Saturday, February 9, 2019
Weekly Commentary:
Delusional
by Doug Noland
full column here:
My summary is below:
For the week ending
February 8, 2019:
STOCKS:
S&P500 little changed (up 8.0% y-t-d)
Dow Industrials added 0.2% (up 7.6%)
Dow Utilities jumped 2.2% (up 5.4%)
Dow Transports added 0.5% (up 11.0%)
S&P 400 Midcaps increased 0.6%
Small cap Russell 2000 added 0.3% (up 11.7%)
Nasdaq100 gained 0.5% (up 9.2%)
Biotechs dropped 2.5% (up 13.4%).
With bullion dipping $3,
the HUI gold stock index
slipped 0.2% (up 5.2%)
Japan's Nikkei 225 dropped 2.2% (up 1.6% y-t-d).
France's CAC40 declined 1.1% (up 4.9%)
German DAX dropped 2.4% (up 3.3%)
Spain's IBEX 35 fell 1.8% (up 3.7%)
Italy's FTSE MIB declined 1.1% (up 5.6%)
Brazil's Bovespa sank 2.6% (up 8.5%)
Mexico's Bolsa declined 1.3% (up 3.7%)
South Korea's Kospi fell 1.2% (up 6.7%)
India's Sensex added 0.2% (up 1.3%)
China's Shanghai Exchange was closed for holiday (up 5.0%)
Turkey's Istanbul National 100 dipped 0.5% (up 12.3%).
Russia's MICEX declined 0.7% (up 6.1%).
US BONDS & MORTGAGES
Ten-year US Treasury yields
fell five bps to 2.64% (down 5bps).
US Treasury long bond yields
declined five bps to 2.98% (down 3bps).
Benchmark Fannie Mae MBS yields
fell seven bps to 3.40% (down 9bps).
U.K.'s FTSE equities index increased 0.7% (up 5.1% y-t-d).
Freddie Mac 30-year fixed mortgage rates
declined five bps to 4.41% (up 9bps y-o-y).
Fifteen-year rates
fell five bps to 3.84% (up 7bps).
Five-year hybrid ARM rates
dropped five bps to 3.91% (up 34bps).
Jumbo mortgage 30-yr fixed rates
down a basis point to 4.41% (down 18bps).
Over the past year,
Fed Credit contracted 9.0%.
M2 (narrow) "money" supply
gained 4.8% over the past year.
Currency Watch:
The U.S. dollar index gained 1.1% to 96.637 (up 0.5% y-t-d).
Commodities Watch:
Goldman Sachs Commodities Index declined 1.3% (up 9.0% y-t-d).
Spot Gold slipped 0.2% to $1,315 (up 2.5%).
Silver declined 0.8% to $15.809 (up 1.7%).
Crude dropped $2.54 to $52.72 (up 16%).
Gasoline added 0.7% (up 11%)
Natural Gas dropped 5.5% (down 12%).
Copper gained 1.4% (up 7%).
Wheat fell 1.3% (up 3%).
Corn declined 1.1% (unchanged).
Market Dislocation Watch:
February 4 – Financial Times (Robin Wigglesworth):
“Markets tend to veer between two extremes: fear and greed. But right now, the dominant emotion appears to be confusion. This may seem strange. After all, global equities have just notched up their best month in more than three years, as the panic that gripped investors in December has dissipated. The bond market has also clawed back most of the losses it suffered last year, helped by the US Federal Reserve’s abrupt decision to pause interest rate increases and willingness to re-examine how quickly it will sell its bond holdings. And yet, many investors admit a gnawing and growing unease. Where once there was certainty — whether bearish or bullish — there is now mostly doubt and indecision. As one top hedge fund manager says: ‘No one has a view, and everyone is positioned accordingly.’”
Trump Administration Watch:
February 5 – Bloomberg (Jenny Leonard):
“President Donald Trump
in his State of the Union address
said a trade deal with China
will have to address
not only what he called
the chronic U.S. trade deficit
but also changes
in Chinese policies
to protect American
workers and businesses.
‘I have great respect for President Xi, and we are now working on a new trade deal with China,’ he said… ‘But it must include real, structural change to end unfair trade practices, reduce our chronic trade deficit, and protect American jobs.’”
“President Donald Trump
in his State of the Union address
said a trade deal with China
will have to address
not only what he called
the chronic U.S. trade deficit
but also changes
in Chinese policies
to protect American
workers and businesses.
‘I have great respect for President Xi, and we are now working on a new trade deal with China,’ he said… ‘But it must include real, structural change to end unfair trade practices, reduce our chronic trade deficit, and protect American jobs.’”
February 4 – Bloomberg (Shawn Donnan and Jenny Leonard):
“One of Donald Trump’s
most persistent economic promises
has been to rewrite
the U.S. relationship with China.
