Weekly Commentary:
Wonderful Monetary Policy and Beautiful De-leveraging
by Doug Noland
full column here:
http://creditbubblebulletin.blogspot.com/2017/07/weekly-commentary-wonderful-monetary.html
My summary is below:
For the Week ending July 7, 2017:
S&P500 little changed (up 8.3% y-t-d)
Dow Industrials up 0.3% (up 8.4%)
Dow Utilities down 0.8% (up 5.4%)
Dow Transports up 1.4% (up 7.2%)
S&P 400 Midcaps unchanged (up 5.2%)
Small cap Russell 2000 little changed (up 4.3%)
Nasdaq100 up 0.2% (up 16.3%)
Biotechs up 1.2% (up 27%)
With GOLD bullion sinking $28,
the HUI gold stock index
fell 3.7% (down 1.9%)
UK's FTSE up 0.5% (up 2.9%).
Japan's Nikkei 225 down 0.5% (up 4.3% y-t-d)
France's CAC40 up 0.5% (up 5.8%)
German DAX up 0.5% (up 7.9%)
Spain's IBEX 35 up 0.4% (up 12.2%)
Italy's FTSE MIB up 2.1% (up 9.3%)
Brazil's Bovespa down 0.9% (up 3.5%)
Mexico's Bolsa up 0.4% (up 9.7%)
South Korea's Kospi down 0.5% (up 17.4%)
India’s Sensex up 1.4% (up 17.8%)
China’s Shanghai up 0.8% (up 3.7%)
Turkey's Istanbul National 100 down 0.4% (up 28.1%)
Russia's MICEX up 1.8% (down 14.3%).
US Ten-year Treasury bond yields
rose eight bps to 2.39%
(down 6bps year-over-year)
US Thirty-year Treasury bond yields
jumped nine bps to 2.93%
(down 14bps).
German bund yields
gained 11 bps to 0.57%
(up 37bps)
Japanese 10-year "JGB" yields
were unchanged at 0.09%
(up 5bps).
U.K. 10-year gilt yields
increased five bps to 1.31%
(up 7bps).
US Freddie Mac 30-year fixed mortgage rates
jumped eight bps to 3.96%
(up 55bps y-o-y).
Fifteen-year rates rose five bps to 3.22%
(up 48bps).
Five-year hybrid ARM rate gained four bps to 3.21%
(up 53bps)
Jumbo mortgage 30-yr fixed rates up nine bps to 4.10%
(up 46bps).
Over the past year, Fed Credit dipped $2.8bn.
M2 money supply last week jumped $35.7bn to a record $13.546 TN.
and expanded $708bn, or 5.5%, over the past year.
Currency Watch:
The U.S. dollar index recovered 0.4% to 96.008 (down 6.2% y-t-d)
Commodities Watch:
Goldman Sachs Commodities Index dropped 1.8%
(down 8.3% y-t-d).
Spot Gold lost 2.3% to $1,213
(up 5.3%)
Silver sank 7.2% to $15.425
(down 4%).
Crude Oil fell $3.91 to $44.23
(down 18%)
Gasoline declined 1.0%
(down 10%)
Natural Gas sank 5.6%
(down 23%)
Copper dropped 2.4%
(up 6%)
Wheat gained another 1.7%
(up 31%)
Corn rose 3.0%
(up 12%)
Trump Administration Watch:
July 3 – Wall Street Journal (Kristina Peterson and Michelle Hackman):
“Republican senators back home on recess this week are hearing from some influential critics of their health-law effort: GOP governors, many of whom are urging them to push back on the legislation because it would cut Medicaid funding.
Governors of states including Ohio, Nevada and Arkansas, which stand to lose billions of dollars in Medicaid funding under the Senate bill, want senators to keep as much of that money as possible.”
July 1 – Financial Times (Demetri Sevastopulo, Tom Mitchell and Charles Clover):
“China lashed out at the US… in protest at an apparent sea change in the Trump administration’s policy towards Beijing as the White House prepared to slap punitive restrictions on Chinese steel imports, agreed an arms deal with Taiwan, and sanctioned a Chinese bank.
