Economic News for the week ending December 21, 2018

Saturday, December 22, 2018

Weekly Commentary: 

Powell Federal Reserve 

Lowers “Fed Put” Strike Price

by Doug Noland

full Noland column is here:

http://creditbubblebulletin.blogspot.com/2018/12/weekly-commentary-powell-federal.html

My summary is below:

For the week ending 
December 21, 2018:

STOCKS:

S&P500 down 7.1% (down 9.6% year-to-date)

Dow Industrials down 6.9% (down 9.2%)

Dow Utilities down 4.3% (up 1.5%)

Dow Transports down 6.7% (down 16.4%)

S&P 400 Midcaps down 7.0% (down 15.2%)

Small cap Russell 2000 down 8.4% (down 15.9%)

Nasdaq100 down 8.3% (down 5.5%)

Biotechs down 10.9% (down 6.7%). 

With gold bullion up $17.60, 

the HUI gold index stock was up 2.5% 

    (down 18.6%).

U.K.'s FTSE declined 1.8% (down 12.6%).

Japan's Nikkei 225 sank 5.7% (down 11.4% y-t-d)

France's CAC40 fell 3.3% (down 11.6%)

German DAX declined 2.1% (down 17.7%). 

Spain's IBEX 35 fell 3.7% (down 14.8%). 

Italy's FTSE MIB dropped 2.7% (down 15.8%)

Brazil's Bovespa declined 2.0% (up 12.2%)

Mexico's Bolsa added 0.4% (down 16%)

South Korea's Kospi slipped 0.4% (down 16.5%)

India's Sensex declined 0.6% (up 4.9%)

China's Shanghai dropped 3.0% (down 23.9%)

Turkey's Istanbul National 100 index gained 1.5% (down 20.4%). 

Russia's MICEX declined 0.8% (up 11.3%).

US  BONDS  

&  MORTGAGE  RATES

Ten-year Treasury yields 

dropped 10 bps to 2.79% (up 39bps). 

Long bond yields fell 11 bps to 3.03% (up 29bps). 

Benchmark Fannie Mae MBS yields 

dropped 13 bps to 3.62% (up 63bps).

Freddie Mac 30-year fixed mortgage rates 

slipped one basis point 

to a four-month low 4.62% 

    (up 68bps y-o-y). 

Fifteen-year rates 

were unchanged at 4.07% 

   (up 69bps). 

Five-year hybrid ARM rates 

fell six bps to 3.98% 

   (up 59bps). 

Jumbo mortgage 

30-yr fixed rates 

own 10 bps 

to a ten-month low 4.46% 

   (up 31bps).

Over the past year, 

Fed Credit contracted 8.2%. 

M2 (narrow) "money" supply 

gained 4.2%, over the past year. 

Currency Watch:

The U.S. dollar index declined 0.5% to 96.956

   (up 5.2% y-t-d). 

Commodities Watch:

Goldman Sachs Commodities Index sank 6.3% (down 14.0% y-t-d). 

Spot Gold gained $17.60 to $1,256 (down 3.6%). 

Silver increased 0.4% to $14.702 (down 14.2%). 

Crude sank $5.61 to $45.59 (down 25%). 

Gasoline fell 8.1% (down 27%)

Natural Gas slipped 0.3% (up 29%). 

Copper dropped 3.2% (down 19%). 

Wheat fell 3.0% (up 20%). 

Corn declined 1.6% (up 8%).

Market Dislocation Watch:

December 21 – CNBC (Thomas Franck): 

“Stocks plunged again on Friday, sending the Dow Jones Industrial Average to its worst week since the financial crisis in 2008, down nearly 7%. 

The Nasdaq Composite Index closed in a bear market and the S&P 500 was on the brink of one itself, down nearly 18% from its record earlier this year.”

