Month: March 2018

Record Treasury Supply Sees Mediocre Demand For 2Y Auction As Yield Jumps

Having sold $96BN in 3 and 6-Month bills earlier today, moments ago the Treasury also sold another $30BN in 2Y Notes, bringing the total sold for the day to $126BN, and almost hitting the midpoint of this week’s record $294BN in Treasury issuance.

And, contrary to speculation by various commentators that there may not be enough demand for today’s issue, the 2Y auction priced without much difficulty. and aside for a modest 0.4bps tail, the issue was quite unremarkable with several metrics performing better than in February. Of note, the auction size of $30 billion stepped up from February’s 28 billion and more than the $26 billion in January, and was the most since June 2014.

The High Yield of 2.310% was higher than February’s 2.256% and tailed the 2.306% When Issued by 0.4bps. This was also the highest yield since August 2008.

The internals were stronger, with the bid to cover unexpectedly rebounding from 2.72 last month to 2.91 today, above the 6 month average of 2.80, even as Indirects pulled back modestly from 46.3% to 44.5%, while Directs took down 14.1%, above February’s 13.4%; Dealers were left with 41.3% of the award, above the 37.9% 6 month average award.

Overall, a slightly better than mediocre auction, as the market refuses to choke on the record supply of paper created by the US government.

 

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May Fearmongers Russian Threat As Moscow Claims Nerve Agent Also Developed By US

UK Prime Minister Theresa May stood up to update the House of Commons following her visit to Brussels, where she successfully made her case against Russia.

“No other country has the capability, intent, or motive for the attack.”

Which failed still to provide actual evidence.. but one could argue – if one were so inclined – that Washington (or its NATO generals) have the capability, intent, and motive to undertake such a messy attack.

To cheers, she said:

“Today 18 countries have announced their intention to expel more than 100 intelligence officers” in what she described as the “largest collective expulsion of Russian intelligence officers in history.”

She warned that the “challenge of Russia is one that will endure for years to come.”

May insists she has been led by evidence not speculation:

“We have information indicating that Russia has investigated ways of delivering nerve agent and has stockpiled small amounts of novichoks.”

Additionally, she said 130 people in Salisbury may been exposed to the agents used and that Russia came up with “preposterous theories.”

However, as May makes her case – ever more Colin-Powell-like – a Russian official claims that the United States was developing a similar if not identical nerve agent in the 1990s as the one which was used on Russian double-agent Sergey Skripal and his daughter Yulia Skripal.

The claim was made by Igor Rybalchenko – head of the laboratory for chemical and analytical control of the scientific center of the Russian Defense Ministry, who says – without evidence (as are the UK’s claims against Russia), that the A-234 compound in the “Novichok” family of nerve agents was published into a database maintained by the National Bureau of Standards (NBS).

“The fact is that back in 1998 when we looked through another version of the spectral library, which was published by the National Bureau of Standards of the United States (NBS), we found a substance there that we found interesting since it was an organophosphorus substance. And we realized that it must have a strong lethal effect. Now it turns out that, judging by the name of this substance, it was just the same nerve agent, A-234,” Igor Rybalchenko said. –Sputnik

The substance was said to be heavy and volatile based on its molecular formula and molecular weight, and that it was also available at the UK’s Porton Down laboratory. 

“I affirm that it exactly corresponds to the formula published by Mirzayanov (Vil Mirzayanov, a Soviet chemist who moved to the USA and the author of the book on the A-234 gas). The chemical name of this substance is A-234 and was named “Novichok” by Boris Johnson, as a substance available in the Porton Down laboratory,” Rybalchenko said.

That said, due to the fact that the Novichok’s chemical structure was never formally classified, according to Professor Alastair Hay at Leeds University, it’s possible that the UK has some of the agent. 

It is quite likely that some government laboratories made minute quantities and storied their characteristics in databases, so that their identity could be confirmed at a later stage if found as an unknown poison in someone’s blood, he adds.

Whether this has happened in the UK’s chemical defence laboratory is not known. –BBC

The UK has brushed off Moscow’s allegations that it could have produced the toxin as “absolute nonsense,” as the Kremlin has also made similar claims that Novichok has been produced in Sweden, Slovakia and the Czech Republic – all of which have denied doing so.

