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Epic Stimulus Overload
Ten-year Treasury yields jumped 13 bps this week to 2.48%, the high going back to March. German bund yields rose 12 bps to 0.42%. U.S. equities have been reveling in tax reform exuberance. Bonds not so much. With unemployment at an almost 17-year low 4.1%, bond investors have so far retained incredible faith in global central bankers and the disinflation thesis.
Between tax legislation and cryptocurrencies, there's been little interest in much else. As for tax cuts, it's an inopportune juncture in the cycle for aggressive fiscal stimulus. And for major corporate tax reduction more specifically, with boom-time earnings and the loosest Credit conditions imaginable, it's Epic Stimulus Overload. History will look back at this week - ebullient Republicans sharing the podium and cryptocurrency/blockchain trading madness - and ponder how things got so crazy.
From my analytical vantage point, the nation's housing markets have been about the only thing holding the U.S. economy back from full-fledged overheated status. Sales have been solid and price inflation steady. While construction has recovered significantly from the 2009/2010 trough, housing starts remain at about 60% of 2004-2005 period peak levels. It takes some time for residential construction to attain take-off momentum. Well, liftoff may have finally arrived. As long as mortgage rates remain so low, we should expect ongoing housing upside surprises. An already strong inflationary bias is starting to Bubble. Is the Fed paying attention?
December 22 - Reuters: "Sales of new U.S. single-family homes unexpectedly rose in November, hitting their highest level in more than 10 years, driven by robust demand across the country. The Commerce Department said... new home sales jumped 17.5% to a seasonally adjusted annual rate of 733,000 units last month. That was the highest level since July 2007... New home sales surged 26.6% from a year ago."
And from Bloomberg's Shobhana Chandra: "...The number of [new] properties sold in which construction hadn't yet started increased almost 43% to 258,000 in November, the most since December 2006... Supply of homes at current sales rate fell to 4.6 months from 5.4 months."
December 20 - Bloomberg (Shobhana Chandra): "Sales of previously owned U.S. homes rose in November to an almost 11-year high, indicating demand picked up momentum heading into the end of the year... The results show broad strength, with particular firmness in the upper-end market where inventory conditions are 'markedly better,' the group said. Forty-four percent of homes sold in November were on the market for less than a month. At the current pace, it would take 3.4 months to sell the homes on the market, the lowest in records to 1999 and down from 3.9 months in the prior month."
December 19 - Bloomberg (Sho Chandra): "Groundbreaking on single-family homes proceeded in November at the strongest pace in a decade, driving U.S. housing starts to a faster-than-estimated rate... Single-family starts jumped 5.3% to 930,000, highest since Sept. 2007; South and West regions also were 10-year highs. The latest results make it more likely that residential construction spending -- which subtracted from economic growth in the second and third quarters -- will add to the pace of U.S. expansion in the October-December period, which is already shaping up as a solid quarter."
U.S. and global growth surprised on the upside in 2017, explained by monetary conditions that somehow became only more extraordinarily loose. The Fed, with its dovish approach to three baby-step hikes, failed to tighten conditions. Led by the Bank of Japan and the European Central Bank, it was another year of massive global QE. Meanwhile, Chinese "tightening" measures couldn't restrain record Credit growth. At the "periphery," EM were the recipients of huge financial flows, spurring domestic Credit systems and economies around the globe. It's been a huge year for Credit on a global basis.
December 19 - Financial Times (Eric Platt and Robin Wigglesworth): "A borrowing binge by companies and governments has reached a new high this year, providing bumper fees for Wall Street but raising questions ahead of a year of expected tightening of cheap money by the world's most important central banks in 2018. Blue-chip corporate borrowers such as AT&T and Microsoft have led the way, as companies accounted for more than 55% of the $6.8tn raised in 2017 through bond sales organised by banks, according to... Dealogic. Countries from Argentina to Saudi Arabia also took advantage of an almost decade of low interest rates in developed economies, which forced investors to chase returns in the bonds of emerging market governments and their companies. 'In 2017, there was such an influx of capital coming into high-quality fixed income. It's a demand-fuelled story,' said Gene Tannuzzo, a portfolio manager with Columbia Threadneedle. 'If you are a sovereign or corporate, with interest rates where they are, you are supposed to borrow now.'"