Yet as he approaches a potential deal, some of the very hawks who have cheered on the president’s trade war already fear he may end up falling short. With less than a month before a March 1 deadline for either a deal or an increase in U.S. tariffs, hardliners inside and outside the administration fret Trump is being outplayed by Chinese President Xi Jinping and seduced by what they see as empty promises. After Trump hosted Chinese Vice Premier Liu He… last week, one administration official privately likened the direction of negotiations to the president’s caving to Democrats in the shutdown battle over funding for a border wall. Another person close to the talks said Trump appeared determined to turn a pile of crumbs offered by China into what at best might turn out to be a slice of bread.”
“One of Donald Trump’s
most persistent economic promises
has been to rewrite
the U.S. relationship with China.
Yet as he approaches a potential deal, some of the very hawks who have cheered on the president’s trade war already fear he may end up falling short. With less than a month before a March 1 deadline for either a deal or an increase in U.S. tariffs, hardliners inside and outside the administration fret Trump is being outplayed by Chinese President Xi Jinping and seduced by what they see as empty promises. After Trump hosted Chinese Vice Premier Liu He… last week, one administration official privately likened the direction of negotiations to the president’s caving to Democrats in the shutdown battle over funding for a border wall. Another person close to the talks said Trump appeared determined to turn a pile of crumbs offered by China into what at best might turn out to be a slice of bread.”
February 6 – Bloomberg (Elena Mazneva):
“President Donald Trump
underscored his desire
to reduce the trade gap
with China in his
State of the Union speech…,
yet the deficit is on track to balloon again this year as a solid economy boosts American demand for imports. The total U.S. deficit in goods with China jumped by $37.6 billion, or 10.9%, in the first 11 months of 2018 compared with a year earlier… That brought the year-to-date U.S. trade gap with the world’s second-largest economy to $382.3 billion -- more than five times the next-largest deficit, with Mexico…”
“President Donald Trump
underscored his desire
to reduce the trade gap
with China in his
State of the Union speech…,
yet the deficit is on track to balloon again this year as a solid economy boosts American demand for imports. The total U.S. deficit in goods with China jumped by $37.6 billion, or 10.9%, in the first 11 months of 2018 compared with a year earlier… That brought the year-to-date U.S. trade gap with the world’s second-largest economy to $382.3 billion -- more than five times the next-largest deficit, with Mexico…”
February 7 – Bloomberg (Lynnley Browning):
“President Donald Trump said
he would consider changes to
a controversial cap on the
federal deduction for state
and local taxes,
one of the most divisive provisions
of the 2017 Republican tax overhaul.
Trump told regional newspaper reporters in… that he’s ‘open to talking about’ revisions to the so-called SALT cap, which limits to $10,000 the amount of state and local levies, including property taxes, that taxpayers can deduct each year on their federal returns. ‘There are some people from New York who have been speaking to me about doing something about that, about changing things. It’s been severe on them,’ he said.”
“President Donald Trump said
he would consider changes to
a controversial cap on the
federal deduction for state
and local taxes,
one of the most divisive provisions
of the 2017 Republican tax overhaul.
Trump told regional newspaper reporters in… that he’s ‘open to talking about’ revisions to the so-called SALT cap, which limits to $10,000 the amount of state and local levies, including property taxes, that taxpayers can deduct each year on their federal returns. ‘There are some people from New York who have been speaking to me about doing something about that, about changing things. It’s been severe on them,’ he said.”
U.S. Bubble Watch:
February 7 – Financial Times (Gillian Tett): “Last week, Beth Hammack, a senior Goldman Sachs banker who chairs a US government advisory group known as the Treasury Bond Advisory Committee, dispatched a letter to Steven Mnuchin, Treasury secretary, with a bombshell at the bottom.
According to TBAC calculations,
America will need to sell
an eye-popping $12 trillion
of bonds in the coming decade,
sharply more than it did in the past 10 years.
This will ‘pose a unique challenge for the Treasury’,
Ms Hammack warned, even ‘without factoring in the possibility of a recession’. In plain English, the Wall Street luminaries on the committee were asking who on earth — or in global finance — will buy this looming mountain of Treasuries? The question is highly timely, if not ironic, given that Mr Mnuchin is heading to Beijing for yet another round of US-China trade talks. In recent decades China has been a reliable source of demand for American debt, as the country amassed vast defensive foreign exchange reserves and its export boom left it with dollars to invest.”
According to TBAC calculations,
America will need to sell
an eye-popping $12 trillion
of bonds in the coming decade,
sharply more than it did in the past 10 years.
This will ‘pose a unique challenge for the Treasury’,
Ms Hammack warned, even ‘without factoring in the possibility of a recession’. In plain English, the Wall Street luminaries on the committee were asking who on earth — or in global finance — will buy this looming mountain of Treasuries? The question is highly timely, if not ironic, given that Mr Mnuchin is heading to Beijing for yet another round of US-China trade talks. In recent decades China has been a reliable source of demand for American debt, as the country amassed vast defensive foreign exchange reserves and its export boom left it with dollars to invest.”
