Economic News for the week ending August 10, 2018

Saturday, August 11, 2018

Weekly Commentary: 

Turkey (Nudged Over the Cliff),

by Doug Noland

full column here:

http://creditbubblebulletin.blogspot.com/2018/08/weekly-commentary-turkey-nudged-over.html

My summary follows:

For the week ending

August 10, 2018

Turkey, a nation of 80 million, 

is a long-time U.S. ally 

and NATO member. 

The U.S. Air Force has significant operations at the Incirlik Air Base, and Turkey was a staging ground for major U.S. military operations including the two gulf wars and, more recently, in Syria.

Donald J. Trump - 5:47 AM - 10 Aug 2018:

 "I have just authorized a doubling of Tariffs on Steel and Aluminum with respect to Turkey as their currency, the Turkish Lira, slides rapidly downward against our very strong Dollar! Aluminum will now be 20% and Steel 50%. Our relations with Turkey are not good at this time!"

The Turkish lira sank -13.7% in chaotic Friday trading. 

The lira's -21.0% "worst week in 17 years" collapse 

pushed y-t-d losses to 41.1%. 

Turkish 10-year yields spiked to almost 21%, 

before retreating somewhat. 

August 10 - Bloomberg (Lionel Laurent): 

"Turkish President Recep Tayyip Erdogan has been standing firm as investors dump his country's assets at an alarming pace, saying: 'They have got dollars, we have got our people, our right, our Allah.' European banks with substantial investments in Turkey will hope some of that divine providence rubs off on them, too, after sticking with a bet that has gotten more perilous over time."

Turkey is the poster child for systems that have for a decade luxuriated in abundant cheap global liquidity. 
A spectacular Turkish borrowing binge fueled a formidable Bubble. A spending boom, ongoing low savings and persistent Current Account Deficits (surpassing 6% this year) have been for years financed with cheap international (chiefly dollar) finance. Turkish corporations have more than doubled foreign-denominated borrowings since the crisis to over $200 billion, approaching 50% of GDP. 

STOCKS:

S&P500 slipped 0.2% (up 6.0% y-t-d)

Dow Industrials declined 0.6% (up 2.4%)

Dow Utilities fell 0.7% (up 0.1%)

Dow Transports were about unchanged (up 4.5%)

S&P 400 Midcaps dipped 0.2% (up 5.0%)

Small cap Russell 2000 gained 0.8% (up 9.9%)

Nasdaq100 added 0.2% (up 15.8%)

Biotechs jumped 1.5% (up 21.6%). 

With gold bullion down $2,

the HUI gold stock index sank 2.9% 

    (down 16.8%).

U.K.'s FTSE little changed (down 0.3% year-to-date).

Japan's Nikkei 225 fell 1.0% (down 2.1% y-t-d)

France's CAC40 declined 1.2% (up 1.9%). 

German DAX dropped 1.5% (down 3.8%). 

Spain's IBEX 35 lost 1.4% (down 4.4%). 

Italy's FTSE MIB dropped 2.2% (down 3.5%). 

Brazil's Bovespa index sank 5.9% (up 0.1%)

Mexico's Bolsa fell 1.9% (down 2.0%). 

South Korea's Kospi slipped 0.2% (down 7.5%). 

India’s Sensex gained 0.8% (up 11.2%). 

China’s Shanghai rallied 2.0% (down 15.5%). 

Turkey's Istanbul National 100 declined 0.7% (down 17.7%). 

Russia's MICEX fell 1.0% (up 7.8%).

US  BONDS & MORTGAGES:

Ten-year Treasury yields dropped eight bps to 2.87% (up 47bps). 

Long bond yields fell six bps to 3.03% (up 29bps). 

Benchmark Fannie Mae MBS yields dropped seven bps to 3.60% (up 60bps).

Freddie Mac 30-year fixed mortgage rates 

    slipped a basis point to 4.59% (up 69bps y-o-y). 

