Saturday, January 20, 2018

Saturday's News Links

[Reuters] Government shuts down as Trump feuds with Democrats

[Reuters] What happens in a U.S. government shutdown?

[Reuters] China accuses U.S. warship of violating its sovereignty

[Reuters] Airstrikes pound Syria's Afrin as Turkey launches 'Operation Olive Branch'

[Reuters] U.S.-backed Syrian force says will have to respond if Turkey attacks

[WSJ] Lawmakers Return to Capitol for Spending Talks

Weekly Commentary: You Can Only Worry For So Long

Ten-year Treasury yields jumped 11 bps this week to 2.66%, moving decisively above the key 2.60% technical level - to the highest yields since July 2014. Two-year yields ended the week up seven bps to 2.07%, the high going back to September 2008. Five-year Treasury yields jumped 10 bps to 2.45%, the high since April 2010. Has the long-delayed bond bear market finally commenced – with barely a whimper? Markets fretted over a potential spike in yields over recent years. I suppose You Can Only Worry For So Long.

The S&P500 has gained 5.1% in three weeks. If this return is lacking, one could have made 6.5% in the Dow Transports, 6.9% in the Nasdaq100, 6.8% in the Nasdaq Composite, 7.0% in the KBW Bank index or 9.5% in the Semiconductors (SOX) – all in 2018’s first 13 trading sessions.

With equities deep into parabolic melt-up, let’s not expect market participants to be all too fixated on Treasury yields at a mere 2.64%. Why worry over where market yields might be in a few months, not with huge gains to harvest on an almost daily basis in equities markets. No reason to worry about the ECB winding down QE later this year. No basis for fretting a few Fed rate increases spread over many months. Clearly, the Bank of Japan is in no hurry either. Government shutdown - no issue. With tax cuts achieved, gridlock is fine. Liquidity abounds – might abound forever. Meanwhile, the reality is that global bond markets could be ending a three-decade bull market that changed the world.

January 17 – Financial Times (Kate Allen): “Governments are set to increase their borrowing from private investors this year for the first time in four years as central banks step back from the market, underlining market concern that the era of ultra-low bond yields appears vulnerable. The net debt of developed nations is expected to rise this year, chiefly driven by an increase in US bond sales, according to… JPMorgan Chase. The European Central Bank is scaling back its bond-buying programme and the Federal Reserve is shrinking its balance sheet… The Fed is set to roll off $222bn of its holdings of Treasuries this year, the analysis shows, while the ECB’s purchases of eurozone sovereign debt will drop to $221bn from $622bn last year. The US will raise a net $828bn of new issuance after the effects of the scaling back of quantitative easing are taken into account, according to JPMorgan — up from $357bn in 2017.”

January 16 – Bloomberg (Sid Verma): “A ‘dramatic’ increase in U.S. bond supply over the next year risks unhinging global markets from their bullish foundations, warns Torsten Slok at Deutsche Bank AG. The supply of U.S. government debt will almost double to $1 trillion this year to finance a widening budget deficit as the Federal Reserve whittles down its holdings. Unless new buyers emerge, the overhang could be far-reaching. ‘If demand for U.S. fixed income doesn’t double over the coming years then U.S. long rates will move higher, credit spreads will widen, the dollar will fall, and stocks will likely go down as foreigners move out of depreciating U.S. assets,’ the chief international economist at the German lender wrote… ‘And this could happen even in a situation where U.S. economic fundamentals remain solid.’”

Markets have grown comfortable with uncertainty. I would posit that markets have come to adore myriad uncertainties. After all, they ensure the certitude of interminable aggressive monetary stimulus. As the bullish thinking goes, it’s wasted energy to contemplate a spike in yields when, obviously, central banks won’t tolerate one. Waiting anxiously to perform another act of heroism, QE can be revived in an instant.

Unless something dramatic transpires, global central bank balance sheet growth will slow significantly in 2018. At the same time, governments are geared up to issue more debt. Central banks accommodated years of (“counter-cyclical”) massive deficit spending, and now big deficits are the (structural) norm.

Supply/demand dynamics will be shifting substantially, yet bond prices are expected to adjust slightly. The U.S. will be financing a huge fiscal deficit as the Fed pares back its balance sheet. Moreover, there’s an unusual degree of uncertainty surrounding future U.S. fiscal deficits. Tax cuts pay for themselves with bountiful prosperity, or perhaps this a replay of the late-nineties Bubble Mirage that had the U.S. paying off all its debt. There’s a scenario – a not outlandish one at that - where the Bubble bursts and deficits skyrocket toward $2.0 TN. For now, there is also the risk of trade battles coupled with a global economic boom and market Bubbles that create unusually uncertain inflation prospects.

Extraordinary: The end of an unparalleled bull market that saw $14 trillion of experimental “money” printing, along with zero/negative rates, push global yields to historic lows, in the face of unprecedented government debt issuance and record corporate debt sales. There is as well the issue of unquantifiable speculative leverage and derivatives exposures, along with a now enormous ETF complex untested in bear market dynamics. Reasons aplenty to take a cautious approach with long-term bonds globally.

When it comes to uncertain 2018 prospects, China joins bond yields near the top of the list. Similar to their approach with bonds, equities buyers are today comfortable with China and feel no compunction to ponder beyond the present. Markets over recent years fretted over a Chinese financial accident. I suppose You Can Only Worry For So Long.

January 12 – Reuters (Fang Cheng and Kevin Yao): “China’s bank lending halved in December as the government kept up its campaign to curb financial system risks, but banks still managed to dole out a record amount for the year amid the tighter scrutiny. Chinese authorities are trying to walk a fine line by containing riskier types of financing and slowing an explosive build-up in debt without stunting economic growth. Banks extended 584.4 billion yuan ($90.46 billion) in December, data from the People’s Bank of China (PBOC) showed…, well below expectations of 1 trillion yuan and November’s 1.12 trillion yuan. But banks lent a record 13.53 trillion yuan of new loans in 2017.”

Total Social Financing (TSF) dropped in December to a weaker-than-expected 1.140 TN yuan (estimates 1.500), or about $178 billion. This was down 30% from both November and December 2016. The fourth quarter marked a significant slowdown in TSF. Quarterly growth in TSF averaged 5.216 TN yuan ($815bn) during the first three quarters of 2017, but then dropped to 3.795 TN yuan ($593bn) during Q4. For the year, growth in TSF (which excludes government borrowings) was 9.2% ahead of 2016 levels to 19.443 TN ($3.038 TN). Yet for the first three quarters of 2017, TSF was expanding at a rate 16.3% above comparable 2016. The fourth quarter actually saw the growth in TSF 12.7% below that of Q4 2016.

Financial institution loans to Chinese households surged 21% in 2017, with lending remaining strong through year end. Lending to corporations slowed markedly last year, with December lending half November’s level. Mortgage loans dominate Chinese household borrowings. And with housing prices inflated after years of easy finance, China is becoming increasingly susceptible to a self-reinforcing downturn in both apartment prices and mortgage Credit growth.

China traditionally begins the year with blockbuster Credit growth. January lending data will provide some indication of whether the fourth quarter slowdown was chiefly seasonal or rather the beginning of a more determined effort by Beijing to rein in Credit excess. Chinese regulators this month toughened their crackdown on off-balance sheet “shadow” lending.

January 14 – Bloomberg: “China’s banking regulator pledged to continue its crackdown on malpractice in the $38 trillion industry in 2018, vowing to tackle everything from poor corporate governance and violation of lending policies to cross-holdings of risky financial products. The China Banking Regulatory Commission unveiled its regulatory priorities for the year… Inspecting the funding source of banks’ shareholders and ensuring they have obtained their stakes in a regular manner. Examining banks’ compliance with rules restricting loans to real estate developers, local governments, industries burdened by overcapacity, and some home buyers. Looking into banks’ interbank activities and wealth management businesses.”

Chinese exports were up 10.9% in December. China ran a $54.69 billion trade surplus in December, the largest since January 2016. Foreign reserves rose to a larger-than-expected $3.140 TN, the highest level in 16 months. Fourth quarter GDP was reported at a stronger-than-expected 6.8% - putting 2017 growth at an above target 6.9%.

Chinese 10-year yields closed Friday at 3.98%, the high going back to October 2014. With the global economy humming along and global finance bubbling along, it’s not an inopportune time for Beijing to finally assume an assertive stance in reining in Credit. They will, of course, seek to avoid a shock. Beijing will, as well, focus on assuring productive Credit is readily available to sustain economic expansion. Productive enterprises should be supported, while speculative endeavors will be starved of finance. Easy to plan, not so straightforward to execute (Federal Reserve 1928/29).

“Houses are built to be inhabited, not for speculation,” proclaimed President Xi back in October during the 19th Party Congress. The problem is that tens of millions of Chinese have made fortunes in real estate. Hundreds of millions more aspire to. Not only has housing become the epicenter of Chinese speculative excess, mortgage Credit has inflated to the point of becoming a majority of total Credit growth - as well as a prevailing source of finance for the real economy. It all evolved into a full-fledged mortgage Credit Bubble, surely an expanding black hole of malinvestment, fraud and bank losses.

January 19 – Reuters: “China’s yuan-denominated outstanding housing loans rose 20.9% from a year earlier to 32.2 trillion yuan ($5.03 trillion) at end-December, China’s central bank said... Outstanding individual mortgages at the end of December grew 22.2% to 21.9 trillion yuan…”

January 18 – Bloomberg: “China’s home sales surged to a record high last month, despite a prolonged government campaign to curb property speculation. Sales by value, excluding affordable housing, jumped to a record 1.45 trillion yuan ($225 billion) in December, gaining 21% at the fastest pace in six months… Earlier today, home price data pointed to a similar acceleration. The upswing comes even as officials have sought to tame resurgent buying sentiment in a market that’s seen home prices skyrocket. The resurgence defies predictions that China’s property market will slow amid China’s moves to tackle excessive leverage and maintain curbs on purchases.”

January 16 – Wall Street Journal – “China’s Hot Housing Market Begins to Cool” (Dominique Fong): “China’s housing market has defied gravity and government restraints for two years, floating on a tide of bank loans and speculation. Until now. In Beijing and Shanghai—two of the country’s largest markets—and other megacities, sales have stalled and prices have dropped, falling slightly in some pockets and dramatically in others. Demand has dried up in these areas as a result of government measures including higher mortgage rates, higher down-payment requirements and limits on buying a second or third home. Would-be sellers are increasingly putting plans on hold in hope that prices will rebound.”

January 16 – Reuters: “China's banking regulator chief warned that a ‘black swan,’ or an unforeseen event could threaten the country's financial stability, official People's Daily reported… Guo Shuqing said that while risks in the financial system are manageable, they are still ‘complex and serious.’ Since his appointment as the head of the China Banking Regulatory Commission early last year, Guo has introduced a flurry of new rules to reign in lender risks including from curbs on shadow banking activities to the crackdown on loan fraud. Guo said the dangers stem from the pressure of rising bad debt, imperfect internal risk systems at financial institutions, the relatively high levels of shadow banking activities and rule violations.”

It’s curious to see Chinese housing transactions and prices plateau (in key markets) in the face of rampant mortgage Credit excess. Markets’ lack of concern notwithstanding, we can remind ourselves that this is China’s first mortgage boom – and a rather long and spectacular one at that. And I’m all too familiar with the view that Beijing is adept at managing oh so many things. Yet they’ve sure made a historic mess of mortgage finance – the extent of which will begin to surface as soon as lending slows. It’s one of history’s great ongoing manias, one that these days barely garners attention in The Age of Equities and Cryptocurrencies.

At this point, it’s not clear how Beijing possibly succeeds in reining in housing speculation without bursting an epic apartment Bubble (makes bitcoin look so tiny). With global yields on the rise and Chinese regulators on the case, the Chinese apartment market could be a critical development to monitor in 2018. Hard for me to believe there’s not a black swan holed up in there somewhere. And that goes for global bond markets as well.