December 16 – Financial Times (Eric Platt, Colby Smith and Joe Rennison): “US credit markets are grinding to a halt with fund managers refusing to bankroll buyouts and investors shunning high-yield bond sales as rising interest rates and market volatility weigh on sentiment. Not a single company has borrowed money through the $1.2tn US high-yield corporate bond market this month. If that drought persists, it would be the first month since November 2008 that not a single high-yield bond priced in the market, according to data providers Informa and Dealogic. In the leveraged loan market, two transactions were postponed last week after Barclays, Deutsche Bank, UBS and Wells Fargo failed to find buyers for the debt packages, a rarity in what has been one of the hottest corners of credit markets this year.”

December 21 – Bloomberg (Davide Scigliuzzo and Sally Bakewell): 

“A rout in the once-hot market for risky corporate loans has some of Wall Street’s largest banks stuck with at least $1.6 billion of unwanted leveraged buyout debt. Banks including Barclays Plc, Goldman Sachs… and Bank of America… -- among the top providers of loans for LBOs -- have struggled in recent weeks to sell loans they’ve agreed to make for private equity deals, as concerns about the global economic outlook spurred investors to flee risky assets. At least four loan sales for buyouts and acquisitions have failed to clear the market so far this month, forcing the banks to keep the debt on their books…”

December 17 – Bloomberg (Lisa Lee): 

“Sales of the rebundled loans, known as collateralized loan obligations, dropped 25% in the first half of December from the same period last year, after falling 10% in November. The firms that issue CLOs buy about half the loans made to junk-rated companies. As demand from these money managers has waned, not to mention buying from retail investors, prices for leveraged loans have reached their lowest levels in more than two years.”

Trump Administration Watch:

December 21 – Bloomberg (Daniel Flatley, Erik Wasson, Steven T. Dennis and Laura Litvan): 

“Parts of the U.S. government began shutting down on Saturday for the third time this year after a bipartisan spending deal collapsed over President Donald Trump’s demands for more money to build a wall along the U.S.-Mexico border. Trump scuttled an agreement that would have kept the government open until February after coming under heavy criticism from conservative talk show hosts and some allies in the House because the measure didn’t include the $5 billion he wanted for the wall. While negotiations to resolve the impasse are underway, it’s not clear whether parts of the government will remain shuttered for days or weeks. Ending the shutdown -- which affects nine of 15 federal departments and dozens of agencies -- requires Democratic leaders and Trump to reach a compromise, which so far has been elusive as both sides hardened their positions.”

December 17 – Wall Street Journal (Alex Leary and Nick Timiraos): 

“President Trump argued Monday on Twitter that it was ‘incredible’ that Federal Reserve policy members were considering raising interest rates again, continuing his public campaign against tighter monetary policy… ‘It is incredible that with a very strong dollar and virtually no inflation, the outside world blowing up around us, Paris is burning and China way down, the Fed is even considering yet another interest rate hike,’ Mr. Trump tweeted. ‘Take the Victory!’”

December 18 – Bloomberg (Tom Schoenberg, Chris Dolmetsch and Jennifer Epstein): “The U.S. Justice Department announced indictments accusing Chinese officials of coordinating a decade-long espionage campaign to steal intellectual property and other data from dozens of companies, adding to tensions amid the trade war between the two nations. Two Chinese nationals, Zhu Hua and Zhang Shilong, were accused… of coordinating with state security officials in an ‘extensive’ hacking campaign, allegedly infiltrating 45 U.S. companies and government agencies… Secretary of State Michael Pompeo and Homeland Security Secretary Kirstjen Nielsen said… they were ‘concerned’ that the alleged operation violated a 2015 agreement China made with the U.S. to stop supporting cyber theft of intellectual property and trade secrets.”

