Saturday, March 16, 2019
Weekly Commentary:
No One Knows How
Monetary Policy Works
by Doug Noland
full column here:
My summary is below:
For the week ending
March 15, 2019:
GLOBAL STOCKS:
U.S.:
S&P500 surged 2.9% (up 12.6% y-t-d)
Dow Industrials rose 1.6% (up 10.8%)
Dow Utilities gained 1.8% (up 10.7%)
Dow Transports increased 1.9% (up 12.4%)
S&P 400 Midcaps rose 1.9% (up 14.0%)
Small cap Russell 2000 gained 2.1% (up 15.2%)
Nasdaq100 jumped 4.2% (up 15.4%)
Biotechs jumped 5.9% (up 21.9%).
While bullion increasing $4,
the HUI gold stock index
declined 0.4% (up 5.5%).
U.K.'s FTSE jumped 1.7% (up 7.4% y-t-d).
Japan's Nikkei 225 rose 2.0% (up 7.2% y-t-d).
France's CAC40 surged 3.3% (up 14.3%)
German DAX jumped 2.0% (up 10.7%)
Spain's IBEX 35 rose 2.3% (up 9.4%)
Italy's FTSE MIB gained 2.7% (up 14.9%)
Brazil's Bovespa surged 4.0% (up 12.8%)
Mexico's Bolsa gained 1.5% (up 1.4%)
South Korea's Kospi rose 1.8% (up 6.6%)
India's Sensex surged 3.7% (up 5.4%)
China's Shanghai Exchange gained 1.7% (up 21.2%)
Turkey's Istanbul National 100 rose 1.7% (up 13.2%)
Russia's MICEX was about unchanged (up 5.0%).
US BONDS & MORTGAGES:
Ten-year Treasury yields
slipped four bps to 2.59% (down 10bps).
Long bond yields
fell six bps to 3.01% (unchanged).
Benchmark Fannie Mae MBS yields
dropped six bps to 3.32% (down 18bps).
Freddie Mac 30-year fixed mortgage rates
sank 10 bps to a 13-month low 4.35%
(down 13bps y-o-y).
Fifteen-year rates
fell seven bps to 3.76% (down 14bps).
fell seven bps to 3.76% (down 14bps).
Five-year hybrid ARM rates
declined three bps to 3.84% (up 17bps)
Jumbo mortgage 30-yr fixed rates
down 10 bps to a one-year low 4.30%
(down 27bps).
Federal Reserve Credit
over the past year,
contracted 9.8%.
M2 (narrow) "money" supply
gained 4.2%, over the past year.
Currency Watch:
The U.S. dollar index declined 0.7% to 96.595
(up 0.4% y-t-d).
(up 0.4% y-t-d).
Commodities Watch:
Goldman Sachs Commodities Index jumped 2.5%
(up 15.5% y-t-d).
(up 15.5% y-t-d).
Spot Gold added 0.3% to $1,302 (up 1.6%).
Silver slipped 0.2% to $15.324 (down 1.4%).
Crude jumped $2.45 to $58.52 (up 29%).
Gasoline rose 3.1% (up 43%)
Natural Gas dropped 2.4% (down 5%).
Copper increased 0.4% (up 11%).
Wheat surged 5.2% (down 8%).
Corn increased 0.7% (down 1%).
