[Reuters] Fed official says rate hikes 'right course' for U.S. monetary policy
[Reuters] China views yuan depreciation not in its interest: Mnuchin
[Reuters] China's central bank says market to play decisive role in yuan exchange rate
[BloombergQ] Emerging Markets Brace for Pain as Fed Hikes Meet Trade War
[CNBC] Draghi to Rome: Don't expect an ECB rescue if budget talks fail
[Reuters] Italy budget debacle puts Europe back in global spotlight
[BloombergQ] Italy Is the Creeping Concern for Finance Chiefs in Bali
[CNBC] Germany's Merkel is facing a crucial test of one of her key alliances
[BloombergQ] Shelves Empty as Specter of Hyperinflation Stalks Zimbabwe
[Reuters] Trump says Saudi Arabia faces 'severe punishment' if Khashoggi was killed
[Reuters] Turkey obtains recordings of Saudi journalist's purported killing: paper
[Reuters] Heeding China's call, Hong Kong tightens grip on dissent
[NYT] Why Italy Could Be the Epicenter of the Next Financial Crisis
[WSJ] U.S. Edges Toward New Cold-War Era With China
[WSJ] In China, a Dot-Com Déjà-Vu
[FT] Geopolitical tension casts pall over IMF meeting
[FT] Saudi Arabia: a kingdom in the dock
[FT] The bond ‘spread’ strikes fear and shrugs on Italian streets
Saturday, October 13, 2018
Friday, October 12, 2018
Weekly Commentary: Rude Awakening Coming
Please join Doug Noland and David McAlvany this Thursday, October 18th, at 4:00PM EST/ 2:00pm MST for the Tactical Short Q3 recap conference call, "Market Contagion is Back." Click here to register.
There's little satisfaction writing the CBB after a big down week in the markets. Motivation seems easier to come by after up weeks, perhaps my defiant streak kicking in. I find myself especially melancholy at the end of this week. There's a Rude Awakening Coming - perhaps it's finally starting to unfold.
Many will compare this week's market downdraft to the bout of market tumult back in early-February. At the time, I likened the blowup of some short volatility products to the June 2017 failure of two Bear Stearns structured Credit funds - an episode marking the beginning of the end for subprime and the greater mortgage finance Bubble. First cracks in vulnerable Bubbles. Back in 2007, it took 15 months for the initial fissure to develop into the "worst financial crisis since the Great Depression."
I posited some months back that tumult in the emerging markets marked the second phase of unfolding Crisis Dynamics. I have argued that the global government finance Bubble, history's greatest Bubble, has been pierced at the "periphery." More recently, the analytical focus has been on "Periphery to Core Crisis Dynamics." I've chronicled de-risking/deleveraging dynamics making headway toward the "Core." This week the "Core" became fully enveloped, as the unfolding global crisis entered a critical third phase.
Today's backdrop is altogether different than that of February. For one, back then "money" was flowing readily into the emerging markets - too much of it "hot money." "Risk on" was still dominant early in the year. Speculative leverage was expanding, with resulting liquidity abundance on an unprecedented global scale. With such a powerful global liquidity backdrop, a fleeting dislocation in U.S. equities proved no impediment to the hard-charging U.S. bull market. Indeed, global liquidity rushed into U.S. securities markets, fueling powerful speculation blow-off dynamics.
February market instability did, however, mark a key inflection point for risk embracement at the "Periphery." And the combination of acutely vulnerable Bubbles at the "Periphery" and blow-off dynamics at the "Core" proved highly destabilizing. The dollar rally helped push EM currencies over the cliff, while booming markets and economic activity in the U.S. pressured both the Fed and market yields. The upshot was a rather abrupt tightening of financial conditions for the emerging markets that, ironically, spurred a dangerous late-cycle Terminal Phase of speculative excess and resulting loose financial conditions in the U.S.
In stark contrast to February's robust financial conditions, the global liquidity backdrop these days is acutely fragile. Rather than the risk embracement environment from early in the year, risk aversion holds sway. On a global basis, speculative dynamics are dominated by de-risking and deleveraging. Liquidity is being destroyed instead of created, and it is anything but clear in my mind how the unfolding tightening of financial conditions would be reversed.
It is not only the speculative backdrop that has experienced momentous change. The Fed has liquidated about $250bn of its holdings since February. Both the ECB and BOJ have significantly reduced monthly QE liquidity injections from earlier in the year. The Fed has increased rates three times for a total of 75 bps. Rates were hiked to 60% in Argentina and 24% in Turkey. Throughout the emerging markets, central banks have been raising rates.
Global bond yields are much higher than in early-February. Argentine 10-year yields have surged 360 bps to 9.66%. Yields are up 685 bps in Turkey (21.1%), 340 bps in Pakistan (11.56%), 326 bps in Lebanon, 250 bps in Indonesia, 157 bps in Russia, 152 bps in Hungary, 114 bps in Brazil, 112 bps in Philippines, 105 bps in Peru, 82 bps in South Africa, 72 bps in Colombia and 56 bps in Mexico. And these are sovereign yields. Corporate debt has performed even worse, with notable weakness in Asian high-yield and dollar-denominated corporates more generally. And it's not as if European finance is sound. Italian 10-year yields have jumped 160 bps to 3.58%. This ongoing spike in global yields has certainly placed intense pressure on leveraged speculation.
Here at home, after trading as high as 3.26% in Monday's session, 10-year Treasury yields ended the week down seven bps to 3.16%. Yields were at 2.84% on February 2nd and then dropped to 2.71% during a tumultuous day for equities on February 5th. WTI crude traded down to $55 in February.
The Bloomberg Barclays US Corporate High Yield index began February at 5.78%, jumped to 6.36% by February 9th and then dropped back below 6.00% in April. And after reaching 6.54% in early July, yields declined to as low as 6.17% last Tuesday (10/2). This index saw yields surge 22 bps this week to 6.63%, the high going back to 2016.
It's my view that enormous leverage has accumulated throughout U.S. corporate Credit over this prolonged period of easy "money." It appears "Risk Off" dynamics attained important momentum in the U.S. corporate debt market this week.
October 12 - Bloomberg (Cecile Gutscher): "Nervous money managers fled from corporate bonds like never before in an exodus that outpaced stocks. Record outflows hit funds that buy investment-grade debt…, according to Bank of America Corp. strategists citing EPFR Global data. The redemptions totaled $7.5 billion in the week through Oct. 10. By comparison, investors pulled $1.4 billion from equity portfolios during the period, while government and Treasuries actually saw inflows… High-grade bond gauges have also suffered the steepest losses of all the Bloomberg Barclays indexes in this month's market meltdown."
As is generally the case, news and analysis follow market direction. With the market breaking to the downside, attention turns to the Federal Reserve and the unfolding trade war with China. Last Wednesday, with the market at record highs, pundits were celebrating the robust U.S. economy. What a difference a week makes.
I've received numerous emails over recent months questioning the supportive comments I've directed at Chairman Powell. This historic Bubble inflated throughout the watches of Drs. Greenspan, Bernanke and Yellen. Powell will surely be the scapegoat when things fall apart. The President has wasted no time in pointing fingers. It has to be the first time a central bank has been lambasted for gradually raising rates to a loco 2.25%.
October 10 - Bloomberg (Justin Sink and Shannon Pettypiece): "President Donald Trump slammed the Federal Reserve as 'going loco' for its interest-rate increases this year in comments hours after the worst U.S. stock market sell-off since February. Trump said… the market plunge wasn't because of his trade conflict with China: 'That wasn't it. The problem I have is with the Fed,' he said. 'The Fed is going wild. They're raising interest rates and it's ridiculous.' 'That's not the problem,' he said of the trade standoff. 'The problem in my opinion is the Fed,' he added. 'The Fed is going loco.' His latest criticism of the central bank began earlier Wednesday as he arrived in Pennsylvania for a campaign rally. 'They're so tight. I think the Fed has gone crazy,' the president said."
We're now, in real time, witnessing the inevitable dilemma created when a central bank falls "behind the curve." And keep in mind that rising asset prices are contemporary finance's prevailing type of inflation (inflationary manifestation). Leaving rates so low for such a long period of time was responsible for inflating myriad major Bubbles. And now central bankers face the high-risk proposition of normalizing rates in an acutely fragile Bubble backdrop. The bulls, of course, believe it would be reckless for a central bank not to reduce rates when the markets find themselves in a bit of trouble. Continuing to raise rates would be gross negligence; a show of total incompetence; and so on. President Trump wants to pin blame on Fed rate hikes, seemingly with no recollection of the "big fat ugly Bubble" he would herald on the campaign trail.
I'll assume that short rates will eventually be heading back to zero - and that more QE will be forthcoming. But that's of little help for today's increasingly illiquid markets. Markets in the near-term have a problem: central bankers are not at the edge of their seats fretting a market meltdown. Dr. Bernanke had a persistently weak stomach, fearful his entire monetary experiment would come crashing down upon him at any time. Markets were similarly confident that a risk averse chair Yellen wouldn't dare try anything that might put global markets at risk.
So inflating Bubbles were left to run wild, market participants ever confident that the greater Bubbles inflated the more averse central bankers would be to removing the punchbowl. Monetary madness stretched out for way too long. The job of returning central banking to some semblance of normality is left to Chairman Powell. It's a thankless job; winless. It is deeply unfair - and I would argue disturbing - to see him setup to be the villain. I believe deeply that monetary inflation is the enemy of the people. Responsible central banking is not.
It would not be surprising if the Fed Chairman and central bankers, more generally, are not at this point overly concerned with the current bout of market instability. After all, markets have over recent years taken these types of selloffs in stride, "buying opportunities" as markets quickly bounced back to ever-higher new records. Besides, aren't speculative markets overdue for a wakeup call? Markets fear that central bankers lack fear.
Hedging and option-related selling surely played a significant role in this week's downdraft. And with expiration next Friday, expect option-related trading to play a major role well into next week - either on the upside or down. Repeatedly we've seen expiration-week rallies destroy put value. If market strength does force a self-reinforcing reversal of hedges into expiration, the bulls will see the rally as evidence of a market on sound footing (the week was notable for the amount of bullish pontification in the face of an unbullish market reality).
But don't be fooled by fleeting option-related buy programs and the appearance of abundant liquidity. The backdrop is changing. Importantly, de-risking/deleveraging dynamics have arrived at the "Core." They have not only made it to the "Core," they've afflicted a vulnerable "Core" in a global backdrop of waning central bank liquidity, rising short-term rates and surging market yields.
"Risk Off" has become a global phenomenon - de-risking/deleveraging within a backdrop of central banks hoping to move beyond years of repeated market liquidity backstop operations. Moreover, it is a backdrop of highly divisive politics and troubling geopolitics. It is a worrying backdrop of escalating populism, nationalism and protectionism - that will matter now that markets are faltering.
I tell my wife that "it's over" just to hear her laugh. "How many times have you said that?," she'll say. With a chuckle, I respond, "This time I mean it." We shared a little laugh together, but this time I wasn't kidding. I do vividly recall thinking "it's over" in the summer of 2012, not anticipating that the Germans would tolerate Draghi's "whatever it takes" unlimited "money" printing operations. And I similarly recall thinking "it's over" with China's Bubble at the precipice in early-2016. I guess I should have anticipated China's "national team," along with a ratcheting up of QE from the BOJ and ECB and an abrupt postponement of Fed "normalization" (after one tiny baby step).
I think "It's over" because all these market bailouts ensured things turned really crazy - and I believe this time around it's going to take central bankers longer to respond. I sense little appetite for another round of concerted global "money" printing operations. The focus is on domestic issues rather than some global agenda.
And market structure has become acutely vulnerable. Trillions in perceived safe and liquid ETFs. Trillions in a hedge fund industry struggling with performance and susceptible to huge outflows. Hundreds of Trillions of derivatives susceptible to market dislocation and illiquidity. Too much derivative market "insurance" that risks fomenting an avalanche of self-feeding sell orders. And let's not forget the maladjusted U.S. economic structure that will function surprisingly poorly in a backdrop of tighter financial conditions and sinking securities markets.
In particular, it was an ominous week for the two great intertwined Bubbles, illustrated by the Shanghai Composite's and S&P500's respective 7.6% and 4.1% declines. I could go on and on, but I find it all sad and frustrating.
There's little satisfaction writing the CBB after a big down week in the markets. Motivation seems easier to come by after up weeks, perhaps my defiant streak kicking in. I find myself especially melancholy at the end of this week. There's a Rude Awakening Coming - perhaps it's finally starting to unfold.
Many will compare this week's market downdraft to the bout of market tumult back in early-February. At the time, I likened the blowup of some short volatility products to the June 2017 failure of two Bear Stearns structured Credit funds - an episode marking the beginning of the end for subprime and the greater mortgage finance Bubble. First cracks in vulnerable Bubbles. Back in 2007, it took 15 months for the initial fissure to develop into the "worst financial crisis since the Great Depression."
I posited some months back that tumult in the emerging markets marked the second phase of unfolding Crisis Dynamics. I have argued that the global government finance Bubble, history's greatest Bubble, has been pierced at the "periphery." More recently, the analytical focus has been on "Periphery to Core Crisis Dynamics." I've chronicled de-risking/deleveraging dynamics making headway toward the "Core." This week the "Core" became fully enveloped, as the unfolding global crisis entered a critical third phase.
Today's backdrop is altogether different than that of February. For one, back then "money" was flowing readily into the emerging markets - too much of it "hot money." "Risk on" was still dominant early in the year. Speculative leverage was expanding, with resulting liquidity abundance on an unprecedented global scale. With such a powerful global liquidity backdrop, a fleeting dislocation in U.S. equities proved no impediment to the hard-charging U.S. bull market. Indeed, global liquidity rushed into U.S. securities markets, fueling powerful speculation blow-off dynamics.
February market instability did, however, mark a key inflection point for risk embracement at the "Periphery." And the combination of acutely vulnerable Bubbles at the "Periphery" and blow-off dynamics at the "Core" proved highly destabilizing. The dollar rally helped push EM currencies over the cliff, while booming markets and economic activity in the U.S. pressured both the Fed and market yields. The upshot was a rather abrupt tightening of financial conditions for the emerging markets that, ironically, spurred a dangerous late-cycle Terminal Phase of speculative excess and resulting loose financial conditions in the U.S.
In stark contrast to February's robust financial conditions, the global liquidity backdrop these days is acutely fragile. Rather than the risk embracement environment from early in the year, risk aversion holds sway. On a global basis, speculative dynamics are dominated by de-risking and deleveraging. Liquidity is being destroyed instead of created, and it is anything but clear in my mind how the unfolding tightening of financial conditions would be reversed.
It is not only the speculative backdrop that has experienced momentous change. The Fed has liquidated about $250bn of its holdings since February. Both the ECB and BOJ have significantly reduced monthly QE liquidity injections from earlier in the year. The Fed has increased rates three times for a total of 75 bps. Rates were hiked to 60% in Argentina and 24% in Turkey. Throughout the emerging markets, central banks have been raising rates.
Global bond yields are much higher than in early-February. Argentine 10-year yields have surged 360 bps to 9.66%. Yields are up 685 bps in Turkey (21.1%), 340 bps in Pakistan (11.56%), 326 bps in Lebanon, 250 bps in Indonesia, 157 bps in Russia, 152 bps in Hungary, 114 bps in Brazil, 112 bps in Philippines, 105 bps in Peru, 82 bps in South Africa, 72 bps in Colombia and 56 bps in Mexico. And these are sovereign yields. Corporate debt has performed even worse, with notable weakness in Asian high-yield and dollar-denominated corporates more generally. And it's not as if European finance is sound. Italian 10-year yields have jumped 160 bps to 3.58%. This ongoing spike in global yields has certainly placed intense pressure on leveraged speculation.
Here at home, after trading as high as 3.26% in Monday's session, 10-year Treasury yields ended the week down seven bps to 3.16%. Yields were at 2.84% on February 2nd and then dropped to 2.71% during a tumultuous day for equities on February 5th. WTI crude traded down to $55 in February.
The Bloomberg Barclays US Corporate High Yield index began February at 5.78%, jumped to 6.36% by February 9th and then dropped back below 6.00% in April. And after reaching 6.54% in early July, yields declined to as low as 6.17% last Tuesday (10/2). This index saw yields surge 22 bps this week to 6.63%, the high going back to 2016.
It's my view that enormous leverage has accumulated throughout U.S. corporate Credit over this prolonged period of easy "money." It appears "Risk Off" dynamics attained important momentum in the U.S. corporate debt market this week.
October 12 - Bloomberg (Cecile Gutscher): "Nervous money managers fled from corporate bonds like never before in an exodus that outpaced stocks. Record outflows hit funds that buy investment-grade debt…, according to Bank of America Corp. strategists citing EPFR Global data. The redemptions totaled $7.5 billion in the week through Oct. 10. By comparison, investors pulled $1.4 billion from equity portfolios during the period, while government and Treasuries actually saw inflows… High-grade bond gauges have also suffered the steepest losses of all the Bloomberg Barclays indexes in this month's market meltdown."
As is generally the case, news and analysis follow market direction. With the market breaking to the downside, attention turns to the Federal Reserve and the unfolding trade war with China. Last Wednesday, with the market at record highs, pundits were celebrating the robust U.S. economy. What a difference a week makes.
I've received numerous emails over recent months questioning the supportive comments I've directed at Chairman Powell. This historic Bubble inflated throughout the watches of Drs. Greenspan, Bernanke and Yellen. Powell will surely be the scapegoat when things fall apart. The President has wasted no time in pointing fingers. It has to be the first time a central bank has been lambasted for gradually raising rates to a loco 2.25%.
October 10 - Bloomberg (Justin Sink and Shannon Pettypiece): "President Donald Trump slammed the Federal Reserve as 'going loco' for its interest-rate increases this year in comments hours after the worst U.S. stock market sell-off since February. Trump said… the market plunge wasn't because of his trade conflict with China: 'That wasn't it. The problem I have is with the Fed,' he said. 'The Fed is going wild. They're raising interest rates and it's ridiculous.' 'That's not the problem,' he said of the trade standoff. 'The problem in my opinion is the Fed,' he added. 'The Fed is going loco.' His latest criticism of the central bank began earlier Wednesday as he arrived in Pennsylvania for a campaign rally. 'They're so tight. I think the Fed has gone crazy,' the president said."
We're now, in real time, witnessing the inevitable dilemma created when a central bank falls "behind the curve." And keep in mind that rising asset prices are contemporary finance's prevailing type of inflation (inflationary manifestation). Leaving rates so low for such a long period of time was responsible for inflating myriad major Bubbles. And now central bankers face the high-risk proposition of normalizing rates in an acutely fragile Bubble backdrop. The bulls, of course, believe it would be reckless for a central bank not to reduce rates when the markets find themselves in a bit of trouble. Continuing to raise rates would be gross negligence; a show of total incompetence; and so on. President Trump wants to pin blame on Fed rate hikes, seemingly with no recollection of the "big fat ugly Bubble" he would herald on the campaign trail.
I'll assume that short rates will eventually be heading back to zero - and that more QE will be forthcoming. But that's of little help for today's increasingly illiquid markets. Markets in the near-term have a problem: central bankers are not at the edge of their seats fretting a market meltdown. Dr. Bernanke had a persistently weak stomach, fearful his entire monetary experiment would come crashing down upon him at any time. Markets were similarly confident that a risk averse chair Yellen wouldn't dare try anything that might put global markets at risk.
So inflating Bubbles were left to run wild, market participants ever confident that the greater Bubbles inflated the more averse central bankers would be to removing the punchbowl. Monetary madness stretched out for way too long. The job of returning central banking to some semblance of normality is left to Chairman Powell. It's a thankless job; winless. It is deeply unfair - and I would argue disturbing - to see him setup to be the villain. I believe deeply that monetary inflation is the enemy of the people. Responsible central banking is not.
It would not be surprising if the Fed Chairman and central bankers, more generally, are not at this point overly concerned with the current bout of market instability. After all, markets have over recent years taken these types of selloffs in stride, "buying opportunities" as markets quickly bounced back to ever-higher new records. Besides, aren't speculative markets overdue for a wakeup call? Markets fear that central bankers lack fear.
Hedging and option-related selling surely played a significant role in this week's downdraft. And with expiration next Friday, expect option-related trading to play a major role well into next week - either on the upside or down. Repeatedly we've seen expiration-week rallies destroy put value. If market strength does force a self-reinforcing reversal of hedges into expiration, the bulls will see the rally as evidence of a market on sound footing (the week was notable for the amount of bullish pontification in the face of an unbullish market reality).
But don't be fooled by fleeting option-related buy programs and the appearance of abundant liquidity. The backdrop is changing. Importantly, de-risking/deleveraging dynamics have arrived at the "Core." They have not only made it to the "Core," they've afflicted a vulnerable "Core" in a global backdrop of waning central bank liquidity, rising short-term rates and surging market yields.
"Risk Off" has become a global phenomenon - de-risking/deleveraging within a backdrop of central banks hoping to move beyond years of repeated market liquidity backstop operations. Moreover, it is a backdrop of highly divisive politics and troubling geopolitics. It is a worrying backdrop of escalating populism, nationalism and protectionism - that will matter now that markets are faltering.
I tell my wife that "it's over" just to hear her laugh. "How many times have you said that?," she'll say. With a chuckle, I respond, "This time I mean it." We shared a little laugh together, but this time I wasn't kidding. I do vividly recall thinking "it's over" in the summer of 2012, not anticipating that the Germans would tolerate Draghi's "whatever it takes" unlimited "money" printing operations. And I similarly recall thinking "it's over" with China's Bubble at the precipice in early-2016. I guess I should have anticipated China's "national team," along with a ratcheting up of QE from the BOJ and ECB and an abrupt postponement of Fed "normalization" (after one tiny baby step).
I think "It's over" because all these market bailouts ensured things turned really crazy - and I believe this time around it's going to take central bankers longer to respond. I sense little appetite for another round of concerted global "money" printing operations. The focus is on domestic issues rather than some global agenda.
And market structure has become acutely vulnerable. Trillions in perceived safe and liquid ETFs. Trillions in a hedge fund industry struggling with performance and susceptible to huge outflows. Hundreds of Trillions of derivatives susceptible to market dislocation and illiquidity. Too much derivative market "insurance" that risks fomenting an avalanche of self-feeding sell orders. And let's not forget the maladjusted U.S. economic structure that will function surprisingly poorly in a backdrop of tighter financial conditions and sinking securities markets.
In particular, it was an ominous week for the two great intertwined Bubbles, illustrated by the Shanghai Composite's and S&P500's respective 7.6% and 4.1% declines. I could go on and on, but I find it all sad and frustrating.
For the Week:
The S&P500 dropped 4.1% (up 3.5% y-t-d), and the Dow fell 4.2% (up 2.5%). The Utilities declined 1.3% (unchanged). The Banks sank 5.7% (down 5.8%), and the Broker/Dealers fell 5.4% (down 1.9%). The Transports sank 6.4% (down 1.2%). The S&P 400 Midcaps dropped 4.9% (down 1.5%), and the small cap Russell 2000 sank 5.2% (up 0.7%). The Nasdaq100 declined 3.3% (up 11.9%). The Semiconductors dropped 4.7% (unchanged). The Biotechs lost 5.0% (up 16.4%). With bullion rallying $15, the HUI gold index jumped 6.9% (down 20.3%).
Three-month Treasury bill rates ended the week at 2.22%. Two-year government yields slipped three bps to 2.85% (up 97bps y-t-d). Five-year T-note yields declined six bps to 3.01% (up 81bps). Ten-year Treasury yields fell seven bps to 3.16% (up 76bps). Long bond yields declined seven bps to 3.33% (up 59bps). Benchmark Fannie Mae MBS yields declined five bps to 3.96% (up 104bps).
Greek 10-year yields dropped 10 bps to 4.38% (up 31bps y-t-d). Ten-year Portuguese yields rose 10 bps to 2.04% (up 10bps). Italian 10-year yields jumped 15 bps to 3.58% (up 156bps). Spain's 10-year yields rose 10 bps to 1.67% (up 11bps). German bund yields dropped eight bps to 0.50% (up 7bps). French yields declined four bps to 0.87% (up 8bps). The French to German 10-year bond spread widened four bps to 37 bps. U.K. 10-year gilt yields fell nine bps to 1.63% (up 44bps). U.K.'s FTSE equities index sank 4.4% (down 9.0%).
Japan's Nikkei 225 equities index sank 4.6% (down 0.3% y-t-d). Japanese 10-year "JGB" yields slipped less than a basis point to 0.15% (up 10bps). France's CAC40 lost 4.9% (down 4.1%). The German DAX equities index sank 4.9% (down 10.8%). Spain's IBEX 35 equities index fell 3.8% (down 11.4%). Italy's FTSE MIB index sank 5.4% (down 11.9%). EM equities were mostly lower. Brazil's Bovespa index added 0.7% (up 8.5%), while Mexico's Bolsa declined 1.3% (down 3.9%). South Korea's Kospi index dropped 4.7% (down 12.4%). India's Sensex equities index gained 1.0% (up 2.0%). China's Shanghai Exchange sank 7.6% (down 21.2%). Turkey's Borsa Istanbul National 100 index rallied 1.9% (down 16.2%). Russia's MICEX equities index declined 2.0% (up 13.9%).
Investment-grade bond funds saw outflows of $360 million, and junk bond funds suffered outflows of $4.928 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates surged 19 bps to 4.90% (up 99bps y-o-y). Fifteen-year rates rose 14 bps to 4.29% (up 108bps). Five-year hybrid ARM rates gained six bps to 4.07% (up 91bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up ten bps to 4.88% (up 70bps).
Federal Reserve Credit last week declined $8.8bn to $4.137 TN. Over the past year, Fed Credit contracted $282bn, or 6.4%. Fed Credit inflated $1.326 TN, or 47%, over the past 310 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $8.3bn last week to $3.444 TN. "Custody holdings" were up $83.9bn y-o-y, or 2.5%.
M2 (narrow) "money" supply jumped $19.6bn last week to a record $14.286 TN. "Narrow money" gained $557bn, or 4.1%, over the past year. For the week, Currency increased $1.9bn. Total Checkable Deposits dropped $24.5bn, while Savings Deposits jumped $37.7bn. Small Time Deposits added $1.5bn. Retail Money Funds gained $2.9bn.
Total money market fund assets gained $16.1bn to an eight-year high $2.888 TN. Money Funds gained $147bn y-o-y, or 5.4%.
Total Commercial Paper added $1.8bn to $1.102 TN. CP gained $38bn y-o-y, or 3.6%.