Cui Tiankai, the Chinese ambassador to Washington, criticised the $1.4bn Taiwanese weapons deal and what he called the ‘long-arm jurisdiction’ of the US in sanctioning Chinese companies…
The deteriorating relations come less than 100 days since Mr Trump hosted Mr Xi at his Mar-a-Lago estate and said the leaders would have a ‘very great relationship’.
Since then, the White House has become frustrated China was not doing enough to pressure North Korea to abandon its ballistic missile and nuclear programmes.”
July 2 – Time (Charlie Campbell):
“On Sunday, Beijing warned the U.S. government that sending an American naval vessel into territorial waters it claims around the Paracel Islands in the disputed South China Sea was a ‘serious political and military provocation,’ in the latest of a slew of incidents that augur souring relations…
… China sent military vessels and fighter planes to ward off the USS Stethem, warning that approaching the Paracels, which are known as the Xisha Islands in China and are also claimed by Taiwan and Vietnam”
China Bubble Watch:
July 5 – Reuters (Yawen Chen and Ryan Woo):
“China's services sector grew at a slower pace in June as new orders slumped, signaling renewed pressure on businesses after a pickup in May and pointing to a softening outlook for the economy…
The findings reinforced analyst views that the world's second-largest economy is cooling after a strong start to the year, as Beijing cracks down on easy credit to contain a dangerous build-up in debt and defuse financial risks.
The Caixin/Markit services purchasing managers' index (PMI) dropped to 51.6 in June from 52.8 in May…”
July 4 – Bloomberg:
“China struck deal after deal to acquire companies abroad over the last few years. Now the bill is coming due.
The nation’s top corporate dealmakers, including HNA Group Co. and Fosun International Ltd., must pay off the equivalent of at least $11.5 billion in bonds and loans by the end of 2018 -- a feat now complicated by government efforts to rein in their aggressive rush overseas.
That figure represents just a fraction of the total debt of 1.1 trillion yuan ($162bn) that the Chinese companies have reported…
The size of their obligations -- and whether they will be able to shoulder them -- has begun to worry global banks and investors now that Beijing has pressed companies to dial back their ambitions abroad.”
Europe Watch:
July 3 – Bloomberg (Carolynn Look):
“Euro-area manufacturing expanded at the strongest pace in over six years as factories across the region took on more workers to deal with surging orders.
A Purchasing Managers’ Index climbed to 57.4 in June, up from 57.0 in May and above a June 23 flash estimate, IHS Markit said…”
July 3 – Reuters (Michael Nienaber):
“Euro zone growth is stronger than expected and this will enable the European Central Bank to slowly normalize its monetary policy and end a ‘crazy situation’ of negative interest rates, German Finance Minister Wolfgang Schaeuble said…
Senior German government officials have stepped up the pressure on the ECB to scale back its monetary stimulus of bond purchases and sub-zero rates as Germany heads toward federal elections and voters complain about meager savings returns”
July 4 – Reuters (Foo Yun Chee, Stephen Jewkes and Antonella Cinelli):
“The European Union has approved a 5.4 billion euro ($6.1bn) state bailout of Italy's fourth-largest lender, Monte dei Paschi di Siena, taking the total amount of Italian taxpayer funds deployed to rescue banks over the past week to more than 20 billion euros.
Outside Greece, Europe has not seen such big state bailouts since the aftermath of the global financial crisis, raising political concerns about the continued use of public funds to mop up losses at badly run banks despite the introduction of new EU rules designed to prevent this.”
July 4 – AFP (Daniel Bosque):
“Catalonia will declare independence ‘immediately’ if a majority of the Spanish region's voters opt for independence in a Scotland-style referendum called for October, its ruling coalition said.
‘If the majority of votes are for creating a Catalan republic, obviously independence will have to be declared immediately,’ said Gabriela Serra, a member of the separatist coalition that governs Catalonia.”
Central Bank Watch:
July 3 – Reuters (Frank Siebelt):
“The European Central Bank is working on moving away from its ultra-easy monetary policy, Jens Weidmann, head of Germany's Bundesbank and a member of the ECB's rate-setting body, said…
Investors are watching for any sign that the ECB may reduce its stimulus, which includes massive bond purchases and ultra-low rates, after a hint in that direction by President Mario Draghi boosted the euro and government bond yields this week.”
