Economic News for the week ending April 26, 2019

Saturday, April 27, 2019
Weekly Commentary: 
Officially on “Periphery” 
Contagion Watch
by Doug Noland


full column here:
http://creditbubblebulletin.blogspot.com/2019/04/weekly-commentary-officially-on.html


My highly edited version is below:



This week saw
all-time highs in the: 
S&P500, 
Nasdaq Composite, 
Nasdaq100, and 
Philadelphia Semiconductor Index



Microsoft's market capitalization
reached $1 trillion for the first time. 


First quarter GDP 
was reported at a 
stronger-than-expected 
3.2% pace.


The Shanghai Composite 
was hammered 5.6% 
this week. 





For the week 
ending
April 26, 2019:





Global  Stocks:
S&P500 gained 1.2% (up 17.3% y-t-d),
Dow Industrials little changed (up 13.8%)
Dow Utilities jumped 1.5% (up 10.7%)
Dow Transports fell 1.0% (up 18.7%)
S&P 400 Midcaps gained 1.0% (up 18.7%) 
Small cap Russell 2000 jumped 1.7% (up 18.0%)
Nasdaq100 advanced 1.8% (up 23.6%)
Biotechs rallied 2.5% (up 12.8%). 

While bullion recovering $11, 
the HUI gold stock index 
was unchanged (down 0.1%


U.K.'s FTSE declined 0.4% (up 10.4% y-t-d).

Japan's Nikkei 225 added 0.3% (up 11.2%). 

France's CAC40 slipped 0.2% (up 17.7%).

German DAX gained 0.8% (up 16.6%)

Spain's IBEX 35 declined 0.8% (up 11.3%)

Italy's FTSE MIB fell 1.0% (up 18.6%)

Brazil's Bovespa gained 1.8% (up 5.7%)

Mexico's Bolsa fell 1.2% (up 8.0%)

South Korea's Kospi dropped 1.7% (up 6.8%)

India's Sensex dipped 0.2% (up 8.3%)

China's Shanghai sank 5.6% (up 23.8% year to date)

Turkey's Istanbul National 100 dropped 2.1% (up 3.8%). 

Russia's MICEX little changed (up 8.2%).



US  Bonds  and  Mortgages:
Ten-year Treasury yields 
declined six bps to 2.50% (down 19bps).

Thirty-year Treasury yields 
fell four bps to 2.92% (down 9bps). 

Benchmark Fannie Mae MBS yields 
dropped eight bps to 3.23% (down 26bps).

Freddie Mac 30-year fixed mortgage rates 
gained three bps to 4.20% (down 38bps y-o-y). 

Fifteen-year rates 
added two bps to 3.64% (down 38bps). 

Five-year hybrid ARM rates 
slipped a basis point to 3.77% (up 3bps). 

Jumbo mortgage 30-yr fixed rates 
down nine bps to 4.25% (down 44bps).

Federal Reserve Credit 
Over the past year,
contracted 10.4%. 

M2 (narrow) "money" supply 
 rose 4.0%, over the past year. 



Currency Watch:
The U.S. dollar index gained 0.6% to 98.006 (up 1.9% y-t-d). 



Commodities Watch:
Bloomberg Commodities Index declined 1.2% this week (up 4.9% y-t-d). 

Spot Gold rallied 0.9% to $1,286 (up 0.3%). 

Silver increased 0.3% to $15.085 (down 2.9%). 

Crude declined 70 cents to $63.30 (up 39%). 

Gasoline gained 1.4% (up 59%)

Natural Gas recovered 3.6% (down 12%). 

Copper fell 1.1% (up 10%). 

Wheat declined 1.2% (down 12%). 

Corn dropped 1.6% (down 4%).



