Weekly Commentary: Bizarre And Ominous

Things have gone from surreal to the bizarre. The President points blame directly at Putin for a chemical attack in Syria. Russia threatens to shoot down any missiles fired into Syria. President Trump tweets “Get ready Russia, because [missiles] will be coming, nice and new and ‘smart!'” A presidential tweet the next morning provided an unequivocal update: “Could Take Place Very Soon Or Not So Soon At All.” Russia claims false flag. “U.S. Says Syria Has Used Chemical Weapons at Least 50 Times During War.” Missiles were flying Friday night.

The President’s personal attorney, target of a criminal investigation, had his office and residences raided by the FBI. An enraged President is said to be considering firing the special counsel and/or the Deputy Attorney General. “Trump Sees Inquiry Into Cohen as Greater Threat Than Mueller.” The Speaker of the House announces he’s through with Washington.

The former Director of the FBI will release his memoirs next week, with interviews lined up. It’s not going to be pretty. Leaks began to flow this week. James Comey likens the “unethical” President to a “mob boss.” The President tweeted that Comey is an “untruthful slime ball.”

The Treasury department announced the U.S. budget deficit had reached $600 billion during the first-half of the fiscal year. March’s deficit of $209 billion was 12% above the consensus estimate. Federal spending during the month was up 7% y-o-y, while revenues increased 2.7%. The CBO announced that Trillion dollar annual deficits will commence soon – about two-years sooner than expected only recently.

“President Xi Jinping presided over the Chinese navy’s largest-ever military display on Thursday…, the country’s latest show of force in the disputed South China Sea.” On board a navy destroyer dressed in full military garb, XI announced China would hold live-fire military drills in the Taiwan Strait next week. “…The task of building a strong navy ‘has never been as urgent as present.'”

Russian stocks sank 4.5% this week. Russian bond yields surged 43 bps to 7.49%, and the ruble fell 6.2%. Russia canceled a ruble bond auction, as Russian sovereign CDS posted their biggest jump in five years. “The Russian government on Monday called the latest US sanctions against the country ‘scandalous’ and ‘illegal’ and vowed it would retaliate…” Russia is putting together a list of banned U.S. imports, including rocket engines and titanium. With the lira down another 1.3% to record lows, Turkish President Erdogan warned that those committing “economic terror” would pay a steep price.

“Vitaly Churkin, Russia’s ambassador at the United Nations, said he unfortunately ‘cannot exclude any possibilities’ when asked about the danger of war between the US and Russia.” An ominous Friday evening Bloomberg headline: “Russia, U.S. Near Brink in Syrian Standoff With Nuclear Risks.”

The Hong Kong Monetary Authority intervened three straight sessions to support the Hong Kong dollar peg against the U.S. dollar. It was their first currency intervention since 2005.

Aluminum prices surged 15% this week. Palladium jumped 9.2%, and Nickel increased 3.0%. Crude (WTI) surged 8.6%, trading at a three-year high. “Americans Face Highest Pump Prices in Years.” Gasoline rose 5.7% this week, and heating oil jumped 7.3%. The GSCI Commodities index jumped 5.5% this week to the high since December 2014.

FOMC minutes offered added confirmation that the Powell Fed is not rushing to coddle the markets. Increasingly, they see upside risks to both growth and inflation. Rates remain much too low. “Fed Leans to Faster Pace of Hikes…” “Excluding food and energy, the core consumer-price index rose 2.1% from March 2017, the most in a year…” “U.S. wholesale prices advanced in March by more than forecast, reflecting broad increases in the costs of services and goods…” Even Chicago Fed President Charles Evans is calling for more hikes.

April 11 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials at their meeting last month expressed greater confidence inflation would rise to their 2% target over the coming year, a development that could affect how much they raise interest rates in coming years. They also debated the costs and benefits of allowing the economy to run hot and discussed how they might need to later raise rates to a level that would deliberately slow growth… The minutes highlight just how much Fed officials’ outlook has changed since last fall, when surprisingly slow inflation raised questions about the need for continued rate increases.”

April 10 – Bloomberg (Alexandre Tanzi): “Global debt rose to a record $237 trillion in the fourth quarter of 2017, more than $70 trillion higher from a decade earlier, according to… the Institute of International Finance. Among mature markets, household debt as a percentage of GDP hit all-time highs in Belgium, Canada, France, Luxembourg, Norway, Sweden and Switzerland. That’s a worrying signal, with interest rates beginning to rise globally… Still, the ratio of global debt-to-gross domestic product fell for the fifth consecutive quarter as the world’s economic growth accelerated. The ratio is now around 317.8% of GDP, or 4 percentage points below the high in the third quarter of 2016…”

Failing to make the top 1000 newsworthy items of the week, Chinese Credit data nonetheless continue to fascinate. China’s March growth in total Social Finance was reported much weaker than expect. At $212 billion (1.33 trillion yuan), growth was about 25% below estimates. Bank loan growth ($180bn) slightly missed estimates. The big story is the intensifying slowdown in shadow lending, which posted a net contraction during the month. Total Social Finance has expanded about $1.49 TN over the past six months, down 17% from the comparable year ago period.