Currency Watch:
October 9 - Wall Street Journal (Saumya Vaishampayan and Mike Bird): "China's effort to support its slowing economy is heaping pressure on the yuan, signaling challenges for Beijing as it tries to stimulate growth amid rising trade tensions without triggering destabilizing capital outflows. The yuan weakened beyond 6.93 per dollar this week, coming within striking distance of its lowest level since January 2017, after China moved over the weekend to free more funds for domestic banks… Interbank lending rates in Hong Kong-an offshore trading hub for the yuan-surged on Tuesday, possibly due to efforts by China's central bank to prevent the yuan from weakening too much, several analysts said. China's efforts to manage its currency are complicated by the escalating trade conflict between the U.S. and China…"
The U.S. dollar index slipped 0.4% to 95.258 (up 3.4% y-t-d). For the week on the upside, the South African rand increased 1.7%, the Brazilian real 1.5%, the Japanese yen 1.4%, the Swedish krona 1.2%, the Norwegian krone 1.0%, the New Zealand dollar 1.0%, the Australian dollar 0.9%, the euro 0.3%, the Singapore dollar 0.3% and the British pound 0.3%. For the week on the downside, the Canadian dollar declined 0.7%, the Mexican peso 0.2%, the Swiss franc 0.1% and the South Korean won 0.1%. The offshore Chinese renminbi declined 0.77% versus the dollar this week (down 6.00% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index dropped 3.2% (up 8.2% y-t-d). Spot Gold rallied 1.2% to $1,218 (down 6.5%). Silver was little changed at $14.63 (down 14.7%). Crude gave back $2.83 to $71.51 (up 18%). Gasoline sank 6.6% (up 8%), while Natural Gas was little changed (up 6%). Copper gained 1.8% (down 15%). Wheat slipped 0.7% (up 21%). Corn gained 1.5% (up 7%).
Market Dislocation Watch:
October 10 - Bloomberg (Andrew Mayeda and Saleha Mohsin): "Global finance chiefs played down the economic risks posed by the biggest U.S. stock sell-off since February, with many describing the decline as a long-awaited correction. 'The fundamentals of the U.S. economy continue to be extremely strong, I think that's why the stock market has performed as well as it has,' U.S. Treasury Secretary Steven Mnuchin told Bloomberg News at the IMF's annual meeting… 'The fact that there's somewhat of a correction given how much the market has gone up is not particularly surprising.'"
October 10 - Wall Street Journal (Editorial Board): "Ten years after the financial panic, the architects of the rescue policies are taking a victory lap. We won't relitigate the immediate panic response, some of which we supported. But there is one policy whose outcome is still uncertain: The Federal Reserve's near-decade of unprecedented zero-interest rates and bond buying. Is the October correction in stocks, including Wednesday's 3% plunge, telling us that this bill is now coming due? The final payments on any Fed monetary cycle aren't merely the results when interest rates are low and policy is easy. The verdict is clear only at the end of the cycle when the Fed has to unwind its accommodation and interest rates rise. Only then can the world see clearly whether the Fed overdid its stimulus with nasty consequences on the other end."
October 10 - Bloomberg (Gowri Gurumurthy): "Junk-bond investors are getting nervous as the financial markets sell-off spreads. Investors pulled $5.4 billion of cash out of high-yield bond funds from Oct. 4 through Tuesday, JPMorgan… wrote…, citing Lipper data. That's the biggest outflow for a similar period since a $6.3 billion drawdown in February, the second largest on record, according to the report. Exchange-traded funds led the drain…"
Trump Administration Watch:
October 11 - Bloomberg (Jennifer Jacobs and Toluse Olorunnipa): "President Donald Trump said he won't fire Federal Reserve Chairman Jerome Powell but blamed an 'out of control' U.S. central bank for the worst stock market sell-off since February. Trump also told reporters in the Oval Office Thursday morning that he knows monetary policy better than the Fed's leaders and continued criticizing them for interest-rate increases. 'The Fed is out of control,' Trump said. 'I think what they're doing is wrong.' The president added that the Fed's interest rate increases are 'not necessary in my opinion and I think I know about it better than they do.' Trump's criticisms mark a stunning departure from the practices of his recent predecessors."
October 12 - Reuters (David Lawder): "U.S. Treasury Secretary Steven Mnuchin said… that he told China's central bank chief that currency issues need to be part of any further U.S.-China trade talks and expressed his concerns about the yuan's recent weakness. Mnuchin also told Reuters in an interview that China needs to identify concrete 'action items' to rebalance the two countries' trade relationship before talks to resolve their disputes can resume."
October 12 - Reuters: "China's trade surplus with the United States surged to a record high of $34.13 billion in September, compared with $31.05 billion in August… The September surplus with the U.S. was larger than China's overall trade surplus of $31.69 billion for the month."
October 9 - Reuters (Roberta Rampton and Lisa Lambert): "President Donald Trump… repeated his threat to slap tariffs on an additional $267 billion of Chinese imports if Beijing retaliates for the recent levies and other measures the United States has imposed in an escalating trade war between the economic giants. Trump, speaking to reporters in the Oval Office, also said China is not ready to reach a deal on trade. 'China wants to make a deal, and I say they're not ready yet,' Trump said. 'I just say they're not ready yet. And we've canceled a couple of meetings because I say they're not ready to make a deal.'"
October 8 - Financial Times (Tom Mitchell and Lucy Hornby): "US officials have warned China that Donald Trump will not engage in trade talks with Xi Jinping at next month's G20 summit if Beijing does not produce a detailed list of concessions, according to three people briefed on negotiations... The Chinese, however, say they have such a list but would not present it without some guarantee of it being received in a stable political climate in Washington, including a point person with a mandate to negotiate on behalf of the Trump administration… US officials have been frustrated by what they see as Beijing's unwillingness to discuss substantive 'structural issues' related to its economic and trade policies. Beijing has been similarly irritated by the erratic approach of the Trump administration…"
October 6 - Wall Street Journal (Bob Davis): "While the White House is progressing on trade deals with allies including Canada, Mexico, Korea and Europe, its dispute with China looks increasingly intractable, with tariffs between the world's two largest economies likely cemented in place for years. In other trade fights, President Trump used tariffs as leverage to reach deals. Threatening car tariffs helped convince Canada and Mexico to concede to U.S. demands for a new North American Free Trade Agreement, the president boasted. 'Without tariffs, we wouldn't be talking about a deal,' he said… China is different. Tariffs aren't simply a negotiating tactic for the U.S., but a way to change economic incentives. The Trump trade team believes U.S. firms need protection from a predatory Chinese state, which Mr. Trump says coerces U.S. companies to fork over technologies and subsidizes Chinese firms to expand globally."
October 10 - CNBC (Tae Kim): "Treasury Secretary Steven Mnuchin has told China not to weaken its currency as the U.S. and China try to resolve their trade differences. Mnuchin told the Financial Times the Treasury Department is closely watching the currency market and wants to talk about the issue with China as part of trade discussions. 'As we look at trade issues there is no question that we want to make sure China is not doing competitive devaluations,' Mnuchin said. 'The renminbi has depreciated significantly during the year. … We are going to absolutely want to make sure that as part of any trade understanding we come to that currency has to be part of that.'"
October 7 - Financial Times (James Politi): "The Trump administration is seeking to stop the EU, UK and Japan from striking separate trade deals with China as it tries to impose economic isolation on its Asian rival. The US's revamped Nafta trade deal with Canada and Mexico includes a provision that would require its two neighbours to give notification of any trade negotiations with a 'non-market economy'. That clause could also force those countries to disclose details of any talks and allow Washington to walk away from the Nafta agreement if such a separate deal were completed."
October 10 - Wall Street Journal (Kate O'Keeffe): "Treasury officials… issued new rules requiring all foreign investors in certain deals involving critical U.S. technology to submit to national security reviews or face fines as high as the value of their proposed transactions. The new regulations, which implement a recently passed law to tighten foreign investment reviews, are more expansive than some had advocated and are likely to bring an unprecedented number of transactions into the purview of the Committee on Foreign Investment in the U.S., known as Cfius. The Treasury-led interagency committee will now require foreign investors to alert it to all deals giving them access to critical technology across 27 industries…"
Federal Reserve Watch:
October 9 - CNBC (Thomas Franck): "President Donald Trump said… that he does not like the Federal Reserve's decision to continue to hike interest rates. He also said that the United States economy does not have an inflation problem and that the central bank is moving too quickly in trying to curb price increases. 'I think we don't have to go as fast,' the president answered to a question… 'I don't want to slow it down even a little bit' when there are no signs of inflation, the president added, referring to the economy. Trump added that he has not spoken to Federal Reserve Chair Jerome Powell about the central bank's moves to raise rates."
October 12 - Bloomberg (Alister Bull): "Asked to comment on President Donald Trump's accusation that the Fed is 'crazy' for raising interest rates, Chicago Fed President Charles Evans says 'we're looking at a very strong economy, strong fundamentals, and we're adjusting the policy stance.' 'After many, many years of accommodative policy, which I have supported strongly, because inflation is now up at 2%, it's time to readjust the policy stance, at least to neutral. Let's see how the economy is performing at that point, and then we might have to do a little bit more at that point.' Evans says his estimate of the neutral interest rate that neither slows down nor speeds up the economy is in the 2.75%-3% range and the Fed may need to lift rates 'maybe 50 bps above neutral"
October 10 - Wall Street Journal (Michael S. Derby and Josh Zumbrun): "New York Fed President John Williams said he expects the Federal Reserve to return to its target interest rate to normal or neutral levels within 'the next year or so.' Mr. Williams said that once rates were at a normal level, then the Fed would be well positioned to respond to surprises-either inflationary or a softening in the economy-that may require raising or lowering rates. 'My view is our path today is getting us back to normal interest rates or neutral interest rates relatively quickly, over the next year or so… From my perspective, the most important thing we can do now is get ourselves well positioned for whatever may come… Once we're there, we're better positioned for whatever may happen. If we need to raise rates more than expected we can do that in a reasonable way. If the economy slows we can adjust to that.'"
October 8 - Reuters (John Geddie and Aradhana Aravindan): "Emerging markets were 'as prepared as they can be' for changes to U.S. monetary policy as the Federal Reserve had been as 'transparent' as possible, St. Louis Federal Reserve Bank President James Bullard said in Singapore…
U.S. Bubble Watch:
October 11 - Reuters (Richard Leong): "The U.S. economy is expanding at a 4.2% annualized rate in the third quarter, the Atlanta Federal Reserve's GDPNow forecast model showed on Wednesday, following the release of the latest data on producer prices and wholesale trade."
October 10 - CNBC (Salvador Rodriguez): "Chamath Palihapitiya, the outspoken Silicon Valley tech investor, called the start-up economy a charade on Wednesday… 'We are, make no mistake … in the middle of an enormous multivariate kind of Ponzi scheme,' said Palihapitiya, at the Launch Scale conference in San Francisco. Palihapitiya slammed the start-up cycle of raising funding rounds and spending money to boost user growth to attract bigger funding rounds. 'It's all on paper, but it looks amazing,' Palihapitiya said. 'You've been told to grow, so you're growing. You're doing your job.'"
October 10 - Reuters (Howard Schneider): "U.S. producer prices increased 0.2% in September, in line with expectations, while a revision to wholesale inventory estimates for August showed the biggest jump in nearly five years, beating forecasts. A rise in services prices offset a slight drop in prices for goods, including a 3.5% drop in gasoline prices…. In the 12 months through September, the producer price index rose 2.6%, slightly less than expected."
October 9 - Bloomberg (Liz McCormick and Alex Harris): "Democrats and Republicans have plenty at stake in the upcoming midterm elections. But it's already looking like a no-win situation for the U.S. bond market. If Democrats take the House, it raises the odds that congressional leaders will propose an infrastructure-spending bill similar in scope to President Donald Trump's original trillion-dollar proposal. And if the GOP defies expectations and holds on in Congress, tax cut 2.0 becomes more likely. In either case, the result will be debt, debt and more debt. That'd be on top of what is already a grim fiscal situation. A deluge of debt supply is set to inundate the $15.3 trillion Treasury market, just as borrowing costs rise. Not only is the U.S. budget deficit primed to swell to roughly $1 trillion by fiscal 2019 and past that in subsequent years, but the interest owed by the government is also forecast to triple in the coming decade to nearly a trillion dollars a year, according to the Congressional Budget Office. 'The current debt trajectory is already quite onerous,' said Subadra Rajappa, an interest-rate strategist at Societe Generale. 'If you keep increasing supply and auction sizes, there is a point where the bond market is going to say, 'Thanks, but no thanks.'"
October 9 - CNBC (Diana Olick): "Millennials are in their prime homebuying years, and they're used to cheap credit. So they might be in for a rude awakening as mortgage rates jump. The average rate on the 30-year fixed loan sat just below 4% a year ago, after dropping below 3.5% in 2016. It just crossed the 5% mark, according to Mortgage News Daily. That is the first time in eight years… 'Five percent is definitely an emotional level inasmuch as it scares prospective buyers about how high rates may continue to go,' said Matthew Graham, chief operating officer of MND."
October 9 - Bloomberg (Janet Lorin): "Harvard University's $39.2 billion endowment has reached a record value. So did Yale. And Brown. And Dartmouth. As many wealthy U.S. universities report bulging assets and strong investment gains for the latest fiscal year, the timing isn't ideal. Their fat coffers may draw the ire of lawmakers, some of whom view schools as hoarding their billions of dollars and have questioned their tax-exempt status. 'It makes the schools' efforts to say that they can't afford to pay the new tax a little harder to find sympathy for,' said Brian Galle, a law professor who specializes in tax at Georgetown University."
China Watch:
October 7 - Reuters (Shu Zhang and Kevin Yao): "China's central bank… announced a steep cut in the level of cash that banks must hold as reserves, stepping up moves to lower financing costs and spur growth amid concerns over the economic drag from an escalating trade dispute with the United States. The reserve requirement cut, the fourth by the People's Bank of China (PBOC) this year, comes as Beijing has pledged to expedite plans to invest billions of dollars in infrastructure projects… Reserve requirement ratios (RRRs) - currently 15.5% for large commercial lenders and 13.5% for smaller banks - would be cut by 100 bps…"
October 7 - Reuters (Shu Zhang, Xiangjin Zeng, Kevin Yao and Yawen Chen): "China's foreign exchange reserves fell more than expected in September to a 14-month low as the yuan currency weakened further against the dollar amid mounting trade tension with the United States. Reserves fell $22.69 billion in September to $3.087 trillion, the biggest drop since February, compared with a decline of $8.23 billion in August… Economists polled by Reuters had expected reserves to drop by $5 billion to $3.105 trillion."
October 8 - Financial Times (Lucy Hornby and Song Jung-a): "China has accused Donald Trump of engaging in 'misguided actions', laying bare the mounting tensions between the world's largest economies as their trade war threatens to escalate into a broader regional confrontation. The rebuke to the US president, made during a visit to Beijing by secretary of state Mike Pompeo, comes just days after a stinging speech by Mike Pence, in which the US vice-president accused China of meddling in the US's midterm elections. Wang Yi, the Chinese foreign minister, accused Mr Trump of 'constantly ramping up' trade disputes, 'hurting China's interest' in Taiwan and finding fault with China's domestic and external affairs 'without reason'."
October 9 - Bloomberg: "The U.S. shouldn't believe that ever higher tariffs can induce China's government to capitulate to American demands in the escalating trade dispute between the world's biggest economies, according to Chinese Commerce Minister Zhong Shan. 'There is a view in the U.S. that so long as the U.S. keeps increasing tariffs, China will back down,' Zhong said... 'The U.S. should not underestimate China's resolve and will… This unyielding nation suffered foreign bullying for many times in history, but never succumbed to it even in most difficult conditions,' Zhong wrote… 'China doesn't want a trade war, but would rise up to it should it break out.'"
October 8 - Reuters (Seng Li Peng): "China must take strong stimulus measures to support growth, with the country in a 'critical' period of stabilizing its economy, according to a commentary in the Global Times, a state-backed Chinese tabloid... The Global Times wrote that perhaps China is unable to overcome these pressures by simply continuing to fine-tune its economic policy. 'In 2008, the Chinese government announced a 4 trillion yuan ($578bn) stimulus package to fight the impact of the global financial crisis. Now, the Chinese economy is under even tougher pressure amid escalating trade friction,' it said."
October 12 - Associated Press: "China's auto sales plunged 12% in September, adding to economic challenges for the country's leaders amid a worsening tariff fight with Washington. Sales in the biggest global market fell to 2 million sedans, SUVs and minivans… Demand has weakened as economic growth cooled after Beijing tightened lending controls to rein in a debt boom. With the latest contraction, sales growth for the first three quarters of the year fell to just 0.6%, down from 2017's already anemic full-year rate of 1.4%."
October 9 - Bloomberg: "Home buyers angry that apartments are being sold for much less than they paid swamped property developers' marketing offices across China over the Golden Week holiday, demanding their money back. A sales center for Xinzhou Mansion, a project of Country Garden Holdings Co… was mobbed last Thursday, videos and pictures circulated on social media show, its windows smashed by scores of protesters throwing rocks. They're furious that Country Garden is selling units for prices around 30% lower than a year ago. Similar demonstrations took place at One Mansion in Shanghai, another of Country Garden's projects. There, apartments are going for as much as 25% less than two months earlier."
October 12 - Bloomberg (Cecile Gutscher): "With China's economy slowing, banks under
pressure to help invigorate growth are rushing to make room on their balance sheets for new lending. That's unleashed a boom in a corner of the nation's credit markets. Structured debt sales in China's interbank bond market jumped in the last quarter to a record 300 billion yuan ($44bn). Residential mortgage backed securities accounted for about 60% of issuance this year through September, from 6% in 2015…"
October 8 - Reuters (Kane W and Julie Zhu): "Chinese conglomerate HNA Group has put up for sale property assets worth at least $11 billion, according to documents seen by Reuters, accelerating a push to cut its large debt and restructure. Two sets of documents reviewed by Reuters listed more than 80 assets that HNA has either put up for sale or intends to sell, including hotels, commercial and residential buildings. They are mostly within China…"
October 10 - Bloomberg (Robert Williams and Kim Bhasin): "Chinese border guards searching travelers' suitcases for undeclared Louis Vuitton bags, Gucci loafers and Tiffany necklaces are giving luxury-goods makers their biggest scare in years. Fears of a slowdown in spending by China's consumers, who account for two-thirds of the luxury market's growth, has fueled the biggest monthly selloff in LVMH shares since 2015. At that time, the industry was wrestling with the last China-induced headache -- a crackdown on giving lavish gifts to officials in exchange for political favors. Luxury investors were already skittish, worried about whether a three-year spending boom could survive the effects of the U.S.-China trade war."
October 9 - Reuters (Seng Li Peng): "China has choked back on imports of liquefied petroleum gas (LPG) from the United States, traders and analysts said, turning to the Middle East for extra supplies amid the two countries' trade dispute."
EM Watch:
October 6 - Reuters (Gabriel Stargardter and Pedro Fonseca): "Brazil's far-right presidential candidate Jair Bolsonaro said… he would stick to his hardline agenda on guns, crime and graft in the second round of the election on Oct. 28, alarming senior statesmen and human rights advocates alike. Bolsonaro, a former Army captain and veteran lawmaker, nearly won the presidency outright on Sunday, taking 46% of votes against leftist Fernando Haddad's 29%, part of a swing to the right in Latin America's largest nation."
October 8 - Financial Times: "Brazil has been rocked by a political earthquake: the victory of far-right former army captain Jair Bolsonaro in the first round of the country's presidential election… As the FT's chief international affairs columnist, Gideon Rachman says, the addition of Brazil to the group of states led by 'strongmen' would make a big difference. After all, the country was, until recently, seen as a model of a nation that had successfully embraced globalisation and left the dark days of authoritarianism behind it… For years, Mr Bolsonaro occasionally made headlines with his outbursts, such as when he told a leftist congresswoman that she did not 'deserve' to be raped. He once praised the leftist Venezuelan president Hugo Chávez, and said former Brazilian president Fernando Henrique Cardoso should face a firing squad for privatising state companies."
October 7 - Reuters (Tuvan Gumrukcu): "President Tayyip Erdogan said… Turkey was not facing any worrying economic problems and would not seek assistance from the International Monetary Fund, despite a currency crisis and likely economic slowdown. Turkey has 'closed the book on the IMF, not be opened again,' Erdogan said in a speech to members of his AK Party."
October 8 - Reuters: "Venezuelan consumer prices rose 488,865% in the 12 months ending in September, a member of the opposition-run congress reported on Monday, as the OPEC nation's hyperinflation continues to accelerate amid a broader economic collapse."
Central Bank Watch:
October 9 - Financial Times (Caroline Binham, Philip Stafford and Jim Brunsden): "The Bank of England has issued its starkest warning yet that up to £41tn of derivatives contracts maturing after Brexit are at risk unless European officials urgently address regulatory uncertainty. The BoE said… that clearing houses would have to tell European members such as banks to move their business or risk falling foul of European law. Ultimately EU banks would bear the cost of the disruption, the BoE warned in its quarterly statement on risks to UK financial stability, citing estimates that suggested every basis point increase in the cost of clearing interest rate swaps could cost EU businesses about €22bn a year."
Italy Watch:
October 8 - Bloomberg (John Follain): "Italian Deputy Prime Minister Matteo Salvini said Europe's real enemy is Jean-Claude Juncker and the Brussels bureaucracy that pushes budget restrictions and open borders… Sitting alongside French nationalist Marine Le Pen at an event in Rome, Salvini said that next year's European Parliamentary elections will be a showdown between those focused on creating jobs and those more concerned with imposing austerity like Juncker, the president of the European Commission, and Pierre Moscovici, the European Union's economic policy chief. 'We are against the enemies of Europe -- Juncker and Moscovici -- shut away in the Brussels bunker,' Salvini said. 'The politics of austerity of the last few years has increased Italian debt and impoverished Italy.'"
Europe Watch:
October 11 - Reuters (Paul Carrel and Jörn Poltz): "Chancellor Angela Merkel's Bavarian allies are heading for their worst showing in a state election in over 60 years, a setback that risks widening divisions within Germany's crisis-prone national government. Polls show the Christian Social Union (CSU) will win at most 35% on Sunday, losing the absolute majority with which it has controlled its southeastern heartland for most of the post-war period."
October 8 - Bloomberg (Tasos Vossos and Emma Haslett): "Europe's primary bond market suffered another blow as Dutch lender Van Lanschot Kempen NV became the fifth issuer to pull a euro-note sale in little more than a week. The bank postponed the bond sale 'due to market circumstances,' spokesman Robin Boon said… The lender planned to sell as much as 100 million euros ($115 million) of Additional Tier 1 notes…"
Global Bubble Watch:
October 9 - Reuters (David Lawder): "Global debt levels reached a record $182 trillion in 2017, having grown 50% in the previous decade, but the picture looks less grim when public assets are taken into account, the International Monetary Fund said… The IMF said a new data base in its semi-annual Fiscal Monitor report showed considerable net worth in 31 countries that account for 61% of global economic output. Assets in these countries were worth about $101 trillion, or twice their gross domestic product, with just over half the total in public corporation assets, and just under half in natural resources such as oil or mineral wealth."
October 9 - CNBC (Yen Nee Lee): "Risks are building up in the global financial system, and a further escalation in trade tensions could push the situation over the edge, the International Monetary Fund warned. Investors have appeared complacent, however, according to the IMF's latest Global Financial Stability Report… The report, published twice a year, contains the fund's assessment of global financial conditions and highlights risks in the system. Stock prices - particularly those in the U.S. - have hit record-high levels multiple times over the past year, which is an indication that investors have continued to take on risks… 'A further escalation of trade tensions, as well as rising geopolitical risks and policy uncertainty in major economies, could lead to a sudden deterioration in risk sentiment, triggering a broad-based correction in global capital markets and a sharp tightening of global financial conditions,' the fund said…"
October 8 - Bloomberg (Siddharth Verma): "Global bonds are hitting fresh milestones of misery. Strong U.S. data, a tighter-than-expected monetary trajectory, rising commodity prices and brewing wage pressures are conspiring to push Treasury yields to cycle-highs, hitting money managers of all stripes. The value of the Bloomberg Barclays Multiverse Index, which captures investment-grade and high-yield securities around the world, slumped by $916 billion last week, the most since the aftermath of Donald Trump's election victory in November 2016."
October 8 - CNBC (Yen Nee Lee): "The International Monetary Fund has cut its global growth forecasts as trade tensions between the U.S. and trading partners have started to hit economic activity worldwide. The IMF said the global economy is now expected to grow at 3.7% this year and next year - down 0.2 percentage points from an earlier forecast, according to the fund's latest World Economic Outlook report…"
October 7 - Bloomberg (Dinesh Nair): "A record wave of mergers and acquisitions could slow sharply as dealmakers get spooked by rising geopolitical concerns, according to a survey by Ernst & Young… Corporate takeover appetite is at a four-year low with only 46% of executives planning to make purchases in the next 12 months, according to a survey of more than 2,600 dealmakers across 45 countries… That's reduced from 56% of executives polled last year. 'Geopolitical, trade and tariff uncertainties have finally caused some dealmakers to hit the pause button,' Steve Krouskos, EY's global vice chair of transaction advisory services, said… 'Despite stronger-than-anticipated first-half earnings and the undeniable strategic imperative for deals, we can expect this year to finish with much weaker M&A than how it started.'"
October 7 - Bloomberg (Carrie Hong Annie Lee): "Asia's dollar bond sales are set to end 2018 with a whimper after a sizzling start. Next year's prospects may prove dimmer, bankers and investors say. Volatile emerging markets, trade wars and now surging U.S. Treasury yields have created a perfect storm that's battering sentiment across Asia. A Bloomberg survey expects primary issuance to slump as much as 46% in the fourth quarter and Credit Suisse Group AG expects more turbulence going into 2019 that will test borrowers' mettle."
Fixed Income Bubble Watch:
October 11 - Bloomberg (Molly Smith and Christopher Cannon): "They were once models of financial strength-corporate giants like AT&T Inc., Bayer AG and British American Tobacco Plc. Then came a decade of weak sales growth and rock-bottom interest rates, a dangerous cocktail that left many companies feeling like they had just one easy way to grow: by borrowing heaps of cash to buy competitors. The resulting acquisition binge left an unprecedented number of major corporations just a rung or two from junk credit ratings… In fact, a lot of these companies might be rated junk already if not for leniency from credit raters… Bloomberg News delved into 50 of the biggest corporate acquisitions over the last five years, and found: By one key measure, more than half of the acquiring companies pushed their leverage to levels typical of junk-rated peers. But those companies, which have almost $1 trillion of debt, have been allowed to maintain investment-grade ratings by Moody's… and S&P Global Ratings. The vast majority of the 50 deals-valued at $1.9 trillion collectively-were financed with debt. This M&A-fueled leveraging of corporate balance sheets contributed to a surge in debt rated in the bottom investment-grade tier and now represents almost half of the outstanding market…"
October 9 - New York Times (Andrew Ross Sorkin): "It is often called the nuclear option. In the trade war between the United States and China, economists and investors have long tried to game out how both sides might use their clout. In virtually all the predictions, at least until recently, they revolved around a tit-for-tat tariff war. Even in the gloomiest of doomsday scenarios, there is one weapon that has long been considered unthinkable: the Chinese, the biggest holder of United States foreign debt with more than $1 trillion, publicly taking a step back from buying United States Treasuries - or worse, dumping what they own in the open market. The very idea is typically dismissed as a waste of time to even consider, and the reason is a sort of mutually assured destruction. It would be wildly irrational in economic terms, the thinking goes. China selling Treasuries would send interest rates up and hurt the United States, but it would simultaneously severely damage the value of China's own Treasury holdings. As the industrialist J. Paul Getty famously said, 'If you owe the bank $100, that's your problem; if you owe the bank $100 million, that's the bank's problem.' In the United States-China relationship, China is very clearly the bank."
