Saturday, March 9, 2019
Weekly Commentary:
Q4 2018 Z.1 "Flow of Funds"
by Doug Noland
full column here:
My summary is below:
2018 posted the strongest credit growth
since before the (2008) crisis – led by
our spendthrift federal government.
Non-Financial Debt rose 5.1%,
closing 2018 at a record 253% of GDP,
compared to 230% to end of 2007
and 189% to conclude the nineties.
Federal borrowing expanded $1.258 trillion
during the year, up from 2017’s $599 billion.
For the week ending
March 8, 2019:
S&P500 fell 2.2% (up 9.4% year-to-date)
Dow Industrials dropped 2.2% (up 9.1%)
Dow Utilities increased 0.7% (up 8.8%)
Dow Transports fell 3.3% (up 10.3%)
S&P 400 Midcaps dropped 3.4% (up 11.9%)
Small cap Russell 2000 sank 4.3% (up 12.9%)
Nasdaq100 declined 1.9% (up 10.8%)
Biotechs sank 5.4% (up 15.2%)
With a volatile bullion gaining $5,
the HUI gold stock index
recovered 3.2% (up 5.9%)
U.K.'s FTSE little changed (up 5.6% y-t-d)
Japan's Nikkei 225 fell 2.7% (up 5.1% y-t-d)
France's CAC40 slipped 0.6% (up 10.6%)
German DAX declined 1.2% (up 8.5%)
Spain's IBEX 35 fell 1.5% (up 6.9%)
Italy's FTSE MIB declined 1.0% (up 11.8%)
Brazil's Bovespa increased 0.8% (up 8.5%)
Mexico's Bolsa dropped 2.4% (down 0.1%)
South Korea's Kospi fell 2.6% (up 4.7%)
India's Sensex gained 1.7% (up 1.7%)
China's Shanghai declined 0.8% (up 19.1%)
Turkey's Istanbul National 100 dropped 1.7% (up 11.2%)
Russia's MICEX little changed (up 5.0%).
US BONDS & MORTGAGE RATES:
Ten-year US Treasury bond yields
fell 12 bps to 2.63% (down 5bps).
Long bond yields dropped 11 bps to 3.01%
(unchanged).
Benchmark Fannie Mae MBS yields
'sank 15 bps to 3.38% (down 12bps).
Freddie Mac 30-year fixed mortgage rates
jumped six bps to 4.41% (down 5bps y-o-y).
Fifteen-year rates
gained six bps to 3.83% (down 11bps).
Five-year hybrid ARM rates
increased three bps to 3.87% (up 24bps).
Jumbo mortgage 30-yr fixed rates
down two bps to 4.40% (down 19bps).
Federal Reserve Credit
over the past year
contracted 9.8%.
M2 (narrow) "money" supply
increased 4.4%, over the past year.
Currency Watch:
The U.S. dollar index gained 0.8% to 97.306 (up 1.2% y-t-d).
Commodities Watch:
Goldman Sachs Commodities Index little changed (up 12.7% y-t-d).
Spot Gold recovered 0.4% to $1,298 (up 1.2%).
Silver rallied 0.6% to $15.349 (down 1.2%).
Crude increased 27 cents to $56.07 (up 24%).
Gasoline surged 4.1% (up 38%)
Natural Gas added 0.2% (down 3%).
Copper declined 1.3% (up 10%).
Wheat sank 3.9% (down 13%).
Corn dropped 2.3% (down 3%)
Trump Administration Watch:
March 7 – Bloomberg (Saleha Mohsin and Emily Barrett):
“As Secretary of State Michael Pompeo pointed out this week, Trump could walk away from the table during a meeting with China’s Xi Jinping -- as he did with North Korea’s Kim Jong Un -- potentially taking trade tension to a new level. The reality is that trade friction could remain a fixture of American policy.”
“As Secretary of State Michael Pompeo pointed out this week, Trump could walk away from the table during a meeting with China’s Xi Jinping -- as he did with North Korea’s Kim Jong Un -- potentially taking trade tension to a new level. The reality is that trade friction could remain a fixture of American policy.”
