECB Succession Race Tests German Faith in Bundesbank Model
[WSJ] Benefit Gains Exceed Wage Growth, New Labor Data Show
[WSJ] Giant Debt Offer Shows Appetite for Low-Rated Companies
[FT] China prepares to dig in its heels in face of US tariff pressure
[FT] White House hawks ratchet up trade hostilities with China
[BloombergSub] China Cuts U.S. Treasury Holdings as Trade War Starts Heating Up
Monday, September 17, 2018
Tuesday's News Links
[BloombergQ] Stocks Shrug Off New Tariffs; Treasuries Yield 3%: Markets Wrap
[CNBC] China says new tariffs on US goods worth $60 billion effective Sept. 24
[Reuters] China says Trump forces its hand, will retaliate against new U.S. tariffs
[BloombergQ] Trump’s Tariffs Will Make Food and Clothes Pricier for Americans
[CNBC] Commerce Secretary Wilbur Ross: China is 'out of bullets' to retaliate against Trump's new tariffs
[Bloomberg, Das] The Risk of Derivatives Isn’t Gone. It’s Merely Morphed.
[CNBC] There's still a lot of central bank 'mismanagement,' says Allianz CEO
[Reuters] 'Who broke the law?' Cohn says in defending Wall Street's role in crisis
[Reuters] Israel indirectly to blame for downing of plane over Syria, Russia says
[WSJ] Chinese Officials Scramble to Respond to Trump’s New Tariffs
[WSJ] Buyback ‘Blackout’ to Test U.S. Stock Market
[WSJ] Florence Is a Tragedy for Homeowners, Not Insurers
[FT] Explained: Donald Trump’s $200bn of new tariffs on China
[FT] The US, China and the logic of trade confrontation
[FT, Weber] Preventive measures will not stop the next financial crisis
[CNBC] China says new tariffs on US goods worth $60 billion effective Sept. 24
[Reuters] China says Trump forces its hand, will retaliate against new U.S. tariffs
[BloombergQ] Trump’s Tariffs Will Make Food and Clothes Pricier for Americans
[CNBC] Commerce Secretary Wilbur Ross: China is 'out of bullets' to retaliate against Trump's new tariffs
[Bloomberg, Das] The Risk of Derivatives Isn’t Gone. It’s Merely Morphed.
[CNBC] There's still a lot of central bank 'mismanagement,' says Allianz CEO
[Reuters] 'Who broke the law?' Cohn says in defending Wall Street's role in crisis
[Reuters] Israel indirectly to blame for downing of plane over Syria, Russia says
[WSJ] Chinese Officials Scramble to Respond to Trump’s New Tariffs
[WSJ] Buyback ‘Blackout’ to Test U.S. Stock Market
[WSJ] Florence Is a Tragedy for Homeowners, Not Insurers
[FT] Explained: Donald Trump’s $200bn of new tariffs on China
[FT] The US, China and the logic of trade confrontation
[FT, Weber] Preventive measures will not stop the next financial crisis
Monday Evening Links
[CNBC] Stock futures drop following new US tariffs on China
[SCMP] Donald Trump hits China with US$200 billion more in tariffs, once again escalating trade war
[CNBC] Trump will slap 10% tariffs on $200 billion in Chinese goods — and they will go to 25% at year end
[CNBC] Trade war could become currency war depending on how China fights back
[BloombergQ] Stocks Pressured on Fresh Trade Fears; Dollar Dips: Markets Wrap
[BloombergQ] China to Cancel Talks If Trump Moves Ahead With Tariffs, Sources Say
[Reuters] Trump adviser eyes entitlement cuts to plug U.S. budget gaps
[CNBC] Kudlow says White House aware of the rising deficit, but economic 'growth solves a lot of problems'
[CNBC] Former Trump economic advisor Gary Cohn: Jamie Dimon would make a 'phenomenal president'
[Reuters] Most U.S. states lack reserves to weather next recession: S&P
[Reuters] Chancellor: The legacy of ultralow interest rates
[WSJ] Trump Announces New Tariffs on Chinese Imports
[SCMP] Donald Trump hits China with US$200 billion more in tariffs, once again escalating trade war
[CNBC] Trump will slap 10% tariffs on $200 billion in Chinese goods — and they will go to 25% at year end
[CNBC] Trade war could become currency war depending on how China fights back
[BloombergQ] Stocks Pressured on Fresh Trade Fears; Dollar Dips: Markets Wrap
[BloombergQ] China to Cancel Talks If Trump Moves Ahead With Tariffs, Sources Say
[Reuters] Trump adviser eyes entitlement cuts to plug U.S. budget gaps
[CNBC] Kudlow says White House aware of the rising deficit, but economic 'growth solves a lot of problems'
[CNBC] Former Trump economic advisor Gary Cohn: Jamie Dimon would make a 'phenomenal president'
[Reuters] Most U.S. states lack reserves to weather next recession: S&P
[Reuters] Chancellor: The legacy of ultralow interest rates
[WSJ] Trump Announces New Tariffs on Chinese Imports
Sunday, September 16, 2018
Monday's News Links
[BloombergQ] Stocks Fall as Trade Fears Return; Dollar Slips: Markets Wrap
[BloombergQ] Turkish Lira Slides as Isbank Fallout Dilutes Rate-Hike Support
[Reuters] U.S. 10-year yield hits highest in four months
[BloombergQ] China’s Stocks Drop to Lowest Level in Nearly Four Years
[BloombergQ] China-U.S. Tariff Talks at Risk After Trump's Latest Threats, WSJ Reports
[Reuters] China won't just play defense in trade war, Global Times says
[CNBC] Monetary policy is directly responsible for economic and financial stability
[BloombergQ] A Roadmap for the Great U.S.-China Divorce
[CNBC] The next crisis could be triggered by the US-China trade war, interest rates: Sovereign wealth chief
[BloombergQ] Turkey Planning Help for Banks on Anticipation of Bad Loans
[BloombergQ] World’s Richest Economies Enjoy Biggest Pay Raise in a Decade
[BloombergQ, El-Erian] Central Banks Strike Back
[NYT] As Trump’s Trade War Mounts, China’s Wall Street Allies Lose Clout
[WSJ] Big Storms Leave Small Marks on the U.S. Economy
[FT] China prepares for new phase of Trump-led trade war
[FT] How US banks took over the financial world
[BloombergSub] One of China's Wildest Housing Markets Is Broken
[BloombergQ] Turkish Lira Slides as Isbank Fallout Dilutes Rate-Hike Support
[Reuters] U.S. 10-year yield hits highest in four months
[BloombergQ] China’s Stocks Drop to Lowest Level in Nearly Four Years
[BloombergQ] China-U.S. Tariff Talks at Risk After Trump's Latest Threats, WSJ Reports
[Reuters] China won't just play defense in trade war, Global Times says
[CNBC] Monetary policy is directly responsible for economic and financial stability
[BloombergQ] A Roadmap for the Great U.S.-China Divorce
[CNBC] The next crisis could be triggered by the US-China trade war, interest rates: Sovereign wealth chief
[BloombergQ] Turkey Planning Help for Banks on Anticipation of Bad Loans
[BloombergQ] World’s Richest Economies Enjoy Biggest Pay Raise in a Decade
[BloombergQ, El-Erian] Central Banks Strike Back
[NYT] As Trump’s Trade War Mounts, China’s Wall Street Allies Lose Clout
[WSJ] Big Storms Leave Small Marks on the U.S. Economy
[FT] China prepares for new phase of Trump-led trade war
[FT] How US banks took over the financial world
[BloombergSub] One of China's Wildest Housing Markets Is Broken
Sunday Evening Links
[BloombergQ] Asia Stocks Face Drop as Trade Concerns Resurface: Markets Wrap
[Reuters] China may reject new trade talks if more tariffs imposed: WSJ
[Reuters] 'Illusion' to think states can completely prevent financial crises: Weidmann
[CNBC] US-China trade war could cause a bear market, stress test shows
[WSJ] U.S. and China Ramp Up Trade Threats
[WSJ] Trump Promised a Rush of Repatriated Cash, But Company Responses Are Modest
[FT] Can macro policy easing still rescue China?
