Saturday, June 16, 2018
Weekly Commentary:
The Great Fallacy
by Doug Noland
full column here:
My summary is below:
For the week
ending June 15, 2018:
STOCKS:
S&P500 was little changed (up 4.0% year-to-date)
Dow Industrials declined 0.9% (up 1.5%)
Dow Utilities rallied 2.1% (down 6.4%)
Dow Transports rose 1.2% (up 4.4%)
S&P 400 Midcaps slipped 0.4% (up 4.8%)
Small cap Russell 2000 added 0.7% (up 9.7%)
Nasdaq100 advanced 1.4% (up 13.4%)
Biotechs jumped 1.8% (up 16.9%)
With bullion down $20,
the HUI gold stock index
declined 0.5%
(down 7.5% y-t-d)
U.K.'s FTSE slipped 0.6% (down 0.7% year-to-date).
Japan's Nikkei 225 increased 0.7% (up 0.4%).
France's CAC40 gained 0.9% (up 3.6%)
German DAX jumped 1.9% (up 0.7%)
Spain's IBEX 35 rose 1.1% (down 1.9%)
Italy's FTSE MIB rallied 3.9% (up 1.5%)
Brazil's Bovespa sank 3.0% (down 7.4%)
Mexico's Bolsa gained 2.2% (down 4.9%)
South Korea's Kospi dropped 1.9% (down 2.6%)
India’s Sensex added 0.5% (up 4.6%)
China’s Shanghai fell 1.5% (down 8.6%)
Turkey's Istanbul National 100 lost 1.4% (down 18.0%)
Russia's MICEX equities dropped 1.3% (up 6.1%).
BONDS & MORTGAGES
US Ten-year Treasury yields
declined three bps to 2.92% (up 52bps).
US long bond yields
fell four bps to 3.05% (up 31bps).
Benchmark Fannie Mae MBS yields
declined four bps to 3.65% (up 66bps).
Freddie Mac 30-year fixed mortgage rates
jumped eight bps to 4.62%
(up 71bps y-o-y).
Fifteen-year mortgage rates
rose six bps to 4.07%
(up 89bps).
Five-year hybrid ARM rates
gained nine bps to 3.83%
(up 68bps).
Jumbo mortgage 30-yr fixed rates
up four bps to 4.66%
(up 66bps).
M2 (narrow) "money" supply
rose $13.8bn last week to a record $14.080 TN.
M2 gained $568bn, or 4.2%, over the past year.
Currency Watch:
The U.S. dollar index jumped 1.3% to 94.788 (up 2.9% y-t-d).
Commodities Watch:
Goldman Sachs Commodities Index dropped 2.6% (up 4.8% y-t-d).
Spot Gold declined 1.5% to $1,280 (down 1.8%).
Silver fell 1.6% to $16.48 (down 3.9%).
Crude declined 68 cents to $65.06 (up 8%).
Gasoline sank 4.0% (up 13%)
Natural Gas rose 4.6% (down 3%).
Copper dropped 4.7% (down 4.7%).
Wheat lost 1.3% (up 20%).
Corn gained 1.3% (up 9%).
Market Dislocation Watch:
June 13 - Bloomberg (Liz Capo McCormick):
"The Treasury yield curve from 5 to 30 years flattened to levels last seen in August 2007 after Federal Reserve officials hiked rates and signaled a faster pace of tightening ahead. The spread narrowed to as little as 24.4 bps, falling below the previous low for 2018, touched in May. The gap between 2- and 10-year yields also slid to the smallest since 2007, touching 39.1 bps, before rebounding to just above 40 bps."¬
June 11 - Financial Times (Philip Stafford and Kate Allen):
"The gyrations in the Italian government bond market have revealed how Europe's liquidity-starved sovereign debt markets are being heavily tested by even short bouts of political instability. The rapid rise and fall in yields in the eurozone's largest debt market in recent weeks has been exacerbated by thin sovereign debt liquidity. During the most intense price swings some primary dealers - banks which deal directly with the national central bank to distribute its bonds into the wider market - reported that the electronic screens they used were showing fewer potential deals than normal. This made it difficult for them to carry out their traditional role of market-makers - providing liquidity to reduce price volatility."
