Less-than-truckload carrier LME has reportedly “suddenly and abruptly” shut down its operations, according to FreightWaves.
The company is a regional carrier based in Minnesota that operated throughout the Midwest. The company had terminals in 30 locations across the U.S. and through interline agreements services all of North America. It also worked with major companies like 3M, John Deere and Toro.
The company reportedly included “over 600 men and women” and has been listed as having 382 power units and 1,228 trailers, with 424 truck drivers.
LME had previously been entangled in litigation with the National Labor Relations Board (NLRB) regarding disputes with Lakeville Motor Express, which shut down abruptly before Thanksgiving 2016. Lakeville had to declare bankruptcy after it was ordered to pay $1.25 million in backpay, according to a June 2019 Star Tribune article:
About 95 Lakeville Motor Express truckers and dockworkers were abruptly locked out of their Roseville job site without notice or pay just before Thanksgiving 2016. While Lakeville Motor Express filed for bankruptcy, affected workers claimed the entity actually continued to operate, just at a different location in the Twin Cities and under the new name LME Inc.
The NLRB ordered the $1.25 million in backpay to be paid starting within 60 days from April 30, 2019, or the amount would double to $2.4 million.
Lakeville reportedly was bankrupted on purpose and was brought back as a non-union carrier under the LME and Finish Line Express brand names. LME had been described by the NLRB as an “the alter-ego” of Lakeville Motor Express. LME’s website says “effective immediately LME will no longer be accepting any pickups.”
As FreightWaves noted, this is the fifth major closure in 2019, after NEMF, Falcon, Williams Trucking and A.L.A.
via ZeroHedge News https://ift.tt/2jEmsTe Tyler Durden
Japanese crypto exchange Bitpoint has suspended all services after losing $32 million in a hack involving XRP, Bitcoin (BTC) and other cryptocurrencies.
In an official announcement on July 12, Bitpoint revealed that it had lost around 3.5 billion yen (~$32 million) — 2.5 billion yen (~$23 million) of which belonged to customers and 1 billion (~$9.2 million) to the exchange.
Bloomberg reports that shares of Bitpoint’s parent firm Remixpoint Inc. shed 19% following news of the incident, and were untraded in Tokyo as of 1:44 p.m. “on a glut of sell orders.”
Alongside XRP and Bitcoin, a total five different cryptocurrencies had been stored in the affected hot wallets, including Litecoin (LTC) and Ether (ETH).
The exchange’s cold wallets are not reportedly thought to have been compromised, Bitpoint’s announcement indicates.
Bitpoint was one of multiple domestic crypto exchanges to have been served a business improvement order from Japan’s financial regulator, the Financial Service Agency (FSA), during its wide-ranginginspections of industry businesses, per Bloomberg.
As previously reported, the industry record-breaking hack of $534 million of NEM from Japan’s Coincheck exchange in January 2018 had been attributed to the fact that the coins were stored in a low-security hot wallet.
In 2019, May’s $40 million hack of top crypto exchange Binance has loomed large over the industry – at least eight crypto exchanges have been the target of large-scale hacking incidents in the first half of this year, most recently Singapore-based Bitrue.
via ZeroHedge News https://ift.tt/2jEIhlA Tyler Durden
What do you do if you are a major Japanese investor, whose mandate is to invest in safe assets, yet the yield on Japanese govvies is too low to cover the cost of your liabilities?
That’s the question that Japan Post Bank Co., the banking unit of Japan Post Holdings, has been grappling with. Its answer: buy and hold over half a trillion dollars, or $577 billion to be precise, worth of foreign corporate bonds. That, as Bloomberg notes, is “more than the investment-grade portfolio at Fidelity Investments or the fixed-income holdings at Britain’s Standard Life Aberdeen Plc.” And since Japan Post is a public company, majority-owned by the government, it means that one Japanese bank (really, Japan, due to its state-ownership) is directly funding countless US-based corporations, resulting in hundreds of billions in stock buybacks , and this bank is also indirectly funding the hiring of thousands of US workers. In this “new normal” era of super low rates, this represents a major change from just a decade ago, when the foreign bond portfolio at Japan Post Bank was virtually nil.
This new global bond market “whale” did not emerge voluntarily: as a result of decades of ZIRP and NIRP, Japan Post was effectively pushed out Japan’s bond market and forced to look for investment opportunities elsewhere. Long-term yields in Japan are around 0%, far below even the exceptionally slim rates in the U.S, crippling the business model the postal bank used for more than a century.