Bloomberg's Michael McKee: "Is the bond market telling the President he's wrong about the potential for increasing the growth rate of the United States."
Federal Reserve Bank of Minneapolis President Neel Kashkari: "Well, I think the bond market is saying a couple things to me. One, inflation expectations are drifting lower. They have drifted lower, and that's in large part, I believe, because of the Fed - because we've been sending these hawkish signals by raising interest rates in a low inflation environment. Second, I think the markets are also pricing in a lower neutral real interest rate. So the interest rate that balances savings and investment in the economy is set by broader economic forces. It's been trending down over the last few decades. I think markets are embracing that concept and pricing in a lower, what we call "r-star", which then caps where bond yields are, and at the same time can explain some of the appreciation in the equities markets, as they're discounting cash flows at a lower rate. So those are the signals that I take away from the bond market right now."
Bloomberg's David Westin: "...If you had your way, if you went from what the Fed is predicting now - three [rate] increases next year - to one, or maybe none, what would happen to the long-end of the yield curve, in your view?"
Kashkari: "In my view, I think that would take off some of the downward - the disinflationary pressure that I think the committee is putting on the long-end of the curve. In my view, by raising rates in a low inflation environment we are sending a signal that our 2% inflation target is not a target. We're sending a signal that it's a ceiling - that we're not going to allow inflation to creep above 2%. And I think that's putting pressure on the long end of the curve. If you look at how we've behaved - not at what we've said - we say it's a target not a ceiling. If you look at how we've behaved over the past five or six years, we've been treating 2% as a ceiling. I think markets have figured that out and they're pricing that in. So to me, the Fed is pushing up the front end with our rate increases and pushing down the long end by sending this very hawkish signal about the outlook for inflation."
"Very hawkish signal"? It's been a while since radical dovishness was an impediment to career advancement at the Federal Reserve (or prospering thereafter).
Central bankers over recent decades have repeatedly found excuses for leaving monetary policy too loose for too long. In the face of history's greatest expansion of global debt, central bankers have since the early nineties justified loose monetary policy by pointing to deflation risk. When the economy and markets were turning increasingly overheated in the late-nineties, chairman Greenspan claimed a New Paradigm of technological advancement presented the U.S. economy with a faster speed limit. When the post-tech Bubble reflation was spurring record Credit growth and rampant mortgage excess, Dr. Bernanke and others proffered the "global saving glut" thesis. Apparently, it was out of the Fed's hands.
Now we have a historically low "r-star" "neutral rate" - and Fed hawkishness supposedly pressuring long-term yields lower. I really struggle with the notion that the Fed has been hawkish "over the past five or six years." Do global central bankers not appreciate that decades of loose finance have been a major force behind disinflationary pressures? Clearly, employing open-ended QE fundamentally altered expectations and market pricing for sovereign debt and long-term financial assets. With myriad Bubbles flourishing around the globe, debt market price in QE forever. I believe global long-term yields would move sharply higher in the event of a stunning outbreak of central bank hawkishness.
December 18 - Wall Street Journal (Michael C. Bender): "Declaring that 'economic security is national security,' President Donald Trump aimed to reframe a national debate over his domestic economic and trade policies by thrusting them into a national-security context. 'Economic vitality, growth and prosperity at home is absolutely necessary for American power and influence abroad,' Mr. Trump said... as he unveiled his new national security strategy. 'Any nation that trades away its prosperity for security will end up losing both.' Recounting a year of stock-market gains and unemployment-rate decreases, Mr. Trump alleged that his predecessors prioritized nation building abroad over economic growth at home. He said his new national security strategy... provided a needed contrast, and included plans for cutting taxes, rebuilding roads and bridges and building a wall along the U.S.-Mexico border."
December 20 - New York Times (Keith Bradsher): "It's Xi Jinping's economy now, and he isn't too worried about debt. China signaled its economic priorities on Wednesday at the end of a meeting of top Communist Party economic leaders with a statement indicating that President Xi is fully in charge. Labeled 'Xi Jinping Thought on Socialist Economy With Chinese Characteristics,' the statement called for trimming industrial overcapacity, controlling the supply of money and other moves that have been staples of China's other recent declarations. Barely mentioned: China's surging debt. Despite downgrades this year by two international credit rating firms and warnings from institutions like the International Monetary Fund, the statement issued at the conclusion of the Central Economic Work Conference called for controlling borrowing by local governments, but it otherwise glossed over a vast borrowing splurge in recent years, driven in large part by Chinese companies."
