Saturday, July 27, 2019
Weekly Commentary:
Fanning the Flames
by Doug Noland
full column here:
Portions that
interested me
are shown below
"Government Spending jumped to a 5.0% annualized growth rate (Q1 2.9%), led by a 7.9% annualized expansion in federal government expenditures (strongest reading since Q2 ’09). With federal deficit spending near 4.5% of GDP, fiscal stimulus has become a powerful force in the real economy."
"Household Net Worth and Net Worth to GDP likely jumped to all-time highs."
"Equities and Total (equities and bonds) Securities as a percentage of GDP will both be near record levels. "
For the
week ending
July 26, 2019:
GLOBAL STOCKS:
S&P500 rose 1.7% (up 20.7% y-t-d)
Dow Industrials little changed (up 16.6%)
Dow Utilities declined 0.8% (up 13.8%).
Dow Transports rose 1.6% (up 17.5%).
S&P 400 Midcaps jumped 2.4% (up 19.2%)
Small cap Russell 2000 gained 2.0% (up 17.1%).
Nasdaq100 advanced 2.3% (up 26.7%)
Biotechs declined 0.7% (up 9.8%).
With gold bullion slipping $7,
the HUI gold index fell 1.9%
(up 28.9%).
U.K.'s FTSE increased 0.5% (up 12.2% y-t-d)
Japan's Nikkei gained 0.9% (up 8.2% y-t-d).
France's CAC40 rose 1.0% (up 18.6%)
German DAX advanced 1.3% (up 17.6%).
Spain's IBEX 35 increased 0.6% (up 8.0%).
Italy's FTSE MIB gained 0.9% (up 19.2%)
Brazil's Bovespa slipped 0.6% (up 13.0%)
Mexico's Bolsa 2.2% (down 2.3%)
South Korea's Kospi fell 1.3% (up 1.2%)
India's Sensex lost 1.2% (up 5.0%)
China's Shanghai gained 0.7% (up 18.1%).
Turkey's Istanbul National 100 rose 1.0% (up 12.7%).
Russia's MICEX increased 0.6% (up 14.6%).
US BONDS:
Ten-year Treasury yields added two bps to 2.07% (down 61bps).
Long bond yields increased a basis point to 2.59% (down 42bps).
Benchmark Fannie Mae MBS yields rose three bps to 2.81% (down 68bps).
US MORTGAGES:
Freddie Mac 30-year fixed
mortgage rates declined
six bps to 3.75%
(down 79bps y-o-y).
Fifteen-year rates
fell five bps to 3.18%
(down 84bps).
Five-year hybrid ARM rates
declined a basis point to 3.47%
(down 40bps).
Jumbo mortgage 30-yr fixed rates
down nine bps to 4.04%
(down 56bps).
Federal Reserve Bank
Fed Credit
contracted 11.3%
over the past year.
M2 (narrow) "money" supply
gained 4.8%, over the past year.
Currency Watch:
The U.S. dollar index gained 0.9%
to 98.01 (up 1.9% y-t-d).
Commodities Watch:
Bloomberg Commodities Index fell 0.8% this week (up 2.3% y-t-d).
Spot Gold declined 0.5% to $1,419 (up 10.6%).
Silver gained 1.2% to $16.397 (up 5.5%).
WTI crude increased 57 cents to $56.20 (up 24%).
Gasoline rallied 1.8% (up 42%)
Natural Gas dropped 3.6% (down 26%).
Copper fell 2.5% (up 2%).
Wheat declined 1.3% (down 1%).
Corn dropped 2.6% (up 13%).
Trump Administration Watch:
July 24 – Bloomberg (Jenny Leonard, Shawn Donnan, and Jeff Black):
“Chinese Commerce Minister Zhong Shan
has joined two conference calls with U.S. Trade Representative Robert Lighthizer
and Treasury Secretary Steven Mnuchin in recent weeks and is expected to be at the table when the two sides start meeting in Shanghai… Zhong was not an unknown quantity for the U.S. with officials including Lighthizer having dealt with him multiple times at international summits over the past two years in his role as China’s trade minister…
Zhong has a reputation as a tough negotiator and is seen by some on the U.S. side as a hard-liner who could make discussions even more hostile than they have been already.”
