June 7, 2019: Horde of Jumbo Bazookas

June 7, 2019: Horde of Jumbo Bazookas
Doug Noland Posted on June 8, 2019

“Stocks Eye Best Week of 2019 on ‘Powell Put’ Bets,” read the Friday Bloomberg headline. By the close of Friday trading, the S&P500 had posted a gain of 4.4% (“best week since November”). Also from Bloomberg: “Fed Watchers Say a July Rate Cut Is In Play, June Not Likely.” Markets now price in a 25% probability of a cut by the June 19th meeting, 86% by July 31st and 96% by September 18th. Markets a month ago saw only a 33% chance of a cut by the September meeting.

Ten-year Treasury yields declined four bps this week to 2.08%. German bund yields dropped another six bps this week to a record low negative 0.26%, with Swiss 10-year yields down three bps to negative 0.52%. Japanese JGB yields declined three bps to negative 0.12%. Some of the more spectacular yield moves have unfolded away from the typical safe havens. Spanish 10-year yields dropped 16 bps this week to a record low 0.55%, and Portuguese yields sank 19 bps to an all-time low 0.62%. Greek yields fell eight bps to 2.81%.

And if there is any doubt that market prices have completely detached from underlying fundamentals, look no further than Italy. Italian 10-year yields collapsed 31 bps this week to 2.36%. Spectacular panic buying across global bond markets.

June 4 – Wall Street Journal (Nick Timiraos): “Markets rallied Tuesday after Federal Reserve officials said they were closely monitoring the recent escalation in trade tensions and indicated they could respond to any economic deterioration by cutting interest rates. ‘We do not know how or when these trade issues will be resolved,’ Fed Chairman Jerome Powell said… ‘We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion.’ Mr. Powell didn’t say whether he thought a rate cut would be needed. The comments show the Fed has ended a debate over whether its next move would be to raise or lower rates and is focusing now on whether and when to cut them.”

The Fed Chairman didn’t suggest – or so much as mention – a rate cut. Markets take “closely monitoring” as assurance that the FOMC learned its lesson back in December. A Thursday headline from the Wall Street Journal: “Fed Begins Debate on Whether to Cut Rate as Soon as June.” And Friday from CNBC: “It’s No Longer a Question of if the Fed Will Cut Interest Rates, But When.”

Assuming the market has this right, the Federal Reserve is preparing for additional monetary stimulus – perhaps in less than two weeks. This means the Fed would be cutting rates from already extremely low levels, with the unemployment rate at 3.6%, 3.1% y-o-y wage growth, 10-year bond yields just above 2.0%, y-o-y CPI up 2.0% (core up 2.1% y-o-y), along with highly speculative stock prices posting strong gains for the year and the S&P500 less than 3% away from all-time record highs.

Back in the nineties, the Greenspan Fed attracted some criticism for their “asymmetrical” policy bias: Greenspan was prone to slash rates aggressively in the event of market instability, but then to increase cautiously in “baby step” 25 bps increments even in the face of booming output and bubbling asset markets. This policy approach corrupted market incentives, fostered speculative excess, and progressively distorted market function.

Yet the old “asymmetrical” appears a remarkably prudent and balanced policy approach in comparison to what we’re witnessing these days. At this point, it might take 4% GDP growth, an upside inflation surprise and an equities melt-up for the Fed to ponder another 25 bps rate increase. But the very prospect of some market instability is enough to unleash aggressive rate slashing and a mad dash to QE and other unconventional measures.

From Chairman Powell’s Tuesday opening remarks before the “Conference on Monetary Policy Strategy, Tools, and Communications Practices:” “Perhaps it is time to retire the term ‘unconventional’ when referring to tools that were used in the crisis. We know that tools like these are likely to be needed in some form in future ELB spells, which we hope will be rare. We now have a significant body of evidence regarding the effectiveness, costs, and risks of these tools, including those used by the FOMC and others tried elsewhere. Our plans must take advantage of this growing understanding as assessments are refined.”

Thursday from the Wall Street Journal (Nick Timiraos): “…One loud message out of this week’s Chicago conference is that Fed officials should move more quickly than the central bank has in the past to shore up growth at the first sign of weakness, because with their short-term benchmark rate at a historically low level they don’t have as much room to cut rates as in previous downturns.”

I have posited that the Fed’s balance sheet could swell to $10 TN during the next crisis. When the current Bubble bursts, the Fed and global central bankers will see no alternative than to flood the global financial system with central bank Credit. This is a terrible, reprehensible prospect.

I warned ten years ago that QE was a slippery slope. After a decade, central bankers would surely today prefer to rebrand QE as a “conventional” – and elemental – part of their arsenals. But it will not be until the next bursting Bubble phase before there is a modicum of a “body of evidence” (from only one cycle) for assessing the effectiveness of history’s most radical monetary experiment. Today, global securities markets are eagerly anticipating the return of zero rates and more QE. Chairman Powell, Draghi and others are conveying the message that they are getting their arsenals ready.

I contemplate global issues (China, financial and economic fragilities, mounting geopolitical risks) and understand why they are compelled to reassure the markets. With limited tools, moving early and aggressively might even seem reasonable. There is one monumental problem: at this stage of a protracted speculative super-cycle these reassurances are throwing gas on a raging fire. That Which Insulates the Bubble Only Makes It Stronger.

Powell: “In short, the proximity of interest rates to the ELB has become the preeminent monetary policy challenge of our time, tainting all manner of issues with ELB risk and imbuing many old challenges with greater significance.”

The ELB (“effective lower bound” – aka zero rates) predicament is of the Fed/central bankers’ own making. After the Fed cut rates to zero (to 0.25%) on December 16, 2008 (having slashed 500 bps in 15 months), it took a full decade to reverse Fed funds 200 bps higher (to 2.25%-2.50%). It’s worth adding that after beginning “normalization” with a 25 bps increase in December 2015, it was then almost three years before rates were raised to 2.0%. Over this period, the S&P500 surged 40%.

Having delayed, postponed and ultimately abandoned “normalization,” the resulting “ELB” predicament ensures the Fed (and fellow central banks) will be swiftly resorting to QE. This prospect has been fundamental to the collapse in global yields, a dynamic that has been fueling precarious Bubble Dynamics throughout global securities markets (sovereign debt, equities and corporate Credit, in particular). This has caused the already gaping divergence between inflating risk market prices and deflating global fundamental prospects to deviate to an unprecedented degree (beyond even late ’07).

Allow me to posit that speculative finance – rather than “ELB” – is “the preeminent monetary policy challenge of our time.” Chairman Powell played the briefest lip service to “Using monetary policy to push sufficiently hard on labor markets to lift inflation could pose risks of destabilizing excesses in financial markets or elsewhere.”

Powell, Draghi, Kuroda and the like fully appreciate that a decade of ultra-loose monetary policies has fueled dangerous Bubbles. But they’ve thrown in the towel; a fight they are afraid to confront. The Fed has not only abandoned “normalization,” it has deserted its primary responsibility for safeguarding financial stability. We’re witnessing nothing short of a historic failure in the Bernanke inflationary policy doctrine, today masked by precarious Speculative Dynamics throughout the risk markets and a historic melt-up in global sovereign bond prices.

History has never experienced such powerful financial Bubbles on a globalized basis. The scope of international trend-following and performance-chasing finance is unprecedented (many tens of Trillions). And with these Bubbles at risk of bursting, central bankers are resolved to employ “whatever it takes” monetary stimulus to hold dislocation at bay. The upshot is only further emboldened market participants, more intense speculation, a greater accumulation of speculative leverage and even more precarious “Terminal Phase” Bubble excess.

June 6 – Reuters (Balazs Koranyi and Francesco Canepa): “The European Central Bank… ruled out raising interest rates in the next year and even opened the door to cutting them or buying more bonds as risk factors such as global trade war and Brexit drag the euro zone economy down. Hoping to maintain the flow of credit to the economy, it also offered to effectively pay banks to borrow from it and lend that money on to the real economy. With the bloc’s inflation prospects diminishing rapidly, ECB President Mario Draghi sought to reassure investors that the central bank was ready to act if needed to support an economy hurt by weaker global trade and that it could even resort to once-taboo measures.”