March 8 – Wall Street Journal (Lingling Wei, Jeremy Page and Bob Davis):
“A U.S.-China trade accord is facing a new roadblock, as Chinese officials balk at committing to a presidential summit until the two countries have a firm deal in hand, according to people familiar with Beijing’s thinking. A week ago, the sides appeared to be closing in on a draft accord. But Chinese leaders were taken aback by President Trump’s failed meeting in Vietnam with North Korean leader Kim Jong Un… Mr. Trump’s decision to break off those talks and walk away sparked concern that China’s President Xi Jinping could be pressured with take-it-or-leave-it demands at a potential summit at Mr. Trump’s Mar-a-Lago estate in Florida late this month, these people said. As a result, China wants a summit to be more of a signing ceremony than a final negotiating session that could break down…”
“A U.S.-China trade accord is facing a new roadblock, as Chinese officials balk at committing to a presidential summit until the two countries have a firm deal in hand, according to people familiar with Beijing’s thinking. A week ago, the sides appeared to be closing in on a draft accord. But Chinese leaders were taken aback by President Trump’s failed meeting in Vietnam with North Korean leader Kim Jong Un… Mr. Trump’s decision to break off those talks and walk away sparked concern that China’s President Xi Jinping could be pressured with take-it-or-leave-it demands at a potential summit at Mr. Trump’s Mar-a-Lago estate in Florida late this month, these people said. As a result, China wants a summit to be more of a signing ceremony than a final negotiating session that could break down…”
March 6 – Associated Press (Josh Boak and Christopher Rugaber):
“Despite signals from Chinese and U.S. officials that some truce could be forthcoming, there are few signs of any truly transformed trade relationship. Beijing’s longstanding policy of subsidizing its own businesses and charges that it illicitly obtains U.S. technology remain key obstacles to any meaningful U.S.-China trade deal. In the meantime, the government said… that the trade deficit in goods with China… hit a record $419.2 billion last year.”
“Despite signals from Chinese and U.S. officials that some truce could be forthcoming, there are few signs of any truly transformed trade relationship. Beijing’s longstanding policy of subsidizing its own businesses and charges that it illicitly obtains U.S. technology remain key obstacles to any meaningful U.S.-China trade deal. In the meantime, the government said… that the trade deficit in goods with China… hit a record $419.2 billion last year.”
March 5 – Associated Press (Martin Crutsinger):
“So far this budget year, the total deficit is 77% higher than the same period a year ago. The… deficit for the first four months of this budget year, which began Oct. 1, totaled $310.3 billion. That’s up from a deficit of $175.7 billion in the same period a year ago… The higher deficit reflected greater spending in areas such as Social Security, defense and interest payments on the national debt. Meanwhile, the government collected lower taxes from individuals and corporations…”
“So far this budget year, the total deficit is 77% higher than the same period a year ago. The… deficit for the first four months of this budget year, which began Oct. 1, totaled $310.3 billion. That’s up from a deficit of $175.7 billion in the same period a year ago… The higher deficit reflected greater spending in areas such as Social Security, defense and interest payments on the national debt. Meanwhile, the government collected lower taxes from individuals and corporations…”
March 6 – Reuters (Lucia Mutikani):
“The U.S. goods trade deficit surged to a record high in 2018 as strong domestic demand fueled by lower taxes pulled in imports, despite the Trump administration’s ‘America First’ policies, including tariffs, aimed at shrinking the trade gap. President Donald Trump is pursuing a protectionist trade agenda to shield U.S. manufacturing from what he says is unfair foreign competition. Trump, who has dubbed himself ‘the tariff man,’ pledged on both the campaign trail and as president to reduce the deficit by shutting out more unfairly traded imports and renegotiating free trade agreements. The Commerce Department said… that a 12.4% jump in the goods deficit in December had contributed to the record $891.3 billion goods trade shortfall last year. The overall trade deficit surged 12.5% to $621.0 billion in 2018, the largest since 2008.”
“The U.S. goods trade deficit surged to a record high in 2018 as strong domestic demand fueled by lower taxes pulled in imports, despite the Trump administration’s ‘America First’ policies, including tariffs, aimed at shrinking the trade gap. President Donald Trump is pursuing a protectionist trade agenda to shield U.S. manufacturing from what he says is unfair foreign competition. Trump, who has dubbed himself ‘the tariff man,’ pledged on both the campaign trail and as president to reduce the deficit by shutting out more unfairly traded imports and renegotiating free trade agreements. The Commerce Department said… that a 12.4% jump in the goods deficit in December had contributed to the record $891.3 billion goods trade shortfall last year. The overall trade deficit surged 12.5% to $621.0 billion in 2018, the largest since 2008.”