Some background: as Bloomberg details, Japan’s postal system set up savings accounts in 1875, which at one point grew to become the world’s largest deposit-taking institution. However, to maintain an especially safe risk profile, the bank was barred from making loans like those of a normal commercial bank, and so the banking unit plowed those deposits into government bonds. Which, when yields were well north of 1%, that made for a boring, yet profitable, enterprise, and helped the bank grow its deposits to a whopping $1.7 trillion, comprising the savings of millions of Japanese households in big cities and remote villages. And, being a bank, it has to invest this money somewhere. But with Japan’s bond yields too low to cover the cost of servicing the bank’s funds, which according to S&P is 0.57%, the bank had to look to other assets.
“It’s a road to insolvency” for the postal bank to invest in Japanese government bonds now, says David Threadgold, a Keefe, Bruyette & Woods analyst in Tokyo who’s followed banks there for more than three decades. And with no other domestic asset class big enough to pour deposits into other than equities, which would require the bank to keep higher capital reserves, “they have to turn themselves into an overseas investment vehicle,” he says.
Such as corporate bonds.
To be sure, the majority of the bank’s investments are still boring enough: Instead of buying supersafe Japanese government bonds paying essentially nothing, it buys supersafe U.S. Treasuries yielding about 2%, which should be sufficient to leave the bank comfortably profitable; the main risk is currency fluctuation, although investors can hedge that risk, even as the cost of doing so has climbed in recent years due to rate differentials between the US and Japan.
Still, its profit margins remain razor thin, and so to boost its profits, the Postal bank has been on the hunt for new kinds of assets. However, with $539 billion of domestic government bonds still on the books and set to mature over time, and deposits continuing to grow, “that’s no simple task.”
To broaden its universe of possible investments, the bank aims to direct some funds to private equity and real estate. It’s also gone into credit investments, including U.S. collateralized loan obligations—which bundle together loans made to riskier companies. Of course, it isn’t the only Japanese savings institution diving into CLOs in search of better yield. Norinchukin Bank, a cooperative that invests the deposits of millions of Japanese farmers and fishermen – and which has recently emerged as a CLO whale – is too. Norinchukin bought $10 billion of CLOs in the U.S. and Europe in the last three months of 2018, accounting for almost half of the top-rated issuance for the period, according to estimates compiled by Bloomberg (more on this later).
So are Japanese savers and pensioners going to be the next financial crisis’ German “widows and orphans“, i.e., bagholders of the trillions in fallen angel corporate bonds and “safe” CLO tranches?
While Bloomberg notes that observers are confident Japan Post doesn’t have major time bombs on its balance sheet, the sad record of Japanese investment overseas is replete with missteps; just two examples:
In March, Japan’s No. 3 bank, Mizuho Financial Group Inc., surprised investors by booking 150 billion yen ($1.4 billion) of losses on its foreign bond holdings.
Norinchukin posted a $6 billion loss during the financial crisis because of its purchases of toxic assets in the U.S.
“You are asking if we are comfortable with this? I don’t think everything is fine. There are risks,” a resigned Japan Post Holdings CEO Masatsugu Nagato said about the need to invest abroad at a June press briefing. He also said: “We are very careful, but foreign bond investment will increase” for one simple reason: he is forced to buy the next generation of “toxic assets” because the BOJ assures the bank’s insolvency, as Keefe, Bruyette said, if it sticks with Japanese assets.
To be sure, this is not the first time questions have been asked about Japan seemingly price-insensitive investments around the world, and mostly in US corporate bonds and CLOs (see “A Japanese Tsunami Out Of US CLOs Is Coming“). Aware of the growing concerns about its massively levered financial system, financial regulators say they are keeping an eye on lenders’ investments in CLOs and other loans, so the postal bank’s freedom to pile into particularly risky assets may be limited (although who can forget that according to none other than Ben Bernanke, “subprime was contained”).
Yet even so, another risk is on the horizon: what if even more Japanese investors scramble for the “high yield” of US Treasurys and corporate bonds? If U.S. Treasury yields fall? “The scary thing really is that they are all depending on the U.S. market,” Michael Makdad, a Morningstar analyst said of Japan Post Bank and its peers.
