Credit Bubble Bulletin
Friday, August 6, 2021
Weekly Commentary
by Doug Noland
My edited easy to read version follows
Ye Editor
For the Week Ending
August 6, 2021:
GLOBAL STOCK INDEXES:
S&P500 gained 0.9% (up 18.1% y-t-d)
Dow Industrials increased 0.8% (up 15.0%)
Utilities rose 2.2% (up 7.3%)
Banks surged 4.3% (up 30.1%)
Broker/Dealers jumped 4.4% (up 27.9%)
Transports added 0.3% (up 16.0%)
S&P 400 Midcaps increased 0.5% (up 17.8%)
Small cap Russell 2000 rose 1.0% (up 13.8%)
Nasdaq100 advanced 1.0% (up 17.2%)
Semiconductors gained 1.7% (up 22.1%)
Biotechs rallied 3.6% (up 3.8%)
With gold bullion down $51, t
he HUI gold stock index sank 5.1%
(down 13.3%)
U.K.'s FTSE gained 1.3% (up 10.3% y-t-d).
Japan's Nikkei rallied 2.0% (up 1.4% y-t-d).
France's CAC40 jumped 3.1% (up 22.8%)
German DAX rallied 1.4% (up 14.9%).
Spain's IBEX 35 advanced 2.3% (up 10.0%).
Italy's FTSE MIB jumped 2.5% (up 16.9%)
Brazil's Bovespa gained 0.8% (up 3.2%)
Mexico's Bolsa added 0.5% (up 16.0%)
South Korea's Kospi recovered 2.1% (up 13.8%).
India's Sensex jumped 3.2% (up 13.7%).
China's Shanghai rallied 1.8% (down 0.4%)
Russia's MICEX gained 0.9% (up 15.7%).
US BONDS
Three-month Treasury bill rates
ended the week at 0.0425%.
Two-year government yields
gained two bps to 0.21% (up 9bps y-t-d).
Five-year T-note yields
rose eight bps to 0.77% (up 41bps).
Ten-year Treasury yields
jumped eight bps to 1.30% (up 38bps).
Long bond yields
increased five bps to 1.95% (up 30bps).
Benchmark Fannie Mae MBS yields
surged 10 bps to 1.78% (up 44bps).
Federal Reserve Credit last week
declined $10.8bn to $8.189 TN.
Over the past 99 weeks,
Fed Credit expanded $4.462 TN, or 120%.
US MORTGAGES:
Freddie Mac 30-year fixed mortgage rates
fell three bps to a five-month low 2.77%
(down 11bps y-o-y).
Fifteen-year rates were unchanged at 2.10%
(down 34bps).
Five-year hybrid ARM rates
dropped five bps to 2.40%
(down 50bps)
Jumbo mortgage 30-year fixed rates
down five bps to 2.97%
(down 15bps).
COMMODITIES:
Bloomberg Commodities Index fell 1.7%
(up 21.3% y-t-d).
Spot Gold dropped 2.8% to $1,763
(down 7.1%).
Silver slumped 4.6% to $24.33
(down 7.8%).
WTI crude sank $5.67 to $68.28
(up 41%).
Gasoline fell 3.3%
(up 60%)
Natural Gas jumped 5.8%
(up 63%).
Copper dropped 3.0%
(up 24%).
Wheat gained 2.2%
(up 12%).
Corn roses 2.1%
(up 15%).
Bitcoin jumped $2,321 this week
to $43,905 (up 51%).
DOUG NOLAND COMMENTARY:
The U.S. economy created 943,000 jobs in July. With upward revisions, there were 938,000 jobs added in June and 614,000 in May – for a notable three-month employment surge of almost 2.5 million.