The marked slowdown in system lending is leading a deceleration in money supply growth. March saw a notable slowdown. M2 money supply expanded 8.2% y-o-y versus estimates of 8.9%. And at this point it would appear the slowdown in money and Credit has impact general pricing pressures. March CPI was reported up 2.1% y-o-y versus estimates of 2.6%. PPI came in up 3.1% y-o-y against estimates of 3.3%.

Curiously, China also report disappointing March trade data. China posted a trade deficit of $5.8 billion, the first deficit since February 2017. Imports surged a stronger-than-expected 14.4% y-o-y, while imports were down 2.7% (after a huge February). It’s worth noting that China’s first quarter trade surplus with the U.S. was up 19.4% to $58.25bn.

Stocks, well, they enjoyed just a splendid week. The S&P500 rose 2.0%, outdone by the Nasdaq100’s 3.0% jump. The Biotechs surged 8.6%, and the Semiconductors advanced 5.0%. The DJIA was up about 440 points at Monday’s trading highs following Chinese President Xi’s “conciliatory” weekend speech. Not enamored with the interpretation, Chinese officials pushed back: “Beijing says Xi speech wasn’t a concession to US, it’s ready to hit back at any escalation.” With option expiration next Friday, it’s been another month to tease – then torment – put buyers.

Earnings season started off with a bang. “JPMorgan Q1 Earnings Beat on Better Rates and Trading.” “Citi beats, profits jump 13%.” “Wells Fargo beats by $0.05 and beats on revenue.” On Friday’s earnings reports, JPMorgan’s (NYSE:JPM) stock fell 2.7%, Citigroup (NYSE:C) dropped 1.6% and Wells Fargo (NYSE:WFC) sank 3.4%. Mark Zuckerberg travels to the nation’s capital and is grilled for 10 hours. My nine-year-old son asked me why the Democrats were meaner to him than the Republicans. Reasonable question. Facebook (NASDAQ:FB) rallied 4.7% this week.

Treasuries were a little worried that stocks remain oblivious to an extraordinary host of mounting risks. Ten-year Treasury yields added five bps to 2.83%. Two-year yields jumped nine bps to 2.36%, the high since August 2008.

It will be interesting to see how markets respond to the missile strikes on Syria. It appears as many as 100 missiles hit at least three targets, in a more intensive operation than a year ago.

Russia’s ambassador in Washington Anatoly Antonov said in a statement on Friday immediately after the first strikes on Syria. ‘The worst expectations have materialized. Our warnings fell on deaf ears. A pre-planned scenario is being acted on. We are being threatened again. We have warned that such actions will not remain without consequences. All responsibility for them rests upon Washington, London and Paris. Antonov stressed that insulting the Russian president was inadmissible.’

The week was bizarre and ominous. Reports had President Trump livid after Monday’s FBI raid on his personal attorney. I can imagine Putin is absolutely livid in Moscow. For different reasons, I worry increasingly about them both.

For the Week:

The S&P500 jumped 2.0% (down 0.6% y-t-d), and the Dow rose 1.8% (down 1.5%). The Utilities fell 1.4% (down 5.9%). The Banks gained 1.2% (down 0.3%), while the Broker/Dealers rose 1.5% (up 7.2%). The Transports rallied 2.2% (down 2.3%). The S&P 400 Midcaps gained 1.6% (down 0.9%), and the small cap Russell 2000 jumped 2.4% (up 0.9%). The Nasdaq100 recovered 3.0% (up 3.6%). The Semiconductors surged 5.1% (up 6.1%). The Biotechs jumped 8.6% (up 9.5%). With bullion up $12, the HUI gold index advanced 3.3% (down 4.6%).

Three-month Treasury bill rates ended the week at 1.72%. Two-year government yields jumped nine bps to 2.36% (up 47bps y-t-d). Five-year T-note yields gained nine bps to 2.67% (up 47bps). Ten-year Treasury yields rose five bps to 2.83% (up 42bps). Long bond yields added a basis point to 3.03% (up 29bps).