Trump Administration Watch:
June 15 - Wall Street Journal (Bob Davis, Vivian Salama and Lingling Wei):
"Beijing retaliated against planned U.S. tariffs on Chinese goods by targeting high-value American exports-including farm products, cars, and crude oil-bringing the world's two biggest economies closer to an all-out trade war. Shortly after the Trump administration unveiled plans Friday to impose tariffs of 25% on $50 billion in Chinese products, China's State Council announced it would levy penalties of the same rate on the U.S. goods of the same value. The U.S. is 'provoking the trade war,' China's Foreign Ministry spokesman Lu Kang said Friday, while pledging to defend the country's interests."
June 12 - Reuters (Matt Spetalnick and David Brunnstrom):
"U.S. President Donald Trump… kept up his feud with America's closest allies over trade, saying he could not allow them to continue taking advantage of the United States… 'We are being taken advantage of by virtually every one of those countries,' Trump told a news conference… 'Look, countries cannot continue to take advantage of us on trade.'"
June 11 - Wall Street Journal (Paul Vieira and Sara Schaefer Muñoz):
"... the fate of NAFTA was on shaky footing following the U.S. decision to impose tariffs on Canadian- and Mexican-made steel and aluminum products on national-security grounds. Both Canada, the largest foreign supplier of both metals to the U.S., and Mexico unveiled retaliatory tariffs, and former trade negotiators warned the levies would only strengthen Canadian and Mexican resolve not to give in to unconventional U.S. demands in Nafta. A successful outcome for the trade pact now seems even more tenuous after President Donald Trump abruptly withdrew U.S. support for a G-7 final communiqué and he and advisers issued a series of highly personal attacks on Twitter and in interviews against Canada's prime minister…"
June 10 - New York Times (Ana Swanson):
"At the rockiest annual meeting of major Western powers in decades, President Trump criticized the tariffs imposed on American goods as 'ridiculous and unacceptable' and vowed to put an end to being 'like a piggy bank that everybody is robbing.' Behind Mr. Trump's outrage is his belief that the United States is at a disadvantage when it comes to global trade and is on the losing end of tariffs imposed by other nations. But to many of the country's trading partners, the president's criticisms ring hollow given that the United States places its own tariffs on everything from trucks and peanuts to sugar and stilettos."
June 14 - Politico (Adam Behsudi and Nancy Cook):
"President Donald Trump wants his staff to push forward with plans to slap 25% tariffs on foreign cars before the midterm elections in a bid to score points with his political base, according to administration and auto industry officials. The president believes a promise to tax cars, trucks and auto parts coming from U.S. competitors like Europe and Japan would allow him to present a concrete win to workers, the officials said. 'Trump sees the auto tariffs as part of his midterm strategy, a way to position Republicans and the White House as pro-worker,' said one senior administration official. 'He views it as part of the broader story about to helping to revitalize the American-based economy.' Raising the price of foreign cars would be the latest in a series of aggressive trade moves by Trump, who is betting that his supporters will be more focused on the protection of local jobs than on the increased costs for consumers…"
June 14 - Reuters (Philip Blenkinsop):
"European Union countries on Thursday unanimously backed a plan to impose import duties on 2.8 billion euros ($3.3bn) worth of U.S. products after Washington hit EU steel and aluminum with tariffs at the start of June, EU sources said… The European Commission has proposed setting 25% duties on U.S. goods such as orange juice, bourbon, jeans, motorcycles in response to what it is sees as illegal U.S. action affecting 6.4 billion euros of its exports."
