Economic News for week ending May 25, 2018

Saturday, May 26, 2018

Weekly Commentary: 

Unfolding Instability Thesis

by Doug Noland

full column here:

http://creditbubblebulletin.blogspot.com/2018/05/weekly-commentary-unfolding-instability.html

My summary is below:

For the week 

ending May 25, 2018:

STOCKS

S&P500 added 0.3% (up 1.8% y-t-d), 

Dow Industrials increased 0.2% (up 0.1%). 

Dow Utilities jumped 3.2% (down 4.9%)

Dow Transports jumped 1.6% (up 2.7%)

S&P 400 Midcaps added 0.2% (up 2.4%)

small cap Russell 2000 was unchanged (up 6.0%)

Nasdaq100 rallied 1.4% (up 8.8%)

Biotechs declined 0.5% (up 10.8%). 

With gold bullion up $9,

 the HUI gold stock index 
recovered 1.4% 

   (down 6.3%).

U.K.'s FTSE slipped 0.6% (up 0.6%).

Japan's Nikkei 225 dropped 2.1% (down 1.4% y-t-d). 

France's CAC40 lost 1.3% (up 4.3%). 

German DAX fell 1.1% (up 0.2%). 

Spain's IBEX 35 sank 2.8% (down 2.2%). 

Italy's FTSE MIB was pounded 4.5% (up 2.5%)

Brazil's Bovespa sank 5.0% (up 3.3%)

Mexico's Bolsa declined 1.3% (down 8.6%)

South Korea's Kospi little changed (down 0.3%)

India’s Sensex added 0.2% (up 2.5%)

China’s Shanghai dropped 1.6% (down 5.0%)

Turkey's Istanbul National 100 gained 0.8% (down 10.5%). 

Russia's MICEX declined 0.9% (up 9.3%).

BONDS, MORTGAGES 

& MONEY SUPPLY

US Ten-year Treasury yields sank 12 bps to 2.93% (up 53bps). 

Long bond yields fell 11 bps to 3.09% (up 35bps). 

Benchmark Fannie Mae MBS yields dropped 12 bps to 3.64% (up 64bps).

Freddie Mac 30-year fixed mortgage rates 
     rose five bps to 4.66% (up 71bps y-o-y). 

Fifteen-year rates jumped seven bps to 4.15% (up 96bps). 

Five-year hybrid ARM rates gained five bps to 3.87% (up 80bps). 

Jumbo mortgage 30-yr fixed rates down two bps to 4.70% (up 64bps).

M2 money" supply jumped $27.1bn last week to a record $13.999 TN. 

M2 gained $513bn, or 3.8%, over the past year. 

Currency Watch:

The U.S. dollar index gained 0.7% to 94.258 (up 2.3% y-t-d). 

Commodities Watch:

Goldman Sachs Commodities Index added 0.5% (up 11.1% y-t-d). 

Spot Gold increased 0.7% to $1,302 (down 0.1%). 

Silver recovered 0.4% to $16.52 (down 3.6%). 

Crude was slammed $3.78 to $67.50 (up 12%). 

Gasoline dropped 2.8% (up 21%)

Natural Gas gained 2.9% (down 1%)

Copper increased 0.4% (down 7%)

Wheat surged 4.8% (up 27%)

Corn gained 0.9% (up 16%).

Market Dislocation Watch:

May 21 - Bloomberg (Luke Kawa): 
"The Italian government's borrowing costs have surged to inauspicious territory. The nation is getting punished in the bond market as the incoming populist government coalition seems ready to boost spending without much regard for European Union budget strictures and mulls the potential creation of assets tantamount to a parallel currency. The result: An Italian note maturing in February 2028 now yields 10 bps more than a euro-denominated sovereign from Indonesia due four months later."

May 24 - Reuters (Sujata Rao and Saikat Chatterjee): 
"Goldman Sachs said… that any systemic spillovers from Italian political risks into peripheral Europe could push the euro down against the dollar by 'around five big figures.' The prospect of a coalition government between the anti-establishment 5-Star Movement and far-right League, bent on big spending plans that would put Italy on a collision course with the European Union, have rattled markets in the past week. 'Should this become a more systemic event...we estimate that EUR/USD could fall by around 5 big figures,' the U.S. bank said in a note…"

Trump Administration Watch:

May 23 - New York Times (Ana Swanson): 

"President Trump has asked for a sweeping trade investigation into whether autos imported into the United States pose a threat to national security, a move that could ultimately result in tariffs on foreign-made cars and further strain relations with global allies. …The Commerce Department said it had begun an investigation 'following a conversation' with Mr. Trump. The announcement followed a statement from the president, in which he said he had instructed the commerce secretary, Wilbur Ross, to investigate imports of cars, trucks and auto parts 'to determine their effects on America's national security.' 'Core industries such as automobiles and automotive parts are critical to our strength as a nation,' Mr. Trump said."