February 4 – Reuters (Lucia Mutikani):
“New orders for U.S.-made goods
unexpectedly fell in November
amid sharp declines in demand for machinery and electrical equipment, government data showed on Monday, suggesting a slowdown in manufacturing as 2018 ended.”
“New orders for U.S.-made goods
unexpectedly fell in November
amid sharp declines in demand for machinery and electrical equipment, government data showed on Monday, suggesting a slowdown in manufacturing as 2018 ended.”
February 4 – Reuters (Jason Lange):
“Demand for loans weakened
among U.S. businesses
and households
in the last three months
of 2018
while banks tightened lending standards for commercial real estate, according to a survey of bank officers that gave worrisome signs for the economic outlook. The U.S. Federal Reserve… released its quarterly survey of senior loan officers. The survey also showed banks had kept standards for commercial and industrial lending ‘basically unchanged’ in the quarter but had tightened standards for credit card borrowing.”
“Demand for loans weakened
among U.S. businesses
and households
in the last three months
of 2018
while banks tightened lending standards for commercial real estate, according to a survey of bank officers that gave worrisome signs for the economic outlook. The U.S. Federal Reserve… released its quarterly survey of senior loan officers. The survey also showed banks had kept standards for commercial and industrial lending ‘basically unchanged’ in the quarter but had tightened standards for credit card borrowing.”
February 5 – Reuters (Jason Lange):
“A sharp drop in demand
for U.S. auto and credit card loans
could point to a troubling answer
to a question vexing economists
in recent weeks:
Are consumers
poised to pull back
despite surging job growth?
A partial shutdown of America’s federal government… interrupted the flow of official data on U.S. retail spending data that economists and policymakers use to gauge the gusto of U.S. consumers, whose spending accounts for roughly two-thirds of U.S. economic output. Other economic indicators have pointed to sharp drops in consumer sentiment in December and January as concerns about the global economy rocked financial markets.”
“A sharp drop in demand
for U.S. auto and credit card loans
could point to a troubling answer
to a question vexing economists
in recent weeks:
Are consumers
poised to pull back
despite surging job growth?
A partial shutdown of America’s federal government… interrupted the flow of official data on U.S. retail spending data that economists and policymakers use to gauge the gusto of U.S. consumers, whose spending accounts for roughly two-thirds of U.S. economic output. Other economic indicators have pointed to sharp drops in consumer sentiment in December and January as concerns about the global economy rocked financial markets.”
February 4 – Wall Street Journal (Adrienne Roberts):
“Car dealers
are beginning 2019
with a heavier inventory
of unsold vehicles
on their lots...
There were 3.95 million vehicles on dealership lots at the end of January, a 4% increase from December and up nearly 3% from the prior-year January, according to… WardsAuto. While January is typically a slower month for new-vehicle sales, analysts say the rising stock levels are becoming problematic because car companies will start this year with more unsold inventory than they had three years ago when U.S. auto sales peaked at 17.55 million for the year. Industry forecasters… predict sales this year will fall well below that figure, dropping to under 17 million vehicles for the first time since 2014.”
“Car dealers
are beginning 2019
with a heavier inventory
of unsold vehicles
on their lots...
There were 3.95 million vehicles on dealership lots at the end of January, a 4% increase from December and up nearly 3% from the prior-year January, according to… WardsAuto. While January is typically a slower month for new-vehicle sales, analysts say the rising stock levels are becoming problematic because car companies will start this year with more unsold inventory than they had three years ago when U.S. auto sales peaked at 17.55 million for the year. Industry forecasters… predict sales this year will fall well below that figure, dropping to under 17 million vehicles for the first time since 2014.”
February 7 – Wall Street Journal (Jesse Newman and Jacob Bunge):
“A wave of bankruptcies
is sweeping the U.S. Farm Belt
as trade disputes add pain
to the low commodity prices
that have been grinding down
American farmers for years.
Throughout much of the Midwest, U.S. farmers are filing for chapter 12 bankruptcy protection at levels not seen for at least a decade… Bankruptcies in three regions covering major farm states last year rose to the highest level in at least 10 years. The Seventh Circuit Court of Appeals, which includes Illinois, Indiana and Wisconsin, had double the bankruptcies in 2018 compared with 2008. In the Eighth Circuit, which includes states from North Dakota to Arkansas, bankruptcies swelled 96%. The 10th Circuit, which covers Kansas and other states, last year had 59% more bankruptcies than a decade earlier.”
“A wave of bankruptcies
is sweeping the U.S. Farm Belt
as trade disputes add pain
to the low commodity prices
that have been grinding down
American farmers for years.
Throughout much of the Midwest, U.S. farmers are filing for chapter 12 bankruptcy protection at levels not seen for at least a decade… Bankruptcies in three regions covering major farm states last year rose to the highest level in at least 10 years. The Seventh Circuit Court of Appeals, which includes Illinois, Indiana and Wisconsin, had double the bankruptcies in 2018 compared with 2008. In the Eighth Circuit, which includes states from North Dakota to Arkansas, bankruptcies swelled 96%. The 10th Circuit, which covers Kansas and other states, last year had 59% more bankruptcies than a decade earlier.”
