Saturday, March 17, 2018

Saturday's News Links

[Bloomberg] G-20 Sees Global Tension, End to Cheap Money as Risk to Growth

[Bloomberg] Brace Yourself, It’s Going to Be a Busy Week in the World Economy

[Reuters] Russia expels 23 British diplomats as crisis over nerve toxin attack deepens

[CNBC] There are about 14,500 nuclear weapons in the world. Here are the countries that have them

[Spiegel] A Soviet Nerve Agent Triggers a New Cold War

Weekly Commentary: Nobody Thinks It Would Happen Again

WSJ: "Ten Years After the Bear Stearns Bailout, Nobody Thinks It Would Happen Again."

Myriad changes to the financial structure have seemingly safeguarded the financial system from another 2008-style crisis. The big Wall Street financial institutions are these days better capitalized than a decade ago. There are "living wills," along with various regulatory constraints that have limited the most egregious lending and leveraging mistakes that brought down Bear Stearns, Lehman and others. There are central bank swap lines and such, the type of financial structures that breed optimism.

March 17, 2008 - Financial Times (Gillian Tett): "In recent years, bankers have succumbed to the idea that the credit world was all about numbers and complex computer models. These days, however, this assumption looks ever more of a falsehood. For as anyone with a classical education knows, credit takes its root from the Latin word credere ("to trust") And as the current credit turmoil now mutates into ever-more virulent forms, it is faith - or, rather, the lack of it - that has turned a subprime squall into a what is arguably the worst financial ­crisis in seven decades. Make no mistake: what we are witnessing right now is not just a collapse of faith in one single institution (namely Bear Stearns) or even an asset class (those dodgy subprime mortgage bonds). Instead, it stems from a loss of trust in the whole style of modern finance, with all its complex slicing and dicing of risk into ever-more opaque forms. And this trend is not just damaging the credibility of banks, but the aura of omnipotence that has enveloped institutions such as the US Federal Reserve in recent years."

Gillian Tett was the preeminent journalist during the waning mortgage finance Bubble period. She was seemingly alone in illuminating the degree of excess in subprime Credit default swaps and structured finance more generally. By March 2008, she had already recognized "the worst financial crisis in seven decades," while Wall Street was trapped in denial. Ms. Tett also appreciated the damage being done to Federal Reserve credibility. Yet no one could have anticipated the evolution of policy measures adopted by the Fed and global central bankers over the following decade. Credibility's New Lease on Life.

What I remember most vividly from the Bear Stearns episode was how well the markets took the spectacular collapse of a $400 billion Wall Street institution. After beginning 2008 at 1,468, the S&P500 closed at 1,277 on Monday, March 17. The index then rallied double-digits to 1,440 by May 19th. I recall about that time being informed that I needed to "get on with my life." Bear Stearns had been resolved. The Fed had it all under control. The crisis was over - before it even got started.

It was not over. I was convinced the overriding issue was Trillions of mispriced securities and derivatives throughout the markets - the enormous gap between perceptions and reality. Both the financial system and economy had grown dependent on rapid Credit growth. Moreover, mortgage lending had come to dominate overall system Credit, while debt growth was increasingly vulnerable to risk intermediation fragilities. Speculative leverage, also closely interlinked with risk intermediation, had evolved into a major source of marketplace liquidity.

Risk aversion had begun to significantly restrict access to Credit for the weakest borrowers, and home price declines had commenced in many locations. The financial system was highly levered in risky Credit, while the real economy was severely maladjusted from previous distortions in the flow of spending and investment. At the time, the Fed-orchestrated Bear Stearns bailout only reinforced the misperception that Washington could forestall financial dislocation. This ensured that the inevitable crisis of confidence would prove catastrophic.

I have long argued that a Bubble in junk bonds would not be perilous from a systemic standpoint. Only so many obviously risky bonds would be issued before the marketplace declares, "No more!" Functioning market mechanisms regulate the scope and duration of such booms, thereby limiting structural financial and economic maladjustment.

A boom funded by "money" is inherently problematic - and potentially disastrous. The insatiable demand for perceived safe and liquid stores of value creates the scope for prolonged systemic booms. So long as confidence is sustained in the underlying money-like financial instruments, ongoing monetary expansion (inflation) can continue to inflate securities and asset prices, spending, investment and economic output.

All the sophisticated mortgage finance Bubble-era Credit structures and risk intermediation distorted risk perceptions, spurring inordinate demand for Credit (and finance more generally). Underpinning all the lending, leveraging and speculation was the belief that Washington wouldn't tolerate a crisis in either mortgage finance or housing. Both the Fed and Wall Street had faith that monetary stimulus could resolve any hangover from a period of excess. This confidence was badly shaken by the crisis.

Importantly, however, 10-years of previously unimaginable stimulus measures - culminating in "whatever it takes" Trillions of (non-crisis) QE, negative rates and market manipulation - ensured that faith in central bank power reemerged stronger than ever. There is a critical lesson that went unlearned from the previous crisis episode: government and central bank-related risk distortions are fundamental to self-reinforcing Bubble inflation and resulting deep structural maladjustment.

One can age the mortgage finance Bubble period at about six years, commencing around governor Bernanke's 2002 "helicopter money" speeches and the Fed's focus on mortgage Credit as the expedient for (post-"tech" Bubble) systemic reflation. It would not, however, be unreasonable to date the Bubble genesis back to 1994/95, with the rapid expansion of GSE and Wall Street Credit.

We'll soon be approaching 10 years of what I back in 2009 labeled the "global government finance Bubble." Importantly, this Bubble originated at the heart of "money" and Credit, only to metastasized into the risk markets. The abuse and impairment has been unprecedented. Government debt and central bank Credit were expanded with reckless abandon. Insatiable demand for "money" granted governments at home and abroad blank checkbooks. Central banks have monetized about $15 TN of government debt, flooding speculative global securities markets with excess liquidity. Securities values have inflated to unprecedented levels. The more Credit supplied the greater its price - and the prices of virtually all assets.

Stocks rallied back (post-Bear Stearns bailout) in the spring of 2007, with players confident the Fed would backstop market liquidity. Despite widening cracks and mounting signs of looming crisis, markets were emboldened. I have argued that the collapse of two Bear Stearns structured Credit funds in the summer of 2007 was a key Bubble inflection point. I would argue further that market complacency surrounding the Bear Stearns corporate collapse ensured a catastrophic crisis of confidence. Faith in liquidity backstops and bailouts blinds the markets to risk and impedes the ability to self-adjust and correct.

"I would buy king dollar and I would sell gold." Larry Kudlow, March 14, 2018

March 14 - Bloomberg (Jeanna Smialek and Alister Bull): "The Federal Reserve's independence and monetary-policy approach had a White House ally in Gary Cohn. His successor Larry Kudlow may be a different story. 'Just let it rip, for heaven's sake,' Kudlow said of economic growth in the U.S., during a more than hour-long interview Wednesday on CNBC. 'The market's going to take care of itself. The whole story's going to take care of itself. The Fed's going to do what it has to do, but I hope they don't overdo it.'"

The current backdrop beckons for humility. It has now been almost a decade of experimental massive expansions in both government debt and central bank Credit. The economy is strong, and the financial system appears robust. Through the prism of the 2008 crisis, the big financial institutions today have less risk and more capital. But that's not the appropriate prism. Government debt and central bank Credit have been this cycle's prevailing source of Bubble fuel. Securities market inflation has been a primary inflationary manifestation. For the most part, private-sector lending is not today's pressing issue.

I understand why Mr. Kudlow would say "buy king dollar" and "sell gold." Washington is on a trajectory of dollar devaluation, with massive twin deficits stoking the risk of a dollar crisis of confidence. A loss of faith in the U.S. currency would spur selling in U.S. financial assets, certainly including Treasuries and corporate Credit. Interest rates would spike higher, revealing the scope of speculative leverage that has accumulated over the past decade. And a crisis of confidence in financial assets would surely create a boon for gold and precious metals. Washington, of course, wants none of that. Inflate Credit while saluting king dollar.

Kudlow is seasoned, articulate and media savvy. He knows Washington, Wall Street and propaganda. "Just let it rip, for heaven's sake." Over the years I've felt Kudlow would say just about anything. At times I respect his analysis; too often over the years I've grouped him with the other charlatans.

He's an ideologue with an enticing message: "Just cut taxes." Kudlow is considered a "supply-side" free market proponent, but I've always viewed him more of an inflationist. A conservative that seemingly has absolutely no issue with loose "money;" never a Bubble he doesn't adore. And to say he was detached from reality during the critical late-stage of the mortgage finance Bubble is an understatement. He was blinded by his deep ideological biases. His sight remains distorted.

Wall Street takes comfort from the notion that Kudlow might be able to pull the President back somewhat from major tariffs and trade confrontations. He is certainly a master of touting the stock market. He, as well, seems the obvious perfect spokesman for "Phase 2" of the Trump tax cuts. Why not slash capital gains rates and make individual tax cuts permanent? Deficits don't matter. Lower taxes will spur growth and pay for themselves - with plenty to spare for infrastructure and a military buildup. There is absolutely no doubt about this; no open discussion or dialogue necessary.

We're now well into the high-risk phase of the boom cycle. The February blow-up of the "short vol" funds marked an inflection point, one I have compared to the collapse of Bear Stearns structured Credit funds in the summer of 2007. Ten-year Treasury yields have jumped 44 bps so far this year, and the dollar has been under pressure. The VIX, Treasury market and greenback have calmed down of late, which has supported an equity market recovery. Corporate Credit, however, has been notably less resilient.

March 15 - Bloomberg (Molly Smith, Brian Smith and Austin Weinstein): "For years, investors have gorged on corporate debt. Now they're showing signs of being full. Fewer orders are coming in for new bonds, relative to what's for sale. Companies that sell notes are paying more interest compared with their other debt, according to data compiled by Bloomberg, and once the securities start trading, prices by one measure have been falling about half the time. It's the latest signal that the investment-grade debt market is losing steam after years of torrid gains, as rising rates and talk of tariffs weigh on the outlook for corporate profit. 'Investors are starting to be a little more disciplined,' said Bob Summers, a portfolio manager at Neuberger Berman… 'They aren't just waving in every deal now." Money managers' restraint amounts to more pain for companies. The average yield on corporate bonds is around its highest levels since January 2012…"

March 15 - Reuters (Richard Leong): "A gauge of stress in the U.S. money markets grew to its highest level in more than six years on Thursday, bolstering the risk of further increase in the costs for banks and other companies to borrow dollars. The spread between the three-month dollar London interbank offered rate and three-month overnight indexed swap rate widened to 50.65 bps, a level not seen since January 2012. At the end of 2017, it was 27.83 bps."

And a Friday headline from Bloomberg: "Libor-OIS Spread Expands to Widest Level Since May 2009." LIBOR - a benchmark short-term interbank lending rate - is increasing (27 straight sessions) and rising more rapidly than the overnight indexed swap (OIS) rate (indicative of a risk-free borrowing rate). Essentially, short-term borrowing rates are rising while Credit risk premiums are increasing. Liquidity is becoming less abundant, and there are numerous explanations posited: The Fed is raising rates and reducing its balance sheet, massive T-bill issuance, tax cuts have incentivized U.S. multinational repatriation of funds (selling short-term instruments in the process) and less QE from the ECB.

I suspect this rate and spread development is not unrelated to the rising costs of hedging currency exposures. When markets are placid and leverage is expanding, liquidity remains abundant and cheap market hedges/protection readily available. But when markets turn more volatile and less predictable, sellers of risk protection become more cautious. Hedging costs rise, a dynamic that reduces the attractiveness of underlying securities and derivatives holdings, especially those held on leverage. In particular, the rising cost to hedge dollar exposures reduces the attractiveness of U.S. fixed income investment by foreign investors/speculators. Less demand for T-bills, overseas inter-bank dollar balances and dollar LIBOR contracts manifests into rising short-term rates and expanding spreads. As we've seen, bank funding costs begin to rise. On the margin, there is less impetus to embrace risk and leverage.

The big unknown is the scope of financial leverage and embedded leverage in derivatives markets that have accumulated over this long boom cycle. The dynamics of this Bubble contrast meaningfully from those of the last. The big financial institutions are not sitting on huge holdings of potentially toxic securities and mortgage-related derivatives. Myriad risks these days are more complex and concealed - and, importantly, even more esoteric.

