Economic News for week ending June 16, 2017

Saturday, June 17, 2017
Peak Stimulus Has Passed
by Doug Noland

full column here:
http://creditbubblebulletin.blogspot.com/2017/06/weekly-commentary-peak-stimulus-has.html

My summary is below:

It’s been going on nine years since the “worst financial crisis since the Great Depression.” 

We’re now only two months from the 10-year anniversary of the Fed’s August 17, 2007 extraordinary measures ...

This ... marked the beginning of unprecedented global central bank stimulus that continues to this day. 

The disastrous aftermath of the Fed aggressively stimulating mortgage Credit - as the centerpiece of its post-“tech” Bubble reflation strategy - has been wiped away by the cagey hand of historical revisionism. 

These days, securities markets have raged on the notion of “enlightened” central bank monetary management. 

Meanwhile, central bankers have viewed robust markets as validation of the ingenuity of both their measures and overall policy frameworks. 

Everyone is happy - for now.

The Fed raised rates Wednesday, and the week was notable as well for less than dovish comments out of the Bank of England and Bank of Canada. 

And while the Bank of Japan left monetary policy unchanged, there has been a recent notable reduction in the quantity of bonds purchased. 

This week also saw Finance Minister Schaeuble (among other German officials) urging the ECB to prepare to reverse course. 

Securities markets have grown convinced that central bankers will not tighten policy to the point of meddling with the great bull market. 

 After nurturing a $3.0 Trillion hedge fund industry, monetary policymaking then promoted at $4.0 Trillion ETF complex. 

Near zero rates have accommodated an unprecedented expansion of global government and government-related debt. 

In China, ultra-loose global finance helped push a historic Bubble to unbelievable extremes. 

History will look back at these measures as a most regrettable end game to a runaway multi-decade Credit and financial Bubble. 


For the week ending June 16, 2017:

S&P500 little changed (up 8.7% y-t-d)
Dow Industrials increased 0.5% (up 8.2%)
Dow Utilities jumped 1.6% (up 10.9%)
Dow Transports gained 0.9% (up 4.1%)

S&P 400 Midcaps slipped 0.2% (up 5.6%)
Small cap Russell 2000 declined 1.1% (up 3.7%)
Nasdaq100 fell 1.1% (up 16.8%)
Biotechs gained 0.9% (up 20.1%)

With bullion down $13, 
the HUI gold stock index dropped 5.2% (up 2.1%).

U.K.'s FTSE declined 0.8% (up 4.5%).
Japan's Nikkei 225 slipped 0.3% (up 4.3% y-t-d). 
France's CAC40 dipped 0.7% (up 8.2%)

German DAX declined 0.5% (up 11.1%)
Spain's IBEX 35 dropped 2.0% (up 15%)
Italy's FTSE MIB declined 0.9% (up 8.9%)

Brazil's Bovespa fell 0.9% (up 2.3%)
Mexico's Bolsa added 0.3% (up 7.8%)
South Korea's Kospi lost 0.8% (up 16.5%)

India’s Sensex declined 0.7% (up 16.6%)
China’s Shanghai Exchange fell 1.1% (up 0.6%)
Turkey's Istanbul National 100 declined 0.8% (up 25.7%). 
Russia's MICEX sank 3.2% (down 18.4%).


 US Ten-year Treasury yields fell five bps to 2.15% 
        (down 29bps). 
US Treasury Long bond yields dropped eight bps to 2.78% 
         (down 29bps).

Japanese 10-year "JGB" yields were unchanged at 0.056% (up 2bps). 
German bund yields increased one basis point to 0.28% (up 7bps).  
U.K. 10-year gilt yields added a basis point to 1.02% (down 22bps). 


US Freddie Mac 30-year fixed mortgage rates 
increased two bps to 3.91% 
   (up 37bps y-o-y). 

Fifteen-year rates gained two bps to 3.18% 
   (up 37bps). 