May 24 - Wall Street Journal (Sean McLain in Tokyo, William Boston and Trefor Moss): "President Donald Trump's push to impose painful tariffs on auto imports has put close U.S. allies in the crosshairs of a global trade row that is creating uncertainty among auto makers, investors and governments. Shares of some of the biggest international auto makers… which have big exposure to the U.S., fell Thursday, a day after the U.S. Commerce Department launched a probe into whether it could raise tariffs to up to 25% on auto imports on the basis of national security. The probe adds to a battle over steel tariffs and, again, pitches the U.S. against three of its closest military allies-Japan, South Korea and Germany. All are major car exporters."

May 24 - Bloomberg (Chris Reiter): 

"U.S. President Donald Trump's threat to levy tariffs on imported vehicles aims at the heart of Germany's export-led economy, further straining relations between the two long-standing allies. While Trump didn't specifically point to Germany when calling for an investigation into protections for the U.S. auto industry on national security grounds, he didn't have to. Past statements have made clear that he resents the country's trade surplus, which amounted to 14.2 billion euros ($16.7bn) last year for Germany's auto industry."

May 23 - Reuters (James Oliphant and Lisa Lambert): 

"U.S. President Donald Trump… railed against Mexico and Canada's efforts in renegotiating the North American Free Trade Agreement (NAFTA), saying both of the United States' neighbors had been very difficult. 'NAFTA is very difficult. Mexico has been very difficult to deal with. Canada has been very difficult to deal with ... but I will tell you that in the end we win,' Trump told reporters…"

May 24 - Bloomberg (Jenny Leonard and Saleha Mohsin): 

"President Donald Trump is backing away from the trade agreement the U.S. just announced with Beijing, under pressure from China hawks among his supporters and in Congress who have assailed the accord as a capitulation. 'Our Trade Deal with China is moving along nicely, but in the end we will probably have to use a different structure in that this will be too hard to get done and to verify results after completion,' Trump said… After boasting of the deal's benefits for farmers in tweets on Monday, Trump first indicated on Tuesday he was having second thoughts as some of his loyalists publicly criticized the agreement. Asked if he was pleased with the direction of his administration's negotiations with China, Trump told reporters 'no, not really.' He later added, 'they're a start.'"

May 19 - Wall Street Journal (Bob Davis and Lingling Wei): 

"A last-ditch effort by the Trump administration failed to get China to accept its demand for a $200 billion cut in the U.S. bilateral trade deficit, as Chinese officials resisted committing to any specific targets after two days of contentious negotiations. The two days of deliberations in Washington ended with both sides arguing all night on Friday over what to say in a joint statement… The Chinese had come willing to step up purchases of U.S. merchandise as a measure to narrow China's $375 billion trade advantage. But U.S. negotiators pushed the Chinese delegates to approve a specific target of $200 billion in additional Chinese purchases. The Chinese refused any such target in specific dollar amounts, and the matter is now in the hands of President Donald Trump and President Xi Jinping, the people said."

May 22 - Wall Street Journal (Kate O'Keeffe and Bob Davis): 

"Lawmakers are moving to thwart Trump administration efforts to ease restrictions on Chinese telecommunications giant ZTE Corp. and other sensitive technology, citing fears the positions would compromise national security in the latest twist in trade negotiations between the world's largest economies. The Senate Banking Committee unanimously approved legislation… that would tighten national-security reviews of Chinese technology deals by the interagency Committee on Foreign Investment in the U.S., strengthen export controls and prohibit the Trump administration from lifting stiff penalties imposed on ZTE."