The Unemployment Rate dropped five-tenths to 5.4%, the low since March 2020. For the two-decade period 2000 through 2019, Unemployment averaged 5.9%. Average Hourly Earnings were up 4.0% y-o-y in July, the strongest rise of the pandemic. And from Thursday’s Challenger data, July job cuts were the smallest since June 2000 (y-t-d cuts lowest on record). Throw in reports of acute labor shortages across industry groups and seemingly the entire economy, and it’s clear job markets are turning tighter by the week.
The U.S. trade deficit increased to a record $75.7 billion in June ... topping the old mark of $75 billion set in March ... So far this year, the goods deficit with China, the largest that the United States runs with any country, totals $158.5 billion, an increase of 19.2% compared to the same period in 2020.”
August 4 – Bloomberg (Reade Pickert):
“U.S. service providers expanded in July at the fastest pace in records dating back to 1997, as measures of business activity, new orders and employment all improved. The Institute for Supply Management’s services index jumped to 64.1 last month from 60.1 in June, topping all estimates ... "
,,, Recall that CPI jumped 0.9% in June, with a y-o-y gain of 5.4%.
Producer Prices surged 1.0%, as y-o-y inflation rose to 7.3%.
The most recent data showed the national FHFA House Price Index up 18.0% y-o-y, with the S&P CoreLogic Index up 16.99%.
Federal Reserve Credit has inflated $4.462 TN, or 120%, over the past 99 weeks.
During this period, M2 “money supply” ballooned $5.450 TN, or 36%, to $20.4 TN.
... The Fed dismisses Bubble and inflation risks.
One has only to look at charts of the Fed’s balance sheet, system Credit growth, M2, and Treasury debt to appreciate that we’ve transitioned into uncharted waters with regard to monetary inflation.
And it is not credible to simply assert that the associated jump in inflation will be transitory.
Inflation psychology has evolved quickly – in commodities pricing, labor markets, and corporate pricing of goods and services.
... The University of Michigan’s survey of one-year inflation expectations jumped to 4.7% in July, the high since 2008.
NEWS IN THE PAST WEEK:
Coronavirus Watch:
August 2 – Reuters (Deena Beasley):
“With a new wave of COVID-19 infections fueled by the Delta variant striking countries worldwide, disease experts are scrambling to learn whether the latest version of coronavirus is making people - mainly the unvaccinated - sicker than before. The U.S. Centers for Disease Control and Prevention warned that Delta, first identified in India and now dominant worldwide, is ‘likely more severe’ than earlier versions of the virus… The agency cited research in Canada, Singapore and Scotland showing that people infected with the Delta variant were more likely to be hospitalized than patients earlier in the pandemic.”
August 4 – Bloomberg:
“Global coronavirus cases topped 200 million, another grim milestone in the 18-month pandemic that has killed more than 4.2 million people. Israel, one of the world’s most vaccinated nations, called on employers to switch to work-at-home and warned that it may have to impose new lockdowns. The World Health Organization called for a moratorium on booster shots to enable poorer countries to catch up in vaccination rates.”
August 5 – Bloomberg:
“China imposed new restrictions on travel in a bid to slow a delta-driven outbreak that’s grown to more than 500 cases scattered across half the country, as the government stuck to an aggressive containment playbook rather than rely on its high vaccination rate. Public transport and taxi services were curtailed in 144 of the worst-hit areas nationwide… Hong Kong re-imposed quarantine on travelers from the mainland, though an exception remained for the southern Guangdong province which neighbors the financial city. Officials reported 94 new local infections on Thursday…”
Market Mania Watch:
August 3 – Bloomberg (Vildana Hajric):
“In a market that hasn’t had a 5% drop in nine months, where records are falling every fourth day and where corporate earnings just doubled, it has occasionally seemed like the good news will never end. That’s how investors are starting to behave, and it’s bothering researchers. Rather than temper expectations after a rousing rally, bulls are getting more bullish. Almost two-thirds of clients in a JPMorgan… survey said they plan to add to stock holdings in the coming weeks.”
