iftttwall

Despite the market collapse and sinking sentiment, Industrial Production rose more than expected in December (up 0.3% vs 0.2% exp), albeit with a downward revision for November. This was driven by a 1.1% MoM surge in Manufacturing output, the most since Feb 2018

In fact, U.S. factory production expanded in December by the most in 10 months, ending the year stronger than expected thanks to a surge in motor-vehicle output and gains across a range of other goods.

The data offer some relief after recent regional and national surveys suggested a worsening outlook for factories. While manufacturing is expected to keep growing, concerns over global growth and trade-war uncertainty may limit gains in 2019.

Production of motor vehicles increased 7.5 percent, the most since June, and other sectors with solid gains included petroleum and coal products, nonmetallic mineral products and computers and electronics. Industries with declines included machinery, textile and product mills and paper.

With the mass layoffs and plant closure that have hit since, we suspect this will not continue.

Utility output fell 6.3 percent, as warmer-than-usual temperatures reduced demand for heating.

And finally, the question is – will IP catch UP to the The Dow or The Dow catch down to IP?

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A secret meeting of envoys from the United States and North Korea took place on Friday in Stockholm, Sweden on Friday, according to the Associated Press, citing an official. 

Swedish Foreign Ministry spokeswoman Diana Kudhaib said the talks included North Korea’s Deputy Foreign Minister Choe Son Hui, however further details were not made available. 

According to Sweden’s TT news agency, US special envoy for North Korea Steven Biegun and Swedish Foreign Minister Margot Wallstrom were also in attendance. 

“These are just talks in a minor format where international experts take part,” said Kudhaib. 

Sweden has had diplomatic relations with Pyongyang since 1973 and is one of only a few Western countries with an embassy there. It provides consular services for the United States.

In March, Wallstrom held talks with her North Korean counterpart, Ri Yong Ho, in Stockholm, leading to the first-ever meeting between U.S. President Donald Trump and North Korean leader Kim Jong Un, in June in Singapore. –AP

The meeting suggests that the US and North Korea are inching closer to a compromise after a months-long impasse over how to proceed with ending North Korea’s nuclear and missile programs. 

In June, US President Trump and North Korean President Kim Jong Un agreed on a vaguely-worded pledge to denuclearize the Korean Peninsula, however progress has stalled as both countries have their own interpretations of the agreement. 

Last weekend a letter from President Trump was hand delivered to Kim ahead of this week’s talks, while rumors were swirling on Monday that the two sides would meet in Washington. As we now know, the meeting was in fact held in Stockholm. 

Kim also made a surprise visit to Beijing last week to meet again with Chinese President Xi – emphasizing that Pyongyang has friends beyond Seoul and Washington, and suggesting that China will remain a player in any future denuclearization plans. 

Washington and South Korea have been discussing how the United States can reciprocate North Korea’s possible denuclearization steps, such as dismantling intercontinental ballistic missiles (ICBMs) or the Yongbyon main nuclear complex, according to Reuters, citing South Korean Officials. 

And in an effort to help mend relations further, South Korea on Tuesday agreed to stop calling North Korea an “enemy” in its biennial defense document – a white paper that was published and posted on the defense ministry’s website, according to AP. The use of the phrases “enemy,” “present enemy” or “main enemy” has been a longstanding source of animosity between the two Koreas. 

Speaking of a second possible meeting between Trump and Kim, Cheong Seong-chang – a senior fellow at South Korea’s Sejong Institute said “At the second summit, they’ll probably focus on reaching a possible interim deal, rather than a comprehensive roadmap for denuclearisation,” adding “Whether Pyongyang is willing to abolish ICBMs, in addition to disabling the Yongbyon complex, would be key, and if so, the North will likely demand sanctions relief in return.”

via RSS http://bit.ly/2FFnuHj Tyler Durden

Via Shard Capital’s Bill Blain,

Wow… we passed the middle of the first month of the New Year, and the world hasn’t blown up. Phew… that’s a relief… For a moment I thought 2019 might get messy….

Messy is as Messy is:

If you can call the current Brexit mess calm and considered political debate – then we’re in great shape here in UK Plc. If you can also explain the why and what of Mark Carney.. please share.

If you can rationalise the US government impasse and shutdown and the multiple multiplier effects trashing the US economy as insignificant, dismiss the rumours Putin has got Trump under his thumb, ignore the lack of process in the White House, worry not about the emerging rift between actions and words on policy, dismiss the fracture between Fed and Donald, then nothing to worry about in the US.

If you can dismiss the noise from stock indicators screaming “overbought market”, while reconciling analysts saying stocks represent fair value against those yelling sell, and dismiss those that still have buy recommendations on stuff like We Work, then well and good.

If you can sleep easy about the lack of current financing in bond markets, and snore through corporates and banks slamming the hatches closed ahead of a storm, then snooze on.

If you can pass up the opportunity to read an Uber-bear Albert Edwards article predicting the end of everything later this year in a corporate leverage / populism cataclysm, and have a nice cup of tea instead.

If the crash-landing of the EU recovery in France and Germany worries you even less than the coming EU elections and the threat of a populist landside, then relax, and just do it.

If China bothers you not as it pumps liquidity into its economy, while trying to win an destructive trade and tech war, then no worries, be happy…

If you can accept the unwind of global QE and low interest rates is not going to impact financial assets, then carry on believing what you wish to believe.

I could go on…

So much to worry about… And worry is unproductive. I reminded of Chief Vitalstatistix, the indomitable Gaulish Chief who was scared of only one thing: the sky falling on his head. He’s probably running a macro fund somewhere, or more like a macro strategist.. (Hang on, there’s an idea for a great book….)

The bottom line is the global macro narrative sounds awful. Its not. Its just nuanced.

Sure, there are massive distortions and risks out there – but equally there are equal and opposite pluses out there. Market sentiment feels a little omnidirectional at present… Stop, Look and Listen.  

I propose 3 strategies:

1)   Fundamentals – look back at the realities of every investment. Good old-fashioned research. Think about demand, competition, numbers, finance, leverage, funding liquidity, and work it out. Consider the landscape, the environment, regulation, and who might be doing it better. Think about evolution, competition and market niches. What is so yesterday, and what will be so tomorrow. It’s a true for credit as it is for stocks.

I am repeatedly told I’m missing the reality of the new stock market – that it really doesn’t matter how much a company loses today, because its future value is in the stock price. Makes sense right up till the moment you realize Netflix’s future value isn’t about how much its paying for  each new subscriber today, but how many of them will pay more to watch Disney Channel tomorrow. Repeat same exercise on each and every unicorn.