October 10 - Bloomberg (Gowri Gurumurthy): "Junk-bond investors are getting nervous as the financial markets sell-off spreads to high-yield funds. Investors pulled $5.4 billion of cash out of high-yield bond funds from Oct. 4 through Tuesday, JPMorgan… wrote… That's the biggest outflow for a similar period since a $6.3 billion drawdown in February, the second largest on record… Exchange-traded funds led the drain, with the SPDR Bloomberg Barclays High Yield Bond ETF, known as JNK, seeing the biggest withdrawal since January on Tuesday. The iShares iBoxx High Yield Corporate Bond ETF, known as HYG, last week got hit with a record single-day outflow."
Leveraged Speculation Watch:
October 8 - Wall Street Journal (Rachael Levy): "Three hedge funds have closed in less than a week as investors question a once-highflying industry plagued by weak returns. Tourbillon Capital Partners… told clients it would return money and close its main fund. Last week, Highfields Capital Management and Criterion Capital Management announced they would return billions of dollars to clients. The closures are the latest in a multiyear re-evaluation of such investment vehicles by managers and investors. Some funds have closed as skepticism has increased about the value of paying hedge fund's famously high fees…. Others have been hurt by poor performance relative to a stock market that has notched nearly a decade of gains. This year, through September, stock hedge funds on average returned 1.9% according to industry research firm HFR."
October 8 - Bloomberg: "The smart money has been one of the biggest victims in the declines sweeping through equity markets. While the S&P 500 Index fell 1% last week, stocks with the highest hedge fund or exchanged-traded fund ownership posted losses that were four times larger, a study from UBS Group AG showed. Broadly, equity returns have been inversely tied to their popularity with funds. That is, the more loved by hedge funds or ETFs, the bigger the drop."
Geopolitics Watch:
October 12 - Wall Street Journal (Editorial Board): "The disappearance of dissident Jamal Khashoggi in the Saudi consulate in Turkey last week is a debacle that could have far-reaching consequences for the Middle East and U.S. interests. President Trump has to seek a full accounting lest he lose control of his foreign-policy agenda in the region. Mr. Khashoggi entered the consulate on Oct. 2 and there is no evidence he left alive. The Turks are whispering to everyone that they have audio surveillance tapes of Mr. Khashoggi's interrogation, torture and murder, though they have released nothing to the public."
October 8 - Wall Street Journal (Jeremy Page and Michael R. Gordon): "A rare public confrontation between the top U.S. and Chinese diplomats marked a new level in the worsening relations between the world's two biggest economies and risked complicating an anticipated summit meeting between President Trump and North Korean leader Kim Jong Un. Secretary of State Mike Pompeo exchanged testy words with Foreign Minister Wang Yi in Beijing… at a critical moment for U.S.-China relations, with trade negotiations stalled, military talks halted and both sides blaming each other for a recent close encounter between their warships in the South China Sea… Mr. Wang began his meeting with Mr. Pompeo by accusing the U.S. of escalating trade friction, causing trouble over Taiwan and unjustifiably criticizing China's domestic and external policies. 'We demand that the U.S. side stop this kind of mistaken action,' Mr. Wang said."
October 9 - Bloomberg (Debby Wu): "Taiwanese leader Tsai Ing-wen cautioned China against any efforts to interfere in local elections next month, in a toughly worded speech that mirrored U.S. Vice President Mike Pence's own rebuke to Beijing. Tsai made the remarks during a National Day address in Taipei, in which she described China as a threat to the international order. The Taiwanese president used the speech to issue a warning about election meddling after her administration accused China, along with Russia and North Korea, of testing cyber-hacking techniques on the democratically run island for use elsewhere. 'We will relentlessly prosecute cases of creation and spread of untruthful information, technology leaks, sabotage of information-technology security systems, interference in elections and politics, if there is solid evidence… We will bolster cooperation with other countries to counter systematic disinformation campaign originating from certain countries.' The speech comes as tensions between Beijing and both Taipei and its main security guarantors in Washington reach their highest in years."
October 7 - Bloomberg (David Tweed): "For decades, the U.S. has guaranteed freedom of navigation in Asia's waters, patrolling the seas with a view to maintaining the principle that no sovereign state shall suffer interference from another. China's growing military prowess, combined with a dogged assertiveness over its territorial claims, is testing the old ways and providing a potential flashpoint for the two powers. That tension is felt most keenly in the South China Sea. Where is the South China Sea? Stretching from China in the north to Indonesia in the south, the waterway encompasses 1.4 million square miles, making it bigger than the Mediterranean Sea. It borders countries including Vietnam, Malaysia and Singapore to the west, and the Philippines and Brunei to the east. It's a thriving fishing zone… holds promising oil and natural gas reserves. Even more noteworthy is the vast amount of trade that transits through its waters. In 2016, that amounted to some $3 trillion, including more than 30% of the global maritime crude oil trade."
The S&P500 dropped 4.1% (up 3.5% y-t-d), and the Dow fell 4.2% (up 2.5%). The Utilities declined 1.3% (unchanged). The Banks sank 5.7% (down 5.8%), and the Broker/Dealers fell 5.4% (down 1.9%). The Transports sank 6.4% (down 1.2%). The S&P 400 Midcaps dropped 4.9% (down 1.5%), and the small cap Russell 2000 sank 5.2% (up 0.7%). The Nasdaq100 declined 3.3% (up 11.9%). The Semiconductors dropped 4.7% (unchanged). The Biotechs lost 5.0% (up 16.4%). With bullion rallying $15, the HUI gold index jumped 6.9% (down 20.3%).
Three-month Treasury bill rates ended the week at 2.22%. Two-year government yields slipped three bps to 2.85% (up 97bps y-t-d). Five-year T-note yields declined six bps to 3.01% (up 81bps). Ten-year Treasury yields fell seven bps to 3.16% (up 76bps). Long bond yields declined seven bps to 3.33% (up 59bps). Benchmark Fannie Mae MBS yields declined five bps to 3.96% (up 104bps).
Greek 10-year yields dropped 10 bps to 4.38% (up 31bps y-t-d). Ten-year Portuguese yields rose 10 bps to 2.04% (up 10bps). Italian 10-year yields jumped 15 bps to 3.58% (up 156bps). Spain's 10-year yields rose 10 bps to 1.67% (up 11bps). German bund yields dropped eight bps to 0.50% (up 7bps). French yields declined four bps to 0.87% (up 8bps). The French to German 10-year bond spread widened four bps to 37 bps. U.K. 10-year gilt yields fell nine bps to 1.63% (up 44bps). U.K.'s FTSE equities index sank 4.4% (down 9.0%).
Japan's Nikkei 225 equities index sank 4.6% (down 0.3% y-t-d). Japanese 10-year "JGB" yields slipped less than a basis point to 0.15% (up 10bps). France's CAC40 lost 4.9% (down 4.1%). The German DAX equities index sank 4.9% (down 10.8%). Spain's IBEX 35 equities index fell 3.8% (down 11.4%). Italy's FTSE MIB index sank 5.4% (down 11.9%). EM equities were mostly lower. Brazil's Bovespa index added 0.7% (up 8.5%), while Mexico's Bolsa declined 1.3% (down 3.9%). South Korea's Kospi index dropped 4.7% (down 12.4%). India's Sensex equities index gained 1.0% (up 2.0%). China's Shanghai Exchange sank 7.6% (down 21.2%). Turkey's Borsa Istanbul National 100 index rallied 1.9% (down 16.2%). Russia's MICEX equities index declined 2.0% (up 13.9%).
Investment-grade bond funds saw outflows of $360 million, and junk bond funds suffered outflows of $4.928 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates surged 19 bps to 4.90% (up 99bps y-o-y). Fifteen-year rates rose 14 bps to 4.29% (up 108bps). Five-year hybrid ARM rates gained six bps to 4.07% (up 91bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up ten bps to 4.88% (up 70bps).
Federal Reserve Credit last week declined $8.8bn to $4.137 TN. Over the past year, Fed Credit contracted $282bn, or 6.4%. Fed Credit inflated $1.326 TN, or 47%, over the past 310 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $8.3bn last week to $3.444 TN. "Custody holdings" were up $83.9bn y-o-y, or 2.5%.
M2 (narrow) "money" supply jumped $19.6bn last week to a record $14.286 TN. "Narrow money" gained $557bn, or 4.1%, over the past year. For the week, Currency increased $1.9bn. Total Checkable Deposits dropped $24.5bn, while Savings Deposits jumped $37.7bn. Small Time Deposits added $1.5bn. Retail Money Funds gained $2.9bn.
Total money market fund assets gained $16.1bn to an eight-year high $2.888 TN. Money Funds gained $147bn y-o-y, or 5.4%.
Total Commercial Paper added $1.8bn to $1.102 TN. CP gained $38bn y-o-y, or 3.6%.
Currency Watch:
October 9 - Wall Street Journal (Saumya Vaishampayan and Mike Bird): "China's effort to support its slowing economy is heaping pressure on the yuan, signaling challenges for Beijing as it tries to stimulate growth amid rising trade tensions without triggering destabilizing capital outflows. The yuan weakened beyond 6.93 per dollar this week, coming within striking distance of its lowest level since January 2017, after China moved over the weekend to free more funds for domestic banks… Interbank lending rates in Hong Kong-an offshore trading hub for the yuan-surged on Tuesday, possibly due to efforts by China's central bank to prevent the yuan from weakening too much, several analysts said. China's efforts to manage its currency are complicated by the escalating trade conflict between the U.S. and China…"
The U.S. dollar index slipped 0.4% to 95.258 (up 3.4% y-t-d). For the week on the upside, the South African rand increased 1.7%, the Brazilian real 1.5%, the Japanese yen 1.4%, the Swedish krona 1.2%, the Norwegian krone 1.0%, the New Zealand dollar 1.0%, the Australian dollar 0.9%, the euro 0.3%, the Singapore dollar 0.3% and the British pound 0.3%. For the week on the downside, the Canadian dollar declined 0.7%, the Mexican peso 0.2%, the Swiss franc 0.1% and the South Korean won 0.1%. The offshore Chinese renminbi declined 0.77% versus the dollar this week (down 6.00% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index dropped 3.2% (up 8.2% y-t-d). Spot Gold rallied 1.2% to $1,218 (down 6.5%). Silver was little changed at $14.63 (down 14.7%). Crude gave back $2.83 to $71.51 (up 18%). Gasoline sank 6.6% (up 8%), while Natural Gas was little changed (up 6%). Copper gained 1.8% (down 15%). Wheat slipped 0.7% (up 21%). Corn gained 1.5% (up 7%).
Market Dislocation Watch:
October 10 - Bloomberg (Andrew Mayeda and Saleha Mohsin): "Global finance chiefs played down the economic risks posed by the biggest U.S. stock sell-off since February, with many describing the decline as a long-awaited correction. 'The fundamentals of the U.S. economy continue to be extremely strong, I think that's why the stock market has performed as well as it has,' U.S. Treasury Secretary Steven Mnuchin told Bloomberg News at the IMF's annual meeting… 'The fact that there's somewhat of a correction given how much the market has gone up is not particularly surprising.'"
October 10 - Wall Street Journal (Editorial Board): "Ten years after the financial panic, the architects of the rescue policies are taking a victory lap. We won't relitigate the immediate panic response, some of which we supported. But there is one policy whose outcome is still uncertain: The Federal Reserve's near-decade of unprecedented zero-interest rates and bond buying. Is the October correction in stocks, including Wednesday's 3% plunge, telling us that this bill is now coming due? The final payments on any Fed monetary cycle aren't merely the results when interest rates are low and policy is easy. The verdict is clear only at the end of the cycle when the Fed has to unwind its accommodation and interest rates rise. Only then can the world see clearly whether the Fed overdid its stimulus with nasty consequences on the other end."
October 10 - Bloomberg (Gowri Gurumurthy): "Junk-bond investors are getting nervous as the financial markets sell-off spreads. Investors pulled $5.4 billion of cash out of high-yield bond funds from Oct. 4 through Tuesday, JPMorgan… wrote…, citing Lipper data. That's the biggest outflow for a similar period since a $6.3 billion drawdown in February, the second largest on record, according to the report. Exchange-traded funds led the drain…"
Trump Administration Watch:
October 11 - Bloomberg (Jennifer Jacobs and Toluse Olorunnipa): "President Donald Trump said he won't fire Federal Reserve Chairman Jerome Powell but blamed an 'out of control' U.S. central bank for the worst stock market sell-off since February. Trump also told reporters in the Oval Office Thursday morning that he knows monetary policy better than the Fed's leaders and continued criticizing them for interest-rate increases. 'The Fed is out of control,' Trump said. 'I think what they're doing is wrong.' The president added that the Fed's interest rate increases are 'not necessary in my opinion and I think I know about it better than they do.' Trump's criticisms mark a stunning departure from the practices of his recent predecessors."
October 12 - Reuters (David Lawder): "U.S. Treasury Secretary Steven Mnuchin said… that he told China's central bank chief that currency issues need to be part of any further U.S.-China trade talks and expressed his concerns about the yuan's recent weakness. Mnuchin also told Reuters in an interview that China needs to identify concrete 'action items' to rebalance the two countries' trade relationship before talks to resolve their disputes can resume."
October 12 - Reuters: "China's trade surplus with the United States surged to a record high of $34.13 billion in September, compared with $31.05 billion in August… The September surplus with the U.S. was larger than China's overall trade surplus of $31.69 billion for the month."
October 9 - Reuters (Roberta Rampton and Lisa Lambert): "President Donald Trump… repeated his threat to slap tariffs on an additional $267 billion of Chinese imports if Beijing retaliates for the recent levies and other measures the United States has imposed in an escalating trade war between the economic giants. Trump, speaking to reporters in the Oval Office, also said China is not ready to reach a deal on trade. 'China wants to make a deal, and I say they're not ready yet,' Trump said. 'I just say they're not ready yet. And we've canceled a couple of meetings because I say they're not ready to make a deal.'"
October 8 - Financial Times (Tom Mitchell and Lucy Hornby): "US officials have warned China that Donald Trump will not engage in trade talks with Xi Jinping at next month's G20 summit if Beijing does not produce a detailed list of concessions, according to three people briefed on negotiations... The Chinese, however, say they have such a list but would not present it without some guarantee of it being received in a stable political climate in Washington, including a point person with a mandate to negotiate on behalf of the Trump administration… US officials have been frustrated by what they see as Beijing's unwillingness to discuss substantive 'structural issues' related to its economic and trade policies. Beijing has been similarly irritated by the erratic approach of the Trump administration…"
October 6 - Wall Street Journal (Bob Davis): "While the White House is progressing on trade deals with allies including Canada, Mexico, Korea and Europe, its dispute with China looks increasingly intractable, with tariffs between the world's two largest economies likely cemented in place for years. In other trade fights, President Trump used tariffs as leverage to reach deals. Threatening car tariffs helped convince Canada and Mexico to concede to U.S. demands for a new North American Free Trade Agreement, the president boasted. 'Without tariffs, we wouldn't be talking about a deal,' he said… China is different. Tariffs aren't simply a negotiating tactic for the U.S., but a way to change economic incentives. The Trump trade team believes U.S. firms need protection from a predatory Chinese state, which Mr. Trump says coerces U.S. companies to fork over technologies and subsidizes Chinese firms to expand globally."
October 10 - CNBC (Tae Kim): "Treasury Secretary Steven Mnuchin has told China not to weaken its currency as the U.S. and China try to resolve their trade differences. Mnuchin told the Financial Times the Treasury Department is closely watching the currency market and wants to talk about the issue with China as part of trade discussions. 'As we look at trade issues there is no question that we want to make sure China is not doing competitive devaluations,' Mnuchin said. 'The renminbi has depreciated significantly during the year. … We are going to absolutely want to make sure that as part of any trade understanding we come to that currency has to be part of that.'"
October 7 - Financial Times (James Politi): "The Trump administration is seeking to stop the EU, UK and Japan from striking separate trade deals with China as it tries to impose economic isolation on its Asian rival. The US's revamped Nafta trade deal with Canada and Mexico includes a provision that would require its two neighbours to give notification of any trade negotiations with a 'non-market economy'. That clause could also force those countries to disclose details of any talks and allow Washington to walk away from the Nafta agreement if such a separate deal were completed."
October 10 - Wall Street Journal (Kate O'Keeffe): "Treasury officials… issued new rules requiring all foreign investors in certain deals involving critical U.S. technology to submit to national security reviews or face fines as high as the value of their proposed transactions. The new regulations, which implement a recently passed law to tighten foreign investment reviews, are more expansive than some had advocated and are likely to bring an unprecedented number of transactions into the purview of the Committee on Foreign Investment in the U.S., known as Cfius. The Treasury-led interagency committee will now require foreign investors to alert it to all deals giving them access to critical technology across 27 industries…"
Federal Reserve Watch:
October 9 - CNBC (Thomas Franck): "President Donald Trump said… that he does not like the Federal Reserve's decision to continue to hike interest rates. He also said that the United States economy does not have an inflation problem and that the central bank is moving too quickly in trying to curb price increases. 'I think we don't have to go as fast,' the president answered to a question… 'I don't want to slow it down even a little bit' when there are no signs of inflation, the president added, referring to the economy. Trump added that he has not spoken to Federal Reserve Chair Jerome Powell about the central bank's moves to raise rates."
October 12 - Bloomberg (Alister Bull): "Asked to comment on President Donald Trump's accusation that the Fed is 'crazy' for raising interest rates, Chicago Fed President Charles Evans says 'we're looking at a very strong economy, strong fundamentals, and we're adjusting the policy stance.' 'After many, many years of accommodative policy, which I have supported strongly, because inflation is now up at 2%, it's time to readjust the policy stance, at least to neutral. Let's see how the economy is performing at that point, and then we might have to do a little bit more at that point.' Evans says his estimate of the neutral interest rate that neither slows down nor speeds up the economy is in the 2.75%-3% range and the Fed may need to lift rates 'maybe 50 bps above neutral"
October 10 - Wall Street Journal (Michael S. Derby and Josh Zumbrun): "New York Fed President John Williams said he expects the Federal Reserve to return to its target interest rate to normal or neutral levels within 'the next year or so.' Mr. Williams said that once rates were at a normal level, then the Fed would be well positioned to respond to surprises-either inflationary or a softening in the economy-that may require raising or lowering rates. 'My view is our path today is getting us back to normal interest rates or neutral interest rates relatively quickly, over the next year or so… From my perspective, the most important thing we can do now is get ourselves well positioned for whatever may come… Once we're there, we're better positioned for whatever may happen. If we need to raise rates more than expected we can do that in a reasonable way. If the economy slows we can adjust to that.'"
October 8 - Reuters (John Geddie and Aradhana Aravindan): "Emerging markets were 'as prepared as they can be' for changes to U.S. monetary policy as the Federal Reserve had been as 'transparent' as possible, St. Louis Federal Reserve Bank President James Bullard said in Singapore…
U.S. Bubble Watch:
October 11 - Reuters (Richard Leong): "The U.S. economy is expanding at a 4.2% annualized rate in the third quarter, the Atlanta Federal Reserve's GDPNow forecast model showed on Wednesday, following the release of the latest data on producer prices and wholesale trade."
October 10 - CNBC (Salvador Rodriguez): "Chamath Palihapitiya, the outspoken Silicon Valley tech investor, called the start-up economy a charade on Wednesday… 'We are, make no mistake … in the middle of an enormous multivariate kind of Ponzi scheme,' said Palihapitiya, at the Launch Scale conference in San Francisco. Palihapitiya slammed the start-up cycle of raising funding rounds and spending money to boost user growth to attract bigger funding rounds. 'It's all on paper, but it looks amazing,' Palihapitiya said. 'You've been told to grow, so you're growing. You're doing your job.'"
October 10 - Reuters (Howard Schneider): "U.S. producer prices increased 0.2% in September, in line with expectations, while a revision to wholesale inventory estimates for August showed the biggest jump in nearly five years, beating forecasts. A rise in services prices offset a slight drop in prices for goods, including a 3.5% drop in gasoline prices…. In the 12 months through September, the producer price index rose 2.6%, slightly less than expected."
October 9 - Bloomberg (Liz McCormick and Alex Harris): "Democrats and Republicans have plenty at stake in the upcoming midterm elections. But it's already looking like a no-win situation for the U.S. bond market. If Democrats take the House, it raises the odds that congressional leaders will propose an infrastructure-spending bill similar in scope to President Donald Trump's original trillion-dollar proposal. And if the GOP defies expectations and holds on in Congress, tax cut 2.0 becomes more likely. In either case, the result will be debt, debt and more debt. That'd be on top of what is already a grim fiscal situation. A deluge of debt supply is set to inundate the $15.3 trillion Treasury market, just as borrowing costs rise. Not only is the U.S. budget deficit primed to swell to roughly $1 trillion by fiscal 2019 and past that in subsequent years, but the interest owed by the government is also forecast to triple in the coming decade to nearly a trillion dollars a year, according to the Congressional Budget Office. 'The current debt trajectory is already quite onerous,' said Subadra Rajappa, an interest-rate strategist at Societe Generale. 'If you keep increasing supply and auction sizes, there is a point where the bond market is going to say, 'Thanks, but no thanks.'"
October 9 - CNBC (Diana Olick): "Millennials are in their prime homebuying years, and they're used to cheap credit. So they might be in for a rude awakening as mortgage rates jump. The average rate on the 30-year fixed loan sat just below 4% a year ago, after dropping below 3.5% in 2016. It just crossed the 5% mark, according to Mortgage News Daily. That is the first time in eight years… 'Five percent is definitely an emotional level inasmuch as it scares prospective buyers about how high rates may continue to go,' said Matthew Graham, chief operating officer of MND."
October 9 - Bloomberg (Janet Lorin): "Harvard University's $39.2 billion endowment has reached a record value. So did Yale. And Brown. And Dartmouth. As many wealthy U.S. universities report bulging assets and strong investment gains for the latest fiscal year, the timing isn't ideal. Their fat coffers may draw the ire of lawmakers, some of whom view schools as hoarding their billions of dollars and have questioned their tax-exempt status. 'It makes the schools' efforts to say that they can't afford to pay the new tax a little harder to find sympathy for,' said Brian Galle, a law professor who specializes in tax at Georgetown University."
China Watch:
October 7 - Reuters (Shu Zhang and Kevin Yao): "China's central bank… announced a steep cut in the level of cash that banks must hold as reserves, stepping up moves to lower financing costs and spur growth amid concerns over the economic drag from an escalating trade dispute with the United States. The reserve requirement cut, the fourth by the People's Bank of China (PBOC) this year, comes as Beijing has pledged to expedite plans to invest billions of dollars in infrastructure projects… Reserve requirement ratios (RRRs) - currently 15.5% for large commercial lenders and 13.5% for smaller banks - would be cut by 100 bps…"
October 7 - Reuters (Shu Zhang, Xiangjin Zeng, Kevin Yao and Yawen Chen): "China's foreign exchange reserves fell more than expected in September to a 14-month low as the yuan currency weakened further against the dollar amid mounting trade tension with the United States. Reserves fell $22.69 billion in September to $3.087 trillion, the biggest drop since February, compared with a decline of $8.23 billion in August… Economists polled by Reuters had expected reserves to drop by $5 billion to $3.105 trillion."
October 8 - Financial Times (Lucy Hornby and Song Jung-a): "China has accused Donald Trump of engaging in 'misguided actions', laying bare the mounting tensions between the world's largest economies as their trade war threatens to escalate into a broader regional confrontation. The rebuke to the US president, made during a visit to Beijing by secretary of state Mike Pompeo, comes just days after a stinging speech by Mike Pence, in which the US vice-president accused China of meddling in the US's midterm elections. Wang Yi, the Chinese foreign minister, accused Mr Trump of 'constantly ramping up' trade disputes, 'hurting China's interest' in Taiwan and finding fault with China's domestic and external affairs 'without reason'."
October 9 - Bloomberg: "The U.S. shouldn't believe that ever higher tariffs can induce China's government to capitulate to American demands in the escalating trade dispute between the world's biggest economies, according to Chinese Commerce Minister Zhong Shan. 'There is a view in the U.S. that so long as the U.S. keeps increasing tariffs, China will back down,' Zhong said... 'The U.S. should not underestimate China's resolve and will… This unyielding nation suffered foreign bullying for many times in history, but never succumbed to it even in most difficult conditions,' Zhong wrote… 'China doesn't want a trade war, but would rise up to it should it break out.'"
October 8 - Reuters (Seng Li Peng): "China must take strong stimulus measures to support growth, with the country in a 'critical' period of stabilizing its economy, according to a commentary in the Global Times, a state-backed Chinese tabloid... The Global Times wrote that perhaps China is unable to overcome these pressures by simply continuing to fine-tune its economic policy. 'In 2008, the Chinese government announced a 4 trillion yuan ($578bn) stimulus package to fight the impact of the global financial crisis. Now, the Chinese economy is under even tougher pressure amid escalating trade friction,' it said."
October 12 - Associated Press: "China's auto sales plunged 12% in September, adding to economic challenges for the country's leaders amid a worsening tariff fight with Washington. Sales in the biggest global market fell to 2 million sedans, SUVs and minivans… Demand has weakened as economic growth cooled after Beijing tightened lending controls to rein in a debt boom. With the latest contraction, sales growth for the first three quarters of the year fell to just 0.6%, down from 2017's already anemic full-year rate of 1.4%."
October 9 - Bloomberg: "Home buyers angry that apartments are being sold for much less than they paid swamped property developers' marketing offices across China over the Golden Week holiday, demanding their money back. A sales center for Xinzhou Mansion, a project of Country Garden Holdings Co… was mobbed last Thursday, videos and pictures circulated on social media show, its windows smashed by scores of protesters throwing rocks. They're furious that Country Garden is selling units for prices around 30% lower than a year ago. Similar demonstrations took place at One Mansion in Shanghai, another of Country Garden's projects. There, apartments are going for as much as 25% less than two months earlier."
October 12 - Bloomberg (Cecile Gutscher): "With China's economy slowing, banks under
pressure to help invigorate growth are rushing to make room on their balance sheets for new lending. That's unleashed a boom in a corner of the nation's credit markets. Structured debt sales in China's interbank bond market jumped in the last quarter to a record 300 billion yuan ($44bn). Residential mortgage backed securities accounted for about 60% of issuance this year through September, from 6% in 2015…"
October 8 - Reuters (Kane W and Julie Zhu): "Chinese conglomerate HNA Group has put up for sale property assets worth at least $11 billion, according to documents seen by Reuters, accelerating a push to cut its large debt and restructure. Two sets of documents reviewed by Reuters listed more than 80 assets that HNA has either put up for sale or intends to sell, including hotels, commercial and residential buildings. They are mostly within China…"
October 10 - Bloomberg (Robert Williams and Kim Bhasin): "Chinese border guards searching travelers' suitcases for undeclared Louis Vuitton bags, Gucci loafers and Tiffany necklaces are giving luxury-goods makers their biggest scare in years. Fears of a slowdown in spending by China's consumers, who account for two-thirds of the luxury market's growth, has fueled the biggest monthly selloff in LVMH shares since 2015. At that time, the industry was wrestling with the last China-induced headache -- a crackdown on giving lavish gifts to officials in exchange for political favors. Luxury investors were already skittish, worried about whether a three-year spending boom could survive the effects of the U.S.-China trade war."
