Saturday, June 9, 2018
Weekly Commentary:
Q1 2018 Z.1 Flow of Funds
by Doug Noland
full column here:
My summary is below:
The first-quarter 2018 Z.1 "flow of funds" report:
In nominal dollars, Total U.S. System Credit
expanded a blazing $962 billion during Q1 2018
to a record $69.717 TN (349% of GDP).
One must return to booming 2007
for a larger ($2.508 TN)
four quarter-period
of Credit expansion.
Treasury debt-to-GDP ended Q1 at 85%,
more than double 2007's 41%.
BONDS:
Total Debt Securities (TDS)
expanded $789 billion
during the quarter
to a record $43.868 TN.
-- a near-record
220% of GDP,
up from 200% in 2007.
STOCKS:
Equities
ended Q1 at $45.156 TN,
or a near-record 226% of GDP.
Equities-to-GDP
posted cycle peaks
at 181% in Q3 2007
and 202% in Q1 2000.
STOCKS + BONDS
Total (Debt and Equity) Securities
ended Q1 at a record $89.024 TN,
or 446% of GDP.
For comparison,
Total Securities
were at 379% to end Q3 2007
and 359% at Q1 2000.
News for the week
ending June 8, 2018:
STOCKS:
S&P500 gained 1.6% (up 3.9% y-t-d)
Dow Industrials jumped 2.8% (up 2.4%)
Dow Utilities fell 3.0% (down 8.3%).
Dow Transports added 0.4% (up 3.1%)
S&P 400 Midcaps jumped 2.2% (up 5.3%)
Small cap Russell 2000 rose 1.5% (up 8.9%)
Nasdaq100 advanced 1.0% (up 11.8%)
Biotechs added 0.5% (up 14.7%).
While bullion gained $6,
the HUI gold stock index
slipped 0.2% (down 7.0%).
U.K.'s FTSE slipped 0.3% (down 0.1%).
Japan's Nikkei 225 rallied 2.4% (down 0.3% y-t-d).
France's CAC40 slipped 0.3% (up 2.6%)
German DAX increased 0.3% (down 1.2%)
Spain's IBEX 35 gained 1.2% (down 3.0%)
Italy's FTSE MIB dropped 3.4% (down 2.3%)
Brazil's Bovespa sank 5.6% (down 4.5%)
Mexico's Bolsa recovered 2.1% (down 6.9%)
South Korea's Kospi gained 0.5% (down 0.6%)
India’s Sensex added 0.6% (up 4.1%)
China’s Shanghai slipped another 0.3% (down 7.3%)
Turkey's Istanbul National 100 fell 3.3% (down 16.9%).
Russia's MICEX declined 1.2% (up 7.5%).
BONDS:
Ten-year US Treasury yields rose four bps to 2.95% (up 54bps).
Long bond yields gained four bps to 3.09% (up 35bps).
Benchmark Fannie Mae MBS yields
jumped eight bps to 3.70% (up 70bps).
Freddie Mac 30-year fixed mortgage rates
declined two bps to 4.54% (up 65bps y-o-y).
Fifteen-year rates
fell five bps to 4.01% (up 85bps).
Five-year hybrid ARM rates
dropped six bps to 3.74% (up 63bps)
Jumbo mortgage 30-yr fixed rates
up six bps to 4.62% (up 63bps).
M2 (narrow) "money" supply
expanded $32.9bn last week to a record $14.066 TN.
M2 gained $546bn, or 4.0%,
over the past year.
Currency Watch:
The U.S. dollar index slipped 0.7% to 93.535 (up 1.5% y-t-d).
Commodities Watch:
Goldman Sachs Commodities Index slipped 0.2% (up 7.6% y-t-d).
Spot Gold recovered 0.4% to $1,299 (down 0.3%).
Silver gained 1.8% to $16.741 (down 2.4%).
Crude slipped seven cents to $65.74 (up 9%).
Gasoline declined 1.3% (up 18%)
Natural Gas fell 2.4% (down 2%).
Copper surged 6.5% (unchanged).
Wheat declined 0.6% (up 22%).
Corn fell 3.5% (up 8%).