For the Week:

The S&P500 gained 0.9% (up 5.1% y-t-d), and the Dow rose 1.0% (up 5.5%). The Utilities slipped 0.5% (down 5.5%). The Banks gained 1.0% (up 7.0%), and the Broker/Dealers added 0.4% (up 6.5%). The Transports declined 0.6% (up 6.5%). The S&P 400 Midcaps rose 0.7% (up 4.1%), and the small cap Russell 2000 increased 0.4% (up 4.0%). The Nasdaq100 advanced 1.1% (up 6.8%).The Semiconductors surged 3.8% (up 9.5%). The Biotechs added 0.5% (up 6.9%). With bullion down $6, the HUI gold index fell 2.2% (up 2.4%).

Three-month Treasury bill rates ended the week at 140 bps. Two-year government yields rose seven bps to 2.07% (up 18bps y-t-d). Five-year T-note yields gained 10 bps to 2.45% (up 24bps). Ten-year Treasury yields jumped 11 bps to 2.66% (up 25bps). Long bond yields gained eight bps to 2.93% (up 19bps).

Greek 10-year yields fell six bps to 3.80% (down 27bps y-t-d). Ten-year Portuguese yields jumped 19 bps to 1.98% (up 4bps). Italian 10-year yields declined two bps to 1.96% (down 5bps). Spain's 10-year yields fell six bps to 1.44% (down 12bps). German bund yields dipped one basis point to 0.57% (up 14bps). French yields declined a basis point to 0.84% (up 6bps). The French to German 10-year bond spread was unchanged at 27 bps. U.K. 10-year gilt yields were unchanged at 1.34% (up 15bps). U.K.'s FTSE equities index slipped 0.3% (up 0.6%).

Japan's Nikkei 225 equities index gained 0.7% (up 4.6% y-o-y). Japanese 10-year "JGB" yields added one basis point to 0.085% (up 4bps). France's CAC40 increased 0.2% (up 4.0%). The German DAX equities index rose 1.4% (up 4.0%). Spain's IBEX 35 equities index added 0.2% (up 4.3%). Italy's FTSE MIB index rose another 1.4% (up 8.7%). EM markets were higher. Brazil's Bovespa index jumped 2.4% (up 6.3%), and Mexico's Bolsa gained 1.1% (up 0.7%). South Korea's Kospi index rose 1.0% (up 2.1%). India’s Sensex equities index surged 2.7% (up 4.3%). China’s Shanghai Exchange gained 1.7% (up 5.5%). Turkey's Borsa Istanbul National 100 index added 0.4% (down 0.2%). Russia's MICEX equities index advanced 1.1% (up 8.4%).

Junk bond mutual funds saw outflows of $3.076 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates gained five bps to 4.04% (down 5bps y-o-y). Fifteen-year rates rose five bps to 3.49% (up 15bps). Five-year hybrid ARM rates were unchanged at 3.46% (up 25bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down five bps to 4.28% (up 4bps).

Federal Reserve Credit last week declined $1.1bn to $4.404 TN. Over the past year, Fed Credit contracted $9.2bn. Fed Credit inflated $1.593 TN, or 57%, over the past 272 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $4.0bn last week to $3.356 TN. "Custody holdings" were up $186bn y-o-y, or 5.9%.

M2 (narrow) "money" supply jumped $20.5bn last week to $13.858 TN. "Narrow money" expanded $599bn, or 4.5%, over the past year. For the week, Currency increased $2.3bn. Total Checkable Deposits surged $97bn, while Savings Deposits dropped $74.7bn. Small Time Deposits were little changed. Retail Money Funds declined $3.8bn.

Total money market fund assets dropped $20.1bn to $2.816 TN. Money Funds gained $150bn y-o-y, or 5.6%.

Total Commercial Paper gained $7.5bn to a near five-year high $1.119 TN. CP gained $151bn y-o-y, or 15.7%.

Currency Watch:

The U.S. dollar index slipped 0.4% to 90.572 (down 1.7% y-o-y). For the week on the upside, the Mexican peso increased 2.2%, the South African rand 1.4%, the Australian dollar 1.0%, the British pound 1.0%, the Norwegian krone 0.7%, the New Zealand dollar 0.5%, the Swiss franc 0.5%, the Brazilian real 0.3%, the Singapore dollar 0.3%, the Japanese yen 0.3% and the euro 0.2%. For the week on the downside, the Canadian dollar declined 0.3% and the South Korean won slipped 0.1%. The Chinese renminbi gained 1.01% versus the dollar this week (up 1.60% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index slipped 0.6% (up 1.8% y-t-d). Spot Gold declined 0.5% to $1,332 (up 2.2%). Silver lost 0.6% to $17.036 (down 1%). Crude declined 93 cents to $63.37 (up 5%). Gasoline added 0.8% (up 4%), while Natural Gas declined 0.5% (up 8%). Copper fell 1.0% (down 3%). Wheat was down 1.8% (down 1%). Corn jumped 1.8% (up 1%).

Trump Administration Watch:

January 20 – Bloomberg (Laura Litvan, Erik Wasson and Anna Edgerton): “The U.S. government officially entered a partial shutdown early Saturday as Senate Democrats and a handful of Republicans blocked a House-passed bill to fund the government after the two parties failed to break their deadlock over immigration. As the midnight passed, senators kept haggling over whether a funding extension shorter than the four-weeks passed by the House might provide a bridge for negotiations. With Democrats mostly unified in their opposition and defections in the Republican ranks, Senate Majority Leader Mitch McConnell couldn’t muster the 60 votes needed to get the temporary funding measure to the floor before the deadline to act.”

January 18 – Reuters (Richard Cowan and Susan Cornwell): “The White House on Wednesday threw its support behind a Republican proposal to avert a government shutdown at week’s end with a one-month extension in funding, but it was unclear whether there were enough votes to pass it in Congress. Congress has been struggling for months to reach an agreement to fund the government, which is currently operating on its third temporary funding extension since the 2018 fiscal year began on Oct. 1. The latest measure expires on Friday.”

January 16 – Wall Street Journal (Andrew Browne): “The last time Washington mobilized for a trade war, Ronald Reagan was president and Japan the adversary. Today, the White House is readying the same big guns—a mix of tariffs and quotas—aimed mainly at Chinese imports. It has in its sights everything from steel to solar panels and washing machines. A record Chinese annual trade surplus with the U.S., announced last week, is the potential catalyst for hostilities after a year of bluster from President Donald Trump. A trade war isn’t a certainty, but if it comes, it will look nothing like the battles that raged in the 1980s over Japanese semiconductors, cars and TV sets.”

January 18 – Reuters (Jeff Mason): “President Donald Trump said… the United States was considering a big ‘fine’ as part of a probe into China’s alleged theft of intellectual property, the clearest indication yet that his administration will take retaliatory trade action against China. In an interview with Reuters, Trump and his economic adviser Gary Cohn said China had forced U.S. companies to transfer their intellectual property to China as a cost of doing business there. The United States has started a trade investigation into the issue…”

January 19 – Reuters (Michael Martina and Kevin Yao): “As influential voices within the U.S. business community warn China that U.S. President Donald Trump is serious about tough action over Beijing’s trade practices, there is little sense of a crisis in the Chinese capital, where officials think he is bluffing. In Beijing, many experts think Washington is unwilling to pay the heavy economic price needed to upset prevailing trade dynamics between the world’s two largest economies. Hanging over trade relations are several inquiries into whether steel and aluminum imports… are harming U.S. national security, possible tariffs on imported solar panels, as well as an investigation into potential Chinese abuse of intellectual property.”

January 17 – Reuters (Jeff Mason and David Lawder): “U.S. President Donald Trump… said that terminating the North American Free Trade Agreement would result in the ‘best deal’ to revamp the 24-year-old trade pact with Canada and Mexico in favor of U.S. interests. Lawmakers as well as agricultural and industrial groups have warned Trump not to quit NAFTA, but he said that may be the outcome. ‘We’re renegotiating NAFTA now. We’ll see what happens. I may terminate NAFTA,’ Trump said…”

Federal Reserve Watch:

January 19 – Bloomberg (Rich Miller): “Federal Reserve policy makers are openly voicing their willingness to accept above-target inflation even as price pressures are beginning to build. ‘Let me be clear: A small and transitory overshoot of 2% inflation would not be a problem,” William Dudley, president of the Federal Reserve Bank of New York, said… ‘Were it to occur, it would demonstrate that our inflation target is symmetric, and it would help keep inflation expectations well-anchored around our longer-run objective.’ Such talk suggests that the central bank won’t respond willy-nilly to mounting price pressures with significantly stepped-up interest rate increases.”

January 19 – Bloomberg (Jesse Hamilton): “The Federal Reserve is working to relax a key part of post-crisis demands for drastically increased capital levels at the biggest banks, according to people familiar with the work, a move that could free up billions of dollars for some Wall Street giants. Central bank staffers are rewriting the leverage-ratio rule -- a requirement that U.S. banks maintain a minimum level of capital against all their assets -- to better align with a recent agreement among global regulators… The people said the Fed effort is drawing opposition from the Federal Deposit Insurance Corp., an agency with authority over banking rules that’s still led by a Barack Obama appointee.”

U.S. Bubble Watch:

January 16 – Wall Street Journal (Martin Feldstein): “Year after year, the stock market has roared ahead, driven by the Federal Reserve’s excessively easy monetary policy. The result is a fragile financial situation—and potentially a steep drop somewhere up ahead. To deal with the Great Recession, the Fed cut interest rates to a historic low. The short-term federal-funds rate hit 0.15% in January 2009 and stayed there until the end of 2015. In a strategy aimed at reducing long-term rates, the Fed under then-Chairman Ben Bernanke promised to keep short-term rates close to zero until the economy fully recovered. The Fed also began buying long-term bonds and mortgage-backed securities, more than quintupling its balance sheet from nearly $900 billion in 2008 to $4.4 trillion now. Mr. Bernanke explained that this ‘unconventional’ monetary policy was designed to encourage an asset-substitution effect. Investors would shift out of bonds and into equities and real estate. The resulting rise in household wealth would push up consumer spending and strengthen the economic recovery.”

January 19 – Bloomberg (Brandon Kochkodin): “Volatility was one of the never-ending talking points of 2017… The Chicago Board Options Exchange Volatility Index, or VIX, finished the year with the lowest average daily level on record. During the course of the year, we saw the market’s fear gauge set a new record low when it closed at 9.14 on Nov. 3. Want more perspective? Try this: Arrange all the trading days this millennium from lowest to highest by the value of the VIX that day. The first 41 entries on that list would all be from 2017! Fully 80 of the top 100 calmest days since the turn of the century were in this past year. It’s not as if there wasn’t anything to worry about. The Federal Reserve’s Partisan Conflict Index, a measure of political disagreements with data stretching back to 1981, hit its highest point on record in March. The country endured the most expensive hurricane season. Threats of a federal government shutdown came and went. Not even a nuclear showdown with North Korea could raise investors’ collective pulse.”

January 16 – Reuters (Claire Milhench and Marc Jones): “Investors have raised their stock allocations to two-year highs and cut cash positions to five-year lows, with a majority expecting the equity bull run to continue into 2019, a survey by Bank of America Merrill Lynch (BAML) showed…”

January 17 – CNBC (Jeff Cox): “Stock market optimism among professional investors just keeps on surging, and is now at the highest levels since before the crash of 1987. Bullishness, or the belief that the market is heading higher, is now at 66.7% in the latest Investors Intelligence survey, a widely followed gauge of sentiment among investment newsletter authors. That's the highest level since early April 1986…”

January 17 – Bloomberg (Craig Torres): “Almost all of the 12 Federal Reserve districts reported ‘modest to moderate gains’ in economic activity at the start of 2018, a Federal Reserve survey showed. The central bank’s Beige Book economic report… said the Dallas Fed bank was the exception, reporting ‘a robust increase.’”