Federal Reserve Watch:
June 13 - Bloomberg (Craig Torres, Christopher Condon and Jeanna Smialek): "Federal Reserve officials raised interest rates for the second time this year and upgraded their forecast to four total increases in 2018, as unemployment falls and inflation overshoots their target faster than previously projected. The so-called 'dot plot' …showed eight Fed policy makers expected four or more quarter-point rate increases for the full year, compared with seven officials during the previous forecast round in March… The median estimate implied three increases in 2019 to put the rate above the level where officials see policy neither stimulating nor restraining the economy. Chairman Jerome Powell told reporters following the decision -- which lifted the Fed's benchmark rate by a quarter percentage point to a range of 1.75% to 2% -- that the main takeaway was that 'the economy is doing very well.' Powell also announced he plans to start holding a press conference after every meeting in January…"
June 13 - Wall Street Journal (Nick Timiraos):
"Federal Reserve officials ...
voted unanimously to raise their benchmark federal-funds rate by a quarter-percentage point to a range between 1.75% and 2%. It is their second rate rise this year, and they penciled in a total of four (interest rate increases for 2018, up from a projection of three at their March meeting. 'The decision you see today is another sign that the U.S. economy is in great shape,' said Fed Chairman Jerome Powell… 'Growth is strong. Labor markets are strong. Inflation is close to target.' Eight of 15 Fed officials now expect at least four rate increases will be needed this year, up from seven in March and four in December."
U.S. Bubble Watch:
June 12 - Reuters (Lindsay Dunsmuir):
"The U.S. government had a $147 billion budget deficit in May, an increase of 66% from the same month last year as the ledger took a hit from declining revenue and higher spending… The deficit for the fiscal year, which began last October, was $532 billion, compared to a deficit of $433 billion in the same period of fiscal 2017. On an adjusted basis, the gap was $584 billion compared with $473 billion in the prior period. Unadjusted receipts last month totaled $217 billion, down 10% from May 2017, while unadjusted outlays were $364 billion, a rise of 11% from the same month a year earlier."
June 14 - Bloomberg (John Gittelsohn):
"The soaring U.S. budget deficit at a time interest rates are increasing may be setting the stage for fiscal trouble, according to Jeffrey Gundlach, chief investment officer of DoubleLine Capital. 'Here we are doing something that almost seems like a suicide mission,' Gundlach said… 'We are increasing the size of the deficit while we're raising interest rates.'"
June 12 - Reuters (Lucia Mutikani):
"In the 12 months through May, the CPI increased 2.8%, the biggest advance since February 2012, after rising 2.5% in April."
June 13 - Reuters (Lucia Mutikani):
"U.S. producer prices increased more than expected in May, leading to the biggest annual gain in nearly 6-1/2 years, the latest sign of a gradual building up of inflation pressures… The producer price index for final demand rose 0.5% last month, boosted by a surge in gasoline prices and continued gains in the cost of services… The PPI edged up 0.1% in April. In the 12 months through May, the PPI increased 3.1%, the largest advance since January 2012. Producer prices rose 2.6% year-on-year in April."
June 14 - CNBC (Patti Domm):
"... after strong retail sales data pushed up tracking GDP growth for the second quarter to about double the first quarter's level. The economy grew by 2.2% in the first quarter. CNBC/Moody's Analytics Rapid GDP Update reported economists' estimates of tracking GDP show average growth at 3.8% for 2Q 2018 ..."
June 12 - Bloomberg (Scott Lanman):
"A gauge of optimism among U.S. small-business owners rose to a 34-year high amid increasingly sunny expectations for sales and profits, a National Federation of Independent Business survey showed… Sentiment index rose 3 points to 107.8 (est. 105), second-highest in gauge's history behind reading of 108 in 1983. Net 31% expect sales to increase, up 10 points from prior month and highest since Nov. Record 34% of respondents said it's a good time to expand…"
June 10 - CNBC (Jeff Cox):
"Corporate executives are using tax cuts and share buybacks to boost their own compensation, a top regulator said… Companies have announced a record-breaking level of share buybacks since Congress passed the Republican-backed tax reduction in December. Critics of the $1.5 trillion measure had worried that it would lead to big rewards for shareholders and only limited benefit to the broader economy. Robert Jackson Jr., a member of the Securities and Exchange Commission, said corporate bigwigs have been selling their shares after the buyback announcements hit, cashing in from the stock price surge that often happens after a repurchase notice."
June 9 - Financial Times (Owen Walker):
"... According to Flowspring, the largest 1% of mutual funds manage 45% of industry assets. That figure is 72 times larger than all the assets managed by the bottom half. This is the highest concentration in two decades and has increased dramatically since the financial crisis. In 2009, the amount managed by the top 1% was just over 30 times that of the bottom half. The ratio was as low as 22:1 in 2006."