The five-year hybrid ARM rate rose four bps to 3.15% 
   (up 41bps). 

Jumbo mortgage 30-yr fixed rates up a basis point to 4.00% 
    (up 33bps).

Over the past year, Fed Credit slipped $3.9bn. 
M2 money supply expanded 5.5%, over the past year. 

Currency Watch:
The U.S. dollar index slipped 0.1% to 97.164 
     (down 5.1% y-t-d). 

Commodities Watch:
Goldman Sachs Commodities Index declined 1.5% (down 8.6% y-t-d). 
Spot Gold lost 1.0% to $1,254 (up 8.8%). 
Silver sank 3.3% to $16.66 (up 4.3%). 
Crude dropped $1.09 to $44.74 (down 17%). 
Gasoline fell 3.1% (down 13%)
Natural Gas was little changed (down 19%). 
Copper dropped 2.7% (up 3%). 
Wheat surged 4.7% (up 18%). 
Corn gained 1.1% (up 11%).

Trump Administration Watch:
June 14 – Politico (Rachel Bade and Sarah Ferris): 
“House GOP efforts to write a fiscal 2018 budget are deadlocked amid Republican infighting, a divide that threatens to undermine President Donald Trump’s agenda by stalling tax reform and delaying progress on appropriations. The House Budget Committee is months behind its usual timeline in releasing and marking up its annual fiscal blueprint. While the panel said it hoped to release the budget by early June, conference-wide bickering over priorities and spending levels have all but ground the process to a halt.”

June 13 – Reuters (Pete Schroeder and Lisa Lambert): 
“The U.S. Treasury Department unveiled a sweeping plan… to upend the country's financial regulatory framework, which, if successful, would grant many items on Wall Street's wishlist. The nearly 150-page report suggested more than 100 changes, most of which would be made through regulators rather than Congress, Treasury Secretary Steven Mnuchin said… ‘We were very focused on, what we can do by executive order and through regulators,’ he said. ‘We think about 80% of the substance in the report can be accomplished by regulatory changes, and about 20% by legislation.’ Republican President Donald Trump has gradually been nominating heads of financial agencies to carry out his agenda…”

China Bubble Watch:
June 14 – Wall Street Journal (Anjani Trivedi): 
“China’s banking regulator should know better by now: loosen the reins and debt soon piles up. While Beijing is carrying out a high-profile campaign to reduce leverage in its financial markets with one hand, with the other it is encouraging more potentially reckless borrowing. This week, the regulator put pressure on the country’s big banks to lend more to small companies and farmers, while the government announced tax breaks for financial institutions that lend to rural households… If the goal of lending to poorer customers sounds noble, the concern is that the execution will only worsen Chinese banks’ existing problems, namely high levels of bad loans and swaths of mispriced credit. Bank lending to small companies is already growing pretty fast, with non-trivial sums involved: It jumped 17% in the year through March to 27.8 trillion yuan ($4.084 trillion). That compares favorably with the 7% rise in loans to large- and medium-size companies over the same period.”

June 14 – Bloomberg: 
“Only a year ago he was hailed as one of the boldest dealmakers in China. But on Wednesday, with scant explanation, Wu Xiaohui was said to be unable to perform his duties as chairman of Anbang Insurance Group Co… The development added another layer of intrigue to the story of Anbang, whose overseas acquisition spree has slowed in recent months amid increased scrutiny at home and abroad. China’s central bank was said to look into suspected breaches of anti-money laundering rules at the insurer late last year, while authorities temporarily banned Anbang’s life insurance unit from selling new products in May. High-profile bids for American hotels, insurance assets and a Manhattan office tower owned by the family of U.S. presidential adviser Jared Kushner have all fallen through over the past 18 months.”