[Reuters] China may reject new trade talks if more tariffs imposed: WSJ
[Reuters] 'Illusion' to think states can completely prevent financial crises: Weidmann
[CNBC] US-China trade war could cause a bear market, stress test shows
[WSJ] U.S. and China Ramp Up Trade Threats
[WSJ] Trump Promised a Rush of Repatriated Cash, But Company Responses Are Modest
[FT] Can macro policy easing still rescue China?
Just the Facts: September 16, 2018
For the Week:
The S&P500 gained 1.2% (up 8.7% y-t-d), and the Dow added 0.9% (up 5.8%). The Utilities increased 0.4% (up 1.9%). The Banks dropped 2.1% (up 0.8%), and the Broker/Dealers added 0.3% (up 2.8%). The Transports jumped 2.0% (up 9.0%). The S&P 400 Midcaps gained 1.0% (up 7.7%), and the small cap Russell 2000 rose 0.5% (up 12.1%). The Nasdaq100 advanced 1.6% (up 18.0%). The Semiconductors gained 1.2% (up 9.9%). The Biotechs were about unchanged (up 21.7%). While bullion slipped $3, the HUI gold index recovered 0.9% (down 28.5%).
Three-month Treasury bill rates ended the week at 2.10%. Two-year government yields rose eight bps to 2.78% (up 89bps y-t-d). Five-year T-note yields gained eight bps to 2.90% (up 70bps). Ten-year Treasury yields rose six bps to 3.00% (up 59bps). Long bond yields added three bps to 3.13% (up 39bps). Benchmark Fannie Mae MBS yields gained six bps to 3.77% (up 77bps).
Greek 10-year yields dropped 20 bps to 4.07% (down 1bp y-t-d). Ten-year Portuguese yields declined five bps to 1.86% (down 9bps). Italian 10-year yields fell five bps to 2.98% (up 97bps). Spain's 10-year yields added two bps to 1.49% (down 8bps). German bund yields rose six bps to 0.45% (up 2bps). French yields rose five bps to 0.77% (down 2bps). The French to German 10-year bond spread narrowed one to 32 bps. U.K. 10-year gilt yields rose seven bps to 1.53% (up 34bps). U.K.'s FTSE equities index increased 0.4% (down 5.0%).
Japan's Nikkei 225 equities index surged 3.5% (up 1.4% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.12% (up 7bps). France's CAC40 gained 1.9% (up 0.8%). The German DAX equities index rose 1.4% (down 6.1%). Spain's IBEX 35 equities index rallied 2.1% (down 6.8%). Italy's FTSE MIB index rose 2.1% (down 4.4%). EM equities were mixed. Brazil's Bovespa index fell 1.3% (down 1.3%), while Mexico's Bolsa gained 1.3% (up 0.5%). South Korea's Kospi index jumped 1.6% (down 6.0%). India's Sensex equities index declined 0.8% (up 11.8%). China's Shanghai Exchange fell 0.8% (down 18.9%). Turkey's Borsa Istanbul National 100 index rallied 1.6% (down 17.8%). Russia's MICEX equities index recovered 1.7% (up 11.9%).
Investment-grade bond funds saw inflows of $3.127 billion, while junk bond funds had outflows of $862 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates jumped six bps to 4.60% (up 61bps y-o-y). Fifteen-year rates rose seven bps to 4.06% (up 62bps). Five-year hybrid ARM rates were unchanged at 3.93% (up 46bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up seven bps to 4.66% (up 51bps).
Federal Reserve Credit last week increased $1.2bn to $4.171 TN. Over the past year, Fed Credit contracted $247bn, or 5.6%. Fed Credit inflated $1.360 TN, or 48%, over the past 306 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $7.0bn last week to $3.422 TN. "Custody holdings" were up $49.4bn y-o-y, or 1.5%.
M2 (narrow) "money" supply slipped $1.7bn last week to $14.246 TN. "Narrow money" gained $564bn, or 4.1%, over the past year. For the week, Currency increased $2.5bn. Total Checkable Deposits surged $134bn, while Savings Deposits sank $149bn. Small Time Deposits increased $5.2bn. Retail Money Funds gained $5.8bn.
Total money market fund assets were little changed at $2.881 TN. Money Funds gained $142bn y-o-y, or 5.2%.
Total Commercial Paper added $1.3bn to $1.067 TN. CP gained $44bn y-o-y, or 4.2%.
Currency Watch:
The U.S. dollar index added 0.5% to 94.927 (up 3.0% y-t-d). For the week on the upside, the Norwegian krone increased 2.4%, the Mexican peso 2.3%, the South African rand 2.0%, the British pound 1.2%, the Canadian dollar 1.0%, the Australian dollar 0.7%, the euro 0.6%, the New Zealand dollar 0.6%, the South Korean won 0.6%, the Singapore dollar 0.3%, the Swiss franc 0.1% and the Swedish krona 0.1%. For the week on the downside, the Brazilian real declined 2.8% and the Japanese yen 1.0%. The Chinese renminbi declined 0.35% versus the dollar this week (down 5.25% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index gained 0.7% (up 5.0% y-t-d). Spot Gold slipped 0.2% to $1,194 (down 8.4%). Silver slipped 0.2% to $14.142 (down 17.5%). Crude rallied $1.24 to $68.99 (up 14%). Gasoline was little changed (up 10%), while Natural Gas slipped 0.3% (down 6%). Copper increased 0.9% (down 20%). Wheat was about unchanged (up 20%). Corn fell 4.2% (unchanged).
Trump Administration Watch:
September 14 - Reuters (Jeff Mason): "U.S. President Donald Trump has directed aides to proceed with tariffs on about another $200 billion of Chinese goods, despite Treasury Secretary Steven Mnuchin's attempts to restart trade talks with China, a source familiar with the matter said on Friday. The timing for activating the additional tariffs was unclear."
September 7 - Bloomberg (Zainab Fattah): "China's trade surplus with the United States widened to a record in August even as the country's export growth slowed slightly… The politically sensitive surplus hit $31.05 billion in August, up from $28.09 billion in July, customs data showed on Saturday, surpassing the previous record set in June. Over the first eight months of the year, China's surplus with its largest export market has risen nearly 15%..."
September 10 - Bloomberg (Jennifer Epstein and Shannon Pettypiece): "President Donald Trump made a sweeping decision in August 2017 that could have rocked the global economy: the U.S. would pull out of Nafta, the World Trade Organization, and its trade deal with South Korea. Alarmed, Trump's top staffers scrambled to stop him, according to Bob Woodward's new book, 'Fear.' …Then-top economic adviser Gary Cohn and staff secretary Rob Porter pulled chief of staff John Kelly into the Oval Office to convince Trump to back down. Soon, Secretary of State Rex Tillerson and Defense Secretary James Mattis were brought into the fold and painted a dire picture of the national security and economic consequences of such a move. The president acquiesced -- but only temporarily."
Federal Reserve Watch:
September 12 - Financial Times (Sam Fleming): "The Federal Reserve may raise interest rates above its estimates of their longer-term level, a senior US policymaker said, as the central bank responds to strong growth and the extra lift provided by tax cuts and higher public spending. Lael Brainard, a member of the Federal Reserve's board of governors, said that with government stimulus providing 'tailwinds to demand' over the next two years, she expected the Fed to boost short-term rates above current estimates of the longer-run rate. Fed policymakers put the median estimate of the longer-run rate at just under 3% in their most recent round of forecasts. Ms Brainard argued in favour of further tightening in part because her estimate of the short-term neutral rate - which keeps output growing at a time of full employment and stable inflation - was rising… 'It appears reasonable to expect the shorter-run neutral rate to rise somewhat higher than the longer-run neutral rate,' Ms Brainard said. 'These developments raise the prospect that, at some point, the Committee's setting of the federal funds rate will exceed current estimates of the longer-run federal funds rate.'"
September 12 - Bloomberg (Jeanna Smialek): "Federal Reserve officials expect to lift the central bank's benchmark interest rate a total of four times in 2018, based on their economic projections. Markets are increasingly becoming believers. Policy makers have already lifted borrowing costs twice this year, and their projections indicate another two quarter-point moves by the end of 2018. The implied yield on January fed funds futures… climbed to an unprecedented 2.36%, indicating around 44 bps of additional tightening by the end of December. The first 25 bps of this is priced as a near certainty for the Federal Open Market Committee's meeting later this month, based on the October fed funds contract."