President Trump is now wedded to the U.S. Bubble. President Xi Jinping is wedded to the Chinese Bubble. I've posited a global "Arms Race in Bubbles." With Trump in charge and the Republicans now pushing through aggressive stimulus, perhaps Chinese officials are rethinking the geopolitical risks associated with efforts to rein in their Bubble excess.
It's been a long time coming. Yet I wouldn't be surprised if this week's jump in yields proves the start of something. Tax cuts coupled with an increasingly overheated economy creates a backdrop conducive to upside inflation surprises. Nice pop in commodities this week. And look at the housing data! And what if Beijing indulges another year of double-digit Credit growth in 2018? And while on the topic of 2018, what are the prospects for the Trump Administration turning its attention to trade competitor China? It's another campaign promise, and where things could turn really interesting.
For a moment, ponder this: an overheated U.S. economy, a surprising uptick in worker compensation and rising import costs. It's been awhile since bond investors had to be concerned with anything other than (predictively dovish) monetary policy. "R-star" trending down forever? Remember when the bond market used to intimidate?
For the Week:
The S&P500 added 0.3% (up 19.9% y-t-d), and the Dow increased 0.4% (up 25.3%). The Utilities sank 4.5% (up 8.6%). The Banks rose 1.6% (up 17.6%), and the Broker/Dealers gained 1.4% (up 30.3%). The Transports rallied 2.7% (up 18.0%). The S&P 400 Midcaps gained 0.9% (up 14.7%), and the small cap Russell 2000 rose 0.8% (up 13.7%). The Nasdaq100 was unchanged (up 32.9%).The Semiconductors advanced 1.6% (up 40.2%). The Biotechs rose 0.7% (up 36.7%). With bullion up $20, the HUI gold index jumped 4.9% (up 3.6%).
Three-month Treasury bill rates ended the week at 130 bps. Two-year government yields rose five bps to 1.89% (up 70bps y-t-d). Five-year T-note yields jumped 10 bps to 2.25% (up 32bps). Ten-year Treasury yields rose 13 bps to 2.48% (up 4bps). Long bond yields gained 14 bps to 2.83% (down 23bps).
Greek 10-year yields rose 15 bps to 4.08% (down 294bps y-t-d). Ten-year Portuguese yields were little changed at 1.84% (down 191bps). Italian 10-year yields rose 10 bps to 1.91% (up 10bps). Spain's 10-year yields slipped two bps to 1.47% (up 9bps). German bund yields jumped 12 bps to 0.42% (up 22bps). French yields rose 11 bps to 0.74% (up 6bps). The French to German 10-year bond spread narrowed one to 32 bps. U.K. 10-year gilt yields gained nine bps to 1.24% (up 1bp). U.K.'s FTSE equities jumped 1.4% (up 6.3%).
Japan's Nikkei 225 equities index rallied 1.5% (up 19.8% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.048% (up 1bp). France's CAC40 increased 0.3% (up 10.3%). The German DAX equities index slipped 0.2% (up 13.9%). Spain's IBEX 35 equities index added 0.3% (up 8.9%). Italy's FTSE MIB index recovered 0.5% (up 15.5%). EM markets were mixed. Brazil's Bovespa index surged 3.6% (up 24.8%), and Mexico's Bolsa added 0.6% (up 6.0%). South Korea's Kospi index fell 1.7% (up 20.4%). India's Sensex equities index gained 1.4% (up 27.5%). China's Shanghai Exchange gained 0.9% (up 6.2%). Turkey's Borsa Istanbul National 100 index rose 1.6% (up 42.2%). Russia's MICEX equities index dropped 1.9% (down 5.8%).
Junk bond mutual funds saw outflows of $1.112 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates added a basis point to 3.94% (down 36bps y-o-y). Fifteen-year rates rose two bps to 3.38% (down 14bps). Five-year hybrid ARM rates gained three bps to 3.39% (up 7bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.15% (down 21bps).