Market Instability Watch:
April 22 – Financial Times (Robin Wigglesworth): 
“The Vix index — Wall Street’s ‘fear gauge’ in popular parlance — recently slipped below the 12-point mark it last touched in the halcyon days of mid-2018. 
But it is not the only measure of calm. There has been a remarkable collapse in volatility across asset classes and regions this year. 
The volatility indices of UK, European, Chinese and Japanese stocks have all sagged back to last year’s lows, and are not far off their 2017 nadirs. Currency and bond volatility gauges are also sedate. Bank of America’s cross-asset volatility index has only been lower for brief periods in early 2018, 2014 and 2007.”



April 23 – Bloomberg (Justina Lee): 
“Growth shares have surged to the highest levels versus cheap equities since the dot-com bubble, 
underscoring fierce demand for companies less exposed to the gyrations of the economic cycle. Stocks posting a strong return on equity are near their most expensive since 1990, according to Sanford C. Bernstein & Co. To cap it all, 
tech multiples have jumped toward 2009 highs relative to the broader gauge.”



Trump Administration Watch:
April 23 – CNBC (Emma Newburger): 
“President Donald Trump appeared to reverse course on Harley Davidson…, pledging to retaliate against ‘unfair’ European Union tariffs that the company partially blamed for its nearly 27% drop in first-quarter profit. 
Trump, who called for a boycott against the motorcycle company last year amid a spat over steel, said that the EU tariffs have forced Harley to move U.S. jobs overseas. ‘So unfair to U.S. We will Reciprocate!’ he said in a tweet.”


April 19 – Reuters (Kanishka Singh): 
“U.S. intelligence has accused Huawei Technologies of being funded by Chinese state security, The Times said on Saturday, adding to the list of allegations faced by the Chinese technology company in the West. 
The CIA accused Huawei of receiving funding from China’s National Security Commission, the People’s Liberation Army and a third branch of the Chinese state intelligence network, the British newspaper reported, citing a source.”






U.S. Bubble Watch:
April 26 – Bloomberg (Katia Dmitrieva, Reade Pickert and Jeff Kearns): 
“While gross domestic product surpassed all analyst expectations, kicking off the year with a 3.2% advance, more than half the gain came from the volatile trade and inventories components that may soon reverse. 
Underlying pillars of growth weakened. Consumer spending… cooled for the third straight quarter, and nonresidential business investment grew at the second-slowest pace since Trump took office. The question remains just how strong is the world’s largest economy.”



April 22 – Associated Press (Andrew Taylor): 
“Medicare is pointed toward insolvency by 2026, according to a report… by the government’s overseers of Medicare and Social Security.
It paints a sobering picture of the programs, though it’s relatively unchanged from last year’s update. Social Security would become insolvent in 2035, one year later than previously estimated. Both programs will need to eventually be addressed to avert automatic cuts should their trust funds run dry… Social Security is the government’s largest program, costing $853 billion last year, with another $147 billion for disability benefits. Medicare’s hospital, outpatient care, and prescription drug benefits totaled about $740 billion. Taken together, the two programs combined for 45% of the federal budget, excluding interest payments on the national debt.”



April 26 – Bloomberg (Jenny Surane): 
“Red flags are flying in the credit-card industry after a key gauge of bad debt jumped to the highest level in almost seven years. 
The charge-off rate -- the percentage of loans companies have decided they’ll never collect -- rose to 3.82% in the first three months of 2019, the highest since the second quarter of 2012… And loans 30 days past due, a harbinger of future write-offs, increased at all seven of the largest U.S. card issuers. There’s been a ‘degradation’ in credit quality for certain customers, according to Richard Fairbank, chief executive officer at Capital One… Fairbank said some customers with negative credit events during the financial crisis are now seeing those problems disappear from their credit-bureau reports. ‘We may be looking at data that might not paint the full picture of a consumer’s credit history,’ Fairbank said… ‘Part of the context for our caution has been not only how deep we are in the cycle but, also, this is the time period when there is less information than there once was.’”