September 10 - Financial Times (Sam Fleming and Robin Wigglesworth): "The clock is ticking. As the Federal Reserve presides over the steady shrinking of its multi-trillion dollar balance sheet, investors are urging policymakers to push forward long-awaited decisions over just how large the central bank's portfolio will ultimately need to be to keep monetary policy running smoothly and the banking sector well-stocked with safe assets. Jay Powell, the Fed chairman, has lined up a debate for this autumn. But as the reduction in the balance sheet accelerates into 2019 the market is looking for much clearer signs from the Fed on its future framework for steering the markets. Some analysts worry the Fed risks shrinking its balance sheet too much. The Fed confronts two big, intertwined decisions. Does it want to stick with its current system for setting interest rates, or revert to something similar to the framework it used before the financial crisis? And how big a balance sheet is it willing to carry to execute monetary policy?"
September 13 - MarketWatch (Gregg Robb): "Three of the Fed's 12 districts - St. Louis, Philadelphia and Kansas City - reported weaker growth in August, according to the Federal Reserve's latest Beige Book… While the overall U.S. economy expanded at a 'moderate pace,' trade concerns and a lack of workers delayed projects. There were also 'some signs of a deceleration' in prices of final goods and services. What happened: Shortages of workers and possible additional trade tariffs continued to be the biggest worries for businesses, they said. Worker shortages spread from trucking and high-skilled sectors to lower-skilled sectors like restaurants and retailers… Concerns about trade seen over the summer have now morphed into some businesses deciding to 'scale back or postpone capital investment.' While businesses were trying to pass along cost hikes to customers, their input costs were still rising more rapidly than their selling prices. A few districts reported increased inflation expectations."
September 13 - Reuters (Lucia Mutikani): "U.S. consumer prices rose less than expected in August as increases in gasoline and rents were offset by declines in healthcare and apparel costs, and underlying inflation pressures also appeared to be slowing… Labor market strength was reinforced by other data… showing the number of Americans filing for unemployment aid dropped last week to near a 49-year low. 'With labor market conditions tight, wage growth accelerating and input prices being pushed up by capacity constraints and recently imposed tariffs, there is plenty of upward pressure on prices,' said Paul Ashworth, chief U.S. economist at Capital Economics…"
September 13 - Reuters: "U.S. Federal Reserve officials tout a decade of falling unemployment as among their major victories in fighting the economic crisis of 2007 to 2009. Now they are beginning to worry they have been too successful. When unemployment falls as low as it is currently, Boston Federal Reserve bank President Eric Rosengren said in a new paper released Thursday as part of a review of Fed policy, recession has inevitably followed, with the central bank showing no success in fine-tuning the economy to a stable rest at full employment."
U.S. Bubble Watch:
September 11 - MarketWatch (Steve Goldstein): "The numbers: The U.S. budget deficit in August was $211 billion, nearly double the gap during the year-ago month, the Congressional Budget Office estimated… Adjusted for shifts in the timing of payments that otherwise would have occurred on a weekend of holiday, the deficit would have grown by 19%... What happened: Excluding timing shifts, outlays grew 8%, as the net interest on public debt jumped 25%, defense spending jumped 10%, outlays for Social Security grew 5%, and outlays for Medicare benefits rose 7%... Receipts fell by 3%, with corporate taxes dropping by $5 billion, while revenue from income and payroll taxes rose marginally."
September 11 - CNBC (John Melloy): "U.S. small business optimism surged to a record in August as the tax cuts and deregulation efforts of President Donald Trump and the Republican-led Congress led to more sales, hiring and investment, according to a survey by the National Federation of Independent Business. The NFIB Small Business Optimism Index jumped to 108.8 last month, the highest level ever recorded in the survey's 45-year history and above the previous record of 108 in 1983… The August figure was up from a 107.9 reading in July."
September 13 - Wall Street Journal (Janet Adamy and Paul Overberg): "American incomes rose and poverty declined for the third consecutive year in 2017, according to census figures… that suggest more Americans are benefiting from the robust economy. The new data… show that median household income increased to $61,372 last year, up 1.8% when adjusted for inflation. There were 39.7 million people in poverty last year, and that rate dropped 0.4 percentage point to its lowest level since 2006. The number of people working full time year round increased by 2.4 million in 2017. Incomes have grown 10.4% in the past three years, and last year's figure was the highest on record."
September 14 - New York Times (Patricia Cohen): "Americans' household earnings are finally stretching back to their pre-recession heights. But feeling secure and comfortable isn't only a measure of how much money you have. It's also a measure of how much you have compared with others. For many, that is one reason that recent financial progress may seem overshadowed by the gains they've missed out on and a needling sense that they've lost ground. As new research illustrates, two groups in particular have stalled: whites without a college degree, and blacks and Hispanics with one. Both are being far outpaced by college-educated whites. 'America has been a story of getting ahead, of progress,' said Morris P. Fiorina, a political scientist at Stanford University. 'There's been no story of progress - for them.'"
September 11 - Reuters (Lucia Mutikani): "U.S. job openings surged to a record high in July and more Americans voluntarily quit their jobs, pointing to sustained labor market strength and confidence that could soon spur faster wage growth. The Labor Department's monthly Job Openings and Labor Turnover Survey, or JOLTS… also suggested a further tightening in labor market conditions, with employers appearing to increasingly have trouble finding suitable workers."
September 11 - Wall Street Journal (Bob Tita): "Workers at two of the biggest U.S. steelmakers are demanding higher compensation as tariffs on foreign metal push prices and profits to their highest point in years in a buoyant economy. Leaders for some 30,000 members of the United Steelworkers union say United States Steet Corp. and ArcelorMittal SA aren't passing those benefits to their workers, who have gone without raises in recent years even as wages have started to climb more broadly."
September 13 - Reuters (Michelle Conlin and Robin Respaut): "The world has moved on from the global financial crisis. Hard-hit areas such as Las Vegas and the Rust Belt cities of Pittsburgh and Cleveland have seen their fortunes improve. But… about 5.1 million …U.S. homeowners are still living with the fallout from the real estate bust that triggered the epic downturn. As of June 30, nearly one in 10 American homes with mortgages were 'seriously' underwater, according to… ATTOM Data Solutions, meaning that their market values were at least 25% lower than the balance remaining on their mortgages. It is an improvement from 2012, when… severe negative equity topped out at 29%, or 12.8 million homes. Still, it is double the rate considered healthy by real estate analysts. 'These are the housing markets that the recovery forgot,' said Daren Blomquist, a senior vice president at ATTOM."
China Watch:
September 14 - Bloomberg: "Chinese state media warned the nation shouldn't expect a quick resolution of its trade dispute with the U.S., as there have been no signs that President Donald Trump has changed his thinking. While it is good to talk, China should be aware that there may not be a deal anytime soon, according to an editorial published… in Global Times, a tabloid run by the official People's Daily. The newspaper said Washington is still taking a tough attitude. The U.S. will only engage in serious discussions if it believes additional tariffs won't bring more benefits, or if public opinion in the U.S. harms Trump's approval rating… Trump tweeting that he isn't under pressure to make a deal with China has stoked concern that the U.S. president isn't serious about a possible new round of trade talks between the two nations. China's commerce ministry said… it welcomed a U.S. offer of talks and that both sides were working on the details. The U.S. proposal to talk could be 'deceptive,' warned the China Daily…"
September 12 - Reuters (Kevin Yao and Fang Cheng): "Chinese banks made fewer new loans in August than expected, highlighting problems facing the central bank as it tries to boost credit to smaller companies facing weaker demand at home and shrinking export orders… Chinese banks extended 1.28 trillion yuan ($186.40bn) in net new yuan loans in August, according to… the People's Bank of China (PBOC)… Analysts polled by Reuters had predicted an August tally of 1.3 trillion yuan, down from July's 1.45 trillion yuan but nearly 20% more than the same month last year. 'Financing demand is relatively weak as firms are unwilling to borrow,' said Luo Yunfeng, chief analyst at Merchants Securities in Beijing."