Federal Reserve Credit last week increased $7.5bn to $4.408 TN. Over the past year, Fed Credit fell $15.3bn. Fed Credit inflated $1.589 TN, or 56%, over the past 267 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt sank $12.0bn last week to $3.373 TN. "Custody holdings" were up $201bn y-o-y, or 6.3%.
M2 (narrow) "money" supply surged $60.7bn last week to a record $13.866 TN. "Narrow money" expanded $695bn, or 5.3%, over the past year. For the week, Currency increased $2.3bn. Total Checkable Deposits gained $5.2bn, and Savings Deposits jumped $48.4bn. Small Time Deposits were unchanged. Retail Money Funds rose $4.6bn.
Total money market fund assets dropped $21.2bn to $2.820 TN. Money Funds rose $107bn y-o-y, or 3.9%.
Total Commercial Paper jumped $28.9bn to a 19-month high $1.079 TN. CP gained $113bn y-o-y, or 11.7%.
The U.S. dollar index slipped 0.6% to 93.347 (down 8.8% y-t-d). For the week on the upside, the South African rand increased 3.8%, the Swedish krona 2.2%, the Canadian dollar 1.1%, the euro 1.0%, the South Korean won 0.9%, the Australian dollar 0.8%, the Norwegian krone 0.8%, the New Zealand dollar 0.4%, the Singapore dollar 0.4%, the British pound 0.3%, and the Swiss franc 0.3%. For the week on the downside, the Mexican peso declined 3.2%, the Brazilian real 1.1% and the Japanese yen 0.6%. The Chinese renminbi gained 0.49% versus the dollar this week (up 5.59% y-t-d).
The Goldman Sachs Commodities Index jumped 2.3% (up 7.7% y-t-d). Spot Gold rose 1.6% to $1,275 (up 10.7%). Silver surged 2.4% to $16.444 (up 2.9%). Crude gained $1.17 to $58.47 (up 9%). Gasoline surged 6.5% (up 6%), and Natural Gas gained 2.1% (down 29%). Copper advanced 3.3% (up 29%). Wheat gained 1.6% (up 4%). Corn rose 1.3% (unchanged).
Trump Administration Watch:
December 22 - Wall Street Journal (Louise Radnofsky): "President Donald Trump signed a sweeping tax overhaul bill into law in the Oval Office on Friday morning, as well as a spending bill to keep the government open through mid-January. Congress this week passed a tax bill that represents the most far-reaching overhaul of the U.S. tax system in decades, reducing the corporate tax rate to its lowest point since 1939 and cutting individual taxes for most households next year."
December 19 - Bloomberg (Liz McCormick and Katherine Greifeld): "With the U.S. about to sell the most debt in eight years, Treasury Secretary Steven Mnuchin may find himself relying on a buyer base that needs to see higher yields before loading up. Government debt sales are set to more than double in 2018, lifting net issuance to $1.3 trillion, the most since 2010... With the Federal Reserve shrinking its bond holdings and deficits poised to swell even before taking into account the tax overhaul, all signs point to higher financing costs. The challenge for Mnuchin is that some analysts predict buying by central banks -- a pillar of support this year -- may fade, in part as international-reserve growth stabilizes."
December 21 - Politico (Kevin Robillard, Nancy Cook and Cristiano Lima): "Conservative groups are planning a multimillion-dollar effort to sell the GOP's tax cut law, hoping the American electorate can learn to love the party's signature — but massively unpopular — legislative achievement. 'We have a public that distrusts anything coming out of Washington, especially anything from the majority party,' said Tim Phillips, president of Americans for Prosperity.... 'We have a job that's not that hard. We have to make sure people understand the benefits they're going to receive from this legislation.'"
December 18 - Reuters (Dustin Volz): "The Trump administration has publicly blamed North Korea for unleashing the so-called WannaCry cyber attack that crippled hospitals, banks and other companies across the globe earlier this year. 'The attack was widespread and cost billions, and North Korea is directly responsible,' Tom Bossert, homeland security adviser to President Donald Trump, wrote..."