Markets are highly confident the ECB will soon redeploy its bond purchase program. There was an interesting exchange in Mario Draghi’s Thursday news conference:

Journalist question: “It feels like we’re further away than ever from returning to normal monetary policy. Have we actually reached the new normal? Is the big question now for central banks not whether or for how long to use non-standard monetary policy tools, but rather in what combination and with what weighting?”

Mario Draghi: “…Is the world more normal today than it was a year ago or three years ago? Monetary policy uses the instruments that are adequate to cope with the contingencies and the challenges that come out. Now we say the monetary policy is non-conventional, that we are far away from normalization. We are far away from normalization because the rest of the world, the rest of the challenges are far away from being normal. It’s been like that now for many, many, many years following first the great financial crisis, then the sovereign debt crisis, then the Greek crisis. Now we have the threat of rising protectionism, the geopolitical threats that we see every day. We have developments in the Eurozone itself that warrant this.”

The world is certainly anything but normal. The critical issue that the world refuses to address is how three decades of progressively “activist” central banking have played a profoundly deleterious role in global financial and economic development. Fed policymaking was fundamental in fueling the “tech” and mortgage finance Bubbles. The bursting of the Bubble in 2008 then incited history’s greatest central banking stimulus. Without this radical stimulus the historic nature of China’s Bubble would not have been possible. It was this radical stimulus that also exacerbated inequality within and between nations. It was the backdrop of inequality and general insecurity that contributed to the global rise of the “strongman” leader. And headstrong leadership, extreme economic imbalances and the zero-sum game mentality today create epic economic and geopolitical risks.

June 6 – Financial Times (Claire Jones): “Throughout his eight years as the European Central Bank’s president, Mario Draghi has stood ready to live by his most famous maxim and do ‘whatever it takes’ to shore up the eurozone economy. Whether they agree with that approach or not, his successor will now have to stomach much of Mr Draghi’s approach after he steps down in the autumn. He has managed to not only lock his successor in to keeping interest rates on hold until the middle of 2020, but he has also now made the first move in shaping the central bank’s reaction if economic conditions worsen. Mr Draghi has controversially remodelled the eurozone’s monetary guardian from a Bundesbank-style central bank to something more akin to the US Federal Reserve, purchasing trillions of euros-worth of bonds to stamp out the threat of deflation — despite fierce opposition in northern member states.”

Draghi’s replacement will suffer the same fate as Bernanke’s successors: Once you’ve pulled out the monetary bazooka, there will be no dropping it from the arsenal. Nothing in fact will suffice but a bigger bazooka. Bigger Bubble Demands Bigger Bazooka. And global bond markets are these days priced for a Horde of Jumbo Bazookas. Yet there’s more to this story than central banks held hostage by speculative Bubbles. More than trade wars, weak global manufacturing and even the fragile European banking system, the vulnerable Chinese Bubble is a likely catalyst that could rather abruptly panic global markets and central bankers alike.

The Shanghai Composite dropped 2.4% this week. The Chinese renminbi has not yet mustered a rally attempt after the recent steep sell-off. More bank worries and another active week for the People’s Bank of China:

June 2 – Reuters (Andrew Galbraith): “China’s central bank sought to calm investors… after last month’s takeover of Inner Mongolia-based Baoshang Bank, saying regulators are not planning any more such moves for the moment… In response to concerns that regulators planned more takeovers of financial institutions, the PBOC said on Sunday that Baoshang was a standalone case. ‘Everyone, please don’t worry. At present we don’t yet have this plan,’ it said in a statement…”

June 5 – Bloomberg (Livia Yap and Claire Che): “China’s central bank added 500 billion yuan ($72bn) to the financial system, more than offsetting the medium-term loans that were maturing Thursday. The People’s Bank of China offered the one-year medium-term lending facilities at 3.3%, and sold 10 billion yuan of seven-day reverse repo at 2.55%… The loans, the second-largest of their kind on record, were offered…”

June 2 – Bloomberg: “Bank of Jinzhou Co. said its auditors resigned, sending some of its debt securities plunging and reigniting investor concerns about the riskiness of China’s smaller lenders. Ernst & Young Hua Ming LLP and Ernst & Young said in a resignation letter to the bank that there are indications that some loans to institutional customers weren’t used in ways consistent with the purposes stated in documents… There are almost 4,000 small city and rural banks in China and these typically have ‘more vulnerable funding and liquidity profiles, larger shadow-financing activities and lower loss-absorption capacity’ than larger commercial banks, according to Fitch Ratings. Bank of Jinzhou was set up in 1997 in Liaoning province in northeastern China. It has total assets of $113 billion and total deposits of $53 billion…”

June 3 – Bloomberg: “Investors in China’s money market avoided debt sold by smaller lenders on Monday as the government’s seizure of Baoshang Bank Co. remained fresh on their minds. Short-term funding costs for China’s top banks swung back to normal by Thursday after an initial jump that followed the first government seizure of a local lender in about more than two decades. However, yields on negotiable certificates of deposits — a popular instrument of interbank lending – issued by smaller banks were still indicated 20 bps higher than ChinaBond valuations this morning… Some of Baoshang’s creditors face potential losses. Demand for smaller bank NCDs remained scarce on Monday after a sharp drop in issuance last week…”

June 4 – Bloomberg: “Some of China’s smaller banks have delayed plans to sell tier-2 bonds in the local market due to weak investor demand after the first government seizure of a lender in about 20 years, according to people familiar with the matter. Guilin Bank Co. and Jincheng Bank Co.’s planned tier 2 bond sales have been postponed, said the people…”

June 3 – Bloomberg: “Underwriters of a new Chinese credit hedging tool just narrowly avoided their first-ever payout in the nation’s $13 trillion bond market. An investor protection clause on two of Beijing Orient Landscape & Environment Co.’s bonds was triggered last month after the note repayment funds were used for other purposes. Bondholders recently gave waivers, not calling them defaults. The close shave is making underwriters more wary of selling credit risk mitigation warrants (CRMWs), according to Southwest Securities Co.”

June 4 – Financial Times (Don Weinland): “China’s stock market was hit by the biggest outflow of foreign capital on record in April and May as the trade war with the US and concerns over the stability of the renminbi darkened investors’ view of the country. A total of about $12bn left the market during April and May, according to data from CEIC and Morgan Stanley, the largest exodus since the launch five years ago of a ‘stock connect’ programme that provides global investors with access to Chinese shares, via Hong Kong.”

June 5 – Financial Times (Don Weinland and Archie Zhang): “A $647bn blind spot in financial reporting by China’s city and rural commercial banks is fuelling investor concerns that more of the country’s lenders face government intervention or collapse in the wake of the state takeover of Baoshang Bank. Baoshang was one of 19 banks with a combined Rmb4.47tn ($647bn) in assets that have yet to publish 2018 financial results, according to… Barclays. The delays are a potential sign of a build-up in non-performing loans and leave investors blind to how many of those assets may have turned into bad debt, as was the case with Baoshang, analysts said.”

June 4 – Bloomberg: “Chinese authorities are taking fresh steps to cool the property market, curtailing onshore fundraising for developers found to have bid aggressively in land auctions. The curbs have affected companies including Sunac China Holdings Ltd. and Gemdale Corp., said people with knowledge of the matter… In some cases, developers’ underwriters were asked by regulators not to tap unused quotas for selling yuan bonds or asset-backed securities… By targeting developers’ financing plans, authorities signal they’re willing to use a wide range of levers for keeping the housing market in check…”

June 6 – Bloomberg: “China’s central bank governor said there’s ‘tremendous’ room to adjust monetary policy if the trade war deepens, joining counterparts in Europe and the U.S. in displaying readiness to act to support the economy. In an exclusive interview with Bloomberg in Beijing, People’s Bank of China Governor Yi Gang also signaled that he’s not wedded to defending the nation’s currency at a particular level, and stressed that the value of the yuan should be set by market forces… ‘We have plenty of room in interest rates, we have plenty of room in required reserve ratio rate, and also for the fiscal, monetary policy toolkit, I think the room for adjustment is tremendous,’ he said. Yi said the currency has been weaker recently due to ‘tremendous pressure’ from the U.S. side but the impact will be temporary.”