Federal Reserve Watch:

December 19 – Financial Times (Sam Fleming): 

“The Fed chairman ploughed ahead on Wednesday with the fourth quarter-point interest rate rise in 2018 and brushed aside calls for the central bank to slow its balance sheet reduction programme. Weeks of market volatility had caused financial conditions to tighten only ‘a little bit’, he said at a press conference. The economy, he added, no longer needed any monetary support. The resulting stock market slide — the S&P 500 dropped as much as 2.3%, marking the worst fall following a Fed rate rise since 1994 — will have come as unwelcome news to a central bank that has been an unwitting contributor to volatility in recent 

December 18 – Bloomberg (Jeff Kearns): 

“Selling in U.S. stocks has an ominous historical comparison for Federal Reserve officials debating an interest-rate increase this week. The last time the S&P 500 Index fell this much in the period between two policy gatherings was the collapse of investment bank Lehman Brothers Holdings Inc. in 2008… The S&P 500 has declined 9.3% from the Fed’s last meeting on Nov. 8 through Monday’s close. That’s the biggest intra-meeting slump since the 18.8% plunge between its Sept. 16, 2008, meeting, a day after Lehman filed for bankruptcy, and a special gathering announced on Oct. 8.”

U.S. Bubble Watch:

December 19 – Reuters (Jason Lange): 

“The U.S. current account deficit increased in the third quarter as imports surged, the Commerce Department said… in a report that also showed U.S. firms brought into the United States $92.7 billion in repatriated earnings. …The current account deficit, which measures the flow of goods, services and investments into and out of the country, widened to $124.8 billion, or 2.4% of national economic output, in the July-September period. Analysts polled by Reuters had expected the current account deficit to widen to $124.3 billion.”

December 18 – CNBC (Bob Pisani):

“It’s official: This is an all-time record year for corporate stock buybacks. Announced buybacks for 2018 are now at $1.1 trillion. And companies are using their authorizations. About $800 billion of stock has already been bought back, leaving about $300 billion yet to be purchased. We’ve seen buyback announcements recently from Lowe’s, Pfizer, and Facebook, but in the last few days, as stocks have moved to new lows, companies are picking up the pace of activity.” 

December 17 – Bloomberg (Scott Lanman): 

“Factories in New York state reported a sharp slowdown in business, sending a Federal Reserve index tumbling this month to a 19-month low and adding to signs U.S. economic growth is moderating. The New York Fed’s Empire State manufacturing index fell 12.4 points to 10.9…”

December 18 – Wall Street Journal (Corrie Driebusch): 

“In 2018, to little fanfare, 38 tech and internet companies valued at $1 billion or more at the time of their IPO listed shares in the U.S., the most to do so since the height of the dot-com boom in 2000, according to Dealogic. That is expected to rise next year, according to bankers and fund managers who follow the IPO market. In 2019 some of the hottest names among the tech unicorns, including Uber Technologies Inc., Lyft Inc. and Slack Technologies Inc. are considering IPOs.”

December 17 – Bloomberg (Ros Krasny):

 “The number of Americans expecting the U.S. economy to get worse in the next year is at its highest point since 2013, a national NBC/Wall Street Journal poll shows… Overall, 28% of Americans said the economy will get better in the next year, while 33% predict it will get worse, according to the survey… Those numbers were essentially reversed from January, when 35% said the economy would get better and 20% said it would get worse.”

December 19 – Reuters (Lucia Mutikani): 

“U.S. home sales unexpectedly rose in November, but recorded their biggest annual decline in 7-1/2 years as the housing market remained mired in weakness amid higher mortgage rates which have made home purchases more expensive… ‘The trend in housing is clearly slowing as affordability takes a bite,’ said Jennifer Lee, a senior economist at BMO Capital Markets… The National Association of Realtors said existing home sales increased 1.9% to a seasonally adjusted annual rate of 5.32 million units last month… Sales have now increased for two straight months.”