Indeed, prompting speculation that US Treasuries have become a Giffen Good, 10Y Treasury yields have tumbled by more than a percentage point over the past nine months, as investors have bought up government debt expecting central banks to become even more dovish as economic growth slows; and yet foreign demand appears to be stable, if not rising. On the other hand, with the Fed set to cut rates, Treasury yields are expected to slide well below 2%. Of course, the euro region hardly offers a better option, with much of the area’s debt trading with negative yields. “If you turn the rest of the world into Japan, then there’s no escape,” Threadgold says.
Meanwhile, as the scramble for yield comes back with a vengeance now that all global central banks have turned dovish again, Japanese mega-buyer Norinchukin Bank – better known as Nochu – and lender to Japan’s farmers and fisherman, has re-started purchasing CLOs after dramatically cutting back around April amid heightened market scrutiny, Bloomberg reported separately.
How big is Nochu in the US CLO market? Let’s just say there is no single bigger player, because until very recently it was a massive presence in the $600 billion CLO market, buying as much as half of the highest-rated bonds in the fourth quarter in Europe and the U.S.
That helped sustain record growth which in turn sparked regulatory scrutiny and diverted attention to the bank’s outsized role in the market, prompting its recent retrenchment. And after taking a brief sabbatical, the bank is back yet even in its absence, CLO sales held near record pace, underscoring their popularity with investors starved of yield; indeed, even with a largely absent Nochu, sales hit $35.9 billion in the second quarter of 2019, compared with $29.5 billion in the first three months of the year.
“We aim to build a portfolio of bonds, equities and credit with healthy risk balances by exercising necessary checks,” a representative for Nochu told Bloomberg. “CLOs are credit assets that we will invest in based on this concept.”
The silver lining is that Japanese banks invest mostly in the super-senior, AAA-tranches. Yet even so, it is only a matter of time before they too are forced to buy riskier tranches. Consider that even with Nochu’s brief absence, average spreads on the triple-A rated bonds sold by top-tier managers tightened to roughly 130 basis points across May and June, compared with about 138 basis points in the first quarter, according to data compiled by Bloomberg. Market participants point to the tightening as proof of the CLO market’s resilience. Of course, the other, more correct explanation, is that with central banks herding investors into increasingly riskier assets, CLOs had nowhere to go but up.
On the other hand, CLO risk premia have been more resistant to tightening than other asset classes in 2019, so the increase in Japanese buyers will likely result in a spike in demand for the bundled loans. That would lower borrowing costs for junk-rated companies and help increase the volume of leveraged buyouts, but could also add air to a market that regulators worry is already over-inflated.
Meanwhile, as Japanese banks seek to allocate trillions in local savings, they have emerged as some of the world’s largest bond, and CLO, investors: Nochu alone held more than 18% of all triple A-rated CLO bonds outstanding at the end of March 31, according to research by Citigroup. Wells Fargo held around 9.5% while Japan Post Bank Co. owned approximately 2.9%, the Citi research showed (of course, Japan Post appears far more interested in buying corporate bonds outright).
“The basic concept of Norinchukin Bank’s investment is global diversification,” the bank’s representative said in its email, written in response to questions from Bloomberg News. As a reminder “diversification” is how you try to justify a reckless investment just after the crash.
And speaking of growing concentration risk, Japanese regulators – and millions of Japanese savers – appear to have no choice but to see more investments into increasingly risky fixed income.
One option to mitigate such risk, according to Bloomberg, would be to wind down balance sheets of banks such as Post Bank and make it smaller. But Japan Post is sometimes the only provider of financial services in areas where the population is shrinking. And the banking unit subsidizes the postal business, so it is a monopolistic Catch 22. Furthermore, the idea of turning customers away or discouraging deposits by adding fees is difficult for any national policymaker to embrace. Japan Post Bank is “a national brand,” says Rie Nishihara, a senior analyst at JPMorgan Chase & Co. in Tokyo. “They face a more challenging yield cycle and credit challenges, and that’s very difficult while also supporting 24,000 branches” across the postal system, she says.
So, as Bloomberg concludes, “the fortunes of this mammoth institution may rely on the U.S. avoiding the same low-rates-forever dynamic that has driven the bank overseas.” Yes, but that’s just half the story, because if instead of dreaded low-rates, yields on the US investments in which Japan has invested trillions suddenly were to suddenly soar, then neither Post Bank nor Nochu would survive absent full-blown nationalization. While it is unclear if such an option is amenable to Japan’s taxpayers, the alternative is for tens of millions of pensioners and savers in the demographically crippled country to one day wake up and upon checking their retirement account finding that it’s gone… it’s all gone.