August 2 – Financial Times (Joe Rennison):
“A better than expected US earnings season has prompted a flurry of ‘buy’ recommendations on stocks, with analysts now as upbeat as they have been in almost two decades. Data from Morgan Stanley show the percentage of buy ratings has hit its highest point in 18 years… But the slowing pace of economic growth should spark caution from analysts as they look towards the end of the year and into 2022, according to David Lebovitz, markets strategist at JPMorgan.”
Market Instability Watch:
August 5 – Financial Times (Tommy Stubbington):
“The value of the world’s stock of negative-yielding debt has ballooned to more than $16.5tn, the highest in six months… Government bond yields have tumbled in recent weeks as some traders have piled in, a move that has blindsided many investors who expected an economic rebound from the pandemic along with rising inflation to lift long-term borrowing costs.”
Inflation Watch:
August 2 – Bloomberg (Joe Deaux):
“For consumers and economists hoping commodities inflation will soon subside, the aluminum market delivered some discouraging news… The world’s second-largest brewer, Heineken NV, said the rising costs of freight and the metal used in beer cans will have a ‘material effect’ on profit next year. Reynolds Consumer Products Inc., the maker of the iconic Reynolds Wrap, said it’s facing costs of about $400 million this year driven in large part by aluminum and resin. The announcements come on the heels of a more than 30% gain in benchmark aluminum prices so far this year…”
August 6 – Reuters (Francesco Canepa and Mark John):
“The bosses of top multinationals are fretting about rising inflation but the very people responsible for keeping price growth in check - central bankers - seem unfazed. Even as policymakers at the U.S. Federal Reserve, European Central Bank and elsewhere diverge on how quickly to wind down massive pandemic stimulus programmes, they agree on one thing: the recent surge in inflation is not a major concern. Yet the latest set of corporate earnings calls are replete with mentions of the word ‘inflation’, with the tally up 1,000% on the year for S&P 500 U.S.-listed companies and 400% in Europe for Stoxx 600 companies, according to Bank of America research.”
August 4 – CNBC (Evelyn Cheng):
“Chinese companies wanting to go global are running into shipping problems. Access to cheap manufacturing at home gave Chinese businesses an advantage overseas. But it’s turning into a disadvantage now, as the pandemic and trade tensions disrupt international supply channels. Many goods can’t be shipped out, said Fang Xueyu, vice president of international marketing and general manager for Asia-Pacific at Chinese home appliance company Hisense. The cost of shipping containers has climbed five-fold from about $3,000 to as much as $15,000 each…”
U.S. Bubble Watch:
August 3 – Financial Times (Colby Smith):
“ ... mortgage originations over the four quarters to June 30 — which include refinancing — amounted to nearly $4.6tn, a historic high. That helped to push mortgage balances to more than $10tn — after a $282bn increase over the preceding three months — meaning about 44% of the outstanding mortgage balance was originated in the past year.”
August 3 – Financial Times (Lauren Fedor and Colby Smith):
“A decade ago, the average house in Ohio’s leafy state capital Columbus would sit on the market for almost 100 days before being sold. Today, a similar property sells in just 10 days. ‘It has never been like this,’ said Michael Jones, a real estate agent at Coldwell Banker Realty with more than 20 years’ experience in central Ohio. ‘It’s unprecedented.’ US policymakers are becoming increasingly concerned about the rising price of housing for both homeowners and renters, as the broadest global house price boom for at least two decades drives up living costs. ‘Today, it is harder to find an affordable home in America than at any point since the 2008 financial crisis,’ Marcia Fudge, US housing and urban development secretary, said… Nationally, house prices in May were 16.6% higher than the year before, according to the latest S&P CoreLogic Case-Shiller index update — the biggest jump in more than 30 years of data…”
August 2 – Reuters (Lindsay Dunsmuir):
“Loan officers at U.S. banks reported easing standards and terms on business loans in the second quarter as the economy revved up on the back of wider reopenings and rising coronavirus vaccination rates. The officers also said in the Federal Reserve survey… that there was greater demand for business loans from firms of all sizes. ‘Major net shares of banks ... cited a more favorable or less uncertain economic outlook, more aggressive competition from other banks on nonbank lenders, and improvements in industry-specific problems as important reasons,’ the U.S. central bank said…”
Fixed-Income Bubble Watch:
August 4 – Bloomberg (Davide Scigliuzzo):
“Surging investor demand for leveraged loans is fueling a dramatic weakening in creditor protections, with borrowers gaining more leeway to incur additional debt and issue dividend payouts, according to Moody’s… Junk-rated companies are taking advantage of record-low rates to reprice loans at more favorable terms, extend maturities and push safeguards meant to protect investors ‘to the brink,’ analysts at the credit-rating firm wrote in a… report that examined term sheets for over 200 new loans.”
