Credit Bubble Bulletin: Q3 2019 Z.1 Flow of Funds: Repo Madness

By Doug Noland

12/14/2019

 

Q3 was yet another fascinating quarter for U.S. finance. Total Credit (Non-Financial, Financial and Foreign U.S. borrowings) jumped a nominal $1.075 TN, the strongest quarterly gain since Q4 2007’s $1.159 TN, ending September at $74.862 TN (348% of GDP). Total Credit was up $3.230 TN over the past four quarter (4.5%) and $6.446 TN (9.4%) in two years. 

Non-Financial Debt (NFD) surged $835 billion during the quarter – double Q2’s growth and the strongest expansion since Q1 2004’s (aberrational) $1.234 TN. At $53.896 TN, NFD ended September at a record 250% of GDP, up from previous cycle peaks of 226% at year-end ‘07 and 183% to end 1999. On a percentage basis, NFD expanded at a 6.32% rate, up from Q2’s 3.15% and Q3 2018’s 4.13%.

Our federal government continues to command the debt bullet train, expanding borrowings at a 10.4% pace during the quarter (strongest since Q1 ’18). Treasury Securities surged a notable $757 billion during the quarter to a record $18.572 TN. Treasury Securities jumped $1.154 TN over the past year and $2.341 TN in two years. Treasury Securities-to-GDP increased to 86%, up from Q4 07’s 41%. A broader measure of Treasury Liabilities ended Q3 at $21.048 TN, or 98% of GDP.

Bank (“Private Depository Institutions”) Assets expanded $245 billion during the quarter, or 5.0% annualized, to $19.753 TN. One-year growth was $829 billion, or 4.4%. Loans increased $118 billion (to $11.580 TN), or 4.1% annualized. Bank Mortgage Loans increased $57 billion, or 4.1% annualized, to $5.597 TN (Total U.S. Mortgage Lending increased $185 billion, the strongest quarterly gain since Q4 ’07). 

While the bank lending business was rather humdrum, the capital markets side of things was anything but. Bank Debt Securities holdings were up $141 billion, or 12.5% annualized, during Q3 to a record $4.639 TN. Treasuries gained $84 billion ($205bn y-o-y) and Agency/MBS $54 billion ($265bn y-o-y). Total Debt Securities holdings jumped $464 billion, or 11.1%, over four quarters. Bank “repo” Assets declined $23 billion during the quarter to $736 billion, though one-year growth of $193 billion was up 36%. 

And while on the subject of booming capital markets, Broker/Dealer Assets jumped $102 billion, or 12% annualized, during Q3 to $3.588 TN (high since Q1 ’13). Over the past year, Broker/Dealer assets surged $394 billion, the strongest one-year growth since 2007. For the quarter, Debt Securities holdings were unchanged at $450 billion, with Treasuries declining $21 billion to $213 billion. Loans increased $3.0 billion, while Equities and Misc. Assets each fell about $5.0 billion. What, then, was the source of such robust overall growth? Security Repurchase Agreements rose $103.3 billion, or 30% annualized. Over four quarters, “repo” Assets surged $302 billion, accounting for 77% of Broker/Dealer Asset growth over the period.

Let’s take a brief diversion from Z.1 data. M2 “money” supply surged an unprecedented $1.044 TN over the past year, or 7.3%. Institutional Money Fund Assets (not included in M2) jumped another $390 billion, or 20.8%. Year-to-date, the S&P500 has returned 28.9%. The Nasdaq Composite is up 31.6%. The Semiconductors (SOX) have surged 55.5%, with the Nasdaq Computer Index up 45.8%. The Banks (BKX) have gained 31.3%. Treasury bonds (TLT) have returned 16.9%. Investment-grade corporates (LQD) enjoy a 2019 return of 17.5%, with junk bonds (HYG) returning 13.3%. Gold has gained 15% so far this year, with Silver up almost 10%. Real estate prices have continued to inflate, along with private businesses, art, professional sports franchises, collectible, etc. It has indeed been the spectacular “everything rally.” 

Such extraordinary asset inflation is possible only with some underlying Monetary Disorder. I have argued that international securities finance is at the epicenter of historic Global Monetary Disorder and resulting runaway asset inflation and Bubbles.

When a new Fed Z.1 report was available during the mortgage finance Bubble period, I would immediately jump to the Fed’s “Total Mortgages,” “Agency- and GSE-Backed Securities,” and “Asset Backed Securities” pages. I would then move on to “Fed Funds and Security Repurchase Agreements” (i.e. “repo”). These days, I go directly to “repo” data for illumination of this period’s key source of Monetary Disorder. Q3 did not disappoint.

Total “repo” (“Federal Funds and Security Repurchase Agreements”) Liabilities jumped another $222 billion during the quarter to $4.502 TN, the high going back to Q3 2008. Over the past year, “repo” surged a record $932 billion, or 26.1%. For perspective, “repo” Liabilities rose on average $51.9 billion annually over the past five years (2014-2018). And the $932 billion gain during the past four quarters is more than double the biggest annual rise over the past decade (2010’s $422bn gain that followed the $1.672 TN two-year crisis-period contraction). Ominously, the past year’s gain also surpasses the previous record four-quarter gain ($824bn) for the period ended in June 2007. “Repo” Assets (as opposed to Liabilities) surged $1.087 TN over the past four quarters to a record $4.813 TN. 