January 17 – Bloomberg (Katia Dmitrieva): “U.S. factory production rose for a fourth straight month in December, capping the strongest quarter since 2010 and underscoring a resurgence in manufacturing that’s primed for further advances, Federal Reserve data showed…”

January 16 – Reuters (Uday Sampath and Siddharth Cavale): “U.S. shoppers spent a record $108 billion snapping up discounts on Amazon and other websites during the 2017 holiday season, with more people using smartphones and tablets, Adobe Analytics said… Adobe, which collects its data by measuring 80% of all online transactions from the top 100 U.S. web retailers, said the amount was 14.7% higher than last year’s total.”

January 16 – Bloomberg (Joanna Ossinger): “Volatility can’t stay this low forever -- or so investors have been saying for what feels like forever. They may have finally found their moment. As the market rallies, ‘volatility isn’t that low anymore,’ Pravit Chintawongvanich of Macro Risk Advisors said…, adding that the Cboe Volatility Index (VIX) curve is flattening. The VIX rose as much as 22% on Tuesday to as high as 12.41, the highest level in six weeks. That is still around 30% below the average of 18.1 since the bull market started in 2009. The correlation of S&P 500 Index stocks to each other has been increasing as the market rallies, the reverse of what’s typically seen, and this gain over the past two months points to broad buying of equities –- a ‘‘melt up’ so to speak,’ Chintawongvanich wrote.”

January 17 – Bloomberg (Martin Z Braun): “New York City is still reaping the benefits of the real estate boom. The city set a value of $1.26 trillion for its more than one million properties for the fiscal year beginning in July, an increase of 9.4% over the previous period that promises to boost the government’s tax collections. ‘This year’s roll confirms increases in the real estate market and additional construction activity in New York City, which is not just concentrated in Manhattan,’ Jacques Jiha, the city’s commissioner for the department of finance, said…”

January 17 – Wall Street Journal (Leslie Scism): “Long-term-care insurance was supposed to help pay for nursing homes, assisted living and personal aides for tens of millions of Americans when they became unable to take care of themselves. Now, though, the industry is in financial turmoil, causing misery for many of the 7.3 million people who own a long-term-care policy, equal to about a fifth of the U.S. population at least 65 years old. Steep rate increases that many policyholders never saw coming are confronting them with an awful choice: Come up with the money to pay more—or walk away from their coverage. ‘Never in our wildest imagination did we consider that the company would double the premium,’ says Sally Wylie, 67, a retired learning specialist…”

China Watch:

January 18 – New York Times (Keith Bradsher): “The pace of growth in China’s economy accelerated last year for the first time in seven years as exports, construction and consumer spending all climbed strongly. At least, that’s what the government says. In reality, the pace of growth in China’s economy is anybody’s guess. Various signals suggest China’s growth did speed up last year, which could give the government the room it needs to tackle an accumulation of serious financial, environmental and social problems this year… The National Bureau of Statistics announced… that the economy expanded 6.9% last year, up slightly from 6.7% in 2016 and breaking a trend of gradual slowing that began in 2011.”

January 18 – Bloomberg: “China home prices rose in the most cities in six months even as the government prolonged its campaign to curb property speculation. New-home prices… in December rose in 57 of 70 cities tracked by the government, compared with 50 in November… Prices fell in 7 cities from the previous month and were unchanged in six.”

January 14 – Reuters (Michael Martina): “China will step up oversight in the banking sector this year to reduce financial risks, the country’s banking regulator said, stressing that long-term efforts would be needed to control banking sector chaos. The China Banking Regulatory Commission (CBRC) said… that its priorities included increasing supervision over shadow banking and interbank activities. ‘Banking shareholder management, corporate governance and risk control mechanisms are still relatively weak, and root causes creating market chaos have not fundamentally changed,’ the CBRC said.”

January 17 – Bloomberg: “A slump in Chinese government debt may worsen, with inflation picking up as breweries, dairies and others raise prices, and energy costs climb amid a government crackdown on coal. Cui Li, Hong Kong-based head of macro research at CCB International Holdings Ltd., expects inflation to rise to 2.5% this year, a marked increase from 2017 when China’s consumer price index averaged 1.6%. ‘Food prices will rise, raw material costs are passing through, and pollution curbs have intensified -- I don’t think the market has yet fully priced in the impact of inflation,’ said Cui. She expects China’s 10-year government bond yield to range between 4.3 and 4.5% by the end of the year versus 3.97% Thursday.”

January 16 – Bloomberg: “China’s central bank boosted injections via open-market operations to the most in two months to counter seasonal tightening of liquidity. The People’s Bank of China pumped in a net 270 billion yuan ($42bn) on Tuesday, as sales of reverse-repurchase agreements more than offset maturities. That’s the most since Nov. 16…”

January 17 – Wall Street Journal (Nathaniel Taplin): “Why did sentiment on China improve so much in 2017? Progress in taming long-running structural problems, such as the country’s excess manufacturing capacity and mushrooming off-balance sheet debt, deservedly caught investors’ attention. The driving force behind that progress was the same factor that should now give investors pause: The primacy of Xi Jinping. Mr. Xi’s five-year campaign to consolidate power has left him in firm control of China’s fractious bureaucracy. He has started to do what his predecessors couldn’t, bringing slippery local officials and state-owned banks and firms to heel. But his success entails a sea-change in how to view China: The biggest risk may no longer be a weak Beijing, but a strong Xi administration which local officials are terrified to defy. That brings up ghosts of a darker time.”

January 18 – Bloomberg (Denise Wee): “It’s been a bad week for bonds of the debt-laden Chinese conglomerate HNA Group Co., with stock trading halts at four units adding to investor concerns. One of the securities sold by HNA Group International Co. that matures in 2019 slid as much as 4.2 cents this week -- the biggest weekly fall in six months -- to a record low of 84 cents on the dollar. The company’s bonds due 2021 shed 3.3 cents this week to 79.5 cents, also near the lowest ever.”

January 18 – Bloomberg: “A local state-owned company in China’s Inner Mongolia, a region that recently admitted having inflated key economic data, has suffered a credit rating downgrade. Fitch Ratings cut Inner Mongolia High-Grade Highway Construction and Development Co.’s long-term foreign- and local-currency issuer default rating to BBB- from BBB, citing the local government’s revision of its fiscal figures… That follows its downgrade of an internal assessment of the creditworthiness of the Inner Mongolia region… Investors are growing more concerned about local credit risks as the government steps up efforts to curb leverage and two regions have admitted faking data.”

January 15 – Bloomberg: “China is escalating its clampdown on cryptocurrency trading, targeting online platforms and mobile apps that offer exchange-like services… While authorities banned cryptocurrency exchanges last year, they’ve recently noted an uptick in activity on alternative venues. The government plans to block domestic access to homegrown and offshore platforms that enable centralized trading, the people said… Authorities will also target individuals and companies that provide market-making, settlement and clearing services for centralized trading…”

January 16 – Financial Times (Yuan Yang, Lucy Hornby and Emily Feng): “China is plugging the last holes in its ‘Great Firewall’ internet censorship apparatus, hampering global groups’ ability to operate in the country. Five international companies and organisations told the Financial Times that access to the global internet from their Chinese offices has been disrupted in recent months. Some of the companies blamed Chinese telecoms providers, saying the groups blocked crucial software used to bypass censorship. China aggressively censors the internet, cutting off locals’ access to Facebook, Google, YouTube and much more, to control what news and facts reach its population.”

Central Bank Watch:

January 16 – Bloomberg (Piotr Skolimowski): “The European Central Bank should adjust its policy guidance before the summer and shouldn’t have any problems ending net asset purchases in one swoop after September, Governing Council member Ardo Hansson said… While the Estonian policy maker judged the ECB’s current stance as broadly appropriate, he argued… that there was a ‘need for action in our communication.’ ‘There are certainly good reasons to reduce the importance of the net purchases in our communication soon -- also with a view to a potential end to these purchases,’ he said. If growth and inflation continue to evolve broadly in line with the ECB’s latest projection, it would ‘certainly be conceivable and also appropriate to end the purchases after September,’ he said.”

January 16 – Bloomberg (Jana Randow): “Bundesbank President Jens Weidmann said that analysts’ expectations that European Central Bank interest rates won’t rise before the middle of next year are reasonable. ‘Those expectations seem to be grosso modo in line with the current forward guidance of the ECB Governing Council, which says that interest rates will only increase well beyond the end of net asset purchases,’ he said…”

January 17 – Bloomberg (Piotr Skolimowski and Alessandro Speciale): “The European Central Bank’s second-highest official waded into the debate over euro-area monetary stimulus after some policy makers expressed concerns over the single currency’s recent gains. Vice President Vitor Constancio cast his lot with Governing Council members Francois Villeroy de Galhau and Ewald Nowotny, who argued over the past two days that a stronger euro may harm ECB efforts to return inflation to the goal of just under 2%.”

January 14 – Reuters (Leika Kihara and Stanley White): “Bank of Japan Governor Haruhiko Kuroda offered a positive view on the economy and inflation…, sending the yen to a four-month high against the dollar on simmering speculation it may exit its ultra-loose monetary policy earlier than expected. Financial markets ignored Kuroda’s reminder that the BOJ will maintain its massive stimulus in a sign of how nervous investors have become on when it might follow the footsteps of other central banks in dialing back crisis-mode stimulus.”

January 17 – Reuters (Balazs Koranyi and Jan Strupczewski): “Euro zone officials could pick a new European Central Bank vice president within weeks, kicking off two years of flux at the top of one of Europe’s most vital institutions and previewing a tussle to replace ECB chief Mario Draghi in 2019. Germany is seen as eager to claim the presidency at last, two decades after the ECB’s creation, but the hawkish views of its obvious candidate, Bundesbank chief Jens Weidmann, will count against him in some member states, euro zone sources say.”

January 14 – Reuters (John Revill and Angelika Gruber): “Three years after the Swiss National Bank shocked currency markets by scrapping the franc’s peg to the euro, it faces the toughest task of any major central bank in normalising ultra-loose monetary policy. If it raises rates, the Swiss franc strengthens. If it sells off its massive balance sheet, the Swiss franc strengthens. If a global crisis hits, the Swiss franc strengthens. And the abrupt decision to scrap the currency peg on Jan. 15, 2015, means it still has credibility issues with financial markets.”

January 19 – Bloomberg (Masaki Kondo): “Investors in Australia’s bonds are boosting bets the central bank will join its global peers in shifting toward a more hawkish policy stance. The extra yield on the nation’s benchmark three-year bonds over the central bank’s overnight cash rate jumped to 75 bps Friday, the widest since May 2010. Retail sales and employment both grew at more than twice the pace economists predicted, according to the latest data published this month.”

Global Bubble Watch:

January 17 – Bloomberg (Daniel Moss): “This is going to be an exciting year for monetary policy. In fact, it already is, thanks to Europe and Japan. Investors were taken aback last week when the Bank of Japan bought fewer bonds and the European Central Bank revealed -- shock, horror -- its language would have to evolve with the euro region's economy. Both developments, and the reaction, were welcome. They say a lot about the strength of global growth and how it still surprises many people… The next potential flashpoint is the Jan. 25 meeting of the ECB's governing council. It's too soon to expect a shift in communications then, but individual council members are off and running.”

January 19 – Financial Times (Gillian Tett): “The $160bn Bridgewater hedge fund produced a chart last year about modern politics that was alarming for at least two reasons. First, the number crunching revealed that the proportion of votes garnered by populist, anti-establishment candidates in the west, such as US President Donald Trump, France’s Marine Le Pen and Jeremy Corbyn, leader of the UK Labour party, exploded from 7% in 2010 to 35% in 2017. Second, the chart showed that the only time an increase of this magnitude occurred in recent memory was in the 1930s, when another financial crisis led to populism. That time, the swing prefigured the rise of nationalism and led to war. Could history repeat itself? The global elite increasingly fears so. The World Economic Forum on Wednesday released its annual survey of the main concerns of its members.”