February 3 – Wall Street Journal (Ruth Simon):
“After a banner year,
many small businesses
are becoming more cautious
about their investment
and hiring plans…
Economic confidence among small firms, which edged downward for much of 2018, in January reached its lowest level since President Trump’s election, according to a monthly survey of 765 small firms for The Wall Street Journal by Vistage Worldwide… The survey showed 14% of firms expect the economy to improve this year, while 36% expect it to get worse. For the first time since the 2016 election, small firms were more pessimistic about their own financial prospects than they were a year earlier…”
“After a banner year,
many small businesses
are becoming more cautious
about their investment
and hiring plans…
Economic confidence among small firms, which edged downward for much of 2018, in January reached its lowest level since President Trump’s election, according to a monthly survey of 765 small firms for The Wall Street Journal by Vistage Worldwide… The survey showed 14% of firms expect the economy to improve this year, while 36% expect it to get worse. For the first time since the 2016 election, small firms were more pessimistic about their own financial prospects than they were a year earlier…”
February 5 – Politico (Ben White):
“Surveys are showing
overwhelming support
for raising taxes
on top earners,
including a new POLITICO/Morning Consult poll… that found 76% of registered voters believe the wealthiest Americans should pay more in taxes.
A recent Fox News survey showed that 70% of Americans favor raising taxes on those earning over $10 million — including 54% of Republicans. The numbers suggest the political ground upon which the 2020 presidential campaign will be fought is shifting in dramatic ways, reflecting the rise in inequality in the United States and growing concerns in the electorate about the fairness of the American system.”
“Surveys are showing
overwhelming support
for raising taxes
on top earners,
including a new POLITICO/Morning Consult poll… that found 76% of registered voters believe the wealthiest Americans should pay more in taxes.
A recent Fox News survey showed that 70% of Americans favor raising taxes on those earning over $10 million — including 54% of Republicans. The numbers suggest the political ground upon which the 2020 presidential campaign will be fought is shifting in dramatic ways, reflecting the rise in inequality in the United States and growing concerns in the electorate about the fairness of the American system.”
February 3 – Financial Times (Robin Wigglesworth):
“The post-crisis explosion
of the US corporate bond market,
and more recently the
leveraged loans industry,
have hogged the attention
of analysts, investors
and regulators.
But it is arguably the underbelly of the American debt market that has seen most change in recent years. ‘It’s a wild west space, where everyone competes for every deal,’ says Oleg Melentyev, head of high-yield credit strategy at Bank of America Merrill Lynch. ‘The whole thing has exploded in size, and everyone is getting into it.’”
“The post-crisis explosion
of the US corporate bond market,
and more recently the
leveraged loans industry,
have hogged the attention
of analysts, investors
and regulators.
But it is arguably the underbelly of the American debt market that has seen most change in recent years. ‘It’s a wild west space, where everyone competes for every deal,’ says Oleg Melentyev, head of high-yield credit strategy at Bank of America Merrill Lynch. ‘The whole thing has exploded in size, and everyone is getting into it.’”
February 7 – Wall Street Journal (Akane Otani and Michael Wursthorn):
“The years long expansion
in U.S. corporate profits
may be coming to an end
sooner than investors expected,
a warning sign for the
nearly decadelong bull market.
More than 30 companies in the S&P 500, including Netflix Inc., Delta Air Lines Inc. and Estée Lauder Cos., have offered first-quarter earnings forecasts that fell short of analysts’ estimates…, citing deteriorating outlooks for the global economy as well as uncertainty around trade policy. The flurry of tepid forecasts has put companies in the broad stock-market index on track to report a 1.4% decline in profits in the first quarter from a year earlier—a marked deterioration from September when earnings for the period were projected to grow by about 7%.”
“The years long expansion
in U.S. corporate profits
may be coming to an end
sooner than investors expected,
a warning sign for the
nearly decadelong bull market.
More than 30 companies in the S&P 500, including Netflix Inc., Delta Air Lines Inc. and Estée Lauder Cos., have offered first-quarter earnings forecasts that fell short of analysts’ estimates…, citing deteriorating outlooks for the global economy as well as uncertainty around trade policy. The flurry of tepid forecasts has put companies in the broad stock-market index on track to report a 1.4% decline in profits in the first quarter from a year earlier—a marked deterioration from September when earnings for the period were projected to grow by about 7%.”
February 2 – Wall Street Journal (AnnaMaria Andriotis):
“One generation of Americans owed $86 billion in student loan debt at last count.
Its members are all 60 years old or more.
Many of these seniors took out loans to help pay for their children’s college tuition and are still paying them off.