Who holds these Trillions of “repos”? Broker/Dealers lead with $1.467 TN, followed by Money Market Funds at $1.173 TN; Rest of World at $781 billion; Foreign Banking Offices in U.S. at $403 billion; and the Fed’s recently acquired $203 billion. In extraordinary growth, over the past year “repo” holdings have increased $302 billion for the Broker/Dealers; $252 billion within Money Market Funds; $145 billion for Rest of World; $98 billion at Foreign Banks in the U.S.; and $203 billion held by the Fed. 

Total Debt Securities (TDS) gained $1.020 TN during the quarter, or 8.9% annualized, to a record $46.742 TN. This huge quarterly expansion was second only to Q1 2004’s $1.177 TN. For comparison, TDS increased $270 billion during Q2 and $449 billion in Q3 ’18. TDS increased $2.115 TN over the past year. For perspective, this is 50% above the average annual growth over the past decade and the largest expansion since 2007. TDS ended September at 217% of GDP (slightly below Q1 ‘13’s record 223%).

Total Equities were down somewhat ($222bn) for the quarter to $49.560 TN, or 230% of GDP. And while this was below Q3 2018’s record 243% of GDP, booming Q4 equities markets will push this ratio back toward all-time highs. Total (Debt and Equities) Securities ended Q3 at a record $96.302 TN, or 447% of GDP (below Q3 2018’s record 458%). For perspective, Total Securities posted previous cycle peaks of 379% of GDP during Q3 2007 and 359% to end Q1 2000.

Subdued equities put somewhat of a damper on the Bubble in perceived household wealth. Household (and Non-Profits) Assets increased $749 billion during Q3 to a record $130.218 TN. And with Household Liabilities up $176 billion to $16.386 TN, Household Net Worth increased $573 billion during the quarter to a record $113.832 TN. For perspective, Household Net Worth peaked during Q3 2007 at $71.346 TN. Household Net Worth has almost doubled from the $60.221 TN trough back in Q1 2009. Surely helping explain the resilient U.S. consumer, Household Net Worth jumped $3.726 TN over the past year and $10.854 TN in two years. Household Net Worth-to-GDP ended September at 528% (down slightly from Q4 17’s record 532%). Previous cycle peaks were at 492% of GDP during Q1 2007 and 446% at Q1 2000.

U.S. securities/“repo” finance is clearly a major source of liquidity for the markets as well as the real economy. Yet this Bubble Dynamic is undoubtedly global, with international securities finance instrumental to inflating securities and asset markets around the world. A Bloomberg article this week referenced a $9.0 TN European “repo” market. There are also large repo markets in Japan and throughout Asia. How much finance used to leverage global securities is originating out of the likes of Hong Kong, Singapore and Shanghai - not to mention the Cayman Islands and Luxembourg? How much global “repo” finance has been flowing into U.S. debt markets?

Rest of World (ROW) holdings of U.S. Assets increased $397 billion during Q3, down sharply from blistering Q2’s $1.017 TN and Q1’s $2.250 TN. After the remarkable Q4 decline ($2.125 TN), ROW holdings are up an astonishing $3.664 TN in nine months, surely a significant contributor to booming asset prices and general Monetary Disorder. In three quarters, ROW holdings of U.S. Debt Securities surged $959 billion, or 11.4%, to a record $12.137 TN. Treasuries jumped $510 billion (to $6.775 TN); Corp Bonds $346 billion (to $3.956 TN); and Agency Securities $93 billion (to $1.171 TN). 

Notably, ROW U.S. “repo” Liabilities jumped $292 billion, or 43%, in nine months to $1.207 TN. How much of this ROW market activity – securities buying and “repo” finance – emanates from global “repo” and off-shore financial centers funding leveraged speculation in U.S. securities?

Markets now relish “clarity.” A “phase 1” U.S./China trade deal has, at long last, been inked. The Tories big election win ensures a decisive Brexit. Meanwhile, the (King of Asymmetric) Fed has essentially signaled no rate hikes until after next year’s election (more likely the 2021 inauguration). Any inkling of instability would certainly elicit additional monetary stimulus. Perhaps bond markets are beginning to have an issue with all of this. Is the Fed really going to expand its balance sheet $500 billion to quell any potential year-end “repo” market pressure? Today’s backdrop becomes even more reminiscent of fateful 1999 (and Y2K). 

 

For the Week:

The S&P500 gained 0.7% (up 26.4% y-t-d), and the Dow added 0.4% (up 20.6%). The Utilities were little changed (up 19.3%). The Banks jumped another 1.5% (up 31.3%), and the Broker/Dealers rose 0.6% (up 22.4%). The Transports rallied 0.6% (up 17.5%). The S&P 400 Midcaps were about unchanged (up 21.7%), while the small cap Russell 2000 added 0.3% (up 21.5%). The Nasdaq100 advanced 1.1% (up 34.1%). The Semiconductors surged 4.2% (up 55.5%). The Biotechs increased 0.3% (up 20.6%). With bullion rising $16, the HUI gold index jumped 3.9% (up 40.6%).