June 12 - Reuters (Diane Bartz and David Shepardson):
"AT&T Inc won court approval… to buy Time Warner Inc for $85 billion, rebuffing an attempt by U.S. President Donald Trump's administration to block the deal and likely setting off a wave of corporate mergers. The deal, which could close next week, is seen as a turning point for a media industry that has been upended by companies like Netflix Inc and Alphabet Inc's Google which produce content and sell it online directly to consumers, without requiring a pricey cable subscription. Cable, satellite and wireless carriers all see buying content companies as a way to add revenue."
June 14 - Financial Times (Nicole Bullock):
"Funds have been raised at a record rate in the US this year for shell companies that offer a 'blank check' to sponsors to pursue takeovers, providing further evidence of the rehabilitation of a controversial tool that waned in the wake of the financial crisis. The so-called special purpose acquisition companies, or spacs, have raised $4.5bn so far in 2018 - the largest amount for this type of fundraising in the period, according to Dealogic… That followed a brisk 2017, the second strongest year on record with nearly $10bn sold."
China Watch:
June 13 - Bloomberg:
"China's broadest measure of new credit slumped in May to the lowest in almost two years, as a campaign to rein in the shadow banking sector gained traction. Aggregate financing stood at 760.8 billion yuan ($118.8bn) in May…, compared with an estimated 1.3 trillion yuan in a Bloomberg survey and 1.56 trillion yuan in April. The change was driven by a fall in off-balance sheet lending of 421.5 billion yuan, the most since data began in 2006… New yuan loans stood at 1.15 trillion yuan, versus a projected 1.2 trillion yuan, and broad M2 money supply increased 8.3%, compared with a forecast 8.5%."
June 12 - Financial Times (James Kynge):
"A moderate shock, perhaps caused by mounting trade frictions, could send China's current account into deficit this year for the first time since 1993, according to Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered. As the current account balance moves closer to zero, more movement in the value of the renminbi… against the US dollar is possible, Mr Ding said. A weakening renminbi has in the past fuelled outflows of capital from China and hit domestic equity and bond markets. Standard Chartered forecasts a narrowing surplus in the current account, which measures trade and services flows, to 1% of GDP this year and 0.5% in 2019, down from 1.3% in 2017."
June 13 - Bloomberg:
"China's two-year long deleveraging campaign is finally taking a toll on corporate financing ... China is grappling with a delicate balancing act to rein in the shadow banking sector without undermining investment and growth in the economy. At least 17 bond defaults have occurred this year, while investors have also become pickier. Since the start of April, 13 issuers rated AA or below and considered junk score in the nation, have called off bond sales, the most for any quarter in two years."
June 13 - Bloomberg (Christopher Balding):
"By several measures, Chinese banks are strained. Their official loan-to-deposit ratio increased from 65.8% in June 2015 to 71.2% at the end of March. New deposits peaked in 2015 and have since failed to keep up with lending growth. Last year, new loans amounted to 100.1% of new deposits. Through the first five months of this year, they were running at 104%... Since 2015, the PBOC has boosted lending to banks by more than 300%, to $1.5 trillion. Beyond just providing liquidity, it's also pushing banks to change their lending patterns: In particular, by allowing short-term debt to expire and rolling it into loans of longer duration. Since January 2017, medium- and long-term loans have made up 85% of all new bank lending."
Emerging Markets Watch:
June 12 - Financial Times (Henny Sender):
"As real US interest rates and the dollar have risen, investors have been pulling money from emerging markets. There has been about $10bn of outflows from EM debt and shares over the past six weeks, according to analysts at Bank of America Merrill Lynch. Portfolio managers are detecting vulnerabilities in several Asian countries, including India and Indonesia. And despite investors feeling far more comfortable about China than they did at the start of 2016, the rebound in the dollar over the past six weeks has increased the scrutiny of the economy. For those starting to pay attention, the focus is on how much dollar-denominated debt corporate China has sold in recent years and, critically, how much of it will fall due next year and in 2020. Plenty of it comes from the country's property companies."