April 23 – Reuters (Lucia Mutikani): 
“Sales of new U.S. single-family homes rose to a near 1-1/2-year high in March… New home sales increased 4.5% to a seasonally adjusted annual rate of 692,000 units last month, the highest level since November 2017… 
Economists polled by Reuters had forecast new home sales, which account for 11.7% of housing market sales, decreasing 2.5% to a pace of 650,000 units in March… The median new house price dropped 9.7% to $302,700 in March from a year ago, the lowest level since February 2017. The drop was because of an increase in the share of homes sold in the $200,000-$300,000 price range.”



April 22 – CNBC (Diana Olick): 
“Sales of existing homes were weaker than expected in March. But behind the headline numbers, an even more disconcerting dynamic is playing out. Both the high end and the low end of the market are struggling due to completely different factors. 
Sales of the lowest-priced homes—those below $100,000—were down 13% in March compared with a year ago… This weakness on the low end started two years ago, as demand began to soar amid very tight supply. The inventory of cheaper homes continues to drop for two reasons: builders are not focused on the sector and investors snapped up lower-end homes during the last housing crisis, turning them into rentals. About 5 million homes were added to the rental stock and very few of them were replaced in the for-sale market. In contrast, sales of high-end homes were soaring in 2017. Million-dollar-plus sales were up nearly 31% that year. This March, sales in that price class were down 11% year over year, even though there are plenty of those homes for sale.”



April 22 – Associated Press (Janie Har):
 “San Francisco’s renowned waterfront hosts joggers, admiring tourists and towering condos with impressive views. It could also become the site of a new homeless shelter for up to 200 people. Angry residents have packed public meetings, jeering at city officials and even shouting down Mayor London Breed over the proposal. They say they were blindsided and argue billionaire Twitter executive Jack Dorsey and other tech executives who support the idea should lobby city officials to build a shelter by their homes. The waterfront uproar is among recent examples of strife in an expensive city that is both overwhelmed by tech wealth and passionate about social justice. San Francisco companies Pinterest and Lyft recently went public, and Uber and Slack are coming soon, driving fears that newly minted millionaires will snap up the few family homes left for under $2 million.”


April 23 – Reuters (Richard Leong and Trevor Hunnicutt): 
“ Gasoline pump prices have already jumped about 25% this year, the fastest rate in three years… Some analysts expect the national average pump price, currently near $2.85 a gallon, will climb above $3 a gallon for the first time since 2014. Few goods prices aggravate U.S. consumers as much as high gasoline prices.”



April 25 – Gallup (Julie Ray): 
“Even as their economy roared, more Americans were stressed, angry and worried last year than they have been at most points during the past decade.
Asked about their feelings the previous day, the majority of Americans (55%) in 2018 said they had experienced stress during a lot of the day, nearly half (45%) said they felt worried a lot and more than one in five (22%) said they felt anger a lot. Each of these figures matches or tops previous highs in the U.S. Additionally, Gallup's latest annual update on the world's emotional state shows Americans were more likely to be stressed and worried than much of the world.”



April 22 – Bloomberg (Suzanne Woolley): 
“Many of America’s elderly are now forgoing retirement: They don’t have enough money. 
Rickety social safety nets, inadequate retirement savings plans and sky high health-care costs are all conspiring to make the concept of leaving the workforce something to be more feared than desired. For the first time in 57 years, the participation rate in the labor force of retirement-age workers has cracked the 20% mark, according to… United Income. As of February, the ranks of people age 65 or older who are working or seeking paid work doubled from a low of 10% back in early 1985. The biggest spike in employment has gone to college-educated older workers; the share of all employees age 65 or older with at least an undergraduate degree is now 53%, up from 25% in 1985.”