Three-month Treasury bill rates ended the week at 1.525%. Two-year government yields slipped a basis point to 1.61% (down 88bps y-t-d). Five-year T-note yields declined one basis point to 1.65% (down 86bps). Ten-year Treasury yields fell two bps to 1.82% (down 86bps). Long bond yields declined two bps to 2.25% (down 76bps). Benchmark Fannie Mae MBS yields dropped four bps to 2.69% (down 80bps).

Greek 10-year yields sank 15 bps to 1.34% (down 306bps y-t-d). Ten-year Portuguese yields dropped five bps 0.37% (down 135bps). Italian 10-year yields sank nine bps to 1.26% (down 148bps). Spain's 10-year yields fell eight bps to 0.41% (down 100bps). German bund yields were unchanged at negative 0.29% (down 53bps). French yields declined three bps to 0.01% (down 70bps). The French to German 10-year bond spread narrowed three to 30 bps. U.K. 10-year gilt yields gained two bps to 0.79% (down 49bps). U.K.'s FTSE equities index jumped 1.6% (up 9.3% y-t-d).

Japan's Nikkei Equities Index surged 2.9% (up 20.0% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to negative 0.02% (down 2bps y-t-d). France's CAC40 gained 0.8% (up 25.1%). The German DAX equities index rose 0.9% (up 25.8%). Spain's IBEX 35 equities index jumped 1.9% (up 12.0%). Italy's FTSE MIB index added 0.6% (up 27.3%). EM equities surged higher. Brazil's Bovespa index gained 1.3% (up 23.7%), and Mexico's Bolsa surged 5.5% (up 6.3%). South Korea's Kospi index jumped 4.2% (up 6.3%). India's Sensex equities index gained 1.4% (up 13.7%). China's Shanghai Exchange rose 1.9% (up 19.0%). Turkey's Borsa Istanbul National 100 index added 1.5% (up 21.0%). Russia's MICEX equities index jumped 2.3% (up 26.5%).

Investment-grade bond funds saw inflows of $4.609 billion, and junk bond funds posted inflows of $939 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates rose five bps 3.73% (down 90bps y-o-y). Fifteen-year rates gained five bps to 3.19% (down 88bps). Five-year hybrid ARM rates slipped three bps to 3.36% (down 68bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up six bps to 3.98% (down 55bps).

Federal Reserve Credit last week surged $27.9bn to $4.047 TN, with a 13-week gain of $321 billion. Over the past year, Fed Credit contracted $1.4bn. Fed Credit inflated $1.236 Trillion, or 44%, over the past 370 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $11.7 billion last week to $3.405 TN. "Custody holdings" gained $20.7 billion, or 0.6% y-o-y.

M2 (narrow) "money" supply was little changed last week at $15.365 TN. "Narrow money" surged $1.044 TN, or 7.3%, over the past year. For the week, Currency increased $5.1bn. Total Checkable Deposits declined $7.4bn, while Savings Deposits added $1.9bn. Small Time Deposits slipped $1.4bn. Retail Money Funds gained $1.5bn.

Total money market fund assets jumped $40.1bn to $3.619 TN. Money Funds gained $616bn y-o-y, or 20.5%.

Total Commercial Paper increased $3.9bn to $1.139 TN. CP was up $49.3bn, or 4.5% year-over-year.

Currency Watch:

December 6 – Reuters (Huizhong Wu and Dominique Patton): “China’s foreign exchange reserves fell $9 billion in November to $3.096 trillion…, as Washington and Beijing remained locked in negotiations over an interim trade agreement.”

The U.S. dollar index declined 0.5% to 97.172 (up 1.0% y-t-d). For the week on the upside, the South Korean won increased 1.6%, the British pound 1.5%, the Mexican peso 1.4%, the Norwegian krone 1.1%, the Swedish krona 1.1%, the Brazilian real 0.8%, the Swiss franc 0.7%, the Canadian dollar 0.7%, the South African rand 0.6%, the euro 0.6%, the Singapore dollar 0.5%, the Australian dollar 0.5% and New Zealand dollar 0.5%. On the downside, the Japanese yen declined 0.7%. The Chinese renminbi gained 0.84% versus the dollar this week (down 1.4% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index gained 1.5% this week (up 3.2% y-t-d). Spot Gold rose 1.1% to $1,476 (up 15.1%). Silver rallied 2.5% to $17.012 (up 9.5%). WTI crude rose 87 cents to $60.07 (up 32%). Gasoline gained 1.0% (up 26%), while Natural Gas dropped 1.6% (down 22%). Copper jumped 2.1% (up 6%). Wheat recovered 1.5% (up 6%). Corn gained 1.1% (up 2%).

