Economic News for the week ending June 14, 2019

Saturday, June 15, 2019

Weekly Commentary: 

Q1 2019 Z.1 "Flow of Funds"

by Doug Noland

The full article is here:

http://creditbubblebulletin.blogspot.com/2019/06/weekly-commentary-q1-2019-z1-flow-of.html

My summary 

of parts that 

interested me,

is below:

Federal 

Reserve 

Bank data:

Q1 Federal Expenditures 

were up 5.9% year-over-year 

to SAAR $4.659 Trillion

Q1 Federal Receipts 

were up 3.9% y-o-y 

to $3.564 Trillion. 

State & Local Expenditures 

were up 2.4% y-o-y 

to SAAR $2.862 Trillion. 

State & Local Receipts 

were up 3.0% y-o-y

to $2.641 Trillion. 

Household Financial Asset holdings 

surged $4.238 TN to a record $88.895 TN, 

or 422% of GDP. 

This ratio is higher than prior peaks of

379% of GDP during Q3 2017, and 

359% of GDP during Q1 2000. 

Federal Reserve Credit

over the past year,

contracted 11.0%. 

M2 (narrow) "money" supply 

rose 4.3%, over the past year. 

For  the  week  ending

    June  14,  2019:

GLOBAL  STOCK  MARKETS:

S&P500 up 0.5% (up 15.2% y-t-d)

Dow Industrials up 0.4% (up 11.8%)

Dow Utilities gained 1.1% (up 14.7%)

Dow Transports up 1.6% (up 12.4%)

S&P 400 Midcaps up 0.4% (up 14.2%)

Small cap Russell 2000 up 0.5% (up 12.9%). 

Nasdaq100 up 0.8% (up 18.2%)

Biotechs down 0.9% (up 6.4%)

With gold bullion little changed, 

the HUI gold stock index

was up 2.8% (up 8.2%).

 U.K.'s FTSE up 0.2% (up 9.2% y-t-d).

Japan's Nikkei up 1.1% (up 5.5% y-t-d).

France's CAC40 little changed (up 13.5%)

German DAX up 0.4% (up 14.6%)

Spain's IBEX 35 down 0.5% (up 7.7%)

Italy's FTSE MIB up 1.2% (up 12.5%)

Brazil's Bovespa up 0.2% (up 7.7%)

Mexico's Bolsa down 0.4% (up 3.6%)

South Korea's Kospi up 1.1% (up 2.7%)

India's Sensex down 0.4% (up 9.4%)

China's Shanghai up 1.9% (up 15.6%)

Turkey's Istanbul National 100 down 3.2% (down 0.5%). 

Russia's MICEX up 0.4% (up 15.6%).

US  BONDS:

Ten-year Treasury yields 

were unchanged at 2.08% 

   (down 62bps). 

Thirty-year Treasury yields

added one basis point to 2.59% 

   (down 43bps). 

Benchmark Fannie Mae MBS yields

 jumped 12 bps to 2.87% 

   (down 62bps).

US  MORTGAGES:

Freddie Mac 30-year fixed mortgage rates 

were unchanged at 3.82% 

   (down 80bps y-o-y). 

Fifteen-year rates 

declined two bps to 3.26% 

   (down 81bps). 

Five-year hybrid ARM rates 

slipped a basis point to 3.51% 

   (down 32bps)

Jumbo mortgage 30-yr fixed rates 

up two bps to 4.17% 

   (down 44bps).

Currency  Watch:

The U.S. dollar index 

gained 1.1% to 97.572 

   (up 1.4% y-t-d). 

Commodities  Watch:

Bloomberg Commodities Index rallied 0.9% this week (up 1.1% y-t-d).

 Spot Gold was little changed at $1,342 (up 4.6%). 

Silver fell 1.5% to $14.803 (down 4.7%). 

WTI crude dropped $1.48 to $52.51 (up 16%). 

Gasoline slipped 0.4% (up 31%)

Natural Gas recovered 2.1% (down 19%). 

Copper was little changed (unchanged). 

Wheat surged 6.7% (up 7%). 

Corn jumped 9.0% (up 21%).

Market  Instability  Watch:

June 9 – Wall Street Journal (Joe Wallace): 

“Gold is on its longest winning streak in almost a year and a half, the latest signal that investors are preparing for the Federal Reserve to lower interest rates amid signs of a slowdown in economic growth. 

The safe-haven metal rose for eight consecutive trading sessions through Friday, its longest run since January 2018. Prices tend to increase when investors are growing anxious about the U.S. economy and seeking more stable alternatives to stocks, oil and other risky assets.”