Trump Administration Watch:
March 11 – Bloomberg (Katia Dmitrieva):
“President Donald Trump’s newest budget forecasts the U.S. fiscal deficit surpassing $1 trillion this year and staying above that level until 2022. The fiscal 2020 proposal sees the deficit expanding to $1.1 trillion for 2019 and 2020, when Trump will run for re-election. The shortfall is seen narrowing slightly to $1.07 trillion in 2012 and $1.05 trillion in 2022…”
“President Donald Trump’s newest budget forecasts the U.S. fiscal deficit surpassing $1 trillion this year and staying above that level until 2022. The fiscal 2020 proposal sees the deficit expanding to $1.1 trillion for 2019 and 2020, when Trump will run for re-election. The shortfall is seen narrowing slightly to $1.07 trillion in 2012 and $1.05 trillion in 2022…”
March 12 – Financial Times (James Politi):
“US President Donald Trump’s trade chief has warned that negotiations to end the tariff war with China were at risk of failing, saying ‘major, major issues’ needed to be resolved before an agreement was reached, and he could not ‘predict success at this point’. Speaking before the Senate finance committee…, Robert Lighthizer, the US trade representative, said that talks with Beijing had intensified and probably entered their ‘final weeks’, as the two countries haggle over structural reforms and enforcement provisions. But Mr Lighthizer indicated that a deal could not be taken for granted. ‘We’re either going to have a good result or we’re going to have a bad result before too long, but I’m not setting a specific timeframe and it’s not up to me,’ Mr Lighthizer said. ‘I’ll work as hard as I can, and the president will tell me when the time is up, or the Chinese will,’ he added.”
“US President Donald Trump’s trade chief has warned that negotiations to end the tariff war with China were at risk of failing, saying ‘major, major issues’ needed to be resolved before an agreement was reached, and he could not ‘predict success at this point’. Speaking before the Senate finance committee…, Robert Lighthizer, the US trade representative, said that talks with Beijing had intensified and probably entered their ‘final weeks’, as the two countries haggle over structural reforms and enforcement provisions. But Mr Lighthizer indicated that a deal could not be taken for granted. ‘We’re either going to have a good result or we’re going to have a bad result before too long, but I’m not setting a specific timeframe and it’s not up to me,’ Mr Lighthizer said. ‘I’ll work as hard as I can, and the president will tell me when the time is up, or the Chinese will,’ he added.”
March 11 – Associated Press (Lisa Mascaro):
“President Donald Trump proposed a record $4.7 trillion budget…, pushing the federal deficit past $1 trillion but counting on optimistic growth, accounting shuffles and steep domestic cuts to bring future spending into balance in 15 years. Reviving his border wall fight with Congress, Trump wants more than $8 billion for the barrier with Mexico, and he’s also asking for a big boost in military spending. That’s alongside steep cuts in health care and economic support programs for the poor that Democrats — and even some Republicans — will oppose. Trump called his plan a bold next step for a nation experiencing ‘an economic miracle.’ House Speaker Nancy Pelosi called his cuts ‘cruel and shortsighted ... a roadmap to a sicker, weaker America.’”
“President Donald Trump proposed a record $4.7 trillion budget…, pushing the federal deficit past $1 trillion but counting on optimistic growth, accounting shuffles and steep domestic cuts to bring future spending into balance in 15 years. Reviving his border wall fight with Congress, Trump wants more than $8 billion for the barrier with Mexico, and he’s also asking for a big boost in military spending. That’s alongside steep cuts in health care and economic support programs for the poor that Democrats — and even some Republicans — will oppose. Trump called his plan a bold next step for a nation experiencing ‘an economic miracle.’ House Speaker Nancy Pelosi called his cuts ‘cruel and shortsighted ... a roadmap to a sicker, weaker America.’”
March 12 – Wall Street Journal (Jeremy Page, Kate O’Keeffe and Rob Taylor):
“ While the U.S. wages a high-profile campaign to exclude China’s Huawei Technologies Co. from next-generation mobile networks over fears of espionage, the company is embedding itself into undersea cable networks that ferry nearly all of the world’s internet data. About 380 active submarine cables—bundles of fiber-optic lines that travel oceans on the seabed—carry about 95% of intercontinental voice and data traffic, making them critical for the economies and national security of most countries. Current and former security officials in the U.S. and allied governments now worry that these cables are increasingly vulnerable to espionage or attack and say the involvement of Huawei potentially enhances China’s capabilities.”
