Economic News for the week ending August 17, 2018

Saturday, August 18, 2018

Weekly Commentary: 

Instability

by Doug Noland

full column here:

http://creditbubblebulletin.blogspot.com/2018/08/weekly-commentary-instability.html

My summary is below:

For the week ending

August 17, 2018:

STOCKS:

S&P500 gained 0.6% (up 6.6% y-t-d)

Dow Industrials rose 1.4% (up 3.8%)

Dow Utilities rallied 2.7% (up 2.8%)

Dow Transports rose 1.2% (up 5.8%)

S&P 400 Midcaps increased 0.7% (up 5.8%)

Small cap Russell 2000 added 0.4% (up 10.3%)

Nasdaq100 slipped 0.4% (up 15.3%)

Biotechs declined 1.0% (up 20.3%). 

With gold bullion down $27, 

the HUI gold stock index sank 10.9% 

   (down 25.9%).

 U.K.'s FTSE fell 1.4% (down 1.7%).

Japan's Nikkei 225 unchanged (down 2.2% y-t-d). 

France's CAC40 fell 1.3% (up 0.6%)

German DAX dropped 1.7% (down 5.5%). 

Spain's IBEX 35 lost 1.9% (down 6.2%). 

Italy's FTSE MIB sank 3.2% (down 6.6%)

Brazil's Bovespa index declined 0.9% (down 0.5%)

Mexico's Bolsa slipped 0.2% (down 2.2%). 

South Korea's Kospi fell 1.6% (down 8.9%). 

India’s Sensex added 0.2% (up 11.4%). 

China’s Shanghai Exchange sank 4.5% (down 19.3%). 

Turkey's Istanbul National 100 index fell 6.5% (down 23.1%). 

Russia's MICEX equities index declined 0.9% (up 6.9%).

US  BONDS  &  MORTGAGES:

Ten-year Treasury yields slipped a basis point to 2.86% (up 45bps). 

Long bond yields declined one basis point to 3.02% (up 28bps). 

Benchmark Fannie Mae MBS yields were unchanged at 3.60% (up 61bps).

Freddie Mac 30-year fixed mortgage rates dropped six bps to 4.53%

   (up 64bps y-o-y). 

Fifteen-year rates declined four bps to 4.01% 

   (up 85bps). 

Five-year hybrid ARM rates slipped three bps to 3.87% 

   (up 71bps). 

Jumbo mortgage 30-yr fixed rates down seven bps to 4.52% 

   (up 45bps).

Over the past year, Fed Credit contracted $211bn, or 4.8%. 

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

Currency Watch:

The U.S. dollar index slipped 0.3% to 96.116 (up 4.3% y-t-d). 

Commodities Watch:

Goldman Sachs Commodities Index fell 1.9% (up 1.6% y-t-d). 

Spot Gold dropped 2.2% to $1,185 (down 9.1%). 

Silver sank 3.4% to $14.775 (down 13.8%). 

Crude fell $1.71 to $65.93 (up 9%). 

Gasoline dropped 3.0% (up 10%)

Natural Gas was little changed (unchanged). 

Copper fell 2.3% (down 19%). 

Wheat gained 1.8% (up 36%). 

Corn jumped 1.9% (up 8%).

Trump Administration Watch:

August 16 - Reuters (Michael Martina and Elias Glenn): 

"China will hold a fresh round of trade talks with the United States in Washington later this month, Beijing said on Thursday, offering a glimmer of hope for progress in resolving a conflict that has set world financial markets on edge. While the engagement was seen by analysts and business officials as positive, they cautioned that the talks were unlikely to lead to a breakthrough given they are among lower level officials and led on the U.S. side by the Treasury Department, not the U.S. Trade Representative (USTR)."

August 11 - Wall Street Journal (Jacob M. Schlesinger): 

"President Trump's decision to double steel tariffs on Turkey as its government battled a currency collapse marked a departure for the U.S. from how it traditionally handles financial turmoil hitting emerging markets. Washington has generally tried to calm global markets in such moments, especially when investors are gripped by fear of contagion. Mr. Trump instead squeezed Ankara further, raising tariffs on Turkish steel imports to 50% and aluminum to 20%, which deepened the Turkish lira's drop and worsened market fears that its banks could be shaken. Administration officials didn't clarify Mr. Trump's motives."