September 15 - Bloomberg: "China's economic momentum weakened again in August, presenting its policy makers with a test of nerve as they prepare for a potential new round of trade talks with their U.S. counterparts. Fixed-asset investment growth in the first eight months slowed to the lowest pace since at least 1999 and infrastructure investment rose just 4.2%, the weakest expansion since the data series started in 2014… A slowing economy gives China a weaker hand ahead of possible new trade talks the two sides are discussing, adding to the risk of a deeper slowdown should U.S. President Donald Trump pull the trigger on tariffs on an additional $200 billion of Chinese goods… Investment rose 5.3% year-on-year in the first eight months, compared with an estimated 5.6%... August industrial production expanded 6.1%, meeting estimates. Retail sales expanded 9% last month from a year earlier, accelerating from an 8.8% pace in July."
September 14 - Wall Street Journal (Stephen Wilmot): "Car sales in China have shifted into reverse, but figuring how exposed the world's biggest auto makers are to the world's biggest car market is almost impossible. Most major car makers have done very well in China… Nissan and Volkswagen get nearly a quarter of their pretax profit from those businesses, and General Motors isn't far behind. What the car companies don't tell investors is how much they earn from exports, royalties and parts sales in China, which can be significant and aren't fully disclosed… After years of rapid growth, the Chinese market is far larger than its counterparts in the West, with more than 24 million cars sold last year compared with roughly 17 million in the U.S. and 15 million in the European Union. But sales fell 7% in August compared with a year earlier…"
September 12 - Bloomberg (Lianting Tu): "S&P Global Ratings lowered its credit ratings by one notch on seven Chinese local government financing vehicles as it believes the likelihood of local government support 'could weaken over time.' The firm said Wednesday morning the rating moves also reflected the gradual weakening of those financing platforms' roles and links with their local-government parents. Moody's… also cut its scores on five LGFVs… as it sees 'reduced likelihood of support for the sector as a whole.' Fitch Ratings took similar actions in June. China has repeatedly said LGFVs must take responsibility to repay their own debts."
EM Watch:
September 14 - Bloomberg (Andrey Biryukov, Anna Andrianova and Olga Tanas): "Russia's central bank unexpectedly raised interest rates for the first time since 2014, following its counterparts across emerging economies as inflation risks mount with a slumping currency and threats of U.S. sanctions. Policy makers said they'll 'consider the necessity of further increases' after lifting their benchmark to 7.5%, a level last seen in March, from 7.25%... Governor Elvira Nabiullina… said easing may not resume for more than a year. 'The quick monetary-policy response will limit the growth of inflationary risks in the future and create the conditions for easing policy by the end of 2019 or the first half of 2020,' Nabiullina told reporters… Further tightening isn't inevitable, but it can't be ruled out, she said."
September 11 - New York Times (Matt Phillips): "Cratering currencies, rising inflation, jumpy investors: A financial panic is again gripping some of the world's developing economies. The sharp sell-off of emerging market currencies, stocks and bonds seems to stand in stark contrast to the United States, where a nearly decade-long bull market continues amid buoyant economic conditions. Higher interest rates in the United States and a stronger dollar rebalance the risks and rewards for investors the world over, and act as a kind of financial magnet, pulling them out of riskier investments. When we've seen this before - in the Mexican peso crisis of 1994, the Thai baht collapse of 1997 and the Russian default of 1998 - investors had to contend with spillover of trouble from one country to others, dragging down economic growth or causing market stress."
September 11 - Financial Times (James Politi and Sam Fleming): "Christine Lagarde has warned that the escalating US-China trade war could deliver a 'shock' to already struggling emerging markets, raising the prospect that a crisis ripping through Argentina and Turkey could spread across the developing world. The IMF managing director told the Financial Times that her staff does not yet see 'contagion' spreading to multiple countries beyond those currently fighting investor flight. But she warned that 'these things could change rapidly' and cited the 'uncertainty [and] lack of confidence already produced by the threats against trade, even before it materialises', as one of the main dangers facing the developing world."
September 13 - Wall Street Journal (David Gauthier-Villars and Jon Sindreu): "Turkey's central bank sharply raised interest rates-defying President Recep Tayyip Erdogan's demand to cut them-in an attempt to counter the country's economic problems and reverse growing investor aversion to emerging-market economies. The central bank increased its main interest rate to 24% from 17.75%..., citing concerns over price stability and saying it would maintain a tight monetary-policy stance until the inflation outlook improves significantly. The turmoil in Turkey has rattled global markets in recent weeks and comes at a precarious time for developing economies around the world, just as investors have started to cast doubt on how long the current period of synchronized global growth can last."
September 14 - Bloomberg (Onur Ant): "Turkey's President Recep Tayyip Erdogan resumed his criticism of the nation's central bank a day after it announced the biggest rate hike of his rule. 'It's currently my phase of patience but there is a limit to this patience,' Erdogan told members of his ruling AK Party… He restated his opinion that higher rates won't help to slow inflation and warned that his restraint won't last forever. The central bank was responding to repeated calls for a rate increase, Erdogan said, and responded with a 'quite' big hike. Turkey would see the 'results of the independence' of the regulator, he said."
September 13 - Financial Times (Laura Pitel): "Two hours before Turkey's central bank unveiled a critical interest rate decision, Recep Tayyip Erdogan took to a stage in Ankara and delivered a classic tirade. The Turkish president, notorious for his opposition to high interest rates, lambasted the central bank and decried interest rates as 'a tool of exploitation'. Yet shortly afterwards, an institution that had come to be seen as almost irrelevant by international investors shocked the markets by sharply increasing its benchmark rate to 24%. Analysts were left wondering what happened. 'Is this something they cooked up together with Erdogan? Or is it something they decided independently?' asked Nora Neuteboom, an economist at the Dutch bank ABN Amro."
September 12 - Bloomberg (Onur Ant): "President Recep Tayyip Erdogan appointed himself chairman of Turkey's sovereign wealth fund and got rid of the entire management staff that had presided over two years of inaction. Zafer Sonmez, head of Turkey and Africa for Malaysia's government investment vehicle Khazanah Nasional Bhd, was named general manager. Treasury and Finance Minister Berat Albayrak, Erdogan's son-in-law, will also sit on the board, according to a decree…"
Global Bubble Watch:
September 13 - Bloomberg (Rachel Evans and Carolina Wilson): "If you work in exchange-traded funds, memories of 2008 aren't all doom and gloom. Lehman Brothers' collapse in September of that year ushered in a new era for ETFs. And they've been on a roll ever since. Assets in the low-cost portfolios that trade like stocks and typically track an index have swelled to $5 trillion globally, up from less than $700 billion before the financial crisis. Meanwhile, the number of funds has more than doubled as they gradually account for bigger and bigger pieces of the equity, bond and commodity markets. Although they started trading in the U.S. in 1993, the financial crisis marked a turning point for ETFs. Banks were forced to shed large inventories to bolster their balance sheets. And retail investors who'd lost their shirts went looking for ways to diversify their risk. ETFs offered both a solution. By packaging slices of the market into tradeable vehicles, ETFs became the go-to instrument for professionals seeking instant, liquid exposure to markets around the world. Mom-and-pop savers, meanwhile, got a cheap, transparent way to buy companies for the long haul. But in remaking financial markets in their image, ETFs have fueled a fear that indexed investing will trigger the next crisis."
September 11 - Bloomberg (Satyajit Das): "Slowing global trade is evidence of how emerging-market stresses are being transmitted to advanced economies. The real concern of contagion remains financial linkages, though. Since 2009, non-resident gross flows into EM financial assets - loans, debt and equity securities - have averaged around $1 trillion annually, although the figure has been volatile. Total outstanding exposure, which remains opaque, may be around 50% of GDP in advanced economies. The main driver has been accommodative monetary policy of developed-world central banks and the lure of higher returns. Despite reductions, bank cross-border lending constitutes around half of the exposure. U.K., European, Japanese and Chinese banks are particularly vulnerable… Spanish banks have substantial amounts at risk in Turkey and South America. China's risks via loans to EM borrowers as part of the Belt and Road initiative are also significant. Investors make up the bulk of the remaining exposure."
September 14 - Reuters (Scott Squires): "Trade and investment ministers from G20 countries meeting in Argentina said there was an 'urgent need' to improve the World Trade Organization, a joint statement said on Friday. With U.S. President Donald Trump readying tariffs on another $200 billion in Chinese goods, the ministers said they were 'stepping up the dialogue' on international trade disputes, according to the statement issued at the summit."