January 17 – Bloomberg (Adam Haigh): “One of the world’s largest money managers says you should fear the lack of fear in markets. Investors in global equities are enjoying the best start to a year in at least three decades, cutting back on cash positions and plowing more money into riskier assets. However, just as many expect this bull run to last even longer than previously expected, Pacific Investment Management Co. says now is the time for caution. ‘The fact that the fear is gone is the main reason why we should be worried,’ Joachim Fels, a global economic adviser at Pimco, told Bloomberg… ‘That means most investors are now pretty fully invested and that means they will want to get out if the markets start to correct -- exacerbating the downdraft.”

Fixed Income Watch:

January 18 – CNBC (Patti Domm): “The bond market is in the process of making an important move, and stock traders are keeping a wary eye on it. On Thursday afternoon, the benchmark 10-year Treasury yield crept close to 2.63%, a level it came near last year but has not really traded above since 2014. The yield was above 2.62% in afternoon trading Thursday. ‘The pain point comes at 2.63%, where everybody believes that's the breakout, and everyone will be keying on that,’ said Art Hogan, chief market strategist at B. Riley FBR. ‘This is a more-than-three-year range that we're attempting to break out of here.’”

January 16 – Financial Times (Roger Blitz, Leo Lewis and Robin Harding): “Global bond investors are casting a nervous eye at Japan. As a wave of selling washed across debt markets last week, the disclosure that the Bank of Japan had trimmed the volume of longer bonds it purchased was seized upon as the trigger for a move higher in yields that prompted veteran investor Bill Gross to again call the end of the three-decade bull run for the $14tn US Treasury market. The intense interest in a standard operation in the BOJ’s quantitative easing programme revealed how sensitive investors are to any perceived changes at a juncture when the European Central Bank is halving its monthly bond buying and the Federal Reserve is tightening policy… Bret Barker, a portfolio manager with asset manager TCW, says the blowback into the US Treasury market reflects how central bank easing through the BoJ targeting a zero yield for the 10-year Japanese government bond, as well as debt purchases and negative rates from the ECB, has acted as an anchor for global interest rates. ‘If those anchors are released . . . that should increase volatility and raise longer rates in the US,’ he says.”

January 17 – Bloomberg (Sophie Caronello): “China and Japan’s combined share of Treasuries fell to about 36% of all foreign-held U.S. government debt in November, the lowest level in about 18 years. China, the biggest foreign holder of U.S. bonds, notes and bills, saw its total drop 1.1% to $1.18 trillion from the previous month… Japan’s holdings dropped 0.9% to $1.08 trillion, the lowest in more than four years.”

January 16 – Bloomberg (Carrie Hong, Annie Lee, Lianting Tu, and Narae Kim): “The boom in Asia’s dollar bond market is ratcheting up a notch, with investors placing orders for five times as much debt as has been sold so far this month. Chances of a steeper path higher for global interest rates that’s lifted government bond yields this year is doing little to damp the appeal for debt from Asian companies outside Japan. The ferocious appetite in 2017, in part due to the hunger from investors chasing higher yields, is extending into January with Chinese property companies finding a flurry of buyers wanting to get their hands on newly issued debt… After a record $322 billion of dollar bond issuance from the region in 2017, Asian firms are off to the strongest ever start to a year. Year-to-date sales have reached $19.3 billion…”

Europe Watch:

January 18 – Bloomberg (Alessandro Speciale, Piotr Skolimowski, and Carolynn Look): “Jens Weidmann hit back at criticism of Germany’s current-account and budget surpluses by International Monetary Fund Managing Director Christine Lagarde, saying that increasing public spending would be the wrong way to go. The Bundesbank president kicked off a joint conference by the two institutions by insisting that Europe’s largest economy doesn’t need more expenditure, though he agreed that it should be better planned. Public outlays should shift away from consumption and toward targeted investment, he said.”

January 14 – Bloomberg (Jeff Black, Stephen Engle, and Enda Curran): “Germany’s central bank has decided to include the Chinese yuan in its own reserves, in a further boost to the international status of the currency. …Bundesbank board member Andreas Dombret said the decision was taken last year following an investment of 500 million euros ($611 million) by the European Central Bank… ‘The renminbi is used increasingly as part of central banks’ foreign-exchange reserves -- for example, the ECB included the RMB but also other European central banks did so,’ Dombret said…”

Japan Watch:

January 19 – Reuters: “The Japanese government raised its assessment of the economy in January for the first time in seven months due to rising consumer spending, an encouraging sign that inflation could start to pick up this year. ‘Japan's economy is gradually recovering,’ the Cabinet Office said… That marked an upgrade from December, when the Cabinet Office said the economy is on a recovery path. The government also raised its assessment of consumer spending for the first time in seven months after retail sales, household spending, and new car sales gained momentum towards the end of last year.”

January 14 – Wall Street Journal (Megumi Fujikawa and Suryatapa Bhattacharya): “The Bank of Japan, after goosing Japanese share prices with a $50-billion-a-year program of stock purchases, now confronts a decision facing many other developed country central banks: when to stop. The Nikkei Stock Average, standing near a 26-year high, doesn’t seem in need of special help anymore, and critics say the BOJ’s buying distorts the market. The Nikkei has more than doubled in the last five years and is up 24% from a year ago. Yet central-bank officials worry that a premature pullback could send the wrong message by suggesting that the BOJ has given up its commitment to reaching 2% inflation.”

January 16 – Bloomberg (Netty Idayu Ismail): “A minor tweak in the Bank of Japan’s bond purchases has emboldened investors to bet the central bank is about to wind back monetary stimulus. Going long on the yen is the biggest currency wager for AMP Capital Investors Ltd.’s Nader Naeimi… Options traders are the most bullish on the yen among developed-market currencies. Japan’s longest stretch of economic growth in two decades is fueling bets the BOJ will join its global peers and begin normalizing policy as soon as this year. The central bank cut purchases of longer-maturity bonds last week, prompting speculation it will allow 10-year yields to rise above its current target of around zero percent.”

January 18 – Bloomberg (Toru Fujioka and Masahiro Hidaka): “A small shift is taking place in internal discussions among Bank of Japan policy makers, with a minority raising the need to eventually start discussing policy normalization, even though they agree the current stimulus program must continue unchanged for some time… Some of them think the change is natural given the improvement in the economy, according to the people, who declined to be named because discussions are private. Japan’s extended economic recovery and a slow but steady rise in inflation are creating the need in the medium-term to at least begin talking about normalization, the people said.”

January 16 – Bloomberg (James Mayger, Connor Cislo, and Maiko Takahashi): “One of Japan’s key targets for addressing its ballooning debt is set to be pushed further into the future when the Cabinet Office updates economic forecasts next week. The primary balance, which measures the government’s fiscal position excluding interest payments on its borrowings, was meant to come out of the red in fiscal 2020. Reaching the goal was seen as a first step for Prime Minister Shinzo Abe’s administration to arrest debt growth… Yet a best-case projection for a primary balance surplus was reset to 2025 in a revision last year and now it’s going to be deferred again, until sometime in the late 2020s…”

Leveraged Speculation Watch:

January 14 – Bloomberg (Nishant Kumar): “Cheese, sunflower seeds and rough rice sounds like an unappetizing mix -- unless you happen to be a hedge-fund manager. A handful of computer-driven funds had a bumper 2017 by betting on the future price of such ‘exotic’ assets. The success of this type of managed futures strategy, the industry’s term for trend-following, is now drawing new entrants despite the risks created by the low levels of liquidity. Hedge funds returns have been battered by central bank monetary policies that have made it more difficult for them to outperform the market… That’s prompting some trend followers to move into less crowded markets such as over-the-counter securities, electricity and coal.”

Geopolitical Watch:

January 15 – CNN (Emma Burrows, Angela Dewan and Lindsay Isaac): “Russian Foreign Minister Sergey Lavrov has accused the United States of destabilizing the world, airing a list of grievances over the Trump administration's foreign policy. Lavrov dedicated the opening of his annual press conference… to castigating the US, which is expected to soon issue a fresh round of sanctions against Russia over its interference in the 2016 US election. Russia has long denied meddling in the vote. Lavrov criticized the US for issuing regular ‘threats’ in relation to events in North Korea and Iran, saying they had ‘further destabilized’ the global situation.”

January 13 – Reuters (Andrey Ostroukh): “Iran said… it would retaliate against new sanctions imposed by the United States after President Donald Trump set an ultimatum to fix ‘disastrous flaws’ in a deal curbing Tehran’s nuclear program. Trump said… he would waive nuclear sanctions on Iran for the last time to give the United States and European allies a final chance to amend the pact. Washington also imposed sanctions on the head of Iran’s judiciary and others. Russia - one of the parties to the Iran pact alongside the United States, China, France, Britain, Germany and the European Union - called Trump’s comments ‘extremely negative.’”

January 16 – Newsweek (Jack Moore): “Iran has condemned the U.S. plan to create a 30,000-strong force inside Syria to protect territory held by the Kurdish-Arab coalition that helped oust the Islamic State militant group (ISIS) from most of northeastern Syria. The U.S.-led coalition worked with the Syrian Democratic Forces (SDF), made up of the Kurdish People’s Protection Units (YPG) militia and Arab militiamen, to defeat ISIS in Raqqa. Now, Washington is working with the SDF to create the force to secure territory along the northern Syrian border in Turkey.”

January 16 – Voice of America (Dorian Jones): “Turkish President Recep Erdogan… stepped up threats to launch a cross-border operation against the Syrian Kurdish militia known as the YPG, which the U.S. backs in the war against Islamic State militants. Ankara sees the YPG as a terrorist organization linked to an ongoing Kurdish insurgency in Turkey. Erdogan used his weekly parliamentary address to his ruling AK Party supporters to say the operation could be imminent. ‘Tomorrow, or the day after, or within a short period, we will get rid of terror nests one by one in Syria, starting with Afrin and Manbij,’ Erdogan said.”

Friday, January 19, 2018

Friday Evening Links

[Reuters] U.S. government shutdown begins as spending bill fails in Senate

[Bloomberg] Stocks Ignore Shutdown Talks, Continue Record Run: Markets Wrap

[Bloomberg] ‘The Intensity Is Crazy’: Stock Advisers Bask in the Bull Market

[CNBC] A government shutdown may not affect stocks much, but a bigger political battle brewing will

[CNBC] Bond yields at a critical level means more than meets the eye

[Reuters] Trump administration says U.S. mistakenly backed China WTO accession in 2001

[Reuters] Fed's Williams says three rate hikes 'good starting point'

[CNBC] Majority of Americans say they are satisfied with the economy at levels not seen since dotcom boom, NBC/WSJ poll finds

[Bloomberg] Investors Yank Money From Junk-Bond ETFs

[Bloomberg] GE's Credit Risk Rises After Insurance Charge Spooks Investors

[Bloomberg] Draghi Task Force Plan for Euro Safe Assets Is Ready

[WSJ] Trump Calls for Four-Week Funding Extension After Talk With Schumer as Possible Shutdown Looms

Friday's News Links

[Bloomberg] Dollar Pressured as Treasuries Steady; Stocks Rise: Markets Wrap

[CNBC] 'Shutdown coming?' All eyes are on divided Senate, Trump as deadline threatens

[CNBC] House passes bill to avoid a government shutdown. Now comes the hard part

[Reuters] U.S. workforce shortages bolster case for Fed rate hikes

[Bloomberg] Fed Officials See Benefits in Letting Inflation Run Above Target

[Reuters] Fed's Williams under consideration for No. 2 Fed post: WSJ

[Reuters] China looks to call bluff on Trump trade action

[Bloomberg] Fed Working on Proposal to Ease Up on Bank Leverage Limits

[Bloomberg] Australia Yields Signal Central Bank Tightening Looms

[Bloomberg] Chinese Region's Fake Data in Focus After Local Borrower Downgrade

[Bloomberg] HNA Group's Bonds Plunge to Record Lows Amid Share Halt Concerns

[Bloomberg] HNA Group CEO to Skip Gathering of Leaders at Davos

[Bloomberg] Why Is Volatility So Low?