Or, as Threadgold said earlier, for Japan “there’s truly no escape.”
via ZeroHedge News https://ift.tt/2LVatMZ Tyler Durden
With some $13 trillion of bonds worldwide yielding less than zero percent, it would be easy to characterize fixed-income assets as nothing more than a giant bubble waiting to burst. Those who agree probably haven’t heard of the concept of a “Giffen good.”
Simply put, a Giffen good is a paradox of economics where rising prices lead to higher demand, which is in contrast to the negatively sloped demand curve that students learn in Economics 101. Named after 19th century Scottish economist Sir Robert Giffen, a Giffen good is typically an essential item that, because of its higher price, leaves less resources to purchase other items. (To be sure, many economists debate whether a Giffen good actually exists.)
In terms of the bond market, it’s important to understand that the rapid plunge in yields, especially for sovereign debt, reflects increased concern about the state of the global economy. Those concerns, in turn, only fuel demand for the safest assets even at negative yields, which pushes prices higher and yields even lower.
There are three more reasons why sovereign bonds have become a Giffen good.
First, inflation rates have been low or declining in the U.S., euro zone and Japan, encouraging investors to allocate more resources to fixed-income assets despite falling yields. High rates of inflation reduce the purchasing power of bond holders, but low rates of inflation do the opposite.
The Federal Reserve’s target of a 2% inflation rate has not been consistently met for more than a decade, and we learned Friday that average hourly earnings of U.S. workers over the past year increased by only 3.1%, less than consensus and continuing to decelerate from a rate of 3.4% earlier this year. The European Central Bank’s 2% inflation target remains a distant dream with prices rising by 1.2%. Japanese consumer prices rose by a mere 0.7% in May.
Second, expectations for central bank monetary policy have been kind to bond investors. Ten-year yields have fallen below policy rates in the U.S., Germany and Japan, providing a reason – and pressure – for monetary authorities to reduce rates. Fed Chairman Jerome Powell bluntly stated in his testimony to Congress this week that the latest month employment report, which showed that the economy added a healthy and greater-than-forecast 224,000 jobs in June, would not prevent the central bank from cutting rates in the near future.
In Europe, the nomination of International Monetary Fund Managing Director Christine Lagarde to become the next President of the ECB was a factor in last week’s drop in yields. Lagarde has been supportive of asset purchases by the ECB, and is widely expected to commence a new quantitative easing program when she assumes her new role on Nov. 1.
Third, the steep decline in U.S. and German risk-free yields have increased the attractiveness of lower-rated sovereign credits. As investors reached for returns, Greek five-year yields have fallen from 1.66% to 1.24% over the past month. Even more dramatic was the draw of Italian 10-year notes, whose yields dropped by 66 basis points over the past month to 1.70%.
And as the Fed, ECB and the Bank of Japan lower interest rates or accelerate asset purchases, don’t expect the global economy to respond positively. Instead, such moves are only likely to increase investor concern about the health of the global economy, which could become a sort of self-fulfilling prophecy and tamp down inflation expectations even further. Such a scenario would cause central bankers to lean toward even more easing, raising the odds of a “Japanification” of the global economy.
Investors would be better off ignoring advice that suggests today’s low bond yields make them unattractive relative to equities. The high prices and low yields of bonds acts as a magnet and is likely to be a gift that keeps on giving for the bulls.
via ZeroHedge News https://ift.tt/2l7plw3 Tyler Durden
The Democrat-led House voted Friday to block President Trump from taking military actions against Iran without first seeking Congressional approval – a vote which had the support of more than two dozen Republicans, much to John Bolton’s chagrin.
According to the Washington Post, the vote will likely ensure a showdown with the GOP-controlled Senate over whether the restriction will be included in the final bill negotiated between the two chambers. Of note, the House version contains an exception for cases of self-defense.
Republicans in both the House and Senate have argued that such language would embolden Tehran amid a ‘divided’ Congress.
“Our national security is not a game. But that is exactly how Democrats are treating it,” said House Minority Leader Kevin McCarthy (R-CA) on Friday morning.
House Armed Services Committee Chairman Rep. Adam Smith (D-WA) pushed back, saying that Republicans “can opposite it, that’s fine, but to say we don’t care about national security . . . is a baldfaced lie.”