There’s “tremendous room to adjust monetary policy” – that is, until the renminbi buckles and Beijing faces a run on its currency and financial system. “Everyone, please don’t worry.” Worry. “China’s stock market was hit by the biggest outflow of foreign capital on record…” How about the huge international flows that were enticed into China’s booming bond market? “A $647bn blind spot in financial reporting by China’s city and rural commercial banks…” “Steps to cool the property market.” All the characteristic of an unfolding crisis.

For the Week:

The S&P500 surged 4.4% (up 14.6% y-t-d), and the Dow jumped 4.7% (up 11.4%). The Utilities rose 2.9% (up 13.5%). The Banks gained 3.7% (up 11.0%), and the Broker/Dealers jumped 4.5% (up 11.1%). The Transports surged 4.1% (up 10.6%). The S&P 400 Midcaps jumped 4.5% (up 13.8%), and the small cap Russell 2000 rose 3.4% (up 12.3%). The Nasdaq100 rallied 4.1% (up 17.2%). The Semiconductors recovered 6.4% (up 19.4%). The Biotechs jumped 3.9% (up 7.4%). With bullion surging $35, the HUI gold index jumped 7.6% (up 5.2%).

Three-month Treasury bill rates ended the week at 2.22%. Two-year government yields fell seven bps to 1.85% (down 64bps y-t-d). Five-year T-note yields dropped six bps to 1.85% (down 66bps). Ten-year Treasury yields declined four bps to 2.08% (down 60bps). Long bond yields were little changed at to 2.57% (down 44bps). Benchmark Fannie Mae MBS yields dropped 10 bps to 2.76% (down 74bps).

Greek 10-year yields fell eight bps to 2.81% (down 159bps y-t-d). Ten-year Portuguese yields sank 19 bps to 0.62% (down 110bps). Italian 10-year yields collapsed 31 bps to 2.36% (down 38bps). Spain’s 10-year yields sank 16 bps to 0.55% (down 86bps). German bund yields fell six bps to negative 0.26% (down 50bps). French yields dropped 13 bps to 0.09% (down 63bps). The French to German 10-year bond spread narrowed seven to 35 bps. U.K. 10-year gilt yields declined seven bps to 0.81% (down 46bps). U.K.’s FTSE equities index rallied 2.4% (up 9.0% y-t-d).

Japan’s Nikkei Equities Index increased 1.4% (up 4.3% y-t-d). Japanese 10-year “JGB” yields declined three bps to negative 0.12% (down 12bps y-t-d). France’s CAC40 rallied 3.0% (up 13.4%). The German DAX equities index recovered 2.7% (up 14.1%). Spain’s IBEX 35 equities index rose 2.6% (up 8.2%). Italy’s FTSE MIB index rallied 2.8% (up 11.1%). EM equities were mostly higher. Brazil’s Bovespa index increased 0.8% (up 7.5%), and Mexico’s Bolsa gained 1.3% (up 4.0%). South Korea’s Kospi index rose 1.5% (up 1.5%). India’s Sensex equities index slipped 0.2% (up 9.8%). China’s Shanghai Exchange dropped 2.4% (up 13.4%). Turkey’s Borsa Istanbul National 100 index surged 3.6% (up 2.8%). Russia’s MICEX equities index jumped 2.4% (up 15.2%).

Investment-grade bond funds saw inflows of $924 million, while junk bond funds posted outflows of $3.217 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates sank 17 bps to 3.82% (down 72bps y-o-y). Fifteen-year rates fell 18 bps to 3.28% (down 73bps). Five-year hybrid ARM rates declined eight bps to 3.52% (down 22bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-yr fixed rates down four bps to 4.15% (down 48bps).

Federal Reserve Credit last week declined $11.8bn to $3.808 TN. Over the past year, Fed Credit contracted $470bn, or 11.0%. Fed Credit inflated $998 billion, or 35%, over the past 344 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $19.9bn last week to $3.443 TN. “Custody holdings” rose $45bn y-o-y, or 1.3%.

M2 (narrow) “money” supply surged $56.7bn last week to a record $14.659 TN. “Narrow money” rose $589bn, or 4.2%, over the past year. For the week, Currency increased $1.0bn. Total Checkable Deposits jumped $33.8bn, and Savings Deposits gained $7.6bn. Small Time Deposits rose $10.6bn. Retail Money Funds increased $3.4bn.

Total money market fund assets gained $14.3bn to $3.163 TN. Money Funds gained $338bn y-o-y, or 12.0%.

Total Commercial Paper jumped $15.5bn to $1.100 TN. CP was up $2.1bn y-o-y, or 0.2%.

Currency Watch:

June 5 – RT (Tom Balmforth, Vladimir Soldatkin and Polina Ivanova): “Russia and China took another step away from the US dollar after the two countries agreed to develop bilateral trade using the ruble and the yuan. It was just one of the major deals reached after the presidents of the two countries, Vladimir Putin and Xi Jinping, held talks in Moscow on Wednesday. ‘Russia and China intend to develop the practice of settlements in national currencies,’ Putin told journalists… He added that the states have signed intergovernmental agreements on expanding the use of the yuan and the ruble in bilateral financial operations.”

The U.S. dollar index declined 1.2% to 96.544 (up 0.4% y-t-d). For the week on the upside, the New Zealand dollar increased 2.1%, the Canadian dollar 1.9%, the Norwegian krone 1.5%, the euro 1.5%, the Swiss franc 1.3%, the Brazilian real 1.1%, the Swedish krona 1.0%, the Singapore dollar 0.9%, the Australian dollar 0.9%, the British pound 0.9%, the South Korean won 0.8%, and the Japanese yen 0.1%. For the week on the downside, the South African rand declined 2.5%. The Chinese renminbi declined 0.07% versus the dollar this week (down 0.45% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index declined 0.7% this week (up 0.2% y-t-d). Spot Gold surged 2.7% to $1,341 (up 4.5%). Silver recovered 3.2% to $15.031 (down 3.3%). WTI crude gained 49 cents to $53.99 (up 19%). Gasoline fell 1.8% (up 31%), and Natural Gas dropped 4.8% (down 21%). Copper declined 0.5% (unchanged). Wheat increased 0.3% (unchanged). Corn dropped 2.6% (up 11%).

Market Instability Watch:

June 5 – Bloomberg (Liz McCormick): “The steepening U.S. yield curve shows bond traders have concluded that the case for Federal Reserve rate cuts is only strengthening, even as top policy makers signal they’re not yet ready to act. Futures reflected more than 70 bps of easing in 2019 at one point Wednesday… Bets on steepening — historically the darling trade during easing cycles — are building amid signs of weakness in U.S. manufacturing and the labor market, with the trade war only threatening to intensify. Add tepid inflation to the mix, and investors see the basis for the Fed’s first rate cut since 2008.”

June 3 – Financial Times (Peter Wells): “The continued collapse in US interest rate expectations has set up short-term Treasuries for their biggest five-day rally since the financial crisis and driven yields to their lowest since 2017. An afternoon downdraft left the yield on the two-year US Treasury, which is particularly sensitive to policy expectations, 10.9 bps lower at a 17-month low of 1.81% on Monday.”

