Tag: finance

Authored by Steve H. Hanke of the Johns Hopkins University. Follow him on Twitter @Steve_Hanke.

Why was the Great Depression so deep, and why did it drag on for so long? According to impressive research by Robert Higgs of the Independent Institute, it was because President Roosevelt abandoned his campaign promises of 1932: to cut federal spending, to balance the budget, to maintain a sound currency, and to rein in Washington’s bureaucracy. Instead, Roosevelt switched gears. Roosevelt and the Congress, according to Higgs, produced a “bewildering, incoherent mass of new expenditures, taxes, subsidies, regulations, and direct government participation in productive activities . . . . The New Deal created so much confusion, fear, uncertainty, and hostility among businessmen and investors that private investment and hence overall private economic activity never recovered enough to restore the high levels of production and employment enjoyed during the 1920s.”

Crucially, the economy failed to add anything to its capital stock between 1930 and 1940, when the net private investment for that period totaled a minus $3.1 billion.

Higgs’ granular analysis of this collapse in private investment led him to introduce and test a new concept: “regime uncertainty.” Higgs’ regime uncertainty is, in short, uncertainty about the course of economic policy — the rules of the game concerning taxes and regulations, for example. These rules of the game affect the net benefits and free cash flows investors derive from their property. Indeed, the rules affect the security of their property rights. So, when the degree of regime uncertainty increases, investors’ risk-adjusted discount rates increase and their appetites for making investments diminish.

Since the Great Recession of 2009, regime uncertainty has been elevated. This has been measured by Scott R. Baker of Northwestern University, Nicholas Bloom of Stanford University and Steven J. Davis of the University of Chicago. Their “Economic Policy Uncertainty Index for the U.S.” measures, in one index number, Higgs’ regime uncertainty. In addition, there is a mountain of other evidence that confirms the ratcheting up of regime uncertainty during the tenures of Presidents George W. Bush and Barack Obama. For example, Pew Research Center surveys find that the percent of the public that trusts Washington, D.C. to do the right thing has fallen to all-time lows.

So, President Trump has inherited a legacy of regime uncertainty, which has caused both private investment and productivity to sag. Trump’s challenge will be to reduce regime uncertainty, and also introduce tax and regulatory policies that encourage private investment. If he fails, private investment and productivity will continue their downward secular trends, and the economy will continue to underperform.

Just how bad is Trump’s inherited legacy? As the accompanying chart shows, gross private domestic business investment, which does not include residential housing investment, has rebounded modestly since the Great Recession. But, most of this gross investment has been eaten up in the course of replacing capital that has been used up or became obsolete. Indeed, the private capital consumption allowances shown in the chart are huge. While these capital consumption figures are approximate, they are large enough to suggest that there is little left for net private business investment. This means that the total capital stock, after actually shrinking in 2009, has grown very little since then. This is bad news, as productivity is dependent on the quality and size of the economy’s private capital stock.

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Four people were stabbed during a fight outside a Midtown public school Wednesday, the NY Daily News reported. The attack took place at Public School 35 at on W. 52nd St. near Eighth Ave. at about 1:45 p.m, and the NYPD was on the spot.

Manhattan: West 52 St & 8th Ave, Active Crime scene in regards to 4 Students stabbed inside at PS35 public school. #BREAKING

— NYC Scanner (@NYScanner) May 24, 2017

NYC Police, cited by Bloomberg, said that three teenagers were stabbed on a street near the Theater District during a fight among students at a nearby school. The stabbing happened in midtown Manhattan, just around the corner from the new Broadway production of “Groundhog Day.”

Police have identified a suspect as a 16-year-old boy wearing a red hat. The attacker fled the area, heading downtown from the scene. An NYPD Level 1 Mobilization was requested, and a crime scene was secured. Heavy traffic was reported in the area.

Authorities say the victims are a 16-year-old boy with a stab wound to the stomach, a 17-year-old boy with a slash on his ear and an 18-year-old with a wound on his arm. Authorities say the victims are expected to live.

A call to the state Department of Education wasn’t immediately returned.