“In fact, our bill isn’t just good, it’s better than the ones that the Republican Party has put together, because we believe the Pentagon should be accountable,” added Smith.
At the center of the Iran amendment is a dispute over how much money should be allocated to the Pentagon and military this year. While Trump and the Republicans want $750 billion, the House bill limits it to $733 billion – a figure Smith says military leaders have previously endorse.
The Iran amendment is just one of several high-profile measures that lawmakers voted this week to include in the first defense authorization bill Democrats have steered through the House since taking over the majority earlier this year. Those measures, which range from ending U.S. participation in Saudi Arabia’s military campaign in Yemen to undoing President Trump’s ban on transgender troops, helped secure the support of liberal Democrats from the congressional Progressive Caucus, who had previously warned that they might vote against the defense bill. –Washington Post
Liberal Democrats, meanwhile say $733 billion is still too steep vs. the current fiscal year’s $717 billion allocation, and have proposed a $16.8 billion reduction to war funding – an effort which failed in the House.
via ZeroHedge News https://ift.tt/2l5MAH4 Tyler Durden
Submitted by Joseph Carson, Former Director of Global Economic Research, Alliance Bernstein.
Preemptive or Bubble-Making Monetary Policy
Preemptive actions is an important feature of monetary policy, but policymakers have never made a preemptive move when the economy’s actual performance has been so closely aligned with the Fed’s own expectations or when the financial markets were so robust. If the Federal Reserve lowers official rates at it’s July 30-31 Federal Open Market Committee meeting it would be done based on the view that a modest “preemptive” move now would obviate the need for larger actions later. Yet, the counterargument is that adding liquidity against a backdrop of overly accommodative financial conditions is precisely the tinder that ignites bubbles.
At the December 18-19 2018 Federal Open Market Committee meeting policymakers revealed their forecasts for 2019; 2.3% gain in real GDP, a 3.5% end of year unemployment rate and core inflation of 2%. And based on those economic and inflation forecasts policymakers had anticipated hiking official rates twice (in increments of 25 basis points) over the course of 2019.
During the first half of 2019 the real economy grew 2.3% annualized (averaging the 3.1% growth of Q1 with the 1.4% estimate for Q2 based on GDPNOW forecasting model of the Federal Reserve Bank of Atlanta), the unemployment rate sat at 3.7% in June and the core consumer price inflation increased at an annualized rate of 2.1%. Despite a near home run in all of its forecasts policymakers are now considering lowering official rates. What changed?
One of the arguments that has been advanced is that some policymakers are worried that the consistent undershoot of the 2% inflation target creates the potential for consumer inflation expectations to become unhinged, hindering the effectiveness of monetary policy.
The first problem with that argument is that monetary policy can influence the degree of liquidity in the system, but it cannot guide its direction. The fact that of the monetary liquidity is being channeled into the asset markets (which are not part of the targeted inflation index) does not mean policy is ineffective or that rates need to be lowered to hit an arbitrary inflation target. Given the complexity of the economy and the imprecision in price measurement hitting a 2% target would occur more by luck than by design.
The second problem with that argument is that either consumer’s are unaware of the Fed’s 2% target or that their actual experienced inflation consistently runs higher than reported inflation. Surveys of consumer inflation expectations have consistently shown that people expect more inflation than the 2% target, and only twice (for a very short spell) in the past 20 years did expectations dip below 2% mark and both of those occurred during a crisis (9/11 and Great Financial Recession).
Another argument advanced by the Fed Chairman Jerome Powell is that the economy is facing a lot of crosscurrents. Crosscurrent is another way of saying that some sectors and industries in the economy are growing and others are not. But that’s always true. The Bureau of Labor Statistics includes in its monthly employment report a diffusion index, measuring how many industries are hiring month over month. In normal times the diffusion index runs between 60% to 65% —-which implies an increase in hiring for a broad range of industries but also a large group that are not hiring as well. The June 2019 diffusion index reading stood at 60.7. Normal times?
* * *
Monetary policy is about to enter uncharted territory. Preemptive easing policy actions in the past have been taken when sharp sell-offs in equity markets or stress in the credit markets had the potential to generate adverse economic outcomes. None of those conditions exist today; if anything, financial conditions are too relaxed.