Fifteen-year rates declined three bps to 4.05% (up 87bps). 

Five-year hybrid ARM rates fell three bps to 3.90% (up 76bps). 

Jumbo mortgage 30-yr fixed rates down four bps to 4.59% (up 56bps).

Federal Reserve Credit over the past year, down 4.4%. 

M2 (narrow) "money" supply over the past year, up only 3.9%.

Currency Watch:

The U.S. dollar index jumped 1.2% to 96.357 

(up 4.6% y-t-d). 

Commodities Watch:

Goldman Sachs Commodities Index declined 1.3% (up 3.6% y-t-d). 

Spot Gold dipped 0.2% to $1,212 (down 7.0%). 

Silver fell 1.1% to $15.295 (down 10.8%). 

Crude declined 86 cents to $67.63 (up 12%). 

Gasoline fell 1.3% (up 14%)

Natural Gas jumped 3.2% (unchanged). 

Copper declined 0.8% (down 17%). 

Wheat fell 1.8% (up 33%). 

Corn dropped 3.3% (up 6%).

Trump Administration Watch:

August 4 - Bloomberg (Margaret Talev): 

"President Donald Trump defended his use of tariffs that have inflamed tensions with China and Europe, telling an audience of diehard supporters… that playing hardball on trade is 'my thing.' 'We have really rebuilt China, and it's time that we rebuild our own country now,' Trump said Saturday during about an hour of free-wheeling remarks at a rally outside Columbus, Ohio. He added that Chinese stocks are down, weakening that nation's bargaining power in the escalating trade war… 'Every country on earth wants to take wealth out of the U.S., always to our detriment,' Trump tweeted, 'I say, as they come, Tax them.'"

August 8 - The Hill (Niv Elis): 

"The federal deficit jumped 20% in the first 10 months of the 2018 fiscal year, the Congressional Budget Office (CBO) reported… Spending outpaced revenue between the beginning of the fiscal year, on Oct. 1, and July by $682 billion, $116 billion more than over the same period in the last fiscal year… The CBO projects that the deficit will reach $793 billion by the end of the year and approach $1 trillion next year. White House estimates have the deficit surpassing $1 trillion in 2019. Budget watchers have warned that interest payments - the amount the Treasury has to pay just to service the debt - are slated to become the fastest-growing annual expenditure."

August 7 - Reuters (Babak Dehghanpisheh and Peter Graff): 

"Companies doing business with Iran will be barred from the United States, President Donald Trump said…, as new U.S. sanctions took effect despite pleas from Washington's allies… 'These are the most biting sanctions ever imposed, and in November they ratchet up to yet another level. Anyone doing business with Iran will NOT be doing business with the United States. I am asking for WORLD PEACE, nothing less!' Trump tweeted…"

U.S. Bubble Watch:

August 8 - Bloomberg (Lananh Nguyen): 

"Republicans defending seats in some of the most competitive races in the House of Representatives have more cash on hand than their Democratic challengers, a Bloomberg tabulation of Federal Election Commission reports shows. But polls, turnout and fundraising show Democrats have a credible shot at winning the House in November. Should Democrats regain majorities in the House or even the Senate, it could put them in a position to step up scrutiny of President Donald Trump's administration and might raise the likelihood of Congressional gridlock that slows the president's policy initiatives."

August 6 - Reuters (Lindsay Dunsmuir): 

"Loan officers at U.S. banks reported easing lending standards for business loans for firms of all sizes while keeping terms for commercial real estate loans almost unchanged in the second quarter, a Federal Reserve survey showed… The officers also said they were seeing stronger demand for business loans from small firms and weaker interest in commercial real estate loans. 'Notably, almost all domestic banks that reportedly eased standards or terms on [business] loans over the past three months cited increased competition from other lenders as a reason for easing,' the U.S. central bank said…"

August 8 - Reuters (Lucia Mutikani): 

"U.S. job openings held near record highs in June amid a modest decline in hiring, pointing to further tightening labor market conditions, which economists hope will soon spur faster wage growth… 'The labor market continues to run hot and this guarantees that more rate hikes are on the way,' said Chris Rupkey, chief economist at MUFG… 'Fed officials are increasingly skeptical that this economy requires any monetary policy support whatsoever.'"