May 24 - CNBC (Stephanie Landsman): 

"One of Wall Street's top Asia experts isn't ruling out a U.S.-China trade war. According to Yale University senior fellow Stephen Roach, the threat is still real, and it could take a big bite out of stocks. 'The bottom line is China has been one of President Trump's core economic issues, and I'd be surprised if he just capitulates on this,' Roach told CNBC's 'Trading Nation'… 'We have to look at the risk of some type of trade tensions very seriously.' Roach, who was Morgan Stanley Asia chairman for five years, said it's hard to have confidence in White House trade policy when Trump administration officials are constantly changing their minds."

May 22 - CNBC (Tom DiChristopher): 

"Secretary of State Mike Pompeo has announced a list of a dozen demands that Iran must meet before the United States lifts punishing sanctions against the country. However, the list is a non-starter and raises the specter of a prolonged standoff in the world's busiest oil exporting region. Pompeo articulated the list at the conservative Heritage Foundation… The address clarified the U.S. playbook for containing Iran following President Donald Trump's announcement that he will abandon a 2015 nuclear deal with Iran and restore sanctions on the Iranian economy, including its lifeblood oil industry."

May 23 - Wall Street Journal (Ryan Tracy and Andrew Ackerman): 

"Ten days after his inauguration, President Donald Trump promised to 'do a big number' on the Dodd-Frank law that tightened rules on financial firms after the 2008 crisis. Behind the scenes, his then top economic adviser and a powerful senator settled on a less ambitious plan. And in recent weeks, Mr. Trump called a senior House lawmaker, urging him to move forward despite objections from Republicans who wanted broader changes. The strategy to seek modest Dodd-Frank changes… paid dividends on Tuesday: The House of Representatives by 258-159 approved the resulting bipartisan legislation…"

May 22 - Reuters (Jeff Mason and Eric Beech): 

"U.S. President Donald Trump said… he will propose new tax cuts sometime prior to November, when Republicans look to retain their control of the U.S. Congress in midterm elections. Trump said he would meet with Republican Representative Kevin Brady, chairman of the tax-writing House Ways and Means Committee, about the proposal."

Emerging Market Bubble Watch:

May 22 - Bloomberg (Enda Curran and Lianting Tu): 

"Emerging-market companies and governments straining to deal with the rising cost of borrowing in dollars face increasing pressure as a record slew of bonds come due. Some $249 billion needs to be repaid or refinanced through next year… That's a legacy of a decade-long debt binge during which emerging markets more than doubled their borrowing in dollars, ignoring the many lessons of history from the 1980s Latin American debt crisis, the 1990s Asian financial crisis and the 2000s Argentine default. Even since the 2013 taper tantrum, the group's dollar debt has climbed in excess of $1 trillion -- more than the combined size of the Mexican and Thai economies…"

May 24 - Bloomberg (Sabrina Valle): 

"Eight anxious hours. That's how long it took the chief executive officer of Petrobras to decide that he must break a promise to investors to help contain the growing chaos from a Brazilian trucker strike. For the first time in three years, Petrobras agreed to sell fuel below market prices in a move based purely on politics. The reaction? Truckers rejected the move and shares in the state-controlled oil producer tumbled the most in a year. Pedro Parente's actions Wednesday came after what started as a routine labor dispute became a logistical crisis spanning Latin America's largest economy. Flights were canceled at some airports amid fuel shortages. Buses were idled in Rio de Janeiro, where the company is based. Supermarkets were beginning to limit purchases in fear of coming shortages."

Federal Reserve Watch:

May 23 - CNBC (Jeff Cox): 

"Federal Reserve officials would be content to let inflation briefly run above their 2% target as the economy continues to recover, according to minutes from the central bank's most recent meeting. Following the May 1-2 session, the policymaking Federal Open Market Committee said it wasn't raising rates yet but added the word 'symmetric' to describe its inflation goal. Market participants since have puzzled over what the change in language might imply. The summary… indicates a substantial level of debate over how the Fed should approach inflation. The minutes also pointed to an interest rate hike at the June meeting amid debate over how close the Fed might be getting to the end of this rate-hiking cycle."