June 14 – Bloomberg (Keith Zhai and Ting Shi): 
“China’s billionaires are learning yet again that wealth and power are no longer enough to keep them out of trouble. Anbang Insurance Group Co. said… that Wu Xiaohui -- its chairman, and one of China’s most aggressive overseas dealmakers -- was unable to perform his duties for personal reasons. Caijing Magazine, a reputable finance and business publication, said he was taken away for questioning. Wu is the latest example of the new reality in Xi Jinping’s China: Almost anyone could be hauled away at any time, regardless of cash or connections. Since Xi became party chief in 2012, billionaires and senior Communist Party members alike have been among those rounded up for questioning over corruption, financial crimes or other misdeeds.”

June 12 – Reuters (Stella Qiu and Jake Spring): 
“Chinese auto sales slipped in May from a year ago, registering two straight months of declines for the first time since 2015, with the automakers' association saying the weakness may drag on as the rollback of a tax incentive continues to hurt. The world's biggest auto market got a shot in the arm in 2016, growing at its fastest pace in three years, after Beijing halved the purchase tax on smaller-engined vehicles. But buyers have shied away since taxes climbed to 7.5%, from 5%, at the start of this year. Auto sales in China fell 0.1% in May from a year ago to 2.1 million vehicles…”

Europe Watch:
June 13 – Bloomberg (Rainer Buergin, Birgit Jennen, and Patrick Donahue): 
“German Finance Minister Wolfgang Schaeuble called for central banks to end ‘ultra loose’ monetary policy to avoid stoking global imbalances, saying that while they were beginning to take steps in that direction it was harder for the European Central bank to do so. ‘The Federal Reserve has already begun this process and even the ECB has made some communications that you could feel that, in a medium-term time, they will continue to think about -- in this direction,’ Schaeuble said… at the Bloomberg Germany G-20 Day conference in Berlin. ‘It’s not easy for the ECB, with all due respect.’”

Central Bank Watch:
June 11 – Bloomberg: 
“Investors who fret about when and how global central banks will run down their crisis-era balance sheets can be relaxed about the biggest of them all -- China’s. Whereas the Federal Reserve’s $4.5 trillion asset pile is set to be shrunk and the European Central Bank’s should stop growing by the end of this year as the outlook brightens, China’s $5 trillion hoard is here to stay for the time being -- and could even still expand, according to the majority of respondents in a Bloomberg survey of People’s Bank of China watchers. The PBOC balance sheet is a fundamentally different beast from its global peers -- run up through years of capital inflows and trade surpluses rather than hoovering up government bonds -- but it still matters for the global economy. Changes in the amount of base money in the world’s largest trading nation are having a bigger impact than ever, making the variable key for stability in a year when political transition in Beijing is in the cards.”

June 12 – Bloomberg (Greg Quinn and Maciej Onoszko): 
“The Bank of Canada offered its strongest signal yet that it’s ready to raise interest rates as the economy gathers steam, in surprise comments that sent the Canadian dollar and bond yields soaring. In a speech Monday, Senior Deputy Governor Carolyn Wilkins highlighted how the nation’s recovery is broadening across regions and sectors, giving policy makers ‘reason to be encouraged.’ She downplayed worries about Toronto’s housing market and said policy makers need to keep their eye on the future evolution of growth, not only current economic conditions.”

Brexit Watch:
June 15 - CNN (Charles Riley): 
“Britain has three days to figure out its Brexit plan. The U.K. confirmed Thursday that official divorce talks with the European Union will start on June 19. But it's far from clear what its negotiating position will be when they get underway. Last week's general election wiped out Prime Minister Theresa May's parliamentary majority and raised big doubts about her hardline EU exit strategy. May is still trying to secure the support of a fringe party whose votes she needs to form a government, and it won't be clear until next Wednesday whether she commands a majority in parliament. Meanwhile, there is open debate about how Britain should approach talks with the EU, despite a year having passed since voters chose to pull the U.K. out of its most important export market.”