Greek 10-year yields jumped nine bps to 4.07% (unchanged y-t-d). Ten-year Portuguese yields declined four bps to 1.65% (down 29bps). Italian 10-year yields added one basis point to 1.80% (down 22bps). Spain’s 10-year yields increased a basis point to 1.24% (down 33bps). German bund yields gained a basis point to 0.51% (up 8bps). French yields rose one basis point to 0.74% (down 7bps). The French to German 10-year bond spread was unchanged at 23 bps. U.K. 10-year gilt yields rose four bps to 1.44% (up 25bps). U.K.’s FTSE equities index advanced 1.1% (down 5.5%).

Japan’s Nikkei 225 equities index rose 1.0% (down 4.3% y-t-d). Japanese 10-year “JGB” yields were down one basis point to 0.04% (down 1bp). France’s CAC40 gained 1.1% (unchanged). The German DAX equities index rose 1.6% (down 3.7%). Spain’s IBEX 35 equities index increased 0.9% (down 2.8%). Italy’s FTSE MIB index jumped 1.7% (up 6.8%). EM equities were mixed. Brazil’s Bovespa index slipped 0.6% (up 10.4%), while Mexico’s Bolsa rose 1.8% (down 1.2%). South Korea’s Kospi index gained 1.0% (down 0.5%). India’s Sensex equities index advanced 1.7% (up 0.4%). China’s Shanghai Exchange rallied 0.9% (down 4.5%). Turkey’s Borsa Istanbul National 100 index sank 4.5% (down 5.0%). Russia’s MICEX equities was hit 4.6% (up 3.1%).

Investment-grade bond funds saw inflows of $3.346 billion, and junk bond funds posted inflows of $989 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates added two bps to 4.42% (up 34bps y-o-y). Fifteen-year rates were unchanged at 3.87% (up 53bps). Five-year hybrid ARM rates slipped a basis point to 3.61% (up 43bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-yr fixed rates down one basis point to 4.48% (up 33bps).

Federal Reserve Credit last week declined $9.6bn to $4.342 TN. Over the past year, Fed Credit contracted $92.2bn, or 2.0%. Fed Credit inflated $1.531 TN, or 54%, over the past 284 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $12.4bn last week to $3.450 TN. “Custody holdings” were up $238bn y-o-y, or 7.4%.

M2 (narrow) “money” supply added $4.5bn last week to a record $13.940 TN. “Narrow money” gained $575bn, or 4.3%, over the past year. For the week, Currency increased $0.3bn. Total Checkable Deposits fell $7.9bn, while savings Deposits rose $10.0bn. Small Time Deposits gained $3.6bn. Retail Money Funds dipped $1.5bn.

Total money market fund assets declined $5.3bn to $2.827 TN. Money Funds gained $183bn y-o-y, or 6.9%.

Total Commercial Paper gained $10.0bn to $1.058 TN. CP gained $72.9bn y-o-y, or 7.4%.

Currency Watch:

April 11 – Bloomberg (Justina Lee and Emma Dai): “Hong Kong’s dollar fell to the weak end of its permitted band for the first time since the range was imposed in 2005, a warning sign for a city where easy money has stoked a property boom and underpinned the stock market’s record rally. The spot rate reached HK$7.85 per dollar on Thursday… The Hong Kong Monetary Authority, which is obligated to defend the band, said in a statement that it stands ready to fulfill any requests from banks to support the currency.”

The U.S. dollar index slipped 0.3% to 89.80 (down 2.5% y-t-d). For the week on the upside, the New Zealand dollar increased 1.4%, the Canadian dollar 1.4%, the Mexican peso 1.4%, the Australian dollar 1.0%, the British pound 1.0%, the Norwegian krone 0.7%, the euro 0.4% and the Singapore dollar 0.3%. For the week on the downside, the Brazilian real declined 1.6%, the Swedish krona 1.0%, the Japanese yen 0.4%, the South African rand 0.3%, and the Swiss franc 0.3%. The Chinese renminbi gained 0.45% versus the dollar this week (up 3.69% y-t-d).

Commodities Watch:

April 11 – Bloomberg (Thomas Wilson): “Aluminum approached a six-year high after top exchanges said they’ll stop accepting metal from United Co. Rusal, increasing concerns about how the market will replace supplies from the Russian smelting giant hobbled by U.S. sanctions.”

The Goldman Sachs Commodities Index surged 5.5% (up 5.8% y-t-d). Spot Gold added 0.9% to $1,345 (up 3.3%). Silver gained 1.8% to $16.658 (down 2.8%). Crude jumped $5.33 to $67.39 (up 12%). Gasoline surged 5.7% (up 15%), and Natural Gas gained 1.3% (down 7%). Copper increased 0.4% (down 7%). Wheat jumped 3.6% (up 15%). Corn declined 0.6% (up 13%).