December 19 - Wall Street Journal (Lingling Wei): "As China prepares to unveil its economic blueprint for 2018, people familiar with the plan say it will show that Beijing is finding it hard to cut debt without jeopardizing growth. In the blueprint to be unveiled on Wednesday, past talk of bringing down debt, the priority for the past two years, is gone in favor of a pledge to just control the rise in borrowing, according to these people. The softening of the goal, decided earlier this month by the Communist Party's top leadership, is an official acknowledgment of how hard it is for Beijing to wean the economy off debt-driven growth. 'Let's face it,' said an official involved in policy discussions, 'it's not realistic to reduce leverage when the whole economy relies on banks for financing.'"
December 17 - Reuters: "Growth in China's new home prices sustained its momentum in November, with increases seen in provincial centres and smaller cities in a sign policymakers may need to step up curbs to rein in speculation in the property market. China's housing market boom has lasted more than two years, giving the economy a major boost but stirring fears of a property bubble, with the government taking stern measures to curtail speculative buying."
December 18 - Bloomberg: "Bond cancellations at Chinese conglomerate HNA Group Co.'s units are spreading, fueling concerns about financing strains after borrowing costs soared to records. The third such scrapped financing plan this month came Tuesday, as Tianjin Airlines Co. said it had set aside a planned offering of 1 billion yuan ($151 million) of 270-day notes... Concerns about financial strains at HNA Group are growing after a debt-fueled $40 billion acquisition spree across six continents that invited scrutiny from regulators across the globe."
December 19 - Bloomberg (Alfred Liu): "A Chinese biotech company defaulted on a loan tied to an asset-management product, after the nation's regulators last month moved to tighten supervision and break an implicit guarantee that's driven investment into such vehicles... Shandong Longlive Bio-technology Co. failed to repay the first 138 million yuan ($20.9 million) installment on a 227 million yuan loan from Zhonghai Trust Co. on Dec. 7... The majority of the missed payment was packaged into an asset-management product issued by Datong Securities Co. Chinese President Xi Jinping and his top economic deputies have vowed to make controlling financial risks their foremost priority, a pledge renewed at the Communist Party's twice-a-decade leadership congress in October."
December 20 - Bloomberg (Richard Frost): "China's campaign to cut risk in the financial sector this year has helped make the nation's stock market the most divided on record. As investors worried about the impact of rising funding costs for companies, they rushed into the safest of stocks -- large-cap firms, mostly state-owned. The result is a performance gap of 27 percentage points between the FTSE China A50 Index of China's biggest companies and the 1,400-member Shanghai Composite Index, the widest margin since at least 2003."
Federal Reserve Watch:
December 17 - Bloomberg (Joanna Ossinger): "Investors have been underestimating the importance of U.S. economic growth for Federal Reserve policy, and giving too much relative emphasis to inflation and wage data that have tended to disappoint expectations, according to Goldman Sachs... If it starts looking more likely that U.S. growth will stay above its potential rate, that could boost the chances of a labor-market overheating that quickens the pace of Fed rate increases, Goldman economists led by Jan Hatzius wrote in a Dec. 17 note."
December 21 - CNBC (Steve Liesman): "Larry Lindsey, a former top economic advisor to President George W. Bush and a one-time Federal Reserve governor, is being considered for the Fed vice chairman job, according to sources. The White House is looking for monetary policy expertise for the position, according to the sources and Lindsey would fit that bill. He was a governor of the central bank from 1991 to 1997."
U.S. Bubble Watch:
December 18 - Wall Street Journal (Andrew Ackerman and Nick Timiraos): "Mortgage-finance giants Fannie Mae and Freddie Mac are here to stay. Lawmakers in both parties and the Trump administration are negotiating overhauls of the two companies—critical to home mortgages but in government conservatorship since the financial crisis—that could keep them at the center of the U.S. mortgage market for years to come, abandoning long-stalled proposals to wind them down... Bipartisan Senate legislation set to be introduced in early 2018 marks the clearest sign of this reversal and shows how the companies, entering their 10th year under federal control, have proven too risky to attempt replacing. The housing market has seen strong demand in recent years, driven in part by steady access for many Americans to 4% or lower 30-year fixed-rate mortgages, thanks in part to a government backstop of the companies."
December 22 - Bloomberg (Manuel Baigorri): "Just as most people are packing up for Christmas, dealmakers across the world are rushing to finish up a slew of transactions in industries ranging from consumer to telecom and health care to gambling. Companies have announced about $361 billion of mergers and acquisitions this month, making it the busiest December in at least 12 years..."