Global Bubble Watch:
June 11 – Bloomberg (Jonas Cho Walsgard): 
“The best returns are not in the riskiest stocks but in the least risky bonds. But you can’t get them without leverage. That philosophy helped Asgard Fixed Income Fund deliver a 19% return in the past year. ‘That’s the core of our strategy,’ Morten Mathiesen, 45, chief investment adviser at Copenhagen-based Moma Advisors A/S, said… ‘The best risk-adjusted returns are actually the low vol trades.’ …Mathiesen uses a proprietary model to forecast and pick the best risk premiums in short-term, high-quality bond markets. Most of the fund’s bonds are AAA rated, such as Danish mortgage bonds… To offset the interest rate risk the fund hedges the bonds with derivatives and is only exposed to the spread. The spread is usually small so the fund must borrow money to boost the return. Current leverage is about 11 times and has been as high as 25 times, according to Mathiesen. The volatility target is about 6%.”

June 14 – Wall Street Journal (Asjylyn Loder and Gunjan Banerji): 
“Wall Street’s ‘fear gauge’ has neared all-time lows this year. That hasn’t stopped retail investor Jason Miller from making a nice chunk of change betting it will go even lower. The Boca Raton, Fla., day trader says he has made $53,000 since the start of the year by effectively shorting the CBOE Volatility Index, nicknamed the VIX. That includes a white-knuckle day on May 17, when the VIX spiked 46% following reports that President Donald Trump had pressured former FBI Director James Comey to drop an investigation into former National Security Advisor Michael Flynn. As the 40-year-old Mr. Miller recalls, he rode out the storm, confident the market would revert to its torpid ways—which it did. ‘One person’s fear is another person’s opportunity,’ says Mr. Miller.”

June 11 – CNBC (Stephanie Landsman): 
“If David Stockman is right, Wall Street should hunker down. ‘This is one of the most dangerous market environments we’ve ever been in. It’s the calm before a gigantic, horrendous storm that I don't think is too far down the road,’ he recently said on ‘Futures Now.’ Stockman, who was director of the Office of Management and Budget under President Ronald Reagan, made his latest prediction after lawmakers grilled former FBI Director James Comey…”

June 14 – Bloomberg (Michael Heath): 
“Australian employment surged in May, led by a rebound in full-time positions, sending the jobless rate to the lowest level in more than four years. The currency surged. Employment jumped 42,000 from April, when it climbed an upwardly revised 46,100… Jobless rate fell to 5.5%, the lowest since Feb. 2013…”

Fixed Income Bubble Watch:
June 14 – Bloomberg (Luke Kawa and Robert Elson): 
“Combine the enduring search for yield with a renewed bull market in Treasuries and what do you get? Record high U.S. corporate debt holdings. Stone & McCarthy Research Associates’ weekly survey of fixed-income portfolio managers showed corporate debt allocations at an all-time high of 37%, matching levels last seen in August 2016. Money managers’ holdings of corporate bonds as a share of assets has oscillated between 32% and 37% over the past five years. Survey participants also reported reducing their allocation to Treasuries ahead of this week’s Federal Reserve meeting to 24.2%...”

June 11 – Bloomberg (Michelle Kaske and Steven Church): 
“Puerto Rico will likely need to fund government operations using sales-tax revenue claimed by warring factions of bondholders unless a legal dispute at the heart of the island’s bankruptcy is resolved by November. The federal oversight board charged with restructuring Puerto Rico’s $74 billion debt asked a judge to let the board appoint two independent agents to help litigate a dispute over who owns cash collected by the government’s sales tax agency…”

Federal Reserve Watch:
June 14 – Bloomberg (Christopher Condon and Craig Torres): 
“Federal Reserve officials forged ahead with an interest-rate increase and additional plans to tighten monetary policy despite growing concerns over weak inflation. Policy makers agreed to raise their benchmark lending rate for the third time in six months, maintained their outlook for one more hike in 2017 and set out some details for how they intend to shrink their $4.5 trillion balance sheet this year. In a press conference…, Fed Chair Janet Yellen said the unwinding plan could be put into effect ‘relatively soon’ if the economy evolves as the central bank expects. ‘Near-term risks to the economic outlook appear roughly balanced, but the committee is monitoring inflation developments closely,’ the Federal Open Market Committee said… ‘The committee currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated.’”

