Economic News for week ending April 27, 2018

Saturday, April 28, 2018

Weekly Commentary: 

Conventional Wisdom

by Doug Noland

full column here:

http://creditbubblebulletin.blogspot.com/2018/04/weekly-commentary-conventional-wisdom.html

My summary is below:

For the week ending April 27, 2018:

STOCKS:
S&P500 was unchanged (down 0.1% y-t-d)
Dow Industrials slipped 0.6% (down 1.7%)
Dow Utilities jumped 2.7% (down 2.3%)
Dow Transports slipped 0.3% (down 0.6%)
S&P 400 Midcaps declined 0.4% (down 0.4%)
Small cap Russell 2000 slipped 0.5% (up 1.3%)
Nasdaq100 dipped 0.2% (up 4.1%)
Biotechs declined 0.2% (up 7.9%)

With bullion down $12, 
the HUI gold tock index dropped 1.2% 
   (down 5.3%). 

U.K.'s FTSE jumped 1.8% (down 2.4%).

Japan's Nikkei 225 gained 1.4% (down 1.3% y-t-d). 
France's CAC40 rose 1.3% (up 3.2%)
German DAX increased 0.3% (down 2.6%). 
Spain's IBEX 35 gained 0.4% (down 1.2%).
Italy's FTSE MIB added 0.4% (up 9.5%)
Brazil's Bovespa rose 1.0% (up 13.1%)
Mexico's Bolsa slipped 0.3% (down 2.2%)
South Korea's Kospi gained 0.6% (up 1.0%)
India’s Sensex jumped 1.6% (up 2.7%)
China’s Shanghai gained 0.3% (down 6.8%). 
Turkey's Istanbul National 100 index fell 3.0% (down 6.7%). 
Russia's MICEX rallied 3.1% (up 9.1%)

BONDS & MORTGAGES:
US Ten-year Treasury yields were unchanged at 2.96% 
   (up 55bps). 

US long bond yields declined two bps to 3.13% 
   (up 38bps). 

Benchmark Fannie Mae MBS yields dipped one basis point to 3.65% 
   (up 65bps).

Freddie Mac 30-year fixed mortgage rates 
jumped 11 bps to 4.58% 
   (up 55bps y-o-y). 

Fifteen-year rates rose eight bps to 4.02% 
    (up 75bps). 

Five-year hybrid ARM rates gained seven bps to 3.74% 
    (up 62bps)

Jumbo mortgage 30-yr fixed rates surging 21 bps to 4.73% 
    (up 59bps).

M2 (narrow) "money" supply rose $10.0bn last week to $13.947 TN. 
"Narrow money" gained $508bn, or 3.8%, over the past year. 

Currency Watch:

The U.S. dollar index jumped 1.4% to 91.542 
   (down 0.6% y-t-d). 

Commodities Watch:

Goldman Sachs Commodities Index little changed 
   (up 6.9% y-t-d). 
Spot Gold declined 0.9% to $1,323 (up 1.6%). 
Silver sank 3.9% to $16.497 (down 3.8%). 
Crude slipped 30 cents to $68.10 (up 13%). 
Gasoline gained 1.5% (up 18%)
Natural Gas rose 1.4% (down 0.6%). 
Copper fell 2.7% (down 7%). 
Wheat jumped 4.5% (up 17%). 
Corn rose 3.4% (up 14%).

Market Dislocation Watch:

April 25 - Bloomberg (Katherine Greifeld): 
"Shares of the FAANG-BAT complex -- which includes U.S. tech giants Facebook, Amazon, Apple, Netflix, and Google parent Alphabet, as well as China's Baidu, Alibaba and Tencent -- have lost more than $200 billion in market value since late last week. Money managers in a Bank of America survey earlier this month labeled being long the companies the most crowded bet in markets. Meanwhile, the dollar resumed its best run since 2016 Wednesday. That's after hedge funds and other large speculators amassed the biggest net-short position in more than five years, Commodity Futures Trading Commission data show."

Trump Administration Watch:

April 26 - Reuters (Roberta Rampton and Susan Heavey): 
"U.S. President Donald Trump's top economic adviser Larry Kudlow said … he hoped upcoming trade talks with China would yield progress but that resolving U.S. complaints would be 'a long process.' Trump is preparing to send a delegation to China to try to head off a trade war. He has threatened a new round of $100 billion in tariffs on Chinese products that could target cellphones, computers and other consumer goods."