Russia’s ambassador to the U.N. has insisted that the development of Soviet-era nerve agents ceased in 1992, and that existing stockpiles were destroyed in 2017. 

Moreover, Rybalchenko says that the substance was added to the U.S. database by a member of the Army Armament Research and Development Center.  

“The most interesting detail in this story is in the following versions of the database, which usually only expand, they are constantly replenished, more and more substances, we did not find this record. And I can’t explain where is it now,” the Russian military chemist said.

In other words – you’ll have to take his word for it unless evidence of the entry in the 1998 database surfaces.

Trump plans expulsion

On Friday, French President Emmanuel Macron and German leader Angela Merkel said that following a meeting of the European Council, that UK PM Theresa May had shared “proof” of Russia’s involvement in the assassination attempt against former Russian spy Sergei Skripal and his daughter, “convincing” the two leaders that Russia was behind the attack. 

What’s a bit disturbing is that May’s “proof” – which is being used to justify punitive action against Russia, has yet to be shown to the public. Moreover, the world leaders have all decided that Russia is “the only reasonable culprit.” In other words, the Kremlin used a poison that would very clearly identify them as the culprits – instead of perhaps a more common and less attributable method of assassination. Makes sense if the plan was to get caught. 

Meanwhle, Russia’s embassy in the UK has been demanding that London produce the complete UK info on “Skripal’s Case” and disclose details on a program to produce weapons-grade toxic substances in Porton Down. The UK has so far refused to comply.

As a result, Bloomberg reports that President Donald Trump is “preparing to expel dozens of Russian diplomats from the U.S.” in response to the nerve-agent poisoning of a former Russian spy in the U.K.” 

Quoting two people “familiar with the matter”, Bloomberg reports that Trump agreed with the recommendation of advisers and the expulsions are likely to be announced on Monday. And while the aides said that Trump is prepared to act, he wants to be sure European allies will take similar steps against Russia before he does so, which could be problematic since Russia controls roughly a third of Europe’s natural gas supplies and thus the volume of any potential response (and also why despite “proof”, Europe responded with nothing more than a harshly-worded statement).

Among the advisors that Trump approached on Friday to discuss the matter were U.S. Ambassador to Russia Jon Huntsman, Treasury Secretary Steven Mnuchin, Commerce Secretary Wilbur Ross, Attorney General Jeff Sessions, Defense Secretary James Mattis, Director of National Intelligence Dan Coats, outgoing National Security Adviser H.R. McMaster and others.

In other words, the West is now punishing Russia in an “open-and-shut” case with zero evidence released to the public for examination. 

What’s weird is that Skripal, according to The Telegraph, was friends with an employee of Christopher Steele, the former U.K. spy who assembled the Trump-Russia dossier. 

If, as The Telegraph reported, Skripal assisted Steele in compiling the dossier – which notably relies on senior Russian officials, despite Steele never having traveled to Moscow – according to testimony by Glenn Simpson of Fusion GPS, it could explain the motive behind the assassination attempt in Salisbury town centre. 

Valery Morozov, a former construction magnate who fled Russia after revealing corruption, claimed last night that Col Skripal, 66, was still working, and remained in regular contact with military intelligence officers at the Russian embassy. That would raise the possibility that he was still feeding intelligence to people in this country.

Mr Morozov said that, as a result, he had decided to steer clear of Col Skripal for his own safety. He told Channel 4 News: “If you have a military intelligence officer working in the Russian diplomatic service, living after retirement in the UK, working in cyber-security and every month going to the embassy to meet military intelligence officers – for me, being a political refugee, it is either a certain danger or, frankly speaking, I thought that this contact might not be very good for me because it can bring some questions from British officials.” –Telegraph

Go into your mind palace and consider something which may warrant at least a cursory investigation by UK authorities… If Skripal was friends with Christopher Steele’s employee, it stands to reason that it’s within the realm of possiblity that Skripal was Steele’s source for the “senior Russian officials” cited in the Trump-Russia dossier. If Skripal was the source, anyone connected to the creation, funding or distribution of the Trump-Russia dossier would probably be OK if he disappeared and was unable to testify to his actions. 