Market Instability Watch:

December 8 – Bloomberg (Liz McCormick): “The September mayhem in the U.S. repo market suggests there’s a structural problem in this vital corner of finance and the incident wasn’t just a temporary hiccup, according to… the Bank for International Settlements. This market, which relies heavily on just four big U.S. banks for funding, was upended in part because those firms now hold more of their liquid assets in Treasuries relative to what they park at the Federal Reserve, officials… concluded… That meant ‘their ability to supply funding at short notice in repo markets was diminished.’ And hedge funds are financing more investments through repo, which ‘appears to have compounded the strains,’ the researchers added.”

December 12 – Wall Street Journal (Michael S. Derby): “The Federal Reserve Bank of New York said… it is again increasing the scope of liquidity operations it is willing to offer financial markets to ensure money-market rates remain relatively calm over an uncertain year-end. The bank, which handles the implementation of monetary policy goals laid out by the rate-setting Federal Open Market Committee, said its provisions of liquidity available via overnight repurchase agreements will rise to $150 billion, from the current $120 billion cap, in operations planned for between Dec. 31 and Jan. 2.”

December 12 – Bloomberg (Alex Harris and Matthew Boesler): “The Federal Reserve Bank of New York is getting its house in order, ramping up measures to combat end-of-year funding risks and tapping permanent leaders to steer its interactions with markets. The branch… said it would conduct additional repurchase-agreement operations that could take the amount its support for funding markets over the crucial year-end period to more than half a trillion dollars… An announcement by the Fed Thursday means that the central bank is now planning to offer a total of $490 billion in liquidity via repo operations for the turn of the year, including the $75 billion that it has already pumped in through three earlier term actions. It announced new term operations totaling $365 billion that will take place this month and next, as well as various changes to its overnight actions.”

December 11 – Reuters (Saqib Iqbal Ahmed and April Joyner): “The options-based Black Swan index may be signaling surging demand from investors for protection against a stock market crash, but Wall Street analysts see little reason to panic. The Cboe Skew Index is near a 14-month high. It tracks the implied volatility of deep out-of-the-money options - that is, contracts that need a large move in the market before they come into play - on the S&P 500. On Monday, the Skew Index hit 136.56, its highest since October 2018.”

December 8 – Bloomberg (Anooja Debnath and Charlotte Ryan): “Currency traders may face new dangers when volatility returns to the market, after a spell of innovation in the industry coincided with a period of unusual calm. An abundance of trading venues means that investors and dealers are spreading their capital more thinly than before, fragmenting liquidity across multiple platforms. That raises the risk of liquidity drying up at some venues during periods of market turmoil, the Bank for International Settlements warns.”

December 8 – Wall Street Journal (Michael Wursthorn): “The S&P 500 is having its best run in six years, but individual investors are fleeing stock funds at the fastest pace in decades… Investors have pulled $135.5 billion from U.S. stock-focused mutual funds and exchange-traded funds so far this year, the biggest withdrawals on record, according to… Refinitiv Lipper, which tracked the data going back to 1992.”

Trump Administration Watch:

December 13 – Bloomberg (Shawn Donnan, Miao Han, and Jenny Leonard): “The U.S. and China said they agreed to the details of the first phase of a broader trade agreement in a move that will see the U.S. reduce tariffs, at least temporarily calm fears of an escalating trade war between the world’s two largest economies. The deal announced hinges on China increasing purchases of American farm goods such as soybeans and pork, and making new commitments on intellectual property, forced technology transfer and currency. …President Donald Trump said he expects China’s agriculture buying to hit $50 billion annually ‘pretty soon.’ The U.S. will also suspend new import taxes that were set to take effect on Sunday covering $160 billion of products such as smartphones and toys, U.S. Trade Representative Robert Lighthizer told reporters… The Asian nation committed to increase imports of U.S. goods and services by no less than $200 billion more than the 2017 level over the next two years, he said.”

December 12 – Reuters (Howard Schneider): “After three interest rate cuts and a fresh round of record highs for U.S. stock markets, has President Donald Trump lost interest in the Federal Reserve? A count of tweets from Trump about U.S. monetary policy suggest a detente may have taken hold between an elected leader who has lambasted Fed officials with insults like ‘clueless’ and ‘boneheads’ and a central bank whose rate cuts have helped buffer the economy from the administration’s own unpredictable trade and tariff policies. On Wednesday, the Fed left interest rates unchanged at the end of a two-day policy meeting, and signaled it was likely to keep them at the current level until at least 2021 - after the Nov. 3 presidential election in which Trump hopes to win a second term.”

Federal Reserve Watch:

December 11 – Wall Street Journal (Nick Timiraos): “The Federal Reserve held interest rates steady and signaled no appetite to raise them soon. After lowering rates at their three previous meetings to guard the U.S. economy from the effects of trade tensions and a global slowdown, Fed officials… indicated comfort with leaving monetary policy on hold through next year while keeping an eye on those risks. ‘Our economic outlook remains a favorable one,’ said Fed Chairman Jerome Powell. The rate-setting committee voted 10-0 to leave the central bank’s benchmark rate in a range between 1.5% and 1.75%... New projections released after the meeting showed most officials think rates are low enough to stimulate growth.”