September 10 - Bloomberg (Onur Ant): "Turkey's finance chief said the imposition of sanctions by the U.S. on the Middle East's largest economy was politically motivated, and called on other nations to form a united front against such actions. U.S. President Donald Trump used sanctions and tariffs to sabotage the Turkish economy, Treasury and Finance Minister Berat Albayrak said… Apart from a short-term currency impact, Turkish economic fundamentals had proved resilient, he said. The rallying cry from Turkey's top economy official, who is also the son-in-law of President Recep Tayyip Erdogan, ratchets up the rhetoric between Ankara and Washington."
September 10 - Bloomberg (Andreo Calonzo and Ian Sayson): "U.S. President Donald Trump is to blame for surging consumer prices in the Philippines after he sparked a trade war with China, said Rodrigo Duterte, head of the Southeast Asian country where inflation has reached a nine-year high. 'This inflation under my watch, believe or not, started when America' under Trump imposed duties on Chinese goods, which prompted retaliation, Duterte said… 'When America raised (tariff) rates and interest rates, everything went up.'"
Fixed Income Bubble Watch:
September 14 - CNBC (Thomas Franck and Alexandra Gibbs): "The yield on the benchmark 10-year Treasury note topped 3% on Friday for the first time since Aug. 2. Yields have been steadily rising since the start of September as expectations for economic growth creep higher. Traders pointed to a revision in the retail sales figures out on Friday as the reason for the latest push higher in rates."
Leveraged Speculation Watch:
September 11 - Bloomberg (Katherine Burton, Melissa Karsh and Sam Dodge): "You'd be forgiven for thinking the hedge fund industry might be starting to rebound. Industry assets are at a record $3.2 trillion this year, and a brand-new firm just brought in an unprecedented $8 billion. But the reality isn't so rosy. Inflows into funds, on the whole, are non-existent and the number of startups has slowed to levels not seen for nearly two decade. Once high-flying powerhouses run by David Einhorn, Bill Ackman and Alan Howard are mere shadows of their former glory after posting years of returns that ranged from uninspiring to downright awful. John Paulson has crashed so badly and seen assets plummet so far that he's largely left managing his own money. Overall, firms' assets are barely growing. Net inflows since the end of 2016 have equaled just $7.8 billion."
September 14 - Bloomberg (Melissa Karsh and Lu Wang): "Already stung by a defensive stance on U.S. stocks, the smart money is only getting more cautious. Hedge funds' net leverage, a measure of the industry's risk appetite, has fallen to the lowest level this year after a brief bounce in late August, client data compiled by Morgan Stanley showed. At 49%, the ratio is down from a peak of more than 60% in March. Hedge funds' reluctance to increase equity exposure underscores a growing skepticism about the durability of the S&P 500 Index's outperformance against equity markets in the rest of the world. Wall Street strategists this month have been sounding warnings about U.S. stocks, with Morgan Stanley lowering its recommendation and Goldman Sachs flagging the danger of a potential bear market should a full-blown trade war erupt."
Geopolitical Watch:
September 10 - Financial Times (Henry Foy): "Hundreds of Russian and Chinese tanks, attack helicopters, fighter jets and thousands of soldiers will this week fight side by side in the biggest war games in Russia since 1981, in a show of strength and friendship between Asia's two largest military powers. Russia's biggest military exercise since the cold war, and its first to be conducted with a country not from the former Soviet bloc, is the strongest sign yet of the deepening strategic bond between Moscow and Beijing… Involving 300,000 troops and close to 40,000 vehicles, the seven-day 'Vostok' war games will coincide with talks between Vladimir Putin and Xi Jinping in Vladivostok…, amid a concerted effort by Russia to pivot east and embrace its powerful neighbour."
September 11 - Bloomberg (Andrew Osburn): "Russia began its biggest war games since the fall of the Soviet Union… close to its border with China, mobilising 300,000 troops in a show of force that will include joint exercises with the Chinese army. China and Russia have staged joint drills before but not on such a large scale, and the Vostok-2018 (East-2018) exercise signals closer military ties as well as sending an unspoken reminder to Beijing that Moscow is able and ready to defend its sparsely populated far east."
September 10 - Bloomberg (Zainab Fattah): "The U.S. Navy is conducting exercises this month to ensure its readiness to guarantee freedom of movement through Persian Gulf and Red Sea waterways amid escalating threats from Iran to disrupt shipping across important choke points. The exercises, with regional and global allies, are part of the U.S. 5th Fleet Theater Counter Mine and Maritime Security Exercise…"
The S&P500 gained 1.2% (up 8.7% y-t-d), and the Dow added 0.9% (up 5.8%). The Utilities increased 0.4% (up 1.9%). The Banks dropped 2.1% (up 0.8%), and the Broker/Dealers added 0.3% (up 2.8%). The Transports jumped 2.0% (up 9.0%). The S&P 400 Midcaps gained 1.0% (up 7.7%), and the small cap Russell 2000 rose 0.5% (up 12.1%). The Nasdaq100 advanced 1.6% (up 18.0%). The Semiconductors gained 1.2% (up 9.9%). The Biotechs were about unchanged (up 21.7%). While bullion slipped $3, the HUI gold index recovered 0.9% (down 28.5%).
Three-month Treasury bill rates ended the week at 2.10%. Two-year government yields rose eight bps to 2.78% (up 89bps y-t-d). Five-year T-note yields gained eight bps to 2.90% (up 70bps). Ten-year Treasury yields rose six bps to 3.00% (up 59bps). Long bond yields added three bps to 3.13% (up 39bps). Benchmark Fannie Mae MBS yields gained six bps to 3.77% (up 77bps).
Greek 10-year yields dropped 20 bps to 4.07% (down 1bp y-t-d). Ten-year Portuguese yields declined five bps to 1.86% (down 9bps). Italian 10-year yields fell five bps to 2.98% (up 97bps). Spain's 10-year yields added two bps to 1.49% (down 8bps). German bund yields rose six bps to 0.45% (up 2bps). French yields rose five bps to 0.77% (down 2bps). The French to German 10-year bond spread narrowed one to 32 bps. U.K. 10-year gilt yields rose seven bps to 1.53% (up 34bps). U.K.'s FTSE equities index increased 0.4% (down 5.0%).
Japan's Nikkei 225 equities index surged 3.5% (up 1.4% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.12% (up 7bps). France's CAC40 gained 1.9% (up 0.8%). The German DAX equities index rose 1.4% (down 6.1%). Spain's IBEX 35 equities index rallied 2.1% (down 6.8%). Italy's FTSE MIB index rose 2.1% (down 4.4%). EM equities were mixed. Brazil's Bovespa index fell 1.3% (down 1.3%), while Mexico's Bolsa gained 1.3% (up 0.5%). South Korea's Kospi index jumped 1.6% (down 6.0%). India's Sensex equities index declined 0.8% (up 11.8%). China's Shanghai Exchange fell 0.8% (down 18.9%). Turkey's Borsa Istanbul National 100 index rallied 1.6% (down 17.8%). Russia's MICEX equities index recovered 1.7% (up 11.9%).
Investment-grade bond funds saw inflows of $3.127 billion, while junk bond funds had outflows of $862 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates jumped six bps to 4.60% (up 61bps y-o-y). Fifteen-year rates rose seven bps to 4.06% (up 62bps). Five-year hybrid ARM rates were unchanged at 3.93% (up 46bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up seven bps to 4.66% (up 51bps).
Federal Reserve Credit last week increased $1.2bn to $4.171 TN. Over the past year, Fed Credit contracted $247bn, or 5.6%. Fed Credit inflated $1.360 TN, or 48%, over the past 306 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $7.0bn last week to $3.422 TN. "Custody holdings" were up $49.4bn y-o-y, or 1.5%.
M2 (narrow) "money" supply slipped $1.7bn last week to $14.246 TN. "Narrow money" gained $564bn, or 4.1%, over the past year. For the week, Currency increased $2.5bn. Total Checkable Deposits surged $134bn, while Savings Deposits sank $149bn. Small Time Deposits increased $5.2bn. Retail Money Funds gained $5.8bn.
Total money market fund assets were little changed at $2.881 TN. Money Funds gained $142bn y-o-y, or 5.2%.
Total Commercial Paper added $1.3bn to $1.067 TN. CP gained $44bn y-o-y, or 4.2%.