July 23 – Bloomberg (Steven T. Dennis and Erik Wasson):
“President Donald Trump once said he would eliminate the $22 trillion federal debt, but the annual budget deficit is on track to top $1 trillion a year -- swollen by bipartisan spending increases and his tax cuts
-- with no real expectation of a change in trajectory any time soon. The deal, which still must clear Congress, ends the automatic budget cuts enacted as a result of a showdown over the debt limit in 2011, when the new Republican majority in the House held federal borrowing authority hostage until President Barack Obama agreed to a spending straitjacket.”
July 23 – CNBC (Jennifer Elias):
“Republicans and Democrats alike are doubling down on their criticism of Big Tech after U.S. Attorney General William Barr announced late Tuesday that the Department of Justice will open a broad antitrust review of big tech companies. He didn’t name names, but shares of Amazon, Alphabet and Facebook traded lower on the news.”
July 23 – Reuters (Philip Blenkinsop):
“The European Union will retaliate with extra duties on 35 billion euros ($39.1bn) worth of U.S. goods if Washington imposes punitive tariffs on EU cars,
the bloc’s trade chief said… ‘We will not accept any managed trade, quotas or voluntary export restraints and, if there were to be tariffs, we would have a rebalancing list,’ European Trade Commissioner Cecilia Malmstrom told a committee of the European Parliament.”
U.S. Bubble Watch:
July 26 – Bloomberg (Katia Dmitrieva):
“2Q U.S. economic growth
-- Consumer spending, the biggest part of the economy, increased at a 4.3% annual rate, while government spending climbed at a 5%annual rate, and offered the biggest boost in a decade.”
July 25 – Reuters (Lucia Mutikani):
“The U.S. trade deficit jumped to a five-month high in May as imports of goods increased… The… trade deficit surged 8.4% to $55.5 billion.
Data for April was revised higher to show the trade gap widening to $51.2 billion instead of the previously reported $50.8 billion. Economists… had forecast the trade gap widening to $54.0 billion… The goods trade deficit with China, a focus of President Donald Trump’s “America First” agenda, increased 12.2% to $30.2 billion, with imports rising 12.8%.”
July 24 – Reuters (Lucia Mutikani):
“Sales of new U.S. single-family homes rebounded sharply in June, but sales for the prior three months were revised down, indicating that the housing market continued to tread water despite lower mortgage rates and a strong labor market.
…New home sales rebounded 7.0% to a seasonally adjusted annual rate of 646,000 units last month. May’s sales pace was revised down to 604,000 units from the previously reported 626,000 units.”
July 25 – Reuters (Lucia Mutikani):
“New orders for key U.S.-made capital goods surged in June, but will probably not change expectations that business investment contracted further in the second quarter and contributed to holding back the economy. …Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, jumped 1.9% last month. Orders in June increased across the board, with demand for machinery increasing by the most in nearly 1-1/2 years.”
July 25 – Bloomberg (Prashant Gopal):
“The U.S. homeownership rate fell to the lowest level in more than a year as rising prices and a tight supply of starter homes put buying out of reach for many renters. The share of Americans who own their homes was 64.1% in the second quarter, the lowest since the third quarter of 2017... It was the second straight decrease, down from 64.2% in the previous three months and 64.3% a year earlier.”
July 20 – CNBC (Emma Newburger):
“In the past year, torrential rains have dumped water on U.S. farmlands, destroying acreage and delaying crops from getting planted on time. Now, farmers face another hurdle: a stifling heat wave that’s spreading across the United States
and is expected to be the worst in the farm regions, including Oklahoma, Kansas, Nebraska, Missouri, Iowa and Illinois. ‘Every time we think we catch a break, it’s just another issue we have to solve,’ Adam Jones, a 28-year-old organic farmer from Illinois, told CNBC. ‘It seems like it never stops.’ ‘This year, there are farmers who are the first in their family for three generations to not grow crops on their fields,’ he continued.”
China Watch:
July 23 – South China Morning Post (Daniel Ren):
“China’s corporate borrowers, especially non-state companies, are missing a record number of bond payments, as business conditions worsened amid the slowest economic growth pace in three decades, while a year-long trade war with the US crimped the biggest market for many exporters.