December 18 – Bloomberg (Romy Varghese): 

“States collected more than $1 trillion in tax revenue in fiscal 2018, a record, while the growth rate is unlikely to be sustained, according to… the Tax Policy Center. Tally increased by 7.8% from 2017: Growth in income tax driven by timing decisions responding to the federal tax overhaul passed last December: States still face large fiscal challenges and uncertainties from tax changes…”

China Watch:

December 17 – Reuters (Stephanie Nebehay): 

“China said on Monday that the Trump administration’s trade measures on items from steel to intellectual property taken under the guise national security were ‘bringing back to life the ghost of unilateralism’.

December 17 – Bloomberg: 

“China’s cleanup of its shadow-banking system is fueling a record number of liquidations in its $1.9 trillion mutual fund market. More than 600 funds have been closed this year, surpassing all liquidations in the previous 12 years combined… It’s also more than triple the total last year, representing a sharp rise in closures for a mutual fund market that has grown more than five-fold since 2011 in assets under management. China’s crackdown on entrusted loans, the No. 2 source of shadow banking, as well as an ailing stock market have contributed to the record liquidations…”

Brexit Watch:

December 20 – Reuters (Kylie MacLellan and William James): 

“British ministers are divided over the government’s next steps if Prime Minister Theresa May’s Brexit deal with the European Union is not approved by parliament next month. With just under 100 days until Britain is due to leave the EU on March 29, deep divisions in parliament have raised the chances of leaving without a deal and increased calls for a second referendum to break the deadlock. Work and Pensions Secretary Amber Rudd said… there would be a ‘plausible argument’ for another referendum if parliament failed to reach a consensus on the way forward, something May has repeatedly ruled out.”

Global Bubble Watch:

December 16 – Bloomberg (Alex Harris and Katherine Greifeld): 

“Non-U.S. banks have amassed dollar-denominated liabilities that are about as big as they were during the global financial crisis. Yet changes to how they obtain dollars make it hard to tell if funding risks have increased or lessened. Foreign institutions from Europe to the Asia-Pacific and the Americas have boosted the proportion of dollar funding they do in their home countries rather than through U.S.-based branches and subsidiaries, according to a paper from the Bank for International Settlements… At the same time though, cross-border flows account for just over half of their dollar liabilities and U.S. residents provide a bigger share of dollar funding than is actually raised in America, it says.”

Europe Watch:

December 18 – Reuters (Geert De Clercq and Gilles Guillaume):

“French ‘yellow vest’ protesters occupied highway toll booths, setting a number on fire and causing transport chaos in parts of the country just days before the Christmas holidays getaway. France’s biggest toll road operator, Vinci Autoroutes, said there were demonstrations at about 40 sites along its network and that some highway intersections had been damaged, notably in tourist towns such as Avignon, Orange, Perpignan and Agde.”

December 16 – Reuters (Matthias Blamont): 

“France’s budget deficit is likely to overshoot the European Union’s limit of 3% of GDP next year and reach 3.4%, National Assembly president Richard Ferrand told… Le Journal du Dimanche. France is expected to break the deficit ceiling after President Emmanuel Macron made concessions to anti-government protesters earlier this month, blowing a 10 billion euro ($11bn) hole in the budget.”

Italy Watch:

December 19 – Financial Times (Miles Johnson): 

“The truce struck between Brussels and Rome’s populist coalition government… has allowed both sides to save face, avoiding a political stand-off. However, the concerns raised by the EU Commission and financial markets about the Italian economy are likely to resurface, analysts say. Rome has agreed to trim its budget deficit target for 2019 from 2.4% to 2% of gross domestic product mostly by delaying the implementation of some of its most expansionary measures. Welfare handouts for the poor, Five Star’s flagship ‘Citizens’ Income,’ will be delayed, as will a plan to unwind pension reforms dating back to Italy’s last financial crisis in 2011. The coalition has also conceded that economic growth for 2019 will be 1%, from 1.5% previously. Meanwhile, the commission said it had secured a commitment from the Italian government to increase value added tax if the country’s public finances deteriorate in 2020 and 2021.”

