Economic News for the week ending March 22, 2019

Saturday, March 23, 2019

Weekly Commentary: 

Doing Harm with Uber-Dovish

by Doug Noland

full column here:

http://creditbubblebulletin.blogspot.com/2019/03/weekly-commentary-doing-harm-with-uber.html

My summary is below:

This week’s FOMC meeting will be debated for years – perhaps even decades. The Fed essentially pre-committed to no rate hike in 2019. 

The committee downgraded both its growth and inflation forecasts. Having all at once turned of little consequence, we can now dismiss the 3.8% unemployment rate and the strongest wage growth in a decade. Moreover, the Fed announced it would be scaling back and then winding down balance sheet “normalization” by September. This put an impressive exclamation point on a historic policy shift since the December 19th meeting. 

At least for me, it hearkened back to a Rick Santelli moment: “What’s the Fed afraid of?”

With three-month T-bill rates at 2.40%, 

the three-month/10-year Treasury curve flattened to the narrowest spread since 2007 (briefly inverting Friday). Five-year Treasury yields ended the week inverted 16 bps to three-month T-bills – and two-year Treasuries were inverted about eight bps.

It’s now commonly accepted 

that the Federal Reserve erred 

in raising rates 25 bps in December 2018. 

For the week ending

March 22, 2019:

GLOBAL  STOCKS:

S&P500 declined 0.8% (up 11.7% y-t-d)

Dow fell 1.3% (up 9.3%)

Utilities added 0.4% (up 11.1%). 

Transports dropped 2.5% (up 9.6%)

S&P 400 Midcaps lost 2.2% (up 11.5%)

Small cap Russell 2000 dropped 3.1% (up 11.7%)

Nasdaq100 increased 0.3% (up 15.7%)

Biotechs sank 3.8% (up 17.3%). 

While gold bullion gained $11, 

the HUI gold stock index fell 1.9% 

   (up 7.8% year-to-date)

 U.K.'s FTSE equities index slipped 0.3% (up 7.1% y-t-d).

Japan's Nikkei 225 equities index added 0.8% (up 8.1% y-t-d)

France's CAC40 dropped 2.5% (up 11.4%)

German DAX equities index fell 2.8% (up 7.6%)

Spain's IBEX 35 equities index declined 1.5% (up 7.7%)

Italy's FTSE MIB index added 0.2% (up 15.0%)

Brazil's Bovespa index sank 5.4% (up 6.7%)

Mexico's Bolsa added 0.2% (up 1.6%)

South Korea's Kospi index increased 0.5% (up 7.1%)

India's Sensex equities index gained 0.4% (up 5.8%)

China's volatile Shanghai Exchange jumped 2.7% (up 24.5%)

Turkey's Borsa Istanbul National 100 index sank 3.4% (up 9.4%)

Russia's MICEX equities index increased 0.6% (up 5.7%).

U.S.  BONDS  &  MORTGAGES

Ten-year Treasury yields dropped 15 bps to 2.44% 

   (down 24bps). 

Long bond yields fell 14 bps to 2.87% 

   (down 14bps). 

Benchmark Fannie Mae MBS yields 

sank 22 bps to 3.10% 

   (down 40bps).

Freddie Mac 30-year fixed mortgage rates 

declined three bps to a 13-month low 4.28% 

   (down 17bps y-o-y).

Fifteen-year rates fell five bps to 3.71% 

   (down 20bps). 

Five-year hybrid ARM rates 

were unchanged at 3.84% (up 16bps). 

Jumbo mortgage 30-yr fixed rates 

down two bps to a one-year low 4.28% 

   (down 32bps).

Federal Reserve Credit 

over the past year 

contracted 9.9%. 

M2 (narrow) "money" supply 

gained 4.1%, over the past year. 

Currency Watch:

The U.S. dollar index was little changed at 96.651 

   (up 0.5% y-t-d). 

Commodities Watch:

Goldman Sachs Commodities Index added 0.4% (up 16% y-t-d). 

Spot Gold gained 0.9% to $1,314 (up 2.4%). 

Silver recovered 0.5% to $15.407 (down 0.9%). 