“ While the U.S. wages a high-profile campaign to exclude China’s Huawei Technologies Co. from next-generation mobile networks over fears of espionage, the company is embedding itself into undersea cable networks that ferry nearly all of the world’s internet data. About 380 active submarine cables—bundles of fiber-optic lines that travel oceans on the seabed—carry about 95% of intercontinental voice and data traffic, making them critical for the economies and national security of most countries. Current and former security officials in the U.S. and allied governments now worry that these cables are increasingly vulnerable to espionage or attack and say the involvement of Huawei potentially enhances China’s capabilities.”
U.S. Bubble Watch:
March 10 – Associated Press (Andrew Taylor):
“Like previous spending blueprints, Trump’s plan for the 2020 budget year will propose cuts to many domestic programs favored by lawmakers in both parties but leave alone politically popular retirement programs such as Medicare and Social Security… It’s put deficit hawks in a gloomy mood. ‘The president doesn’t care. The leadership of the Democratic Party doesn’t care,’ said former Sen. Judd Gregg, R-N.H. ‘And social media is in stampede mode.’”
“Like previous spending blueprints, Trump’s plan for the 2020 budget year will propose cuts to many domestic programs favored by lawmakers in both parties but leave alone politically popular retirement programs such as Medicare and Social Security… It’s put deficit hawks in a gloomy mood. ‘The president doesn’t care. The leadership of the Democratic Party doesn’t care,’ said former Sen. Judd Gregg, R-N.H. ‘And social media is in stampede mode.’”
China Watch:
March 11 – Reuters (Brenda Goh):
“China may increase its tolerance for non-performing loans at small companies in order to help spur their growth, the state-backed Securities Times newspaper quoted a senior official from the banking regulator as saying…”
“China may increase its tolerance for non-performing loans at small companies in order to help spur their growth, the state-backed Securities Times newspaper quoted a senior official from the banking regulator as saying…”
March 13 – Reuters (Lusha Zhang and Stella Qiu):
“Growth in China’s industrial output
fell to a 17-year low
in the first two months of the year,
pointing to further weakness in the world’s second-biggest economy… Industrial output rose 5.3% in January-February…, less than expected and the slowest pace since early 2002.”
“Growth in China’s industrial output
fell to a 17-year low
in the first two months of the year,
pointing to further weakness in the world’s second-biggest economy… Industrial output rose 5.3% in January-February…, less than expected and the slowest pace since early 2002.”
Brexit Watch:
March 14 – Bloomberg (Tim Ross):
“U.K. Prime Minister Theresa May enjoyed a rare good day in Parliament, fighting off her opponents and winning the endorsement of British politicians to seek to delay Brexit day. The result on Thursday means her Brexit plan -- which has twice been rejected by huge majorities in the House of Commons - is still in play. The House of Commons voted 412 to 202 to support May’s motion, which as well as calling for a delay also reveals May’s strategy for getting her unpopular deal approved. She is offering members of Parliament a choice between backing her deal and delivering Brexit with a short delay, or risk being trapped in a long extension with terms set by the bloc.”
“U.K. Prime Minister Theresa May enjoyed a rare good day in Parliament, fighting off her opponents and winning the endorsement of British politicians to seek to delay Brexit day. The result on Thursday means her Brexit plan -- which has twice been rejected by huge majorities in the House of Commons - is still in play. The House of Commons voted 412 to 202 to support May’s motion, which as well as calling for a delay also reveals May’s strategy for getting her unpopular deal approved. She is offering members of Parliament a choice between backing her deal and delivering Brexit with a short delay, or risk being trapped in a long extension with terms set by the bloc.”
Europe Watch:
March 11 – Reuters (Abhinav Ramnarayan):
“Euro zone bond yields dipped on Monday after German industrial production fell in January, adding weight to market bets on a slowing European economy and the European Central Bank’s dovish policy stance. Industrial output data showed that Europe’s largest economy is still suffering from trade frictions and unease about Brexit after narrowly avoiding recession last year. ‘We have had a lot of sentiment indicators pointing to this, but industrial production is hard data and it is really cementing the impression that the European economy is slowing down,’ Mizuho rates strategist Antoine Bouvet said.”