[WSJ] Showdown Looms as Senate Democrats Prepare to Reject Spending Bill

[FT] Sovereign debt sell-off continues in Asia

[FT] Populist swing alarms financial titans

Wednesday, January 17, 2018

Wednesday Evening Links

[Bloomberg] Asian Stocks Head for New Highs, Bonds Hold Losses: Markets Wrap

[Reuters] Exclusive: Trump says terminating NAFTA would yield the 'best deal' in renegotiations

[Bloomberg] Fed Says Almost All Districts Saw Modest to Moderate Growth

[Bloomberg] China, Japan's Share of Treasuries Hits Lowest Since 2000

[Bloomberg] Pimco Says Lack of Fear in Markets Means You Should Be Worried

[Bloomberg] Beware the $500 Billion Bond Exodus

[Bloomberg] The Value of New York Real Estate Jumps More Than 9%

[Bloomberg] Trump's Tax Cuts Let Banks Off the Hook for Lousy Trading Results

[Bloomberg] China Bond Traders Are Underestimating Inflation Risk, CCB Warns

[CNBC] Few large US companies say they'll use tax savings to boost wages, CNBC survey finds

[WSJ] ‘Melt-Up’ Rally Propels Dow Above 26000 as Fear Turns to Greed

[WSJ] Millions Bought Insurance to Cover Retirement Health Costs. Now They Face an Awful Choice

[WSJ] Strongman Xi Jinping Now a Big Risk for China’s Economy

Wednesday's News Links

[Bloomberg] Stocks Rise as BofA Continues Strong Bank Earnings: Markets Wrap

[Bloomberg] House GOP Bid to Avert Shutdown Gains Steam as Deadline Near

[Bloomberg] U.S. Manufacturing Output Rose in December for a Fourth Month

[CNBC] Stock market optimism from pros reaches highest level in nearly 32 years

[CNBC] Stock market's wild flip flop comes as warning signs build

[Bloomberg] Euro Frustrates ECB Policy Makers as Stimulus Debate Heats Up

[Reuters] Japan central bank to keep policy on hold, offer upbeat inflation view

[Reuters] China banking regulator chief warns 'black swan' event could threaten financial stability

[Bloomberg] Third HNA Unit Halted From Trading, Pending Major Announcement

[Bloomberg] Germany Asks Whether Its Economic Boom Needs a Policy Rethink

[Bloomberg] Did Bitcoin Just Burst? How It Compares to History's Big Bubbles

[Bloomberg] VIX May Have Finally Found Its Floor, Macro Risk Advisors Say

[Bloomberg] Yen Is Top Currency Wager for Funds Betting on BOJ Shift

[Bloomberg] Japan's Budget Goal Is Being Deferred Again

[Bloomberg] Asia Dollar Bond Boom Intensifies With Sky High Investor Demand

[WSJ, Feldstein] Stocks Are Headed for a Fall

[WSJ] Fed’s Kaplan Expects 3 Rate Rises This Year, but Says More May Be Needed

[WSJ] China’s Hot Housing Market Begins to Cool

[FT] Dollar’s weakness unsettles central bankers

[FT] Era of low yields faces test as governments increase debt sales

[FT] China infrastructure projects fall foul of debt concerns

Tuesday, January 16, 2018

Tuesday Afternoon Links

[Bloomberg] Stocks Mixed, Give Back Gains After Record Surge: Markets Wrap

[Reuters] U.S. holiday shoppers spend record $108 billion online: Adobe

[Bloomberg] Weidmann Says Predictions for Mid-2019 ECB Rate Hike Are Realistic

[VOA] Turkish President Steps Up Threats on US-backed Militia in Syria

[Newsweek] Iran Says Trump Fanning 'Flames of War' with New Syria Force


Tuesday's News Links

[Bloomberg] Stocks Race to Records as Big Banks Show Strength: Markets Wrap

[Bloomberg] ‘Explosion’ in U.S. Bond Supply Endangers Global Market Rally

[Bloomberg] U.S. Consumers See Higher Wage Growth, Inflation in Fed Survey

[Bloomberg] Yuan Strength Leaves Market Guessing at China's Line in the Sand

[Bloomberg] Bitcoin Tumbles 20% as Fears of Cryptocurrency Crackdown Linger

[Bloomberg] GOP Leaders Struggle to Avert Shutdown After Immigration Blow-Up

[Bloomberg] China's Xi Urges Trump to Seek Settlement of Trade Disputes

[Reuters] Investors extend bets on stocks climbing into 2019: BAML survey

[Bloomberg] ECB Confronts New Inflation Reality Jolted by Oil and Euro

[Bloomberg] ECB's Hansson Says Bond Purchases Could End After September

[Bloomberg] China’s Central Bank Boosts Injections to the Most in Two Months

[CNBC] Billionaire Sam Zell sees 'irrational exuberance' in the stock market and holds mostly cash

[WSJ] Battle Stations: U.S. and China Prepare for Trade Clash of the Titans

[WSJ] A Month-Long Trading Halt? China’s HNA Group Keeps Investors Guessing

[FT] China disrupts global companies’ web access as censorship bites

Sunday, January 14, 2018

Monday's News Links

[Bloomberg] Dollar Slide Deepens as Euro Strength Saps Stocks: Markets Wrap

[Bloomberg] Metals Power Higher as Sickly Dollar Spurs Copper-to-Gold Rally

[Reuters] BOJ's Kuroda sounds more positive on prices, yen hits four-month high

[Bloomberg] China Vows to Toughen Rules on $38 Trillion Banking Industry

[Bloomberg] Bundesbank Says It'll Add China's Yuan to Currency Reserves

[Bloomberg] China Escalates Crackdown on Cryptocurrency Trading

[Bloomberg] Carillion Collapses After U.K. Government Refuses Bailout

[WSJ] Bank of Japan’s $50 Billion Question: When to Stop Buying Stocks

[CNN] Russian foreign minister berates US for 'destabilizing' world

Sunday Evening Links

[Bloomberg] Asia Stocks Climb on Growth Views; Euro Holds Gain: Markets Wrap

[Reuters] Oil dips away from 2014 highs on rising U.S. rig count, but analysts say market supported

[Reuters] BOJ's Kuroda repeats resolve to maintain massive stimulus

[Reuters] Three years on from currency shock, Swiss central bank can't get back to normal

[Bloomberg] Hedge Funds Are Making Money From Exotic Bets

Sunday's News Links

[Reuters] China to step up banking oversight in 'arduous' fight on financial risks

[Reuters] Trump, Lighthizer discuss China, NAFTA trade talks: White House

[Reuters] Merkel could join Macron in Davos for epic clash with Trump

[WSJ] Dollar Gets the Cold Shoulder in Global Economic Boom

Saturday, January 13, 2018

Saturday's News Links

[Bloomberg] Iraq Joins U.A.E., Qatar in Call to Keep Oil Cuts

[Reuters] U.S. ultimatum on nuclear deal, new sanctions draw Iran threat

[FT] Strong US inflation signals rate rise in March

[FT] Bond markets: Is the bull run over?

Weekly Commentary: Mania

This might be the most fascinating market backdrop of my career. Not yet as dramatic as 1987, 1990, 1994, 1997, 1998, 1999, 2000, 2002, 2007, 2008, 2009 or 2012 – but, heck, we’re only two weeks into 2018 trading.

In the first nine trading sessions of the year, the DJIA tacked on 1,084 points. The S&P500 has advanced 4.2%, the Dow Transports 7.2%, the KBW Bank Index 6.0%, the Nasdaq100 5.7%, the Nasdaq Industrials 5.7%, the Nasdaq Bank Index 5.7%, the Nasdaq Composite 5.2%, the New York Arca Oil index 7.1%, the Philadelphia Oil Service Sector Index 9.8%, the Semiconductors (SOX) 5.5%, and the Biotechs (BTK) 6.3%.

It’s synchronized global speculation unlike anything I’ve witnessed. Italian stocks are up 7.2%, French 3.9%, Spanish 4.2%, German 2.5%, Portuguese 4.0%, Belgian 4.7%, Austrian 5.2%, Greek 6.1% and Icelandic 4.1%, European Bank stocks (STOXX600) have gained 5.4%, with Italian banks up double-digits. Hong Kong financials have gained 5.9%. Japan’s Topix Bank index is up 5.6%. Japan’s Nikkei has gained 3.9%, Hong Kong’s Hang Seng 5.0%, and China’s CSI 300 4.8%. Stocks are up 7.2% in Russia, 6.7% in Romania, 4.8% in Bulgaria and 5.8% in Ukraine. In Latin America, major equities indexes are up 3.9% in Brazil, 3.0% in Chile, 4.0% in Peru and 8.8% in Argentina.

It’s evolved into a full-fledged speculative Bubble and intense Mania. This type of euphoria, while fun and captivating, comes with unfortunate consequences. But there will be no worry for now. None of that. Once things have regressed to this point, negative news and troubling developments are easily disregarded. Speculation detached from reality.

I recall the speculative market that culminated in manic trading in the summer of 1998 – just weeks before the global system convulsed with the collapses of Russia and Long-Term Capital Management. There was the first quarter 2000 technology stock speculative melt-up - right in the face of deteriorating industry fundamentals. And how can we forget the fateful “subprime doesn’t matter” speculative run to all-time highs in the Autumn of 2007.

The backdrop is extraordinarily fascinating because of the intensity of speculative excess in the face of key developments that hold the potential to bring this party to a conclusion. Headlines from the week: “China Weighs Slowing or Halting Purchases of U.S. Treasuries.” “ECB Hawks Take the Lead on QE Debate as Doves Stay Quiet.” “Japan’s Central Bank Trims Bond Purchases, Prompting Taper Talk.” “Yen’s Spike Shows Taste of What Comes When BOJ Really Does Shift.” “ECB Joins Central Bank Chorus Hinting at Faster Tightening.” “Fed’s Dudley Warns That Tax Cuts Putting Economy on an 'Unsustainable Path'.” “U.S. Core Consumer Prices Post Biggest Gain in 11 months.” “Investors Spooked at Specter of Central Banks Halting Bond-Buying Spree.”

Not all that spooked. “Junk-Bond Funds See Largest Cash Inflows Since December 2016.” Investment-grade funds saw inflows of $4.186 billion. And while 10-year Treasury yields were up 7 bps this week – and 14 bps to begin 2018 – there’s certainly no panic. Even the so-called bond bears forecast the mildest of bear markets. I haven’t seen any predictions of a big backup in yields. A 1994 tightening cycle – 10-year Treasury yields up 250 bps – is today unimaginable. Yet excesses during ‘91-93 barely register when compared to the last nine years.

A Bloomberg News article, based on unnamed “senior government officials,” reported that China was considering slowing or halting purchases of U.S. Treasury securities. Though denied by Chinese authorities, this news resonated in the marketplace. The Bloomberg report followed by two days a Politico article, “White House Preparing for Trade Crackdown.”

It’s worth an additional look at pertinent Q3 2017 Z.1 “flow of funds” analysis: “Rest of World holdings of U.S. Financial Assets jumped $724 billion (nominal) during the quarter to a record $26.347 TN. This puts growth over the most recent three quarters at a staggering $2.124 TN (16% annualized). What part of these flows has been associated with ongoing rapid expansion of global central bank Credit? It’s worth recalling that ROW holdings ended 2007 at $14.705 TN and 1999 at $5.639 TN. As a percentage of GDP, ROW holdings of U.S. Financial Assets ended 1999 at 57%, 2007 at 100%, and Q3 2017 at a record 135%.”