Preemptive policymaking requires a constant and broad assessment of economic and financial conditions so not to risk over doing it one way or the other. Equity prices should figure prominently in this monitoring process since equity prices offer signals on future growth but they are also a receptacle for excess liquidity. The sharp rise in equity prices over the first half of 2019 should tell policymakers that the problems the economy faces are non-monetary related and lowering official rates is not the appropriate policy response. The danger in promising more easy money is that equity prices rise to unsustainable levels creating bigger adjustment risks to the economy that presently exists in low inflation and crosscurrents.
via ZeroHedge News https://ift.tt/2jEv3W8 Tyler Durden
In April we reported that thousands of Amazon contractors have been eavesdropping on customers who own the company’s Alexa devices.
Now, thanks to a whistleblower, we find out that Google is doing it too via their Google Home smart speakers, despite repeatedly claiming that they don’t eavesdrop, according to Dutch broadcaster VRT – which notes that the recordings are happening whether or not the speakers are activated.
VRT NWS was able to listen to more than a thousand excerpts recorded via Google Assistant. In these recordings we could clearly hear addresses and other sensitive information. This made it easy for us to find the people involved and confront them with the audio recordings. –VRT
“This is undeniably my own voice,” said one man tracked down by VRT based on recordings obtained by the outlet. Another couple from Waasmunster, Belgium said they immediately recognized the voices of their son and grandchild. The recordings include conversations and quarrels between people, confidential business calls, conversations with children and ‘bedroom activities.‘
Speech recognition automatically generates a script of the recordings. Employees then have to double check to describe the excerpt as accurately as possible: is it a woman’s voice, a man’s voice or a child? What do they say? They write out every cough and every audible comma. These descriptions are constantly improving Google’s search engines, which results in better reactions to commands. One of our sources explains how this works.
Most recordings made via Google Home smart speakers are very clear. Recordings made with Google Assistant, the smartphone app, are of telephone quality. But the sound is not distorted in any way. –VRT
Sex and violence
According to more than a thousand sound clips reviewed by VRT, 153 of them included conversations which should have never been recordeddue to a clear lack of an activation command. Many of those include sex and violence according to the outlet’s sources.
One of our three independent sources says he had to describe a recording where he heard a woman who was in definite distress. What are employees supposed to do with such information? We are told that there are no clear guidelines regarding such cases. It is, however, an important ethical matter. Employees only receive specific directions when it comes to account numbers and passwords. Those are marked as sensitive information.
The recordings also strikingly confirm one of the Internet’s rules: men seem to look for porn a lot, even via smart speakers. –VRT
“This is shocking,” said cyber security expert Bavo Van den Heuvel, who pointed out that the recordings could be made anywhere – “in a doctor’s surgery, for example, or in a police or judicial context, where people are dealing with sensitive, private matters.”
Why is this happening?
Google Home Speakers are normally activated when someone says “Hey, Google” or “OK, Google.” It also activates if someone says anything remotely similar. The recordings are then sent to Google subcontractors who manually review the clips.
According to USA Today, Google reviews just 0.2% of audio recordings for manual transcription – while customers must opt-in to have their voice recordings stored to their account. According to the report, however, Google requires users to turn on voice recording in order to access all of Google Home’s features.
“Your device will only send audio to Google if we detect that you or someone in your home is interacting with your Assistant … or if you use a feature that needs it,” said the company, adding: “You can always turn the microphone off.”
via ZeroHedge News https://ift.tt/30uBvP3 Tyler Durden
Authored by Mark Orsley, PrismFP head of macro strategy
The non-fundamental flattening reverses as the case for steepeners moves into “goldilocks” territory
Powell makes watershed comments on the Dollar
Deficits are the main non-economic data driven reason why the Fed will cut
On Tuesday we discussed how the curve flattening in the US over the last week made very little fundamental sense and provided an attractive risk/reward entry point. As the great Ron Burgundy said, “well that escalated quickly.”
On Tuesday 2s10s was at the bottom of the range and on Friday we are back at the top of the range where you can actually think about booking profits. US 2s10s hit trend support and bounced firmly. Notice the higher lows being put into place after a broken downtrend. Short-term you can take some profits but the long-term bullish technical narrative is still firmly in place…
The case for the steepener has only strengthened since Tuesday. On the one hand, the data deterioration theme got solidified with another labor market indicator showing rate-of-change weakness (JOLTS), but on the other hand there was surprisingly good inflation data and better claims.