December 11 – Reuters (Jonnelle Marte): “With memories of September’s historic spike in short-term funding costs still raw, Wall Street and the Federal Reserve are gearing up for another potential cash crunch at year end. Liquidity levels will be tested as early as Monday, when Wall Street firms have to shell over cash to the U.S. Treasury for this week’s government bond sales and businesses draw down reserves to make quarterly tax payments - events that could drain more than $100 billion in liquidity from the banking system… And a new wild card may come into play this month. Some large banks may scale back lending in the repo market in an effort to shrink their balance sheets to avoid regulatory penalties…”

December 11 – Bloomberg (Alex Harris, Benjamin Purvis, and Christopher Condon): “The Federal Reserve is willing to extend its reserve management related purchases of Treasuries to coupon-bearing securities if needed, according to Chairman Jerome Powell. ‘We’re not at this place, but if it does become appropriate for us to purchase other short-term coupon securities, then we would be prepared to do that if the need arises,’ he said at his post-decision news conference... The Fed is ‘willing to adapt’ its strategy on bill purchases, Powell said.”

December 9 – Financial Times (Joe Rennison): “Investors snapped up a further $25bn in short-term loans from the Federal Reserve on Monday, seeking to shore up financing over the end of the year. It marks the third ‘repo’ operation in which the New York branch of the US central bank has offered the loans in exchange for Treasuries and other high quality collateral… Demand was in line with last week’s operation at $43bn for the $25bn on offer. The continued demand for cash despite the Fed’s operations has unnerved some investors…”

December 11 – Reuters (Jonnelle Marte): “The Federal Reserve’s efforts to calm money markets could fall short at the end of the year, potentially leading to a spike in Treasury yields and forcing the central bank to resort to launch a round of quantitative easing, a Credit Suisse analyst warned this week.”

U.S. Bubble Watch:

December 11 – Associated Press (Paul Wiseman): “The U.S. budget deficit rose by 2% last month to $209 billion, another step in a journey back toward $1 trillion-a-year budget shortfalls. The… federal government took in $225 billion in tax and other revenue but spent a record $434 billion in November… The Congressional Budget Office is forecasting that the deficit for 2020 will hit $1 trillion and will stay above $1 trillion for the next decade. The country last ran annual $1 trillion annual deficits from 2009 through 2012 during and after the financial crisis… So far this budget year, the government is running a deficit of $343 billion, up 12% from a year earlier.”

December 11 – Reuters (Lucia Mutikani): “U.S. consumer prices increased solidly in November, which together with labor market strength could support the Federal Reserve’s intention to keep interest rates steady indefinitely after reducing borrowing costs three times this year… The consumer price index rose 0.3% last month as households paid more for gasoline and electricity, and food prices increased for a third consecutive month. The CPI advanced 0.4% in October. In the 12 months through November, the CPI shot up 2.1% after gaining 1.8% in October.”

December 11 – Reuters (Lucia Mutikani): “U.S. worker productivity fell by the most in nearly four years in the third quarter…, while growth in unit labor costs was not as robust as initially thought. …Nonfarm productivity, which measures hourly output per worker, decreased at a 0.2% annualized rate in the last quarter, the biggest drop since the fourth quarter of 2015.”

December 13 – Reuters (Lucia Mutikani): “U.S. retail sales increased less than expected in November as Americans cut back on discretionary spending, which could see economists dialing back economic growth forecasts for the fourth quarter. …Retail sales rose 0.2% last month. Data for October was revised up to show retail sales increasing 0.4% instead of gaining 0.3%... Economists… forecast retail sales would accelerate 0.5% in November. Compared to November last year, retail sales increased 3.3%.”

December 10 – Bloomberg (Jeff Kearns): “Sentiment among small U.S. businesses climbed by the most in more than a year as more owners said profit trends are looking up and that it’s a favorable time for expansion, adding to signs that a key part of the economy is holding up in the fourth quarter. The National Federation of Independent Business optimism index rose 2.3 points in November to a four-month high of 104.7, topping all estimates…”

December 10 – Wall Street Journal (Ben Eisen): “Fannie Mae and Freddie Mac are pulling back on some mortgages meant to make homeownership more affordable, their latest effort to rein in risk at the behest of their regulator. The two companies are cutting back on the proportion of loans they back to borrowers with small down payments, for example, and mortgages to deeply indebted borrowers. The regulator, the Federal Housing Finance Agency, says it wants Fannie and Freddie to be prepared for a possible economic downturn.”

December 12 – New York Times (Alexandra Stevenson): “A decade ago, natural gas was heralded as the fuel of the future. In shale fields across the country, hydraulic fracturing uncorked a lucrative new source of supply. Energy giants like Exxon Mobil and Chevron snapped up smaller companies to get in on the action, and investors poured billions of dollars into export terminals to ship gas to China and Europe. The boom has given way to a bust. A glut of cheap natural gas is wreaking havoc on the energy industry, and companies are shutting down drilling rigs, filing for bankruptcy protection and slashing the value of shale fields they had acquired in recent years.”