June 11 – Bloomberg (Tian Chen and Amy Li): 

“Hong Kong stocks tumbled and the currency soared as interbank interest rates jumped amid protests that closed roads in the city’s financial district. 

The Hang Seng Index fell 1.7% at the close, with local property developers among the biggest losers, while the Hong Kong dollar strengthened as much as much as 0.26%, the largest gain in seven months. The one-month interbank borrowing cost, known as Hibor, rose 29 bps to about 2.42%, the highest since 2008.”

June 12 – Financial Times (Adam Samson): 

“Germany has sold medium-term Bunds at the lowest yield on record in the latest sign of how the uncertain outlook for Europe’s economy has depressed borrowing costs. 

The country auctioned 10-year Bunds at a yield of minus 0.24%... The yield was well below the minus 0.07% at the previous 10-year auction in late May. The previous trough of minus 0.11% was recorded in 2016.”

June 10 – Bloomberg (Robert Brand):

 “Foreign investors dumped the most South African bonds on record on Friday amid concern the government will have to increase borrowing to rescue the state-owned electricity company, Eskom Holdings SOC Ltd. 

Non-residents sold a net 9.6 billion rand ($644 million) securities, the most since Bloomberg started compiling the data in 1996… The country’s current-account deficit is among the widest in emerging markets and the outflows threaten to weigh on its currency, which has already weakened more than 5% over the past month.”

Trump  Administration  Watch:

June 11 – Bloomberg (Justin Sink): 

“President Donald Trump said he’s personally holding up a trade deal with China and that he won’t complete the agreement unless Beijing returns to terms negotiated earlier in the year. ‘

It’s me right now that’s holding up the deal,’ Trump said… ‘And we’re going to either do a great deal with China or we’re not going to do a deal at all.’”

June 11 – Bloomberg (Shawn Donnan): “President Donald Trump is eager to crow about the economic weapon he wielded against Mexico to win concessions on immigration: ‘Tariffs are a great negotiating tool,’ he declared… Now, Trump says, it’s China’s turn to cower. 

Yet to visit China these days is to encounter the limits of his punch-them-in-the-nose strategy. Even as Trump threatens to raise import duties to painful levels, 10 days of meetings with Chinese officials, academics, entrepreneurs and venture capitalists revealed a nation rewriting its relationship with the U.S. and preparing to ride out a trade war. Trump is seeking to increase pressure on Xi Jinping, his Chinese counterpart, before this month’s G-20 summit, but Trump may already have pushed too far. Last month, Xi exhorted his countrymen to a second Long March, an echo of Mao’s seminal strategy to preserve the communist revolution. What Xi didn’t say was that the new march… is already underway. ‘This is definitely an inflection point,’ said Tom Liu, chief executive officer of Shanghai-based data company ChinaScope Financial Ltd. ‘People are seeing an indefinite trade shock.’ And they are planning for it.”

June 14 – Wall Street Journal (Courtney McBride, Rory Jones, Benoit Faucon and Costas Paris): 

“The U.S. blamed Iran for attacks on two tankers in the Gulf of Oman on Thursday, saying the assaults were the latest in a series of hostile actions meant to disrupt the flow of oil. 

‘Taken as a whole, these unprovoked attacks present a clear threat to international peace and security, a blatant assault on the freedom of navigation, and an unacceptable campaign of escalating tension by Iran,’ Secretary of State Mike Pompeo said, vowing the U.S. would defend itself and its partners.”

June 9 – Reuters (Sabine Siebold and Francois Murphy): 

“Iran has followed through on a threat to accelerate its production of enriched uranium, 

the head of the U.N. atomic watchdog said on Monday, departing from his usual guarded language to say he was worried about increasing tension.”

June 12 – Reuters (Steve Holland and Timothy Gardner): 

“President Donald Trump said… he was considering sanctions over Russia’s Nord Stream 2 natural gas pipeline project — which the United States has told European companies to avoid — and warned Germany against being dependent on Russia for the fuel. 

‘We’re protecting Germany from Russia and Russia is getting billions and billions of dollars from Germany,’ Trump told reporters at an appearance with Polish President Andrzej Duda…”

U.S.  Bubble  Watch:

June 12 – Bloomberg (Sarah McGregor): 

“The U.S. budget deficit widened to $738.6 billion in the first eight months of the fiscal year, a $206 billion increase from a year earlier, despite a revenue boost from President Donald Trump’s tariffs on imported merchandise. The shortfall was 38.8% more than the same period a year ago… So far in the 2019 fiscal year that began Oct. 1, 2019, 

a revenue increase of 2.3% hasn’t kept pace with a 9.3% rise in spending.”