August 15 - Reuters (Tim Ahmann and Lesley Wroughton): 

"The United States imposed sanctions on a Russian port service agency and Chinese firms for aiding North Korean ships and selling alcohol and tobacco to Pyongyang in breach of U.S. sanctions… 'The tactics that these entities based in China, Singapore, and Russia are using to attempt to evade sanctions are prohibited under U.S. law, and all facets of the shipping industry have a responsibility to abide by them or expose themselves to serious risks,' U.S. Treasury Secretary Steven Mnuchin said…"

Turkey Watch:

August 11 - Reuters (Humeyra Pamuk): 

"President Tayyip Erdogan denied on Saturday that Turkey is in a currency crisis, dismissing a plunge in the lira as 'fluctuations' which have nothing to do with economic fundamentals. Speaking after U.S. President Donald Trump doubled tariffs on Turkish steel and aluminum imports, Erdogan described Friday's 18% fall in the lira to a record low as the 'missiles' of an economic war waged against Turkey. Erdogan said those who plotted against Turkey in a failed coup attempt in July 2016 were now trying to target the country through its economy, and pledged to fight back… 'Those who can't compete with us on the ground have brought online fictional currency plots that have nothing to with the realities of our country, production and real economy,' Erdogan told a provincial meeting of his AK Party…"

August 16 - Wall Street Journal (Jon Sindreu and Sarah McFarlane): 

"Turkey faces another big problem after it deals with the immediate impact of its currency crisis: How is it going to pay for its dependence on imported oil and natural gas? Turkey imports the vast majority of its fuel needs. Its devalued lira makes paying for such imports more expensive. Meanwhile, the economy is rapidly running out of hard currency to pay for that imported energy and support all its other foreign-currency needs, especially among Turkish companies who have borrowed heavily in U.S. dollars. While oil is roughly 6% more expensive year to date for international traders, its price tag has risen more than 60% for Turkish buyers because of the plunge in their currency against the dollar."

U.S. Bubble Watch:

August 12 - Bloomberg (Sarah McGregor): 

"The U.S. budget deficit widened 
in the first four months of the fiscal year 
as growth in spending exceeded revenue. 

The U.S. fiscal gap increased by 11% 
to $175.7 billion between October and January 
from the same period a year earlier… 

Outlays rose by 5% to $1.3 trillion, 
while receipts increased by 4% to $1.1 trillion. 

The budget deficit widened 
the last fiscal year 
to the largest since 2013. 

The gap is expected to keep increasing as an aging population boosts spending on healthcare and retirement programs and from tax cuts enacted this year that are expected to cut revenue by up to $1.5 trillion over the next decade… 

The Trump administration's 
proposed budget released Monday 
shows the 2019 deficit 
widening to nearly $984 billion 
and totaling $7.1 trillion 
over the next decade."

August 14 - Bloomberg (Matthew Boesler): 

"U.S. household debt continued to increase in the second quarter, propelled by an advance in mortgage borrowing… Total household debt rose 3.5% from a year earlier in the April-to-June period to a record $13.3 trillion, while mortgage debt rose 3.5% to $9 trillion. The majority of newly originated mortgages continued to go to borrowers with the highest credit scores… As borrowing advanced, borrower stress continued to decline. Loans slipping into delinquency fell to 4.52% in the second quarter, the lowest in data from 2003."

August 14 - Bloomberg (Matthew Boyle): 

"It's getting more expensive for retailers like Walmart Inc. to stock its shelves with household staples like diapers, paper towels and bottled water. The question now is whether that translates into more pain at the check-out line. Soaring costs for transportation and raw materials -- some related to tariffs -- have prompted Procter & Gamble Co., Nestle SA, Coca-Cola Co. and others to announce price increases this summer on a wide swath of consumer staples. The companies are betting that demand will remain steady even though wage growth is tepid and Americans' wallets are already getting pinched by higher gas prices…"

August 15 - Reuters (Lucia Mutikani): 

"U.S. retail sales rose more than expected in July as households boosted purchases of motor vehicles and clothing, suggesting the economy remained strong early in the third quarter… Retail sales in July 
increased 6.4% from a year ago." 

August 15 - Bloomberg (Reade Pickert and Scott Lanman): 

"Spending at U.S. restaurants surged over the past three months by the most on record, making it both a bright spot for the economy and a risk if appetites for eating out return to normal. Sales at food-service and drinking establishments rose 1.3% in July to $61.6 billion... That brought the three-month annualized gain to 25.3%, the fastest pace in figures going back to 1992."