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Authored by Pater Tenebrarum via Acting-Man.com,

Money Supply and Credit Growth Continue to Falter

The decline in the growth rate of the broad US money supply measure TMS-2 that started last November continues, but the momentum of the decline has slowed last month (TMS = “true money supply”).  The data were recently updated to the end of April, as of which the year-on-year growth rate of TMS-2 is clocking in at 6.05%, a slight decrease from the 6.12% growth rate recorded at the end of March. It remains the slowest y/y growth since October of 2008, when the Fed had just begun to pump quite heavily.

 

US money supply and credit growth keep slowing.

 

The monthly y/y growth rate of M1 fell rather more sharply in April, from 8.76% to 7.07% (the most recent weekly annualized growth rate is lower at 6.80%). The composition of M1 is close to, but not quite equal to narrow money AMS (or TMS-1) – in particular, it does not contain the balances held at the Treasury’s general account with the Fed.

As a result, the growth rates of the two measures have drifted apart more sharply since 2016 than they usually do, as there were huge swings in the Treasury’s general account from mid 2016 to early 2017. These swings were very likely connected with money market funds moving large amounts of dollars from the euro-dollar market into treasury bills.

Reports by the Treasury Borrowing Advisory Committee suggest that the topic was on the agenda for a while. The surge in demand from MM funds may well have been accommodated by an increase in debt issuance, which the growing cash hoard mirrored.

 

Monthly y/y growth rates of TMS-2 and M1 – TMS-2 growth remains at the lowest level since October 2008 – click to enlarge.

 

One reason to look at M1 as well is that it shows a slowdown in growth even without taking the above mentioned fluctuations in Treasury deposits into account (these remained at odds with deposit money growth even when the treasury drew its balances down again in Q1 2017; we have yet to find out why, but the fact is that there was no commensurate increase in deposit money at US banks).

A continued slowdown in bank credit growth is undoubtedly the culprit. The next chart compares weekly y/y M1 growth with the y/y growth rate of commercial and industrial loans (which is also made available weekly) as of the first week of May.

C&I lending grew at 2.01% according to the latest reading, which represents a new post GFC recovery low. Total bank credit growth kept declining as well, but growth in business loans is in our opinion the most important component of bank lending growth.

 

Weekly y/y growth rate of M1 and commercial & industrial loans –  the latter has hit a new post GFC recovery low of 2.01% – click to enlarge.

 

The next chart shows the ratio of capital goods vs. consumer goods production, a rough measure of which parts of the production structure tend to be stronger magnets for investment (the usual caveats regarding the flaws of such statistical aggregates apply). The ratio remains elevated, but it has faltered after peaking in 2014, in line with the tapering/ end of QE3 and the subsequent collapse in oil prices – which evidently had a sizable effect on capital goods production.

 

Capital vs. consumer goods production. Recessions are characterized by sharp downturns in this ratio, as malinvestments are liquidated. As a rule, these are concentrated in the higher order stages of the production structure. The downtrend since 2014 was relatively mild, but the recent recovery seems to be faltering already – in spite of a big surge in oil drilling-related investment in Q1. If money supply growth keeps slowing down, an accelerated decline in the ratio will eventually take hold. These phases are usually associated with sharp declines in asset prices – click to enlarge.

 

A Really Good Reason for Concern

Normally the above data points would not give cause for a lot of concern regarding the timing of the next boom-bust tipping point just yet. There is one major reason though why they should, apart from the ominously sharp decline in federal tax receipts we have shown here.

The effect of the post GFC money supply expansion on asset prices was extreme (note: the cumulative increase in TMS-2 since early 2008 amounts to roughly 140%). That introduces a vulnerability that might otherwise not exist, mainly because economic confidence is very closely correlated with asset prices.

The following chart from John Hussman illustrates the situation. In terms of the median price/revenue ratio of S&P 500 components, the stock market is currently more overvalued than ever.

 

S&P 500 Index components, median price/revenue ratio. The extreme overvaluation at the peak in 2000 in terms of the P/E ratio was caused by a relatively small number of big cap tech stocks. The chart above inter alia suggests that overvaluation is far more widespread this time – there will hardly be anything worth “rotating” into once a decline in stock prices begins – click to enlarge.