Thirty private businesses missed their repayment obligations on 89 issues valued at a combined 60 billion yuan (US$8.7bn) so far this year, an increase of 150% from the same period in 2018… That’s more than the state-owned enterprises that missed eight bonds valued at 10 billion yuan, and topping last year’s 126 defaults worth 11.4 billion yuan. ‘The reality on the ground is that thousands of private companies are facing difficulties in sustaining their business growth this year, because of declining sales and narrower profit margins,’ said Eric Han, a senior manager with business advisory firm Shanghai Suolei. ‘Business morale appears to be low among entrepreneurs who are reluctant to invest in business expansion.’”
July 22 – Bloomberg:
“Two months after China shocked investors with the first government seizure of a bank in two decades, market confidence in the nation’s smaller lenders has yet to fully recover.
That may be just what the country needs. When it took control of Baoshang Bank Co. on May 24 and imposed losses on some creditors, China’s government upended the long-held assumption that it would always provide banks with a 100% backstop. The result has been a wholesale repricing of risk for all but the largest Chinese lenders, a development that analysts say was long overdue in a country rife with moral hazard. While the upheaval has underscored the fragility of some smaller banks and adds to short-term headwinds buffeting the economy, it may ultimately put China’s $40 trillion banking system on a more sustainable path by forcing markets to differentiate between weak and strong lenders.”
July 23 – Reuters (Shu Zhang):
“China’s campaign to boost loans to small firms was supposed to support the economy during its biggest slowdown in decades, but banks’ reluctance to lend has left exporters and manufacturers in its southern industrial belt struggling to pay the bills.
Despite prodding from Beijing, several bankers have told Reuters they have little appetite to lend to smaller companies due to the uncertain economic outlook, the U.S.-China trade war and a years-long drive to purge risks from the financial system. That has chilled credit flows to private sector firms, undermining stimulus measures that were designed to cushion the impact of slowing demand.”
July 23 – Reuters (Catherine Cadell):
“China said… that U.S. officials were behind violent chaos in Hong Kong and warned against interference, following a series of protests in the city, including bloody clashes on the weekend. ‘We can see that U.S. officials are even behind such incidents,’ said Chinese Foreign Ministry spokeswoman Hua Chunying…”
July 26 – New York Times (Keith Bradsher):
“China has too many factories making too many goods. Thanks to its punishing trade war with the United States, its biggest overseas customer isn’t buying like before. So China is seeking new customers.
They could prove to be a hard sell. China this week formally restarted its efforts to create a free-trade zone across the Asia-Pacific region, with an unlikely goal of striking a deal by November. If successful, the pact could eventually open markets from Australia to India. Beijing is also trying to keep alive long-shot, three-way talks that would lower trade barriers among China, Japan and South Korea. More broadly, it is unilaterally reducing its own tariffs on a broad range of goods from all over the world, even as it puts higher retaliatory tariffs on American-made goods. At stake is the health of the Chinese economy.”
Brexit Watch:
July 23 – Reuters (William James and Kylie MacLellan):
“Boris Johnson promised in his first speech as prime minister to lead Britain out of the European Union on Oct. 31 with ‘no ifs or buts’ and warned that if the bloc refused to negotiate then there would be a no-deal Brexit.
Johnson, who has been hailed by U.S. President Donald Trump as Britain’s Trump, is sending the strongest message yet to the EU that he will be taking a distinctly tougher approach to negotiating a revision of the Brexit divorce deal.”
Asia Watch:
July 25 – Wall Street Journal (Timothy W. Martin):
“A trade feud between Japan and South Korea, two of the world’s leading tech producers, has prompted groups representing Silicon Valley giants to warn an escalation could wreak long-term damage across an already-buckling global supply chain.
Having been hit by disrupted U.S.-China relations, American trade groups… have written to Japan and South Korea, emphasizing that the global supply chain relies on efficient delivery of components, chemicals and materials. The two nations produce semiconductors and displays that are indispensable for services and gadgets made by the likes of Apple Inc., Amazon.com Inc., and Microsoft Corp.”