August 15 - Reuters (Lucia Mutikani): 

"U.S. worker productivity increased at its fastest pace in more than three years in the second quarter, depressing labor costs, but the trend in productivity growth remained moderate. …Nonfarm productivity, which measures hourly output per worker, rose at a 2.9% annualized rate in the April-June quarter."

August 13 - CNBC (Annie Nova): 

"More than 1 million student loan borrowers each year go into default. Outstanding education debt in the U.S. has tripled over the last decade and now exceeds $1.5 trillion, posing a greater burden to Americans than auto or credit card debt. For many, the payments are proving unmanageable. By 2023, nearly 40% of borrowers are expected to default on their student loans."

China Watch:

August 15 - The Street.com (Bradley Keoun): 

In the escalating trade war with President Donald Trump, China might be digging in its heels. According to a new report, China now appears willing to undertake a major currency devaluation - similar to the policy changes that roiled global markets in late 2015 and early 2016. The move by the Chinese government would help to offset the effect of the Trump administration's enacted or threatened tariffs on some $250 billion of imports from the country, writes the economic forecaster TS Lombard… China's main reason for avoiding a major devaluation so far was that it could spark large capital outflows from the country… according to TS Lombard. But the government has imposed capital controls to keep money from flowing out, providing officials with a source of confidence as they look for ways to push back against Trump and his trade war, according to the economists."

August 14 - Reuters (Jessica Jaganathan and Chen Aizhu): 

"Chinese oil importers are shying away from buying U.S. crude as they fear Beijing's decision to exclude the commodity from its tariff list in a trade dispute between the world's biggest economies may only be temporary. Not a single tanker has loaded crude oil from the United States bound for China since the start of August…"

August 16 - Bloomberg:

"The Chinese Communist Party's top newspaper issued a rare direct criticism of President Donald Trump's agenda, saying his 'America First' policies were hurting his own people and fomenting discontent in the country. 'After more than a year of observing American diplomatic practice, people have seen the United States strides under the slogan 'America First,' but the complaints of those Americans who have not felt the benefits of 'America First' are growing,' an opinion piece… in the People's Daily said. 'Bizarrely, U.S. trade policy makers seem to be deaf.'"

August 11 - South China Morning Post (He Huifeng): 

"China can easily find other countries to buy agricultural goods from instead of the U.S., its vice agriculture minister said, warning that American farmers could permanently lose their share of the Chinese market as a result of the trade war. 'Many countries have the willingness and they totally have the capacity to take over the market share the U.S. is enjoying in China. If other countries become reliable suppliers for China, it will be very difficult for the U.S. to regain the market,' Han Jun told official Xinhua news agency…"

August 14 - Wall Street Journal (Chao Deng): 

"A missed bond payment by a quasi-military organization in the Xinjiang Uighur Autonomous Region is fueling fresh concerns about China's ability to shoulder its massive debt. A unit of the Xinjiang Production & Construction Corps, an organization with military heritage that runs commercial enterprises for the government, acknowledged… that it failed to pay back interest and principal for $73 million of onshore bonds. The XPCC unit, known as the Sixth Division of State-Owned Asset Management, warned in another statement that it might also have trouble paying a separate 500 million yuan bond due Sunday. 'The company is negotiating several ways to repay the money,' that statement said… Several Chinese news media reports heralded the missed payment… as the first instance of a local-government financing vehicle to default."

Global Bubble Watch:

August 14 - Wall Street Journal (Ben Eisen): 
"Turkey's escalating crisis is spotlighting the giant stockpile of foreign-currency debt held by emerging markets, a build-up that threatens to throw those economies off course in the coming years. Governments, financial firms and other companies in emerging markets have $2.7 trillion in U.S. dollar-denominated debt that comes due between now and the end of 2025, according to the Institute of International Finance. These countries will need to pay off or refinance their loans and bonds as they come due. The trouble: A slide in emerging-market currencies against the U.S. dollar makes it tougher to pay back that greenback debt, particularly for countries where more revenue is generated in local currencies that are suddenly less valuable on a relative basis… Hungary, Argentina, Poland and Chile all have foreign-currency denominated debt that stands at more than half of gross domestic product, according to Deutsche Bank."