China Watch:
April 23 – Bloomberg: 
“The debt pain engulfing some of China’s big conglomerates has intensified in recent days 
with more bond defaults, asset freezes and payment uncertainties. China Minsheng Investment Group Corp. said last week cross defaults had been triggered on dollar bonds worth $800 million.
Lenders to HNA Group Co.’s CWT International Ltd. seized control of assets in Singapore, China and the U.S. after the unit failed to repay a loan… Citic Guoan Group Co., backed by a state-owned company, isn’t certain whether it can pay a bond coupon due on April 27. The increased repayment stress sweeping some of China’s biggest corporations is a sign that the liquidity crunch -- induced by a two-year long deleveraging campaign -- is far from over despite an improving economy. Bonds from at least 44 Chinese companies totaling $43.7 billion faced repayment pressure as of last week, a 25% jump from the tally at the end of March… ‘The debt crisis at conglomerates can have more of a contagion impact on the corporate bond market compared with an average corporate default because those issuers typically have more creditors and large amount of outstanding debt,’ said Li Kai, a multi-strategy investment director at Genial Flow Asset Management Co.”



April 26 – Bloomberg: “Chinese President Xi Jinping addressed some 40 world leaders at the Belt and Road forum in Beijing, but his speech may have been aimed at a head of state not in the audience: U.S. President Donald Trump. 
Xi spent a large portion of his speech Friday 
addressing Chinese domestic reforms, pledging to address state subsidies, protect intellectual property rights, allow foreign investment in more sectors and avoid competitive devaluation of the yuan. All four are issues the U.S. is addressing in trade talks with Beijing. ‘We will establish a binding enforcement system for international agreements,’ Xi said, adding that China will standardize all levels of government in terms of issuing administrative licenses and market regulation, and also ‘eliminate improper rules, subsidies and practices that impede fair competition and distort the market.’”



April 24 – Bloomberg (Tian Chen and Wenjin Lv): 
“China’s government bonds, among some of the world’s top-performing debt last year, have tumbled so much over the past month they’ve become the worst bets in Asia-Pacific.
The yield on 10-year government bonds has surged more than 30 bps since late March, as wagers on broad monetary easing receded due to a better economic outlook and a rally in stocks. Singapore’s sovereign notes were the second-worst performer, followed by the Philippines.”



April 21 – Bloomberg: 
“China’s cash-strapped companies are going to new lengths to raise money from the booming stock market, even if it comes at a cost to existing shareholders. 
Nine firms have said they plan to raise a combined 40.5 billion yuan ($6bn) through rights issues since January, almost twice the amount announced all of last year… That includes Tianqi Lithium Corp. and Xinjiang Tianrun Dairy Co., whose shares slumped 5.4% and 10% immediately after their respective announcements. Chinese companies face restrictions on how much, how often and at what price they can sell new shares through private placements, the hitherto most popular method to raise money via the equity market. That’s sent them on a hunt for alternative funding tools, making the most of this year’s surging risk appetite.”



April 22 – Financial Times (Gregory Meyer, Hudson Lockett and Andres Schipani): “As millions of pigs disappear in China, the rest of the world is beginning to notice. The country’s pig population, the largest in the world, is likely to shrink by almost a third, losing 130m animals as African swine fever ravages the country’s farms. 
The outbreak will reshape protein markets across the globe, driving up meat prices as China, the leading consumer and producer of pork, braces for years of shortages and disruptions to its food supply. ‘This has been a game-changer,’ says Jais Valeur, group chief executive at Danish Crown, Europe’s leading pork processor. ‘We’re only starting to see the real impact of African swine fever.’ The ASF virus, endemic to Africa, is fatal to pigs and has no cure. The current wave of cases began in Georgia in 2007 and spread to parts of eastern Europe and Russia before reaching China in August.”


April 24 – Bloomberg (Alfred Cang and Anna Kitanaka): 
“In almost 40 years of analyzing commodity markets, Arlan Suderman says he has never witnessed an industry-jolting event as dramatic as the contagion spreading across China’s hog farms. 
The chief commodities economist at INTL FCStone Inc… has been warning clients about the impact of African swine fever, which he says is not only under-reported but will spur a restructure of China’s entire farm industry and trigger an escalation in meat prices globally. Most react in disbelief, Suderman said, but the situation is likely to worsen before it gets better.”