2)   Alternatives.  I recently met a chum managing a very large fund who grinned as he told me his allocation for Alternative has been upped from 5% to 40%. Fantastic – that’s the business I’m focused upon. But it slightly worries me.. if every one suddenly wants to buy off-market, private placement real assets backed by real cash flows, then there are bound to be mistakes, tears and pain. Yield tourism can be a terrible thing. Any approach to Alternatives has to be based on (again) fundamentals – understand the cash flows, the asset, the risk, the threats, etc.

3) Maintain a healthy skepticism of everything. Remember the market has no memory and panics easily. It also tends to be taken in by glib talking salesmen selling snake oil on far to frequent a basis (ask any Landesbank…)

And don’t believe all the doom and gloom. Its never as bad as you think. In fact I’m positive.

via RSS http://bit.ly/2FwAYWF Tyler Durden

Now firmly in control of the House, the Democrats are trying to figure out exactly how they will proceed with the myriad investigations they have promised into potential conflicts of interest pertaining to Trump’s business dealings (among other things). And apparently, the president’s lending relationship with scandal-plagued Deutsche Bank – one of the few banks willing to lend to the Trump Organization over the past decade – could be a jumping off point.

According to Reuters, after pushing to subpoena records from the troubled German lender pertaining to its business relationship with Trump back when she was the committee’s ranking member back in 2017, “Mad Maxine” (now backed by “Socialist Sandy”) is preparing to renew her efforts – and this time, Republicans are no longer in a position to stop her from demanding records that the bank had previously argued were shielded by client confidentiality laws.

But the probe into Trump’s ties to Deutsche Bank won’t be handled by financial services exclusively. The House Intelligence Committee, led by longtime Trump antagonist Adam Schiff, is also planning to take the lead on the investigation, alongside finance (though Waters has the broadest power to request records from DB). As Chairwoman, Waters can unilaterally issue subpoenas.

Aides for the two committees are presently discussing how they will divide up the investigative work to avoid overlapping records requests.

Already feeling the heat from its involvement in European money laundering investigations, it appears Deutsche Bank may be abandoning its resistance to the probes, according to a statement to Reuters.

A Deutsche Bank spokesman said: “Deutsche Bank takes its legal obligations seriously and remains committed to cooperating with authorized investigations. Our recent record of cooperating with such investigations has been widely recognized by regulators. We intend to keep working in this spirit.”

Waters won’t be able to let the subpoenas fly until after the committee’s first business meeting later this month. But aides say she’s already planning to “move quietly” on the investigation.

Deutsche has extended millions of dollars in credit to the Trump Organization, making the bank one of few willing to lend extensively to Trump in the past decade.

A 2017 financial disclosure form showed liabilities for Trump of at least $130 million to Deutsche Bank Trust Company Americas, a unit of German-based Deutsche Bank AG.

House Intelligence Committee Democrats also want to investigate Trump and his Deutsche links, said three congressional officials familiar with committee discussions. A Judiciary Committee spokesman said it has been consulted.

Though if Friday’s report is any indication, expect a torrent of leaks about every detail of Trump’s business relationship with Deutsche in the coming months.

via RSS http://bit.ly/2VV4RVk Tyler Durden

Days after JP Morgan’s Q4 earnings missed on seemingly every metric aside from compensation (which came in right at the top of the range), the bank has confirmed that CEO Jamie Dimon earned $31 million in compensation during 2018, a 5.1% increase from the prior year and his second-biggest annual haul ever.

To be sure, while JPM posted abysmal FICC trading results and other results that were “very un-JP Morgan like,” as one analyst put it, the bank notched the highest profit in US banking history in 2018, thanks to Trump’s tax reform plan, which has helped lift earnings across Wall Street (the bank took home $32.5 billion).

The bank also benefited from rising interest rates and its booming credit card business (unsurprising, as consumer debt has ballooned to all-time highs).

Here’s a breakdown of Dimon’s pay package, courtesy of Bloomberg:

Dimon’s pay package included $24.5 million of restricted stock tied to performance, an annual base salary of $1.5 million and a $5 million cash bonus, the New York-based bank said Thursday in a regulatory filing.

Dimon is currently overseeing a plan to expand JPM’s retail-banking business into more states, while building a new headquarters in Manhattan.

The CEO’s pay for 2018 was second only to the $49.9 million he earned during 2007, two years after taking the reins at the bank. Dimon promised in January to remain CEO for at least five more years. According to the Wall Street Journal, which cited data from MyLogIQ, the median pay for the 43 banking and financial CEOs was $12.1 million, which was in line with the median pay for the S&P 500 as a whole. Despite the drop in trading revenue, JPM reported EPS of $1.98 a share during Q4.

 

 

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The Malaysian government has a message for Goldman Sachs CEO David Solomon: Your disingenuous, blame-deflecting apology for Goldman’s role in one of the biggest financial frauds ever perpetrated in Asia isn’t going to cut it.

According to Bloomberg, Finance Minister Lim Guan Eng told reporters on Friday that Malaysian prosecutors might consider dropping the criminal charges brought last month against the bank, several Asian subsidiaries and two of its employees (who have also been indicted in the US) if the bank agrees to pay back the total amount that the Malaysian government believes was looted during the fraud.

Finance Minister Lim Guan Eng

That amount? A staggering $7.5 billion.

“Goldman Sachs should understand the agony and the trauma suffered by the Malaysian people as a result of the 1MDB scandal,” Lim said in the administrative capital of Putrajaya. “An apology is just not sufficient. Not enough. There must be the necessary reparations and compensations.”

Earlier this week, Solomon apologized to the Malaysian people during an earnings call with analysts, where he blamed senior banker Tim Leissner (who is now believed to be cooperating with federal authorities to testify about the bank’s “culture of corruption”) for the scandal and claimed Malaysia was “defrauded by many individuals” who – as was implied – just happened to work at Goldman Sachs. 

Lim characterized Solomon’s apology as “insufficient”, presumably because media reports have revealed that senior Goldman execs, including former CEO Lloyd Blankfein blithely ignored concerns raised by the bank’s compliance department and did everything in their power to court Malaysia’s business (Blankfein himself was involved in several meetings with then-Prime Minister Najib Razak, who is now awaiting trial on corruptoin charges, and fugitive financier Jho Low, who is believed to have masterminded the scheme).

Goldman earned $600 million in fees on the $6.5 billion in bonds it underwrote for 1MDB, which was launched by Razak as a sovereign wealth fund intended to fund public works projects.

“At least he accepted that they have to bear and shoulder some responsibility,” Lim said, referring to Solomon. “That apology of course goes some way toward that, but that is insufficient.”

While Leissner is cooperating with authorities in the US, his former subordinate, senior Asian banker Roger Ng, is being held in Malaysia.

Of course, Lim, as the country’s finance minister, isn’t authorized to cut deals with Goldman. That authority is reserved by Attorney General Tommy Thomas, the country’s top prosecutor, who brought the criminal case against Goldman.