August 3 – Wall Street Journal (Sebastian Pellejero): “Sales of securities backed by riskier commercial real-estate loans have surged to a record, highlighting investors’ demand for higher-yielding debt and expectations for a recovery in business properties. Commercial real-estate collateralized loan obligations are created by private real-estate investors. In these deals, lenders sell debt and equity to make short-term loans to borrowers that renovate business properties, particularly multifamily housing… Bridge loans are typically made to properties in flux, such as empty or outdated apartment buildings, and the renovations they finance can fail to pay off as quickly as expected, leading to delayed repayments and defaults. As a result, CRE CLOs offer relatively high payouts at a time many investors continue to expect commercial properties to rebound further from the pandemic.”
China Watch:
August 2 – Bloomberg (Ailing Tan):
“Chinese firms have already defaulted on more bonds than any prior full year as policy makers are increasingly comfortable that missed payments by some won’t cause systemic problems. Just seven months into 2021, borrowers have missed payments on $30.2 billion of local and overseas notes… The figure for all of last year was a record $29.9 billion.”
Global Bubble Watch:
August 3 – Financial Times (Claire Jones):
“China is the world’s biggest lender to governments. And that’s not just because of its gigantic stockpile of US Treasuries. For much of the past decade Beijing has sought to plug massive infrastructure funding gaps across multiple continents through its Belt and Road Initiative. The overarching aim, other than to bolster global influence, is to upgrade transport links on the old silk road routes which enabled trade between the Far East and what lay to the west of it. While Beijing has recently reined in spending, between 2008 and 2019 the China Development Bank and the Export-Import Bank of China lent $462bn. For context, that’s just short of the $467bn loaned by the World Bank over the same timeframe…”
Japan Watch:
August 3 – Reuters (Daniel Leussink):
“Japan’s services sector activity shrank at a faster pace in July to contract for the 18th consecutive month as curbs rolled out to combat a resurgence in coronavirus infections dealt a blow to business activity and confidence. Activity and new business inflows contracted at a faster pace as the spread of the coronavirus undermined the world’s third-largest economy’s recovery prospects by hurting both confidence and sales.”
Geopolitical Watch:
August 5 – CNN (Jennifer Hansler):
“The Biden administration has informed Congress of a proposed $750 million weapons sale to Taiwan in a move likely to further inflame tensions with Beijing. The administration gave notice about the intended sale on Wednesday…The deal includes 40 M109A6 Medium Self-Propelled Howitzer Systems and related equipment. ‘If concluded, this proposed sale will contribute to the modernization of Taiwan's howitzer fleet, strengthening its self-defense capabilities to meet current and future threats,’ the spokesperson said.”
August 5 – Associated Press (Laurie Kellman):
“Israel’s defense minister warned… his country is prepared to strike Iran, issuing the threat against the Islamic Republic after a fatal drone strike on a oil tanker at sea that his nation blamed on Tehran. The comments by Benny Gantz come as Israel lobbies countries for action at the United Nations over last week’s attack on the oil tanker Mercer Street that killed two people. The tanker, struck off Oman in the Arabian Sea, is managed by a firm owned by an Israeli billionaire.”
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