April 27 - Reuters (Koh Gui Qing):
"The U.S. government may start scrutinizing informal partnerships between American and Chinese companies in the field of artificial intelligence, threatening practices that have long been considered garden variety development work for technology companies, sources familiar with the discussions said. So far, U.S. government reviews for national security and other concerns have been limited to investment deals and corporate takeovers. This possible new expansion of the mandate - which would serve as a stop-gap measure until Congress imposes tighter restrictions on Chinese investments - is being pushed by members of Congress, and those in U.S. President Donald Trump's administration who worry about theft of intellectual property and technology transfer to China…"

April 22 - Financial Times (Gavyn Davies): 
"A familiar dispute has erupted between Republican and Democrat macro-economists in the US about the causes of the permanently high budget deficits and public debt ratios shown in new CBO projections for the medium term. The Republican economists blame excessive entitlement programmes, while the Democrats blame abnormally low taxation following the Trump budget. No surprises there: the non-partisan truth is that both spending and taxation have to be adjusted in hugely unpopular directions if the debt ratio is to be stabilised. The political discipline to do this has been absent since the Clinton era. In the absence of early policy changes, economists on both sides believe that America is facing a looming debt 'crisis'. The Republicans say this could hit 'like an earthquake as short-term bondholders attempt to escape fiscal carnage'. The Democrats agree that 'a debt crisis is coming; none of that is in dispute'. "

April 24 - CNBC (Sarah O'Brien): 
"The number of homeowners who will benefit from the mortgage tax break is expected to plummet this year by more than half, according to a congressional report… About 13.8 million taxpayers will be able to claim the mortgage-interest deduction in 2018, down from more 32.3 million in 2017… That's about a 57% drop."

U.S. Bubble Watch:

April 24 - CNBC (Diana Olick): 
"The critical shortage of homes for sale continues to drive home prices higher nationwide. Values jumped 6.3% nationally in February compared with a year earlier, according the S&P CoreLogic Case-Shiller Home Price Index. That is a wider gain than January's 6.1% annual jump. Home prices nationally were 6.7% higher than their peak in July 2006… Prices are increasing more sharply in the nation's largest metropolitan markets. The largest 10 cities saw an annual increase of 6.5% compared with 6% in February. The largest 20 cities saw 6.8% gains, up from 6.4% in January. Local leaders continue to be Seattle (+12.7%), Las Vegas (+ 11.6%) and San Francisco (+10.1%). Thirteen of the top 20 cities saw bigger annual price increases in February than in January."

April 26 - Bloomberg (Prashant Gopal and Matthew Boesler): 
"The U.S. homeowner vacancy rate dropped to 1.5% in the first quarter, the lowest level since 2001, a sign that houses aren't going to waste amid a residential supply crunch. The rate was down from 1.7% a year earlier and 1.6% in the fourth quarter, the U.S. Census Bureau said… The vacancy rate is the proportion of the non-vacation-home inventory that is vacant and for sale. The declining vacancy rate only adds to concerns about record low housing supplies…"

April 25 - CNBC (Evelyn Cheng): 
"Several companies, including chipmaker Nvidia and toymaker Hasbro, are reporting how a shortage of truck drivers is affecting their business. 'Trucking is right now … experiencing a severe crisis,' Robert Csongor, vice president and general manager of automotive at Nvidia, said… 'There's a shortage of trucking drivers driven by the Amazon age.' Trucks account for more than 70% of all tonnage moved in the U.S… A shortage of drivers has persisted for years due primarily to an aging workforce and poor compensation for the long hours away from home coupled with increasing demand led by Amazon, according to industry experts."

April 26 - Bloomberg (Keith Naughton): 
"Ford Motor Co. is cleaving an additional $11.5 billion from spending plans and dropping several sedans, including the Fusion and Taurus, from its lineup to more quickly reach an elusive profit target. The automaker is almost doubling a cost-cutting goal to $25.5 billion by 2022… By not investing in next generations of any car for North America except the Mustang, the company now anticipates it'll reach an 8% profit margin by 2020, two years ahead of schedule."

China Watch:

April 24 - Financial Times (Gabriel Wildau): 
"Chinese banks have embarked on a new round of capital raising, prompted by regulations on shadow banking that are forcing lenders to bring shadow loans back on to their balance sheets. Pressure on banks to boost capital is a key element of Beijing's broader effort to contain financial risks from the country's extraordinary debt growth over the past decade. For most of the past decade, banks' dominance of China's financial system has waned as non-bank lenders and capital markets expanded. But the new rules forbid banks from packaging off-balance-sheet loans into 'wealth management products' that combine high yields with an implicit guarantee against default. That has spurred a revival of traditional bank lending. The resulting swell in bank balance sheets is boosting lenders' need for capital to comply with Chinese regulators' aggressive implementation of global Basel III capital adequacy rules."

April 24 - Bloomberg: 
"The next front in China's crackdown on debt is the one closest to home. On the back of a boom in property prices, household borrowing has been climbing for 10 years straight, at a pace that rivals any such run-up in major economies. At $6.7 trillion, and a record 50% of gross domestic product, private debt is now approaching developed-world levels and crimping consumer spending power. Take Huang Panpan, a 33-year-old public-relations executive from Beijing. Last year, he took the plunge on a 2.9-million-yuan ($460,000) mortgage on a 385-square-foot home and now faces monthly loan payments of about half of his take-home salary."