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Submitted by Ronan Manly, BullionStar.com

This month the Chinese central bank reported that in December 2018, its gold reserve holdings increased by 10 tonnes, the first claimed increase in Chinese monetary gold holdings since October 2016.

Based on previous patterns reporting patterns, a two year hiatus in reporting gold holdings is not unprecedented for the Chinese central bank and its reporting agency SAFE. What is strange, however, is that after an extended absence of reporting, the Chinese are coming back to the table with not a lot to show for it.

It is extremely difficult to believe that the Chinese central bank has not been accumulating gold throughout the last two years. Having said that, the claimed 10 tonne gold addition in December is worthy of analysis in regards to its timing and what it may signal. However, it is also important to keep in mind that there is huge and justified skepticism about the true size of the Chinese State’s monetary gold holdings held through the People’s Bank of China (PBoC), and to this we can probably now add skepticism about the real accumulation pattern of PBoC gold.

 

A 10 tonne teaser

News of December’s central bank gold purchase was initially published on the web site of China’s State Administration of Foreign Exchange (SAFE) in it’s December 2018 ‘Official Reserve Assets’ report. Note that SAFE reserve asset updates don’t actually state the quantity of gold the PBoC holds but instead report a US dollar figure valued at the corresponding month-end US dollar gold price.

So for example, the PBoC’s gold holdings were valued at US$ 72.122 billion at the end of November, which at a month-end November gold price of US$ 1217.55 was 1842.5 tonnes, while the stated gold valuation at the end of December was US$ 76.331 billion, which at an end of December LBMA gold price of US$ 1281.65 was 1852.5 tonnes, i.e. a 10 tonne increase.

Also note that it was not a case of SAFE not reporting China’s gold holdings between November 2016 and November 2018, SAFE does report reserve asset valuations each month. It’s just that SAFE reserve asset reporting for each month during those 2 years claimed unchanged PBoC gold holdings.

Accumulation

Since the early 2000s, Chinese official gold holdings have nearly quintupled, rising from 394 tonnes of gold in late 2001 to the current claimed holdings of 1852 tonnes today. But notably, during that time spanning more than 17 years, the Chinese central bank has only publicly revealed its gold holdings on four separate occasions, as well as a fifth short period between July 2015 and October 2016 when it reported monthly increases in gold holdings in all months between those dates (July 2015 to October 2016).

The five Chinese gold reserve increase announcements / ranges and their dates are as follows:

• Quarter 4 2001: Gold holdings rose from 394 to 500 tonnes – an addition of 104 tonnes
• Quarter 4 2002: From 500 to 600 tonnes – addition of 100 tonnes
• April 2009: From 600 to 1,054 tonnes – addition of 454 tonnes
• July 2015: From 1,054 to 1,658 tonnes – addition of 604 tonnes
• Between July 2015 and October 2016: From 1658 to 1842 tonnes – addition of 184 tonnes.

 

From October 2016 until December 2018, SAFE and the PBoC went quiet, claiming in the SAFE monthly reserve updates that China’s monetary gold reserves had remained static at 1842 tonnes throughout all of that period. Which brings us up to date to December 2018, when the Chinese State now claims to have added another 10 tonnes of gold to its reserve holdings.

 

Precendents and Modus Operandi

This sporadic update policy by SAFE and the PBoC, while frustrating from a transparency perspective, is still useful in providing a few milestones and precedents into how the Chinese state previously handled gold holdings updates, and also as to how it said it was active in the gold market between these holdings revelation dates.

Taking the two previous occasions when China revealed gold holdings additions after a prolonged absence, April 2009 and July 2015, on both of these occasions the quantity of gold added was significant, 454 tonnes and 604 tonnes respectively, or 1058 tonnes in total. The gold buying activity of the PBoC from 2003 to 2009 and from 2009 to 2015, on its own admission, also puts into question the accuracy of the December 2018 update, making it extremely difficult to believe that the PBoC just went out and bought 10 tonnes of gold in December, while doing no gold buying at all during November 2016 to November 2018.

Add to this the 184 tonnes of gold the PBoC says it bought between July 2015 and October 2016, this would mean that the Chinese state bought 1242 tonnes of gold over a 14 year period but then suddenly stopped in October 2016, only to resume again in December 2018 with a smallish 10 tonne purchase.

The commentaries provided by SAFE and PBoC at the time of their April 2009 and July 2015 gold holdings updates provide some insight into how the Chinese state buys gold, i.e. via constant accumulation. In April 2009, Hu Xiaolian, the then head of SAFE said that the 454 tonnes of gold that had been added to the PBoC reserves from 2003 to early 2009 “had been purchased from domestic production”. With domestic gold production in those years between only 200-300 tonnes per annum (as per the chart below), the PBoC could not have been just buying very large chunks of a few years gold production to reach this 454 tonne target. It would have to have been accumulating.

 

Likewise, when in July 2015, SAFE announced the first update to Chinese gold holdings since 2009, the PBoC stated at the time that the “major channels of accumulation” for that 604 additional tonnes of gold was from a variety of sources including domestic gold production, secondary domestic scrap sources, purchases in international markets, and other transacting in the domestic market.

An addition of a substantial 454 tonnes of gold from early 2003 to April 2009, an even larger 604 tonnes of gold from April 2009 to July 2015, and then 184 tonnes added from July 2015 and October 2016. But no gold added by the Chinese central bank from November 2016 to November 2018. It just doesn’t add up and is not beliveable.

Contrast this to the Russian central bank which over the same time period bought 223 tonnes of gold in 2017, a then record for the Bank of Russia. It then ramped up the gold purchases even further in 2018, adding 264.3 tonnes of gold to its reserves between January to November 2018.

Overall the PBoC wants us to believe that between November 2016 and November 2018, a period in which the Russian state bought 518.4 tonnes of gold (including 31.1 tonnes in November 2016), the Chinese state bought no gold at all. It defies belief and consigns the Chinese official reporting to the dustbin.

Even the PBoC’s statement at the time of its July 2015 gold holdings update contradicts the data put out by SAFE this month. Because in July 2015, the PboC said:

“On the basis of our assessment of the value of gold assets and our analysis of price changes, and on the premise of not creating disturbances in the market, we steadily accumulated gold reserves through a number of international and domestic channels.”

PBoC Headquarters in Beijing

 

Not that anyone much at all believes the official data about Chinese strategic gold reserves. Recall that BullionStar ran a Twitter survey last September asking “How much gold does the Chinese central bank (PBoC) really hold?” and provided four optional answers:

• 1842 tonnes as it claimed at the time
• more than 1842 tonnes but less than 4000 tonnes
• more than 4000 tonnes
• less gold than it claims i.e. less than 1842 tonnes

A respectable 2337 respondents answered the survey, with a full 91% of respondents (2127 votes) not believing the official figure put out by the Chinese central bank, and only 9% of respondents (210 votes) thinking that the PBoC has the 1842 tonnes of gold it claimed to have at the time in September.