Others took out student loans for themselves in the wake of the last recession, as they went back to school to boost their own employment prospects. On average, student loan borrowers in their 60s owed $33,800 in 2017, up 44% from 2010… Total student loan debt rose 161% for people aged 60 and older from 2010 to 2017—the biggest increase for any age group… Some are having funds garnished from their Social Security checks. The federal government… garnished the Social Security benefits, tax refunds or other federal payments of more than 40,000 people aged 65 and older in fiscal year 2015 because they defaulted… That’s up 362% from a decade prior, according to the latest data from the Government Accountability Office.”
“One generation of Americans owed $86 billion in student loan debt at last count.
Its members are all 60 years old or more.
Many of these seniors took out loans to help pay for their children’s college tuition and are still paying them off.
Others took out student loans for themselves in the wake of the last recession, as they went back to school to boost their own employment prospects. On average, student loan borrowers in their 60s owed $33,800 in 2017, up 44% from 2010… Total student loan debt rose 161% for people aged 60 and older from 2010 to 2017—the biggest increase for any age group… Some are having funds garnished from their Social Security checks. The federal government… garnished the Social Security benefits, tax refunds or other federal payments of more than 40,000 people aged 65 and older in fiscal year 2015 because they defaulted… That’s up 362% from a decade prior, according to the latest data from the Government Accountability Office.”
February 7 – Bloomberg (Alex Tanzi):
“A decade after the recession,
more than one in 11
mortgaged properties in the U.S.
is considered ‘seriously underwater,’
according to the year-end
home equity report
by ATTOM Data Solutions.
This dreaded classification applies when 25% or greater is owed than the home’s market value… More than five million U.S. properties fit the bill. In 27 zip codes, with a minimum of 2,500 mortgaged properties in each, more than half are ‘seriously underwater.’ At the end of 2018, the most ‘seriously underwater’ zip code was Trenton’s 08611 -- in New Jersey’s capital – where 70.3% of mortgaged homes were valued at $100 or less for every $125 owed. The St. Louis zip code 63137 follows at 64.8%. Zip codes 60426 in Harvey, Illinois (62.3%); 38106 in Memphis, Tennessee (60.5%) and 61104 in Rockford, Illinois (59.6%) round out the worst five. Additionally, the cities of Chicago, Cleveland, Atlantic City, Detroit and Virginia Beach show pockets of severely distressed mortgaged housing stock.”
“A decade after the recession,
more than one in 11
mortgaged properties in the U.S.
is considered ‘seriously underwater,’
according to the year-end
home equity report
by ATTOM Data Solutions.
This dreaded classification applies when 25% or greater is owed than the home’s market value… More than five million U.S. properties fit the bill. In 27 zip codes, with a minimum of 2,500 mortgaged properties in each, more than half are ‘seriously underwater.’ At the end of 2018, the most ‘seriously underwater’ zip code was Trenton’s 08611 -- in New Jersey’s capital – where 70.3% of mortgaged homes were valued at $100 or less for every $125 owed. The St. Louis zip code 63137 follows at 64.8%. Zip codes 60426 in Harvey, Illinois (62.3%); 38106 in Memphis, Tennessee (60.5%) and 61104 in Rockford, Illinois (59.6%) round out the worst five. Additionally, the cities of Chicago, Cleveland, Atlantic City, Detroit and Virginia Beach show pockets of severely distressed mortgaged housing stock.”
China Watch:
February 3 – CNBC (Weizhen Tan):
“Chinese authorities’ efforts
to revive their country’s
slowing economy
have been ‘ineffective,’
and it needs to do more, J.P. Morgan Private Bank’s head of investment strategy for Asia said… ‘I still think they need to do more. I don’t think they’ve done enough yet. So far the measures they’ve taken have been fairly, fairly ineffective, they haven’t really produced the rebound in economic growth, and they haven’t really produced the rebound in confidence either,’ J.P. Morgan’s Alex Wolf told CNBC… ‘In recent years, China has engaged in extensive stimulus to keep its economy churning, Wolf said. But now, high debt levels and a change in the political landscape are pressuring Beijing to take smaller steps, he added. China’s banks extended a record 12.65 trillion yuan ($1.88 trillion) in loans in 2016 as the government encouraged credit-fueled stimulus to meet its economic growth target. The credit explosion stoked worries about financial risks from a rapid build-up in debt, which authorities have pledged to contain.”
“Chinese authorities’ efforts
to revive their country’s
slowing economy
have been ‘ineffective,’
and it needs to do more, J.P. Morgan Private Bank’s head of investment strategy for Asia said… ‘I still think they need to do more. I don’t think they’ve done enough yet. So far the measures they’ve taken have been fairly, fairly ineffective, they haven’t really produced the rebound in economic growth, and they haven’t really produced the rebound in confidence either,’ J.P. Morgan’s Alex Wolf told CNBC… ‘In recent years, China has engaged in extensive stimulus to keep its economy churning, Wolf said. But now, high debt levels and a change in the political landscape are pressuring Beijing to take smaller steps, he added. China’s banks extended a record 12.65 trillion yuan ($1.88 trillion) in loans in 2016 as the government encouraged credit-fueled stimulus to meet its economic growth target. The credit explosion stoked worries about financial risks from a rapid build-up in debt, which authorities have pledged to contain.”