December 12 – Bloomberg (Jennifer Surane and Shahien Nasiripour): “Americans are projected to fall seriously behind on their credit card bills at the highest rate in a decade as banks push a record number of people to get plastic. The share of credit card borrowers who are at least 90 days past due on their accounts will probably tick up to 2.01% next year, the highest level since 2010, according to… TransUnion.”

December 9 – Reuters (Joshua Franklin and Anirban Sen): “More and more companies are putting plans for U.S. initial public offerings (IPO) on ice this year because of investor pushback against their valuations, creating a backlog that could make stock market debuts more challenging in 2020. While 2019 had promised to be a bumper year for IPOs, investor sentiment quickly soured… This has led to companies’ postponing listing plans. Some 44 companies withdrew their IPO registration in 2019 as of Dec. 3, up almost 50% on 2018 and the highest level since 2016…”

December 11 – CNBC (Maggie Fitzgerald): “2019 is the year of CEO departures. In November, 148 chief executives left their posts, according to business and executive coaching firm Challenger, Gray & Christmas. Only five more CEOs need to depart for 2019 to be the highest year on record, and we already know of a few CEOs out in December.”

China Watch:

December 12 – Reuters (Cate Cadell): “Senior Chinese diplomat Wang Yi said on Friday that the United States had seriously damaged the hard-won mutual trust between the countries by criticizing Beijing over issues such as Hong Kong and the treatment of Muslim Uighurs. ‘Such behavior is almost paranoid, and is indeed rare in international exchanges, seriously damaging the hard-won foundation of mutual trust between China and the United States, and seriously weakening the United States’ international credibility,’ said State Councillor Wang.”

December 7 – Reuters (Dominique Patton): “China’s top diplomat Yang Jiechi told U.S. Secretary of State Mike Pompeo… that the United States should stop interfering in China’s internal affairs, according to… state TV. Citing the passing of the Uighur Human Rights Policy Act of 2019 and the Hong Kong Human Rights and Democracy Act of 2019, Yang said the United States had seriously violated international relations, and urged Washington to ‘correct its mistakes’ and ‘immediately stop interfering in China’s internal affairs’.”

December 8 – Bloomberg: “The Chinese government is taking further steps to remove foreign technology from state agencies and other organizations, a clear sign of determination for more independence amid escalating tensions with the U.S. Beijing will likely replace as many as 20 million computers at government agencies with domestic products over the next three years, according to research from China Securities. More than 100 trial projects for domestic products were completed in July… The Financial Times newspaper said the Communist Party’s Central Office earlier this year ordered state offices and public institutions to shift away from foreign hardware and software.”

December 12 – New York Times (Alexandra Stevenson): “China’s companies racked up some towering bills as they expanded, and the world’s investors and lenders rushed to offer them even more money. Now the bills are coming due, and a growing number of Chinese companies can’t pay up, in a sign that the world’s No. 2 economy is feeling the stress from its worst slowdown in nearly three decades. Two high-profile companies — a giant government-run trading firm and a conglomerate backed by China’s most distinguished university — are the latest to join a long list of Chinese businesses that have run short of cash when it was time to pay back their debts. Chinese corporate borrowers have defaulted on nearly $20 billion in loans this year. The amount is small compared with China’s overall economy, but the toll is rising. Chinese companies owe hundreds of billions of dollars in debt that is coming due over the next two years, including more than $200 billion owed to lenders and investors around the globe.”

December 11 – Bloomberg: “A major Chinese commodities trader became the biggest dollar bond defaulter among the nation’s state-owned companies in two decades, in a moment of reckoning for Beijing as it struggles to contain credit risk in a weakening economy. Tewoo Group Corp. announced results of its unprecedented debt restructuring, which saw a majority of its investors accepting heavy losses. This is expected to reshape investors’ perceptions about government-owned borrowers whose identity has for years offered a relatively strong sense of security.”

December 8 – Bloomberg: “The latest bond failure by a Chinese local government investment arm has rekindled concerns about a group of borrowers whose outlook is closely tied to Beijing’s shifting definition of its implicit backing. The debt woes faced by Hohhot Economic & Technological Development Zone Investment Development Group, a local government financing vehicle from Inner Mongolia, have sent chills among investors holding other such LGFV bonds, driving prices sharply lower for some.”

December 10 – Bloomberg (Denise Wee): “Closer linkages between China’s onshore and offshore bond markets are threatening to spread contagion from local defaults. As the nation’s economy slows and liquidity tightens, its weakest companies are facing repayment woes. This, in turn, is creating jitters offshore. Growing participation by Chinese investors in the dollar bond market has led to concentration risk, with such buyers now dumping their holdings at the first hint of trouble. Asian junk notes -- the majority of which are from Chinese issuers -- suffered their worst losses last week since August, as a string of onshore nonpayments doused cold water on a rally.”

December 9 – Reuters (Lusha Zhang and Huizhong Wu): “China’s consumer inflation climbed to nearly eight-year peaks in November as pork prices doubled, but factory-gate prices remained in the red, adding to uncertainty over whether the manufacturing sector is bottoming out as trade risks persist… Consumer prices in November rose 4.5% on year, the fastest pace seen since January 2012… That topped analysts’ expectations of 4.2% and October’s 3.8% rise.”