I would argue that the Bubble in government finance has distorted pricing and liquidity throughout the securities and derivatives markets. Securities markets have succumbed to systemic mispricing, a circumstance fostered by liquidity misperceptions and readily available market risk "insurance." The previous cycle's "Moneyness of Credit" evolved into central bank-induced "Moneyness of Risk Assets." And while virtually everyone takes comfort from the apparent soundness of financial institutions, crisis lurks in the tangled world of securities and derivatives markets liquidity.

About a decade ago, runs on Bear Stearns and then Lehman fomented the '08 market crisis. I suspect the next U.S. crisis will unfold with "runs" on stocks and corporate Credit. We've already witnessed how quickly the VIX and equities derivatives markets can dislocate. I'm curious to see how interest-rate and Credit derivatives perform in a backdrop of faltering equities, illiquidity and derivatives market stress. And considering the direction of policymaking in Washington, don't be all too surprised by an unexpected bout of market tumult in Treasuries and the dollar.

Larry Kudlow's "king dollar" and "let it rip" might play well domestically, surely in the oval office. But I suspect it's not confidence inspiring to our lowly foreign creditors. We're at the stage of the cycle that would seem to beckon for caution, contemplation and prudence. How much trouble could Team Trump and Kudlow provoke? There's ample arrogance and ideology to risk plenty.

For the Week:

The S&P500 declined 1.2% (up 2.9% y-t-d), and the Dow fell 1.5% (up 0.9%). The Utilities rallied 2.5% (down 4.9%). The Banks dropped 2.7% (up 5.8%), and the Broker/Dealers declined 1.5% (up 12.0%). The Transports slipped 0.5% (up 0.7%). The S&P 400 Midcaps dipped 0.7% (up 1.8%), and the small cap Russell 2000 declined 0.7% (up 3.3%). The Nasdaq100 fell 1.1% (up 9.7%).The Semiconductors slipped 0.6% (up 13.5%). The Biotechs dropped 1.7% (up 13.5%). With bullion down $9, the HUI gold index lost 1.0% (down 11.0%).

Three-month Treasury bill rates ended the week to 1.74%. Two-year government yields added three bps to 2.29% (up 41bps y-t-d). Five-year T-note yields slipped a basis point to 2.64% (up 44bps). Ten-year Treasury yields were down five bps to 2.85% (up 44bps). Long bond yields fell eight bps to 3.08% (up 34bps).

Greek 10-year yields were little changed at 4.17% (up 10bps y-t-d). Ten-year Portuguese yields sank 11 bps to 1.76% (down 19bps). Italian 10-year yields declined three bps to 1.98% (down 3bps). Spain's 10-year yields fell six bps to 1.38% (down 19bps). German bund yields dropped eight bps to 0.57% (up 14bps). French yields fell seven bps to 0.82% (up 3bps). The French to German 10-year bond spread widened one to 25 bps. U.K. 10-year gilt yields dropped six bps to 1.43% (up 24bps). U.K.'s FTSE equities index declined 0.8% (down 6.8%).

Japan's Nikkei 225 equities index gained 1.0% (down 4.8% y-t-d). Japanese 10-year "JGB" yields declined two bps to 0.04% (down 1bp). France's CAC40 increased 0.2% (down 0.6%). The German DAX equities index gained 0.3% (down 4.1%). Spain's IBEX 35 equities index rose 0.8% (down 2.8%). Italy's FTSE MIB index added 0.5% (up 4.6%). EM markets were mixed. Brazil's Bovespa index fell 1.7% (up 11.1%), and Mexico's Bolsa dropped 2.2% (down 3.8%). South Korea's Kospi index rose 1.4% (up 1.1%). India’s Sensex equities index slipped 0.4% (down 2.6%). China’s Shanghai Exchange dropped 1.1% (down 1.1%). Turkey's Borsa Istanbul National 100 index added 0.3 (up 1.6%). Russia's MICEX equities index declined 0.7% (up 8.8%).

Investment-grade bond funds saw inflows of $2.316 billion, and junk bond funds had inflows of $11 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates declined two bps to 4.44% (up 14bps y-o-y). Fifteen-year rates fell four bps to 3.90% (up 40bps). Five-year hybrid ARM rates gained four bps to 3.67%, the high since April 2011 (up 39bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.57% (up 14bps).

Federal Reserve Credit last week gained $5.1bn to $4.359 TN. Over the past year, Fed Credit contracted $69.1bn, or 1.6%. Fed Credit inflated $1.549 TN, or 55%, over the past 280 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $11.8bn last week to $3.452 TN. "Custody holdings" were up $254bn y-o-y, or 8.0%.

M2 (narrow) "money" supply jumped $29.9bn last week to a record $13.905 TN. "Narrow money" expanded $572bn, or 4.3%, over the past year. For the week, Currency increased $2.7bn. Total Checkable Deposits surged $55.7bn, while savings Deposits dropped $25.8bn. Small Time Deposits added $1.9bn. Retail Money Funds fell 4.7bn.

Total money market fund assets sank $36.3bn to $2.820 TN. Money Funds gained $143bn y-o-y, or 5.3%.

Total Commercial Paper fell $12.6bn to $1.081 TN. CP gained $119bn y-o-y, or 12.3%.

Currency Watch:

The U.S. dollar index gained 0.2% to 90.233 (down 2.1% y-o-y). For the week on the upside, the Norwegian krone increased 0.8%, the Japanese yen 0.8%, the British pound 0.7%, the Swedish krona 0.6%, and the South Korean won 0.3%. For the week on the downside, the Canadian dollar declined 2.2%, the Australian dollar 1.7%, the South African rand 1.3%, the New Zealand dollar 0.9%, the Brazilian real 0.8%, the Mexican peso 0.4%, the euro 0.1% and the Singapore dollar 0.1%. The Chinese renminbi was little changed versus the dollar this week (up 2.71% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index was about unchanged (up 0.5% y-t-d). Spot Gold slipped 0.7% to $1,314 (up 0.9%). Silver fell 2.0% to $16.272 (down 5.1%). Crude increased 30 cents to $62.34 (up 3%). Gasoline rose 2.2% (up 8%), while Natural Gas fell 2.2% (down 9%). Copper declined 0.9% (down 5.8%). Wheat sank 4.4% (up 10%). Corn lost 2.0% (up 9%).

Trump Administration Watch:

March 13 - Bloomberg (Nick Wadhams): "President Donald Trump ousted U.S. Secretary of State Rex Tillerson on Tuesday, ending a rocky tenure in an abrupt move that stunned the former Exxon Mobil Corp. CEO and set in motion a shakeup of the administration's foreign policy team. Trump announced Tillerson's ouster in a tweet shortly before 9 a.m. after weeks of staff turmoil, saying he would nominate CIA Director Mike Pompeo as secretary of state. But it was several hours before Trump discussed his decision with Tillerson, who said he'll hand over all responsibilities to Deputy Secretary John Sullivan at midnight Tuesday."

March 13 - Politico (Adam Behsudi and Andrew Restuccia): "President Donald Trump is getting ready to crack down on China. Trump told Cabinet secretaries and top advisers during a meeting at the White House last week that he wanted to soon hit China with steep tariffs and investment restrictions in response to allegations of intellectual property theft, according to three people familiar with the internal discussions. During the meeting… U.S. Trade Representative Robert Lighthizer presented Trump with a package of tariffs that would target the equivalent of $30 billion a year in Chinese imports. In response, Trump urged Lighthizer to aim for an even bigger number - and he instructed administration officials to be ready for a formal announcement in the coming weeks…"

March 14 - Reuters (David Lawder): "The Trump administration is pressing China to cut its trade surplus with the United States by $100 billion, a White House spokeswoman said…, clarifying a tweet last week from President Donald Trump. Last Wednesday, Trump tweeted that China had been asked to develop a plan to reduce its trade imbalance with the United States by $1 billion, but the spokeswoman said Trump had meant to say $100 billion. The United States had a record $375 billion trade deficit with China in 2017…"

March 15 - Bloomberg (Justin Sink and Steve Matthews): "Larry Kudlow wasted no time in showing Wall Street and Washington that he's ready to serve as an unabashed economic warrior for President Donald Trump. Within minutes of being named as top White House economic adviser…, Kudlow was on the airwaves to push a tough stance toward China and promise a new phase of tax cuts -- hitting two of Trump's favorite talking points and making clear why he was chosen for the job. Trump confirmed the selection… on Twitter. 'Our Country will have many years of Great Economic & Financial Success, with low taxes, unparalleled innovation, fair trade and an ever expanding labor force leading the way! #MAGA,' Trump tweeted. Kudlow… has demonstrated a Trump-like willingness to ignore taboos. In a rare departure for someone about to take a senior government job, he questioned Federal Reserve monetary policy and even offered a trading recommendation: 'I would buy King Dollar and I would sell gold.'"

March 14 - Bloomberg (Sarah Ponczek): "President Donald Trump's push for import tariffs and the recent White House personnel upheaval increase the chance of a global trade war -- and traders need to stay alert, because the end result could be the reappearance of inflation, according to at least one market analyst. 'We've gone a long time with a zero percent chance of a trade war, it's now higher than that -- probably significantly higher than that,' Matt Maley, a Miller Tabak equity strategist, said… 'The internationalists have lost and the nationalists have won.'"

March 14 - Financial Times (Katrina Manson): "Mike Pompeo's appointment as America's top diplomat puts a populist hawk in charge of foreign policy at a critical point in the country's strained relations with Iran, North Korea and Russia. The former Central Intelligence Agency director has touted the benefits of regime change in Iran and North Korea, and will probably push for a much tougher posture on both than his ousted predecessor Rex Tillerson. 'Pompeo wants to further the president's agenda,' said an administration official, contrasting him with Mr Tillerson, whose few fans saw him as a bulwark for a liberal global order under attack from a nationalistic and isolationist president."

March 13 - CNBC (Chloe Aiello): "President Donald Trump killed Broadcom's proposed buyout of Qualcomm, citing national security concerns, according to a statement issued by the White House… 'There is credible evidence that leads me to believe that Broadcom Limited, a limited company organized under the laws of Singapore (Broadcom)...through exercising control of Qualcomm Incorporated (Qualcomm), a Delaware corporation, might take action that threatens to impair the national security of the United States,' the statement said. Both companies were ordered to immediately abandon the proposed deal. The order, an unusual move by any sitting U.S. president, also prohibits all 15 of Broadcom's proposed candidates for Qualcomm's board from standing for election."

U.S. Bubble Watch:

March 13 - Wall Street Journal (Justin Baer and Ryan Tracy): "A major investment bank careens toward bankruptcy. It has $400 billion in assets, 85 years of history and deep ties to every major bank on Wall Street. As word of its troubles spreads, a run begins, sending its stock plummeting. Ten years ago Wednesday, that was Bear Stearns Cos., a once-storied firm whose excessive leverage had helped put it on the brink. The Federal Reserve tried to limit the damage with extraordinary actions, first extending the firm credit before forcing it into a hasty weekend shotgun marriage to JPMorgan…, with $29 billion in assistance. It was the first time the Fed had intervened with a noncommercial bank since the Great Depression. 'Industry participants didn't want to see Bear Stearns go down, and they didn't want to see others go down,' says Alan Schwartz, then Bear's chief executive."

March 12 - Bloomberg (Sarah McGregor): "The U.S. recorded a $215 billion budget deficit in February -- its biggest in six years -- as revenue declined. Fiscal income dropped to $156 billion, down 9% from a year earlier, while spending rose 2% to $371 billion… The deficit for the fiscal year that began in October widened to $391 billion, compared with a $351 billion shortfall the same period a year earlier… The data underscore concerns by some economists that Republican tax cuts enacted this year could increase the U.S. government debt load, which has surpassed $20 trillion. The tax changes are expected to reduce federal revenue by more than $1 trillion over the next decade, while a $300 billion spending deal reached by Congress in February could push the deficit higher."

March 12 - Reuters (Jonathan Spicer): "U.S. inflation expectations edged higher last month, with one measure hitting its highest level in a year, according to a Federal Reserve Bank of New York survey published Monday that adds to signs of price pressures. The survey of consumer expectations, which the Fed considers among other data as it continues to gradually raise interest rates, showed median one-year ahead inflation expectations rose to 2.83% from 2.71% in January, the highest reading since February 2017."