Crude oil added 52 cents to $59.04 (up 30%). 

Gasoline jumped 3.7% (up 48%)

Natural Gas fell 1.5% (down 6%).

Copper dropped 2.2% (up 8%). 

Wheat increased 0.8% (down 7%).

Corn gained 1.3% (up 1%).

Trump Administration Watch:

March 19 – Bloomberg (Jenny Leonard, Saleha Mohsin and Jennifer Jacobs): 

“ Chinese officials have shifted their stance because after agreeing to changes to their intellectual-property policies, they haven’t received assurances from the Trump administration that tariffs imposed on their exports would be lifted… Beijing has also stepped back from its initial promises over data protection of pharmaceuticals, didn’t offer details on plans to improve patent linkages, and refused to give ground on data-service issues, one person familiar with the U.S.’s views said. Beijing is trying to bring in wording that would ensure rules in the trade agreement have to comply with Chinese laws, the person added.”

March 20 – Bloomberg (Jennifer Jacobs and Andrew Mayeda):

 “President …Trump said he’ll keep tariffs on China until he’s sure Beijing is complying with any trade deal, refuting expectations that the two nations will agree to roll back duties as part of a lasting truce to their trade war. ‘We’re not talking about removing them, we’re talking about leaving them for a substantial period of time, because we have to make sure that if we do the deal with China that China lives by the deal,’ Trump told reporters… 

‘They’ve had a lot of problems living by certain deals.’ The president’s comments dim hopes that round-the-clock trade negotiations between the world’s two biggest economies could lead to them removing the roughly $360 billion in tariffs they’ve imposed on each other’s imports. Beijing has pushed the Trump administration to remove tariffs as part of any deal.”

March 20 – CNN (Haley Byrd): 

“President Donald Trump placed more pressure on the stalled trade talks with the European Union…, threatening tariffs on European automobiles if no deal is reached. ‘The European Union has been very tough on the United States for many years,’ Trump told reporters…, saying the auto tariffs were under review. ‘We're looking at something to combat it.’ Trump received a report from the Commerce Department last month with the findings of an investigation into whether imports of automobiles and auto parts could qualify for tariffs as a national security threat… Trump has until the middle of May to choose a course of action. On Wednesday, Trump said his decision would hinge on how talks with the EU proceed. He has long threatened to impose hefty tariffs on European autos and auto parts.”

U.S. Bubble Watch:

March 22 – MarketWatch (Steve Goldstein): 

“The IHS Markit flash purchasing managers index for manufacturing in March fell to a 21-month low, while the services PMI weakened to a two-month low. The flash manufacturing PMI fell to 52.5 from 53 in February, while the services PMI fell to 54.8 from 56.”

March 22 – Reuters (Jason Lange):

 “U.S. home sales surged in February to their highest level in 11 months, a sign that a pause in interest rate hikes by the Federal Reserve was starting to boost the U.S. economy. The National Association of Realtors said on Friday existing home sales jumped 11.8% to a seasonally adjusted annual rate of 5.51 million units last month… ‘(It’s) quite a powerful recovery that’s taking place,’ said Lawrence Yun, chief economist with the National Association of Realtors.”

March 18 – CNBC (Hugh Son): 

“J.P. Morgan Chase CEO Jamie Dimon said that the U.S. economy has essentially been split into those benefiting from thriving corporations and those who are left behind. ‘I don’t want to be a tone deaf CEO; while the company is doing fine, it is absolutely obvious that a big chunk of [people] have been left behind,’ Dimon said.

 ‘40% of Americans make less than $15 an hour. 40% of Americans can’t afford a $400 bill, whether it’s medical or fixing their car. 15% of Americans make minimum wages, 70,000 die from opioids’ annually.
‘If you travel around to most neighborhoods where companies live, they’re doing fine,’ Dimon said. ‘So we’ve kind of bifurcated the economy.’”