April 22 – Financial Times (Tom Hancock): 
“A massive scheme to demolish nearly 25m homes in designated ‘slum’ areas in China — forcing the relocation of some 100m people over the past four years — is straining local government finances amid a downturn in land sales. 
Residents of Qiangbei village in the central Chinese city of Jiaozuo say the government has been destroying homes without compensating those evicted with new housing or money. ‘The national policy is to build relocation housing before demolition, but here it’s the opposite way around,’ said Zhang Xiaoqin, a… farmer who was collecting the last items from her two-storey village house ahead of demolition. The villagers’ plight reflects difficulties some municipalities in China have had in meeting spending obligations as they struggle under a collective debt burden that reached Rmb40.3tn ($6tn) last year, according to S&P Global.”


Europe Watch:
April 23 – Bloomberg (Ferdinando Giugliano): 
“The euro zone has only recently recovered from a double-dip recession, but there are already questions about how prepared it would be for a new crisis. 
All eyes are on the European Central Bank, which has been the strongest line of defense against an economic slowdown. While pessimists worry that the ECB has few tools left if it needs to revive growth — given the region’s already rock-bottom interest rates — such concerns are overdone. A far bigger risk is the replacement of Mario Draghi as the central bank’s president this year. Will the new chief be willing to use all of the instruments available to take the monetary union out of any crisis? It’s far from certain.”



April 24 – Reuters (Paul Carrel and Jörn Poltz): 
“German business morale deteriorated in April, bucking expectations for a small improvement, as trade tensions hurt the industrial engine of Europe’s largest economy… The Munich-based Ifo economic institute said… its business climate index fell to 99.2 in April from an upwardly revised 99.7 in March, the first rise after six straight declines. The consensus forecast for a rise to 99.9. ‘March’s gentle optimism regarding the coming months has evaporated,’ Ifo President Clemens Fuest said… ‘The German economy continues to lose steam.’”



Emerging  Markets  Watch:
April 25 – Financial Times (Adam Samson): 
“Turkey’s financial markets suffered a new blow on Thursday as the country’s central bank unnerved investors by signaling a growing reluctance to raise interest rates and disclosed a further drop in its foreign currency reserves. 
The monetary policy decision, along with fresh data that show the country’s foreign currency coffers had dropped $1.8bn last week, deepened worries about the country’s deteriorating financial defences.”



Global Bubble Watch:
April 26 – Financial Times (Peter Campbell): 
“Global gloom swept the auto industry this week with Daimler and Renault becoming the latest in a string of carmakers to report falling sales and squeezed margins. Their results for the first quarter follow falling sales at Peugeot-owned PSA and a sharp earnings drop at Volvo, while Nissan this week slashed its profit forecasts by a fifth… Car sales have slumped in China and emerging markets, while Europe and the US are stagnating, as the global automotive cycle eases into reverse following years of strong growth. At the same time as slowing sales, carmakers are facing rising costs from developing electric and hybrid models to meet emissions targets, as well as new technologies such as self-driving vehicles.”



April 24 – Reuters (Joori Roh and Cynthia Kim): 
“South Korea’s economy unexpectedly shrank in the first quarter, marking its worst performance since the global financial crisis, as companies slashed investment and exports slumped in response to Sino-U.S. trade tensions and cooling Chinese demand… 
Gross domestic product (GDP) in the first quarter declined a seasonally adjusted 0.3% from the previous quarter, the worst contraction since a 3.3% drop in late 2008…”



April 25 – Bloomberg (Fergal O'Brien): 
“The global trade funk is dragging on, with new data on Thursday showing volumes are falling at the fastest pace since the depths of the financial crisis. 
Calculations by Bloomberg based on the Dutch statistics office’s trade monitor show a 1.9% drop in the three months through February compared with the previous three months. That marks the steepest drop since the period through May 2009.”