August 12 - Financial Times (Eric Platt and James Fontanella-Khan): 

"Acquisitions worth more than $540bn have been scuppered so far this year as blockbuster takeovers have come under renewed threat from government scrutiny. Countries are increasingly turning to foreign investment laws to block deals in sensitive industries, including the technology and utility sectors, while antitrust regulators have put up barriers to several multibillion-dollar transactions this year. Among the casualties was chipmaker Broadcom's $142bn hostile bid for rival Qualcomm, which was blocked by US president Donald Trump on national security grounds… In the last week alone, a handful of marquee transactions were killed…"

Japan Watch:

August 16 - Reuters (Leika Kihara): 
"The Bank of Japan may allow long-term interest rates to creep up to around 0.4% under new guidance introduced last month, which lays the groundwork for 'stealth' rate hikes, the central bank's former executive Hideo Hayakawa said… The Bank of Japan may allow long-term interest rates to creep up to around 0.4% under new guidance introduced last month, which lays the groundwork for 'stealth' rate hikes, the central bank's former executive Hideo Hayakawa said…"

Fixed Income Bubble Watch:

August 15 - Financial Times (Colby Smith): 
"Convertible debt has emerged as a rare bright spot in the beleaguered fixed-income market this year, boosted by a rallying share market and rising interest rates, and in turn triggering the fastest pace of new sales in a decade, led by technology companies. US corporate bonds that convert to stock at a given price have generated a total return of 6% for investors this year... In contrast, investment-grade-rated corporate debt has lost 5.8% and high-yield bonds have dropped 2.4% in 2018… Fast-growing technology companies dominate convertible issuance as they are a cheaper way to raise money than issuing common stock or traditional junk bonds… Companies are issuing more convertible debt, with the volume of sales reaching $31.6bn so far this year, according to Dealogic - the fastest pace since the financial crisis."

August 16 - Wall Street Journal (Matt Wirz): 

"Investors bought record amounts of junk-rated corporate loans in recent years, betting they would deliver more stable returns than high-yield bonds, but the loans are no longer as safe as their owners may think.  A rapid deterioration in the quality of 'leveraged loans' means loanholders would recover far less in a future economic downturn than they have historically, according to research by Moody's... Years of low rates have spurred record amounts of corporate borrowing, often in the $1.4 trillion market for below-investment-grade loans."

Geopolitical Watch:

August 14 - Bloomberg (Tony Halpin): 

"Vladimir Putin isn't letting a good crisis go to waste. While Turkey's lira troubles have gripped global markets worried about contagion risks, Russia spies an opportunity in the political frictions between Ankara and the U.S. The idea of bringing Turkey tighter into Russia's embrace isn't as unrealistic as it was even a few years ago, with Turkish President Recep Tayyip Erdogan warning that spiraling conflict with the U.S. may prompt him to find new allies. As President Donald Trump's top national security aide warned Turkey's U.S. envoy they have nothing to discuss until a detained American pastor is released, Russia's foreign minister was holding talks in Ankara. Trump doubled tariffs on Turkish steel and aluminum while Erdogan and Putin discussed economic cooperation."

August 12 - Financial Times (Kathrin Hille): 

"Russia is trying to reduce its dependence on the dollar by cutting US securities holdings and settling more trade payments in other currencies, Moscow's chief economic policymaker said… Anton Siluanov, finance minister and deputy prime minister for the economy, said the US currency was 'becoming a risky instrument in international settlements'. 'We have decreased to a minimum level and will further cut our investment in the US economy, in US securities,' he added, in the most direct confirmation so far of a Russian government sell-off of US Treasuries."

August 12 - Financial Times (Henry Foy): 

"Russia has pledged to deepen co-operation with Iran and its Central Asian neighbours through a landmark deal on carving up the Caspian Sea, potentially paving the way for long-stalled energy projects and confirming Russia's military supremacy over the world's biggest lake. The Caspian's littoral states of Azerbaijan, Iran, Kazakhstan, Russia and Turkmenistan have quarrelled for more than two decades since the collapse of the Soviet Union over how to divide the strategically-important landlocked sea. On Sunday they signed a deal to manage a resource that holds large hydrocarbon resources and is a bridge between Central Asia, the Middle East and Europe. 'This is an exceptional summit with milestone significance for the fate of the Caspian Sea,' Russian president Vladimir Putin told his fellow leaders."

August 16 - Reuters (Christopher Bing and Jack Stubbs): 

"Hackers operating from an elite Chinese university probed American companies and government departments for espionage opportunities following a U.S. trade delegation visit to China earlier this year, security researchers told Reuters. Cybersecurity firm Recorded Future said the group used computers at China's Tsinghua University to target U.S. energy and communications companies, as well as the Alaskan state government, in the weeks before and after Alaska's trade mission to China."