Or, Moscow decided to get revenge on Skripal eight years after voluntarily giving him to the UK in a 2010 spy exchange – and when choosing how to assassinate the former (?) double-agent, the Kremlin used a nerve agent which would have led directly back to them. 

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Kim Jong Un Takes Mystery, High Security Train To Beijing For Surprise Visit

Kim Jong Un has made an unexpected visit to Beijing in his first known trip outside North Korea since taking power seven years ago, according to unconfirmed media reports.

Mystery train in 2010

Hours ago, footage of a mysterious, high security train was captured entering Beijing – leading to speculation that it may have been the North Korean leader. 

So far, further details of the visit, including how long Kim would stay and who he would meet, were not available according to Bloomberg.

The special train may have carried Kim through the northeastern Chinese border city of Dandong, Japan’s Kyodo News reported earlier. Nippon TV showed footage of a train arriving Monday in Beijing that looked similar to one used by Kim’s father, Kim Jong Il, to visit the Chinese capital shortly before his death in 2011, Bloomberg adds.

The train’s arrival was said to have “disrupted the whole railway schedule for northeast China, and people are observing that and drawing conclusions about who might be on that train,” according to Yun Sun, a North Korea and China expert at the Stimson Center who spoke with Business Insider. 

It would “make perfect sense” for Kim to travel to Beijing “using father’s armored train,” tweeted O’Carrol, who said the rout was well-tested by North Korean security and that the blackout on state media covering the trip was consistent with trips his father, Kim Jong Il, made to Beijing.

Of note, China is North Korea’s main trading partner, and lifeline to trade with the outside world. Kim Jong Un has reportedly turned down offers to visit Beijing in the past, however that’s all changed with recent geopolitical rumblings.

The surprise visit comes weeks after President Trump’s decision to grant an unprecedented meeting to Kim, following meetings by South Korean envoy Chung Eui-Yong, who brokered the upcoming talks. During the trip to Pyongyang, the envoys became the first South Korean officials to meet with Kim since he took power in 2011.

The South Korean envoys announced that Kim told them he is willing to begin negotiations with the United States on abandoning nuclear weapons and that he would suspend all nuclear and missile tests while engaged in talks. 

While the Trump administration greeted the offer cautiously, expressing both hope that talks can happen and skepticism at Kim’s sincerity, Trump “appreciated the briefing and said he would meet Kim Jong Un by May to achieve permanent denuclearization.”

Prior to meeting with Trump, Kim was expected to first meet with South Korea’s President, Moon Jae-in, near their shared border. As Bloomberg notes, Ties between China and North Korea — neighbors and allies during the Cold War — have been strained as China backed progressive rounds of United Nations sanctions against the country’s weapons program. Business Insider’s Alex Lockie asks the question: Did Trump make this happen?

Sun said that China has attempted to meet with Kim in the past, but rising tensions as North Korea’s nuclear testing heated up derailed the preparations and deteriorated bilateral relations. Previously, China saw Kim as defiant and abusing Beijing’s support for the country, and denied them “the honor, the validation, of having a meeting” with Xi.

“The only variable has changed,” in the Pyongyang-Beijing relationship, according to Sun, is that Trump accepted a face-to-face meeting with Kim, which she said may have “motivated the Chinese to change their mind.”

Also, North Korea may not be able to handle a summit with Trump on their own, and China has a good deal of anxiety about being left out of diplomatic efforts between Pyongyang and its adversaries, according to Sun.

In any case, the train’s journey to Beijing fits the profile of Kim family visits to China’s rulers in the past, and makes sense from both the Chinese and North Korean sides in the run up to attempting diplomacy with Trump face-to-face. –Business Insider

The meeting between Kim Jong Un and China’s President Xi follows President Trump’s visit to Beijing four months ago, and comes on the heels of China’s saber rattling over Taiwan and an ongoing military buildup. It stands to reason that Xi and Kim are getting their ducks in a row before “great negotiator” Trump sits down at the table with the North Korean leader.

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“Tesla, Without Any Doubt, Is On The Verge Of Bankruptcy…”

Authored by Simon Black via SovereignMan.com,

Just a few days ago, shareholders of Tesla approved an almost comical pay package for their cult leader CEO Elon Musk that could potentially put $50 BILLION in his pocket over the next decade.