 

The current S&P 500 trailing P/E ratio of roughly 24 is certainly not threatening the record high established at the peak of the tech mania in 2000, but in terms of the indicator shown above, valuations have moved well beyond good and evil. “Where precisely is that?”, we hear you ask. Before we get to that, we want to briefly comment on what else the above chart tells us.

 

Mean and Reversion-Prone

The fact that the SPX trailing P/E ratio is historically extremely elevated, but still a good sight below its year 2000 record high of ~46, while price/ revenue ratios have streaked to a comparatively much higher level, indicates that profit margins are at an extremely high level as well.

Profit margins tend to fluctuate, i.e., they are the kind of datum that mean-reverts with unwavering regularity. Reportedly there is growing belief in a “new era” bereft of the mean-reversion concept, which we think can be safely dismissed. As John Hussman notes in this context:

Because profit margins are systematically elevated at cyclical economic peaks, raw earnings-based measures invariably reassure investors that extreme stock market levels are really not as dangerous as they seem. As Ben Graham warned decades ago, “The purchasers view the good current earnings as equivalent to ‘earning power’ and assume that prosperity is equivalent to safety.”

This has of course happened many times in the course of market history, and every time someone came forward to explain to the investoriat why higher profit margins (and by implication significantly overvalued stock prices) would be permanent this time. Usually these explanations were provided shortly before it turned out they were not permanent after all.

Assuming that this historical tendency remains operative – and there is no good reason to expect otherwise – feeling “comfortable” with a trailing P/E ratio of 24 and a Shiller P/E ratio of ~29 strikes us as quite audacious.  The latter by the way represents a new high for the move, exceeded only by the feverish readings taken at the 1929 and 2000 peaks (~32 and 44). In fact, very high profit margins make an overvalued market even more dangerous, precisely because they won’t stay where they are.

So where is the realm that is “beyond good and evil”? Much of our understanding of higher dimensional environments was unfortunately lost when we slipped on an Enrique surface in spite of its Ricci flatness. An entire canonical bundle of it – trivial, but useful – fell into a six-dimensional Calabi-Yau manifold, where it is busy conjecturing ever since. Sadly, it is fated to eventually decompose.

But here is a wild guess anyway. Stock market valuations have reached the dimension in which this guy lives:

 

Some of our readers surely remember the clown with the hard to pronounce name, who reportedly lives in a higher-dimensional space beyond human ken. That is where the stock market’s median price/revenue ratio now lives as well. It is to be feared that it will one day return to Earth with thud.

 

Conclusion

Slowing money supply and credit growth and historically extremely high stock market valuations far more often than not turn out to be uneasy bedfellows. In fact, usually the latter will eventually fall out of bed. Circumspection remains advisable.

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In today's FOMC Minutes, Fed member issued yet another explicit warning to America's investing public (before they pull the pin on the balance sheet normalization) about asset valuations beiung "vulnerable" and also piling on once again that commercial real estate values were "elevated."

 

Of course, traders don't care and have bid stocks to the highs of the day.

The Fed's explicit warning that "vulnerabilities have increased for asset valuation pressures."

This overall assessment reflected the staff’s judgment that… asset valuation pressures in some markets were notable. Although these assessments were unchanged from January’s assessment, vulnerabilities appeared to have increased for asset valuation pressures, though not by enough to warrant raising the assessment of these vulnerabilities to elevated.

Maybe the Fed was looking at this chart:

As a reminder, according to Bank of America: based on the 20 most widely used valuation metrics, the S&P remains significantly overvalued on 18 of 20 valuation metrics, the only exceptions being free cash flow, helped by depressed capex), and relative to bonds, whole yields are depressed thanks to $18 trillion in global central bank purchases.

And a bonus chart: why is the market so overvalued? Because 2017 has continued the trend seen in 2016, when the market "shrugged off one event after another."

Additionally, as America's retailpocalypse continues, The Fed warned once again on commercial real estate prices:

it was noted that real estate values were elevated in some sectors of the CRE market, that a sharp decline in such valuations could pose risks to financial stability, and that potential reforms in the housing finance sector could have implications for such valuations.