March 13 - Bloomberg (Katia Dmitrieva): "U.S. consumer prices continued to firm in February, indicating inflation is creeping up toward the Federal Reserve's target without the kind of breakout that would warrant a faster pace of interest-rate hikes. Both the main consumer price index and the core gauge, which excludes food and energy, rose 0.2% from January, matching the median estimates… The CPI was up 2.2% in the 12 months through February, compared with 2.1% in January, while the core index increased 1.8% from a year earlier for a third month."

March 14 - Reuters (Lucia Mutikani): "U.S. producer prices increased slightly more than expected in February as a rise in the cost of services offset a decline in the price of goods. The Labor Department said… its producer price index for final demand rose 0.2% last month after increasing 0.4% in January. That lifted the year-on-year increase in the PPI to 2.8% in February from 2.7% in January."

March 15 - Bloomberg (Prashant Gopal): "Home prices in the U.S. surged 8.8% in February -- the biggest gain in four years -- as buyers battled for an increasingly scarce resource: homes. While sales were little changed amid the thin inventory, the median price across 172 large metropolitan areas jumped to $285,700, according to… brokerage Redfin Corp. It was the 72nd straight month of year-over-year increases since the market bottomed in 2012. U.S. home prices are now 6.3% higher than their peak in July 2006 and 46% above their trough in February 2012, according to the S&P CoreLogic Case-Shiller national home-price index."

March 13 - CNBC (Matthew J. Belvedere): "Not enough for-sale signs in front yards are driving residential home prices higher, the chief economist at the Mortgage Bankers Association said… Compounding the problem is that Americans' wage growth is being left far behind, according to the MBA's Mike Fratantoni. 'We're still seeing home prices increase at twice the rate of income growth,' he told CNBC… 'The major constraint in the market right now is the lack of supply,' Fratantoni said. 'The absolute number of units on the market is near an all-time record low.' Fratantoni said homebuilders are trying to increase their pace of construction but 'not fast enough.'"

March 14 - CNBC (Diana Olick): "Higher interest rates caused applications to refinance a home loan to fall 2% for the week and 18% from a year ago, when rates were lower. The refinance share of all mortgage applications fell to 40%, the lowest since 2008. Mortgage applications to purchase a home did manage to eke out a slight gain, up 3% for the week and also up 3% from a year ago."

March 15 - Reuters: "U.S. import prices rose more than expected in February as the largest increase in the cost of capital goods since 2008 offset a drop in petroleum prices, bolstering views that inflation will pick up this year. …Import prices increased 0.4% last month after a downwardly revised 0.8% surge in January. Economists… had forecast import prices climbing 0.2% in February… In the 12 months through February, import prices increased 3.5% after rising 3.4% in the 12 months through January."

March 13 - Bloomberg (Scott Lanman and Christopher Condon): "Optimism among chief executive officers of large U.S. companies has reached a record high, a Business Roundtable survey showed… Index advanced to 118.6, highest since the survey began in 2002, from 96.8 in the fourth quarter… Gauge of capital spending plans in the next six months rose to 115.4 from 92.7; sales outlook jumped to 141.9 from 122. Measure of hiring expectations increased to 98.5 from 75.7."

March 14 - Bloomberg (Adam Tempkin): "More Americans are falling behind on their car payments and that's making it more expensive for subprime auto lenders to sell bundled loans. On average, AAA bond investors last year demanded insulation from the first 51% of losses on subprime-auto asset-backed securities, up more than seven percentage points from 2016, according to Wells Fargo NA. Prime lenders needed to offer enhancements on just 6%, Fitch Ratings said. The demands come as investors have grown weary of a market that's worsening at the same time that the extra interest offered over safer debt has started to shrink to levels last seen before the financial crisis. Delinquencies have steadily increased over the last five years, according to S&P Global Ratings, with losses rising to 8.32% for subprime-auto bonds in 2017 from 8.13% in 2016."

March 12 - CNBC (Jeff Cox): "Companies have been feverishly putting the savings they reaped from the tax breaks passed in December into their investors' pockets this year. Share buybacks in 2018 have averaged $4.8 billion a day, double the pace for the same period last year, according to… TrimTabs. That comes following Congress's move to slash the corporate tax rate from the highest-in-the-world 35% to 21%. The buyback announcements also have happened amid a volatile backdrop for the stock market… The share repurchases have helped keep the market afloat, as investors have pulled $23.5 billion out of funds that focus on U.S. stocks this year, according to Bank of America Merrill Lynch."

March 15 - Reuters (Pete Schroeder): "The U.S. Senate voted 67 to 31… to ease bank rules, bringing Congress a step closer to passing the first rewrite of the Dodd-Frank reform law enacted after the 2007-2009 global financial crisis. The draft legislation now heads to the U.S. House of Representatives where Republicans in the majority say they want to add more provisions to ease financial regulations. Those changes have some of the bill's backers worried that late alterations could upend the deal struck in the Senate between Republicans and Democrats."

March 13 - Bloomberg (Carolina Wilson): "A whopping 44% of all flows into U.S.-listed ETFs this year has gone to four low-cost funds from BlackRock Inc. At the top is the iShares Core MSCI EAFE ETF, known by its ticker IEFA, which has taken in $13.7 billion… Not far behind is the iShares Core S&P 500 ETF, or IVV, which has swelled by $12.2 billion. The iShares Core MSCI Emerging Markets ETF (IEMG) and the iShares Core U.S. Aggregate Bond ETF (AGG) also make the cut, taking in $5.1 billion and $2.4 billion respectively, the data show."

March 15 - Bloomberg (Emma Orr and Tiffany Kary): "IHeartMedia Inc., the biggest U.S. radio-station owner, filed for bankruptcy with a plan to halve its debt load of more than $20 billion, the legacy of a leveraged buyout that hobbled the company as the digital era spawned new rivals. IHeart, with about 850 radio stations and 17,000 employees worldwide, filed for Chapter 11 protection…, a move that allows iHeart to keep operating while it tries to cement its turnaround plan."

China Watch:

March 13 - Wall Street Journal (Tom Hancock and Lucy Hornby): "China has unveiled a sweeping revamp of its government bureaucracies, breaking up traditional power structures as President Xi Jinping attempts to fuse the ruling Communist party into the day-to-day operations of the state. The changes are aimed at streamlining the civil government and closing regulatory gaps that have frustrated Beijing's attempts to implement central policy. However, they will also allow closer alignment between the party and the civil bureaucracies, giving the CCP a greater role in day-to-day governance. Among the biggest changes is the creation of a National Supervision Commission that subjects a wider-range of government staff, such as hospital managers and university staff, to the party's internal disciplinary apparatus, reversing a division of labour that has been in place for decades."

March 12 - Bloomberg: "China unveiled a 'revolutionary' government restructuring plan that consolidates Communist Party authority, giving President Xi Jinping more direct control over the levers of money and power. The plan put before China's rubber-stamp parliament… calls for giving the People's Bank of China greater oversight in the $43 trillion banking and insurance industry and merging regulators that oversee the sector. The plan's goal was 'strengthening the Communist Party's overall leadership' of the state, the document said."

March 12 - Bloomberg: "China is giving its central bank the power to write the rules for the financial sector, as part of a sweeping overhaul aimed at closing regulatory loopholes and curbing risk in the $43 trillion banking and insurance industries. The China Banking Regulatory Commission and the China Insurance Regulatory Commission will be merged in the biggest industry overhaul since 2003. Some of their functions, including drafting key regulations and prudential oversight, will move to the People's Bank of China… A new regulatory structure with the PBOC as the pivot is emerging as the annual legislative meetings progress through their second week. Still to come are personnel appointments…"

March 12 - Bloomberg (Enda Curran): "When Zhou Xiaochuan hands over the reins of the People's Bank of China after 15 years in control, his successor will take charge of a central bank with unprecedented global influence. The economy's size has ballooned from $1.5 trillion in 2002 when he started… to about $12 trillion today. China is estimated to have contributed more than a third of global growth last year… The nation surpassed the U.S. as the world's biggest oil importer last year, buying about 8.43 million barrels a day. It's also the world's biggest trading nation with total trade of $3.82 trillion in 2016, ahead of $3.58 trillion for the U.S. Other central banks are scrambling to deepen links and decipher PBOC policies. Reserve managers including the Bundesbank are buying yuan, Thailand has joined countries extending a currency swap arrangement while the Bank of Indonesia is opening a representative office in Beijing this year -- the ninth central bank to establish an office in China."

March 12 - Financial Times (Gideon Rachman): "The foundations of America's relationship with China crumbled last week. The key developments were a lurch by the US towards protectionism and a swing by China towards one-man rule. For the past 40 years, the world's two largest economies have both embraced globalisation, based on understandings about how the other would behave. The Chinese assumed that the US would continue to support free trade. The Americans believed that economic liberalisation in China would eventually lead to political liberalisation. Both of these assumptions are now shattered. On Sunday, China's National People's Congress rubber-stamped a constitutional change that would allow President Xi Jinping to rule for life. Three days earlier, President Donald Trump announced tariffs on steel and aluminium and tweeted that 'trade wars are good and easy to win'."

March 15 - Financial Times (Gabriel Wildau and Jane Pong): "China is not immune to the charms of symbolic gestures when they serve a diplomatic purpose. From 2005 to 2014, when US criticism of China for undervaluing its currency was a big bilateral issue, Beijing frequently pushed the renminbi higher in advance of international summits and state visits, only to revert once international attention had faded. But this time - faced with demands by President Donald Trump to cut the bilateral trade deficit by $100bn - Beijing has few easy options. 'If you look at China's overall trade or current account surplus, we can't really call that a mercantilist or excess-saving economy,' says Louis Kuijs, head of Asia economics at Oxford Economics... 'China now runs trade deficits with many countries, but it happens to run big surpluses with US, Europe and India - three regions where there is now increasing momentum towards protectionism.'"

March 11 - Reuters (Elias Glenn): "Any trade war with the United States will only bring disaster to the world economy, Chinese Commerce Minister Zhong Shan said…, as Beijing stepped up its criticism on proposed metals tariffs by Washington amid fears it could shatter global growth."

March 13 - Bloomberg (Blake Schmidt, Pei Yi Mak and Venus Feng): "HNA Group Co., the poster child for runaway corporate debt in China, is increasingly drawing attention to another of the nation's financial ills: trading halts that leave stock investors trapped for weeks on end. Seven listed units of HNA have halted their shares for seven weeks or more, creating the largest swathe of frozen stock tied to a single business group in China. The suspensions, which affect $31 billion of equity, have prevented minority shareholders from selling at a time of mounting financial stress for the aviation-to-hotels conglomerate."

March 11 - Associated Press: "The day China's ruling Communist Party unveiled a proposal to allow President Xi Jinping to rule indefinitely as Mao Zedong did a generation ago, Ma Bo was so shaken he couldn't sleep. So Ma, a renowned writer, wrote a social media post urging the party to remember the history of unchecked one-man rule that ended in catastrophe. 'History is regressing badly,' Ma thundered in his post. 'As a Chinese of conscience, I cannot stay silent!' Censors silenced him anyway, swiftly wiping his post from the internet. As China's rubber-stamp legislature prepares to approve constitutional changes abolishing term limits for the president…, signs of dissent and biting satire have been all but snuffed out."

Central Bank Watch:

March 13 - Bloomberg (Birgit Jennen, Alessandro Speciale, and Chris Reiter): "By all rights, it's Germany's turn for one of the biggest political plums in Europe: the chance to name the next president of the European Central Bank. Chancellor Angela Merkel may be prepared to trade that for other items on her agenda. Merkel's political partners say they're potentially willing to concede Germany's chit. The tradeoff: more influence on French President Emmanuel Macron's push to create closer ties among euro countries. The party leaders asked not to be identified because Merkel hasn't announced her plans publicly. The man who could be left out of the equation is Bundesbank chief Jens Weidmann, a leading contender to become the fourth head of the ECB."

March 14 - Financial Times (Claire Jones): "Mario Draghi has set out his intent for how the European Central Bank will raise interest rates, advocating a moderate series of rises after the bank ends its extraordinary stimulus measures. A commitment to slow and cautious rises could set the path of ECB policy beyond the end of Mr Draghi's term of office next year and make it more difficult for his successor to deviate from his dovish monetary policy. Mr Draghi reiterated… that the central bank would not raise rates until 'well past' the end of its bond-buying programme, known as quantitative easing, which is expected by the latter stages of this year."