Fixed Income Bubble Watch:

April 26 - Bloomberg (Liz McCormick and Saleha Mohsin): 
"The U.S. government's need for new financing, rising in part from tax cuts and increased spending under President Donald Trump, has Wall Street predicting the Treasury will ramp up borrowing yet again next week. Treasury officials are set to announce this quarter's funding plans on May 2, and bond dealers expect another across-the-board boost to auction sizes… The nation's fiscal overseers may have little choice, with deficits projected to surpass $1 trillion by 2020. The deterioration in federal finances, which is putting the U.S. debt profile on track to resemble Italy's, is becoming more glaring ahead of crucial midterm elections in November. American taxpayers are already bearing the cost, as swelling issuance has helped drive yields on some maturities to the highest in a decade. Government debt sales will more than double this year, to a net $1.44 trillion by JPMorgan Chase & Co.'s estimate…"

April 25 - Bloomberg (Liz McCormick and Alex Harris): 
" ... investors may be missing the most important movement afoot in the world's biggest debt market. It's the spike higher in U.S. short-term rates that's really flashing a warning signal for companies, share prices and consumers, according to Peter Tchir at Academy Securities Inc. The surge in two-year yields to the highest since 2008, is 'the scariest chart for investors,' said the firm's head of macro strategy. One-year bill rates are also the highest in almost a decade. 'The 10-year yield might attract all the attention but higher short-term yields are more problematic, ' Tchir wrote… 'Consumers who want to purchase large items are faced with higher costs. Investors can allocate to less risky bonds and out of dividend stocks and still get some yield.'"

April 25 - Bloomberg (Adam Tempkin and Brian W Smith): 
"Bonds with the lowest investment grade have been a market darling over the past decade, ballooning in size as low global interest rates drew fund managers seeking higher returns. But as borrowing costs climb to a four-year high just as investors begin to anticipate a downturn in the global economy, some analysts are starting to sound the alarm. 'We're late in the credit cycle, and trying to figure out when everything turns,' said Erin Lyons, a senior credit strategist at… CreditSights Inc. 'Some of these may eventually be downgraded.' Notes in the lowest rungs above high-yield junk -- in the BBB group from S&P Global Ratings or the Baa bucket from Moody's… -- total about $3 trillion…"

Global Bubble Watch:

April 24 - CNBC (Patti Domm): 
"Rising costs and rising interest rates make for a bad brew for stocks. The 10-year Treasury yield rose to 3% Tuesday for the first time in four years. The psychologically important number sent ripples across financial markets because rising interest rates are a sea change for consumers and companies that have lived with ultra-low borrowing costs for the past decade. Along with interest rates, other costs are rising for companies, with the potential to bite into profits and dampen earnings growth. This earnings season, with double-digit growth, was expected to pump up stock prices and take investors' minds off trade wars and geopolitical concerns. But strong earnings may have opened the door to a new concern - commodities and labor costs are going up along with interest rates."

Japan Watch:

April 27 - Bloomberg (Toru Fujioka and Masahiro Hidaka): 
"Governor Haruhiko Kuroda began his new term at the Bank of Japan much as he did the first one -- emphasizing his commitment to hitting 2% inflation. The BOJ left its policy settings intact, vowing to push ahead with stimulus even as other major central banks move further toward policy normalization, though at a moderating pace amid signs of slowing economic growth. Still there was a twist -- not uncommon in Kuroda's tenure -- as the BOJ's policy statement omitted mention of the projected time frame for hitting his longstanding 2% target."

Emerging Markets Bubble Watch:

April 26 - New York Times (Clifford Krauss): 
"As President Trump moves to recast trade and border relations with Mexico, American oil companies are worried that the prospective winner of Mexico's presidential election will play his own nationalist card. The leading candidate, Andrés Manuel López Obrador, wants to reverse policies that have tied a knot between Mexico and the United States in recent years in energy production and consumption. And he has promised to make sure that oil never falls 'back into the hands of foreigners.' In addition to threatening refinery profits in the United States, his proposals could slow oil production in Texas and impede deepwater drilling in the Gulf of Mexico by international oil giants like Exxon Mobil and Chevron. They would also jeopardize the United States' energy trade surplus with Mexico, which reached roughly $15 billion last year."

Geopolitical Watch:

April 25 - Reuters (Ben Blanchard and Jess Macy Yu): 
"A series of Chinese drills near Taiwan were designed to send a clear message to the island, and China will take further steps if Taiwan independence forces persist in doing as they please, Beijing said on Wednesday, as Taiwan denounced threats of force. Over the past year or so, China has ramped up military drills around democratic Taiwan, including flying bombers and other military aircraft around the self-ruled island. Last week China drilled in the sensitive Taiwan Strait. China claims Taiwan as its sacred territory, and its hostility towards the island has grown since the 2016 election as president of Tsai Ing-wen from the pro-independence Democratic Progressive Party."

April 24 - Reuters (Brenda Goh): 
"China has conducted live combat drills in the East China Sea…, the latest in a series of air and sea military exercises it has conducted over the past 10 days. Xinhua said a Chinese aircraft formation, which included the Liaoning carrier and J-15 planes, conducted anti-aircraft and anti-submarine warfare training where they intercepted 'enemy' jets, fired anti-air missiles from ships surrounding the carrier and dodged 'enemy' submarines."