Economic News for the week ending April 19, 2019

Saturday, April 20, 2019

Weekly Commentary: 

Full Capitulation

by Doug Noland

Full column here:

http://creditbubblebulletin.blogspot.com/2019/04/weekly-commentary-full-capitulation.html

My summary follows:

For the week ending 

April 19, 2019:

GLOBAL  STOCKS

S&P500 little changed (up 15.9% y-t-d)

Dow Industrials added 0.6% (up 13.9%)

Dow Utilities fell 1.4% (up 9.0%)

Dow Transports increased 0.7% (up 19.8%)

S&P 400 Midcaps declined 0.6% (up 17.5%)

Small cap Russell 2000 fell 1.2% (up 16.1%)

Nasdaq100 gained 0.8% (up 21.5%)

Biotechs sank 7.7% (up 10.1%). 

With bullion down $15, 

the HUI gold stock index

dropped 4.7% (down 0.1%)

U.K.'s FTSE added 0.3% (up 10.9% y-t-d).

Japan's Nikkei 225 gained 1.5% (up 10.9%)

 France's CAC40 rose 1.4% (up 18.0%)

German DAX equities index jumped 1.9% (up 15.8%). 

Spain's IBEX 35 rose 1.2% (up 12.2%). 

Italy's FTSE MIB added 0.4% (up 19.8%)

Brazil's Bovespa rallied 1.8% (up 3.9%)

Mexico's Bolsa 1.9% (up 9.3%)

South Korea's Kospi declined 0.8% (up 8.6%)

India's Sensex increased 1.0% (up 8.5%)

China's Shanghai rallied 2.6% (up 31.2%)

Turkey's Borsa Istanbul National 100 index increased 0.9% (up 6.1%). 

Russia's MICEX equities index was little changed (up 3.9%).

US  BONDS  &  MORTGAGES

Ten-year Treasury yields 

  dipped a basis point to 2.56% (down 13bps). 

Long bond yields 

  declined two bps to 2.96% (down 5bps). 

Benchmark Fannie Mae MBS yields 

  increased three bps to 3.31% (down 19bps).

Freddie Mac 30-year fixed mortgage rates 

  rose five bps to 4.17% (down 38bps y-o-y). 

Fifteen-year rates 

   added two bps to 3.62% (down 39bps). 

Five-year hybrid ARM rates
   slipped two bps to 3.78% (up 22bps). 

Jumbo mortgage 30-yr fixed rates 

   up five bps to 4.30% (down 12bps).

Federal Reserve Credit 

over the past year

contracted 10.4%. 

M2 (narrow) "money" supply 

rose 3.9% over the past year. 

Currency Watch:

The U.S. dollar index increased 0.5%

 to 97.378 (up 1.2% y-t-d). 

Commodities Watch:

Bloomberg Commodities Index declined 1.2% this week (up 6.1% y-t-d). 

Spot Gold fell 1.2% to $1,275 (down 0.5%). 

Silver increased 0.5% to $15.038 (down 3.2%). 

Crude added 11 cents to $64.00 (up 41%). 

Gasoline rose 1.7% (up 57%)

Natural Gas sank 6.4% (down 15%). 

Copper declined 0.7% (up 11%). 

Wheat dropped 4.3% (down 11%). 

Corn dipped 0.6% (down 2%).

Trump Administration Watch:

April 17 – Wall Street Journal (William Mauldin and Josh Zumbrun): 

“The U.S. and China are planning two rounds of face-to-face meetings as they seek to wrap up a trade deal, with negotiators aiming for a signing ceremony in late May or early June, according to people familiar with the situation. Under the tentative schedule, U.S. trade representative Robert Lighthizer is set to travel to Beijing the week of April 29, the people said, with Chinese envoy Liu He coming to Washington the week of May 6. Treasury Secretary Steven Mnuchin also will be a part of the delegation to China, a senior administration official said. President Trump said… negotiations were ‘moving along quite well.’”

April 15 – Reuters (Philip Blenkinsop): 

“The European Union is ready to start talks on a trade agreement with the United States and aims to conclude a deal before year-end, European Trade Commissioner Cecilia Malmstrom said…"

April 14 – The Hill (Sylvan Lane): 

“President Trump is struggling to win his fight to reshape the Federal Reserve with Republicans rebelling over a potential nominee and the bank's chairman resisting calls to cut interest rates. ... Four Republican senators this week announced they would reject Herman Cain if Trump appointed him to the Federal Reserve's Board of Governors… It's only the latest blow to Trump, marking the third time his own party has derailed one of his picks for the central bank.”