March 14 - Bloomberg (Piotr Skolimowski): "Mario Draghi said the European Central Bank will avoid surprising investors with sudden changes to its stimulus plans, stressing that inflation is still too low and U.S. trade policies and a stronger euro are concerns. 'Adjustments to our policy will remain predictable, and they will proceed at a measured pace,' the institution's president said in his opening speech at the annual ECB and Its Watchers conference… 'We still need to see further evidence that inflation dynamics are moving in the right direction. So monetary policy will remain patient, persistent and prudent.'"

March 13 - Reuters (Leika Kihara): "Bank of Japan Governor Haruhiko Kuroda… voiced confidence the central bank could engineer a smooth exit from its ultra-loose monetary policy, but said it was too early to debate specifics with inflation still distant from its target. 'By combining various tools, it's possible to shrink the BOJ's balance sheet at an appropriate pace while keeping markets stable,' Kuroda told parliament…"

March 11 - Reuters (Marc Jones): "The recent volatility in global financial markets should not deter top central banks from lifting interest rates or ending years of unprecedented stimulus, the Bank for International Settlements said… The latest report from the… group said that after such a long period of calm there were bound to be more market wobbles and that trade war worries were making the 'delicate task' of trying to normalize policy more complicated. Nevertheless, the move toward higher interest rates, which started in the United States and is gradually gaining traction elsewhere, should continue. 'Treading the path (of policy normalization) will call for a great deal of skill, judgment and, yes, also a measure of good fortune,' said Claudio Borio, the head of the BIS' monetary and economic department."

Global Bubble Watch:

March 11 - Reuters (Claire Milhench): "Chinese banks have significantly stepped up their lending activities in recent years to rank now as the sixth-largest international creditor group, the Bank for International Settlements (BIS) said… The BIS, an umbrella body for global central banks, said in its latest report that Chinese banks had cross-border financial assets worth about $2 trillion as of the third quarter of 2017. As Chinese banks lend abroad largely in U.S. dollars, in absolute terms this makes them the third-largest provider of U.S. dollars to the international banking system… 'Their global footprint encompasses not just emerging market economies, but also advanced economies and offshore centers worldwide,' the BIS said."

March 11 - Bloomberg (John Glover): "China, Canada and Hong Kong are among the economies most at risk of a banking crisis, according to early-warning indicators compiled by the Bank for International Settlements. Canada -- whose economy grew last year at the fastest pace since 2011 -- was flagged thanks to its households' maxed-out credit cards and high debt levels in the wider economy. Household borrowing is also seen as a risk factor for China and Hong Kong… 'The indicators currently point to the build-up of risks in several economies,' analysts Inaki Aldasoro, Claudio Borio and Mathias Drehmann wrote in the BIS's latest Quarterly Review…"

March 12 - Bloomberg (Narae Kim, Lianting Tu, and Carrie Hong): "After complaints of 'drive-by' deals, weaker covenants and abbreviated roadshows in Asia's booming dollar-bond market, some participants are starting to see scope for demanding bigger premiums from weaker borrowers. The landscape may be changing, with a jump in volatility and benchmark 10-year Treasury yields climbing toward 3%. At least two issuers delayed deals last week as scrutiny rises. 'That's investors being selective,' said Ashley Perrott, head of pan-Asia fixed income at UBS Asset Management… 'Rising tides lifted all boats' during the record issuance last year, he said. 'Those days are kind of finished for now.'"

March 12 - Bloomberg (David Goodman and Sharon R Smyth): "London house prices are falling at the fastest pace since the depths of the recession almost a decade ago, with the capital's most expensive areas seeing the biggest declines. Average prices fell to 593,396 pounds ($820,000) in January, an annual decline of 2.6%... That's the most since August 2009."

Fixed-Income Bubble Watch:

March 15 - Bloomberg (Edward Bolingbroke): "For traders focused on the short end of the U.S. rates market, next week's Federal Reserve policy meeting is turning into a sideshow amid a relentless march higher in the London interbank offered rate and other money-market benchmarks. With a quarter-point Fed hike largely priced in by the overnight index swaps market, all eyes are now on the surging dollar Libor rate and its spread over the OIS rate. A spread known as FRA/OIS, which measures market expectations for the Libor/OIS gap, this week breached 50 bps for the first time since January 2012 and extended through 52 bps Thursday. The increase, partly a result of climbing T-bill issuance, is distorting the market for eurodollar futures, which are used to speculate about Fed policy and which settle based on Libor. Three-month dollar Libor jumped 3.25 bps Thursday to 2.17750 percent, the highest since 2008, prompting a flurry of sales in March and June eurodollar contracts."

March 13 - Bloomberg (Liz McCormick and Sid Verma): "While many fixed-income investors may be focused on the specter of higher long-term Treasury yields, there's a sea change afoot at the shorter end -- in U.S. money markets. The London interbank offered rate, or Libor, and rates on Treasury bills are around levels not seen since 2008. The Federal Reserve's move to tighten policy forms the backdrop for the increase, but an added force behind the surge this year has come from a deluge of supply as U.S. deficits widen. Higher short-term borrowing costs have implications for investors and also for banks, which find themselves paying up to borrow through the commercial-paper market as they compete to lure cash. 'We are in a new paradigm,' said Jerome Schneider, head of the short-term and funding desk at Pacific Investment Management Co. 'The clear focus for the market is where will incremental demand come from to meet this supply.'"

March 12 - Wall Street Journal (James Mackintosh): "It's easy to lend money. The trick to successful finance is getting it back-and lenders, egged on by politicians, are once again forgetting how hard it can be to recover debts in a downturn… The excesses are becoming visible. Leveraged lending hit a new high of $1.6 trillion last year, spreads over the interbank lending rate neared postcrisis lows and lenders showed an unprecedented willingness to waive the usual protections. Just as in the high-yield bond market, covenants designed to prevent the most egregious behavior of borrowers were scrapped and investors took more on faith: Half of U.S. leveraged loans and 60% of Europe's are 'covenant-lite'…'This is a market with a ton of cash chasing too few deals,' says one major underwriter. 'It feels awfully frothy, going back to the days of 2006, 2007.'"

March 12 - Reuters (Max Bower): "Senior participants are warning that today's market could be as good as it gets, despite a robust global economic backdrop and buoyant mood in the private equity and leveraged loan markets. Comparisons to 2007's pre-crisis conditions are becoming more common and industry figures are debating whether today's robust conditions constitute a bubble, as purchase prices rise, jumbo buyouts proliferate and deal terms become more aggressive. 'I think we're now in bubble territory,' said Frode Strand-Nielsen, founder of Nordic private equity firm FSN Capital. Leveraged buyout purchase price multiples hit a record high of 11.2 times average Ebitda in 2017 and average buyout sizes also hit a new record of US$675m in the third quarter of 2017, up from 10 times in 2016, according to… Bain & Co."

Europe Watch:

March 14 - Reuters (Gavin Jones and Claudia Cristoferi): "The leader of Italy's eurosceptic League said on… a government deal with the anti-system 5-Star Movement was possible after an inconclusive election, raising the prospect of two radical groups running the country. The March 4 vote ended in gridlock, with 5-Star and the League emerging as the top two parties in parliament, but no bloc or group securing a majority to govern alone."

Japan Watch:

March 12 - Bloomberg (Andy Sharp): "Japan's government said… that the names of Prime Minister Shinzo Abe, his wife and his finance minister were deleted from documents at the heart of a land scandal that erupted last year, a revelation that threatens to derail his administration and its economic strategy. Finance Minister Taro Aso apologized and said an internal investigation was ongoing as opposition lawmakers called for him to resign. He admitted that staff in his department tampered with the documents, but said all the blame rests with one of his subordinates who resigned last week. Abe also sought to limit the damage. 'We'll continue the investigation to get to the bottom of why this happened -- I want Finance Minister Aso to take responsibility for that,' Abe told reporters… 'This situation has shaken public trust in the whole administration, and as its head, I feel responsibility and deeply apologize to the people.'"

Leveraged Speculator Watch:

March 13 - Bloomberg (Sridhar Natarajan and Nabila Ahmed): "A group of powerful hedge funds is banding together to repair the credit-default swaps market after a spate of manufactured defaults has threatened the usefulness of the product. Elliott Capital Management and Apollo Global Management are among firms working on closing loopholes that have allowed investors to profit from engineering defaults on a company's debt… Companies' failures to make payments on their borrowings can trigger CDS payouts. Investors have previously complained that these maneuvers spur defaults from companies that are still very much alive, when credit derivatives were meant to protect money managers against the borrowers' demise. Those complaints are translating to action now after a controversial trade late last year from Blackstone Group's GSO Capital, where it loaned money to Hovnanian Enterprises Inc. and planned to induce a default on a portion of that company's debt."

March 12 - Bloomberg (Dani Burger): "Chalk one up for the humans. Hedge funds that use artificial intelligence and machine learning in their trading process posted the worst month on record in February, according to a Eurekahedge index that's tracked the industry from 2011. The first equity correction in two years upended their strategies as once-reliable cross-asset correlations shifted. While computerized programs are feared for their potential to render human traders obsolete, the AI quants lagged behind their discretionary counterparts. The AI index fell 7.3% last month, compared to a 2.4% decline for the broader Hedge Fund Research index."

Geopolitical Watch:

March 14 - Financial Times (Claire Jones): "Russia considers the British government to be engaging in 'very serious provocation' in its response to the poisoning of a former double agent earlier this month, the Russian ambassador to the UK has told Sky News. Describing the UK response to the nerve gas attack in Salisbury as 'absolutely unacceptable', the ambassador said: 'I had a meeting in the Foreign Office. Everything that is done today by the British government is absolutely unacceptable and we consider this a provocation. The UK should follow international law.'"

March 13 - Reuters (Andrew Osborn): "Russia said on Tuesday it had information that the United States planned to bomb the government quarter in Damascus on an invented pretext, and said it would respond militarily if it felt Russian lives were threatened by such an attack. Valery Gerasimov, head of Russia's General Staff, said Moscow had information that rebels in the enclave of eastern Ghouta were planning to fake a chemical weapons attack against civilians and blame it on the Syrian army."

Thursday, March 15, 2018

Thursday Afternoon Links

[Bloomberg] Stocks Mixed Before Next Week's Fed Rate Report: Markets Wrap

[The Hill] Mueller subpoenas Trump Organization: report

[Bloomberg] ‘King Dollar’ Kudlow Is Fighting a Tide of Bearish Greenback Wagers

[Bloomberg] China's Holdings of U.S. Treasuries Drop to Six-Month Low

[Bloomberg] Risk Parity Is the Weak Hand in Markets ‘Tethered’ to Volatility

[CNBC] Get ready to hear a lot more from Fed Chairman Jerome Powell than his predecessors

[CNBC] Homeowners gained an average of $15,000 in home equity last year – or $908 billion in total

[Bloomberg] JPMorgan Moves Closer to Urging a Rotation Away From Equities

[BBC] Saudi Arabia pledges to create a nuclear bomb if Iran does

Thursday's News Links

[Bloomberg] Stocks Rise, Bonds Steady on Factory, Jobs Data: Markets Wrap

[Bloomberg] U.S. Home Prices Rise Almost 9%, the Biggest Gain in Four Years

[Bloomberg] U.S. Homebuilder Outlook Eases While Hovering Near 18-Year High

[Reuters] U.S. job market tightening, inflation steadily rising

[CNBC] Import prices rise more than expected in February

[CNBC] China is ready for a trade war with the US — and it could hurt Americans

[Reuters] Senate approves bill rewriting post-crisis bank rules

[Bloomberg] Kudlow Plunges Into New Role as Trump’s Economic Warrior

[Bloomberg] Fed Takes a Back Seat for Traders Focused on Libor's Big Blowout

[CNBC] Over $60 billion wiped off value of cryptocurrencies in 24 hours as bitcoin slide continues

[Bloomberg] What Central Bankers Are Saying About Trump's Trade War Threat

[Bloomberg] These Huge Fund Outflows Show Growing Distaste for U.S. Dollar

[Bloomberg] IHeart Files for Bankruptcy With Last-Minute Creditor Deal

[Bloomberg] Japan’s Aso to Skip G-20 Amid Calls for His Resignation

[Bloomberg] Abe’s Bad Month Gets Worse as Allies Press Him Over Scandal

[Bloomberg] U.S., Germany, France Demand Russia Explain Attack in U.K.