In a world awash in finance, foreign “money” has been pouring into U.S. securities markets. China has been a major purchaser of Treasuries, as it recycles a massive and growing trade surplus with the U.S. (around $300bn in ’17). And as financial flows inundated EM in 2017, emerging central banks also turned significant buyers of U.S. government debt. At an estimated $2.7 TN, global QE played a major role in global liquidity abundance, “money” that at least partially circulated into booming U.S. securities markets.

There is a prevailing view in the U.S. that QE doesn’t matter. The Fed ended balance sheet expansion a few years back, and financial markets didn’t miss a beat. Better yet, the Fed is now contracting its balance sheet holdings and stock market gains have only accelerated. The reality is that it’s a global Bubble fueled by globalized liquidity. Central bank QE liquidity is fungible - $14 TN and counting.

Ten-year Treasury yields jumped to 2.60% on Wednesday’s China story, although they drifted back down on Chinese denials. And while the attention was on market yields, the more fascinating moves were in the currencies. The euro gained 1.4% this week on the rising prospect of an early end to the ECB’s QE program.

January 7 – Reuters (Sam Edwards): “The European Central Bank should set a date to end its asset-buying program, the head of Germany’s Bundesbank, Jens Weidmann, told Spanish newspaper El Mundo. Tipped as a potential candidate to succeed ECB President Mario Draghi when his term expires at the end of October 2019, Weidmann is a vocal critic of the bank’s quantitative easing program. ‘The prospects for the evolution of prices correspond to a return of inflation to a level sufficient to maintain the stability of prices. For this reason, in my opinion, it would be justifiable to put a clear end to the buying of debt bonds by establishing a concrete date (for ending the program),’ Weidmann said…”

The euro’s gain this week was overshadowed by the 1.8% surge in the Japanese yen.

January 8 – Bloomberg (Chris Anstey): “A minor tweak in a regular Bank of Japan bond-purchase operation on Tuesday was enough to send the yen climbing the most in almost a month, even though evidence weighs overwhelmingly against the adjustment signifying anything meaningful. What the yen’s spike does show is just how big a move will come whenever the central bank does telegraph a fine-tuning in its stimulus program. Tuesday’s gain was as big as 0.5% against the dollar, in wake of the BOJ trimming purchases of bonds dated in 10-to-25 years by 10 billion yen ($89 million) compared with its previous operation.”

By their nature, speculative Bubbles and melt-ups are at heightened risk to unexpected developments. The current environment is so fascinating specifically because there are anticipated developments capable of bringing this long party to an end. The Trump administration appears determined to focus on trade in 2018, with China in the crosshairs. China has more than ample Treasury holdings to sell if it decides to make a point.

Meanwhile, it’s no coincidence that with global markets going nuts we are beginning to hear more decisive hawkish talk from around the world of central banking. Bundesbank president Jens Weidmann’s preference for a “clear end” to bond purchases should not be dismissed. The likelihood that ECB purchases end completely in October are rising. Moreover, I would expect growing momentum within the executive board for ending the open-ended nature of Draghi’s stimulus doctrine. Mr. Weidmann is a leading candidate to head the ECB next year at the completion of Draghi’s term. Even if a German is not soon at the helm of the European Central Bank, expect a push to return to traditional monetary management. I’m not anticipating an immediate return to “the ECB does not pre-commit.” But perhaps it’s time for the markets to become less complacent with regard to assurances of open-ended market support and permanently very low rates.

Prospects are growing for a 2018 tightening of global financial conditions. But with stocks rising percentage points by the week, there’s great incentive to focus on the here and now of over-liquefied market conditions. Besides, won’t the potential for a destabilizing spike in the yen keep Kuroda on full throttle? Don’t the doves still hold the majority at the ECB? Won’t the risk of a looming trade war with China (and others) ensure the Fed remains cautious, placing a lid on Treasury yields? Besides, the Chinese are too smart for the type of wound to be self-inflicted from threatening to dump Treasuries – aren’t they?

Markets are sure willing to assume a lot and ignore even more. There remains overwhelming confidence that global central bankers will work in concert to ensure markets don’t buckle, at least so long as inflation stays well-contained. Rising inflationary pressures are one of my Themes 2018. WTI crude this week traded to $64.30, up 6.4% in two weeks to a near three-year high. The GSCI Commodities Index rose 2.1% this week. The dollar index has declined 1.2% to begin the new year.  Interestingly, Gold is up a quick 2.7%.

General inflationary pressures have gained some momentum. The global economy has attained strong momentum. And markets these days are left to contemplate how a runaway global risk market melt-up could impact economic activity, and what an outright boom might mean to inflation dynamics.

German 10-year bund yields jumped 15 bps this week to a near two-year high 58 bps. Yields rose 11 bps in Switzerland, and 10 bps in Sweden, the UK, and Australia. Mexico yields surged 22 bps, Russia 27 bps and Brazil eight bps. There’s the old market adage that you know you’re commencing a bear market when prices decline yet people are feeling pretty good about it.

Click here to register:  MWM TS First-Quarter 2018 Conference Call: Bubbles, Bear Markets and the Triggers for Melt-Up and Melt-Down.  Thursday, January 18th, at 4:30pm EST (2:30pm MST)


For the Week:

The S&P500 rose 1.6% (up 4.2% y-t-d), and the Dow gained 2.0% (up 4.4%). The Utilities fell 2.2% (down 5.0%). The Banks surged 3.8% (up 5.9%), and the Broker/Dealers rose 3.4% (up 6.0%). The Transports surged 4.2% (up 7.2%). The S&P 400 Midcaps gained 1.5% (up 3.4%), and the small cap Russell 2000 jumped 2.0% (up 3.7%). The Nasdaq100 increased 1.6% (up 5.7%). The Semiconductors slipped 0.3% (up 5.5%). The Biotechs jumped 3.6% (up 6.3%). With bullion up $19, the HUI gold index rose 1.6% (up 4.7%).

Three-month Treasury bill rates ended the week at 141 bps. Two-year government yields gained four bps to 2.00% (up 11bps y-t-d). Five-year T-note yields rose six bps to 2.35% (up 14bps). Ten-year Treasury yields jumped seven bps to 2.55% (up 14bps). Long bond yields gained four bps to 2.85% (up 11bps).

Greek 10-year yields rose 13 bps to 3.86% (down 21bps y-t-d). Ten-year Portuguese yields dropped 15 bps to 1.75% (down 15bps). Italian 10-year yields slipped two bps to 1.98% (down 3bps). Spain's 10-year yields declined two bps to 1.50% (down 7bps). German bund yields jumped 14 bps to 0.58% (up 15bps). French yields gained five bps to 0.85% (up 7bps). The French to German 10-year bond spread narrowed nine to 27 bps. U.K. 10-year gilt yields jumped 10 bps to 1.34% (up 15bps). U.K.'s FTSE equities index increased 0.7% (up 1.2%).

Japan's Nikkei 225 equities index slipped 0.3% (up 3.9% y-o-y). Japanese 10-year "JGB" yields increased two bps 0.078% (up 3bps). France's CAC40 added 0.8% (up 3.8%). The German DAX equities index slipped 0.8% (up 2.5%). Spain's IBEX 35 equities index increased 0.5% (up 4.2%). Italy's FTSE MIB index surged 2.9% (up 7.2%). EM markets were mostly higher. Brazil's Bovespa index added 0.4% (up 3.9%), while Mexico's Bolsa dropped 1.5% (down 0.4%). South Korea's Kospi index was little changed (up 1.2%). India’s Sensex equities index gained 1.3% (up 1.6%). China’s Shanghai Exchange rose 1.1% (up 3.7%). Turkey's Borsa Istanbul National 100 index dropped 1.7% (down 0.6%). Russia's MICEX equities index jumped 2.5% (up 7.2%).

Junk bond mutual funds saw inflows of $2.651 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates gained four bps to 3.99% (down 13bps y-o-y). Fifteen-year rates rose six bps to 3.44% (up 7bps). Five-year hybrid ARM rates added a basis point to 3.46% (up 23bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 20 bps to 4.33% (up 9bps).

Federal Reserve Credit last week declined $10.1bn to $4.405 TN. Over the past year, Fed Credit contracted $8.4bn. Fed Credit inflated $1.595 TN, or 57%, over the past 271 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $6.2bn last week to $3.352 TN. "Custody holdings" were up $170bn y-o-y, or 5.3%.

M2 (narrow) "money" supply declined $5.3bn last week to $13.838 TN. "Narrow money" expanded $637bn, or 4.8%, over the past year. For the week, Currency increased $8.5bn. Total Checkable Deposits dropped $59.5bn, while Savings Deposits jumped $45bn. Small Time Deposits gained $1.5bn. Retail Money Funds were little changed.

Total money market fund assets slipped $1.9bn to $2.836 TN. Money Funds gained $145bn y-o-y, or 5.4%.

Total Commercial Paper surged $24.9bn to a 19-month high $1.111 TN. CP gained $152bn y-o-y, or 15.8%.

Currency Watch:

The U.S. dollar index dropped 1.1% to 90.74 (down 1.2% y-o-y). For the week on the upside, the Japanese yen increased 1.8%, the Norwegian krone 1.7%, the euro 1.4%, the Swedish krone 1.4%, the British pound 1.2%, the New Zealand dollar 1.0%, the Swiss franc 0.8%, the Mexican peso 0.8%, the Brazilian real 0.7%, the Australian dollar 0.7%, the Singapore dollar 0.7%, and the Singapore dollar 0.2%. For the week on the downside, the South African rand declined 0.4%, the Canadian dollar 0.4% and the South Korean won 0.2%. The Chinese renminbi declined 0.3% versus the dollar this week (up 0.58% y-t-d).

Commodities Watch:

January 10 – Bloomberg (Jessica Summers): “Oil closed above $63 a barrel for the first time in over three years as crude stockpiles stowed in American tanks and terminals dwindled for an eighth straight week.”

The Goldman Sachs Commodities Index increased jumped 2.1% (up 2.4% y-t-d). Spot Gold rose 1.4% to $1,338 (up 2.7%). Silver slipped 0.8% to $17.141 (unchanged). Crude jumped $2.86 to $64.30 (up 6.4%). Gasoline rose 3.6% (up 3%), and Natural Gas surged 14.5% (up 8%). Copper slipped 0.3% (down 3%). Wheat was little changed (up 1%). Corn declined 1.4% (down 1.3%).

Trump Administration Watch:

January 10 – Bloomberg (Sarah McGregor): “The possibility that China may taper its purchases of U.S. Treasuries sends a message that America could pay a price for imposing new trade barriers. There’s been more tough talk than action from President Donald Trump’s year-old administration about cracking down on China’s unfair trading practices to reduce the deficit. But Trump is facing decision time as deadlines approach over whether to slap tariffs on imports from steel and aluminum to solar panels -- which would be clearly aimed at China.”