It seems that message is getting to Investors' brains…

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Having top-ticked US economic data with its March rate-hike, all eyes are on the May minutes to confirm the total lack of data-dependence now present at The Fed. The main focus of the minutes was on the 'normalization' of the balance sheet (since June hike odds are at 100%), which was confirmed with details of the plan revealed. Economic weakness in Q1 was shrugged off as "transitory" and tightening is appropriate "soon" signaling June is on. Fed also warns of asset valuations.

Fed Minutes Headlines:

• *MOST FED OFFICIALS SAW TIGHTENING LIKELY APPROPRIATE `SOON'
• *FED BALANCE-SHEET PLAN WOULD RAISE ROLLOFF CAPS EVERY 3 MONTHS
• *FOMC VOTERS: PRUDENT TO AWAIT EVIDENCE SLOWDOWN IS TRANSITORY

What the market appears to be focusing on is the triple reiteration of "weakness" in the FOMC minutes, and furthermore the warning that Q1 GDP weakness was not due to seasonality:

The staff judged that the weakness in first-quarter real GDP was probably not attributable to residual seasonality and that it instead reflected transitorily soft consumer expenditures and inventory investment.

And another risk factor: the Fed expected PCE inflation to pick up more the spring "which would be more consistent with ongoing gains in employment." It did not happen…

Importantly, PCE  growth was expected to pick up to a stronger pace in the spring, which would be more consistent with ongoing gains in employment, real disposable personal income, and households’ net worth.

And what if that does not continue to happen, especially as the commodity surge base effect jump is now behind us and headline inflation is poised to decline?

Ironically, just a few lines lower, the Fes does blame the weather:

It was noted that much of the recent slowing likely reflected transitory factors, such as low consumer spending for energy services induced by an unusually mild winter and a decline in motor vehicle sales  from an unsustainably high fourth-quarter pace. Nevertheless, contacts expected that demand for motor vehicles would be well maintained.

Sure, it could also be inducted by the collapse in demand for auto and credit card loans as the Fed itself discovered just a few days after the May FOMC meeting in its latest Senior Loan Officer Survey, and reported previously here.

Yet despite the Fed's growing concern about "weakness", its conclusion was that gradual tightening remains appropriate:

Although the data on aggregate spending and inflation received over the intermeeting period were, on balance, weaker than participants expected, they generally saw the outlook for the economy and inflation as little changed and judged that a continued gradual removal of monetary policy accommodation remained appropriate.

As for employment and inflation…

Consistent with the downside risks to aggregate demand, the staff viewed the risks to its outlook for the unemployment rate as tilted to the upside. The risks to the projection for inflation were judged to be roughly balanced. The downside risks from the possibility that longer-term inflation expectations may have edged down or that the dollar could appreciate substantially were seen as roughly  counterbalanced by the upside risk that inflation could increase more than expected in an economy that was projected to continue operating above its longer-run potential.

Also notable is the Fed's explicit warning that "vulnerabilities have increased for asset valuation pressures."

This overall assessment reflected the staff’s judgment that leverage as well as vulnerabilities from maturity and liquidity transformation in the financial sector were low, that leverage in the nonfinancial sector was moderate, and that asset valuation pressures in some markets were notable. Although these assessments were unchanged from January’s assessment, vulnerabilities appeared to have increased for asset valuation pressures, though not by enough to warrant raising the assessment of these vulnerabilities to elevated.

Translated: the prices are too high!

*  *  *

If The Fed somehow makes believe that the data "continues to support" normalization, then their credibility just went negative…

 

Data-dependence? The Fed is still calling for 2 more rate hikes, the market sees just 1.44 hikes…

 

So what happens when The Fed balance sheet normalization begins?

 

June rate hike odds were 100% before the Minutes (and 50% chance of anmother hike by December – 39.3% + 9.6%)

 

Full Minutes Below…

 

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Coming just a month after Project Gotham Shield, a major nuclear detonation drill in the New York-New Jersey area, a false alarm that went out to some people’s television sets Tuesday might have scared some in New Jersey.

As NBC New York reports, a nuclear power plant warning issued in Cumberland and Salem counties was sent out by mistake.

The message that was sent out said “a civil authority has issued a nuclear power plant warning for the following counties/areas.”

A short time later, the New Jersey Office of Emergency Management Tweeted that the emergency alert was “false.”