December 10 – Financial Times (Sun Yu): “A surge in China’s consumer inflation to a seven-year high coupled with a decline in the producer price index are squeezing Beijing’s options to ease monetary policy. The official consumer price index rose to 4.5% in November…, while the PPI fell 1.4%, its fifth consecutive month of decline. Analysts said soaring consumer inflation, powered by runaway pork prices, and falling raw material prices that pointed to weak industrial demand, were limiting China’s policy tools to fight the economic downturn.”

December 11 – Bloomberg: “Vehicle sales in China are set to fall about 8% this year, an industry body said, the second straight annual drop for the world’s biggest auto market as consumers stay away from showrooms amid a cooling economy… The drop compares with about a 3% decline in 2018, when sales fell for the first time since 1990.”

December 11 – Financial Times (Don Weinland): “A flurry of Chinese banks are being forced to buy back shares to stabilise their stock prices following a series of bank bailouts and mounting pressure on the country’s financial system. At least 10 small, listed banks have been required by local regulations to purchase their own shares after their stock traded below net asset value per share for more than 20 consecutive days. The share purchases, called ‘stock price stabilisation plans’, are mandatory for companies whose stocks perform poorly within the first three years after listing, and are common among China’s listed companies.”

December 11 – Reuters (Felix Tam and Donny Kwok): “Thousands of Hong Kong protesters gathered… to mark six months since their first major clash with police, when they blocked legislators from advancing an extradition bill that has since been scrapped. On June 12, police fired tear gas and rubber bullets to disperse protesters occupying roads near the legislative council just as it was to give a second reading to the bill that would have allowed criminal suspects to be extradited to mainland China, where courts are controlled by the Communist Party.”

December 7 – Associated Press (Kate O'Donnell-Lamb and Jessie Pang): “Vast crowds of black-clad demonstrators thronged Hong Kong on Sunday in the largest anti-government protests since local elections last month that boosted the pro-democracy movement seeking to curb controls by China… It was the first time since August that the Civil Human Rights Front - organizer of million-strong marches earlier in the year… - had received authorities’ permission for a rally. It estimated turnout of 800,000 while police said 183,000.”

December 9 – Reuters: “China’s exports in November shrank for the fourth consecutive month, underscoring persistent pressures on manufacturers from the Sino-U.S. trade war but growth in imports may be a sign that Beijing’s stimulus steps are helping to stoke demand. The 17-month long trade dispute has heightened the risks of a global recession and fueled speculation that China’s policymakers could unleash more stimulus as growth in the world’s second-largest economy cooled to nearly 30-year lows. Overseas shipments fell 1.1% from a year earlier last month… China’s trade surplus for November stood at $38.73 billion, compared with an expected $46.30 billion surplus… and a $42.81 billion surplus recorded in October.”

December 8 – Associated Press (Joe McDonald): “China’s trade with the United States sank again in November as negotiators worked on the first stage of a possible deal to end a tariff war. Exports to the United States fell 23% from a year earlier to $35.6 billion… Imports of American goods were off 2.8% at $11 billion, giving China a surplus with the United States of $24.6 billion.”

Central Banking Watch:

December 8 – Bloomberg (Enda Curran): “The era of central bank shock and awe is over. More than ten years of crisis fighting -- including this year’s rush to support global growth -- have left policy makers in key economies facing a new decade with few good options to fight the next downturn. Interest rates are either already around historic lows or negative after more than 750 cuts since 2008, spurring concerns they are doing more harm than good. At the same time, leading central banks are buying bonds again -- so called quantitative easing -- after the purchase of more than $12 trillion of financial assets wasn’t enough to revive inflation.”

December 11 – Reuters (Balazs Koranyi and Francesco Canepa): “Christine Lagarde struck a more upbeat tone on the economy in her first news conference as head of the European Central Bank on Thursday and promised a new style of leadership as she outlined a sweeping one-year review of the bank’s workings. With the euro zone economy barely expanding, the former IMF chief firmly embraced the ECB’s easy money policy but suggested that the worst of the bloc’s slowdown may now over and an often-discussed but elusive recovery could now begin.”

Brexit Watch:

December 12 – Associated Press (Gregory Katz): “British Prime Minister Boris Johnson campaigned on one theme alone — ‘Get Brexit done.’ His sweeping victory in Thursday’s election means that could now happen within weeks. Even before his Conservative Party had officially crossed the winning line Friday, Johnson said it looked like his party had ‘a powerful new mandate’ to complete Britain’s divorce from the European union. Johnson now looks certain to pull Britain out of the EU by the Jan. 31 deadline, but he will still face the mountainous challenge of negotiating a complex trade deal with the EU by the end of next year — a task that many experts say is not possible.”