Let’s put this figure in perspective: at $5 billion per year, Musk would make more than every single CEO in the S&P 500. COMBINED.

In other words, if you add up the salaries of all the CEOs of the 500 largest companies in America, it would still be less than the $5 billion per year that Mr. Musk stands to earn.

That’s pretty astounding given that Tesla’s own 2017 4th quarter financial report (page 24) states that Elon “does not devote his full time and attention to Tesla”.

Or more importantly, that under Musk’s leadership, Tesla’s chronic financial incompetence has racked up more than $4.97 billion in operating losses for its shareholders.

Or that the company has been under SEC investigation (without bothering to disclose this fact to shareholders).

Yet they saw fit to reward him with the largest CEO pay package in the history of the world.

This is precisely the type of behavior that is only seen during periods of extreme irrationality when financial markets are at their peak… and poised for a serious correction.

I’ll close this brief letter today quoting John Thompson, Chicago-based value investor and Chief Investment Officer of Vilas Capital Management.

Thompson is one of the few hedge fund managers who has consistently outperformed the market, and his fund is betting big against Tesla. What follows are some passages about Tesla from Thompson’s recent investor updates:

I think Tesla is going to crash in the next 3-6 months. . .

. . . partially due to their incompetence in making and delivering the Model 3, partially due to falling demand for the Model S and X, partially due to the extreme valuation, partially due to their horrendous finances that will imminently require a huge capital raise, partially due to a likely downgrade of their credit rating by Moody’s from B- to CCC (default likely) which should scare their parts suppliers into requiring cash on delivery (a death knell), partially due to the market’s recent falling appetite for risk, and partially due to our suspicions of fraudulent accounting activities, evidenced by 85 SEC letters/investigations and two top finance people leaving in the last month. . .

Tesla, without any doubt, is on the verge of bankruptcy.

The company cannot survive the next twelve months without access to capital from Wall Street Banks or private investors.

We estimate that Tesla will need roughly $8 billion in the next 18 months to fund operating losses, capital expenditures, debts coming due, and working capital needs.

However, it appears that due to past SEC investigations and current investigations (which terrifyingly have not been disclosed by the company), it will likely be difficult for Tesla to access public markets.

According to a recent analyst report, there have been 85 SEC requests for additional information and disclosures in the last 5 years.

This compares to Ford Motor Company’s total of zero over the same time frame. This means that Tesla is pushing many, many boundaries.

When a company is under formal investigation, it is difficult, if not impossible, to raise capital from public markets as these investigations must be made public, which generally craters the equity and debt values.

Therefore, Tesla investors better hope there are a number of Greater Fools in China or elsewhere to keep the company solvent.

At some point, the music stops and there aren’t any open chairs.

No matter how good a social investment makes you feel as it is going up, extreme anger will result if most or all of your money is permanently lost, especially when it is due to false and misleading statements by senior company officers.

This is when the [Department of Justice] steps in and escorts untruthful managements to their new living quarters.

. . . As a reality check, Tesla is worth twice as much as Ford* yet Ford made 6 million cars last year at a $7.6 billion profit while Tesla made 100,000 cars at a $2 billion loss.

Further, Ford has $12 billion in cash held for “a rainy day” while Tesla will likely run out of money in the next 3 months.

. . . I have never seen anything so absurd in my career.

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BofA: We Are Witnessing The Third Biggest Assset Bubble Created By A Central Bank

In its scramble to reflate the biggest asset-bubble in hopes of inflating away the $233 billion in global debt, which at 318% of world GDP has never been higher, the Fed took a wrong turn somewhere, and instead of successfully sending “inflation” assets into the stratosphere, it successfully “reflated” deflationary assets.

Commenting on this divergence, BofA notes that while we are now in the second longest US equity bull market of all time…

… the bull market leadership has been in assets that provide scarce “growth” & scarce “yield”. Specifically, the “deflation” assets, such as bonds, credit, growth stocks (315%), have massively outperformed inflation assets, e.g., commodities, cash, banks, value stocks (249%) since QE1. At the same time, US equities (269%) have massively outperformed non-US equities (106%) since launch of QE1

And, as happens every time the Fed tries to manage asset prices, it has blown another  bubble.