December 20 - Bloomberg Businessweek (Stephen Gandel): "Some have been warning recently that a crash in leveraged loans, one of Wall Street's hottest debt markets, could do investors a lot more damage than in the past. Investors, though, show little signs of concern. Indeed, money has continued to race into leveraged loans. U.S. companies have raised nearly $1.4 trillion in the relatively risky lending market this year, up 46% from a year ago... The yield on the average leveraged loan was 5.4% at the end of November, which is nearly the same as it was in the month a year earlier."
December 19 - CNBC (Steve Liesman): "Buoyant American attitudes on the economy look set to show up in plentiful, record-setting holiday spending this season. The CNBC All-America Survey found that average holiday spending intentions will top $900 for the first time in the 12-year history of the poll, eclipsing last year's estimate of $702 by a wide margin. The survey of 800 Americans nationwide... found a surge in the percentage of Americans planning to spend more than $1,000, to 29% from 24%."
December 21 - Bloomberg (Arie Shapira and Kailey Leinz): "There's a new leader in the sweepstakes for the zaniest name change in the crypto craze. Long Island Iced Tea Corp. shares rose as much as 289% after the unprofitable... company rebranded itself Long Blockchain Corp. It's the latest in a near-daily phenomenon sweeping the stock market, where obscure microcap companies reorient to focus on some aspect of the mania sparked by bitcoin's 1,500% rally this year. Long Blockchain, whose business has been selling non-alcoholic beverages, says it will now seek to partner with or invest in companies that develop the decentralized ledgers known as blockchain, the technology that underpins bitcoin."
December 18 - Financial Times (Nicole Bullock and Robin Wigglesworth): "When shares in a company led by a self-styled 'global techno entrepreneur' and 'financial wizard' increase 10-fold on news that it has acquired a digital currency business, the echoes of the dotcom bubble are too loud to ignore. Analysts and investors said the excitement around bitcoin and blockchain technology was now reminiscent of the period almost two decades ago, when adding dotcom to a company name could drive a buying frenzy. The latest example was the surging share price of LongFin, a business specialising in trade finance that went public on Nasdaq... When it announced, just two days later, that it was buying a blockchain-related venture called Ziddu.com, LongFin shares jumped more than 1,000% — in a move that even its own founder called 'unwarranted'."
December 17 -New York Times (Matthew Goldstein): "Puerto Rico has had an awful decade — and it's about to get worse. First came a brutal 10-year recession and financial crisis that drove businesses from this island and left 44% of the population impoverished. Then, in September, Hurricane Maria, a powerful Category 4 storm, shredded buildings, wrecked the electrical power grid and possibly led to more than 1,000 deaths. Now Puerto Rico is bracing for another blow: a housing meltdown that could far surpass the worst of the foreclosure crisis that devastated Phoenix, Las Vegas, Southern California and South Florida... If the current numbers hold, Puerto Rico is headed for a foreclosure epidemic that could rival what happened in Detroit... About one-third of the island's 425,000 homeowners are behind on their mortgage payments to banks and Wall Street firms that previously bought up distressed mortgages."
December 17 - Financial Times (Alistair Gray and Oliver Ralph): "Insurers are braced for another multi-billion-dollar loss from the fires in southern California, capping what is already shaping up to be one of the costliest ever years for the industry. Adam Kamins, senior economist at Moody's Analytics, estimates that losses from the Thomas Fire alone — the most serious of several in the region — would come in at about $1.5bn. That could rise sharply depending on how much it spreads. The ultimate losses will depend in large part on winds in the coming days. Insurers already face claims of more than $100bn from a string of natural disasters this year, including hurricanes in the Caribbean and southern US, earthquakes in Mexico and wildfires in northern California in October."
December 21 - Bloomberg (Gabrielle Coppola and Claire Boston): "Private-equity firms that plunged headlong into subprime auto lending are discovering just how hard it might be to get out. A Perella Weinberg Partners fund has been sitting on an IPO of Flagship Credit Acceptance for two years as bad loan write-offs push it into the red. Blackstone Group LP has struggled to make Exeter Finance profitable, despite sinking almost a half-billion dollars into the lender since 2011 and shaking up the C-suite multiple times. And Wall Street bankers in private say others would love to cash out too, but there's currently no market for such exits."