June 12 – Reuters (Jason Lange): 

“Washington posted a $208 billion budget deficit in May as a modest increase in revenues failed to make up for higher spending on the military and social welfare programs like Medicare… The federal deficit was the highest ever for the month of May and wider than the average forecast of $185.5 billion… Government spending rose to $440 billion, up 21% from May of 2018. Receipts increased to $232 billion, up 7% from the same month last year… The deficit for the fiscal year to date was $739 billion, compared with $532 billion in the comparable period the year earlier.”

June 12 – CNSNews (Jason Lange): 

“For the first time in the history of the United States, the federal government has spent more than $3 trillion in the first eight months of the fiscal year… 

The record $3,013,541,000,000 that the federal government spent in October through May of fiscal 2019 was $181,157,920,000 more than the previous record of $2,832,383,080,000… that the federal government spent in October through May of fiscal 2009… Even with the second highest tax revenues ever collected in the first eight months of the fiscal year, the federal government still ran a deficit for those eight months of $738,639,000,000.”

June 11 – New York Times (Matt Phillips): 

“A decade after reckless home lending nearly destroyed the financial system, the business of making risky loans is back. ... It’s called shadow banking, and it is a key source of the credit that drives the American economy. With almost $15 trillion in assets, 

the shadow-banking sector in the United States is roughly the same size as the entire banking system of Britain, the world’s fifth-largest economy. In certain areas — including mortgages, auto lending and some business loans — shadow banks have eclipsed traditional banks, which have spent much of the last decade pulling back on lending in the face of stricter regulatory standards aimed at keeping them out of trouble.”

June 12 – CNBC (Jeff Cox): 

“The trade war and global slowdown are combining to trigger a sharp drawdown in profits for U.S. multinational companies. 

Companies that derive more than half their sales outside the U.S. are expected to see a 9.3% slump in second-quarter earnings as the reporting season looms about a month away, according to FactSet estimates that see the S&P 500 broadly reporting a 2.3% decline. That means big companies like Apple and Boeing that have far-flung operations and count on business and lower costs from other countries as a big ingredient in their recipe for success. Of the S&P 500′s 11 sectors, information technology is expected to see the biggest drop-off in earnings at 11.8%.”

June 12 – New York Times (Martha C. White): 

“A new battlefront has opened in the trade war between the United States and China: the $1.6 trillion American travel industry. 

A Los Angeles hotel long popular with Chinese travelers saw a 23% decline in visits last year and another 10% so far this year. In New York City, spending by Chinese tourists, who spend nearly twice as much as other foreign visitors, fell 12% in the first quarter. And in San Francisco, busloads of Chinese tourists were once a mainstay of one fine jewelry business; over the last few years, the buses stopped coming. Figures from the Commerce Department’s National Travel and Tourism Office show a sharp decline in the number of tourists from China last year. Industry professionals worry that the drop-off is picking up speed this year, affecting not just airlines, hotels and restaurants, but also retailers and attractions like amusement parks and casinos.”

June 13 – Bloomberg (Ben Steverman): 

“One of the toughest problems retirees face is making sure their money lasts as long as they do. 

From the U.S. to Europe, Australia and Japan, retirement account balances aren’t increasing fast enough to cover rising life expectancy, the World Economic Forum warns… The result could be workers outliving their savings by as much as a decade or more. ‘The size of the gap is such that it requires action’ from policymakers, employers and individuals, said report co-author Han Yik… Unless more is done, older people will either need to get by on less or postpone retirement, he said. ‘You either spend less or you make more.’ In the U.S., the forum calculates that 65-year-olds have enough savings to cover just 9.7 years of retirement income. That leaves the average American man with a gap of 8.3 years. Women, who live longer, face a 10.9-year gap.”

June 12 – New York Times (Jeff Sommer): 

“Next year, for the first time since 1982, the Social Security program must start drawing down its assets in order to pay retirees all of the benefits they have been promised, 

according to the latest government projections. Unless a political solution is reached, Social Security’s so-called trust funds are expected to be depleted within about 15 years. Then, something that has been unimaginable for decades would be required under current law: Benefit checks for retirees would be cut by about 20% across the board.”

China  Watch:

June 9 – Reuters (Josh Horwitz): 

“China is preparing to curb some technology exports to the United States, the chief editor of China’s Global Times newspaper said…

 If enacted, the measures suggest Beijing would retaliate over U.S. restrictions imposed on Shenzhen-based Huawei Technologies Co Ltd due to what Washington said were national security issues. In a tweet, the pro-CCP paper’s editor-in-chief Hu Xijin said that China ‘is building a management mechanism to protect China’s key technologies.’”