U.S. Bubble Watch:

May 24 - Bloomberg (Alex Tanzi): 

"National home values have increased 8.7% since last April to a median value of $215,600, according to Zillow. Newly released data from the Federal Housing Finance Agency confirm the widespread gains seen by Zillow… The FHFA report shows first-quarter home prices rose 6.9% from a year earlier. Annual appreciation surpassed 10% in Nevada (13.7%), Washington (13.1%), Idaho (11.1%), Colorado (10.6%). The rise in home prices has allowed more people to take cash-out of the homes when they refinance. Refinancing, where the home owner took additional cash out, rose to 61% in the first quarter -- the highest rate seen since the third quarter of 2008…"

May 22 - CNBC (Jeff Cox): 

"Multiple signs of inflation in freight-related industries are at or near historical highs, in what could be an early sign that price pressures are building and ready to reverberate around the economy. Freight marketplace DAT keeps track of supply and demand in the freight industry through a bulletin board that matches companies with loads to be delivered to the vehicles that will take the goods to the marketplace… Recent readings show demand for vehicles skyrocketing, a sign that generally points to inflationary pressures building up in the supply chain."

May 21 - Bloomberg (Saleha Mohsin and David McLaughlin): 

"Treasury Secretary Steven Mnuchin urged the Justice Department to review the power that large technology firms such as Google have over the American economy, the latest U.S. official to back antitrust scrutiny of the industry. A '60 Minutes' segment on Sunday devoted to assertions that Alphabet Inc.'s Google wields a destructive monopoly in online search hammered home the notion of the company's dominance during a time of heightened public concern with technology giants… 'These issues deserve to be reviewed carefully,' Mnuchin said… 'These are issues the Justice Department needs to look at seriously, not for any one company, but as these technology companies have a greater and greater impact on the economy.'"

May 20 - Financial Times (Rana Foroohar): 

"Financial crises always start the same way. Loose monetary policy leads to an increase in debt and a rise in risk-taking. Over-confident financiers, lax regulators and politicians desperate to please voters operate in this toxic environment until a bubble eventually bursts, taking the financial system down with it. I am not saying we are heading for this fate in the very near future. But it is worth noting that this coming week the US Congress may very well pass a bill to rollback the post-financial crisis-era Dodd-Frank reforms. This is happening at a time when interest rates have been at historic lows for nearly 10 years, public and private debt is at record levels, consumer debt loads and subprime defaults are rising, and politicians are looking to throw a bit more kerosene on the economy to seduce voters in the run-up to November's midterm elections."

May 23 - Reuters (Richard Leong): 

"U.S. applications on mortgages to refinance an existing home fell to their lowest level in 17-1/2 years as some 30-year borrowing costs climbed to their highest levels in over seven years, the Mortgage Bankers Association said…"

China Watch:

May 23 - Reuters (Andreas Rinke and Ben Blanchard):

"China said… it would 'open its door wider' to German businesses, giving a warm reception to visiting Chancellor Angela Merkel, who has wooed Beijing to counterbalance trade threats from U.S. President Donald Trump. Germany and China, two exporting nations that run large trade surpluses with the United States, have found themselves in Trump's firing line and are scrambling to preserve the multi-lateral order on which their prosperity rests. Merkel faces a delicate balancing act on the trip to show Chinese-German solidarity over trade and the Iran nuclear deal without harming ties with long-term ally Washington."

Global Bubble Watch:

May 22 - Financial Times (Robin Wigglesworth): 

"The overall volume of mergers and acquisitions globally has reached nearly $2tn already this year, according to Dealogic, on track to beat the post-crisis high of 2015. However, M&A splurges tend to be a classic late-cycle harbinger. The acquisitions boom has already left US companies with record amounts of debt on their balance sheets, and the quality of that debt… has deteriorated."

May 24 - Bloomberg (Lianting Tu and Narae Kim): 

"Debt issuers in the Asian dollar-bond market are learning the wisdom behind the old adage 'if at first you don't succeed, try, try again.' In a twist hardly thinkable during the record sales of last year, investors balked at two investment-grade Chinese companies' offerings last week. Increasing strains thanks to the appreciating dollar and steady increase in benchmark Treasury yields are shaking up this near-$1 trillion market…"

May 21 - Financial Times (Attracta Mooney):
 "Chinese investors have been big buyers of international property for years, helping to boost real estate markets globally as they plouwed money into so-called trophy assets. However, last year the country tightened capital controls on foreign property purchases. As a result, Chinese cross-border real estate investment in the first quarter of 2018 was the lowest in three years, as outflows fell 27% year-on-year to $5.6bn for the period. Now institutional investors are grappling with what this tightening of policy means for commercial property markets around the world and whether the retreat of Chinese buyers will push down prices."