June 14 – Bloomberg (Cameron Crise): 
“The Federal Reserve’s focus on consumer-price inflation, over which it exerts relatively little influence, means it’s ignoring asset prices that are veering dangerously close to bubble territory. The surge in prices this year for virtual currencies such as bitcoin is reminiscent of the technology-stock excess of the late 1990s, and even after a recent selloff, the biggest U.S. tech shares are still up more than 20%. Policy makers could rein in the speculation by speeding up the pace of interest-rate increases…”

June 14 – Bloomberg (Nick Timiraos and Kate Davidson): 
“The White House is set to launch its search for the next Federal Reserve chief, according to a senior official, and it will be managed by Gary Cohn, the former Wall Street executive who some market strategists believe could be a candidate for the post himself. Officials won’t publicly outline any timetable for their decision or shortlist of candidates. Fed Chairwoman Janet Yellen’s term runs through January… Ms. Yellen’s reappointment isn’t an outcome many observers expect because of Mr. Trump’s fierce criticism of her during the final weeks of last year’s presidential campaign. But his willingness to consider her speaks to the amicable relationship they have forged since Mr. Trump took office, observers say.”

U.S. Bubble Watch:
June 14 – Bloomberg (Sho Chandra):
 “U.S. retail sales fell in May by the most since the start of 2016, reflecting broad declines in categories including motor vehicles and electronics… Retail sales dropped 0.3% (est. unchanged) after a 0.4% increase in prior month. Sales excluding autos and gasoline were unchanged after a revised 0.5% advance…”

June 14 – Wall Street Journal (Jon Sindreu): 
“Desperate to increase returns, some of the world’s most conservative investors are taking bigger risks by aping banks and lending directly to companies. In recent years, there has been a surge in investments from pension funds and life insurers into specialist asset managers that lend to midsize firms who can’t get financing from banks… But now the flood of cash is pushing down returns, leading these funds to design riskier and more complex products, while increasing their leverage. Because ultralow interest rates and other monetary stimulus have pushed down yields across markets, pension funds and life insurers have struggled to match their long-dated liabilities. That has encouraged them to chase riskier assets, such as real estate, private equity and now direct lending to companies.”

June 13 – Bloomberg (Julie Verhage): 
“U.S. stocks are the most overvalued investment in the world. At least that’s what institutional investors say. A record 44% of fund managers polled in a monthly survey from Bank of America Merrill Lynch see equities as overvalued, up from 37% last month. The technology-heavy Nasdaq Composite Index was named the most crowded trade, with 57% of investors saying Internet stocks are expensive and 18% calling them ‘bubble-like.’ Still, analysts caution that these results don’t spell the end of the bull market.”

June 14 – Bloomberg (Matt Scully): 
“Two of the biggest online consumer lenders don’t always check whether borrowers are lying to them, and if they find errors in an application, they may still approve the loan. Prosper Marketplace Inc. doesn’t verify key information like income and employment for around a quarter of the loans it makes, according to documents... LendingClub Corp. said it only verified income about a third of the time for one of the most popular loans it made in 2016… If either lender finds mistakes in a borrower’s application, such as overstated income, they may still go ahead with the loan, according to disclosures…”

June 12 – Wall Street Journal (Kristen Grind): 
“Brokers willing to learn the lost art of making risky mortgages are in demand again. Brandon Boyd was a high school junior during the financial crisis. Now, the former Calvin Klein salesman is teaching mortgage brokers how to make subprime loans. Mr. Boyd, a 25-year-old account executive at FundLoans in a beach town outside of San Diego, is at the cusp of efforts to bring back an army of salespeople who once powered the mortgage industry and, some say, contributed to the housing crisis.”