Fixed-Income Bubble Watch:
April 25 – Wall Street Journal (Sam Goldfarb): 
“A sharp rally in speculative-grade corporate bonds 
has pushed the average yield on those bonds below that of comparably rated loans, an unusual market distortion reflecting an improved U.S. economic outlook and the Federal Reserve’s retreat from tightening monetary policy. Bond yields… typically exceed those of loans because holders of the latter are typically paid first in bankruptcies. This year, yields on both are down amid a broad rally in riskier assets. Still, yields on bonds are down more in large part because the floating coupons of loans have become less appealing now that the Fed is no longer raising interest rates. At the same time, investors see little reason to seek shelter in loans given a still-benign economic environment and low rate of corporate defaults. As of Tuesday, the average yield to maturity of bonds in the Bloomberg Barclays high yield index was 6.51%, down from 8% at the end of last year, while the average yield of loans in the S&P/LSTA Leveraged Loan index was 6.53%, down from 7.23%.”






Geopolitical Watch:
April 24 – Reuters (Hyonhee Shin, Joyce Lee, Maria Kiselyova, Darya Korsunskaya and Maxim Rodionov): 
“Russian President Vladimir Putin said after holding his first face-to-face talks with North Korean leader Kim Jong Un on Thursday that U.S. security guarantees would probably not be enough to persuade Pyongyang to shut its nuclear program.”


April 20 – Reuters (Joori Roh and Josh Smith): 
“North Korea has criticized U.S. National Security Adviser John Bolton’s ‘nonsense’ call for Pyongyang to show that it’s serious about giving up its nuclear weapons, the second time it has criticized a leading U.S. official in less than a week. 
U.S. President Donald Trump has said he is open to a third summit with North Korean leader Kim Jong Un, but Bolton told Bloomberg… there first needed to be ‘a real indication from North Korea that they’ve made the strategic decision to give up nuclear weapons’.”



April 23 – Financial Times (Lucy Hornby, Anjli Raval, Aime Williams and Najmeh Bozorgmehr): 
“China has hit out at a US decision to tighten restrictions on oil exports from Iran, warning that the move could destabilize the Middle East even as other buyers scramble to fall into line with Washington. 
Beijing emerged quickly… as the chief opponent of a Trump administration move to scrap waivers that had enabled China and several other countries to buy Iranian oil despite US sanctions. Chinese oil companies are among Iran’s biggest customers and China’s foreign ministry lodged a formal protest with the US over the decision, according to the ministry spokesman Geng Shuang… ‘The decision from the US will contribute to volatility in the Middle East and in the international energy market,’ he said.”


April 22 – Bloomberg (Arsalan Shahla and Ladane Nasseri): 
“Iran will close the Strait of Hormuz, a waterway vital for global oil shipments, if the country is prevented from using it, a senior military official said… in what appears to be a response to the U.S. plan to end waivers on Iranian oil exports. 
‘If we are prevented from using it, we will close it,’ the state-run Fars news agency reported, citing Alireza Tangsiri, head of the Revolutionary Guard Corps navy force. ‘In the event of any threats, we will not have the slightest hesitation to protect and defend Iran’s waterway.’”


April 22 – Financial Times (Anjli Raval and Ed Crooks): 
“The US has stepped up pressure on Tehran 
by deciding to end sanctions waivers that have allowed big economic powers to continue importing crude from Iran, a move that raises questions about the ability of other oil producers to fill the gap. 
The move helped push up the price of Brent crude…, which climbed above $74 a barrel for the first time in six months this week. The US… restated its desire to bring Iran’s oil exports down to ‘zero’ — an ambition it announced last November when it reintroduced sweeping anti-Iran economic sanctions. Although exports have dropped since then they did not vanish, partly because of the exemptions that will now be phased out. Iran’s exports averaged about 2.5m barrels a day before the US decision to reimpose curbs… In the past five months its exports have dropped to 1m-1.3m barrels per day, according to estimates by consultancy FGE Energy. Tanker-tracking websites suggest Iran has been secretly exporting rather more: about 1.9m b/d.”