June 8 – New York Times (Kate Conger): 

“The Chinese government this past week summoned major tech companies including Microsoft and Dell from the United States and Samsung of South Korea, to warn that they could face dire consequences if they cooperate with the Trump administration’s ban on sales of key American technology to Chinese companies, 

according to people familiar… Held on Tuesday and Wednesday, the meetings came soon after Beijing’s announcement that it was assembling a list of ‘unreliable’ companies and individuals. That list was widely seen as a way of hitting back at the Trump administration for its decision to cut off Huawei…”

June 11 – Bloomberg: 

“Trump on Monday said he could impose tariffs ‘much higher than 25%’ on $300 billion in Chinese goods if Xi doesn’t meet him at the upcoming Group of 20 summit in Japan. China’s foreign ministry… declined Tuesday to say whether the meeting would take place. 

The brinkmanship puts Xi -- China’s strongest leader in decades -- in perhaps the toughest spot of his six-year presidency. If Xi caves to Trump’s threats, he risks looking weak at home. If he declines the meeting, he must accept the economic costs that come with Trump possibly extending the trade conflict through the 2020 presidential elections.”

June 11 – South China Morning Post (Kristin Huang and Lee Jeong-ho): 

“The United States has been accused of demanding ‘enormous, even hundreds’ of changes to Chinese laws to protect intellectual property, according to a Chinese government adviser, who said it was a key factor in the collapse of the trade talks. 

Shi Yinhong, a prominent international relations scholar from Renmin University, said the gap between the two sides was widening as Washington demanded a strong enforcement mechanism while Beijing wanted more leeway. He said China could only agree to a ‘relatively weak enforcement mechanism’ without too much scrutiny and there should not be automatic penalties for violating the agreement.”

June 12 – Financial Times (Tom Hancock): 

“Car manufacturers in China saw their sales fall by nearly a fifth last month as consumers in the world’s largest vehicle market remained reluctant to purchase due to new emissions rules and concerns about the economy. 

Key passenger vehicles sales fell 17.4 % in May compared with the same month last year, following a 17.7% decline in April… In the overall market, vehicle sales fell 16.4% in May, their fastest year-on-year decline on record, mainly due to a sharp drop in sales of commercial vehicles such as buses and trucks, which fell 11.8%...”

June 14 – Bloomberg: 

“China’s industrial output growth slowed to the weakest pace since 2002 and investment decelerated, highlighting the headwinds the economy is facing as it grapples with the U.S. tariff war. 

Industrial output rose 5% from a year earlier, while fixed-asset investment expanded 5.6% in the first five months. Both were slower than in April and below expectations. Retail sales was a bright spot, expanding 8.6% compared to May last year, partly because a longer May Day holiday encouraged more tourism and spending.”

June 9 – CNBC (Yen Nee Lee): 

“China said… its overall trade surplus was $41.65 billion last month, significantly more than expected as the trade impasse between Washington and Beijing drags on… The larger trade surplus came as the country’s dollar-denominated exports surprisingly increased last month, while imports came in worse than expected. …Exports in May inched up 1.1% year-on-year, while imports fell 8.5% during the same period.”

June 9 – Associated Press (Ken Moritsugu): 

“China is creating a system to protect its technology, according to state media, as the U.S. restricts the access of Chinese companies to American technology in a spiraling trade dispute. 

The People’s Daily newspaper said… the system will build a strong firewall to strengthen the nation’s ability to innovate and to accelerate the development of key technologies. ‘China ... will never allow certain countries to use China’s technology to contain China’s development and suppress Chinese enterprises,’ the main paper of the ruling Communist Party said, without directly referring to the United States.”

Brexit  Watch:

June 11 – Reuters (Gabriela Baczynska): 

“The stalled EU-UK divorce treaty will not change with the arrival of a new prime minister in London, the outgoing head of the European Union’s executive said… European Commission President Jean-Claude Juncker reiterated the EU’s refusal to renegotiate as many of the Conservative Party candidates vying to replace Prime Minister Theresa May said they would seek a new agreement. ‘I have the impression for months now that the interest for the British political society is how to replace PM May, not how to find an agreement with the EU,’ Juncker said…”

Europe  Watch:

June 11 – Financial Times (Rebecca Spang): 

“Italy’s governing coalition is talking of issuing low-denomination, non-interest-bearing treasury bills (so-called mini-BOTs) — to circulate alongside euros. Proponents argue the Italian economy needs more money and that the public-spending cuts and tax increases 

the EU insists upon will only make matters worse. As a member of the euro, Italy cannot legally issue its own currency. But if the government paid its creditors in mini-BOTs — and if it agreed to take them back again as payment for taxes or train tickets — then total liquidity could increase without expansion of the official money supply.”