June 10 - Reuters (Andreina Aponte):
"Prices in Venezuela rose almost 24,600% in the 12 months ended May 31, the country's opposition-led National Assembly, whose numbers are broadly in line with those of independent economists, reported…"
Global Bubble Watch:
June 14 - Bloomberg (Suzanne Woolley):
"Personal wealth around the globe reached $201.9 trillion last year, a 12% gain from 2016 and the strongest annual pace in the past five years, Boston Consulting Group said… Booming equity markets swelled fortunes, and investors outside the U.S. got an exchange-rate bonus as most major currencies strengthened against the greenback. The growing ranks of millionaires and billionaires now hold almost half of global personal wealth, up from slightly less than 45% in 2012… In North America, which had $86.1 trillion of total wealth, 42% of investable capital is held by people with more than $5 million in assets. Investable assets include equities, investment funds, cash and bonds."
June 10 - Wall Street Journal (Richard Rubin):
"Multinational companies shift about 40% of the profits they earn outside their home countries into tax havens, eluding tax-collection efforts, according to an analysis that points to persistent gaps in government revenue collection. U.S. companies are among the most aggressive users of profit-shifting techniques, which often relocate paper profits without bringing jobs and wages, according to the study by economists Thomas Torslov and Ludvig Wier of the University of Copenhagen and Gabriel Zucman of the University of California, Berkeley. Mr. Zucman said the research suggests the global trend toward lower corporate tax rates in major countries-including the recent U.S. reduction to 21% from 35%-won't by itself cause companies to alter their tax-avoidance moves. Companies can still lower their tax bills significantly by shifting profits to places with effective tax rates between zero and 10%."
June 11 - Bloomberg (Michael Heath and Garfield Reynolds):
"Australia's east-coast property bubble is showing signs of deflating at a faster clip as home-lending data recorded the longest losing streak in almost a decade. Housing finance fell 1.4% in April, the fifth straight monthly drop and the longest stretch of declines since September 2008… The downturn is most prominent in Sydney where prices slid 4.2% in May from a year earlier, when they were rising at an annual pace of 17%. Sales at auctions -- a popular way of marketing houses Down Under - have slumped to the lowest since early 2016 in Australia's biggest city, with only around half of properties successfully selling."
Japan Watch:
June 14 - Bloomberg (Leika Kihara and Izumi Nakagawa):
"Japan's 'Abenomics' stimulus program is sputtering just as the government and the central bank wanted to tap the brakes, heightening the chance they will be forced to fight the next economic downturn with a near-empty policy arsenal. Analysts say Japan will avoid a recession… and suggest the first-quarter slump was a soft patch caused by temporary factors like bad weather and weak stock markets. But there are signs growth is moderating after two years of expansion. Factory output slowed and inventory rose in April, a sign firms may have overestimated global demand."
Fixed Income Bubble Watch:
June 11 - Bloomberg (Christopher DeReza):
"Sales of the riskiest subprime auto bonds are on pace for a record year, according to Barclays Plc. Companies have sold more than $150 million of B rated subprime auto ABS bonds this year, compared with nothing last year, and an annual average of about $20 million since the financial crisis, Barclays analyst Alin Florea wrote… Meanwhile, BB rated debt in the sector has already exceeded $500 million and looks set to pass last year's total of $950 million. 'Despite the volatility earlier in the year, 2018 is shaping up to be a banner year for subprime, auto ABS high yield issuance,' Florea wrote. Subprime auto ABS issuers have started to sell more BB- and B rated bonds to meet investor demand for riskier slices of the debt."
Geopolitical Watch:
June 12 - Reuters (Mohammed Ghobari and Mohamed Mokhashef):
"A Saudi-led alliance of Arab states launched an attack on Yemen's main port city on Wednesday in the largest battle of the Yemen war, aiming to bring the ruling Houthi movement to its knees at the risk of worsening the world's biggest humanitarian crisis. Arab warplanes and warships pounded Houthi fortifications to support ground operations by foreign and Yemeni troops massed south of the port of Hodeidah in operation 'Golden Victory'."
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