[BBC] Russian spy: Moscow vows swift response on expulsions

[NYT] Hard-Charging Chinese Energy Tycoon Falls From Xi Government’s Graces

[WSJ] Trump Takes Aim at Next Tariff Target: China

[WSJ] Nobody’s Trading 10-Year Japanese Government Bonds

[FT] More countries are learning from Russia’s cyber tactics

[FT] China faces uphill climb to meet Trump’s $100bn trade demand

[FT] How Jamie Dimon came to rue his Bear Stearns deal

Wednesday, March 14, 2018

Wednesday Evening Links

[Bloomberg] Asian Stocks Face Weak Start as Caution Sets In: Markets Wrap

[Bloomberg] Stocks Slump as Traders Await Next Week's Fed Move: Markets Wrap

[Reuters] U.S. pressing China to cut trade surplus by $100 billion: White House

[CNBC] Larry Kudlow, new chief economic advisor to Trump, says China 'has earned a tough response'

[Bloomberg] Key Departures at the White House Raise the Risk of a Trade War

[Bloomberg] Trump Plans to Name Kudlow Top Economic Adviser, CNBC Reports

[CNBC] All that optimism for hot first-quarter economic growth is rapidly fading away

[Bloomberg] The Dollar Is the ‘Big Loser’ in Trump’s Political Turmoil

[Bloomberg] Toys ‘R’ Us Will Proceed With Shutdown of U.S. Operations

[Bloomberg] Fitch Sees Central Banks Gaining Confidence to Tighten Policy

[Reuters] Italy's League leader opens door to government deal with 5-Star

[FT] Regime change leaves hawks ascendant in US foreign policy

[FT] US blames Russia for Skripal attack, in ‘absolute solidarity’ with UK

Wednesday's News Links

[Bloomberg] Stocks Turn Lower, Dollar Steady on Retail Report: Markets Wrap

[Reuters] Rising services costs lift U.S. producer prices in February

[Bloomberg] U.S. Retail Sales Unexpectedly Fall for Third Straight Month

[CNBC] Mortgage refinances fall to decade low

[Bloomberg] Subprime Auto Bonds Caught in Vise of Rising Costs, Bad Loans

[Bloomberg] China’s Factory Output, Investment Rise on Robust Global Demand

[Bloomberg] China Economy's Strong Start Faces Risks at Home and Abroad

[Bloomberg] Draghi Promises to Avoid Surprises as ECB Tiptoes to QE End

[Bloomberg] Why Merkel May Give Up Germany's Shot to Lead the ECB

[Reuters] BOJ Kuroda signals confidence on smooth exit from easy policy

[Bloomberg] Tension Is Running High in U.S. Stocks

[Reuters] British PM May says Russia is culpable for spy poisoning

[Reuters] Turkey's Erdogan says hopes Syria's Afrin town to be captured by Wednesday evening

[FT] Draghi advocates measured pace of ECB interest rate rises

[FT] Russian ambassador says UK engaging in ‘very serious provocation’

Tuesday, March 13, 2018

Tuesday Evening Links

[Bloomberg] Asia Stocks Set to Drop as Trump Shuffles Cabinet: Markets Wrap

[Bloomberg] Stocks Decline as Trump Cabinet Turmoil Deepens: Markets Wrap

[Reuters] Trump seeking tariffs on up to $60 billion Chinese goods; targets tech, telecoms

[CNBC] Trump considers indefinite tariffs, investment restrictions against China: Source

[Politico] Trump demands aides pump up anti-China tariffs

[Bloomberg] U.S. CEO Optimism Hits Record as Tax Cuts Boost Spending Plans

[Bloomberg] Higher U.S. Rates Now Threaten a Post-Crisis Refuge for Yield

[Bloomberg] BlackRock's Lowest-Cost ETFs Devour Almost Half of U.S. Flows

[Reuters] U.S. junk bonds exhibit stress, investors want stronger terms

[Bloomberg] Hedge Funds Seek Fixes to Credit Default Swaps After Being Stung by Loopholes

[Bloomberg] A $31 Billion Trading Halt Has Left HNA Investors Trapped

[Reuters] Russia says U.S. plans to strike Damascus, pledges military response

[WSJ] Ten Years After the Bear Stearns Bailout, Nobody Thinks It Would Happen Again

[WSJ] Pompeo Nomination for Secretary of State Signals Shift on Foreign Policy

Tuesday's News Links

[Bloomberg] Stocks Pare Gains After Tame Inflation Report: Markets Wrap

[Bloomberg] U.S. Inflation Picked Up in February Without Any Big Acceleration

[Bloomberg] Trump Fires Tillerson, Names CIA’s Pompeo as Secretary of State

[Reuters] Conservative commentator Kudlow a contender to replace Cohn: source

[Bloomberg] Sea Change Is Underway in Money Markets for Banks, Investors

[CNBC] Real estate economist: Home prices are increasing twice as fast as income growth

[CNBC] It’s the 9th inning of the bull market — and there’s no chance of extra innings, David Rosenberg warns

[Bloomberg] Why Investors Can't Afford to Ignore China's Central Bank

[Bloomberg] Bond Buyers Start Separating Weak, Strong Asia Dollar Debt

[Bloomberg] China Creates Super Regulator for $43 Trillion Finance Industry

[Bloomberg] China Unveils 'Revolutionary' Plan to Give Communist Party Even More Power

[Bloomberg] Central Banks Are Looking for New Ways to Meet Inflation Targets

[CNBC] Russian military threatens action against the US in Syria

[WSJ] Time to Fret About the Bet on Debt

[WSJ] Don’t Mistake Market Calm for Being Out of the Woods

[FT] China revamps bureaucracies as Xi tightens grip

Monday, March 12, 2018

Monday Evening Links

[Bloomberg] Mixed Start Greets Asia Traders Ahead of Key Data: Markets Wrap

[Bloomberg] Stocks Close Lower Before Inflation, Retail Data: Markets Wrap

[CNBC] Trump blocks Broadcom-Qualcomm deal, citing national security concerns

[Bloomberg] U.S. Posts Biggest Budget Deficit Since 2012

[Reuters] U.S. inflation expectations rise: New York Fed survey

[CNBC] Companies are putting tax savings in the pockets of shareholders

[Bloomberg] Bond Market’s Most Feared Traders Threaten Treasuries Once Again

Monday's News Link

[Bloomberg] Stocks Climb on Upbeat Outlook; Dollar Declines: Markets Wrap

[Bloomberg] Trump's Trade War and the $470 Billion Hit to the Global Economy

[Bloomberg] Bond Traders Haven't Been So Leery of U.S. Auctions Since the Crisis

[CNBC] On 10th anniversary of Bear Stearns' near collapse, Senate pushes to rewrite financial regulation

[Bloomberg] Emerging-Market Investors Face a Week of Tumult as Trade War Looms

[Bloomberg] Investors Brace for Inflation to Come Roaring Back

[Bloomberg] Hedge Funds That Use AI Just Had Their Worst Month Ever

[Reuters] Private equity firms brace for downturn

[Bloomberg] London House Prices Are Dropping at the Fastest Pace Since 2009

[Bloomberg] Abe’s Government Under Fire as Japan Scandal Grips Inner Circle

[Bloomberg] The Communist Party's Influence Is Expanding — in China and Beyond

[WSJ] Investors, Worried About End of Goldilocks Market, Pare Back Riskier Bets

[WSJ] U.S. Trading Partners Seek Guidance on How to Avoid Tariffs

[FT] America v China: How trade wars become real wars

Saturday, March 10, 2018

Saturday's News Links

[Bloomberg] No Deal for EU Seeking Exemptions From Trump’s Steel, Aluminum Tariffs

[Reuters] EU, Japan start push for exemptions from Trump tariffs

[Reuters] How Trump’s tariffs morphed from 'no exemptions' to carve-outs galore

[Bloomberg] Gundlach Says Volatility ‘Genie’ May Not Be Back in Its Bottle

[AP] Critics silenced ahead of China’s move to end Xi term limits

[WSJ] Inside Trump’s Trade War: How Tariff Backers Beat Free Traders

[WSJ] Why Bond Investors Aren’t Worried About Corporate America’s Rising Debt Load

[FT] Markets aren’t braced for four rate rise narrative

Weekly Commentary: Q4 2017 Z.1 Flow of Funds

So much uncertainty in the world these days. Some things, however, we know with certitude: U.S. Debt, the value of the securities markets and Household Net Worth do grow to the sky. The Fed’s latest Z.1 report documents another quarter of inflating Credit, markets and perceived wealth – three additional months of history’s greatest Bubble.

Total (non-financial and financial) U.S. System borrowings jumped a nominal $495 billion during the quarter and $2.630 TN in 2017 to a record $68.591 TN. Total Non-Financial Debt (NFD) expanded at a seasonally-adjusted and annualized rate (SAAR) of $1.407 TN during 2017’s fourth quarter to a record $49.050 TN (’17 growth of $1.793 TN). Credit growth slowed from Q3’s SAAR $3.007 TN and Q2’s SAAR $1.921 TN, while it was closely in line with Q4 2016’s SAAR $1.435 TN. NFD as a percentage of GDP ended 2017 at 249%. This compares to 230% to end 2007 and 179% in 1999.

By major category for the quarter, Household Debt expanded SAAR $790 billion, a notable acceleration from Q3’s $516 billion and Q2’s $573 billion. For perspective, one must go back to 2007’s $946 billion to see annual growth exceeding Q4’s pace of Household borrowings. For 2017, total Household Borrowings expanded $604 billion, up from 2016’s $510 billion, ‘15’s $403 billion, ‘14’s $402 billion, ‘13’s $241 billion, and ‘12’s $266 billion. Household Borrowings contracted $51 billion in ’11 and $61 billion in ’10.

And while Household Mortgage borrowings increased to SAAR $302 billion (from Q3’s $282bn), the surge in Household Borrowings was led by a record SAAR $292 billion jump in (non-mortgage) Consumer Credit. Consumer Credit rose SAAR $134 billion in Q3 and SAAR $229 billion in Q4 2016. It’s worth noting that Consumer Credit growth posted its previous cycle peak at $181 billion in Q3 2007.

Total Corporate Credit growth slowed markedly during Q4 to SAAR $520 billion, down from Q3’s SAAR $840 billion, Q2’s $808 billion and Q1’s $815 billion – but was ahead of Q4 ‘16’s $314 billion. Total Corporate Borrowings expanded $746 billion in 2017, up from ‘16’s $710 billion but below ‘15’s $819 billion.

Federal government borrowings slowed sharply during the fourth quarter, with massive debt issuance pushed into Q1 ’18. For calendar year 2017, federal borrowings dropped to $447 billion from ‘16’s $843 billion. 2018 federal borrowings will be enormous.

On a percentage basis, Non-Financial Debt growth slowed to 3.8% in 2017, down from ‘16’s 4.6%. But this slowdown was chiefly related to a halving of the growth in federal borrowings to 2.8% from 5.6%. Household Debt expanded at a 4.1% pace, up from ‘16’s 3.6% to the strongest growth since 2007’s 7.1%.

The Domestic Financial Sector expanded nominal $1.832 TN during the quarter to a record $97.041 TN. During the quarter, Agency/GSE securities gained SAAR $302 billion, Corporate & Foreign Bonds SAAR $517 billion, Fed Funds & Repo SAAR $486 billion and Loans SAAR $898 billion.

Bank (Private Depository Institutions) Assets increased nominal $204 billion, or 4.4% annualized, during Q4 to a record $18.925 TN. Bank Loans jumped nominal $167 billion, or 6.3% annualized, to $10.776 TN. Bank Assets were up $852 billion in 2017 (4.5%), an increase from 2016’s $712 billion (3.9%).

From a more conventional perspective, growth in U.S. “money” and Credit doesn’t appear all that remarkable. Yet asset-based lending has quietly gained significant momentum. Total Mortgage Credit jumped $573 billion in 2017 (Q4 SAAR $625bn), the strongest expansion since 2007. Q4 multifamily mortgage growth was the strongest in years. Agency Securities gained nominal $337 billion (3.9%) in 2017 to a record $8.857 TN, with a two-year gain of $688 billion. It’s anything but clear why the GSEs should be growing rapidly at this point. Broker/Dealer Assets jumped nominal $116 billion during Q4 (15% annualized) to $2.229 TN, an almost three-year high. Broker/Dealer assets expanded $206 billion in 2017, the largest expansion since 2010’s $235 billion. Exchange-traded Funds (ETF) expanded $263 billion during Q4 to $3.400 TN. ETFs expanded $876 billion, or 34.7% in 2017, with a two-year gain of $1.300 TN, or 62%.