June 6 – Financial Times (Robin Wigglesworth and Joe Rennison): “The global bond market has enjoyed its biggest weekly investor inflows in over four years, with investors dumping equity funds in favour of fixed income amid concerns that the international economy is wilting and central banks will have to cut interest rates. Fixed income funds tracked by EPFR, a data provider, sucked in $17.5bn globally in the week ending June 5, the biggest inflows since February 2015. More highly rated ‘investment grade’ funds took in $18.5bn — the biggest five-day inflow on record.”

June 3 – Bloomberg (Phil Kuntz): “The value of the world’s negative-yielding bonds jumped the most in more than three weeks on Friday, and now makes up more than a fifth of the investment-grade market. Bonds yielding less than zero had a market value of $11.3 trillion as of last week’s close, the highest since just after the record $12.2 trillion stockpile in June 2016. Those securities now comprise 21.1% of the Bloomberg Barclays Global Aggregate Index, which includes government, corporate and securitized debt.”

Trump Administration Watch:

June 7 – Reuters (Roberta Rampton and Diego Oré): “The United States and Mexico struck a deal on Friday to avert a tariff war, with Mexico agreeing to rapidly expand a controversial asylum program and deploy security forces to stem the flow of illegal Central American migrants…’The Tariffs scheduled to be implemented by the U.S. on Monday, against Mexico, are hereby indefinitely suspended,’ Trump said in a tweet on Friday evening.”

June 4 – Bloomberg (Saleha Mohsin): “U.S. Treasury Secretary Steven Mnuchin this weekend will have his first chance to break an impasse in a deepening trade war with China — if officials from the two countries decide they want to jump-start talks at an international summit in Japan. Mnuchin is set to meet Chinese central bank Governor Yi Gang during a gathering of G-20 finance ministers from June 7 to 9 in Fukuoka…”

June 6 – Reuters (Steve Holland and Stella Qiu): “U.S. President Donald Trump said… he would decide whether to carry out his threat to hit Beijing with tariffs on at least $300 billion in Chinese goods after a meeting of leaders of the world’s largest economies late this month.”

June 1 – Bloomberg (Ros Krasny): “Self-professed ‘Tariff Man’ President Donald Trump on Saturday defended his decisions to impose or raise levies against imports from Mexico and China, respectively, saying ‘companies are moving to the U.S.’ to avoid paying the levies, and that ‘TARIFF is a beautiful word indeed!’”

June 4 – Wall Street Journal (Siobhan Hughes and Kristina Peterson): “Senate Republicans threatened… to block the White House’s planned tariffs on Mexico, hours after President Trump signaled he was prepared to move ahead with the levies barring a last-minute deal over border security. Mr. Trump, frustrated with the flow of asylum-seeking Central American families at the southern U.S. border, said last week that the U.S. would impose escalating tariffs on all Mexican imports starting on Monday unless Mexico took sufficient steps to stop migration. U.S. and Mexican negotiators are meeting this week in Washington to try to fashion a deal and head off a trade fight between close trading partners.”

May 31 – Reuters (David Lawder, Stella Qiu and Se Young Lee): “The United States began collecting higher, 25% tariffs on many Chinese goods arriving in U.S. seaports on Saturday morning in an intensification of the trade war between the world’s two largest economies and drawing retaliation from Beijing.”

June 5 – Reuters (Mike Stone and Patricia Zengerle): “The United States is pursuing the sale of more than $2 billion worth of tanks and weapons to Taiwan, four people familiar with the negotiations said, in a move likely to anger China as a trade war between the world’s two biggest economies escalates. The potential sale included 108 General Dynamics Corp M1A2 Abrams tanks worth around $2 billion as well as anti-tank and anti-aircraft munitions, three of the sources said. Taiwan has been interested in refreshing its existing U.S.-made battle tank inventory which includes M60 Patton tanks. The United States is a main arms supplier to Taiwan, which China deems its own and has never renounced the use of force to bring the self-ruled island under its control.”

June 4 – Reuters (Brenda Goh): “The sudden deterioration in trade talks between the United States and China last month has ratcheted up concerns among U.S. firms that the dispute could go beyond tariffs and affect business in the long-term. Business associations and consultants say they have been fielding a growing number of inquiries from companies about how best to navigate the trade dispute. They expect those calls to intensify after FedEx Corp over the weekend became embroiled in U.S.-China frictions and an ongoing spat over Chinese tech giant Huawei.”

June 4 – Bloomberg: “The U.S. and China are heading for a stand-off over critical minerals used in everything from washing machines to military hardware. The U.S. Commerce Department… promised ‘unprecedented action’ to ensure that the U.S. won’t be cut off from supplies rare earths, a group of 17 obscure but vital elements whose production is dominated by China. The Department’s release of a report outlining steps to ensure supply came hours after the Asian nation’s top state economic planning body said it’s studying proposals to establish export controls on the materials.”

June 5 – Financial Times (Henry Sanderson): “The US Commerce Department has warned that any halt to China’s rare earth exports would cause ‘significant shocks’ to US and foreign supply chains. The commerce department said the US was ‘heavily dependent’ on foreign sources of the minerals, which made the country vulnerable to actions by foreign governments. The department said the US should streamline the permitting process for domestic mining and boost efforts to recycle critical minerals as part of a strategy to boost domestic production.”

June 3 – Wall Street Journal (Brent Kendall and John D. McKinnon): “Federal antitrust enforcers and lawmakers are poised to scrutinize the nation’s largest technology companies for potential anticompetitive practices, bringing a new regulatory focus to the vast markets for digital services and a new level of concern for investors. After years when the government took a broadly laissez-faire attitude toward the regulation of Silicon Valley, antitrust officials at the Justice Department and Federal Trade Commission are choosing lanes with a view to studying the practices of at least four of the world’s largest and highest-profile tech companies. Under a series of arrangements between the two agencies, the Justice Department now has authority over any potential antitrust investigation into Alphabet Inc.’s Google and Apple Inc., while the FTC has oversight of Facebook Inc. and Amazon.com Inc. Google and Facebook appear to be closest to being in the agencies’ investigative crosshairs…”

May 31 – Reuters (Idrees Ali): “The United States will no longer ‘tiptoe’ around Chinese behavior in Asia, with stability in the region threatened on issues ranging from the South China Sea to Taiwan, acting U.S. Defense Secretary Patrick Shanahan said… Shanahan did not directly name China when making accusations of ‘actors’ destabilizing the region, but went on to say the United States would not ignore Chinese behavior, the latest in the exchange of acerbic remarks between the world’s two biggest economies… ‘Perhaps the greatest long-term threat to the vital interests of states across this region comes from actors who seek to undermine, rather than uphold, the rules-based international order,’ Shanahan said…”

June 1 – Bloomberg (Tony Czuczka): “A Pentagon report slammed China for ‘eroding the values and principles of the rules-based order’ just as acting U.S. Defense Secretary Patrick Shanahan was in Singapore attempting to downplay a spat between the world’s two largest economies. In the more than 50-page ‘Indo-Pacific Strategy Report,’ released on Saturday, the U.S. criticized China’s actions in the region on several points, and affirmed the U.S. commitment to boost multilateral efforts with other Asian countries. China, under Communist Party leadership, ‘seeks to reorder the region to its advantage by leveraging military modernization, influence operations, and predatory economics to coerce other nations,’ according to the report…”

May 31 – Bloomberg (Justin Sink and Jenny Leonard): “President Donald Trump opened another potential front in his trade war on Friday, terminating India’s designation as a developing nation and thereby eliminating an exception that allowed the country to export nearly 2,000 products to the U.S. duty-free. ‘I have determined that India has not assured the United States that India will provide equitable and reasonable access to its markets,’ Trump said in a proclamation. ‘Accordingly, it is appropriate to terminate India’s designation as a beneficiary developing country effective June 5, 2019.’”

June 2 – New York Times (Ana Swanson, Maggie Haberman and Jim Tankersley): “The Trump administration considered imposing tariffs on imports from Australia last week, but decided against the move amid fierce opposition from military officials and the State Department… Some of President Trump’s top trade advisers had urged the tariffs as a response to a surge of Australian aluminum flowing onto the American market over the past year.”