“Euro zone bond yields dipped on Monday after German industrial production fell in January, adding weight to market bets on a slowing European economy and the European Central Bank’s dovish policy stance. Industrial output data showed that Europe’s largest economy is still suffering from trade frictions and unease about Brexit after narrowly avoiding recession last year. ‘We have had a lot of sentiment indicators pointing to this, but industrial production is hard data and it is really cementing the impression that the European economy is slowing down,’ Mizuho rates strategist Antoine Bouvet said.”
Emerging Markets Watch:
March 12 – Financial Times (Paul Callan, Bassem Bendary and Yohann Sequeira): “The developing world could be heading towards a new debt crisis. Public debt in emerging markets now averages 50% of gross domestic product, the highest level since the 1980s. More than 80% of developing countries have increased their public debt in the past five years. The number of developing countries whose public debt level is rated as ‘unsustainable’ or ‘high-risk’ is now 32, more than double the number in 2013. Most of the media’s attention has focused on Chinese loans that add to developing country debts. But China is not the only lender contributing to the looming crisis: the majority of new loans to at-risk, low-income and lower-middle-income countries have come from other sources, including other countries and multilateral institutions such as the World Bank and regional development banks.”
March 11 – Financial Times (Colby Smith):
“Turkey is in recession. For the first time in a decade… By all accounts, it was just a matter of time. Since last summer's currency crisis, which saw the lira lose 40% of its value until its central bank finally heeded to economic orthodoxy in September and raised interest rates, Turkey's economy has rebalanced, and hard… GDP has since shrunk 3% year-over-year, with seasonally adjusted GDP decreasing by 2.4% on a quarterly basis, the slowest since the global financial crisis.”
“Turkey is in recession. For the first time in a decade… By all accounts, it was just a matter of time. Since last summer's currency crisis, which saw the lira lose 40% of its value until its central bank finally heeded to economic orthodoxy in September and raised interest rates, Turkey's economy has rebalanced, and hard… GDP has since shrunk 3% year-over-year, with seasonally adjusted GDP decreasing by 2.4% on a quarterly basis, the slowest since the global financial crisis.”
Global Bubble Watch:
March 13 – CNBC (Jeff Cox):
“Corporate, government and household indebtedness rose to $178 trillion as of June 2018, a 50% increase from a decade ago, according to figures S&P Global Ratings… The expansion was especially acute at the government level, which stood at $62.4 trillion, or 77% higher than it did before the public borrowing binge began. ‘Global debt is certainly higher and riskier today than it was a decade ago, with households, corporates, and governments all ramping up indebtedness,’ S&P Global Ratings credit analyst Terry Chan said… ‘Although another credit downturn may be inevitable, we don’t believe it will be as bad as the 2008-2009 global financial crisis.’”
“Corporate, government and household indebtedness rose to $178 trillion as of June 2018, a 50% increase from a decade ago, according to figures S&P Global Ratings… The expansion was especially acute at the government level, which stood at $62.4 trillion, or 77% higher than it did before the public borrowing binge began. ‘Global debt is certainly higher and riskier today than it was a decade ago, with households, corporates, and governments all ramping up indebtedness,’ S&P Global Ratings credit analyst Terry Chan said… ‘Although another credit downturn may be inevitable, we don’t believe it will be as bad as the 2008-2009 global financial crisis.’”
March 11 – Bloomberg (Fergal O'Brien):
“The global economy’s sharp loss of speed through 2018 has left the pace of expansion the weakest since the global financial crisis a decade ago, according to Bloomberg Economics. Its new GDP tracker puts world growth at 2.1% on a quarter-on-quarter annualized basis, down from about 4% in the middle of last year. While there’s a chance that the economy may find a foothold and arrest the slowdown, ‘the risk is that downward momentum will be self-sustaining,’ say economists Dan Hanson and Tom Orlik.