Emerging  Markets  Watch:

June 10 – Reuters (David Stanway): 

“The Chinese financial news website wallstreetcn.com said it has been shut down to undergo ‘rectification’ amid a wider crackdown by the Chinese authorities on websites and news providers. Wallstreetcn.com announced on its official Twitter-like Weibo account on Monday night that its website and app had been taken down following a request from the authorities.”

Global  Bubble  Watch:

June 11 – Bloomberg (Emily Barrett): 

“Bond markets around the globe are acting like central-bank rate cuts are only a rubber-stamp away from becoming a reality. 

Just look at the size and scope of the recent rally, which has dragged down yields across the curve. For example, the aggregate rate on longer-maturity sovereign debt ended last week at 1.18%, a level last seen two weeks before Donald Trump was elected U.S. president… That’s despite repeated assurance from Federal Reserve policy makers that they will be ‘patient’ in making their next move. ‘It’s almost a new form of bond market vigilante-ism,” Michael Purves, chief global strategist at Weeden & Co., told Bloomberg… Markets ‘seem to be almost taunting the Fed here,’ he said.”

June 11 – CNBC (Weizhen Tan): 

“China’s lending to other countries, often shrouded in secrecy, is thought to be higher than the amounts that are officially tracked, resulting in much ‘hidden debt.’ That growing debt problem could spark a worse-than-expected slowdown, among other problems, experts warn. The lack of transparency would also affect investors who are considering bonds issued by those countries, or organizations such as the International Monetary Fund (IMF) which are helping those countries with their debts, according to Carmen Reinhart, a professor… at Harvard University. …She said: ‘China’s rise as a global creditor has also meant that there are a lot of hidden debts. That is, countries that had borrowed from China but this borrowing is not reported by the IMF, by the World Bank.’ ‘So there is a tendency to think these countries had lower debt levels than what they actually have,’ she concluded.”

Fixed-Income  Bubble  Watch:

June 11 – Bloomberg (Sally Bakewell and Thomas Beardsworth): 

“Time and again, regulators in the U.S. and Europe have pointed to the hazards of businesses taking on too much debt. At issue is the $1.3 trillion leveraged lending market, composed of high-yield loans from firms with some of the weakest finances. 

While Federal Reserve and European Central Bank officials have drawn attention to these heavily indebted companies and the deteriorating standards of loans bundled into securities called CLOs, most regulators are careful to say a repeat of 2008 is unlikely because investors… hold most of the debt. Yet that’s created a new, and potentially more dangerous, kind of risk. Precisely because roughly 85% of leveraged loans are held by non-banks, regulators are largely in the dark when it comes to pinpointing where the risks lie… More and more, critics are questioning whether regulators like the Fed have a handle on the problem or the right tools to contain the fallout.”

Geopolitical  Watch:

June 13 – Bloomberg (Adela Lin and Chinmei Sung): 

“China’s heavy-handed tactics in Hong Kong could be also hurting its cause in neighboring Taiwan. In recent weeks, 

Taiwan’s China-skeptic president, Tsai Ing-wen, has come out strongly against Hong Kong’s controversial proposal to allow extraditions with the mainland. The criticism has not only won Tsai praise from democracy advocates in Hong Kong, it’s helped her recover from a local election defeat last year that threatened to scuttle her bid for a second term.”

June 10 – Bloomberg:

“It was Beijing’s decision almost 30 years ago to make rare earths a strategic material, and ban foreigners from mining them, that helped pave the way for China to elbow aside the U.S. as the world’s leading producer.
In the intervening period, as China tightened control of domestic output of rare earths -- a broad group of 17 elements used in everything from electric vehicles to military hardware -- the U.S. all but surrendered to China’s dominance of the sector. With China now accounting for 70% of global production, and only one U.S. mine in operation, American industries outside of defense have ‘no immediate avenues’ to break their reliance on China for supply of rare earth elements, according to Citigroup Inc.”

June 12 – Reuters (Andrew Osborn and Maria Tsvetkova): 

“President Vladimir Putin said relations between Moscow and Washington were getting worse and worse, noting in an interview… that the current U.S. administration had imposed dozens of sanctions on Russia… ‘They (our relations) are going downhill, they are getting worse and worse,’ Putin told the Mir TV channel…”