January 8 – Bloomberg (Andrew Restuccia and Doug Palmer): “President Donald Trump’s administration is preparing to unveil an aggressive trade crackdown in the coming weeks that is likely to include new tariffs aimed at countering China’s and other economic competitors’ alleged unfair trade practices, according to three administration officials. Trump is tentatively scheduled to meet with Cabinet secretaries and senior advisers as soon as this week to begin finalizing decisions on a slew of pending trade fights involving everything from imports of steel and solar panels to Chinese policies regarding intellectual property… Senior aides are also laying plans to use Trump’s State of the Union address at the end of the month to flesh out the president’s trade vision and potentially preview a more aggressive posture toward China…”

January 10 – Bloomberg (Josh Wingrove): “Canadian government officials said there’s an increasing likelihood U.S. President Donald Trump will give six-months’ notice to withdraw from Nafta, dragging down the loonie, yields on government bonds and Mexico’s peso… The comments have raised worries the Nafta countries -- the U.S., Canada and Mexico, who trade more than $1 trillion annually -- are further apart on coming to an agreement than feared. The Canadian officials said a U.S. withdrawal notice could come at any time…”

January 10 – CNBC (Nyshka Chandran): “The U.S. House Foreign Affairs Committee passed two bills on Tuesday aimed at bolstering ‘the critical U.S.-Taiwan partnership,’ according to a statement. One bill, called the Taiwan Travel Act, encouraged high-level visits between Washington and Taipei ‘at all levels of government’ while the second addressed Taiwan's exclusion from the World Health Organization. Currently, the State Department enforces self-imposed restrictions on official travel due to the unofficial nature of the bilateral alliance… A state-run Chinese newspaper denounced the bill's passage, saying it could shake political ties with Chinese President Xi Jinping's administration.”

January 11 – Reuters (Roberta Rampton and Makini Brice): “Steven Mnuchin, the U.S. treasury secretary, said… that he expects the United States to renegotiate the North American Free Trade Agreement (NAFTA) with Canada and Mexico or to pull out of the deal. ‘Ambassador (Robert) Lighthizer is doing an amazing job renegotiating NAFTA, and we expect that will be renegotiated or we’ll pull out,’ Mnuchin told journalists.”

January 10 – The Hill (Jordain Carney): “Lawmakers are scrambling to avoid a government shutdown as they barrel toward another funding deadline without a clear path forward. GOP leadership is remaining tightlipped about their plan, with Senate Majority Leader Mitch McConnell (R-Ky.) and Speaker Paul Ryan (R-Wis.) declining to outline their next steps before a Jan. 19 deadline. They are expected to offer a short-term stopgap measure given the fast-approaching deadline and a failure to lockdown a deal on raising spending ceilings for defense and nondefense.”

Federal Reserve Watch:

January 11 – CNBC (Jeff Cox): “New York Fed President Bill Dudley painted an unflattering picture for future growth, saying in a speech Thursday that the recently passed tax cuts pose an ominous threat down the road. While he said the reforms that slash corporate taxes and lower rates for many earners will boost the economy in the near term, that ‘will come at a cost.’ ‘After all, there is no such thing as a free lunch,’ Dudley said… ‘The legislation will increase the nation's longer-term fiscal burden, which is already facing other pressures, such as higher debt service costs and entitlement spending as the baby-boom generation retires.’”

January 8 – MarketWatch (Greg Robb): “The economic outlook, if not the weather, was sunny in Philadelphia this weekend, where the economics profession gathered for its annual conference and job fair. Federal Reserve officials appearing here chose to spend little time stressing the positives like low unemployment and eight years of slow-but-steady economic growth. Instead, officials started a serious conversation about what new tools they might need to combat the next downturn. The issue is likely going to be at the top of the agenda for new Fed chairman Jerome Powell. Whenever the economy stumbles, it is taken pretty much as a given by economists here that the Fed will have to slash interest rates back to zero. That means it may also have to restart quantitative easing, or asset purchases, that was so unpopular on Main Street and in Congress… ‘The Fed knows it will probably revisit the zero lower bound sometime in the future and it is a matter of prudent planning to shore up their tool kit now,’ said Julia Coronado, president of Macropolicy Perspectives.”

January 10 – CNBC (Steve Liesman): “Even while the economy and markets are booming, Federal Reserve officials are worrying about how they'll respond to the next recession, and they don't especially like the picture they see. It's one where the economy starts contracting but the Fed, still at a low interest rate, has little ability to respond. It lowers rates to zero but that amounts to only a fraction of the stimulus it has provided in past downturns. Once again, the Fed faces the quandary of what more it can do when it's at zero and can't cut anymore and is forced to contemplate extraordinary, uncertain and controversial measures like quantitative easing. More and more, Fed officials and academic economists are wondering if there's a better way and beginning to think seriously about a dramatic change to monetary policy that would revise or even scrap its current, flailing 2% inflation target.”

January 8 – Bloomberg (Craig Torres): “Former Federal Reserve Chairman Ben Bernanke predicted that the central bank’s new leadership will study alternate regimes for monetary policy over the next year to 18 months. ‘There will be some pretty serious discussions’ on policy frameworks at the Fed under the chairmanship of Jerome Powell, Bernanke said… He said Powell is likely to assign a subcommittee of officials to study the subject. ‘I imagine this will come up for serious debate in the next year to 18 months.’ Bernanke made the comments on a panel with San Francisco Fed President John Williams at the Brookings Institution in Washington on whether the central bank should keep its 2% inflation target or rethink it. Williams advocated a price-level target, while other scholars on the panel argued in favor of a nominal target for gross domestic product.”

January 8 – Wall Street Journal (Nick Timiraos): “Two Federal Reserve officials said… the U.S. central bank should consider changes in its inflation-targeting framework to create more ammunition to respond to future downturns. The Fed established a formal 2% inflation target six years ago, but in recent months some officials and other economists, including former Fed Chairman Ben Bernanke, have said the central bank should revisit the framework because interest rates now appear likely to remain much lower for longer. As a result, the Fed could find itself with less room to stimulate economic growth during the next downturn. The idea of revisiting the Fed’s inflation target also has gained new attention because inflation has confounded officials’ forecasts for years by consistently falling below the 2% target.”

January 9 – New York Times (Binyamin Appelbaum): “In the wake of a deep economic crisis and a disappointingly slow recovery, a growing number of experts, including some Federal Reserve officials, say it is time for the Fed to consider a new approach to managing the economy. Since the mid-1990s, the Fed has focused on keeping inflation slow and steady, at about 2% a year, in the belief that it was the best way to nurture economic growth and avoid painful downturns. Those pushing for a new approach do not agree on the best alternative — the ideas range from minor tweaks to tossing the current rule book — but there is broad agreement that the Fed should seize the moment now, before the next crisis hits. ‘Monetary policy has not been as successful as we might like over the last decade,’ Christina Romer, an economist at the University of California, Berkeley, said… ‘Now really is the time for every monetary economist to say, ‘Is there something better?’’”

U.S. Bubble Watch:

January 11 – CNBC (Huileng Tan): “U.S. bonds sold off on Wednesday — and that may have been the point. Markets took a hit following a Bloomberg News report that cited unnamed sources as saying that officials in Beijing have recommended China, the largest holder of U.S. Treasurys, to slow or even halt its purchases of that debt. U.S. stocks on Wednesday snapped a six-day winning streak, and Treasury yields, already in an upswing, moved higher with the 10-year reaching 2.597%, their highest level since March 15… China's foreign exchange regulator publicly refuted the Bloomberg report on Thursday, saying it cited ‘false information.’ But the jolt to markets may have been designed as a warning to Washington, which is clashing with China over trade and other issues. China holds $1.2 trillion of U.S. debt — more than any country.”

January 8 – Bloomberg (Matthew Boesler): “The last time Goldman Sachs Group Inc.’s financial conditions index was pointing to a market environment this good, its then-chief economist was using the gauge to analyze the effects of Federal Reserve decisions that he now helps make. New York Fed President William Dudley developed the index in the 1990s while at Goldman to create an alternative way to measure the impact of monetary policy on the economy. Now, with the index signaling the easiest conditions since 2000 after a big run-up in U.S. stocks, Fed officials are starting to wonder if they will need to address inflated asset prices in order to avoid over-inflated consumer prices.”

January 11 – Bloomberg (Sarah McGregor): “The U.S. budget deficit is widening on increased spending, just as tax cuts look set to knock the other side of the government’s ledger: revenue. The U.S. budget gap rose 7% to $225 billion in the first quarter of the government’s fiscal year from a year earlier, the Treasury Department reported on Thursday. Spending rose at a slightly higher pace than revenue, increasing 5% to $994.5 billion between October and December. Receipts gained 4% to $769.5 billion.”

January 5 – CNBC (Diana Olick): “All signs and numbers point to a huge year for the construction industry. Even in December, with much of the nation frozen, the construction industry added 30,000 jobs… For all of 2017, construction added 210,000 jobs, a 35% increase over 2016. Construction spending is also soaring, rising more than expected in November to a record $1.257 trillion… Spending increased across all sectors of real estate, commercial and residential, with particular strength in private construction projects… Construction firms are clearly looking to hire more workers. Three-quarters of them said they plan to increase payrolls in 2018... Industry optimism for all types of construction, measured by the ratio of those who expected the market to expand versus those who expected it to contract, hit a record high.”

January 8 – Bloomberg (Vince Golle): “U.S. consumer credit outstanding rose in November by the most in 16 years as credit-card balances surged, Federal Reserve data showed… Total credit rose $28b (est. $18b) or at an 8.8% annualized rate after a $20.5b gain.”

January 8 – Wall Street Journal (Gunjan Banerji): “Big stock-market gains are leading a number of investors to abandon defensive positions taken to protect against a market downturn, the latest sign that many doubters are shedding caution as the long rally rolls on. Investors with significant positions in stocks often look to offset that risk by buying put options on stocks or major stock indexes, like the S&P 500. These contracts are a form of insurance… But with the Dow Jones Industrial Average breaking through 25000 for the first time, the Nasdaq Composite crossing 7,000 and with market volatility falling to near all-time lows, many investors have decided that spending money to hedge against big declines is a waste of money.”

January 8 – Bloomberg (Sarah Ponczek): “Retail investors in the U.S. are showing the most enthusiasm for stocks since the nine-year bull market began, another signal of growing optimism as financial markets hit new highs. Clients at TD Ameritrade added to stock holdings for a 11th straight month in December, one of the longest buying streaks for retail investors ever recorded by the brokerage. That helped push the firm’s Investor Movement Index (IMX)…to a new record for the second month in a row.”

January 11 – Reuters (Howard Schneider): “Walmart’s tit-for-tat minimum wage battle with Target, ratcheting to $11 an hour for the least experienced workers with likely pressure to move higher, may signal broader gains to come for workers in a tightening U.S. labor market - a moment politicians and policymakers have been hoping for.”

January 9 – Reuters (Robin Respaut): “U.S. states could see revenue growth in 2018 from improving national economics, but difficult demographics and macroeconomic challenges are on the horizon, according to… S&P Global Ratings. States have benefited from continued economic expansion and strong capital markets in recent years, which helped to bring in greater tax revenues. The robust stock market performance in 2017 could also produce windfall capital gains tax revenues to state treasuries in April 2018. But ominous clouds could be looming on the horizon. Periods of faster revenue growth linked to soaring equity markets, while favorable, lend the potential for revenue instability, S&P reported.”

January 8 – CNBC (Robert Ferris): “Major hurricanes and wildfires fueled a record year for costs related to natural disasters in the United States, according to… the National Oceanic and Atmospheric Administration. That report also said 2017 was the third-warmest year in 123 years of record keeping, behind only 2014 and 2012. Natural disasters in the United States cost more than $300 billion last year, far surpassing the previous record of $214.8 billion set in 2005…”

China Watch:

January 7 – Bloomberg (Alfred Liu): “China took another step to clamp down on leverage in the financial system, ordering banks to ensure they aren’t exposed to risks from their entrusted loan business. Banks can only act as intermediaries when arranging entrusted loans, and must not provide guarantees or get involved in decision-making, according to new rules… on the China Banking Regulatory Commission’s website… The CBRC’s measure is the latest attempt by China to curb the threat that excessive leverage in the financial system poses to the nation’s economy. President Xi Jinping and his senior economic officials have vowed to make controlling financial risks a top priority…”

January 9 – Bloomberg: “As the end of People’s Bank of China Governor Zhou Xiaochuan’s term approaches, a firmer yuan and calm markets are providing a window to get some of his long-term reforms back on track. The latest news in the two-steps forward, one-step back move to a more freely traded currency came Tuesday, as Bloomberg reported the central bank has tweaked its management of the daily currency fixing, removing a hurdle to the influence of market forces. PBOC adviser Huang Yiping says that shows authorities’ desire to further liberalize the exchange rate.”