Brexit Watch:
July 1 – Reuters (Andrew MacAskill):
“British business leaders have been told to brace for the possibility that Prime Minister Theresa May's government may walk out of Brexit talks this year, according to the Sunday Telegraph.
The move would be designed for ‘domestic consumption’ to show the government is negotiating hard with the European Union…
The Sunday Telegraph said the briefing of business leaders by a senior May aide took place after last month's general election and the person has since left in the recent overhaul at the top of government.”
Global Bubble Watch:
July 6 – Bloomberg (Dani Burger):
"Coordinated or not, signals from central bankers from Europe to Canada and the U.S. have roiled financial markets: The 10-year Treasury note yield jumped more than 20 bps, bund rates reclaimed 0.50% for the first time in 18 months…
While a few days of trading doesn’t cement the fate of markets for months to come, the debate is heating up over whether the moves are fleeting, amplified in the short term by summer vacation-induced light volumes, or if they mark the start of the end of a decade of easy money.”
July 6 – Bloomberg (Katia Dmitrieva, Erik Hertzberg, and Kristine Owram):
“Toronto’s housing market is losing steam.
A series of government measures and the prospect of higher interest rates boosted listings and sparked the biggest sales decline in more than eight years last month, the Toronto Real Estate Board reported…
Average home prices rose just 6.3% to C$793,915 ($612,000), the smallest annual increase since January 2015.
Toronto’s real estate market, mostly known for bidding wars and 20% price gains, is beginning to feel the effects of government rule changes that make it harder to get a mortgage.”
Fixed Income Bubble Watch:
July 3 – Wall Street Journal (Richard Barley):
“It is too easy to lose money in bonds.
Returns on bonds come from two sources: the interest income that accrues to holders and changes in bond prices.
But years of zero-interest-rate policy have drastically reduced the former, making the latter far more important.
That shift is important, in that it has changed the way in which normally reliable bonds behave.
Take Germany… The country’s benchmark 10-year bond pays a coupon of 0.25%, and at the start of last week was priced nearly close to par, with a yield of 0.25%.
By the end of the week, it yielded 0.47%, but the bond’s price had dropped by around 2%...”
July 3 – Reuters (Lauren Hirsch and Nick Brown):
“The Puerto Rico power utility PREPA, laden with a $9 billion debt load, has filed for a form of bankruptcy, Puerto Rico's primary fiscal agent said… “
Federal Reserve Watch:
July 4 – Wall Street Journal (Nick Timiraos):
“Federal Reserve officials have indicated there is a strong chance they will announce in September a decision to start shrinking the central bank’s portfolio of bonds and other assets, while putting off until December any further interest-rate increase.
The moves would give officials time to assess how markets react to the balance-sheet reductions and to confirm their view that a recent slowdown in inflation will fade.”
U.S. Bubble Watch:
July 5 – Wall Street Journal (Greg Ip):
“If you drew up a list of preconditions for recession, it would include the following: a labor market at full strength, frothy asset prices, tightening central banks, and a pervasive sense of calm.
In other words, it would look a lot like the present.
Consider the worrisome absence of worry. ‘Implied volatility’ measures the cost of hedging against big market moves via options.
When fear is pervasive, options are expensive so implied volatility is high.
At present, implied volatility in bonds, stocks, currencies and gold sits near its lowest since mid-2007, the eve of the financial crisis…
The economic expansion is now entering its ninth year and in two years will be the longest on record.
The unemployment rate sits at 4.3%, the lowest in 16 years, suggesting the economy has reached, or nearly reached, full capacity.”
July 3 – Bloomberg (Elise Young):
“Were it not for Illinois’s flirtation with a junk credit downgrade and New Jersey Governor Chris Christie’s luxuriating on a closed public beach, the budget woes of U.S. states might have assumed their annual spot in the dust bin of public-policy history.
This year, spending strife is unusually widespread, with 11 states missing their July 1 fiscal-year deadlines...