June 5 – Reuters (Ernest Scheyder and Zandi Shabalala): “The U.S. Department of Defense has held talks with Malawi’s Mkango Resources Ltd and other rare earth miners across the globe about their supplies of strategic minerals, part of a plan to find diversified reserves outside of China, a department official said…”

June 3 – CNBC (Mike Calia): “President Donald Trump… called for a boycott of AT&T to force ‘big changes’ at subsidiary CNN, which Trump often accuses of biased and negative coverage of his administration. ‘I believe that if people stoped using or subscribing to @ATT, they would be forced to make big changes at @CNN, which is dying in the ratings anyway. It is so unfair with such bad, Fake News!’ the president tweeted from the U.K…”

June 3 – Bloomberg: “First trade, then technology — now talent. The Trump administration has started taking aim at China’s best and brightest in the U.S., scrutinizing researchers with ties to Beijing and restricting student visas. Several Chinese graduate students and academics told Bloomberg News in recent weeks that they found the U.S. academic and job environment increasingly unfriendly. Emory University dismissed two Chinese-American professors on May 16, and China’s Education Ministry issued a warning Monday on the risks of studying in the U.S. as student visa rejections soar. ‘I’m nervous, worried, even saddened by the unnecessary conflict,’ said Liu Yuanli, founding director of the Harvard School of Public Health’s China Initiative and now serves as dean of Peking Union Medical College’s School of Public Health in Beijing. ‘The restrictions on Chinese scholars and students are irrational and go against the very core value that makes U.S. a great nation.’”

Federal Reserve Watch:

June 6 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials are beginning preparations for a June policy meeting with difficult choices to deliberate. A month ago, Fed Chairman Jerome Powellplayed down speculation of a rate cut this summer. Now officials at the central bank face a darker economic outlook and heightened trade tensions, making a rate cut possible—if not at their meeting on June 18-19, then in July or later. The officials need to decide what would trigger such action, how much more information they want before making a decision and how to signal their intentions and plans. They are to begin their customary premeeting quiet period at the end of this week. Traders in futures markets have signaled about a 20% chance of a rate cut at the June 18-19 meeting, and a 70% chance of at least one cut by the meeting after that, on July 30-31…”

June 4 – Bloomberg (Enda Curran): “Central banks are resuming their first-responder role as the world economy runs into trouble even if they lack the firepower they once had at their disposal. With Australia cutting interest rates on Tuesday for the first time in three years and India likely to follow on Thursday, monetary policy makers are again seeking to shore up weak growth and inflation. European Central Bank officials are poised this week to agree, at the very least, on generous terms for new long-term loans for banks. Federal Reserve Chairman Jerome Powell signaled an openness to loosening if necessary, and Former Treasury Secretary Lawrence Summers wrote that the Fed should cut by 50 bps over coming months, if not more, to ward off recession risks.”

June 6 – CNBC (Jeff Cox): “New York Federal Reserve President John Williams called… for central banks to change their strategy to combat low inflation, which he labeled ‘a symptom of deeper problems affecting advanced economies.’ ‘In the pre-2008 era, inflation was a major concern for the public and central banks alike,’ the leader of the Fed’s key district said… ‘And, while I will always be vigilant about inflation that’s too high, inflation that’s too low is now a more pressing problem.’ …‘Persistently low inflation creates a vicious circle, where expectations of low inflation drag down current inflation. If inflation falls, central banks will have even less room to maneuver when faced with a slowdown… Starting with monetary policy, central banks should reassess their strategies, goals, and the tools they use to achieve them.’”

June 4 – CNBC (Jeff Cox): “Federal Reserve Vice Chairman Richard Clarida said the economy is in a good place but he and his fellow central bankers are willing to take action if conditions change. ‘We will put in policies that need to be in place to keep the economy, which is in a very good place right now, and it’s our job to keep it there,’ he told CNBC’s Steve Liesman… In particular, he addressed the issue of an insurance rate cut, done as a preventive measure to get ahead of a slowdown. ‘I’m not going to look into a crystal ball. I will look into the past,’ Clarida said. ‘That has been in the monetary policy toolkit in the past.’”

June 3 – Reuters (Howard Schneider and Trevor Hunnicutt): “A Federal Reserve policymaker on Monday said that a rate cut may be needed ‘soon,’ the strongest signal yet that the central bank may change course as trade tensions threaten the U.S. economy. St. Louis Federal Reserve President James Bullard’s remarks marked the first by a Fed official to suggest that a worsening trade war, as well as weak U.S. inflation, may soon require a central bank response.”

June 5 – Reuters (Jason Lange): “The U.S. Federal Reserve… reported that its contacts at companies across the country were worried that international trade tensions could weigh on business even as economic activity picked up. The U.S. central bank said its surveys of business contacts pointed to a ‘slight improvement’ in growth in economic activity, which it described as being “modest” from April through mid-May.”

June 4 – Reuters (Howard Schneider and Ann Saphir): “Resigned to holding trillions of dollars in bonds and buying yet more to fight future downturns, Federal Reserve officials are debating how to design future asset purchases to be as effective as possible in steering markets and holding down interest rates. The next time their benchmark lending rate hits zero, as it did a decade ago, should they follow rapidly with, say, $5 trillion of bond buying? What about a set of rules for when a purchase program kicks in? Or should they promise beforehand to buy however much is needed to keep long-term interest rates at a targeted level? These questions are front and center to a two-day Chicago Fed conference on the central bank’s strategy that kicked off on Tuesday. The answers could prove critical in determining how the Fed next deploys its virtually limitless power to buy assets, a strategy designed to bring down the long-term interest rates that shape household spending and business investment.”

June 4 – Reuters (Howard Schneider and Ann Saphir): “U.S. President Donald Trump may finally get the rate cut he has been demanding, but for the wrong reasons, as top Federal Reserve officials began warning this week that the global trade war may force them to respond. Fed Chairman Jerome Powell made a subtle move in that direction on Tuesday, dropping his standard reference to the Fed being ‘patient’ in approaching any rate decision, and saying instead the central bank was watching fallout from the trade war and would react ‘as appropriate.’ The comment was a nod to what markets have been warning for weeks, and follows a substantial ratcheting up of trade tensions the Fed had, until recently, assumed would fade away soon. ‘We do not know how or when these issues will be resolved,’ Powell said. ‘We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2% objective.’”

U.S. Bubble Watch:

June 7 – Bloomberg (Reade Pickert and Jeff Kearns): “U.S. employers added the fewest workers in three months and wage gains cooled, suggesting broader economic weakness and boosting expectations for a Federal Reserve interest-rate cut as President Donald Trump’s trade policies weigh on growth. Nonfarm payrolls rose 75,000 in May after a downwardly revised 224,000 advance the prior month… The increase missed all estimates in Bloomberg’s survey calling for 175,000. The jobless rate held at a 49-year low of 3.6% while average hourly earnings climbed 3.1% from a year earlier, less than projected.”

June 6 – Reuters (Lucia Mutikani): “The U.S. trade deficit unexpectedly narrowed in April as imports and exports tumbled, leading economists to warn that the Trump administration’s ‘America First’ agenda was curbing trade between the United States and the rest of the world… The U.S. trade deficit fell 2.1% to $50.8 billion in April… The politically sensitive goods trade deficit with China surged 29.7% to $26.9 billion. The gap with Mexico fell 14.1% to $8.2 billion in April.”

June 3 – Reuters (Dan Burns and Jason Lange): “Growth in U.S. manufacturing activity slowed in May to its weakest pace in over two years as factory managers raised concerns about a trade war between the United States and China… The Institute for Supply Management said its U.S. Manufacturing Purchasing Managers Index declined to 52.1 from 52.8 in April, hitting the lowest level since October 2016.”