U.S. Bubble Watch:

April 17 – Reuters (Richard Leong): 

“Applications to U.S. lenders seeking loans to buy a home climbed to their highest level in almost nine years last week even as mortgage rates increased for a second week, the Mortgage Bankers Association said… ‘The spring buying season continues to be robust, with activity more than 7% higher than a year ago and up year-over-year for the ninth straight week,’ Joel Kan, MBA’s associate vice president of economic and industry forecasting, said…”

April 17 – Reuters (Pete Schroeder): 

“Labor markets remained tight across the United States as businesses struggled to find skilled workers and wages grew modestly, the Federal Reserve said… in its latest report on the economy. Prices have risen modestly since the last Beige Book, with tariffs, freight costs and rising wages often cited as key factors, the Fed said… Wages grew moderately in most districts for both skilled and unskilled workers, with only three reporting slight growth in workers’ pay… Businesses in most districts reported shortages of skilled workers, mainly in manufacturing and construction, but also in technical and professional roles. Companies have responded to the tight labor market by boosting bonuses and benefits packages, along with raising wages moderately…”

April 18 – Reuters (Lucia Mutikani):

 “U.S. retail sales increased by the most in 1-1/2 years in March as households boosted purchases of motor vehicles and a range of other goods, the latest indication that economic growth picked up in the first quarter after a false start. …Retail sales surged 1.6% last month. That was the biggest increase since September 2017 and followed an unrevised 0.2% drop in February… In March, sales at auto dealerships jumped 3.1%, the most since September 2017.”

April 12 – New York Times (Sapna Maheshwari): 

“As the internet continues to change shopping habits, stores across the United States continue to close. 
Less than halfway through April, American retailers have announced plans this year to shut 5,994 stores, exceeding the 5,854 announced in all of 2018…”

April 16 – Wall Street Journal (Patrick Thomas): 

“The best place to make money in the world of finance and investment may not be at a bank but in real estate. Real-estate investment trusts had some of the highest median worker pay among financial, real-estate and insurance companies in 2018… Property companies such as Host Hotels & Resorts Inc. and HCP Inc. paid their median employees more than some of the largest banks did. Host Hotels & Resorts, the lodging REIT formed through deals including a spinoff over 20 years ago from what was Marriott Corp., had median worker pay of $183,956…”

April 17 – Reuters (Lucia Mutikani): 

“The U.S. trade deficit fell to an eight-month low in February as imports from China plunged, temporarily providing a boost to President Donald Trump’s ‘America First’ agenda and economic growth in the first quarter… The trade deficit tumbled 3.4% to $49.4 billion in February, the lowest level since June 2018.”

China Watch:

April 16 – Reuters: 

“China’s industrial output grew 8.5% in March from a year earlier, the fastest pace since July 2014…, as factories ramped up output in anticipation of more business amid government support measures. Analysts polled by Reuters had expected industrial output would grow 5.9%, accelerating from 5.3% in the combined January-February period. The fixed-asset investment grew 6.3% in the first three months of 2019 from the same period a year earlier, the strongest pace since January-April last year…”

April 16 – Reuters (Kevin Yao): 

“China’s stimulus measures will shore up economic growth this year and next but may undermine the country’s drive to control debt and worsen structural distortions over the medium term, the OECD said… Local governments will be allowed to issue 2.15 trillion yuan ($320.60bn) worth of special purpose bonds in 2019 to fund infrastructure projects, a jump of 59% from last year. But S&P Global Ratings estimated last year that local governments were already sitting on hidden debt that could be as high as 40 trillion yuan. ‘Infrastructure stimulus could lift growth over the projection horizon, but it could lead to a further build-up of imbalances and capital misallocation, and thereby weaker growth in the medium term,’ the OECD said… ‘The stimulus risks increasing once again corporate sector indebtedness and, more generally, reversing progress in deleveraging,’ it said.”

April 16 – Reuters (Lusha Zhang and Ryan Woo):

 “New home prices in China grew slightly faster in March after growth slowed the previous month, putting a floor under the cooling market, as Beijing rolled out stimulus to boost the economy. The sector’s solid growth could cushion the impact of a vigorous multi-year government crackdown on debt and escalating trade tensions with the United States, although some analysts say bubble risks are rising as prices continue to climb. Average new home prices in China’s 70 major cities rose 0.6% in March, quickening from a 0.5% gain in February… On the whole, it logged the 47th straight month of price increases. Most of the 70 cities surveyed by the NBS reported monthly price increases for new homes, and the number climbed sharply to 65 from 57 in February. On an annual basis, home prices rose 10.6% in March, the highest since April 2017, and also accelerating from a 10.4% gain in February.”