March 1 – Reuters (David Lawder and Alexandra Alper):
“The Trump administration filed another salvo at the World Trade Organization…, saying U.S. trade policy was not going to be dictated by the international body and defending its use of tariffs to pressure China and other trade partners. A report drawn up by the U.S. Trade Representative outlining the White House’s trade agenda for 2019 said the United States will continue to use the… WTO to challenge what it sees as unfair practices. However, ‘the United States remains an independent nation, and our trade policy will be made here – not in Geneva. We will not allow the WTO Appellate Body and dispute settlement system to force the United States into a straitjacket of obligations to which we never agreed,’ the report said.’”
“The Trump administration filed another salvo at the World Trade Organization…, saying U.S. trade policy was not going to be dictated by the international body and defending its use of tariffs to pressure China and other trade partners. A report drawn up by the U.S. Trade Representative outlining the White House’s trade agenda for 2019 said the United States will continue to use the… WTO to challenge what it sees as unfair practices. However, ‘the United States remains an independent nation, and our trade policy will be made here – not in Geneva. We will not allow the WTO Appellate Body and dispute settlement system to force the United States into a straitjacket of obligations to which we never agreed,’ the report said.’”
U.S. Bubble Watch:
March 5 – Reuters (Andrea Ricci):
“The Treasury said federal spending in January was $331 billion, up 6% from the same month in 2018,
while receipts were $340 billion, down 6% compared to January 2018. The deficit for the fiscal year to date was $310 billion, compared with $176 billion in the comparable period the year earlier. When adjusted for calendar effects, the budget was in balance in January 2019, compared with a $30 billion surplus the prior year.”
“The Treasury said federal spending in January was $331 billion, up 6% from the same month in 2018,
while receipts were $340 billion, down 6% compared to January 2018. The deficit for the fiscal year to date was $310 billion, compared with $176 billion in the comparable period the year earlier. When adjusted for calendar effects, the budget was in balance in January 2019, compared with a $30 billion surplus the prior year.”
March 6 – Wall Street Journal (Paul Kiernan and Josh Zumbrun):
“The U.S. trade deficit in goods hit a record in 2018,
defying President Trump’s efforts to narrow the gap, as imports jumped and some exports, including soybeans and other farm products, got hammered by retaliation against U.S. trade policies. The deficit in goods grew 10% last year to $891.3 billion, the widest on record… U.S. trade gaps with China and Mexico, already the nation’s largest, reached new records. The picture looked less dire when services including tourism, higher education and banking are counted, though this deficit still deteriorated markedly.
With services included, the trade gap grew 12% last year to $621 billion, the widest since 2008.”
“The U.S. trade deficit in goods hit a record in 2018,
defying President Trump’s efforts to narrow the gap, as imports jumped and some exports, including soybeans and other farm products, got hammered by retaliation against U.S. trade policies. The deficit in goods grew 10% last year to $891.3 billion, the widest on record… U.S. trade gaps with China and Mexico, already the nation’s largest, reached new records. The picture looked less dire when services including tourism, higher education and banking are counted, though this deficit still deteriorated markedly.
With services included, the trade gap grew 12% last year to $621 billion, the widest since 2008.”
March 8 – Reuters (Lucia Mutikani):
“U.S. employment growth almost stalled in February, with the economy creating only 20,000 jobs, adding to signs of a sharp slowdown in economic activity in the first quarter. The meager payroll gains… were the weakest since September 2017, with a big drop in the weather-sensitive construction industry. They also reflected a decline in hiring by retailers and utility companies as well as the transportation and warehousing sector, which is experiencing a shortage of drivers.”
“U.S. employment growth almost stalled in February, with the economy creating only 20,000 jobs, adding to signs of a sharp slowdown in economic activity in the first quarter. The meager payroll gains… were the weakest since September 2017, with a big drop in the weather-sensitive construction industry. They also reflected a decline in hiring by retailers and utility companies as well as the transportation and warehousing sector, which is experiencing a shortage of drivers.”