***FALSE EMERGENCY ALERT*** You may have seen this message on your TV tonight.There is NO emergency. This message went out in error

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Something stinks here.

February we first reported on the Anwan brothers, the (Not-Russian) IT Staff Who Allegedly Hacked Congress' Computer Systems.

Imran Awan seen below with Bill Clinton

The brothers were barred from computer networks at the House of Representatives Thursday, The Daily Caller News Foundation Investigative Group has learned.

Three members of the intelligence panel and five members of the House Committee on Foreign Affairs were among the dozens of members who employed the suspects on a shared basis. The two committees deal with many of the nation’s most sensitive issues, information and documents, including those related to the war on terrorism.

 

The brothers are suspected of serious violations, including accessing members’ computer networks without their knowledge and stealing equipment from Congress.

The three men are “shared employees,” meaning they are hired by multiple offices, which split their salaries and use them as needed for IT services.

Then in March, we noted that House Democrats decided to delay the firing (until today) because their Muslim background, some with ties to Pakistan, could make them easy targets for false charges.

“I wanted to be sure individuals are not being singled out because of their nationalities or their religion. We want to make sure everybody is entitled to due process,” Meeks said.

 

“They had provided great service for me. And there were certain times in which they had permission by me, if it was Hina or someone else, to access some of my data.”

 

Fudge told Politico on Tuesday she would employ Imran Awan until he received “due process.”

 

“He needs to have a hearing. Due process is very simple. You don’t fire someone until you talk to them,” Fudge said.

 

On Wednesday, Lauren Williams, a spokeswoman for Fudge, wouldn’t provide details about Imran Awan’s firing but did confirm he was still employed in Fudge’s office as of Tuesday afternoon.

The bottom line is simple – these House Democrats decided it was better to be at risk of hacking and extortion than to be accused of racism.

Then yesterday we reported that Congressional Aides Fear Suspects In IT Breach Are Blackmailing Members With Their Own Data…

The baffled aides wonder if the suspects are blackmailing representatives based on the contents of their emails and files, to which they had full access.

“I don’t know what they have, but they have something on someone. It’s been months at this point” with no arrests, said Pat Sowers, who has managed IT for several House offices for 12 years. “Something is rotten in Denmark.”

A manager at a tech-services company that works with Democratic House offices said he approached congressional offices, offering their services at one-fourth the price of Awan and his Pakistani brothers, but the members declined. At the time, he couldn’t understand why his offers were rejected but now he suspects the Awans exerted some type of leverage over members.

“There’s no question about it: If I was accused of a tenth of what these guys are accused of, they’d take me out in handcuffs that same day, and I’d never work again,” he said.

And today, The Daily Caller's Luke Rosiak reports Rep. Debbie Wasserman Schultz threatened the chief of the U.S. Capitol Police with “consequences” for holding equipment that she says belongs to her in order to build a criminal case against a Pakistani staffer suspected of massive cybersecurity breaches involving funneling sensitive congressional data offsite.

The Florida lawmaker used her position on the committee that sets the police force’s budget to press its chief to relinquish the piece of evidence Thursday, in what could be considered using her authority to attempt to interfere with a criminal investigation.

The Capitol Police and outside agencies are pursuing Imran Awan, who has run technology for the Florida lawmaker since 2005 and was banned from the House network in February on suspicion of data breaches and theft.

“My understanding is the the Capitol Police is not able to confiscate Members’ equipment when the Member is not under investigation,” Wasserman Schultz said in the annual police budget hearing of the House Committee On Appropriations’ Legislative Branch Subcommittee.

 

“We can’t return the equipment,” Police Chief Matthew R. Verderosa told the Florida Democrat.

 

“I think you’re violating the rules when you conduct your business that way and you should expect that there will be consequences,” Wasserman Schultz said.

As one of eight members of the Committee on Appropriations’ Legislative Branch subcommittee, Wasserman Schultz is in charge of the budget of the police force that is investigating her staffer and how he managed to extract so much money and information from members.

In a highly unusual exchange, the Florida lawmaker uses a hearing on the Capitol Police’s annual budget to spend three minutes repeatedly trying to extract a promise from the chief that he will return a piece of evidence being used to build an active case.