EM Watch:

December 12 – Bloomberg (Kartik Goyal): “Indian bonds, the worst performer this month among Asian peers, may extend losses with no let-up in the bad news facing them. The benchmark 10-year debt had sold off Wednesday evening after S&P Global Ratings warned of a downgrade, dealing a blow to an already frail sentiment. The Reserve Bank of India’s shock hold on rates last week led to the worst weekly fall in bond prices in more than one-and-a-half years. S&P’s red flag adds to lingering concerns about a wider fiscal deficit, rising inflation, volatile oil prices and the absence of bond purchases by the RBI. Retail inflation accelerated to 5.54% in November from a year earlier…”

December 6 – Bloomberg (Ronojoy Mazumdar): “India’s real estate, construction and infrastructure industries are in ‘deep trouble,’ and non-bank finance companies which lend to these sectors should have their asset quality reviewed, former central bank Governor Raghuram Rajan said. There is also ‘significant distress in rural areas,’ Rajan wrote… He said India is in a growth recession, defined as an economy growing at a slow pace and where unemployment is rising. India’s GDP growth slowed to 4.5% in the quarter ended September, a six-year low. A crisis among shadow lenders and a build-up of bad loans at banks have curbed lending in the economy.”

December 12 – Reuters (Daren Butler, Ezgi Erkoyun and Ali Kucukgocmen): “Turkey’s central bank cut its policy rate by 200 basis points to 12%... The bank lowered its benchmark one-week repo rate from 14%, bringing Turkish ‘real’ rates below the levels in most emerging markets. Economists polled by Reuters had expected a cut of 150 bps.”

Europe Watch:

December 10 – Reuters (Paul Carrel): “The ZEW research institute’s monthly index on economic morale among investors rose to 10.7 from -2.1 a month earlier. The reading exceeded even the highest forecast in a Reuters poll of economists, which showed a consensus prediction of 0.0.”

Global Bubble Watch:

December 8 – Bloomberg (Anchalee Worrachate): “The European repo market may have escaped the kind of turmoil that engulfed the U.S. financial system this year, but that doesn’t mean all is calm. The 8 trillion-euro ($9 trillion) market is becoming increasingly fragmented, according to the Bank for International Settlements. While this hasn’t caused harm yet, it raises the risk that cash may not flow through the system properly, BIS said in its quarterly review. That’s what caused chaos in the U.S. almost three months ago.”

December 8 – Bloomberg (John Ainger, Vivien Lou Chen, and Ruth Carson): “First it was Japan. Then Europe. Now investors are scanning the world for the next outbreak of stagnant inflation and tumbling yields. The malaise of ‘Japanification’ burst into the mainstream this year, leaving in its wake a record amount of negative-yielding debt. Quantitative easing and a low-rate regime in Europe delivered banner returns on the region’s bonds -- at the expense of bank profits and retirement savings. Many say it recalls Japan’s lost decade.”

Japan Watch:

December 8 – Reuters (Daniel Leussink): “Japan’s economy expanded at a much faster pace than initially reported in the third quarter, as resilient domestic demand and business spending offset the hit to growth from falling exports and global trade tensions. Gross domestic product grew an annualised 1.8% in July-September, stronger than the preliminary reading of 0.2% annualised growth…”

December 12 – Reuters (Leika Kihara and Kaori Kaneko): “Japanese big manufacturers’ business mood sank to a near seven year low in the fourth quarter, a closely watched central bank survey showed, as the U.S.-China trade war and soft global demand weighed on the export-reliant economy. Companies expect conditions to remain unchanged or even worsen three months ahead, the Bank of Japan’s ‘tankan’ quarterly survey showed, suggesting that the fallout from the trade conflict could hurt broader sectors of the economy.”

Leveraged Speculation Watch:

December 8 – Financial Times (Tommy Stubbington and Joe Rennison): “Hedge funds exacerbated the recent turmoil in the repo market with their thirst for borrowing cash to juice up returns on their trades, according to the Bank for International Settlements. Investors, bankers and policymakers were left stunned in September when the cost of borrowing cash overnight in exchange for high-quality collateral such as US government debt shot higher, eventually forcing action from the Federal Reserve to keep the market functioning smoothly.”

Geopolitical Watch:

December 7 – Reuters (Soyoung Kim, Josh Smith): “U.S. President Donald Trump said… that North Korean leader Kim Jong Un risks losing ‘everything’ if he resumes hostility and his country must denuclearize, after the North said it had carried out a ‘successful test of great significance.’ ‘Kim Jong Un is too smart and has far too much to lose, everything actually, if he acts in a hostile way. He signed a strong Denuclearization Agreement with me in Singapore,’ Trump said on Twitter…”

December 9 – Bloomberg (Jihye Lee): “North Korea took its most personal swipe at President Donald Trump in more than two years, saying the U.S. leader’s recent comments made him sound like a ‘heedless and erratic old man.’ The statement… by North Korean official Kim Yong Chol… was the latest in a rhetorical tit-for-tat ahead of Pyongyang’s self-imposed year-end deadline for a breakthrough in nuclear talks. On Sunday, Trump played down warnings from the regime, saying in a tweet that North Korean leader Kim Jong Un was ‘too smart and has far too much to lose’ to renew hostility with the U.S. ‘This naturally indicates that Trump is an old man bereft of patience,’ said Kim Yong Chol… ‘As he is such a heedless and erratic old man, the time when we can not but call him a ‘dotard’ again may come.’”

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