China Watch:

March 17 – Bloomberg (Christopher Balding): 

“China’s banks may have a flood of bad loans waiting in the wings. Not that you’d know it from looking at official levels for 2018, which suggest the problem was broadly contained. The reality is that newly soured debt was coming through the front door as fast as banks could shovel it out the back. Authorities worked hard to restrain financial-system leverage in 2018. Outstanding credit increased a relatively modest 10%... The government accomplished this primarily by tightening restrictions on shadow banking and moving that lending into the formal banking system, which recorded a 13% jump in new loans last year. To make way for that increase, and with new deposits falling 1% last year, banks sold a lot of nonperforming debt to asset management companies. Sales to AMCs and other disposals totaled almost 1.8 trillion yuan ($268bn), according to… Jason Bedford, executive director of Asian financials research at UBS…”

March 20 – CNBC (Weizhen Tan):

 “An economic slowdown and extremely tight credit conditions pushed corporate debt to a record high in China last year, according to experts. Defaults for Chinese corporate bonds — issued in both U.S. dollars and the Chinese yuan — soared last year… Yuan-denominated debt rose to an ‘unprecedented’ 119.6 billion yuan ($17.8bn) — four times more than 2017, according to… Singapore bank DBS. …Nomura’s estimates… were even higher, putting the size of defaults in onshore bonds — or yuan-denominated bonds — at 159.6 billion yuan ($23.8bn) last year. That number is roughly four times more than its 2017 estimate. Offshore corporate dollar bonds, or U.S. dollar-denominated debt…, followed the same trend. Nomura said the amount of such debt rose to $7 billion in 2018, from none the year before.”

March 19 – Reuters (Choonsik Yoo): 

“Confidence among Asian companies held near three-year lows in the first quarter as a U.S.-China trade dispute dragged on, pulling down a global economy that is already on a downward path, a Thomson Reuters/INSEAD survey found. The Thomson Reuters/INSEAD Asian Business Sentiment Index tracking firms’ six-month outlook was flat in the March quarter from the previous quarter’s 63, compared with a near three-year low of 58 set in the September quarter.”

Brexit Watch:

March 19 – Financial Times (George Parker, Laura Hughes and Sebastian Payne): “Theresa May’s cabinet has split over whether the UK should request a long delay to Brexit if MPs continue to block the prime minister’s exit deal. Eight Eurosceptic ministers said in tetchy exchanges during a meeting of Mrs May’s cabinet… that any extension of the Article 50 exit process should last no longer than June 30… These ministers added that Britain should be prepared to leave the EU at that point — without a deal if necessary. But Europhile ministers — including chancellor Philip Hammond — argued the prospect of a longer delay to Brexit was needed to keep pressure on Eurosceptic Conservative MPs to finally back Mrs May’s deal.”

Europe Watch:

March 18 – Bloomberg (Carolynn Look): 

“The slowdown in Europe’s largest economy is unlikely to have enjoyed a long-awaited turnaround at the start of 2019 as German industry continued to stumble. ‘The basic cyclical trend of the German economy remained subdued after the turn of theyear. This was mainly due to the continuing slowdown in industrial momentum,’ the Bundesbank said… ‘Greater catch-up effects in the country’s auto industry ‘are no longer expected for the current quarter.’”

March 19 – Reuters (Leigh Thomas and Yann Le Guernigou):

 “The French economy should grow about 1.4% this year, Finance Minister Bruno Le Maire said…, revising down the forecast of 1.7% growth in this year’s budget. Le Maire told the Senate’s law and economic affairs commissions that the yellow vest anti-government unrest had in the short-term trimmed 0.2 percentage points off growth in 2018 and 2019.”

Emerging  Markets  Watch:

March 21 – Reuters (Marcelo Rochabrun): 

“Brazil prosecutors on Thursday alleged that detained former president Michel Temer was the leader of a ‘criminal organization’ that diverted 1.8 billion reais ($471.62 million) in funds as part of a scheme related to the construction of a nuclear plant complex. Temer was arrested on Thursday morning in Sao Paulo.”