A sizeable 40% of respondents (935 votes) thought the PboC holds more than 4000 tonnes of gold. Another 15% (351 people) thought that the Chinese central bank had more than 1842 tonnes of gold but less than 4000 tonnes. i.e. 55% (1286 respondents) thought that the PBoC has more gold than it claims to have. There were also 36% (841 people) among the Twitter poll respondents who thought that the PBoC has less gold than it claims, showing skepticism on the downside. But the takeaway here is that less than 10% of a cross-section of more than 2300 twitter users believed the official Chinese gold holdings figures.

Even Bloomberg Intelligence wrote in April 2015 that:

“The People’s Bank of Chine may have tripled holdings of bullion since it last updated then in April 2009, to 3510 metric tons, says Bloomberg Intelligence, based on trade data, domestic output and China Gold Association figures.”

So the question is, why do the Chinese continue with the charade of rarely reporting gold holdings and then with numbers which pretty much no one believes?

Even the statements that regularly come from Chinese officials connected to the Chinese government, monetary authorities, and gold industry refer to buying targets for Chinese state gold that are far larger than the PBoC data reveals. The probable answer here is that the Chinese state / PBoC want to continue to buy physical gold without the wider market knowing, and without this demand leaking into gold price discovery.

For example, in February 2010, during the mysterious IMF on-market gold sales (which were actually off market and secretive), China Daily news reported that a top official from the China Gold Association (CGA) speaking anonymously had said that:

“Contrary to much speculation China may not buy the International Monetary Fund’s (IMF) remaining 191.3 tons of gold which is up for sale as it does not want to upset the market.”

“It is not feasible for China to buy the IMF bullion, as any purchase or even intent to do so would trigger market speculation and volatility”

In March 2013, the deputy governor of the PBoC, Yi Gang, also commented on how the Chinese state had to be discrete about official purchases so as not to upset the gold market:

“We will always keep gold in mind as an option in reserve assets and investments….we will also take into consideration a stable gold market. If the Chinese government were to buy too much gold, gold prices would surge, a scenario that will hurt Chinese consumers. We can only invest about 1-2 percent of the foreign exchange reserves into gold because the market is too small.”

And then the July 2015 statement from the PBoC itself that:

“…on the premise of not creating disturbances in the market, we steadily accumulated gold reserves“

 

Conclusion

We will have to wait until the next SAFE reserve asset report in early February to see whether the PBoC decides to announce any gold purchases for January. If so, it could mark the beginning of a trend of regular monthly reporting by the Chinese state. If not, then the 10 tonnes gold purchase in December 2018 will go down as a strange anomaly, perhaps as a warning shot to economic adversaries such as the US that it can at any time announce gold reserve updates which could impact foreign exchange markets.

But how much gold might the Chinese central bank really be buying each year, beyond the selective and fabricated numbers? Based on pronouncements and hints from top Chinese officials, the answer may be somewhere in the region of 500 tonnes per year range. In a study in 2012, Zhang Bingnan, Vice-President of the China Gold Association discussed the optimal size of Chinese State gold reserves and their growth rate, saying that:

“Forecasting the optimal gold reserve capacity in the next 20 years. The conclusion is: [by] 2020, China’s gold optimal reserves should be 5,787 tonnes – 6,750 tonnes. [by] 2030 should be 8,995 tonnes – 10,532 tonnes.”

In July 2014, Song Xin, President of the China Gold Association, said that the PBoC should initially aim for a target of 4,000 tonnes of gold:

“We must raise our [official] gold holdings a great deal, and do so with a solid plan. Step one should take us to the 4,000 tonnes mark, more than Germany and become number two in the world, next, we should increase step by step towards 8,500 tonnes, more than the US.”

Accumulating 500 tonnes of gold per year as these senior Chinese officials suggest would meet the 4000 – 6000 tonne accumulation targets. Only holding 1852 tonnes of gold as the PBoC maintains and buying no gold between November 2016 and November 2018 would not. Just like a good poker player only shows what they they want to show, mixes up their hand, and is sometimes a poker chameleon, the Chinese central bank has a strength of hand and patience to show what it wants while staying in the game.

Footnotes:

For more details about the Chinese state’s gold holdings, see the following articles from BullionStar:

Central Bank Gold Policies – People’s Bank of China https://www.bullionstar.com/gold-university/central-bank-gold-policies-peoples-bank-china

PBoC Gold Purchases: Secretive Accumulation on the International Market https://www.bullionstar.com/gold-university/chinese-central-bank-gold-buying

Chinese Gold Market  – Peoples Bank of China (PBoC) section https://www.bullionstar.com/gold-university/chinese-gold-market#heading-21

Neck and Neck: Russian and Chinese Official Gold Reserves https://www.bullionstar.com/blogs/ronan-manly/neck-neck-russian-chinese-official-gold-reserves/

Skepticism reigns about the True state of Chinese central bank gold reserves https://www.bullionstar.com/blogs/ronan-manly/skepticism-reigns-true-state-chinese-central-bank-gold-reserves/

This article was originally published on the BullionStar.com website under the same title “Separating truth from fiction in China’s golden game of Poker“.

via RSS http://bit.ly/2FAXJZc Tyler Durden

The “Mnuchin Plunge Protection Team/Government Shutdown” rally extended overnight, and is now more than 13% from the Dec 24 lows with US equity futures and European stocks rising following a strong Asian session following a since-denied WSJ report that the US is considering easing Chinese tariffs to boost the market, followed by a report that China has told local governments to push consumption of cars and home appliances. The result is a sea of green in global markets, which look set to close the week at one month highs, while safe haven assets continued to decline with Treasuries, the yen and gold all edging lower.

As a result of resurgent trade dispute optimism coupled with ongoing rumors of further stimulus from China, a Fed which has removed the threat of further rate hikes and an ok earnings season so far, global stocks rose to their highest in more than a month on Friday.

European stocks rose to the highest since early December, carrying over the trade optimism from the Asian session where major equity indices posted >1% gains after the WSJ reported that the US was considering lifting China import tariffs, and even though the Treasury promptly rejected the report, the story reinforced speculation the administration is more eager for a deal and helped upward momentum now that the 50DMA resistance has been breached in the S&P500.

“The story was probably not as interesting as the headlines suggested, as the story states that the proposal comes from Treasury Secretary Steven Mnuchin (a China dove), while the US Trade Representative Robert Lighthizer (China hawk) opposes the idea,” strategists at Danske Bank wrote in a note to clients. “Nonetheless, we still interpret the story as another sign that a US-China trade deal is moving closer and markets probably do as well.”