After beginning 2008 at $6.051 Trillion (42% of GDP), Treasury Securities ended 2017 at $16.431 TN (83% of GDP). Treasury and Agency Securities combined for $25.288 TN, or 128% of GDP. It’s a staggering amount of so-called “risk free” securities underpinning the entire financial system. Also “staggering” and “underpinning,” global finance pouring into U.S. securities markets is unrelenting. It's become a primary source of fuel sustaining the Bubble.

Rest of World (ROW) increased holdings of U.S. financial assets by a nominal $646 billion during Q4. For perspective, this is more than triple the Q4 expansion of bank loans. This put 2017 ROW growth at a record $2.817 TN, up from ‘16’s $1.182 TN and surpassing ‘13’s $2.174 TN and ‘06’s $2.125 TN. ROW now holds a record $11.456 TN of U.S. debt securities, $7.888 TN of equites and mutual funds, $737 billion of Repos and $4.699 TN of Foreign Direct Investment. Since the end of 2008, ROW holdings have increased $13.342 TN, or 97%, to end 2017 at a record $27.042 TN. ROW holdings began the nineties at $1.738 TN and ended that decade at $5.621 TN.

Total outstanding Debt Securities (TDS) expanded nominal $441 billion during Q4 to a record $42.826 TN. TDS gained $1.537 TN in 2017, after increasing $1.543 TN in ’16. TDS has increased $11.88 TN, or 38%, since the end of 2008. TDS as a percent of GDP remained constant during Q4 at 217%, after ending 2007 at 200%.

Total Equities Securities (TES) jumped $2.285 TN during Q4 to a record $45.825 TN. TES rose $7.403 TN during 2017, or 19.3%. Since the end of ’08, TES has surged $30.587 TN, or 201%. As a percentage of GDP, TES ended 2017 at a record 232%. This compares to cycle peaks 181% to end Q3 ’07 and 202% during Q1 2000. It’s worth mentioning as well that TES as a percentage of GDP didn’t recover to 100% until Q3 ’95 (106% in 1968). TES as a percentage of GDP ended 1970 at 77%, 1975 at 50%, 1980 at 52%, 1985 at 52%, and 1990 at 59%.

Total (Debt and Equities) Securities ended 2017 at a record $88.651 TN. Total Securities surged to a record 449% of GDP, up from 429% to conclude 2016. For perspective, Total Securities to GDP peaked at 379% ($55.3TN) during Q3 2007 and 359% ($36.0TN) at cycle highs in Q1 2000. Total Securities as a percent of GDP ended 1970 at 148%, 1975 at 122%, 1980 at 128%, 1985 at 155%, 1990 at 189%, and 1995 at 262%.

Massive inflows of international finance have been integral to the U.S. securities market Bubble. Inflating securities and asset prices have inflated perceived household wealth, a dynamic fundamental to the U.S. Bubble Economy.

Household Assets jumped nominal $2.284 TN during Q4 to a record $114.395 TN, with a one-year gain of $7.760 TN and two-year rise of $13.514 TN. For the quarter, Real Estate increased $511 billion to a record $27.848 TN. Financial Assets jumped $1.699 TN in Q4 to a record $80.395 TN, with total equities up $972 billion to $26.562 TN.

With Household Liabilities up $209 billion to $15.650 TN, Household Net Worth jumped $2.076 TN during the quarter to a record $98.746 TN. Household Net Worth inflated $7.162 TN during 2017 to a record 500% of GDP. For comparison, Net Worth to GDP ended 2007 at 459% and 1999 at 445%. Net Worth to GDP ended 1970 at 357%, 1975 at 342%, 1980 at 359%, 1985 at 350%, 1990 at 367% and 1995 at 381%.

I define a Bubble as a self-reinforcing but inevitably unsustainable inflation. Household Net Worth at 500% of GDP is not sustainable. I believe it is unsustainable because I don’t believe Total Securities at 449% of GDP is sustainable. And current securities values are unsustainable because the current financial structure is not sustainable.

Too large a percentage of new Credit creation is financing overvalued assets (securities and real estate, in particular), leaving this key source of liquidity vulnerable to asset price reversals. Too much of the new Credit is Treasury and government-related securities that are grossly mispriced in the marketplace. Moreover, enormous foreign-sourced inflows are having a major (if unappreciated) impact on marketplace liquidity. I suspect that a significant portion of these inflows are related to global QE and, somewhat less directly, to speculative leveraging (“carry trades,” etc.). These sources of liquidity are increasingly vulnerable to central bank “normalization,” higher funding costs and rising global yields.

For the Week:

The S&P500 rallied 3.5% (up 4.2% y-t-d), and the Dow recovered 3.3% (up 2.5%). The Utilities increased 0.7% (down 7.2%). The Banks jumped 3.8% (up 8.8%), and the Broker/Dealers surged 6.8% (up 13.7%). The Transports rose 3.9% (up 1.2%). The S&P 400 Midcaps rallied 3.8% (up 2.6%), and the small cap Russell 2000 surged 4.2% (up 4.0%). The Nasdaq100 jumped 4.2% (up 11.0%). The Semiconductors surged 4.9% (up 14.2%). The Biotechs rose 4.7% (up 15.4%). With bullion about unchanged, the HUI gold index was little changed (down 10.1%).

Three-month Treasury bill rates ended the week to 1.63%. Two-year government yields added two bps to 2.26% (up 38bps y-t-d). Five-year T-note yields rose three bps to 2.65% (up 44bps). Ten-year Treasury yields were up three bps to 2.89% (up 49bps). Long bond yields added two bps to 3.16% (up 42bps).

Greek 10-year yields fell 17 bps to 4.16% (up 9bps y-t-d). Ten-year Portuguese yields dropped 12 bps to 1.86% (down 8bps). Italian 10-year yields gained four bps to 2.01% (unchanged). Spain's 10-year yields fell 11 bps to 1.44% (down 13bps). German bund yields were little changed at 0.65% (up 22bps). French yields declined three bps to 0.89% (up 11bps). The French to German 10-year bond spread narrowed three to 24 bps. U.K. 10-year gilt yields added two bps to 1.49% (up 30bps). U.K.'s FTSE equities index rallied 2.2% (down 6%).

Japan's Nikkei 225 equities index gained 1.4% (down 5.7% y-t-d). Japanese 10-year "JGB" yields declined two bps to 0.05% (up 1bp). France's CAC40 rallied 2.7% (down 0.7%). The German DAX equities index recovered 3.6% (down 4.4%). Spain's IBEX 35 equities index rose 1.6% (down 3.6%). Italy's FTSE MIB index surged 3.8% (up 4.1%). EM markets were mostly higher. Brazil's Bovespa index increased 0.7% (up 13.0%), and Mexico's Bolsa gained 2.1% (down 1.6%). South Korea's Kospi index rose 2.4% (down 0.3%). India’s Sensex equities index fell 2.2% (down 2.2%). China’s Shanghai Exchange gained 1.6% (unchanged). Turkey's Borsa Istanbul National 100 index was unchanged (up 1.4%). Russia's MICEX equities index rose 1.0% (up 9.6%).

Investment-grade funds saw outflows of $740 million, and junk bond funds had outflows of $525 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates gained three bps to 4.46%, the high since January 2014 (up 25bps y-o-y). Fifteen-year rates rose four bps to 3.94% (up 52bps). Five-year hybrid ARM rates added a basis point to 3.63% (up 40bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.59% (up 23bps).

Federal Reserve Credit last week declined $11.8bn to $4.354 TN. Over the past year, Fed Credit contracted $63.3bn, or 1.5%. Fed Credit inflated $1.544 TN, or 55%, over the past 279 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt surged $22.0bn last week to $3.440 TN. "Custody holdings" were up $258bn y-o-y, or 8.1%.

M2 (narrow) "money" supply jumped $32.1bn last week to a record $13.875 TN. "Narrow money" expanded $535bn, or 4.0%, over the past year. For the week, Currency increased $4.2bn. Total Checkable Deposits rose $11.5bn, and savings Deposits gained $15.9bn. Small Time Deposits and Retail Money Funds were little changed.

Total money market fund assets rose $14.3bn to $2.857 TN. Money Funds gained $168bn y-o-y, or 6.3%.

Total Commercial Paper added $1.7bn to $1.094 TN. CP gained $130bn y-o-y, or 13.4%.

Currency Watch:

March 6 – South China Morning Post (Alun John): “A senior Hong Kong Monetary Authority official said… that while the Hong Kong dollar had reached its weakest level in more than 30 years, this valuation was ‘well within the design of the system’… The Hong Kong dollar touched new lows against the US dollar, …one US dollar was worth 7.8337 Hong Kong dollars, its lowest level in 33 years…The Hong Kong dollar is pegged to the US dollar, and its value is permitted to fluctuate between 7.75 to 7.85 Hong Kong dollars to one US dollar.”

March 6 – Bloomberg (Katherine Greifeld and Liz McCormick): “In foreign-exchange markets, investors aren’t waiting to find out if all the tariff threats being thrown around lead to a full-blown trade war. Some money managers have begun piling into traditional havens like the yen; others are trimming currency exposure altogether; and even those who’re betting not much will come from the row are hedging just in case. The concern is that President Donald Trump’s plan to impose steel and aluminum tariffs will trigger a wave of retaliatory levies that derail the worldwide economic expansion… ‘Currencies can be very small but sharp objects, where a little exposure can have a large impact,’ said Gene Tannuzzo, a portfolio manager at Columbia Threadneedle Investments. ‘So you could see more and more managers just not really stick their neck out as it relates to FX exposure.’”

The U.S. dollar index added 0.2% to 90.093 (down 2.2% y-o-y). For the week on the upside, the Mexican peso increased 1.1%, the Australian dollar 1.1%, the South Korean won 1.0%, the South African rand 0.9%, the New Zealand dollar 0.6%, the Canadian dollar 0.6%, the British pound 0.4%, the Singapore dollar 0.3%, and the Norwegian krone 0.2%. For the week on the downside, the Swiss franc declined 1.5%, the Japanese yen 1.0%, the Brazilian real 0.1% and the euro 0.1%. The Chinese renminbi increased 0.17% versus the dollar this week (up 2.72% y-t-d).

Commodities Watch:

March 6 – Bloomberg (Jessica Summers): “U.S. crude production is poised to accelerate this year, reaching the highest annual average on record. The Energy Information Administration boosted its output forecasts for 2018 and 2019, and said that production would top 11 million barrels a day in October… The forecast comes as U.S. shale producers met with OPEC officials for a dinner on the sidelines of the CERAWeek by IHS Markit conference in Houston… OPEC Secretary General Mohammad Barkindo told Bloomberg after the dinner that he wasn’t worried about U.S. production growth because ‘demand is very robust, very strong.’”

The Goldman Sachs Commodities Index increased 0.6% (up 0.4% y-t-d). Spot Gold was little changed at $1,323 (up 1.6%). Silver gained 0.9% to $16.608 (down 3.1%). Crude recovered 79 cents to $62.04 (up 2.7%). Gasoline added 0.2% (up 6%), and Natural Gas gained 1.4% (down 8%). Copper increased 0.4% (down 5%). Wheat dropped 2.2% (up 15%). Corn rose 1.4% (up 11%).

Market Dislocation Watch:

March 6 – CNBC (Jeff Cox): “February's brutally volatile market saw investors flee U.S. stocks in near-record numbers, and they're only slowly coming back. Funds that focus on domestic equities saw investors withdraw $41.1 billion during the month, according to… TrimTabs, which said it was the third most in the market data firm's records. Global funds went in the other direction, attracting $17.9 billion even though stock markets abroad fared even worse than in the U.S. Outflows were evenly distributed between exchange-traded funds (-$19.6bn) and mutual funds (-$21.5bn)…”

March 6 – Bloomberg (Sid Verma): “Investors appear to be paring exposure to U.S. bonds as selloff pressure endures in the world’s largest debt market. The biggest fixed-income exchange-traded fund -- the iShares Core U.S. Aggregate Bond ETF, ticker AGG -- was hit by a record $798 million outflow Monday, the largest one-day withdrawal since its September 2003 inception. Expectations that President Donald Trump’s tough talk on tariffs would fail to spur strongly protectionist outcomes fed risk appetite during Monday’s trading, sending 10-year Treasury yields toward 2.90%.”