February 5 – Financial Times (Lucy Hornby):
"China, the world’s second-largest economy,
accounted for 18% of the global economy
— just like Japan on the cusp of a decade of stagnation, and just like the Soviet Union shortly before it collapsed. Like China today, these two nations were viewed as strategic rivals by Washington. In 1995, US newspapers were full of the industrial exploits of Japanese conglomerates. A decade earlier, the Soviet Union… was caught up in an arms race with the US. In reality, in each case, both the Japanese and Soviet economies were struggling. ‘The USSR and Japan were the two cases where everyone thought they would overtake the US,’ says Michael Pettis, professor of finance at Peking University’s Guanghua School of Management. ‘Every time you saw such rapid growth, there’s always been a significant reversal.’”
"China, the world’s second-largest economy,
accounted for 18% of the global economy
— just like Japan on the cusp of a decade of stagnation, and just like the Soviet Union shortly before it collapsed. Like China today, these two nations were viewed as strategic rivals by Washington. In 1995, US newspapers were full of the industrial exploits of Japanese conglomerates. A decade earlier, the Soviet Union… was caught up in an arms race with the US. In reality, in each case, both the Japanese and Soviet economies were struggling. ‘The USSR and Japan were the two cases where everyone thought they would overtake the US,’ says Michael Pettis, professor of finance at Peking University’s Guanghua School of Management. ‘Every time you saw such rapid growth, there’s always been a significant reversal.’”
Brexit Watch:
February 7 – Reuters (William Schomberg and David Milliken):
“The Bank of England
said Britain faced its
weakest economic growth
in 10 years in 2019,
blaming mounting Brexit uncertainty and the global slowdown, but it stuck to its message that interest rates will rise if a Brexit deal is done… ‘The fog of Brexit is causing short term volatility in the economic data, and more fundamentally, it is creating a series of tensions in the economy, tensions for business,’ BoE Governor Mark Carney said… after the Bank’s policymakers voted unanimously to keep rates at 0.75% as expected.”
“The Bank of England
said Britain faced its
weakest economic growth
in 10 years in 2019,
blaming mounting Brexit uncertainty and the global slowdown, but it stuck to its message that interest rates will rise if a Brexit deal is done… ‘The fog of Brexit is causing short term volatility in the economic data, and more fundamentally, it is creating a series of tensions in the economy, tensions for business,’ BoE Governor Mark Carney said… after the Bank’s policymakers voted unanimously to keep rates at 0.75% as expected.”
Global Bubble Watch:
February 3 – Wall Street Journal (Mike Bird):
“Data released… showed that the J.P. Morgan Global Manufacturing Purchasing Managers’ Index dropped to 50.7 in January. A reading above 50 indicates growth, but the index is signaling its weakest expansion in 2½ years. The new exports portion of the index was even weaker, dropping from 49.6 in December to 49.4 last month, the lowest since May 2016. The index, which is compiled from surveys of thousands of purchasing executives around the world, has been a reliable predictor of real global trade volumes which are published weeks or months after the fact.”
“Data released… showed that the J.P. Morgan Global Manufacturing Purchasing Managers’ Index dropped to 50.7 in January. A reading above 50 indicates growth, but the index is signaling its weakest expansion in 2½ years. The new exports portion of the index was even weaker, dropping from 49.6 in December to 49.4 last month, the lowest since May 2016. The index, which is compiled from surveys of thousands of purchasing executives around the world, has been a reliable predictor of real global trade volumes which are published weeks or months after the fact.”
February 6 – Financial Times (Peter Campbell, Patrick McGee and Patti Waldmeir): “Three of the world’s
largest automakers
added to the industry’s gloom
… by warning that 2019
is looking increasingly bleak,
with little hope of an end to a Chinese slowdown or the changing customer tastes that are forcing costly overhauls to their model lines. The pessimistic outlook for the year ahead from Toyota, General Motors and Daimler — which together account for one in five vehicles sold globally — was accompanied by reports of dismal results for the year just concluded, with all three announcing a fall in profits.”
largest automakers
added to the industry’s gloom
… by warning that 2019
is looking increasingly bleak,
with little hope of an end to a Chinese slowdown or the changing customer tastes that are forcing costly overhauls to their model lines. The pessimistic outlook for the year ahead from Toyota, General Motors and Daimler — which together account for one in five vehicles sold globally — was accompanied by reports of dismal results for the year just concluded, with all three announcing a fall in profits.”
February 6 – Bloomberg (Elena Mazneva):
“After two years of bumper profits,
the steel industry is entering a slowdown.