“If a Member loses equipment and it is found by your staff and identified as that member’s equipment and the member is not associated with any case, it is supposed to be returned. Yes or no?” she said.

Police tell her it is important to “an ongoing investigation,” but presses for its return anyway.

The investigation is examining members’ data leaving the network and how Awan managed to get Members to place three relatives and a friend into largely no-show positions on their payrolls, billing $4 million since 2010.

The congresswoman characterizes the evidence as “belonging” to her and argues that therefore it cannot be seized unless Capitol Police tell her that she personally, as opposed to her staffer, is a target of the investigation.

When TheDCNF asked Wasserman Schultz Monday if it could inquire about her strong desire for the laptop, she said “No, you may not.” After TheDCNF asked why she wouldn’t want the Capitol Police to have any evidence they may need to find and punish any hackers of government information, she abruptly turned around in the middle of a stairwell and retreated back to the office from which she had come.

Her spokesman, David Dameron, then emerged to say “We just don’t have any comment.”

Though on the surface Wasserman Schultz would have been a victim of Awan’s scam, she has inexplicably protected him, circumventing the network ban by re-titling him as an “adviser” instead of technology administrator.

Politico described him and his wife, Hina Alvi, as having a “friendly personal relationship” with both Wasserman Schultz and Rep. Gregory Meeks of New York.

That baffled a Democratic IT staffer, who said

“I can’t imagine why she’d be that good of friends with a technology provider.”

 

“Usually if someone does bad stuff, an office is going to distance themselves” rather than incur political fallout for a mere staffer.

Wasserman Schultz resigned as Chairman of the Democratic National Committee in 2016 after Wikileaks published thousands of internal emails obtained by an as-yet unidentified hacker.

The last 30 seconds of the exchange can also be seen here…

As we said at the start – something stinks here!! But do not expect the mainstream media to report on it. One can't help but wonder if anything related to Seth Rich is lurking on that laptop?

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Having lambasted the market's abhorrent response to the worst terror attack in Britain in 12 years yesterday, Bloomberg's Richard Breslow takes aim at the flip-flopping consensus rearing its ugly head in bond land worldwide.

As he writes, it’s become very fashionable to get on the bandwagon that sovereign yields are never, or at least no time soon, going to rise.

A number of the biggest banks have joined the parade just recently. This relies largely on making the obverse of the assumptions they stated with great assurance for much of this year. It’s also borne out of impatience for this conviction view to start working already. That’s not a great investing thesis.

 

Contributing to this capitulation is the fact that U.S. numbers haven’t been nearly what analysts were hoping for. Even if they clearly show an economy that can’t be described as in crisis. But what isn’t accounted for in this line of reasoning is that global growth is improving further and faster than anyone factored in. It was a mistake to look at the U.S. in isolation at the beginning of the year and it’s just as questionable to do so now.

 

The last thing the ECB wants to do is upset the apple cart of peripheral markets, but it’s undeniable that they are beginning the process of softening up the market for an eventual change in policy.

 

With the numbers coming in strong and the rhetoric contemplating the when and how rather than if, every ECB event has become a major one. Whenever Mario Draghi speaks, traders will be listening on tenterhooks. After speaking in Madrid today, his next appearance will be at the post-ECB meeting briefing in two weeks. No coincidence, perhaps, that the Schatz yield is pushing year-to-date highs.

 

The U.S. two-year, for that matter, isn’t behaving as if last week’s Washington turmoil was a game-changer.

 

It’s common to point to dollar weakness and proclaim it’s a sign of a Fed that will have to climb down from its projections. Think of it instead as evidence that the rest of the world is doing relatively better. That doesn’t represent sad news and isn’t a reason to be bullish on yields.

 

So why haven’t yields responded? Making a flow rather than stock argument, it’s because the central banks are still buying a lot of bonds right on schedule. Are you willing to bet these amounts will hold steady or decrease over time?

 

People love the Plunge Protection Team conspiracy theory when looking at equities. Well that’s exactly what is happening in bonds, right out in the open.

 

 

Despite all the headlines, of late, gold is doing a whole lot of nothing. Really not suggestive of a world that expects, at least at the moment, yields to plumb April’s depths. And if they do, your stop is only a dozen or so basis points away in the tens. An interesting risk/reward.

