Economic News for week ending May 18, 2018

Saturday, May 19, 2018

Weekly Commentary: 

Crisis Watch

by Doug Noland

full column here:
http://creditbubblebulletin.blogspot.com/2018/05/weekly-commentary-crisis-watch.html

My summary is below:

For the week ending 
May 18, 2018:

STOCKS:
S&P500 declined 0.5% (up 1.5% year-to-date)
Dow Industrials dipped 0.5% (unchanged)
Dow Utilities sank 3.1% (down 7.8%)
Dow Transports increased 0.2% (up 1.1%)
S&P 400 Midcaps added 0.2% (up 2.3%)
Small cap Russell 2000 jumped 1.2% (up 5.9%)
Nasdaq100 declined 1.2% (up 7.3%)
Biotechs gained 0.9% (up 11.4%). 

With gold bullion sinking $26, 
the HUI gold stock index 
dropped 2.5% (down 7.6%).

U.K.'s FTSE increased 0.7% (up 1.2%).

Japan's Nikkei 225 gained 0.8% (up 0.7% y-t-d).

France's CAC40 rose 1.3% (up 5.7%)

German DAX added 0.6% (up 1.2%)

Spain's IBEX 35 dropped 1.5% (up 0.7%)

Italy's FTSE MIB sank 2.9% (up 7.3%)

Brazil's Bovespa dropped 2.5% (up 8.7%)

Mexico's Bolsa fell 2.3% (down 7.5%)

South Korea's Kospi declined 0.7% (down 0.3%)

India’s Sensex dropped 1.9% (up 2.3%)

China’s Shanghai gained 0.9% (down 3.4%)

Turkey's Istanbul National 100 recovered 0.5% (down 11.2%)

Russia's MICEX equities declined 0.8% (up 10.3%).

BONDS / MORTGAGES / M2

US Ten-year Treasury yields 
jumped eight bps to 3.06% 
   (up 65bps). 
Long bond yields rose nine bps to 3.20% 
   (up 46bps). 

Freddie Mac 30-year fixed mortgage rates 
jumped six bps to 4.61% (up 59bps y-o-y). 

Fifteen-year rates gained seven bps to 4.08% (up 81bps). 

Five-year hybrid ARM rates rose five bps to 3.82% (up 69bps). 

Jumbo mortgage 30-yr fixed rates up a basis point to 4.72% (up 64bps).

M2 money supply rose $16.0bn last week to a record $13.971 TN. 
M2 gained $511bn, or 3.8%, over the past year. 

Currency Watch:

The U.S. dollar index jumped 1.2% to 93.637 (up 1.6% y-t-d). F

Commodities Watch:

The Goldman Sachs Commodities Index gained 1.0% (up 10.6% y-t-d). 
Spot Gold fell 1.9% to $1,293 (down 0.8%). 
Silver dropped 1.8% to $16.455 (down 4.0%). 
Crude gained 58 cents to $71.28 (up 18%). 
Gasoline jumped 2.0% (up 24%)
Natural Gas rose 1.5% (down 4%)
Copper declined 1.5% (down 7%)
Wheat rallied 3.9% (up 21%)
Corn jumped 1.5% (up 15%).

Trump Administration Watch:

May 18 - Bloomberg (Eric Martin, Josh Wingrove and Jenny Leonard): 
"President Donald Trump's chief NAFTA negotiator said the U.S., Canada and Mexico are 'nowhere near close to a deal' to update the region's 24-year-old free-trade pact as U.S. lawmakers warn that time is almost up to reach a agreement that can pass the current Congress. 'There are gaping differences on intellectual property, agricultural market access, de minimis levels, energy, labor, rules of origin, geographical indications, and much more,' U.S. Trade Representative Robert Lighthizer said… 'We of course will continue to engage in negotiations, and I look forward to working with my counterparts to secure the best possible deal for American farmers, ranchers, workers, and businesses.'"

May 16 - Bloomberg: 
"The Trump administration is delivering the World Trade Organization 'three hard blows' that could destroy the body's ability to regulate global commerce, China's ambassador to the Geneva-based body said. 'The U.S. is blocking selection of new Appellate Body members, taking restrictive trade measures under Section 232 and threatening to impose tariff measures of $50 billion of goods imports from China under Section 301 of U.S. domestic law,' said Zhang Xiangchen, China's envoy to the WTO since last year. 'Any one of these, if left untreated, will fatally undermine the functioning of the WTO.'"