June 12 – Bloomberg (Matt Scully): 
“Subprime auto bonds issued in 2015 are by one key measure on track to become the worst performing in the history of car-loan securitizations, according to Fitch Ratings. This group of securities is experiencing cumulative net losses at a rate projected to reach 15%, which is higher even than for bonds in the 2007, Fitch analysts Hylton Heard and John Bella Jr. wrote… ‘The 2015 vintage has been prone to high loss severity from a weaker wholesale market and little-to-no equity in loan contracts at default due to extended-term lending, a trend which was not as apparent in the recessionary vintages,’ said the analysts, referring to lenders’ stretching out repayment terms on subprime loans, sometimes to over six years, to lower borrowers’ monthly payment.”

Japan Watch:
June 14 – Wall Street Journal (Saumya Vaishampayan and Megumi Fujikawa): 
“Don’t look now, but Japan’s central bank is slowing its vast bond-buying exercise. The Bank of Japan bought just ¥7.89 trillion ($71.6bn) worth of Japanese government debt last month, according to J.P. Morgan. While that sounds like a lot, it is the least outright buying… since October 2014, when the central bank surprised markets by saying it would increase its asset purchases. The latest figure raises a question: Is the BOJ trying to rein in its ultraloose policies by stealth?”


Leveraged Speculator Watch:
June 14 – Bloomberg (Evelyn Cheng): 
“Short-term investors should sell stocks and get ready for a drop in the market this summer, Jeffrey Gundlach, CEO and CIO of DoubleLine, said… ‘If you’re a trader or a speculator I think you should be raising cash today, literally today. If you're an investor you can easily sit through a seasonally weak period,’ Gundlach said… Gundlach reiterated his expectation for a summer correction in the U.S. stock market, while Treasury yields rise.”

June 13 – Bloomberg (John Gittelsohn): 
“Investors should be wary as low interest rates, aging populations and global warming inhibit real economic growth and intensify headwinds facing financial markets, according to Bill Gross. ‘Don’t be mesmerized by the blue skies,’ Gross, manager of the Janus Henderson Global Unconstrained Bond Fund, wrote... ‘All markets are increasingly at risk.’”

Geopolitical Watch:
June 13 – Reuters (Idrees Ali and Mike Stone): 
“U.S. Defense Secretary Jim Mattis said… that North Korea's advancing missile and nuclear programs were the ‘most urgent’ threat to national security and that its means to deliver them had increased in speed and scope. ‘The regime’s nuclear weapons program is a clear and present danger to all, and the regime’s provocative actions, manifestly illegal under international law, have not abated despite United Nations’ censure and sanctions,’ Mattis said… ‘The most urgent and dangerous threat to peace and security is North Korea… North Korea's continued pursuit of nuclear weapons and the means to deliver them has increased in pace and scope.’”

June 10 – Reuters (Maria Kiselyova): 
“Russia said… it had told the United States it was unacceptable for Washington to strike pro-government forces in Syria after the U.S. military carried out an air strike on pro-Assad militia last month. Russian Foreign Minister Sergei Lavrov relayed the message to U.S. Secretary of State Rex Tillerson… on Saturday initiated by the U.S. side, the Russian Foreign Ministry said…”

June 13 – Reuters (Jim Finkle): 
“Two cyber security firms have uncovered malicious software that they believe caused a December 2016 Ukraine power outage, they said…, warning the malware could be easily modified to harm critical infrastructure operations around the globe. ESET, a Slovakian anti-virus software maker, and Dragos Inc, a U.S. critical-infrastructure security firm, released detailed analyses of the malware, known as Industroyer or Crash Override, and issued private alerts to governments and infrastructure operators to help them defend against the threat.”