Europe’s Stoxx50 rose 1.4%, crossing above the 50DMA for the first time since September, with banks enjoying the largest gains (+1.8%), recovering Thursday’s losses to resume the week’s rally, while Autos also rallied (+1.5%) supported by reports that China told local governments should boost policy support for consumption of home appliances and cars, according to a statement from the National Development and Reform Commission.

China’s ministries called for boosting consumption in rural areas, including raising the quality of products consumed, and called for an increase in marketing of high- quality industrial products to rural areas. In short, China is telegraphing that consumption is to play a bigger role in dealing with downward economic pressures, although it is unclear just how this is possible when consumer debt in China has exploded in recent years, especially mortgage loans and credit card debt.

News of additional Chinese stimulus helped lift the MSCI index of Asia-Pacific shares ex Japan by 0.55%; the index has gained 1.3 percent this week, while the Shanghai Composite was up 1 percent. Australian stocks rose 0.5%, South Korea’s KOSPI advanced 0.6 percent and Japan’s Nikkei gained more than 1 percent to a one-month high.

The gains across regions helped lift the MSCI All-Country World Index to its highest since early December. The index was set for its fourth straight weekly gain, its longest weekly winning streak in six months, a furious rally that started the day after the US government was shut down, when Steven Mnuchin summoned the Plunge Protection Team, and as president Trump said  “I think it’s a tremendous opportunity to buy. Really a great opportunity to buy.” So far he has been right.

In the US, S&P futures traded at session highs , up 0.5% following the S&P 500 cash Index’s first close above its 50-day average since early December. The yen fell for a fourth day and oil extended a third week of gains toward $53 a barrel in New York

The bid for risk assets weighed on long dated bond maturities as curves bear steepened and swap spreads tighten. 10Y TSY yields rose to session highs of 2.77% the highest level in three weeks, while long-end Gilts underperformed with yields rising ~3.5bps before stalling. Peripheral bonds continue to trade well, led by BTPs which pare some of the early ~8bp tightening to Germany.

In FX trading, DXY trades to the lower end of a tight range, EURUSD reclaims 1.14, GBP backs away from 1.3000.  The dollar was supported after U.S. Treasury yields rose amid improved risk appetite. The dollar was set for its first weekly rise in five.  The euro rose to $1.1398 after dipping overnight. It was on track for a weekly loss of 0.7 percent. The pound was 0.3 percent lower at $1.2950 after climbing to a two-month peak of $1.3001 on hopes that Britain can avoid a no-deal Brexit.

As Bloomberg notes, stocks and junk bonds are heading into the weekend with momentum after investors got some relief over concerns about the growth and rates outlook from U.S. economic data and central bankers. Chicago Fed President Charles Evans said the American economy is doing well, allowing that “we can easily be patient” in deciding on further interest-rate increases. Global stocks powered toward their fourth weekly gain.

“We think valuations are attractive,” said Marija Veitmane, senior multi-asset strategist at State Street. “There’s quite a lot of bad news already priced in. Lack of bad news is good news, and we can see markets re-pricing back to higher multiples.”

In overnight political news, the White House confirmed US President Trump cancelled the delegation trip to Davos amid government shutdown, while the White House also stated that US President Trump and Treasury Secretary Mnuchin are to hold Oval Office meeting today. Elsewhere, US Treasury Secretary Mnuchin has declined a request to testify next week regarding government shutdown according to US House Ways and Means Committee Chairman Neal, while the US Treasury instead offered to send senior officials to the Way and Means hearing.

EU Commission has proposed negotiating mandates for trade talks with the US, the EU seeks cover tariff removal for industrial goods and regulatory cooperation. Trade Commissioner Malmstrom added that EU are ready to put cars into the negotiations with the US; we are not proposing to restart broad free trade agreements with the US. German government spokesman, when asked about mulling the ban of Huawei from its 5G network, said security is important for Germany.

In commodities, crude oil futures extended Thursday’s gains, adding 0.8% to $52.49 per barrel. Brent crude was up 0.6 percent at $61.56 per barrel and on track to gain roughly 2% on the week. Elsewhere in commodities, palladium was 1.5 percent higher at $1,417.00 an ounce after rising to an all-time high of $1,434.50 overnight. Demand has recently outstripped supply for the metal, used in emissions-reducing catalytic converters for cars. Palladium also appeared to get a boost from hopes for further government stimulus in China, the world’s biggest auto market. Spot gold was down 0.3 percent at $1,299.06 an ounce, after relinquishing its spot as the most expensive precious metal to palladium early in December.

Expected data include industrial production and University of Michigan Consumer Sentiment. State Street and Schlumberger are among companies reporting earnings

Market Snapshot

• S&P 500 futures up 0.5% to 2,647
• STOXX Europe 600 up 1% to 354.35
• MXAP up 0.6% to 153.27
• MXAPJ up 0.7% to 498.07
• Nikkei up 1.3% to 20,666.07
• Topix up 0.9% to 1,557.59
• Hang Seng Index up 1.3% to 27,090.81
• Shanghai Composite up 1.4% to 2,596.01
• Sensex up 0.02% to 36,382.51
• Australia S&P/ASX 200 up 0.5% to 5,879.59
• Kospi up 0.8% to 2,124.28
• German 10Y yield rose 2.6 bps to 0.269%
• Euro up 0.07% to $1.1397
• Brent Futures up 0.9% to $61.75/bbl
• Italian 10Y yield rose 1.0 bps to 2.406%
• Spanish 10Y yield fell 1.6 bps to 1.348%
• Brent futures up 0.9% to $61.75/bbl
• Gold spot down 0.5% to $1,285.34
• U.S. Dollar Index up 0.04% to 96.11

Top Overnight News from Bloomberg

• President Trump told his lawyer Michael Cohen to lie to Congress about talks to build a Trump Tower in Moscow, BuzzFeed reports, citing two unidentified federal law enforcement officials involved in a probe of the matter
• Investors have been flocking to the safety of longer-dated gilts, preferring them over shorter maturities, a sign that they think the risks surrounding the economy are growing. At the same time, they are betting that inflation will become a headache for policy makers
• Theresa May met leading pro-Brexit Tories and promised them she won’t agree to keep Britain in a customs union with the EU, according to people familiar with the matter. She was also firm there won’t be an extension to the March 29 deadline and she’s not going to rule out leaving the EU with no deal
• The European Commission said it is “not taking any chances” in preparing for Brexit as the possibility of a no-deal divorce was seen to increase after May was defeated in Parliament this week
• Trump administration officials are considering measures to roll back tariffs on Chinese products in order to calm financial markets, the Wall Street Journal reported, a report the Treasury Department quickly denied
• Norway Prime Minister Erna Solberg has tightened her grip on politics with a deal that secures a parliamentary majority to a conservative-led government in Norway for the first time in more than three decades
• Japan’s key inflation gauge slowed again in December, highlighting the difficulty of reaching the central bank’s 2% price goal. Yen at 98 would trigger BOJ to take action, economists say
• China’s ambassador to Canada warned that excluding Huawei Technologies Co. from its next-generation wireless network will have repercussions
• India’s government signaled it’s ready to sacrifice fiscal discipline to stoke economic growth, as it prepares to unveil its last spending plan next month before a general election
• Global oil demand remains on course to be stronger this year than in 2018 as a boost from lower fuel prices counters slowing economic activity, according to the International Energy Agency