August 9 - Wall Street Journal (Jennifer Smith): 

"Empty trucks are so hard to come by right now that Dean Foods Co., one of North America's largest milk suppliers, cut its full-year earnings outlook in part because it simply can't move its goods for anything close to what it expected to pay this year. 'Industry capacity for truck drivers remains extremely tight. This is driving third-party hauling rates to record levels, up 26% versus prior year,' Chief Executive Ralph Scozzafava said… The warning from the… dairy processor puts Dean in a growing line of U.S. businesses struggling with the tightest freight market in recent memory. Distribution channels that carry goods to retailers, factories and consumers are struggling to keep up the fast-growing U.S. economy as more companies caution that the strains in the transport sector are holding back their ability to grow."

August 7 - New York Times (Jamie Condliffe): 

"Corporate boards have authorized the repurchase of $754 billion of stock so far this year, up 80% from the same period last year, according to a Goldman Sachs report.
And that figure could reach a record $1 trillion by the end of the year."

August 8 - Reuters (Richard Leong): 

"U.S. mortgage application activity decreased to its lowest in 2-1/2 years last week as loan requests to refinance an existing home fell to their weakest level since December 2000… MBA's measure on loan applications to buy a home, a proxy on future housing activity, fell 2% to 233.1 in the latest week, which was the lowest since 225.5 in the week of Feb. 16."

August 5 - Financial Times (Chris Flood): 

"US private equity managers have extracted $400bn in fees and expenses from investors since 2006 but on average they failed to beat the returns from an S&P 500 tracker fund… The findings are an analysis by Oxford Saïd Business School… Pension funds and other institutional investors hunting better returns after the 2007-08 financial crisis ramped up allocations to illiquid private equity strategies. This created a gold rush for managers such as Blackstone, KKR, Apollo, Carlyle and CVC Capital. Investors, however, have difficulty in assessing value for money because of complex and opaque agreements that allow private equity managers to charge multiple layers of hidden fees. About $2tn in new cash was raised from investors by US private equity managers between 2006 and the end of 2015."

August 7 - Wall Street Journal (Anne Tergesen): 

"The rate at which Americans age 65 and older are filing for bankruptcy has more than tripled since 1991 amid reductions in the social safety net and a shift away from pensions, according to a new study. 'Older Americans are more likely than ever to find themselves in bankruptcy court, seeking protection from creditors,' said the study written by academics at institutions including the University of Idaho and University of Illinois. It also said that among Americans in bankruptcy, the percentage of older people 'has never been higher.' The study, titled 'Graying of U.S. Bankruptcy: Fallout from Life in a Risk Society,' found that between 2013 and 2016, the average rate at which 65- to 74-year-old Americans filed for bankruptcy increased to 3.6 out of every 1,000 individuals from a rate of 1.2 per 1,000 in 1991."

China Watch:

August 8 - Wall Street Journal (Yoko Kubota): 

"Beijing warned it would match the Trump administration step for step should it move ahead with new tariffs on Chinese imports, as trade data showed the country is shoring up its economy for a long trade conflict with the U.S. China's Ministry of Commerce… criticized the U.S.'s plan to impose new 25% tariffs on $16 billion in Chinese goods on Aug. 23, and released an updated list of items it would target with similar tariffs… 'This is very unreasonable,' the ministry said. 'In order to defend China's rightful interests and the multilateral trade system, China has to retaliate as necessary.' …State media… said that China will get through this storm, and those placing tariffs on it would end up hurting themselves, without resolving economic imbalances. 'Some people selfishly swim against the tide and act against morality, wantonly raising the barrier of tariffs and waving the stick of hegemony everywhere,' said the editorial…"