May 16 - Politico (Andrew Restuccia, Nancy Cook and Doug Palmer): 
"Tensions between Trump administration moderates and hard-liners on trade with China are boiling over ahead of talks with Chinese negotiators in Washington this week - and as President Donald Trump seems increasingly eager to reach a deal. Peter Navarro, a Beijing critic and the standard-bearer of the president's harsh campaign rhetoric on China, had a screaming match with Treasury Secretary Steven Mnuchin, a moderate, during an initial round of talks in Beijing two weeks ago. On Wednesday, his name wasn't on a Treasury Department list of U.S. officials who will meet with Chinese Vice Premier Liu He and the rest of the Beijing delegation at Treasury on Thursday and Friday."

May 17 - Bloomberg (Toluse Olorunnipa): 
"John Bolton's desire to turn North Korea into the next Libya isn't going over so well in Pyongyang, where Kim Jong Un's government has threatened to cancel upcoming talks with the U.S. in part because of the U.S. national security adviser's remarks. Bolton drew the ire of the North Korean government for saying that the country's nuclear disarmament should follow the 'Libya model' embraced by Muammar Qaddafi, who was later overthrown and killed in a U.S.-backed uprising."

May 13 - Reuters (Valerie Volcovici and Richard Cowan): 
"The United States threatened on Sunday to impose sanctions on European companies that do business with Iran, as the remaining participants in the Iran nuclear accord stiffened their resolve to keep that agreement operational. White House national security adviser John Bolton said U.S. sanctions on European companies that maintain business dealings with Iran were 'possible,' while Secretary of State Mike Pompeo said he remained hopeful Washington and its allies could strike a new nuclear deal with Tehran."

May 14 - Politico (Andrew Restuccia and Doug Palmer): 
"Wilbur Ross has largely been sidelined in high-stakes trade negotiations with China in the latest signal that President Donald Trump is losing confidence in his commerce secretary… Ross - whom Trump once affectionately called a 'killer,' a high compliment in the president's lexicon - has steadily become a bit player, with the president regularly leaning on Treasury Secretary Steven Mnuchin, U.S. Trade Representative Robert Lighthizer and White House trade adviser Peter Navarro. The commerce secretary's standing took another hit this week when the president tweeted criticism of the department's recent decision to block the Chinese phone-maker ZTE from accessing U.S. technology…"

U.S. Bubble Watch:

May 14 - CNBC (Jeff Cox): 
"America's budget deficit and unemployment rate are heading in opposite directions - something that's never happened during post-World War II peacetime and could cause a significant jump in interest rates. Goldman Sachs projects, for instance, that the 10-year Treasury note could be yielding 3.6% next year. The deficit increase is coming due to the recent barrage of fiscal stimulus from Congress, including a $1.5 trillion tax cut approved in December 2017 and a $1.3 trillion spending bill aimed at keeping the government operating through the end of the fiscal year. Normally such moves would come in the early stages of an economic recovery. The U.S. economy, though, is in the eighth year of its post-financial crisis expansion…"

May 15 - CNBC (Diana Olick):
 "A sharp sell-off in the bond market is sending mortgage rates to the highest level in seven years. The average contract rate on the 30-year fixed will likely end the day as high as 4.875% for the highest creditworthy borrowers and 5% for the average borrower… Mortgage rates, which loosely follow the yield on the 10-year Treasury, started the year right around 4% but began rising almost immediately. They then leveled off in March and early April, only to begin rising yet again."

May 15 - Wall Street Journal (Akane Otani, Ben Eisen and Chelsey Dulaney): "U.S. companies are ramping up spending on their businesses at the fastest pace in years, a long-awaited development after years of tepid growth. Spending on factories, equipment and other capital goods by companies in the S&P 500 is expected to have risen to $166 billion in the first quarter, up 24% from a year earlier, according to Credit Suisse…. It is on track for the fastest pickup since 2011 and a record for the first quarter of a year. The jump has been aided by the U.S. tax-code overhaul, which is putting more cash in companies' coffers."