Market Dislocation Watch:
June 5 - Bloomberg (Dani Burger):
"The volatility complex -- the selling or shorting of options tied to U.S. stocks -- is back with a vengeance, shrugging off February's vol-mageddon in its wake. Hedge funds hold the most number of short positions on the Cboe Volatility Index since late January -- before the record spike in the gauge that wiped out over $5 trillion in global stocks and jolted investors from their complacent slumber. Meanwhile, money managers are back to selling products linked to equity price swings en masse, either to speculate conditions will remain subdued or hedge underlying exposures."
Trump Administration Watch:
June 7 - Wall Street Journal (Emre Peker in Brussels, Paul Vieira and Bojan Pancevski):
"U.S. allies Canada, Japan and the European Union are banding together to increase pressure on Washington following the Trump administration's metals tariffs as they head to a meeting of Group of Seven industrialized countries in Quebec… With trade likely to dominate the agenda of the summit, the U.S. tariff move has driven a wedge between the U.S. and the other six nations, say leaders and officials, and has dashed hopes that the group would focus on a coordinated response to another longstanding trade issue: the global steel glut driven by Chinese production. 'Tariffs imposed last week by President Trump on EU and Canada have increased significantly tensions before the meeting,' a senior EU official said, adding that a breakthrough to ease trade tensions was unlikely. 'We have extremely low expectations.'"
June 6 - Wall Street Journal (Jacob Bunge, Heather Haddon and Benjamin Parkin): "U.S. farmers, already losing sales to China, are facing new threats to sales in other big overseas markets as trade tensions spread globally. Mexico this week imposed tariffs on major U.S. exports such as cheese and pork, while Canada and the European Union are considering tariffs on imports of U.S. food and farm goods from corn to orange juice to peanut butter, in response to the U.S. placing tariffs last week on steel and aluminum imports from those countries. In addition, analysts say, China could target other crops and products after Trump administration officials last week outlined potential tariffs on $50 billion worth of Chinese goods. The rapid-fire exchange of tariffs and trade threats leaves U.S. farmers and agricultural groups fearing tougher sells in their most important overseas markets…"
June 4 - Financial Times (Tom Mitchell): "The world's two largest economies remained on track to commence a $100bn trade war as early as this month, after a third round of China-US trade negotiations ended in Beijing on Sunday without a breakthrough. Last week US president Donald Trump said he would move to implement previously threatened tariffs on $50bn worth of Chinese industrial exports 'shortly' after June 15, which Beijing has promised to reciprocate."
June 5 - New York Times (Ana Swanson and Jim Tankersley):
"Mexico hit back at the United States on Tuesday, imposing tariffs on around $3 billion worth of American pork, steel, cheese and other goods in response to the Trump administration's steel and aluminum levies, further straining relations between the two countries as they struggle to rewrite the North American Free Trade Agreement. The tariffs, which were announced last week, came into effect as the Trump administration threw yet another complication into the fractious Nafta talks."
June 6 - CNBC (Philip Blenkinsop):
"The European Union expects to hit U.S. imports with additional duties from July, ratcheting up a transatlantic trade conflict after Washington imposed its own tariffs on incoming EU steel and aluminum. EU members have given broad support to a European Commission plan to set 25% duties on up to 2.8 billion euros ($3.3bn) of U.S. exports in response to what is sees as illegal U.S. action. EU exports that are now subject to U.S. tariffs are worth 6.4 billion euros."
EM Bubble Watch:
June 7 - Financial Times (Orla McCaffrey):
"Investors have taken the gloves off against the Brazilian real in retaliation for rising political uncertainty, driving it to two-year lows of about R$3.94 against the dollar. The next threshold for the currency is R$4.00 as local weakness combines with external pressure from expected further rate tightening by the US Federal Reserve. The sell-off was sparked by the government's intervention in diesel prices to placate striking truckers- a throwback to the country's blighted history of price controls and a bad sign for efforts to undertake much-needed fiscal reforms. The central bank has twice intervened by selling US dollar swaps, effectively a bet against the greenback in favour of the real. Since last Friday, the stock of outstanding swaps has increased 13.5% and since end-April by 44.5%."