I am not trying to pour cold water on the CPI as it was firm in all aspects. You saw some payback of some of the “transitory” factors that were roundly expected to bounce with a bit of help from tariffs so it was a nice number. However, it is important to remember that the Fed’s preferred inflation metric is of course Core PCE. Ironically, that will arrive just before the July FOMC but do note that Core PCE remains below the Fed’s target.
Further, in the Fed’s newfangled mindset driven by the new core (the Average Inflation Targeting {AIT} clan of Williams, Clarida, Brainard, Evans), inflation on an average basis is still not where they would like it to be. If you look over the last five years, Core PCE has only been above the 2% target just 8 months out of 60 months.
Core PCE remains below the Fed’s target and has been below target in 52/60 months. This is the persistently low inflation you hear about from core FOMC voting members (red shaded below target, green shaded above target).
Importantly, Fed officials, with CPI data in hand, were roundly dovish so you need to consider what the Fed WILL DO not what you think they SHOULD DO. Bostic and Barkin had a couple dovish twist but neither are voting members so let’s focus on the voters:
Powell: “we’ve signaled that we’re open to accommodation; monetary policy hasn’t been as accommodative as thought”
Williams: “arguments for adding accommodation have strengthened”
Quarles: “there are significant risks out there (despite US economy being strong)”
Brainard: “supports softening the rate path due to risks and low inflation”
Evans: “a couple rate cuts could boost inflation; nervous about inflation”
FOMC Minutes: “MANY Fed officials saw strong rate cut case amid rising risks; MANY saw more accommodation warranted in the near-term”
The Brainard comment is exactly what we are talking about. So yes CPI was firm, but inflation as measured by the Fed’s preferred metric is still below and averaging well below the Fed’s target.
Getting back to the steepener, isn’t this a goldilocks scenario for further steepening?
Continued data deterioration which signals end of cycle
Firmer inflation data
Fed that is about to cut rates and possibly have two more additional doves added to the board
In other words stagflation that is likely driven by supply side considerations for you neo-Keynesians out there. The front end will be pegged lower by the Fed and a back end that can trade heavy due to the better inflation, and that is what has driven us back to the upper end of the range in steepeners.
It was also notable how poorly the 30yr bond auction went yesterday that saw weak bid-to-cover along with a plunging indirect bid (or lack thereof). Suddenly, foreign investors are shunning the long end.
US 30 Year Notes Bidder Participation for % of Indirect Bidders…
Why would you buy the long end when you can buy the front end where the Fed has your back? Also note per Quarles that when the Fed starts to buy Treasurys again via SOMA, the average maturity the Fed purchases will shift down more into the front end. Therefore, I am ok with taking partial profits and playing the range on the curve, but the long-term bull case for steepeners has only gotten better this week.
I wanted to highlight this one comment from Powell separately because I think it is vitally important. Chair Powell said:
“Do not assume the US Dollar status as a reserve currency is permanent.”
I mean….WOW! Does anyone recall a Fed chair outright talking down the Dollar like that? First I would say that is Gold bullish.
Gold is in the midst of forming a bull flag pattern. Depending on the breakout level of the flag, the target will be up around 1560ish…
Gold is in the midst of forming a bull flag pattern. Depending on the breakout level of the flag, the target will be up around 1560ish…
However let’s get to the heart of that statement. Powell was referring to the US fiscal deficit and what that would mean for the Dollar. The deficit has been increasingly coming up in Powell’s communication. He had it noted as a concern in his statement to Congress this week as well as in the Q&A.
“And I remain concerned about the longer-term effects of high and rising federal debt, which can restrain private investment and, in turn, reduce productivity and overall economic growth. The longer-run vitality of the U.S. economy would benefit from efforts to address these issues.”
This is the main point you should chew on this weekend; you may disagree with my data deterioration theme which gives the Fed reasons to cut, but do not miss this important point why the Fed will cut:
Rising deficits which causes increase treasury supply at a time when foreigners are losing their appetite to fund the US govt (as noted above in the bond auction) means the Fed needs to talk dovish/cut rates/provide accommodation/inject liquidity in order to keep yields from rising. We saw what happens when front end yields like 1y1y rise above 3% as it did in Q3 2018; the system breaks.
As I said in Tuesday’s note, we are seeing this issue play out in the FF/IOER spread whose widening is purely on the back of too much government debt sitting on bank balance sheets. The Fed is struggling to control front end rates and you cannot have rates rising or this whole economic cycle and market will fall apart.