January 8 – Bloomberg: “After selling billions of dollars of debt backed by consumer loans last year, Chinese billionaire Jack Ma’s Ant Financial is pausing such fundraising as the government steps up curbs on micro lending. The company hasn’t sold any asset-backed securities since early December… That marks an abrupt shift after it issued a record 238 billion yuan ($37bn) in 2017 of such securities backed by consumer loans.”

January 6 – Reuters (Josephine Mason, Meng Meng and Cheng Fang): “China’s foreign exchange reserves rose to their highest in more than a year in December, blowing past economists’ estimates, as tight regulations and a strong yuan continued to discourage capital outflows… Notching up their 11th straight month of gains, reserves rose $20.2 billion in December to $3.14 trillion, the highest since September 2016 and the biggest monthly increase since July.”

January 7 – Financial Times (Hudson Lockett): “Researchers at China’s central bank have agreed that higher interest rates could be appropriate in the near future thanks to improvements in industrial prices and enterprise profitability, according to state media. State-run newspaper China Daily said… that top researchers at the People’s Bank of China had recently agreed that higher rates would ‘help to squeeze asset bubbles and restrain debt expansion, as a tool to be used with broader oversight of financial activities.’”

Central Bank Watch:

January 10 – Bloomberg (Alessandro Speciale): “As the European Central Bank enters 2018, the debate over its stimulus plans is being dominated by policy makers warning against keeping policy ultra-loose for too long. With the euro-area economy expanding solidly after three years of negative interest rates and quantitative easing, hawks such as Bundesbank President Jens Weidmann have stepped up calls for a definite end-date to bond purchases. Even Executive Board member Benoit Coeure, a leading proponent of QE when the region faced deflation, now sees a ‘reasonable chance’ the latest extension of the program to September will be the last. The key though is whether President Mario Draghi and doves such as chief economist Peter Praet also adjust their positions. They’ve stayed quiet this year…”

January 11 – Bloomberg (Alessandro Speciale): “European Central Bank policy makers said they’re open to tweaking their policy guidance soon to align it with a strengthening economy, spurring a rise in the euro as traders bet bond-buying will end in September. In the account of its December meeting, the Governing Council said there was a ‘widely shared’ view among officials that communication would need to evolve gradually based on the outlook for growth and inflation. But the language on the monetary-policy stance could be revisited early this year.”

January 9 – Bloomberg (Katherine Greifeld, Robert Fullem, and Liz McCormick): “Dollar bears take heed: Asian central banks may be putting the brakes on the greenback’s slide. After working for three years to staunch the yuan’s slump, China is now moving to combat the opposite problem. The People’s Bank of China has stopped using a component of its daily fixing formula that had been widely interpreted as a tool to support the currency… The yuan sank on the news. Meanwhile, South Korea’s government has been warning about the ascent in the won, Asia’s best-performing currency in 2017. And Taiwan’s central bank also sought to curb gains in its dollar. With emerging-market currencies adding to last year’s rally, Asia’s exporting nations are fretting about the repercussions for their economies.”

Global Bubble Watch:

January 9 – Bloomberg (Nikolaj Gammeltoft and Cecile Vannucci): “It made for quite a chart. On the morning of Dec. 20, just as billions of dollars of futures tied to the Cboe Volatility Index were set to expire, the index plunged. The result was a settlement price, a weekly value critical to holders of some the most heavily traded derivatives in the country, that was 13% below the prior day’s close. A nice break, if you were short. For much of last year, the Cboe had to defend itself after an academic study purported to show the VIX settlement is subject to manipulation. While the exchange has seen nothing to alter its view that the claims are baseless, December’s events gave the conversation another stir. ‘There couldn’t have been a more appropriate cherry on top of the 2017 cake,’ said Patrick Hennessy, head trader at IPS Strategic Capital… ‘The VIX settlement in December was one for the books.’”

January 8 – Bloomberg (Luke Kawa): “The most hated rally this is not. Equity euphoria has gripped most of the world to kick off 2018, with the 14-day relative strength index for major stock markets surging to overbought levels. The S&P 500 Index, MSCI Asia Pacific Index, MSCI World Index, Nikkei 225 Index, and MSCI Emerging Markets Index are all in overbought territory, while the Euro Stoxx 600 Index lingers just shy of such a level.”

January 9 – Bloomberg (Dani Burger): “The sound of euphoria just got a bit louder. The new year isn’t even two weeks old, and already $2.1 trillion has been added to the market capitalization of global equities. The market is verging on such overbought levels that not even reliably bullish analysts can keep up with the new highs… The bull market, now in its ninth year, has finally reached the point of euphoria, said Morgan Stanley’s U.S. equity strategists. ‘Now, we have seen a total reversal with people having a hard time even imagining how the market could decline,’ they wrote… ‘We must admit the speed and relentlessness of the move is a bit troubling.’”

January 9 – Bloomberg (Dina Bass): “Microsoft Corp. said fixes for security flaws present in most processors may significantly slow down certain servers and dent the performance of some personal computers, the software maker’s first assessment of a global problem that Intel Corp. initially downplayed. Microsoft’s statement suggests slowdowns could be more substantial than Intel previously indicated. While Intel Chief Executive Officer Brian Krzanich on Monday said the problem may be more pervasive than first thought, he didn’t discuss the degree of impact -- only that some machines would be more affected than others.”

January 10 – Bloomberg (Yuji Nakamura and Haidi Lun): “The world’s biggest cryptocurrency exchange keeps getting bigger. Hong Kong-based Binance.com is adding ‘a couple of million’ registered users every week, with 240,000 people signing up in just an hour on Wednesday, Chief Executive Officer Zhao Changpeng said… Demand is so high that the company is limiting new customers, he said, though Binance may fully reopen in the coming weeks. ‘We did not expect this kind of growth to be honest,’ Zhao said…”

January 7 – Financial Times (Nicholas Megaw): “The short-term outlook for global sovereign and corporate borrowers is at its healthiest level in a decade, according to Fitch, but the ratings agency warned that rising interest rates and political uncertainty will threaten credit quality over the longer term. In its quarterly credit outlook report, …Fitch said the number of governments and organisations with positive credit outlooks now outnumbered the number with negative outlooks for the first time since the financial crisis. The ratings agency is forecasting global GDP expansion of 3.3% in 2018…”

Fixed Income Watch:

January 10 – Bloomberg: “China added to bond investors’ jitters on Wednesday as traders braced for what they feared could be the end of a three-decade bull market. Senior government officials in Beijing reviewing the nation’s foreign-exchange holdings have recommended slowing or halting purchases of U.S. Treasuries, according to people familiar with the matter. The news comes as global debt markets were already selling off amid signs that central banks are starting to step back after years of bond-buying stimulus. Yields on 10-year Treasuries rose for a fifth day, touching the highest since March. China holds the world’s largest foreign-exchange reserves, at $3.1 trillion, and regularly assesses its strategy for investing them. It isn’t clear whether the officials’ recommendations have been adopted.”

January 11 – Bloomberg (Eliza Ronalds-Hannon and Sally Bakewell): “More than $2.6 billion flowed into high-yield bond funds during the week ended Jan. 10, according to Lipper Fund Flows…, as investors looked to get a piece of a junk-debt rally already blowing through year-end forecasts. The inflows, which were the sector’s highest since December 2016… come as junk spreads narrowed to the tightest since 2007.”

January 8 – Bloomberg (Sally Bakewell): “When a group of banks led by Credit Suisse and including Barclays cut a $1 billion check to finance a buyout by Apollo Global Management back in mid-2015, they pocketed as much as $25 million in fees. Not an insignificant nugget in its own right but it was, it turns out, just the beginning for the banks. Some of them would make a new loan for Apollo the following April and then proceed to rework the terms of that debt with the firm four separate times over the next 14 months. The dizzying succession of follow-up deals -- aimed at locking in falling borrowing costs and boosting the size of the loan -- handed the banks as much as another $45 million in fees… The torrent of leveraged lending last year generated a record $12.4 billion in bank fees, a 41% surge over 2016, said Freeman Consulting Services.”

January 8 – Bloomberg (Adam Tempkin and Charles E Williams): “Citigroup Inc. led in U.S. collateralized loan obligations by market share last year as sales surged 65% from 2016 to about $120 billion… The momentum in CLO sales is expected to continue this year as global demand for the floating-rate product grows amid investors’ hunt for yield.”

January 11 – Reuters (Richard Leong): “Issuance of U.S. investment-grade corporate bonds in the first seven days of 2018 totaled $53.38 billion for its slowest start to the year since 2015, according to strategists at Bank of America Merrill Lynch. The amount of high-grade debt supply was down 38% from a sum of $86.09 billion a year earlier…”

Europe Watch:

January 8 – Bloomberg (Catherine Bosley): “Confidence in the euro area continued its advance at the end of 2017, capping what was probably the strongest year for the economy in a decade. The European Commission’s measure of sentiment touched its highest since late 2000 in December.”

January 9 – Bloomberg (Catherine Bosley): “Joblessness in the euro area declined to the lowest level since early 2009, raising the prospect of a tighter jobs market finally putting the upward pressure on wages keenly anticipated by the European Central Bank. The unemployment rate dropped to 8.7% in November from 8.8% the previous month…”

January 9 – Reuters (Joseph Nasr and Michael Nienaber): “Industrial production and exports from Germany rose more than expected in November, prompting the government to raise its estimate of growth for 2017 and signaling that its expansion would carry on this year. Industrial output jumped 3.4% for the month, the biggest increase since September 2009…”

Japan Watch:

January 9 – CNBC (Patti Domm): “The Bank of Japan is seen as the last grown-up in the room actively filling the global liquidity punch bowl with both hands. That's why a slight tweak to its bond-buying program caused a flurry across financial markets Tuesday, sparking speculation it was joining the Federal Reserve and European Central Bank in cutting back on asset purchases, a move that could ultimately help drive up global interest rates. On Tuesday, the BOJ modestly trimmed its purchases of Japanese government bonds by about $10 billion in the 10- to 25-year maturities and another $10 billion in maturities of more than 25 years.”

Leveraged Speculation Watch:

January 8 – Bloomberg (Nico Grant): “Two hedge funds tell the up and down story for the industry in 2017. Equity fund Coatue Qualified Partners soared 24% on its tech bets while the Caxton Global macro fund dropped 13.4%... The equity and macro strategies served as bookends for the industry, which delivered a lukewarm overall performance for the year. Hedge funds last year returned 6.5% on average on an asset-weighted basis, the best annual performance since 2013, according to a Hedge Fund Research report… That good news has been overshadowed by the broader stock market rally and flood of money into passive products by investors no longer willing to pay high hedge fund fees.”

January 7 – Financial Times (Hudson Lockett): “The quantitative hedge fund industry is on the brink of surpassing $1tn of assets under management this year after breakneck growth from rising interest in more systematic, computer-powered investment strategies. The amount of money managed by quant hedge funds tracked by HFR, …rose to more than $940bn by the end of October 2017 — nearly double the level of 2010 — and flows have continued to be strong in the fourth quarter… An explosion of interest in automated, algorithmic investment approaches, ranging from the simple to high-octane strategies powered by artificial intelligence, has driven the surge.”

Geopolitical Watch:

January 11 – Reuters (Vladimir Soldatkin and Christian Lowe): “Russian President Vladimir Putin said… North Korean leader Kim Jong Un was ‘shrewd and mature’ and had won the latest standoff with the West over his nuclear and missile programs. ‘I think that Mr Kim Jong Un has obviously won this round. He has completed his strategic task: he has a nuclear weapon, he has missiles of global reach, up to 13,000 km, which can reach almost any point of the globe,’ Putin told Russian journalists…”