In a poor economy, states often freeze spending while lawmakers and the chief executive work out how to plug budget holes.
This year’s standoffs, though, come amid record stock-market gains and low national unemployment.”
July 6 – Reuters (Howard Schneider):
“A decade after doubts about the creditworthiness of mortgage-backed securities helped trigger the worst financial crisis since the Great Depression, systemic risk remains given the concentration of mortgages in Fannie Mae and Freddie Mac.
‘We're almost at a now-or-never moment,’ Fed Governor Jerome Powell told a conference…, arguing that the window for political action on an overhaul of housing finance may not stay open for long.”
July 4 – MarketWatch (Rachel Koning Beals):
“As car buyers’ obsession with bigger, pricier vehicles grows, so does their willingness to take longer to pay for them, says new analysis from Edmunds.com.
The average auto-loan length reached an all-time high of 69.3 months in June.
The average amount that buyers financed was hit with the biggest uptick for the year last month, at $30,945.
The financing trend also lead to the highest monthly payments for the year, now averaging $517…”
Japan Watch:
July 3 – Reuters (Linda Sieg):
“Prime Minister Shinzo Abe's Liberal Democratic Party suffered an historic defeat in an election in the Japanese capital on Sunday, signaling trouble ahead for the premier, who has suffered from slumping support because of a favoritism scandal.
On the surface, the Tokyo Metropolitan assembly election was a referendum on Governor Yuriko Koike's year in office, but the dismal showing for Abe's party is also a stinging rebuke of his 4-1/2-year-old administration.”
July 2 – Reuters (Leika Kihara and Tetsushi Kajimoto):
“Confidence among Japan's big manufacturers hit its highest level in more than three years in the June quarter, …adding to signs the recovery in the world's third largest economy is gaining pace.
Big firms also saw the job market at its tightest in 25 years, offering policymakers some hope that companies may finally raise wages…
The survey underscores the Bank of Japan's view that the economy is heading for a moderate expansion…”
Geopolitical Watch:
July 5 – Wall Street Journal (Jonathan Cheng):
“The U.S. warned North Korea that it is ready to fight if provoked, as Pyongyang claimed another weapons-development breakthrough following its launch of an intercontinental ballistic missile a day earlier.
The regime, having demonstrated its capacity to reach the U.S. with a missile, …touted another achievement of the test launch: It claimed that its missile warhead—the forward section, which carries the explosive—can withstand the extreme heat and pressure of re-entering the earth’s atmosphere.”
July 4 – Reuters (Jack Kim and Christine Kim):
“North Korea said… its newly developed intercontinental ballistic missile (ICBM) can carry a large nuclear warhead, triggering a call by Washington for global action to hold it accountable for pursuing nuclear weapons.
A spokeswoman for the U.S. Defense Department said it had concluded that North Korea test-launched an ICBM on Tuesday, which some experts now believe had the range to reach the U.S. state of Alaska as well as parts of the mainland United States.
U.S. Secretary of State Rex Tillerson said the test, on the eve of the U.S. Independence Day holiday, represented ‘a new escalation of the threat’ to the United States and its allies, and vowed to take stronger measures.”
July 6 – Reuters (Rodi Said and Dominic Evans):
“The head of the Syrian Kurdish YPG militia said… that Turkish military deployments near Kurdish-held areas of northwestern Syria amounted to a ‘declaration of war’ which could trigger clashes within days.
Turkey's Deputy Prime Minister Numan Kurtulmus retorted that his country was not declaring war but that its forces would respond to any hostile move by the YPG, which he described as a small-scale army formed by the United States.”
July 1 – Reuters (Pavel Polityuk):
“Ukraine said… that Russian security services were involved in a recent cyber attack on the country, with the aim of destroying important data and spreading panic.
The SBU, Ukraine's state security service, said the attack, which started in Ukraine and spread around the world…, was by the same hackers who attacked the Ukrainian power grid in December 2016.
Ukrainian politicians were quick to blame Russia for Tuesday's attack, but a Kremlin spokesman dismissed ‘unfounded blanket accusations’.”
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