Japan Watch:

December 17 – Reuters (Stanley White):

“Japan’s government revised down its forecasts for economic growth and consumer prices for the current and next fiscal years as natural disasters and weakening export demand weighed on the economy… Japan’s government revised down its forecasts for economic growth and consumer prices for the current and next fiscal years as natural disasters and weakening export demand weighed on the economy…”

December 18 – Reuters (Tetsushi Kajimoto): 

“Japan’s export growth slowed to a crawl in November as shipments to the United States and China weakened sharply, in a sign slowing external demand and a Sino-U.S. trade dispute may leave the world’s third-largest economy underpowered over the next year. The 0.1% year-on-year rise in exports undershot a 1.8% annual increase expected by economists in a Reuters poll, and was well below a 8.2% jump in October. In volume terms, exports fell 1.9% in the year to November.”

Fixed Income Bubble Watch:

December 20 – Bloomberg (Adam Tempkin): 

“A record amount of collateralized loan obligations will be eligible to be reset or refinanced next month, potentially putting more pressure on prices. But the concerns may be for naught as the malaise weighing on credit markets could derail part of the push. More than $52 billion of CLOs originally issued in 2017 and 2018 could be refinanced or reset in January… However, if spreads remain near the widest levels in over a year, the exercise may be unprofitable for many managers. ‘Generally speaking, execution of refi/reset/re-issue can be more challenging compared to new-issue in a volatile environment,’ JPMorgan analysts Rishad Ahluwalia and Heather Rochford wrote…”

December 19 – Wall Street Journal (Gunjan Banerji and Heather Gillers): 

“U.S. cities and counties are using fewer ratings to assess the risks of the bonds they sell, providing investors with just one opinion on an increasing amount of new debt. Roughly 25% of the dollar value of all municipal debt issued this year carried a single grade from one of the major ratings firms, according to Municipal Market Analytics data… If that percentage holds through the end of the year, it would be the highest since the research firm began tracking the data in 2006. For the riskiest debt, the single-grade ratio by dollar volume was 37%. Municipal officials and advisers said fewer ratings help cities trim expenses and save time when they borrow… Bond issuers typically pay rating firms to issue a report. But some analysts said opting for one grade from a single firm puts smaller investors at a disadvantage as less information circulates through the $3.8 trillion municipal market.”

Geopolitical Watch:

December 20 – Reuters (Polina Nikolskaya and Andrew Osborn):

“President Vladimir Putin… accused the United States of raising the risk of nuclear war by threatening to spurn a key arms control treaty and refusing to hold talks about another pact that expires soon. In a news conference that lasted more than three hours, Putin also backed U.S. President Donald Trump’s decision to pull troops out of Syria, said British Prime Minister Theresa May had no choice but to implement Brexit and that Western democracy was under serious strain.”

December 17 – Bloomberg (Nour Al Ali): 

“North Korea told the U.S. that sanctions and pressure -- as evident from the past -- won’t work to force the country into action on its nuclear program. ‘The U.S. should realize before it is too late that ‘maximum pressure’ would not work against us and take a sincere approach to implementing the Singapore DPRK-U.S. Joint Statement,’ the country’s state-run Korean Central News Agency said Sunday…”

December 19 – Reuters (Jeongmin Kim and Josh Smith): 

“Any deal for North Korea to give up its nuclear arsenal must include ‘completely removing the nuclear threats of the U.S.’, North Korean state media said…, in one of the clearest explanations of how North Korea sees denuclearization. U.S. President Donald Trump and North Korean leader Kim Jong Un issued a statement after a historic meeting in Singapore in June reaffirming the North’s commitment to ‘work toward complete denuclearization of the Korean Peninsula’ and including U.S. guarantees of security to North Korea. Conflicting or vague views of what exactly ‘denuclearization’ means, however, have complicated negotiations that now appear stalled.”