October 9 - Reuters (Seng Li Peng): "China has choked back on imports of liquefied petroleum gas (LPG) from the United States, traders and analysts said, turning to the Middle East for extra supplies amid the two countries' trade dispute."
EM Watch:
October 6 - Reuters (Gabriel Stargardter and Pedro Fonseca): "Brazil's far-right presidential candidate Jair Bolsonaro said… he would stick to his hardline agenda on guns, crime and graft in the second round of the election on Oct. 28, alarming senior statesmen and human rights advocates alike. Bolsonaro, a former Army captain and veteran lawmaker, nearly won the presidency outright on Sunday, taking 46% of votes against leftist Fernando Haddad's 29%, part of a swing to the right in Latin America's largest nation."
October 8 - Financial Times: "Brazil has been rocked by a political earthquake: the victory of far-right former army captain Jair Bolsonaro in the first round of the country's presidential election… As the FT's chief international affairs columnist, Gideon Rachman says, the addition of Brazil to the group of states led by 'strongmen' would make a big difference. After all, the country was, until recently, seen as a model of a nation that had successfully embraced globalisation and left the dark days of authoritarianism behind it… For years, Mr Bolsonaro occasionally made headlines with his outbursts, such as when he told a leftist congresswoman that she did not 'deserve' to be raped. He once praised the leftist Venezuelan president Hugo Chávez, and said former Brazilian president Fernando Henrique Cardoso should face a firing squad for privatising state companies."
October 7 - Reuters (Tuvan Gumrukcu): "President Tayyip Erdogan said… Turkey was not facing any worrying economic problems and would not seek assistance from the International Monetary Fund, despite a currency crisis and likely economic slowdown. Turkey has 'closed the book on the IMF, not be opened again,' Erdogan said in a speech to members of his AK Party."
October 8 - Reuters: "Venezuelan consumer prices rose 488,865% in the 12 months ending in September, a member of the opposition-run congress reported on Monday, as the OPEC nation's hyperinflation continues to accelerate amid a broader economic collapse."
Central Bank Watch:
October 9 - Financial Times (Caroline Binham, Philip Stafford and Jim Brunsden): "The Bank of England has issued its starkest warning yet that up to £41tn of derivatives contracts maturing after Brexit are at risk unless European officials urgently address regulatory uncertainty. The BoE said… that clearing houses would have to tell European members such as banks to move their business or risk falling foul of European law. Ultimately EU banks would bear the cost of the disruption, the BoE warned in its quarterly statement on risks to UK financial stability, citing estimates that suggested every basis point increase in the cost of clearing interest rate swaps could cost EU businesses about €22bn a year."
Italy Watch:
October 8 - Bloomberg (John Follain): "Italian Deputy Prime Minister Matteo Salvini said Europe's real enemy is Jean-Claude Juncker and the Brussels bureaucracy that pushes budget restrictions and open borders… Sitting alongside French nationalist Marine Le Pen at an event in Rome, Salvini said that next year's European Parliamentary elections will be a showdown between those focused on creating jobs and those more concerned with imposing austerity like Juncker, the president of the European Commission, and Pierre Moscovici, the European Union's economic policy chief. 'We are against the enemies of Europe -- Juncker and Moscovici -- shut away in the Brussels bunker,' Salvini said. 'The politics of austerity of the last few years has increased Italian debt and impoverished Italy.'"
Europe Watch:
October 11 - Reuters (Paul Carrel and Jörn Poltz): "Chancellor Angela Merkel's Bavarian allies are heading for their worst showing in a state election in over 60 years, a setback that risks widening divisions within Germany's crisis-prone national government. Polls show the Christian Social Union (CSU) will win at most 35% on Sunday, losing the absolute majority with which it has controlled its southeastern heartland for most of the post-war period."
October 8 - Bloomberg (Tasos Vossos and Emma Haslett): "Europe's primary bond market suffered another blow as Dutch lender Van Lanschot Kempen NV became the fifth issuer to pull a euro-note sale in little more than a week. The bank postponed the bond sale 'due to market circumstances,' spokesman Robin Boon said… The lender planned to sell as much as 100 million euros ($115 million) of Additional Tier 1 notes…"
Global Bubble Watch:
October 9 - Reuters (David Lawder): "Global debt levels reached a record $182 trillion in 2017, having grown 50% in the previous decade, but the picture looks less grim when public assets are taken into account, the International Monetary Fund said… The IMF said a new data base in its semi-annual Fiscal Monitor report showed considerable net worth in 31 countries that account for 61% of global economic output. Assets in these countries were worth about $101 trillion, or twice their gross domestic product, with just over half the total in public corporation assets, and just under half in natural resources such as oil or mineral wealth."
October 9 - CNBC (Yen Nee Lee): "Risks are building up in the global financial system, and a further escalation in trade tensions could push the situation over the edge, the International Monetary Fund warned. Investors have appeared complacent, however, according to the IMF's latest Global Financial Stability Report… The report, published twice a year, contains the fund's assessment of global financial conditions and highlights risks in the system. Stock prices - particularly those in the U.S. - have hit record-high levels multiple times over the past year, which is an indication that investors have continued to take on risks… 'A further escalation of trade tensions, as well as rising geopolitical risks and policy uncertainty in major economies, could lead to a sudden deterioration in risk sentiment, triggering a broad-based correction in global capital markets and a sharp tightening of global financial conditions,' the fund said…"
October 8 - Bloomberg (Siddharth Verma): "Global bonds are hitting fresh milestones of misery. Strong U.S. data, a tighter-than-expected monetary trajectory, rising commodity prices and brewing wage pressures are conspiring to push Treasury yields to cycle-highs, hitting money managers of all stripes. The value of the Bloomberg Barclays Multiverse Index, which captures investment-grade and high-yield securities around the world, slumped by $916 billion last week, the most since the aftermath of Donald Trump's election victory in November 2016."
October 8 - CNBC (Yen Nee Lee): "The International Monetary Fund has cut its global growth forecasts as trade tensions between the U.S. and trading partners have started to hit economic activity worldwide. The IMF said the global economy is now expected to grow at 3.7% this year and next year - down 0.2 percentage points from an earlier forecast, according to the fund's latest World Economic Outlook report…"
October 7 - Bloomberg (Dinesh Nair): "A record wave of mergers and acquisitions could slow sharply as dealmakers get spooked by rising geopolitical concerns, according to a survey by Ernst & Young… Corporate takeover appetite is at a four-year low with only 46% of executives planning to make purchases in the next 12 months, according to a survey of more than 2,600 dealmakers across 45 countries… That's reduced from 56% of executives polled last year. 'Geopolitical, trade and tariff uncertainties have finally caused some dealmakers to hit the pause button,' Steve Krouskos, EY's global vice chair of transaction advisory services, said… 'Despite stronger-than-anticipated first-half earnings and the undeniable strategic imperative for deals, we can expect this year to finish with much weaker M&A than how it started.'"
October 7 - Bloomberg (Carrie Hong Annie Lee): "Asia's dollar bond sales are set to end 2018 with a whimper after a sizzling start. Next year's prospects may prove dimmer, bankers and investors say. Volatile emerging markets, trade wars and now surging U.S. Treasury yields have created a perfect storm that's battering sentiment across Asia. A Bloomberg survey expects primary issuance to slump as much as 46% in the fourth quarter and Credit Suisse Group AG expects more turbulence going into 2019 that will test borrowers' mettle."
Fixed Income Bubble Watch:
October 11 - Bloomberg (Molly Smith and Christopher Cannon): "They were once models of financial strength-corporate giants like AT&T Inc., Bayer AG and British American Tobacco Plc. Then came a decade of weak sales growth and rock-bottom interest rates, a dangerous cocktail that left many companies feeling like they had just one easy way to grow: by borrowing heaps of cash to buy competitors. The resulting acquisition binge left an unprecedented number of major corporations just a rung or two from junk credit ratings… In fact, a lot of these companies might be rated junk already if not for leniency from credit raters… Bloomberg News delved into 50 of the biggest corporate acquisitions over the last five years, and found: By one key measure, more than half of the acquiring companies pushed their leverage to levels typical of junk-rated peers. But those companies, which have almost $1 trillion of debt, have been allowed to maintain investment-grade ratings by Moody's… and S&P Global Ratings. The vast majority of the 50 deals-valued at $1.9 trillion collectively-were financed with debt. This M&A-fueled leveraging of corporate balance sheets contributed to a surge in debt rated in the bottom investment-grade tier and now represents almost half of the outstanding market…"
October 9 - New York Times (Andrew Ross Sorkin): "It is often called the nuclear option. In the trade war between the United States and China, economists and investors have long tried to game out how both sides might use their clout. In virtually all the predictions, at least until recently, they revolved around a tit-for-tat tariff war. Even in the gloomiest of doomsday scenarios, there is one weapon that has long been considered unthinkable: the Chinese, the biggest holder of United States foreign debt with more than $1 trillion, publicly taking a step back from buying United States Treasuries - or worse, dumping what they own in the open market. The very idea is typically dismissed as a waste of time to even consider, and the reason is a sort of mutually assured destruction. It would be wildly irrational in economic terms, the thinking goes. China selling Treasuries would send interest rates up and hurt the United States, but it would simultaneously severely damage the value of China's own Treasury holdings. As the industrialist J. Paul Getty famously said, 'If you owe the bank $100, that's your problem; if you owe the bank $100 million, that's the bank's problem.' In the United States-China relationship, China is very clearly the bank."
October 10 - Bloomberg (Gowri Gurumurthy): "Junk-bond investors are getting nervous as the financial markets sell-off spreads to high-yield funds. Investors pulled $5.4 billion of cash out of high-yield bond funds from Oct. 4 through Tuesday, JPMorgan… wrote… That's the biggest outflow for a similar period since a $6.3 billion drawdown in February, the second largest on record… Exchange-traded funds led the drain, with the SPDR Bloomberg Barclays High Yield Bond ETF, known as JNK, seeing the biggest withdrawal since January on Tuesday. The iShares iBoxx High Yield Corporate Bond ETF, known as HYG, last week got hit with a record single-day outflow."
Leveraged Speculation Watch:
October 8 - Wall Street Journal (Rachael Levy): "Three hedge funds have closed in less than a week as investors question a once-highflying industry plagued by weak returns. Tourbillon Capital Partners… told clients it would return money and close its main fund. Last week, Highfields Capital Management and Criterion Capital Management announced they would return billions of dollars to clients. The closures are the latest in a multiyear re-evaluation of such investment vehicles by managers and investors. Some funds have closed as skepticism has increased about the value of paying hedge fund's famously high fees…. Others have been hurt by poor performance relative to a stock market that has notched nearly a decade of gains. This year, through September, stock hedge funds on average returned 1.9% according to industry research firm HFR."
October 8 - Bloomberg: "The smart money has been one of the biggest victims in the declines sweeping through equity markets. While the S&P 500 Index fell 1% last week, stocks with the highest hedge fund or exchanged-traded fund ownership posted losses that were four times larger, a study from UBS Group AG showed. Broadly, equity returns have been inversely tied to their popularity with funds. That is, the more loved by hedge funds or ETFs, the bigger the drop."
Geopolitics Watch:
October 12 - Wall Street Journal (Editorial Board): "The disappearance of dissident Jamal Khashoggi in the Saudi consulate in Turkey last week is a debacle that could have far-reaching consequences for the Middle East and U.S. interests. President Trump has to seek a full accounting lest he lose control of his foreign-policy agenda in the region. Mr. Khashoggi entered the consulate on Oct. 2 and there is no evidence he left alive. The Turks are whispering to everyone that they have audio surveillance tapes of Mr. Khashoggi's interrogation, torture and murder, though they have released nothing to the public."
October 8 - Wall Street Journal (Jeremy Page and Michael R. Gordon): "A rare public confrontation between the top U.S. and Chinese diplomats marked a new level in the worsening relations between the world's two biggest economies and risked complicating an anticipated summit meeting between President Trump and North Korean leader Kim Jong Un. Secretary of State Mike Pompeo exchanged testy words with Foreign Minister Wang Yi in Beijing… at a critical moment for U.S.-China relations, with trade negotiations stalled, military talks halted and both sides blaming each other for a recent close encounter between their warships in the South China Sea… Mr. Wang began his meeting with Mr. Pompeo by accusing the U.S. of escalating trade friction, causing trouble over Taiwan and unjustifiably criticizing China's domestic and external policies. 'We demand that the U.S. side stop this kind of mistaken action,' Mr. Wang said."
October 9 - Bloomberg (Debby Wu): "Taiwanese leader Tsai Ing-wen cautioned China against any efforts to interfere in local elections next month, in a toughly worded speech that mirrored U.S. Vice President Mike Pence's own rebuke to Beijing. Tsai made the remarks during a National Day address in Taipei, in which she described China as a threat to the international order. The Taiwanese president used the speech to issue a warning about election meddling after her administration accused China, along with Russia and North Korea, of testing cyber-hacking techniques on the democratically run island for use elsewhere. 'We will relentlessly prosecute cases of creation and spread of untruthful information, technology leaks, sabotage of information-technology security systems, interference in elections and politics, if there is solid evidence… We will bolster cooperation with other countries to counter systematic disinformation campaign originating from certain countries.' The speech comes as tensions between Beijing and both Taipei and its main security guarantors in Washington reach their highest in years."
October 7 - Bloomberg (David Tweed): "For decades, the U.S. has guaranteed freedom of navigation in Asia's waters, patrolling the seas with a view to maintaining the principle that no sovereign state shall suffer interference from another. China's growing military prowess, combined with a dogged assertiveness over its territorial claims, is testing the old ways and providing a potential flashpoint for the two powers. That tension is felt most keenly in the South China Sea. Where is the South China Sea? Stretching from China in the north to Indonesia in the south, the waterway encompasses 1.4 million square miles, making it bigger than the Mediterranean Sea. It borders countries including Vietnam, Malaysia and Singapore to the west, and the Philippines and Brunei to the east. It's a thriving fishing zone… holds promising oil and natural gas reserves. Even more noteworthy is the vast amount of trade that transits through its waters. In 2016, that amounted to some $3 trillion, including more than 30% of the global maritime crude oil trade."
Friday Evening Links
[BloombergQ] Tech Rally Powers Stock Rebound as Banks Slump: Markets Wrap
[Reuters] With risky bets back in play, stock selloff revives 'Volmageddon' memories
[Reuters] U.S. banks profit from higher rates, more loans and lower costs
[Reuters] SNB's Jordan: Central banks should not be cowed by politics
[Reuters] European stocks fail to rebound in worst week since Feb
[Reuters] With risky bets back in play, stock selloff revives 'Volmageddon' memories
[Reuters] U.S. banks profit from higher rates, more loans and lower costs
[Reuters] SNB's Jordan: Central banks should not be cowed by politics
[Reuters] European stocks fail to rebound in worst week since Feb
Thursday, October 11, 2018
Friday's News Links
[BloombergQ] Stocks Gain With Earnings in Focus; Dollar Steady: Markets Wrap
[Reuters] Oil prices rise, but still set for weekly fall amid equities rout
[CNBC] October consumer sentiment falls shy of expectations, but confidence in economic policy is at a 15-year high
[Reuters] U.S.-China trade talks must cover currency, U.S. Treasury chief says
[CNBC] Treasury Secretary Mnuchin: I won't be 'losing any sleep' if China dumps US bonds in retaliation over trade
[CNBC] Fed's Evans says it's time to 'readjust the policy stance' and keep raising rates
[Reuters] Retirement target-date funds stung by emerging markets, U.S. bonds
[Reuters] China's September trade surplus with U.S. widens to record $34.13 billion
[AP] China auto sales sink in September as economy cools
[Reuters] Unwelcome guest: U.S. tariffs loom at China's biggest trade fair
[CNBC] Jamie Dimon sounds warning about 'Geopolitical issues bursting all over the place'
[Reuters] JPMorgan's consumer banking strength offsets bond trading weakness
[Reuters] Citigroup profit beats on higher bond trading, LatAm growth
[BloombergQ] Australia’s Central Bank Warns of Heightened Trade-War Risk to Economy
[WSJ] Fed Officials See Strong Economy Justifying Interest Rate Rises
[FT] Pakistan's IMF bailout adds to Belt and Road woes
[Reuters] Oil prices rise, but still set for weekly fall amid equities rout
[CNBC] October consumer sentiment falls shy of expectations, but confidence in economic policy is at a 15-year high
[Reuters] U.S.-China trade talks must cover currency, U.S. Treasury chief says
[CNBC] Treasury Secretary Mnuchin: I won't be 'losing any sleep' if China dumps US bonds in retaliation over trade
[CNBC] Fed's Evans says it's time to 'readjust the policy stance' and keep raising rates
[Reuters] Retirement target-date funds stung by emerging markets, U.S. bonds
[Reuters] China's September trade surplus with U.S. widens to record $34.13 billion
[AP] China auto sales sink in September as economy cools
[Reuters] Unwelcome guest: U.S. tariffs loom at China's biggest trade fair
[CNBC] Jamie Dimon sounds warning about 'Geopolitical issues bursting all over the place'
[Reuters] JPMorgan's consumer banking strength offsets bond trading weakness
[Reuters] Citigroup profit beats on higher bond trading, LatAm growth
[BloombergQ] Australia’s Central Bank Warns of Heightened Trade-War Risk to Economy
[WSJ] Fed Officials See Strong Economy Justifying Interest Rate Rises
[FT] Pakistan's IMF bailout adds to Belt and Road woes
Thursday Evening Links
[CNBC] Early trading in Dow futures indicate 200-point surge as stocks try to rebound from this week's rout
[Reuters] Wall St. extends slide with trade and rates in focus
[BloombergQ] Stocks Sink in Turbulent Trading, Treasuries Gain: Markets Wrap
[Reuters] Oil falls 3 percent as equity markets drop, inventories climb
[CNBC] Trump says the Federal Reserve caused the stock market correction, but he won't fire Chair Powell
[Reuters] Trump calls 'loco' Federal Reserve 'too aggressive': Fox interview
[Reuters] U.S. 30-year mortgage rate hits seven-and-a-half year peak: Freddie Mac
[Reuters] Mounting costs add to worries about 2019 U.S. profit growth
[BloombergQ] Traders Push Volume for $65 Billion Tech ETF to Decade High
[CNBC] Gundlach says the global stock market is signaling 'something bad' is happening
[WSJ] Trump and Xi Plan to Meet Amid Trade Tension
[WSJ] U.S. to Strengthen Controls on Nuclear Technology Exports to China
[WSJ] Italy Pays More to Borrow as Budget Fight Brews
[FT] Trump blames Fed for stock rout but won’t fire Powell
[FT] IMF readies for further danger signals in emerging markets
[Reuters] Wall St. extends slide with trade and rates in focus
[BloombergQ] Stocks Sink in Turbulent Trading, Treasuries Gain: Markets Wrap
[Reuters] Oil falls 3 percent as equity markets drop, inventories climb
[CNBC] Trump says the Federal Reserve caused the stock market correction, but he won't fire Chair Powell
[Reuters] Trump calls 'loco' Federal Reserve 'too aggressive': Fox interview
[Reuters] U.S. 30-year mortgage rate hits seven-and-a-half year peak: Freddie Mac
[Reuters] Mounting costs add to worries about 2019 U.S. profit growth
[BloombergQ] Traders Push Volume for $65 Billion Tech ETF to Decade High
[CNBC] Gundlach says the global stock market is signaling 'something bad' is happening
[WSJ] Trump and Xi Plan to Meet Amid Trade Tension
[WSJ] U.S. to Strengthen Controls on Nuclear Technology Exports to China
[WSJ] Italy Pays More to Borrow as Budget Fight Brews
[FT] Trump blames Fed for stock rout but won’t fire Powell
[FT] IMF readies for further danger signals in emerging markets
Wednesday, October 10, 2018
Thursday's News Links
[Reuters] Wall Street extends sell-off, S&P breaches key level
[BloombergQ] U.S. Stocks Mixed, Dollar Falls as Sell-Off Eases: Markets Wrap
[MarketWatch] Gold jumps, draws demand as a safety play away from embattled stock market
[Reuters] Nikkei sinks as much as 4.2 percent to 1-month low amid global rout
[Reuters] Oil extends losses as other markets fall, stockpiles climb
[CNBC] US inflation slows in September on rental costs, energy
[BloombergQ] Trump Steps Up Fed Pressure With ‘Gone Crazy’ Jab After Sell-off
[BloombergQ] Central Bankers Defend Fed After Trump Accuses It of ‘Going Loco’
[BloombergQ] Mnuchin, Fed Officials Downplay Market Rout as Sell-Off Widens
[BloombergQ] Mnuchin Says U.S. Markets ‘Correction’ Is Not Very Surprising
[CNBC] World Bank president warns: Debt and trade problems are painting 'a troubling picture'
[CNBC] Start-up economy is a 'Ponzi scheme,' says Chamath Palihapitiya
[CNBC] 'I would not associate Jay Powell with craziness,' says IMF's Christine Lagarde
[Reuters] U.S. raises pressure on Saudi Arabia over missing journalist
[Reuters] Alarm bells for Merkel as Bavarian allies face election slump
[WSJ] Markets Tumble Across Asia, Led by Tech, as Growth Worries Dominate
[WSJ] Ben Bernanke’s End Game
[WSJ] Big Lenders Make Push to Liquidate Sears
[FT] ETFs begin to reshape bond trading
[FT] What is behind the global stock market sell-off?
[BloombergQ] U.S. Stocks Mixed, Dollar Falls as Sell-Off Eases: Markets Wrap
[MarketWatch] Gold jumps, draws demand as a safety play away from embattled stock market
[Reuters] Nikkei sinks as much as 4.2 percent to 1-month low amid global rout
[Reuters] Oil extends losses as other markets fall, stockpiles climb
[CNBC] US inflation slows in September on rental costs, energy
[BloombergQ] Trump Steps Up Fed Pressure With ‘Gone Crazy’ Jab After Sell-off
[BloombergQ] Central Bankers Defend Fed After Trump Accuses It of ‘Going Loco’
[BloombergQ] Mnuchin, Fed Officials Downplay Market Rout as Sell-Off Widens
[BloombergQ] Mnuchin Says U.S. Markets ‘Correction’ Is Not Very Surprising
[CNBC] World Bank president warns: Debt and trade problems are painting 'a troubling picture'
[CNBC] Start-up economy is a 'Ponzi scheme,' says Chamath Palihapitiya
[CNBC] 'I would not associate Jay Powell with craziness,' says IMF's Christine Lagarde
[Reuters] U.S. raises pressure on Saudi Arabia over missing journalist
[Reuters] Alarm bells for Merkel as Bavarian allies face election slump
[WSJ] Markets Tumble Across Asia, Led by Tech, as Growth Worries Dominate
[WSJ] Ben Bernanke’s End Game
[WSJ] Big Lenders Make Push to Liquidate Sears
[FT] ETFs begin to reshape bond trading
[FT] What is behind the global stock market sell-off?
Wednesday Evening Links
[CNBC] US stock futures point to another drop on Thursday as October stock-market rout continues
[CNBC] Dow plummets 800 points in worst drop since February, Amazon and tech shares lead the rout
[Reuters] S&P tumbles 3 percent as U.S. yields soar, investors shun risk
[Fortune] Trump Says the Federal Reserve Has 'Gone Crazy' and Markets Are in a 'Correction'
[Reuters] Rising U.S. bond yields bring back Wall Street's sinking feeling
[AsiaTimes] Has the derivatives volcano already begun to erupt?
[Reuters] Atlanta Fed raises U.S. third-quarter GDP growth view to 4.2 percent
[Reuters] Fed's Evans sees 'a little bit more to go' before hitting neutral
[BloombergSub] Options Activity in ‘Fear Gauge’ Spikes as U.S. Stocks Sink
[BloombergSub] There’s Nowhere to Hide in U.S. Markets as Correlation Breaks Down
[BloombergSub] Bond Market Slump Is Now Hitting High-Yield Funds
[WSJ] Real-Estate Backed Loans Stage Comeback in CLO Surge
[FT] Biggest bond ETF suffers record withdrawals
[FT] Italy turmoil is hitting our banks, says Bank of Greece governor
[CNBC] Dow plummets 800 points in worst drop since February, Amazon and tech shares lead the rout
[Reuters] S&P tumbles 3 percent as U.S. yields soar, investors shun risk
[Fortune] Trump Says the Federal Reserve Has 'Gone Crazy' and Markets Are in a 'Correction'
[Reuters] Rising U.S. bond yields bring back Wall Street's sinking feeling
[AsiaTimes] Has the derivatives volcano already begun to erupt?