Europe Watch:

May 23 - CNN (Andrea Mammone and Federico Finchelstein): 

"Italy is set to create its most anti-establishment government since the end of fascism in 1945. The Five Star Movement's leader, Luigi Di Maio, and Matteo Salvini's Northern League met with Italy's President, Sergio Mattarella, and put forward Giuseppe Conte -- a law professor with no political experience -- as their proposed candidate for prime minister The formation of a new cabinet under Conte's leadership could take a while yet, but one thing is sure: Italy -- and the rest of Europe -- is a long way from stemming the anti-establishment surge that's been plaguing the continent in recent years Some pundits believe that the 'modern barbarians' are literally at the gate of Rome."

Fixed Income Bubble Watch:

May 21 - Bloomberg (Cecile Gutscher): 

"You need to rifle through 18 years of history to find selloffs that compare to the one corporate bond investors are now enduring. Debt of American companies just posted their third-worst 100-day returns since 2000, according to a JPMorgan Chase & Co. index, as tighter monetary conditions leave their mark on high-quality bonds with longer maturities. With negative returns likely to scare off retail investors, the outlook for the asset class looks grim, JPMorgan strategists said in a Friday note. But they find a silver lining: the highest yields in almost five years are likely to discourage new bond supply, which would at least help the technical picture. The selloff in corporate credit is now on par with the routing emerging markets. A Bloomberg Barclays index of U.S. investment-grade credit is down 3.9 percent so far this year, while dollar bonds of developing nations have declined at about the same clip."

May 25 - Bloomberg (Tracy Alloway and Cecile Gutscher): 

"The C-C-Craze for some of the riskiest corporate credits has gone too far, according to Goldman Sachs… While U.S. investment-grade bonds that are most sensitive to moves in borrowing costs have been hit hard this year, investors continue to pile into debt sold by some of the weakest junk-rated companies. Bonds in the CCC category -- just two notches above default -- have returned a whopping 330 bps in total this year… That outperformance has helped push spreads on the Bank of America Merrill Lynch gauge of CCC rated debt to below 700 bps earlier this week -- the smallest premium since July 2014. Meanwhile, Goldman's preferred valuation measure of corporate credit, which subtracts their projected expected-loss rates from current spreads, shows U.S. high-yield obligations are now mispriced for even the most benign scenarios."

May 25 - Bloomberg (Sally Bakewell): 

"Wall Street's hottest debt market is approaching hyperdrive. Investors haven't been able to get enough of the repackaged corporate loans known as collateralized loan obligations. That intense demand is allowing the money managers that put these securities together to sell off pieces of CLOs that by law they previously had to hang on to. These sales are the crest of what could be a $7 billion wave of such deals. The frenzied buying isn't limited to older securities -- Wells Fargo & Co. is forecasting that there will be a record $150 billion of new U.S. CLOs issued this year. Moody's… can't keep up with the demand for its services, and is taking around a month more to rate the securities than it needed before. That strong demand is allowing managers to sell CLOs with weaker protections, and it's making the leveraged loans that get bundled into the securities riskier too. Investors are buying CLOs because they are seen as safe: they offer protection against rising interest rates and against losses if loans default."

Japan Watch:

May 21 - Reuters (Stanley White and Leika Kihara):

"The Bank of Japan… won approval from influential members of the government's leading advisory panel for its decision to abandon the timeframe it had set for meeting its inflation target… In its quarterly outlook report, the BOJ ditched its forecast for when inflation will reach 2%, saying this will dispel the notion that the central bank is obliged to ease policy if it pushes back this forecast."

May 24 - Bloomberg (Christopher Anstey): 

"In 1988 trades worth $1 billion in one shot weren't unusual, and they would often send yields seesawing. Fast forward three decades and the market for Japanese government bonds -- JGBs -- is very different. Gone are the days of wild swings, and sometimes the market doesn't move at all. On one Tuesday in March there wasn't a single trade in the benchmark 10-year Japanese government bond. 'That was very sad," Kikugawa said... "We used to say that volatility was your friend. There's no friend anymore.'"

Geopolitical Watch:

May 18 - Reuters (David Stanway and Winni Zhou): 

"China's air force has landed bombers on islands and reefs in the South China Sea as part of a training exercise in the disputed region, it said… It said the pilot of the H-6K bomber conducted assault training on a designated sea target and then carried out take-offs and landings at an airport in the area, describing the exercise as preparation for 'the West Pacific and the battle for the South China Sea'."