The Fed has to ease, long-term economic trends show data deterioration, but there appears to be a bit of inflation creeping into the pipeline, i.e. stagflation. That all means steeper curves and now higher gold prices.
via ZeroHedge News https://ift.tt/32rdWbA Tyler Durden
Oracle shares tumbled on Friday after the networking giant lost a critical court case against the Pentagon and Amazon. The loss will allow the DoD to proceed with awarding a $10 billion contract to one of the two finalists – a group that includes Amazon and Microsoft.
Ever since the Pentagon named Amazon a finalist for the contract, critics have accused Amazon and the Pentagon of conflicts of interest, claiming that Amazon effectively secured the extremely lucrative project before the bidding even began. Earlier this week, WSJ publicized new evidence showing that senior Amazon executives met with senior DoD officials, including then-Defense Secretary James Mattis, to discuss the project before the bidding even began.
The Pentagon has already delayed its decision on who will get the contract to build the Pentagon’s new “war cloud” infrastructure, known as the Joint Enterprise Defense Infrastructure, or JEDI. And some suspected that the decision would be delayed yet again due to the court challenge.
Finishing JEDI is expected to take up to a year, making the winner of the contract a de facto long-term partner with the Pentagon and a major military contractor in their own right.
The computing project would store and process vast amounts of classified data, allowing the Pentagon to use artificial intelligence to speed up its war planning and fighting capabilities.
The court ruled in favor of the DoD and Amazon, saying Oracle had not met certain criteria when bids were due.
The JEDI decision is due next month, and the Pentagon confirmed that Microsoft and Amazon are the final two contenders.
At this point, if AWS gets the contract, the company and the DoD will be dogged by these suspicion, which could hurt Amazon’s chances. Despite Jeff Bezos’s highly visible feud with President Trump, it appears his company is still the front-runner to win the contract.
On May 24, Oracle filed an updated complaint with the US Court of Federal Claims alleging that the procurement process for JEDI had been rife with conflicts of interest.
Oracle alleged that at least two Amazon employees, Deap Ubhi (who was also briefly employed at the Pentagon before returning to Amazon) and Anthony DeMartino, improperly influenced the process to favor AWS at the expense of other competitors. Oracle claims these men helped influence the Pentagon’s decision to structure JEDI as a ‘winner-take-all’ contract, ensuring that Amazon, the cloud computing industry leader, would win the entire $10 billion. These claims have caught the attention of some lawmakers, who have started looking into the bidding.
At this point, it seems just as likely that the contract could go to Microsoft. That would be a major blow for AWS’s market leader status, and could impact the company’s revenue guidance and, ultimately, its share price. But Amazon is still the industry leader, and its lobbying efforts clearly ran pretty deep.
Bezos might still be able to pull it off, and in the process, gain access to the largest repository of classified defense-related intelligence this country has ever seen.
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The UK Is Staring Into The Abyss Of A Currency Crisis
The pound is slumping and yet its fundamental outlook gets even gloomier by the day.
When any asset moves in an almost-straight line for more than two months, there’s a natural instinct to wonder when the pullback is due. When it comes to sterling, there’s little indication the ongoing decline is stretched. Any relief rallies will likely be weak and brief.
The Bloomberg Pound Index has fallen on 38 of the past 48 trading days. Currency weakness is usually a good release valve for economic pressure, but all the signs are that it needs to fall much further.
The collapse in PMIs raises the specter the country is heading for recession.
Worryingly, consensus forecasts for the current-account deficit are widening rapidly, now at 4.2% for 2019, from a 3.7% projection only one month ago and a 3.25% prediction six months ago. This is reminiscent of an EM currency.
It’s not just the economics that are reminiscent of an emerging market, but the politics too. The man who polls indicate is almost certain be to the next leader of the country, Boris Johnson, is openly considering suspending Parliament and the democratic process even before he takes the reins. Many market participants are even more worried by the economic consequences of the opposition party taking power at some point.
Pound traders all must fear the seemingly inevitable position squeeze. But the point is that there’s really no silver lining to the cloud over sterling.
The U.K. is a leveraged economy with a large and growing current-account deficit, deeply negative real yields and poor growth.
On a trade-weighted basis, sterling looks set for record lows in the months ahead and, despite the substantial weakness already seen, the vulnerable side for a sudden gapping move is definitely down. Much further down.
via ZeroHedge News https://ift.tt/2G8pTty Tyler Durden