Asian equity markets traded higher across the board as the region took impetus from Wall St where the major indices were lifted on hopes of easing trade tensions after the US was said to mull lifting China trade tariffs to break the stalemate, although the Treasury was quick to downplay the prospects regarding this. As such, ASX 200 (+0.5%) and Nikkei 225 (+1.3%) were positive with broad gains across the sectors and with the Japanese benchmark the outperformer as it coat-tailed on the favourable currency moves. Hang Seng (+1.3%) and Shanghai Comp. (+1.4%) were boosted by the trade hopes with US and China also said to be in discussions on reopening access for US poultry exports to China, while the PBoC’s continued efforts this week resulted to a substantial net weekly injection of CNY 1.16tln to the interbank market. Finally, 10yr JGBs were lower as they tracked the downside in T-notes and with demand for bonds subdued by the positive sentiment across stock markets in the region, but with losses limited amid improved demand in the enhanced liquidity auction for 10yr, 20yr & 30yr JGBs.

Top Asian News

• Serial Defaulter IL&FS in Spotlight as Bond Payment Due
• Alibaba Is Said to Postpone Some Hiring, Cut Travel Spending
• Carlyle, Nomura Are Said to Weigh Bid for Orion Breweries
• Asia’s Richest Man Outlines His Plan to Take on Amazon in India

Major European equities are firmly in the green amidst positive trade updates [Euro Stoxx 50 +1.6%]. FTSE MIB (+1.0%) was initially weighed on by the poor performance of index heavyweight Telecom Italia (-7.0%) at the bottom of the Stoxx 600 after saying they expect 2018 organic EBITDA of domestic business unit to be in the lower mid-single digits compared to the previous year; adding that this may influence 2019. Major sectors are similarly in the green with some underperformance in telecom names on the back of aforementioned Telecom Italia. Other notable movers include Casino (+6.6%) after the Co’s CFO states that despite the French protests they expect to meet 2018 profit goals. Ryanair (-1.7%) have dropped to their lowest level in around 4 years as the Co. have cut their full year guidance. Easyjet (-2.4%) have been dealt a double blow this morning suffering from the Ryanair guidance cut and a downgrade at JP Morgan. Foxconn have cut 50k jobs at their iPhone factory since October, the scale of the cut is not necessarily deeper than prior years but it is significantly earlier; according to Nikkei citing industry sources.

Top European News

• Sweden Ends Historic Political Impasse as Government Is Formed
• ECB Has Narrow Window for Rate Hikes Before Economy Is Too Soft
• Telecom Italia Shares Plunge on Domestic Profit Warning
• Ryanair Earnings Outlook Takes Another Dive on Winter Fares

In FX, the USD Little changed and within a tight 96.000-140 band following yesterday’s volatile trade amid reports that the US are said to be mulling rolling back on China trade tariffs in an attempt to break the stalemate in talks, although the Treasury was quick to downplay the prospects regarding this. Furthermore, participants will be eyeing the meeting between US President Trump and Treasury Secretary Mnuchin at 17:45 GMT for any fresh details on trade or the government shutdown. DXY keeps its head above 96.000 and north of its 100 DMA at 96.055 ahead of the US industrial production data. Wells Fargo notes that a solid print in December IP would show that the industrial sector remains stable, while “a weaker print, on the other hand, may further stoke fears surrounding ongoing trade tensions and Fed policy.”

• GBP – The table has turned for the Pound after yesterday’s climb to test 1.3000 to the upside amid continued hopes of an Article 50 extension with reports stating that the EU are prepared to delay Brexit until at least July. In terms of the latest, the Northern Irish DUP party is reportedly leaning towards a Norway-style deal if it removes the threat of a NI backstop. This type of deal would essentially remove customs checks and allow for trade deals to be struck outside of the EU, though one key rule which must be accepted is the free movement of goods, services, persons and capital to and from EU and EEA member states. PM May has scheduled meetings with party leaders (ex-Labour) to find some common ground before she heads to Brussels. Labour MPs have accepted the PM’s invitation to cross-party talks in a move which defies party leader Corbyn following his demand for a no-deal Brexit to be taken off the table before dialogue can commence. GBP/USD edged lower at the start of the EU session though further downside was seen just before the release of disappointing UK December retail sales (Y/Y 3.0% vs. Exp. 3.6%), with the ONS citing weak sales as shoppers brought forward spending for Black Friday discounts. Subsequently, Cable fell to an intraday low of 1.2930 (vs.; high 1.2993) and currently stands as the G10 underperformer.
• EUR – Relatively uneventful and stuck in sideways Dollar-dominated trade as EUR/USD flirts with the 1.1400 handle ahead of the ECB interest rate decision next week where focus will be on EZ growth outlook. In related news, Bank of America Merrill Lynch has cut its 2019 Euro area growth forecast to 1.1% (Prev. 1.4%) and added that balance of risks remains clearly tilted to the downside. EUR/USD remains above its 50 DMA at 1.1380 ahead of heavy option expiries for today’s NY cut with 4bln at strikes 1.1375-1.1405 and a further 2bln between 1.1415-25 which may cap upside.

In commodities, Brent (+1.3%) and WTI (+1.4%) prices are benefitting from the positive market sentiment generated by potential US-China trade progress, currently just above USD 61/bbl and USD 52/bbl respectively. IEA’s report maintains their global oil demand growth estimate at 1.4mln BPD, and global oil supply fell by 950k BPD in December. However, the report does highlight that Russia raised their oil production in December to 11.5mln BPD and that it is unclear when they will cut production. For context, yesterday Russian Energy Minister Novak said that Russia will try to accelerate cuts in their oil output, but that there are technical limitations.

Gold (-0.5%) has suffered in the US-China stemmed positive risk environment, with the yellow metal residing towards the bottom of its USD 5/oz range. LME copper has breached USD 6000/tonne to the upside on reports stating the US are considering lifting tariffs on China; although this was swiftly downplayed. Elsewhere, spot palladium resides just below its all-time record of USD 1434.50/oz achieved on Thursday.