U.S. Bubble Watch:
June 8 - Bloomberg (Craig Torres):
"U.S. economic growth could face a challenging slowdown as the Trump Administration's powerful fiscal stimulus fades after two years, according to former Federal Reserve Chairman Ben Bernanke. Bernanke said the $1.5 trillion in personal and corporate tax cuts and a $300 billion increase in federal spending signed by President Donald Trump 'makes the Fed's job more difficult all around' because it's coming at a time of very low U.S. unemployment. 'What you are getting is a stimulus at the very wrong moment,' Bernanke said… 'The economy is already at full employment.'"
June 6 - CNBC (Jeff Cox):
"The jobs market has reached what should be some kind of inflection point: there are now more openings than there are workers. April marked the second month in a row this historic event has occurred, and the gap is growing. According to the monthly Job Openings and Labor Turnover Survey…, there were just shy of 6.7 million open positions in April... That represented an increase of 65,000 from March and is a record. The number of vacancies is pulling well ahead of the number the Bureau of Labor Statistics counts as unemployed. This year is the first time the level of the unemployed exceeded the jobs available since the BLS started tracking JOLTS numbers in 2000."
June 8 - CNBC (Diana Olick):
"Fast-rising home prices may be a roadblock for buyers, but they are putting some homeowners on Easy Street. As home prices rise, so does the percentage of home equity for those owners with a mortgage. Home equity jumped 13.3% in the first quarter of this year compared from a year earlier, according to CoreLogic. For the average borrower, that translates to $16,300 in additional home equity gained during the year, or a collective $1.01 trillion. That is the biggest gain in four years."
June 5 - Wall Street Journal (Ryan Dezember):
"The good news for home builders and house hunters is that lumber prices have sold off since hitting an all-time high in mid May. The bad news: wood prices are still up 67% over the past year, adding thousands of dollars to the cost of each new house. The historic run-up in lumber prices-attributable to a trade dispute with Canada, wildfires and limited rail capacity-comes as U.S. home builders are already struggling to meet demand amid shortages in buildable lots and labor… Meanwhile plywood prices have risen 43% over the last year… 'We've never seen anything like this,' said Deb Maples, risk management consultant at… INTL FCStone Financial Inc. 'It's been unprecedented.'"
June 6 - Wall Street Journal (Doug Cameron and Alison Sider):
"Jet-fuel prices have surged more than 50% over the past year, pushing carriers to raise fares and Delta Air Lines Inc. to cut its profit expectations. Delta… said… it could take six to 12 months to recoup the extra fuel costs via pricier tickets. Fuel is again the single-largest expense for most airlines, accounting for about a quarter of operating costs. The recent run-up in prices echoes the jump seen from 2009 to 2011, which first spawned stand-alone surcharges on many international flights."
China Watch:
June 3 - Reuters (Stella Qiu and Ryan Woo):
"China's debt crackdown is a key risk to the country's economic growth and will have significant knock-on effects for the global economy, particularly emerging markets with high commodity dependence or close Chinese trade links, Fitch Ratings said. Beijing's campaign to put a lid on debt could also lead to a sharp slowdown in business investment…, forecasting that growth in the world's second-biggest economy would slow to around 4.5% over the medium term."June 4 - Bloomberg: "China's banks, scrambling to adjust to the government's deleveraging campaign, are likely to add to pressures on the corporate bond market as they shed more of their massive note holdings and de-risk their balance sheets. Further payment problems are likely in a market that has already seen at least 14 corporate bond defaults this year… As well as cutting their own holdings, Chinese banks have pulled back from lending to other firms that use the funds to buy bonds, exacerbating the pressure on the market… Strains have already spread from high-yield trust products to corporate bonds this year as China's campaign against its $10 trillion shadow banking industry has choked off refinancing for the weaker borrowers."