[Reuters] Atlanta Fed raises U.S. third-quarter GDP growth view to 4.2 percent
[Reuters] Fed's Evans sees 'a little bit more to go' before hitting neutral
[BloombergSub] Options Activity in ‘Fear Gauge’ Spikes as U.S. Stocks Sink
[BloombergSub] There’s Nowhere to Hide in U.S. Markets as Correlation Breaks Down
[BloombergSub] Bond Market Slump Is Now Hitting High-Yield Funds
[WSJ] Real-Estate Backed Loans Stage Comeback in CLO Surge
[FT] Biggest bond ETF suffers record withdrawals
[FT] Italy turmoil is hitting our banks, says Bank of Greece governor
Tuesday, October 9, 2018
Wednesday's News Links
[BloombergQ] Stocks Sink Most Since June on Trade, Yield Angst: Markets Wrap
[Reuters] Tech, luxury goods lead Wall Street slide
[Reuters] Treasuries-Yields gain after U.S. producer prices data
[Reuters] U.S. producer prices rebound in September
[CNBC] Mnuchin warns China against devaluing currency, says yuan agreement must be part of trade deal
[Reuters] Global financial stability risks rising with trade tensions, IMF says
[CNBC] Sears reportedly preparing for bankruptcy filing as soon as this week
[CNBC] Weekly mortgage applications fall 1.7% as interest rates move above 5%
[CNBC] Trade tensions could trigger another global financial crisis, but investors appear complacent, IMF says
[Reuters] Global debt is growing, IMF says, but so are values of public assets
[WSJ] Fed’s Williams Sees Interest Rates Reaching Neutral Levels in ‘the Next Year or So’
[WSJ] Beijing Struggles to Keep Its Currency On Course
[WSJ] Treasury Spells Out New Rules on Foreign Deals Involving U.S. Technology
[Reuters] Tech, luxury goods lead Wall Street slide
[Reuters] Treasuries-Yields gain after U.S. producer prices data
[Reuters] U.S. producer prices rebound in September
[CNBC] Mnuchin warns China against devaluing currency, says yuan agreement must be part of trade deal
[Reuters] Global financial stability risks rising with trade tensions, IMF says
[CNBC] Sears reportedly preparing for bankruptcy filing as soon as this week
[CNBC] Weekly mortgage applications fall 1.7% as interest rates move above 5%
[CNBC] Trade tensions could trigger another global financial crisis, but investors appear complacent, IMF says
[Reuters] Global debt is growing, IMF says, but so are values of public assets
[WSJ] Fed’s Williams Sees Interest Rates Reaching Neutral Levels in ‘the Next Year or So’
[WSJ] Beijing Struggles to Keep Its Currency On Course
[WSJ] Treasury Spells Out New Rules on Foreign Deals Involving U.S. Technology
Tuesday Evening Links
[BloombergQ] Tech Snaps 3-Day Skid But Stocks Can't Hold Gains: Markets Wrap
[BloombergQ] Oil Climbs as Storm Ravages U.S. Gulf and Global Risks Abound
[Reuters] Italy's bond yields fall after Tria makes Draghi-style pledge
[CNBC] Trump says he doesn't like what the Fed is doing, central bank is going too fast in raising rates
[Reuters] Trump repeats threat of more tariffs if China retaliates on trade
[Reuters] Rising yields suggests 'conflicting factors' over U.S. growth: Fed's Kaplan
[CNBC] Mortgage rates jump past 5%, signaling more home price cuts ahead
[BloombergQ] Investors Yank Record Cash Out of Stock, Real Estate, and Muni ETFs
[Reuters] China slashes U.S. LPG imports amid trade war
[BloombergQ] Taiwan’s President Says China Poses Threat to International Order
[NYT] The Unknowable Fallout of China’s Trade War Nuclear Option
[BloombergSub] The Bond Market’s $1 Trillion Deficit Spiral Has No Political Fix
[FT] BoE warns EU that £41tn of derivatives at risk after Brexit
[BloombergQ] Oil Climbs as Storm Ravages U.S. Gulf and Global Risks Abound
[Reuters] Italy's bond yields fall after Tria makes Draghi-style pledge
[CNBC] Trump says he doesn't like what the Fed is doing, central bank is going too fast in raising rates
[Reuters] Trump repeats threat of more tariffs if China retaliates on trade
[Reuters] Rising yields suggests 'conflicting factors' over U.S. growth: Fed's Kaplan
[CNBC] Mortgage rates jump past 5%, signaling more home price cuts ahead
[BloombergQ] Investors Yank Record Cash Out of Stock, Real Estate, and Muni ETFs
[Reuters] China slashes U.S. LPG imports amid trade war
[BloombergQ] Taiwan’s President Says China Poses Threat to International Order
[NYT] The Unknowable Fallout of China’s Trade War Nuclear Option
[BloombergSub] The Bond Market’s $1 Trillion Deficit Spiral Has No Political Fix
[FT] BoE warns EU that £41tn of derivatives at risk after Brexit
Monday, October 8, 2018
Tuesday's News Links
[BloombergQ] Stocks Retreat as Treasuries Steady; Oil Advances: Markets Wrap
[Reuters] Selloff sucks Europe back under after Asia sinks to 17-month low
[Reuters] U.S. 10-year, 30-year Treasury yields hit fresh multi-year highs
[Reuters] China must take strong stimulus measures to support growth: state media
[CNBC] IMF cuts its global growth forecast, citing trade disruptions
[BloombergQ] Bonds in $916 Billion Wipeout Spark Fear of Worst Run Since 1976
[BloombergQ] Italy’s Tria Warns on Global Growth; Gap With EU ‘Unacceptable’
[Reuters] U.S. economists win Nobel for work on climate change, innovation
[Reuters] China's HNA lists property assets worth $11 billion for sale: documents
[WSJ] Yuan Lending Rate Surges as China Struggles to Stem Currency’s Slide
[WSJ] Hedge Funds Retreat as Markets Advance
[WSJ] U.S.-China Tensions Break Out in Beijing
[WSJ] Pence Unloaded on China; Here’s Why That’s Important
[FT] US threatens to block trade talks with China at G20
[FT] Growth policies and populism threaten global economy, IMF warns
[Reuters] Selloff sucks Europe back under after Asia sinks to 17-month low
[Reuters] U.S. 10-year, 30-year Treasury yields hit fresh multi-year highs
[Reuters] China must take strong stimulus measures to support growth: state media
[CNBC] IMF cuts its global growth forecast, citing trade disruptions
[BloombergQ] Bonds in $916 Billion Wipeout Spark Fear of Worst Run Since 1976
[BloombergQ] Italy’s Tria Warns on Global Growth; Gap With EU ‘Unacceptable’
[Reuters] U.S. economists win Nobel for work on climate change, innovation
[Reuters] China's HNA lists property assets worth $11 billion for sale: documents
[WSJ] Yuan Lending Rate Surges as China Struggles to Stem Currency’s Slide
[WSJ] Hedge Funds Retreat as Markets Advance
[WSJ] U.S.-China Tensions Break Out in Beijing
[WSJ] Pence Unloaded on China; Here’s Why That’s Important
[FT] US threatens to block trade talks with China at G20
[FT] Growth policies and populism threaten global economy, IMF warns
Monday Evening Links
[BloombergQ] U.S. Stocks Reverse Losses as Tech Gets Beat Up: Markets Wrap
[Reuters] European shares slides to 6-month low on China, Italy worries
[CNBC] US growing concerned about China's falling currency and 'turn away from market-oriented policies'
[CNBC] Rising yields could be a big problem for booming corporate profits
[Bloomberg/Newsmax] Most Popular Hedge Fund Stocks Getting Hit Hardest in Market Rout
[BloombergQ] Fifth Bond Sale Pulled as Cracks Grow in Europe's Primary Market
[BloombergQ] Tourbillon Hedge Fund to Return $1 Billion in Latest Closure
[Reuters] Venezuela's annual inflation hits 488,865 percent in September: congress
[Reuters] Chill in the air as Pompeo meets Chinese counterparts in Beijing
[FT] Risk appetite hit by Italy and China worries
[FT] China slams Trump’s ‘misguided actions’
[FT] Who is Jair Bolsonaro? Five key facts about Brazil’s far-right frontrunner
[Reuters] European shares slides to 6-month low on China, Italy worries
[CNBC] US growing concerned about China's falling currency and 'turn away from market-oriented policies'
[CNBC] Rising yields could be a big problem for booming corporate profits
[Bloomberg/Newsmax] Most Popular Hedge Fund Stocks Getting Hit Hardest in Market Rout
[BloombergQ] Fifth Bond Sale Pulled as Cracks Grow in Europe's Primary Market
[BloombergQ] Tourbillon Hedge Fund to Return $1 Billion in Latest Closure
[Reuters] Venezuela's annual inflation hits 488,865 percent in September: congress
[Reuters] Chill in the air as Pompeo meets Chinese counterparts in Beijing
[FT] Risk appetite hit by Italy and China worries
[FT] China slams Trump’s ‘misguided actions’
[FT] Who is Jair Bolsonaro? Five key facts about Brazil’s far-right frontrunner
Sunday, October 7, 2018
Monday's News Links
[Reuters] Shares slide on 'powerful cocktail' of China slump, Treasuries and Italy
[Reuters] China stocks tumble despite central bank's move to support economy
[Reuters] Italy's bonds, bank stocks hammered as Rome, EU draw budget battle lines
[BloombergQ] China's Yuan Sinks Past Key Support Level as Trade War Heats Up
[Reuters] Oil drops 1 percent as U.S. considers granting some waivers on Iran crude sanctions
[BloombergQ] New Era of Rising Rates Finally Dawns On U.S. Treasury Investors
[BloombergQ] Italy's Outlook Darkens as Politics Skews From Orthodox Thinking
[Reuters] Emerging markets prepared for U.S. monetary policy changes: Fed's Bullard
[Reuters] Far right, ex-military officer to face leftist in Brazil presidential runoff
[BloombergQ] Global M&A Appetite Wanes Amid Geopolitical Concerns
[BloombergQ] Asia Dollar Bond Sales Drop to Spill Into 2019 on Yield Woes
[BloombergQ] China-U.S. Tensions Flare in Testy Pompeo Visit to Beijing
[BloombergQ] Why the South China Sea Fuels U.S.-China Tensions
[Reuters] China stocks tumble despite central bank's move to support economy
[Reuters] Italy's bonds, bank stocks hammered as Rome, EU draw budget battle lines
[BloombergQ] China's Yuan Sinks Past Key Support Level as Trade War Heats Up
[Reuters] Oil drops 1 percent as U.S. considers granting some waivers on Iran crude sanctions
[BloombergQ] New Era of Rising Rates Finally Dawns On U.S. Treasury Investors
[BloombergQ] Italy's Outlook Darkens as Politics Skews From Orthodox Thinking
[Reuters] Emerging markets prepared for U.S. monetary policy changes: Fed's Bullard
[Reuters] Far right, ex-military officer to face leftist in Brazil presidential runoff
[BloombergQ] Global M&A Appetite Wanes Amid Geopolitical Concerns
[BloombergQ] Asia Dollar Bond Sales Drop to Spill Into 2019 on Yield Woes
[BloombergQ] China-U.S. Tensions Flare in Testy Pompeo Visit to Beijing
[BloombergQ] Why the South China Sea Fuels U.S.-China Tensions
Sunday Evening Links
[BloombergQ] Asia Stocks Fall, Yuan Dips as PBOC Eases Policy: Markets Wrap
[CNBC] Global dealmaking appetite falls to a four-year low amid Brexit, US-China trade fears, study says
[Reuters] Right-winger leads Brazil election, heading for run-off
[CNBC] Here's the number everyone in the financial markets is obsessing about and why
[CNBC] Ron Paul: US is barreling towards a stock market drop of 50% or more, and there's no way to prevent it
[NYT] China to Pump $174 Billion Into Its Economy as Slowdown and Trade War Loom
[WSJ] Investment in Infrastructure Is Booming Despite Lack of Progress on Trump’s Pledges
[FT] Trump tries to cut China out of trade deals with partners
[FT] Dark clouds gather over the US housing market
[CNBC] Global dealmaking appetite falls to a four-year low amid Brexit, US-China trade fears, study says
[Reuters] Right-winger leads Brazil election, heading for run-off
[CNBC] Here's the number everyone in the financial markets is obsessing about and why
[CNBC] Ron Paul: US is barreling towards a stock market drop of 50% or more, and there's no way to prevent it
[NYT] China to Pump $174 Billion Into Its Economy as Slowdown and Trade War Loom
[WSJ] Investment in Infrastructure Is Booming Despite Lack of Progress on Trump’s Pledges
[FT] Trump tries to cut China out of trade deals with partners
[FT] Dark clouds gather over the US housing market
Sunday's News Links
[Reuters] China's Sept FX reserves fall more than expected to $3 trln
[Reuters] China slashes banks' reserve requirements as trade war imperils growth
[BloombergQ] Italy Outlook Darkens as Politics Skews From Orthodox Thinking
[Reuters] Brazilians vote in tense presidential race led by right-winger
[Reuters] Erdogan says Turkey is not facing any worrying economic problems
[NYT] China Acts to Shore Up Economy Amid Weight of Trade War
[WSJ] U.S. Tariffs on China Aren’t a Short-Term Strategy
[WSJ] Surging Yields Raise Threat of Tipping Point for Stocks
[FT] China cuts banks’ reserve requirement to fuel growth
[Reuters] China slashes banks' reserve requirements as trade war imperils growth
[BloombergQ] Italy Outlook Darkens as Politics Skews From Orthodox Thinking
[Reuters] Brazilians vote in tense presidential race led by right-winger
[Reuters] Erdogan says Turkey is not facing any worrying economic problems
[NYT] China Acts to Shore Up Economy Amid Weight of Trade War
[WSJ] U.S. Tariffs on China Aren’t a Short-Term Strategy
[WSJ] Surging Yields Raise Threat of Tipping Point for Stocks
[FT] China cuts banks’ reserve requirement to fuel growth
Saturday, October 6, 2018
Saturday's News Links
[CNBC] A 'potentially lethal combination' between hot jobs market and trade tensions could unleash inflation, Stephen Roach warns
[CNBC] China pencil-tip spy chip's ultimate market risk: The profits built on big tech's low-cost global supply chain
[Reuters] Exclusive: U.S. Commerce's Ross eyes anti-China 'poison pill' for new trade deals
[Reuters] Turkey's Erdogan tells ministers to stop using U.S. firm McKinsey
[Reuters] Brazil's polarized election enters last day of campaigning
[Reuters] China silent as French police probe disappearance of Interpol chief
[WSJ] Banks Brace for the Downside of Higher Rates
[CNBC] China pencil-tip spy chip's ultimate market risk: The profits built on big tech's low-cost global supply chain
[Reuters] Exclusive: U.S. Commerce's Ross eyes anti-China 'poison pill' for new trade deals
[Reuters] Turkey's Erdogan tells ministers to stop using U.S. firm McKinsey
[Reuters] Brazil's polarized election enters last day of campaigning
[Reuters] China silent as French police probe disappearance of Interpol chief
[WSJ] Banks Brace for the Downside of Higher Rates
Friday, October 5, 2018
Weekly Commentary: Contemporary Finance's Defect
October 3 - CNBC (Jeff Cox): "Federal Reserve Chairman Jerome Powell said the central bank has a ways to go yet before it gets interest rates to where they are neither restrictive nor accommodative. In a question and answer session Wednesday with Judy Woodruff of PBS, Powell said the Fed no longer needs the policies that were in place that pulled the economy out of the financial crisis malaise. 'The really extremely accommodative low interest rates that we needed when the economy was quite weak, we don't need those anymore. They're not appropriate anymore… Interest rates are still accommodative, but we're gradually moving to a place where they will be neutral… 'We may go past neutral, but we're a long way from neutral at this point, probably.'"
Market bulls grimaced. Powell: "We may go past neutral, but we're a long way from neutral at this point…" CNBC's Jim Cramer called it "amateurish." Chairman Powell was certainly candid, something shockingly unusual for a Fed chair. So atypical was his candor, the Chairman was misconstrued as a novice unschooled in the art of modern central banking.
The bottom line is the Fed waited much too long to begin normalizing monetary policy. Moreover, they pre-committed to an extremely gradual path of rates increases. This policy approach essentially ensured that so-called "tightening" measures would fail to tighten financial conditions. Over-liquefied and speculative markets were content to look right through them, confident that cheap liquidity and easy Credit conditions would run unabated. Clearly, stock gains in the multiple thousands of basis points easily counteracted a couple hundred basis point increase in short-term borrowing costs.
I'll add that this issue of a so-called "neutral" rate only confused the issue. What Fed funds target rate would be just right, neither stimulating nor restricting? Well, in this age of market-based finance, market dynamics have a profound effect on economic performance. "Risk on" in the marketplace ensures strong wealth effects, readily available cheap finance for spending and investment, and easy Credit Availability (throughout the economy) more generally. On the other hand, "Risk Off" would see a tightening of financial conditions, tighter Credit, diminished perceived wealth and more restrictive spending and investing.
Perhaps there's a view that a "neutral" policy would be a target rate that balances "Risk on" and "Risk Off." In a policy paper perhaps, but that's not the way markets function in the real world. In reality, if financial conditions remain too loose for too long, powerful Speculative Dynamics take hold. And once inflation psychology takes deep root in the asset markets, the commanding spell will be broken only from the shock of much tighter financial conditions and painful losses. "Housing prices only go up." "Buy and Hold. Stocks for the long-term."
There's further pertinent monetary policy analysis. Back in 2013, chairman Bernanke resorted to "the Fed will push back against a tightening of financial conditions." It received little attention at the time, but it was a fateful declaration. The backdrop was one where the Fed had employed extraordinary policy measures, inflating securities markets as its primary post-crisis stimulus mechanism. It was Bernanke paddling ever deeper into uncharted waters, explicitly signaling to the markets that the Federal Reserve was ready to respond to an equities market pullback with additional monetary stimulus. This was a game changer for market perceptions and played a major role in exacerbating Bubble Dynamics.
For years now, markets have been operating under the presumption that the Fed would immediately pull back from "normalization" in the event of fledgling risk aversion and/or stock market weakness. Chairman Powell on Wednesday afternoon threw the proverbial monkey wrench into this central market perception.
September's 3.7% Unemployment Rate was the lowest since December 1969. Year-over-year Average Hourly Earnings came in at 2.8% and are poised to soon surpass 3% for the first time since April 2009. The ISM Non-Manufacturing Index jumped three points to the strongest reading since August 1997. The ISM Employment component surged almost six points to 62.4, the highest level in data going back to 1997.
Federal Reserve Bank of Chicago president Charles Evans (on Bloomberg TV): "I think that my own take on a neutral longer run funds rate is 2.75%. So, I think getting policy up to us slightly restrictive setting, 3%, 3.25% would be consistent with the strong economy and good inflation that we're looking at."
When even the most perennially dovish Federal Reserve president uses the word "restrictive" and discusses taking the Fed funds up another 100 bps, one has to take notice.
It took a while, but central bankers have become less complacent with respect to inflation risks. For too long they have been fixated on deflation, in spite of the greatest securities and asset market inflation the world has ever experienced. Clearly, the Fed didn't see a 3.7% unemployment rate coming. More importantly, they never anticipated massive late-cycle fiscal stimulus. A booming economy and Trillion dollar deficits? No way. Way.
They were blindsided by the rise of tariffs and protectionism. To be sure, the Fed today has no way to gauge the economic and inflationary consequences associated with a prolonged trade war with China. Rather suddenly, there's a murky future out there that has Fed officials fretting inflation making a dazzling revival on their watch.
All of a sudden, 2% short rates seem incongruous with a booming economy, rising price pressures and the risk of a trade-related inflationary shock. And if central bankers are now on edge, markets better be on edge. This is new and awkward. But what about faltering EM and slowing global growth? All the overcapacity in China and globally?
Well, there is now a not unlikely scenario of faltering markets concurrent with some stubborn inflationary pressures. The GSCI commodities Index was up another 1.7% this week, with WTI jumping past $74. Confidence that any tightening of financial conditions (i.e. weak equities) would be met with resolute measures from the Fed (and global central banks) is increasingly dubious. Ten-year Treasury yields jumped this week to highs since 2011.
I continue to think back to the nineties. And to know where I'm coming from, I was convinced that finance had fundamentally changed in the nineties. No one, it seemed, was paying any attention. I would share my analysis with market professionals, academics, journalists and even Federal Reserve officials and the response was some variation of "Doug, you don't understand." After all these years, this most critical of issues remains unsolved.
I began posting the CBB analysis back in 1999, on a weekly basis attempting to explain what had changed; what was still changing; and what might be some of the momentous ramifications associated with the combination of unfettered "Wall Street finance" and "activist" central bank monetary management.
It was not until 2007, when Pimco's Paul McCulley coined the term "shadow banking," that some began to take some notice. But with the following year's "greatest financial crisis since the Great Depression," desperation saw the focus shift to extreme monetary stimulus and basically using any means possible to reflate the securities markets and Credit more generally. It was not only that concerns for the inherent instability of contemporary market-based finance were pushed to the side. This high-powered finance machine was the centerpiece of central bank reflationary policymaking - around the world.
In an early CBB, I resorted to my CPA training and went through (in painful detail) a series of debit and Credit journal entries to demonstrate how the GSEs would borrow in the money markets to purchase MBS in the marketplace, and how this "liquidity" could be "recycled" back through the money markets and borrowed again and again. In short, the GSEs would issue new short-term liabilities (IOUs) in exchange for "immediately available funds" (IAF). The IAF provided the purchasing power for MBS, with the GSE's transferring these funds to the MBS seller. The seller would then deposit these IAF right back into the money market, where the GSE's (or others) could borrow them repeatedly (exchanging additional short-term IOUs for IAF).
This was akin to the old bank deposit multiplier (fractional reserve banking) but with zero reserve requirements. Traditionally, a bank might lend 80% of a new $100 deposit (20% reserve requirement), with this loan creating $80 of new funds that would be deposited at other institutions (where the next bank could lend 80% of the $80 deposit, then the next 80% of $64 and so on).
I argued that contemporary non-bank market-based finance, operating outside of bank reserve requirements, created an "infinite multiplier effect." And I posited that "unfettered finance" essentially changed everything (market dynamics, policy, saving & investment, economic structure, etc.) In particular, "money" would circulate freely throughout the securities markets, inflating asset prices and incentivizing speculation. In particular, there was essentially unlimited cheap finance available for securities speculation, ensuring price Bubbles inflated by self-reinforcing speculative leverage. "Money" could be borrowed in, for example, the "repo" market to purchase securities, where the proceeds from the sale would be recycled right back into the money markets where it would be available to borrow again and again without limit.
It amounted to the greatest transformation in financial and market structure in history, all backstopped by the "activist" Federal Reserve and global central bankers. It was a New Era - a New Paradigm - that worked miraculously until its 2008 malfunction risked bringing down the global financial system. Most importantly, this incredible system of ever-expanding speculative leverage, seemingly endless liquidity and powerful asset Bubbles has a fundamental Defect: it doesn't function in reverse (with deleveraging). Yet rather than addressing what went so terribly wrong in 2008, global central banks resuscitated and then bolstered this deviant financial apparatus, sending it on its merry way to reflate global markets and economies.
The past decade has seen similar dynamics to the mortgage finance Bubble period: expanding leverage and liquidity spinning around the system, promoting self-reinforcing securities and asset inflation. The big difference during this cycle has been its unprecedented global scale. Central bankers and market bulls are fond of asserting that leverage is not an issue these days. Yet the most egregious leverage throughout this cycle has been in central bank and sovereign balance sheets. Liquidity created in the expansion of central bank balance sheets, in particular, circulated through the securities and funding markets where it has been "recycled" again and again…
A few examples: A hedge fund borrows at zero in Japan to lever in a higher-yielding dollar denominated EM debt "carry trade." This new liquidity flows into an EM banking system, where it is exchanged for local currency by the domestic central bank. The EM central bank then exchanges these dollar balances for U.S. Treasury bonds in the marketplace. The seller of Treasuries, say a hedge fund, then uses the proceeds from this short sale to leverage U.S. corporate debt. The corporate treasurer then uses the proceeds from the debt issue to repurchase equity shares, creating liquidity in the marketplace for the purchase of U.S. equities or even international shares - where it can begin the cycle anew.
Example 2: The ECB, expanding its liabilities, creates "money" to purchase Italian bonds in the marketplace. The seller transfers the sales proceeds to one of the large German banks where it is held on deposit. The German bank then uses this liquidity to purchase U.S. agency securities from a U.S. broker/dealer that had previously acquired these GSE-issued securities with short-term money market "repo" financing. This "repo" loan is repaid, creating money market liquidity to finance other securities speculations. Or instead, the German bank (rather than holding deposits) buys short-term German debt from a hedge fund happy to short these securities at negative yields (borrow at negative interest-rates) to finance holdings of higher-yielding instruments in the U.S.
Example 3: An Asian hedge fund shorts (sells) one-year Singapore sovereign debt at 1.88% and uses the proceeds to purchase Chinese corporate debt yielding 10%. A Chinese bank swaps the Singapore dollars into U.S. dollars, and then deposits these funds with the People's Bank of China (PBOC). The PBOC then exchanges these U.S. dollar balances for purchasing Treasuries. The U.S. Treasury then uses this "money" to service its debts, liquidity that will then be available to purchase additional securities in the marketplace (or, perhaps, "money" to spend on imported Chinese goods, where the dollars make their way to the PBOC and then back into the Treasury market).
Example 4: A U.S. pension fund shorts (sells) Treasuries to finance higher-yielding dollar-denominated EM debt. The pension fund buys bonds directly from a EM government, with the EM central bank exchanging local currency for dollar balances. The EM central bank then uses these dollars to purchase Treasuries, recycling liquidity right back to U.S. securities markets. The seller of Treasuries, a hedge fund operating an "all weather" strategy, uses the proceeds from shorting Treasuries to finance a leveraged portfolio of stocks, fixed-income, EM securities and commodities - "recycling" this liquidity right back into U.S. and global financial markets.
Just a few basic examples of how various leveraged strategies fuel abundant liquidity flows around the globe. I suspect some of the greatest leverage is associated with sophisticated derivatives strategies - cross currency "swaps," myriad bond "carry trades," the proliferation of equities option strategies and ETF arbitrage, to name but a few. And as market prices rise and leverage increases, self-reinforcing liquidity abundance feeds the perception that the party can last indefinitely.
The amount of global speculative leverage that has accumulated over the past (almost) decade is impossible to know. There is no transparency. Most assume it's not an issue. We'll know more over the coming months, but there is ample support for the view of unprecedented global speculative excess - across regions, countries and asset classes. I have posited that the global Bubble has been pierced at the "Periphery," and that contagion effects have begun gravitating to the "Core." This week offered additional confirmation of this thesis.
Let's begin at the "Periphery." A period of relative EM instability came to an end. The South African rand sank 4.3% this week, with the Chilean peso down 3.0% and the Colombian peso falling 2.0%. Asian currencies were under notable pressure, with the South Korean won down 1.9%, the Indonesian rupiah 1.8%, the Indian rupee 1.7%, and the Thai baht 1.6%. The Russian ruble declined 1.6%, the Polish zloty 1.3% and the Turkish lira 1.3%. As for major equities indices, stocks in both Turkey and India sank 5.1%. Equities fell 4.4% in Taiwan and 3.7% in South Korea. Argentine stocks sank 9.8%, with Mexico down 2.9%.
As much as currencies and stocks were under pressure, the more ominous EM moves were in bond markets. Ten-year (local) sovereign yields surged 33 bps in Indonesia, 26 bps in Russia, 21 bps in South Africa, and 14 bps in Hungary. Dollar-denominated EM debt provided no safe haven. Venezuela's 10-year dollar yields surged 70 bps to 38.55%; Argentina's 64 bps to 9.90%; and Turkey's 52 bps to 7.86%. Ten-year dollar yields jumped 19 bps in Indonesia, 19 bps in Chile, 18 bps in Russia, 17 bps in Mexico and 14 bps in Colombia.
How were markets faring at the "Periphery of the Core"? Italian 10-year yields surged another 28 bps to 3.42%, the high going back to March 2014. Italian bank stocks were hit another 4.7%, bringing 2018 losses to 19.2%. Contagion saw Greek yields jump 33 bps to 4.45%, with Greece's major equities indices down 5.0%. European bank stocks fell another 1.9% this week. Equities indices were down 2.4% in France and 2.6% in the UK. UK yields jumped 15 bps to the high since January 2016.
It was as if the dam finally broke. Ten-year Treasury yields jumped 17 bps this week to 3.23% (high since May 2011). Interestingly, long-bond yields were under even more pressure, as yields rose 20 bps to 3.41% (high since July '14). Mortgage securities fell under intense pressure, with benchmark MBS yields jumping 20 bps - surpassing 4.00% for the first time since July 2011. The old mortgage duration problem: When rates jump, borrowers are less likely to refinance their mortgages or upgrade to new homes. Investment-grade corporate debt was under pressure as well, with the LQD ETF declining 1.7% to a multi-year low.
The DJIA traded to a record high Wednesday before reality began to set in. The S&P500 also reached all-time highs in Wednesday trading before selling took over. The broader market was under heavy selling pressure.
It certainly had the appearance of incipient fear of tightening financial conditions - contagion having made important headway from the "Periphery" to the "Core." If, as it appears, global "Risk Off" is attaining some momentum, my thoughts return to Contemporary Finance's Defect: it doesn't function in reverse.