March 5 – KRON (Alexa Mae Asperin):
“If you thought rent in San Francisco couldn't get any higher -- you were very wrong. Apparently San Francisco rent has reached a new peak of $3,690, according to home and apartment rental app Zumper. That's also a rise of nearly 9% from the same time last year, the survey found…”
“If you thought rent in San Francisco couldn't get any higher -- you were very wrong. Apparently San Francisco rent has reached a new peak of $3,690, according to home and apartment rental app Zumper. That's also a rise of nearly 9% from the same time last year, the survey found…”
China Watch:
March 5 – Wall Street Journal (Lingling Wei):
“‘Made in China 2025,’ a government-led industrial program at the center of the contentious U.S.-China trade dispute, is officially gone—but in name only.
During a nearly 100-minute speech to China’s legislature…, Premier Li Keqiang dropped any reference to the plan that the Trump administration has criticized as a subsidy-stuffed program to make China a global technology leader at the expense of the U.S. The policy had been a highlight of Mr. Li’s State-of-the-Nation-like address for three years running. Instead, Mr. Li said the government would promote advanced manufacturing. He ticked off a list of emerging industries to nurture—next-generation information technology, high-end equipment, biomedicine and new-energy automobiles—that were also in ‘Made in China 2025’ and with a similar goal: ‘Buy China.’”
“‘Made in China 2025,’ a government-led industrial program at the center of the contentious U.S.-China trade dispute, is officially gone—but in name only.
During a nearly 100-minute speech to China’s legislature…, Premier Li Keqiang dropped any reference to the plan that the Trump administration has criticized as a subsidy-stuffed program to make China a global technology leader at the expense of the U.S. The policy had been a highlight of Mr. Li’s State-of-the-Nation-like address for three years running. Instead, Mr. Li said the government would promote advanced manufacturing. He ticked off a list of emerging industries to nurture—next-generation information technology, high-end equipment, biomedicine and new-energy automobiles—that were also in ‘Made in China 2025’ and with a similar goal: ‘Buy China.’”
March 7 – Reuters (Stella Qiu and Ryan Woo):
“China’s exports tumbled the most in three years in February while imports fell for a third straight month, pointing to a further slowdown in the economy and stirring talk of a ‘trade recession’, despite a spate of support measures… February exports fell 20.7% from a year earlier, the largest decline since February 2016…”
“China’s exports tumbled the most in three years in February while imports fell for a third straight month, pointing to a further slowdown in the economy and stirring talk of a ‘trade recession’, despite a spate of support measures… February exports fell 20.7% from a year earlier, the largest decline since February 2016…”
March 3 – Bloomberg:
“China’s worst car-market slump in a generation
is forcing manufacturers and dealers to resort to generous discounts and loan offers to lure buyers, as the slowdown hits automakers’ profits. Incentives and reductions equivalent to more than 10% of the sticker price are now commonplace and interest-free loan offers abound as carmakers and dealerships struggle to bring buyers back to showrooms… But buyers aren’t biting, with car sales continuing to decline this year after the first annual drop in more than two decades.”
“China’s worst car-market slump in a generation
is forcing manufacturers and dealers to resort to generous discounts and loan offers to lure buyers, as the slowdown hits automakers’ profits. Incentives and reductions equivalent to more than 10% of the sticker price are now commonplace and interest-free loan offers abound as carmakers and dealerships struggle to bring buyers back to showrooms… But buyers aren’t biting, with car sales continuing to decline this year after the first annual drop in more than two decades.”
Brexit Watch:
March 6 – Reuters (Gabriela Baczynska):
“Talks with Britain on amending its divorce deal with the European Union have made no headway and no swift solution is in sight, EU officials said
…, a week before British lawmakers must vote on the plan to avoid a chaotic Brexit… ‘Things are not looking good,’ one diplomat said after EU negotiators briefed envoys on the previous evening’s talks... Another described the mood as ‘downbeat,’ although Brussels insiders were divided on whether May might yet accept an EU offer by next week — or risk an 11th-hour crisis at a summit on March 22.”
“Talks with Britain on amending its divorce deal with the European Union have made no headway and no swift solution is in sight, EU officials said
…, a week before British lawmakers must vote on the plan to avoid a chaotic Brexit… ‘Things are not looking good,’ one diplomat said after EU negotiators briefed envoys on the previous evening’s talks... Another described the mood as ‘downbeat,’ although Brussels insiders were divided on whether May might yet accept an EU offer by next week — or risk an 11th-hour crisis at a summit on March 22.”