Global Bubble Watch:
June 6 - Financial Times (Shawn Donnan):
"Rising trade tensions are dragging down long-term cross-border investment by companies around the world, UN figures showed… Global foreign direct investment fell by 23% in 2017 and is expected to grow only modestly, if at all, this year… Threatening this year's picture are the growing prospects of a trade war between the US and China and the EU. The US last week imposed steel and aluminium tariffs on the EU, Canada and Mexico. It is due to release lists of tariffs and investment restrictions against China by the end of this month and is also threatening to impose import taxes on the $190bn of cars brought into the US from overseas annually."
Europe Watch:
June 5 - Reuters (Steve Scherer and Gavin Jones):
"Italy's new prime minister promised… to bring radical change to the country, including more generous welfare and a crackdown on immigration, as the two party bosses who hold the keys to his anti-establishment government nodded their approval. Prime Minister Giuseppe Conte addressed the Senate, flanked by the leaders of two formerly fringe parties that shoved aside mainstream groups at an election in March to form a coalition with little-known law expert Conte as its head."
Fixed Income Bubble Watch:
June 6 - Bloomberg (Sid Verma and Cecile Gutscher):
"Students of history will find two parallels to today's credit market -- and neither will provide much comfort. According to a key valuation metric, investors are headed for the kind of bullishness on high-yield bonds that's been seen just twice before: during the halcyon days of 1997's tech bubble before the Asia crash, and on the eve of the global financial crisis a decade later. The ratio between U.S. junk-bond yields and their high-grade counterparts has reached levels that 'hearken back to the high risk appetite days of October 1997 and June 2007,' CreditSights Inc. strategists Glenn Reynolds and Kevin Chun Wrote…"
June 1 - Bloomberg (Claire Boston):
"Commercial mortgage bonds are getting stuffed with the lowest-quality loans since the financial crisis by one measure, according to Moody's…, a warning sign that the $517 billion market may be headed for harder times. The securities are backed by as many interest-only mortgages as they were in late 2006 and early 2007… Those loans are riskier because borrowers don't pay any principal early in the debt's life. When that period expires, the property owners are on the hook for much higher payments. The percentage of interest-only loans in a commercial mortgage bond is an 'important bellwether' for the industry, according to Moody's analysts, because the loans are more likely to default and to bring bigger losses to lenders when they do."
Leveraged Speculator Watch:
June 5 - Bloomberg (Josh Friedman):
"Bridgewater Associates, the hedge fund firm led by billionaire Ray Dalio, told clients it's bearish on almost all financial assets, the website ZeroHedge reported… '2019 is setting up to be a dangerous year, as the fiscal stimulus rolls off while the impact of the Fed's tightening will be peaking,' the hedge fund giant said in a recent note written by Co-Chief Investment Officer Greg Jensen… Bridgewater, the world's largest hedge fund firm, manages about $160 billion."
Geopolitical Watch:
June 4 - Reuters (Phil Stewart and Idrees Ali):
"The United States is considering sending a warship through the Taiwan Strait, U.S. officials say, in a move that could provoke a sharp reaction from Beijing at a time when Sino-U.S. ties are under pressure from trade disputes and the North Korean nuclear crisis. A U.S. warship passage, should it happen, could be seen in Taiwan as a fresh sign of support by President Donald Trump after a series of Chinese military drills around the self-ruled island."
June 3 - Bloomberg (Rosalind Mathieson and Keith Zhai):
"Even as defense ministers and military chiefs meeting in Singapore called out China for parking missiles on outposts in the disputed South China Sea, a bigger potential China-related hot spot looms. Concern about Taiwan -- and recent sparring between Beijing and Washington over the democratically run island -- percolated discussions at the annual IISS Shangri-La Dialogue… U.S. Secretary of Defense James Mattis warned China against disrupting the 'status quo' on Taiwan, as Beijing steps up air-and-sea maneuvers nearby and accelerates efforts to isolate Taipei."
June 6 - Reuters (Ben Blanchard):
"No military ship or aircraft can scare China away from its resolve to protect its territory, China's Foreign Ministry said… after two U.S. Air Force B-52 bombers were reported to have flown near disputed islands in the South China Sea… The United States was willing to work with China on a 'results-oriented' relationship, but its actions in the South China Sea were coercive and the Pentagon would 'compete vigorously' if needed, U.S. Defense Secretary Jim Mattis said…"
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