“The global economy’s sharp loss of speed through 2018 has left the pace of expansion the weakest since the global financial crisis a decade ago, according to Bloomberg Economics. Its new GDP tracker puts world growth at 2.1% on a quarter-on-quarter annualized basis, down from about 4% in the middle of last year. While there’s a chance that the economy may find a foothold and arrest the slowdown, ‘the risk is that downward momentum will be self-sustaining,’ say economists Dan Hanson and Tom Orlik.
March 10 – Wall Street Journal (Avantika Chilkoti):
“Investors have driven the eurozone’s most closely followed government bond yield close to negative territory for the first time since 2016, underscoring the increasingly bleak outlook for the European economy. Germany’s 10-year government bonds, known as bunds, yielded as little as 0.04% on Friday, a microscopic return for investors and the lowest level since October 2016 when the region was still emerging from a protracted sovereign-debt crisis… The European Central Bank slashed its growth forecasts for this year to 1.1% from 1.7% and all but ruled out raising its benchmark interest rate, currently negative, before the start of next decade at the earliest.”
“Investors have driven the eurozone’s most closely followed government bond yield close to negative territory for the first time since 2016, underscoring the increasingly bleak outlook for the European economy. Germany’s 10-year government bonds, known as bunds, yielded as little as 0.04% on Friday, a microscopic return for investors and the lowest level since October 2016 when the region was still emerging from a protracted sovereign-debt crisis… The European Central Bank slashed its growth forecasts for this year to 1.1% from 1.7% and all but ruled out raising its benchmark interest rate, currently negative, before the start of next decade at the earliest.”
March 14 – Bloomberg (Erik Hertzberg):
“Canadian home values fell last year for the first time in three decades amid falling prices in some of the country’s priciest markets, even as debt burdens increased. The value of residential real estate in Canada held by households dropped C$30 billion ($22.5bn) in the fourth quarter to C$5.10 trillion… The 0.6% decline is the first decrease in country-wide home values in data going back to 1990.”
“Canadian home values fell last year for the first time in three decades amid falling prices in some of the country’s priciest markets, even as debt burdens increased. The value of residential real estate in Canada held by households dropped C$30 billion ($22.5bn) in the fourth quarter to C$5.10 trillion… The 0.6% decline is the first decrease in country-wide home values in data going back to 1990.”
March 10 – Reuters (Roberta Rampton):
“At their peak, prices in Sydney more than doubled between 2008 and 2017, but have since fallen back by around 10%. The boom in Australian home prices and building over the past decade or so was primarily driven by lower real interest rates, while strong migration tended to lift rents, according to a study paper from the country’s central bank… "
“At their peak, prices in Sydney more than doubled between 2008 and 2017, but have since fallen back by around 10%. The boom in Australian home prices and building over the past decade or so was primarily driven by lower real interest rates, while strong migration tended to lift rents, according to a study paper from the country’s central bank… "
Geopolitical Watch:
March 12 – CNBC (Tom DiChristopher):
“The United States will continue to do whatever it takes to rid Venezuela of disputed leader Nicolas Maduro, Secretary of State Mike Pompeo told CNBC... ‘As the president said, every option is on the table to deliver to the Venezuelan people the democracy they deserve. And then ultimately we’ll build back an economy where they can again have the wealth that they have under their own feet,’ Pompeo said…, referring to Venezuela’s vast oil reserves.”
“The United States will continue to do whatever it takes to rid Venezuela of disputed leader Nicolas Maduro, Secretary of State Mike Pompeo told CNBC... ‘As the president said, every option is on the table to deliver to the Venezuelan people the democracy they deserve. And then ultimately we’ll build back an economy where they can again have the wealth that they have under their own feet,’ Pompeo said…, referring to Venezuela’s vast oil reserves.”