US Event Calendar

• 9:15am: Industrial Production MoM, est. 0.2%, prior 0.6%; Manufacturing (SIC) Production, est. 0.3%, prior 0.0%
• 10am: U. of Mich. Sentiment, est. 96.8, prior 98.3; Current Conditions, est. 116, prior 116.1; Expectations, est. 86.5, prior 87

DB’s Jim Reid concludes the overnight wrap

Mrs May is the latest to pull out of going to Davos next week due to her pressing Brexit concerns at home. She’s followed Mr Trump (Government shutdown) and Mr Macron (Gilet Jaunes) as having more important domestic issues to resolve. I’m increasingly feeling like it’s only me (and Will.I.Am) going. Although I actually now have my own domestic issues that may threaten my participation. Yes my builders told me yesterday that my porch (or portico) on my renovation project is rotten and falling down so we need to urgently decide on options. Sadly the only viable option is to work harder to pay for a new one. As a reminder if you or anyone from your organisation is going to Davos next week please let them know that I’ll be speaking about “The end of the globalisation supercycle (1980-2016)” on Wednesday morning and on “Whether robots will take your job?” on Thursday. If you or they want an invite please contact me.

Meanwhile the rally edges on and US markets got a late boost last night after the Wall Street Journal reported that the US may be approaching a trade détente with China, though officials almost immediately refuted the story. The S&P 500 jumped as much as +1.11% on the headlines, which said that “U.S. officials are debating ratcheting back tariffs on Chinese imports as a way to calm markets” and that “the president has made clear he wants a deal.” Equities retraced a bit after a Treasury spokesman denied the reports, but the S&P 500 still closed +0.76% higher for its third day of gains and 9 out of 12 so far in 2019. The DOW and NASDAQ also posting healthy climbs of +0.67% and +0.71% respectively. After playing the hero the day prior, banks for the most part of the day, did their best to reverse that move post Morgan Stanley’s numbers (more on that shortly). The Huawei investigation also lurked in the background from the day before while a weaker than expected update from Societe Generale also weighed on European financials. Indeed European banks closed down -1.20% (after being +2.51% the day before) with US banks rallying from losses of -0.91% to close up +0.93% while the STOXX 600 clawed back earlier losses to finish broadly unchanged (+0.04%) by the closing bell. High yield spreads in the US and European were similarly muted but still edged -4bps and -2bps tighter respectively.

After the closing bell last night Netflix reported somewhat disappointing results for the fourth quarter, as revenues disappointed. The company’s topline came in at $4.19bn last quarter, versus expectations for $4.21bn, and its guidance for the current quarter was notably soft at $4.49bn, versus expected $4.60bn. Nevertheless, the company added a healthy 8.8 million new subscribers, taking its total number of paying subscribers to 139 million, which would make the Netflix nation the 10th largest country in the world by population. The stock is trading down -3.93%, but it’s still up almost 50% since Christmas Eve. Remarkable.

US equity futures are trading up +0.22% overnight while sentiment across the rest of Asia is being buoyed by the positive trade headlines from last night with the Nikkei (+1.25%), Hang Seng (+1.04%), Shanghai Comp (+0.79%) and Kospi (+0.63%) all up. In term of overnight data releases, Japan’s December CPI and core-core CPI came in line with expectations and both at +0.3% yoy while core CPI was a one-tenth below consensus at +0.7% yoy.

Back to markets yesterday, Treasuries had actually broken below 2.70% at one stage early in the morning before closing a few basis points off that at 2.745%. A stronger-than-expected Philly Fed reading helped the reversal while in Europe Bunds closed +1.9bps higher with BTPs +1bp higher. The ECB’s Lautenschlaeger stuck to the script in an interview with Politico, saying that she would wait for March projections before revisiting her view of a 2019 rate hike. Staying in Europe, it’s worth flagging an MNI article yesterday (which granted hasn’t proven to be the most reliable source of late) suggesting that the ECB is growing increasingly concerned about a deepening economic slowdown which could prove longer-lasting. The market doesn’t price the next ECB hike until mid-2020 anyways, so it’s clearly already taking a dovish view relative to the ECB at the moment.

We thought we all needed a breather from Brexit so we’ve shunted it down the pecking order today. In terms of the latest update, yesterday we got confirmation that the Commons vote on PM May’s Plan B will now be on January 29th with May presenting it on Monday. Corbyn did say that a second referendum remains an option but failed to commit to it. Corbyn also appealed to all Labour MPs not to speak to May’s government until she meets the party’s conditions for talks. That is: until ‘no deal’ is off the table. However it’s clear that several Labour MPs have already met Mrs May. It seems the government have issued a note alongside these cross party talks that suggests a second referendum would take over a year to organise which for them might be an argument for suggesting it as unfeasible. Most campaigners would disagree about the necessary time frame. Nevertheless you could argue that the very discussion of another referendum puts the option back on the table and slightly raises the odds of it being realised. Obviously, another referendum would inject another dose of uncertainty into the process though. On the other hand, anything that delays things over a year could at least kick the uncertainty down the road and maybe allow for a near-term rally.

We’re a very long way from such an outcome, but the pound rallied notably yesterday, advancing +0.83% to its strongest level in two months at $1.2992. The currency was perhaps supported by a coincidental YouGov poll that suggested support for “Remain” had increased to 56% and a 12 point margin over “leave” – a post-2016 record. Overall the market yesterday perhaps appreciated the combination of the potential for a longer delay to Brexit, some engagement by Labour backbenchers in talks, all options being discussed, a second referendum being mentioned, and the supportive poll. On the other side, May reportedly promised hard-Brext-supporting MPs that she would not agree to keep the UK in the EU customs union, which would presumably be negative for the likelihood of a soft Brexit but did nothing to dampen the steady sterling rally. Meanwhile, The Times reported that the DUP is now edging towards a customs union and The Telegraph reported that as many as 20 mid-ranking ministers have indicated that they are prepared to quit the Government so they can support backbench moves to stop a no-deal Brexit. Expect lots more conflicting headlines to come. As a reminder, earlier this week our FX strategistic published “it’s time to buy the pound”. The link is here .

Coming back to the bank results yesterday, Morgan Stanley shares closed down -4.41% after reporting a miss at both the revenue and earnings lines. Like the bank’s peers, FICC revenues tumbled much more than expected (down -30% yoy) and in fact the most of the five big US banks. In addition there was also a miss in the equities division although the outlook was left broadly unchanged. Here in Europe, Societe Generale fell -5.66% after releasing a Q4 profit warning which cited weaker performance in the investment bank.

On the Fed front, Governor Quarles, who admittedly is more involved in financial regulation than monetary policy, gave a rosy view of the economic outlook. He said “the core base case remains very strong” though “clearly markets are more attuned currently to the downside risks.” So yet another example that FOMC members are unifying around the same message of strong growth but heightened risks given financial conditions. After US markets closed, Chicago Fed President Evans repeated his recent dovish rhetoric, saying that the Fed is “at a good point for pausing,” and that there could be fewer than two hikes this year.