Global Bubble Watch:

March 18 – Bloomberg (William Horobin): 

“According to a survey of 22,000 people in 21 OECD countries, there’s a ‘clear sense of dissatisfaction and injustice’ in advanced economies. A majority believe they wouldn’t easily access benefits if needed, less than 20% say they get a fair share given the taxes they pay, and in many countries most people feel governments ignore their views. The OECD said the exercise in ‘listening to people’ has produced ‘deeply worrying’ results.”

March 20 – CNBC (Kate Rooney): 

“Corporate giants doing business abroad are painting a dreary picture of the world’s economy. With an ongoing trade war between the U.S. and China, Brexit uncertainty weighing on Europe and the U.K., and new weakness out of Japan, some business leaders say it’s harder than ever to rake in profits. This week, top executives at FedEx, BMW, UBS and others described bleak global business conditions while discussing quarterly results. Fitch Ratings also ‘aggressively’ cut its forecast for the year. The head of UBS was among the latest to blame the world’s backdrop for weaker-than-expected results.”

March 20 – CNBC (Kate Rooney): 

“A top executive at FedEx 
is flagging serious concerns 
in the global economy. 
The multinational package delivery service reported declining international revenue as a result of unfavorable exchange rates and the negative effects of trade battles. ‘Slowing international macroeconomic conditions and weaker global trade growth trends continue, as seen in the year-over-year decline in our FedEx Express international revenue,’ Alan B. Graf, Jr., FedEx Corp. executive vice president and chief financial officer, said…”

Japan Watch:

March 17 – Reuters (Tetsushi Kajimoto): 

“Japan’s exports fell for a third month in February in a sign of growing strain on the trade-reliant economy, suggesting the central bank might be forced to offer more stimulus eventually… Slowing global growth, the Sino-U.S. trade war and complications over Britain’s exit from the European Union have already forced many policymakers to shift to an easing stance over recent months.”

March 19 – Reuters (Tetsushi Kajimoto and Izumi Nakagawa): 

“Confidence among Japanese manufacturers hit its weakest in two-and-a-half years in March, a Reuters poll showed… The monthly poll, which tracks the Bank of Japan’s (BOJ) closely watched tankan quarterly survey, found confidence fell for a fifth straight month while sentiment in the service sector held steady…”

Fixed-Income Bubble Watch:

March 21 – Bloomberg (Christopher DeReza): 

“The influx of investor cash into U.S. corporate-bond funds accelerated, helping to keep the market on track for its biggest quarterly gain in three years. Investors added $5.14 billion to investment-grade funds in the week ended March 20, the biggest net increase since March 2017, Lipper data show. That followed a $3.29 billion inflow the previous week and marked the eighth straight week of gains with investors pouring $21 billion of cash into the funds.”

March 18 – Bloomberg (Russell Ward):

 “ In Japan, where yields have been near zero for some traders’ entire careers, an increasingly popular investment is bundled U.S. corporate loans known as CLOs, or collateralized loan obligations. Some observers have drawn parallels to the collateralized debt obligations, or CDOs, that helped turn packaged U.S. mortgages into bombs that laid waste to global financial markets in 2008. Japanese regulators have drafted a rule that could limit their risk… Japanese banks have been buying CLOs and other securities abroad because the central bank’s ultra-easy monetary policy has made it extremely difficult to profit from domestic bonds and loans. They hold at least 10% of the $750 billion global market for CLOs…”

Geopolitical Watch:

March 16 – Reuters (Sanjeev Miglani and Drazen Jorgic): 

“The sparring between India and Pakistan last month threatened to spiral out of control and only interventions by U.S. officials, including National Security Advisor John Bolton, headed off a bigger conflict, five sources familiar with the events said. At one stage, India threatened to fire at least six missiles at Pakistan, and Islamabad said it would respond with its own missile strikes ‘three times over’, according to Western diplomats and government sources…”

March 19 – Reuters (Philip Pullella): 

“High-level U.S.-Russian talks on how to defuse Venezuela’s crisis ended… with the two sides still at odds over the legitimacy of President Nicolas Maduro. Russia has said Maduro remains the country’s only legitimate leader whereas the United States and many other Western countries back Juan Guaido, head of the opposition-controlled National Assembly who invoked a constitutional provision in January to assume an interim presidency.”