May 31 – MarketWatch (Mark DeCambre): “The rich are getting richer. It is a refrain that has certainly been uttered before, and likely will again, as Deutsche Bank Securities’ chief economist points out that the gap between the haves and have-nots in the U.S. is, indeed, widening. Deutsche Bank’s Torsten Sløk says that the distribution of household wealth in America has become even more disproportionate over the past decade, with the richest 10% of U.S. households representing 70% of all U.S. wealth in 2018, compared with 60% in 1989, according to a recent study by… the Federal Reserve. The study finds that the share of wealth among the richest 1% increased to 32% from 23% over the same period.”

June 3 – CNBC (Diana Olick): “Mortgage rates are falling unexpectedly and sharply, and that means millions more homeowners can now benefit from refinancing their loans. The average rate on the popular 30-year fixed has fallen from a recent high of 4.23% on May 21 to 3.94% now… There are now about 5.9 million borrowers who could see their rates drop by at least 75 basis points by refinancing their mortgages. That is an increase of 2 million in just the past month, according to Black Knight, a mortgage software and analytics company.”

June 6 – CNBC (Phil LeBeau): “People buying a new vehicle are borrowing more and paying more each month for their auto loan. Experian, which tracks millions of auto loans each month, said the average amount borrowed to buy a new vehicle hit a record $32,187 in the first quarter. The average used-vehicle loan also hit a record, $20,137. ‘We have not seen a slowdown in loan demand. In fact, volume for new and used loans is up from previous years,’ said Melinda Zabritski, senior director of automotive financial solutions for Experian… The average monthly payment for a new vehicle continued to climb to a new high of $554 and to a record $391 for used vehicles…”

June 3 – Financial Times (Gregory Meyer and Robert Armstrong): “It was the Red River Valley’s biggest farmland auction in years: several thousand acres of prime Minnesota ground for growing corn, soyabeans and sugar beets. No parcel was unsold when bidding closed. The $21m paid by 15 buyers was ‘surprising’, said Steve Dalen, who conducted the sale… With the seller in financial trouble, a huge number of acres to offload and the US-China trade war curtailing grain exports, conditions were not encouraging. ‘When this auction went off we worried about collapsing the market,’ said Mr Dalen, a real estate agent… In fact, he ended up with about $4,500 an acre, well above the local price a few years ago. Despite a half-decade of falling grain prices, Midwestern farmland has held much of its value, and has become the foundation for a borrowing boom. Farm debt across the US has risen to $427bn, close to amounts that preceded the 1980s agricultural crash, when adjusted for inflation. Farmers remain creditworthy in the eyes of banks, even as their incomes fall, because the collateral value of land remains high.”

June 2 – Reuters (Trevor Hunnicutt): “Goldman Sachs… analysts… downgraded their second-quarter economic growth forecasts for the United States because of risks stemming from trade conflicts with Mexico and China. The analysts also said they saw a rising probability of the U.S. Federal Reserve cutting rates but not enough of a chance to pencil such a cut into its baseline forecast. Their second-quarter gross domestic product growth forecast is now 1.1%, down from 1.3% little more than a week ago.”

June 4 – Bloomberg (Oshrat Carmiel): “Amazon.com Inc. isn’t setting up a new headquarters in New York City, but Jeff Bezos may be. The tech giant’s chief executive officer is buying three condos at Manhattan’s 212 Fifth Ave. with a total value of about $80 million… If the three apartments — a penthouse and two units below it — were combined, the home would have 12 bedrooms and more than 17,000 square feet (1,600 square meters) of space, the Journal reported.”

China Watch:

June 2 – Associated Press (Christopher Bodeen): “China fired back at the U.S. Sunday over the two nations’ trade dispute, issuing a report that blamed the conflict on the Trump administration but refrained from escalating the trade war. The report… said China won’t back down on ‘major issues of principle,’ but offered no sense of whether or how the world’s second largest economy might retaliate against U.S. tariffs on goods manufactured in China. The report said China has kept its word throughout 11 rounds of talks and will honor its commitments if a trade agreement is reached. It accused the U.S. of backtracking three times over the course of the talks by introducing new tariffs and other conditions beyond what was agreed on. ‘But the more the U.S. government is offered, the more it wants,’ it said, accusing America’s negotiators of ‘resorting to intimidation and coercion.’”

June 1 – Reuters (Lee Chyen Yee, Gerry Doyle, Cate Cadell and Yimou Lee): “China and the United States clashed again this weekend on trade and security, accusing each other of destabilizing the region and potentially the world. Speaking… at the Shangri-La Dialogue in Singapore, Asia’s premier defense summit, China’s Defence Minister Wei Fenghe warned the United States not to meddle in security disputes over Taiwan and the South China Sea. On Saturday, acting U.S. Defense Secretary Patrick Shanahan told the meeting that the United States would no longer ‘tiptoe’ around Chinese behavior in Asia. ‘Perhaps the greatest long-term threat to the vital interests of states across this region comes from actors who seek to undermine, rather than uphold, the rules-based international order,’ Shanahan said.”

June 6 – Associated Press (Ken Moritsugu): “China’s Commerce Ministry will release a list of ‘unreliable’ foreign companies in the near future, a spokesman said… The decision to create the list… is widely seen as a response to a U.S. decision to put Huawei Technologies on a blacklist for alleged theft of intellectual property and evasion of Iran sanctions. Chinese Commerce Ministry spokesman Gao Feng told reporters at a weekly briefing that the process of drawing up the list was underway. He said no particular company or industry is being targeted.”

June 4 – Associated Press (Christopher Bodeen and Elaine Kurtenbach): “China issued a pair of travel warnings for the U.S… and slammed what it called ‘interference’ in its internal affairs. Foreign Ministry spokesman Geng Shuang accused the U.S. of acting in bad faith in trade negotiations and said any attempts to interfere or undermine China’s stability would be ‘doomed to fail.’ The volleys of criticism between the two largest economies leave them further than ever from resolving their standoff over U.S. complaints that Beijing resorts to unfair trade practices and unscrupulous methods to obtain advanced technologies.”

June 3 – Financial Times (Lucy Hornby and Archie Zhang): “China has warned its students and scholars that they face growing difficulties in visiting the US, as the escalating trade war between the world’s two largest economies spills into the broader bilateral relationship. ‘Visa issuances for Chinese students studying in the United States have been restricted. The visa review period has been extended, the validity period has been shortened, and the refusal rate has increased,’ the Chinese education ministry said… ‘This has affected the Chinese students in the United States normally or successfully completing their studies in the United States.’”

June 6 – Reuters (Winni Zhou and Andrew Galbraith): “Boosting liquidity to the financial system on Thursday, China’s central bank signaled its readiness to supply smaller banks with a steady stream of cash after the takeover of a troubled lender, letting more banks access the funds. The People’s Bank of China (PBOC) lent 500 billion yuan ($72.32bn) to financial institutions via its medium-term lending facility (MLF), offsetting 463 billion yuan worth of MLF loans maturing on the same day.”

June 1 – Bloomberg (Tony Czuczka): “China targeted FedEx Corp. in its escalating trade war with the U.S., giving a hint of the kind of foreign companies it may blacklist as ‘unreliable.’ As details of China’s criteria trickled out, the investigation into FedEx’s ‘wrongful delivery of packages’ was framed by the state news agency as a warning by Beijing after the Trump administration imposed a ban on business with telecom giant Huawei Technologies Co.”

June 2 – Reuters (Yawen Chen and Ryan Woo): “China’s factory activity expanded at a steady but modest pace in May, a private survey showed, but analysts say front-loading of exports by firms to the United States to avoid higher tariffs masked underlying weakness in the economy… Monday’s Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) also showed only modest expansion at 50.2, unchanged from April…”

June 5 – Bloomberg (Shawna Kwan and Enda Curran): “Record high home prices in Hong Kong have prompted some economists to forecast a bursting of the bubble. Residential property values in the city reached an all-time high last week after relentless gains over the past three months. Prices have risen by 8.6% since the beginning of the year… However with Hong Kong exposed to the trade war between China and the U.S. and the city’s stock market taking a hit, analysts say the likelihood of home prices declining is even greater now.”