August 7 - CNBC (Huileng Tan): 

"China's state media continued its aggressive rhetoric against U.S. President Donald Trump's administration, accusing Washington of being 'double-faced' amid an ongoing trade dispute. 'Pointing China with (sic) gun and artillery and then asking for a talk, the U.S. showed zero sincerity,' said the People's Daily newspaper… 'Washington is playing double-faced tactics in the ongoing trade war,' the official newspaper of the Chinese Communist Party said in its editorial… 'From $50 billion, to $200 billion and then the proposed $500 billion, from 10% to 25%, Washington's tariff game has been seen through by China,' it added. The U.S. is using 'carrot-and-stick diplomacy to bully China into unilateral trade concessions,' but any move to 'defeat China' will be futile, said the People's Daily. The Communist Party paper said that Beijing would overcome the American 'trade blackmail,' adding: 'China will not surrender to the US, nor could it ignore the trade war. The only way is to face it and win it.'"

August 8 - Reuters (Ryan Woo and David Lawder): 

"China is slapping additional tariffs of 25% on $16 billion worth of U.S. imports from fuel and steel products to autos and medical equipment, the Chinese commerce ministry said, as the world's largest economies escalated their trade dispute. The tariffs will be activated on Aug. 23, the ministry said, the same day that the United States plans to begin collecting 25% extra in tariffs on $16 billion of Chinese goods."

August 8 - The Hill (Brenda Goh):

"Chinese state media on Thursday accused the United States of a 'mobster mentality' in its move to implement additional tariffs on Chinese goods, and warned Beijing had all the necessary means to fight back."

August 7 - CNBC (Arjun Kharpal): 

"Apple has benefited from cheap labor and a strong supply chain in China and needs to share more of its profit with the Chinese people or face 'anger and nationalist sentiment' amid the ongoing trade war, an article in the state-backed People's Daily warned… But the continuing trade war between the U.S. and China could leave Apple and other U.S. firms vulnerable as 'bargaining chips' for Beijing, according to the article. 'The eye-catching success achieved in the Chinese market may provoke nationalist sentiment if U.S. President Donald Trump's recently adopted protectionist measures hit Chinese companies hard,' the People's Daily said."

August 9 - Reuters (Ben Blanchard and Kevin Yao):

"A growing trade war with the United States is causing rifts within China's Communist Party, with some critics saying that an overly nationalistic Chinese stance may have hardened the U.S. position, according to four sources close to the government. President Xi Jinping still has a firm grip on power, but an unusual surge of criticism about economic policy and how the government has handled the trade war has revealed rare cracks in the ruling Communist Party. A backlash is being felt at the highest levels of the government, possibly hitting a close aide to Xi, his ideology chief and strategist Wang Huning, according to two sources…"

August 8 - Bloomberg: 

"Chinese car sales slumped for a second consecutive month as a slowing economy and a tit-for-tat trade war with the U.S. kept consumers away from showrooms. Retail sales of cars, SUVs and multipurpose vehicles fell 5.4% to 1.6 million units in July… That compares with a 3.7% drop in June and trimmed the year-to-date growth in the world's biggest automobile market to 2%. China's economy is showing signs of weakness as a weakening yuan and a slump in stocks cost the country its rank as the world's second-biggest equity market."

August 5 - Financial Times (Tom Hancock and Wang Xueqiao): 

"Struggling to find well-paid work after arriving in Shanghai as a graduate from a middle-ranked Chinese university, Tom Wang turned to another source to fund his spending: credit cards… To cover repayments and keep spending, Mr Wang took on more debt - borrowing Rmb60,000 over four credit cards - before turning to online lenders for a further Rmb70,000. Interest payments 'snowballed' to Rmb1,500 a month, he said. Mr Wang is part of a generation of young consumers who have rejected the thrifty habits of their elders and become used to spending with borrowed money. Outstanding consumer loans - used for vehicle purchases, holidays, household renovations and buying expensive household goods - in China grew nearly 40% last year to reach Rmb6.8tn, according to Chinese investment bank CICC."