For the Week:
The S&P500 declined 1.0% (up 7.9% y-t-d), while the Dow was little changed (up 7.0%). The Utilities rallied 1.8% (up 1.5%). The Banks recovered 1.6% (down 0.1%), and the Broker/Dealers rallied 3.4% (up 3.7%). The Transports fell 1.5% (up 5.6%). The S&P 400 Midcaps dropped 2.6% (up 3.5%), and the small cap Russell 2000 sank 3.8% (up 6.3%). The Nasdaq100 fell 3.0% (up 15.7%). The Semiconductors dropped 3.7% (up 5.0%). The Biotechs sank 3.8% (up 22.5%). With bullion gaining $10, the HUI gold index rallied 1.7% (down 2%).
Three-month Treasury bill rates ended the week at 2.17%. Two-year government yields rose seven bps to 2.89% (up 100bps y-t-d). Five-year T-note yields gained 12 bps to 3.07% (up 86bps). Ten-year Treasury yields jumped 17 bps to 3.23% (up 83bps). Long bond yields surged 20 bps to 3.41% (up 66bps). Benchmark Fannie Mae MBS yields jumped 20 bps to 4.01% (up 101bps).
Greek 10-year yields surged 33 bps to 4.48% (up 41bps y-t-d). Ten-year Portuguese yields rose six bps to 1.94% (unchanged). Italian 10-year yields jumped 28 bps to 3.42% (up 141bps). Spain's 10-year yields gained eight bps to 1.58% (up 1bp). German bund yields rose 10 bps to 0.57% (up 15bps). French yields gained 10 bps to 0.91% (up 12bps). The French to German 10-year bond spread was little changed at 34 bps. U.K. 10-year gilt yields jumped 15 bps to 1.72% (up 53bps). U.K.'s FTSE equities index dropped 2.6% (down 4.8%).
Japan's Nikkei 225 equities index declined 1.4% (up 4.5% y-t-d). Japanese 10-year "JGB" yields rose three bps to 0.155% (up 11bps). France's CAC40 fell 2.4% (up 0.9%). The German DAX equities index declined 1.1% (down 6.2%). Spain's IBEX 35 equities index lost 1.4% (down 7.9%). Italy's FTSE MIB index dropped 1.8% (down 6.9%). EM equities were mostly lower. Brazil's Bovespa index surged 3.8% (up 7.7%), while Mexico's Bolsa sank 2.9% (down 2.6%). South Korea's Kospi index dropped 3.2% (down 8.1%). India's Sensex equities index sank 5.1% (up 0.9%). China's Shanghai Exchange was closed for holiday (down 14.7%). Turkey's Borsa Istanbul National 100 index dropped 5.1% (down 17.7%). Russia's MICEX equities index declined 1.0% (up 16.2%).
Investment-grade bond funds saw inflows of $1.222 billion, and junk bond funds had inflows of $1.389 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates added a basis point to 4.71% (up 72bps y-o-y). Fifteen-year rates slipped one basis point to 4.15% (up 71bps). Five-year hybrid ARM rates rose four bps to 4.01% (up 83bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down three bps to 4.78% (up 63bps).
Federal Reserve Credit last week declined $15.6bn to $4.146 TN. Over the past year, Fed Credit contracted $274bn, or 6.2%. Fed Credit inflated $1.335 TN, or 47%, over the past 309 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt slipped $2.4bn last week to $3.436 TN. "Custody holdings" were up $70bn y-o-y, or 2.1%.
M2 (narrow) "money" supply rose $17.7bn last week to a record $14.266 TN. "Narrow money" gained $557bn, or 4.1%, over the past year. For the week, Currency increased $2.4bn. Total Checkable Deposits gained $3.8bn, and Savings Deposits increased $9.8bn. Small Time Deposits added $2.7bn. Retail Money Funds slipped $0.9bn.
Total money market fund assets fell $11.7bn to $2.872 TN. Money Funds gained $131bn y-o-y, or 4.8%.
Total Commercial Paper surged $18bn to $1.100 TN. CP gained $31bn y-o-y, or 2.9%.
Currency Watch:
The U.S. dollar index added 0.5% to 95.624 (up 3.8% y-t-d). For the week on the upside, the Brazilian real increased 5.5% and the British pound gained 0.7%. For the week on the downside, the South African rand declined 4.3%, the New Zealand dollar 2.7%, the Australian dollar 2.4%, the Swedish krona 1.9%, the South Korean won 1.9%, the Norwegian krone 1.3%, the Singapore dollar 1.1%, the Swiss franc 1.0%, the euro 0.7%, the Mexican peso 0.6%, and the Canadian dollar 0.2%. The offshore Chinese renminbi declined 0.27% versus the dollar this week (down 5.52% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index jumped 1.7% (up 11.7% y-t-d). Spot Gold rallied 0.9% to $1,203 (down 7.7%). Silver gained 1.5% to $14.649 (down 14.6%). Crude rose another $1.09 to $74.34 (up 23%). Gasoline was little changed (up 16%), while Natural Gas surged 4.5% (up 6%). Copper declined 1.5% (down 16%). Wheat gained 2.4% (up 22%). Corn rose 3.4% (up 5%).
Trump Administration Watch:
October 2 - CNBC (Sri Jegarajah): "Using trade deals with Canada, Mexico and South Korea as leverage, Washington looks set to sharpen its hard line trade policy against China and what it deems unfair trade practices from Beijing, strategists told CNBC. Though some experts have said a tariff-impacted slowdown in Chinese economic activity may make Beijing more willing to agree to a deal, many still maintain China won't back down and will respond to further U.S. escalation by raising regulatory obstacles to U.S. businesses operating in the mainland."
October 1 - Reuters (Steve Holland and David Lawder): "President Donald Trump… touted a new trade deal with Canada and Mexico as a win for U.S. workers while investors breathed a sigh of relief that the key pillars of NAFTA had survived his hardball strategy to reshape global commerce. Washington and Ottawa reached an agreement… after weeks of tense bilateral talks to update the 1994 North American Free Trade Agreement. The United States had forged a separate trade deal with Mexico… in August. The new agreement, called the United States-Mexico-Canada Agreement (USMCA), is aimed at bringing more jobs into the United States, with Canada and Mexico accepting more restrictive commerce with the United States, their main export customer."
September 30 - Bloomberg (Christopher Anstey): "With little prospect of a restart for U.S.-China trade talks, JPMorgan… now expects an escalation in tensions that will see higher American tariffs on all Chinese imports, sending the yuan sliding to its weakest against the dollar in more than a decade. 'JPMorgan has adopted a new baseline that assumes a U.S.-China endgame involving 25% U.S. tariffs on all Chinese goods in 2019,' JPMorgan strategists including John Normand wrote… While growth forecasts for both the U.S. and China aren't much affected, thanks in part to Chinese stimulus measures, 'a weaker yuan becomes part of the new equilibrium,' they wrote."
October 3 - AFP: "The bitter trade dispute between China and the US is increasingly spilling into the military domain, with a risky incident in the South China Sea highlighting the dangers of souring relations. In what the US Navy has called an 'unsafe and unprofessional' encounter, a Chinese warship sailed within just 45 yards of a US destroyer Sunday as it passed by Chinese-claimed features in the South China Sea, forcing the American vessel to take evasive action."
September 30 - Bloomberg (Ben Holland and Jeanna Smialek): "With its plaintive call for balanced budgets, the fiscal hawk once pervaded Washington. But it's getting harder to spot one. That's because of President Donald Trump, and the equal-and-opposite reaction he's provoked on the U.S. left. Trump is proving as indifferent to fiscal orthodoxy as to any other kind. The spending measure he signed on Friday, along with the one approved in March and December's tax bill, amount to the biggest stimulus outside recessions since the 1960s. They sailed through a House led by the supposedly hawkish Paul Ryan, who's due to step down in January without much progress on his goal of reining in so-called entitlements like social security -- an illustration of how Republican deficit scolds are in retreat. On the Democratic side, the reaction that's firing up the grassroots isn't 'How could you do that?'' It's: ' Why can't we do that?' … In both parties, deficit spenders are gaining ground… 'The tax cuts really set off a spiral of irresponsible justifications for not caring about fiscal responsibility,' says Maya MacGuineas, president of the CRFB."
Federal Reserve Watch:
October 3 - Financial Times (Chris Giles): "The US economy has reached a 'normal' stage of the economic cycle without any further need for monetary policymakers to be accommodative with interest rates or provide long-term guidance to markets, a Federal Reserve official has said. Speaking to the Financial Times in London, Charles Evans, who will be a voting member of the Fed's policy committee next year, said there was probably a need for a period of tight monetary policy to slow the economy a little and keep inflation under control."
October 2 - Reuters (Howard Schneider and Jonathan Spicer): "U.S. Federal Reserve Chairman Jerome Powell… hailed a 'remarkably positive outlook' for the U.S. economy that he feels is on the verge of a 'historically rare' era of ultra-low unemployment and tame prices for the foreseeable future. It is a view, he said, based on how a changed economy is operating today, with businesses and households immunized by strong central bank policy from the inflationary psychology that caused unemployment, inflation and interest rates to swing wildly in the 1960s and 1970s. It is an outlook that includes an economic performance 'unique in modern U.S. data,' with unemployment of below 4% expected for at least two more years and inflation remaining modest even as wages rise."
October 2 - CNBC (Jeff Cox): "Federal Reserve policymakers have been able to stave off sharply higher inflation even with low unemployment by managing expectations, central bank Chairman Jerome Powell said… Should those attitudes change, Powell said in a speech, the Fed won't hesitate to respond. 'From the standpoint of contingency planning, our course is clear: Resolutely conduct policy consistent with the [Federal Open Market Committee's] symmetric 2% inflation objective, and stand ready to act with authority if expectations drift materially up or down,' he told the National Association for Business Economics… 'What is more likely, in my view, is that many factors, including better conduct of monetary policy over the past few decades, have greatly reduced, but not eliminated, the effects that tight labor markets have on inflation,' he said."
October 1 - Bloomberg (Christopher Condon): "Federal Reserve Bank of Boston President Eric Rosengren said the U.S. central bank should keep raising its benchmark interest rate until it's reached 'mildly restrictive' territory. With a strong labor market expected to become tighter, he said, economic imbalances, including inflationary pressures, will continue to mount. 'Federal Reserve policy makers will likely need to move interest rates gradually from a mildly accommodative stance to a mildly restrictive stance,' Rosengren said… Such a policy 'is fully consistent with a forecast of GDP growth above potential that leads to further tightening of labor markets, and inflation mildly overshooting the Federal Reserve's 2% target.'"
October 1 - Reuters (Howard Schneider): "The tight U.S. labor market may be good for workers, allowing them to jump between jobs more easily and coax higher wages from their boss. But it may also pitch the economy toward unexpected inflation or other problems if it remains as low as the Federal Reserve anticipates, Boston Federal Reserve president Eric Rosengren said… in remarks defending the case for continued interest rate increases by the Federal Reserve."
October 1 - Bloomberg (Timothy A Duy): "The Federal Reserve's 'r-star' has gone full supernova. New York Federal Reserve President John Williams, its key proponent, made clear in a speech late Friday that the neutral interest rate is no longer a guiding star for monetary policy. This means a federal funds rate in the range of what is considered neutral has no special significance as far as policy is concerned. That is hawkish relative to any expectations that the Fed would pause as policy rates approach a level that neither stimulates nor restricts the economy… Williams's attachment to r-star cannot be overstated. At a professional level, it has been a key element of his research agenda. As recently as May he said that for 'the moment, r-star continues to shine brightly, guiding monetary policy, but hold steady, low on the horizon.'"
U.S. Bubble Watch:
October 3 - CNBC (Fred Imbert): "The U.S. services sector expanded last month at its fastest pace on record, according to… the Institute for Supply Management. The ISM non-manufacturing index rose to 61.6 last month. That is the highest level since the index was created in 2008… The index jumped from 58.5 in August. 'The non-manufacturing sector has had two consecutive months of strong growth since the 'cooling off' in July. Overall, respondents remain positive about business conditions and the current and future economy,' said Anthony Nieves, ISM chair… However, 'concerns remain about capacity, logistics and the uncertainty with global trade.'"
October 3 - CNBC (Jeff Cox): "Job growth surged in September to its highest level in seven months as the economy put up another show of strength, according to… ADP and Moody's Analytics. Private companies added 230,000 more positions for the month, the best level since the 241,000 jobs added in February and well ahead of the 168,000 jobs added in August… Construction grew by 34,000 as goods-producing industries overall contributed 46,000 to the final count. 'This labor market is rip-roaring hot,' Mark Zandi, chief economist at Moody's Analytics, told CNBC. 'The risk that this economy overheats is very high, and this is one more piece of evidence of that.'"
October 3 - Wall Street Journal (Anna Wilde Mathews): "The average cost of employer health coverage offered to workers rose to nearly $20,000 for a family plan this year, according to a new survey, capping years of increases… Annual premiums rose 5% to $19,616 for an employer-provided family plan in 2018, according to the yearly poll of employers by the nonprofit Kaiser Family Foundation. Employers, seeking to blunt the cost of premiums, also continued to boost the deductibles that workers must pay out of their pockets before insurance kicks in."
October 1 - Wall Street Journal (Corrie Driebusch and Maureen Farrell): "Stock investors are welcoming money-losing companies into the public markets this year with open arms. About 83% of U.S.-listed initial public offerings in 2018's first three quarters involve companies that lost money in the 12 months leading up to their debut, according to… University of Florida finance professor Jay Ritter. That is the highest proportion on record, according to Mr. Ritter, an IPO expert whose data goes back to 1980. Some analysts and market watchers are concerned. They see similarities with the dot-com bubble of nearly two decades ago that left many investors with enormous losses. The prior high-water mark for money-losing companies going public was 2000, when 81% of stock-market debutantes were unprofitable… Investors' tolerance for red ink has been rewarded so far in 2018. Stocks of money-losing companies listing in the U.S. soared 36% on average from their IPO price through Thursday."
October 1 - Reuters (Richard Leong): "The U.S. housing market, already struggling with tight inventory and rising building costs, faces a fresh headwind as 30-year mortgage rates rise close to the 5% threshold for the first time in years. Even as home prices have climbed steadily thanks largely to a lack of supply of homes for sale, housing affordability has remained relatively stable thanks to historically low borrowing costs. But that is changing."
September 29 - New York Times (Ben Casselman): "By nearly any measure, this city is booming. The unemployment rate is below 3%. There is so much construction that a local newspaper started a 'crane watch' feature. Seemingly every week brings headlines about companies bringing high-paying jobs to the area. Yet, Denver's once-soaring housing market has run into turbulence. Sales and construction activity have slowed in recent months. Houses that would once have drawn a frenzy of offers are sitting on the market for days or weeks. Selling prices are rising more slowly, and asking prices are being slashed to attract buyers. Similar slowdowns have hit New York, Seattle and even San Francisco, cities that until recently ranked among the nation's hottest housing markets. The specifics vary, but economists, real estate agents and home builders say the core issue is the same: Home buyers are reaching a breaking point after years of breakneck price increases that far exceeded income gains."
October 1 - Bloomberg (Oshrat Carmiel): "It's been a rough year for Manhattan's home sellers, and they're not about to catch a break any time soon. In the three months through September, purchases dropped 11% from a year earlier to 2,987 -- the fourth straight quarter with a decline, according to… Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. Listings piled on to the market at an even greater rate, climbing 13% to 6,925 homes, the most for a third quarter since 2011. A surging stock market typically fuels buyer bullishness on Manhattan real estate -- but not this time."
October 2 - Bloomberg (Oshrat Carmiel): "Rent or buy? It's a common debate among people shopping for a home in New York City. And many owners trying to find takers for their properties are appealing to both sides of it. The number of homes simultaneously listed for sale and for rent in New York jumped 51% this year through Sept. 1 -- to 1,087 -- as owners try to get the best price at a time when both markets are weakening, according to data compiled by StreetEasy. They're not exactly offering bargains. Owners of the simultaneously listed homes are seeking to sell them for a median of $1.395 million, or 24% higher than a year earlier for similar properties, the firm said. The owners are seeking a median monthly rent of $4,800 for those same properties, a 14% increase."
October 3 - Bloomberg (Lily Katz): "U.S. regional malls suffered their biggest increase in vacancies in almost a decade as retailers continue to shutter locations with no end in sight. The vacancy rate rose to 9.1% in the third quarter from 8.6% in the prior three-month period, Reis Inc. said in a report, citing closures by Sears Holdings Corp. and Bon-Ton Stores Inc. The average asking rent fell for the first time since 2011, dropping 0.3% to $43.25 a square foot."
China Watch:
September 30 - Wall Street Journal (Liyan Qi and Lingling Wei): "An intensifying trade brawl with the U.S. is starting to take a heavier toll on China's economy, as weakening foreign demand and sluggish domestic consumption cause Chinese manufacturers to significantly scale back production. The manufacturing slowdown, detailed in reports released Sunday, raises the prospect that China's leaders will step up economic stimulus measures to prop up growth. The new data showed that privately owned makers of cars, machinery and other products stopped expanding in September, as export orders dropped the most in more than two years. At the same time, output by large, state-owned manufacturers continued to weaken."
October 2 - Wall Street Journal (Dominique Fong): "Apartment rental prices are soaring across China, posing a new challenge to Chinese authorities and compounding the threat of sky-high housing prices to the economy. Rental prices for apartments are accelerating by double digits in 30 of China's biggest, most vibrant cities. In Beijing, rents are up as much as 21% from a year ago, while in the south-central megacity of Chengdu they have climbed more than 30%... This surge is an unintended consequence of Beijing's efforts to cool off the housing market by steering more home buyers into the rental market… For China's government, the sudden rise in rents poses a new financial risk, as well as a social problem."
September 29 - Reuters (Josephine Mason, Hallie Gu, Ben Blanchard and Kevin Yao): "China's central bank pledged to maintain its 'prudent and neutral' monetary policy and to use multiple tools to keep liquidity ample, as the world's second-biggest economy comes under increasing pressure from a heated trade dispute with the United States."
September 30 - Reuters (Maximilian Heath): "Argentina has 'nearly closed' a new currency swap deal with China that will add the equivalent of $9 billion to the South American country's reserves, the central bank said… Argentina and China first agreed to a swap program in 2009 to boost the South American country's dwindling reserves under former President Cristina Fernandez."
October 1 - Financial Times (Emily Feng): "Beijing will not renew significant cuts on steel production and coal use aimed at improving air quality this winter, as policymakers look to boost China's economic performance in the midst of the country's trade war with the US. The curbs - a rare restriction imposed on industries where state enterprises are prevalent - were meant to target airborne pollution, which worsens during the winter as much of the country's northern cities are heated with coal-fired power."
September 28 - New York Times (Sui-Lee Wee and Li Yuan): "China has long made it clear that reporting on politics, civil society and sensitive historical events is forbidden. Increasingly, it wants to keep negative news about the economy under control, too. A government directive sent to journalists in China… named six economic topics to be 'managed,' according to a copy of the order… reviewed by The New York Times. The list of topics includes: Worse-than-expected data that could show the economy is slowing; Local government debt risks; The impact of the trade war with the United States. Signs of declining consumer confidence. The risks of stagflation, or rising prices coupled with slowing economic growth. 'Hot-button issues to show the difficulties of people's lives.'"
EM Watch:
October 2 - Bloomberg (Onur Ant): "Turkey's consumer inflation climbed to one of the highest levels since President Recep Tayyip Erdogan came to power 15 years ago, spurring calls for higher interest rates to rein in prices. The inflation rate rose for a sixth month to 24.5% in September from a year earlier… The monthly rate was 6.3%, driven by an across-the-board spike provoked by the lira's meltdown. Treasury and Finance Minister Berat Albayrak blamed hoarders and speculators, and predicted inflation would stop quickening in October. Wednesday's inflation report puts monetary policy makers in a bind. The central bank raised borrowing costs last month to their highest level in nearly two decades, yet prices are gaining at their fastest pace since June 2003."
October 2 - Wall Street Journal (Andrew Peaple): "Spotting new 'Lehman moments' has become a pastime for global market watchers since 2008. The latest supposed sighting is in India, where the government this week summarily replaced the board of Infrastructure Leasing & Financial Services-a nonbank lender that regulators have deemed systemically important, and which has recently roiled local markets after defaulting on a string of debts. The story may not herald the collapse of India's financial system. But it raises fresh-and serious-questions about its underlying health. IL&FS's core problem is a classic asset-liability mismatch. Though it invests in infrastructure projects with long payback periods, it has become ever more reliant on short-term funding… Some of the company's projects are now in trouble… That's left it struggling to service its $12.6 billion debt pile…"
October 1 - Reuters (Ezgi Erkoyun and Orhan Coskun): "Turkish manufacturing activity slid to its lowest level in nine years in September, a business survey showed…, in what economists said was among the clearest signs yet that Turkey was headed for a deep recession after months of currency turmoil."
October 2 - Reuters (Anthony Boadle): "Brazil's far-right presidential candidate Jair Bolsonaro is polling ahead of leftist Workers Party rival Fernando Haddad for the expected runoff in this month's election, a Datafolha opinion poll showed… In a simulated second-round vote, the poll found Bolsonaro would get 44% support, beating Haddad's 42%... If no candidate wins a majority in the first round on Sunday, the election will be decided in a second-round run-off on Oct. 28 between the two top vote-getters."
October 3 - Bloomberg (Anirban Nag): "A crisis at one of India's biggest infrastructure financiers is the latest example of how the end of an easy money era is causing strain in the world's fastest-growing economy. Rising borrowing costs are putting pressure on lenders like Infrastructure Leasing & Financial Services Ltd. -- whose recent debt defaults rocked financial markets in India and sparked fears of a contagion -- as well as on debt-focused mutual funds that are liquidating holdings. There's more pain to come as global interest rates rise and the Reserve Bank of India proceeds with its own tightening…"
October 1 - Bloomberg (Liau Y-Sing): "Indonesia's rupiah weakened past 15,000 per dollar for the first time in 20 years as sentiment toward emerging-nation assets soured and oil prices jumped. The currency has tumbled almost 10% this year as rising U.S. interest rates have boosted the dollar and Indonesia's current-account deficit has left the economy exposed to the financial turmoil that afflicted Turkey and Argentina. Crude prices have almost tripled since February 2016, ratcheting up the cost of imports."
September 30 - Reuters (Lisa Barrington and Karin Strohecker): "Lebanon's worst bond market shock in a decade has raised doubts about whether the country's banks are willing and able to continue to bankroll the government, raising pressure on Beirut to step up reforms or risk a destabilizing currency crisis."
Central Bank Watch:
October 2 - Bloomberg: "Global central banks are gradually withdrawing easy monetary policy a decade since they began racing to the rescue of a world economy skidding into recession. The Federal Reserve's benchmark is now the highest since 2008 and officials are signaling another hike in December and more in 2019. Emerging markets from Argentina to India have acted to defend their currencies. All told, 10 of the 22 central banks monitored in Bloomberg Economics' quarterly outlook raised interest rates since the start of July. Seven are predicted to do so again before the end of this year. That's not to say global policy is tight and there is a sense of divergence among the big policy makers. The European Central Bank will buy assets until December and pledges not to increase rates before the summer. The Bank of Japan continues to deliver massive stimulus and the People's Bank of China is alert to weakening growth."
October 3 - CNBC (Weizhen Tan): "The rupee's plunge into record-low territory this year is unlikely to slow - even if India's central bank hikes its rate this week, according to experts… Analysts largely expect India, Asia's third-largest economy, to raise its benchmark rate by 25 bps at its meeting this week, with more increases to come this and next year. But while an interest rate hike would normally be expected to support a currency, the rupee 'is in for continued losses ahead,' according to Prakash Sakpal, vice president of research at Dutch bank ING."
Italy Watch:
October 2 - Reuters (Gavin Jones): "Italy defied pressure from Brussels and its euro zone partners on Tuesday to water down ambitious budget plans, threatening to sue EU officials it said were to blame for a deepening sell-off on Rome's financial markets… 'We are not turning back from the 2.4% target... We will not backtrack by a millimeter,' Luigi Di Maio, deputy prime minister and leader of the anti-establishment 5-Star Movement, said on RTL radio."
October 4 - Reuters (Jan Strupczewski): "Senior European Union officials believe Italy risks facing a massive debt restructuring task - and one that would hit its own citizens hardest - unless it backs down in its unprecedented challenge to Brussels' budget rules. Italy's 2.3 trillion euro national debt dwarfs that of Greece and the euro zone bailout fund would not be able to cope with the costs of supporting its government in a crisis. Any such crisis could threaten the euro itself, seen by many as the EU's greatest achievement."
October 3 - Bloomberg (Kevin Costelloe and Andrew Davis): "Italy's populist government will offer some concessions to fend off European Union pressure about its public finances, committing to reduce its budget deficit targets in 2020 and 2021, while sticking to its guns for next year, Corriere della Sera newspaper reported. The government will maintain its plan for a shortfall of 2.4% of gross domestic product for 2019, while reducing the targeted gap to 2.2% and 2% for the two successive years respectively, according to Corriere. The government had originally said it would aim for 2.4% for all three years."
October 2 - Wall Street Journal (Avantika Chilkoti and Georgi Kantchev): "A deepening selloff of Italian bonds and banks has revived concerns over the 'doom loop' between weak lenders and fragile government finances. Italian banks have large portfolios of the country's bonds and the recent fall in their value will have eroded the sector's capital cushion, which is needed to protect it from future financial shocks. During the sovereign debt crisis earlier this decade, a selloff in government bonds raised concerns about the banks that held them which, in turn, added to worries about the country's economic strength. But this year, Italian banks have loaded up on even more of the country's bonds, even as other eurozone countries have whittled down their portfolios."
October 3 - Financial Times (Miles Johnson in Rome and Jim Brunsden): "As Italy's populist coalition government prepares to submit its draft budget to the European Commission this month all eyes are on the possibility of a dangerous confrontation with Brussels and financial markets. While Luigi Di Maio, leader of the Five Star Movement, and Matteo Salvini, leader of the League, have said they will resist outside attempts to change their plans, senior European figures have warned Rome that their expensive policies are likely to be in breach of budget rules… The Italian government said last week that its plans would see the country's budget deficit for next year rise to 2.4% of gross domestic product. Giovanni Tria, Italy's technocratic economy minister, has said the deficit will come down in 2020 and 2021. But the economic assumptions behind these estimates are likely to be as important in deciding the commission's reaction as the figure itself."
October 1 - Bloomberg (Lorenzo Totaro, Viktoria Dendrinou, and Nikos Chrysoloras): "Italian Finance Minister Giovanni Tria's effort to promote his government's new fiscal strategy ended in failure on Monday, with the head of the European Commission warning of a Greek-style crisis and the nation's bonds dropping to their weakest level in more than four years. 'Recent announcements by the Italian government have raised concerns about its budgetary course,' Mario Centeno, the Portuguese finance minister, said… Dutch Finance Minister Wopke Hoekstra went further, saying 'I'm somewhat less optimistic after having talked to my colleagues than beforehand.'"