June 4 – Bloomberg: “As big as its world-leading car market is, China has decided that 486 aspiring electric-vehicle companies are too many. The country is considering rules to raise the barrier to entry for electric-vehicle makers and nurture fewer but more competitive players, according to people familiar with the matter. Specifically, China plans to clamp down on EV startups who farm out their manufacturing, the people said, asking not to be named as the rules are still being drafted.”

June 5 – Bloomberg (Jason Gale, Hannah Dormido and Adrian Leung): “The deadly pig virus that jumped from Africa to Europe is now ravaging China’s $128 billion pork industry and spreading to other Asian countries, an unprecedented disaster that has prompted Beijing to slaughter millions of pigs. But stopping African swine fever isn’t so easy. The virus that causes the hemorrhagic disease is highly virulent and tenacious, and spreads in multiple ways. There’s no safe and effective vaccine to prevent infection, nor anything to treat it. The widespread presence in China means it’s now being amplified across a country with 440 million pigs—half the planet’s total—with vast trading networks, permeable land borders and farms with little or no ability to stop animal diseases.”

Central Banking Watch:

June 4 – Reuters: “Australia’s central bank cut its cash rate to a record low 1.25% on Tuesday in what could be the first in a series of stimulus measures amid growing calls for policymakers to revive the country’s slowing economy. The Reserve Bank of Australia (RBA) lowered rates for the first time in three years with data due on Wednesday likely to show annual growth in the A$1.9 trillion ($1.33 trillion) economy slowed to a decade low of 1.8%.”

June 7 – Bloomberg (Daniela Guzman): “Chile’s central bank stunned analysts by cutting its key interest rate by 50 bps, the biggest reduction in a decade, saying the economy could grow faster without fueling inflation.”

June 6 – Financial Times (Amy Kazman): “India’s central bank has cut its benchmark interest rate for the third time this year as it seeks to reverse the country’s sharp economic slowdown and also signalled the possibility of further easing. The Reserve Bank of India’s monetary policy committee voted unanimously to lower the benchmark repo rate by 25 bps to 5.75%, bringing it to its lowest level since late 2010.”

Europe Watch:

June 5 – Financial Times (Editorial Board): “Italy is the only large EU country where the eurozone crisis never truly ended. Its economy is burdened with extremely high public debt, chronically low growth and too much fragility in the banking sector. Its traditional political classes have lost so much public trust that the government fell last year into the hands of an unholy alliance of anti-immigrant, rightwing nationalists and inexperienced anti-establishment populists. Each wing of the government, the League and the Five Star Movement, is hostile to the EU’s economic and fiscal orthodoxies. This combination of long-term vulnerability of the public finances and short-term government defiance of Brussels explains why the European Commission on Wednesday set in motion a disciplinary procedure against Italy. For the first time, a government risks being put in the EU’s dock on account of excessive public debt. In principle, such procedures can result in fines worth billions of euros.”

June 4 – Financial Times (Davide Ghiglione and Valentina Romei): “Debate is growing in Italy about the suggestion that a new domestic currency could be introduced by the government to pay its debts — and the possibility that Rome’s Eurosceptic coalition might use it to facilitate the nation’s departure from the euro. Prominent members of deputy prime minister Matteo Salvini’s ruling League party have floated the proposal — which was endorsed by a vote in the Italian parliament last week. But how would it work, and how likely is it to happen? The Italian government should issue debt in small denominations that can change hands as a medium of exchange — that, at least, is the view of key advisers to Mr Salvini. Claudio Borghi, one of the League’s most influential economic advisers, has championed the idea, as has Alberto Bagnai, president of the finance committee in Rome’s Senate.”

June 2 – Reuters (Holger Hansen and Edward Taylor): “Andrea Nahles said… she would resign as leader of Germany’s Social Democrats (SPD), raising new doubts about the durability of Chancellor Angela Merkel’s ruling coalition with the center-left party.”

Japan Watch:

June 2 – Financial Times (Robin Harding): “Japan’s finance minister has said it is impossible to tackle trade imbalances one country at a time and that Donald Trump’s tariff war with China and Mexico may just shift the US deficit to different countries. In an interview with the Financial Times, Taro Aso said next weekend’s G20 finance ministers’ meeting in Fukuoka, which he is hosting, will be a chance to switch the discussion to a global level.”

EM Watch:

June 5 – Reuters (Stefanie Eschenbacher): “In a double blow for Mexico, credit ratings agency Fitch downgraded the nation’s sovereign debt rating on Wednesday, citing risks posed by heavily indebted oil company Pemex and trade tensions, while Moody’s lowered its outlook to negative. Cutting Mexico’s rating to BBB, nearing junk status, Fitch said the financial woes of state oil company Pemex were taking a toll on the nation’s prospects. Fitch said mounting trade tensions influenced its view…”

June 6 – Bloomberg (Divya Patil): “Little did anyone know a year back that it would get this bad with missed debt deadlines in India’s credit markets. But twelve months after infrastructure financier IL&FS Group defaulted for the first time in June last year, investor confidence has again been shaken this week by signs that the crisis is spreading among shadow banks… Among the worst hit in the wake of the IL&FS shock, which pushed up financing costs and made it harder for non-bank financing companies to access the bond market, is major mortgage lender Dewan Housing Finance Corp. The firm’s short-term credit rating was cut to default by Crisil, the Indian unit of S&P… Its shares plunged 11.5% on Thursday.”

Global Bubble Watch:

June 4 – Bloomberg (Michael Heath): “Australia’s economy expanded at the slowest pace in almost a decade as a prolonged housing downturn weighed on consumer spending… Gross domestic product advanced 0.4% in the first three months of the year from the prior quarter… The economy grew just 1.8% from a year earlier, the weakest reading since the global financial crisis, as households boosted their savings and cut spending in a classic response to wealth erosion.”

Fixed-Income Bubble Watch:

June 4 – Bloomberg (Lananh Nguyen and Sally Bakewell): “The U.S. economy is on solid footing except for one potential trouble spot, according to Bank of America Corp.’s Chief Executive Officer Brian Moynihan: leveraged loans — a business the bank has dominated for a decade. Problems aren’t yet emerging as the economic expansion continues and companies churn out profits, Moynihan said… His own bank has repeatedly said it focuses on ‘responsible growth’ and sticks to lending standards it’s had for years. Yet, leveraged finance threatens to become an issue in the broader market, he said. ‘It’ll be ugly for those companies if the economy slows down and they can’t carry the debt and then restructure it, and then the usual carnage goes on,’ Moynihan said. He also pointed to weakening terms in the wider market for riskier corporate lending.”

June 3 – Financial Times (Robin Wigglesworth): “The Sino-American trade war is rattling markets, but a lesser-appreciated and potentially significant tail risk is lurking off the coast of China. Taiwan may be small, but the island has emerged as a financial superpower thanks to the thriftiness of local savers and an eye-watering current account surplus of about 15% of gross domestic product. The country now has the second-largest financial system in the world, relative to gross domestic product. And its life insurance industry is the biggest, with assets-to-GDP of 145%… The local economy is not big enough to accommodate these enormous sums, so Taiwanese financial institutions have funnelled a whopping $1.2tn abroad. Other countries have large overseas stashes of money, but largely in the form of central bank reserves or sovereign wealth funds… The money has been invested conservatively, largely in US government and corporate bonds with high credit ratings.”

Leveraged Speculation Watch:

June 4 – Financial Times (Owen Walker, Chris Flood and Siobhan Riding): “The humbling of Britain’s best-known fund manager has sent shockwaves through the UK investment industry. The decision to prevent investors in Neil Woodford’s flagship Equity Income fund from withdrawing their money caused alarm among fellow fund company executives, while analysts have speculated the move signals the end of the career of one of the last remaining star fund managers. However, questions are also being asked of the financial regulator, service providers and distributors that stood by as Mr Woodford’s main fund ran into liquidity problems and ultimately had to stop investors pulling money out.”