March 5 – Bloomberg (Dani Burger): “Finding shelter from stormy markets is getting harder than ever. Major asset classes have been trending together to levels rarely seen over the past decade and, more often than not, that trend has been down. Investors who enjoyed easy gains as markets rose in sync in the past six months are struggling to find securities that move in opposition, leaving them exposed to losses even if they’re diversified. Once immune to geopolitics, proposed U.S. tariffs have sent global stock markets lower. But bonds aren’t offering much of a fallback option, as reflationary threats and hawkish central banks hobble returns. Hoping commodities will provide a haven? Too bad. Crude and copper futures are extending losses after a hefty February decline…”

Trump Administration Watch:

March 6 – Bloomberg (Andrew Mayeda and Jennifer Jacobs): “The Trump administration is considering clamping down on Chinese investments in the U.S. and imposing tariffs on a broad range of its imports to punish Beijing for its alleged theft of intellectual property, according to people familiar with the matter. An announcement following an investigation by the U.S. Trade Representative’s office into China’s IP practices is expected in the coming weeks, potentially handing President Donald Trump further cause to impose trade restrictions… ‘The U.S. is acting swiftly on intellectual property theft. We cannot allow this to happen as it has for many years!’ Trump said in a Twitter post… In an earlier tweet, he said China has been asked to develop a plan to reduce their ‘massive trade deficit with the United States.’”

March 6 – Bloomberg (Toluse Olorunnipa): “President Donald Trump reiterated his commitment to levying tariffs on steel and aluminum, saying that the U.S. has poor trading conditions with other nations, including those in the European Union. ‘When we’re behind every single country, trade wars aren’t so bad,’ Trump said… ‘The trade war hurts them, not us.’ Trump said that the E.U. has been ‘particularly tough’ on U.S. products, yet is able to sell its own goods such as cars to Americans. Trump warned that he would impose a 25% penalty on European car imports if the bloc carried out a threat to retaliate against the metals tariffs… ‘We have to straighten this out. We really have no choice,’ Trump said.”

March 7 – Bloomberg (Jonathan Stearns): “The European Union mounted a last-ditch push to stop U.S. President Donald Trump from triggering tariffs on foreign steel and aluminum, vowing a ‘firm’ response and warning of widespread damage from a trans-Atlantic trade war. ‘I truly hope that this will not happen,’ EU Trade Commissioner Cecilia Malmstrom told reporters… ‘A trade war has no winners.’ The EU intends to hit a range of U.S. goods with punitive tariffs in retaliation for Trump’s pledges to impose a 25% duty on foreign steel and a 10% levy on imported aluminum. His plan is based on a national-security argument that Malmstrom called ‘alarming’ and ‘deeply unjust.’”

March 5 – Wall Street Journal (Siobhan Hughes and William Mauldin): “House Speaker Paul Ryan warned… that President Donald Trump’s plan to impose tariffs on steel and aluminum imports could trigger a trade war, as the president sought to wrest economic concessions from Canada and Mexico by turning up pressure on the proposal. Mr. Trump’s evolving trade policy drew harsh criticism from congressional Republicans, who said they are concerned the president’s new threats will provoke retaliation rather than draw concessions. ‘We are extremely worried about the consequences of a trade war and are urging the White House to not advance with this plan,’ said a spokeswoman for Mr. Ryan…”

March 4 – Reuters (Lesley Wroughton and Sharay Angulo): “Mexican and U.S. officials pushed… to speed up NAFTA negotiations, with the United States floating the idea of reaching an agreement ‘in principle’ in coming weeks to avoid political headwinds later this year. U.S. Trade Representative Robert Lighthizer, showing impatience at the slow pace of the talks, said Mexico’s presidential election and the looming expiry of a congressional negotiating authorization in July put the onus on the United States, Mexico and Canada to come up with a plan soon. ‘We probably have a month, or a month and a half, or something to get an agreement in principle,’ Lighthizer told reporters…”

March 5 – Reuters (Jeff Mason and Christine Kim): “Feeling the pressure of sanctions, North Korea seems ‘sincere’ in its apparent willingness to halt nuclear tests if it held denuclearization talks with the United States, President Donald Trump said… as U.S., South Korean and Japanese officials voiced skepticism about any discussions.”

March 6 – Reuters (Susan Cornwell and Jeff Mason): “Economic nationalists appeared to gain the upper hand in a White House battle over trade with the resignation of Donald Trump’s top economic adviser, Gary Cohn, on Tuesday in a move that could ramp up protectionist measures that risk igniting a global trade war… He had told Trump that markets would slump on a tariffs threat and was regarded as a bulwark of economic orthodoxy in an administration whose protectionist policies have sparked alarm among U.S. legislators and in governments around the world. Cohn’s resignation came after Trump said he was sticking with plans to impose hefty tariffs on steel and aluminum imports. While the measures on their own are relatively small, the risk is that an emboldened Trump administration will push ahead with a full-scale economic confrontation with China.”

March 8 – Reuters (David Chance and Roberta Rampton): “An economist who believes that Chinese goods are literally poisoning Americans, advocates ending Washington’s ‘One China’ policy and says trade deals have weakened the United States economically with the connivance of U.S. business has emerged as the big winner from renewed turmoil in the White House. While Peter Navarro says he is not in the running to replace Trump’s top economic adviser Gary Cohn…, he will be a big winner from the departure of a person seen as a bulwark against economic protectionism… He has publicly backed Trump’s proposed steel and aluminum tariffs in a series of media appearances after being out of the public eye for months. Navarro has endorsed withdrawal from the North American Free Trade Agreement as well as from a trade deal with South Korea. He believes the World Trade Organization allows unfair tax practices like value added tax that penalize American business.”

March 6 – New York Times (Cecilia Kang and Alan Rappeport): “As the United States and China look to protect their national security needs and economic interests, the fight between the two financial superpowers is increasingly focused on a single area: technology. The clash erupted in public on Tuesday after the United States government, citing national security concerns, called for a full investigation into a hostile bid to buy the American chip stalwart Qualcomm… The proposed acquisition by the Singapore-based Broadcom would have been the largest deal in technology history, creating a major force in the development of the computer chips that power smartphones and many internet-connected devices. But a government panel said the takeover could weaken Qualcomm and give its Chinese rivals an advantage. ‘China would likely compete robustly to fill any void left by Qualcomm as a result of this hostile takeover,’ a United States Treasury official wrote in a letter calling for a review of the deal. The fight over technology is redefining the rules of engagement in an era when national security and economic power are closely intertwined.”

U.S. Bubble Watch:

March 7 – Reuters (Lucia Mutikani): “The U.S. trade deficit increased to a more than nine-year high in January, with the shortfall with China widening sharply, suggesting that President Donald Trump’s ‘America First’ trade policies aimed at eradicating the deficit will likely fail. The trade gap continues to widen a year into the Trump presidency. Trump, who claims that the United States is being taken advantage of by its trading partners, has imposed tariffs on imports of some goods and threatened punitive measures on others to shield domestic industries from competition. The protectionist measures have sparked fears of a trade war… The Commerce Department said… the trade deficit jumped 5.0% to $56.6 billion. That was the highest level since October 2008 and exceeded… expectations… Part of the rise in the trade gap in January reflected higher commodity prices. The politically sensitive goods trade deficit with China surged 16.7% to $36.0 billion, the highest since September 2015.”

March 5 – Wall Street Journal (Spencer Jakab): “…The U.S. trade balance may be much worse than it looks. The reason is the boom in U.S. energy production has dramatically reduced the need for oil imports. The U.S. trade deficit in goods and services was $566 billion last year, and in December widened to its highest since 2008. The annual deficit with China alone climbed to $375.2 billion. It would have been much worse without energy. Since 2007 net trade in three major categories of petroleum and related products plus natural gas has improved by $233 billion.”

March 7 – CNBC (Jeff Cox): “Job creation saw another powerful month in February, with companies adding 235,000 positions, ADP and Moody's Analytics reported… Growth actually decelerated slightly, as January posted an upwardly revised 244,000 from the initially reported 234,000. February marked the fourth month in a row that private payrolls hit 200,000 or better. ‘The job market is red hot and threatens to overheat,’ Mark Zandi, chief economist at Moody's, said… ‘With government spending increases and tax cuts, growth is set to accelerate.’”

March 4 – Wall Street Journal (AnnaMaria Andriotis): “Small banks have been fighting for a bigger piece of the credit-card market in search of higher returns. Now, they’re contending with rising losses. Missed payments on credit cards at small banks have risen sharply over the past year, a sign that their cardholders are taking on more debt than they can handle. Their charge-off rate, or the share of outstanding card balances written off as a loss after consumers failed to pay, hit 7.2% in the fourth quarter, up from 4.5% a year ago…”

March 7 – Reuters (Lucia Mutikani): “U.S. unit labor costs increased faster than initially thought in the fourth quarter amid weak worker productivity, but the trend pointed to a gradual increase in inflation. The Labor Department said… that unit labor costs, the price of labor per single unit of output, rose at a 2.5% annualized rate in the last quarter instead of increasing at a 2.0% pace as reported last month.”

March 7 – Wall Street Journal (Laura Kusisto): “The economy is booming, take-home pay is rising and millennials are getting married and having children. Despite all those homebuying catalysts, this could be one of the weakest spring selling seasons in recent years. The culprits: rising mortgage rates, a tax bill that reduces the incentives for homeownership and a growing weariness among first-buyers being priced out of the market—all of which are expected to damp demand for homes this year. The next few months are a critical test of the housing market, as buyers look to get into contract on a home before summer vacations and the new school year. About 40% of the year’s sales take place from March through June…”

March 5 – New York Times (Nellie Bowles): “In search of reasonable rent, the middle-class backbone of San Francisco — maitre d's, teachers, bookstore managers, lounge musicians, copywriters and merchandise planners — are engaging in an unusual experiment in communal living: They are moving into dorms. Shared bathrooms at the end of the hall and having no individual kitchen or living room is becoming less weird for some of the city's workers thanks to Starcity, a new development company that is expressly creating dorms for many of the non-tech population. Starcity has already opened three properties with 36 units. It has nine more in development and a wait list of 8,000 people.”

Federal Reserve Watch:

March 6 – CNBC (Jeff Cox): “Raising interest rates now gives the U.S. the best chance to keep pushing the economy forward, Dallas Fed President Robert Kaplan said… In that light, Kaplan said he favors three rate hikes this year, a sentiment reflected in markets that nevertheless have been wary that the central bank may get more aggressive should the improving economy start generating more noticeable inflation. ‘It's three for this year. I think we should get started sooner rather than later, though,’ he said…”

March 5 – Reuters (Pete Schroeder): “The chief regulator for the U.S. Federal Reserve said Monday the nation’s regulators are actively considering a significant rewrite of the ‘Volcker Rule.’ Fed Vice Chair for Supervision Randal Quarles told bankers gathered in Washington that regulators want to make ‘material changes’ to streamline and simplify several aspects of the ban on certain bank trading, put in place after the 2007-2009 financial crisis. His comments are the most explicit endorsement yet of regulators rewriting one of the central post-crisis rules, which bans banks from making profit-seeking trades on their own account.”

March 6 – Bloomberg (Jeanna Smialek and Christopher Condon): “Federal Reserve Governor Lael Brainard, one of the central bank’s most ardent doves, sounded optimistic about the U.S. economy’s outlook and suggested the pace of monetary policy tightening may need to accelerate. ‘The macro environment today is the mirror image of the environment we confronted a couple of years ago,’ Brainard told the Money Marketeers of New York University… ‘In the earlier period, strong headwinds sapped the momentum of the recovery and weighed down the path of policy. Today, with headwinds shifting to tailwinds, the reverse could hold true.’”