As Breslow concludes, the best argument for buying bonds is a hedge for the long equity position you have and hate.

But while that’s legitimate portfolio theory, it may no longer fit central bank thinking. Just ask the Chinese…

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After 4 consecutive 5Y auctions that resulted in a “tail”, moments ago the Treasury sold $34 billion in 5Y paper which finally “stopped through” the When Issued for the first time since December, printing at a High Yield of 1.831%, 0.7bps through the 1.838% When Issued.

Another confirmation that like yesterday’s 2Y auction today’s 5Y issuance was stronger than expected, was the jump in the Bid to Cover which rose to 2.67, the highest since December, and well above the 2.42 6 month average, as total bids of $95.0 billion were received for $38.1BN in notes.  Additionally, the internals were strong too, with Indirecst rebounding from last month’s 57.3% low to 68.7%, above the 6 month average of 63.1%, while Directs were awarded 8.6% of the auction, above the 5.3% in April and 6MMA. Dealers were left just 22.7% of the auction, the lowest going back to August 2016.

Overall, a very strong auction, and certainly better than what the market had expected.

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Despite a near-collapse in the US economic surprise index – a key leading indicator, and major negative for the US economy…

… and recent disappointing inflation readings, largely attributed to the telecom sector in general and unlimited phone plan packages, not to mention the 0.7% Q1 GDP print, today’s FOMC minutes scheduled (released at 2:00pm today with the usual 3 week lag) are likely to reveal a relatively optimistic Fed with many Committee members expecting the weakness early on in 2017 to prove “transitory.” 

Points of focus in the minutes will include future plans for the balance sheet (with reduction coming under increased scrutiny in recent times), after minutes of the March meeting showed that many of the policymakers thought a change in the Fed’s reinvestment policy would “likely be appropriate later this year.“

As a reminder, Fed officials left the interest rate unchanged within a range between 0.75% and 1% at their May 3 meeting, whose minutes could indicate whether they are preparing to lift it by a quarter percentage point at their next meeting June 13-14.  As such, traders and analysts will will be combing through the minutes to better understand the Fed’s current contraditory, and clearly non-data dependent assessment of the country’s growth and inflation, as well as policymakers’ forecast for activity going forward in the remaining seven months of the year.

Also according to Stifel’s Lindsey Piegza the market will also be looking for clues in the latest minutes as to the Committees’ likely handling of the $4.5T balance sheet. Some analysts have anticipated specifics of a tapering to be revealed in the May FOMC minutes; while the conversation of shrinking the Fed’s balance sheet was no doubt readdressed at last month’s meeting, details or a conclusive pathway are unlikely to be unveiled.

Addressing the balance sheet with a scheduled taper of monthly purchases will no doubt impact the pace of additional interest rate increases, slowing the pathway to reaching the expected terminal level on the Fed funds rate, as tapering itself will be seen as a de facto act of tightening. In other words, if the expected terminal rate on Fed funds is 3%, as many officials have suggested, and the anticipated timeframe of reaching said level is around two to three years, now, addressing the balance sheet during that same period could extend the timeframe from reaching the terminal level to five years, maybe more. Nevertheless, at the point, according to Bloomberg, the probability of a rate hike at the upcoming June 14th FOMC meeting remains elevated at near 100%.

In addition to the above, here are five things to watch for courtesy of the WSJ:

1. How Likely Is a June Rate Increase?

 

The Fed last raised short-term rates in March, and it penciled in two additional quarter-percentage-point increases this year. June offers a good opportunity for another move: The meeting is followed by a press conference by Chairwoman Janet Yellen, and raising rates a second time in the first half of 2017 would give officials more time to evaluate how the economy evolves before considering a third increase in the second half of the year. Expectations for a June rate increase are high. A recent Wall Street Journal survey found 88% of economists expected such a move. Traders in futures markets place an 83% likelihood of a move in June, according to CME Group. The minutes could either confirm or confound that expectation. 