August 5 - Financial Times: 

"China's ratio of gross debt to GDP surged from about 171% before the (2008) crisis to 299% this year… Its corporate sector is the world's most indebted, and its most highly leveraged. A huge and loosely regulated shadow finance system conceals eruptive risks. Small and medium-sized banks, which have doubled in size over the past decade to account for 43% of total banking assets, are riddled with risky funding models and a few have already had to be bailed out."

Emerging Markets Watch:

August 9 - Reuters (Andrew Osborn): 

"The Turkish lira sank to a record low as concern about souring relations with the U.S. and runaway inflation outweighed the nation's plans to stem a market rout. The lira sank about 4%, while the iShares MSCI Turkey ETF extended a two-day plunge. The currency had initially pared losses after the government set a growth target of less than 4%, down from 5.5%. The move represents Treasury and Finance Minister Berat Albayrak's first whack at fixing the $880 billion economy's vulnerabilities since a market meltdown sparked by last week's U.S. sanctions."

Europe Watch:

August 8 - Wall Street Journal (Laurence Norman and Drew Hinshaw):

 "The European Union has spent nearly $1 trillion to unify the continent by delivering highways and trains into places where there were once gravel paths. In current dollars, that is over eight times the Marshall Plan that rebuilt Europe after World War II. The EU has bought airports and bridges, trams and swimming pools. It has repaired castles and medieval churches. It hasn't bought love. To the vexation of European leaders, some of the biggest recipients of funding are now hotbeds of discontent, brimming with voters disquieted by the cultural and political pressures that have accompanied European integration, and threatening the bloc's cohesion."

Fixed Income Bubble Watch:

August 8 - The Hill (Niv Elis): 

"The amount of debt the federal government owes could be double the size of the entire U.S. economy in the next 30 years, according to a new report from the Congressional Budget Office (CBO). Debt would surpass an unprecedented 200% of gross domestic product (GDP) by 2048 under any of three scenarios explored by the CBO in its report…, while the nation's economy would be smaller than under current projections."

Geopolitical Watch:

August 3 - Bloomberg (Nicholas Wadhams and Jason Koutsoukis): 

"U.S. Secretary of State Michael Pompeo warned against easing up on sanctions until North Korea gives up its nuclear weapons, drawing a rebuke from the regime that underscored how far apart the two sides remain almost two months after their leaders met in Singapore. Back in Singapore for a regional security forum, Pompeo… called out Russia and China, highlighting reports that they are violating United Nations Security Council resolutions restricting trade with North Korea. 'We expect the Russians and all countries to abide by the UN Security Council resolutions and enforce sanctions on North Korea,' Pompeo said. 'Any violation that detracts from the world's goal of finally fully denuclearizing North Korea would be something that America would take very seriously.'"

August 8 - Reuters (Ben Blanchard and Michelle Martin): 

"China and Germany defended their business ties with Iran… in the face of President Donald Trump's warning that any companies trading with the Islamic Republic would be barred from the United States. The comments from Beijing and Berlin signaled growing anger from partners of the United States, which reimposed strict sanctions against Iran…, over its threat to penalize businesses from third countries that continue to operate there. 'China has consistently opposed unilateral sanctions and long-armed jurisdiction,' the Chinese foreign ministry said."

August 6 - Wall Street Journal (Asa Fitch and Aresu Eqbali): 

"Iranians are hoarding gold as a safeguard against a collapsing local currency and soaring cost of living as the U.S. is poised to impose economic sanctions on Iran, pushing the metal's price to records in Tehran. On Tuesday… the Trump administration is set to bring back a first wave of restrictions that had been waived under the Iran nuclear deal, an Obama-era agreement that gave Iran sanctions relief in exchange for curbs on its nuclear program."