April 14 – Bloomberg: 

“Alarm bells are ringing as Chinese citizens keep pouring their savings into wealth-management products, a market that has tripled to more than $4 trillion in a little over three years. Like mortgage-backed securities were in the U.S., these products are building blocks of a shadow-banking system that exists largely off banks’ balance sheets. In China, a history of bailouts has persuaded many investors that WMPs are implicitly guaranteed by the issuing bank or the state. The People’s Bank of China has taken note, as have other regulators. Issued by banks, WMPs have emerged as a key tool for lenders to attract funds. Investors are lured by yields of 3% to 5%, compared with 1.5% for one-year bank deposits. The WMPs invest in everything from bonds to property and can be exposed to struggling industries like mining. The banks can keep the WMPs off their balance sheets provided the products are not principal-guaranteed, which most are not. They can also hand over the products to non-banks to manage in return for a predetermined interest rate.” 

April 14 – Bloomberg (Livia Yap): 

“China’s savers are turning a deaf ear to government warnings about one of their favorite investments. Individuals hold nearly 90% of instruments known as wealth management products, a record share, because many believe they’re shielded from losses -- a view officials have tried hard to discourage. The assumption of safety has been buttressed by the fact that the large banks that issue WMPs have at times dipped into their own balance sheets to protect investors from losses or even outright defaults. That retail buyers have kept piling into WMPs even as corporate investors and financial institutions pared their exposure presents a quandary for Chinese policy makers preoccupied with controlling risks. While they want to stress that WMPs aren’t immune from losses to curb moral hazard, they must also avoid sparking a stampede for the exit among China’s millions of yield-hungry savers. ‘Regulators face the tough task of having to educate investors about the risks without actually having these risks play out,’ said Dexter Hsu, a Taipei-based analyst at Macquarie Research.”

April 17 – Bloomberg: 

“Donald Trump once called himself the ‘king of debt.’ Hui Ka Yan, China’s richest property mogul, has a much stronger claim to the throne. No one has gotten wealthier on the back of a corporate borrowing binge than Hui. His junk-rated China Evergrande Group is not only the nation’s most indebted developer, it also has the highest leverage among companies underlying the world’s largest fortunes. Hui, who has a net worth of $35 billion, is the 26th richest person in the Bloomberg Billionaires Index. Everyone above him for whom data is publicly available… has grown their fortune via companies with far more conservative balance sheets. In many ways, Hui is more emblematic of recent trends in global business than his richer peers. Worldwide corporate debt has swelled by 26% over the past decade to $132 trillion as companies have taken advantage of historically low interest rates to fund their growth. Like Evergrande, many have also used borrowed cash to repurchase shares and boost dividends.”

Brexit Watch:

April 14 – Financial Times (Wolfgang Münchau): 

“Last week’s European Council was dominated by Brexit. But it may be remembered for the visible cracks in the Franco-German relationship. Emmanuel Macron’s refusal to accept the German-led majority view to agree to a long Brexit extension is perhaps the most clear sign of an end to the love-in between the two countries. The French president’s uncompromising stance caught most German political observers off-guard. Some members of Angela Merkel’s entourage in Brussels expressed unbridled fury at Mr Macron’s insurrection. How dare he? What the debate in Germany misses is that Mr Macron owes little to the German chancellor. She managed to fend off most of his eurozone reforms.”

Europe Watch:

April 17 – Associated Press (Geir Moulson): 

“The German government… slashed its 2019 economic growth forecast for the country for the second time this year, halving its outlook to a meager 0.5%. The update came less than three months after the government cut its forecast to 1% from 1.8% in late January. Weaker growth elsewhere as a result of global trade tensions and uncertainty over Britain’s exit from the European Union has weighed on Germany’s prospects — along with the after-effects of its own weak performance at the end of last year, when output was dragged down largely by one-time factors related to new car emissions standards.”

April 17 – Bloomberg (Arne Delfs): 

“The German economy is turning into Europe’s underperformer, with the government now predicting 2019 will see the weakest expansion in six years. 
Amid slowing global momentum and concerns over Brexit and trade disputes, the economy ministry… cut its estimate to 0.5%, half the pace previously forecast. It’s the latest in a series of downward revisions from a 2.1% projection a year ago. Growth for next year is seen at 1.5%.”