Central Banker Watch:
December 19 - Bloomberg (Jana Randow and Paul Gordon): "European Central Bank policy maker Jens Weidmann reiterated his call for a definite end-date for the institution's bond-buying program, a refrain that looks likely to gain traction among his colleagues next year. Saying that domestic price pressures should strengthen as wage growth improves, he said they are 'therefore on track toward our definition of price stability.' While policy makers meeting last week reaffirmed their commitment to buy debt until September 'or beyond,' officials including at least half the six-member Executive Board have signaled they're willing to rein in expectations for another extension... 'A faster conclusion of net asset purchases and a clearly communicated end date would have been reasonable,' Weidmann, who also heads Germany's Bundesbank, told reporters..."
December 20 - Reuters (Simon Johnson and Daniel Dickson): "Sweden's central bank took its first baby steps toward reversing ultra-loose policy on Wednesday, holding rates unchanged and ending net new bond purchases. Coupons and maturing bonds will be reinvested, however, and the balance sheet will swell temporarily. As a result the central bank's holdings of government bonds will increase temporarily in 2018 and the beginning of 2019. 'We are slowly normalising, but with emphasis on slowly,' Governor Stefan Ingves told reporters."
Global Bubble Watch:
December 21 - Bloomberg (Sid Verma): "Lowflation drove global markets to dizzying highs this year. Inflation could drive them off a cliff. The risk for 2018 is that consumer price growth stages a comeback, roiling investor portfolios and corporate profits, according to investors and strategists. The consequent return of higher real interest rates would imperil bullish market psychology more than you might think. 'A significant inflation shock would be just about the worst thing that could happen to today's investment portfolios,' Ben Inker, head of asset allocation at... Grantham Mayo Van Otterloo & Co., wrote... 'Unlike most of history, it seems plausible that a meaningful inflation increase from here would impose worse losses on portfolios than a depression.'"
December 20 - Reuters (Stanley White): "Business confidence among Asian companies rose in October-December to the highest in almost seven years due to robust consumption and global trade... The Thomson Reuters/INSEAD Asian Business Sentiment Index .TRIABS RACSI, representing the six-month outlook of 94 firms, rose to 78 for the December quarter from 69 three months before."
December 20 - Bloomberg (John Bowker, Renee Bonorchis, and Franz Wild): "It could wind up being South Africa's version of the Enron accounting scandal. Furniture retailer Steinhoff International Holdings NV captivated investors by growing into a global force, latterly under its billionaire chairman, Christo Wiese. Now it's drawing attention for all the wrong reasons. Shares in Steinhoff crashed 80% in two days after the company reported accounting irregularities that stretch back to 2016. Wiese has stepped down, Chief Executive Officer Markus Jooste has resigned and the company is looking for leniency from its creditors."
December 19 - Bloomberg (Renee Bonorchis): "Embattled furniture retailer Steinhoff International Holdings NV was pushed to the brink of collapse after it said lenders have started to cut off support in the wake of an accounting scandal that destroyed most of its value in a matter of days. As the owner of Conforama in France and Mattress Firm in the U.S. seeks a lifeline, it's still unable to assess the magnitude of financial irregularities disclosed two weeks ago..."
December 20 - Bloomberg (Kana Nishizawa and Narae Kim): "It was a year for bitcoin, technology stocks and the power consolidation of China's Xi Jinping. Those were some of the most popular topics for people boning up on issues important to finance and business through Google searches in 2017."
Fixed Income Watch:
December 22 - Financial Times (Robin Wigglesworth): "No one knows when the US credit cycle will keel over. But when it eventually does, the outcome is likely to be unusually nasty, brutish and protracted. The US corporate bond market has been on fire this year, with companies raising a record $1.14tn of debt. Even junk-rated companies enjoy average borrowing costs of less than 6%. That might look miserly, but corporate debt has been a welcome oasis of yield in a desert where close to $10tn of sovereign bonds still trade with negative interest rates. Yet when the economy inevitably turns, this oasis might look more like a sinkhole. Many creditors are likely to face more severe losses than they have in the past, and more arduous debt workouts. The debt boom has been accompanied by a sharp deterioration of the legal protection offered to creditors, as borrowers have taken advantage of desperate investors to weaken or scrap 'covenants' designed to help insulate lenders from financial shenanigans."