March 12 – Reuters (Vivian Sequera and Deisy Buitrago):
“Venezuela ordered American diplomats on Tuesday to leave within 72 hours after President Nicolas Maduro accused U.S. counterpart Donald Trump of cyber ‘sabotage’ that plunged the South American country into its worst blackout on record.”
“Venezuela ordered American diplomats on Tuesday to leave within 72 hours after President Nicolas Maduro accused U.S. counterpart Donald Trump of cyber ‘sabotage’ that plunged the South American country into its worst blackout on record.”
March 14 – Reuters (Joyce Lee and David Brunnstrom):
“North Korea is considering suspending talks with the United States and may rethink a freeze on missile and nuclear tests unless Washington makes concessions, a senior diplomat said on Friday, according to news reports from the North’s capital… North Korean Vice Foreign Minister Choe Son Hui blamed top U.S. officials for the breakdown of last month’s summit between Kim and U.S. President Donald Trump in Hanoi… ‘We have no intention to yield to the U.S. demands (at the Hanoi summit) in any form, nor are we willing to engage in negotiations of this kind,’ TASS quoted Choe… ‘I want to make it clear that the gangster-like stand of the U.S. will eventually put the situation in danger…’”
“North Korea is considering suspending talks with the United States and may rethink a freeze on missile and nuclear tests unless Washington makes concessions, a senior diplomat said on Friday, according to news reports from the North’s capital… North Korean Vice Foreign Minister Choe Son Hui blamed top U.S. officials for the breakdown of last month’s summit between Kim and U.S. President Donald Trump in Hanoi… ‘We have no intention to yield to the U.S. demands (at the Hanoi summit) in any form, nor are we willing to engage in negotiations of this kind,’ TASS quoted Choe… ‘I want to make it clear that the gangster-like stand of the U.S. will eventually put the situation in danger…’”
March 12 – Wall Street Journal (Gordon Lubold and Dustin Volz):
“The Navy and its industry partners are ‘under cyber siege’ by Chinese hackers and others who have stolen national security secrets in recent years, exploiting critical weaknesses that threaten the U.S.’s standing as the world’s top military power, an internal Navy review concluded. The assessment… depicts a branch of the armed forces under relentless cyberattack by foreign adversaries and struggling in its response to the scale and sophistication of the problem. Drawing from extensive research and interviews with senior officials across the Trump administration, the tone of the review is urgent and at times dire, offering a rare, unfiltered look at the military’s cybersecurity liabilities.”
“The Navy and its industry partners are ‘under cyber siege’ by Chinese hackers and others who have stolen national security secrets in recent years, exploiting critical weaknesses that threaten the U.S.’s standing as the world’s top military power, an internal Navy review concluded. The assessment… depicts a branch of the armed forces under relentless cyberattack by foreign adversaries and struggling in its response to the scale and sophistication of the problem. Drawing from extensive research and interviews with senior officials across the Trump administration, the tone of the review is urgent and at times dire, offering a rare, unfiltered look at the military’s cybersecurity liabilities.”
March 13 – Bloomberg (Nick Wadhams):
“Secretary of State Michael Pompeo said China was in a ‘league of its own’ as a human-rights violator over a campaign that’s put hundreds of thousands of Uighurs and other Muslims in reeducation camps, an unusually blunt U.S. critique of the country’s abuses. Presenting the State Department’s annual report on global human rights practices, Pompeo said… that China had interred more than 1 million Uighurs, ethnic Kazakhs and other Muslims in camps ‘designed to erase their religious and ethnic identities.’”
“Secretary of State Michael Pompeo said China was in a ‘league of its own’ as a human-rights violator over a campaign that’s put hundreds of thousands of Uighurs and other Muslims in reeducation camps, an unusually blunt U.S. critique of the country’s abuses. Presenting the State Department’s annual report on global human rights practices, Pompeo said… that China had interred more than 1 million Uighurs, ethnic Kazakhs and other Muslims in camps ‘designed to erase their religious and ethnic identities.’”
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