ArcelorMittal, as well as smaller European producers like Salzgitter AG and Voestalpine AG, are sounding the alarm about weakening conditions, particularly in China. The country, which uses about half of the world’s steel, is now expected to see a drop in demand, the first contraction since 2015. Demand in the U.S. and Europe will grow at a slower pace this year, ArcelorMittal said.”
“After two years of bumper profits,
the steel industry is entering a slowdown.
ArcelorMittal, as well as smaller European producers like Salzgitter AG and Voestalpine AG, are sounding the alarm about weakening conditions, particularly in China. The country, which uses about half of the world’s steel, is now expected to see a drop in demand, the first contraction since 2015. Demand in the U.S. and Europe will grow at a slower pace this year, ArcelorMittal said.”
February 4 – Bloomberg (Michael Heath):
“Australian retail sales
suffered the biggest drop
in 12 months and imports slumped
by the most in almost seven years,
raising doubts about
the resilience of household spending.
Sales fell 0.4% in December, compared with estimates for an unchanged reading… Imports dropped 6% in the month, the worst result since February 2012. A private report… also showed a gauge of services -- a key component of the Australian economy -- plunged in January. The economy is confronting a sharp downturn in property prices that is threatening to hit consumers’ confidence through the so-called wealth effect -- even if losses on house prices so far are only on paper.”
“Australian retail sales
suffered the biggest drop
in 12 months and imports slumped
by the most in almost seven years,
raising doubts about
the resilience of household spending.
Sales fell 0.4% in December, compared with estimates for an unchanged reading… Imports dropped 6% in the month, the worst result since February 2012. A private report… also showed a gauge of services -- a key component of the Australian economy -- plunged in January. The economy is confronting a sharp downturn in property prices that is threatening to hit consumers’ confidence through the so-called wealth effect -- even if losses on house prices so far are only on paper.”
Europe Watch:
February 7 – Reuters (Francesco Guarascio):
“The European Commission sharply cut
… its forecasts for euro zone
economic growth this year and next
because it expects the bloc’s largest countries to be held back by global trade tensions and an array of domestic challenges. The Commission said euro zone growth will slow to 1.3% this year from 1.9% in 2018, before rebounding in 2020 to 1.6%. The new estimates are far less optimistic than those released in November, when Brussels expected the euro zone to grow 1.9% this year…”
“The European Commission sharply cut
… its forecasts for euro zone
economic growth this year and next
because it expects the bloc’s largest countries to be held back by global trade tensions and an array of domestic challenges. The Commission said euro zone growth will slow to 1.3% this year from 1.9% in 2018, before rebounding in 2020 to 1.6%. The new estimates are far less optimistic than those released in November, when Brussels expected the euro zone to grow 1.9% this year…”
February 5 – Financial Times (Adam Samson):
“Italy’s services sector slumped
back into contraction
as 2019 got under way,
according to a new survey that suggests the country’s late 2018 economic downturn may have bled into the near year. The IHS Markit purchasing managers’ index, compiled based on a survey of business executives, slipped to 49.7 in January from 50.5 the previous month.”
“Italy’s services sector slumped
back into contraction
as 2019 got under way,
according to a new survey that suggests the country’s late 2018 economic downturn may have bled into the near year. The IHS Markit purchasing managers’ index, compiled based on a survey of business executives, slipped to 49.7 in January from 50.5 the previous month.”
February 7 – CNBC (Holly Ellyatt):
“With its immense debt pile
and potential budget blowout,
Italy is a risk first and foremost to itself,
Valdis Dombrovskis, a vice president at the European Commission told CNBC. ‘Fragility in Italy’s economy needs to be addressed,’ Dombrovski told CNBC’s Willem Marx… ‘Given the high level of Italy’s public debt, and Italy has the highest debt-to-GDP (gross domestic product) ratio in the EU after Greece, it’s important that Italy puts its debt-to-GDP ratio on a downwards trajectory. And this is something which we have (been) consistently emphasizing and we think that this is important,’ he said. Italy’s debt pile of 2.3 trillion euros ($2.6 trillion) is ‘first and foremost (it’s) a risk factor for Italy itself, but one that needs to be addressed,’ he added.”
“With its immense debt pile
and potential budget blowout,
Italy is a risk first and foremost to itself,
Valdis Dombrovskis, a vice president at the European Commission told CNBC. ‘Fragility in Italy’s economy needs to be addressed,’ Dombrovski told CNBC’s Willem Marx… ‘Given the high level of Italy’s public debt, and Italy has the highest debt-to-GDP (gross domestic product) ratio in the EU after Greece, it’s important that Italy puts its debt-to-GDP ratio on a downwards trajectory. And this is something which we have (been) consistently emphasizing and we think that this is important,’ he said. Italy’s debt pile of 2.3 trillion euros ($2.6 trillion) is ‘first and foremost (it’s) a risk factor for Italy itself, but one that needs to be addressed,’ he added.”