Currency Watch:
The U.S. dollar index added 0.5% to 94.927 (up 3.0% y-t-d). For the week on the upside, the Norwegian krone increased 2.4%, the Mexican peso 2.3%, the South African rand 2.0%, the British pound 1.2%, the Canadian dollar 1.0%, the Australian dollar 0.7%, the euro 0.6%, the New Zealand dollar 0.6%, the South Korean won 0.6%, the Singapore dollar 0.3%, the Swiss franc 0.1% and the Swedish krona 0.1%. For the week on the downside, the Brazilian real declined 2.8% and the Japanese yen 1.0%. The Chinese renminbi declined 0.35% versus the dollar this week (down 5.25% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index gained 0.7% (up 5.0% y-t-d). Spot Gold slipped 0.2% to $1,194 (down 8.4%). Silver slipped 0.2% to $14.142 (down 17.5%). Crude rallied $1.24 to $68.99 (up 14%). Gasoline was little changed (up 10%), while Natural Gas slipped 0.3% (down 6%). Copper increased 0.9% (down 20%). Wheat was about unchanged (up 20%). Corn fell 4.2% (unchanged).
Trump Administration Watch:
September 14 - Reuters (Jeff Mason): "U.S. President Donald Trump has directed aides to proceed with tariffs on about another $200 billion of Chinese goods, despite Treasury Secretary Steven Mnuchin's attempts to restart trade talks with China, a source familiar with the matter said on Friday. The timing for activating the additional tariffs was unclear."
September 7 - Bloomberg (Zainab Fattah): "China's trade surplus with the United States widened to a record in August even as the country's export growth slowed slightly… The politically sensitive surplus hit $31.05 billion in August, up from $28.09 billion in July, customs data showed on Saturday, surpassing the previous record set in June. Over the first eight months of the year, China's surplus with its largest export market has risen nearly 15%..."
September 10 - Bloomberg (Jennifer Epstein and Shannon Pettypiece): "President Donald Trump made a sweeping decision in August 2017 that could have rocked the global economy: the U.S. would pull out of Nafta, the World Trade Organization, and its trade deal with South Korea. Alarmed, Trump's top staffers scrambled to stop him, according to Bob Woodward's new book, 'Fear.' …Then-top economic adviser Gary Cohn and staff secretary Rob Porter pulled chief of staff John Kelly into the Oval Office to convince Trump to back down. Soon, Secretary of State Rex Tillerson and Defense Secretary James Mattis were brought into the fold and painted a dire picture of the national security and economic consequences of such a move. The president acquiesced -- but only temporarily."
Federal Reserve Watch:
September 12 - Financial Times (Sam Fleming): "The Federal Reserve may raise interest rates above its estimates of their longer-term level, a senior US policymaker said, as the central bank responds to strong growth and the extra lift provided by tax cuts and higher public spending. Lael Brainard, a member of the Federal Reserve's board of governors, said that with government stimulus providing 'tailwinds to demand' over the next two years, she expected the Fed to boost short-term rates above current estimates of the longer-run rate. Fed policymakers put the median estimate of the longer-run rate at just under 3% in their most recent round of forecasts. Ms Brainard argued in favour of further tightening in part because her estimate of the short-term neutral rate - which keeps output growing at a time of full employment and stable inflation - was rising… 'It appears reasonable to expect the shorter-run neutral rate to rise somewhat higher than the longer-run neutral rate,' Ms Brainard said. 'These developments raise the prospect that, at some point, the Committee's setting of the federal funds rate will exceed current estimates of the longer-run federal funds rate.'"
September 12 - Bloomberg (Jeanna Smialek): "Federal Reserve officials expect to lift the central bank's benchmark interest rate a total of four times in 2018, based on their economic projections. Markets are increasingly becoming believers. Policy makers have already lifted borrowing costs twice this year, and their projections indicate another two quarter-point moves by the end of 2018. The implied yield on January fed funds futures… climbed to an unprecedented 2.36%, indicating around 44 bps of additional tightening by the end of December. The first 25 bps of this is priced as a near certainty for the Federal Open Market Committee's meeting later this month, based on the October fed funds contract."
September 10 - Financial Times (Sam Fleming and Robin Wigglesworth): "The clock is ticking. As the Federal Reserve presides over the steady shrinking of its multi-trillion dollar balance sheet, investors are urging policymakers to push forward long-awaited decisions over just how large the central bank's portfolio will ultimately need to be to keep monetary policy running smoothly and the banking sector well-stocked with safe assets. Jay Powell, the Fed chairman, has lined up a debate for this autumn. But as the reduction in the balance sheet accelerates into 2019 the market is looking for much clearer signs from the Fed on its future framework for steering the markets. Some analysts worry the Fed risks shrinking its balance sheet too much. The Fed confronts two big, intertwined decisions. Does it want to stick with its current system for setting interest rates, or revert to something similar to the framework it used before the financial crisis? And how big a balance sheet is it willing to carry to execute monetary policy?"
September 13 - MarketWatch (Gregg Robb): "Three of the Fed's 12 districts - St. Louis, Philadelphia and Kansas City - reported weaker growth in August, according to the Federal Reserve's latest Beige Book… While the overall U.S. economy expanded at a 'moderate pace,' trade concerns and a lack of workers delayed projects. There were also 'some signs of a deceleration' in prices of final goods and services. What happened: Shortages of workers and possible additional trade tariffs continued to be the biggest worries for businesses, they said. Worker shortages spread from trucking and high-skilled sectors to lower-skilled sectors like restaurants and retailers… Concerns about trade seen over the summer have now morphed into some businesses deciding to 'scale back or postpone capital investment.' While businesses were trying to pass along cost hikes to customers, their input costs were still rising more rapidly than their selling prices. A few districts reported increased inflation expectations."
September 13 - Reuters (Lucia Mutikani): "U.S. consumer prices rose less than expected in August as increases in gasoline and rents were offset by declines in healthcare and apparel costs, and underlying inflation pressures also appeared to be slowing… Labor market strength was reinforced by other data… showing the number of Americans filing for unemployment aid dropped last week to near a 49-year low. 'With labor market conditions tight, wage growth accelerating and input prices being pushed up by capacity constraints and recently imposed tariffs, there is plenty of upward pressure on prices,' said Paul Ashworth, chief U.S. economist at Capital Economics…"
September 13 - Reuters: "U.S. Federal Reserve officials tout a decade of falling unemployment as among their major victories in fighting the economic crisis of 2007 to 2009. Now they are beginning to worry they have been too successful. When unemployment falls as low as it is currently, Boston Federal Reserve bank President Eric Rosengren said in a new paper released Thursday as part of a review of Fed policy, recession has inevitably followed, with the central bank showing no success in fine-tuning the economy to a stable rest at full employment."
U.S. Bubble Watch:
September 11 - MarketWatch (Steve Goldstein): "The numbers: The U.S. budget deficit in August was $211 billion, nearly double the gap during the year-ago month, the Congressional Budget Office estimated… Adjusted for shifts in the timing of payments that otherwise would have occurred on a weekend of holiday, the deficit would have grown by 19%... What happened: Excluding timing shifts, outlays grew 8%, as the net interest on public debt jumped 25%, defense spending jumped 10%, outlays for Social Security grew 5%, and outlays for Medicare benefits rose 7%... Receipts fell by 3%, with corporate taxes dropping by $5 billion, while revenue from income and payroll taxes rose marginally."
September 11 - CNBC (John Melloy): "U.S. small business optimism surged to a record in August as the tax cuts and deregulation efforts of President Donald Trump and the Republican-led Congress led to more sales, hiring and investment, according to a survey by the National Federation of Independent Business. The NFIB Small Business Optimism Index jumped to 108.8 last month, the highest level ever recorded in the survey's 45-year history and above the previous record of 108 in 1983… The August figure was up from a 107.9 reading in July."
September 13 - Wall Street Journal (Janet Adamy and Paul Overberg): "American incomes rose and poverty declined for the third consecutive year in 2017, according to census figures… that suggest more Americans are benefiting from the robust economy. The new data… show that median household income increased to $61,372 last year, up 1.8% when adjusted for inflation. There were 39.7 million people in poverty last year, and that rate dropped 0.4 percentage point to its lowest level since 2006. The number of people working full time year round increased by 2.4 million in 2017. Incomes have grown 10.4% in the past three years, and last year's figure was the highest on record."