May 17 - Axios (Steve LeVine and Chris Canipe): "At a time of rock-bottom joblessness, high corporate profits and a booming stock market, more than 40% of U.S. households cannot pay the basics of a middle-class lifestyle - rent, transportation, child care and a cellphone, according to a new study. Quick take: The study, conducted by United Way, found a wide band of working U.S. households that live above the official poverty line, but below the cost of paying ordinary expenses. Based on 2016 data, there were 34.7 million households in that group - double the 16.1 million that are in actual poverty…"

May 17 - Wall Street Journal (Janet Adamy): 
"American women are having children at the lowest rate on record, with the number of babies born in the U.S. last year dropping to a 30-year low… Some 3.85 million babies were born last year, down 2% from 2016 and the lowest number since 1987, according to the Centers for Disease Control and Prevention's National Center for Health Statistics. The general fertility rate for women age 15 to 44 was 60.2 births per 1,000 women-the lowest rate since the government began tracking it more than a century ago…"

China Watch:

May 14 - Reuters (Kevin Yao and Fang Cheng):
 "China reported weaker-than-expected investment and retail sales in April and a drop in home sales, clouding its economic outlook even as policymakers try to navigate debt risks and defuse a heated trade row with the United States. Fixed asset investment grew the slowest since 1999 while the pace of retail sales softened to a four-month low, suggesting a long-anticipated slowdown in the world's second-largest economy may finally be setting in even as protectionism is on the rise. The lone bright spot on Tuesday's activity data was industrial output, which jumped more than expected as automobile and steel production surged."

May 14 - Reuters (Kevin Yao and Yawen Chen): 
"China's property investment growth slowed in April while sales marked their biggest fall in six months as higher borrowing costs and increased curbs on buyers weighed on demand, backing views that a key driver of the economy is losing some momentum. Real estate investment rose 10.2% in April from the same period a year earlier, compared with a 10.8% rise in March… New household loans, mostly mortgages, slowed to 528.4 billion yuan in April from 580 billion yuan in March…"

Global Bubble Watch:

May 17 - Bloomberg (Sridhar Natarajan): 
"Warren Buffett once called them 'financial weapons of mass destruction.' Now Pope Francis, of all people, is taking aim at derivatives. In a sweeping critique of global finance released by the Vatican…, the Holy See singled out derivatives including credit-default swaps for particular scorn. 'A ticking time bomb,' the Vatican called them. The unusual rebuke -- derivatives rarely reach the level of religious doctrine - is in keeping with Francis's skeptical view of unbridled global capitalism. 'The market of CDS, in the wake of the economic crisis of 2007, was imposing enough to represent almost the equivalent of the GDP of the entire world. The spread of such a kind of contract without proper limits has encouraged the growth of a finance of chance, and of gambling on the failure of others, which is unacceptable from the ethical point of view,' the Vatican said in the document."

May 17 - Bloomberg (Sid Verma): 
"In credit markets, it's America first no longer. A wave of foreign selling of U.S. corporate bonds threatens to unhinge global debt markets from their bullish moorings, according to HSBC… After a multi-year binge, the largest owners of America Inc.'s debt -- overseas investors -- are paring their exposures as higher short-term U.S. rates drive up hedging costs, especially for Europeans. The accompanying pressure on the biggest corporate bond market risks hobbling credit bulls around the world. 'Our analysis of foreign investors in U.S. dollar and euro suggests major changes in global capital flows are underway,' strategists led by Jamie Stuttard wrote… While European issuers will benefit from repatriation flows, a 'disorderly' retrenchment from dollar debts would ensure no developed credit market escapes the 'bearish correlations.' Higher relative yields and the U.S. economic recovery lured a tide of capital inflows in recent years. Now short-term dollar rates are at crisis-era levels, increasing the cost for foreigners to hedge their exposures, and dimming the market's allure even as yields on U.S. investment-grade notes rise to seven-year highs."

May 15 - Bloomberg (Greg Quinn): 
"Canadian home sales fell to the lowest in more than five years in April, as tougher mortgage qualification rules deterred buyers. The number of homes sold last month declined 2.9% from March, the Canadian Real Estate Association said… Declines were recorded in about 60% of cities tracked including Vancouver, Calgary, Toronto and Montreal."