February 6 – Associated Press:
“German factory orders
were down 1.6% in December
compared with the previous month…
— a worse-than-expected performance that adds to worries about slowing growth in Europe’s biggest economy.
Economists had expected a 0.3% increase.”
“German factory orders
were down 1.6% in December
compared with the previous month…
— a worse-than-expected performance that adds to worries about slowing growth in Europe’s biggest economy.
Economists had expected a 0.3% increase.”
Fixed-Income Bubble Watch:
February 4 – Reuters (Jessica DiNapoli, Kate Duguid and Joshua Franklin):
“Many U.S. companies that gorged
on cheap debt with forgiving terms
over the last decade
now find themselves shackled by it, spending much of their earnings paying off lenders rather than investing in their businesses or hiring. As small firms, which together account for half of U.S. employment, begin to feel the squeeze, this could have a chilling effect on hiring, wages and consumption… The number of companies struggling with their debt obligations is hovering near record highs. Some 17% of publicly-traded U.S. companies had trouble making debt interest payments at the end of last year, up from less than 10% in 2010 and off from a high of over 20% in 2016, according to the Institute of International Finance…”
“Many U.S. companies that gorged
on cheap debt with forgiving terms
over the last decade
now find themselves shackled by it, spending much of their earnings paying off lenders rather than investing in their businesses or hiring. As small firms, which together account for half of U.S. employment, begin to feel the squeeze, this could have a chilling effect on hiring, wages and consumption… The number of companies struggling with their debt obligations is hovering near record highs. Some 17% of publicly-traded U.S. companies had trouble making debt interest payments at the end of last year, up from less than 10% in 2010 and off from a high of over 20% in 2016, according to the Institute of International Finance…”
Geopolitical Watch:
February 2 – Reuters (Vladimir Soldatkin):
“Russia has suspended the Cold War-era Intermediate-range Nuclear Forces Treaty, President Vladimir Putin said on Saturday, after the United States announced it would withdraw from the arms control pact, accusing Moscow of violations. Moscow’s relations with the West are strained over issues including Russia’s annexation of Crimea from Ukraine, allegations of meddling in the U.S. presidential election and being behind a nerve agent attack in Britain.”
“Russia has suspended the Cold War-era Intermediate-range Nuclear Forces Treaty, President Vladimir Putin said on Saturday, after the United States announced it would withdraw from the arms control pact, accusing Moscow of violations. Moscow’s relations with the West are strained over issues including Russia’s annexation of Crimea from Ukraine, allegations of meddling in the U.S. presidential election and being behind a nerve agent attack in Britain.”
February 3 – Reuters (Brian Ellsworth):
“U.S. President Donald Trump said military intervention in Venezuela was ‘an option’ as Western nations boost pressure on socialist leader Nicolas Maduro to step down, while the troubled OPEC nation’s ally Russia warned against ‘destructive meddling.’ The United States, Canada and several Latin American countries have disavowed Maduro over his disputed re-election last year and recognized self-proclaimed President Juan Guaido as the country’s rightful leader. Trump said U.S. military intervention was under consideration in an interview with CBS aired on Sunday. ‘Certainly, it’s something that’s on the - it’s an option,’ Trump said…”
“U.S. President Donald Trump said military intervention in Venezuela was ‘an option’ as Western nations boost pressure on socialist leader Nicolas Maduro to step down, while the troubled OPEC nation’s ally Russia warned against ‘destructive meddling.’ The United States, Canada and several Latin American countries have disavowed Maduro over his disputed re-election last year and recognized self-proclaimed President Juan Guaido as the country’s rightful leader. Trump said U.S. military intervention was under consideration in an interview with CBS aired on Sunday. ‘Certainly, it’s something that’s on the - it’s an option,’ Trump said…”
February 7 – Reuters:
“Amid tensions between the United States and China,
a group of Republican U.S. senators asked House of Representatives Speaker Nancy Pelosi to invite Taiwanese President Tsai Ing-Wen to address a joint meeting of the U.S. Congress, an invitation that would anger Beijing… The senators, including Cory Gardner, Marco Rubio, Tom Cotton, John Cornyn and Ted Cruz, released their letter to Pelosi…, ahead of a March 1 deadline for Washington and Beijing to reach a trade deal. Relations between China and Washington have been tense in recent months. Many U.S. lawmakers have been critical of Chinese business practices and accused its government of espionage and human rights abuses.”
“Amid tensions between the United States and China,
a group of Republican U.S. senators asked House of Representatives Speaker Nancy Pelosi to invite Taiwanese President Tsai Ing-Wen to address a joint meeting of the U.S. Congress, an invitation that would anger Beijing… The senators, including Cory Gardner, Marco Rubio, Tom Cotton, John Cornyn and Ted Cruz, released their letter to Pelosi…, ahead of a March 1 deadline for Washington and Beijing to reach a trade deal. Relations between China and Washington have been tense in recent months. Many U.S. lawmakers have been critical of Chinese business practices and accused its government of espionage and human rights abuses.”
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