Geopolitical Watch:

June 5 – Reuters (Tom Balmforth, Vladimir Soldatkin and Polina Ivanova): “Chinese President Xi Jinping presented two pandas to Moscow’s zoo at a ceremony with Vladimir Putin…, in a gesture the Russian president described as a sign of deepening trust and respect between the two powers. Xi unveiled the pandas – Ru Yi and Ding Ding – after talks with Putin whom he called his ‘best friend’ at the start of a three-day visit that will see him attend Russia’s flagship economic forum in St Petersburg later this week.”

June 5 – Financial Times (Henry Foy and Christian Shepherd): “Vladimir Putin hailed Xi Jinping as his ‘dear friend’ at the start of a three-day visit by the Chinese president designed to strengthen a new-found alliance that has been forged in the face of pressure on both countries by the US. Mr Xi arrived in Russia… as one of the Russian president’s closest foreign allies. His visit will include the signing of new trade deals and investment pledges, alongside expected joint rhetorical sallies against what they see as US over-reach. With both Moscow and Beijing under fire from the US — whether through sanctions or President Donald Trump’s trade war — Mr Putin and Mr Xi have struck up a warm friendship that defies decades of mistrust between their countries.”

June 4 – Reuters (Vladimir Soladtkin): “Relations between Russia and China have reached an ‘unprecedently high level’, Russian President Vladimir Putin said…”

June 1 – Financial Times (Kathrin Hille): “Taiwan’s armed forces wrapped up their Han Kuang military exercises last week — the annual war-games aimed at simulating an invasion by China — with live-fire drills, air raid defence rehearsals and an amphibious landing on the southern tip of the island. The drills were held against a backdrop of rising anxiety among Taiwanese buffeted by a slowing economy and rising pressure from Beijing, which at the weekend reasserted its determination to defend ‘at all costs’ its claimed sovereignty over Taiwan, a de facto independent state, at the Shangri-La Dialogue security forum in Singapore…”

June 1 – Bloomberg (Krystal Chia and Alfred Cang): “When it comes to Taiwan, China’s generals say they are simply following the example of U.S. President Abraham Lincoln. China’s Defense Minister Wei Fenghe… invoked Lincoln’s efforts during the U.S. Civil War to justify Beijing’s approach toward Taiwan, which it sees as an integral part of its territory that must be unified by force if necessary. ‘American friends told me that Abraham Lincoln was the greatest American president because he led the country to victory in the Civil War and prevented the secession of the U.S.,’ Wei said… at the Shangri-La Dialogue, a security conference in Singapore. ‘The U.S. is indivisible, so is China. China must be and will be reunified.’”

June 1 – Reuters (Lee Chyen Yee): “The United States’ actions on Taiwan and the South China Sea are hardly conducive to maintaining stability in the region, a senior Chinese military official said…, responding to comments by acting U.S. Defense Secretary Patrick Shanahan. ‘He (Shanahan) has been expressing inaccurate views and repeating old tunes about the issues of Taiwan and the South China Sea,’ Shao Yuanming, a senior official of the People’s Liberation Army, told reporters…”

June 3 – Reuters (Michael Martina): “China’s embassy in the United States expressed ‘strong dissatisfaction’ …towards the United States’ remarks on the 30th anniversary of the Chinese government’s bloody crackdown on student-led protests in Tiananmen Square. A statement from the embassy said U.S. Secretary of State Mike Pompeo’s comments on the anniversary were made ‘out of prejudice and arrogance’ and grossly interfered with China’s internal affairs. ‘China’s human rights are in the best period ever,’ it said. Pompeo called on Beijing… to mark the June 4 anniversary by releasing all prisoners jailed for fighting human rights abuses in China.”

June 2 – Reuters (Yimou Lee and Ben Blanchard): “China must ‘sincerely repent’ for the bloody crackdown on pro-democracy demonstrators in and around Tiananmen Square three decades ago, Taiwan said…, as a Chinese newspaper said nobody in China was interested in dragging up the past… ‘China has to sincerely repent for the June 4 incident and proactively push for democratic reforms,’ Taiwan’s Mainland Affairs Council said in a statement likely to infuriate China. ‘We earnestly admonish the Chinese authorities to face up to the historical mistake, and sincerely apologize as soon as possible.’”

June 3 – Reuters (Yimou Lee): “China continues to cover up the truth about the bloody crackdown on pro-democracy demonstrators in and around Beijing’s Tiananmen Square 30 years ago, Taiwan’s president said on Tuesday, ahead of vigils in the region to commemorate the event… Chinese authorities ban any public commemoration and have never released a full death toll. ‘The Chinese government not only did not plan to repent for the past mistake, but it also continued to cover up the truth,’ Taiwan President Tsai Ing-wen said…”

June 5 – Bloomberg (Stepan Kravchenko and Henry Meyer): “Chinese President Xi Jinping touted a new level of relations with Vladimir Putin as he embarked on a three-day visit to Russia that highlights a deepening partnership between the two countries as both face growing tensions with the U.S. ‘Step by step, we’ve been able to bring our relations to the highest level in history,’ Xi said… The countries’ position ‘on key world problems are close,’ the Russian leader said, referring to the Chinese leader as his ‘dear friend.’”

June 7 – Reuters (Andrey Ostroukh and Katya Golubkova): “Aggressive U.S. tactics such as a campaign against Chinese telecoms firm Huawei will lead to trade wars – and possibly real wars – Russian President Vladimir Putin said on Friday, in a show of solidarity with China alongside its leader Xi Jinping. In some of his strongest words on the subject, Putin accused Washington of “unbridled economic egoism”, singling out U.S. efforts to thwart a Russian gas pipeline to Europe and a U.S. campaign to persuade countries to bar Huawei, the world’s biggest telecoms equipment maker, from supplying network gear… ‘States which previously promoted free trade with honest and open competition have started speaking the language of trade wars and sanctions, of open economic raiding using arm-twisting and scare tactics, of eliminating competitors using so-called non-market methods,’ said Putin.”

June 3 – CNBC (Huileng Tan): “A high-level colonel in the Chinese military admits there’s a possibility of a ‘miscalculation’ in the South China Sea, but defended China’s ‘need’ to protect what Beijing deems as its territory. Zhou Bo, a senior colonel… said that ‘China does need to have necessary defense of these islands and rocks which we believe are Chinese territory.’ ‘We don’t believe that they are artificial islands,’ he told CNBC’s Sri Jegarajah… China has staked its claims on a massive section of the resource-rich South China Sea that extends roughly 1,000 miles from its southern shores. Parts of the waterway — one of the world’s busiest — have also been claimed by the Philippines, Vietnam, Taiwan, Malaysia and Brunei.”

June 7 – Reuters (Andrew Osborn and Tim Kelly): “Russia and the United States blamed each other for a near collision between their warships in the East China Sea on Friday with both countries accusing one another of dangerous and unprofessional behavior. Russia’s Pacific Fleet said that the USS Chancellorsville, a guided-missile cruiser, had come within just 50 meters (165 feet) of the Russian destroyer Admiral Vinogradov which had been forced to take emergency action to avoid a collision, Russian news agencies reported.”

June 6 – Reuters (Vladimir Soldatkin, Maria Kiselyova and Christian Lowe): “Russian President Vladimir Putin warned… that U.S. military intervention in Venezuela would be a disaster and said even Washington’s allies did not support such a course of action. Speaking at an economic forum in St Petersburg, Putin also said that Russian technical specialists remained in Venezuela in order to service Russian military hardware…”

May 31 – Reuters (Ali Abdelaty): “Saudi Arabia’s King Salman said that a meeting of the Organization of Islamic Cooperation (OIC) in Mecca on Friday would seek to confront threats and work for the future of Arab and Islamic states. ‘We will resolutely confront aggressive threats and subversive activities,’ King Salman said on Twitter…”

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