Fixed Income Bubble Watch:

May 18 - Bloomberg (Sally Bakewell and Kiel Porter):
 "Buyout titans are benefiting as banks get less fearful about leveraged buyouts. When Leonard Green & Partners recently decided to buy a majority stake in SRS Distribution Inc., banks led by Bank of America Corp. and Barclays Plc sought loans and bonds to help finance the $3.6 billion buyout. Investors have so far been willing to increase debt for the building supply company to more than seven times a measure of earnings, a level that just a few years ago would have raised regulators' eyebrows. That deal isn't unusual. Debt in leveraged buyouts is creeping above the six times level that regulators said in 2013 was potentially too risky, after commitments to private equity deals scorched banks during and after the crisis. The average company in an LBO had borrowings equal to 6.4 times earnings before interest, taxes depreciation and amortization in 2018, according to Fitch… Last year it was 6.2 times Ebitda and in 2016, it was 5.9 times. The higher debt burdens are a symptom of memories getting shorter as the economic expansion grows longer."

Emerging Market Bubble Watch:

May 16 - Bloomberg (Ben Bartenstein): 
"While money managers from Goldman Sachs… to UBS Wealth Management still tout investing opportunities in emerging markets, the asset class has one notable critic: Harvard professor Carmen Reinhart. The… economist points to mounting debt loads, weakening terms of trade, rising global interest rates and stalling growth as reasons for concern. In fact, developing nations are worse off than during their two most recent moments of weakness: The 2008 global financial crisis and 2013 taper tantrum, when equities endured routs of 64% and 17% respectively. 'The overall shape they're in has a lot more cracks now than it did five years ago and certainly at the time of the global financial crisis,' Reinhart said… 'It's both external and internal conditions.'"

May 16 - Wall Street Journal (Richard Barley): 
"Who's next? The fear of contagion is stalking emerging markets again, but Argentina and Turkey have put themselves in the firing line while others have distanced themselves from it. The shakeout in emerging markets sparked by the 'taper tantrum' of 2013 put the spotlight on countries with relatively wide current-account deficits… Right now, the uncomfortable spotlight is on Argentina, where the peso has fallen more than 23% against the dollar this year and the country is seeking support from the International Monetary Fund, and Turkey, where the lira has fallen more than 15%. Both stand out for having current-account deficits estimated by the International Monetary Fund in 2018 at more than 5% of gross domestic product: the widest of the emerging-market members of the Group of 20 nations."

Japan Watch:

May 16 - Bloomberg (Yuko Takeo): 
"Japan's first economic contraction in two years is expected to be only a speed bump on the road to further, yet slower growth. The economy shrank in the first quarter at an annualized rate of 0.6% due to capital investment unexpectedly falling 0.1% and flat private consumption. Growth is forecast to resume in the current quarter as global trade and Japanese exports regain traction."

Geopolitical Watch:

May 16 - CNBC (Natasha Turak): 
"Turkey's President Recep Erdogan and Israeli Prime Minister Benjamin Netanyahu went at each other's necks via Twitter, accusing each other of brutality and human rights abuses. The spat… went down in the wake of violence on the Israeli-Gaza border on Monday during which Israeli forces killed at least 60 Palestinian protesters, coinciding with the opening of the U.S. embassy in Jerusalem. Turkey's government loudly condemned the killings. 'Israel is wreaking state terror. Israel is a terror state,' Erdogan said in a speech for state television… 'What Israel has done is a genocide. I condemn this humanitarian drama, the genocide, from whichever side it comes, Israel or America.' In response, Netanyahu shared some choice words for the Turkish president on Twitter, saying, 'Erdogan is among Hamas's biggest supporters and there is no doubt that he well understands terrorism and slaughter. I suggest that he not preach morality to us.'"

May 13 - Reuters (Ahmed Aboulenein and Maher Chmaytelli): 
"Populist cleric Moqtada al-Sadr, a long-time adversary of the United States, has all but won Iraq's parliamentary election, the electoral commission said, in a surprise turn of fortune for the Shi'ite leader. In the first election since Islamic State was defeated in the country, Iran-backed Shi'ite militia chief Hadi al-Amiri's bloc was in second place, while Prime Minister Haider al-Abadi, once seen as the front-runner, trailed in third."