As for the US data, the Philly Fed business outlook reading printed at +17.0 for January compared to expectations for a much more modest rise to +9.5 (vs. a downwardly revised +9.1 in December). That’s the highest reading since October however the details were slightly more mixed. New orders rose to the highest since July last year at 21.3 however prices paid slid to a thirteen-month low at 32.7 – which plays into the Fed patience argument. On an ISM-adjusted basis the series actually slid to 54.8 compared to 55.3 previously. That’s a steeper slide than the move implied by empire manufacturing earlier this month, but the trend remains downward going into the start of the year.

The other data out in the US yesterday was the latest weekly initial jobless claims print which fell -3k to 213k and towards the current cycle lows again. The details did however confirm another tick up in claims at a state level in Washington, DC as a result of the shutdown. DC is in fact showing the highest level of claims since 1996, the previous record-holder for longest-ever shutdown.

Meanwhile in Europe there were no surprises with the final December core CPI reading for the Euro Area at +1.0% mom (unrevised versus the flash). Here in the UK there was some interest in the BoE credit conditions survey with the data revealing that UK lenders expect demand for credit card lending over the next three months to fall at the fastest pace since records started in 2007. UK lenders also expect mortgage demand to fall at the fastest pace in eight years. So certainly a softer survey and it’s worth noting that the BoE follow the data closely so something to keep in mind. On that, Dutch tech company Philips announced yesterday that it would close its factory in Suffolk and transfer its operations to the Netherlands. So the wider Brexit impact on UK growth is becoming more and more apparent and as our UK economists noted this will make life for the BoE difficult when undertaking the supply side review on the 7th Feb inflation report.

Finally, to the day ahead now where this morning we get the November current account balance reading for the Euro Area followed later by December UK retail sales data. This afternoon in the US there should be some interest in the December industrial production print (+0.2% mom expected) along with the preliminary University of Michigan consumer sentiment survey for January. Away that we’re due to hear from the Bank of Italy’s Visco and Italian Finance Minister Tria at an event this morning in Rome at 9am GMT, while this afternoon the Fed’s Williams (at 2.05pm GMT) and Harker (4pm GMT) are slated to speak. Schlumberger is the highlight on a quiet day of earnings releases.

via RSS http://bit.ly/2U2oqth Tyler Durden

In the latest indication that the slump in sales of Apple’s most recent batch of iPhones isn’t a transitory trend, Nikkei Asia Review on Friday reported that Foxconn, one of Apple’s biggest and most important iPhone suppliers, is cutting seasonal staff more swiftly than in previous years, a sign that it is bracing for weak sales in the months ahead as the industry suffers its worst downturn in 10 years.

Normally, the 50,000 contract workers who have been let go at Foxconn’s most important factory in Zhengzhou would have been kept around for a few more months, as the manufacturer gradually reduced its employee head count.

The report comes after Apple announced plans to cut iPhone production for the second time in two months.

Around 50,000 contract workers have been let go since October at Foxconn Technology Group’s most important iPhone factory at Zhengzhou, in China’s Henan Province, according to an industry source familiar with the situation. Normally, the contracts of these workers would be renewed every month from August until mid- to late January, when the workforce is traditionally scaled back for the slow iPhone production season.

The depth of the cuts isn’t deeper than in previous years, it’s just happening much earlier than expected, as many workers were asked to leave before year-end as expectations for holiday sales slumped.

The scale of the cuts is not necessarily deeper than previous years, it is simply significantly earlier, industry sources said. “It’s quite different this year to ask assembly line workers to leave before the year-end,” a source with knowledge of Foxconn’s reductions said.

Other important iPhone suppliers have let workers go much earlier than usual as they struggle with slower-than-expected demand for Apple’s iconic product. The California tech giant earlier this month shocked the market by warning of a slump in revenues at the end of 2018. This year is also shaping up to be difficult, with further declines expected in the smartphone market, while the ongoing U.S.-China trade war is taking a heavy toll.

Foxconn isn’t alone in its cutbacks: Other companies further down the supply chain are also cutting jobs.

Pegatron, Apple’s second-biggest iPhone assembler, began canceling monthly labor contracts in November. A source close to the company said its normal practice was to reduce the 200,000-strong head count by tens of thousands every month until reaching about 100,000 – the minimum required for daily operation, according to one source familiar with the situation. “And for [2018], it just happened sooner than in the past because of poor demand.”

Industry sources said early cutbacks were happening further down the supply chain as well. One key component supplier based in Shenzhen had asked 4,000 workers to take an extended “vacation” from October to March, a person with knowledge of the situation said. “The company has not actively laid off those workers yet. It will decide whether or not to lay them off after March 1,” the source said.

To be sure, Foxconn’s cutbacks stretch beyond its iPhone manufacturing units. It is also paring back the number of managers and consolidating business units as it aims to cut 100,000 permanent positions.

Meanwhile, Foxconn – formally Hon Hai Precision Industry – is in the middle of an aggressive cost-cutting program as it braces for a difficult 2019. In addition to letting contract workers go early, it is hoping to reduce expenses with an organizational restructuring, according to people close to the Taiwanese company. It has recently merged business units making Apple’s MacBooks and iPads with another division making laptops and desktops for Dell and Acer.

The result of the consolidation will be steep cuts to management jobs and back office support staff such as human resources, administration, accounting and finance, and utility support jobs. “Previously, each business unit had its own supporting staff, and by merging business divisions, Foxconn can slash some 50% of those supporting jobs and even condense managerial positions too,” a person familiar with the reshuffle told the Nikkei Asian Review.

The reorganization is part of Foxconn’s push to cut 100,000 jobs out of about 1.1 million by the end of 2018 across all of its affiliates and subsidiaries, as reported by Nikkei Asian Review in November. Foxconn aims to cut costs by some 20 billion yuan ($2.96 billion) in 2019 compared with 2018, according to an internal document dubbed the “1031 project” seen by Nikkei.

To be sure, Foxconn’s embrace of automation has been partly responsible for the reduction in its head count. But as smartphone sales slowed last year, Foxconn and other iPhone suppliers revealed steep declines in revenue, with Foxconn’s yoy revenue falling 8% in December compared with the same month last year.

But as Apple CEO Tim Cook has decided to stop breaking out iPhone sales and to place more emphasis on the company’s software and other product offerings should, investors (including the Oracle of Omaha himself) who are hoping for a return to $1 trillion market cap should probably hope that the company hurries up and launches its next-generation iPhone Air Pods. Or maybe – just maybe – cutting prices on its increasingly expensive flagship product.

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