Europe Watch:
October 3 - Financial Times (Martin Arnold and Kerin Hope): "Some of Greece's biggest banks suffered steep share price falls on Wednesday as investors worried they may not have enough capital to meet fresh targets on reducing their large portfolios of bad debts. Shares in Piraeus Bank, the country's largest lender by assets, dropped more than 20%, cutting its market capitalisation to less than €600m."
Japan Watch:
September 30 - Reuters (Leika Kihara and Tetsushi Kajimoto): "Rising raw material costs and a string of natural disasters that disrupted production sapped business confidence among Japan's big manufacturers in the September quarter, a central bank survey showed…, taking it to the lowest in more than a year."
Global Bubble Watch:
September 30 - Financial Times (Patrick Jenkins): "Black pots and kettles spring to mind. Over the past couple of weeks, three different policymakers from the European Central Bank have spoken in concerned tones about the risks posed to the financial system by the growing role of 'shadow banking'. Ten years after the world was rocked by an unprecedented banking crisis, policymakers are sounding the alarm about the spread of risk out of the now more regulated banks and into the 'shadows' where asset managers, insurers and others carry out banklike business. First came Mario Draghi, ECB president. …He pointed out that the non-bank financial sector in the EU now harboured €42tn, or 40%, of the region's entire financial system… Next came François Villeroy de Galhau, the Banque de France governor, who cited the same figures but added a touch of politics by blaming 'the big investment funds, they are partly American'… Finally, last week, Peter Praet, the ECB's chief economist, told a Financial Times conference that he was particularly worried about 'the degree of leverage in the financial system . . . because of the shadow banking system'."
October 3 - Reuters (Weizhen Tan): "'Irresponsible fiscal policy' is on the rise as governments increasingly try to appeal to angry voters, according to a chief investment officer overseeing international macroeconomic trends. …Michael Hasenstab, chief investment officer at Templeton Global Macro… called the trend a response to populism… and emphasized that political risk had become a pressing investment consideration. 'One of the main factors that we look at throughout emerging markets and the developed markets, take Italy for example, is the rise of populism leading to irresponsible fiscal policy. Probably one of the most important political variables we have to look at,' Hasenstab told CNBC…"
September 30 - Bloomberg (Matthew Burgess): "Australia's property slump has reached the one-year mark as the nation's two major cities have become the biggest drag. National dwelling values dropped 0.5% last month, weighed by declines in Sydney and Melbourne, according to CoreLogic… Prices in the two east coast cities, which make up more than half of the national value of housing, have fallen 6.1% and 3.4% respectively from a year earlier… Values have fallen greatest among the most expensive properties as lenders curb their appetite for high debt to income ratio lending…"
Fixed Income Bubble Watch:
October 3 - Bloomberg (Christopher Anstey and Gowri Gurumurthy): "Risk premiums on U.S. junk-rated bonds have tumbled to the lowest level since the start of the global financial crisis… A dearth of fresh supply, as well as continued investor inflows and rising U.S. government-debt yields, helped push the yield spread on sub-investment grade U.S. bonds over benchmark Treasuries to 3.09 percentage points Monday -- the lowest since July 2007. Issuance of new corporate debt is about 30% lower this year than in the same period of 2017, and is running at the slowest pace since 2009. Against that, the largest junk bond ETF recorded its biggest one-day inflow on record Monday."
Leveraged Speculation Watch:
October 3 - Wall Street Journal (Juliet Chung): "Boston hedge fund Highfields Capital Management is returning billions in client money and converting into a family office, founder Jonathan Jacobson told investors... The decision to return money to investors would mark one of the largest hedge fund closings in recent history. Mr. Jacobson started the $12.1 billion stock-trading firm in 1998… About $9.5 billion of Highfields' assets are outside client money. 'Done correctly, money management is an all-consuming, 24/7 pursuit… After three-and-a-half decades of sitting in front of a screen, I realized I am ready for a change,' Mr. Jacobson, 57 years old, wrote… Mr. Jacobson's decision to return money… is the latest closure by a high-profile manager during a tough period for hedge funds. This year through August, stock hedge funds on average returned 2.3% compared with a 10% return for the S&P 500…"
Geopolitics Watch:
September 29 - Wall Street Journal (Farnaz Fassihi and Chris Gordon): "Top diplomatic officials from China and Russia admonished the U.S. on an array of issues ranging from multilateral agreements to sanctions policy at the United Nations on Friday, portraying Washington as stepping back from world commitments while their own countries were expanding global engagement. Russian Foreign Minister Sergei Lavrov and Chinese Foreign Minister Wang Yi were among the speakers scheduled near the end of a week of addresses by world leaders at the U.N. General Assembly."
October 4 - CNN (Barbara Starr): "The US Navy's Pacific Fleet has drawn up a classified proposal to carry out a global show of force as a warning to China and to demonstrate the US is prepared to deter and counter their military actions, according to several US defense officials. The draft proposal from the Navy is recommending the US Pacific Fleet conduct a series of operations during a single week in November. The goal is to carry out a highly focused and concentrated set of exercises involving US warships, combat aircraft and troops to demonstrate that the US can counter potential adversaries quickly on several fronts."
October 2 - Reuters (Robin Emmott): "Russia must halt its covert development of a banned cruise missile system or the United States will seek to destroy it before it becomes operational, Washington's envoy to NATO said… The United States believes Russia is developing a ground-launched system in breach of a Cold War treaty that could allow Russia to launch a nuclear strike on Europe at short notice, but Moscow has consistently denied any such violation."
October 1 - Reuters (Ben Blanchard and David Stanway): "China expressed anger… after a U.S. Navy destroyer sailed near islands claimed by China in the disputed South China Sea, saying it resolutely opposed an operation that it called a threat to its sovereignty. Beijing and Washington are locked in a trade war in which they have imposed increasingly severe rounds of tariffs on each other's imports. A U.S. official… said the destroyer the USS Decatur traveled within 12 nautical miles of Gaven and Johnson Reefs in the Spratly Islands…"
October 1 - Wall Street Journal (Gordon Lubold and Jeremy Page): "U.S. military officials complained… that a Chinese warship harassed a U.S. Navy vessel as it sailed through the South China Sea, adding to a growing roster of disputes between the two countries in a sudden escalation of tensions. The ship complaint comes as the latest episode between Washington and Beijing after a year-long trade and tariff war has spilled over into political conflict and military strains between the rival powers. Rhetoric has risen markedly in the past week, with President Trump charging at the United Nations last week that China had meddled in U.S. elections by purchasing misleading newspaper ads designed to look like news articles that criticize Trump administration policies."
October 4 - Reuters (Idrees Ali and Robin Emmott): "U.S. Defense Secretary Jim Mattis said… that Russia's violation of an arms control treaty was 'untenable' and unless it changed course the United States would respond. The United States believes Russia is developing a ground-launched system in breach of a Cold War treaty, known as the Intermediate-Range Nuclear Forces Treaty (INF), that could allow Moscow to launch a nuclear strike on Europe at short notice."
Market bulls grimaced. Powell: "We may go past neutral, but we're a long way from neutral at this point…" CNBC's Jim Cramer called it "amateurish." Chairman Powell was certainly candid, something shockingly unusual for a Fed chair. So atypical was his candor, the Chairman was misconstrued as a novice unschooled in the art of modern central banking.
The bottom line is the Fed waited much too long to begin normalizing monetary policy. Moreover, they pre-committed to an extremely gradual path of rates increases. This policy approach essentially ensured that so-called "tightening" measures would fail to tighten financial conditions. Over-liquefied and speculative markets were content to look right through them, confident that cheap liquidity and easy Credit conditions would run unabated. Clearly, stock gains in the multiple thousands of basis points easily counteracted a couple hundred basis point increase in short-term borrowing costs.
I'll add that this issue of a so-called "neutral" rate only confused the issue. What Fed funds target rate would be just right, neither stimulating nor restricting? Well, in this age of market-based finance, market dynamics have a profound effect on economic performance. "Risk on" in the marketplace ensures strong wealth effects, readily available cheap finance for spending and investment, and easy Credit Availability (throughout the economy) more generally. On the other hand, "Risk Off" would see a tightening of financial conditions, tighter Credit, diminished perceived wealth and more restrictive spending and investing.
Perhaps there's a view that a "neutral" policy would be a target rate that balances "Risk on" and "Risk Off." In a policy paper perhaps, but that's not the way markets function in the real world. In reality, if financial conditions remain too loose for too long, powerful Speculative Dynamics take hold. And once inflation psychology takes deep root in the asset markets, the commanding spell will be broken only from the shock of much tighter financial conditions and painful losses. "Housing prices only go up." "Buy and Hold. Stocks for the long-term."
There's further pertinent monetary policy analysis. Back in 2013, chairman Bernanke resorted to "the Fed will push back against a tightening of financial conditions." It received little attention at the time, but it was a fateful declaration. The backdrop was one where the Fed had employed extraordinary policy measures, inflating securities markets as its primary post-crisis stimulus mechanism. It was Bernanke paddling ever deeper into uncharted waters, explicitly signaling to the markets that the Federal Reserve was ready to respond to an equities market pullback with additional monetary stimulus. This was a game changer for market perceptions and played a major role in exacerbating Bubble Dynamics.
For years now, markets have been operating under the presumption that the Fed would immediately pull back from "normalization" in the event of fledgling risk aversion and/or stock market weakness. Chairman Powell on Wednesday afternoon threw the proverbial monkey wrench into this central market perception.
September's 3.7% Unemployment Rate was the lowest since December 1969. Year-over-year Average Hourly Earnings came in at 2.8% and are poised to soon surpass 3% for the first time since April 2009. The ISM Non-Manufacturing Index jumped three points to the strongest reading since August 1997. The ISM Employment component surged almost six points to 62.4, the highest level in data going back to 1997.
Federal Reserve Bank of Chicago president Charles Evans (on Bloomberg TV): "I think that my own take on a neutral longer run funds rate is 2.75%. So, I think getting policy up to us slightly restrictive setting, 3%, 3.25% would be consistent with the strong economy and good inflation that we're looking at."
When even the most perennially dovish Federal Reserve president uses the word "restrictive" and discusses taking the Fed funds up another 100 bps, one has to take notice.
It took a while, but central bankers have become less complacent with respect to inflation risks. For too long they have been fixated on deflation, in spite of the greatest securities and asset market inflation the world has ever experienced. Clearly, the Fed didn't see a 3.7% unemployment rate coming. More importantly, they never anticipated massive late-cycle fiscal stimulus. A booming economy and Trillion dollar deficits? No way. Way.
They were blindsided by the rise of tariffs and protectionism. To be sure, the Fed today has no way to gauge the economic and inflationary consequences associated with a prolonged trade war with China. Rather suddenly, there's a murky future out there that has Fed officials fretting inflation making a dazzling revival on their watch.
All of a sudden, 2% short rates seem incongruous with a booming economy, rising price pressures and the risk of a trade-related inflationary shock. And if central bankers are now on edge, markets better be on edge. This is new and awkward. But what about faltering EM and slowing global growth? All the overcapacity in China and globally?
Well, there is now a not unlikely scenario of faltering markets concurrent with some stubborn inflationary pressures. The GSCI commodities Index was up another 1.7% this week, with WTI jumping past $74. Confidence that any tightening of financial conditions (i.e. weak equities) would be met with resolute measures from the Fed (and global central banks) is increasingly dubious. Ten-year Treasury yields jumped this week to highs since 2011.
I continue to think back to the nineties. And to know where I'm coming from, I was convinced that finance had fundamentally changed in the nineties. No one, it seemed, was paying any attention. I would share my analysis with market professionals, academics, journalists and even Federal Reserve officials and the response was some variation of "Doug, you don't understand." After all these years, this most critical of issues remains unsolved.
I began posting the CBB analysis back in 1999, on a weekly basis attempting to explain what had changed; what was still changing; and what might be some of the momentous ramifications associated with the combination of unfettered "Wall Street finance" and "activist" central bank monetary management.
It was not until 2007, when Pimco's Paul McCulley coined the term "shadow banking," that some began to take some notice. But with the following year's "greatest financial crisis since the Great Depression," desperation saw the focus shift to extreme monetary stimulus and basically using any means possible to reflate the securities markets and Credit more generally. It was not only that concerns for the inherent instability of contemporary market-based finance were pushed to the side. This high-powered finance machine was the centerpiece of central bank reflationary policymaking - around the world.
In an early CBB, I resorted to my CPA training and went through (in painful detail) a series of debit and Credit journal entries to demonstrate how the GSEs would borrow in the money markets to purchase MBS in the marketplace, and how this "liquidity" could be "recycled" back through the money markets and borrowed again and again. In short, the GSEs would issue new short-term liabilities (IOUs) in exchange for "immediately available funds" (IAF). The IAF provided the purchasing power for MBS, with the GSE's transferring these funds to the MBS seller. The seller would then deposit these IAF right back into the money market, where the GSE's (or others) could borrow them repeatedly (exchanging additional short-term IOUs for IAF).
This was akin to the old bank deposit multiplier (fractional reserve banking) but with zero reserve requirements. Traditionally, a bank might lend 80% of a new $100 deposit (20% reserve requirement), with this loan creating $80 of new funds that would be deposited at other institutions (where the next bank could lend 80% of the $80 deposit, then the next 80% of $64 and so on).
I argued that contemporary non-bank market-based finance, operating outside of bank reserve requirements, created an "infinite multiplier effect." And I posited that "unfettered finance" essentially changed everything (market dynamics, policy, saving & investment, economic structure, etc.) In particular, "money" would circulate freely throughout the securities markets, inflating asset prices and incentivizing speculation. In particular, there was essentially unlimited cheap finance available for securities speculation, ensuring price Bubbles inflated by self-reinforcing speculative leverage. "Money" could be borrowed in, for example, the "repo" market to purchase securities, where the proceeds from the sale would be recycled right back into the money markets where it would be available to borrow again and again without limit.
It amounted to the greatest transformation in financial and market structure in history, all backstopped by the "activist" Federal Reserve and global central bankers. It was a New Era - a New Paradigm - that worked miraculously until its 2008 malfunction risked bringing down the global financial system. Most importantly, this incredible system of ever-expanding speculative leverage, seemingly endless liquidity and powerful asset Bubbles has a fundamental Defect: it doesn't function in reverse (with deleveraging). Yet rather than addressing what went so terribly wrong in 2008, global central banks resuscitated and then bolstered this deviant financial apparatus, sending it on its merry way to reflate global markets and economies.
The past decade has seen similar dynamics to the mortgage finance Bubble period: expanding leverage and liquidity spinning around the system, promoting self-reinforcing securities and asset inflation. The big difference during this cycle has been its unprecedented global scale. Central bankers and market bulls are fond of asserting that leverage is not an issue these days. Yet the most egregious leverage throughout this cycle has been in central bank and sovereign balance sheets. Liquidity created in the expansion of central bank balance sheets, in particular, circulated through the securities and funding markets where it has been "recycled" again and again…
A few examples: A hedge fund borrows at zero in Japan to lever in a higher-yielding dollar denominated EM debt "carry trade." This new liquidity flows into an EM banking system, where it is exchanged for local currency by the domestic central bank. The EM central bank then exchanges these dollar balances for U.S. Treasury bonds in the marketplace. The seller of Treasuries, say a hedge fund, then uses the proceeds from this short sale to leverage U.S. corporate debt. The corporate treasurer then uses the proceeds from the debt issue to repurchase equity shares, creating liquidity in the marketplace for the purchase of U.S. equities or even international shares - where it can begin the cycle anew.
Example 2: The ECB, expanding its liabilities, creates "money" to purchase Italian bonds in the marketplace. The seller transfers the sales proceeds to one of the large German banks where it is held on deposit. The German bank then uses this liquidity to purchase U.S. agency securities from a U.S. broker/dealer that had previously acquired these GSE-issued securities with short-term money market "repo" financing. This "repo" loan is repaid, creating money market liquidity to finance other securities speculations. Or instead, the German bank (rather than holding deposits) buys short-term German debt from a hedge fund happy to short these securities at negative yields (borrow at negative interest-rates) to finance holdings of higher-yielding instruments in the U.S.
Example 3: An Asian hedge fund shorts (sells) one-year Singapore sovereign debt at 1.88% and uses the proceeds to purchase Chinese corporate debt yielding 10%. A Chinese bank swaps the Singapore dollars into U.S. dollars, and then deposits these funds with the People's Bank of China (PBOC). The PBOC then exchanges these U.S. dollar balances for purchasing Treasuries. The U.S. Treasury then uses this "money" to service its debts, liquidity that will then be available to purchase additional securities in the marketplace (or, perhaps, "money" to spend on imported Chinese goods, where the dollars make their way to the PBOC and then back into the Treasury market).
Example 4: A U.S. pension fund shorts (sells) Treasuries to finance higher-yielding dollar-denominated EM debt. The pension fund buys bonds directly from a EM government, with the EM central bank exchanging local currency for dollar balances. The EM central bank then uses these dollars to purchase Treasuries, recycling liquidity right back to U.S. securities markets. The seller of Treasuries, a hedge fund operating an "all weather" strategy, uses the proceeds from shorting Treasuries to finance a leveraged portfolio of stocks, fixed-income, EM securities and commodities - "recycling" this liquidity right back into U.S. and global financial markets.
Just a few basic examples of how various leveraged strategies fuel abundant liquidity flows around the globe. I suspect some of the greatest leverage is associated with sophisticated derivatives strategies - cross currency "swaps," myriad bond "carry trades," the proliferation of equities option strategies and ETF arbitrage, to name but a few. And as market prices rise and leverage increases, self-reinforcing liquidity abundance feeds the perception that the party can last indefinitely.
The amount of global speculative leverage that has accumulated over the past (almost) decade is impossible to know. There is no transparency. Most assume it's not an issue. We'll know more over the coming months, but there is ample support for the view of unprecedented global speculative excess - across regions, countries and asset classes. I have posited that the global Bubble has been pierced at the "Periphery," and that contagion effects have begun gravitating to the "Core." This week offered additional confirmation of this thesis.
Let's begin at the "Periphery." A period of relative EM instability came to an end. The South African rand sank 4.3% this week, with the Chilean peso down 3.0% and the Colombian peso falling 2.0%. Asian currencies were under notable pressure, with the South Korean won down 1.9%, the Indonesian rupiah 1.8%, the Indian rupee 1.7%, and the Thai baht 1.6%. The Russian ruble declined 1.6%, the Polish zloty 1.3% and the Turkish lira 1.3%. As for major equities indices, stocks in both Turkey and India sank 5.1%. Equities fell 4.4% in Taiwan and 3.7% in South Korea. Argentine stocks sank 9.8%, with Mexico down 2.9%.
As much as currencies and stocks were under pressure, the more ominous EM moves were in bond markets. Ten-year (local) sovereign yields surged 33 bps in Indonesia, 26 bps in Russia, 21 bps in South Africa, and 14 bps in Hungary. Dollar-denominated EM debt provided no safe haven. Venezuela's 10-year dollar yields surged 70 bps to 38.55%; Argentina's 64 bps to 9.90%; and Turkey's 52 bps to 7.86%. Ten-year dollar yields jumped 19 bps in Indonesia, 19 bps in Chile, 18 bps in Russia, 17 bps in Mexico and 14 bps in Colombia.
How were markets faring at the "Periphery of the Core"? Italian 10-year yields surged another 28 bps to 3.42%, the high going back to March 2014. Italian bank stocks were hit another 4.7%, bringing 2018 losses to 19.2%. Contagion saw Greek yields jump 33 bps to 4.45%, with Greece's major equities indices down 5.0%. European bank stocks fell another 1.9% this week. Equities indices were down 2.4% in France and 2.6% in the UK. UK yields jumped 15 bps to the high since January 2016.
It was as if the dam finally broke. Ten-year Treasury yields jumped 17 bps this week to 3.23% (high since May 2011). Interestingly, long-bond yields were under even more pressure, as yields rose 20 bps to 3.41% (high since July '14). Mortgage securities fell under intense pressure, with benchmark MBS yields jumping 20 bps - surpassing 4.00% for the first time since July 2011. The old mortgage duration problem: When rates jump, borrowers are less likely to refinance their mortgages or upgrade to new homes. Investment-grade corporate debt was under pressure as well, with the LQD ETF declining 1.7% to a multi-year low.
The DJIA traded to a record high Wednesday before reality began to set in. The S&P500 also reached all-time highs in Wednesday trading before selling took over. The broader market was under heavy selling pressure.
It certainly had the appearance of incipient fear of tightening financial conditions - contagion having made important headway from the "Periphery" to the "Core." If, as it appears, global "Risk Off" is attaining some momentum, my thoughts return to Contemporary Finance's Defect: it doesn't function in reverse.
For the Week:
The S&P500 declined 1.0% (up 7.9% y-t-d), while the Dow was little changed (up 7.0%). The Utilities rallied 1.8% (up 1.5%). The Banks recovered 1.6% (down 0.1%), and the Broker/Dealers rallied 3.4% (up 3.7%). The Transports fell 1.5% (up 5.6%). The S&P 400 Midcaps dropped 2.6% (up 3.5%), and the small cap Russell 2000 sank 3.8% (up 6.3%). The Nasdaq100 fell 3.0% (up 15.7%). The Semiconductors dropped 3.7% (up 5.0%). The Biotechs sank 3.8% (up 22.5%). With bullion gaining $10, the HUI gold index rallied 1.7% (down 2%).
Three-month Treasury bill rates ended the week at 2.17%. Two-year government yields rose seven bps to 2.89% (up 100bps y-t-d). Five-year T-note yields gained 12 bps to 3.07% (up 86bps). Ten-year Treasury yields jumped 17 bps to 3.23% (up 83bps). Long bond yields surged 20 bps to 3.41% (up 66bps). Benchmark Fannie Mae MBS yields jumped 20 bps to 4.01% (up 101bps).
Greek 10-year yields surged 33 bps to 4.48% (up 41bps y-t-d). Ten-year Portuguese yields rose six bps to 1.94% (unchanged). Italian 10-year yields jumped 28 bps to 3.42% (up 141bps). Spain's 10-year yields gained eight bps to 1.58% (up 1bp). German bund yields rose 10 bps to 0.57% (up 15bps). French yields gained 10 bps to 0.91% (up 12bps). The French to German 10-year bond spread was little changed at 34 bps. U.K. 10-year gilt yields jumped 15 bps to 1.72% (up 53bps). U.K.'s FTSE equities index dropped 2.6% (down 4.8%).
Japan's Nikkei 225 equities index declined 1.4% (up 4.5% y-t-d). Japanese 10-year "JGB" yields rose three bps to 0.155% (up 11bps). France's CAC40 fell 2.4% (up 0.9%). The German DAX equities index declined 1.1% (down 6.2%). Spain's IBEX 35 equities index lost 1.4% (down 7.9%). Italy's FTSE MIB index dropped 1.8% (down 6.9%). EM equities were mostly lower. Brazil's Bovespa index surged 3.8% (up 7.7%), while Mexico's Bolsa sank 2.9% (down 2.6%). South Korea's Kospi index dropped 3.2% (down 8.1%). India's Sensex equities index sank 5.1% (up 0.9%). China's Shanghai Exchange was closed for holiday (down 14.7%). Turkey's Borsa Istanbul National 100 index dropped 5.1% (down 17.7%). Russia's MICEX equities index declined 1.0% (up 16.2%).
Investment-grade bond funds saw inflows of $1.222 billion, and junk bond funds had inflows of $1.389 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates added a basis point to 4.71% (up 72bps y-o-y). Fifteen-year rates slipped one basis point to 4.15% (up 71bps). Five-year hybrid ARM rates rose four bps to 4.01% (up 83bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down three bps to 4.78% (up 63bps).
Federal Reserve Credit last week declined $15.6bn to $4.146 TN. Over the past year, Fed Credit contracted $274bn, or 6.2%. Fed Credit inflated $1.335 TN, or 47%, over the past 309 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt slipped $2.4bn last week to $3.436 TN. "Custody holdings" were up $70bn y-o-y, or 2.1%.
M2 (narrow) "money" supply rose $17.7bn last week to a record $14.266 TN. "Narrow money" gained $557bn, or 4.1%, over the past year. For the week, Currency increased $2.4bn. Total Checkable Deposits gained $3.8bn, and Savings Deposits increased $9.8bn. Small Time Deposits added $2.7bn. Retail Money Funds slipped $0.9bn.
Total money market fund assets fell $11.7bn to $2.872 TN. Money Funds gained $131bn y-o-y, or 4.8%.
Total Commercial Paper surged $18bn to $1.100 TN. CP gained $31bn y-o-y, or 2.9%.
Currency Watch:
The U.S. dollar index added 0.5% to 95.624 (up 3.8% y-t-d). For the week on the upside, the Brazilian real increased 5.5% and the British pound gained 0.7%. For the week on the downside, the South African rand declined 4.3%, the New Zealand dollar 2.7%, the Australian dollar 2.4%, the Swedish krona 1.9%, the South Korean won 1.9%, the Norwegian krone 1.3%, the Singapore dollar 1.1%, the Swiss franc 1.0%, the euro 0.7%, the Mexican peso 0.6%, and the Canadian dollar 0.2%. The offshore Chinese renminbi declined 0.27% versus the dollar this week (down 5.52% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index jumped 1.7% (up 11.7% y-t-d). Spot Gold rallied 0.9% to $1,203 (down 7.7%). Silver gained 1.5% to $14.649 (down 14.6%). Crude rose another $1.09 to $74.34 (up 23%). Gasoline was little changed (up 16%), while Natural Gas surged 4.5% (up 6%). Copper declined 1.5% (down 16%). Wheat gained 2.4% (up 22%). Corn rose 3.4% (up 5%).
Trump Administration Watch:
October 2 - CNBC (Sri Jegarajah): "Using trade deals with Canada, Mexico and South Korea as leverage, Washington looks set to sharpen its hard line trade policy against China and what it deems unfair trade practices from Beijing, strategists told CNBC. Though some experts have said a tariff-impacted slowdown in Chinese economic activity may make Beijing more willing to agree to a deal, many still maintain China won't back down and will respond to further U.S. escalation by raising regulatory obstacles to U.S. businesses operating in the mainland."
October 1 - Reuters (Steve Holland and David Lawder): "President Donald Trump… touted a new trade deal with Canada and Mexico as a win for U.S. workers while investors breathed a sigh of relief that the key pillars of NAFTA had survived his hardball strategy to reshape global commerce. Washington and Ottawa reached an agreement… after weeks of tense bilateral talks to update the 1994 North American Free Trade Agreement. The United States had forged a separate trade deal with Mexico… in August. The new agreement, called the United States-Mexico-Canada Agreement (USMCA), is aimed at bringing more jobs into the United States, with Canada and Mexico accepting more restrictive commerce with the United States, their main export customer."
September 30 - Bloomberg (Christopher Anstey): "With little prospect of a restart for U.S.-China trade talks, JPMorgan… now expects an escalation in tensions that will see higher American tariffs on all Chinese imports, sending the yuan sliding to its weakest against the dollar in more than a decade. 'JPMorgan has adopted a new baseline that assumes a U.S.-China endgame involving 25% U.S. tariffs on all Chinese goods in 2019,' JPMorgan strategists including John Normand wrote… While growth forecasts for both the U.S. and China aren't much affected, thanks in part to Chinese stimulus measures, 'a weaker yuan becomes part of the new equilibrium,' they wrote."