As BofA’s Michael Hartnett writes, the “lowest interest rates in 5,000 years have guaranteed a melt-up trade in risk assets”, which Hartnett has called the Icarus Trade since late 2015, and points out that the latest, “e-Commerce” bubble, which consists of AMZN, NFLX, GOOG, TWTR, EBAY, FB, is up 617% since the financial crisis, making it the 3rd largest bubble of the past 40 years, and at this rate – assuming no major drop in the 6 constituent stocks – the e-Commerce bubble is set to become the largest bubble of all time over the next few months.

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US Charges 9 Iranians With Hacking Into Hundreds Of Universities, Gov’t Agencies

Via Middle East Monitor,

The United States on Friday charged and sanctioned nine Iranians and an Iranian company for attempting to hack into hundreds of universities worldwide, dozens of firms and parts of the US government, including its main energy regulator, on behalf of Tehran’s government between 2013 to 2017.

US officials claimed that the nine Iranian worked on behalf of the Iranian Revolutionary Guards to carry out the hacking.

The US Treasury Department said it was placing sanctions on the nine people and the Mabna Institute, a company US prosecutors characterised as designed to help Iranian research organisations steal information. It is unlikely that the accused Iranians would be prosecuted in an American court because there is no extradition treaty between the US and Iran.

According to the Justice Department, the group breached computer systems at 144 American universities and 176 universities in 21 other countries, 47 American and foreign companies, the US Department of Labour, the Federal Energy Regulatory Commission, the State of Hawaii, the State of Indiana and the United Nations.

US Deputy Attorney General Rod Rosenstein said the nine Iranians were considered fugitives who may face extradition in more than 100 countries if they travel outside Iran.

US Deputy Attorney General Rod Rosenstein said:

“The Department of Justice will aggressively investigate and prosecute hostile actors who attempt to profit from America’s ideas by infiltrating our computer systems and stealing intellectual property.”

The case “will disrupt the defendants’ hacking operations and deter similar crimes,” he added.

The hackers were not accused of being directly employed by Iran’s government. They were instead charged with criminal conduct waged primarily through the Mabna Institute on behalf of the Islamic Revolutionary Guard Corps, the elite military force assigned to defend Iran’s Shia theocracy from internal and external threats.

In Tehran, Iran’s foreign ministry spokesman Bahram Qasemi denounced the move as “provocative, illegitimate, and without any justifiable reason and another sign of the hostility of the (US) ruling circles towards the Iranian nation”, state news agency IRNA said.

The targeting of the Federal Energy Regulatory Commission, or FERC, was a matter of special concern, US Attorney Geoffrey Berman said, because it oversees the interstate regulation of energy and holds details of some of the country’s “most sensitive infrastructure.”

Hackers targeted email accounts of more than 100,000 professors worldwide, half in the United States, and compromised about 8,000, prosecutors said. Hackers also targeted the US Labour Department, the United Nations and the computer systems of the US states Hawaii and Indiana, prosecutors said.

Friday’s actions are part of an effort by senior cyber security officials at the White House and across the US government to blame foreign countries for malicious hacks.

They were announced a day after US President Donald Trump named John Bolton, a former US ambassador to the United Nations who is deeply skeptical of the 2015 international nuclear accord with Iran, as his new national security adviser.

Trump himself has repeatedly cast doubt on the nuclear deal, in which the US and other world powers eased sanctions in exchange for Tehran putting limits on its nuclear program.

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European Stocks Enter Correction As Bank-Battering Continues

Europe’s Stoxx 600 index is now down over 10% from its January highs, officially entering correction…

As (major exporter) Germany leads the drop this month…

 

And bank stocks continues to get battered…

Though we note that the last two weeks have seen US banks underperform EU, as credit risk spikes on global funding stress…

 

 

 

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A One-Page Provision About Minor League Baseball Shows How Broken Congress’ Legislative Process Is

An excellent example of the screwy process that led to the omnibus budget bill that passed last week—and of the ways special interests can manipulate that process—is the inclusion of a provision that exempts minor league baseball players from federal minimum wage laws and laws regarding overtime pay.

The provision has little, if anything, to do with the federal budget. But it is by no means insignificant. Major League Baseball successfully lobbied for its inclusion in the omnibus bill as a way to codify a longstanding de facto exemption and to undermine a lawsuit being brought by several players who argue they are due additional pay under federal rules, according to The Washington Post, which first reported on the provision’s inclusion in the omnibus.