December 22 - Bloomberg (Esteban Duarte, Maria Tadeo, Charles Penty, and Vidya N Root): "Spanish Prime Minister Mariano Rajoy is meeting with allies this morning to plot his next move after a drubbing in Thursday's Catalan election that saw separatists reclaim control of the regional assembly. Rajoy headed to a 9:30 a.m. cabinet meeting in Madrid and planned to sit down with his People's Party leadership later in the day, with the resurgent Catalan independence campaign at the top of the agenda. The PP lost eight of its 11 seats in the region's parliament as ousted President Carles Puigdemont's party confounded projections to become the biggest group in a three-way separatist bloc."
December 19 - Reuters: "The Bank of Japan's holdings of government debt rose to a record in July-September under its quantitative easing programme, which could deepen concerns its policy framework is unsustainable. The BOJ held a record 445 trillion yen ($3.94 trillion) in government debt at the end of September, up 7.6% from the same period a year earlier... The central bank held 40.9% of all government debt at the end of September, also the highest on record."
December 21 - Bloomberg (Toru Fujioka): "The Bank of Japan left policy settings unchanged in the final meeting of 2017, retaining its unprecedented monetary stimulus as it waits for a pickup in stubbornly low inflation. With Japan's economy continuing to grow at a healthy pace, and inflation at least moving in the right direction, there is little pressure on the BOJ adjust its interest-rate and asset-purchase targets any time soon. This sets it apart from its global counterparts, with the Federal Reserve hiking interest rates and the European Central Bank moving closer toward policy normalization."
December 22 - Reuters (Tetsushi Kajimoto): "Japanese Prime Minister Shinzo Abe's cabinet endorsed a record $860 billion budget for fiscal 2018 on Friday, opting to keep the economy on a sustained recovery with aggressive monetary stimulus and putting fiscal reforms on the back burner again... The budget - a record high for the sixth year - got a boost from snowballing welfare spending to respond to a fast-ageing population and a record military outlay amid regional tensions related to North Korea."
December 17 - Bloomberg (James Mayger and Masahiro Hidaka): "The pace at which the Bank of Japan is expanding its massive hoard of bonds will continue to slow in 2018, according to the majority of economists surveyed... The central bank will increase its Japanese government bond holdings by about 44 trillion yen ($392bn) next year, according to the average estimate... That's well below the BOJ's 80 trillion yen annual guideline and a considerable drop from the 61 trillion yen increase that was seen in the 12 months through the end of November... Under Governor Haruhiko Kuroda, the BOJ has come to dominate the government bond market in Japan, owning more than 40% of outstanding debt and depressing volatility and interest rates."
December 18 - Reuters (Tetsushi Kajimoto and Stanley White): "Japan's government revised up its growth projections for the current and next fiscal years, forecasting the economy to expand 1.9% and 1.8% respectively on the back of steady improvement in domestic demand, the Cabinet Office said..."
Emerging Market Watch:
December 19 - Bloomberg (Natasha Doff): "It's one of the most crowded trades for good reason. But dizzying returns and a surge of inflows have put emerging markets on a narrow precipice. After several false starts, economists are predicting next year will finally be the one in which borrowing costs get a significant leg-up. The International Monetary Fund is warning it could mark the tipping point for emerging-market bond funds sitting on the biggest annual inflows since the financial crisis... Investors piled into emerging-market bond funds this year as central banks delayed curbing monetary stimulus that's pumped liquidity to developing economies over the past decade."
December 21 - Bloomberg (Nyshka Chandran): "When it comes to territorial disputes in Asia, the South China Sea typically commands the bulk of attention. But the East China Sea, a lesser-known hotbed of tensions, might be more likely to trigger an international conflict. 'Despite the lower profile, the dispute in the East China Sea may carry greater risk of drawing the United States into conflict with China than the various disputes in the South China Sea,' Ryan Hass, David M. Rubenstein Fellow at Brooking's foreign policy program, wrote... Both China and Japan lay claim to a set of islands in the East China Sea that cover around 81,000 square miles. Called Senkaku in Tokyo and Diaoyu in Beijing, the area is near major shipping routes and rich in energy reserves."