September 14 - New York Times (Patricia Cohen): "Americans' household earnings are finally stretching back to their pre-recession heights. But feeling secure and comfortable isn't only a measure of how much money you have. It's also a measure of how much you have compared with others. For many, that is one reason that recent financial progress may seem overshadowed by the gains they've missed out on and a needling sense that they've lost ground. As new research illustrates, two groups in particular have stalled: whites without a college degree, and blacks and Hispanics with one. Both are being far outpaced by college-educated whites. 'America has been a story of getting ahead, of progress,' said Morris P. Fiorina, a political scientist at Stanford University. 'There's been no story of progress - for them.'"
September 11 - Reuters (Lucia Mutikani): "U.S. job openings surged to a record high in July and more Americans voluntarily quit their jobs, pointing to sustained labor market strength and confidence that could soon spur faster wage growth. The Labor Department's monthly Job Openings and Labor Turnover Survey, or JOLTS… also suggested a further tightening in labor market conditions, with employers appearing to increasingly have trouble finding suitable workers."
September 11 - Wall Street Journal (Bob Tita): "Workers at two of the biggest U.S. steelmakers are demanding higher compensation as tariffs on foreign metal push prices and profits to their highest point in years in a buoyant economy. Leaders for some 30,000 members of the United Steelworkers union say United States Steet Corp. and ArcelorMittal SA aren't passing those benefits to their workers, who have gone without raises in recent years even as wages have started to climb more broadly."
September 13 - Reuters (Michelle Conlin and Robin Respaut): "The world has moved on from the global financial crisis. Hard-hit areas such as Las Vegas and the Rust Belt cities of Pittsburgh and Cleveland have seen their fortunes improve. But… about 5.1 million …U.S. homeowners are still living with the fallout from the real estate bust that triggered the epic downturn. As of June 30, nearly one in 10 American homes with mortgages were 'seriously' underwater, according to… ATTOM Data Solutions, meaning that their market values were at least 25% lower than the balance remaining on their mortgages. It is an improvement from 2012, when… severe negative equity topped out at 29%, or 12.8 million homes. Still, it is double the rate considered healthy by real estate analysts. 'These are the housing markets that the recovery forgot,' said Daren Blomquist, a senior vice president at ATTOM."
China Watch:
September 14 - Bloomberg: "Chinese state media warned the nation shouldn't expect a quick resolution of its trade dispute with the U.S., as there have been no signs that President Donald Trump has changed his thinking. While it is good to talk, China should be aware that there may not be a deal anytime soon, according to an editorial published… in Global Times, a tabloid run by the official People's Daily. The newspaper said Washington is still taking a tough attitude. The U.S. will only engage in serious discussions if it believes additional tariffs won't bring more benefits, or if public opinion in the U.S. harms Trump's approval rating… Trump tweeting that he isn't under pressure to make a deal with China has stoked concern that the U.S. president isn't serious about a possible new round of trade talks between the two nations. China's commerce ministry said… it welcomed a U.S. offer of talks and that both sides were working on the details. The U.S. proposal to talk could be 'deceptive,' warned the China Daily…"
September 12 - Reuters (Kevin Yao and Fang Cheng): "Chinese banks made fewer new loans in August than expected, highlighting problems facing the central bank as it tries to boost credit to smaller companies facing weaker demand at home and shrinking export orders… Chinese banks extended 1.28 trillion yuan ($186.40bn) in net new yuan loans in August, according to… the People's Bank of China (PBOC)… Analysts polled by Reuters had predicted an August tally of 1.3 trillion yuan, down from July's 1.45 trillion yuan but nearly 20% more than the same month last year. 'Financing demand is relatively weak as firms are unwilling to borrow,' said Luo Yunfeng, chief analyst at Merchants Securities in Beijing."
September 15 - Bloomberg: "China's economic momentum weakened again in August, presenting its policy makers with a test of nerve as they prepare for a potential new round of trade talks with their U.S. counterparts. Fixed-asset investment growth in the first eight months slowed to the lowest pace since at least 1999 and infrastructure investment rose just 4.2%, the weakest expansion since the data series started in 2014… A slowing economy gives China a weaker hand ahead of possible new trade talks the two sides are discussing, adding to the risk of a deeper slowdown should U.S. President Donald Trump pull the trigger on tariffs on an additional $200 billion of Chinese goods… Investment rose 5.3% year-on-year in the first eight months, compared with an estimated 5.6%... August industrial production expanded 6.1%, meeting estimates. Retail sales expanded 9% last month from a year earlier, accelerating from an 8.8% pace in July."
September 14 - Wall Street Journal (Stephen Wilmot): "Car sales in China have shifted into reverse, but figuring how exposed the world's biggest auto makers are to the world's biggest car market is almost impossible. Most major car makers have done very well in China… Nissan and Volkswagen get nearly a quarter of their pretax profit from those businesses, and General Motors isn't far behind. What the car companies don't tell investors is how much they earn from exports, royalties and parts sales in China, which can be significant and aren't fully disclosed… After years of rapid growth, the Chinese market is far larger than its counterparts in the West, with more than 24 million cars sold last year compared with roughly 17 million in the U.S. and 15 million in the European Union. But sales fell 7% in August compared with a year earlier…"
September 12 - Bloomberg (Lianting Tu): "S&P Global Ratings lowered its credit ratings by one notch on seven Chinese local government financing vehicles as it believes the likelihood of local government support 'could weaken over time.' The firm said Wednesday morning the rating moves also reflected the gradual weakening of those financing platforms' roles and links with their local-government parents. Moody's… also cut its scores on five LGFVs… as it sees 'reduced likelihood of support for the sector as a whole.' Fitch Ratings took similar actions in June. China has repeatedly said LGFVs must take responsibility to repay their own debts."
EM Watch:
September 14 - Bloomberg (Andrey Biryukov, Anna Andrianova and Olga Tanas): "Russia's central bank unexpectedly raised interest rates for the first time since 2014, following its counterparts across emerging economies as inflation risks mount with a slumping currency and threats of U.S. sanctions. Policy makers said they'll 'consider the necessity of further increases' after lifting their benchmark to 7.5%, a level last seen in March, from 7.25%... Governor Elvira Nabiullina… said easing may not resume for more than a year. 'The quick monetary-policy response will limit the growth of inflationary risks in the future and create the conditions for easing policy by the end of 2019 or the first half of 2020,' Nabiullina told reporters… Further tightening isn't inevitable, but it can't be ruled out, she said."
September 11 - New York Times (Matt Phillips): "Cratering currencies, rising inflation, jumpy investors: A financial panic is again gripping some of the world's developing economies. The sharp sell-off of emerging market currencies, stocks and bonds seems to stand in stark contrast to the United States, where a nearly decade-long bull market continues amid buoyant economic conditions. Higher interest rates in the United States and a stronger dollar rebalance the risks and rewards for investors the world over, and act as a kind of financial magnet, pulling them out of riskier investments. When we've seen this before - in the Mexican peso crisis of 1994, the Thai baht collapse of 1997 and the Russian default of 1998 - investors had to contend with spillover of trouble from one country to others, dragging down economic growth or causing market stress."
September 11 - Financial Times (James Politi and Sam Fleming): "Christine Lagarde has warned that the escalating US-China trade war could deliver a 'shock' to already struggling emerging markets, raising the prospect that a crisis ripping through Argentina and Turkey could spread across the developing world. The IMF managing director told the Financial Times that her staff does not yet see 'contagion' spreading to multiple countries beyond those currently fighting investor flight. But she warned that 'these things could change rapidly' and cited the 'uncertainty [and] lack of confidence already produced by the threats against trade, even before it materialises', as one of the main dangers facing the developing world."
September 13 - Wall Street Journal (David Gauthier-Villars and Jon Sindreu): "Turkey's central bank sharply raised interest rates-defying President Recep Tayyip Erdogan's demand to cut them-in an attempt to counter the country's economic problems and reverse growing investor aversion to emerging-market economies. The central bank increased its main interest rate to 24% from 17.75%..., citing concerns over price stability and saying it would maintain a tight monetary-policy stance until the inflation outlook improves significantly. The turmoil in Turkey has rattled global markets in recent weeks and comes at a precarious time for developing economies around the world, just as investors have started to cast doubt on how long the current period of synchronized global growth can last."