In other words, Congress bowed to the wishes of a powerful special interest and used the federal budget bill to put a big thumb on the scale of a lawsuit that has nothing to do with the budget. It did all that as part of a piece of legislation that totaled more than 2,200 pages and was made public just over a day before both chambers passed it. The baseball provision is found on page 1,967 of the bill, tucked in between a grant for increasing background checks for people who work with children and a grant to “protect young athletes from abuse.”

The language included in the budget omnibus was lifted from a bill introduced by Rep. Brett Guthrie (R-Ky.), called the “Save America’s Pastime Act.” The bill did not get any cosponsors and has not received so much as a committee hearing or a vote. Yet it’s now law.

It’s an example of “how our government is operating right now,” Garrett Broshius, a minor league player turned attorney who is the players in their lawsuit, told Bloomberg Law. “You have billionaires lobbying on something proposed in secret and rushed into a spending bill even though it has nothing to do with spending.”

In the suit filed against Major League Baseball and its minor league affiliates, players argue that some athletes make as little as $3,000 for a season that lasts about five months. Ballplayers have been exempted from federal minimum wage laws in the past because they’ve been considered employees of an “amusement or recreational establishment.” The players were challenging that de facto arrangement (which dates back to 1922), but Congress’ action last week means the arrangement is no longer de facto and the lawsuit is likely to fail now.

This doesn’t mean—as Mother Jones and others have suggested—that Congress has condemned minor league ballplayers to work for “poverty wages.” No one is forcing anyone to become a minor league baseball player, nor to sign a $3,000 contract for five years of work. Each player chooses to work for those terms, and most are doing so in hopes of reaching the major leagues and getting a much larger paycheck in the future. There are many circumstances in which people might choose to defer compensation in the present for the promise of greater opportunity.

It’s also not clear to me that the ballplayers were headed toward victory in their lawsuit before Congress stepped in. Courts had been split, so far, on the question of whether minor league ballplayers are amusement or recreational employees—certainly, professional ballplayers, even minor league ones, don’t have much in common with most people who fall into this class, which is mostly reserved for summer jobs and the like—and the two lawsuits have progressed slowly since they were launched in 2014.

Yet Congress’ decision to kneecap those lawsuits and include the minimum wage rider in the omnibus bill is still a mistake, one that highlights just how broken the legislative process is.

If Congress believed legislation was necessary to address the situation raised by the ballplayers’ lawsuit, it should have crafted that legislation in an open and honest process, with all interested parties having an opportunity to have their say. Instead, lawmakers slipped a bill that had zero co-sponsors into massive, completely unrelated piece of legislation and didn’t allow any time for debate or amendments.

This sort of thing happens all the time, but that’s no excuse. Every time it happens, the same message gets sent: If you have the money and resources to lobby Congress, you can short-circuit the legislative process and get what you want.

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The Fed’s Dot Plot Would Bury The Indebted US Consumer

Authored by Chris Wood via Grizzle.com,

The new Federal Reserve chairman’s first FOMC meeting last week, and subsequent press conference, confirmed that Jerome Powell is not an egghead obsessed with macroeconomic models. This is refreshing given the highly academic nature of his predecessors Janet Yellen and Ben Bernanke, and suggests that he will alter his view on the economy based on the reported data rather than theoretical projections of the future.

This also suggests that the so called ‘dot plots’, which are nothing more than the forecasts of individual Fed governors, should become less important. But for now the financial markets will still pay attention to those dots, most particularly as they are showing three rate hikes next year on top of the three projected this year (though that three has nearly become four).

Fed Dot Plot: FOMC Members’ Fed Funds Rate Forecasts

Note: Based on midpoint of Fed funds rate target range. Red dots denote median forecasts. Source: Federal Reserve

The ‘Dot Plot’ Would Bury the Indebted US Consumer

This would take the upper end of the federal funds rate target range to 3.0% by the end of 2019. That is a level of interest rates which Grizzle has a hard time believing will happen given the sensitivity of the indebted American economy to higher interest rates.