October 3 - AFP: "The bitter trade dispute between China and the US is increasingly spilling into the military domain, with a risky incident in the South China Sea highlighting the dangers of souring relations. In what the US Navy has called an 'unsafe and unprofessional' encounter, a Chinese warship sailed within just 45 yards of a US destroyer Sunday as it passed by Chinese-claimed features in the South China Sea, forcing the American vessel to take evasive action."
September 30 - Bloomberg (Ben Holland and Jeanna Smialek): "With its plaintive call for balanced budgets, the fiscal hawk once pervaded Washington. But it's getting harder to spot one. That's because of President Donald Trump, and the equal-and-opposite reaction he's provoked on the U.S. left. Trump is proving as indifferent to fiscal orthodoxy as to any other kind. The spending measure he signed on Friday, along with the one approved in March and December's tax bill, amount to the biggest stimulus outside recessions since the 1960s. They sailed through a House led by the supposedly hawkish Paul Ryan, who's due to step down in January without much progress on his goal of reining in so-called entitlements like social security -- an illustration of how Republican deficit scolds are in retreat. On the Democratic side, the reaction that's firing up the grassroots isn't 'How could you do that?'' It's: ' Why can't we do that?' … In both parties, deficit spenders are gaining ground… 'The tax cuts really set off a spiral of irresponsible justifications for not caring about fiscal responsibility,' says Maya MacGuineas, president of the CRFB."
Federal Reserve Watch:
October 3 - Financial Times (Chris Giles): "The US economy has reached a 'normal' stage of the economic cycle without any further need for monetary policymakers to be accommodative with interest rates or provide long-term guidance to markets, a Federal Reserve official has said. Speaking to the Financial Times in London, Charles Evans, who will be a voting member of the Fed's policy committee next year, said there was probably a need for a period of tight monetary policy to slow the economy a little and keep inflation under control."
October 2 - Reuters (Howard Schneider and Jonathan Spicer): "U.S. Federal Reserve Chairman Jerome Powell… hailed a 'remarkably positive outlook' for the U.S. economy that he feels is on the verge of a 'historically rare' era of ultra-low unemployment and tame prices for the foreseeable future. It is a view, he said, based on how a changed economy is operating today, with businesses and households immunized by strong central bank policy from the inflationary psychology that caused unemployment, inflation and interest rates to swing wildly in the 1960s and 1970s. It is an outlook that includes an economic performance 'unique in modern U.S. data,' with unemployment of below 4% expected for at least two more years and inflation remaining modest even as wages rise."
October 2 - CNBC (Jeff Cox): "Federal Reserve policymakers have been able to stave off sharply higher inflation even with low unemployment by managing expectations, central bank Chairman Jerome Powell said… Should those attitudes change, Powell said in a speech, the Fed won't hesitate to respond. 'From the standpoint of contingency planning, our course is clear: Resolutely conduct policy consistent with the [Federal Open Market Committee's] symmetric 2% inflation objective, and stand ready to act with authority if expectations drift materially up or down,' he told the National Association for Business Economics… 'What is more likely, in my view, is that many factors, including better conduct of monetary policy over the past few decades, have greatly reduced, but not eliminated, the effects that tight labor markets have on inflation,' he said."
October 1 - Bloomberg (Christopher Condon): "Federal Reserve Bank of Boston President Eric Rosengren said the U.S. central bank should keep raising its benchmark interest rate until it's reached 'mildly restrictive' territory. With a strong labor market expected to become tighter, he said, economic imbalances, including inflationary pressures, will continue to mount. 'Federal Reserve policy makers will likely need to move interest rates gradually from a mildly accommodative stance to a mildly restrictive stance,' Rosengren said… Such a policy 'is fully consistent with a forecast of GDP growth above potential that leads to further tightening of labor markets, and inflation mildly overshooting the Federal Reserve's 2% target.'"
October 1 - Reuters (Howard Schneider): "The tight U.S. labor market may be good for workers, allowing them to jump between jobs more easily and coax higher wages from their boss. But it may also pitch the economy toward unexpected inflation or other problems if it remains as low as the Federal Reserve anticipates, Boston Federal Reserve president Eric Rosengren said… in remarks defending the case for continued interest rate increases by the Federal Reserve."
October 1 - Bloomberg (Timothy A Duy): "The Federal Reserve's 'r-star' has gone full supernova. New York Federal Reserve President John Williams, its key proponent, made clear in a speech late Friday that the neutral interest rate is no longer a guiding star for monetary policy. This means a federal funds rate in the range of what is considered neutral has no special significance as far as policy is concerned. That is hawkish relative to any expectations that the Fed would pause as policy rates approach a level that neither stimulates nor restricts the economy… Williams's attachment to r-star cannot be overstated. At a professional level, it has been a key element of his research agenda. As recently as May he said that for 'the moment, r-star continues to shine brightly, guiding monetary policy, but hold steady, low on the horizon.'"
U.S. Bubble Watch:
October 3 - CNBC (Fred Imbert): "The U.S. services sector expanded last month at its fastest pace on record, according to… the Institute for Supply Management. The ISM non-manufacturing index rose to 61.6 last month. That is the highest level since the index was created in 2008… The index jumped from 58.5 in August. 'The non-manufacturing sector has had two consecutive months of strong growth since the 'cooling off' in July. Overall, respondents remain positive about business conditions and the current and future economy,' said Anthony Nieves, ISM chair… However, 'concerns remain about capacity, logistics and the uncertainty with global trade.'"
October 3 - CNBC (Jeff Cox): "Job growth surged in September to its highest level in seven months as the economy put up another show of strength, according to… ADP and Moody's Analytics. Private companies added 230,000 more positions for the month, the best level since the 241,000 jobs added in February and well ahead of the 168,000 jobs added in August… Construction grew by 34,000 as goods-producing industries overall contributed 46,000 to the final count. 'This labor market is rip-roaring hot,' Mark Zandi, chief economist at Moody's Analytics, told CNBC. 'The risk that this economy overheats is very high, and this is one more piece of evidence of that.'"
October 3 - Wall Street Journal (Anna Wilde Mathews): "The average cost of employer health coverage offered to workers rose to nearly $20,000 for a family plan this year, according to a new survey, capping years of increases… Annual premiums rose 5% to $19,616 for an employer-provided family plan in 2018, according to the yearly poll of employers by the nonprofit Kaiser Family Foundation. Employers, seeking to blunt the cost of premiums, also continued to boost the deductibles that workers must pay out of their pockets before insurance kicks in."
October 1 - Wall Street Journal (Corrie Driebusch and Maureen Farrell): "Stock investors are welcoming money-losing companies into the public markets this year with open arms. About 83% of U.S.-listed initial public offerings in 2018's first three quarters involve companies that lost money in the 12 months leading up to their debut, according to… University of Florida finance professor Jay Ritter. That is the highest proportion on record, according to Mr. Ritter, an IPO expert whose data goes back to 1980. Some analysts and market watchers are concerned. They see similarities with the dot-com bubble of nearly two decades ago that left many investors with enormous losses. The prior high-water mark for money-losing companies going public was 2000, when 81% of stock-market debutantes were unprofitable… Investors' tolerance for red ink has been rewarded so far in 2018. Stocks of money-losing companies listing in the U.S. soared 36% on average from their IPO price through Thursday."
October 1 - Reuters (Richard Leong): "The U.S. housing market, already struggling with tight inventory and rising building costs, faces a fresh headwind as 30-year mortgage rates rise close to the 5% threshold for the first time in years. Even as home prices have climbed steadily thanks largely to a lack of supply of homes for sale, housing affordability has remained relatively stable thanks to historically low borrowing costs. But that is changing."
September 29 - New York Times (Ben Casselman): "By nearly any measure, this city is booming. The unemployment rate is below 3%. There is so much construction that a local newspaper started a 'crane watch' feature. Seemingly every week brings headlines about companies bringing high-paying jobs to the area. Yet, Denver's once-soaring housing market has run into turbulence. Sales and construction activity have slowed in recent months. Houses that would once have drawn a frenzy of offers are sitting on the market for days or weeks. Selling prices are rising more slowly, and asking prices are being slashed to attract buyers. Similar slowdowns have hit New York, Seattle and even San Francisco, cities that until recently ranked among the nation's hottest housing markets. The specifics vary, but economists, real estate agents and home builders say the core issue is the same: Home buyers are reaching a breaking point after years of breakneck price increases that far exceeded income gains."
October 1 - Bloomberg (Oshrat Carmiel): "It's been a rough year for Manhattan's home sellers, and they're not about to catch a break any time soon. In the three months through September, purchases dropped 11% from a year earlier to 2,987 -- the fourth straight quarter with a decline, according to… Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. Listings piled on to the market at an even greater rate, climbing 13% to 6,925 homes, the most for a third quarter since 2011. A surging stock market typically fuels buyer bullishness on Manhattan real estate -- but not this time."
October 2 - Bloomberg (Oshrat Carmiel): "Rent or buy? It's a common debate among people shopping for a home in New York City. And many owners trying to find takers for their properties are appealing to both sides of it. The number of homes simultaneously listed for sale and for rent in New York jumped 51% this year through Sept. 1 -- to 1,087 -- as owners try to get the best price at a time when both markets are weakening, according to data compiled by StreetEasy. They're not exactly offering bargains. Owners of the simultaneously listed homes are seeking to sell them for a median of $1.395 million, or 24% higher than a year earlier for similar properties, the firm said. The owners are seeking a median monthly rent of $4,800 for those same properties, a 14% increase."
October 3 - Bloomberg (Lily Katz): "U.S. regional malls suffered their biggest increase in vacancies in almost a decade as retailers continue to shutter locations with no end in sight. The vacancy rate rose to 9.1% in the third quarter from 8.6% in the prior three-month period, Reis Inc. said in a report, citing closures by Sears Holdings Corp. and Bon-Ton Stores Inc. The average asking rent fell for the first time since 2011, dropping 0.3% to $43.25 a square foot."
China Watch:
September 30 - Wall Street Journal (Liyan Qi and Lingling Wei): "An intensifying trade brawl with the U.S. is starting to take a heavier toll on China's economy, as weakening foreign demand and sluggish domestic consumption cause Chinese manufacturers to significantly scale back production. The manufacturing slowdown, detailed in reports released Sunday, raises the prospect that China's leaders will step up economic stimulus measures to prop up growth. The new data showed that privately owned makers of cars, machinery and other products stopped expanding in September, as export orders dropped the most in more than two years. At the same time, output by large, state-owned manufacturers continued to weaken."
October 2 - Wall Street Journal (Dominique Fong): "Apartment rental prices are soaring across China, posing a new challenge to Chinese authorities and compounding the threat of sky-high housing prices to the economy. Rental prices for apartments are accelerating by double digits in 30 of China's biggest, most vibrant cities. In Beijing, rents are up as much as 21% from a year ago, while in the south-central megacity of Chengdu they have climbed more than 30%... This surge is an unintended consequence of Beijing's efforts to cool off the housing market by steering more home buyers into the rental market… For China's government, the sudden rise in rents poses a new financial risk, as well as a social problem."
September 29 - Reuters (Josephine Mason, Hallie Gu, Ben Blanchard and Kevin Yao): "China's central bank pledged to maintain its 'prudent and neutral' monetary policy and to use multiple tools to keep liquidity ample, as the world's second-biggest economy comes under increasing pressure from a heated trade dispute with the United States."
September 30 - Reuters (Maximilian Heath): "Argentina has 'nearly closed' a new currency swap deal with China that will add the equivalent of $9 billion to the South American country's reserves, the central bank said… Argentina and China first agreed to a swap program in 2009 to boost the South American country's dwindling reserves under former President Cristina Fernandez."
October 1 - Financial Times (Emily Feng): "Beijing will not renew significant cuts on steel production and coal use aimed at improving air quality this winter, as policymakers look to boost China's economic performance in the midst of the country's trade war with the US. The curbs - a rare restriction imposed on industries where state enterprises are prevalent - were meant to target airborne pollution, which worsens during the winter as much of the country's northern cities are heated with coal-fired power."
September 28 - New York Times (Sui-Lee Wee and Li Yuan): "China has long made it clear that reporting on politics, civil society and sensitive historical events is forbidden. Increasingly, it wants to keep negative news about the economy under control, too. A government directive sent to journalists in China… named six economic topics to be 'managed,' according to a copy of the order… reviewed by The New York Times. The list of topics includes: Worse-than-expected data that could show the economy is slowing; Local government debt risks; The impact of the trade war with the United States. Signs of declining consumer confidence. The risks of stagflation, or rising prices coupled with slowing economic growth. 'Hot-button issues to show the difficulties of people's lives.'"
EM Watch:
October 2 - Bloomberg (Onur Ant): "Turkey's consumer inflation climbed to one of the highest levels since President Recep Tayyip Erdogan came to power 15 years ago, spurring calls for higher interest rates to rein in prices. The inflation rate rose for a sixth month to 24.5% in September from a year earlier… The monthly rate was 6.3%, driven by an across-the-board spike provoked by the lira's meltdown. Treasury and Finance Minister Berat Albayrak blamed hoarders and speculators, and predicted inflation would stop quickening in October. Wednesday's inflation report puts monetary policy makers in a bind. The central bank raised borrowing costs last month to their highest level in nearly two decades, yet prices are gaining at their fastest pace since June 2003."
October 2 - Wall Street Journal (Andrew Peaple): "Spotting new 'Lehman moments' has become a pastime for global market watchers since 2008. The latest supposed sighting is in India, where the government this week summarily replaced the board of Infrastructure Leasing & Financial Services-a nonbank lender that regulators have deemed systemically important, and which has recently roiled local markets after defaulting on a string of debts. The story may not herald the collapse of India's financial system. But it raises fresh-and serious-questions about its underlying health. IL&FS's core problem is a classic asset-liability mismatch. Though it invests in infrastructure projects with long payback periods, it has become ever more reliant on short-term funding… Some of the company's projects are now in trouble… That's left it struggling to service its $12.6 billion debt pile…"
October 1 - Reuters (Ezgi Erkoyun and Orhan Coskun): "Turkish manufacturing activity slid to its lowest level in nine years in September, a business survey showed…, in what economists said was among the clearest signs yet that Turkey was headed for a deep recession after months of currency turmoil."
October 2 - Reuters (Anthony Boadle): "Brazil's far-right presidential candidate Jair Bolsonaro is polling ahead of leftist Workers Party rival Fernando Haddad for the expected runoff in this month's election, a Datafolha opinion poll showed… In a simulated second-round vote, the poll found Bolsonaro would get 44% support, beating Haddad's 42%... If no candidate wins a majority in the first round on Sunday, the election will be decided in a second-round run-off on Oct. 28 between the two top vote-getters."
October 3 - Bloomberg (Anirban Nag): "A crisis at one of India's biggest infrastructure financiers is the latest example of how the end of an easy money era is causing strain in the world's fastest-growing economy. Rising borrowing costs are putting pressure on lenders like Infrastructure Leasing & Financial Services Ltd. -- whose recent debt defaults rocked financial markets in India and sparked fears of a contagion -- as well as on debt-focused mutual funds that are liquidating holdings. There's more pain to come as global interest rates rise and the Reserve Bank of India proceeds with its own tightening…"
October 1 - Bloomberg (Liau Y-Sing): "Indonesia's rupiah weakened past 15,000 per dollar for the first time in 20 years as sentiment toward emerging-nation assets soured and oil prices jumped. The currency has tumbled almost 10% this year as rising U.S. interest rates have boosted the dollar and Indonesia's current-account deficit has left the economy exposed to the financial turmoil that afflicted Turkey and Argentina. Crude prices have almost tripled since February 2016, ratcheting up the cost of imports."
September 30 - Reuters (Lisa Barrington and Karin Strohecker): "Lebanon's worst bond market shock in a decade has raised doubts about whether the country's banks are willing and able to continue to bankroll the government, raising pressure on Beirut to step up reforms or risk a destabilizing currency crisis."
Central Bank Watch:
October 2 - Bloomberg: "Global central banks are gradually withdrawing easy monetary policy a decade since they began racing to the rescue of a world economy skidding into recession. The Federal Reserve's benchmark is now the highest since 2008 and officials are signaling another hike in December and more in 2019. Emerging markets from Argentina to India have acted to defend their currencies. All told, 10 of the 22 central banks monitored in Bloomberg Economics' quarterly outlook raised interest rates since the start of July. Seven are predicted to do so again before the end of this year. That's not to say global policy is tight and there is a sense of divergence among the big policy makers. The European Central Bank will buy assets until December and pledges not to increase rates before the summer. The Bank of Japan continues to deliver massive stimulus and the People's Bank of China is alert to weakening growth."
October 3 - CNBC (Weizhen Tan): "The rupee's plunge into record-low territory this year is unlikely to slow - even if India's central bank hikes its rate this week, according to experts… Analysts largely expect India, Asia's third-largest economy, to raise its benchmark rate by 25 bps at its meeting this week, with more increases to come this and next year. But while an interest rate hike would normally be expected to support a currency, the rupee 'is in for continued losses ahead,' according to Prakash Sakpal, vice president of research at Dutch bank ING."
Italy Watch:
October 2 - Reuters (Gavin Jones): "Italy defied pressure from Brussels and its euro zone partners on Tuesday to water down ambitious budget plans, threatening to sue EU officials it said were to blame for a deepening sell-off on Rome's financial markets… 'We are not turning back from the 2.4% target... We will not backtrack by a millimeter,' Luigi Di Maio, deputy prime minister and leader of the anti-establishment 5-Star Movement, said on RTL radio."
October 4 - Reuters (Jan Strupczewski): "Senior European Union officials believe Italy risks facing a massive debt restructuring task - and one that would hit its own citizens hardest - unless it backs down in its unprecedented challenge to Brussels' budget rules. Italy's 2.3 trillion euro national debt dwarfs that of Greece and the euro zone bailout fund would not be able to cope with the costs of supporting its government in a crisis. Any such crisis could threaten the euro itself, seen by many as the EU's greatest achievement."
October 3 - Bloomberg (Kevin Costelloe and Andrew Davis): "Italy's populist government will offer some concessions to fend off European Union pressure about its public finances, committing to reduce its budget deficit targets in 2020 and 2021, while sticking to its guns for next year, Corriere della Sera newspaper reported. The government will maintain its plan for a shortfall of 2.4% of gross domestic product for 2019, while reducing the targeted gap to 2.2% and 2% for the two successive years respectively, according to Corriere. The government had originally said it would aim for 2.4% for all three years."
October 2 - Wall Street Journal (Avantika Chilkoti and Georgi Kantchev): "A deepening selloff of Italian bonds and banks has revived concerns over the 'doom loop' between weak lenders and fragile government finances. Italian banks have large portfolios of the country's bonds and the recent fall in their value will have eroded the sector's capital cushion, which is needed to protect it from future financial shocks. During the sovereign debt crisis earlier this decade, a selloff in government bonds raised concerns about the banks that held them which, in turn, added to worries about the country's economic strength. But this year, Italian banks have loaded up on even more of the country's bonds, even as other eurozone countries have whittled down their portfolios."
October 3 - Financial Times (Miles Johnson in Rome and Jim Brunsden): "As Italy's populist coalition government prepares to submit its draft budget to the European Commission this month all eyes are on the possibility of a dangerous confrontation with Brussels and financial markets. While Luigi Di Maio, leader of the Five Star Movement, and Matteo Salvini, leader of the League, have said they will resist outside attempts to change their plans, senior European figures have warned Rome that their expensive policies are likely to be in breach of budget rules… The Italian government said last week that its plans would see the country's budget deficit for next year rise to 2.4% of gross domestic product. Giovanni Tria, Italy's technocratic economy minister, has said the deficit will come down in 2020 and 2021. But the economic assumptions behind these estimates are likely to be as important in deciding the commission's reaction as the figure itself."
October 1 - Bloomberg (Lorenzo Totaro, Viktoria Dendrinou, and Nikos Chrysoloras): "Italian Finance Minister Giovanni Tria's effort to promote his government's new fiscal strategy ended in failure on Monday, with the head of the European Commission warning of a Greek-style crisis and the nation's bonds dropping to their weakest level in more than four years. 'Recent announcements by the Italian government have raised concerns about its budgetary course,' Mario Centeno, the Portuguese finance minister, said… Dutch Finance Minister Wopke Hoekstra went further, saying 'I'm somewhat less optimistic after having talked to my colleagues than beforehand.'"
Europe Watch:
October 3 - Financial Times (Martin Arnold and Kerin Hope): "Some of Greece's biggest banks suffered steep share price falls on Wednesday as investors worried they may not have enough capital to meet fresh targets on reducing their large portfolios of bad debts. Shares in Piraeus Bank, the country's largest lender by assets, dropped more than 20%, cutting its market capitalisation to less than €600m."
Japan Watch:
September 30 - Reuters (Leika Kihara and Tetsushi Kajimoto): "Rising raw material costs and a string of natural disasters that disrupted production sapped business confidence among Japan's big manufacturers in the September quarter, a central bank survey showed…, taking it to the lowest in more than a year."
Global Bubble Watch:
September 30 - Financial Times (Patrick Jenkins): "Black pots and kettles spring to mind. Over the past couple of weeks, three different policymakers from the European Central Bank have spoken in concerned tones about the risks posed to the financial system by the growing role of 'shadow banking'. Ten years after the world was rocked by an unprecedented banking crisis, policymakers are sounding the alarm about the spread of risk out of the now more regulated banks and into the 'shadows' where asset managers, insurers and others carry out banklike business. First came Mario Draghi, ECB president. …He pointed out that the non-bank financial sector in the EU now harboured €42tn, or 40%, of the region's entire financial system… Next came François Villeroy de Galhau, the Banque de France governor, who cited the same figures but added a touch of politics by blaming 'the big investment funds, they are partly American'… Finally, last week, Peter Praet, the ECB's chief economist, told a Financial Times conference that he was particularly worried about 'the degree of leverage in the financial system . . . because of the shadow banking system'."
October 3 - Reuters (Weizhen Tan): "'Irresponsible fiscal policy' is on the rise as governments increasingly try to appeal to angry voters, according to a chief investment officer overseeing international macroeconomic trends. …Michael Hasenstab, chief investment officer at Templeton Global Macro… called the trend a response to populism… and emphasized that political risk had become a pressing investment consideration. 'One of the main factors that we look at throughout emerging markets and the developed markets, take Italy for example, is the rise of populism leading to irresponsible fiscal policy. Probably one of the most important political variables we have to look at,' Hasenstab told CNBC…"
September 30 - Bloomberg (Matthew Burgess): "Australia's property slump has reached the one-year mark as the nation's two major cities have become the biggest drag. National dwelling values dropped 0.5% last month, weighed by declines in Sydney and Melbourne, according to CoreLogic… Prices in the two east coast cities, which make up more than half of the national value of housing, have fallen 6.1% and 3.4% respectively from a year earlier… Values have fallen greatest among the most expensive properties as lenders curb their appetite for high debt to income ratio lending…"
Fixed Income Bubble Watch:
October 3 - Bloomberg (Christopher Anstey and Gowri Gurumurthy): "Risk premiums on U.S. junk-rated bonds have tumbled to the lowest level since the start of the global financial crisis… A dearth of fresh supply, as well as continued investor inflows and rising U.S. government-debt yields, helped push the yield spread on sub-investment grade U.S. bonds over benchmark Treasuries to 3.09 percentage points Monday -- the lowest since July 2007. Issuance of new corporate debt is about 30% lower this year than in the same period of 2017, and is running at the slowest pace since 2009. Against that, the largest junk bond ETF recorded its biggest one-day inflow on record Monday."
Leveraged Speculation Watch:
October 3 - Wall Street Journal (Juliet Chung): "Boston hedge fund Highfields Capital Management is returning billions in client money and converting into a family office, founder Jonathan Jacobson told investors... The decision to return money to investors would mark one of the largest hedge fund closings in recent history. Mr. Jacobson started the $12.1 billion stock-trading firm in 1998… About $9.5 billion of Highfields' assets are outside client money. 'Done correctly, money management is an all-consuming, 24/7 pursuit… After three-and-a-half decades of sitting in front of a screen, I realized I am ready for a change,' Mr. Jacobson, 57 years old, wrote… Mr. Jacobson's decision to return money… is the latest closure by a high-profile manager during a tough period for hedge funds. This year through August, stock hedge funds on average returned 2.3% compared with a 10% return for the S&P 500…"
Geopolitics Watch:
September 29 - Wall Street Journal (Farnaz Fassihi and Chris Gordon): "Top diplomatic officials from China and Russia admonished the U.S. on an array of issues ranging from multilateral agreements to sanctions policy at the United Nations on Friday, portraying Washington as stepping back from world commitments while their own countries were expanding global engagement. Russian Foreign Minister Sergei Lavrov and Chinese Foreign Minister Wang Yi were among the speakers scheduled near the end of a week of addresses by world leaders at the U.N. General Assembly."
October 4 - CNN (Barbara Starr): "The US Navy's Pacific Fleet has drawn up a classified proposal to carry out a global show of force as a warning to China and to demonstrate the US is prepared to deter and counter their military actions, according to several US defense officials. The draft proposal from the Navy is recommending the US Pacific Fleet conduct a series of operations during a single week in November. The goal is to carry out a highly focused and concentrated set of exercises involving US warships, combat aircraft and troops to demonstrate that the US can counter potential adversaries quickly on several fronts."
October 2 - Reuters (Robin Emmott): "Russia must halt its covert development of a banned cruise missile system or the United States will seek to destroy it before it becomes operational, Washington's envoy to NATO said… The United States believes Russia is developing a ground-launched system in breach of a Cold War treaty that could allow Russia to launch a nuclear strike on Europe at short notice, but Moscow has consistently denied any such violation."
October 1 - Reuters (Ben Blanchard and David Stanway): "China expressed anger… after a U.S. Navy destroyer sailed near islands claimed by China in the disputed South China Sea, saying it resolutely opposed an operation that it called a threat to its sovereignty. Beijing and Washington are locked in a trade war in which they have imposed increasingly severe rounds of tariffs on each other's imports. A U.S. official… said the destroyer the USS Decatur traveled within 12 nautical miles of Gaven and Johnson Reefs in the Spratly Islands…"
October 1 - Wall Street Journal (Gordon Lubold and Jeremy Page): "U.S. military officials complained… that a Chinese warship harassed a U.S. Navy vessel as it sailed through the South China Sea, adding to a growing roster of disputes between the two countries in a sudden escalation of tensions. The ship complaint comes as the latest episode between Washington and Beijing after a year-long trade and tariff war has spilled over into political conflict and military strains between the rival powers. Rhetoric has risen markedly in the past week, with President Trump charging at the United Nations last week that China had meddled in U.S. elections by purchasing misleading newspaper ads designed to look like news articles that criticize Trump administration policies."
October 4 - Reuters (Idrees Ali and Robin Emmott): "U.S. Defense Secretary Jim Mattis said… that Russia's violation of an arms control treaty was 'untenable' and unless it changed course the United States would respond. The United States believes Russia is developing a ground-launched system in breach of a Cold War treaty, known as the Intermediate-Range Nuclear Forces Treaty (INF), that could allow Moscow to launch a nuclear strike on Europe at short notice."
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