Emerging Markets Watch:

April 17 – Bloomberg (Michelle Jamrisko and Catarina Saraiva): 

“Inflation that’s projected to reach an eyeball-popping 8 million percent this year has left Venezuela saddled with the title of the world’s most miserable economy. The embattled South American nation topped the rankings of Bloomberg’s Misery Index, which sums inflation and unemployment outlooks for 62 economies, for the fifth straight year.”

Global Bubble Watch:

April 16 – Financial Times (Chelsea Bruce-Lockhart and Joe Rennison): 

“Global corporate bond issuance has reached almost $747bn for the year…, according to… Dealogic, edging ahead of the previous record of $734bn issued over the same time period in 2017, which ended up being the biggest year on record for new debt sales. A sharp U-turn in global monetary policy, with the Federal Reserve pausing further interest rate increases in the US and the European Central Bank committing to reviving growth, has breathed life into corporate debt markets.”

Japan Watch:

April 15 – Reuters (Tetsushi Kajimoto): 

“Bank of Japan Governor Haruhiko Kuroda… vowed to ‘patiently continue’ the central bank’s ‘powerful’ monetary easing as it was taking longer than previously thought to accelerate inflation to its 2% target. Prices remain weak despite a tight labor market, but the momentum toward 2% inflation is intact, Kuroda told lawmakers… While continuing its massive monetary stimulus, the BOJ will examine whether the decline in profits at regional banks may undermine financial intermediation, Kuroda added…”

Fixed-Income Bubble Watch:

April 17 – Financial Times (Joe Rennison): 

“While most areas of the debt markets have rebounded sharply from a slump in prices at the end of 2018, one corner remains under pressure: collateralised loan obligations. CLOs bundle up loans that then back a series of bonds and equity, with varying degrees of risk and return for investors. Pristine, triple-A slices of new debt have languished behind the recovery seen in other markets such as investment grade debt, junk bonds and risky leveraged loans, with yields rising to an average of 1.44 percentage points above the interest rate benchmark Libor. That is the highest it has been in more than two years. The drab performance in this $600bn market reflects a stark change in appetite among the fund managers, insurance companies and international banks that had piled into one of the hottest corners of debt markets in recent years.”

Geopolitical Watch:

April 18 – Reuters (Yimou Lee): 

“China was stepping up a campaign to exert influence over Taiwan, including its upcoming presidential election, a senior U.S. official said…, at a time of heightened tension between the self-ruled island and Beijing. China has increased military and diplomatic pressure on Taiwan, whose president, Tsai Ing-wen, Beijing suspects of pushing for the island’s formal independence, a red line for China which has never renounced the use of force to bring Taiwan under its control. The island is gearing up for a presidential election in January that could shake up the political landscape, with contenders including Terry Gou, chairman of Apple supplier Foxconn. ‘They’ve obviously stepped up campaigns of disinformation and direct influence against Taiwan,’ James Moriarty, chairman of the American Institute in Taiwan, told Reuters.”

April 14 – Reuters (Yimou Lee): 

“Chinese bombers and warships conducted drills around Taiwan on Monday, the latest military maneuvers near the self-ruled island that a senior U.S. official denounced as ‘coercion’ and a threat to stability in the region. The United States has no formal ties with Taiwan but is bound by law to help provide the island with the means to defend itself and is its main source of arms.”

April 16 – Reuters (Ulf Laessing and Ahmed Elumami): 

“At least four people were killed in heavy shelling in the Libyan capital Tripoli, an official said on Wednesday as Europe and the Gulf were divided over a push by eastern forces commander Khalifa Haftar to seize the city. Nearly two weeks into its assault, the veteran general’s eastern-based Libyan National Army (LNA) is stuck in the city’s southern outskirts battling armed groups loyal to the internationally recognized Tripoli government.”

April 16 – Reuters (David Brunnstrom): 

“Satellite images from last week show movement at North Korea’s main nuclear site that could be associated with the reprocessing of radioactive material into bomb fuel, a U.S. think tank said… Any new reprocessing activity would underscore the failure of a second summit between U.S. President Donald Trump and North Korean leader Kim Jong Un in Hanoi in late February to make progress toward North Korea’s denuclearization.”

April 12 – Reuters (Natalia A. Ramos Miranda): 

“U.S. Secretary of State Mike Pompeo… defended sanctions on Venezuela and said the United States would not ‘quit the fight’ in the socialist-run Latin American nation which is spiraling into deepening economic and political crisis. Pompeo is on a three-day trip to Chile, Paraguay and Peru, a clutch of fast-growing countries in a region where Washington’s concerns are focused on China’s growing presence as well as the Venezuelan crisis.”