Emerging Markets Watch:
March 3 – Financial Times (Edward White):
“South Korean manufacturing production slumped to its worst level in nearly four years in February…, in the latest sign of the downturn in global trade hitting economies across Asia. The Nikkei-Markit manufacturing purchasing managers’ index fell to 47.2 last month, from 48.3 in January…”
“South Korean manufacturing production slumped to its worst level in nearly four years in February…, in the latest sign of the downturn in global trade hitting economies across Asia. The Nikkei-Markit manufacturing purchasing managers’ index fell to 47.2 last month, from 48.3 in January…”
March 3 – Financial Times (Hudson Lockett):
“A survey of Taiwan’s manufacturing sector has yielded the worst reading in three and a half years, with contraction sharpening as export orders tumbled at the fastest rate since November 2011 amid trade war and growth concerns. The Nikkei-Markit manufacturing purchasing managers’ index for Taiwan fell to 46.3 in February…”
“A survey of Taiwan’s manufacturing sector has yielded the worst reading in three and a half years, with contraction sharpening as export orders tumbled at the fastest rate since November 2011 amid trade war and growth concerns. The Nikkei-Markit manufacturing purchasing managers’ index for Taiwan fell to 46.3 in February…”
March 3 – Bloomberg (Michelle Jamrisko):
“Seven of the top 10 most polluted cities in the world are in India, according to a new study showing South Asia’s battle with deteriorating air quality and the economic toll it’s expected to take worldwide. Gurugram, located southwest of India’s capital New Delhi, led all cities in pollution levels in 2018, even as its score improved from the previous year, according to data released by IQAir AirVisual and Greenpeace. Three other Indian cities joined Faisalabad, Pakistan, in the top five.”
“Seven of the top 10 most polluted cities in the world are in India, according to a new study showing South Asia’s battle with deteriorating air quality and the economic toll it’s expected to take worldwide. Gurugram, located southwest of India’s capital New Delhi, led all cities in pollution levels in 2018, even as its score improved from the previous year, according to data released by IQAir AirVisual and Greenpeace. Three other Indian cities joined Faisalabad, Pakistan, in the top five.”
Global Bubble Watch:
March 5 – Reuters (Swati Pandey):
“Australia’s top central banker sounded sanguine about a sharp slowdown in the country’s property market saying it was unlikely to derail momentum even as data showed the $1.3 trillion economy hit an airpocket last quarter.
Domestic activity slowed sharply in the second half of last year…, with gross domestic product (GDP) rising 0.2% in the December quarter following a sub-par 0.3% in the previous three-month period. Annual GDP rose a below-trend 2.3%, the slowest pace since mid-2017…”
“Australia’s top central banker sounded sanguine about a sharp slowdown in the country’s property market saying it was unlikely to derail momentum even as data showed the $1.3 trillion economy hit an airpocket last quarter.
Domestic activity slowed sharply in the second half of last year…, with gross domestic product (GDP) rising 0.2% in the December quarter following a sub-par 0.3% in the previous three-month period. Annual GDP rose a below-trend 2.3%, the slowest pace since mid-2017…”
Fixed-Income Bubble Watch:
March 5 – Bloomberg (Thomas Beardsworth):
“Swollen stocks of corporate debt in the riskiest investment-grade category leave markets vulnerable to a rout if economic weakness triggers bouts of rating downgrades, according to the Bank for International Settlements. Investment-grade bonds classed BBB by ratings firms – one step above junk status -- have proved popular with funds bound by their own rules to hold only low-risk securities. While central banks pursued cheap money policies in the years after the financial crisis, such bonds offered tempting yields while still falling into the low-risk category that made them eligible holdings. In 2018, BBB-rated bonds accounted for about 45% of U.S. and European mutual fund portfolios, up from 20 percent in 2010, according to the BIS.”
“Swollen stocks of corporate debt in the riskiest investment-grade category leave markets vulnerable to a rout if economic weakness triggers bouts of rating downgrades, according to the Bank for International Settlements. Investment-grade bonds classed BBB by ratings firms – one step above junk status -- have proved popular with funds bound by their own rules to hold only low-risk securities. While central banks pursued cheap money policies in the years after the financial crisis, such bonds offered tempting yields while still falling into the low-risk category that made them eligible holdings. In 2018, BBB-rated bonds accounted for about 45% of U.S. and European mutual fund portfolios, up from 20 percent in 2010, according to the BIS.”
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