 

2. Weak Economic Growth

 

One argument for holding off on a June rate increase could be the economy’s mixed performance since March. Inflation wobbled recently: The Fed’s preferred inflation gauge, the price index for personal-consumption expenditures, briefly exceeded the Fed’s annual 2% target in February but slipped below it again in March, as prices rose 1.8%. Economic growth in the first quarter also disappointed, with gross domestic product expanding at a 0.7% annual rate. However, the Fed said in its May policy statement that the slowing was “likely to be transitory,” suggesting the central bank wasn’t overly worried about the slump. Also on the plus side, the unemployment rate has fallen further since the Fed last raised rates, to 4.4% in April, its lowest level in a decade. The minutes could provide more detail on officials’ assessment of the economy’s health.

 

3. Slimming the Balance Sheet

 

A point of interest in the May minutes will be officials’ discussion of how and when to start shrinking the Fed’s portfolio of bonds and other assets. Minutes of the Fed’s March policy meeting indicated officials wanted to begin the process by the end of the year, but questions remained over the pace of reductions and the size of the holdings when they finish. The Fed’s balance sheet has grown to $4.5 trillion, or around 23% of U.S. gross domestic product, from less than $1 trillion, or around 6%, before the financial crisis. Reducing its size without roiling markets will be a delicate task. Officials in March were careful to note they wanted to proceed in a “gradual and predictable” way, likely to avoid a rerun of the 2013 “taper tantrum,” when the prospect that the Fed would slow its asset purchases set off market volatility, including a spike in Treasury yields and large capital outflows from many emerging-market economies.

 

4. Fiscal Policy

 

Fed officials continue to assess whether the Trump administration’s proposed tax cuts, spending plans, regulatory changes or other policies could boost economic growth and drive up inflation. Minutes of the Fed’s March meeting showed most officials saw a possibility that the economy could perform better than they expected because of possible new tax and spending policies. Minutes of the May meeting could provide a more recent snapshot of their thinking.

 

5. Challenging Assumptions

 

A couple of Fed officials have cast doubts on the strength of the labor market recently, and that will be a point to watch in the minutes. Although the unemployment rate hit an ultralow 4.4% last month, there hasn’t been a breakout in inflation. Economists would usually expect inflation to rise when joblessness gets low as companies compete for scarcer workers by offering higher wages. Over the past few weeks, several Fed officials have said the labor market has returned to full employment, which means essentially every worker looking for a job can find one. But two officials, Fed governor Lael Brainard and Minneapolis Fed President Neel Kashkari, have expressed doubts about that in recent days, arguing there might be further room for improvement in the labor market since the low joblessness hasn’t meaningfully boosted prices. Details of this debate could show up in the May minutes, and could indicate some officials might be inclined to keep rates lower for longer to help push up wages.

Additionally, BofA highlights 4 issues which could hinder the Fed’s plans going forward:

1. First and foremost, China is trying to reign in its shadow banking system and there is a risk of “overshooting,” damaging growth.
2. The markets seem quite complacent about the Fed.
3. Next year’s likely end to QE in the Euro Area.
4. Have interest rates really been too low for too long? Economic slack and muted inflation suggest otherwise

Of the above, #2 may be most important as the Fed has increasingly warned that stocks are getting ahead of themselves, and it is possible that Yellen will hike just to take out some of the froth in stocks.

Finally, in terms of market reaction, Bloomberg points out that the latest CFTC data shows the most extreme speculator positions currently sit in 10Y futures, which recently grew to heaviest longs since January 2008, while futures positioning remains near record shorts across eurodollars. This turnaround in speculator TY longs has been sharp, following the biggest short unwind on record that occurred three weeks ago.  On the other end, speculator Eurodollar shorts remain near record levels.

The conclusion is that near record long TY coupled with short eurodollar positioning among speculator accounts leaves the market open to exacerbated moves.

This means that a dovish take on the minutes may see sharp short-covering across front eurodollars, leading Treasury prices higher further out the curve, while a hawkish outcome could see intermediates out to 10s lead a wider move lower in price as accounts look to take profits on recently built-up longs.

Finally, a potential reason for dovish take may be soft CPI and retail sales data from May 12, while a dismissal of the data as “transitory” may result in a more hawkish view. Going into the minutes, current odds of a June hike based on OIS probabilities sit at 76%; a full hike and further 4bp is priced in for September; almost 1.5 hikes is priced in by year-end.

via http://ift.tt/2rAFjR0 Tyler Durden