Europe Watch:
July 24 – Reuters (Jonathan Cable):
“Euro zone business growth was much weaker than expected this month, hurt by a deepening contraction in manufacturing, and forward-looking indicators in surveys…
suggest conditions will get worse next month. IHS Markit’s Flash Composite Purchasing Managers’ Index (PMI), considered a good guide to economic health, dropped to 51.5 this month from a final June reading of 52.2…”
July 25 – Financial Times (Adam Samson):
“German factory executives have reported that industry conditions are in ‘free fall’, according to a survey…
The Ifo Institute’s manufacturing business climate index slumped to minus 4.3 in July from positive 1.3 the previous month. The reading was the lowest in more than nine years… The broader Ifo sentiment gauge, which also covers Germany’s services sector, declined as well, hitting the lowest level since 2013. ‘In manufacturing, the business climate indicator is in freefall,’ said Clemens Fuest, president of the Ifo Institute… ‘No improvement is expected in the short term, as businesses are looking ahead to the next six months with more pessimism.’”
Asia Watch:
July 21 – Reuters (Choonsik Yoo):
“South Korea’s exports for the first 20 days of this month fell a sharp 13.6% from a year earlier…,
led by poor semiconductor shipments and underscoring continued weakness in global demand. Semiconductor products, which make up for about one-fifth of the country’s total exports, suffered a 30.2% drop in overseas shipments…”
Japanc Watch:
July 25 – Bloomberg (Taiga Uranaka and Yuki Hagiwara): “
"Japanese banks have spent more than three years trying to flee negative interest rates at home by ramping up lending abroad. Now their escape routes are closing. Declining global rates are buffeting the country’s three largest lenders as they prepare to post fiscal first-quarter results next week. And with central banks around the world now in monetary easing mode, financial firms are growing concerned that the Bank of Japan may loosen policy further.”July 26 – Reuters (Andrey Ostroukh): “The Russian central bank trimmed its key interest rate to 7.25% on Friday, as expected, and said more cuts were likely later this year amid slowing inflation.”
Emerging Markets Watch:
July 24 – Bloomberg (Anirban Nag and Ronojoy Mazumdar):
“India was until recently the fastest-growing major economy in the world, clocking annual rates of 7% or more and sparking predictions that it would soon overtake the likes of the U.K. and Germany. Now it looks like that rapid pace may have been overstated.
An academic paper by a former chief economic adviser to Prime Minister Narendra Modi estimates annual growth averaged closer to 4.5% a year in the fiscal years from 2011-12 through 2016-17, and says recent changes to the way gross domestic product is measured are problematic.”
July 23 – Bloomberg (Dhwani Pandya and Rahul Satija):
“The liquidity crunch facing property firms and their lenders in India may deepen after the National Housing Bank restricted certain mortgage-payment plans that developers typically use to push sales
… The removal of that funding avenue will likely impact apartment sales and in turn, the loan books of already troubled shadow lenders that have been increasing their exposure to the real-estate sector.”
Global Bubble Watch:
July 23 – Reuters (Dave Sherwood):
“Global trade expanded by just 0.5% in the first quarter of 2019, marking the slowest year-on-year pace of growth since 2012 amid signs a more significant slowdown is possible, International Monetary Fund officials said…”
Geopolitical Watch:
July 24 – Reuters (Babak Dehghanpisheh and Nafisa Eltahir):
“The top military adviser to Iran’s Supreme Leader Ayatollah Ali Khamenei said… that Tehran would not negotiate with the United States under any circumstances, an apparent hardening of its position as the Gulf tanker crisis escalates.”
July 24 – Reuters (Hyonhee Shin and Joyce Lee):
“North Korea test-fired two new short-range ballistic missiles on Thursday, South Korean officials said, its first missile test since its leader, Kim Jong Un, and U.S. President Donald Trump agreed to revive denuclearisation talks last month…
Firing a ballistic missile would be a violation of U.N. Security Council resolutions that ban the North from the use of such technology.”
July 22 – Reuters (Catherine Cadell):
“More than half of Venezuela’s 23 states lost power on Monday, according to Reuters witnesses and reports on social media, a blackout the government blamed on an ‘electromagnetic attack.’”
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