September 14 - Bloomberg (Onur Ant): "Turkey's President Recep Tayyip Erdogan resumed his criticism of the nation's central bank a day after it announced the biggest rate hike of his rule. 'It's currently my phase of patience but there is a limit to this patience,' Erdogan told members of his ruling AK Party… He restated his opinion that higher rates won't help to slow inflation and warned that his restraint won't last forever. The central bank was responding to repeated calls for a rate increase, Erdogan said, and responded with a 'quite' big hike. Turkey would see the 'results of the independence' of the regulator, he said."
September 13 - Financial Times (Laura Pitel): "Two hours before Turkey's central bank unveiled a critical interest rate decision, Recep Tayyip Erdogan took to a stage in Ankara and delivered a classic tirade. The Turkish president, notorious for his opposition to high interest rates, lambasted the central bank and decried interest rates as 'a tool of exploitation'. Yet shortly afterwards, an institution that had come to be seen as almost irrelevant by international investors shocked the markets by sharply increasing its benchmark rate to 24%. Analysts were left wondering what happened. 'Is this something they cooked up together with Erdogan? Or is it something they decided independently?' asked Nora Neuteboom, an economist at the Dutch bank ABN Amro."
September 12 - Bloomberg (Onur Ant): "President Recep Tayyip Erdogan appointed himself chairman of Turkey's sovereign wealth fund and got rid of the entire management staff that had presided over two years of inaction. Zafer Sonmez, head of Turkey and Africa for Malaysia's government investment vehicle Khazanah Nasional Bhd, was named general manager. Treasury and Finance Minister Berat Albayrak, Erdogan's son-in-law, will also sit on the board, according to a decree…"
Global Bubble Watch:
September 13 - Bloomberg (Rachel Evans and Carolina Wilson): "If you work in exchange-traded funds, memories of 2008 aren't all doom and gloom. Lehman Brothers' collapse in September of that year ushered in a new era for ETFs. And they've been on a roll ever since. Assets in the low-cost portfolios that trade like stocks and typically track an index have swelled to $5 trillion globally, up from less than $700 billion before the financial crisis. Meanwhile, the number of funds has more than doubled as they gradually account for bigger and bigger pieces of the equity, bond and commodity markets. Although they started trading in the U.S. in 1993, the financial crisis marked a turning point for ETFs. Banks were forced to shed large inventories to bolster their balance sheets. And retail investors who'd lost their shirts went looking for ways to diversify their risk. ETFs offered both a solution. By packaging slices of the market into tradeable vehicles, ETFs became the go-to instrument for professionals seeking instant, liquid exposure to markets around the world. Mom-and-pop savers, meanwhile, got a cheap, transparent way to buy companies for the long haul. But in remaking financial markets in their image, ETFs have fueled a fear that indexed investing will trigger the next crisis."
September 11 - Bloomberg (Satyajit Das): "Slowing global trade is evidence of how emerging-market stresses are being transmitted to advanced economies. The real concern of contagion remains financial linkages, though. Since 2009, non-resident gross flows into EM financial assets - loans, debt and equity securities - have averaged around $1 trillion annually, although the figure has been volatile. Total outstanding exposure, which remains opaque, may be around 50% of GDP in advanced economies. The main driver has been accommodative monetary policy of developed-world central banks and the lure of higher returns. Despite reductions, bank cross-border lending constitutes around half of the exposure. U.K., European, Japanese and Chinese banks are particularly vulnerable… Spanish banks have substantial amounts at risk in Turkey and South America. China's risks via loans to EM borrowers as part of the Belt and Road initiative are also significant. Investors make up the bulk of the remaining exposure."
September 14 - Reuters (Scott Squires): "Trade and investment ministers from G20 countries meeting in Argentina said there was an 'urgent need' to improve the World Trade Organization, a joint statement said on Friday. With U.S. President Donald Trump readying tariffs on another $200 billion in Chinese goods, the ministers said they were 'stepping up the dialogue' on international trade disputes, according to the statement issued at the summit."
September 10 - Bloomberg (Onur Ant): "Turkey's finance chief said the imposition of sanctions by the U.S. on the Middle East's largest economy was politically motivated, and called on other nations to form a united front against such actions. U.S. President Donald Trump used sanctions and tariffs to sabotage the Turkish economy, Treasury and Finance Minister Berat Albayrak said… Apart from a short-term currency impact, Turkish economic fundamentals had proved resilient, he said. The rallying cry from Turkey's top economy official, who is also the son-in-law of President Recep Tayyip Erdogan, ratchets up the rhetoric between Ankara and Washington."
September 10 - Bloomberg (Andreo Calonzo and Ian Sayson): "U.S. President Donald Trump is to blame for surging consumer prices in the Philippines after he sparked a trade war with China, said Rodrigo Duterte, head of the Southeast Asian country where inflation has reached a nine-year high. 'This inflation under my watch, believe or not, started when America' under Trump imposed duties on Chinese goods, which prompted retaliation, Duterte said… 'When America raised (tariff) rates and interest rates, everything went up.'"
Fixed Income Bubble Watch:
September 14 - CNBC (Thomas Franck and Alexandra Gibbs): "The yield on the benchmark 10-year Treasury note topped 3% on Friday for the first time since Aug. 2. Yields have been steadily rising since the start of September as expectations for economic growth creep higher. Traders pointed to a revision in the retail sales figures out on Friday as the reason for the latest push higher in rates."
Leveraged Speculation Watch:
September 11 - Bloomberg (Katherine Burton, Melissa Karsh and Sam Dodge): "You'd be forgiven for thinking the hedge fund industry might be starting to rebound. Industry assets are at a record $3.2 trillion this year, and a brand-new firm just brought in an unprecedented $8 billion. But the reality isn't so rosy. Inflows into funds, on the whole, are non-existent and the number of startups has slowed to levels not seen for nearly two decade. Once high-flying powerhouses run by David Einhorn, Bill Ackman and Alan Howard are mere shadows of their former glory after posting years of returns that ranged from uninspiring to downright awful. John Paulson has crashed so badly and seen assets plummet so far that he's largely left managing his own money. Overall, firms' assets are barely growing. Net inflows since the end of 2016 have equaled just $7.8 billion."
September 14 - Bloomberg (Melissa Karsh and Lu Wang): "Already stung by a defensive stance on U.S. stocks, the smart money is only getting more cautious. Hedge funds' net leverage, a measure of the industry's risk appetite, has fallen to the lowest level this year after a brief bounce in late August, client data compiled by Morgan Stanley showed. At 49%, the ratio is down from a peak of more than 60% in March. Hedge funds' reluctance to increase equity exposure underscores a growing skepticism about the durability of the S&P 500 Index's outperformance against equity markets in the rest of the world. Wall Street strategists this month have been sounding warnings about U.S. stocks, with Morgan Stanley lowering its recommendation and Goldman Sachs flagging the danger of a potential bear market should a full-blown trade war erupt."
Geopolitical Watch:
September 10 - Financial Times (Henry Foy): "Hundreds of Russian and Chinese tanks, attack helicopters, fighter jets and thousands of soldiers will this week fight side by side in the biggest war games in Russia since 1981, in a show of strength and friendship between Asia's two largest military powers. Russia's biggest military exercise since the cold war, and its first to be conducted with a country not from the former Soviet bloc, is the strongest sign yet of the deepening strategic bond between Moscow and Beijing… Involving 300,000 troops and close to 40,000 vehicles, the seven-day 'Vostok' war games will coincide with talks between Vladimir Putin and Xi Jinping in Vladivostok…, amid a concerted effort by Russia to pivot east and embrace its powerful neighbour."
September 11 - Bloomberg (Andrew Osburn): "Russia began its biggest war games since the fall of the Soviet Union… close to its border with China, mobilising 300,000 troops in a show of force that will include joint exercises with the Chinese army. China and Russia have staged joint drills before but not on such a large scale, and the Vostok-2018 (East-2018) exercise signals closer military ties as well as sending an unspoken reminder to Beijing that Moscow is able and ready to defend its sparsely populated far east."
September 10 - Bloomberg (Zainab Fattah): "The U.S. Navy is conducting exercises this month to ensure its readiness to guarantee freedom of movement through Persian Gulf and Red Sea waterways amid escalating threats from Iran to disrupt shipping across important choke points. The exercises, with regional and global allies, are part of the U.S. 5th Fleet Theater Counter Mine and Maritime Security Exercise…"
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