But if short-term rates really go that high, the view here is that the yield curve will by then have inverted in terms of short-term interest rates moving above long-term interest rates. On this point, the yield curve has already begun to flatten again of late. The spread between the 10-year and the 2-year Treasury bond yields has declined from a recent high of 78bp reached in mid-February to 54bp (see following chart).

US Yield Curve (10Y – 2Y Treasury Bond Yields)

Source: Bloomberg

Weak US Dollar Despite Hawkish Fed

Meanwhile, it remains remarkable how the US dollar still cannot rally given the relative optimism on the American economy suggested by this week’s Fed statement and given the hawkish signal provided by the ‘dots’ with the US Dollar Index declining by 0.9% since the Fed rate hike on Wednesday. This is a further sign that investors should continue to assume for now that the US dollar remains weak (see following chart), which remains a positive for emerging markets.

US Dollar Index

Source: Bloomberg

It is also not bullish for the dollar that the US Dollar Index speculative net futures position has switched from a net short of 5,787 contracts in late January to a net long of 847 contracts in the week ended 13 March (see following chart).

CFTC US Dollar Index (DXY) Speculative Net Futures Positions

Source: US Commodity Futures Trading Commission (CFTC), Bloomberg

Rate Hikes Have Been a Catalyst for Gold

It is also interesting how the gold price rallied by US$21 on the day of the Fed rate hike. This follows a pattern whereby gold sells off prior to monetary tightening and then rallies on the news. Indeed gold has rallied on each of the six rate hikes that have taken place so far in this Fed tightening cycle which began in December 2015 (see following chart).

The obvious reason for gold’s relative resilience this year despite rising Fed tightening forecasts is the weak dollar and the growing belief that inflation is returning. But, whatever the reason, Grizzle remains positive on the yellow metal.

If inflation really returns, an outcome about which skepticism is maintained here, gold will clearly do well. If it does not, then Fed policy is going to reverse dramatically since there is no way the indebted American economy can handle the higher level of real interest rates implied by the above mentioned ‘dots’.

Gold Bullion Price and Fed Rate Hikes

Source: Federal Reserve, Bloomberg

US Economic Data — Examining Case For Monetary Tightening

Meanwhile, the latest American wage data has, for now at least, eased monetary tightening concerns. This is because wage growth slowed. US average hourly earnings rose by 2.6%YoY in February, down from a downward revised 2.8%YoY in January (see following chart).

US Average Hourly Earnings Growth and Change in Nonfarm Payrolls

Source: US Bureau of Labour Statistics

It is also a positive that job growth picked up markedly and the non-participation rate declined. Nonfarm payrolls increased by 313,000 jobs in February, up from 239,000 in January — the biggest increase since July 2016. Also, Americans not in the labour force declined from a record 95.7 million in January to 95.0 million in February, while the labour force participation rate increased from 62.7% to 63% (see following chart). This is a reminder that there remains considerable slack in the American labour market despite all the talk of “full employment”.

US Labour Force Participation Rate and Americans Not in the Labour Force

Source: US Bureau of Labour Statistics

The next average hourly earnings growth data will be reported on April 6th. Meanwhile, if a guess had to be made as to the timing of the next monetary tightening scare, it would be the announcement of core CPI for March due on April 11th. This is because the base effect suggests that this month should show the greatest statistical evidence in 2018 of a pickup in price pressures.

Core CPI declined by 0.1% MoM in March 2017, the only monthly decline in 2017. As for the February CPI inflation, core CPI inflation remained unchanged at 1.8% YoY, still below the Fed’s 2% target (see following chart).

US Core CPI Inflation

Source: Bureau of Labour Statistics

Investors should also be aware that offshore dollar rates have picked up in recent weeks resulting in a widening of the so-called ‘Ted spread’ — which is the spread between the 3-month Libor and the 3-month Treasury bill rate.

The 3-month Libor has risen by 58bp so far this year to 2.27%, while the Ted spread has risen from a low of 18bp in mid-November to 56bp (see following chart).

The best guess as to why this is happening is due to the dollar funding pressures created by the repatriation of offshore US corporate cash as a result of the one-off tax rate offered to American corporates under the Trump administration’s tax reform to incentivize them to repatriate the estimated US$2.6 trillion of cash they hold offshore.

Three-month USD Libor and the TED Spread

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