China Watch:

March 6 – Financial Times (Matthew C Klein): “The rapidity and size of China’s debt boom in the past decade has been almost entirely without precedent. The few precedents that do exist — Japan in the 1980s, the US in the 1920s — are not encouraging. Most coverage has rightly focused on China’s corporate sector, particularly the debts that state-owned enterprises owe to the big four state-owned banks. After all, these liabilities constitute the biggest bulk of the total debt outstanding… Chinese households, however, are quickly catching up. This is bad news… As of mid-2017, Chinese households had debts worth about 106% of their disposable incomes. For perspective, Americans currently have debts worth about 105% of their disposable incomes… The difference is that American indebtedness has been basically flat the past few years after steady declines since 2007. Chinese households have been experiencing rapid income growth by rich-country standards for a long time, but their debts have grown far faster… Since the start of 2007, Chinese disposable household income has grown about 12% each year on average, while Chinese household debt has grown about 23% each year on average. The cumulative effect is that (nominal) income has slightly more than tripled but debts have grown by nearly a factor of nine. The mismatch has been getting worse recently…”

March 8 – Reuters (Elias Glenn): “China’s exports unexpectedly surged at the fastest pace in three years in February, suggesting both its economy and global growth remain resilient even as trade relations with the United States rapidly deteriorate. China’s February exports rose 44.5% from a year earlier, far more than analysts’ median forecast for a 13.6% increase and January’s 11.1% gain…”

March 4 – Bloomberg: “China stepped up its push to curb financial risk, cutting its budget deficit target for the first time since 2012 and setting a growth goal of around 6.5% that omitted last year’s aim for a faster pace if possible. The deficit target… was lowered to 2.6% of gross domestic product from 3% in the past two years. The 6.5% goal is consistent with President Xi Jinping’s promise to deliver a ‘moderately prosperous’ society by 2020. Policy makers dropped a target for M2 money supply growth, saying it’s expected to expand at similar pace to last year. Authorities reiterated prior language saying prudent monetary policy will remain neutral this year and that they’ll ensure liquidity at a reasonable and stable level.”

March 6 – Bloomberg: “China is attempting to pull off an unusual fiscal feat: Cut taxes, boost spending and shrink the deficit, all with a slowing economy. Premier Li Keqiang… announced the first budget deficit goal reduction since 2012, to 2.6% of gross domestic product from 3%. He also pledged tax cuts of 800 billion yuan ($126bn) for companies and individuals and set a 6.5% annual economic growth target… In the context of China’s multi-year effort to slow debt growth, a tighter fiscal budget sends a powerful signal -- even the state is tightening its belt.”

March 6 – Reuters (Philip Wen): “China must strengthen regulatory oversight and control the overall amount of money supply to guard against mounting financial risks in the economy, a top economic official said… Yang Weimin, the deputy director of the Office of the Central Leading Group on Financial and Economic Affairs, said the ‘extremely arduous’ task was necessary to head off the financial risks in the Chinese economy that were becoming ‘progressively visible’, according to the Securities Times business newspaper.”

March 6 – Bloomberg (Keith Zhai): “Chinese President Xi Jinping is preparing to extend a sweeping government overhaul that would give the Communist Party greater control over everything from financial services to manufacturing to entertainment in the world’s second-largest economy, two people familiar with the matter said. The changes are part of a proposed ‘CPC leadership system’ approved by the party on Feb. 28… Details of that document, which called for merging more than a dozen state agencies, are due to be revealed by March 17 when the National People’s Congress -- China’s rubber-stamp legislature -- votes on the plan.”

March 4 – Bloomberg: “China said that it would increase coordination of monetary policy, macroprudential monitoring and financial supervision, the strongest signal yet that top leaders gathering in Beijing this week plan to unveil an overhaul of economic authorities. The financial supervision system will be improved to ensure financial stability and prevent systemic risk, the official Xinhua News Agency reported…, citing a decision by a Communist Party committee on deepening government reform.”

March 6 – Bloomberg (Alfred Cang): “Just six months ago, CEFC called itself China’s largest private oil and gas company, with 50,000 employees and revenue of more than $40 billion. That’s when it agreed to buy a $9 billion stake in Russian state energy giant Rosneft PJSC following a series of deals elsewhere -- a spree that spawned speculation over how the previously obscure firm managed to make its mark on the international stage so quickly. Now, it’s being hit by a slew of bad news. Chairman Ye Jianming is said to have been investigated by authorities, it’s reported to have been taken over by an arm of the Shanghai government and the company’s bonds have posted record declines. All that’s raised questions about the status of the Rosneft deal, which is yet to close. CEFC is also said to have missed paying $63 million for an oil-trading joint venture.”

Central Bank Watch:

March 8 – Financial Times (Claire Jones and Michael Hunter): “The European Central Bank has taken a significant step towards ending its crisis-era economic stimulus measures, dropping an explicit commitment to expand its bond-buying programme if the current eurozone expansion sputters. As often with the ECB, the important policy shift was couched in a minor change in wording in its post-governing council meeting statement…, where it took out language vowing to intervene more aggressively in bond markets should growth disappoint. But the change in its ‘easing bias’ marked one of the final steps Mario Draghi… must go through before winding up a programme launched three years ago… It also comes amid a global effort by central banks to return to pre-crisis policymaking, a shift that has unnerved financial markets accustomed to cheap money pumped into the system by years of massive emergency stimulus from the ECB, US Federal Reserve and Bank of Japan.”

March 4 – Bloomberg (Enda Curran and Toru Fujioka): “The end of the easy money era which spanned the global economy for the last decade came into even sharper focus as the Bank of Japan gave fresh insight into when it might slow its stimulus program. Governor Haruhiko Kuroda’s remarks… that the central bank will start thinking about how to complete its unprecedented easing around the fiscal year starting April 2019 was the clearest signal yet that a conclusion might be in sight to emergency support for the Japanese economy. While Kuroda’s statement in response to questions from lawmakers was in some ways stating the obvious… the significance is that he’s put down a marker in public that he can be held to.”

March 8 – Financial Times (Claire Jones and Guy Chazan): “On the face of it, it looks an easy choice for Germany. More than at any other point in the history of monetary union Berlin has the clout — and a willing candidate in Bundesbank chief Jens Weidmann — to secure the presidency of the European Central Bank. But officials in the eurozone’s largest and most powerful economy are still hesitating whether to risk political capital on a campaign to anoint one of their own as Mario Draghi’s successor. The fear is that they will have to bend too much to Paris and Rome’s vision of European monetary union in return. ‘The price can’t be too high,’ said one German official. ‘The question is what political and economic benefit it brings to Germany.’”

Global Bubble Watch:

March 4 – Financial Times (Caroline Binham): “‘Shadow banking’ grew by nearly 8% globally to more than $45tn on a conservative measure after international rulemakers were able to include detailed data from China and Luxembourg for the first time. Shadow banking — the parts of the financial system that perform banklike functions such as lending but do not have the same safeguards — accounted for 13% of total global financial assets, according to the Financial Stability Board, the international group of policymakers and regulators that makes recommendations to the G20.”

March 6 – Wall Street Journal (Paul J. Davies): “Tax cuts and economic growth are spurring a spending spree by U.S. companies on deal making as well as share buybacks. But with some deals being done at big earnings multiples, companies and their investors may find they haven’t spent wisely when the dust eventually settles… Mergers and acquisitions announced by U.S. acquirers so far in 2018 are running at the highest dollar volume since the first two months of 2000, according to Dealogic… More than $325 billion worth of bids have been launched so far in 2018…, with all-cash offers outstripping all-share offers by three-to-one in dollar terms, highlighting the continued availability of cheap debt as well as the income boost to come from tax cuts.”

Europe Watch:

March 5 – Financial Times (James Politi): “Italian voters put their country on a potential collision course with the EU after delivering sweeping gains for populist and Eurosceptic parties in a general election that marked the biggest political upheaval in Europe since the Brexit vote in 2016. With Italy on course for a hung parliament, the populist Five Star Movement and anti-immigration Northern League party are likely to take a leading role in complex talks to form the next government. The outcome of protracted negotiations is likely to see Italy clash with Brussels on everything from budget rules to immigration. The governing centre-left Democratic party suffered a crushing defeat, forcing Matteo Renzi, leader and former prime minister, to resign while Silvio Berlusconi’s Forza Italia lost its leadership of the centre-right coalition.”

March 5 – Wall Street Journal (Eric Sylvers and Marcus Walker): “Italy entered a period of political instability… after national elections boosted populists but failed to produce a winner with enough support to patch together a parliamentary majority. Sunday’s two big winners—the 5 Star Movement and a center-right coalition including former Premier Silvio Berlusconi and the anti-immigrant League—each claimed Monday to have won enough support to earn the right to try to form a government. But with neither group having won an outright majority, Italy is likely to face weeks or months of consultations among the parties.”

March 6 – Reuters (Thomas Escritt and Michelle Martin): “Germany’s Social Democrats (SPD) decisively backed another coalition with Chancellor Angela Merkel’s conservatives on Sunday, clearing the way for a new government in Europe’s largest economy after months of political uncertainty. Two thirds of the membership voted ‘yes’ to the deal in a ballot — a wider margin than many had expected. That means Merkel could be sworn in for a fourth term as early as the middle of the month, in a repeat of the grand coalition that has governed since 2013.”

Japan Watch:

March 6 – Reuters (Leika Kihara and Tetsushi Kajimoto): “Japan’s central bank chief said… a future exit from ultra-easy monetary policy would need to be ‘very gradual’, in comments analysts described as a bid to temper expectations about a near-term end to crisis-mode stimulus. Bank of Japan Governor Haruhiko Kuroda startled markets last week when he told lawmakers that the central bank could consider exiting easy policy if his inflation target was met in fiscal 2019 as projected… ‘When the BOJ exits, it will be a very gradual process ... so as not to trigger a spike in long-term interest rates or a disruption in financial markets,’ Kuroda said…”

EM Bubble Watch:

March 5 – Financial Times (Jonathan Wheatley): “…Across the emerging world, businesses, households and governments loaded up on an estimated $40tn of cheap debt during the decade of loose monetary policy in the developed world that followed the global financial crisis. Now that period is nearing its end, and as the US continues its ‘normalisation’ of monetary policy… several analysts have questioned whether the emerging world’s debt pile is sustainable. ‘The premise on which lenders keep lending to borrowers as they become more indebted is that the backdrop will stay benign,’ says Sonja Gibbs, senior director for global capital markets at the… Institute of International Finance… With political uncertainty on the rise around the world, she says, ‘it feels more like there is the potential for events to trigger volatility in emerging markets than it has done for some time’.”

March 8 – Bloomberg (Justin Villamil and Taylan Bilgic): “Turkey’s credit rating was cut further into junk by Moody’s… on an erosion of institutional strength as well as more risk of external shocks and geopolitical risks. The lira weakened. Moody’s lowered the rating one notch to Ba2, two levels below investment grade… Moody’s analyst Kristin Lindow said… That leaves the nation on par with Brazil, Croatia and Costa Rica. The government of President Recep Tayyip Erdogan appears focused on short-term measures, undermining effective monetary policy and economic reform, Lindow wrote.”

Leveraged Speculator Watch:

March 6 – Bloomberg (Dani Burger): “A decades-old $350 billion pocket of quantitative money management may have met its match in February’s choppy markets -- and it could get worse from here. Some quant investors are concerned that the most popular trend-following commodity trading advisers, more widely known as CTAs, are ill-equipped to handle a new era of steeper declines and sudden volatility spikes. The strategy, which rides price trends across asset classes, fell 6.4% in February, the worst month since 2001, according to a Societe General basket of the 20 largest managers…. Many programs that were built on data from nine years of relative market calm are breaking down, according to Quest Partners’s Nigol Koulajian.”

March 4 – Bloomberg (Klaus Wille): “The PruLev Global Macro Fund gave up almost one-third of last year’s 52% gain in February, after being caught out by the return of volatility. The fund, the world’s best performer last year among macro funds with assets of more than $100 million, lost 16%, mainly from stock bets…”

Geopolitical Watch:

March 6 – Bloomberg (David Tweed and Adrian Leung): “As lawmakers meet this week to cement Xi Jinping’s power at home, China’s president is also looking to boost his country’s military might abroad. He’s overhauled China’s military to challenge U.S. supremacy in the Indo-Pacific, most visibly with a plan to put half-a-dozen aircraft carriers in the world’s oceans. Still, Xi has a problem: He needs bases around the world to refuel and repair his global fleet. So far, China only has one overseas military base, compared with dozens for the U.S., which also has hundreds of smaller installations. In recent years China has stepped up efforts to challenge the U.S.’s military presence in the South China Sea, developing missiles to deter American warships and reclaiming land to build bases on the disputed Spratly Islands. It also started sending submarines and frigates into the Indian Ocean, opened its first overseas base in Djibouti and invested in ports around the region that could one day be used for military purposes.”

March 4 – Reuters (Pete Schroeder): “China said… that it would never tolerate any separatist schemes for self-ruled Taiwan and would safeguard China’s territorial integrity with the aim of ‘reunification’ with an island it considers its sacred territory. Premier Li Keqiang issued the warning in a speech at the opening of the annual session of China’s parliament, his stern words coming amid mounting Chinese anger over a U.S. bill that seeks to raise official contacts between Washington and Taipei.”